[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

                               __________

                           NOVEMBER 14, 2018

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-122
                           
                           
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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:
    November 14, 2018............................................     1
Appendix:
    November 14, 2018............................................    47

                               WITNESSES
                      Wednesday, November 14, 2018

Quarles, Hon. Randal, Vice Chairman for Supervision, Board of 
  Governors of the Federal Reserve System........................     6

                                APPENDIX

Prepared statements:
    Quarles, Hon. Randal.........................................    48

              Additional Material Submitted for the Record

Meeks, Hon. Gregory:
    Letter from the Honorable Chris Van Hollen...................    56
    Letter from the Congressional Black Caucus...................    59

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

                              ----------                              


                      Wednesday, November 14, 2018

                     U.S. House of Representatives,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:06 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, Stivers, Hultgren, Pittenger, 
Wagner, Barr, Rothfus, Tipton, Williams, Poliquin, Hill, Emmer, 
Zeldin, Trott, Loudermilk, Mooney, MacArthur, Davidson, Budd, 
Kustoff, Hollingsworth, Waters, Maloney, Velazquez, Sherman, 
Meeks, Lynch, Scott, Green, Moore, Perlmutter, Foster, Kildee, 
Delaney, Beatty, Vargas, Crist, and Kihuen.
    Chairman Hensarling. The 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 within 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.''
    Before beginning my opening statement, don't turn on the 
clock quite yet. I wish to make a couple of introductory 
comments.
    I have been in Congress for 16 years now and seen a number 
of elections come and go. Sometimes my party wins; sometimes it 
loses. It is a little bit more fun when we win. But I want to 
acknowledge and congratulate my friends on the other side of 
the aisle for their victory. Although I am retiring and will 
not be here in the next Congress, I know that not all of my 
side will acquiesce in your agenda. But please be assured I 
will do everything today to ensure that there will be an 
efficient and peaceful transfer of power. We respect the will 
of the people.
    I do not wish to get involved in the inner sanctum of the 
Democratic Caucus, so I know that we do not yet know who will 
chair this committee, although I have a pretty good idea. And I 
would just like to acknowledge the Ranking Member's long time 
participation, her leadership on this committee, her leadership 
of the other party. And should that be the will of her caucus, 
I certainly would congratulate her on her accomplishment. And 
enjoyed those times. Wish it would have been a few more where 
we have managed to work on a bipartisan basis.
    But, again, privately I told her that the majority side 
stands ready and prepared to do everything possible for there 
to be an efficient and peaceful transfer of power on this 
committee, and I wish to acknowledge that and, again, 
congratulate my friends on the other side of the aisle.
    I now recognize myself for 3 minutes to give an opening 
statement.
    This morning we welcome back, for his semi-annual 
testimony, the Honorable Randy Quarles, the Federal Reserve's 
Vice Chairman for Supervision.
    As we know all too well, the Dodd-Frank Act dramatically 
increased the Fed's power way beyond its traditional monetary 
policy and responsibilities. Through so-called heightened 
prudential standards, the Fed can functionally now control the 
largest financial institutions in our economy, which is most 
disconcerting. Increased capital and liquidity standards, as 
long as they are not counterproductive or duplicative, add to 
stability. Regulatory complexity and micromanagement do not. If 
not properly tailored and calibrated, both hinder economic 
growth.
    Two weeks ago, the Fed proposed changes to the supervisory 
requirements for some financial institutions. These proposals 
are the direct result of the House-led deregulatory and pro-
growth provisions contained in the Economic Growth, Regulatory 
Relief, and Consumer Protection Act. These proposals are a most 
welcome sign of progress. But to be clear, they do not yet 
represent success. If they represent the Fed's final offerings, 
it is pretty thin gruel.
    There is clearly a direct connection between sluggish 
economic growth and the regulatory tsunami we experienced for 
nearly 2 decades prior to President Trump taking office. 
Studies, including one by the Mercatus Center, found that 
regulatory drag on the economy can be attributed to a loss in 
real income of approximately $13,000 for every American, a 
staggering figure.
    We should note that, while total overall regulatory 
restrictions have increased by nearly 20 percent since 1997, 
regulatory restrictions on finance and insurance have increased 
by a whopping 72 percent. This is why this committee has 
devoted so much time and attention to legislation, much of it 
bipartisan, that properly tailors financial regulation.
    Certainly, we can never lose site of systemic risk, but 
neither can we lose site of economic growth which today has led 
to the lowest unemployment rate in 50 years, the greatest wage 
increases in a decade, and a resurgence of optimism by both 
consumers and businesses.
    The Vice Chairman previously has expressed his support for 
a comprehensive evaluation and improvement of the post-crisis 
regulatory regime. Guided by the principles of transparency, 
efficiency, and simplicity of regulations, these are indeed 
laudable principles. I would suggest including one other. The 
principle that the rule of law not be supplanted by the 
arbitrary discretion of regulators. That means keeping 
regulators out of the Boardroom, both literally and 
figuratively, and kept out of management decisions.
    While I am pleased to see the Fed's willingness to better 
tailor, perform cost benefit analysis, implement prudential 
regulatory risk adjustments, and propose amendments to the 
Volcker Rule, each of these as they stand should again be 
viewed simply as first steps and insufficient to truly propel 
our economy to sustain 4 percent economic growth.
    Vice Chairman Quarles, again, I look forward to your 
testimony today and exploring with you the importance in 
assuring each of the Federal Reserve's proposals arrive at 
results that truly are transparent, efficient, and simple.
    The Chair now recognizes the Ranking Member of the 
committee, the gentlelady from California, for 4 minutes for an 
opening statement.
    Ms. Waters. Thank you very much, Mr. Chairman. And allow me 
to take a few minutes to say that I have appreciated the 
opportunity to work with you. We did not always agree on 
everything, but I am always amused that the press can't seem to 
get our relationship right. Sometimes our Members can't even 
get it right. We have Members from the opposite side of the 
aisle who say I am the worst thing since you know what, and 
others who say, well, you know, I get along with her pretty 
well, and she keeps her word.
    And so let me just say this, let's keep them confused. I 
like it that way. As a matter of fact, the more confused they 
are, the better I have an opportunity to have some wins.
    But I thank you for your offer to be of assistance in 
transition. And as you know, while it is thought that I would 
chair this committee, we have not gone through our formal 
processes yet, and I welcome the opportunity and appreciate it, 
certainly, to have the support from my colleagues on this side 
of the aisle to chair this committee.
    And I look forward to working with you in any and every way 
that I can, and other Members of our committee, to make sure 
that we have the kind of transition that serves the people of 
this country.
    Thank you very much.
    So, Mr. Chairman, this is the first hearing since the 2018 
midterm election in which voters gave Democrats the majority in 
the U.S. House of Representatives' next Congress. Of course, 
that also means changes in committee leadership and in the 
agenda for the committee.
    Given the expressed desire by the American people for a 
change, I do feel it is appropriate to discuss Dodd-Frank and 
the harmful effects of the current committee majority to weaken 
and roll back parts of this law.
    These efforts include those by some to weaken capital 
standards for our largest banks. As we can see in one of the 
slides before us, capital standards are an effective method to 
prevent bank failures. Make no mistake, come January in this 
committee, the days of this committee, weakening regulations 
and putting our economy, once again, at risk of another 
financial crisis will come to an end.
    Dodd-Frank created the position of Vice Chairman for 
Supervision at the Fed as one of the several actions in the law 
to help rectify the Fed's inadequate supervision and 
enforcement prior to the financial crisis. It is essential that 
the Fed keeps a watchful eye on the financial institutions it 
supervises and makes strong use of its existing enforcement 
tools to crack down on institutions that break the law.
    I must say that I am concerned about proposals the Fed has 
put forth this year to reduce capital and liquidities 
requirements for the largest financial institutions, which 
would weaken strong safeguards established by Dodd-Frank to 
protect the U.S. economy from another costly financial crisis. 
That is why, in September, I and 18 other Democratic Members 
sent a letter to Federal Reserve Board Chairman Powell urging 
the Fed to maintain strong capital requirements for global 
systemically important banks.
    The current higher capital standards and related regulatory 
improvements required by Dodd-Frank have strengthened the 
resiliency of the largest banks as well as the entire financial 
system without undermining economic growth.
    In fact, bank lending to businesses has increased 80 
percent since 2010, and banks of all sizes are making record 
profits. On average, they have made $167 billion in profit 
annually the last 3 years. As we saw in the last crisis, it is 
the average hardworking Americans that will suffer the 
consequences if Washington deregulates Wall Street mega banks 
again.
    I look forward to discussing these and other matters with 
Vice Chairman Quarles today, and I thank you. And I yield back 
the remainder 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. And welcome, Vice 
Chairman Quarles. Thank you for joining us today and for the 
steps you have taken to rightsize regulation.
    As we have discussed, it is imperative we take a more 
practical approach to supervision, one that extends from the 
top down to each member of your staff in D.C. and to every 
examiner in the field. On the topic of enhanced Prudential 
Standards, the Federal Reserve has a strong system in place 
with a systemic risk score indicator. Your latest proposal goes 
in a different direction, but I am glad to see you are taking a 
more risk-based approach to regulation.
    More should be done. And I encourage you to remain flexible 
going forward to revisit arbitrary thresholds and drive Federal 
Reserve supervision to an even more risk-based approach taken 
on an institution-by-institution basis. That should include 
tailoring for U.S. intermediate holding companies of foreign 
banks and more accommodations for smaller institutions that do 
not pose any systemic risk.
    I thank you for taking on this responsibility, and I yield 
back to the Chair.
    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.
    I first want to say that I appreciate the comments you and 
the Ranking Member made about this committee and about one 
another. And on behalf of the confused, I am happy to hear that 
you are working well together.
    I would like to welcome Vice Chairman Quarles. We are 
looking forward to your testimony.
    When you were here in April, I asked about how the Federal 
Reserve could ensure the effectiveness of the Community 
Reinvestment Act (CRA), because it is so important that there 
is equity in how the financial system works. To that end, the 
recent move by the Office of the Comptroller of the Currency 
(Office of the Comptroller of the Currency) to update the 
Community Reinvestment Act is concerning. I would like to hear 
from you how the Federal Reserve will use its authority to 
ensure that, in this update, the Community Reinvestment Act is 
not weakened.
    The CRA is important to ensuring credit availability in 
older industrial communities, in particular, like my hometown 
of Flint that I know the Members here have heard me discuss in 
the past. That community is really a troubled community and 
could benefit greatly from the efforts under the Community 
Reinvestment Act.
    It is important that in a time of reduced supervision of 
community and regional banks that financial agencies modernize 
and strengthen the CRA to ensure that banks meet their 
obligations to provide credit and economic development 
opportunities to these underserved low- and moderate-income 
communities.
    So thank you for being here. I look forward to your 
testimony and particularly addressing those questions.
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Michigan, Mr. 
Huizenga, the Chairman of the Capital Markets Subcommittee, for 
1 minute.
    Mr. Huizenga. Thank you, Mr. Chairman. And I echo the--at 
least the confused part of my colleague from Michigan as well, 
so I look forward to working with him on trying to unclutter 
those things.
    But earlier this year, Vice Chair Quarles, you mentioned 
that the Federal Reserve and other regulatory agencies had 
completed the bulk of the work in this post-crisis regulation. 
And on February 22 you said, quote, ``now is an imminently 
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 of regulation, it is inevitable that we are 
available to improve them, especially with the benefit of 
experience and hindsight,'' closed quote.
    So moving forward during your appearance in this committee 
in April, you discussed the Fed's commitment to tailoring 
regulations for these smaller financial institutions to ensure 
that regulations are not overly burdensome and while also 
ensuring safety and soundness.
    Last month, the Federal Reserve voted 3-1 to honor that 
commitment by streamlining and tailoring those enhanced 
supervision requirements for both regional and larger banks. 
These reforms take into consideration banks based on size as 
well as other risk factors instead of an arbitrary $50 billion 
threshold regardless of any actual risk to the financial 
system.
    We have also seen positive movement on reforming Section 
619, the Volcker Rule, which you called detrimental to our 
capital markets here in the U.S. I agree with your assessment 
that Volcker is, quote, ``an example of a complex regulation 
that is not working well,'' end quote.
    It is my hope that regulators, including the Fed, will 
continue to work toward a more simplified rule that is better 
tailored to our financial institutions.
    And I look forward to working with you. Thank you, and I 
yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    We now again welcome the Vice Chairman for Supervision of 
the Board of Governors of the Federal Reserve System, Mr. Randy 
Quarles. He has appeared before our committee before, so needs 
no introduction. Again, Mr. Quarles, welcome. You are now 
recognized for 5 minutes for your testimony.
    You need to turn on the microphone there. And bring it 
close to you, please.
    There we go.

