House Financial Services Committee on the Impact of Dodd -Frank
House Financial Services Committee
“Assessing the Impact of the Dodd-Frank Act Four Years Later”
Wednesday, July 23, 2014
Key Topics & Takeaways
- SIFIs and TBTF: All witnesses, including Frank, agreed that the $50 billion threshold for SIFI designation is arbitrary and too low.
- Community Banks: Republicans were critical of the Dodd-Frank Act’s impact on community banks, blaming it for the significant decrease in the number of small banks.
- Risk Retention: Frank highlighted risk retention for mortgage lenders as one of more most important parts of the Dodd-Frank Act.
- Cost-Benefit Analysis and Regulator Funding: Frank said measures such as imposing a cost-benefit analysis mandate on regulators or cutting their funding are ways for Republicans to restrict rulemaking without publically calling for a repeal of the Dodd-Frank Act.
- Volcker Rule: Carfang warned that the Volcker Rule would hurt liquidity in the marketplace.
- Derivatives and End-Users: Deas said failure to pass end-user protections would negatively many businesses that use derivatives to facilitate growth, expansion, and job creation.
- GSE Reform: Frank supported housing finance reform, but criticized the PATH Act and Republicans for failing to pass a bill in the four years that they controlled the House.
- Compliance Costs: Mulvaney said the need to hire new compliance officers is causing a shift “from a productive financial sector to a compliant financial sector.”
Speakers
- Mr. Dale K. Wilson, Chairman, President, and Chief Executive Officer, First State Bank
- Mr. Anthony J. Carfang, Partner, Treasury Strategies, Inc.
- The Honorable Barney Frank, former Chairman, House Committee on Financial Services
- Mr. Thomas C. Deas, Vice President & Treasurer, FMC Corporation, on behalf of the Coalition for Derivatives End-Users
- Mr. Paul H. Kupiec, Resident Scholar, American Enterprise Institute
Opening Statements
In his opening statement, Chairman Jeb Hensarling (R-Texas) said the Dodd-Frank Act was based on the “false premise” that deregulation caused the 2008 financial crisis. He claimed that “regulatory burden” increased in the decades leading up to the crisis and that Fannie Mae and Freddie Mac encouraged mortgage lending to those who could not afford homes. He said Dodd-Frank was the “wrong remedy” and only added “incomprehensible complexity to incomprehensible complexity.”
Dodd-Frank, Hensarling asserted “codified too big to fail into law,” made the big banks bigger, and authorized “unelected and unaccountable bureaucrats” to define financial stability. He said Dodd-Frank regulations impose high risk management costs on community banks, which at worst puts them out of business and at best makes it more difficult for them to serve small businesses, families, and farmers. He claimed that the Volcker Rule has decreased liquidity, making it more difficult for companies to access working capital.
In her opening statement, Ranking Member Maxine Waters (D-Calif.) asserted that years of deregulation, “lax enforcement,” and “zero accountability” caused the financial crisis which “destroyed more than $13 trillion in growth” and caused foreclosures and high unemployment figures. Dodd-Frank, she said, augmented oversight of Wall Street, created “tools to end too big to fail,” eliminated regulatory loopholes, and “restored responsibility and accountability to the financial system.” She stressed that it was not government low income housing assistance but rather private mortgage securitization that cause the crisis.
Waters praised the work of the Consumer Financial Protection Bureau (CFPB) and endorsed the Volcker Rule for forcing banks to invest “in the real economy.” She criticized Republicans for attempting to restore the pre-crisis regulatory regime and for failing to offer alternative proposals to address large financial institution resolution and housing finance reform.
Rep. Shelley Moore Capito (R-W.Va.) stressed the wide scope of Dodd-Frank, noting that the legislation was 2300 pages long, that it authorized 4000 new rules, and that 24 percent of those rules have not yet been proposed. She said Dodd-Frank has had a “detrimental impact” on Main Street lenders, businesses, and consumers. The “central flaw” of Dodd-Frank, she said, is that it is based on the premise that lending decisions are best determined by “Washington bureaucrats” rather than by local lenders. She expressed concern that the application of capital standards to insurance companies could result in higher premiums for policy holders.
Rep. Carolyn Maloney (D-N.Y.) noted that allegations of overly intrusive regulation also plagued the financial reforms enacted in response to the Great Depression, which now form the “cornerstone” of the “robust” United States financial industry. She stressed that proper financial reform “takes time” as it requires congressional, regulatory, and industrial flexibility.
Rep. Randy Neugebauer (R-Texas) called Dodd-Frank the “most far reaching” reform of the financial sector since the Great Depression. Dodd-Frank compliance, he said, requires “24 million man hours per year,” a cost that hurts small businesses and discourages lending.
Rep. Sean Duffy (R-Wisc.) alleged that Dodd-Frank restricted consumer choice and created threats to the financial system. Dodd-Frank, he said, made it harder for small banks to serve the American people. He said the CFPB hurts consumers by imposing regulations such as the qualified mortgage (QM) rule that restrict consumer access to financial products.
Rep. Jim Himes (D-Conn.) discussed the 80 page Dodd-Frank review published by Committee Republicans, noting that it discusses only Titles 1 and 2 of a 16 title bill. He said the report fails to mention the successes of the CFPB, such as limiting the extension of “toxic mortgages,” the first meaningful regulation of the derivatives market, and the fact that financial markets are currently “thriving.” He said that “none of us know” whether effective tools to address too big to fail have been implemented, and that legislators must seek to answer this “terribly important question.”
