SBC Hearing on Fostering Economic Growth with Regulators

Senate Banking Committee

“Fostering Economic Growth: Regulator Perspective”

Thursday, June 22, 2017

Key Topics & Takeaways

  • The Volcker Rule: When asked by Chairman Crapo for examples of regulations that need tailoring, Powell specifically pointed to the Volcker Rule. Noreika and Gruenberg also pointed to Volcker as an area in need of reevaluation and balancing.
  • Regulatory Redundancy: Noreika proposed a “statutory traffic light” system to reduce regulatory redundancy and streamline oversight. Cooper stated the sheer volume of regulations, their complexity, and overlap contribute to regulatory burden.
  • Asset Threshold: All witnesses agreed with Chairman Crapo’s suggestion that changing the $50 billion asset threshold is appropriate, subject to risk profiling.


Opening Statements

In his opening statement, Chairman Mike Crapo (R-Idaho) said he is convinced there is “growing support for legislation that supports economic growth” on the Senate Banking Committee and expressed optimism that a bipartisan legislative package could be passed in the 115th Congress. Crapo said it is a priority for him to reform the bank regulatory framework, and discussed how momentum for this has increased with the committee’s call for legislative proposals to encourage economic growth, the Federal Financial Institutions Examination Council (FFIEC)’s recent Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) report on regulatory changes, and the Treasury Department’s report on proposed regulatory changes for depository institutions. Crapo said the Senate Banking Committee is discussing several ideas, including changing asset thresholds for regulations, community bank capital requirements, stress test regulations, and others.

In his opening statement, Ranking Member Sherrod Brown (D-Ohio) praised the Dodd-Frank Act for improving the capital positions of American banks. He deplored the losses of homes and jobs in the 2008 financial crisis, and praised the Consumer Financial Protection Bureau (CFPB) for protecting consumers from fraud. Brown then criticized the Treasury Department’s recent report on regulatory changes as a “Wall Street wish list” that cloaked unjustified regulatory relief in the guise of raising lending levels, saying there is “no evidence that relaxing rules will lead banks to lend more.” Brown said that reduced regulatory costs would result in more money for bank executives and shareholders without helping the public. Brown also said he was concerned the Treasury report would hurt the effectiveness of bank supervision, and criticized its “misguided ideas” of including more cost-benefit analysis for regulations, and of making changes to stress tests that would allow banks to “game” them, among others.


The Honorable Jerome H. Powell, Member, Federal Reserve Board of Governors

In his testimony, Powell said that America needs a resilient and well-capitalized financial system, and that there is “little doubt” the financial system is stronger now than it was a decade ago. He praised improvements in loss-absorbing capacity, capital requirements, and stress testing, saying that banks now face far fewer liquidity risks and that resolution planning has reduced the threat of a systemically important financial institution (SIFI) failing. Powell identified five areas that financial regulators should explore to improve the financial regulatory architecture: 1) recalibrating small and mid-sized bank regulations; 2) resolution plans; 3) looking at Volcker implementing regulations, and whether it most efficiently achieves its objectives; 4) increasing the transparency of the Comprehensive Capital Analysis and Review (CCAR); and 5) a new look at enhanced supplemental leverage ratio (SLR).

The Honorable Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation (FDIC)

In his testimony, Gruenberg said that the financial sector is more stable and that the economic expansion has been one of the longest in American history. He continued that banks have made great strides in improving asset quality, raising net income, become more stable, and these positive developments have been seen at banks of all sizes. Gruenberg stressed that a strong and well-capitalized banking system is a source of strength to the U.S. economy, and reforms will make the system more stable and sustain the availability of credit throughout the business cycle. Gruenberg stated that agencies are looking at ways to reduce reporting, examination, and appraisal requirements and the FDIC would support three legislative reforms raised by EGRPRA comment groups: 1) raising the $10 billion threshold for stress tests to $50 billion or tailoring stress testing to bank profile and condition; 2) increasing the asset threshold for banks eligible to an 18 month exam cycle from $1 billion to $2 billion in total assets; 3) agencies developing a proposal to increase the threshold for requiring an appraisal on commercial real estate loans. He stated it is critical that financial regulations be “simple and straightforward.”

