[Senate Hearing 115-82]
[From the U.S. Government Publishing Office]
S. Hrg. 115-82
FOSTERING ECONOMIC GROWTH: REGULATOR PERSPECTIVE
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
ON
RECEIVING LEGISLATIVE AND REGULATORY RECOMMENDATIONS FROM FINANCIAL
REGULATORS ON FOSTERING ECONOMIC GROWTH
__________
JUNE 22, 2017
__________
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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
Joe Carapiet, Senior Counsel
Graham Steele, Democratic Chief Counsel
Laura Swanson, Democratic Deputy Staff Director
Dawn Ratliff, Chief Clerk
Cameron Ricker, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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THURSDAY, JUNE 22, 2017
Page
Opening statement of Chairman Crapo.............................. 1
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
WITNESSES
Jerome H. Powell, Member, Board of Governors of the Federal
Reserve System................................................. 4
Prepared statement........................................... 36
Responses to written questions of:
Senator Brown............................................ 111
Senator Reed............................................. 114
Senator Tester........................................... 115
Senator Scott............................................ 116
Senator Cotton........................................... 117
Senator Warner........................................... 120
Senator Warren........................................... 122
Senator Tillis........................................... 124
Martin J. Gruenberg, Chairman, Federal Deposit Insurance
Corporation.................................................... 6
Prepared statement........................................... 40
Responses to written questions of:
Senator Brown............................................ 131
Senator Heller........................................... 137
Senator Reed............................................. 138
Senator Tester........................................... 140
Senator Scott............................................ 141
Senator Sasse............................................ 142
Senator Warner........................................... 152
Senator Warrer........................................... 153
Senator Tillis........................................... 157
Senator Heitkamp......................................... 162
Senator Cortez Masto..................................... 164
J. Mark McWatters, Acting Board Chairman, National Credit Union
Administration................................................. 7
Prepared statement........................................... 67
Responses to written questions of:
Senator Brown............................................ 165
Senator Scott............................................ 167
Senator Sasse............................................ 172
Senator Warner........................................... 175
Senator Rounds........................................... 176
Senator Kennedy.......................................... 178
Senator Tillis........................................... 185
Keith A. Noreika, Acting Comptroller, Office of the Comptroller
of the Currency................................................ 9
Prepared statement........................................... 75
Responses to written questions of:
Senator Brown............................................ 191
Senator Scott............................................ 193
Senator Sasse............................................ 194
Senator Cotton........................................... 202
Senator Warner........................................... 203
Senator Tillis........................................... 204
Senator Kennedy.......................................... 207
Senator Cortez Masto..................................... 209
Charles G. Cooper, Banking Commissioner, Texas Department of
Banking, on behalf of the Conference of State Bank Supervisors. 10
Prepared statement........................................... 90
Responses to written questions of:
Senator Sasse............................................ 212
Senator Tillis........................................... 216
Additional Material Supplied for the Record
Letter submitted by the U.S. Chamber of Commerce................. 220
Letter submitted by the Consumer Bankers Association............. 222
Letter submitted by the Credit Union National Association........ 227
Letter submitted by FIA.......................................... 230
Letter submitted by the Financial Services Roundtable............ 234
FOSTERING ECONOMIC GROWTH: REGULATOR PERSPECTIVE
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THURSDAY, JUNE 22, 2017
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:19 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. Welcome,
everyone. I apologize that we had to set the hearing back a few
minutes, and you will see there are no Republicans in the room
right now. They are having a conference right now on health
care, and----
Senator Donnelly. Can we have a few Committee votes here?
[Laughter.]
Senator Heitkamp. Where is the room?
[Laughter.]
Chairman Crapo. I will tell you where. If you look at where
almost every reporter in the complex is, it is right in the
middle of that circle.
Senator Brown. ``Conference'' would suggest ``confer.''
Chairman Crapo. That is right. I figured we might get into
that.
Senator Brown. Sorry, Mr. Chairman.
Chairman Crapo. But, anyway, thank you. They should be
coming. I had to leave that conference early, and I expect that
we will see more Republicans coming. You are going to the
conference now?
Senator Donnelly. I am, yeah.
[Laughter.]
Senator Donnelly. And I am as well informed as the rest of
them.
[Laughter.]
Senator Tester. We are heading to the briefing, Mike.
Chairman Crapo. All right. We do get along on this
Committee.
Senator Heitkamp. I am hanging with you.
Chairman Crapo. Thank you, Heidi. You did well after
Sherrod.
So now let me re-collect my thoughts. The hearing is
already in order, and we will hear from our financial
regulators today to receive legislative and regulatory
recommendations that would foster economic growth.
Based on conversations I have had with current and former
regulators, recommendations in Treasury's recent report,
testimony at hearings before this Committee, and the recent
EGRPRA report, I am convinced that there is growing support for
legislation that promotes economic growth.
I have had conversations with Members on both sides of the
aisle who have told me that they are committed to pursuing
bipartisan improvements.
One of my key priorities in this Congress is passing
bipartisan legislation to improve the bank regulatory framework
and promote economic growth.
In March, Senator Brown and I began our process to receive
and consider proposals to help foster economic growth, and I
appreciate the valuable insights and recommendations we have
received.
Most recently, we heard from small financial institutions
and from midsize and regional banks about the need to tailor
existing regulations and laws to ensure that they are
proportional and appropriate. For example, something that
witnesses highlighted that has bipartisan agreement is that the
regulatory regime for small lenders is unnecessarily
burdensome.
There also seems to be genuine interest by Members in
assessing whether certain rules applied based on asset
threshold alone reflect the underlying systemic risk of
financial institutions.
Specifically, there is interest in finding bipartisan
solutions aimed at: tailoring regulation based on the
complexity of banking organizations; changing the $50 billion
threshold for SIFIs; exempting more banks from stress testing;
simplifying the Volcker rule; and simplifying small-bank
capital rules.
These are just a few of the many issues that the Committee
is reviewing.
Today I look forward to hearing recommendations from our
financial regulators on these issues. And as this process
continues, I will be working with all Members of the Committee
from both sides of the aisle to bring strong, robust bipartisan
legislation forward.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman, for holding today's
hearing. I would like to welcome our five witnesses. Thank you
for joining us, those who have been here a while and done this
and those who are new to this Committee and to this process.
I am guessing that none of our witnesses today had their
homes foreclosed on in the last decade. I would make the
assumption that none of you lost your jobs because of what
happened because your company went out of business. I would bet
that none of you saw almost your entire savings, retirement
savings, disappear. But perhaps you know someone that did.
Perhaps, as Lincoln said, we all need to get out and get our
public opinion baths more than we do as elected officials and
as regulators, or as Pope Francis said, admonished his parish
priests, ``Go out and smell like the flock.'' Perhaps we all
need to do that better than we do.
Wall Street greed, the resulting financial crisis, what it
did to millions of Ohioans and so many of our constituents is a
lesson, collective amnesia in this body notwithstanding, is a
lesson we need to learn, to remember, and to act on. We must
never forget those stories.
Many of you have heard, my colleagues have, my wife and I
live in Cleveland, Ohio, ZIP Code 44105. Ten years ago right
now, they had more foreclosures in my ZIP Code, 44105,
Cleveland, than any ZIP Code in the United States of America.
Wall Street reform created a more stable financial sector
by strengthening the capital position of the Nation's largest
banks. American consumers have recovered $12 billion of their
hard-earned money because we now have an independent agency,
the CFPB, protecting them from scams and abuse. Senator Reed,
the most senior Democrat on this Committee, is working on
legislation particularly aimed at the work and to expand the
work Holly Petraeus did at CFPB on behalf of servicemembers,
and if we have military bases in our States, we all know what
kind of characters hang right outside these military bases--
payday lenders, other predators scamming these servicemen- and
-women who are often vulnerable in their economic situation. It
is a question, as Ms. Petraeus and Senator Reed said yesterday,
when they have their financial security so challenged by scam
artists.
That is why the report that the Treasury Department
released last week is just misguided. Their report is a Wall
Street wish list specifically targeting the capital and
liquidity rules for the largest banks and seeking to undermine
the CFPB. The report takes as gospel that more lending and
leverage is the best way to create economic growth. Data shows
that lending has, in fact, been healthy and at sustainable
levels since the crisis. The last thing we should advocate for
is going back to the levels of 2001 and 2002 and 2003 which led
to the subprime crisis, a time period which the Treasury report
holds up as an example.
There is no evidence that relaxing rules will lead banks to
lend more. It is just as likely that bank executives will pass
any savings, if history is an indication, it just as likely
they will pass any savings along to themselves, shockingly, and
their shareholders. I am concerned that many of Treasury's
recommendations will undermine or delay the effectiveness of
bank supervision, something that was severely lacking leading
up to the crisis. These misguided ideas include additional
layers of cost-benefit analysis, more obstacles to supervisory
actions, weakened leverage rules, changes to stress tests that
will allow the banks to game the stress tests, and changes to
living wills. These recommendations would make the watchdogs'
jobs harder and prevent them from spotting risks before they
again balloon out of control. They would make our system less
stable. They would leave consumers more vulnerable.
The Treasury report missed an opportunity to put forth an
agenda that actually does create real economic growth for our
country. At every turn, the Administration has advocated for an
agenda that hurts average Americans, more handouts for Wall
Street, more tax cuts for millionaires and billionaires, less
health care for working people, cuts to programs that help
those who need it the most.
There are ideas worth considering in the Treasury report,
as evidenced by the overlap with some of the recommendations in
the agency's EGRPRA review for small institutions. But many of
Treasury's recommendations seem like a steep price to pay for
our country after the 2008 financial crisis. We have seen the
damage that happens when the Administration pushes financial
watchdogs to prioritize special interests over working people.
It is pretty telling that Treasury met with 17 representatives
for every one advocate for ordinary Americans--17
representatives for every one advocate for ordinary Americans--
and that 31 out of 40 requests made by those representing the
biggest banks were included in the reports.
The five of you have a very, very important job. I hope
that you do not have that same bias that this Treasury
Department does. Again, 31 out of the 40 requests put forward
by the largest banks were included in this report. I hope this
Committee can focus on the issues that will reduce burdens for
small institutions and struggling communities, will help
consumers, and in the end will create long, sustainable
economic growth.
Mr. Chairman, I look forward to working with you and our
colleagues, but it would be a shame if we forgot so soon in
less than a decade, or in about a decade, the lessons of the
Great Recession.
Chairman Crapo. Thank you, Senator Brown.
Now we will turn to oral testimony, and first we will
receive testimony from Governor Jay Powell, a Member of the
Board of Governors of the Federal Reserve System.
Next we will hear from Chairman Martin Gruenberg, Chairman
of the Federal Deposit Insurance Corporation.
Then we will hear from Acting Chairman Mark McWatters,
Acting Chairman of the National Credit Union Administration.
Next we will hear from Acting Comptroller Keith Noreika--
did I get that right?
Mr. Noreika. Close enough.
Chairman Crapo. Thank you--who is Acting Comptroller of the
Office of the Comptroller of the Currency.
And, finally, we will hear from Commissioner Charles
Cooper, Commissioner of the Texas Department of Banking, on
behalf of the Conference of State Bank Supervisors.
Each witness is recognized for 5 minutes. Mr. Powell, you
may proceed.
STATEMENT OF JEROME H. POWELL, MEMBER, BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
Mr. Powell. Thank you, Chairman Crapo, Ranking Member
Brown, and Members of the Committee. I appreciate the
opportunity to testify here today on the relationship between
regulation and economic growth. We need a resilient, well-
capitalized, well-regulated financial system that is strong
enough to withstand even severe shocks and support economic
growth by lending through the economic cycle. And the Federal
Reserve has approached the post-crisis regulatory and
supervisory reforms with that outcome in mind.
There is little doubt that the U.S. financial system is
stronger today than it was a decade ago. As I discuss in
significantly more detail in my written testimony, loss-
absorbing capacity among banks is substantially higher as a
result of both regulatory requirements and stress testing
exercises.
The banking industry, and the largest banks in particular,
face far less liquidity risk than before the crisis, and
progress in
resolution planning by the largest firms has reduced the threat
that their failure would pose. These efforts have made U.S.
banking firms both more robust and more resolvable.
Turning to the subject of today's hearing, evidence
overwhelmingly shows that financial crises can cause severe and
lasting damage to the economy's productive capacity and growth
potential. Post-crisis reforms to financial sector regulation
and supervision have been designed to significantly reduce the
likelihood and severity of future financial crises, and we have
sought to accomplish this goal in significant part by reducing
both the probability of the failure of a large banking firm and
the consequences of such a failure were it to occur.
As I mentioned, we substantially increased the capital,
liquidity, and other prudential requirements for large banking
firms. These measures are not free. Higher capital requirements
increase bank costs, and at least some of those costs will be
passed along to bank customers and shareholders. But in the
longer term, stronger prudential requirements for large banking
firms will produce more sustainable credit availability and
economic growth through the cycle.
Our objective should be to set capital and other prudential
requirements for large banking firms at a level that protects
financial stability and maximizes long-term, through-the-cycle
credit availability, and economic growth. And to accomplish
that goal, it is essential that we protect the core elements of
these reforms for our most systemic firms in capital,
liquidity, stress testing, and resolution.
With that in mind, I will highlight briefly five key areas
of focus for regulatory reform.
The first is simplification and recalibration of regulation
of small- and medium-sized banks. We are working to build on
the relief that we have provided in the areas of call reports
and exam cycles, by developing a proposal to simplify the
generally applicable capital framework that applies to
community bank organizations.
The second area is resolution plans. The Fed and the FDIC
believe that it is worthwhile to consider extending the cycle
for living will submissions from annual to once every 2 years
and focusing every other of these filings on topics of interest
and material changes from the prior submission. We are also
considering other changes as detailed in my written testimony.
Third, the Fed and others are looking at the Volcker rule
implementing regulation and asking whether it most efficiently
achieves its policy objectives, and we look forward to working
with all four other Volcker agencies to find ways to improve
that regulation. In our view, there is room for eliminating or
relaxing aspects of the implementing regulation in ways that do
not undermine the Volcker rule's main policy goals.
Fourth, we will continue to enhance the transparency of
stress testing and CCAR. We will soon seek public feedback
concerning possible forms of enhanced disclosure, including a
range of indicative loss rates predicted by our models for
various loan and securities portfolios, and information about
risk characteristics that
contribute to the loss estimate ranges. We will also provide
more
detail on the qualitative aspects of stress testing in next
week's CCAR announcement.
Finally, the Federal Reserve is taking a fresh look at the
enhanced supplementary leverage ratio. We believe that the
ratio is an important backstop to the risk-based capital
framework, but that it is important to get the relative
calibrations of the leverage ratio and the risk-based capital
requirements right.
In conclusion, U.S. banks today are as strong as any in the
world. As we consider the progress that has been achieved in
improving the resiliency and resolvability of our banking
industry, it is important for us to look for ways to reduce
unnecessary burden. We also have to be vigilant against new
risks that develop. In all of our efforts, our goal is to
establish a regulatory framework that helps ensure the
resiliency of our system, the availability of credit, economic
growth, and financial market efficiency, and we look forward to
working with our fellow agencies and with Congress to achieve
these goals.
Thank you.
Chairman Crapo. Thank you, Mr. Powell.
Mr. Gruenberg.
STATEMENT OF MARTIN J. GRUENBERG, CHAIRMAN, FEDERAL DEPOSIT
INSURANCE CORPORATION
Mr. Gruenberg. Thank you, Mr. Chairman.
Chairman Crapo, Ranking Member Brown, and Members of the
Committee, I appreciate the opportunity to testify today on
legislative and regulatory relief recommendations.
It has been nearly a decade since the onset of the worst
financial crisis since the 1930s. In that time, the U.S.
banking industry has experienced a gradual but steady recovery
that has put it in a strong position to support the credit
needs of the economy.
The economic expansion that began in 2009 is now
approaching its ninth year, making it the third longest
expansion on record. While this expansion has been marked by
the slowest pace of economic growth and the lowest short-term
interest rates of any expansion of the past 70 years, the
sustained period over which it has occurred, combined with the
regulatory changes implemented in the post-crisis period, have
enabled FDIC-insured institutions to make substantial progress
in strengthening their capital and liquidity, improving their
asset quality, and in raising their net income to record highs.
The improvements have occurred across the industry,
including at community banks, which have outpaced noncommunity
banks by a number of measures during this post-crisis period.
The experience of the crisis and its aftermath suggests
that a strong and well-capitalized banking system is a source
of strength and support to our national economy. The reforms
implemented in the post-crisis period, particularly in regard
to large institutions, have been aimed at making the system
more resilient to the effects of future crises or recessions
and better able to sustain credit availability throughout the
business cycle.
Nonetheless, the FDIC remains cognizant of the costs
imposed by regulatory requirements, particularly for smaller
institutions, which operate with fewer staff and other
resources than their larger counterparts.
In March, the FDIC, along with the OCC and the Federal
Reserve, submitted a report to Congress pursuant to the
Economic Growth and Regulatory Paperwork Reduction Act, or
EGRPRA. The agencies jointly have taken or are in the process
of taking a number of actions to address comments received
during the EGRPRA process.
In addition to actions already taken to reduce examination
frequency, reduce reporting requirements, and ease appraisal
requirements, the agencies are developing a proposal to
simplify the generally applicable capital framework for small
banks.
Additionally, the FDIC would support three legislative
reforms raised by EGRPRA commenters.
First, the FDIC would support raising the $10 billion in
total assets threshold to $50 billion for conducting annual
stress tests required by statute, while retaining supervisory
authority to require stress testing if warranted by a banking
organization's risk profile or condition.
Second, the FDIC would be receptive to legislation further
increasing the asset threshold for banks eligible for an 18-
month exam cycle from $1 billion to $2 billion.
Finally, the FDIC supports legislative changes that would
create a new appraisal residential real estate threshold
exemption that would minimize burden for many community banks.
In addition to these EGRPRA reforms, the FDIC and the
Federal Reserve are exploring ways to improve the living will
resolution planning process. We believe it is worthwhile to
consider extending the cycle for living will submissions from
annual to once every 2 years, and focusing every other filing
on key topics of interest and the material changes from the
prior full plan submission. In addition, there may be
opportunities to reduce the submission requirements for a large
number of firms due to their relatively small, simple, and
domestically focused banking activities. Such an approach could
limit full plan filing requirements to firms that are large,
complex, or have a systemically critical operation.
Mr. Chairman, it is desirable that financial regulations be
simple and straightforward, and that regulatory burdens and
costs be minimized, particularly for smaller institutions. In
considering ways to simplify or streamline regulations,
however, it is important to preserve the gains that have been
achieved in restoring financial stability and the safety and
soundness of the U.S. banking system in the post-crisis period.
Mr. Chairman, that concludes my statement, and I would be
glad to respond to questions.
Chairman Crapo. Thank you, Mr. Gruenberg.
Mr. McWatters.
STATEMENT OF J. MARK McWATTERS, ACTING BOARD CHAIRMAN, NATIONAL
CREDIT UNION ADMINISTRATION
Mr. McWatters. Good morning, Chairman Crapo, Ranking Member
Brown, and Members of the Committee. Thank you for the
opportunity to participate in this important hearing on
regulatory relief for financial institutions.
Since 1987, the NCUA has undertaken a rolling 3-year review
of all of our rules, and although not required by law, the NCUA
is an active participant in the EGRPRA process. After
independent analysis, the agency has agreed to comply with the
spirit of the recently issued Executive orders addressing the
regulation of the financial services sector and the overall
structure of the Federal financial regulators.
The NCUA is unique among Federal financial regulators
because of its structure as a one-stop shop. The NCUA insures,
regulates, examines, supervises, charters, and provides
liquidity to credit unions. My mandate to staff is to make the
NCUA even more efficient, effective, transparent, and fully
accountable while protecting America's $1.3 trillion credit
union community, its 108 million largely middle-class account
holders, and the safety and soundness of the National Credit
Union's Share Insurance Fund.
The NCUA is committed to promulgating targeted regulation
accompanied by a thoughtfully tailored supervisory and
examination programs as ill-considered, scattershot rules and
compliance protocols stifle innovation and the ability of
credit unions to offer appropriately priced services to their
members. The agency endeavors to identify emerging adverse
trends in a timely manner and remains mindful that regulators
should learn from the past, yet focus on the future. Fighting
the last battle gave us the S&L, leveraged buyout, dot-com
crises and laid the foundation for the near collapse of our
economy in September 2008. A prudently regulated credit union
community grows, thrives, and prospers and, as such, protects
the taxpayers from bailout risk. This approach is consistent
with the theme of the report recently issued by the U.S.
Treasury Department and the view that well-capitalized and
appropriately managed financial institutions warrant a reduced
regulatory burden.
Along these lines, within the past 18 months, the NCUA has:
one, implemented a broad-based change to our member business
lending rule; two, modernized our field of membership rule;
three, revised our entire examination approach; four, worked to
enhance the due process rights of credit unions and their
members; five, issued a proposed regulation requiring the
disclosure of compensation payments related to a voluntary
merger; six, developed an approach to streamline and modernize
the rules for corporate credit unions and the stress testing of
the largest credit unions; seven, issued an ANPR requesting
comments on the issuance of supplemental capital for risk-based
net worth purposes; eight, invited comments and revisions on
our call report; nine, implemented our enterprise solutions
modernization program; ten, undertaken the development of a
credit union advisory council; and, eleven, initiated a full
review of the NCUA's operations and management.
In addition to these actions, I intend to consider
revisions to the agency's risk-based net worth rule before its
effective date in 2019.
The recent EGRPRA report also highlights three beneficial
legislative measures that would: one, provide the NCUA with
greater flexibility in designing capital standards for credit
unions; two, permit all credit unions to add underserved areas
to expand access to financial services for the unbanked and the
underbanked; three, provide credit unions with more flexibility
to extend credit to small businesses to fuel economic growth.
In closing, the NCUA remains committed to providing
regulatory relief for the credit union community in compliance
with the Federal Credit Union Act and streamlining and
modernizing the operations of the agency while focusing on our
prime role as a prudential regulator. We also stand ready to
work with you and your colleagues on your legislative
priorities.
I look forward to your questions. Thank you.
Chairman Crapo. Thank you, Mr. McWatters.
Mr. Noreika.
STATEMENT OF KEITH A. NOREIKA, ACTING COMPTROLLER, OFFICE OF
THE COMPTROLLER OF THE CURRENCY
Mr. Noreika. Thank you, Mr. Chairman.
Chairman Crapo, Ranking Member Brown, and Members of the
Committee, thank you for the opportunity to testify. We all
share the goal of a strong national economy. Since becoming the
Acting Comptroller, I have worked with staff and colleagues to
promote economic growth and opportunity. I am honored to serve
in this role until the Senate confirms the 31st Comptroller.
During my service, the OCC will carry out its mission to
maintain the safety and soundness of our Federal banking system
and will do so consistently with the President's Executive
Order on Core Financial Principles and the recent Treasury
report.
Our country has the world's most respected banking system.
When running well, it powers economic growth and prosperity. To
run well, we must balance prudent regulations with sound
opportunities for expansion. It has been 10 years since the
Great Recession began. It is time again for a constructive,
bipartisan conversation about how to recalibrate our regulatory
framework. In doing so, we must carefully consider the
cumulative effects of our actions, especially on community and
midsize banks.
When I arrived at the OCC 6 weeks ago, I sought the views
of all affected parties on the issues facing the agency and the
industry. I sought ideas from our boots on the ground to reduce
unnecessary regulatory requirements and encourage economic
growth. Our staff has submitted more than 400 suggestions and
are excited to use our collective expertise to contribute to
more efficient and effective regulation.
I also sought the views of colleagues at the Federal and
State levels, bankers, trades, scholars, community groups, and
others on what we can do to make our regulatory framework
better for everyone. The response has been overwhelming. People
from all sectors have accumulated 10 years of experience and
want to share it so that we can continue to have the strongest
banking system in the world.
My testimony offers legislative options for your
consideration that address two general issues that have become
apparent in my canvassing of affected parties.
First, I repeatedly hear about regulatory redundancy. My
support of legislative action to rationalize our regulatory
framework relies on our organically developed decentralization
of authority and responsibility. Independent regulators for
different and unique financial sectors ensure multiple points
of view and important checks and balances. But we must be
mindful that as our system has evolved, it has created
unnecessary regulatory burden and overlap. The need now is to
recalibrate roles and responsibilities to maximize efficiency
and eliminate growth-inhibiting redundancy.
Second, it has become apparent that we need a right-sizing
of regulation to eliminate inflexible, one-size-fits-all
requirements that result in banking regulation that
simultaneously under- and over-regulates bank activities. I
want to highlight four ideas from my written testimony that
respond to these issues.
First, Congress could streamline the regulation of smaller,
less complex bank holding companies by amending the law so that
when a small depository institution constitutes the majority of
its holding company's assets, the Federal regulator of the
depository institution would have sole examination and
enforcement authority for the holding company as well.
Second, Congress could eliminate 19th century impediments
for smaller, less complex national banks to operate without a
holding company by allowing these banks to have the same access
as State banks to the publicly traded markets.
Third, Congress could eliminate a statutory barrier to
entry for new community banks by allowing de novo banks to
obtain deposit insurance automatically when chartered by the
OCC.
Finally, a bipartisan consensus is emerging that the
Volcker rule needs clarification and recalibration to eliminate
burden on banks that do not engage in covered activities and do
not present systemic risks. Various options exist that can be
pursued at both the congressional and agency levels. I hope
that we, the agencies, can move forward on seeking public
comment on this topic soon.
My testimony provides a summary of the EGRPRA report as
well as other ideas to consider. Today's conversation is a
healthy one, and I look forward to working with the Committee
as we move ahead.
Thank you, and I look forward to answering your questions.
Chairman Crapo. Thank you, Mr. Noreika.
Mr. Cooper.
STATEMENT OF CHARLES G. COOPER, BANKING COMMISSIONER, TEXAS
DEPARTMENT OF BANKING, ON BEHALF OF THE CONFERENCE OF STATE
BANK SUPERVISORS
Mr. Cooper. Good morning, Chairman Crapo, Ranking Member
Brown, and Members of the Committee. My name is Charles Cooper.
I am the Commissioner of the Texas Department of Banking, and I
serve as the immediate past Chair of the Conference of State
Bank Supervisors. It is my pleasure today to testify on behalf
of CSBS.
We applaud the Committee's focus on economic growth and
banking. I have more than 47 years in the financial service
industry, both as a banker and as a State and Federal
regulator. Over these years, few things have become more
evident than the value of community banks. They are vital to
our economy and our financial stability.
Also over these years, I have seen many swings in the
regulatory pendulum. Extreme swings to either side are wrong.
We must all seek ways to ensure a balanced approach.
State banking regulators charter and supervise over 78
percent of our Nation's banks. We continue to see firsthand
that community banks are disproportionately burdened by
oversight that is not tailored to their business model or
activities.
Looking beyond the industry's aggregate performance data,
we have lost 2,156 banks over the last 8 years. That is 300
banks a year, nearly a community bank every day. And we have
had only five new banks coming in.
This consolidation cannot continue if we are to have a
robust banking sector. There are many factors to blame for this
consolidation, but regulatory burden is certainly one of them.
We may have the best opportunity in years to appropriately
calibrate our regulatory approach, especially for community-
based institutions. I believe that this can be done while
maintaining strong and effective regulation that ensures safety
and soundness, protects our consumers, and meets the economic
needs of our communities.
State regulators were part the EGRPRA process, and we
engaged with the Treasury Department in their recent work. With
nearly 100 recommendations in the Treasury report and 440 pages
of comments and recommendations in the EGRPRA report, there is
no denying that we have a problem with the volume, complexity,
and overall approach of the regulatory framework.
I would like to point out that the sheer volume of
regulations confounds the best of our bankers, but the issue of
regulatory burden goes well beyond the laws and regulations. It
includes the interpretations and supervisory techniques that
are utilized. How we operate our agencies can contribute to
regulatory burden. How or why we got to this point is not as
important at the opportunity we have to come together to
address it. There are tangible recommendations in these reports
that present opportunities for both Congress and regulators to
have a positive impact on the banking industry and our
citizens.
My written testimony makes several recommendations for
right-sizing bank regulation.
Number one, reducing the complexity of the capital rules
for smaller banks;
Two, mortgage rule relief for community banks holding loans
in portfolio;
Three, greater transparency and timeliness in fair lending
supervision for community banks;
And, number four, an activities-based approach to defining
community banks for regulatory relief.
Our community banks need the relief to do what they do
best, and that is to serve their communities and their
customers. Regardless of the charter or agency, we are all in
this together. We must ensure that sound judgment and
appropriate flexibility are central to our supervisory
approach.
Thank you for the opportunity to testify today, and I look
forward to your questions.
Chairman Crapo. Thank you, Mr. Cooper. And I want to also
thank all of you for the work you do and for the excellent
testimony you have just provided. You each provided some
significant insights and some significant suggestions for how
we could improve. I appreciate that.
My first question I would like to have each one of you
answer, and when we do this, it sometimes takes up our whole
time if we get long answers. So if you could, I would
appreciate the panel being as concise as you can be so that I
can get through a few questions.
The first question is: Over the past few years, Congress
has been working with the regulations to change the $50 billion
SIFI threshold. I appreciate your willingness to work with me
on this issue. Do you agree that changing the $50 billion SIFI
threshold would be appropriate? And I will start with you,
Governor Powell.
Mr. Powell. Yes.
Chairman Crapo. That is a good, short answer.
Mr. Gruenberg.
Mr. Gruenberg. Chairman, I would have some caution in
regard to that. I would not argue that a $50 billion
institution is necessarily systemic. On the other hand, from
the perspective of the deposit insurer, I would note that the
most expensive bank failure in this crisis and in the history
of the FDIC was the failure of a $30 billion thrift
institution, IndyMac, which ultimately cost the Deposit
Insurance Fund over $12 billion. So I would just note that even
though an institution of that size might not raise systemic
implications, it could still have significant consequences
certainly for the Deposit Insurance Fund.
Chairman Crapo. So are you saying you do not believe we
should address the $50 billion threshold or that we should have
some tailoring and adequate ability to analyze the risks?
Mr. Gruenberg. I would be more inclined toward tailoring,
Senator.
Chairman Crapo. All right. Thank you.
Mr. McWatters.
Mr. McWatters. Yes, but when it comes to the credit union
community itself, and concepts of increasing that number to $50
billion for stress testing, I think we need to be thoughtful on
the range between $10 and $50 billion. A $30 billion credit
union loss to the Share Insurance Fund would be quite a bit
more dramatic than a $30 billion loss to the FDIC Fund.
Thank you.
Chairman Crapo. Thank you.
Mr. Noreika.
Mr. Noreika. Thank you, Chairman Crapo. Yes, we believe the
$50 billion threshold needs to be changed or reevaluated. What
concerns us is that it is being used as a competitive barrier
to entry because the costs of regulation increase dramatically
as you cross that $50 billion threshold. For the largest banks,
the gap is about 33 times that of smaller banks. The largest
banks get a competitive advantage off that. And we have only
ever seen one or two banks cross that threshold. That is not
good for the competitive environment or consumers.
Chairman Crapo. Thank you.
Mr. Cooper.
Mr. Cooper. Yes, subject to risk profiling.
Chairman Crapo. All right. Thank you. And my next question
is also one that I am going to ask each of you to address. It
is a more general question, but, again, if you could be very
concise, I would appreciate it.
I would just like to ask each of you to identify one area
that we should examine--and you may have already done so in
your testimony, if that is what you want to pick--of where
tailoring of our regulation is needed. Governor Powell?
Mr. Powell. I will start with Volcker. Volcker was designed
to address proprietary trading, and the insight that that
should not happen in a depository institution probably could
have been limited to a handful of firms. But the law applies to
all banks. So, you know, we probably have some authority under
the statute to do this, but I think we would support a
significant tailoring of the application of Volcker so that
really it falls on the banks that have big trading books, and
it falls much more lightly as you go down. It is very important
that, you know, the intensity of regulation be tailored
appropriately for the risks that the institutions present.
Chairman Crapo. All right. Thank you.
Mr. Gruenberg.
Mr. Gruenberg. Mr. Chairman, I think I would focus on the
issues relating to small-bank capital compliance, particularly
risk-based capital. I do think there is an opportunity there
for smaller institutions, say under $10 billion, that are
strongly capitalized on the leverage ratio to provide some
relief in regard to risk-based capital, particularly if they
are not engaged in a limited set of specified activities.
Chairman Crapo. Thank you.
Mr. McWatters.
Mr. McWatters. I would like to see the Federal Credit Union
Act amended to give all credit unions the ability to add
underserved areas to their field of membership. Currently, that
is limited, believe it or not. So people who are unbanked and
underbanked, where there may be a credit union within a
specific field of membership, simply cannot join that credit
union.
Chairman Crapo. Thank you.
Mr. Noreika and Mr. Cooper, I have 22 seconds.
Mr. Noreika. Thank you. I would just refer you to our
testimony where we talk about a regulatory traffic light system
so that where there are overlapping jurisdictions between the
regulators, we have a system where one regulator can take the
lead and the others then can join or be foreclosed.
Chairman Crapo. Thank you.
Mr. Cooper.
Mr. Cooper. Reduce the complexity of capital rules for
smaller banks.
Chairman Crapo. Thank you, and I appreciate you working
with me on the timeframe.
Senator Brown.
Senator Brown. Well done.
Last week, Treasury, as I mentioned in my opening
statement, put out a report suggesting changes to the
regulatory structure. We know the impact of deregulatory
policies advocated by Departments of Treasury in past
Administrations, and following the Chairman's construct, I
would like to as a series of questions, and I think you can do
these with ``yes'' or ``no.'' I would ask you if you would.
All five of your represent independent agencies. And
starting with you, Governor Powell, do you commit to being
independent from the Administration?
Mr. Powell. Yes.
Mr. Gruenberg. Yes
Mr. McWatters. Yes.
Mr. Noreika. Yes.
Mr. Cooper. Yes.
Senator Brown. OK. Thank you. Again, do you commit to
speaking out if you think a legislative or regulatory
recommendation threatens the financial stability of our economy
or the safety and soundness of our banking system? Governor?
Mr. Powell. Yes, sure.
Mr. Gruenberg. Yes.
Mr. McWatters. Yes.
Mr. Noreika. Yes.
Mr. Cooper. Of course.
Senator Brown. And, last, do you commit to make consumer
protection a priority?
Mr. Powell. Absolutely.
Mr. Gruenberg. Yes.
Mr. McWatters. Absolutely.
Mr. Noreika. Yes.
Mr. Cooper. Yes.
Senator Brown. OK. Thank you.
Last year, the Fed--and this is for Governor Powell. Thank
you. And thanks for your years of service and your work with
this Committee over the years. And, Mr. Gruenberg, you, too.
Governor Powell, last year the Fed proposed adding capital
surcharges into the biggest banks' stress tests. Governor
Tarullo last week said the biggest banks' capital requirements
``are still somewhat below where they should be,'' and that
incorporating the surcharges into CCAR will protect against
contagion from one of these banks infecting, spreading to the
rest of the financial system. By your testimony, you suggest
that the Fed will integrate the stress test into the banks'
regulatory requirements. I assume that means the Fed is moving
forward with adding the capital surcharge into the stress
tests?
Mr. Powell. That is the plan, yes. We have asked staff to
work up some options on that. We are working on it. There is no
specific data upon which we bring that forward, but we would
like to have it in place.
Senator Brown. I would like to encourage you to do that as
quickly as possible. Is there a reason you cannot move quickly?
Mr. Powell. No; just we want to get it right.
Senator Brown. And you do not plan to wait until new Board
members on the Fed are nominated and confirmed? That is not
part of the delay?
Mr. Powell. No. We have ongoing things; we are doing stuff
all the time. We are announcing CCAR results this afternoon.
This is another thing that is in the pipeline, and we will get
to it when we need to get to it.
Senator Brown. OK. Thank you, Governor.
Mr. Gruenberg, there have been recent press reports that
any additional profits that the money center banks make from
deregulation will go to stock buybacks and dividends up, to $30
billion in one estimate. Is that what banks will do with their
profits if we relax the stress tests?
Mr. Gruenberg. I do not know that we have evidence to the
contrary in regard to that, Senator.
Senator Brown. Governor Powell, your comments on that?
Mr. Powell. What banks would do with the profits?
Senator Brown. Yeah.
Mr. Powell. I think it is hard to know. Some of it would go
to shareholders; some of it would go to management; some of it
would go in pricing and customers, I suppose.
Senator Brown. Shouldn't we want to know whether a
decreased regulatory burden on banks will lend to more lending
and economic growth if the money goes to stock buy--certainly
an imperfect analogy, but what happened with the bank holiday
of--or the tax holiday on overseas--money kept overseas from
corporations brought back, it did not exactly work because
there were no strings attached the way a lot of policyholders
thought. So shouldn't we know if banks are going to save money
because of a decreased regulatory burden that it will, in fact,
lend to more lending and economic growth or just increase
dividends?
Mr. Powell. I guess I would look at it from the other end,
which is we should make sure that we do not impose unnecessary
costs through regulation. Regulation should not cost any more
than it needs to. It does not make the economy any better to
raise banks' costs. If we can cut those costs without affecting
safety and soundness, we cut them. And I think that, you know,
that funding will help the economy, and it should help the
economy in a very general way, but in a broad way I would
think.
Senator Brown. So, to the two of you, Mr. Gruenberg and Mr.
Powell, what do you think of the idea that if money--if banks
do better, are more profitable because of deregulation, that
maybe the best way to increase economic growth would be to ban
buybacks and limit dividends in order to ensure the banks
increase lending and contribute to economic growth? Mr.
Gruenberg first.
Mr. Gruenberg. Senator, let me say I think in terms of
reducing regulatory burden, the biggest bang for the buck is to
reduce burden on smaller institutions that serve their
communities and will either strengthen those institutions or
strengthen their ability to serve their communities. I would be
cautious in terms of making changes, particularly for the large
systemic institutions. I think there we really need to preserve
the prudential standards that we have established.
Senator Brown. Thank you, Chairman Gruenberg.
Governor Powell, if you would just answer that, and I am
done.
Mr. Powell. I would be wary of prescriptive things like
limiting dividends and that sort of thing. And, again, I would
just go back to this. I do not think what we are talking about
here amounts to deregulation or broad deregulation. I think it
amounts to making regulation more efficient, protecting the
important gains that we have made. We are not really talking
about some massive program here.
Senator Brown. OK.
Chairman Crapo. Senator Shelby.
Senator Shelby. Thank you, Mr. Chairman.
One of the main tenets all of you know of the recently
released Treasury Department report regarding core principles
for financial regulation is calling for Federal financial
regulators to conduct cost-benefit analysis for all
economically significant regulations. That is something I have
long advocated for right here in this Committee.
I will start with you, Governor Powell. Do you believe that
conducting cost-benefit analysis when you are determining or
considering financial regulations is very important not only to
the regulatory body itself but to the consumer, to the bank
system, all of it?
Mr. Powell. Yes, I do, and we have always tried to
implement regulations in the way that is faithful to what
Congress has asked us to do in the least costly and least
burdensome way. More recently, we have actually tried to up our
game more and take a more analytical approach to that. We are
doing more on that front. We actually are planning on hiring a
few people, but we are waiting until the hiring freeze rolls
off to do that.
Senator Shelby. But that could be very important to the
whole banking system and to the American people, could it not?
Mr. Powell. I think it is our obligation, and it is an
important obligation.
Senator Shelby. Marty?
Mr. Gruenberg. I agree with that, Senator. I think doing
cost-benefit analysis has value, and particularly including it
in proposed rulemakings to give the industry an opportunity to
comment and get their feedback. And evaluating both the impact
of the proposed rule as well as alternatives to the rule does
have value, and that is something we are doing in the preamble
of every rulemaking that we do.
Senator Shelby. Mr. McWatters?
Mr. McWatters. Yes, Senator, I do, but we have to be
thoughtful about this. It is an art more than a science, and it
would be helpful if all of us had a consistent methodology as
to how to compute and conduct the cost-benefit analysis across
the board. So the NCUA is not doing one on an ad hoc basis, or
the FDIC, the Fed, or the OCC. But we had some consistency and
well thought out, bring some economists in, work through this,
come up with a protocol that can be implemented in a
transparent way that people will take a step back and say,
yeah, that is fair.
Senator Shelby. Yes, sir?
Mr. Noreika. Thank you, Senator. My own view is in
regulating a dynamic industry, we must always look at the costs
and benefits not only of the new regulations but of the
existing ones as well, and, importantly, what we are doing
here, looking at the statutory basis as well.
Senator Shelby. Mr. Cooper?
Mr. Cooper. Senator Shelby, I certainly agree with cost-
benefit analysis on the regulations. I do feel very strongly
that it has to go beyond just regulations. It has to include
the way we operate our agencies. We have to be efficient, and
not only efficient in the use of our time but efficient in the
use of our banks' time.
Senator Shelby. I will direct this to the Comptroller's
office. In your testimony, Mr. Noreika, you stated that
financial institutions' risk should not be determined strictly
by their size. I agree with that. In your view, what should be
considered when tailoring regulations for small- and mid-sized
banks? And could you elaborate on what specific regulations
should be further tailored through administrative or
congressional action?
Mr. Noreika. Sure. Thank you.
Senator Shelby. That is a lot of work.
[Laughter.]
Mr. Noreika. I think we have many options on how to gauge
the risk of institutions. Size is one of them, but it is not
the only one of them. There are risk profiles as well. Just
because you are bigger does not mean you are riskier. Just
because you are smaller does not mean you are less risky all
the time. So I think we have to make both a quantitative and a
qualitative judgment before determining what we impose, and
then those regulations that follow are based on the riskiness
of the institution. Controls would include capital
requirements, liquidity requirements, perhaps activity
restrictions as well. So I think all of those would go into
that calculus, Senator.
Senator Shelby. Mr. Powell, I think the word ``redundancy''
was brought up earlier, and that is important. There are a lot
of overlapping regulations in the banking field. What could be
done to do away with some of the redundancy which costs money
for banks to comply with?
Mr. Powell. I think that is part of the exercise now we are
undergoing to try to identify those and limit them or eliminate
them, if possible. And I would say if you think about Volcker,
to come back to that, the insight of not wanting proprietary
trading in these big firms probably makes sense. But before the
crisis, we did not have strong capital requirements, and under
the trading book we did not have liquidity requirements. We did
not have the stress tests, which are very tough on those
things. So trading by the big banks is supported by several
other policy initiatives, it gives us a little more freedom to
think about how we can draw back the scope of Volcker and make
it less burdensome.
Senator Shelby. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman. And thank you
all for your testimony.
Chair McWatters, let me ask you, there are more than 300
credit unions that have been certified as CDFIs. Community
development credit unions like the North Jersey Federal Credit
Union in Totowa, New Jersey, have stepped up to supply banking
services in underserved neighborhoods and communities across
the country, the very communities that President Trump said he
wanted to help. And in terms of doing that, the CDFI Fund is
critical to those credit unions that work in low-income
communities.
So do you believe that Congress should eliminate the CDFI
Fund as proposed in the President's budget?
Mr. McWatters. No, I do not.
Senator Menendez. I appreciate that because the Treasury
Department released a report just a few weeks ago that said,
``CDFIs are often the only source of credit and financial
services in impoverished urban and rural low- and moderate-
income areas with limited access to the banking system.'' So it
defies their own logic, and I am glad to see you share the view
that it is critical to maintain the fund.
Chairman Gruenberg, the Treasury report includes
recommendations to reform the Community Reinvestment Act
examination process and ratings system. The report argues that
the CRA examinations play a role in preventing certain banks
from merging and opening new branches. What is your view of
this argument?
Mr. Gruenberg. First of all, Senator, CRA is an important
statute that encourages banks to meet the credit and basic
banking services needs of all of their communities. So the
function it performs is a very important one. Most
institutions, as you know, get satisfactory or better ratings
under the CRA. There are opportunities for local organizations
to raise issues when an institution files an application for a
merger or other activity as part of the statute. That happens
in relatively few cases. So as a general proposition, I do not
think it is a significant impediment.
Senator Menendez. So most of them receive satisfactory
ratings; therefore, it should not impede mergers of those who
desire a merger.
Mr. Gruenberg. The local organizations still have an
opportunity to raise the issue, but in terms of actually
impacting significant activity, I do not think it does.
Senator Menendez. I appreciate that response because it
seems to me that the Administration should be focused on
ensuring that the evaluation and ratings system is holding
institutions accountable in providing equitable access to
credit rather than focusing its efforts on weakening the
Community Reinvestment Act. And, frankly, it is a little
difficult to take seriously the recommendation of the Treasury
Secretary when his only experience on the matter is running a
bank that so struggled to meet its obligations to provide
equitable access to credit in and of itself.
Governor Powell, let me ask you, just shy of 9 years ago,
Lehman Brothers filed for a bankruptcy, the largest bankruptcy
in history, one that sent shock waves throughout the entire
financial system. In short order, numerous other entities
failed, leading to unprecedented support from the U.S.
Government and taxpayers to bail out the institutions that had
been playing fast and loose without guard rails and subjecting
Americans' hard-earned savings to unjustifiable risk. It became
abundantly clear in that moment that we needed a process to
deal with the adverse market effects of the failure of a large,
complex, and interconnected financial firm.
In response, we created the Orderly Liquidation Authority
in Title II of Dodd-Frank. This process, thankfully, has not
been needed. But if it were to be utilized, it is designed to
protect taxpayers and the market at large by ensuring that the
burden of the failure falls on the owners and managers of the
firm, that you do not privatize profit and collectivize risk.
Do you agree, Governor, that this authority to resolve
firms whose failure would present a threat to U.S. financial
stability is critically important?
Mr. Powell. I do, Senator. Working with the FDIC, we have
made a lot of progress under Title I, but I think it is
absolutely essential that we keep Title II as a backup.
Senator Menendez. Chair Gruenberg, do you have anything to
add to that?
Mr. Gruenberg. I strongly agree with that. The Orderly
Liquidation Authority really is the last recourse but a
critically important backstop to assure an orderly failure,
even of a systemic firm. And as you point out, Senator, to
assure that the stakeholders in the firm--the shareholders, the
creditors, the management of the firm--are held accountable.
Senator Menendez. Finally, the Federal Reserve Bank of New
York highlighted in November that there has been an uptick in
delinquency rates on auto loans made to borrowers with subprime
credit scores. I would like to hear from each of you your
thoughts regarding this trend. Is this something that you are
concerned about? I see it going--since 2013, 90-day delinquency
rates made to borrowers with subprime credit scores have risen
by more than 40 percent. Is that an early bird warning here?
Mr. Noreika. Our agency has been tracking this since about
2014, and we do notice an uptick, and it is something that we
are certainly making our regulated entities aware of to keep
track of.
Senator Menendez. Is there something we should be doing?
Mr. Noreika. Our job as regulators is to watch and monitor
credit risk and to flag where we are seeing increased risks.
This is one of those areas.
Senator Menendez. Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman.
A couple quick questions because I know the Chairman wants
everyone to keep this brief. I just want to associate myself
with the comments on the Volcker rule. When you look, many
current and former regulators also publicly state that the
Volcker rule is way too complicated. It is my experience when a
rule is too complicated, there is not much compliance, so it
does not really get you what you need.
I think that what I am hearing today is no one wants to go
back, but everybody wants to tailor a rule or find a rule that
can, in fact, accomplish the purpose without overly burdening,
you know, all manners of banks and certainly something that
makes common sense. So I want to just kind of put that on the
record, and thank you all for your comments.
My questions are to Governor Powell. Are you aware of the
bills that have been introduced, bipartisan bills that have
been introduced at this Committee regarding relieving midsize
banks from Dodd-Frank stress tests and exempting community
banks from the requirements of the Volcker rule and the
qualified mortgage rule?
Mr. Powell. Generally, yes, aware.
Senator Heitkamp. Have you had a chance to review those
proposals?
Mr. Powell. Our staff has. I have not had a chance to
review them carefully, but I am generally aware that they are
there.
Senator Heitkamp. OK. I think it is critically important
that we get your input moving forward. We obviously think there
is broad bipartisan support for these kinds of changes and
would love to see the Banking Committee produce some bills that
would fulfill the commitment that we all privately have made to
not only our small community banks but also our midsize banks.
I think the time for talking is over and the time for doing is
now.
Marty, I am really concerned about what is happening right
now at ag lending in my State, and I think you guys frequently
can be on the tip of the spear, the leading indicator of
challenges that we are going to have. I obviously have argued
before for flexibility in these kinds of cyclical environments,
especially in agriculture. And so just a couple questions.
Have you experienced or observed meaningful changes in
terms of the risk in the ag economy? And how is the FDIC
approaching ag lenders who continue to provide credit,
absolutely essential credit, to our producers who now are being
squeezed by low commodity prices?
Mr. Gruenberg. So, Senator, we do have a changing
environment, as you know well, in the ag sector. We are seeing
low commodity prices and some decline in land values in the
agricultural areas. And we are starting to see some pressure in
regard to the banks that are focused on agricultural lending.
So from a supervisory standpoint, the institutions are
still as a general matter in pretty good shape, but they are
under some pressures, and the trend seems to be toward
increasing pressure. So from a supervisory standpoint, this is
something we are paying close attention to.
Senator Heitkamp. I think it is critical that we be aware
of what those indicators are and that we work together with the
private lending industry to make sure that we do not let
cyclical changes in agriculture shut down especially our small
family farmers, who struggle the most in this kind of
environment. And so I think before we see widespread pressure
from the examiners to do things in that space that would, in
fact, cutoff liquidity for farmers, we need to have a
conversation here, because what you do will have ripple effects
in the ag economy. Can I have your commitment that you will
stay on top of this and let us know?
Mr. Gruenberg. You do, Senator.
Senator Heitkamp. OK. I want to just close out with a
question on appraisals. As part of the EGRPRA process,
regulators identified access to timely appraisals, especially
in rural America, as a major challenge for small lenders. Yet
the report itself did little to address residential appraisal
requirements.
Governor Powell, do you share my concerns that the
appraisal system in rural America really does not work and that
we need to have special attention paid to how we can make those
changes?
Mr. Powell. Yes, Senator, I think we are sensitive to the
problem and would like to do more.
Senator Heitkamp. Right, and have you had any discussions
about what that ``do more'' would look like?
Mr. Powell. Not recently, but this is something we are
going to come back to.
Senator Heitkamp. Well, we will follow up because most of
you know I come from a small town of 90 people. People say you
want to, you know, see kind of the average sale, good luck
getting that. It is not going to happen. And it is a huge
challenge in terms of mortgage lending for our small community
banks, and so this appraisal issue is not going away. I want
you to come up with solutions to this and cut our small
community banks some slack. OK?
Chairman Crapo. Thank you.
Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman. And I want to
thank all the members of our panel today for your service and
for being here.
I want to talk about flood insurance, which, of course, is
extraordinarily important to my State, Louisiana, but, frankly,
most States. The current National Flood Insurance Program
expires September 30th. We have to renew it. This Committee
will be working hard to do so under the leadership of our
Chairman and our Ranking Member. But here is a question that I
think goes to what undermines the entire program.
About 53 percent of the people that should carry--excuse
me--are required to carry flood insurance carry it. What do we
do about that? I am sorry. Excuse me. What do you think we
should do about that?
Let me put it another way. Let me ask our FDIC Chairman--
before I choke to death.
[Laughter.]
Senator Kennedy. I am just so overwhelmed with emotion at
that health insurance bill that I am almost speechless.
Mr. Chairman, do you think it would be a good idea to ask
FEMA to compile a list of mortgages in high-risk flood areas so
we will know who is supposed to carry insurance and who does
not?
Mr. Gruenberg. Senator, actually I think that is a good
idea. One of the challenges in this area is a lack of reliable
data----
Senator Kennedy. Yes, sir.
Mr. Gruenberg.----really to assess the extent of compliance
with the flood insurance requirement. Getting better data would
have real value here, and I think FEMA as the agency
responsible for the National Flood Insurance Program would
probably be the appropriate agency to do that.
Senator Kennedy. How do we get FEMA to do that, other than
just asking pretty please?
Mr. Gruenberg. Well, on that score, Senator, you probably
would have a better feel for that than we would.
Senator Kennedy. OK. Governor Powell, I saw where we
recently had a bank--Sun Trust Bank was fined $1.5 million for
violations regarding mandatory compliance with the National
Flood Insurance Act. How did the Fed determine that they had a
pattern and practice of noncompliance? What is a pattern and
practice?
Mr. Powell. Senator, I remember that case. I do not
remember the specifics of that case, though, to be honest. A
pattern or
practice would be I think what it sounds like, which is
something that happens repeatedly.
Senator Kennedy. Well, what triggered the review?
Mr. Powell. I should not talk about a particular
enforcement action, and I am actually not deeply familiar with
the individual facts of that case. I could get back to you on
that.
Senator Kennedy. Would you? That would be very helpful.
Mr. Powell. I would be glad to.
Senator Kennedy. Let me open this up to anyone. I do not
want to add to the regulatory burden on our community banks. I
do not. But at the same time, when somebody does not carry
flood insurance who is required to carry flood insurance and
they flood, somebody else has to help them recover. And that is
not fair to the American taxpayer, and it is not really fair to
the people who do the right thing and carry the flood
insurance.
I am going to go to each of you. I only have a minute, but
give me your thoughts about what we can do to increase
participation from 53 percent. That is embarrassing.
Mr. Powell. This is for flood insurance?
Senator Kennedy. Yes, sir.
Mr. Powell. Well, I cannot improve on your idea of FEMA.
Senator Kennedy. How about Mr. Cooper?
Mr. Cooper. Senator, obviously knowing a little bit about
what happened in your State, I would agree with your
recommendation. One of the concerns that I have is that, I
believe, in several places in your State, several of the places
never flooded before flooded this time. And so----
Senator Kennedy. That is true.
Mr. Cooper. It is hard, these lines of who floods and who
does not flood, they blur, and, quite frankly, we have to deal
with that. And I am not sure how to do that.
Senator Kennedy. OK.
Mr. Noreika. Senator, certainly this is something that is a
very high priority for our agency, and we take very seriously
our supervisory obligations to examine our banks to make sure
that loans have the proper flood insurance for those areas. So
while I do not know the percentages off the top of my head,
this is something that I know our supervisors and our examiners
in our institutions take very seriously, and there are
mandatory penalties that come if they do not----
Senator Kennedy. Well, I am out of time, but I will be
contacting you individually to talk about what we can do to
help get the compliance right. We need to do a better job.
Mr. Noreika. Thank you.
Senator Kennedy. And we need to start with our friends at
FEMA.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Warren.
Senator Warren. Thank you, Mr. Chairman. Thank you all for
being here today.
So last week, the Treasury Secretary issued a report that
included about 100 recommendations for changing our financial
rules, and these recommendations were basically cut and pasted
from the banking industry's lobbying priorities. In fact, one
bank lobbyist was brutally honest, saying, ``The report is
basically our entire wish list.''
Now, most of these changes do not require any congressional
action. Federal agencies can make the changes all by
themselves, and that means all of you at the banking regulatory
agencies have a lot of power to decide whether to hold the line
on financial rules or to make every wish come true for giant
banks.
So, Governor Powell, the Federal Reserve is responsible for
many of the rules governing the country's biggest banks, and
you are now the point person at the Fed for regulatory issues.
You are also on record as being a fan of cost-benefit analysis,
so let us do that here. The potential cost of implementing
recommendations in the EGRPRA report seems pretty clear to me.
It could increase the risk of another financial crisis and
another bailout.
So I want to ask about what the potential benefit is
letting banks add to the already record profits they have
generated in the past several quarters. Where is the benefit
side?
Mr. Powell. Well, Senator, I guess I see it as a mixed bag.
There are some ideas in the report that make sense, maybe not
exactly as expressed there, but that would enable us to reduce
the cost of regulation without affecting safety and soundness.
There are some ideas, of course, that I would not support, that
we would not support as well. But I guess I see it as mixed.
Senator Warren. Well, I get your point about mixed. The
only benefit you see then is just cost reduction?
Mr. Powell. I think we have an obligation to make our
regulation no more costly than it need be.
