[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
EXAMINING THE RELATIONSHIP
BETWEEN PRUDENTIAL REGULATION
AND MONETARY POLICY AT THE
FEDERAL RESERVE
=======================================================================
JOINT HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
AND THE
SUBCOMMITTEE ON MONETARY
POLICY AND TRADE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 12, 2017
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-40
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29-541 PDF WASHINGTON : 2018
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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
STEVAN PEARCE, New Mexico GREGORY W. MEEKS, New York
BILL POSEY, Florida MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin DAVID SCOTT, Georgia
STEVE STIVERS, Ohio AL GREEN, Texas
RANDY HULTGREN, Illinois EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina KEITH ELLISON, Minnesota
ANN WAGNER, Missouri ED PERLMUTTER, Colorado
ANDY BARR, Kentucky JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania BILL FOSTER, Illinois
LUKE MESSER, Indiana DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine JOYCE BEATTY, Ohio
MIA LOVE, Utah DENNY HECK, Washington
FRENCH HILL, Arkansas JUAN VARGAS, California
TOM EMMER, Minnesota JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Kirsten Sutton Mork, Staff Director
Subcommittee on Financial Institutions and Consumer Credit
BLAINE LUETKEMEYER, Missouri, Chairman
KEITH J. ROTHFUS, Pennsylvania, WM. LACY CLAY, Missouri, Ranking
Vice Chairman Member
EDWARD R. ROYCE, California CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
BILL POSEY, Florida DAVID SCOTT, Georgia
DENNIS A. ROSS, Florida NYDIA M. VELAZQUEZ, New York
ROBERT PITTENGER, North Carolina AL GREEN, Texas
ANDY BARR, Kentucky KEITH ELLISON, Minnesota
SCOTT TIPTON, Colorado MICHAEL E. CAPUANO, Massachusetts
ROGER WILLIAMS, Texas DENNY HECK, Washington
MIA LOVE, Utah GWEN MOORE, Wisconsin
DAVID A. TROTT, Michigan CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
Subcommittee on Monetary Policy and Trade
ANDY BARR, Kentucky, Chairman
ROGER WILLIAMS, Texas, Vice GWEN MOORE, Wisconsin, Ranking
Chairman Member
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
BILL HUIZENGA, Michigan BILL FOSTER, Illinois
ROBERT PITTENGER, North Carolina BRAD SHERMAN, California
MIA LOVE, Utah AL GREEN, Texas
FRENCH HILL, Arkansas DENNY HECK, Washington
TOM EMMER, Minnesota DANIEL T. KILDEE, Michigan
ALEXANDER X. MOONEY, West Virginia JUAN VARGAS, California
WARREN DAVIDSON, Ohio CHARLIE CRIST, Florida
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
C O N T E N T S
----------
Page
Hearing held on:
September 12, 2017........................................... 1
Appendix:
September 12, 2017........................................... 43
WITNESSES
Tuesday, September 12, 2017
Calomiris, Charles W., Henry Kaufman Professor of Financial
Institutions, Columbia Business School, Columbia University.... 5
Cecchetti, Stephen G., Rosen Family Chair in International
Finance, Brandeis International Business School, Brandeis
University..................................................... 7
Sivon, James C., Partner, Barnett Sivon & Natter P.C., on behalf
of the Financial Services Roundtable........................... 8
APPENDIX
Prepared statements:
Calomiris, Charles W......................................... 44
Cecchetti, Stephen G......................................... 117
Sivon, James C............................................... 125
EXAMINING THE RELATIONSHIP
BETWEEN PRUDENTIAL REGULATION
AND MONETARY POLICY AT THE
FEDERAL RESERVE
----------
Tuesday, September 12, 2017
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
and Subcommittee on Monetary
Policy and Trade,
Committee on Financial Services,
Washington, D.C.
The subcommittees met, pursuant to notice, at 2:02 p.m., in
room 2128, Rayburn House Office Building, Hon. Andy Barr
[chairman of the Subcommittee on Monetary Policy and Trade]
presiding.
Members present: Representatives Luetkemeyer, Barr,
Rothfus, Royce, Huizenga, Pittenger, Tipton, Hill, Emmer,
Davidson, Kustoff, Tenney, Hollingsworth; Clay, Moore, Sherman,
Scott, Foster, Kildee, and Heck.
Ex officio present: Representative Hensarling.
Chairman Barr. The subcommittees will come to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittees at any time.
Today's hearing is entitled, ``Examining the Relationship
Between Prudential Regulation and Monetary Policy at the
Federal Reserve.''
I now recognize myself for 2\1/2\ minutes to give an
opening statement.
Congress tasked the Federal Reserve System with
responsibilities for both monetary policy and financial
regulation. A fundamental question for today is whether these
responsibilities complement or conflict with each other. The
stakes are much more than academic. Monetary policy and
financial regulation play foundational roles in the economic
opportunities that can and should be available to every
American household.
To fully realize these opportunities, we need monetary
policies and financial regulations to build from the ground up.
Only in that way can real goods and services, which include
labor, reliably find their most promising opportunities and do
so in a timely and efficient manner.
Today, we will examine how this most basic of economic
services can be produced more consistently and distributed more
broadly. We will examine whether monetary policy and financial
regulation should be housed under the same roof as it is in our
Federal Reserve System or if monetary policy and financial
regulation could both work better with greater independence and
accountability.
If monetary policy and financial regulation do not work,
then our economy cannot work. When monetary policies and
financial regulations lack independence and accountability,
even the most dutiful efforts from households and businesses
cannot bridge the gap to our full potential. Viewed in this
light, Americans are rightly disappointed with our economic
opportunities. Despite 8 years of recovery, growth has been
slow and weak, and our economy has yet to realize its full
potential. The accumulated loss of economic opportunity has
risen to almost $13 trillion. That is almost $100,000 per
household on average and considerably larger than China's
economy, the world's second largest.
Putting an end to these losses is not enough. We must
reestablish a more vibrant and resilient economy. The 3-percent
growth we produced last quarter is a good start. To build on
that promising economic report, however, we must make sure that
our institutions for monetary policy and financial regulation
are effectively organized.
I look forward to testimony from this afternoon's
distinguished witnesses on how we can do just that.
The Chair now recognizes the ranking member of the
Subcommittee on Monetary Policy and Trade, the gentlelady from
Wisconsin, Gwen Moore, for 5 minutes for an opening statement.
Ms. Moore. Thank so much, Mr. Chairman.
Good morning to our witnesses. I have to warn you to
prepare yourself for a discussion on the dual mandate of the
Fed, despite the title of this hearing. The other side always
wants to challenge the propriety of being concerned about
employment, which sounds like a good idea to me. I don't know
why we would turn employment into a bogeyman.
But that being said, the central question that the
Republicans will be asking here today is whether Congress
should hamper the Federal Reserve's bank supervision authority.
Now let me really quickly address the bad idea of creating a
distinction between monetary policy and supervisory functions
of the Fed as a raison d'etre for the GOP to cripple banking
regulations through the appropriations process so that they can
come in and just take money away from the Fed if they don't
like what regulations come down the pike.
First, the Fed sets a single interest rate, and then those
rates are transmitted to dealer banks. So the Fed uses the
institutions it regulates as agents in transmitting monetary
policy.
Secondly, the Fed acts as a lender of last resort. So it
makes sense for it to oversee and have supervisory functions
over those institutions that may one day need liquidity
support, unless you want the Fed playing behind the eight ball
in a crisis.
Thirdly, the Fed in its function as a central bank sets
leverage requirements and underwriting standards. These are
both supervisory and useful and targeted tools to combat market
bubbles.
Fourth, the supervision provides valuable insight on the
economic outlook, which plays a role in how the Fed sets the
monetary policy.
Finally, the Fed, of course, is the systemic regulator of
our financial system. Following the 2008 financial crisis,
Dodd-Frank corrected a glaring hole--no, let me just call it a
crater--in making the Fed the regulatory agency of systemically
significant firms.
The U.S. economy has grown post-Dodd-Frank, and the
financial system is far safer and fairer for consumers. So the
``wrong choice'' Act was a little more than a poisonous tonic
for a healthy system.
And I would reserve the balance of my time, Mr. Chairman.
Chairman Barr. The Chair now recognizes the chairman of the
Subcommittee on Financial Institutions and Consumer Credit, the
gentleman from Missouri, Blaine Luetkemeyer, for 2\1/2\ minutes
for an opening statement.
Chairman Luetkemeyer. Thank you, Mr. Chairman. I appreciate
the opportunity to hold this hearing with you. And thank you
for your leadership on these issues.
The Financial Institutions Subcommittee has examined the
growing role and influence of Federal financial regulators in
the post-Dodd-Frank and Obama era. The Federal Reserve in
particular seems to be taking its supervisory authority to
unparalleled heights. Financial institutions operate in a world
of ambiguous guidance and aggressive enforcement. There is a
near unanimous feeling that document productions fall into a
black hole with the Fed providing little to no meaningful
feedback on supervisory issues.
Financial institutions also recognize that Fed policies are
inconsistent. Several weeks ago, I had a conversation with two
financial institutions that offered a nearly identical product.
One Fed district expressed interest in seeing the product
offered more widely. Another said the product was a danger to
consumers and should be shut down. I have also shared the story
of small town and mid-Missouri that I represent, which has been
in Fed purgatory for 5 years. The Fed staff decided it didn't
like certain products, products to which the FDIC and State of
Missouri did not object and in fact suggested be made more
readily available. This inconsistent approach to regulation has
a negative effect on the economy at the local, national, and
global levels. Federal Reserve officials have said their work
as prudential regulators informs their monetary policy
decisions, helping them to meet the charge to ensure global
financial stability. But the reality is that the Federal
Reserve's regulatory regime does not necessarily translate to a
more stable economy. So we ask ourselves whether or not it is
appropriate for the Federal Reserve to be both a prudential
regulator and the sole dictator of monetary policy.
As I said in the past, it is time to take the power out of
Washington and demand a reasonable financial regulatory
structure. It is time to ensure that monetary policy decisions
that impact the daily lives of our constituents are made in a
sound, unbiased manner. We have a distinguished panel with us
today, and I look forward to the testimony.
Thank you, Mr. Chairman.
And I yield back the balance of my time.
Chairman Barr. The gentleman yields back.
The Chair now recognizes the gentleman from California, Mr.
Sherman, for 2 minutes for an opening statement.
Mr. Sherman. When we are talking about the structure of the
Fed, we see a dramatically antidemocratic institution
exercising governmental power. First, the New York Bank gets a
seat on the Open Market Committee, whereas the California Bank,
with twice as many people, doesn't. Second, substantial Fed
powers in the hands of those who are put on the Board in an
election by banks. This is the only institution of governmental
power in our country where we have the one--not ``one person,
one vote'' but ``$1 billion in banking, one vote.''
Second, our system does not provide capital to small
businesses, other than SBA. Small businesses are told: Use your
credit cards to finance business expansion or get some sort of
shadow bank 36 percent loan. This is where the jobs,
technology, and innovation is going to come from, but it won't
come from small business if we tell people, tell banks they
can't make a prime-plus-5 loan. That is in effect what we have
done. Back in the old days, you used to be able to go to a
business that had a 1 in 20 chance, 1 in 40 chance of failure,
and still make a loan and charge a few extra percentage points.
Now we have crushed that out of the banking system to the huge
disadvantages of small business.
Speaking of huge, too-big-to-fail is too-big-to-exist. And
as the Wells Fargo example shows us, it is too-big-to-manage.
Finally, when it comes to the Fed, we need lower interest
rates to create the labor shortage necessary to create major
increases in wages in our country. And we have low inflation,
so we can do that instead. In this committee room, the Fed is
often told to raise interest rates, and that is antithetical to
creating the labor shortage that is necessary to help most
Americans. And, of course, we need more, not less, quantitative
easing.
Finally, the Fed was able over to turn over $100 billion of
profit to the United States Government. We usually have the
debt clock in back of our witnesses, and now we have been
pressuring the Fed to stop giving us the $100 billion by
reducing its balance sheet.
I yield back.
Chairman Barr. The gentleman's time has expired.
We will now turn to our witnesses.
Dr. Charles Calomiris is the Henry Kaufman professor of
financial institutions at the Columbia Business School,
director of the Business School's Program for Financial Studies
and its Initiative on Finance and Growth in Emerging Markets,
and a professor at Columbia's School of International and
Public Affairs. His research spans the areas of banking,
corporate finance, financial history, and monetary economics.
He is a distinguished visiting fellow at the Hoover
Institution, a fellow at the Manhattan Institute, a member of
the Shadow Open Market Committee and the Financial Economists
Roundtable, and a research associate of the National Bureau of
Economic Research. He received a BA in economics from Yale
University, magna cum laude, and a Ph.D. in economics from
Stanford University. Professor Calomiris holds an honorary
doctorate from the University of Basel.