The Honorable J. Mark McWatters, Acting Chairman, National Credit Union Administration (NCUA)

In his testimony, McWatters said that the NCUA has agreed to follow the spirit of the recent Executive Orders on financial regulations. McWatters said the NCUA is unique because of its structure as a “one-stop shop” that handles all aspects of credit union regulations. However, he expressed concern that “ill conceived” and “scattershot” rules will hurt the ability of credit unions to serve their customers, and called on bank regulators to “learn from the past” and avoid previous mistakes. McWatters endorsed the idea that well-capitalized and well-managed financial institutions warrant a reduced regulatory burden, and called for changes to regulations that would allow credit unions to engage in more small business lending.

Keith Noreika, Acting Comptroller, Office of the Comptroller of the Currency (OCC)

In his testimony, Noreika said it is time to have a discussion about recalibrating financial regulations, especially for community and midsized banks. He continued that the OCC has sought out ideas for reducing regulatory requirements, and staff has generated approximately 400 suggestions on changes internally. Noreika said he supports legislative action to “rationalize” regulatory framework, and although some overlap is valuable and can provide multiple points of view, it is necessary to recalibrate roles and responsibility to eliminate redundancy. Noreika stressed the need for a “right-sizing of regulations” to eliminate inflexible one-size fits-all requirements that simultaneously over- and under-regulate banking activity, specifically pointing to Volcker as needing reevaluation and calibration. He also stated that the Volcker rule needs clarification to eliminate burdens on banks that do not engage in covered activities and do not pose systemic risks.

Charles G. Cooper, Commissioner, Texas Department of Banking, on behalf of the Conference of State Bank Supervisors

In his testimony, Cooper stressed the importance of community banks to the American economy and overall financial stability. He stressed that community banks are “disproportionately burdened” by oversight that is not tailored to their business models or activities. Cooper said there is currently an opportunity to calibrate our regulatory approach, which can be done while maintaining strong and effective regulation that ensures safety and soundness, protects consumers, and meets the economic needs of our communities. He stated that the sheer volume of regulations, their complexity, and the overall regulatory framework contribute to the overall regulatory burden, which also includes how agencies interpret these regulations and supervise banks. He stressed that sound judgement and flexibility should be central to the regulatory approach.

Question and Answer

Volcker Rule

Crapo asked the witnesses to identify one area in need of regulation tailoring that should be examined. Powell responded that they would support significant tailoring of the Volcker Rule so it falls primarily on banks with large trading books and much more lightly on others. He argued that the intensity of regulation should be tailored appropriately for the risk the institutions present.

When asked by Senator Thom Tillis (R-N.C.) how the complexity of Volcker can be reduced, Powell responded that Congress can play a role in exempting smaller banks below a certain level with no loss to safety and soundness. Gruenberg indicated there are opportunities to strike a balance between simplifying compliance and achieving the purpose of the rule.

Asset Threshold

Crapo asked witnesses if changing the $50 billion asset threshold is appropriate, with which all witnesses agreed. Noreika agreed that the threshold should be changed or reevaluated, as it is at times used as a competitive barrier to entry, adding that the largest banks get a competitive advantage, which is not beneficial for the competitive environment or the consumer.

Cost-Benefit Analysis

Senator Richard Shelby (R-Ala.) asked if conducting a cost-benefit analysis is an important step in considering financial regulations. Powell indicated that the Federal Reserve has been taking a more analytical approach, issuing regulations in the least costly and least burdensome way, to reduce the cost of regulation without affecting safety and soundness. All witnesses agreed cost-benefit analysis was an important step in the process.

Regulatory Redundancy

Senator Tom Cotton (R-Ark.) addressed a common compliant that banks answer to multiple regulations from multiple agencies, and the various interpretations of the regulations by those agencies, asking the witnesses how to prioritize and enact recommendations for streamlining. Noreika proposed a “statutory traffic light system” among federal regulators such that when one agency acts, others will be foreclosed. Cotton stressed the need to streamline the multiplicity of regulators, to which Powell replied that the Federal Reserve is working to identify and limit or eliminate regulatory redundancies.

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