[Senate Hearing 115-17]
[From the U.S. Government Publishing Office]




                                                         S. Hrg. 115-17

 
       FOSTERING ECONOMIC GROWTH: THE ROLE OF FINANCIAL COMPANIES

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                                   ON

EXAMINING THE STATE OF THE ECONOMY, THE SERVICES PROVIDED BY FINANCIAL 
 COMPANIES TO CONSUMERS AND MARKET PARTICIPANTS, AS WELL AS CONSUMERS' 
  AND MARKET PARTICIPANTS' FINANCIAL NEEDS AND THE STATE OF ECONOMIC 
               DEVELOPMENT IN COMMUNITIES ACROSS AMERICA

                               __________

                             MARCH 28, 2017

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban Affairs
  
  
  
  
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      MIKE CRAPO, Idaho, Chairman

RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada                  JON TESTER, Montana
TIM SCOTT, South Carolina            MARK R. WARNER, Virginia
BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada

                     Gregg Richard, Staff Director

                 Mark Powden, Democratic Staff Director

                      Elad Roisman, Chief Counsel

                      Jared Sawyer, Senior Counsel

                Brandon Beall, Professional Staff Member

                Graham Steele, Democratic Chief Counsel

            Laura Swanson, Democratic Deputy Staff Director

                 Elisha Tuku, Democratic Senior Counsel

                       Dawn Ratliff, Chief Clerk

                     Cameron Ricker, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                        TUESDAY, MARCH 28, 2017

                                                                   Page

Opening statement of Chairman Crapo..............................     1
    Prepared statement...........................................    38

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2

                               WITNESSES

Robert Heller, Former Governor, Board of Governors of the Federal 
  Reserve System.................................................     4
    Prepared statement...........................................    38
    Responses to written questions of:
        Senator Brown............................................    88
Donald Powell, Former Chairman, Federal Deposit Insurance 
  Corporation....................................................     5
    Prepared statement...........................................    50
    Responses to written questions of:
        Senator Brown............................................    88
        Senator Heller...........................................    89
Thomas C. Deas, Jr., Chairman, National Association of Corporate
  Treasurers.....................................................     7
    Prepared statement...........................................    55
    Responses to written questions of:
        Senator Brown............................................    90
        Senator Toomey...........................................    91
Deyanira Del Rio, Coexecutive Director, New Economy Project......     9
    Prepared statement...........................................    63
    Responses to written questions of:
        Senator Brown............................................    92
William E. Spriggs, Professor of Economics, Howard University, 
  and Chief Economist, AFL-CIO...................................    11
    Prepared statement...........................................    81
    Responses to written questions of:
        Senator Brown............................................    93

              Additional Material Supplied for the Record

``Risk Weights or Leverage Ratio? We Need Both'', American Banker    95

                                 (iii)


       FOSTERING ECONOMIC GROWTH: THE ROLE OF FINANCIAL COMPANIES

                              ----------                              


                        TUESDAY, MARCH 28, 2017

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 9:34 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Mike Crapo, Chairman of the 
Committee, presiding.

            OPENING STATEMENT OF CHAIRMAN MIKE CRAPO

    Chairman Crapo. This hearing will come to order.
    This morning we are holding a hearing on ``Fostering 
Economic Growth: The Role of Financial Companies''. One of our 
witnesses has been held up in traffic, but we are going to go 
ahead and start, and he will join us as traffic allows.
    A strong, vibrant economy is important for American 
consumers, businesses, and the stability of the financial 
sector.
    Financial companies of all sizes and forms provide critical 
services to businesses and consumers, helping businesses manage 
operations, entrepreneurs get funding to start companies, and 
average citizens buy a first home or deal with a financial 
crisis.
    As policymakers, we must diligently and frequently study 
the state of our economy, our regulatory framework, the use of 
capital, and provision of financial services.
    According to recent studies, since the crisis, large 
businesses are experiencing a more robust recovery than small 
firms and entrepreneurs. One of the main drivers of 
underperformance by new and small firms compared to their 
larger counterparts is their limited access to credit.
    There are direct links between post-crisis regulation and 
restricted finance. Data from the St. Louis Federal Reserve 
shows that a mere decade ago, small banks made more business 
loans compared to larger banks. That is no longer the case.
    Consumers, many on the periphery of mainstream banking, are 
seeing certain products and product features disappear. For 
example, one product line, short-term, small-dollar credit, is 
expected to see a 60- to 70-percent decrease in market size--
according to the CFPB--with virtually no other avenue for 
product users to access credit.
    These are a few examples that support the need for a 
thorough review of our regulatory framework and the role of 
financial companies in the country. I have been encouraged by 
President Trump's Executive orders and memoranda on regulations 
and core principles for regulating the financial system. The 
Treasury Department has begun its review, and I look forward to 
seeing the recommendations it puts forward on how well existing 
laws and regulations promote or inhibit economic growth.
    In addition, last Monday, Senator Brown and I announced a 
formal process to receive stakeholder proposals that will help 
consumers, market participants, and financial companies 
responsibly participate in the economy in a more effective and 
efficient manner.
    And last Tuesday, the Federal banking regulators released 
their EGRPRA report, which sought to identify regulations or 
laws that are outdated, unnecessary, or unduly burdensome. 
Taken together, these actions will provide a clearer picture of 
what is working and what is not working within our financial 
regulatory framework.
    Today this Committee will study how financial companies 
participate in the economy, with a goal of better understanding 
their role in fostering economic growth. Our witnesses have 
diverse backgrounds, and I look forward to hearing their unique 
perspectives on this issue.
    For example, why are community financial institutions 
important in local communities? And what happens when 
communities begin losing financial institutions?
    What services do financial companies provide businesses of 
all sizes? And are services being deployed in an effective, 
efficient manner?
    How can large financial companies help U.S.-based companies 
compete in global markets?
    Senator Brown and I have started working together on a 
bipartisan basis to hear the thoughts and concerns of various 
stakeholders and Members of the Committee. It is my hope that 
Members will find this to be a thorough, inclusive process, and 
one that is structured for success.
    Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman, for holding this 
hearing. I appreciate the 9:30 start time today, too. And I 
appreciate the process that you have put in place that you 
referenced in your opening remarks for the Committee to discuss 
economic growth. I hope that with the Committee's call for 
proposals we will be able to put some new ideas on the table 
that would gain broad and bipartisan support.
    Rolling back Wall Street reform clearly does not fit the 
bill. Our financial system is more stable because of Wall 
Street reform, banks are better able to handle losses, and 
consumers are better protected from the types of predatory 
loans that led to the crisis. Too many Americans still have not 
recovered from the 2008 financial crisis--and this is important 
to remember--when 9 million workers lost jobs, 5 million 
homeowners were foreclosed upon, people lost trillions of 
dollars from their retirement saving. Remember that: 9 million 
lost jobs, 5 million homes foreclosed on, people lost trillions 
from their retirement savings.
    This crisis came on top of economic policies that, since 
the 1970s, have shrunk the middle class. Minority communities, 
particularly African Americans, were hit even harder by the 
crisis and have had the most difficulty rebuilding wealth and 
buying homes and saving for retirement and reentering the labor 
force.
    I understand why so many Americans are angry. Nearly a 
decade after the financial crisis, the wealthy have pocketed 
almost all of the gains, but wages for most Americans have been 
stagnant. Wall Street is once again making record profits, and 
many indicators--stock prices, business lending, consumer 
lending--are at pre-crisis levels or higher.
    Wages of Wall Street employees have increased 70 percent 
since the 1980s when they were comparable to the wages of those 
in other industries. During that same period, good financial 
jobs disappeared as a result of trade and tax policies that 
favored investors over workers. Even within the financial 
sector, the gains have been far from even. Bank workers at the 
low end of the pay scale saw their real wages decline from 2000 
to 2013. One-third, fully one-third, of bank tellers working 
for banks are on Government assistance. One-third of bank 
tellers working for banks where executive compensation has 
skyrocketed, one-third of them are on Government assistance. 
The CEOs of the top five banks make 470 times--a ratio of 470 
times--the annual salary of the median front-line bank worker.
    Hard work is not paying off for so many Americans the way 
it used to. It is true for all workers across industry at any 
income levels. Whether you punch a time sheet or you make a 
salary or you rely on tips, whether you are a contract worker 
or a temp, whether you work in a call center or a factory floor 
or in a bank, one of the best ways financial services companies 
can help economic growth is to pay their workers a living wage 
and provide decent benefits. It should come as no great shock 
the demand for housing and other goods and services is tepid--
the demand for those services is tepid. Too many Americans are 
struggling to make ends meet.
    The response from this Administration is not encouraging. 
It has been stocked with Wall Street executives who want to do 
a number on the law that holds their former firms accountable. 
Its budget would eliminate much of the Federal efforts to 
promote economic development opportunities in communities both 
rural and urban across our country. So far, there is no sign of 
the promised, much heralded $1 trillion infrastructure program 
extolled at almost every stop by Candidate Trump.
    If Americans do not have reliable housing or transit 
systems to get to work or even access to meals, how do we 
expect to have a healthy and productive workforce? How will we 
get to a growing economy? Financial companies have an important 
role to play in our economy to the extent that they support the 
rest of the economy.
    Finance is a means to an end, not an end in itself. Trading 
paper among a few large financial companies or making the 
wealthiest 1 percent of Americans even wealthier simply does 
not grow our economy.
    Earlier this year, in Columbus at the John Glenn School, I 
outlined a broad plan to restore the value of work in four key 
ways: one, raise wages and benefits; two, give workers more 
power in the workplace; three, make it easier for more workers 
to save and employers to make matching contributions for 
retirement, something Senator Crapo and I as members of the 
Finance Committee have partnered one and worked together on; 
and, four, encourage companies to invest in their workforce.
    When we talk about economic growth, we need to talk about 
policies that help Americans' pocketbooks, their savings, their 
job security, empowering the middle class and those who aspire 
to the middle class.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you very much, Senator Brown.
    We will proceed with our testimony from the witnesses at 
this point.
    First, we will receive testimony from the Honorable Robert 
Heller, former Governor of the Federal Reserve.
    Next we will hear from the Honorable Donald Powell, former 
Chairman of the Federal Deposit Insurance Corporation.
    He will be followed by Mr. Thomas Deas, Jr., chairman of 
the National Association of Corporate Treasurers.
    And then we will go to Deyanira Del Rio, who is the 
codirector of the New Economy Project.
    And Mr. Spriggs will go last if he is able to make it here. 
He is a professor economics at Howard University and chief 
economist at the AFL-CIO.
    Mr. Heller, you may proceed.

STATEMENT OF ROBERT HELLER, FORMER GOVERNOR, BOARD OF GOVERNORS 
                 OF THE FEDERAL RESERVE SYSTEM

    Mr. Heller. Chairman Crapo, Honorable Member Brown, and 
Senators, thank you very much for inviting me to speak and to 
testify on the contribution made by financial institutions to 
foster economic growth and the role of these organizations in 
that context.
    Economic growth tends to parallel financial growth, and a 
strong economy needs to be supported by a dynamic financial 
system, just like a healthy body needs to be nurtured by 
vigorous blood flow.
    Two important changes occurred in the 1980s and 1990s that 
modernized our banking system and brought it up to world 
standards. First of all, there was the Riegle-Neal Interstate 
Banking legislation which allowed nationwide branching; and 
then the Gramm-Leach-Bliley Act, which removed the barriers 
between commercial and investment banking, thereby allowing for 
greater product diversification.
    These two innovative congressional acts allowed banks to 
serve their retail and wholesale customers better and increased 
bank safety by allowing for greater diversification along 
geographic and product lines.
    The banking crisis of 2008-09 was primarily triggered, as 
was pointed out, by irresponsible and excessive subprime 
mortgage lending and resulted in a major economic crisis, 
validating the strong nexus between financial and economic 
activity.
    In response, the Dodd-Frank Act enacted hundreds of new 
regulations that imposed virtual straitjackets on the banks. As 
a result of these regulations, as well as the prolonged zero 
interest rate policy by the Federal Reserve, new bank formation 
came to a virtual standstill. It is no surprise that the 
economy experienced the slowest recovery on record since World 
War II.
    I think there are two ways in which banks can be made 
safer: through tighter regulation and by holding more capital. 
Based on my experience, as the Chairman of the Committee on 
Bank Supervision and Regulation at the Fed, and my banking 
experience, I would argue that strong capital requirements are 
generally more effective and efficient than a myriad of 
detailed regulations.
    Regulations are a straitjacket that constrains each and 
every banking activity and by the imposition of inflexible 
rules that are more appropriate for a rigid, centrally planned 
command economy.
    Moreover, regulations call for an army of supervisors to 
enforce all the rules, as well as an expensive compliance staff 
on behalf of the banks. In contrast, capital requirements are a 
flexible buffer that can protect the shareholders, depositors, 
and taxpayers alike. And at the same time, it provides an 
incentive to engage only in economically rewarding activities. 
Thereby it kills two birds with one stone.
    An innovative case to ease the regulatory burden for 
financial institutions is proposed in the Financial CHOICE Act. 
It rewards banks that are well managed and protected through 
high levels of capital with considerable regulatory relief.
    Let me close with one more suggestion that will 
considerably lower the costs to the banks as well as to the 
Government and the taxpayers, and that is the elimination or 
consolidation of overlapping regulatory agencies in the 
financial sector.
    Among the Federal regulators alone, we have the Federal 
Reserve System, the Comptroller of the Currency, the FDIC, the 
SEC, the newly formed CFPB, and the CFTC. In fact, there are 
now so many regulators that there are even agencies to 
coordinate the regulators. For instance, the FFIEC, of which I 
was a member in my days at the Federal Reserve, is tasked with 
coordinating the rulemaking and examination processes by the 
various agencies.
    So I think the time has come to simplify this regulatory 
jungle. If we need special councils to coordinate the 
regulators, we have a few regulators too many, and one layer of 
bureaucracy should be eliminated.
    Thank you very much, Mr. Chairman, for inviting me and 
giving me the opportunity to express my views on this important 
topic.
    Chairman Crapo. Thank you, Mr. Heller.
    Mr. Powell.

 STATEMENT OF DONALD POWELL, FORMER CHAIRMAN, FEDERAL DEPOSIT 
                     INSURANCE CORPORATION

    Mr. Powell. Chairman Crapo, Ranking Member Brown, Members 
of the Committee, thank you for the opportunity to testify.
    I have spent 40 years plus working in the financial 
services industry. My experience includes serving as an 
employee, CEO, owner, and board member of various small- and 
mid-sized banks. Additionally, I have served as a banking 
regulator as Chairman of the FDIC. Furthermore, I have served 
on the board of one of the world's largest financial 
institutions.
    All of these experiences have caused me to understand and 
respect the critical role a bank has in the success of a 
community, State, and in our Nation. The quality of life in a 
community has a direct link to the bank's activities and 
services, including the creation of jobs, the caliber of 
education, the excellence of health care, and the general 
prosperity of a community. The bank is the alter ego of a 
community. Banks, both large and small, contribute to the well-
being of a community. Most banks have a culture that demands 
that all of its employees participate and provide leadership in 
all that is good within the community.
    The data is overwhelming as to the role banks play in 
economic activity, and when banks are not engaged in lending or 
in providing other services, the local, State, and the national 
economy suffers and economic growth becomes anemic. Thus, it is 
important that the Nation have viable, safe, and sound banks 
serving this great country. Part of the confidence placed in 
banks is a result of the depository protection offered by the 
FDIC and of the supervision of each insured institution. 
Confidence in the soundness of an institution is critical to 
the success of the banking system and, thus, the free 
enterprise system.
    During my career, I have experienced good and bad economic 
times and have observed the various reactions to these cycles 
by the marketplace, policymakers, regulators, and other 
stakeholders. I have studied the cause and effect of each 
downturn. After each downturn, Congress, as well as banking 
regulators, have attempted to address the issues attributed to 
the slump in our banking system. All of the banking supervisors 
have reacted by creating more stringent rules and a tougher 
oversight process.
    Today's examination and supervisory process includes, as 
expected, more focus on threats to our way of life and to 
treating every potential customer in a fair, transparent, and 
forthright manner. Laws and supervision oversight may be fluid 
depending upon the latest threats, risk, and conditions within 
the banking industry.
    There has been discussion, supported by data, that banks 
today, especially smaller banking institutions, are not the 
vehicle that breathes economic life into a community because of 
the unnecessary burden of the examination process and of 
certain regulations. Often, after a downturn, the tone, 
attitude, and trust between banks and regulators become 
strained, which results in negative energy and a nonproductive 
environment. It is important to understand the cost of 
regulation and to distinguish between sound policy and 
unnecessary rules, laws, and policies that stifle economic 
activity. The overriding issue is how does this policy, law, or 
regulation support economic activity without burdening the 
consumer, small business owner, or other business ventures?
    I remain active in the financial services industry and have 
direct knowledge of the supervisory process and would offer 
some guiding principles rather than specific regulations, 
policies, and laws that are valid in all seasons. Without these 
principles, laws, policies, and regulations might be neutered 
or weakened.
    One, every banking regulator must be fiercely independent 
and cannot be politically influenced. The independence includes 
no political agenda, and activity must follow the mission 
established by law. Accountability is balanced with term limits 
and oversight from an independent Inspector General. Regulators 
should not be intimidated by any force of direct or indirect 
influences and should not be a political tool for any agenda.
    Second, leadership at the various regulator agencies is 
critical. As with any enterprise, leadership sets the tone and 
mood for the entity. The ability to work with all stakeholders 
without compromising the mission should be a tenet for all 
leaders. Obviously the confirmation process should measure 
leadership that is validated by life's experiences.
    Three, disputes must have a due process path. Without a 
trustworthy, reliable, and transparent due process, an American 
core principle is lost. There is not a valid due process 
existing today to resolve disputes between regulator and 
banker. I have offered a solution, and the paper is attached 
for the record.
    Four, rulemaking should be transparent, and common sense 
and judgment should prevail. Experience is vital to an 
understanding of the banking industry, and the process should 
be deliberate and seek input from all interested parties. 
Rulemaking does not include making laws or incorporating a 
political agenda into the regulation.
    Five, accountability follows authority and a vigorous 
review process is important; proper oversight by a responsible 
IG is important.
    While there are certain core principles to a safe and sound 
banking system, banking cannot be commoditized as every 
community market is different and judgment must be part of the 
process. Banking laws and regulations must be followed, but 
policymakers must understand the cost, burden, and intention of 
these laws and amend them when necessary. Today's data 
indicates that there is more emphasis on compliance than on 
safety and soundness. It is important to understand that 
without the soundness of a bank, a community cannot thrive. We 
must get compliance with laws, safety and soundness all 
collaborated to the benefit of the community.
    Finally, after experiencing several banking crises 
firsthand and participating in mistakes and questioning myself 
and industry leaders, my conclusion is that there will continue 
to be cycles and new risks will emerge. But these common themes 
are present in those entities that survive: sufficient capital, 
liquidity to support the apparent risk and the unexpected 
events, and management that understands risk and provides 
oversight with the proper balance between serving the 
community, return on capital, and commitment to the basics 
without complexity.
    Thank you.
    Chairman Crapo. Thank you, Mr. Powell.
    And before we go to Mr. Deas, I want to welcome Mr. Spriggs 
here. We understand the traffic is terrible out there today. As 
you had not quite made it yet, I told Ms. Del Rio she would go 
after Mr. Deas, and so we will let you go cleanup after Ms. Del 
Rio. Thank you very much.
    Mr. Deas.

     STATEMENT OF THOMAS C. DEAS, JR., CHAIRMAN, NATIONAL 
              ASSOCIATION OF CORPORATE TREASURERS

    Mr. Deas. Chairman Crapo, thank you very much, Ranking 
Member Brown, and the other Members of this Committee. Thank 
you for the opportunity to testify at this important hearing 
focusing on our country's future economic growth. I am Tom 
Deas, recently retired vice president and treasurer of FMC 
Corporation and the current chairman of the National 
Association of Corporate Treasurers. NACT is an organization of 
treasury professionals from several hundred of the largest 
public and private companies in the country. I also represent 
NACT on the Steering Committee of the Coalition for Derivatives 
End Users. The coalition is comprised of several hundred 
companies whose treasurers employ derivatives to manage risks 
in their day-to-day business activities.
    At the outset, I would like to thank you, Chairman Crapo, 
for your efforts to make sure that end users are able to engage 
in prudent risk management activities without facing costs that 
would make such activities prohibitively expensive. We 
appreciate your efforts to move a bill, enacted in the last 
Congress, to exempt end users from unnecessary margin 
requirements.
    The financial system is critical to the day-to-day business 
activities of end-user companies. As a corporate treasurer, I 
can tell you that I interacted with our financial 
counterparties every day through such critical tasks as 
collecting payments from our customers; concentrating cash 
collections in a secure depository institution; sending cash 
safely from where it was collected and concentrated to wherever 
it is needed to meet the company's day-to-day business 
obligations; also borrowing or investing to meet temporary or 
longer-term cash shortfalls or surpluses; managing the 
company's capital structure with adequate committed credit and 
appropriate amounts of debt and equity capital; and also 
identifying and hedging the company's financial risks from 
exposures to such factors as changes in interest rates, foreign 
exchange rates, and commodity prices.
    Let me give you a real-world example, if I may. Companies 
use commodity derivatives to help structure cross-border 
bartering transactions. Consider a U.S. agricultural chemicals 
company selling into Brazil. With financial markets far less 
developed in Brazil, the U.S. company can access the 
derivatives market in ways unavailable to the Brazilians. The 
customer in Brazil needs crop protection chemicals at planting 
time, but can only pay 6 months in the future, at harvest time. 
During this period, the Brazilian farmer has commodity price 
risk and currency risk. The U.S. manufacturer arranges a barter 
trade where the Brazilian farmer agrees to pay in bushels of 
soybeans 6 months in the future at harvest time for the 
chemicals it needs to apply at planting time. The farmer has 
thereby transferred the price risk to the U.S. chemicals 
manufacturer, which can lay off that risk in a customized 
commodity derivative locking in the U.S. dollar price 6 months 
in the future, thereby hedging its risk.
    By reducing the overall volatility of its business results, 
the end-user corporate treasurer contributes to the stability 
and predictability of his business. But we cannot do this 
without our bank counterparties, and we also cannot do it if 
the pricing is too high. And while I and the end-user community 
support smart regulation of financial services, we are 
concerned about overregulation, which can increase our costs 
and make risk management activities prohibitively expensive.
    European policymakers, for example, have implemented 
capital charges on derivatives positions significantly more 
favorable to their end users than have the U.S. prudential 
banking regulators. The European approach recognizes that end-
users' hedging activities are, in fact, risk reducing and, 
accordingly, exempts end-user derivatives transactions from the 
credit valuation adjustment, which would otherwise require the 
bank counterparty to hold additional capital to mitigate 
counterparty credit risk in a derivatives transaction. The 
absence of a U.S. exemption puts American companies at a 
meaningful competitive disadvantage compared to our European 
competitors. In fact, the CVA charge may force end users to 
post collateral to offset banks' CVA capital requirements, 
subtracting from funds available for business investment. This 
is an example of overregulation harming end users while 
benefiting foreign competitors.
    We need a regulatory system that allows Main Street 
companies to use the financial system to hedge day-to-day 
commercial risks, securely manage their cash-flows, fund their 
businesses in the most cost-effective way, and play on a level 
field with their foreign competitors. By having a regulatory 
system that allows businesses to improve their planning and 
forecasting, manage unforeseen and, indeed, at times 
uncontrollable events, offer more stable prices to consumers, 
end users can more readily contribute to economic and 
employment growth.
    Thank you. I will do my best to answer any questions you 
may have.
    Chairman Crapo. Thank you, Mr. Deas.
    Ms. Del Rio.

   STATEMENT OF DEYANIRA DEL RIO, COEXECUTIVE DIRECTOR, NEW 
                        ECONOMY PROJECT

    Ms. Del Rio. Chairman Crapo, Ranking Member Brown, and 
Members of the Committee, thank you for the invitation to 
testify today at this hearing. My name is Deyanira Del Rio, and 
I am the codirector of New Economy Project. We are an economic 
justice center based in New York City, and for more than 20 
years, we have worked with community, labor, civil rights, and 
many other groups throughout New York to press for fair lending 
and economic inclusion, as a matter of racial justice and 
equitable neighborhood development. I am pleased to share our 
experiences and perspective about the vital role that 
responsible financial institutions play in fostering economic 
growth and opportunity, but also the devastating and 
destabilizing impact that abusive and unregulated lending has 
on communities and the economy.
    My testimony is additionally informed by my 15 years as a 
board member and currently the board chair of the Lower East 
Side People's Federal Credit Union. We are a not-for-profit 
regulated credit union and Treasury-certified community 
development financial institution that primarily serves a 
membership of low-income and immigrant New Yorkers.
    I have two overarching points to frame the testimony that I 
am delivering today. First, we believe that eliminating 
barriers to fair banking and credit access is critical to 
ensuring economic inclusion and opportunity for all. And, 
indeed, unequal access to credit has historically fueled 
housing segregation, racial disparities in homeownership and 
business ownership, and vast deepening wealth inequality across 
the country.
    Although affordable and appropriate financial services is 
critical to a healthy economy, as you heard, we reject the 
notion that consumer credit and credit in itself is a solution 
to deeper structural inequities in our economy. Exploitative 
credit and debt, as we have seen, can worsen these inequities, 
as we saw with subprime mortgages that led to the foreclosure 
crisis and undid, wiped out hard-won gains in homeownership for 
families of color, as well as payday loan debt traps that 
exploit working families that struggle to make ends meet, and 
rather than help them make ends meet, they throw them a brick 
to entrap them in debt. So in terms of the short-term and 
small-dollar loans known as ``payday loans'' decreasing, we 
would say that that would be something to celebrate. And the 
point of all of that is to say that regulations and policies 
that address root causes of economic insecurity are fundamental 
and cannot be replaced by simply providing credit to help 
people cover expenses that they should be able to cover through 
fair wages and other kinds of protections.
    It must also be said up front that efforts by this 
Administration and Congress to dismantle our financial reform 
laws, if successful, will inevitably lead to new crises and 
further erode Americans' trust in the financial system, which 
we have seen firsthand is already pretty low. We believe it is 
critical to preserve existing reforms and consumer protections 
and begin to work toward fundamental change in our system so 
that we can create a financial services sector that serves the 
real economy and not a financialized economy that is extractive 
and often exploitative.
    Three quick points.
    One, the financial crisis inflicted enormous costs on 
communities, the economy, and on responsible financial 
institutions--with repercussions that continue today. 
Communities of color are especially hard hit and continue to 
reel from the crisis.
    Just a couple of statistics are that fully half of the 
collective wealth of black families and two-thirds of the 
wealth of Latino families was lost in 3 years, from 2007 to 
2010. And the big banks, it needs to be reminded, fueled this 
wave of predatory lending through securitization and creating 
the market that fueled subprime loans and allowed that sector 
to reach crisis proportions.
    Just a note about the impact on responsible regulated 
financial institutions like my credit union, which played no 
part in the crisis, in creating the crisis. We were not spared 
the effects, nor were our communities. And one of the reasons 
that our institution has supported financial regulation at the 
State and Federal level and we supported and have weighed in on 
the Consumer Financial Protection Bureau and its rulemaking and 
enforcement is because we feel like we have learned that the 
effects, the cost to our institutions and our communities of 
not having sound regulations that prevent wealth stripping in 
our communities has presented to our institution far greater 
risks than the marginal and short-term costs of compliance with 
new regulations.
    A second point. Again, strong prudential regulation and 
consumer protections--including a robust and independent CFPB--
is crucial to avert future crises. Congress enacted Dodd-Frank 
in the wake of undeniable regulatory failure and destructive 
lending and created requirements that include such basic tenets 
of responsible lending as that lenders must assess a borrower's 
ability to repay loans. And the fact that that is 
controversial, something that our institution and many others, 
my credit union, believe is just basic to responsible 
underwriting and lending has been lost shows the need for these 
regulations.
    The CFPB has so far returned $12 billion to 29 million 
Americans and has brought payday lenders, credit reporting 
agencies, and other powerful sectors under meaningful 
supervision for the first time. The fact that banks and others 
are pushing relentlessly to weaken the CFPB to us demonstrates 
its effectiveness and its independence.
    Finally, community development financial institutions have 
played vital roles in meeting credit and financial services 
needs in communities as banks become more consolidated and 
further removed from communities across the country. The 
proposed gutting of the Federal CDFI Fund, the elimination of 
its budget, puts these institutions, which are supporting 
economic growth in the real economy--would be greatly harmed by 
these cuts, and we hope that they are promptly restored.
    I know I am out of time, so I am happy to elaborate on 
anything else in the Q&A and to answer any questions. Thank you 
again.
    Chairman Crapo. Thank you.
    Mr. Spriggs.

