[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]


                  SEMI-ANNUAL TESTIMONY ON THE FEDERAL
                  RESERVE'S SUPERVISION AND REGULATION
                        OF THE FINANCIAL SYSTEM

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 17, 2018

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-86
                           
                           

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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

                     Shannon McGahn, Staff Director
                            
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 17, 2018...............................................     1
Appendix:
    April 17, 2018...............................................    55

                               WITNESSES
                        Tuesday, April 17, 2018

Quarles, Hon. Randal, Vice Chairman for Supervision, Board of 
  Governors of the Federal Reserve System........................     5

                                APPENDIX

Prepared statements:
    Quarles, Hon. Randal.........................................    56

              Additional Material Submitted for the Record

Huizenga, Hon. Bill:
    Letter to the Federal Reserve................................    70
Quarles, Hon. Randal:
    Written responses to questions for the record submitted by 
      Representative Beatty......................................    72
    Written responses to questions for the record submitted by 
      Representative Budd........................................    76
    Written responses to questions for the record submitted by 
      Representative Delaney.....................................    81
    Written responses to questions for the record submitted by 
      Representative Hultgren....................................    83
    Written responses to questions for the record submitted by 
      Representative Luetkemeyer.................................    87
    Written responses to questions for the record submitted by 
      Representative Rothfus.....................................    91
    Written responses to questions for the record submitted by 
      Representative Tipton......................................    93
    Written responses to questions for the record submitted by 
      Representative Velazquez...................................    95
    Written responses to questions for the record submitted by 
      Representative Waters......................................    96

 
                  SEMI-ANNUAL TESTIMONY ON THE FEDERAL
                  RESERVE'S SUPERVISION AND REGULATION
                        OF THE FINANCIAL SYSTEM

                              ----------                              


                        Tuesday, April 17, 2018

                     U.S. House of Representatives,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling 
[chairman of the committee] presiding.
    Present: Representatives Hensarling, McHenry, Royce, Lucas, 
Posey, Luetkemeyer, Huizenga, Duffy, Stivers, Hultgren, Ross, 
Pittenger, Wagner, Barr, Rothfus, Tipton, Williams, Poliquin, 
Love, Hill, Emmer, Zeldin, Trott, Loudermilk, Mooney, 
MacArthur, Davidson, Budd, Kustoff, Tenney, Hollingsworth, 
Waters, Maloney, Velazquez, Sherman, Lynch, Scott, Green, 
Cleaver, Moore, Ellison, Himes, Foster, Kildee, Delaney, 
Sinema, Beatty, Heck, Vargas, Crist, and Kihuen.
    Chairman Hensarling. Committee will come to order. Without 
objection, the Chair is authorized to declare a recess of the 
committee at any time, and all members will have 5 legislative 
days in which to submit extraneous materials to the Chair for 
inclusion in the record.
    This hearing is for the purpose of receiving the Semi-
annual Testimony on the Federal Reserve's Supervision and 
Regulation of the Financial System. I now yield myself 3 
minutes for an opening statement.
    Today, we are very, very pleased--I am very pleased to 
welcome the Honorable Randy Quarles, Vice Chairman for 
supervision for the Fed. We have been waiting, Mr. Quarles, 8 
years for your arrival. We would like to know what took you so 
long.
    I think what we know is, under Dodd-Frank, the statute says 
the President shall--``shall'' appoint a Vice President of 
Supervision, not ``may.'' And yet President Obama refused to.
    We all know that Governor Tarullo de facto filled the 
position, but he did it without oversight and without checks 
and balances. Fortunately, President Trump has a very different 
view of the statute, Constitution, and his respect of Congress.
    We all know that, today, Governor Quarles is appearing on 
Tax Day. We also know that, thanks to the President and 
Republican Congress, we now have a 3 percent growth tax code.
    We know that 90 percent of all Americans are now receiving 
better take-home pay because of this act. And people are seeing 
pay increases, 401(k) increases, and job expansion all over the 
Nation. That is the good news.
    We may have a 3 percent tax policy in America, but we do 
not yet have a 3 percent of capital markets and banking policy 
in America. And we need one; 3 percent growth makes a huge 
difference in the lives of our countrymen.
    Since the time that I have been on the face of the planet, 
a little over half of the years have seen 3 percent growth, and 
a little less than half the years have seen less than 3 percent 
growth.
    Chairman Hensarling. In those years that have seen 3 
percent growth, four-fifths of all the jobs that were created 
in my lifetime were created in 3 percent growth years. Poverty 
fell by almost three-quarters and real median household income 
grew by approximately $20,000.
    In the years since I was born where the economy grew less 
than 3 percent, only one-fifth of the jobs were created, the 
poverty rate rose by over a third, and household income fell by 
over $10,000.
    For the average family in America, 3 percent growth is the 
line of demarcation which determines whether all their work and 
sacrifice for the year will actually translate into getting 
ahead. So it is important that we get it right.
    And we all know that Dodd-Frank, regardless of what it may 
have done for financial stability, is perhaps the most complex, 
costly, confusing regulatory onslaught onto our capital markets 
that we have seen. Many market participants, in fact, believe 
that it has cut 0.5 percent to 1 percent of GDP.
    That is why, Governor Quarles, we very much welcome your 
call for efficiency, transparency, and simplicity in 
regulation, because we also know that, in a post-Dodd-Frank 
world, the Fed is now our uber-financial regulator. And I 
particularly appreciate your call for efficiency to make sure 
that ``the cost of regulation in reduced economic growth or 
increased frictions in the financial system is outweighed by 
the benefits of the regulation,'' to quote you. I look forward 
to hearing more in your testimony.
    The Chair now yields 4 minutes to the Ranking Member for an 
opening statement.
    Ms. Waters. Thank you, Mr. Chairman, and welcome, Vice 
Chairman Quarles. I look forward to hearing Vice Chairman 
Quarles' testimony today on the Federal Reserve Bank's 
supervision and enforcement activities.
    I want to point out that the position of Vice Chairman for 
Supervision was created following the financial crisis as part 
of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act as one of several steps to address the Fed's insufficient 
supervision and enforcement leading into the crisis.
    Vice Chairman Quarles is, in fact, the first person to 
officially hold this important role that is critical in keeping 
our financial system safe and sound.
    I was encouraged when the Fed took action under then-Chair 
Janet Yellen and initiated a strong enforcement action against 
Wells Fargo for its egregious consumer abuses and capped the 
bank's growth until it cleans up its act.
    Of particular significance is the fact that this 
enforcement action is not just a fine, but it comes attached 
with real consequences for Wells Fargo, which is a repeat 
offender with a terrible track record of harming consumers, 
including by opening up millions of fraudulent accounts without 
their customers' consent.
    I hope to see that they continue to strongly use its 
enforcement tools. We need our independent regulators to be 
vigilant in carrying out their statutory duties and make robust 
use of their authorities to crack down on bad actors.
    Sadly, that independence is under attack. Just last week, 
Office of Management and Budget Director Mick Mulvaney, who was 
unlawfully appointed by President Trump to serve as acting 
director of the Consumer Financial Protection Bureau, testified 
before this committee.
    Mr. Mulvaney's illegal appointment--there have been zero 
enforcement actions by the Consumer Bureau since his 
appointment, and he has taken a series of actions to weaken the 
agency's ability to carry out this important mission and 
benefit the predatory actors that the agency is designed to 
police.
    Indeed, the Trump Administration and my colleagues across 
the aisle are working to move our system of banking regulation 
in exactly the wrong direction in their efforts to dismantle 
the crucial reforms that Democrats put in place in Dodd-Frank.
    These efforts at deregulation come at a time of record bank 
profits for banks of all sizes. But, even though the banks are 
making money hand over fist, this President and Republicans in 
Congress are pushing hard to help out the Nation's largest 
banks.
    Nearly every week, Republicans push through harmful 
legislation that undermines Dodd-Frank. I am also very 
concerned by the recent proposal from the Fed that would lower 
the capital buffer at the eight largest banks by a combined 
$112 billion.
    Under this proposal, Wells Fargo, for example, would be 
allowed to hold 20 billion less in capital than the current 
standard for a well-capitalized bank of its size.
    I look forward to discussing these and other important 
issues with Vice Chairman Quarles here today. And thank you. I 
yield back the balance of my time.
    Chairman Hensarling. The gentlelady yields back.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Luetkemeyer, the Chairman of the Financial Institutions and 
Consumer Credit Subcommittee, for 1 minute.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. Vice Chairman 
Quarles, welcome.
    As we all know, the Federal Reserve Board was without a 
designated Vice Chair for Supervision for almost a decade. With 
your appointment, that position has finally been filled, and we 
are pleased to have you here today, Mr. Quarles. Welcome.
    Since your initial confirmation in October, you have made 
many statements outlining your agenda and your intentions. I 
wholeheartedly agree that it is time to step back and do a 
comprehensive examination of the previous Administration's 
regulatory regime.
    Looking forward, there is an immense amount of work to be 
done. As we assess the Federal Reserve's role, we must ensure a 
more practical approach to supervision, one that extends from 
the top, all the way down to each and every field examiner.
    We also need to ensure the Federal Reserve adequately and 
appropriately tailors its supervisory approach on an 
institution-by-institution basis and puts more thought into the 
manner in which it regulates and examines.
    I am confident you will make the critical changes needed to 
benefit our economy and improve the stability and productivity 
of our financial system. I look forward to your testimony 
today.
    With that, Mr. Chairman, I yield back. Welcome.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from Michigan, Mr. 
Kildee, the Vice Ranking Member, for 1 minute.
    Mr. Kildee. Thank you, Mr. Chairman and Madam Ranking 
Member. And, Mr. Quarles, welcome. We appreciate your testimony 
today.
    I have been an advocate for pushing our Federal Government, 
at every level, to focus more attention on the struggles that 
America's older industrial cities, old cities and towns face, 
many of them that continue to be left behind even during 
periods of economic growth.
    The regional banks have done some interesting work in this 
space, particularly the Cleveland and Boston banks recently, 
but the Philly and Minneapolis banks have also focused some 
attention on this.
    What I am interested in hearing from you are any thoughts 
you have about how the supervisory authority of the Fed--the 
levers that come with that authority can be used not just for 
the purposes of streamlining the regulatory process, but those 
levers could be used in ways to increase the efficiency, the 
efficacy of the Community Reinvestment Act, access to credit--
essentially trying to use the tools you have to ensure that 
there is equity in the way the financial system works, 
particularly in those places with high unemployment, high 
levels of poverty, like my hometown of Flint, Michigan.
    So thank you for your appearance here today and I look 
forward to your testimony.
    Chairman Hensarling. Time of the gentleman has expired.
    The Chair now recognizes yet another gentleman from 
Michigan, Mr. Huizenga, the Chairman of the Capital Markets 
Subcommittee, for 1 minute.
    Mr. Huizenga. Thank you Mr. Chairman, and happy Tax Day, 
Vice Chair Quarles, I--I would use air quotes, but, for many of 
us, we believe that this is the beginning of a better 
situation.
    As the former Chair of the Monetary Policy and Trade 
Subcommittee that had oversight of the Fed, I watched very 
closely as the enactment of Dodd-Frank supercharged the Federal 
Reserve, bestowing on it even more power, influence, and 
control over the financial system, all while remaining shrouded 
in mystery to the American people. That is something we hear 
consistently, is that people don't understand what the Fed 
does.
    Specifically, Title 11 of the Dodd-Frank Act created a new 
position of the Vice Chair of Supervision. And we are very 
pleased that you have taken that position.
    On February 22, in a speech that you gave, you mentioned 
that the Federal Reserve and other regulatory agencies have 
completed the bulk of the work of post-crisis regulation.
    And I quote, ``as such, now, it is eminently natural and 
expected time to step back and assess those efforts. It is our 
responsibility to ensure that they are working as intended. 
And, given the breadth and complexity of this new body 
regulation, it is inevitable that we will be able to improve 
them, especially with the benefit of experience and 
hindsight.''
    Mr. Quarles, as has been noted, we have been waiting a long 
time, and I appreciate this thoughtful retrospective view is 
happening as we drive this economy forward.
    I yield back.
    Chairman Hensarling. Time of the gentleman has expired.
    Indeed, today, we now welcome the testimony of the 
Honorable Randal K. Quarles, the first Vice Chairman for 
Supervision at the Federal Reserve. Pursuant to Section 1108 of 
the Dodd-Frank Act, President Trump nominated Mr. Quarles to 
serve as Vice Chairman for Supervision.
    He became a member of the Board of Governors of the Federal 
Reserve on October 13 of last year to fill an unexpired term. 
He was sworn in as Vice Chairman for Supervision on October 13, 
2017, for a term of 4 years, through October 13, 2021.
    Prior to his appointment to the board, Mr. Quarles was 
Founder and Managing Director of the Cynosure Group, a Utah-
based investment firm. Before founding that group, Mr. Quarles 
was a partner at the Carlyle Group, a private equity firm based 
here in Washington, D.C.
    Mr. Quarles has previously served in public service, having 
served as Undersecretary of the Treasury for domestic finance, 
Assistant Secretary of the Treasury for international affairs, 
policy Chair of the Committee on Foreign Investment in the 
United States, and the U.S. Executive Director of the 
International Monetary Fund.
    Mr. Quarles received an A.B. in philosophy and economics, 
summa cum laude, from Columbia and earned a law degree from the 
Yale Law School. Without objection, the witness's written 
statement will be made part of the record.
    The Chair wishes to inform all members that I expect to 
excuse the witness no later than 2 p.m. this afternoon and no 
intervening floor votes are expected at this time.
    Mr. Quarles, you are now recognized to give an oral 
presentation of your testimony. Again, welcome. But you do need 
to press the button for the microphone.

