[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]





                   THE IMPACT OF THE DODD-FRANK ACT:
                  UNDERSTANDING HEIGHTENED REGULATORY
                          CAPITAL REQUIREMENTS

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 18, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-130













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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

           James H. Clinger, Staff Director and Chief Counsel
       Subcommittee on Financial Institutions and Consumer Credit

             SHELLEY MOORE CAPITO, West Virginia, Chairman

JAMES B. RENACCI, Ohio, Vice         CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
EDWARD R. ROYCE, California          LUIS V. GUTIERREZ, Illinois
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JEB HENSARLING, Texas                RUBEN HINOJOSA, Texas
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
THADDEUS G. McCOTTER, Michigan       JOE BACA, California
KEVIN McCARTHY, California           BRAD MILLER, North Carolina
STEVAN PEARCE, New Mexico            DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         GREGORY W. MEEKS, New York
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             JOHN C. CARNEY, Jr., Delaware
FRANCISCO ``QUICO'' CANSECO, Texas
MICHAEL G. GRIMM, New York
STEPHEN LEE FINCHER, Tennessee













                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 18, 2012.................................................     1
Appendix:
    May 18, 2012.................................................    15

                               WITNESSES
                          Friday, May 18, 2012

McCardell, Daniel, Senior Vice President and Head of Regulatory 
  Affairs, The Clearing House Association L.L.C..................     3
Wald, Richard C., Chief Regulatory Officer, Emigrant Bank........     5

                                APPENDIX

Prepared statements:
    Canseco, Hon. Francisco......................................    16
    Grimm, Hon. Michael..........................................    17
    King, Hon. Peter.............................................    18
    Maloney, Hon. Carolyn........................................    19
    McCardell, Daniel............................................    24
    Wald, Richard C..............................................    32

              Additional Material Submitted for the Record

Maloney, Hon. Carolyn:
    Written statement of the New York Bankers Association (NYBA).    36
    Letter from Sheila Bair, Senior Advisor, the Pew Charitable 
      Trusts, and former Chairman, FDIC..........................    38
Renacci, Hon. James:
    Written statement of the American Council of Life Insurers 
      (ACLI).....................................................    40
    Written statement of the Financial Services Roundtable.......    43

 
                   THE IMPACT OF THE DODD-FRANK ACT:
                  UNDERSTANDING HEIGHTENED REGULATORY
                          CAPITAL REQUIREMENTS