STATEMENT OF WILLIAM E. SPRIGGS, PROFESSOR OF ECONOMICS, HOWARD 
            UNIVERSITY, AND CHIEF ECONOMIST, AFL-CIO

    Mr. Spriggs. Thank you, Chair Crapo and Ranking Member 
Brown, for the this invitation to speak today, and I do 
apologize, Chair, that I was running behind and missed some of 
the earlier testimony and your opening remarks. I apologize for 
that.
    My name is William Spriggs, and I am here representing the 
AFL-CIO, which is America's house of labor. It represents the 
working people of the United States. I am also here as a 
professor of economics at Howard University. Howard has 
produced three U.S. Senators. We are very proud at the 
Department of Economics of the third one because Senator Kamala 
Harris is a graduate of the Department of Economics at Howard.
    I want to take my testimony in a slightly different 
direction than what you have just heard. Clearly, sound 
financial systems are necessary for growth. When you look at 
U.S. economic history prior to the Glass-Steagall Act, you see 
episode after episode after episode of financial crisis, bank 
failures, and the type of event that did not take place between 
the Glass-Steagall Act and 2008.
    So we understand that having a sound fiscal system can do 
away with very great variations and downturns, and it is 
important so that we can continue a progress of growth. But, 
more importantly, I want you to focus on the real growth. 
Growth actually occurs in the real economy. And if we really 
are concerned about business formation, if we really are 
concerned about economic growth, then we have to think about 
labor force growth, labor force productivity, an we have to 
think about investment and productive capital that increases 
the productivity of those workers.
    A financial system that serves the purpose of taking excess 
capital and moving it to productive capital is the point. If it 
is doing something else, it is diverting funds. Deepening of 
the financial sector does not necessarily mean moving excess 
savings to productive capital.
    How did we grow so successfully from 1946 to 1979? There 
are a couple of things that correlate with that. Primary is an 
agreement between Republicans and Democrats that we had to 
invest in the American people and we had to invest in America. 
It was a belief by both parties that if you invest in America 
and you invest in Americans, it will always--always--pay high 
dividends. So whether it was the effort of Dwight Eisenhower, a 
Republican President, to give us the National Student Defense 
Loan system that propelled many Americans into the high-tech 
sector, gave us the teachers that taught the people who 
produced the Internet and produced the micro computer, or 
whether it was Eisenhower giving us the Interstate Highway 
System, the infrastructure that is still the backbone of our 
Nation's transportation system.
    These were bipartisan beliefs that Government played a key 
role in providing the means by which America could pay 
dividends to its citizens and to the world. It created a growth 
pattern that was equal so that we saw all income portions grow. 
Whether you were at the bottom of the income distribution or at 
the top, everyone grew together. The key element there is that 
what matters in economics is the customer market. When all 
incomes grow, then the budget line for all households grows, 
and everyone is a potential new customer. Businesses grow from 
new customers. And so if you want innovation, if you want 
faster growth, you have to have broad-based income growth. That 
is what we had from 1946 to 1979 from that consensus and that 
belief, and the role of Government to foster that kind of 
investment and to believe in broad-based income growth.
    Since then, we have departed. We have had massive 
inequality. Those at the bottom have not benefited as those at 
the top, and our customer base is not expanding. The result is 
we have had slower new business formation, and that has been 
key at slowing our growth.
    Sound fiscal systems are necessary for the stability of 
that growth, systems that do not continue to foster huge banks. 
Small businesses have succeeded as the economy has rebounded 
because of small banks. That is where the majority of small 
businesses are now getting their funding.
    So we need a competitive banking system, we need a sound 
banking system, and we need to remember, as we were just 
reminded, the very high cost of this economic downturn. The 
costs of regulation against the trillions of dollars that our 
economy lost from the financial collapse have to be weighed. 
Those trillions of dollars we have not yet regained.
    Thank you.
    Chairman Crapo. Thank you, Mr. Spriggs. And as we begin the 
question period, I remind all Senators to please honor the 5-
minute rule. As usual, we are under some time pressures here.
    Senator Brown has a real time pressure, so I am going to 
let him go first.
    Senator Brown. Thank you, Mr. Chairman. I will honor the 5 
minutes and set the pace, so thank you for that.
    I will start with Dr. Spriggs. Thank you for your 
testimony, all five of you. Most public companies seem to have 
become beholden to the quarterly earnings report. One survey of 
financial executives found that 78 percent would sacrifice 
economic value of their own company just to meet financial 
reporting targets. That is no way, obviously, to grow our 
economy. Families do not think in terms of 3-month earning 
quarters. They think in terms of school years. They think in 
terms of 30-year mortgages. They think in terms of years left 
to save for retirement.
    Why is it important for Congress to focus on workers and 
consumers when trying to foster economic growth?
    Mr. Spriggs. Well, thank you, Senator. It is very important 
to focus on consumers and workers because that is the real 
economy, and we do not want to lose sight of that. And the real 
economy grows when we have customer bases grow. So we need 
workers, all workers, to have raises, to have their wages match 
productivity growth, so that we can see a dynamic business 
environment.
    The rate at which new businesses are being created in the 
United States has slowed down, and instead of new businesses, 
the way that companies are getting new customers is through 
consolidation. They buy each other out. And this phenomenon 
that you mention is part of that. Part of that is the 
financialization of our system.
    So for a CEO, I can actually get higher pay, not by taking 
capital to invest in my company and increase my capital, but by 
simply buying back my stock. Billions of dollars have been 
spent simply buying back stock, simply bidding up the price of 
stock, which is the barometer by which the CEOs declare that 
they have been successful to the stockholders.
    That is not adding to the productive capacity of the 
economy. It is not feeding back into training workers. It is 
not feeding back into higher wages. It is not feeding back into 
making us more competitive.
    So this is why Congress has to be concerned with this type 
of practice, and the growth of inequality means that Congress 
has to be concerned about the growth of the consumer base.
    Senator Brown. Thank you.
    Ms. Del Rio, you spoke of community development financial 
institutions, CDFI. I want to ask you a question about that. 
East Liverpool, Ohio, a small city, used to be the center of 
the pottery industry in the United States, a county on the Ohio 
River in eastern Ohio. The Progress Fund, a CDFI, worked with 
American Mug and Stein, a small manufacturer, many of them--
they were hiring. They hired in many cases people who needed a 
second chance, former offenders. The CDFI restructured its debt 
after it was turned down by a traditional lender. Starbucks is 
now a steady customer of their mugs. It has doubled its 
workforce. The Administration's ``skinny budget'' eliminates 
CDFI Fund grants, but CDFIs play an important role in rural and 
urban communities in Appalachia and New York City and 
communities in every State. I would add that the area where 
this company is was a huge--President Trump, Candidate Trump, 
won a huge majority in that county, as he did along the Ohio 
River.
    Ms. Del Rio, tell us who CDFIs serve, whether the private 
market can meet the needs of these communities, and how the 
Administration proposed cuts to CDFI grants would impact urban 
and rural communities.
    Ms. Del Rio. Sure. Thank you for that question. So CDFIs 
can be loan funds, credit unions, many other kinds of 
institutions. My primary experience is with credit union CDFIs, 
so that is what I will focus on. But all CDFIs serve 
economically distressed communities. That is their focus, and 
that is why they are certified by Treasury as such, and they 
receive investments through CDFI Fund.
    One note is that I think there is a misunderstanding about 
what the CDFI Fund does. It does not make grants. It is not 
charity. It provides capital grants, capital investments into 
institutions that then get leveraged at rates of $12 to $23 per 
every CDFI dollar invested. And so it is actually an investment 
in financial services to support economic growth.
    CDFIs make loans to support affordable housing, small 
business development, jobs, commercial and community spaces, to 
expand access to child care, and many, many other services. And 
they have their ear to the ground. They are truly community-
based, and that is their focus, as in the example that you 
provided.
    There are 8 million people served by credit union CDFIs 
across the country in 46 different States, and my credit union 
is one of them. And we have used CDFI Fund and other support 
that we have been able to receive to expand business lending in 
our community, to provide a whole range of services that we 
would not otherwise be able to do. And, critically, it has 
enabled us to grow.
    So for small institutions, when you bring in a lot of 
deposits or you make a lot of loans, in the short term your net 
worth decreases. Your capital ratio decreases. So for a small 
credit union or any institution that is serving a low-income 
population that does not have a lot of resources, these 
infusions of capital are critical to enable us to meet the loan 
demand in our communities. We would not be able to make the 
volume of loans--we are 100 percent loaned out in terms of our 
member deposits right now. We could not do that if we were not 
able to get these infusions of investments.
    And one of the things that we are really proud of in New 
York City is that we are one of the sole lenders--banks do not 
make these loans--to low-income housing cooperatives. They are 
low-income, limited-equity cooperatives, and they represent one 
of the last remaining affordable homeownership options for low-
income New Yorkers, and we have been able to extend $18 million 
in loans to these buildings themselves and to individuals that 
are purchasing in those buildings. And to give you a sense of 
that, some people are able to purchase their apartments for as 
low as $5,000 in New York City. These are limited equity. 
People cannot flip them to make a profit, and so they are not 
sort of on the market. They are not something that lots of 
investors or lenders want to be involved in. But it is 
something that we do as a CDFI that we are really proud of.
    Senator Brown. Thank you so much.
    Thanks, Mr. Chairman.
    Chairman Crapo. Thank you.
    And I will continue to forgo my questioning, and we will go 
next to Senator Kennedy.
    Senator Kennedy. Thank you, Mr. Chairman. Thanks to all of 
you for coming today. I have learned a lot listening to you. I 
particularly want to thank Mr. Powell. Mr. Powell was in charge 
of recovery in Louisiana after Katrina. You did an 
extraordinary job, and the people in my State owe a great debt 
of gratitude to you, and I wanted to recognize that.
    I wanted to ask each of you a question about Dodd-Frank and 
community banks. I am defining a community bank or a community 
credit union as being $10 billion or less. My understanding is 
that those institutions comprise about 98 percent of all of our 
financial institutions.
    The Chairwoman of the Federal Reserve talked to us a few 
weeks ago. I asked her directly what did the community banks do 
to contribute to the meltdown in 2008, and she said, 
``Nothing.''
    I would like your thoughts, given the regulatory costs and 
the impact on lending and the forced consolidation that has 
gone on in community banking, I would like your thoughts on 
whether you think it would be appropriate to exempt community 
banks, $10 billion or less, from the regulations of Dodd-Frank. 
We will just start at the end, if that is OK.
    Mr. Heller. I think that is a very good idea that really 
needs to be explored. I am in favor of exempting them from the 
regulations as long as they are well managed, as determined by 
the regulators, and that they have a good, sound level of 
capital. Those are two things that I would require and then you 
ease up on the rules so that you do not have that enormous 
regulatory burden.
    In our community bank--I am on the board of a $2 billion 
bank--we have doubled our compliance staff over the last 10 
years, and that does not do anybody any good.
    Mr. Powell. Senator, I think without question that there is 
an extraordinary amount of burden upon community banks. They do 
not have the cost structure to comply with some of the burdens 
of Dodd-Frank.
    Having said that, obviously, Dodd-Frank was implemented for 
certain purposes, but I am on a community bank board, and I was 
just reflecting, as you were speaking, about our last board 
meeting. We reviewed 50-some-odd policies as it relates to 
compliance with Dodd-Frank. That takes a lot of effort, a lot 
of cost. I think it is appropriate to review those and to 
eliminate some of those, specifically on these issues. The 
qualified mortgage issue as it relates to community banks is a 
big handicap in serving their customers. I understand the 
rationale behind qualified mortgage, but we have got to get 
away from customizing--we are getting away from judgment.
    And so these community banks really know their community 
and they know their customers. And the last thing they want to 
do is make a bad loan. We forget that. We forget that nobody 
wants to make a bad loan. So a qualified mortgage, we have 
commoditized these products, and you cannot do that in a 
community bank.
    I think the second issue is that data collection, we really 
need to review that in a community bank. Why do you need all 
the data collection? I recognize and understand that, but it is 
a real burden upon a community bank. A community bank, you have 
got to remember, they are a reflection and they are the alter 
ego of the community. They want to serve their community. But 
they know their customers probably better than anybody else in 
the community. They have lived with them; they work with them. 
They go to school with them; they go to church with them.
    So the burden of the Dodd-Frank I think needs to be exempt 
to these smaller institutions, without compromising capital 
ratios, not compromising liquidity. Safety and soundness is 
clearly an issue.
    Senator Kennedy. OK. Mr. Deas.
    Mr. Deas. Senator, I can only say as an end user and a 
large company corporate treasurer, I have dealt mostly with 
larger banks, but I will say that with the efforts of Members 
of this Committee in the last Congress, there was a bipartisan 
consensus to exempt end users from some of the regulations 
under Dodd-Frank that would outweigh the benefits of those 
regulations. And so by analogy, I would think that if community 
banks whose function is to take funds from where they are 
generated, redeploy them where they are needed in their 
community, are being unduly burdened by these regulations, that 
we should relieve them of that burden.
    Senator Kennedy. OK. I have got 12 second--no. I think I am 
over. I am sorry, Mr. Chairman.
    Chairman Crapo. Well, we will let the remaining witnesses 
provide written responses to this question as well.
    And thank you very much, Senator Kennedy, for paying 
attention to the clock.
    Senator Reed.
    Senator Reed. Well, in order to--Mr. Spriggs, why don't you 
answer that question? It was a very good question posed by 
Senator Kennedy, and then Ms. Del Rio briefly.
    Mr. Spriggs. Thank you, and I will be brief to respect your 
clock, Senator.
    I think that flexibility has already been shown to the 
smaller banks. They do play the vital role, as I mentioned; 
close to 70 percent of the small business loans were from small 
banks, and so they provide the backbone for helping businesses 
grow.
    But we have to think about what those regulations do in 
total. The greatest threat to the community banks is that we 
continue to have banks too big to fail that dominate the market 
and continue to present too great a systemic risk to our 
economy. We need them broken up so that that will create more 
space for community banks to thrive and to prosper. Their 
greatest enemy right now are these huge banks.
    Senator Reed. Ms. Del Rio.
    Ms. Del Rio. As a small institution, the credit union I am 
on the board of has $51 million in assets. We already have 
certain accommodations for us under Dodd-Frank. An example is 
that we are supervised for compliance with consumer protection 
laws by our existing Federal regulator, the National Credit 
Union Administration.
    Additionally, since we are CDFI certified in certain CFPB 
rules, including the qualified residential mortgage rule, there 
are exemptions made for institutions like ours.
    I think that there has been thoughtful consideration of how 
to accommodate smaller institutions. Our experience is that 
community banks are a spectrum. They are not all wonderful. 
They are not--and there are problematic practices at some of 
these institutions, so a wholesale exemption is not something 
that I would support.
    Senator Reed. Well, thank you. And let me thank Senator 
Kennedy or the wonderful question. It helped me. Thank you.
    Mr. Spriggs, one of the issues that we are struggling with 
here is the cost-benefit analysis. Obviously, you do not want 
to burden any system with costs in excess of benefits or derive 
short-term benefits at huge cost. And we saw in 2008-09 
extraordinary costs to the system, and I do not think the 
community banks were immune from the economic chaos. And as a 
result, part of Dodd-Frank is to sort of avoid another 
catastrophic event.
    Again, does the current system help insulate us from that 
shock of another catastrophe? It could be improved a bit, but 
isn't it a vast improvement over what we had before the crash?
    Mr. Spriggs. Yes, Senator, it is a vast improvement, and 
all previous bank failures, as I gave the whole history for the 
U.S., we have had Congress respond, and this time Congress did 
respond. Now, we still have banks that are too big to fail, and 
we still have to address that. But we do have to remind 
ourselves the tremendous cost in trillions of dollars--almost 
our entire GDP, one might argue, in cost--lost banks; community 
banks that got swallowed up, not because of something they did; 
pension funds, the costs to municipalities when pension funds 
collapse because of this financial crisis. Many of our cities 
and State governments ran into huge problems because their 
pension funds collapsed.
    You have to look at the loss from the household sector in 
terms of homeownership wealth, in terms of pension wealth. All 
of this cost, the cost to the global system, the collapse of 
international trade that took place, the loss to potential GDP 
of the United States. When you look at projections that were 
made in 2001 through 2005 of what our economy would look like, 
when you add all that up, almost 1 year's worth of GDP after 
you add it all up, you have to say that a few cautionary 
measures by banks to prevent that has to be worth it.
    Senator Reed. Thank you. Just one point that you made, Ms. 
Del Rio, in your testimony--and you alluded to it--is the 
Consumer Financial Protection Bureau, and one of the 
impressions I have is that, again, looking back at the crisis, 
some of the difficulties were caused by these nonbank banks, 
entities that were chartered by States, not as financial 
institutions, not regulated properly, et cetera, but were 
competing in the mortgage market and competing in other 
markets. And one thing that the CFPB does to protect 
particularly smaller institutions is they actually have some 
authority to regulate these nonbank banks.
    Have you found that to be helpful or impactful on your 
credit union?
    Ms. Del Rio. Extremely so, and in my work as well as New 
Economy Project. I think that that is what is so crucial about 
the CFPB, is that it is the first Federal agency with the 
mission of--its core mission of protecting consumers in this 
marketplace. This was a piece of lots of different agencies' 
responsibility, but inevitably, it was not a priority. The 
priority was on other regulations and prudential regulation, 
which, ironically, helped to lead to the sort of regulatory 
failure, because in the short term subprime lending was 
extremely lucrative until the crash happened. Payday lending is 
extremely lucrative.
    So, you know, there are a lot of practices that can be 
profitable for an institution and good for their bottom line, 
but that are harmful and present systemic risk as well as 
harming consumers and communities, and that is the key to 
strong financial--why financial regulation in addition to 
capital requirements and skin in the game is needed.
    Senator Reed. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Crapo. Thank you.
    Senator Perdue.
    Senator Perdue. Thank you, Mr. Chairman. I will do this 
standing up, if that is OK.
    Chairman Crapo. Sorry about that.
    [Laughter.]
    Senator Perdue. No. It is fine.
    This is a topic that is at the forefront, I think, of what 
we need to be talking about in Congress. Look, there is no 
question that parts of the financial industry got ahead of 
itself leading up to 2008-09, but let us remember that the 
basic instrument that caused that was created by the desire 
back in the late 1990s to increase homeownership, and things 
like no-income and low-income verification loans were created 
that started defaulting almost immediately in the 40-percent 
range. But rating agencies and all that, that is not the 
direction I want to go in today.
    Dr. Spriggs, I could not agree with you more. Your 
testimony today I thought was pretty much right on. I agree 
with most of it. But I want to come back to a question about 
small businesses. It looks to me like over the last 70 years, 
since 1946, as you well called out, Dr. Spriggs, our economic 
miracle--which, by the way, is the largest in the history of 
humankind for all Americans, basically--was created by 
innovation, capital formation, and the rule of law. Ms. Del 
Rio, I agree, though, that there was an imbalance in that 
growth, and it had to do with a lot of things--geographic 
issues, racial issues, et cetera, et cetera. But, by and large, 
those were the three things that created this.
    Today, unfortunately, I think that our unilateral chase 
toward Basel III when these other countries are not doing that 
as well, we required our small and regional banks to have 
capital requirements that are well beyond any reasonable level 
that would require--that they should be required to be 
protected. They did not have anything to do with the debacle of 
2009. They were not levered up 67 times like some of those guys 
were. And today the impact on small businesses--and this is the 
question I have for Dr. Heller first. Small business today, we 
have around 650,000 missing, as I calculate it, small 
businesses today, and this is from the Bureau of Census, that 
if you take the jobs created from 1977 through 2007 and 
extrapolate that forward to the number of small businesses that 
we should have today, we have about 650,000 fewer businesses 
today. And that is a steep fall from 2009.
    I would argue that that is probably caused mostly by a lack 
of capital. Innovation has not fallen off. The rule of law has 
not been changed much. So it is basically access to capital in 
small communities that I am so familiar with.
    Can you address that? You are on the board of a community 
bank. You just answered the question about Dodd-Frank. But I 
would like to know about the capital requirements for not just 
small community banks but also regional banks that had no part 
in the debacle of 2009. Could you address that first?
    Mr. Heller. It is a very serious problem, as you say. First 
of all, community banks with about $300 to $400 million in 
asset size, they have a very, very hard time surviving, and 
they are merging incessantly. They are going out of existence, 
and they get swallowed up by either like-sized institutions or 
by larger banks that are acquiring them.
    Senator Perdue. In my State alone, we have lost 90 banks, 
small banks, since 2009, and it had nothing to do with their 
financial position. It had to do with the cost of compliance, 
and it made them an extremely attractive target for a bigger 
bank. So it looks to me like what we have done is incented the 
consolidation of an industry where we want to break up larger 
banks in theory. But the reality, the unintended consequences, 
we have done just the opposite. Do you agree or----
    Mr. Heller. And to make it worse, Senator, every year 
typically we have between 150 and 200 new banks being formed, 
and that stopped totally with the imposition of Dodd-Frank. 
Since then, there have been virtually no new bank formations. 
In the last 5 years, there were two new banks, according to the 
last statistics available from the FDIC. So no new banks are 
replacing the ones that are disappearing, and so you get 
exactly the effect that you point out. Small bank lending to 
small corporations, to small customers, that has come mostly to 
a standstill. And recently we have seen for the first time in 
U.S. history that the exit of small corporations was larger 
than the formation of new corporations. So there is no new 
lifeblood coming into the country because more companies are 
exiting than entering, paralleling the scene on the bank side.
    Senator Perdue. Mr. Powell, estimates have been made that 
this is somewhere around $2 trillion that is not at work in the 
economy right now, that is on the balance sheets of small 
regional banks. I do not know if you have seen that number. Do 
you agree that there s a significant amount of capital that 
should be released into these small communities?
    Mr. Powell. That is a complex question. I think capital 
will follow opportunity. I think in the community banks that 
capital is not an issue. I think they have plenty of capital to 
loan, and I think they have money to loan.
    I think the issue is more complex than that, Senator. I 
think part of it is the regulator oversight, the tone, the 
mood, the environment, they have to be very, very careful. I 
think complying with certain standards, complying with certain 
laws and regulations is, in fact, a burden. And I might add 
that the small business person has the same thing.
    So one of the reasons that people are not creating new 
businesses is not necessarily for the lack of capital, because 
they can get the capital from outside banks.
    Senator Perdue. So you think the regulatory environment has 
something to do with that?
    Mr. Powell. Yes, sir.
    Senator Perdue. So here is the final question. I am out of 
time, but I would like to see this answered in writing, if you 
all do not mind. That is, the true cost of compliance is lack 
of jobs in local communities, and I would love to know what we 
can do, what are the priorities you guys all see on all sides 
of what we could do that does not change the intent of what we 
needed to do after the 2009 debacle to fix the problems we had 
there, but that would release some of the problems we have with 
the unintended consequences in these small communities?
    Thank you very much. Thanks to all of you.
    Chairman Crapo. Senator Heitkamp--oh, wait a minute. I did 
not realize. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman.
    Senator Heitkamp. I should have jumped in.
    Senator Warren. You should have. You should have. You lost 
it there.
    [Laughter.]
    Senator Warren. But I do want to get this in, and thank you 
for holding this hearing.
    It is clear that a robust, well-functioning financial 
sector can help grow the economy, and a healthy financial 
sector helps officially allocate capital and manage risk, and 
that is good for consumers, and that is good for businesses.
    But according to a number of recent research papers, a 
growing financial sector does not necessarily mean a growing 
economy. In fact, after a certain point, growth in the 
financial sector can hurt the overall economy, and it can hurt 
it a lot.
    A 2015 paper from the International Monetary Fund found 
that an economy too dominated by the financial sector is less 
productive and less efficient at allocating capital. And a 2015 
paper from the Bank for International Settlements found that 
after a certain point, financial sector growth sucks money away 
from the real economy, particularly hurting industries that 
depend most on research and development.
    And here is the kicker. According to that 2015 IMF research 
report, which gathered empirical data from countries around the 
world, America's financial sector is too big a part of our 
economy. In other words, the economy would be more productive 
if we scaled back the financial services industry and 
reoriented it to making investments in the real economy.
    Now, Mr. Spriggs, a lot of the discussion today has been 
about how to make life easier for banks, how to encourage them 
to grow and engage in more activities, with the assumption that 
economic growth will follow. As banks get bigger, do they 
necessarily help the economy grow?
    Mr. Spriggs. Thank you for the question, Senator, and by 
grow, I think more specifically what we found is as they grow 
as a share of the economy and, very importantly, as a share of 
the workforce, oddly, productivity increases have kept the 
share of Americans in manufacturing declining, just as with 
agriculture, the share of people in agriculture has declined 
because of productivity increases.
    With computers, with advances that we have in technology, 
one would well imagine that the financial sector, therefore, 
should shrink as a share of the economy because very smart 
people working with very smart computers should be able to do 
it with fewer people. Remarkably, they do it with more people.
    Senator Warren. Right.
    Mr. Spriggs. It is the one sector that does not reflect 
this productivity growth. So right there is your hint that 
maybe this is not the way to go.
    Senator Warren. All right.
    Mr. Spriggs. I would just give you one anecdotal evidence 
of stealing from the productive sector. Fortunately, many 
Howard University students work for the top firms on Wall 
Street. Those firms do not just recruit from our School of 
Business. They do not just recruit from the Department of 
Economics. They love the School of Engineering. Now, we are 
taking the Nation's key innovators and putting them on Wall 
Street. This type of competition for people who the economy 
might be better served doing innovative things I think is one 
of those other indicators that perhaps it is getting too big.
    Senator Warren. That is a very helpful comment, Mr. 
Spriggs, and, in fact, given the conclusion of the IMF paper, 
it looks like to me that our question today should be how to 
push banks toward investing in the real economy instead of 
investing in complex, high-risk activities that produce very 
little economic value. I take it you would agree with that?
    Mr. Spriggs. Yes.
    Senator Warren. Yeah. So the IMF paper had another 
interesting finding that I want to talk about for a second 
here. Expanding access to the financial sector always had a 
positive impact on growth, so more access helped growth. To me, 
that means one of the best things we can do to promote economic 
growth in this country is to make every effort to provide basic 
banking services to the 40 million unbanked households in this 
country.
    So let me ask you this, Mr. Spriggs: For the past few 
years, I have argued that the post office should be permitted 
to provide basic banking services, just checking, savings, bill 
paying, that sort of thing. This would be a win-win for 
consumers and for the post office.
    Do you think it would also help promote economic growth if 
postal banking expanded access to the financial system for some 
of the 40 million households that are locked out today?
    Mr. Spriggs. Yes, it would, Senator. I mean, one of the key 
factors is that we have improved on the public sector side in 
how we can deliver transfer funds, how we can help low-income 
families. We can do this electronically. But because they are 
unbanked, we end up with lots of leakages. In fact, my State, 
Virginia, had to take some steps because we used to do the 
State income tax refund that way. Many people found out that it 
cost more to access the refund because of that than the refund 
was worth, and the State has tons of dollars wasted because of 
that.
    Reaching the unbanked would provide the stability in those 
economies, those local economies, those micro economies, that 
helps small businesses to develop. And one of the difficulties 
at the smaller level, the neighborhood level, is the managing 
of cash-flow. The problem with payday lenders is part of people 
trying to manage their own cash-flow because they do not have 
access to banking. And that would help small businesses at the 
neighborhood level.
    Senator Warren. That is very helpful, Mr. Spriggs, and I 
really do appreciate it. You know, a lot of Americans have 
known for a long time that the financial sector has gotten too 
big, too complex, and too powerful. And now there is a big 
stack of research to back that up.
    It seems to me that our job here on this Committee is to 
advance policies to make the economy grow, not policies just to 
make big banks even bigger. Reining in the big banks is good 
for financial stability and avoiding bailouts, and it is good 
for the economy. There is no tradeoff here between regulation 
and growth. They work hand in hand if done right. And I hope 
that will be the focus of this Committee and Congress. Thank 
you very much.
    Thank you, Mr. Chairman.
    Senator Cotton [presiding]. Thank you.
    Mr. Heller, in your written testimony, you say there are 
two basic ways to increase bank safety: one is more regulation, 
one is more capital. Could you explain a little bit more for 
the Committee about the tradeoff from those two choices and 
what might be the wiser course of action as a matter of policy?
    Mr. Heller. Well, like I say in the statement, if we have 
well-capitalized banks--and Senator Warren was citing IMF 
studies. There are also IMF studies that, for instance, show 
that banks, once they reach about 15 percent capital, the 
marginal benefit, the incremental benefit of that additional 
capital really is very close to zero. So by well capitalized, I 
would say somewhere between 10, 15 percent, roughly in that 
range, according to the IMF data, basically, banks do not fail. 
If banks do not fail, that means that they can serve the 
communities very well, and they do not need all the regulatory 
restrictions in order to make them safer. So that is the 
tradeoff that we have, and I think the CHOICE Act does exactly 
that. It says if you are a well-managed, well-capitalized bank, 
then you are relieved from the regulatory straitjacket that we 
are talking about.
    Senator Cotton. Is it fair to say that having a higher 
capital standard is a simpler, less complicated way to ensure 
bank safety than having exquisitely refined regulations written 
by a multiplicity of banking regulators?
    Mr. Heller. Exactly, Senator. And, furthermore, it is a 
much cheaper way because you do not have to have all the armies 
of regulators coming in. We have plenty of regulatory agencies 
that supervise even small banks. They come in; there is a lot 
of manpower. And then the bank staff has to respond to them, 
and as a result, there is an endless dialogue between the 
regulators and the banks. And the compliance staff is growing, 
and that does not make the economy more efficient, and it does 
not make the banks more efficient.
    Senator Cotton. Who, in your opinion, in the industry would 
resist such higher capital standards in lieu of greater 
regulation?
    Mr. Heller. Well, traditionally--I mean, I am an old man. I 
remember Walter Wriston arguing at Citibank that they did not 
need any capital at all; you know, zero was enough. Clearly, 
that was wrong. So, typically, large financial institutions 
tend to resist it more than the smaller institutions. But also 
for the smaller institutions, it clearly means that they are 
not earning as much on every dollar invested in the 
institution. So, in a sense, they say less is better.
    But I think your role in Congress is to say that--give 
people a choice, either regulation or the capital requirements. 
Please do not do both.
    Senator Cotton. Mr. Powell, I saw you nodding your head, 
perhaps in agreement, perhaps in fond memory of some of the 
same battles fought years ago when you were at one of these 
agencies. Would you care to share your thoughts?
    Mr. Powell. You have got to remember I was CEO of a bank in 
the late 1980s that almost failed. We were in a cease-and-
desist order. So I have tattooed on my chest, ``Capital.''
    I am kidding. It is not on my chest, but it is very sacred 
to me.
    Having said that, I think--I do not want to give the wrong 
impression from my view that regulation is not necessary. It 
is. Just as self-assessment is not one of my virtues, all of us 
need some type of oversight. When you have FDIC insured and the 
United States treasury is at risk, you have got to have some 
type of regulatory. Capital is extremely important, but I do 
not think it replaces that you should ignore regulation. So I 
think the balance is very important, that we try to get it 
right. We go to extremes every time there is a crisis one way 
or the other.
    So I think reassessing, rethinking about what the 
regulatory environment is for small and large institutions--
and, incidentally, the large institutions have been getting 
batted around a little bit. I was on the board of Bank of 
America, so I have been at a community bank and I have been at 
large institutions. Clearly, those institutions provide a 
service and provide an economic engine for entities that the 
community banks cannot take care of.
    So I think capital is extremely important, but you have got 
to remember, Senator, shareholders want a return. So you have 
got to attract capital, so if you attract too much and the 
return is not much, there is no capital there.
    So you have got to understand that shareholders want a 
return and that there is a base of capital there that, as you 
said, there is no return for it. But I do not want anybody to 
have the impression that we do not need any regulation from my 
point of view, because we do.
    Senator Cotton. Thank you. My time has expired.
    Senator Heitkamp.
    Senator Heitkamp. Thank you, Mr. Chairman.
    Just a couple points on previous conversations. Mr. 
Spriggs, Dr. Spriggs, we have got a little bit of a chicken-
and-egg problem as it relates to big versus small, right? You 
said, well, look, you know, the big threat to small 
institutions is the growth of large institutions. But by 
overregulating the small institutions, what was supposed to be 
too big to fail has become too small to succeed, driving 
business up. And so we have got to figure out the small 
business and the small bank piece of this.
    We have been working very hard on compromises, trying to 
advance some additional regulatory relief, taking a look at a 
lot--a lot of the discussion that we have had here today is 
very helpful.
    Senator Perdue said, look, we have a problem that we are 
not moving enough capital into business. I am not sure I agree 
with that, but I do agree with that as it relates to small 
rural counties and communities. And I just want to give you 
some statistics, and this is for Mr. Heller and Mr. Powell 
mainly. If you look at economic studies, from 2010 to 2014 U.S. 
counties with 100,000 or fewer residents combined to lose more 
businesses than they created, despite a growing national 
economy and a falling unemployment rate.
    In a recovery beginning in 1992, by comparison, those 
counties, those same counties created a third of the Nation's 
new business on net. Moreover, nearly two out of three rural 
counties lost business in this recovery, on net, from 2010 to 
2014, and that is up from just two in five counties in the 
early 2000s.
    What is happening? And how do we fix this? And I know that 
that is a bigger question probably than just the banks, but 
capital formation is obviously a key component to economic 
growth. So what do we do to turn this around? Because we saw 
the reaction to this in this last election. And people keep 
saying, ``What is going on in rural America?'' This is what is 
going on in rural America. So how do we fix this?
    Mr. Heller. I fully agree with you, Senator, with what you 
are saying, if I understood you right. In the current 
expansion, there was less business formation than in previous 
expansions.
    Senator Heitkamp. In rural counties.
    Mr. Heller. In rural counties, and especially among small 
firms, and that is exactly the point I am making in my 
testimony. Firms are actually leaving currently at a faster 
clip than there are entering new ones, so we have net losses. 
We also have the same phenomenon on the small bank side. There 
are no new banks coming in, rural or urban, basically none. And 
both of those things hang together. The topic of today is: What 
does the financial sector contribute to economic growth? And 
the financial sector in these rural counties especially is 
weak, and there is no new lifeblood coming in, and nobody can 
afford--and Mr. Powell, who is more of a rural small town 
banker than I am--I am a suburban small banker--can speak to 
that, I am sure.
    It is very difficult to get the additional funds and to be 
able to stand the regulatory burden for these small 
institutions. So they are just not being formed.
    Senator Heitkamp. Mr. Powell.
    Mr. Powell. Senator, I think that is a valid point. I think 
one of the things--it is a complex question because quality-of-
life issues, there are a lot of issues that contribute to that. 
But from a bank standpoint, if I were going to put a bank in a 
rural community, I have got to see economic activity. I have to 
get a return on my capital. So I have a choice where I go. My 
capital will follow where I make money. So one way I can make 
money is that the regulatory burden--I am not saying free ride, 
free lunch, and all those things. I hope you understand that.
    Senator Heitkamp. Yes.
    Mr. Powell. But I cannot be worrying about assembling data. 
I cannot be worrying about a qualified mortgage when I have a 
farmer who has got a farm that is clear and he wants to borrow 
a 100 percent loan on the house. I cannot worry about stuff 
like that.
    So you have got to give me a different set of regulations 
in order that I can breathe and exist, because I have choices, 
and I am not going to go to that rural market unless I can make 
a buck. And if you burden me with regulations to open a bank 
there and to try and engage in banking, I am not going to do 
it.
    Senator Heitkamp. You know, the dirty little secret is that 
