HFSC Hearing on Legislative Proposals to Reduce Regulatory Burdens
House Financial Services Committee
Subcommittee on Financial Institutions and Consumer Credit
“Examining Legislative Proposals to Reduce Regulatory Burdens on Mainstreet Job Creators”
Wednesday, October 21, 2015
Key Topics & Takeaways
- H.R. 2209: Rep. Luke Messer (R-Ind.) said his bill is aimed at an odd situation in which all American municipal bonds, “among the safest investments in the world,” are excluded from HQLA while certain foreign sovereign bonds are included. Most Subcommittee members spoke in support of the legislation.
- H.R. 2896: Rep. Stevan Pearce (R-N.M.) said Dodd-Frank regulations, which were intended for large institutions, often “bleed down” to smaller ones. Kupiec called this a natural process given that the supervisors who monitor the largest institutions are thought to be the “best and brightest” and this creates a standard that small bank examiners want to follow.
- H.R. 3340: Rep. Roger Williams (R-Texas) said H.R. 3340 would “no doubt create greater transparency [in the FSOC] where it is sorely needed.” Ireland noted that firms designated as systemically important are subject to regulation by the Federal Reserve, saying the Fed is a banking regulator and the suitability of this type of regulation for non-banks is “debatable.”
Witnesses
- Paul Kupiec, Resident Scholar, American Enterprise Institute
- Oliver Ireland, Partner, Morrison & Foerster LLP
- Marcus Stanley, Policy Director, Americans for Financial Reform
Bills Discussed
- H.R. 2121 (Rep. Stivers), the “SAFE Transitional Licensing Act of 2015”
- H.R. 2209 (Rep. Messer), to require the appropriate Federal banking agencies to treat certain municipal obligations as level 2A liquid assets, and for other purposes.
- H.R. 2287 (Rep. Mulvaney), the “National Credit Union Administration Budget Transparency Act”
- H.R. 2473 (Rep. Clay), the “Preserving Capital Access and Mortgage Liquidity Act of 2015”
- H.R. 2896 (Rep. Tipton), the “TAILOR Act”
- H.R. 2987 (Rep. Meeks), the “Community Bank Capital Clarification Act”
- H.R. 3340 (Rep. Emmer), the “Financial Stability Oversight Council Reform Act”
Opening Statements
In his opening statement, Chairman Randy Neugebauer (R-Texas) noted that the House Financial Services Committee has heard testimony throughout this session on how regulatory impediments are harming financial institutions and consumer choice. He stressed the need to reduce regulatory burdens for Main Street job creators.
Ranking Member William Lacy Clay (D-Mo.) stated that much of the Subcommittee’s work has been dedicated to finding common ground on regulatory relief and said many of the proposals to be considering during the hearing would provide “real relief for Main Street.” However, he cautioned his colleagues against proposals that have failed to attract bipartisan support and that seek to undermine the Dodd-Frank Act.
Testimony
Paul Kupiec, Resident Scholar, American Enterprise Institute
In his testimony, Paul Kupiec stated that none of the bills being considered would magnify financial sector risk or undermine Dodd-Frank. He briefly discussed H.R. 3340 and defended it for putting the Office of Financial Research (OFR) and Financial Stability Oversight Council (FSOC) under normal congressional oversight.
On H.R. 2209, Kupiec commented that many state and municipal securities are “at least as liquid” as corporate bonds, have higher ratings, and are more liquid. He cited concerns that the exclusion of municipal securities from the list of high quality liquid assets (HQLA) could damage market liquidity and called the changes in the proposed rule “appropriate and consistent with public interest.” He further called for municipal securities that satisfy the characteristics required of Level 2B assets under the liquidity coverage rule (LCR) to receive 2B treatment under the HQLA regime.
Oliver Ireland, Partner, Morrison & Foerster LLP
Oliver Ireland, in his testimony, praised H.R. 2896, the TAILOR Act, for addressing regulatory burdens facing smaller institutions that should not be subject to complex rules. On H.R. 2209, he stated that the failure to include municipal securities as HQLA would adversely affect liquidity and pricing of these obligations, and warned that this would make it more difficult for states and municipalities to obtain funding going forward. He also lauded the budgetary transparency and accountability at OFR and the FSOC that would come from H.R. 3340.
