HFSC Wall Street Hearing
House Financial Services Committee
Holding Megabanks Accountable: An Update on Banking Practices, Programs and Policies
Thursday, May 27, 2021
- Mr. Jamie Dimon, Chairman & Chief Executive Officer, JPMorgan Chase & Co.
- Ms. Jane Fraser, Chief Executive Officer, Citi
- Mr. James P. Gorman, Chairman & Chief Executive Officer, Morgan Stanley
- Mr. Brian T. Moynihan, Chairman & Chief Executive Officer, Bank of America
- Mr. Charles W. Scharf, Chief Executive Officer & President, Wells Fargo & Company
- Mr. David M. Solomon, Chairman & Chief Executive Officer, Goldman Sachs
Chairwoman Maxine Waters (D-Calif.)
In her opening statement, Waters said her priority is conducting rigorous oversight of the banks appearing before the Committee today. She noted that she is especially interested in hearing about the firms’ various responses to the pandemic, including their role as it relates to the provision of mortgage forbearance, the extension of affordable loan modifications, and offering Paycheck Protection Program (PPP) loans. Waters outlined her desire for the witnesses to provide updates on efforts to reach underserved communities and address banking deserts. She continued that these banks made large commitments to support diversity and inclusion, but claimed they have repeatedly been found to engage in discriminatory practices. Waters said the Committee expects to discuss: 1) actions to be taken this upcoming year to address racial disparities in the banking system; 2) plans to improve diversity and inclusion in senior leadership, bank wages and CEO compensation; 3) the use of emerging technology like artificial intelligence (AI) and cryptocurrency; and 4) efforts to address climate risk.
Ranking Member Patrick McHenry (R-N.C.)
In his opening statement, McHenry called this hearing an unnecessary “sequel” and nothing more than a tool for his Democratic colleagues to “grill” these banks. McHenry said the pandemic presented our economy with a once in a generation challenge, but that Congress, the Federal Reserve, and the Department of the Treasury met the crisis head on. He added that these banks played a critical role in making sure support was available to families and small businesses, arguing that they deserve a lot of credit for the major recovery taking place. He continued that he is concerned by troubling job data beginning to emerge, citing that the U.S. economy added only 266,000 jobs in April while roughly eight million jobs remain unfilled. McHenry also expressed concern that banks are being forced to focus on political activism, arguing that the business world does not need to become political in nature. He concluded by emphasizing that the Committee should be working together to rebuild the economy and move forward to normalcy.
Jamie Dimon, Chairman & CEO, JPMorgan Chase & Co.
In his testimony, Dimon highlighted many major examples of how JPMorgan Chase contributed to customers, clients, and the economy during the pandemic including: 1) offering $2.3 trillion of credit for consumers and businesses; 2) extending forbearance options for nearly two million accounts; and 3) committing $250 million in philanthropic initiatives for underserved small businesses and nonprofits. He said they are proud to have participated in various Federal Reserve emergency programs, such as the PPP, Primary Dealer Credit Facility, Commercial Paper Funding Facility, Money Market Mutual Fund Liquidity Facility and the Secondary Market Corporate Credit Facility. Dimon said the events of last year exacerbated longstanding inequality for Black families and increased barriers to wealth creation, and as such, JPMorgan has committed $30 billion over five years to advance their commitment to racial equality. In terms of risk management, Dimon said they devote special attention to compliance with the laws and regulations governing anti-money laundering, terrorist financing, economic sanctions and anti-corruption efforts. He emphasized that cybersecurity is an incredibly important priority for the firm, as well as a serious national security concern. Dimon concluded with policy recommendations that he believes will help address longstanding racial and economic inequalities: 1) increasing the federal minimum wage; 2) reforming the Earned Income Tax Credit (EITC) by raising the maximum credit and income limit; 3) increasing resources for the Small Business Administration (SBA) Microloan program; 4) making the SBA Community Advantage program permanent; and 5) supporting comprehensive housing reforms to expand affordable housing and homeownership for underserved communities.
