    [House Hearing, 114 Congress]
    [From the U.S. Government Publishing Office]

      MAKING A FINANCIAL CHOICE: MORE CAPITAL OR MORE GOVERNMENT CONTROL?

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

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 JULY 12, 2016

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 114-96

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

    PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking
        Vice Chairman                        Member
    PETER T. KING, New York              CAROLYN B. MALONEY, New York
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
    SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
    RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
    STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
    BILL POSEY, Florida                  WM. LACY CLAY, Missouri
    MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
        Pennsylvania                     DAVID SCOTT, Georgia
    LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
    BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
    BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
    SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
    ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
    STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
    STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
    MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
    MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
    RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
    DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
    ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
    ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
    ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
    KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
    LUKE MESSER, Indiana                 JUAN VARGAS, California
    DAVID SCHWEIKERT, Arizona
    FRANK GUINTA, New Hampshire
    SCOTT TIPTON, Colorado
    ROGER WILLIAMS, Texas
    BRUCE POLIQUIN, Maine
    MIA LOVE, Utah
    FRENCH HILL, Arkansas
    TOM EMMER, Minnesota

                         Shannon McGahn, Staff Director
                        James H. Clinger, Chief Counsel

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        July 12, 2016................................................     1
    Appendix:
        July 12, 2016................................................    65

                                   WITNESSES
                             Tuesday, July 12, 2016

    Allison, John A., former President and Chief Executive Officer,
      Cato Institute.................................................     6
    Levitin, Adam J., Professor of Law, Georgetown University Law
      Center.........................................................    10
    Newell, Jeremy, General Counsel, The Clearing House Association..    13
    Nussle, Hon. Jim, President and Chief Executive Officer, Credit
      Union National Association.....................................     8
    Pollock, Alex J., Distinguished Senior Fellow, R Street Institute    12
    Purcell, Jim R., Chairman, State National Bank of Big Spring,
      Texas, and Chairman, Texas Bankers Association.................    15

                                    APPENDIX

    Prepared statements:
        Hinojosa, Hon. Ruben.........................................    66
        Allison, John A..............................................    67
        Levitin, Adam J..............................................    70
        Newell, Jeremy...............................................    92
        Nussle, Hon. Jim.............................................   116
        Pollock, Alex J..............................................   221
        Purcell, Jim R...............................................   225

                  Additional Material Submitted for the Record

    Hill, Hon. French:
        Article from the Arkansas Democrat-Gazette entitled, ``Four
          of state's banks generate most profits,'' dated June 19,
          2016.......................................................   231
    Waters, Hon. Maxine:
        Written statement of Americans for Financial Reform..........   234
        Letter to Hon. Jeb Hensarling and Hon. Randy Neugebauer from
          various undersigned organizations, dated July 11, 2016.....   248
        Letter to Hon. Jeb Hensarling from Steptoe & Johnson LLP,
          dated July 11, 2016........................................   253

                           MAKING A FINANCIAL CHOICE:

                              MORE CAPITAL OR MORE

                              GOVERNMENT CONTROL?

                                  ----------

                             Tuesday, July 12, 2016

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 10:05 a.m., in
    room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
    [chairman of the committee] presiding.
        Members present: Representatives Hensarling, Royce, Lucas,
    Garrett, Neugebauer, Pearce, Posey, Fitzpatrick, Luetkemeyer,
    Huizenga, Duffy, Hurt, Mulvaney, Hultgren, Ross, Pittenger,
    Wagner, Barr, Rothfus, Schweikert, Guinta, Tipton, Williams,
    Poliquin, Love, Hill, Emmer; Waters, Maloney, Velazquez,
    Sherman, Meeks, Scott, Cleaver, Himes, Carney, Sewell, Foster,
    Kildee, Murphy, Delaney, Sinema, Beatty, and Vargas.
        Chairman Hensarling. The Financial Services Committee will
    come to order.
        Without objection, the Chair is authorized to declare a
    recess of the committee at any time.
        Today's hearing is entitled, ``Making a Financial Choice:
    More Capital or More Government Control?''
        I now recognize myself for 3 minutes to give an opening
    statement.
        Regrettably, we remain stuck in the slowest, weakest
    economic recovery since at least World War II. The economy
    simply isn't working for tens of millions of working Americans
    who cannot get ahead and who fear for the future of their
    families.
        Their paychecks remain stagnant, and their savings have
    declined. They are losing hope.
        Why is this happening? One of the principal reasons is the
    Dodd-Frank Act, a grave mistake Washington foisted upon the
    American people nearly 6 years ago. Simply put, Dodd-Frank has
    hurt the economy, hurt consumers, codified bank bailouts, and
    made our financial system less stable.
        It is time for a new paradigm in banking and capital
    markets. It is time to offer all Americans opportunities to
    raise their standards of living and achieve financial
    independence.
        In a phrase, we need economic growth for all and bank
    bailouts for none. There is a better way forward and it is
    called the Financial CHOICE Act, an acronym standing for
    Creating Hope and Opportunity for Investors, Consumers, and
    Entrepreneurs.
        The Financial CHOICE Act rests on the belief that a high
    level of private bank capital is the most basic element in
    making a financial system healthy, resilient, and reliable for
    economic growth.
        The Financial CHOICE Act will relieve financial
    institutions from growth-strangling regulations that create
    more economic burden than benefit in exchange for voluntarily
    meeting higher, yet simpler, capital requirements.
        Our reform stops investors from making risky bets with
    taxpayer money. It once and for all ends taxpayer bailouts,
    period.
        It is quite simply a market-based, equity-financed Dodd-
    Frank offramp.
        To avail themselves of this exchange, many larger banks
    will have to raise significant additional equity capital. Most
    community banks and credit unions will have to raise little to
    no additional capital.
        Under our plan, banking organizations that maintain a
    simple leverage ratio of at least 10 percent at the time of the
    election, and have a composite CAMELS rating of one or two, may
    elect to be functionally exempt from the post-Dodd-Frank
    supervisory regime of Basel III capital and liquidity
    standards, and a number of other regulatory burdens that
    predate Dodd-Frank.
        Banking organizations that make a capital election will
    still be supervised and regulated by the banking agencies, but
    the presumption will be that such institutions are operating
    safely and soundly.
        Importantly, the CHOICE Act relies upon a leverage ratio
    approach to measuring capital adequacy rather than the
    discredited risk-based capital regime advanced by the Basel
    Committee on Banking Supervision that proved so destructive
    during the last crisis.
        Nothing is riskier than one centralized, politicized,
    globalized view of financial risk.
        While maintaining a large capital buffer does not guarantee
    that a bank will never fail, it should be noted that among all
    insured depository institutions that entered 2008 with a
    leverage ratio of at least 10 percent, 98 percent survived the
    financial crisis. Of those that did fail, none was of
    sufficient size or scale to even remotely present any systemic
    issues.
        It is also important to note that a 10 percent simple
    leverage ratio will provide a far greater capital buffer than
    required under either Basel or the Dodd-Frank Act.
        Seven-plus years of Obamanomics and 6 years of Dodd-Frank
    have delivered nothing to the American people but stagnant
    paychecks and diminished savings.
        Freeing well-capitalized, well-managed financial firms from
    the chokehold of an overly intrusive, heavily politicized
    regulatory regime will help create a healthier economy for all
    struggling Americans.
        I now yield 1 minute to the gentleman from New Jersey, Mr.
    Garrett, chairman of our Capital Markets Subcommittee.
        Mr. Garrett. Thank you, Mr. Chairman.
        I am sure you all know it was Einstein who was credited
    with saying that the definition of insanity is doing the same
    thing over and over again while expecting different results.
        For too long our financial regulatory system has been
    governed by global networks of really detached elites who
    believe they are smarter than the market and the people when it
    comes to allocating and assessing risk.
        Prudential regulator bigwigs that make up the Basel
    Committee have for years gamed capital standards to ensure that
    investment flowed into politically favored asset classes,
    whether it was the debt of nations or the subprime market. And
    this approach failed spectacularly back in 2008 and in the
    years since.
        But unfortunately, the regulators in the Obama
    Administration have now doubled down on the failed policy of
    the past and they expect different results this time.
        Today, the risk weight capital regime of Basel is even more
    complex, more costly, and more risky than ever before, and I
    have no doubt, if left unaddressed, it will continue to the
    next crisis as well.
        So, fortunately, the CHOICE Act offers us a way out by
    pointing us towards a system that will allow the people and the
    markets to determine the risk of financial institutions and
    make it unlikely that the taxpayers will ever be called on
    again to bail out Wall Street and the bad decisions of the
    regulators who oversee it.
        And so I look forward to the witnesses today.
        And I yield back to the chairman.
        Chairman Hensarling. The Chair now recognizes the ranking
    member for 5 minutes.
        Ms. Waters. Thank you, Mr. Chairman.
        Since the passage of Dodd-Frank, we have seen piecemeal
    attempts by our colleagues on the other side of the aisle aimed
    at undercutting Wall Street reform, whether through legislation
    in this committee or budget riders on the House Floor or
    through endless, meritless investigations.
        There has been a drumbeat of effort aimed at weakening the
    rules we put forward in response to the worst financial crisis
    since the Great Depression.
        This is all part of a massive deregulatory agenda not to
    make America great, but to put the needs of special interests
    above those of working Americans and leave taxpayers footing
    the bill.
        The legislation we will consider today, the wrong CHOICE
    Act, is the centerpiece of this deregulatory agenda and is the
    culmination of 6 years of Republican efforts to gut financial
    reform.
        It recycles every bad idea this committee has ever
    generated, adds a few more bad ideas on top, and creates an
    omnibus of special interest giveaways that invites the next
    financial crisis.
        The hearing convened today is especially focused on Title I
    of the wrong CHOICE Act which gives banks a hall pass from Wall
    Street reform if they achieve a 10 percent capital ratio.
        Let me be clear. This idea is not serious. While credible
    financial reformers have proposed strengthening capital
    requirements in exchange for some regulatory relief for
    community banks, this, the wrong CHOICE Act, is not that bill.
    In fact, it takes the names of true financial experts in vain
    by stealing their ideas and weakening them. It then tries to
    rebrand these weak ideas as reform.
        Namely, the wrong CHOICE Act contains none of the
    guardrails of the other proposals, including limits on banks'
    derivatives activity. It has no caps on bank mergers, meaning
    big banks will only get bigger. And the capital standards in
    this bill are far weaker than those proposed in bipartisan
    Senate legislation, which itself doesn't also repeal Dodd-Frank
    as this bill does.
        It is why Governor Tarullo of the Federal Reserve, when
    asked about this legislation, said it would, ``incentivize
    banks to move forward such riskier assets,'' and that capital
    levels ``would have to be substantially higher to make
    regulators comfortable.''
        What's more, this bill makes other radical changes to our
    financial regulatory framework that would harm consumers and
    the greater economy by repealing the living wills requirement.
    It does nothing to shrink mega firms or ensure that they could
    be resolved if they fail.
        And while the bill claims to end taxpayer bailouts, it
    would actually put us right back to where we were in 2008 when
    the largest banks had an implicit taxpayer guarantee.
        The list goes on. The legislation would repeal the Volcker
    Rule which prevents banks from gambling with taxpayer money. It
    would repeal the Financial Stability Oversight Council's
    (FSOC's) ability to designate our largest, non-bank firms, like
    AIG, for heightened regulation. It would all but gut the
    enforcement authority of the Securities and Exchange
    Commission.
        And importantly, the bill would make it nearly impossible
    for the Consumer Financial Protection Bureau (CFPB) to actually
    protect borrowers from financial abuse.
        Indeed, by turning the bureau into a partisan, gridlocked
    commission, eliminating its independent funding and bogging it
    down in onerous cost/benefit analysis, it would render the CFPB
    totally toothless and unable to protect consumers from
    predatory mortgages, payday lending, discriminatory automobile
    financing, forced arbitration contracts or other harmful
    products and practices.
        To me, this does not make good sense. When we have an
    agency that has returned $11.4 billion to 25 million consumers
    in 5 short years, why would anyone want to hamstring its work
    in this way?
        So it is clear to me that this bill is the wrong choice for
    consumers, for investors, and for the entire financial system.
    Instead of spending so much time and energy trying to repeal
    Dodd-Frank, we should be building on its reforms and ensuring
    that our regulators can implement them effectively.
        That is the work of this committee and that is the work
    that this committee should be focused on.
        I thank you and I yield back the balance of my time.
        Chairman Hensarling. The gentlelady yields back.
        The Chair now recognizes the gentleman from Texas, Mr.
    Neugebauer, chairman of our Financial Institutions
    Subcommittee, for 1 minute.
        Mr. Neugebauer. Thank you, Mr. Chairman.
        The Financial CHOICE Act serves as an important proposal
    that offers a clear alternative to the complex and faulty
    regulatory framework banks currently operate under.
        The CHOICE Act's capital provisions offer financial
    institutions the choice of holding higher equity in exchange
    for less government-directed management of their businesses.
        A simple leverage ratio supplants the ill-conceived risk
    weighting of assets, which leads to asset crowding, political
    manipulation and incredible compliance costs for community
    financial institutions.
        Risk weighting failed to adequately be a predictor of bank
    stability during the financial crisis. While the 10 largest
    banks had tier one capital on the average of 7 percent, their
    average leverage ratio was below 3 percent.
        According to FDIC Vice Chairman Thomas Hoenig, the leverage
    result will result in a more effective, more efficient, and
    more cost-effective supervisory regime.
        While the leverage ratio will certainly help improve the
    supervisory regime, one cannot understate the benefits of
    financial stability that will also result.
        As we saw during the financial crisis, run-like behavior
    was exacerbated by the fears that highly leveraged firms
    couldn't withstand periods of extreme market stress. Research
    shows that higher levels of equity funding decreases the danger
    of runs on banks. There is no benefit to getting to the bank
    first.
        I fully support the shift to a simpler, more stable
    regulatory framework.
        Chairman Hensarling. The time of the gentleman has expired.
        We will now turn to our panel.
        Our first panelist is Mr. John Allison who comes to us with
    a 38-year career in banking, the last 19 years as CEO of BB&T,
    which he helped grow into the 10th-largest bank holding company
    in America. He also is the recently retired president and CEO
    of the Cato Institute. Mr. Allison is a Phi Beta Kappa graduate
    of the University of North Carolina, has a master's degree in
    management from Duke University, and is a graduate of the
    Stonier Graduate School of Banking.
        The Honorable Jim Nussle was our colleague and served in
    the House from 1991 to 2007. He served in this institution as
    the chairman of the House Budget Committee. He was my chairman.
    We will find out how much he enjoys being on the other side of
    the witness table today. He also served as the Director of the
    OMB under President Bush. He is a graduate of Luther College
    and Drake University Law School.
        Mr. Adam Levitin is a professor of law at Georgetown
    University Law Center. He serves on the CFPB's Consumer
    Advisory Board. He is a graduate of Harvard Law School,
    Columbia University, and Harvard College.
        Mr. Alex Pollock is a distinguished senior fellow at the R
    Street Institute. He comes to us with a 35-year banking career,
    part of it serving as president and CEO of the Federal Home
    Loan Bank of Chicago. He is a published author, and a graduate
    of Princeton University, the University of Chicago, and
    Williams College.
        Mr. Jeremy Newell is the executive managing director, head
    of regulatory affairs, and general counsel at the Clearing
    House Association. Mr. Newell is a graduate of Yale Law School
    and is a faculty member of the Banking Law Fundamentals Program
    at the Berkeley Center for Law, Business, and the Economy, and
    Boston University Law School.
        Last but not least, Mr. Jim Purcell. And for his
    introduction, I yield to the gentleman from Texas, Mr.
    Neugebauer.
        Mr. Neugebauer. Thank you, Mr. Chairman.
        Jim Purcell serves as the CEO and the chairman of State
    National Bank in Big Spring, Texas, which, by the way, is in
    the 19th Congressional District of Texas. He is also the newest
    chairman of the Texas Bankers Association. Jim has a great
    understanding of the issues facing community banks as he has
    been a community banker for multiple years in the community of
    Big Spring, Texas, which is a rural community of about 30,000
    people.
        Jim has been a longtime friend and constituent of mine. And
    I am thankful for his insight into community banking and the
    importance of it to those communities, but also to the overall
    economy. And so I am glad to have Mr. Purcell here with us
    today, Mr. Chairman.
        Chairman Hensarling. We will now turn to all of our
    witnesses. Each of you will be recognized for 5 minutes to give
    an oral presentation of your testimony.
        And without objection, each of your written statements will
    be made a part of the record.
        Mr. Allison, we will go from left to right, physically and
    not philosophically, and we will begin with you. You are now
    recognized for your testimony.

       STATEMENT OF JOHN A. ALLISON, FORMER PRESIDENT AND CHIEF
                   EXECUTIVE OFFICER, CATO INSTITUTE

        Mr. Allison. Thank you, Mr. Chairman. Good morning.
        I have a unique experience. I was heading the lending
    business of BB&T in 1980 and then CEO in 1990 when we went
    through another financial crisis, which gives me kind of a
    different context.
        I am absolutely certain that the policies of the Federal
    Reserve, both the monetary policies and the regulatory
    policies, were major contributors to the recent crisis.
        In regards to regulation, they made three big mistakes.
    One, they didn't regulate. Two, they encouraged a misallocation
    of capital to politically correct purposes like affordable
    housing or in Europe to sovereign debt, and then they got
    obsessed with Basel in terms of capital standards and they got
    lost in the mathematics.
        Banks and regulators fooled themselves about risk because
    of the complexity of these mathematical models.
        During the crisis this time, they made a really severe
    mistake, which had a big effect on the economy, and hurts our
    growth today. In the early crises, the regulators attacked the
    unhealthy banks and allowed them to fail. In this crisis, they
    attacked the whole industry.
        In the past, BB&T could help our customers through the
    crisis. We took on a lot of healthy customers of unhealthy
    banks, but we couldn't do that this time. They forced us to
    stop doing the kind of lending that allowed us to get through
    the crisis without any kind of financial problems, without a
    single quarterly loss.
        They stopped what I call venture capital lending. Venture
    capital lending is where you make a judgment of the individual
    and the project instead of the mathematics. I did a lot of
    those loans that have created hundreds of thousands of jobs.
    And my friend Bernie Marcus, who started Home Depot, has told
    me that he couldn't start Home Depot today under the standards
    that exist. And that has had a big impact on growth.
        After the crisis, because the regulators have wanted to
    keep things tight, they continue to stop venture capital
    lending and that has kept growth from happening in the economy
    and it has reduced competition which actually has been a
    subsidy to big businesses. We have been subsidizing big
    businesses.
        I have a friend who owns a restaurant chain and he talks
    about how much easier it is in the restaurant chain because
    nobody is starting up restaurants because they can't get bank
    financing today.
        It has also slowed growth in the economy, lowered
    productivity, and lowered the standard of living for the
    average consumer.
        It is a big mistake to believe that regulators know the
    proper level of risk. They had no idea what was going on before
    the financial crisis. They didn't predict it. In fact, Ben
    Bernanke said we weren't having a recession after the recession
    had already started.
        Today they are doing exactly the opposite. They have
    tightened standards way too much and it is hurting the normal
    growth rate in the economy. They didn't predict the financial
    crisis. Last year, they didn't predict what was going to happen
    to energy; energy was a very low-weighted loan from a risk
    perspective in Basel until this year after the horse was out of
    the barn.
        In my 40 years experience in the banking business, the
    single-biggest determinant--not the only determinant and not a
    perfect determinant--of the health and safety of a bank is its
    capital position. A sound capital position radically reduces
    the risks of bank failures. Very few banks fail with proper
    capital.
        I strongly believe that capital position has to be
    understandable, it has to be a clear goal, and it cannot be too
    complex because I guarantee you the big banks will game the
    system. They do it every single time. You need a simple, clear
    standard.
        It is interesting that at the end of last year, Citigroup
    had a leveraged capital ratio, a supplemental leveraged capital
    ratio of 6.4 percent. I will guarantee you that Citigroup would
    be a lot less risky if they were forced to have a leveraged
    capital ratio of 10 percent versus having 10,000 regulators go
    micromanage Citigroup. I tell you that with certainty.
        The opt-out in this bill is very important because it
    actually creates market pressure to get a rational banking
    size.
        Those of you who are opposed to big banks and too-big-to-
    fail, this is a way to deal with that problem. There is no way
    to arbitrarily decide how big a bank will be. But management
    will manage to the capital standards and get rid of
    unprofitable businesses, which will be very good for the
    economy and the market will force banks to do that. Because if
    you don't opt out, the market will say, hey, you are a high-
    risk institution.
        By the way, that is why some of the big banks will be
    opposed to this bill.
        In the kind of society we have, banks play a critical role
    of helping businesses get started and helping businesses change
    their model so they can grow. And we can't do that today.
        I can tell you, it is harder to make a small-business loan
    today than it has been in my 40-plus-year career in banking and
    that is not good for the economy and it is not good for the
    consumer.
        And the irony is we can actually reduce risk and improve
    the performance of the economy by having higher capital
    standards and much less regulation.
        [The prepared statement of Mr. Allison can be found on page
    67 of the appendix.]
        Chairman Hensarling. Thank you, Mr. Allison.
        We now turn to you, Chairman Nussle.