Marcus Stanley, Policy Director, Americans for Financial Reform
In his testimony, Marcus Stanley spoke in opposition of the TAILOR Act, claiming that regulators are already tailoring regulations for smaller institutions. He also spoke against H.R. 3340 by defending what he called the “political independence” of the FSOC and OFR. Stanley did not openly oppose H.R. 2209, but did raise concerns that it may be more appropriate to leave a decision on the LCR rule to the regulators themselves.
Question and Answer
Neugebauer asked about the consequences facing municipal and state bonds if they do not receive HQLA treatment from the banking regulators. Kupiec replied that any rule limiting the ability of large institutions to hold municipal securities would be bad for the market, and discussed what he called a “feedback loop” in which the currently liquid municipal bond market will become illiquid precisely because of the current LCR rule.
Ireland agreed that assets excluded from HQLA treatment will suffer and opined that the rule would shape the market and cost municipalities and states their funding. “I think it adversely affects everyone concerned,” he closed.
Stanley added that he is pleased the legislation specifies that municipal bonds must meet certain standards to be treated as Level 2A assets.
Rep. Ruben Hinojosa (D-Texas) commented that banking regulators have been unable to effectively differentiate between liquid and non-liquid municipal securities. He then asked whether H.R. 2209 effectively means that Congress would be picking winners and losers in the municipal securities market. Kupiec reject this notion, pointing out that the Federal Reserve is already beginning the rethink the treatment of municipal bonds on its own and stating that the bill is just a recognition from Congress that this is a step in the right direction.
Hinojosa expressed concern that H.R. 2209 would help large issuers but hurt smaller communities such as his own.
Rep. Gregory Meeks (D-N.Y.) expressed his belief that high quality municipal bonds should be included in the definition of Level 2A HQLA for the LCR rule, and called H.R. 2209 “an important improvement that we need to approve.”
Rep. Carolyn Maloney (D-N.Y.) stated that it makes “no sense” that the current LCR rule includes corporate bonds as HQLA but not municipal securities. She noted that the Federal Reserve has recognized this error, but added that the Office of the Comptroller of the Currency (OCC) is refusing to amend this rule and “insists on favoring corporations over municipalities.” Maloney asked if the OCC could distinguish between liquid and illiquid municipal securities just as it has been able to do with corporate bonds. Kupiec replied that the distinction can be made.
Rep. Brad Sherman (D-Calif.) agreed with Maloney’s statements. Kupiec again stressed that the Committee should consider Level 2A and Level 2B treatment for municipal securities, and Sherman responded that this should be considered either in H.R. 2209 or in subsequent regulation.
Rep. Luke Messer (R-Ind.) said his bill is aimed at an odd situation in which all American municipal bonds, “among the safest investments in the world,” are excluded from HQLA while certain foreign sovereign bonds are included. He argued that the current LCR rule drives up the cost of borrowing for municipalities, and asked if there is any reason the value of these assets should be discounted under the rule. Kupiec replied that there is no reason, and that if a security meets the liquidity criteria identified by the rule than it “ought to be counted.”
H.R. 2287, the National Credit Union Administration Budget Transparency Act
Clay asked Stanley to describe the regulatory capture concerns that arise if credit unions are able to shape the budget of the National Credit Union Administration (NCUA). Stanley explained that regulated entities may be able to use the budget process to “punish” regulators for stringent supervision. He stressed that lines between public regulatory bodies and self-regulatory organizations must be kept clear.
H.R. 2896, the TAILOR Act
Rep. Stevan Pearce (R-N.M.) said Dodd-Frank regulations, which were intended for large institutions, often “bleed down” to smaller ones. Kupiec called this a natural process given that the supervisors who monitor the largest institutions are thought to be the “best and brightest” and this creates a standard that small bank examiners want to follow.
