SBC Regulator Oversight Hearing
Senate Committee on Banking, Housing, and Urban Affairs
Oversight of Regulators: Does our Financial System Work for Everyone?
Tuesday, August 3, 2021
Chairman Sherrod Brown (D-Ohio)
In his opening statement, Brown said that big banks have stifled lending, and he criticized fintech firms that claim to make banking easier but lack regulations to make sure people’s money is safe with them. Brown stressed that it is necessary to close loopholes for fintech firms and make them subject to the same scrutiny as other financial institutions. Brown concluded that regulators must change their pro-Wall Street approach and ensure financial inclusion while preventing fraud from “dodgy shadow banks.”
Ranking Member Patrick J. Toomey (R-Penn.)
In his opening statement, Toomey expressed his concern with the Biden administration using financial regulations to advance social goals unrelated to banking, thereby further politicizing the banking regulators. Toomey added that the OCC joining the Network for Greening the Financial System (NGFS) is antithetical to a free market system. Toomey urged regulators to focus on increasing competition in the market and improving regulatory efficiency. Toomey said that new innovative financial products will add to consumer protection, increasing safety and soundness, while reducing risks.
The Honorable Todd M. Harper, Chairman, National Credit Union Administration
In his testimony, Harper stressed that the ability to manage interest rate risk remains a crucial determinant of credit union performance going forward and highlighted that the Shared Insurance Fund is almost reaching its statutory minimum for equity ratio due to the lack of investment income resulting from a persistent low interest-rate environment. He added that the NCUA has set their priorities to include maintaining sufficient loss reserves, compliance with anti-money laundering legislations and the Bank Secrecy Act, monitoring credit and liquidity risks, and transitioning from the use of London Inter-bank Offered Rate (LIBOR). Harper encouraged more credit unions to join the Central Liquidity Facility (CLF) to bolster the system’s access to emergency liquidity and increase lending capacity for the facility. He said that cybersecurity risks are heightened due to the pandemic and that the NCUA continues to provide guidance and resources to assist credit unions with strengthening their cyber defenses. Harper emphasized the impact of climate financial risks on the credit union system and that NCUA will continue examining the effects. Harper also added that the NCUA will adopt a new examination system, Modern Examination & Risk Identification Tool (MERIT), and has been exploring the concept of virtual examination of credit unions to reduce onsite examinations. Harper said that the NCUA has been actively trying to grow the size of minority dominant credit unions by helping with cybersecurity and offering guidance on forming new credit unions. Harper asked Congress for specific additional tools: 1) provide the agency with examination and enforcement authority over third-party vendors; 2) improve the Shared Insurance Fund by removing the 1.5 percent statutory ceiling, institute a risk-based premium system, and remove the limitation on assessing premiums when the equity ratio exceeds 1.3 percent; 3) make the enhancements to the NCUA’s CLF granted in the CARES Act permanent; and 4) increase the CDRLF appropriation to $10 million.
The Honorable Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation
In her testimony, McWilliams said the FDIC will continue monitoring and researching the risks of climate change to the banking sector. She explained how the FDIC helped families impacted by the pandemic and has been working with other agencies on Community Reinvestment Act (CRA) reform efforts and addressing false advertisements, disparities in property appraisals, risk management for third party relationships, and financial inclusion. McWilliams emphasized the low savings rate for minorities and promised that the FDIC is using its authorities to address this problem by promoting minority depository institutions (MDIs). To support MDIs, McWilliams listed two initiatives being pursued by the FDIC: to match interested investors with MDIs and facilitate the implementation of emergency capital investment program in low-income communities. She added that the FDIC has also been focusing on supervising banks to ensure compliance with consumer protection regulations. McWilliams said that the FDIC formed the division of complex institution supervision and resolution to better regulate banks with more than $100 billion in asset where FDIC is not the primary regulator. McWilliams concluded by stressing that although the FDIC deposit insurance fund’s reserve ratio fell to 1.25 percent due to fiscal stimulus efforts, they have created a plan to restore the statutory minimum of 1.35 percent within 8 years.
Mr. Michael J. Hsu, Acting Comptroller, Office of the Comptroller of the Currency
In his testimony, Hsu said that there are four challenges facing the OCC and the federal banking system: 1) guarding against complacency by banks; 2) reducing inequality in banking; 3) adapting to digitalization; and 4) acting on the risks that climate change present to the financial system. Hsu stressed the inequality in the housing market and suggested that predatory and discriminatory practices within the financial sector need to be prohibited to promote financial inclusion and increase access to credit for unbanked and underbanked communities. Hsu mentioned the OCC’s launch of the Roundtable for Economic Access and Change (REACh) to give Americans who lack a credit score a chance to obtain mortgages and credit cards. He added that it is also important to increase homeownership and the inventory of affordable housing to help minority communities. He emphasized the importance of the OCC granting charters to fintech and payment firms to encourage innovation and limit races to the bottom while maintaining regulatory oversight. Hsu also stressed the danger of climate change on the financial market as it poses tremendous financial risks and added that the OCC will work with other agencies to address the financial stability implications of climate change.