Dr. Steven G. Cecchetti is the Rosen Family Chair in
International Finance at the Brandeis International Business
School, a research associate of the National Bureau of Economic
Research, and a research fellow of the Center for Economic
Policy Research. His research interests include monetary
policy, the economics of financial regulation, macroeconomic
theory, and price and inflation measurement. From 2008 to 2013,
Professor Cecchetti served as economic adviser and head of the
Monetary and Economic Department at the Bank for International
Settlements. During his time at the Bank for International
Settlements, Dr. Cecchetti participated in numerous post-
crisis, global regulatory reform initiatives. Professor
Cecchetti holds an undergraduate degree from the Massachusetts
Institute of Technology, a doctorate from the University of
California, Berkeley, and an honorary doctorate in economics
from the University of Basel.
Mr. James Sivon is a partner in the Washington, D.C., law
firm of Barnett, Sivon & Natter, and is testifying today on
behalf of the Financial Services Roundtable as a specialist on
financial services law and regulations. Mr. Sivon is a member
of the Executive Council of the Federal Bar Association's
Banking Law Committee and the Executive Committee of the
Exchequer Club. He is a former senior vice president and
general counsel for the Association of Bank Holding Companies,
and he served as the staff director for the Republican Members
of the U.S. House Committee on Banking, Finance, and Urban
Affairs. He received his undergraduate degree from Denison
University, and his law degree from Georgetown University Law
Center.
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.
Dr. Calomiris, you are now recognized for 5 minutes.
Mr. Calomiris. Thank you, Mr. Chairman.
STATEMENT OF CHARLES W. CALOMIRIS, HENRY KAUFMAN PROFESSOR OF
FINANCIAL INSTITUTIONS, COLUMBIA BUSINESS SCHOOL, COLUMBIA
UNIVERSITY
Chairman Barr, Chairman Luetkemeyer, Ranking Members Moore
and Clay, it is a pleasure to be with you today, and I will
deliver a summary of my written testimony, which I have
submitted.
The Federal Reserve is now more politicized than it has
been at any time in its history, and, consequently, it is also
less independent in its actions than almost any time in its
history.
As the Fed accumulates more and bigger political lightning
rods of discretionary power, the Fed finds itself increasingly
politicized and less independent, both in the realm of monetary
policy and in regulatory and supervisory reactions. With
discretionary power inevitably comes attacks by special
interests seeking to manipulate those powers. The Fed finds
itself making political deals with special interests and their
representatives largely as a result of its burgeoning
discretion.
Also, Fed leaders routinely offer distorted and self-
interested opinions about reform proposals while pretending
that their opinions should be viewed as unbiased professional
analysis. Fed Chair Janet Yellen's August 2017 Jackson Hole
speech was a full-throated defense of the status quo of
financial regulation. But that speech ignored scores of studies
that contradict the narrative that she offered. Many of the
studies she ignored were written by economists working at the
Federal Reserve Board, the various Federal Reserve banks, the
OFR, as well as top academic researchers.
Don't be fooled by the charade: Financial regulatory policy
is unbalanced, unlikely to prove effective in achieving its
stated objectives, and fails to meet basic standards of due
process for a democracy operating under the rule of law.
Reforms can fix those problems. And I want to emphasize I
am here to talk about reform, not just deregulation.
The ideal set of reforms would include clear rules to guide
both monetary policy and regulatory policy, would avoid
undesirable conflicts of interest, especially by placing day-
to-day regulatory and supervisory authority in an agency other
than the Fed, and would establish administrative and budgetary
discipline over the process of regulation supervision.
A less drastic set of reforms that wouldn't remove the Fed
from those activities could still accomplish a great deal of
improvement. Specifically, if it were possible to establish
clear rules governing both monetary and regulatory policy and
impose administrative and budgetary discipline on the process
of regulation, then, even if regulatory and supervisory powers
remained vested in the Fed, the problems associated with Fed
conflicts and politicization would be substantially reduced.
Requiring Congress to weigh the social costs and benefits
that arise in regulation likely would limit special interest
manipulation of regulatory discretion after regulations are
passed. I would refer you to a recent paper by two political
scientists, Gordon and Rosenthal, for a discussion of how the
delegation to regulatory discretion undermined the intended
risk-limiting provisions of Dodd-Frank with respect to the
mortgage market.
Most importantly, to improve and depoliticize regulation,
Congress must establish clear rules that limit the use of
unaccountable discretion, must establish budgetary authority
for regulatory implementation, and must limit the abusive
reliance on guidance in regulatory actions by requiring a much
greater reliance on formal rulemaking consistent with the
Administrative Procedures Act. If this were done alongside the
establishment of a flexible monetary policy rule, that would go
a long way toward restoring balance in the regulatory process,
depoliticizing the Fed, and ensuring accountability of
monitoring regulatory policy. These changes would have major
positive consequences for the economy.
Only by clarifying the goals of the Fed and requiring it to
work within clear rules can regulatory and monetary policy be
improved to make those policies focus on long-run objectives,
avoid short-run politicization, ensure appropriate balance and
due process in regulation supervision, and make the Fed
accountable to the will of the people. Thank you.
[The prepared statement of Dr. Calomiris can be found on
page 44 of the appendix.]
Chairman Barr. Thank you.
Dr. Cecchetti, you are now recognized for 5 minutes.
STATEMENT OF STEPHEN G. CECCHETTI, ROSEN FAMILY CHAIR IN
INTERNATIONAL FINANCE, BRANDEIS INTERNATIONAL BUSINESS SCHOOL,
BRANDEIS UNIVERSITY
Mr. Cecchetti. Thank you, Chairman Barr, Ranking Member
Moore, Ranking Member Clay, and members of the subcommittees.
Thank you for inviting me to present my views on the
relationship between prudential supervision and monetary
policy.
The U.S. financial system is far more resilient today than
it was a decade ago. And the likelihood of another systemwide
crisis is now lower. As a consequence of post-crisis regulatory
reforms, banks have more loss-absorbing equity capital than
they had in 2007, and they also face liquidity requirements.
And the biggest among them must meet rigorous stress tests.
Importantly, this new environment ensures that all large
complex financial organizations are much less likely to become
a burden on the taxpayer.
It is important that we build on this progress. Regulations
must remain sufficiently strict and supervisors must interpret
and imply the rules rigorously.
My comments today focus on governance. I will make two
points. First, prudential supervision needs to be an
independent function sheltered from day-to-day political
influence with control of its own budget. And, second, the
central bank should be a lead supervisor, supervising
systemically important institutions.
Starting with independence, we all agree that, because of
their ability to take a long view, independent central banks
deliver lower inflation without sacrificing higher employment
and higher growth. What is true for monetary policy is true for
supervisors. Supervisors can maintain a long-term view if they
are sheltered from political influence, including having
control over their own budget. This form of independence gives
them the ability to credibly enforce rigorous regulatory
standards, thereby promoting financial resilience and reducing
public costs.
It is equally important that the central bank be a leading
supervisor. Supervision is integral to the central bank's core
functions as the lender of last resort, the monetary authority
and the organization responsible for the health and stability
of the overall financial system. Let me explain why.
To protect the integrity of the system and the public
finances, the lender of last resort needs to be able to
determine a borrowing institution's solvency and the value of
the collateral being posted to back a loan. That is, a lender
needs to know whether the borrower will be able to repay. This
requires confidential financial assessments, knowledge of the
firm's business practices, and the skills to value illiquid
assets--all things that supervisors generally have.
Importantly, this information has to be available to high-
ranking central bank officials on very short notice. In some
cases, decisions have to be made in a matter of minutes. So the
quality of data must be without question, and it cannot be in
the hands of people who may or may not choose to share it.
Turning to the relationship between monetary policy and
prudential supervision, to quote from Paul Volcker's testimony
before the Financial Services Committee in May of 2010, these
two functions are inextricably intertwined. As a practical
matter, it is impossible to say where one stops and the other
one starts. This is true because the people engaged in these
functions operate as a team, sharing knowledge and expertise
that each requires from the other. That is, monetary
policymakers require supervisory information to evaluate the
state of the financial system and supervisors use monetary
policymakers' understanding of economic prospects to evaluate
the safety and soundness of individual institutions.
Finally, there is the fact that the central bank is
responsible for systemic stability. The Federal Reserve does
not have an explicit financial stability mandate, but without a
stable financial system, the Fed would surely fail to achieve
their statutory objectives of maximum employment, stable
prices, and moderate long-term interest rates.
Identifying threats to the financial system requires a
specialized set of skills as well as day-to-day access, all
things that the Federal Reserve has information on.
In closing, let me emphasize my firm belief that when
supervisors are independent of political interference, complete
with budgetary autonomy, the financial system is more stable
and taxpayer costs are lower. Furthermore, a supervisory
function is essential for effective and efficient execution of
core central bank functions. As the lender of the last resort,
the monetary policy authority, and the guardian of health and
stability of the overall financial system, it is essential that
the Federal Reserve remain a leading supervisor, especially for
systemically important institutions. The American public would
be ill-served if that were to change.
Thank you. And I would be pleased to respond to questions.
[The prepared statement of Dr. Cecchetti can be found on
page 117 of the appendix.]
Chairman Barr. Thank you.
And Mr. Sivon, you are recognized for 5 minutes.
STATEMENT OF JAMES C. SIVON, PARTNER, BARNETT SIVON & NATTER
P.C., ON BEHALF OF THE FINANCIAL SERVICES ROUNDTABLE
Mr. Sivon. Chairman Barr, Ranking Member Moore, Chairman
Luetkemeyer, Ranking Member Clay, and members of the
subcommittees, my name is Jim Sivon, and I am appearing on
behalf of the Financial Services Roundtable (FSR). Thank you
for inviting FSR to participate in the hearing.
A decade ago, gaps in regulations contributed to a
financial crisis. Subsequent actions by Congress and regulators
in the industry itself have restored the stability of the
financial system. Since the crisis, large bank holding
companies have increased their capital levels by $700 billion
and increased their aggregate holdings of highly liquid assets
by more than 50 percent.
Yet some of the regulations put in place since the crisis
are holding back a more robust recovery. Data on loans to
mortgage borrowers and small businesses illustrates this
problem. Also, an analysis of post-crisis lending conducted by
the Federal Reserve Board has found that lending growth by the
more heavily regulated large banks lags behind lending growth
of small banks.
FSR believes that the goal of prudential regulation should
be to promote both financial stability and economic growth. FSR
appreciates the steps the Board has taken to tailor some
regulations. However, more could be done.
I will briefly describe some of FSR's recommendations for
tailoring existing regulations, starting with the capital
planning and stress testing rules.
The capital planning and stress testing rules have helped
FSR members build stronger capital positions and improve risk-
management practices. Recent stress test results show that
large bank holding companies can withstand an economic downturn
even more severe than the 2008 financial crisis. However, the
rules could be adjusted without impairing their fundamental
purpose. FSR supports more disclosure regarding the models used
by the Board in conducting stress tests. Disparities in loss
projections between the models used by FSR members and those
used by the Board create a level of uncertainty that impacts
lending practices.
The stress test results also indicate that we have reached
a point where the capital and liquidity rules could be adjusted
to promote more economic growth without jeopardizing financial
stability. For example, FSR recommends that the supplementary
leverage ratio exclude risk-free assets from the calculation of
a company's total assets and that the liquidity rule be revised
to give more favorable treatment to certain securities and the
runoff assumptions in that rule be aligned with the historical
experience.
Resolution planning has helped FSR members rationalize
operations and contracts, yet this requirement, combined with
separate recovery planning requirements, is an area where
greater coordination among the agencies is needed. As a result
of the Dodd-Frank Act, the Board gained regulatory authority
over a number of insurance companies. While the Board has
indicated a willingness to tailor regulations for those
companies, FSR believes the Board could be more attentive to
the differences between the business of insurance and the
business of banking.
FSR recommends that the Board and other Federal regulators
revisit the Volcker Rule. For example, FSR recommends that the
Rule exempt institutions that are not complex or interconnected
and that the prohibitions on trading and investments be
narrowed.
FSR also has three general recommendations for better
aligning financial regulation with economic growth. First, FSR
recommends that prudential standards be based upon risk
assessments, not arbitrary asset thresholds. Second, FSR
encourages Congress to promote greater coordination among
Federal financial regulators. Enhancing coordination would not
require restructuring of the agencies. Greater coordination
could be achieved through the enactment of a set of guiding
principles, such as those proposed by the Executive Order on
core principles for regulating the U.S. financial system.
Finally, FSR recommends that Congress evaluate the impact
of the current expected credit loss, or CECL, accounting
standard, which we believe will require an adjustment on how
bank capital standards are calculated.
Thank you again for the opportunity to address the Board's
role as a prudential regulator, and I would be pleased to
answer any questions.
[The prepared statement of Mr. Sivon can be found on page
125 of the appendix.]
