    [Senate Hearing 116-119]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 116-119

                       OVERSIGHT OF FINANCIAL REGULATORS

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

                                    HEARING

                                   BEFORE THE

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

                         ONE HUNDRED SIXTEENTH CONGRESS

                                 FIRST SESSION

                                       ON

      EXAMINING THE EFFORTS, ACTIVITIES, OBJECTIVES, AND PLANS OF FEDERAL
      REGULATORY AGENCIES WITH RESPECT TO PRUDENTIAL REGULATIONS FOR U.S.
                    FINANCIAL INSTITUTIONS AND CREDIT UNIONS

                                   __________

                                  MAY 15, 2019

                                   __________

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

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                    Available at: https: //www.govinfo.gov /

                                  __________

                        U.S. GOVERNMENT PUBLISHING OFFICE
    39-484 PDF                 WASHINGTON : 2022

    -----------------------------------------------------------------------------------

                COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                          MIKE CRAPO, Idaho, Chairman

    RICHARD C. SHELBY, Alabama           SHERROD BROWN, Ohio
    PATRICK J. TOOMEY, Pennsylvania      JACK REED, Rhode Island
    TIM SCOTT, South Carolina            ROBERT MENENDEZ, New Jersey
    BEN SASSE, Nebraska                  JON TESTER, Montana
    TOM COTTON, Arkansas                 MARK R. WARNER, Virginia
    MIKE ROUNDS, South Dakota            ELIZABETH WARREN, Massachusetts
    DAVID PERDUE, Georgia                BRIAN SCHATZ, Hawaii
    THOM TILLIS, North Carolina          CHRIS VAN HOLLEN, Maryland
    JOHN KENNEDY, Louisiana              CATHERINE CORTEZ MASTO, Nevada
    MARTHA McSALLY, Arizona              DOUG JONES, Alabama
    JERRY MORAN, Kansas                  TINA SMITH, Minnesota
    KEVIN CRAMER, North Dakota           KYRSTEN SINEMA, Arizona

                         Gregg Richard, Staff Director

                    Laura Swanson, Democratic Staff Director

                          Joe Carapiet, Chief Counsel

                    Brandon Beall, Professional Staff Member

                   Catherine Fuchs, Professional Staff Member

                     Elisha Tuku, Democratic Chief Counsel

               Corey Frayer, Democratic Professional Staff Member

                          Cameron Ricker, Chief Clerk

                          Shelvin Simmons, IT Director

                        Charles J. Moffat, Hearing Clerk

                              Jim Crowell, Editor

                                      (ii)

                               C O N T E N T S

                                  ----------

                            WEDNESDAY, MAY 15, 2019

                                                                       Page

    Opening statement of Chairman Crapo..............................     1
        Prepared statement...........................................    39

    Opening statements, comments, or prepared statements of:
        Senator Brown................................................     3
            Prepared statement.......................................    40

                                   WITNESSES

    Joseph M. Otting, Comptroller of the Currency, Office of the
      Comptroller of the Currency....................................     5
        Prepared statement...........................................    41
        Responses to written questions of:
            Chairman Crapo...........................................    97
            Senator Brown............................................    97
            Senator Menendez.........................................   107
            Senator Rounds...........................................   107
            Senator Tillis...........................................   108
            Senator Warren...........................................   111
            Senator Moran............................................   113
            Senator Schatz...........................................   114
            Senator Cortez Masto.....................................   115
            Senator Smith............................................   121
            Senator Sinema...........................................   121
    Randal K. Quarles, Vice Chairman for Supervision, Board of
      Governors of the Federal Reserve System........................     6
        Prepared statement...........................................    50
        Responses to written questions of:
            Chairman Crapo...........................................   122
            Senator Brown............................................   125
            Senator Menendez.........................................   197
            Senator Rounds...........................................   199
            Senator Tillis...........................................   202
            Senator Warner...........................................   211
            Senator Warren...........................................   213
            Senator Moran............................................   215
            Senator Schatz...........................................   216
            Senator Cortez Masto.....................................   219
            Senator Smith............................................   228
            Senator Sinema...........................................   229
    Jelena McWilliams, Chairman, Federal Deposit Insurance
      Corporation....................................................     8
        Prepared statement...........................................    54
        Responses to written questions of:
            Chairman Crapo...........................................   230
            Senator Brown............................................   233
            Senator Menendez.........................................   243
            Senator Rounds...........................................   244
            Senator Perdue...........................................   245
            Senator Tillis...........................................   246
            Senator Moran............................................   249
            Senator Schatz...........................................   250
            Senator Cortez Masto.....................................   252
            Senator Sinema...........................................   255
    Rodney E. Hood, Chairman, National Credit Union Administration...     9
        Prepared statement...........................................    64
        Responses to written questions of:
            Senator Brown............................................   256
            Senator Menendez.........................................   266
            Senator Cortez Masto.....................................   268
            Senator Sinema...........................................   270

                  Additional Material Supplied for the Record

    Letter from an alliance of banking institutions regarding CECL...   272
    Letter from the Credit Union National Association (CUNA).........   275
    Letter from the National Association of Federally-Insured Credit
      Unions (NAFCU).................................................   279
    Letter to Secretary Steve Mnuchin and Chairman Jerome Powell
      regarding comment on proposed amendments from Timothy F.
      Geithner, Jacob J. Lew, Janet L. Yellen, and Ben S. Bernanke...   282

                       OVERSIGHT OF FINANCIAL REGULATORS

                                  ----------

                            WEDNESDAY, MAY 15, 2019

                                           U.S. Senate,
              Committee on Banking, Housing, and Urban Affairs,
                                                        Washington, DC.
        The Committee met at 9:33 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. We are going to come into order. However,
    we are not going to proceed for a few minutes. We still have to
    have Mr. Otting, and he is hung up, I understand, getting
    through the security line right now. So he should be able to be
    here in just a moment. So we are going to recess, but we needed
    to gavel it in so that Senators could get on to their other
    hearings if they want to check in and get moving.
        [Recess.]
        Chairman Crapo. The Committee will come to order.
        Today we will receive testimony from Joseph Otting, the
    Comptroller of the Currency; Randal Quarles, Federal Reserve
    Vice Chairman for Supervision; Jelena McWilliams, Chairman of
    the FDIC; and Rodney Hood, Chairman of the NCUA. We welcome all
    of you, and thank you for being here.
        This hearing provides the Committee an opportunity to
    examine the current state of and recent activities related to
    prudential regulation and supervision.
        The Fed's most recent report on Supervision and Regulation
    reports that the performance of the economy over the last 5
    years has contributed to the robust financial performance of
    the U.S. banking system, and that over the past 5 years, the
    banking system has expanded loans by nearly 30 percent--an
    encouraging development.
        It has been nearly a year since the enactment of Senate
    bill 2155, the Economic Growth, Regulatory Relief, and Consumer
    Protection Act, and each one of your agencies has taken
    additional steps to implement key provisions of that bill.
        I appreciate your agencies' continued diligence to get
    these and other rulemakings out quickly.
        However, there are aspects of some recent proposals that
    merit further attention, including:
        The Community Bank Leverage Ratio. Senator Moran and I
    wrote to most of you recently encouraging you to establish the
    CBLR at 8 percent and ensure that the proposed Prompt
    Corrective Action framework for the CBLR would not
    unintentionally deter community banks from utilizing the CBLR
    framework;
        Simplifying the Volcker Rule, including by eliminating the
    proposed accounting prong and revising the ``covered funds''
    definition's overly broad application to venture capital, and
    other long-term investments and loan creation;
        Harmonizing margin requirements for inter-affiliate swaps
    with treatment by the CFTC;
        Indexing any dollar-based thresholds in the tailoring
    proposals to grow over time generally in line with growth in
    the financial system; and
        Continuing to examine whether the regulations that apply to
    the U.S. operations of foreign banks are tailored to the risk
    profile of the relevant institutions and consider the existence
    of home-country regulations that apply on a global basis.
        Turning to guidance and supervision, the Banking Committee
    held a hearing last month on Guidance, Supervisory
    Expectations, and the Rule of Law.
        During that hearing, the Committee examined situations
    where the Federal banking agencies have enacted guidance or
    other policy statements that are being enforced as rules and
    therefore comply with neither notice-and-comment rulemaking
    processes nor with the Congressional Review Act.
        I urge each of your agencies to continue to follow the CRA
    and submit all rules to Congress, even if they have not gone
    through the formal notice-and-comment rulemaking and continue
    to provide more clarity about the applicability of guidance.
        More can be done within your agencies to educate and ensure
    that supervisors know how guidance should be treated and that
    they do not use the discretion provided to them by Congress in
    inappropriate ways.
        I was encouraged that Vice Chairman Quarles last week
    recognized that it is incumbent on the Federal Reserve and on
    financial regulatory agencies to think very carefully through
    what the agencies mean by supervision and what they mean by
    regulation and how to use each appropriately.
        I was also encouraged that the Fed recently issued a notice
    of proposed rulemaking to revise its ``control'' rules under
    the Bank Holding Company Act.
        Vice Chairman Quarles, you noted that the ``control
    framework has developed over time through a Delphic and
    hermetic process that has generally not benefited from public
    comment,'' and that ``this proposal . . . allow[s] public
    comment on those positions to improve their content and
    consistency.''
        I urge the Fed to thoughtfully consider the severe
    restrictions on ``business relationships'' and whether business
    relationships should apply to expenses of the investee and the
    investor.
        Finally, while I have you all here, I would stress the
    importance of the agencies remaining neutral, unbiased, and
    nonpolitical, especially when it comes to reviewing bank
    mergers and applications, as your agencies have done
    successfully for many years.
        I appreciate each of you taking the time to testify today,
    and I look forward to hearing more about your respective
    agencies' priorities for the rest of 2019.
        Senator Brown.

               OPENING STATEMENT OF SENATOR SHERROD BROWN

        Senator Brown. Thank you, Mr. Chairman. We welcome all four
    of you. As regulators, your jobs are so important to this
    country, as you know and as we have talked.
        When you look at all the rules the regulators have torn up
    over the last year and a half, you have to wonder if they want
    to see another financial crisis.
        In 2006, back when President Trump was just the president
    of a fly-by-night university handing out worthless diplomas, he
    was asked about the possibility of housing prices collapsing
    and throwing the economy into chaos. He said: ``I sort of hope
    that happens, because then people like me would go in and
    buy.''
        Think about that for a moment. It really sums up the
    President's philosophy about this economy. He basically said he
    does not care what happens to millions of hardworking families
    as long as it benefits people like him.
        ``I sort of hope that happens, because people like me can
    then come in and buy.''
        Maybe that is why the economy today seems to be working so
    well for people like Donald Trump, but not so great for
    everybody else.
        Things look pretty great for banks, as the Chairman said,
    pretty good for real estate investors, wonderful for the
    wealthiest Americans. CEO pay is up and up and up. Stock
    buybacks are up. Real estate prices are up. The Trump tax plan
    really helped them, too.
        But if you care about the dignity of work, if you punch a
    clock or swipe a badge, your wages are flat. If you honor work,
    if you respect work, if you are a stay-at-home parent or you
    take care of your older relatives, you are struggling to get
    by. Millions of families cannot keep up with the cost of living
    as it is. They are crossing their fingers that experts are
    looking out to make sure there is not another crisis on the
    horizon that is going to wipe away their hard work.
        Vice Chair Quarles, I appreciate last week your coming to
    Cleveland. I appreciate your going. I appreciate your engaging
    with everybody that you saw in a very constructive way. I
    appreciate our conversation afterwards. You heard how ZIP Code
    44105--my neighborhood, Slavic Village--and many on this
    Committee have heard me talk about that neighborhood, the
    highest number of foreclosures in the first half of 2007 than
    any ZIP Code in America. You know how it was devastated by the
    crisis. You saw how many families there continue to struggle.
    You also saw they are hardworking, innovative, and optimistic
    about the future. Thanks for going and doing that.
        The last thing they need is another crisis. There is no
    bailout for people like them.
        When President Trump was confronted about his comments on
    the financial crisis, he replied, ``It is just business.''
        That is not good enough. It is not fair that people like
    him get to use bankruptcy for sport, but people struggling with
    student loan debt cannot use bankruptcy to save their work
    lives.
        It is not fair that workers with stagnant wages and rising
    prices are left on their own to fend off financial predators,
    while the new Director of the CFPB is going out of her way to
    make life easier--easier--easier--for financial companies.
        Meanwhile, the people in this Administration who are
    supposed to look out for regular people are suggesting that
    hardworking Americans just need to improve their ``financial
    literacy.''
        These are the watchdogs who are supposed to--sure, we all
    should. We all should read more. We all should know more. But
    these are the watchdogs who are supposed to be looking out for
    the American people, to make sure they are not steered into a
    shady loan or an unaffordable mortgage that could bankrupt
    them. And they seem more concerned with making it easier for
    Wall Street firms to do as they please.
        This will never help Slavic Village.
        I am concerned that this Administration is not going to
    prevent the next crisis, may even cause it.
        I am not the only one. As you know, two former Federal
    Reserve Chairs--one appointed initially by a Democrat, one
    appointed initially by a Republican--and two Treasury
    Secretaries that saw the last crisis firsthand delivered a 10-
    page warning this week about just one of this Administration's
    rollbacks on the safety of our financial system.
        Fitch, a credit-rating agency, suggested that the changes
    the regulators are making will make banks riskier and that
    failures will be more catastrophic.
        BB&T and SunTrust are on the verge of creating a bank about
    10 times the size of Countrywide, and this Administration so
    far seems happy to oblige.
        The New York Fed reported yesterday that household debt is
    a trillion dollars higher today than its peak before the crisis
    a decade ago.
        What that number means is that for people across Ohio and
    across America, this isn't just business--it's personal. It is
    about the hard choices families make when budgeting for rent
    and groceries and utilities and child care and saving for a
    downpayment. It is about keeping your promise to your child who
    wants to go to community college. It is about being able to
    enjoy a retirement you have earned over a lifetime.
        Your job is to protect them. Your job is never to forget
    what happened 10 years ago even as the virus of collective
    amnesia seems to have infected the entire Republican caucus and
    the conference in the U.S. Senate.
        Whether it is loosening the rules for foreign mega banks or
    ignoring risks like leveraged lending or encouraging banks and
    fintechs to get into payday lending, it does not seem like you
    take that job seriously enough.
        I know the President appointed all of you to your jobs, but
    you are--his comments notwithstanding, his attacks on some of
    you or your bosses or your agencies, his personal attacks, all
    that notwithstanding, you are independent regulators. Your job
    is to make the economy work for everyone, from Slavic Village
    to the nicest neighborhoods around Washington.
        Thank you, Mr. Chairman.
        Chairman Crapo. Thank you, and we will proceed with the
    testimony now. I remind our witnesses to pay attention to the 5
    minutes, as well as our Senators to pay attention to the time.
        With that we will proceed in order, starting on my left.
    Mr. Otting, you may proceed.

      STATEMENT OF JOSEPH M. OTTING, COMPTROLLER OF THE CURRENCY,
               OFFICE OF THE COMPTROLLER OF THE CURRENCY

        Mr. Otting. Good morning, and I would like to apologize to
    the Committee for being a few minutes late. I got caught up in
    the Peace Officer Memorial Event outside, which for a few
    minutes I thought about skipping this hearing and attending
    that. But it is an honor to be here.
        Chairman Crapo, Ranking Member Brown, and Members of the
    Committee, I am honored to be here with my regulatory
    colleagues to share my perspective on the condition of our
    Nation's banking system and our efforts to ensure that the bank
    supervision operates in the most efficient and effective
    manner.
        Since becoming Comptroller of the Currency in 2017, the OCC
    has focused on ensuring regulation and supervision support
    banks' ability to serve their customers and promote economic
    opportunity while still operating in a safe and sound manner.
    That work includes the Economic Growth, Regulatory Relief, and
    Consumer Protection Act of 2018 as well as advancing several
    priority items within the agency.
        The financial performance of the Nation's banking system
    improved in 2018 and early 2019, driven primarily by strong
    operating performance. Capital and liquidity remain near
    historic highs. Return on equity is near pre-crisis levels, and
    OCC-supervised banks reported healthy revenue growth in 2018.
    Net income increased 25 percent for banks with assets less than
    $1 billion and increased nearly 50 percent for the Federal
    banking system as a whole.
        The Tax Cuts and Jobs Act accounts for nearly half of the
    increase while asset quality, as measured by traditional
    metrics such as delinquencies, nonperforming assets, and
    losses, is stable and secure.
        While the condition of the Federal banking system is
    strong, the OCC monitors risks on a continuous basis and
    summarizes those risks twice a year in our Semiannual Risk
    Perspective. Key risks highlighted in the most recent report
    include credit, operational, compliance, and interest rate
    risks. These areas continue to evolve in the context of
    changing economic, technological, and bank operating
    developments, and we work to ensure that our supervised
    institutions are aware of and appropriately managing these
    risks.
        Maintaining the viability of the Nation's economy depends
    in large part on the ability of financial institutions,
    particularly community and mid-sized banks and savings
    associations, to operate efficiently, effectively, and without
    unnecessary regulatory burden.
        The Economic Growth Act provided a commonsense bipartisan
    framework to reduce regulatory burden for small and mid-size
    banks while safeguarding the Nation's system and protecting
    consumers. We have made significant progress in implementing
    this Act. The Act authorizes the OCC to issue one regulation on
    its own and to issue others with fellow safety and soundness
    regulators.
        Separately, we are consulting with the Consumer Financial
    Protection Bureau on a variety of consumer protection
    requirements in the Act. The regulation tasks solely the OCC to
    afford Federal savings loans under $20 billion in consolidated
    assets business flexibility without the burden of changing
    charters. In 2018, the OCC proposed a rule to implement this
    provision of the law, and we plan to issue this rule in the
    near future.
        In December 2018, the agencies jointly issued final rules
    to expand eligibility for an 18-month examination cycle. This
    change reduces burdens on well-managed community banks and
    allows the agencies to focus their resources on more risk and,
    thus, enhancing the safety and soundness of all financial
    institutions.
        Regulators are working together to finalize other
    rulemakings to implement the remaining provisions of the Act.
    Most will be completed in the third quarter of this year, and
    all are scheduled to be completed by year end. Those efforts
    include finalizing rules that ease reporting requirements for
    more than community banks, certain rural residential mortgages
    under $400,000 from appraisal requirements, narrow the Volcker
    Rule to expand banks engaged in riskier activities, and
    implement a simplified measure of capital adequacy for
    qualifying communities banks through a community bank leverage
    ratio.
        Regulators are also working to implement rules that exclude
    custodial banks' qualifying deposits at central banks from the
    supplementary ledger, qualifying deposits such as those at the
    central bank. We are also focused on allowing banks to treat
    qualifying investment-grade municipal securities at Level 2
    liquid assets and limit the type of acquisition, development,
    and construction loans that may be considered high-volatility
    commercial real estate exposure and subject to heightened
    capital standards.
        We are also finalizing changes to certain aspects of
    company-run stress tests and tailoring capital and liquidity
    requirements consistent with Section 401 of the Economic Act.
        In addition to these rules, the OCC is focused very
    specifically on a number of other activities like the Community
    Reinvestment Act, the Bank Secrecy Act, and promoting small-
    dollar ticket lending.
        My written testimony provides additional detail on the
    conditions of the Federal banking system, the risk it faces,
    and the regulatory efforts underway to ensure that banks serve
    the needs of their customers in a safe and sound manner for
    decades to come.
        I thank the Committee for this opportunity to discuss these
    important issues and look forward to answering your questions.
        Chairman Crapo. Thank you, Mr. Otting.
        Mr. Quarles.