these community banks are relationship bankers.
    Mr. Powell. Absolutely.
    Senator Heitkamp. And I can tell you, I grew up in a town 
of 90 people, and you could look at a balance sheet of one guy 
and say he is--you know, just on the numbers, he is the guy 
that you should be giving money to. No one in town is going to 
give him money because he does not pay his bills.
    Mr. Powell. Absolutely.
    Senator Heitkamp. And you can see the guy come in whose 
balance sheet is net loss, and you know he is going to pay you 
back because you know him. It is character banking, and we are 
losing it in this country. And it is part of why rural America 
is not--is retracting, I believe, is that we do not have that 
anymore.
    Mr. Powell. But, Senator, they cannot make that loan. They 
cannot make that loan under current regulations.
    Senator Heitkamp. Right. I agree.
    Mr. Powell. They cannot do it.
    Senator Heitkamp. We have got to unleash it. But I think 
that rural economic development is so complex, and one of you 
raised the quality-of-life issues. I have a test: Can they 
stream Netflix? You know, it seems like such a small thing, but 
I can tell you, housing and quality of life, we have--we used 
to say in rural America that if you created primary sector 
jobs, you build it, they will come. Guess what? We have 80 open 
primary sector jobs in places in my State where they cannot get 
workforce. And so we have got to build back these communities, 
but that bank, that community corner bank, has always been a 
huge part of that economic development, and we are losing it as 
a result of overregulation of the community banks and the 
credit unions. There is no doubt in my mind.
    And so we are adamant that this is going to get fixed, but 
I do not want to walk out of here and not point out that the 
most despair economically in this country is in rural America.
    Mr. Powell. Right.
    Senator Heitkamp. Thank you, Mr. Chairman.
    Senator Cotton. Senator Van Hollen.
    Ms. Van Hollen. Thank you, Mr. Chairman. Thank you to all 
our witnesses. Just a couple points on some of the issues that 
have been raised.
    Clearly, we need good capital requirements in banks, but I 
agree with Mr. Powell, they cannot be a complete substitute for 
some kind of reasonable regulation.
    Mr. Chairman, I would just like to put in the record an 
article that appeared in the American Banker called, ``Risk 
Weights or Leverage Ratio? We Need Both'', by Aaron Klein at 
Brookings on this topic.
    Senator Cotton. Without objection.
    Ms. Van Hollen. The other issue I would like to just raise 
and tag and am interested in maybe feedback later is this issue 
of community banks and commercial banks generally, because a 
lot of the discussion is that you saw this rapid decline after 
Dodd-Frank. And I would just point out--and I have this chart, 
put together by the FDIC, 2014, which indicates a dramatic drop 
in commercial banks in the United States, starting back in the 
mid-1980s where we had over 14,500 commercial banks, and before 
the financial crash, that was cut almost in half--in fact, a 
little more than half. And the decline since then is just on 
the same trajectory that it was before Dodd-Frank.
    Mr. Powell, could you comment on that?
    Mr. Powell. Yes, Senator. I think some of the things we 
have talked about here today is that if I have--if I am going 
to capitalize an entity, capitalize a bank, I have choices. So 
I have got to have a return on my capital. I have got to expect 
that I am going to be able to increase my capital and continue 
to make money, so I will look at the handicaps and the burdens 
of that. I will look at the community; I will look at a lot of 
things. But one of the things and a primary factor, very 
frankly, Senator, is the burden of regulation. And it is more 
than the written burden of regulation. It is the tone, the 
attitude. I could tell you that plays very important in the 
decision.
    I mean, I can read the regulations and understand what the 
cost of the regulation is. But when a regulator comes in and 
how he or she addresses those issues is critical. It is really, 
really important. And that is the reason in my testimony I said 
agency heads, leadership, these agency heads are critical.
    Ms. Van Hollen. And I agree with that, and I agree we need 
to find ways to strengthen community banks. I just think it is 
important to recognize that the drop in the number of 
commercial banks in the United States is something that long 
preceded Dodd-Frank--in fact, even more dramatically so. So 
there are other things that are going on.
    Mr. Powell. That is right.
    Ms. Van Hollen. Not that we do not need to address them. We 
do.
    In Dr. Heller's testimony, his written testimony, you 
reference the fact that in the 1970s and 1980s we had a lot of 
companies providing the defined benefit retirement plans, and 
we have obviously gotten away from that a lot with the defined 
contribution plans. And you indicate, Dr. Heller, in your 
testimony that that puts consumers in charge of their own 
``financial destiny,'' and that is much more true today.
    The problem we have got is that there are many companies, 
more than half of companies and businesses in the United States 
do not provide their employees right now access to 401(k) 
plans. In fact, according to Brookings Institute, 52 percent of 
employers with 50 to 99 workers do not offer retirement plans, 
and among companies with fewer than 10 employees, that 
proportion rises to 80 percent.
    Now, in the State of Maryland and some other States, we 
have adopted legislation, bipartisan legislation, signed by the 
Republican Governor of Maryland, to create these State-based 
retirement plans that employees can voluntarily enter into if 
their employer is not providing access to 401(k)s. And you are 
finding lots of people, especially a lot of young people, 
signing up for this.
    At the same time, right here in Congress, we have a piece 
of legislation coming through that could undermine those 
efforts.
    Dr. Spriggs, could you comment on this? Because we all know 
that trying to build a secure retirement requires providing 
more access to these vehicles? Could you comment on the 
legislation and the whole concept? And then I would be 
interested----
    Mr. Spriggs. Well, that type of legislation that you speak 
of is actually a compromise because part of it is to figure out 
a way to handle the fiduciary responsibility of the company 
that initially collects that savings. And that is a compromise 
at the State level in how we handle that so that it can, in 
fact, take place.
    That type of compromise, as long as it is in law and 
protects the workers, we are very much in favor of it, and 
States are responding to Congress not expanding Social 
Security. The best thing we could do is to expand Social 
Security. But without that taking place, having States take the 
initiative is a good thing, and particularly for low-wage 
workers: school cafeteria workers who are no longer part of the 
public system, they have been privatized; the school crossing 
guard. These people are vital to our community and have been 
cutoff from this access to retirement savings, and this is a 
way to let States begin to address that. And as I mentioned, in 
each case that it has happened so far, it has been a compromise 
to protect the savings of those workers, and I think it is a 
thing to encourage, not a thing to discourage, because it is 
one time where the States as a laboratory are leading.
    Ms. Van Hollen. Thank you, Mr. Chairman. I realize my time 
is up, but if Dr. Heller or others have time and any interest 
in a written response, I would be interested in your comments. 
Thank you for raising the issue in your testimony. Thank you.
    Senator Tillis [presiding]. Thank you, Senator Van Hollen.
    Thank you all for being here today. I happen to be next in 
the order and sitting in the chair. We have got people cycling 
through like me with three different committees many of us are 
bouncing between, so I apologize for not being here earlier.
    Mr. Powell, I want to start with you. You wrote an 
interesting article just recently back in January that was 
titled, ``Why Dodd-Frank Is Unfair to Banks''. I apologize if 
people have asked this question before, but I would like to go 
back and maybe in the context of all my questions, answer it in 
the context of what I consider to be the financial services 
ecosystem, which I think is out of balance now. I will give you 
my prejudice.
    You know, at the high end are the big banks, then the 
regional banks, and then the community banks and credit unions. 
But other financial institutions that are at that base of the 
pyramid provide access to money in an orderly fashion, if it is 
regulated properly, that people may not otherwise be able to 
get. So can you tell me in the context of that ecosystem which 
banks Dodd-Frank is unfair to and what you think we should 
consider as a matter of regulatory reform?
    Mr. Powell. Yes, Senator, thank you. That piece, the 
caption was a little bit misleading in that the sense of that 
was due process. So I think that is something that we have 
forgotten about. I mean, it is an American----
    Senator Tillis. And I love the way that you--I should have 
entered that into my question or thought about it in my 
question. The board that you are talking about to actually 
provide due process that has a balance of people with banking 
industry experience, regulatory experience at the State and 
Federal level, how does that play out, again, within that 
ecosystem, knowing that as you get further down to the base of 
the financial ecosystems, people's resources are limited? But I 
think that that is a great example. We could use better due 
process in a lot of regulatory contexts, but if you could 
explain it in that manner, I would appreciate it.
    Mr. Powell. Sure. Well, it is alive at the top and at the 
bottom on that whole process. I think it would enable the 
bottom. I think it would enable--I think it would give power--
it would be an enabler to the bottom because of resources. I 
mean, if larger--mid-sized and larger institutions have an 
array of attorneys and an array of compliance officers at their 
disposal. So whereas the smaller institutions, they do not have 
that, and when they have a dispute or a disagreement with the 
regulator, what are they going to do? They are going to forget 
about it. Whereas, large institutions have a lot of resources 
to combat that. So I think that particular thought--my 
suggestion was--that is just one suggestion. There may be 
others. It would empower those people.
    Senator Tillis. And, Ms. Del Rio, I was not here, but I 
know that you having some experience with credit unions and 
credit unions have what I think is an appropriate exemption 
that is not extended to maybe other peers at the base of the 
pyramid, why is it fair for one area to have that exemption and 
others not?
    Ms. Del Rio. Thanks for the question. I actually do not 
think that credit unions should have wholesale exemptions, or 
any institution. My credit union, as I discussed earlier, is a 
community-based small financial institution that focuses on 
serving low-income and immigrant communities, and, you know, 
yes, we have costs of regulation. We are under lots of 
regulation, not just Dodd-Frank. And we try our best to embrace 
that and to recognize that there are bigger needs for that 
that, you know, we do have exemptions as CDFI-certified credit 
unions from certain rules. But, by and large, I am not aware of 
wholesale credit union exemptions, nor would we support that 
per se.
    Senator Tillis. Nor am I. I am getting more to the point of 
other--I think that we have to look at the different strata of 
the financial services ecosystem and figure out whether or not 
we have a fair or consistent treatment with those who are at, I 
think, the base of the ecosystem, as I think credit unions are, 
community banks, and other lending resources. There is always a 
question about how you regulate it for consumer protection, and 
I get that. But how do you have a more consistent treatment for 
the people whose customer base and the nature of their products 
have similarities and should either enjoy the same exemptions 
or not have them?
    I have a general question so that I can move to Senator 
Schatz, and it is around--I think that we are at our best when 
we set expectations right for what we can do around this 
building for regulatory reform. And I think there are a lot of 
opportunities for small ``R'' regulatory reform--reforms that 
reduce the disproportionate burden that goes on smaller 
financial institutions for regulatory compliance. We clearly 
needs regs to ensure consumer protections and market viability, 
but do it in a way that I think is beneficial to the financial 
services community.
    I heard it said in this Committee that we need to focus 
less on the financial services community and more on the real 
economy. The real economy does not exist without a thriving and 
secure financial services community. I do not see how the two 
work. Who underwrites risk? Who provides the funding for long-
term capital investments, et cetera?
    So I am probably going to stick around for another round, 
but, Mr. Deas, I want to tell you that I was even skeptical 
about small ``R'' regulatory reform until South Carolina made 
it to the Final Four. Now I know anything is possible. So if I 
have time for a second round, I am going to go back and ask 
this question again.
    Senator Schatz? Or, I am sorry, it is Senator Cortez Masto.
    Senator Cortez Masto. Thank you, Mr. Chair, and I apologize 
for bounding back and forth as well in the Banking Committee. 
And let me just say to the Chair, I am an alum of Gonzaga, so 
we will see you at the Final Four.
    Senator Tillis. I am counting on them to win in the Final 
Four and then lose against my Tar Heels.
    [Laughter.]
    Senator Cortez Masto. We will see. We will see.
    So let me just say I am from Nevada. As you well know, 
subprime mortgages had a devastating impact on us. I was the 
Attorney General at the time, and I will say this: I am not for 
a wholesale rollback of Dodd-Frank just because we can. I think 
it was important regulations that were put in place, an 
important law to address a horrific thing that happened with 
subprime mortgages and will continue to support it.
    However, I am also about finding the balance, and I think 
there are times when we do overregulate, and we need to figure 
that out. So I am willing to work with my colleagues to figure 
out what we can do to tweak it or improve it. But at the end of 
the day, when it comes to homeowners who suffered and people 
who had no control, who are still suffering in Nevada, I am 
going to be there fighting for them every step of the way. So I 
am about reasonable, commonsense laws and legislation.
    Here is my concern, and I am going to open this up to all 
of you. A few weeks ago, the Trump administration released 
their ``skinny budget'' for the coming fiscal year. And while 
the document lacked many key details, it did outline a 15-
percent cut relative to the housing and urban development 
funding bill that passed the Senate committee last year.
    Last week, my office released a report on the proposed 
budget's impact to Nevada which found that, if enacted, the 
Trump budget would cause my State to lose over $39 million in 
grant assistance and more than 1,300 housing vouchers. If we 
are interested in promoting economic growth, does it make sense 
to severely cut investments in community infrastructure such as 
sidewalk repairs, accessibility, enhancements for people with 
disabilities, social services like youth mentoring, food 
pantries, and transportation to take elderly people to medical 
appointments, and affordable housing construction? These are 
all types of programs that would be defunded in Nevada. I am 
curious if any of you have a comment on what I have just talked 
about.
    Mr. Spriggs. Well, Senator, if I may go first, thank you 
for the question. One of the key elements in the real economy 
is the growth of the labor force. This downturn has slowed 
labor force participation. The labor force participation rate 
especially for American women flattened back in 2000, and we 
cannot continue to have--or we cannot return to faster growth 
until we find ways to increase our labor force participation 
rates.
    The U.S. has lagged all other countries. We have now fallen 
behind, in terms of female labor force participation, countries 
which we thought culturally were not predisposed to it. So we 
now have a lower labor force participation rate for American 
women than for Japanese women, as an example.
    Compared to Canada, we have also done worse, and that is 
our neighbor and very similar in many ways to the U.S.
    One of those key elements is the provision of adequate 
child care. Those funds that are going to be cut to Nevada and 
to other American communities go straight to funding child 
care. Without that, we cannot get American women back to work. 
Without having assistance to people with disabilities, we 
cannot get their labor force participation rate up. Without the 
kind of infrastructure that makes it possible to get to work on 
time that the housing community development funds provide, we 
cannot have the infrastructure in many communities that lock 
people out from access to jobs. We need to find ways to invest 
in Americans and to make that investment where it counts, and 
where it counts for growth is you have to have a faster labor 
force participation rate--a higher labor force participation 
rate and faster labor force growth.
    So these things are going to hurt growth, and the chicken 
or the egg in all of this, it is not that businesses then get 
us people. The causation runs the other way. The causation is 
wages go up. These are now new potential customers, and 
businesses develop to take advantage of that, to see where the 
opportunity is, and that creates a virtuous cycle. But the 
causation is wages go up, then you get the businesses. And so 
if you do not have widespread income growth, if you do not 
serve the communities that will be hurt by these cuts, then you 
are not going to see the customer base grow widely.
    Senator Cortez Masto. Thank you. And, Mr. Chair, I see my 
time is up. If there is a second round of questions, I would 
like to ask one more. Thank you very much.
    Senator Tillis. Senator Cortez Masto, also happy birthday 
tomorrow.
    Senator Schatz.
    Senator Schatz. Thank you, Mr. Chairman. Thanks to all the 
panelists for an interesting discussion.
    I want to talk to you about student loan debt, and the 
reason for that is that I think in the context of the U.S. 
Congress, there is a lot of conversation about student loan 
debt as a sort of family issue, as a personal issue, and none 
of us escape it, whether we are parents or grandparents or kids 
or some of us paying off debt while we are saving up for our 
own children. But that is not the part I want to talk to you 
about. I want to talk to you about it as a national economic 
issue. And it seems to me that there is Fed data that indicates 
that it is quickly becoming a real macroeconomic question. The 
Fed says that student loan debt now tops $1.3 trillion and 
continues to grow. It has surpassed all other kinds of consumer 
debt except for mortgages. And it is not sustainable. The Fed 
shows that about 50 percent of all borrowers have not begun 
repaying, and 30 percent of borrowers who are in repayment are 
delinquent on their loans.
    So the question becomes two things, in my view: First of 
all, it is clearly crowding out the ability for consumers to 
afford other things, right? To purchase cars, to purchase 
consumer items, to get a mortgage, to get on their feet 
financially. So that is one aspect of how it is impacting the 
overall national economy.
    The other thing is it seems to me that even though we spend 
more and more in real dollars and in inflation-adjusted dollars 
on Pell grants and subsidies on the Federal side than ever, we 
continue to see the cost of college rise more than ever.
    And so now we have got this system where we are throwing 
free money at the system, right? And yet we have got massive 
disincentives. For the very first time, you can sit down with a 
17-year-old, and it is an open question whether or not it makes 
economic sense for them to pursue a higher education. And that 
is not just a personal question. That is not just a political 
or ideological question. That is a question of our national 
economic strategy. If we have configured a system where we are 
disincentivizing our young people from going to college or we 
are saddling them with so much debt that they cannot even get 
on their feet once they are done, it seems to me that has got 
macroeconomic impacts. And I would like each one of the 
panelists to quickly comment, starting from left to right.
    Mr. Heller. A very important topic, Senator. First of all, 
let us look at the cost side of the equation that you have just 
talked about. I used to be a professor at UCLA. We used to 
teach two or three courses a week. You know how much they teach 
now? One. That means the cost of an education has doubled or 
even tripled. You know, there is a relationship between how 
many professors teach how many students.
    I think it is almost unconscionable what is happening in 
many of the universities around the country. So you have got to 
increase teaching loads, and that will bring down the cost of 
college educations for the individual.
    Senator Schatz. In the interest of time, that is compelling 
and provocative, so I will just move on so we can hear from 
everybody else.
    Mr. Heller. Thank you.
    Senator Schatz. Mr. Powell.
    Mr. Powell. Senator, I recently served on the Board of 
Regents of Texas A&M University system, which is a large 
system. I will give you some data.
    Of the graduates at Texas A&M, the flagship institution, 
only 30 percent of the graduates have debt, and it is less than 
$30,000. So there is a way to do it. Now, part of it--it is a 
complex question. Some of it is efficiency. Some of it is a lot 
of other things. But part of it is culture, also. Part of it is 
culture, and part of it is sacrifice, part of it is--I think 
this has been fed because of some Government programs. It is 
easy to get debt. It is very easy. I can get, anybody can get 
student debt. So we have got to change those standards, too, 
and then we have got to look at success ratios.
    Senator Schatz. Mr. Deas.
    Mr. Deas. Thank you, Senator. I am speaking as director of 
the University of South Carolina Educational Foundation, and I 
can say from the time I graduated in 1972 to now, the 
percentage of support from the State of South Carolina to the 
university has decreased greatly. We just completed a $1 
billion capital campaign, one of the principal purposes for 
which was to support students who would otherwise be unable to 
afford our education.
    Senator Schatz. Thank you.
    Mr. Spriggs.
    Mr. Spriggs. I think that last point is the key. In the 
1970s, 60 percent of the budget came from State and local 
governments. Now it is 30 percent. We have asked students to 
catch up with that gap, and that has driven universities to be 
tuition-driven. They need the money. And if you look at the 
growth in income inequality, remember that the top 20 percent 
of income distribution consumes 60 percent of the education 
budget. So if you are running a university, you are chasing 
those dollars. Specifically, you are chasing the 1 percent.
    So if you look at tuition increases, they follow the 
increase of income for the 1 percent. Because the 1 percent 
have had faster income growth than the median or even the 20 
percent, that is where the gap is coming from. And we have 
asked students to fill that gap. So the key is to reinvest as a 
Nation in our students.
    Senator Schatz. Ms. Del Rio.
    Ms. Del Rio. Thank you. So at the beginning of my 
testimony, I made the point that although credit is vital, it 
should not be advanced as a sole solution to deeper issues, and 
this is an example where student loan debt, especially when 
placed on very low income students, has been advanced to fill 
the gaps left by public investment in higher education. Payday 
lending has been advanced--these usurious 400-percent interest 
rate loans have been advanced as a solution to the fact that 
people are not earning living wages. These are the examples 
that really have impact not just on people and communities but 
on the economy ultimately, as you see this $1.3 billion in 
student loans being amassed.
    Our organization operates a free legal-financial justice 
hotline in New York City, and I just want to point out that 
some of the calls that we used to get around student loan debts 
really exemplified another public policy issue, which is that 
these student loans, especially when they are made to cover 
tuition at for-profit and often fraudulent schools, are by and 
large subsidized by the Federal Government in the form of 
student loan guarantees. And this business model has been well 
documented. These are schools that are set up not to provide 
education but to siphon public dollars by using these low-
income individuals and their eligibility for Federal 
guarantees. And not only is that a poor use of public subsidies 
and dollars, but those individuals then, once they did not get 
their degree or they were not able to get a job or they found 
out the degree they had was actually not--was worthless, they 
were not able to then get Federal student loans to go and 
attend a sound school because they had used it up for these 
shoddy schools.
    Senator Schatz. Thank you----
    Ms. Del Rio. So there are layers and layers, so thanks for 
the question.
    Senator Schatz. Thank you very much, and I thank the Chair 
for his indulgence.
    Senator Tillis. Thank you, Senator Schatz.
    I think that Senator Cortez Masto and I both have plans to 
ask a second round. And, Senator Cortez Masto, as a birthday 
gift, I will let you go before me.
    Senator Cortez Masto. Thank you, Mr. Chair.
    I am interested in the discussion on how we grow the 
economy, and one of the areas that is important for me is the 
issue that I believe--and I have seen the statistics to show--
that if we just passed comprehensive immigration reform, that 
would grow our economy. I know--and I have seen and let me just 
run through it really quickly--the studies that are consistent 
that show President Trump's Executive order would reduce our 
Nation's cumulative GDP over 10 years by $4.7 trillion. An 
article in Politico today that says the Hispanics, who make up 
two-thirds of the Nation's undocumented population, are 
critical players in the building and sale of single-family 
homes, which account for about one-sixth of the U.S. economy.
    I am curious from your perspective, Ms. Del Rio, is that 
true, that you see a correlation between economic growth and 
passing comprehensive immigration reform?
    Ms. Del Rio. There are ample stories that show different 
cities and towns throughout the country that were experiencing 
economic disinvestment that were revitalized as a result of 
immigration to these new areas, often for the first time. These 
were sort of not the traditional immigration corridors.
    Our organization for many years ran an immigrant financial 
justice project that tried to address barriers and worked very 
hard with a broad section of groups and lenders and advocates 
and others to address and eliminate barriers that immigrants 
face with respect to our economy, and these include things as 
fundamental as basic bank access. New York City, as you may 
know, our population is 40 percent foreign-born, and yet the 
biggest banks routinely impose identification requirements that 
go far beyond what the law requires, that basically exclude 
low-income and undocumented immigrants. There are no 
requirements right now, there are no legal barriers to 
immigrants, regardless of status, participating in the economy 
through purchasing homes, starting businesses, and, in fact, 
many do, and so on. And yet banks, which are supposed to be the 
gateway into the economy, have consistently put up barriers.
    I think that is a really critical issue to examine because 
I think if immigrants that are here now have pathways to status 
and also have pathways into the real economy and are not 
relegated to sort of these high-cost, fraudulent, often 
unregulated sectors, it would do a lot for the overall economy.
    And just one other note. You know, immigration status--yes, 
immigration reform we believe would go far toward advancing 
fairness and economic growth overall. But, you know, 
immigration status even without comprehensive reform can be 
very fluid, and, you know, the Deferred Action program is one 
example. You have now hundreds of thousands of people across 
the country who have this status where they are able to work, 
they are able to get work permits, Social Security numbers, and 
participate in the open in the system, and yet financial 
institutions are not by and large serving that population 
either. And so I think that this is an unrecognized by really 
critical issue.
    Senator Cortez Masto. Thank you very much.
    Thank you, Mr. Chairman.
    Senator Tillis. Thank you, Senator Cortez Masto.
    Back on a point that Senator Schatz was making--and I 
think, Mr. Heller, you went on a good path, because instead of 
answering how do we continue to address the increasing cost of 
education, how do you get to the underlying cost drivers, you 
used one example. Another one, in North Carolina, the public 
university system there estimates that they spend about $1.2 
billion a year in regulatory compliance, and it 
disproportionately harms the smaller institutions.
    So one of the ways, if we are really going to get serious 
about addressing student loan debt and affordability of 
college, we need to understand that we are also the root cause 
of some of the spiraling costs. And we have got to work on 
that, and I am glad that Senator Schatz brought it up. It is 
something we need to work on. It is not in this lane, but it is 
critically important because it affects those who want student 
loans, bending the curve.
    Mr. Deas, since I took a shot at the University of South 
Carolina earlier, I am going to start with you, but in a 
positive way. I actually like the Gamecocks except when they 
are playing a couple other teams down in the Carolinas. But I 
want to ask you and Mr. Heller to explain to me how large, 
medium, and small financial services institutions are helping 
U.S.-based companies get access to international markets and 
whether or not you think that is important.
    Mr. Deas. Senator, I think it is very important, and 
companies have a network of banks providing committed credit, 
and since committed credit is the most important thing they 
need, they frequently rely on those banks to provide other 
ancillary services, especially those that would take advantage 
of their international networks for documentary letter of 
credit collection and other activities through the financial 
system that would facilitate trade, exports, and other 
activities. So it is very important.
    Senator Tillis. Mr. Heller.
    Mr. Heller. Yes, I have testified that all financial 
institutions are important, different sizes, and that we need a 
mix of them. But if you focus specifically on international 
trade, obviously, the large institutions are the ones that 
really play the important role. A community bank just cannot be 
involved in international trade finance or offer various 
facilities to make international commerce easier for the 
corporations. So you need specialized institutions or large 
institutions that offer these very specialized services. In 
this country, we are interested in increasing our exports, so 
we have got to have export finance, private export finance 
available. You have got to have receivable finance, and by its 
very nature the time periods are longer. It takes 2 or 3 weeks 
until the ship gets over to Europe or to Asia. So these larger 
institutions play a vital role there, and foreign exchange 
services, all those things together.
    Senator Tillis. And, Mr. Deas, I just have one other 
question for you. I know in your testimony you talked a little 
bit about the impact of rules that are promulgated on the end 
users. Can you talk a little bit more maybe in specific terms 
about risk mitigation instruments an end user may have had at 
their disposal at one point in time but through the regulatory 
process it is not a factor in their process of seeking capital 
or financing?
    Mr. Deas. Yes, sir. Thank you for that question. From the 
end-user's standpoint--and I have had the privilege of working 
for American manufacturing companies for almost 40 years--we 
view the financial system as very similar to the electric 
transmission system that takes electricity from where it is 
generated and transmits it to where it is needed. And the 
financial system for us does the same thing. It takes funds 
from wherever they may be generated and in excess and transmits 
then to where they are needed.
    They do the same thing for the transmission of risk, if we 
have one company that is exporting and selling in a foreign 
currency, it needs to lay off that foreign currency risk to 
somebody that may be importing and needs to purchase the 
foreign currency.
    And so when there is a burden that is placed on this 
transmission system, it inevitably raises the cost to end 
users. And so through the actions of Chairman Crapo and others 
on this Committee in the last Congress, we were able to get a 
clear exemption from the end-user margin requirement that would 
have required us to post cash to offset derivative positions. 
But now the bank capital requirements are imposing the exact 
same economic burden on end users through the imposition of--
the capital that we would have paid in margin is now capital 
banks have to set aside against our derivative positions. And 
when that transmission of risk becomes too complicated, 
companies do not take the risk. They do not produce, and 
ultimately they do not hire more American workers.
    Senator Tillis. Thank you. I could go on forever, 
particularly since I have got the gavel right now.
    [Laughter.]
    Senator Tillis. But, Mr. Spriggs, I did have one final 
question for you, and it relates to the line of comments and 
questions that Senator Cortez Masto had on immigration reform.
    What is your opinion on what she said and the extent to 
which immigration reform is important for economic growth and 
American job growth in the United States?
    Mr. Spriggs. Well, thank you very much for that question, 
Senator, because I think it is very important. When workers do 
not have the security of the certainty of their status, it 
means they have to be in the shadows. Their companies have to 
be in the shadows. And it means that we have a poorly regulated 
labor market. The protections to make sure that workers do not 
have their wages stolen, be safe at work--all of those things 
disappear.
    When workers have the certainty of their status, several 
things happen. The labor market becomes more dynamic. They are 
free to move. They are free to take the job that they would 
like to take. And a more dynamic labor market, a labor market 
in which workers are free, is one of the prerequisites for 
getting wages to go up. They need to be able to bargain. 
Workers without status would not dare risk forming a union 
because they know they are going to be in trouble right away. 
Workers who do not have a clear status are not going to go to 
the Department of Labor, even though the Department of Labor, 
while I was there, made sure to let workers know that we 
enforce the laws of the United States, period.
    But all of those things mean that the labor market does not 
function as well; workers are not in the positions that would 
be the most productive. And giving them that certainty, giving 
them that path to know that I am going to be free to move 
around in the labor market benefits all workers. No one 
benefits by having 11 million people in the shadow, and we 
should understand that this is not a ``them'' and then an 
``us.'' People who are undocumented are married to American 
citizens. They have American citizen children. So this is not 
kind of a----
    Senator Tillis. Let me just ask one follow up, and then we 
will bring the Committee to an end. Let us assume, now that we 
know anything is possible, that we move into some immigration 
reform dialogue. The next logical step or one of the components 
in immigration reform would obviously be the consideration for 
work visas at the full spectrum, highly skilled STEM resources 
to lower-skilled resources. How does that weave into your 
concept of comprehensive immigration reform suggested by 
Senator Cortez Masto?
    Mr. Spriggs. We believe that workers always have to have a 
path to citizenship. Temporary visa programs--the H-2B program, 
the H-1B visa program--all exploit workers and work to the 
detriment of American workers and to those workers. And we have 
seen the abuse of the H-1B for high-end workers where Americans 
recently in the University of California hospital system had to 
forfeit their jobs and train a set of workers to replace them--
--
    Senator Tillis. Do you believe that there is a sufficient 
number of American citizens and the population that is 
illegally present to fulfill the H-1B visa needs of this Nation 
and a 3- to 3.5-percent GDP growth? I do get the exploitation. 
That is why we want to find the businesses that do that, that 
actually discredit visa programs. But do you believe that we 
have sufficient labor force to meet a growing economy at 3.5-, 
4-percent GDP growth?
    Mr. Spriggs. If we continue to make the proper investment 
in American----
    Senator Tillis. But I am talking about today.
    Mr. Spriggs. Today we have enough workers. If we continue--
if we can return to making the proper investment in American 
children and believe in them, we can educate enough people to 
do the job. During the downturn, we continued to bring in H-1B 
visa workers even though we were laying off workers in that 
industry and even though we were continuing to graduate 
students desperate for jobs. That generation--anyone born 
between 1985 and 1994 is going to pay a permanent lower wage 
penalty because of the size and duration of this downturn, 
including those who got advanced degrees in computer science.
    And I would just note, you know, they are smart enough to 
know this. My son is going to graduate in electrical 
engineering because we do not do H-1B visas in electrical 
engineering. Students in engineering know this. They know that 
if you do certain fields, there are no H-1B visas. And they 
know if you do other fields, you face that competition.
    Senator Tillis. I have completely swum out of the lane of 
banking into my position on the Immigration Subcommittee in 
Judiciary, and what I am hoping--and maybe that is an 
appropriate committee for you or others to come before. But I 
think that there is a way to--if we are going to get serious 
about immigration reform, we have to recognize that these are 
all levers that need to be available. They need to be scaled up 
and ramped down based on the needs of the U.S. economy and the 
supply of the resources to fill some of the roles. When we see 
the analytics, we may disagree on the outcomes on some of them, 
but I do think that that is a key part of--otherwise, we are 
just going to continue the 40-year-old chorus of failing to fix 
immigration reform in this country.
    But I appreciate you all being here today. On behalf of 
Chairman Crapo, I thank you all for spending the time here.
    We will bring the Committee to an end, but we will leave 
the record open for 1 week so that any additional information 
or questions from the Members can be submitted to you for your 
response. Thank you all so much for being here. The meeting is 
adjourned.
    [Whereupon, at 11:37 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
               PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
    A strong and vibrant economy is important for American consumers, 
businesses, and the stability of the financial sector.
    Financial companies of all sizes and forms provide critical 
services to businesses and consumers, helping businesses manage 
operations, entrepreneurs get funding to start companies, and average 
citizens buy a first home or deal with a financial emergency.
    As policymakers, we must diligently and frequently study the state 
of our economy, our regulatory framework, the use of capital, and 
provision of financial services.
    According to recent studies, since the crisis, large businesses are 
experiencing a more robust recovery than small firms and entrepreneurs.
    One of the main drivers of underperformance by new and small firms 
compared to their larger counterparts is their limited access to 
credit.
    There are direct links between post-crisis regulation and 
restricted finance.
    Data from the St. Louis Federal Reserve shows that a mere decade 
ago, small banks made more business loans compared to larger banks. 
That is no longer the case.
    Consumers, many on the periphery of mainstream banking, are seeing 
certain products and product features disappear.
    For example, one product line, short-term, small-dollar credit, is 
expected to see a 60-70 percent decrease in market size--according to 
the CFPB--with virtually no other avenue for product users to access 
credit.
    These are a few examples that support the need for a thorough 
review of our regulatory framework and the role of financial companies 
in the economy.
    I have been encouraged by President Trump's executive orders and 
memoranda on regulations and core principles for regulating the 
financial system.
    The Treasury Department has begun its review, and I look forward to 
seeing the recommendations it puts forth on how well existing laws and 
regulations promote or inhibit economic growth.
    Last Monday, Ranking Member Brown and I announced a formal process 
to receive stakeholder proposals that will help consumers, market 
participants, and financial companies responsibly participate in the 
economy in a more effective and efficient manner.
    And last Tuesday, the Federal banking regulators released their 
EGRPRA report, which sought to identify regulations or laws that are 
outdated, unnecessary, or unduly burdensome.
    Taken together, these actions will provide a clearer picture of 
what is working and what is not working within our financial regulatory 
framework.
    Today, this Committee will study how financial companies 
participate in the economy, with a goal of better understanding their 
role in fostering economic growth.
    Our witnesses have diverse backgrounds, and I look forward to 
hearing their unique perspectives on this issue.
    For example, why are community financial institutions important in 
local communities, and what happens when communities begin losing 
financial institutions?
    What services do financial companies provide businesses of all 
sizes, and are services being deployed in an effective and efficient 
manner?
    How can large financial companies help U.S.-based companies compete 
in global markets?
    Ranking Member Brown and I have started working together on a 
bipartisan basis to hear the thoughts and concerns of various 
stakeholders and Members of the Committee.
    It is my hope that Members will find this to be a thorough, 
inclusive process, and one that is structured for success.
                                 ______
                                 