          STATEMENT OF THE HONORABLE RANDAL K. QUARLES

    Mr. Quarles. Does this work?
    Chairman Hensarling. That will work. Thank you.
    Mr. Quarles. Thank you, Chairman.
    Chairman Hensarling, Ranking Member Waters, Members of the 
committee, I appreciate this opportunity to testify on the 
Federal Reserve's regulation and supervision of the financial 
system.
    My prepared remarks address two main topics: Our efforts to 
improve regulatory transparency and our progress in making the 
post-crisis regulatory framework simpler and more efficient.
    I am mindful that this semi-annual testimony, like my 
position as Vice Chairman for Supervision, is grounded in 
Congress' efforts to strengthen and improve the Nation's 
regulatory framework following the financial crisis.
    This testimony reflects a critical element of those 
efforts, the desire, and a need for greater transparency. 
Transparency is part of the foundation of public accountability 
and a cornerstone of due process, as the Chairman referred to 
in his remarks this morning. It is also a key to a well-
functioning regulatory system and an essential aspect of safety 
and soundness as well as financial stability.
    Transparency provides firms clarity on the letter and 
spirit of their obligations, it provides supervisors with 
exposure to a diversity of perspectives, and it provides 
markets with insight into the condition of regulated firms 
which fosters market discipline. Transparency increases public 
confidence in the role of the financial system to support 
credit, investment, and economic growth.
    The Federal Reserve has taken a number of steps since my 
last testimony to further increase transparency and to provide 
more information about our supervisory activities to both 
regulated institutions and to the public.
    We recently improved our supervisory rating system for 
large financial institutions, better aligning our ratings with 
the supervisory feedback that those firms receive. With our 
fellow banking agencies, we clarified that supervisory guidance 
is a tool to enhance the transparency of supervisory 
expectations and should never be the basis of an enforcement 
action.
    And we expect shortly to make final a set of measures to 
increase visibility into the Board's supervisory stress testing 
program, including more granular descriptions of our models, 
more information about the design of our scenarios, and more 
detail about the outcomes we project.
    The report that accompanies my testimony today is another 
tool to keep Congress and the public informed about our work, 
about the banking system, and about the role that both play in 
supporting the broader economy. As the report shows and as my 
written testimony discusses, the banking sector remains in 
strong condition in line with strong U.S. economic performance 
with lending growth, fewer nonperforming loans, and strong 
overall profitability.
    We are, however, very much aware of the dangers of 
complacency, and our report lists several priority areas of 
risk we will continue to monitor closely, including cyber and 
IT risks, that supervise firms of all sizes.
    Improving regulatory efficiency is another core element of 
our current efforts. Tailoring regulation and supervision to 
risk has been a programmatic goal of Federal Reserve policy for 
more than 2 decades. The motivations are clear. Supervisory 
resources are not limitless, and supervision is not costless 
either to the public or to supervised institutions. Activities 
and firms that pose the greatest risk should receive the most 
scrutiny. And where the risk is lower, the regulatory burden 
should be lower as well.
    This principle-guided Congress and the agencies in 
designing the post-crisis regulatory framework, and it has 
guided our implementation of the Economic Growth Regulatory 
Relief and Consumer Protection Act.
    On this front, as my written testimony details, we have 
made substantial progress. Our most significant step came 2 
weeks ago when then Board issued two proposals to better align 
prudential standards with the risk profile of regulated 
institutions.
    These proposals would significantly reduce regulatory 
compliance requirements for firms in the lowest risk category, 
including most institutions with between $100 billion and $250 
billion in assets. Firms with $250 billion or more in assets or 
firms with assets between $100 and $250 billion that meet a 
risk threshold will face reduced liquidity requirements. The 
proposals would largely maintain existing requirements for the 
largest and most complex firms.
    These new categories draw on our experience administering 
enhanced prudential requirements and other post-crisis 
measures, and they move toward a more risk-sensitive nuanced 
framework where riskier activities and a larger systemic 
footprint correspond to higher supervisory and regulatory 
requirements.
    I have detailed several other efforts to improve regulatory 
efficiency in my written testimony including simplifying and 
tailoring requirements under the Volcker Rule. Our work to 
improve regulatory efficiency is not done, and we expect to 
make additional progress in the months ahead on a number of 
issues. In particular, we are working with our counterparts at 
the OCC and FDIC (Federal Deposit Insurance Corporation) on a 
community bank leverage ratio proposal.
    I look forward to making progress on that and other efforts 
and to participating in the committee's oversight of our work.
    Thank you, and I look forward to answering your questions.
    [The prepared statement of Mr. Quarles can be found on page 
48 of the Appendix.]
    Chairman Hensarling. Thank you, Mr. Chairman.
    Before yielding to myself for questions, I failed to 
announce to the committee that we will excuse the witness no 
later than 1 o'clock today.
    I now yield myself 5 minutes for questions.
    Again, Vice Chairman Quarles, thank you for your appearance 
today. I could spend my limited 5 minutes heralding your 
progress, or I can spend my 5 minutes talking about your 
shortcomings. I think I will talk about your shortcomings.
    So in your last appearance before the committee, you said 
that the Board of Governors had the authority to jettison the 
qualitative aspect of CCAR. And what I have noticed is that the 
qualitative aspect has only fallen off for the lowest of the 
four tiers that we now operate under. I am disappointed to find 
this. I don't understand why that qualitative aspect is there. 
I do not understand why the quantitative aspect of the test is 
not sufficient.
    Can you, please, illuminate to me, if you have the power to 
jettison, why is it still there?
    Mr. Quarles. So I guess the short answer is we do have the 
power to jettison, and I believe that the time has come for us 
to move the qualitative objection into our regular supervisory 
engagement with firms as opposed to a separate process. We have 
already done that, as you know, for the smaller firms. There 
has been significant progress among all the firms with their 
capital planning measures, with the seriousness and ability 
that they approach their part of the stress test. And given 
that, I think that it is appropriate for us to look at that 
part of the firm's practices, as we look at many other of their 
practices, as part of our general evaluation of the firm's risk 
management, of their capital planning, and include that in 
their overall ratings, but not as a separate process. I think--
    Chairman Hensarling. Well, again, many are still fearful 
that it is subject to abuse and can intertwine the Fed and 
management decisions of the banks.
    Next, we have spoken about this matter both publicly and 
privately. Many on this side of the aisle have advocated that 
we have full transparency with respect to the models of the 
stress test. And I must admit that I am still somewhat 
uncertain as to exactly what will be released about these 
tests. And a foundational principle is the rule of law, and the 
rule of law works best when you actually know what the law is. 
We haven't known. It has been a gotcha kind of game.
    So can you be more precise? Because after I have seen the 
proposed rule, I think many people are still unclear what the 
Fed intends to share with respect to the stress test.
    Mr. Quarles. So I break that into two or three areas. One 
is transparency about our models. And up to now there has been 
limited transparency about the models that the Fed uses to 
evaluate the performance of banks' portfolios in the stress 
test.
    We have proposed being much more granular about what we 
reveal about those models, and specifically the loss function 
with respect to different categories of assets and what losses 
we expect to see in response to particular stresses. Banks will 
be able to have a better understanding, then, of how their 
models compare with at least those loss functions of ours.
    We have also described in the measures that we have 
proposed and are making final that this process will continue. 
We will continue to get more transparent with each iteration of 
the stress test. So there will be certain models about which 
more transparency is given in the next cycle. After that, more 
transparency about certain other aspects of our models.
    Another aspect, though, as to which transparency is 
important, is the design of the scenarios themselves as opposed 
to the models. That is a more complicated question, and we will 
be seeking very vigorous input from the public about how we can 
get, in a practical way, more input on the scenario design. We 
will be doing that over the course of this coming year.
    Chairman Hensarling. So in your tenure on the Fed, Vice 
Chairman Quarles, have you concluded that there is a nexus 
between fixed-income markets, volatility, and illiquidity in 
the Volcker Rule?
    Mr. Quarles. Yes. So I couldn't quantify it for you. I 
think that the efforts that various economists have made to 
quantify that have pointed in different directions. But I think 
it is inarguable from the experience of market participants.
    Chairman Hensarling. Are you familiar with H.R. 4798, 
legislation by Mr. Hill and Mr. Foster, bipartisan legislation 
that passed the House with over 300 votes that would help 
simplify Volcker by unifying under one rulemaking authority and 
one regulatory authority? Are you familiar with that 
legislation?
    Mr. Quarles. I am.
    Chairman Hensarling. Is that something that the Fed, 
through an interagency agreement, could enter into on its own?
    Mr. Quarles. It would require interagency agreement, but, 
certainly, the agencies could agree to operate in that fashion.
    Chairman Hensarling. I think it is your term and not mine, 
but I think that you haven't quite demurkified the Volcker Rule 
yet.
    And I see my time has expired.
    The Chair now recognizes the Ranking Member for 5 minutes.
    Ms. Waters. Thank you very much.
    Before I get into my question, as you know, California 
residents have been dealing with some of the most devastating 
wildfires it has ever seen in the past few years. In 
communicating with banks you regulate, I believe the Fed and 
other regulators have previously encouraged flexibility to help 
customers who have been affected by the disasters.
    Do you know of any steps that the Fed is taking to be 
helpful in this emergency?
    Mr. Quarles. I don't know that we have taken any steps yet, 
but those are logical things for us to consider.
    Ms. Waters. I would certainly encourage that.
    Mr. Quarles. I will be happy to report to you on what that 
is we--
    Ms. Waters. Thank you very much.
    Vice Chairman Quarles, response to a follow up question 
from our April hearing, you wrote, and I quote, ``the 
regulatory reforms that were in place in the wake of the 
financial crisis have helped to make the U.S. financial system 
stronger and more resilient. As I have stated publicly on 
several occasions, I believe that the core regulatory reforms, 
heightened capital, and liquidity standards, stress testing, 
and resolution planning should be preserved. My focus is not 
deregulation,'' end of quote.
    Now--and yet the Fed appears to be deregulating the largest 
banks anyway. Regulatory experts on both sides of the aisle, as 
well as community banks and others, have criticized several of 
the Fed's proposals arguing that they will materially reduce 
bank capital and liquidity reserves for the largest banks.
    Former Governor Brainard voted against these proposals 
noting the recent tailoring proposal would reduce high quality 
liquid assets held by large banks by about $70 billion.
    Former FDIC Chairman Gruenberg and Vice Chair Hoenig 
opposed the leverage proposal as it would reduce bank capital 
by more than $120 billion. And just the other day, former Fed 
Vice Chair Fischer said the deregulation effort is, and I 
quote, ``something that I find extremely worrisome.''
    What is your response to the many critics that argue that 
those proposals ignore lessons from the last crisis and will 
make our financial system less safe?
    Mr. Quarles. So I think that quantitatively those 
assessments are off the mark. It has been a principle of ours, 
as we focus on recalibrating, in order to ensure that the 
incentives that face the financial sector are appropriately 
lined and that they don't actually increase risk in the sector, 
that we not reduce the resiliency, including the capital 
resiliency or the liquidity resiliency of the system. And I 
think that we have done that.
    The various proposals, for example, that affect capital 
affect it by less than 1 percent, 1 percentage point. One of 
the criticisms that you pointed out from the FDIC that was with 
respect to a measure that would reduce the capital in the 
aggregate system by 4/100 of 1 percent. These are not material 
amounts.
    The liquidity tailoring that we proposed just a couple of 
weeks ago, for example, I think that that is an implementation 
of the instruction from Congress that we shall tailor. I think 
it is a recognition of differing risk. It does not affect the 
largest banks in the system. And it would reduce the overall 
high quality liquid assets in the system by 2 to 2-1/2 percent.
    There is still trillions of dollars more liquidity in the 
system than there was before the crisis. We have added $3 
trillion of liquidity. Multiples of liquidity that existed 
before the crisis. And these tailoring proposals, I think, have 
a significant benefit in reducing compliance burden on less 
complex and less systemically risky firms. But they do not 
materially affect the resilience of the system.
    Ms. Waters. Well, that is interesting.
    Now, did you work with Governor Brainard to resolve her 
concerns?
    Mr. Quarles. Yes.
    Ms. Waters. You just made a very strong argument here that 
there is no significant reduction in capital based on what you 
are doing.
    So you had that conversation with Governor Brainard?
    Mr. Quarles. Absolutely. And we have taken her comments 
into account. I would be quite confident that she would say we 
have a robust process.
    Ms. Waters. As you know, I and 18 of my Democratic 
colleagues wrote the Fed urging you not to weaken capital rules 
for the globally systemically important banks. And since you 
are saying that you are not doing that, will you commit to this 
committee here today that you will not be reducing capital 
levels at the global systemically important banks in any 
significant way?
    Mr. Quarles. So it is not our intention. Indeed, it is the 
opposite of our intention, to affect the total loss-absorbing 
capacity of the largest firms. Capital is an important part of 
that, and there is a general framework that affects their 
resiliency and their loss absorbancy. And I think that we 
should not be looking to change that. Both Chairman Powell and 
I have said a number of times we think it is just about right.
    Ms. Waters. Thank you very much.
    In the Fed's Supervision and Regulation Report released 
last week, it was troubling to see the report noted that there 
are 795 pending supervisory actions against the 12 biggest 
banks. And most of these supervisory actions relate to 
shortcomings with the banks' governance and controls, including 
the lack of compliance with laws and regulations. While the 
report claims progress has been made since the number of 
pending supervisory actions is down from about 1,000 in 2013, 
nearly 800 pending supervisory actions is still a lot. That 
averages out to 66 pending supervisory actions at each of these 
mega banks.
    Does this data suggest that mega banks are too large to 
manage? Why or why not?
    Mr. Quarles. So I think that if you look at that 
information in context over the--since the financial crisis, 
there has been very material progress in the banks on their 
capital and liquidity, which is exactly what we would have 
wanted them to focus on in the first instance. And there has 
been a dramatic improvement in that.
    Now that that is in a much better place, they are turning 
their resources to addressing questions of governance. And we 
have seen those MRAs and MRIAs about governance begin to come 
down. I think we would expect to see them continue to come down 
at a strong clip given that their resources can now be focused 
principally on those.
    Ms. Waters. Thank you.