    STATEMENT OF RANDAL K. QUARLES, VICE CHAIRMAN FOR SUPERVISION,
            BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

        Mr. Quarles. Thank you. Chairman Crapo, Ranking Member
    Brown, Members of the Committee, thank you for your time and
    for your invitation to testify today on the Federal Reserve's
    regulation and supervision of the financial system.
        My visit today comes 10 years, almost to the day, after the
    Federal Reserve released the results of its first supervisory
    stress tests. That exercise was an invention of both urgency
    and necessity and a tool to move the country's largest
    financial institutions toward safety and stability. Many
    innovations from that period are now regular elements of the
    Federal Reserve's supervisory and regulatory work. These
    innovations have helped strengthen firms that were damaged by
    the crisis; they have given supervisors and the public a
    clearer view of risks in the financial system; they have
    provided a solid foundation for the Nation's economic recovery.
    And now--when the financial system and economy are in good
    health--is the time to consolidate the insights we have gained
    with experience over time and to better the regulatory
    framework that we have built.
        Today I will briefly review the Federal Reserve's steps to
    improve that framework since my last appearance before this
    Committee, outline the supervision and regulation report that
    accompanies my testimony, and discuss our other engagement on
    community, consumer, and financial stability issues both at
    home and abroad.
        Almost a year ago, Congress passed the Economic Growth,
    Regulatory Relief, and Consumer Protection Act. A cornerstone
    of this legislation was a directive to the regulatory agencies
    to tailor oversight of institutions to ensure that our
    regulations match the character of the firms we regulate, with
    specific congressional direction for firms between $100 billion
    and $250 billion in assets.
        The core of the resulting regulatory efforts were the
    tailoring proposals for domestic institutions that the agencies
    issued last year. Those proposals share a common goal: to focus
    our energy and attention on both the institutions that pose the
    greatest risks to financial stability and the activities that
    are most likely to challenge safety and soundness.
        A more recent proposal addresses prudential requirements
    for the U.S. operations of foreign banks. Like last year's
    tailoring proposal for domestic institutions, it categorizes
    firms according to their size, business model, and risk
    profile. The proposal differs from the domestic proposals to
    account for the unique structural differences of foreign banks
    and asks for input on a number of important issues. I look
    forward to reviewing the comments that we receive.
        We also have been providing targeted regulatory relief,
    especially for community banks and other less complex
    organizations.
        The Community Bank Leverage Ratio would give community
    banking organizations a more straightforward approach to
    satisfying their capital requirements, for example. We also
    proposed to expand community banking organizations' eligibility
    for both longer examination cycles and exemptions from holding
    company capital requirements.
        The report accompanying my testimony provides more details
    on these and other recent regulatory steps, as well as on the
    overall condition of the banking system.
        In the past half-year, the Board has also taken steps to
    consolidate the role that stress testing plays in our work.
    Following the directive from S. 2155, we began to transition
    less complex firms to an extended testing cycle, reflecting the
    lower risks that they pose relative to their larger and more
    complex peers. We published new details of our methodology and
    models, improving public understanding of the program, while
    maintaining the integrity of its results. We announced a new
    stress-testing conference that will take place in July in order
    to seek public input on our processes. And while maintaining a
    rigorous evaluation of capital planning, we committed to
    addressing qualitative deficiencies at most firms through
    supervisory ratings and enforcement actions rather than through
    a stand-alone qualitative objection.
        As detailed in my written testimony, we have taken other
    steps that support our supervisory and regulatory framework by
    making it simpler and more transparent. We also continue to
    engage with our regulatory counterparts overseas through
    standard-setting bodies and the Financial Stability Board,
    where I recently began a 3-year term as Chair.
        The strength of our financial system today rests on the
    insight, patience, and persistence of a decade's work on post-
    crisis reforms. Only by thoughtfully evaluating the reforms
    that we have made, and adjusting our approach when appropriate,
    can we preserve and improve the efficacy and efficiency of our
    regulatory framework.
        Thank you, and I look forward to answering your questions.
        Chairman Crapo. Thank you, Mr. Quarles.
        Ms. McWilliams.

       STATEMENT OF JELENA McWILLIAMS, CHAIRMAN, FEDERAL DEPOSIT
                         INSURANCE CORPORATION

        Ms. McWilliams. Thank you. Good morning, Chairman Crapo,
    Ranking Member Brown, Members, and staff of the Committee. It
    is always nice to be back in this room.
        Thank you for the opportunity to testify today about the
    FDIC's efforts to strengthen our oversight of depository
    institutions of all sizes and ensure that our regulated
    institutions are serving their communities.
        The Nation's banks are at the center of economic activity
    in their communities. Their ability to provide safe and secure
    financial products and services forms the backbone of a strong
    national economy.
        For these reasons, the FDIC's oversight of banks is
    critical to financial stability and consumer protection. It is
    incumbent upon us to exercise our oversight judiciously and in
    a manner that recognizes each institution's unique business
    model and risk profile.
        My written statement details the many actions the FDIC has
    taken over the past year, both independently and in cooperation
    with our regulatory partners, to ensure that we are
    appropriately addressing risks to the system and are not
    imposing unnecessary regulatory burdens that might impede safe
    and secure banking activities. The written statement also
    contains an update on the progress we have made in implementing
    the Economic Growth, Regulatory Relief, and Consumer Protection
    Act.
        In addition to our supervisory role, the FDIC is tasked
    with resolving failed banks and, if called upon, large bank
    holding companies and other systemically important financial
    institutions.
        The FDIC reviews bankruptcy planning requirements for the
    largest U.S. bank holding companies and the resolution plans
    filed by larger insured depository institutions. This work,
    along with other measures, has improved our readiness for these
    resolutions and helps ensure that market participants, not
    taxpayers, bear the risk of loss in the event of a large bank
    failure.
        Most of my professional life has been focused on the
    financial services industry. Before my tenure at the FDIC, I
    intuitively understood how important our Nation's banks were to
    the economy. But until I had real conversations with bankers,
    their customers, and State supervisors on my 50-State listening
    tour which I commenced, I did not fully appreciate how our
    banks, particularly community banks, are so intimately involved
    in the very fabric of their communities and their customers'
    lives. I am nearly halfway through my tour now. Across the
    country, these banks help fund a town's grocery stores, barber
    shops, restaurants, local libraries, and small businesses. In
    rural communities and urban settings, our banks provide a
    critical lifeline for low- and moderate-income customers while
    supplementing infrastructure and social services.
        It is the FDIC that provides consumers with the confidence
    to trust those banks with their deposits. And I would be remiss
    if I did not mention the 6,000 dedicated FDIC employees who go
    to work every day laser-focused on protecting the stability and
    integrity or our financial system. I am proud to stand with
    them as we fulfill our mission and regulatory mandate to
    preserve and promote public confidence in the U.S. financial
    system.
        Thank you again for the opportunity to testify today, and I
    look forward to your questions.
        Chairman Crapo. Thank you, Ms. McWilliams.
        Mr. Hood.

