SBC Oversight of Financial Regulators Hearing
Senate Committee on Banking, Housing, and Urban Affairs
Oversight of Financial Regulators: A Strong Banking and Credit Union System for Main Street
Tuesday, November 15, 2022
- The FTX collapse was a key focus of Committee members, and many expressed the need for cryptocurrency to be brought within a regulatory regime in the U.S.
- Republicans raised their concern with regulators’ actions on climate change-related risks, while Democrats supported the agencies looking into and issuing guidance on it.
Chairman Sherrod Brown (D-Ohio)
In his opening statement, Brown criticized overdraft and other fees banks charge. He also noted today’s banks are much larger than the largest banks that failed in 2008 and that strong capital requirements are needed. Brown also pointed out that regulators are paying attention to other risks like climate change, cryptocurrency, and cyberattacks.
Ranking Member Pat Toomey (R-Pa.)
In his opening statement, Toomey pointed out regulators are straying from their mandates and are becoming involved in political issues like climate change, even though it is not proven to present a physical risk to banks. He noted banks have more than doubled their loss-absorbing capital since 2008, leaving them prepared for a downturn. Toomey said crypto activity has been pushed to foreign jurisdictions with weaker or no regulatory regimes.
The Honorable Michael S. Barr, Vice Chair for Supervision, Board of Governors of the Federal Reserve
In his testimony, Barr said the recent events in the crypto industry have highlighted the risks associate with new asset classes when accompanied by strong guardrails. He said he is taking a holistic look at the Fed’s capital framework and that merger activity has increased the size of banks, potentially complicating resolving those firms during a crisis. He listed monitoring crypto activity as a priority and mentioned the Fed’s pilot climate change exercise.
The Honorable Todd M. Harper, Chair, National Credit Union Administration
In his testimony, Harper said the NCUA has taken action to strengthen capital, enhance cybersecurity, and support small and minority institutions. He said the NCUA requests a permanent adjustment to the agent member requirements for the central liquidity facility and seeks restoration of the ability to oversee third party vendors. He also advocated for the Improving Cybersecurity of Credit Unions Act.
The Honorable Martin J. Gruenberg, Acting Chair, Federal Deposit Insurance Corporation (FDIC)
In his testimony, Gruenberg listed five key priorities of the FDIC: Strengthening the Community Reinvestment Act, addressing financial risks of climate change, reviewing the bank merger process, evaluating risks of crypto assets to the banking system, and finalizing the BASEL III capital rule. He noted FDIC also wishes to promote minority institutions and cybersecurity.
Mr. Michael J. Hsu, Acting Comptroller, Office of the Comptroller of the Currency (OCC)
In his testimony, Hsu said the OCC is considering updates with respect to analyzing mergers. He mentioned the OCC’s new Office of Financial Technology as they focus on the growth of fintech. Hsu said the OCC has taken a careful and cautious approach to crypto.
Question & Answer
Sens. Jon Ossoff and Brown asked each witness what they view as the largest risks. Harper said he sees four risks which are interest rate risks for the institution itself, liquidity risks, cybersecurity risks, and credit risks that happens as unemployment rises. Gruenburg stated that there is a rising interest rate environment that provides several risks to the banking system, adding that institutions are going to have to pay close attention to the interest rate risk that has accumulated on their balance sheet both through longer term assets they have accumulated and the unrealized losses they have. Barr said his agency is paying careful attention to how institutions manage the major risks mentioned by Harper and Gruenburg, in addition to risks in China and other foreign events, longer-term risks, and the risks that we have not learned about like cryptocurrency. Hsu said banks are not paying enough attention to new risks like crypto. Sen. Van Hollen (D-Md.) asked the witnesses if crypto should be regulated, and they all agreed it should be.
Toomey focused on the custody of crypto assets, asking if the OCC discourages banks from providing custody and why the OCC has not provided clarity or guidance in the area. Hsu replied that the OCC discourages banks from doing things that are not sound or safe and that there are fundamental questions and issues with crypto. Toomey said the OCC has some obligation to provide clarity about the custody of crypto assets and asked Barr if the banking sector could use guidance on this issue. Barr said it would be useful to provide guidance on how to safely custody crypto assets. Both Toomey and Sen. Bill Hagerty (R-Tenn.) pointed out the FTX events were not caused by crypto or the technology, but by bad actors.
Sen. Bob Menendez (D-N.J.) said Congress needs to take a serious look at crypto and asked Gruenberg how consumers in the crypto space can be better protected and informed. Gruenberg said it is a priority and that misrepresenting FDIC insurance is against the law and erodes public trust in the FDIC. Sen. Cynthia Lummis (R-Wyo.) also said Congress needs to pay serious attention to crypto and asked Barr about Regulation W to provide transparency on affiliate relationships. Barr said it would protect consumers, depositors, and the deposit insurance system. Sen. John Kennedy (R-La.) also voiced his displeasure with the FTX situation.
Sen. Tina Smith (D-Minn.) asked regulators what the reception from banks has been like on climate change guidance. Hsu said he shows them the opportunities with managing this risk. Gruenburg stated that the industry is receptive to guidance from the agencies in regards to managing the financial risks of climate change, adding that he thinks the action taken by the OCC and the FDIC laid out a framework to incorporate the financial risks of climate change into the risk management framework that our institutions are familiar with.
Consumer Financial Protection Bureau
Sen. Elizabeth Warren (D-Mass.) voiced her displeasure with the Fifth Circuit’s ruling that the Consumer Financial Protection Bureau (CFPB) was unconstitutional due to its funding mechanism, adding that the Federal Reserve, FDIC, and OCC are not funded by appropriations and are therefore unconstitutional by the Fifth Circuit’s logic. Sen. Mike Rounds (R-S.D.) asked about the CFPB’s peer-to-peer payment rule’s effect on bank safety and soundness. Barr said since Regulation E is implemented by the CFPB, it makes sense for them to figure out what they want and to propose it, then to understand it more broadly.
Sen. Thom Tillis (R-N.C.) aske Barr if economic activity continues to slow and capital requirements increase, is there a scenario where that is a good thing. Barr said he does not look at capital requirements to find out what the right capital level should be tomorrow, adding that he tries to think about how his agency should set capital requirements over time. He said it is a process to change them, so they are looking forward to best fit our economy.
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