Chairman Barr. The gentleman yields back.
And the Chair now recognizes himself for 5 minutes for
questions.
Dr. Calomiris, in Dr. Cecchetti's testimony, he argued that
monetary policy and prudential supervision are complementary,
and I believe he quoted former Chairman Volcker in making the
argument that the two are inextricably intertwined. And I hear
this frequently when I have conversations with Fed officials
who make the argument that their supervisory activities inform
their monetary policy decisionmaking.
There are dissenting views on this argument. Vincent
Reinhart, the former Secretary of the Fed's Monetary Policy
Committee, observed that if the FOMC made materially better
decisions because of the Fed's role and supervision, there
should be instances of informed discussion of the linkages.
Anyone making the case for beneficial spillovers should be
asked to produce numerous relevant excerpts from that
historical resource. I don't think they will be able to do so.
Lars Svenson, who served on the faculty of Princeton and as
a Deputy Governor for the Central Bank of Sweden, presented
research to the Federal Reserve Bank of Boston in 2015, arguing
that, ``monetary policy cannot achieve financial stability.''
And even former Fed Chairman Ben Bernanke expressed concern
about expanding the Fed's dual mandate to also include
responsibility for ``reducing risks to financial stability.''
So my question to you, Dr. Calomiris, is, could we enjoy
better monetary policy and financial regulation if there was
more independence and accountability?
Mr. Calomiris. Absolutely. And I think there is a confusion
between--that often comes up among three different activities.
One of them is called regulation. The other is called
supervision. And the third one is called examination. Now, in
the Treasury White Paper of 2008, where they proposed removing
the Fed from day-to-day control over regulation, supervision,
they specifically pointed out that that would not mean that the
Fed would be removed from constant contact with financial
institutions and from the participation examination process
which is necessary to its role as lender of last resort. And
that is what Paul Volcker was referring to. And when Paul
Volcker was testifying about those matters, he also pointed
out, very much consistent with my testimony, that the increased
regulatory functions that were envisioned in Dodd-Frank for the
Fed were going to be a politicization problem.
Chairman Barr. Can I follow up right there?
Mr. Calomiris. It is a very important distinction.
Chairman Barr. In the argument about politicization, can
you give a concrete example or two of how the combination of
Fed regulation and monetary policy politicizes each of them?
Mr. Calomiris. Yes. Well, the most common pattern over the
past few decades has been that Fed officials are extremely
concerned about insulating their independence in monetary
policy, and they often basically use regulatory policy as a
sacrificial lamb. So they make political deals on the
regulatory policy side in order to preserve the monetary policy
autonomy. Now they wouldn't need to do that if monetary policy
actually followed rules, because then that would ensure, that
would defend them against those attacks.
So, by combining the regulatory policy and the monetary
policy, basically, the Fed has often been put into a position--
I am not attacking individual Fed policymakers--where they make
concessions to special interests on regulatory policy in order
to try to defend their discretion in monetary policy.
I can give you a few recent examples. I think the Fed's
complicity in Operation Choke Point was a disgrace. That was
true of the other regulators too, by the way. But this is
something where basically if we can have our regulatory
officials engaging in Operation Choke Point, there is pretty
much nothing that we can't have them engaged in. We are not
protected in any way for living in a country, a popular
sovereignty country under rule of law. And that was clearly
under political pressure and, again, deals that are being made
with certain constituencies.
And I think that there are other examples. There have been
rumors at the highest levels of the Federal Reserve, people I
know, that actually Members of Congress have been very involved
in trying to get appointments to occur in certain Federal
Reserve presidencies. I can go on. There is a long list.
Chairman Barr. In the remaining time, do you think that
funding the Fed's regulatory and supervisory responsibilities
through appropriations would strengthen monetary policy
independence?
Mr. Calomiris. Absolutely. And it would because it would,
again, help defend the Fed policymakers as all rules do against
this kind of special interest interventions.
I would also--
Chairman Barr. My time has expired on that so I am going to
have to cut you off there. Thank you for the testimony.
The Chair now recognizes the distinguished ranking member,
Congresswoman Gwen Moore, for 5 minutes.
Ms. Moore. Thank you so much, Mr. Chairman.
As I expected, this is a tremendous panel, a tremendous
knowledge base, and I appreciate the witnesses for being here.
I am just feeling a little bit puzzled and confused because
this hearing is talking about the supervisory responsibilities
of the Fed and setting monetary policy and discussions about
the independence of the Fed. And it is not clear to me how
subjecting them to the appropriations process makes them more
independent. I have meetings in my office all the time with
bankers who--people who want us to do this or to do that. And
if you can get the ear of whomever is in the Majority at any
given time, and the appropriators, then you can wield your
weight. So it is not really clear to me how subjecting them to
the appropriations process makes them independent. It is kind
of oxymoronic.
Wouldn't you agree with that, Dr. Cecchetti?
Mr. Cecchetti. Yes, I would. I think that--
Ms. Moore. And please give us the examples you weren't able
to give us during your short testimony about how this works.
Mr. Cecchetti. Yes, there is a set of very straightforward
examples. First of all, let my start by saying that one of the
Basel Committee's core principles for effective supervision is
independence of the supervisors, including independent
budgetary authority. I agree with you that it is very difficult
to understand how giving politicians the control of budget is a
way of improving people's independence.
I do agree, however, that in a Congressional, in a
democratic process with the Congress, that it is your role to
give objectives to independent authorities and then to hold
them accountable for meeting those objectives.
The examples that I would point to would be primarily--
there are two examples that I would point to domestically and
several internationally. So the Federal Home Loan Banks were
subjected to the appropriations process, and we ended up with
the savings and loan crisis. OFHEO was subjected to the
appropriations process, and we ended up with Fannie Mae and
Freddie Mac on the government's--as being in conservatorship.
If I look internationally, I can point to the cases in
Korea, Indonesia where the crises in the late 1990s occurred,
and those were crises that occurred as a consequence of
supervision being political. And, finally, I would say--
Ms. Moore. How about Zimbabwe?
Mr. Cecchetti. Zimbabwe has even bigger problems. They
don't have independent monetary policy either. So I think that
these--in most of these other examples, we at least independent
monetary--
Ms. Moore. Let me ask you this follow-up question. Unless I
am hearing wrong, it almost sounds to me that people are
challenging the role of central banks globally. If we are
suggesting a model where we create some new ghost agency that
does the supervision versus our central banks, what are we
proposing to model for the rest of the world, and how would
this work? Central banks typically have the credibility because
they are independent--can you just weigh in on that?
Mr. Cecchetti. Yes, I think that is an extremely good
point. And I think that--one of the things that I would say is
that the lender--I emphasized in my comments and you did as
well in your introduction about the lender-of-last-resort
function. I think the lender-of-last-resort function relies
extremely heavily on supervisory information, on the
information about the safety and soundness of an institution
and about the quality of the assets that it has on its balance
sheet. If someone else is doing that, then what that means is
that you are going to have the lending being done outside the
central banks. So, as you point out, you would need to create a
shadow central bank somehow. And I can't imagine having a
second central bank.
Ms. Moore. One last question in my remaining seconds here
that is a source of confusion for me. If we are pushing for
independence of the bank--I keep hearing this notion that we
need to have some sort of monetary rule. We had Dr. Taylor
here, for example. How does having some kind of rule square
with a bank being independent?
Mr. Cecchetti. I think we are out of time, but the answer
is it doesn't really square with that. And what we need is an
objective that is set by you, the Congress, and then
accountability for meeting that objective.
Ms. Moore. Thank you for your indulgence and thank you.
Chairman Barr. The gentlelady's time has expired.
The Chair now recognizes the chairman of the Financial
Institutions and Consumer Credit Subcommittee, Mr. Luetkemeyer,
for 5 minutes.
Chairman Luetkemeyer. Thank you, Mr. Chairman.
Before I begin my questioning, I would like to recognize
that we are missing a few of our colleagues today. Some, like
Mr. Posey and Mr. Ross, are home in Florida dealing with the
aftermath of Hurricane Irma. Our thoughts are with them and all
those impacted by not only Irma but Hurricane Harvey as well.
Our prayers are also with our friend and colleague, Barry
Loudermilk, who was injured in a car accident early this
morning. Both Congressman Loudermilk and his wife were
transported to the hospital with non-life-threatening injuries
and have been released. We will keep both of them in our
thoughts, and pray for a speedy recovery for both Barry and his
wife, Desiree.
As we can see, life goes on, but life is affected, and it
is very, very important. As important as this hearing is, keep
it in perspective.
Thank you, gentlemen, for being here today. It is certainly
an honor to be able to discuss with you some concerns and some
information we would like to get from you with regards to Fed
regulation and monetary policy.
Mr. Sivon, last month, I sent a letter to Chair Yellen
expressing concern over the FBO rule and the impact it would
have, not only on foreign banks in the United States but also
on U.S. banks operating internationally. We are on the cusp of
seeing capital unnecessarily ring-fenced across the globe. Does
that really contribute to global financial security? As a
follow-up, is there any argument to be made that the Fed's
actions have dampened the global economy?
Mr. Sivon. Thank you, Congressman.
In my testimony, I expressed that one of the major concerns
of the Roundtable is a lack of coordination and cooperation
here domestically among the various Federal financial
regulatory agencies. That applies globally as well. And so the
issue that you have raised is illustrative of the fact that
there is a lack of sufficient coordination among international
regulators that is leading to some consequences, and one of
those consequences is ring-fencing, where institutions are
asked to trap certain assets and capital in certain locations
and then do not have the ability and flexibility to move those
as business needs.
Chairman Luetkemeyer. And in your judgement, I assume you
believe that does affect the global economy?
Mr. Sivon. Yes, I do, and I would suggest that there is a
need for some kind of overarching principles that international
regulators, including the Fed, could agree upon to avoid that
type of consequence.
Chairman Luetkemeyer. You talked about the coordination not
only globally, but you also mentioned within our country here.
And one of the things--I point to the Treasury report recently
put out back in, I think it was June. And in the back of the
report here, it has a lot of recommendations, and one of them
deals with trying to stop the overlap of regulations, to find
more coordination between all the different regulatory
agencies. And I guess in here, it talks--it lists the agency
that it should be applicable to, and it has gotten the Fed in a
lot of these situations. Have you seen the report? And do you
believe that this is a pretty good synopsis of what needs to
transpire to improve our financial structure?
Mr. Sivon. Yes, sir. We have looked at that report. FSR
submitted its own set of recommendations to Treasury as they
prepared that report. And many of our recommendations in fact
are reflected in the final report. We do think there is a need
for greater coordination among the regulators. And one of the
specific suggestions that we have in the testimony today is
that Congress could adopt some overarching principles to guide
the regulators in their separate missions. The core principles
that were put out in the Executive Order on financial stability
would provide some guidance for them.
Chairman Luetkemeyer. Our good friend, the ranking member,
seems to worry about the independence of the regulators. I can
tell you, being a former regulator, there is no reason for them
not to have some oversight as well. Everybody needs to have
oversight. And regulators need to have oversight as well. I
think it is important.
You also made a comment in your testimony with regards to
systemically important financial institutions and indicated
that you preferred a risk-based assessment model versus a
threshold. Could you elaborate just for a few seconds?
Mr. Sivon. Yes, I would be happy to. In fact, FSR
specifically supports the legislation that you introduced that
would provide for the designation of systemically important
institutions through some type of risk methodology rather than
a simple asset threshold. We think that is a more constructive
and tailored approach than what exists today.
Chairman Luetkemeyer. Very quickly, you also talked about
CECL. Could you elaborate on it just a little bit and explain
what it is and your thoughts?
Mr. Sivon. CECL was a fundamental accounting change that
changes the way banks have set up reserves for the past 40
years. Previously, banks have, and today they still set up
reserves based on the probability of a loss, and then when the
loss occurs, they will book the reserve.
Chairman Luetkemeyer. How does that affect the monetary
policy?
Mr. Sivon. Let me just finish with what CECL does. What
CECL does is, it says: You have to put up your reserve at the
beginning of the loan. You have to estimate where the economy
is going, forecast then the amount to put into your reserve.
Our concern is that CECL doesn't hit monetary policy as
much as it hits capital requirements. We think that what this
does is it creates the loss reserve to be the equivalent of
capital, and so the loss reserve, in our opinion, should get
tier 1 capital treatment under the capital rules.
Chairman Luetkemeyer. So you think one of the tools for
being a banker today is having a crystal ball?
Mr. Sivon. It is very difficult to predict the future.
Chairman Luetkemeyer. That would seem to be the approach.
Thank you very much. My time has expired.
Chairman Barr. The gentleman's time has expired.
The Chair now recognizes the ranking member of the
Financial Institutions Subcommittee, Mr. Clay from Missouri.
Mr. Clay. Thank you, Mr. Chairman.