     STATEMENT OF RODNEY E. HOOD, CHAIRMAN, NATIONAL CREDIT UNION
                             ADMINISTRATION

        Mr. Hood. Chairman Crapo, Ranking Member Brown, and Members
    of the Committee, thank you for the opportunity to testify
    today about the state of America's federally insured credit
    unions and the NCUA's efforts to maintain a safe and sound
    credit union system.
        Federally insured credit unions are vital to the economic
    stability of communities across America. More than one-third of
    U.S. households are members of credit unions. In 2018, the
    credit union system continued to perform well. By year's end,
    credit union membership grew to more than 116 million members,
    and assets increased to $1.45 trillion.
        The credit union system is well capitalized with an
    aggregate net worth ratio of 11.3 percent, well above the 7
    percent statutory requirement. The Share Insurance Fund is
    strong, so strong, in fact, that we have been able to issue
    nearly $900 million in Share Insurance Fund dividends over the
    last two years. Credit unions are using these funds to improve
    the financial capability of people of modest means, support
    small businesses, and strengthen communities across the
    country.
        My priority is to strengthen the vitality of the credit
    union industry by doing even more to bolster underserved
    communities, including those in rural areas, persons with
    disabilities, and low- to
    moderate-income households. To that end, I am working closely
    with the agency's senior leadership, especially the Offices of
    Minority and Women Inclusion and Credit Union Resources and
    Expansion, to ensure that NCUA is doing everything we can to
    assist small and low-income designated credit unions, including
    encouraging the formation of de novo minority depository
    institutions.
        For example, we are helping credit unions navigate the
    certification process for becoming community development
    financial institutions. We are also providing grants to low-
    income designated credit unions through our Community
    Development Revolving Loan Fund.
        Last year, NCUA awarded over $2 million in technical
    assistance and urgent needs grants to 211 credit unions to help
    them develop new products and services, recover from natural
    disasters, and offer financial services to unbanked and
    underserved populations. Just last month, we entered into a
    partnership with the Small Business Administration to help
    credit unions better utilize the SBA's various lending
    programs. I further intend to leverage my expertise and
    experience as a former Rural Housing Administrator at the U.S.
    Department of Agriculture in order to seek additional
    opportunities to connect credit unions and their members in
    rural areas to existing public sector lending programs. And
    next week I have the honor of presenting a new Federal credit
    union charter that will serve a Native American community. This
    low-income designated credit union will provide much-needed
    financial services to individuals and businesses in one of our
    Nation's most underserved areas.
        On the regulatory front, we are constantly evaluating our
    regulatory framework to ensure our rules are effective but not
    excessive. For example, we are in the process of providing
    credit unions more flexibility under our payday alternative
    loan program, allowing them to safely offer less expensive
    small-dollar loan options. Wherever we have the authority to
    improve the regulatory system and create a safe environment for
    credit unions and their members, we are doing our level best to
    do so.
        While the credit union system is strong and the NCUA is
    faithfully executing its mission, I remain focused on the
    various risks posed by the rapidly changing financial services
    landscape. Frankly, one of them, cybersecurity, keeps me up at
    night. Cyber attacks pose an enormous threat to the entire
    financial system, including credit unions. The credit union
    system is especially vulnerable to this risk because the NCUA
    lacks sufficient legal authority to directly identify and
    address systemic cybersecurity risks within the system.
    However, strengthening our cyber defenses is one of the NCUA's
    top priorities, and we collaborate regularly with our peer
    regulators on how best to address the challenges. As Chairman,
    I intend to employ the resources necessary to combat
    cybersecurity threats and ensure data protection for the
    agency, the credit union industry, and its members.
        I want to close by highlighting an area where congressional
    action dealing with help credit unions better serve their
    members,
    especially those of modest means. Amending the Federal Credit
    Union Act to permit all types of federally chartered credit
    unions to add underserved areas to their fields of membership
    will
    promote financial inclusion and shared prosperity in
    underserved and distressed communities. I look forward to
    working with Members of this Committee on these and other
    legislative issues.
        Thank you for the opportunity to testify today. I look
    forward to your questions.
        Chairman Crapo. Thank you very much, Mr. Hood. And to each
    of you, I appreciate the attention that you have shown in your
    written testimony as well as your comments today toward
    implementing Senate bill 2155 as it was intended, and I
    appreciate your efforts. I had a lot of questions that I was
    going to ask on that. I will probably submit those to you
    because I would like to go into an issue, sort of a broader
    issue that continues to get raised.
        I noted in my introductory comments that, as a result of, I
    think, Senate bill 2155 and of the regulatory activities that
    we are seeing you engaged in, we have seen a very strong
    performance of the financial industry, the financial sector in
    the United States. I noted that that had caused the banking
    system to expand its loans by nearly 30 percent over the last 5
    years.
        The attack that is being made seems to imply that that is
    just benefiting the wealthy, that the loans have been called--
    this increase in the ability of our system to provide these
    loans is putting shady loans on folks in the United States who
    are not of such wealth that they can access higher-quality
    credit. And the list goes on.
        I would just like to ask--I do not want long answers
    because I want to go further, but who are the beneficiaries of
    this successful financial industry activity? Is it big, wealthy
    donors? Or do they have access already to credit? Who are those
    in our society who are benefited by this increase in a strong,
    stable banking system? Anybody could jump in on that. Mr.
    Quarles?
        Mr. Quarles. Well, I think that a dynamic economy benefits
    everyone. I think we see that currently in the strength of the
    labor market. We have been bringing people back into the labor
    market. Our labor force participation rate has been increasing.
    The unemployment rate is as low as it has been in half a
    century, and all of that benefits the broad populace and
    reflects the fact that we have a strong economy that is
    supported by a dynamic financial sector.
        Chairman Crapo. And small businesses, credit union members,
    and so forth, right?
        Ms. McWilliams. If I may just add----
        Chairman Crapo. Ms. McWilliams.
        Ms. McWilliams. This is to the Midwest in particular. It is
    the farmers that are able to get access to credit, and small
    businesses, as well as the consumers to both refinance their
    mortgages at better terms and to put their kids through school,
    et cetera, et cetera. We have been very pleased with the
    economic activity and the ability of banks to lend credit. And
    from my personal experience as somebody who barely could
    refinance my loan in 2008, I can tell you that consumers are
    better served with some of the favorable terms that banks are
    able to refinance their home mortgages into.
        Chairman Crapo. Mr. Hood?
        Mr. Hood. Yes, Senator Crapo, the credit union members are
    definitely benefiting. We are seeing an increase in loan
    activity to those 116 million members that I mentioned; a good
    40 percent of those would be classified as low- or moderate-
    income. They are getting loans for autos, they are getting
    loans for their mortgages, and they are also seeing an increase
    in member business lending as well. So they are definitely
    benefiting thanks to Senate bill 2155, so thank you.
        Chairman Crapo. And this can be a really quick answer by
    any of you who wants to, but are these shady loans?
        Mr. Hood. They are well-underwritten loans, sir, with
    strong underwriting criteria.
        Chairman Crapo. That is what I thought.
        Mr. Otting. Senator Crapo, I would just make a comment. I
    do think it has been across the economy. However, there are
    certain segments, like the small-ticket small business and
    small lending that banks were kind of forced out of. We have
    been working over the last year and a half to bring banks back
    into that space. It has been served predominantly by online
    lenders.
        I also think some of the things that we are doing with CRA
    to open up more opportunities to do things in economic areas
    that are distressed will be helpful. But I think Mr. Hood's,
    Chairman Hood's point about these are strong, well-underwritten
    loans with good loan-to-value's, good DTIs that are being done
    in the market today.
        Chairman Crapo. Well, thank you. And this question is, I
    guess, for you, Mr. Quarles. There has been reference to the
    letter that was sent out just the last day or two from a number
    of former Fed members, and particularly Ben Bernanke and Janet
    Yellen. Wasn't that letter referencing an FSOC rule?
        Mr. Quarles. Yes, the letter addressed the proposal for an
    activities-based approach to financial stability regulation.
        Chairman Crapo. And other than the activities-based focus,
    which I think is a risk-based focus rather than just a numbers
    focus, does that letter refer to any of the other
    implementation of Senate bill 2155?
        Mr. Quarles. No. It is focused entirely on that one
    measure.
        Chairman Crapo. That is what I also thought. And my
    question is this--and, again, I would like to--I am pretty
    much--well, actually, I am down to 10 seconds, so I am going to
    stop, and I am going to move on and follow my own 5-minute rule
    and move to Senator Brown.
        Senator Brown. Thanks, Mr. Chairman. I appreciate that.
        Mr. Otting, if a car manufacturer cut corners and sold
    unsafe cars that harmed millions of American families, would
    you recommend that the Government respond by recommending car
    mechanic literacy so they can decide for themselves if the car
    is safe? Yes or no.
        Mr. Otting. I do not think it is a yes-or-no answer. I
    think you would have to understand the----
        Senator Brown. Well, it kind of is.
        Mr. Otting. Well, I do not view it as a yes-or-no answer.
        Senator Brown. OK. I will try another. Mr. Hood, if a drug
    company cut corners and sold tainted prescriptions that hurt
    millions of Americans, would you suggest that we adopt a
    pharmaceutical literacy program in our schools so that students
    can decide for themselves which drugs are safe?
        Mr. Hood. I would need a little bit more information on
    that, but likely I would need to----
        Senator Brown. Well, common sense would be the information
    that would come to mind. The question obviously begs the
    question: Why can't we protect Americans from dangerous
    financial products like we do in every other industry? I cannot
    imagine any citizens, stuck in traffic or not, that would come
    here and you ask that question, of course, they would say
    Government should have consumer protections for autos; of
    course, they would say Government should have consumer
    protections for pharmaceuticals; and, of course, they would say
    Government should have consumer protections for financial
    products.
        Let me flip for a moment to Mr. Quarles, and I would like
    you to just--I want to ask you a couple of questions, Mr.
    Quarles. I want to read you a couple of your quotes, and answer
    these as concisely as you can. I want to read you a couple of
    your quotes. I want you to tell me if you said these quotes in
    2006 before the subprime mortgage crisis in one of your earlier
    jobs or if you said it earlier this month about leveraged
    lending. And I noticed leveraged lending got a bit short shrift
    in the testimony today even though a number of us had written
    letters to each of you about the importance of it, and you are
    on the verge of a major decision.
        So if you would answer, Mr. Quarles, if you said this in
    2006--these are direct quotes--or if you said them more
    recently. The first quote: ``For the most part, banks that are
    originating these loans are not keeping them on their books.''
    Did you say that in 2006 or earlier this month?
        Mr. Quarles. I believe I said that about a week ago in New
    Haven.
        Senator Brown. Correct. Thank you. That is true.
        ``If there were to be a sudden repricing, I would not
    expect this''--``I would not expect that to be financially
    destabilizing.'' ``If there were to be a sudden repricing, I
    would not expect that to be financially destabilizing.'' Did
    you say that leading up to the subprime crisis in 2006 or
    earlier this month?
        Mr. Quarles. I said that earlier this month.
        Senator Brown. OK. Correct.
        Regarding an economic downturn, you said, ``I have to say
    this is an unlikely scenario.'' ``I have to say this is an
    unlikely scenario.'' Was that recently or back in 2006?
        Mr. Quarles. That was in 2006.
        Senator Brown. OK. Correct. A man with a good memory.
        Dismissing news reports regarding risks to the economy, you
    said, ``Earth must be getting hit by a meteor.'' Was that
    earlier this month or back in 2006?
        Mr. Quarles. I use that phrase a lot, but I referred to the
    Earth getting hit by an asteroid or not getting hit by an
    asteroid about a week ago.
        Senator Brown. OK. Thank you.
        Many financial experts and regulators agree that leveraged
    lending is a serious concern. I was not impressed first at the
    cursory mention in testimony today about the importance of
    leveraged lending and the risk. I was not impressed with the
    response that we got from Secretary Mnuchin on a couple of
    approaches from him.
        Given that the subprime crisis took you, Mr. Quarles, and,
    frankly, all the regulators by surprise back in the Bush years,
    how should I know from your actions and comments about
    leveraged lending, how should I know whether the economy is
    safe or that you are just bad at making economic predictions?
    Why should the American public feel safe with your actions
    here?
        Mr. Quarles. So there is not a lot of time left, and we
    have done a lot with respect to leveraged lending. Let me try
    very concisely to go through some of this, and I will be glad
    to expand later or in QFRs, if you would like.
        There is the question of risk to financial stability. There
    is the question of a potential change in the pricing of these
    assets given the volume of them that has increased to perhaps
    amplify an economic downturn in the future. Those are two--you
    know, there is an important difference between them. They are
    two important questions.
        My comments with respect to financial stability, we have
    done a very careful analysis of whether a sudden repricing of
    that asset class could have amplifying and destabilizing
    effects on the financial system as opposed to amplifying
    effects on a future business downturn. And for a variety of
    reasons, we do not think that it will.
        On the other hand, we are concerned, and appropriately so,
    about what is the right regulatory response to developments in
    the underwriting of leveraged loans that could affect a
    business downturn in the future. And in the last Shared
    National Credit Exam, which the banking agencies jointly look
    at the largest credits in the country, we looked at leveraged
    lending underwriting practices and identified some, a number,
    where we felt that there needed to be improvement and we
    examined the banks and we made clear to the banks that those
    improvements would be appropriate. At the Financial Stability
    Board, we have been looking on a global basis. One of the first
    things that I did was begin a process to look at where exposure
    to the CLO structures, in which most of these leveraged loans
    are held, are held around the globe, so we have looked at it in
    the United States, but we are not sure where it is held around
    the globe. And since we are in an interrelated financial
    system, it is important that we understand that, and we expect
    by later this fall or the end of this year to have much more
    granular and better understanding of where that risk may lie
    and whether there may be appropriate responses to it.
        So there has been a lot of activity, a lot of careful
    analysis. I think it is important with respect to the comments
    that you made, important to draw a difference between the point
    I was making that I do not think that there is a risk to the
    financial system, to financial stability, versus the question
    of are there issues we ought to be thinking about, you know,
    the business cycle and the way that leveraged lending and the
    volume of leveraged lending and underwriting standards might
    play into that that we ought to take into account or that we
    are taking into account.
        I am sorry I went over my time.
        Senator Brown. Thank you. And one sentence, I am sorry, Mr.
    Chairman. And it is important, though, to look at history and
    listen to your predecessors who warned in very stern language
    to Treasury Secretaries, to Fed Chairs, including a George
    Bush-appointed Fed Chair, and what they say about this.
        Thank you.
        Chairman Crapo. Thank you.
        Senator Moran.
        Senator Moran. Chairman, thank you very much. Thank you to
    our panel for being here.
        I was involved when this Committee passed legislation to
    reform, to alter Dodd-Frank. It occurred on a straight party-
    line vote, every Republican voting yes, every Democrat voting
    no. It became clear to me that the opportunity to actually make
    some substantive changes in the regulatory environment for
    lenders would not occur. There were not 60 votes on the floor
    of the U.S. Senate to accomplish that.
        We then spent two years trying to figure out among
    Republicans and Democrats on this Committee what we could
    accomplish. The end result was S. 2155.
        I was pleased for what I thought would be the outcome of S.
    2155, its consequences upon those who lend money and, more
    importantly than the lenders, those who were actually the
    recipients of the credit. Unfortunately, when I talk to Kansas
    lenders today and ask what was the consequence of S. 2155, it
    is a bit of a shrug of shoulders, hope that something is going
    to happen, we have not seen much relief.
        I was also pleased to see that Republicans and Democrats--I
    want the U.S. Senate, I want this Committee to function. I was
    pleased to see that we could find common ground, pass
    legislation on an important topic that affects the country. And
    if the end result of what I have seen to date on S. 2155 is the
    final result, then in my view we have failed. I do not know who
    ``we'' is--Congress, the regulators. There is simply not enough
    consequence to the passage of S. 2155 out in the real world.
        Chairwoman McWilliams, I very much appreciate you seeing,
    listening, learning, traveling the country. It is those bankers
    and particularly their customers that I am the most concerned
    about. I am particularly concerned about agriculture. Today
    when commodity prices are what they are, when weather has been
    what it has been, the survival of our family farms, our
    agricultural communities in rural America, is at stake. And I
    am of the view that, in the absence of a relationship bank--let
    me say that differently--a relationship between the banker and
    the lender, the ability for agriculture's future is minimized
    significantly. And I have used these hearings as an opportunity
    from time to time to provide examples of that, but the reality
    is, when times are tough in agriculture, the survival of
    agriculture is dependent upon a relationship between the lender
    and the borrower. Oftentimes that is generational, family-owned
    financial institution, family-owned farm going back to
    grandparents, great-grandparents. And in the absence of a
    bank's ability, a financial lender's ability to take into
    account things that are important, such as character, past
    history, the ability for the communities that I represent in
    rural America is very, very bleak.
        So I am trying to figure out what it is that either
    Congress has not done or the regulators have not pursued under
    S. 2155 to make the difference that I had hoped would be there.
    The idea that the CBLR that the Chairman mentioned is the best
    we can do is amazing to me, the call report, that we would have
    slightly less reporting, a few pages less after all the effort
    that went into trying to figure out how to do this better.
    Regulations have their place, but I would indicate that there
    is little systemic risk to the kind of relationship banks that
    I wanted to see improvement for.
        Again, I point this out to bankers and to credit union
    management. I am not so much about you and your success. I am
    about what the consequences are if you do not have that
    success. And rural America is at a point in time in which the
    struggles are significant and great. It has been true
    throughout the history of our country, but these are among the
    most difficult times there are, and access to credit is key.
        I saw this last year when we had grass fires in a county in
    Kansas in which 80 percent of the grass was burned, and,
    therefore, the collateral of a cattleman or cattlewoman's
    operation, there was no collateral left, no cattle, no fences,
    no grass. And yet the financial institutions in that community
    said, ``We know these people. They will pay their bills.'' If
    this becomes always about crossing every ``T'' and dotting
    every ``I,'' if it about looking for more dust, then we will
    have failed a significant component of our economy, and States
    like Kansas will be significantly--their future significantly
    diminished.
        My question is: Can I expect more? Is it a matter of
    timing? Is there conflict within your agencies, within the
    regulatory community, as to what can be done? Is it divisive?
    It seems to me there are a number of issues in which the
    agreement ought to be easily reached, and yet the results do
    not appear. What is missing? What more needs to be done by
    either me as a Senator or what can I expect more to happen from
    regulators? For as long as I have been in the Senate, on the
    Banking Committee, regulators have said the right things to me:
    We have an advisory committee. We are studying the issues. We
    are working on this. But if you ask a banker, has there been
    any consequence, unfortunately in almost every circumstance the
    answer is no, or at least not much.
        What can I do differently? What can you do differently?
        Chairman Crapo. And if you could keep your responses brief
    and maybe supplement.
        Mr. Otting. Senator Moran, I appreciate your concerns, and
    I think you know I was a banker also, and so I do interact with
    a lot of bankers across America. And my family still owns my
    original grandfather and grandmother's farm in Iowa, so I am
    tied very closely into the farming community of what is going
    on.
        I think if you look at the list of the S. 2155 activities,
    the 20 interagencies that are amongst us, I would tell you
    there is a great agreement, great interaction. The rule-writing
    process is something that I was exposed to since I have been in
    Washington, and it is complex. But I think if we are here on
    September 30th, you will see the vast majority of those are
    across the finish line with a few of those that are going to
    move into the fourth quarter. And I would say there is no
    conflict. In fact, Jelena and Randy and I
    either meet monthly or have a phone call every week, and the
    topic is always what are the outstanding issues on S. 2155. I
    know from each of the other agencies and the OCC, we have more
    resources dedicated to this cause, and so I would say be a
    little patient with us. We are going to get these across the
    finish line, and there are no issues amongst us that we have
    not been able to work out.
        Senator Moran. That is encouraging.
        Chairman Crapo. And if we could let that be the answer for
    the group and the others supplement it in writing, I would
    appreciate that.
        Senator Moran. Did I speak too long?
        [Laughter.]
        Chairman Crapo. Yes. But it was interesting.
        Senator Schatz.
        Senator Schatz. Thank you, Mr. Chairman. Thank you to all
    of you for being here.
        Mr. Quarles, when you responded to my letter about the
    financial risks around climate change, you said that the
    current supervisory work takes into account risks from severe
    weather shocks. But climate change is accelerating in both
    frequency and severity, and it is getting worse. If you are
    relying on historical trends, you are underestimating the
    risks. So are you relying on historical trends, or are you
    using data from the National Climate Assessment?
        Mr. Quarles. We are not relying purely on historical
    trends. Our requirement for institutions is that they have a
    risk management program that----
        Senator Schatz. Right, but are you using the National
    Climate Assessment? Are you using any of the data that the
    Government generates outside of your agency?
        Mr. Quarles. We require them to take all relevant data into
    account.
        Senator Schatz. But are you using the data? The question--
    --
        Mr. Quarles. I personally am not, no.
        Senator Schatz. Here is the question: The frequency and
    severity of severe weather events--right?--is going up. And if
    you are using historical data, then you in your supervisory
    capacity are underestimating climate risk.
        Mr. Quarles. We do not do that.
        Senator Schatz. So then----
        Mr. Quarles. We do not rely purely on historical data.
        Senator Schatz. So are you using the National Climate
    Assessment? Are you relying on DOD data? Are you going to the
    National Weather Service? How are you getting your data to
    assess the increased risk around climate change?
        Mr. Quarles. We require banks to assess their risks, and we
    require them to----
        Senator Schatz. Right, but you----
        Mr. Quarles.----look at a broad range of data.
        Senator Schatz. Hold on. But for you to understand the risk
    in your supervisory capacity, you have to actually know whether
    they are booking it properly, and there is tons of evidence
    that they are not doing it. And so I understand that the burden
    is on them, but then the burden is on you to say whether it is
    adequate. I will just take that as a no.
        Have you attempted to quantify the financial risks from
    changes in the climate itself, in other words, not the episodic
    severe weather events but fundamental changes like high
    temperatures, drought, and sea level rise?
        Mr. Quarles. We have not--well, I should be careful there.
    The Federal Reserve does a lot of research, and we have done
    research on climate change and how it affects the financial
    sector. As part of our supervisory processes, we do not do
    that.
        Senator Schatz. When you assess banks' loan quality,
    liquidity, and capital adequacy during times of stress, how do
    you ask banks to quantify the risk of climate change?
        Mr. Quarles. We require them to take into account their
    exposure to severe weather events.
        Senator Schatz. Do you understand the difference between
    severe weather and climate?
        Mr. Quarles. I do.
        Senator Schatz. Can you just tell me what it is?
        Mr. Quarles. Climate is a long-term change, and severe
    weather are specific events.
        Senator Schatz. Right, and what I am saying is: What is the
    relationship between climate change and severe weather?
        Mr. Quarles. Well, I am not a meteorologist or a climate
    scientist, and there are a variety of views about that.
        Senator Schatz. And yet you have to measure these risks. So
    do you rely on meteorologists or climate scientists in
    evaluating whether or not these financial institutions are
    adequately booking the risk?
        Mr. Quarles. We require the banks to take that information
    into account. What we evaluate is their risk management system,
    not their particular conclusions.
        Senator Schatz. Right, but as the risk profile goes up, it
    seems to me that both the banks and the institution that
    supervises the banks needs to somehow load that into their
    supervisory process, and I am not--I am listening very
    carefully, but I am not satisfied that you have actually done
    anything to change your process. As you know, I think there are
    36--or 30 central banks and regulators from around the world
    that are kind of puzzling through this difficult problem. The
    United States is not participating in that process. Do you
    commit to participate in that process?
        Mr. Quarles. We are looking very closely at it. I am
    actively encouraging that we examine it.
        Senator Schatz. Will you commit to hiring or consulting
    with climate economists who can translate the physical risks of
    climate change into economic and financial risks?
        Mr. Quarles. We do that work currently. I mean, we have
    people on the staff who do that sort of research, as I said
    earlier.
        Senator Schatz. Should I take that as a no? I mean, you are
    satisfied that you are doing this adequately? I mean, I guess
    that is what I am trying to get at. I am trying to drill down
    with specific questions, but the basic question is: Are you
    satisfied that you are doing enough to measure climate risk? Or
    do you think that you should be doing more, learning more,
    working with other central banks, working with economists to
    constantly update the way you evaluate risk?
        Mr. Quarles. That I wholly agree with you on. We should
    definitely be engaged in learning more about risk to the
    financial sector, and that includes climate change risk.
    Insurance companies, for example, are very focused on that
    issue.
        Senator Schatz. Will you commit to engaging with Federal
    scientific agencies about their assessment of the physical
    risks of climate change?
        Mr. Quarles. I do not know in what context I would do that,
    but, you know, we are constantly seeking to inform ourselves
