Senate Banking on Wall Street Reform
Key Topics & Takeaways
- FSOC Designation: Sen. Crapo called for a moratorium on new FSOC SIFI designations until there is more transparency in the process
- Living Wills: Tarullo and Gruenberg said they are prepared to use the authorities granted to them under Dodd-Frank to ensure resolvability of financial institutions if their living wills are not credible.
- Capital Surcharge: Tarullo said that a capital surcharge will be applied to the eight largest U.S. banks at a higher level than the Basel standard; adding “noticeably so, in some cases.”
- CFTC Margin Re-Proposal: Massad announced that the CFTC will hold a meeting on Sep. 17 to consider a re-proposal on margin for non-cleared swaps as well as a rule on “special entities.”
- LCR and Muni Securities: Sen. Schumer expressed concern about the exclusion of munis from HQLA in the LCR and asked Tarullo, Gruenberg, and Curry if they were open to including them if they are found to be highly liquid. All three agreed that they would consider inclusion if a staff study shows these bonds as being as liquid as the corporate bonds captured.
- Risk Retention Rule: Tarullo, Gruenberg, and Curry hope to finish the risk retention rule by the end of the year.
- Cybersecurity: Sen. Reed said that the investing public should know quickly if a company has been hit by a cyber attack and urged the SEC to move quickly in their efforts to require disclosures.
- CEO Pay Ratio: White said she “hopes and expects” to see the SEC complete a rule on CEO pay ratio by the end of the year
Witnesses
- Daniel Tarullo,Governor, Federal Reserve Board of Governors
- Martin Gruenberg, Chairman, Federal Deposit Insurance Corporation
- Thomas Curry,Comptroller of the Currency
- Richard Cordray, Director, Consumer Financial Protection Bureau
- Mary Jo White, Chair, Securities and Exchange Commission
- Timothy Massad,Chairman, Commodity Futures Trading Commission
In his opening statement, Chairman Tim Johnson (D-S.D.) said the Dodd-Frank Act was the appropriate response at the time of the financial crisis, and that the benefits of the law are already visible; citing an enhanced system of regulation, increased transparency and oversight, and improved coordination between regulators. He said the road to reform has been long and not always easy, and that Congress has not provided adequate funding for some regulators.
Johnson lauded finalized rules produced thus far as being stronger because of input from the financial industry, even if market participants have not met new rules with open arms. He stressed that policymakers must not forget the lessons of the crisis, and that the financial system is strongest with tough but fair oversight.
In his opening statement, Ranking Member Mike Crapo (R-Idaho) noted that of the roughly 400 rules mandated by Dodd-Frank, slightly more than half have been finalized, 25 percent have been proposed, and the rest are yet to be written. He stated that the cumulative costs of the law cannot be known until all the rules are implemented, but that Congress cannot pretend that costs are not passed onto consumers. He said financial institutions are spending money for compliance costs rather than investing it and creating jobs, and that this needs to be addressed. He urged the regulators to go through a regulatory review and provide a list of recommendations to Congress of rules that are unnecessarily burdensome.
Crapo also criticized the Financial Stability Oversight Council (FSOC), repeating concerns about the transparency of its designation process. He warned that the U.S. financial system cannot remain the preferred destination for investors around the world if regulators continue to act under a “cloak of secrecy” and urged regulators to use public, indicator-based criteria for the designation of systemically-important financial institutions (SIFIs). He pushed for a moratorium on new designations until such criteria are available.
Witness Testimony
Governor Tarullo
In his testimony, Federal Reserve Governor Daniel Tarullo said this year was the “beginning of the end” of implementing major parts of Dodd-Frank. He said, however, that agencies have much work left to do, and highlighted two priorities for prudential requirements for SIFIs: 1) proposed capital surcharges for the eight U.S. banks designated at globally systemic; and 2) a proposal for the same eight banks to hold a minimum amount of long-term unsecured debt.
Tarullo also stated the need to consider raising the threshold for the applicability of Dodd-Frank regulations to some banks. He noted the Federal Reserve is working to reduce regulatory burden on smaller and mid-size banks, and that there would be some benefit to statutory changes. He also proposed raising the $50 billion threshold for SIFI designation.
Chairman Gruenberg
In his testimony, Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg said recent actions by banking regulators for rules on a supplementary leverage ratio, liquidity coverage ratio (LCR), and a proposal for margin requirements address three key areas of systemic risk, and noted that the leverage capital requirements go well beyond requirements from the Basel III agreement.
