SBC Executive Session and Nomination Hearing

Senate Banking Committee

Executive Session and Nomination Hearing

Tuesday, November 28, 2017

Key Takeaways

  • HUD Nominees: The nominations of Kurtz and Tufts passed by a voice vote. The nomination of Montgomery passed in a 18-5 roll call vote. All three nominees were reported favorably to the Senate.
  • Regulatory Relief: Senate Banking Committee Chairman Mike Crapo (R-Idaho) noted the bipartisan support for tailoring existing regulations so they are “proportional and appropriate,” and asked which regulations Fed Chair nominee Jerome Powell thought would benefit the most. Powell replied that the Fed wants the most intense regulations to be for the biggest financial institutions, and for the level of intensity to decrease as it moves down to community and regional banks. He noted that capital requirements are one area that will benefit the most from tailoring, as well as the Volcker Rule, adding that he is in favor of the provision in Crapo’s bill that exempts banks under $10 billion in assets from the rule.
  • Housing Finance Reform: Crapo stated that housing finance reform will be a priority for the committee after regulatory relief, and asked Powell if he would work with the committee on that, which Powell agreed to. Crapo then asked how Powell would rank housing finance reform in importance, and Powell replied that it is a “great time to move forward on it,” as it is a “highly important piece of unfinished business from the financial crisis.”

Nominees

Executive Session Opening Statements

Chairman Mike Crapo (R-Idaho), Senate Banking Committee

In his opening statement, Crapo addressed the nominees, the Honorable Brian D. Montgomery, of Texas, to be Assistant Secretary for Housing – Federal Housing Commissioner, U.S. Department of Housing and Urban Development (HUD); Mr. Robert Hunter Kurtz, of Virginia, to be Assistant Secretary for Public and Indian Housing, HUD; and Ms. Suzanne Israel Tufts, of New York, to be Assistant Secretary for Administration, HUD. Crapo stated that Montgomery would provide “steadfast leadership” to the Federal Housing Administration (FHA). Crapo continued that Kurtz has spent much of his career working in affordable housing, and has led successful local and federal programs. Crapo said Tufts was a “recognized expert” in turnaround management and leadership development. Crapo concluded by expressing his support for the nominees, stating they would bring a “wealth of experience” to HUD and would help improve access to safe affordable housing.

Ranking Member Sherrod Brown (D-Ohio), Senate Banking Committee

In his opening statement, Brown congratulated the nominees and thanked them for their willingness to serve the American people, stating that the nation currently faces a number of housing challenges, including a growing shortage of affordable housing and potential borrowers “shut out of home ownership.” Brown stated he supports the nominations of Tufts and Kurtz, and expressed concerns about whether Kurtz will face resource constraints due to budget cuts. Brown stated he does not support the nomination of Montgomery, expressing concerns that Montgomery could “lose sight of consumers.”

Vote

The nominations of Kurtz and Tufts passed by a voice vote. The nomination of Montgomery passed in a 18-5 roll call vote. All three nominees were reported favorably to the Senate.

Nomination Hearing Opening Statements

Chairman Mike Crapo (R-Idaho), Senate Banking Committee

In his opening statement, Crapo introduced Jerome Powell, nominated to be Chairman of the Board of Governors of the Federal Reserve System, explaining that he has experience in investment banking and has “proven” he is qualified to be Fed Chair. He noted the important role the Fed plays in balancing the safety and soundness of the financial system and growing a “vibrant” economy. Crapo noted several areas where the Fed should focus on updating, to include the Volcker Rule, stress tests and resolution plans, and discussed the bipartisan legislation he introduced that will tailor and simplify regulations. He explained that the bill will tailor rules for smaller financial institutions, improve access to mortgage credit and housing, and addresses the $50 billion systemically important financial institution (SIFI) threshold.

Ranking Member Sherrod Brown (D-Ohio), Senate Banking Committee

In his opening statement, Brown thanked Fed Chair Janet Yellen for her service, adding his disappointment that President Trump did not reappoint her. He then pivoted to Powell’s work on Wall Street Reform, and noted Powell’s opposition to “micromanaging” the Fed, adding that he hopes Powell continues this work. Brown then noted his concern about financial regulations under the current administration, and referred to the June Treasury Department report on financial regulations as a “big bank wish list.”

Testimony

The Honorable Jerome Powell, to be Chairman of the Board of Governors of the Federal Reserve System

In his testimony, Powell introduced his family and discussed his professional background. He noted that he served under previous Chairs Ben Bernanke and Yellen, and that he will continue to achieve the goals of the Fed while also ensuring the Fed’s independence and non-partisan status is maintained, adding that transparency and accountability “must accompany that independence.” Powell stated that while the financial system is “far stronger than it was 10 years ago,” the Fed must ensure it remains stable and efficient. He explained that the Fed is working on tailoring regulations based on an institution’s size and risk profile, and that they must be “clear and transparent” about the decisions and expectations the Fed has for financial institutions.

Question & Answer

Fed Balance Sheet

Members on both sides of the aisle asked about the Fed’s balance sheet, including what level Powell believes is appropriate going forward. Powell replied that right now it is at $4.5 trillion, and that while it will be “much smaller” in the future, it will still be larger than it was pre-crisis. He continued that the balance sheet will primarily consist of treasury securities, and that the balance will shrink by allowing securities to roll off as they mature, taking approximately 3-4 years to reach the new level. Powell stated that an appropriate balance would be somewhere between $2.5 trillion to $3 trillion.

