HFSC Prudential Regulators Hearing
House Financial Services Committee
Oversight of Prudential Regulators: Ensuring the Safety, Soundness, Diversity, and Accountability of Depository Institutions
Wednesday, May 19, 2021
Chairman Maxine Waters (D-Calif.)
In her opening statement, Waters outlined how the Committee continues to focus on the economic impact of the COVID-19 pandemic. She stated they will hear what the prudential regulators are doing to respond to the crisis and make sure banks and credit unions are not further harming consumers, particularly those of color. Waters criticized the previous administration for taking harmful actions to roll back key Dodd-Frank reforms, and that she is pleased the Senate took action to reverse the Office of the Comptroller of the Currency’s (OCC) True Lender rule. She said she is alarmed by reports that the Federal Reserve (Fed) plans to weaken its bank merger review process and raised concerns about concentration in the $250-700 billion asset size category. She said these concerns should not be surprising given the various rollbacks on large bank capital and liquidity requirements as well as other safeguards. She urged regulators to “reverse course” immediately in order to promote financial stability. Waters said she looks forward to hearing what is being done about banking deserts, receiving an update on agency efforts on diversity and inclusion in the banking sector, as well as working to support minority deposit institutions (MDIs) and community development financial institutions (CDFIs). Waters concluded that temporary regulatory relief for banks must come to an end and be allowed to expire, arguing the pandemic can no longer be used as a cover to delay key financial safeguards and regulations.
Ranking Member Patrick McHenry (R-N.C.)
In his opening statement, McHenry said he believes the work of these regulators has set the U.S. up for a strong economic rebound from the pandemic. McHenry expressed his disappointment in not having a confirmed comptroller of the OCC in time for this hearing. He emphasized that his Democratic colleagues’ tendency to overregulate has a negative impact on our economy and claimed they are treating the pandemic exactly like the 2008 financial crisis. He then outlined how outsized regulation is problematic and that financial technology plays, and will continue to play, an important role in our lives. He continued that advances in technology can bring more underbanked Americans “into the fold” and close banking deserts. He concluded in saying Congress should build on gains rather than try to “re-litigate 2009.”
Todd Harper, Chairman, National Credit Union Administration
In his testimony, Harper focused on the credit union industry and the National Credit Union Share Insurance Fund, saying the credit union system has remained on solid footing throughout 2020. Looking ahead, he outlined that the top priority for the National Credit Union Administration (NCUA) is ensuring that the credit union system and the Share Insurance Fund are prepared to weather any economic fallout related to the pandemic. Harper continued that they are actively monitoring credit unions closely connected to the oil and gas, travel and leisure, and agricultural sectors. He also highlighted several recent rulemakings, as well as the agency’s efforts to advance diversity and inclusion, improve consumer financial protection, and advance economic equity and justice. He concluded with several legislative requests related to vendor authority, flexibility in managing the National Credit Union Share Insurance Fund, and permanently extending the temporary enhancements of the Central Liquidity Facility.
Michael Hsu, Acting Comptroller of the Currency, Office of the Comptroller of the Currency
In his testimony, Hsu outlined his priorities for the OCC as well as a review of key regulatory standards and pending actions that he initiated upon taking office. He mentioned four current problems facing the OCC and the federal banking system that require immediate attention: 1) guarding against complacency by banks; 2) reducing inequality in banking; 3) adapting to digitalization; and 4) acting on the risks that climate change presents to the financial system. Shortly after taking office, Hsu said he requested a review of key regulatory standards and matters pending before the OCC which included the 2020 Community Reinvestment Act (CRA) final rule and associated Notice of Proposed Rulemaking (NPR) related to performance benchmarks, interpretative letters and guidance regarding cryptocurrencies and digital assets as well as pending licensing decisions. Hsu said the OCC plans to seek public input before making any changes to the final CRA rule. He added that the Fair Access rule is not part of the review and he has no intention of revisiting that decision. Hsu concluded that during all stages of review he will keep an open mind and hopes for the process to conclude by this summer when he plans to announce next steps.
Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation
In her testimony, McWilliams said our nation’s banks have withstood the economic and financial market volatility of 2020 and that banks became instrumental in supporting individuals and businesses via lending and other financial intermediation as well as by distributing financial support provided by the federal government. She outlined that despite the challenges of the pandemic, banks increased their capital levels in 2020. However, she added that the low interest rate environment and economic uncertainties will continue to challenge the banking sector, placing downward pressure on revenue and the net interest margin. She also emphasized that the Federal Deposit Insurance Corporation (FDIC) will continue monitoring in commercial real estate, agricultural and consumer lending, technology investments, climate, and cybersecurity. McWilliams said the FDIC’s continued response to the pandemic includes encouraging banks to assist affected customers and communities, providing flexibility for banks, fostering small business lending, and maintaining the Deposit Insurance Fund (DIF). She said one of her main priorities as Chairman is creating an inclusive financial system. To help address racial disparities, she stated the FDIC launched a targeted public awareness campaign to inform consumers about the benefits of developing a relationship with a bank. In terms of fostering innovation and American competitiveness, McWilliams said the FDIC has announced a rapid prototyping competition, issued an interagency request for information (RFI) on financial institutions’ use of artificial intelligence (AI), and recently issued an RFI seeking comment on banks’ current and potential activities related to digital assets.
Randal Quarles, Vice Chairman of Supervision, Board of Governors of the Federal Reserve System
In his testimony, Quarles said the American economy and banking sector remained at the edge of the “COVID-19 storm”, with one wave of stress behind us and others yet to come. He mentioned the Federal Reserve’s recent reports which detail how banking organizations have remained an important source of strength in this recovery with higher levels of capital and liquidity, better risk management, and more robust systems that let them absorb the shock. Quarles called the pandemic a unique shock and that it was real world test of the regulatory and supervisory regime established after the 2008 financial crisis. He said any lessons to be learned begin with the strong performance of supervisory stress testing. He continued that the stress-testing program not only prepared banks for a period of prolonged hardship, but also clarified their health and resilience as the pandemic progressed. Quarles mentioned various other areas that remain a focus for the Fed including short-term funding markets, Treasury markets, and the design and calibration of the Supplementary Leverage Ratio (SLR). He concluded that the Fed’s two highest priorities for this year are to finalize the post-crisis Basel III reforms and to complete the long-overdue transition away from LIBOR.
Question & Answer
Prudential Regulation & Financial Stability
Reps. Ann Wagner (R-Mo.) asked about price spikes and requested that Quarles elaborate on the current economic conditions. Quarles responded that the such dislocations are characteristic of the fact that we are emerging out of a very constrained economic environment. Rep. Blaine Luetkemeyer (R-Mo.) asked for Quarles’ view on current vulnerabilities to the reserve system. Quarles stated that as it relates to borrowers that may be under pressure as a result of the COVID-19 pandemic, the Fed will continue in its supervisory stance of encouraging banks to work with these borrowers as opposed to simply closing out the loan, even as forbearance ends.
Rep. French Hill (R-Ark.) questioned how the Fed is regulating the capital ratio given the increase in money supply and liquidity flowing into banks. Quarles noted that while it does not appear to be the right time for a change in approach, it is something that the Fed will continue to monitor over the coming months. In response to a question from Rep. David Kustoff (R-Tenn.) regarding inflation, Quarles stated his believe that now is not the right time to close off this economic recovery prematurely in attempt to try and stay ahead of inflation but added that the Fed has the tools to address any change. Rep. Trey Hollingsworth (R-Ind.) asked for an update on margin eligibility requirements. Quarles outlined that work continues and that it is part of a larger ongoing discussion.
Rep. Richie Torres (R-N.Y.) discussed Archegos and pushed for greater disclosure and transparency. Quarles noted that while such an episode certainly requires the Fed to review the regulatory and supervisory framework, Archegos did not result in material losses in the United States. Quarles also stated that any regulatory action related to family offices is premature at this point in time.
Reps. Bill Posey (R-Fla.) and Wagner asked about climate risk. Wagner specifically discussed what data is necessary to understand climate risks for supervisory purposes. Quarles stated that the Fed is actively engaging on this question with the hopes of eventually developing a comprehensive data framework. Rep. Andy Barr (R-Ky.) also pressed Quarles on the Fed’s role as it relates to climate. Quarles responded that the Fed’s role is to ensure that the financial system is resilient to risk and that they have a responsibility to analyze all aspects of possible risk, including climate-related items.
