House Oversight Hearing on the FDIC Application Process
Paul Hadzewycz | [email protected] | 202-962-7480
House Oversight and Government Reform Committee
Oversight of the FDIC Application Process
Wednesday, July 13, 2016
Key Topics & Takeaways
- Appropriations Process: Rep. William Lacy Clay (D-Mo.) noted that some Republicans have proposed subjecting all financial regulators to the congressional budget process. He asked whether this would pose risks to the financial system. MIT Professor Simon Johnson argued that this is a “very serious issue” because the Federal Deposit Insurance Corporation (FDIC) has been the “gold standard” for independent regulation, and changing its funding basis would harm the banking industry and the economy.
- Orderly Liquidation Authority (OLA): Johnson argued that bankruptcy would not work for a complex institution, and this is why OLA is so important. Asked what would happen if OLA were to be repealed, as proposed in the Financial CHOICE Act, Johnson said it “would be a disaster” and recalled that we experienced this “in vivid and horrible detail” in 2008.
- Too-Big-to-Fail Subsidy: Rep. Stacey Plaskett (D-Virgin Islands) asked about Johnson’s work suggesting that the largest financial institutions are incented to take more risks. Johnson said the protection TBTF firms receive from downside risks works as a subsidy and incents greater risk taking, and that this had a massive negative impact on the economy. He continued that the largest bank holding companies still have this protection, and it is only adding to systemic risk.
- Living Wills: Rep. Carolyn Maloney (D-N.Y.) stated that the FDIC and Federal Reserve have the authority to impose higher capital, liquidity and leverage requirements on large institutions that fail to submit credible living wills. She questioned how the public and banks can be sure that the FDIC is serious about the living will process if it fails to impose those penalties. FDIC Chairman Gruenberg said the five plans that were jointly found to be non-credible will be resubmitted in October, at which point the regulators will evaluate the firms’ responsiveness to their concerns and decide about potential penalties.
Participants
- Martin Gruenberg, Chairman, Federal Deposit Insurance Corporation
- Matthew Browning, National Association of Industrial Bankers; Utah Bankers Association
- Guy Williams, Gulf Coast Bank and Trust Company; American Bankers Association
- Simon Johnson, MIT Sloan School of Management
Opening Statements
Chairman Jason Chaffetz (R-Utah) said the hearing would highlight an area “truly undermining our country’s economic future,” the decreasing number of local financial institutions and the fact that they are “drowning in a sea of red tape.” He stressed that rules need to be fairly administered and predictable, and lamented that the financial system has not grown stronger since the passage of the Dodd-Frank Act.
Noting that the U.S. today has its lowest number of banks since 1934 and pointing to the decline in de novo applications, Chaffetz suggested that the Federal Deposit Insurance Corporation (FDIC) does not want to see consumers have access to new banks. He said the hearing would examine whether the FDIC is open to receiving and accepting new applications, or whether red tape is keeping new institutions from forming and weakening the financial system.
Ranking Member Elijah Cummings (D-Md.) commented that neighborhood banks are the lifeblood of communities, and that lack of access to basic banking services is a challenge to families trying to climb out of poverty. However, he rejected claims that the FDIC is inappropriately blocking the creation of new institutions and instead blamed the low interest rate environment. He expressed concern that this hearing is only “the latest effort” by Republicans to rollback financial safeguards put in place since the financial crisis.
Witness Testimony
Martin Gruenberg, Chairman, Federal Deposit Insurance Corporation
In his testimony, Gruenberg insisted that the FDIC encourages the creation of new institutions, but agreed with Cummings that the low interest rate environment has decreased new banks’ profitability and is the leading factor of the low number of new applications. He outlined FDIC initiatives to promote new applications, such as FAQs, training conferences, outreach meetings, and application guidelines.
Matthew Browning, National Association of Industrial Bankers; Utah Bankers Association
Browning, in his testimony, criticized the FDIC and claimed it is preventing the chartering of new banks and that it has “unilaterally adopted a no-growth policy.” He argued that the FDIC avoids finding applications complete by making vague demands for modifications and changing the process.