    about potential risks----
        Senator Schatz. You do not know in what context you would
    consult with Federal agencies about the physical risks of
    climate change? You are not sure about what context that would
    be in?
        Mr. Quarles. Well, I--yes. Yes; I am not entirely sure what
    you are asking me to do.
        Senator Schatz. I am asking you to make sure that, to the
    extent that the whole of the Federal Government understands,
    predicts, measures the risks related to climate change, that
    you make sure you have all of those data sets, you have access
    to all that expertise, and that it informs your process. Do you
    commit to that?
        Mr. Quarles. We look at a broad range of information with
    respect to risks to the financial sector. We----
        Senator Schatz. So I am hearing that you do not commit to
    getting the National Climate Assessment, to getting the
    Quadrennial Defense Review, to working with the National
    Weather Service and NASA, to working with the USDA, and
    figuring out whether any of that information may be useful in
    your supervisory role?
        Mr. Quarles. We do look at all that information, Senator.
        Senator Schatz. Thank you.
        Chairman Crapo. Senator Toomey.
        Senator Toomey. Thank you, Mr. Chairman. And I want to
    thank the witnesses for joining us today.
        Let me go back to financial stability, which we discussed a
    little bit earlier, Vice Chairman Quarles. First of all, I
    appreciate the work that went into the recent Financial
    Stability Report, and just as an aside--I think I read it a
    week or a little over that now, so I may have gotten this
    wrong, but I seem to remember that one of the conclusions by
    the Fed's economist in that report was that individual American
    and American families' consumer balance sheets are actually in
    quite good shape, that the savings rate is up, total loan
    amounts relative to their incomes is down, that consumers are
    in better shape than they have been in for years on a broad,
    general basis, including consumers of modest means. Am I
    remembering that correctly, or do I have that wrong?
        Mr. Quarles. You are. Household borrowing is at low levels.
        Senator Toomey. So in addition to all the data that we see
    in the headlines about literally record-low unemployment rates,
    this tremendous growth in workforce participation, the fact
    that there are more job openings than there are people looking
    for work, the fact that wages are now growing faster than they
    have grown in a long time, in addition to all that--and, of
    course, related to all that--we see that families' and
    individuals' balance sheets are in better shape than it has
    been in many, many years. I would say that is generally really
    good news for an awful lot of Americans, right?
        Mr. Quarles. I agree.
        Senator Toomey. Let us talk a little bit about the
    leveraged loans. There is no question, right, there has been a
    big increase in the total amount of leveraged loans. But is it
    true that a large majority of leveraged loans, whether they are
    through CLOs or otherwise, they are actually not on the balance
    sheets of banks. Is that true?
        Mr. Quarles. That is correct. Only about 12 percent of the
    loans originated remain on the balance sheets of the banks.
        Senator Toomey. So a very large majority are somewhere
    other than on bank balance sheets.
        Mr. Quarles. Correct.
        Senator Toomey. And when you are thinking about systemic
    risk of our financial system, and you think about a big
    hypothetical future down price draft in an asset class like
    this, do you generally think it tends to be less of a risk to
    the financial stability if those assets are held by end
    investors who are not leveraged themselves? Or would you rather
    they be on the balance sheets of financial intermediaries like
    banks that fund themselves with deposits?
        Mr. Quarles. No. It is clearly financial stability
    enhancing for them to be held either by end users or by
    intermediate vehicles that have liabilities that are longer
    than the maturity of the underlying assets, which is how most
    of these loans are held.
        Senator Toomey. Exactly. So the short version is the fact
    that these are held off the balance sheets of banks and by
    investors other than banks is a significant reduction in the
    risk that we would otherwise have in the financial system?
        Mr. Quarles. Yes. The one addition I would make to that is
    that it is key that the holders of exposure to those stable
    holding vehicles, principally CLOs, are themselves nonrunnable
    institutions.
        Senator Toomey. Right, right.
        Mr. Quarles. And that, domestically, we have a good handle
    on, I believe, but globally, we could do with more information.
    And there is a significant amount of this exposure that is sold
    abroad, so that is what the FSB is doing now, is getting a
    handle on exactly where that international exposure is.
        Senator Toomey. Right. Let me move on. I had two other
    things I want to touch on quickly--one for Vice Chairman
    Quarles--and that is, foreign banks, as you know very well,
    have a very substantial, very constructive role in the American
    banking system. They employ over 200,000 Americans. They make a
    very significant percentage of all the commercial industrial
    loans. You know all this. In Pennsylvania, we happen to have a
    number of foreign-owned banks that operate hundreds and
    hundreds of branches, employ thousands of Pennsylvanians, and
    provide competition so that my constituents have many choices
    in banking services.
        One of my concerns is that two otherwise very similar
    banks, similar in size, similar in the role that they play, one
    owned through a domestic holding company, another owned through
    an IHC by virtue of its foreign ownership, might be subject to
    different regulatory regimes, and I am concerned about creating
    an unlevel playing field that would ultimately diminish
    competition, which I think is very good for my constituents.
        Could you comment briefly on your thoughts on how we create
    a level playing field for this regulatory environment?
        Mr. Quarles. Absolutely. You are absolutely right about the
    participation of foreign banks in our domestic financial
    system, they have always been about 20, 25 percent of it for
    all of our lives. Really, it is very important. It is important
    that they compete on a level playing field, you know, that we
    give them a level playing field. And we are obliged by law to
    consider national treatment, giving them a level playing field
    as we construct our regulatory positions.
        The proposals that we have for the foreign banks track very
    closely the domestic tailoring proposals. There are a couple of
    differences, and probably the largest is whether we look only
    at the IHC or at the consolidated U.S. operations in
    determining the base size of the operation. We have proposed
    that we look at the consolidated U.S. operations, but we will
    carefully consider comments as to whether we should adjust
    that.
        I think that that is certainly the right starting place and
    probably the right place, but we will carefully consider
    comments otherwise.
        Senator Toomey. Thank you, Mr. Chairman.
        Chairman Crapo. Thank you.
        Senator Smith.
        Senator Smith. Thank you, Chair Crapo and Ranking Member
    Brown, and I want to thank all of our panelists for being here
    today. Mr. Quarles, thanks so much for taking the time to come
    in and see me the other day in my office.
        I want to start out by talking about the Community
    Reinvestment Act. Senator Toomey is talking about the growth in
    wages and wealth in the United States, but I want to just hone
    in on one thing. Isn't it true that wealth--for African
    American families, for example, wealth that they have
    accumulated is a fraction of what we see nationally amongst the
    broad population?
        Mr. Quarles. Yes, absolutely.
        Senator Smith. So if we can expand access to credit in
    underserved areas, we can improve these communities' and these
    families' stability and their growth and their wealth, and we
    know that the path to doing that is homeownership and the
    opportunities for small businesses to grow. And this is true in
    rural communities and in tribal communities and in communities
    of color.
        You know, just last week I was in Minneapolis and I was
    talking with an African American small business owner who told
    me that of all of the African American-owned businesses that he
    knows, not a single one of them was able to get a business loan
    without help from some nonprofit to augment their credit. The
    Community Reinvestment Act is supposed to help us to ensure
    that banks are serving all Americans.
        So let me just ask you, to Mr. Otting and Mr. Quarles, and
    Ms. McWilliams, as we think about updating the CRA rules, will
    you commit to not supporting changes to the CRA rules that
    would reduce oversight over discriminatory lending practices
    and make it more difficult for borrowers to access credit?
        Mr. Otting. So I probably am the appropriate person to take
    the CRA question on because the OCC has been an initiator of
    the
    rewrite and has partnered with both the FDIC and the Fed to do
    this. We have been on about a 15-month journey to try to elicit
    feedback. The OCC alone had 1,000 people that have come in and
    talked to us about the CRA, and we also received 1,500 comments
    in the ANPR.
        There are four areas we are most focused on in the CRA
    rewrite: what qualifies, and the historical statute limited
    small business revenue to $1 million, so a lot of businesses
    are restricted by that, but also that small business could be
    utilized on a broader scale. And so what qualifies.
        Second is where does it qualify, and part of the issue is
    when a bank chooses its assessment area, those CRA activities
    only count in a very small area, and so we are looking at ways
    to broaden the assessment areas, because on one side of the
    street for a particular bank it may qualify, and for the other
    side of the street it does not, but it is still in their
    community.
        Third, which I think really is important, is how do we
    measure CRA, and today it is somewhat ambiguous amongst the
    three agencies and throughout geographics, so we are trying to
    come up with a way that all of us could understand CRA. And I
    often say if we were going to examine you for your capital and
    credit but we would not tell you what the criteria is until
    after the exam, you would think we were nuts. And that is
    similar to what gets done with CRA today.
        And then I would say just as important, Senator Smith, is
    we do not have a mechanism to count the aggregate CRA activity
    being done in America today, and we think we can do that via
    this rewrite. So we will be able to come every year and talk to
    you about where the growth in CRA has been across the Nation.
        Senator Smith. So I look forward to continuing this
    conversation with you, but can you commit to not supporting
    changes to the CRA rules that would reduce oversight of
    discriminatory practices?
        Mr. Otting. I absolutely can commit to that.
        Senator Smith. All right. On Monday, Treasury Secretaries
    Geithner and Lew and former Fed Chairs Bernanke and Yellen
    wrote a letter raising significant concerns about recent
    decisions by the Financial Stability Oversight Council, FSOC,
    to remove systemically important designation from several large
    nonbank financial institutions, and I want to just ask about
    this a little bit. They raised concerns over FSOC's approach to
    try to target risk activities rather than too-big-to-fail
    institutions.
        One of the things that they argued here is that the revised
    approach that is being suggested could take 6 years or more to
    move through, and so I want to ask: Would you agree that that
    is the case? And then how would that work given that so much
    can change in 6 years? I mean, AIG quadrupled in size just
    between 2002 and 2005.
        Mr. Quarles. So we just received the letter, and we are
    looking at it. But the conclusion that the designation process
    would take 6 years was highly dependent on a number of very
    contingent assumptions.
        Senator Smith. Based on their experience.
        Mr. Quarles. Well, they did not really have experience with
    an activities-based approach, so, you know, they were making
    some assumptions. I do not think that those assumptions are
    likely to obtain. I do not think that it would take that long.
    But we are still examining their analysis.
        Senator Smith. Mr. Chairman, I know I am out of time. I
    would like to request that that letter be introduced into the
    record, and I will have further questions on the letter for the
    rest of you following up.
        Chairman Crapo. Without objection, and thank you.
        Senator Smith. Thank you.
        Chairman Crapo. Senator McSally.
        Senator McSally. Thank you, Mr. Chairman.
        I represent Arizona, and over the last several years, there
    have been significant challenges with those businesses in
    Nogales and Douglas, legitimate businesses, family-owned
    businesses that have had their accounts closed because of the
    Anti-Money-Laundering and Bank Secrecy Act and how they have
    been implemented. We have had several roundtables and
    discussions with many of your agencies about this. This has
    really hurt our community. While we have got to stop the
    cartels and illegal cross-border money laundering for sure, we
    need to make sure that these small businesses are protected who
    are doing legitimate commerce that includes cross-border.
        At the request of Senator McCain and Senator Flake, the GAO
    did a study of this, which was released last year, and,
    Comptroller Otting and Vice Chairman Quarles and Chairwoman
    McWilliams, each of your organizations responded to that by
    saying you were going to collaborate more with each other to
    make sure that these rules for anti-money-laundering would be
    more tailored, to make sure that it is impacting the obviously
    illegitimate activities without hurting and closing legitimate
    businesses.
        So can each of you give me an update on what you have done
    since the GAO report and what more there is to do? Because this
    is really impacting my State.
        Mr. Otting. I can appreciate it, being in California for a
    period of time and having similar experiences. The one thing
    that I would advise you is this particular group meets once a
    month collectively together and our staffs meet once a week,
    and we have a list of items that we have been focused on to try
    to bring clarity and we are tailoring where it is appropriate.
        The big, I would say, lever to that will be later this year
    when we plan to update the Examination Manual, and that I think
    will be more--we are looking more to move toward a risk-based
    approach on that process. But I would assure you, Senator, that
    it has our attention not only from the standpoint of the way we
    execute on AML/BSA today but what the future could look like
    and how technology will play a role in that.
        Senator McSally. So when you say ``later this year,'' can
    you give me a timeline? Because, again, these businesses are
    waiting anxiously for some relief.
        Mr. Otting. It is an enormous underwriting, and I can tell
    you there are fully dedicated resources. And I would just have
    to say I cannot give you like a particular date. I would be
    happy to keep your office apprised as we move through that
    process.
        Senator McSally. Please do.
        Mr. Otting. But I would tell you it does have our
    attention.
        Senator McSally. And it seems, just from the trends, what
    we are seeing is a lot of the larger banks, you know, the de-
    risking activity, they have just, you know, not been willing to
    engage in these accounts. But some of the smaller banks that
    are actually coming in to really help this community, they
    actually have less resources for compliance. And so as we
    continue down the line here, if you have anything else to add,
    provide some clarity to even those trends or what else can be
    done.
        Mr. Quarles. So I think Comptroller Otting said quite
    correctly that we are all very engaged on this, and we are
    engaged together. So his description of what we are doing is
    joint activity. A significant part of this, of course, will be
    folks who are not at the table, FinCEN and others that are
    responsible for the BSA/AML regulations. We are responsible for
    supervising and examining against those regulations, and we are
    working with them as well to try to reduce the burden
    associated with this and increase its efficacy, because I think
    in the modern day of data analysis and manipulation, we ought
    to be able to be more effective in addition to less costly.
        Senator McSally. Exactly. Chair McWilliams?
        Ms. McWilliams. Thank you. If I can just add to that, in
    the past the disconnect has been that the regulations will be
    promulgated by FinCEN and OFAC, and we would be on the
    receiving end of those regulations and our examiners would have
    to implement them. I met with bankers in both Texas and
    California and heard about some of these issues. We have
    actually brought FinCEN to the drafting table as we look at the
    Examination Manual. Every 10 years when we go through the
    EGRPRA process, we get comments on these regulations as they
    are affecting community banks, especially in the border
    regions. We hear them complain about how difficult it is to do
    what they need to do without cutting lawful access. At the same
    time, our hands are tied because we cannot amend the
    regulations. By bringing FinCEN to the table and engaging with
    them more proactively, we believe we can come to a better
    outcome soon, hopefully very soon. I understand the urgency of
    this issue.
        Senator McSally. OK. Great, thanks.
        Mr. Hood, do you have anything to add?
        Mr. Hood. Just that credit unions are continuing to be more
    effective with BSA and AML. We are also part of the working
    group that Comptroller Otting mentioned. We have not had any of
    our credit union members experience some of the closing of
    accounts that you have referenced with the other financial
    services providers.
        Senator McSally. OK, great.
        Mr. Otting. Senator, I would add just one point. I should
    have brought this up. One thing we did do earlier this year is
    it used to be that each individual small bank had to have their
    own AML/BSA resources, and we agreed to allow the banks to
    share that resource. And the smaller banks will tell you that
    was a huge relief because of the expense for those types of
    talent.
        Senator McSally. Thank you. I am out of time.
        Chairman Crapo. Thank you.
        Senator Cortez Masto.
        Senator Cortez Masto. Thank you. Thank you for this
    hearing.
        Let me circle back to the Community Reinvestment Act. This
    is something that I have been concerned about, and, Mr. Otting,
    I know this is something that you are dealing with right now. I
    have been trying to ensure that we have protections in place
    and they stay robustly in place to prevent redlining, to ensure
    that our financial institutions are providing credit in low-
    income and moderate-income communities. And it is the role of
    the OCC to ensure that that occurs, correct?
        Mr. Otting. Yes, it is, ma'am.
        Senator Cortez Masto. OK. And so I know, and we have heard
    statistics, our Nation has the largest gap between white
    homeownership and African American homeownership since we began
    recording it, whites more than 73 percent and African Americans
    slightly above 41 percent. You are in the process of reforming
    the CRA, but wouldn't you agree that any changes you make to
    the CRA should not make that gap worse?
        Mr. Otting. I agree with that.
        Senator Cortez Masto. And to make those changes--you just
    said it earlier--you are receiving public comment to help as
    you maneuver through this to ensure that that gap does not get
    worse, and you are taking those public comments into
    consideration, correct?
        Mr. Otting. That is correct.
        Senator Cortez Masto. And some of that public comment you
    may not agree with, but you are going to take all of it into
    consideration?
        Mr. Otting. Most of it I do.
        Senator Cortez Masto. Right, but that is the nature of it.
    You get public comments. Some you agree with, some you do not,
    but you try to do the right thing here and ensure that you are
    enforcing the law and protecting against redlining. Isn't that
    correct?
        Mr. Otting. That is correct.
        Senator Cortez Masto. OK. So what I do not understand,
    then, is why, when you receive public comment--and this is the
    first time I have ever seen a regulatory body do this--you are
    trying to silence some of that public comment. You sent a
    letter to California Reinvestment Coalition trying to quiet
    them. You did an op-ed under Barry Wides, Deputy Comptroller
    for Community Affairs, talking about how some of the public
    comment you received you felt was not constructive, and you
    were scolding them. I am not quite sure what purpose that
    serves and why and how that benefits----
        Mr. Otting. Because we felt the facts should be accurately
    reflected, and that particular organization was dispelling
    false information.
        Senator Cortez Masto. OK. And so I do not understand what
    the false information is. If they----
        Mr. Otting. I would be happy to come by and share that with
    you.
        Senator Cortez Masto. Well, let me just say this: If they
    have concerns and they are a community organization--let me----
        Mr. Otting. They are----
        Senator Cortez Masto. Let me approach it this way because I
    have only got about 5 minutes, so I appreciate you----
        Mr. Otting. They cannot go out and say false things about--
    --
        Senator Cortez Masto.----and you can come in and talk to me
    about it. Let me approach it this way: To ensure that these
    financial institutions are complying with the CRA, don't you
    need to get input from the community and public comment to
    ensure they are complying?
        Mr. Otting. That is why we met with the thousand separate
    organizations, got 1,500 comments. When we complete the NPR, we
    will put it back out for 75 days for additional comment. We----
        Senator Cortez Masto. No, even when you are not doing the
    public comment, once the CRA is in place----
        Mr. Otting. Oh, absolutely.
        Senator Cortez Masto.----don't you need community comment?
    In fact----
        Mr. Otting. In fact, we have 16 people around the United
    States----
        Senator Cortez Masto.----isn't it true--let me just ask you
    this----
        Mr. Otting.----that does outreach on a consistent basis.
        Senator Cortez Masto. Perfect. And isn't it true that a
    bank wants Federal regulatory approval for a deal like a
    merger, and when that goes through and community regulators
    consider the bank's compliance with the CRA at that moment in
    time and the bank's promises for future compliance measures, so
    you are--when that happens and mergers occur, you are going out
    into that community and getting community input. Isn't that
    true?
        Mr. Otting. There is an open comment period where people
    are able to offer those comments.
        Senator Cortez Masto. Right, and it provides a basis for
    community groups to comment and say whether or not they think
    those financial institutions have complied within their
    community with the CRA----
        Mr. Otting. Absolutely.
        Senator Cortez Masto.----isn't that correct?
        Mr. Otting. That is correct.
        Senator Cortez Masto. OK. So I guess why I am confused is
    why, then, is the OCC instructing examiners to investigate some
    of the claims separately rather than addressing them within the
    merger approval process?
        Mr. Otting. So I think there is confusion on this topic,
    and it may be originating by the same group who we wrote the
    letter about, that what we have done is we have taken the
    issues and we have provided them to the examiners. That is
    generally done parallel with the licensing process to allow
    them to be able to evaluate the validity of any claims, whether
    they are fair lending or----
        Senator Cortez Masto. So what does it matter whether it is
    an individual or community group? Why are you trying to limit
    the community group's ability----
        Mr. Otting. We are not trying to limit anything.
        Senator Cortez Masto.----to provide that information?
        Mr. Otting. That is an inaccurate statement that we are
    doing any limiting.
        Senator Cortez Masto. OK. So can I ask you this: There is a
    statement that has been made that has been attributed to you,
    and it quotes this: ``I went through''--and this is you saying
    this: ``I went through a very difficult period with some
    community groups that did not support our community'' when you
    were with OneWest when you were trying to merge with CIT Bank
    merger, and you claim they ``did not support our community who
    came''--``and these community groups came in at the bottom of
    the ninth inning that tried to change the direction of our
    merger, and so I have a very strong viewpoint.''
        You have also stated that part of your marginalization plan
    is to prevent community groups from pole-vaulting in and
    holding bankers hostage, and so that is why you are trying to
    prevent these community groups from being able to provide under
    the CRA their input. Is that true? Are those comments true?
        Mr. Otting. That is not true. Those comments are accurate.
    However, when I was----
        Senator Cortez Masto. Wait a minute. The comments are
    accurate?
        Mr. Otting. Those comments are accurate. They reflect what
    I said. And what the reason was is because we had overwhelming
    support in our community for the merger, and groups came from
    outside the community that had no input, no data, were not
    familiar with our organization, and tried to stop the merger.
    And so they have an open voice. I would never try to cover
    their voice. I just want it to be an accurate process.
        Senator Cortez Masto. So you are telling me right now that
    the comments that were made that you just talked about,
    individuals from outside the community came into----
        Mr. Otting. That is right.
        Senator Cortez Masto. So the California Reinvestment
    Coalition and anybody in California----
        Mr. Otting. They were not in our geographic----
        Senator Cortez Masto.----they were not within that
    community?
        Mr. Otting. They were not. They are a Northern California-
    based organization, and we were a Southern California-based
    bank.
        Senator Cortez Masto. OK. I notice my time is up. I will
    submit the rest of my questions for the record.
        Senator Cortez Masto. Thank you.
        Mr. Otting. Thank you very much.
        Chairman Crapo. Thank you.
        Senator Tillis.
        Senator Tillis. Thank you, Mr. Chairman. Thank you all for
    being here. And, Chair Hood, I cannot help but notice that
    Carolina blue tie you are wearing. It cannot be by accident.
    Thank you for being here.
        Maybe we could start on a bank merger discussion that is
    important to me, and that is the BB&T-SunTrust merger. Mr.
    Quarles, when we talked, we were talking about trying to
    compress the regulatory approval timeframe from about a year to
    about 120, 117 days. Now what I am hearing, I am wondering,
    were those calendar days or legislative days? And what is the
    current status? I know that we have done two hearings in the
    field. I would be interested in what more we are going to be
    doing and then what the time horizon looks like for anybody
    else who wants to chime in, starting with you.
        Mr. Quarles. Thank you. So we just completed the second of
    the two public hearings on May 3rd. At the same time, we had
    extended the comment period for public comment also to May 3rd.
    We received about 800 comments. We are in the process of both
    evaluating those and then looking at the proposed merger in
    terms of both the statutory factors that we are required to
    consider and the timeframes in which we are required to
    consider them. And so we will proceed with dispatch.
        The analysis, I cannot say exactly how long it will take,
    but we are proceeding with the times frames in mind and the
    statutory timeframes in mind.
        Senator Tillis. Well, I know that that is in your lane. I
    think folks on the other side of the Hill seem to be making
    comments that they would want to delay the merger. I just hope
    that we move expeditiously, and I trust you all to go through
    the proper process.
        Mr. Quarles. I would add that there is a very clear
    framework that has been imposed on us by Congress. Congress has
    said what it is that we are to consider in connection with the
    merger and the timeframes that we are to consider it in. We
    will follow that congressional instruction.
        Senator Tillis. Thank you.
        Now, we had a hearing a couple weeks ago on guidance, and
    that is something that I think, Chair McWilliams, you have done
    a great job on taking a look at guidance in your lane and
    removing the ones that simply did not make sense or should have
    actually gone through the Administrative Procedures Act. Can
    you all give me down the line--and we will start with you since
    this is, I think, your first hearing, Chair Hood, since your
    confirmation. So go down the line and give me a quick update.
        Mr. Hood. Yes, sir. In my first month on the job, I have
    been meeting with agency leadership and staff to ensure that we
    are looking at guidance and not having it misinterpreted as
    rules.
        Senator Tillis. Thank you.
        Ms. McWilliams. Thank you, Senator. We have been able to
    retire close to 60 percent of our financial institution letters
    simply because they were outdated or duplicative. The agency
    did not previously archive these guidances, and now we have.
    Also, I think just generally taking a look at guidance and its
    proper role in our rulemaking process, guidance is not supposed
    to restate the law. It is not supposed to introduce new
    interpretations of the law.
        Senator Tillis. So you disagree with some supervisors who
    appear to think that guidance can override a statute?
        Ms. McWilliams. I tend not to comment on my fellow
    supervisors, but I will tell you that at the FDIC, we have
    taken this job very seriously because we need to stay within
    our lane in terms of our legal interpretations.
        Senator Tillis. Thank you. And as you are going down the
    line, I also wanted to bring up inter-affiliate margin. I will
    have to cover a lot of stuff probably through questions for the
    record, but, Mr. Quarles?
        Mr. Quarles. So on guidance, we have issued a comprehensive