                  PREPARED STATEMENT OF ROBERT HELLER
   Former Governor, Board of Governors of the Federal Reserve System
                             March 28, 2017
    Chairman Crapo, Ranking Member Brown, and Members of the Committee, 
thank you very much for inviting me to testify on the contribution made 
by financial institutions to foster economic growth and the role of 
regulation in that context.
    Having spent most of my career in banking and related financial 
sectors of our economy, I had the honor of serving as a member of the 
Board of Governors of the Federal Reserve System, where I served as the 
chairman of the Committee on Bank Supervision and Regulation. Currently 
I am on the board of directors of Bank of Marin, a community bank 
located in the San Francisco Bay Area. It is my pleasure to offer the 
following observations.
The Role of the Financial System in the Economy
    Every student of economics knows about the vital role played by the 
financial system in supporting and fostering economic growth. In the 
interest of time, I will focus my remarks mainly on the role of the 
banking system, but there are many other financial service companies 
that perform similar or complementary functions as well.
    The variety of financial services offered by our Nation's banks is 
truly extraordinary and ranges from simple payments and banking 
services to highly complex financial products.
    Consumers benefit from having convenient, secure and efficient 
payments and depository facilities like checking, savings, and money 
market accounts available to them. Credit cards allow them to buy now 
and pay later for their purchases. As people go through the various 
phases of their life, they may have a need to finance their college 
tuition, buy a car with the help of an automobile loan or lease, or 
take out a mortgage or home-equity loan to purchase a house and to 
furnish it. Over a lifetime, people also want to accumulate enough 
resources to provide for a secure retirement and maybe fund a trust 
account to provide for the needs of loved ones.
    Large and small businesses also have an ever-changing need for a 
broad range of financial services. Small companies may need simple cash 
management services as well as a loan to finance inventory or to buy 
new equipment. Larger corporations may want to issue bonds and stocks 
to finance their growth and expansion. Companies that are active in 
international markets will also need foreign exchange and remittance 
services. Finally, large multinational corporations may want to avail 
themselves of a myriad of complex financial services, such as swaps and 
derivatives, which enable corporations to shift risk from their own 
balance sheet to others through hedging activities carried out with the 
help of experienced financial intermediaries. In addition, they may 
need local banking services in the foreign countries around the world 
where they do business.
    In a sense, the financial flows pulsing through our financial 
system and supporting the economy at large are akin to the lifeblood 
coursing through our body and nourishing all vital organs. Without the 
financial flows nourishing the economy, the rest of the economy would 
wither and die.
Loan Growth Parallels Economic Growth
    Over the economic cycle, loan growth tends to parallel economic 
growth as is shown in Figure 1, which depicts the growth rates of GDP 
and that of commercial and industrial loans made by banks since 1980.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Each recession is accompanied by a decline in loan growth and once 
economic growth recovers, loan growth also tends to accelerate. The 
relationship works in both directions: higher economic growth calls for 
new financing of supplies and equipment, and new loans by banks help to 
spur economic activity. Economic growth and financial activity go hand 
in hand.
Our Multifaceted Economic and Financial System
    Our economic system is composed of a multitude of enterprises of 
various sizes. All enterprises start small and, if they are successful, 
they grow into huge multinational enterprises. It is truly amazing that 
in our dynamic economy, two companies founded during our lifetime in 
Bentonville, Arkansas, and Cupertino, California, grew into some of the 
largest corporations in the world. Small, dynamic companies often 
experience the highest growth rates and create the most new jobs.
    The same holds true for our financial institutions, which range in 
size from small community banks to trillion-dollar strong, 
multinational financial corporations that span the globe.
    Community banks have always been a mainstay of the American 
financial system. They are generally small, community-based 
institutions, which tend to focus on relationship banking. They serve 
the banking needs of the consumers and the small- to mid-sized 
businesses within their footprint. They know their customers well and 
have established relationships that often last for decades. Community 
bankers know their customers by name and are intimately familiar with 
the customers they lend to--often because they live next door to them. 
They do not tend to compete on price, but on the quality of the 
services they provide on the basis of personal relationships. Community 
banks that have a solid credit culture and avoid risky exposures can do 
very well by serving their established customers.
    At the other end of the spectrum, we have a handful of large banks 
that offer a broad range of financial services to their customers. 
These trillion-dollar strong universal banks provide a broad range of 
depository services and loans as well as sophisticated financial 
products and services to their customers from coast-to-coast and indeed 
around the world. Their services encompass consumer-oriented products 
as well as products oriented towards middle-market firms. They also 
offer sophisticated financial services to multinational corporations 
that include nationwide payments services as well as all the 
traditional investment banking services available in today's 
sophisticated capital markets.
    It was not always that way.
    Until the 1980s, our financial system was mostly composed of 
community banks and even sizeable institutions consisted basically of a 
large number of community banks under one common umbrella.
    In those days, the Nation's banking system was fragmented along 
geographic and functional lines. In addition to the community banks, 
there were specialized financial institutions that served the unique 
needs of their customers. There were investment houses that catered to 
the needs of corporations wanting to issue stocks or bonds; savings 
banks that specialized in the issuance of mortgages; and even credit 
card banks to issue credit cards. Moreover, traditional commercial 
banks were largely prohibited from crossing State lines.
    Several factors combined to lead to the elimination of these 
geographic and functional barriers. There were the insights of academic 
and financial experts that pointed to the risk-reducing advantages of 
diversified business activities and portfolios. While one set of 
activities was lagging, other sectors might be booming. Thus, the 
enterprise as a whole would have a more stable income stream. Asset or 
loan portfolios would be better balanced and able to weather unexpected 
risks. Diversification along both geographic and functional lines was 
seen as making financial institutions safer.
Regulations Shaping Our Financial System
    Besides these fundamental academic insights on diversification, 
there were new laws and regulations that shaped the financial landscape 
as it exists today. The financial services sector has always been 
highly regulated, and legal and regulatory actions have fundamentally 
influenced the structure of the industry. Let us look at just a few 
seminal events in recent history.
Geographic Barriers
    Until the 1980s, financial institutions were strictly regulated 
along geographic lines. The depression era McFadden Act of 1927 
prohibited federally chartered banks from branching outside their home 
State. While one might argue that this was in contravention to the 
interstate commerce clause, it established equality between federally 
chartered and State-chartered institutions, which were restricted to 
just that one State in their operations. Furthermore, many States were 
so-called unit-banking States, where branch banking was prohibited and 
where banks were restricted to a single locality to conduct their 
business.
    Eventually, bank holding companies overcame some of these 
restrictions by combining individual banks under a bank-holding company 
umbrella. But these banking confederations were limited in their 
ability to lend by being separately capitalized and therefore severely 
restricted in their lending limits. Each bank also had its own separate 
board of directors, which was not only an expensive proposition, but 
also required multiple decisions made by often independently minded 
directors who wanted to move in different directions.
    The double-dip recession of the early 1980s hit various parts of 
the country with different intensities. It affected many of the unit 
banks negatively and resulted in a record number of bank failures. It 
became clear that geographic diversification would add considerable 
strength to the American banking system and the Riegle-Neal Interstate 
Banking and Branching Efficiency Act of 1994 legalized interstate 
banking and permitted branching across State lines. The passage of this 
legislation enabled many multistate bank holding companies to 
consolidate and made de novo interstate branching, as well as 
acquisitions across State lines, possible.
    The resulting banks were safer because they were more diversified 
geographically and enabled to serve their commercial customers on a 
nationwide basis. The result was greater efficiency for the banks as 
well as better service for their customers--especially nationwide 
corporations.
Functional Barriers
    Ever since the Glass-Steagall Act was passed in 1933 at the height 
of the Great Depression, American consumers and businesses were served 
separately by commercial banks and investment banks for their financial 
needs. This was not the case in the rest of the world, where the 
``universal'' banking model prevailed and financial institutions were 
allowed to serve both the commercial and investment banking needs of 
their customers.
    As the U.S. economy expanded during the 1970s and 1980s, both 
consumers and companies began to argue increasingly in favor of 
allowing one banking institution to serve all their financial needs. 
For instance, the Employee Retirement Income Security Act (ERISA) of 
1974 enabled consumers to save tax-free for their retirement. At the 
same time, many corporations terminated their defined-benefit 
retirement plans and switched to defined-contribution plans or IRA 
accounts. Increasingly, consumers were in charge of their own financial 
destiny. But commercial banks could only offer a rather limited product 
range to their customers. Consumers questioned why they could not 
conveniently avail themselves also of investment products, such as 
stocks, bonds and annuities, through their own familiar banking 
institution.
    Some commercial banks therefore tried to ``follow their customers'' 
and began to acquire brokerage firms. For instance, Bank of America 
acquired the Charles Schwab Company in 1983.
    At the same time, commercial banks wanted to increase their 
investment banking services to their corporate customers as well. The 
regulatory agencies slowly responded to these demands by increasing the 
magnitude of the securities activities permitted for commercial banks 
from virtually nothing to 10 percent. \1\ But it took legislative 
action in the form of the Financial Services Modernization Act of 1999, 
also known as the Gramm-Leach-Bliley Act (GLB Act), to give banks the 
power to offer both commercial and investment banking services under 
one roof. President Clinton signed this bill into law on November 12, 
1999.
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     \1\ For my own role in this process, see: Robert Heller, The 
Unlikely Governor, Maybridge Press, 2015, p. 287.
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    By this legislative act, commercial banks were enabled to also 
offer their retail customers a complete line of investment products and 
asset management services under one roof.
    Similarly, the new universal banks could offer their corporate 
customers the complete line of payments, loan and securities products 
that they needed. For instance, a bank that had helped a small start-up 
company grow by financing their first receivables and equipment, was 
now also able to introduce the growing company to the securities market 
and to issue stocks and bonds.
    The Gramm-Leach-Bliley Act also made American banks more 
competitive with their foreign counterparts in Europe and Asia, which 
had always benefitted from the integrated universal banking model.
    At the height of the 2007-08 banking crisis, many financial 
institutions were under severe stress. Those exposed to the subprime 
mortgage sector either through their mortgage origination activities, 
such as Countrywide Financial, or through their syndication and trading 
activities, like Lehman Brothers and Bear Stearns, were hit 
particularly hard.
    During the crisis, which culminated in the collapse of the Lehman 
Brothers investment bank on September 15, 2008, all major American 
investment banks were either merged into commercial banks or took out 
bank charters themselves. For example: JPMorgan acquired Bear Stearns 
and Bank of America absorbed Merrill Lynch. Both Goldman Sachs and 
Morgan Stanley became bank holding companies. They became universal 
banks, subject to supervision by the Federal Reserve and gaining access 
to the discount window as well as other credit facilities.
    Some observers have argued that the elimination of the Glass-
Steagall barriers made banks more vulnerable during the financial 
crisis of 2007-08. I believe that nothing could be further from the 
truth. Without the ability to merge commercial and investment banks, 
the banking crisis would have been much deeper and widespread than it 
was and there would have been more Lehman-like failures or the 
Government would have had to engage in many additional large bailouts. 
\2\
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     \2\ President Clinton, who signed the Gramm-Leach-Bliley Act into 
law, also believes that the legislation helped to stabilize the 
American banking system during the crisis. He stated so in the 
following exchange between himself and Maria Bartiromo (BusinessWeek, 
September 23, 2008)
     Maria Bartiromo: Mr. President, in 1999 you signed a bill 
essentially rolling back Glass-Steagall and deregulating banking. In 
light of what has gone on, do you regret that decision?
     Former President Clinton: No, because it wasn't a complete 
deregulation at all. We still have heavy regulations and insurance on 
bank deposits, requirements on banks for capital and for disclosure. I 
thought at the time that it might lead to more stable investments and a 
reduced pressure on Wall Street to produce quarterly profits that were 
always bigger than the previous quarter. But I have really thought 
about this a lot. I don't see that signing that bill had anything to do 
with the current crisis. Indeed, one of the things that has helped 
stabilize the current situation as much as it has is the purchase of 
Merrill Lynch by Bank of America, which was much smoother than it would 
have been if I hadn't signed that bill.
---------------------------------------------------------------------------
    Of course, that judgment begs the question of what caused the 
crisis that triggered the Great Recession in the first place. It is 
evident that both subprime mortgages and mortgage-backed securities 
were at the center of the crisis.
    Prior to the crisis, many American presidents \3\ championed the 
idea of widespread home ownership. Much legislation and regulation 
promoted the idea that homeownership should be supported by our 
financial institutions above and beyond the levels that would result if 
regular market forces were left alone to determine the level of 
mortgage loans made. Many of these subprime loans were made to people 
who could not afford to service them. Subsequently, they were packaged 
into complex and little-understood financial securities that were then 
sold to third parties, such as Fannie and Freddie. Thus, a toxic brew 
of opaque and risky securities was created that eventually imploded 
when delinquencies reached unexpected levels.
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     \3\ That includes President Roosevelt (Homeowners Refinancing Act 
of 1934 and the Home Owners' Loan Corporation Act. Fannie Mae was 
created in 1938), President Carter (Community Reinvestment Act of 
1977), President Clinton (Housing and Community Development Act of 
1992) and President George W. Bush who advocated the ``Ownership 
Society.''
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    But as President Clinton pointed out, if the Glass-Steagall 
barriers had still been in place, the crisis might well have been even 
worse than actually experienced.
Regulation Versus Capital
    Extensive legislative and regulatory rules govern the conduct of 
all commercial banks. Everyone will agree that our financial 
organizations--and especially our depository institutions--should be as 
safe as possible and that a repeat of the financial turmoil experienced 
a decade ago needs to be avoided.
    There are two basic methods to increase bank safety: more 
regulation or more capital. Let us consider each in turn.
Regulation
    Rules and regulations are one way in which financial institutions 
can be made more safe and secure. They will prohibit especially risky 
behavior and limit the scope of risk-taking by the institution. But as 
one rule is established, the drive to serve their customers and to make 
more profits often leads managers to develop ways to circumvent the 
rule and to develop new products that are not governed by the existing 
regulations.
    The natural reaction by regulators is to counter with the 
imposition of even more rules. As a consequence, an ever-tighter and 
more cumbersome straightjacket of regulations develops that becomes 
more and more complicated to implement and follow.
    One look at the three-page contract that I signed in order to 
obtain my first mortgage many years ago, compared to the six-inch stack 
of papers and supporting documents and dozens of signatures that I had 
to sign to obtain my latest refinancing loan, tells the story of 
increased regulation over the decades.
    Bank supervision is also by its very nature a backward-looking 
process. It looks at what has actually happened in the past and whether 
any transgressions or rule violations have occurred.
    A friend of mine, who spent his entire career in the automobile-
manufacturing sector, always espouses the mantra that ``quality should 
be built into the production process--and not inspected-in 
afterwards.'' By this he means that it is much more efficient to build 
a high-quality automobile in the first place than to try and find 
defective cars at the end of the assembly line through an arduous 
inspection process.
    The same applies to financial institutions. Auditors may be able to 
identify bad loans, but it is much more efficient not to make any 
questionable loans in the first place. At Bank of Marin, we endeavor to 
make only solid loans and during the entire 27-year history of the 
bank, we have foreclosed on only one single loan that we originated. 
Regulators, consumers and trade magazines recognize this attention to 
quality. For instance, American Banker has consistently ranked Bank of 
Marin among the Top 100 community banks.
    We have tried to make only solid loans in the first place and have 
worked diligently with the customer, if he should encounter 
difficulties in servicing the loan. That's what relationship banking is 
all about.
    Nevertheless, at Bank of Marin our Compliance Department expenses 
have more than doubled since 2009. But these direct costs do not tell 
the whole story. In addition, lenders and branch personnel have to 
undergo costly compliance training and a great deal of compliance-
related information has to be collected and documented throughout the 
new loan approval and boarding process. Our staff also spends 
considerable time in compliance working group meetings to assure that 
all developments and updates are communicated throughout the 
organization. Then there are the internal and external auditors to look 
over the shoulders of the line officers to make sure that all is in 
order and well-documented and is able to stand scrutiny by the 
regulators.
    Since the passage of the Dodd-Frank Act, there is even a federally 
chartered organization to scrutinize the work of the independent 
auditors: the Public Company Accounting Oversight Board (PCAOB).
    When will there be enough layers of supervision and control?
Capital
    In a modern company, capital consists of the financial resources 
provided by the shareholders of the corporation. It is invested in the 
means of production, be that land, equipment or human resources. It is 
also an essential part of the financial resources that enable a company 
to operate. Finally, it is an important cushion to absorb any losses. 
Scarce capital provides a powerful incentive to management and 
directors to make only prudent investment and loan decisions. This will 
enable the institution to make profits, which will in turn accrue to 
the owners of the capital stock.
    Capital is not cheap, and because it is the cushion that will have 
to absorb any losses, shareholders (as the owners of the capital) have 
a vital interest in making sure that the institution follows prudent 
policies in their lending department as well as in other risky 
activities, such as trading.
    Higher capital levels provide important protection against failure 
of a financial institution. A recent study by the International 
Monetary Fund points out that an optimal level of capital takes into 
account not only the costs and benefits to bank shareholders, but also 
to the overall economy. The study concludes that additional bank 
capital is beneficial at first, but has rapidly diminishing values 
above a risk-weighted capital to asset ratio of 15 to 23 percent. \4\ 
The law of diminishing returns applies to capital as well.
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     \4\ Jihad Dagher, Giovanni Dell'Ariccia, Lev Ratnovski, and Hui 
Tong, ``Capital Buffers'', International Monetary Fund, Finance and 
Development, September 2016.
---------------------------------------------------------------------------
    In the United States, the overall ratio of bank regulatory capital 
to risk-weighted assets is now close to this 15 percent level, as shown 
by the solid line in Figure 2. However, the ratio of bank capital to 
total assets (shown by the dash-dot line) is somewhat lower. In any 
case, we may conclude that these increased capital levels have made the 
American banking system much safer and more resilient.
The Choice Between Capital and Regulation
    The question remains whether higher capital levels or more 
regulation offer a better protection for depositors, shareholders, and 
taxpayers alike.
    Based on my experience, both as the Chairman of the Committee on 
Bank Supervision and Regulation at the Federal Reserve Board and my 
banking experience, I would argue that strong capital requirements are 
generally much more effective than a myriad of regulations in keeping a 
financial institution healthy.