Simon Johnson, MIT Sloan School of Management
In his testimony, Johnson attributed the decline in new applications to low interest rates, calling them a major disincentive to the creation of new community banks. He explained that the FDIC is essentially an insurance company, and that it must make choice regarding the risks it takes, and that he sees no reason to push it further considering that the deposit insurance fund almost ran out of money during the crisis.
Johnson then criticized the regulation and treatment of large banks, arguing that the taxpayer subsidy enjoyed by too-big-to-fail (TBTF) firms distorts competition. He said the FDIC has not made enough progress on living wills, and asserted that there can be no level playing field for small banks as long as large institutions remain TBTF.
Guy Williams, Gulf Coast Bank and Trust Company; American Bankers Association
Williams, in his testimony, stated that excessive and complex regulations that are not tailored to the specific risks of institutions are a leading factor of the small number of new applications to the FDIC. He welcomed the “small changes” made by the FDIC to help de novo banks, but said that they did nothing to address the bigger issues of capital hurdles, unreasonable regulatory expectations, and an inflexible regulatory infrastructure.
Questions
De Novo Applications
Chaffetz noted that the FDIC has not approved 94 percent of de novo applications, and asked if Congress was supposed to believe that so many applications were insufficient. Gruenberg explained that the U.S. has been in a post-crisis environment with low interest rates, so it is harder for new institutions to establish realistic business plans.
Chaffetz retorted that the FDIC’s failure to approve more new banks contributed to systemic risk because it has led to a consolidation of the banking system and larger institutions.
Appropriations Process
Rep. William Lacy Clay (D-Mo.) noted that the FDIC is not subject to the appropriations process, but that some Republicans have proposed subjecting all financial regulators to the congressional budget process. He asked whether this would pose risks to the financial system. Johnson argued that this is a “very serious issue” because the FDIC has been the “gold standard” for independent regulation, and changing its funding basis would harm the banking industry and the economy.
Clay asked what the result of subjecting all the financial regulators to the appropriations process would be. Johnson stated that this would lead to less effective and less predictable regulation.
TBTF Subsidy
Rep. Stacey Plaskett (D-Virgin Islands) asked about Johnson’s work suggesting that the largest financial institutions are incented to take more risks. Johnson said the protection TBTF firms receive from downside risks works as a subsidy and incents greater risk taking, and that this had a massive negative impact on the economy. He continued that the largest bank holding companies still have this protection, and it is only adding to systemic risk.
Orderly Liquidation Authority
Rep. Robin Kelly (D-Ill.) asked how the FDIC’s Orderly Liquidation Authority (OLA) is different from bankruptcy. Gruenberg described it as a threshold capability for the FDIC to resolve a failing financial institution if it cannot go through bankruptcy. He said he believes that if a large institution were to fail today, the FDIC has the authority in place to resolve it.
Johnson argued that bankruptcy would not work for a complex institution, and this is why OLA is so important. Asked what would happen if OLA were to be repealed, as proposed in the Financial CHOICE Act, Johnson said it “would be a disaster” and reminded that we experienced this “in vivid and horrible detail” in 2008 with Lehman Brothers.
LivingWills
Rep. Carolyn Maloney (D-N.Y.) stated that the FDIC and Federal Reserve have the authority to impose higher capital, liquidity and leverage requirements on large institutions that fail to submit credible living wills. She called these penalties “sticks” to encourage the banks to file credible plans but cautioned that they are only effective if banks believe regulators will use them. She questioned how the public and banks can be sure that the FDIC is serious about the living will process if it fails to impose the penalties. Johnson stated that the FDIC and Federal Reserve’s decisions not to impose the penalties already lead to low public confidence in the process.
Gruenberg said the five plans that were jointly found to be non-credible will be resubmitted in October, at which point the regulators will evaluate the firms’ responsiveness to their concerns and decide about potential penalties.
Cost-Benefit Analysis
Kelly asked about the credibility of proposals calling for quantitative cost-benefit analyses by regulators making new rules. Johnson warned that forecasting the benefits of avoiding a crisis must be a part of cost-benefit analysis, and that not including this would be “deeply misleading.”