Dr. Cecchetti, as you know, the Dodd-Frank Act, among other
things, significantly enhanced the macroprudential
responsibilities of the Federal Reserve. In testimony by former
Vice Chairman Donald Kohn before this committee back in 2009,
Vice Chairman Kohn wrote, ``The Federal Reserve's monetary
policy objectives are closely aligned with those of minimizing
systemic risk. To the extent that the proposed new regulatory
framework would contribute to greater financial stability, it
should improve the ability of monetary policy to achieve
maximum employment and stable prices.''
Do you agree with Dr. Kohn's assessment?
Mr. Cecchetti. I do agree with his assessment. I think that
this is true for several reasons. The first one is that
financial stability is necessarily the basis for stability in
the entire economic system. And so, if it is the case that the
monetary policy is to achieve its mandated objectives of stable
prices and maximum sustainable employment, then financial
stability is a foundation for that.
The second thing that I would say is that, if it is the
case that the financial system becomes unstable and monetary
policy needs to react to that financial instability, it takes
away from its ability to do its primary job. And I think what
that means is that there is really another set of tools that we
need. And this is why it is that many people have focused on
trying to generate tools that would ensure financial stability
and allow interest rates especially to be the instrument that
is used for price stability and maximum sustainable growth.
Mr. Clay. And if you had the Federal Reserve and its
leadership in one of your courses at the university, what grade
would you give them for the past 4 or 5 years? How have they
performed?
Mr. Cecchetti. I think they have performed extremely well.
You have to take into account that they did it in real time.
Maybe, in hindsight, we could give them an A-minus, but if we
had to grade them along the way, we would give them an A.
Mr. Clay. Mr. Chairman, that is a pretty good grade from
what I know about school and educating people.
Let me ask all of the witnesses: In addition to
strengthening the capital positions of the Nation's banks, can
each of you comment on how the collection of a standardized
data set from the largest financial institutions in the U.S. is
likely to help inform the Fed's various policymaking roles,
including its supervisory and monetary policy function?
Starting with you, Dr. Calomiris, 30 seconds.
Mr. Calomiris. Yes. That's an interesting question. I have
actually been pointing to some deficiencies in the data that is
being collected and used that I think should be remedied. The
most obvious one is, for example, Fed stress tests are
currently based on Y-14 and Y-9 data, which are pretty
irrelevant for stress test purposes. They should be collecting
information based on the managerial accounting of the bank,
which would allow them to really understand the bank as a
business. They don't do that.
Mr. Clay. Dr. Cecchetti?
Mr. Cecchetti. I think the Fed is the guardian of financial
stability and needs to be able to measure aggregate systemic
risk, and to judge how it is distributed in the financial
system. And this requires, in my view, access to
intermediaries' exposure information, which is more than we are
getting right now. All we have is accounting of assets and
liabilities, primarily in some derivatives. The degree to which
they are going to be able to transmit shocks, so we need to be
able to create network models of how banks are related to each
other. This is extremely detailed, and I think it would be very
valuable.
Mr. Clay. Thank you.
Mr. Sivon, how would data collection--
Mr. Sivon. As Professor Calomiris indicates, the Fed stress
tests today are based on FRY-14 data that is collected. And we
have some concerns about the manner in which--while the Fed
is--and the FSR have had a nice dialogue on the manner in which
it is collected, we do have some concerns that the monthly
reports are not really needed and that institutions need some
additional time to implement changes in those reporting
requirements.
We would also like to see the release of some of that data
on aggregated basis.
Mr. Clay. Thank you.
My time is up. I yield back.
Chairman Barr. The gentleman's time has expired.
The Chair recognizes the gentleman from Pennsylvania, Mr.
Rothfus.
Mr. Rothfus. Thank you.
Mr. Sivon, in your testimony, you brought up some of the
challenges associated with the supplementary leverage ratio, or
SLR, and how it is calculated. I share your concerns about this
problem. I have introduced legislation, H.R. 2121, the Pension,
Endowment, and Mutual Fund Access to Banking Act, to address
this issue for custody banks. Many members of this committee
are cosponsors of this bill. In your testimony, you wrote,
``Banking regulators should revise the calculation of the
supplementary leverage ratio to exclude risk-free assets from
the calculation of a company's total assets for purposes of the
ratio. This would include reserves held at the Federal Reserve,
cash, and Treasury securities.''
As you may know, the Treasury Department's recent report on
banks and credit unions also endorses this idea. Governor
Powell and Chair Yellen have also expressed openness to this
concept. Why do you believe that excluding risk-free assets,
like cash held at central banks, from SRL makes sense?
Mr. Sivon. First of all, FSR supports your legislation and
would like to see it expanded to cover all types of banks, not
just custody banks, because we do think it makes sense. It
would free up some assets that could then be put into more
productive use. These are risk-free assets that, in our
opinion, do not need to be counted as part of the leverage
ratio.
Mr. Rothfus. Is there a specific impact for custody banks
with respect to this?
Mr. Sivon. It poses a special issue for custody banks
because that is the very nature of those institutions. They are
holding a lot of deposits, and so they place them at the Fed
for security purposes.
Mr. Rothfus. Dr. Calomiris, as you know, Professor
Cecchetti takes a very different view of the extent and
benefits of interaction between monetary policy and supervisory
and regulatory functions at the central bank. In his testimony,
he writes that, ``a supervisory function is essential for
effective and efficient execution of core central bank
functions.''
However, in your testimony, you assert, ``There is no
evidence of any synergy between monetary and regulatory
policy.'' Why do you take a different view from the professor?
Mr. Calomiris. Again, I think language is very important.
People often confound the informational or examination with the
regulatory role. Regulation is setting the rules. There is
absolutely no connection between making law and doing monetary
policy. There is a lot of connection between having an ongoing
access to examination to participate in examinations. Again,
this was exactly the distinction that was made very clear in
the 2008 Treasury White Paper, and I support that distinction.
So I think there is a little bit of confounding of language
here.
Mr. Rothfus. If I could go back to Mr. Sivon, in your
testimony, you suggested that an assessment of the impact of
the current expected credit loss, or CECL, accounting standard
on lending and economic growth should be conducted. What
impacts do you anticipate as this standard is implemented?
Mr. Sivon. As I mentioned, the new standard requires
institutions to forecast forward where the economy may go and
set up at a reserve. Needless to say, that becomes much more
difficult when you get into longer-term loans, such as a 30-
year mortgage. So we are concerned that it could have an impact
in pulling--causing institutions to make fewer mortgage loans
or maybe fewer small business loans. We think one way to offset
this is to give institutions credit for this reserve as part of
capital.
Mr. Rothfus. If I could go back to Dr. Calomiris. This
didn't jump out at me from your testimony, but I am curious
about it, and that has to do with the Fed's balance sheet,
which is, frankly, a consequence of the Fed's unconventional
monetary policy. Does that balance sheet raise any conflict of
interest with respect to its regulatory side of work, and how?
Mr. Calomiris. Yes. There are multiple conflicts of
interest that have come from the new Fed powers that the Fed
has taken on in the last several years. One obvious one that is
actually related to the supplementary leverage requirement is
that the Fed has become a competitor in the repo market. And it
was, in fact, a strange coincidence that the supplementary
leverage requirement rule was passed at the exact same time
that the Fed entered--which applied to repos--was passed at
exactly the same time that the Fed became a competitor in that
market. And the Fed profited from that rule.
Now I am not saying that the Fed did it only to profit, but
there is no question that there was a clear conflict of
interest.
Mr. Rothfus. Does that have anything to do with the nature
of the assets in the Fed's balance sheet, Treasuries and GSEs--
GSE notes?
Mr. Calomiris. This has to do with the repo function that
the Fed has entered.
With respect to the assets, there is a different conflict.
Mr. Rothfus. What is that?
Mr. Calomiris. And that is, mortgage-backed securities that
the Fed is holding, as you raise interest rates, if the Fed
sells those securities, it will experience capital losses,
which have political consequences for the Fed through their
ramifications for the Fed's contribution to the budget deficit.
They are extremely worried about that. So that could actually
keep them from selling off mortgage-backed securities as
quickly as they might otherwise. So these are the reasons why
it is good to have a monetary authority that is not doing
fiscal or regulatory policy.
Mr. Rothfus. I yield back.
Chairman Barr. The gentleman's time has expired.
The Chair now recognizes the gentleman from Georgia, Mr.
Scott, for a word before his time begins.
Mr. Scott. Sure. Thank you very much.
I, too, want to join with my Republican colleagues and
certainly from this side of the aisle in wishing a speedy
recovery to our good friend, Congressman Loudermilk.
Congressman Loudermilk, as we know, was in a car accident. The
car flipped over 2 or 3 times. He was en route up from, and the
accident occurred near, Knoxville, Tennessee, and they have
been flown back to Atlanta for further medical treatment. So we
will get a report on that.
And this is just the second time in a matter of a short
period of time that very near-death incidents have happened. As
you will recall, he was there on the ball field when our
Republican colleague, Steve Scalise, was shot. So I just ask
everybody that we join in a prayer for him and wish him a very
speedy recovery. And thank you for giving me that time.
Chairman Barr. Thank you.
Mr. Scott. Barry Loudermilk and I not only share--
Ms. Moore. I would love to associate myself with the
comments of Members on both sides of the aisle and make it part
of the record that we are prayerful during this hearing.
Mr. Scott. Thank you very much. What I wanted to say was in
addition, it is very important that Barry Loudermilk and I not
only serve Georgia together, but we share counties together. We
share Cobb County together. And so we work very closely on very
important issues for our joint constituencies.
Thank you, Mr. Chairman.
I have been sitting here listening to this debate, and it
called to my mind the great words of--we had a great many
Founding Fathers, and none more valuable or greater than the
great Alexander Hamilton. And it was Hamilton who said that a
strong centralized national banking system shines at its most
brilliant in a time of national crisis.
And that is what happened when we suffered the Wall Street
bailout situation, and we were very fortunate to have that
strong national banking system there. And we responded by
establishing Dodd-Frank. And in that we were able, because we
had, which was represented by the Federal Reserve, the
apparatus there. And we put stress testing there. And it
surprises me that some of my Republican colleagues might not be
as mindful of how that benefitted us.
So, Dr. Cecchetti, what do you make of all this? It is my
understanding that the Federal Reserve is not only doing a
great job with stress testing, but it is because of that that
our banking system is flourishing now.
Mr. Cecchetti. Yes, thank you.
Let me just start, your colleague Congressman Clay asked me
to grade the Federal Reserve only over the last 4 or 5 years.
If I were to grade them from 2007, 2008, 2009, I would have
given them an A-plus. And that is not unrelated to your
question, because stress tests grew out of the crisis.
Stress tests came in the winter and spring of 2009 when the
banking system was on the verge of collapse. And what happened
was that by stress testing the banks, what the Federal Reserve
did was it made everybody more confident that those banks were
healthy. And so I think that it is absolutely essential.
Stress testing, which we discovered then by accident
essentially as a crisis management tool, I think has now become
the most important crisis mitigation tool and the tool that we
use to ensure the resilience of the financial system more
broadly.
Mr. Scott. Yes. And Hamilton went on to say that the
greatness of this system is that it had the power, it has the
authority, and it is free from persuasive, divisive politics.
And that is why it is so important to have this away from the
regular appropriations process for their funding.
Now, my staff tells me that the Fed has hundreds of Ph.D.
economists who constantly are combing over data so that
talented folks like Chair Yellen can make informed decisions,
and her predecessors, and people will follow her.
So let me ask you about this idea of how important it is to
keep the Fed independent away from what Hamilton refers to as
this political persuasiveness and division?
Mr. Cecchetti. I think it is absolutely essential. I think
what is essential is that monetary policy and supervision both
be done by people who can have long horizons, that they not be
under the influence of short-term political pressures or those
of constituencies that would want them to behave differently
from what is in the long-term interest.
My view of this is that if we are to minimize the cost to
taxpayers in the long run we need to make them independent,
accountable to all of you surely for meeting their objectives,
but independent in terms of their daily actions and in terms of
the budgets to get their work done.
Mr. Scott. Right. And you mentioned the key word. It is who
determines their budget, who determines their money. As the guy
said in the great movie, ``Follow the money.'' That is what
determines your power and authority.
And I thank you for your comments there on how important it
is to keep the funding in an independent way. Thank you, sir.
Chairman Barr. The gentleman's time 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 joining us today.
Just a comment in reference to my good friend Mr. Scott's
perspective on the net effect of the regulatory policy from the
Fed as a result of the Dodd-Frank bill. In North Carolina, we
have lost 50 percent of our banks since 2010 because of the
compliance requirements. And of course that has resulted in
less capital and credit for small businesses so important for
our economy.
Mr. Sivon, the Volcker Rule with its immense complexities
ensures full employment, it appears to me, for the Washington
lawyers and consultants and bureaucrats, but it continues to
really harm others who are in small and medium-sized companies
that aren't able to expand their businesses.