      STATEMENT OF THE HONORABLE JIM NUSSLE, PRESIDENT AND CHIEF
          EXECUTIVE OFFICER, CREDIT UNION NATIONAL ASSOCIATION

        Mr. Nussle. Thank you, Mr. Chairman.
        And thank you, Ranking Member Waters.
        It's great to be back before you. And I want to thank the
    members of the committee. Thank you for the opportunity to
    testify and give America's credit unions' perspective and views
    on Title I of the chairman's Financial CHOICE Act.
        I have been at the Credit Union National Association now
    for almost 2 years. And the constant refrain I hear from my
    members wherever I go is that they are being crushed by
    regulations implemented mostly in response to a crisis that
    they neither caused or contributed to.
        And so the time and financial costs of regulatory burden is
    impeding their ability and credit unions' ability to serve
    members and is really a leading driver to the credit union
    consolidation that we see across the country, which has
    accelerated since 2010 and that consolidation is now at a
    record pace.
        We estimate the regulatory cost to America's credit unions
    and their members at $7.2 billion in 2014 alone, which is up
    from $4.4 billion in 2010.
        And Mr. Chairman, I have attached a regulatory burden study
    that was done by a third party, that I would be glad to share
    with the committee, and is part of my written testimony.
        This is money that is not being put to use to benefit
    credit union members, but they are definitely paying for it. If
    the regulatory burden costs were reduced, credit unions would
    and could invest more in their members in the communities
    through better rates on savings and loans, stronger capital
    positions, and the development of alternative delivery
    channels.
        This would allow credit unions to make an even more
    powerful impact on the lives of their members and communities.
        Credit union executives and board members have a hard time
    understanding why they must comply with rules designed
    primarily for the largest financial institutions and abusers of
    consumers, and have an even harder time understanding why their
    elected officials have a difficult time doing anything about
    it.
        So we are here to engage in the process, not because this
    bill will solve all of the regulatory burden challenges facing
    credit unions, but because we think this is a good place to
    start the discussion on removing barriers so credit unions can
    more fully serve their members. And we hope the committee will
    engage in this process in a bipartisan manner.
        As you know, credit unions are subject to a statutory
    capital requirement already under the Federal Credit Union Act.
    In order to be considered well-capitalized for purposes of
    prompt corrective action, a credit union must maintain a net
    worth ratio of at least 7 percent. That is 1 percentage point
    higher, by the way, than the current requirement for banks.
        Unlike banks, credit unions are not-for-profit cooperatives
    and the only source of capital for credit unions is their
    retained earnings. With this limited ability to raise capital,
    and given the relatively conservative market strategy which is
    inherent in credit unions' cooperative structure, many credit
    unions currently operate with a leverage ratio in excess of 10
    percent already.
        Title I would create a path forward and would allow for
    greater operation with that 10 percent.
        To give you a sense of how this legislation would impact my
    credit unions today, nearly 4,000 of the 6,000 insured credit
    unions have a leveraged ratio greater than 10 percent. This
    represents about 65 percent of all credit unions. It represents
    about 62 percent of all credit union assets and serving nearly
    60 percent of the 100 million credit union members.
        We believe many of these credit unions would take advantage
    of the regulatory process provided under Section 102, which
    would include relief from, among other things, NCUA's
    regulations on interest rate risk, liquidity requirements, and
    the recently finalized risk-based capital requirements.
        So we appreciate that this legislation structures the
    higher capital threshold as an option rather than a
    requirement. And we would ask that you resist efforts to
    require credit unions to hold additional capital because this
    actually could reduce their ability to lend to credit union
    members.
        Further, such a requirement would be inappropriate and
    unnecessary for credit unions because they don't really have a
    history of capital inadequacy.
        Nevertheless, providing credit unions relief who have
    demonstrated with their history of operating with higher
    capital levels and developing a process for remediation in the
    event that capital levels fall below 10 percent, I think that
    strikes an appropriate balance. And we think that is an
    appropriate part of this legislation.
        So we appreciate the committee considering the legislation
    to provide meaningful regulatory relief for many of the credit
    unions. We look forward to working with you. We know this is a
    work in progress and we stand ready to work with you in order
    to try and accomplish some regulatory relief and remove
    barriers between our credit unions and our members.
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. Nussle can be found on page
    116 of the appendix.]
        Chairman Hensarling. Thank you, Chairman Nussle.
        Professor Levitin, you are now recognized for 5 minutes.

      STATEMENT OF ADAM J. LEVITIN, PROFESSOR OF LAW, GEORGETOWN
                         UNIVERSITY LAW CENTER

        Mr. Levitin. Chairman Hensarling, Ranking Member Waters,
    and members of the committee, thank you for inviting me to
    testify today.
        It is only possible to evaluate the CHOICE Act's signature
    Title I regulatory opt-out in the context of the Act's other
    provisions. This is because the Title I regulatory opt-out
    would occur against a background of massive, preexisting
    deregulation for all financial firms irrespective of how well-
    capitalized they are.
        This deregulatory background makes the additional Title I
    regulatory opt-out all the riskier.
        The CHOICE Act has several deregulatory elements that open
    the door to an enormous amount of additional risk in the
    financial system even before we get to Title I.
        First, the CHOICE Act eliminates key prudential regulations
    for all firms irrespective of their capital levels. Thus, the
    CHOICE Act repeals the Volcker Rule, eliminates regulation of
    critical financial market utilities, and repeals the risk
    retention requirement for securitizations.
        Second, the CHOICE Act virtually eliminates Federal
    consumer financial protection.
        Third, the CHOICE Act would significantly reduce the SEC's
    deterrence power.
        Fourth, the CHOICE Act strips the Federal Reserve and the
    FDIC of key crisis response tools.
        And finally, the CHOICE Act ensures that all Federal
    regulators will be subjected to constant political interference
    and congressional micromanagement such that they will not be
    able to use their remaining regulatory tools effectively.
        Now, the CHOICE Act's provisions outside of Title I not
    only increase the likelihood of a financial crisis through
    across-the-board deregulation, but they also ensure that crisis
    resolution will be a disaster.
        Title II of the CHOICE Act would eliminate Dodd-Frank's
    orderly liquidation authority and replace it with an unworkable
    bankruptcy-based resolution system. This bankruptcy system
    cannot work. This is because private capital markets are
    incapable of providing the level of financing that would be
    required for a bridge company for a large financial institution
    at a time when markets are frozen and with no notice.
        A bridge company might need $50 billion or $100 billion of
    capital the next day. Capital markets have never provided a DIP
    loan of more than $9 billion. Only the government unfortunately
    is capable of coming up with that kind of money.
        Even if the CHOICE Act's bankruptcy provision worked,
    however, it would have the perverse effect of ensuring that
    Wall Street creditors get paid in full while Main Street
    creditors, vendors, and retirees, as well as tax authorities,
    get paid little or nothing. That is just wrong.
        Moreover, the CHOICE Act's priority system creates an
    enormous moral hazard and reduces market discipline because it
    removes all credit risk on swaps, derivatives, and other
    qualified financial contracts.
        The result will be to encourage excessive use of those
    products.
        It is in this context of a denuded regulatory system and a
    nonfunctional resolution system that we need to consider Title
    I of the CHOICE Act.
        As a starting point, let me point out that there is no
    basis whatsoever for the 10 percent leveraged ratio number. It
    is not supported by any research. As far as I can tell, the 10
    percent number is plucked out of thin air and it is grossly
    irresponsible to use as a basis for a regulatory system.
        The particular leveraged ratio number, though, is not the
    most serious problem with Title I. Title I's simple leveraged
    ratio is drafted as a single option for all financial
    institutions, but it actually functions as two distinct
    options, a quite reasonable one for community banks and a very
    dangerous one for mega banks.
        Community banks are given the choice between a simple
    leveraged ratio and the Basel III risk-weighted leverage
    ratios. Now, I have some concerns about the particulars of the
    CHOICE Act in this regard, but I am generally supportive of
    allowing community banks to use a simple leveraged ratio. There
    are a lot of problems with risk-weighted leverage ratios.
        The problem, though, the real problem is the deal offered
    to the mega banks. Mega banks get a much better deal under the
    CHOICE Act than community banks. Mega banks are allowed to opt
    out, not only from Basel III, but also from Dodd-Frank's
    heightened prudential standards.
        The danger of letting mega banks substitute higher capital
    for the multifaceted regulatory scheme of Dodd-Frank is that
    capital is a necessary, but insufficient protection against
    financial crises.
        Ounce for ounce, capital may be the best protection against
    firm failure, but requiring only capital is like an Atkins diet
    for financial institutions. It is not a balanced diet; it is
    not healthy in the long run.
        Indeed, a simple leverage requirement alone actually
    incentivizes risky bank behavior. It encourages banks to load
    up on high-risk, high-return assets in order to compensate for
    the lower return on equity caused by higher capitalization.
        To prevent this, capital needs to be combined with other
    regulatory tools, such as credit exposure limits and liquidity
    requirement that curb excessive risk-taking.
        The choice is not either capital or regulation, but there
    is another option, there are both.
        All told then, the CHOICE Act is a bad choice. It is a
    recipe for financial disaster. It prioritizes ideologically
    driven positions over careful and serious policy analysis and
    reasoning. And the fate of the U.S. economy is too important to
    stake on an ideological gamble like the CHOICE Act.
        [The prepared statement of Mr. Levitin can be found on page
    70 of the appendix.]
        Chairman Hensarling. Thank you, Professor Levitin.
        Mr. Pollock, you are now recognized for 5 minutes.

     STATEMENT OF ALEX J. POLLOCK, DISTINGUISHED SENIOR FELLOW, R
                            STREET INSTITUTE

        Mr. Pollock. Thank you, Mr. Chairman, Ranking Member
    Waters, and members of the committee.
        Adam, the title of my remarks is, ``An Excellent Choice.''
        Now, let me start with this thought, ``Detailed intrusive
    regulation is doomed to fail.'' This is the conclusion, in my
    view correct, of a prominent expert in bank regulation. It is
    true because nobody knows enough about the future to tell other
    people what to do about it in a detailed way.
        Surely there is a better way to proceed than promoting
    unfettered bureaucratic agencies trying to do something at
    which they are doomed to fail.
        I believe the CHOICE Act offers the opportunity of a better
    way precisely by the fundamental choice it provides.
        The lack of sufficient capital in banks is a permanent and
    irresistible temptation to governments to pursue intrusive
    microregulation. This has an underlying logic to it. After all,
    in a world in which governments explicitly and implicitly
    guarantee bank creditors, the government is in effect supplying
    risk capital to the banks who don't have enough of their own.
        However, the greater the equity capital of a bank is, the
    less rationale there is for the detailed regulation.
        This suggests indeed a fundamental and sensible trade-off:
    more capital, reduced intrusive and onerous regulation.
        Want to run on less capital? You get the intrusive
    regulation.
        Thus, the CHOICE Act offers to banks a very logical
    decision between two options, which I would characterize like
    this:
        Option one, put enough of your equity investors' own money
    in between your creditors and the risk that other people will
    have to bail the creditors out if you make mistakes. Mistakes
    are inevitable when dealing with the future, and this includes
    mistakes by bankers, by regulators, by central bankers, and by
    everybody else.
        The defense is equity capital. Have enough so the
    government can't claim you are living on the taxpayers' credit
    and indeed don't be living on the taxpayers' credit.
        Option two, don't get your equity capital up high enough
    and instead live with the luxuriant regulation of Dodd-Frank as
    the imposed cost of using the taxpayers' capital instead of
    your own.
        I believe the choice thus offered is a truly good idea. To
    my substantial surprise, the Washington Post editorial board
    agrees. They write, ``More promising and more creative is Mr.
    Hensarling's plan to offer relief from some of Dodd-Frank's
    more onerous oversight provisions for banks that hold at least
    10 percent capital. Such a capital cushion can offer as much or
    more protection against financial instability as intrusive
    regulations do and do so more simply.''
        Very true and very well-stated.
        Of course, we have to answer the question, how much capital
    makes the capital high enough?
        To consider the matter first in principle, without doubt,
    there is some level of capital at which this trade-off makes
    sense, some level of capital at which everyone would agree that
    the Dodd-Frank burdens become superfluous. But what is the
    practical level for a rational and realistic trade?
        My written testimony discusses numerous bank capital
    proposals.
        And Adam, I think if you consider that you will find that
    10 percent fits into a quite elaborate and extensive literature
    and empirical study of bank capital.
        Of course, we do have to make a judgment because there is
    no pure market test.
        The CHOICE Act uses, as has been said, the simple and
    direct measure of tangible leverage capital. This, in my
    judgment, is superior to the complex and opaque measures of
    risk-adjusted assets and risk-based capital. And I explain this
    further in my written testimony, in particular, that the risk
    weightings and risk-based capital are bureaucratic compromises,
    whereas real risk is dynamic and changing.
        So for purposes of setting up the choice for banks in the
    proposed Act, I believe the simplicity of tangible leveraged
    capital is the right answer.
        In sum, the CHOICE Act's proposed choice between option one
    and option two makes perfect sense. And in my judgment, it
    ought to be enacted.
        Thank you for the chance to share these views.
        [The prepared statement of Mr. Pollock can be found on page
    221 of the appendix.]
        Chairman Hensarling. Thank you, Mr. Pollock.
        Mr. Newell, you are now recognized for 5 minutes.

    STATEMENT OF JEREMY NEWELL, GENERAL COUNSEL, THE CLEARING HOUSE
                              ASSOCIATION

        Mr. Newell. Chairman Hensarling, Ranking Member Waters, and
    members of the committee, thank you for your invitation today.
        My name is Jeremy Newell and I am the general counsel of
    the Clearing House Association.
        Owned by 24 of the largest banks operating in this country,
    we are a nonpartisan organization that contributes research,
    analysis, and data to the public policy debate. We welcome this
    opportunity to discuss how capital and other rules could be
    rationalized and tailored to better serve consumers' businesses
    and economic growth while still ensuring the resilience and
    stability of our financial system.
        As a first principle, it is useful to consider these
    questions in the context of the substantial capital strength of
    the U.S. banking system today.
        The quantity and quality of capital that all banks must
    hold has increased substantially due to core post-crisis
    reforms, reforms that we strongly support. For our 24 owner
    banks, the strongest form of capital has nearly tripled over
    the last 7 years to more than $950 billion.
        The strength of banks' current capital position was evident
    in the Federal Reserve's most recent CCAR stress test in which
    large banks were required to weather an extraordinary
    hypothetical stress, everything from a sharp 5 percentage point
    jump in unemployment to an 11,000 point plunge in the Dow, all
    while continuing to do business as usual.
        In last month's results, every single one of the 33 CCAR
    banks demonstrated that they would exceed the regulatory
    minimums after that stress, and they did so with substantial
    capital to spare.
        Together, those 33 banks held $275 billion in common equity
    tier one capital over and above their required co-stress
    minimums. Those numbers speak for themselves. The U.S. banking
    system does not need even more capital.
        And yet, there are pending or planned new regulations from
    U.S. and international regulators that would do just that,
    including a Basel IV project to rewrite, again, the capital
    framework, a planned increase in required post-stress capital
    under CCAR and a new counter-cyclical capital buffer. All are
    ill-advised.
        We should instead be considering the effects of existing
    rules on economic growth and taking steps to better rationalize
    or tailor those that have high costs, but only minimal
    benefits. The CHOICE Act includes several promising ideas to
    help achieve that objective.
        A number of other opportunities to improve regulation in
    this way are described in my written testimony, so I will focus
    here on one that may be of most interest as the CHOICE Act
    would expand its use, and that is the U.S. supplementary
    leveraged ratio.
        The supplementary leveraged ratio measures the capital
    adequacy of a bank by dividing its capital by its total assets
    and off-balance-sheet exposures. Although sometimes viewed as
    an alternative to risk-based capital, the leveraged ratio is in
    fact also a risk-based measure of capital, albeit it a very
    inaccurate one.
        It assesses the risk of holding every asset to be exactly
    the same, akin to setting the same speed limit for every road
    in the world, whether it is a highway or a school zone.
        Although the risk weights used and risk-based measures can
    sometimes be wrong about the risk of an asset, a leveraged
    ratio is almost always wrong.
        This inaccuracy is especially pronounced for banks engaged
    in capital markets or custodial activities or those holding
    large amounts of liquidity. All involve large quantities of
    cash, Treasuries, and other truly low-risk assets which a
    leveraged ratio penalizes harshly, requiring much more capital
    than economics or risk would otherwise suggest.
        To be clear, the leveraged ratio can be useful as a simple
    backstop to other primary measures. But because its one-size-
    fits-all view of risk is so inconsistent with the actual
    economics and risks of banking, if it is set at a level that
    binds, either by choice or by mandate, a leveraged ratio will
    inevitably alter and distort the allocation of credit to the
    economy.
        Indeed, even at the current 6 percent leveraged ratio that
    applies to the largest U.S. banks, we already see substantial
    impediments to banks' ability to support consumers and
    businesses.
        For example, banks are currently holding over $50 billion
    in capital against the cash on their balance sheets, capital
    that could be supporting new loans or other activities.
        The current leveraged ratio is also having sizable adverse
    effects on capital markets and custodial services. An even
    higher supplementary leveraged ratio would only exacerbate
    these effects.
        Accordingly, while we support the CHOICE Act's goal of
    reducing unnecessary regulation for well-capitalized banks, we
    suggest that its use of the supplementary leveraged ratio be
    reconsidered.
        With respect to other elements of the CHOICE Act discussion
    draft, there are a number of promising ideas, including the
    basic concept of more tailored regulation for well-capitalized
    banks, process enhancement to CCAR, and better analysis of
    costs and benefits in regulation.
        I would be happy to discuss these and anything else during
    Q&A. I look forward to your questions.
        [The prepared statement of Mr. Newell can be found on page
    92 of the appendix.]
        Chairman Hensarling. Thank you, Mr. Newell.
        And Mr. Purcell, you are now recognized for 5 minutes.

