HFSC Prudential Hearing
House Committee on Financial Services
Oversight of Prudential Regulators: Ensuring the Safety, Soundness, Diversity, and Accountability of Depository Institutions
Wednesday, November 16, 2022
- Members on both sides raised the recent FTX collapse, agreed regulators should provide guidance, and expressed interest in legislation from Congress.
- Barr said he was deeply encouraged by the stablecoin legislation Waters and McHenry are working on and that Congress should step in and provide a strong prudential framework with Fed oversight, supervision regulation and approval through which to offer stablecoins.
- McHenry, Sherman, and Wagner questioned Barr on Treasury market and leverage ratio issues.
- Steil and Barr asked about the economic impact of raising bank capital requirements.
- Roger Williams highlighted concerns over Basel III and the risk to U.S. financial institutions.
Chairwoman Maxine Waters (D-Calif.)
In her opening statement, Waters said FTX showed us what happens when exchanges operate in the shadows, and she appreciates steps taken to make sure banks are cautious of the risks of digital assets. She also noted the work regulators are doing to address climate change and review bank mergers.
Ranking Member Patrick McHenry (R-N.C.)
In his opening statement, McHenry said Congress must develop a clear regulatory framework for the digital asset ecosystem in light of the FTX collapse. He also said housing and Treasuries are a concern of his. McHenry told the regulators their proposed changes to the Bank Merger Act are having a chilling effect and pointed out that progress at the OCC to reach the un- and underbanked has stopped.
Rep. Ed Perlmutter (D-Colo.)
In his opening statement, Perlmutter said he is concerned about business foreclosures and failures. He also stated his interest in reviewing diversity and inclusion and environmental issues.
Rep. Blaine Luetkemeyer (R-Mo.)
In his opening statement, Luetkemeyer said focusing on climate risk does not help lower gas prices and that banks just endured the real-world test of COVID and maintained strong capital levels.
The Honorable Michael S. Barr, Vice Chair for Supervision, Board of Governors of the Federal Reserve
In his testimony, Barr said the recent events in the crypto industry have highlighted the risks associated with new asset classes when unaccompanied by strong guardrails. He said he is taking a holistic look at the Fed’s capital framework and that merger activity has increased the size of banks, complicating risk during a crisis. He listed monitoring crypto activity as a priority and mentioned the Fed’s pilot climate change exercise.
The Honorable Martin J. Gruenberg, Acting Chair, Federal Deposit Insurance Corporation
In his testimony, Gruenberg listed five key priorities of the FDIC: Strengthening the Community Reinvestment Act, addressing financial risks of climate change, reviewing the bank merger process, evaluating risks of crypto assets to the banking system, and finalizing the Basel III capital rule. He stated the FDIC’s intent to promote minority institutions and address cybersecurity.
The Honorable Todd M. Harper, Chair, National Credit Union Administration
In his testimony, Harper said the NCUA has taken action to strengthen capital, enhance cybersecurity, and support small and minority institutions. He said the NCUA requests a permanent adjustment to the agent member requirements for the central liquidity facility and seeks restoration of the ability to oversee third party vendors. He also advocated for the Improving Cybersecurity of Credit Unions Act.
Mr. Michael J. Hsu, Acting Comptroller, Office of the Comptroller of the Currency
In his testimony, Hsu said the OCC is considering updates to analyzing mergers. He mentioned the OCC’s new Office of Financial Technology’s focus on the growth of fintech and said the OCC has taken a careful and cautious approach to digital assets.
Question & Answer
Capital Requirements and Liquidity
McHenry asked Barr if he agreed that increased capital requirements on banks, like the supplemental leverage ratio, ultimately have impacted their ability to provide liquidity in the Treasuries marketplace and what Barr is doing to address concerns about the Treasury market. Barr said he is attentive to concerns about liquidity in the market and that volatility tends to lead to lower liquidity. He added that the reason for those issues is multifaceted and that the Fed is examining those reasons as part of a broader interagency review of resilience in the Treasury market, having taken some steps already to think about the resilience of that market. Barr also said the Fed is looking at the enhanced supplementary leverage ratio and other capital requirements and seeing how they work together. He continued to explain that other agencies are also looking at other elements of the package and that the Securities and Exchange Commission (SEC), for example, has made a set of proposals with respect to oversight of trading firms that are not currently regulated as dealers but are significant participants in the Treasury market and is also looking at central clearing with respect to Treasury securities. Upon further questioning by McHenry, Barr stated that the Fed is looking at the full range of tools to make sure the Treasury market is resilient.