    I yield back the balance of my time.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. McHenry, Vice Chairman of the committee.
    Mr. McHenry. Thank you, Vice Chair Quarles. Thank you for 
being here.
    So I just want to tick through a couple of these questions 
about your speech in particular.
    So removing the leverage ratio from the stress test capital 
requirements, is that more or less regulation or just different 
regulation?
    Mr. Quarles. So I would not view that as a--in any way, as 
a weakening of regulation. I think that is an appropriate 
alignment of regulation.
    Mr. McHenry. In light of the fact that we are so far 
distant from the financial crisis, and you have economic data 
to indicate you can make that change?
    Mr. Quarles. Yes. I think that--I think that conceptually 
there is a difference between--the stress test is a very--is a 
firm specific risk-based test. The leverage ratio is intended 
to be nonrisk sensitive and to serve as a backstop. And so when 
you put that into the stress test, you are really confusing the 
two things.
    Mr. McHenry. Which, basically, admits that your stress test 
isn't as good as you think it is in many respects.
    Mr. Quarles. It is not doing what it was designed to do if 
you have a post stress--
    Mr. McHenry. So two more things, just very quickly.
    Greater transparency for the stress test process, is that 
more or less regulation?
    Mr. Quarles. That is just more transparency.
    Mr. McHenry. OK. More transparency.
    And the end game of the public shaming for those that pass 
or fail stress tests and this public ingredient, is that more 
or less or just different regulation?
    Mr. Quarles. I think that is refinement. It is not 
relaxation.
    Mr. McHenry. So I appreciate your speech. And I think 
outlining the updates that you are seeking to make post-crisis 
and now with Dodd-Frank as fully implemented as it is going to 
be and having this economic data so you can actually shift and 
make sure that the Fed is doing the right and appropriate thing 
given the current market.
    But one thing in particular. I noticed in your inaugural 
report on supervision and regulation, a great deal of 
discussion about the Bank Secrecy Act (BSA) and anti-money 
laundering (AML) and the compliance and data and information 
technology pieces of that, which I find really interesting. Can 
you walk us through the basic challenges banks are facing 
regarding technology, and particularly partnering with 
technology companies.
    Mr. Quarles. Well, I think there are both challenges and 
opportunities. Particularly in this area of Bank Secrecy Act 
and anti-money laundering compliance, there are a lot of 
opportunities for banks to use machine learning and big data 
management that did not exist at the time that our current 
regulatory framework was put into place that would be of 
benefit to us as the government, to law enforcement. Would be 
more efficient use of bank resources.
    So I am very supportive of efforts to help the banks do 
that, which I think they are quite willing to do.
    Mr. McHenry. So, in admission that banks are struggling to 
manage data and IT risk as well as this BSA/AML compliance, why 
not encourage banks to actually partner with technology 
companies to get ahead of the curve? Why not the Fed lean in on 
encouraging that so that we can have banks keep pace with the 
rest of the technology sector?
    Mr. Quarles. Well, that is an interesting thought. We 
certainly are trying not to be a disincentive to business 
decisions that banks might make in that respect. We do want to 
be sure that where there are those partnerships that we, as 
regulators and all those responsible for the system, understand 
what risk there might be in those partnerships. But I don't 
think there is any reason for us to stand in the way of those 
partnerships.
    Interesting question of whether we should encourage them as 
to how we ought to effect those business decisions of the 
firms. But certainly, at the very least, we should not 
discourage them.
    Mr. McHenry. Right. But there is a mixed message here.
    So you have Governor Brainard discouraging banks and 
partnering with innovation companies and the admission that 
with AI and the technology sector moving dramatically forward. 
And this dissident piece of information, or dissident voices in 
the Fed around technology, it seems like, for banks, it is 
damned if you do, damned if you don't, right? That the Fed will 
take a harsh look at new technology.
    But their consumers, my constituents, their customers are 
desirous of the best technology and that technology ensuring 
these institutions are safe and sound. So I think you have to 
do better in encouraging the use of technology, or we are going 
to have a riskier banking sector.
    I yield back. Thank you.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentlelady from New York, Mrs. 
Maloney, Ranking Member on our Capital Markets Subcommittee.
    Mrs. Maloney. Thank you, Mr. Chairman, and Ranking Member 
Waters. And thank you, Vice Chairman Randal Quarles, for your 
public service.
    Very painful to many of us is the memory of a financial 
crisis where we lost $13 trillion of household wealth, 9 
million jobs, millions of homes, and unemployment was at 10 
percent. And I am proud of the way that we bounded back as a 
country. Our economy is getting stronger every day. Bank 
profits are now higher than they have ever been, $173 billion, 
I believe the highest ever.
    So we bounded back. And it is good that the banks are 
working and that the economy is humming. But I am very 
concerned about any effort to roll back the stress test that, 
in many ways, has guaranteed this financial success in safety 
and soundness in our banking system.
    So my first question is, in the Fed's recent tailoring 
proposal, the Fed proposed to give regulatory relief to banks 
that are over $250 billion in assets, the so-called Category 3 
banks. And one of the main ways the Fed is proposing to give 
these banks relief is by allowing them to hold less liquidity 
by scaling back two liquidity rules for the Category 3 banks. 
So I am concerned about this. If the system is working, why do 
we want to deregulate?
    First, what evidence do you have that Category 3 banks are 
currently holding too much liquidity? And second, seeing as one 
of the liquidity rules that the Fed is proposing to scale back 
has not even been finalized yet, how did you conclude that a 
regulation that hasn't even been implemented was already too 
burdensome for the banks for Category 3?
    Mr. Quarles. So to begin, the first point, I guess I would 
make in response to that question, is that we have, in thinking 
about our tailoring proposals for banks of any size and any 
level of complexity, had, as a first principle, that we do not 
want to affect the resiliency of the system. We are not seeking 
to relax or impair the resiliency of the system, including 
overall liquidity.
    And the quantitative consequence of our liquidity proposals 
is, as I had said to Ranking Member Waters, our expectation is 
that, depending on where we finally calibrate that liquidity 
tailoring, it would be between 2 and 2-1/2 percent of the 
overall liquidity in the system.
    So I don't think that we have, again, in any material way 
effected that liquidity. There has been a huge increase in 
liquidity in the system since before the crises. Trillions of 
dollars. This is a small reduction.
    But I do think that tailoring is something that applies 
across the continuum of banks. The legislation requires us now 
to tailor. The language in Section 1652a was changed from we 
may tailor to we shall tailor.
    And in thinking about appropriate tailoring, I do think 
that liquidity for that category of banks is somewhere we could 
do it. And we saw that we could do it in a way that would be a 
reduction of burden and implementation of congressional intent 
but not an impairment of resiliency of the system.
    Mrs. Maloney. Well, in your speech last Friday, you said 
that you wanted to remove the so-called stress leverage buffer 
from the Fed's proposed overhaul of the stress test regime. But 
the leverage buffer was intended to replace the requirement for 
banks to meet a minimum leverage ratio even in a period of 
stress. And so my question is: By removing the leverage buffer, 
wouldn't you be saying that banks are--no longer have to meet 
any leverage environment in the stress test?
    Mr. Quarles. Well, banks would still be subject to a 
leverage requirement, so I may have--I certainly don't want to 
have confused that issue.
    Mrs. Maloney. But not in the stress test. I am talking 
about the stress test.
    Mr. Quarles. That's right, because--
    Mrs. Maloney. In the stress steps there would still be a 
leverage requirement?
    Mr. Quarles. No, because the stress test is one thing, and 
a leverage requirement is another. The leverage requirement is 
designed to be a backstop to our risk-based measures.
    Mrs. Maloney. Right. So why take the backstop out?
    Mr. Quarles. But we are not. So the backstop would remain. 
The leverage ratio would still be there as a backstop. It is 
just that in the risk stress test, the risk measures would be 
risk measures and the leverage measures would be leverage 
measures.
    Mrs. Maloney. I have to say that I find that troubling. The 
leverage ratio has been the binding capital requirement for all 
of our largest banks in the past two stress tests. So removing 
this leverage buffer could significantly weaken the stress 
test, in my view, and I am opposed to it.
    Chairman Hensarling. The 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.
    Vice Chairman Quarles, again, thank you for being here.
    As you know, this committee passed a bill introduced by Mr. 
Lucas to require financial regulators to recognize the 
exposure-reducing nature of client margin for clear 
derivatives. The Fed's SA-CCAR proposal recognizes that client 
margin for clear derivatives reduces the bank's exposure, yet 
the Federal Reserve chose to propose a rule without recognition 
of that fact.
    This is a priority for me and for other Members of this 
committee. And I hope you will work on this issue. I think 
that, if I am not mistaken, Mr. Lucas has some questions with 
regard to that, so I won't go into detail on it. But this is a 
concern I just want to put on your radar.
    My first question deals with their inter-affiliate margin 
requirements. This a conversation we had recently. And I 
appreciate you taking my call and discussing it with me.
    As you know, I am a firm believer in capital requirements. 
But I think it is important those requirements make sense and 
don't necessarily tie up capital. We have a system in place 
that requires firms to post margin multiple times on the same 
transaction. The amount of unnecessary locked-up capital is 
even more concerning when you consider that U.S. financial 
institutions are isolated.
    European and Asian regulators do not similarly propose 
initial margin, as you well know. Nor does the CFTC (Commodity 
Futures Trading Commission) for non-bank entities. To that 
extent, I think it is important that you look at this issue. 
And along that line, I guess the question is, do you believe 
this initial margin is still warranted? Would you agree that 
the policy needs to be revisited? And would you commit to 
making this a regulatory priority in reducing or eliminating 
inter-affiliate initial margin?
    Mr. Quarles. So as we have discussed, and as you note, we 
are isolated in doing this. No other country has that treatment 
of inter-affiliate margin. The CFTC doesn't have that 
treatment. I do think that it is something that we have to look 
at closely. We are still having discussions internally at the 
Federal Reserve. But for me it is a priority to address that 
question, and I personally share your view.
    The Fed, as you know, has rules, Section 23 of the Federal 
Reserve Act and Regulation W that implements that deal with 
affiliate transactions and protecting against exposures that 
are created by affiliate transactions. And it may be--may well 
be possible that that which has existed for decades, that 
framework, may be entirely satisfactory and allow us to move 
into compliance with the rest of the world.
    Mr. Luetkemeyer. One of the reasons for the question, as 
you know, is to get you on record here so we can begin the 
discussion so we can continue to follow up on it. And we 
appreciate your response.
    Thank you very much.
    With regards to CECL (current expected credit loss), which 
is, to me--I am extremely concerned about it. This rule 
fundamentally changes accounting practice of banks, especially 
small banks. And I think we had--that can have, I think, 
serious consequences.
    We have roughly 5,200 banks altogether, and there is 
roughly probably over 5,000 of them that are smaller banks. 
Most of those probably are privately owned, not publicly owned. 
And yet this is what this standard is supposed to be focusing 
on is investment--the ability of investors to better see a 
picture of the financial institution's standing, which really 
makes no sense when you have a bank that is privately held.
    This--again, I just can't get my head wrapped around it. So 
I guess my question to you is seeing the impact on most of our 
banks, would be, I think, a negative, what is your concern with 
it? Do you have any concerns with it? Where do you think we 
need to go with this? Are you willing to work with us? Or do 
you think it is a great thing? And I want to move on.
    Mr. Quarles. Well, I am always in favor of measures that 
make more transparent the position of any financial 
institution. But I do agree with you that the implications of 
CECL for small firms, for large firms are not currently deeply 
understood. And we need to have time to understand them.
    So we have proposed a phased-in implementation of CECL in 
how that affects--how that works with our regulatory capital 
regime. And we think that will give us time to see how it is 
working in operation before it gets plugged into the regulatory 
capital regime--allow us to see whether there are any changes. 
I don't know that there are. Continue to work with you and the 
committee on questions of what CECL implementation means.
    For the larger firms, I think that--it is a little 
interesting. Those firms that are affected by the stress test, 
CECL could actually be a wash, because to the extent it means a 
larger reserve at the outset of the period of stress, then you 
will chew through that reserve before you chew through other 
things in the stress test, and it can be a one-to-one offset.
    Mr. Luetkemeyer. I see some ramifications of this that, 
here we have increased costs for doing business for banks. And 
when they increase costs, they have one of two things that they 
do. Either they pass those costs along to the consumer, or they 
do away with certain services that cost them this extra money, 
as we have seen with small-dollar lending, as we have seen with 
home mortgages.
    So are we going to restrict the ability of banks to offer 
services? When that happens, you are talking about hurting the 
CRA regulation, our compliance.
    And so to me it has lots and lots of ramifications. I am 
very concerned about it, and we are certainly going to follow 
up.
    Thank you very much. I yield back.
    Mr. Quarles. Thank you.
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentlelady from New York, Ms. 
Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Vice Chairman Quarles, when you last came here before this 
committee in April, you and I spoke about the Community 
Reinvestment Act. During our conversation, you told me that you 
expect there to be a joint rulemaking between the OCC, the Fed, 
and the FDIC to modernize the CRA.
    When the OCC released its ANPR (advanced notice of proposed 
rulemaking) in August, the Fed and the FDIC choose not to sign 
on. Why was there not a joint rulemaking like you originally 
anticipated? And what can you tell us about the Fed's decision 
not to sign on?
    Mr. Quarles. Well, actually, I do still expect there to be 
a joint rulemaking. The OCC has come out with an advanced 
notice of proposed rulemaking, a series of questions. And both 
the Fed and the FDIC--well, I guess I shouldn't speak for the 
FDIC. But we did participate in the crafting of that ANPR, and 
we certainly will work with the OCC in developing an NPR post 
that is--
    Ms. Velazquez. And that includes FDIC?
    Mr. Quarles. Well, I can't speak for the FDIC. But we are 
working together on it. We have been, and so I expect that to 
continue.
    It has been a joint process. The OCC did go out singly with 
its ANPR, but we are encouraging people to comment on the ANPR. 
We are receiving comments, although we haven't signed on to the 
ANPR, people who are commenting on the OCC's ANPR are sending 
in those comments to us effectively. And we will work together 
on further CRA work with the OCC.
    Ms. Velazquez. Would that mean that you will not release 
your own proposal? It will be a joint rulemaking?
    Mr. Quarles. That is my expectation currently, yes. We are 
all expecting that that would be a joint rulemaking.
    Ms. Velazquez. In public remarks made earlier this year, 