                              ----------                              


                          Friday, May 18, 2012

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 11 a.m., in 
room 2128, Rayburn House Office Building, Hon. Blaine 
Luetkemeyer presiding.
    Members present: Representatives Capito, Renacci, Pearce, 
Luetkemeyer, Huizenga, Duffy, Canseco, Grimm; Maloney, McCarthy 
of New York, and Scott.
    Ex officio present: Representative Frank.
    Mr. Luetkemeyer [presiding]. I think we will begin. 
Chairwoman Capito and Vice Chairman Renacci will be joining us 
later, so for now, you get a substitute Chair.
    Thank you all for coming this morning.
    I believe we have agreed to waive opening statements from 
both sides? Okay. Everybody is going to waive their opening 
statement except the ranking member, Mr. Frank, and so we will 
recognize him for 5 minutes.
    Mr. Frank?
    Mr. Frank. Thank you.
    I want to address the procedural question here. There are 
two issues here, procedural and substantive. I don't have any 
objection to either, but I do think it is important for our 
commitment to regular order that we be clear about this.
    The piece of legislation we are talking about today affects 
one institution. I have no objection to that, but I must be 
honest and say I was asked if we could do this in a way that 
would move quickly, and my answer was, yes, I would like to 
move quickly, but I think it is important that it be done in 
the light of day. Frankly, I think, had it not been done this 
way, somebody might have drawn adverse inferences about the 
legislation which aren't justified.
    I will say that the underlying bill, the trust-preferred, 
when this amendment was offered--and it was an amendment that 
came from the Senator from Maine, Senator Collins--I thought it 
went too far. It was something that was prepared by the FDIC. I 
thought that for smaller banks, community banks, it was a 
little bit harsher than it should be right away. So I was, at 
that time, trying to ameliorate it, and I thought the phasing 
in of the grandfathering was very important.
    We now have one bank which misses, I guess, the date by a 
very small amount of time, and I don't think that does any 
substantive harm. And, as I said, it was a provision of a bill 
of which I had some questions. But I did think it was in the 
interests of all of us to have this done in an open way.
    I believe, at the end of this process, it is unlikely that 
anyone will have substantive objections. I do think we should 
be asking the regulators. We asked the FDIC, and they told us 
they had no position on it. I think it is important that that 
be the case. The FDIC had been a strong advocate of the 
underlying amendment by Senator Collins, and it, I think, would 
have been a problem if we had gone ahead and not asked them, 
because I have had a great deal of respect for the way the FDIC 
has operated. So we have a view by the FDIC that there is no--
they have no objection, they are neutral on the subject. I 
think it is important to have that out there.
    And now, I hope that we will have a conversation. This is 
an opportunity, if anyone thinks there is anything wrong with 
this, they have the opportunity to say so. I, myself, have not 
seen substantive objections that seem to me to have appropriate 
weight, but I did think it was important that the process be 
this way. And I would expect, as a result of this hearing, if 
we don't hear any substantive negative objections, this bill 
will proceed, it will get voted on, and I think that is the way 
it ought to be.
    Thank you.
    Mr. Luetkemeyer. Okay. With that, we will recognize the 
ranking member of the subcommittee, Mrs. Maloney.
    Mrs. Maloney. I waive my opening statement and ask 
unanimous consent to place in the record a statement in support 
of the bill from the New York Bankers Association; a statement 
from Sheila Bair, former Chairman of the FDIC; and my own 
opening statement.
    And I want to publicly thank Ranking Member Frank for his 
commitment to openness, regular order, and a fair voice for 
everyone, and I also thank him for his leadership in authoring 
Dodd-Frank and for his leadership in so many areas.
    So I thank you, and I yield back.
    Mr. Luetkemeyer. Without objection, it is so ordered.
    With that, the balance of the opening statements--anybody 
else who wants to have one can put them into the record.
    But, with that, we will hear testimony from our witnesses 
here this morning: Mr. Daniel McCardell, vice president and 
head of regulatory affairs for The Clearing House Association 
L.L.C.; and Mr. Richard Wald, chief regulatory officer for 
Emigrant Bank.
    Gentlemen, you have 5 minutes. The little machine in front 
of you there will light up. And please pull the microphone 
close and speak as clearly as possible.
    Mr. Frank. Mr. Chairman, would you yield to me briefly, 
just so I can clarify? We have the letter from Sheila Bair. 
Sheila Bair, when she was head of the FDIC, was the major 
advocate for this. And we did ask her specifically if she had 
any comment on the legislation, and, once again, she had no 
particular comment.
    I think it is important to say that she is a strong 
supporter of the underlying amendment but has no objection nor 
approval for the bill that we are talking about for the one 
institution. And given her role in this, and the justified 
reputation she has for integrity, I think her saying that she 
has no comment one way or the other is an important piece of 
this and is in line with what I said earlier.
    Mr. Luetkemeyer. Do you have a letter to that effect?
    Mr. Frank. The gentlewoman--
    Mr. Luetkemeyer. Okay.
    Mr. Frank. That was in the letter. The letter is about the 
underlying bill, but I think there was some question, would she 
object to the particular bill--
    Mr. Luetkemeyer. Okay.
    Mr. Frank. --and she has no objection to make to the 
particular bill. And I will say, from my experience with Ms. 
Bair, if she doesn't like something, you know about it. She is 
a woman of very few secrets about her dislikes, and we have 
benefited from that openness.
    Mr. Luetkemeyer. Okay. Thank you for that clarification.
    Mr. McCardell, you are recognized for 5 minutes.

 STATEMENT OF DANIEL MCCARDELL, SENIOR VICE PRESIDENT AND HEAD 
  OF REGULATORY AFFAIRS, THE CLEARING HOUSE ASSOCIATION L.L.C.