Rep. Blaine Luetkemeyer (R-Mo.) offered support for the TAILOR Act, describing it mainly as a push to have regulators revisit their rules to judge whether past decisions still make sense.
H.R. 3340, the Financial Stability Oversight Council Reform Act
Rep. Maxine Waters (D-Calif.) warned that H.R. 3340 would eliminate the independence of the FSOC and OFR by subjecting them to the budget process, and asked Stanley what the consequences of this could be. Stanley replied that “we’ve all seen” in Washington that narrow financial interests can come to dominate processes such as financial regulation, and stressed the importance of regulator independence.
Rep. Robert Pittenger (R-N.C.) asked if there is any funding limitation for the FSOC and OFR. Kupiec explained that the two draw funding from the Treasury Department and other regulators. He continued, saying the notion that the FSOC and OFR are independent is “insane” given that the Treasury Secretary is the head of the FSOC and the OFR is an office within Treasury.
Rep. Roger Williams (R-Texas) said H.R. 3340 would “no doubt create greater transparency where it is sorely needed.” He asked whether the FSOC has been transparency in its designations of non-banks. Kupiec and Ireland both answered that it has not been transparent.
Williams followed up by asking how this non-transparency system of designation has been harmful to taxpayers and consumers. Kupiec answered that any process by which sweeping new regulations can be imposed with no justifiable cause is costly and problematic. Ireland added that firms designated as systemically important are subject to regulation by the Federal Reserve, noting the Fed is a banking regulator and that the suitability of this type of regulation for non-banks is “debatable.”
Rep. Andy Barr (R-Ky.) asked Kupiec to respond to Stanley’s assertions of the importance of independence for the FSOC and OFR. Kupiec reiterated that the FSOC is not transparent or apolitical because it is headed by the Secretary of the Treasury.
Rep. Tom Emmer (R-Minn.) commented that he believes everyone can agree that financial regulations are best administered when there is appropriate interaction between Congress, regulators, and industry. He then expanded on this by arguing that it should be easy to agree that minor changes to the FSOC and OFR that introduce proper “checks and balances” would improve their processes.
For more information on this hearing, please click here.
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House Financial Services Committee
Subcommittee on Financial Institutions and Consumer Credit
“Examining Legislative Proposals to Reduce Regulatory Burdens on Mainstreet Job Creators”
Wednesday, October 21, 2015
Key Topics & Takeaways
- H.R. 2209: Rep. Luke Messer (R-Ind.) said his bill is aimed at an odd situation in which all American municipal bonds, “among the safest investments in the world,” are excluded from HQLA while certain foreign sovereign bonds are included. Most Subcommittee members spoke in support of the legislation.
- H.R. 2896: Rep. Stevan Pearce (R-N.M.) said Dodd-Frank regulations, which were intended for large institutions, often “bleed down” to smaller ones. Kupiec called this a natural process given that the supervisors who monitor the largest institutions are thought to be the “best and brightest” and this creates a standard that small bank examiners want to follow.
- H.R. 3340: Rep. Roger Williams (R-Texas) said H.R. 3340 would “no doubt create greater transparency [in the FSOC] where it is sorely needed.” Ireland noted that firms designated as systemically important are subject to regulation by the Federal Reserve, saying the Fed is a banking regulator and the suitability of this type of regulation for non-banks is “debatable.”
Witnesses
- Paul Kupiec, Resident Scholar, American Enterprise Institute
- Oliver Ireland, Partner, Morrison & Foerster LLP
- Marcus Stanley, Policy Director, Americans for Financial Reform
Bills Discussed
- H.R. 2121 (Rep. Stivers), the “SAFE Transitional Licensing Act of 2015”
- H.R. 2209 (Rep. Messer), to require the appropriate Federal banking agencies to treat certain municipal obligations as level 2A liquid assets, and for other purposes.
