HFSC with Chair Yellen
House Financial Services
Committee
“Semi-Annual
Testimony on the Federal Reserve’s Supervision
and Regulation of the
Financial System”
Wednesday, September 28, 2016
Key Topics & Takeaways
Volcker
Illiquid Funds:
Rep. Carney (D-Del.) reiterated his request for the Fed to redefine “illiquid assets”
under the Volcker Rule. Yellen acknowledged that there is a “significant issue”
that requires clarification under the rules to provide “greater certainty” to
the market, and added that the Fed is working on a solution.
Merchant
Banking Authority: Reps. Neugebauer (R-Texas), Luetkemeyer (R-Mo.), Lucas
(R-Okla.) and Royce (R-Calif.) expressed concern about the Fed’s recent recommendation
to repeal merchant banking authorities, as well as a notice of proposed
rulemaking that would impose significant capital requirements on banks’
investments in physical commodities. They
shared the concern that the Fed is hiking up capital requirements on activities
that have not been proven to manifest themselves in material “environmental
risks,” and that the proposal is a solution in search of a problem. Yellen
acknowledged that the proposal was not based on a historical analysis, but
rather reflects a “forward-looking concern” that a bank’s investment in
physical commodities could be associated with environmental risks.
Changes to
Stress Tests:
Rep. Robert Pittenger (R-N.C.) asked whether the Fed will recalibrate the GSIB
surcharge before including it in Comprehensive Capital Analysis and Review (CCAR),
since several rules have been proposed or implemented to improve GSIB
resolvability. Yellen explained that the Fed will issue a proposal for public
comment before incorporating the GSIB surcharge in the stress testing regime,
but maintained that the surcharge should not be recalibrated at this time.
Incentive
Compensation: Yellen explained that
the six financial regulatory agencies recently received comments on the
re-proposal under Section 956 of the Dodd-Frank Act, and their staffs are
working through those comments. She indicated that she hopes to finalize the rule
as soon as possible, and promised to do “everything [she] can” to prepare the
Fed to act on the final rule as soon as possible.
Witness
Janet Yellen, Chair, Federal Reserve Board of
Governors
Opening Remarks
Rep. Jeb Hensarling (R-Texas), Committee Chairman
In his opening remarks,
Hensarling noted the significant expansion of the Federal Reserve’s (Fed’s)
responsibilities under the Dodd-Frank Act, and claimed that it can “now
functionally control the largest financial institutions in [the U.S.] economy.”
He criticized the “secrecy” surrounding
the Fed’s stress tests, which he said makes it “nearly impossible” to measure the
effectiveness of the Fed’s regulatory oversight or the integrity of the tests’
findings; and argued that the living wills grant “unbridled discretion” to the
Fed and Federal Deposit Insurance Corporation (FDIC) under a “standard-less
process” the relies solely on the “discretion” of financial regulators. Hensarling highlighted his bill, H.R. 5983, the
Financial CHOICE Act as a “better way” forward that will offer “relief from
job-killing regulations,” as well as ensure that the Fed remains focused on “good”
monetary policy.
Rep. Maxine Waters (D-Calif.), Ranking Member
Waters praised the
progress made in improving safety and soundness since the financial crisis, and
concluded that there is more work to be done to protect consumers. She noted a
recent enforcement action against a large bank and concluded that it serves as
a reminder as to why reforms “were necessary in the first place,” since
mismanagement “could be catastrophic.”
Waters expressed interest in learning about how the Fed’s supervision
practices have evolved over the past several years, how it is using the flexibility
provided in the Dodd-Frank Act to tailor regulations to the risk profiles of
different firms, as well as the Financial Stability Oversight Council’s
(FSOC’s) ability to regulate activities of systemically important
non-banks.
Rep. Randy Neugebauer (R-Texas)
Neugebauer noted that the
Obama Administration has still not put forth a nominee for the Fed’s Vice Chair
of Supervision position, and expressed concern that Fed Governor Daniel Tarullo
exercises these authorities outside of the statutory construct. He expressed
interest in learning more about how the Fed’s recommendation to repeal the
merchant banking authority would impact end-users of physical commodities, as
well as whether the Fed intends to revise its leverage ratio to recognize segregated
margin in line with the international standard set by the Basel Committee.