              STATEMENT OF THE HON. RANDAL QUARLES

    Mr. Quarles. Thank you very much, Chairman Hensarling, 
Ranking Member Waters, other members of the committee. It is a 
pleasure to appear before you today. And I appreciate the 
opportunity to testify on the Federal Reserve's regulation and 
supervision of financial institutions.
    The Federal Reserve, along with the other U.S. banking 
agencies, has made substantial progress in building stronger 
regulatory and supervisory programs since the global financial 
crisis, especially with respect to the largest and the most 
systemically important firms.
    These improvements have helped to build a more resilient 
financial system, one that is well-positioned to provide 
American consumers, businesses, and communities access to the 
credit they need, even under challenging economic conditions.
    At the same time, we are mindful that, just as there is a 
strong public interest in the safety and soundness of the 
financial system, there is a strong public interest in the 
efficiency of the financial system.
    Our financial sector is the critical mechanism for 
directing the flow of savings and investment in our economy in 
ways that support economic growth. And economic growth, in 
turn, is the fundamental precondition for the continuing 
improvement in the living standards of all of our citizens that 
has been one of the outstanding achievements of our country.
    As a result, the regulation of that system should support 
and promote the system's efficiency just as it promotes its 
safety. And, moreover, our achievement of these objectives will 
be improved when we pursue them through processes that are as 
transparent as possible and through measures that are clear and 
simple, rather than needlessly complex.
    In my testimony today, I will review our regulatory and 
supervisory agenda to improve the effectiveness of the post-
crisis framework through these principles of efficiency, 
transparency, and simplicity. I have also included an update on 
the condition of the industry and the Federal Reserve's 
engagement with foreign regulators in my written testimony.
    So, to begin with efficiency measures, last week, the board 
and the Office of the Comptroller of the Currency (OCC) issued 
a proposal that would recalibrate the enhanced supplementary 
leverage ratio, or the ESLR, applicable to our global 
systemically important banks, or G-SIBs.
    The proposal would calibrate the ESLR so that it is less 
likely to act as a primary constraint, which can actually 
encourage excessive risk-taking, while still continuing to 
serve as a meaningful backstop.
    Last year, the board also adopted a rule that eliminated 
the so-called qualitative objection of the Federal Reserve's 
CCAR (Comprehensive Capital Analysis and Review) exercise for 
mid-size firms that pose less systemic risk. As a result, 
deficiencies in the capital planning processes of those firms 
will be addressed in the normal course of supervision.
    And I believe this approach should also be considered for a 
broader range of firms. And, last week, we called for comment 
on that potential expansion.
    On the subject of tailoring, I support Congressional 
efforts regarding tailoring as offered in both the House and 
Senate. In addition to this potential legislation, there are 
further measures I believe we can take to match the content of 
our regulation to the character and risk of the institutions 
being regulated.
    For example, I believe it is time to take concrete steps 
toward calibrating liquidity coverage ratio requirements 
differently for non-G-SIBs than for G-SIBs. I also think we can 
improve the efficiency of our requirements regarding living 
wills.
    U.S. banking agencies have also taken a number of steps to 
advance more efficient and effective supervisory programs. For 
example, the agencies recently increased the threshold for 
acquiring an appraisal on commercial real estate loans from 
$250,000, to $500,000, which doesn't pose a risk to safety and 
soundness.
    The Federal Reserve has also instituted various measures to 
clarify and streamline its overall approach to the supervision 
of community and regional banks in particular, which is 
detailed in my written testimony.
    Transparency is essential to the Federal Reserve's mission 
in supervision, no less than in monetary policy. Late last 
year, in the first material proposal following my confirmation, 
the board released for public comment an enhanced stress 
testing transparency package.
    The proposal would provide greater visibility into the 
supervisory models that often determine their binding capital 
constraints. And we are continuing to think about how we can 
make the stress testing process more transparent without 
undermining the strength and usefulness of the supervisory 
test.
    Looking ahead, we are also in the process of developing a 
revised framework for determining control under the Bank 
Holding Company Act. A more transparent framework should, among 
other things, facilitate the raising of capital by community 
banks, where control issues are generally more prevalent.
    Simplicity of regulation promotes public understanding and 
compliance by the industry with regulation. Just last week, the 
Federal Reserve issued a proposal that would effectively 
integrate the results of the supervisory stress test into our 
non-stress capital requirements. For the largest bank holding 
companies, that would reduce the loss absorbency requirements 
from 24 to 14.
    We estimate that the proposed changes would generally 
maintain--in some cases, modestly increase--the minimum risk-
based capital required for the G-SIBs, although no bank would 
actually be required to raise capital because their existing 
capitals are well above those minimums, and generally modestly 
decrease the amount of risk-based capital required for most 
non-G-SIBs.
    Our fellow regulators are also working with us to further 
tailor implementation of the Volcker Rule and to reduce burden 
particularly for firms that do not have large trading 
operations and don't engage in the sorts of activities that may 
give rise to proprietary trading.
    In conclusion, the reforms we have adopted since the 
financial crisis represent a substantial strengthening of the 
Federal Reserve's regulatory framework, should help ensure that 
the U.S. financial system remains able to fulfill its vital 
role of supporting the economy. We will do everything we can to 
fulfill the responsibility that has been entrusted to us by the 
Congress and by the American people.
    Thank you again for the opportunity to testify before you 
this morning. I am looking forward to answering your questions.
    [The prepared statement of Mr. Quarles can be found on page 
56 of the Appendix.]
    Chairman Hensarling. Thank you, Chairman Quarles. The Chair 
now yields himself 5 minutes for questions.
    As you heard in my opening statement, I am very concerned 
with the policies and the implementation of the policies that 
are necessary to sustain long-term, 3 percent plus economic 
growth.
    And I am somewhat fearful, sometimes, that one day, I may 
wake up and find out that our financial firms have been turned 
into the equivalent of public utilities, which will not be 
commensurate with 3 percent economic growth.
    So I have raised this issue before, and that is the whole 
issue of supervision versus corporate governance. A number of 
institutions have come to this committee to say that 
representatives of the Fed have insisted on attending meetings 
of the board of directors or committee meetings of the board of 
directors.
    So my question is, do you believe that the Fed has the 
legal authority to demand attendance at board meetings? And, if 
so, why is this a wise policy?
    Mr. Quarles. I actually can get back to you on the answer 
of what our legal authority is.
    I think the more important question is, is it a wise 
policy? And we ought to be focusing as supervisors on ensuring 
that boards are structured in order to be able to do their jobs 
and that our supervisory and regulatory requirements of them 
support their fulfilling their roles in the corporate 
organization.
    We came out, as you know, with a board effectiveness 
guidance proposal last August, when now-Chairman Powell was 
then responsible for the supervisory and regulatory affairs of 
the board. And the purpose of that guidance was precisely to 
scale back some of the excessive micromanagement and 
misdirection of board--
    Chairman Hensarling. So that is its purpose. I must admit, 
I have heard from several who believe that it may have the 
opposite impact in bringing the board more into day-to-day 
management. So I am heartened to hear that you think it will 
have the opposite effect.
    Let me run a couple of other situations by you. This 
committee has heard that some Fed examiners have made 
recommendations to management that certain board members, if 
you will, be fired. Again, does the Fed have the legal 
authority to make those recommendations? And, if so, is that 
wise policy?
    Mr. Quarles. So, again, on the legal authority, I will get 
back to you with a legal analysis of what our legal authority 
is.
    Chairman Hensarling. I would appreciate that.
    Mr. Quarles. I do think that, at the highest level, it 
probably shouldn't be something that, at the direct supervisory 
team level, would be engaged.
    At the highest level, if there were serious concerns about 
the fitness of a director, I think that probably is something 
that, at the highest level of the Fed, we should weigh in on. 
But those would be extremely rare cases, I think.
    Chairman Hensarling. Something else we have heard that the 
Fed has weighed in on--we had representatives from one large 
diversified financial services company say their examiners 
question them about their lobbying activities.
    Now, the right to petition your Government for the redress 
of grievances is enshrined in the Constitution. I assume you 
would agree that the Federal Reserve Act of 1913 does not trump 
the Constitution. Why would it be appropriate supervisory 
questioning to question one's lobbying activities?
    Mr. Quarles. I can't think of any reason.
    Chairman Hensarling. Is that going to continue under your 
watch?
    Mr. Quarles. Now that I am aware of it, no.
    Chairman Hensarling. OK.
    Again, as you know, typically, corporate governance is 
determined by State laws. There are, frankly, hundreds of years 
of case law. I am somewhat concerned, is the Fed trying to 
supplant itself over State corporate governance law? Where is 
the line to be drawn between supervision and corporate 
governance? Because it is getting rather murky.
    Mr. Quarles. So it certainly is our intention, actually, to 
de-murkify that whole area. And that was the intention behind 
the board effectiveness guidance.
    We are receiving comments on that. We have received 
comments on that and are evaluating them. And I will certainly 
be looking at those comments through the lens of ensuring that 
we are providing a clear framework for--that allows bank 
directors and bank holding company directors--
    Chairman Hensarling. Well, to borrow your phrase, there 
appears to be a lot of de-murkification to go.
    My time has expired. The Chair now yields to the Ranking 
Member.
    Ms. Waters. Thank you very much.
    Could you tell me why you have recused yourself on all 
matters related to Wells Fargo?
    Mr. Quarles. Thank you. Well, as you know, I do not have a 
legal conflict with respect to Wells Fargo. I completely 
cleared that legal conflict.
    In reflecting on some of the issues that were facing the 
board, I thought that it was appropriate to go beyond the mere 
requirements of the law and avoid even any appearance of an 
issue.
    As some of the members of the committee know, my wife's 
family had a historical connection with a bank that was 
acquired by Wells Fargo. It was many years ago now.
    So even though it was not required by the law and I do not 
have a conflict, I thought that it was appropriate for me to go 
above and beyond and avoid even the question.
    Ms. Waters. The Center for Investigative Reporting 
published several articles after a year-long investigation of 
31 million records publicly available under the Home Mortgage 
Disclosure Act--that is, HMDA--to identify lending disparities.
    Using Philadelphia as a case study, the reporters wrote, I 
quote, Lending patterns in Philadelphia today resemble 
redlining maps drawn across the country by Government officials 
in the 1930's, when lending discrimination was legal, quote, 
unquote.
    The report noted that, despite this evidence of 
discriminatory lending, 99 percent of banks were deemed 
satisfactory or outstanding based on inspections administered 
under the Community Reinvestment Act, a 40-year-old law 
designed to reverse rampant redlining.
    Would you agree that the CRA (Community Reinvestment Act) 
test is not vigorous enough if nearly all banks get good grades 
on the CRA exams, and yet discriminatory lending practices 
remain pervasive in 2018?
    Put another way, if 10 banks lend to one side of a city and 
no banks lend to the other side of the city, how can regulators 
change this dynamic and implement CRA to ensure banks which are 
backed by all of that city's residents as taxpayers fully serve 
the convenience and needs of entire city's residents?
    Mr. Quarles. In reflecting on the current state of the 
Community Reinvestment Act and ways to improve its application, 
I think that is an important focus for the regulatory agencies 
currently.
    As you know, the Treasury Department recently put out a 
report for ways to improve and invigorate the application of 
CRA. I think that that is something that we should be strongly 
engaged in.
    Ms. Waters. So do you support the Treasury's 
recommendations?
    Mr. Quarles. As I have reviewed them, yes, I think that it 
lays out a good framework for consideration. There are a lot of 
details that will remain to be decided by the regulatory 
agencies. But I think that it is a good map.
    Ms. Waters. Do you have any concerns at all about the 
satisfactory reports of these banks--99 percent, I suppose, 
satisfactory ratings, even though we have redlining? What do 
you think about that? What would you do about that?
    Mr. Quarles. Well, I think one of the issues that I, at 
least, have seen with respect to CRA is that, over the years, 
it has become a little formulaic and ossified.
    And the ways in which both banks themselves and community 
development institutions themselves would like to--the activity 
that they would like to see happen really isn't the path of 
least resistance under practices that have developed under the 
CRA.
    I think moving CRA off autopilot, which is one of the 
principal benefits, I think, of the Treasury review and of the 
efforts that are being undertaken by the banking regulators 
currently, is something that we should be doing and that would 
help address some of the issues that you have raised.
    Ms. Waters. So when you say you would move them off 
autopilot, have you determined that they simply get these 
satisfactory ratings without requirements that would make them 
better and more effective? Or are you saying that they are just 
ignored--the requirements now? What are you saying?
    Mr. Quarles. No, I am saying that the banks have developed 
ways of complying with the law out of genuine desire to comply. 
The examiners have developed expectations about what they know 
will be viewed by the community as passing.
    Community development institutions have developed, again, 
practices and expectations. And all of that could be, really, 
broadened to have greater effect, as opposed to moving down the 
path of least resistance.
    It is not as though the law is being ignored. It is just we 
have gotten comfortable in how it can be applied, and we really 
ought to think about ways to apply it more effectively.
    Ms. Waters. Thank you. I yield back.
    Chairman Hensarling. Time of the gentlelady has expired. 
The Chair now recognizes the gentleman from Missouri, Mr. 
Luetkemeyer, Chairman of our Financial Institutions 
Subcommittee.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Mr. Quarles, over the years, a large amount of agency 
guidance, handbooks and circulars have been issued. Almost none 
of it has ever been withdrawn or rescinded.
    Almost none of it went through notice and comment 
rulemaking or was submitted to Congress, pursuant to the 
Congressional Review Act. Should banks and examiners be 
treating this guidance as binding rules?
    Mr. Quarles. No. I do think that there is a role for 
guidance. I think that it is clear that, in some instances, the 
practices of the banking regulators have blurred the role 
between guidance and rules.
    If something is to be a binding rule, both our obligation 
of democratic accountability, as well as our desire to see that 
rule be as effective as possible and therefore receive as much 
comment as possible, would require us to go through a 
transparent rulemaking process. That is good for both of those 
reasons.
    Guidance does have a role. The banks, in fact, want to 
know, once a rule has been made, if there are--where there are 
questions of interpretation. But we need to make sure that that 
guidance really is just guidance and doesn't supplant the 
rulemaking process.
    Mr. Luetkemeyer. Well, I appreciate that.
    I think, we hear consistently and frequently from banks 
that, these rules are sometimes being enforced as something 
more than just--guidance is being enforced as a rule, versus 
whatever.
    The other day, we had Chairman Powell here. He made a 
comment that guidance is guidance and rules are rules. So I 
look forward to some progress on this. So thank you for your 
comment.
    The DOJ (Department of Justice) has issued a memorandum 
prohibiting the department from issuing guidance documents that 
effectively bind the public without undergoing the notice and 
comment process.
    It goes on to prohibit DOJ from using guidance to require 
regulated parties to take any action beyond what is required by 
the terms of the applicable statute or lawful regulation. Would 
you support the Fed issuing a guidance policy along the lines 
of what DOJ just put out?
    Mr. Quarles. We are considering--we have communicated that 
message that guidance is guidance and rules are rules to our 
examiners and throughout the supervisory system. We are 
considering the right way to further formalize that. I think 
that is a salutary process, yes.
    Mr. Luetkemeyer. One of the--I have got a couple more 
questions here, but I want to make sure I get to this one with 
regards to cost-benefit analysis.
    Although Executive branch agencies are subject to mandatory 
cost-benefit analysis requirements, independent agencies, such 
as the Federal Reserve, are not. There is no statute that 
generally imposes on the Fed a requirement to perform 
regulatory impact analysis or cost-benefit analysis.
    However, during a January 19th speech at the American Bar 
Association Banking Law Committee Annual Meeting, which is a 
mouthful, Vice Chairman, you indicated additional efforts to 
implement cost-benefit analysis. And I won't go into your 
comment, but--because it is quite lengthy, but it is--also is 
very instructive.
    Furthermore, it has been reported that the Federal Reserve 
has created a new department named the Policy Effectiveness and 
Assessment Committee, charged with conducting cost-benefit 
analysis on regulations.
    No. 1, would you like to elaborate on these comments? And, 
No. 2, can you explain the creation of this new department, and 
is it being used?
    Mr. Quarles. As you have indicated, the thrust of my 
comments--and as I indicated in my opening remarks to the 
testimony--we have a very strong public interest in ensuring 
that our financial system and our regulation of the financial 
system are efficient, as well as that they are promoting safety 
and soundness.
    And that necessarily involves an assessment of the costs 
versus the benefits of regulation, both the direct costs of 
compliance that are imposed on institutions, as well as the 
larger question of the effectiveness of the regulation in 
achieving an objective, versus the broader costs that are 
created by that regulation.
    We are looking at that at the Fed. We have stood up a group 
of economists that are examining the body of post-crisis 
regulation through those lenses to determine exactly how we 
measure the effectiveness of the key areas of capital and 
liquidity and resolution effectiveness.
    And I will be looking--that--that is a complicated and 
lengthy process, and I am looking forward to the results of 
their work.
    Mr. Luetkemeyer. Well, as you know, with Dodd-Frank, we 
have a lot of community banks and credit unions going out of 
business because of the cost of compliance. And I would hope--
this is a really important question I would just ask you with 
regards to cost-benefit analysis.
    While a rule may be well-intentioned, if it is going to 
drive businesses out of business so there is a limit--access to 
credit, or raises cost for that credit or ability to do 
