[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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75-736 PDF WASHINGTON : 2012
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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
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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