Testimony
Janet Yellen, Chair,
Federal Reserve Board of Governors
In her testimony, Yellen underscored that
the Fed aims to ensure its regulatory and supervisory program is tailored to
risks posed by specific institutions. She noted that the Fed sometimes imposes
less stringent standards on small- and medium-sized banking organizations whose
failures would pose less risk to the financial system, and she indicated that
the Fed would continue to build on the steps it has taken to ensure smaller
banks do not face an outsized regulatory burden.
Yellen also explained
that the Fed remains focused on promoting safety and soundness and limiting the
adverse effects of its regulations on the real economy. She recalled the enhanced
prudential standards imposed on large banking organizations and efforts underway
to make large institutions more resolvable, such as the living wills process
and the Fed’s proposed long-term debt requirements. She cautioned that, as demonstrated during the
financial crisis, capital buffers that seem adequate during a “benign environment”
may prove inadequate during periods of stress.
While Yellen touted the
success of the Fed’s stress testing program, she noted that the Fed is
considering making several changes to the stress test process, such as to
integrate the Comprehensive Capital Analysis and Review (CCAR) with the
regulatory capital framework. She noted
that the Fed aims to incorporate the GSIB surcharge in the test, as well as
exempt certain bank holding companies with less than $250 billion in assets from
the qualitative requirements under the stress test.
Question and Answer
SIFI Designation Process
Hensarling asked how the
FSOC considers the 11 factors stipulated in the Dodd-Frank Act before
designating firms “systemically important financial institutions” (SIFIs). Yellen
responded that the FSOC prepares an analysis detailing how the firm’s balance
sheet exposures would impact financial stability – however Hensarling concluded
that this appears to be a purely “discretionary process.”
Rep. Dennis Ross (R-Fla.)
noted that the District Court’s ruling in the Metlife v. FSOC case reinforced
concerns that the Council decided “capriciously” whether non-bank firms should
be designated as SIFIs. Yellen contested
that claim, explaining that she “was involved in the process and [does not]
think it was capricious at all.” Yellen
also argued that the FSOC’s designation process does include an off-ramp whereby
firms can de-risk to become de-designated.
Yellen explained that the
Fed recently released a proposal to exempt banks under the $250 billion
threshold (that do not have significant international or non-bank activities)
from the qualitative requirements under the annual stress test. She noted that these firms would still be
subject to the quantitative requirements of the stress test, but claimed that
supervision of these banks is “adequate” and that this change would provide significant
relief from regulatory burdens for affected firms.
Rep. Carolyn Maloney
(D-N.Y.) noted that some market observers have called on the Fed to request
public comment on the scenarios and underlying assumptions of its stress tests. Yellen explained that the Fed issues for
comment the principles underlying the stress tests, as well as publishes
information on how it constructs the adverse scenarios, but argued that
publishing the details of the stress tests would not help the Fed achieve its policy
objectives.
Rep. Robert Pittenger
(R-N.C.) asked whether the Fed will recalibrate the GSIB surcharge before
including it in CCAR, since several rules have been proposed or implemented to
improve GSIB resolvability. Yellen explained that the Fed will issue a proposal
for public comment before incorporating the GSIB surcharge in the stress
testing regime, but maintained that the surcharge should not be recalibrated at
this time.
Living Wills
Waters recalled that the
Fed and FDIC deemed the living wills of five firms “noncredible” in April,
which will require them to re-submit their plans in October. She encouraged the Fed to use its authority
to address financial stability risks if those banks do not adequately address
the weaknesses in their initial living wills. Yellen claimed that the Fed and
FDIC “stand ready” to use authorities available, such as raising capital
requirements for those firms, if they do not adequately remedy the deficiencies
highlighted in their initial living wills.