Rep. Brad Sherman (D-Calif.) asked if there is thought being given to adjust leverage requirements to help incentivize more intermediation in the Treasury market. Barr said we are seeing higher levels of volatility in that market, and therefore, lower levels of liquidity, and the Fed is looking at the range of reasons for that, including looking at the enhanced supplementary leverage ratio. He added that the Fed has set up backstop facilities in the event there is significant stress in the market, and this is part of a larger set of reforms that Treasury and other agencies are undertaking. Rep. Ann Wagner (R-Mo.) asked Barr if he thought addressing Treasury market issues with leverage ratios could improve function and stability. He said circumstances have driven liquidity down, and their reform efforts are broad and include other agencies.
Reps. Andy Barr (R-Ky.) and Bryan Steil (R-Wis.) asked what the economic impact of raising bank capital requirements would be. Barr said strong capital requirements permit banks to lend in good times and in bad. Roger Williams (R-Texas) highlighted regulators’ plans to implement the final set of Basel III standards, questioned why regulators are going to take this additional step to abide by an international standard that will put American financial institutions at a further disadvantage, and asked why we should take another additional step to hold capital. Barr said he is undertaking a holistic review of capital requirements that includes the Basel III endgame. Rep. Bill Foster (D-Ill.) said he supports increased capital requirements because they prevent crises.
Consumer Financial Protection Bureau
Luetkemeyer questioned Hsu on the OCC’s part in a CFPB analysis of the FDIC Board’s bylaws. Hsu said the OCC conducted no analysis but that it was appropriate because his focus was on policy and the policy was in regards to bank mergers. Rep. Warren Davidson (R-Ohio) mentioned he was interested to see how the CFPB’s 1033 rulemaking comes along.
Waters asked Barr if he supported her and McHenry’s stablecoin approach. Barr said he was deeply encouraged by the legislation and that stablecoins present an urgent and important risk to address. He also said it is important for Congress to step in and say you are not permitted to offer a stablecoin unless it is done under a strong prudential framework with Federal Reserve oversight, supervision regulation and approval, because private money can create enormous financial stability risks unless it is appropriately regulated. Waters then asked if the comingling of funds and digital assets should be allowed, and Hsu said comingling has proven to be a difficult risk to manage.
Rep. Nydia Velazquez (D-N.Y.) asked Barr what guardrails he is considering after the FTX collapse and if he thought legislation from Congress would be helpful. He pointed out that the collapse occurred outside of the regulatory perimeter and that clear guard rails are needed. He said there should be a strong prudential framework for stablecoins. Rep. Carolyn Maloney (D-N.Y.) also asked what affect this has on our financial system, and Barr said he saw no systemic risk.
Rep. Josh Gottheimer (D-N.J.) asked Barr how he would develop a supervisory framework that levels the playing field for those in the bank and non-bank sectors. Barr said there needs to be approval and regulation of stablecoins because they are a form of private money.
Rep. Bill Huizenga (R-Mich.) also discussed FTX and asked about the Fed’s future on stablecoins. Barr said the Fed is looking at issues that arise when banks are engaged in crypto activities, and they are working to provide greater clarity.
Rep. William Timmons (R-S.C.) asked Barr if he sees an urgent need for a central bank digital currency (CBDC), and Barr said he would work with Congress if he did see an urgent need.
Luetkemeyer asked Gruenberg if he plans to bring back Operation Chokepoint to limit financial access for industries. Gruenberg said any customer complying with laws can access banking products and services. Reps. Alex Mooney (R-W.V.), Frank Lucas (R-Okla.), Juan Vargas (D-Calif.), Sean Casten (D-Ill.), Barr, and Williams also asked about climate change. The regulators said they are paying attention to it but will not cut off certain industries from banking or regulate based on climate change. Barr explained the Fed’s climate change pilot scenario and upcoming guidebook.
Velazquez asked how the sector’s reliance on cloud storage affects its risk profile. Barr said the Fed will spend increasing attention to this but that it is a relatively small part of the risk profile now.
Diversity and Inclusion
Rep. Al Green (D-Texas) and Joyce Beatty (D-Ohio) stated his displeasure at how few banks are African American-owned and asked what regulators are doing. Gruenberg highlighted the FDIC’s statutory obligation to support minority institutions. Rep. Emmanuel Cleaver (D-Mo.) voiced his support for the Community Reinvestment Act and preventing discrimination in the banking system. Rep. Ralph Norman (R-S.C.) asked how appraisers can eliminate discrimination, and Harper said all appraisers should go through training.
Maloney talked about her Overdraft Protection Act to establish fair and transparent practices. She asked Gruenberg how overdraft practices have changed overtime. Gruenberg said some institutions do not give customers required disclosures on overdraft or other fees. Maloney asked him if the FDIC may have to classify some overdraft programs as unsafe or unsound, and Gruenberg said it is a possibility depending on how the practice is implemented. Rep. French Hill (R-Ark.) asked Gruenberg if he thinks Non-Sufficient Funds (NSF) fees are not reasonably avoided by consumers. Gruenberg said it depends on how the bank handled the issue and if they disclosed the fee policy to the customer.
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