Rep. Marlin Stutzman (R-Ind.) asserted that Dodd-Frank failed to end bailouts and to improve the economy. He accused Dodd-Frank of putting the interests of regulators before those of taxpayers and consumers. Loans, he explained, are now harder to come by for consumers. He criticized Senate Democrats for not considering bipartisan Dodd-Frank reform legislation passed by the House.
Witness Testimony
In his testimony, Dale Wilson, Chairman, President and CEO of First State Bank, said the regulatory burden for small banks has “multiplied tenfold” due to the implementation of Dodd-Frank. Managing the “tsunami of regulation,” he said, can be “overwhelming” for a small bank. He noted that there are 80 fewer banks in Texas than there were before the crisis. These banks, he explained, could not survive the increase in regulatory costs and were forced to merge with larger banks. The costs of this decline in small bank activity, he said, are felt by small town borrowers and businesses. He said new QM rules caused his bank to stop issuing mortgage loans because the associated costs and risks are too high.
In his testimony, Anthony Carfang, Partner at Treasury Strategies, Inc., said that Dodd-Frank and the accompanying regulations have created an atmosphere of “fear, uncertainty, and doubt” in the financial markets. Delays in implementation, ambiguities, and vague languages, he explained, have caused “tremendous uncertainty that is a drag on the economy.” He asserted that designating a firm as a systemically important financial institution (SIFI) sends the signal that the firm is protected by the government. He noted that cash on balance sheets has grown from 9 percent to 12 percent of GDP as a consequence of regulatory uncertainty. This money, he said, should be in the economy contributing to growth. Banks are getting bigger, he said, so Dodd-Frank has only exacerbated too big to fail, and the drastic growth of the Federal Reserve balance sheet is the “next taxpayer bailout in the making.” He recommended eliminating the Financial Stability Oversight Council (FSOC), eliminating ambiguities, and creating carve-out protections for businesses not directly involved in the financial markets.
In his testimony, former Rep. Barney Frank (D-Mass.) said the Committee report’s reference to former Treasury Secretary Timothy Geithner was wrongheaded. Geithner, he explained believes that government bailouts are inevitable, and that Dodd-Frank eliminated too many bailout methods. Frank cited the efforts of financial institutions to avoid SIFI designation as evidence that SIFI designation is not a desirable implicit government guarantee. He stressed that the law prohibits the Fed from giving money to insolvent financial institutions. He expressed his disbelief that the decline in extension of low income people was criticized because such loans were contributed to the financial crisis. He noted that the Republicans have been in control of the House for four years without taking action on housing finance reform.
In his testimony, Thomas Deas, Vice President and Treasurer of FMC Corporation and appearing on behalf of the Coalition for Derivatives End-Users, said that end-users make up only 10 percent of the derivatives market and were not engaged in the speculative or risky trading that contributed to the crisis. End-users, he explained use derivatives to hedge and offset “everyday business risks,” and should therefore be exempt from regulations aimed at swap dealers. He expressed concern about the “web of at times conflicting rules, including cross-border conflicts, that lead to the risk of foreign regulatory arbitrage and impose a “competitive burden that could limit growth.”
In his testimony, Paul Kupiec, Resident Scholar at the American Enterprise Institute, said Dodd-Frank had failed to meet its primary objectives of removing the perception of too big to fail and removing the need for government intervention to prevent the failure of a large financial institution from adversely impacting financial stability. He noted that after Dodd-Frank , large banks have enjoyed a “funding cost subsidy of 22 basis points” over smaller banks. He said prudential regulation has become “so intrusive” that it is “not a stretch” to say that the largest financial institutions are run in part by the Fed. He claimed that resolution plans are not “prepackaged bankruptcy,” as creditors do not accept the restructuring plans and firms are not obligated to follow them if they enter bankruptcy. He asserted that because Title and the Federal Deposit Insurance Corporation’s (FDIC) single point of entry approach insure all the liabilities of a financial institution’s subsidiaries, orderly liquidation authority constitutes a government bank bailout.
Question and Answer
Rep. Randy Luetkemeyer (R-Mo.) said it is not the size of an institution, but rather its size, risk and complexity that should be considered during SIFI designation. Carfang noted that once a firm is designated, it falls under the jurisdiction of the Financial Stability Oversight Council (FSOC), which can subject it to a sort of “double jeopardy” when FSOC feels other regulators have failed in their oversight.
Maloney stressed that the law forbids the use of public money to keep a financial institution in business. She asked Frank to speak about how Dodd-Frank protects taxpayer dollars. Frank noted that Democrats advocated the use of assessments on institutions larger than $50 billion to fund resolutions, but that Senate Republicans objected. Instead, explained Frank, Republicans placed the cost on taxpayers by allowing the FDIC to borrow money from the Treasury to fund resolutions. He stressed that Dodd-Frank created “death panels” for failing large financial institutions by requiring firms to enter receivership before debts are addressed.
Rep. Scott Garrett (R-N.J.) asked whether Frank intended an FSOC designation of a non-bank institution as a SIFI to last “into perpetuity.” Frank replied that he did not, and that he was “skeptical” that FSOC should designate non-banks as SIFIs at all. Kupiec agreed that FSOC should not designate non-banks as SIFIs, and said that if they do, the designation should be reviewed annually. He criticized FSOC criteria for being “unclear.”