Neugebauer noted that the
Fed recently released a report on bank investment activities, as well as
released a notice of proposed rulemaking that he said will impose significant
capital requirements on banks’ investments in physical commodities. He expressed concern that the Fed is hiking
up capital requirements on activities that have not been proven to manifest
themselves in material risks, and asked what “catastrophic” environmental risks
this proposed rule seeks to address.
Yellen acknowledged that the proposal was not based on a historical
analysis, but rather reflects a “forward-looking concern” that a bank’s
investment in physical commodities could be associated with environmental
risks.
Rep. Blaine Luetkemeyer (R-Mo.)
noted that Fed staff have previously concluded that the benefits of merchant
banking activities outweigh the risks, yet the most recent rule proposal
limiting banks’ investments in physical commodities seems to be a solution in
search of a problem.
Rep. Frank Lucas
(R-Okla.) emphasized the importance of stable commodity markets in his district
and also expressed concern over the impact of the Fed’s proposed rule on
physical commodities on businesses and municipalities. Yellen explained that the Fed examined the
nature of banks’ involvement in physical commodities markets and the
“environmental risk[s]” that the agency aims to address. She indicated that she would provide
additional information in writing regarding the proposed 300 percent risk-based
capital requirements that would be applied to certain physical commodities
dealings.
Rep. Ed Royce (R-Calif.)
asked whether alternative sources of capital would be available if Congress enacts
the Fed’s recommended repeal of merchant banking authorities. Yellen maintained that banks would still be
able to provide a wide range of lending, and that private equity would provide alternative
sources of financing if the recommendation was enacted.
Ending “Too-Big-to-Fail”
Rep. Brad Sherman
(D-Calif.) maintained that “too-big-to-fail is too-big-to-exist” and asked
Yellen to commit to using available authorities to break up large banks, when
necessary. Yellen agreed that she would continue to hold the largest
institutions to the highest standards.
Rep. Sean Duffy (R-Wis.)
asked whether policymakers have succeeded in ending “too-big-to-fail” (TBTF).
Yellen responded that TBTF is a “less significant problem” now than it was
before, and that the Fed has “done a great deal” to make it possible to resolve
a systemically important institution successfully. Duffy pointed to a recent report issued by former
Treasury Secretary Larry Summers, which suggested that risks have increased
since the financial crisis, but Yellen clarified that she “disagree[s]
significantly” with that conclusion, because it rests upon the notion that markets
correctly evaluated risks before the crisis in 2008. She added that “nothing could be farther from
the truth.”
Rep. Al Green (D-Texas) noted
that ending TBTF is “addressed in Dodd-Frank” in a “profound way,” and that the
Fed and FDIC have the authorities to “eviscerate” firms if they fail the living
will process.
Separation Between Monetary Policy and
Supervision
Rep. Bill Huizenga
(R-Mich.) reiterated his efforts to separate the Fed’s monetary policy and
supervisory roles, as well as bring the latter under the budget review process,
through H.R. 3189, the Fed Oversight Reform and Modernization (FORM) Act. Yellen noted that other banking agencies’
budgets are not appropriated by Congress and expressed concern that the Fed
would “lack the flexibility” to “ramp up supervision” if it was subject to the congressional
budget process.
Cross-Selling Practices
Rep. Stephen Lynch
(D-Mass.) noted the recent enforcement action against a large bank and urged
Yellen to “just get after them” to deter similar cross-selling abuses at other
firms. Yellen explained that the Fed is comprehensively reviewing the largest
bank holding companies’ compliance practices and internal controls, since there
has been a “disturbing pattern” in recent enforcement actions.
Rep. John Carney (D-Del.)
reminded Yellen that he sent her a letter in May asking for the Fed to redefine
“illiquid assets” under the Volcker Rule.
Since then, he noted that the Fed extended the compliance timeline to
July 2017 but that it still has not offered further guidance. Yellen acknowledged that there is a
“significant issue” that requires clarification under the rules to provide
“greater certainty” to the market, and added that the Fed is working on a
solution.