financial services work, it really harms the consumer, and we 
have to really think about that.
    Thank you very much.
    Chairman Hensarling. Time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Mrs. 
Maloney, Ranking Member of the Capital Markets Subcommittee.
    Mrs. Maloney. Thank you, Mr. Chairman.
    Governor Quarles, as you know, the Senate's banking bill, 
sponsored by Senator Crapo, includes a provision that would 
allow custody banks to exclude reserves that they hold at the 
central bank from the supplemental leverage ratio, or SLR.
    And then, just last week, the Fed and the OCC proposed an 
amendment to the SLR that is intended to address the same 
custody bank issue that Section 402 does. So in your view, do 
the Fed's proposed changes to the SLR make Section 402 of the 
Crapo bill unnecessary?
    Mr. Quarles. No, I wouldn't say that they make that 
unnecessary. Both our objective and the objective of that 
provision, as you know, are to adjust the ESLR so that it is 
not a primary binding measure, because, when you have a 
leverage ratio that is creating the incentives for decisions at 
the margin, because that leverage ratio isn't risk-sensitive, 
that means that your decisions at the margin will not be risk-
sensitive. You will have an incentive to basically take on more 
risk.
    So I think it is important to calibrate that down. There 
are two ways to do it. The Crapo bill has proposed one way. Our 
regulatory proposal, it would accomplish it in a different 
fashion.
    Mrs. Maloney. So you see them coexisting? You see them 
coexisting?
    Mr. Quarles. Yes. If that provision in the Senate bill were 
to become law, I think we would then have to consider how to 
calibrate our proposal to take account of the fact that certain 
banks would have had the denominator of the ESLR changed for 
them. That would be appropriate, if that does become law.
    Mrs. Maloney. And, as you know, the Fed proposed a package 
of changes designed to increase the transparency of the Fed's 
stress test last December. Personally, I believe that the Fed's 
proposal is more than adequate to address transparency issues.
    You have stated that you believe that these disclosures 
should, quote, go further, and that the proposed changes don't 
go far enough to provide visibility into the stress test 
models. So my question is, what additional disclosures do you 
think should be made about the stress test models?
    Mr. Quarles. So we have received a lot of comments, as you 
might expect, on that proposal, and we are in the process of 
carefully examining those comments. So I don't want to, at this 
point, say exactly where we would land.
    I think it is clear from the thrust and the strength of the 
arguments in those comments that there are areas where we will 
be able to provide more transparency without undermining the 
effectiveness of--
    Mrs. Maloney. But which areas? Do you know which areas?
    Mr. Quarles. I think one example that we do want to 
consider and where we had called for comment is with respect to 
the scenario design itself, as opposed to simply the models of 
that are used in the stress test.
    You know, I think that we would actually benefit, and the 
credibility of the scenarios would benefit, from some period--
not an excessively long period--but for some appropriate period 
of input from the public on those scenarios, each year.
    Mrs. Maloney. Thank you.
    I want to ask about the Financial Stability Board, or FSB, 
which is an international body of all the major financial 
regulators, including the Fed, to monitor--where they monitor 
the global financial stability. Do you believe it is in the 
country's interest to participate in the FSB?
    Mr. Quarles. I actually do, yes. I think it is actually--we 
have a strong national interest with respect to--
    Mrs. Maloney. What about--my time is almost up--what about 
the--is it important for the U.S. banking regulators to 
participate in the Basel Committee on Banking Supervision?
    Mr. Quarles. Yes. To ensure a level playing field for our 
banks, we need to be able to influence those decisions and 
not--
    Mrs. Maloney. And so do you believe that it would harm the 
American banking system if they pulled out of Basel and the 
FSB?
    Mr. Quarles. I think that the processes of those 
institutions can be improved. I think that we can improve their 
transparency. Even they have acknowledged that. But I do think 
that we should remain engaged in them, yes.
    Mrs. Maloney. Thank you, my time has expired.
    Chairman Hensarling. The gentlelady yields back.
    The Chair now recognizes the gentleman from Michigan, Mr. 
Huizenga, Chairman of our Capital Markets Subcommittee.
    Mr. Huizenga. Thank you, Mr. Chairman.
    And I want to--Mr. Quarles, I want to revisit the issue 
that you had talked about with the Chairman, in his 
questioning, and that--you twice said that you would need to, 
quote, get back to you on the legalities of the Fed involvement 
at the board level.
    And it seems to me that this is a crucial question to--to 
what the boundaries of intrusion into the day-to-day management 
of a company that the Fed has as a regulator.
    Somewhat to that--to that point, I would like to, Mr. 
Chairman, submit for the record a joint letter that myself and 
Chairman Barr and Chairman Duffy have sent you. I haven't 
expected that--since it was dated Friday, you probably haven't 
seen it as of yet, unless you were in the office on the 
weekend, so--
    Chairman Hensarling. Without objection.
    Mr. Huizenga. The--and what it is, is specifically the 
supervisory expectations for board directors. It was docket 
number OP-1570 on guidance. We write you with some concern that 
potential to further empower the Federal Reserve to manage--to 
address the regulatory overreach in the boardroom has placed 
undue burdens on bank boards.
    I don't want to read the whole letter here, but, although 
the proposed guidance purports to distinguish between the role 
of the board, one of oversight and guidance, and the role of 
management, day-to-day functions, it continues to 
inappropriately blur these lines by creating numerous new 
requirements that a board, quote, ``ensure, establish, approve, 
set, develop or detail''--all of those were in closed quotes--
items that simply do not reflect boards' oversight of and 
guidance to management.
    As such, these terms would impose new legal and managerial 
requirements on a board that would have the board direct a bank 
holding company's daily business decisions.
    I think this really gets to what both the Chairman and a 
number of us have said is, if you have a financial institution 
that is not in trouble, that hasn't tripped any of these legal 
wires. Really, what is the legal standing for the Federal 
Reserve and its regulators to come in and be involved with 
board decisions, much less discussions with committees of that?
    So, again, as I said, we must establish those legal 
boundaries of intrusion by the Fed. So I look forward to your 
response to this letter.
    I do want to--
    Mr. Quarles. And I actually have seen the letter, 
Congressman.
    Mr. Huizenga. Well, I commend you for that. So glad to hear 
that.
    I do also want to move on, real quickly, to Volcker. And, 
on page 10 of your testimony, you address it briefly. And I 
think you acknowledge what many of us are concerned about, is 
that it is very complex and it has not been working well.
    And, as you say, while the fundamental premise of the rule 
is simple, the implementing regulation is exceedingly complex. 
And you talk about the fellow regulators working to further 
tailor implementation of that. Could you tell us exactly who 
you are working with as those fellow regulators and what they 
are doing?
    Mr. Quarles. Yes. There is engagement from the top of the 
five Volcker agencies, down. That is the CFTC (Commodity 
Futures Trading Commission), the SEC (U.S. Securities and 
Exchange Commission), the FDIC (Federal Deposit Insurance 
Corporation), the OCC, and the Fed.
    Mr. Huizenga. All an alphabet soup of regulators, I might 
add.
    Mr. Quarles. Yes.
    Mr. Huizenga. We have five regulators that are in charge of 
this.
    Mr. Quarles. Yes. It is a five-headed hydra. And there are 
certain collective action issues with that. But I would say 
that over the last few months, we have been working together. 
The other regulators have been working with the Federal Reserve 
to develop a revised Volcker Rule proposal.
    Mr. Huizenga. Is the Volcker Rule, as it is written, 
detrimental to capital markets right now?
    Mr. Quarles. I think that is unarguable. The extent of the 
effect on liquidity is something that economists do argue 
about. But that there is a consequence and simply that there is 
an excessive burden as a result of the Volcker Rule--great deal 
of uncertainty, a great deal of cost--I think that part is 
unarguable.
    Mr. Huizenga. And do the board or any other regulators 
tasked with implementation--those five others--can you repeal 
the Volcker Rule, given the Volcker Rule is technically under 
the Bank Holding Company Act?
    Mr. Quarles. We can't repeal the Volcker Rule, and there 
are certain limits on our ability to make changes that we might 
otherwise have thought appropriate because of the terms of the 
statute itself.
    But there is a lot that we can do to increase the certainty 
of application, to reduce the burden of application. And the 
other agencies are working with us, really, quite well together 
in order to effect that.
    Mr. Huizenga. We will be watching closely. My time has 
expired. I appreciate it. Thank you.
    Chairman Hensarling. Time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Ms. 
Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Quarles, news reports indicate that the Fed and the 
FDIC have been participating in discussions with the OCC over 
potential changes to the C.R. But it remains unclear whether 
the Fed and the FDIC will sign on to the OCC's advance notice 
of proposed rulemaking.
    What can you tell us about these discussions? Do you agree 
with the direction the OCC is taking?
    Mr. Quarles. So those discussions--they have had the full 
engagement of all three of the banking regulators. And, so far, 
they have been--and I have no reason to expect that that would 
change--they have been collaborative among all three of us.
    Ms. Velazquez. Do you anticipate the Fed signing on to the 
OCC's ANPR (advanced notice of proposed rulemaking)?
    Mr. Quarles. So I think that there will be a joint ANPR 
that comes out. Right now, I do expect that to be a joint 
proposal.
    Ms. Velazquez. Well, Mr. Quarles, I just would like to say 
that the C.R. is extremely important for LMI communities. While 
I agree that there is a need to look at the CRA, I would be 
very concerned with any proposal that drives investment away 
from these communities.
    Mr. Quarles, I have a question about Wells Fargo--submitted 
plans. But I hear you. You said that you have recused yourself 
from any matters as it relates to Wells Fargo.
    But my message to you and to Wells Fargo is that we are 
watching Wells Fargo. And we want to make sure that the 
concerns--or the consumer abuses that Wells Fargo engage in are 
put to an end.
    Mr. Quarles. Thank you, ma'am.
    Ms. Velazquez. Regarding the asset cap, I echo the 
statement of the Ranking Member with regard to Wells Fargo as a 
cap. And I will be concerned if it is removed too soon.
    Chairman Quarles, last week, the Fed proposed loosening the 
supplementary leverage ratio for the eight largest U.S. banks. 
While the OCC joined the Fed in the proposal, the FDIC did not. 
And FDIC Chairman Martin Gruenberg specifically cited the 
reductions in the capital requirements as the reason the FDIC 
did not join the Fed and the OCC.
    And he went on to say that strengthening the leverage 
capital requirements for the largest, most systematically 
important banks was among the most important post-crisis 
reforms. What do you think of the FDIC's decision not to join 
the proposal? And how would you respond to Chairman Gruenberg's 
statement?
    Mr. Quarles. I agree that the emphasis on leverage capital 
ratios after the crisis has been important. And, frankly, that 
was something that I learned from the crisis. I have a higher 
estimation of the role of leverage capital ratios in the 
overall capital regime, given the consequence of the crisis, 
than I did before.
    I do think, however, that their role is as a backstop and 
that the most effective and efficient capital ratios are those 
that are risk-sensitive.
    If we allow the--any of the various leverage ratios that we 
have--but if we allow a leverage capital measure to be the 
marginally effective capital measure for an institution that 
drives decisions at the margin, then we are creating a 
regulatory incentive for that institution to add risk, rather 
than to reduce risk, and we probably shouldn't do that.
    And so, in evaluating the changes that we proposed to the 
SLR last week I looked at what was a relatively modest capital 
reduction under that leverage ratio--it was a few hundred 
million dollars out of the many, many, many billions of dollars 
of capital in the system, against the benefit of changing that 
incentive, and I thought that this was the right time to do it.
    Ms. Velazquez. Wouldn't that be a slippery slope? You are 
going to start with a low reduction, and then go on to reduce 
it more?
    Let me just say this: We took substantial steps to raise 
capital to ensure that the largest banks do not threaten the 
financial system. And I will tend to agree with Chairman 
Gruenberg that any proposal to lower the capital requirements 
is a bad idea.
    I yield back.
    Chairman Hensarling. The gentlelady's time has expired. 
With that the Chair recognizes the gentleman from Wisconsin, 
Mr. Duffy, the Chairman of the Housing and Insurance 
Subcommittee.
    Mr. Duffy. Thank you Mr. Chairman. And, Mr. Quarles, 
welcome. It is, as my colleagues have mentioned, nice to have 
you here and testifying before the committee. As we have 
complained, it has been long overdue. So, welcome.
    I first want to thank you for your ongoing work to evaluate 
the systemic risk, or lack thereof, of our U.S. insurance 
industry; thank you for that. Now, we all know that you have 
direct oversight over our savings and loan holding companies 
and those that have been designated as SIFIs (systemically 
important financial institutions) by FSOC (Financial Stability 
Oversight Council).
    But you have a more indirect role through international 
insurance standards setting with the Fed's seat on the FSB and 
the IAIS (International Association of Insurance Supervisors). 
The IAIS is developing international capital standards similar 
to our European solvency standards. First for you, do you 
believe that our State-based insurance regulatory model has 
been effective in the U.S.?
    Mr. Quarles. Yes. I think that, over the long life of 
insurance regulation that has been--
    Mr. Duffy. A hundred-plus years, it has been pretty 
effective, right?
    Mr. Quarles. Yes.
    Mr. Duffy. OK. And so will you commit that the Federal 
Reserve and your work with Treasury will make clear that we 
will not cede our regulatory system and move forward with the 
development of a European-centric international capital 
standard unless IAIS leadership acknowledges the U.S. insurance 
regulatory system has--as satisfying any IAIS credit 
standards--making sure that we are preserving our U.S. model, 
not ceding our U.S. model to a now European-centric model?
    Mr. Quarles. In those discussions, the Federal Reserve has 
been a voice for the so-called building-block approach to 
capital regulation that is, that has been supported through the 
U.S. processes. And we will certainly continue to do that.
    Mr. Duffy. So--but in regard to trying to preserve our 
State-based model here, what is your view as you negotiate with 
the IAIS?
    Mr. Quarles. Well, we certainly--we both wouldn't and 
couldn't, just given the nature of those bodies, do anything 
that would affect the Federal distribution of--well, by--
Federal with a small f--distribution of insurance regulation in 
this country.
    Mr. Duffy. Some of us might disagree with what you actually 
can do through international negotiations and agreements. But 
let's leave that aside, and hopefully we can work together 
further on this issue.
    I want to move--and you have had this issue brought up a 
couple of times by the Chairman and by Mr. Huizenga, in regard 
to board management and the Federal Reserve pressuring boards 
to fire certain members--are you aware of that actually 
happening? Because we have had a number of people come in and--
given us feedback that that has taken place.
    Mr. Quarles. No, I am not aware of that happening. But I am 
not challenging that it has happened, either. I think that that 
is disturbing.
    Mr. Duffy. OK. And, if you are hearing this, does--as you 
sit here today, maybe for the first time, are you concerned 
that that would take place?
    Mr. Quarles. Yes. I would think that that is the--I would 
think that that is the sort of supervisory engagement--as I 
indicated with the Chairman, I don't know that it is--I don't 
think that it is always inappropriate that the Fed might have a 
view on that.
    Mr. Duffy. Let's hold on for a second--who elects the 
board? Give me 101 here.
    Mr. Quarles. The shareholders, obviously.
    Mr. Duffy. The shareholders do. So does the Fed have a role 
in electing a board?
    Mr. Quarles. If there were a profoundly unsatisfactory 
director--
    Mr. Duffy. So, the answer is yes, that the Fed does have a 
role in electing board members?
    Mr. Quarles. Well, not in electing the board members, but--
    Mr. Duffy. But firing board members that the shareholders 
actually elected, is that your position?
    Mr. Quarles. In very rare circumstances, I think that could 
be appropriate, if there is a completely unsatisfactory board 
member. But it should not--
    Mr. Duffy. As determined by the Fed, not by the 
shareholders?
    Mr. Quarles. If determined by the Fed, yes, I do think that 
that could be appropriate in some circumstances.
    Mr. Duffy. So, in essence, we can say the Fed, really, can 
step in at any point and say, We don't like--we don't like 
board members, we can supersede shareholders and we can put 
pressure to have them fired, is what you are saying today?
    Mr. Quarles. Well, the law, for example, would not allow 
the shareholders to elect people who have committed certain 
crimes from being board directors. And, if they did, it would 
be appropriate for the Federal Reserve to say that that is not 
an appropriate director. I think I am really on your side on 
this. I think that should be something that is extremely rare.
    Mr. Duffy. I think this is a space that you--I think you 
need to take a look at. It is concerning, the Fed's role here. 
And I think, if you take some time, we are going to be on the 
same page on this issue.
    Mr. Quarles. Exactly.
    Mr. Duffy. I want to look to examiners, in their exams, 
asking questions of financial institutions about their lobbying 
efforts. Would that concern you? Is that a proper role of the 
Fed, to ask questions about how a financial institution is 
lobbying the Congress?
    Mr. Quarles. I can't imagine how it would be.
    Mr. Duffy. OK. And are you going to implement policies or 
procedures to root this problem out?
    Mr. Quarles. Absolutely.
    Mr. Duffy. And does that come by memo, directive, e-mail? 
And I think you have to think about, How do I actually stop 
this practice--get it down to the boots on the ground and make 
sure this practice actually stops? And my--tapped--
    Mr. Huizenga [presiding]. Gentleman's time has expired.
    Mr. Duffy. --tapping and I yield back.
    Mr. Huizenga. Gentleman's time has expired.
    With that, the Chair recognizes the gentleman from Georgia, 
Mr. Scott, for 5 minutes.
    Mr. Scott. How are you, Vice Chairman Quarles? Good to have 
you in the committee.
    Mr. Quarles, in your testimony, you said this--you said 
that you personally believe that our stress-testing disclosures 
can go further, and you said that we should consider additional 
measures, such as publishing our stress testing scenarios out 
for public comment.
    Well, with all due respect, I couldn't disagree with you 
more. Let me explain why.
    I was the Democratic lead and negotiator on the stress-
testing bill that we marked up in committee last week, as you 
know. We passed that out.
    And, when I negotiated with my Republican partner, Mr. 
Zeldin, I negotiated out that language that would have required 
the Fed to publish their stress-test scenario. And let me tell 
you why.
    I think the Fed must be very, very careful not to expose 
how they are going to conduct these stress tests. Because, as 
you all know, stress tests are meant to evaluate what happens 
and what may happen to a bank's assets under stress.
    But if a bank knows and is aware in advance of how you are 
going to do the stress testing, then that bank will be able to 
optimize its balance sheet for that particular day on which you 
are doing the stress test.
    So I hope you will consider that. We passed a bill. It is 