Regulatory Relief

Crapo noted the bipartisan support for tailoring existing regulations so they are “proportional and appropriate,” and asked which regulations Powell thought would benefit the most. Powell replied that the Fed wants the most intense regulations to be for the biggest financial institutions, and for the level of intensity to decrease as it moves down to community and regional banks. He noted that capital requirements are one area that will benefit the most from tailoring, as well as the Volcker Rule, adding that he is in favor of the provision in Crapo’s bill that exempts banks under $10 billion in assets from the rule.

Sen. Mike Rounds (R-S.D.) asked Powell if there should be asset thresholds for regulations, to which Powell replied that the decision is up to Congress. Powell continued that asset thresholds provide clarity for who is and is not covered by the regulation, but that it is only one indicator of a firm’s risk profile, and that it is “healthy” to look at all the risk factors.

Sen. Dean Heller (R-Nev.) asked if Powell supports reforms to the Dodd-Frank Act, to which Powell replied that reforms could be made to make certain regulations more transparent, like stress testing and resolution, and that he would work with the committee on tailoring.

Sen. Elizabeth Warren (D-Mass.) asked if there are any post-financial crisis regulations that should be made stronger, to which Powell replied that there have been eight years of rules, and that he cannot think of where an important rule is lacking. She then asked if he supports changes to the Volcker Rule, and Powell replied that he supports a re-write of the rule that is “faithful” to its intent.

Sen. Tim Scott (R-S.C.) stated that clarity is needed when it comes to the SIFI designation and non-designation process.

Sen. Thom Tillis (R-N.C.) asked how Powell will work with Fed Vice Chair of Supervision Randall Quarles, to which Powell replied that Quarles “has the lead” on those issues, to include Basel.

Brown opined that regulatory relief changes could “pave the way” for the next financial crisis, though Powell replied that he is “confident they won’t.”

Housing Finance Reform

Crapo stated that housing finance reform will be a priority for the committee after regulatory relief, and asked Powell if he would work with the committee on that, to which Powell agreed. Crapo then asked how Powell would rank housing finance reform in importance, and Powell replied that it is a “great time to move forward on it,” as it is a “highly important piece of unfinished business from the financial crisis.”

Fed Independence

Brown asked what Powell will do to ensure the Fed maintains its influence from outside political influences. Powell replied that he is “strongly committed” to the Fed’s independence, and that “nothing in conversations” with the administration have given him concern. Brown then asked if it is important for other independent agencies to be free from political pressure, to which Powell replied that independent agencies should not “look at politics.”

Tax Bill

Brown asked whether the Fed has done any modeling on the proposed tax bills in Congress, to which Powell replied that he does not have any estimates on the bills’ impact on the economy, but that since it is unclear what final language will pass, it is difficult to start modeling. Other Democratic Senators asked similar questions, with Powell replying the same. When asked, Powell stated that he does not have a view on the tax bills.

Democratic Senators asked if adding an additional $1.5 trillion to the debt would be bad for the economy, to which Powell replied yes.

Orderly Liquidation Authority (OLA)

Sen. Jack Reed (D-R.I.) asked why the OLA should be retained, to which Powell replied that while bankruptcy should be the preferred option for failing institutions, a backup like OLA is needed for emergency situations that threaten the economic health of the country.

Cybersecurity
Reed noted Securities and Exchange Commission (SEC) Chair Jay Clayton’s remarks about the importance of cybersecurity, and noted the need for the Fed to take a “proactive position” when it comes to cybersecurity. Powell agreed, adding that cybersecurity “may be the single most important risk financial institutions face.”

Too Big to Fail (TBTF)
Sen. John Kennedy (R-La.) asked if there are still institutions that are TBTF, to which Powell replied that a great deal of progress has been made since the financial crisis, and that he does not believe there are banks that are TBTF.

Fed Transparency
Heller asked if Powell continues to oppose “Audit the Fed” legislation, to which Powell replied that a Government Accountability Office (GAO) audit at the request of Congress would be “a way for Congress to insert itself into the making of monetary policy,” adding that it would not serve the Fed well.

Blockchain
Sen. David Perdue (R-Ga.) asked about blockchain and cryptocurrencies, and Powell replied that while cryptocurrencies “could matter” in the long run, they are not big enough today to matter, but that they are being monitored “very carefully.”

Diversity
Sen. Catherine Cortez Masto (D-Nev.) asked Powell what he will do to increase the diversity of leadership in the Federal Reserve System. Powell replied that diversity makes “better decisions” and that the Fed is “very committed” in both the governors and reserve banks. He added that “what works is a holistic plan that you stick to over time,” to include recruitment efforts and a company culture that is focused on diversity.

Cost-Benefit Analysis
Sen. Richard Shelby (R-Ala.) asked if there should be cost-benefit analysis for regulations before they are implemented, and Powell replied that the Fed always tries to implement regulations in the most efficient, cost-effective way possible that is also consistent with Congress’s intent. He added that the Fed has recently started releasing white papers soliciting comments when regulations are released.

Exam Process
Tester asked if the Fed has any plans to update and modernize the exam process between regulators to eliminate duplication, to which Powell replied that he is committed to improving the overlap and duplication across regulators.

For more information on this hearing, click here.