Gruenberg then turned to resolution, noting that the Federal Reserve and FDIC issued letters to each of the eleven largest bank holding companies on the shortcomings of their resolution plans and requirements for their 2015 submission. He specified that the firms’ plans had unrealistic or inadequately supported assumptions and often failed to identify changes to firm structure to promote an orderly resolution. Gruenberg said the agencies would work closely with the institutions to improve the resolution plans by simplifying their legal structures, amending derivatives contracts, and ensuring the continuity of critical operations during bankruptcy.
Comptroller Curry
In his testimony, Comptroller of the Currency Thomas Curry reported that the Office of the Comptroller of the Currency (OCC) has completed all Dodd-Frank rulemakings for which it was solely responsible, and has made good progress on collaborative rules. He credited the rules for leading to steady improvements in the overall strength of the financial system, but stressed that supervisors must remain vigilant, and that requiring higher supervisory standards for the largest and most systemic institutions is consistent with the objectives of Dodd-Frank.
Curry said regulators should hold themselves accountable for regulatory improvements, and stated that the OCC asked a team of international regulators to assess its supervision of large banks. He noted that the team identified areas for improvement, including the expansion of a lead-expert program to better compare the operations of institutions, and the enhancement of risk monitoring and reporting.
Director Cordray
In his testimony, Consumer Financial Protection Bureau (CFPB) Director Richard Cordray noted his agency’s initial responsibility to address deep problems in the mortgage market that helped bring about the financial crisis. He pointed out that, just this year, the CFPB issued rules for mortgage servicing, loan originator compensation, and disclosures, and claimed that his agency works diligently to monitor the effects of rules on the mortgage market so that it can make changes when warranted.
Chair White
In her testimony, Securities and Exchange Commission (SEC) Chair Mary Jo White stated that her agency has made “substantial progress” in implementing their rulemaking agenda under the Dodd-Frank Act; focusing on eight key areas: 1) credit rating agencies; 2) asset-backed securities; 3) municipal advisors; 4) asset management, including regulation of private fund advisers; 5) over-the-counter derivatives; 6) clearance and settlement; 7) proprietary activities by financial institutions; and 8) executive compensation. She then noted the SEC has implemented 20 significant rulemakings since April 2013, and, overall, have proposed rules to address 90 percent of the provisions from Dodd-Frank that require SEC rulemaking.
White said that, going forward, the SEC will be focusing their efforts on completing required rules under Title VII of Dodd-Frank for securities-based swaps, and on rules regarding executive compensation practices. White stressed that the SEC “must be deliberate as we consider and prioritize our remaining mandates” and that these actions should be “supported by robust economic analysis.”
Chairman Massad
In his testimony, Commodity Futures Trading Commission (CFTC) Chairman Tim Massad said that regulators and Congress must never forget the “terrible cost” imposed on the country due to the financial crisis, and stressed that this cost is why implementation of the new regulatory regime is so important.
Massad said that the CFTC, moving forward, will “likely make adjustments” to their rules and that “this is to be expected” with “reforms as significant as these.” He stressed that the CFTC wants to ensure that their rules “do not place undue burden on commercial end-users” and that their reforms, if they are to succeed, must be harmonized with other global regulators “as much as possible.” He also highlighted the need for strong enforcement and compliance efforts to ensure market participants comply with the new rules and stressed the need for consistent data reporting standards to ensure market information is collected “accurately and promptly.”
Massad also noted that the CFTC will be holding a meeting on September 17 to consider a rule for “special entities,” such as public utilities, as well as a re-proposal of a rule on margin requirements for non-cleared swaps, similar to the proposal put out last week by banking regulators. Massad later noted that with the time required for public comment, the margin rule is not likely to be finalized by the end of the year.
Question and Answer
New Rules
Johnson asked the regulators what rules would be finalized before the end of the year, and asked specifically about risk retention. Tarullo answered that he expects to finalize the financial sector concentration rule by the end of the year, and that the Federal Reserve is in “the home stretch” on the risk retention rule but may not complete it in 2014. Gruenberg and Curry both expressed their hope to complete the risk retention rule by the end of the year.
Insurance Company Designations
Johnson noted that the Federal Reserve staff has taken a two-track approach on capital rules for designated insurance companies, based on whether or not Congress enacts legislation to give regulators flexibility to tailor rules for insurance companies. He asked if it was important that Congress pass legislation. Tarullo replied that legislation would be very welcome, and that staff is conducting a quantitative impact study to develop information on the insurance industry.
