Senate Banking Committee Nomination Hearing
AT THE MARCH 13TH SENATE BANKING COMMITTEE HEARING, lawmakers heard from the following nominees: Dr. Stanley Fischer, to be a Member and Vice Chairman of the Board of Governors of the Federal Reserve System; The Honorable Jerome H. Powell, to be a Member of the Board of Governors of the Federal Reserve System; The Honorable Lael Brainard, to be a Member of the Board of Governors of the Federal Reserve System; Mr. Gustavo Velasquez Aguilar, to be an Assistant Secretary of the U.S. Department of Housing and Urban Development; and Mr. J. Mark McWatters, to be a Member of the National Credit Union Administration Board.
Opening Remarks
In his opening remarks, Chairman Tim Johnson (D-S.D.) said that the Federal Reserve has many important tasks, including the implementation of Wall Street reform, ending “Too Big to Fail,” and providing monetary policy to improve employment. He stressed that it is critical to have a full board with diverse viewpoints to a voice applying a “one size fits all” approach with banks.
Ranking Member Mike Crapo (R-Idaho) stated that he looks forward to the continued implementation of the Dodd-Frank Act and hopes that community bank experience is a priority when establishing the replacement of the open position at the board. The replacements must bring balanced views with regulation and monetary policy from the Federal Reserve.
Sen. Bob Corker (R-Tenn.) acknowledged that housing finance is a complex topic and there is an opportunity for the committee to pass something that matters, and to do so in an environment where it might be difficult.
Witness Testimony
In his testimony, Fischer said that the Fed has made “significant progress” towards achieving maximum employment and price stability, even though “the degree of expansion is being gradually and cautiously cut back as the Fed reduces its monthly purchases of longer-term Treasury securities and agency mortgage-backed securities.” He continued that while the Dodd-Frank Act created a framework that should make these goals attainable, “we must also recognize that maintenance of the robustness and stability of the financial system cannot be attained without strong regulation and supervision.”
In his testimony, Powell said that “the task for monetary policy will be to provide continued support” for as long as needed, and that policy should be returned to a “normal stance” without having to “spark” inflation or financial instability. He added that “there are risks from removing monetary accommodation too soon as well as too late.” He continued that there is “much work to be done” when it comes to renovating financial regulation.
In her testimony, Brainard said that the Fed needed to “carefully calibrate” its monetary policy tools in order to reach “normalization,” and that the Fed must continue “robust implementation” of financial reform, as well as “enhance supervision” to make sure that no financial institution is too big to fail. She added that “massive” leverage and “opaque” risk taking must be discouraged.
In his testimony, Aguilar discussed his years of experience in human rights, saying that he has demonstrated leadership and management in both the D.C. Office of Latino Affairs and the Office of Human Rights. He said that he was committed to combating discrimination and promoting equal opportunity.
In his testimony, McWatters said that “fundamental issues create the most opportunity for concern,” and that “the basic issues…lead to the difficult question.” He continued that the fundamentals of capital, liquidity and transparency should not be neglected, as “the greatest threat to a financial system may [be]…hidden within plain view.”
Question & Answer
Johnson started the questions by asking Fischer if community banks should have a different degree of regulation than larger banks. Fischer agreed that they should, adding that it was important for community banks to “survive,” and therefore smaller banks should not have to fulfill all of the requirements that are imposed on large banks.
Johnson asked Powell what the next steps to improving cross-border resolution were.
Committing to end too big to fail, Powell replied, was important because the private sector was not an area the government needed to be involved in. He continued that the U.S. has stronger capital and liquidity requirements than other nations.
Powell explained that large institutions now have to have living wills during “reasonable” times, and that law allows for a temporary stay so that derivative counterparties cannot foreclose or accelerate against collateral. He added that it was critical to avoid the creation of a run on institutions that could spread, and that while there is a lot of working going on around the world to improve cross-border resolution, there was still much left to do.
Johnson asked Brainard what she would do to help strengthen global coordination.
Brainard replied that in order to ensure safety and soundness in U.S. institutions, there had to be a high degree of coordination in the largest financial centers. She continued that there has been some success in Europe and Asia, but that there was still some “persuading” that needed to be done with global counterparts in order to put capital standards into place.