     STATEMENT OF JIM R. PURCELL, CHAIRMAN, STATE NATIONAL BANK OF
       BIG SPRING, TEXAS, AND CHAIRMAN, TEXAS BANKERS ASSOCIATION

        Mr. Purcell. Chairman Hensarling, Ranking Member Waters,
    and distinguished members of this committee, I thank you for
    the opportunity to come before you to testify.
        State National Bank is a time-tried and panic-tested bank
    that originated in 1909 under the Currie family. It continues
    to this day. We are about $300 million. We are in a town of
    28,000. We are in rural parts. One of the locations is about
    7,000 people and another one, if you take the employees out of
    the bank, it is probably about 500 people in that location.
        I started in bookkeeping after an injury. The doctor told
    me not to get on a horse for a year or a tractor for a year,
    and I got into banking.
        I don't know if that was a wise choice.
        [laughter]
        I took the lowest-paying job that was offered to me, it had
    the fewest benefits, and it was in the coldest part of Texas at
    Dalhart, Texas, when I started.
        It had the largest number of elder statesmen in the bank.
    All of them wore hearing aids, and some of them used a cane, so
    I thought that would be a pretty good place to start.
        I started in bookkeeping, but I also understood what
    community banking was because of the efforts of those employees
    of Citizen State Bank in Dalhart.
        But right now, I started in bookkeeping, let us talk about
    some numbers. In June of 2010 when the Dodd-Frank Act was being
    finalized, there were 626 FDIC-insured banks in the State of
    Texas. As of last quarter, the end of March of this year, we
    were down to 477, a decline of 149 institutions.
        That is in a State that has one of the healthiest economies
    in our country.
        Of course, no one is ascribing that the decline of this 24
    percent of the banks in the State of Texas was entirely because
    of the Dodd-Frank Act. But these are the numbers and we
    certainly do not think it is coincidental to the Dodd-Frank.
        As a community banker, my belief is that the Dodd-Frank Act
    has been negative, not just for community banking, but for
    large banks and also medium-sized banks across the industry. It
    has likely had a negative impact on the country by restraining
    the bank industry's ability to mediate our depositors' funds
    into loans and companies and other worthy borrowers as
    otherwise would have been the case.
        For this reason, the Texas Bankers Association strongly
    supports the Financial CHOICE Act as a path to reform through
    the option of establishing a capital threshold for relief from
    the hopelessly complex Basel III requirements and other
    counterproductive regulations.
        This bill would utilize a capital standard of 10 percent
    which is double the current definition of a well-capitalized
    bank. A variation of this approach could also be included in a
    simplified risk-based aspect, as what has been proposed. Or
    perhaps a component suggested by FDIC Vice Chairman Hoenig,
    which would incorporate a business activities test.
        Four years ago when I testified before this committee, I
    mentioned that Senator Dodd said, ``In a nation with more than
    6,000 banks, the bulk of the bill's new regulations apply only
    to a few dozen of the largest ones, each holding more than $50
    billion in assets.''
        No prediction could be farther from the mark.
        In terms of the former chairman's reference to the total
    number of U.S. banking institutions, it still is above 6,000,
    at 6,122, but that is down a staggering 1,708 from the number
    of U.S. banks just prior to the enactment of the Dodd-Frank
    Act.
        Most alarmingly of all, just three new banks have been
    chartered since 2010 when the Dodd-Frank Act passed.
        Our message to the Congress is drawn from the very outset
    of seeing how the Dodd-Frank Act was being implemented, has
    been on the need for additional flexibility so that regulators
    can tailor policies and examinations to a bank's business
    model.
        What I hear from bankers in Texas and around the country is
    that the pendulum in bank examination over the past 5 years has
    been transposed from prudent oversight to compliance overreach.
    The message is getting through for different things.
        Perhaps there is a Dodd-Frank business model that works,
    but we haven't seen it yet.
        I would like to close by saying that we got out of the
    mortgage business because of high-priced mortgages. We couldn't
    accommodate the debt-to-income ratios, and for self-employed
    individuals there is not a way to do it.
        In conclusion, Chairman Hensarling and Ranking Member
    Waters, the Texas Bankers Association appreciates all the work
    which obviously went into the preparation of this legislation
    and we look forward to working with you on the reforms on both
    sides of the aisle.
        [The prepared statement of Mr. Purcell can be found on page
    225 of the appendix.]
        Chairman Hensarling. Thank you, Mr. Purcell, for your
    testimony.
        The Chair now yields himself 5 minutes for questions.
        Mr. Allison, I think I would like to begin with you.
        Clearly, we know that our economy continues to suffer. We
    are limping along at just a little better than 50 percent of
    our typical economic growth. The real unemployment rate, when
    you add in those who have dropped out of the labor force, and
    those who are underemployed, is really about 10 percent.
        So the fundamental question, I think, that is posed to us
    is really, which system will maximize economic growth and
    minimize systemic risk? And is that system high levels of
    private equity bank capital or high levels of government
    control and intrusion?
        So you bring almost 4 decades of banking experience to the
    witness table. You helped build a very small, local, regional
    bank in to the nation's 10th-largest bank.
        In your testimony you say that the financial service
    industries are now focused on compliance instead of innovation
    and productivity, that this is paralyzing the industry,
    speaking of regulation, and slowing innovation, creativity, and
    economic growth, and that lower-income individuals are the most
    negatively damaged by this sad situation.
        So how is the current regulatory environment harming the
    economy? And how would the Financial CHOICE Act change that?
        Mr. Allison. Mr. Chairman, I strongly believe that the
    current regulatory environment has basically forced bankers to
    focus on the wrong thing. They are focused internally on a
    massive set of rules and regulations, a massive set of
    mathematical formulas, instead of doing what they are supposed
    to do, which is identify ways to help their clients grow their
    businesses.
        And then because regulators have overreacted, and I have
    seen this every time, this is the extreme of overreaction in my
    career, too loose before, too tight now, but keeping banks from
    doing what banks would naturally do if they were freed up.
        Now, would some banks make mistakes? Of course, but if they
    had the proper capital position, there would be no losses and
    no risks to the taxpayers.
        The banks that failed and got in trouble in the financial
    crisis were all grossly undercapitalized
        One of the fundamental problems with Dodd-Frank is banks
    can't be properly capitalized. In response to what Professor
    Levitin said, they can't be properly capitalized and afford the
    regulatory costs of Dodd-Frank. So they have a choice and the
    choice is to be focused on regulation and that is what
    regulators want them to do, instead of being properly
    capitalized and really focused on running their business.
        I know that we are not making loans that we would have made
    in my 40-year career, and that is hurting the economy.
        Chairman Hensarling. Let us talk a little bit about
    systemic risk.
        In your testimony, Mr. Allison, I think pretty early in the
    written testimony, you say, ``Investors, rightly so, assumed
    bank regulators were controlling industry risk and investors
    were lulled to sleep. Without the perception that regulators
    knew what the risks were, investors would have studied the
    industry far more carefully. The market was fooled by banking
    regulators.''
        So how does this current regulatory regime take away from
    market discipline?
        Mr. Allison. It takes away because the markets naturally
    believe that regulators have the inside information, that they
    know what is going on in the industry, they know who is going
    to fail and they are going to put out some warning in that
    regard.
        In my career, I have never seen the regulators identify a
    bank that was a bad bank before we already knew it was a bad
    bank. They are always closing the barn door after the horse is
    out of the barn.
        And today, of course, I think that they have probably
    reduced the risk of banks failing but at the expense of
    economic growth. And banks should be taking some risks and a
    few banks should fail every once in a while.
        What we don't want is systematized risk, forcing everybody
    to the same standards, which is what a Basel does, forcing
    everybody to take the same risks, which is what affordable
    housing does, is when you get systematic problems instead of
    individual failures.
        Individual failures are okay, that is what happens in
    business. It is a mass failure, and you don't have mass
    failures when banks are properly capitalized.
        Chairman Hensarling. Mr. Pollock, I would like to turn to
    you now in my remaining time, same theme, which system can
    reduce systemic risk more.
        We have had discussions on risk weighting, and some of our
    panelists believe that you need risk weighting.
        In your testimony, you say, ``The deepest problem with risk
    weightings is that they are bureaucratic while risk is dynamic
    and changing. Designating an asset as low risk is likely to
    induce flows of increased credit, which end up making it high
    risk. What was once a good idea becomes a `crowded trade,' and
    what was once a tail risk becomes instead a highly probable
    unhappy outcome.''
        So are you saying risk weightings can actually lead to more
    systemic risk?
        Mr. Pollock. Yes, Mr. Chairman, I am saying precisely that.
    And a good example is Greek government debt with zero risk
    weighting. This was mentioned by several members.
        I will just add that the payout of the 2012 restructuring
    of Greek debt was 25 cents on the dollar, hardly a risk-free
    outcome.
        Chairman Hensarling. Thank you. My time has expired.
        The Chair now recognizes the ranking member for 5 minutes.
        Ms. Waters. Thank you.
        Professor Levitin, in defense of Title I of the wrong
    CHOICE Act, my colleagues in the Majority claim that a simple
    capital level is easier for regulators to enforce and a better
    predictor of bank health and stability than the complex systems
    of accountability in the Dodd-Frank Act and Basel.
        They also say it is less politicized and less subject to
    banks gaming the system.
        However, can you discuss how the effectiveness of the
    capital requirements in the bill would be undercut by the
    provisions in the bill? For example, the legislation would
    allow banks to challenge regulators' supervisory decisions,
    would repeal regulators' independent funding, and would vastly
    increase the instances where private sector entities could seek
    judicial review of the independent regulatory decisions.
        Wouldn't these provisions make it difficult for regulators
    to get a clearer view of bank health and take action to
    remediate banks' pre-failure?
        Mr. Levitin. They absolutely would. That is why the choice
    offered in Title I of the CHOICE Act is so problematic. If it
    was just a freestanding choice without the other provisions in
    the CHOICE Act, there would be, I think, a reasonable
    discussion to have about it.
        But when it is combined with all the other provisions from
    the CHOICE Act that basically render Federal regulators
    completely ineffective, it becomes very dangerous because then
    we are relying on nothing other than banks' own representation
    of what their capital is to protect us from a systemic crisis.
        Ms. Waters. So basically, have you concluded that if in
    fact you eliminate or interfere with regulators' ability to do
    anything, we would be relying solely on capital representation?
        Mr. Levitin. That is basically where we end up.
        Ms. Waters. Let me just go further. The wrong CHOICE Act
    off-ramp is currently based on bank capital on the last day of
    the quarter. How could this open up the ratio to gaming via
    capital relief trays? What did we witness during the crisis
    with instances, including Lehman Brothers' exotic repos, in
    terms of how this could be disastrous?
        Mr. Levitin. The problem is the way the CHOICE Act takes
    its measurement of capital measures it is on a particular day
    at the end of the quarter. That is a system that is very easily
    gamable. Lehman Brothers showed the blueprint for it.
        Lehman Brothers had a set of transactions called repo 105,
    where basically on the last day of each quarter, Lehman
    Brothers would transfer a bunch of assets in a sale where there
    is an agreement that they were going to repurchase them the
    next day. And what that meant was on the measurement date,
    Lehman looked much better capitalized than it in fact was.
        So, I have no doubt that aggressive bank lawyers and
    accountants will be able to come up with ways to end run a
    measurement system that uses a particular calendar day rather
    than, say, a running average.
        Ms. Waters. You made an interesting statement when you were
    talking about the capital market's ability to be able to
    provide the finance that is needed at any given time. Would you
    repeat that?
        Mr. Levitin. Sure. I am by training a bankruptcy lawyer.
    And I love the bankruptcy system. I have a great opinion of the
    U.S. bankruptcy courts. I would love to see a bankruptcy system
    that could handle financial institution bankruptcies.
        But here is the problem, and this is not a political
    opinion, this is just a fact. If you want a bankruptcy to work
    you need to have financing. You need to be able to pay the
    bills to keep the lights on, to retain employees, and to be
    able to keep valuable assets, like contracts.
        The CHOICE Act requires that the bridge institution, if it
    wants to assume any of the financial contracts, the failed bank
    is going to have to provide assurances that it can actually
    perform those contracts. Therefore, it needs financing.
        It is going to need massive financing. It is not going to
    need a hundred million or something, it is going to need tens
    or hundreds of billions if you had a bank like JPMorgan.
        Ms. Waters. But how much is available at any given time?
        Mr. Levitin. The largest DIP loan, the largest bankruptcy
    financing, debtor-in-possession financing that we have ever
    seen from private capital markets was $9 billion.
        Ms. Waters. And so explain a little bit further how $9
    billion is not enough.
        Mr. Levitin. If you need, say, $50 billion, $9 billion just
    isn't going to cut it. And $50 billion might be for just one
    firm. Suppose you have multiple firms that go down at the same
    time. There just isn't the ability in private capital markets
    to come up with that amount of money overnight at a time when
    there is panic in the markets. That capacity just doesn't
    exist.
        If you want to have a bankruptcy system work for financial
    institution resolution, it is going to have to involve some
    sort of government financing.
        I know that is anathema to many members, but that is just
    the plain truth. The system isn't going to work if we rely on
    private capital markets.
        Ms. Waters. And nothing in this wrong CHOICE Act
    anticipates that.
        Mr. Levitin. No, it does not.
        Ms. Waters. Thank you, I yield back.
        Chairman Hensarling. The time of the gentlelady has
    expired.
        The Chair now recognizes the gentleman from New Jersey, Mr.
    Garrett, the chairman of our Capital Markets Subcommittee.
        Mr. Garrett. I thank the chairman. And I thank the chairman
    for holding this very important hearing today.
        I have a whole bunch of questions, and I'll start with Mr.
    Newell.
        A couple of weeks ago before a Senate Banking Committee,
    Greg Baer was testifying for the clearinghouses at a hearing.
    And in his written testimony, he appeared to endorse Title I of
    Dodd-Frank, and in his written testimony, he appeared to
    endorse Title II of Dodd-Frank. He went into living wills and
    core post-crisis reforms and what have you.
        In his oral testimony, Mr. Baer also appeared to endorse
    Title VIII of Dodd-Frank conceding that was even against
    interest, as he put it, given that clearinghouses were
    designated as a market utility. I am sure you saw his
    testimony.
        So just to be clear, does the Clearing House, which
    obviously through its member companies includes some of the
    largest commercial banks, support, in essence, Title I in Dodd-
    Frank and Title II of Dodd-Frank as was testified last 2 weeks
    ago by Greg Baer for the Clearing House?
        Mr. Newell. Thank you. We certainly support Title II. We
    think it is an important tool to financial stability.
        Mr. Garrett. Right, and also Title I and VIII that he
    referenced.
        Mr. Newell. Yes, as Mr. Baer said, we certainly support the
    core capital liquidity reforms that have been enacted since the
    crisis. We continue to think that there are aspects of those
    rules that frankly provide only minimal benefits, but have high
    costs, and we think those pieces should be tailored.
        Mr. Garrett. Okay. So let me kick that over to Mr. Allison
    then.
        Does it surprise you that the largest banks support Dodd-
    Frank? And we heard from Mr. Purcell at the other end that
    maybe with the smaller guys not so much.
        Mr. Allison. I think the fact is the smaller banks are the
    real victims of Dodd-Frank. And the healthy banks are the
    victims of Dodd-Frank.
        My bank, BB&T, that went through the financial crisis
    without a single quarterly loss, has had to incur much more
    costs than unhealthy banks have because we had to change our
    basic business model which was local decision-making. We had a
    series of community banks. We have been hurt much more than
    Citigroup has.
        In addition, the large banks know they can own the system.
    They have figured it out already and they are going to control
    the regulatory process in a way. And they also get the biggest
    benefit. This gets pretty esoteric.
        But on capital, for most banks, having more capital is not
    really expensive because it actually brings down part of your
    debt cost.
        Mr. Garrett. Right.
        Mr. Allison. But if you have an implicit government
    guarantee, like a Citigroup, you don't want more capital
    because it doesn't bring down your debt cost.
        Mr. Garrett. Right. So the takeaway from the testimony
    today and 2 weeks ago is that big guys benefit under Dodd-
    Frank. The smaller guys--Mr. Purcell is nodding his head right
    now--are the ones who are paying the price.
        Let me just say with you, Mr. Allison. We saw a thing
    behind you, you can't see the screen, earlier, a quote from
    Governor Tarullo from the Federal Reserve. He says a leveraged
    ratio was the only requirement that was put in place that banks
    would be incentivized to move forward towards much riskier
    assets because their capital requirements wouldn't change.
        You have seen Governor Tarullo make those comments. But the
    problem with Governor Tarullo's comments is that is not the
    history of the Fed and Basel being able to get that right.
        Governor Tarullo over there at the Fed, look, they were
    wrong when it came to subprime mortgages, saying that they were
    less risky. They were wrong and he was wrong when talking about
    Greek debt being less risky than some corporate bonds. And they
    were wrong and Basel was wrong, too, with regard to things like
    green bonds issued by the World Bank, that they should be
    receiving preferable treatment because they are moving towards
    some sort of social goal.
        So doesn't Tarullo totally, absolutely, 100 percent miss
    the point? If he is worried about banks being incentivized to
    move riskier assets, should he recognize that they already were
    encouraged to do under Basel and through the prudential
    regulators? Isn't that true?
        Mr. Allison. Absolutely. In fact, one reason BB&T didn't
    get in trouble is, we didn't manage by Basel. We actually
    managed by the leveraged ratio. We did Basel because we had to.
    The banks that got in trouble were managing by Basel.
        Mr. Garrett. And if we moved away from that system where
    some of the folks like Basel and the elites at the Fed who got
    it wrong repeatedly, should we move to a system where the
    markets make that assessment? And when I say the markets, I am
    actually saying the people, because the markets are basically
    made up of the people. Wouldn't the people do a lot better than
    some opaque system overseas or opaque system here in the United
    States?
        Mr. Allison. Absolutely. Also, you have to assume that
    bankers aren't totally stupid. And if banks were allowed to
    fail, which I would vote for let banks fail, then the smart
    banks would survive, so banks care about liquidity. It is just
    because they have a leveraged ratio isn't the only thing we
    were going to focus on. We didn't manage against regulatory
    standards, we managed for our own safety and soundness. We
    weren't fools.
        Mr. Garrett. Yes. And I see I have 2 seconds left. I will
    yield those back.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentlelady from New York, Ms.
    Velazquez.
        Ms. Velazquez. Thank you, Mr. Chairman.
        Professor Levitin, you stated in your written testimony
    that the CHOICE Act will only help mega banks, not community
    banks. Can you elaborate?
        Mr. Levitin. Not that it will only help mega banks, it will
    help both, but it is going to help mega banks more than it will
    help community banks.
        The CHOICE Act lets everyone, mega banks and community
    banks, opt out of Basel III. But the CHOICE Act also allows
    mega banks to opt out of Dodd-Frank's heightened prudential
    standards and out of certain other longstanding provisions,
    such as the Riegle-Neal deposit concentration cap that limits
    bank size to 10 percent of deposits in the United States.
        So what that means is if you are a mega bank you are
    getting a better deal under the CHOICE Act. You are getting
    more for making the election under the CHOICE Act.
        And it is pretty astounding to me that one of the benefits
    you get is that you can grow to more than 10 percent of
    deposits in the United States. That is just exacerbating the
    too-big-to-fail problem.
        Ms. Velazquez. Are there better ways to help community
    banks?
        Mr. Levitin. Absolutely. A simple way, not necessarily the
    way I think is optimal, but a very simple way would be just to
    limit the election in Title I of the CHOICE Act to community
    banks, to banks with less than $10 billion of consolidated
    assets. That would be a very simple fix.
        Ms. Velazquez. Thank you.
        And Professor, the Financial CHOICE Act repeals the Volcker
    Rule, Dodd-Frank's ban on speculative trading in certain
    investments in hedge funds and private equity funds by banking
    entities with access to the Federal safety net. Doesn't this
    repeal expose taxpayers to losses associated with banks'
    proprietary trading which amplifies the costs associated with
    the 2008 crisis?
        Mr. Levitin. It absolutely does. And this is really a mega
    bank problem. It is not a problem with credit unions or
    community banks, this is a mega bank problem. And the CHOICE
    Act repeals the Volcker Rule for all banks irrespective of what
    their capitalization is. So that is a real concern.
        Ms. Velazquez. Okay. And in 5 short years, the CFPB has
    already been extremely successful, returning $11.4 billion to
    over 25 million consumers. Unfortunately, however, the
    Financial CHOICE Act guts the CFPB by turning it into a
    commission, eliminating its independent funding and forcing the
    bureau to conduct onerous cost/benefit analysis.
        How will the changes made by the Financial CHOICE Act make
    it easier for special interests to challenge its rules and how
    will the CFPB work across a number of key areas?
        Mr. Levitin. So the Financial CHOICE Act makes it a lot
    easier for businesses to bring litigation challenges against
