HFS Subcommittee Hearing on Reg Reform
House Financial Services Subcommittee on Financial Institutions and Consumer Credit
“Examination of the Federal Financial Regulatory System and Opportunities for Reform”
Thursday, April 6, 2017
Key Topics & Takeaways
- SEC/CFTC Merger: Rep. Scott asked if merging the SEC and CFTC would bring more confusion and less order to the financial system. Michel replied that it would not cause any additional confusion than there already is, adding that an artificial distinction was made in Title VII of Dodd Frank about financial instruments. He continued that whether trading futures, derivatives, indexes, or stocks, some sort of financial asset is being traded in the market and that “these things are very similar.”
- CFPB Arbitration Rule: Himpler discussed the CFPB’s arbitration rule, stating that the Director’s own economic rule said arbitration is better than litigation for the consumer, yet if the rule goes into effect, small and community banks will go out of business because they cannot afford the risk associated with a class action lawsuit.
- Orderly Liquidation Authority: Rep. Maloney noted that one of the main changes made in Dodd Frank was to give regulators the ability to “wind down” large financial institutions when they fail through the orderly liquidation authority (OLA), and asked what would happen if it was repealed. Gerety explained that the OLA did not exist during the financial crisis and that choices were limited, causing a “massive problem” for the American people. He continued that through the development of capital rules to go with the OLA, as well as the strategies of single point of entry (SPOE), the markets have reacted positively, stressing that bankruptcy and orderly liquidation are not substitutes.
Speakers
- Greg Baer, President, The Clearing House Association, Executive Vice President and General Counsel, The Clearing House Payments Company
- Norbert Michel, Senior Research Fellow, Financial Regulations and Monetary Policy Institute for Economic Freedom and Opportunity, The Heritage Foundation
- Amias Moore Gerety, Former Acting Assistant Secretary for Financial Institutions, U.S. Department of the Treasury
- Bill Himpler, Executive Vice President, American Financial Services Association
Opening Statements
In his opening statement, Subcommittee Chairman Blaine Luetkemeyer (R-Mo.) stated that financial companies are “standing in regulatory quicksand” full of “ambiguous guidance” and “contradicting rules” that lead to confusion in trying to comply with the Dodd Frank Act. He continued that customers are left “clamoring” for access to financial services and paying more for the services they do have. Luetkemeyer criticized the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) process due to the lack of feedback received, and questioned “whether the Fed is even reading” submissions. He concluded that small businesses continue to struggle to access the financial services they need, causing customers to suffer, and that something needs to be done to increase transparency and build a “strong, steady financial system and economy.”
In his opening statement, Rep. David Scott (D-Ga.) stressed the need for the U.S. to have the “most healthy financial system in the world,” and that “striking the right balance” between consumer protection and regulatory burden is an important priority. He described the “lay of the land” as the U.S. experiencing job growth for 77 consecutive months, but that there still is not enough gain. Scott continued that small business lending is trending upward, housing debt is finally dipping below the 2008 peak, and that while “things seem great…we can make them better.” He stressed the need to reexamine the entire regulatory system, not just Dodd Frank, and criticized the Financial CHOICE Act for completely “throwing out” Dodd Frank, stating that the legislation is a “non-starter” for Democrats.
Testimony
Greg Baer, President, The Clearing House Association, Executive Vice President and General Counsel, The Clearing House Payments Company
In his testimony, Baer stated that public input and a transparent process “tend to make better regulation,” and criticized the CCAR stress test as having “deficiencies.” He continued that the Fed discards results from the CCAR and runs a variety of its own models, with formulas and results that are not subject to any peer review. Baer then discussed the CAMELS rating system adopted in 1979, noting that since its creation, it has not been updated, and how a wholesale review of the system should be conducted to modernize it. Regarding living wills, Baer explained that Title I of Dodd Frank created the bankruptcy plan for banks, adding that they are “important and appropriate.” He then turned to the supervision of bank corporate governance, stating that oversight is “increasingly subjective,” with examiners attending meetings of the Board of Directors, causing discussions to be shielded and devoting meeting topics to regulatory compliance rather than innovation.
Norbert Michel, Senior Research Fellow, Financial Regulations and Monetary Policy Institute for Economic Freedom and Opportunity, The Heritage Foundation
In his testimony, Michel stated that there are “countless” ways to reform the federal financial regulatory system, as it is full of counterproductive, overlapping authorities. He continued that the U.S. has too many financial regulators, and criticized that banks are forced to comply with regulations from any combination of regulators, as well as state regulators. Michel explained that the regulatory system should be reorganized so that there are only two banking regulators and one capital markets regulator. He then suggested that the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) merge, as the two agencies have common participants and purposes. Michel criticized the Consumer Financial Protection Bureau (CFPB), stating that it raises “serious due process” and separation of power concerns, and that Americans would still be protected without the Bureau.
