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Senate BHUA Hearing: Oversight of Financial Regulators: Protecting Main Street Not Wall Street

Senate Banking, Housing, and Urban Affairs Committee

Oversight of Financial Regulators: Protecting Main Street Not Wall Street

Tuesday, November 14, 2023

 

Topline

  • Democrats asked questions about equity in banking and whether Basel III would hurt investments and loans in low-income and minority communities.
  • Republicans expressed concerns about how Basel III will impact small businesses, and the workplace rights and safety of those working in the FDIC.

 

Witnesses

  • Hon. Michael Barr, Vice Chair for Supervision, Federal Reserve
  • Hon. Martin Gruenberg, Chair, Federal Deposit Insurance Corporation
  • Hon. Todd Harper, Chair, National Credit Union Administration
  • Mr. Michael Hsu, Acting Comptroller, Officer of the Comptroller of the Currency

 

Opening Statements

Committee Chairman Sherrod Brown (D-Ohio)

In his opening statement, Brown said that after this year’s bank failures, agencies called out these banks, but that failed to result in real action from bank management to do anything to mitigate these risks. Brown spoke of the importance of holding bank executives accountable to prevent a similar disaster from occurring and ensuring that banks serve their communities and continue to have the capital necessary to do so. He recommended to his colleagues that the Senate needs to pass the bipartisan RECOUP Act to hold senior bank executives accountable when they gamble with customers’ money. Brown noted that the turmoil in the financial industry has made the big banks even bigger and left the financial system vulnerable. He lamented that bank consolidation drives consumers out of the banking system and toward predatory alternative financial institutions, as well as reducing access to capital for small businesses. Brown said this all means more power in our economy ends up in the hands of a small number of big bankers on Wall Street. Brown applauded the regulators’ ability to come together and finalize the new Community Reinvestment Act which was enacted to ensure banks meet the credit needs of all communities they do business with. He also highlighted the Basel III endgame proposal and said it represents the final and long overdue plank in the post-financial crisis overhaul of our regulatory framework about ensuring that the largest banks have enough capital to address the risks that are unique to their institution and crises that affect their banks. Brown referenced recent bank failures as evidence of the need for this proposal and criticized the banking industry’s response to the proposal saying that all affected banks have the capacity to comply with this proposal. Brown closed by asking agencies to be vigilant when it comes to all the risks associated with illicit finance and the banking and credit union systems.

 

Committee Ranking Member Mike Rounds (R-S.D.)

In his opening statement, Rounds began by saying that banking regulators in the last few months have put forth or finalized regulations that represent the biggest rewrite of banking regulations since the passage of Dodd-Frank. Rounds said Republicans find it concerning that federal regulators have failed to consider how these rules will impact banks and businesses of all sizes, ultimately harming the American people. He said as a direct result of these regulations, banks will now spend their time complying with more Washington bureaucratic red tape instead of investing that time in their local communities. Rounds noted that the cost of the rulemaking onslaught will be borne by small businesses and wage owners who rely on their local banks for loans and access to credit. Rounds cited his letter along with 37 other Republicans on the Basel III endgame proposal which emphasizes the detrimental impacts of the proposal. Rounds expressed disappointment in the proposal and said it would put a strain on all institutions seeking to provide services that would help American consumers and businesses prosper. He then brought up climate scenario analysis being pushed by the Fed as another example of the Fed’s overreach. He closed by saying the last thing the US needs is a bunch of Washington bureaucrats ending and rewriting a decade’s worth of banking rules, which will only serve to restrict capital harm to the economy and punish American families and urged regulators to go back to the drawing board on their proposals.

 

Testimony

Hon. Michael Barr, Vice Chair for Supervision, Federal Reserve

In his testimony, Barr said that the banking system is sound and resilient and that organizations continue to report capital and liquidity ratios above minimum regulatory levels. He noted that preserving a sound and resilient banking system requires continued attention to address identified vulnerabilities and vigilance to changing conditions. Barr said the Federal Reserve has been moving forward with ways to improve the speed, force, and agility of supervision as appropriate, and that they are very mindful of the differences in size, risk, and complexity of supervised institutions and the importance of maintaining the strength and diversity of banks of all sizes that serve communities across the country. He noted that supervisors are focused on the material risk presented by the current economic environment, including conducting targeted reviews at banks with higher interest rate and liquidity risk profiles. Barr invoked the pain felt by Americans during and after the 2008 financial crisis and explained that the reforms made following that period improved the stability and viability of US banks. He closed by saying that the current Basel III endgame proposal is the final piece of these reforms. He continued saying that the proposed rules would apply to banks with at least $100 billion in assets, fewer than 40 of the over 4,000 banks in the US banking system, and that community banks would not be affected at all.