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    First of all, capital is a flexible buffer that protects the 
shareholder, depositor, and taxpayer alike against all the activities 
carried on in various parts of the bank. One year, commercial loans may 
be experiencing particularly high losses and in another year, it may be 
mortgages that are stressed. A large bank may experience losses in its 
trading or underwriting activities, while the regular banking business 
flourishes.
    In contrast, regulations are a straightjacket where each and every 
activity is constrained in its own right. It is almost impossible to 
take advantage of unusual opportunities that avail themselves, even if 
they are not particularly risky under the circumstances.
    I believe that the financial sector, and thereby indirectly the 
entire economy, will thrive best if there are as few rules and 
regulations as possible. Efficiency is not obtained by having so many 
rules that essentially all institutions are forced to follow a similar 
business model. That amounts to central planning more appropriate for a 
command economy. One size does not fit all and leaves no room for 
innovation.
    A centrally planned economy is certainly not immune to errors, and 
command economies have suffered many economic setbacks and generally 
low growth. Similarly, regulators are not exempt from the potential to 
make errors in their guidance. As recent history shows, when the 
governmental authorities attempted to encourage more lending than the 
mortgage sector could safely bear, the results were not pretty.
    Furthermore, bank supervision is by its very nature a backward-
looking activity that tries to catch errors and transgressions made in 
the past.
    Regulation also results in never-ending meetings between regulators 
and management. It drives up staffing costs in the compliance 
department as well as in the operational departments that have to 
supply the necessary information to the compliance officers. In 
addition, the staff of the regulators needs to be paid.
    Of course, capital is expensive, but given a choice between higher 
capital and more regulations, I would generally recommend the higher 
capital levels. This will enable financial institutions to deploy their 
capital in a flexible manner, so that the growth of the economy at 
large can be supported in an optimal manner. The economy at large will 
thrive if banks and other financial institutions can accommodate the 
needs of their customers in a flexible, but safe manner.
    One such way to ease the regulatory burden for financial 
institutions is proposed in the Financial CHOICE Act, which gives 
regulatory relief to financial institutions that are not only well-
managed, but also maintain very high capital levels. This approach will 
allow banks to essentially ``self-regulate'' if they have enough skin 
in the game in the form of high capital levels. \5\
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     \5\ I was honored that the Preamble to the Financial Choice Act 
cites my recommendation to that effect in: House Committee on Financial 
Services, The Financial CHOICE Act, www.FinancialServices.House.Gov/
CHOICE, June 23, 2016, pp. 6-7. The citation is from: Robert Heller, 
The Unlikely Governor, Maybridge Press, 2015, p. 231.
---------------------------------------------------------------------------
    Allowing banks to obtain relief from onerous micro-regulations by 
electing to maintain higher capital levels benefits everybody: the 
banks gain flexibility to manage their own affairs and have lower 
compliance costs; consumers and corporations will benefit from being 
able to deal with more flexible and responsive banks; shareholders will 
receive higher returns; and bank regulators will save in personnel and 
other oversight costs.
Eliminating Overlapping Regulation
    There is one further improvement in the financial services sector 
that would considerably lower costs and thereby enhance economic 
growth. This is the elimination of overlapping regulatory agencies in 
the financial sector.
    Among the Federal financial regulators, we have the Federal Reserve 
System, the Office of the Comptroller of the Currency, the Federal 
Deposit Insurance Corporation, the Securities and Exchange Commission, 
the newly formed Consumer Financial Protection Agency, the Commodity 
Futures Trading Commission for institutions active in the derivatives 
markets. In addition, there are the State bank supervisors for State-
chartered institutions. Moreover, institutions offering insurance 
products are also subject to the supervision of the relevant State 
insurance regulators.
    A typical financial institution is subject to the supervision and 
regulation of at least two or three of these regulators and the more 
complex organizations may be subject to the supervision of six or even 
seven regulators.
    In fact, there are now so many regulatory agencies that there exist 
even additional agencies to coordinate and streamline the regulators. 
The Federal Financial Institutions Examination Council (FFIEC) is 
tasked to coordinate the rulemaking by the various agencies. In 
addition, the Financial Stability Oversight Council (FSOC) is there to 
coordinate and, if necessary set aside, regulations of the various 
agencies in the interest of overall financial stability.
    The time has come to simplify this regulatory jungle. \6\ If we 
need special councils to coordinate the regulators, we have a few 
regulators too many and one layer of bureaucracy should be eliminated.
---------------------------------------------------------------------------
     \6\ Robert Heller, ``The Time Has (Finally) Come for a Single 
Regulator'', American Banker, December 7, 2016.
---------------------------------------------------------------------------
    Ideally, there should be only one Federal regulator for each 
federally chartered financial institution. This simplification would 
not only result in less confusing and possibly contradictory regulatory 
requirements, but also bring about significant manpower and cost 
savings to the industry and budgetary saving to the Government.
The Impact of Regulation on Small Banks
    While the Dodd-Frank legislation was mainly aimed at the large 
financial institutions that were deemed as being systemically important 
or as ``too big to fail,'' its impact was probably more heavily felt by 
the Nation's community banks--those with less than $10 billion in 
assets.
    Research has shown that the burden of complying with the Dodd-Frank 
Act was particularly burdensome for these small banks. \7\ A full 90 
percent of the respondents to a survey stated that their compliance 
costs had increased in response to the passage of the Dodd-Frank 
legislation, with 83 percent stating that their costs had increased by 
more than 5 percent. Nearly 64 percent of the institutions anticipated 
making changes to their residential mortgage offerings. Ten percent 
anticipated discontinuing their mortgage banking activities entirely, 
with 5 percent having already done so by 2014. In spite of the fact 
that the CFPB has no direct supervisory authority over small banks 
(those with less than $10 billion in assets), 71 percent of the 
surveyed banks reported that the Bureau affected their business 
activities and in particular their mortgage offerings negatively.
---------------------------------------------------------------------------
     \7\ Hester Peirce, Ian Robinson, and Thomas Stratmann, ``How Are 
Small Banks Faring Under Dodd-Frank?'' Mercatus Center at George Mason 
University, Working Paper, February 27, 2014.
---------------------------------------------------------------------------
    By adding approximately 20,000 pages of complex rules and 
regulations to the American banking system, the Dodd-Frank Act made it 
more difficult for financial institutions to operate efficiently and 
maybe even to survive.
    Perhaps the most drastic effect of the Dodd-Frank legislation has 
been its impact on the entry of new banks. Figure 3 shows that in the 
decade before 2010, each year 100 to 200 new banks were established. In 
contrast, during the 5 years after the passage of the Dodd-Frank Act, 
only two new banks were formed.
    Furthermore, the total number of FDIC-insured banks decreased from 
6,533 in 2010 to 5,349 by 2015, representing an overall decline in the 
number of banks by approximately 19 percent.
    Just last week, the House Financial Services Subcommittee held 
hearings on the chilling impact of the Dodd-Frank Act on the formation 
of new financial institutions. One of the key takeaways from the 
Hearing was that the number of new or ``de novo'' banks and credit 
unions has declined to historic lows since the passage of the Dodd-
Frank Act. \8\
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     \8\ House Financial Services Subcommittee, ``Subcommittee Examines 
Chilling Impact of Dodd-Frank on New Financial Institutions'', Press 
Release, March 21, 2017.

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    While other reasons were also contributing to this virtual 
cessation in new bank formation, such as generally low interest rates 
accompanied by low net interest margins; the evidence is nevertheless 
very troublesome. The Dodd-Frank Act, together with the low interest 
rates engineered by the Federal Reserve, which was supposed to 
stimulate the economic recovery, created an absolutely toxic 
environment for formation of new banks.
The Financial Sector and Economic Growth
    Finally, let us turn to the relationship between growth in the 
financial sector and overall economic growth. In a recent study by the 
Federal Reserve Bank of St. Louis, the authors conclude that financial 
conditions do indeed affect real economic activity. As might be 
expected, the impact is stronger for smaller firms and for industries 
that depend more heavily on external financing for investment. But the 
authors caution that the overall effect is rather moderate. \9\
---------------------------------------------------------------------------
     \9\ Hee Sung Kim and Juan M. Sanchez, ``Financial Conditions--Do 
the Ups and Downs Affect the Rest of the Economy?'' Federal Reserve 
Bank of St. Louis, The Regional Economist, First Quarter 2017.
---------------------------------------------------------------------------
    Let us examine the nexus between small community-based banks and 
the formation of new firms a bit more closely. Many new firms have to 
rely on financial resources from community-based banks. These local 
banks may even know the founders or owners of the new company 
personally. In many cases, these new firms rely on personal loans, 
credit cards or home-equity lines of credit for the initial financing 
of their company's equipment and supply purchases because the firm 
itself is not yet creditworthy.
    It is therefore not surprising that during the same time period 
that saw virtually no new bank formation, we also experienced a very 
low rate of entry by new establishments. As solid line in Figure 4 
shows, during the 4 years prior to the passage of the Dodd-Frank 
legislation (2006-09), on average 740,000 new establishments were 
formed. That number dropped to an average of 652,000 in the 4 years 
after the passage of the Act (2011-15).
    As a matter of fact, in the years 2009 and 2010 the exit rate of 
new firms (dashed line in Figure 4) exceeded the entry rate (solid 
line) for the first time in 2009 as firms were leaving in greater 
numbers than new firms being formed. These were the years of the Great 
Recession that also saw virtually no new bank formation. While other 
factors were also at work, low bank formation rates and low entry rates 
for firms certainly go hand-in-hand, showing the nexus between the 
banking system and the business sector.

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    The Dodd-Frank Act of 2010 was passed one year after the Great 
Recession ended. It was supposed to make the financial system safer, 
but also resulted in many new restraints and additional costs to the 
financial system. As Figure 5 shows, GDP growth ranged between only 1.7 
and 2.7 percent during the subsequent recovery, making it the slowest 
recovery on record since World War II.
    During the recovery, the Federal Reserve maintained a highly 
expansionary monetary policy and the Federal Government ran a very 
stimulative fiscal policy. The Federal Reserve not only kept the 
Federal Funds rate at zero until 2015, but also added $2.8 trillion in 
Treasury and mortgage-backed securities to its portfolio, thereby 
vastly expanding the lending power of banks. Federal deficits during 
the period of 2010-2016 ranged between $438 billion and $1.3 trillion 
per year, adding a total of over $4.5 trillion to the Federal debt 
since the end of the Great Recession. Not since World War II has the 
Nation experienced a similar period of highly expansionary monetary and 
fiscal policies.

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    As both monetary and fiscal policies were exceptionally 
stimulatory, the reason for the slow economic growth rate during the 
current expansion must be found somewhere else. It is difficult not to 
come to the conclusion that it was the regulatory policy focused on the 
financial sector that was holding the economy back.
Conclusion
    We have examined in some detail the nexus between the financial 
system and the economy and have established the important role that 
financial institutions, both large and small, play in fostering 
economic growth.
    The financial system is a highly regulated sector of the economy 
and legislative and regulatory changes play an important role in 
shaping the lending behavior of commercial banks as well as other 
institutions.
    During the 1980s and 1990s, important changes allowed banks to 
expand across both geographic and functional barriers that had 
previously existed. First of all, the Riegle-Neal Interstate Banking 
and Branching Efficiency Act of 1994 legalized interstate banking and 
permitted branching across State lines, thereby enabling geographic 
diversification. Second, the Gramm-Leach-Bliley Act of 1999 gave banks 
the power to offer both commercial and investment banking services 
under one roof, thereby allowing greater product diversification and 
creating ``universal'' banks.
    As a result of increased geographic and product diversification, 
the American banking system was made both safer and more efficient.
    But at the same time, other regulations pushed financial 
institutions to make a large number of sub-prime mortgages that could 
not be served properly by the homeowners. Many of these mortgages were 
packaged and sold to investors in the form of mortgage-backed 
securities. When a large number of these often highly complex mortgages 
and securitized loans went into default starting in 2007, it triggered 
a major financial crisis.
    In turn, the financial collapse sparked the Great Recession, which 
affected many consumers and businesses adversely and led to a sharp 
decline in GDP.
    After the crisis had begun, the Federal Reserve did act swiftly by 
providing liquidity and emergency capital to the affected financial 
institutions. Moreover, the regulators facilitated the merger of many 
endangered institutions across previously existing industry barriers 
and an even worse financial and economic calamity was avoided with the 
help of the Government. In the absence of these actions, the crisis 
could have been even worse. But many consumers, businesses and their 
employees suffered greatly as a result of the Great Recession.
    But it should also be pointed out that the regulatory and 
supervisory agencies did not see the crisis coming and did little to 
prevent the calamity from occurring in the first place. They only acted 
after the horse had bolted from the barn.
    The main legislative reaction was the imposition of many more 
highly complex regulations through the Dodd-Frank Act. While this 
legislation was largely designed to prevent large banks from failing in 
the future, it also affected adversely virtually all community banks 
that had little or nothing to do with triggering the financial crisis. 
The new regulations, as well as the low interest rate policy 
implemented by the Federal Reserve and the accompanying low lending 
margins, brought new bank formation to a total standstill.
    These circumstances made it more difficult for many consumers and 
small businesses to obtain financing and the rate of new business 
formation dropped precipitously. The entrepreneurial spirits that drive 
new economic growth were severely constrained, making the recovery the 
slowest one on record in the post-war period.
    My suggested financial sector reform solutions to restore financial 
vitality and thereby help to reignite economic growth are twofold: 
first of all, allow small banks and maybe even banks of all sizes to 
``opt out'' from the regulatory straightjacket by holding a 
sufficiently large capital cushion. Second, eliminate the multiple 
layers of regulatory authorities that financial institutions of all 
sizes have to cope with at the present time. Instead, have only one 
Federal regulatory agency be responsible for each institution under its 
supervision. The resulting increases in efficiency and cost savings 
will be beneficial to bankers, consumers, businesses and taxpayers 
alike.
    Thank you very much for giving me this opportunity to express my 
views on this important topic.
                                 ______
                                 
                  PREPARED STATEMENT OF DONALD POWELL
         Former Chairman, Federal Deposit Insurance Corporation
                             March 28, 2017
    Chairman Crapo and Ranking Member Brown, Members of the Committee, 
thank you for the opportunity to testify.
    I have spent 40 plus years working in the financial service 
industry. My experience includes serving as an employee, CEO, owner and 
board member of various small- and mid-size banks. Additionally, I've 
served as a banking regulator as Chairman of the FDIC. Furthermore, 
I've served on the board of one of the world's largest financial 
institutions.
    All of these experiences have caused me to understand and respect 
the critical role a bank has in the success of a community, State, and 
in our Nation. The quality of life in a community has a direct link to 
the bank's activities and services, including the creation of jobs, the 
caliber of education, the excellence of health care, and the general 
prosperity of a community. The bank is the alter ego of a community. 
Banks, both large and small, contribute to the well-being of a 
community. Most banks have a culture that demands that all of its 
employees participate and provide leadership in all that is good within 
the community.
    The data is overwhelming as to the role banks play in economic 
activity, and when banks are not engaged in lending or in providing 
other services, the local, State, and national economy suffers and 
economic growth becomes anemic. Thus, it is important that the Nation 
have viable, safe and sound banks serving this great country. Part of 
the confidence placed in banks is a result of depository protection 
offered by the FDIC and of the supervision of each insured institution. 
Confidence in the soundness of an institution is critical to the 
success of the banking system, and thus, the free enterprise system.
    During my career, I have experienced good and bad economic times 
and have observed the various reactions to these cycles by the 
marketplace, policy makers, regulators and other stakeholders. I have 
studied the cause and effect of each downturn. After each decline, 
Congress, as well as banking regulators, have attempted to address the 
issues attributed to the slump in our banking system. All of the 
banking supervisors have reacted by creating more stringent rules and a 
tougher oversight process.
    Today's examination and supervisory process includes, as expected, 
more focus on threats to our way of life and to treating every 
potential customer in a fair, transparent, and forthright manner. Laws 
and supervision oversight may be fluid depending upon the latest 
threats, risk, and conditions within the banking industry.
    There has been discussion, supported by data, that banks today, 
especially smaller banking institutions, are not the vehicle that 
breathes economic life into a community because of the unnecessary 
burden of the examination process and of certain regulations. Often, 
after a downturn, the tone, attitude and trust between banks and 
regulators become strained, which results in negative energy and a 
nonproductive environment. It is important to understand the cost of 
regulation and to distinguish between sound policy and unnecessary 
rules, laws and policies that stifle economic activity. The overriding 
issue is how does this policy, law, or regulation support economic 
activity without burdening the consumer, small business owner, or other 
business ventures?
    I remain active in the financial services industry and have direct 
knowledge of the supervisory process and would offer some guiding 
principles rather than specific regulations, policies, and laws that 
are valid in all seasons. Without the principles--laws, policies and 
regulations might be neutered or weakened.
    1. Every banking regulator must be fiercely independent and cannot 
be politically influenced. The independence includes no political 
agenda and activity must follow the mission established by law. 
Accountability is balanced with term limits and oversight from an 
independent Inspector General. Regulators should not be intimidated by 
any force of direct or indirect influences, and should not be a 
political tool for any agenda.
    2. Leadership at the various regulator agencies is critical. As 
with any enterprise, leadership sets the tone and mood for the entity. 
The ability to work with all stakeholders without compromising the 
mission should be a tenet for all leaders. Obviously the confirmation 
process should measure leadership that is validated by life's 
experiences.
    3. Disputes must have a due process path. Without a trustworthy, 
reliable and transparent due process, an American core principle is 
lost. There is not a valid due process existing today to resolve 
disputes between regulator and banker. I have offered a solution and 
the paper is attached for the record.
    4. Rule making should be transparent and common sense and judgment 
should prevail. Experience is vital to an understanding of the banking 
industry and the process should be deliberate and seek input from all 
interested parties. Rule making does not include making laws or 
incorporating a political agenda into the regulation.
    5. Accountability follows authority and a vigorous review process 
is important; proper oversight by a responsible IG is important.
    While there are certain core principles to a safe and sound banking 
system, banking cannot be commoditized as every community market is 
different and judgement must be part of the process. Banking laws and 
regulations must be followed, but policy makers must understand the 
cost, burden and intentions of these laws and amend them when 
necessary. Today's data indicates that there is more emphasis on 
compliance than on safety and soundness. It is important to understand 
that without the soundness of a bank the community cannot thrive. We 
must get compliance with laws, safety and soundness all collaborated to 
benefit the community.
    Finally, after experiencing several banking crises first hand and 
participating in mistakes, and questioning myself and industry leaders, 
my conclusion is that there will continue to be cycles and new risks 
will emerge but these common themes are present in those entities that 
survive:

  1.  Sufficient Capital

  2.  Liquidity to support the apparent risk and the unexpected events.

  3.  Management that understands risk and provides oversight with the 
        proper balance between serving community, return on capital, 
        and commitment to the basics without complexity.
        
