Senate Banking Committee Hearing on the Role of Financial Companies
Senate Banking Committee
“Fostering Economic Growth: The Role of Financial Companies”
Tuesday, March 28, 2017
Key Topics & Takeaways
Capital Requirements: The hearing featured a wide-ranging discussion on different ways to regulate financial services firms. Some witnesses (namely Spriggs) called for the dismantling of systemically-important financial institutions (SIFIs), while others argued that it would be better for both banks and the economy to rely on prudential regulations that were easy to implement – namely, by relying on relatively straightforward capital requirements, which they argued would encourage lending while maintaining soundness in the system.
Community Banks: A frequent discussion topic at the hearing was regulatory relief for community banks. Witnesses and Senators discussed different ways that the decline in the number of community banks could be reversed, as well as the impact of community banks on economic growth.
Witnesses
The Honorable Robert Heller, Former Governor, Board of Governors of the Federal Reserve System
The Honorable Donald Powell, Former Chairman, Federal Deposit Insurance Corporation
The Honorable William Spriggs, Professor of Economics, Howard University, and Chief Economist, AFL-CIO
Deyanira Del Rio, Co-Director, The New Economy Project
Thomas C. Deas Jr., Chairman, National Association of Corporate Treasurers
Opening Statements
In his opening statement, Chairman Mike Crapo (R-Idaho) discussed how financial companies provide critical services to businesses and individuals. Crapo said he believes one of the main reasons for underperformance in midcap and small companies since the 2008 crisis, relative to large companies, is limited access to credit. He discussed data from the St. Louis Federal Reserve and the Consumer Financial Protection Bureau (CFPB) that showed declines in business lending by small banks, as well as shrinking short-term, small dollar credit markets. Crapo also said he was looking forward to the Department of the Treasury’s review of regulations, as mandated by President Trump’s recent Executive Order on “Core Principles” for regulating financial markets. Crapo also mentioned the committee’s recent call for proposals on changes to capital markets.
In his opening statement, Ranking Member Sherrod Brown (D-Ohio) said he hopes the Banking Committee’s call for proposals will yield “new ideas to encourage growth” but said that “rolling back Wall Street reform clearly does not fit the bill” for possible legislative changes. Brown said the financial system is more stable and that consumers are better protected due to the Dodd-Frank Act. Brown also criticized banks, saying that “one-third of bank tellers are on government assistance” and that “bank CEOs make a ratio of 470 times the salary of the median front line bank employee.” Brown closed by arguing that financial companies have “an important role to play in our economy, to the extent that they support the rest of the economy” but said that “finance is a means to an end, not an end in itself.”
Testimony
The Honorable Robert Heller, Former Governor, Board of Governors of the Federal Reserve System
In his testimony, Heller discussed how economic growth parallels financial sector growth, and argued that a strong economy needs a “vigorous” financial sector. Heller pointed to two important changes in the 1980s and 1990s that modernized the banking sector – legislation that allowed interstate branching, and the Gramm-Leach-Bliley Act. These laws, according to Heller, allowed banks to serve customers better and increased bank safety. Heller argued that the response to the 2008 financial crisis – which was primarily triggered by irresponsible and excessive subprime mortgage lending – were hundreds of new regulations that “imposed virtual straightjackets” on banks. Heller argued that these rules, as well as the prolonged low interest rate policy by the Federal Reserve, kept new bank creation at a standstill.
Heller pointed to two ways to keep banks safer – tighter regulation, and higher capital requirements – and argued that strong capital requirements are more effective and efficient than having a “myriad of detailed regulations.” He also lauded the Financial CHOICE Act, as it rewards banks with high levels of capital with regulatory relief, and proposed the elimination or consolidation of “overlapping regulatory agencies” in the financial services space.
The Honorable Donald Powell, Former Chairman, Federal Deposit Insurance Corporation
In his testimony, Powell discussed the link between quality of life in a community and the presence of vibrant local banking, describing the data supporting that relationship as “overwhelming.” Powell argued that recent data also indicates that the burden of the examination process for banks has hurt economic growth and created a “nonproductive regulatory environment.” He called on regulators to avoid stifling economic growth by following several principles for regulation – including regulatory restraint and avoiding the injection of a “political agenda” into promulgated rules. He also said regulators should avoid “commoditizing” bank services, as financial needs are community and customer specific and not easily comparable.