    guidance on guidance so that we have in writing for all of our
    examination and supervisory staff a very clear expectation that
    guidance is not supposed to be used as the basis for
    enforcement actions, that it is guidance and not a rule.
        I am going around to each of the reserve banks, having town
    halls with all of the supervisors, discussing the current
    supervisory practices in general, ensuring that supervisory
    practices align with our regulatory decisions in Washington.
    And I will not chew up more of your time with this, but I do
    think it is a really important question, drawing this line, and
    Chairman Crapo referred to some comments I had made on it
    earlier. I think it is incumbent on us at the Fed and all of us
    to think very carefully in a way that has not been done in
    decades about where we are drawing the line between what can be
    accomplished through supervision and what types of things have
    to be accomplished through regulation, if we are going to
    accomplish them, and the due process requirements that apply to
    regulation under the Administrative Procedures Act. We have not
    done a very good job of that over the course of the last
    decade, either at the Fed or, I think, the banking regulators
    generally. Apologies. But I think that some of the issues that
    you and others on the Committee have been raising have really
    thrown this question into relief, and we are making it a high
    priority at the Fed to think about that in a comprehensive,
    intellectual way, in addition to dealing with some of the
    specific guidance questions.
        Senator Tillis. Mr. Chair, if you would just let Mr. Otting
    respond to the question.
        Mr. Otting. Senator, I would echo Randy's comments. We
    spend an enormous amount of time with the examiners. We have
    issued guidance on guidance. We have had lots of training to
    reinforce what guidance truly is. And I do see limited guidance
    being issued in the future.
        Senator Tillis. That is good news. Thank you all. We will
    be sending questions for the record to all of you.
        Senator Tillis. Thank you.
        Chairman Crapo. Thank you.
        Senator Menendez.
        Senator Menendez. Thank you, Mr. Chairman. Thank you all.
        Let me ask Comptroller Otting and Vice Chair Quarles, with
    a simple yes or no, if you can answer it: If any congressional
    committee subpoenaed you for information on Deutsche Bank or
    Capital One, would you comply?
        Mr. Quarles. I would have to talk with our lawyers. We
    would obviously--we have worked well with the Committee over
    the past. I realize this is not a yes or no, but if it is
    legal, of course we would comply.
        Mr. Otting. I would echo Randy's comments. We would have to
    consult our counsel.
        Senator Menendez. Do financial institutions have to consult
    with you before complying with congressional subpoenas?
        Mr. Quarles. Well, I believe--I am looking back at our
    General Counsel. I mean, we do have limitations on the ability
    of financial institutions to share confidential supervisory
    information with anyone, and so I would expect--I do not know
    if they are legally
    required, but I would expect that they would prudentially want
    to talk to us before sharing what they might think was
    confidential supervisory information.
        Senator Menendez. What about nonconfidential supervisory
    information?
        Mr. Quarles. I do not think that we would require them to
    talk to us before sharing information that was not CSI.
        Mr. Otting. Same answer, if it is non-CSI.
        Senator Menendez. Aside from steps to protect confidential
    supervisory information, does not complying with congressional
    subpoenas create legal risks for banks?
        Mr. Quarles. It has been 20 years since I practiced as a
    lawyer, but I would think that they ought to think about that
    question, yes.
        Mr. Otting. I agree. I agree with the answer.
        Senator Menendez. Well, the reason I ask you is because
    last month the House Financial Services and Intelligence
    Committees subpoenaed both of these entities for records
    relating to President Trump's businesses as part of their
    congressional duty to conduct oversight and investigate
    potential money laundering and foreign influence in U.S.
    political processes. And now the courts are being used to try
    to stop the banks from complying with that subpoena. I just
    want to make it very clear from my perspective, having served
    in both Houses, there should be no doubt about this. Banks and
    regulators have no excuse not to comply with a congressional
    subpoena. Protecting subpoena power is critical so that
    Congress can exercise its constitutional responsibility of
    oversight, so we can learn the truth and ultimately make policy
    choices to safeguard our economy and our country. And I hope
    that that is the way, if you are called upon, that you will act
    appropriately.
        Comptroller Otting, in a hearing last year before the House
    Financial Services Committee, you refused to give a straight
    yes-or-no answer when asked if you believed discrimination
    exists in America today. So now that you have read the public
    comments on your CRA proposal, including those by Unidos, the
    NAACP, State affiliates, New Jersey Citizen Action, do you now
    believe that discrimination exists in America?
        Mr. Otting. Senator Menendez, that was not my response. My
    response----
        Senator Menendez. Give me your response now.
        Mr. Otting.----was that I did not personally observe that.
    I also would----
        Senator Menendez. But you do not have to observe it to
    believe that discrimination exists in----
        Mr. Otting. That is correct, and----
        Senator Menendez. So I will ask you the question again.
    Does discrimination exist in----
        Mr. Otting.----the other response that I gave was that my
    in-laws are all first-generation Hispanic people in this
    community. Other friends of mine who are from the black
    community will tell me it exists and they have experienced it.
    And so, yes, I do believe it exists in America.
        Senator Menendez. Thank you very much. I am glad we have
    gotten that far.
        Chair McWilliams and Vice Chair Quarles, because the
    Community Reinvestment Act is at its core a civil rights law,
    will you commit to getting the support of the civil rights
    community before issuing a final rulemaking on the CRA?
        Mr. Quarles. I will take that first. Certainly the process
    that we are undergoing is to ensure that we have input from the
    civil rights community, and they have been very supportive of
    our looking at making this regulation more effective. I think
    that they are--we have received a lot of support from community
    organizations, including civil rights organizations generally,
    about ways in which this regulation can be improved.
        Ms. McWilliams. I can attest, Senator, that as I travel to
    different States, I try to meet with consumer groups,
    especially in places where they are very active, to solicit
    their feedback on the needs of the LMI community as well as
    what needs to be done for CRA purposes. I have met with a
    number of CDFIs and CDCs to make sure that their input is
    heard.
        Senator Menendez. I appreciate both of your answers, but
    could you envision passing a rule where the civil rights
    community in unity was against the rule?
        Mr. Quarles. If there were unity of the affected
    communities in opposition to a rule, I think that would be
    surprising for us to approve a rule.
        Senator Menendez. But if it happened, could you envision
    adopting such a rule?
        Ms. McWilliams. I have worked on some of the rulemakings in
    the past, and it is almost never in unity that, you know, one
    part of the industry or consumer community responds. So it is a
    hypothetical, but I would imagine if there is strong
    opposition, we would make amends to the rule----
        Senator Menendez. Well, I hope you will come up with a rule
    that ultimately has the support of the civil rights community.
    If not, I would be looking forward to engaging with you.
        Thank you, Mr. Chairman.
        Chairman Crapo. Thank you.
        Senator Warren.
        Senator Warren. Thank you, Mr. Chairman.
        So over the past few years, we have learned about one
    illegal scheme after another at Wells Fargo. The bank has
    scammed customers by opening millions of fake accounts. It has
    unlawfully repossessed tens of thousands of cars, including
    cars that belong to deployed servicemembers. It has cheated
    thousands of their own employees out of their hours and kicked
    hundreds of families out of their homes in unlawful
    foreclosures.
        Regulators, including your agencies, have sued Wells Fargo
    over and over again to force it to stop scamming its customers.
    As I understand it, the OCC alone right now has at least three
    open enforcement actions against the bank.
        So, Comptroller Otting, let me ask, on April 3rd you wrote
    me that the OCC was ``disappointed with the Wells Fargo Bank
    proposal under our consent orders.'' Has the OCC's position
    changed in the last 5 weeks?
        Mr. Otting. It has not.
        Senator Warren. All right. So you are not alone in being
    disappointed by Wells Fargo's progress. Chairman Powell and
    CFPB Director Kraninger have also made it clear that Wells
    Fargo has not cleaned up its act. But one big thing has
    changed. CEO Tim Sloan was finally kicked out, so Wells needs a
    new CEO.
        Now, in a law that was passed in the wake of the savings
    and loan crisis in the 1980s, Congress gave the OCC the
    authority to examine the ``competence, character, experience,
    or integrity'' of candidates for senior positions in a
    ``troubled bank'' like Wells Fargo. In other words, the OCC can
    effectively veto CEO candidates who do not pass muster.
        Comptroller Otting, I recently wrote you a letter asking
    why the OCC waived its right to a troubled bank review in
    recent settlements with Wells Fargo, and you responded
    yesterday that the agency was committed to conducting a review
    of the candidates for Wells Fargo CEO.
        Will this review be exactly the review that Congress gave
    you the authority to conduct? I just want to be clear.
        Mr. Otting. Yes. No, I understand. First of all, Wells is
    currently not a troubled bank by the definition----
        Senator Warren. I just want to know if you are going to
    conduct the review according to the authority that has been
    given to you.
        Mr. Otting. Yes, we will.
        Senator Warren. You will. OK. I am glad, because when you,
    the OCC, waived the examination in your 2015 order settling
    claims that Wells Fargo broke anti-money-laundering laws and
    when you waived the examination in your 2016 fake accounts
    scandal settlement, the result was that Tim Sloan, a bank
    insider, complicit in the fake accounts scam, became CEO
    without a peep from the OCC.
        Now, you also told me in your letter that you have decided
    that you will treat the results of the review as confidential
    supervisory information, which means that this review will be
    done in secret, behind closed doors, and never discussed
    publicly.
        Comptroller Otting, under the OCC regulations you have the
    discretion to disclose this confidential supervisory
    information when it is ``necessary and appropriate.'' Will you
    commit to publicly disclosing the OCC's evaluation of the
    ``competence, experience, character, or integrity'' of the next
    Wells CEO?
        Mr. Otting. I will not.
        Senator Warren. Why not?
        Mr. Otting. Because it will be confidential supervisory
    information.
        Senator Warren. Well, it is confidential if you make it
    confidential. The point is you have the legal authority to----
        Mr. Otting. At this point in time, I do not have plans to
    release that information publicly.
        Senator Warren. And what is the reason that you do not have
    plans? Why are you keeping this secret?
        Mr. Otting. Because, as you indicated, it is my
    prerogative.
        Senator Warren. OK. And our job is oversight here. So I
    would like to know why you want to exercise your prerogative to
    keep secret----
        Mr. Otting. I have not exercised----
        Senator Warren.----the oversight that the OCC has ducked
    repeatedly.
        Mr. Otting. Senator Warren, no one has been tougher on
    Wells Fargo than myself. No one has been more outspoken----
        Senator Warren. You mean at the OCC? That is a low bar.
        Mr. Otting. I would disagree with that. I find that
    insulting that you would make that comment.
        Senator Warren. Good. You know, people all across this
    country were scammed and squeezed by Wells Fargo. Their houses
    were taken away, their cars were stolen, because the bank's
    executives were more concerned about making mountains of money
    than about following the law. And the OCC never uttered a peep
    about their executives who were leading this. The OCC blew it
    once by letting Tim Sloan take over. This time you need to show
    your work and make your supervision public. That way consumers
    and Congress can hold you accountable, too.
        Mr. Otting. I appreciate the request.
        Chairman Crapo. Thank you.
        Senator Jones.
        Senator Jones. Thank you, Mr. Chairman. And thank you all
    for being here today.
        I would like to follow up in a moment with something that
    Senator Moran said. I will be very charitable to him and call
    it a ``question.'' But like my friend on the other side of the
    aisle, I am also very concerned about the future of rural
    America and agriculture in this country. Times, as he said, are
    tough, the future is bleak, and I think he said struggles in
    rural America are great, and they are because agriculture is
    being so victimized by nature and fluctuating markets. But I
    would also add a couple of things.
        Number one, it is not just natural disasters. It is
    congressional disasters, when we cannot find congressional aid,
    supplemental aid to help these people, and we cannot put--the
    Congress and the Administration cannot put their politics aside
    to get some aid to these farmers and folks who need it
    desperately.
        And the other thing is the markets that are leaving because
    of the Chinese tariffs. That is a huge problem, and we can have
    wonderful relationships with bankers, but that is not going to
    do any good if we do not have crops and we do not have
    commodities and we do not have markets to sell those
    commodities, and those relationships are going to get strained
    mightily if that banker is sitting at a witness table at a 341
    bankruptcy hearing as the chief creditor for these farmers. So
    there are a lot of reasons, and I agree with Senator Moran
    about the relationship banking. I am a big, big proponent of
    that.
        So now that I have gotten through with my ``question'' on
    that, as Senator Moran did, I would like to ask just a couple
    of little bit easier ones. CECL, the current expected credit
    loss model that is being considered by FASB, Senator Tillis and
    I and about 15 colleagues sent a letter expressing concern
    about that. I know that you are looking at that issue. I am
    concerned about how credit will be available in downturns of
    the economy, and what I see often in Congress and through
    regulation is that it is the unintended consequences that are
    not adequately looked at.
        So I would like to ask Vice Chairman Quarles and Chairwoman
    McWilliams if you could just briefly talk to me about that,
    making sure that that is on your radar, and the fact that you
    are reaching out to institutions to get their concerns.
        Mr. Quarles. Yes, Senator, very much. CECL is very much on
    our radar. We have received a broad range of estimates of what
    the potential effect of CECL would be, both its so-called day
    one effect, potentially increasing reserves immediately upon
    its implementation and what its potential procyclical effect
    might be. And, again, from the industry, large and small, from
    the accountants, from academics, from our own staff, the
    assessments in each of those areas have been widely varying.
        So what we have done, given that we do not actually control
    either the content of the accounting standard or the timing of
    its implementation, because that is controlled by FASB, we
    proposed a phase-in process so that essentially we will hold
    the effect of this will be phased in over time because of the
    way we will treat our capital rules and any potential increase
    in reserving under the capital rules, until we see exactly what
    the effects are, given these widely varying estimates that have
    been made of them. And if we see some of these adverse
    consequences that have been proposed, we have the tools to be
    able to address them by adjusting other aspects of the
    regulatory system to ensure that it is not a burden on the
    banks.
        Senator Jones. Thank you.
        Ms. McWilliams, just briefly.
        Ms. McWilliams. Sure. I have to tell you that is the number
    one question I hear from community banks as I travel around the
    country. I am coming to Alabama in August, and I suspect that
    is going to be the first question they ask me. The issue is
    expected versus probable incurred losses, and the standard has
    changed. You know, as Vice Chairman Quarles said, FASB is in
    charge of the rule. We have met collectively with the FASB
    Chairman and the board members to talk about our concerns with
    implementation, and we are actively working with banks to make
    sure they understand how to comply with whatever is done within
    our purview. So long as banks have to follow U.S. GAAP, which
    is a statutory requirement and FASB sets the GAAP standards,
    our hands are somewhat tied.
        Senator Jones. Thank you. I want to follow up with you,
    Chair McWilliams, real quick on an issue that is important to
    me and I think is getting a lot of bipartisan support. We have
    got a problem in this country, I think, right now where, based
    on something that happened in the 1950s, so many people are
    getting excluded from being able to work at banks because of
    misdemeanor convictions, criminal convictions that really have
    no relevance to today's world. I heard from one bank that they
    had to fire an employee, a customer service representative,
    simply because they found that she had a shoplifting
    misdemeanor from 1972. And I think there is just something
    fundamentally wrong with institutions being forced to let
    people go much less keeping people out of that market at a time
    when we need to be inviting good people to join it.
        Is this something that you are looking at? Is it something
    that any of you are looking at, but particularly--and, Mr.
    Hood, I see you ready to answer--so we can kind of get more
    people into this and get rid of this just arcane law?
        Mr. Hood. Yes, Senator Jones. It is something that we at
    NCUA are examining. In fact, within my first month, one of the
    first votes I was able to cast was for a person who did have
    one of these convictions many years ago, but she has now for
    the past 40 years been able to operate safely and soundly, and
    she now has the authority and opportunity to work at a
    federally insured credit union if the opportunity presents
    itself. So the process does work. She served her time and paid
    her debt to society, and we are happy to have her join our
    workforce someday.
        Senator Jones. All right. I want to follow up, though, and,
    Ms. McWilliams, I may follow up in writing, because what I am
    really looking at is what we can do to streamline that process.
    I know you can get waivers, but that is a cumbersome process,
    and that waiver process alone sometimes has that chilling
    effect on people applying. So I will follow up with both of you
    on that since I am way over time, like Senator Moran was.
        Chairman Crapo. Well, thank you. And there are a couple who
    have asked for a second round. I would like to finish by 11:30
    if we can, so I will proceed. Senator Brown. And we may only
    have one request.
        Senator Brown. Thanks. Thank you again for your patience,
    all four of you. I am glad you got to say something, Mr. Hood,
    after all this. It is not always an advantage to get to be able
    to talk at these hearings.
        You know, Americans increasingly are concerned or alarmed,
    or worse, about what is happening in industry after industry. I
    think if you ask the flying public about airline consolidation
    and airline mergers, when a city--two in Ohio, Cleveland and
    Cincinnati--were ``victimized,'' is probably the right word, by
    major airline mergers, it hurts employees, it hurts the flying
    public, it hurts the communities. It is good for the
    executives, typically.
        In big tech, we know the increasing problems there about
    data and privacy. Senator Crapo and I want to work on those
    issues together.
        We know what happens with mega farms. We know what happens
    environmentally with the problems with Lake Erie in part are
    because of mega farms and how that pushes some small farmers
    too often off the land.
        My colleague in Wisconsin, Senator Baldwin, has pointed out
    to me how many dairy farms have gone out of business just in
    the last couple of years. I think the Trump tariffs are part of
    it, but more than that, there is so much else.
        So my question to any of you, are you in favor of the
    consolidation of the banking industry that will inevitably
    leave us with a few large banks and fewer community banks? Mr.
    Otting?
        Mr. Otting. Am I in favor----
        Senator Brown. And keep your answer close to a yes or no.
        Mr. Otting. It is a long-term trend. I think what we have
    really tried to do on the startup side of that is be very open
    to having de novos and minority deposit institutions trying to
    gather more----
        Senator Brown. It is hard to imagine startups are going to
    compensate for these mega mergers.
        Mr. Quarles, as briefly as you can on it.
        Mr. Quarles. I think that competition in the banking
    industry is as good as competition is anywhere, and so as we
    look at consolidation, we try to ensure that we are maintaining
    a competitive system.
        Senator Brown. With all the advantages that bigness brings.
        Ms. McWilliams?
        Ms. McWilliams. Sure. Consolidation has been happening, as
    you know, for decades now. We are looking at ways to enable
    banks, smaller banks in particular, to compete so that the
    effects of consolidation on the industry and the marketplace
    and the communities they serve is not felt as hard as it could
    be otherwise.
        Senator Brown. Mr. Hood?
        Mr. Hood. I will be working diligently with our agency and
    senior leaders to see what we can do to reduce the regulatory
    burden on some of our smaller credit unions. While there has
    been consolidation, we want to help the ones that still remain,
    we want to make sure that they are able to grow, thrive, and
    serve their members.
        I announced earlier that I will be working on de novo
    credit unions. I am presenting a credit union charter to a
    Native tribe of Indians next weekend. So de novos do exist, and
    I look forward to seeing more of them.
        Senator Brown. Thank you, all four of you.
        Mr. Vice Chair, while we were debating S. 2155, Chair
    Powell and others at the Fed assured me that the law would
    change treatment of domestic regional banks but not require
    changes to how the Fed treats foreign banks, foreign mega banks
    with U.S. operations, especially nonglobally systemic banks.
    Last month, you announced your proposal and said, ``This
    proposal should look familiar because it shares the same basic
    framework as the domestic proposal.'' I realize you noted
    domestic and foreign banks will not be treated ``identically,''
    I think was your word. But isn't it true that under your
    proposal, foreign mega banks will see reduced regulation of
    their U.S. operations, including the U.S. operations of some
    globally systemic banks?
        Mr. Quarles. There will be changes in the regulation, but
    there will be some significant increases as well. The liquidity
    requirements on U.S. operations of foreign banks as a result of
    our proposal are measurably higher, almost 4 percent higher by
    our estimates, as a result of this proposal.
        Senator Brown. But aren't foreign banks that have hundreds
    of billions in global assets--you plan on applying enhanced
    prudential standards in categories based on assets in the
    United States, so as if that foreign bank was comparable to,
    say, Huntington and Columbus with assets of more or less $100
    billion?
        Mr. Quarles. I mean, we are looking at the risk of the U.S.
    operations to the risk to the U.S. economy. I think that is our
    obligation as regulators. But we do not ignore the fact that
    those operations are part of a global institution, and we
    regularly engage with the foreign regulators in the home
    country for the home jurisdiction. And there are certain
    aspects of the proposal that take into
    account, you know, the branch operations, which are part of the
    global bank, the branch operations in the United States in a
    way that would not be done for a domestic institution.
        Senator Brown. Did S. 2155 require you to make those
    changes for foreign mega banks?
        Mr. Quarles. No.
        Senator Brown. OK. So apparently you and Chair Powell
    wanted to do, for whatever public policy reason, some kind of
    favor for the foreign mega banks.
        Last question, Mr. Otting. You know many of us are
    concerned about your plans for the Community Reinvestment Act.
    You said at the Milken Institute, ``Anybody who feels that we
    are weakening CRA is either misinformed or is economically
    advantaged by the current structure.''
        Does that mean you are saying that communities that have
    been the victims of redlining and other lending discrimination
    are not smart enough to understand the benefit of requiring
    banks to lend in their communities?
        Mr. Otting. Two separate issues, people talking about
    gutting and reducing what banks have to do. I can assure you
    all of us sitting at the table here feel banks should do more,
    and we need to give them a measurement and criteria to be able
    to do that, and that is what that quote was in regards to.
        Senator Brown. So you think--OK. I will leave it at that.
    Thank you, all four of you.
        Chairman Crapo. All right. Thank you. That concludes the
    questions.
        I will use my time for a second round just to make an
    observation on a different issue, and that is the joint effort
    that Senator Brown has referenced that he and I are engaged in
    for data privacy and trying to resolve some of the issues of
    big data in the country right now.
        The Banking Committee held its first hearing to understand
    the European Union's General Data Protection Regulation and how
    individuals can be given real control over their data that is
    used in ways that has an immense impact on their financial
    lives. Earlier this month, the Wall Street Journal reported
    that Facebook is recruiting dozens of financial firms and
    merchants to launch a cryptocurrency-based payment system,
    which comes after Facebook last year asked U.S. banks to share
    detailed financial information about their customers.
        Last week, Senator Brown and I wrote a letter to Facebook
    asking questions about their new cryptocurrency-based system,
    including critical questions related to privacy and consumer
    protections under this new payment system, consumer information
    collection and sharing and use, as well as protection, and how
    Facebook ensures that it is not using the consumer information
    in violation of the Fair Credit Reporting Act.
        Given Facebook's reach to billions of active users, access
    to vast amounts of consumer information, engagement in
    financial services-like activities, and work with numerous
    financial service firms, it seems appropriate that Federal
    financial regulations would be appropriate and that our Federal
    financial regulators would need to understand the nature of
    Facebook's financial services activities and engage to ensure
    that it follows all applicable laws and regulations. And so I
    just bring that issue to the attention of each of you as our
    regulators.
        And, by the way, this does not apply just to Facebook. The
    explosion of data collection, sharing, management, and use that
    is going on right now that impacts specifically consumers and
    users of credit and people engaging in our financial sector is
    becoming ever larger, and I appreciate the fact that Senator
    Brown is working with me together on this issue. It is a joint
    effort to address how we need to deal with this issue. So I
    encourage you as our regulators to pay attention to this issue
    as well. We have Gramm-Leach-Bliley and we have the Fair Credit
    Reporting Act and other statutes that I think, importantly,
    necessarily raise questions about how we approach the
    appropriate oversight of what I will call ``big data'' and
    ``individual privacy.''
        With that, our questioning and commenting is concluded, and
    for Senators who wish to submit questions for the record, those
    questions are due to the Committee by Wednesday, May 22nd. We
    ask the witnesses as always to respond as quickly as you can.
        Again, I thank you all for your time and your efforts and
    attention to these issues, and this hearing is adjourned.
        [Whereupon, at 11:26 a.m., the hearing was adjourned.]
        [Prepared statements, responses to written questions, and
    additional material supplied for the record follow:]
                   PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
        Today we will receive testimony from Randy Quarles, Federal Reserve
    Vice Chairman for Supervision; Joseph Otting, OCC Comptroller of the
    Currency; Jelena McWilliams, Chairman of the FDIC; and Rodney Hood,
    Chairman of the NCUA.
        This hearing provides the Committee an opportunity to examine the
    current state of and recent activities related to prudential regulation
    and supervision.
        The Fed's most recent report on Supervision and Regulation reports
    that the performance of the economy over the last 5 years has
    contributed to the robust financial performance of the U.S. banking
    system, and that over the past 5 years, the banking system has expanded
    loans by nearly 30 percent--an encouraging development.
        It has been nearly a year since the enactment of S. 2155, the
    Economic Growth, Regulatory Relief and Consumer Protection Act, and
    each one of your agencies has taken additional steps to implement key
    provisions of the bill.
        I appreciate your agencies' continued diligence to get these and
    other rulemakings out quickly.
        However, there are aspects of some recent proposals that merit
    further attention, including:

        The Community Bank Leverage Ratio (CBLR). Senator Moran and
            I wrote to most of you recently encouraging you to establish
            the CBLR at 8 percent and ensure that the proposed Prompt
            Corrective Action framework for the CBLR would not
            unintentionally deter community banks from utilizing the CBLR
            framework;

        Simplifying the Volcker Rule, including by eliminating the
            proposed accounting prong and revising the ``covered funds''
            definition's overly broad application to venture capital, other
            long-term investments and loan creation;

        Harmonizing margin requirements for inter-affiliate swaps
            with treatment by the CFTC;

        Indexing any dollar-based thresholds in the tailoring
            proposals to grow over time generally in line with growth in
            the financial system; and

        Continuing to examine whether the regulations that apply to
            the U.S. operations of foreign banks are tailored to the risk
            profile of the relevant institutions and consider the existence
            of home country regulations that apply on a global basis.

        Turning to guidance and supervision, the Banking Committee held a
    hearing last month on Guidance, Supervisory Expectations and the Rule
    of Law.
        During that hearing, the Committee examined situations where the
    Federal banking agencies have enacted guidance or other policy
    statements that are being enforced as rules and therefore comply with
    neither notice-and-comment rulemaking processes nor with the
    Congressional Review Act (CRA).
        I urge each of your agencies to continue to follow the CRA and
    submit all rules to Congress, even if they have not gone through formal
    notice-and-comment rulemaking and continue to provide more clarity
    about the applicability of guidance.
        More can be done within your agencies to educate and ensure that
    supervisors know how guidance should be treated and that they do not
    use the discretion provided to them by Congress in inappropriate ways.
        I was encouraged that Vice Chairman Quarles last week recognized
    that it is incumbent on the Federal Reserve and on financial regulatory
    agencies to think very carefully through what the agencies mean by
    supervision and what they mean by regulation, and how to use each
    appropriately.
        I was also encouraged that the Fed recently issued a notice of
    proposed rulemaking to revise its ``control'' rules under the Bank
    Holding Company Act.
        Vice Chairman Quarles, you noted that the ``control framework has
    developed over time through a Delphic and hermetic process that has
    generally not benefited from public comment,'' and that ``this proposal
    . . . allow[s] public comment on those positions to improve their
    content and consistency.''
        I urge the Fed to thoughtfully consider the severe restrictions on
    ``business relationships'' and whether business relationships should
    apply to expenses of the investee and investor.
        Finally, while I have you all here, I would stress the importance
    of agencies remaining neutral, unbiased and nonpolitical, especially
    when it comes to reviewing bank mergers and applications, as your
    agencies have done successfully for many years.
        I appreciate each of you taking the time to testify today, and I
    look forward to hearing more about your respective agencies' priorities
    for the rest of 2019.
                                     ______

                  PREPARED STATEMENT OF SENATOR SHERROD BROWN
        When you look at all the rules the regulators have torn up over the
    last year and a half, you have to wonder if they want to see another
    financial crisis.
        In 2006, back when President Trump was just the president of a fly
    by-night university handing out worthless diplomas, he was asked about
    the possibility of housing prices collapsing and throwing the economy
    into chaos. He said: ``I sort of hope that happens, because then people
    like me would go in and buy.''
        Think about that for a moment, it really sums up the President's
    philosophy about this economy. He basically said that he doesn't care
    what happens to millions of hardworking families as long as it benefits
    people like him.
        Maybe that's why the economy seems to be working so well for people
    like Trump, but not so great for everybody else.
        Things look pretty great for banks, real estate investors, and the
    wealthiest Americans. CEO pay is up. Stock buybacks are up. Real estate
    prices are up. And the Trump tax plan really helped out, too.
        But if you punch a clock or swipe a badge--your wages are flat. If
    you're a stay at home parent or you take care of your older relatives,
    you're struggling to get by. Millions of families can't keep up with
    the cost of living as it is--and they're crossing their fingers that
    experts are looking out to make sure there's not another crisis on the
    horizon that's going to wipe out all of their hard work.
        Vice Chair Quarles, I appreciate you coming to Cleveland last week.
    You heard how 44105--Slavic Village--was devastated by the crisis, and
    you saw how too many families there continue to struggle. But you also
    saw how they are hardworking, innovative, and optimistic about the
    future.
        The last thing they need is another crisis. There's no bailout for
    people like them.
        When President Trump was confronted about his comments on the
    financial crisis, he replied ``it's just business.''
        That's not good enough. It's not fair that people like him get to
    use bankruptcy for sport, but people struggling with student loan debt
    can't use bankruptcy to save their lives.
        It's not fair that workers with stagnant wages and rising prices
    are left on their own to fend off financial predators, while the new
    Director of the CFPB is going out of her way to make life easier for
    financial companies.
        Meanwhile, the people in this Administration who are supposed to
    look out for regular people, are instead suggesting that hardworking
    Americans just need to improve their ``financial literacy.''
        These are the watchdogs who are supposed to be looking out for the
    American people, to make sure they aren't steered into a shady loan or
    unaffordable mortgage that could bankrupt them. And they seem more
    concerned with making it easier for Wall Street firms to do as they
    please.
        This isn't going to help Slavic Village.
        I'm concerned that this Administration isn't going to prevent the
    next financial crisis, and may even cause it.
        And I'm not the only one. Two former Federal Reserve Chairs and two
    Treasury Secretaries that saw the last crisis first hand-delivered a
    10-page warning this week about just one of this Administration's
    rollbacks on the safety of our financial system.
        Fitch, a credit-rating agency, has also suggested that the changes
    the regulators are making will make banks riskier, and their failures
    more catastrophic.
        BB&T and SunTrust are on the verge of creating a bank more than ten
    times the size of Countrywide, and this Administration is happy to
    oblige.
        The New York Fed reported yesterday that household debt is a
    trillion dollars higher today than its peak before the 2008 crisis.
        What that number means is that for people across Ohio and across
    America, this isn't just business--it's personal. It's about the hard
    choices families make when budgeting for rent and groceries and
    childcare and savings for a down payment. It's about keeping your
    promise to your child who wants to go to college. It's about being able
    to enjoy a retirement you earned over a lifetime.
        Your job is to protect them.
        Whether it's loosening the rules for foreign megabanks, or ignoring
    risks like leveraged lending, or encouraging banks and fintechs to get
    into payday lending, it does not seem like you are taking that job
    seriously.
        I know the President appointed all of you to your jobs, but you are
    independent financial regulators. Your job is to make the economy work
    for everyone--not just people like him.
                                     ______

                     PREPARED STATEMENT OF JOSEPH M. OTTING
    Comptroller of the Currency, Office of the Comptroller of the Currency
                                       *
    ---------------------------------------------------------------------------
        * Statement Required by 12 U.S.C. Sec.  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.
    ---------------------------------------------------------------------------
                                  May 15, 2019
        Chairman Crapo, Ranking Member Brown, and Members of the Committee,
    thank you for the opportunity to testify on the Office of the
    Comptroller of the Currency's (OCC) supervision and regulation of
    financial institutions. My testimony today primarily focuses on the
    condition of the Federal banking system, and the OCC's priorities and
    objectives.
    Condition of the Federal Banking System and Assessment of Risks
        As of the end of 2018, the Federal banking system comprised more
    than 1,200 national banks, Federal savings associations, and Federal
    branches of foreign banks (banks) operating in the United States. These
    banks range in size from small community banks to the largest most
    globally active U.S. banks. The vast majority of national banks and
    Federal savings associations, approximately 968, have less than $1
    billion in assets, while more than 60 have greater than $10 billion in
    assets. Combined, these banks hold $12.7 trillion or almost 70 percent
    of all assets of U.S. commercial banks. These banks also manage more
    than $50 trillion in assets held in custody or under fiduciary control,
    which amounts to 43 percent of all fiduciary and custodial assets in
    insured U.S. banks, savings associations, and national trust banks. The
    Federal banking system holds nearly three-quarters of credit card
    balances in the country, while servicing almost a third of all
    residential mortgages. Through their products and services, a majority
    of American families have one or more relationships with an OCC-
    regulated bank.
        The condition of the Federal banking system is strong. The
    financial performance of banks making up the Federal banking system
    strengthened in 2018 and early 2019, driven primarily by strong
    operating performance. Capital and liquidity remain at or near historic
    highs. Return on equity is near pre-crisis levels, and OCC-supervised
    banks reported healthy revenue growth in 2018 compared with 2017. Net
    income increased 25 percent for banks with total assets of less than $1
    billion and increased nearly 50 percent for the Federal banking system
    as a whole, with tax cuts resulting from the Tax Cuts and Jobs Act
    accounting for approximately half of the increase. Asset quality has
    historically been impacted by cyclicality; however, as measured by
    traditional metrics such as delinquencies, nonperforming assets, and
    losses, asset quality is currently strong and stable. Loan performance
    is the best it has been in the past decade.\1\
    ---------------------------------------------------------------------------
        \1\ See Semiannual Risk Perspective, Fall 2018 (https://occ.gov/
    publications/publications-by-type/semiannual-risk-perspective/pub-
    semiannual-risk-perspective-fall-2018.pdf).
    ---------------------------------------------------------------------------
        The health of the Federal banking system is reflected also in the
    declining number of outstanding Matters Requiring Attention (MRA)
    concerns. One way the OCC communicates supervisory concerns about a
    bank's deficient practices to a bank's board and management is in the
    form of MRAs. In 2018, the number of outstanding MRA concerns declined
    for the sixth consecutive year and to the lowest level since 2006.
    Banks have invested significant time and resources addressing our
    supervisory concerns, and the declines in outstanding MRAs represent
    sustained improvements in bank governance, oversight, and risk
    management systems and controls.
        While the condition of the Federal banking system is strong, the
    OCC monitors risks to the system on a continuous basis and publishes a
    summary of risks facing banks twice a year in our Semiannual Risk
    Perspective. Key risks highlighted in the most recent issue of the
    report, published in December 2018, include credit, operational,
    compliance, and interest rate, as discussed below. These areas continue
    to evolve in the context of changing economic, technological, and bank
    operating developments.
        Credit quality remains strong when measured by traditional
    performance metrics. Nonetheless, credit risk is increasing because of
    accumulated risk in loan portfolios from successive years of
    incremental easing in underwriting, risk layering, concentrations, and
    rising potential impact from external factors. The OCC continues to
    monitor the effects of strong competition, within and outside the
    Federal banking system, particularly on the origination quality of new
    loans. In addition, the OCC is monitoring for any increased levels of
    lender complacency within credit risk identification and management.
        Operational risk is elevated as banks respond to an evolving and
    increasingly complex operating environment. Cybersecurity continues to
    be a key operational risk, especially in light of the continually
    evolving threat landscape. Innovation in the banking industry
    emphasizes the need for banks to effectively manage operational changes
    as technology advances. Banks increasingly rely on third-party service
    providers to deliver key services, which presents distinct risks.
    Further, there are examples of core activities for the industry that
    are concentrated in a handful of third-party service providers.
    Additional factors contributing to elevated operational risk are the
    expected increase in mergers and acquisitions activity as well as
    rising trends in fraud and attempted fraud. Operational disruptions
    underscore the need for effective change management when implementing
    new products, services, and emerging technologies.
        Compliance risk remains elevated as banks seek to manage money-
    laundering risks in a complex, dynamic operating and regulatory
    environment. In addition, the adoption of new technologies and other
    innovations and implementing changes to policies and procedures to
    comply with amended consumer protection requirements are challenging
    banks' compliance risk management processes.
        Interest rate risk poses potential challenges given the current
    rising rate environment, competitive pressures, changes in technology,
    and untested depositor behavior. All these factors make it difficult to
    forecast liability costs. The advances in technology, such as online
    banking, mobile banking, and the acceleration of fintech, have made it
    easier to move money, potentially causing depositors to switch
    financial institutions or switch to nonbank competitors. Banks may
    experience unexpected shifts in liability mix or increasing costs that
    could reduce earnings or increase liquidity risk.
        A specific credit risk that warrants attention involves the
    leveraged loan market. The Federal banking agencies have increasingly
    observed transactions that include elevated leverage, including fewer
    and less stringent protective covenants, more liberal repayment terms,
    and incremental debt provisions that allow for increased debt that may
    inhibit deleveraging capacity and dilute repayment to senior secured
    creditors. We continue to monitor how this combination of risks is
    evolving and to assess the adequacy of bank risk management and
    controls. Through our supervisory activities, we have seen that the
    leveraged lending guidance issued by the Federal banking agencies has
    contributed to banks having a more balanced risk management approach in
    this area. We will also continue to monitor the potential impact of
    these risks in the aggregate on the broader leveraged lending market
    and banking system.
        Bank holdings of leveraged loans are not our only significant
    concern. Although supervised banks originate a significant portion of
    leveraged loans, nonbank entities have substantially increased their
    purchases of leveraged loans. Most of the problem loan leveraged loan
    exposure is held outside of the regulated banking system where there is
    much less transparency. While purchases of leveraged loan
    participations by nonbank entities allows the risks to be shared more
    broadly, the nonbank entities may not be required to hold the levels of
    capital and liquidity that supervised financial institutions must hold
    to protect them in an economic downturn or during a period of market
    disruption.
        As is our practice, the OCC will continue to assess leveraged
    lending risk regularly through the supervisory process. Recent
    supervisory assessments show that OCC regulated banks have satisfactory
    risk management around leveraged lending. Leveraged loans can also
    present indirect risk and we will continue to assess OCC regulated
    banks' management of risks from lending to leveraged loan investors,
    lending to and investing in collateralized loan obligations, and from
    other borrowers that may have critical suppliers or vendors that are
    highly leveraged. In addition, although less transparent to the Federal
    banking agencies, we will continue to monitor nonbank leveraged lending
    activity and its potential impacts to the extent possible.
        The Federal banking agencies will continue to perform semiannual
    interagency shared national credit (SNC) reviews. These reviews are
    risk-based and focus on loans shared by at least three regulated
    entities with a committed value of $100 million or greater. For some
    time, SNC reviews have been heavily weighted toward leveraged loans,
    and results are used by examiners when assessing credit quality and
    risk management practices at individual banks that originate or
    purchase portions of those loans. The Federal banking agencies issue a
    joint, annual public statement to summarize SNC findings.
    OCC Priorities and Objectives
        The Federal banking system should be an engine to promote economic
    growth
    and prosperity for consumers, businesses, and communities across the
    country. My
    priorities address tailoring regulatory requirements to remove
    unnecessary burden, and increasing bank lending and investment in the
    businesses and communities the banks serve. They include modernizing
    the Community Reinvestment Act (CRA) to increase lending, investment,
    and financial education to where it is needed most; encouraging banks
    to meet short-term small-dollar credit needs to provide consumers with
    additional safe, affordable credit choices; completing the
    implementation of the Economic Growth, Regulatory Relief, and Consumer
    Protection Act (Economic Growth Act) to reduce regulatory burden for
    small and mid-size institutions while safeguarding the financial system
    and protecting consumers; and supporting responsible innovation to
    provide more choices to consumers and businesses. My priorities also
    include improving the efficiency and effectiveness of Bank Secrecy Act
    (BSA) and Anti-Money Laundering (AML) regulations, supervision, and
    examination, while continuing to support law enforcement, protect the
    financial system from those who seek to exploit it for illicit and
    illegal purposes, and reduce the burden of BSA/AML compliance; and
    working with the other Federal agencies to implement the incentive
    compensation provisions of section 956 of the Dodd-Frank Wall Street
    Reform and Consumer Protection Act (Dodd-Frank Act).
    Modernization of the Community Reinvestment Act
        During the four decades since it became law, the CRA has proven to
    be a powerful tool for community revitalization and has encouraged
    trillions of dollars in lending, investment and other banking
    activities in low- and moderate-income communities across our Nation.
    However, the regulatory approach to implementing CRA has become too
    complex, outdated, cumbersome, and subjective. Stakeholders from all
    perspectives have called for modernizing the current regulatory
    framework. Complaints with the current framework include significant
    administrative burden, lack of consideration for investments in areas
    with needs beyond a bank's assessment area, and failure to adapt the
    framework to advances in banking such as interstate branching and
    digitization of services. Others have complained about the limited
    opportunity for bank activities to qualify for CRA consideration.
    Bankers and community groups alike criticize the length of time between
    the issuance of CRA performance evaluations, the unwieldly length of
    performance evaluation reports, and the lack of transparency and
    clarity.
        We have an opportunity to modernize the regulatory framework around
    CRA to better serve its original purpose and encourage more investment
    and banking activity supporting the people and communities needing it
    most. The OCC took the first step by issuing an advance notice of
    proposed rulemaking (ANPR) in August 2018. The ANPR did not make any
    regulatory proposals. Instead, it presented 31 questions on a variety
    of issues and options that could reform the CRA framework, including
    one that asked stakeholders to tell us what issues we may have missed.
    The OCC solicited input from all stakeholders regarding any and all
    ideas and opinions about how regulators may strengthen and enhance the
    CRA framework.
        Certain stakeholders, however, have made inaccurate claims about
    the purpose of the ANPR, mischaracterizing it as an effort to limit
    public input. To the contrary, the OCC met with over 1,000 people
    during outreach to discuss CRA modernization. In addition, we received
    approximately 1,500 letters with varied opinions and insights that,
    absent the ANPR, would not have been available to regulators. The OCC
    has shared all these comments with the other Federal banking
    regulators, and we are working with them to jointly develop and issue a
    proposed rule later this year.
        Our goals for strengthening CRA regulations include: 1) clarifying
    what counts for CRA consideration; 2) updating where CRA activity
    counts; 3) creating an objective means to count it; and 4) making
    reporting timelier and more transparent. The agencies are actively
    engaged in working together toward these broad goals, which will make
    CRA regulations work more effectively and efficiently for everyone. The
    proposal will be published for notice and comment, allowing the public
    another opportunity to provide input on the modernization of CRA
    regulations.
    Small-dollar lending
        Millions of Americans rely upon short-term small-dollar credit to
    make ends meet. Consumers need safe, affordable choices, and banks
    should be part of that solution. Banks are well-suited to offer
    affordable short-term small-dollar installment lending options that can
    help consumers find a path to more mainstream financial services
    without trapping them in cycles of debt.
        To facilitate banks offering responsible short-term small-dollar
    installment loans to help meet the credit needs of their customers, the
    OCC published a bulletin in May 2018 setting out three core principles
    for these products:

        All bank products should be consistent with safe and sound
            banking, treat customers fairly, and comply with applicable
            laws and regulations.