For more information on this hearing, please click here.
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Paul Hadzewycz | [email protected] | 202-962-7480
House Oversight and Government Reform Committee
Oversight of the FDIC Application Process
Wednesday, July 13, 2016
Key Topics & Takeaways
- Appropriations Process: Rep. William Lacy Clay (D-Mo.) noted that some Republicans have proposed subjecting all financial regulators to the congressional budget process. He asked whether this would pose risks to the financial system. MIT Professor Simon Johnson argued that this is a “very serious issue” because the Federal Deposit Insurance Corporation (FDIC) has been the “gold standard” for independent regulation, and changing its funding basis would harm the banking industry and the economy.
- Orderly Liquidation Authority (OLA): Johnson argued that bankruptcy would not work for a complex institution, and this is why OLA is so important. Asked what would happen if OLA were to be repealed, as proposed in the Financial CHOICE Act, Johnson said it “would be a disaster” and recalled that we experienced this “in vivid and horrible detail” in 2008.
- Too-Big-to-Fail Subsidy: Rep. Stacey Plaskett (D-Virgin Islands) asked about Johnson’s work suggesting that the largest financial institutions are incented to take more risks. Johnson said the protection TBTF firms receive from downside risks works as a subsidy and incents greater risk taking, and that this had a massive negative impact on the economy. He continued that the largest bank holding companies still have this protection, and it is only adding to systemic risk.
- Living Wills: Rep. Carolyn Maloney (D-N.Y.) stated that the FDIC and Federal Reserve have the authority to impose higher capital, liquidity and leverage requirements on large institutions that fail to submit credible living wills. She questioned how the public and banks can be sure that the FDIC is serious about the living will process if it fails to impose those penalties. FDIC Chairman Gruenberg said the five plans that were jointly found to be non-credible will be resubmitted in October, at which point the regulators will evaluate the firms’ responsiveness to their concerns and decide about potential penalties.
Participants
- Martin Gruenberg, Chairman, Federal Deposit Insurance Corporation
- Matthew Browning, National Association of Industrial Bankers; Utah Bankers Association
- Guy Williams, Gulf Coast Bank and Trust Company; American Bankers Association
- Simon Johnson, MIT Sloan School of Management
Opening Statements
Chairman Jason Chaffetz (R-Utah) said the hearing would highlight an area “truly undermining our country’s economic future,” the decreasing number of local financial institutions and the fact that they are “drowning in a sea of red tape.” He stressed that rules need to be fairly administered and predictable, and lamented that the financial system has not grown stronger since the passage of the Dodd-Frank Act.
Noting that the U.S. today has its lowest number of banks since 1934 and pointing to the decline in de novo applications, Chaffetz suggested that the Federal Deposit Insurance Corporation (FDIC) does not want to see consumers have access to new banks. He said the hearing would examine whether the FDIC is open to receiving and accepting new applications, or whether red tape is keeping new institutions from forming and weakening the financial system.
Ranking Member Elijah Cummings (D-Md.) commented that neighborhood banks are the lifeblood of communities, and that lack of access to basic banking services is a challenge to families trying to climb out of poverty. However, he rejected claims that the FDIC is inappropriately blocking the creation of new institutions and instead blamed the low interest rate environment. He expressed concern that this hearing is only “the latest effort” by Republicans to rollback financial safeguards put in place since the financial crisis.
Witness Testimony
Martin Gruenberg, Chairman, Federal Deposit Insurance Corporation
In his testimony, Gruenberg insisted that the FDIC encourages the creation of new institutions, but agreed with Cummings that the low interest rate environment has decreased new banks’ profitability and is the leading factor of the low number of new applications. He outlined FDIC initiatives to promote new applications, such as FAQs, training conferences, outreach meetings, and application guidelines.
Matthew Browning, National Association of Industrial Bankers; Utah Bankers Association
Browning, in his testimony, criticized the FDIC and claimed it is preventing the chartering of new banks and that it has “unilaterally adopted a no-growth policy.” He argued that the FDIC avoids finding applications complete by making vague demands for modifications and changing the process.