Crapo asked Fischer if there is an exit policy, when it comes to monetary stimulus, that would not disrupt the economy.
Fischer replied that due to the Fed reducing its monthly purchases, an exit has already started. He added that there is a reliance on market reaction and that decisions have to be adjusted if the reactions are not what were expected.
Crapo mentioned his fears that the aggregate impact of the rules in the Dodd-Frank Act would be “immense” and that they could “push financial companies into regulatory death” if there was not a careful evaluation of costs and benefits, and asked Brainard if she agreed with his assessment.
Brainard explained that the process of reforming the financial system is a “work in progress,” and that the rules Dodd-Frank put in place were “very important.” She added that it is important to be mindful of the aggregate impact, as well as how business models change, and that credit needed to be “flowing” to small businesses.
Crapo asked Powell about how the regulatory framework in Dodd-Frank impacted community banks.
Powell answered that community banks are going out of business due to regulations aimed at large banks, adding that the community banking model is “under pressure” from national products, and that additional pressure should not be added.
Sen. Robert Menendez (D-N.J.) stated that a great deal has been written about the theory of expansionary austerity being tried in Europe, and asked the nominees if the lessons from these countries, as well as the stimulus in Japan, changed their approach to monetary policy.
Fischer answered that recent experiences in Europe and Asia suggest that fiscal austerity reduces output. Powell added that it should not be expected that fiscal austerity should result in short or medium-term growth. Brainard replied that financial austerity “doesn’t work.”
Sen. Sherrod Brown (D-Ohio) asked the nominees if they agreed that a too big to fail subsidy exists, and that systemically important financial institution (SIFI) capital surcharges should be higher.
Powell answered that studies show there is a subsidy, and added that SIFI capital surcharges leave “more to be done,” recommending capital surcharge based on exposure to short-term wholesale funding.
Brainard made it clear that market participants must understand that there can be no institute that is too big to fail, and that going forward she would be “open-minded” about taking additional measures that could include higher capital charges on the largest institutions.
Fischer “fundamentally agreed” with Powell and Brainard, and continued that the market has not had enough time to understand how the future financial system is going to work.
Sen. Jack Reed (D-R.I.) stated that there is a debate as to whether bank-like capital standards in Dodd Frank should apply to bank holding companies and insurance companies. He asked Fischer if there should be a variation in applying these standards.
Fischer answered that they are clearly not identical activities, with insurance companies trying to match their liabilities. Capital requirements should take those differences into account, he said.
Reed said that the core issue is whether the Federal Reserve has the authority to establish rules and regulations to take such differences into account. The Fed has stated that it does not have that authority.
Fischer answered that there was a proposal to change that legislation.
Reed then asked if Powell agreed with Fischer that they are different balance sheets, and described the core issue as one of “regulatory discretion and the ability to do it.”
Powell agreed that they are different businesses and capital requirements should reflect that, but also noted that he has read the Collins Amendment and thus far has looked “in vain for flexibility.”
Brainard also agreed that capital standards designed for banks are not well designed for insurance companies.
Reed asked Powell if he thought that unemployment benefits stimulate demand.
Powell responded that while this is not his area of expertise, he believes there are two effects: the aggregate demand effect, which helps people who cannot find jobs to live decently, and the incentive effect. During a period of time when jobs are more difficult to find, he added, unemployment benefits should be lengthened.
Brainard added that the nature of the job market should concern everyone. The job market is weaker than it should be and that should “color the analysis of what role unemployment insurance plays in the system.”
Sen. Elizabeth Warren (D-Mass.) said she is concerned that big banks “not only have the capacity to tilt the financial system, but that they also have the capacity to tilt the political systems.” She stated that as banks get larger and larger, their lobbying power and influence in Washington tend to grow. In that case, banks can delay, water down, or even kill important regulations, she said. She asked Fischer if he thought it was possible for big Wall Street banks to amass too much political power.
Fischer answered that “even for the largest economies, there’s a case for discouraging financial institutions from growing excessively.” The possibility that Warren raised, he said, is one that seems natural.