        Banks should effectively manage the risks associated with
            the products they offer, including credit, operational,
            compliance, and reputation risks.

        All credit products should be underwritten based on
            reasonable policies and practices, including guidelines
            governing the amounts borrowed, frequency of borrowing, and
            repayment requirements.

        The agency's bulletin also highlighted reasonable policies and
    practices specific to short-term small-dollar installment lending.
    While banks initially may not have had the infrastructure to engage in
    such lending, banks are purchasing loans and loan pools from online
    lenders, creating more liquidity for these lenders, and exploring
    relationships with lenders offering small dollar loans that align with
    the sound lending principles discussed in the bulletin.
        In addition, over the course of the past year, the OCC has had
    discussions with several banks that are considering new small-dollar
    products. The CFPB's proposal to amend its Payday Lending Rule, issued
    in January 2019, could accelerate interest in small-dollar products.
    However, as commenters noted in response to the Federal Deposit
    Insurance Corporation's (FDIC) November 2018 request for information,
    regulatory uncertainty remains. The Federal banking agencies are
    exploring principles-based options to address this uncertainty and to
    encourage banks to deliver safe, fair, and less expensive short-term
    credit products that support the long-term financial health of their
    customers.
    Implementation of the Economic Growth Act
        The strength and vitality of the Nation's financial system depend,
    in large part, on the ability of financial institutions, particularly
    community and mid-size banks, to operate efficiently, effectively, and
    without unnecessary regulatory burden. The Economic Growth Act provided
    a bipartisan framework to significantly reduce regulatory burden for
    small- and mid-size institutions while safeguarding the financial
    system and protecting consumers. I am happy to report that we have made
    significant progress implementing the Act.
        Examination cycle. In December 2018, the agencies jointly issued
    rules finalizing the August 2018 interim final rule changes to the
    agencies' examination cycles. Section 210 of the Act expanded
    eligibility for an 18-month examination cycle, making the extended
    examination cycle available to a larger number of qualifying 1- and 2-
    rated institutions. This change, together with parallel changes to the
    onsite examination cycle for U.S. branches and agencies of foreign
    banks, allows the agencies to better focus their supervisory resources
    on financial institutions that are more likely to present capital,
    managerial, or other supervisory issues and thus enhance safety and
    soundness collectively for all financial institutions.
        Thrift charter flexibility. In September 2018, the OCC issued a
    notice of proposed rulemaking to provide greater flexibility to Federal
    savings associations by implementing a new section of the Home Owners'
    Loan Act added by section 206 of the Act. This proposal would establish
    streamlined standards and procedures under which a Federal savings
    association with total consolidated assets of $20 billion or less, as
    reported to the Comptroller as of December 31, 2017, may elect to
    operate with the same rights and privileges and be subject to the same
    duties and restrictions as a similarly located national bank but would
    retain its charter and existing governance framework. The comment
    period closed in late 2018, and the OCC hopes to issue a final rule in
    the near term.
        Short-form Call Report. Section 205 of the Act provides for reduced
    reporting requirements on Call Reports for the first and third quarters
    for institutions with less than $5 billion in total consolidated
    assets. This change expands the number of community institutions that
    can benefit from the reduced burden associated with the short form Call
    Report, freeing up employees and other resources to serve customers and
    the operational needs of the institutions. The agencies published a
    notice of proposed rulemaking in November 2018, and the comment period
    closed earlier this year. The agencies are working toward issuing a
    final rule shortly.
        Appraisals of Residential Real Property. Section 103 of the Act
    provides a tailored exemption from the appraisal requirements for
    certain residential mortgage loans with a transaction value of less
    than $400,000 that are located in rural areas. The agencies received
    comments on the threshold for appraisals for residential real estate
    transactions during both the Economic Growth and Regulatory Paperwork
    Reduction Act (EGRPRA) regulatory review process and the rulemaking
    process to raise the threshold for commercial real estate transactions.
        After considering all of the comments and further analysis by the
    agencies, the agencies issued a notice of proposed rulemaking in
    December 2018 to increase the appraisal threshold for residential real
    estate transactions in order to reduce regulatory burden, particularly
    in rural areas, in a manner that is safe and sound and consistent with
    consumer protection. The comment period closed in February. The
    agencies are reviewing the more than 500 comments received, with the
    goal of issuing a final rule later this year.
        Volcker Rule. Sections 203 and 204 of the Act make changes to the
    statutory provisions underlying the Volcker Rule, including reducing
    the number of institutions subject to its requirements. These changes
    provide regulatory relief to institutions that do not pose the types of
    risks the Volcker Rule was intended to limit.\2\ The agencies published
    a notice of proposed rulemaking in February 2019 to exclude community
    banks with $10 billion or less in total consolidated assets and total
    trading assets and liabilities of 5 percent or less of total
    consolidated assets from the restrictions of the Volcker Rule and to
    ease Volcker Rule restrictions on common names between banks and
    sponsored funds, consistent with the Act. The comment period closed in
    March 2019, and the agencies are working toward a final rule later this
    year.
    ---------------------------------------------------------------------------
        \2\ The agencies explained in a July 2018 interagency statement
    that they will not enforce the Volcker Rule in a manner inconsistent
    with the Act.
    ---------------------------------------------------------------------------
        Community Bank Leverage Ratio. The agencies issued a notice of
    proposed rulemaking in late 2018 to implement section 201 of the Act,
    which addresses the complex and burdensome process--particularly for
    highly capitalized community banks--of calculating and reporting
    regulatory capital. The proposal provides a simplified measure of
    capital adequacy for qualifying community banking organizations. Those
    qualifying community banking organizations that elect to use and comply
    with the community bank leverage ratio (CBLR) framework and that
    maintain a CBLR greater than 9 percent would be considered to have met
    the capital requirements for the ``well-capitalized'' capital category
    under the agencies' prompt corrective action (PCA) frameworks and would
    no longer be subject to the generally applicable capital rule.
        Based on our analysis, setting the threshold at 9 percent in
    combination with the other qualifying criteria would allow most
    community banks to qualify for the CBLR framework, generally maintain
    the same amount of capital in the banking system, and exclude banks
    with higher risk profiles unsuitable for a noncomplex reporting regime.
    With the 9 percent threshold and other qualifying criteria,
    approximately 84 percent of insured banks with total consolidated
    assets under $10 billion could take advantage of the CBLR framework.
        As the agencies made clear in the proposal, electing to use the
    CBLR framework would be optional. Under the proposal, banks have the
    option to move in and out of the CBLR framework at any time without
    restrictions. However, to opt back into the CBLR framework, a bank must
    meet all the qualifying criteria and have a CBLR greater than 9
    percent.
        The proposal also includes an additional PCA framework. The
    agencies proposed the additional framework to allow banks the option to
    remain in the CBLR framework even if they no longer met the required 9
    percent threshold. Doing so would give banks an additional option; they
    could continue to calculate a single leverage ratio, rather than being
    required to use the generally applicable framework, including all risk-
    based capital calculations, which potentially could be costly for banks
    to re-implement.
        The comment period for the proposal closed in April. The agencies
    are reviewing the comments received on the proposal, with the goal of
    issuing a final rule by the end of this year.
        Supplementary Leverage Ratio for Custody Banks. In April, the
    agencies issued a proposal to implement section 402 of the Act. Section
    402 directs the agencies to amend the supplementary leverage ratio
    (SLR) to exclude qualifying deposits at a central bank for banking
    organizations that are predominantly engaged in custody, safekeeping,
    and asset servicing activities.
        High-Quality Liquid Assets. Section 403 of the Act requires the
    Federal banking agencies to amend their Liquidity Coverage Ratio (LCR)
    rules to treat qualifying liquid and readily marketable, investment
    grade municipal securities as level 2B liquid assets. The agencies
    issued an interim final rule to implement section 403 in August 2018
    and expect to finalize the rule this summer.
        High Volatility Commercial Real Estate. In September 2018, the
    agencies published a notice of proposed rulemaking to implement section
    214 of the Act, which limits the types of acquisition, development, and
    construction loans that may be considered high volatility commercial
    real estate exposures and subject to heightened capital requirements.
    The comment period closed in late 2018. The agencies are working toward
    a final rule early this summer.
        Stress Testing. In February, the agencies published a notice of
    proposed rulemaking to implement changes to certain aspects of
    ``company-run'' stress-testing requirements, as required by section 401
    of the Act. The Act raises the minimum asset threshold for banks
    covered by the company-run stress-testing requirement from $10 billion
    to $250 billion in total consolidated assets; revises the requirement
    for banks to conduct stress tests periodically instead of annually; and
    reduces the number of required stress-test scenarios from three to two.
    The agencies are working toward issuing a final rule this summer.
        Tailoring Capital and Liquidity Requirements. The agencies recently
    issued proposed rules to establish risk-based categories for
    determining applicability of requirements under the regulatory capital
    rules, the LCR rules, and the proposed net stable funding ratio rules
    for large domestic U.S. and foreign banking organizations. These
    proposals buildupon the agencies' existing practices of tailoring
    capital and liquidity requirements based on the size, complexity, and
    overall risk profile of banking organizations. The proposals are
    consistent with section 401 of the Economic Growth Act that raises the
    minimum asset threshold for application of enhanced prudential
    standards from $50 billion to $250 billion in total consolidated
    assets. Importantly, regulatory capital and liquidity requirements for
    U.S. global systemically important banks would not change under the
    tailoring proposal.
    Supporting Responsible Innovation
        In July 2018, the OCC announced its decision to consider
    applications for special purpose national bank charters from qualifying
    fintech companies engaged in the business of banking. This decision is
    consistent with bipartisan government efforts at Federal and State
    levels to promote economic opportunity and support innovation and will
    help to provide more choices to consumers and businesses. Companies
    that provide banking services in innovative ways deserve the
    opportunity to pursue that business on a national scale as a federally
    chartered, regulated bank. We continue to have conversations with
    several such companies about the special purpose national bank charter.
        A fintech company that receives a national bank charter will be
    subject to the same high standards of safety and soundness and fairness
    that all federally chartered banks must meet. As it does for all banks
    under its supervision, the OCC would tailor these standards based on
    the bank's size, complexity, and risk profile, consistent with
    applicable law. In addition, a fintech company with a national bank
    charter will be supervised like similarly situated national banks,
    including with respect to capital, liquidity, and risk management
    requirements.
        The OCC also expects a fintech company that receives a national
    bank charter to demonstrate a commitment to financial inclusion. The
    nature of that commitment will depend on the company's business model
    and the types of products, services, and activities it plans to
    provide. By applying a standard similar to that of the CRA for
    depository institutions, the financial inclusion commitment will help
    ensure that special purpose national bank charters are held to the same
    agency expectations of fair access to financial services and fair
    treatment of customers.
        A special purpose national bank charter is only one option for
    innovative companies engaged in the business of banking. Companies may
    also pursue a full-service national bank charter, State charter or
    license where available, or partner with banks and other financial
    service companies. The OCC Office of Innovation is a resource available
    to fintechs to help them understand the opportunities available to
    them.
    Bank Secrecy Act and Anti-Money Laundering
        The BSA and AML laws and regulations exist to protect our financial
    system from criminals who would exploit that system for their own
    illegal purposes or use that system to finance terrorism. While
    regulators and the industry share a commitment to fighting money
    laundering and other illegal activities, the process for complying with
    current BSA/AML laws and regulations has become inefficient and costly.
    It is critical that the BSA/AML regime be updated and enhanced to
    address today's threats and better use the capabilities of modern
    technology to protect the financial system from illicit activity.
        The OCC has taken a leadership role in coordinating discussions
    with the FDIC, Board of Governors of the Federal Reserve System,
    National Credit Union Administration, Treasury's Office of Financial
    Intelligence, and FinCEN to identify and implement ways to improve the
    efficiency and effectiveness of BSA/AML regulations, supervision, and
    examinations, while continuing to meet the requirements of the statute
    and regulations, support law enforcement, and reduce BSA/AML compliance
    burden. In October 2018, these agencies released a joint statement
    clarifying ways in which community banks with a lower BSA risk profile
    may be able to increase efficiency and reduce burden in their BSA/AML
    compliance programs by sharing BSA resources. The statement describes
    how these banks can effectively use collaborative arrangements to share
    human, technology, or other resources related to BSA compliance to
    reduce costs, increase operational efficiency, and leverage specialized
    expertise.
        More recently, in December 2018, these agencies issued a joint
    statement encouraging banks to take innovative approaches to meet their
    BSA/AML compliance obligations. The statement recognizes significant
    potential for technological innovation to transform BSA/AML compliance.
    In addition to assisting banks' efforts to control their costs,
    innovation is increasingly necessary to counter constantly changing
    threats, as illicit financing methods evolve to exploit vulnerabilities
    in existing systems. The statement makes clear the agencies are
    committed to continued engagement with the private sector to modernize
    and innovate in their BSA/AML compliance programs. The OCC is actively
    engaged in discussions with banks and other stakeholders regarding ways
    to explore enhanced technology usage while maintaining the current
    strong protections for the financial system.
        The OCC also has identified areas in which legislative changes
    could increase the impact and efficiency of BSA/AML regulation and
    compliance programs. The OCC generally supports legislative changes
    that would reduce unnecessary industry burden and compliance costs and
    allow for more effective information sharing related to illicit
    finance. These include requiring a regular review of BSA/AML
    regulations to identify those that could be strengthened, refined or to
    reduce unnecessary burden, and providing safe harbors to promote
    sharing of information.\3\
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        \3\ For more detail, see Testimony of Grovetta N. Gardineer. U.S.
    Senate Committee on Banking, Housing, and Urban Affairs. November 29,
    2018. https://occ.gov/news-issuances/congressional-testimony/2018/ct-
    2018-127-written.pdf.
    ---------------------------------------------------------------------------
    Section 956 of the Dodd-Frank Act
        Section 956 of the Dodd-Frank Act generally requires that the OCC,
    Federal Reserve, and FDIC, along with the National Credit Union
    Administration, the Federal Housing Finance Agency, the Securities and
    Exchange Commission, jointly issue regulations or guidelines that
    prohibit incentive-based payment arrangements that encourage
    inappropriate risks by certain financial institutions by providing
    excessive compensation or that could lead to material financial loss,
    and require those financial institutions to disclose information
    concerning incentive-based compensation arrangements to the appropriate
    Federal regulator.
        Incentive compensation arrangements can be useful tools in the
    successful management of financial institutions. However, compensation
    arrangements can provide executives and employees with incentives to
    take imprudent risks that are not consistent with the long-term health
    of the institution. We have initiated discussions with the other
    agencies to explore principles-based options to implement section 956.
    Additional Information
    OCC's Diversity Efforts
        The fulfillment of the agency's core mission of bank supervision
    depends on its employment of talented staff with high levels of
    expertise and experience. The OCC is fully committed to maintaining a
    competent, highly qualified workforce and recruiting the best, diverse
    talent available from a variety of sources. The agency is committed to
    maintaining an inclusive culture and workplace environment with a
    diversity strategy that focuses on leadership commitment, recruitment,
    development, retention, work-life balance, and an engaging culture. The
    OCC has had an agency-wide diversity strategy in place for over 10
    years and regularly aligns those diversity strategic goals with the
    agency's strategic plan.
        As of September 30, 2018, the participation rate of females in the
    OCC's permanent workforce was 45.1 percent, and the participation rate
    of minorities in the OCC's workforce was 35.1 percent. The
    participation rates for African Americans and Asian Americans were 17.6
    percent and 9.0 percent, respectively, both above the National Civilian
    Labor Force (NCLF) rate. The participation rate for Hispanic Americans,
    at 7.3 percent, fell slightly below the NCLF rate; however, fiscal year
    2018 hiring rates for Hispanic Americans exceeded the NCLF rate.
        The OCC benefits greatly from the input of its seven Employee
    Network Groups (ENG) that advance special emphasis programs: the
    Network of Asian Pacific Americans; the Coalition of African American
    Regulatory Employees; PRIDE (the Gay, Lesbian, Transgender, and
    Bisexual Employees network group); the Hispanic Organization for
    Leadership and Advancement; The Women's Network; Generational
    Crossroads; and the Veterans Employee Network. These ENGs serve as a
    resource for mentoring and engagement, and as a collective voice in
    communicating workplace concerns and providing input to management
    around diversity and inclusion programs and activities within the OCC.
    The groups hold an annual leadership forum with the Comptroller and
    other key agency stakeholders to align individual group objectives with
    agency strategic priorities pertaining to recruitment, career
    development, and retention.
        The OCC has a robust recruitment program to attract highly
    qualified candidates who reflect a cross-section of the national
    population, particularly for its entry-level assistant national bank
    examiner positions. The recruitment program features ongoing
    partnerships with colleges, universities, banking associations, and
    professional affiliations. These efforts include participating in
    recruitment activities at Hispanic Serving Institutions, Historically
    Black Colleges and Universities, as well as outreach to student
    organizations. The OCC has also recruited on campus at minority-serving
    institutions and sponsored similar activities at colleges and
    universities with large female student bodies (60.0 percent or
    greater). The OCC also participates annually in a wide range of
    meetings, conferences, and career fairs to develop relationships and
    gain access to a diverse student applicant pool.
        We are particularly pleased that, over the last three fiscal years
    (2016-2018), the OCC through the Federal Pathways Internship Program
    has hired 36 students, of whom 41.7 percent were females and 47.2
    percent were minorities. We also have hired 35 financial interns, of
    whom 54.3 percent were females and 31.4 percent were minorities. Over
    the same timeframe, the agency sponsored 73 interns through its
    National Diversity Internship Program.\4\
    ---------------------------------------------------------------------------
        \4\ The OCC's National Diversity Internship Program partners with
    the following organizations that focus on developing opportunities for
    minorities and women in the industry: the Hispanic Association of
    Colleges and Universities; INROADS; Proxtronics Dosimetry; Wire2Net;
    Minority Access; and The Washington Center.
    ---------------------------------------------------------------------------
        This year we also are partnering with the District of Columbia's
    Department of Employment Services to provide paid summer internships to
    more than 80 rising seniors from DC high schools. The internships will
    provide these minority students exposure to a professional workplace,
    career-readiness training, and greater awareness of potential career
    opportunities in the financial service industry and regulation.
        We continue to work toward enhancing the diversity of applicant
    pools for manager and senior-level manager opportunities by ensuring
    that diversity and inclusion are foundational components in developing
    the pipeline for OCC leadership roles. In support of this work,
    executive management reviews staffing selections for pipeline positions
    on a weekly basis; monitors the diversity of participants in career
    development programs, activities and opportunities; and supports
    unconscious bias training for all employees.
        The OCC is equally committed to the inclusion of minorities, women,
    and minority- and women-owned businesses at all levels of the agency's
    business activities. Payments to minority- or women-owned businesses
    represented 43.2 percent of the OCC's total contractor payments in
    fiscal year 2018, an 11 percent increase since 2014.
        Section 308 of the Financial Institutions Reform, Recovery and
    Enforcement Act (FIRREA) describes goals for preserving and promoting
    minority depository institutions. The OCC takes numerous actions to
    achieve these goals. For example, OCC subject matter experts provided
    technical assistance to minority depository institutions (MDI) on
    various topics, including cybersecurity, legal, accounting, compliance,
    and safety and soundness issues. The OCC annually hosts meetings of its
    Minority Depository Institutions Advisory Committee to assess the
    current condition of minority depository institutions, what regulatory
    changes or other steps the OCC may be able to take to fulfill the
    mandate of section 308, and other issues of concern to OCC-supervised
    minority depository institutions. The OCC holds bank director workshops
    throughout the United States that address risk governance, credit risk,
    compliance risk, and other important banking issues; it encourages MDI
    directors to attend these workshops, waiving participation fees as an
    incentive. The OCC's District Community Affairs Officers consult with
    MDIs on community development, the CRA, and related topics, and the
    OCC's External Outreach and Minority Affairs staff consult with MDIs on
    community development financial institution certification and advise
    them about other Federal resources that support their missions.
    Review of Proposed Mergers
        The OCC charters, regulates, and supervises national banks and
    Federal savings associations (FSA). As such, we do not have a role in
    evaluating the proposed
    merger of BB&T and SunTrust, neither of which are a national bank or
    Federal savings association.
        When evaluating a proposed business combination transaction
    involving a national bank or Federal savings association--mergers,
    consolidations, and certain purchase and assumption transactions--the
    OCC evaluates the capital level of the resulting national bank or FSA;
    conformity of the transaction to applicable law and regulation; the
    transaction's purpose and impact on the safety and soundness of the
    national bank or FSA; and the effect of the transaction on the national
    bank's or FSA's shareholders (or members, for a mutual savings
    association), depositors, other creditors, and customers.
        In addition, when evaluating a proposed business combination under
    the Bank Merger Act, the OCC also considers the effect of a proposed
    business combination on competition; the financial and managerial
    resources and future prospects of the existing or proposed
    institutions; the probable effects of the business combination on the
    convenience and needs of the community served; the effectiveness of any
    insured depository institution involved in the transaction in combating
    money laundering activities; the risk to the stability of the U.S.
    banking and financial system; the statutory deposit concentration
    limit\5\ for certain interstate transactions; the statutory total
    liabilities concentration limit\6\ for certain combinations involving
    large financial firms; and the performance of the applicant and the
    other depository institutions involved in the business combination in
    helping to meet the credit needs of the relevant communities, including
    low- and moderate-income neighborhoods, consistent with safe and sound
    banking practices, in accordance with 12 U.S.C. 2903(a)(2).
    ---------------------------------------------------------------------------
        \5\ See 12 U.S.C. 1828(c)(13).
        \6\ See 12 U.S.C. 1852.
    ---------------------------------------------------------------------------
    Enforcement Actions
        The OCC uses enforcement actions against banks as an extension of
    our supervisory resources to require a bank's board of directors and
    management to take timely actions to correct a bank's deficient
    practices or violations (collectively, deficiencies). Enforcement
    actions against banks can be either formal or informal. Informal bank
    enforcement actions include commitment letters, memorandums of
    understanding, and notices of deficiency issued under 12 CFR 30. When a
    bank's deficiencies are severe, uncorrected, repeat, unsafe or unsound,
    or negatively affect the bank's condition, the OCC may use formal bank
    enforcement actions. Formal bank enforcement actions typically are
    published or made available to the public and
    include consent orders, formal agreements, Gramm-Leach-Bliley Act
    (GLBA) agreements pursuant to 12 CFR 5.39, and civil money penalties.
    Except for GLBA agreements and formal agreements, formal bank
    enforcement actions are enforceable through the Federal court system.
        When determining the appropriate response to a bank's deficiencies,
    OCC exercises judgment based on the totality of the conduct and a range
    of circumstances. Examiners consider numerous factors including the
    bank's condition as reflected in its composite and component ratings;
    the bank's risk profile; the nature, extent, and severity of the bank's
    deficiencies; the extent of any unsafe or unsound practices; the board
    and management's ability and willingness to correct deficiencies within
    an appropriate timeframe; and potential adverse impact to bank
    customers, the Deposit Insurance Fund, or the public.
        Notwithstanding a bank's composite rating, the bank's financial
    condition, or the board and management's ability or willingness, the
    OCC has a presumption in favor of a formal bank enforcement action when
    the bank exhibits significant deficiencies in its risk management
    systems, including policies, processes, and control systems; there are
    systemic or significant violations of laws or regulations; or the board
    and management have disregarded, refused, or otherwise failed to
    correct previously identified deficiencies.
        While the OCC uses our enforcement authority when warranted to
    ensure that a bank is accountable to remedying identified problems,
    bank executives and board members are ultimately accountable for the
    safe, sound, and compliant operation of their banks, as well as
    ensuring corrective actions when necessary. When assessing a bank's
    progress toward meeting our regulatory expectations set forth in an
    enforcement action, the OCC may assess civil money penalties or take
    other additional supervisory or enforcement action if the bank is not
    making sufficient and sustainable progress to remediate deficiencies.
    Such actions could include issuing an order that imposes business
    restrictions or requires the bank to make changes to its senior
    executive officers or members of the board of directors.
    Conclusion
        Thank you for the opportunity to testify before the Committee
    today. While the condition of the Federal banking system is strong, we
    continue to be vigilant in monitoring economic conditions, bank
    activities and emerging risks. We also are advancing several priorities
    to ensure that banks appropriately invest to the communities that they
    serve and that our regulatory requirements are properly calibrated. We
    welcome Congress' support and interest in these activities.
                                     ______