Reps. Lee Zeldin (R-N.Y) and Barry Loudermilk (R-Ga.) also criticized certain climate initiatives pushed by central banks and other participants in the financial services industry for discriminating against lawful businesses. Rep. Sean Casten (D-Ill.) pushed back on his Republican colleagues and asserted that the Fed has the right, and responsibility, to be examining climate risk.
Rep. Brad Sherman (D-Calif.) highlighted the need for federal legislation to address legacy contracts with inadequate fallbacks as a result of the LIBOR transition. Rep. Bill Huizenga (R-Mich.) asked Quarles to outline the specific challenges facing the Fed as it relates to the LIBOR transition and whether SOFR is the optimal fallback rate. Quarles responded that the fundamental position of the Fed is that LIBOR is ending and firms must be prepared for that transition, but not that they must transition to a particular rate. Rep. Hill outlined that he has heard from some community banks who are concerned with SOFR and whether the Fed supports a variety of alternative to replace LIBOR. Quarles emphasized that the Fed does not support every alternative because the rate must not be susceptible to manipulation.
Rep. Anthony Gonzalez (R-Ohio) asked Quarles to elaborate on the Fed’s plan to facilitate greater certainty as it relates to the LIBOR transition and whether there is a need for Congressional action. Quarles emphasized the importance of clarity, stating that one single standard is helpful in terms of logistics. He also added his view that federal legislation will be necessary.
Rep. Nydia Velazquez (D-N.Y) highlighted a variety of government responses to the COVID-19 pandemic, most notably, the Paycheck Protection Program (PPP) and the Fed’s emergency lending programs. Quarles noted that these programs that were put in place clearly worked to ease the economic strain throughout. In response to a question from Rep. Roger Williams (R-Texas) regarding the checks on the Fed’s ability to use these extraordinary measures, Quarles emphasized that the governance structure is designed so that a significant majority is needed on the board for such special actions during a crisis.
True Lender Rule
A variety of members on both sides of the aisle asked Hsu to elaborate on next steps for the True Lender rule following the Senate vote to subject it to a Congressional Review Act resolution. Hsu emphasized to all members that when he took this position, he included the rule as part of a larger review of pending matters and standards that in his view, required critical attention. He continued that this review commenced before the Senate vote and that they have paused the review due to Congressional deliberation on the matter. In response to a question from Rep. Greg Meeks (D-N.Y.), Hsu stated that if the True Lender rule is repealed, he is not prepared to say at this time whether they would, or could, put forth a new rule.
Community Reinvestment Act
Rep. Carolyn Maloney (D-N.Y) highlighted that the OCC recently announced that it would consider the 2020 Community Reinvestment Act final rule. She asked Hsu to outline the deficiencies in the rule that led to this reconsideration. In response, Hsu said that the impacts of the pandemic, the new information gleaned from the comments on the Fed’s ANPR, and experience with partial implementation of the rule are the three factors that necessitated this reconsideration. Reps. Emanuel Cleaver (D-Mo.) and Al Lawson (D-Fla.) also spoke to the importance of an effective Community Reinvestment Act.
In response to a variety of questions, Quarles discussed the Fed’s pilot project with MIT to create a central bank digital currency (CBDC) while the other witnesses noted that the clear growth of digital currency and virtual asserts requires robust engagement on behalf of the regulatory community. Rep. Ted Budd (R-N.C.) focused his questioning exclusively on crypto-related issues, asking Quarles for an update on a unified definition for what is considered a cryptocurrency. Quarles said that all the relevant agencies are engaged on this and they hope to produce such a definition.
Reps. Waters outlined her concern with financial deserts and whether credit unions should be allowed to expand their field of membership in order to address communities with no physical bank branches present. Harper agreed that these underserved customers need access to financial services and noted that many credit unions have already stepped up to meet this challenge. He commented that Waters’ proposal would be a potential means by which to provide service in these communities.
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