Senator Warren. Fair enough. Fair enough. But I am just
asking about any other benefits because I was--the Treasury
report, actually I want to read a direct quote from it about
our financial rules on capital and liquidity, and it explained
the rules on capital and liquidity saying that these can
decrease the resources--the current rules can decrease the
resources a bank has available for customer loans.
So let me ask it that way since that is what the Treasury
Department claims is the reason for reducing capital. Do you
agree with that, Mr. Powell?
Mr. Powell. Let me say this: I do not support and we do not
support reducing risk-based capital requirements. So that is
not the idea. But I think of it a little bit differently.
Capital is more expensive than debt, so if we raise capital
standards, you are raising costs. Some of those costs will be
passed through to customers. The question is: Where is the
cost-benefit analysis? And I happen to think we have got it
about right today.
Senator Warren. You know, because I am really worried about
this, because the big banks obviously would like to see capital
requirements reduced. And I started looking at what happened
recently with JPMorgan Chase. The biggest bank in the country
spent $26 billion in the last 5 years on stock buybacks. They
had $26 billion they could have spent on anything they wanted
to spend it on, and they could have spent it on lending to
customers, but, no, what they decided to do with the money is
to spend $26 billion to pump up their share price. And, in
fact, every one of the big banks in the country has spent
billions and billions of dollars in the past 5 years on stock
buybacks.
So it sounds like to me that these banks have plenty of
capital available to them. Governor Powell?
Mr. Powell. Well, I think their obligation is to meet their
minimum capital standards and even more relevant for the
biggest banks to meet their CCAR requirements. And once they do
that, you know, they are entitled to pay dividends or buy back
stock as long as post-stress and post-minimums--you know, as
long as they meet those capital requirements.
Senator Warren. But what I am hearing you say----
Mr. Powell. They do have plenty of capital.
Senator Warren. That is right, that they have plenty of
capital and there is no reason to reduce their capital
standards here.
Mr. Powell. We are not in favor of that.
Senator Warren. All right. I think that is very helpful
because, you know, the team at Goldman Sachs that is running
financial policy for this Administration really wants to boost
profits for the Wall Street banks, and I think that is what the
Treasury report is all about. And here is what is going to
happen if regulators make the changes for the big banks that
they want, and that is that bank stock prices will go up,
bonuses for bankers will go up, bank stock buybacks will go up,
and the risk of another financial crisis and bailout will go
up.
You know, I recognize that the bank lobbyists will be
thrilled by this report and be thrilled if that happens. CEOs
will be thrilled. But we will not see any increase in lending,
and I do not think we are going to see a boost to our economy
from it.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Cotton.
Senator Cotton. Thank you. And thank you, gentlemen.
You know, since that Treasury report came out, I have heard
a lot of complaints, like Senator Warren's complaint today but
many others, not just from Senators and Congressmen in the
Congress but outside observers as well, about how many of those
changes could be made without congressional action. I think I
have heard something like two-thirds of the proposed changes
could be made without congressional action. That may be the
case. It may not. I do not know. But I would suggest that that
would counsel us to stop giving so much power to unelected
regulators in Washington, DC--not just in the financial
services arena but in every single area.
All you gentlemen are extremely capable professionals. We
may have our disagreements here or there. But none of you are
in Washington because you won an election and are, therefore,
accountable to the American people. We are on this dais. There
are 537 people who are. They should be making the rules that
govern the conduct of the American people so they can be held
accountable at the next election.
I have got to break the news to everyone watching at home.
I am sorry that I have to bring the scales down from your eyes.
Many Congressmen and Senators like to punt the ball to
regulators like these gentlemen. They like to pass laws like
Dodd-Frank or Obamacare or anything else that does not require
them to make a hard choice and be held accountable. Because
what do they do? They declare victory when the law passes, and
then 2 or 3 years later when the CFPB or the SEC or the
Department of Labor or the EPA makes the regulation, they
declare victory a second time by denouncing the unelected
bureaucrats who make the rules that do not implement their
guidance. That is not the way we should govern ourselves in
this country.
A second point. We are having a hearing today about
financial regulators, and we have five gentlemen here at the
table--four from the Federal Government, one representing a
consortium of State regulators. That is a lot of people to look
to. On the Armed Services Committee, when we have a hearing
about strategy in Afghanistan or the Islamic State, there is
one person sitting at the table: the Secretary of Defense. Why
is that? Because the military believes in the unity of chain of
command, and if you are a private in Nangarhar Province today
or outside Mosul, you know exactly who is in your chain of
command from your squad leader all the way up to the President
of the United States. And one of the most common complaints I
hear from our bankers in Arkansas is that they have to answer
to multiple masters who, if they do not issue conflicting
rules, they at least give conflicting interpretations or
guidance or even attitudes. And I think that is something that
we need to address.
So, Mr. Noreika, of all the banking agencies, you were the
only one that provided what Bloomberg News called a ``sweeping
list of recommendations to streamline oversight.'' My question
about this multiplicity of regulators is this: In the context
of today's meeting, how do you think we ought to approach your
recommendations and how should we prioritize them, given how
difficult it has been to get anything done in Washington, DC,
lately?
Mr. Noreika. Thank you, Senator, and thank you for the
question. As you point out, there is a real risk, actually and
in practice of regulatory redundancy happening here in
Washington with respect to the financial services industry. And
one of the things that we are proposing is having a statutory
traffic light system among the Federal regulators so that when
one regulator acts to effectuate regulation, others will be
foreclosed. And what we are seeing in practice is both under-
and over-regulation at the same time. And the CFPB is a great
example. When we consider banks $10 to $50 billion where the
CFPB has exclusive jurisdiction, we do not see much activity of
the CFPB regulating those institutions at all. So they have
actually in many ways gotten less regulation since Dodd-Frank
has passed.
And yet if we go in and we examine them with our backup
authority, as we do, if there is an issue, you may see the CFPB
come. And so while they are underregulated until we regulate
them, then they become overregulated.
So I think what we are trying to do in our testimony with
the long list of regulatory suggestions for consideration is to
start a dialogue and identify what the problems are, and you
have put your finger on one of the biggest problems, and to
start a bipartisan, constructive conversation about how we
recalibrate our regulation of this dynamic industry.
Senator Cotton. Thank you. My time is almost expired. I
just want to suggest to the Members of this Committee and the
Chairman and the Ranking Member, who I know have been working
together very carefully to try to craft some bipartisan
compromises, that this is something we should look at. I do not
see any reason why we could not have bipartisan agreement on an
effort to put more accountability in our own hands, since we
are the ones elected to make these decisions and the only ones
accountable to the American people; and, second, to streamline
somewhat the multiplicity of regulators that our bankers,
especially our small bankers, who do not have the capital base
to respond to multiple requests from multiple regulators, to
give them a little bit of an eased burden.
Chairman Crapo. Thank you.
Senator Cortez Masto.
Senator Cortez Masto. Thank you, Mr. Chair. Thank you,
gentlemen, for your testimony today. It has been very helpful,
enlightening, and I really appreciate it.
I, however, would like to start with Mr. Noreika. Your
testimony, including your written testimony, includes a lot of
ideas about how to restructure our financial regulatory system.
I want to focus on your recommendations related to the Consumer
Financial Protection Bureau, and let me put this in
perspective. I am a new Senator. I was not here----
Mr. Noreika. I am new, too, Senator.
Senator Cortez Masto. Well, and I recognize that. But where
I was previously was the Attorney General of the State of
Nevada during the worst crisis we have ever seen. And I will
tell you this: I supported the CFPB after what I had seen, and
I know the CFPB was created because before the crisis, we in
our States trusted the safety and soundness regulators like the
OCC to oversee consumer protection, and they failed to do so,
threatening both the homeowners in my State and across this
country. In fact, one former State prosecutor who tried to stop
the banks' predatory lending said about the OCC, and I quote,
``Not only were they negligent, they were aggressive players
attempting to stop any enforcement action. Those guys should
have been on our side.'' In that particular case, you were
actually representing the bank that was being sued. Yet in your
testimony you suggest that we return examination and
supervision authority for all depository institutions back to
their primary banking or credit union regulator.
In other words, this would strip the CFPB of its ability to
go in and routinely supervise big banks for noncompliance with
the laws that protect consumers, seniors, students, and
servicemembers. This represents a return to the bad old days
and would undermine an essential pillar of the Wall Street
reform.
You come to the OCC, as you said, on an interim basis from
a prominent law firm where you represented big banks. Under
special hiring authority, you can serve for only 130 days. But,
in exchange, you get to avoid Senate confirmation, and you do
not have to sign the typical ethics pledge. And here we get a
recommendation from you to roll back the regulations for CFPB.
That concerns me. And how is the CFPB supposed to catch
wrongdoing and
enforce the law if they are not able to examine and supervise
the largest banks?
As a former law enforcement official, I know how difficult
it is to identify fraud as it is happening. It seems like it
would be more difficult for the Bureau to quickly stop the
mortgage servicing debt collection and credit card abuses if it
is not inside the big banks monitoring them. How do we address
that?
Mr. Noreika. Thank you, Senator, and thank you for the
opportunity to respond to your question. As I responded to
Senator Cotton earlier, this is a big concern of ours to
actually increase the consumer compliance and monitoring at the
smaller banks within the CFPB's exclusive jurisdiction to
ensure compliance with the relevant consumer protection laws.
Since Dodd-Frank, we have a CFPB that writes rules, and as
you will see from my written testimony, that is something we
support them doing. The real question now is the correct
allocation of scarce regulatory resources to enforce those
rules. And what we are seeing in practice is that the CFPB is
not enforcing those rules against the midsize banks, the large
small banks to the small big banks. And so we do have a problem
of both over- and under-inclusion. When we get up to the bigger
banks, we have a little bit of overlap and overkill there. So
we need some better system of coordination.
Now, whether that involves taking that responsibility and
putting it back with the prudential bank regulators who can
balance, as they traditionally have, the supervisory priorities
of the bank or adopting, as I have said twice before, a
statutory traffic light system, I think both of those are
options. And yet we have to talk about what the problems are
first.
Senator Cortez Masto. I appreciate the comments. I do not
understand them. Quite frankly, in one breath you are saying
that there are scarce regulatory resources with the CFPB so
that means that we should give them the resources they need to
supervise, and in other breath giving it back to the same
regulators who were not there when I was in my State trying to
help homeowners who were not enforcing the laws. It does not
make sense to me.
Chairman Gruenberg----
Mr. Noreika. I am happy to meet with you to discuss it
more.
Senator Cortez Masto. Chairman Gruenberg, as a banking
regulator, would you say that having the independent Consumer
Bureau has been successful? And do you think that the CFPB's
existence is a threat to the FDIC?
Mr. Gruenberg. Yes to the first, and no to the second,
Senator.
Senator Cortez Masto. Thank you.
Chairman Crapo. Thank you.
Senator Cortez Masto. Let me just say this, finally, Mr.
Chair, and thank you. The CFPB has returned $12 billion to 29
million consumers. I really do not understand the motivation
behind stripping the Bureau of its powers. And I will tell you
this: As somebody who has focused for 8 years on consumer
protection, there is a need for the CFPB. And to roll back any
regulations and say that we cannot find a balance somehow and
still look at how we address the regulatory burdens that are
happening right now with our banks, and particularly with our
community banks and our credit unions, I think we need to
calibrate there. There is no doubt about it. I think we need to
work in that space. But we need to find this balance, and the
balance is not doing away with consumer protection completely,
because it is working. And that is all I am looking for, in
this day and age, is somebody reasonable to come up and figure
out how we find that balance. I am not for rolling back any of
those regulations because that is going to continue to harm the
homeowners that I fought for for 8 years in my State. And I am
concerned about the future.
Chairman Crapo. Thank you.
Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman. That is one of the
nice things in the Banking Committee: you get to hear some
diverse points of view. Rest assured when it comes to the CFPB,
I think there is a group of us out here that feel that they are
flat out out of control and that there are no controls on them
that Congress can come in, bring them in and ask questions.
Their budget is not part of the budget that we authorize. And
we think that there most certainly is room to be able to allow
for consumer protection based upon the original agencies who
had the responsibility, and if you were not living up to those
responsibilities, I think it would have been more appropriate
for Congress to have come back and demanded that or to provide
you with the tools in order to do that as opposed to creating a
new behemoth type of an agency there that is just flat out, in
my opinion, out of control. If I could repeal it, I would. And
if I cannot do that, the least we ought to do is put it under
the control of the appropriations process up here. But it is
always interesting to hear the different points of view when it
comes to something as controversial as the CFPB.
I did want to spend just a few minutes and talk about the
TAILOR Act. We have reintroduced it again this year. The idea
behind it is to allow for the regulatory entities within the
banking systems to be able to look at the individual types of
business models that individual banks have. Community banks
have a different business model than some of those that do
international banking and so forth.
It looks to me like if you had the appropriate direction
from
Congress that you most certainly in almost every phase of the
regulatory process you could really do a better job of
tailoring the regulatory approach based upon the size and
business model, specifically the business model of the
individual banks themselves.
I would just like, if you could, can you just very, very
briefly suggest whether or not the introduction of the TAILOR
Act or the adoption of the TAILOR Act would be of benefit in
giving direction to you as agencies that oversee these
financial institutions?
Mr. Powell. Senator, I have not looked at the TAILOR Act in
a few months, but just in general, I would say I agree with
what you are suggesting. You know, what Dodd-Frank did was it
put these numerical cliffs in, and those are nondiscretionary.
They are sort of arbitrary in a way. And that was a choice that
Congress made for that.
A different choice would have been to let us think about
the size and business model, and I think we can work with
either. In fact, for the largest institutions there is more
discretion in who got
designated. So Congress really did both. I think if you wanted
to change the way the thresholds worked and put us in a
situation of being more discretionary and looking at size and
business model, we could certainly work with that, and it would
help us.
Senator Rounds. Mr. Gruenberg?
Mr. Gruenberg. Senator, I would want to look more closely
at the statutory language. The issue you raise is a critical
one. Appropriately tailoring regulation to the size and
complexity and business model of the particular institution in
some ways is the core challenge for us as bank regulators. So I
think you are certainly focusing our attention on the right
issue. I am glad to engage with you on it, but I would want to
look at the specific statutory language.
Senator Rounds. Fair enough.
Mr. McWatters?
Mr. McWatters. Regulations should be targeted with a laser.
Shotguns do not work. Shotgun regulation creates collateral
damage, unintended consequences. But in order to target a
regulation to the real problem that is out there, the future
problem that is out there, you have to understand the business
that you are regulating. You have to understand the business
model. You have to understand how they make money. You have to
understand their ambitions. So focusing in on that will allow
me to target regulations and stay away from the scattershot
approach with unintended consequences and collateral damage.
Senator Rounds. Thank you.
Mr. Noreika?
Mr. Noreika. Thank you, Senator. Certainly, as I mentioned
earlier in my testimony, we are concerned about under- and
over-inclusiveness of regulation to make sure it is most
efficient and effective. And certainly the idea of tailoring
regulation is very important.
With respect to your bill, we are happy to work with you.
Senator Rounds. Thank you.
Mr. Cooper?
Mr. Cooper. Senator, I cannot remember all the provisions
of your bill, but obviously the thought process behind it we
would support.
The one thing I would like to say is, again, I have been
around this for a long time. We have been talking about this
for a long time, and we need to start working toward making
some solutions.
Senator Rounds. Thank you.
I have one real quick one, and I am just going to ask this
of Governor Powell and Mr. Gruenberg. The SLR and the ESLR, you
have diverging points of view regarding that. I am concerned
about mutual funds and where they place their accountable.
Right now it looks to me like we have got a real problem
between European banks, which have one capital requirement,
versus the American banks with the ESLR makes them less
competitive when it comes to the costs of providing those
custodial services. Shouldn't we be trying to address the costs
for mutual funds? When it comes to these custodial banks--there
are not a lot of them--shouldn't we be able to make our
American banks as competitive as those in other parts of the
country regarding custodial accounts? Can you explain to me the
reason why you have divergent points of view as to why we have
not done something about the--at least allowing for the
accounts that are being held where we are placing deposits with
the central bank. It looks to me like we ought to be able to
help these folks out a little bit and bring down the cost of
what it is for a custodial bank to bring in and maintain mutual
fund relationships.
Mr. Powell. Senator, briefly, we look at the leverage ratio
as a backup to binding risk-based capital, and the leverage
ratio sees a junk bond the same as a bank deposit, the same as
a Treasury, and makes it uneconomic for banks that have a
model, a business model that involves having a lot of deposits
in cash and puts that money, for example, at a reserve bank. So
we want it to be a binding backstop so that banks cannot game
the risk-based capital, but we feel it is time to rethink the
calibration.
Senator Rounds. Mr. Gruenberg, you had kind of a differing
point of view.
Mr. Gruenberg. Yes, Senator. We do see the strengthening of
the leverage ratio as one of the core reforms that have been
put in place with the large systemic institutions to deal with
one of the important lessons of the crisis. The lesson was that
in that stressed environment, leverage capital had credibility
with the financial markets as opposed to risk-based capital. So
we think it is really quite important from a safety and
soundness and systemic risk standpoint to have rough
comparability between risk-based capital and leverage capital.
Prior to the crisis, the leverage capital requirements were
lower. The changes we made were really designed to produce that
comparability because both measures of capital--and I will keep
this brief--both measures of capital have strengths and issues.
Risk-based capital has the strength of being linked to the
risk of the activities taken by the institution. It has the
downside of being subject to manipulation and, frankly, we saw
some of that during the crisis.
Leverage capital has the strength of being a simple, loss-
absorbing measure of capital that is not manipulatable. It has
the downside of not being risk-sensitive.
The two together, roughly comparable, we think, make the
strongest basis for a capital system.
Senator Rounds. Mr. Chairman, thank you for your patience.
It just seems as though we have really got an issue with regard
to deposits that are central bank deposits and whether or not
we should be not giving some leniency for folks that are
depositing with the central bank and making them very
uncompetitive with other banks around the world.
Thank you, Mr. Chairman.
Chairman Crapo. Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. I thank all of
you for your testimony today.
Mr. Noreika, as you know, many of us were troubled by the
mechanism procedure that was used to put you in your current
position because it kind of short-circuited the advice and
consent process. I know it is not a permanent position, but it
is a position of incredible public trust. I think you would
agree with that, would you not?
Mr. Noreika. Yes, Senator.
Senator Van Hollen. And barring that process, one of the
things that the Trump administration has touted as a mechanism
for upholding the public trust has been their ethics pledge. So
my question to you today is: Will you uphold or sign that Trump
administration ethics pledge?
Mr. Noreika. Well, Senator, I do not have a position that
is subject to the ethics pledge.
Senator Van Hollen. So even though you have got the top
position in the department, in OCC, you are saying that the
Trump administration did not write its ethics protections in a
way that would cover that position?
Mr. Noreika. It was President Obama who wrote that policy
and the Trump administration----
Senator Van Hollen. No, I am talking----
Mr. Noreika. Senator, it is President Obama's policy that
the Trump administration is following with respect to special
Government employees. So I think when you make the
characterization of President Trump writing the policy, I think
that is the wrong characterization.
Senator Van Hollen. Well, OK. But I think you know that
President Trump tried to sell his ethics pledge as much more
robust than that of the Obama administration. I am going to go
on.
And I would like to ask you, Governor Powell, about the
issue of the foreign banking organizations, and specifically
Deutsche Bank, but the others as well. As you know, during the
financial crisis the Fed provided about $538 billion in
emergency loans to European banks, and as part of that, we also
provided some oversight. Recently, the Department of Treasury
has suggested rolling back some of those provisions. I think
all of us on this Committee want to look for ways to provide
relief for community banks and want to make sure that all our
regulations are tailored to accomplish their purpose. We are
talking here about major foreign banks. I want to ask you if
you support their proposal that would loosen or weaken the
requirements for loss-absorbing long-term debt. Are you
familiar with that particular recommendation?
Mr. Powell. For foreign banks?
Senator Van Hollen. Yeah. They want to scale back----
Mr. Powell. This is from the Treasury report?
Senator Van Hollen. This is the Treasury report.
Mr. Powell. I would have to look at it, Senator. I mean, it
is a lot of recommendations.
Senator Van Hollen. OK. And I would appreciate it if you
could get back to us on that.
How about their other recommendations regarding foreign
banking organizations? Have you had a chance to look at the
other ones?
Mr. Powell. Yes, our view at the beginning was that we
should look to the U.S. assets rather than the global assets in
designating these companies for purposes of Section 165, and it
went the other way. So we would actually be comfortable with
that change. But I will come back to you on the other ones.
Senator Van Hollen. I appreciate that. And I want to thank
you and Mr. Gruenberg for your service.
And, Chairman Gruenberg, if you could please comment both
on that proposal that was made by the Treasury Department
regarding the long-term debt, the loss-absorbing long-term
debt, but also this issue of just looking at U.S.-based assets.
On the one hand, I understand that. On the other hand, these
are major multinational banking organizations, and my sense is
that if they melt down in their operations outside the United
States, it is going to have a dramatic impact here in the
United States. If you could comment on those?
Mr. Gruenberg. So I would want to look at the specifics in
regard to foreign institutions. As a general proposition, one
of the important rules that the Federal Reserve has adopted is
to require a minimum level of loss-absorbing debt for large
institutions, which includes some of the foreign banking
organizations. It is an important resource to have so that if
one of these institutions gets into difficulty and begins to
fail, that resource can be utilized in a resolution to
recapitalize the bank, imposing the costs of the
recapitalization on the creditors of the institution and
protecting the taxpayer. We view it as one of the key changes
that have been made, and we are highly supportive of the
Federal Reserve rule that has been adopted. We think it has
been properly calibrated to allow an appropriate level of debt
to ensure that these institutions in resolution could be
recapitalized in a way that would be credible with the markets
and allow for the orderly failure of the institution. So it is
quite important.
Senator Van Hollen. And the other provision, if I could----
Mr. Gruenberg. The other thing we do think is important in
evaluating the U.S. operations of these institutions is that
certainly the foreign operations can impact them. But in
looking at their U.S. operations, we should not and have not
allowed them to rely on an expectation of support from the
foreign parent. One of the lessons we learned during the crisis
is that support may not be forthcoming, so they need to have
the appropriate standards here to protect the U.S. operations
based on the U.S. requirement----
Senator Van Hollen. On a stand-alone basis. Yeah, OK. Thank
you.
Chairman Crapo. Thank you.
Senator Tillis.
Senator Tillis. Thank you, Mr. Chair. Gentlemen, thank you
all for being here.
Governor Powell, I know that a couple of the former
regulators appointed by the Obama administration have either
called for a reduction in the complexity of Volcker; I think at
least one of them has called for its outright repeal. Can you
give me an idea of where you think we need to be? On that
spectrum of just changes, can you talk a little bit about
specific things that we should be looking at or expecting in
terms of regulatory relief as it relates to Volcker?
Mr. Powell. Yes, Senator. What we have been focusing on is
laying the statute side by side with the rule and looking at
the
degrees of freedom we have to make the rule less burdensome
consistent with both the letter and the spirit of the law. And
I would say our--and it is complicated, down-in-the-weeds
stuff, but I think we have a significant amount of freedom--we
do--to tailor for large institutions versus small institutions,
those with big trading books in particular.
Senator Tillis. Can you give me an idea of some of those
weeds that would get whacked?
Mr. Powell. I would. I would be delighted to. I think in
general, we believe we have the authority to draw a line below
those with the big trading books--maybe $10 billion and up--and
have sort of that group regulated in one way, and then
everybody else regulated a lot less. A lot less.
I think we also believe we can change the definition of
``trading account,'' which I think that some of the choices
that were made in the regulation go well beyond what is in the
statute, for example, the rebuttable presumption, the
definition of a covered fund when you get to the fund side.
Quite a lot of those things--not all of them, but quite a lot
of those were drafting choices made in the regulation, and so
we believe, really based on 2 \1/2\ years of experience and 5
years of discussion, that we can go back and revisit those and
do a lot.
I would say Congress could play a role here. It, in effect,
could exempt banks below a certain level, just completely
exempt them from this. There would be no loss to safety and
soundness and an appreciable gain to cost-effectiveness.
Senator Tillis. That is a point I want to make. I think it
was Senator Warren that brought it up. I do not see how those
sorts of changes create any significant risk. I see how it
makes the regulations leaner. But I do not really understand.
What would be the argument for saying that considering those
signs of changes are going to create a greater risk?
Mr. Powell. We are committed to not doing things that
create a significantly----
Senator Tillis. That is a bad thing----
Mr. Powell.----greater risk. The whole idea is to
preserve--in my view, and I think our view, the important core
reforms that we have made, but to go back and clean up our
work. I think our obligation is to do that. I think Volcker is
a very, very difficult statute to implement, and I think if you
look at it, it is implemented in a way that is too costly. I
think it is on us to address that as supervisors and
regulators. So that is how I see it.
Senator Tillis. Anybody else have a comment on that?
Mr. Gruenberg. I would just add, Senator, I think the basic
premise of the Volcker rule, which is that risky proprietary
trading should not be supported by insured deposits, by the
public safety net, is a premise that is generally accepted. I
think the issue is the implementation of the Volcker rule. I
think there is a general view that there are opportunities to
simplify compliance while achieving the purposes of the rule.
And I think there will be an effort among the regulators to do
that.
I think obviously here the key is to strike a balance
between trying to simplify compliance while being sure that we
are achieving the purpose of the rulemaking.
I would say on the exemption side, I would be more inclined
toward a regulatory safe harbor for institutions, smaller
institutions that engage in traditional banking activities
rather than trying to have a flat exemption because then that
would capture the vast number of institutions, say, below $10
billion. But you do not want to create a vehicle for a small
number of those institutions to be used for the proprietary
trading activity. So striking a balance there seems to me would
make some sense.
Mr. Noreika. And as the third Volcker agency at this table,
we strongly support a full review of the Volcker rule, putting
it out for comment to get the views of the affected parties as
far as what we can do, what works, what does not work. Where
the costs vastly exceed the benefits, we need to, revise it and
streamline it.
Senator Tillis. Mr. Chair, I am not going to go to far
over, even though I am the last person here, because I have
another commitment. But I really believe that we have to go
through the process of regulatory reform, and I think it was
Mr. McWatters that said something about we should not be using
a shotgun as a method for rightfully going in and making sure
that financial institutions are complying with regulations that
expose our economy to risk or financial sector to a risk. But I
think we have got some pretty dumb ways for doing that today. I
think that we have to take a look at the risk profiles of
banking institutions, get away from arbitrary thresholds so
that we are actually making sure that the green light and the
red light is being driven by common-sense assessments of the
risk that a given institution represents, and it goes far
beyond many of the regulations that I think that are driving
our agencies today. And I look forward to a lot of
recommendations that we can fast-track to get to that point, to
get to the minimum amount of regulation to cover the risk and
to free up financial services institutions, free up market
makers, do the kind of things that we know we need to do if we
are going to be serious about getting to the kind of economic
growth we need to get to in this country.
Thank you all for being here. I will have several questions
for the record.
Senator Tillis. Thank you, Mr. Chair.
Chairman Crapo. Thank you very much, and that does conclude
the questioning. I again want to thank our witnesses for not
only your time and effort to appear here today, but the work
that you do in helping us to administer the financial
governance of our system in the United States.
I also appreciate the fact that each of you provided very
helpful suggestions to the process that we are going through.
And I will be quick, too, in wrapping up, in line with what
Senator Tillis was just talking about.
We are, as you know, engaged in an effort to identify where
statutorily we can make things better. I do not think that it
necessarily always does--in fact, it often does not come down
to trying to figure out how to analyze the cost and benefit of
allowing risk to go up in return for some kind of efficiency in
the system. There are many efficiencies in the system that we
can achieve that will not cause increase in risk and, in fact,
might even reduce risk. And it is those kinds of efforts that I
think we are primarily focused on today.
We need to get the right balance in our system so that we
can have the strongest economic engine that we possibly can in
our country. That is what will provide the kind of strength and
reduce risk in maybe the biggest way possible, in my opinion.
But you are literally on the front lines, and the advice that
you provide is tremendously helpful to this Committee, and I
appreciate it.
You will receive some additional questions from Senators,
as Senator Tillis just indicated. For the Senators, their
questions will be due within 7 days, which will be next
Thursday. I ask you to be very prompt in your responses because
we are literally actively engaged right now in moving forward
with developing this legislation.
With that, thank you again for coming today, and this
hearing is adjourned.
[Whereupon, at 12:04 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF JEROME H. POWELL
Member, Board of Governors of the Federal Reserve System
June 22, 2017
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
I appreciate the opportunity to testify at today's hearing on the
relationship between regulation and economic growth. We need a
resilient, well-capitalized, well-regulated financial system that is
strong enough to withstand even severe shocks and support economic
growth by lending through the economic cycle. The Federal Reserve has
approached the post-crisis regulatory and supervisory reforms with that
outcome in mind.
As a result of an improving economy and actions taken by both the
Federal regulators and the industry, the U.S. financial system is
substantially stronger and more stable than it was before the financial
crisis erupted nearly a decade ago. In this testimony, I will highlight
the considerable gains made since the crisis and reflect on the
principles that should guide us in the next phase. I will also discuss
some specific actions that align with these principles that we have
recently taken or expect to take that are designed to reduce regulatory
burden without compromising safety and soundness and financial
stability.
Post-Crisis Regulatory and Supervisory Reform
There is little doubt that the U.S. financial system is stronger
today than it was a decade ago. As I will discuss, loss-absorbing
capacity among banks is substantially higher. The banking industry, and
the largest banking firms in particular, face far less liquidity risk
than before the crisis. And progress in resolution planning by the
largest firms has reduced the threat that their failure would pose.
These efforts have made U.S. banking firms both more robust and more
resolvable. And history shows that when U.S. banking firms are
financially strong, they are able to better serve their customers.
Today I will highlight developments in the four key regulatory
areas designed to improve and maintain the resiliency of the banking
industry: capital, stress testing, liquidity, and resolution planning.
Regulatory capital reforms
The U.S. banking agencies have substantially strengthened
regulatory capital requirements for large banking firms, improving the
quality and increasing the amount of capital in the banking system.
High-quality common equity tier I capital (CETI) is important because
it is available under all circumstances to absorb losses.
Since the financial crisis, U.S. banks have been required to meet
new minimum requirements for CETI to ensure a base of protection
against losses. U.S. banks also have been required to meet capital
conservation buffers that incentivize banking firms to keep their
capital levels well above the minimums in order to maintain full
flexibility to allocate profits to shareholders and employees. For the
U.S. global systemically important banks (G-SIBs), we have also imposed
an additional capital surcharge designed to reduce the threat that a
failure of any of these firms would pose to financial stability.
Stress testing
The Federal Reserve also conducts the Comprehensive Capital
Analysis and Review (CCAR), a stress test that assesses whether large
banking firms have enough capital to withstand severely adverse
macroeconomic and financial market stress. We also use this process to
assess the quality of the capital planning processes of large banking
firms. The U.S. bank holding companies (BHCs) subject to CCAR have more
than doubled the dollar amount of their CETI from around $500 billion
in 2009 to $1.2 trillion in the first quarter of 2017, and have more
than doubled their CETI risk-based capital ratios from 5.5 percent to
12.4 percent over that period.
Liquidity regulation reforms
The banking agencies have also required large banking firms to
substantially reduce their liquidity risk. Our key reforms in this area
include a liquidity coverage ratio (LCR) that requires large banking
firms to keep enough high-quality liquid assets (HQLA) to meet net
stressed cash outflows over a 30-day period. The Federal Reserve has
also adopted the Comprehensive Liquidity Analysis and Review (CLAR)
supervisory program for evaluating the liquidity of the most systemic
banking firms. In addition, the banking agencies have proposed a net
stable funding ratio (NSFR) regulation that would help ensure that
large banking firms maintain a stable funding profile over a 1-year
horizon.
Liquidity positions within the U.S. banking system have improved
substantially since the financial crisis. The U.S. G-SIBs increased
their holdings of HQLA from about $1.5 trillion to about $2.3 trillion
between 2011 and the first quarter of 2017. The same institutions have
also reduced their reliance on short-term wholesale funding from
approximately 35 percent of assets in 2006 to about 15 percent of
assets today.
Large bank resolvability reforms
As required by the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act), the Federal Reserve has been working
with the Federal Deposit Insurance Corporation (FDIC) to improve
resolution planning by banks. Through thoughtful resolution planning,
firms can reduce the risk that their failure would have disruptive
effects on the financial system and the economy. The resolution
planning process has caused the largest U.S. banking firms to
substantially improve their internal structures, governance,
information collection systems, and allocation of capital and liquidity
in ways that both promote resolvability. The Federal Reserve also has
helped improve the resolvability of the largest banking firms by
requiring U.S. G-SIBs and the U.S. intermediate holding companies of
foreign G-SIBs to meet long-term debt and total loss absorbing capacity
(TLAC) requirements.
Effect of regulation on U.S. banks
Evidence overwhelmingly shows that financial crises can cause
severe and lasting damage to the economy's productive capacity and
growth potential.\1\ Post-crisis reforms to financial sector regulation
and supervision have been designed to significantly reduce the
likelihood and severity of future financial crises. We have sought to
accomplish this goal in significant part by reducing both the
probability of failure of a large banking firm and the consequences of
such a failure were it to occur. We have substantially increased the
capital, liquidity, and other prudential requirements for large banking
firms, and these increases are not free. Stronger capital requirements
increase bank costs, and at least some of those costs are passed along
to bank customers. But in the longer term, stronger prudential
requirements for large banking firms will produce more sustainable
credit availability and economic growth. Our objective should be to set
capital and other prudential requirements for large banking firms at a
level that protects financial stability and maximizes long-term,
through-the-cycle credit availability and economic growth.
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\1\ See, for example, Robert F. Martin, Teyanna Munyan, and Beth
Anne Wilson (2014), ``Potential Output and Recessions: Are We Fooling
Ourselves?'' IFDP Notes (Washington: Board of Governors of the Federal
Reserve System, November 12), www.federalreserve.gov/econresdata/notes/
ifdp-notes/2014/potential-output-and-recessions-are-we-fooling-
ourselves-20141112.html; and Olivier Blanchard, Eugenio Cerutti, and
Lawrence Summers (2015), ``Inflation and Activity--Two Explorations and
Their Monetary Policy Implications, IMF Working Paper WP/15/230
(Washington: International Monetary Fund, November), https://
www.imf.org/external/pubs/ft/wp/2015/wp15230.pdf.
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Guiding Principles to Simplify and Reduce Regulatory Burden
As we near completion of the major post-crisis regulatory reforms,
this is a good time to assess the effectiveness and efficiency of these
reforms. Several principles are guiding us in this effort. First, we
should protect the core elements of the reforms for our largest banking
firms in capital regulation, stress testing, liquidity regulation, and
resolvability. Second, we should continue to tailor our requirements to
the size, risk, and complexity of the firms subject to those
requirements. In particular, we should always be aware that community
banks face higher costs to meet complex requirements. Third, we should
assess whether we can adjust regulation in common-sense ways that will
simplify rules and reduce unnecessary regulatory burden without
compromising safety and soundness. And finally, we should strive to
provide appropriate transparency to supervised firms and the public
regarding our expectations.
Areas of Focus for Recalibration and Simplification
Small- and medium-bank regulatory simplification
Over the course of the last year, the Federal Reserve and the other
U.S. banking agencies finalized significant burden-reducing measures
for smaller banks. The banking agencies significantly streamlined Call
Report requirements for banks with less than $1 billion in total
assets. This streamlined Call Report resulted in 24 fewer pages than
the previous total of 85, and reduced data items required to be
reported by small banks by 40 percent. The banking agencies also
increased the number of institutions eligible for 18-month, rather than
12-month, cycles for safety and soundness and Bank Secrecy Act exams.
And the Federal Reserve implemented a desirable statutory change to
raise the threshold of its Small Bank Holding Company Policy Statement
from $500 million to $1 billion in assets.
In addition, earlier this year, the U.S. banking agencies issued a
report under the Economic Growth and Regulatory Paperwork Reduction Act
(EGRPRA) that outlined additional measures that the agencies committed
to completing to reduce regulatory burden. Perhaps most notably, the
agencies committed to developing a proposal to simplify the generally
applicable capital framework that applies to community banking
organizations. Among other things, this proposal is being designed to
simplify the current regulatory capital treatment of commercial real
estate exposures, mortgage-servicing assets, and deferred tax assets.
The agencies would seek industry comment on the proposal through the
normal notice and comment process. The agencies also expect to further
reduce burden on small banks by additional streamlining of Call
Reports.
The Federal Reserve has also supported increases in various
statutory thresholds in the Dodd-Frank Act to more narrowly focus
financial stability reforms on larger banking firms. For example, we
believe that small banking organizations could be exempted from the
Volcker rule and from the incentive compensation requirements of the
Dodd-Frank Act. We also would support an increase in the $10 billion
Dodd-Frank Act asset threshold for company-run stress tests and risk
committee requirements, and in the $50 billion threshold for enhanced
prudential standards under section 165 of the Dodd-Frank Act.
Resolution plans
The U.S. G-SIBs have made substantial progress in improving their
resolvability and have taken concrete steps to implement important
organizational, governance, and operational measures developed in the
course of their resolution planning exercises. These firms will be
filing new plans on July 1 that should incorporate agency feedback and
guidance. The Federal Reserve and FDIC will engage in a full review of
these plans.
We are exploring with the FDIC ways to improve the resolution
planning process. We believe it is worthwhile to consider extending the
cycle for living will submissions from annual to once every 2 years,
and focusing every other of these filings on key topics of interest and
material changes from the prior full plan submission. In addition,
there may be opportunities to greatly reduce the submission
requirements for a large number of firms due to their relatively small,
simple, and domestically focused activities. Such an approach could
limit full plan filing requirements to firms that are large, complex,
or have systemically critical operations.
Volcker rule
The Federal Reserve is reassessing whether the Volcker rule
implementing regulation most efficiently achieves its policy
objectives, and we look forward to working with the other four Volcker
rule agencies to find ways to improve the regulation. In our view,
there is room for eliminating or relaxing aspects of the implementing
regulation that do not directly bear on the Volcker rule's main policy
goals. We also believe it would be constructive for Congress to
consider focusing the Volcker rule on entities with significant trading
books and eliminating the requirement that smaller firms be subject to
the rule. In the meantime, we believe that it is worthwhile for the
agencies to consider further tailoring of the implementing rule as it
applies to smaller firms and firms with small trading books, and to
consider ways to streamline or reduce the paperwork and reporting
burden associated with the rule.
Enhancements to stress testing and CCAR
The Federal Reserve is committed to increasing the transparency of
the stress testing and CCAR processes. We will soon seek public
feedback concerning possible forms of enhanced disclosure. One such
disclosure would be a range of indicative loss rates predicted by the
Federal Reserve's models for various loan and securities portfolios. We
would also disclose more information about risk characteristics that
contribute to the loss-estimate ranges.
When we release CCAR results next week, we will disclose more
detailed information on CCAR's qualitative assessment. We will also
publish a document later this year summarizing the performance of the
industry on qualitative matters. Many of our largest banking firms have
made substantial progress toward meeting supervisory expectations for
capital planning. If that progress continues, I believe it will be
appropriate to consider removing the qualitative objection from CCAR
for those firms that achieve and sustain high-quality capital planning
capabilities. We would continue to assess the capital planning
practices of these firms as part of our ongoing supervisory processes.
I would also see it as appropriate to adjust CCAR's assumptions
regarding the balance sheet and capital distributions. These
adjustments would take place in conjunction with the integration of the
stress test into a firm's regulatory capital requirements.
Leverage ratio
In light of the substantial progress in the build-out of our
overall regulatory capital and stress testing frameworks over the past
few years, the Federal Reserve is taking a fresh look at the enhanced
supplementary leverage ratio. We believe that the leverage ratio is an
important backstop to the risk-based capital framework, but that it is
important to get the relative calibrations of the leverage ratio and
the risk-based capital requirements right. Doing so is critical to
mitigating any perverse incentives and preventing distortions in money
markets and other safe asset markets. Changes along these lines also
could address concerns of custody banks that their business model is
disproportionately affected by the leverage ratio.
Conclusion
U.S. banks today are as strong as any in the world, as shown by
their solid profitability and healthy lending over recent years. As we
consider the progress that has been achieved in improving the
resiliency and resolvability of our banking industry, it is important
for us to look for ways to reduce unnecessary burden. We must also be
vigilant against new risks that may develop. In all of our efforts, our
goal is to establish a regulatory framework that helps ensure the
resiliency of our financial system, the availability of credit,
economic growth, and financial market efficiency. We look forward to
working with our fellow regulatory agencies and with Congress to
achieve these important goals.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF J. MARK McWATTERS
Acting Board Chairman, National Credit Union Administration *
June 22, 2017
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
as Acting Chairman of the National Credit Union Administration Board, I
appreciate the invitation to testify about regulatory relief. I was
sworn in as a Member of the NCUA Board in 2014 and named Acting
Chairman by President Trump on January 23, 2017.
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* NCUA is the independent Federal agency created by the U.S.
Congress to regulate, charter, and supervise Federal credit unions.
With the backing of the full faith and credit of the United States,
NCUA operates and manages the National Credit Union Share Insurance
Fund, insuring the deposits of 108 million account holders in all
Federal credit unions and the overwhelming majority of State-chartered
credit unions. At MyCreditUnion.gov and Pocket Cents, NCUA also
educates the public on consumer protection and financial literacy
issues.
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As requested in your letter of June 6, my testimony today addresses
recommendations to achieve real relief while maintaining safety and
soundness and compliance with all legal requirements. I cover
recommendations in the most recent report under the Economic Growth and
Regulatory Paperwork Reduction Act, EGRPRA, and in the U.S. Treasury
Department's June 2017 report, ``A Financial System That Creates
Economic Opportunities Banks and Credit Unions.'' I also discuss the
NCUA Board's most recent efforts to reduce regulatory and examination
burdens for credit unions to help create economic growth.
Economic Growth and Regulatory Paperwork Reduction Act
The NCUA voluntarily participates in the ongoing interagency review
process created by the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (EGRPRA).\1\ EGRPRA requires the Federal
Financial Institutions Examination Council and its member agencies to
review their regulations at least once every 10 years to identify rules
that might be outdated, unnecessary, or unduly burdensome.
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\1\ 12 U.S.C. 3311.
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Overview of the NCUA's Participation in EGRPRA
The NCUA is not required by law to participate in the EGRPRA review
process, because the NCUA is not defined as an ``appropriate Federal
banking agency,'' under EGRPRA.\2\ Nonetheless, the NCUA embraces the
objectives of EGRPRA and, in keeping with the spirit of the law, the
NCUA participates in the review process. (The NCUA also participated in
the first EGRPRA review, which ended in 2006).
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\2\ See 12 USC 1813(q).
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The categories used by the NCUA to identify and address issues are:
Agency Programs;
Applications and Reporting;
Capital;
Consumer Protection;
Corporate Credit Unions;
Directors, Officers and Employees;
Money Laundering;
Powers and Activities;
Rules of Procedure; and
Safety and Soundness.
These categories are comparable, but not identical, to the
categories developed jointly by the banking agencies covered by EGRPRA,
and reflect some of the fundamental differences between credit unions
and banks. For example, `corporate credit unions' is a category unique
to the NCUA. For the same reason, the NCUA decided to publish its
notices separately from the joint notices used by the banking agencies,
although all of the notices were published at approximately the same
time. The NCUA included in its EGRPRA review all rules over which the
NCUA has drafting authority, except for certain rules that pertain
exclusively to internal operational or organizational matters at the
agency, such as the NCUA's Freedom of Information Act rule.
The NCUA is also mindful that credit unions are subject to certain
rules issued or administered by other regulatory agencies, such as the
Consumer Financial Protection Bureau (CFPB) and the Department of the
Treasury's Financial Crimes Enforcement Network. Because we have no
independent authority to change such rules, our notices (like the joint
notices prepared by the other agencies) advise that comments submitted
to us but focused on a rule administered by another agency will be
forwarded to that agency for appropriate consideration.
Response to EGRPRA Comments:
Field of Membership
Credit unions are limited to providing service to individuals and
entities that share a common bond, which defines their field of
membership. The NCUA Board diligently implements the Federal Credit
Union Act's directives regarding credit union membership. In October
2016, the NCUA Board modified and updated its field of membership rule
addressing issues such as:
The definitions of local community, rural district, and
underserved area;
Multiple common-bond credit unions and members' proximity
to them;
Single common-bond credit unions based on a trade,
industry, or profession; and
The process of applying for a new charter or expanding an
existing Federal credit union.\3\
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\3\ A challenge of this rule by the American Bankers Association is
currently pending.
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Member Business Lending
Congress has empowered the Board to implement the provisions in the
Federal Credit Union Act that address member business loans. A final
rule adopted by the NCUA Board in February 2016 was challenged by the
Independent Community Bankers of America, but was affirmed by the
District Court for the Eastern District of Virginia in January 2017.
The final rule, approved unanimously by the Board, is wholly consistent
with the Act, as the Court reinforced, and contains regulatory
provisions which:
Give credit union loan officers the ability, under certain
circumstances, to no longer require a personal guarantee;
Replace explicit loan-to-value limits with the principle of
appropriate collateral and eliminating the need for a waiver;
Lift limits on construction and development loans;
Exempt credit unions with assets under $250 million and
small commercial loan portfolios from certain requirements; and
Affirm that nonmember loan participations, which are
authorized under the Federal Credit Union Act, do not count
against the statutory member business lending cap.
Federal Credit Union Ownership of Fixed Assets
In December 2016, the NCUA Board issued a final rule that
eliminated the requirement that Federal credit unions have a plan by
which they will achieve full occupancy of premises within an explicit
timeframe. The final rule allows Federal credit unions to plan for and
manage their use of office space and related premises in accordance
with their strategic plans and risk-management policies. It also
clarified that, ``partial occupancy'' means occupation of 50 percent of
the relevant space.
Expansion of Share Insurance Fund Coverage
With the enactment by Congress of the Credit Union Share Insurance
Fund Parity Act in December 2014, the NCUA was expressly authorized to
extend Federal share insurance coverage on a pass-through basis to
funds held on deposit at federally insured credit unions and maintained
by attorneys in trust for their clients, without regard to the
membership status of the clients.\4\ Many industry advocates, including
some EGRPRA commenters, urged the NCUA to consider ways to expand this
type of pass-through treatment to other types of escrow and trust
accounts maintained by professionals on behalf of their clients. The
NCUA Board issued a proposed rule in April 2015, inviting comment on
ways in which the principles articulated in the Parity Act might be
expanded into other areas and types of account relationships.
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\4\ See Pub. L. No 113-252 (December 18, 2014).
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Reviewing the numerous comments received in response to this
invitation, the agency undertook extensive research and analysis and
concluded that some expansion of this concept into other areas was
warranted and legally permissible. Accordingly, in December 2015, the
NCUA Board unanimously approved the issuance of a final rule in which
expanded share insurance coverage on a pass-through basis would be
provided for a licensed professional or other fiduciary that holds
funds for the benefit of a client or a principal as part of a
transaction or business relationship. As noted in the preamble to the
final rule, examples of such accounts include, but are not limited to,
real estate escrow accounts and prepaid funeral accounts.
Improvements for Small Credit Unions
The credit union system is characterized by a significant number of
small credit unions. The NCUA is acutely aware that the compliance
burden on these institutions can become overwhelming, leading to
significant expense in terms of staff time and money, strain on
earnings, and, ultimately, consolidation within the industry as smaller
institutions are unable to maintain their separate existence. While
this is a difficult, multi-faceted problem, the NCUA is committed to
finding creative ways to ease the regulatory burden without sacrificing
the goal of safety and soundness throughout the credit union system.
The agency has approached this problem from several different
angles. Among the adjustments and improvements implemented in recent
years are the following:
Responding to requests to facilitate access to and use of
secondary capital by low-income credit unions (of which a
significant percentage are also small), the agency has
developed a more flexible policy. Investors can now call for
early redemption of portions of secondary capital that low-
income credit unions may no longer need. These changes also
were designed to provide investors greater clarity and
confidence.\5\
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\5\ See https://www.ncua.gov/newsroom/Pages/
NW20150406NSPMSecondaryCapital.aspx for more information about the low-
income credit union secondary capital announcement.
Low-income designated credit unions have expanded powers to
serve their members. The process by which credit unions may
claim the low-income designation has also been streamlined and
improved. Now, following an NCUA examination, credit unions
that are eligible for the designation are informed by the NCUA
of their eligibility and provided with a straightforward opt-in
procedure through which they may claim the low-income
designation. During the 6-year period ending December 31, 2016,
the number of low-income credit unions increased from 1,110 to
2,491, reflecting an increase of 124 percent over that
timeframe. Today more than 40 percent of credit unions have the
low-income designation. Together, low-income credit unions had
39.3 million members and more than $409 billion in assets at
year-end 2016, compared to 5.8 million members and more than
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$40 billion in assets at the end of 2010.
Explicit regulatory relief: Small credit unions have been
expressly exempted from the NCUA's risk-based capital
requirements and the NCUA's rule pertaining to access to
sources of emergency liquidity.
Expedited exam process: The NCUA has created an expedited
exam process for well-managed credit unions with CAMEL ratings
of 1, 2, or 3 and assets of up to $50 million. These expedited
exams require less time by examiners onsite and focus on issues
most likely to pose threats to the smallest credit unions.
CDFI enhancements: The NCUA signed an agreement in January
2016 with the Department of the Treasury's Community
Development Financial Institutions Fund to double the number of
credit unions certified as Community Development Financial
Institutions within 1 year. The NCUA is leveraging data it
routinely collects from credit unions to provide a pre-analysis
and to assist in the streamlining of the CDFI application
process. In addition, the NCUA recently adopted several
technical amendments to its rule governing the Community
Development Revolving Loan Fund. The amendments update the rule
and make it more succinct, improving its transparency,
organization and ease of use by credit unions.\6\
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\6\ Located within the U.S. Department of the Treasury, the
Community Development Financial Institutions Fund's mission is to
expand the capacity of financial institutions to provide credit,
capital, and financial services to underserved populations and
communities in the United States.
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Expanded Powers for Credit Unions
Enhanced powers for regulated institutions, consistent with
statutory requirements, can have a significant beneficial effect that
is similar in some ways to a
reduced compliance burden. The NCUA has taken several recent steps to
provide Federal credit unions with broader powers. These enhancements,
as discussed below, have positioned credit unions to take better
advantage of the activities Congress has authorized to strengthen their
balance sheets.
In January 2014, the NCUA Board amended its rule governing
permissible investments to allow Federal credit unions to
invest in certain types of safe and legal derivatives for
hedging purposes. This authority enables Federal credit unions
to use simple ``plain vanilla'' derivative investments as a
hedge against interest rate risk inherent in their balance
sheets.
In February 2013, the NCUA Board amended its investments
rule to add Treasury Inflation Protected Securities to the list
of permissible investments for Federal credit unions. These
securities provide credit unions with an additional investment
portfolio risk-management tool that can be useful in an
inflationary economic environment.
In March 2016, the NCUA Board further amended its
investments rule to eliminate language that unduly restricted
Federal credit unions from investing in bank notes with
maturities in excess of 5 years. With this change, Federal
credit unions are now able to invest in such instruments
regardless of the original maturity, so long as the remaining
maturity at the time of purchase is less than 5 years. This
amendment broadens the range of permissible investments and
provides greater flexibility to credit unions, consistent with
the Federal Credit Union Act.
In December 2013, the NCUA Board approved a rule change to
clarify that Federal credit unions are authorized to create and
fund charitable donation accounts--styled as a hybrid
charitable and investment vehicle--as an incidental power,
subject to certain specified regulatory conditions to ensure
safety and soundness.
Consumer Complaint Processing
Responding to comments received by interested parties, the NCUA
conducted a thorough review of the way in which it deals with
complaints members may have against their credit union. In June 2015,
the agency announced a new process, as set out more fully in Letter to
Credit Unions 15-CU-04.\7\ The new process refers consumer complaints
that involve Federal financial consumer protection laws for which the
NCUA is the primary regulator to the credit union, which will then have
60 days to resolve the issue with its member before the NCUA's Office
of Consumer Financial Protection and Access considers whether to
initiate a formal investigation of the matter. Results of the new
process have been excellent, with the majority of complaints resolved
at the level closest to the consumer and with a minimal NCUA footprint.
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\7\ Letter to Credit Unions 15-CU-04. https://www.ncua.gov/
Resources/Documents/LCU2015-04.pdf.
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Interagency Task Force on Appraisals
12 CFR part 722 of the NCUA's rules and regulations establishes
thresholds for certain types of lending and requires that loans above
the thresholds must be supported by an appraisal performed by a State-
certified or licensed appraiser. The rule is consistent with an
essentially uniform rule that was adopted by the banking agencies after
the enactment of FIRREA. The rule covers both residential and
commercial lending.\8\
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\8\ In contrast to the agencies, the NCUA's rule contains no
distinction, with respect to the appraisal requirement, between
commercial loans for which either sales of real estate parcels or
rental income derived from the property is the primary basis for
repayment of the loan, and loans for which income generated by the
business itself is the primary repayment source. Under 12 CFR part 722,
the dollar threshold for either type of commercial loan is $250,000;
loans above that amount must be supported by an appraisal performed by
a State certified appraiser. By contrast, the banking agencies' rule
creates a separate category for the latter type of commercial loan and
establishes a threshold of $1 million; loans in this category but below
that threshold do not require an appraisal.
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In response to comments received through the EGRPRA process, the
NCUA joined with the banking agencies to establish an interagency task
force to consider whether changes in the appraisal thresholds are
warranted. Work by the task force is underway, including the
development of a proposal to increase the threshold related to
commercial real estate loans from $250,000 to $400,000. Any other
recommendations developed by the task force will receive due
consideration by the NCUA.
Recommendations in the June 2017 Treasury Study
The June Treasury Department report, written pursuant to Executive
Order 13772, seeks to align the regulation of financial institutions to
help meet the needs of our economy more efficiently and effectively. It
calls for the tailoring of rules to target specific problems areas and
recommends greater cooperation among financial regulators. These
recommendations combine to form a framework that is consistent with my
approach as Acting Chairman and many of the efforts the NCUA Board has
been pursuing in the past several months, which are addressed in this
testimony.
Several of the report's specific recommendations could be
particularly effective in achieving regulatory reform, depending on how
they are implemented. For example, the proposal to allow institutions
with at least 10 percent capital to achieve regulatory relief could be
important for all types of financial institutions.
The report also recognizes that the interests of consumers and
financial inclusion must be integral pillars of regulatory reform. At
the same time, the Treasury report reflects the realization that
consumer protection rules are among the most burdensome that financial
institutions face. In that regard, the report makes a number of
recommendations for regulatory relief, including key changes to the
Ability to Repay/Qualified Mortgage rule.
Credit union-specific proposals include raising the threshold for
stress testing requirements for federally insured credit unions to $50
billion in assets (from assets of $10 billion) and relief in the
examination process, two key areas the NCUA has reviewed. The report
also supports greater coordination among the NCUA, CFPB, and State
regulators to streamline the supervisory process.
Additional NCUA Initiatives
The NCUA Board is actively considering several initiatives to
reduce the regulatory burden on credit unions and to update and improve
our rules. These are likely to be implemented within the relatively
near term.
Possible Temporary Corporate Credit Union Stabilization Fund Proposal
for Early Termination
Congress authorized the creation of the Temporary Corporate Credit
Union Stabilization Fund in 2009.\9\ The availability of this fund
allowed the agency to respond to the insolvency and failure of five
large corporate credit unions without immediate depletion of the Share
Insurance Fund, which protects the deposits and savings of credit union
members. This fund also enabled the agency to fund massive liquidation
expenses and guarantees on notes sold to investors backed by the
distressed assets of the five failed corporate credit unions.
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\9\ Pub. L. No. 111-22 (May 20, 2009), 204(f).
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Current projections are that the distressed assets underlying the
notes will perform better than initially expected. In addition to
improved asset performance, significant recoveries on legal claims have
created a surplus that may eventually be returned to insured credit
unions. The NCUA is exploring ways to speed up this process,
principally by closing the Stabilization Fund and transferring its
remaining assets to the Share Insurance Fund more quickly than
initially anticipated. Doing so would bolster the equity ratio of the
Share Insurance Fund, leading to a potential distribution of funds in
excess of the Share Insurance Fund's established equity ratio.