In his testimony, Spriggs called on the committee to focus on “the real economy,” especially on labor force growth, labor force productivity, and investment that increases that productivity. Spriggs said the financial sector should take excess capital and make it “productive,” and that much activity currently engaged in by financial firms is unhelpful to the economy.
Deyanira Del Rio, Co-Director, The New Economy Project
In her testimony, Del Rio discussed the work of the New Economy Project in pushing for “economic and racial justice.” She argued that Congress should focus on eliminating barriers to fair banking and credit access, as this will improve opportunity for all Americans. Del Rio argued that limited credit access has fed income and wealth inequality and housing segregation, among other “evils,” and she also criticized the Trump Administration’s plans to loosen bank regulation. Del Rio closed by calling for a “strong and independent” CFPB as key to preserving stability in the financial sector.
Thomas C. Deas Jr., Chairman, National Association of Corporate Treasurers
In his testimony, Deas discussed the work of Coalition for Derivatives End Users, which seeks to exempt end users from margin requirements for derivatives products. Deas argued that the financial system is critical to the day-to-day business opportunities of end user companies, providing cash handling services, lending and credit, and the hedging of financial risks. Deas said that European derivatives regulations are far more favorable to end users than those enacted by U.S. regulators, and give European companies a competitive advantage.
Questions and Answers
Sen. David Perdue (R-Ga.) criticized U.S. regulators for adopting standards “unilaterally” that exceeded the country’s Basel III obligation. Perdue argued that tough U.S. regulations, on both SIFIs and regional banks, contrasts sharply with European implementation of Basel III, and that the disparity in regulatory standards has hurt U.S. competitiveness. Heller agreed that applying Basel III to regional banks has hurt growth, and noted that strict rules enacted as part of Dodd-Frank have had a similar effect. Powell agreed, and argued that the regulatory environment broadly has hurt business creation.
Sen. Tom Cotton (R-Ark.) asked Heller to discuss his ideas on capital standards and their relationship to regulatory supervision. Heller argued that “well-capitalized banks are critical” and noted International Monetary Fund (IMF) data that called for a 10-15 percent capital requirement. Heller went so far to say that banks at the 15 percent level “do not fail” and hence do not need regulatory restrictions to make them safer. He noted that using capital levels would create simpler compliance regimes that would require fewer regulators to implement.
During the hearing, Heller also repeatedly expressed support for House Financial Services Committee Chairman Jeb Hensarling’s (R-Texas) Financial CHOICE Act, which contains a regulatory off-ramp, whereby financial institutions can be exempted from regulations if they meet certain capital requirements.
Powell took a less strident line on regulatory reform, and called for a “rethinking” of the regulatory environment. He pointed out that some type of oversight is important when deposits are insured by the Federal Deposit Insurance Corporation (FDIC), but that the key is to strike a balance between safety and growth.
Sen. Jack Reed (D-R.I.) asked if the current regulatory system is sufficiently insulated from systemic financial shocks. Spriggs said Dodd-Frank was “a vast improvement” over pre-crisis regulation, but that Congress still needs to address the “too-big-to-fail” problem.
Sen. John Kennedy (R-La.) focused on Dodd-Frank’s impact on community banks, noting that in her testimony in February, Federal Reserve Chairman Janet Yellen said that community banks made no contribution to the 2008 crisis. Kennedy asked if it was appropriate to exempt community banks from Dodd-Frank regulations, to which Heller, Powell, and Deas agreed. Heller argued that an exemption could be tied to capital levels for smaller institutions, as well as sound management. Spriggs argued that community banks have already received much regulatory flexibility already, and said that if Congress broke up “too-big-to-fail” institutions that community banks would thrive.
Sen. Heidi Heitkamp (D-N.D.) asked how the financial sector could play a role in encouraging growth in predominantly rural areas. Heller agreed that rural counties have struggled throughout the recovery, and argued it was at least partly due to a stagnation of small bank creation. Heller said that declining access to credit has compounded the problem of declining numbers of community banks, as there is now reduced demand for bank lending to start businesses. Powell also argued that retail banking in small communities is harder due to regulatory burdens on community banks.