    CFPB rules. And it is kind of ironic that it does that because
    the CHOICE Act also slams the door shut to the courts for
    consumers by taking away the CFPB's power to restrict binding
    mandatory arbitration.
        So here is how the CHOICE Act would facilitate litigation
    by businesses. It would overturn longstanding Supreme Court
    precedent about judicial deference to agency decisions, known
    as the Chevron doctrine. That is a bedrock of administrative
    law that would be repealed by the CHOICE Act.
        That would mean that basically there would be a totally
    fresh judicial review by non-expert judges of technical expert
    decision-makings. It would also require agencies, like the
    CFPB, to go through cost/benefit analysis on pretty much
    everything.
        And that is ironic because you think whether we should use
    cost/benefit analysis should itself be subjected to cost/
    benefit analysis. Cost/benefit analysis is not always actually
    an effective thing. And pretty much the academic consensus on
    this is for financial regulation cost/benefit analysis is not
    very appropriate because it is hard to figure in things like
    systemic risk.
        Minuscule chance that we have an absolute meltdown in the
    economy is just a hard thing to figure into an equation in any
    kind of scientific way. But having the cost/benefit analysis
    requirement opens the door for yet another thing that can be
    challenged by financial institutions that don't like a
    regulation.
        Ms. Velazquez. Thank you.
        Mr. Chairman, I yield back.
        Chairman Hensarling. The gentlelady yields back.
        The Chair now recognizes the gentleman from Texas, Mr.
    Neugebauer, chairman of our Financial Institutions
    Subcommittee.
        Mr. Neugebauer. Thank you, Mr. Chairman.
        Mr. Allison, you mentioned that in your former employment
    at BB&T, you really had to change the whole business model
    after Dodd-Frank. So now that you have the CHOICE Act you have
    to sit down and analyze, would we continue to do business under
    Dodd-Frank or do we take our choice and do the CHOICE Act?
        Can you kind of walk us briefly through what that process
    would look like?
        Mr. Allison. I think at BB&T it would be a no-brainer
    because the regulatory cost has been horrendous. It has far
    exceeded our cost of taxes. It has radically reduced the
    company's financial performance. We went 20 years with record
    financial performance every year and Dodd-Frank has hurt
    healthy institutions.
        The fundamental difference is we used to have community
    banks that we allowed to make local decisions. And one reason
    we didn't get in trouble is, we weren't all making the same
    mistake, whereas large companies, really large companies, BB&T
    is large, it was a very decentralized company, now we have to
    make central decisions because the regulators wanted to control
    us. Right? You can't control local decision-making, even though
    it produces a better outcome.
        If I were still CEO, we had a leveraged ratio over 10
    percent at one time, we actually brought it down because the
    big banks were bringing theirs down under Basel and they were
    going to buy us unless we brought our ratio down.
        So I would do the 10 percent, and I would go back to
    community banking. It would improve our profitability.
        And most importantly, bankers are human beings. We want our
    communities to do well. I enjoyed helping businesses get
    started, and we just can't do that anymore.
        Mr. Neugebauer. Doesn't it allow you to adapt the bank to
    your customers rather than adapt your financial institution to
    the government?
        Mr. Allison. Exactly. Right now we are totally being driven
    by what makes regulators happy instead of what makes customers
    successful.
        Mr. Neugebauer. Mr. Purcell, you mentioned something that
    you and I have had a lot of conversation about, and that is the
    concern we have about the diminishing number of community banks
    particularly in Texas. And while that might not be an issue in
    some of the communities that ``over-banked'' in the 19th
    Congressional District, in many cases now in some of our
    smaller communities, they have one bank or one credit union and
    some have none.
        Do you look at the CHOICE Act as possibly a way to reverse
    that trend a little bit?
        Mr. Purcell. We would hope that it would be the beginning
    of the conversation to reverse the trend.
        We can agree that things are not real good in the financial
    industry at this time. And we can look at the numbers and let
    it frame the story. And when you lose 24 percent of your
    independent banks and your small-community banks that some no
    longer have a bank in that community so the community will dry
    up, it has an astounding effect.
        I don't know if it is part of the Basel start that, if we
    changed the rule for everybody to drive in the United States on
    the left-hand side like England does, we would have chaos for a
    good while. And that is kind of what we did when we adopted the
    Basel Act in that we had a European system that addressed
    financial systems that weren't anything like ours.
        Part of the strength of America and what is the envy of the
    world in the financial world is that we have community banks
    that are dealing with people. We don't have to have startup new
    funds like maybe in Central America for small businesses. We
    have the infrastructure in place at this time.
        But if we don't look at the numbers and work together, when
    is it enough? Is it after we have lost 50 percent of the family
    banks? It is pretty tough.
        Mr. Neugebauer. If you could start to reverse that trend of
    the money that you have spent, and you have shared some numbers
    with me of what it has cost you to ramp up, to be in compliance
    with some of the new things that have come out, how does it--
        Mr. Purcell. We have it on our balance sheet that last year
    we spent about $300,000 in compliance and we made about a
    million-and-a-half.
        Mr. Neugebauer. Yes. And so what would putting 300,000 more
    dollars back in your community do for the community in Big
    Spring?
        Mr. Purcell. We have talked about the Consumer Financial
    Protection Bureau is to protect the consumer and I am for that.
    We have to go to school with those or our kids go to school
    with the kids of the community, we coach baseball, we do all
    that. But how is it taking care of our customer? And that is
    who is paying the price, when before we did a balloon mortgage
    based on the amount that they were paying in rent or how much
    they could afford and that makes it unsound?
        How is it that you treat a family who has been doing
    business with your bank for four generations and the matriarch
    comes in and says if I don't send someone in there you better
    watch him because they will take advantage of you? When you
    have customers who can mark an ``X'' because they can't sign
    their name and you are hurt by the CFPB in the name of helping
    consumers, but you can't deal with the consumer?
        You start looking at a check box and every peg has to have
    a square hole for a square peg.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Georgia, Mr.
    Scott.
        Mr. Scott. Thank you very much, Mr. Chairman.
        This is, in my opinion, a very dangerous bill and it could
    very well place our economy in a very dangerous situation.
        And of course, I say that with all due respect to my
    distinguished chairman who is a friend; we have worked together
    on many things.
        But let me tell you the two most dangerous parts of this
    bill, to me. The first one is in Title I and this overzealous
    effort to get out from under the regulatory regime of the
    Federal Reserve and to use just this arbitrary, out-of-the-sky
    10 percent to apply in the place of a very good regime that we
    worked out. As the chairman knows, we both were here together
    working on Dodd-Frank and both Republicans and Democrats
    realized we had to do something.
        And so we came up with this plan to be able to perform with
    certain types of capital requirements that the Fed would place
    there and the ability to come back and do annual stress tests,
    to take a peek-a-boo every now and then to see and make sure
    things were going right.
        Now, why did we do that? The reason we did that was because
    Lehman Brothers was gaming the system in a manner and in a way
    that they very well will do again under the chairman's bill.
    Danger number one.
        Danger number two, to remove the Volcker Rule? I don't know
    that people understand what the Volcker Rule is. But the
    Volcker Rule prohibits banks from using their customers'
    deposits. Everybody sitting here has a bank account. We go and
    we make our deposits. You mean to tell me we want to give away
    for the banks to be able to take our deposits and make risky
    bets on those? No.
        That is a dangerous situation, so dangerous that if you
    recall such a situation happened with the London Whale.
    Remember that? They went in, they used.
        And so this bill comes about in a way and in a manner, and
    I am sure he has good intentions, but on those two counts
    alone, to remove Volcker and to get the Federal Reserve and
    give an offramp to get out beyond rules and regulations that
    have worked very well and have produced a very stabilizing
    situation.
        So with all due respect, I think it is a dangerous bill and
    also a dangerous area.
        Now, Mr. Levitin, let me ask you, where am I going right
    here, where am I going wrong? What is your take on this? And
    where did the 10 percent come from? And wouldn't you think it
    would put us in a terrible situation if we go back to letting
    banks use their depositors' money, their customers' to make
    risky bets?
        Mr. Levitin. I think your analysis is spot on. I want to be
    really clear, the Volcker Rule does not prohibit banks from
    using deposits to make loans.
        Mr. Scott. Federally insured.
        Mr. Levitin. Right. They are allowed to make loans, but
    they are not allowed to go and speculate on stocks for their
    own account using customers' money.
        So it is a limitation on some of the riskier investment
    activities of banks.
        Regarding the 10 percent, with all due respect to Alex
    here, the 10 percent figure has absolutely no basis. If you
    look at the Republican memorandum on the CHOICE Act, there is
    only one citation, it is to a speech by Andrew Haldane, who is
    the chief economist at the Bank of England.
        Mr. Haldane, however, does not endorse 10 percent. That
    number is derived from a reading of a graph of his, which is
    not a statistically significant graph, for figuring out whether
    10 percent is the right number. And Mr. Haldane actually says
    you need capital and a whole bunch of other things, such as
    better regulatory tools. So it is hardly an endorsement of 10
    percent.
        Now, Mr. Pollock in his written testimony and in an op-ed,
    I think it was in American Banker, cites a number of studies
    that have a range of percentages. And one of those he cites is
    by Professor Charles Calomiris for 10 percent. The thing is
    that is not what Professor Calomiris actually wrote.
        Professor Calomiris used 10 percent as an illustration of
    how CoCo bonds work. He was not endorsing 10 percent as being
    the right number. So there is no one out there who has actually
    said 10 percent is the right number.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Missouri, Mr.
    Luetkemeyer, chairman of our Housing and Insurance
    Subcommittee.
        Mr. Luetkemeyer. Thank you, Mr. Chairman.
        Mr. Nussle, you haven't had anybody ask you a question yet,
    so I am going to try and start with you right quick here.
        How many credit unions went under in 2008 as a result of
    the crisis?
        Mr. Nussle. Year by year, the way I would put it is about
    1,900 since the crisis in that--
        Mr. Luetkemeyer. Okay, that is a consolidation, though,
    right?
        Mr. Nussle. Correct, that is everything.
        Mr. Luetkemeyer. Okay. My question would be--
        Mr. Nussle. Oh, during the actual--
        Mr. Luetkemeyer. Yes, how many went under as a result of
    being undercapitalized?
        Mr. Nussle. I'm sorry. At that time, it was, I think, about
    167 if I remember correctly.
        Mr. Luetkemeyer. Okay. All right, very good. So you believe
    that the 10 percent--you made a good point a while ago with
    regards to the 10 percent number in that 4,000, roughly two-
    thirds of your members already are at 10 percent.
        And of that hundred-and-some, how many of them were
    capitalized at 10 percent or more, do you know off-hand?
        Mr. Nussle. No, I don't know right off-hand.
        Mr. Luetkemeyer. Okay. That would be a great number to get
    back to us with. I would sure appreciate if you would because
    it would certainly give us some ammunition to refute Professor
    Levitin.
        Mr. Nussle. Sure, I would be happy to.
        Mr. Luetkemeyer. My good friend sitting next to me, Mr.
    Schweikert, has all kinds of data which will shoot down Mr.
    Levitin's comment here in a minute, but I will let Mr.
    Schweikert be able to load his gun on that.
        A quick question for Mr. Purcell and Mr. Pollock and Mr.
    Allison's standpoint that we continue to be concerned about 10
    percent being a magic number that suddenly banks don't have to
    be regulated anymore, suddenly they are going to be the Wild,
    Wild West, they will be able to do anything they want to do.
        There are still going to be a lot of regulations on the
    banks, are there not? The regulators, they are going to come
    in, there are still a lot of things that they can come in and
    examine and put pressure on banks to do.
        Mr. Pollock, do you want to give me a quick answer?
        Mr. Pollock. That is absolutely right, Congressman.
        Mr. Luetkemeyer. Mr. Purcell?
        Mr. Purcell. That is correct. They will still be there.
        Mr. Luetkemeyer. Mr. Allison?
        Mr. Allison. That is correct, and markets regulate, too.
        Mr. Luetkemeyer. Absolutely.
        Mr. Allison. Markets discipline everything else in the
    economy and we don't have massive wipeouts in the other
    segments of the economy. The one segment of the economy that
    had big problems is the one that is the most regulated.
    Surprised?
        Mr. Luetkemeyer. And one of the arguments, I think, for
    doing this is that--and we were considering this, I am one of
    the subcommittee Chairs and so we were working very closely
    with the chairman on the bill, is that looking at it and
    saying, well, it is not necessarily for every bank. The big
    banks may not want to do this, but they are only capitalized at
    6 percent. And Mr. Newell has already made the comment that it
    is going to be very difficult for them to get there.
        Our hope was that this will be for the community banks,
    which Professor Levitin said that for anybody under 10, that
    would be a great idea.
        So if we can give them the relief that they need, and let
    me just give you a reason why I think this is very important.
        In my State of Missouri at the end of 2015, 26 of 44 banks
    under the size of $50 million, now, that is the little, bitty
    guys, but they take care of a community, $50 million bank, 26
    of the 44 lost money last year. So that tells me we have 26
    banks that are in a bubble. They are getting ready to either
    get closed or they are going to get merged. Now, that is
    communities that are going to be hurt by having that happen.
        And why? It is because of compliance costs. And this bill
    tries to take care of helping the smaller community banks
    reduce some of their compliance costs.
        And again, it is not for everybody. It is an individual
    decision that they make. I can see where if a bank wants to go
    out and purchase another bank, wants to merge, they may drop
    underneath the 10 percent for a while until until they can get
    their capital back up or have an influx of capital to make it
    happen, you want to grow your bank, and if you want to get down
    to 10 percent and you are at 9\1/2\ right now, maybe you will
    contract your bank to get down there to get underneath some of
    this.
        It is an incentive to manage your bank in a different way.
    It is not an incentive to get away with something wrong.
    Examiners are still going to come in and look at you, right?
    They are still going to manage what you try and do.
        It is interesting to see the perspective sometimes of some
    of the decisions here, but it is not a get-out-of-jail-free
    card. It is another management tool for banks and credit unions
    to be able to better manage themselves in their communities and
    with their asset liability makeup.
        Mr. Allison, you also made a comment with regards to
    regulation causes less competition. Would you like to elaborate
    on that a little bit? Because I think that is important from
    the standpoint of the regulations which most of the community
    banks are going through right now.
        Mr. Allison. In the banking industry obviously it causes
    less competition by driving community banks out of business.
    But in the economy, banks generate a lot of competition.
        We are venture capital lenders. We start a lot of small
    businesses and we particularly help a lot of small businesses
    change their business model and grow. And I personally did that
    a lot.
        Those loans don't necessarily fit the regulatory model even
    though the history of their losses is very low. A properly
    financed institution, capitalized institution can afford to do
    that. We did that at BB&T and had no trouble during the
    financial crisis.
        Today, we are a strong bank, we can't do that anymore.
        Mr. Luetkemeyer. The thing about the capital that we need
    to remember, it is just like if you make a loan to an
    individual, they have to have equity in their business or in
    their home, that is what this capital is to a bank. It is the
    equity in there that gives you the cushion to be able to
    withstand whatever crisis, whatever problems, just like a
    homeowner or just like a business would have to overcome.
        With that, I yield back to the chairman.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes another gentleman from Missouri, Mr.
    Cleaver, ranking member of our Housing and Insurance
    Subcommittee.
        Mr. Cleaver. Thank you, Mr. Chairman.
        And I thank you and the ranking member for the hearing.
        We have six witnesses. I want to ask each of you a yes-or-
    no question.
        And I will start with you, Mr. Allison.
        Did you have any idea that prior to the passage of Dodd-
    Frank, this committee held 41 hearings related to financial
    reform?
        Mr. Allison. I knew you had some hearings; I didn't know
    exactly what the hearings were.
        Mr. Cleaver. Mr. Nussle, did you have any idea that the
    committee held five markups on provisions included in Dodd-
    Frank?
        Mr. Nussle. I recollect that ballpark figure, yes.
        Mr. Cleaver. Mr. Levitin, did you have any idea that over
    55 hours of markup debate was held?
        Mr. Levitin. I did not know the specific number of hours.
        Mr. Cleaver. Mr. Pollock, did you know that there were 120
    Republican amendments considered in Dodd-Frank?
        Mr. Pollock. I know that the Dodd-Frank discussions were
    extensive and lengthy and very partisan, as was the final vote.
        Mr. Cleaver. Mr. Newell, there were 134 Democratic
    amendments. Were you aware of that?
        Mr. Newell. I am not sure I was aware of the exact number,
    but that is certainly consistent with my memory.
        Mr. Cleaver. Mr. Purcell, do you have any idea of how many
    hours this committee spent in debate on Dodd-Frank?
        Mr. Purcell. I am not sure of the exact hours, I know there
    was quite a bit. But now that we have a history of what has
    been accomplished, maybe we need to spend some more time on it.
        [laughter]
        Mr. Cleaver. We are today--48 hours.
        Now, spending a lot of time and doing all these things I
    have asked you about doesn't necessarily mean the bill is
    perfect and the fact that we are imperfect humans means that
    rarely are we going to have perfect legislation.
        I also believe we need to do something about the community
    banks. But I don't want anybody to get the impression that this
    was just thrown together and there was not a lot of thought
    into it. And in spite of thought, we can still make mistakes.
        But sometimes when we get into these hearings, the
    impression is sent out that it was just kind of run in and do
    something quickly.
        And I have one question for Mr. Nussle, because this is the
    part of my colleagues' legislation that I am confused about.
        There is concern, and I heard it all along as well as from
    a friend and homeboy from Missouri, Mr. Luetkemeyer, that Dodd-
    Frank is putting small banks out of business and so we need to
    pass this bill to stop that. Is that pretty much what you
    think?
        Mr. Nussle. No, I wouldn't say it is the only, there are
    lots of factors that go into reasons why, and I can only speak
    for credit unions, of why there has been consolidation, why
    there has been challenges.
        But there is no question that regulatory burden has added
    to a lot of the consolidation speed, the quantity of
    regulations that all credit unions, all small institutions have
    to be mindful of.
        There are 222 rules that have passed from 15 different
    agencies representing over 6,000 pages in the Federal Register.
    And I don't care what size institution you are, you have to
    know all of that. And that adds to the consolidation and the
    challenges that I think are out there.
        So I wouldn't say it is the only thing, Congressman, but it
    certainly is a huge part of it.
        Mr. Cleaver. Yes, because if that is a consideration at all
    in the legislation, if we need to curb concentration in the
    banking industry, this legislation actually repeals the limits
    on mergers, including the one that no bank can hold more than
    10 percent of the insured deposits in the country.
        So if this bill is passed and we are removing these limits,
    doesn't that encourage consolidation?
        Anybody?
        Mr. Levitin. I think it gives a green light to
    consolidation and for the largest banks to become even larger.
    It is pretty surprising to me to see that the 10 percent cap
    would be removed in the bill because that is something that
    benefits only, by definition, the very largest banks in the
    United States.
        Mr. Cleaver. Do the rest of you agree?
        Mr. Pollock. I don't agree. I think the most important
    point of the bill is to make the smaller banks and all banks
    more competitive, freer, and well-capitalized to take away
    using the taxpayers' capital. When those banks are freer and
    more energetic, they obviously have a more successful future.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Michigan, Mr.
    Huizenga, chairman of our Monetary Policy and Trade
    Subcommittee.
        Mr. Huizenga. Thank you, Mr. Chairman.
        I am going to move quickly and I will resist the temptation
    of asking you each a yes-or-no question about whether you knew
    of that pay ratio, Volcker Rule, conflict minerals, most of
    Title IX, SEC reserve funds and the Durbin amendment were all
    airdropped in without a single hearing or discussion here
    publicly. But we can leave that for another time.
        I do, Mr. Allison, want to talk a little bit about this 10
    percent leveraged ratio being plucked out of thin air, I
    believe as was put forward.
        I, too, was a part of the discussion as to what that
    leveraged ratio should be. And I am curious, would it surprise
    you to learn that according to the FDIC data that 98 percent of
    the insured depositories that entered the crisis with a
    leveraged ratio of 10 percent or better weathered the storm and
    of those that did fail none of it was of sufficient size or
    scale to present any kind of systemic risk? Would that surprise
    you at all?
        Mr. Allison. No, it doesn't. Being in the industry, the
    single factor, and there are other factors that you can look
    at, is strong capitalized banks very seldom fail, and a
    leveraged ratio of 10 percent is kind of a rule of thumb. I
    think there is some science behind it.
        But it is one that has had very good success with the
    industry over a long period of time.
        Mr. Huizenga. And you can feel free to answer this. I am
    curious, Mr. Pollock, as well. I was stunned by this notion of
    it doesn't really matter what the effects of regulations, the
    cost/benefit analysis shouldn't be done. Do you care to address
    that at all?
        Mr. Pollock. Thanks, Congressman. I think cost/benefit