Garrett asked whether the cost of the resolution by a megabank should be borne by the SIFIs. Kupiec replied that it should, while Frank noted that $50 billion and larger institutions should also contribute. Garrett noted that asset managers must also contribute, even though they hold less capital. He asked whether the retirement funds of a “widow,” for example, might be used to make the payment. Kupiec said that they might, as “the money would have to come from somewhere.” Frank said the law addressed that concern by including a formula that requires asset managers to contribute a “much smaller share of what they have.”
Rep. Mick Mulvaney (R-S.C.) asked if it would be better to replace the $50 billion threshold for SIFI designation with something that looks at actual business models. Kupiec said the threshold is too low, adding that banks between $50 and $250 billion in total assets are not systemic until they fail and are absorbed by a larger bank. He said Title I should be used to direct the Federal Deposit Insurance Corporation (FDIC) to break up failing banks rather than selling them to an even larger institution. He argued that the notion that the FDIC handles big banks well is “ridiculous.”
Neugebauer asked what benefits Dodd-Frank has given larger institutions. Kupiec explained that close government oversight and involvement with the larger banks creates the impression among investors that the government will not let those banks fail. Larger banks, therefore, enjoy a cost of funding advantage over smaller banks, he said. He added that Dodd-Frank will continue to increase consolidation in the banking industry and encourage greater concentration of assets and deposits in larger institutions.
Frank argued that if it was a benefit for institutions to be designated as SIFIs, then they would not be fighting against so strongly against the closer supervision.
Rep. Brad Sherman (D-Calif.) criticized Hensarling for not holding markups on “the only two legislative suggestions” for addressing too big to fail. He asked whether Wilson agreed that the Qualified Residential Mortgage (QRM) rule should be issued “promptly.” Wilson said that if a bank keeps a mortgage in portfolio, i.e. retains 100 percent of the risk, the QRM rule should not apply.
Rep. Stephen Lynch (D-Mass.) said regulators should look at factors beyond size, such as leverage, off-sheet balance sheet exposure, and the degree to which a firm is already regulated. He asked Frank if believes that asset managers should be designated as SIFIs, to which Frank replied “absolutely not” and explained that they do not post a systemic threat.
Rep. David Scott (D-Ga.) asked Frank if a bank’s systemic importance should be based solely on its size. Frank answered that any number is arbitrary, but that raising the current $50 billion threshold is reasonable and a very high number should be used as a cutoff. For firms below the cutoff, other conditions should be considered.
Himes noted that it is not possible to know whether TBTF has ended until another large institution has to be resolved. He said that Dodd-Frank and the ensuing regulations have established tools for regulators to monitor and change the nature of businesses of SIFIs, as well as set procedures to resolve them. He asked what more could be done. Frank said the priority is not to end TBTF, but rather to keep large institutions from failing by eliminating risky practices. Carfang pointed out that there is still no clear definition for “systemically important.”
Hensarling noted that Wilson was not the only community banker who had expressed concerns about the Dodd-Frank regulatory burden. He asked whether Wilson believed Dodd-Frank was “strangling” community banks. Wilson said Dodd-Frank was indeed “strangling” small banks, explaining that even the retraining costs associated with regulatory change posed “challenges” to a 17 employee bank such as his.
Hensarling cited a study showing a reduction of about 800 community banks since the implementation of Dodd-Frank. He claimed that this decline has hurt moderate and low income people by increasing the costs they pay on credit cards and mortgages. Wilson agreed that Dodd-Frank, by suppressing activity in the community banking sector, has hurt moderate and low income people by limiting their access to credit.
Waters noted that a bank under $2 billion can keep its loans in portfolio under Dodd-Frank. She asked Frank what steps he had taken to assist smaller banks. Frank reiterated that tougher standards on loans to low income borrowers were aimed at addressing a root cause of the financial crisis. He stated that banks who keep loans in portfolio should not face regulation-associated problems. Frank stressed “risk retention” as the best way to ensure the quality of loans. He endorsed exempting community banks from Volcker Rule and compensation requirement compliance as a means of easing compliance costs.
Luetkemeyer called it “mindboggling” to see the effect of Dodd-Frank’s regulatory onslaught, adding that he hears about fear and uncertainty whenever speaking to bankers. He said that while community bankers were not part of the problem leading up to the crisis, they were roped into the solution. He explained that it is not a bad economy, but rather the cumulative cost of compliance that is hurting small bankers.
Duffy remarked that rules and regulations intended for larger banks have come down to community banks. He argued that small banks are now at a competitive disadvantage relative to larger institutions because the large banks have economies of scale to deal with regulation.
Duffy asked if CFPB rules, intended for large banks, have had an impact on community banks. Wilson replied that while community banks are not examined by the CFPB, they are still subject to agency’s rules.
Rep. Robert Hurt (R-W.Va.) noted that access to capital is crucial to creating jobs and asked if community banks are important to providing this capital, and whether the consolidation of community banks in itself creates systemic risk. Kupiec said community bankers are especially important in rural areas where large banks do not have branches, and said losing these banks would be bad for the economy. Carfang lamented that the loss of community banks is marking a transition from relationship-based banking to compliance banking. Frank states that it is not a systemic risk issue because many of the small banks are absorbed into regional banks.