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               PREPARED STATEMENT OF THOMAS C. DEAS, JR.
         Chairman, National Association of Corporate Treasurers
                             March 28, 2017
    Chairman Crapo, Ranking Member Brown, and the other Members of this 
Committee: Thank you for the opportunity to testify at this important 
hearing focusing on our country's future economic growth. I am Thomas 
C. Deas, Jr., recently retired vice president and treasurer of FMC 
Corporation and current chairman of the National Association of 
Corporate Treasurers (NACT), an organization of treasury professionals 
from several hundred of the largest public and private companies in the 
country. I also represent the NACT on the Steering Committee of the 
Coalition for Derivatives End Users (the Coalition), comprised of 
several hundred companies that employ derivatives to manage risks in 
their day-to-day business activities, principally through the dedicated 
efforts of their corporate treasurers.
    At the outset, I would like to thank you, Chairman Crapo, for your 
efforts to make sure that end users are able to engage in prudent risk-
management activities without facing costs that could make such 
activities prohibitively expensive. We appreciate your efforts to move 
a bill, enacted in the last Congress, to exempt end users from 
unnecessary margin requirements.
Background on End-Users' Interactions With the Financial System
    I am thankful you have asked me to assist your efforts to foster 
future economic growth by ensuring that American Main Street companies 
can interact in ways that make sense economically with the financial 
system you help to oversee. The financial system is critical to the 
day-to-day business activities of end-user companies, including through 
activities such as:

    Collecting payments from customers

    Concentrating cash collections in secure depository 
        institutions

    Sending cash safely from where it was collected and 
        concentrated to wherever it is needed to meet the company's 
        day-to-day business obligations to suppliers, employees, 
        Government entities, investors, and others due payments

    Borrowing or investing to meet temporary or longer term 
        cash shortfalls or surpluses

    Managing the company's capital structure with adequate 
        committed credit and appropriate amounts of debt and equity 
        capital with repayment obligations to investors structured to 
        limit risks, especially anticipating future periods when 
        liquidity may be constrained

    Identifying and hedging the company's financial risks from 
        exposures to such factors as:

      Interest rates

      Foreign exchange rates

      Commodity prices

    End users are fundamentally different from financial companies in 
that they use the financial system to facilitate their business 
operations and they do not engage in speculative, inherently risky 
position-taking as do some financial firms. For example, end users 
employ derivatives to reduce risks arising from operating their 
businesses and do not engage the kind of transactions that roiled the 
markets during the financial crisis. End users comprise less than 10 
percent of the notional amount of the over-the-counter (OTC) 
derivatives market and do not meaningfully contribute to systemic risk. 
However, in markets as complex and interrelated as we have now in the 
global financial system, there is a clear need for a regulatory 
framework that recognizes these complex interactions. We have been 
gratified at the bipartisan consensus that has developed since the 
financial crisis that:

    end users employ the financial markets to reduce risk and, 
        therefore their activities should not be unduly burdened, and

    recognizing that the financial markets in today's world are 
        truly global, American companies and their workers should have 
        a consistent, predictable, and level regulatory playing field 
        in which they do not suffer any relative disadvantages compared 
        to their foreign competition.

    We believe a clear understanding of end-users' interactions with 
the financial system is critical to maintaining a regulatory framework 
that does not burden the end-user producers and job creators with the 
costs of well-intentioned measures more appropriately applied to 
financial firms. With these complexities in our increasingly 
interrelated markets, it can easily be the result that a regulatory 
change at one end produces an unintended consequence and higher costs 
on end users several steps down the chain. Further, foreign regulators 
have in certain cases granted exemptions to end users that are not 
available under U.S. law, placing American end users at a competitive 
disadvantage compared to their foreign competitors.
    Since its start in the early 1980s, the OTC derivatives market has 
grown to be the largest financial market in the world with outstanding 
transactions totaling nearly $700 trillion in notional amounts. \1\ 
Transactions between swap dealers and other financial intermediaries 
represent most of the trades, with nonfinancial end users comprising 
less than 10 percent of derivatives activity, as mentioned above. 
However, much of the trading by financial intermediaries can be assumed 
to be transactions to balance risk positions that originated with end-
user trades. The exponential growth in the derivatives market came in 
significant part from end users in the real economy needing to hedge 
their exposures to changes in interest rates, commodity prices, and 
foreign exchange rates, along with credit exposures to customers or 
suppliers, exposures to equity prices, and other commercial risks they 
face in their day-to-day business operations. OTC derivatives can be 
matched exactly as to timing, currency, rates or amounts of the 
underlying exposures in ways that the futures markets, with round lots 
and fixed settlement dates could not. The customization available in 
the OTC derivatives market has been essential in allowing end users to 
match exactly derivatives with underlying business exposures so that 
they move in equal, but opposite ways. Additionally, OTC derivatives 
together with relevant regulatory exemptions allow end users to 
negotiate credit support measures individually with their derivatives 
counterparties.
---------------------------------------------------------------------------
     \1\ Bank for International Settlements OTC derivatives statistics 
at http://www.bis.org/statistics/derstarts.htm.
---------------------------------------------------------------------------
    Today I propose to focus on a few areas in which certain regulatory 
changes could benefit Main Street companies so that we can grow our 
businesses and increase employment opportunities for our American 
workers.
Day-to-Day Business Examples of End-Users' Interaction With the 
        Financial System
    End-user corporate treasuries today routinely use the financial 
system to facilitate their day-to-day business tasks. However, they are 
matching exactly in amount, currency, and duration the financial 
transactions with the business flows they are managing. Instead of 
speculating, for example in foreign currencies, through a foreign 
exchange transaction unmatched to a committed business transaction, an 
end user is offsetting a known transaction to lock in the price and 
manage the risk of future movements in the currency markets.
    Corporations engaged in manufacturing activities with their costs 
in one currency and selling into foreign markets in another currency 
have access to derivatives transactions that will allow them to hedge 
this cross-currency risk. Depending on the predictability of future 
sales, they can enter into forward sales of the selling currency while 
taking back payments in the currency in which they are incurring their 
manufacturing costs. Since the future sale is not yet recorded on the 
corporation's financial statements, it is important to achieve the 
objective of reduced earnings volatility, that changes in the 
derivative's valuation be deferred from being recognized in income 
until the anticipated sale is actually made and recorded on the end-
users' financial statements, creating an offset. Accounting rules in 
the U.S. and Europe generally permit this treatment.
    Multinational manufacturing groups have often sought to locate 
production facilities where they can match the currency exposures of 
their production costs with anticipated revenues in the same currency. 
This is referred to as creating a ``natural hedge'' of like-currency 
offsets and reduces the need to hedge in the OTC derivatives market. 
Multinationals are monitoring the increasing costs and operational 
complexities of cross-border derivatives regulatory compliance. By 
keeping end-users' regulatory burdens appropriate to the actual 
financial risks their transactions represent, we sustain U.S. 
manufacturers' ability to produce at home, export abroad, and manage 
the cross-border currency risks with derivatives whose costs are not 
too expensive.
    Commodity derivatives are used by end-users' corporate treasuries 
to manage movements in prices of raw materials used in their production 
or goods they sell. Consider a manufacturer using natural gas in its 
production. It can fix the price of this important cost component by 
entering into a fixed-price contract with one of several deregulated 
natural gas suppliers. This effectively embeds a derivative in its 
supply agreement. Alternatively, it can enter into a floating-price 
purchase contract and have its corporate treasury arrange a matching 
commodity derivative in which it pays a fixed price and receives the 
floating price it passes on to its supplier. With either arrangement, 
there is a risk to the corporation that its price-locked structure 
fails when the mark-to-market is in the money to the corporation. It is 
generally far easier to monitor the creditworthiness of a swap 
counterparty, often a regulated financial or trading institution, than 
to try to monitor an energy supplier. This in part is why end-user 
businesses are increasingly relying on the derivatives market to hedge 
commodity price risks.
    Another important use of commodity derivatives is to allow 
structuring cross-border bartering transactions. Consider a 
multinational agricultural chemicals manufacturer selling into Brazil. 
Like its fellow BRIC countries, Brazil has plentiful land and labor as 
classic economic inputs to production, but less access to capital and 
associated financial markets. The multinational chemicals company can, 
however, access the global derivatives markets. Its customer in Brazil 
needs crop-protection chemicals at planting time, but can only pay 6 
months in the future, at harvest time. During this period, the 
Brazilian farmer has commodity price risk and currency risk. The 
multinational manufacturer arranges a barter trade where the Brazilian 
farmer agrees to pay in soybeans at harvest time 6 months forward for 
the chemicals it needs to apply at planting time. The farmer has 
transferred the commodity price risk to the chemicals manufacturer, 
which can enter into a customized OTC commodity derivatives locking in 
the U.S. dollar price 6 months in the future, thereby hedging its risk 
in the derivatives market.
    In some cases, large sales requiring several years to fulfill may 
motivate a supplier to enter into a credit default derivative to hedge 
the risk that its customer goes bankrupt before it is paid. A credit 
default derivative can be structured for a notional principal amount 
sufficient to mitigate the payment risk. As discussed below, the amount 
of capital regulated swap counterparties have to hold against this type 
of trade as an aftermath of the financial crisis make it a costly hedge 
for most corporate treasuries to enter into.
    By reducing the overall volatility of its business results, the 
end-user corporate treasurer contributes to the stability and 
predictability of his or her business. If done consistently and 
communicated properly to stakeholders, the result is a lower overall 
riskiness for the end-user business, justifying a lower risk-adjusted 
discount rate for its estimated future cash flows and hence a higher 
valuation.
Capital Requirements
    A bipartisan effort in the last Congress, supported by the 
leadership of Chairman Crapo, resulted in the enactment of a clear end-
user exemption from having to post cash margin for end-users' 
derivatives positions. \2\ However, we are increasingly concerned that 
the uncleared OTC derivatives we seek to continue using to reduce our 
business risks will become too costly because of much higher regulatory 
capital requirements imposed on the financial companies that we rely on 
as our derivatives counterparties.
---------------------------------------------------------------------------
     \2\ See 7 U.S.C. 2(h)(7); 7 U.S.C. 6s(e)(4).
---------------------------------------------------------------------------
    The Prudential Banking Regulators have now finalized rules 
implementing Basel III capital requirements which increase the capital 
bank counterparties are required to hold against derivatives. 
Additionally, other bank capital measures, including the net stable 
funding ratio (NSFR) and the supplemental leverage ratio (SLR), risk 
further increasing derivatives transaction pricing and loans for end 
users.
Credit Valuation Adjustment
    European policymakers have implemented capital charges on 
derivatives positions significantly more favorable to end users than 
the U.S. Prudential Banking Regulators. The European approach 
recognizes that end-users' hedging activities are in fact reducing 
risks, and accordingly, exempts end-user derivatives transactions from 
the credit valuation adjustment (CVA) risk capital charge, which would 
otherwise require the calculation and subsequent holding of capital to 
mitigate counterparty credit risk in a derivatives transaction. The 
absence of a U.S. exemption puts American companies at a meaningful 
competitive disadvantage compared to our European competitors.
    The lack of a CVA exemption for U.S. end users that are hedging 
their commercial risks would deny or significantly reduce the end-user 
community the benefits of the statutory exemptions from clearing and 
margin requirements as end users that engage with banking organizations 
that are the subject of the CVA charge imposed by the U.S. Prudential 
Banking Regulators see those charges passed through in the form of 
higher pricing. Such a result thwarts the will of Congress to provide 
clear exemptions for American end-user companies.
    Further, the CVA charge may force end users to post collateral to 
offset banks' CVA capital requirements. If banks require collateral, 
end users may be put in the position of borrowing from financial 
institutions to obtain the cash required to support those transactions, 
resulting merely in a shift of risk between financial institutions. The 
result of requiring the posting of collateral contradicts the objective 
of facilitating end-users' access to capital, drives costs directly to 
end users, and does nothing to mitigate risk within the financial 
system, as the risk is simply being transferred from one bank to 
another.
Net Stable Funding Ratio
    We believe the Prudential Regulators' June 2016 proposal on the 
NSFR could lead to billions in additional funding requirements for end-
users' derivatives and borrowing activities. This is especially 
concerning given that many of the provisions of the NSFR would further 
restrict end-users' ability to hedge by increasing the cost of risk 
management and could lead to decreased liquidity in the derivatives 
markets. We are concerned that long-term funding costs required under 
the NSFR might limit and discourage dealer involvement in derivatives 
and derivatives-related transactions, effectively reducing liquidity in 
the market that end users rely on to hedge risk. Additionally, costs 
associated with capital-raising in a less liquid market would 
inevitably be borne by derivatives end users and consumers. The 
immediate impact of the NSFR can already be seen as fewer bank 
counterparties are willing to extend longer-term credit, including in 
the form of swaps used to hedge end-users' long-term business 
exposures. Additionally, the costs to hedge are likely to be passed on 
to end-user companies in the form of increased fees or transaction 
costs, less favorable terms, and collateral requirements.
    These concerns are particularly reflected in the add-on costs 
associated with counterparty payables; the treatment of 
uncollateralized receivables; the lack of collateral offsetting 
provisions; and the liquidity squeeze related to the treatment of 
corporate debt. For example, requiring dealer counterparties to provide 
required stable funding for 20 percent of the negative replacement cost 
of derivative liabilities (before deducting variation margin posted) is 
a clear example of the direct burdens that would affect end-users' 
ability to mitigate risk efficiently.
    Another concern under the NSFR is the treatment of dealers with 
respect to uncollateralized net receivables, which could require 100 
percent long-term funding. As we are now seeing, end users are being 
required to collateralize transactions with cash margin to meet the 
stringent Basel III leverage ratio requirements. Or, if a dealer 
counterparty did not demand collateral, the costs of long-term funding 
could simply be passed on to end users through embedded derivatives 
fees.
    Moreover, we believe that disproportionate discounting of the 
collateral posted by end users forces dealers to mitigate costs 
elsewhere. As a result, in implementing the NSFR, the Prudential 
Banking Regulators should align collateral posted by commercial end 
users with long-term funding obligations under NSFR. This is 
particularly true because, while most end users are exempted from 
posting margin for their derivatives with bank counterparties, the 
``back-to-back'' hedges entered into by banks to offset end-user 
transactions are still subject to mandatory clearing and margin 
requirements. Consequently, the costs borne by banks to offset end-user 
transactions are passed on to the very end users that were meant to be 
exempt from the costs of mandatory clearing and margin requirements--
and ultimately to consumers.
    Further, the NSFR's treatment of corporate debt could hinder end-
user capital-raising efforts. The NSFR does not take into account the 
maturity of end-user-issued debt when determining a dealer's required 
stable funding and would restrict liquidity in the corporate debt 
markets by requiring dealers to raise 50-85 percent long-term funding 
to support their inventory of end-user notes, which would discourage 
market making. End users rely on market-based funding and the 
importance of liquid markets for corporate bonds and commercial paper 
(CP). To cite a real-world example of the costs and diminished 
liquidity from these rules, many corporate treasuries issue CP daily to 
balance their funding requirements. If they are faced with a same-day 
payment that they identify too late in the day to complete a placement 
in the market of the required CP, their bank CP dealer frequently will 
take the paper overnight for its own account and fund out the 
requirement the next day in the market. The NSFR rules require the bank 
to hold 85 percent of that overnight funding as long-term funding--at a 
cost multiple times the overnight amount. Ultimately this liquidity 
will no longer be available to end-user treasury departments. 
Accordingly, the Prudential Banking Regulators should carefully 
consider the impact of the NSFR's 50-85 percent long-term funding 
requirements on end users.
Supplemental Leverage Ratio
    The SLR is another capital requirement imposed on financial 
institutions that flows through to end users through the lack of an 
end-user exemption. The SLR penalizes high-quality assets and acts as a 
disincentive to market participants to provide clearing services. The 
SLR does not permit the clearing member to take ``credit'' for the 
segregated initial margin posted by its customers, including end users, 
even though the initial margin is expressly for the purpose of limiting 
the clearing member's exposure to the derivative it is clearing. 
Further, segregated initial margin in the form of cash may be required 
to be added to a clearing member's balance sheet exposure, requiring 
additional capital. On the whole, the SLR seems to ignore the fact that 
for derivatives cleared on behalf of a customer, the customer's 
segregated initial margin must be held to margin the customer's 
positions and cannot be used as leverage by the clearing firm.
    Ultimately, the failure of the SLR to recognize the risk-reducing 
effect of segregated client collateral will likely lead to fewer banks 
willing to provide clearing services for customers, thus constraining 
the ability of end users that clear derivatives to access central 
clearing. Further, even end users that do not clear their derivatives 
will likely see the impact of the SLR in the form of increased costs 
for hedging, as their bank counterparties will see their clearing costs 
increase on their back to back hedges and will pass those costs along 
to end users. We are hopeful that regulators can work together to get 
this right in the United States and abroad.
    In summary, although a bipartisan consensus in the last Congress 
confirmed the original legislative intent of the Dodd-Frank Act to 
exempt end users from having to use their own capital for mandatory 
margining of derivatives transactions, capital requirements imposed on 
banks would seem to undermine this intent by forcing our bank 
counterparties to hold much more of their own capital in reserve 
against end-users' derivatives positions, passing on the increased 
costs to these end users and ultimately consumers.
Cross-Border Harmonization of Regulations in the Global Financial 
        System
    NACT and the Coalition appreciate the important efforts being 
undertaken by U.S. and foreign regulators to resolve differences in how 
their regulations apply to cross-border transactions. Applying 
derivatives reform rules in a global marketplace is an inherently 
complex undertaking. Unlike most stock market transactions, a 
derivative creates an ongoing relationship between parties that 
continues from its initial inception until its final termination in the 
future. Thus, many transactions exist between parties in different 
jurisdictions for many years. While the United States has completed 
many of its derivatives rules, other regulators around the world are 
just now finalizing and implementing many of their rules. Consequently, 
derivatives end users now find themselves simultaneously subject to 
multiple regulatory regimes. Understanding and implementing compliance 
structures for derivatives rules across multiple jurisdictions is a 
significant and costly undertaking. Accordingly, American end users are 
subject to incentives to avoid complication by limiting their 
transactions to counterparties located in their same jurisdiction. The 
lack of regulatory harmonization can cause fragmented and less 
efficient markets for end users, and can raise the cost of delivering 
stable prices to consumers. We believe it is critical that you urge 
U.S. regulators to continue working closely with their foreign 
counterparts and move quickly to recognize equivalency and substituted 
compliance with foreign regulatory regimes when the objectives of 
foreign regulations are comparable to those under the Dodd-Frank Act 
and where foreign regulations do not unduly burden U.S. end users.
Commodity Derivatives To Hedge End-Users' Commodity Price Risks
    End users are subject to the risks of changing prices for such 
items as commodity inputs to their manufacturing processes and energy 
consumed in manufacturing their final products. To hedge these 
exposures, they prefer to arrange properly constructed commodity 
derivatives contracts with one of their banks. The Federal Reserve 
Board proposes to issue a final rule imposing limitations and 
restrictions on the physical commodity activities of the financial 
holding companies it regulates. Among other things, it would make 
physical commodities trading by financial holding companies more 
expensive by imposing up to a 1,250 percent risk weighting, even on 
some physical commodities that are widely traded such as oil and 
certain other petroleum-based products. NACT is concerned that:

    Financial holding companies already are being forced to 
        exit the physical commodity markets and end users that rely on 
        bank counterparties for physical commodities transactions are 
        having to find substitutes that can be less creditworthy and 
        less strictly regulated than their banks

    The exit of banks from these markets brings about reduced 
        liquidity resulting in higher costs from less competition

    New documentation is being required that is less credit 
        efficient in the sharing of risks among counterparties, also 
        bringing higher costs
End Users and Money Market Mutual Funds
    There is no question that liquidity is the lifeblood of any 
business. Without having ample liquidity, production comes to halt, 
inventories run low, and bills are not paid on time. The cyclical 
nature of many businesses places significant importance on the 
availability of committed financing so that they can operate 
efficiently and without disruption. To illustrate the 
interconnectivities between end users and the financial markets, it is 
useful to consider their use of money market mutual funds (MMMFs). This 
has been a market of more than US$2.5 trillion not only selling short-
term investments to handle treasurers' temporary excess cash, but on 
the other side, buying the commercial paper corporate treasurers issue 
to finance the day-to-day funding needs of their companies. However, in 
September 2008 the Primary Fund of the Reserve Fund group of mutual 
funds ``broke the buck'' when it reported a net asset value per share 
that rounded to less than a dollar. \3\ In the period since the 
financial crisis, regulators have sought new rules for MMMFs to 
strengthen the market during times of financial stress. MMMFs had 
always operated with fixed net asset values (NAV) with a price per 
share greater than US$0.995 and less than US$1.005, so that the NAV 
rounded to the nearest cent was one dollar per share.
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     \3\ The New York Times, Dealbook, September 7, 2008, ``Money-
Market Fund `Breaks the Buck' ''.
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    Congress felt it unnecessary to include additional reforms for 
MMMFs in the Dodd-Frank Act as the SEC had already enhanced regulations 
under its Rule 2a-7 changes in 2010. However, additional changes went 
into effect on October 14, 2016 that impose liquidity fees and 
redemption gates to spring up during periods of market stress. A 
requirement for a prime fund's NAV to float and be reported to the 
nearest hundredth of a cent significantly complicates investments in 
prime funds for corporate treasurers. The floating NAV requirement does 
not apply to MMMFs investing in Government securities, however.
    The practical implications of the new rules are daunting for 
corporate treasurers. Corporate treasury and financial reporting 
systems up until now have treated fixed NAV MMMFs as cash equivalents. 
Now MMMF shares in nongovernment funds will have a floating NAV per 
share that must be tracked essentially in real time. For Federal and 
State income tax purposes, a floating NAV requires treasurers to keep 
track of gains and losses when they inevitably buy MMMF shares at one 
price and sell them at another in the routine redemption of their 
investment. Since treasury systems must compete with other departments 
for internal IT resources, the question of what alternatives are 
available must be answered. Corporate treasurers can abandon the prime 
MMMF market and instead invest in Government MMMFs that can retain the 
dollar per share fixed NAV. However, prime funds are important to 
treasurers not only as a flexible alternative for investments of 
temporary excess cash balances, but also as providers of short-term 
funding by buying corporate CP notes. As the graph below shows, in the 
year running up to the October 14, 2016, implementation of the new 
regulations, fund purchases of corporate CP declined significantly.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Concerns about investors fleeing prime MMMFs have indeed proven 
true, declining by US$1 trillion to US$376 billion since the rule 
became final (see Chart below).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The cure proved worse than the disease for many fund managers as 
they closed almost 200 institutional prime funds (see Chart below).