Cumulative Review
Rep. Ann Wagner (R-Mo.) asked
whether Yellen would commit to review the post-crisis regulations to better
understand their cumulative impact on the financial markets and economy. Yellen explained that the Fed is still
finalizing many of the post-crisis regulations, and that she hopes implement
them before undertaking such a comprehensive review. She added that financial crises are “few and
far between” and that there “is no clear and rigorous way” to predict a crisis,
much less how a particular regulation affects the probability of a crisis.
Rep. Keith Ellison
(D-Minn.) requested an update on the Fed’s efforts to finalize incentive
compensation rules under Section 956 of the Dodd-Frank Act. Yellen explained that the six financial
regulatory agencies recently received comments on the re-proposal, and their staffs
are working through those comments. She indicated that she hopes to finalize
the rule as soon as possible, and promised to do “everything [she] can” to prepare
the Fed to act on the final rule as soon as possible.
Ellison also expressed
concern that junior staff – rather than senior managers – have been held
accountable for compliance failures.
Yellen maintained that senior executives are responsible for
establishing risk management practices that would ensure adequate internal
reviews to detect compliance problems.
She added that boards of directors should review compensation schemes at
all levels of their organizations to ensure they do not result in compliance
failures, and explained that this expectation will be formalized in the final rule
under Section 956.
Tailoring for Community Banks
Hensarling indicated that
he was “encouraged” by the growing bipartisan consensus that policymakers need
to further tailor regulations for community banks. He noted Yellen’s
recommendations to carve out community banks from the Volcker Rule and
incentive compensation rules under Section 956 of the Dodd-Frank Act, as well
as the Fed’s proposal to exempt banks under $250 billion in assets from the
qualitative review requirement under CCAR, which he said is “wise and a small
step in right direction.”
Green expressed concern
that large banks have “hijacked” the term “community bank” in order to benefit
from efforts to reduce regulatory burdens on smaller institutions.
Additional information
about this event can be accessed here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Capital/Resolution Authority/SIFIs,Hearing Summaries Agency:House Financial Services Committee,Publish Year:2016
House Financial Services
Committee
“Semi-Annual
Testimony on the Federal Reserve’s Supervision
and Regulation of the
Financial System”
Wednesday, September 28, 2016
Key Topics & Takeaways
Volcker
Illiquid Funds:
Rep. Carney (D-Del.) reiterated his request for the Fed to redefine “illiquid assets”
under the Volcker Rule. Yellen acknowledged that there is a “significant issue”
that requires clarification under the rules to provide “greater certainty” to
the market, and added that the Fed is working on a solution.
Merchant
Banking Authority: Reps. Neugebauer (R-Texas), Luetkemeyer (R-Mo.), Lucas
(R-Okla.) and Royce (R-Calif.) expressed concern about the Fed’s recent recommendation
to repeal merchant banking authorities, as well as a notice of proposed
rulemaking that would impose significant capital requirements on banks’
investments in physical commodities. They
shared the concern that the Fed is hiking up capital requirements on activities
that have not been proven to manifest themselves in material “environmental
risks,” and that the proposal is a solution in search of a problem. Yellen
acknowledged that the proposal was not based on a historical analysis, but
rather reflects a “forward-looking concern” that a bank’s investment in
physical commodities could be associated with environmental risks.
Changes to
Stress Tests:
Rep. Robert Pittenger (R-N.C.) asked whether the Fed will recalibrate the GSIB
surcharge before including it in Comprehensive Capital Analysis and Review (CCAR),
since several rules have been proposed or implemented to improve GSIB
resolvability. Yellen explained that the Fed will issue a proposal for public
comment before incorporating the GSIB surcharge in the stress testing regime,
but maintained that the surcharge should not be recalibrated at this time.
Incentive
Compensation: Yellen explained that
the six financial regulatory agencies recently received comments on the
re-proposal under Section 956 of the Dodd-Frank Act, and their staffs are
working through those comments. She indicated that she hopes to finalize the rule
as soon as possible, and promised to do “everything [she] can” to prepare the
Fed to act on the final rule as soon as possible.