    Mr. McCardell. Thank you.
    Mr. Chairman, Ranking Member Maloney, and members of the 
subcommittee, my name is Dan McCardell, and I am senior vice 
president and head of regulatory affairs for The Clearing House 
Association. I appreciate the opportunity to appear before you 
today to discuss Section 171 of the Dodd-Frank Act, commonly 
known as the Collins Amendment.
    By way of background, The Clearing House was established in 
1853 and is the oldest banking association and payments company 
in the United States. It is owned by 24 commercial banks that 
collectively employ over 2 million people. The Clearing House 
is a nonpartisan advocacy organization representing its owner 
banks on a variety of systemically important banking issues.
    Before I address the specific topic of today's hearing, let 
me begin by reiterating our strong support for recent U.S. 
regulatory reform efforts which have substantially increased 
the quantity and quality of capital that banking organizations 
are required to hold. This is critically important, as 
insufficient capital at some institutions clearly contributed 
to the onset and escalation of the financial crisis. As I will 
discuss, U.S. banking organizations have already significantly 
increased the amount of capital they hold as a result of these 
regulatory reform efforts.
    We have also consistently supported significant and 
fundamental changes to financial services regulation in order 
to establish a regulatory framework that both protects the 
financial system against potential systemic risks and enables 
banks to play their critical role in fostering economic and job 
growth. We are concerned, however, that certain specific 
aspects of these capital reforms could potentially work at 
cross purposes with these important policy objectives.
    The Collins Amendment does three things of particular 
importance to our members. First, it imposes a minimum risk-
based capital floor consisting of the Basel I base requirements 
on certain large U.S. banks. Second, these so-called Basel II 
banks are required to calculate their minimum capital 
requirements under both Basel I and Basel II in perpetuity. 
Third, with a limited exception for smaller bank holding 
companies, the Collins Amendment requires a phaseout of trust-
preferred and other hybrid securities from inclusion in Tier 1 
capital.
    The Collins Amendment's imposition of the Basel I floor is 
but one of a number of U.S. and international regulatory reform 
initiatives that have increased the amount and quality of 
capital that U.S. banks are required to hold. For example, the 
final Basel III capital and liquidity frameworks have been the 
foundation for post-crisis international efforts to address 
capital adequacy and liquidity risk. The Federal banking 
agencies have also adopted the capital plan rule, which 
requires that covered banks demonstrate their ability to 
maintain capital above existing minimum requirements under 
severely stressed conditions.
    The heightened capital requirements under Basel III alone 
will require U.S. banking institutions to increase the amount 
of Common Equity Tier 1 capital by over 100 percent from the 
amount held before the crisis. In addition, as a result of the 
imposition of Basel III's quantitative, qualitative, and risk-
rating requirements, the 7 percent minimum Common Equity Tier 1 
ratio under Basel III is equivalent to a 14 percent Tier 1 
common equity capital ratio under the pre-crisis Basel I rules.
    Furthermore, Basel III and related enhancements to the 
capital framework made under Basel II.5 not only address 
aggregate capital requirements but also the specific areas in 
which excessive risk was thought to have been incurred. For 
example, Basel II.5 dramatically increases, often by 400 
percent or more, the capital charge on trading positions held 
by banks.
    There will also be significant practical challenges in 
complying with the Collins Amendment's Basel I floor 
requirements. As I mentioned, Basel II banks in the United 
States will be required in perpetuity to calculate their 
capital requirements under two different regimes. This will 
entail a significant amount of duplication that we believe will 
make capital planning a needlessly complex endeavor, as these 
institutions will need to organize their capital planning 
policies and procedures and operations around two separate and 
distinct capital regimes. Significant supervisory resources 
will also need to be expended by the Federal banking agencies 
to monitor this duplicative capital exercise.
    In addition to these administrative complexities and 
redundancies, the Collins Amendment's Basel I base floor and 3-
year phaseout of hybrid securities could place U.S. 
institutions at a competitive disadvantage. Other jurisdictions 
have not adopted the Collins Amendment's approach of imposing a 
Basel I floor. Accordingly, the potentially higher resulting 
capital requirements will apply to U.S. banking institutions 
but not to their overseas competitors.
    An implicit assumption underlying the Collins Amendment's 
Basel I floor appears to be that requiring more capital is 
always a better policy outcome. However, we believe that there 
is a significant underappreciation of the tradeoffs between 
ever-higher capital levels and the risk of reducing economic 
and job growth and pushing financial transactions to the shadow 
banking sector.
    In conclusion, we believe that the policy concern that 
apparently gave rise to the Collins Amendments Basel I base 
minimum capital floor--namely, that the Basel II approach could 
require too little capital--has been separately and more 
appropriately addressed by other regulatory reforms that have 
resulted in significant enhancements to both the quantity and 
quality of capital held by U.S. banking organizations. We urge 
policymakers in Congress, the Administration, and the Federal 
banking agencies to keep these issues in mind as the financial 
services regulatory reform efforts in the United States and 
internationally are evaluated and considered on an ongoing 
basis.
    Again, I thank you for the opportunity to testify before 
you today, and I look forward to any questions you may have.
    [The prepared statement of Mr. McCardell can be found on 
page 24 of the appendix.]
    Mr. Renacci [presiding]. Thank you, Mr. McCardell.
    Next, we have Mr. Richard Wald, chief regulatory officer, 
Emigrant Bank.
    You are recognized for 5 minutes.