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The cumulative effect of the regulatory changes on MMMFs caused 
US$1 trillion to leave prime funds with much of that moving to 
Government funds unaffected by all the same rules. Corporate treasury 
investors in these funds were unable to justify or implement quickly 
enough changes to their treasury and financial reporting systems 
required by the new rules. End-user companies were adversely affected 
not only through fewer choices for the investment of their cash, but 
for many, an uptick in CP borrowing costs as an important investor base 
went away.
Summary
    A bipartisan consensus in the last Congress confirmed that the 
legislative intent of the Dodd-Frank Act was to exempt end users from 
having to use their own capital for mandatory margining of derivatives 
transactions, which would have diverted these funds from investments to 
build inventories for higher sales, conduct research and development 
activities, expand plant and equipment, and ultimately grow jobs. 
However, the imposition of additional capital requirements by the 
Prudential Banking Regulators on financial institutions acting both as 
derivatives counterparties and lenders to end users would undermine 
this intent by forcing banks to hold much more of their own capital in 
reserve against end-users' derivatives and borrowing positions, passing 
on these increased costs to end users and ultimately their customers.
    The cumulative effect of new derivatives regulation threatens to 
impose undue burdens on end users. The indirect effects of this 
regulation of end users through bank capital and liquidity requirements 
serves to discourage end-user risk management through hedging and would 
effectively negate the benefits of Congress' clear intent to exempt end 
users from margin requirements. There are also several adverse effects 
on end-users' funding costs from the way certain bank capital 
requirements are applied. We urge you to direct financial regulators to 
conduct a study of major regulatory initiatives for cumulative impacts 
on end users directly and indirectly through financial institutions. 
Many NACT members participated in a recent survey by the U.S. Chamber 
of Commerce, which underscores the need to examine our financial 
services regulatory structure. The Chamber's report, Financing Growth: 
The Impact of Financial Regulation, asked more than 300 corporate 
finance professionals, including CFOs and treasurers, to report on the 
impact of financial services regulatory reform on the availability and 
cost of the products and services most crucial to the growth of Main 
Street businesses.
    One key finding from the report includes the fact that access to 
credit remains their top concern. However, more than three-quarters of 
American companies of all sizes believe that the cumulative effect of 
financial regulations adopted over the past 6 years is making it harder 
for them to access the financial services they need. In addition, 79 
percent of respondents indicate that they are affected by changes in 
financial services regulation, resulting in 39 percent of respondents 
absorbing higher costs and 19 percent delaying or cancelling planned 
investments.
    We need a regulatory system that allows Main Street companies to 
use the financial system to hedge day-to-day commercial risks, securely 
manage their cash flows, fund their businesses in the most cost-
effective way, and play on a level field with their foreign 
competitors. By having a regulatory system that allows businesses to 
improve their planning and forecasting, manage unforeseen and 
uncontrollable events, offer more stable prices to consumers, end users 
can more readily contribute to economic growth.
    End users are using the financial system to mitigate the business 
risks they face in their day-to-day business activities. In this 
respect, they are fundamentally different from financial companies who 
maintain an open book of exposures and who seek profit through properly 
structured speculative positions. However, when rules intended to apply 
to financial institutions directly or indirectly burden end users, it 
is the end-user segment of our economy that bears the higher costs. The 
imposition of unnecessary burdens on end-user businesses restricts job 
growth, decreases investment and undermines our ability to meet and 
beat international competition, leading to material adverse cumulative 
impacts on corporate end users, American workers, and our economy.
    The consequences of getting the right balance in the regulation of 
our financial system will benefit American business, our customers and 
our workers.
    Thank you. I will do my best to address any questions you may have.
                                 ______
                                 
                 PREPARED STATEMENT OF DEYANIRA DEL RIO
               Coexecutive Director, New Economy Project
                             March 28, 2017
    Chairman Crapo, Ranking Member Brown, and Members of the Committee, 
thank you for the opportunity to testify at today's hearing. My name is 
Deyanira Del Rio and I am the codirector of New Economy Project, an 
economic justice center based in New York City. For more than 20 years, 
our organization has worked with an array of community, labor, civil 
rights and other organizations to press for fair lending and financial 
inclusion, as a matter of racial justice and equitable neighborhood 
development. I am pleased to share our experiences and perspective 
about the vital role that responsible financial institutions play in 
fostering economic growth and opportunity--as well as the devastating 
and destabilizing impact of abusive and unregulated lending on 
communities and the economy.
    New Economy Project has led efforts in New York to challenge 
predatory lending and other discriminatory economic practices, 
including by pressing for policy change and regulatory accountability 
at the local, State and Federal levels. Our accomplishments include 
winning strong antipredatory mortgage lending and foreclosure 
prevention legislation; keeping payday lending debt traps out of New 
York, through vigorous defense of New York State's 25 percent usury cap 
and other consumer protections; ending in NYC an insidious form of 
employment discrimination based on a job applicant's personal credit 
history; and settling a groundbreaking class action lawsuit brought 
against a debt buyer network, resulting in a $59 million monetary award 
and the imminent vacating of almost $800 million in debt collection 
default judgments. \1\
---------------------------------------------------------------------------
     \1\ [Cite--http://www.nytimes.com/2015/11/14/nyregion/victims-of-
debt-collection-scheme-in-new-york-win-59-million-in-settlement.html; 
www.neweconomynyc.org/resource/sykes-v-mel-s-harris-associates]
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    My testimony today is additionally informed by my 15 years as a 
board member (and current board chair) of the Lower East Side People's 
Federal Credit Union (LES People's), a regulated, not-for-profit 
community development financial institution (CDFI) that serves a 
majority low-income and immigrant membership in New York City. I 
previously served on the board of directors of the National Federation 
of Community Development Credit Unions, which helped to establish the 
Federal CDFI Fund in 1994 and continues to serve CDFI and low-income 
designated credit unions across the country.
    I have two overarching points that frame my testimony today: First, 
eliminating barriers to fair banking and credit access is important to 
ensuring economic inclusion and opportunity for all. Indeed, in 
communities across New York and around the country, unequal access to 
credit has long fueled housing segregation, racial disparities in 
homeownership and small business-ownership, and vast and deepening 
wealth inequality.
    Second, although affordable and appropriate financial services and 
credit are vital components of a healthy economy, we reject the notion 
that consumer credit is in itself a solution to structural inequities 
in our economy. Exploitative credit and debt can worsen these 
inequities, as we saw with subprime mortgages that led to the 
foreclosure crisis and wiped out hard-won homeownership gains among 
families of color; and payday loan debt traps that exploit working poor 
Americans struggling to make ends meet, and who would benefit from 
living wage laws and other measures to address root causes of economic 
insecurity.
    It must also be said up-front that efforts by the Trump 
administration and Congress to dismantle financial reform laws, if 
successful, will inevitably lead to new crises and further erode 
Americans' trust in the financial services industry. On the one hand, 
we must do everything possible to preserve existing financial reforms 
and consumer protections, as inadequate as they are--thanks in no small 
measure to banks' relentless lobbying to defeat even basic reforms. On 
the other hand, we need to change our financial services system more 
fundamentally, if we are to have an equitable system that serves the 
real economy, rather than a financialized economy that is intrinsically 
extractive and exploitative of people and communities.
    I would like to address three additional points in my testimony:
    1. The financial crisis inflicted enormous costs on communities, on 
our economy, and on responsible financial institutions--with 
repercussions that continue today. Communities of color, in particular, 
are still reeling from the crisis.
    The financial crisis exacerbated historical inequities in our 
financial services system and broader economy. Between 2007 and 2010, 
the median net worth of American families decreased by nearly 40 
percent, driven primarily by a collapse in housing prices. \2\ Losses 
were especially devastating for people of color, whose wealth was 
overwhelmingly concentrated in the form of homeownership, and whose 
neighborhoods were targeted by predatory mortgage lenders. Fully half 
of the collective wealth of black families and 67 percent of Latino 
families' wealth--already far below that of whites--were destroyed 
during the Great Recession. \3\
---------------------------------------------------------------------------
     \2\ ``Changes in U.S. Family Finances from 2007 to 2010: Evidence 
from the Survey of Consumer Finances'', at www.federalreserve.gov/pubs/
bulletin/2012/pdf/scf12.pdf.
     \3\ ``The Roots of the Widening Racial Wealth Gap: Explaining the 
Black-White Economic Divide'' (Institute on Assets and Social Policy), 
at https://iasp.brandeis.edu/pdfs/Author/shapiro-thomas-m/
racialwealthgapbrief.pdf.
---------------------------------------------------------------------------
    The big banks fueled this wave of predatory lending, by 
facilitating the securitization of high-cost loans and by directly 
acquiring or financing the worst subprime lenders. The banks further 
exacerbated the foreclosure crisis through abusive and often illegal 
mortgage servicing practices--including systematically failing to offer 
loan modifications equitably in communities of color. \4\
---------------------------------------------------------------------------
     \4\ ``Troubled Asset Relief Program: More Efforts Needed on Fair 
Lending Controls and Access for Non-English Speakers in Housing 
Programs'', at www.gao.gov/products/GAO-14-117.
---------------------------------------------------------------------------
    Banks have also fueled the growth of the bottom-feeding debt buyer 
industry, which purchases charged-off consumer debts from banks and 
others, for pennies on the dollar, and pursues people through civil 
lawsuits and other aggressive methods--often violating Federal debt 
collection and consumer protection laws and people's fundamental due 
process rights. These companies specialize in amassing court default 
judgments against consumers, which they use to garnish people's wages 
and freeze their bank accounts--another form of wealth extraction that 
disproportionately harms communities of color. \5\ Predatory lending, 
foreclosures, and abusive debt collection, meanwhile, appear in 
people's credit reports and can block their access to housing, jobs, 
affordable insurance and other vital opportunities.
---------------------------------------------------------------------------
     \5\ ``The Debt Collection Racket in New York: How the Industry 
Violates Due Process and Perpetuates Economic Inequality'', at 
www.neweconomynyc.org/wp-content/uploads/2014/08/
DebtCollectionRacketUpdated.pdf.
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    Responsible lenders and the communities they serve were not spared 
the effects of the financial collapse and ensuing Great Recession, 
including loan losses resulting from long-term unemployment; and the 
ongoing challenges of operating in a depressed interest rate 
environment. According to the U.S. Treasury Department, the U.S. 
economy lost 8.8 million jobs and $19.2 trillion in household wealth 
between 2007 and 2009. \6\
---------------------------------------------------------------------------
     \6\ ``The Financial Crisis Response in Charts'', at 
www.treasury.gov/resource-center/data-chart-center/Documents/20120413--
FinancialCrisisResponse.pdf.
---------------------------------------------------------------------------
    2. Strong prudential regulation and consumer protections--including 
a robust and independent Consumer Financial Protection Bureau--are 
crucial to avert future crises and to ensure a fair financial services 
system that meets the needs of people and communities.
    Congress enacted the Dodd-Frank Wall Street Reform and Consumer 
Protection Act in 2010, in the wake of undeniable regulatory failure 
and destructive lending that destabilized neighborhoods, exposed the 
financial system to broad, systemic risk, and nearly brought down the 
global economy. Among the Act's provisions is a requirement that 
lenders assess borrowers' ability to repay loans--a basic, common sense 
tenet of responsible lending that nevertheless has been cited by 
opponents of the Act as an example of unwarranted regulatory intrusion.
    New Economy Project and allies across New York and the country 
advocated for the creation of the Consumer Financial Protection Bureau 
(CFPB)--the first Federal agency with a core mission of protecting 
consumers in the financial services marketplace. Our organization has 
since testified at numerous CFPB field hearings; organized meetings 
between the CFPB and local groups, to elevate issues and inform the 
bureau's rulemaking and enforcement; and pressed the CFPB to promulgate 
strong Federal rules to end predatory payday lending, debt collection, 
and abusive bank overdrafts.
    The CFPB plays an absolutely vital role in identifying and 
eliminating financial exploitation--a function that was sorely missing 
in the years leading up to the crash. To date, the Bureau has returned 
$12 billion to 29 million Americans, while bringing payday lenders, 
credit reporting agencies, and other powerful industries under 
meaningful supervision for the first time. The fact that banks are 
pushing relentlessly to weaken the CFPB is a testament to its 
effectiveness and its independence.
    LES People's, the credit union whose board I chair, similarly 
welcomed the establishment of the CFPB and its efforts to level the 
playing field for responsible community development lenders. We have 
urged the CFPB to crack down on rampant abusive lending practices, 
including payday lending and hidden overdraft fees. These two financial 
products alone siphon billions of dollars from low income people and 
communities each year. In many markets, these high-cost loans 
additionally force a ``race to the bottom'' in which otherwise 
responsible lenders compete, for example, with payday lenders by 
mimicking the structure of these harmful loans; or rely on high and 
hidden overdraft loan fees that drain the accounts of low income bank 
and credit union customers, to compensate for low interest income and 
to compete with other financial institutions.
    3. Community development financial institutions (CDFIs) have a 
proven track record of meeting affordable housing, small business and 
consumer credit needs. The proposed gutting of the Federal CDFI Fund 
puts them at grave risk.
    After receiving trillions of dollars in TARP bailout money and no-
interest loans from the Fed, banks have failed to meaningfully extend 
credit to small businesses and other vital sectors of the economy. New 
York City is 40 percent foreign-born, yet banks routinely bar immigrant 
NYC residents from opening accounts, through restrictive identification 
requirements and other discriminatory barriers. Not a single one of the 
big banks accepts NYC's municipal identification card, IDNYC, as a 
primary form of ID, despite guidance from Federal regulators confirming 
they may do so, and despite pressing need.
    As banks continue to consolidate and become further removed from 
communities and local economies, community development financial 
institutions (CDFIs) play an increasingly important role in stimulating 
small business, affordable housing and other development in 
economically distressed neighborhoods, through fair and transparent 
loans and investments. CDFI-certified credit unions, including LES 
People's, serve more than eight million people across 46 States and, 
despite serving low income communities, exceed the financial growth and 
performance of their mainstream peers. \7\
---------------------------------------------------------------------------
     \7\ ``CDFI Certification: A Building Block for Credit Union 
Growth: Performance, Profiles, and Prospects for CDFI Credit Unions'', 
at www.cdcu.coop/wp-content/uploads/2014/05/CDFI_whitepaper_final.pdf.
---------------------------------------------------------------------------
    Since 1994, the U.S. Treasury has provided CDFI certification and 
investments to qualifying institutions, shoring up their net worth and 
allowing them to grow deposits and loans, as well as attract other 
investors. (CDFIs must match Federal investments dollar for dollar with 
private sources.) CDFI investments have helped my credit union, LES 
People's, for example, to make more than $92 million in business, 
mortgage and consumer loans since our inception, and to grow in assets 
from $33 million to $51 million in a few short years. Our members' 
deposits are fully loaned out, and among the needs our credit union 
fulfills is lending to low income, limited-equity housing cooperatives 
in NYC--one of the few remaining avenues to homeownership that are 
accessible to low income New Yorkers.
    Given the CDFI Fund's ability to achieve massive impact with 
relatively small investments, it has consistently garnered broad, 
bipartisan support. The Trump administration's recently proposed FY2018 
budget, however, virtually zeroes out the CDFI Fund, along with other 
vital community development programs. Federal disinvestment from a 
sector that is financing true economic growth and jobs would have a 
devastating impact on communities across the country, and we hope this 
funding is swiftly and fully restored.
    Thank you again for the opportunity to testify today. 
Unfortunately, we find ourselves in a position in which we must do 
everything possible to resist attacks on financial reform and consumer 
protection. I would be happy to respond to any questions you might have 
about the role of the financial sector in fostering economic growth, 
including our vision for a just and equitable economy.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



                PREPARED STATEMENT OF WILLIAM E. SPRIGGS
Professor of Economics, Howard University, and Chief Economist, AFL-CIO
                             March 28, 2017
    Thank you to Chair Mike Crapo and Ranking Member Sherrod Brown for 
this invitation to give testimony before your Committee today on issues 
of policies to promote economic growth. I am happy to offer this 
testimony on behalf of the AFL-CIO, America's house of labor, 
representing the working people of the United States; and based on my 
expertise as a professor in Howard University's Department of 
Economics, whose alumni include your colleague Senator Kamala Harris.
    Financial firms and monetary policies can and do play a role in 
shaping economic growth. But, it is important to first note that 
economic growth characterizes events in the real economy; the 
production and sale of goods and services. The key elements of growth 
are the growth rate of the labor force, the skills of the labor force 
and the productivity of the labor force. Financial markets play a role 
in insuring that investments add to productive capital that can boost 
the productivity of workers, and there are fair terms for workers to 
make investment in their education and skill attainment. And, fair and 
equitable access to financial institutions can insure that households 
can have enough liquidity to smooth their consumption to be resilient 
during economic downturns and in retirement, and to make investments in 
capital, like housing, that can boost employment.
    To have sustained growth, the financial system must remain stable. 
When banks grow too large and present systemic risks to the system, or 
when banks can create shadow investments trading in their own debt, the 
system itself becomes a risk. Glass-Steagall, the Banking Act of 1933, 
\1\ provided a period of such stability. The financial collapse of 
2007-2008 clearly demonstrated that the financial system cannot self-
regulate. The fallout in the real economy was deep and far reaching, 
causing a collapse in private and public investment, and the stripping 
of wealth of the household sector by depleting savings to keep 
households going. Nine years away, we have yet to restore public 
investment to the level needed to sustain strong growth. So, similarly 
to the lessons learned from the financial collapse of the Great 
Depression, Dodd-Frank, the Wall Street Reform and Consumer Protection 
Act of 2010, \2\ addresses the excesses that the financial collapse of 
the Great Recession demonstrated create a system of great economic 
risk. For that reason, the AFL-CIO supported the Dodd-Frank reforms and 
continues to believe it prudent to defend them as necessary for 
sustained growth.
---------------------------------------------------------------------------
     \1\ Public Law 73-66 http://www.legisworks.org/congress/73/publaw-
66.pdf.
     \2\ Public Law 111-203 https://www.gpo.gov/fdsys/pkg/PLAW-
111publ203/html/PLAW-111publ203.htm.
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    It is key for monetary policy to provide enough liquidity to the 
market to allow for investment in productive capital, and enough 
liquidity for households to make long term purchases like automobiles 
and houses; and with regulation to reduce systemic risks from market 
concentration and discrimination in access. A necessary condition for 
growth is monetary policy that adheres to the Humphrey-Hawkins Act, the 
Full Employment and Balanced Growth Act of 1978, to keep Americans at 
work, letting the economy run at a rate that keeps unemployment low. 
\3\
---------------------------------------------------------------------------
     \3\ Public Law 95-523, 92 Stat. 1887, https://www.gpo.gov/fdsys/
pkg/STATUTE-92/pdf/STATUTE-92-Pg1887.pdf.
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    In the real economy, many policies fostered a period of shared 
prosperity and rapid economic growth in the United States. From 1946 to 
1979, the wages of American workers grew with their productivity. And, 
income gains were roughly equally shared throughout the income 
distribution. There were many Federal policies that invested in the 
American people and put the Government on the side of raising wages. In 
sum, these policies promoted shared prosperity, so incomes grew at each 
income quantile. Economists are converging on a consensus that equality 
promotes faster economic growth. And, equality provides the basis for 
enhancing social mobility and a more meritocratic society.
    Several key Federal programs stand out for enhancing shared 
prosperity. The GI Bill, gave many World War II veterans access to 
college by paying their tuition and giving them living stipends; home 
ownership through reduced down payments and low interest loans--two 
tickets to the middle class.
    The introduction in 1946 of Federal legislation to establish a 
national school lunch program decreased the food insecurity of 
children. Participation of children in interventions to address basic 
food needs has been shown to improve the health of children and have 
lasting impacts on educational attainment. \4\
---------------------------------------------------------------------------
     \4\ Craig Gundersen, Brent Kreider, and John Pepper, ``The Impact 
of the National School Lunch Program on Child Health: A Nonparametric 
Bounds Analysis'', Journal of Econometrics, Vol. 156 (January 2012): 
79-91; Peter Hinrichs, ``The Effects of the National School Lunch 
Program on Education and Health'', Journal of Policy Analysis and 
Management, Vol. 29 (Summer 2010): 479-505.
---------------------------------------------------------------------------
    During this period, broad political consensus maintained a neutral 
National Labor Relations Board that maintained balance in labor 
management relations. The period allowed for the continued ability of 
workers to exercise their right to organize. So, during this period, 
the share of workers who were organized rose, as did their diversity. 
At higher levels of union density all workers benefit, both union and 
nonunion in striking deals to divide the benefits of rising 
productivity. \5\
---------------------------------------------------------------------------
     \5\ Daniel Tope and David Jacobs, ``The Politics of Union Decline: 
The Contingent Determinants of Union Recognition Elections and 
Victories'', American Sociological Review, Vol. 74 (October 2009): 842-
864; Jake Rosenfeld, Patrick Denice, and Jennifer Laird, ``Union 
Decline Lowers Wages of Nonunion Workers: The Overlooked Reason Why 
Wages Are Stuck and Inequality Is Growing'', Economic Policy Institute, 
(August 30, 2016) at http://www.epi.org/files/pdf/112811.pdf.
---------------------------------------------------------------------------
    Each President during the period signed legislation to raise the 
minimum wage and keep all wages in step with general growth in 
productivity and wage gains. This spread the benefits of increases in 
productivity to the wages of the lowest quantile; insuring that work 
paid. Increases in the minimum wage are linked to reducing food 
insecurity and lowering low-birth weight and premature babies for less 
educated women. \6\
---------------------------------------------------------------------------
     \6\ George Wehby, Dhaval Dave, and Robert Kaestner, ``Effects of 
the Minimum Wage on Infant Health'', National Bureau of Economic 
Research, NBER Working Paper No. 22373 (June 2016); William M. Rodgers 
III, ``The Impact of the 1996/97 and 2007/08/09 Increases in the 
Federal Minimum Wage on Food Security'', manuscript, Rutgers University 
(September 2015) at https://www.researchgate.net/publication/266023361-
The-Impact-of-the-199697-and-20070809-Increases-in-the-Federal-Minimum-
Wage-on-Food-Security.
---------------------------------------------------------------------------
    Republican President Dwight Eisenhower, when the former Soviet 
Union launched Sputnik in October 4, 1957, got the Democratic Senate to 
pass legislation in less than 1-year to launch the National Defense 
Student Loan program that assured American students could borrow enough 
money to cover an Ivy League education at interest rates below the 
prime rate. Students who were supported by the loans but accepted jobs 
in K-12 education had their loans forgiven.
    American became the world's most educated country with the highest 
share of its workforce holding college degrees. The NDSL provided the 
money for the teacher corps that then produced the inventors of the 
personal computer and internet. \7\
---------------------------------------------------------------------------
     \7\ Public Law 85-864 (September 2, 1958) https://
research.archives.gov/id/299869; Saul B. Klaman, ``The Postwar Pattern 
of Mortgage Interest Rates'', in Saul B. Klaman (ed.) The Postwar 
Residential Mortgage Market (Princeton University Press, 1961) sited 
from: http://www.nber.org/chapters/c2341.pdf, University of 
Pennsylvania, ``University History, Tuition and Mandated Fees, Room and 
Board and Other Educational Costs at Penn Since 1900: 1950-1959'' web 
page: http://www.archives.upenn.edu/histy/features/tuition/1950.html.
---------------------------------------------------------------------------
    President Eisenhower also launched one of the largest peace time 
Government programs in creating our current modern interstate highway 
system. Not only did this create many middle-class construction jobs, 
it vastly improved America's infrastructure and lowered transportation 
and production costs for American business. It spurred the expansion of 
new industries like motels and reduced the isolation of rural 
communities.
    In the 1960s, President Lyndon Johnson expanded the role of the 
Federal Government in investing in the early education of America's 
children. The Head Start program, launched in 1965 has proven to be a 
valuable program in changing the long-run prospects for children from 
low-income families: increasing their success in school, earnings in 
adulthood and lowering criminal activity. \8\
---------------------------------------------------------------------------
     \8\ Patrick Kline and Christopher Walters, ``Evaluating Public 
Programs With Close Substitutes: The Case of Head Start'', National 
Bureau of Economic Research, NBER Working Paper No. 21658 (October 
2015); Hilary Shager, Holly S. Schindler, Katherine A. Magnuson, Greg 
J. Duncan, Hirokazu Yoshikawa, and Cassandra M.D. Hart, ``Can Research 
Design Explain Variation in Head Start Research Results? A Meta-
analysis of Cognitive and Achievement Outcomes'', Educational 
Evaluation and Policy Analysis, Vol. 35 (March 2013): 76-95.
---------------------------------------------------------------------------
    Also in 1965, President Johnson put in place Medicaid and Medicare. 
Medicaid has been shown to increase the educational attainment and 
earnings of women who had greater access to Medicaid as children, and 
boosts the taxes paid by young adults who were helped by Medicaid. \9\ 
Medicare ended racial segregation in the provision of health in the 
United States, improved the lives of older Americans and began 
narrowing the life expectancy gap between whites and African Americans.
---------------------------------------------------------------------------
     \9\ David W. Brown, Amanda E. Kowalski, and Ithai Z. Lurie, 
``Medicaid as an Investment in Children: What Is the Long-Term Impact 
on Tax Receipts?'' National Bureau of Economic Research, NBER Working 
Paper No. 20835 (January 2015).
---------------------------------------------------------------------------
    These investments in American children and the American people, and 
the investment in public infrastructure put the Federal Government 
clearly on the side of empowering Americans to achieve a high level of 
productivity. It provided American corporations the largest pool of 
highly educated and healthy workers to propel American growth. And, the 
Government was clearly on the side of American workers in getting their 
fair share of the increased productivity. Wages rising with 
productivity insured all the correct market signals in the labor market 
would encourage Americans to make the investment in their skills. And, 
by keeping unemployment rates low, fiscal, and monetary policy gave 
incentive to firms to train workers, invest in their productivity and 
aim at retaining those workers.
    Since that era, most of those policies have been undermined. In the 
1980s and again in the 2000s the NLRB too often took positions 
favorable to management to limit workers organizing; raising the 
minimum wage went from a bipartisan effort to a partisan battle; the 
wages for the middle stagnated and the wages at bottom fell. Profits as 
a share of national income rose, but taxes from corporate America 
shrank, putting more of the Nation's tax burden on workers as the wage 
share of national income fell. Once the United States stood out for its 
highly educated work force, as recently as 1995 ranking first for the 
share of workers with college degrees, but by 2012 the United States 
ranked 19th among 28 advanced economies. \10\ In 1975 State and local 
governments provided 63 percent of all expenditures on higher 
education, by 2010 that figure fell to 34.1 percent resulting in a 
trend of ever rising tuition for individual students. \11\
---------------------------------------------------------------------------
     \10\ Liz Westin, ``OECD: The U.S. Has Fallen Behind Other 
Countries in College Completion'', Business Insider (September 9, 2014) 
at http://www.businessinsider.com/r-us-falls-behind-in-college-
competition-oecd-2014-9.
     \11\ Thomas Mortenson, ``State Funding: A Race to the Bottom'', 
American Council on Education (Winter 2012) at http://www.acenet.edu/
the-presidency/columns-and-features/Pages/state-funding-a-race-to-the-
bottom.aspx.
---------------------------------------------------------------------------
    The financial collapse of 2007-2008 further crippled American 
manufacturing, forcing American automobile manufacturing into 
bankruptcy and reorganization, and crushed public sector investment 
beyond de-investment in higher education. Falling values of pension 
investments and drops in revenue, led to the greatest drop in State and 
local public investment since the Great Depression.
    Americans see politicians that argue for tax breaks for the top 1 
percent, and a retreat on policies to invest in them while their wages 
stagnate and corporations are given support to suppress those wages, 
hours and working conditions. This is a great source of cynicism as 
workers no longer believe in ``trickle down'' economics.
    Now most economists agree. The International Monetary Fund (MF) and 
the Organization for Economic Cooperation and Development (OECD) find 
that income inequality hurts growth.
    The IMF finds that near term growth over the business cycle, 
roughly 5 years, is slower and of shorter duration in those advanced 
economies where net income inequality is higher; where net income 
inequality considers market-based income (or gross inequality) net of 
income transfer programs (safety-net and other redistributive 
programs). \12\ There are various reasons for this. At high levels of 
inequality, those at the bottom of the income distribution are more 
vulnerable and lack resiliency to absorb downward shocks in income. 
Workers also become highly leveraged to keep up when the economy 
expands, increasing systemic risks for the economy. Importantly, the 
IMF find that redistribution of income has no effect on growth, but 
inequality does. This means that concerns that safety-net programs slow 
growth by reducing labor supply and effort is not shown in the data. 
But, the effects of inequality do show. So, the net benefit of 
redistribution that lowers inequality is clear.
---------------------------------------------------------------------------
     \12\ Jonathan D. Ostry, Andrew Berg, and Charalambos G. 
Tsangarides, ``Redistribution, Inequality, and Growth'', IMF Staff 
Discussion Note, SDN/14/02 (February 2014) at https://www.imf.org/
external/pubs/ft/sdn/2014/sdn1402.pdf.
---------------------------------------------------------------------------
    Focusing on income distribution more specifically, the IMF finds 
that when growth goes up disproportionately to the top 20 percent of 
the income distribution that national income growth--GDP per capita--
falls. Clearly, policies that aim to increase the post-tax income of 
the top do not trickle down; they instead slow overall growth. They 
further find that programs that increase access to education and health 
in particular, that help the middle class and the poor specifically, 
reduce inequality, and spur growth. \13\ And, that labor market 
policies that do not exclude the poor from accessing middle income jobs 
spur growth. In short, the very policies pursued by the United States 
across Democrat and Republican Presidencies during the 1946 to 1979 
era.
---------------------------------------------------------------------------
     \13\ Era Dabla-Norris, Kalpana Kochhar, Nujin Suphaphiphat, 
Frantisek Ricka, and Evridiki Tsounta, ``Causes and Consequences of 
Income Inequality: A Global Perspective'', IMF Staff Discussion Note, 
SDN/15/13 (June 2015) at https://www.imf.org/external/pubs/ft/sdn/2015/
sdn1513.pdf.
---------------------------------------------------------------------------
    The IMF further investigates and finds that the growth in 
inequality is mainly driven by gains at the top 10 percent and is tied 
together with a reduction in the share of workers in labor unions to 
bargain for a higher share of gains to the middle and the lowering 
value of minimum wages that protect earnings at the bottom. The report 
also found evidence that declining top marginal income tax rates 
increases inequality, as does financial deregulation. Technological 
change was not a driving force. \14\
---------------------------------------------------------------------------
     \14\ Florence Jaumotte and Carolina Osorio Buitron, ``Inequality 
and Labor Market Institutions'', IMF Staff Discussion Note, SDN/15/14 
(July 2015) at https://www.imf.org/external/pubs/ft/sdn/2015/
sdn1514.pdf.
---------------------------------------------------------------------------
    The OECD research finds a sizable impact on growing inequality and 
slowing growth. Specifically, the decline in the share of income for 
the bottom 40 percent of income distribution hurts growth the most. The 
OECD finds a clear link between the shrinking income share of the 
bottom 40 percent and a drop in educational investment. Clearly, an 
effect of rising inequality that can be mitigated is to increase public 
investment in education targeted toward the bottom 40 percent. They 
also find that policies that can increase women's labor force 
participation, like supporting child care, paid sick days and family 
leave, also reduce inequality, and promote growth. And, raising labor 
standards to reduce nonstandard and irregular work, reduce poverty and 
inequality, and promote growth. \15\
---------------------------------------------------------------------------
     \15\ ``OECD, In it Together: Why Less Inequality Benefits All'', 
(OECD Publishing: Paris, 2015) at http://www.keepeek.com/Digital-Asset-
Management/oecd/employment/in-it-together-why-less-inequality-benefits-
all-9789264235120-en#.V-FiwCgrKhc.
---------------------------------------------------------------------------
    OECD research also finds that increased centralized bargaining 
structures, like those that can come from higher labor union density, 
help to reduce the risk of extreme failures from economic shocks. And, 
it is also the case that higher minimum wages reduce the risks of very 
negative extremes from economic shocks. Perhaps explaining stability in 
the United States economy during the 1946 to 1979 period. \16\
---------------------------------------------------------------------------
     \16\ Aida Caldera Sanchez and Oliver Roehn, ``How do Policies 
Influence GDP Tail Risks?'' OECD Economics Department Working Paper 
(forthcoming).
---------------------------------------------------------------------------
    The evidence from the IMF and OECD that has been built on a growing 
economic literature on the effects of inequality are reassuring in 
understanding what helped form greater political and social cohesion in 
the United States from 1946 to 1979 when U.S. productivity, income 
growth and educational attainment led the world. The loss of faith of 
American workers in the system has risen with policies that have 
promoted inequality, that reversed patterns of investing in America and 
Americans and led to rising inequality that has slowed economic growth. 
There can be little social cohesion when policies consistently favor 
those at the top, as they do not help growth.
    Since 1979, incomes have grown very unequal in the U.S. \17\ This 
growth in inequality has been accompanied by several other discouraging 
factors. Among those factors has been a decline in new establishment 
creation including small businesses. The creation of new firms is 
related to product innovation and labor market reallocation. These two 
help increase aggregate productivity, a key to faster economic growth 
rates. \18\
---------------------------------------------------------------------------
     \17\ Congress of the U.S., Congressional Budget Office, Trends in 
the Distribution of Income Between 1979 and 2007, October 2011 at 
http://www.cbo.gov/sites/default/files/cbofiles/attachments/10-25-
HouseholdIncome.pdf.
     \18\ Ryan Decker, John Haltiwanger, Ron S. Jarmin, and Javier 
Miranda, ``Where Has All the Skewness Gone? The Decline in High Growth 
(Young) Firms in the U.S.'', NBER Working Paper No. 21776 (December 
2015) at http://www.nber.org/papers/w21776.
---------------------------------------------------------------------------
    Firm growth is dependent on the growth of their customer base. \19\ 
When there is broadly shared prosperity more households have their 
budget constraint expanded; resulting in a larger increase in potential 
customers. When the economy produced shared prosperity, new 
establishments were created without hurting the market share of large 
firms. But, when income growth is limited, there is a smaller increase 
in potential customers. Customer growth becomes a zero-sum game. Firms 
with adequate liquidity compete by lowering prices or buying 
competitors. But, lowering costs by lowering wages means a competition 
for customers that lowers the incomes of some households, further 
shrinking the aggregate customer base. In 1980 when the Federal Reserve 
deliberately created a slowdown in the economy, incomes dropped as did 
wages. The depth of the drop was the most severe since the Great 
Depression to that point. The slowdown was achieved greatly limiting 
access to liquidity. Real wages for Americans fell, accommodated by a 
fall in the real value of the minimum wage. The result was rise in 
income inequality, and a slowing of the growth of the customer base. 
And, a trend of declining new establishments ensued, as expected 
initially in the retail sector; the one tied directly most directly to 
need for the growth of a broad customer base. \20\
---------------------------------------------------------------------------
     \19\ Simon Gilchrist and Egon Zakrajsek, ``Customer Markets and 
Financial Frictions: Implications for Inflation Dynamics'', Federal 
Reserve Bank of Kansas City, 2015 Economic Symposium: Inflation 
Dynamics and Monetary Policy, (August 2015) at https://
www.kansascityfed.org//media/files/publicat/sympos/2015/
2015gilchrist_zakrajsek.pdf?la=en.
     \20\ Decker, Haltiwanger, et al. (2015).
     
