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SBC Nomination Hearing

Senate Committee on Banking, Housing and Urban Affairs                                                      

Nomination Hearing

Wednesday, November 30, 2022

Topline

  • Democrats highlighted concerns over digital assets, with Sen. Brown calling it a national security issue.
  • Republicans voiced their concerns with Gruenberg’s tenure at the FDIC, accusing him of trying to politicize the agency by targeting certain industries like firearms or oil and gas.

Witnesses

  • The Hon. Martin Gruenberg, Member and Chairperson Designate, Board of Directors of the Federal Deposit Insurance Corporation
  • Travis Hill Member and Vice Chairperson Designate, Board of Directors of the Federal Deposit Insurance Corporation
  • Jonathan McKernan, Member Designate, Board of Directors of the Federal Deposit Insurance Corporation
  • Kimberly Ann McClain, Assistant Secretary Designate, Housing and Urban Development

Opening Statements
Chairman Sherrod Brown (D-Ohio)

In his opening statement, Brown noted that the Federal Deposit Insurance Corporation (FDIC) is responsible for ensuring deposits and the supervision of 5,000 banks and savings associations. He added that Marty Gruenberg is exceptionally well qualified to serve as the Chair of the FDIC and said Gruenberg has been unanimously confirmed by the Senate for five terms. Brown said this is a critical time for the banking system as the country emerges from the pandemic and that he expects financial regulators to serve Main Street rather than Wall Street.

Ranking Member Patrick Toomey (R-Pa.)

In his opening statement, Toomey began by noting that nominations represent an overdue return to normal, as the FDIC has not been governed by a full five-member board since 2015. He discussed several concerns with Gruenberg’s nomination including his “partisan power grab at the FDIC board” and involvement in Operation Chokepoint. Toomey said Gruenberg was involved in Operation Chokepoint by directing banks to cease operations with payday lenders and cited his concern that a pattern of pressuring banks not to provide services to lawful but disfavored businesses would repeat itself at Mr. Gruenberg’s direction.

Toomey said his office received whistleblower reports that the FDIC has been deterring banks from doing business with crypto-related companies and repeated his concerns that Gruenberg would continue to politicize the agency. Toomey concluded by noting that Hill and McKernan are both extremely well-qualified nominees.

Testimony

Martin Gruenberg, Member and Chairperson Designate, Board of Directors of the Federal Deposit Insurance Corporation

In his testimony, Gruenberg said the banking industry is entering the current period of economic uncertainty in a position of strength. He added that the industry is experiencing strong loan growth, continuing good asset quality measures, and remaining well-capitalized and highly liquid. Gruenberg acknowledged that the industry faces significant downside risks from inflation, rising market interest rates, and geopolitical uncertainty. He noted these risks may reduce profitability, weaken credit quality and capital, and limit loan growth in coming quarters.

Gruenberg mentioned several key priorities for the FDIC, including maintaining a strong deposit insurance fund, strengthening the Community Reinvestment Act, addressing the financial risks of climate change, reviewing the bank merger process, evaluating the risks of crypto assets to the banking system, and finalizing the Basel III capital rules. He said he would focus on strengthening cybersecurity and information security within the banking industry.

Travis Hill, Member and Vice Chairperson Designate, Board of Directors of the Federal Deposit Insurance Corporation

In his testimony, Hill discussed the importance of a well-tailored regulatory framework that promotes economic growth, innovation, and broad access to credit and ensures our nation’s banks remain safe, sound, and resilient to shocks. Hill noted he appreciates the value of a banking sector with institutions of different sizes and business models, including community banks and minority depository institutions.

Jonathan McKernan, Member Designate, Board of Directors of the Federal Deposit Insurance Corporation

In his testimony, McKernan discussed the impacts of the financial crisis of 2008, noting that almost every American family suffered during the economic fallout, which is still being felt today. McKernan said the financial crisis left him with the enduring conviction that we must have a strong financial regulatory system.

Dr. Kimberly Ann McClain, Assistant Secretary Designate, Housing and Urban Development

In her testimony, McClain pledged to ensure the Office of Congressional and Intergovernmental Relations would be empowered and equipped to be agile and responsive, to increase the capacity and continuity of the Office’s workforce to deliver exceptional customer service, and to develop strong and trusted relationships through consistent communication and engagement.

Question & Answer

Crypto Regulation

Sen. Robert Menendez (D-N.J.) said the collapse of several crypto asset platforms this year highlighted the growing economic risks of unregulated digital assets. He noted that the contagion risk will be amplified if digital assets become further integrated with the traditional economy and financial system. Menendez asked Hill and McKernan how they would ensure FDIC-supervised institutions were shielded from inappropriate risk in the digital asset space. Hill said it is important to distinguish between different types of crypto-related activities in which banks can get involved. McKernan added that crypto-related activities at an FDIC-supervised bank must be performed safely, in compliance with consumer protection, and cannot pose a risk to financial stability. He said there is a role for regulators to define the rules of the road in this space.

Sen. Jon Tester (D-Mont.) asked how regulators could stop crypto regulations from inherently giving crypto credibility. Gruenberg said the FDIC was thoughtful of the problem, while Hill said the focus should remain on the safety and soundness of the institutions the FDIC oversees.

Sen. Elizabeth Warren (D-Mass.) asked if the contagion that spread through the crypto industry has shaken our traditional banking system. McKernan said it has not. Warren replied that it was not by accident, explaining that our banks stayed safe when crypto imploded because many of President Biden’s regulators fought to keep crypto from becoming dangerously intertwined with our banks.

