Exclusive: Congress Plans Hearings on Volcker Rule

Congressional leaders plan to hold hearings on one of the more controversial parts of the Dodd-Frank financial reform known as the Volcker Rule that prevents the nation’s big banks from practices that federal regulators say are dangerous -- but which have also generated enormous profits for Wall Street, the FOX Business Network has learned.

The hearing is being planned by the House Financial Services committee and comes as the final drafts of the rule have been approved by federal regulators this week. Named after former Obama Administration economic adviser Paul Volcker, the rule generally bars banks from businesses like “proprietary trading” or using firm capital to trade securities, and vastly limits the amount of money banks can invest in hedge funds and in private equity accounts.

Many on Wall Street have criticized the impact of the Volcker Rule for squeezing bank profits, and causing layoffs. Others question whether practices like proprietary trading and hedge-fund investing were at the heart of the Wall Street risk-taking that led to the 2008 financial collapse. Already firms like Goldman Sachs (NYSE:GS) have been forced to shed staff because of the rule, and some analysts say Wall Street layoffs will continue to ramp up next year as costs of these regulations further dampen earnings.

In recent weeks, House Republican leaders increased their criticism of the Dodd-Frank financial overhaul, passed in the aftermath of the financial meltdown, blaming the cost of these new regulations for forcing banks to increase fees on consumer products. Bank of America (NYSE:BAC), for example, has begun a $5-a-month charge on the use of debit cards in response to the increased costs associated with complying with the regulations.

The hearing on the Volcker Rule opens up a new front in this attack.

“The hearing will be looking at the economic impact and the competitiveness of this rule,” said Marisol Garibay, the communications director for the Financial Services committee. “No one has looked at the cumulative impact of these regulations.”

Committee chairman Spencer Bachus (R-AL) is eyeing a November hearing date. A witness list has yet to be drawn up but could include top officials from the Treasury, the Federal Reserve, the Securities Exchange Commission, the Federal Deposit Insurance Corp, the Commodities Future Trading Commission and the Office of the Comptroller of the Currency.

All of these organizations are involved in writing and implementing Dodd-Frank.

Volcker, the former Fed chairman and one of President Obama’s top economic advisers before stepping down earlier in the year, has long been a vocal critic of the risk taking at the big banks, which he has said led to the financial collapse. Volcker convinced President Obama to add his regulations involving proprietary trading and other practices to the 2010 Dodd-Frank overhaul even over the objections of some in the administration.

But others say his rule focuses on the wrong things; firms’ business of packaging mortgage- backed securities for customers, not proprietary trading, led to the vast majority of the losses experienced by banks in 2007 and 2008, and it’s unclear if the Volcker Rule will deter these practices.

Meanwhile, analysts say Wall Street profits will be squeezed as the rule takes full effect. Brad Hintz, a securities analyst for Sanford C. Bernstein, said the rules should hurt the competitiveness of US banks when fighting for business against foreign competitors.

“I understand what the regulators are trying to get at, but these rules are going to hurt US banks, and the big winners will be European and Canadian banks,” Hintz said.

Bachus’s hearings are expected to focus on how the Volcker Rule may put US banks at a competitive disadvantage and whether the regulations are sending jobs overseas, FOX Business has learned.

A spokeswoman for the Obama Administration had no comment.