In your testimony you stated and suggested that the Volcker
Rule would ``impair liquidity in the Nation's capital markets,
which as a consequence would force business to face higher
borrowing costs, resulting in less economic activity and
translating into fewer jobs.''
Having said that, do you believe this still to be a valid
concern? And specifically, what actions should Congress take to
remedy this situation and help these businesses ensure full
economic opportunity?
Mr. Sivon. Thank you, Congressman.
When the rule was contemplated, there were concerns that it
could have some impact on liquidity, and recent studies are
starting to bear that out. In fact, studies by the Federal
Reserve itself have started to bear that out.
So we recommend that the rule be revisited. We are not
alone in making this recommendation. The agencies themselves
and the Treasury Department are starting to acknowledge that it
is overly complex and there could be some improvements.
In my own practice I have helped a number of mid-sized
banks develop their compliance programs for this rule, and what
that exercise turns out to be is a demonstration that they are
not engaged in proprietary trading, they are not making
investments, so it becomes proving the negative.
Clearly, there is a category of institutions that this rule
should not apply to, the scope of the prohibitions could be
narrowed, the compliance requirements could be more
streamlined.
Mr. Pittenger. What role then should the Fed play in trying
to implement any changes?
Mr. Sivon. The Fed is one of the five agencies that are
responsible for writing this rule. So the Fed could coordinate
with the other agencies in helping to streamline and address
these issues.
Mr. Pittenger. Thank you.
Mr. Calomiris, as you are well-aware, the Fed was
established more than 100 years ago. According to the Board of
Governors website, it says that it was established to provide a
safer, more flexible, and more stable monetary and financial
system. Yet the research suggests that the U.S. has been the
most financially unstable developed economy in the world for
two centuries.
As you know, Dr. Calomiris, Dodd-Frank gave the Fed a
prominent role in the prudential regulation of our financial
system. Should we believe that this time is different, that we
finally found the optimal regulatory structure for a crisis-
prone financial system, or is the new regulatory structure the
same as the old one, fragile by design?
Mr. Calomiris. I don't think that it is very promising
looking forward. I agree with my colleagues here who have said
the banking system right now is more stable than it was before.
That is not really the interesting question. The interesting
question is, when we go through the next unstable period, will
these regulations work better than the last ones? And I think
it is pretty clear that they won't.
I have just completed a book that I know all of you have
because I made sure you all got a copy explaining why I don't
think it is going to work.
And that also underlines my point that this shouldn't just
be a discussion about deregulation, this should be a discussion
about strengthening regulations that are not credible. And I
would say that the implementation of Dodd-Frank is not very
credible.
We are already seeing mortgage markets looking very similar
to what they were doing in the late 1990s and early 2000s. That
is the result of government decisions, FHA decisions, FHFA
decisions. These were political decisions. They are putting us
back into the same direction.
We saw the QM and the QRM standard, because they were given
to the regulatory agencies to decide the details of, we saw
those being whittled away. And we saw, of course, what Barney
Frank has bemoaned as the loophole that ate the standard.
So I think that we have a lot of reasons not to be very
confident.
Mr. Pittenger. Thank you.
My time has, unfortunately, expired. Thank you very much.
Mr. Calomiris. I'm sorry if I went on too long.
Mr. Pittenger. I appreciate your testimony.
Chairman Barr. The time of the gentleman has expired.
The Chair recognizes the gentleman from Illinois, Mr.
Foster.
Mr. Foster. Thank you, Mr. Chairman.
And thank you to our witnesses.
There have been two great financial crises, I guess, in our
lifetime: the 2008 crisis; and the savings and loan crisis. In
which one of these did the taxpayer have to write a bigger
check? Anyone who wants to answer it? Just roughly?
Mr. Calomiris. The first one.
Mr. Foster. That is my impression, that it was the check
was about 2 percent of GDP, right?
Mr. Calomiris. A little bit more. But it is a tough one
because if you are asking write a check, that is a complicated
question to answer. The total exposure of the taxpayer,
potential loss exposure, was greater in the second crisis, but
the actual--
Mr. Foster. Potential, but the actual losses were higher. I
think they were--the nominal losses at least were near zero--
Mr. Calomiris. I agree with that, yes.
Mr. Foster. So I think that is a significant point. And I
am trying to get back to your point, Dr. Cecchetti, about what
we are hearing here is that the solution to our problems is to
subject regulators to the appropriations process, which is
something you pointed out had been done to the regulators of
the S&L. And we are also talking about the crosstalk between
monetary policy and regulation.
And it is my sort of simpleminded understanding of the S&L
crisis is it was a bunch of smaller institutions getting on the
wrong side of an interest rate bet, and then when the Fed made
a big move in monetary policy they were in big trouble. And it
was the lack of any communication between the regulators and
understanding what sort of stress that would put the regulated
institutions under when the Fed made a big interest rate move
that actually was the driving mechanism. Of course it spiraled
into fraud and everything else.
But I was just wondering, is that a fair evaluation of how
useful subjecting regulators to the appropriations is?
Mr. Cecchetti. I believe that it is. And let me just say
that I think you have exactly the right pathology in mind,
which is to say that interest rate increases generally harm
bank profitability and bank equity positions.
It is important, therefore, for the people who are
contemplating those increases to understand what their overall
impact is likely to be. They are going to be in the best
position also to ensure that when they do raise interest rates,
which they will ultimately have to do under circumstances in
order to ensure that prices remain stable and that growth
remains stable, that they understand what the consequences of
those actions are going to be at a relatively detailed level.
Mr. Foster. And that had there been better communication
between regulators and monetary policy actually would have been
our best shot at preventing that largest taxpayer bailout of
history in the savings and loan crisis.
Mr. Cecchetti. I am not sure I would go quite that far. But
I do believe that what was missing, especially in the last
crisis, was having someone who was clearly responsible for the
financial system as a whole and especially for the largest,
say, three or four dozen financial intermediaries that are
systemic where any one of them failing had large consequences
for the system as a whole.
Mr. Foster. Okay. Thank you.
And, Dr. Calomiris, you have written extensively on
contingent capital, which you are aware I am a big fan of as a
mechanism, a market-based mechanism to make sure that it is not
the taxpayer who is left holding the bag.
Could you just say a little bit about what you think the
experience has been internationally with using these and what
the prospects should be for avoiding future bank bailouts?
Mr. Calomiris. Very quickly, the right instrument that I
have been proposing has never been created yet. What we do
know, however, is that the demand for contingent capital-type
instruments has turned out to be very high by ultimate
investors, so I think that is the evidence that is the most
promising.
What we also know, though, is that we have created this
total loss-absorbing capital concept, which the contingent
capital could be used now in the context of that concept as the
form required at the bank holding company. But it has to be
required in a much larger amount than is currently present. So
I think we have a lot of inadequacies that the contingent
capital could help.
Mr. Foster. But there is also an important difference here,
that the TLAC triggers that insolvency not violation of capital
requirements.
Mr. Calomiris. Exactly.
Mr. Foster. And so a market-based instrument that warns the
banks two steps back from the cliff rather than at the point of
insolvency has real merit.
Mr. Calomiris. That is exactly right. And I think that is
the essence of why this is so important, because I don't have
confidence in the FDIC's ability to resolve these very large
institutions, despite what they say under Title II. So we have
to keep them far away from that point so we don't test that.
Mr. Foster. Thank you, and keep on this subject. I am a big
fan.
Chairman Barr. The gentleman's time has expired.
The Chair now recognizes the gentleman from Colorado, Mr.
Tipton.
Mr. Tipton. Thank you, Mr. Chairman.
And I thank the panel for taking the time to be here.
Mr. Sivon, I would like to return back to a question, and
maybe get a little more comment from you, that Chairman
Luetkemeyer had raised in regards to rules and regulations and
the overlaps that we have had.
We sent a letter to Secretary Mnuchin, 31 members of this
committee, asking him in his capacity regarding the FSOC to be
able to address rule and regulation overlap, to be able to
streamline some of those processes. We have had Chair Yellen
before this committee on numerous occasions, also noting that
regulatory policy does have a trickle-down effect that is
impacting smaller institutions, as well.
Can you maybe speak a little bit to some of the costs that
are going to be associated with having that duplicative
overlapping regulatory policy and how that impacts people
literally at home?
Mr. Sivon. Yes, thank you. It is a major issue for the
members of the roundtable, which are larger institutions. But
you are absolutely correct that there is a trickle-down effect.
Even though rules may be tailored, they are often applied to
institutions below the specific rule.
Some examples. Today, institutions have to prepare
resolution plans for a holding company. They also have to
prepare resolution plans at the individual bank level. Some
recovery planning is required by some regulators, which is a
plan that before you get into a failing situation. There are
duplicating requirements on risk management standards that the
OCC and the Fed have put out.
So there are examples of instances where we are quite
concerned that the agencies are not coordinating as much as
they should be. FSOC could play a role here as an organization
where all these agencies do sit, and maybe in the new
Administration it will play more of a coordinating role.
Mr. Tipton. Thanks. I appreciate that. I think that is a
lot of the challenge, particularly at the community bank level,
that we are seeing, our smaller institutions. Best practices.
It may not be theoretically applicable to you, but indeed it
becomes applicable to you, and that tends to flow down the
list.
And I just had an opportunity during the August break to be
able to visit with a lot of our community banks, and I think a
number of them would actually be applauding you when you are
saying make the loan loss reserves Tier I capital. You used to
think of this as something separate and unto itself to be able
to deal with it, but it is now impacting that ability really to
be able to make some loans and to be able to help our folks at
home to be able to grow the economy.
Would you maybe talk a little bit more--I thought it was
interesting when you were talking about some of the modeling on
the stress tests, to be able to reveal some more information so
that you our banks--we understand we don't want anybody to be
able to game the system. But would you maybe speak to that just
a bit more?
Mr. Sivon. Yes. I would agree with others on the panel that
stress testing is one of the more important reforms that has
been put in place since the crisis. And, in fact, if you look
at the results of the latest stress tests, they do demonstrate
that large institutions could survive a crisis of worse
magnitude than we went through in 2008.
The problem that we see with the manner in which the stress
tests are operated today, though, is the models that the board
maintains are not shared, they are not transparent with the
industry. So you have bankers who are trying to estimate what
the board's model may show and modifying their loan activity to
try to meet that standard, whereas that may not be the most
appropriate manner in which they should be engaging in their
particular community given their risk profile and the market in
which they operate.
So we think there is a little disconnect between the lack
of transparency under the current structure.
Mr. Tipton. Thank you.
And, Dr. Calomiris, I would like to maybe just return a
little bit to the ability to be able to use a little bit of the
power of the purse, the appropriations process, in terms of
some questions that have been asked in terms of making the Fed
actually more accountable.
When we look at 15 percent of the U.S. mortgage market
securities are currently held in the Fed, is that going to
impact some of theirs? Is there an appropriate way or would
using that monetary policy be negative?
Mr. Calomiris. I am very worried about the Fed keeping
those on its balance sheet. And I support a recommendation,
which I also have made a long time ago, and that Charles
Plosser has also been pushing, for us to engage in a swap
between the Treasury and the Fed, to swap those for Treasury
securities so that we get the Fed out of the mortgage business.
And that is also an inappropriate fiscal intervention. The
Fed is clearly intending to affect the relative cost of
particular financial instruments. That is not monetary policy.
Mr. Tipton. Thank you very much, Mr. Chairman. The time has
expired. I yield back.
Chairman Luetkemeyer [presiding]. The gentleman yields
back. We are playing musical chairmen here today, so I will be
chairing for a little bit, for the rest of the hearing.
So with that, we also have an important moment here. The
gentleman from Indiana is going to be recognized to question
for 5 minutes. But I understand it is a very, very important
day in his life.
Happy birthday. Is that correct, sir?
Mr. Hollingsworth. Yes, that is correct. Thank you. Very,
very important may be overstating it.
Chairman Luetkemeyer. It is very important, very important.
Mr. Hollingsworth. I am happy to make another milestone.
Chairman Luetkemeyer. Older and wiser. There you go.
The gentleman is recognized for 5 minutes.
Mr. Hollingsworth. Good afternoon, gentlemen. I really
appreciate you taking the opportunity to come talk to us today.
And so far it has proven enthralling, I can tell you. And for
the dozens of my constituents back home watching this, it is
indeed enthralling for them, I am sure, right?
But I wanted to come back to something because I have heard
it implied or even explicitly stated a few times, that the lack
of a crisis in the last 9 years is somehow evidence that this
extra regulatory burden will forever and always keep us safe
from a crisis instead of some recognition that by the same
logic the fact that we had regulators and regulations before
the last crisis seems to be some evidence that regulation, and
especially by edict out of D.C., instead of enabling and
empowering lenders to be able to pursue their own business
models, it might in fact be one of the root causes for some of
the instability.
And I would love it if Dr. Calomiris would comment on that.