Question & Answer
Community Reinvestment Act
Brown asked for an estimated timeline of the CRA proposal. Hsu said the OCC does not have an exact timeline for the proposal. Sen. Tina Smith (D-Minn.) asked how the CRA can be strengthened to address the gap in minority business ownership. Hsu said the CRA is a very complicated rule and that they have ongoing workstreams pursuing options to make sure the needs of low- and moderate-income communities are met.
Toomey asked if recently issued approvals to national trust banks to improve safety and soundness by bringing digital asset activity into the regulated banking system will result in increased oversight. Hsu said he is supportive of responsible innovation but explained the purpose of the review is to ensure there is no regulatory arbitrage or race to the bottom. Toomey said companies operating in the space want to comply and that these reversals of the approvals damages the credibility of the OCC.
Toomey asked about climate change affecting banks. Hsu said the focus is on risk management and recognizing that climate change presents risk management challenges. He added that banks need to prepare for the transitional and physical challenges.
Sen. Catherine Cortez Masto (D-Nev.) asked how the NCUA is working with credit unions to reduce climate change concentration risks. Harper said when they supervise a credit union, they look at where the loans are, like if homes are primarily in a flood plain or near wildfires, and then want the credit union to ensure it is taking risk mitigation techniques. Cortez Masto said wildfires are a daily occurrence, and Harper said the NCUA is working with and funding the small credit unions that apply for urgent needs grants.
Cortez Masto asked how the OCC will implement its two pronged approach to climate change and what the vision is for a climate change risk officer. Hsu said the first prong is to work with agencies and partners and share best practices. He said the vision for the climate officer is to expand their capacity to work with stakeholders and banks and that they need resources to accelerate the development and adoption of new climate change risk management actions.
Sen. Richard Shelby (R-Ala.) asked what allowed for bank resiliency during the pandemic and what potential problems could still pose threats in the future. McWilliams said the fact that banks could modify loans and dip into capital buffers helped their resiliency. She said their main concerns will be distributing payments from incoming congressional actions while being cognizant of the potential for inflation and added that they are monitoring risks around cybersecurity and commercial real estate.
Sen. Elizabeth Warren (D-Mass.) said regulators have not formerly denied a single bank merger in fifteen years, arguing that merger review has become the definition of a “rubber stamp”. Asked if banking agencies are currently required to reject mergers when the resulting bank will be bigger or more complex than our banking rules are set up to handle, Hsu said one of the factors involves financial stability, but they are not required to reject a merger.
MDIs and CDFIs
Sen. Tim Scott (R-S.C.) asked for an update on the FDIC’s mission driven bank fund for private sector and philanthropic investment in CDFIs and MDIs. McWilliams said it is in the process of being set up, they have a fund advisor, they have close to $200 million in private commitment, and hope to open the fund by the end of the year. Scott asked if there is an update to the approach for small dollar lending. Harper said the NCUA allows federal credit unions to make payday alternative loans and that they are performing generally well and noted that small dollar loans are often a gateway to bring more people into the financial system. Hsu mentioned their efforts on MDIs, noting that 23 banks have signed the MDI pledge, and the focus on small businesses is mainly consortium lending and other efforts to make these dollars available.
Sen. Jerry Moran (R-Kans.) asked where the FDIC currently stands with its implementation of the independent appeals process plan. McWilliams said over the past thirteen years, the FDIC has had over 110,000 exams but only 50 appeals filed, arguing there was something wrong with their appeals process. She concluded that she is hoping to have a more robust process now. Hsu said their examiners are very good and that they have an intense process for examiners to get credentialed, and their process for dealing with appeals is slightly different from the FDIC.
Moran asked about the importance of amending Section 29 of the FDIC Act to provide FDIC the authority to modernize the brokered deposit framework for community banks. McWilliams said the rules have not been updated in 40 years and the statute does not define brokered deposits, but rather broker for deposit, and that it was important for the FDIC to look at the framework with a fresh eye. She said her only recommendation to Congress has been to update the rules themselves and enforce an asset growth cap or a limit on the growth of institutions once they reach a troubled condition.
Sen. Chris Van Hollen (D-Md.) mentioned three businesses under jurisdiction of the OCC that make one hundred percent of their profits from overdraft fees, and asked Hsu if these are truly safe and sound financial institutions. Hsu said it raises a lot of flags, and that excessive overdraft fees and high cost debt traps should all be prohibited. He said the OCC is looking closely at these issues and is currently pursuing a review, adding that there is an interagency effort to address the “$35 coffee”.
Diversity and Inclusion
Sen. Bob Menendez (D-N.J.) asked witnesses to commit to increasing Latino representation in senior positions. Harper said inclusion is highly important and diverse perspectives need to be represented and acknowledged that their Hispanic hiring is a weakness for the agency. McWilliams said they had a 2.6 percent increase in minority workforce since she assumed her position. Hsu said they recently had a town hall to discuss this exact issue.
Sen. Thom Tillis (R-N.C.) asked if risk-based pricing is an important tool. McWilliams said yes, Hsu said an exciting development is using additional data to inform those risk based assessments.
Brown urged the FDIC to crackdown on non-banks that mislead consumers, arguing that McWilliams has expanded the reach of non-banks and fintechs into the banking sector.
Tillis asked if the NCUA will require COVID-19 vaccinations for staff. Harper said it is not an executive order but that they are currently evaluating that decision.
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