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House Committee on Financial Services: Importing Global Governance: Examining the Dangers of Ceding Authority Over American Financial Regulation

House Committee on Financial Services
Importing Global Governance: Examining the Dangers of Ceding Authority Over American Financial Regulation
Thursday, March 21, 2024

Topline

  • Republicans discussed concerns about international standard-setters pressuring the Fed to divest from fossil energy companies. Republicans also criticized the opacity of the Basel Committee.
  • Democrats argued that it’s beneficial for U.S. regulators to engage with their international counterparts on global issues, including climate risk.

Witnesses

  • Dr. Michael Gibson, Director of Supervision and Regulation, Board of Governors of the Federal Reserve System
  • Ryan Billingsley, Deputy Director of Capital Markets and Accounting Policy, Division of Risk Management Supervision, Federal Deposit Insurance Corporation
  • Grovetta Gardineer, Senior Deputy Comptroller for Bank Supervision Policy, Office of the Comptroller of the Currency

Opening Statements

Financial Services Chair Patrick McHenry (R-N.C.)

In his opening statement, McHenry described the hearing as a good government exercise, citing the lack of visibility into the dealings between American financial regulators and the complex network of international regulators. He discussed his concerns that other countries are influencing financial regulations in the US. McHenry explained that international cooperation can be positive, but when the scale tips in favor of our competitors, it’s a problem. He asked why American banking regulators are seeking to shrink U.S. influence on the world stage and noted the lack of transparency by President Biden’s financial regulators. McHenry said the Committee would consider a bill to create clear reporting requirements for financial regulators dealing with international governance groups.

Financial Services Ranking Member Maxine Waters (D-Calif.)

In her opening statement, Waters noted that it’s been one year since the failures of Silicon Valley Bank and First Republic Bank, and said she was thankful for the swift actions taken by President Biden to keep the banking system strong. She explained that as banking regulators seek to write rules relating to bank capital and our climate crisis, Republicans are attacking any effort to collaborate with other countries.

Waters said she is seeing big banks are giving in to extreme MAGA Republicans and walking back their climate commitments. She named Bank of America, J.P. Morgan, State Street, and BlackRock, and discussed their decision to pull out of an international coalition aimed at resolving climate issues. Waters concluded that the US banking system has the potential to be the strongest in the world but said the U.S. can’t get there if financial institutions block the government from protecting our nation’s consumers.

Subcommittee on Financial Institutions and Monetary Policy Chair Andy Barr (R-Ky.)

In his opening statement, Barr noted that the American people and their elected representatives know next to nothing about the deals between international bodies and US banking regulators. He discussed the recent global governance in action and cited the agreement on Basel III Endgame, which no elected official negotiated or signed. Barr concluded that unelected bureaucrats and bodies seemingly have the ability to bypass Congress.

Subcommittee on Financial Institutions and Monetary Policy Ranking Member Bill Foster (D-Ill.)

In his opening statement, Foster discussed how geopolitical risks and new technologies like AI pose new risks to our financial institutions. He said forums like the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS) allow us to leverage our expertise in crafting new banking regulations. Foster concluded that any proposals created by these bodies must abide by US laws and procedures.

Testimony

Dr. Michael Gibson, Director of Supervision and Regulation, Board of Governors of the Federal Reserve System 

In his testimony, Gibson explained how the Federal Reserve Board participates in many international boards to comply with its mission of ensuring financial stability. He discussed how the Board seeks to ensure the stability of the financial system by supporting strong and consistent regulatory standards globally. Gibson noted that the regulations put forth by these bodies are voluntary and clarified that any regulations on US banks would come through US regulatory bodies. He described the international groups as consensus-driven organizations where participants seek to find a common understanding of issues. Gibson said this approach serves as a check on potentially undesirable policy recommendations.

He concluded that the Federal Reserve Board supports efforts to regularly publish public information, including work plans and meeting summaries, and to subject work products to public comment.

