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Senate Banking Committee Nominations Hearing

Senate Committee on Banking, Housing, and Urban Affairs

“Nomination Hearing”

Tuesday, January 23, 2018

Key Topics & Takeaways

  • Cost-Benefit Analysis: Sen. Richard Shelby (R-Ala.) asked the nominees how important cost-benefit analyses are for rulemaking and regulations. Jelena McWilliams stressed that they are “crucial” for agencies, and if they are not conducted it is hard to determine how consumers will be impacted by regulations. Goodfriend and Workman echoed McWilliams comments.
  • SIFI Designation: Chairman Mike Crapo (R-Idaho) asked for Workman’s opinion on the current designation process for nonbank systemically important financial institutions (SIFIs). Workman replied that Treasury’s recommendation to turn to an activities-based or industry-based approach “deserves consideration.”
  • Orderly Liquidation Authority: Sen. Jack Reed (D-R.I.) asked about orderly liquidation authority (OLA) and noted Fed Governor Jerome Powell’s comment that his preferred option is bankruptcy, but that there could be a time when that does not work. Goodfriend agreed with Powell’s comment, stating that OLA “deserves reconsideration given how important it is,” and that he will make it a priority if confirmed.

Witnesses

  • Jelena McWilliams, to be a member of the Board of Directors, Federal Deposit Insurance Corporation (FDIC)
  • Thomas E. Workman, to be a Member, Financial Stability Oversight Council (FSOC)
  • Dr. Marvin Goodfriend, to be a Member of the Board of Governors, Federal Reserve System

Opening Statements

Sen. Mike Crapo (R-Idaho), Chairman, Senate Committee on Banking, Housing, and Urban Affairs

In his opening statement, Crapo commented that the nominees were “highly qualified,” and the positions they are nominated to fill are essential to ensuring a safe, sound, vibrant financial system. Crapo noted that Jelena McWilliams is a former Senate Banking Committee staffer, and said she would bring the necessary expertise to the Federal Deposit Insurance Corporation (FDIC), which plays a “critical role” in ensuring the safety and soundness of the U.S. economic system and in promoting economic growth.

Crapo noted that Dr. Marvin Goodfriend has worked at the Federal Reserve Bank of Richmond for 30 years, written “extensively” on monetary and regulatory policy, and even testified before the Committee in 2016. Crapo noted that the Federal Reserve is “normalizing” monetary policy by winding down its balance sheet and raising interest rates, and reviewing rules put in place after the crisis.

Crapo introduced Thomas E. Workman by explaining the Financial Stability Oversight Council (FSOC) identifies risks and responds to emerging threats to financial stability. Crapo stated Workman is “well-equipped” to fill the insurance expert role for which he is nominated, continuing that Workman brings four decades of insurance industry experience, including serving as the head of a major New York state insurance trade group. Crapo entered into the record seventeen letters in support of the nominees.

Sen. Sherrod Brown (D-Ohio), Ranking Member, Senate Committee on Banking, Housing, and Urban Affairs

In his opening statement, Brown thanked the nominees for their willingness to serve the public, and stated that the financial regulatory reforms enacted after the financial crisis were intended to hold banks and their watchdogs to a “higher standard,” but that some policymakers have forgotten the lessons of the crisis.

Brown noted that McWilliams will be in a “key position” to ensure another financial crisis does not occur, and will be charged with the stewardship of the nation’s community banking system, noting that financial crises are a “large part” of why there are fewer community banks now than thirty years ago.

Brown expressed concern about Goodfriend’s views on monetary and regulatory policy, particularly his questioning of the Federal Reserve’s mandate to fight unemployment and his endorsement of legislation to “gut” the Consumer Financial Protection Bureau (CFPB). Brown continued that he is concerned Goodfriend will not defend the independence of the Federal Reserve.

Brown highlighted Workman’s long career in Ohio, noting that he would now be shifting to a “watchdog” role. Brown expressed concerns that the FSOC is “abandoning its mission,” stating that he expects Workman to use his position to make the economy work better for American families.