    analysis is essential to any regulatory regime, as is
    appropriate governance of regulatory bodies and their control
    by the elected representatives of the people.
        If I could, Congressman, could I just point out on this
    question of 10 percent, that the International Monetary Fund
    recently conducted a large study in which they conclude that 15
    to 23 percent risk-based capital would have avoided creditor
    losses. That doesn't mean bank failures, that means no losses
    to creditors. In the vast majority of banking crises, they
    continue, this range is consistent with a 9.5 percent total
    leverage exposure. That is to say--
        Mr. Huizenga. I'm sorry, could you repeat that? It almost
    sounds like the IMF agrees with this committee that--
        Mr. Pollock. It does.
        Mr. Huizenga. --10 percent would be sufficient.
        Mr. Pollock. Their number is 9.5 percent, which I think it
    would be fair to say is pretty close to 10.
        Mr. Huizenga. Interesting, okay. Well, I think it's fair
    enough to say that this wasn't plucked out of thin air. It
    clearly was debated, and has been debated by academics for a
    long time as well.
        I do want to also hit on another issue here in my remaining
    2 minutes here. I Chair the Monetary Policy and Trade Oversight
    which has oversight of the Fed.
        The Federal Reserve, in my opinion--I wasn't here for the
    creation of it; I am just trying to clean up the mess of Dodd-
    Frank--really has become a super regulator under Dodd-Frank.
    And I think it is blurred, unfortunately, that line between
    regulator and monetary policy.
        And either Mr. Allison or Mr. Pollock, one, how does the
    Fed basically virtually control every major corner of the
    financial services space right now?
        Mr. Allison. They definitely control it and it's definitely
    dangerous. You definitely should separate monetary policy from
    regulatory policy.
        Clearly during the financial crisis, they made many
    decisions that weren't related to monetary policy, but
    individual Federal Reserve Governors who were involved in the
    process didn't want their bank to get in trouble and so they
    made decisions to protect that bank maybe at the expense of
    monetary policy and maybe at the expense of the economy.
        Remember, these are human beings who who don't want to look
    bad. And I think mixing regulation and monetary policy is a
    really bad format.
        Mr. Huizenga. Should they be able to shield those
    regulatory activities from the American people and frankly
    congressional oversight by sort of hiding behind this cloak of
    independence?
        Again, just so I am clear with my friends on the other
    side, we are not talking about monetary policy independence; we
    are talking about regulatory independence that they somehow
    have magically no oversight.
        Mr. Allison. I can't see any reason why you would want the
    Fed not to be responsible to Congress in the same way that any
    other agency is. And regulation is regulation. It is just like
    any other agency.
        Mr. Huizenga. I am going to ask Mr. Pollock here for the
    last 15 seconds.
        Mr. Pollock. I just want to agree with my colleague and
    you, Congressman, that the Federal Reserve, like every public
    servant, needs to be accountable in its actions and, in my
    judgment, in all of its actions.
        Mr. Huizenga. With that, I will do the equivalent of a mic
    drop and yield back.
        [laughter]
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from California, Mr.
    Sherman.
        Mr. Sherman. Mr. Chairman, we worked together to try to
    stop the TARP bailout, but Congress passed the law.
        In 2007, we had a loose regulatory system that provided
    enormous capital to the subprime mortgage market. The only way
    to prevent the next bailout is to make sure that too-big-to-
    fail is too-big-to-exist.
        I agree with you that just a host of regulations of the
    giant financial institutions won't by themselves work and is a
    departure from free market capitalism. Free market capitalism
    is there is never an institution that can call this government
    and tell us we have to bail them out, otherwise they are going
    to take the country down with them. And free market capitalism
    does recognize that at times a bank will fail. But it needs to
    fail as an independent entity, not drag our entire economy with
    them.
        Mr. Chairman, I note with regret that your bill removes
    rather than strengthens the Frank and Sherman provisions on
    credit rating agencies. These are the agencies that destroyed
    our economy. They gave AAA to Alt-A and the reason they did it
    is because they are selected and paid by the issuer.
        This makes as much sense as a baseball league where the
    umpire is selected and paid by one of the teams.
        Mr. Levitin, I am trying to understand how the chairman's
    proposal would work. Imagine two well-run banks, one continues
    to be well-run and somehow meets the 10 percent capital, and
    the other one decides on a high-risk, high-bonus strategy. They
    double what they pay on deposits, so they attract an awful lot
    of FDIC-insured deposits and they invest in junk bonds,
    Willard, the guy in my district who makes really bad pizza, but
    he is willing to pay 20 percent for an expansion loan, and
    Zimbabwe bonds.
        As you understand this statute, that bank, as long as it
    had been well-run in the past, the bank could have 10 percent
    capital and devote all of its lending to those categories of
    high-risk instruments?
        Mr. Levitin. That is correct. So the CHOICE Act requires
    that at the time that a bank makes it selection to go to the 10
    percent capital that it have a CAMELS rating, that is a
    basically bank safety and soundness rating of one of the
    highest two levels.
        Mr. Sherman. Right.
        Mr. Levitin. But thereafter, there is no requirement that
    it maintain that CAMELS rating. Its CAMELS rating could go down
    to the bottom.
        Mr. Sherman. So at least for a few years, my Zimbabwe bonds
    could be doing very well and I could be getting enormous,
    enormous bonuses as an executive of this bank. I could be
    taking in deposits, there would be a line of people to give me
    FDIC-insured deposits at double the prevailing rate. And if the
    Zimbabwe bonds go down, I retire to Aruba and the FDIC takes
    over.
        If only I had a plan as to how to execute this, I might
    cosponsor the bill.
        But I want to move on, and I think this just illustrates
    that no exact amount of capital is enough if you allow the
    bank, having passed one test, to then have its executives go
    into a high-risk direction. If you are going to go in a high-
    risk direction you need more than 10 percent capital.
        But Mr. Nussle, the purpose of this hearing is to focus on
    more capital, more capital for financial institutions and more
    capital, and that allows you to be able to lend capital to
    businesses in our districts.
        If a credit union thought, hey, we would like to expand, we
    would like more capital, we would like to issue subordinated
    debt, in order to do that, would the Federal Government
    interfere with those efforts to get more capital?
        Mr. Levitin. Yes.
        Mr. Sherman. Would they prohibit those efforts to get more
    capital?
        Mr. Nussle. As you know, yes, they would.
        Mr. Sherman. So instead of the Federal Government--so with
    other parts of the financial institutions area, we in 2008 gave
    them capital. With regard to credit unions, we prohibit you
    from raising capital in the private sector.
        Mr. Nussle. Yes, our capital is from our own retained
    earnings.
        Mr. Sherman. And that is the only place and you are not
    allowed to go to--
        Mr. Nussle. Zimbabwe.
        Mr. Sherman. --to those who would invest in--
        Mr. Nussle. We don't go to Zimbabwe, Congressman.
        Mr. Sherman. Okay. So Zimbabwe bonds yes, subordinated debt
    for credit unions no. Okay, thank you.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Wisconsin, Mr.
    Duffy, chairman of our Oversight and Investigations
    Subcommittee.
        Mr. Duffy. Thank you, Mr. Chairman.
        And welcome, panel.
        I missed some of the first part of your testimony. I was at
    a Transatlantic Group meeting with some of the elected
    officials from the European Union, which makes me think that
    our U.S. regulatory system is becoming more like the European
    regulatory system where we have a one-size-fits-all paradigm
    which I don't think actually works very well.
        So just quickly, 22,000 pages of new regulation in Dodd-
    Frank. Does anyone on the panel think that this is going to
    stop too-big-to-fail, Dodd-Frank?
        Mr. Newell, you do?
        Mr. Newell. Yes, I do. I would point to two things. First,
    more generally and it is often overlooked, the substantial
    increase both in the capital liquidity position of the largest
    banks at first made it much less likely that they would fail.
    And second, we now have today both the legal and operational
    framework that will assure that even the largest bank can be
    resolved in an orderly fashion without posing risks to the
    taxpayer or to the financial system more broadly.
        Mr. Duffy. Okay. And I would just note that I think your
    position is even disagreed with by my friends across the aisle,
    Democrats. It has been a bipartisan issue that too-big-to-fail
    hasn't ended. This is not just a Republican issue. Even
    Democrats admit that their bill hasn't ended too-big-to-fail.
    It has become a common talking point from the left.
        Elizabeth Warren still talks about too-big-to-fail. And so
    if Dodd-Frank was the end of it, you are even in disagreement
    with some of the Democrats who agree that they haven't
    accomplished that goal, which was the auspices for this massive
    new regulation.
        We had bank failures, taxpayers bailed them out, Americans
    were angry, and so Democrats said let us end too-big-to-fail
    and this is the bill that is going to do it. A massive new
    regulation that actually doesn't resolve the problem that they
    set out allegedly to fix.
        So I think it is pretty unique. Mr. Hensarling's bill here
    has a little bit different approach, giving banks the choice to
    hold more capital in exchange for less regulation.
        And the debate today is, as you are seeing it break down,
    is between regulators and capital. Can regulators stop the next
    crisis or can capital stop the next crisis?
        Did regulators fail in the last economic crisis of 2008,
    Mr. Pollock?
        Mr. Pollock. Yes, without a doubt, and not only in this
    country.
        Mr. Duffy. But around the world. Mr. Allison?
        Mr. Allison. Absolutely they failed. And I do not believe
    we have solved the too-big-to-fail problem. Under the exact
    same circumstances, the regulators today would act to save the
    biggest. They shouldn't, but they would.
        Mr. Duffy. Mr. Nussle?
        Mr. Nussle. Yes, our model, because it is locally
    controlled and members manage it, it is inherently more
    conservative. And so I think it is not only a failure
    generically of regulators and I suppose policymakers, having
    been one of them myself, but it is also, I think, a failure of
    the way we do business if in fact the chairman's right that we
    are trying to balance the need for growth with inherent risk.
        Assuming that one entity in Washington can manage all of
    that without the involvement of consumers, without the
    involvement of real people and the market making that decision,
    I think that is inherently problematic.
        So I think it is more than just a failure of the regulators
    in that instance.
        Mr. Duffy. But regulators are human, right?
        Mr. Nussle. Correct.
        Mr. Duffy. Humans make errors. And whether you are a
    regulator or a banker, you will make mistakes. And the way you
    blunt those mistakes is holding more capital.
        Is that a fair assessment, Mr. Pollock?
        Mr. Pollock. Yes, it is. It is so fair that I say it in my
    written testimony.
        [laughter]
        Mr. Duffy. That is very well said.
        I only have a minute left. So quickly, Mr. Allison, would
    you agree that banking regulations increased from 1997 to 2008?
        Mr. Allison. Oh, yes. Banking regulation increased
    exponentially. It was things like the Patriot Act and the
    Privacy Act and Sarbanes-Oxley. You can count the pages, it was
    a massive increase in regulation. There was no deregulation of
    the banking industry. That is an absolute myth.
        Mr. Duffy. So even with more regulation, we still had the
    failure. And I think that point needs to be made.
        One of my concerns is risk weighting. Is it fair to say
    with risk weighting that through regulation we will consolidate
    risk not just in one bank, but across the banking sector? So
    mortgage-backed securities, we say they are safe or today we
    will say that government debt is safe, causes systemic
    potential risk throughout the whole banking system.
        Mr. Pollock?
        Mr. Pollock. I think that is true. I think a wonderful
    example, which we haven't mentioned today, is the risk
    weighting applied to Fannie Mae and Freddie Mac under the U.S.
    capital standards, in which their debt and even their preferred
    stock were given extremely low capital risk weightings and
    induced an excess flow of credit with disastrous results.
        Mr. Duffy. Well said, and I think diversification across
    the industry, which is outside then risk weighting, would make
    a lot of sense to make sure we don't have systemic failures in
    the future.
        My time is up, I yield back, Mr. Chairman.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from New Mexico, Mr.
    Pearce, for 5 minutes.
        Mr. Pearce. Thank you, Mr. Chairman. I appreciate the
    opportunity to ask questions.
        So Mr. Purcell, if you did not have one regulation coming
    from the Federal Government, would you choose to make
    discriminatory loans?
        Mr. Purcell. No. The success of our community and the
    success of our business means that we have to serve everyone.
    If our community doesn't do well, we do not do well.
        Mr. Pearce. What is the demographic in Big Spring? By the
    way, I live in Hobbs, so Big Spring was always a vacation
    destination for us. We read the billboard and thought that it
    was actually a big spring. It is just a big spring for our
    area.
        Mr. Purcell. It is kind of like banking. It used to have a
    big spring.
        Mr. Pearce. Yes. So what is the demographic in Big Spring?
        Mr. Purcell. It is probably 50/50.
        Mr. Pearce. Actually, I just looked it up on the internet.
    It is 53 percent minority and 44.7 Anglo. So I don't think you
    could even stay in business.
        I know that I am not in the retail banking business, but I
    am in a retail business. I have to sell myself. My district is
    60 percent minority. So this idea, among many outlandish
    comments, comes from Mr. Levitin saying financial liberty also
    apparently includes the right to engage in discriminatory
    lending.
        And I just find that absolutely incredible that it would be
    in print, because I look at New Mexico and a businessman could
    not stay in New Mexico, and I suspect in west Texas, if they
    discriminated because that is at least half and maybe more of
    the market and every one of the single towns.
        On page five, you suggest that you all have gotten out of
    the mortgage lending. So since you, who used to provide loans,
    mortgage loans, to the full spectrum of your community are not
    in the business, who provides those mortgage loans and how
    satisfactory is it?
        Mr. Purcell. Actually, the ones that provide the mortgage
    loans now for the larger mortgage loans, there is a market for
    that that would be called a prime mortgage. However, the ones
    that in the rural area it would be below $50,000, it is owner-
    financed, there may be a few loan sharks out there that will do
    one at 15 or 20 percent, but the banks have pulled back from
    that.
        Mr. Pearce. So basically the bottom end of the spectrum is
    ill-served because of what the Dodd-Frank regulations did. It
    did it in our State, too. In my district, 50 percent of the
    houses are trailer houses and so the people in that spectrum,
    you just can't find lending for it because the geniuses on Wall
    Street are certainly not going to come out there. And Dodd-
    Frank, regardless of what everything else it does, benefits the
    big players, not the small players.
        Now, the people getting out, your report talks about the
    bankers getting out of the business, why are they getting out?
    Just two or three main reasons.
        Mr. Purcell. One, the amount of paperwork. And then if you
    are wrong, it used to be if you had a pattern or practice, you
    had something that regulators would get onto you, now it is one
    single occurrence and that is pretty substantial.
        If you comply with all of the mortgage lending and someone
    wants to borrow $25,000, do you think they are going to read
    the 125 pages of pre-notice?
        Mr. Pearce. Yes. So basically, people are getting out
    because it is complex.
        Now, again, among the comments that Mr. Levitin makes, he
    says that in unfettered markets the bad will drive out the good
    as consumers cannot readily distinguish good actors from bad
    actors.
        Mr. Allison, do you find that the consumers are that
    unknowledgeable?
        Mr. Allison. I think that is absurd.
        Mr. Pearce. I think it is absurd, too. Because what
    actually happens is what Mr. Purcell was talking about. The
    regulations drive out the people who will bring honesty and
    transparency. And the people who live there are the ones who
    will get lawyers and beat the system and they will come in and
    they will stick you.
        And so all the stuff that the regulations from the left
    tell us are going to happen, actually it is not going to happen
    under a free market, it is going to happen under the regulatory
    processes put in place by the Dodd-Frank. And they come up with
    ludicrous suggestions like those in this amazing report.
        I yield back, Mr. Chairman.
        Chairman Hensarling. The gentleman yields back. The Chair
    now recognizes the gentlelady from New York, Mrs. Maloney,
    ranking member of our Capital Markets Subcommittee.
        Mrs. Maloney. Thank you.
        Mr. Newell, some people claim that the problem with the
    risk-weighted capital requirements before the crisis was that
    the risk weights were inaccurate. They treated certain mortgage
    debt and sovereign bonds as safer than they actually turned out
    to be.
        But under the chairman's bill, the solution is a leveraged
    ratio which means even less accurate risk weights.
        Isn't the better solution to inaccurate risk weights more
    accurate risk weights?
        Mr. Newell. Yes. And in fact, the problem with the
    leveraged ratio is the one that you point out. It effectively
    treats the risk of all assets exactly the same, which, of
    course, isn't true in fact. So it results in measurements that
    aren't accurate.
        Certainly risk weights can be wrong. And Greek bonds and
    other examples have been provided today.
        But again, I think the better answer there is to improve
    the risk weights. I think part of that is improving the process
    at the Basel committee and here in the United States to make
    sure that we have better transparency and public debate and
    less politicization of those risk weights.
        I would also say that we are in a better position today
    than we have been in the past because of the CCAR stress
    testing exercise. And again, what that really is is a dynamic
    annual assessment of the risk of each individual asset in a
    crisis. And so in that sense, it is as much an annual stress
    test of the risk weights as it is a stress test of the banks.
        And for those reasons, again, I guess the one thing I would
    also mention is it is important to step back and just think
    about what the impact of moving to a higher leveraged ratio is.
        Here at the Clearing House we did just some very
    preliminary estimates, again. And those showed that if the
    entire U.S. banking industry were to move to a 10 percent
    supplementary leveraged ratio, whether that is by choice or by
    mandate, the current capital in the U.S. banking system would
    support $4.8 trillion less in loans and other economically
    productive activities than it currently supports today. So that
    is a very real and significant impact.
        Mrs. Maloney. And I would like to ask Professor Levitin,
    the chairman's bill would exempt banks with a leveraged ratio
    of over 10 percent from any and all regulations addressing
    capital or liquidity.
        In your view, does this dramatically roll back the banking
    regulators' authority? Doesn't this leave the regulators with
    even less authority to maintain the safety and soundness of
    banks than they had before Dodd-Frank?
        Mr. Levitin. Absolutely. There is a question about how
    broadly the language in the bill should be interpreted. But I
    think arguably it would prevent regulators from ordering
    prompt, corrective action because that is based on
    capitalization levels.
        Basically, the regulators could not tell a firm that was
    headed for a collision that it needs to raise more capital
    pronto. I don't think they would have that ability under the
    CHOICE Act.
        Mrs. Maloney. Do you think it is dangerous to prohibit the
    banking regulators from imposing liquidity requirements on any
    subset of banks, no matter how well-capitalized?
        Mr. Levitin. I think it is absolutely reckless.
        Mrs. Maloney. Thank you, okay.
        Also, Mr. Newell, the chairman's bill would repeal Dodd-
    Frank's orderly liquidation authority, which is intended to
    give regulators the authority to safely unwind the Nation's
    biggest banks.
        I am concerned that even with the 10 percent leveraged
    ratio in the chairman's bill, repealing the orderly liquidation
    authority would leave our financial system dangerously exposed
    to another Lehman Brothers.
        What is your viewpoint on repealing the orderly liquidation
    authority? Does this make it less safe? Does it make it safer
    or less safe?
        Mr. Newell. Yes, so we would not support repeal of the
    Title I regime. We think that it would make the financial
    system less safe.
        Again, we think Title II is a very important tool to make
    sure that under any circumstances a large firm can be resolved
    in an orderly fashion, again, without putting the taxpayers at
    risk.
        Certainly, bankruptcy always should be the preferred
    option. And indeed, that is why we support the enhancements to
    the bankruptcy code included in the discussion draft. But it is
    very important to have Title II as a backstop.
        And I would say, again, that really is in the interest of
    financial stability. It is, at the end of the day, the very
    largest banks that actually bear the cost of the Title II
    regime. Under the Fed's TLAC rule, the largest banks are going
    to have to hold $1\1/2\ trillion in total loss absorbing
    capacity, which is to say equity and long-term debt.
        If a large bank would go into failure, it is the
    shareholders and long-term debt holders of that bank who have
    to absorb the losses.
        And then, again, in the incredibly unlikely circumstance if
    there were to be a shortfall in the orderly liquidation fund,
    it is the banks that have to fund that.
        So, again, we support Title II and that is notwithstanding
    the fact that banks are first, second, and third in line in
    terms of bearing the costs of that regime.
        Mrs. Maloney. We now use the leveraged ratio as a backup.
    And going back to that in my remaining seconds, in your view,
    does using a 10 percent leveraged ratio as the primary capital
    requirement make the financial system safer or does it
    encourage banks to get rid of their safest assets and load up
    on riskier assets?
        Mr. Newell. Yes, so it uses a primary measure, particularly
    at that level. It would have exactly that sort of effect of
    misincentives. It would discourage lower-risk assets and
    encourage higher risk.
        Mrs. Maloney. Thank you.
        Chairman Hensarling. The time of the gentlelady has
    expired.
        The Chair now recognizes the gentleman from Arizona, Mr.
    Schweikert.
        Mr. Schweikert. Thank you, Mr. Chairman.
        Forgive my tone or my frustration because I have heard a
    few things here that have made me realize how few have actually
    read the legislation. Because a couple of the comments that
    have bounced around here are bordering on absurd if you have
    actually read the language.
        I accept the fact that to many of my brothers and sisters