Ryan Billingsley, Deputy Director of Capital Markets and Accounting Policy, Division of Risk Management Supervision, Federal Deposit Insurance Corporation   

In his testimony, Billingsley explained that the FDIC’s core mission is to ensure the stability of our financial system and said the FDIC’s international involvement is guided by this mission. He noted the Financial Stability Board was created to promote international cooperation and promote effective regulatory and supervisory policies and explained that the FDIC is not a member of the FSB Plenary but is a member of the Resolution Steering Group. Billingsley said the FDIC engages with the Network for Greening the Financial System (NGFS) to foster collaboration and share best practices for engaging on climate risk. He concluded that the FDIC engages with international organizations to ensure that we have standards and best practices for ensuring deposits but emphasized that any proposal is voluntary and subject to US comment and regulatory requirements.

Grovetta Gardineer, Senior Deputy Comptroller for Bank Supervision Policy, Office of the Comptroller of the Currency

In her testimony, Gardineer explained that because the OCC oversees many banks and US affiliates of foreign banks that conduct business on a global scale, they must assess the effectiveness of their proposals internationally. She said international forums present an opportunity for the OCC to share knowledge while fulfilling their individual supervisory mandates. Gardineer explained how the OCC’s engagement in international forums is beneficial to the agency and the US banking system, noting that their participation provides an opportunity to promote US policies. She discussed how the OCC’s participation allows them to create a level playing field for banking regulations and protect banks from countries with lax banking standards. Gardineer discussed how the OCC’s participation in international forums supports the development of more consistent global frameworks and helps US banks understand what to expect in foreign jurisdictions. She concluded that global participation helps the OCC to develop best practices on cryptocurrency and AI, since these issues do not recognize international borders.

Question & Answer

Basel Committee & Basel III Endgame

McHenry noted that the Basel Committee’s charter requires a public consultation process for all Basel standards and said that in May 2022 the Basel Committee, without public consultation, altered the G-SIB surcharge for the largest banks, but specifically for European Union banks. He said that EU banks had a 50-basis point reduction of their capital surcharge as a result and asked Gibson if he was aware of that. Gibson responded yes.

McHenry said many groups, including progressive groups, criticized the decision to lower capital charges for European banks without public input and asked Gibson if the Fed felt there was public input for that decision. Gibson said he does not remember if they received public comment on that change.

McHenry asked why foreign nationals have a voice in US banking policy. Gibson explained that nothing at the Committee is binding.

McHenry asked how the Federal Reserve reconciles relaxing European bank surcharges while raising capital surcharges for US banks during the very next negotiation on surcharges. Gibson said that the Basel Committee’s surcharges are negotiated with international partners and then implemented domestically by regulatory agencies.

McHenry asked who attends the Basel Committee on behalf of the Federal Reserve. Gibson said that he attends the Basel Committee meetings, and that Chair Powell and Vice Chair Barr attend Oversight Body of Governors and Heads of Supervision.

McHenry then asked if there was a vote to lower the G-SIB surcharge for EU banks. Gibson replied that decisions are not voted on and instead are made by consensus.

McHenry explained that there are no disclosures as to the actual thoughts and opinions from US regulators that go into influencing international standard setters. Gibson said that he briefs his principal, Vice Chair Barr, on the discussions in Basel Committee meetings and noted that nothing done in the Basel Committee is binding but that the US regulators want to give their input into those discussions. 

Waters asked Gibson to confirm that in the Fed’s report on Silicon Valley Bank that the Fed found the bank appeared better capitalized by nearly two percent because of the opt out for accumulated other comprehensive income. (AOCI) Gibson said the Fed only applies that AOCI passthrough to the largest banks and it was not applied to Silicon Valley Bank, confirming what Waters said. Waters asked if Gibson could confirm that the Basel III endgame proposal would close this loophole. Gibson said that is what the agencies proposed last year and noted that the Fed received comments on that provision, so they are reviewing the comments.

Rep. French Hill (R-Ark.) spoke to the frustration among many commenters and organizations with the Basel III endgame proposal. He then asked Gibson what percentage of the comments the Fed received on Basel III were positive. Gibson said most comments were negative. Hill then asked if some of those negative comments were about the proposal creating an uneven playing field for the US banks. Gibson said the Fed did receive comments about that. Hill then asked if most comments said the new rules would make things worse not better. Gibson said the Fed received comments in both directions, but that the majority were negative.