Warren then stated that three of the last four democratic treasuries had Citigroup ties, and the fourth was offered, but turned down, the CEO position at Citigroup. While acknowledging that private sector experience can be important in government service, Warren said “it’s dangerous if our government falls under a tight knit group.” She asked Fischer if he was concerned about the “revolving door” between Citigroup and other democratic institutions.
Fischer responded that while there is something to be worried about, the three years he spent at Citigroup were the most critical education he received to be a supervisor of banks.
Warren expressed that her question was not whether private industry experience is important, but whether there should be “more diversity” outside of the connection between Citigroup and the government.
Fischer said that diversity is always a great goal but that he was not colleagues with the others Warren mentioned at the time.
Sen. Charles Schumer (D-N.Y.) said that “diversity is good between people, but also good within someone.” Fischer’s background establishes him as a diverse candidate, Schumer said, and his Citigroup experience should be seen as “an asset, rather than a liability.” He asked what advice Fischer would give to Chair Yellen as to how the Federal Reserve can increase economic growth in the U.S.
Fischer answered that the Federal Reserve is charged with both trying to achieve the maximum employment rate as well as price stability at 2% inflation. He said the U.S. needs to focus on the unemployment rate at this time.
Schumer asked how Fischer’s experience at Citigroup helped make him a better banker in terms of both the economy and bank regulation.
Fischer responded that the basic issue is whether a person understands why the markets are behaving one way or another. Additionally, regulators need to have the confidence based on what they observe in the markets to speak to the public and give people confidence without exaggerating.
Schumer cited an incident in which Fischer had to prosecute a chairman of a large bank in Israel, stating that it shows he will “go after people who violate the law and do the wrong thing.”
Schumer then asked McWatters about the opportunities he sees for credit unions in the current environment.
McWatters answered that low income credit unions can expand their mandate to Americans who are “underbanked and unbanked.” If he is confirmed as a Member of the National Credit Union Administration Board, he said, he will reach out to credit unions and discuss with the NCUA to determine if credit unions are overregulated.
For more information on this hearing and to view a webcast, please click here.
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AT THE MARCH 13TH SENATE BANKING COMMITTEE HEARING, lawmakers heard from the following nominees: Dr. Stanley Fischer, to be a Member and Vice Chairman of the Board of Governors of the Federal Reserve System; The Honorable Jerome H. Powell, to be a Member of the Board of Governors of the Federal Reserve System; The Honorable Lael Brainard, to be a Member of the Board of Governors of the Federal Reserve System; Mr. Gustavo Velasquez Aguilar, to be an Assistant Secretary of the U.S. Department of Housing and Urban Development; and Mr. J. Mark McWatters, to be a Member of the National Credit Union Administration Board.
Opening Remarks
In his opening remarks, Chairman Tim Johnson (D-S.D.) said that the Federal Reserve has many important tasks, including the implementation of Wall Street reform, ending “Too Big to Fail,” and providing monetary policy to improve employment. He stressed that it is critical to have a full board with diverse viewpoints to a voice applying a “one size fits all” approach with banks.
Ranking Member Mike Crapo (R-Idaho) stated that he looks forward to the continued implementation of the Dodd-Frank Act and hopes that community bank experience is a priority when establishing the replacement of the open position at the board. The replacements must bring balanced views with regulation and monetary policy from the Federal Reserve.
Sen. Bob Corker (R-Tenn.) acknowledged that housing finance is a complex topic and there is an opportunity for the committee to pass something that matters, and to do so in an environment where it might be difficult.
Witness Testimony
In his testimony, Fischer said that the Fed has made “significant progress” towards achieving maximum employment and price stability, even though “the degree of expansion is being gradually and cautiously cut back as the Fed reduces its monthly purchases of longer-term Treasury securities and agency mortgage-backed securities.” He continued that while the Dodd-Frank Act created a framework that should make these goals attainable, “we must also recognize that maintenance of the robustness and stability of the financial system cannot be attained without strong regulation and supervision.”