Amias Moore Gerety, Former Acting Assistant Secretary for Financial Institutions, U.S. Department of the Treasury
In his testimony, Gerety gave an overview of the financial crisis and stated that the financial system only works with clear rules and safeguards, adding that Dodd Frank created a number of provisions to curb risk taking. He explained that post-crisis Wall Street reforms have supported the financial system and its recovery, to include adding millions of new jobs and increasing household wealth, as well as maintain steady real gross domestic product (GDP). Gerety continued that Dodd Frank uses clear exemptions, statutory requirements, and market-based rules. He stressed that the largest banks and smaller banks are not the same, and that such diversity is a “strength” of the U.S. banking system. However, Gerety added that the biggest financial institutions must have “tough standards” to avoid the “awful” choices the industry was faced with during the financial crisis. He concluded that the goal of banking regulations “should not be to satisfy the financial industry, but rather the public interest.”
Bill Himpler, Executive Vice President, American Financial Services Association
In his testimony, Himpler stressed his desire to have “bad actors” eliminated from the marketplace, and that while federal regulators have a long history of supervising banks, trying to supervise finance companies as if they are the same as banks “can be disastrous.” He discussed the CFPB, stating that if state regulation works, the Bureau should coordinate and work with the states to preserve protections. Himpler continued that that CFPB has “often managed to exceed its limits” set by Congress, and criticized the Bureau for its use of regulation by enforcements. He concluded that while the Bureau tries to utilize an unfair “prong” in the unfair, deceptive, or abusive acts or practices (UDAAP) regulation, it should be “removed and returned” to the Federal Trade Commission (FTC).
Question & Answer
CCAR
Luetkemeyer stated that with the CCAR process, examiners are in banks on a full-time basis, seeing information “every day,” and that it seems superfluous for banks to have to compile such information. Baer replied that there are two components of the assessment, the quantitative and the qualitative, and that there are not a lot of standards for banks to know whether they will pass or fail the test. He stressed the need to streamline the process to reduce the burden on banks, adding that it is frustrating for the banks to go through the work and have their results discarded by the Fed’s own models.
Rep. Andy Barr (R-Ky.) asked why the CCAR’s qualitative assessment should be removed. Baer explained that lack of standards and feedback lead to firms not knowing whether they will pass or fail the test, adding that there is already a quantitative assessment.
Barr noted the “apparent need” for the government to impose capital requirements that go “well beyond” anything imposed on banks around the world, and questioned its impact on the competitiveness of American banks. Baer replied that the bigger concern is the effect on economic growth, as there is no international parallel with stress tests except possibly in the United Kingdom. He continued that there is a benefit to U.S. banks being the most rapidly capitalized post-crisis, which has helped them competitively. However, Baer added that the imposition of ring fencing on foreign banks operation in the U.S. have real effects on their ability to serve U.S. customers.
SEC/CFTC Merger
Scott asked if merging the SEC and CFTC would bring more confusion and less order to the financial system. Michel replied that it would not cause any additional confusion than there already is, adding that an artificial distinction was made in Title VII of Dodd Frank about financial instruments. He continued that whether trading futures, derivatives, indexes, or stocks, some sort of financial asset is being traded in the market and that “these things are very similar.”
Supplemental Leverage Ratio
Rep. Keith Rothfus (R-Pa.) stated that he is considering putting forward legislation that would exclude custody bank funds held at the central bank from the supplemental leverage ratio (SLR) regulation, and asked how it would measure the viability of custody banks. Baer replied that the Bank of England recently did this, and that it “makes a lot of sense.” Regarding the leverage ratio, he explained that there is no way to know how much any asset will be worth during a crisis, but that no one has gotten the value of cash wrong.
Executive Orders
Ranking Member William Lacy Clay (D-Mo.) discussed the Presidential Executive Order directing the Department of Treasury to consult with members of the Financial Stability Oversight Council (FSOC) to produce a report on whether the current financial regulatory system meets several core principles, and asked what advice would be given to Treasury as it conducts its review. Gerety replied that the Treasury already conducts consistent reviews, and that the question is how to articulate the regulations or guidance in ways that are appropriate to the risk, as well as how to build on the progress already made in the financial system.