 

Hon. Martin Gruenberg, Chair, Federal Deposit Insurance Corporation

In his testimony, Gruenberg said the US banking industry has proven to be quite resilient despite the period of stress earlier this year, though he noted that the industry continues to face significant downside risks, from the effects of inflation, rising market interest rates, and geopolitical uncertainty. He said that these risks could cause credit quality and profitability to weaken, loan growth to slow, provision expenses to rise, and liquidity to become more constrained. Gruenberg noted that proposed rulemakings would enhance the resilience and improve the resolvability of large regional banks, and that the Basel III endgame proposal is a continuation of the agency’s efforts to revise the regulatory capital framework for the nation’s largest, most systemic, financial institutions following the global financial crisis of 2008. He closed by briefly acknowledging sexual harassment allegations within his agency and expressed his concerns and disgust.

 

Hon. Todd Harper, Chair, National Credit Union Administration

In his testimony, Harper said during the last year, the credit union system has largely remained stable in its performance and resilient against economic disruptions. He said he is concerned that increasing liquidity, interest rates, and credit risks have led to a drop in composite CAMELS code ratings to threes, fours, and fives. Harper said credit unions must carefully manage their credit risks going forward. He asked Congress on behalf of NCUA to restore the CLF’s corporate credit union and agent member provisions, and closed by saying his agency is ready to address the impact of the evolving risks within the credit union system, including growing liquidity, interest rates, and credit risks.

 

Mr. Michael Hsu, Acting Comptroller, Officer of the Comptroller of the Currency

In his testimony, Hsu said the OCC has urged the banks’ supervisors to stay on the balls of their feet with regards to risk management. He noted that the final rule modernizes the CRA by recognizing banking activities that take place beyond physical branches. He acknowledged that banks’ relationships with third parties, including financial technology companies, continue to expand and that the use of third parties has significant potential benefits, but poor risk management can hurt consumers. Hsu closed by noting the digital asset space’s attention is shifting from crypto to the tokenization of real-world assets.

 

Question & Answer

FDIC Allegations and Workplace Misconduct

Brown asked Gruenberg how he will be addressing the sexual harassment allegations within his agency. Gruenberg noted that the report was deeply disturbing that that harassment is unacceptable, and they are taking all actions to address this issue effectively.

 

Rounds asked if Gruenberg knew about these allegations before they were published. He said he did not.

 

Sen. Thom Tillis (R-N.C.) asked Gruenberg if he knew about the matters before the publication. Gruenberg reiterated that he did not know.

 

Tillis also asked Barr how a Fed worker released confidential information to the public, and whether someone looked into the matter. Barr said he was upset by the news and that the Fed has strict rules.

 

Sen. Jon Tester (D-Mont.) asked Gruenberg if he believes these accusations are fire-able offenses. Gruenberg said it’s a case-by-case scenario.

 

Sen. Catherine Cortez Masto (D-Nev.) asked how long the case review will take. Gruenberg said that the work has just begun and that they hope to close the case within the next 90 days.

 

Sen. John Kennedy (R-La.) asked Gruenberg if he has ever sexually harassed an employee at the FDIC. Gruenberg said no.

 

Sen. Cynthia Lummis (R-Wyo.) asked what reforms to civil service does the FDIC need to remove bad employees from positions of public trust instead of shuffling them to the Fed or the OCC, and further, and specifically what Gruenberg is specifically doing about this. Gruenberg said the agency is undertaking a comprehensive review of the agency in all offices.

 

Basel III Endgame Proposal

Brown asked Barr to explain why the new capital proposal is needed. Barr responded that capital is key to a thriving banking system and economy, and that we need capital to fund small businesses and prevent financial crises. He noted that the proposal affects only a small number of banks and focuses on having higher capital requirements for activities like trading where banks could have more risk.

 

Rounds asked how many days Barr’s colleagues were given to review your holistic review of Basel III before Barr provided them with the rulemaking. Barr said he did not know the exact number of days but would provide the information after the hearing.

 

Rounds then asked Barr if his holistic review of Basel III was publicly accessible and whether other members of the Fed’s Board of Governors had seen it. Barr said it was an internal review and his colleagues had not seen it because the “holistic review” is not a physical document and rather the decision to create a proposal made by Barr after conducting a holistic review.

