[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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