Comptroller Otting stated that the OCC will be working with the 
FDIC and the Fed to update and improve the BSA/AML's rules and 
processes.
    What is the current state of that joint effort, and what 
are the prospects for reform?
    Mr. Quarles. Well, I think the prospects for reform are 
good. Again, we are working together. The banking agencies 
together with Treasury and FinCEN have a very active process in 
reviewing both the banking agencies' examination and 
enforcement practices with respect to BSA/AML as well as 
Treasury and FinCEN's rulemaking on BSA/AML. And I think we 
will see some material benefit out of that.
    Ms. Velazquez. Sure.
    Going back to your exchange with Congressman McHenry, I 
would like to ask you, based on the report, the Fed's 
Supervision and Regulation Report on those areas where it 
discusses witnesses such as governance and controls, including 
BSA/AML programs internal audit functions, IT risk management, 
and cybersecurity, what can you tell us about the results of 
that study? And do you find them disturbing?
    Mr. Quarles. Well, as I indicated, there is a lot to be 
done that the banks still need to do with respect to risk 
management and some of these governance and controls issues. 
But I don't find--I don't find it surprising that there is 
still much to be done. The banks are making progress on 
addressing our supervisory expectations in those areas. They 
did devote, appropriately and with our encouragement, the most 
resources initially to capital and liquidity ensuring that 
those foundational aspects were taken care of to resolution 
issues, enormous amounts of resources devoted to resolution.
    So now that we move into these governance matters, we are 
seeing those come down. We are obviously not complacent about 
it. We are very engaged with the banks on it. But it is not as 
though there is foot dragging or impossible management problems 
at these firms at all, it is a question of prioritization and 
things moving about, I think as we all would have expected.
    Ms. Velazquez. Do you think that better coordination 
between foreign banks and the Fed is needed?
    Mr. Quarles. We have pretty good--I would say that our--
again, our supervision of foreign banks is not deficient. We 
have good cooperation with their home country supervisors, 
which is important in understanding their overall positions.
    The foreign banks, because we only recently imposed the so-
called intermediate holding company requirement, which requires 
them to organize their non-banking activities in a way that 
applies many of these Fed rules, that is fairly recent. And so 
they haven't had as much experience as the domestic banks, but 
I think they are getting there.
    Ms. Velazquez. Thank you.
    I yield back.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Michigan, Mr. 
Huizenga, Chairman of our Capital Markets Subcommittee.
    Mr. Huizenga. Thank you, Mr. Chairman. And Chair Quarles, 
thank you. I appreciate you being here.
    I want to touch on two things: Volcker Rule and then 
covered funds.
    Needless to say, many people believe that the Volcker Rule 
was a solution in search of a problem and that the 
implementation of it--I have deep concerns about how the 
implementation of the rule has been affecting U.S. financial 
institutions and ultimately liquidity in the market. We have 
seen it--definitely have seen a decline in the market liquidity 
while not really experiencing actual market stability that was 
promised, right?
    So earlier this year, as part of 2155, the banking 
regulatory relief bill that was passed and signed into law, a 
provision was included to relieve banks under $10 billion in 
total assets from having to comply with the Volcker Rule, which 
I think was absolutely on target. And even though the Volcker 
Rule is part of the Bank Holding Company Act, it also applies 
to industrial banks. And that is where I am concerned, because 
it is another type of banking charter that has its own 
statutory framework and a separate set of rules.
    But these industrial banks are used by a variety of 
different companies, and where it is actually oftentimes a 
small part of it. Michigan, we have an energy company that has 
a small ILC (industrial loan company). It is the larger 
companies that might have this as a portion of what they do. 
And the overall consolidation of the industry, really, I think 
has made these even more important.
    So I am aware that some of these banks have not been able 
to take advantage of the relief that we have provided, because 
under a total consolidated asset test, the parent companies 
exceed the thresholds themselves.
    So the intent of making sure that these smaller industrial 
banks have the same relief as community banks and these other 
institutions below $10 billion hasn't actually come into 
effect. So you are now burdening these companies with still 
having to comply with Volcker.
    So I am curious, what are your plans to address this? Do 
you think--first of all, do you think this makes sense? Do you 
see that there is a problem there? And then what are we going 
to be doing to change that? And I just want to encourage you to 
do so, but I would like to have some concrete steps on how that 
might happen.
    Mr. Quarles. Sure. I appreciate that.
    So I do think that is an issue. What you have described is 
an issue. We are working through how to address it given the 
restrictions of the law and the terms of the law. But I do 
think that it is something that--it is an anomaly. Related to 
that, though, are questions of control. And one of the--so 
there is the question of the application of the Volcker Rule to 
these ILCs, but there are also questions of interpretations of 
control around the ILCs. I have heard that from some people who 
are concerned about this issue. And we do have a separate 
project that is underway at the Federal Reserve to rationalize 
and make more transparent some of these control rules. I think 
the two together--I don't know what the answer is as we talk 
about here, but I think we should continue to talk about it. 
And we are thinking about this question in both of those 
contexts.
    Mr. Huizenga. And do you believe that you currently are 
able to address this? Or do we need to address this 
legislatively for clarity?
    Mr. Quarles. I don't know the answer to that question 
today, but I'll get back to you with--
    Mr. Huizenga. Let's make sure we continue to work on that.
    And real quickly in the last minute here. Covered funds. 
Working together Chairman Hensarling and Subcommittee Chairman 
Luetkemeyer and I wrote a letter to--including to Chair Powell, 
the various regulators outlining our concerns with that. And 
without objection, Mr. Chair, I would like submit that letter 
to the record.
    Chairman Hensarling. Without objection.
    Mr. Huizenga. Thank you to my friend from Colorado. You may 
be jumping the gun a little bit, but the--I am eating into my 
own time here.
    So while the--we stated--or, I am sorry, Chairman Powell, 
when he was before the committee, stated that the banks' 
engagement in covered funds does not pose safety and soundness 
concerns and that our banks are able to invest in any number of 
companies--both credit and equity investments via their balance 
sheets.
    Can you explain to me the rationale that would exist for 
allowing banks to make an investment on their balance sheet 
while preventing it in a fund structure. And wouldn't doing it 
through a fund structure make the investment even safer because 
the investment has more investors than just one bank alone?
    Mr. Quarles. No. I think that is a very sensible way to 
think about it. It would be, and we have in our Volcker Rule 
proposal, as you know, we have requested questions, asked for 
comments on how to treat covered funds, and that is an 
important part of what the next step will be.
    Mr. Huizenga. Hopefully we have your commitment you are 
going to continue to work on the covered funds and address 
this. Thank you.
    And, Mr. Chairman, I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman.
    Mr. Sherman. I wonder if we could put up the charts that we 
have arranged. Yes, Mr. Quarles, behind you are going to be two 
charts during the next 5 minutes. I have a friend who I don't 
take theological advice from very often who claims that there 
is a special place in hell for those who used statistics that 
are not inflation adjusted. The Fed has now hit its 2-percent 
inflation target, and this chart shows that if you use the 
unadjusted phony statistics, you can show that, from the first 
quarter of this Administration, we have seen an increase in 
wages for those with high school degrees or diplomas. But if 
you inflation adjust the statistics and use the real numbers, 
the real wage for high school graduates has slightly declined 
over this Administration. We will also see a chart later about 
our trade deficit with China, which has increased over the last 
7 months.
    Now for some bipartisan questions.
    In recent years, there has been a growing number of 
cybercriminals targeting real estate transactions using wire 
fraud to steal home buyers' down payments. Cybercriminals do 
this by hacking into the email accounts of home buyers, real 
estate agents, lenders, et cetera, and send false wire 
instructions to home buyers to steal their downpayment. Under 
these spoofing email cybercrimes, consumers have been scammed 
out of about $12 billion since 2013, and the FBI says that 
these scams are up sharply.
    Mr. Quarles, you may know that fraud in real estate 
transactions is a growing problem, and much of it is done 
through wire transfers. These scams are effective because there 
is no requirement that the name of the individual intended to 
receive a wire transfer actually matches the name on the 
account that the funds are deposited into. Has the Federal 
Reserve considered requiring banks and other financial 
institutions to apply payee matching when initiating a wire 
transfer?
    Mr. Quarles. So we have not implemented that, but we are 
considering that. We have a number of active efforts within the 
payment system group at the Fed to address questions related to 
wire transfer.
    Mr. Sherman. I hope you would go back and light a fire 
under them because this is important.
    Mr. Quarles. Absolutely.
    Mr. Sherman. We have provided in legislation significant 
relief to small community banks, but for that to work, you have 
to define the term, ``tangible equity capital.'' When are you 
going to provide a definition?
    Mr. Quarles. Soon.
    Mr. Sherman. Very soon would be the better answer.
    Mr. Quarles. So we are working on that as part of our 
implementation.
    Mr. Sherman. OK. Another similar question, Congress 
provided the Federal Reserve with clear instructions to remove 
regional banks from the enhanced prudential standards unless 
they designated that bank as systemically risky. For that to 
work you need to address capital and liquidity rules in a 
comprehensive manner. You have provided clear liquidity rules 
for the large banks. When will you propose new capital rules 
for regional lenders?
    Mr. Quarles. For the smaller banks, we have. Our proposal--
    Mr. Sherman. But my focus here is on the regional banks.
    Mr. Quarles. And for the whole continuum, our tailoring 
proposal at the end of October was intended at least--and so, 
if it is deficient, please let us know--but it was intended to 
create a framework, if we will, for all banks as to when 
enhanced prudential standards would apply to them.
    Mr. Sherman. In the questions for the record, I will detail 
the areas that still need to be fleshed out for these 
regulations to be effective.
    Mr. Quarles. I appreciate that.
    Mr. Sherman. And, finally, I think you need to codify the 
activities-based approach to nonbank SIFI (systemically 
important financial institution) designations, and I wonder 
whether that is on track.
    Mr. Quarles. So the FSOC (Financial Stability Oversight 
Council) is very much engaged in a pretty robust process in 
thinking about how to implement an activities-based approach.
    Mr. Sherman. Do you think they will get there soon?
    Mr. Quarles. I do, yes. I both think they will get there 
soon and that the process will be well done. It is a tricky 
thing to do, but I think that it will be done well.
    Mr. Sherman. So summarize your answers to my questions with 
the word ``soon.''
    Mr. Quarles. Soon.
    Mr. Sherman. Thank you.
    Chairman Hensarling. The time of the gentleman is expired.
    The Chair now recognizes the gentleman from Kentucky, Mr. 
Barr, Chairman of our Monetary Policy and Trade Subcommittee.
    Mr. Barr. Thank you, Governor Quarles, for returning to the 
committee as required by the Dodd-Frank law, and I appreciate 
your work, and I appreciate your commitment to reviewing and 
correcting some of these perhaps well-intentioned regulations 
but obviously overly burdensome regulations that are making it 
more expensive for Americans to access the capital they need to 
continue to grow our economy. There was no doubt that, in the 
wake of the financial crisis, some of these financial rules 
were needed to change, but in some instances, Congress and the 
Federal Reserve overcorrected, as you have acknowledged. Your 
efforts and those of others at the Federal Reserve fixing these 
problems are to be applauded, and we appreciate that work. I do 
want to focus on the October 31 tailoring proposal. And in 
particular one of the areas where we saw maybe an 
overcorrection was the impact that these new post-Dodd-Frank 
regulations were having on small business lending by banks. We 
have seen that, because of the strict capital liquidity 
requirements that were put into place, we have seen a pretty 
significant decline in small business lending. C&I lending 
maybe remained healthy, but what we saw was that loans less 
than a million dollars dropped from 2-1/2 percent of GDP in 
2001 to 1.7 percent in 2017, and such loans make up a smaller 
proportion of total bank assets, dropping from 4 percent in 
2001 to 2.1 percent in 2016.
    So, given that small business formation and access--small 
business access to capital is really critical, can you tell us 
what you anticipate the new proposals, the impact of the new 
proposals, tailoring, could have on banks' capacity for small 
business lending?
    Mr. Quarles. So I can't quantify that for you today, but we 
would be happy to try to do that so you have some 
quantification. I think that it is unarguable, however, that 
small business lending, a particular source of small business 
lending comes from smaller and regional banks and that, to the 
extent that we have subjected those institutions to levels of 
regulation that are more appropriate for much larger 
institutions, you are going to have a disproportionate effect 
on small business lending, and so our proposal should address 
that.
    Mr. Barr. Is your tailoring proposal enough to revive small 
business lending back to levels that we saw previously?
    Mr. Quarles. There are a number of reasons for the decline 
in small business lending or the effects on small business 
lending, so I wouldn't want to say that these tailoring 
proposals--they will have an effect. Will they be enough to 
completely address the issue? I wouldn't want to say here 
today.
    Mr. Barr. Let me move on to the absence in the tailoring 
proposal to address foreign banking organizations. As you know, 
international banks represent approximately 20 percent of 
banking assets and one third of all loans to businesses in the 
United States. Obviously, they contribute in major ways to U.S. 
economic growth. International banks comprise two of the top 
three commercial agricultural lenders in the United States and 
as the former acting comptroller of the currency noted, 
international banks, and I am quoting here, are also an 
important potential source of stability to our economy. In 
times of financial stress in the United States, the global 
operations of international banks may well be healthy and 
stable.
    As you know, in recent years, international banks have been 
subjected to duplicative and overlapping regulations. You 
responded to a letter to several Members of Congress. Recently, 
in a letter dated October 26, you noted that the Board 
recognizes the important role of FBOs in the U.S. financial 
sector. You said that the Board's enhanced prudential standards 
generally treat an intermediate holding company of a foreign 
banking organization similarly. But is that the case and are 
you all in your proposal to level the playing field--tell us a 
little bit more about your intentions in that regard because we 
want to be able to, number one, facilitate that foreign direct 
investment and not disadvantage the U.S. in very competitive 
global marketplace.
    Mr. Quarles. So I completely agree with all of the points 
you made about the importance of foreign banks to our domestic 
economy, and that has been true for decades, and it is, 
therefore, very much in our interest to ensure that their 
participation is facilitated.
    We--but they are different cats, so they aren't identical 
to domestic banks, and we are going to go through a process 
where we consider how to ensure we have a level playing field 
but that takes account of their differences.