Sen. Mike Johanns (R-Neb.) asked how the FSOC could get “this far down the road” in designating insurance companies as SIFIs when they admit that more information on insurance companies is needed. Tarullo said he draws a distinction between the creation of capital standards and the assessment of systemic risk, and that the FSOC is not concerned with the core insurance activities of companies.
Shelby said insurance has traditionally been regulated by the states, and asked if this was the beginning of preemption by the federal government over the states. Tarullo said this is not the Federal Reserve’s point of view.
Johnson asked what the FDIC would do to monitor systemic banks as they develop new plans for living wills. Gruenberg answered that each firm has been given a detailed roadmap of needed changes, and that the FDIC anticipated giving them direction and guidance to follow through.
Sen. Bob Corker (R-Tenn.) said Title I and II of Dodd-Frank were some of the strongest pieces of the bill, but noted that when the FDIC and Federal Reserve put out a joint statement on the shortcomings of submitted living wills, the Federal Reserve then followed it with a separate statement that “watered down” the concern. Tarullo said the Federal Reserve and FDIC agreed on the measures that banks needed to take to become more resolvable, but that while the FDIC determined the plans the “non-credible,” the Federal Reserve thought it more important to identify shortcomings and go through another iterative process. He continued that by being more specific in the shortcomings and expectations for the banks, concerns over a lack of guidance should be put to rest.
Corker asked if the Federal Reserve and FDIC would use the powers given to them to simplify firms if they cannot create acceptable resolution plans. Tarullo stressed that the objective of the process is to get firms to resolvability, but that he is committed to using the powers given by Dodd-Frank if this does not happen. Gruenberg also said the FDIC is prepared to use its statutory authorities if changes are not made.
Sen. Elizabeth Warren (D-Mass.) noted that the joint Federal Reserve-FDIC statement told the banks they had to make “significant progress” in their next submissions. She asked what would constitute “significant” change and what action the agencies would take if the banks do not meet the expectations. Gruenberg answered that the agencies laid out a list of specific, measurable actions to take, and that they will work closely with the banks to ensure they meet these expectations. Tarullo said there are supervisors working with the institutions to look for tangible measures to address each problem. When asked by Warren if they would use their tools to simplify institutions if they fail to submit credible resolution plans, Tarullo said they would.
EGRRPA
Crapo raised the Economic Growth and Regulatory Paperwork Reduction Act (EGPRPA), and asked whether the Federal Reserve, FDIC, and OCC would commit to providing Congress with a list of regulations that are unnecessary or unduly burdensome. Curry said the Federal Financial Institutions Examination Council (FFIEC) is overseeing the EGPRPA process, and that it has two objectives: 1) to make changes that regulators have control over; and 2) to report to Congress recommendations that would require statutory changes. Gruenberg said the process offers regulators an opportunity to take an overview of regulatory compliance and identify areas for change, and that the FFIEC is planning a series of public hearings around the country.
SIFI Designation
Crapo asked Tarullo about raising the $50 billion threshold for SIFI designation. Tarullo said several years of testing and assessment have given regulators a chance to speak on the designation threshold. Given the intensity and complexity of work around stress testing, he said regulators “haven’t felt that the additional safety and soundness benefits of designation really are substantial enough to warrant the kinds of expenditures” required of banks which are above $50 billion in assets but well below the largest systemically important institutions.
Municipal Bonds
Sen. Charles Schumer (D-N.Y.) was highly critical of the exclusion of municipal bonds from high-quality liquid asset (HQLA) classification in the recent LCR final rule, warning that regulators risk limiting the scope of financial institutions willing to take on investment grade municipal securities that are critical to the nation’s infrastructure. He stressed that municipal securities are high-quality assets that adequately cover liquidity outflows in periods of stress. He expressed his hope that regulators would reconsider the rule.
Tarullo said the Federal Reserve’s staff has been asked to prepare a proposal that would allow the recognition as HQLA of state and municipal bonds that are “in the same league” as corporate bonds. He said analysis during the comment period suggested that there ought to be a way to identify more liquid municipal securities. Gruenberg and Curry said they would monitor the impact of the rule on the market, and that they are open to revising the rule if necessary.
Capital Surcharge
Sen. Sherrod Brown (D-Ohio) noted Tarullo’s statement that capital surcharges for big banks could be much higher than Basel rules, and asked if this is important to financial stability. Tarullo said an analysis was done a few years ago that, while failing to give an exact number for an appropriate charge, did develop a range. He said the Basel recommendation was at the low end of the range, and that banking regulators feel more comfortable being in the middle of that range. He noted that other nations have come to similar conclusions, including Switzerland, Sweden, and the Netherlands.
