STATEMENT BY PAUL A. VOLCKERBEFORE THECOMMITTEE ON BANKING AND FINANCIAL SERVICESOF THEHOUSE OF REPRESENTATIVESSEPTEMBER 24, 2009Mr. Chairman, Members of the Committee:I appreciate the opportunity to appear before you thismorning. You are dealing with critically important issues.The laws passed in the 1930’s successfully dealt with thegrave weaknesses in the financial system at that time,weaknesses that contributed to the severity of the GreatDepression. The legislation you are debating this yearshould set out a constructive path for a reformed financialsystem for years ahead.Now the financial pressures have eased and there aresigns of renewed economic growth. There are some on “WallStreet” who would like to return to ”business as usual”.After all, for a time, and for some that system wasenormously remunerative. However, it placed at risk notonly the American economy, but also large parts of the

world economy. The challenge is not to paper over or tinkeraround the edges of the broken system. We need to minimizethe danger that the uncertainties and risks inherent in thefunctioning of a market-based financial system do not againjeopardize the functioning and foundation of our economy.Over recent months the Administration has set outimportant proposals which, taken together and implemented,would provide a reformed framework for financial regulationand supervision. There are key elements of theAdministration’s approach that I believe deserve your fullsupport. I particularly welcome the strong reaffirmation ofone long-standing principle – the separation of bankingfrom commerce – that has long characterized the Americanapproach toward financial regulation. In practice, over anumber of years that approach has been eroded by loopholesin the legal framework and by technological changes infinancial instruments and the nature of banking. Asemergency measures, further exceptions to the rule wereaccepted in the face of the severe crisis.

Failure to close those existing loopholes willinevitably weaken needed prudential safeguards and raisedifficult questions about the extent of “moral hazard”, anissue that looms very large in the light of events of thepast year. It is those events – including particularly therescue of money market mutual funds and the decisions tobroaden direct access by non-banks to Federal Reservecredit facilities – that point to the need for strongenforcement of the distinction between banks and otherfinancial or commercial institutions.Important parts of the Administration’s proposedreforms can be – and some are being – implemented andenforced under existing authority. The Treasury has set outprinciples for capital and liquidity standards. Otherprudential approaches are under consideration. Mostnotably risk management practices, for banks and certainother regulated institutions have been placed under urgentreview. At the supervisors’ initiative, useful and neededsteps are being taken to encourage more prudentcompensation practices.