Rep. Al Green (D-Texas) stated that when Congressmen talk about community bank problems, they discuss rural and small town banks. However, he continued, when the discussion turns to legislation they include banks with assets up to $40 billion. He argued that the definition of “small bank” is too vague.
Rep. Stevan Pearce (D-N.M.) asked what other options low-income borrowers have when community banks shut down in small towns. Wilson said there are payday lenders available, to which Pearce replied that unregulated lenders are filling the vacuum. He said that Dodd-Frank leaves rural communities “without a paddle.”
Rep. Andy Barr (R-Ky.) asked if Frank would support a proposal to give a qualified mortgage safe harbor status on loans in which the lender retains the risk. Frank said he would.
Rep. Keith Ellison (D-Minn.) asked Frank what elements of the Dodd-Frank Act he was most proud of. Frank answered that risk retention in mortgage lending was the biggest piece but also the element he worried the most about. He argued that the ability of lenders to take risks without having to carry responsibility for it is what led to the financial crisis.
Cost Benefit Analysis and Regulator Funding
Rep. Gwen Moore (D-Wis.) asked about legislation that would hamper the ability of regulators to operate by imposing practices such as mandatory cost-benefit analysis. Frank answered that such legislation requiring cost-benefit analysis that could go through courts is just an indirect attack from legislators who are unwilling to advocate for a full repeal of Dodd-Frank because of the law’s popularity.
Ellison also asked about the lack of funding for regulatory agencies, to which Frank replied that he is proud the CFPB was “insulated from strangulation through non-appropriation” as has happened to CFTC. He stated that Republicans have been just as critical of Dodd-Frank as they have of the Affordable Car Act, but do not have to will to go ahead the bill’s popular support and repeal it, so they are instead looking to cut funding to regulators.
Rep. Lynn Westmoreland (R-Ga.) asked Kupiec if he believes that regulators objectively implement a cost-benefit analysis while making new rules. “Absolutely not,” Kupiec replied. He commented that when he worked for the FDIC, they never any cost-benefit analysis, and that he never saw such an analysis from the Federal Reserve of Office of the Comptroller of the Currency on the Basel rules.
Stutzman asked about the impact of the Volcker Rule on liquidity and the availability of credit. Carfang explained that the rule would eliminate proprietary trading, but that this would make markets less-liquid with fewer buyers and sellers.
Following up, Stutzman pointed out that the Volcker Rule will take effect at the same time as Basel III, and asked about the combined impact. Carfang said the outcome in unknown, but that corporate treasurers and small bankers would be like “deer in headlights.”
Rep. Frank Lucas (R-Okla.) asked how Deas’ business would be impacted if the Consumer Protection and End-User Relief Act were not enacted. Deas said that failure to pass end-user protections would negatively impact his business and others, as many businesses use derivatives to facilitate growth, expansion, and job creation.
Rep. Ed Royce (R-Calif.) stated that getting efficient global derivatives markets is important, and that it is important to understand how Europe and Asia are implementing reforms and to act in concert with them. He asked if the failure to deliver a joint rule on how Title VII will be applied outside the U.S. is hurting the ability of businesses to manage risk. Carfang replied that this absolutely hurts, and that when markets are clouded or muted corporate CFOs will change the way they invest. Deas agreed that the lack of harmonization between the Commodity Futures Trading Commission (CFTC) and banking regulators has created uncertainty and can put Americans at a competitive disadvantage.
Rep. Steve Stivers (R-Ohio) asked what would happen without a fix to the centralized clearing margin requirement for end-users. Deas answered that this would increase the uncertainty of the end-user margin exemption, making end-users post cash margin that could otherwise be used for other purposes.
Rep. John Carney (D-Del.) spoke about his housing finance reform bill, the Partnership to Strengthen Home Ownership Act, which he said would price risk appropriately and provide an explicit government guarantee. Frank said he believes it is time to “get rid of” Fannie Mae and Freddie Mac, and that government action is needed to preserve the 30-year fixed-rate mortgage. He welcome Carney’s bill as well as the Johnson-Crapo bill, but stated that the Protecting American Taxpayers and Homeowners Act clearly would not pass through the House. He predicted that the Republican-controlled House of Representatives would fail in passing housing finance reform for the fourth consecutive year.
Hensarling countered and noted that the Democrat-controlled Senate was also “having trouble” passing a bill, and called the president “unengaged.”
Capito asked about the impact “moving forward” of the rules that still need to be written. Kupiec said the regulatory burden continues to be “significant.” He noted that some banks are laying off employees but hiring compliance officers.
Rep. Nydia Velasquez (D-N.Y.) asked whether average people were “buying” the rhetoric that Dodd-Frank has hurt the economy despite observing the rebounding economy, easier access to small business capital, and strong markets. Frank said they were not, and noted that Republicans had killed a bill that would have expanded bank lending to small businesses by extending transaction account guarantees. He stressed that regulations such as the Volcker Rule were “not intended to limit small banks.” He speculated that lawyers had persuaded banks to unnecessarily expand their compliance operations.
Mulvaney pointed out that banks are hiring thousands of compliance officers, yet total employment is decreasing, and warned that we are moving “from a productive financial sector to a compliant financial sector.”