Mr. Calomiris. There are so many pieces to it. Of course, I
wrote a book that went through that in some detail.
But it is important to remember that as we are worried
about too-big-to-fail institutions, we are running up
inordinate risks having to do with the mortgage market, that
the Fed was the institution that first of all was managing the
merger process that created too-big-to-fail institutions, and
it was the Fed that was also managing the prudential regulatory
process that decided whether they had adequate capital. And I
would say the Fed was extremely politicized.
Mr. Hollingsworth. Right.
Mr. Calomiris. And that its extreme politicization led it
to approve of mergers in a way that created mortgage risk and
then therefore could not set capital requirements that would
have created adequate capital.
So that was, to my way of thinking, probably the single
best example of the kinds of problems that come from a
politicized regulator that is a central bank.
Mr. Hollingsworth. One of the deep challenges I have--and
again, my statistics is rusty--but the use of the
counterfactual here, somehow saying because we have not had a
crisis that we are okay. But what we haven't talked about is
the tremendous costs on the U.S. economy of the misallocation
of capital across it because of government intervention,
government distortion, and excessively burdensome government
regulation, which continues to misallocate capital and not get
it in the hands of those that could most productively use it,
and the economy has suffered because of that. People back home
have suffered because of that. And I would love it if you would
comment a little bit on that.
Mr. Calomiris. The most obvious area has been small
business lending, especially because small banks have a lot to
do with small business lending, and small banks have been
really hit a lot by the overhead costs of the regulatory
burden. That is one part of it.
Mr. Hollingsworth. And just what I hear from my small
bankers in the community is what they say is: We have been
essentially forced to combine because the regulatory burden is
so heavy and that fixed cost is so heavy we have to amortize
that over more and more customers, more and more loans, more
and more products, and so we have combined and gotten larger.
And thus, they find themselves less capable of serving the
communities and find themselves more and more, in their
feeling, in servitude of a bureaucracy in D.C. instead of
focusing on enabling and empowering their customers.
Mr. Calomiris. It shows in all the statistics I have quoted
in my various work. One thing that I would also point out is we
are going to great lengths through a variety of measures to
push mortgages rather than small business lending, is what
small banks do.
Mr. Hollingsworth. Right.
Mr. Calomiris. And so it is not just that small banks have
been hurt, it is also that if we actually required banks to be
more diversified across their lending we would help small
businesses quite a lot.
Mr. Hollingsworth. Indeed.
And, Mr. Sivon, I wanted to ask you specifically about a
bill that I have recently introduced. This bill, H.R. 3179, the
Transparency and Accountability for Business Standards Act, is
really simple. It is about harmonizing regulation across
jurisdictions. And the fact is that the United States has gold-
plated many of the standards coming back from overseas. And I
wondered if you could talk a little bit about the global
competitiveness of U.S. institutions in the face of a heavier
regulatory burden here at home than others may face in other
jurisdictions.
Mr. Sivon. Thank you, Congressman. It is one of the issues
highlighted in our testimony. We do think that the layering on
of additional requirements for the larger U.S. institutions
does raise competitive issues for them in global markets. And
the legislation that you have introduced provides for the
regulators to do a cost-benefit analysis before imposing that
kind of a standard.
We strongly support that. We think the idea of cost-benefit
analysis makes sense there as well as in other regulations that
the agencies are proposing.
Mr. Hollingsworth. So the net-net is, when I think about
the regulatory burden in this country, the misallocation of
capital is costing opportunities for higher economic growth,
for people to realize meaningful wages. And then in addition,
that regulatory burden is costing U.S. companies
competitiveness around the world to be able to export some of
the great things that we have developed here to other
countries.
And with that, I will yield back, sir.
Chairman Luetkemeyer. The gentleman's time has expired.
We now go to the gentleman from Minnesota, Mr. Emmer, who
is recognized for 5 minutes.
Mr. Emmer. Thank you very much, and thanks to the panel for
being here.
I just don't even know where to start. So much of this has
been covered. It is a very interesting discussion. But I think
I want to start with Dr. Calomiris.
You had talked about one of the reforms being budgeting
authority, having more oversight on budgeting authority. What
about the argument that we hear constantly, and I think Dr.
Cecchetti made this argument at some point, that this would
impact the Federal Reserve's independence, putting their budget
under the supervision of Congress, for instance? How would you
respond to that?
Mr. Calomiris. I think the important first step is to ask,
when we talk about Fed independence, what are we talking about?
Independence in the literature for decades has always meant
independent of special interest pressures, independent of
short-term pressures coming from the Administration. It has
never, ever meant that laws that the Fed administers should be
made independently of the United States Congress.
So I just want to be clear, when I use the word,
``independence,'' I don't think that it is consistent with our
Constitution to think that the Fed should be writing
regulations that are not overseen by the U.S. Congress. I think
that is a very radical and new idea that seems to me to be just
wrong.
So the question then is, well, what is the role of
budgetary discipline? Congress under the Constitution is the
only agency, is the only institution that is supposed to be
sending funds for whatever purpose in the government. So I
don't really understand how you can read the Constitution and
find this authority for the Fed to have a blank check to spend
money any way it wants.
Mr. Emmer. Thank you.
Dr. Cecchetti, you had testified, and I wrote it down,
early this afternoon that you need to have an objective and
then there need to be guidelines on how to get to that
objective. How is that different from having a rule in place
which is in effect a guideline? I think the proposal from this
Congress or this committee has been, one of the proposals, to
put a rule in place so that at least people in the public know
what to expect. But it doesn't have to be followed, and if it
is not followed then it would require an explanation as to why
we are not following it. How is that different?
Mr. Huizenga. I am so sorry, but would the gentleman yield
for just a second?
Mr. Emmer. Absolutely.
Mr. Huizenga. As the author of the FORM Act, and I know
Chairman Barr has been working on this, we actually had said
that the Fed could make up their own guideline and just have it
out there and then explain when they were going to deviate from
that. So that was not even anything that we on this panel or
the House or the Senate or anybody else would put forward, it
would actually be a guideline created by the Fed and measure
themselves.
So I yield back.
Mr. Emmer. Great context. How is that different from what
you said?
Mr. Cecchetti. So what I was trying to say is that I view
the job of the Congress as to set the objectives and to hold
the Federal Reserve accountable for meeting those objectives. I
do not believe that it is worthwhile for the Congress to be
involved directly in setting policy.
Mr. Emmer. But actually, to interrupt, because we are going
to run out of time, that is exactly what my colleague just said
that they were proposing, is go ahead and set the objective,
you do the policy so all of us know what it is, and then you
have the guidelines, the policy guidelines and you explain. It
sounds to me, sir, as though we actually agree on this.
I have to go back with the limited time I have left to Dr.
Calomiris, because I have some concerns with this conflict of
interest and the politicizing of the Federal Reserve. We have
lost so many community banks, family-owned community banks and
credit unions over the last 7 years since Dodd-Frank was in
existence, and, in fact, it started even before that, but it
has been accelerated in the last 7 years.
And it seems as though, looking at it and reading your
testimony, listening to you here today, and perhaps your
colleague might weigh in as well, in order to exist with this
regulatory function and the monetary policy function you have
to have a lot of resources in order to exist, and we are not
creating new banks. Is there a favoritism towards the larger
institutions?
Mr. Calomiris. I just have a new volume coming out that I
am editing on this. And some of the rules are hitting the large
institutions, of course. Some of the rules are hitting the
small institutions. The main problem with the small
institutions is, how do you spread the overhead from having to
comply with these things over a small balance sheet? And I
think that is why it just becomes existential for them.
Chairman Luetkemeyer. The gentleman's time has expired.
The gentleman from Arkansas, Mr. Hill, is recognized for 5
minutes.
Mr. Hill. I thank the chairman. I thank both chairmen for
this interesting topic, to continue our exploration of the Fed
and the role of the Fed both in monetary policy and in
regulatory policy. And I am sorry I have been in and out today.
It is one of those days on Capitol Hill.
I would like to talk and follow up with my friend from
Indiana's comments about misallocation of capital and get your
views just from a little different perspective. Obviously
market prices provide a lot of information to market
participants. And you have had the Fed really over the last few
years be unprecedented in sustained decline of zero interest
rates, plus doubling down with QE1, QE2, QE3.
And we have the third most expensive S&P 500 now in
history. Only 1997 to 2001 and 1929 exceed the price earnings
multiple on the S&P 500 right now. And we have historically low
cap rates for long-tailed commercial real estate properties,
for example. And I think at the last count something like $13
trillion of sovereign debt is at a negative yield.
So these are clearly unprecedented times.
But one of the key components of that was back in 2012 the
Fed established an inflation target of 2 percent, which we have
not hit. And I wonder if that calls into question whether they
should even have set such a target if they can't hit it. I
think Gary Shilling said, and I am paraphrasing, if you can't
hit a target, maybe we need to question our authority to even
try to do that.
So I am interested in your views on that inflation target.
Should that be maintained or should we, as we normalize the
balance sheet or attempt to, also let that go by the wayside as
a test for the last years? Each of you, if you would comment on
that, please?
Mr. Calomiris. I will be quick. I would have preferred a 1
percent target rather than a 2 percent target, which is the one
Alan Greenspan, as I read it, suggested in 2006. But now that
they have stated the 2 percent target, I think it is important
that it not be subject to change. I think that they need to
stick with it because they have now said that that is their
long-run target. That should be subject, of course, to your
approval, but I think that it is a good idea to stick with it.
I also don't agree with people who say the Fed has
undershot its target, because this is a long-run target. It is
not clear yet whether being at 1.5 percent for current
inflation means that they are pursuing policies that are long
run below the target. So I don't think that we want to be too
critical of the Fed for coming in at 1.5 rather than at 2.
Mr. Hill. I just want to add one nuance to that. At 1.7
percent, should we just declare victory and say we have hit 2
percent if it is going to not let us take other policy
decisions in the monetary policy arena surrounding the balance
sheet that maybe we should because it is just one factor
considered, not the only factor?
Mr. Calomiris. So just very quickly, monetary policy
remains accommodative. In real English what that means is
monetary policy is still pushing toward going to a higher rate
of price growth. And that is appropriate given that the Fed has
a 2 percent objective. I think it should be less accommodative
than it is.
So I think the Fed is basically doing behavior that is so
far consistent with a 2 percent policy objective, and I think
that we shouldn't beat them up too much.
Mr. Cecchetti. I agree with my esteemed colleague that 2
percent, now that you have it, I think you have to keep it. If
you start changing it then everybody is going to wonder when
you are going to change it.
And the most important thing, I think, for all of us and
for individuals, for small businesses, for households, for
investors is that they be able to have some security in what
inflation will be over the long run. And in this I think Dr.
Calomiris and I completely agree that these modest deviations
over relatively short periods of time are not a problem.
Mr. Hill. Mr. Sivon, quickly, sir?
Mr. Sivon. On monetary policy, the members of the FSR will
operate in any interest rate environment.
Mr. Hill. Thank you, Mr. Chairman. I yield back.
Chairman Barr. The gentleman's time has expired.
The gentleman from California, Mr. Royce, is recognized for
5 minutes.
Mr. Royce. Thank you very much, Mr. Chairman.
Dr. Calomiris, as you may know, I have spent a lot of time
concerned about the drug of leverage, as you referred to it. In
fact, when the House considered GSE reform back in legislation
in 2005, I introduced an amendment to give the regulator the
authority to curtail the systemic risk posed by Fannie and
Freddie's portfolio. The regulator would have had the ability
to deleverage those portfolios.
That amendment was defeated by a large margin, leaving the
underlying legislation incapable of curtailing the risk
exposure from these portfolios. The opponents of my amendment
on both sides of the aisle claimed Fannie and Freddie posed no
threat to the financial markets and that systemic risk was, in
one of these debates I remember here, a theoretical term.
In reality the opposition was looking to preserve the
status quo. They were looking to allow Fannie and Freddie to
grow at a very alarming rate without any meaningful
constraints, and I would add without any oversight from this
institution.
You have said we need the political courage to give up the
drug. Do you think we have learned from that crisis? Have we
brought transparency to the GSEs and the Federal Reserve and
the role they play in terms of subsidizing our housing markets,
do people really understand that, or is the moral hazard that I
pointed out then still in play today?
Mr. Calomiris. It has gotten worse. So let me remind you
that as soon as Mr. DeMarco was replaced by Mr. Watt, one of
the first things Mr. Watt did was to lower the downpayment
requirements for GSE mortgages from 5 percent to 3 percent.
Five percent is way too low. Three percent is unbelievably low.
The FHA also cut insurance premiums.
Has the FSOC, who is supposed to be looking for systemic
risk, ever used the word, ``mortgage'' or the words, ``real
estate'' in any of their discussions? Almost none. Why? The
Secretary of the Treasury is the head of the FSOC, so why would
the Administration that appointed Mr. Watt then also say that
Mr. Watt just created risk. They wouldn't, right?