in there. With all due respect to you, I think your point is 
well taken, but I hope you understand that you can't let the 
cat out of the bag before it is time to get the fair 
adjustment.
    Now, on another point on fintech, there are many people who 
think that fintech businesses are just in California and New 
York. But, in Georgia and in Atlanta, especially, we are 
becoming the burgeoning capital of this new and exciting 
industry.
    And so you also mention in your testimony, when we talked 
about that, that the innovations in this industry can expand 
access to credit, you said, including to underserved 
communities and small businesses, which can really benefit the 
economy.
    I agree with you 100 percent. But I also believe that 
fintechs can be the answer to so many other serious problems. 
But here is where we are: The GAO did a report, as you know, 
and we talked about that. And there is a problem.
    There is a lack of coordination, a lack of harmonization. 
Now, I am working on legislation that would give the fintechs a 
voice, because they need to have a point of entry into this new 
regulatory stream.
    Second, they need to have harmonization. It is not just you 
in the Fed that is seeking to regulate these fintechs. You have 
got the OCC. You have got the CFPB (Consumer Financial 
Protection Bureau). You have got the CFTC. You have got all of 
them clamoring here.
    So I wanted you to know about our legislation. I would like 
to work with you on that, because, of all of the regulators, it 
is the Fed that is the anchor of our financial system. You are 
the point person for that in this very good and new position 
that we created as the supervisor for regulation for the Fed.
    And, finally, I want to just ask you if you could help us 
with something. My good friend, Mr. Luetkemeyer, got a bill, 
the SIFI bill. It passed, too. Much of what means something is 
coordinated into Senate bill 2155. But it is sitting in the 
House. People say it is going to die.
    Can you help us? Can you get on the phone over there and 
help us move this bill and get it going?
    Mr. Quarles. Well, I am very supportive of the efforts in 
both the House and the Congress to further increase the 
legislative framework for tailoring the application of our 
regulation and supervisory principles to institutions, and 
particularly to relieve the burden on smaller institutions. I 
am very supportive of that.
    Chairman Hensarling [presiding]. Time of the gentleman has 
expired.
    The Chair now recognizes the gentlelady from Missouri, Mrs. 
Wagner, Chairman of the Oversight and Investigations 
Subcommittee.
    Mrs. Wagner. I thank you, Chairman Hensarling. Vice 
Chairman Quarles, welcome at long last. Since I have a couple 
of topics that I wanted to touch on today, I will get right to 
the point.
    In your testimony this morning, you noted that the Federal 
Reserve is very focused on the increased risk to all financial 
institutions and are working to strengthen the cyber resiliency 
of the financial sector.
    Further, you have stated previously that cyber attacks are 
often connected to poor basic information technology hygiene 
and firms must continue to devote resources to these basics. We 
also know that attackers always work to be one step ahead, and 
we need to prepare for cyber events. Those are your words.
    Recognizing that cyber attacks have increased dramatically 
over the last decade, do you think it is more important that 
cybersecurity staff at financial institutions are better using 
their time to protect their--their company and other critical 
infrastructure, or to help answer regulatory exam questions 
from a multitude of different regulators?
    Mr. Quarles. I think you put your finger on something that 
is very important. I do think--and, across the Government, 
there is an effort to approach this in a systematic and 
effective way.
    You know, I do think that our supervisory engagement on the 
cyber issue can be improved to be better directed at actually 
supporting the ability of these firms to be resilient to a 
cyber attack.
    There is a fair bit of pure compliance, as opposed to real 
focus on the cyber risk in our current engagement. And we need 
to work to improve that, and we are.
    Mrs. Wagner. I think so. We need to make sure that the 
companies are actually protecting themselves, thus the 
consumer, as opposed to dealing with a constant flow of 
regulatory exams and things of this nature, doing the real work 
that keeps us safe, keeps our information, our data, our 
privacy safe when it comes to cyber attacks.
    Mr. Quarles. Completely agree.
    Mrs. Wagner. Thank you.
    You talked also about continuing to collaborate with our 
Federal agencies on this topic. Are there any specific examples 
of collaboration where the Federal Reserve is aligning its 
supervisory activity with other financial services regulatory 
agencies as it relates to cybersecurity?
    Mr. Quarles. So there are existing interagency processes of 
the Government that we participate in, and there are also--and, 
through the FSOC, these consider--these issues are also being 
considered.
    So there is a fair bit of interagency engagement in trying 
to determine exactly what the right way to improve our focus on 
actual resilience, as opposed to pure compliance, if you will, 
can be done. We are still in the process of doing that. It is a 
difficult question, but an extremely important one.
    Mrs. Wagner. You say, then, you are collaborating with the 
FSOC?
    Mr. Quarles. Yes, with the FSOC and the FBIIC--the FBIIC, I 
think, is the acronym.
    Mrs. Wagner. OK. Great. Thank you.
    Switching topics somewhat, I want to go back to something 
you said in your testimony about innovation. You talked about 
making sure that regulations don't stifle innovation.
    But, as regulators, it is your job to make sure it is done 
in a responsible way. What are you doing to ensure banks 
understand and manage these risks?
    Mr. Quarles. So that is part of our regular supervisory 
engagement with the firm. You know, as part of that, we also 
look at the connections of a banking institutions to both their 
technology exposure, as well as their technology engagement. 
And a lot of that is individual to each type of institution, 
and the direct supervisory teams have individual assessments of 
each firm.
    Mrs. Wagner. Concerned that, by putting a large focus on 
systemic risk, are we discouraging innovation? Are we putting 
competition for consumers at risk?
    Mr. Quarles. Well, it is our job to ensure that we don't. I 
think that is something that we need to keep in mind.
    And one of the themes that I have tried to stress in 
general about our regulation and supervision currently is that, 
I think, in the decade following the crisis, the focus was 
entirely on systemic risk and safety and soundness. And all--
those are important, but we also need to focus equally on 
efficiency and innovation and supporting that.
    Mrs. Wagner. Completely agree. My time has lapsed. I thank 
the Chairman for his indulgence, and I thank and welcome you.
    Chairman Hensarling. Time of the gentlelady has expired.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Cleaver, Ranking Member of our Housing and Insurance 
Subcommittee.
    Mr. Cleaver. Thank you, Mr. Chairman. Thank you very much 
for being here today.
    Fintech is rapidly becoming a financial behemoth, and I 
would like to get your reaction to, first, this phenomenal and 
continuing growth, and then, secondarily, what, if any 
involvement in or monitoring of fintech will the Fed look at?
    Mr. Quarles. There clearly is a lot of innovation that is 
going on in the fintech space currently--has been for some 
years. And the opportunities that that creates for improvement 
of consumer service, I think that they are real. And we are 
seeing that happen.
    Most of what people think of as fintech--the startup firms 
in various parts of the country that are creating different 
types of user interface to the financial system--do plug into 
the traditional financial sector at one point or another. They 
have behind them a traditional bank that is proving the funding 
or providing the actual payments--payment system services that 
the fintech firms are the interface for.
    And, in the supervision of the traditional banks, we both 
have insight into what is happening in the fintech sector, we 
can look into their activities through our ability to examine 
them under the Bank Service Act--for example, if they are, when 
the connection is such that it allows that kind of examination.
    And so we--I think that we do have tools, currently, that 
allow us to look at that sector and understand what is 
happening there.
    Mr. Cleaver. But nothing alarms you?
    Mr. Quarles. I wouldn't say there is anything alarming, 
currently. I think that there are issues that are raised, and 
we think about them and are addressing them.
    Mr. Cleaver. Do you believe that there is some way that 
fintech can help resolve the payday loan issue that impacts 
millions of low-income Americans?
    Mr. Quarles. Well, one of the hallmarks of fintech 
generally is reducing cost, and particularly for retail 
transactions. It is not really my role as a supervisor to make 
suggestions as to how that issue ought to be addressed through 
a particular commercial means, but--
    Mr. Cleaver. We don't care. I mean, we are not--we don't--
you can do it. Go ahead.
    Mr. Quarles. But I can certainly imagine that happening. I 
would certainly be something that would be beneficial.
    Mr. Cleaver. Well, I am just curious, because they really 
are not being regulated right now. And so it would seem to me 
they have enormous flexibility that could be used for something 
that most people believe to be important.
    I don't have much time left, so I apologize, but--I wanted 
to get into that even more with you. But let me move to the--
one of the other issues that I am concerned about. And it is 
unemployment among African-Americans and Latinos in this 
country.
    Through the Obama Administration, and then the Trump 
Administration continuing, the unemployment in the country has, 
blessedly, dropped significantly. All of us should be happy 
about it. However, the minority communities are still not 
dropping at the same rate as non-minorities.
    Is there anything that can be done, in your portfolio, 
there is this issue of employment that--do you have anything in 
the toolbox that you think would be of help in trying to reduce 
minority unemployment?
    Mr. Quarles. In the Fed's toolbox, our mandate, which we 
pursue assiduously, is maximum employment, maximum aggregate 
employment. And, obviously, that has an effect, because, as 
maximum aggregate employment has been increasing, unemployment 
decreasing. Unemployment for all segments of the population, 
including minority segments, has been going down.
    That differential remains. We don't really have the tools 
to address it. But we do try to provide information and 
analysis of it to help others who do have the tools.
    Chairman Hensarling. Time of the gentleman has expired. The 
Chair now recognizes the gentleman from Kentucky, Mr. Barr, 
Chairman of our Monetary Policy and Trade Subcommittee.
    Mr. Barr. Congratulations, Mr. Vice Chairman, on your 
confirmation. And thank you for your testimony today 
recognizing that regulation should support and promote 
financial system efficiency just as much as regulation should 
support safety and soundness, because, I think as you would 
agree, overregulation and cost-burdening our banking system can 
just as much weaken our financial system and contribute to 
illiquidity as inadequate supervision could.
    As you know, the Federal Reserve's performance as a bank 
regulator in the lead-up to the financial crisis has been 
subject to scrutiny and criticism on both sides of the aisle 
and across the political spectrum.
    Despite having teams of resident examiners embedded in the 
largest financial institutions in the run-up to the financial 
crisis, the Fed failed to identify material weaknesses in these 
firms' operations and failed to identify risks that were 
lurking in those portfolios until it was too late.
    Yet, instead of scaling back the Federal Reserve's 
authority, the drafters of the Dodd-Frank Act chose to double 
down, and they conferred broad new power on the Fed to regulate 
virtually every corner of the financial sector. And it can be 
argued that the Dodd-Frank Act made the Federal Reserve our 
Nation's most powerful bureaucracy.
    So, given the Fed's enormous new supervisory and regulatory 
powers now, an argument can be made that the Fed should be made 
more, not less accountable to Congress.
    My question to you is, in reference to my colleague, 
Congressman Davidson's proposal, the Federal Reserve Regulatory 
Oversight Act, which would bring the non-monetary-policy-
related functions of the Board of Governors into the 
appropriations process, what is your take on that proposal?
    Mr. Quarles. I have thought a lot about these issues and 
wrestled with them, because the importance of the democratic 
accountability of the Federal Reserve is something you know 
that I share. And it is important to our ability to do our 
jobs.
    Similarly--and I know it is something that everyone in this 
committee shares, as well--I think that a democracy can 
appropriately determine, and wisely determine, to create a 
buffer of independence around certain functions of the country, 
some of the law enforcement functions, some of the monetary 
policy functions.
    So the question is, does a proposal to bring the non-
monetary-policy functions of the Federal Reserve--how does it 
balance those two objectives--democratic accountability and 
independence around the monetary policy function?
    I am concerned that it would, because of the fungibility of 
money, create the possibility for some future Congress to put 
pressure on the monetary policy side.
    Mr. Barr. Well, I would like to work with you on that. My 
time is running out, so I want to move on, but I want to work 
with you on that--
    Mr. Quarles. And I very much so--
    Mr. Barr. I think there are--I respect the Fed's 
independence, as Chairman of the subcommittee oversight over 
monetary policy, I respect Fed independence with respect to 
monetary policy.
    But, with respect to your jurisdiction and supervision and 
regulation, the Fed arguably is the most significant, powerful 
regulator in America with respect to financial services.
    And I think it is altogether appropriate, no matter what 
your perspective--whether there is too little or too great 
regulation--there should be accountability. And I want to work 
with you on that, and Mr. Davidson, to make the Fed more 
accountable with respect to regulation.
    And, to that end, the Fed's decision to reduce the burden 
of stress tests on non-complex firms by focusing the 
qualitative review and CCAR to the largest, most complex 
financial institutions, I believe, is a good first step. And I 
compliment the Fed on that.
    However, with regard to the Fed's newly proposed stress 
capital buffer, do you agree also with your predecessor, who 
was not known as a deregulator--Mr. Tarullo, Governor Tarullo--
that the qualitative assessment in CCAR be phased out for all 
banking organizations, especially in light of the recent stress 
capital buffer rule?
    Mr. Quarles. Yes, I think that is something that we should 
consider and have called for a comment on, definitely.
    Mr. Barr. Well, I appreciate you considering that. And, 
with respect to that proposal to create a stress capital 
buffer, as you know, the main driver of these stress tests is 
the severely adverse scenario. And it has been published by the 
Fed without the benefit of any public comment or external 
review. And the model that will be employed to calculate the 
bank's stress losses using that severely adverse scenario is 
the Fed's proprietary model.
    But is there no transparency regarding the elements used in 
determining a significantly and potentially highly variable 
component of the minimum capital requirement? And is the Fed 
open--publishing these scenarios and models for notice in 
comment?
    Mr. Quarles. I think that we need to get more public input 
on them. A full APA (Administrative Procedure Act) notice and 
comment process, which could take years--I think that might be 
logistically difficult. But I think that there are ways that we 
can get genuine, serious input and still be consistent with the 
purposes of the test. I agree with you.
    Mr. Barr. Thank you. Thank you. My time is expired.
    Chairman Hensarling. Time of the gentleman has expired.
    The Chair now recognizes the gentlelady from Wisconsin, Ms. 
Moore, Ranking Member of the Monetary Policy and Trade 
Subcommittee.
    Ms. Moore. Thank you so much, Mr. Chairman, and welcome to 
you, here today, Mr. Vice Chairman Randy Quarles. I welcome you 
to your new position and I hope that you are prosperous.
    I would just like to hear, since you are new, what lessons 
that you learned from the financial crisis that you can share 
with us.
    Mr. Quarles. I would say that there are some specific ones; 
there are some general ones. Probably the most general one is a 
sense of humility about the omniscience of the regulators.
    You know, as has been mentioned and is certainly widely 
known, the regulators were closely involved with the financial 
system at a very granular level. And, for a period there, at 
least on a policy level, when I was at the Treasury Department, 
I certainly was involved with policy regarding the financial 
sector.
    And while we considered issues about potential financial 
stress, none of us believed--none of us knew that the 
financial--that this sort of financial stress was coming. And, 
indeed, most people didn't.
    I approach my current responsibilities with a great sense 
of humility about the ability of even very well-meaning, smart, 
engaged, informed people to know the future. And I think that 
has to inform how we think about what we think are good ideas 
currently.
    There are some specific examples, as well. I mentioned one 
of them--the leverage ratio. I did not have a sufficient regard 
for the role of leverage capital requirements in the overall 
capital system--
    Ms. Moore. I mean, before the crisis, or since Dodd-Frank?
    Mr. Quarles. Before the crisis.
    Ms. Moore. OK.
    Mr. Quarles. And since then--
    Ms. Moore. So Dodd-Frank has helped in that regard?
    Mr. Quarles. Well, I would say that the regulatory 
response, in general, has been appropriate, following the 
crisis.
    Ms. Moore. OK. All right. So banks are doing really well 
right now. Their profits are up. Their shares are up. And so--
but we see a constant drumbeat of complaints, I think, from 
some of the larger banks and maybe even some of the regional 
banks regarding so many regulations.
    So, very specifically, I would like to know: Do you support 
the Volcker Rule? Do you support what Dodd-Frank has done with 
the new derivative framework provided to FSOC? As examples of 
two things, do you support those things?
    Mr. Quarles. So the Volcker Rule, as it has been 
implemented, I do think isn't working well. I think that it is 
excessively burdensome. I think it creates uncertainty. And so 
I think it is not really an effective implementation of the 
statutory requirements.
    Ms. Moore. So you are not--you are not afraid of 
proprietary trading at all and ratcheting things up to where we 
were?
    Mr. Quarles. Well, there as a regulator, we can't change 
the Volker Rule, so that will remain the law of the land. I 
think that we can implement the statutory intent in a way that 
is actually more effective by clarifying, simplifying the rule, 
and reducing the burden of complying with it.
    Ms. Moore. OK, just let me just briefly share with you. The 
Fed Chair Powell has recently been with us and he has talked 
about the profitability of the banks and their return and their 
returns on capital and buying back stock and so on. And so I am 
wondering if--if you are concerned about the--any negative or 
adverse impacts that you see with the banks enriching 
themselves and buying back stock, harm to our economy overall? 
Is there any concern on your part?
    Mr. Quarles. I think that a healthy financial sector is in 
our interest. It is one of the--having a robust financial 
sector ensures that we have got robust support for the real 
economy and for economic growth in the real economy. And as 
long as that sector is healthy and is safe and sound, our job 
as regulators is to ensure that they are operating the safe and 
sound manner. And then the distribution of their profits is up 
to the shareholders and management and some of that will go to 
customers and some will go to employees and some will go to 
shareholders.
    Chairman Hensarling. Time of the gentlelady has expired. 
The Chair now recognizes the gentleman from California, Mr. 
Royce, Chairman of the House Foreign Affairs Committee.
    Mr. Royce. Thank you very much, Mr. Chairman. And Vice 
Chairman Quarles, thank you. I think in your analysis the 
response that you gave in terms of the regulatory community and 