    STATEMENT OF RICHARD C. WALD, CHIEF REGULATORY OFFICER, 
                         EMIGRANT BANK

    Mr. Wald. Thank you, Mr. Chairman, and members of the 
subcommittee. Thank you for allowing me this opportunity to 
provide testimony in support of H.R. 3128.
    By way of background, I began my career as an attorney with 
the FDIC. For the last 20 years, I have been with Emigrant 
Bank. I currently serve as the chief regulatory officer of 
Emigrant and the CEO of the residential and commercial real 
estate lending divisions.
    Chartered in 1850 as a mutual savings bank, Emigrant is the 
oldest savings bank in New York City. Its 32 branches are 
mostly concentrated in the outer boroughs, where we do most of 
our residential and small-balance commercial lending. As of 
today, Emigrant has approximately $10.5 billion in assets and 
is considered by its regulators to be well-capitalized and in 
compliance with all regulations. Emigrant has operated with 
less than $15 billion in assets for most of its history.
    The bank supports passage of H.R. 3128 because we believe 
it is consistent with the original intent of the Collins 
Amendment to allow institutions with less than $15 billion in 
assets to continue to include trust-preferreds in Tier 1 
capital and, thus, be grandfathered from the bill's 
limitations. In this regard, the bill furthers the public 
policy of enhancing credit availability to residential 
borrowers and small-business owners.
    Specifically, the bill seeks to establish an additional 
lookback date for the part of the Collins Amendment that sets 
the criteria for which institutions are grandfathered. Under 
Collins, an institution may no longer count its trust-
preferreds as Tier 1 capital, eliminating such amount by one-
third in each year for 3 years commencing this January. This 
capital restriction affects all institutions except those with 
assets under $15 billion as of December 31, 2009.
    The Collins Amendment grandfathered these smaller community 
banks, and while we believe the policy for such grandfathering 
is sound, it is the lookback date for which assets are measured 
that needs to be expanded. We believe an additional lookback 
date of March 31, 2010, is necessary as a matter of promoting 
credit availability. Every other cutoff date in the Collins is 
May 19, 2010, or later.
    Importantly, Emigrant was briefly and temporarily over the 
$15 billion asset size on December 31, 2009, because of a 
prudent, cautious move to increase its liquidity during the 
height of the financial crisis. During the first quarter of 
2008, as the financial crisis appeared to escalate, we analyzed 
the extent of our uninsured deposits above the $100,000 deposit 
insurance limit. We determined that we had $2.3 billion in 
uninsured deposits that were most at risk of being pulled from 
the bank if the financial crisis worsened. To be extra 
cautious, the bank borrowed $2.3 billion from the Federal Home 
Loan Bank of New York at 2\1/2\ percent.
    Soon after we borrowed these funds, the deposit insurance 
limit was raised to $250,000. This would have largely 
eliminated our need for this liquidity insurance. However, 
these Home Loan Bank borrowings could not be prepaid without 
penalty except starting during the first quarter of 2010. The 
penalty on such prepayment would have been $40 million.
    We held this liquidity insurance as an asset at the Federal 
Reserve because of the safety and ease of access of keeping 
them at the Fed. Ultimately, all of these Home Loan borrowings 
were repaid during the first quarter of 2010, and we used the 
assets held at the Fed to retire this borrowing. Thus, by March 
31, 2010, Emigrant was once again a sub-$15 billion community 
bank. Indeed, by the end of that quarter, we had about $13 
billion in assets.
    So the cruel irony here is that because we were prudent and 
prepared for a worst-case scenario that never came to pass, we 
were temporarily above $15 billion in assets on December 31, 
2009. Today, we are unable to avail ourselves of the 
grandfathering provision that was established for community 
banks like us. Consequently, without the bill, we would be 
required to begin to eliminate $300 million in trust-preferred 
from our capital over the course of the next 3 years. In year 
one alone, we would lose the capacity to originate $2 billion 
in one- to four-family, bread-and-butter residential real 
estate loans.
    Given Emigrant's role as a 150-year-old community bank 
primarily serving the outer boroughs of New York City, this 
would be an odd result and inconsistent with the very purpose 
of the grandfathering provision of the Collins Amendment--to 
ensure that community banks like Emigrant could provide sorely 
needed residential and commercial lending in the communities 
they serve, especially during these difficult and uncertain 
economic times.
    We thus urge passage of H.R. 3128 in order to address the 
unintended consequences of the lookback date now in the Collins 
Amendment. This will allow Emigrant to continue to fulfill its 
important mission as a portfolio lender of residential and 
small business loans in the New York City boroughs.
    Thank you for the opportunity to testify, and I would be 
happy to answer any questions.
    [The prepared statement of Mr. Wald can be found on page 32 
of the appendix.]
    Mr. Renacci. Thank you, Mr. Wald.
    We are now going to recognize Members for 5 minutes each. 
First, I will recognize myself for 5 minutes.