So the problem is the FSOC is politicized and is not going
to be honest about mortgage risk. And it is currently a threat.
It is going to get worse.
Mr. Royce. Let me ask Mr. Sivon a question, because you are
someone who has opined on insurance regulation for many years.
Could you take a minute or 2 to describe how we ended up
where we are today? Because this is no longer a discussion
about State versus Federal regulation. It is now a discussion
about layered regulation. That is the difference. The Federal
Reserve now plays a pronounced role in this regulation.
And I can think of some of the possible positives from the
outcome. You could argue that maybe now on the monetary policy
side the Fed better understands the impact prolonged low
interest rates have on life insurers trying to plan for the
long term. That is a positive. But on the regulatory side, it
is unclear what the proper role for the Fed is in the future.
So I offer you the floor here with the remaining minutes.
Mr. Sivon. One of the major changes in the Dodd-Frank Act
was to give the Fed regulatory and supervisory authority over a
number of insurance companies. In fairness to them, I think
they have been moving slowly in the manner in which they have
been exercising that authority.
On the other hand, as I noted in my testimony, we think it
is very important for the agency to appreciate the distinction
between the business of insurance and the business of banking,
and some of the supervisory policy statements that they have
put out have been more aimed at banking than recognizing the
distinct issues that an insurance company faces.
The most recent action that they took last year was to
propose capital standards for the insurers that they regulate.
They proposed two alternative standards: one called the
consolidated approach for the very largest insurers that they
regulate; and another called a building block approach for the
savings and loan holding companies that are owned by insurance
companies.
The building block approach is based upon State insurance
regulation. And so it is our strong view that as the Fed moves
forward in regulating capital requirements for the insurers
that it regulates it doesn't layer on yet a new type of capital
requirement, but look to what the States have done and build on
this building block approach for capital requirements for
insurance companies.
Mr. Royce. Thank you very much.
And I thank you again, Mr. Chairman, and I thank our
witnesses.
Chairman Luetkemeyer. The gentleman's time has expired.
We have a situation where we are truly enthralled by your
expertise today, and we have another round of questions that we
would like to ask if you guys have some time. We would like to
impose on you to be able to do that. Or do you guys have some
other places to go shortly? No? Okay.
Otherwise, we would like to start a second round, and we
will start with the gentleman who is the chairman of the
Oversight Subcommittee, the gentleman from Kentucky, Mr. Barr.
Chairman Barr. Thank you, Mr. Chairman.
And I appreciate the indulgence of our witnesses. We
appreciate the very interesting exchange of ideas here today.
What I have heard from all of the witnesses is a general
agreement that Fed independence, a Fed free from politicization
is a goal that we share.
But I think a strong argument can be made that the Fed's
aggressive implementation of the Dodd-Frank Act, that their
zealous supervisory activities, their overregulation arguably,
that that has, in fact, diminished economic growth, that that
has undermined credit availability in capital formation, and
that that process, that process of being engaged in the
regulatory supervisory process, has actually induced the Fed to
pursue a radically unconventional and accommodative monetary
policy to offset the growth-destroying effects of the
regulatory policies.
And that obviously, that monetary policy has distorted
financial asset values. It has discouraged financial capital
from freely engaging in its most promising opportunities. And
witnesses in this committee, in this subcommittee, have
expressed concern about the Fed's balance sheet stepping out of
what is necessary for the conduct of monetary policy and
obviously into unprecedented unchartered credit policy.
So the point I am trying to make is that this conduct, I
would submit, does not really look like a government agency
free of politics. That to me looks like a government agency
that is totally politicized. And so I invite your feedback on
that observation.
Dr. Calomiris?
Mr. Calomiris. I think that it is true. It is inevitable.
When you get into things like mortgage-backed securities
markets and you are making changes in relative interest rates
for different financial instruments, that is what we economists
call fiscal policy. That is a decision to subsidize some kinds
of uses of funds at the expense of others.
So when you get engaged in that, just like any political
institution, you become a political institution and you become
a lightning rod for influence. This is one of the reasons why
monetary policy just has to stay away from those kinds of
things.
Chairman Barr. Just to follow up to your answer there, and
I want to hear from the other witnesses on that, but I think
you have made the point, Dr. Calomiris, that as an owner of
over 15 percent of U.S. mortgage market securities, the Fed's
monetary policymakers are quite conflicted when it comes to
interest rate policy.
Mr. Calomiris. That is right.
I also just want to say I think your analysis of the
motivation of the Fed is right, that the Fed having been part
of the problem of creating the growth slowdown has actually
tried to do things to try to prop things up. It is not working
very well. And Marco DiMaggio, my former colleague, his study
found that the only part of QE that really had a positive
effect of QE2 and QE3 was the mortgage-backed security part.
Chairman Barr. Dr. Cecchetti, I do want to give you an
opportunity to respond. And as you respond, could you also
address the testimony that you offered earlier that the job of
the Congress is to set objectives and hold the Fed accountable?
But how do you hold, how does Congress hold the Fed accountable
on rulemaking if they are completely immune from the meaningful
oversight of the appropriations process?
Mr. Cecchetti. I believe that you can hold them accountable
with--let me start with your first points. I think there are
two points.
First of all, on the mortgages, I think that many people,
including me, are uncomfortable with the fact that the Federal
Reserve owns so many mortgages, the mortgage-backed securities.
But these were purchased as the Fed was trying to support the
mortgage market during a collapse, and I think that they will
let those run off as soon as they practically can.
On the issue of stringent capital requirements, I think it
is important to understand that capital requirements facilitate
lending. Strong banks lend. Banks that have strong underlying
capital positions are lending, and they are doing it now, and I
think that that is a very, very important thing that I hope
that everybody appreciates.
There is an issue which has come up a number of times which
I will comment very briefly on, and that is that I think there
is also broad agreement that a $1 trillion bank and a $1
billion bank should not be treated identically. And the
question then is how do you change that treatment?
Chairman Barr. I yield back.
Chairman Luetkemeyer. The gentleman's time has expired.
We now go to the ranking member of the Financial
Institutions Subcommittee, the gentleman from Missouri, Mr.
Clay.
Mr. Clay. Thank you, Mr. Chairman.
And, Dr. Cecchetti, the outlook of the economy, including
whether financial conditions are likely to lead to faster or
slower future growth, has a significant impact on both
inflation and employment. Given this, can you talk about how
the information that the Fed learns through its supervision of
the financial system would inform and enhance the Fed's outlook
on how it may need to adjust its monetary policy stance in
order to achieve its statutory full employment and price
stability objectives?
Mr. Cecchetti. Yes, Congressman, I would be happy to.
The Federal Reserve's interest rate actions operate through
the banking system. So it is essential when they set their
interest rate to know what it is that the banking system is
doing.
The information that the Federal Reserve has access to
today prior to making those decisions includes information
about individual borrowers and individual lenders. They know
about the size of loans, they know who it is that is doing the
borrowing, and they know what the terms are of those loans.
They use that information--aggregating it, obviously--in a way
that then informs them on how it is they need to set their
policy in order to ensure that the easing or tightening of the
policy has the desired impact.
Mr. Clay. And to what extent does the Fed's forecasting
function tend to rely on analysis of supervisory data?
Mr. Cecchetti. I think the answer to that is that we are
going to know more and more about that over the next few years.
As Dr. Calomiris pointed out, the Federal Reserve as part
of its accountability mechanism releases transcripts of the
Federal Open Market Committee meetings with a 5-year lag. So
right now we don't actually have access to the discussions and
the meetings for the past 5 years, but my understanding from
speaking to some people inside of the Federal Reserve is that
the kind of information that we are describing here now has
found its way in that time period, because it hasn't been
collected in a consolidated and consistent way until the last
few years, that it is now finding its way into those decisions
and into those discussions.
Mr. Clay. Thank you for that.
And, Dr. Calomiris, considering the performance of the U.S.
economy over the last year, do you think the Federal Reserve
has made the correct moves as far as being able to lower
unemployment and the strong market indicators that we see now?
Do you give them any credit for that performance?
Mr. Calomiris. Absolutely. As I said, I think we are below
our long-run inflation target. I think that according to the
Fed's own measures, though, of unemployment, it has been a
moving target. So the Fed doesn't really have a very good sense
of what the long-term right level of unemployment is, and that
has been one of the things we have been learning.
So it has been a tough job. I think that qualitatively they
have done a fair job. My friend, Mr. Cecchetti, is an easier
grader than I am. But I would say that they have done a decent
job under a circumstance of extreme uncertainty about the long-
run unemployment rate.
Mr. Clay. Thank you for your response.
I would prefer to take a course from Dr. Cecchetti, I
think.
And with that, Mr. Chairman, I yield back.
Chairman Luetkemeyer. The gentleman from Missouri yields
back the balance of his time. As the gentleman who actually got
an A or two in school, we are okay with either one of these
guys. I think we could make it work.
With that, we go to the gentleman from Indiana, Mr.
Hollingsworth, for 5 minutes.
Mr. Hollingsworth. I really appreciate the testimony again,
and thank you for being here.
So one of the things that was said a few minutes ago was
that strong banks make loans, and I don't doubt that loan
growth hasn't been zero, but it certainly hasn't been as robust
as it otherwise would be.
When we look back at prior recessions and loan growth post-
recessions, we have continued to see this one lags back behind
by many, many dozens of statistics and measures, and that is a
real challenge.
It is a real challenge because capital formation out in
especially where I come from, in the heartland, is really,
really poor, and we have to fix that.
So that is one thing that I talk a lot about, which is kind
of the wet blanket effect of all of these regulations.
The other thing, which isn't talked about as much but I
have been pushing really hard, is the effect on bank balance
sheets of these many intrusive regulations. And let me tell you
what I think I mean, which is the more and more that we develop
a higher and higher regulatory threshold in a variety of
different areas, the more and more we force institutions to
look more and more similar to each other. By government saying
we are going to weight these and not these, we are pushing
banks into a corner.
And you have to be really careful when you line banks up
like that because you better hope you got everything right,
because now you have lined them up to where the moment there is
an issue it is a very quick transmission from institution to
other institutions because their balance sheet looks very
familiar.
What I fundamentally believe is that robustness and
resiliency are emergent qualities from a system, not qualities
that can be demanded by fiat.
And so Mr. Sivon had talked about this a little bit
earlier, just allowing for diversity of businesses to exist
within the financial landscape and a diversity of business
models. And I wondered if you might touch on that again and
talk about how maybe a resilient, robust system, one that can
withstand shocks, probably derives from that diversity of
business models, risks, and profiles.
Mr. Sivon. Yes. Thank you. Clearly, the system is stable
today in part because of many of the steps that have been taken
by the industry and regulators and Congress.
Our view is that we probably have some excess capital and
some excess liquidity requirements today that could be put to
more productive use and help economic growth. And that is the
nature of the recommendations that we make in our testimony in
terms of adjusting the capital requirements and the liquidity
rule and the Volcker Rule and the supplemental leverage ratio
and so on. There are quite a number of changes that could be
done in a fine-tuning way to help economic growth.
Mr. Hollingsworth. Dr. Calomiris, could you comment?
Mr. Calomiris. I will, like a broken record, just point out
that it can't possibly be a good thing that, putting aside the
largest banks, that the banks throughout our country have about
three-quarters of their loans in real estate.
When you are asking, are we in a situation that is going to
be resilient, when all those balance sheets are basically
lending to one sector that is very correlated with the business
cycle and has a very hard time selling assets during a
downturn, how are we dealing with systemic risk? I think it is
kind of a joke.
Mr. Hollingsworth. Dr. Cecchetti?
Mr. Cecchetti. Two quick comments.
First of all, I think it would be very difficult to
disagree with your comment about the need for what I would call
a diverse ecology in the financial system in order to ensure
its resilience. I think that is absolutely, absolutely
essential. And to the extent that the regulatory environment is
overly constraining in certain ways, it will decrease that
diversity and reduce the resilience.
I would, however, want to comment on the issue of the
lending levels. I think that we did not come into the crisis
with levels of debt that were sustainable. And so the fact that
levels of debt today are lower and that growth rates during the
recovery have been lower than those in previous recoveries I
think is something that we should not be terribly upset about.
The distribution of those loans is a separate issue, as my
colleague just described. And so I might--I would agree that if
all you are doing again is lending to real estate, that that is
an issue.
Mr. Hollingsworth. I certainty understand that perspective,
but back home in Indiana there are a lot of people who feel
like it is something to be upset about.
And the lack of loan growth, and especially loan growth to
the incremental individual who might be on the bubble of
creditworthiness but is trying to start that business, trying
to make a difference, trying to build a better financial future
for themselves, to them the lack of loan growth or credit
growth or credit availability has been a real challenge, and
they feel like it is being more and more directed by
bureaucrats in a fashion towards others and not towards
empowering them across the heartland.