Sen. Thom Tillis (R-N.C.) asked about the role that financial institutions play in helping American businesses – particularly small and mid-sized businesses – access foreign markets. Heller said that these businesses rely on large financial institutions with significant overseas activities for financing, and that regional banks, who generally lack international operations, are unable to provide these services.
International Monetary Fund Research on Financial Institutions
Sen. Elizabeth Warren (D-Mass.) asked witnesses about research papers produced in 2015 by the IMF and the Bank for International Settlements (BIS). She continued that those reports discussed an observed, negative relationship between the size of the financial sector in a country and gross domestic product (GDP) growth. Warren claimed the reports showed that the U.S. financial sector is “too big” relative to the rest of the economy, and that the U.S. would be better off if the financial sector was smaller. Spriggs generally agreed with the report, and pointed to statistics that the financial sector has had less productivity growth than other parts of the economy.
Warren then discussed IMF findings that wider access to the financial services could impact growth, and argued about her idea for a Post Office-managed bank. Warren concluded that there is “no tradeoff” between regulation and growth, and that regulatory limitations on big banks would provide financial stability.
Derivatives
Tillis asked Deas to discuss the importance of derivatives to end users and how recent regulation may have impeded access to these products. Deas said that from the standpoint of the end user, derivatives can transmit risks around the financial sector, and the exemption of end users from margin requirements was a good step. However, Deas explained, capital requirements on banks that require capital be set aside for derivatives agreements are still passed along to end users in the form of higher costs for banking services.
State IRAs
Sen. Chris Van Hollen (D-Md.) asked Spriggs to comment on proposals in several states to create a state-run retirement fund for workers whose employers do not offer retirement plans. Spriggs applauded this initiative and said it was a response to Congress not expanding Social Security.
Consumer Financial Protection Bureau
Reed asked about the importance of the CFPB and Del Rio described the agency as “critical.” She cited predatory lending practices in the run-up to the subprime crisis as a rationale for the agency.
For more information on this hearing, please click here.
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Senate Banking Committee
“Fostering Economic Growth: The Role of Financial Companies”
Tuesday, March 28, 2017
Key Topics & Takeaways
Capital Requirements: The hearing featured a wide-ranging discussion on different ways to regulate financial services firms. Some witnesses (namely Spriggs) called for the dismantling of systemically-important financial institutions (SIFIs), while others argued that it would be better for both banks and the economy to rely on prudential regulations that were easy to implement – namely, by relying on relatively straightforward capital requirements, which they argued would encourage lending while maintaining soundness in the system.
Community Banks: A frequent discussion topic at the hearing was regulatory relief for community banks. Witnesses and Senators discussed different ways that the decline in the number of community banks could be reversed, as well as the impact of community banks on economic growth.
Witnesses
The Honorable Robert Heller, Former Governor, Board of Governors of the Federal Reserve System
The Honorable Donald Powell, Former Chairman, Federal Deposit Insurance Corporation
The Honorable William Spriggs, Professor of Economics, Howard University, and Chief Economist, AFL-CIO
Deyanira Del Rio, Co-Director, The New Economy Project
Thomas C. Deas Jr., Chairman, National Association of Corporate Treasurers
Opening Statements
In his opening statement, Chairman Mike Crapo (R-Idaho) discussed how financial companies provide critical services to businesses and individuals. Crapo said he believes one of the main reasons for underperformance in midcap and small companies since the 2008 crisis, relative to large companies, is limited access to credit. He discussed data from the St. Louis Federal Reserve and the Consumer Financial Protection Bureau (CFPB) that showed declines in business lending by small banks, as well as shrinking short-term, small dollar credit markets. Crapo also said he was looking forward to the Department of the Treasury’s review of regulations, as mandated by President Trump’s recent Executive Order on “Core Principles” for regulating financial markets. Crapo also mentioned the committee’s recent call for proposals on changes to capital markets.