Call Report Enhancements
The NCUA intends to conduct a comprehensive review of the process
by which it conducts its offsite monitoring of credit unions, namely
through the Form 5300 Call Report and Profile. As the data reflected in
these reports affect virtually all of the NCUA's major systems, the
agency's exploration of changes in the content of the Call Report and
Profile will be on the front end of the NCUA's recently announced
Enterprise Solutions Modernization initiative, which will be a multi-
year process. Started in the summer of 2016, this effort is
comprehensive, ranging from the content of the Call Report and Profile
to the systems that collect and use these data such as CU Online and
the Automated Integrated Regulatory Examination System or AIRES.
Throughout the process, we will seek input from external stakeholders
to ensure our overarching goals are met.
The imperative driving this modernization effort is--quite simply--
that credit unions, like other depository institutions, are growing
larger and more complex every day. At the same time, smaller credit
unions face significant competitive challenges. In such an environment,
it is incumbent on the NCUA to ensure its reporting and data systems
produce the information needed to properly monitor and supervise risk
at federally insured credit unions while leveraging the latest
technology to ease the burden of examinations and reporting on
supervised institutions.
For these reasons, three of the other FFIEC agencies--the FDIC,
OCC, and Federal Reserve--are currently reviewing their Call Report
forms with an eye to reducing reporting burden.
The NCUA's goals in reviewing its data collection are:
Enhancing the value of data collected in pre-exam planning
and offsite monitoring;
Improving the experience of users;
Protecting the security of the data collected; and
Minimizing the reporting burden for credit unions.
The NCUA will review all aspects of its data collection for
federally insured credit unions. This review will go beyond reviewing
the content of the Call Report and Profile to look at the systems
credit unions use to submit data to the NCUA--namely CU Online. The
agency has already conducted a broad canvassing of internal and
external stakeholders to obtain their feedback on potential
improvements to the Call Report and Profile. We have engaged
stakeholders through a variety of methods, including a request for
information published in the Federal Register with a 60-day comment
period.\10\ The comment period was intended to provide all interested
parties an opportunity to provide input very early in the process. We
also developed a structured focus group process to aid in assessing
ideas (to complement internal and State regulatory agency input), and
we have created data collection systems that can be used to activate
the focus group.
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\10\ 81 Fed. Reg. 36,600 (June 7, 2016).
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Supplemental Capital
The NCUA plans to explore ways to permit credit unions that do not
have a low-income designation to issue subordinated debt instruments to
investors that would count as capital against the credit union's risk-
based net worth requirements. At present, only credit unions having a
low-income designation are allowed to issue secondary capital
instruments that count against their mandatory leverage ratios. For
credit unions that do not have the low-income designation, only
retained earnings may be used to meet the leverage requirements of the
Federal Credit Union Act.\11\ Consistent with its regulatory review
objectives, the NCUA issued an advance notice of proposed rulemaking
regarding certain constraints that, if applied to subordinated debt
instruments issued by credit unions, would enable institutions to count
those instruments as capital for purposes of the risk-based capital
rule.
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\11\ 12 USC 1790d(o)(2); see Legislative Recommendations, infra,
for additional discussion about this requirement and the NCUA's support
for amending this provision.
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Risk-Based Capital
I intend to revisit the NCUA's recently finalized risk-based
capital rule in its entirety and to consider whether significant
revision or repeal of the rule is warranted.\12\
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\12\ 12 CFR part 702, subpart A; see 80 Fed. Reg. 66,706 (October
29, 2015).
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Examination Flexibility
In response to the financial crisis and the Great Recession that
ensued, the NCUA determined in 2009 to shorten its examination cycle to
12 months.\13\ The agency also hired dozens of new examiners at that
time. Since then, the agency policy has been that every Federal credit
union, and every federally insured, State-chartered credit union with
assets over $250 million, should undergo an examination at least once
per calendar year.
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\13\ Although the exam cycle immediately prior to 2009 had been in
the 18-month range, for most of its history the NCUA has followed an
exam cycle of approximately 1 year.
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In an effort to implement regulatory relief and to address some
inefficiencies associated with the current program, the agency has
undertaken a comprehensive review of all issues associated with
examiner time spent onsite at credit unions,
including both frequency and duration of examinations. The relatively
strong health of the credit union industry at present supports
addressing exam efficiencies. A working group within the agency was
established, and it solicited input from the various stakeholders,
including from within the agency, State regulatory authorities, and
credit union representatives. The working group issued recommendations,
which the Board incorporated into the agency's 2017-18 budget. These
included the recommendation that the agency provide greater flexibility
in scheduling exams of well-managed and well-capitalized credit unions,
consistent with the practices of other Federal financial regulators and
the agency's responsibility to protect the safety and soundness of the
Share Insurance Fund.
Other objectives for consideration include evaluating the
feasibility of incorporating a virtual examination approach, as well as
improvements to examiner training and a movement away from undue
reliance on ``best practices'' that are
unsupported by statute or regulation. In addition, the agency intends
to revisit its recently enacted rule on stress testing for the largest
credit unions to consider whether it is properly calibrated, and also
to explore whether to move this important function in-house and out of
the realm of expensive third-party contractors. The ultimate goal of
the NCUA's examination review and other initiatives has been and
remains that safety and soundness will be assured with minimal
disruptive impact on the well-managed credit unions subject to
examination.
Enterprise Solutions Modernization
The NCUA's Enterprise Solutions Modernization program is a multi-
year effort to introduce emerging and secure technology that supports
the agency's examination, data collection and reporting efforts in a
cost effective and efficient way. The changes in our technology and
other systems will improve the efficiency of the examination process
and lessen, where possible, examination burdens on credit unions,
including cost and other concerns identified during our EGRPRA review.
Over the course of the next few years, the program will deploy new
systems and technology in the following areas:
Examination and Supervision_Replace the existing legacy
examination system and related supporting systems, like the
Automated Integrated Regulatory Examination System or AIRES,
with modernized tools allowing examiners and supervisors to be
more efficient, consistent, and effective.
Data Collection and Sharing_Define requirements for a
common platform to securely collect and share financial and
nonfinancial data, including the Call Report, Credit Union
Profile data, field of membership, charter, diversity and
inclusion levels, loan and share data, and secure file transfer
portal.
Enterprise Data Reporting_Implement business intelligence
tools and establish a data warehouse to enhance our analytics
and provide more robust data reporting.
Additionally, the NCUA envisions introducing new processes and
technology to improve its workflow management, resource and time
management, data integration and analytics, document management, and
customer relationship management. Consistent with this vision, the NCUA
intends to consider ways to more transparently streamline its budget
and align its priorities with its budget expenditures.
Additional Areas of Focus
Several other areas present opportunities for the NCUA to focus on
improving and enhancing its body of regulations and its oversight of
the credit union industry. These include:
Appeals Procedures. At present, the procedures by which a
credit union or other entity aggrieved by an agency
determination may seek redress at the level of the NCUA Board
are inconsistent and poorly understood. As a result, the NCUA
has developed proposed uniform rules to govern this area, both
with respect to material supervisory determinations and other
significant issues warranting review by the Board.
Corporate Rule (Part 704). Reform and stringent controls
over the corporate credit union sector was necessary during the
financial crisis that began in 2008. Nine years later, a
reconsideration of the corporate rule and an evaluation of
whether restrictions therein may be loosened is appropriate.
The NCUA will consider a proposed rule at the Board's monthly
meeting this Friday.
Credit Union Advisory Council. Development of such a
council would enable the agency to listen to and learn from
industry representatives more directly, enhancing our efforts
to identify and eliminate unnecessarily burdensome, expensive,
or outdated regulations.
Legislative Recommendations
The Committee asked the NCUA to identify ways to ease credit union
regulatory burdens through legislation.
Looking ahead, the NCUA has several proposals to share with the
Committee related to regulatory flexibility, field of membership
requirements, member business lending, and supplemental capital.
Regulatory Flexibility
Today, there is considerable diversity in scale and business models
among financial institutions. As noted earlier, many credit unions are
very small and operate on extremely thin margins. They are challenged
by unregulated or less-regulated competitors, as well as limited
economies of scale. They often provide services to their members out of
a commitment to offer a specific product or service, rather than a
focus on any incremental financial gain.
The Federal Credit Union Act contains a number of provisions that
limit the NCUA's ability to revise regulations and provide relief to
such credit unions.
Examples include limitations on the eligibility for credit unions to
obtain supplemental capital, field-of-membership restrictions,
investment limits, and the general 15-year loan maturity limit, among
others.\14\
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\14\ 12 U.S.C. 1751 et. seq.
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To that end, the NCUA encourages Congress to consider providing
regulators with enhanced flexibility to write rules to address such
situations, rather than imposing rigid requirements. Such flexibility
would allow the agency to effectively limit additional regulatory
burdens, consistent with safety and soundness considerations.
As previously noted, the NCUA continues to modernize existing
regulations with an eye toward balancing requirements appropriately
with the relatively lower levels of risk smaller credit unions pose to
the credit union system. Permitting the NCUA greater discretion with
respect to scale and timing when implementing statutory language would
help mitigate the costs and administrative burdens imposed on smaller
institutions, consistent with congressional intent and prudential
supervision.
The NCUA would like to work with Congress so that future rules can
be tailored to fit the risk presented and even the largest credit
unions can realize regulatory relief if their operations are well
managed, consistent with applicable legal requirements.
Field-of-Membership Requirements
The Federal Credit Union Act currently permits only Federal credit
unions with multiple common-bond charters to add underserved areas to
their fields of membership. We recommend Congress modify the Federal
Credit Union Act to give the NCUA the authority to streamline field of
membership changes and permit all Federal credit unions to grow their
membership by adding underserved areas. The language of H.R. 5541, the
Financial Services for the Underserved Act, introduced in the House
during the 114th Congress by Congressman Ryan of Ohio, would accomplish
this objective.
Allowing Federal credit unions with a community or single common-
bond charter the opportunity to add underserved areas would open up
access for many more unbanked and underbanked households to credit
union membership. This legislative change also could enable more credit
unions to participate in programs offered through the congressionally
established Community Development Financial Institutions Fund, thus
increasing the availability of affordable financial services in
distressed areas.
Congress may wish to consider other field of membership statutory
reforms, as well. For example, Congress could allow Federal credit
unions to serve underserved areas without also requiring those areas to
be local communities. Additionally, Congress could simplify the
``facilities'' test for determining if an area is underserved.\15\
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\15\ The Federal Credit Union Act presently requires an area to be
underserved by other depository institutions, based on data collected
by the NCUA or Federal banking agencies. 12 U.S.C. 1759 (c)(2)(A)(ii).
The NCUA has implemented this provision by requiring a facilities test
to determine the relative availability of insured depository
institutions within a certain area. Congress could instead allow the
NCUA to use alternative methods to evaluate whether an area is
underserved to show that although a financial institution may have a
presence in a community, it is not qualitatively meeting the needs of
an economically distressed population.
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Other possible legislative enhancements could include elimination
of the provision presently contained in the Federal Credit Union Act
that requires a multiple common-bond credit union to be within
``reasonable proximity'' to the location of a group in order to provide
services to members of that group.\16\ Another legislative enhancement
that recognizes the way in which people share common bonds today, would
be to provide for explicit authority for web-based communities as a
basis for a credit union charter.
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\16\ See 12 U.S.C. 1759(f)(1).
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The NCUA stands ready to work with Congress on these proposals, as
well as other options to provide consumers more access to affordable
financial services through credit unions.
Member Business Lending
The NCUA reiterates the agency's long standing support for
legislation to adjust the member business lending cap, such as S. 836,
the Credit Union Residential Loan Parity Act, which Senators Wyden and
Murkowski have introduced. This bipartisan legislation addresses a
statutory disparity in the treatment of certain residential loans made
by credit unions and banks.
When a bank makes a loan to purchase a one- to four-unit, non-
owner-occupied residential dwelling, the loan is classified as a
residential real estate loan. If a credit union were to make the same
loan, it is classified as a member business loan and is, therefore,
subject to the member business lending cap. To provide regulatory
parity between credit unions and banks for this product, S. 836 would
exclude such loans from the statutory limit. The legislation also
contains appropriate safeguards to ensure strict underwriting and
servicing standards are applied.
Supplemental Capital
The NCUA supports legislation to allow more credit unions to access
supplemental capital, such as H.R. 1244, the Capital Access for Small
Businesses and Jobs Act. Introduced by Congressmen King and Sherman,
this bill would allow healthy and well-managed credit unions to issue
supplemental capital that would count as net worth. This bipartisan
legislation would result in a new layer of capital, in addition to
retained earnings, to absorb losses at credit unions.
The high-quality capital that underpins the credit union system was
a bulwark during the financial crisis and is key to its future
strength. However, most Federal credit unions only have one way to
raise capital--through retained earnings. Thus, fast-growing,
financially strong, well-capitalized credit unions may be discouraged
from allowing healthy growth out of concern it will dilute their net
worth ratios and trigger mandatory prompt corrective action-related
supervisory actions.
A credit union's inability to raise capital outside of retained
earnings limits its ability to expand its field of membership and to
offer more products and services to its membership and eligible
consumers. Consequently, the NCUA has previously encouraged Congress to
authorize healthy and well-managed credit unions to issue supplemental
capital that will count as net worth under conditions determined by the
NCUA Board. Enactment of H.R. 1244 would lead to a stronger capital
base for credit unions and greater protection for taxpayers.
Conclusion
In conclusion, we must slow, if not stop, the machine that grinds
out a relentless flow of new regulatory burdens. We must also do much
more to improve how we regulate and to consider the costs, as well as
the benefits, of each new regulation. Credit unions cannot afford to
let time slip through their fingers because they are too busy complying
with unnecessary and burdensome regulations. Instead, they must focus
on today's challenges and risks while thoughtfully preparing for the
future. Absent safety and soundness concerns, the NCUA must not stand
in the way of credit unions' efforts to develop and execute their
business plans, meet the expectations of their members, and build a
robust and dynamic credit union community for the future.
Thank you again for the invitation to testify. I am happy to answer
your questions.
______
PREPARED STATEMENT OF KEITH A. NOREIKA
Acting Comptroller of the Currency, Comptroller of the Currency *
June 22, 2017
I. Introduction
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* Statement Required by 12 U.S.C. 250: The views expressed herein
are those of the Office of the Comptroller of the Currency and do not
necessarily represent the views of the President.
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Chairman Crapo, Ranking Member Brown, and Members of the Committee,
thank you for the opportunity to testify today about fostering economic
growth by strengthening our Nation's financial institutions. I am
grateful for the courtesy you have shown me since I became the Acting
Comptroller of the Currency on May 6, and I appreciate your ongoing
interest in the Office of the Comptroller of the Currency (OCC) and its
role in the effective administration of the Federal banking system.
I am honored to serve in this important position and to support the
statutory mission of the OCC: to ensure that national banks and Federal
savings associations (banks) operate in a safe and sound manner,
provide fair access to financial services, treat customers fairly, and
comply with applicable laws and regulations. The agency is comprised of
extraordinary professionals who share a deep commitment to this
mission, and I am proud to serve alongside them until the Senate
confirms the 31st Comptroller of the Currency.
During my service, I look forward to engaging with my colleagues,
stakeholders, and Congress to initiate a robust dialogue and explore
opportunities to foster economic growth. For our part, we at the OCC
will move ahead to do what we can within our current authorities to
foster economic growth and opportunity. Our efforts will be informed by
the financial regulatory policy of this Administration, as articulated
in the President's Executive Order entitled ``Core Principles for
Regulating the United States Financial System''\1\ and developed more
fully in the recent report prepared by the Department of the Treasury
(Treasury Report).\2\
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\1\ Executive Order 13772 (February 3, 2017).
\2\ U.S. Department of the Treasury, ``A Financial System That
Creates Economic Opportunities; Banks and Credit Unions'' (June 2017).
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The banks that the OCC supervises should be--as they are today--
engines of economic growth for the Nation. When the Federal banking
system is running well, it can power growth and prosperity for
consumers, businesses, and communities across the country. Our job as
bank supervisors is to strike the right balance between supervision
that effectively ensures safety, soundness, and compliance, while--at
the same time--enabling economic growth. To achieve that balance, we
need to avoid imposing unnecessary burden and creating an environment
so adverse to risk that banks are inhibited from lending and investing
in the businesses and communities they serve. Regulation does not work
when it impedes progress, and banks cannot fulfill their public purpose
if they cannot support and invest in their customers and communities.
In the less than 2 months that I have served as Acting Comptroller,
I have already taken several important steps to promote a regulatory
environment that is balanced and that provides the certainty needed to
encourage investment. In particular, I have met with various trade
groups, scholars, community groups, and my colleagues at the Federal
and State levels to begin a constructive, bipartisan dialogue on how
our regulatory system might be recalibrated to foster economic growth.
For example, I have sought the views of my colleagues at the other
Federal banking agencies about simplifying the regulatory framework
implementing the Volcker Rule. In recent years, many of the Nation's
financial institutions have struggled to understand and comply with
these regulations, devoting significant resources that could have been
put to more productive uses. There is near unanimous agreement that
this framework needs to be simplified and clarified. I have recommended
that we invite stakeholders to share their thoughts and ideas at an
early stage to help inform how the agencies should proceed. Our
conversation on this issue is ongoing, and it is my hope that the
effort we undertake will lead to solutions that the agencies can
implement and that also will inform Congress's consideration of
legislation in this area.
The Volcker Rule provides a practical example of how conflicting
messages and inconsistent interpretation can exacerbate regulatory
burden by making industry compliance harder and more resource intensive
than necessary. Under my leadership, the OCC is undertaking
improvements in our internal operations to attack that problem in ways
that are within our control. For example, I have emphasized the
importance of the OCC speaking with one voice. The banks that we
supervise must hear a clear and consistent message, regardless of
whether it comes from Washington, DC, or our field offices. A single
voice provides certainty, without which businesses and consumers are
reluctant to invest in the future, and it instills in the American
people confidence in our Government.
I also have made a point of seeking the views of our agency's
``boots on the ground'' for ideas to reduce unnecessary regulatory
burden and improve efficiency in our supervision and regulation of the
Federal banking system in order to promote economic growth. The
response has been overwhelming. To date, we have over 400 suggestions.
OCC employees are excited to operationalize our collective experience
and to contribute to efficient and effective regulation of the Federal
banking system. In this way, the OCC will play our part to help to
minimize the burden associated with regulation and maximize regulatory
certainty that will promote healthy lending by banks. The investments
by the banking sector in customers, local communities, and businesses
will, in turn, drive economic growth. The next section of my testimony
discusses the opportunities that I see to maximize regulatory
efficiency and promote the availability of credit to fund the needs of
consumers and businesses. The third section summarizes the results of
the recently completed Economic Growth and Regulatory Paperwork
Reduction Act (EGRPRA) regulation review. As noted below, I also
include an appendix containing a number of legislative ideas and
recommendations for the Committee's consideration.
II. Opportunities to Foster Economic Growth
Overview
The United States has the strongest financial system in the world,
and one that others want to emulate, in part because it has proven to
be dynamic, resilient, and adaptable to changing conditions. Most would
agree that whatever improvements we seek to make to that system and the
way it is regulated ought to reinforce those qualities, not undermine
them. I also believe that now--nearly 10 years after the events that
sparked the Great Recession and 7 years after the enactment of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act)--is a good time to take stock of how well our financial system is
working and to strive for balance and improvements in the system and in
how we regulate it.
This sort of reevaluation has occurred, typically on a bipartisan
basis, at intervals throughout our history. The alphabet soup of
financial legislation enacted in modern memory--CEBA, FIRREA, FDICIA,
GLBA, and, earlier, the Banking Act of 1933 and the laws creating
Federal deposit insurance and bank holding companies (BHC)--were
responses to then-current events that compelled a shift in the scope or
tenor of the Government's oversight of the financial system. So it is
not unusual--in fact, it has been our national practice--to revisit
financial regulation from time to time and to make the adjustments that
can attract a consensus for reform.
In that same spirit, today I offer recommendations for improvements
that would promote the dynamism and resiliency of the Federal banking
system while addressing areas that I believe unnecessarily encumber
economic growth. In my view, bringing balance to financial regulation
in a way that encourages economic investment and expansion involves
eliminating unnecessary or duplicative regulatory activities,
streamlining and updating regulatory processes to enhance effectiveness
and efficiency, and providing regulatory clarity to promote confidence
and certainty for market participants. The appendix to this testimony
describes each of the OCC's recommendations, and I will highlight a few
of them here. In most cases, there are a number of approaches that
could achieve the objectives of promoting economic growth and trimming
burden. I would like to start a dialogue about which ones are best.
Our recommendations are informed by two straightforward ideas.
First, while the content of some regulations can rightly be described
as burdensome because, for example, the regulation is needlessly
prescriptive or complex, it also is the case that a multiplicity of
regulators performing overlapping functions can contribute
substantially to regulatory burden and hinder economic growth. Our
system sometimes deploys multiple regulators to solve the same problem.
That is an approach that can lead to waste, redundancy, and duplication
of resources both in the regulatory agencies and for the institutions
we supervise. I have suggestions for where we might streamline
supervision to reduce regulatory redundancy.
Second, our system sometimes covers more institutions or broader
categories of activity than it needs to in order to contain or mitigate
the risks it seeks to address. This has often been referred to as a
lack of appropriate ``tailoring'' or, conversely, as a ``trickling-
down'' to lower-risk institutions or activities of regulatory standards
or approaches that really are only appropriate for high-risk
institutions or activities. I have suggestions to offer in this
category as well.\3\
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\3\ The OCC's proposals also contain suggestions for updating laws
that may impede economic growth because they no longer reflect modern
business practice.
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The OCC's recommendations are consistent with the Treasury Report,
which is guided by free-market principles and aimed at maximizing
sustainable, economic growth. The Treasury Report includes proposals to
break the cycle of sluggish growth, improve access to credit, maintain
liquid markets, and engage in a holistic analysis of the cumulative
impact of the regulatory environment. The Treasury Report is a
thoughtful addition to the ongoing discussion of how to promote
economic growth, and I appreciate Treasury's consultation with the OCC
in developing it.
Maximizing Economic Growth by Minimizing Regulatory Inefficiency
Our organically developed, uniquely American system of independent
banking regulators risks, at times, unnecessary regulatory burden and
overlap. Accordingly, we need to be mindful to calibrate regulatory
jurisdiction to maximize regulatory efficiency by minimizing
unnecessary regulatory duplication.
As the Treasury Report notes, many of the changes that would
streamline regulation and free up resources that could fuel economic
growth are not possible under the current statutory framework. In some
instances, Federal banking law allocates jurisdiction to regulators in
a way that actually promotes duplication and redundancy. Congress could
foster economic growth by reducing regulatory overlap and increasing
coordination within the Federal financial regulatory framework.
For example, under current law (subject to certain exemptions, like
the one for banks that conduct only fiduciary activities) companies
that own banks are regulated as BHCs by the Board of Governors of the
Federal Reserve System (Federal Reserve Board) under the Bank Holding
Company Act. Their depository institution subsidiaries, however, are
often regulated at the Federal level by a different
regulator.\4\ This means that most companies that own banks have at
least two regulators, even if they are small and even when the
depository institution subsidiary comprises the vast majority of the
company's assets so that there is no meaningful distinction between the
business of the company and the business of its bank subsidiary.
Congress could reduce regulatory redundancy in this situation by
amending the Bank Holding Company Act to provide that when a depository
institution constitutes a substantial portion of its holding company's
assets (e.g., 90 percent), the regulator of the depository institution
would have sole examination and enforcement authority for both the
holding company and the depository institution. This change would
eliminate supervisory duplication and its inherent inefficiencies,
freeing resources to meet the needs of banks' customers and
communities. It could be limited to BHCs of a certain asset size. At
the same time, banking law would continue to recognize that it is
appropriate to have a separate regulator for large companies that
conduct complex activities, including securities and derivatives
businesses, as well as consumer and commercial banking. The proposed
change simply would extend to smaller banking organizations the
benefits of having a single Federal regulator at both the bank and
holding company levels that State banks that are members of the FRS and
their holding companies already enjoy today.
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\4\ The regulator of the insured depository institution (IDI)
subsidiary of the BHC will be the OCC in the case of national banks and
Federal savings associations, the Federal Deposit Insurance Corporation
(FDIC) in the case of State-chartered banks that are not members of the
Federal Reserve System (FRS), and the Federal Reserve Board itself in
the case of State-chartered banks that are FRS members.
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Another approach to the problem of multiple regulators would be to
eliminate statutory impediments for firms that want the choice to
operate without a holding company. Congress could modernize the
corporate governance requirements for national banks by allowing them
to adopt fully the governance procedures of, for example, the State in
which their main office is located, the Delaware General Corporation
Law, or the Model Business Corporation Act. This change would put these
banks on the same footing as BHCs and benefit banks that wish to
operate and access the capital markets without a holding company.
A second example of regulatory duplication in banking law is the
allocation of authority to the Consumer Financial Protection Bureau
(CFPB) to examine and supervise the activities of IDIs over $10 billion
in asset size with respect to compliance with the laws designated as
Federal consumer financial laws. This division of
authority means that two separate regulators--the CFPB and the
prudential regulator--conduct examination and supervision activities
with respect to the same institutions.
There are many options Congress could consider to address this
overlap. For example, Congress could return examination and supervision
authority with respect to Federal consumer financial laws to the
Federal banking agencies for the institutions that they otherwise have
jurisdiction to supervise, without regard to an institution's asset
size. Under this approach, the CFPB would continue to set the standards
with respect to the Federal consumer financial laws, supervise
nondepository institutions, and take enforcement action. Depository
institutions would have a single supervisor overseeing compliance with
Federal consumer financial and other laws, as well as their safety and
soundness, reinforcing the interdependency between sound banking
practices and fair treatment of a bank's customers. As is the case
today, the primary prudential regulator would retain enforcement
authority with respect to institutions at or under $10 billion in asset
size. The primary regulator also would retain the current ``back-up''
enforcement authority with respect to institutions over $10 billion in
asset size, which enables it to bring an enforcement action when
warranted if the CFPB declines to do so.
This approach would reduce regulatory burden and provide regulatory
certainty by eliminating the need for an institution to prepare for
multiple, potentially overlapping examinations and to meet the
differing expectations of multiple regulators. This approach also could
result in a more effective deployment of limited regulatory resources
and thus facilitate more effective and efficient supervision with
existing resources. In this regard, it may be useful--either as the
predicate for or an alternative to this revision to current law--for
Congress to require a study of how the CFPB's authorities are currently
used. It has been the OCC's experience that the CFPB has focused its
examination and supervisory resources primarily on the largest banks
that serve the greatest number of consumers. If that observation is
accurate, then returning supervisory responsibility to the primary
regulator should result in a more appropriate level of oversight for
midsize institutions.
As the Treasury Report describes, the formation of new financial
institutions is crucial to maintain a vibrant and growing economy.
Federal law currently requires the approval of two regulators to form
an IDI--the chartering authority (i.e., the OCC for national banks and
Federal savings associations) and the FDIC. This requirement for dual
approval has slowed the formation of de novo institutions in recent
years. To facilitate new entrants into the market, Congress could
streamline the process of forming de novo banks by allowing banks that
receive deposits (other than trust funds) to obtain FDIC deposit
insurance upon certification of the OCC when the OCC charters and
authorizes new banks to commence business. This was the state of the
law prior to 1991, and I believe it is preferable to the current
process which requires applicants for a bank charter to submit two
applications covering the same proposal to two different Federal
agencies, each of which reviews the proposal for essentially the same
issues.
The current process wastes resources, results in unnecessary
delays, and represents a significant barrier to entry into the banking
business. Instead, we should ensure that our processes tilt in favor of
chartering and insuring entities that can qualify under the statutory
standards. Congress also could explore providing the FDIC with a
specified time period--such as 30 days--within which to object to the
grant of deposit insurance to a particular new bank and provide written
reasons for its objection. Statutory consequences would attach to the
FDIC's action. The FDIC's failure to object would result in the grant
of insurance; the FDIC's objection, together with its rationale, would
be reviewable in court as final agency action.
The options above--the allocation of supervisory authority over
consumer compliance matters and the role of the primary regulator in
the decision to grant deposit insurance--suggest an approach that might
be used more generally to address situations where there has been an
unnecessary overlap of regulators. The approach is akin to a system of
traffic lights. One regulator has the lead responsibility or primary
authority: it has a ``green light'' to act. Other regulators that have
concurrent or back-up authority have a ``red light.'' They wait to act
until a contingency provided in the law has occurred.
There are a number of places where the banking laws use this
approach today. The backup authority that primary regulators have to
the CFPB with respect to the enforcement of consumer laws in the case
of institutions over $10 billion in asset size, discussed above, is one
example.\5\ The primary regulators' back-up examination authority with
respect to the conduct of bank-permissible activities by nondepository
institution subsidiaries of a BHC is another.\6\ In my view, the
primary Federal prudential regulator ordinarily should have the lead
responsibility for matters pertaining to an entity supervised by that
regulator. But providing for the exercise of back-up, secondary, or
contingent authority in well-defined circumstances by another Federal
regulator with a statutory interest in the conduct of activities of the
supervised entity can provide an orderly mechanism for accomplishing
the objectives of multiple statutes that apply to the entity.
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\5\ 12 U.S.C. 5515(c)(3).
\6\ 12 U.S.C. 1831c(d)(2).
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Right-Sizing Regulation
The statutes do not always provide the Federal banking agencies
with sufficient flexibility to tailor their regulations to the risk
profiles of different institutions. This is true despite the fact that
the risks inherent in large, complex institutions are markedly
different in type and scope from those of smaller institutions. As a
result, statutes that were intended to address the systemic risks
typically associated with larger institutions often must be applied to
smaller ones that do not pose such broad, systemic risks. This portion
of my testimony provides a few examples of unintended consequences that
could be reversed if specific statutes were amended to eliminate the
most onerous consequences for smaller banks.
For purposes of this discussion, ``right-sizing'' certainly means
tailoring rules to fit the community bank business model. In some
cases, such as the Volcker Rule, that may mean exempting community
banks altogether from the obligation to comply with a rule because they
simply do not engage in the type of activity or present the levels of
risk that the rule was designed to address.
In my view, right-sizing also means tailoring rules to the business
models of midsize, or regional, banks. For midsize institutions, the
threshold approach taken in a number of provisions in the law--$50
billion commonly defines the line between midsize and large
institutions--represents a barrier to growth because, above that line,
compliance costs rise so dramatically. The effect is to discourage
competition with the largest institutions. For that reason, while asset
size can appropriately be used as one measure of when and how to tailor
regulations, in many cases, it should be supplemented by measures that
better capture the level of risk an institution presents. The nature
and scope of the institution's activities are one such measure. So is a
prudential regulator's judgment--based on the qualitative and
quantitative results of the regulator's examinations--about the
institution's effectiveness in managing the risk that it does take on.
Application of the Volcker Rule again illustrates the point. In
reforming the Volcker Rule, it is preferable to create an ``off-
ramp''--a clear path to exit for those institutions that do not present
the risks that the Volcker Rule was designed to address. In my view,
while size could be a factor in constructing the off-ramp, it is
equally important to identify the nature and level of the activities
that would bar an institution from the use of an off-ramp. In some
cases, such as with community banks, an organization's size generally
reflects its traditional, noncomplex activities. Because the activities
of an organization will change over time as banks enter new business
lines, perhaps in new ways, I favor using notice-and-comment
rulemaking, undertaken by the Federal banking agencies, as the best way
to decide how to define them.
Similarly, section 165 of the Dodd-Frank Act requires an annual
stress test for all banks with assets of more than $10 billion,
limiting regulators' flexibility to determine when and within what
parameters a stress test should be conducted. In certain circumstances,
the burden of annual stress testing, particularly in accordance with
prescriptive statutory requirements, is not commensurate with the
systemic risks presented by an institution.
The Treasury Report recommends raising the threshold for these
stress tests from $10 billion to $50 billion, recognizing that
institutions in this size range, as a practical matter, generally do
not present the risks that require annual stress testing. In addition,
the Treasury Report would grant the banking regulators authority to
further calibrate the threshold for banks above the $50 billion
threshold to account for risk and complexity. Another option to address
this issue would be for Congress to give the Federal banking agencies
broad authority to tailor by rule the statutory stress testing
requirement, without regard to an asset threshold. This approach is
consistent with the principle of bringing balance to financial
regulation I discussed earlier in my testimony. It would avoid the
potential for over and under inclusiveness associated with fixed-asset
thresholds. It also provides regulators flexibility to calibrate rules
and requirements to be commensurate with the systemic risks presented
by individual or groups of institutions.
Congress also could simplify the capital requirements currently
applicable to community banks by exempting banks that do not use
models-based capital requirements from section 171 of the Dodd-Frank
Act (the ``Collins Amendment''). This provision was adopted to prevent
banks using models-based capital requirements from holding less than
the generally applicable amount of capital. But smaller banks do not
use models-based capital requirements, so the Collins Amendment may
limit bank regulators from tailoring capital requirements to these
smaller institutions even when the original purpose of the Collins
Amendment is not present. Adopting this change would allow the Federal
banking agencies to tailor the capital rules to match the size and
complexity of the institutions to which this provision applies,
consistent with the recommendations of the Treasury Report. One such
approach that the agencies could pursue with this legislative change is
the idea to exempt community banks from the Basel-based capital
standards that currently apply, provided they comply with a robust
leverage ratio requirement--10 percent, for example--and also do not
engage in a set of risky activities that the regulators should define
through notice-and-comment rulemaking.
Congress also could streamline the reporting requirements to which
community banks are subject, freeing the banks' employees to return to
the business of banking. For example, Congress could repeal section 122
of the Federal Deposit Insurance Corporation Improvement Act, which
requires the Federal banking agencies to collect unneeded information
on small business lending.\7\ Congress could repeal other unnecessary
information collection provisions, such as the requirement stemming
from section 1071 of the Dodd-Frank Act that banks gather extensive
information on business loans, the benefits of which are unclear.
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\7\ The Treasury Report also recommended that the OCC, FDIC, and
Federal Reserve Board continue their ongoing work to simplify the Call
Report. I fully support this work and have encouraged these efforts at
the OCC.
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The potential legislative changes I have discussed seek to strike
the right balance between maintaining the strength of the Federal
banking system through appropriate oversight of the Nation's banks,
while simultaneously enabling economic opportunity and encouraging
economic growth. The balance can be achieved by eliminating duplication
and redundancy and providing appropriate flexibility and discretion to
promulgate rules that are effective and appropriately tailored.
Balanced and coherent regulation, in turn, results in minimizing the
cost of effective supervision and regulation and maximizing regulatory
certainty and efficient compliance in order to promote growth and
lending by banks that drives economic growth.
III. EGRPRA
The agency already has streamlined and reduced duplication and
redundancy in several of its regulations following the recently
completed EGRPRA process. EGRPRA requires the OCC, FDIC, and Federal
Reserve Board, along with the Federal Financial Institutions
Examination Council (FFIEC), to conduct a review of their regulations
at least once every 10 years to identify outdated or otherwise
unnecessary regulatory requirements imposed on IDIs.
The agencies completed the first decennial EGRPRA review in 2007,
and in June 2014, they began the second EGRPRA review. Over an 18-month
period, the agencies jointly published four Federal Register notices,
inviting the public to consider every rule applicable to the
institutions they supervise, including the then-recently finalized
capital rules and rules issued pursuant to the Dodd-Frank Act, and to
identify outdated, unnecessary, or unduly burdensome regulations.
In each notice, the agencies identified specific issues for the
public to consider, such as whether a rule or underlying statute
imposed unnecessary requirements, created competitive disadvantages, or
failed to account for the unique characteristics of a particular type
of financial institution. The agencies also asked specific questions
about how the regulations or underlying statutes affected community
banks and other small IDIs. These questions reflected the agencies'
particular concern about the effect of regulatory burden on smaller
institutions and their understanding that smaller institutions do not
have the resources that larger institutions can bring to bear on
regulatory compliance.
To broaden public participation in the EGRPRA review, the agencies
hosted six public outreach sessions in geographically diverse areas
across the country, including a session focused on rural banks in
Kansas City, Missouri. These outreach sessions provided the public with
an opportunity to present their views directly to the agencies. Agency
principals and staff participated in each session, as did
representatives from banks, community and consumer groups, and other
interested parties. Live and recorded audio and video broadcasts of
each session were accessible on the agencies' joint EGRPRA website to
extend the reach of the EGRPRA review.
From the beginning and throughout the review, the agencies received
a steady stream of public feedback with ideas about how to reduce
regulatory burden. Although the commenters identified a wide range of
issues, they singled out certain areas where agency or legislative
action could lead to meaningful burden reduction, including regulatory
reporting, exam frequency, real estate appraisals, and the capital
rules.\8\
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\8\ A discussion of the significant issues raised in the EGRPRA
review and the agencies' responses are included in the Joint Report to
Congress, Economic Growth and Regulatory Paperwork Reduction Act (March
2017) (EGRPRA Report), at 22-78.
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The agencies took important steps to address issues raised by
commenters while the review was still in process. As noted in the
Treasury Report, they finalized Call Report revisions, including a
streamlined Call Report for institutions having only domestic offices
and less than $1 billion in total assets. This new Call Report reduced
the number of data items required by approximately 40 percent and can
be used by approximately 90 percent of all institutions required to
file Call Reports.
The agencies also finalized rules to raise the asset threshold for
well capitalized and well managed institutions to qualify for an 18-
month (rather than a 12-month) safety and soundness examination cycle.
An additional 600 institutions now can qualify for this extended
examination cycle. Institutions that qualify for the 18-month
examination cycle also should be subject to less frequent Bank Secrecy
Act (BSA) exams because an institution's BSA compliance program is
typically reviewed during its safety and soundness examination. In
response to commenters' concerns, the agencies also clarified when less
burdensome evaluations can be performed in place of appraisals on real
estate loans and issued guidance advising institutions of measures to
address the shortage of State certified and licensed appraisers,
particularly in rural areas.
In addition to these interagency projects, the OCC independently
took steps prior to the completion of the EGRPRA review to address
comments received during the EGRPRA process, as well as to make other
burden-reducing changes identified by OCC staff. For example, the OCC
revised its licensing rules to provide expedited and simplified
procedures for certain transactions and simplified requirements
applicable to Federal savings associations. As always, the agency's
actions were framed by its statutory authority and calibrated to
preserve the right balance where prudent oversight provides ample room
for economic growth and investment. Upon completion of the EGRPRA
review, in March 2017, the agencies published the EGRPRA Report. This
report summarizes the significant issues raised by the more than 230
written comments received in response to the Federal Register notices
and the many comments from the panelists and attendees at the outreach
sessions, each of which was carefully reviewed and considered. The
EGRPRA Report highlights ongoing work, as well as steps the agencies
plan to pursue jointly, in response to issues raised by commenters,
including:
Replacing the complex treatment of high-volatility
commercial real estate exposures in the current, capital
framework with a more straightforward treatment for most
acquisition, development, or construction loans;
Simplifying the regulatory capital treatment for mortgage
servicing assets, certain deferred tax assets, and holdings of
regulatory capital instruments issued by financial
institutions;
Simplifying the limitations on minority interests in the
current regulatory capital framework;
Increasing from $250,000 to $400,000 the threshold for when
an appraisal is required for commercial real estate loans;
Adjusting certain asset-size thresholds that trigger the
prohibition on a management official of one depository
organization serving as a management official of an
unaffiliated depository organization; and
Clarifying our flood insurance guidance on the escrow of
flood insurance premiums, force-placed insurance, and detached
structures.
The EGRPRA Report also details individual agency efforts to
address comments received during the EGRPRA process, including
OCC projects to:
Continue to integrate national bank and Federal savings
association rules to promote economic growth by reducing
regulatory burden, ensuring fairness in supervision, and
creating efficiencies;
Remove redundant and unnecessary supervisory information
requests;
Improve the planning of onsite and offsite examinations;
and
Make the examination process more efficient and less
burdensome by leveraging technology.
The agencies are aware that regulatory burden does not emanate only
from statutes and regulations, but also from the processes and
procedures related to examinations and supervisory oversight. In this
regard, through the FFIEC, the agencies are jointly reviewing the
examination process, examination report format, and examination report
preparation process to identify further opportunities to minimize
burden, principally by rethinking traditional processes and the use of
technology. This effort is consistent with the Treasury Report's
recommendation that the regulators expand on current efforts to
coordinate and rationalize examination procedures to promote
accountability and clarity.
The OCC also is continuing its work to enhance supervision with
respect to consumer protection and compliance; to address our Community
Reinvestment Act performance evaluation backlog; and to provide
guidance on compliance with respect to the BSA and consumer protection
matters. At the same time, the OCC continues its ongoing practice of
reviewing and updating its supervisory and examiner guidance to align
it with current practices and risks and to eliminate unnecessary or
outdated guidance.
The EGRPRA review and the resulting EGRPRA Report represent a
significant effort on the part of the agencies and provided us and the
public with an opportunity to take stock of how our regulations affect
the institutions to which they apply and the improvements that we can
make. The information we learned from this effort will inform our work
to reduce regulatory burden, and I will ensure that these efforts
continue during my time at the OCC.
IV. Conclusion
During my tenure as Acting Comptroller of the Currency, I will
support the OCC's efforts and work with my colleagues at the other
Federal banking agencies to foster economic growth, including by
championing regulatory and legislative changes that eliminate
unnecessary regulatory burden and promote the health and vitality of
the banking system. I will pursue opportunities to make this system
more inclusive to new banks engaged in the business of banking. I will
work to ensure accountability within the agency.
Thank you for the opportunity to provide this Committee with my
views on fostering economic growth by strengthening our Nation's
financial institutions. I look forward to working with you to achieve
this goal.
APPENDIX
Legislative Proposals to Foster Economic Growth by Strengthening our
Nation's Financial Institutions
I. Proposals to Maximize Economic Growth By Minimizing Regulatory
Inefficiency
1. Streamline the Supervision of Holding Companies in Certain
Circumstances
Summary: This proposal would provide the appropriate Federal
banking agency (i.e., the OCC, FRB, or FDIC) with sole examination and
enforcement authority for a BHC and savings and loan holding company
with total assets below a certain threshold where a bank or savings
association comprises a substantial amount (e.g., 90 percent) of the
assets of the holding company. Under this approach, the FRB would
retain authority to issue regulations implementing the Bank Holding
Company Act and the provisions of the Home Owners' Loan Act (HOLA)
relating to savings and loan holding companies.
Explanation: Depository institutions often comprise a substantial
amount of the assets of holding companies. This is certainly true for
those holding companies with less than $50 billion in assets. However,
in most cases the depository institution and the holding company have
different supervisors. Smaller institutions where the depository
institution makes up the bulk of the assets in the holding company do
not engage in the expansive activities that give rise to the types of
complexity and interconnectedness that raise macroprudential concerns
(such as resolvability). Requiring these institutions to respond to two
supervisors is inefficient, redundant, and burdensome on the
institution. Legislative changes that require a single regulator to
oversee both the holding company and its depository institution and
other subsidiaries would streamline the regulatory process, reduce the
potential for supervisory duplication and inefficiencies, strengthen
the regulators' accountability, and enhance opportunities for economic
growth by reducing regulatory burden. The proposal simply would extend
to smaller institutions the benefits of having a single Federal
regulator at both the bank and holding company levels that State banks
that are members of the FRS and their holding companies already enjoy
today.
2. Modernize the Corporate Governance Procedures Applicable to
National Banks
Summary: This proposal would repeal the residency and stock
ownership requirements for directors in 12 U.S.C. 72 and harmonize and
modernize the shareholder notification and meeting requirements for
mergers in 12 U.S.C. 214a, 215 and 215a. It would also allow national
banks to fully adopt the corporate governance procedures of, for
example, the law of the State in which the main office of the bank is
located, the Delaware General Corporation Law, or the Model Business
Corporation Act.
Explanation: National banks currently have the option to adopt the
corporate governance procedures identified above, but only to the
extent not inconsistent with corporate governance procedures set forth
in applicable Federal banking statutes or regulations, or bank safety
and soundness (12 C.F.R. 7.2000). Amending relevant law to allow
national banks to fully adopt a corporate governance regime would
modernize corporate governance for national banks and enhance
efficiencies for banks with public stock. The National Bank Act (NBA)
and other relevant law contains a number of corporate governance
procedures that are inflexible and outdated compared to State corporate
law, such as requiring shareholder supermajorities, requiring notice to
shareholders by publication and certified mail, requiring formal
meetings, and requiring explicit shareholder votes. These proposals
would modernize these corporate governance provisions and place
national banks on the same footing as BHCs and State banks.
Modernization of these provisions would benefit national banks by
providing them flexibility to operate more efficiently and access the
capital markets without having to employ a holding company structure
and being subject to the associated regulatory burden.
3. Modernize and Add Flexibility to the Federal Savings Association
Charter
Summary: This proposal would amend the HOLA to give Federal savings
associations the ability to elect to exercise national bank powers
subject to restrictions applicable to national banks without changing
their charters. HOLA could also be amended to streamline the ability of
savings associations to issue securities.
Explanation: HOLA requires that a specified percentage of the
assets of a savings association be in qualified thrift investments.
Under existing law, a Federal savings association must convert to a
bank charter to implement a strategic decision to
engage in commercial or consumer lending to a greater extent than is
permitted by HOLA. The charter conversion process can be time consuming
and burdensome, particularly for smaller institutions. Federal mutual
savings associations face especially hard choices, since they must
convert to the stock form of organization before they can convert to a
bank charter.
In addition, section 4(h) of HOLA (12 U.S.C. 1463(h)) provides that
no savings association shall: (1) issue securities which guarantee a
specific maturity except with the specific approval of the appropriate
Federal banking agency; or (2) issue any securities the form of which
has not been approved by the appropriate Federal banking agency. The
limitation of section 4(h) of HOLA is an inhibitor to savings
associations' access to the capital markets.
Amending HOLA to provide Federal savings associations with
additional flexibility to adapt to changing economic conditions and
business environments without having to change their corporate form
would enable them to better meet the needs of their communities. In
addition, streamlining the ability of savings associations to issue
securities would enhance their capacity to raise capital which they
could deploy to make loans and invest in consumers, local businesses,
and communities and support economic growth. National banks are not
subject to restrictions of the type set forth in section 4(h). The
OCC's experience with national banks does not demonstrate a need for
these restrictions. OCC regulations already require approval for
national banks and Federal savings association to increase capital in
appropriate circumstances, such as when a national bank or Federal
savings association issues securities for consideration other than
cash, or is required to obtain agency approval pursuant to the terms of
an enforcement action.
4. Streamline Supervision and Enforcement of Federal Consumer
Financial Laws
Summary: This proposal would amend the Dodd-Frank Act to return
examination and supervision authority with respect to Federal consumer
financial laws (as defined in the Dodd-Frank Act) to the Federal
banking agency for the financial institutions over which it has
jurisdiction, without regard to an institution's asset size. Under this
approach, the CFPB would continue to set the standards with respect to
Federal consumer financial laws, supervise nondepository institutions,
and take enforcement action. In connection with, or as an alternative
to, this proposal, Congress could require a study of how the CFPB's
authorities are currently used.
Explanation: Providing for a single regulator to oversee a
depository institution's compliance with Federal consumer financial
laws, in addition to its safety and soundness and compliance with other
laws and regulations, would reduce regulatory burden and enhance
opportunities for economic growth. It would minimize redundancy and
enhance regulatory certainty by eliminating the need for a depository
institution to prepare for multiple, potentially overlapping
examinations and to meet the differing expectations of two separate
regulators. Currently, the CFPB and prudential regulator examinations
for depository institutions over $10 billion in assets may overlap
because the prudential regulators have supervisory responsibility for a
number of consumer-related laws (including the Fair Housing Act, the
Community Reinvestment Act, the Servicemembers Civil Relief Act, and
the unfair or deceptive acts or practices prohibitions of section 5 of
the Federal Trade Commission Act) that intersect with the Federal
consumer financial laws under the CFPB's supervisory jurisdiction.
Also, each agency that examines a bank for compliance with consumer-
related laws reviews aspects of the bank's compliance management system
and assigns a Consumer Compliance Rating, raising the potential for
unnecessary burden created by differing expectations or inconsistent
findings.
A study of how the CFPB's authority is currently used would assist
Congress in identifying any gaps in the enforcement of Federal consumer
financial laws and determining how best to allocate regulatory
resources to ensure an appropriate level of oversight.
5. Simplify the Process for National Banks to Obtain Deposit
Insurance
Summary: This proposal would simplify the process for national
banks to obtain deposit insurance. One approach would be to restore the
process that existed under the Federal Deposit Insurance Act (FDI Act)
prior to 1991. Under that process, a national bank engaged in the
business of receiving deposits other than trust funds would become an
insured bank upon chartering by the OCC and being authorized by the OCC
to commence business. A separate application to the FDIC was not
required. In addition to its other chartering requirements, the OCC,
among other things, was required by statute to give consideration to
the same factors that the FDIC currently must consider under the FDI
Act in granting deposit insurance. The OCC would issue a certificate to
the FDIC that consideration had been given to those factors.
Congress could also explore providing the FDIC with a specified
time period--such as 30 days--within which to object to the grant of
deposit insurance to a particular entity. Inaction by the FDIC would
result in the grant of insurance. An FDIC objection would have to
specify the reasons for the objection and would constitute a final
agency action subject to judicial review.
Explanation: Congress amended the FDI Act in 1991 to require
national banks to apply to the FDIC separately for deposit insurance.
The statute also adopted a similar process for State banks. As a
result, applicants to become nationally or State chartered depository
institutions must submit two parallel applications covering the same
proposal to two different Federal agencies that review the proposals
essentially for the same matters. This creates duplication, the need to
spend extra resources and time, and the potential for delay. In the
case of national banks this duplication is particularly unwarranted
since the Comptroller of the Currency is a co-equal Federal bank
regulator and is a member of the FDIC's board. A separate application
for insurance at the FDIC in effect permits the FDIC to overrule OCC
decisions about chartering. Moreover, the proposal would ensure that
obtaining deposit insurance can be as efficient as other fundamental
aspects of the chartering process. Specifically, while national banks
are required to become members of the FRS as part of the chartering
process, Federal law does not require a separate application and
approval by the FRB. The decision of the OCC to grant a charter is
sufficient to confer FRS membership.
6. Require an EGRPRA-Like Review Process for Bank Secrecy Act (BSA)
Regulations
Summary: This proposal would require Treasury to conduct a periodic
review of all BSA regulations in order to identify outdated,
unnecessary, or unduly burdensome requirements for financial
institutions. Most of these regulations are issued by the Financial
Crimes Enforcement Network (FinCEN). The proposal could require
Treasury to consult with the Federal banking agencies, law enforcement
agencies, and other stakeholders, as appropriate. It could require
Treasury to solicit public comment and to submit a report to Congress
on the results of its review. It could also require Treasury to
specifically solicit public comment on technology that could reduce
cost and burden on financial institutions, including community banks.
Explanation: During the most recent EGRPRA review, the OCC, FDIC,
and FRB received many comments about the burdens imposed on financial
institutions--particularly community banks--by FinCEN's BSA rules. This
new requirement would give financial institutions an opportunity to
express their concerns directly to the agency with the authority to
issue, repeal, and modify BSA rules and require review and response by
that agency.
7. Require Information Sharing in Connection with the Stress Test
Requirements of Section 165
Summary: This proposal would amend section 165(i) of the Dodd-Frank
Act to require the FRB to provide the appropriate primary financial
regulatory agencies access to the models used to conduct its
supervisory stress tests. Additionally, this proposal would require
that the FRB provide the agencies with the model assumptions and the
derivation of those assumptions. This proposal would also amend section
165(i) of the Dodd-Frank Act to require that the FRB share the results
of supervisory stress tests with the appropriate financial regulatory
agencies in a timely manner before those results are released to the
public.
Explanation: Section 165(i)(1)(A) of the Dodd-Frank Act requires
the FRB to conduct supervisory stress tests of nonbank financial
companies supervised by the FRB and BHCs with total consolidated assets
of $50 billion or more ``in coordination with the appropriate primary
financial regulatory agencies and the Federal Insurance Office.''
Section 165 also requires ``all other financial companies'' (i.e.,
banks and savings associations) with $10 billion or more in assets to
conduct company-run stress tests in accordance with regulations that
the Federal primary financial regulatory agencies have issued.
The FRB develops and operates its own models to conduct the
supervisory stress tests known as the Comprehensive Capital Analysis
and Review (CCAR). In many instances, an IDI is the primary driver of a
BHC's CCAR results. In addition to CCAR, those IDIs are required to
complete depository institution-level stress tests under section
165(i)(2), known as Dodd-Frank Act stress testing (DFAST). The FRB
frequently uses the CCAR stress test models and assumptions as a basis
for developing the DFAST stress tests. The other Federal banking
agencies should have
access to the FRB's CCAR stress test models and assumptions to enhance
their
assessment of the DFAST stress tests performed by IDIs. The OCC and
FDIC also need time to review the results of CCAR supervisory stress
tests before they are released to the public to ensure that the OCC and
FDIC understand the underlying reasons for the results, which allows
the OCC and FDIC to improve supervision and respond to questions from
the public. The proposal would ultimately enhance the consistency and
robustness of stress testing processes.
8. Make the OCC's and FDIC's Authority to Clear PRA Notices
Consistent with that of the FRB
Summary: This proposal would amend the Paperwork Reduction Act
(PRA), specifically, 44 U.S.C. 3507(i), to direct the Office of
Management and Budget (OMB) to designate an officer of the OCC and the
FDIC to approve proposed collections of information for all agency
purposes. This change would give the OCC and FDIC the same authority as
the FRB to clear their own collections of information.
Explanation: The PRA requires each Federal agency to establish a
process for reviewing collections of information, to solicit public
comment on proposed collections of information, and to submit proposed
collections of information to the OMB for review and approval. The
process of reviewing a collection of information, soliciting public
comment on it, and obtaining OMB approval generally takes about 4
months. A 4-month delay in information collection activities to seek
approval from OMB, an agency that does not have expertise in banking or
financial services regulation or practices, can significantly hinder
the OCC's and FDIC's ability to address emerging issues in individual
institutions and in the larger financial system; this has the potential
to undermine the effectiveness and efficiency of supervision by the OCC
and FDIC. The OMB has provided the FRB with the authority to review and
approve its own collection of information requests, collection of
information requirements, and collections of information in current
rules. The OCC and FDIC should have the same authority as the FRB.
II. Proposals to Right-Size Regulation
9. Volcker Rule: Exempt Community Banks, Provide an Off-Ramp for
Midsize Banks, and Simplify Requirements
Summary: This proposal would revise the Volcker Rule to limit its
scope and focus on banking entities that are materially engaged in
risky trading activities that have the potential to trigger systemic
consequences. Community banks, given the nature and scope of their
activities, would be exempted altogether. Other institutions would be
exempted if they qualify for an ``offramp.'' While asset size could be
a factor in designing the off-ramp, qualification for the offramp would
also depend on whether an institution engages in the type of
activities, or in activities that present the type of risk, that the
Volcker Rule was designed to restrict. The activities measure could be
based on the nature or the scope of the bank's trading activities. A
bank could qualify for the off-ramp if its trading activities are low-
risk, if the volume of its trading is relatively low, or if its trading
revenues do not comprise a significant percentage of its total
revenues. A combination of these measures could be used as well. The
features of this off-ramp should be determined through a notice-and-
comment rulemaking.
Institutions that did not qualify for the off-ramp would continue
to be subject to the Volcker Rule, but the Rule's prohibitions and
requirements would be simplified. The proprietary trading definition
would be revised so that the determination whether trading is
proprietary does not depend on the purpose of a trade. Instead,
regulators would use bright-line, objective factors, such as applying
the rule only to trading positions covered by the Market Risk Capital
Rule. In addition, the requirements for permitted activities, such as
market-making and risk-mitigating hedging, would be streamlined.
Similarly, the covered fund prohibition could be simplified by
narrowing the prong of the covered fund definition that refers to
sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 so
that the definition of a covered fund would only cover funds with
certain characteristics.