And with that, I will yield back, Mr. Chairman.
Chairman Barr. The gentleman's time has expired.
The gentleman from Georgia, Mr. Scott, is recognized for 5
minutes.
Mr. Scott. Thank you, Mr. Chairman.
Mr. Cecchetti, it seems to me that some of my Republican
friends want to strip the Fed of its supervisory and regulatory
functions and leave the Fed, in my opinion, and I want your
opinion on this, wouldn't that leave the Fed ill-equipped to be
able to judge the conditions of the financial institutions that
they are in business to do? Wouldn't that make it very
difficult, particularly when the Fed has a role of being the
lender of last resort?
Mr. Cecchetti. I certainly believe that. Making a loan to a
bank--for the central bank to make a loan to a bank I think is
a very important financial stability tool. At the same time it
is extremely important that the central bank, the Federal
Reserve, not make a loan to an insolvent bank. You cannot be in
the business of lending money to people who are already
bankrupt.
Mr. Scott. Right.
Mr. Cecchetti. There are many reasons for that. The first
one is that is basically a bailout. The second one is that you
are subordinating existing debt holders. Because the Federal
Reserve is going to require collateral, it is going to come in
senior to everybody else that is out there.
The second thing you are going to do is you are going to
make the cleanup more costly.
And the third thing is that if you make loans to bankrupt
institutions, what is going to happen is that people are going
to come to know that you make loans to bankrupt institutions,
and then others are going to assume that if you go for a loan
you are bankrupt, and nobody is going to want to go for a loan,
so it is going to be very stigmatizing.
So I think that the only way to ensure that the Federal
Reserve or any central bank does not make loans to insolvent
institutions, to bankrupt institutions, is to have supervisory
information, because you need things that are very, very
current, and you need people who you can trust providing you
with that information.
Mr. Scott. And it seems to me that they want to take it
away from the Fed and put it to some outside entity. What
outside entity are they talking about?
Mr. Cecchetti. I think you would have to create a new one.
Either that or you are going to have to combine the Federal
Reserve's supervisory and regulatory authority with an existing
agency, and I don't see anyone suggesting that. But I don't see
how you could do it.
Mr. Calomiris. There are many ways to do it. Let me remind
you that in 2009 Senator Dodd, that was his vision of how we
should have crafted the Dodd-Frank Act, and I agree with that.
I think we should have gone in that direction.
Furthermore, that the 2008 Treasury Blueprint that I keep
referring to specifically made the same distinction. It seems
like Professor Cecchetti and I are sort of in agreement,
because the key point is you want the lender of last resort and
the monetary authority to have continuous unfettered access to
all information and to participate actively in the examination
process, that aspect of supervision.
But you don't need them to be deciding who gets to merge
and who doesn't. You don't need them to be setting laws down.
It is a different function.
Mr. Scott. But it just seems to me that if you are the
lender of last resort and that power and authority rests with
you, you are the fulcrum of the welfare of the entire economy.
But if you take away that ability to give it to an outside
source, that really is a mystery. You just can't pluck it out
the air here and give it to it. I would think it would be
devastating turbulence to our whole economy.
Mr. Cecchetti. I think that I am not the historian that Dr.
Calomiris is, but I will say that the Federal Reserve was
started in 1914 by the Congress in order to actually do this.
And so it is hard for me to see how you would organize this in
a different way.
Mr. Scott. Let me just ask you on the appropriations
process, Mr. Cecchetti, what will subjecting the Fed's
nonmonetary functions to the appropriations process, in your
opinion, do to the economy?
Mr. Cecchetti. I think it would be bad, but I think you
have run out of time.
Mr. Scott. You did say it--
Mr. Cecchetti. It would be bad. I think it would not serve
us well.
Mr. Scott. All right. Thank you.
Chairman Luetkemeyer. The gentleman's time has expired.
The gentleman from Illinois, Mr. Foster, is recognized for
5 minutes.
Mr. Foster. Thank you, again.
One of the issues in the inflation target is whether we
actually measure inflation properly. I guess Larry Summers and
others have been going around giving talks that we are making a
bad mistake in how we--one simple example that everyone points
out is this supercomputer in my hand here is the equivalent to
a couple-million-dollar Cray-1 supercomputer. And so everyone
in my family can now afford their own private supercomputer
that used to cost a million dollars in 1970 dollars.
And so we are not doing inflation--or Wikipedia. Every
middle- class family used to put 500 bucks down into World Book
Encyclopedias for their children that they now get for free or
essentially free.
And so that especially in items having to do with the
digital economy, it is not at all clear we are doing inflation
right. And if you look at people's leisure time, it is going
more and more into free things on the internet that we used to
pay a lot for. Just a long list of these things.
And you can make a case that we are badly mismeasuring
inflation. If that is true, it has real implications for
monetary policy.
And I was wondering what your attitude is on this part of
the debate, because the digitalization of our economy is
accelerating, and this is going to be more important in the
future.
Anyone?
Mr. Cecchetti. We are trying to pass this around.
I think this is an extremely difficult question. And my own
view is that these problems have existed to one degree or
another for a very long time. Television is very much like some
aspects of the internet. So television comes on in the 1950s
and provides us with free television in exchange for
advertising.
Google provides us with free lots of things in exchange for
advertising, which then the advertising, of course, costs get
impounded into the costs of all of the other products that we
have, that we purchase.
So the question is whether or not that has gotten
materially worse. I love my supercomputer in my pocket, as
well, and I use it quite a lot, and it is it is much more than
a--I would have put the price at more like $30 million in 1970
dollars than $1 million. It is a lot.
But I think that are we today worse than we were, say,
during the time there was the Boskin Commission in the 1990s
that estimated the bias in the Consumer Price Index at roughly
1 percentage point per year. One percentage point seems to me
to be a reasonable number. That means that actual inflation is
closer to 1 than--when it reads 2 it is closer to 1.
Mr. Foster. That has real implications, for example,
politically where there is a narrative that real wages have not
gone up in the last generation. And if you change that by 1
percent, that is a big change in that narrative.
Mr. Cecchetti. I agree with that completely. And the person
whom I would point to as the biggest champion of that is
actually Martin Feldstein, who I think normally testifies for
your Republican colleagues.
Mr. Foster. Let's see. I guess there is a line of
commenting actually that has been happening about the
politicization of the Fed. I was just wondering when in the
past have Presidents seen fit to appoint political operatives,
campaign operatives and speechwriters, to Chair the Federal
Reserve. I am only aware of that happening one time in my
historical knowledge. Any other example than Chair Greenspan?
Mr. Calomiris. I can't think of a--
Mr. Foster. Of a second example.
Mr. Calomiris. Just to answer that more constructively, I
don't think it is about the personalities or the backgrounds of
the people as much as it is about the incentives of the
institution.
Mr. Foster. I presume you have read Chair Greenspan's book,
I take it you probably all have, and you see he talked in
glowing terms about his experience as a campaign operative and
also his sadness when George Herbert Walker Bush, George Bush,
Sr., accused him of being responsible for George Bush, Sr.'s
losing the election because he appropriately tightened credit
at the wrong time.
Mr. Calomiris. I know a little bit about that story if you
want to hear about it.
Mr. Foster. Did he correctly report it, in your belief, in
his book?
Mr. Calomiris. So Nicholas Brady told me, and he told me
because he knew I was a financial historian and he wanted the
record to contain this, that Alan Greenspan had made a promise
to him that he reneged on. And I think that was the nature,
that, in fact, George Bush's promise to or willingness to
consider tax increases was premised on that agreement.
That is how Washington works, which you know better than I.
And so I think a lot of the bitterness had to do with the fact
that President Bush actually made a concession on tax policy
expecting the Fed to do something that they then backed out on.
Mr. Foster. I see. And is it fair to say, though, my last
question, that for President Bush II, when he had the
opportunity to tighten credit at a time that you could make a
strong argument for, that he did not repeat his mistake?
Mr. Calomiris. Which Bush are we talking about?
Mr. Foster. We are talking about Bush II and the question
of whether keeping the housing bubble inflating potentially to
influence the reelection of George Bush, Jr.
Mr. Calomiris. I don't know whether that was part of the
calculation.
Mr. Foster. Okay. Well, thank you. I appreciate it.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we are going to wrap up the questioning. I have
a few comments and a few questions here. So we will try and be
brief here.
Mr. Sivon, all large banks have on-site examiners from the
Federal Reserve. How have the Federal Reserve supervisory
practices changed since the crisis? Have the supervisors been
adequately transparent?
Mr. Sivon. Thank you, Congressman.
Chairman Luetkemeyer. I know you represent a lot of big
banks with the Financial Services Roundtable.
Mr. Sivon. Thank you, Congressman. It is true that the
larger banks have on-site examiners.
I think, in fairness, the supervisory policies of all the
agencies have tightened since the crisis, the Fed included. And
where we are at this juncture and what our testimony is trying
to indicate is that we are at a tipping point where we think
that there could be some refinement both in regulation and in
supervisory policy.
Chairman Luetkemeyer. I have just a few thoughts here. We
have had a very lengthy discussion today, and I don't want to
drag this out any longer, but just a couple of little thoughts
here with regards to some of the comments that were made and
some of the testimony that we have heard.
I think, Mr. Sivon, you made the comment with regards to
stress test models, and I am kind of concerned sometimes that
the stress testing that is being done doesn't actually reflect
a stressed or a situation that could actually occurred. That is
my concern with some of the stress tests.
I know there are some difficulties in modeling because the
Fed doesn't tell the banks how to do this. They are kind of
doing it on a guesstimate way of going about it. But at the
same time I am kind of concerned at the way the Fed's modeling
on these things is going, that they are really not modeling a
real situation that could actually occur in today's world, and
that is a concern of mine.
Mr. Sivon. One of our recommendations to address that
specific concern is that the Fed's stress test scenarios be put
out for public comment so that they could be scrubbed and the
Fed could benefit from that type of input from people on this
panel.
Chairman Luetkemeyer. Dr. Calomiris, do you have--
Mr. Calomiris. I agree with that. I have a specific version
of that, which I have proposed.
But I also want to come back to the point of the stress
test. The stress test using the current data can't answer the
question they want to answer. What they want to answer is, how
will we be able to tell whether banks might be suddenly losing
their economic value? That is what causes a crisis.
The failure of banks to be able to roll over their short-
term debt and to be able to behave normally reflects a sudden
loss of economic value. That is not going to be captured unless
you model the creation of economic value. You can't model the
loss of it.
Relying on book value of equity ratios and using the kind
of data that are used in these financial reports simply cannot
answer the question.
So I would say that stress tests are close to useless as a
forecasting tool for the sudden loss of economic value, and I
don't believe the scenarios are very meaningful. So I do think
currently they are not helpful, but they are currently for most
of the banks the binding constraint on capital. So I think that
is very troubling.
I am a big fan of stress tests as an idea, but the current
procedures have the secrecy problem, which is unaccountability,
and therefore bad modeling is quite likely. But even more
deeply, conceptually they are just not addressing the right
question, and they don't have the data to address them.
Mr. Cecchetti. I would just like to be the defender of what
is going on today. I believe that the Federal Reserve is doing
a reasonable job of this. I think they are trying to improve
every day that they go to work to do a better job. I think they
are trying to do that both on the modeling side, the scenario
side, and on the side of the data that is being collected.
What I would say is that I think we want to be very, very
wary of transparency on the scenarios and on the models. I
think that the idea that people are going to game the system is
a very real one and that we want to guard against that.
Chairman Luetkemeyer. It is interesting, because in this
very committee, in that far corner over to the left, we had a
stack of paper to represent 20,000 pages, what is sometimes a
small stress test for some of these institutions, and it took
up that whole table and then some. And yet, I don't know that
anybody even reads it when it gets to the Fed.
And so as a former regulator, the Fed already has all this
information. This is one of my concerns with the stress tests.
To me it is an exercise where they don't seem to be willing to
do their job, which is to assess risk themselves. The Fed does
its own systemic risk analysis for all those institutions, yet
I am not sure why we need a stress test. It is done by the bank
itself, which seems to be a game of ``gotcha.'' Am I wrong?
Mr. Calomiris. If it were done properly the stress test
could answer questions, a well-posed question: In the event
that these things happened, would you suffer a very large
sudden loss of value?
So I think it does have a function that is unique. I am not
against stress tests as an exercise. I just don't think they
are currently ready for primetime.
Chairman Luetkemeyer. My time has expired here, so we need
to move on. I will let you gentlemen get home. And again, thank
you for your expertise and your willingness to be with us and
share your knowledge today. It has been a great hearing.
And I thank the chairman of the Oversight and
Investigations Subommittee, Mr. Barr, for all his hard work and
participation in putting this together and his great comments.
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.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
With that, this hearing is adjourned.
[Whereupon, at 4:15 p.m., the hearing was adjourned.]
A P P E N D I X
September 12, 2017
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