For more information on this hearing, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:General,Hearing Summaries Agency:House Financial Services Committee,Publish Year:2014
House Financial Services Committee
“Assessing the Impact of the Dodd-Frank Act Four Years Later”
Wednesday, July 23, 2014
Key Topics & Takeaways
- SIFIs and TBTF: All witnesses, including Frank, agreed that the $50 billion threshold for SIFI designation is arbitrary and too low.
- Community Banks: Republicans were critical of the Dodd-Frank Act’s impact on community banks, blaming it for the significant decrease in the number of small banks.
- Risk Retention: Frank highlighted risk retention for mortgage lenders as one of more most important parts of the Dodd-Frank Act.
- Cost-Benefit Analysis and Regulator Funding: Frank said measures such as imposing a cost-benefit analysis mandate on regulators or cutting their funding are ways for Republicans to restrict rulemaking without publically calling for a repeal of the Dodd-Frank Act.
- Volcker Rule: Carfang warned that the Volcker Rule would hurt liquidity in the marketplace.
- Derivatives and End-Users: Deas said failure to pass end-user protections would negatively many businesses that use derivatives to facilitate growth, expansion, and job creation.
- GSE Reform: Frank supported housing finance reform, but criticized the PATH Act and Republicans for failing to pass a bill in the four years that they controlled the House.
- Compliance Costs: Mulvaney said the need to hire new compliance officers is causing a shift “from a productive financial sector to a compliant financial sector.”
Speakers
- Mr. Dale K. Wilson, Chairman, President, and Chief Executive Officer, First State Bank
- Mr. Anthony J. Carfang, Partner, Treasury Strategies, Inc.
- The Honorable Barney Frank, former Chairman, House Committee on Financial Services
- Mr. Thomas C. Deas, Vice President & Treasurer, FMC Corporation, on behalf of the Coalition for Derivatives End-Users
- Mr. Paul H. Kupiec, Resident Scholar, American Enterprise Institute
Opening Statements
In his opening statement, Chairman Jeb Hensarling (R-Texas) said the Dodd-Frank Act was based on the “false premise” that deregulation caused the 2008 financial crisis. He claimed that “regulatory burden” increased in the decades leading up to the crisis and that Fannie Mae and Freddie Mac encouraged mortgage lending to those who could not afford homes. He said Dodd-Frank was the “wrong remedy” and only added “incomprehensible complexity to incomprehensible complexity.”
Dodd-Frank, Hensarling asserted “codified too big to fail into law,” made the big banks bigger, and authorized “unelected and unaccountable bureaucrats” to define financial stability. He said Dodd-Frank regulations impose high risk management costs on community banks, which at worst puts them out of business and at best makes it more difficult for them to serve small businesses, families, and farmers. He claimed that the Volcker Rule has decreased liquidity, making it more difficult for companies to access working capital.
In her opening statement, Ranking Member Maxine Waters (D-Calif.) asserted that years of deregulation, “lax enforcement,” and “zero accountability” caused the financial crisis which “destroyed more than $13 trillion in growth” and caused foreclosures and high unemployment figures. Dodd-Frank, she said, augmented oversight of Wall Street, created “tools to end too big to fail,” eliminated regulatory loopholes, and “restored responsibility and accountability to the financial system.” She stressed that it was not government low income housing assistance but rather private mortgage securitization that cause the crisis.
Waters praised the work of the Consumer Financial Protection Bureau (CFPB) and endorsed the Volcker Rule for forcing banks to invest “in the real economy.” She criticized Republicans for attempting to restore the pre-crisis regulatory regime and for failing to offer alternative proposals to address large financial institution resolution and housing finance reform.
Rep. Shelley Moore Capito (R-W.Va.) stressed the wide scope of Dodd-Frank, noting that the legislation was 2300 pages long, that it authorized 4000 new rules, and that 24 percent of those rules have not yet been proposed. She said Dodd-Frank has had a “detrimental impact” on Main Street lenders, businesses, and consumers. The “central flaw” of Dodd-Frank, she said, is that it is based on the premise that lending decisions are best determined by “Washington bureaucrats” rather than by local lenders. She expressed concern that the application of capital standards to insurance companies could result in higher premiums for policy holders.
Rep. Carolyn Maloney (D-N.Y.) noted that allegations of overly intrusive regulation also plagued the financial reforms enacted in response to the Great Depression, which now form the “cornerstone” of the “robust” United States financial industry. She stressed that proper financial reform “takes time” as it requires congressional, regulatory, and industrial flexibility.
Rep. Randy Neugebauer (R-Texas) called Dodd-Frank the “most far reaching” reform of the financial sector since the Great Depression. Dodd-Frank compliance, he said, requires “24 million man hours per year,” a cost that hurts small businesses and discourages lending.
Rep. Sean Duffy (R-Wisc.) alleged that Dodd-Frank restricted consumer choice and created threats to the financial system. Dodd-Frank, he said, made it harder for small banks to serve the American people. He said the CFPB hurts consumers by imposing regulations such as the qualified mortgage (QM) rule that restrict consumer access to financial products.
Rep. Jim Himes (D-Conn.) discussed the 80 page Dodd-Frank review published by Committee Republicans, noting that it discusses only Titles 1 and 2 of a 16 title bill. He said the report fails to mention the successes of the CFPB, such as limiting the extension of “toxic mortgages,” the first meaningful regulation of the derivatives market, and the fact that financial markets are currently “thriving.” He said that “none of us know” whether effective tools to address too big to fail have been implemented, and that legislators must seek to answer this “terribly important question.”