Explanation: The statutory prohibition applies to any ``banking
entity.''\9\ As a result, the Volcker Rule applies to many entities
that do not engage in the activities or present the risks that the Rule
was designed to address. Applying the Rule to community banks engaged
primarily in traditional banking activities or to institutions that are
not materially engaged in risky trading activities does not further the
statutory purpose. Exempting community banks and providing an off-ramp
for larger institutions depending on the nature and scope of their
trading activities would reduce complexity, cost, and burden associated
with the Volcker Rule by providing a tailored approach to addressing
the risks the Rule was designed to contain.
---------------------------------------------------------------------------
\9\ ``Banking entity'' is statutorily defined to include any IDI,
any company that controls an IDI, or that is treated as a BHC for
purposes of section 8 of the International Banking Act of 1978, and any
affiliate or subsidiary of such entity. 12 U.S.C. 1851(a)(1); 12
U.S.C. 1851(h)(1).
---------------------------------------------------------------------------
The Volcker Rule's proprietary trading and covered fund provisions
are complex and needlessly burdensome. Streamlining these provisions
would facilitate institutions' ability to engage in permissible
activities, such as market-making and risk-mitigating hedging, and
would reduce compliance costs so that resources could be put to more
productive uses. For example, if proprietary trading was redefined to
include only Market Risk Capital Rule-covered positions for banks, the
proprietary trading restrictions would apply to a smaller number of
banks, and banks and the regulators could determine whether an activity
constitutes proprietary trading without examining intent. This would
promote efficiency and conserve resources for both banking entities and
the agencies charged with implementing the rule.
10. Eliminate Size Thresholds and Frequency Requirements for DFAST
Summary: This proposal would eliminate the $10 billion threshold
and the requirement that stress tests of ``all other financial
companies'' (including banks and savings associations) be conducted
annually under section 165(i)(2) of the Dodd-Frank Act. Instead of
proposing alternative statutory requirements for size thresholds and
frequency, this proposal would direct the primary Federal financial
regulatory agencies to each issue rules establishing the frequency for
stress testing of institutions of various sizes and characteristics.
Legislation could set out factors for the agencies to consider in
issuing those rules, such as asset size and complexity.
Explanation: Supervisors should have more flexibility, within
certain parameters, about when and under what scenarios DFAST stress
tests are conducted, and to which institutions they must apply. These
changes would tailor stress testing requirements to fit the needs and
risk profiles of various types of institutions.
11. Exempt Community Banks from the Collins Amendment
Summary: This proposal would modify section 171 of the Dodd-Frank
Act (commonly referred to as the ``Collins Amendment'') to exempt banks
that do not use models-based capital requirements from having to comply
with the ``generally applicable'' capital rules.
Explanation: The Collins Amendment currently requires the Federal
banking agencies to apply a common set of ``generally applicable''
capital requirements to all depository institutions, nearly all
depository institution holding companies, and nonbank financial
institutions supervised by the FRB (except for certain insurance
companies), without regard to asset size or amount of foreign exposure.
This requirement was included in the Dodd-Frank Act to prevent the
Federal banking agencies from permitting relatively large banking
organizations to use advanced models-based approaches to determine
regulatory capital requirements that could be lower than the
standardized requirements applied to smaller, less complex
institutions.
An exemption from the Collins Amendment for banks that do not use
models-based capital requirements would free the Federal banking
agencies from impediments that currently prevent the agencies from
tailoring their capital rules for
highly capitalized smaller institutions that wish to escape the
regulatory burden of
calculating and complying with the standardized capital requirements.
The exemption would allow the agencies to tailor the capital rules to
match the size and complexity of the institutions to which the Collins
Amendment applies to reduce regulatory burden for smaller and less
complex institutions, which would contribute to economic growth.
12. Exempt Certain Community Banks from Capital Standards
Summary: This proposal would exempt smaller, less complex
depository institutions from the Basel-based capital standards that
currently apply if those institutions comply with a robust leverage
ratio requirement (e.g., 10 percent) and do not engage in a set of
risky activities identified by the Federal banking agencies by rule.
Explanation: Simplifying capital requirements for these smaller,
less complex depository institutions would reduce regulatory burden and
contribute to economic growth.
13. Focusing the Scope of Section 165 of the Dodd-Frank Act
Summary: This proposal would raise the threshold for application of
enhanced prudential standards under section 165 of the Dodd-Frank Act
to some higher level, or use a qualitative assessment process, to more
specifically capture the companies that present the types of risks
requiring application of enhanced prudential standards.
Explanation: The enhanced prudential standards under section 165 of
the Dodd-Frank Act apply to BHCs with $50 billion or more in total
consolidated assets. While enhanced prudential standards should apply
to the largest, most complex companies, they should not apply to
regional institutions that have business models more like a community
bank. Raising the threshold for the application of, or using an
assessment process that more closely aligns with the risk being
addressed by, the enhanced prudential standards under section 165 would
reduce regulatory burden for BHCs with a more traditional business
model. Such companies would not have to comply with enhanced prudential
standards that are more appropriately imposed on larger and more
complex companies.
Moreover, given the multitude of requirements and burdens that are
imposed by the enhanced standards of section 165 of the Dodd-Frank Act,
when the thresholds associated with these standards are set at a low
level, they become an effective barrier to competition that protects
the market position and competitive advantage of the largest, most
complex firms. All firms subject to section 165 of the Dodd-Frank Act,
whether they have trillions of dollars in assets or just $50 billion in
assets, must comply with the enhanced prudential standards and the
associated costs and burden. Because these burdens and costs tend to be
proportionally larger and higher for smaller institutions, larger firms
have a return-on-cost advantage that increases as their asset size
increases, and they can more effectively absorb the impact of dealing
with enhanced prudential standards. In addition, smaller firms crossing
the threshold simply lack the resources and regulatory know-how to
navigate the labyrinth of these enhanced prudential standards. Because
competition fosters innovation that makes the banking system more
vibrant and banking products more cheaply available over time, the
barrier to entry created by a dollar threshold that is set too low
harms the health of the system, consumers, and ultimately economic
growth.
14. Reduce Regulatory Burden by Repealing Unnecessary Call Report
Requirement to Collect Data on Small Business Lending
Summary: This proposal would repeal section 122 of the Federal
Deposit Insurance Corporation Improvement Act.
Explanation: Section 122 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 requires the Federal banking
agencies to collect data on small business lending in the Call Report;
however, the agencies do not use this information. Eliminating this
section would reduce burden on the banking industry and contribute to
economic growth. The Federal banking agencies received comments from
numerous bankers that providing this information is particularly
burdensome and should be eliminated. Agency staff does not use this
information for any supervisory or examination purpose, yet it must
still be collected due to the statutory requirement.
15. Reduce Regulatory Burden by Repealing the Small Business Data
Collection Requirement in Section 1071 of the Dodd-Frank Act
Summary: This proposal would repeal section 1071 of the Dodd-Frank
Act.
Explanation: Section 1071 of the Dodd-Frank Act amends the Equal
Credit Opportunity Act to require a financial institution making a
business loan to obtain and maintain information on whether the loan is
being extended to ``a women-owned, minority-owned, or small business.''
Moreover, the financial institution must collect additional granular
data from each loan applicant in the form and manner provided in
section 1071, and any data that the CFPB ``determines would facilitate
enforcement of fair lending laws and enable communities, governmental
entities, and creditors to identify business and community development
needs and opportunities of women-owned, minority-owned, and small
businesses.'' The Dodd-Frank Act directs the CFPB to write regulations
or issue guidance, as necessary, to implement this section.
The CFPB has just begun the rulemaking process and has not yet
issued a proposed regulation for implementation of this section. It
likely will be very difficult to come up with workable definitions for
this type of data collection in the small business lending context, and
the rulemaking process itself could be protracted and burdensome.
Moreover, once issued, the regulation implementing this section is
likely to impose new and burdensome reporting requirements on financial
institutions, including smaller banks that will be challenged to find
the resources to comply with the new requirements, and the benefits
from such reporting in the promotion of fair lending and community
development are uncertain.
III. Proposals to Provide Regulatory Certainty and Promote Economic
Growth
16. Support Clarification of the Applicability of the ``Valid when
Made'' Doctrine
Summary: This proposal would overturn the Second Circuit's decision
in Madden v. Midland Funding, LLC by providing that the rate of
interest on a loan made by a bank, savings association, or credit union
that is valid when the loan is made remains valid after transfer of the
loan.
Explanation: This proposal reduces uncertainty by reestablishing
well-settled black-letter law that a loan is valid when made and the
interest rate charged by a national bank legally at origination remains
legal upon assignment of the loan to a third-party. It would also
create a uniform standard so that there is no longer a difference in
the treatment of loans made in different judicial circuits. The
proposal supports economic growth by facilitating the ability of banks,
savings associations, and credit unions to sell their loans, thereby
promoting liquid markets.
17. Modernize Receivership Authorities for Uninsured National Banks
and Federal Branches
Summary: This proposal would modernize the powers available to
receivers of uninsured national banks, as well as uninsured Federal
branches and agencies of foreign banks (``uninsured Federal branches'')
by amending the NBA to provide the OCC with the same receivership
authorities provided to the FDIC under the FDI Act. An alternative
proposal would be to amend the FDI Act to specify the FDIC as the
entity to serve as the receiver for OCC-chartered banks and OCC-
licensed branches, without distinction between insured and uninsured
status. For uninsured national banks, this would restore the status quo
to the framework established by Congress when the FDIC was created in
1933, which existed until the enactment of the Federal Financial
Institutions Reform, Recovery, and Enforcement Act in 1989.
Explanation: Currently, the OCC appoints and supervises receivers
for uninsured national banks and Federal branches. The OCC's receiver
liquidates the institution or the branch pursuant to receivership
powers and directives set forth in the NBA. These statutory provisions
date back to the creation of the national banking system in 1863. The
receiver for an uninsured Federal branch exercises the same rights,
privileges, powers, and authority as a receiver for an uninsured
national bank, pursuant to the International Banking Act. This proposal
would provide uninsured national banks and Federal branches with
additional certainty and clarity about the receivership process. It
would also provide the OCC with updated authority to help address
issues faced by modern institutions.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JEROME H.
POWELL
Q.1. Governor Powell, in a speech in April, and echoed in your
written testimony for this hearing, you have suggested changes
that ``allow boards of directors and management to spend a
smaller portion of their time on technical compliance exercises
and more time focusing on the activities that support
sustainable economic growth.'' The issues at Wells Fargo seem
to indicate that bank boards do need to play a more active
oversight role, and compliance is especially important to
ensure that activities aren't happening in the bank that can
cause consumer, employee and reputational harm.
Do you think the lesson from the Wells Fargo episode is
that the Board should have been less involved in Bank
oversight?
A.1. The Federal Reserve Board (Board) strongly agrees with
your assertion that boards need to play an active role in bank
oversight. As supervisors, we need to refocus our expectations
to redirect boards' time and attention toward fulfilling their
core responsibilities, including oversight of bank compliance.
In my April speech, the reference to ``technical
compliance'' exercises was a recognition that over the years,
the Board has issued supervisory guidance that in the aggregate
include hundreds of expectations for boards and senior
management concerning a broad range of topics. Some of these
expectations are outdated or redundant, some are overly
prescriptive or improperly focused, and many fail to
differentiate between the roles of boards and senior
management.
Consequently, many boards feel compelled to devote a
significant amount of time to satisfying these expectations
rather than focusing on their core responsibilities, such as
guiding the development of a firm's strategy and risk appetite,
overseeing senior management and holding them accountable,
supporting the stature and independence of the independent risk
management and internal audit functions, and adopting effective
governance practices.
To that end, the Board recently proposed new guidance for
large financial institutions, such as Wells Fargo, identifying
the key attributes of effective boards of directors, and more
clearly distinguish between the roles and responsibilities of
boards and senior management. In particular, the proposal
emphasizes a board's responsibility to hold senior management
accountable for, among other things, adhering to the firm's
strategy and risk appetite and remediating material or
persistent deficiencies in risk management and control
practices. The Board also proposed to eliminate or revise
supervisory expectations for boards included in certain
existing Board Supervision and Regulation letters to ensure
that guidance is aligned with the Board's current consolidated
supervisory frameworks for both smaller and larger firms.
Q.2. The Treasury Report released on June 12 recommended that
the FDIC be removed from the process to approve banks' living
wills. Governor Powell, do you believe that the FDIC should
remain part of the process?
A.2. I do. The Board and Federal Deposit Insurance Corporation
(FDIC) have developed a strong and productive working
relationship in their oversight of the living will process.
Each agency has made important contributions and brought
relevant experience to the process. The FDIC is the agency that
acts as the receiver, or liquidating agent, for failed
federally insured depository institutions and that perspective
has been highly valuable to the process.
Q.3. A working paper by Federal Reserve Board economists
concluded that ``optimal [tier 1] bank capital levels in the
United States range from just over 13 percent to over 26
percent [relative to risk-weighted assets].'' Current capital
ratios for the largest U.S. GSIBs are between 8 and 11.5
percent. In your oral testimony, you said:
Higher capital requirements increase bank costs, and at least
some of those costs will be passed along to bank customers and
shareholders. But in the longer term, stronger prudential
requirements for large banking firms will produce more
sustainable credit availability and economic growth through the
cycle. Our objective should be to set capital and other
prudential requirements for large banking firms at a level that
protects financial stability and maximizes long-term, through-
the-cycle credit availability, and economic growth. And to
accomplish that goal, it is essential that we protect the core
elements of these reforms for our most systemic firms in
capital, liquidity, stress testing, and resolution.
To get optimal results, it seems that capital requirements
should be increased further. Do you agree?
A.3. No. I do not believe that current capital requirements are
too low. I believe that the combination of bank capital
standards and stress tests has raised overall levels of capital
to appropriately high levels. Capital requirements are one of
the strongest prudential tools available for maintaining a
stable financial system, although there is a tradeoff between
the increased resiliency arising from higher levels of bank
capital and the associated increase in costs, some of which are
passed along to bank customers and shareholders. The paper
referenced in the question attempts to estimate the costs and
benefits associated with various capital levels but many
assumptions are required of the analysis. Changes to the
assumptions could result in either higher or lower levels of
optimal bank capital. The paper is a staff working paper that
does not represent the views of other Federal Reserve staff or
the Board.
Through various post-crisis reforms, including strengthened
regulatory capital rules that improved the quality and quantity
of regulatory capital as well as supervisory stress testing,
regulatory capital at large banks is at its highest level in
decades. Additionally, the largest and most complex U.S. and
foreign banks are required to maintain sufficient amounts of
long-term debt, which can be converted to equity during
resolution, thereby further increasing their loss absorbing
capacity. The 2017 supervisory stress test projections suggest
that, in the aggregate, the U.S. banks subject to the stress
test would experience substantial losses under a hypothetical
stress scenario but could continue lending to businesses and
households. This speaks to the resiliency of the current U.S.
regulatory regime and financial system.
Q.4. As a response to questions from several senators you said
that you support changes to the Volcker rule. That said, the
Treasury Report recommends changes to the Volcker Rule and
changes to capital and liquidity requirements, stress tests,
and other enhanced prudential standards. What would be the
impact on financial stability if changes were made to weaken
both rules to limit proprietary trading in bank holding
companies and enhanced prudential standards, including capital
and liquidity rules, stress tests, and others, applicable to
the largest bank holding companies?
A.4. Material weakening of the post-crisis regulatory framework
would not support a strong and stable banking system or
economy. However, there may be some targeted changes to
streamline regulations and reduce burdens that can be made
without compromising the underlying goals and benefits of the
regulations. For example, the Board is pursuing further
tailoring of regulations, including the Volker Rule and capital
regulations, to reduce burdens for smaller firms while
maintaining the benefits of the regulations for U.S. financial
stability and safety and soundness.
The Volcker Rule seeks to prevent financial institutions
with access to the Federal safety net--FDIC insurance and the
Board discount window--from engaging in proprietary trading and
to limit their ability to invest in hedge funds and private
equity funds. The goal of capital and liquidity regulation is
to ensure the safety and soundness of the banking system and to
protect financial stability for the whole economy. The crisis
revealed that the pre-crisis capital and liquidity regulatory
framework was insufficient. The regulatory changes to this
framework that have been made post-crisis are critical to the
safety and soundness of the financial system as well as broader
financial stability.
Q.5. This week, the House approved the FY 2018 Financial
Services and General Government Appropriations bill. Included
in this bill is the provision from the CHOICE Act to bring all
independent financial regulatory agencies' budgets under the
appropriations process. What would be the impact on the Federal
Reserve System if its budget for nonmonetary policy activities
were appropriated?
A.5. The impact of this change could be quite serious. Congress
wisely led the way in establishing political independence as a
cornerstone of central bank independence.
The Board should be and is accountable to the American
people and their elected representatives. The Board is a
prudent steward of taxpayer resources, and is transparent about
our operations.
The Board's monetary policy, supervisory, and financial
stability functions have always been closely connected and have
become even more tightly connected following the financial
crisis. Robust supervisory and financial stability programs,
with steady and reliable funding, are a crucial support for the
Board's monetary policymaking. During the financial crisis, the
deep knowledge and expertise of banking supervisors was
critical to the Board's efforts to
assess and address the challenges facing the financial system.
Our examiners at the major banking firms, coupled with
extensive data collection, provide critical insights relevant
to the judgments of
policymakers on many questions that are extremely important in
the conduct of monetary policy, such as the assessment of
overall conditions in credit markets, evidence of imbalances in
particular sectors or markets, signs of emerging liquidity
pressures or indications of a withdrawal from risk-taking.
Accurate and early readings on such issues are very useful to
the Board in determining the appropriate stance of monetary
policy.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED FROM JEROME H.
POWELL
Q.1. Some have called for the FDIC to be removed from the
living will process. Do you believe the FDIC should be removed
from this process?
A.1. The Federal Reserve Board (Board) does not support
removing the Federal Deposit Insurance Corporation (FDIC) from
the living will process. The Board and FDIC have developed a
strong and productive working relationship in their oversight
of the living will process. Each agency has made important
contributions and brought relevant experience to the process.
The FDIC is the agency that acts as the receiver, or
liquidating agent, for failed federally insured depository
institutions and that perspective has been highly valuable to
the process.
Q.2. Many of us have come to recognize that the Orderly
Liquidation Authority is an incredibly important part of the
Wall Street Reform and Consumer Protection Act. Could you
please explain in plain terms why OLA is so important?
A.2. A key lesson we learned from the financial crisis was that
we needed a better way to deal with a large financial firm that
fails. In the crisis, Government authorities were faced with
the choice between a Government bailout of a failing large
financial firm (for example, AIG), or a chaotic and disorderly
collapse of the firm (for example, Lehman Brothers). The
Orderly Liquidation Authority (OLA) in Title II of the Dodd-
Frank Wall Street Reform and Consumer Protection Act provides
the Government with a workable framework for the orderly
resolution of a large financial firm that fails--thus reducing
the need for Government bailouts in any future financial
crisis.
OLA has a number of key strengths as a resolution regime.
First, it allows the FDIC, as resolution authority, to move
quickly to reorganize the failed firm and prevent a disorderly
unraveling of the financial contracts of the failed firm.
Second, it enables tire FDIC to coordinate effectively with
tire foreign regulators of the cross-border operations of the
failed firm. Third, it allows tire FDIC to provide temporary
funding to stabilize the failed firm's operations if necessary.
Critically, it does not allow for Government capital injections
and requires that taxpayers suffer no losses from the
resolution.
The primary beneficiary of an OLA resolution would be the
U.S. financial system and, by extension, taxpayers. In an OLA
resolution, the shareholders of the failed firm would bear full
losses. Long-term creditors of the failed firm would bear any
additional losses. But there would be mechanisms to minimize
excessive shocks to the financial system and the economy that
could negatively impact Main Street. Market discipline would be
maintained and taxpayers protected.
Bankruptcy should be the preferred route for a failing
firm. We have made great strides through the living will
process to make our largest banking firms easier to resolve
under the traditional bankruptcy code. However, given the
uncertainties around how financial crises unfold, it is prudent
to keep OLA as a backstop resolution framework.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR TESTER FROM JEROME H.
POWELL
Q.1. Chair Gruenberg and Governor Powell, you've both talked
about the Volcker Rule and the complexity that comes along with
this rule. And in the past, Comptroller Curry had suggested
that we could exempt community banks entirely. After having
conversations with many of my community banks I agree with Mr.
Curry and believe they should be entirely exempt from Volcker
Rule compliance. Following these lines, I have introduced a
bill with Senator Moran that would exempt community banks with
less than $10 billion from compliance.
Q.1.a. Is this a bill that both the FDIC and the Federal
Reserve would support at this juncture?
Q.1.b. Does eliminating the Volcker Rule for banks with less
than $10 billion pose any real risk to our financial system?
Q.1.c. Absent Congress passing legislation related to the
Volcker Rule, does the FDIC or the Federal Reserve have any
plans to make any changes on their own to the Volcker Rule?
A.1.a.-c. The Volcker Rule is an area where relief for smaller
institutions would be helpful. The risks identified by the
Volcker Rule exist almost exclusively in larger financial
institutions. Community banks rarely engage in any of the
activities prohibited by the Volcker Rule.\1\ Accordingly, the
Federal Reserve Board (Board) supports exempting community
banks with total consolidated assets of less than $10 billion
from the statutory provisions. Moreover, in the event where the
trading or investment funds activity of a community bank might
raise concerns that could be addressed through our normal
examination process.
---------------------------------------------------------------------------
\1\ See The Volcker Rule: Community Bank Applicability (Dec. 10,
2013), available at: http://www.federalreserve.gov/newsevents/press/
bcreg/bcreg20131210a4.pdf.
---------------------------------------------------------------------------
As part of the rules implementing the Volcker Rule, the
agencies charged with implementing that statutory provision
endeavored to minimize compliance burdens for banking entities
by reducing the compliance program and reporting requirements
applicable to banking entities with $10 billion or less in
total consolidated assets. This was based in part on
information that indicated that banking entities of this size
generally have little or no involvement in prohibited
proprietary trading or investment activities in covered funds.
Exempting banking entities of this size from the Volcker Rule
would provide relief for thousands of community banks that
incur ongoing compliance costs simply to confirm that their
activities and investments are indeed exempt from the
statute. At the same time, an exemption at this level of assets
would not be likely to increase risks to U.S. financial
stability. The vast majority of activity and investment that
the Volcker Rule addresses takes place at the largest and most
complex financial firms, whose failure could have a significant
effect on the stability of the financial system. Moreover, even
with an exemption, the Federal banking agencies could continue
to use existing prudential authority to address unsafe and
unsound practices at a community bank that engaged in imprudent
trading or investment activities.
The Board is working with the Federal Deposit Insurance
Corporation, Office of the Comptroller of the Currency,
Commodity Futures Trading Commission, and the Securities and
Exchange Commission to identify areas of the implementing
regulations that could be simplified. The core premise of the
Volcker Rule is relatively straightforward: that financial
institutions with access to the Federal safety net--Federal
Deposit Insurance Corporation insurance and the Board's
discount window--should not engage in proprietary trading. The
Volcker Rule's statutory provisions, however, are complex,
which has led to a complex rule. There are some ways to
streamline and simplify the Volcker Rule while adhering to the
underlying goals. For example, the Volcker Rule could be
focused on larger banks that engage in more material trading
activities. Supervisors have taken some steps to mitigate
compliance burdens for smaller firms, but a change to the law
to exempt smaller firms would be a cleaner and more
comprehensive way to reduce burdens for smaller firms. Even
without a statutory change, there may be ways to streamline and
simplify the interagency Volcker Rule regulation to reduce
burdens without sacrificing key objectives, and the Board is
exploring possibilities.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCOTT FROM JEROME H.
POWELL
Each of you serve at agencies that are members of the
Financial Stability Oversight Council (FSOC). Insurance has
been regulated at the State level for over 150 years--it's a
system that works. But FSOC designations of nonbank
systemically important financial institutions (SIFIs) have made
all of you insurance regulators, despite the fact that you are
bank regulators at your core.
Strong market incentives exist for insurers to hold
sufficient capital to make distress unlikely and to achieve
high ratings from
financial rating agencies, including incentives provided by
risk sensitive demand of contract holders and the potential
loss of firms'
intangible assets that financial distress would entail.
Additionally, insurance companies are required by law to hold
high levels of capital in order to meet their obligations to
policyholders. Bottom line: Insurance companies aren't banks,
and shouldn't be treated as such.
In March, my colleagues and I on the Senate Banking
Committee sent a letter to Treasury Secretary Mnuchin
indicating our concerns regarding the FSOC's designation
process for nonbanks. I support efforts to eliminate the
designation process completely.
I was pleased that President Trump issued a ``Presidential
Memorandum for the Secretary of the Treasury on the Financial
Stability Oversight Council'' (FSOC Memorandum) on April 21,
2017, which directs the Treasury Department to conduct a
thorough review of the designation process and states there
will be no new nonbank SIFI designations by the FSOC until the
report is issued. Relevant decisionmakers should have the
benefit of the findings and recommendations of the Treasury
report as they carry out their responsibilities with respect to
FSOC matters.
Please answer the following with specificity:
Q.1. What insurance expertise do you and your respective
regulator possess when it comes to your role overseeing the
business of insurance at FSOC?
A.1. The Federal Reserve System contains a significant amount
of insurance expertise and resources with prior experience in
the insurance industry. Staff who participate in the
development of policy concerning and supervision of insurance
companies subject to Federal Reserve Board (Board) supervision
include former State insurance regulators, practitioners from
insurance advisory services, catastrophe modeling specialists,
and analysts from credit rating agencies that cover insurance
companies, as well as life and property/casualty actuaries and
accountants versed in U.S. Statutory Accounting Principles.
In its consolidated supervision of insurance firms, the
Board remains committed to tailoring its supervisory approach
to the business of insurance. The Board's supervisory program,
complementary to and in coordination with the States in their
protection of policyholders, continues to be tailored to
consider the unique characteristics of the firms and their
insurance operations.
Board principals at the Financial Stability Oversight
Council (FSOC) are briefed by these experts, or senior staff
that oversee them, in advance of FSOC discussions on insurance
matters.
Q.2. Do you support the Senate Banking Committee's recent
legislative effort, the Financial Stability Oversight Council
Insurance Member Continuity Act, to ensure that there is
insurance expertise on the Council in the event that the term
of the current FSOC independent insurance member expires
without a replacement having been confirmed?
A.2. The independent member with insurance expertise has
provided important contributions to the work of the Council.
However, membership in the Council is a matter for Congress to
decide.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR COTTON FROM JEROME H.
POWELL
Q.1. President Trump issued an Executive order in February
establishing Core Principles for Regulating the United States
Financial System. One of the principles is to prevent taxpayer-
funded bailouts. Presumably that includes considering what
could cause a disruption to the financial system. One potential
cause is a requirement that banks publicly publish granular
details of a complex liquidity regulatory metric called the
Liquidity Coverage Ratio (LCR). Regulators already receive
information daily to monitor a firm's liquidity position, but
now the Fed is requiring banks to
publicly disclose these complex and technical liquidity
details. If misunderstood, the disclosure could destabilize
markets.
How is this requirement in keeping with the President's
core principles? And how will the Fed manage through the next
financial crisis and get banks to meet the funding needs of
households and small business when meeting such needs will hurt
banks' LCR?
A.1. The purpose of the Liquidity Coverage Ratio (LCR) public
disclosure requirements is to provide market participants broad
information about the liquidity risk profile of large banking
organizations to support market discipline and encourage
covered companies to take adequate steps to appropriately
manage their liquidity positions. In addition, during times of
stress, public disclosures can enhance stability by providing
relevant information about firms. Without information about the
liquidity strength of their counterparties, market participants
may assume the worst about their counterparties and draw back
from the market, exacerbating the problem. Thus, the LCR public
disclosure requirements are consistent with enhancing financial
stability and the principle of preventing taxpayer-funded
bailouts.
To serve this purpose, the information disclosed must be
sufficiently informative and timely. In order to mitigate
potential financial stability and firm-specific risks related
to the disclosure of real-time liquidity information, the LCR
public disclosure rule requires covered companies to disclose
average values of broad categories of liquidity sources and
uses over a quarter, with a 45-day lag after the end of the
quarter. In addition, as part of its LCR disclosures, a covered
company is required to disclose a qualitative discussion of its
LCR results to facilitate the public's understanding of its
liquidity risk profile and ensure that the LCR disclosures are
not misunderstood by the public. The Federal Reserve Board
(Board) will carefully monitor the implementation of these
requirements going forward. If warranted, I would be willing to
revisit aspects of the LCR disclosures that result in
significant undesirable or unintended consequences.
The LCR rule is designed to ensure that large banking
organizations can withstand idiosyncratic or market liquidity
stress without pulling back from meeting the funding needs of
households and small business or resorting to fire sales of
illiquid assets. The LCR rule requires covered companies to
hold a minimum amount of high quality liquid assets to meet
outflows over a 30-day stress scenario. It encourages banking
organizations to fund extensions of credit with longer term
debt or relatively stable deposits rather than short-term
wholesale funding. In addition, the calibration of the LCR rule
treats transactions with retail clients and wholesale
counterparties favorably relative to transactions with
financial sector entities. Importantly, the LCR rule is
designed to allow banking organizations to use high quality
liquid assets when needed to meet liquidity stresses and does
not require a company to reduce lending if it depletes its
liquid assets.
A company must notify its supervisor when it has an LCR
shortfall, and the supervisor will monitor and respond
appropriately to the unique circumstances that are giving rise
to the company's shortfall.
Q.2. How do the required data points for Liquidity Coverage
Ratio (LCR) disclosure compare in both quantity and granularity
to other mandatory public disclosures?
A.2. Consistent with the Board's longstanding commitment to
public disclosure, firms are required to provide the public
with various disclosures and reports that provide insight on
their financial condition and risk management. The requirements
of each report or disclosure are tailored to its purpose.
The LCR public disclosures have quantitative and
qualitative risk management components. The quantitative LCR
public disclosures are quarterly average amounts of broad
categories of sources and uses of liquidity under the LCR rule.
The LCR disclosures are contained in one summary level table
that includes three categories for a firm's high quality liquid
asset holdings, 11 categories of outflows, and 7 categories of
inflows, and the covered company's LCR ratio.
The LCR disclosures are less granular than disclosures of
borrowing from the Board's discount window, which includes
transaction-specific information about a bank's business
decision to
borrow at the window including the amounts borrowed and the
collateral provided to secure each loan.
The LCR public disclosures are both less numerous and less
granular than the qualitative and quantitative disclosures that
bank holding companies with total assets greater than $50
billion are required to make about their capital adequacy and
risk profile.\1\ These disclosures address the composition of
capital, measures of capital adequacy, and specific information
about a range of granular exposure types, such as general
credit risk, securitization, equity risk, and interest rate
risk. They are described in 10 tables in the regulatory capital
rule and typically require quarter-end values rather than
quarterly averages. In addition, bank holding companies that
must calculate risk-weighted assets for market risk must
disclose a range of risk measures for each material portfolio
of covered positions on a quarterly basis, as well as more
granular information about specific risks and qualitative risk
management information.\2\
---------------------------------------------------------------------------
\1\ See 12 CFR 213.61. Certain large and internationally active
bank holding companies must make the public disclosures described in 13
tables in 12 CFR 217.173.
\2\ See 12 CFR217.212.
---------------------------------------------------------------------------
The LCR public disclosures are also less numerous and less
granular than the Board's FR Y-9C Consolidated Financial
Statement for Holding Companies, which collects basic financial
data and requires firms to provide a balance sheet, an income
statement, and detailed supporting schedules.\3\ Typically this
data is as of quarter-end.
---------------------------------------------------------------------------
\3\ See https://www.federalreserve.gov/apps/reportforms/
reportdetail.aspx?sOoYJ+5BzDal8cbq
nRxZRg==.
Q.3. The Basel III capital requirements increase the risk-
weighting of Mortgage Service Rights (MSR) held by banks from
100 percent to 250 percent. Mortgage servicing is a stable and
important revenue stream, especially for smaller banks, and
allows banks to
preserve a vital customer interface after they have sold the
originated mortgage on the secondary market.
Basel III increases the risk-weighting for MSRs by a factor
of 2.5 can you please justify this significant increase in
capital required of banks to hold mortgage servicing assets,
and detail the methodology used to quantify the risk associated
with MSRs?
A.3. The Board recognizes community banks' concerns with
respect to the burden and complexity of certain aspects of the
U.S. regulatory capital framework, including the current
treatment of mortgage servicing assets (MSAs). As described in
the report on the review of the Economic Growth and Regulatory
Paperwork Reduction Act, the Federal banking agencies are
jointly developing a proposal to simplify certain aspects of
the regulatory capital framework, including the treatment of
MSAs, while maintaining safety and soundness of the banking
system.
The Board and the other Federal banking agencies have long
limited the inclusion of MSAs in regulatory capital due to the
high level of uncertainty regarding the ability of banking
organizations to realize value from these assets, especially
under adverse financial conditions. These limitations help
protect banks from sudden fluctuations in the value of MSAs and
from the inability to quickly divest these assets at their full
estimated value during periods of financial stress. In
developing the current regulatory capital rule, the Federal
banking agencies took into consideration statutory limitations
related to MSAs, invited public comment on the proposed
regulatory capital treatment of MSAs, and addressed industry
comments in the final rule. In addition, the Federal banking
agencies considered whether the capital rule appropriately
reflects the risk inherent in banking organizations' business
models. Prior to issuing the capital rule, the Federal baking
agencies conducted a pro-forma economic impact analysis that
showed that the vast majority of small banking organizations
would meet the rule's minimum capital requirements on a fully
phased in basis, including the treatment of MSAs.
A study by the Federal banking agencies, together with the
National Credit Union Administration, similarly concluded that
MSA valuations are inherently subjective and subject to
uncertainty because they rely on assessments of future economic
variables (see the July 2016 Report to the Congress on the
Effect of Capital Rules on Mortgage Servicing Assets). The
results of the study support a conservative treatment of MSAs
for purposes of regulatory capital.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR WARNER FROM JEROME H.
POWELL
Q.1. Gov. Powell, there seems to be developing consensus that
there are improvements that can be made to the Volcker Rule's
implementing rule such that the policy goals of prohibiting
proprietary trading are preserved, while potential unintended
consequences, such as illiquidity in the fixed income markets,
are avoided or minimized. Can you please describe a) whether
the Federal Reserve shares this view; and b) how the Federal
Reserve may, along with the other four agencies responsible for
implementing the Volcker Rule, be approaching this issue to
protect taxpayers while minimizing adverse consequences for the
markets?
A.1. The core premise of the Volcker Rule is relatively
straightforward: that financial institutions with access to the
Federal safety net--Federal Deposit Insurance Corporation
insurance and the Federal Reserve Board (Board) discount
window--should not engage in proprietary trading. The Volcker
Rule's statutory provisions, however, are complex, which has
led to a complex rule. While many changes to the Volcker Rule
would require amendment to the statute, there may be ways to
streamline and simplify the interagency Volcker Rule regulation
to reduce burdens without sacrificing key objectives. The Board
is exploring possibilities and is working with the other
agencies.
Q.2. Cybersecurity regulation is receiving increased emphasis
by all financial institution regulators. How do your agencies
coordinate with each other to harmonize the promulgation of new
cybersecurity regulations? With the increased use of the NIST
Cybersecurity Framework by both Federal agencies and the
private sector, how do your agencies intend to achieve greater
alignment between the framework and your own regulatory
initiatives?
A.2. The Federal Reserve is an active participant in the
Financial and Banking Information Infrastructure Committee
(FBIIC),\1\ which coordinates efforts to improve the
reliability and security of the financial sector
infrastructure. Federal Reserve staff chair a harmonization
subcommittee of the FBIIC focused on achieving greater
harmonization of cyber requirements and examination approaches
across FBIIC member entities. We intend to achieve greater
alignment with National Institute of Standards and Technology
(NIST) by using the subcommittee to map the cybersecurity
requirements of the FBIIC member agencies to NIST and analyzing
any gaps and differences. The Board also coordinates our
examination of cybersecurity risks with the other Federal
banking agencies through the Federal Financial Institutions
Examination Council (FFIEC).\2\ The FFIEC agencies are actively
sharing the lessons learned from our individual examinations to
promote greater consistency in supervisory practices and to
reduce unnecessary regulatory burden on supervised
institutions.
---------------------------------------------------------------------------
\1\ The FBIIC consists of representatives from the Department of
the Treasury, American Council of State Savings Supervisors, Commodity
Futures Trading Commission, Conference of State Bank Supervisors,
Consumer Financial Protection Bureau, Farm Credit Administration,
Federal Deposit Insurance Corporation, Federal Housing Finance Agency,
Federal Reserve Bank of Chicago, Federal Reserve Bank of New York,
Federal Reserve Board, National Association of Insurance Commissioners,
National Association of State Credit Union Supervisors, National Credit
Union Administration, North American Securities Administrators
Association, Office of the Comptroller of the Currency, Securities and
Exchange Commission, and Securities Investor Protection Corporation.
\2\ The FFIEC is an interagency body empowered to prescribe uniform
principles, standards, and report forms for the Federal examination of
financial institutions by the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, the National Credit
Union Administration, the Office of the Comptroller of the Currency,
and the Consumer Financial Protection Bureau, and to make
recommendations to promote uniformity in the supervision of financial
institutions. In 2006, the State Liaison Committee (SLC) was added to
the Council as a voting member. The SLC includes representatives from
the Conference of State Bank Supervisors, the American Council of State
Savings Supervisors, and the National Association of State Credit Union
Supervisors.
---------------------------------------------------------------------------
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR WARREN FROM JEROME H.
POWELL
Q.1. At the hearing, you stated that you did not support
changing ``risk-based capital'' standards for the country's
biggest financial institutions. Do you support changing any
capital, leverage, or liquidity standards for banks with more
than $500 billion in assets? If so, please describe which
standards you support modifying and why.
A.1. The safety and soundness of large banks is crucial to the
stability of the U.S. financial system. To clarify, I do not
support reducing risk-based capital requirements for firms with
total consolidated assets of more than $500 billion. The
Federal Reserve Board (Board) does review and update its
regulations on an ongoing basis to ensure that they are
achieving their intended objectives, to address developments in
the banking industry, and to limit regulatory burden. In
addition, the Board is considering revising certain
requirements for firms subject to its Comprehensive Capital
Analysis and Review, which would include firms with more than
$500 billion in total assets. Specifically, the Board is
contemplating ways to better integrate the Board's regulatory
capital rule and the capital requirements related to the annual
supervisory stress test in a manner that simplifies the Board's
overall approach to capital regulation. With respect to other
requirements applicable to these firms, the Board also intends
to review the current calibration of its enhanced supplementary
leverage ratio standards in order to mitigate possible adverse
incentives or market distortions that it may create.
Q.2. The common argument in favor of reducing capital standards
for large financial institutions is that it will increase
lending and economic growth. I am aware of research showing
that well-capitalized institutions actually provide more loans
than less-well capitalized competitors. Can you provide any
empirical research that demonstrates that the opposite is true?
A.2. As stated in my testimony, stronger capital requirements
increase bank costs, and at least some of those costs are
passed along to customers. But in the longer term, stronger
prudential requirements for large banking firms will produce
more sustainable credit availability and economic growth. Our
objective should be to set capital and other prudential
requirements for large banking firms at a level that protects
financial stability and maximizes long-term, through the cycle
credit availability and economic growth.
Existing economic research provides mixed results regarding
the link between bank capital requirements and economic growth.
There are studies on both sides of the issue, some suggesting
that higher capital levels increase economic growth and others
suggesting the opposite. Recent studies focusing on the costs
and benefits of bank capital suggest that heightened capital
requirements are good for economic growth up to some point, but
would have a negative impact on social welfare beyond that
point.
While there are several studies which suggest that raising
capital standards reduces bank lending, these studies typically
do not address the broader impact of capital standards on
economic growth. For example, Furfine \1\ analyzes data on
large U.S. commercial banks between 1989 and 1997 and concludes
that a 1-percentage point increase in capital standards reduces
loan growth by 5.5 percent. Berrospide and Edge \2\ find a more
modest impact. Using U.S. bank holding company data from 1992
to 2009, the authors conclude that a 1-percentage point
increase in capital requirements reduces loan growth by roughly
1.2 percentage points. Other studies tell a similar story using
non-U.S. data. For instance, Francis and Osborne \3\ find,
using U.K. data, that a 1-percentage point increase in capital
requirements reduces bank lending by approximately 1.2 percent.
Finally, Martynova's \4\ survey of the literature--mostly of
studies using non-U.S. data--shows that an increase in capital
requirements by 1 percentage point reduces loan growth by 1.2
to 4.6 percentage points.
---------------------------------------------------------------------------
\1\ Furfine, Craig (2000). ``Evidence on the Response of U.S. Banks
to Changes in Capital Requirements.'' BIS Working Papers No. 88.
\2\ Berrospide, Jose M. and Rochelle M. Edge (2010). ``The Effects
of Bank Capital on Lending: What Do We Know, and What Does It Mean?''
Federal Reserve Board Finance and Economics Discussion Series 2010-44.
\3\ Francis, William B. and Matthew Osborne (2012). ``Capital
Requirements and Bank Behavior in the United Kingdom: Are There Lessons
for International Capital Standards?'' Journal of Banking and Finance,
36, 803-816.
\4\ Martynova, Natalya (2015). ``Effect of Bank Capital
Requirements on Economic Growth: A Survey.'' DNB Working Paper No. 467.
---------------------------------------------------------------------------
There is a growing body of research regarding the costs and
benefits of bank capital that addresses the impact of capital
standards on economic growth. A number of studies, including
the Basel Committee on Banking Supervision,\5\ the Bank of
England,\6\ the Federal Reserve Bank of Minneapolis,\7\ and
Firestone et al.\8\ suggest that higher bank capital
requirements (up to a point) are good for long-term credit
availability and economic growth, and only at levels of capital
beyond that point is social welfare decreased. While the
optimal level of capital varies between studies, the basic
framework is the same.
---------------------------------------------------------------------------
\5\ Basel Committee on Banking Supervision (2010). ``An Assessment
of the Long-Term Economic Impact of Stronger Capital and Liquidity
Requirements.''
\6\ Brooke, Martin et al. (2015). ``Measuring the Macroeconomic
Costs and Benefits of Higher U.K. Bank Capital Requirements.'' Bank of
England Financial Stability Paper No. 35.
\7\ Federal Reserve Bank of Minneapolis (2016). ``The Minneapolis
Plan to End Too Big To Fail.''
\8\ Firestone, Simon, Amy Lorenc, and Ben Ranish (2017). ``An
Empirical Economic Assessment of the Costs and Benefits of Bank Capital
in the United States.'' Federal Reserve Board Finance and Economics
Discussion Series 2017-034.
---------------------------------------------------------------------------
A variety of assumptions are required of all studies in the
literature, and changes to the assumptions could result in
either higher or lower levels of optimal bank capital. The
current calibration of our risk-based capital requirements for
U.S. banks is roughly in line with the optimal level of capital
found under a wide range of these studies.
Q.3. You have said that you support providing banks with more
``transparency'' into the stress test process. The goal of the
stress test is to gauge how banks would fare in times of severe
economic distress. Historically, the source of that economic
distress is unforeseen, as we witnessed during the 2008 crisis.
Indeed, the very reason there is economic distress is that
banks and regulators have failed to anticipate the source or
severity of that distress. In light of that, please explain how
it is consistent with the goal of the stress tests to provide
banks with more advance knowledge of what kinds of stresses
they can expect to face?
A.3. Capital stress tests, which play a critical role in
bolstering confidence in the capital position of the U.S. firms
in the wake of the financial crisis, have become one of the
most important features of our supervisory program in the post-
crisis era. Stress tests better ensure that large firms have
sufficient capital to continue lending through periods of
economic stress and market turbulences, and that they are
sufficiently capitalized for their risk profile.
The Board's annual Comprehensive Capital Analysis and
Review, or CCAR, is the binding capital constraint for many of
the largest firms, and their concerns about transparency are
warranted. The Board has made a wide variety of information
available about our stress testing process, and is committed to
finding ways to safely enhance the transparency of that
process. However, because of the concerns you raise in your
question and other issues discussed below, we have not
disclosed the full details of our stress testing models, nor
have we provided firms with our stress scenarios in advance of
the stress testing cycle.
One implication of releasing all details of the models is
that firms could use them to guide modifications to their
businesses that change the results of the stress test without
changing the risks faced by the firms; that is, full disclosure
could encourage firms to ``manage to the test.'' In the
presence of such behavior, the stress test could give a
misleading picture of the actual vulnerabilities faced by
firms. Further, such behavior could increase correlations in
asset holdings among the largest banks, making the financial
system more vulnerable to adverse financial shocks. Another
implication is that full model disclosure could incent banks to
simply use models similar to the Board's, rather than build
their own capacity to identify, measure, and manage risk. That
convergence to the Board's model would create a ``model
monoculture,'' in which all firms have similar internal stress
testing models which may miss key idiosyncratic risks faced by
the firms.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM JEROME H.
POWELL
Q.1. I'm a proponent of tailoring regulations based off of the
risk profiles of financial institutions, as opposed to having
strict asset thresholds that do not represent what I believe is
the smart way to regulate. But, my question here is really
about the importance of ensuring that we have a system that is
rooted in fundamental, analytical, thoughtful regulation so
that we can achieve and execute on goals, whether balancing
safety and soundness with lending and growth, or encouraging
more private capital in the mortgage market to protect
taxpayers and reform the GSEs.
Q.1.a. Do you think that we should use asset thresholds as a
way to regulate--yes or no? If no, can you provide me with the
metrics or factors by which a depository institution should be
evaluated? If yes, please explain.
Q.1.b. Section 165 of Dodd-Frank requires enhanced supervision
and prudential standards for banks with assets over $50
billion. This applies to any bank that crosses the asset
threshold, without regard to the risks those banks pose based
upon the complexity of the business model. This includes
heightened standards on liquidity and capital under the
Liquidity Coverage Ratio (LCR) and the Comprehensive Capital
Analysis and Review (CCAR) which have a various assumptions
built in that may drive business model.
i. LI understand under these two regulatory regimes, banks
have changed certain lending behaviors because of the
assumptions Federal regulators have made regarding
certain classes of assets and deposits. Can you provide
some examples of how the LCR and CCAR have changed the
types of loans, lending, and deposits your institution
holds?
ii. LConstruction lending by banks over the $50 billion
threshold has been a source of concern, namely because
these enhanced prudential standards have treated
construction loans punitively. This includes
construction lending for builders of apartments,
warehouses, strip malls, and other projects that may
have varying risk profiles associated with them.
However, under the CCAR and DFAST assumptions, the
regulators have assigned all these categories of
lending the same capital requirements. The result is an
overly broad capital requirement for varying loans that
have different risks, a capital requirement that may be
greater for some loans and lower for others,
influencing the decision of many banks over the $50
billion threshold to hold less of these assets due to
the punitive capital requirements associated with them.
Have you seen a similar corresponding issue with
construction loans because of the heightened prudential
standards?
iii. LUnder the CCAR regulations, Federal regulators
routinely assign risk weights to certain assets that
Bank Holding Companies have on their balance sheets.
These risk weights often time changes the costs
associated with holding certain investments, such as
Commercial Real Estate. Has this changed the type of
assets that institutions hold, or caused institutions
to alter their business plans because of the regulatory
capital costs? If so, can you provide examples of this?
iv. LDo you think that regulators, on a general basis, get
the risks weights right?
v. LFed Governor Tarullo, has argued that the $50 BB
threshold is too low in terms of an asset threshold for
enhanced prudential standards; does this number make
sense? Why do we need such arbitrary thresholds?
Shouldn't we get away from these thresholds and move
toward a regulatory system that evaluates substance and
activities of an institution as opposed to an arbitrary
number? Why can't we do that?
LDoes Title I allow the Fed to treat a $51 BB
bank in a similar manner to a $49 BB bank for the
purposes of enhanced prudential standards?
A.1. In all of our efforts, our goal is to establish a
regulatory framework that helps ensure the resiliency of our
financial system, the availability of credit, economic growth,
and financial market efficiency. The Federal Reserve has been
working for many years to make sure that our regulation and
supervision is tailored to the size and risk posed by
individual institutions.
The failure or distress of a large bank can harm the U.S.
economy. The recent financial crisis demonstrated that
excessive risk-taking at large banks makes the U.S. economy
vulnerable. The crisis led to a deep recession and the loss of
nearly nine million jobs. Our regulatory framework must reduce
the risk that bank failures or distress will have such a
harmful impact on economic growth in the future.
The Federal Reserve Board (Board) has already implemented,
via a regulation that was proposed and adopted following a
period of public notice and comment, a methodology to identify
global systemically important banking organizations (GSIBs),
whose failure could pose a significant risk to the financial
stability of the United States.\1\ The ``systemic footprint''
measure, which determines whether a large firm is identified as
a GSIB, includes attributes that serve as proxies for the
firm's systemic importance across a number of categories: size,
interconnectedness, complexity, cross-jurisdictional activity,
substitutability, and reliance on short-term wholesale funding.
---------------------------------------------------------------------------
\1\ Board of Governors of the Federal Reserve System (2015),
``Regulatory Capital Rules: Implementation of Risk-Based Capital
Surcharges for Global Systemically Important Bank Holding Companies,''
final rule, Federal Register, vol 80 (August 14), pp. 49082-49116.
---------------------------------------------------------------------------
There are many large financial firms whose failure would
pose a less significant risk to U.S. financial stability, but
whose distress could nonetheless cause notable harm to the U.S.
economy (i.e., large regional banks). The failure or distress
of a large regional bank could harm the U.S. economy in several
ways: by disrupting the flow of credit to households and
businesses, by disrupting the functioning of financial markets,
or by interrupting the provision of critical financial
services, including payments, clearing, and settlement.
Economic research has documented that a disruption in the flow
of credit through banks or a disruption to financial market
functioning can affect economic growth.\2\ Some level of
tailored enhanced regulation is therefore appropriate for these
large regional banks.
---------------------------------------------------------------------------
\2\ For evidence on the link between bank distress and economic
growth, see Mark A. Carlson, Thomas King, and Kurt Lewis (2011)
``Distress in the Financial Sector and Economic Activity,'' The B.E.
Journal of Economic Analysis & Policy: Vol. 11: Iss. 1 (Contributions),
Article 35. For evidence on the link between financial market
functioning and economic growth, see Simon Gilchrist and Egon Zakrajsek
(2012), ``Credit Spreads and Business Cycle Fluctuations,'' American
Economic Review, Vol. 102 ( 4): 1692-1720.
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The application of tailored enhanced regulation should
consider the size, complexity, and business models of large
regional banks. The impact on economic growth of a large
regional bank's failure will depend on factors such as the size
and geographic distribution of the bank's customer base and the
types and number of borrowers that depend on the bank for
credit. Asset size is a simple way to proxy for these impacts,
although other measures may also be appropriate. For large
regional banks with more complex business models, more
sophisticated supervisory and regulatory tools may be
appropriate. For example, the Board recently tailored our
Comprehensive Capital Analysis and Review (CCAR) qualitative
assessment to exclude some smaller and less complex large
regional banks, using asset size and nonbank assets to measure
size and complexity, respectively.\3\ In other contexts,
foreign activity or short-term wholesale funding may be another
dimension of complexity to consider. Any characteristics or
measures that are used to tailor enhanced regulation for large
regional banks should be supported with clear analysis that
links them with the potential for the bank's failure or
distress to cause notable harm to the U.S. economy.
---------------------------------------------------------------------------
\3\ Board of Governors of the Federal Reserve System (2017),
``Amendments to the Capital Plan and Stress Test Rules; Regulations Y
and YY,'' final rule, Federal Register, vol 82 (February 3), pp. 9308-
9330.
---------------------------------------------------------------------------
The Board currently has only limited authority to tailor
the enhanced prudential standards included in section 165 of
the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act). In particular, Congress required that certain
enhanced prudential standards must apply to firms with $10
billion in total assets, with other standards beginning to
apply at $50 billion in total assets.
I understand that Congress is currently considering whether
and how to raise these statutory thresholds. The Board has
supported increasing these thresholds. As an alternative to
simply raising the thresholds, your question asks whether
Congress should move away from an asset-size threshold. As my
answer above noted, I believe that it would be logical to use a
wider range of factors than asset size to determine the
application of tailored enhanced regulation for large regional
banks. The Board stands ready to work with Members of Congress
to pursue either approach: raising the dollar thresholds, or
providing for the Federal Reserve to decide which firms are
subject to enhanced prudential standards.
Several parts of your question concern the impact of
enhanced prudential standards, including the liquidity coverage
ratio (LCR) and CCAR, on commercial real estate lending at
banks with assets greater than $50 billion. A recent study that
evaluates pre-and post-crisis lending by large bank holding
companies above and below the $50 billion asset threshold found
no noticeable difference in commercial real estate loan growth
since the implementation of enhanced prudential standards.\4\
Commercial real estate lending has consistently grown faster at
the smaller banks all the way back to 2001, perhaps reflecting
a structural competitive advantage held by smaller banks. In
addition, the study notes that banks' lending standards for
commercial real estate loans, as measured by the Federal
Reserve's Senior Loan Officer Opinion Survey, are similar for
banks above and below the $50 billion threshold.\5\
---------------------------------------------------------------------------
\4\ See Figure 6 from Cindy M. Vojtech (2017), ``Post-Crisis
Lending by Large Bank Holding Companies,'' FEDS Notes, Washington:
Board of Governors of the Federal Reserve System, July 6, 2017. https:/
/www.federalreserve.gov/econres/notes/feds-notes/post-crisis-lending-
by-large-bank-holding-companies-20170706.htm.
\5\ See Figure 7 from Vojtech (2017).
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More broadly, post-crisis reforms to the supervision and
regulation of the large banks were informed by the substantial
body of research that has reached a consensus indicating that
well-capitalized banks with strong liquidity positions are best
able to support sustainable lending to creditworthy borrowers
through the full business cycle. Indeed, overall bank lending
has remained robust since post-crisis reforms began to be
phased in--bank lending grew significantly faster than nominal
GDP between 2013 and 2016.\6\ As such, the strong capital and
liquidity positions of U.S. banks could be said to have
contributed to a stronger recovery from the financial crisis in
the United States compared with other countries.
---------------------------------------------------------------------------
\6\ See, Vojtech (2017).
---------------------------------------------------------------------------
That said, it is difficult to isolate the effect that
specific regulations have had on banks' business decisions from
other factors that affect those decisions. For instance, an
important determinant of bank lending is the amount of demand
for loans, and banks undoubtedly would have altered their
lending standards to reflect a better understanding of the
riskiness of certain business lines that were incorrectly
perceived to be lower-risk prior to the financial crisis. To be
sure, changes in regulation and supervision were designed to
incentivize the banking industry to become safer and less prone
to the type of systemic risks that built up during the mid-
2000s, and we believe that those intended effects are
occurring. A relatively new and growing literature on bank
responses to specific post-crisis regulations, like CCAR, is
not yet comprehensive enough to fully understand how banks have
adapted to the new regulatory environment, but it does provide
some early evidence that banks are taking regulations into
account when making business decisions.\7\ We remain vigilant,
however, in research and monitoring efforts to understand and
address any unintended effects of regulatory changes, and
welcome discussions with the public and the industry about ways
to address those challenges without undermining the increased
safety and resiliency of the financial system.
---------------------------------------------------------------------------
\7\ For example, a study that finds that the 2011 CCAR had a
negative effect on the share of jumbo mortgage originations and
approvals at banks subject to that exercise is Calero, Paul S. and
Correa, Ricardo and Lee, Seung Jung, Prudential Policies and Their
Impact on Credit in the United States (2017). BIS Working Paper No.
635. Available at SSRN: https://ssrn.com/abstract=2967129. Another
recent study that finds that the stress tests have led to a reduction
in bank lending to riskier borrowers is Acharya, Viral V. and Berger,
Allen N. and Roman, Raluca A., Lending Implications of U.S. Bank Stress
Tests: Costs or Benefits? (2017). Journal of Financial Intermediation,
Forthcoming. Available at SSRN: https://ssrn.com/abstract=2972919.