Testimony
Jelena McWilliams, to be a member of the Board of Directors, Federal Deposit Insurance Corporation
In her testimony, McWilliams argued that her background has prepared her to lead the FDIC and noted that in her role at Fifth Third Bank in Ohio, she advised senior management and the the company’s board on legal, compliance, and regulatory matters. McWilliams also discussed her experience as counsel and staff director of the  Senate Banking Committee. McWilliams continued that these experiences give her a “360-degree view” of the financial system and the entities that regulate it, and that she is confident she can execute the FDIC’s mission effectively.

Thomas E. Workman, to be a Member, Financial Stability Oversight Council
Workman began his testimony by explaining his professional background, which includes service in the U.S. Army and over 43 years of experience in insurance. Workman stated he helped develop his law firm’s insurance law practice, and represented an association of Ohio insurance companies. Workman has also served as the president and CEO of the Life Insurance Council of New York. Workman stated his years of experience working with insurers, regulators, and legislators has prepared him to be the FSOC member with insurance expertise, and that he shares the objective to “ensure promises are kept and customers are treated fairly.” Workman highlighted that the role of FSOC is to identify risks to the U.S. economy, promote market discipline, and respond to emerging threats.

Dr. Marvin Goodfriend, to be a Member of the Board of Governors, Federal Reserve System

Goodfriend began his testimony by noting the many responsibilities of the Federal Reserve, stating the Federal Reserve is the “foundation” of economic prosperity. Goodfriend noted the Federal Reserve should learn lessons from its past and be alert to future challenges. Goodfriend explained his background, including his time as an economist focused on central banking, his service with the Federal Reserve of Richmond, and experience as a professor at Carnegie Mellow University. Goodfried said he looks forward to contributing his voice and experience to addressing policy issues to increase the transparency and accountability of the Federal Reserve.

Question & Answer

Improving Financial Regulations
Crapo asked the nominees what their priorities are for improving financial regulations. McWilliams stated that she will focus on the regulatory burdens facing community banks (including international regulatory burdens), de novo charters, and cybersecurity. Goodfriend discussed improving transparency at the Federal Reserve for stress tests, reference rules, and boundaries and clarification of resolution policy. Workman stated that he will focus on collaborating with state insurance regulators and entities under consideration for designation, as well as on cost-benefit analyses and promoting a level playing field in the market.

Sen. Richard Shelby (R-Ala.) asked the nominees how important cost-benefit analyses are for rulemaking and regulations. McWilliams stressed that they are “crucial” for agencies, and if they are not conducted it is hard to determine how consumers will be impacted by regulations. Goodfriend and Workman echoed McWilliams comments.

Sen. Patrick Toomey (R-Pa.) asked McWilliams for ideas on how to relieve the regulatory burden on community banks. She replied that regulatory burdens, such as the Basel framework, may still have a “trickle-down effect” on them, and committed to revisiting regulations if confirmed.

Sen. Jon Tester (D-Mont.) asked McWilliams what she will do to ensure the examination process is modernized and not duplicative. She replied that the FDIC Chair sits on the Federal Financial Institutions Examination Council (FFIEC) and that it is “crucial” there are uniform standards across the Office of the Comptroller of the Currency (OCC), Federal Reserve and FDIC. McWilliams continued that if confirmed, she will look at what has been done at the FFIEC regarding the standardization process, as well as speak with the FDIC interagency working group.

Sen. Dean Heller (R-Nev.) asked how McWilliams would stop the consolidation of community banks. She replied that she will look at how the FDIC has structured the capital and liquidity regulations for small banks, citing the Volcker Rule as an example.

Brown asked if McWilliams will oppose weakening leverage ratios, to which she replied that she will look into the leverage rules. She continued that such rules should be different for small and large banks.

SIFI Designation
Crapo asked for Workman’s opinion on the current designation process for nonbank systemically important financial institutions (SIFIs). Workman replied that Treasury’s recommendation to turn to an activities-based or industry-based approach “deserves consideration.”

Shelby asked Workman for his thoughts on whether banks and insurance companies are different, to which Workman replied that they are functionally different and that their differences should be considered when making SIFI designations.

Tester noted the changes made last Congress on FSOC transparency, to include notifying companies moving through stages of the designation process and providing information during annual reviews, and asked Workman for his thoughts on the changes and whether they should be codified. Workman replied that while he is not certain of each change, “they sound good.” He continued that he would give codifying “serious consideration,” and stressed the importance of companies understanding what the FSOC is thinking during the designation process.