In his testimony, Powell said that “the task for monetary policy will be to provide continued support” for as long as needed, and that policy should be returned to a “normal stance” without having to “spark” inflation or financial instability. He added that “there are risks from removing monetary accommodation too soon as well as too late.” He continued that there is “much work to be done” when it comes to renovating financial regulation.
In her testimony, Brainard said that the Fed needed to “carefully calibrate” its monetary policy tools in order to reach “normalization,” and that the Fed must continue “robust implementation” of financial reform, as well as “enhance supervision” to make sure that no financial institution is too big to fail. She added that “massive” leverage and “opaque” risk taking must be discouraged.
In his testimony, Aguilar discussed his years of experience in human rights, saying that he has demonstrated leadership and management in both the D.C. Office of Latino Affairs and the Office of Human Rights. He said that he was committed to combating discrimination and promoting equal opportunity.
In his testimony, McWatters said that “fundamental issues create the most opportunity for concern,” and that “the basic issues…lead to the difficult question.” He continued that the fundamentals of capital, liquidity and transparency should not be neglected, as “the greatest threat to a financial system may [be]…hidden within plain view.”
Question & Answer
Johnson started the questions by asking Fischer if community banks should have a different degree of regulation than larger banks. Fischer agreed that they should, adding that it was important for community banks to “survive,” and therefore smaller banks should not have to fulfill all of the requirements that are imposed on large banks.
Johnson asked Powell what the next steps to improving cross-border resolution were.
Committing to end too big to fail, Powell replied, was important because the private sector was not an area the government needed to be involved in. He continued that the U.S. has stronger capital and liquidity requirements than other nations.
Powell explained that large institutions now have to have living wills during “reasonable” times, and that law allows for a temporary stay so that derivative counterparties cannot foreclose or accelerate against collateral. He added that it was critical to avoid the creation of a run on institutions that could spread, and that while there is a lot of working going on around the world to improve cross-border resolution, there was still much left to do.
Johnson asked Brainard what she would do to help strengthen global coordination.
Brainard replied that in order to ensure safety and soundness in U.S. institutions, there had to be a high degree of coordination in the largest financial centers. She continued that there has been some success in Europe and Asia, but that there was still some “persuading” that needed to be done with global counterparts in order to put capital standards into place.
Crapo asked Fischer if there is an exit policy, when it comes to monetary stimulus, that would not disrupt the economy.
Fischer replied that due to the Fed reducing its monthly purchases, an exit has already started. He added that there is a reliance on market reaction and that decisions have to be adjusted if the reactions are not what were expected.
Crapo mentioned his fears that the aggregate impact of the rules in the Dodd-Frank Act would be “immense” and that they could “push financial companies into regulatory death” if there was not a careful evaluation of costs and benefits, and asked Brainard if she agreed with his assessment.
Brainard explained that the process of reforming the financial system is a “work in progress,” and that the rules Dodd-Frank put in place were “very important.” She added that it is important to be mindful of the aggregate impact, as well as how business models change, and that credit needed to be “flowing” to small businesses.
Crapo asked Powell about how the regulatory framework in Dodd-Frank impacted community banks.
Powell answered that community banks are going out of business due to regulations aimed at large banks, adding that the community banking model is “under pressure” from national products, and that additional pressure should not be added.
Sen. Robert Menendez (D-N.J.) stated that a great deal has been written about the theory of expansionary austerity being tried in Europe, and asked the nominees if the lessons from these countries, as well as the stimulus in Japan, changed their approach to monetary policy.
Fischer answered that recent experiences in Europe and Asia suggest that fiscal austerity reduces output. Powell added that it should not be expected that fiscal austerity should result in short or medium-term growth. Brainard replied that financial austerity “doesn’t work.”
Sen. Sherrod Brown (D-Ohio) asked the nominees if they agreed that a too big to fail subsidy exists, and that systemically important financial institution (SIFI) capital surcharges should be higher.
Powell answered that studies show there is a subsidy, and added that SIFI capital surcharges leave “more to be done,” recommending capital surcharge based on exposure to short-term wholesale funding.
Brainard made it clear that market participants must understand that there can be no institute that is too big to fail, and that going forward she would be “open-minded” about taking additional measures that could include higher capital charges on the largest institutions.