    Mr. Barr. Thank you.
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from New York, Mr. 
Meeks.
    Mr. Meeks. Thank you, Mr. Chairman.
    First, I would like to submit for the record a letter that 
I sent with a number of my Congressional Black Caucus 
colleagues, as well as a letter from Senator Van Hollen, urging 
the Fed to move quickly on its faster payment initiative.
    Chairman Hensarling. Without objection.
    Mr. Meeks. Thank you.
    Mr. Vice Chairman, the Federal Reserve recently solicited 
comments on its proper role in implementing a faster payment 
system in the United States. Given the potential consumer 
benefits, I urge the Fed move more quickly on this initiative, 
but I am also sympathetic though to some concerns that some of 
the consumer groups and advocates brought to my attention who 
argue that faster payments may also mean faster fraud, 
especially for vulnerable individuals like our seniors. So my 
question to you is, from a supervisory standpoint, what do you 
believe the Fed's proper role will be in preventing fraud 
within a faster payments regime?
    Mr. Quarles. So, obviously, it is up to the Federal Reserve 
to enforce the antifraud laws on those institutions that we 
supervise, that we have the legal authority to do that for. We 
have been very active in doing that and will continue to do so, 
whether those payments are being affected through the 
traditional payment system or through a new technologically 
advanced payment system.
    Mr. Meeks. Let me also, one of the issues that--I want to 
move with the time that I have. The OCC has issued an ANPR on 
modernizing CRA, and the agency solicited opinions on the 
concept of a more metric-based system for CRA ratings. And 
while consistency in CRA ratings is important, there are 
important qualitative factors that CRA examiners consider that 
cannot fully be measured by a formula ratio. Would you concur 
with that?
    Mr. Quarles. I think those are important considerations.
    Mr. Meeks. So, in fairly assessing the qualitative factors 
required at a certain level of an examiner's discretion, a 
purely metric-based CRA rating system, in fact, can tie the 
hands of examiners. Are you concerned with the CRA's proposals 
that are overly prescriptive and can limit examiner discretion 
when it comes to assessing the innovativeness and 
responsiveness of CRA lending?
    Mr. Quarles. So I do think we need to think carefully about 
how to ensure that we have uniform treatment as well as how to 
ensure that we have a real reinvigoration of the CRA. My 
concern with respect to the current administration of the CRA 
is, as I think I said in my last appearance here, it has become 
a little ossified and formulaic. And communities themselves 
will benefit if we can be more creative about that.
    At the same time, we do also want to ensure that we have 
regulatory measures that treat similar banks similarly and that 
we have a framework that does that.
    Mr. Meeks. And, last, Mr. Vice Chair, we have been working 
very closely because we know I am seeing a lot of banking 
deserts coming up, and the cure to that is to make sure we can 
keep small and community banks in communities and make sure 
that they are able to afford it. And in my conversations with a 
few of them, BSA becomes very costly, and I am concerned, 
therefore, about the impact that these costs may have on these 
banks and credit unions also, which have higher compliance 
costs relative to their larger competitors, and I know that the 
Fed has sent some recent guidance on how the banks can share 
BSA, but to a lot, it is still not clear. Do you think the Fed 
can do more to--as far as a guide to the institutions? Because 
they are nervous. They want to make sure it is clear to them, 
especially the smaller banks with less exposure on how to 
lawfully share a BSA office.
    Mr. Quarles. So we do intend having taken that joint action 
with the other regulators and allowing sharing of resources 
with suspected BSA/AML, we will be engaged with our supervisors 
and with the banks to ensure that they understand what it is 
that they can do, but we are very supportive of efforts to both 
take advantage of the cost reductions that come from using new 
technologies and reducing the costs in general of effective 
BSA/AML compliance.
    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 Chairman Quarles, one of the key provisions in S. 2155 
that was intended to help spur economic growth is the Home 
Owners Loan Act (HOLA) flexibility provision, Section 206, that 
originated with legislation I introduced. That section gives 
institutions chartered under HOLA greater flexibility in 
meeting the changing borrowing needs of the communities that 
they serve. I want to commend Comptroller Otting and his staff 
for moving quickly on regulations to implement this provision 
with a proposed rule already published and comments due next 
week. I also understand that the Federal Reserve is considering 
what issues, if any, may exist when institutions that are 
organized as savings and loan holding companies exercise the 
provisions under Section 206. I would hope that both the OCC 
and the Fed would adhere as closely as possible to the 
congressional intent to provide meaningful flexibility to HOLA-
chartered institutions, including S&L holding companies, while 
avoiding unnecessary costs or legal complications that would 
impede the provision of needed services to their communities. 
To that end, I would urge the staff at the Federal Reserve to 
work closely with the OCC staff to ensure a coordinated 
approach that provides the flexibility intended by the 
statutory provision. Can you share any detail on the issues the 
Board is reviewing and how you might address them?
    Mr. Quarles. Well, we are working closely with the OCC on 
that question. We haven't come to detailed views as to how we 
will implement that provision, but we certainly intend to hew 
to the congressional intent.
    Mr. Rothfus. I appreciate that and look forward to 
following up. In your testimony, you highlighted the importance 
of improving regulatory inefficiency. You also wrote that, 
quote, ``supervisory resources are not limitless, and 
supervision is not costless either to the public or to 
supervised institutions.'' I certainly agree with this view. 
That is why I introduced the legislation, H.R. 5059 with 
Representative Beatty, to address inefficiencies in the 
supervision of insurance savings and loan holding companies 
(ISLHCs). As you may know, this bill passed the House of 
Representatives by a voice vote earlier this year. 
Unfortunately, the regulatory inefficiency continues to drive 
ISLHCs out of business of banking. Though your support on Fed 
supervision and regulation claims that the Fed has worked 
closely with departments of insurance and the National 
Association of Insurance Commissioners to tailor supervision of 
ISLHCs, I have not seen much evidence of this. Are you 
concerned that ISLHCs continue to debank?
    Mr. Quarles. It certainly isn't the objective of our 
supervision to have that effect. There is no reason that it 
should, and we need to continue to work at the Fed to ensure 
that our, again, as part of our general tailoring that our 
supervisory engagement with these firms is appropriate to the 
actual size--
    Mr. Rothfus. Are there any specific actions that can be 
taken to that end to ensure that these institutions aren't 
debanking?
    Mr. Quarles. Other than ensuring again that our supervisory 
engagement is appropriate, I don't think that there are 
specific changes, but I am aware of issues that we have had 
that we are trying to address. They aren't regulatory or 
quantitative. They are more in the nature of qualitative, and 
we are trying to address them.
    Mr. Rothfus. I appreciate your awareness of the issue and 
look forward to following up.
    S. 2155 contains Section 402(b) the provision that exempted 
cash deposits placed at central banks by custody banks from the 
supplemental leverage ratio. The provision was not only part of 
S. 2155 but also passed the Financial Services Committee as 
H.R. 2121, the Pension Endowment and Mutual Fund Access to 
Banking Act, by unanimous vote. Given the strong support for 
this provision, can you give us an update on when Section 
402(b) will be implemented?
    Mr. Quarles. An exact date I can't give you, but we do 
expect that to be soon.
    Mr. Rothfus. Any update on the Federal Reserve Board's 
enhanced supplemental leverage ratio proposal and how that 
proposal would work with section 402(b)?
    Mr. Quarles. So what we need to do in thinking about our 
proposal with respect to the enhanced supplemental leverage 
ratio is to ensure that if we implement that, that there isn't 
double counting. So there is a statutory provision that affects 
some firms. Our provision would have affected all firms. If we 
simply implement that without any adjustment, then you would 
have some double counting for the firms that are covered by the 
congressional action. That would not be our intention. That is 
also a little tricky to figure out. My expectation would be 
that we will first implement the clear congressional 
instruction and then work on refining ours to address that 
double counting issue.
    Mr. Rothfus. Thank you.
    I appreciate that, and I yield back.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Lynch.
    Mr. Lynch. Thank you, Mr. Chairman, and thank you, Vice 
Chairman. Let me follow up on the gentleman from Pennsylvania's 
question there regarding the bill we passed recently. Our 
version was 2121. The Senate bill was 2155. And the idea was 
that we would reduce the--we would count--we would exempt 
deposits made by custodial banks when they park their money at 
the Fed, which you got 60 votes in this committee, which is 
highly unusual, and we are still waiting for that to happen. So 
I just want to register my support for Mr. Rothfus' comments 
and urge you to be diligent in making sure that that happens.
    Mr. Quarles. So I appreciate that, and while I would only 
offer the--behind my ``soon'' with respect to implementation 
that on the tailoring proposal that was the heart of EGRRCPA, I 
do think that our implementing--our proposal to implement that 
was done with a speed that was almost unprecedented in the 
history of the Fed. So ``soon'' is not a way of putting things 
off but of generally saying I do think that will be implemented 
soon.
    Mr. Lynch. All right. Fair enough. Let me ask you, do you 
think there are any nonbank systemically important financial 
institutions in the country?
    Let me give you a for-instance. OK. So, for instance, 
Prudential, largest insurance company in the United States, 
approaching a trillion dollars in assets, FSOC recently 
dedesignated them as a SIFI, and yet when you look at 
Prudential, they hadn't undertaken any large-scale 
restructuring since their SIFI designation. In fact, they got 
considerably larger. I think they have grown 17 percent in the 
last 5 years. And in its dedesignation, FSOC found that 
Prudential had not significantly increased its total market 
exposure investment--I am sorry, did not significantly decrease 
its total market exposure. They didn't decrease their 
investment portfolio or market share, and they didn't address 
issues of resolvability in case something went wrong. And yet 
they were dedesignated. And I am just curious what is the 
thinking there?
    Mr. Quarles. Well--
    Mr. Lynch. Let me ask you, what I see is--because 
Prudential did little to nothing except get bigger and more 
complicated, more complex, but FSOC changed. FSOC changed, the 
people on FSOC changed, and I think that is the difference 
here. That is the difference, and that is not good for America. 
That is not good for the United States' economic system, and 
you can tell me why I am wrong, if you will.
    Mr. Quarles. So, one of the principles that we have been 
talking about here is that it is not merely size, but that 
there are a variety of other factors that need to be taken into 
account in determining the systemic--
    Mr. Lynch. Let me just say that Fortune magazine says that 
Prudential Insurance Company is changing the world. They are 
interconnected. They are complex. They are huge, like I say, 
approaching a trillion dollars in assets. And if they are not a 
systemically important financial institution--nonbank, but they 
certainly have the exposure, the market share, all the things 
that made us designate it to begin with, and, not unlike--well, 
not unlike AIG, although AIG was making some bad bets, but they 
are still colossal, and I just--it just--
    Mr. Quarles. They are big, but size alone does not 
determine systemic importance. It was a very careful decision. 
I was actually very pleased with the precision and depth of the 
analysis that went into the decision to dedesignate Prudential. 
As I had indicated earlier, I am, with the work that is being 
done on thinking about how we could look at activities that 
would cut across all firms--because it certainly is the case 
that nonbanking firms can be engaged in activities that have 
systemic consequence, we need to have a good framework for 
understanding when that would be and how we would--
    Mr. Lynch. Let me just reclaim a little bit of time I have 
left. The two-step analysis is that we look at the nature, 
scope, size, scale, concentration, interconnectedness on mix of 
activities of the nonbank financial company that might pose a 
threat to the financial stability of the United States, and 
none of that analysis that you came up with at all addressed 
the first question and nobody--we put a two-step procedure, and 
FSOC never addressed the second step that Congress laid out 
there.
    I yield back. Thank you.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from Oklahoma, Mr. 
Lucas.
    Mr. Lucas. Thank you, Mr. Chairman. Vice Chair Quarles, I 
am curious as to the Fed's progress on the mortgage servicing 
rights (MSRs) rulemaking. Last year, regulators passed a 
proposed rule that allowed banks to keep a greater portion of 
the MSRs under Basel III, but it seems the rule was placed on 
the back burner during the Senate 2155 debate. I also hear from 
my constituent banks there may be more relief coming in the 
rule. I would like to be able to tell my constituents that help 
is on the way. Is it possible to release something close to 
last year's proposed rule as an interim rule while you and the 
OCC work on something more final? Barring that, I would love to 
hear of when you think the rule will be completed.
    Mr. Quarles. So you are actually--it is quite astute that 
in our effort to ensure that we implemented 2155 promptly, that 
a lot of resources went into that and some things stepped to 
the side, but we are reengaging with all of those now, and I do 
expect that we can make that rule final soon--not too distant 
future.
    Mr. Lucas. That would be good. My next question was 
previewed earlier by Mr. Luetkemeyer, and I had mentioned to 
you that I serve on both this committee and the Ag Committee, 
and as you know, my many farmers and ranchers use derivative 
markets to hedge their bets. When they need to access the 
cleared market, they must post margin to a clearing member, 
such as bank, and I have argued for a while that the capital 
rules covering this margin lead to unhealthy derivatives 
markets. Prudential regulators should offset such margin when 
calculating the supplemental leverage ratio. And as you 
mentioned earlier, this committee has approved a bill by Mr. 
Luetkemeyer to legislatively mandate such an offset. This idea 
has bipartisan support too, and the current Democratic CFTC 
members have publicly identified capital rules as inhibiting a 
healthy cleared market--derivatives market, I should say. And 
even further, the Europeans have found a solution to this issue 
that is expected by the end of the year. I was wondering or I 
am wondering why the Fed's recent leverage ratio methodology 
includes merely a question asking for input on the idea of an 
offset for cleared margin client. It seems like the Fed has 
enough evidence already to solve this on its own. Given 
everything Congress, the CFTC, and the Europeans have stated 
about the need for this policy, what information does the Fed 
hope to receive that it does not already have?
    Mr. Quarles. Well, I think that there is always more 
information that we can gain, but I agree with you that my 
personal view is that we ought to be open to changing our 
treatment of initial margin in this way. We have rules at the 
Fed, in particular 23(a) and (b) and regulation W that 
implement them, that address some of these concerns, and we 
ought to use those.
    Mr. Lucas. Absolutely, and I would agree with you on the 
need to be fully prepared for the next step, but it seems to me 
like we are ready for that step to be taken care of.
    One last note regarding margin rules: Mr. Luetkemeyer 
mentioned inter-affiliate margin. I appreciated your response 
to him about making this a priority for you, and I will note 
further that not only is the United States isolated in 
requiring this, but even other regulators here, like the CFTC, 
don't require it. In fact, former Chairman, CFTC Chairman, 
Massad identified initial margin as a very costly and not very 
effective way to enhance risk management that was better meant 