Small and Community Banks
Clay asked how Dodd Frank shifted the regulatory focus to more risky, large banks and nonbanks. Gerety explained that there is affirmative targeting to ensure the toughest rules apply to the largest financial institutions, such as enhanced prudential standards, and that Dodd Frank explicitly and implicitly carves out community banks.
Rep. Robert Pittenger (R-N.C.) asked if prudential regulators do enough to tailor regulations for small institutions. Baer replied that more can be done, and gave the example of the living will process, adding that that level of planning is not necessary for such institutions.
CFPB Arbitration Rule
Himpler discussed the CFPB’s arbitration rule, stating that the Director’s own economic rule said arbitration is better than litigation for the consumer, yet if the rule goes into effect, small and community banks will go out of business because they cannot afford the risk associated with a class action lawsuit.
Orderly Liquidation Authority
Rep. Carolyn Maloney (D-N.Y.) noted that one of the main changes made in Dodd Frank was to give regulators the ability to “wind down” large financial institutions when they fail through the orderly liquidation authority (OLA), and asked what would happen if it was repealed. Gerety explained that the OLA did not exist during the financial crisis and that choices were limited, causing a “massive problem” for the American people. He continued that through the development of capital rules to go with the OLA, as well as the strategies of single point of entry (SPOE), the markets have reacted positively, stressing that bankruptcy and orderly liquidation are not substitutes.
Regulatory Reform
Barr asked if the Fed should participate in the FSOC, to which Michel replied no.
Barr then discussed the argument that multiple regulators can lead to greater accountability. Michel replied that there is “little support” for the “race to the bottom” hypothesis.
Luetkemeyer noted the desire for all regional Fed presidents to be on the Fed board, as part of the country is not reflected without it. Michel agreed that it does not make sense to not have everyone rotated on the board.
Anti-Money Laundering
Rep. Edward Royce (R-Calif.) stated that research from the Clearinghouse shows that billions in bank resources are spent on anti-money laundering compliance, with limited benefits, and asked what legislative steps should be made to better align regulations. Baer replied that the fundamental problem is not resources, but rather management and leadership. He continued that Congress can help by expanding information sharing through the Patriot Act, as well as legislation such as the Incorporation Transparency and Law Enforcement Assistance Act from 2016.
For more information on this hearing, please click here.
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House Financial Services Subcommittee on Financial Institutions and Consumer Credit
“Examination of the Federal Financial Regulatory System and Opportunities for Reform”
Thursday, April 6, 2017
Key Topics & Takeaways
- SEC/CFTC Merger: Rep. Scott asked if merging the SEC and CFTC would bring more confusion and less order to the financial system. Michel replied that it would not cause any additional confusion than there already is, adding that an artificial distinction was made in Title VII of Dodd Frank about financial instruments. He continued that whether trading futures, derivatives, indexes, or stocks, some sort of financial asset is being traded in the market and that “these things are very similar.”
- CFPB Arbitration Rule: Himpler discussed the CFPB’s arbitration rule, stating that the Director’s own economic rule said arbitration is better than litigation for the consumer, yet if the rule goes into effect, small and community banks will go out of business because they cannot afford the risk associated with a class action lawsuit.
- Orderly Liquidation Authority: Rep. Maloney noted that one of the main changes made in Dodd Frank was to give regulators the ability to “wind down” large financial institutions when they fail through the orderly liquidation authority (OLA), and asked what would happen if it was repealed. Gerety explained that the OLA did not exist during the financial crisis and that choices were limited, causing a “massive problem” for the American people. He continued that through the development of capital rules to go with the OLA, as well as the strategies of single point of entry (SPOE), the markets have reacted positively, stressing that bankruptcy and orderly liquidation are not substitutes.
Speakers
- Greg Baer, President, The Clearing House Association, Executive Vice President and General Counsel, The Clearing House Payments Company
- Norbert Michel, Senior Research Fellow, Financial Regulations and Monetary Policy Institute for Economic Freedom and Opportunity, The Heritage Foundation
- Amias Moore Gerety, Former Acting Assistant Secretary for Financial Institutions, U.S. Department of the Treasury
- Bill Himpler, Executive Vice President, American Financial Services Association
Opening Statements
In his opening statement, Subcommittee Chairman Blaine Luetkemeyer (R-Mo.) stated that financial companies are “standing in regulatory quicksand” full of “ambiguous guidance” and “contradicting rules” that lead to confusion in trying to comply with the Dodd Frank Act. He continued that customers are left “clamoring” for access to financial services and paying more for the services they do have. Luetkemeyer criticized the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) process due to the lack of feedback received, and questioned “whether the Fed is even reading” submissions. He concluded that small businesses continue to struggle to access the financial services they need, causing customers to suffer, and that something needs to be done to increase transparency and build a “strong, steady financial system and economy.”