    on the other side, Dodd-Frank is a faith-based text. But a
    little intellectual consistency here of, one time we will have
    an argument here of how we need to lower down payments to spur
    the economy and help home buyers, oh, but over here we want
    more. Just a little intellectual consistency.
        Mr. Allison, I want to walk through just a couple, and work
    with me because I want to be intellectually credible, not
    sarcastic.
        But in function, we are having an argument here of what
    makes a financial institution more robust, paper and file
    cabinets put in by dozens and dozens if not tens of thousands
    of regulators around the Nation. So regulators sitting in a
    bank or cash sitting in a bank?
        How many regulators were sitting in IndyMac the very day it
    went under? Wasn't it in the hundreds?
        Mr. Allison. My view is the regulators very, very seldom
    identify problems in advance. As I said, in my career I have
    never seen a case of that. But they are so lost in the trees
    they can't see the forest.
        Capital reduces the risk of banks, things like cash and
    liquidity.
        And also, this kind of bizarre motivation that bankers
    don't care how healthy their banks are, this idea that we are
    all trying to make money and go off to the Caribbean. That is
    crazy.
        Are there a few bankers who do that? Yes. Will markets
    clear them out in a short period of time if the government
    doesn't bail them out? Yes.
        BB&T has been in business since 1872. We care about the
    safety and soundness; we don't need the regulators to tell us
    about that stuff. That is what we do. And we know about it
    because that is what we do.
        Mr. Schweikert. And Mr. Newell, I am going to ask you on
    this one. In some of the comments, and tell me if I am
    misinterpreting what you said, aren't you conflating the risk-
    weighting mechanics with cash? Because you are almost making an
    argument that is saying it is our risk-weighting mechanics,
    because we are so brilliant we absolutely know what tomorrow's
    black swan is, not to grab a Talebish quote but what tomorrow's
    black swan is where cash is the ultimate flexible repairer of
    sins.
        Did I misunderstand you what you said a moment ago?
        Mr. Newell. Yes, well, keep in mind here what we are
    talking about is capital, right, and the amount of capital that
    you need to hold against a given asset, right?
        Mr. Schweikert. But, no, back up with me. First on the risk
    weighting, the belief that we are all so brilliant now that
    somehow we know what tomorrow's cascade event that damages the
    banking system, and therefore we can build a risk-weighted
    model that gets it right where at least cash always gets it
    right.
        Mr. Newell. Yes. So what I would say there, so certainly,
    right, we are not always going to get every single risk weight
    right, which is why I think we should be having continual
    discussions, Basel in here.
        Mr. Schweikert. But if it is not going to get right, isn't
    cash the ultimate--
        Mr. Newell. The problem is--
        Mr. Levitin. Clarification--
        Mr. Schweikert. We will come back to you, Professor.
        Mr. Newell. The problem is, when you are talking about cash
    under the leveraged ratio, right, it is always going to get it
    wrong, right? The way to think about the leveraged ratio, what
    it says is every single asset gets a hundred percent risk
    weight.
        Mr. Schweikert. No, no, no, that is not, no, that is
    absolutely, that is not--okay.
        Mr. Allison, we have this conversation and I am actually
    one of those who do believe the money-centered banks, we have
    too much concentration in our financial markets. Isn't the most
    rational way to reduce the size of a money-centered bank is not
    the crazy theory of let us go in and break up a bank because we
    are all so brilliant we will know what business units actually
    can stand and serve the economy, but compete away part of their
    largeness and you need a vibrant, flexible, regional, local
    banking system to do that competition?
        Mr. Allison. Absolutely. And the large money banks are
    uncomfortable with this because what they are really going to
    do, instead of raising more capital, is they are going to
    shrink. And the assets are going to be redistributed to
    companies that can use them better and produce better returns.
        So the subsidy that too-big-to-fail creates for the large
    banks is going away out of this process. That is why they are
    uncomfortable with it and why they would rather have Basel and
    risk-based because they have a much bigger chance of beating
    that system because they are great at mathematics. They have a
    lot of Ph.D.s in mathematics.
        So yes, there are problems with the leveraged ratio, but
    there are a lot more problems when you can game the system.
        Mr. Schweikert. I know we are almost out of time.
        And Professor, I promise this summer I will look for some
    of your reviewed articles and read them because I have never
    read your stuff before. But I have binders of this type of
    material of every institution that failed in 2008 and their
    ratios. And binder after binder, I will see that you get some
    of it.
        Thank you, Mr. Chairman. I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentlelady from Ohio, Mrs.
    Beatty.
        Mrs. Beatty. Thank you, Mr. Chairman.
        And thank you, Ranking Member Waters.
        Let me also thank the panelists. While I was not here
    earlier, I had the privilege to watch by video much of the
    discussion.
        And in reviewing the discussion draft which I did read of
    the Financial CHOICE Act, I have to admit that I didn't get
    very far into it before it gave me great pause and that I had a
    lot of concerns.
        As a matter of fact, when I first started reading it on
    page one, the fact that the short description of the Financial
    CHOICE Act found on the first page in its statement that says
    that this bill repeals the provisions of the Dodd-Frank Act
    that make America less prosperous, less stable, and less free,
    I started asking myself this question, how is America less
    prosperous now than it was prior to the passage of Dodd-Frank?
        How is America less stable now than it was before the
    passage of the Dodd-Frank? How is America less free now than it
    was prior to the passage of Dodd-Frank?
        And certainly not to be sarcastic, but when I think about
    specifically if these ideas are part of the GOP's platform for
    financial regulatory reform heading into this fall and into the
    115th Congress, how does this legislation make America great
    again, and how is America greater now than it was prior to the
    Dodd-Frank?
        When I look at the data, Mr. Chairman, the Consumer
    Financial Protection Bureau has returned over $11 billion to
    over 25 million consumers, has the longest streak of private
    sector jobs growth we have had in 76 months, over 14 million
    jobs created, the Dow Jones average is up over 80 percent, and
    I could keep going and going.
        So Mr. Levitin, when I think about the author of the
    Financial CHOICE Act, it frequently cites Federal Deposit
    Insurance Corporation Vice Chairman Thomas Hoenig's proposal
    for regulatory relief and a simple 10 percent capital leveraged
    ratio as evidence of broad support for the ideas being proposed
    in this bill.
        Also, his regulatory relief proposal did not depend
    strictly on the size of the bank, but on the activity and the
    complexity of the bank.
        In addition to keeping a 10 percent equity-to-capital
    ratio, the vice chairman's proposal would require banks to
    effectively hold zero trading assets or liabilities. Does the
    Financial CHOICE Act also include this requirement for
    regulatory relief?
        Mr. Levitin. No. The Financial CHOICE Act does not include
    many of the protections that Vice Chairman Hoenig retains in
    his proposal.
        For example, the Volcker Rule would remain in place under
    Vice Chairman Hoenig's proposal. It is gone in the CHOICE Act.
        Mrs. Beatty. Okay. The proposal would also require banks to
    have virtually no derivative positions. Does the Financial
    CHOICE Act also include this requirement in the regulatory
    relief?
        Mr. Levitin. No, it does not. And the Financial CHOICE Act
    is really about capital and nothing more.
        And just a clarification that unfortunately Mr. Schweikert
    is not here for, capital is not the same as cash. Capital can
    be in illiquid assets and that is one of the problems with the
    CHOICE Act is it does not require any liquidity for large
    financial institutions. You can have a solvent institution that
    fails because it is illiquid.
        Mrs. Beatty. So if a bank is heavily engaged in derivative
    trading, a practice that Warren Buffet stated in his 2002
    letter to shareholders as time bombs for the economic system
    and described them as financial weapons of mass destruction, is
    it possible they could get regulatory relief under the
    Financial CHOICE Act?
        Mr. Levitin. Absolutely. And under the Financial CHOICE
    Act, banks would be incentivized to load up on the riskiest
    derivative positions possible. This is what Mr. Newell was
    saying.
        When you have just a simple leveraged ratio, there is the
    incentive to pursue riskier assets in order to maximize the
    return on equity.
        And then when you add in Title II of the CHOICE Act, which
    basically removes all credit risk from derivative contracts by
    ensuring that they are going to get paid a hundred cents on the
    dollar in a bankruptcy, why wouldn't you pursue those
    derivative contracts if you are a bank?
        And in fact, you can structure your loans through
    derivative contracts and get better treatment that way.
        Mrs. Beatty. Okay, thank you very much.
        Thank you, Mr. Chairman.
        And thank you, Ranking Member Waters.
        Chairman Hensarling. The gentlelady yields back.
        The Chair now recognizes the gentleman from California, Mr.
    Royce, chairman of the House Foreign Affairs Committee.
        Mr. Royce. Thank you, Mr. Chairman.
        Mr. Chairman, banks with stronger capital positions
    maintain higher levels of lending over the course of economic
    cycles with those that have less capital on hand. I think the
    FDIC has noted that better-capitalized banks compete favorably
    in the market and survive economic shocks without failing or
    without requiring bailouts.
        So I was going to ask a question of Mr. Allison here.
        I have been struck by a view which I think is rather
    myopic, a view from some of the critics of the Financial CHOICE
    Act who have suggested that the required higher capital levels
    will result in a sharp contraction in credit availability.
        Don't we also have to factor in the sharp reduction in
    compliance costs that will result from being freed from Basel
    III and freed from Dodd-Frank's endlessly complex mandates?
    Isn't that part of the equation here?
        And wouldn't it be that what is proposed by the chairman,
    wouldn't it be so that that would free up these significant
    resources that would be redirected to lending and redirected to
    job-creating activities?
        Mr. Allison. Absolutely. I think today banks are focused on
    the wrong thing. They are focused on making government
    bureaucrats happy instead of investing in their business and in
    their customer base.
        So yes, technically, okay, we have to raise more capital.
    But if that capital can be used productively to grow the
    economy, that is a good thing. It is just kind of like it is
    bad for banks to raise capital, that is a pretty strange
    argument to me.
        Today banks aren't doing what they are supposed to be doing
    because they are trying to make regulators happy instead of
    making good loans.
        Mr. Royce. And let me get back to this Basel III aspect of
    the question I asked about. And I will ask Mr. Purcell and Mr.
    Nussle.
        We have heard you and we have heard others say that the
    Basel III accord was intended to apply only to large, complex
    and internationally active institutions. However, the rules
    released by U.S. regulators would apply certain new capital
    rules to community banks and to large institutions alike.
        And you have the NCUA that has followed suit with its new
    risk-based rule. So is one-size-fits-all the right approach
    here?
        Mr. Purcell. It never has been the right approach in that
    we make up a different part of the economy, I don't even know
    what some of the ones that claim to be banks are compared to
    what we do in Big Spring. We don't worry about a lot of the
    leverages that go, we want to serve our community.
        And it isn't just the regulations, it is the customers
    being afraid of everything they have to go through to be
    treated like a criminal to apply for a loan. But Basel does not
    apply to the small banks.
        Mr. Royce. I want to jump in here on another question to
    Mr. Newell, if I could.
        Because as we just heard, community financial institutions
    are concerned about Basel III, but you raised something in your
    testimony that caught my eye. You said Europe is moving ahead
    with Basel IV discussions, contemplating yet another change to
    the regulation of bank capital.
        From what you know of the proposal so far, what would the
    impact be on our U.S. institutions? Do we have a seat at this
    table? Should we have a seat at this table?
        Mr. Newell. Sure. So I think the impact is very, very
    likely to be negative. These are actually a series of 11
    separate proposals all being hashed out in piecemeal fashion by
    the Basel committee. We are still waiting to see the final
    details, but they seem very likely to raise the amount of
    capital, again, it has to be held against trading activities.
    It seemed very likely to raise the amount of capital that has
    to be held against credit card lines, home equity lines,
    financing lines to businesses.
        Again, these are all very, very impactful, important
    proposals and they frankly are getting no airtime here in the
    United States, and we don't really have a clear sense of what
    position the U.S. regulators are going to take there,
    notwithstanding the fact that they would have very, very
    serious consequences here in the United States.
        Mr. Royce. Mr. Chairman, to be frank, I am concerned that
    while we sit here today discussing what the right capital
    standards should be for our U.S. financial institutions,
    foreign regulators are having similar discussions, and they are
    having theirs behind closed doors.
        So what is to stop U.S. regulators from adopting these
    changes, as they have done with Basel III, these changes from
    Basel IV that is underway with little notice, with little
    opportunity for comment, with no opportunity for a cost/benefit
    analysis?
        I yield back, Mr. Chairman.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from New York, Mr.
    Meeks.
        Mr. Meeks. Thank you, Mr. Chairman, and Ranking Member
    Waters.
        First, I want to affiliate myself with some of the comments
    of Mrs. Beatty. Because I don't know who would want to go back
    to 2008, if that is what make us, that going back, great again,
    I don't know that.
        But I would admit that there are no perfect bills and we
    can make improvements to all bills, including Dodd-Frank. In
    fact, this committee could pass comprehensive measures to
    provide meaningful relief to over 95 percent of banks in the
    Nation.
        And I want to emphasize that we could actually work on
    measures that can pass both chambers of Congress, both the
    House and the Senate, and be signed by the President and offer
    meaningful regulatory relief to almost 6,000 banks in this
    country, especially small and community and MDIs.
        So I am really disappointed that we have been so divided
    that we will end up accomplishing here nothing at all. At a
    time we all agree that banks can do more to help revitalize
    communities, that they need more financial services, and we are
    all debating proposals that are going far too far that we will
    never be able to pass and never agree upon, that we are
    debating something that is far too risky, that are not targeted
    to community financial institutions and, hence, that cannot
    gain the great majority and consensus needed to become law at
    all.
        A few days ago I had the privilege of welcoming OCC
    Comptroller Curry in my district in Queens, New York. We went
    on a tour and visited small banks in downtown Jamaica, New
    York, and we made stops at bank branches that had closed,
    highlighting the challenges that banks are facing today.
        We then proceeded to visit community development projects
    funded by banks through CRA incentives. And as we talked to
    these community bankers and local economic developers, there is
    consensus that Congress can do more to help these banks do more
    in their communities.
        And again, I stress that we can provide significant relief
    today to more than 95 percent of banks in the Nation without
    repealing the very foundation of the Dodd-Frank Act, which has
    greatly strengthened our banking sector and capital markets
    from the riskiest activities that caused the financial crisis
    in the first place.
        Regrettably, Mr. Chairman, I think the CHOICE Act is just
    far too extreme and goes way wrong and would send a dangerous
    message to our financial markets. How can we undermine FSOC and
    our ability to deal with systemic risk and TBFT financial
    institutions? How can we undermine our ability to have an
    orderly liquidation authority which is so central in containing
    contagion?
        How can we remove the Volcker Rule for large banks and
    couple with that the removal of risk weighting, which together
    are meant to limit the riskiest activities that pose the
    greatest risks to our banking institutions?
        Mr. Chairman, the proposal almost exclusively relies on the
    leveraged ratio. The leveraged ratio only deals with quantity
    of assets and is awfully insufficient when it comes to
    discouraging the riskiest activities and assets that banks are
    tempted to hold for higher returns.
        And the CHOICE Act goes further. It removes the liquidity
    safeguards that were imposed as one of the great lessons of the
    failures during the financial crisis. I can hardly comprehend
    how we could encourage such a dangerous combination of removing
    all of these crucial safeguards at this time.
        Let me just ask Mr. Levitin a quick question.
        Banks that get in trouble often do so because they often
    get too aggressive or too greedy in their banking strategy and
    take on too much risk. In fact, we have learned from the
    financial crisis that bankers' behavior toward excessive risk-
    taking was a major cause of this crisis.
        And hence, I am concerned about the message the CHOICE Act
    would send to bankers about their ability to take on more risk.
        Can you comment on how this Act can change risk-taking in
    banking and why we should be concerned about that?
        Mr. Levitin. Sure. The CHOICE Act, first of all, makes it
    possible for all banks, regardless of their capital level, to
    use depositor funds to speculate on the stock market, to
    speculate on derivatives because it repeals the Volcker Rule.
    So regardless of how well-capitalized a bank is, the CHOICE Act
    frees it up to engage in gambling with insured deposits.
        Secondly, because the CHOICE Act uses a simple leveraged
    ratio without any additional safeguards, it encourages banks to
    load up on higher-risk, higher-return assets.
        There are a lot of problems with risk-weighted capital
    ratios. I would not disagree with any of the criticisms made of
    them. But a simple leveraged ratio has its problems, too, and
    that is why it needs to be combined with other safeguards.
        The CHOICE Act, though, relies solely on that, on simple
    leveraged ratio.
        Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Illinois, Mr.
    Hultgren.
        Mr. Hultgren. Thank you, Mr. Chairman.
        And thank you all for being here.
        I want to address first questions to Mr. Allison, and I
    would love to get your response kind of from this last
    discussion, in your response as well.
        But let me ask you a question and then if you can kind of
    put it together that would be great.
        I know on June 15, 2015, there was a letter written to the
    editor of The Wall Street Journal by FDIC Vice Chairman Hoenig,
    and he wrote, ``Higher capital doesn't contribute to lower
    lending, the data shows that the opposite is true. Banks with
    stronger capital positions maintain higher levels of lending
    over the course of economic cycles than those with less
    capital. Additionally, better-capitalized banks compete
    favorably in the market and survive economic shocks without or
    requiring bailouts.''
        I would like to hear from you about the long-term growth
    strategy you put in place for BB&T while you served as its CEO.
    What decisions did you make leading up to the financial crisis
    that helped BB&T weather such a severe economic shock? And how
    much focus did you put into managing BB&T's leveraged ratio?
        Chairman Hensarling. I'm sorry, would the gentleman
    suspend?
        A procedural vote has been called on the House Floor. There
    are 14 minutes and 16 seconds left. We will continue with the
    hearing, and perhaps Mr. Pittenger, Mr. Tipton, and Mr. Rothfus
    could go vote and return immediately. And Mr. Hultgren can
    continue.
        The gentleman may proceed.
        Mr. Hultgren. Mr. Allison?
        Mr. Allison. Okay. In terms of the question, Professor
    Levitin assumes that bankers are fools, there is no discipline,
    we are going to just go take crazy risks. And just because we
    have a stronger capital position, that is not true.
        One reason that BB&T got through the financial crisis is we
    had a stronger capital position and we chose before the crisis
    not to do the kinds of loans that were very destructive during
    the crisis because we knew they wouldn't work out.
        So we wanted to be in business for the long term. And we
    were able and willing, although the regulators wouldn't let us,
    to lend through the crisis. We had lent through the 1980s
    crisis, we went through the 1990s crisis. This time they
    stopped us from doing what we were prepared to do, which was
    make loans to our customers and get them through the crisis.
        Regulators put a lot of people out of business
    unnecessarily and that is why the crisis ended up being so
    deep.
        Mr. Hultgren. Thank you.
        Mr. Purcell, in practice, do you have an estimate of how
    many banks would elect to increase their capital to the
    requisite level to achieve regulatory relief under the CHOICE
    Act? As we know, raising capital can be expensive, but so is
    complying with reams of new regulation from Dodd-Frank and
    Basel.
        How would you as a banker weigh these costs and benefits?
    And what is the process for raising additional capital?
    Obviously, this varies by institution, but do you think there
    are willing investors and, as we hear far too often, banking is
    a tough business nowadays?
        So I would like to get your thoughts on how this would
    impact.
        Mr. Purcell. In rural America, raising capital is not an
    easy solution. You can retain your earnings and that is
    something that we have done over the past couple of years in
    our bank trying to get the capital up to 10 percent. And we are
    nearly there.
        The Texas Bankers Association had a tour and we toured all
    of Texas in a week's period, went to 17 different locations.
    And we asked the same question, and it was approximately 50/50;
    about half of the banks in Texas currently have the 10 percent
    and there are a number that don't.
        But we are still assessing what is satisfied at 10 percent.
    Should it be 9 percent? But it is not going to be easy. If you
    are not in a high-growth area, it is not going to be easy to
    raise capital.
        Mr. Hultgren. Yes, thank you.
        Congressman Nussle, if I could address this to you. I
    wonder, did credit unions play a significant role in causing
    the financial crisis? If not, why would Democrats force a bill
    through Congress that subjected you to significantly more
    stringent regulatory requirements?
        Mr. Nussle. I am not sure I can respond to the second
    except to say that I think there is a tendency to apply one-
    size-fits-all solutions. It just seems to be a tendency of our
    policy process these days, unfortunately. And I think we were
    kind of folded into that as a result.
        But no, we don't feel like we caused the crisis. Our
    insurance fund was not impacted by the crisis. We held strong