Rep. Marlin Stutzman (R-Ind.) asserted that Dodd-Frank failed to end bailouts and to improve the economy. He accused Dodd-Frank of putting the interests of regulators before those of taxpayers and consumers. Loans, he explained, are now harder to come by for consumers. He criticized Senate Democrats for not considering bipartisan Dodd-Frank reform legislation passed by the House.
Witness Testimony
In his testimony, Dale Wilson, Chairman, President and CEO of First State Bank, said the regulatory burden for small banks has “multiplied tenfold” due to the implementation of Dodd-Frank. Managing the “tsunami of regulation,” he said, can be “overwhelming” for a small bank. He noted that there are 80 fewer banks in Texas than there were before the crisis. These banks, he explained, could not survive the increase in regulatory costs and were forced to merge with larger banks. The costs of this decline in small bank activity, he said, are felt by small town borrowers and businesses. He said new QM rules caused his bank to stop issuing mortgage loans because the associated costs and risks are too high.
In his testimony, Anthony Carfang, Partner at Treasury Strategies, Inc., said that Dodd-Frank and the accompanying regulations have created an atmosphere of “fear, uncertainty, and doubt” in the financial markets. Delays in implementation, ambiguities, and vague languages, he explained, have caused “tremendous uncertainty that is a drag on the economy.” He asserted that designating a firm as a systemically important financial institution (SIFI) sends the signal that the firm is protected by the government. He noted that cash on balance sheets has grown from 9 percent to 12 percent of GDP as a consequence of regulatory uncertainty. This money, he said, should be in the economy contributing to growth. Banks are getting bigger, he said, so Dodd-Frank has only exacerbated too big to fail, and the drastic growth of the Federal Reserve balance sheet is the “next taxpayer bailout in the making.” He recommended eliminating the Financial Stability Oversight Council (FSOC), eliminating ambiguities, and creating carve-out protections for businesses not directly involved in the financial markets.
In his testimony, former Rep. Barney Frank (D-Mass.) said the Committee report’s reference to former Treasury Secretary Timothy Geithner was wrongheaded. Geithner, he explained believes that government bailouts are inevitable, and that Dodd-Frank eliminated too many bailout methods. Frank cited the efforts of financial institutions to avoid SIFI designation as evidence that SIFI designation is not a desirable implicit government guarantee. He stressed that the law prohibits the Fed from giving money to insolvent financial institutions. He expressed his disbelief that the decline in extension of low income people was criticized because such loans were contributed to the financial crisis. He noted that the Republicans have been in control of the House for four years without taking action on housing finance reform.
In his testimony, Thomas Deas, Vice President and Treasurer of FMC Corporation and appearing on behalf of the Coalition for Derivatives End-Users, said that end-users make up only 10 percent of the derivatives market and were not engaged in the speculative or risky trading that contributed to the crisis. End-users, he explained use derivatives to hedge and offset “everyday business risks,” and should therefore be exempt from regulations aimed at swap dealers. He expressed concern about the “web of at times conflicting rules, including cross-border conflicts, that lead to the risk of foreign regulatory arbitrage and impose a “competitive burden that could limit growth.”
In his testimony, Paul Kupiec, Resident Scholar at the American Enterprise Institute, said Dodd-Frank had failed to meet its primary objectives of removing the perception of too big to fail and removing the need for government intervention to prevent the failure of a large financial institution from adversely impacting financial stability. He noted that after Dodd-Frank , large banks have enjoyed a “funding cost subsidy of 22 basis points” over smaller banks. He said prudential regulation has become “so intrusive” that it is “not a stretch” to say that the largest financial institutions are run in part by the Fed. He claimed that resolution plans are not “prepackaged bankruptcy,” as creditors do not accept the restructuring plans and firms are not obligated to follow them if they enter bankruptcy. He asserted that because Title and the Federal Deposit Insurance Corporation’s (FDIC) single point of entry approach insure all the liabilities of a financial institution’s subsidiaries, orderly liquidation authority constitutes a government bank bailout.
Question and Answer
Rep. Randy Luetkemeyer (R-Mo.) said it is not the size of an institution, but rather its size, risk and complexity that should be considered during SIFI designation. Carfang noted that once a firm is designated, it falls under the jurisdiction of the Financial Stability Oversight Council (FSOC), which can subject it to a sort of “double jeopardy” when FSOC feels other regulators have failed in their oversight.
Maloney stressed that the law forbids the use of public money to keep a financial institution in business. She asked Frank to speak about how Dodd-Frank protects taxpayer dollars. Frank noted that Democrats advocated the use of assessments on institutions larger than $50 billion to fund resolutions, but that Senate Republicans objected. Instead, explained Frank, Republicans placed the cost on taxpayers by allowing the FDIC to borrow money from the Treasury to fund resolutions. He stressed that Dodd-Frank created “death panels” for failing large financial institutions by requiring firms to enter receivership before debts are addressed.
Rep. Scott Garrett (R-N.J.) asked whether Frank intended an FSOC designation of a non-bank institution as a SIFI to last “into perpetuity.” Frank replied that he did not, and that he was “skeptical” that FSOC should designate non-banks as SIFIs at all. Kupiec agreed that FSOC should not designate non-banks as SIFIs, and said that if they do, the designation should be reviewed annually. He criticized FSOC criteria for being “unclear.”