---------------------------------------------------------------------------
Finally, you ask whether risk weights, including those
implied by the Federal Reserve's CCAR supervisory stress test,
are generally correct or whether they are overly broad,
assigning the same capital requirement to loans with different
risks. It is traditional risk weights, not CCAR, that group
loans into broad categories. Those traditional risk weights do
create an incentive for a bank to prefer the riskiest loans in
a particular category, if a bank's only consideration were to
minimize its regulatory capital requirement. However, in CCAR,
the Federal Reserve's stress test models control for the most
important risk drivers in a bank's portfolio, down to the level
of the individual loan in some cases. For example, commercial
real estate loans are treated differently depending on the
remaining maturity of the loan, the loan-to-value ratio, and
whether the loan is collateralized by an income-producing
property or is a construction loan. In addition, unlike
traditional risk weights, stress tests account for the income
generated by the loans as well as the potential losses under
stress. Of course, traditional risk weights, stress tests, and
any other individual measure of risk will necessarily be
imperfect. Assessing capital using multiple perspectives--from
traditional risk weights and stress tests--should produce a
more stable and reliable treatment of risk over the various
stages of the credit cycle.
Q.2. Governor Powell: Given the importance of international
standards to both the United States and the global financial
stability, would you agree with the U.S. Treasury Department's
recommendation that there should be more transparency for the
public into the agenda of the Basel Committee? If so, do you
think the Federal Reserve Board could be leading voice at the
Basel Committee to shine some light into the agenda of that
body and its proposed standards? And if, as goes the old adage
says, ``there's no time like the present,'' do you see any
reason why we can't start with more transparency on the
proposal on the table relating to the finalization of the Basel
III reforms?
A.2. The Board strongly supports transparency in the
international standard setting process. Over the years, the
Board has led efforts to increase transparency in the context
of the Basel standards, and is generally pleased with the
progress that has been made to date.
More remains to be done, however, and the Board will
continue to use its influence to heighten openness around Basel
standard setting, including the process for consideration of
comments received through consultations and meeting agendas.
The Basel Committee on Banking Supervision currently is
studying approaches to increase external communication of work
that is underway. The Board supports this effort and will be an
active contributor to the deliberations.
Q.3. Governor Powell: A number of President Obama's regulators
who helped devise the Volcker after the passage of Dodd-Frank
have come out and called for additional legislative and
regulatory changes to the law. Your former colleague Governor
Tarullo has called for statutory changes and said the law is
too complicated. Former Fed Governor Stein, again an Obama
appointee, has called for its outright repeal. The Federal
Reserve staff have concluded in a report that the rule is
negatively impacting market liquidity. These are just a few of
the calls for changes from respected Democratic regulators.
Would you agree that we should revisit this provision of Dodd-
Frank, which most people agree had nothing to do with the
financial crisis and clarify that the statute does not impact
legitimate market making? Can you provide me with specific
legislative suggestions for how Congress can assist with your
efforts to change Volker to cure its implementation issues?
Q.3.a. There are many unintended consequences from Volker, and
in the recent Treasury report, one of those consequences that
was highlighted is the prohibition on a covered fund sharing
the name of a bank-affiliated manager--even if the manager and
the fund do not use the name of the bank. As the report stated:
Q.3.a.i. ``Although the prohibition on depository institutions
sharing a name with the funds they sponsor is appropriate to
avoid customer confusion as to whether the fund is insured,
banking entities other than depository institutions and their
holding companies should be permitted to share a name with
funds they sponsor provided that the separate identity of the
funds is clearly disclosed to investors.''--Last Congress, H.R.
4096 was introduced to address this issue. Do you think that
Congress should take up this measure, or are there ways by
which the Fed or another regulatory body can address this
issue?
Q.3.a.ii. Chair Yellen has indicated she has ``some sympathy''
for some of the changes that Treasury has proposed. Will the
Fed address this technical, unintended consequence in what
seems to be an over-broad application of the Volcker Rule? And
soon--as I understand the compliance date is July 21st?
A.3.a.i.-ii. The core premise of the Volcker Rule is relatively
straightforward: that financial institutions with access to the
Federal safety net--Federal Deposit Insurance Corporation
insurance and the Board discount window--should not engage in
proprietary trading. The Volcker Rule's statutory provisions,
however, are complex, which has led to a complex rule. While
many changes to the Volcker Rule would require amendment to the
statute, there may be ways to streamline and simplify the
interagency Volcker Rule regulation to reduce burdens without
sacrificing key objectives, and the Board is exploring
possibilities.
The Board is working with the Federal Deposit Insurance
Corporation, Office of the Comptroller of the Currency,
Commodities and Futures Trade Commission (CFTC), and Securities
and Exchange Commission (SEC) (together, the agencies) to
identify areas of the implementing regulations that could be
simplified. There are, however, limits to addressing
inefficiencies of the Volcker Rule through amendments of the
implementing regulations. For example, a change to the statute
to exempt smaller firms would be a cleaner and more
comprehensive way to reduce burdens for smaller firms.
Additional examples are the treatment of foreign excluded funds
and the name-sharing restriction, discussed further below,
which may require statutory changes to be addressed more fully
than through regulatory amendment.
You also ask about the name-sharing restriction of the
Volcker Rule. This provision is imposed by the statute. The
statute prohibits a banking entity from sponsoring a covered
fund and defines ``sponsor'' to mean ``to share with a fund,
for corporate, marketing, promotional, or other purposes, the
same name or a variation of the same name.'' The statute also
prohibits a banking entity from sharing the same name or
variation of the same name with a covered fund that the banking
entity organizes and offers. In particular, the statute
provides as a requirement to permissibly organize and offer a
covered fund that ``the banking entity does not share with the
hedge fund or private equity fund, for corporate, marketing,
promotional, or other purposes, the same name or a variation of
the same name.''\8\ The statute also defines the scope of the
prohibition by defining the term ``banking entity'' to
generally include any affiliate or subsidiary of an insured
depository institution or any company that controls an insured
depository institution. A change to the statute thus would be
required to modify the scope of the namesharing provision, and
any legislation is ultimately up to Congress to decide.
---------------------------------------------------------------------------
\8\ 12 U.S.C. 1851(d)(1)(G)(vi).
---------------------------------------------------------------------------
Finally, you ask whether the Federal Reserve will address
the technical, unintended consequences in the Volcker Rule.
While we are restricted from granting burden relief that is in
contravention of the requirements of the statute, we have
provided relief for some provisions. Most recently, certain
foreign noncovered funds
organized and offered outside the United States may have become
subject to the Volcker Rule by virtue of typical corporate
governance structures for funds sponsored by a foreign banking
entity in a foreign jurisdiction or by virtue of investment by
the foreign banking entity in the fond. In July, the agencies,
in consultation with the SEC and the CFTC, issued a statement
of policy that indicates the agencies would not propose to make
a finding that a banking entity is out of compliance with
respect to the provisions of the rule that may apply to such
foreign noncovered funds for 1 year while the agencies consider
available avenues to address this issue. This issue could
potentially be solved either through regulatory or legislative
action. We will explore potential regulatory solutions to this
issue in the context of the broader regulatory changes that we
are working on.
Q.4. Like community banks, there are a number of savings & loan
holding companies that include small- and medium-sized
insurance companies that serve the interests and needs of small
farmers and businesses of all kinds. And, like community banks
they provide critical financial services, in this case security
from loss and loss prevention advice, that make it possible for
small farms and other small businesses to exist, thrive, and
employ. And, like community banks they are well regulated by
their primary supervisor and are not systemically risky.
Considering these facts, what are you doing to prevent and
reduce unproductive regulatory burden on these insurers whose
groups you supervise?''
A.4. The Board recognizes the importance of community banks and
insurance companies in providing services to small businesses
and farmers. As you know, the Dodd-Frank Act mandates that the
Board supervise the consolidated entity of any insurance
savings and loan holding company (ISLHC). In doing so, the
unique characteristics, risks, and activities of each ISLHC are
considered in the supervisory approach.
In order to mitigate regulatory overlap and burden in
supervising these firms, the Board has been relying to the
greatest extent possible on State insurance regulators' work
related to the business of insurance. The Board has information
sharing Memorandums of Understanding with every State insurance
regulator. Supervision staff from Reserve Banks and the Board
regularly meet with State insurance regulators to coordinate
examination and inspection activities and share information
relative to supervision. The Board and the National Association
of insurance Commissioners continue to discuss State and
Federal supervision, any ongoing enhancements to the respective
supervisory programs, potential for coordination, and possible
areas of overlap.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM MARTIN J.
GRUENBERG
Q.1. The Treasury Report released on June 12 recommended that
the FDIC be removed from the process to approve banks' living
wills. Chair Gruenberg, what would the impact of this
recommendation be if adopted?
A.1. There are significant benefits to having both the FDIC and
Federal Reserve involved jointly in the resolution plan
process.
The FDIC brings the unique perspective as the resolution
authority responsible for winding down failed banks and
ensuring market confidence. The Federal Reserve brings the
important perspective of the bank holding company regulator.
The FDIC's review of living wills also supports the FDIC's
responsibilities to wind-down a financial institution pursuant
to the Orderly Liquidation Authority. The information and
insight that the firms generate about their own structure,
business models, and risks is a source of essential information
and structural improvement that enables the agency to help
avoid bailouts and protect the U.S. financial system.
Implementing the living will requirement over the past 7
years, the FDIC and the Federal Reserve have developed a close
cooperative relationship. We issue joint guidance, hold joint
meetings with firms, and our review teams train together and
conduct their reviews in close collaboration.
This joint process has yielded significant benefits toward
improving the resolvability of systemically important banking
institutions in the United States. Removing either the FDIC or
the Federal Reserve from the process would, in my view,
significantly reduce the quality of the process and undermine
the goal of improving the resolvability of these systemically
important financial institutions.
Q.2. The largest banks have suggested that the results of the
stress tests show that they have enough capital and that now is
the time to loosen some of the Wall Street Reform capital and
liquidity rules so that they can do more to lend and contribute
to economic growth. Is that how capital requirements work? Is
there a point when a bank has enough capital and it is
appropriate to reduce the requirement?
A.2. Capital requirements establish a minimum amount of equity
that a banking organization must hold to support its business
activities. The largest banks have performed well in recent
stress tests; however, reducing capital requirements may have
an adverse impact on their ability to continue to conduct
business during periods of stress. It is critical that a
sufficient amount of equity capital is held at the largest
banking organizations to help ensure that they have the loss
absorbing capacity necessary to serve as financial
intermediaries through the economic cycle. Strong capital
positions support banks' ability to support economic activity
through lending; for example, as noted in my testimony, large
U.S. banking organizations are both better capitalized and have
increased their lending to a greater extent than their European
counterparts. Strong capital also serves as an important buffer
during times of stress to reduce the probability of failure for
banking organizations.
Q.3. Chair Greenberg, can you describe the cost benefit
analysis currently conducted by the FDIC as part of its
rulemaking process? Some have suggested that the independent
financial regulatory agencies should do more cost benefit
analysis. They have introduced proposals in Congress or made
recommendations to increase the requirements for cost benefit
analysis and to subject
independent agencies to OIRA review. What would be the impact
of these proposals on FDIC rulemaking?
A.3. The FDIC believes that analysis of expected costs and
benefits is an integral part of the rulemaking process that
helps produce more effective regulations. As an independent
agency, the FDIC is not subject to the provisions of Executive
Order 12866 and OMB Circular A-4. However, our procedures are
broadly consistent with the OMB circulars and adhere to our own
2013 Statement of Policy as well as a number of statutory
mandates.
The Administrative Procedures Act (APA) establishes general
requirements for a Notice and Comment process that helps to
inform the design and analysis of each FDIC proposed or final
rule. Consistent with both best practice and the OMB circulars,
the preamble of each FDIC proposed and final rule addresses:
the policy objectives of the rule, its likely economic effects,
comments submitted by the public and the industry, and
reasonable and possible alternatives to the rule.
These practices help to ensure that the FDIC Board is well
informed about the costs and benefits of each rule. By
highlighting these considerations in the preamble, the
rationale of each rule is made transparent to the public and
the parties most affected. Recent audits of our rulemaking
process by the Government Accountability Office (GAO) have
identified no material weakness in our analytical processes.
Subjecting independent agencies like the FDIC to review by
the Office of Information and Regulatory Affairs within the
Office of Management and Budget would compromise the
independence of the rulemaking process. This would impair the
agencies' ability to respond quickly to emerging risks and to
meet statutory deadlines for rulemaking. The resulting delays
can be expected to increase the risk of financial instability
and create uncertainty among affected entities.
Recent proposals to increase requirements for cost benefit
analysis could also impose unrealistic standards to quantify
the effects of each rule. The expected benefits of many FDIC
rules are difficult to quantify. They frequently center on
reducing the likelihood and severity of future financial
crises. Long-term financial stability, in turn, depends
critically on behavioral factors such as public confidence and
market liquidity that are prone to volatility, and therefore
are difficult to model with precision.
Despite these challenges, there is no question that the
potential benefits of stability-enhancing rules are
substantial. Recent experience clearly shows that a financial
crisis can have a devastating effect on real economic activity
as well as on the banking industry itself. Estimates vary as to
the total cumulative loss in gross domestic product (GDP)
compared to potential output during and after the latest
crisis, but these estimates generally exceed $10 trillion.\1\
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\1\ See Atkinson, Tyler; Luttrel, David; and Rosenblum, Harvey,
``How Bad Was It? The Costs and Consequences of the 2007-09 Financial
Crisis,'' Federal Reserve Bank of Dallas, Staff Paper No. 20, July
2013. https://www.dallasfed.org/assets/documents/research/staff/
staff1301.pdf.
---------------------------------------------------------------------------
Requiring a strict quantification of the likely effects of
each rule would limit the ability of the independent financial
regulatory agencies to apply their ample expertise, experience
and judgment to promote long-term financial stability. We
expect that the end result would be a more volatile financial
system that is less consistent in its ability to support U.S.
economic activity.
Q.4. In his testimony, Acting Comptroller of the Currency
Noreika suggested that the OCC be able to approve deposit
insurance automatically when it charters a national bank.
Currently, that authority lies with the FDIC. What do you think
about this proposal?
A.4. From the FDIC's inception in 1933 through 1989, national
banks and State member banks automatically received deposit
insurance as a matter of law, upon receipt of certification by
the FDIC from either the OCC or Federal Reserve. In reaction to
the banking crisis of the 1980s, and because the chartering
authority does not have the same incentives as the deposit
insurer, Congress enacted legislation to protect the Deposit
Insurance Fund (DIF). First, in 1989, FIRREA authorized the
FDIC to comment on charter applications of national and State
member banks. Then, in 1991, FDICIA required institutions to
apply for and be granted Federal deposit insurance by the
FDIC.\2\
---------------------------------------------------------------------------
\2\ History of the Eighties, Lessons for the Future, Volume 1, p.
110.
---------------------------------------------------------------------------
These changes in authority were a direct result of the
chartering activity in the years prior to the crisis of the
late 1980s and early 1990s. For example, from 1982-85, well
over 800 national bank charters were granted compared to about
400 State bank charters.\3\ However, just over half (51
percent) of all national banks chartered from 1980-87 were
located in the Southwest, which was one of the regions most
affected by bank failures during the crisis.\4\ Further, of the
approximate 2,800 new banks (national and State chartered)
chartered between 1980 and 1990, more than 16 percent had
failed by 1994, compared with 7.6 percent of banks that were
already in existence at year-end 1979--a failure rate that was
more than twice as high.\5\ In the southwest, 33.3 percent of
banks chartered from 1980-90 failed through 1994, compared to
21.4 percent of banks that were already in existence at year-
end 1979.\6\ These higher failure rates of banks chartered
under the more relaxed chartering regime of the 1980s
substantially increased costs to the DIF.
---------------------------------------------------------------------------
\3\ History of the Eighties, Lessons for the Future, Volume 1, p.
108.
\4\ History of the Eighties, Lessons for the Future, Volume 1, p.
109.
\5\ History of the Eighties, Lessons for the Future, Volume 1, pp.
31-32.
\6\ History of the Eighties, Lessons for the Future, Volume 1, pp.
31-32.
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Although chartering authorities should account for a
proposed bank's potential to operate successfully, the
chartering authority is not responsible for the resolution of a
failed bank, and the analyses of the agencies regarding risk to
the DIF can differ. Risk to the Deposit Insurance Fund is a
statutory factor to be considered by the FDIC in evaluating
deposit insurance applications, and by each of the Federal
banking agencies in evaluating notices of change of control of
an institution.
As steward of the Fund, the FDIC has a fiduciary duty to
administer the DIF, in large part by maintaining a
comprehensive understanding of the risk profile of insured
institutions and ensuring that, with respect to all insured
institutions, appropriate supervisory and regulatory actions
are taken when necessary, regardless of institution size,
chartering authority, or primary Federal
regulator (PFR). Requiring all banks to apply formally to the
FDIC for deposit insurance enables the potential costs of
failure to betaken into account during the chartering process
and serves to protect the DIF.
Q.5. This week, the House approved the FY 2018 Financial
Services and General Government Appropriations bill. Included
in this bill is a provision from the CHOICE Act to bring all
independent financial regulatory agencies' budgets under the
appropriations process. What would be the impact on the FDIC if
its budget was appropriated?
A.5. LCongressional control of funding could reduce
the FDIC's flexibility to address unforeseen and unfunded
emergencies and exigent circumstances in the banking system.
The FDIC must be able to act independently in the public
interest to maintain public confidence and promote the safety
and soundness of the banking system and the DIF. This requires
that the FDIC, as deposit insurer, be able to make difficult
decisions in a timely manner and maintain focus on the mission
to protect the stability of our banking system. Sometimes this
means recognizing risks, or even losses, when they occur rather
than allowing potentially destabilizing risks to compound.
The FDIC's current funding structure allows the agency to
respond appropriately and promptly in response to unforeseen
emergencies and exigent circumstances. For example, the FDIC
can change the size of its resolution and examination staff in
response to changes in markets and bank risk-taking.
LSubjecting the FDIC to the annual appropriations
process could undercut efforts to promote safety and
soundness.
History shows us that when financial regulators are
constrained in their ability to rein in inappropriate risk, the
consequences can be dire. For example, in the early 1980s, the
Federal Home Loan Bank Board (FHLBB) did not have control of
either its funding levels or the purposes for which funds could
be used. The FHLBB, therefore, could not allocate resources to
increase examination staffing levels or to provide examination
staff essential training to address changes in the savings and
loan (S&L) industry. Unable to augment its examination staff,
it was unable to prevent the worst of the S&L crisis. (National
Commission on Financial Institution Reform, Recovery and
Enforcement, Origins and Causes of the S&L Debacle: A Blueprint
for Reform, July 1993, at p. 57.)
Q.6. Is there any evidence that Wall Street Reform is the
primary cause of driving of consolidation among community
banks?
A.6. Consolidation is a long-term banking industry trend that
dates back to the mid-1980s. The number of federally insured
bank and thrift charters has declined by two-thirds since 1985.
Long-term consolidation in banking has taken place in the
context of powerful historical forces--two banking crises and
relaxation of restrictions on intra-State branching and
interstate banking and branching.
More recently, a pickup in the pace of voluntary mergers
and a very slow pace of de novo bank formation have contributed
to
continued consolidation. These trends are likely related to the
historically low interest rates and slow growth in economic
activity experienced during this recovery. While 95 percent of
community banks were profitable last year, they clearly face
some economic headwinds. Low interest rates have contributed to
narrow net
interest margins, subpar levels of profitability, and low
market premiums as reflected in price-to-book ratios for banks.
These conditions have made it less attractive to start new
banks and more
attractive to acquire existing banks.
A 2016 study by Federal Reserve Bank of New York
economists, Robert Adams and Jacob Gramlich, shows that at
least 75 percent of the post-crisis decline in new bank
formation could be attributed to economic factors, and would
have occurred without any regulatory change.\7\ Our expectation
is that once interest rates normalize, we will begin to see the
pace of bank mergers and new bank formation return to more
normal levels, thereby slowing the pace of consolidation. We
are already seeing an increase in new applications for deposit
insurance, and have approved six of these applications over the
past 10 months.
---------------------------------------------------------------------------
\7\ Adams, Robert M. and Gramlich, Jacob (2016), Where Are All the
New Banks? The Role of Regulatory Burden in New Bank Formation, Review
of Industrial Organization, 48(2), pp, 181-208.
Q.7. After the financial crisis, the FDIC created the Division
of Depositor and Consumer Protection. Your predecessor, Sheila
Bair, stated that this division would complement the activities
---------------------------------------------------------------------------
of the Consumer Financial Protection Bureau.
Please describe your experiences working with the CFPB to
protect consumers at FDIC supervised banks. Do you think
further limiting the institutions CFPB supervises for consumer
compliance would advance the FDIC's mission to protect
consumers and the Deposit Insurance Fund?
A.7. Since it was established in 2011, the FDIC and CFPB have
developed and maintained a positive, constructive relationship
to protect consumers at FDIC-supervised banks, both in terms of
rule-writing and through supervision of institutions to
identify, mitigate, and prevent consumer harm. Through the
legally mandated consultation process and meetings at multiple
levels with the CFPB, we have seen increased coordination and
communication between the FFIEC member agencies since 2011.
Additionally, the FDIC, FRB, OCC and NCUA maintain a
``Memorandum of Understanding on Supervisory Coordination''
(https://www.fdic.gov/news/news/press/2012/pr12061a.pdf) with
the CFPB, which establishes mechanisms for cooperation between
the Agencies in both supervision and enforcement, consistent
with the Dodd-Frank Act. The FDIC and CFPB communicate
regularly regarding supervisory activities, such as examination
schedules and review of examination reports, regarding
institutions where we share supervisory authority to ensure
effective and coordinated supervision.
The CFPB's supervision for consumer compliance has not been
an impediment to the FDIC's ability to carry out its mission to
protect consumers and the Deposit Insurance Fund. In fact, the
CFPB has been an effective partner with the FDIC in addressing
problematic practices identified at supervised institutions
through enforcement actions. In 2012, the FDIC and CFPB, along
with the Utah Department of Financial Institutions, partnered
in an
investigation of three American Express subsidiaries, which led
to an enforcement action in which $85 million was refunded to
250,000 customers for illegal card practices. Additionally, our
two agencies joined in another 2012 enforcement action, this
time against Discover Bank (Discover) for deceptive
telemarketing and sales tactics. Discover was ordered to return
$200 million to more than 3.5 million consumers.
In addition, nonbank consumer financial firms are now
subject to Federal supervision for the first time due to the
CFPB's Dodd-Frank Act authority, creating a more level playing
field between insured and supervised financial institutions and
nonbank firms. On balance, this has benefited community banks,
which have long been subject to Federal supervision.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR HELLER FROM MARTIN J.
GRUENBERG
Q.1. Does the FDIC welcome new industrial loan company (ILC)
applications?
A.1. The FDIC welcomes all deposit insurance applications,
including industrial loan companies. Regardless of charter
type, each filing is reviewed under the framework of statutory
factors found in Section 6 of the FDI Act:
LFinancial History and Condition
LAdequacy of Capital Structure
LFuture Earnings Prospects
LGeneral Character of Management
LRisk to Deposit Insurance Funds
LConvenience and Needs of Community
LConsistency with Powers in FDI Act
As stated in the FDIC's Statement of Policy on Applications for
Deposit Insurance, in general, the applicant will receive
deposit insurance if all of these statutory factors plus the
considerations required by the National Historic Preservation
Act and the National Environmental Policy Act of 1969 are
resolved favorably.
Q.2. Do you believe that the FDIC has all the tools and
resources to manage and oversee current and new ILCs properly?
A.2. The FDIC believes that it has the statutory, regulatory,
and supervisory frameworks necessary to oversee ILCs. Each
institution is subject to the statutes and regulations
applicable to other insured institutions, including those
related to affiliate and insider transactions, consumer
protection, community reinvestment, anti-tying, and others.
Further, with respect to FDIC-supervised ILCs, the institutions
are supervised in the same manner as other institutions in that
supervisory strategies are customized to the risk profile of
the institution.
While there is generally no Federal Reserve Board-
supervised holding company for an ILC, the FDIC has the
authority to examine the affairs of any affiliate, including
the parent and its subsidiaries, as maybe needed to disclose
the relationship between the ILC and the affiliate, and the
affiliate's effect on the institution. And, similar to other
insured institutions, the FDIC can prohibit an insured ILC from
engaging in activities with an affiliate or any third party
that may cause harm to the ILC.
In the event supervisory concerns are noted, the FDIC may
pursue the same enforcement powers authorized with respect to
any other insured institution. Parent companies of nonbank
banks are considered institution-affiliated parties under the
FDI Act and may be directly subject to enforcement actions by
the FDIC. As with other FDIC-supervised institutions, section
38 of the FDI Act authorizes the FDIC to obtain guarantees of
capital plans from the nonbank bank's parent company in certain
circumstances. The FDIC's Board may terminate a depository
institution's insured status after a hearing if the institution
violates a condition or written agreement imposed by the FDIC
in connection with the approval of an application or other
request by the depository institution.
Additionally, the FDIC has pursued strategies to mitigate
risks related to the parent company structure, including
various parent company and operating agreements. These
agreements may address a variety of circumstances regarding
supervision, corporate governance, and financial support of the
insured institution.
Q.3. Do you believe that new ILCs should be insured by the FDIC
if they meet underlying statutory factors for deposit
insurance?
A.3. The FDIC welcomes all deposit insurance applications,
including industrial loan companies. Regardless of charter
type, each filing is reviewed under the framework of statutory
factors found in Section 6 of the FDI Act:
LFinancial History and Condition
LAdequacy of Capital Structure
LFuture Earnings Prospects
LGeneral Character of Management
LRisk to Deposit Insurance Funds
LConvenience and Needs of Community
LConsistency with Powers in FDI Act
As stated in the FDIC's Statement of Policy on Applications for
Deposit Insurance, in general, the applicant will receive
deposit insurance if all of these statutory factors plus the
considerations required by the National Historic Preservation
Act and the National Environmental Policy Act of 1969 are
resolved favorably.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED FROM MARTIN J.
GRUENBERG
Q.1. Some have called for the FDIC to be removed from the
living will process. Do you believe the FDIC should be removed
from this process?
A.1. There are significant benefits to having both the FDIC and
Federal Reserve involved jointly in the resolution plan
process.
The FDIC brings the unique perspective as the resolution
authority responsible for winding down failed banks and
ensuring market confidence. The Federal Reserve brings the
important perspective of the bank holding company regulator.
The FDIC's review of living wills also supports the FDIC's
responsibilities to wind-down a financial institution pursuant
to the Orderly Liquidation Authority. The information and
insight that the firms generate about their own structure,
business models, and risks is a source of essential information
and structural improvement that enables the agency to help
avoid bailouts and protect the U.S. financial system.
Implementing the living will requirement over the past 7
years, the FDIC and the Federal Reserve have developed a close
cooperative relationship. We issue joint guidance, hold joint
meetings with firms, and our review teams train together and
conduct their reviews in close collaboration.
This joint process has yielded significant benefits toward
improving the resolvability of systemically important banking
institutions in the United States. Removing either the FDIC or
the Federal Reserve from the process would, in my view,
significantly reduce the quality of the process and undermine
the goal of improving the resolvability of these systemically
important financial institutions.
Q.2. Many of us have come to recognize that the Orderly
Liquidation Authority is an incredibly important part of the
Wall Street Reform and Consumer Protection Act. Could you
please explain in plain terms why OLA is so important?
A.2. The Orderly Liquidation Authority (OLA) is an essential
backstop for protecting taxpayers--and avoiding bailouts--in
circumstances when the bankruptcy process cannot handle the
orderly failure of a systemically important financial
institution, putting the stability of the U.S. financial system
at risk.
During the financial crisis, policymakers lacked the tools
for managing the failure of a potentially systemic financial
institution and--when faced with that possibility--were forced
to choose between two bad options: taxpayer bailouts or
systemic disruption in bankruptcy.
The Dodd-Frank Act established a framework for helping to
ensure that a potentially systemic financial institution can
fail in an orderly way. Bankruptcy is the statutory first
option under the framework--and the Act established the living
will process whereby firms demonstrate how they can fail, in
bankruptcy, without threatening U.S. financial stability.
While significant progress has been made through this
process, we cannot rule out the possibility that in the future
circumstances may arise where the bankruptcy process might not
be able to handle the orderly failure of a systemically
important financial institution. Title II of the Dodd-Frank Act
established the Orderly Liquidation Authority as a backstop in
such cases. OLA would allow the FDIC to wind-down and liquidate
a failed financial firm--in an orderly way. This authority
would protect taxpayers and avoid a repeat of the bailouts and
financial disruption that occurred before OLA's enactment.
The Orderly Liquidation Authority provides the FDIC several
authorities--not available under bankruptcy--that are broadly
similar to those the FDIC has to resolve banks. They include
the
authority to establish a bridge financial company, to stay the
termination of certain financial contracts, to provide
temporary
liquidity that may not otherwise be available, and to
coordinate with domestic and foreign authorities ahead of a
resolution to better address any cross-border impediments. The
critical abilities to plan in advance and to move quickly to
deploy a team of professionals experienced in financial
institution resolution in order to stabilize the failed
financial institution are additional advantages the FDIC can
bring to bear. The tools available under the OLA would enable
the FDIC to carry out the process of winding down and
liquidating the firm, while ensuring that shareholders,
creditors, and culpable management are held accountable. By
law, taxpayers cannot bear any losses. Losses must be paid for
out of the assets of the failed firm and, if necessary, through
assessments on large financial institutions.
It is clear that without these authorities, we would be
back in the same position as 2008, with the same set of bad
choices.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR TESTER FROM MARTIN J.
GRUENBERG
Chair Greenberg and Governor Powell, you've both tallied
about the Volcker Rule and the complexity that comes along with
this rule. And in the past, Comptroller Curry had suggested
that we could exempt community banks entirely. After having
conversations with many of my community banks I agree with Mr.
Curry and believe they should be entirely exempt from Volcker
Rule compliance. Following these lines, I have introduced a
bill with Senator Moran that would exempt community banks with
less than $10 billion from compliance.
Q.1. Is this a bill that both the FDIC and the Federal Reserve
would support at this juncture?
Q.2. Does eliminating the Volcker Rule for banks with less than
$10 billion pose any real risk to our financial system?
Q.3. Absent Congress passing legislation related to the Volcker
Rule, does the FDIC or the Federal Reserve have any plans to
make any changes on their own to the Volcker Rule?
A.1.-3. The agencies are currently reviewing the Volcker Rule
to identify and reduce unnecessary complexity and burden. The
agencies could establish a regulatory safe harbor for banking
organizations that meet certain activities-based criteria. As
long as a banking organization met the safe harbor
requirements, it would not be required to prove compliance with
the proprietary trading restrictions of the Volcker Rule. This
would eliminate compliance concerns for smaller banking
organizations, including most community banks with less than
$10 billion in assets, provided that they genuinely do not
engage in proprietary trading.
Establishing such a safe harbor through regulation may be a
better approach than a statutory exemption. While most
community banks do not engage in activities covered by the
Volcker Rule, such an exemption based solely on asset size
could create an arbitrage opportunity for consultants and
others to promote risky, otherwise impermissible, activities to
small banks.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCOTT FROM MARTIN J.
GRUENBERG
Each of you serve at agencies that are members of the
Financial Stability Oversight Council (FSOC). Insurance has
been regulated at the State level for over 150 years--it's a
system that works. But FSOC designations of nonbank
systemically important financial institutions (SIFIs) have made
all of you insurance regulators, despite the fact that you are
bank regulators at your core.
Strong market incentives exist for insurers to hold
sufficient capital to make distress unlikely and to achieve
high ratings from
financial rating agencies, including incentives provided by
risk sensitive demand of contract holders and the potential
loss of firms' intangible assets that financial distress would
entail. Additionally, insurance companies are required by law
to hold high levels of capital in order to meet their
obligations to policyholders. Bottom line: Insurance companies
aren't banks, and shouldn't be treated as such.
In March, my colleagues and I on the Senate Banking
Committee sent a letter to Treasury Secretary Mnuchin
indicating our concerns regarding the FSOC's designation
process for nonbanks. I support efforts to eliminate the
designation process completely.
I was pleased that President Trump issued a ``Presidential
Memorandum for the Secretary of the Treasury on the Financial
Stability Oversight Council'' (FSOC Memorandum) on April 21,
2017, which directs the Treasury Department to conduct a
thorough review of the designation process and states there
will be no new nonbank SIFI designations by the FSOC until the
report is issued. Relevant decisionmakers should have the
benefit of the findings and recommendations of the Treasury
report as they carry out their responsibilities with respect to
FSOC matters. Please answer the following with specificity:
Q.1. What insurance expertise do you and your respective
regulator possess when it comes to your role overseeing the
business of insurance at FSOC?
A.1. The FDIC has an insurance industry monitoring team within
its Complex Financial Institution branch, which is responsible
for the monitoring of insurance companies designated as
systemically important. Collectively, the team has over 20
years of insurance industry experience both from working for
major U.S. insurers and covering the insurance industry as a
private sector analyst. Other core areas of expertise within
the team include investment banking and regulatory oversight of
U.S. broker dealers during the 2008 financial crisis. In
addition to the monitoring team, in 2016, the FDIC added an
insurance specialist within its Legal Division to help further
its work with resolution plans filed by systemically important
insurers, orderly liquidation authority, and any insurance
issues coming before the FSOC. The specialist has nearly 20
years of insurance expertise and served at the U.S. Department
of Treasury, both in legal and policy capacities, including as
senior advisor to the FSOC's current independent member with
insurance expertise, immediately prior to joining the FDIC.
In addition to its insurance-focused staff, the FDIC has
insurance experience gained through the execution of its core
missions.
Among other duties, the FDIC regulates State-chartered
banks that are not members of the Federal Reserve System. The
FDIC has executed supervisory Memoranda of Understanding with
State insurance authorities covering supervisory and
examination responsibilities with regard to insured State-
chartered nonmember banks with insurance affiliates. The FDIC
also coordinates with insurance regulators, as appropriate.
Some FDIC-regulated banks sell insurance products through
licensed agent and broker affiliates, and while the FDIC's
focus is the safety and soundness of the bank, its examiners
are familiar with bank-sold insurance. The FDIC may also be
appointed as the receiver of failed insured depository
institutions (IDIs). In that capacity, the FDIC has engaged
with State insurance regulators and insurance receivers in
those instances where cooperation is appropriate in resolving
the IDI, and has gained practical experience with insurance
receivership issues. The FDIC has also pursued and litigated
insurance claims against insurance companies as part of its
receivership responsibilities and has experience on insurance
coverage matters.
Q.2. Do you support the Senate Banking Committee's recent
legislative effort, the Financial Stability Oversight Council
Insurance Member Continuity Act, to ensure that there is
insurance expertise on the Council in the event that the term
of the current FSOC independent insurance member expires
without a replacement having been confirmed?
A.2. The FDIC has not taken a position on the Financial
Stability Oversight Council Insurance Member Continuity Act and
has no objection to it.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE FROM MARTIN J.
GRUENBERG
Q.1. Has the CFPB effectively coordinated with the FDIC on
rulemaking and enforcement actions? If not, how could
coordination be improved?
A.1. As required by statute, the CFPB regularly consults with
the FDIC and other prudential regulators during the course of
its rulemakings. We have found the consultations to be
meaningful and substantive on significant rulemaking efforts.
In particular, we have found the CFPB to be interested in our
perspective as the primary Federal supervisor for the majority
of the Nation's community banks.
With regard to enforcement, coordination between the FDIC
and the CFPB has been effective. The two agencies have issued
some joint and some concurrent enforcement actions in cases
where both agencies had authority over a particular matter.
Coordination is managed through ongoing communications at the
regional level and the Washington Office level. The regions
share information related to schedules for supervisory actions,
findings that may impact supervision, supervisory letters, and
reports of examination. Much of this sharing is performed in
accordance with the Memorandum of Understanding on Supervisory
Coordination issued on May 19, 2012 at https://www.fdic.gov/
news/news/press/2012/pr12061a
.pdf.
At the Washington Office level, coordination is
accomplished via a recurring meeting between leadership in
supervision and enforcement at each agency.
Q.2. As you know, the CFPB may be moving forward on a
rulemaking for Section 1071 of Dodd-Frank, which granted the
CFPB the authority to collect small business loan data. I've
heard some concerns that implementing Section 1071 could impose
substantial costs on small financial institutions and even
constrict small business lending.
Q.2.a. Are you concerned how a Section 1071 rulemaking could
hurt small business access to credit?
A.2.a. As you note, Section 1071 of the Dodd-Frank Act requires
the CFPB to collect small business loan data. The CFPB is
currently in the process of gathering information prior to
beginning the rulemaking process. As a result, it is too early
in the process for the FDIC to make a judgment regarding the
potential impact such future rulemaking may have on small
business access to credit. The FDIC is currently engaged in a
research effort to better understand small business lending by
insured institutions, which may provide useful insight and
context for future consideration of the impact of this
rulemaking effort.
Q.2.b. Has the FDIC coordinated with the CFPB to ensure that
implementing these requirements does not constrict small
business access to credit?
A.2.b. The CFPB is currently in the process of gathering
information prior to beginning the rulemaking process. No
requirements have, as yet, been proposed.
Q.3. The agencies' EGRPRA report highlights newly streamlined
call reports for banks with less than $1 billion in assets.
However, I'm told by community banks in my State with under $1
billion in assets that these changes will not help them because
the streamlined call report form just removes items that few
community banks needed to report in the first place.
Q.3.a. What more can the FDIC do to reduce the regulatory
paperwork burden on community banks regarding call reports and
more broadly?
A.3.a. Effective March 31, 2017, the Federal banking agencies,
under the auspices of the Federal Financial Institutions
Examination Council (FFIEC), implemented a new streamlined
FFIEC 051 Call Report for eligible small institutions,
initially defined, in general, as institutions with domestic
offices only and less than $1 billion in total assets. Such
institutions represent about 87 percent of all insured
depository institutions. Eligible small institutions have the
option of filing the FFIEC 051 Call Report or continuing to use
the FFIEC 041 Call Report otherwise applicable to all
institutions, regardless of size, with domestic offices only.
Some burden-reducing changes to the FFIEC 041 and FFIEC 031
versions of the Call Report, the latter of which applies to
institutions with foreign offices, also took effect as of March
31, 2017. Nearly 3,500 or slightly more than two thirds of the
approximately 5,100 eligible small institutions filed the FFIEC
051 Call Report for the first quarter of 2017. Eligible small
institutions that did not file the FFIEC 051 as of March 31,
2017, may begin reporting on this new version of the Call
Report as of June 30, 2017, or as of later report dates in
2017.
The FFIEC 051 report was created by: (1) removing certain
existing schedules and data items from the FFIEC 041 report and
replacing them with a limited number of data items in a new
supplemental schedule, (2) eliminating certain other existing
FFIEC 041 data items, and (3) reducing the reporting frequency
of certain FFIEC 041 data items. These actions resulted in the
removal of approximately 950 or about 40 percent of the nearly
2,400 data items in the FFIEC 041. Of the data items remaining
from the FFIEC 041, the agencies reduced the quarterly
reporting frequency for approximately 100 data items in the
proposed FFIEC 051 to either semiannual or annual.
The agencies recognize that not all community institutions
eligible to file the FFIEC 051 have seen a substantial
reduction in burden by switching to this new version of the
Call Report. Approximately 300 of the data items removed from
the FFIEC 041 to create the FFIEC 051 were data items for which
all institutions with assets less than $1 billion were exempt
from reporting. Other items not included in the FFIEC 051
applied to institutions of all sizes, but may not have applied
to every community institution due to the nature of each
institution's activities. For example, in creating the FFIEC
051, the agencies removed from the FFIEC 041 the data items on
Schedule RC-L, Derivatives and Off-Balance Sheet Items, in
which about 800 eligible institutions that have derivative
contracts had been required to separately report the gross
positive and negative fair values of these contracts by
underlying exposure. On the other hand, the agencies reduced
from quarterly to semiannual the reporting frequency in the
FFIEC 051 of Schedule RCC, Part II, Loans to Small Businesses
and Small Farms, which bankers have cited as one of the more
burdensome Call Report schedules, and Schedule RC-A, Cash and
Balances Due from Depository Institutions, which applies only
to institutions with $300 million or more in total assets.
About 90 percent of institutions with less than $1 billion in
total assets have data to report in Schedule RC-C, Part II.
Nearly all of the more than 1,400 institutions with between
$300 million and $1 billion in assets report dollar amounts in
Schedule RC-A.
In addition, during the banker outreach activities the
agencies conducted as part of their community bank Call Report
burden-reduction initiative, bankers indicated that they
routinely review the Call Report instructions for data items
for which they have previously had no amounts to report to
determine whether this remains the case. The reduction in the
number of data items in the FFIEC 051 report compared to the
FFIEC 041 report means that bankers will not need to review as
many instructions for data items that are not applicable to
their institutions, thereby reducing reporting burden.
In their ongoing communications to the industry about the
new streamlined report and the Call Report burden-reduction
initiative itself, the FFIEC and the bankingagencies have
emphasized that the introduction of the FFIEC 051 Call Report
in March 2017 was not the end of their streamlining efforts and
that they would be issuing additional burden-reducing Call
Report proposals in 2017. In this regard, the banking agencies,
under the auspices of the FFIEC, published a Federal Register
notice on June 27, 2017, that requests comment for 60 days on
further proposed burden-reducing revisions to the three
versions of the Call Report. These revisions are proposed to
take effect March 31, 2018.
These proposed revisions in the current proposal resulted
from the review of responses from Call Report users at FFIEC
member entities to the middle portion of a series of nine
surveys of groups of Call Report schedules requiring users to
explain their need for and use of the data items in these
schedules. The FFIEC and the agencies also considered comments
regarding the Call Report
received during the EGRPRA review, feedback and suggestions
received during banker outreach activities, and comments on the
agencies' August 2016 FFIEC 051 Call Report proposal. The
agencies' current Call Report proposal would remove, raise the
reporting threshold for, or reduce the reporting frequency of
approximately 7 percent of the data items in the FFIEC 051 Call
Report for eligible small institutions. The proposal includes
similar actions affecting 10 percent and 12 percent of the much
larger number of data items in the FFIEC 041 and FFIEC 031 Call
Reports, respectively.
The Federal Register notice for the current Call Report
proposal notes that the agencies plan to propose further
burden-reducing changes resulting from their analysis of the
responses to the final portion of the nine user surveys. The
FFIEC and the agencies expect to issue this next proposal for
public comment later this year. These proposed revisions also
would have a planned effective date of March 31, 2018, but the
actual effective date would be dependent on industry feedback.
In addition, in their August 2016 Federal Register notice
proposing the streamlined FFIEC 051 Call Report for eligible
small institutions, the agencies stated their commitment to
explore alternatives to the $1 billion asset-size threshold
that, at present, generally determines an institution's
eligibility to file the FFIEC 051 Call Report. In beginning
this effort this quarter, the FFIEC member entities will be
evaluating Call Report data from institutions of various sizes
in excess of $1 billion, particularly with respect to
institutions' involvement in the complex and specialized
activities for which only limited information is collected in
the FFIEC 051 report compared to the more detailed data on
these activities currently reported in the FFIEC 041 report.
The FFIEC's goal would be to ensure that any proposed expansion
of the eligibility to file the FFIEC 051 Call Report would not
result in a loss of data critical to effective supervision and
the conduct of FFIEC member entities' other missions. Any
proposal to expand eligibility for the FFIEC 051 report would
be published in the Federal Register for public comment.
Q.3.b. Do any of these changes require statutory authorization?
A.3.b. No, the burden-reducing changes to the Call Report that
the agencies have implemented and are continuing to propose do
not require statutory authorization.
Q.4. Our financial system has become increasingly consolidated,
as community banks and credit unions either close their doors
or merge with larger institutions.
Q.4.a. Are you concerned about this pattern? Why?
Q.4.b. What services can these smaller institutions provide
that larger institutions cannot provide?
A.4.a.-b. Consolidation is a long-term banking industry trend
that dates back to the mid-1980s. The number of federally
insured bank and thrift charters has declined by two-thirds
since 1985. Long-term consolidation in banking has taken place
in the context of powerful historical forces--two banking
crises and relaxation of restrictions on intra-State branching
and interstate banking and branching. Since the financial
crisis, voluntary mergers and a very slow pace of de novo bank
formation have contributed to continued consolidation. These
trends are likely related to the historically low interest
rates and slow growth in economic activity that have been
experienced during the post-crisis period.
While 95 percent of community banks were profitable last
year, they clearly face some economic headwinds. Low interest
rates have contributed to narrow net interest margins, subpar
levels of profitability, and low market premiums as reflected
in price-to-book ratios for banks. These conditions have made
it less attractive to start new banks and more attractive to
acquire existing banks. Our expectation is that once interest
rates normalize, we will begin to see the pace of bank mergers
and new bank formation return to more normal levels, thereby
slowing the pace of consolidation. We are already seeing an
increase in new applications for deposit insurance, and have
approved 6 of these applications over the past 10 months.
It should be pointed out that the consolidation of
community bank charters does not necessarily diminish the
influence of community banks in their local market. More than
three-quarters of the community banks that have been acquired
since the end of 2015 were acquired by other community banks.
After declining steadily in the years leading up to the crisis,
the community bank share of industry loans has remained steady
since 2007 at just over 16 percent. On a merger-adjusted basis,
annual growth in total loans at community banks has exceeded
growth at noncommunity banks for five consecutive years.
The FDIC is acutely aware of the importance of community
banks to the U.S. financial system and our economy. In 2012, we
initiated a community bank research initiative that has
resulted in a comprehensive review of this sector and a
continuing series of research papers designed to better
understand how it is performing over time.\1\ While community
banks hold 13 percent of industry assets, they hold 43 percent
of small loans to farms and businesses. Community banks hold
more than three-quarters of FDIC-insured deposits in over 1,200
U.S. counties, making them the lifeline to mainstream banking
for rural counties, small towns, and urban neighborhoods across
the country.
---------------------------------------------------------------------------
\1\ See FDIC, Community Banking Initiative, Research and Reports.
https://www.fdic.gov/regulations/resources/cbi/research.html.
---------------------------------------------------------------------------
As relationship lenders, community banks have an ability to
tailor their services to the needs of their customers. They
play a unique role in small business lending, real estate
lending, and the vitality of their local economies that large
institutions often are unable to fill. The FDIC carries out its
regulatory and supervisory responsibilities with this in mind.
Q.5. Multiple anecdotes from constituents make it clear that
there are several Nebraska counties where consumers cannot get
a mortgage, due to CFPB regulations such as TRID and the QM
rule. What is the best way to address this problem from a
regulatory standpoint?
A.5. As a general matter, we have not seen a QM rule-related
effect on access to mortgage credit, Likewise, preliminary
results from examinations on TRID show that banks are
successfully complying with the rule.
QM status involves important safeguards for lenders,
borrowers, and the system, including basic underwriting
standards and protections against products that proved to be
particularly risky in the crisis, such as option ARMs,
negatively amortizing loans, and certain balloon loans. Most of
our institutions had already been making loans consistent with
the QM standard prior to the rule being promulgated, as noted
in a GAO study titled ``Mortgage Reforms: Actions Needed to
Help Assess Effects of New Regulations,'' GAO-15-185 (June
2015).
In addition, changes by the CFPB to the definitions of
``small creditor'' and ``rural'' further expanded the
eligibility of community banks and allowed additional
flexibility to comply with the Ability to Repay (ATR)/QM Rule.
For example, such entities may offer balloon QM loans and are
not constrained by QM debt-to-income limits. The vast majority
of FDIC supervised institutions are small creditors and qualify
as ``rural'' under the rules.
Additionally, the FDIC and the other prudential bank
regulators have issued guidance saying that, to the extent
insured depositories are making non-QM loans, as long as the
loan is made in a safe and sound manner, such loans will not be
subject to criticism solely on the basis of being a non-QM
loan. We are seeing reports in the trade press that non-QM
lending is growing.\2\
---------------------------------------------------------------------------
\2\ According to a May 12, 2017, article in Inside Nonconforming
Markets, there has been an increase in the amount of non-QM mortgage
lending leading to a re-emergence of mortgage-based securities backed
by non-QM loans. This has helped lower interest rates for the product,
according to this article.
---------------------------------------------------------------------------
TRID was promulgated in part because of longstanding
industry concerns regarding required disclosures for mortgage
transactions. Required disclosures under TILA and RESPA
overlapped, which confused and overwhelmed consumers without
providing needed clarity on details of the loan transaction.
Concerns were also raised that consumers did not easily
understand loan cost or pricing information.
Since both the QM rule and the TRID rule went into effect,
the merger-adjusted growth in 1-to-4 family mortgages made by
community banks has improved (continuing a trend that began in
2010) and has consistently outperformed noncommunity banks.
Q.6. Are there concrete ways in which you believe the CFPB has
improperly tailored regulations to match the unique profile of
smaller financial institutions?
A.6. During the consultation process, we have generally found
the CFPB to be interested in the FDIC's perspective as the
primary Federal supervisor of the majority of the Nation's
community banks. In our view, major rules typically take into
account the profile of smaller financial institutions and make
adjustments intended to address differences between community
bank business models and business models of other institutions.
For example, the CFPB established and then significantly
broadened the definitions of ``small creditor'' and ``rural''
lender, allowing the majority of community banks to qualify for
multiple exceptions contained in the new mortgage rules. The
CFPB, through its rulemakings, has extended a number of
accommodations that reflect the profile of smaller financial
institutions, including:
LA broader safe harbor for a small creditor's
Qualified Mortgage (QM) loans kept in portfolio for 3
years.
LA significantly expanded exemption from the
requirement to escrow for higher-priced mortgage loans
for small creditors operating in rural or underserved
areas; a small creditor now qualifies for this
exemption if it makes just one mortgage loan in a rural
area in the past year. In addition, these small
creditors are able to offer QMs that have balloon
payment features without regard to the 43 percent debt-
to-income (DTI) limit in the standard QM.
LAn exemption for small servicers from the more
process- and paperwork-intensive requirements of the
new servicing rules, including those related to early
intervention, continuity of contact, certain loss
mitigation, the provision of periodic statements, and
the requirement to maintain written policies and
procedures.
LA de minimis exception allowing occasional mortgage
loan originators to participate fully in a bank's
profit-sharing plan; this exception is particularly
helpful to the management and staff of smaller
financial institutions that on occasion need to step in
and cover for full-time loan originators.
Q.7. My understanding is that very few banks have opened since
the passage of Dodd-Frank.
Q.7.a. Why do you believe this is the case?
A.7.a. New or de novo bank formation has always been cyclical.
De novo activity dropped to historically low levels after the
last financial crisis in the 1980s and early 1990s, before
recovering as the economy improved. De novo activity has surged
in economic upswings, such as those of post-World War II, the
mid-1990s, and the early 2000s. But in the recent post-crisis
period, the pace of new bank formation has slowed to historic
lows, averaging around one de novo institution per year since
2010.
There are a number of factors that have slowed new bank
formation. For potential bank investors, the opportunity to
acquire failed or underperforming institutions represents an
alternative to starting new banks. In periods with high levels
of problem banks and failures and low price-to-book ratios,
acquisitions may represent a more economical way for interested
investors to acquire the operations of troubled banks,
including loan and deposit platforms, personnel, and back
office operations. These factors have likely increased the pace
of voluntary mergers in recent years even as the annual number
of crisis-related failures has fallen.
Profitability ratios have also not been conducive to new
bank formation in the post-crisis period. During this period,
community bank earnings have recovered, and 95 percent of
community banks had positive earnings in 2016. But historically
low interest rates and narrow net interest margins have kept
bank profitability ratios (return on assets and return on
equity) well below pre-crisis levels, making it relatively
unattractive to start new banks. A recent study by economists
at the Federal Reserve suggests that economic factors alone--
including a long period of zero interest rates--explain at
least three quarters of the post-crisis decline in new
charters.\3\ The authors conclude:
---------------------------------------------------------------------------
\3\ Adams, Robert M. and Gramlich, Jacob (2016), ``Where Are All
the New Banks? The Role of Regulatory Burden in New Bank Formation,''
Review of Industrial Organization, 48(2), pp. 181-208.
The large, recent decline in new bank formation has been noted
by industry observers, policymakers, and the public press.
Concern has been expressed by some that the decline may be due
to burdensome regulation. This paper addresses the hypothesis
by investigating the factors that have led to the dramatic
decline in new charters. Interest rates are known drivers of
banking profitability, and regression results suggest that
these rates--plus other nonregulatory influences such as weak
banking demand--would have caused approximately 75 percent or
more of the decline in new charters absent any regulatory
effect. These nonregulatory effects have been under-emphasized
---------------------------------------------------------------------------
in the popular press.
To the extent that this model is accurate, one would expect the
rate of new applications to rise as interest rates and other
economic indicators normalize. We have seen an increase in de
novo activity accompanying the recent interest rate increases
by the Federal Reserve. The FDIC has approved deposit insurance
for six de novo banks in the past 10 months, and is receiving
increasing expressions of interest by groups considering
starting a new bank.
Q.7.b. What potential impacts does this have on our financial
system?
A.7.b. The entry of new banks helps to preserve the vitality of
the community banking sector. The dearth of new bank formation
since the financial crisis is therefore a matter of concern to
the FDIC and a focus of our attention.
Community banks are critically important to the U.S.
financial system. FDIC research documents that community banks
today account for approximately 13 percent of the banking
assets in the United States, and approximately 44 percent of
all small loans to businesses and farms made by all banks in
the United States. These statistics may understate the
importance of community banks because most of the small
business lending by large banks is credit card lending. In
fact, community banks are generally the lenders with the first-
hand knowledge about the small business seeking a loan.
Furthermore, FDIC research has also found that community banks
are the only banking offices in more than 20
percent of counties within the United States, meaning that the
only physically present banking institution for thousands of
rural communities, small towns, and urban neighborhoods is a
community bank. As a result, community banks matter
significantly in providing basic banking services and credit to
consumers, farms, and small businesses across the United
States.
Q.7.c. Is there anything more the FDIC can do to encourage the
opening of new banks?
A.7.c. The FDIC welcomes applications for deposit insurance,
and is committed to working with any group with an interest in
starting an insured depository institution. We have seen
indications of increased interest in de novo charter
applications in recent quarters.
FDIC has undertaken a number of initiatives to encourage
deposit insurance applications, including the following:
LIssued two sets of answers to frequently asked
questions associated with the FDIC's Statement of
Policy on Applications for Deposit Insurance to provide
transparency and to aid applicants in developing
proposals. Topics include; pre-filing meetings,
processing timelines, capitalization, and business
plans.
LProvided an overview of the deposit insurance
application process during a conference of State bank
supervisory agencies, and hosted an interagency
training conference to promote coordination among State
and Federal banking agencies in the review of
applications.
LReturned the period of enhanced supervisory
monitoring of newly insured depository institutions to
3 years from 7 years.
LDesignated subject matter experts or applications
committees in the FDIC regional offices to serve as
points of contact for deposit insurance applications.
LInitiated industry outreach meetings to ensure
industry participants are well informed about the
FDIC's application process, and are aware of the tools
and resources available to assist organizing groups.
Outreach meetings were held in all six of the FDIC's
Regions.
LConsolidated application-related resources on the
FDIC's public website to provide better and more
efficient access to applicable materials for organizers
and other interested parties.
LIssued a deposit insurance application handbook for
public comment. This publication serves as a guide for
organizing groups and incorporates lessons shared by de
novo banker panelists during the outreach events. The
publication also addresses the timeframes within which
applicants may expect communication from the FDIC
regarding the application review process.
LIssued for public comment a procedures manual for
processing and evaluating deposit insurance
applications. The manual contains expanded instructions
for FDIC staff as they evaluate and process deposit
insurance applications, and addresses each stage of the
insurance application process: from pre-filing
activities to application acceptance, review, and
processing; preopening activities; and postopening
considerations. Making these expanded instructions
public is meant to enhance the transparency of FDIC's
evaluation processes.