Sen. Richard Shelby (R-Ala.) asked if foreign banks would be subject to the surcharge. Tarullo said that is not the intention, and again noted that other countries have imposed higher surcharges of their own.
Sen. Jack Reed (D-R.I.) said that the investing public should “know very quickly” if public companies have been affected by a cyber attack and asked White if she is considering an “action forcing device” to require disclosure of impacts.
White noted that the SEC released disclosure guidance in 2011, which the Division of Corporate Finance continues to review and give comments on. She also mentioned that the SEC has formed an inter-divisional cyber working group within the SEC to look at these issues.
Sen. Joe Manchin (D-W.Va.) stressed the need for cybersecurity reform, noting recent breaches with retailers, and asked Tarullo and Curry for their thoughts. Tarullo spoke of the “asymmetry” in requirements between banks and non-financial institutions, saying this is frustrating for banks of all sizes. He said non-financial companies should also have cybersecurity expectations. Curry agreed on the need to “level the playing field” with non-financial companies.
Executive Compensation
Sen. Robert Menendez (D-N.J.) said that investors should have information about CEO compensation levels and if their pay is creating value or is “simply value capture by insiders.” He then asked White about the CEO pay ratio provision in Dodd-Frank and when the SEC expects to finalize their rulemaking in this area.
White said that this rulemaking is “certainly a priority” and that she expects it to be completed this year.
Menendez then asked if the SEC plans to engage in a rulemaking to require disclosure of corporate political spending, noting that the SEC has received over one million comments supporting such a rule.
White explained that there are two petitions pending at the SEC to require this disclosure, but that the SEC staff is not currently working on a rule in this space. She then noted that many companies voluntarily disclose this information and that if political spending is “material” then the current law requires it to be disclosed.
Market Structure
Senator Mark Warner (D-Va.) asked if the SEC has any specific plans to address complexity in the equities market to improve transparency and if the SEC will either allow participants to audit fees and rebates or ban some of these practices.
White noted that the SEC has a number of initiatives to address market structure concerns on fees, complexity, and conflicts of interest. She mentioned that the exchanges are currently auditing their structures and will report back to the SEC with that information. She then said that while the U.S. markets are strong and reliable, that does not mean that “enhancements and more level playing field initiatives can’t and shouldn’t be undertaken.”
Guide 3 Disclosures
Brown asked when the SEC expects to update their “Industry Guide 3” on disclosures for bank holding companies, to make these organizations more transparent.
White said that the SEC staff is currently in the process of preparing recommendations to update this guide and noted that any changes will be put out for public comment.
Broker-Dealer Leverage Ratio
Warner expressed concern with the high level of leverage among certain broker-dealers and asked White if she shares this concern.
White said she is concerned with highly leveraged broker-dealers. She noted that the SEC’s net capital rule and oversight role seeks to address some of these concerns and also said that SEC is considering a possible rulemaking on leverage for broker-dealers.
SEC Swaps Rules
Reed asked for assurance from White that the SEC’s rules under Title VII “are at the very top of your list.” White told Reed that the SEC’s swaps rules are a “major priority of mine to get them done as quickly as we can, but also as well as we can.”
Settlements and Individual Responsibility
Warren pointed out that multiple large banks have admitted to breaking the law this year and paid large settlements, but lamented that despite their misconduct, no senior executives have been criminally prosecuted. She asked how many senior executives have been referred to the Department of Justice. Tarullo answered that while there are often individuals that can be singularly identified as responsible, regulators cannot charge them, though they have shared information with the Department of Justice.
Warren said civil settlements do not provide deterrence, and claimed that some executives are even rewarded for negotiating settlements with raises, setting a bad precedent.
Shelby said people should not be able to buy their way out of responsibility, and placed more responsibility on the Department of Justice for not pursuing charges.
Bitcoin
Manchin expressed concern with Bitcoin, calling it “wildly speculative” and subject to theft and scams. He asked for an update on the SEC’s efforts and if they are considering any possible actions with regard the crypto-currency.
White said Bitcoin “is an evolving area for all the regulators” and noted that the SEC has issued two separate investor alerts on the topic. White said of Bitcoin, “at this stage we have not concluded that it is a security that would be subject to that kind of regulation by us, but it is something we’re still very focused on.”