    capital ratios. We do now, we continue to do now. We don't
    raise capital easily and so it is something that is very
    precious to our institutions. And we have a very conservative
    model which in and of itself, I think, helps mitigate the risks
    of some of the other challenges that might be out there that I
    know Professor Levitin has referred to.
        Mr. Hultgren. Yes. Mr. Nussle, really quickly, do you
    believe the capital election provision in Title I of the CHOICE
    Act would provide meaningful regulatory relief to credit unions
    with the most conservative balance sheets? And what percent of
    credit unions maintain a simple leveraged ratio at or above 10
    percent?
        Mr. Nussle. We are over 60 percent now and quite a few that
    are close and I think would move very quickly toward a 10
    percent number if in fact that is what is decided.
        Mr. Hultgren. Great, thank you.
        Thank you all.
        I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Maine, Mr.
    Poliquin.
        Mr. Poliquin. Thank you, Mr. Chairman.
        Thank you all very much for being here today. I appreciate
    it.
        For those of you who haven't planned your summer vacation
    to Maine it is not too late.
        [laughter]
        We are a beautiful State of hardworking people,
    independent-minded. We have blueberry pie and lobster and moose
    and the whole thing up there. And our district is very much
    like yours, Mr. Purcell. We have two population centers:
    Bangor, with 35,000 people; and Lewiston/Arbor, which we call
    LA, that has 35,000 people, and we have 400 small towns.
        And if you drive through the small towns in our district,
    what you will find is a police station, usually a volunteer
    fire department, a little library, a convenience store, maybe a
    little league field and a community bank or a credit union.
        And the communities in these small towns throughout
    America, not only Maine, revolve around these institutions. It
    is so important to make sure that we have a government that
    helps these institutions and not hurts them.
        Now, we all know and it has been discussed here today that
    for years Washington regulators made it very easy for a lot of
    folks to own homes, buy homes and they couldn't afford them.
    And then when the real estate market collapsed, it took the
    economy with it.
        And of course, Washington responded the way it usually
    does--it overreacts and it tries to come in and save everybody
    with a smothering set of regulations. And they were really
    designed for these large, money-centered banks, not for our
    credit unions, not for our small, local banks.
        But we are caught in the same net and it is really a shame
    because now when you travel in our district, just like yours,
    Mr. Purcell, that you said, you listen to our folks who run
    credit unions and local banks and they are just unable to make
    the car loan or a home mortgage, extend the home mortgage or a
    small-business loan they way they could before, even though
    they know the families and have for three or four generations.
        So what I have found in my work in the private sector is
    that when regulations go up, costs go up. When costs go up,
    choice goes down. So it is no wonder that we don't have free
    checking accounts throughout our industry, this industry, and
    haven't for a long time. It is no wonder why the monthly fees
    that your credit union bank or bank charges are going up.
        So I would like to extend this question to you, Mr.
    Purcell.
        Most of the community banks, local banks throughout our
    country and our credit unions have plenty of capital to operate
    safely and effectively. If the CHOICE Act becomes law, could
    you be really specific with the folks who are there listening,
    the folks back in my district in Maine, what behavior might
    change at your local bank when it comes to services offered,
    reduction of fees, extension of more credit?
        Mr. Purcell. That is a tough one because I am not sure what
    all relief is coming with the CHOICE Act.
        The 10 percent is attainable, it is realistic to not have a
    complicated business and have the regulations tailored for our
    business, I think is extremely important.
        I think the attitude of our customers as well as the
    employees of the institution would be significantly different.
    If people said you make and you live with your decisions, and
    if you don't you go out of business, but if we do not change we
    are going to be absorbed by someone else.
        Mr. Poliquin. Mr. Nussle, would you mind commenting with
    respect to the credit unions. And in particular, I am asking, I
    am not trying to lead the witness, I am really asking you a
    straightforward question, if there is relief as dictated in the
    CHOICE Act that has extended to our credit unions, what might
    you see on the ground with respect to the extension of credit,
    growing economy, more jobs in these communities?
        Mr. Nussle. It gives the--certainly having the ability to
    lend and to have some of those costs that are certainly
    restricting that at this point in time and as well as just time
    constraints would make that easier.
        But I have an actual--I have talked to a few of my credit
    unions about this, and interestingly enough, you will find this
    interesting as almost maybe a case study on how behavior will
    change.
        Already those credit unions that are well-capitalized to
    above 7 strive for more capital because they see a change in
    the examinations and the examiners that come through. The
    higher capital ratio, the more they tend to not be quite as
    restrictive or concerned.
        And so they already see a behavioral change on the part of
    regulators the more capital that they retain. So it is kind of
    interesting.
        So I think that behavior is going to manifest itself in a
    law like this as well.
        Mr. Poliquin. Thank you, gentlemen.
        Chairman Hensarling. The time of the gentleman has expired.
        Pending conclusion of the single vote on the Floor, the
    committee will stand in recess.
        [recess]
        Mr. Huizenga [presiding] The committee will come to order.
        And at this point, the Chair recognizes Mr. Ross, of
    Florida, for 5 minutes.
        Mr. Ross. Thank you, Mr. Chairman.
        I want to thank the panel for being here.
        Mr. Allison, I agree with you and your opening statement.
    And I firmly appreciate it. I think that the regulators were
    asleep at the switch. I think that they forced too many of our
    lending institutions to use their capital in areas that were
    not prudent. And that, in and of itself, compiled into a
    terrible situation for us in 2007.
        And here we see an overreaction where we think, well, more
    regulation because we know best, because we are the regulators.
    And yet, none of them have spent any time on Main Street, none
    of them have spent any time trying to be an entrepreneur.
        When you state that the founder of Home Depot couldn't
    start his business today, that is a sad state of affairs for
    America, a country that was founded on the entrepreneurial
    spirit that is so dependent on the lifeblood of commerce and
    the availability of capital.
        And so my question to you is, what are the consequences
    when Washington imposes one-size-fits-all rules that dictate
    who they can and cannot lend to, no matter their character?
    Aren't lower-income Americans disproportionately harmed?
        Mr. Allison. No question. Dodd-Frank has been terrible for
    low-income Americans. And we are talking about this income gap
    that is happening in America and we are ignoring the regulatory
    cause of this. It is not the only cause by any means, but it is
    definitely a cause.
        Mr. Ross. And when you look at, let us say, 10 percent, for
    the sake of conversation, for the sake of the CHOICE Act we
    have said 10 percent capital requirements, but yet we are not
    saying then you are free and easy. You still have the CAMELS
    rating that you have to uphold by. And is that not in and of
    itself an opportunity for the regulatory environment to
    continue to subjectively prevent a lending institution from
    exempting themselves, even if they have a 10 percent capital
    ratio?
        Mr. Allison. Absolutely. But I will say again, in my years
    of experience I have seen very few times the regulators
    actually identified things in advance.
        What I think less regulation would lead to is more market
    discipline.
        Mr. Ross. I agree. And not only that, but if they can
    leverage that capital that is well over 10 percent being held
    and they make it available to the consumer, whether it be
    residential, whether it be consumer, whether it be commercial,
    whomever, and they make it available at a lower rate and you
    start spawning investment, then you also create competition.
    And would it not mean that market discipline would then suggest
    that, by golly, if X, Y, Z institution is doing this and doing
    well, why would I not do the same thing and increase my capital
    reserves instead of saying, well, I will just hold it and play
    risk because this is what I can get by with with the regulatory
    environment?
        Mr. Allison. Absolutely. It would create more market
    discipline, more competition between banks. But also by banks
    being willing to start up more businesses, it would be more
    competition in the economy as a whole.
        We have created a massive subsidy for big businesses. You
    can't start anything up; therefore, if I am in business I don't
    have to invest because, hey, I have no new competitors.
        Mr. Ross. And that is a little frightening because we see
    the government get in the business of business more and more as
    we move on, whether it be the insurance business, whether it be
    in the banking business, whatever it may be. If they want to
    instead tax, take a premium and call it whatever they want,
    that is what we are going into.
        So my question to the panel would be, this Administration
    has embraced itself since the passage of Dodd-Frank on
    enhancing access to credit. Is there any evidence that that has
    been made available prior to the Dodd-Frank passage?
        Is there any, whether it be anecdotal or actual, is there
    any evidence that this Administration has increased access to
    credit?
        Mr. Newell?
        Mr. Newell. Yes, Congressman, if I may. I think, certainly,
    because we follow these figures quite closely, you continue to
    see major headwinds against credit and you especially see that,
    again to where you started against, in terms of folks who have
    less than pristine credit and credit availability to them.
        I think maybe just one specific example because it is
    something that we worry a lot about in terms of how the current
    regulatory regime is driving some of these impacts is the CCAR
    exercise.
        Mr. Ross. Right.
        Mr. Newell. The CCAR exercise, because it involves an area
    that has a very, very large jump in unemployment. What that
    means is loans to folks or small businesses that are very
    sensitive to unemployment changes, and those typically tend to
    be loans to folks of smaller means or smaller small businesses,
    those are the ones that are actually impacts the most harshly
    under CCAR. And so that impact can create a very strong
    disincentive, again, relative to other activities for that kind
    of activity.
        Mr. Ross. Do you believe that these rules that are being
    suggested here, the rules for the capital requirements, should
    apply to smaller financial institutions? Not the ones, there
    are more community banks, the credit union ones that have a
    higher capital reserve, and yet they are paying probably
    greater proportionally in compliance costs than the larger
    institutions. Shouldn't they be susceptible to at least be able
    to take advantage of this?
        Mr. Allison. Yes.
        Mr. Newell. Sure.
        Mr. Ross. Thanks. I realize my time is up.
        Mr. Pollock. For sure, Congressman.
        Mr. Ross. Thank you all.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from North Carolina,
    Mr. Pittenger.
        Mr. Pittenger. Thank you, Mr. Chairman.
        And I thank each of you for being here today. I have
    learned a great deal.
        I would like to respond to some comments that my loyal
    opposition made a few minutes ago regarding the merits of the
    CHOICE Act and whether it is prosperous and stable and free.
        And I would think we should consider the present course of
    our economy with 1\1/2\ percent economic growth, 12 to 20
    million people who are unemployed or underemployed, it is
    seasonal factors there, low-income minority individuals or
    demographic group has risen the least in this economy in the
    last 7 years. We have 10 percent-plus real unemployment when
    you consider the underemployed and unemployed.
        And they tout 14 million jobs since 2008. That comes to
    about 160,000 jobs a month. That is below the low end of our
    recovery in the 1980s where after 2 years we were creating
    300,000 jobs and 400,000 jobs and 500,000 jobs and in 1 month a
    million jobs, growing at 6 percent.
        So I would like them to reflect a little deeper on the
    merits of this current economy and as such the impact that the
    Dodd-Frank bill has had.
        Mr. Purcell, having grown up in Texas, I have an
    appreciation for the State. And certainly, you are from a rural
    area.
        You did say in your testimony that there have only been
    three startup banks since 2010. Is that correct?
        Mr. Purcell. To the best of my knowledge, and that wasn't
    just in Texas; that was in the United States.
        Mr. Pittenger. I believe you are right. But I am glad to
    have that clarified.
        Mr. Purcell, having served on a community bank for a
    decade, I certainly appreciate the merits of the banking system
    and the small banks and what they offer. But what would you
    consider should be done to provide this type of access to
    capital for small businesses, particularly those that are in
    rural areas?
        How has economic growth been impeded? And what have been
    the factors that have kept small banks and community banks from
    having startups for capital to be invested in these types of
    good businesses?
        Mr. Purcell. I am kind of slow, I am not sure I will get
    all your questions answered or if I can remember them all. But
    one thing is you cannot legislate a perfect world. And so for
    everything that we do, there are going to be consequences
    because of our actions later on.
        But if we look at the history of things, it was not the
    community banks in rural America that caused the problems, but
    yet they are sharing the responsibilities for cleaning it up.
        We have to have hope, our people have to have hope in the
    ability to succeed and better themselves, either as an
    entrepreneur in a new job or in taking care of their family.
    And once they lose hope, we have a tough battle. And right now
    there are a lot of people who have lost hope and they don't see
    any way to comply with all of the regulations, whether it be
    from the individual in the bank or whether it be from our
    customers.
        Mr. Pittenger. Thank you.
        Mr. Nussle, quickly, I would like to ask you, kind of help
    me understand the significant role that credit unions played in
    causing the financial crisis.
        Mr. Nussle. Of course, we don't feel like we did either. I
    would share Mr. Purcell's comment on that and feel like we are
    part of the solution that you should be turning to if we want
    to create opportunities and jobs.
        As you know, people in search of credit are going to go
    find money. And the question is, do you want them to go through
    a regulated, safe and sound institution or do you want them to
    go into a predatory institution or a predatory situation?
        And I think what we are doing is we are making it more
    difficult for the people that we are trying to help, all of us,
    that you are trying to help to build that credit and establish
    that credit in a safe and sound way.
        Mr. Pittenger. The enactment of the Dodd-Frank Act clearly
    has impacted your industry. Would you just give us quickly some
    salient points to that regard?
        Mr. Nussle. Since 2010, we have seen about a $3 billion
    increase in annual regulatory costs year after year. That is
    the kind of challenge I said before, all of the different pages
    of regulations. And whether you are a big institution or a
    small, you have to comply, you have to look at all of those.
    Even if you have an exemption as a smaller institution, you
    have to read all 6,000 pages to find out where your exemption
    is.
        So, it is that kind of thing that makes it difficult to
    continue to establish and build the credit with the people that
    you are serving.
        Mr. Pittenger. Thank you, my time has expired.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Pennsylvania,
    Mr. Rothfus.
        Mr. Rothfus. Thank you, Mr. Chairman.
        And like my colleague from North Carolina, I, too, was
    struck by some of the suggestions across the aisle that Dodd-
    Frank has not made us less prosperous. And I think simply put,
    if you look at the numbers that my colleague was talking about,
    from North Carolina, this simply isn't your parents' recovery,
    it is not your grandparents' recovery when you look at the drag
    that we have had and the average economic growth coming out of
    recessions and depressions over the last 80 years. And this is
    anemic growth at 1 percent, 2 percent.
        And the differential is fewer jobs, looking at the lowest
    labor participation rate since 1978 and less income. People
    aren't getting raises because the economy has not been
    prosperous.
        Indeed, Chair Yellen was here a couple of weeks ago and for
    the third time talking at length about the ``headwinds'' that
    have been facing the economy, often referring to geopolitical
    events and other uncontrollable external factors.
        I contend that many of the headwinds are man-made,
    anthropogenic to borrow a phrase.
        Mr. Allison, in your testimony, you remarked, ``One tragic
    irony is that by tightening lending standards, the Federal
    Reserve has undermined its monetary policy. They cannot get the
    money supply to grow because the velocity of money has slowed
    because banks are only making loans to large businesses.'' You
    also add that the Fed is effectively subsidizing large firms.
        What are the main provisions in the CHOICE Act that will
    help to alleviate this self-inflicted constraint on growth?
        Mr. Allison. The fact that banks can significantly
    eliminate a big chunk of the regulatory burden will get them
    back to doing the core lending that they used to do, not just
    before the financial crisis, but for 40 years.
        So banks today are focused on making regulators happy
    instead of going out and making the kind of loans and they
    can't literally make the kind of loans that drive the economy.
        And I do think it is ironic that the Fed keeps printing
    money, but it doesn't do anything, because banks are money
    multipliers by making loans. And they have destroyed the money
    multiplier.
        Mr. Rothfus. Yes. With this kind of accommodative monetary
    policy, you would expect us to be booming.
        Mr. Allison. We should be booming or maybe highly
    inflationary. But if you destroy the multiplier, because banks,
    savings and loans, credit unions can make loans, then the
    multiplier is collapsed.
        Mr. Rothfus. You may have noticed a slide on our screen
    quoting Fed Governor Tarullo that a 10 percent leveraged ratio
    is too rigid, it can be gained by simply increasing balance
    sheet risks. But doesn't Mr. Tarullo assume that the stock
    price of the financial institution would not react to the risk?
    He would be correct if the Fed keeps bailing out banks. But
    under CHOICE's bankruptcy regime, wouldn't shareholders face
    the full risk of their decisions?
        Mr. Allison. I think you are exactly right. What Mr.
    Tarullo says is totally wrong. If you had less evidence, if it
    was clear that the banks could not be bailed out, then markets
    would discipline banks and they would care how much capital and
    how much risk they were taking.
        And it is also not in the long-term advantage of somebody
    running a bank to make crazy decisions if they are going to be
    punished by being allowed to fail.
        Mr. Rothfus. You would expect those investors to be a form
    of discipline.
        Mr. Allison. They discipline all other companies, right?
    Now, that doesn't mean that there won't be some banks that fail
    because investors aren't perfect, but investors will be
    disciplinaries if banks are not perceived to be protected.
        Mr. Rothfus. Mr. Nussle, credit unions have previously
    testified that they have had to cease offering certain products
    and services to their customers as a result of increased
    regulations. What are some of the products and services that
    have been most affected?
        Mr. Nussle. For instance, mortgages. Just take that. Some
    of the smaller institutions who don't do that many--they are in
    smaller communities or it is an area that they provide for
    their members, that is one that I often will hear that is
    curtailed and severely.
        And again, if you are trying to establish credit, if you
    are trying to buy a home or whatever it might be, that is
    pretty tough for people in their community to not have that
    access. So that would probably be the marquee one that I would
    put out there.
        Mr. Rothfus. Other remaining products and services they
    offer, it is generally the case that compliance costs are
    passed along to customers. If so, to what extent have costs
    increased for frequently used financial products of the credit
    unions?
        Mr. Nussle. Yes, they have to be. Certainly a credit union,
    while it is a cooperative and is peer-to-peer lending, is
    members helping members--we have to run a business with a
    bottom line to be able to maintain safety and soundness. And
    so, of course, we have to be able to pass on those costs, if
    incurred, throughout, spread out, whether it is in lower
    returns on deposits, or it has to be higher rates for lending.
        Mr. Rothfus. I thank the chairman, and I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentlelady from Missouri, Mrs.
    Wagner.
        Mrs. Wagner. Thank you, Mr. Chairman.
        Thank you all for joining us today to discuss an important
    topic on how we rethink financial regulation in order to make
    our system safer and to boost financial growth.
        Since Dodd-Frank, we have seen bank small-business loans
    decline by 11 percent, and 58 percent of startups report unmet
    financing needs. Consistently, we see the effects of increased
    bank regulation fall disproportionately, as discussed, on
    smaller businesses that have few alternative sources of
    finance. A lot of this comes from what I consider this one-
    size-fits-all regulation being applied to banks and
    institutions of all sizes.
        Mr. Purcell, what has your institution had to do to ensure
    compliance with these regulatory mandates? And what kinds of
    investments have you had to make as a result?
        Mr. Purcell. Our loan demand in Big Spring is not very
    great right now. We are in the Permian Basin so there has been
    some stress in the oil- and gas-producing parts of the United
    States.
        We got completely out of the mortgage business because the
    type of loans that we made did not comply because they were a
    balloon note.
        I had dinner last night with some bankers from Mississippi
    and there were five there and they said they do not even make
    mobile home loans now.
        Mrs. Wagner. Unbelievable.
        Mr. Purcell. I don't know what status you are in society,
    but if you are not receiving the small loans to buy a house or
    you are not able to buy a mobile home, I would say that is not
    helping the low income.
        Mrs. Wagner. So not only is it affecting the cost of
    compliance for your bank, your institution, you are actually
    seeing these regulatory burdens, what they mean for actual
    consumers and your ability to provide them the credit that they
    need, especially when it comes to small-business loans or small
    loans of this kind of purchase.
        Mr. Purcell. Yes, ma'am.
        Mrs. Wagner. Mr. Allison, as you operated BB&T during the
    financial crisis, would you say financial regulation was
    already highly complex back then? And if you could then go on
    to comment, have things become more complex?
        Mr. Allison. Absolutely. The financial industry was the
    most regulated industry in the United States based on just the
    number of pages of regulation and the multiple regulators