Sen. Catherine Cortez Masto (D-Nev.) noted the recent Treasury report that called for disbanding nonbank SIFI designation, and asked if this should idea should be “tossed out.” Workman replied that the FSOC should look at the market and find out what concerns there are, then follow up with primary regulators.

Brown asked if Workman would recommend FSOC raise the $50 billion asset threshold to $250 billion like Crapo’s regulatory relief bill suggests, but Workman said he could not comment as he has not “adequately learned about” the topic yet.

Mandatory Arbitration

Brown asked if mandatory arbitration agreements should be prohibited. Goodfriend replied that while he has not considered the issue.

Community Reinvestment Act
Sen. Robert Menendez (D-N.J.) discussed the Community Reinvestment Act (CRA) and asked how McWilliams will meet the needs of low- and middle-income communities. She replied that the CRA is the “law of the land” and that the FDIC must abide by it, committing to ensure the FDIC “fully executes” the mandate.

Orderly Liquidation Authority
Sen. John Kennedy (R-La.) asked what the proper role of government is during a  large bank failure. Goodfriend replied that banks should rely on bankruptcy first, and that orderly liquidation plans should be revisited to ensure plans are “in the right place.”

Sen. Jack Reed (D-R.I.) asked about the orderly liquidation authority (OLA) and noted Federal Reserve Chair nominee Jay Powell’s comment that his preferred option is bankruptcy, but that there could be a time when bankruptcy does not work. Goodfriend agreed with Powell’s comment, stating that OLA “deserves reconsideration given how important it is,” and that he will make it a priority if confirmed.

Housing
Tester asked if a government guarantee is needed to preserve the 30-year fixed rate mortgages. Goodfriend replied that while the 30-year mortgage is “useful,” it does not need a government guarantee. Tester then asked if banks would offer 30-year mortgages without such a guarantee, to which Goodfriend said it is up to Congress to decide, not the Fed.

Kennedy asked what role the FDIC plays in establishing a national flood insurance program. McWilliams replied that Congress decides and then the agencies implement programs. She continued that banks need to be appropriately supervised, as it is a problem if flood insurance is not required on loans that are in flood zones and that banks should be fined if they do not abide by regulatory requirements.

Cortez Masto asked what McWilliams will do to encourage homeownership to minorities and millennials. McWilliams said that if confirmed, she will analyze how much the agency has done to encourage homeownership, and if needed, bring initiatives forward.

Sen. Tom Cotton (R-Ark.) noted his concern about high volatility acquisition, development, or construction (HVADC) exposures, stating that all loans may be treated the same when assessing risk. McWilliams stated that if she is confirmed before the rulemaking is finalized, she will read the relevant comment letters.

Green Finance
Sen. Thom Tillis (R-N.C.) asked about green finance and what will happen if banks “wade” into business activities that may trigger Volcker Rule restrictions on trading. McWilliams replied that she understands some banks have committed to being completely green within a certain time, and that some of the activities may require appropriate Volcker Rule compliance.

Consumer Protection
Sen. Doug Jones (D-Ala.) asked if Goodfriend supports the Fed’s Division of Consumer and Community Affairs and their efforts to protect consumers, and if he has any recommended changes for the division. Goodfriend replied that he “absolutely support[s] that mission,” and that if confirmed, he will look into the mission to ensure consumer confidence is maintained.

Anti-Money Laundering
Cotton asked about anti-money laundering regulations and the supervision and enforcement in the Bank Secrecy Act (BSA). McWilliams responded that the FDIC examines and ensures compliance, but that rules and regulations are set up at multiple agencies. He then asked if she is open to looking at the process, to which she replied “absolutely.”

Cybersecurity
Reed asked the nominees for their view on cybersecurity, to which McWilliams replied that it is “one of the most important issues,” and Goodfriend and Workman agreed. Workman also noted the New York Department of Financial Services cybersecurity proposal that influenced National Association of Insurance Commissioners (NAIC) action, and that states now have a cybersecurity model due to the NAIC.

For more information on this hearing, please click here.