what you did not see coming is partially true but there was one 
thing the regulatory community did see coming and tried to do 
something about, it was the overleveraged--the GSEs 
(government-sponsored enterprises), Fannie Mae and Freddie Mac, 
which reached 100 to 1.
    In 2003 and 2004, I had legislation that tried to control 
for systemic risk. Tried to transfer the authority to the 
regulatory community to take down the overleveraged in terms of 
those portfolios, and the regulatory community, the Fed in 
particular was very supportive of that. We could not get that 
legislation through.
    I would say that they saw that coming. What perhaps they 
didn't see coming was also the investment banks--the four big 
investment banks in doing their own modeling had leveraged up 
the ratio from what should have been 10 to 1, probably 30 to 1. 
And so the combination, first housing collapsing with the GSEs, 
and then on top of it, the big investment banks, I think that 
was a major blow here.
    I think what we are rediscovering in this generation is 
that this cyclical nature of the economy because we fail to 
adjust or regulate for these kinds of problems are with us and 
I think unfortunately Washington tends to exacerbate in some 
ways, may be exacerbating, rather than mitigating the booms and 
the busts, and I just wanted to ask you about that because 
Washington is willing to come in and scale back capital 
requirements when times are good. When times are bad, as we saw 
during the last crisis, Washington overshoots and limits the 
ability of banks to aid in the economic recovery.
    We all saw countless examples of that with community banks. 
What is your view on regulation in terms of the economic cycle? 
Where do you think we are in the cycle, and how does that 
impact your assessment of regulatory changes, especially now as 
it relates to capital?
    Mr. Quarles. So those are extremely good questions. In 
general, the banks should, and I think that they are, build 
their capital during good times so that they can survive stress 
when it comes. And we know that there will be periods of stress 
in the future. I think that it is an open question. There are 
regulatory tools that are designed to provide those 
countercyclical incentives.
    The stress test is one of them, it becomes known as asset 
values increase, as times become good, the stress necessarily 
if you assume that asset values are going to fall to a certain 
level, that stress is going to be greater and that provides a 
certain countercyclical incentive.
    There are other tools that we could use. At the same time, 
the efficiency of the system does--is supported by 
predictability--the ability of the--of the CFOs and the banks 
to predict how their bank ought to respond to the overall 
regulatory system, and balancing that is the difficulty that we 
wrestle with.
    Mr. Royce. Let me ask you another question. Is it possible 
for businesses around the world to take advantage, you said of 
the fact that we are in a world of opportunity, but it is an 
opportunity that is unbalanced, that the developed world will 
face strong significant headwinds, for quite an amount of time, 
the emerging world has both robust growth and growth that is 
being driven by consumer consumption?
    So that was your--that was your point. Shouldn't we be 
looking outward to the emerging world for growth? We have got 5 
percent of the population, 25 percent of the GDP. Shouldn't we 
support a renewed interest in the Trans-Pacific Partnership as 
a net positive for the U.S. economy in terms of that 
engagement? Just your view on that.
    Mr. Quarles. Well the Fed's responsibility is not trade 
partnerships, but in general, certainly, the United States has 
benefited from an open trading system and from open trade and 
that has been in our interest over a long period of time.
    Mr. Royce. Thank you, Vice Chairman Quarles, very much. 
And, Mr. Chairman, I thank you as well for this hearing.
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentleman from Minnesota, Mr. 
Ellison.
    Mr. Ellison. Good morning, Mr. Quarles, how are you?
    Mr. Quarles. Thank you.
    Mr. Ellison. So the Center for Investigative Reporting 
looked at 31 million mortgages using HMDA data and they found 
evidence that redlining is still alive in about 61 major 
American cities. Did you see that report?
    Mr. Quarles. I have not had a chance to study it, no.
    Mr. Ellison. We will send it to you. I think this is 
absolutely unacceptable; 50 years since the passage of the Fair 
Housing Act, which banned discrimination in lending, 41 years 
since the passage of the Community Reinvestment Act, which 
requires banks to lend and to invest in communities which they 
operate, including low- and moderate-income communities.
    In a recent speech you said that you want to improve and I 
will quote you, ``the current supervisory and regulatory 
framework for the CRA to further the statutes objective of 
promoting access to credit and financial inclusion.''
    What did you mean by that?
    Mr. Quarles. Well, I think that the objective of the CRA is 
a broad one, which is to--
    Mr. Ellison. I will reclaim my time. I was hoping you had 
some things in mind. Do you have specific things you want to do 
with the CRA that you could identify today?
    Mr. Quarles. Well, we are working with the other regulators 
on specific proposals. And since those aren't out yet, I don't 
want to prejudge that process.
    Mr. Ellison. You don't want to mention them just yet? Well, 
yes. So where--it is in the process. So, look, can you assure 
the members of this committee today that you will not support 
any changes to the CRA that will result or cut lending in low- 
and moderate-income communities?
    Mr. Quarles. The objective of the changes we are 
considering is to improve support to communities, not to--
    Mr. Ellison. Right, right.
    Mr. Quarles. --cut it.
    Mr. Ellison. So that is the objective. But the outcome is 
what I am asking you about. Can you assure us today that you 
will not support changes to the CRA that will cut lending in 
low- and moderate-income communities?
    Mr. Quarles. That certainly wouldn't be my intention.
    Mr. Ellison. OK. So what assurance can you give us, that 
your intentions will be fulfilled regarding the CRA?
    Mr. Quarles. Well, I will--I will be here again shortly, 
and you can hold me accountable for the outcome of our 
proposals. We will seek comments, and--on the proposals that we 
make, and take seriously people's comments as to whether we are 
achieving our objectives.
    Mr. Ellison. OK. Well, earlier this month, the Treasury 
released a series of recommendations for revising the CRA, 
which you have alluded to already.
    One of those recommendations related to penalties lenders 
face for failing CRA exams. Only about, I don't know, 1 percent 
or 1.5 percent fail, right?
    Mr. Quarles. It is rare to fail.
    Mr. Ellison. Yes. It is rare to fail. But the report says, 
a bank with a less-than-satisfactory CRA reading--about 1 
percent of the people--banks--should continue to receive 
enhanced scrutiny. But more consideration should be given to 
the bank's remediation efforts to date, and whether improving 
the application would benefit the communities served by the 
bank.
    Do you believe Treasury's plan to relax penalties for banks 
who fail the CRA exam will achieve the CRA's intention--and 
your intention--of increasing lending and investment in low-
income communities?
    Mr. Quarles. Well I don't think that Treasury's intention 
there, in that reference, is to relax penalties, but rather to 
consider the overall consequences of a particular transaction 
that may be proposed.
    There are certainly circumstances where the low- and 
moderate-income portions of a community can be, actually, 
helped by a particular transaction that, under current 
practices, might not be allowed for--
    Mr. Ellison. You mean like payday lending and rent-to-own? 
Is that what you have in mind?
    Mr. Quarles. No. Simply the increasing the ability of a 
particular institution to service a low-and moderate-income 
community might be helped. I think they are saying we ought to 
look at the facts and circumstances of the case, and that I 
would support. And try to decide whether we are actually 
achieving our objective.
    Mr. Ellison. Well, when you think about 61 major American 
cities having evidence of redlining based on home mortgage 
disclosure data, and still 98 percent pass, I think that the 
exams should be tougher, not easier.
    And I hope that you will carry that forward. Because for 
the people who are denied mortgages after they have qualified 
based on, sometimes, the color of their skin, I hope you share 
my concern with that and will use your authority to uphold 
people's rights.
    Mr. Quarles. I definitely share the concern that there 
should not be discrimination in lending.
    Mr. Ellison. Thank you.
    Chairman Hensarling. Time of the gentleman has expired, the 
Chair now recognizes the gentleman from Florida, Mr. Ross.
    Mr. Ross. Thank you Chairman, and Chairman, thank you for 
being here as well. I am one of those people who firmly believe 
that access to capital and liquidity are probably the lifeblood 
of a stable and vibrant flow of commerce.
    I have seen the accumulation of capital, but yet I have not 
seen until recently the investment of capital.
    And what concerns me about that is that while--those that 
form capital for investment purposes to strengthen an economy 
do so and choose to do so in environments that are more 
conducive to investment and consumer satisfaction, just has not 
been what Dodd-Frank resulted in for us as a Nation.
    And now that we see some tax reform, we see the opening up 
of capital, we see the availability of more liquid markets, 
some people have said that regulation has impaired market 
liquidity. What is your position on that?
    I mean, is it making it--had it made it more harder and 
costlier to transact business?
    Mr. Quarles. So I think that there are instances where it 
has. I think that the Volcker Rule is an example of that. Again 
as I mentioned, economists will argue over measures of 
liquidity and how great the extent is of its effect on 
liquidity.
    Certainly practitioners believe it has been great and it is 
inarguable that it is existent. And I think that it is 
unnecessary. I think that we can have an implementation of the 
Volcker Rule that doesn't have those costs, or at least reduces 
those costs.
    Liquidity regulation itself has also had an effect. As I 
indicated in my testimony, I think that we can and will and 
should give consideration to how to further tailor liquidity 
regulation along the scale of firms. Because that also can have 
an effect that you are describing.
    Mr. Ross. And as we talk about, and I think my colleague 
Ms. Moore talked about, access to capital for small business. 
That to me is so fundamental to regrowth of a vibrant economy. 
Thirty years ago when I started my law practice, I had very 
limited access to capital.
    And I had to actually go and borrow some from friends to 
get started. And granted, after the track record and solvency 
and the growth of my business came, well the access to capital 
was there. Today, I am not so sure we have that access to 
capital.
    Apparently some former members of the Federal Reserve have 
dismissed concerns about access to capital, and I have 
expressed the current state of small business lending. For 
example, a September 2017 Federal Reserve report entitled, 
``Availability Of Small Credit To Businesses'' cited a survey 
from the NFIB.
    Which found that polls suggest credit availability is a 
relatively minor concern for small businesses. I don't agree 
with that. I think access to capital is one of the huge, most 
important concerns of a small business.
    During a March 26 speech, you discussed the findings of a 
survey published by the 12 reserve banks. Can you tell us what 
that survey revealed in terms of access to capital to small 
businesses?
    Mr. Quarles. Well without getting into the terms of any 
particular survey, I think that lending to small businesses is 
an issue. And one of the things that I did earlier in my career 
was--
    Mr. Ross. Is an issue as that there are--there is a 
regulatory impediment to the access to capital?
    Mr. Quarles. I think that there is. Certainly at the 
community--I think that the cost of regulation on community 
banks has been an impediment. Community banks are an important 
source for credit for small businesses.
    Earlier in my career when I was an investor in smaller 
banks, I was very aware--
    Mr. Ross. And so the lifting of that regulatory burden 
would allow community banks the ability to lend more, and in 
turn growing those communities and in turn building a more 
vibrant and productive economy?
    Mr. Quarles. Yes, I believe that.
    Mr. Ross. And we should be doing what is necessary to see 
that that is done?
    Mr. Quarles. Yes, we should. And some tailoring has 
happened. I think that there is more that we can do in order to 
reduce the burden on smaller institutions.
    Mr. Ross. Thank you, and I have just got just a couple 
seconds left, and I just want to reiterate what the Chairman of 
the Housing Insurance Committee had talked about with regard to 
the sanctity of State-regulated insurance.
    I think that we, and I hope that you would continue to 
advocate on behalf of our system of the State-based regulatory 
scheme, not only in terms of capital standards, not only in 
terms of solvency, but also in terms of consumer protection. So 
thank you for being here. I yield back.
    Mr. Quarles. Thank you.
    Chairman Hensarling. Time of the gentleman has expired. The 
Chair now recognizes the gentleman from Massachusetts, Mr. 
Lynch.
    Mr. Lynch. Thank you, Mr. Chairman. Welcome, Vice Chairman 
Quarles. I would like to follow up on Ms. Moore's earlier 
question regarding the Volcker Rule. On January 19th of this 
year, you gave a speech to the American Bar Association Banking 
Law Committee.
    And you outlined plans to review and modify numerous bank 
regulations. During your remarks, you said, and this is a 
quote, ``The relevant agencies have begun work on a proposal to 
streamline the Volcker Rule. It will naturally take a bit of 
work, but Volcker Rule reform remains a priority.''
    I am not sure that was the same response that Ms. Moore 
got. I just want to ask you about that. So the Volcker Rule--at 
least the core of the Volcker Rule says no more proprietary 
trading. We had a disaster back during the housing crisis.
    A lot of these banks were engaging in speculative activity, 
very, very highly speculative and risky activity in terms of 
credit default swaps and all that. A lot of these banks got in 
trouble, we had to bail them out.
    So we said no--the Volcker Rule basically said no more 
proprietary trading, OK? So my question is how do you 
streamline no more proprietary trading? How does that actually 
work?
    Mr. Quarles. Well again, I don't want to directly front run 
proposals that we are working on with four other regulators and 
that aren't yet--
    Mr. Lynch. Just conceptually, then. Don't go into their 
stuff, but just--if it is a stop sign, don't proprietary trade, 
don't put the American taxpayer at risk. How do you streamline 
that? I am just wondering.
    Mr. Quarles. The key issues will be around the definition 
of proprietary trading and providing enough certainty that 
institutions in fact know what it is that we will consider to 
be proprietary trading.
    Mr. Lynch. So you are going to change the definition of 
proprietary trading?
    Mr. Quarles. Well I think that there is a scope to provide 
additional certainty around that in order to better affect the 
intention of the statute.
    Mr. Lynch. So what Congress was trying to prohibit was what 
I just described. So those bets, the speculatory trading, 
defaults--credit default swaps--all of that. We were 
unwilling--as taxpayers we were unwilling partners on that 
activity and we ended up when they lost money the American 
taxpayer was a loser as well, even though we didn't authorize 
that--we didn't support it. Are we going back to that?
    Mr. Quarles. No. I mean, absent statutory change the 
statutory injunction is clear.
    Mr. Lynch. Right, but you were telling me 2 minutes ago 
that you were going to redefine what proprietary trading is and 
that makes me nervous because Congress spoke in terms of what 
we wanted to prohibit, and no is no. There is no streamlining 
no.
    Mr. Quarles. Right, and we are not proposing to say yes. 
The question is, if it is impossible to understand and to 
implement the definition of proprietary trading that the 
regulators have come up with, not the Congress. I mean, we took 
the statutory language and have turned it into a virtually--
certainly a very difficult, some would say impossible standard.
    Mr. Lynch. We wanted it to be difficult. We did. We saw 
what happened. So, I just hope you are not trying to disrupt 
the intent of Congress. We wanted it to stop, and it has 
stopped.
    Mr. Quarles. I am not even sure that you could say that.
    Mr. Lynch. If you want to have that debate, we think we are 
the ones that should have that debate about whether it should 
be relaxed or refined but that is a decision for Congress. We 
certainly sent a clear message in Dodd-Frank and in the Volcker 
Rule that we wanted proprietary trading stopped, we wanted the 
American people to be out of that casino.
    We didn't want them being partners of that. We didn't want 
to have another bailout. Everybody on both sides said no more 
bailouts--that is enough. So, we looked at the risky activity 
and we said we don't want any more of this.
    So, I just want you to take that back if you would and 
incorporate that as one ingredient in your discussions.
    Mr. Quarles. No, I deeply appreciate that. We are not 
seeking to undermine the intent of Congress at all.
    Mr. Lynch. Thank you so much. Mr. Chairman, I yield back.
    Chairman Hensarling. The gentleman yields back. The Chair 
now recognizes the gentleman from Illinois, Mr. Hultgren.
    Mr. Hultgren. Thank you Mr. Chairman. Thank you, Vice 
Chairman for being here today and for your work. I want to jump 
right into questions if I might. I am very concerned with the 
use of the current exposure method and requirements for banks 
who cleared the trades of liquidity providers.
    As Chairman Powell noted last year, CEM--and I quote--he 
said, ``ignores whether a derivative is margined and 
undervalued, netting benefits,'' end quote. The current 
exposure method is sensitive to risks, so its mandatory use 
artificially caps market liquidity, particularly in large-cap 
index options which are crucial hedging vehicles by making it 
more expensive to hedge artificially constrained liquidity in 
S&P 500 index options has knock-on effects that increase 
overall market volatility, as we have seen in recent months.
    Rulemaking is the long-term answer but that is a slow 
process, taking years. Liquidity providers are dealing with 
this issue now. There is no reason to believe volatility is 
going to decrease anytime soon. What short-term steps can you 
take to fix current exposure methods damaging effect on market 
liquidity? Short of rulemaking, what can be done?
    Mr. Quarles. Well, I think that the most effective method 
is for us simply to proceed in making that rule effective. 
Where I completely agree with your assessment of the 
difficulties that that has caused, and I think that we should 
proceed at pace and simply have the final rule that will 
address that effective.
    Mr. Hultgren. Again, my concern is just that we get answers 
for people soon. The Treasury Department's October 2018 report 
on capital markets calls for a near-term solution of risk-
adjusted approach for valuing options for purposes of a capital 
rules to better reflect the exposure such as potentially 
weighting objects by their delta.
    Moving on, the Federal Reserve's current large financial 
institutions risk-management proposal contains expectations for 
business-line management that would apply to both business 
lines and critical operations.
    I believe this is duplicative. It is regulatory 
inefficiency that could be addressed. Why is the holding 
company regulator, the Fed, reviewing the same activities as 
the bank regulator--banking regulator? If the Fed reviews a 
bank's credit card business, for example, it is reviewing the 
same thing the FDIC has already reviewed. What is the 
justification for the Fed to conduct core business line reviews 
of activities contained within a holding company's bank's 
subsidiary when those activities are already subject to 
examination by the bank's primary regulator?
    Mr. Quarles. Well, I think that to the extent that we do 
that and frequently we ought to be able to rely on the bank's 
primary regulator. If there are cases where, for a particular 
supervisory reason, we think that we should also be involved, 
we should do that in a way that doesn't duplicate the burden on 
the institution.
    Mr. Hultgren. With respect to Volcker Rule reform, you have 
said publicly that it is important to, among other things, 