    Mr. Wald, in your testimony, you say that under the Collins 
Amendment, the bank would be required to eliminate $100 million 
of the trust-preferred securities that count toward its Tier 1 
capital ratios each year for 3 years. How will Emigrant Bank 
look to replace this Tier 1 capital? Will you raise capital or 
reduce your assets?
    Mr. Wald. As a privately-held institution, it is a little 
bit more difficult for us to access the equity markets to raise 
capital. What we have normally done over the years is to build 
capital the old-fashioned way, through retained earnings.
    Mr. Renacci. Let's assume Emigrant Bank phases out their 
trust-preferred securities and it cannot replace them with a 
qualified form of Tier 1 capital. What would that mean for the 
bank and for its customers? Will you have to cut back on 
lending, or what would you be doing?
    Mr. Wald. As of today, we are already at $10.5 billion. So 
we we may, in fact, have to face this elimination of trust-
preferreds. And, consequently, I think it will impair or 
curtail lending.
    Mr. Renacci. Okay.
    Mr. McCardell, according to the Federal Reserve, 85 percent 
of bank holding companies with more than $10 billion in total 
assets included hybrid capital in their Tier 1 capital. Trust-
preferred securities accounted for 82 percent of the hybrid 
capital instruments.
    What are the other types of hybrid capital? And what made 
trust-preferred securities so popular?
    Mr. McCardell. Thank you for the question.
    Trust-preferred securities were obviously tax-beneficial. 
They were a hybrid of debt and equity. They provided certain 
tax benefits. They were useful in terms of using for Tier 1 
capital.
    That said, since the phaseout, particularly for large 
banks, since the Collins Amendment, our member banks have 
basically been required to find other forms of capital to 
replace that. And our member banks are on track to do so.
    Mr. Renacci. Okay.
    How many bank institutions will fall below the minimum 
amounts of regulatory capital if trust-preferred securities are 
excluded from Tier 1 capital? Any thoughts or ideas?
    Mr. McCardell. I don't have any data on that. Again, I know 
that our member banks are complying with Collins and are on 
track to phase out trust-preferred securities and replace those 
with other forms of capital in Tier 1.
    Mr. Renacci. Okay.
    I have no more questions. I am going to recognize Mrs. 
Maloney for 5 minutes for questioning.
    Mrs. Maloney. I want to thank you for calling this hearing, 
and I want to thank the panelists today for your testimony.
    And I would like to ask Mr. Wald, your testimony states 
that Emigrant was above the $15 billion threshold for a period 
of approximately what, 2 years?
    Mr. Wald. Yes, for a couple of years.
    Mrs. Maloney. Okay. Can you elaborate on the decisions that 
made the bank over the threshold?
    Mr. Wald. As I said in the testimony, we, and I am assuming 
a lot of community banks during the financial crisis, were 
evaluating the extent that they were holding deposits that were 
above the $100,000 deposit insurance limit. And, obviously, to 
the extent that those deposits exceeded $100,000, they were the 
most vulnerable deposits that could leave the institution in 
the event of a continuation of the crisis.
    So what we tried to do was create a replacement liquidity 
as insurance just in case an event like that did occur. 
Fortunately, nothing happened. And, in addition, shortly after 
that, the FDIC recognized that this was a concern, I guess, not 
only of us but of other institutions, and raised the deposit 
insurance limit to $250,000.
    Mrs. Maloney. And the assets in your bank are what, $10 
billion, $13 billion consistently, basically?
    Mr. Wald. We are currently $10.5 billion, projected to be 
under $10 billion by the end of the year.
    Mrs. Maloney. So during the economic crisis, in probably 
early 2008, you took steps basically to enhance the finances, 
the flexibility and the capital to be able to have a greater 
financial firewall in light of the uncertainty of the times. 
And it seems like a perfect example here that no good deed goes 
unpunished. You took steps to protect your depositors, to 
protect the safety and soundness of your institution and, 
therefore, the larger economic community, and inadvertently you 
have been caught in this, what I would describe as an unfair, 
unintended consequence.
    I would like you to describe the consequences of this bill 
in terms of, first, the number of bank holding companies on 
which it could confer grandfathered status--or, Mr. McCardell, 
you might want to weigh in on these questions--second, whether 
a change in grandfathered status would affect the capital 
adequacy of such bank holding companies; and, third, the 
resulting public policy benefits of expanding the scope of the 
grandfather. And as I understand it, there will be two dates 
now.
    Would you like to elaborate? Either of you?
    Mr. Wald. I can only speak to Emigrant itself. We have 
enough to deal with now with the implementation of Dodd-Frank 
as it is going forward. But I really don't know whether or not 
it affects other institutions.
    Mr. McCardell. Again, our institutions are adapting.
    I would just highlight one additional issue, in fact the 
core issue that we have with Collins on behalf of our member 
banks, and that is the transition schedules, in which we see 