for lowering risk on trades between unaffiliated parties. I 
admit to having my disagreements with the Chairman on many 
things, but his opinion on this topic speaks volumes for me. So 
please make it a priority going forward during your tenure 
because I truly believe relief is needed.
    And with that, Mr. Chairman, in the spirit of brevity, I 
will yield back.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Scott.
    Mr. Scott. Thank you very much, Mr. Chairman.
    Chairman Quarles, let me just ask you, as you noticed, 
several Members of our committee are concerned about the Fed's 
interpretation of what we passed in S. 2155, and you may have 
addressed some of this along the way, but I want to get a 
little clarity here regarding regional banks and what the 
intent was so that we are clear. Most of the regional banks in 
our country are in the South, where I come from, and so we want 
to make sure that it is clear. And in that bill, we ask you to 
remove them from that requirement of the enhanced prudential 
standards, and you did this: You propose a tailored framework, 
but you didn't remove the EPS designation, and you only clearly 
address liquidity rules, but you did not do anything specific 
about capital planning. And capital planning is extremely 
important, but you failed to provide the clarity for our 
regional bankers, and in that way, it could be interpreted you 
really sidestepped the intent of the bill. So I want to give 
you a chance to respond to that. And very quickly, let us know, 
when can we expect the Fed to propose new capital rules for our 
regional banks?
    Mr. Quarles. So I appreciate the opportunity to clarify 
that. It is our--I think that that will come as we make final 
the tailoring proposal, which again, it is our intention to 
move as promptly on that at making it final as we did in 
proposing it. We are gathering comments right now on questions 
such as how we ought to approach capital planning for the firms 
that are in that category. We will evaluate those comments, but 
it is also very, very much our intent to hew to the 
congressional intent in making it final.
    Mr. Scott. Absolutely. We certainly want you to clarify 
that. Now let me go to your speech to the Brookings Institute 
regarding the stress test. And our stress tests are very 
important for the financial stability of our country. Now, what 
you said in your speech was that your proposals will give the 
banks more information about the test in advance, including, 
and I quote here, you said ``additional details on the 
supervisory stress test models and results of and portfolios of 
hypothetical loans and associated loss ratios,'' and this 
sounds very much like you are going to be giving away the exact 
questions on the stress test ahead of time. Can you explain how 
you are not doing that?
    Mr. Quarles. So there are a couple of--I think there are 
maybe three important things to say about that. One, it is 
because we are a democracy and the due process requirements of 
people who are subject to rules from the Fed, because of our 
accountability our need to be clear to you and to the public 
about what it is that we are doing, I think it is a very high 
bar for us to be less than fully transparent around anything we 
do, and that includes the stress test. I do think that that bar 
is met in the case of some lack of transparency around the 
stress test. I won't chew up your time by going into all the 
details about that, but I think we can be much more transparent 
than we have been in the past without giving away the test. We 
are only talking about making clear broad categories of assets, 
what our loss function is on broad categories of assets, not 
every single, not with deep precision as to each category, but 
broader categories of assets.
    And, second, we are talking about the models as opposed to 
the scenarios, and the scenario design, the differing scenarios 
each year, is really what is more akin to the test that is 
being provided, and the models are more akin to the textbook.
    Mr. Scott. Well, let me ask you, but doesn't that mean that 
if you are going to give out hypothetical portfolios ahead of 
time, that they will be able to figure out exactly the 
questions that are going to be on the test ahead of time?
    Mr. Quarles. No, I don't think so because that will--the 
scenarios each year that we test them against will differ from 
year to year. So they won't really be able to respond to that.
    Mr. Scott. Well, thank you. Give my regards to Chairman 
Powell, won't you?
    Mr. Quarles. I will do that.
    Mr. Scott. He is doing a great job.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Colorado, Mr. 
Tipton.
    Mr. Tipton. Thank you, Mr. Chairman.
    And, Vice Chairman Quarles, thank you for being here. I 
come from rural Colorado.
    Mr. Quarles. So do I.
    Mr. Tipton. Great spot to be from. And a lot of our banks 
are obviously community banks, small businesses that are there, 
and as the Chairman has often noted, capitalism will not work 
without capital. But our small banks have had a terrifically 
difficult time being able to deal with a lot of the regulatory 
burdens from the trickle down of Dodd-Frank. During your 
testimony, you cited that the Federal Reserve is working 
diligently with the OCC and the FDIC to be able to reduce some 
of the reporting burdens coming down to our community bank 
organizations while preserving the effective oversight. And 
would you describe a little bit how these efforts to be able to 
reduce the compliance burdens on our smaller institutions will 
extend past banks to the benefit of the everyday consumers, the 
people that I worry about in my district that are just trying 
to be able to earn a living for the financial service products 
that they need?
    Mr. Quarles. Sure. Absolutely. The ability, particularly of 
smaller banks, to provide credit to small businesses--and in 
rural areas, we know that small banks have a particular role in 
doing that--and the purpose of these banks is to provide 
support to the real economy to everyday people who are engaged 
in their businesses. To the extent that we can reduce the 
compliance burden, the cost that these banks face in their 
businesses without in any way undermining the safety and 
soundness of the system, then we increase their ability to 
provide credit to the real economy and particularly in these 
areas of the economy--small business and rural areas.
    Mr. Tipton. So you are comfortable we are going to be able 
to make sure that we do have the regulatory compliance in place 
for these small banks, but also recognizing those costs will be 
passed on to the consumers, so the more we can reduce that the 
better we can create a win-win for our communities.
    Mr. Quarles. Absolutely.
    Mr. Tipton. Great. The Federal Reserve has also recently 
put forward some proposals to be able to tailor the prudential 
standards, and the model that has been laid out by the Board 
has several different tiers, as I know you are aware, from the 
smaller institutions above $50 billion in assets scaled all the 
way up to our global institutions, as well. These scaled 
requirements, could you explain why you feel that that is 
important for the supervisory scheme of the Fed to be able to 
divide it up into the tiers?
    Mr. Quarles. Because I think that it is important generally 
that the nature and character of our regulation match the 
nature and character of the firms that are being regulated so 
that firms that have more systemic consequence, that are more 
complex, that are engaged in riskier activities should be 
subject to regulation that addresses those, and firms that are 
simpler, smaller, and less systemically consequential should be 
subject to regulation that is appropriate to that. That will 
inevitably be less costly regulation, and yet, even though you 
can have less costly regulation, then you ensure that the 
system as a whole is operating most efficiently, that you get 
the safety in the system that you want with the least cost 
across the horizon of firms.
    Mr. Tipton. Great. I appreciate that. And you know, in 
September, Craig Phillips, Counselor to Treasury Secretary 
Mnuchin, he argued that the U.S. fintech industry risks being 
left behind if regulators don't provide proper coordination 
guidance to the industry to be able to keep it competitive with 
the rest of the world, and speaking about the growth of opening 
banking regimes globally, Phillips stated, ``There is a huge 
competitive threat if we don't get the investment right. There 
is a risk that the U.S. will fall behind, and with that, a risk 
that jobs will go elsewhere.''
    What measures do you believe we can take to make sure that 
the U.S. fintech industry does stay competitive with the rest 
of the world, and do these need to be statutorily or 
regulatorily implemented?
    Mr. Quarles. Oh, I do think there could be measures that 
are both statutory and regulatory that help that. The main 
thing I think the regulators can do is try to ensure that the 
regulatory steps that we take to ensure the safety of the 
firm--the safety of the system are again calibrated to be as 
efficient as possible and to not impose unnecessary costs, 
particularly on small startup firms. Obviously, we do need to 
be concerned about compliance. There will be some costs that 
are inevitable, but we always ought to be looking to ensure 
that we again have calibrated the measures to the real risks 
that we perceive as opposed to being excessively costly.
    Mr. Tipton. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes another gentleman from Colorado, 
Mr. Perlmutter.
    Mr. Perlmutter. Mr. Vice Chair, great to have you here.
    A statement and then a couple, three questions for you. So 
the first statement, and I would disappoint the Chair if I 
didn't bring this up, is now we are at about 47, 48 States that 
have some level of marijuana use, and our banking laws and 
generally the Controlled Substances Act are not in line with 
all of these different States. And it is something that I want 
to make sure we get the State laws and the Federal laws to be 
aligned. And a lot of this comes to the intersection of the 
banking sector and to the Board of Governors of the Federal 
Reserve. Number one.
    Number two, just some very general questions. We have had 
about 100 months of job growth, 80 or so under President Obama, 
the last 20 under President Trump. One, is this sustainable, 
and, two, what clouds do you see on the horizon, if any?
    Mr. Quarles. So I do think that is sustainable with the 
right measures. We have a very strong economy currently. We are 
bringing people back into the labor force. We have a low 
unemployment rate, but that has not been associated with 
excessively high inflation, really high inflation at all. We 
have hit our target, but we are not exceeding it. There are--
there is some interesting work that has been done that changing 
educational attainment of the U.S. workforce has actually been 
affecting the natural rate of unemployment, the level of 
unemployment--the level at which unemployment can fall without 
increasing inflation. It may be materially less than we have 
estimated in the past, and that may explain some of what we are 
seeing, but my general assessment certainly is that we can 
continue this strong economy and this strong labor market for 
some period of time.
    Mr. Perlmutter. OK. So let's go into this education 
question and the workforce generally. So, obviously between 
globalization but primarily automation, we see tremendous 
technological strides being made. Do you as the Vice Chair or 
does the Federal Reserve generally, are you keeping an eye and 
are you concerned about the potential for automation, in 
particular eliminating whole occupations, really having a 
dampening effect on the labor force that could be harmful 
generally?
    Mr. Quarles. So, obviously, we do look at that. That is I 
think more of a much longer-term issue. History would tell us 
to be optimistic about that, that the application of technology 
in the past, although it has changed the character of the labor 
force--it has changed what people do--it generally hasn't 
eliminated the need for human work, but it has made humans much 
more productive. I think that that, at least in the early 
stages, is what we are continuing to see here, and certainly, 
in the very near term, the very strong demand for labor in our 
current economy would cause us to be optimistic as well.
    Mr. Perlmutter. Last question on cryptocurrencies and 
digital currencies. How does the Federal Reserve take in these 
new currencies, bitcoin or Ethereum or whatever it might be, 
how do you--does that get added into the monetary supply, 
subtracted from the monetary supply? How do you look at that in 
terms of liquidity and how much there is to spend out there?
    Mr. Quarles. So, currently, the characteristics of all 
those cryptocurrencies would not lead one to consider them--
    Mr. Perlmutter. As a currency.
    Mr. Quarles. --money yet. They really aren't money yet. 
They are an asset. In fact, I think internationally we have 
taken to calling them crypto assets as opposed to 
cryptocurrencies. They are an asset that has been highly 
volatile in price, which makes them less appealing even as a 
store of value and certainly not as a payment mechanism. There 
are issues, and because of that, there are issues around 
criminal activity and consumer protection that I think we ought 
to be appropriately concerned about. Ten, 20 years down the 
road, do either some of these assets or some assets like these, 
do they have a role in the payment system? They could evolve 
some way. There is nothing inherently defective about them, I 
don't think, but at this point, they don't really factor into 
our consideration of the money supply.
    Mr. Perlmutter. Thank you. I yield back.
    Chairman Hensarling. The time of the gentleman is expired.
    The Chair now recognizes the gentleman from Ohio, Mr. 
Stivers.
    Mr. Stivers. Thank you, Mr. Chairman.
    Thank you Mr. Vice Chair. I am over here. Good to see you. 
Right behind Mr. Hill there. I appreciate you being here. I saw 
one of your speeches earlier in the year where you talked a 
little bit about the cybersecurity threat and you talked 
about--you attributed it in part to poor technology hygiene and 
said we need to work to be a step ahead of those who would 
steal or have other nefarious intents with cyber, and I totally 
agree with you. If you look at the history of the industrial 
revolution, what we did was we created as a society worker's 
compensation insurance that increased and improved industrial 
hygiene. I believe that there is a way to use cybersecurity 
insurance to do the same thing. The problem with the static 
standard is the day that you create a static standard, it is 
essentially out of date. So we have to figure out how to create 
a dynamic standard, and one of the benefits of cyber insurance, 
if we create the right safe harbors for folks and create the 
right coverages that make sure that it really covers the 
liabilities, then it can create--the underwriting for that 
cyber insurance can create that dynamic standard, and I would 
ask that you guys think of that, and I am curious if it is 
something that you have looked at as a way to mitigate and 
create a dynamic standard in cybersecurity protections and 
avoid some of these petty jurisdictional issues we are fighting 
now between the committee across the hall.
    Mr. Quarles. So I think that is a really interesting idea. 
I myself have not given thought to it. I am sure there must be 
some folks on the staff of the Fed who have, and I am actually 
adding it to my to do list now to go back and find them because 
I think that many aspects of what you just said are 
interesting.
    Mr. Stivers. I would love to sit down privately and talk to 
you guys and work with you guys on this. I think it is 
something that will help build private capacity. I think it is 
something that will help increase the technology hygiene and 
create active and passive defenses that we can price so people 
understand how much they want to invest in that based on what 
their premiums would be. It creates a pricing mechanism to 
create the right incentives in cyber investment, and that is 
one of the concerns that some companies have had is, how do you 
price what you are willing to do? And it would put a price on 
it. So just an idea that is one of the things obviously 
insurance does; it is a pricing mechanism. So I hope you will 
go back and take a look at it, and I love the dynamic nature of 
it. And I know from your speeches, you have talked about that.
    Switching subjects to one other thing that I know Mr. 
Luetkemeyer and Mr. Lucas brought up, the inter-affiliate 
margin issue. I just want to ask you to look at that. While 
inter-affiliate swaps don't have all the hassles that other 
swaps do, this whole idea of additional counterparty exposure 
that isn't really there has led to $29 billion being locked up 
in margin that doesn't really need to happen, and that is money 
that could be used to help those firms create jobs and help 
those firms create capital in our system that would echo and 
help our economy that is now growing, but there is still a 
great need for capital, and I hope you will take a look at it. 