redefine the market-making exemption which is admittedly an 
important issue both for the banks that are market makers as 
well as for the broader economy.
    However, what can be done specifically for smaller banks, 
say those in the $10 billion to $50 billion range to reduce the 
burden of Volcker Rule compliance? There are a number of 
regional banks in Illinois that fall into this category.
    Mr. Quarles. Well, that is one of the things that we are 
discussing among the four regulators. I think an approach might 
be--either to be more clear about what it is that would be 
proprietary trading and therefore that they can be clear that 
it is not something that they are engaged in and supervisors 
can be clear it is not something that they need to look at 
because we have a very clear definition.
    There may be a way to look at the risks of particular 
institutions and determine that simply as an allocation of 
supervisory resources matter the burden of proof in an 
examination changes, for example. But that you will be presumed 
not to be in compliance with the Volcker Rule unless there is a 
reason to think otherwise, there are a variety of approaches 
one could use.
    Mr. Hultgren. My last minute here. I want to get into some 
fintech issues. Technology has significantly changed the way we 
do most everything including access to financial products and 
services. Banks must comply with extensive regulations 
especially in the post Dodd-Frank regulatory environment which 
other financial services companies may not be subject to.
    Are you concerned about nonbanks often times with the 
competitive advantage of lower regulatory cost, offering nearly 
identical financial products and services without being subject 
to the same regulation? And if so, how would you address this 
in your role as Vice Chair of Supervision?
    Mr. Quarles. So, I think that our regulatory system should 
not create unlevel playing fields. That is across a whole range 
of issues, whether it is banks or nonbanks or different banks 
and different types of regulated entities--small banks and big 
banks. I mean, we should not be creating an unlevel playing 
field.
    And so, on the specifics of how to address that with banks 
and nonbanks, that then gets very complex given the limitations 
of our statutory framework that we have to operate under but 
something that is a high priority for me.
    Mr. Hultgren. Thanks, Vice Chairman. I yield back.
    Mr. Miller. The time of the gentleman has expired. The 
Chair now recognizes the gentleman from California, Mr. 
Sherman.
    Mr. Sherman. I believe Mr. Huizenga pointed out that the 
people don't know what the Fed does. That is not by chance, 
that is by design. The bank is an example of the fact that the 
elites of this country believe in democracy for every country 
in the world except ours.
    And it is undemocratic in at least three ways. First, both 
parties seem to have agreed that monetary policy is too 
important for politicians to talk about or for citizens to try 
to influence.
    Second, the Fed has a structure where the Class A voters 
are banks; not one person, one vote, one bank, one vote, or 1 
billion, one vote. And then the Class B directors are selected 
by the Class A directors. So it is undemocratic in that it is 
partially bank-controlled.
    And then finally, geographically, 1/5 of all Americans live 
in the western area, and yet that bank is not entitled to a 
permanent seat on the FMOC. Eight percent of Americans live in 
the New York Bank area. That bank is guaranteed.
    So if you ever want an example in the United States, not of 
democracy, but of the Chinese system of government, the 
Confucian system of government where learned, according to 
Confucius, men self-select a renewable group of people who have 
the mandate of heaven, though not the mandate of voters, there 
is no better example of the Chinese system in the United 
States.
    Mr. Vice Chair, believe it or not I have a question. Are 
there any financial institutions in this country that are too 
big to fail?
    Mr. Quarles. I think that we have made really tremendous 
progress since the financial crisis--
    Mr. Sherman. That was the exact answer your chairman gave 
until Senator Kennedy pushed him further and asked--and 
pressed, is any single bank right now too big to fail? Do you 
agree with your chairman when he said no?
    Mr. Quarles. Well, I don't want to be in the position of 
disagreeing with my chairman.
    Mr. Sherman. You are supposed to. That is why we pay the 
salaries for more than one person at the Fed. If they are all 
going to agree, then any one of them would be superfluous.
    Mr. Quarles. But I do think that all of the large banks are 
much more resolvable than they have been before--
    Mr. Sherman. Resolvable--are they too big to fail? Could 
the--could a--could a disaster at one bank bring down our whole 
economy the way we saw in 2008?
    Mr. Quarles. Currently, I think that the system is much 
more resilient--
    Mr. Sherman. I didn't ask you that. Not going to let you 
slip away. Senator Kennedy was good enough to get your chairman 
to be specific in an answer. Is there any bank whose failure 
could bring down our entire economy? Yes or no?
    Mr. Quarles. We think that we have made sufficient 
progress--
    Mr. Sherman. That is not an answer. I know you have made 
progress. Is there any bank the failure of which could bring 
down our entire economy?
    Mr. Quarles. At the moment I don't see how that could 
happen.
    Mr. Sherman. OK, then would you support getting rid of the 
limited bailout provisions that were in Dodd-Frank since, if 
any one of those banks were to go under, we should, as good 
capitalists, simply wave and say that is business? Toys R Us 
are going out of business and America will survive and you have 
described a situation where any one bank would pretty much have 
the same effect.
    Mr. Quarles. Well, in response to a previous question, 
someone asked what I had learned from the financial crisis, and 
the principal lesson I learned was the humility that we all 
ought to have around--
    Mr. Sherman. We should all--the--
    Mr. Quarles. --our judgments of the future at any 
particular time.
    Mr. Sherman. I am going to sneak in one more question. Back 
in the old days there used to be banks that would make, to a 
small portion of their--of their loans would be prime-plus-
four, prime-plus-five loans, made to local businesses that you 
and I would agree aren't creditworthy enough so that a bank 
could make a profit made with a loan of prime-plus-one or 
prime-plus-two.
    Do your regulators allow banks to use 10 or 20 percent of 
their portfolio to make prime-plus-four loans to businesses 
like the pizzerias in my district where that would be the 
appropriate rate? Or are those folks closed out of the banking 
system and having to call late night television commercial 
lenders?
    Mr. Quarles. I hope that we don't have supervisors that are 
preventing that type of credit extension.
    Mr. Sherman. I will talk to you privately. You do.
    Chairman Hensarling. Time of the gentleman has expired. The 
Chair now recognizes the gentleman from North Carolina, Mr. 
Pittenger.
    Mr. Pittenger. Thank you, Mr. Chairman. Thank you, Chairman 
Quarles, for being with us, for your leadership. And 
congratulations. In your March 26th speech at the Hope Global 
Forums Annual Meeting, you stated, quote, ``Loans entail high 
fixed costs that are roughly the same regardless of whether a 
loan is for $100,000 or $1 million, reducing the profitability 
of smaller dollar loans,'' end of quote.
    Has the composition of credit that is being offered 
changed?
    Mr. Quarles. That is an interesting question. I think that 
inevitably that evolves over time. I don't think that it has 
changed in a dramatically disadvantageous way.
    Mr. Pittenger. Well, then are larger financial institutions 
playing a larger role in financing small businesses because of 
their ability to better eat the cost of high--of higher 
underwriting standards?
    Mr. Quarles. That I definitely think is true. Yes, I do 
think that larger institutions are providing a larger share of 
the credit to small business than happened in the past.
    Mr. Pittenger. Surely. Well, the Dodd-Frank's numerous 
regulatory rules have constrained the flow of bank credit, 
holding back small businesses that depend on bank lending while 
large corporate--corporates benefit from the nonbank sources of 
finance.
    In your March 26th speech, you recognized that, quote, 
``The economy, small businesses need adequate and affordable 
credit in order to form, grow and succeed. Otherwise, they may 
underperform, slowing growth and employment.'' What are the 
side effects of reduced access to adequate and affordable 
credit for small businesses?
    Mr. Quarles. Well, I think the--small businesses as we all 
know are a principal engine of generating employment. They are 
an important engine of the economy, and credit to small 
businesses is an important element of allowing them to grow.
    Traditionally, that has come--and a large portion of the 
credit extended to small businesses has come from community 
banks. Community banks are closer to the communities in which 
these small businesses reside, are able to make credit 
decisions that larger banks sometimes might not be able to make 
with respect to a particular borrower in a community.
    So all of those are issues that are having an effect, 
clearly.
    Mr. Pittenger. Yes, sir. Thank you. On another matter, as 
you are fully aware that the Fed Bank of New York, on April the 
3rd, began publishing its new reference rate, SOFR, the Secured 
Overnight Financing Rate, which is intended to be an 
alternative to LIBOR (London Inter-bank Offered Rate). Mr. Vice 
Chairman, has there been a robust cost-benefit analysis 
conducted by the Fed regarding the potential economic impact to 
consumers and commercial borrowers from shifting from LIBOR to 
SOFR?
    Mr. Quarles. So the shift to the extent happens would be 
entirely voluntary. So this isn't something that the Fed is 
going to require. So while that is a question that we have 
looked at, we also think that in determining whether any 
particular institution would make the shift, that cost is 
something that they would evaluate as well.
    So since we are not mandating it, that is a different kind 
of analysis. Now obviously, we have been told that LIBOR as a 
potential standard will be disappearing. So I think that our 
providing this alternative is an important option. I think it 
will be very useful, but it is voluntary.
    Mr. Pittenger. Have you looked at the impact that this 
change would have on the borrowing costs for businesses?
    Mr. Quarles. In the context of LIBOR disappearing, I think 
that that will be--I think inevitably the alternative of not 
having it available would be a problem.
    Mr. Pittenger. Yes, sir. Well since repo rates move in the 
opposite direction of LIBOR during the market stress would any 
new systemic risk arise of the banking sector by shifting to 
SOFR?
    Mr. Quarles. That is a question that we have looked at. I 
don't think that we are increasing systemic risk. And again, 
when one considers the alternative of the current widespread 
standard disappearing, the provision of an alternative is 
important I think.
    Mr. Pittenger. Have you all sought the input from community 
or regional banks concerning the potential costs associated in 
shifting away from LIBOR?
    Mr. Quarles. Yes, we have.
    Mr. Pittenger. Did you find favorable input?
    Mr. Quarles. Yes, and you know, and as that process 
continues to move forward, we are continuing to evaluate input.
    Mr. Pittenger. Could you give us a reaction that you have 
had from the smaller banks?
    Mr. Quarles. You know, again our assessment in general has 
been that since the shift is going to be voluntary, each 
institution will decide of itself whether the costs outweigh 
the benefits.
    Mr. Pittenger. Thank you. My time has expired.
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentleman from Pennsylvania, Mr. 
Rothfus.
    Mr. Rothfus. Thank you, Mr. Chairman. Vice Chair Quarles, I 
want to start by commending you for the posture you assumed 
earlier in your tenure by setting efficiency, transparency, and 
simplicity as guiding principles for your regulatory 
improvement agenda. The mistakes of the last 8 years 
demonstrated just how important it is that we have regulations 
that are straightforward and appropriately tailored.
    As you know, the implementation of the Dodd-Frank Act--
through the implementation of the Dodd-Frank Act, insurance 
companies have--that have depository institution subsidiaries 
were brought under Fed supervision. This created a situation in 
which many of these insurance companies are supervised at the 
holding company level by both the Federal and State insurance 
regulators.
    This leads to duplicative supervision that is 
disproportionate to the risks that these insurance companies 
pose. And I would argue that this violates the principles of 
efficiency and simplicity. Would you support a more streamlined 
regulatory approach for these insurance companies that would 
uphold the State insurance supervisory and regulatory regime 
while rightsizing the Federal Reserve's examination authority?
    Mr. Quarles. Yes, the devil is in the details of that. But 
I have spoken to a number of these insurance companies, and I 
think it is clear that the burden of our regulation is, has 
been excessive relative to the scope of the issue.
    So I think that that is something that we need to work on. 
Now as long as the insurance companies have depository 
institution subsidiaries, I think that that is something that 
we need to have an appropriate regulatory relation to. But we 
need to do a better job of ensuring that that regulatory 
engagement is felt by the firms as proportional to the scope of 
the issue.
    Mr. Rothfus. I look forward to following up with you on 
that.
    Mr. Quarles. Yes, very much so.
    Mr. Rothfus. As you know, the FSOC has begun work on 
reviewing the objective criteria used for designating non-bank 
SIFIs. I support that effort. And I look forward to seeing the 
formal rulemaking. Can you give us an update on the status of 
that project?
    Mr. Quarles. Not a satisfactory one. Beyond that it is 
underway, but I support as well the effort to look at an 
activities based approach for designation, which is where the--
where the rest of the thinking is going.
    Mr. Rothfus. You mentioned the bank exams tailored to risk 
or BETR (Bank Exams Tailored to Risk) program for regional and 
community banks in your testimony. BETR uses financial metrics 
to differentiate the level of risk between banks before exams 
and ensures that examiners tailor their procedures to minimize 
regulatory burden for firms engaged in low-risk activities.
    I can see how this approach could make sense for all banks, 
not just community and regional banks. For instance, an 
institution that is not engaged in consumer activities should 
not have to go through the same examination process or modeling 
review of consumer losses as a bank that has a large credit 
card or mortgage business. Will the Fed expand this risk-based 
tailoring to supervisory programs for all banks?
    Mr. Quarles. So we haven't given consideration yet as to 
that particular program. However, the tailoring of supervision 
to the character and risk of particular institutions is 
something that I completely agree extends along the spectrum of 
institutions from the smallest to the largest. And it doesn't 
stop at any particular level. And we need to be giving thought 
as to how we do that.
    Mr. Rothfus. Before my time expires, I want to commend you 
for recognizing the negative impacts of the supplementary 
leverage ratio. I know that Congresswoman Maloney had touched 
on this, especially the effect on custody banks.
    As you know, the Fed is currently undertaking a rulemaking 
to alter the application of the enhanced supplementary leverage 
ratio, the rulemaking proposal says the following. Over the 
past few years, concerns have arisen that in certain cases, the 
standards in the ESLR rule have become a generally binding 
constraint rather than a backstop to the risk-based standards.
    Thus, although the ESLR standards provide incentives to 
maintain a strong capital base, the current calibration also 
has created incentives for banking organizations to reduce 
their participation in lower risk, low-return business 
activity, such as taking custody deposits, notwithstanding 
client demand for those services. This is an issue that we have 
discussed extensively in this committee.
    As you know, we unanimously passed a proposal to address 
this problem earlier this Congress. This solution has also 
passed the Senate. While I applaud the Fed for beginning to 
address this issue, I also want to reiterate my support for a 
legislative solution.
    With that, I would yield back to the Chairman.
    Chairman Hensarling. The gentleman yields back. The Chair 
now recognizes the gentleman from Colorado, Mr. Tipton.
    Mr. Tipton. Thank you, Mr. Chairman. And thank you, Vice 
Chair Quarles, for being here today. First of all, I do want to 
commend you in terms of comments that you made to my colleague 
Mr. Ross in regards to the banks and wanting to be able to see 
that more tailored to be able to create those access areas.
    But wanted to go on a little bit of a different track in 
regards to some of the proposed rulemaking that is being put 
forward by the Fed regarding the 2-hour recovery time objective 
(RTO) from cybersecurity attacks. In February of this year, you 
stated that you had worked with other financial regulatory 
agencies on harmonizing cyber risk management standards and 
regulatory expectations across financial services sector.
    The Fed's proposal for the 2-hour RTO, obviously, differs 
significantly from the standards and principles that are 
established by other domestic and foreign regulators.
    As head of the Committee on Supervision and Regulation, 
have you studied the risks and benefits of the 2-hour RTO 
proposal, its lack of harmonization with other regulators, and 
where it is being exercised elsewhere?
    Mr. Quarles. So those are all important issues. And as part 
of receiving comments on a proposal, we will certainly take all 
of that into account.
    Given the importance of resiliency, the Fed at the time 
believed that that was an important issue to get comment on, 
but we will take into account the comments that we are 
receiving.
    Mr. Tipton. Great, yes. I think some of the concern was 
simply the timeframe, 2 hours. And to be able to have the 
recovery end of it, given all of the different challenges that 
were there, so we will look forward to hearing back on that.
    Also in December, you stated that cyber threat to the 
financial system is a matter of national security. I assume 
that is still your position. Do you plan to review the Fed's 
proposals for cyber-security?
    Mr. Quarles. Yes, yes. As I stated a little earlier, I 
think that we really do need to focus our engagement in that 
area on cyber-security, to seeing how we, in the bank 
regulatory community and across the Government as a whole, can 
really support the efforts of these firms to be resilient 
against cyber-attack.
    And because it is such a difficult issue, I do think that a 
lot of our engagement currently is more focused on compliance 
than real resiliency, and I don't want to denigrate the 
importance of compliance, but I think we can do more and 
better. It is a high priority for me.
    Mr. Tipton. Great. And thank you. Governor Quarles, the 
Federal Reserve Board is making progress in simplifying the 
capital rules and stress-testing requirements, particularly for 
smaller institutions.
    I have heard positive feedback from the industry on these 
goals, but I have also heard some concerns that the evaluation 
of risk management can be subjective. And that compliance 
requirements change depending on which supervisor is in charge.
    Are efforts being made to be able to evaluate and 
potentially modify current risk management expectations and 
supervisory practices, to allow for improved effectiveness and 
greater reliance on the rule of law?
    Mr. Quarles. Yes. I think that ensuring the uniform 
application of principles across a diverse body of supervisors 
is a difficult management task.
    But it is one that, again, is a high priority for me and 
that we are working, and that we definitely are working on, 
both within the Federal Reserve and across the other bank 
regulators, to try to ensure that we have more predictability 
and consistency.
    Mr. Tipton. Can you give us a couple of ideas on what you 
are--when you say you are looking at it, how trying to be able 
to pursue that?
    Mr. Quarles. Well, some things that we have actually done 
about trying to ensure consistency. We do have a structure in 
place for the largest institutions, that is designed to try to 
ensure consistency of supervision.
    On the--with respect to smaller institutions, that is 
principally a matter of training. And so we regularly have, 
when there is a new regulation that comes out or new guidance 