 

Tillis asked Barr if he intends to move forward with the proposal if he does not have consensus among the board. Barr said he hopes to get at least a broad consensus, meaning most of the board, and that he tries generally to get full consensus on regulatory matters. Tillis noted the proposal puts the US at a disadvantage and urged Barr to change course.

 

Tester asked how the Fed and FDIC are evaluating the effects of the Basel III endgame proposal on consumers. Barr said based on the Fed’s analysis, he does not believe there will be significant negative impacts on small businesses. Tester followed up and asked if comments submitted reflect his concerns about the proposal’s negative impacts on small businesses and consumers. Barr said he has heard similar concerns and is paying close attention to that.

 

Tester also asked about how the Fed is evaluating which activities will be pushed out to the non-banking sector as a result of the proposal. Barr said that the Fed’s goal is to reduce risk and if they felt the proposal was increasing risk the Fed would re-evaluate.

 

Sen. Katie Britt (R-Ala.) asked Barr if he had done a thorough analysis to understand the impacts of the operational risk requirements in the proposal. Barr said the analysis goes into details on these issues and that in regard to credit risk, the impact of the combination of the credit risk and operation risk proposals is very small in relation to current rules.

 

Britt then asked Barr if he’s unable to do a cumulative impact analysis. Barr said that the agency continues to study impacts of the rule and welcomes public comment on the proposal.

 

Kennedy asked if the proposal would make credit more expensive and push people into the non-regulated, non-bank financial system. Barr said the capital increases mostly affect trading and non-lending activities of banks and that with respect to credit the Fed expects the proposal to have a very modest effect on the price of credit.

 

Lummis asked if overall consumer lending dropping or lending migrating to non-bank entities is more likely under Basel III. Barr said that his expectation is that given the very small nature of the credit changes in the rule that credit would not significantly change under the rule, but that they are open to public comment on this.

 

Sen. Steve Daines (R-Mont.) asked if there has been a cost-benefit analysis for the Basel III endgame proposal. Barr said that he is considering all concerns and that he wants this rule to work for small businesses and banks in particular.

 

Daines also asked if Barr is planning to alter or resubmit the Basel III proposal to better reflect the concerns of other members of the board in spirit of trying to get consensus. Barr said that almost every rule has been unanimously decided since he joined the board and that he values consensus and will continue to work on achieving it.

 

Sen. Elizabeth Warren (D-Mass.) asked if the proposed rule will make it harder for banks to provide capital to small businesses. Barr said he believes the effects on the credit side will be minimal and that most of the new requirements affect non-lending activity.

 

Warren asked how many insured depository institutions Basel III would apply to. Barr said 37 banks would be impacted by Basel III. Warren then asked Barr for the 1% of banks that are covered by these rules, will stronger capital requirements make it harder for them to extend credit to small businesses. Barr said it would not.

 

Supervision and Risk

Brown asked each witness to explain how their agencies have altered their supervisory approaches in response to recent bank failures. Hsu said the OCC monitored those failures and identified areas where they could strengthen their supervision. Harper explained the NCUA has increased their assessments of liquidity within individual credit unions. Gruenberg said the FDIC has issued new guidance for examiners on what to identify and how to respond to issues in the future. Barr said the Fed is working to increase supervision of the highest risk firms and to ensure the assessment of risk appropriately influences supervisory activities.

 

Reed asked what the risks that financial development banks face when they engage in synthetic risk transfers on a significant scale and what guard rails are necessary to protect the financial system. Barr said these transactions are different than what is permitted by rule, and that the Fed approved them on a case-by-case basis and will monitor their performance to decide whether to allow them to be generally available.

 

Minorities and Low-Income Communities

Sen. Bob Menendez (D-N.J.) asked Barr as he finalizes the Basel III endgame proposal, what he says to Black and Hispanic communities who are concerned that his proposal could make the dream of home ownership even more difficult to achieve. Barr said that the agency is open to comments, and that they want to improve the rule before it becomes final. Barr also noted that he has heard these concerns elsewhere and is taking them seriously.

 

Cortez Masto asked how the Community Reinvestment Act improve lending and investments in low- and moderate-income communities. Hsu said that the bill modernizes the CRA by taking into account these banking activities that take place outside of traditional branches in the ATMs. Gruenberg noted that the rule gives banks the flexibility to engage in a community through financing, whether that’s lending or investment. Barr said the rule will help banks and communities due to increased transparency.

 

Cortez Masto also asked how Project REACh is promoting home ownership for Latinos, African Americans, and those on tribal lands. Hsu said that the OCC acts as a convener and we bring together the leaders of banks, communities, organizations, civil rights organizations, tech companies, and others.

 

 

For more information on this meeting, please click here.

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