And we are ready to work with you. It has been a bipartisan 
issue, and I want to work with you guys going forward to try to 
get to the right answer on that.
    Mr. Quarles. I appreciate that. Very much looking forward 
to working with you on it, and as I had indicated, I do think 
that it is something that is ripe for us to consider.
    Mr. Stivers. Thank you. I yield back the balance of my 
time, Mr. Chairman, now that Mr. Royce is here.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Green.
    Mr. Green. Thank you, Mr. Chairman.
    I thank the Ranking Member as well, and I thank the witness 
for appearing today.
    I would like to visit with you briefly about the CRA. As 
you know, it was developed and put in place, if you will, in 
1977 to deal with redlining, and I think that it has been quite 
effective. I am looking at at least one indication that some $2 
trillion in small business and community development loans have 
been made since 1996.
    The CRA is used to evaluate applications for future 
merging, charters, acquisitions, bank openings, and deposit 
facilities. Do we have a record that you can share with us of 
the number of mergers that have been held up or that have been 
denied because of the CRA?
    Mr. Quarles. I don't have those figures for you today, but 
they are obtainable.
    Mr. Green. I would like to have them, if I may. Do you know 
of any merger currently--this would just be from your 
recollection--that is being held up because of CRA?
    Mr. Quarles. I am not aware of one that is currently being 
held up.
    Mr. Green. A charter that is being held up because of CRA?
    Mr. Quarles. No.
    Mr. Green. Acquisition?
    Mr. Quarles. Again, I am not aware of anything.
    Mr. Green. Bank opening?
    Mr. Quarles. No.
    Mr. Green. Deposit facility? I mention these to you, Mr. 
Vice Chairman, because we hear a lot of complaints about the 
CRA, but I am not finding the empirical evidence to indicate 
that there is a lot of suffering because of it. I think that it 
is doing a lot of good, and I think that banks are--most of 
them are getting satisfactory reports about 98 percent. So, if 
the banks are getting satisfactory reports and CRA seems to be 
working fairly well, the question becomes why would we change 
it such that it might be weakened to some extent? Now weakened 
depends upon your point of view, of course, but I am concerned 
about the OCC and some of the actions that are taking place. I 
want to see businesses blossom, especially small businesses, 
but I am also concerned about the other aspects of CRA, and I 
just don't see the need to make the changes. I am open to a 
review and someone working with me, but I am not finding the 
empirical evidence of the necessity to weaken it, and perhaps 
you can give me some additional thoughts.
    Mr. Quarles. So I would completely agree with you. I don't 
think that we should be weakening the CRA. My view is almost 
because of--I mean, the banks do comply with the CRA, and they 
have a good record of compliance for all the reasons that you 
cite, but it has become a little formulaic. Both our 
supervisors and the banks themselves know that if they do X, Y, 
and Z, they will pass. And X, Y, and Z has become just a little 
unimaginative. And I think that you can actually have more 
effect in really supporting the low- and moderate-income 
portions of the communities that banks serve by taking this 
opportunity to reinvigorate the CRA. So I view this CRA reform 
movement that the OCC has taken the lead on but that the other 
banking agencies, including the Fed, have participated in and 
not reluctantly from that viewpoint as a way to really make the 
CRA achieve the objectives that were identified in 1977 in a 
way that is continuing to be relevant in the 21st century, not 
to weaken it at all. I do think that if we work together, we 
can do that, and I would be delighted to work with you on that.
    Mr. Green. Well, I am appreciative, and I respect your 
response. The term that you have used is ``reinvigorate,'' and 
I think that is a good term. I tend to think of strengthening 
it, and maybe we are saying the same things, and it may be a 
question of semantics, but I am amenable to working with you 
and others to strengthen it. I think that you are right, we can 
do more. It can better serve the communities. Especially given 
that we are going to online banking now, there will be some 
questions that we will have to resolve that we haven't 
confronted, and also we are losing a lot of the brick-and-
mortar facilities. Banks are moving to centralized locations 
for the most part, and then they will have online facilities. 
So I think that we do have to think about these things, but I 
want to think about them from the rationale that we had in 1977 
when we instituted the CRA. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Royce, Chairman of the House Foreign Affairs Committee.
    Mr. Royce. Thank you, Mr. Chairman, very much, and just to 
recap here in September 2008, your former boss Treasury 
Secretary Paulson declared that the U.S. Government would step 
in and place Fannie Mae and Freddie Mac in conservatorship and 
provide enough taxpayer support for the GSEs to fulfill our 
financial obligations. We effectively nationalized the GSEs in 
2008. As you know, shortly after, the Fed embarked on an asset 
purchase program that included well over 1 trillion of 
mortgage-backed securities from the now effectively 
nationalized GSEs. Today, there is talk that this 
Administration may seek to release the GSEs from 
conservatorship. A release of the GSEs out of conservatorship 
would reverse that structure that was put in place in 2008 and 
would raise some serious issues from a monetary policy 
standpoint I think for all of us. Instead of purchasing assets 
from two government-owned and controlled companies, you would 
be purchasing assets from companies owned and operated by 
private shareholders.
    As a member of the FOMC, you have thought about what it 
would mean for the Fed's current portfolio and the future 
purchases should these institutions return to being privately 
owned and controlled companies. I know you have, and you might 
want to share your thoughts on some of this. And before we get 
to that, let me say that I regret that we were not able to 
resolve this issue during my time here in Congress, but I would 
like to caution against making a bad situation worse. If talks 
about releasing the GSEs from conservatorship ever reach you at 
the Fed I sincerely hope that you will recognize the important 
role the Fed has played in this space dating back to the 
1990's. I had many conversations with Alan Greenspan on the 
need for systemic risk regulation over the GSEs into the early 
2000's. And, in fact, I had legislation here that we were not 
able to pass in order to try to control that systemic risk and 
in order to try to reduce the leverage in those portfolios.
    I hope that you consider the potential impact on monetary 
policy and consider the massive moral hazard problem, which is 
the thing that worries me most about all of this, that would be 
created by releasing these companies back to shareholder 
control. We have seen politics and short-term profits went out 
over good policy when it comes to the GSEs in the past. I hope 
this Administration and this Congress have learned something 
from this failed duopoly and do the hard work necessary to 
reform our housing finance system, but in the interim, there is 
your role in this, and so, if I could ask you to respond, I 
would greatly appreciate it.
    Mr. Quarles. So thank you.
    Certainly, with respect to the GSEs, in my earlier Treasury 
service, that was a topic that I gave a lot of thought to and 
very much share your concern that we need to ensure that the 
risk around those institutions is appropriately handled and the 
structure of them does not create systemic risk in our 
financial system.
    Mr. Royce. Well, the reason it is so important is that the 
moral hazard that was created by that and--it was not the only 
factor. But certainly, at 100-to-1 leverage, it became a key 
factor. And the fact that so many other institutions held this 
as basically in their--under the law as equivalent of cash--
    Mr. Quarles. Right.
    Mr. Royce. --meant that suddenly they were undercapitalized 
so that when housing finance went down, it meant that 
eventually the financial system nearly went down. And so now we 
find ourselves with this reality also that once these 
institutions that are neither--that really have an opaque 
structure where the investor doesn't know who really owns them 
but presumes that the government will bail out the 
consequences--and, of course, that has been proved--it creates 
an inability to price risk for these institutions. So, at this 
point, I was looking for some assurance in terms of your 
leadership in trying to do something to prevent that 
catastrophe from occurring again.
    Mr. Quarles. It is something that we give thought to as we 
consider the normalization of our balance sheet, definitely.
    Mr. Royce. Thank you. Mr. Quarles, thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Arkansas, Mr. 
Hill.
    Mr. Hill. I thank the Chairman for the time. I appreciate 
Mr. Quarles being here. It is good to see you before the 
committee. I appreciate your service.
    I want to echo something that Mr. Lucas discussed with you, 
which is mortgage servicing rights. I have been in Congress for 
2 terms, 4 years, and this has been a topic that we have talked 
about for all those 4 years with no progress. And in your role 
in the private sector and now as Vice Chairman of the Fed, do 
you acknowledge that mortgage servicing rights are an 
acceptable banking practice for a commercial bank or a bank 
holding company to be in that business?
    Mr. Quarles. Absolutely.
    Mr. Hill. And don't you agree that Basel III and the 
resulting--results of that have driven that business out of the 
depository institution sector into shadow banking and other 
investors?
    Mr. Quarles. It has certainly been a material factor, yes.
    Mr. Hill. Yes.
    So we have--I know the default answer today from the Fed is 
soon.
    Mr. Quarles. Soon.
    Mr. Hill. But I would invite you to commit that we will 
have our mortgage servicing rights regulatory proposal out 
before the end of the year. Is that possible?
    Mr. Quarles. I don't know that it will be possible before 
the end of the year, but we are not talking about before the 
end of next year. So it will be sooner than--it will be soon.
    Mr. Hill. So now I have gotten you to say ``sooner'' rather 
than ``soon.'' That is good. I like that. Thank you.
    We also talked about--earlier today about Volcker. And you 
were asked, I think by the Chairman, an interesting proposal, 
which is on this idea of harmonization.
    Could the interagency process though the SIFI act with 
leadership from the Fed really push regulatorily what I have 
tried to push legislatively, which is harmonization with the 
Fed as the leader among equals on that topic? Because we have 
serious record over the past--since the passage of Dodd-Frank 
of misinterpretation and conflicting interpretation of this 
rule. I don't think it is going to be resolved by Volcker 2.0. 
I really don't. I think these are hard issues. I think they are 
made difficult by the statute itself. I don't believe the 
agencies are going to be able to wordsmith their way around the 
statute.
    So this harmonization piece that was left out of 2155 I 
think is really an important issue.
    Do you believe that is realistic, that the agencies could 
work together? When I say ``the agencies,'' I don't mean 
banking. I mean CFTC and SEC as well.
    Mr. Quarles. So it is certainly not impossible. The work 
right now on simplifying Volcker is, I think, proceeding very 
well. And that is--while it is being pushed by the Fed, all the 
agencies are participating equally, and I think exactly as one 
would want and as exactly as one would expect under the--if the 
proposed legislation were in effect.
    And so I would think that one could move that at least in 
the initial circumstances. You could maybe see that happening. 
I am not sure how sustainable it would be over many different 
administrations, different people sitting in these seats. The 
current group of regulators works very well together for a 
whole variety of reasons. I don't know that that would be a 
sustainable solution, although it could be a near-term one.
    Mr. Hill. Well, I certainly will work in the remainder of 
this Congress and early in the next Congress to push this 
harmonization idea. We had 300 votes for that in this House. 
And so I want to make sure that, on a bipartisan basis, that we 
can move that forward.
    I also heard you address with Mr. Luetkemeyer CECL. And I 
was pleased to read in the last couple weeks that suddenly 
Jamie Dimon at JPMorgan Chase has learned about CECL. I was 
pleased to hear his comments on that.
    In meetings with the district bank presidents around the 
country, they don't seem to have that issue brought to their 
table, and I would encourage you to reach out to the district 
bank presidents and proactively ask for comments about CECL. I 
think the Feds should take a leadership role in dealing with 
FASB (Financial Accounting Standards Board) pronouncements and 
not treat that as something over here because of the severe 
impact on compliance costs for your institutions you supervise 
and the unintended consequences of it as it relates to capital 
where, as you noted a few minutes ago, it could be essentially 
a redundant exercise to what we are already doing. So I would 
urge you to do that.
    And I thank you for appearing today. And I yield back the 
balance of my time, Mr. Chairman. Thank you.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Loudermilk.
    Mr. Loudermilk. Thank you, Mr. Chairman.
    And thank you for being here today. And I trust you 
received the letter I sent on September 28 with most of the 
Republicans regarding the SIFI regulations. And I am looking 
forward to your response soon. And my questioning is going to 
be around that area.
    Do regional banks with less than $250 billion in assets 
currently pose a systemic risk to the economy?
    Mr. Quarles. I would say, with the current configuration of 
their activities, none of them individually does, no.
    Mr. Loudermilk. OK. And that is my feeling, and especially 
working with a lot of the banks, especially regional banks back 
home. And I agree. I think with most of the data the Fed has, 
it shows they don't pose a systemic risk.
    And so some of the concerns--and I appreciate my colleague 
bringing up CECL--is it appears that there may be a pro-
cyclical effect that CECL may have in that incentivizing making 
loans in a strong economy but decentivizing those loans in a 
downward economy. I understand maybe you have the same feelings 
about that, that you mentioned in a speech. Can you elaborate?
    Mr. Quarles. So I think that we need to understand much 
better than we do what the effects of CECL would be, both the 
so-called day one effects and then the longer-term effects, 
including effects during a period of stress.
    We have gotten a lot of input already with respect to what 
that would be, but a lot of it points in different directions, 
which is one of the reasons why we have said that--for how CECL 
reserving relates to our capital requirements, we are going to 
phase that in so that we can have more experience with how it 
actually operates in practice before it actually begins to 
affect, essentially add to the loss absorbency with our capital 
regime. So we will be studying that and phasing it in over time 
so we can see how that works because I think there is a lot 
that we don't really know.
    Mr. Loudermilk. OK. And I appreciate that.
    Last question, and it actually looks like I may have a 
little time to reserve back for once.
    Some of the banks that I talk to back home have concerns 
that, if the Federal Reserve banks will actually abide by the 
changes to the SIFI regulation when they are supervising banks, 
the concern that it may not flow; these changes may not flow 
all the way down. Can you commit that that will happen with 
these updated changes?
    Mr. Quarles. Yes. We are devoting a lot of resources to 
ensure that these supervisory messages flow throughout system. 
As you can appreciate, that is a lot of work. It is not a 
question of turning on a switch, but it is work that we are 
very much engaged in.
    Mr. Loudermilk. OK.
    Thank you, Mr. Chairman. I yield back.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from West Virginia, 
Mr. Mooney.
    Mr. Mooney. Thank you, Mr. Chairman.
    And, Mr. Quarles, good see you again.
    The Trump Administration has frozen implementation of Basel 
III's punitive treatment of mortgage servicing assets.
    What are your long-term plans for MSAs? And will you be 
returning to the treatment of MSAs to pre-Basel III for 
community banks?
    Mr. Quarles. So we have a proposal out that would 
significantly increase from Basel III the proportion of 
mortgage servicing assets that can count for capital. It would 
not go all the way back to--the proposal would not go all the 
way back to pre-Basel III levels, but it is a material 