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Figure 1 shows the difference between the broadly shared growth of 
incomes from 1947 and 1979 with the period from 1979 to 2012. Fast and 
equal growth before 1979 has given way to negative growth at the bottom 
for workers like those who keep our schools in order as crossing 
guards, cafeteria workers or janitors (for those workers most affected 
by policies that keep unemployment rates too high and away from full 
employment) and meager growth for the rest of America's workers in the 
bottom 80 percent. \21\
---------------------------------------------------------------------------
     \21\ Russell Sage Foundation Chartbook of Social Inequality at 
http://www.russellsage.org/sites/all/files/chartbook/
Income%20and%20Earnings.pdf.
---------------------------------------------------------------------------
    Indeed, between 1992 and 2015, there is a high correlation between 
income growth in each portion of the income distribution and the growth 
rate in the formation of new establishments in the following year. But, 
that correlation is more pronounced for income growth from the bottom 
up through the upper middle income fifth than between the top 20 
percent and new establishment formation. When incomes grow widely, more 
potential customers make it easier to create a firm to take advantage. 
Increases among the highest income groups are more likely to increase 
the intensity of demand (spending more money on the same things) than 
demand of more goods. With this correlation, clearly the rate of new 
establishments will be lower in the post 1979 era of rising inequality 
and modest income growth for the bottom 80 percent.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Figure 2 shows the correlation between income growth of the bottom 
80 percent of the income distribution, roughly households with incomes 
less than $110,000 a year, and the rate of new establishment formation 
in the following year, and for the top 20 percent of the income 
distribution. The correlation for the bottom 80 percent is presented to 
summarize the relationship between each of the lower fifths of the 
income distribution (the lowest fifth of the household income 
distribution making less than roughly $22,500 like meat packers and 
textile workers, lower-middle income households making less than 
$42,600 like computer control machine tool operators and bus drivers, 
middle income households making less than $68,200 like airplane 
mechanics and fire fighters and those in upper middle income households 
like air traffic controllers and registered nurses) who are the 
backbone of America's working families with new establishment 
formation. \22\ New establishment creation needs accommodating 
financial conditions, but more importantly first needs customer growth 
through widely shared income growth.
---------------------------------------------------------------------------
     \22\ Calculations based on authors calculations from U.S. Bureau 
of Labor Force Statistics, Consumer Expenditure Survey data, and 
Business Employment Dynamics data. The correlation is between pre-tax 
income growth by quintile reported in the Consumer Expenditure data and 
average quarterly New Establishment Rate data for each year from the 
Business Employment Dynamics data. The reverse correlation, using the 
rate of new establishments correlated to income growth the following 
year is much lower, suggesting the causation is more likely that income 
growth leads to new establishment formation.
---------------------------------------------------------------------------
    From 2014 to 2015 when all parts of the income distribution showed 
income growth, the share of small firms with employees reporting 
profitability and rising revenues increased from 15 to 27 percent, and 
from 21 to 26 percent. In 2015 among growing and start-up firms, credit 
availability ranked fourth among their challenges, mentioned half as 
often as the more highly ranked problems of hiring and cash flow. While 
only 47 percent of small firms with employees applied for funding, 61 
percent did so to expand their business. Firms were more successful 
borrowing from small banks than large banks; overall, 79 percent of 
firms who applied for funding received at least some funding. \23\ So, 
the data on small business financial demand point to responding to 
growing opportunities from rising revenue and to fuel growth. They also 
point to the need of financial regulation to insure there is fair 
access to capital.
---------------------------------------------------------------------------
     \23\ Federal Reserve Banks of New York, Atlanta, Boston, 
Cleveland, Philadelphia, Richmond, St. Louis, 2015 Small Business 
Survey Report on Employer Firms (March 2016) at https://
www.newyorkfed.org/medialibrary/media/smallbusiness/2015/Report-SBCS-
2015.pdf.
---------------------------------------------------------------------------
    The data suggest that promoting new establishments (including small 
business) requires an economy that creates broad based income growth 
for all workers, and supportive small banks close to the action of 
small business and willing to invest in their growth; that is an 
economy that needs regulations to protect workers and protect the 
viability of a competitive banking landscape. Legislation like Dodd-
Frank is necessary to limit systemic risk and excesses of exploiting 
consumers. Sustained growth needs conscious Government investment in 
Americans, in their health and their education, and in the Nation, in 
its environment and its infrastructure.
        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                       FROM ROBERT HELLER

Q.1. GDP grew 1.9 percent in the fourth quarter of last year. 
During the same period, community banks' loan balances grew by 
over 8 percent. According to the most recent NFIB survey, only 
3 percent of small business respondents said that they were 
unable to get loans, and a record 67 percent said they had no 
interest in borrowing. Yet we hear from banks that if only 
there were fewer regulations, they could loan more. It seems to 
me that banks are having no problems growing their loan 
portfolios, while growth of goods and services produced is at a 
much slower pace. Figure 1 in your testimony appears to confirm 
the premise of this question. Isn't it true that the only other 
time where the spread between GDP and growth in loans was this 
high during the credit bubble before the crisis?

A.1. You are correct in noting that towards the end of 2016 the 
growth rate of overall bank lending exceeded that of economic 
activity. This is not atypical for the late phase of the 
economic cycle. In fact, during most expansions the growth rate 
of bank lending tends to exceed the economic growth rate late 
in the cycle. That is the time when exuberance can take over 
and sow the seeds for future loan losses.
    But, rather than focusing on very short periods for growth 
or lending comparisons, I believe it is also very important to 
look at longer periods, such as the decade before or after the 
passage of the Dodd-Frank Act, as I did in my testimony.
    The difficulty facing analysts at the present time is to 
distinguish between the cycle and the trend. In that context, 
the increased regulatory burden imposed by the Dodd-Frank 
legislation may well have contributed to the rather slow rate 
of expansion that we have experienced in the current cycle. The 
question is whether an easing of the regulatory burdens would 
lead to greater economic growth and a continuation of the 
expansion. I believe that this is the case and that an easing 
of some of the onerous and costly restrictions would be 
beneficial for economic growth.
    At the same time, it needs to be recognized that it is the 
responsibility of the banking industry to originate only 
quality loans. Banks should only make loans that will be able 
to perform during an economic slowdown and not to make loans 
for loan growth sake. This is where solid, experienced bank 
management comes into play. Disciplined management is the key 
to a healthy bank and a solid financial system.
    I currently serve on the board at Bank of Marin. It has a 
very disciplined, conservative management which has kept the 
bank safe, sound and highly profitable over the past decades. 
No amount of regulation alone is going to have the same effect. 
If you increase regulation, you just add complexity and 
expense, thereby punishing the well-run, strong-performing 
community banks.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                       FROM DONALD POWELL

Q.1. GDP grew 1.9 percent in the fourth quarter of last year. 
During the same period, community banks' loan balances grew by 
over 8 percent. According to the most recent NFIB survey, only 
3 percent of small business respondents said that they were 
unable to get loans, and a record 67 percent said they had no 
interest in borrowing. Yet we hear from banks that if only 
there were fewer regulations, they could loan more. It seems to 
me that banks are having no problems growing their loan 
portfolios, while growth of goods and services produced is at a 
much slower pace. Might demand be a constraint on the growth of 
lending?

A.1. Growth of loans outstanding at U.S. banks exceeded 5 
percent per year in each of the years 2014, 2015, and 2016. 
During these years, bank loan growth significantly exceeded the 
growth of U.S. gross domestic product (GDP). This loan growth 
reflects that U.S. banks have recovered strongly from the 
crisis, both in terms of earnings and in terms of significantly 
stronger capital positions to support lending activity.
    That said, what banks are not able to do is generate as 
much new business through outreach and marketing efforts. For 
community banks the time and staff that would be available for 
marketing is increasingly devoted to filling out forms and 
other compliance activities.
    Moreover, the Fed's latest Small Business Credit Survey for 
2016 (drawn from input from all 12 FR banks), reported the 
following:
    Forty-five percent of small business firms applied for 
financing, a slight tick down from 2015. Three-quarters said 
they received at least some financing, and 40 percent said they 
received the full amount--down from 50 percent the year before. 
Traditional bank lending remains the primary source of 
financing for the Nation's small businesses, the small banks 
approving at least some of the amount requested for 67 percent 
of credit applicants, while large banks approved credit for 54 
percent of applicants. Credit approval rates fell in all lender 
categories. Firms with revenue of more than $1 million were 
more likely to have credit approved.
    Loan demand appears to have been greater among larger 
business borrowers in recent years. Commercial and industrial 
loans outstanding at banks grew 21 percent during the 3 years 
period 2014-2016. Construction loans outstanding at banks grew 
40 percent during the same period, and commercial real estate 
loans secured by nonfarm, nonresidential property grew 19 
percent.
    FDIC data show that loan growth slowed during the fourth 
quarter of 2016 across a number of loan categories. It is too 
soon to say whether this marks the beginning of a cyclical 
slowdown in lending activity. Anecdotal information suggests 
bankers continue to compete vigorously for lending business, 
notwithstanding the extra compliance burden not experienced by 
nonbanks.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER
                       FROM DONALD POWELL

Q.1. In Nevada, Industrial Loan Companies (ILCs) play an 
important role in our economy. Mr. Powell, you have stated in 
the past that ``The FDIC believes the ILC charter, per se, 
poses no greater safety and soundness risk than other charter 
types.'' Do you still believe that ILCs are safe and sound? Do 
you believe that the FDIC has all the tools and resources to 
manage and oversee current and new ILCs properly? Do you 
believe that new ILCs should be chartered if they meet FDIC 
standards?

A.1. I have previously said and would still say that the safety 
and soundness of a given institution depends on the 
characteristics of the institution rather than its charter 
type. The risks posed depend on the appropriateness of the 
institution's business plan and model, management's competency 
to administer the bank's affairs, the quality of the 
institution's risk-management processes, and the institution's 
level of capital.
    I do believe the FDIC has the tools necessary to properly 
oversee existing and newly insured ILCs. Generally, the FDIC 
focuses its supervisory efforts on the activities and risks of 
the institution and its holding company, regardless of charter 
type. ILCs are held to the same standards as other FDIC-insured 
institution. The FDIC's supervisory efforts include ensuring 
that ILCs comply with all applicable laws and regulations and 
operate with sufficient capital. Parent companies of ILCs are 
subject to regulation or oversight by the State banking agency 
under which the ILC is chartered. While parent companies of 
ILCs are not generally required to meet regulatory requirements 
imposed by the Bank Holding Company Act of 1956 (BHCA), the 
FDIC does have authority under the FDI Act to examine the 
affairs of any affiliate, including the parent company, as may 
be necessary to disclose fully the relationship between the 
institution and the affiliate, and to determine the effect of 
such relationship on the depository institution.
    The FDIC's approach to ILC supervision was ultimately 
tested during the recent financial crisis, when several ILCs' 
parent companies or affiliates experienced severe stress, but 
their ILCs did not fail. I would say, however, while the 
regulation and supervision of ILCs is adequate, consolidated 
supervision authorities provide important safety and soundness 
safeguards.
    Finally, I do believe that new ILCs should be insured if 
they meet the underlying statutory factors for deposit 
insurance.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                    FROM THOMAS C. DEAS, JR.

Q.1. GDP grew 1.9 percent in the fourth quarter of last year. 
During the same period, community banks' loan balances grew by 
over 8 percent. According to the most recent NFIB survey, only 
3 percent of small business respondents said that they were 
unable to get loans, and a record 67 percent said they had no 
interest in borrowing. Yet we hear from banks that if only 
there were fewer regulations, they could loan more. It seems to 
me that banks are having no problems growing their loan 
portfolios, while growth of goods and services produced is at a 
much slower pace. Might demand be a constraint on the growth of 
lending?

A.1. End users view the financial system in very much the same 
way we see the electric transmission system. The electric grid 
takes electricity from where it is generated and transmits it 
to where it is needed. We hope it is regulated in a way that 
makes it function reliably and in the most cost-effective ways 
possible. For those of us who have had the privilege of serving 
in U.S. manufacturing companies, we seek to keep all our costs 
as low as possible. If the costs of electric transmission rise 
too much, they will hamper manufacturing competitiveness and 
constrict growth in output and ultimately employment. End users 
have the same expectations for the functioning of the financial 
system. If a project has started up and is generating cash, the 
system should be able to take that cash and through a series of 
transactions and intermediaries move it in the most cost 
effective way to where it is needed for new investments. If 
excessive costs are imposed by regulators, less investment can 
be justified and fewer new projects will be started. Some of 
these regulations impose costs directly on end users, while 
others impose costs directly on banks. In either case, end 
users face higher costs, which can reduce capital expenditures 
and cost jobs.
    The National Association of Corporate Treasurers recently 
worked with the U.S. Chamber of Commerce through their Center 
for Capital Markets Competitiveness on a survey that is 
worthwhile to review. Responses were received from more than 
300 financial professionals, including treasurers and CFOs. The 
study was published last year as Financing Growth: The Impact 
of Financial Regulation. In it more than three-quarters of 
American companies of all sizes responding saw the cumulative 
effect of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act and other financial regulatory rules adopted 
over the past 6 years as making it harder for them to access 
the financial services they need. This was true among small, 
midsized, and large companies and was felt most acutely in a 
lack of access to services helping them manage day-to-day 
liquidity. Further, 79 percent of respondents indicated that 
they have been affected by changes in financial services 
regulation, resulting in 39 percent of respondents absorbing 
higher costs and 19 percent delaying or canceling planned 
investments.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                    FROM THOMAS C. DEAS, JR.

Q.1. As you noted in your testimony, Congress recognized the 
important benefits to the economy when end users use OTC 
derivatives to manage their business risks. Title VII of Dodd-
Frank included an end-user exemption from certain derivatives 
rules like central clearing and margin to reduce burdens that 
might otherwise prevent them from managing their risks. Are the 
current exemptions sufficient or should Congress reexamine them 
to ensure they do not unnecessarily burden productive firms in 
our economy?

A.1. End users of derivatives are grateful for the bipartisan 
support they have received from Congress and for the passage of 
amendments to the Dodd-Frank Act exempting them from central 
clearing and requirements to post initial and variation margin 
for their derivatives positions. If end users had not been 
exempted, margin requirements would be a direct subtraction 
from limited funds that would otherwise be invested to grow 
inventory to support higher sales, to conduct research and 
development activities, to buy new plant and equipment, and to 
sustain and ultimately grow U.S. employment. While these 
exemptions are critical for end users, Congress should 
reexamine how certain financial regulations impact end users.
    One relates to the Credit Valuation Adjustment (CVA) which 
is a capital charge imposed on bank counterparties to OTC 
derivatives transactions. The CVA causes increased costs to 
U.S. commercial businesses that are seeking to manage risks 
associated with their businesses and effectively undermines the 
exemptions from mandatory clearing and margin requirements that 
Congress expressly granted to end users. European regulators 
have provided an exemption from the CVA charge for a European 
bank's trades with end users; however, the U.S. Prudential 
Banking Regulators have not provided a similar exemption for 
U.S. banks trading with end users and instead impose the CVA 
charge on end-user trades. This uneven playing field results in 
higher capital requirements for U.S. banks and ultimately 
higher costs for U.S. commercial businesses compared to their 
European competitors.
    Another area of concern involves the definition of 
``financial entity'' in the Commodity Exchange Act. The 
definition as currently drafted inappropriately captures 
certain smaller financial affiliates of commercial end users 
(e.g., cash pooling entities, in-house insurance companies) and 
financial end users that are using swaps to hedge or mitigate 
commercial risks in the same way as nonfinancial end users. 
Other jurisdictions around the world have recognized this and 
provide exemptions from mandatory clearing and margin 
requirements for financial entities that do not exceed a de 
minimis threshold of nonhedging activities. Most recently, the 
European Commission has proposed to expand their clearing 
exemption (which is already broader than that in the U.S. 
rules) to include small financial companies. U.S. commercial 
end users and financial end users are again placed at a 
competitive disadvantage as compared to competitors around the 
world.
    Finally, we believe it is critical for financial regulators 
to conduct a study of the major financial regulatory 
initiatives to determine their cumulative effects on end users. 
Such a study should consider both direct and indirect effects 
on end users, looking both at regulations of end users and of 
their counterparty financial institutions. It also should 
consider the effects on the cross-border comparability of the 
regulations and their ultimate effects on U.S. competitiveness.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                     FROM DEYANIRA DEL RIO

Q.1. Hard work isn't paying off the way it used to. At the same 
time, predatory lenders often target workers that don't make a 
living wage because they know these people are under constant 
financial pressure. What is the economic impact of predatory 
lending in low-income communities and how does the Consumer 
Financial Protection Bureau help here?

A.1. Response not received in time for publication.

Q.2. GDP grew 1.9 percent in the fourth quarter of last year. 
During the same period, community banks' loan balances grew by 
over 8 percent. According to the most recent NFIB survey, only 
3 percent of small business respondents said that they were 
unable to get loans, and a record 67 percent said they had no 
interest in borrowing. Yet we hear from banks that if only 
there were fewer regulations, they could loan more. It seems to 
me that banks are having no problems growing their loan 
portfolios, while growth of goods and services produced is at a 
much slower pace. Might demand be a constraint on the growth of 
lending?

A.2. Response not received in time for publication.

Q.3. At the hearing, Senator Perdue asked what we can do, and 
what our priorities should be, to best help small communities, 
including the small financial institutions in those 
communities, form small businesses, create jobs and grow the 
economy. Do you have other recommendations about how to 
strengthen community development lenders, particularly smaller 
institutions that are meeting small business, housing and 
consumer needs in neighborhoods across the country?

A.3. Response not received in time for publication.

Q.4. What other recommendations do you have to meet the needs 
of individuals that aren't currently being met by private 
actors?

A.4. Response not received in time for publication.

Q.5. At the hearing, Senator Cortez Masto asked a question 
about the impact of the Trump administration's ``skinny 
budget'' on communities. She detailed the cuts in grant 
assistance, housing vouchers and construction programs, 
investments in community infrastructure like sidewalk repairs 
and enhancements for people with disabilities, and social 
services like youth mentoring, food pantries, and 
transportation for elder Americas, among other cuts. What will 
be the impact of cuts to these types of programs in the 
communities you work in?

A.5. Response not received in time for publication.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                    FROM WILLIAM E. SPRIGGS

Q.1. How does predatory lending impact wealth inequality? How 
does the Consumer Financial Protection Bureau help?

A.1. Response not received in time for publication.

Q.2. GDP grew 1.9 percent in the fourth quarter of last year. 
During the same period, community banks' loan balances grew by 
over 8 percent. According to the most recent NFIB survey, only 
3 percent of small business respondents said that they were 
unable to get loans, and a record 67 percent said they had no 
interest in borrowing. Yet we hear from banks that if only 
there were fewer regulations, they could loan more. It seems to 
me that banks are having no problems growing their loan 
portfolios, while growth of goods and services produced is at a 
much slower pace. Might demand be a constraint on the growth of 
lending?

A.2. Response not received in time for publication.

Q.3. At the hearing, Senator Perdue asked what we can do, and 
what our priorities should be, to best help small communities, 
including the small financial institutions in those 
communities, form small businesses, create jobs and grow the 
economy. What do you think?

A.3. Response not received in time for publication.

Q.4. At the hearing, Senator Schatz asked a series of questions 
about the increase in student loan debt and the increase in the 
cost of college. Is there anything you'd like to add to your 
answer to his question?

A.4. Response not received in time for publication.
              Additional Material Supplied for the Record
   ``RISK WEIGHTS OR LEVERAGE RATIO? WE NEED BOTH'', AMERICAN BANKER
   
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