[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

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs




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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      MIKE CRAPO, Idaho, Chairman

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

                     Gregg Richard, Staff Director
                 Mark Powden, Democratic Staff Director
                      Elad Roisman, Chief Counsel
                      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

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                            C O N T E N T S

                              ----------                              

                        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

                              ----------                              


                        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.



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                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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
                                ------                                


  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.
                                ------                                


  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.
                                ------                                


  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.
                                ------                                


 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.
                                ------                                


 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\
---------------------------------------------------------------------------
    \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 
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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 
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \2\ 12 U.S.C. 1751 et. seq.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    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.
                                ------                                


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.
                                ------                                


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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