In his opening statement, Rep. David Scott (D-Ga.) stressed the need for the U.S. to have the “most healthy financial system in the world,” and that “striking the right balance” between consumer protection and regulatory burden is an important priority. He described the “lay of the land” as the U.S. experiencing job growth for 77 consecutive months, but that there still is not enough gain. Scott continued that small business lending is trending upward, housing debt is finally dipping below the 2008 peak, and that while “things seem great…we can make them better.” He stressed the need to reexamine the entire regulatory system, not just Dodd Frank, and criticized the Financial CHOICE Act for completely “throwing out” Dodd Frank, stating that the legislation is a “non-starter” for Democrats.
Testimony
Greg Baer, President, The Clearing House Association, Executive Vice President and General Counsel, The Clearing House Payments Company
In his testimony, Baer stated that public input and a transparent process “tend to make better regulation,” and criticized the CCAR stress test as having “deficiencies.” He continued that the Fed discards results from the CCAR and runs a variety of its own models, with formulas and results that are not subject to any peer review. Baer then discussed the CAMELS rating system adopted in 1979, noting that since its creation, it has not been updated, and how a wholesale review of the system should be conducted to modernize it. Regarding living wills, Baer explained that Title I of Dodd Frank created the bankruptcy plan for banks, adding that they are “important and appropriate.” He then turned to the supervision of bank corporate governance, stating that oversight is “increasingly subjective,” with examiners attending meetings of the Board of Directors, causing discussions to be shielded and devoting meeting topics to regulatory compliance rather than innovation.
Norbert Michel, Senior Research Fellow, Financial Regulations and Monetary Policy Institute for Economic Freedom and Opportunity, The Heritage Foundation
In his testimony, Michel stated that there are “countless” ways to reform the federal financial regulatory system, as it is full of counterproductive, overlapping authorities. He continued that the U.S. has too many financial regulators, and criticized that banks are forced to comply with regulations from any combination of regulators, as well as state regulators. Michel explained that the regulatory system should be reorganized so that there are only two banking regulators and one capital markets regulator. He then suggested that the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) merge, as the two agencies have common participants and purposes. Michel criticized the Consumer Financial Protection Bureau (CFPB), stating that it raises “serious due process” and separation of power concerns, and that Americans would still be protected without the Bureau.
Amias Moore Gerety, Former Acting Assistant Secretary for Financial Institutions, U.S. Department of the Treasury
In his testimony, Gerety gave an overview of the financial crisis and stated that the financial system only works with clear rules and safeguards, adding that Dodd Frank created a number of provisions to curb risk taking. He explained that post-crisis Wall Street reforms have supported the financial system and its recovery, to include adding millions of new jobs and increasing household wealth, as well as maintain steady real gross domestic product (GDP). Gerety continued that Dodd Frank uses clear exemptions, statutory requirements, and market-based rules. He stressed that the largest banks and smaller banks are not the same, and that such diversity is a “strength” of the U.S. banking system. However, Gerety added that the biggest financial institutions must have “tough standards” to avoid the “awful” choices the industry was faced with during the financial crisis. He concluded that the goal of banking regulations “should not be to satisfy the financial industry, but rather the public interest.”
Bill Himpler, Executive Vice President, American Financial Services Association
In his testimony, Himpler stressed his desire to have “bad actors” eliminated from the marketplace, and that while federal regulators have a long history of supervising banks, trying to supervise finance companies as if they are the same as banks “can be disastrous.” He discussed the CFPB, stating that if state regulation works, the Bureau should coordinate and work with the states to preserve protections. Himpler continued that that CFPB has “often managed to exceed its limits” set by Congress, and criticized the Bureau for its use of regulation by enforcements. He concluded that while the Bureau tries to utilize an unfair “prong” in the unfair, deceptive, or abusive acts or practices (UDAAP) regulation, it should be “removed and returned” to the Federal Trade Commission (FTC).
Question & Answer
CCAR
Luetkemeyer stated that with the CCAR process, examiners are in banks on a full-time basis, seeing information “every day,” and that it seems superfluous for banks to have to compile such information. Baer replied that there are two components of the assessment, the quantitative and the qualitative, and that there are not a lot of standards for banks to know whether they will pass or fail the test. He stressed the need to streamline the process to reduce the burden on banks, adding that it is frustrating for the banks to go through the work and have their results discarded by the Fed’s own models.