Jane Fraser, CEO, Citi
In her testimony, Fraser said she believes Citi proved itself to be a very different bank post-pandemic than the one that entered the 2008 financial crisis, as they have worked to become a smaller, stronger, and less complex institution. She highlighted that Citi has remained the leading financer of affordable housing in the country for the past 11 years. She said Citi serves many mid-sized American companies looking to expand both domestically and internationally, finances critical infrastructure for state and local governments, and works to provide stellar execution as their clients navigate evolving global factors such as ESG, wellness, mobility, and fintech. Moving forward, she said Citi’s priorities will focus on building financial inclusion to support an inclusive recovery, excelling in their risk and control environment, and setting clear governance and controls for cryptocurrencies and emerging technologies. Fraser said in all of their efforts, Citi will continue to promote sustainability, equity, diversity, and human rights.
James Gorman, Chairman & CEO, Morgan Stanley
In his testimony, Gorman said the pandemic has highlighted serious humanitarian and economic issues. In response, he emphasized that Morgan Stanley has been, and continues to be, extremely focused on serving clients, communities, and employees. Gorman said they helped corporate and institutional clients raise additional liquidity and obtain financing, including over $50 billion in capital for the industry sectors most affected, and healthcare capital for both Moderna and Pfizer which included a sustainable bond issuance by Pfizer to support patient access to medicines and vaccines. Gorman said they worked to guide their retail clients and help manage their investment portfolios amidst extreme volatility. He said Morgan Stanley provides a stable foundation of support during any market environment, acting as financial advisors to help companies raise equity and debt capital, assisting public sector entities raise municipal financing, and aiding pension and mutual funds manage their assets. Gorman emphasized their large presence in the market by noting that Morgan Stanley manages of $5.6 trillion of assets for households and institutions. He said they remain committed to their communities as well as racial and social justice, adding that they began a program to provide 60 students with full four-year scholarships to Howard University, Morehouse College and Spelman College – three of America’s leading Historically Black Colleges and Universities. Gorman concluded in saying they remain concerned with climate risk and are working to mitigate its effect on the future.
Brian Moynihan, Chairman & CEO, Bank of America
In his testimony, Moynihan said this past decade has been transformative for Bank of America in their approach to running the company and pushing for “responsible growth,” which he outlined as growing sustainably in the market with a customer focus while ensuring a comprehensive risk framework. He mentioned their efforts to support clients through their own relief program, the Client Assistance Program, as well as government programs like the PPP, stimulus payments, and unemployment insurance. Moynihan said Bank of America has worked to provide important resources to local communities to support health and safety as well as boost racial equality, economic opportunity and affordable housing. He said in terms of improving overall client experience, Bank of America is committed to the thoughtful and responsible use of emerging technologies and AI, and are continuing to evaluate cryptocurrency risks and applications of distributed ledger technology (DLT) and blockchain. Moynihan concluded by emphasizing Bank of America’s commitment to fostering a diverse and inclusive workplace and supply chain, providing competitive wages and benefits, and achieving net zero greenhouse emissions in their financing activities and operations before 2050.
Charles Scharf, President & CEO, Wells Fargo & Company
In his testimony, Scharf said Wells Fargo continued to support their customers and broader communities throughout the pandemic, noting that they deferred payments and waived fees for over 3.7 million accounts and were one of the leading lenders in the Paycheck Protection Program (PPP). He said today, Wells Fargo serves one-third of U.S. households and more than ten percent of middle-market companies in the country, and views itself as an industry leader in affordable housing, retail mortgage, and commercial real estate lending. Scharf said Wells Fargo feels uniquely positioned to serve customers around the country with their customer feedback program, large branch network, and extensive financial inclusion efforts. Scharf said he is committed to Wells Fargo employees and increasing diversity, equity, and inclusion efforts as well as assisting lower-middle income (LMI) communities. In terms of their approach regarding risk and societal engagement, Scharf outlined that Wells Fargo has launched a new Social Impact and Sustainability strategy to focus on community needs and put into place more transparent and comprehensive environmental, social, and governance (ESG) risk disclosures. Finally, Scharf said Wells Fargo is committed to implementing procedures governing the safe and responsible use of technology, investing in cyber threat management and personal data privacy practices, engaging in research on DLT, and closely following developments around cryptocurrencies.