there is a 3-year transition schedule for Collins, and yet a 
10-year transition schedule for trust-preferreds under Basel 
III. We would actually like to see that addressed and perhaps 
see those two reconciled.
    Mrs. Maloney. Okay.
    I have no further questions, and I yield back.
    Mr. Renacci. Thank you, Mrs. Maloney.
    Before recognizing the next Member, I want to ask unanimous 
consent that the following items be made a part of the record: 
a letter from the American Council of Life Insurers; a letter 
from the Financial Services Roundtable; and the opening 
statements of Mr. Bachus, Mrs. Capito, Mr. Hensarling, Mr. 
Canseco, and Mr. Grimm.
    At this time, I recognize Mr. Luetkemeyer for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    I am just kind of curious, Mr. McCardell, if we don't do 
anything with this amendment, if this amendment would not pass 
or would not be implemented, what is the risk that we have?
    Mr. McCardell. Our member banks that are the largest 
commercial banks in the country are complying with Collins; we 
are on track for that. We are finding new forms of capital to 
replace trust-preferreds--
    Mr. Luetkemeyer. What kind of capital? When you say new 
forms, can you explain?
    Mr. McCardell. Common equity, for instance, among others, 
which is the most stable form of--
    Mr. Luetkemeyer. Selling more stock?
    Mr. McCardell. Correct.
    So we are adapting, our member banks are adapting. Again, I 
would just flag the issue I mentioned a minute ago, which is 
the transition schedules, where there is a disparity between 
the Collins and the Basel III. So suffice it to say that our 
members are adapting.
    Mr. Luetkemeyer. Okay. My question, though, is, what is the 
risk if we don't do this?
    Mr. McCardell. To our members, we don't see a significant 
risk.
    Mr. Luetkemeyer. What is the risk if we do it? Is there 
enhanced risk? Is there less risk?
    Mr. McCardell. Again, we did have some issues with Collins, 
but are on track to comply. I think our banks are doing a good 
job in moving in a direction to comply with Collins.
    Mr. Luetkemeyer. Okay. I am kind of curious--I think I know 
the answer, but let me ask you, if a bank goes under and it has 
trust-preferred securities, where does it stand in the loss 
column? At what point--is it lost like stockholders, or are 
they part of the group that would be paid back something?
    Mr. McCardell. I believe for trust-preferreds, it is lower 
than common equity. I would need to confirm that for you. And, 
again, that is in the process of being phased out right now 
over the next several years.
    Mr. Luetkemeyer. So that is one of the concerns, I would 
assume, and the reason for the amendment, in that there is 
concern that it really isn't equity, that there is some ability 
to pay it back. The stockholders or whomever has stock in the 
bank should be the last to realize anything out of it if things 
go bad. And you should be able to go back to those capital 
accounts, which are the dollars that are invested in stock, to 
be able to absorb whatever losses. And if you can't use those 
trust-preferred securities as something you can absorb losses 
with, that, I assume, is why they are no longer treating it as 
capital. Is that--
    Mr. McCardell. I believe that probably was one of the 
motivations behind Collins.
    Mr. Luetkemeyer. Okay.
    Mr. Wald, I know the discussion has been to try and extend 
the phaseout from 3 years to 5 years. Would that help your 
situation significantly?
    Mr. Wald. I just want to comment, make one point on the 
question you just asked him, because the trust-preferred was 
issued at Emigrant's parents' holding company. And all of the 
proceeds of those trust-preferreds were then downstreamed to 
Emigrant Bank and the insured bank.
    So it actually, with regard to us, because we don't hold 
those funds at the holding company, it is an additional capital 
buffer really for the benefit of the FDIC.
    Mr. Luetkemeyer. Okay, so what you are saying is those 
dollars are actually equity that is in the bank--
    Mr. Wald. Exactly.
    Mr. Luetkemeyer. --but they are securities--money has been 
put in them by their holding companies.
    Mr. Wald. Exactly. They are paid in capital at the bank--at 
our bank.
    Mr. Luetkemeyer. Okay. So if something goes belly up with 
the bank, where does this put--
    Mr. Wald. The FDIC is better off that we had issued those 
trust-preferreds.
    Mr. Luetkemeyer. Okay. As an examiner, a firm examiner, you 
can attest to that, I take it?
    Mr. Wald. It is held at the bank, not at the holding 
company. And, in fact, the regulators at any moment could go 
into any insured bank and tell them not to pay dividends to 
their holding companies to pay those trust-preferreds. So it is 
probably at the safest place it could be, if it is at the 
insured institution.
    Mr. Luetkemeyer. Okay.
    That is basically all I have. I thank you, Mr. Chairman. I 
yield back.
    Mr. Renacci. Thank you.
    I now recognize Mrs. McCarthy for 5 minutes.
    Mrs. McCarthy of New York. Thank you, Mr. Chairman, and I 
thank you for holding this hearing. I think it is important.
    When we look at H.R. 3218, in doing some research over the 
last couple of weeks, we found that not only would it 
inadvertently disqualify institutions which have been 
grandfathered under the current date in the statue, and 
allowing for an additional quarter lookback period would only 