Hill said the proposal doubled down on gold plating and puts US banks at a disadvantage with other international banks. He also noted the proposal is inconsistent with what is being proposed in other jurisdictions like the UK, Japan, and Canada.

Rep. Brad Sherman (D-Calif.) noted that European standards are not particularly high and said that he is mainly concerned that the US will make mistakes in how we adopt the Basel regulations for which Europeans are not to blame. Sherman said that the Basel II endgame proposal gives no weight to private mortgage insurance and asked if that is true and whether the Fed will fix that. Gibson said the Fed has received comments on this and said the proposal doesn’t change the treatment of private mortgage insurance and that it is recognized in current capital rules.

Sherman clarified asking if the Fed is changing risk weights on high loan-to-value mortgages, ignoring whether someone has private mortgage insurance. Gibson said that is not necessarily how they will be treated. Sherman said that that is what everyone in the industry is saying and asked if any witnesses would like to assure him that private mortgage insurance will be reflected in the risk weights. Billingsley said that he can’t make an assurance but noted that is an area where the regulators received a lot of comments.

Sherman asked if he could count on the regulators to fix the way clean energy tax credits are treated under the proposal. Gardineer said that they have gotten a lot of comments on that issue and that they will review the comments and make changes accordingly.

Sherman explained that the capital proposal gives Wall Street a huge advantage over Mainstreet, noting the difference in risk weighting for loans to public and private businesses which affects small businesses and mutual funds. He also criticized the proposal for not counting long term bonds as mark-to-market if the bank holding them says they will hold them to maturity. He asked the witnesses if he could be assured that small and medium-sized businesses and mutual funds would not be discriminated against in the proposal as compared to publicly traded corporations. Billingsley said that while he can’t provide the assurance he is looking for, the issue Sherman is important and will be looked at.

Rep. Frank Lucas (R-Okla.) asked if the Basel Committee deliberations on capital standards were public.

Gibson said yes and explained that the Basel Committee puts out their standards for public comments and takes those comments into consideration for the final rule. Lucas asked why decisions made by the Basel Committee are adopted by consensus. Gibson said the Basel Committee operates by consensus because none of its decisions are binding. Lucas asked if this was the only model to adopt a lasting capital framework. Gibson said there is no other way that the Basel Committee can have these discussions.

Lucas expressed concern that the Fed’s commitments to the Basel Committee would run in way of the Administrative Procedure Act’s guidance on agency rule making and then asked what weight the Fed gives its commitment to the Basel Committee during its rule making process. Gibson said the Fed’s rulemaking process is focused on what the best rule to implement its domestic statutory mandate would be.

Lucas asked if equal weight applied to each member of the Basel Committee, regardless of their economy’s size. Gibson said that it is a consensus driven organization, but that the US certainly has a big role being the world’s largest economy.

Rep. David Scott (D-Ga.) noted that Britain and the EU respectively expect a 3% and 10% increase in aggregate capital levels for their banks and asked Gibson if it is correct that US banks are expected to see a nearly 30% increase in aggregate capital levels. Gibson said those comparisons are an area where they got a lot of comments and that the Fed will look at that.

Scott asked about the path forward for the Basel III proposal. Gibson said the Fed is considering comments. Scott asked what changes the Fed is considering in response to comments from businesses about the proposal. Gibson said the Fed is considering all the comments on the proposal.

Rep. Blaine Luetkemeyer (R-Mo.) asked if any US regulations were adopted by the Basel Committee given the number of regulations pushed from the Basel Committee onto the US. Gibson said that sometimes they do, and noted the G-SIB surcharge as an example of a US proposal that was subsequently proposed by the Basel Committee.

Barr cited the Federal Reserve Act which states that the Board of Governors cannot delegate its policy and supervision functions to a Federal Reserve bank, and asked how the Federal Reserve reconciles delegating to the New York Fed the ability to be on the Basel Committee. Gibson said when the Board and New York Fed attend the Basel Committee, they coordinate and explained that the Board does not delegate anything to the New York Fed.