David M. Solomon, Chairman & CEO, Goldman Sachs
In his testimony, Solomon said Goldman Sachs was well capitalized before and throughout the COVID-19 pandemic and that these capital levels have allowed them to serve clients and provide support for the economy. He said they have devoted substantial resources across the firm to improve their resiliency and resolvability as well as reduce structural complexity to improve efficiency. Solomon said that throughout the pandemic, they continued to invest in their people, retail customers, and the broader economy. Examples that he cited included launching their Customer Assistance Program to help customers navigate financial stress and provide flexibility to defer loans, as well as their Urban Investment Group (UIG), which has financed the creation of affordable housing, space for educational and health facilities, and grocery stores in food deserts. He added that Goldman has also invested over $200 million in capital to support Black-led Minority Depository Institutions (MDIs). Through their Small Businesses program, Solomon said they announced an additional $250 million commitment to serve 10,000 businesses in 2020. With respect to diversity and inclusion efforts, he said that since becoming CEO, he has been vocal about the importance of advancing Goldman’s diversity, including gender, race, sexual orientation, gender identity, veteran status and disability. Solomon said that as of July 1, 2021, their five most recently appointed independent directors will be women and they are continuing to increase the diversity of their workforce. He concluded by outlining developments addressing climate risk, noting that they have been carbon neutral since 2015 and are targeting net-zero greenhouse gas emissions by 2030, thereby aligning their financing activities with the goals of the Paris Agreement.
Question & Answer
Rep. Ann Wagner (R-Mo.) asked Moynihan and Dimon how the proposed corporate tax increase would impact their ability to support recovery and what burden would be borne by workers and small business. Moynihan said small and medium sized businesses are worried about tax increases and that such increases will cause bigger companies to shift capital overseas. Dimon said the U.S. needs a globally competitive tax rate, otherwise capital will be retained overseas to the detriment of American companies and the economy writ large. Both Moynihan and Dimon said an increased rate would make them less competitive globally. Wagner also raised concerns over a financial transaction tax (FTT) and asked what adverse effects would occur within the financial system. Solomon said it would negatively impact investor activity.
Rep. Frank Lucas (R-Ok.) requested the witnesses’ views on a global minimum corporate tax rate. Dimon responded that America would be the only country in the world with a global tax rate and such a status could result in capital, R&D, and investment being driven overseas.
Rep. David Kustoff (R-Tenn.) asked if there would be a negative effect on the economy if a retroactive capital gains tax rate increase were to become reality. Moynihan said a capital gains tax impacts all investors, and that retroactivity is never in anyone’s mindset so as such, it could have a bigger negative effect than if it could have been planned for. Fraser said currently, savers are moving to longer dated assets and that a change in these rules would have an impact at a time when returns on savings are already low. Gorman and Scharf said every business and individual deserves to know the tax regime when making decisions, and that any retroactive tax would be unfair.
Rep. Jake Auchincloss (D-Mass.) highlighted the Stop CHEATERS Act, asserting that this legislation would address the tax gap by requiring the banks for individuals who make over $400,000 a year to issue a new 1099 report that tracks income in and withdrawals out. Auchincloss emphasized his belief that this will help the Internal Revenue Service better verify people’s actual income.
Rep. Brad Sherman (D-Calif.) asked if federal legislation is warranted to address the financial and legal fallout that will occur if there is no replacement rate for LIBOR. All witnesses responded that federal legislation is warranted.
Rep. Warren Davidson (R-Ohio) noted recent stress tests that show large banks are adequately capitalized, but asked if this could mean that current capital requirements are out of balance and potentially impeding economic growth. Scharf said the results that come from stress tests are idiosyncratic to the individual assumptions for each scenario, making it is difficult to draw a conclusion from any one specific test. He concluded that across the industry, there is an exceptional amount of capital in the system.
Rep. Juan Vargas (D-Calif.) asked if any witnesses think climate and ESG disclosures are not important, and no one objected.
Rep. French Hill (R-Ark.) noted his concern that the financial industry is not prepared to provide climate related disclosures that provide tangible value to investors. Rep. John Rose (R-Tenn.) asked why JPMorgan allows customers to invest in volatile cryptocurrencies but not legal businesses like fossil fuel companies. Dimon said they do not tell their clients what to do, and with respect to cryptocurrency, they want to help design a safe system. Dimon said JPMorgan will continue to work with fossil fuel companies to help reduce their carbon footprint.
Rep. Sean Casten (D-Ill.) asked whether these institutions have a consistent methodology for calculating the carbon impact of respective investments. Gorman responded that this process is still evolving as governments, regulators, international bodies, and banks work to develop the correct methodology. Casten also highlighted the reintroduction of his Climate Change Financial Risk Act, legislation that directs the Federal Reserve to conduct stress tests on large financial institutions to measure their resilience to climate-related financial risks.