- H.R. 2287 (Rep. Mulvaney), the “National Credit Union Administration Budget Transparency Act”
- H.R. 2473 (Rep. Clay), the “Preserving Capital Access and Mortgage Liquidity Act of 2015”
- H.R. 2896 (Rep. Tipton), the “TAILOR Act”
- H.R. 2987 (Rep. Meeks), the “Community Bank Capital Clarification Act”
- H.R. 3340 (Rep. Emmer), the “Financial Stability Oversight Council Reform Act”
Opening Statements
In his opening statement, Chairman Randy Neugebauer (R-Texas) noted that the House Financial Services Committee has heard testimony throughout this session on how regulatory impediments are harming financial institutions and consumer choice. He stressed the need to reduce regulatory burdens for Main Street job creators.
Ranking Member William Lacy Clay (D-Mo.) stated that much of the Subcommittee’s work has been dedicated to finding common ground on regulatory relief and said many of the proposals to be considering during the hearing would provide “real relief for Main Street.” However, he cautioned his colleagues against proposals that have failed to attract bipartisan support and that seek to undermine the Dodd-Frank Act.
Testimony
Paul Kupiec, Resident Scholar, American Enterprise Institute
In his testimony, Paul Kupiec stated that none of the bills being considered would magnify financial sector risk or undermine Dodd-Frank. He briefly discussed H.R. 3340 and defended it for putting the Office of Financial Research (OFR) and Financial Stability Oversight Council (FSOC) under normal congressional oversight.
On H.R. 2209, Kupiec commented that many state and municipal securities are “at least as liquid” as corporate bonds, have higher ratings, and are more liquid. He cited concerns that the exclusion of municipal securities from the list of high quality liquid assets (HQLA) could damage market liquidity and called the changes in the proposed rule “appropriate and consistent with public interest.” He further called for municipal securities that satisfy the characteristics required of Level 2B assets under the liquidity coverage rule (LCR) to receive 2B treatment under the HQLA regime.
Oliver Ireland, Partner, Morrison & Foerster LLP
Oliver Ireland, in his testimony, praised H.R. 2896, the TAILOR Act, for addressing regulatory burdens facing smaller institutions that should not be subject to complex rules. On H.R. 2209, he stated that the failure to include municipal securities as HQLA would adversely affect liquidity and pricing of these obligations, and warned that this would make it more difficult for states and municipalities to obtain funding going forward. He also lauded the budgetary transparency and accountability at OFR and the FSOC that would come from H.R. 3340.
Marcus Stanley, Policy Director, Americans for Financial Reform
In his testimony, Marcus Stanley spoke in opposition of the TAILOR Act, claiming that regulators are already tailoring regulations for smaller institutions. He also spoke against H.R. 3340 by defending what he called the “political independence” of the FSOC and OFR. Stanley did not openly oppose H.R. 2209, but did raise concerns that it may be more appropriate to leave a decision on the LCR rule to the regulators themselves.
Question and Answer
Neugebauer asked about the consequences facing municipal and state bonds if they do not receive HQLA treatment from the banking regulators. Kupiec replied that any rule limiting the ability of large institutions to hold municipal securities would be bad for the market, and discussed what he called a “feedback loop” in which the currently liquid municipal bond market will become illiquid precisely because of the current LCR rule.
Ireland agreed that assets excluded from HQLA treatment will suffer and opined that the rule would shape the market and cost municipalities and states their funding. “I think it adversely affects everyone concerned,” he closed.
Stanley added that he is pleased the legislation specifies that municipal bonds must meet certain standards to be treated as Level 2A assets.
Rep. Ruben Hinojosa (D-Texas) commented that banking regulators have been unable to effectively differentiate between liquid and non-liquid municipal securities. He then asked whether H.R. 2209 effectively means that Congress would be picking winners and losers in the municipal securities market. Kupiec reject this notion, pointing out that the Federal Reserve is already beginning the rethink the treatment of municipal bonds on its own and stating that the bill is just a recognition from Congress that this is a step in the right direction.
Hinojosa expressed concern that H.R. 2209 would help large issuers but hurt smaller communities such as his own.
Rep. Gregory Meeks (D-N.Y.) expressed his belief that high quality municipal bonds should be included in the definition of Level 2A HQLA for the LCR rule, and called H.R. 2209 “an important improvement that we need to approve.”