that comes out, we have various training seminars for the 
supervisors.
    I meet regularly with the leadership in the supervisory 
function at the Fed, to ensure that those messages are going 
down to individual supervisors. It is a blocking and tackling 
management function as opposed to a silver bullet. It is 
something we have to work at every day.
    Mr. Tipton. Well, I appreciate that and that is, probably, 
one of the bigger issues that we are hearing out of our smaller 
institutions, is the trickle-down effect.
    Mr. Quarles. Yes.
    Mr. Tipton. So, obviously, the training will put in a plug 
for some of the legislation that we have passed through the 
House with a lot of bipartisan support to try and make sure 
that we are getting real continuity for the smaller 
institutions and the opportunity to be able to make those loans 
for small businesses. I come from a rural community and that is 
a real challenge, thank you for being here today.
    Mr. Quarles. Thank you.
    Chairman Hensarling. The gentleman yields back. The 
gentleman from Texas, Mr. Williams, is recognized for 5 
minutes.
    Mr. Williams. Thank you, Mr. Chairman and Vice Chairman, 
good to have you with us today. I am glad to see--finally see a 
Presidentially appointed, Senate confirmed Vice Chairman for 
the long unoccupied post.
    It has been 8 years since Dodd-Frank was enacted and only 
now is the economy showing signs of recovery, in spite of the 
overall burdensome regulatory environment that we have, not 
because of it.
    The role you play as Vice Chairman for Supervision is 
crucial in tackling some of the regulatory issues that have 
been plaguing this economy for so long. I hope that you will be 
a catalyst for change, inside an agency that has, far too long, 
become immune to change and reform.
    Our economy is as strong as it has ever been thanks to this 
Congress and this Administration's folks on deregulation and a 
modernized tax code that is propelling Main Street toward 
landmark gains.
    My first question, Mr. Vice Chairman, is we must protect 
small businesses and consider their credit needs. The 12 
Federal Reserve banks recently completed a small business 
credit survey, which concluded that credit needs continue to go 
unmet.
    As a small business owner, myself, for 47 years, I know, 
all too well, the difficulty some of these companies face. So, 
now that Congress has passed tax reform to help spread the 
development of Main Street. What actions will you take to 
ensure that small businesses can have their credit needs met?
    Mr. Quarles. Well, I think the principle action that we can 
take and we have begun this, there is more that we can do, is 
to reduce the burden on smaller banks, the banks that tend to 
provide this credit and that are best positioned to provide 
this credit to smaller businesses.
    Through the EGRPRA process, for example, we have reduced 
some regulatory burden on the community banks, but that is 
something that we are always continuing to look at. Are ways to 
reduce the cost of compliance and ensure that the regulations 
that we are applying to particular banks are appropriate to the 
activities they are engaged in and the risks that they pose, 
which, for community banks, is relatively minor.
    Mr. Williams. Great. In your testimony you state that the 
financial conditions of the community banks also had 
strengthened significantly since the financial crisis. So, I 
want to unpack that a bit because I know, first hand, that 
main--the challenges Main Street has continued to face in the 
last 10 years.
    One credit union or community bank is going out of business 
each working day. Now, this must be addressed and these 
critical institutions have forwarded the relief necessary, 
which you talked about. So, as you examine ways to improve the 
effectiveness and efficiency of supervisory programs, how do 
you plan to ease the regulatory burden on the community 
financial institutions?
    Mr. Quarles. Well, I think, it is through a continuing 
examination of where it is that we are imposing costs that 
aren't necessary in order to achieve our objectives. I think 
that we can. I think that over the course of the last couple of 
years, I think that we have reduced those costs.
    As I had mentioned in response to an earlier question. When 
I was an investor in smaller banks, the level of that 
compliance cost was much greater than it had been in the past 
and was a significant factor in decisions. I think that is a 
little less over the last couple of years. And, going forward, 
I think we can make it even less.
    Mr. Williams. Well, that is important because it just hits 
their bottom line and--
    Mr. Quarles. Precisely.
    Mr. Williams. --keeps it from getting out in the system.
    Mr. Quarles. Yes.
    Mr. Williams. So, as you reflect back on the regulatory 
actions of the Federal Reserve over the past 8 years, you have 
recently discussed the need to review the costs and benefits of 
past initiatives. While I understand that the Federal Reserve 
is not like most other agencies who are required to adhere to 
cost-benefit analysis in their rulemakings, I would like to see 
more consideration given to the consequences of the board's 
regulatory actions.
    So, as you undergo the review of the effectiveness of past 
initiatives, what factors are you look for and will you make 
the conclusions of these and reviews available to Congress to 
examine?
    Mr. Quarles. We are looking, in general, across a broad 
range of measures of effectiveness of the core elements of 
regulation. And, clearly a significant portion of that is the 
cost that they impose upon institutions particularly, both, 
direct cost and then a broader concept of cost that are imposed 
on the system and on society.
    We are still determining, as this process go underway, 
exactly how we will deal with the results and how we will make 
the results public, but certainly, that we will inform our 
interaction with Congress and our public statements, as to 
the--as we think about improving the efficiency of regulation.
    Mr. Williams. OK. Mr. Chairman, I yield my time back to the 
Chair, thank you.
    Mr. Quarles. Thank you.
    Mr. Rothfus. [Presiding.] The gentleman yields back. The 
gentlewoman from Utah, Mrs. Love, is recognized for 5 minutes.
    Mrs. Love. Thank you for testifying today, Mr. Quarles. 
Last week, the House passed the Volcker Rule Regulatory 
Harmonization Act, which would conclude community--which would 
exclude community banks from compliance with the Volcker Rule 
by exempting banks under $10 billion with limited trading 
activity. Does the Federal Reserve support exempting community 
banks from the Volcker Rule?
    Mr. Quarles. Yes, I think that that is a decision that 
Congress makes. I think that would be, entirely, appropriate.
    Mrs. Love. OK. So, you would--you would support the--OK. 
Does the Federal Reserve believe the Volcker Rule is an 
appropriate or necessary response to the financial crisis or do 
you think we need to tailor it back a little bit?
    Mr. Quarles. I do think that certainly, the way that we 
have implemented the Volcker Rule--and that is less Congress's 
fault than the regulator's fault--it has been excessively 
burdensome.
    Probably the scope of the Volcker Rule limits our ability 
to really focus on what the Volcker Rule is trying to get at. I 
just--I think that it does limit our ability to respond.
    Mrs. Love. Would the Federal Reserve support other changes 
to the Volcker Rule such as, what we talked about, maybe even 
expanding the range of banks that are exempt from the rule or 
even repealing it altogether?
    Mr. Quarles. Yes, in terms of supporting them, I think that 
those are decisions for Congress to make. And if Congress makes 
them, we would have no difficulty implementing them. Obviously 
everything depends on the scope of the particular proposals, 
but I don't that doing that would create any risk to the safety 
and soundness of the financial system, at all.
    Mrs. Love. OK, so, you don't--it almost sounds like you 
don't really have an opinion about it. You are just saying we 
are going to take direction from Congress whether it is 
repealed or not. I just want to get some expertise and 
experience. Would you support expanding the range of banks that 
are exempt or just--
    Mr. Quarles. Yes, I don't think that doing that would 
create any financial stability risk, at all.
    Mrs. Love. OK. We are also learning more and more about the 
other unintended consequences with the rule. One that has come 
up has to do with non-financial companies that own 
depositories, such as ILCs (industrial loan companies) or 
unitary thrifts. As the Volcker provision is drafted, if a non-
financial company owns a depository, the Volcker requirements 
apply to all their operations, even those not engaged in any 
financial services.
    This means that non-financial company's ability to carry 
out some basic risk management could be seriously impacted. Do 
you believe that the intent of the Volcker provision was to 
apply it to the non-financial affiliates of an industrial 
company that owns a depository?
    Mr. Quarles. I am not sure whether that was the intent of 
the provision, but it may be what the statute says. That is 
among the issues that we have to deal with in the current 
statutory construct--statutory language of the Volcker Rule.
    Mrs. Love. OK, the health and the viability of industrial 
banking sector is something that is really important to me. As 
a representative from Utah, I can attest to the importance of 
our ILCs, the vitality of our State's economy, the size and 
strength and diversity of our State's banking sector, even to 
the health of our non-profits, which benefit not just from the 
financial contributions, but also the intellectual capital that 
they are able to draw from their colleagues in the banking 
sector.
    It was a big loss to our State when GE decided to give up 
their banking charter due to the current regulatory environment 
including the Volcker Rule. I would just be really interested 
in your thoughts regarding industrial bank sectors. Have you 
had a chance to review the safety and soundness records of the 
ILCs at all?
    Mr. Quarles. As a citizen of Utah, I am very familiar with 
them, and it hasn't been a--and I am familiar with all of the 
facts that you cite and they are all true and meaningful. It 
hasn't been a project of the Federal Reserve up to now to 
consider our regulatory system and how that applies to the ILCs 
but I am very aware of the importance of the issues that you 
are stating and the importance of ILCs.
    Mrs. Love. So you are--you would agree that ILCs have been 
a stable source of capital in our communities, even during the 
financial crisis?
    Mr. Quarles. That certainly was my experience, yes.
    Mrs. Love. OK, thank you, Mr. Chairman, I yield back the 
rest of my time.
    Mr. Rothfus. The gentlewoman yields back. The Chair 
recognizes the gentleman from Arkansas, Mr. Hill, for 5 
minutes.
    Mr. Hill. Thank the Chairman, thanks Mr. Quarles for being 
here. I want to echo Chairman Hensarling and Chairman 
Luetkemeyer's comments about cost-benefit analysis. I noted 
that back during disco days in 1979, that the Fed agreed to 
be--abide by OMB's cost-benefit analysis rules, but really 
hasn't as a general matter over that 35 years.
    So I was really heartened by your speech in January where 
you thought cost-benefit analysis was important, and you have 
set up a group to look at policy assessment. Does that imply 
that you are supportive of a regular look at all Fed rules on a 
cost-benefit basis?
    Mr. Quarles. Yes, I think that we need to do a better job 
of that. We haven't decided as a board, exactly how we will 
implement that. But I think that we can do a better job, I 
think that is evident.
    Mr. Hill. And I think, just from my past experience of 
being in the regulated industries for those same 3 decades, 
this issue that economists frequently look at marginal cost of 
a rule, but not at average costs, not at the cumulative cost.
    And so this idea of looking at compliance cost by bank size 
on a percentage of average assets or a percentage of pretax 
earnings I think should be part of that cost-benefit analysis, 
and not just look at the particulars of the rule that a group 
of analysts are considering.
    It is the idea that it is--you have heard the old 
expression of the final straw that breaks the camel's back, 
let's measure that whole pile of straw and how the marginal 
rule impacts it. So thank you for that.
    Recently I was looking at FINRA (Financial Industry 
Regulatory Authority), a rule that is gone--going final within 
Rule 4210, which has to do with mortgage-backed security agency 
securities and putting up margin on those securities.
    This is something the commission has asked FINRA to do and 
the SEC has approved this rule, and it is going to final, but 
from reading it, it appeared to me to be two issues. First of 
all, this says that if we are doing a when-issued mortgage-
backed securities pool, that during that 30-day inter-when-
issued basis, we would be putting up margin on those securities 
based on a mark-to-market, which I understand.
    And this is integral to every consumer in our country, 
because that would get a 60-day lock for individual home 
mortgage, which is very important to consumers. But in looking 
at this rule, it appears to me two problems with it I would 
like you to look into it.
    One, it appears anti-competitive to me for a bank-owned 
dealer has an advantage over a non-bank-affiliated broker 
dealer. Why? Because if FINRA just applies to the broker 
dealer, a broker dealer that has a bank affiliate, could simply 
move this one issued business over to the bank, therefore being 
anti-competitive with non-bank-owned dealers. And I have a 
problem with that. I think that is unfair in public policy.
    And second, you may want to have a little jurisdictional 
concern because I am not sure that the SEC has the authority to 
regulate margin and agency securities. I think last time I 
checked, that was a Federal Reserve prerogative. So would you 
commit to me that you will look into this rule and see how we 
can assure a level playing field in the agency market?
    Mr. Quarles. Yes, absolutely. I think that needs to be a 
very high principle in regulation generally, is that regulation 
should not be tilting a playing field one way or the other 
across a whole range of issues.
    Mr. Hill. Appreciate that, and in the time I have 
remaining, another issue I think that is--I think the Fed 
should weigh in on is--is this issue where under Dodd-Frank, 
the TLAC (total loss-absorbing capacity) process, putting up 
abundant capital to resolve potential bank crisis.
    I think now appears to me to be in conflict with our new 
and--tax reform and tax cut package that we are very proud of 
in the Congress. We believe this is why CBO says we are growing 
at 3.3 percent now, a big increase from the past decade. And 
that is great for all Americans.
    But part of that was, as you know, on the international tax 
regime, this base erosion anti-abuse tax feature of the tax 
reform bill, now appears to me to be in conflict with financial 
services policies on TLAC. Are you familiar with this and have 
you talked to the Treasury about this potential conflict?
    Mr. Quarles. Yes, I am familiar with the issue, I have 
talked with the affected banks, with the Treasury, and what we 
are trying to do or asking the banks to do is to first quantify 
the issue because quantifying it is very complex, as you know, 
because it depends on their whole tax position.
    And that has taken them some time, we are beginning to come 
back with some estimates now from at least some banks at what 
they think the quantifications are, and then the question is--
is the best way to do that through a Treasury rulemaking, 
through thinking about Federal Reserve regulatory policy, and 
we are just beginning to start working with the Treasury on 
that.
    Mr. Hill. Good, well best wishes and please keep up 
apprised on your thoughts there. Thank you very much, I yield 
back, Chairman.
    Mr. Quarles. Thank you.
    Chairman Hensarling [presiding]. Time of the gentleman has 
expired. The Chair now recognizes the gentleman from Georgia, 
Mr. Loudermilk.
    Mr. Loudermilk. Thank you very much, Mr. Chairman, and 
thank you for being here with us. A couple areas I just--I want 
to talk about with you is--is first a 1977 bill, the Community 
Reinvestment Act, to start with, then I want to talk a little 
bit about cybersecurity, if we have time for it.
    But, as you know, this bill was implemented in 1977, and I, 
as many others believe, it is time to revisit and revise this 
bill. And last month I wrote a letter with Mr. Tipton and Mr. 
Luetkemeyer to the three banking agencies and the Treasury 
Department about modernizing the implementation of the CRA.
    And we received back from the Treasury Department, which 
recently released its recommendations for CRA reform, and the 
OCC will be doing the same, and the FDIC Chairman, Mr. 
Gruenberg, wrote us back and said he agrees that we need to 
revisit this.
    And the three areas that I--I think--that we have been 
focusing on and I think we need to pay attention to, is, first, 
the taking in account of the recent developments in fintech; 
two, is being transparent with banks about which loans receive 
CRA credit; and the third is giving banks timely CRA exam 
results.
    And so, my first question is simple. Do you agree that 
there is a need to revisit the implementation, particularly in 
these areas?
    Mr. Quarles. Very much so. As you have noted, it is a law 
from 1977, and the world is very different today than it was in 
1977, and achieving the same objectives will probably require 
different measures now than it did then.
    Mr. Loudermilk. And it--I am often reminded, when I go back 
and I watch movies from 1977, how much has changed. And it is 
not just the hair styles, but the economy and technology has 
changed, and we have been extremely slow in keeping up with 
technology and the regulations for that. And so I appreciate 
your answer.
    Follow up on that, do you think the CRA can be modernized 
without detracting from its core purpose?
    Mr. Quarles. Not only without detracting from its core 
purpose, I think that for it to achieve its core purpose in the 
modern world, I think it can better achieve it if we take a 
fresh look at it.
    Mr. Loudermilk. Well, I appreciate it, and I agree with you 
on that. So I look forward to working with you as--as we do 
this. Shift over a little bit on cybersecurity, I spent 20 
years in the IT business, this is an area that is very 
important to me.
    And I know during your speech at the Financial Services 
Roundtable in February, you stated that you support the private 
sector's efforts to harmonize cybersecurity efforts across the 
financial services industry, and I agree with that.
    But I also think there is a need for Federal regulators to 
harmonize the many overlapping and sometimes conflicting 
cybersecurity standards that are applied to private sector 
companies.
    Especially a lot of banks will have multiple cybersecurity 
requirements--or financial institutions, I should say--that are 
differing from the different regulating agencies. In fact, I 
had one tell me one time, Well, if I am in compliance with 
Regulator A, I am out of compliance with Regulator B in certain 
instances.
    What is the Federal Reserve doing to coordinate these 
cybersecurity supervisory activities with the other regulatory 
agencies?
    Mr. Quarles. There are some standing processes--interagency 
processes that are intended to help coordinate that are focused 
on the IT infrastructure exams, and the infrastructure of the 
financial system, generally.
    But, as I have indicated, I do think that we need to, in 
those processes, and within the Federal Reserve, we really need 
to rejuvenate the way we are thinking about it, and focus on 
real resiliency, and what we can do to support that, as opposed 
to pure compliance.
    Mr. Loudermilk. So do you think there is more that we can 
do to coordinate between the--
    Mr. Quarles. Very much so.
    Mr. Loudermilk. --various agencies? You say, when you have 
conflicting requirements, it actually harms cybersecurity than 
actually strengthens it, so I think--
    Mr. Quarles. Absolutely.
    Mr. Loudermilk. --the same thing that you were saying about 
the CRA, I think we can apply to cybersecurity. Last question: 
In your testimony, you said that you are focusing on mitigating 
cybersecurity risk to financial institutions. Can you just hit 
on a few of the things that you are doing in that arena?
    Mr. Quarles. Right now the principal effort is in these 
interagency discussions, to think about where are the real 
risks in the system. So it is behind the scenes, as to figure 
out exactly what we ought to be doing, and then we work on how 
to affect what we ought to be doing.
    And they are difficult questions, and we are still working 
on them, but at very high priority.
    Mr. Loudermilk. Well, thank you. I see my time is expired, 
and I yield back.
    Chairman Hensarling. Gentleman yields back. Chair now 