impact your institution, from what we have heard from the Feds.
    Is that your understanding also?
    Mr. Wald. I know it affects our institution. I am not sure 
whether it affects any other institutions. I haven't looked at 
that.
    Mrs. McCarthy of New York. We have learned that it would 
not affect any other institution. And for that, I think it is 
important that you go over the dates again. Because the dates, 
in my opinion, are what is important here.
    When did the bank go above the $15 billion? You mentioned 
that threshold as a result of the $2.3 billion liquidity loan. 
And when you paid that loan back--and I think when you said the 
first quarter, for a lot of people--it was actually the first 
week in January, wasn't it?
    Mr. Wald. The minute we had the opportunity to begin 
retiring the Federal Home Loan Bank borrowings without penalty, 
we started.
    Mrs. McCarthy of New York. Correct.
    And just following up on a question that one of my 
colleagues asked you, what is your immediate plan to replace 
the $100 million of the Tier 1 capital you will lose in 2013?
    Mr. Wald. We are always looking at our assets, our 
liabilities, our capital position. We are currently 
overcapitalized. It really comes down to credit availability in 
the communities to whom we lend. And, how is this going to 
impact our ability to keep lending as vigorously and as safely 
as possible in those communities? I think that is the real 
question, and I think that is where it begins to impair our 
operations.
    Mrs. McCarthy of New York. Just to go back again on the 
dates, and I know I am harping on the dates, but the dates are 
actually really important. Because in your testimony, you do 
have a good timeline on when you borrowed the money to cover 
during the difficult time that we were all going through and 
what the intent was in the beginning to have a March 31st date. 
And if you could go into that a little bit more, I think people 
would understand it.
    Mr. Wald. The borrowings from the Federal Home Loan Bank 
all occurred during the first quarter of 2008. We retired all 
of those borrowings during the first quarter of 2010. So that 
is the period of time, that $2.3 billion is what caused us to 
get over that $15 billion threshold.
    Mrs. McCarthy of New York. Have you gone back to the $15 
billion, have you ever gone over that threshold since?
    Mr. Wald. No. No, we haven't. In most of our history--and 
it is in my testimony--we have been well under $15 billion. We 
are currently at $10.5 billion now.
    Mrs. McCarthy of New York. With that, I yield back. Thank 
you, Madam Chairwoman.
    Chairwoman Capito. The gentlelady yields back.
    Mr. Canseco is recognized for 5 minutes.
    Mr. Canseco. Thank you, Madam Chairwoman.
    Mr. McCardell, in your testimony you say that the Collins 
Amendment, combined with higher capital levels under Basel, 
would push certain products and services to the so-called 
shadow banking system. And if I am reading your testimony 
correctly, are you saying that the overlap of Collins and Basel 
requirements could potentially increase risk in the financial 
system?
    Mr. McCardell. We think there is an overarching risk across 
the regulatory spectrum that basically too much regulation in 
the financial sector, while we are highly supportive of higher 
capital standards, of the demands for higher quality capital, 
we are fully supportive of regulation which has strengthened 
the financial system and provided for greater stability, we 
think there is a risk in there that less-regulated financial 
institutions, the shadow banking system, grows and becomes--is 
less regulated than the banking sector. And we think there are 
certain risks implicit in that.
    Mr. Canseco. Let's look at the trust-preferred for a 
second. I want to try to look at it from an investor's point of 
view. And if I were an insurance company or a mutual fund and I 
needed to diversify my portfolio or separate accounts, what 
aspects of the trust-preferred issued by small or regional 
banks would be attractive for me from an investor standpoint?
    Mr. McCardell. To be honest, Congressman, I can't speak to 
that. Maybe my fellow panelist could. Again, our member banks 
are in the process of phasing these assets out and are on track 
for that currently.
    Mr. Canseco. Let's look at it from a perspective of a small 
or medium-sized bank. What aspects of it would be attractive to 
an investor to go in if we are doing away with the trust-
preferred on Tier 1?
    Mr. McCardell. I'm sorry? What aspect of trust-preferreds 
would be attractive to investors, is that what you are--
    Mr. Canseco. Right. Would it be?
    Mr. McCardell. I think the main appeal of trust-preferreds 
for banks was that they did have a tax advantage status and 
that they were constructive in that regard for use as Tier 1 
capital.
    As to the demand for trust-preferreds by investors, I could 
get back to you on that.
    Mr. Canseco. Okay. I would appreciate it.
    Is it prudent to harmonize capital standards for bank 
holding companies and depository institutions? And aren't there 
significant differences between holding companies and 
depository institutions that would call for different capital 
standards?
    Mr. McCardell. We believe that capital standards are 
harmonized across banks regardless of size today. We think that 
is positive, we think that is important. And today banks, 
regardless of size, are basically required to hold the same 