For more information on this hearing and to view a webcast, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:General,Hearing Summaries Agency:Senate Banking Committee,Publish Year:2014
Key Topics & Takeaways
- FSOC Designation: Sen. Crapo called for a moratorium on new FSOC SIFI designations until there is more transparency in the process
- Living Wills: Tarullo and Gruenberg said they are prepared to use the authorities granted to them under Dodd-Frank to ensure resolvability of financial institutions if their living wills are not credible.
- Capital Surcharge: Tarullo said that a capital surcharge will be applied to the eight largest U.S. banks at a higher level than the Basel standard; adding “noticeably so, in some cases.”
- CFTC Margin Re-Proposal: Massad announced that the CFTC will hold a meeting on Sep. 17 to consider a re-proposal on margin for non-cleared swaps as well as a rule on “special entities.”
- LCR and Muni Securities: Sen. Schumer expressed concern about the exclusion of munis from HQLA in the LCR and asked Tarullo, Gruenberg, and Curry if they were open to including them if they are found to be highly liquid. All three agreed that they would consider inclusion if a staff study shows these bonds as being as liquid as the corporate bonds captured.
- Risk Retention Rule: Tarullo, Gruenberg, and Curry hope to finish the risk retention rule by the end of the year.
- Cybersecurity: Sen. Reed said that the investing public should know quickly if a company has been hit by a cyber attack and urged the SEC to move quickly in their efforts to require disclosures.
- CEO Pay Ratio: White said she “hopes and expects” to see the SEC complete a rule on CEO pay ratio by the end of the year
Witnesses
- Daniel Tarullo,Governor, Federal Reserve Board of Governors
- Martin Gruenberg, Chairman, Federal Deposit Insurance Corporation
- Thomas Curry,Comptroller of the Currency
- Richard Cordray, Director, Consumer Financial Protection Bureau
- Mary Jo White, Chair, Securities and Exchange Commission
- Timothy Massad,Chairman, Commodity Futures Trading Commission
In his opening statement, Chairman Tim Johnson (D-S.D.) said the Dodd-Frank Act was the appropriate response at the time of the financial crisis, and that the benefits of the law are already visible; citing an enhanced system of regulation, increased transparency and oversight, and improved coordination between regulators. He said the road to reform has been long and not always easy, and that Congress has not provided adequate funding for some regulators.
Johnson lauded finalized rules produced thus far as being stronger because of input from the financial industry, even if market participants have not met new rules with open arms. He stressed that policymakers must not forget the lessons of the crisis, and that the financial system is strongest with tough but fair oversight.
In his opening statement, Ranking Member Mike Crapo (R-Idaho) noted that of the roughly 400 rules mandated by Dodd-Frank, slightly more than half have been finalized, 25 percent have been proposed, and the rest are yet to be written. He stated that the cumulative costs of the law cannot be known until all the rules are implemented, but that Congress cannot pretend that costs are not passed onto consumers. He said financial institutions are spending money for compliance costs rather than investing it and creating jobs, and that this needs to be addressed. He urged the regulators to go through a regulatory review and provide a list of recommendations to Congress of rules that are unnecessarily burdensome.
Crapo also criticized the Financial Stability Oversight Council (FSOC), repeating concerns about the transparency of its designation process. He warned that the U.S. financial system cannot remain the preferred destination for investors around the world if regulators continue to act under a “cloak of secrecy” and urged regulators to use public, indicator-based criteria for the designation of systemically-important financial institutions (SIFIs). He pushed for a moratorium on new designations until such criteria are available.
Witness Testimony
Governor Tarullo
In his testimony, Federal Reserve Governor Daniel Tarullo said this year was the “beginning of the end” of implementing major parts of Dodd-Frank. He said, however, that agencies have much work left to do, and highlighted two priorities for prudential requirements for SIFIs: 1) proposed capital surcharges for the eight U.S. banks designated at globally systemic; and 2) a proposal for the same eight banks to hold a minimum amount of long-term unsecured debt.
Tarullo also stated the need to consider raising the threshold for the applicability of Dodd-Frank regulations to some banks. He noted the Federal Reserve is working to reduce regulatory burden on smaller and mid-size banks, and that there would be some benefit to statutory changes. He also proposed raising the $50 billion threshold for SIFI designation.
Chairman Gruenberg
In his testimony, Federal Deposit Insurance Corporation (FDIC) Chairman Martin Gruenberg said recent actions by banking regulators for rules on a supplementary leverage ratio, liquidity coverage ratio (LCR), and a proposal for margin requirements address three key areas of systemic risk, and noted that the leverage capital requirements go well beyond requirements from the Basel III agreement.