LFurther, several initiatives are underway and will be
completed later this year. Among these, FDIC is
conducting additional training for internal staff that,
in part, addresses deposit insurance applications. FDIC
will also be considering the need for additional
answers to frequently asked questions associated with
the FDIC's Statement of Policy on Applications for
Deposit Insurance.
Q.7.d. Is there anything more Congress should do to encourage
the opening of new banks?
A.7.d. The FDIC believes that new bank formation is primarily
driven by economic conditions and the interest rate
environment, as these are factors that heavily influence
overall economic activity within a market and the profitability
of a proposed institution. As conditions improve, we expect to
see renewed interest in new bank formation. In fact, the FDIC
has approved a number of applications in recent months, and has
seen indications of additional interest on the part of
organizing groups.
As such, we believe the appropriate statutory and
regulatory structure is in place. Further, we believe the
various initiatives undertaken by the FDIC with respect to
deposit insurance applications will aid interested parties in
pursuing the formation of additional insured depository
institutions.
Q.8. I'm concerned that our Federal banking regulatory regime
relies upon too many arbitrary asset thresholds to impose
prudential regulations, instead of relying on an analysis of a
financial institution's unique risk profile.
Q.8.a. Should a bank's asset size be dispositive in evaluating
its risk profile in order to impose appropriate prudential
regulations?
A.8.a. The use of dollar thresholds has always been an integral
part of bank regulation, but this is only one consideration
within a comprehensive process in assessing institution risk.
Establishing cohorts based on asset size provides benefit for
supervisors. For example, regulatory Call Reports group
institutions based on asset size, loan review processes
establish dollar thresholds for review samples, and community
and large bank thresholds are established for analytical
purposes. Use of asset size allows regulators to conduct
comparative analysis of institutions based on standardized
reporting requirements.
However, it is important to note that these thresholds are
a starting point, and are only one of many factors considered
in assessing the risk profile of an institution. It is
essential that regulators are granted flexibility within
statutory requirements to tailor supervisory programs based on
risk identified to apply more robust standards and review to
those institutions with complex business models and less to
less complex institutions, regardless of asset size.
Q.8.b. If not, what replacement test should regulators follow
instead of, or in addition to, an asset-based test?
A.8.b. As mentioned above, establishment of asset thresholds is
a long-standing principle within supervisory frameworks. This
metric is not a standalone measure of risk, but acts as one
input in
assessing risk at individual institutions or industry-wide. The
concept of risk-based supervision is critical in implementing
an effective supervisory program, which allows for efficient
allocation of resources to address emerging risk within the
industry. The risk-focused examination process attempts to
assess an institution's ability to identify, measure, evaluate,
and control risk. If management controls are properly designed
and effectively applied, they should help ensure that
satisfactory future performance is achieved. In a rapidly
changing environment, a bank's condition at any given point in
time may not be indicative of its future performance. The risk-
focused examination process seeks to strike an appropriate
balance between evaluating the condition of an institution at a
certain point in time and evaluating the soundness of the
bank's processes for managing risk.
Regulators may also identify business lines or products
that show building risk features and conduct horizontal reviews
to assess potential systemic risks posed.
Large institutions are subject to enhanced supervision
given that a relatively small number of insured institutions
represent a significant majority of industry assets. This risk-
focused view is a well-established concept embedded in existing
supervisory frameworks.
Q.9. Both Mr. Noreika and Governor Powell testified on the need
to further tailor the Volcker Rule. Do you agree? Why or why
not?
A.9. I understand that certain aspects of the Volcker Rule may
be complicated, particularly for smaller banking organizations.
I think that it is important for the agencies to review the
Volcker Rule to identify and reduce unnecessary complexity and
burden. There is a lot that can be done in this area through
the rulemaking process and I believe that the agencies should
exhaust the rulemaking process before seeking statutory change.
For example, the agencies could look at providing a safe harbor
to banking organizations that meet certain activities-based
criteria. As long as a banking organization met. the safe
harbor requirements, it would not be required to prove
compliance with the proprietary trading restrictions of the
Volcker Rule. This would greatly reduce compliance concerns for
most smaller banking organizations.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR WARNER FROM MARTIN J.
GRUENBERG
Q.1. Cybersecurity regulation is receiving increased emphasis
by all financial institution regulators. How do your agencies
coordinate with each other to harmonize the promulgation of new
cybersecurity regulations? With the increased use of the NIST
Cybersecurity Framework by both Federal agencies and the
private sector, how do your agencies intend to achieve greater
alignment between the framework and your own regulatory
initiatives?
A.1. The FDIC, the Federal Reserve Board, and the Office of the
Comptroller of the Currency (the Federal banking agencies) have
not issued any cybersecurity regulations. The Federal banking
agencies have, however, coordinated to publish a joint advance
notice of proposed rulemaking on Enhanced Cyber Risk Management
Standards in October 2016. The agencies are considering the
comments received.
The FDIC, as a member of the Federal Financial Institutions
Examination Council (Council), collaborates with the Board of
Governors of the Federal Reserve System, the Consumer Finance
Protection Bureau, the National Credit Union Administration,
the Office of the Comptroller of the Currency, and the State
Liaison Committee to harmonize any new cybersecurity guidance,
policies and procedures. The Council is a formal interagency
body empowered to prescribe uniform principles, standards, and
report forms for the examination of financial institutions and
to make recommendations to promote uniformity in the
supervision of financial institutions. The Council's Task Force
on Supervision meets monthly, and each agenda includes a
discussion of cybersecurity issues.
LIn June 2013, the FFIEC announced the creation of
the Cybersecurity and Critical Infrastructure Working
Group to enhance communication on these areas among the
FFIEC members. This working group has created work
programs and other tools to coordinate the members'
cybersecurity examinations.
LOn June 30, 2015, the Council released a
Cybersecurity Assessment Tool (Assessment) in response
to requests from the industry for assistance in
determining preparedness for cyber threats. The
Assessment was updated in May 2017, to address industry
feedback after use. Institution use of the Assessment
is voluntary. The Assessment incorporates
cybersecurity-related principles from the FFIEC
Information Technology (IT) Examination Handbook and
regulatory guidance, and concepts from other industry
standards, including the NIST Cybersecurity Framework.
Appendix B of the assessment provides a mapping of the
Assessment to the NIST Cybersecurity Framework.
The FDIC, as a member of the Financial and Banking Information
Infrastructure Committee (FBIIC), is evaluating ways to further
align guidance, exam procedures, and tools (like the
Assessment) with the NIST Cybersecurity Framework. For example,
the Committee has received industry feedback on the value of
creating a common cybersecurity lexicon, based on NISI
material, which would be used consistently across agencies.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR WARREN FROM MARTIN J.
GRUENBERG
Q.1. The House of Representatives recently passed the Financial
Institutions Bankruptcy Act of 2017 (FIBA), which amends the
bankruptcy code to allow big financial institutions to elect a
new ``Subchapter V'' bankruptcy process. While the legislation
does not repeal Title II of the Dodd-Frank Act, many argue that
if FIBA or similar legislation is enacted, Congress can safely
repeal Title II.
Q.1.a. Do you agree with that view?
A.1.a. No. While we support efforts to improve the Bankruptcy
Code with respect to the resolution of a large, complex
financial institution with global operations, given the
uncertainties
surrounding any particular failure scenario, a backstop is
required for circumstances when failure in bankruptcy might
threaten the financial stability of the United States. The
Orderly Liquidation Authority (OLA) of Title II of the Dodd-
Frank Act is an essential backstop for protecting taxpayers,
avoiding bailouts, and ensuring that financial firms can fail
in an orderly way.
While FIBA or similar legislation may help improve failure
in bankruptcy, it does not address all the key obstacles that
could threaten orderly resolution of a potential systemic
financial institution. For example, FIBA provides no liquidity
or DIP financing should the institution lack, or be unable to
secure, sufficient resources on its own. Title II, by contrast,
provides the Orderly Liquidation Fund (OLF)--a dedicated, back-
up source of liquidity not capital to be used, if necessary, in
the initial stage of resolution until private funding can be
accessed. This ensures that the institution will not have to
resort to fire sales of assets to raise liquidity, which, in
turn, would have systemic effects. This marks a critical
difference between Title II and an amended Bankruptcy Code. No
taxpayer funds may be used to repay any borrowings from the
OLF. Repayments must come from the assets of the filed
institution or through assessments on large financial
institutions. Other key obstacles include the inability of a
bankruptcy court to engage in cross-border cooperation and pre-
failure planning. Development of cross-border relationships
with key foreign jurisdictions are a key element to avoiding
systemic effects where financial institutions engage in highly
interconnected global operations--such as facilitating payments
and processing the foreign exchange transactions that are vital
to international finance.
The OLA enables the FDIC to address these obstacles if
necessary, in circumstances when failure in bankruptcy could
not.
Finally, it is important to note that many bankruptcy
experts share the view that Title II should continue to remain
available even if the Bankruptcy Code is amended. The National
Bankruptcy Conference, a voluntary, nonpartisan, organization
of 60 of the Nation's leading bankruptcy judges, professors,
and practitioners, stated in their letter to Congress in
response to FIBA:\1\
---------------------------------------------------------------------------
\1\ http://nbconf.org/wp-content/uploads/2015/07/NBCLetter-re-
Resolution-of-Systemically-Important-Financial-Institutions-March-17-
2017.pdf.
. . . we are concerned that the bankruptcy process might not
be best equipped to offer the expertise, speed and decisiveness
needed to balance systemic risk against other competing goals
in connection with resolution of a SIFI [systemically important
financial institution]. Likewise, bankruptcy might not be the
best forum in which to foster cooperation by non-U.S.
regulators of foreign subsidiaries whose adverse actions could
prevent the orderly resolution of the firm. Consequently, the
Conference believes a regulator supervised resolution regime
with resolution tools similar to those contained in OLA
[Orderly Liquidation Authority] should continue to be available
even if special provisions are added to the Bankruptcy Code
---------------------------------------------------------------------------
with respect to the resolution of SIFIs.
Q.1.b. If not, what do you think the risks would be to
taxpayers, the financial system, and the economy of repealing
Title II even if FIBA or similar legislation were enacted?
A.1.b. During the financial crisis, policymakers lacked the
tools for managing the failure of a potentially systemic
financial institution, and--when faced with that possibility--
were forced to choose
between two bad options: taxpayer bailouts or systemic
disruption in bankruptcy.
It is clear that without the Title II OLA, we would be back
in the same position as 2008, with the same set of bad choices.
Q.2. The FDIC closely monitors the health of the banking
industry.
Q.2.a. How would you describe the performance of so-called
regional banks (those with between $50 billion and $500 billion
in assets) in the last 5 years?
A.2.a. Banks with assets between $50 billion and $500 billion
accounted for 0.5 percent of all banks and 30 percent of total
industry assets over the last 5 years. In aggregate, this peer
group has been as profitable as the overall industry with an
average pre-tax return on assets (ROA) of 1.47 percent compared
to 1.48 percent for the industry.\2\
---------------------------------------------------------------------------
\2\ We use pre-tax ROA to compare profitability across size groups
because many community banks are organized as Subchapter S Corporations
(35 percent of all banks with assets less than $10 billion at year-end
2016). Subchapter S Corporations pass income and tax obligations of the
corporation through to shareholders. As a result, comparing net income
on a pre-tax basis avoids overstating the relative profitability of
Subchapter S Corporations.
---------------------------------------------------------------------------
This peer group had higher revenues (as a percent of total
assets) than the overall industry, in part due to a higher
average net interest margin.
These banks experienced loan growth greater than the
industry 5-year average at 5.3 percent while the industry grew
only 4.6 percent. Regarding capital, their leverage capital
ratio is above the industry average while their total risk
weighted capital ratio is slightly below the industry average.
Q.2.b. How does that performance compare to community banks
(banks with under $10 billion in assets), mid-size banks (those
with between $10 billion and $50 billion in assets), and the
biggest banks (those with more than $500 billion in assets)?
A.2.b. Banks with assets less than $10 billion accounted for 98
percent of all banks and 19 percent of total industry assets
over the last 5 years. With an average pre-tax ROA of 1.34
percent, this peer group was somewhat less profitable on a pre-
tax basis than those banks with assets between $50 billion and
$500 billion. These banks experienced a 5-year average loan
growth rate of 5.8 percent, higher than banks with total assets
between $50 billion and $500 billion and higher than the
industry average. These banks have a leverage capital ratio
considerably higher than the industry average.
Banks with assets between $10 billion and $50 billion
accounted for 1.1 percent of all banks and 10 percent of total
industry assets over the last 5 years. With an average pre-tax
ROA of 1.79 percent, this peer group was more profitable on
average than those banks with assets between $50 billion and
$500 billion. This group had the highest 5-year average loan
growth at 7.9 percent, well above the industry average. These
banks, as with those with total assets between $50 billion and
$500 billion, have a leverage capital ratio slightly higher
than the industry average.
Banks with assets greater than $500 billion (the four
largest FDIC-insured banks) accounted for 0.06 percent of all
banks and 41 percent of total industry assets over the last 5
years. With an average pre-tax ROA of 1.49 percent, this peer
group has been as profitable as those banks with assets between
$50 billion and $500 billion. However, these banks have not
grown their loan portfolios as rapidly as the other groups and
are well below the industry average with a 5-year average of
2.3 percent. These banks have a leverage capital ratio
considerably less than the industry average.
Q.2.c. Do you see evidence that being subject to tailored
enhanced prudential standards has precluded regional banks from
competing against banks of other sizes?
A.2.c. Banks subject to enhanced prudential standards are a
diverse group with business models that yield differing
measures of performance. However, with a pre-tax ROA
essentially the same as the overall industry, loan growth
greater than the industry average, and with an overhead expense
ratio (as a percent of total assets) less than that of banks
with assets below $50 billion, there is no evidence at the
aggregate level that this peer group is having difficulty
competing against banks that are not subject to enhanced
prudential standards.
Q.3. At the Banking Committee hearing, you testified that you
favored maintaining the $50 billion threshold for enhanced
prudential standards rather than raising it or replacing it
with a set of qualitative requirements. What are the risks of
raising or replacing the threshold?
A.3. The use of dollar thresholds as a supervisory tool has
always been an integral part of the regulatory process. It is
beneficial to use quantitative measures to assess and monitor
risk on an ongoing basis. Such measures allow for supervisors
to effectively and efficiently identify potential outliers and
assign resources as needed to further analyze potential
exposure. Establishing thresholds allows for effective
comparative analysis among institutions, portfolios, business
lines, or other operations of a financial institution to
identify, monitor, and react to risk.
In our judgment, the concept of enhanced regulatory
standards for the largest institutions is sound and is
consistent with our approach to bank supervision. It is
appropriate to take into account differences in the size and
complexity of banking organizations when assessing risk and
developing regulatory standards, and the concept of risk-based
supervision is a key tenant of an effective supervisory
program. Asset thresholds are a starting point in terms of the
overarching supervisory process and represent only one of many
tools used in assessing risk of large institutions. It is
important to maintain flexibility in our ability to apply
supervisory standards. Clearly, there is a range of risk posed
by the institutions with total assets over $50 billion, and the
regulators' goal is to tailor processes to address more complex
and higher risk activities. From the perspective of a deposit
insurer, the most expensive failure in the most recent
financial crisis was that of an institution with $32 billion in
assets that resulted in losses to the deposit insurance fund of
approximately $12.8 billion.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM MARTIN J.
GRUENBERG
Q.1. I'm a proponent of tailoring regulations based off of the
risk profiles of financial institutions; as opposed to having
strict asset thresholds that do not represent what I believe is
the smart way to regulate. But, my question here is really
about the importance of ensuring that we have a system that is
rooted in fundamental, analytical, thoughtful regulation so
that we can achieve and execute on goals, whether balancing
safety and soundness with lending and growth, or encouraging
more private capital in the mortgage market to protect
taxpayers and reform the GSEs.
Q.1.a. Do you think that we should use asset thresholds as a
way to regulate--yes or no? If no, can you provide me with the
metrics or factors by which a depository institution should be
evaluated? If yes, please explain.
A.1.a. The use of dollar thresholds has always been an integral
part of bank regulation, but this is only one consideration
within a comprehensive process in assessing institution risk.
Establishing cohorts based on asset size provides benefit for
supervisors. For example, regulatory Call Reports group
institutions based on asset size, loan review processes
establish dollar thresholds for review samples, and community
and large bank thresholds are established for analytical
purposes. Use of asset size allows regulators to conduct
comparative analysis of institutions based on standardized
reporting requirements.
However, it is important to note that these thresholds are
a starting point, and only one of many factors considered in
assessing the risk profile of an institution. It is essential
that regulators are granted flexibility within statutory
requirements to tailor supervisory programs based on risk
identified to apply more robust standards and review to those
institutions with complex business models and less to less
complex institutions, regardless of asset size.
Q.1.b. Section 165 of Dodd-Frank requires enhanced supervision
and prudential standards for banks with assets over $50
billion. This applies to any bank that crosses the asset
threshold, without regard to the risks those banks pose based
upon the complexity of the business model. This includes
heightened standards on liquidity and capital under the
Liquidity Coverage Ratio (LCR) and the Comprehensive Capital
Analysis and Review (CCAR) which have a various assumptions
built in that may drive business model.
Q.1.b.i. I understand under these two regulatory regimes, banks
have changed certain lending behaviors because of the
assumptions Federal regulators have made regarding certain
classes of assets and deposits. Can you provide some examples
of how the LCR and CCAR have changed the types of loans,
lending, and deposits your institution holds?
Q.1.b.ii. Construction lending by banks over the $50 billion
threshold has been a source of concern, namely, because these
enhanced prudential standards have treated construction loans
punitively. This includes construction lending for builders of
apartments, warehouses, strip malls, and other projects that
may have varying risk profiles associated with them. However,
under the CCAR and DFAST assumptions, the regulators have
assigned all these categories of lending the same capital
requirements. The result is an overly broad capital requirement
for varying loans that have different risks, a capital
requirement that maybe greater for some loans and lower for
others, influencing the decision of many banks over the $50
billion threshold to hold less of these assets due to the
punitive capital requirements associated with them. Have you
seen a similar corresponding issue with construction loans
because of the heightened prudential standards?
Q.1.b.iii. Under the CCAR regulations, Federal regulators
routinely assign risk weights to certain assets that Bank
Holding Companies have on their balance sheets. These risk
weights often time changes the costs associated with holding
certain investments, such as Commercial Real Estate. Has this
changed the type of assets that institutions hold, or caused
institutions to alter their business plans because of the
regulatory capital costs? If so, can you provide examples of
this?
A.1.b.i.-iii. FDIC Quarterly Banking Profile reports show that
asset and loan growth has been generally strong post crisis.
For full-year 2016, total loans and leases increased by $466
billion. Loan growth rates in the past 3 years are approaching
those reported prior to the recession, and larger banks are the
primary driver of loan growth trends for the industry.
Many of the principles and standards required by the Dodd-
Frank Act address issues that are within the existing scope of
Federal banking agencies authority. For example, the agencies
have the ability to: establish regulatory capital requirements,
liquidity standards, risk-management standards, and
concentration limits; to mandate disclosures and regular
reports; and to conduct stress tests. These are important
safety and soundness authorities that the agencies have
exercised by regulation and supervision in the normal course
and outside the context of section 165.
Banks and bank holding companies are subject to risk-based
capital rules separate and distinct from CCAR. The risk-weights
were assigned deliberatively based on notice and comment, and
the risk-based capital rules divide exposure types into broad
risk weight categories. This is intended to assign lower
capital charges to low-risk credit exposures and higher capital
charges to high-risk credit exposures. For example, the capital
rules do impose a higher risk weight for certain acquisition,
development or construction loans. However, commercial real
estate lending remains robust across the banking industry which
indicates that banking organizations are not dissuaded as a
result of the risk weight. Unfunded commitments to make
commercial real estate loans also are exhibiting robust growth,
suggesting that there continues to be momentum for future
commercial real estate lending growth.
Q.1.b.iv. Do you think that regulators, on a general basis, get
the risks weights right?
A.1.b.iv. The risk-based capital rules provide a relative basis
to separate lower risk activities from higher risk activities.
The risk weights were assigned deliberatively based on notice
and comment, and the risk-based capital rules divide exposure
types into broad risk weight categories. This is intended to
assign lower
capital charges to low-risk credit exposures and higher capital
charges to high-risk credit exposures. Careful consideration is
given to the tradeoff between the number of risk weight
categories and risk sensitivity of the framework versus the
desire to reduce unnecessary complexity.
In general, the risk weights are designed to apply on a
portfolio level so that, in the aggregate, low-risk and high-
risk assets can be differentiated for risk-based capital
purposes. The risk weights are subject to regular review to
assure they are appropriately capturing relative risk.
Q.1.b.v. Fed Governor Tarullo, has argued that the $50 BB
threshold is too low in terms of an asset threshold for
enhanced prudential standards; does this number make sense? Why
do we need such arbitrary thresholds? Shouldn't we get away
from these thresholds and move toward a regulatory system that
evaluates substance and activities of an institution as opposed
to an arbitrary number? Why can't we do that?
A.1.b.v. Please refer to A.1.a. above.
Q.1.b.vi. Does Title I allow the Fed to treat a $51 BB bank in
a similar manner to a $49 BB bank for the purposes of enhanced
prudential standards?
A.1.b.vi. The thresholds established in the enhanced prudential
standards legislative framework establish a starting point by
which to apply more robust standards to larger institutions,
and it is critical that regulators have sufficient flexibility
in applying these standards based on risk. Over the past 7
years, the FDIC and other agencies have used that flexibility
to tailor requirements for firms over $50 billion.
Q.2.a. Since Section 29 of the Federal Deposit Insurance Act
establishing brokered deposits was enacted in 1989; the has
remained unchanged despite significant changes in the industry,
technology and the financial regulatory structure, including
the passage of Gramm-Leach-Bliley and Dodd-Frank. Furthermore,
since 1989, the FDIC has written a series interpretive letters
and FAQs that have significantly expanded the scope of deposits
required to be classified as brokered, going well beyond the
types of relationships and deposits that concerned Congress
when adopting Section 29. Yet in the FDIC's report stemming
from Section 1506 of Dodd-Frank, the FDIC concluded that no
statutory updating was necessary. In light of the significant
legal, technological and marketplace changes that have occurred
over the past quarter century, why has the FDIC refused to re-
examine its positions regarding what is a brokered deposit?
A.2.a. We recognize that what constitutes a brokered deposit is
fact specific and needs to take account of changes in
technology and the marketplace. In an effort to be responsive
to the unique and evolving ways in which banks can gather
deposits, FDIC staff continues to engage the industry. Through
advisory opinions, staff is able to provide interpretations on
new issues for example--whether deposits placed in new ways
stemming from legal, technological, and marketplace changes
would be considered brokered deposits.
As background, Section 29 was enacted in 1989 as part of
FIRREA to restrict troubled institutions from accepting
deposits from a third party (a deposit broker). The legislative
history of Section 29 reflects that many of the thrifts that
failed during the S&L crisis relied on volatile funding, such
as brokered deposits controlled by a few individuals, which
could be quickly withdrawn,
potentially destabilizing the institution. Further, many of
these institutions attempted to grow themselves out of trouble
with high cost brokered deposits. As a result, the institutions
increased asset yields by taking on greater risks in order to
balance the higher cost of funding, which ultimately resulted
in a higher number of failures and higher costs to the
insurance funds.
In 2011, pursuant to the Dodd-Frank Act, the FDIC
conducted, and subsequently submitted to Congress, a study on
core deposits and brokered deposits. Based upon the study,
which included public input and review of statistical analysis,
the FDIC concluded that the brokered deposit statute continues
to serve an important function. The key findings from the study
include that: (1) banks that use brokered deposits have a
higher growth rate and higher subsequent nonperforming loan
ratios, which are both associated with a higher probability of
failure; (2) deposits gathered through third parties or by
offering high interest rates may leave the bank quickly; and
(3) brokered deposits tend to increase the losses to the DIF
when a bank fails.
In 2015, in an effort to assist the industry and provide
information on identifying and accepting brokered deposits (as
provided by the statute, regulations, published advisory
opinions, and the study) in one place, the FDIC issued
Frequently Asked Questions (FAQs). That same year, staff held
an industry call to discuss the FAQs and to respond to
questions raised by the industry after the FAQs were issued.
More than 1,400 industry participants listened to the call, and
after gathering feedback, the FDIC requested comment on
proposed updates to the original FAQs. After consideration of
the public input (written comments and meetings with key
stakeholders), the FDIC issued an updated set of FAQs in 2016.
The FDIC intends to update the FAQs on a periodic basis, as
needed.
Q.2.b. Do you believe that legislation is needed to address
present-day issues with Section 29?
A.2.b. The brokered deposit statute provides an essential
function and is sufficiently flexible to allow the FDIC to
adapt to and address present-day issues. Based on the FDIC's
2011 study, deposits placed through third parties and high
interest rate deposits still present similar concerns to those
existing in 1989. As noted in the study, ``brokered deposits
are correlated with behaviors that increase the risk of
failure.''\1\ The study also notes that on average, banks that
accept brokered deposits typically rely on lower shares of core
deposit funds than banks that do not, and, as a result, they
face a higher probability of default in their loan portfolios.
---------------------------------------------------------------------------
\1\ See FDIC's Study on Core Deposits and Brokered Deposits, at p.
47.
---------------------------------------------------------------------------
The findings of the FDIC study are consistent with other
reviews. For example the Comprehensive Study on the Impact of
the Failure of Insured Depository Institutions \2\ noted that
material loss reviews \3\ reflecting the most commonly reported
contributing causes of failures of banks during the 2008-2009
financial crisis were ``the institutions' management strategy
of aggressive growth that concentrated assets in CRE and ADC
loans, often coupled with inadequate risk management practices
for loan underwriting, credit administration, and credit
quality review.'' According to this study, a number of these
IDIs also relied on ``volatile funding sources'' to support
their growth.
---------------------------------------------------------------------------
\2\ See Table 6, Page 50, Federal Deposit Insurance Corporation,
Office of the Inspector General, Comprehensive Study on the Impact of
the Failure of Insured Depository Institutions, EVAL-13-002, January
2013, https://www.fdicig.gov/reports13/13-002EV.pdf.
\3\ Section 38(k) of the FDI Act, as amended, provides that if the
Deposit Insurance Fund incurs a ``material loss'' with respect to an
insured depository institution, the Inspector General of the
appropriate regulator (which for the OCC is the Inspector General of
the Department of the Treasury) shall prepare a report to that agency,
identifying the cause of failure and reviewing the agency's supervision
of the institution.
---------------------------------------------------------------------------
In contrast, the Acquisition, Development, and Construction
Loan Concentration Study \4\ found that ``some institutions
with ADC concentrations were able to weather the recent
financial crisis without experiencing a corresponding decline
in their overall financial condition. The factors that
contributed to their survival validate the point that
regulators have emphasized and reiterated for years--a well-
informed and active Board, strong management, sound credit
administration and underwriting practices, and adequate capital
are important in managing ADC concentrations in a safe and
sound manner.'' In addition, the banks in the study ``did not
rely on brokered deposits to fund growth . . . ''
---------------------------------------------------------------------------
\4\ Federal Deposit Insurance Corporation, Office of Inspector
General, Acquisition, Development, and Construction Loan Concentration
Study, EVAL-13-001, October 2012, https://www.fdicig.gov/reports13/13-
001EV.pdf.
---------------------------------------------------------------------------
The FDIC's statistical analyses also show that brokered
deposits are an indicator of higher risk appetite. Banks with
significant reliance on brokered deposits typically have more
rapid growth rates and higher subsequent nonperforming loan
ratios, which are both associated with a higher probability of
failure. In addition, brokered deposits tend to increase the
FDIC's losses when a bank fails. A traditional brokered deposit
that remains at a bank when it fails has no franchise value.
Bidders have repeatedly told the FDIC that they are not
interested in paying for brokered deposits and the FDIC, as a
result, does not seek bids for brokered deposits. While many
brokered deposits do not usually pass to the acquiring
institution (AI) when a bank fails, AIs have sometimes accepted
certain deposits without paying a premium. Last, gathering
deposits through a third party may attract volatile funding
that may quickly leave the bank if the bank reduces its deposit
rates or if a competitor offers more attractive terms. Because
high rate or volatile deposits are not attractive to potential
purchasers and do not add to a bank's franchise value, this
results in higher losses to the DIF and, in the long run,
higher premiums for surviving institutions.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR HEITKAMP FROM MARTIN
J. GRUENBERG
Q.1. As part of the EGRPRA process, regulators identified
access to timely appraisals--especially in rural America--as a
major challenge for small lenders. Yet the report itself did
little to address residential appraisal requirements.
Q.1.a. Do you share my concerns that the appraisal system in
rural America is broken?
A.1.a. The FDIC shares concerns about appraisal issues in rural
America. During the Economic Growth and Regulatory Paperwork
Reduction Act process, a frequently commented upon issue was
the scarcity of appraisers in rural areas and resultant delays
or problems completing transactions because of the lack of
appraisers. This was a particular concern of bankers at our
Kansas City outreach session, which was focused on rural
banking issues. Also at that session, there were what appeared
to be some misinterpretations of the monetary thresholds set
forth in the interagency appraisal regulations, with some
bankers thinking that the regulations--or examiners--require
appraisals even for transactions below the thresholds.
Additionally, in an effort to respond to these concerns and
as described in the EGRPRA report, the FDIC, along with the
other regulators, has taken steps to address appraisal issues
raised by rural bankers.
Supervisory Expectations for Evaluations_On March 4, 2016,
the FDIC, along with the OCC and the FRB, clarified supervisory
expectations for real estate evaluations, which are addressed
in FDIC FIL-16-2016. This guidance addresses questions raised
during outreach meetings held pursuant to the EGRPRA, and
advises institutions that the agencies' appraisal regulations
allow the use of an evaluation in lieu of an appraisal for
certain real estate-related transactions, including those below
the $250,000 monetary threshold.
Advisory on Availability of Appraisers_On May 31, 2017, the
FDIC, FRB, OCC, and NCUA issued an advisory on appraiser
availability, which is addressed in FDIC FIL-19-2017. The
advisory discusses two existing options that may help insured
depository institutions and bank holding companies address
appraiser shortages: temporary practice permits and temporary
waivers.
Appraisal Threshold_The 2017 EGRPRA Report to Congress
states the agencies will develop a notice of proposed
rulemaking, or NPR, to raise the appraisal threshold for
commercial real estate transactions from $250,000. This NPR was
issued on July 18, and includes a question seeking comment on
whether the appraisal threshold for residential real estate
should be raised.
Q.1.b. In the EGRPRA report, you provide a ``temporary waiver''
option; however, most lenders view this as cumbersome and
unworkable. How can you streamline this process and what steps
have you taken to make this option accessible to lenders?
A.1.b. The aforementioned May 2017 Interagency Advisory on the
Availability of Appraisers (Advisory) addresses existing
options that may help relieve appraiser shortages in rural
areas. One
existing option is the authority under Title XI of the
Financial
Institutions Reform, Recovery, and Enforcement Act of 1989
(Title XI) for the Appraisal Subcommittee (ASC), with the
approval of the FFIEC, to grant temporary waivers of
requirements for appraisals needing to be performed by licensed
or certified appraisers.
The issuance of a temporary waiver would allow financial
institutions lending in affected areas access to more
individuals who would be considered eligible to complete the
appraisals required under Title XI. Nevertheless, we have also
heard views that the process for seeking temporary waivers
appears cumbersome, and in the EGRPRA report, the FDIC and the
other agencies have publicly stated that we will work with the
ASC to streamline the process for the evaluation of temporary
waiver requests. To that end, we are very interested in hearing
ways to improve that process at our outreach sessions with
rural bankers and rural bank supervisors. The agencies are
reaching out to States to explain the waiver process and assist
States in applying for the waivers.
Q.1.c. What concerns would you have with raising the
residential exemption threshold--which was last modified in
1994--above its current limit of $250K?
A.1.c. As noted above, the NPR requests comment on the current
residential appraisal threshold and whether it should be
raised, consistent with consumer protection, safety and
soundness, and reduction in unnecessary regulatory burden. The
agencies view this as an open issue.
Q.2. On several occasions before this Committee Governor
Tarullo stated that the dollar asset thresholds in Dodd-Frank
such as the $50 billion threshold for SIFI designation, is far
too high [sic].
Q.2.a. Do you believe regulators could effectively address
systemic risk if the threshold were raised above $50 billion?
A.2.a. The $50 billion threshold applies to only a relatively
few companies whose assets account for a large majority of
industry assets. History has shown that the largest financial
institutions may be vulnerable to sudden market-based stress.
From the perspective of a deposit insurer, the most expensive
failure in the FDIC's history occurred in the most recent
financial crisis when an institution with $32 billion in assets
failed, resulting in losses to the deposit insurance fund of
approximately $12.8 billion.
Congress established the $50 billion threshold in section
165 of the Dodd-Frank Act. Congress also provided for
significant flexibility in implementation of the enhanced
prudential requirements. The agencies have made appropriate use
of this flexibility thus far, and where issues have been raised
by industry, we believe that we have been responsive.
In our judgment, the concept of enhanced regulatory
standards for the largest institutions is sound, and is
consistent with our longstanding approach to bank supervision.
Certainly, degrees of size, risk, and complexity exist among
the banking organizations subject to section 165, but all are
large institutions. Some of the specializations and more
extensive operations of regional banks require elevated risk
controls, risk mitigations, corporate governance, and internal
expertise than what is expected from community banks. We should
be cautious about making changes to the statutory framework of
heightened prudential standards that would
result in a lowering of expectations for the risk management of
large banks.
Q.2.b. Are there specific provisions in Dodd-Frank which you
believe are particularly costly or unnecessary for a certain
subset of banks above the $50 billion threshold?
A.2.b. The agencies are currently reviewing the Volcker Rule to
identify ways to address industry concerns about complexity and
burden. There is a lot that can be done in this area through
the rulemaking process and I believe that the agencies should
exhaust the rulemaking process before seeking statutory change.
Q.2.c. Are there specific provisions in Dodd-Frank which you
believe are necessary for all banks above $50 billion in assets
that should be retained in order to mitigate systemic risk?
A.2.c. The ability to have information to help ensure the
orderly failure of large institutions is critical for oversight
of systemic institutions, and stress testing rules provide
important insight into how large banks will respond to economic
downturns, as well as providing supervisors with key insight
into the effectiveness of an institution's internal risk
management process. We believe the living will and stress
testing requirements should be retained for banks over $50
billion, appropriately tailored to the size and complexity of
each institution.
Q.2.d. What concerns do you have with having a purely
qualitative test for identifying systemic risk?
A.2.d. Longstanding regulatory programs seek to utilize both
qualitative and quantitative measures to identify systemic
risk. Relying on qualitative measures alone would significantly
limit the ability of regulators to identify and analyze
systemic risk. Quantitative measures allow supervisors to
effectively and efficiently identify potential outliers and
assign resources as needed to further analyze potential
exposure. Establishing thresholds allows for effective
comparative analysis among institutions, portfolios, business
lines or other operations of a financial institution to
identify, monitor, and react to risk. Furthermore, establishing
asset thresholds provides transparency to regulated
institutions as to what regulations will apply to them and
allows them to adequately prepare for the regulation in advance
of the effective date.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR CORTEZ MASTO FROM
MARTIN J. GRUENBERG
Q.1. In his written testimony to the Committee, Mr. Noreika of
the OCC suggested that Congress revolve the CFPB's authority to
examine and supervise the activities of insured depository
institutions with over $10 billion in assets with respect to
compliance with the laws designated as Federal consumer
financial laws. Mr. Noreika further suggested that Congress
return examination and supervision authority with respect to
Federal consumer financial laws to Federal banking agencies.
When I asked him about this recommendation at the hearing,
he noted that, ``what we're seeing in practice is that the CFPB
is not enforcing those rules against the mid-size banks--the
large-small banks to the small-big banks. And so we do have a
problem of both over- and under-inclusion. And so when we get
up to the bigger banks, we have a little bit of overlap and
overkill there. So we need some better system of coordination.
And so when we get up to the bigger banks, we have a little bit
of overlap and overkill there. So we need some better system of
coordination.''
LDoes your experience suggest that the CFPB is
failing to supervise and enforce consumer financial
laws for ``large-small banks'' to the ``small-big
banks?'' And is there ``overkill'' when it comes to
CFPB supervision and enforcement of consumer financial
laws for ``bigger banks?''
A.1. The FDIC and CFPB coordinate regularly regarding
supervisory activities regarding State nonmember institutions
with
assets over $10 billion to ensure effective and coordinated
supervision. The FDIC and CFPB employ risk-based supervisory
strategies tailored to the risk, complexity, and business model
of supervised institutions. The CFPB has been an effective
partner with the FDIC in addressing problematic practices
identified at supervised institutions of various sizes through
enforcement actions to address illegal conduct. In 2012, the
FDIC and CFPB, along with the Utah Department of Financial
Institutions, partnered in an investigation of three American
Express subsidiaries, which led to an enforcement action in
which $85 million was refunded to 250,000 customers for illegal
card practices. Additionally, our two agencies joined in
another 2012 enforcement action, this time against Discover
Bank (Discover) for deceptive telemarketing and sales tactics.
Discover was ordered to return $200 million to more than 3.5
million consumers. We are not aware of any situations where
CFPB has failed to supervise or enforce consumer financial laws
for ``large-small banks'' or ``small-big banks.''
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM J. MARK
McWATTERS
Q.1. Credit unions' primary mission is to serve their customers
especially in areas underserved by other financial
institutions. During your time on the board, have NCUA
supervision teams identified and corrected any consumer
protection issues? What do you
believe is NCUA's role to ensure that the credit unions you
regulate protect their customers?
The NCUA ensures credit unions protect their members
through a variety of methods. They include:
LProviding substantive guidance and regular outreach
to credit unions about Federal consumer financial laws
and protections;
LExamining credit unions for compliance with
consumer financial protection laws and regulations and
requiring credit unions to take appropriate steps to
address deficiencies and violations found as a result
of the examination;
LResolving and investigating consumer complaints
about credit unions;
LDeveloping consumer financial protection policies
and programs that allow credit unions to meet the
financial needs of their members in a cost-efficient
and effective manner;
LPromoting and developing financial literacy
resources for both consumers and credit unions, that
educate consumers about their financial protections;
and
LIncreasing consumer access to credit union services
with, as appropriate, the approval of new credit union
charters and field of membership expansion requests.
Given the above responsibilities and efforts, the NCUA has
identified and worked to correct numerous consumer financial
protection issues since joining the NCUA Board in August 2014.
The majority of Federal consumer financial protection laws
violations cited by the NCUA during the period from August 2014
to June 2017 involved the Truth in Lending Act, the Equal
Credit Opportunity Act, and the Real Estate Settlement
Procedures Act. The NCUA required credit unions to address
these violations, as appropriate, by revising or implementing
new credit union policies and procedures, increasing staff
training or by imposing other administrative remedies.
The NCUA's role in ensuring that credit unions protect
their members recognizes that a core credit union mission is to
provide affordable financial services, benefiting both credit
union members and their communities. The NCUA is dedicated to
supporting credit union efforts to fulfill this mission, which
is unique among financial institutions, and to comply fully
with consumer financial protection laws and regulations. In
addition to the Federal financial regulator responsibilities
listed above, the NCUA has an important role in ensuring that
consumer financial protections do not have the unintended
consequences of limiting access and imposing unnecessarily
burdensome costs on credit unions and their members.
Q.2. This week, the House approved the FY 2018 Financial
Services and General Government Appropriations bill. Included
in this bill is a provision from the CHOICE Act to bring all
independent financial regulatory agencies' budgets under the
appropriations process. What would be the impact on the NCUA if
its budget was appropriated?
A.2. Placing the NCUA's budget under the annual appropriations
process would require the Agency to make a multitude of systems
and process changes, many of which are outlined below. The
cumulative impact of these changes would be an increase in the
fees assessed to the Federal credit unions as the NCUA made the
conversion to the Federal appropriations process.
A particularly significant change would remove the NCUA
Board's authority to determine independently its annual
operating budget. The established Federal budget process does
not allow for Federal agencies to engage stakeholders in its
budget development, in the way that NCUA does. The budget
process used by the NCUA provides for direct input from the
credit union system, and is a process which is very nimble when
changes are needed. The Board holds public meetings to discuss
the budget and makes the proposed budget publicly available for
stakeholder comments prior to final adoption of the budget. The
Board has the authority to make adjustments to its budget
during the course of the year, which for some Federal agencies
requires a more time-consuming reprogramming process. The
extent of direct stakeholder input and the nimbleness of
process are not hallmarks of the Federal appropriations
process.
On an administrative level, subjecting the NCUA to the
Federal appropriations process would require the agency to make
numerous systems and process changes, including the following:
LThe NCUA would need to move to a Federal fiscal
year, subject to the terms and conditions of an
appropriation (fixed period of availability, fixed
amount of availability, reprogramming and transfer
limitations set by the Congress in annual
appropriations acts). The NCUA's operating budget and
its Share Insurance Fund now operate on a calendar-year
business cycle.
LThe NCUA's Operating Fund is currently accounted
for under commercial accounting standards set by the
Financial Accounting Standards Board (FASB). The
appropriations process limits an agency's ``Budget
Authority,'' not its level of expenditure, during the
fiscal year, whereas the NCUA operates with controls on
its expenditures. The NCUA would need to adjust its
financial management systems and processes to better
recognize and record commitments and obligations of
funds prior to expenditure and train staff accordingly.
This would be a significant undertaking, affecting
almost all nonpayroll transactions in the agency,
including travel.
LThe NCUA would need to modify its billing process
for operating fees it collects from Federal credit
unions. The NCUA would likely need to adjust the timing
for the collection of these fees, and it would need to
create additional billing and refund processes with
respect to the fees to adjust for changes made when the
appropriation is enacted, assuming the annual
appropriations were not enacted prior to the start of
the fiscal year.
LThe NCUA would experience transition costs for
systems changes (accounting system, budget system, and
travel system), business process changes, and training.
In addition, certain one-time charges likely would be
needed to account for transactions under Federal budget
procedures versus the current commercial accounting
standards. An example of this is the treatment of the
note (borrowing) between the Operating Fund and the
Share Insurance Fund for the purchase of the NCUA's
Central office in the early 1990s. The outstanding
amount of the note is about $8.9 million. Agencies
receiving appropriations are generally prohibited from
having capital leases or agreements such as this,
unless the full amount of the lease (or, in this case,
the note) is funded up-front with current
appropriations.
LThe NCUA would need to hire additional staff
familiar with the appropriations process.
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCOTT FROM J. MARK
McWATTERS
Each of you serve at agencies that are members of the
Financial Stability Oversight Council (FSOC). Insurance has
been regulated at the State level for over 150 years--it's a
system that works. But FSOC designations of nonbank
systemically important financial institutions (SIFIs) have made
all of you insurance regulators, despite the fact that you are
bank regulators at your core.
Strong market incentives exist for insurers to hold
sufficient capital to make distress unlikely and to achieve
high ratings from financial rating agencies, including
incentives provided by risk sensitive demand of contract
holders and the potential loss of firms' intangible assets that
financial distress would entail. Additionally, insurance
companies are required by law to hold high levels of capital in
order to meet their obligations to policyholders. Bottom line:
Insurance companies aren't banks, and shouldn't be treated as
such.
In March, my colleagues and I on the Senate Banking
Committee sent a letter to Treasury Secretary Mnuchin
indicating our concerns regarding the FSOC's designation
process for nonbanks. I support efforts to eliminate the
designation process completely.
I was pleased that President Trump issued a ``Presidential
Memorandum for the Secretary of the Treasury on the Financial
Stability Oversight Council'' (FSOC Memorandum) on April 21,
2017, which directs the Treasury Department to conduct a
thorough review of the designation process and states there
will be no new nonbank SIFI designations by the FSOC until the
report is issued. Relevant decisionmakers should have the
benefit of the findings and recommendations of the Treasury
report as they carry out their responsibilities with respect to
FSOC matters.
Please answer the following with specificity:
Q.1. What insurance expertise do you and your respective
regulator possess when it comes to your role overseeing the
business of insurance at FSOC?
A.1. I do not have a background in insurance, but, as a
financial attorney with significant experience in corporate
finance and mergers and acquisitions, and as a certified public
accountant, I have a strong background in understanding the
risks firms face when they deploy funds in financial markets.
In addition, I have a deep understanding of the developments
and factors that were important in the most recent financial
crisis through my service on the Troubled Asset Relief Program
Congressional Oversight Panel.
As a fully participating member of the TARP Congressional
Oversight Panel, we investigated the Treasury Department's
implementation of the TARP program and how the $700 billion of
TARP money was deployed. But in doing that, we also
investigated the fundamental causes of the financial crisis--
who was at fault and why. We were required to report to
Congress every month. The reports were usually about 100 to 150
pages long. The longest report was on the American
International Group, Inc. (AIG), an American multinational
insurance corporation, and it was around 350 pages.
Through that work, I gained a strong appreciation for the
role that insurance companies can play and risks they can pose
in our financial system. For example, I came to understand that
the magnitude of AIG's operations and the company's far-flung
linkages across the global financial system led to multiple
rounds of exceptional assistance from the Government. Only
Fannie Mae and Freddie Mac, institutions in Government
conservatorship, received more assistance during this period.
The Panel had to pay particular attention to AIG because it
occupied a unique position in the financial system and because
of the significant investment of taxpayer dollars required to
avert the company's collapse. In addition to the Panel's June
2010 report, which focused solely on AIG, the Panel also held a
hearing, in which I fully participated, to explore the rescue
of AIG, its impact on the markets, and the outlook for the
Government's significant investment in the company.
Although credit unions and insurance companies appear to be
very different, they create value by managing the risk of their
assets and liabilities. The channels through which distress at
insurance companies would transmit or amplify risk have mostly
to do with the interconnections and exposures to other
financial institutions, rather than insurance operations.
I am very familiar with these interconnections. The design
of the Council ensures that each member of the FSOC will bring
a unique perspective to the FSOC's deliberations, informed by
our particular areas of expertise and experience. In my case,
that is a long career in and around the financial services
industry and considerable experience in examining the features
in the financial landscape that led to the financial crisis.
The institutional structure of the Council ensures that a broad
array of views about the financial system are considered in
matters related to financial stability. Issues presented to the
Council about insurance companies are, for the most part, about
their connections and exposures to other financial
institutions.
The NCUA does not have insurance underwriting experts on
staff. However, the NCUA does have experts in asset-liability
management, capital market activity, interest-rate risk, and
derivatives. As such, many NCUA employees, through their
everyday work, have a deep understanding of the financial
policy matters that are common to financial institutions that
manage their assets by participating in credit markets.
Further, many NCUA employees have considerable financial
market experience, both from employment in the private sector
and in other Government agencies such as the Federal Reserve,
Federal Deposit Insurance Corporation, Securities and Exchange
Commission, and the Department of the Treasury. They bring this
experience to bear on credit union issues primarily, but their
knowledge, experience, and training enables them to understand
and comment knowledgeably on a wide variety of financial policy
issues beyond the regulation of credit unions.
It is also worth noting that NCUA, like the FDIC for banks,
is the insurer of credit union deposits, maintaining the
National Credit Union Share Insurance Fund. As such, NCUA is
familiar with many of the issues facing other insurers.
Q.2. Do you support the Senate Banking Committee's recent
legislative effort, the Financial Stability Oversight Council
Insurance Member Continuity Act, to ensure that there is
insurance expertise on the Council in the event that the term
of the current FSOC independent insurance member expires
without a replacement having been confirmed?
A.2. It is important that the FSOC have continuous access to a
member with insurance expertise on the Council, just like it is
important for the FSOC to have continuous access and input from
regulators with banking industry experience or credit union
experience. I would support legislation to ensure that the
FSOC's insurance expertise is maintained during transitions.
Q.2.a. I served on the board of Heritage Trust Federal Credit
Union, a great institution based in Charleston. During my time
at Heritage Trust, we wanted to make loan decisions based on
more than what people looked like on paper. We were able to do
so because we had such close relationships with our members.
Our loan delinquency rate was only 2 percent, I might add.
I've been on the other side of the equation: I received my
first car loan from a credit union. It wasn't a handout--it was
a hand up. The credit union sat me down and we talked about the
importance of staying on top of my finances, the obligations
associated with taking a loan, and how I could pay it back.
As community banks and credit unions close up shop, we lose
that personal touch.
Regulatory burdens are driving the consolidation. I think
too many regulators are acting without an eye to the
consequences of their actions on economic growth.
But the NCUA's approach has been refreshing.
After my friend, and now Director of the Office of
Management and Budget, Mick Mulvaney introduced legislation
mandating more budget transparency at the NCUA, you made it
happen.
You reduced the number of exams for well-capitalized credit
unions, meaning they can hire more loan officers than
compliance lawyers.
You've also engaged in rulemaking on field-of-membership
issues in economically distressed areas, which I think is
encouraging. Please answer the following with specificity:
What kind of economic cost-benefit analysis does the NCUA
engage in?
A.2.a. As an independent agency, the NCUA is not required to
conduct formal cost-benefit analyses. As a matter of course,
however, we always try to develop information and analyses that
help us consider the relevant direct and indirect potential
costs, as well as the direct and indirect potential benefits.
That said, it's well understood that cost-benefit analyses
contain at least as much art as science, and reasonable people
can and do disagree about net benefits. One of my goals is to
ensure that the agency's rulemakings are reasonable and cost-
effective. As we consider a rule's intended effects and try to
analyze potential areas of unintended consequences, if we don't
think there are net positive benefits, we don't make the rule.
Although we have no specific cost-benefit analysis
requirement, other Federal statutes do require us to develop
analyses and reports that help us to develop a more complete
picture of the costs and benefits of the rules we make. These
include: (1) the Administrative Procedure Act which, among
other things, requires Federal agencies to afford proper notice
and comment as part of issuing a regulation; (2) the Regulatory
Flexibility Act, which requires Federal agencies to prepare an
analysis of any significant economic
impact a regulation may have on a substantial number of small
entities; and (3) the Paperwork Reduction Act, which applies to
rulemakings in which an agency creates a new burden on
regulated entities or increases an existing burden.
Q.3. What credit union specific proposals in the Treasury
Department's recent report on regulatory relief should Congress
pursue to help grow the economy?
A.3. I believe that, of the Treasury Department proposals, the
credit union-specific recommendation that would have the
largest impact on economic growth is the proposal to revise the
risk-based capital requirement for credit unions with assets in
excess of $10 billion dollars or eliminate the requirement all
together for credit unions satisfying a 10 percent simple
leverage, or net worth, test. Eliminating the arbitrary
restrictions on asset accumulation that may hinder credit union
lending is an important and useful step that would, in my
opinion, help to pave the way for future economic growth.
Q.4. What specific revisions to the NCUA-issued risk-based
capital rule that is slated to go into effect January 1, 2019,
are you considering or pursuing?
A.4. The NCUA Board has not taken action to change amend or
repeal the capital rule scheduled to take effect January 1,
2019. However, I do intend to revisit this rule and consider
whether it should be substantially amended or repealed.
Q.5. Do you believe that the CFPB should consult with the NCUA
when it is writing rules that impact credit unions? Do you
think this coordination has been sufficient up until this
point?
A.5. Yes, the CFPB should and does consult with the NCUA when
it is writing rules that affect credit unions. The NCUA's
Office of Consumer Financial Protection and Access coordinates
and works with the CFPB on rulemaking and related matters
affecting credit unions. This consultative process allows the
NCUA to inform the CFPB how credit unions differ from other
financial institutions, how a ``one-size-fits-all'' approach is
not always appropriate, and how certain provisions may
inadvertently disadvantage credit unions and their members.
This process can, but does not often, result in regulatory
language or changes to address the NCUA's comments and
concerns.
Although the consultations are very informative, they do
not generally result in regulatory relief for credit unions, as
appropriate, for certain matters. With this goal in mind, on
May 24, 2017, I wrote to Director Cordray outlining three areas
where some type of relief for credit unions from the CFPB's
proposed or final regulations is justified. These three subject
areas involve the Home Mortgage Disclosure Act, the Unfair,
Deceptive and Abusive Acts or Practices Act and CFPB's proposed
rule regarding payday, title and other high-cost installment
loans. I also recently met with Director Cordray to discuss
this letter and additional matters of concern to the NCUA,
credit unions and their members.
In addition, on July 6, 2017, I wrote to Director Cordray
asking for consideration of an exemption of federally insured
credit unions from the examination and enforcement provisions
of section 1025 of the Consumer Financial Protection Act of
2010. I believe the NCUA should be allowed to act as the
primary agency responsible for the examination and enforcement
of the consumer financial protection laws for the six federally
insured credit unions with assets greater than $10 billion.
These credit unions are currently subject to the CFPB's
exclusive examination and primary enforcement authority. The
exemption I requested would continue to provide robust consumer
financial protections for these credit union members and allow
the CFPB to focus on the larger investor-owned, for-profit
financial providers. The CFPB also would retain secondary
enforcement authority to examine or take an enforcement action
against these credit unions if it determines the NCUA is not
adequately enforcing the consumer financial protection laws. In
his July 21, 2017, reply to me, Director Cordray expressly
rejected my requested exemption as inconsistent with the Dodd-
Frank Act. I continue to believe, however, that the CFPB has
such exemption discretion under the Dodd-Frank Act.
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE FROM J. MARK
McWATTERS
Q.1. As you know, in 2016, 70 U.S. Senators and 329 U.S.
Representatives separately wrote the CFPB, asking that it
better tailor regulations to match the unique profile of small
financial institutions. Unfortunately, as you pointed out in a
May 24, 2017, letter to CFPB Director Richard Cordray on
various regulatory issues, the CFPB's tailor efforts have
failed to provide sufficient regulatory relief for smaller
financial institutions. For example, in the letter, you said
that the CFPB could ``alleviate the compliance burden of credit
unions with respect to the Unfair, Deceptive, and Abusive Acts
of Practices (UDAAP) requirements of [Dodd-Frank] without
sacrificing consumer protection.''
Q.1.a. How has the CFPB's exercise of UDAAP authority increased
the compliance burden of credit unions?
A.1.a. Credit unions seek to be in full compliance with
consumer financial protection laws and regulations, including
Unfair, Deceptive, and Abusive Acts or Practices. The struggle
to stay abreast of the increasing number of consumer financial
protection requirements increases the burdens of credit unions,
particularly those that have limited numbers of staff and
resources. In addition, the CFPB's assertions in legal and
enforcement actions that certain behavior is considered to be
``abusive,'' without providing a clear definition of the
meaning of this term, results in credit unions having
difficulty determining what specific behavior is noncompliant.
Q.1.b. How should the CFPB alleviate the compliance burden
regarding the UDAAP authority? For example, should the CFPB
conduct a rulemaking on its UDAAP authority?
A.1.b. As I indicated in my May 24, 2017, letter to Director
Cordray, the CFPB should promptly issue clear, transparent
guidance that is reasonable, objective, and specifically
tailored for the credit unions so that they can comply fully
with the laws and meet the needs of members in a cost efficient
and effective manner. I also recently met with Director Cordray
to discuss this letter and additional matters of concern to
NCUA, credit unions and their members.
Q.1.c. Your letter also highlighted disclosure requirements
under the Home Mortgage Disclosure Act (HMDA) as a key
regulatory burden on credit unions. How have HMDA requirements
burdened credit unions?
A.1.c. The Home Mortgage Disclosure Act provides valuable
mortgage lending information and is an important tool for
identifying housing needs and remedying credit discrimination.
Credit unions that meet HDMA reporting thresholds have
increased recordkeeping and reporting responsibilities. The
activities require credit unions to expend resources for data
gathering, retention, and
reporting of a large number of data points mandated by law and
regulation. An increase in the number of HMDA data points that
credit unions are required to report about, particularly those
that
currently are not routinely disclosed as part of the mortgage
lending process, increases a credit union's reporting burden.
Q.1.d. How could the CFPB better tailor HMDA requirements?
A.1.d. The CFPB should consider raising the various HMDA
reporting thresholds to a more substantive asset and
transaction volume level to reduce the reporting burden on
smaller credit unions. In addition, it should exempt credit
unions from collecting and reporting the additional 14 data
points imposed solely by the CFPB's regulatory changes.