Simon Johnson, MIT Sloan School of Management
In his testimony, Johnson attributed the decline in new applications to low interest rates, calling them a major disincentive to the creation of new community banks. He explained that the FDIC is essentially an insurance company, and that it must make choice regarding the risks it takes, and that he sees no reason to push it further considering that the deposit insurance fund almost ran out of money during the crisis.
Johnson then criticized the regulation and treatment of large banks, arguing that the taxpayer subsidy enjoyed by too-big-to-fail (TBTF) firms distorts competition. He said the FDIC has not made enough progress on living wills, and asserted that there can be no level playing field for small banks as long as large institutions remain TBTF.
Guy Williams, Gulf Coast Bank and Trust Company; American Bankers Association
Williams, in his testimony, stated that excessive and complex regulations that are not tailored to the specific risks of institutions are a leading factor of the small number of new applications to the FDIC. He welcomed the “small changes” made by the FDIC to help de novo banks, but said that they did nothing to address the bigger issues of capital hurdles, unreasonable regulatory expectations, and an inflexible regulatory infrastructure.
Questions
De Novo Applications
Chaffetz noted that the FDIC has not approved 94 percent of de novo applications, and asked if Congress was supposed to believe that so many applications were insufficient. Gruenberg explained that the U.S. has been in a post-crisis environment with low interest rates, so it is harder for new institutions to establish realistic business plans.
Chaffetz retorted that the FDIC’s failure to approve more new banks contributed to systemic risk because it has led to a consolidation of the banking system and larger institutions.
Appropriations Process
Rep. William Lacy Clay (D-Mo.) noted that the FDIC is not subject to the appropriations process, but that some Republicans have proposed subjecting all financial regulators to the congressional budget process. He asked whether this would pose risks to the financial system. Johnson argued that this is a “very serious issue” because the FDIC has been the “gold standard” for independent regulation, and changing its funding basis would harm the banking industry and the economy.
Clay asked what the result of subjecting all the financial regulators to the appropriations process would be. Johnson stated that this would lead to less effective and less predictable regulation.
TBTF Subsidy
Rep. Stacey Plaskett (D-Virgin Islands) asked about Johnson’s work suggesting that the largest financial institutions are incented to take more risks. Johnson said the protection TBTF firms receive from downside risks works as a subsidy and incents greater risk taking, and that this had a massive negative impact on the economy. He continued that the largest bank holding companies still have this protection, and it is only adding to systemic risk.
Orderly Liquidation Authority
Rep. Robin Kelly (D-Ill.) asked how the FDIC’s Orderly Liquidation Authority (OLA) is different from bankruptcy. Gruenberg described it as a threshold capability for the FDIC to resolve a failing financial institution if it cannot go through bankruptcy. He said he believes that if a large institution were to fail today, the FDIC has the authority in place to resolve it.
Johnson argued that bankruptcy would not work for a complex institution, and this is why OLA is so important. Asked what would happen if OLA were to be repealed, as proposed in the Financial CHOICE Act, Johnson said it “would be a disaster” and reminded that we experienced this “in vivid and horrible detail” in 2008 with Lehman Brothers.
LivingWills
Rep. Carolyn Maloney (D-N.Y.) stated that the FDIC and Federal Reserve have the authority to impose higher capital, liquidity and leverage requirements on large institutions that fail to submit credible living wills. She called these penalties “sticks” to encourage the banks to file credible plans but cautioned that they are only effective if banks believe regulators will use them. She questioned how the public and banks can be sure that the FDIC is serious about the living will process if it fails to impose the penalties. Johnson stated that the FDIC and Federal Reserve’s decisions not to impose the penalties already lead to low public confidence in the process.
Gruenberg said the five plans that were jointly found to be non-credible will be resubmitted in October, at which point the regulators will evaluate the firms’ responsiveness to their concerns and decide about potential penalties.
Cost-Benefit Analysis
Kelly asked about the credibility of proposals calling for quantitative cost-benefit analyses by regulators making new rules. Johnson warned that forecasting the benefits of avoiding a crisis must be a part of cost-benefit analysis, and that not including this would be “deeply misleading.”
For more information on this hearing, please click here.