Barr asked Gibson if when he is at the Basel Committee whether he represents the US or if he is simply engaged in an international standard setting exercise. Gibson said he represents his agency and the US. Barr then asked if he has American energy companies’ interests in mind while in the Basel Committee. Gibson said he has the Fed’s statutory mission in mind.

Rep. Warren Davidson (R-Ohio) said that the Chair of the Basel Committee said in a speech that most jurisdictions will implement the rules by the end of the year and asked if Gibson thinks the US will implement our rules in that timeframe. Gibson said the timing is uncertain because the Fed is reviewing all the comments it received.

Davidson asked if robust public engagement following the Administrative Procedure Act would ensure that new capital requirements are fit for American banks. Gibson said that is the goal.

Rep. Scott Fitzgerald (R-Wisc.) asked if it would have been better to do more analysis upfront on the final Basel rule. Gibson said the Notice of Proposed Rulemaking included analysis and reiterated that the Fed is continuing to go through the comments on the proposal.

Rep. Ritchie Torres (D-N.Y.) noted that various officials from the Fed and Treasury, including Chair Powell and Secretary Yellen, testified recently that the banking system is well capitalized and asked Gibson if he agreed with those statements. Gibson said he agreed. Torres then said that the assertion that the banking system is well capitalized undermines the underlying assumption of the Basel III endgame proposal that the banking system is undercapitalized and asked Gibson what he made of that. Gibson said the purpose of the proposal was to make capital requirements more risk sensitive, consistent, and ensure they adequately reflect risk.

Torres then asked if Gibson agreed that the goal of these regulations should not be the Europeanization of capital requirements and instead be finding the right balance between financial stability and economic growth. Gibson said the Fed’s goal is a strong US banking system to support a strong US economy.

Torres asked if the Fed produced a study that aimed to find the right level of capital requirements to achieve optimal economic growth and financial stability. Gibson said there were studies cited in the proposal. Torres pushed back asking if the Fed itself had conducted a study. Gibson said yes and that it was cited in the proposal.

Torres asked if Gibson believes that the Basel III proposal would have no impact on the availability of credit. Gibson said there are costs and benefits.

Rep. Steven Horsford (D-Nev.) asked what processes the Fed has in place to examine the Basel III endgame proposal for its effects on low-income and marginalized communities. Gibson said the Fed evaluates those concerns when creating its rulemakings and when considering changes to its proposal.

Rep. Young Kim (R-Calif.) asked if Gibson felt the US Basel proposal was out of line with the goal of harmonizing standards because other jurisdictions have watered down their standards while the US gold plates. Gibson said the Basel Committee recognizes that each jurisdiction has to take back the recommendations and implement them in the context of their own domestic economic landscape.

Kim asked all witnesses if it is their understanding that when the BCBS looks at US capital standards and their compliance with BCBS recommendations, stricter US standards in some areas do not receive credit under the Basel Committee’s rating scheme. All witnesses said that was true, as the assessments look for areas where a jurisdiction standard might be below the global standard rather than above.

Climate Risk

Waters asked what the OCC is learning from international bodies on regulating climate risk. Gardineer explained that through their engagement with NGFS and the Basel Committee, the OCC is learning and sharing knowledge on what their experience has been and how they have implemented rules. She said that in 2022, the OCC began reviewing information on the largest institutions by doing a range of practice reviews based on things they have learned from international engagement.

Rep. Bill Huizenga (R-Mich.) asked if the FDIC agrees with the Basel Committee that it is important to consider “imaginary climate related bank runs” as a possible source of financial instability and if so, what evidence is there. Billingsley said the FDIC is not focused on climate change, and rather is focused on how climate related risk could feed into the traditional banking system. Huizenga asked twice more about what evidence there was, and Billingsley said he is not aware of a bank run scenario as a risk.

Huizenga asked if the FDIC agrees with the idea of double materiality, which is that banks should consider their own climate risk, but also potential risks created by lending to industries that could further climate risk. Billingsley said no, explaining that double materiality is not a part of the FDIC’s mandate.

Huizenga asked what is stopping the Fed from using concepts like double materiality to help steer capital away from less sustainable “brown” sectors toward other sectors. Gibson said the Fed’s focus is on safety and soundness and that it is not focused on favoring one sector over another.