Garrett asked whether the cost of the resolution by a megabank should be borne by the SIFIs. Kupiec replied that it should, while Frank noted that $50 billion and larger institutions should also contribute. Garrett noted that asset managers must also contribute, even though they hold less capital. He asked whether the retirement funds of a “widow,” for example, might be used to make the payment. Kupiec said that they might, as “the money would have to come from somewhere.” Frank said the law addressed that concern by including a formula that requires asset managers to contribute a “much smaller share of what they have.”
Rep. Mick Mulvaney (R-S.C.) asked if it would be better to replace the $50 billion threshold for SIFI designation with something that looks at actual business models. Kupiec said the threshold is too low, adding that banks between $50 and $250 billion in total assets are not systemic until they fail and are absorbed by a larger bank. He said Title I should be used to direct the Federal Deposit Insurance Corporation (FDIC) to break up failing banks rather than selling them to an even larger institution. He argued that the notion that the FDIC handles big banks well is “ridiculous.”
Neugebauer asked what benefits Dodd-Frank has given larger institutions. Kupiec explained that close government oversight and involvement with the larger banks creates the impression among investors that the government will not let those banks fail. Larger banks, therefore, enjoy a cost of funding advantage over smaller banks, he said. He added that Dodd-Frank will continue to increase consolidation in the banking industry and encourage greater concentration of assets and deposits in larger institutions.
Frank argued that if it was a benefit for institutions to be designated as SIFIs, then they would not be fighting against so strongly against the closer supervision.
Rep. Brad Sherman (D-Calif.) criticized Hensarling for not holding markups on “the only two legislative suggestions” for addressing too big to fail. He asked whether Wilson agreed that the Qualified Residential Mortgage (QRM) rule should be issued “promptly.” Wilson said that if a bank keeps a mortgage in portfolio, i.e. retains 100 percent of the risk, the QRM rule should not apply.
Rep. Stephen Lynch (D-Mass.) said regulators should look at factors beyond size, such as leverage, off-sheet balance sheet exposure, and the degree to which a firm is already regulated. He asked Frank if believes that asset managers should be designated as SIFIs, to which Frank replied “absolutely not” and explained that they do not post a systemic threat.
Rep. David Scott (D-Ga.) asked Frank if a bank’s systemic importance should be based solely on its size. Frank answered that any number is arbitrary, but that raising the current $50 billion threshold is reasonable and a very high number should be used as a cutoff. For firms below the cutoff, other conditions should be considered.
Himes noted that it is not possible to know whether TBTF has ended until another large institution has to be resolved. He said that Dodd-Frank and the ensuing regulations have established tools for regulators to monitor and change the nature of businesses of SIFIs, as well as set procedures to resolve them. He asked what more could be done. Frank said the priority is not to end TBTF, but rather to keep large institutions from failing by eliminating risky practices. Carfang pointed out that there is still no clear definition for “systemically important.”
Hensarling noted that Wilson was not the only community banker who had expressed concerns about the Dodd-Frank regulatory burden. He asked whether Wilson believed Dodd-Frank was “strangling” community banks. Wilson said Dodd-Frank was indeed “strangling” small banks, explaining that even the retraining costs associated with regulatory change posed “challenges” to a 17 employee bank such as his.
Hensarling cited a study showing a reduction of about 800 community banks since the implementation of Dodd-Frank. He claimed that this decline has hurt moderate and low income people by increasing the costs they pay on credit cards and mortgages. Wilson agreed that Dodd-Frank, by suppressing activity in the community banking sector, has hurt moderate and low income people by limiting their access to credit.
Waters noted that a bank under $2 billion can keep its loans in portfolio under Dodd-Frank. She asked Frank what steps he had taken to assist smaller banks. Frank reiterated that tougher standards on loans to low income borrowers were aimed at addressing a root cause of the financial crisis. He stated that banks who keep loans in portfolio should not face regulation-associated problems. Frank stressed “risk retention” as the best way to ensure the quality of loans. He endorsed exempting community banks from Volcker Rule and compensation requirement compliance as a means of easing compliance costs.
Luetkemeyer called it “mindboggling” to see the effect of Dodd-Frank’s regulatory onslaught, adding that he hears about fear and uncertainty whenever speaking to bankers. He said that while community bankers were not part of the problem leading up to the crisis, they were roped into the solution. He explained that it is not a bad economy, but rather the cumulative cost of compliance that is hurting small bankers.
Duffy remarked that rules and regulations intended for larger banks have come down to community banks. He argued that small banks are now at a competitive disadvantage relative to larger institutions because the large banks have economies of scale to deal with regulation.
Duffy asked if CFPB rules, intended for large banks, have had an impact on community banks. Wilson replied that while community banks are not examined by the CFPB, they are still subject to agency’s rules.
Rep. Robert Hurt (R-W.Va.) noted that access to capital is crucial to creating jobs and asked if community banks are important to providing this capital, and whether the consolidation of community banks in itself creates systemic risk. Kupiec said community bankers are especially important in rural areas where large banks do not have branches, and said losing these banks would be bad for the economy. Carfang lamented that the loss of community banks is marking a transition from relationship-based banking to compliance banking. Frank states that it is not a systemic risk issue because many of the small banks are absorbed into regional banks.