Warren asked if crypto boosters had gotten their wish and if banks insured by the FDIC were “all in” on crypto and holding FTX’s tokens on their balance sheets or accepting crypto tokens as collateral for loans. Warren also questioned if our banking system will be less safe than it is today. Gruenberg agreed it would be less safe. Warren concluded that the crypto industry is powered by fraud and money laundering and warned if these “toxic assets” become more integrated into the banking system, taxpayers will be on the hook the next time crypto stumbles.

Toomey said nothing about what happened at FTX should require us to blame crypto. He explained that the FTX collapse resulted from the misuse of customer accounts by the individual controlling them, which has also happened in conventional financial institutions.

Community Reinvestment Act

Sen. Catherine Cortez-Masto (D-Nev.) asked McKernan how he will ensure that changes to the Community Reinvestment Act (CRA) preserve branch banking so that people can open and maintain accounts. McKernan said banks must support all segments of their community and are committed to ensuring that any rulemaking achieves that mandate.

Cortez-Masto asked how McKernan would address limited banking services for tribal communities.

McKernan answered that the CRA will have a role to play in addressing limited banking services for tribal communities.

Sen. Chris Van Hollen (D-Md.) asked Gruenberg for an update on the new CRA rulemaking timeline. Gruenberg said the FDIC is reviewing the comments and is in the process of final rulemaking. He added the FDIC’s goal is to get it done as soon as possible and estimated it would be complete early next year.

Van Hollen asked Gruenberg to identify three top priorities of the new rulemaking. Gruenberg noted that the core provision of the rulemaking centered on the CRA is limited to the branch network of banks. He noted while assessment areas are tied to banks’ physical branch networks, an increasing portion of lending by banks is done online. Gruenberg explained that the core proposal of the rulemaking will identify new retail lending assessment areas where a bank may have significant lending activity but does not have a physical branch.

Community Banking

Sen. Jack Reed (D-R.I.) asked Gruenberg to comment on the state of community banking and any challenges facing community banking. Gruenberg said community banking is central to the FDIC’s mission to maintain a strong community banking system. He noted that community banks play a critical role in our financial system and consistently punch above their weight. Gruenberg said community banks account for about 12% of all banking assets in the United States and provide nearly 40% of all small loans to small businesses and farms.

Cortez-Masto asked Hill what he will do to expand on the work of the FDIC through its bank-on collaborations and other approaches to ensure that banks can provide affordable and accessible banking services to residents of their communities. Hill said financial inclusion is important and pledged to engage on what more can be done.

Interest Rates

Sen. Jon Ossoff (D-Ga.) asked about the most significant leverage that poses the most significant risk. Gruenberg said the most significant risk is posed by securities being held on the balance sheets of banks, especially longer term securities that banks accumulated during the prolonged period of very low interest rates.

Politicization

Sens. Richard Shelby (R-Ala.) and Thom Tillis (R-N.C.) seconded the concerns mentioned by Sen. Toomey in his opening statement. Sen. Bill Hagerty (R-Tenn.) said our financial system is becoming politicized and weaponized. He asked Gruenberg to commit the FDIC to not requiring insured entities to disclose their involvement in the oil and gas industry, the firearm industry, or any other politically sensitive industries. Gruenberg agreed.

Sen. Steve Daines (R-Mont.) noted Operation Chokepoint was implemented under Gruenberg’s leadership of the FDIC. Daines said federal regulators used their authorities to intimidate banks into shunning lawful but politically disfavored industries, including firearms and ammunition dealers. He asked Gruenberg to commit to actively preventing employees of the FDIC from criticizing, discouraging, or prohibiting banks from lending or doing business with any industries or customers that are operating by the law. Gruenberg committed.

Industrial Loan Companies

Cortez-Masto noted that industrial loan companies (ILCs) are important to Nevada’s financial sector. She questioned Gruenberg about his testimony before the House Financial Services Committee, where he discussed the FDIC’s work on contending with a range of risks to ensure resiliency in our banking system. She asked if he had anything to add regarding risks to the financial sector posed by other non-bank sectors. Gruenberg maintained this is a key risk factor for the agency to focus on, adding that bank relationships with non-bank third parties are a significant source of risk for our insured depository institutions.

Military Lending Act

Reed asked Hill and McKernan if they would support a potential proposal to expand the Military Lending Act, which counts interest at 36%, to all Americans. Hill said we should be careful regarding how we balance affordability with access to credit. McKernan said he would provide technical assistance to Reed on the issue.

Basel III Requirements

Sen. Brown asked Hill and McKernan if they agreed with Fed Vice Chair Barr that the Basel III requirements should be implemented with enhanced regulatory capital requirements. Both men committed to a holistic review and pledged to keep an open mind.

Climate Policy

Sen. Toomey asked Gruenberg about his decision for the FDIC to join the Network for the Greening of the Financial System. Toomey said the group has “an explicit mission to mobilize mainstream finance to support the transition to a sustainable economy.” He then asked Gruenberg if he believed it was appropriate for the FDIC to seek to play a role in determining the pace of the transition of our economy to a lower carbon economy. Gruenberg said that was not the FDIC’s responsibility. Toomey told Gruenberg that he did not have the authority to set climate policy and suggested withdrawing from the group.

Diversity

Sen. Cynthia Lummis (R-Wyo.) said the nominees did not represent diversity and inclusion. She added that she is angry that Gruenberg forced the resignation of his predecessor, who is a first-generation American and a woman, as FDIC chair. Lummis asked if there were any women currently nominated or serving on the FDIC board. Gruenberg replied that there were not. She noted Dodd-Frank requires FDIC board members to have served as state bank regulators. Lummis said that since none of the nominees fulfilled Dodd-Frank’s mandate, the Committee should not move forward with the nominations.

For more information on this hearing, please click here.

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