Gruenberg then turned to resolution, noting that the Federal Reserve and FDIC issued letters to each of the eleven largest bank holding companies on the shortcomings of their resolution plans and requirements for their 2015 submission. He specified that the firms’ plans had unrealistic or inadequately supported assumptions and often failed to identify changes to firm structure to promote an orderly resolution. Gruenberg said the agencies would work closely with the institutions to improve the resolution plans by simplifying their legal structures, amending derivatives contracts, and ensuring the continuity of critical operations during bankruptcy.
Comptroller Curry
In his testimony, Comptroller of the Currency Thomas Curry reported that the Office of the Comptroller of the Currency (OCC) has completed all Dodd-Frank rulemakings for which it was solely responsible, and has made good progress on collaborative rules. He credited the rules for leading to steady improvements in the overall strength of the financial system, but stressed that supervisors must remain vigilant, and that requiring higher supervisory standards for the largest and most systemic institutions is consistent with the objectives of Dodd-Frank.
Curry said regulators should hold themselves accountable for regulatory improvements, and stated that the OCC asked a team of international regulators to assess its supervision of large banks. He noted that the team identified areas for improvement, including the expansion of a lead-expert program to better compare the operations of institutions, and the enhancement of risk monitoring and reporting.
Director Cordray
In his testimony, Consumer Financial Protection Bureau (CFPB) Director Richard Cordray noted his agency’s initial responsibility to address deep problems in the mortgage market that helped bring about the financial crisis. He pointed out that, just this year, the CFPB issued rules for mortgage servicing, loan originator compensation, and disclosures, and claimed that his agency works diligently to monitor the effects of rules on the mortgage market so that it can make changes when warranted.
Chair White
In her testimony, Securities and Exchange Commission (SEC) Chair Mary Jo White stated that her agency has made “substantial progress” in implementing their rulemaking agenda under the Dodd-Frank Act; focusing on eight key areas: 1) credit rating agencies; 2) asset-backed securities; 3) municipal advisors; 4) asset management, including regulation of private fund advisers; 5) over-the-counter derivatives; 6) clearance and settlement; 7) proprietary activities by financial institutions; and 8) executive compensation. She then noted the SEC has implemented 20 significant rulemakings since April 2013, and, overall, have proposed rules to address 90 percent of the provisions from Dodd-Frank that require SEC rulemaking.
White said that, going forward, the SEC will be focusing their efforts on completing required rules under Title VII of Dodd-Frank for securities-based swaps, and on rules regarding executive compensation practices. White stressed that the SEC “must be deliberate as we consider and prioritize our remaining mandates” and that these actions should be “supported by robust economic analysis.”
Chairman Massad
In his testimony, Commodity Futures Trading Commission (CFTC) Chairman Tim Massad said that regulators and Congress must never forget the “terrible cost” imposed on the country due to the financial crisis, and stressed that this cost is why implementation of the new regulatory regime is so important.
Massad said that the CFTC, moving forward, will “likely make adjustments” to their rules and that “this is to be expected” with “reforms as significant as these.” He stressed that the CFTC wants to ensure that their rules “do not place undue burden on commercial end-users” and that their reforms, if they are to succeed, must be harmonized with other global regulators “as much as possible.” He also highlighted the need for strong enforcement and compliance efforts to ensure market participants comply with the new rules and stressed the need for consistent data reporting standards to ensure market information is collected “accurately and promptly.”
Massad also noted that the CFTC will be holding a meeting on September 17 to consider a rule for “special entities,” such as public utilities, as well as a re-proposal of a rule on margin requirements for non-cleared swaps, similar to the proposal put out last week by banking regulators. Massad later noted that with the time required for public comment, the margin rule is not likely to be finalized by the end of the year.
Question and Answer
New Rules
Johnson asked the regulators what rules would be finalized before the end of the year, and asked specifically about risk retention. Tarullo answered that he expects to finalize the financial sector concentration rule by the end of the year, and that the Federal Reserve is in “the home stretch” on the risk retention rule but may not complete it in 2014. Gruenberg and Curry both expressed their hope to complete the risk retention rule by the end of the year.
Insurance Company Designations
Johnson noted that the Federal Reserve staff has taken a two-track approach on capital rules for designated insurance companies, based on whether or not Congress enacts legislation to give regulators flexibility to tailor rules for insurance companies. He asked if it was important that Congress pass legislation. Tarullo replied that legislation would be very welcome, and that staff is conducting a quantitative impact study to develop information on the insurance industry.