Rep. Al Green (D-Texas) stated that when Congressmen talk about community bank problems, they discuss rural and small town banks. However, he continued, when the discussion turns to legislation they include banks with assets up to $40 billion. He argued that the definition of “small bank” is too vague.
Rep. Stevan Pearce (D-N.M.) asked what other options low-income borrowers have when community banks shut down in small towns. Wilson said there are payday lenders available, to which Pearce replied that unregulated lenders are filling the vacuum. He said that Dodd-Frank leaves rural communities “without a paddle.”
Rep. Andy Barr (R-Ky.) asked if Frank would support a proposal to give a qualified mortgage safe harbor status on loans in which the lender retains the risk. Frank said he would.
Rep. Keith Ellison (D-Minn.) asked Frank what elements of the Dodd-Frank Act he was most proud of. Frank answered that risk retention in mortgage lending was the biggest piece but also the element he worried the most about. He argued that the ability of lenders to take risks without having to carry responsibility for it is what led to the financial crisis.
Cost Benefit Analysis and Regulator Funding
Rep. Gwen Moore (D-Wis.) asked about legislation that would hamper the ability of regulators to operate by imposing practices such as mandatory cost-benefit analysis. Frank answered that such legislation requiring cost-benefit analysis that could go through courts is just an indirect attack from legislators who are unwilling to advocate for a full repeal of Dodd-Frank because of the law’s popularity.
Ellison also asked about the lack of funding for regulatory agencies, to which Frank replied that he is proud the CFPB was “insulated from strangulation through non-appropriation” as has happened to CFTC. He stated that Republicans have been just as critical of Dodd-Frank as they have of the Affordable Car Act, but do not have to will to go ahead the bill’s popular support and repeal it, so they are instead looking to cut funding to regulators.
Rep. Lynn Westmoreland (R-Ga.) asked Kupiec if he believes that regulators objectively implement a cost-benefit analysis while making new rules. “Absolutely not,” Kupiec replied. He commented that when he worked for the FDIC, they never any cost-benefit analysis, and that he never saw such an analysis from the Federal Reserve of Office of the Comptroller of the Currency on the Basel rules.
Stutzman asked about the impact of the Volcker Rule on liquidity and the availability of credit. Carfang explained that the rule would eliminate proprietary trading, but that this would make markets less-liquid with fewer buyers and sellers.
Following up, Stutzman pointed out that the Volcker Rule will take effect at the same time as Basel III, and asked about the combined impact. Carfang said the outcome in unknown, but that corporate treasurers and small bankers would be like “deer in headlights.”
Rep. Frank Lucas (R-Okla.) asked how Deas’ business would be impacted if the Consumer Protection and End-User Relief Act were not enacted. Deas said that failure to pass end-user protections would negatively impact his business and others, as many businesses use derivatives to facilitate growth, expansion, and job creation.
Rep. Ed Royce (R-Calif.) stated that getting efficient global derivatives markets is important, and that it is important to understand how Europe and Asia are implementing reforms and to act in concert with them. He asked if the failure to deliver a joint rule on how Title VII will be applied outside the U.S. is hurting the ability of businesses to manage risk. Carfang replied that this absolutely hurts, and that when markets are clouded or muted corporate CFOs will change the way they invest. Deas agreed that the lack of harmonization between the Commodity Futures Trading Commission (CFTC) and banking regulators has created uncertainty and can put Americans at a competitive disadvantage.
Rep. Steve Stivers (R-Ohio) asked what would happen without a fix to the centralized clearing margin requirement for end-users. Deas answered that this would increase the uncertainty of the end-user margin exemption, making end-users post cash margin that could otherwise be used for other purposes.
Rep. John Carney (D-Del.) spoke about his housing finance reform bill, the Partnership to Strengthen Home Ownership Act, which he said would price risk appropriately and provide an explicit government guarantee. Frank said he believes it is time to “get rid of” Fannie Mae and Freddie Mac, and that government action is needed to preserve the 30-year fixed-rate mortgage. He welcome Carney’s bill as well as the Johnson-Crapo bill, but stated that the Protecting American Taxpayers and Homeowners Act clearly would not pass through the House. He predicted that the Republican-controlled House of Representatives would fail in passing housing finance reform for the fourth consecutive year.
Hensarling countered and noted that the Democrat-controlled Senate was also “having trouble” passing a bill, and called the president “unengaged.”
Capito asked about the impact “moving forward” of the rules that still need to be written. Kupiec said the regulatory burden continues to be “significant.” He noted that some banks are laying off employees but hiring compliance officers.
Rep. Nydia Velasquez (D-N.Y.) asked whether average people were “buying” the rhetoric that Dodd-Frank has hurt the economy despite observing the rebounding economy, easier access to small business capital, and strong markets. Frank said they were not, and noted that Republicans had killed a bill that would have expanded bank lending to small businesses by extending transaction account guarantees. He stressed that regulations such as the Volcker Rule were “not intended to limit small banks.” He speculated that lawyers had persuaded banks to unnecessarily expand their compliance operations.
Mulvaney pointed out that banks are hiring thousands of compliance officers, yet total employment is decreasing, and warned that we are moving “from a productive financial sector to a compliant financial sector.”
For more information on this hearing, please click here.