Witness
Janet Yellen, Chair, Federal Reserve Board of
Governors
Opening Remarks
Rep. Jeb Hensarling (R-Texas), Committee Chairman
In his opening remarks,
Hensarling noted the significant expansion of the Federal Reserve’s (Fed’s)
responsibilities under the Dodd-Frank Act, and claimed that it can “now
functionally control the largest financial institutions in [the U.S.] economy.”
He criticized the “secrecy” surrounding
the Fed’s stress tests, which he said makes it “nearly impossible” to measure the
effectiveness of the Fed’s regulatory oversight or the integrity of the tests’
findings; and argued that the living wills grant “unbridled discretion” to the
Fed and Federal Deposit Insurance Corporation (FDIC) under a “standard-less
process” the relies solely on the “discretion” of financial regulators. Hensarling highlighted his bill, H.R. 5983, the
Financial CHOICE Act as a “better way” forward that will offer “relief from
job-killing regulations,” as well as ensure that the Fed remains focused on “good”
monetary policy.
Rep. Maxine Waters (D-Calif.), Ranking Member
Waters praised the
progress made in improving safety and soundness since the financial crisis, and
concluded that there is more work to be done to protect consumers. She noted a
recent enforcement action against a large bank and concluded that it serves as
a reminder as to why reforms “were necessary in the first place,” since
mismanagement “could be catastrophic.”
Waters expressed interest in learning about how the Fed’s supervision
practices have evolved over the past several years, how it is using the flexibility
provided in the Dodd-Frank Act to tailor regulations to the risk profiles of
different firms, as well as the Financial Stability Oversight Council’s
(FSOC’s) ability to regulate activities of systemically important
non-banks.
Rep. Randy Neugebauer (R-Texas)
Neugebauer noted that the
Obama Administration has still not put forth a nominee for the Fed’s Vice Chair
of Supervision position, and expressed concern that Fed Governor Daniel Tarullo
exercises these authorities outside of the statutory construct. He expressed
interest in learning more about how the Fed’s recommendation to repeal the
merchant banking authority would impact end-users of physical commodities, as
well as whether the Fed intends to revise its leverage ratio to recognize segregated
margin in line with the international standard set by the Basel Committee.
Testimony
Janet Yellen, Chair,
Federal Reserve Board of Governors
In her testimony, Yellen underscored that
the Fed aims to ensure its regulatory and supervisory program is tailored to
risks posed by specific institutions. She noted that the Fed sometimes imposes
less stringent standards on small- and medium-sized banking organizations whose
failures would pose less risk to the financial system, and she indicated that
the Fed would continue to build on the steps it has taken to ensure smaller
banks do not face an outsized regulatory burden.
Yellen also explained
that the Fed remains focused on promoting safety and soundness and limiting the
adverse effects of its regulations on the real economy. She recalled the enhanced
prudential standards imposed on large banking organizations and efforts underway
to make large institutions more resolvable, such as the living wills process
and the Fed’s proposed long-term debt requirements. She cautioned that, as demonstrated during the
financial crisis, capital buffers that seem adequate during a “benign environment”
may prove inadequate during periods of stress.
While Yellen touted the
success of the Fed’s stress testing program, she noted that the Fed is
considering making several changes to the stress test process, such as to
integrate the Comprehensive Capital Analysis and Review (CCAR) with the
regulatory capital framework. She noted
that the Fed aims to incorporate the GSIB surcharge in the test, as well as
exempt certain bank holding companies with less than $250 billion in assets from
the qualitative requirements under the stress test.
Question and Answer
SIFI Designation Process
Hensarling asked how the
FSOC considers the 11 factors stipulated in the Dodd-Frank Act before
designating firms “systemically important financial institutions” (SIFIs). Yellen
responded that the FSOC prepares an analysis detailing how the firm’s balance
sheet exposures would impact financial stability – however Hensarling concluded
that this appears to be a purely “discretionary process.”