increase. And we are in the--we are gathering comments and in 
the process of evaluating those comments to determine whether 
there should be additional changes.
    Mr. Mooney. OK. Well, I have been working on my, with my 
staff, on legislation to support community banks, who are, 
frankly, suffering under these Basel III absurd treatment of 
these assets. And I would like to work with you, take a look at 
the draft legislation when I get it, and possibly recommend 
some improvements so we can get community banks lending again.
    Mr. Quarles. Very much I would be delighted with you on 
that.
    Mr. Mooney. And then one additional question, really from 
my friend from New York, Congressman John Faso. He successfully 
sponsored an amendment to the CHOICE Act, which would have 
restored the ability of directors of a bank organized as a 
mutual holding company by resolution to waive dividend 
returning to the status quo prior to Dodd-Frank. Unfortunately, 
this provision was not included in our Dodd-Frank reform passed 
earlier this year. So Representative Faso had sent you a letter 
in May 2018 whether the Fed can undertake a review of its 
regulation to remove this unnecessary impediment to MHC 
operations.
    Can you advise on the status of his request or whether you 
believe this change can and should be made?
    Mr. Quarles. So we are looking into that. It is a 
complicated situation, but we are looking into what can be 
done.
    Some of it isn't really even legal interpretation or 
changes that we can make as opposed to changes in practice, but 
I don't have a resolution for you today, but we are working on 
it.
    Mr. Mooney. OK. It is a long, three-page letter. I have a 
copy of it I can leave with you if you want to review it again.
    Mr. Quarles. It is on my desk.
    Mr. Mooney. You got it?
    OK. Thank you.
    Mr. Quarles. Because it is extremely interesting. It is not 
easy.
    Mr. Mooney. Again, I appreciate your good work.
    And, Mr. Chairman, that exhausts my time. I yield back the 
balance of my time.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from Ohio, Mr. 
Davidson.
    Mr. Davidson. Thank you, Mr. Chairman.
    Mr. Quarles, thank you for your testimony. Thanks for the 
service that you are doing for our country in your role as Vice 
Chairman of the Federal Reserve.
    And it is an incredibly important role in the regulatory 
environment and, in fact, has taken a strong international 
component. We have talked a lot about Basel. We have talked 
about the importance of clarity on Volcker and, frankly, the 
implementation of the major reform that we were able to 
successfully pass through the House, the Senate, and get the 
signature on it. So I trust you guys are fairly busy.
    One of the areas I have taken a strong interest in is 
crypto assets. While the U.S. is a global leader in the 
financial sector, my fear is that we are losing ground to other 
prominent nations, such as Singapore, Switzerland, and the 
U.K., due to lack of legislation and regulatory clarity with 
these assets.
    I was pleased to hear you use the phrase ``crypto assets,'' 
because it recognizes they are not generally currencies, and, 
in fact, there are all sorts of varieties: Crypto securities, 
crypto commodities, and certainly things that approach 
currencies.
    One of the big challenges for them to be currencies, 
however, is ubiquity. And it is hard to have ubiquity without 
regulatory certainty.
    I was quite alarmed, however, when you talked about 
something over a 10-year, 20-year horizon on something that 
could be used in a payment system. And the reality is, if you 
look at the way a ripple can settle in seconds versus the 
payment system we are using today, you are in the process of 
dealing with that. I believe that open blockchain technology 
offers solutions.
    Could you talk about the intersection of that that is real 
time, something you are actively working on in payment systems, 
and open blockchain versus one that I think you guys are 
contemplating that would be quite closed and controlled?
    Mr. Quarles. So, with respect to--so I completely agree 
with you that the technology--not just the blockchain 
technology, although that is obviously very important, but then 
the specific application of the blockchain to some of these 
crypto assets is--I think there is a lot that is quite 
interesting about that.
    My only point was that, currently, until society gets a 
handle on how they are going to value these, it makes it 
difficult for any of these assets, whatever their technological 
advantage is, to be the type of store of value or constant--to 
have--for users to have enough confidence in their continued 
value to really be a substitute for currency. Over time, I 
could see that happening.
    On the payment system, what we are trying to do is to 
catalyze the private sector to come to solutions there because 
of limitations on our own authority, a view of what is the 
appropriate role of the Government/Federal Reserve versus 
private sector solutions. So we are trying to catalyze private 
sector solutions as much as possible.
    And so it really will be up to them how they take advantage 
of some of these technological advances and which of them they 
think are most--
    Mr. Davidson. Thank you for that. Because I think a lot of 
people will be encouraged to hear that you are not looking at 
contemplating crowding out the private sector there.
    Mr. Quarles. Right.
    Mr. Davidson. And, to the factor of volatility, certainty, 
without regulatory certainty, we are likely to see more 
volatility.
    And, last, on that, there are now stablecoins that are out 
there. They are essentially like pegged currencies, so it takes 
away the volatility that would be inherent.
    As my time is rapidly winding down, I would just add to the 
dialog that has already occurred on CECL and the role of FASB. 
I do believe that FASB has had market distorting 
pronouncements. And to the extent that the Fed can join the SEC 
in being a buffer against irrational actions by FASB, we would 
greatly appreciate your efforts there.
    I would like to yield the balance of my time, Chairman.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. Budd.
    Mr. Budd. Thank you, Mr. Chairman.
    And, Mr. Quarles, good to see you again. Again, thank you 
for your hard work.
    I want to start with CECL, or the current expected credit 
loss, and discuss that a little bit. I think my colleague Mr. 
Hill from Arkansas mentioned that just a few moments ago.
    But you have said in the past that regulators seem to agree 
that, in times of stress, the CECL accounting standard will add 
pro-cyclicality to the banking system. So I know that 
regulators have proposed phasing in over 3 years the regulatory 
capital impact at the time of adoption.
    However, due to the increased pro-cyclicality, in my view, 
the phase-in would have little effect if the economy goes into 
a slowdown shortly after it were to be adopted.
    So can you tell us, is there any consideration being given 
to an ongoing add-back to regulatory capital for the impact of 
CECL until this new regime, one that is CECL responsive, can be 
agreed on? And if so, how long do you think it will take to 
finalize a capital plan like that?
    Mr. Quarles. So there is not a concrete plan to have an 
interim capital add-back to account for CECL. But obviously we 
are looking at, during this phase-in period--and one reason for 
the long phase-in period is for us to consider what responses 
there ought to be for us to see how CECL operates in practice 
and then to consider whether there ought to be a response.
    If we saw that there was a negative effect that we saw 
happening more quickly than during this phase-in period, 
perhaps because of changes in the macro economy, then we would 
accelerate what it is that we were doing.
    Mr. Budd. OK. Or slow it down, depending on what would be 
needed?
    Mr. Quarles. Right.
    Mr. Budd. I want to switch over now to a smaller part of 
your portfolio: Insurance oversight. And I know that you have 
extensive knowledge of the way that the international standard 
setting and regulatory cooperation is done. I know that you are 
familiar with the concept of mutual recognition.
    One of the areas where a large bipartisan majority of this 
committee is trying to achieve mutual recognition is for our 
State-based insurance regulatory system with the IAIS 
(International Association of Insurance Supervisors) on their 
development of an international capital standard, ICS.
    The IAIS, through both their actions and words, has 
repeatedly made it clear that their goal is to force changes to 
the entire U.S. State-based insurance regulatory system to make 
our insurance solvency regime look exactly like Europe's 
through Solvency II. I find this unacceptable for our U.S. 
insurance consumers, our markets, and our industries.
    There has been a publicly released document from the IAIS 
detailing an agreement reached in Kuala Lumpur, and this was in 
November 2017, the IAIS proclaims that the base parameters of 
the ICS are going to be Eurocentric. The release also does 
leave the door open to having the U.S. system formally 
recognized by the IAIS. But numerous statements from them and 
their officials make it clear that is not their goal and that 
their end goal is to, in fact, force significant changes to the 
U.S. system.
    So my question is this: Will you commit to us today to 
stand up to European members of the IAIS who are attempting to 
use that forum to force us to adopt their system? I will let 
you--that was a long question, so I will let you--give you a 
few moments.
    Mr. Quarles. So the Fed in its--which sits on the IAIS, as 
you know, has been working very closely with the State 
regulators' so-called Team USA approach in ensuring that the 
building-block approach to capital, which reflects the U.S. 
system, is accepted in the IAIS. And I think that that is--I 
actually think that that process is working reasonably well. 
The reports that I get from our delegation are that they--
that--well, it is a process that the IAIS is--that they are 
reasonably happy with how that is proceeding. In any event, we 
are very committed to it, and we are working with the State 
regulators on it. And certainly that is not over.
    Mr. Budd. I want to add just another piece to that 
question. So would you commit today that you will not allow the 
Federal Reserve to be part of any final agreement on the ICS 
that does not formally recognize the U.S. system of insurance 
regulation, one that has worked well for us for the for last 
150 years?
    Mr. Quarles. I mean, we certainly wouldn't have the ability 
to commit to anything that would change our domestic insurance 
system at all, so--
    Mr. Budd. OK. Chairman, my time is nearly expired. I yield 
back.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from Indiana, Mr. 
Hollingsworth.
    Mr. Hollingsworth. Happy Wednesday. I am glad that you were 
here and have reached what I think is the end of the line, like 
Little Round Top at Gettysburg, you have reached the end.
    I wanted to work through two questions, two very separate 
questions. You had an earlier exchange with Representative Barr 
talking about some foreign banks that operate in the United 
States and how you had recently issued guidelines, I think on 
October 31, around regional banks, or what I consider regional 
banks, that are domestic and providing some updated guidance or 
views on what that updated guidance may look like, right? And I 
think you referenced that these foreign banks that are 
operating in the United States aren't identical to those 
domestic operating banks, and so there may need to be some 
deviations from that or some further reviews.
    First, do you have a timeline of what that further review 
may look like? And then, second, do you know of any deviations 
that may exist or need to exist for these foreign bank--I think 
in previous testimony and a lot of speeches you have expounded 
the philosophy that banks should be competing on a level 
playing field and the importance of foreign banks operating in 
the United States for consumers, for borrowers, for depositors, 
and how we want to maintain that level playing field.
    So I am curious about those two things.
    Mr. Quarles. So, on the timeline, I think we should have a 
proposal for you early next year.
    Mr. Hollingsworth. Great.
    Mr. Quarles. With respect to the foreign banks, the 
tailoring for the foreign banks.
    With respect to specific differences, again, as you stated, 
as I have stated and completely agree with, the foreign banks 
are an important part of our domestic financial system, and so 
we need to ensure that there is a level playing field for them. 
They are different than a domestic bank of the same size for a 
few reasons. So the foreign banks are organized. You have the 
intermediate holding company that contains the nonbank assets 
that are enhanced potential standards directly applied to. But 
they operate--there is always a branch of the larger parent 
that also operates in the United States, isn't directly covered 
by that regime. They can exchange assets. They operate in 
concert to some extent. That, again, changes a little bit the 
character of how they think about them. They are part of a 
larger global organization. That can be stability enhancing.
    Mr. Hollingsworth. It can be positive; it can be negative.
    Mr. Quarles. It can be positive; it can be negative. And so 
you need to think about that.
    So I don't view it as a one-for-one transposition if you 
have an intermediate holding company of X size, it ought to be 
treated exactly the same as a domestic holding company of X 
size in order for there to be a level playing field, because 
there are those differences.
    Mr. Hollingsworth. So I just want to encourage that even if 
there are deviations in the mechanics by which you arrive, the 
goal is to arrive at the same place.
    Mr. Quarles. Precisely.
    Mr. Hollingsworth. OK. And I just want to make sure that we 
continue to encourage that. I want them to be able to compete 
on a level playing field even if there are mechanical 
differences in how we arrive at that.
    Second question, far afield from that. Much has been talked 
about large banks, large institutions, and some of the work 
that has been requested or has not been requested in how we 
might further fine-tune and make more efficient the regulatory 
environment. I think everybody here concurs that we want to 
watch our large institutions closely, but I am really, really 
concerned about how we are layering on surcharges and looks and 
reviews on top of reviews and how those begin to pile up and 
create really distortionary effects for our larger 
institutions. So, again, trying to create an environment where 
we can get to more efficient regulation at the super large 
institutions as well.
    Do you see that there is any opportunity to be able to make 
that more efficient, more transparent and, thus, more effective 
both for those that are regulated and consumers that are a big 
part of the consumer base for those large institutions?
    Mr. Quarles. I do. I think that some of the changes that I 
have talked about recently, evolution of our stress-testing 
practices, which are very important for the largest 
institutions, and changes in those practices can happen that 
significantly reduce regulatory burden on those institutions 
without affecting their resiliency or the overall loss 
absorbency of the firms or of the system.
    I do think we need to think about the international level 
playing field for our largest firms and not so much--I mean, 
certainly it is important whether the playing field is fair to 
them, to domestic U.S. firms, but for the systemic reason that, 
if you have an unlevel playing field, you will have risky 
activities moving to the weakest parts of that system, which it 
may not be our firms but that ultimately we in the U.S. may 
suffer from if you get these systemic imbalances that result 
from regulatory incentives we create. So we need to be thinking 
all of that through.
    Mr. Hollingsworth. Right.
    I just want to make sure and continue to encourage you, as 
we look at how we manage the regulatory framework for our super 
large institutions, that we don't layer in redundancy after 
redundancy without point--and we continue to try to make a 
framework that is clear, transparent, but also efficient, and 
to remember that millions of depositors, millions of consumers, 
millions of borrowers do business with these large banks every 
single day. And it is important to those to make sure that we 
continue to get to a more efficient framework, not just a 
larger, more redundant one.
    So thank you so much.
    Chairman Hensarling. The time of the gentleman has expired.
    There are no other Members remaining in the queue. Thus, I 
would like to thank the witness for his testimony today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    Governor Quarles, we would ask that you respond as promptly 
as you are able.
    This hearing stands adjourned.
    [Whereupon, at 12:34 p.m., the committee was adjourned.]

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                           November 14, 2018
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