Rep. Alexandria Ocasio-Cortez (D-N.Y.) asked firms if they are still financing new oil and gas production. Fraser and Moynihan said yes, but to help their clients with the transition. Ocasio-Cortez asked firms if they have set specific targets for reduction in carbon emissions. Dimon said they are working with clients to have targets for absolute returns in emissions by industry, and noted the estimates are not public yet. Moynihan said they are doing the same on an industry by industry basis to help them transition in a rational timeframe.
McHenry asked for an outlook on jobs moving forward as millions of positions remain unfilled. Scharf said they hear from clients that confidence is building and that they feel positive about the prospects for the second half of the year. Moynihan said their small business customers have outlined repeatedly the difficulty in getting people back to work and training employees. Fraser said there are significant dislocations as the economy normalizes. Dimon said it is likely due to unemployment insurance and schools not reopening, but believes there will be a booming economy soon and for years to come.
Rep. Roger Williams (R-Texas) asked the witnesses if there are any regulations that in their view should be reevaluated as a result of lessons learned from the pandemic. Moynihan noted that some of the liquidity rules could be fine-tuned and there is also a need to address appraisal regulations.
Rep. Van Taylor (R-Texas) asked if any witnesses believe the economy is not overheating. Gorman said he does not think the economy is overheating, but that we are making a dramatic recovery from a very depressed state. Taylor followed up and asked if there is support for more stimulus money in the economy. Gorman, Solomon, and Dimon said that they would be cautious about further elevated levels of stimulus, noting that at some point the combination of low interest rates, extra stimulus, and synchronized recovery becomes a problem. Dimon added that he thinks we will get to the “boiling point” sometime in 2022. Taylor asked Dimon if they are changing the composition of their balance sheets in the anticipation of inflation. Dimon said they protect themselves against multiple scenarios and that tool is one example they have used.
Rep. Bryan Steil (R-Wis.) asked whether the witnesses agree that the pandemic and related spending imposes an inflationary risk. He also asked what these institutions are doing to prepare for a possible inflationary environment. Solomon responded that there is no question that the combination of monetary policy and fiscal spending, combined with the re-acceleration of the economy, is contributing to some degree of inflation. He continued that the debate should focus on whether these pressures are transitory and that there is a need to prepare for any risks or implications relating to asset prices.
Debt Ceiling and Federal Default
Rep. Bill Foster (D-Ill.) asked if we are headed for another default crisis and how the firms handle a default on U.S. Treasuries in their risk management and stress testing. Dimon said there are complex questions to answer if Treasuries cross-default, such as if the Fed can buy defaulted Treasuries and what the butterfly effect would be in the case of a default. Moynihan said the market often takes great comfort when there is bipartisan confidence in stating that a federal default will not happen, but added they take it into account as a tail risk.
McHenry asked for insight into the lack of transparency in Chinese lending and if the witnesses believe it poses a risk to global financial stability. Solomon said transparency in markets is extremely important and that some issues highlighted could have a contagion effect, but is unlikely to be a major concern in the near future.
Reps. Blaine Luetkemeyer (R-Mo.) and Andy Barr (R-Ky.) asked if the firms are mandating environmental emissions standards in their Chinese investments in the same manner that they are implementing these standards in the U.S. All witnesses emphasized that their standards are global and that they are servicing clients around the world to help transition to lower carbon technologies. Luetkemeyer also highlighted the human rights violations perpetrated by the Chinese Communist Party, emphasizing that these firms have a role to play in pushing back against these crimes.
Rep. Barry Loudermilk (R-Ga.) mentioned the Colonial Pipeline data breach and SolarWinds hack, asking for the latest on the cybersecurity front and how the banks are using AI to help protect against, and address, these threats. Dimon said they spend a tremendous amount of resources, roughly $600-700 million, on cybersecurity, arguing it is the biggest risk to the system outside of nuclear proliferation. Dimon said they use an extensive amount of AI to capture as much as they can, noting that they get attacked “a million times a day.” Rep. William Timmons (R-S.C.) also noted the increasing cybersecurity risks associated with third party vendors, noting that the banking regulators recently provided guidance on practices to reduce such risk.
Cryptocurrency and Digital Assets
Rep. Warren Davidson (R-Ohio) mentioned reports that JPMorgan will now offer a bitcoin fund for private wealth clients and asked how their views have developed over the years as well as why they believe Congress needs to provide regulatory clarity for this asset class. Dimon said JPMorgan is debating if they should make it available in a safe way for people to buy and sell, but that his own personal views are characterized by the sentiment of “buyer beware.”