Rep. Carolyn Maloney (D-N.Y.) stated that it makes “no sense” that the current LCR rule includes corporate bonds as HQLA but not municipal securities. She noted that the Federal Reserve has recognized this error, but added that the Office of the Comptroller of the Currency (OCC) is refusing to amend this rule and “insists on favoring corporations over municipalities.” Maloney asked if the OCC could distinguish between liquid and illiquid municipal securities just as it has been able to do with corporate bonds. Kupiec replied that the distinction can be made.
Rep. Brad Sherman (D-Calif.) agreed with Maloney’s statements. Kupiec again stressed that the Committee should consider Level 2A and Level 2B treatment for municipal securities, and Sherman responded that this should be considered either in H.R. 2209 or in subsequent regulation.
Rep. Luke Messer (R-Ind.) said his bill is aimed at an odd situation in which all American municipal bonds, “among the safest investments in the world,” are excluded from HQLA while certain foreign sovereign bonds are included. He argued that the current LCR rule drives up the cost of borrowing for municipalities, and asked if there is any reason the value of these assets should be discounted under the rule. Kupiec replied that there is no reason, and that if a security meets the liquidity criteria identified by the rule than it “ought to be counted.”
H.R. 2287, the National Credit Union Administration Budget Transparency Act
Clay asked Stanley to describe the regulatory capture concerns that arise if credit unions are able to shape the budget of the National Credit Union Administration (NCUA). Stanley explained that regulated entities may be able to use the budget process to “punish” regulators for stringent supervision. He stressed that lines between public regulatory bodies and self-regulatory organizations must be kept clear.
H.R. 2896, the TAILOR Act
Rep. Stevan Pearce (R-N.M.) said Dodd-Frank regulations, which were intended for large institutions, often “bleed down” to smaller ones. Kupiec called this a natural process given that the supervisors who monitor the largest institutions are thought to be the “best and brightest” and this creates a standard that small bank examiners want to follow.
Rep. Blaine Luetkemeyer (R-Mo.) offered support for the TAILOR Act, describing it mainly as a push to have regulators revisit their rules to judge whether past decisions still make sense.
H.R. 3340, the Financial Stability Oversight Council Reform Act
Rep. Maxine Waters (D-Calif.) warned that H.R. 3340 would eliminate the independence of the FSOC and OFR by subjecting them to the budget process, and asked Stanley what the consequences of this could be. Stanley replied that “we’ve all seen” in Washington that narrow financial interests can come to dominate processes such as financial regulation, and stressed the importance of regulator independence.
Rep. Robert Pittenger (R-N.C.) asked if there is any funding limitation for the FSOC and OFR. Kupiec explained that the two draw funding from the Treasury Department and other regulators. He continued, saying the notion that the FSOC and OFR are independent is “insane” given that the Treasury Secretary is the head of the FSOC and the OFR is an office within Treasury.
Rep. Roger Williams (R-Texas) said H.R. 3340 would “no doubt create greater transparency where it is sorely needed.” He asked whether the FSOC has been transparency in its designations of non-banks. Kupiec and Ireland both answered that it has not been transparent.
Williams followed up by asking how this non-transparency system of designation has been harmful to taxpayers and consumers. Kupiec answered that any process by which sweeping new regulations can be imposed with no justifiable cause is costly and problematic. Ireland added that firms designated as systemically important are subject to regulation by the Federal Reserve, noting the Fed is a banking regulator and that the suitability of this type of regulation for non-banks is “debatable.”
Rep. Andy Barr (R-Ky.) asked Kupiec to respond to Stanley’s assertions of the importance of independence for the FSOC and OFR. Kupiec reiterated that the FSOC is not transparent or apolitical because it is headed by the Secretary of the Treasury.
Rep. Tom Emmer (R-Minn.) commented that he believes everyone can agree that financial regulations are best administered when there is appropriate interaction between Congress, regulators, and industry. He then expanded on this by arguing that it should be easy to agree that minor changes to the FSOC and OFR that introduce proper “checks and balances” would improve their processes.
For more information on this hearing, please click here.