Q.1.e. Are there other concrete ways in which you believe the
CFPB has improperly tailored regulations to match the unique
profile of credit unions? Does any of these changes require
statutory authorization?
A.1.e. The NCUA is not aware that the CFPB has acted
``improperly'' in tailoring regulations to address the credit
union industry. However, I believe that it could do more to
provide regulatory relief to credit unions. For example, the
CFPB's proposed rule on Payday, Vehicle Title and Certain High-
Cost Installment Loans would, if issued as proposed, impose
requirements on Federal credit unions that issue Payday
Alternative Loans under the NCUA's regulation. The NCUA crafted
its Payday Alternative Loans regulation to permit Federal
credit unions to issue safe small-dollar, short-term credit to
members in need, protecting those borrowers from the predatory
lending market. The CFPB should fully exempt the NCUA's Payday
Alternative Loans made by Federal credit unions in accordance
with the NCUA regulations.
Q.1.f. Has the CFPB effectively coordinated with the NCUA on
rulemakings and enforcement actions? If not, how could
coordination be improved?
A.1.f. The NCUA's Office of Consumer Financial Protection and
Access coordinates and works closely with the CFPB on
rulemaking and related matters. This consultative process
allows the NCUA to inform the CFPB how credit unions differ
from other financial institutions, how a ``one-size-fits-all''
approach is not always appropriate, and how certain proposed
provisions may inadvertently disadvantage credit unions and
their members. This process can, but does not often, result in
regulatory language or changes to address the NCUA's comments
and concerns. The CFPB provides advance notice of its
interpretation of major consumer financial protection policy
matters.
The Dodd-Frank Act requires the CFPB and each prudential
regulator to coordinate on supervision activity. The NCUA and
the CFPB operate under three Memoranda of Understanding
covering the supervision of, information sharing about and
handling of complaints against credit unions with total assets
over $10 billion. Coordination among the agencies could be
improved with earlier notification of potential CFPB
enforcement activities.
In addition, on July 6, 2017, I wrote to Director Cordray
asking for consideration of an exemption of federally insured
credit unions from the examination and enforcement provisions
of section 1025 of the Dodd-Frank Act. I believe the NCUA
should be allowed to act as the primary agency responsible for
the examination and enforcement of the consumer financial
protection laws for the six FICUs with assets greater than $10
billion. These credit unions are currently subject to the
CFPB's exclusive examination and primary enforcement authority
for consumer financial protection laws. The exemption I
requested would continue to provide robust consumer financial
protections for these credit union members and allow the CFPB
to focus on the larger investor-owned, for-profit financial
providers. The CFPB also would retain secondary enforcement
authority to examine or take enforcement action against these
credit unions if it determines the NCUA is not adequately
enforcing consumer financial protection laws. In his July 21,
2017, reply to me, Director Cordray expressly rejected my
requested exemption as inconsistent with the Dodd-Frank Act. I
continue to believe, however, that the CFPB has such exemption
discretion under the Dodd-Frank Act.
Q.2. As you know, the CFPB may be moving forward on a
rulemaking for Section 1071 of Dodd-Frank, which granted the
CFPB the authority to collect small business loan data. I've
heard some concerns that implementing Section 1071 could impose
substantial costs on small financial institutions and even
constrict small business lending.
Q.2.a. Are you concerned how a Section 1071 rulemaking could
hurt small business access to credit?
A.2.a. Yes, I am concerned that given the CFPB's overly broad
HMDA rulemaking activity, a Section 1071 rulemaking requiring
the collection of business lending data might have the
unintended consequence of limiting small business access to
credit. However, I also appreciate the intent of Section 1071
which amends the Equal Credit Opportunity Act to require
financial institutions to compile, maintain, and report
information concerning credit applications made by women-owned,
minority-owned, and small businesses. We intend to monitor this
rulemaking and offer input to ensure it does not interfere with
appropriate access to credit.
Q.2.b. Has the NCUA coordinated with the CFPB to ensure that
implementing these requirements does not constrict small
business access to credit?
A.2.b. The CFPB is currently seeking industry and public
comment on the small business financing market and privacy
concerns
related to the disclosure purposes of Section 1071. The NCUA
intends to consult with the CFPB on information provided on
these topics by the credit union industry and the CFPB's Credit
Union Advisory Council. We will also work with the CFPB in an
attempt to ensure that any Section 1071 data collection
requirements do not restrict access to credit or raise privacy
concerns.
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RESPONSE TO WRITTEN QUESTION OF SENATOR WARNER FROM J. MARK
McWATTERS
Q.1. Cybersecurity regulation is receiving increased emphasis
by all financial institution regulators. How do your agencies
coordinate with each other to harmonize the promulgation of new
cybersecurity regulations? With the increased use of the NIST
Cybersecurity Framework by both Federal agencies and the
private sector, how do your agencies intend to achieve greater
alignment between the framework and your own regulatory
initiatives?
A.1. The NCUA is a voting member of the Federal Financial
Institutions Examination Council, which is a formal interagency
body empowered to prescribe uniform principles, standards, and
report forms for the Federal examination of financial
institutions and to make recommendations to promote uniformity
in the supervision of financial institutions. The NCUA actively
participates on multiple FFIEC IT-related committees.
The FFIEC was established on March 10, 1979, pursuant to
title X of the Financial Institutions Regulatory and Interest
Rate Control Act of 1978, Public Law 95-630. In 1989, title XI
of the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 established The Appraisal Subcommittee within the
Examination Council.
In addition to the NCUA, the voting FFIEC members include
the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the Office of the
Comptroller of the Currency, and the Consumer Financial
Protection Bureau. The State Liaison Committee is also a voting
member. The State Liaison Committee includes representatives
from the Conference of State Bank Supervisors, the American
Council of State Savings
Supervisors, and the National Association of State Credit Union
Supervisors.
With respect to cybersecurity regulation, in 2001, each
financial institution regulator adopted guidelines for
safeguarding customer information to implement certain
provisions of the Gramm-Leach-Bliley Act. The GLB Act required
the NCUA Board to establish appropriate standards for federally
insured credit unions relating to administrative, technical,
and physical safeguards for member records and information.
These safeguards are intended to: insure the security and
confidentiality of member records and information, protect
against any anticipated threats or hazards to the security or
integrity of such records, and protect against unauthorized
access to or use of such records or information that could
result in substantial harm or inconvenience to any member.
The guidelines require credit unions to have an information
security program and establish a risk management framework,
which is an approach that has held up very well over time. The
guidelines strike an effective balance between the necessary
regulatory structure to protect member information and
flexibility to avoid a ``one-size-fits-all'' or overly
prescriptive approach to address ever-changing technology
issues and related threats, such as those posed by the current
cyber threat environment.
The NCUA works within the FFIEC construct to maintain an
Information Technology Handbook as the official source of
information technology regulatory guidance for financial
institutions. The IT Handbook is a series of guidance booklets
designed for examiners and financial institutions. The IT
Handbook development process is collaborative and contributors
consider numerous third-party standards, related controls, and
practices most appropriate to financial institutions.
In 2015, the FFIEC agencies also jointly developed the
Cybersecurity Assessment Tool for financial institutions to
assess their risk profiles and level of cybersecurity
preparedness. FFIEC members developed the Assessment to help
institutions' management identify their risks and determine
their cybersecurity preparedness. The Assessment provides a
repeatable and measurable process that financial institutions'
management may use to measure their cybersecurity preparedness
over time. In developing the assessment tool, the FFIEC
leveraged best practices from the IT Handbook, the National
Institute of Standards and Technology Cybersecurity Framework,
and industry-accepted cybersecurity practices.
The NCUA and the other FFIEC agencies collaborated with
NIST to review and provide input on mapping the FFIEC
assessment tool to the NIST Cybersecurity Framework, to ensure
consistency with NIST Cybersecurity Framework principles, and
to highlight the complementary nature of the two resources. The
FFIEC has published this mapping on its website. The NIST
cybersecurity framework addresses all types of infrastructures
including public utilities whereas the FFIEC assessment tool is
specific to financial institutions.
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR ROUNDS FROM J. MARK
McWATTERS
Q.1. The Consumer Financial Protection Bureau has been
aggressively expanding its authority into areas more
effectively regulated by others--including the turf of the
National Credit Union Administration. I believe that the agency
best suited to develop regulations tailored to credit unions is
the agency exclusively focused on credit unions--your agency.
You recently sent a letter to CFPB Director Richard Cordray
highlighting areas where the Bureau's broadsword approach to
regulation could potentially harm credit unions and the members
they serve. In that letter, you urged Director Cordray to
expand the Bureau's use of Section 1022 exemption authority for
credit unions, something I support.
Could you describe the Bureau's receptiveness to meaningful
collaboration with other Federal regulatory agencies? And more
specifically, have you had the opportunity to discuss with
Director Cordray the excellent points you raised in your
letter?
A.1. CFPB has demonstrated a willingness to listen to
reasonable requests for adjustments to its regulations. In
addition, the NCUA's Office of Consumer Financial Protection
and Access coordinates and works closely with CFPB on
rulemaking and related matters. This consultative process
allows the NCUA to inform CFPB how credit unions differ from
other financial institutions, how a ``one-size-fits-all''
approach is not always appropriate, and how certain provisions
may inadvertently disadvantage credit unions, and their
members. This process can result in regulatory language or
changes to address NCUA comments and concerns.
Last month, I met with Director Cordray and discussed the
matters raised in my May 24, 2017, letter and additional
matters of concern to the NCUA, credit unions and their
members. Although the conversation was informative, it did not
result in any progress on the matters detailed in my letter--
namely regulatory relief for credit unions for certain Home
Mortgage Disclosure Act and Unfair, Deceptive, and Abuse Acts
or Practices matters.
In addition, on July 6, 2017, I wrote to Director Cordray
asking for consideration of an exemption of federally insured
credit unions from the examination and enforcement provisions
of section 1025 of the Consumer Financial Protection Act of
2010. I believe the NCUA should be allowed to act as the
primary agency responsible for the examination and enforcement
of the consumer financial protection laws for the six federally
insured credit unions with assets greater than $10 billion.
These credit unions are currently subject to CFPB's exclusive
examination and primary enforcement authority for consumer
financial protection laws. The exemption I requested would
continue to provide robust consumer financial protections for
these credit union members and allow CFPB to focus on the
larger investor-owned, for-profit financial providers. CFPB
also would retain secondary enforcement authority to examine or
take an enforcement action against these credit unions if it
determines the NCUA is not adequately enforcing consumer
financial protection laws. In his July 21, 2017, reply to me,
Director Cordray expressly rejected my requested exemption as
inconsistent with the Dodd-Frank Act. I continue to believe,
however, that the CFPB has such exemption discretion under the
Dodd-Frank Act.
Q.2. As a voting member of the FSOC, you have a role to play in
helping to make certain that regulations promulgated from a
myriad of agencies do not conflict with each other. What do you
believe the FSOC should be doing to create a regulatory
environment that provides certainty of compliance for entities
that are acting in good faith?
A.2. It is important that agency rules do not conflict so that
regulated entities have clear guidelines for activities. Clear
guidelines help to provide certainty of compliance for those
entities that are making good faith efforts to comply. For the
most part, the FSOC's primary duties relate to financial
stability, not directly to the regulations and structures
adopted by independent agencies for their regulated companies.
This means that there is limited scope for the FSOC to engage
with its member agencies on rules that do not materially affect
the stability of the financial system as a whole. Instead,
conflicts, when they do appear, are approached on a bilateral
basis. More generally, however, the FSOC's inter-agency actions
on its range of financial stability efforts are very helpful in
improving inter-agency communication and understanding of the
issues each individual regulator faces. Enhanced communication
and understanding among the regulators is important for
minimizing the likelihood that agencies will adopt conflicting
rules in the first place.
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR KENNEDY FROM J. MARK
McWATTERS
Q.1. I have made it a top priority to provide regulatory relief
for America's financial institutions. However, your agency has
issued a new proposed regulation that would require thousands
of hours of paperwork burdens and unnecessary costs for credit
unions that have chosen to merge voluntarily. Why is your
Government agency proposing more regulatory burdens at a time
when the Trump administration and the Senate Banking Committee
have a public mandate to reduce regulatory burdens?
A.1. The NCUA is very cognizant of the need to reduce
regulatory burdens and has been doing so whenever possible. In
that regard, the NCUA has issued a number of rules over the
past months that would lessen regulatory burden on credit
unions. For example, some of these burden-reducing rules
include initiatives to:
Laddress fields of membership by, for instance,
modifying and updating the definitions of local
community, underserved areas and rural districts;
Lenhance alternative capital by establishing a more
flexible policy for low-income credit unions (of which
a significant percentage are small) designed to provide
greater clarity and confidence for investors;
Lsimplify member business loans by lifting limits on
construction and development loans, replacing explicit
loan-to-value limits with the principle of appropriate
collateral, (eliminating the need for a waiver),
exempting credit unions with assets under $250 million
from certain requirements, and affirming that nonmember
loan participations do not count toward the statutory
member business lending cap;
Limplement examination flexibility this year by
extending the examination cycle for well-capitalized
and well-managed credit unions to periods longer than
the previous 12-month requirement;
Lexpand share insurance coverage on funds held on a
pass-through basis, held on deposit at federally
insured credit unions, and maintained by attorneys in
trust for their clients to other types of escrow and
trust accounts maintained by professionals on behalf of
their clients;
Lassist corporate credit unions by proposing a rule
in June to reduce certain restrictions placed on the
corporates during the financial crisis; and
Limprove the processes by which credit unions appeal
the NCUA's decisions by proposing uniform rules to
govern this area.
The proposed merger rule increases the merger-related
information available to the member-owners of Federal credit
unions so they can make an informed decision about the merger,
but does not significantly increase the regulatory burden on
merging credit unions.
The NCUA has been informed by many credit unions and their
members that the current merger regulation in place is
insufficient to protect the member-owners of Federal credit
unions. Michael Fryzel, a former NCUA Chairman and Board Member
and the head of the NCUA transition team for the Trump
administration, recently published an opinion that he believed
the proposed merger rule was necessary to curb ``abuses'' in
the merger process.\1\
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\1\ http://www.cutoday.info/THE-tude/A-New-Reg-CUs-Asked-For-It.
Q.1.a. Why are you using your Government agency to interfere
with free-market business decisions made by credit union boards
---------------------------------------------------------------------------
of directors who were elected by their members?
A.1.a. The proposed merger rule does not interfere with the
business decisions of Federal credit unions' leadership. In
fact, it enhances free-market efficiency. Free markets function
best when all participants in a transaction have access to all
relevant information about the transaction. Members of merging
Federal credit unions have a right to know how much of the
credit union's net worth--which they own--will be used to
compensate officials and staff, how much will transfer to the
continuing credit union, and how much will be paid out to
members in the form of a merger dividend or share adjustment.
The proposed merger rule simply facilitates delivery of this
information to the member-owners of Federal credit unions,
critical information needed to understand all facets of the
transaction. Member-owners of Federal credit unions cannot cast
an informed vote on the merger without access to relevant
information.
Q.1.b. How did you calculate the 8,832 hours or paperwork
burden for your new proposed regulation?
A.1.b. To calculate the estimated burden, the NCUA determined
the proposed rule adds 560 burden hours (2 hours for the
changes to Part 708a plus 558 hours for the changes to Part
708b).\2\ We then added the 560 new burden hours to the current
burden of 8,272 hours for a total of 8,832 hours. The exact
number of hours will depend on how many credit unions propose
transactions covered under Parts 708a and 708b of NCUA's
regulations. Based on the average number of voluntary mergers
of Federal credit unions in the last 5 years, the NCUA
estimated that one federally insured credit union per year will
be subject to the changes to Part 708a of the NCUA's
regulations and 138 federally chartered credit unions will be
subject to the changes to Part 708b.
---------------------------------------------------------------------------
\2\ The full supporting statements for the changes to Parts 708a
and 708b are available at https://www.reginfo.gov/public/do/
PRAViewICR?ref_nbr=201705-3133-004 (708a) and https://www.reginfo.gov/
public/do/PRAViewDocument?ref_nbr=201705-3133-006 (708b).
Q.2. I thought you would agree that consolidation is a healthy
strategy to raise economies of scale and strengthen the
competitiveness of American businesses. My understanding is
that credit unions are engaging in voluntary mergers for the
same competitive reasons that banks are consolidating--to gain
scale.
Why is your Government agency deliberately slowing down
voluntary mergers that would benefit thousands of credit union
employees and hundreds of thousands of credit union members?
A.2. The proposed rule changes the required minimum member
notice period from 7 days to 45 days. The NCUA's recent
experience with several mergers indicates the current rule's 7-
day minimum notice period is often insufficient to provide
Federal credit union member-owners with sufficient time to
digest the information they need to cast an informed vote and
determine the fate of their institution. The addition of a few
weeks to the merger process is minimally intrusive as compared
to the great benefit it will provide members by giving them
sufficient time to analyze the terms of the proposed merger,
return their ballots, or make plans to attend the meeting where
the merger will be explained.
Q.2.a. Would stopping voluntary mergers affect the
competitiveness of the credit union movement?
A.2.a. The NCUA does not wish to stop voluntary mergers, and
the proposed rule does not do so. The proposed rule simply
provides for full disclosure to members in a reasonable
timeframe.
Q.3. I am sure you would agree that small credit unions have
less ability than larger institutions to absorb regulatory
compliance costs, technology costs, and the severe impact of
the accounting rule changes that will soon take effect.
Wouldn't your policy to discourage voluntary mergers
actually cause small credit unions to lose capital and thus
increase risks to the National Credit Union Share Insurance
Fund?
A.3. It is not the NCUA's policy to discourage voluntary
mergers. The proposed merger rule facilitates the NCUA's policy
of making the voluntary merger process fair and transparent to
the member-owners. The proposed rule ensures that members of
merging Federal credit unions are provided with all information
relevant to the merger transaction. This in no way discourages
mergers that are good for the credit unions and their members.
The NCUA will continue to monitor the health of small credit
unions, as it does for all credit unions. When a credit union
is facing declining capital, the NCUA works with the credit
union's board and management to devise strategies to address
the situation so that the credit union will not cause a loss to
the Share Insurance Fund. The proposed merger rule does not
change this approach.
Q.3.a. Wouldn't you agree that, in this context, voluntary
mergers actually reduce risk to your fund and enable members to
continue their relationship with a thriving credit union?
A.3.a. Yes, we agree. In most cases, voluntary mergers are
advantageous to the merging credit unions, their members, and
the Share Insurance Fund. Accordingly, as noted above, the
proposed rule does not discourage or hamper voluntary mergers;
it only seeks to make them fair and transparent to credit
unions and their members through adequate disclosure.
Q.4. Several provisions in your new proposed regulation of
voluntary mergers would add costs to credit unions but provide
no benefit to members. Why would NCUA require merging credit
unions to ``disclose all increases in compensation or
benefits'' for covered employees ``during the 24 months before
approving a merger agreement-regardless of whether the
increases were made because of the merger''?
A.4. The NCUA respectfully disagrees that the proposed
voluntary merger rule adds significant costs to the merger
process and provides no benefits to members. The proposed rule
recognizes the important status of a Federal credit union
member as an owner of a not-for-profit financial cooperative.
In recognition of the member's ownership interests, the
proposal protects the member's right to receive full and fair
disclosure of all relevant information prior to the merger
vote. This is similar to the rights afforded to corporate
shareholders.
At least one industry expert suggests that Federal credit
unions lag behind other corporate entities, including State-
chartered credit unions, in terms of being required to disclose
material information to members.\3\ The disclosure requirements
in the proposed rule enable Federal credit union members to
decide if a merger is in their best interests and determine if
the merger presents any conflicts of interest for management
officials resulting from merger-related financial arrangements
paid by either the merging credit union or the continuing
credit union.
---------------------------------------------------------------------------
\3\ See Lisa Freeman, Opinion: Does the Voluntary Merger Rule Make
Credit Unions Look Bad?, Credit Union Journal (June 19, 2017)
(available at https://www.cujournal.com/opinion/does-the-voluntary-
merger-rule-make-credit-unions-look-bad) (quoting Eric Richard, former
general counsel for the Credit Union National Association).
---------------------------------------------------------------------------
Furthermore, the proposed rule ameliorates a common
communications problem for members of merging Federal credit
unions by creating an easy, inexpensive, and reliable mechanism
for those members to communicate with one another about the
merger. Accordingly, the NCUA believes the proposed rule
provides significant benefits to members for this and other
reasons.
The NCUA is specifically proposing to require the
disclosure of any increase in compensation or benefits during
the 24 months before a merger because those increases are
frequently related to the merger. Setting this specific and
limited, bright-line disclosure timeframe significantly
simplifies the NCUA's current approach, which is to analyze
board minutes over a potentially open-ended timeframe to
determine the existence of any merger-related financial
arrangements. This has been an area of confusion for some
merging credit unions, and the proposed rule addresses this
problem in a way that is fair, transparent, and easy for
merging credit unions to implement.
Q.4.a. If these increases were not made because of a merger,
why would your Government agency want to regulate free-market
compensation and benefits?
A.4.a. The proposed voluntary merger rule does not regulate
compensation and benefits. Rather, the proposed rule addresses
the current lack of sufficient information being disclosed to
members of a merging credit union.\4\ Unless a particular
compensation or
benefit arrangement presents a safety and soundness risk to the
Federal credit union, the NCUA's policy is to respect the
business decisions of Federal credit union boards and members
regarding employee compensation, provided there has been full
and fair disclosure.
---------------------------------------------------------------------------
\4\ Access to full and complete information is a key assumption in
neoclassical economics and several noted economists have argued that
the role of effective regulation is to eliminate informational
asymmetries where possible. See Joseph E. Stigliz, Information and the
Change in the Paradigm in Economics, Nobel Prize Lecture (Dec. 8, 2001)
(available at https://www.nobelprize.org/nobel_prizes/economic-
sciences/laureates/2001/stiglitz-lecture.pdf); see also Ronald H.
Coase, The Problem of Social Cost, 3 J. Law & Econ. 1 (Oct. 1960) (the
role of law is to reduce transaction costs to allow effective
bargaining) (available at http://www.law.uchicago.edu/files/file/coase-
problem.pdf).
Q.4.b. Why would you require such a violation of privacy for
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credit union employees?
A.4.b. The voluntary merger rule does not violate the privacy
of Federal credit union employees. As owners of the Federal
credit union, members have a right to all information relevant
to a proposed merger vote, including proposed compensation
arrangements for employees and senior management. This approach
is consistent with general corporate practice. Furthermore,
this approach, which limits disclosure to members in the
context of a merger, is far less intrusive than the disclosure
requirements for other nonprofits, including State-chartered
credit unions, which must report compensation and benefits
information annually on IRS Form 990, which is publicly
available.
Q.5. You have attempted to justify your new proposed regulation
of voluntary mergers by claiming it would provide
``transparency'' for credit union members. But when you require
credit unions to disclose compensation and benefits that are
not related to a merger, doesn't that ``transparency'' really
violate the privacy of credit union employees?
A.5. As noted above, the proposed voluntary merger rule does
not violate the privacy of Federal credit union employees.
Federal credit unions are democratically owned, not-for-profit
financial cooperatives. Their unique status as democratically
owned institutions means that members have a right, as member-
owners, to control and oversee credit union operations
including employee compensation. The disclosure of employee
compensation allows member-owners to more effectively fulfill
their roles as the ultimate decisionmakers of the credit union.
Q.6. One expert in the industry was recently quoted in The
Credit Union Journal saying your new proposed regulation of
voluntary mergers is, I quote: ``One on the worst proposals in
memory.'' This expert predicts that if NCUA slows down the
natural consolidation in the credit union marketplace, there
will be fewer voluntary mergers, but more involuntary mergers.
Q.6.a. Which is better: a voluntary merger or an involuntary
merger?
A.6.a. It is important to distinguish the underlying causes and
motivations for credit union mergers. There are essentially
three types of merger scenarios that we've experienced
historically, and they differ quite significantly from one
another as to why they occur:
1. LTwo viable credit unions that seek to combine for
mutually agreed strategic reasons; or
2. LA credit union that is having difficulties remaining
viable that seeks to merge into a stronger continuing
credit union in order to perpetuate access to credit
and other services for its membership; or
3. LA credit union operating under NCUA or State
conservatorship, and that is not viable, being combined
into a continuing credit union that has successfully
bid to acquire the failing credit union. Please note,
the NCUA does not officially use the term ``involuntary
merger.'' There are circumstances where the agency
utilizes a merger as the means to resolve a failing
institution when it is under conservatorship. These are
sometimes informally referred to as an involuntary
merger.
For mergers outlined in scenarios one and two above, the NCUA
does not participate in the identification or selection process
concerning voluntary mergers. The decision to merge is based on
a business decision made by the respective credit unions'
boards of directors. The NCUA's role in these situations is to
ensure the required procedures are followed and that the
combination does not pose a safety-and-soundness concern.
The types of compensation arrangements the disclosure
proposal is intended to address in practice would typically
apply to the merger of two relatively healthy institutions.
Also, the NCUA does not believe the additional disclosure will
have any material impact on the speed of mergers.
Q.6.b. Once a credit union reaches the point where they have no
choice other than involuntary merger, hasn't a tremendous
amount of capital already been lost at this point?
A.6.b. Not necessarily. Some credit unions aren't viable
because of the inability to replace retiring management and/or
insufficient interest to maintain a volunteer board of
directors. Others aren't viable because of operational problems
that don't always result in the loss of capital.
Q.6.c. Would you agree that involuntary mergers tarnish the
reputation of the credit union industry as a whole?
A.6.c. Not necessarily. The resolution of a failed credit union
through a merger is an effective means to ensure that service
for the members of record can be preserved through combination
into a viable institution willing to provide the same or better
services. The reasons for individual credit union failures vary
and do not necessarily reflect on the industry as a whole. The
NCUA does not believe the proposed regulation will have a
material impact on mergers or credit union failures.
Q.6.d. Do you agree or disagree that employees of a merging
credit union have better employment prospects in a voluntary
merger where they receive employment guarantees and improved
benefits, compared to an involuntary merger where branches are
closed and jobs are lost? Won't your new proposed regulation
further deplete the capital of financially constrained small
credit unions because your merger process will take so long?
A.6.d. A merger of two viable institutions, often motivated by
economies of scale considerations, can involve cost-cutting
measures like branch closures and layoffs. A merger of a weaker
institution into a healthy one can result in improved
employment prospects for employees of the weaker institution
and maintenance--and sometimes expansion--of service facilities
for the membership of the weaker institution. Each situation
and scenario is unique. Thus, it is not always, or even
typically, the case that one type of combination effectuates
better results for employees. In addition, the NCUA does not
believe the proposed regulation will have a material impact on
the completion time of mergers.
Q.6.e. Who determines which credit unions receive involuntary
mergers?
A.6.e. Voluntary mergers are business decisions of the involved
credit unions. The NCUA's role is to review the safety and
soundness of the combination and compliance with applicable
rules and regulations, such as field of membership
compatibility when the continuing institution is a Federal
credit union. In those instances where the NCUA uses merger (or
a purchase and assumption) to resolve a failed institution, the
agency solicits bids from interested credit unions and selects
the bid with the lowest cost to the Share Insurance Fund, with
continued service to the membership whenever possible.
Q.6.f. What criteria do you use to select the surviving credit
union in an involuntary merger?
A.6.f. In general, NCUA selects the bid with the lowest cost to
the Share Insurance Fund while also seeking to preserve service
to members. The process is addressed by NCUA Letters to Credit
Unions 10-CU-11 and 10-CU-22.
Q.6.g. Isn't this why one industry consultant predicts that, I
quote: ``NCUA Regional Directors will become like banana
republic dictators controlling their fiefdoms by rewarding
their loyal cronies with the spoils of involuntary mergers''?
A.6.g. The voluntary merger process is a business decision made
by the credit unions involved. For failing institutions, the
NCUA has a duty to achieve a least-cost resolution, and the
agency seeks to preserve the interests of the members. In
resolving failing institutions, the NCUA has a fair process
with appropriate checks and balances for inviting credit unions
to bid and selecting the winning bidder.
Q.6.h. How do you ensure transparency in your selection of
winners and losers in involuntary mergers?
A.6.h. The process is addressed by NCUA Letters to Credit
Unions 10-CU-11 and 10-CU-22. The NCUA invites interested
credit unions capable of safely acquiring a failing credit
union to conduct due diligence and submit a bid. In general,
the NCUA selects the bid with the lowest cost to the Share
Insurance Fund while also seeking to preserve service to
members.
Q.7. I am sure you are aware of the serious legal implications
of attempting to exert political influence over a financial
institution's examination.
Q.7.a. Have you or your staff ever given direction or guidance,
or even the impression, that examiners should stop, slow or
limit any credit union's growth through voluntary mergers?
A.7.a. Voluntary mergers are a business decision made by credit
unions. The NCUA is required to review the safety and soundness
of the transaction and compliance with applicable rules and
regulations. The only time NCUA staff would intervene is if the
proposed merger posed safety and soundness concerns or would
violate a law or regulation.
Q.7.b. Have you or your staff ever given direction or guidance
to supervisory staff in the chain of command to override the
findings of an Examiner-in-Charge?
A.7.b. Our quality control process involves various layers of
review. This can include a review of the examination report and
areas of concern prior to, as well as after, the report's
issuance. In addition, once the report has been issued, the
agency has both an informal and formal appeals process. The
quality control and--if it is pursued--the appeals process
could result in the appropriate override of examination
findings. These safeguards help ensure the final examination
product is correct and reasonable. The NCUA also maintains a
strict prohibition on retaliation. Our Inspector General
independently investigates any alleged retaliation.
Q.7.c. How do you justify your Government agency targeting the
fastest-growing credit unions and trying to slow their
strategic growth?
A.7.c. The proposed amendment ensures member owners have
access to the necessary information to make an informed
decision related to their credit union when asked to vote in a
voluntary merger membership vote. The NCUA is not attempting to
slow credit unions' growth achieved through merger or any other
appropriate means.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM J. MARK
McWATTERS
Q.1. I'm a proponent of tailoring regulations based off of the
risk profiles of financial institutions, as opposed to having
strict asset thresholds that do not represent what I believe is
the smart way to regulate. But, my question here is really
about the importance of ensuring that we have a system that is
rooted in fundamental, analytical, thoughtful regulation so
that we can achieve and execute on goals, whether balancing
safety and soundness with lending and growth, or encouraging
more private capital in the mortgage market to protect
taxpayers and reform the GSEs.
Q.1.a. Do you think that we should use asset thresholds as a
way to regulate--yes or no? If no, can you provide me with the
metrics or factors by which a depository institution should be
evaluated? If yes, please explain.
A.1.a. Yes, when appropriate. Asset thresholds can represent a
simple yet elegant proxy for ensuring a rule is targeting
specific risks and activities. As a general rule, I agree that
tailoring regulations based on risk profiles is appropriate.
However, under certain circumstances, the NCUA has found that
using asset thresholds can be an effective way to reduce
regulatory burden without the need for complex risk-based
criteria. It has allowed the agency to exempt some
institutions--typically, smaller ones--from complying with some
rules, or provisions within a rule, without having to decipher
a potentially complex set of applicability standards. However,
in some cases simple asset thresholds may not sufficiently
correlate to the targeted risks or activities, and therefore a
more precise approach is warranted.
The NCUA formulates its financial regulations to include
clear guiding principles that specify minimum risk management
policies and programs necessary to conduct permissible
activities in a safe and sound manner. By design, the NCUA's
regulatory and supervisory expectations increase commensurate
with the size, scope, and complexity of an institution's risk
exposures.
Q.1.b. Section 165 of Dodd-Frank requires enhanced supervision
and prudential standards for banks with assets over $50
billion. This applies to any bank that crosses the asset
threshold, without regard to the risks those banks pose based
upon the complexity of the business model. This includes
heightened standards on liquidity and capital under the
Liquidity Coverage Ratio (LCR) and the Comprehensive Capital
Analysis and Review (CCAR) which have a various assumptions
built in that may drive business model.
Q.1.b.i. I understand under these two regulatory regimes, banks
have changed certain lending behaviors because of the
assumptions Federal regulators provide some examples of how the
LCR and the CCAR have changed the types of loans, lending, and
deposits your institution holds?
A.1.b.i. Credit unions are not subject to standards pertaining
to Comprehensive Capital Analysis and Review or Liquidity
Coverage Ratio. The NCUA has instituted regulations governing
capital planning and capital stress testing for those consumer
credit unions with assets in excess of $10 billion. These
requirements are deemed important to demonstrate that credit
unions can prudently manage the risks under their strategic
initiatives to serve their members. The NCUA set this asset
threshold for compliance, as we deem these institutions
systemically important to the National Credit Union Share
Insurance Fund. We did not base our standards on those used to
define financial institutions systemically important to the
U.S. financial system.
We have not seen evidence that our capital planning and
stress testing regulations have stifled growth. The stress
testing requirements became effective in 2014. Since this time
period loan growth has exceeded 9.8 percent and share (deposit)
growth has exceeded 8.4 percent for the covered credit unions
in aggregate. We believe this evidences healthy growth for
financial institutions.
Q.1.b.ii. Construction lending by banks over the $50 billion
threshold has been a source of concern, namely because these
enhanced prudential standards have treated construction loans
punitively. This includes construction lending for builders of
apartments, warehouses, strip malls, and other projects that
may have varying risk profiles associated with them. However,
under the CCAR and DFAST assumptions, the regulators have
assigned all these
categories of lending the same capital requirements. The result
is an overly broad capital requirement for varying loans that
have different risks, a capital requirement that may be greater
for some loans and lower for others, influencing the decision
of many banks over the $50 billion threshold to hold less of
these assets due to the punitive capital requirements
associated with them. Have you seen a similar corresponding
issue with construction loans because of heightened prudential
standards?
A.1.b.ii. Credit unions are not subject to standards pertaining
to CCAR and LCR. Construction and development lending is not a
key strategic element for those credit unions subject to our
capital planning and capital stress testing requirements. Only
one credit union subject to stress testing engages in this
activity, and the total volume is negligible.\1\ Even so, the
NCUA evaluates the risks of all loans through processes that
capture their underlying credit quality, not generalized
capital assessments. As such, credit unions that would
underwrite such loans prudently would exhibit less credit risk
than those which adopt looser standards.
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\1\ Less than 0.02 percent for Navy Fed if you need the precise
number.
Q.1.b.iii. Under the CCAR regulations, Federal regulators
routinely assign risk weights to certain assets that Bank
Holding Companies have on their balance sheets. These risk
weights often time changes the costs associated with holding
certain investments, such as Commercial Real Estate. Has this
changed the type of assets that institutions hold, or caused
institutions to alter their business plans because of the
regulatory capital costs? If so, can you provide examples of
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this?
A.1.b.iii. The NCUA's current risk-based net worth requirement
is applicable only to federally insured credit unions with
total assets greater than $50 million and whose risk-based net
worth requirement exceeds 6 percent. Generally, we have not
seen evidence that the NCUA's risk-weighted capital scheme has
caused covered credit unions to alter their business plans. As
of March 31, 2017, only 529 federally insured credit unions
were subject to the risk-based net worth requirement, and only
three failed the risk-based net worth requirement. Since the
implementation of the NCUA's risk-based capital requirement in
2001, only a few credit unions have failed to maintain a
sufficient level of net worth necessary to pass the test. Thus,
regulatory capital standards for credit unions have not likely
had a material impact on their asset composition or business
plans, except for those few that took extreme risk positions.
Q.1.b.iv. Do you think that regulators, on a general basis, get
the risks weights right?
A.1.b.iv. The overall goal for a risk-based capital system is
to better relate risks to capital requirements and ensure
institutions with significantly elevated levels of risk are
required to hold commensurate levels of capital. In
establishing risk weights, the goal is to ensure assigned
weights properly reflect observed levels of risks for each
asset type relative to other asset types and a given minimum
benchmark level of capital. These goals are laudable. However,
there are significant challenges in ensuring any broadly
applicable risk weighting scheme is properly calibrated, does
not create unintended consequences, and the overall benefits
exceed the costs. Thus, I think there is still work to do in
narrowing the scope of institutions that should be subject to
risk-based standards and in ensuring the asset classes and risk
weights are properly calibrated.
Q.1.b.v. Fed Governor Tarullo, has argued that the $50 BB
threshold is too low in terms of an asset threshold for
enhanced prudential standards; does this number make sense? Why
do we need such arbitrary thresholds? Should we get away from
these thresholds and move toward a regulatory system that
evaluated substance and activities of an institution as opposed
to an arbitrary number? Why can't we do that?
Does Title I allow the Fed to treat a $51 BB bank in a
similar manner to a $49 BB bank for the purposes of enhances
prudential standards?
A.1.b.v. Credit unions are not subject to CCAR or the $50
billion threshold established in the Dodd-Frank Act. The NCUA
has adopted $10 billion as its threshold to subject credit
unions to enhanced supervisory standards. We set this asset-
based threshold based on the systemic risk of these
institutions relative to the balance of the National Credit
Union Share Insurance Fund. At this time, there are six credit
unions subject to these enhanced standards.
The NCUA is contemplating raising the asset threshold. Any
adjustment will follow careful scrutiny of the performance of
our Share Insurance Fund and adoption of supervisory tools
commensurate with prudent oversight of our largest credit
unions.
For all credit unions, the NCUA adopts specific supervisory
practices commensurate with the unique risks posed by each
credit union. Accordingly, we would enhance supervision of
those credit unions that exhibit higher risk profiles.
Q.2. While the NCUA has made it a priority over the past
several years to provide regulatory relief to credit unions
where warranted, it seems that even more can be done to allow
them to continue to serve consumers. Are there areas where
Congress could make changes that would allow credit unions to
foster economic growth? Do you have specific recommendations
for this body to consider?
A.2. Yes, the NCUA has several proposals to share with the
Committee related to regulatory flexibility, field of
membership requirements, member business lending, and
supplemental capital:
Regulatory Flexibility_Today, there is considerable
diversity in scale and business models among financial
institutions. Many credit unions are very small and operate on
extremely thin margins. They are challenged by unregulated or
less-regulated competitors as well as by their limited
economies of scale. They often provide services to their
members out of a commitment to offer a specific product or
service rather than a focus on any incremental financial gain.
The Federal Credit Union Act contains a number of
provisions that limit the NCUA's ability to revise regulations
and provide
relief to such credit unions. Examples include limitations on
the eligibility for credit unions to obtain supplemental
capital, field-of-
membership restrictions, investment limits, and the general 15-
year loan maturity limit, among others.\2\
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\2\ 12 U.S.C. 1751 et. seq.
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To that end, the NCUA encourages Congress to consider
providing regulators with enhanced flexibility to write rules
to address such situations, rather than imposing rigid
requirements. Such flexibility would allow the agency to
effectively limit additional regulatory burdens, consistent
with safety and soundness considerations.
The NCUA continues to modernize existing regulations with
an eye toward balancing requirements appropriately with the
relatively lower levels of risk smaller credit unions pose to
the credit union system. Permitting the NCUA greater discretion
with respect to scale and timing when implementing statutory
language would help mitigate the costs and administrative
burdens imposed on smaller institutions, consistent with
congressional intent and prudential supervision.
The NCUA would like to work with Congress so that future
rules can be tailored to fit the risk presented and even the
largest credit unions can realize regulatory relief if their
operations are well managed, consistent with applicable legal
requirements.
Field-of-Membership Requirements_The Federal Credit Union
Act currently permits only Federal credit unions with multiple
common-bond charters to add underserved areas to their fields
of membership. We recommend Congress modify the Federal Credit
Union Act to give the NCUA the authority to streamline field of
membership changes and permit all Federal credit unions to grow
their membership by adding underserved areas. The language of
H.R. 5541, the Financial Services for the Underserved Act,
introduced in the House during the 114th Congress by
Congressman Ryan of Ohio, would accomplish this objective.
Allowing Federal credit unions with a community or single-
common-bond charter the opportunity to add underserved areas
would open up access for many more unbanked and underbanked
households to credit union membership. This legislative change
also could enable more credit unions to participate in programs
offered through the congressionally established Community
Development Financial Institutions Fund, thus increasing the
availability of affordable financial services in distressed
areas.
Congress may wish to consider other field of membership
statutory reforms, as well. For example, Congress could allow
Federal credit unions to serve underserved areas without also
requiring those areas to be local communities. Additionally,
Congress could simplify the ``facilities'' test for determining
if an area is underserved.\3\
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\3\ The Federal Credit Union Act presently requires an area to be
underserved by other depository institutions, based on data collected
by the NCUA or Federal banking agencies. 12 U.S.C. 1759 (c)(2)(A)(ii).
The NCUA has implemented this provision by requiring a facilities test
to determine the relative availability of insured depository
institutions within a certain area. Congress could instead allow the
NCUA to use alternative methods to evaluate whether an area is
underserved to show that although a financial institution may have a
presence in a community, it is not qualitatively meeting the needs of
an economically distressed population.
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Other possible legislative enhancements could include
elimination of the provision presently contained in the Federal
Credit Union Act that requires a multiple-common-bond credit
union to be within ``reasonable proximity'' to the location of
a group in order to provide services to members of that
group.\4\ An enhancement that recognizes the way in which
people share common bonds today would be to provide for
explicit authority for web-based communities as a basis for a
credit union charter.
---------------------------------------------------------------------------
\4\ See 12 U.S.C. 1759(f)(1).
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Member Business Lending_The NCUA reiterates the agency's
long standing support for legislation to adjust the member
business lending cap, such as S. 836, the Credit Union
Residential Loan Parity Act, which Senators Wyden and Murkowski
have introduced. This bipartisan legislation addresses a
statutory disparity in the treatment of certain residential
loans made by credit unions and banks.
When a bank makes a loan to purchase a one- to four-unit,
non-owner-occupied residential dwelling, the loan is classified
as a residential real estate loan. If a credit union were to
make the same loan, it is classified as a member business loan
and is, therefore, subject to the member business lending cap.
To provide regulatory parity between credit unions and banks
for this product, S. 836 would exclude such loans from the
statutory limit. The legislation also contains appropriate
safeguards to ensure strict underwriting and servicing
standards are applied.
Supplemental Capital_The NCUA supports legislation to allow
more credit unions to access supplemental capital, such as H.R.
1244, the Capital Access for Small Businesses and Jobs Act.
Introduced by Congressmen King and Sherman, this bill would
allow healthy and well-managed credit unions to issue
supplemental capital that would count as net worth. This
bipartisan legislation would result in a new layer of capital,
in addition to retained earnings, to absorb losses at credit
unions.
The high-quality capital that underpins the credit union
system was a bulwark during the financial crisis and is key to
its future strength. However, most Federal credit unions only
have one way to raise capital: through retained earnings. Thus,
fast-growing, financially strong, well-capitalized credit
unions may be discouraged from allowing healthy growth out of
concern it will dilute their net worth ratios and trigger
mandatory prompt corrective action-related supervisory actions.
A credit union's inability to raise capital outside of
retained earnings limits its ability to expand its field of
membership and to offer more products and services to its
membership and eligible
consumers. Consequently, the NCUA has previously encouraged
Congress to authorize healthy and well-managed credit unions to
issue supplemental capital that will count as net worth under
conditions determined by the NCUA Board. Enactment of H.R. 1244
would lead to a stronger capital base for credit unions and
greater protection for taxpayers.
The NCUA stands ready to work with Congress on these
proposals, as well as other options to provide consumers more
access to affordable financial services through credit unions.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN FROM KEITH A.
NOREIKA
Q.1. In response to Senator Menendez's question about
regulatory concerns about the increase in auto loan
delinquencies, you said that you ``notice an uptick and you are
certainly making our regulated entities aware of to keep track
of.'' You continued by saying, ``our job as regulators is to
watch and manage credit risk and to flag where we are seeing
increased risks.''
Related to other OCC efforts to monitor increased credit
risks, in 2013, the OCC updated guidance on leveraged lending,
in part as a reaction to the credit bubble in markets for
leveraged loans experienced during the crisis (as described by
the Financial Crisis Inquiry Commission), and because of
increasing concerns about escalating leveraged lending with
deteriorating underwriting criteria in the years following the
crisis. The recent Treasury Report recommends re-issuing the
leveraged lending guidance because of concerns that it has
harmed businesses. Do you agree with this
recommendation that the OCC and other regulators should pull
back the guidance, even in light of the impact of leveraged
lending during the crisis and the concerns raised following it?
A.1. The interagency leveraged lending guidance was updated and
re-issued in 2013. The updated guidance was issued in response
to significant growth in the leveraged loan market and
examinations identifying weaknesses in underwriting and risk
management, such as liberal loan structures and deficient
management information systems. Its primary purpose was to
provide sound risk management guidance to banks involved in
leveraged loan activities and to minimize excessive risk
buildup in the leveraged loan market. Maintaining appropriate
risk safeguards in the leveraged loan market helps to reduce
volatility and the impact of adverse economic events during
periods of stress, and thus help maintain banks' ability to
provide needed capital to the economy during weaker times.
The guidance has had a positive effect on bank practices
without adversely affecting leveraged lending volumes or access
to capital. Agent banks have improved their underwriting and
risk management processes to reduce and manage risk of
leveraged lending exposure. In particular, most agent banks are
now better equipped to project future cash-flows to assess
borrower repayment capacity and enterprise valuations, which
better align with basic safety and soundness principles. In
addition, leveraged lending volumes remain robust. Following
the 2007-2009 recession, syndicated leveraged lending issuance
increased significantly each subsequent year to a record
issuance of $1.1 trillion in 2013. This volume was
substantially higher than the prior record level of $700
billion in 2007. Although annual issuance levels in 2014-2016
were lower than 2013, these volumes were well above 2007 and
represented the second, fourth, and third highest volumes on
record, respectively.
The agencies have conducted extensive industry outreach
since issuing the guidance, and they have published leveraged
lending Frequently Asked Questions (FAQ) to clarify the
guidance and supervisory expectations. The purpose of the
outreach and FAQ is to promote transparency and consistency for
banks' understanding and examiners' application of the
guidance. These outreach
activities have helped reduce the number of inconsistencies
that bankers noted following the initial issuance of the
guidance. The outreach has also indicated that certain parts of
the guidance present continued challenges to banks.
The Office of the Comptroller of the Currency (OCC)
believes that the guidance is an appropriate and effective
supervisory tool that has served the agencies and the banking
industry well. Nonetheless, we recognize the challenges
expressed during outreach regarding agency expectations and
unintended consequences of the guidance. We are open to
pursuing additional opportunities for the public to provide
such input on the guidance and to considering whether such
input necessitates clarifications to the guidance. As noted
above, because the guidance is interagency, we will need to
engage with the other agencies to ensure consistency.
The OCC is committed to maintaining consistent, reasonable,
and transparent application of the guidance. Supervisory
guidance should complement the safe and sound activities of
federally regulated financial institutions, and the guidance
should remain relevant, appropriate, and meaningful to support
banks' activities. The OCC will continue to listen to
institutions' comments about what has worked well with the
guidance and FAQ, and what opportunities exist to clarify the
guidance and encourage economic growth in a safe and sound
manner.
Q.2. At the time of your appointment as Acting Comptroller of
the Currency, you were representing Ant Financial, a Chinese
company that is currently under review by CFIUS.
Q.2.a. What, if any, conversations did you have with Treasury
Secretary Mnuchin or Treasury staff about Ant Financial or the
CFIUS process as you were being vetted to serve as Acting
Comptroller?
A.2.a. In line with its statutory confidentiality restrictions,
Treasury does not discuss cases before the Committee on Foreign
Investment in the United States (CFIUS), including whether or
not any case has been filed with CFIUS. That said, I never had
any conversations with the Secretary regarding any Ant
Financial matter. My only communications with Treasury staff
regarding Ant Financial during this time period were limited to
my disclosures to ethics officials of my client lists as part
of the ethics vetting process.
Q.2.b. Do you believe that there are any conflict of interests
by having conversations about a job position within Treasury as
you were representing a foreign company that is being reviewed
by Treasury as part of the CFIUS process?
A.2.b. No. My only communications with Treasury officials about
Ant Financial on any matter during this time period were
limited to my disclosures of my client lists to Treasury ethics
officials as part of the ethics vetting process. In addition,
all ethical rules were observed in the course of my legal
representation of Ant Financial to avoid any conflict of
interest.
Q.2.c. Separately, have you had communications with any U.S.
Government officials about the Ant-MoneyGram transaction since
you were appointed to your position?
A.2.c. Since I have become Acting Comptroller, my only
communications with U.S. Government officials about Ant
Financial on any matter were to alert officials, where
applicable (e.g., ethics officials), of my prior client
relationship to screen me from any possible involvement in any
discussion on any Ant Financial matter.
Q.2.d. Have you had any communications with any officials
involved in the CFIUS review of that transaction?
A.2.d. Since I have become Acting Comptroller, I have not had
any discussions with any U.S. Government officials on any Ant
Financial matters, other than as noted earlier, to alert
officials (e.g., ethics officials) of my prior client
relationship to screen me from any possible involvement in any
discussion on any Ant Financial matter.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCOTT FROM KEITH A.
NOREIKA
Each of you serve at agencies that are members of the
Financial Stability Oversight Council (FSOC). Insurance has
been regulated at the State level for over 150 years--it's a
system that works. But FSOC designations of nonbank
systemically important financial institutions (SIFIs) have made
all of you insurance regulators, despite the fact that you are
bank regulators at your core.
Strong market incentives exist for insurers to hold
sufficient capital to make distress unlikely and to achieve
high ratings from
financial rating agencies, including incentives provided by
risk sensitive demand of contract holders and the potential
loss of firms' intangible assets that financial distress would
entail. Additionally, insurance companies are required by law
to hold high levels of capital in order to meet their
obligations to policyholders. Bottom line: Insurance companies
aren't banks, and shouldn't be treated as such.
In March, my colleagues and I on the Senate Banking
Committee sent a letter to Treasury Secretary Mnuchin
indicating our concerns regarding the FSOC's designation
process for nonbanks. I support efforts to eliminate the
designation process completely.
I was pleased that President Trump issued a ``Presidential
Memorandum for the Secretary of the Treasury on the Financial
Stability Oversight Council'' (FSOC Memorandum) on April 21,
2017, which directs the Treasury Department to conduct a
thorough review of the designation process and states there
will be no new nonbank SIFI designations by the FSOC until the
report is issued. Relevant decisionmakers should have the
benefit of the findings and recommendations of the Treasury
report as they carry out their responsibilities with respect to
FSOC matters.
Please answer the following with specificity:
Q.1. What insurance expertise do you and your respective
regulator possess when it comes to your role overseeing the
business of insurance at FSOC?
A.1. As one of 10 voting members, the OCC brings considerable
expertise to the Financial Stability Oversight Council (FSOC).
Many of the areas of financial risk on which the OCC focuses as
part of its supervision of financial institutions--for example,
credit,
liquidity, interest rate, earnings and operational risk--are
risks that the FSOC evaluates with respect to the criteria for
designation of nonbank financial companies.
In addition, since passage of the Gramm-Leach-Bliley Act of
1999, national banks have express authority to own so-called
``financial subsidiaries.'' These subsidiaries are specifically
authorized to engage in the same set of financial activities,
including insurance activities that are permissible for
financial holding companies supervised by the Federal Reserve.
Thus, through our supervision and regulation of national banks
and their financial subsidiaries, the OCC has acquired, and
brings to FSOC, important experience and perspective concerning
insurance.
Q.2. Do you support the Senate Banking Committee's recent
legislative effort, the Financial Stability Oversight Council
Insurance Member Continuity Act, to ensure that there is
insurance expertise on the Council in the event that the term
of the current FSOC independent insurance member expires
without a replacement having been confirmed?
A.2. We are supportive of efforts to ensure that there is
continuity of service for the independent member.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE FROM KEITH A.
NOREIKA
Q.1. Has the CFPB effectively coordinated with the OCC on
rulemaking and enforcement actions? If not, how could
coordination be improved?
A.1. Rulemaking: The CFPB consults with the OCC regarding its
significant rulemakings. However, as a general matter, the
basic framework and policy direction of the CFPB's rulemakings
are already in place at the time the OCC is consulted. Early in
the CFPB's history, that agency was implementing statutorily
required regulations in a compressed timeframe. Now that many
of the required regulations are in place, coordination could
potentially be improved by earlier consultations regarding the
regulatory framework and direction being contemplated. The OCC
stands ready to work with the CFPB to continue to improve
coordination.
Enforcement Actions: The OCC endeavors to coordinate with
the CFPB on enforcement actions, at the examiner and
supervisory levels and by way of conference calls and meetings
between the enforcement staff of both agencies. Staff have also
shared documents and other information related to possible
enforcement actions. Further, OCC staff communicate with
supervisory and enforcement staff in the CFPB's Office of Fair
Lending and Equal Opportunity to coordinate on supervisory and
enforcement matters relating to banks for which the two
agencies have overlapping jurisdiction.
Q.2. As you know, in December of 2016 the OCC released a
whitepaper discussing the possibility of a fintech charter,
entitled, ``Exploring Special Purpose National Bank Charters
for Fintech Companies.''
Q.2.a. Do you intend to move the OCC forward on finalizing a
fintech charter? Why or why not? If so, please provide a
timeline on these efforts.
A.2.a. The OCC is continuing to consider in a deliberative way
the special purpose national bank charter described in the
December paper. We have no imminent or concrete plans to use
the authority set out in our regulations\1\ to charter, or to
accept applications to charter, an uninsured special purpose
fintech national bank. Companies may, however, continue to
apply for a charter as a full-
service national bank or Federal savings association, and they
also may seek a charter under the OCC's long-established
authority to charter other types of special purpose national
banks, such as credit card banks and trust companies.
---------------------------------------------------------------------------
\1\ 12 C.F.R. S. 20(e)(1).
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The OCC is continuing to hold discussions with fintech
companies that may be interested in a bank charter to better
understand diverse business models and identify potential risk.
These meetings have been very informative and provide important
insights into the changing landscape of the financial services
industry.
Yesterday, I explained these points in greater detail in
remarks given before the Exchequer Club.\2\
---------------------------------------------------------------------------
\2\ Exchequer Club Remarks at https://www.occ.gov/news-issuances/
speeches/2017/pub-speech-2017-82.pdf.
Q.2.b. Does the OCC have sufficient statutory authorization to
---------------------------------------------------------------------------
implement a fintech charter? Why or why not?
A.2.b. The OCC has broad authority under the National Bank Act
to grant charters for national banks to carry on the ``business
of banking.'' That authority includes granting charters for
special purpose national banks. The OCC clarified eligibility
for receiving a special purpose national bank charter in 2003
in a regulation, 12 CFR 5.20(e)(1). Specifically, a special
purpose national bank that conducts activities other than
fiduciary activities must conduct at least one of the following
three core banking functions: receiving deposits, paying
checks, or lending money.
Two lawsuits have been filed, by the New York Department of
Financial Services and the Conference of State Bank
Supervisors, respectively, that challenge the OCC's authority
to grant special purpose national bank charters to fintech
companies. We are currently preparing our responses in both
cases, and will vigorously defend our authority to charter
these special purpose national banks.
Q.2.c. Under what legal circumstances is the OCC allowed to
regulate fintech companies?
A.2.c. As the chartering authority and the prudential regulator
for national banks, the OCC has clear authority to regulate and
supervise a fintech company that is engaged in the business of
banking. Indeed, the OCC has made clear that a fintech company
with a special purpose national bank charter would be regulated
and supervised like similarly situated national banks. That
regulation and supervision would include, for example, capital
and liquidity standards, risk management and governance
expectations, and regular examination by OCC examiners.
The OCC also has authority under the Bank Service Company
Act to regulate fintech companies if they are acting as third-
party service providers to national banks or Federal savings
associations.
Q.2.d. What concerns, if any, do you have with the OCC's
fintech charter, as outlined in the previously mentioned
December 2016 whitepaper?
A.2.d. As I explained in my Exchequer Club remarks, in my view
companies that offer banking products and services should be
allowed to apply for national bank charters so that they can
pursue their businesses on a national scale if they choose, and
if they meet the criteria and standards for doing so. Providing
a path to become national banks is pro-growth and in some ways
can reduce regulatory burden for those companies. National
charters should be one choice that companies interested in
banking should have. That option should exist alongside other
choices that include becoming a State bank or operating as a
State-licensed financial service provider, or pursuing some
partnership or business combination with existing banks.