Waters raised concerns about forbearance and the foreclosure moratorium, asking how many of the firms will offer homeowners opportunities for loan modification. Dimon said that where appropriate, JPMorgan will bend over backwards to help homeowners keep their homes. Fraser said Citi no longer services their mortgages but will ensure their partners provide loan modifications. Moynihan said they will continue to offer loan modifications.
Rep. Cindy Axne (D-Iowa) asked if affordable housing can help create growth. Scharf said it undoubtedly helps growth and that there should be more focus on providing financing for affordable housing via the offering of small dollar loans as well as helping people with down payments and closing costs. Dimon said local zoning laws and regulations make everything more costly, and if underwriting mortgage laws were simplified, it would reduce the cost of mortgages and make affordable mortgages more available.
Discrimination and Inequality
Rep. Gregory Meeks (D-N.Y.) asked Dimon and Fraser to elaborate on their opposition to independent racial equity audits. Dimon said they are devoted to doing better for Black and Latinx communities and have announced many programs to do so, but added that this effort is different from outside audits that come in to “certify” something which does not help and adds unnecessary cost. Fraser said Citi has put out an extensive update on their racial equity plan, and did not think it necessary to have a separate audit but pledged to reexamine their position.
MDIs and CDFIs
Meeks inquired as to whether the represented firms’ public commitments to invest in MDIs has, or will, result in direct agreements with those institutions. Scharf said they have agreements with 13 Black-owned MDIs representing $15 million of equity commitments which is separate from commitments made to CDFIs of $250 million. Moynihan said they have completed and money is in common equity for 17 institutions for up to five percent and have made offers to many others.
Rep. Anthony Gonzalez (R-Ohio) asked how many firms are running similar strategies around return swaps, and if Congress should adjust the disclosure regime with respect to swaps and other instruments that mask the percent exposure and leverage they have on the balance sheet. Solomon said the concentration level in certain securities was unusual, where the market cap of those securities was moving very quickly. Solomon stated his support for a more modern disclosure structure.
Rep. Ritchie Torres (D-N.Y.) asked how much Morgan Stanley sustained in losses from the collapse and if they would support an SEC rule requiring disclosure of a significant economic interest in a company, given the lack of transparency and clarity surrounding the credit risk of Archegos. Gorman gave an estimate of $911 million and said that adequate disclosure is in everyone’s best interest and that he hopes to work with Chair Gensler on the topic. Reps. Ed Perlmutter (D-Ore.) and Sherman also touched on Archegos, emphasizing the need for transparency and risk management.
SPACs and IPO Market
Gonzalez asked where the special purpose acquisition company (SPAC) disclosure regime could be improved so that retail investors can make a fully informed investment decision. Solomon said there is an opportunity for more plain language disclosure, and that there is a need for increased understanding around the differences between the pre-IPO and de-SPAC process.
Rep. Carolyn Maloney (D-N.Y.) mentioned plans to reintroduce her Overdraft Protection Act to crack down on “predatory” overdraft fees and asked Wells Fargo why they have not eliminated overdraft fees like Citi and Bank of America. Scharf said they are constantly looking at ways to be more consumer friendly and that they introduced an account a year ago which has no overdraft fees. He added that they offer overdraft protection and overdraft rewind.
Current Threats to Industry
Rep. Bill Huizenga (R-Mich.) asked for the witnesses’ views on the greatest threat facing the financial system. In response, Fraser said cybersecurity if infrastructure sits in private hands. Solomon said cybersecurity, central clearing risk, and the growing government debt around the world. Dimon said public policy not being properly executed. Gorman said cyber and the impact on data privacy. Scharf also said cybersecurity. Huizenga questioned why none of the CEOs mentioned climate risk as they have made significant commitments and contributions to climate change mitigation.
Rep. David Scott (D-Ga.) expressed his frustration that the Child Tax Credit payments cannot be provided through direct deposits and asked what can be done to address underbanked communities. Scharf said they are committed to bringing more individuals into the system via a combination of financial education, product design, and having the right kinds of facilities and partners outside of the banks themselves to ensure that what is being built actually serves the needs of the community. Dimon emphasized the importance of financial education and better outreach to communities through the MDI and CDFI networks.
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