In his opening statement, Ranking Member Sherrod Brown (D-Ohio) said he hopes the Banking Committee’s call for proposals will yield “new ideas to encourage growth” but said that “rolling back Wall Street reform clearly does not fit the bill” for possible legislative changes. Brown said the financial system is more stable and that consumers are better protected due to the Dodd-Frank Act. Brown also criticized banks, saying that “one-third of bank tellers are on government assistance” and that “bank CEOs make a ratio of 470 times the salary of the median front line bank employee.” Brown closed by arguing that financial companies have “an important role to play in our economy, to the extent that they support the rest of the economy” but said that “finance is a means to an end, not an end in itself.”
Testimony
The Honorable Robert Heller, Former Governor, Board of Governors of the Federal Reserve System
In his testimony, Heller discussed how economic growth parallels financial sector growth, and argued that a strong economy needs a “vigorous” financial sector. Heller pointed to two important changes in the 1980s and 1990s that modernized the banking sector – legislation that allowed interstate branching, and the Gramm-Leach-Bliley Act. These laws, according to Heller, allowed banks to serve customers better and increased bank safety. Heller argued that the response to the 2008 financial crisis – which was primarily triggered by irresponsible and excessive subprime mortgage lending – were hundreds of new regulations that “imposed virtual straightjackets” on banks. Heller argued that these rules, as well as the prolonged low interest rate policy by the Federal Reserve, kept new bank creation at a standstill.
Heller pointed to two ways to keep banks safer – tighter regulation, and higher capital requirements – and argued that strong capital requirements are more effective and efficient than having a “myriad of detailed regulations.” He also lauded the Financial CHOICE Act, as it rewards banks with high levels of capital with regulatory relief, and proposed the elimination or consolidation of “overlapping regulatory agencies” in the financial services space.
The Honorable Donald Powell, Former Chairman, Federal Deposit Insurance Corporation
In his testimony, Powell discussed the link between quality of life in a community and the presence of vibrant local banking, describing the data supporting that relationship as “overwhelming.” Powell argued that recent data also indicates that the burden of the examination process for banks has hurt economic growth and created a “nonproductive regulatory environment.” He called on regulators to avoid stifling economic growth by following several principles for regulation – including regulatory restraint and avoiding the injection of a “political agenda” into promulgated rules. He also said regulators should avoid “commoditizing” bank services, as financial needs are community and customer specific and not easily comparable.
In his testimony, Spriggs called on the committee to focus on “the real economy,” especially on labor force growth, labor force productivity, and investment that increases that productivity. Spriggs said the financial sector should take excess capital and make it “productive,” and that much activity currently engaged in by financial firms is unhelpful to the economy.
Deyanira Del Rio, Co-Director, The New Economy Project
In her testimony, Del Rio discussed the work of the New Economy Project in pushing for “economic and racial justice.” She argued that Congress should focus on eliminating barriers to fair banking and credit access, as this will improve opportunity for all Americans. Del Rio argued that limited credit access has fed income and wealth inequality and housing segregation, among other “evils,” and she also criticized the Trump Administration’s plans to loosen bank regulation. Del Rio closed by calling for a “strong and independent” CFPB as key to preserving stability in the financial sector.
Thomas C. Deas Jr., Chairman, National Association of Corporate Treasurers
In his testimony, Deas discussed the work of Coalition for Derivatives End Users, which seeks to exempt end users from margin requirements for derivatives products. Deas argued that the financial system is critical to the day-to-day business opportunities of end user companies, providing cash handling services, lending and credit, and the hedging of financial risks. Deas said that European derivatives regulations are far more favorable to end users than those enacted by U.S. regulators, and give European companies a competitive advantage.
Questions and Answers
Sen. David Perdue (R-Ga.) criticized U.S. regulators for adopting standards “unilaterally” that exceeded the country’s Basel III obligation. Perdue argued that tough U.S. regulations, on both SIFIs and regional banks, contrasts sharply with European implementation of Basel III, and that the disparity in regulatory standards has hurt U.S. competitiveness. Heller agreed that applying Basel III to regional banks has hurt growth, and noted that strict rules enacted as part of Dodd-Frank have had a similar effect. Powell agreed, and argued that the regulatory environment broadly has hurt business creation.