I also believe that a firm that provides banking products
and services should be regulated and supervised like a bank.
That is not the case today. Hundreds of fintechs presently
compete against banks without the rigorous oversight and
requirements facing national banks and Federal savings
associations. That status quo disadvantages banks in many ways.
While charters would provide great value to the companies that
receive them, the supervision that accompanies becoming a
national bank would help level the playing field in meaningful
ways.
Q.3. As you know, the OCC recently released a bulletin
entitled, ``Frequently Asked Questions to Supplement OCC
Bulletin 2013-29,'' which provided some regulatory guidance for
banks that partner with fintech companies. However, I am told
there is still confusion about such partnerships, including
when fintech companies will be treated as third-party service
providers, as well as the regulatory implications of this
arrangement.
Q.3.a. Should the OCC provide further guidance to banks about
their partnership with fintech companies, including when
fintech companies will be treated as third-party service
providers, and the corresponding regulatory implications for
banks? If so, please provide a timeline for such efforts.
Q.3.b. Under what conditions have onsite bank examiners treated
fintech companies as third-party service providers?
A.3.a.-A.3.b. The OCC has issued guidance on the expectations
for risk management of third-party relationships. The primary
guidance document is OCC Bulletin 2013-29, ``Third-Party
Relationships: Risk Management Guidance'' (October 30, 2013).
OCC Bulletin 2017-7, ``Supplemental Examination Procedures for
Third-Party Relationships'' (January 24, 2017), provides
examiners and banks steps on how to review third-party risk
management systems. We published OCC Bulletin 2017-21,
``Frequently Asked Questions to Supplement OCC Bulletin 2013-
29,'' (June 7, 2017), to address questions on third-party risk
management, including several that relate to fintech companies.
As is the OCC's practice, we will continue to compile and
review questions about third-party risk management and issue
further guidance, when we deem necessary. We have no immediate
plans to do so at this time.
As part of our supervisory process, we encourage banks to
contact their local supervisory office or the appropriate
headquarters divisions to seek clarification on our guidance on
the management of third-party relationships. The OCC has also
established the Office of Innovation, which serves as a central
point of coordination for the OCC on banks' interest in
fintech, including partnerships. The OCC expects that if a
financial institution engages, partners, or otherwise leverages
the services of a third-party service provider, including a
fintech firm, bank management should understand, assess, and
appropriately manage the risk associated with services being
provided through the third-party firm. The level of due
diligence, control structures, monitoring, and oversight should
be commensurate with the inherent risk of the activity or
service provided. If the provider service or relationship is
critical to the financial institution, we expect strong
controls and regular oversight and monitoring.
As part of the supervisory process, examiners may review a
financial institution's third-party risk management program,
including a listing or inventory of such relationships. If a
fintech is
included in such a listing or inventory, the examiner would
expect that relationship to be managed appropriately and in
line with OCC guidance. If an examiner becomes aware of fintech
or other companies with which the bank has a business
arrangement are not being treated as third-party relationships,
the examiner may follow-up to determine if the relationships
are being appropriately managed.
Q.4. As you know, the CFPB may be moving forward on a
rulemaking for Section 1071 of Dodd-Frank, which granted the
CFPB the authority to collect small business loan data. I've
heard some concerns that implementing Section 1071 could impose
substantial costs on small financial institutions and even
constrict small business lending.
Q.4.a. Are you concerned how a Section 1071 rulemaking could
hurt small business access to credit?
Q.4.b. Has the OCC coordinated with the CFPB to ensure that
implementing these requirements does not constrict small
business access to credit?
A.4.a.-b. As I noted in my testimony, Congress could streamline
the reporting requirements to which banks--particularly
community banks--are subject, freeing the banks' employees to
return to the business of banking. In this regard, I
specifically suggested that Congress could repeal unnecessary
information collection provisions such as the requirement
stemming from section 1071 of the Dodd-Frank Act that banks
gather extensive information on business loans. The benefits of
such information collection are unclear.
Concerning CFPB coordination, I note that the CFPB conducts
its coordination with respect to rulemaking on an interagency
basis. Rather than consult with each Federal banking agency
(FBA), it shares draft rulemakings with all the FBAs at the
same time and collects and responds to comments in a similar
fashion. The OCC has regularly participated, along with the
other FBAs in these joint consultations on other rules. To
date, the CFPB has made a presentation to an interagency task
force on its small
business loan data rulemaking efforts, but has not yet begun
consultations.
Q.5. Constituents in my State tell me that the EGRPRA report
came short in highlighting concrete ways to reduce the
regulatory paperwork burden.
Q.5.a. What more can the OCC do to reduce the regulatory
paperwork burden on community banks?
Q.5.b. Do any of these changes require statutory authorization?
A.5.a.-A.5.b. There is broad consensus that community banks
need regulatory burden relief, including paperwork burden
reduction. While the Economic Growth and Regulatory Paperwork
Reduction Act Report outlines ideas the agencies received from
the public to address this need, shortly after arriving at the
OCC, I solicited feedback from OCC staff, including the
agency's examiners, for additional ways to reduce burden and
improve the efficiency of our supervision and regulation of the
Federal banking system. I also have met with trade and
community groups, scholars, and my Federal and State colleges
to begin a constructive, bipartisan dialogue on how our
regulatory system might be recalibrated.
As the Treasury Report notes, however, congressional action
is required to implement many of the changes needed to
streamline regulation and free up resources, particularly for
smaller institutions. My written testimony outlines a variety
of legislative changes that would provide specific relief to
community banks, thereby strengthening these financial
institutions and fostering economic growth. I would be happy to
work with Congress on any of the ideas I submitted.
Q.6. Our financial system has become increasingly consolidated,
as community banks either close their doors or merge with
larger institutions.
Q.6.a. Are you concerned about this pattern?
Q.6.b. What services can these smaller institutions provide
that larger institutions cannot provide?
Q.6.c. Are there any benefits that come from consolidation?
A.6.a.-c. I am concerned that a consolidation trend may result
in fewer community banks. As I noted in my testimony, the
formation of new financial institutions is crucial to maintain
a vibrant and growing economy. To facilitate new entrants into
the market, I have suggested options for how Congress could
streamline the process of forming de novo banks by allowing
banks that receive deposits (other than trust funds) to obtain
Federal Deposit Insurance Corporation (FDIC) deposit insurance
more quickly after the OCC charters and authorizes new banks to
commence business. This approach would reduce the significant
delays that plague the current process and dis-incent de novo
formations.
The OCC supervises over 1,000 national banks and Federal
savings associations in its community bank supervision line of
business. These community banks, which range from several
million dollars to over $1 billion in total assets, play a
crucial role in providing consumers and small businesses in
communities across the Nation with essential financial services
and a source of credit that are critical to economic growth and
job expansion. Throughout the country, community bankers help
small businesses grow and thrive by offering ``hands-on''
counseling and credit products that are tailored to their
specific needs. They fund home purchases; they lend to small
businesses and farms; and they play key roles in civic,
religious and public organizations. In addition, they often
invest or assist in underwriting municipal bonds funding
infrastructure improvements for local communities. Community
banks and their
employees strengthen our communities through their active
participation providing staff and monetary resources to support
civic life in their towns.
Community banks are important to the OCC, and the OCC is
committed to fostering a regulatory climate that allows well-
managed community banks to grow and thrive. We have built our
supervision of community banks around local field offices where
the Assistant Deputy Comptroller (ADC) has responsibility for
the supervision of a portfolio of community banks. We have
based our community bank examiners in over 60 locations
throughout the United States, living in the same communities
served by the local banks they supervise. Approximately two-
thirds of our examination staff is dedicated to the supervision
of community banks.
Through this supervisory structure, community banks receive
the benefits of highly trained bank examiners with local
knowledge and experience, supplemented by the resources and
specialized expertise that a nationwide organization can
provide. Our bank supervision policies and procedures establish
a common framework, but tailor our expectations for banks based
on each bank's risk profile. We clearly communicate which, or
to what extent, each piece of guidance applies to community
banks. Each bank's portfolio manager then tailors the
supervision of each community bank to its individual risk
profile, business model, and management strategies. We give our
ADCs considerable decisionmaking authority, reflecting their
experience, expertise, and first-hand knowledge of the
institutions they supervise.
OCC-supervised community banks, which demonstrated their
resilience in the aftermath of the recent financial crisis and
recession, face challenges in today's operating environment.
Strategic planning and governance risk pose a challenge as
banks implement plans for adapting business models to respond
to changing loan
demand, a sustained period of low interest rates, and intense
competitive pressures, including competition from nonbanks.
Community banks also face challenges from demographic changes
to the communities where they operate, technology advances
impacting product and services, and attracting and retaining
qualified staff. Consolidation is one strategic approach to
these challenges--banks pursue merger and acquisition (M&A)
activity to maximize shareholder or franchise value, gain
economies of scale, increase market penetration, and improve
efficiencies. Whether through such M&A activity or by growth
and adaptation, community banks will continue to play a
critically important role in the U.S. financial system and
economy.
Q.7. Multiple anecdotes from constituents make it clear that
there are several Nebraska counties where consumers cannot get
a mortgage, due to CFPB regulations such as TRIO and the QM
rule. What is the best way to address this problem from a
regulatory standpoint?
A.7. It is important for regulators, particularly those
responsible for standard setting, to consider issues and
concerns raised by stakeholders regarding the impact current
regulations have on the availability of credit and to adopt
appropriate responsive regulatory amendments.
The CFPB has rulemaking authority for the Truth in Lending
Act (TILA), which includes the TILA-RESPA Integrated
Disclosures (TRIO) and Qualified Mortgage (QM) provisions. The
OCC participates in rulemakings through the statutorily
mandated consultation process and provides appropriate feedback
to the CFPB regarding individual rules. The OCC supervises
banks that range from small community banks and Federal savings
associations to multi-trillion dollar institutions that are
among the world's largest financial companies. Our ongoing
supervisory work offers an efficient channel for soliciting
input from a range of supervised institutions regarding the
impact of current regulations and any frustrations and concerns
about current regulatory requirements. The input we receive
from our institutions is a key component of the feedback that
we have provided to the CFPB as part of the consultation
process.
Q.8. Are there concrete ways in which you believe the CFPB has
improperly tailored regulations to match the unique profile of
smaller financial institutions?
A.8. As I stated in my testimony, the OCC is supportive of the
need to tailor rules to fit the community bank business model.
To the extent we receive input from community banks regarding
concerns or frustrations with regulatory requirements, we share
those views through the consultation process.
Q.9. My understanding is that very few banks have opened since
the passage of Dodd-Frank.
Q.9.a. Why do you believe this is the case?
Q.9.b. What potential impacts does this have for our financial
system?
Q.9.c. Is there anything more the OCC can do to encourage the
opening of new banks?
Q.9.d. Is there anything more Congress should do to encourage
the opening of new banks?
A.9.a.-d. Community banks are essential to our Nation's
economic growth and prosperity. They play a vital role in
meeting the credit needs of consumers and small businesses
across the country and help these businesses thrive by offering
products and services tailored to their needs.
While the OCC recently approved a charter application for a
new national bank, you are correct that there has been a
paucity of new bank charters issued since passage of the Dodd-
Frank Act. The reasons for this are wide-ranging and include
the cost of capital; competition from nonbank financial service
providers; and the cost of complying with applicable statutory
and regulatory requirements. In addition, as I noted in my
testimony, under existing law, a new insured depository
institution must obtain the approval of two
regulators--the chartering authority (i.e., the OCC for
national banks and Federal savings associations) and the FDIC.
This process results in significant delays and has slowed the
formation of de novo institutions in recent years. I have
suggested options for Congress to consider to address this
particular issue.
While the OCC cannot address all the factors that have
caused the decrease in new bank charter applications, we are
committed to minimizing unnecessary regulatory burden for these
institutions and will continue to consider carefully the effect
that current and future regulations and policies may have.
At the same time, there are steps that Congress can take by
providing new and existing community banks with more
flexibility to reduce burdens. For example, as I discussed in
my June 22, 2017, testimony, Congress could:
LModernize the corporate governance requirements for
national banks by allowing them to adopt fully the
corporate governance procedures of, for example, the
State in which their main office is located, the State,
the Delaware General Corporation Law, or the Model
Business Corporation Act;
LProvide regulatory relief to community banks, for
example, by exempting community banks altogether from
the obligation to comply with the Volcker Rule; and
LAddress areas of uncertainty that national banks
face, for example, by codifying the ``valid when made''
principle (i.e., preserving the original interest terms
following a transfer of a loan from a national bank)
called into question by the Second Circuit in Madden v.
Midland Funding, LLC.
Each of these would help create an environment more conducive
to community bank success and, thereby, encourage applicants
for new bank charters. I look forward to working with Congress
to encourage the formation of de novo banks.
Q.10. I'm concerned that our Federal banking regulatory regime
relies upon too many arbitrary asset thresholds to impose
prudential regulations, instead of relying on an analysis of a
financial institution's unique risk profile.
Q.10.a. Should a bank's asset size be dispositive in evaluating
its risk profile in order to impose appropriate prudential
regulations?
Q.10.b. If not, what replacement test should regulators follow
instead of, or in addition to, an asset-based test?
A.10.a.-10.b. I share your concern about the use of arbitrary
asset thresholds for prudential regulation, particularly for
midsize and regional banks. For midsize institutions, the
commonly used $50 billion threshold can create a barrier to
growth as well as a competitive barrier to entry because
compliance costs rise dramatically for banks with assets of $50
billion or more. Although asset size may be appropriate to use
as one measure of when and how to tailor regulations, in many
cases it may make sense to supplement the use of asset size
with other measures that better capture a bank's level of risk.
For example, other factors to consider could include the nature
and complexity of the bank's activities and the prudential
regulator's judgment about the bank's effectiveness in managing
risk, which is based on the qualitative and quantitative
results of examinations. The precise mix of tailoring measures
can and should vary depending on context. My written testimony
provides several context-specific suggestions for how this type
of tailoring could be achieved. For example, Congress could
give the FBAs the authority to issue rules creating an ``off-
ramp'' for the Volcker Rule that takes into consideration asset
size and the nature and complexity of an institution's
activities. The use of both asset size and the nature of the
institution's activities would, in the Volcker Rule, allow the
FBAs to recognize that smaller institutions generally do not
engage in the types of risky activities the Volcker Rule was
intended to address. In contrast, in the stress testing
context, an asset threshold may not be necessary. Instead,
Congress could give the FBAs the flexibility to issue rules
that tailor the stress testing requirements to be commensurate
with risks posed by individual institutions or groups of
institutions.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR COTTON FROM KEITH A.
NOREIKA
In your testimony, you stated that the CFPB has a different
supervisory approach to bank examinations than the OCC.
Q.1. Can you explain the differences in approach between the
agencies in examining national banks and Federal savings
associations for compliance with consumer protection
requirements?
A.1. There are a number of differences in the OCC and CFPB
approaches to examining for compliance with consumer protection
laws. Based on the statutory and regulatory requirements, the
OCC examines each of its institutions on a regular cycle,
currently every 12 or 18 months depending on the bank's asset
size and rating. At each examination, the OCC reviews areas
that are mandated by statute, regulation, or agency policy and
also applies a risk-based approach to assess the bank's
operations and focus exam work on areas of highest risk. As an
example, OCC supervisory offices are responsible for
identifying and assessing fair-lending risks during each
supervisory cycle. For institutions with assets of $10 billion
or less, the OCC has the authority to assess compliance with
the 18 Federal consumer financial laws defined in Title X of
Dodd-Frank, 12 U.S.C. 5481(14). These laws include the Equal
Credit Opportunity Act, the Fair Debt Collection Practices Act,
the Home Mortgage Disclosure Act of 1975, the Home Owners
Protection Act of 1998, the Home Ownership and Equity
Protection Act of 1994, the Truth in Lending Act, the Truth in
Savings Act, and the Real Estate Settlement Procedures Act of
1974. In performing this responsibility, the agency focuses its
examination resources on areas of greatest risk based on that
bank's particular retail business model and operations, in the
context of the then-current state of the legal, regulatory and
market environment. For banks with total assets of more than
$10 billion, the OCC evaluates the quantity of risk and the
quality of compliance risk management through the OCC's Risk
Assessment System and assigns consumer compliance ratings.
The CFPB, however, does not have a similar statutory
mandate to conduct consumer compliance examinations on a fixed
schedule. Instead, as we understand it, the CFPB has developed
a process that focuses on identifying and addressing across all
of its supervised institutions (institutions with over $10
billion in assets), the areas of highest risk to consumers
throughout the financial services industry. We understand that
the CFPB implements this approach each year by identifying
focus areas of high risk to consumers, then identifying and
scheduling for examination the financial services providers
(both banks and nonbanks) that it believes pose the greatest
risks to consumers in these areas.
As a result of this targeted approach, the number of CFPB
examinations of OCC-supervised banks with more than $10 billion
in assets each year may be limited. In addition, the scope of
these exams may also be limited to specific rules, lines of
business, products or services or other similar areas that have
been identified as having the highest associated risk to
customers.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR WARNER FROM KEITH A.
NOREIKA
Q.1. Cybersecurity regulation is receiving increased emphasis
by all financial institution regulators. How do your agencies
coordinate with each other to harmonize the promulgation of new
cybersecurity regulations? With the increased use of the NIST
Cybersecurity Framework by both Federal agencies and the
private sector, how do your agencies intend to achieve greater
alignment between the framework and your own regulatory
initiatives?
A.1. The FBAs (OCC, FRB, and FDIC) meet monthly to discuss
topics of mutual interest. The FBAs also work very closely to
assess any potential new regulation. The Federal Financial
Institutions Examination Council (FFIEC) is more expansive in
membership and includes the FBAs as well as the National Credit
Union Administration, the CFPB, and the State Liaison
Committee, which includes representatives designated by the
Conference of State Bank Supervisors, the American Council of
State Savings Supervisors, and the National Association of
State Credit Union Supervisors. The FFIEC's Task Force on
Supervision includes two specific working groups that assess
technology and cybersecurity: Cybersecurity Critical
Infrastructure Working Group (CCIWG) and Information Technology
Systems (ITS). These committees meet monthly with a primary
objective of discussing shared interest and assessing and
developing any new examiner guidance.
The FFIEC has a legal mandate to develop common examination
guidance for the banking sector. The FFIEC has historically and
currently uses the National Institute of Standards and
Technology (NIST) security and technology standards as a
reference when assessing potential new regulations or
developing examiner guidance. The CCIWG developed the
Cybersecurity Assessment Tool (CAT) as a voluntary tool that
institutions could use to provide a repeatable and measureable
process to inform management of the institution's risks and
cybersecurity preparedness. The FFIEC published the CAT in June
2015. The FFIEC worked closely with the NIST during the
development phase of the CAT and mapped many of the CAT
declarative statements to standards set forth in the NIST
Cybersecurity Framework. NIST references the CAT on their
website as a tool that incorporates the NIST Framework. The OCC
as a bank regulator with individual rule writing authority and
as a member of the FFIEC will continue to consult with the NIST
and reference the NIST Framework during any consideration of
new examiner guidance or potential regulation.
The CAT does not represent new requirements or guidance.
The CAT packages existing, often long standing, FFIEC guidance
at the expected Baseline level to focus on cybersecurity. The
CAT is publicly available on the FFIEC website for industry
awareness in keeping with the regulators' principle of
transparency. The CAT may also be used by regulatory agencies
during their normal duties. The OCC has implemented the FFIEC
CAT in our normal supervisory processes to assess the Federal
banking system's cybersecurity preparedness.
The OCC also attends the quarterly Federal Banking
Information Infrastructure Committee (FBIIC) meetings. The
FBIIC includes a broad group (18) of regulators and industry
consortiums related to the financial services industry. The
FBIIC serves as mechanism to discuss common approaches and
items of mutual interest related to technology and
cybersecurity.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM KEITH A.
NOREIKA
Q.1. I'm a proponent of tailoring regulations based off of the
risk profiles of financial institutions, as opposed to having
strict asset thresholds that do not represent what I believe is
the smart way to regulate. But, my question here is really
about the importance of ensuring that we have a system that is
rooted in fundamental, analytical, thoughtful regulation so
that we can achieve and execute on goals, whether balancing
safety and soundness with lending and growth, or encouraging
more private capital in the mortgage market to protect
taxpayers and reform the GSEs.
Q.1.a. Do you think that we should use asset thresholds as a
way to regulate--yes or no? If no, can you provide me with the
metrics or factors by which a depository institution should be
evaluated? If yes, please explain.
A.1.a. Although in some cases asset size may be appropriate to
use as one measure of when and how to tailor regulations, in
many cases it may make more sense to supplement asset size with
other measures that better capture the level of risk a bank
presents. One such measure is the nature and complexity of the
bank's activities. Another is the prudential regulator's
judgment about the bank's effectiveness in managing risk, which
is based on the qualitative and quantitative results of
examinations.
The precise mix of tailoring measures can and should vary
depending on context. My written testimony provides several
context-specific suggestions for how this type of tailoring
could be achieved. For example, Congress could give the FBAs
the authority to issue rules creating an ``off-ramp'' for the
Volcker Rule that takes into consideration asset size as well
as the nature and level of an institution's activities. The use
of both asset size and activities would be appropriate in the
Volcker Rule context because it would allow the FBAs to
recognize that smaller institutions generally do not engage in
the types of risky activities the Volcker Rule was intended to
address. In contrast, in the stress testing context, an asset
threshold may not be necessary. Instead, Congress could give
the FBAs the flexibility to issue rules that tailor the stress
testing requirements to be commensurate with risks posed by
individual institutions or groups of institutions.
Q.1.b. Section 165 of Dodd-Frank requires enhanced supervision
and prudential standards for banks with assets over $50
billion. This applies to any bank that crosses the asset
threshold, without regard to the risks those banks pose based
upon the complexity of the business model. This includes
heightened standards on liquidity and capital under the
Liquidity Coverage Ratio (LCR) and the Comprehensive Capital
Analysis and Review (CCAR) which have a various assumptions
built in that may drive business model.
Q.1.b.i. I understand under these two regulatory regimes, banks
have changed certain lending behaviors because of the
assumptions Federal regulators have made regarding certain
classes of assets and deposits. Can you provide some examples
of how the LCR and CCAR have changed the types of loans,
lending, and deposits your institution holds?
Q.1.b.ii. Construction lending by banks over the $50 billion
threshold has been a source of concern, namely because these
enhanced prudential standards have treated construction loans
punitively. This includes construction lending for builders of
apartments, warehouses, strip malls, and other projects that
may have varying risk profiles associated with them. However,
under the CCAR and DFAST assumptions, the regulators have
assigned all these categories of lending the same capital
requirements. The result is an overly broad capital requirement
for varying loans that have different risks, a capital
requirement that may be greater for some loans and lower for
others, influencing the decision of many banks over the $50
billion threshold to hold less of these assets due to the
punitive capital requirements associated with them. Have you
seen a similar corresponding issue with construction loans
because of the heightened prudential standards?
Q.1.b.iii. Under the CCAR regulations, Federal regulators
routinely assign risk weights to certain assets that Bank
Holding Companies have on their balance sheets. These risk
weights oftentime changes the costs associated with holding
certain investments, such as Commercial Real Estate. Has this
changed the type of assets that institutions hold, or caused
institutions to alter their business plans because of the
regulatory capital costs? If so, can you provide examples of
this?
A.1.b.i.-b.iii. Banks' balance sheets have changed since the
financial crisis. These changes, which include reducing
reliance on short-term funding, strengthening the quality and
quantity of capital, streamlining business units, and improving
and investing in data and associated infrastructure, are likely
to improve banks' resilience. Many factors are driving these
changes including banks' strategic reactions to the financial
crisis, newly developed or enhanced capital and liquidity
planning efforts, and statutory and regulatory changes such as
the Comprehensive Capital Analysis and Review (CCAR) and
liquidity coverage ratio (LCR). Banks
consider all of these factors as they manage their businesses
and make portfolio decisions.
It has been our experience that CCAR is consistently the
most binding capital constraint. Banks often maintain a capital
buffer above the CCAR requirements due to uncertainty
surrounding the CCAR assessments and potential future changes
in the Federal
Reserve's assumptions and model. The capital calculations
within CCAR and Dodd-Frank Act Stress Test (DFAST) are based on
the regulatory capital rule, which assigns risk weights based
on the relative riskiness of broad categories of assets. With
respect to commercial real estate (CRE) loans, the capital rule
assigns a higher risk weight to certain CRE acquisition,
development, and construction loans as historically most banks
have experienced higher loss rates on such loans compared to
loans that fund stabilized, completed CRE properties.
Similarly, the OCC expects banks to model losses for the two
categories of CRE loans separately for purposes of stress
testing.
Since the LCR rule was implemented, national banks have
materially increased their portfolio of high quality liquid
assets (or HQLA). Since 2009, as the LCR was being developed
internationally, the 19 largest national banks added $1.7
trillion of highly liquid assets, a proxy for HQLA, which now
represent 29 percent of those banks' assets. The LCR also has
transformed liabilities, as firms were encouraged to reduce
reliance on funding from financial entities and short-term repo
and increase core deposits and longer-term funding. Core
deposits at national banks increased by nearly $2.9 trillion
from 2009-2016.
Q.1.b.iv. Do you think that regulators, on a general basis, get
the risks weights right?
A.1.b.iv. I think the relevant risk weights are generally
appropriate. The regulatory capital rules assign risk weights
to assets based on the relative riskiness of broad asset
categories. The regulatory capital rules went through the
public notice and comment process and the OCC, FDIC and Federal
Reserve considered the public comments received when finalizing
the rules.
As part of the rulemaking process, the agencies considered
the potential cost of the revised capital rules using
regulatory reporting data, supplemented by certain assumptions
and estimates if data needed for certain calculations were not
available. The FBAs reviewed the results of their respective
reviews, as well as the input received from commenters during
the notice and comment process, and concluded that the vast
majority of banks had regulatory capital sufficient to meet the
revised minimum requirements on a fully phased-in basis. In
fact, the vast majority had capital sufficient to exceed the
fully phased-in capital conservation buffer, such that they
would not face restrictions on capital distributions.
Q.1.b.v. Fed Governor Tarullo has argued that the $50 BB
threshold is too low in terms of an asset threshold for
enhanced prudential standards; does this number make sense? Why
do we need such arbitrary thresholds? Shouldn't we get away
from these thresholds and move toward a regulatory system that
evaluates substance and activities of an institution as opposed
to an arbitrary number? Why can't we do that?
Q.1.b.vi. Does Title I allow the Fed to treat a $51 BB bank in
a similar manner to a $49 BB bank for the purposes of enhanced
prudential standards?
A.1.b.v.-A.1.b.vi. I am concerned that the $50 billion
threshold for the application of enhanced prudential standards
(EPS) under
section 165 of the Dodd-Frank Act creates an effective barrier
to competition that protects the market position and
competitive advantage of the largest, most complex institutions
while imposing
proportionally higher costs and larger burdens on institutions
with assets closer to the $50 billion threshold. Consequently,
I would support efforts to raise the threshold for application
of EPS under section 165 of the Dodd-Frank Act. I would also
support efforts to use a qualitative assessment process. Either
approach would more specifically capture the companies that
present the types of risk that would require EPS.
There are several ways to implement these approaches.
Congress could take action to amend the $50 billion threshold
established by section 165 of the Dodd-Frank Act. In the
alternative, section 115 of the Dodd-Frank Act gives the FSOC
the ability to make recommendations to the Federal Reserve
about the establishment and refinement of EPS, including
recommendations to differentiate among companies subject to EPS
on an individual basis or by category, taking into
consideration their capital structure, riskiness, complexity,
financial activities, size, and any other risk-related factor,
and recommendations for an asset threshold that is higher than
$50 billion for contingent capital requirements, resolution
plans, credit exposure reports, concentration limits, public
disclosures, and short-term debt limits. In addition, under
section 165(a) of the Dodd-Frank Act, the Federal Reserve could
differentiate among companies with respect to application of
EPS, either on its own or pursuant to a recommendation from the
FSOC and, pursuant to a recommendation from the FSOC, could
raise the asset thresholds for EPS addressing contingent
capital requirements, resolution plans, credit exposure
reports, concentration limits, public disclosures, and short-
term debt limits.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR KENNEDY FROM KEITH A.
NOREIKA
Q.1. In response to a question from Chairman Crapo, you
responded by saying that not only was changing the $50 billion
threshold appropriate, but that arbitrary thresholds in general
act as barriers to entry to higher asset levels. Furthermore,
in response to a question from Sen. Shelby, you responded that
size is not the only factor to consider and that risk profiles
are imperative when judging appropriateness.
In light of these responses, do you think that a risk-based
formula such as the one already developed and in use by the
Federal Reserve to determine G-SIB surcharges, could be
effectively and appropriately used to determine which firms are
systemically important and should be subject to increased
regulation?
A.1. Regulators use a variety of measures to tailor their
regulations to identify and take into account the level of risk
an institution presents. The Federal Reserve's risk-based
formulas for identifying, and assessing capital against, global
systemically important bank holding companies (GSIBs) is one
example of how a regulator can use a variety of measures to
assess risk. The Federal Reserve's formulas use a methodology
based on metrics that are correlated with systemic
significance: size, interconnectedness, cross-jurisdiction
activity, substitutability, complexity, and short-term
wholesale funding. To identify GSIBs, each institution is
scored by category relative to aggregate global indicator
amounts across other large, global banking organizations and an
aggregate systemic indicator score is calculated. A bank
holding company that exceeds a defined threshold is identified
as a GSIB.
This approach has some drawbacks. While metrics such as
those used by the Federal Reserve to identify GSIBs should be
taken into account when determining an institution's level of
systemic risk, these metrics do not always leave room for a
prudential regulator's judgment. Regulators should be able to
leverage the insight into an institution's effectiveness in
managing risk that they have gained through the examination
process. This insight is especially important when regulating
sophisticated financial institutions. Furthermore, relying on
relative measurements of systemic risk profiles can make it
more difficult for an institution to alter its systemic
importance through its own actions (such as a reduction in its
risk profile), since its systemic indicator score is influenced
not only by its own actions, but also by the actions of other
institutions included in the aggregate global indicator. To the
extent practicable we should strive for methodologies that
minimize such relational distortions.
Q.2. You both have spoken about the need to ``right-size'' or
eliminate regulations that are duplicative, costly and that
inhibit growth. Dodd-Frank added to an already complex set of
overlapping capital regimes that could be considerably
streamlined by your agency without the need for legislative
action. Larger regional banks that do not pose the kinds of
systemic risks as the larger global players remain subject to
the Advanced Approaches regime under Basel. That regime compels
regional banks to run complex internal capital models,
deploying valuable resources and costing tens of millions of
dollars in compliance costs, all for no risk management
benefits. In fact, the Collins Amendment to the Dodd-Frank Act
nullified the relevance of Advanced Approaches by
requiring large regionals to adhere to the simpler Standardized
Approach, which requires higher capital levels.
Would you support either raising the threshold for
application of the Advanced Approaches regime from $250B to
capture only truly global banks, or giving large regionals the
opportunity to opt-out of this regime?
A.2. I fully agree that when setting an asset threshold in a
regulation, financial institutions on different sides of the
asset threshold are affected differently. As I said in my
testimony, it is a bank supervisor's job to strike the right
balance between supervision that effectively ensures safety,
soundness, and compliance, while at the same time enabling
economic growth. Establishing a higher asset threshold is one
way to provide regulatory relief to institutions that do not
pose systemic risks. However, I believe that regulators are
likely to have more success in striking the right balance in
the context of capital requirements if they have the
flexibility to establish standards that are tailored to take
risk into consideration.
Allowing regulators to consider a broader array of
factors--such as size, complexity, risk profile, and
interconnectedness--when developing and implementing capital
regulations would allow them to better capture the level of
risk an institution presents. Using measures that consider the
nature and scope of an institution's activities complemented by
the prudential regulator's judgment are critical components of
an efficient and effective regulatory framework. The OCC will
work within our current authorities to achieve this aim and
foster economic growth and opportunity.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
KEITH A. NOREIKA
Q.1. In your written testimony to the Committee, you suggested
that Congress revoke the CFPB's authority to examine and
supervise the activities of insured depository institutions
with over $10 billion in assets with respect to compliance with
the laws designated as Federal consumer financial laws. You
further suggest that Congress return examination and
supervision authority with respect to Federal consumer
financial laws to Federal banking agencies.
When I asked you about this recommendation at the hearing,
you noted that:
what we're seeing in practice is that the CFPB is not enforcing
those rules against the mid-size banks--the large-small banks
to the small-big banks. And so we do have a problem of both
over- and under-inclusion. And so when we get up to the bigger
banks, we have a little bit of overlap and overkill there. So
we need some better system of coordination.
Q.1.a. Can you elaborate on your comments from the hearing and
describe which rules the CFPB is not enforcing against ``large-
small banks'' to ``small-big banks?'' Please list specific
examples, to the best of your ability, of instances where the
CFPB failed to catch or remediate misconduct at these
institutions through the supervisory process.
A.1.a. Based on the statutory and regulatory requirements, the
OCC examines each of its institutions on a regular cycle,
currently every 12 or 18 months depending on the bank's asset
size and rating. At each examination, the OCC reviews areas
that are mandated by statute, regulation, or agency policy and
also applies a risk-based approach to assess the bank's
operations and focus exam work on areas of highest risk. As an
example, OCC supervisory offices are responsible for
identifying and assessing fair-lending risks during each
supervisory cycle. For institutions with assets of $10 billion
or less, the OCC has the authority to assess compliance with
the 18 Federal consumer financial laws defined in Title X of
Dodd-Frank, 12 U.S.C. 5481 (14). These laws include the Equal
Credit Opportunity Act, the Fair Debt Collection Practices Act,
the Home Mortgage Disclosure Act of 1975, the Home Owners
Protection Act of 1998, the Home Ownership and Equity
Protection Act of 1994, the Truth in Lending Act, the Truth in
Savings Act, and the Real Estate Settlement Procedures Act of
1974. In performing this
responsibility, the agency focuses its examination resources on
areas of greatest risk based on that bank's particular retail
business model and operations, in the context of the then-
current state of the legal, regulatory and market environment.
For banks with total assets of more than $10 billion, the OCC
evaluates the quantity of risk and the quality of compliance
risk management through the OCC's Risk Assessment System and
assigns consumer compliance ratings.
The Consumer Financial Protection Bureau (CFPB), however,
does not have a similar statutory mandate to conduct consumer
compliance examinations on a fixed schedule.
Instead, as we understand it, the CFPB has developed a
process that focuses on identifying and addressing across all
of its supervised institutions (institutions with over $10
billion in assets), the areas of highest risk to consumers
throughout the financial services industry. We understand that
the CFPB implements this approach each year by identifying
focus areas of high risk to consumers, then identifying and
scheduling for examination the financial services providers
(both banks and nonbanks) that it believes pose the greatest
risks to consumers in these areas.
As a result of this targeted approach, the number of CFPB
examinations of OCC-supervised banks with more than $10 billion
in assets each year may be limited. In addition, the scope of
these exams may also be limited to specific rules, lines of
business, products or services or other similar areas that have
been identified as having the highest associated risk to
customers. This approach has resulted in a substantial number
of OCC-supervised banks with more than $10 billion in assets
that have not received an examination from the CFPB for
multiple years. For example, based on information provided to
us by the CFPB since 2012, we have calculated that only
approximately one-third of OCC-supervised banks with more than
$10 billion but less than $50 billion in assets are subject to
consumer compliance examinations from the CFPB annually. As a
result, approximately two-thirds of national banks and Federal
savings associations within the CFPB's jurisdiction lack the
necessary supervisory examination of compliance with Federal
consumer financial laws as the OCC does not have the authority
to assess compliance for these institutions.
Q.2. Please also describe specific examples where CFPB
supervision of insured depository institutions has led to ``a
little bit of overlap and overkill'' for ``bigger banks.'' What
instances informed your views expressed in this comment? In
what ways has the CFPB been too punitive toward ``bigger
banks?''
A.2. We have observed an emerging trend of the CFPB focusing
its supervisory and enforcement activities on banks with asset
sizes over $50 billion. In 2015 and 2016, the records currently
available to the OCC indicate that the CFPB examined 41 percent
and 34 percent, respectively, of the largest OCC-supervised
banks. During the same period, our records indicate that the
CFPB examined 12 percent and 16 percent of OCC-supervised
midsize banks (generally between $10 and $50 billion in
assets). The cumulative result therefore, is that the ``bigger
banks'' are the focus of more of the CFPB's supervisory
activity. Several of these banks also have,
during the 5 years of the CFPB's existence, been subject to
simultaneous consumer protection-related enforcement actions by
multiple regulators.
In my written testimony, I proposed an approach to address
the overlap in supervisory authority over consumer compliance
matters. In describing the OCC's proposed approach, the
testimony uses the analogy of traffic lights--one regulator has
the lead responsibility or primary authority to act (i.e.,
``green light''). The other regulators have concurrent or back-
up authority (i.e., ``red light''). They wait to act until a
contingency provided in the law has occurred. Such an approach
avoids the current situation where, not only is there a
trending CFPB focus on bigger banks, but there is also an
emerging practice of multiple regulators taking actions at the
same time for the same underlying reason.
Q.3. Since joining the OCC several weeks ago, have you
discussed with CFPB Director Cordray your concern that ``large-
small banks'' and ``small-big banks'' are receiving inadequate
oversight through the supervisory process?
A.3. Yes.
Q.4. Please describe the asset sizes or other characteristics
that define, to your mind, ``large-small banks,'' ``small-big
banks,'' and ``bigger banks.''
A.4. In my written testimony, I discussed the importance of
``right-sizing regulation,'' noting the unintended consequences
of applying statutes intended to address systemic risks that
are typically associated with larger, more complex institutions
to smaller institutions that do not pose those broad, systemic
risks. Right-sizing regulation emphasizes tailoring the rules
to the business models and risk profiles of banks, rather than
relying on arbitrary asset thresholds.
While asset size can be an important consideration, it
should be combined with considerations of the risks that are
present in the institution. The latter are generally associated
with factors such as an institution's product and service
offerings, customer base, target markets and geographic
locations in which the institution or its customers conduct
business. Adding these risk considerations may change the
overall profile of the institution. Therefore, when viewed
holistically, a bank that falls into the category of a large
bank in terms of asset size, may have a risk profile that has
traditionally been viewed as one associated with a bank that is
small in asset size.
In referring to the terms ``large-small banks,'' ``small-
big banks,'' and ``bigger banks,'' the OCC is combining
consideration of asset size and risk profile. Large-small banks
could be viewed as banks that are small in terms of asset size,
but have ``large bank'' risk profiles. Similarly, a small-big
bank would be one that would be considered large in terms of
asset size, but have a ``small bank'' risk profile. In these
cases, applying the same regulation to all large or small banks
in terms of asset size would be inappropriate as the risk
profiles of the banks in each of these asset groups may vary.
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE FROM CHARLES G.
COOPER
Q.1. Our financial system has become increasingly consolidated,
as community banks and credit unions either close their doors
or merge with larger institutions.
Q.1.a. Are you concerned about this pattern? Why?
A.1.a. State regulators are very concerned about this pattern.
Small, local banks continue to consolidate across the country,
leaving many communities without access to financial services
and reducing the diversity of the banking system.
An astonishing 1,715 community banks have disappeared since
2010, and this trend continues with 54 banks exiting the market
in the first quarter of 2017. By contrast, only three community
banks have closed due to failure in 2017. Consolidation leaves
consumers with less choice, and diminishes healthy competition
within the market.
Prior to the financial crisis, this consolidation was
countered by new bank formation. However, the current trend of
consolidation lack a corresponding appearance of new entrants.
State regulators are concerned that further consolidation and a
lack of de novo applications could have drastic effects on
credit availability.
Q.1.b. What services can these smaller institutions provide
that larger institutions cannot provide?
A.1.b. According to the Federal Reserve's 2016 Small Business
Credit Survey, small banks are a primary source of credit for
small businesses, and successful small business loan applicants
are most satisfied with small banks. Community banks have an
outsized role in small business lending--despite smaller asset
size, community banks make 45 percent of all small loans to
businesses in the United States. In fact, small business
startups with assets under $1 million are most likely to be
approved for financing at community banks. Small banks' small
business lending activity levels the playing field, allowing
for small firms to gain a foothold in the local market.
Furthermore, community banks hold majority market share in the
agricultural lending space, originating upwards of 75 percent
of agricultural loans.
State regulators have seen that these lending activities
require an understanding of not only the borrower, but also the
local community. The effectiveness of this relationship-lending
model is reflected in the market share held by community banks
in small business and agricultural lending, despite smaller
asset size.
Q.2. Multiple anecdotes from constituents make it clear that
there are several Nebraska counties where consumers cannot get
a mortgage, due to CFPB regulations such as TRID and the QM
rule. What is the best way to address this problem from a
regulatory standpoint?
A.2. Regarding the Ability to Repay/Qualified Mortgage (ATR/QM)
Rule, smaller and less complex institutions have reported that
stringent documentation requirements to obtain safe-harbor
status from qualified-mortgage (QM) rules have made mortgage
lending increasingly unprofitable and more difficult to provide
these loans to their customers. Recent research indicates that
discontinuation of residential mortgage origination by
community banks is on the rise. The CFPB's QM rule and the
ability to repay (ATR) requirements, both made effective in
2014, have had a demonstrable effect on community bank
residential lending activity. State supervisors find this to be
a disconcerting trend, as community banks are the primary
source of mortgage credit in many of our communities.
State regulators recommend that banks that retain mortgages
in portfolio should be subject to more flexible underwriting
practices, as they are fully incentivized to ensure the
borrower can meet the monthly obligations of a mortgage.
Specifically, State regulators recommend granting QM status to
all loans held in portfolio by community banks. This approach
reflects the alignment of interest between the bank and the
borrower, tailoring regulatory requirements to the
relationship-based nature of community bank mortgage lending.
Regarding the RESPA-TILA Integrated Disclosure Rule (TRID),
State regulators were generally supportive of the Bureau's
efforts to streamline the incongruent disclosure requirements,
language, and definitions in RESPA and TILA. State regulators
are supportive of the enhanced consumer protections in the
rule, but are cognizant of the fact that compliance has been
costly and time consuming for smaller banks, leading to delays
in the mortgage lending and closing process while providing
little benefit to the customer.
Among the more than 500 community banks that responded to
the Federal Reserve/CSBS 2016 National Survey of Community
Banks, 23 percent of total compliance costs were expended on
compliance with TRID. In addition to being the most costly, the
RESPA and TILA regulations were also identified by surveyed
bankers as the most confusing to administer. Nearly 45 percent
of surveyed bankers said that the rule either ``slowed the pace
of business'' or ``delayed closings.'' Frustration is reflected
in the comment of one banker who said, ``Only one person in the
bank knows how to close a loan.'' It seems that a rule intended
to protect the consumer and increase understanding of the
mortgage process has instead increased confusion for lenders
and borrowers alike. State regulators believe that the CFPB
should assess the quantitative impact of the TRID rule to
ensure that the onerous compliance requirements are not
preventing consumers from accessing mortgage credit.
Q.3. Are there concrete ways in which you believe the CFPB has
improperly tailored regulations to match the unique profile of
smaller financial institutions?
A.3. Examples of CFPB rules that are improperly tailored to the
unique profile of smaller financial institutions include the
Small Dollar Lending Rule proposed in 2016 and the 2015 Final
HMDA Rule.
The CFPB's Small Dollar Lending Rule will require any
lender that makes a single covered small-dollar loan to comply
with a 1,300-page rule. The rule fails to acknowledge the
fundamental differences in business model between community
banks and payday lenders.
Community banks do not generate a considerable profit from
their small-dollar lending, and they generally offer these
loans as an accommodation to existing customers.
The Bureau has acknowledged that there will be significant
consolidation in the payday lending industry as a result of the
rulemaking. Following the rule's finalization, consumer demand
for small-dollar credit is unlikely to decrease. Therefore,
borrowers could turn to depository institutions as sources of
small-dollar credit. However, the complexity of the proposed
rule is likely to discourage banks that currently offer small-
dollar credit from continuing to do so. It will also make it
unlikely that banks will innovate in this area by developing
new products.
In addition, the costs associated with the creation of a
compliance program specific to small-dollar lending will be
prohibitive for community banks, especially smaller banks in
rural areas. To the contrary, large nondepository lenders who
are able to automate installment lending that is compliant with
the Bureau's rule will have an advantage over relationship
lenders. In multiple areas within the proposed rule's
commentary, the Bureau asked for comment on whether they should
create a de minimis exemption for certain segments of the
industry. State regulators believe that the Bureau should use
their authority under Section 1022(3) of the Dodd-Frank Act to
provide a de minimis exemption from all of the rule's
requirements for depository institutions. The exemption should
apply to institutions that meet certain criteria regarding loan
volume and the percentage of institutions' gross revenue
resulting from small-dollar lending. An exemption structured in
this way would allow community banks, credit unions, and
community development financial institutions (CDFIs) to
continue to serve as a source of small-dollar credit.
The 2015 HMDA Final Rule added 25 new data fields that, for
2018 transactions, institutions must collect, record and (in
2019) report. The rule also modified 14 existing data points.
In total, covered institutions will be required to collect and
report on 48 data fields. With respect to the 13 new data
points that were required to be collected by Dodd-Frank, State
regulators generally believe that the Bureau has taken
appropriate measures to implement the Dodd-Frank requirements.
However, State regulators are very concerned that the new
reporting requirements, when viewed as a whole, will impose a
disproportionate cost burden on small reporters, especially
community banks. With the new rule, the Bureau sought to
decrease burden for small reporters by raising the loan volume
threshold from one covered loan to 25 covered loans. State
regulators are appreciative of the attempt to reduce burden on
financial institutions that report less than 25 loans, however,
it seems that the number was chosen primarily to shed more
light on the lending practices of nondepository institutions,
who previously had to report HMDA data only if they originated
more than 99 loans. The one-size-fits-all loan volume threshold
fails to take into account the relationship (portfolio) lending
business model of small depository lenders. State regulators
believe that the Bureau, under its delegated authority, should
consider the necessity and benefit of the chosen threshold
against the backdrop of every increasing regulatory burden for
the smallest financial service providers. State regulators
believe that the Bureau should take a tiered approach to HMDA
reporting. For example, the tiered approach could consist of a
first tier where institutions that make less than 100 loans
would be exempt from HMDA reporting. A second tier could apply
the original HMDA reporting requirements to institutions that
originate 100 to 300 loans. A final tier would apply the
expanded HMDA reporting requirements in the final rule to
institutions that make in excess of 300 loans.
Q.4. My understanding is that very few banks have opened since
the passage of Dodd-Frank.
Q.4.a. Why do you believe this is the case?
A.4.a. State regulators are concerned that the recent decline
in the number of banks is due to a collapse of entry into
commercial banking. There are a variety of factors at work that
influence the lack of new banks--increased regulatory burden,
macroeconomic factors, and effects of the crisis. Whatever the
cause, it is a point of concern--a diverse field of banks is
essential to meet the credit needs of local communities. State
regulators have recognized a research gap when it comes to
community banks, and consequently developed the CSBS-Federal
Reserve Community Banking Research Conference, which is going
into its fifth year. State regulators hope to identify, through
data-driven analyses, which
primary factors are influencing the lack of new banks.
Q.4.b. What potential impacts does this have on our financial
system?
A.4.b. New banks encourage competition, innovation, and provide
credit in communities that may otherwise not have it. Smaller
and less-complex banks, by the nature of their business model,
fulfill an important role in local communities. Per recent FDIC
research, there are 1,200 U.S. counties, encompassing 16.3
million people, who would have limited access to mainstream
banking services if not for community banking organizations.
Community banks are much more likely to be in nonmetro areas
and rural areas, and without access to fundamental banking
services, those regional economies could be negatively
impacted.
Q.4.c. Is there anything more Congress should do to encourage
the opening of new banks?
A.4.c. In a general sense, Congress should consider a more
tailored approach to regulation for the banking industry, one
that takes into consideration smaller institutions and the way
they operate. Further, it is essential that individuals with
community bank supervisory experience be included at every
stage of Federal rulemaking and supervisory process
development. Without representation of individuals who
understand how the banking business model that makes up the
majority of the industry operates, de novo applications could
remain stagnant. We encourage Congress to seek out the
perspective of State regulators, as a local, on the ground
perspective is critical to effective policy development.
Q.5. I'm concerned that our Federal banking regulatory regime
relies upon too many arbitrary asset thresholds to impose
prudential regulations, instead of relying on an analysis of a
financial institution's unique risk profile.
Q.5.a. Should a bank's asset size be dispositive in evaluating
its risk profile in order to impose appropriate prudential
regulations?
A.5.a. No, a bank's asset size should not be dispositive in
evaluating its risk profile. Policymakers have often approached
bank regulatory requirements based on an institution's asset
size. However, this has led to a fragmented and arbitrary
regulatory framework that negatively impacts community banks.
State regulators are concerned that the current approach to
applicable regulation falls short in providing a tailored and
reasonable approach to community bank regulation, which in turn
harms these institutions and the communities they serve. For
example, Commissioners have seen community banks approaching
the $10 billion asset mark choose to acquire another
institution to quickly achieve a size well beyond $10 billion
(rather than organically grow) to absorb the increased costs of
direct supervision by the Consumer Financial Protection Bureau
(CFPB or Bureau).
Q.5.b. If not, what replacement test should regulators follow
instead of, or in addition to, an asset-based test?
A.5.b. CSBS has developed an activities-based approach to
defining community banks that is based on the Federal Deposit
Insurance Corporation's (FDIC) research definition, introduced
in 2012. CSBS believes the FDIC research definition of a
community bank--which considers an institution's business
activities, funding characteristics, and geographic footprint--
provides a good foundation on which to build a more rational
regulatory and supervisory framework for community banks.
The FDIC's research definition is activities-based, while
also providing certainty, as the FDIC publishes on a quarterly
basis the list of institutions meeting this definition. State
regulators also propose that the FDIC's research definition can
be coupled with a petition process for institutions who fall
outside the definition to petition their chartering authority
for designation as a community bank.
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RESPONSE TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM CHARLES G.
COOPER
Q.1. I'm a proponent of tailoring regulations based off of the
risk profiles of financial institutions, as opposed to having
strict asset thresholds that do not represent what I believe is
the smart way to regulate. But, my question here is really
about the importance of ensuring that we have a system that is
rooted in fundamental, analytical, thoughtful regulation so
that we can achieve and execute on goals, whether balancing
safety and soundness with lending and growth, or encouraging
more private capital in the mortgage market to protect
taxpayers and reform the GSEs.
Q.1.a. Do you think that we should use asset thresholds as a
way to regulate--yes or no? If no, can you provide me with the
metrics or factors by which a depository institution should be
evaluated? If yes, please explain.
A.1.a. No. Regulation and supervision should be tailored to the
complexity and risk profile of the institution. As an example,
CSBS has developed an activities-based approach to defining
community banks that is based on the Federal Deposit Insurance
Corporation's (FDIC) research definition, introduced in 2012.
CSBS believes the FDIC research definition of a community
bank--which considers an institution's business activities,
funding characteristics, and geographic footprint--provides a
good foundation on which to build a more rational regulatory
and supervisory framework for community banks.
The FDIC's research definition is activities-based, while
also providing certainty, as the FDIC publishes on a quarterly
basis the list of institutions meeting this definition. State
regulators also propose that the FDIC's research definition can
be coupled with a petition process for institutions who fall
outside the definition to petition their chartering authority
for designation as a community bank. As the complexity and risk
profile increases, so should the regulatory scheme, with the
highest level being the systemically important institutions.
Q.1.b. Section 165 of Dodd-Frank requires enhanced supervision
and prudential standards for banks with assets over $50
billion. This applies to any bank that crosses the asset
threshold, without regard to the risks those banks pose based
upon the complexity of the business model. This includes
heightened standards on liquidity and capital under the
Liquidity Coverage Ratio (LCR) and the Comprehensive Capital
Analysis and Review (CCAR) which have a various assumptions
built in that may drive business model.
Q.1.b.i. I understand under these two regulatory regimes, banks
have changed certain lending behaviors because of the
assumptions Federal regulators have made regarding certain
classes of assets and deposits. Can you provide some examples
of how the LCR and CCAR have changed the types of loans,
lending, and deposits your institution holds?
A.1.b.i. State regulators experience to date has been that the
impact of the LCR and CCAR alone on lending activity is
difficult to isolate, particularly given market conditions.
More broadly, there is no doubt that the LCR and CCAR have an
impact on the firms by consuming resources and adding operating
expenses as the banks endeavor to meet higher regulatory
expectations. It is difficult to determine a dollar cost
because LCR/CCAR support is woven throughout the organizations.
Q.1.b.ii. Construction lending by banks over the $50 billion
threshold has been a source of concern, namely because these
enhanced prudential standards have treated construction loans
punitively. This includes construction lending for builders of
apartments, warehouses, strip malls, and other projects that
may have varying risk profiles associated with them. However,
under the CCAR and DFAST assumptions, the regulators have
assigned all these categories of lending the same capital
requirements. The result is an overly broad capital requirement
for varying loans that have different risks, a capital
requirement that may be greater for some loans and lower for
others, influencing the decision of many banks over the $50
billion threshold to hold less of these assets due to the
punitive capital requirements associated with them. Have you
seen a similar corresponding issue with construction loans
because of the heightened prudential standards?
A.1.b.ii. I am aware of industry concerns about this. From my
position as a regulator, it is difficult to know what loans are
not made; however, maintenance and the personnel cost of CCAR
systems are inordinately expensive. It is easy to assume that
some of this cost has been diverted away from the lending area.
This emphasizes the need to require this type of testing only
on the more complex institutions.
Q.1.b.iii. Under the CCAR regulations, Federal regulators
routinely assign risk weights to certain assets that Bank
Holding Companies have on their balance sheets. These risk
weights often time changes the costs associated with holding
certain investments, such as Commercial Real Estate. Has this
changed the type of assets that institutions hold, or caused
institutions to alter their business plans because of the
regulatory capital costs? If so, can you provide examples of
this?
A.1.b.iii. The goal of these risk weightings is to affect the
mix of assets and investments banks hold, and State regulators
have seen this occurring.
Q.1.b.iv. Do you think that regulators, on a general basis, get
the risks weights right?
A.1.b.iv. Appropriately calibrating risk weights has proven to
be a challenge as risk weightings tend to reflect the most
recent crisis or backwards looking. The elevated risk weights
for High Volatility Commercial Real Estate (HVCRE) and Mortgage
Servicing Assets (MSAs) are two instances where risk weights
may not accurately reflect the risks associated with the
underlying asset class. In the 2017 EGRPRA Report, the Federal
banking agencies committed to revisiting these particular risk
weights; an effort which we have and continue to encourage the
Federal banking agencies to pursue.
However, equally important to ensuring that the individual
risk weights themselves are appropriately calibrated is
ensuring that the risk weighting system as a whole is
appropriately calibrated. Specifically, the new exposure
categories and risk weights introduced under Basel III should
be revisited and potentially eliminated for institutions, such
as community banks, where greater granularity does not result
in greater risk sensitivity but simply unnecessary compliance
burden.
Q.1.b.v. Fed Governor Tarullo, has argued that the $50 BB
threshold is too low in terms of an asset threshold for
enhanced prudential standards; does this number make sense? Why
do we need such arbitrary thresholds? Shouldn't we get away
from these thresholds and move toward a regulatory system that
evaluates substance and activities of an institution as opposed
to an arbitrary number? Why can't we do that?
A.1.b.v. State regulators believe that a bank's asset size
should not be dispositive in evaluating its risk profile.
Policymakers have often approached bank regulatory requirements
based on an institution's asset size. However, this has led to
a fragmented and
arbitrary regulatory framework that negatively impacts
community banks.
Q.1.b.vi. Does Title I allow the Fed to treat a $51 BB bank in
a similar manner to a $49 BB bank for the purposes of enhanced
prudential standards?
A.1.b.vi. No; however, if a bank is getting close to going over
the threshold, regulatory expectations are that the institution
should ramp up its processes to be prepared for the new
standards. Some cite this is as the ``trickle-down effect.''
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