levels and the same quality of capital. So we do think that is 
a positive thing.
    Mr. Canseco. But holding companies are very different from 
the banks that are held within the holding companies.
    Mr. McCardell. Correct. And it is at the holding company 
that those standards are now harmonized.
    Mr. Canseco. Okay. And do you think that is a good thing, 
that both the holding company and the bank be held to the same 
capital standards?
    Mr. McCardell. Yes, that is the law, and I think it has 
provided for stronger capital standards and higher quality 
capital. And we think that has provided for a more stable 
system already.
    I think it is worth noting, by the way, that our member 
banks today hold approximately 100 percent more capital than 
they did pre-crisis. So, writ large, we think we are moving in 
a very positive direction with these higher capital standards.
    Mr. Canseco. In your testimony, you note the importance of 
capital standards to balance the need between safety and 
soundness and economic growth. So, in your opinion, does the 
Collins Amendment meet the standard?
    Mr. McCardell. I appreciate the acknowledgement of that. We 
do think it is an often underacknowledged risk or part of the 
system that there is a balance between stability among the 
financial system, which we wholeheartedly support, and economic 
growth and job growth at the other end. And we think at some 
point, there is a tradeoff.
    Again, banks are holding far more capital today, the system 
is far more robust. Collins arguably has contributed to that. 
And, again, we think we are in a far better position in terms 
of capital today.
    Mr. Canseco. So you like that Collins Amendment?
    Mr. McCardell. We had some issues, as I mentioned, the 
transition issues. There were some issues we had under there in 
terms of applying a mandate to use both Basel I and Basel II 
methodologies to test capital. But it is the law of the land. 
Outside of the transition issue, we are supportive.
    Mr. Canseco. Thank you, Mrs. Capito. I see my time has 
expired.
    Chairwoman Capito. Yes.
    Mr. Grimm is recognized for 5 minutes.
    Mr. Grimm. I would like to thank you, Madam Chairwoman, for 
holding this hearing.
    Panelists, we appreciate you being here today.
    I would also like to thank my colleagues on the other side 
of the aisle, Carolyn Maloney, the gentlelady from New York, as 
well as the ranking member, Barney Frank, for helping organize 
and really working together in a bipartisan manner on this 
issue. So thank you very much to them, as well.
    Mr. Wald, a yes-no question, if I may. During the mortgage 
bubble, did Emigrant sell its loans into the securitization 
market or offer subprime loans or teaser rates, anything like 
that?
    Mr. Wald. Emigrant is a portfolio lender, and unlike all of 
the robo-signing issues and other servicing-related issues that 
you saw some of the larger institutions deal with, we have all 
of our loan documents in our vault--
    Mr. Grimm. So that would be a very strong ``no?''
    Mr. Wald. --on 42nd Street. Yes.
    Mr. Grimm. Okay.
    Mr. Wald. Yes, it is a strong ``no.''
    Mr. Grimm. All right. And as you just started to say, I was 
going to ask you, how about--we hear a lot of problems about 
the robo-signing, standing issues, loss of loan documents, 
incorrectly recorded deeds, all of those issues. You don't have 
any of those problems at your bank?
    Mr. Wald. The bank has an unblemished record in that 
regard.
    Mr. Grimm. Can you tell me a little bit about the local 
communities in New York City where Emigrant does its lending 
and how that lending will be impacted if we don't take action 
today?
    Mr. Wald. Most of our branches are in the boroughs. And 
most of our borrowers are cops, teachers, firemen, or 
corrections officers. This is the traditional deposit and 
borrowing base that we--these are our customers. And so, to the 
extent that our capital has to shrink, obviously those are the 
types of individuals for whom credit will be less available.
    Mr. Grimm. Obviously, this provision doesn't take effect 
until January. Why is it important to fix it now?
    Mr. Wald. We can't wait until January to manage our balance 
sheet. We have to look at the future--we know this is coming 
down the pike, so we have already had to start.
    Mr. Grimm. Have you already experienced any impact?
    Mr. Wald. Yes, we have already had to start thinking very 
carefully about the types of assets that we continue to put on 
our balance sheet.
    Mr. Grimm. Let me ask you this, if you didn't have this 
potential threat hanging over your head, would Emigrant be 
lending more today?
    Mr. Wald. Yes.
    Mr. Grimm. With that, I yield back.
    Chairwoman Capito. The gentleman yields back.
    Since I was late--and I apologize for that; it has been 
kind of a crazy day--I am not going to ask any questions, 
because I have missed pretty much the substance of the 
questions. I would probably be repeating myself.
    But I want to thank both of the gentlemen for coming today. 
And I again apologize for starting late, but I think we have 
gotten a lot of good information.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    This hearing is adjourned.
    [Whereupon, at 11:40 a.m., the hearing was adjourned.]






                            A P P E N D I X



                              May 18, 2012










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