Sen. Tom Cotton (R-Ark.) asked Heller to discuss his ideas on capital standards and their relationship to regulatory supervision. Heller argued that “well-capitalized banks are critical” and noted International Monetary Fund (IMF) data that called for a 10-15 percent capital requirement. Heller went so far to say that banks at the 15 percent level “do not fail” and hence do not need regulatory restrictions to make them safer. He noted that using capital levels would create simpler compliance regimes that would require fewer regulators to implement.
During the hearing, Heller also repeatedly expressed support for House Financial Services Committee Chairman Jeb Hensarling’s (R-Texas) Financial CHOICE Act, which contains a regulatory off-ramp, whereby financial institutions can be exempted from regulations if they meet certain capital requirements.
Powell took a less strident line on regulatory reform, and called for a “rethinking” of the regulatory environment. He pointed out that some type of oversight is important when deposits are insured by the Federal Deposit Insurance Corporation (FDIC), but that the key is to strike a balance between safety and growth.
Sen. Jack Reed (D-R.I.) asked if the current regulatory system is sufficiently insulated from systemic financial shocks. Spriggs said Dodd-Frank was “a vast improvement” over pre-crisis regulation, but that Congress still needs to address the “too-big-to-fail” problem.
Sen. John Kennedy (R-La.) focused on Dodd-Frank’s impact on community banks, noting that in her testimony in February, Federal Reserve Chairman Janet Yellen said that community banks made no contribution to the 2008 crisis. Kennedy asked if it was appropriate to exempt community banks from Dodd-Frank regulations, to which Heller, Powell, and Deas agreed. Heller argued that an exemption could be tied to capital levels for smaller institutions, as well as sound management. Spriggs argued that community banks have already received much regulatory flexibility already, and said that if Congress broke up “too-big-to-fail” institutions that community banks would thrive.
Sen. Heidi Heitkamp (D-N.D.) asked how the financial sector could play a role in encouraging growth in predominantly rural areas. Heller agreed that rural counties have struggled throughout the recovery, and argued it was at least partly due to a stagnation of small bank creation. Heller said that declining access to credit has compounded the problem of declining numbers of community banks, as there is now reduced demand for bank lending to start businesses. Powell also argued that retail banking in small communities is harder due to regulatory burdens on community banks.
Sen. Thom Tillis (R-N.C.) asked about the role that financial institutions play in helping American businesses – particularly small and mid-sized businesses – access foreign markets. Heller said that these businesses rely on large financial institutions with significant overseas activities for financing, and that regional banks, who generally lack international operations, are unable to provide these services.
International Monetary Fund Research on Financial Institutions
Sen. Elizabeth Warren (D-Mass.) asked witnesses about research papers produced in 2015 by the IMF and the Bank for International Settlements (BIS). She continued that those reports discussed an observed, negative relationship between the size of the financial sector in a country and gross domestic product (GDP) growth. Warren claimed the reports showed that the U.S. financial sector is “too big” relative to the rest of the economy, and that the U.S. would be better off if the financial sector was smaller. Spriggs generally agreed with the report, and pointed to statistics that the financial sector has had less productivity growth than other parts of the economy.
Warren then discussed IMF findings that wider access to the financial services could impact growth, and argued about her idea for a Post Office-managed bank. Warren concluded that there is “no tradeoff” between regulation and growth, and that regulatory limitations on big banks would provide financial stability.
Derivatives
Tillis asked Deas to discuss the importance of derivatives to end users and how recent regulation may have impeded access to these products. Deas said that from the standpoint of the end user, derivatives can transmit risks around the financial sector, and the exemption of end users from margin requirements was a good step. However, Deas explained, capital requirements on banks that require capital be set aside for derivatives agreements are still passed along to end users in the form of higher costs for banking services.
State IRAs
Sen. Chris Van Hollen (D-Md.) asked Spriggs to comment on proposals in several states to create a state-run retirement fund for workers whose employers do not offer retirement plans. Spriggs applauded this initiative and said it was a response to Congress not expanding Social Security.
Consumer Financial Protection Bureau
Reed asked about the importance of the CFPB and Del Rio described the agency as “critical.” She cited predatory lending practices in the run-up to the subprime crisis as a rationale for the agency.
For more information on this hearing, please click here.