recognizes gentleman from Ohio, Mr. Davidson.
    Mr. Davidson. Thank you, Chairman, and thank you Vice 
Chairman Quarles. I really appreciate your testimony today, 
both written and in the Q&A session, so thanks for helping with 
the transparency that is part of the role.
    But I will confess that the average constituent, the 
average person who is maybe looking at the clock, saying, Hey, 
I am coming up on my second-shift job, catching lunch or 
something--they may know that the Federal Reserve's out there. 
They may know that the Federal Reserve Chairman deals with 
setting interest rates. They might not differentiate that as 
monetary policy.
    Could you succinctly describe, in a basic way, where the 
distinction between monetary policy and regulatory supervision 
is drawn?
    Mr. Quarles. I will try to do that succinctly, but because 
the two are related in important ways, and that gets very 
complicated to try to describe.
    But our regulation of the financial sector and of the 
banking system is the development of rules to ensure the safe, 
sound, and efficient operation of the system.
    And then we have a supervisory function, where we examine 
all of the banks that are subject to our jurisdiction to ensure 
that they are complying with the rules and operating in a safe, 
sound, and efficient manner.
    Mr. Davidson. Thank you. And having been the first person 
to fill this role, I appreciated your testimony earlier with 
Mr. Luetkemeyer, when he was differentiating guidance from 
rulemaking.
    And, of course, rulemaking is generally subject to more 
oversight from Congress, and we struggle with the guidance. 
And, frankly, there is very little accountability for what 
guidance is given, except reactionary after the fact, and then 
it is hard to substantiate, and it is finger pointing--no, he 
didn't, yes he did--kind of events.
    But it has a profound impact on the economy. In your role, 
how do you see you personally and your team being able to 
contribute to clarity around that?
    Mr. Quarles. I think that transparency in all of our 
processes ought to be something that is a high priority for us. 
And it has been a priority, but I think it is becoming a higher 
priority.
    And that means that when we--when we are taking an action 
that we think is going to have the effect of a rule that we 
intend to apply as a rule, then we should take that through a 
fully APA-compliant process, and seek notice and comment, and 
put that forward as a rule.
    And then, perhaps in the past at the margin that sometimes 
hasn't happened. I mean, that distinction has been blurred. I 
do think there is a role for guidance. I don't think that, it 
is never the case that we would--that we would put out 
guidance. The banks ask us for guidance, right? Once we have 
gone through the complex--
    Mr. Davidson. We appreciate that distinction from the Fed's 
activity and the CFPBs, for example, where they don't want to 
be accountable for even giving guidance.
    Mr. Quarles. Precisely.
    Mr. Davidson. Yes.
    Mr. Quarles. And with respect to our guidance, I think that 
we can be, as opposed to that, which sometimes in the past--
that is less than the case of the recent past, but sometimes in 
the past has--has just gone out to the examiners and the banks.
    I think we can go out for comment on guidance, even when 
something is not a rule. I think that we--I think we benefit 
from that process. It is not just--again it is not just a 
question of being fair to the regulated industry, it is not 
just a question of being accountable to the public. It is also 
a question of improving the content of what it is that we do by 
getting as much comment on it as possible.
    Mr. Davidson. Well, thank you and thank you for that role 
in the ability to protect the average American in their safety 
and soundness of the financial markets in that way.
    And Chairman Barr alluded to a bill that I have introduced 
that would provide a way to do more of that accountability 
through putting the regulatory side, the supervision side of 
the Fed on appropriations. And so I look forward to working 
with you and Chairman Barr on that as you committed to do, so 
thank you.
    Another important role is the engagement with international 
agreements, and I will confess I have been very concerned about 
the previous path and personally affected by some of those 
decisions. How do you plan on having the Fed represented at 
these international accords in the future given your leadership 
role?
    Mr. Quarles. So, as I have indicated, I do think that it is 
in our interest. I know that there has been frustration with 
these bodies in the past. I think that our engagement with them 
is in our interest, in part precisely because of that reason. 
We have particularly for our institutions that do operate 
globally; we don't want the decisions made in those bodies made 
without our strong and effective engagement.
    I think that we need to argue for them to continue their 
evolution toward more transparency. I think they have been. I 
think that as we implement the rules we need to be transparent 
about how to do that.
    Mr. Davidson. Thank you, my time is expired and I yield.
    Chairman Hensarling. Time of the gentleman has expired. The 
Chair now recognizes the gentleman form North Carolina, Mr. 
Budd.
    Mr. Budd. Thank you, Mr. Chairman, and also thank you, Vice 
Chairman Quarles, for coming today and again for your service. 
You are a breath of fresh air.
    My questions are about a smaller part of your portfolio but 
no less important. It is about insurance oversight.
    Mr. Quarles. Yes.
    Mr. Budd. So specifically I want to talk about the ongoing 
work on international capital standards that are being 
developed by the International Association of Insurance 
Supervisors. So in November of last year at a meeting in Kuala 
Lumpur, IAIS announced that it was moving forward with an ICS 
(Insurance Capital Standard) version 2.0. It will be very 
similar to European Solvency Regulation and will use European 
accounting rules and European capital resource determinations.
    So in my view, this European-centric approach is unworkable 
for the U.S. Insurance Regulatory system. So with that being 
said, my first question is do you believe existing State-based 
capital requirements promote the solvency of the U.S. insurance 
companies?
    Mr. Quarles. I think they do, yes.
    Mr. Budd. OK, very good. Last week I received a response 
from Chairman Powell to a letter I sent him on this same topic. 
Specifically, Chairman Powell cites two rationales for the 
creation of ICS. One was to provide a level playing field. The 
second was to prevent regulatory arbitrage. So while I know the 
response I received was not from you, you and Chairman Powell 
work very closely together on these, and so I have two brief 
questions on Chairman Powell's response.
    First, why is capital the only component when EU regulators 
and EU insurers talk about a level playing field? And I will go 
on. So does Europe have the robust insured--consumer protection 
insurer resolution mechanisms that we have here in the U.S., 
and where is the level playing field on these very important 
topics?
    Mr. Quarles. I agree with you that we need to be thinking 
about a level playing field across the whole regulatory 
regime--
    Mr. Budd. And not just with capital standards?
    Mr. Quarles. And not just with capital, certainly yes. That 
is--that is--that ought to be an important part of our general 
engagement.
    Mr. Budd. Could you elaborate other areas where we would 
want to have a level playing field?
    Mr. Quarles. As you have indicated, I think that all the 
elements of a regulatory regime affect the burden and 
competitiveness of an institution and it is in our interest to 
look across all of the elements. And different fora--there may 
be different fora that are the right places to try to push 
those arguments, depending on different types of regulation, 
but it is in our interest to ensure that the whole playing 
field is level.
    Mr. Budd. So beyond the capital standards insurance and 
consumer protections and insure resolution mechanisms, level 
the playing field there, as well, is fair to say? Next 
question, should the Federal Reserve as a prudential or safety 
and soundness regulator be concerned about an international 
level playing field. Isn't that more of a focus of trade policy 
and not just monetary policy?
    Mr. Quarles. Well, as a financial regulator though, I do 
think that it gets a little weedy. You know our trade policy 
generally stands back. Our trade representative and trade 
negotiations stand back from financial regulation and those are 
separately negotiated--positions are simply negotiated because 
we do have an interest in ensuring that our internationally 
active firms are treated equally and--and--and not subject to 
differing rules in different jurisdictions in ways that might 
be deleterious to them.
    I do think that we have an interest in engaging in those 
fora to try to ensure level rules in those areas, and I think 
that it is appropriate for that to be done in the financial 
regulatory sphere, both with the Federal Reserve and with other 
participants.
    Mr. Budd. I appreciate the clarification. Mr. Chairman, I 
yield back. Thank you.
    Chairman Hensarling. Would you yield to the Chairman?
    Mr. Budd. I yield to the Chairman.
    Chairman Hensarling. Mr. Chairman, under the living will 
requirements, and I think we may have touched upon this once, 
you are really given--the Fed is given unreviewable discretion 
to really fundamentally restructure a number of private 
businesses that seemingly lack objective standards. And so the 
entirety of the annual living will process is all predicated on 
a quote, unquote, credible plan, whatever that is.
    So you have talked about transparency. What is it you can 
do to increase transparency to the living will process? And 
with respect to having to do this on an annual basis, do you 
have it within your power to do it on a less frequent basis?
    Mr. Quarles. With respect to transparency, I do think that 
as with many of our regulatory and supervisory issues we have 
with firms, I think that we can just be more interactive and 
open about what our expectations are, get more comment from 
them about--about our expectations, ask more questions, all of 
that is something I think that we can do better.
    On the frequency, yes, we do have it in our power to have 
these assessments done less frequently and I think we are 
probably at a time where it is appropriate to do that. Whatever 
the merits of the prior process of restructuring, it is largely 
complete.
    Chairman Hensarling. Time of the gentleman from North 
Carolina has expired, and the Chair now recognizes the 
gentleman from Tennessee, Mr. Kustoff.
    Mr. Kustoff. Thank you, Mr. Chairman, and thank you, Vice 
Chairman Quarles, for being here with us today this afternoon. 
I am going to go a little bit more broad than some of the other 
questions.
    Obviously the Federal Reserve--community bank background 
and, I saw that firsthand with good community banks, especially 
in my area of West Tennessee.
    You gave a speech a few weeks ago to the HOPE Global Forums 
annual meeting and in that speech, the way I read it, you 
acknowledge that the small business credit needs are in many 
instances not being met. Do you believe that there is a need to 
reduce the regulatory burden on our small community 
institutions so that they can continue to meet the needs of our 
small local businesses?
    Mr. Quarles. Yes, I think that there is a need to do that 
and that it is important for us to address it.
    Mr. Kustoff. And you talked in your speech about the 
easing, and in particular, are there particular types of 
companies that you have identified or that you would identify 
as having the most difficulty finding adequate access to 
credit?
    Mr. Quarles. So I am sure that that study has been done. I 
do not know the facts, but I can certainly get them for you as 
to our assessment of whether there are particular companies 
that have the most difficulty getting access credit.
    Mr. Kustoff. Thank you very much. As it relates to--as it 
related to fintech, can you explain, if you would how the Fed 
carries out a supervisory role in new and expanding markets to 
protect consumers from fraud and cyber attacks?
    Mr. Quarles. With respect to fintech, our supervisory 
relationship with fintech principally comes from where the 
fintech firms connect with the directly regulated financial 
system of the banking system, which most of them do. They 
receive their funding or access to the payment system through a 
regulated bank usually in one place or another.
    And when they do that, then we both supervise the bank as 
it engages with the fintech company and in certain cases, we 
have the ability to look at the fintech company and its 
connection to the bank, and then we look and determine the 
compliance of that activity, both with safety and soundness 
regulation, as well as with consumer compliance regulation.
    Mr. Kustoff. Thank you very much, and I yield back the 
balance of my time. Thank you, sir.
    Chairman Hensarling. Would you yield to the Chairman?
    Mr. Kustoff. I yield to Chairman to the gentleman.
    Chairman Hensarling. I thank the gentleman for yielding. 
Chairman Quarles, back to the living wills. As I understand it 
Section 165 of the Dodd-Frank Act would allow you to publicly 
disclose the assessment framework. Is that your understanding, 
as well?
    Mr. Quarles. Yes, I think that we could disclose it.
    Chairman Hensarling. OK. Are you familiar with H.R. 4292 of 
Congressman Zeldin's Financial Institutions Living Will 
Improvement Act?
    Mr. Quarles. I am.
    Chairman Hensarling. Well, it would--it would do just that. 
And are you familiar that this bill passed the House 414-0?
    Mr. Quarles. I knew that there was a bill that had and now 
I know it is that one.
    Chairman Hensarling. You might want to just take my word 
for it. Anyway, please take this as a very strong suggestion of 
the House of Representatives. So, you do have the authority to 
publicly disclose this assessment framework. The House 
unanimously is suggesting that you do that. I hope that you 
will give it careful, careful consideration.
    In addition, I believe one--Section 165 of Dodd-Frank would 
also allow the Federal Reserve to provide feedback on Section 
165D, living wills. Is that your understanding, as well?
    Mr. Quarles. Yes.
    Chairman Hensarling. And I suppose you could do this in a 
timeframe of, say, 6 months?
    Mr. Quarles. That would be possible.
    Chairman Hensarling. OK. Just for your edification, you 
will also find this in H.R. 4292--and I would suggest that the 
Fed take a very serious look at doing just that.
    Time of the gentleman has expired. The Chair now recognizes 
the gentleman from Indiana, Mr. Hollingsworth.
    Mr. Hollingsworth. Well, good afternoon. Thank you so much 
for being here. You have reached the end of the line here. Like 
Chamberlain at Little Round Top. Well, I wanted to reiterate a 
few things. I know you have talked a lot about cost-benefit 
analysis, comprehensive analysis, the importance of that 
overall, and obviously I am working on a bill specifically that 
we have dropped that really helps and drives the Federal 
Reserve to do cost-benefit analysis where their regulations are 
in excess of the international standard.
    And just the statement that says, look, if it needs to be 
in excess than it should be delivered through a cost-benefit 
analysis. People deserve to know the reasons why we have done 
this right and if the analysis itself does not bear out that it 
should be in excess of international standards then we want to 
know that as well.
    And so it does nothing to force it to match international 
standards, does nothing to change existing standards, but just 
as you have said in your testimony as you said in the Q&A 
period here how important transparency is really helps with 
that process. So I would love it if you take a look at that as 
well.
    Mr. Quarles. Absolutely.
    Mr. Hollingsworth. On a very, very different topic I also 
want to talk about G-SIB surcharge, and how important that is 
and I am actually reading a book right now that talks a lot 
about Wheeler and Feynman's collaboration on quantum mechanics. 
And one of the things that really stuck with me was they said 
the hardest part about quantum mechanics is the constant change 
as well as the variables.
    And that brings me back to some of the coefficients in the 
method, too. They have been in place and they have been set 
since 2015 but the economy, the world, the environment, the 
risk profile have all changed since then. And so, I wondered if 
you might comment a little bit about the potential to update 
some of those coefficients to reflect the new reality and 
specifically with regard to economic growth. We don't want our 
firms to be penalized because the economy is growing, because 
the world has gotten bigger. I wonder if you might comment on 
that a little bit.
    Mr. Quarles. I think that those are very good points. I 
think those are things that we have to look at with respect to 
the calculation of the G-SIB surcharge in general. The original 
calculation of that was made a number of years ago and in part 
in relation to the living will process that we have just been 
talking about--were just talking about.
    If we leave, which I do believe I think we--I think it is 
generally accepted that that has resulted in improvement in 
resolvability of the firms and that means that the consequence 
of their default is less. And the reason for the G-SIB 
surcharge is precisely our assessment of the heightened 
consequence of their default.
    If we have reduced that consequence, we ought to be able to 
think about--now I don't know exactly what the size of that 
effect is, what the outcome of that would be, but then a 
process of thinking about is appropriate now.
    Mr. Hollingsworth. Yes. And, we should reflect that with 
the reality that we see on the ground, like you said, not only 
with their lowered risk profile, but the enhanced economic 
environment, as well.
    Ultimately, we haven't slaughtered the business cycle. But 
we want to make sure that at every step of the way, that the 
coefficients themselves reflect reality, because if they don't, 
they start to drive reality and cause firms to make decisions 
that might not be in the best interest of a stable, safe, 
secure, but also efficient financial system like you pointed 
out.
    Specifically, one of the things that I wanted to talk about 
within the method to and within the coefficients is how the 
short-term wholesale funding is measured and how certain--are 
treated. And I just wanted to draw your attention to those, as 
well.
    Obviously, like you talked about, I think in your written 
testimony, you even refer to the great changes that have been 
made over time, specifically with the G-SIBs in reducing their 
reliance, but making sure that ultimately we have that 
reflected in the equations themselves. And I appreciate your 
work.
    And then, as David mentioned, how important it is to 
overall step back, and how much we appreciate the work that you 
are beginning, and really looking at, and as you say in your 
testimony, the fact that it is not incompatible to say we want 
a safe and secure system, but we also need an efficient, 
effective system, as well, and making sure that those two go in 
hand. And I really appreciate the fact that you have been 
willing to look at so many things, recalibrate so many things.
    Because I think this is very much an iterative process and 
making sure that the things that we have done in the past, 
whether that is Congress or regulators, haven't had a 
deleterious effect on the economy, either credit availability, 
but also on U.S. firms' ability to compete around the world.
    Because ultimately financial services is something we do 
exceptionally well in this country. I will make sure that that 
continues to be the case and that public policy doesn't stand 
in a way of that. So thank you for being here today. With that 
I go back, Mr. Chairman.
    Chairman Hensarling. Would you yield to the Chairman?
    Mr. Hollingsworth. I would, indeed.
    Chairman Hensarling. Mr. Chairman, going back to the CCAR 
process, recently, the Fed announced that it would no longer 
object to a company's capital plan based upon the qualitative 
deficiencies for banks under $250 billion, is that correct?
    Mr. Quarles. Yes.
    Chairman Hensarling. So, under Section 165 of the Dodd-
Frank, you also have the power to do that for all banks, is 
that correct?
    Mr. Quarles. That is also correct.
    Chairman Hensarling. Are you considering doing that for all 
banks?
    Mr. Quarles. We are.
    Chairman Hensarling. Excellent.
    The time of the gentleman has expired. There being no 
further members in the queue. 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.
    [Whereupon, at 12:58 p.m., the committee was adjourned.]

                            A P P E N D I X


                             April 17, 2018

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