Rep. Andy Barr (R-Ky.) asked why the CCAR’s qualitative assessment should be removed. Baer explained that lack of standards and feedback lead to firms not knowing whether they will pass or fail the test, adding that there is already a quantitative assessment.
Barr noted the “apparent need” for the government to impose capital requirements that go “well beyond” anything imposed on banks around the world, and questioned its impact on the competitiveness of American banks. Baer replied that the bigger concern is the effect on economic growth, as there is no international parallel with stress tests except possibly in the United Kingdom. He continued that there is a benefit to U.S. banks being the most rapidly capitalized post-crisis, which has helped them competitively. However, Baer added that the imposition of ring fencing on foreign banks operation in the U.S. have real effects on their ability to serve U.S. customers.
SEC/CFTC Merger
Scott asked if merging the SEC and CFTC would bring more confusion and less order to the financial system. Michel replied that it would not cause any additional confusion than there already is, adding that an artificial distinction was made in Title VII of Dodd Frank about financial instruments. He continued that whether trading futures, derivatives, indexes, or stocks, some sort of financial asset is being traded in the market and that “these things are very similar.”
Supplemental Leverage Ratio
Rep. Keith Rothfus (R-Pa.) stated that he is considering putting forward legislation that would exclude custody bank funds held at the central bank from the supplemental leverage ratio (SLR) regulation, and asked how it would measure the viability of custody banks. Baer replied that the Bank of England recently did this, and that it “makes a lot of sense.” Regarding the leverage ratio, he explained that there is no way to know how much any asset will be worth during a crisis, but that no one has gotten the value of cash wrong.
Executive Orders
Ranking Member William Lacy Clay (D-Mo.) discussed the Presidential Executive Order directing the Department of Treasury to consult with members of the Financial Stability Oversight Council (FSOC) to produce a report on whether the current financial regulatory system meets several core principles, and asked what advice would be given to Treasury as it conducts its review. Gerety replied that the Treasury already conducts consistent reviews, and that the question is how to articulate the regulations or guidance in ways that are appropriate to the risk, as well as how to build on the progress already made in the financial system.
Small and Community Banks
Clay asked how Dodd Frank shifted the regulatory focus to more risky, large banks and nonbanks. Gerety explained that there is affirmative targeting to ensure the toughest rules apply to the largest financial institutions, such as enhanced prudential standards, and that Dodd Frank explicitly and implicitly carves out community banks.
Rep. Robert Pittenger (R-N.C.) asked if prudential regulators do enough to tailor regulations for small institutions. Baer replied that more can be done, and gave the example of the living will process, adding that that level of planning is not necessary for such institutions.
CFPB Arbitration Rule
Himpler discussed the CFPB’s arbitration rule, stating that the Director’s own economic rule said arbitration is better than litigation for the consumer, yet if the rule goes into effect, small and community banks will go out of business because they cannot afford the risk associated with a class action lawsuit.
Orderly Liquidation Authority
Rep. Carolyn Maloney (D-N.Y.) noted that one of the main changes made in Dodd Frank was to give regulators the ability to “wind down” large financial institutions when they fail through the orderly liquidation authority (OLA), and asked what would happen if it was repealed. Gerety explained that the OLA did not exist during the financial crisis and that choices were limited, causing a “massive problem” for the American people. He continued that through the development of capital rules to go with the OLA, as well as the strategies of single point of entry (SPOE), the markets have reacted positively, stressing that bankruptcy and orderly liquidation are not substitutes.
Regulatory Reform
Barr asked if the Fed should participate in the FSOC, to which Michel replied no.
Barr then discussed the argument that multiple regulators can lead to greater accountability. Michel replied that there is “little support” for the “race to the bottom” hypothesis.
Luetkemeyer noted the desire for all regional Fed presidents to be on the Fed board, as part of the country is not reflected without it. Michel agreed that it does not make sense to not have everyone rotated on the board.
Anti-Money Laundering
Rep. Edward Royce (R-Calif.) stated that research from the Clearinghouse shows that billions in bank resources are spent on anti-money laundering compliance, with limited benefits, and asked what legislative steps should be made to better align regulations. Baer replied that the fundamental problem is not resources, but rather management and leadership. He continued that Congress can help by expanding information sharing through the Patriot Act, as well as legislation such as the Incorporation Transparency and Law Enforcement Assistance Act from 2016.
For more information on this hearing, please click here.