Rep. Dennis Ross (R-Fla.)
noted that the District Court’s ruling in the Metlife v. FSOC case reinforced
concerns that the Council decided “capriciously” whether non-bank firms should
be designated as SIFIs. Yellen contested
that claim, explaining that she “was involved in the process and [does not]
think it was capricious at all.” Yellen
also argued that the FSOC’s designation process does include an off-ramp whereby
firms can de-risk to become de-designated.
Yellen explained that the
Fed recently released a proposal to exempt banks under the $250 billion
threshold (that do not have significant international or non-bank activities)
from the qualitative requirements under the annual stress test. She noted that these firms would still be
subject to the quantitative requirements of the stress test, but claimed that
supervision of these banks is “adequate” and that this change would provide significant
relief from regulatory burdens for affected firms.
Rep. Carolyn Maloney
(D-N.Y.) noted that some market observers have called on the Fed to request
public comment on the scenarios and underlying assumptions of its stress tests. Yellen explained that the Fed issues for
comment the principles underlying the stress tests, as well as publishes
information on how it constructs the adverse scenarios, but argued that
publishing the details of the stress tests would not help the Fed achieve its policy
objectives.
Rep. Robert Pittenger
(R-N.C.) asked whether the Fed will recalibrate the GSIB surcharge before
including it in CCAR, since several rules have been proposed or implemented to
improve GSIB resolvability. Yellen explained that the Fed will issue a proposal
for public comment before incorporating the GSIB surcharge in the stress
testing regime, but maintained that the surcharge should not be recalibrated at
this time.
Living Wills
Waters recalled that the
Fed and FDIC deemed the living wills of five firms “noncredible” in April,
which will require them to re-submit their plans in October. She encouraged the Fed to use its authority
to address financial stability risks if those banks do not adequately address
the weaknesses in their initial living wills. Yellen claimed that the Fed and
FDIC “stand ready” to use authorities available, such as raising capital
requirements for those firms, if they do not adequately remedy the deficiencies
highlighted in their initial living wills.
Neugebauer noted that the
Fed recently released a report on bank investment activities, as well as
released a notice of proposed rulemaking that he said will impose significant
capital requirements on banks’ investments in physical commodities. He expressed concern that the Fed is hiking
up capital requirements on activities that have not been proven to manifest
themselves in material risks, and asked what “catastrophic” environmental risks
this proposed rule seeks to address.
Yellen acknowledged that the proposal was not based on a historical
analysis, but rather reflects a “forward-looking concern” that a bank’s
investment in physical commodities could be associated with environmental
risks.
Rep. Blaine Luetkemeyer (R-Mo.)
noted that Fed staff have previously concluded that the benefits of merchant
banking activities outweigh the risks, yet the most recent rule proposal
limiting banks’ investments in physical commodities seems to be a solution in
search of a problem.
Rep. Frank Lucas
(R-Okla.) emphasized the importance of stable commodity markets in his district
and also expressed concern over the impact of the Fed’s proposed rule on
physical commodities on businesses and municipalities. Yellen explained that the Fed examined the
nature of banks’ involvement in physical commodities markets and the
“environmental risk[s]” that the agency aims to address. She indicated that she would provide
additional information in writing regarding the proposed 300 percent risk-based
capital requirements that would be applied to certain physical commodities
dealings.
Rep. Ed Royce (R-Calif.)
asked whether alternative sources of capital would be available if Congress enacts
the Fed’s recommended repeal of merchant banking authorities. Yellen maintained that banks would still be
able to provide a wide range of lending, and that private equity would provide alternative
sources of financing if the recommendation was enacted.
Ending “Too-Big-to-Fail”
Rep. Brad Sherman
(D-Calif.) maintained that “too-big-to-fail is too-big-to-exist” and asked
Yellen to commit to using available authorities to break up large banks, when
necessary. Yellen agreed that she would continue to hold the largest
institutions to the highest standards.
Rep. Sean Duffy (R-Wis.)
asked whether policymakers have succeeded in ending “too-big-to-fail” (TBTF).