Rep. Al Green (D-Texas) asked how the Fed could assure Congress that banks will be in a position to deal with the risks of climate change. Gibson said the Fed makes it clear that they expect banks to manage all material risks, including climate risks. Green asked if Gibson was concerned with how well banks are capitalized. Gibson said there is no direct link between capital requirements and climate risks. He noted that when banks are evaluating their own risks, they need to know whether their capital is sufficient for all risks.

Rep. Sean Casten (D-Ill.) asked Gibson if it’s important that we work with our international partners on climate related financial risk regulations. Gibson said that the Fed coordinates with international partners in furtherance of the Fed’s statutory mandate.

Rep. Barry Loudermilk (R-Ga.) asked how the Fed evaluated NGFS’ trajectories for illustrative scenarios, and what measure of plausibility was used. Gibson said when the Fed was constructing the Climate Pilot Scenario Analysis, they decided to use the scenarios from the NGFS because it would be the least burdensome way to complete the exercise. Gibson also noted that the purpose of the exercise was to give banks a chance to evaluate the scenarios and give them the ability to evaluate their risks around climate-related risks. Loudermilk asked if the Fed formally endorsed these scenarios as a supervisory standard when evaluating a bank’s adherence to the joint climate risk guidance. Gibson said no.

Rep. Ralph Norman (R-S.C.) asked Gibson if the Fed did not include climate risk in the Basel proposals buckets of market risk, credit risk and operational risk. Gibson said that the Fed asks banks to think about climate risk only in the ways it could manifest in those traditional channels.

Norman asked for an example of a climate risk that would affect the banking industry. Gibson said the Fed ran a pilot climate scenario where they asked banks to consider how a large-scale hurricane hitting the east coast would affect their loan book. Billingsley said the cost and availability of insurance could act as a credit risk to an institution.

Horsford asked about the impacts on banks if climate-induced risks are ignored. Gibson said the Fed is working to ensure that banks are evaluating all their risks, including climate-related risks. He explained that as bank supervisors, the Fed needs to understand their balance sheets and their risks.

Rep. Zach Nunn (R-Iowa) asked if it’s consistent with the Fed’s mission to engage with the NGFS’ climate policy regime. Gibson said that while the Fed is not a climate regulator, it has responsibilities for bank safety and soundness. He emphasized that the Fed only takes climate-related financial risks into account.

American Influence & Competitiveness

Rep. Wiley Nickel (D-N.C.) asked Gibson how the Fed intends to collaborate with other US regulatory agencies and international counterparts to maintain the dollar’s influence. Gibson responded saying that when the Fed participates in international groups, the Fed and other regulators work to support the goal of a strong dollar.


Nickel asked what the benefits of a strong dollar are. Gibson replied that low interest rates and extremely liquid US debt markets are among the benefits.

Horsford asked Billingsley to discuss the effects on American competitiveness if we were to lose our global leadership in the financial sector. Billingsley said the extent to which we can influence global minimum standards makes the U.S. banking system safer and the world safer.       

Rep. Dan Meuser (R-Pa.) asked Gibson how the Fed prioritizes business sovereignty and standards against the growing influence of international regulatory bodies. Gibson said when the Fed participates in international groups, it supports its statutory responsibilities around supervision and regulation and is working to shape those recommendations to the needs of the US financial system. He also noted that those recommendations aren’t binding so the Fed makes decisions on domestic mandates according to its own goals.

Non-Bank Financial Institutions

Rep. Steven Lynch (D-Mass.) asked what the witnesses have learned through their work with other jurisdictions about the shadow banking sector and what we can do to ensure that the shadow banking sector is not a regulatory blind spot and a risk to our financial system. Gardineer said non-bank financial institutions pose a risk to the global financial system and that it is important to manage that risk and ensure it does not trickle into the US financial system. Gibson said that that the Financial Stability Board has been focused on that and has increased transparency into the shadow banking sector. Billingsley said that the regulators could learn more about how banks are connected to the non-banking system.

For more information on this meeting, please click here. 

For an archive of past SIFMA hearing coverage, please click here.