Sen. Mike Johanns (R-Neb.) asked how the FSOC could get “this far down the road” in designating insurance companies as SIFIs when they admit that more information on insurance companies is needed. Tarullo said he draws a distinction between the creation of capital standards and the assessment of systemic risk, and that the FSOC is not concerned with the core insurance activities of companies.
Shelby said insurance has traditionally been regulated by the states, and asked if this was the beginning of preemption by the federal government over the states. Tarullo said this is not the Federal Reserve’s point of view.
Johnson asked what the FDIC would do to monitor systemic banks as they develop new plans for living wills. Gruenberg answered that each firm has been given a detailed roadmap of needed changes, and that the FDIC anticipated giving them direction and guidance to follow through.
Sen. Bob Corker (R-Tenn.) said Title I and II of Dodd-Frank were some of the strongest pieces of the bill, but noted that when the FDIC and Federal Reserve put out a joint statement on the shortcomings of submitted living wills, the Federal Reserve then followed it with a separate statement that “watered down” the concern. Tarullo said the Federal Reserve and FDIC agreed on the measures that banks needed to take to become more resolvable, but that while the FDIC determined the plans the “non-credible,” the Federal Reserve thought it more important to identify shortcomings and go through another iterative process. He continued that by being more specific in the shortcomings and expectations for the banks, concerns over a lack of guidance should be put to rest.
Corker asked if the Federal Reserve and FDIC would use the powers given to them to simplify firms if they cannot create acceptable resolution plans. Tarullo stressed that the objective of the process is to get firms to resolvability, but that he is committed to using the powers given by Dodd-Frank if this does not happen. Gruenberg also said the FDIC is prepared to use its statutory authorities if changes are not made.
Sen. Elizabeth Warren (D-Mass.) noted that the joint Federal Reserve-FDIC statement told the banks they had to make “significant progress” in their next submissions. She asked what would constitute “significant” change and what action the agencies would take if the banks do not meet the expectations. Gruenberg answered that the agencies laid out a list of specific, measurable actions to take, and that they will work closely with the banks to ensure they meet these expectations. Tarullo said there are supervisors working with the institutions to look for tangible measures to address each problem. When asked by Warren if they would use their tools to simplify institutions if they fail to submit credible resolution plans, Tarullo said they would.
EGRRPA
Crapo raised the Economic Growth and Regulatory Paperwork Reduction Act (EGPRPA), and asked whether the Federal Reserve, FDIC, and OCC would commit to providing Congress with a list of regulations that are unnecessary or unduly burdensome. Curry said the Federal Financial Institutions Examination Council (FFIEC) is overseeing the EGPRPA process, and that it has two objectives: 1) to make changes that regulators have control over; and 2) to report to Congress recommendations that would require statutory changes. Gruenberg said the process offers regulators an opportunity to take an overview of regulatory compliance and identify areas for change, and that the FFIEC is planning a series of public hearings around the country.
SIFI Designation
Crapo asked Tarullo about raising the $50 billion threshold for SIFI designation. Tarullo said several years of testing and assessment have given regulators a chance to speak on the designation threshold. Given the intensity and complexity of work around stress testing, he said regulators “haven’t felt that the additional safety and soundness benefits of designation really are substantial enough to warrant the kinds of expenditures” required of banks which are above $50 billion in assets but well below the largest systemically important institutions.
Municipal Bonds
Sen. Charles Schumer (D-N.Y.) was highly critical of the exclusion of municipal bonds from high-quality liquid asset (HQLA) classification in the recent LCR final rule, warning that regulators risk limiting the scope of financial institutions willing to take on investment grade municipal securities that are critical to the nation’s infrastructure. He stressed that municipal securities are high-quality assets that adequately cover liquidity outflows in periods of stress. He expressed his hope that regulators would reconsider the rule.
Tarullo said the Federal Reserve’s staff has been asked to prepare a proposal that would allow the recognition as HQLA of state and municipal bonds that are “in the same league” as corporate bonds. He said analysis during the comment period suggested that there ought to be a way to identify more liquid municipal securities. Gruenberg and Curry said they would monitor the impact of the rule on the market, and that they are open to revising the rule if necessary.
Capital Surcharge
Sen. Sherrod Brown (D-Ohio) noted Tarullo’s statement that capital surcharges for big banks could be much higher than Basel rules, and asked if this is important to financial stability. Tarullo said an analysis was done a few years ago that, while failing to give an exact number for an appropriate charge, did develop a range. He said the Basel recommendation was at the low end of the range, and that banking regulators feel more comfortable being in the middle of that range. He noted that other nations have come to similar conclusions, including Switzerland, Sweden, and the Netherlands.