Yellen responded that TBTF is a “less significant problem” now than it was
before, and that the Fed has “done a great deal” to make it possible to resolve
a systemically important institution successfully. Duffy pointed to a recent report issued by former
Treasury Secretary Larry Summers, which suggested that risks have increased
since the financial crisis, but Yellen clarified that she “disagree[s]
significantly” with that conclusion, because it rests upon the notion that markets
correctly evaluated risks before the crisis in 2008. She added that “nothing could be farther from
the truth.”
Rep. Al Green (D-Texas) noted
that ending TBTF is “addressed in Dodd-Frank” in a “profound way,” and that the
Fed and FDIC have the authorities to “eviscerate” firms if they fail the living
will process.
Separation Between Monetary Policy and
Supervision
Rep. Bill Huizenga
(R-Mich.) reiterated his efforts to separate the Fed’s monetary policy and
supervisory roles, as well as bring the latter under the budget review process,
through H.R. 3189, the Fed Oversight Reform and Modernization (FORM) Act. Yellen noted that other banking agencies’
budgets are not appropriated by Congress and expressed concern that the Fed
would “lack the flexibility” to “ramp up supervision” if it was subject to the congressional
budget process.
Cross-Selling Practices
Rep. Stephen Lynch
(D-Mass.) noted the recent enforcement action against a large bank and urged
Yellen to “just get after them” to deter similar cross-selling abuses at other
firms. Yellen explained that the Fed is comprehensively reviewing the largest
bank holding companies’ compliance practices and internal controls, since there
has been a “disturbing pattern” in recent enforcement actions.
Rep. John Carney (D-Del.)
reminded Yellen that he sent her a letter in May asking for the Fed to redefine
“illiquid assets” under the Volcker Rule.
Since then, he noted that the Fed extended the compliance timeline to
July 2017 but that it still has not offered further guidance. Yellen acknowledged that there is a
“significant issue” that requires clarification under the rules to provide
“greater certainty” to the market, and added that the Fed is working on a
solution.
Cumulative Review
Rep. Ann Wagner (R-Mo.) asked
whether Yellen would commit to review the post-crisis regulations to better
understand their cumulative impact on the financial markets and economy. Yellen explained that the Fed is still
finalizing many of the post-crisis regulations, and that she hopes implement
them before undertaking such a comprehensive review. She added that financial crises are “few and
far between” and that there “is no clear and rigorous way” to predict a crisis,
much less how a particular regulation affects the probability of a crisis.
Rep. Keith Ellison
(D-Minn.) requested an update on the Fed’s efforts to finalize incentive
compensation rules under Section 956 of the Dodd-Frank Act. Yellen explained that the six financial
regulatory agencies recently received comments on the re-proposal, and their staffs
are working through those comments. She indicated that she hopes to finalize
the rule as soon as possible, and promised to do “everything [she] can” to prepare
the Fed to act on the final rule as soon as possible.
Ellison also expressed
concern that junior staff – rather than senior managers – have been held
accountable for compliance failures.
Yellen maintained that senior executives are responsible for
establishing risk management practices that would ensure adequate internal
reviews to detect compliance problems.
She added that boards of directors should review compensation schemes at
all levels of their organizations to ensure they do not result in compliance
failures, and explained that this expectation will be formalized in the final rule
under Section 956.
Tailoring for Community Banks
Hensarling indicated that
he was “encouraged” by the growing bipartisan consensus that policymakers need
to further tailor regulations for community banks. He noted Yellen’s
recommendations to carve out community banks from the Volcker Rule and
incentive compensation rules under Section 956 of the Dodd-Frank Act, as well
as the Fed’s proposal to exempt banks under $250 billion in assets from the
qualitative review requirement under CCAR, which he said is “wise and a small
step in right direction.”
Green expressed concern
that large banks have “hijacked” the term “community bank” in order to benefit
from efforts to reduce regulatory burdens on smaller institutions.
Additional information
about this event can be accessed here.