December 11 – As the clock ticks on passage of the government spending bill, reaction has varied widely on a provision that was added to revise the Dodd-Frank financial reform act. At issue is the “swaps pushout rule,” which has yet to take effect.
Here’s a sampling of official reaction:
Thomas Hoenig, Vice Chair of the FDIC: “In 2008 we learned the economic consequences of conducting derivatives trading in taxpayer-insured banks. Section 716 of Dodd-Frank is an important step in pushing the trading activity out to where it should be conducted: in the open market, outside of taxpayer-backed commercial banks. It is illogical to repeal the 716 push out requirement. In fact, under 716, most derivatives — almost 95 percent — would not be pushed out of the bank. That is because interest rate swaps, foreign exchange and cleared credit derivatives can remain within the bank. In addition, derivatives that are used for hedging can remain in the bank.
“The main items that must be pushed out under 716 are uncleared credit default swaps (CDS), equity derivatives and commodities derivatives. These are, in relative terms, much smaller and where the greater risks and capital subsidy is most useful to these banking firms.Derivatives that are pushed out by 716 are only removed from the taxpayer support and the accompanying subsidy of insured deposit funding — they will continue to exist and to serve end users. In fact, most of these firms have broker-dealer affiliates where they can place these activities, but these affiliates are not as richly subsidized, which helps explain these firms’ resistance to 716 push out.”
Maxine Waters, D-Calif., ranking member of the House Financial Services Committee: “I am increasingly optimistic that House Democrats will come together to defeat this effort to protect Wall Street’s biggest banks. In a meeting this morning, many of my Democratic colleagues spoke out against this unconscionable effort to cram these harmful provisions into a must-pass spending bill that is essential to keeping the government open. Even members that supported this as a standalone measure expressed concerns about circumventing the Democratic progress to ram through such a complex piece of legislation.
“There is a reason the Republican leadership slipped this harmful provision in the dead of night. Subsidizing banks with taxpayer money is an issue that concerns Republicans and Democrats. House leadership will need support from both parties if it hopes to pass this legislation, and I believe Democrats will stand up against these tactics. This harmful provision must be removed from the spending bill.”
James Ballentine, ABA’s executive vice president of congressional relations and political affairs: “The banking industry strongly supports a proposed bipartisan compromise on the treatment of financial derivatives that would amend a law that harms the ability of banks of all sizes to serve their customers and imposes a significant cost on the broader economy.
“The majority of banks, including community banks, that use swaps do so in order to hedge or mitigate risk from their ordinary business activities, including lending. Hedging and mitigating risk are not only good business practices, but are important tools that banks use to help borrowing customers hedge their own business risks. The push-out requirement to move some swaps into separate affiliates makes one-stop shopping impossible for businesses ranging from family farms to energy companies that want to hedge against commodity price changes.”
“Banking regulators have repeatedly expressed their support for commonsense adjustments to this law, and we strongly support congressional action on this important issue.”