Sen. Richard Shelby (R-Ala.) asked if foreign banks would be subject to the surcharge. Tarullo said that is not the intention, and again noted that other countries have imposed higher surcharges of their own.
Sen. Jack Reed (D-R.I.) said that the investing public should “know very quickly” if public companies have been affected by a cyber attack and asked White if she is considering an “action forcing device” to require disclosure of impacts.
White noted that the SEC released disclosure guidance in 2011, which the Division of Corporate Finance continues to review and give comments on. She also mentioned that the SEC has formed an inter-divisional cyber working group within the SEC to look at these issues.
Sen. Joe Manchin (D-W.Va.) stressed the need for cybersecurity reform, noting recent breaches with retailers, and asked Tarullo and Curry for their thoughts. Tarullo spoke of the “asymmetry” in requirements between banks and non-financial institutions, saying this is frustrating for banks of all sizes. He said non-financial companies should also have cybersecurity expectations. Curry agreed on the need to “level the playing field” with non-financial companies.
Executive Compensation
Sen. Robert Menendez (D-N.J.) said that investors should have information about CEO compensation levels and if their pay is creating value or is “simply value capture by insiders.” He then asked White about the CEO pay ratio provision in Dodd-Frank and when the SEC expects to finalize their rulemaking in this area.
White said that this rulemaking is “certainly a priority” and that she expects it to be completed this year.
Menendez then asked if the SEC plans to engage in a rulemaking to require disclosure of corporate political spending, noting that the SEC has received over one million comments supporting such a rule.
White explained that there are two petitions pending at the SEC to require this disclosure, but that the SEC staff is not currently working on a rule in this space. She then noted that many companies voluntarily disclose this information and that if political spending is “material” then the current law requires it to be disclosed.
Market Structure
Senator Mark Warner (D-Va.) asked if the SEC has any specific plans to address complexity in the equities market to improve transparency and if the SEC will either allow participants to audit fees and rebates or ban some of these practices.
White noted that the SEC has a number of initiatives to address market structure concerns on fees, complexity, and conflicts of interest. She mentioned that the exchanges are currently auditing their structures and will report back to the SEC with that information. She then said that while the U.S. markets are strong and reliable, that does not mean that “enhancements and more level playing field initiatives can’t and shouldn’t be undertaken.”
Guide 3 Disclosures
Brown asked when the SEC expects to update their “Industry Guide 3” on disclosures for bank holding companies, to make these organizations more transparent.
White said that the SEC staff is currently in the process of preparing recommendations to update this guide and noted that any changes will be put out for public comment.
Broker-Dealer Leverage Ratio
Warner expressed concern with the high level of leverage among certain broker-dealers and asked White if she shares this concern.
White said she is concerned with highly leveraged broker-dealers. She noted that the SEC’s net capital rule and oversight role seeks to address some of these concerns and also said that SEC is considering a possible rulemaking on leverage for broker-dealers.
SEC Swaps Rules
Reed asked for assurance from White that the SEC’s rules under Title VII “are at the very top of your list.” White told Reed that the SEC’s swaps rules are a “major priority of mine to get them done as quickly as we can, but also as well as we can.”
Settlements and Individual Responsibility
Warren pointed out that multiple large banks have admitted to breaking the law this year and paid large settlements, but lamented that despite their misconduct, no senior executives have been criminally prosecuted. She asked how many senior executives have been referred to the Department of Justice. Tarullo answered that while there are often individuals that can be singularly identified as responsible, regulators cannot charge them, though they have shared information with the Department of Justice.
Warren said civil settlements do not provide deterrence, and claimed that some executives are even rewarded for negotiating settlements with raises, setting a bad precedent.
Shelby said people should not be able to buy their way out of responsibility, and placed more responsibility on the Department of Justice for not pursuing charges.
Bitcoin
Manchin expressed concern with Bitcoin, calling it “wildly speculative” and subject to theft and scams. He asked for an update on the SEC’s efforts and if they are considering any possible actions with regard the crypto-currency.
White said Bitcoin “is an evolving area for all the regulators” and noted that the SEC has issued two separate investor alerts on the topic. White said of Bitcoin, “at this stage we have not concluded that it is a security that would be subject to that kind of regulation by us, but it is something we’re still very focused on.”
For more information on this hearing and to view a webcast, please click here.