    before the financial crisis. It is not surprising the most
    regulated industry is where we had the biggest problem. And
    there should be a lesson in that.
        But instead of saying, well, hey, maybe these regulations
    made a mess, we ended up with many, many more regulations that
    are doing just what you said. It is making it very difficult
    for banks to make small-business loans and the traditional
    loans to consumers.
        My bank used to do a lot of the real estate kind of
    financing, small houses, somebody wants to add a carport, can't
    do it interestingly enough because the consumer compliance
    rules keep you from helping consumers.
        Mrs. Wagner. So one-size-fits-all on these financial
    institutions is definitely disproportionately affecting
    smaller-sized people who want to invest or want to take out a
    loan. Is that what I am hearing from both of you?
        Mr. Allison. Yes, it is hurting smaller institutions more.
    But by the way, I would say a lot of these rules are
    destructive for everybody, like the tightening of lending
    standards for traditional mobile homes and things like that. It
    is actually bad for the economy.
        So yes, it is hurting smaller institutions more and a
    number of these things are bad for everybody.
        Mrs. Wagner. Let me ask, Mr. Allison, the EU is currently
    undergoing an exercise called a call for evidence and it is
    looking at all their post-financial-crisis regulations that
    have been released and how they could be simplified for
    economic growth.
        Additionally, the CHOICE Act offers a simplified approach
    to capital requirements to replace a myriad of complex Dodd-
    Frank regulations.
        Could you comment, sir, on how moving toward simplification
    in our financial regulations not only helps make our system
    safer, but also helps to boost economic growth?
        Mr. Allison. No question about it. If something is not
    understandable, is overly complex, then it is easy to screw it
    up and it is easy to mismanage it. And simplification will
    allow financial institutions to spend a lot less time on
    regulation and I think banks would rather have higher, worse,
    whatever, and more simple regulation because then they can
    manage against them. And that will allow them to get back to
    their business instead of focusing on regulators and the
    regulatory costs. They can go help people make more successful
    businesses and happier consumers.
        Mrs. Wagner. Great, thank you, Mr. Allison. I appreciate
    it.
        I appreciate all of your time being here today.
        Mr. Chairman, I yield back.
        Chairman Hensarling. The gentlelady yields back.
        The Chair now recognizes the gentleman from Kentucky, Mr.
    Barr.
        Mr. Barr. Thank you, Mr. Chairman. And thank you for your
    leadership in introducing the Financial CHOICE Act.
        Mr. Allison, a question for you. As the former CEO of a
    regional bank, a mid-sized bank, you have a view of the kind of
    institutions that are smaller than you and the institutions
    that are larger than you.
        So I am interested in your take on the following questions.
    What kind of a regulatory regime benefits small institutions?
    Is it a highly regulated environment with high costs? Does that
    benefit the community bank or does that benefit the larger Wall
    Street mega banks?
        Mr. Allison. I started out at BB&T when it was a small bank
    and then it grew to be a larger bank, so I really have personal
    experience with that.
        The regulatory cost is much higher in a smaller institution
    because the CEO has to spend his time doing that. The bigger
    the company gets, the more you can hire other people to do that
    kind of work. And the CEOs and the relatively small number of
    people actually impact the productivity of smaller institutions
    more.
        Mr. Barr. So in other words, the more volume, the more
    complexity of regulation, the better it is from a competitive
    standpoint for larger institutions.
        Mr. Allison. Yes. And I think Jamie Dimon basically said
    that. He basically said Dodd-Frank is a competitive advantage
    for us. It is probably true.
        Mr. Barr. How about orderly liquidation authority that
    arguably gives larger institutions a funding advantage, do you
    see that? Does the orderly liquidation authority that is
    codified in Dodd-Frank, does that help small banks, community
    banks, or does that help large banks in terms of
    competitiveness within the banking marketplace?
        Mr. Allison. It creates the perception of too-big-to-fail.
    And I think that is why large banks like it, right?
        I have to say, I have a very different perspective of the
    financial crisis. I think big banks should have been allowed to
    fail. I don't think the world was getting ready to go crazy, it
    was just a huge flight of quality. Money was going to healthy
    institutions, away from unhealthy institutions.
        Markets can deal with failures, they just can't deal with
    ambiguity.
        Mr. Barr. So what I am hearing you testify today is that
    Dodd-Frank's regulatory approach has actually helped Wall
    Street banks and hurt small-community banks.
        Mr. Allison. It has helped them relatively.
        Mr. Barr. Relatively.
        Mr. Allison. It will help them in the long term because if
    you destroy the competitors that are coming up, it actually
    subsidizes them in the long term.
        Mr. Barr. Is it fair to say that Dodd-Frank creates an
    unlevel playing field for larger institutions over smaller
    community banks?
        Mr. Allison. It does. And a couple of people have talked
    about this. Theoretically, a lot of smaller institutions are
    immune from Dodd-Frank. That is not what is going to happen in
    the real world.
        In the real world, if I am regulating a small institution,
    I am a regulator, I am going to apply the same rules to that
    because if a small bank gets in trouble I am going to look bad
    and I am worried about my career. And so being exempt is a
    joke.
        Mr. Barr. And so since the enactment of Dodd-Frank, there
    are about 1,500 fewer institutions in America. Has that
    actually helped to consolidate and concentrate risk as opposed
    to diffuse risk?
        Mr. Allison. No question.
        Mr. Barr. Okay.
        Mr. Allison. It has actually increased it.
        Mr. Barr. Okay. And finally one final question, what is the
    greater risk to our financial system, heavily regulated, under-
    capitalized banks or less regulated and highly capitalized
    banks?
        Mr. Allison. No question, less regulated, highly
    capitalized. And there is a trade-off and I want to reemphasize
    this: Banks simply cannot afford to pay the regulatory costs of
    Dodd-Frank and be highly capitalized.
        As I mentioned earlier, Citigroup is only at 6.4 percent
    leveraged capital ratio. The reason the regulators haven't
    raised it higher is they know it won't work. But they would
    prefer regulation because that is their job over capital, and
    there is a definite trade-off.
        Mr. Barr. In my final time, Mr. Newell, a question for you.
        This relates to Professor Levitin's comments that
    irrespective of the capital requirement opt-in provision in the
    Financial CHOICE Act, some of the deregulatory measures that
    occur in Financial CHOICE, regardless of the choice made by an
    institution, he contends are destabilizing to the financial
    system, for example, repeal Volcker, repeal of the risk
    retention requirement, and some of the changes to the
    derivatives regulation.
        Do you care to respond to those allegations or those
    arguments?
        Mr. Newell. Certainly. So I think, with respect to the
    various provisions of the CHOICE Act, I think some of them are
    net positive to financial stability, I think some of them are
    net negative to financial stability. So I think fortunately it
    really just depends on the individual provision one is talking
    about.
        Mr. Barr. Mr. Pollock, do you think that repeal of Volcker
    would be destabilizing to the financial system?
        Mr. Pollock. Congressman, I do not. I don't think Volcker
    had much to do with the crisis and that the rule didn't have a
    lot of solid rationale in the first place, so we can get rid of
    it.
        Mr. Barr. Thank you. I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentleman from Colorado, Mr.
    Tipton.
        Mr. Tipton. Thank you, Mr. Chairman. Thank you for your
    leadership on the CHOICE Act, and I thank our panel for taking
    the time to be able to be here.
        Mr. Purcell, I thought it was interesting as you were
    talking because you were describing in Texas what we see in my
    rural district in Colorado, oftentimes as mobile homes are the
    homes that people have access to, but just looking at the
    impact on a community, that the rules and regulations that we
    are seeing under Dodd-Frank.
        I assume in your bank--I served on a small-community bank
    board as well, and we had plumbers, electricians, and home
    builders all impacted with those mortgage loans that were being
    made. And you have a collateral of domino effect that actually
    moves in.
        Is there a concern? Because we have had, I think, abundant
    testimony frankly from Chair Yellen, Governor Tarullo, and all
    of the Administration officials in terms of the trickle-down
    effect of rules and regulations.
        Right now we are still waiting for 40 percent of Dodd-Frank
    to be able to come into play. How is this going to have a real
    impact on those community banks, their ability to be able to
    make those loans to the communities that frankly right now and
    be able to buttress, to a little bit of Mr. Pittenger's
    comments, of the impacts of an economy that is not working for
    all Americans? For the first time since we have been keeping
    statistics, we have more small businesses shutting down than
    there are new business startups. That typically describes rural
    America.
        Mr. Purcell. And the shoe hasn't dropped yet because I
    believe the CFPB is going to start investigating how they can
    help on the small-business lending and start passing out fines
    on that, too.
        So, if it costs you $125 or $130 a loan to make in
    compliance costs, what do you have to charge a $500 borrower to
    get your money back? You are going to lose money on it.
        How many businesses can keep going when they lose money?
    They can't. So the size of the loan keeps growing up to cover
    those costs and then you have the CFPB coming in saying let us
    go ahead and attack the small business. It has nothing to do
    with the economy, it is just that you guys don't know how to
    loan money. Or better yet, let the Post Office do it.
        Mr. Tipton. Great.
        Mr. Allison, would you maybe like to comment a little bit
    in terms of the impact of those regulations, in terms of
    startups and small businesses?
        Mr. Allison. I think they have been traumatic. As I said
    earlier, I started my career as a small-business lender. That
    is what BB&T did, that was our core business. We did a lot of
    what I would call venture capital lending where you make a
    judgment of the individual and the idea instead of just the
    numbers.
        I was fortunate enough to help a lot of small businesses
    become bigger businesses. And it is not just startup. There is
    a moment where a business says, I am going to have two
    locations or I am going to have a hundred. And at that moment
    you have to make a judgment call. You cannot do that in today's
    marketplace.
        The way the regulators have tightened lending standards,
    they would immediately make you charge that loan off or they
    would require so much down payment that the guy couldn't do it.
    It kills that market.
        And that market, even though only a small percentage of
    them get to be bigwigs, that is a huge job creator and really
    important in terms of prosperity.
        Mr. Tipton. I find it interesting, we have had a lot of
    commentary, a lot of testimony, your comments here today on the
    importance of our community banks, our small credit unions,
    delivering a service to communities.
        But Mr. Purcell points out, in Texas they lost 149
    community banks. I assume mergers probably took place. Is Dodd-
    Frank actually driving a self-fulfilling prophecy and rather
    than eliminating too-big-to-fail actually driving it into a
    more consolidated market, which is going to create far more
    challenges, far more risks for the economy as we move forward?
        Mr. Allison?
        Mr. Allison. No question it is encouraging consolidation.
    And I will have to say this: I am not sure the Fed doesn't like
    that because the Federal Reserve would much rather regulate a
    relatively small number of banks which they can have a huge
    control over than a lot of banks running in a different
    direction.
        So it may not be a conscious policy, but I am almost
    positive it is an unconscious policy. They like the
    consolidation process because it gives them more control and
    that is what they think is good.
        Mr. Tipton. I appreciate that.
        And Mr. Chairman, I think as we listen to this testimony, I
    am hearing stories about communities, I am hearing Home Depot
    would not start up under the regulatory environment today. I am
    hearing from credit unions that are saying that they are
    struggling to be able to provide a service to rural
    communities.
        And I want to applaud your leadership in regards to the
    CHOICE Act to try and be able to open those markets back up to
    our local communities to be able to make those real decisions
    at the local level.
        To be able to make something, Mr. Allison, you spoke to in
    terms of a character loan, people who actually know their
    customers, to be able to open that economy, that real capital
    so that we can get this economy moving and let all Americans
    share in some future prosperity.
        I yield back.
        Chairman Hensarling. The time of the gentleman has expired.
        The Chair now recognizes the gentlelady from Utah, Mrs.
    Love.
        Mrs. Love. Thank you, Mr. Chairman.
        I would like to thank all of you for being here today. It
    is really beneficial for me to hear your expertise and just
    your experiences in this area.
        I want to change gears a little bit and focus on the
    Volcker Rule.
        From its inception, the Volcker Rule has been a solution in
    search of a problem. It seeks to address the activities that
    have nothing to do with the financial crisis and the practical
    effect has been to undermine the financial stability rather
    than preserve it.
        The Volcker Rule will increase borrowing costs for
    businesses, lower investment returns for households, and reduce
    economic activity overall because it constrains market-making
    activities that already reduce liquidity in key fixed-income
    market-making activities.
        Repeal of the Volcker Rule, as the CHOICE Act provides,
    will promote more including the corporate bond markets and will
    promote more stable financial systems.
        So this is my question for Mr. Pollock: Why have the five
    regulators charged with implementing the Volcker Rule yet to
    find any connection between the Volcker Rule and the
    precipitous drop in bond market liquidity?
        Mr. Pollock. There is something else they haven't found,
    Congresswoman, which, as you said in the beginning, is a link
    between the financial crisis and the things prevented by the
    Volcker Rule in the first place.
        If you are committed to the rule, of course, you don't want
    to find things that are wrong with it. That would be a
    speculation of mine.
        Mrs. Love. Okay. Has the Volcker Rule, in your opinion, had
    any impact on cost of hedging risk? And what consequences does
    that have for businesses and other customers of banks?
        Mr. Pollock. I am not an expert on this particular topic,
    Congresswoman, but I believe that it is true what you say, that
    whenever you tie up an activity with more and more regulation
    you are going to create problems that you didn't mean to
    create, but you have created them anyway.
        Mrs. Love. Mr. Allison, do you have anything to add to
    that?
        Mr. Allison. Yes. I would say, again, it is not my area of
    expertise, but I would say almost certainly the Volcker Rule
    has reduced liquidity in bond markets. It would have to because
    it makes it harder for big banks to hold bond portfolios. So it
    has definitely reduced liquidity.
        Mrs. Love. Okay.
        Mr. Allison. And I would just reemphasize what Mr. Pollock
    said. There is no evidence that a problem the Volcker Rule was
    trying to deal with had anything to do with the financial
    crisis. So why did it get thrown in?
        Mrs. Love. Okay. So if proprietary trading has no social
    good or value in creating liquidity and creating markets, why
    then did Congress exempt U.S. obligations and those of States
    and municipalities from proprietary trading then?
        Mr. Allison. Obviously, they believed it really does have
    some good or they wouldn't have exempted themselves.
        Mr. Pollock. That is a wonderful rhetorical question,
    Congresswoman, and you answered your own question.
        Mrs. Love. Just asking, would you agree that the net effect
    of post-crisis regulations is to remove productive capital out
    of the real economy and leave it stranded in government
    securities?
        Mr. Allison. No question. The mathematics will support
    that. But even more important is what I call intellectual
    capital. And if you have all the brains in the financial
    services industry, which is a massive, productive industry that
    creates thousands and thousands of jobs, thinking about
    regulations, instead of about how to provide better products,
    how to improve technology, that has a huge impact on economic
    well-being.
        And there has been basically no innovation in the industry
    since Dodd-Frank. And that is a big cost. There is not just a
    capital cost on that. A human resource is the most important
    resource. And we put balls and chains around our human
    resource.
        Mrs. Love. Okay. And I just have one more. I guess I would
    ask the two gentlemen this question again: Are we already
    seeing the impacts of the real economy, even though many of
    these regulations are just being implemented? What are your
    thoughts about what is just being implemented and what the
    future looks like 5, 10, 15 years down the road?
        Understand that my background is, I am a mayor, and I have
    seen how these community banks have literally built our city. I
    am not just talking about a teacher who is building an
    expansion of her school that helps 4-year olds read, but I am
    talking about people who have built our community.
        Chairman Hensarling. The time of the gentlelady has
    expired.
        Members are advised there is a pending procedural vote on
    the Floor, with 10 minutes, 13 seconds left.
        The Chair will recognize the last Member, Mr. Hill from
    Arkansas, and then we will adjourn the hearing.
        The gentleman from Arkansas is recognized.
        Mr. Hill. Thanks, Mr. Chairman, and I thank the ranking
    member as well for holding this hearing on the CHOICE Act.
        I have been in banking on and off in my career for a long
    time, since the 1970s, since before the Monetary Control Act
    was passed, Garn-St. Germain, so I have a little experience.
        I would like to ask unanimous consent to enter in the
    record an article from The Arkansas Democrat-Gazette dated 6/
    19/2016.
        Chairman Hensarling. Without objection, it is so ordered.
        Mr. Hill. This article talks about the return on assets of
    community banks in Arkansas, which 104 banks, by the way that
    is about half of what it was when I was involved in starting my
    last company, offered an RoA of 129. Pretty good.
        But if you back out the four big banks that are chartered
    in Arkansas, it is only a .8, 40 basis points less, and that is
    endemic to the struggle I think that our community banks have
    in coping with the competitive situation and the costly
    situation brought about by Dodd-Frank, reducing consumer
    lending, reducing small-business lending and trying to comply
    with all the rules.
        For even if those small banks are ``exempt'' from an exam
    by the CFPB, they are not in any way exempt from the costs and
    regulations promulgated by the CFPB.
        The other thing I wanted to mention before I ask a question
    is my good friend from Missouri, Mr. Cleaver, went through a
    long litany and you guys participated in the give-and-take on
    all the due diligence that had happened before the Dodd-Frank
    Act was passed by the House and the Senate in 2010.
        What he failed to mention, though, is that the Congress
    commissioned a financial inquiry commission to find out what in
    fact took place in the financial crisis and make
    recommendations to this body as to what to do about it. But I
    would report to you that Dodd-Frank passed 6 months before that
    commission issued their report. So that is my response to Mr.
    Cleaver.
        I want to talk about the leveraged ratio and get some give-
    and-take. As I understand in the discussion draft the committee
    has put out that it uses the supplementary leveraged ratio that
    Mr. Newell talked about extensively, which includes, of course,
    off-balance-sheet items.
        And for my way of thinking, I think the straight GAAP,
    tier-one leveraged ratio might be superior and certainly be
    related to the vast, vast majority of banks in the country.
    Plus, we can all measure it pretty easily by looking at the
    call report data.
        Mr. Newell, would you start on that and comment on that
    point, please?
        Mr. Newell. Certainly. And obviously, we have concerns just
    at the general level with the supplementary leveraged ratio in
    terms of its inaccuracy.
        I guess I would also say, in terms of the off-balance-sheet
    exposures, there is a very long laundry list of very technical
    requirements in terms of how you translate all the off-balance
    sheets and convert them into on-balance-sheet assets for
    purposes of the supplementary leveraged ratio, which actually
    makes it, I think, much more complicated and transparent than
    people might otherwise think.
        But I can certainly imagine on the one hand that for
    smaller banks, like Mr. Purcell's, there is probably not a
    whole lot of off-balance-sheet exposures that would be worth
    that incredibly cumbersome exercise.
        Mr. Hill. So do you think that perhaps then for smaller
    banks that don't report on the call report any off-balance-
    sheet exposure that maybe they could use the more strict tier-
    one GAAP ratio instead of--
        Mr. Newell. Yes. I certainly would not think that the
    complicated conversion would be, add any net benefit.
        Mr. Hill. Mr. Purcell, do you want to comment on that?
        Mr. Purcell. For instance, we are probably 9.7 percent on
    our capital. We do not have the off-balance-sheet problems, and
    yet the type of bank we are, we are over 30 percent on our risk
    based because maybe our deposits at Fed may be a little bit
    suspect, but typically we hold quite a bit of cash and bonds in
    agencies and government.
        But I don't think the off-balance-sheet items will affect
    us at all.
        Mr. Hill. Thank you very much.
        Mr. Allison, in looking at the proposed list of regulatory
    relief that one would get if they held the 10 percent capital
    ratio, can you think of another area besides the ones that are
    included in the bill that might be useful?
        Of course, we talk about Basel III, we talk about the CFPB,
    we talk about Volcker, for example. But how about in the non-
    Dodd-Frank arena, are there things that would benefit our
    institutions, that there might be some relief there in another
    area?
        Mr. Allison. If I were in charge, I would go across the
    whole spectrum. I think a lot of regulations are
    counterproductive for the economy and counterproductive for the
    people they are supposed to help.
        So you are making a good step, but I would do more.
        Mr. Hill. Thank you.
        Thank you, Mr. Chairman.
        Chairman Hensarling. The time of the gentleman has expired.
        I would like to thank our witnesses for their testimony
    today.
        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 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
        I ask our witnesses to please respond as promptly as you
    are able.
        Also, without objection, Members will have 5 legislative
    days to submit extraneous materials to the Chair for inclusion
    in the record.
        This hearing stands adjourned.
        [Whereupon, at 1:26 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                 July 12, 2016

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