Fischer “fundamentally agreed” with Powell and Brainard, and continued that the market has not had enough time to understand how the future financial system is going to work.
Sen. Jack Reed (D-R.I.) stated that there is a debate as to whether bank-like capital standards in Dodd Frank should apply to bank holding companies and insurance companies. He asked Fischer if there should be a variation in applying these standards.
Fischer answered that they are clearly not identical activities, with insurance companies trying to match their liabilities. Capital requirements should take those differences into account, he said.
Reed said that the core issue is whether the Federal Reserve has the authority to establish rules and regulations to take such differences into account. The Fed has stated that it does not have that authority.
Fischer answered that there was a proposal to change that legislation.
Reed then asked if Powell agreed with Fischer that they are different balance sheets, and described the core issue as one of “regulatory discretion and the ability to do it.”
Powell agreed that they are different businesses and capital requirements should reflect that, but also noted that he has read the Collins Amendment and thus far has looked “in vain for flexibility.”
Brainard also agreed that capital standards designed for banks are not well designed for insurance companies.
Reed asked Powell if he thought that unemployment benefits stimulate demand.
Powell responded that while this is not his area of expertise, he believes there are two effects: the aggregate demand effect, which helps people who cannot find jobs to live decently, and the incentive effect. During a period of time when jobs are more difficult to find, he added, unemployment benefits should be lengthened.
Brainard added that the nature of the job market should concern everyone. The job market is weaker than it should be and that should “color the analysis of what role unemployment insurance plays in the system.”
Sen. Elizabeth Warren (D-Mass.) said she is concerned that big banks “not only have the capacity to tilt the financial system, but that they also have the capacity to tilt the political systems.” She stated that as banks get larger and larger, their lobbying power and influence in Washington tend to grow. In that case, banks can delay, water down, or even kill important regulations, she said. She asked Fischer if he thought it was possible for big Wall Street banks to amass too much political power.
Fischer answered that “even for the largest economies, there’s a case for discouraging financial institutions from growing excessively.” The possibility that Warren raised, he said, is one that seems natural.
Warren then stated that three of the last four democratic treasuries had Citigroup ties, and the fourth was offered, but turned down, the CEO position at Citigroup. While acknowledging that private sector experience can be important in government service, Warren said “it’s dangerous if our government falls under a tight knit group.” She asked Fischer if he was concerned about the “revolving door” between Citigroup and other democratic institutions.
Fischer responded that while there is something to be worried about, the three years he spent at Citigroup were the most critical education he received to be a supervisor of banks.
Warren expressed that her question was not whether private industry experience is important, but whether there should be “more diversity” outside of the connection between Citigroup and the government.
Fischer said that diversity is always a great goal but that he was not colleagues with the others Warren mentioned at the time.
Sen. Charles Schumer (D-N.Y.) said that “diversity is good between people, but also good within someone.” Fischer’s background establishes him as a diverse candidate, Schumer said, and his Citigroup experience should be seen as “an asset, rather than a liability.” He asked what advice Fischer would give to Chair Yellen as to how the Federal Reserve can increase economic growth in the U.S.
Fischer answered that the Federal Reserve is charged with both trying to achieve the maximum employment rate as well as price stability at 2% inflation. He said the U.S. needs to focus on the unemployment rate at this time.
Schumer asked how Fischer’s experience at Citigroup helped make him a better banker in terms of both the economy and bank regulation.
Fischer responded that the basic issue is whether a person understands why the markets are behaving one way or another. Additionally, regulators need to have the confidence based on what they observe in the markets to speak to the public and give people confidence without exaggerating.
Schumer cited an incident in which Fischer had to prosecute a chairman of a large bank in Israel, stating that it shows he will “go after people who violate the law and do the wrong thing.”
Schumer then asked McWatters about the opportunities he sees for credit unions in the current environment.
McWatters answered that low income credit unions can expand their mandate to Americans who are “underbanked and unbanked.” If he is confirmed as a Member of the National Credit Union Administration Board, he said, he will reach out to credit unions and discuss with the NCUA to determine if credit unions are overregulated.
For more information on this hearing and to view a webcast, please click here.