                    PREPARED STATEMENT OF RANDAL K. QUARLES
         Vice Chair for Supervision, Board of Governors of the Federal
                                 Reserve System
                                  May 15, 2019
        Chairman Crapo, Ranking Member Brown, Members of the Committee,
    thank you for your time and for your invitation to testify today on the
    Federal Reserve's regulation and supervision of the financial system.
        My visit comes 10 years, almost to the day, after the Federal
    Reserve released the results of its first supervisory stress tests.\1\
    That exercise was an invention of both urgency and necessity and a tool
    to move the country's largest financial institutions toward safety and
    stability. Many innovations from that period are now regular elements
    of the Federal Reserve's supervisory and regulatory work. These
    innovations have helped strengthen firms that were damaged by the
    crisis; given supervisors and the public a clearer view of risks in the
    financial system; and provided a solid foundation for the Nation's
    economic recovery. Economic and market conditions have afforded us the
    time and opportunity to refine and improve the post-crisis regulatory
    framework. Now--when the financial system and economy are in good
    health--is the time to consolidate the insights we have gained and to
    better the framework we have built.
    ---------------------------------------------------------------------------
        \1\ Board of Governors of the Federal Reserve System, ``Federal
    Reserve, OCC, and FDIC release results of the Supervisory Capital
    Assessment Program,'' news release, May 7, 2009, https://
    www.federalreserve.gov/newsevents/pressreleases/bcreg20090507a.htm.
    ---------------------------------------------------------------------------
        Since my last appearance before this Committee, the Federal Reserve
    has taken several steps to improve the framework, by integrating post-
    crisis innovations more fully into our supervisory processes; directing
    our attention and resources to the places and institutions that merit
    them most; and making our regulatory standards as simple, efficient,
    and transparent as possible. Today, I will briefly review those steps;
    outline the Supervision and Regulation Report that accompanies my
    testimony;\2\ and discuss our other engagement on community, consumer,
    and financial stability issues, both at home and abroad.
    ---------------------------------------------------------------------------
        \2\ Board of Governors of the Federal Reserve System, ``Supervision
    and Regulation Report,'' May 10, 2019, https://www.federalreserve.gov/
    publications/files/201905-supervision-and-regulation-report.pdf.
    ---------------------------------------------------------------------------
    Regulatory Tailoring and Supervision and Regulation Report
        Almost a year ago, Congress passed the Economic Growth, Regulatory
    Relief, and Consumer Protection Act (ERRCPA).\3\ A cornerstone of this
    legislation was a directive to the regulatory agencies to tailor
    oversight of institutions to ensure that our regulations match the
    character of the firms we regulate, with specific congressional
    direction for firms between $100 billion and $250 billion in total
    assets. The Board's Supervision and Regulation Report centers on our
    recent efforts to accomplish this goal.
    ---------------------------------------------------------------------------
        \3\ EGRRCPA, Pub. L. No. 115-174, 132 Stat. 1296 (2018).
    ---------------------------------------------------------------------------
        The core of these efforts are two sets of regulatory proposals,
    which better align the application of our prudential standards to the
    risk profiles of different banking firms.\4\ Both sets derive from
    careful analysis and have benefited from collaboration with the Federal
    Deposit Insurance Corporation (FDIC) and the Office of the Comptroller
    of the Currency (OCC). The proposals share a common goal: to focus our
    energy and attention on both the institutions that pose the greatest
    risks to financial stability and the activities that are most likely to
    challenge safety and soundness.
    ---------------------------------------------------------------------------
        \4\ Board of Governors of the Federal Reserve System, ``Federal
    Reserve Board invites public comment on framework that would more
    closely match regulations for large banking organizations with their
    risk profiles,'' news release, October 31, 2018, https://
    www.federalreserve.gov/newsevents/pressreleases/bcreg20181031a.htm;
    Board of Governors of the Federal Reserve System, ``Federal Reserve
    Board invites public comment on regulatory framework that would more
    closely match rules for foreign banks with the risks they pose to U.S.
    financial system,'' news release, April 8, 2019, https://
    www.federalreserve.gov/newsevents/pressreleases/bcreg2019040
    8a.htm.
    ---------------------------------------------------------------------------
        The most recent proposal addresses prudential requirements for the
    U.S. operations of foreign banks. Like last year's tailoring proposal
    for domestic institutions, it categorizes firms according to their
    size, business model, and risk profile. Certain aspects differ from the
    domestic proposal, however, to reflect the unique characteristics of
    foreign banks operating in the United States, while preserving
    faithfulness to the principles of national treatment and competitive
    equity. The proposal also asks for input on a number of important
    issues, and I look forward to reviewing the comments we receive.
        These proposals are only one aspect of our efforts to implement
    last year's legislation. We also have been providing targeted
    regulatory relief, especially for community banks and other less
    complex organizations.

        We proposed a new interagency Community Bank Leverage Ratio
            to give community banking organizations a more straightforward
            approach to satisfying their capital requirements. State-bank
            supervisors and others have provided thoughtful comments on our
            work, which we are taking into account.\5\
    ---------------------------------------------------------------------------
        \5\ Board of Governors of the Federal Reserve System, Federal
    Deposit Insurance Corporation, and Office of the Comptroller of the
    Currency, ``Agencies propose community bank leverage ratio for
    qualifying community banking organizations,'' news release, November
    21, 2018, https://www.federalreserve.gov/newsevents/pressreleases/
    bcreg20181121c.htm.

        We expanded community banking organizations' eligibility
            for both longer examination cycles and exemptions from holding
            company capital requirements, and we have proposed more limited
            regulatory reporting requirements for community banks.\6\
    ---------------------------------------------------------------------------
        \6\ Board of Governors of the Federal Reserve System, Federal
    Deposit Insurance Corporation, and Office of the Comptroller of the
    Currency, ``Agencies issue final rules expanding examination cycles for
    qualifying small banks and U.S. branches and agencies of foreign
    banks,'' news release, December 21, 2018, https://
    www.federalreserve.gov/newsevents/pressreleases/bcreg
    20181221c.htm; Board of Governors of the Federal Reserve System,
    Federal Deposit Insurance Corporation, and Office of the Comptroller of
    the Currency, ``Agencies issue proposal to streamline regulatory
    reporting for qualifying small institutions,'' news release, November
    7, 2018, https://www.federalreserve.gov/newsevents/pressreleases/
    bcreg20181107a.htm; Board of Governors of the Federal Reserve System,
    ``Federal Reserve Board issues interim final rule expanding the
    applicability of the Board's small bank holding company policy
    statement,'' news release, August 28, 2018, https://
    www.federalreserve.gov/newsevents/pressreleases/bcreg20180828a.htm.
    While holding companies that meet the conditions of the small bank
    holding company policy statement are excluded from consolidated capital
    requirements, their depository institutions continue to be subject to
    minimum capital requirements.

        We provided smaller regional bank holding companies
            immediate relief from annual holding company assessments and
            fees, stress-testing requirements, and other prudential
            measures designed for larger institutions.\7\
    ---------------------------------------------------------------------------
        \7\ Board of Governors of the Federal Reserve System, ``Statement
    regarding the impact of the Economic Growth, Regulatory Relief, and
    Consumer Protection Act (EGRRCPA),'' July 6, 2018, https://
    www.federalreserve.gov/newsevents/pressreleases/files/
    bcreg20180706b1.pdf. The Board also participated in a recent proposal
    that would modify resolution planning requirements. See Board of
    Governors of the Federal Reserve System and Federal Deposit Insurance
    Corporation, ``Agencies invite comment on modifications to resolution
    plan requirements; proposal keeps existing requirements for largest
    firms and reduces requirements for firms with less risk,'' news
    release, April 16, 2019, https://www.federalreserve.gov/newsevents/
    pressreleases/bcreg2019
    0416a.htm.

        We adjusted our regulatory capital treatment of high-
            volatility commercial real estate exposures and our regulatory
            liquidity treatment of municipal securities; exempted community
            banking organizations from the Volcker Rule; and clarified how
            collaboration among smaller institutions can help them address
            their BSA/AML risks.\8\
    ---------------------------------------------------------------------------
        \8\ Board of Governors of the Federal Reserve System, Federal
    Deposit Insurance Corporation, and Office of the Comptroller of the
    Currency, ``Agencies propose rule regarding the treatment of high
    volatility commercial real estate,'' news release, September 18, 2018,
    https://www.federalreserve.gov/newsevents/pressreleases/
    bcreg20180918a.htm; Board of Governors of the Federal Reserve System,
    Commodity Futures Trading Commission, Federal Deposit Insurance
    Corporation, Office of the Comptroller of the Currency, and Securities
    and Exchange Commission, ``Agencies invite comment on a proposal to
    exclude community banks from the Volcker rule,'' news release, December
    21, 2018, https://www.federalreserve.gov/newsevents/press
    releases/bcreg20181221d.htm; Board of Governors of the Federal Reserve
    System, Federal Deposit Insurance Corporation, Financial Crimes
    Enforcement Network, National Credit Union Administration, and Office
    of the Comptroller of the Currency, ``Federal agencies issue a joint
    statement on banks and credit unions sharing resources to improve
    efficiency and effectiveness of Bank Secrecy Act compliance,'' news
    release, October 3, 2018, https://www.federal
    reserve.gov/newsevents/pressreleases/bcreg20181003a.htm; see also Board
    of Governors of the Federal Reserve System, ``Federal Reserve Board
    issues joint statement encouraging depository institutions to explore
    innovative approaches to meet BSA/anti-money laundering compliance
    obligations and to further strengthen the financial system against
    illicit financial activity,'' news release, December 3, 2018, https://
    www.federalreserve.gov/newsevents/pressreleases/bcreg2018
    1203a.htm.
    ---------------------------------------------------------------------------
    Many of the regulatory developments implement statutory changes, but
    they also align with a long-held Federal Reserve policy of directing
    more resources to the most complex institutions and the most pressing
    risks. To that end, I am aware that policy changes in Washington can
    only succeed if they are accompanied by consistent implementation in
    the field. Deliberate, thoughtful supervision is essential, not only to
    translate regulatory standards into practice, but also to monitor
    whether rules are working as intended. I have been visiting supervisory
    and examination staff across the Federal Reserve System to discuss
    these issues and to help ensure that the activities of field examiners
    and policymakers are fully aligned. I plan to continue doing so in the
    months ahead.
        The report accompanying my testimony provides more details on these
    recent regulatory steps, as well as on the overall condition of the
    banking system. On that front, I am happy to share positive news.
    Banking institutions of all shapes and sizes continue to show greater
    loan volumes and fewer delinquencies. Capital levels remain high, and
    nonperforming loan ratios remain well below their 5-year averages. The
    banking sector often reflects the health of the overall economy, and we
    continue to monitor emerging risks across the system to ensure
    institutions of all sizes can maintain their safety and soundness
    throughout the business cycle.
    Regulatory and Supervisory Activities
        Supervisory stress testing has become a potent tool for
    understanding these emerging risks. Its original purpose, however, was
    much narrower. Even after months of extraordinary public support, the
    financial system a decade ago remained exceedingly fragile. To relieve
    strain on the banking system and recapitalize the sector, markets
    needed credible information, which was then in short supply.\9\ The
    first crisis-era stress test provided such insight when it was
    available from few other sources; it was an analysis of last resort,
    which marked a turning point in the crisis. As conditions changed, the
    role of stress testing changed as well. Today, the Comprehensive
    Capital Analysis and Review (CCAR) provides a forward-looking
    measurement of bank capital, a view of risks across the sector, and a
    broader understanding of the health of the financial system. As the
    environment in which we conduct our stress tests evolves, our stress-
    testing processes should evolve commensurately.
    ---------------------------------------------------------------------------
        \9\ See Ben S. Bernanke, ``Stress Testing Banks: What Have We
    Learned?'' (speech at the ``Maintaining Financial Stability: Holding a
    Tiger by the Tail'' financial markets conference sponsored by the
    Federal Reserve Bank of Atlanta, Stone Mountain, GA, April 8, 2013),
    https://www.federalreserve.gov/newsevents/speech/bernanke20130408a.htm.
    ---------------------------------------------------------------------------
        In the past half year, the Board took steps to consolidate the role
    that stress testing plays in our work. Following the directive from the
    EGRRCPA, we began to transition less complex CCAR firms to an extended
    testing cycle, reflecting the lower risks they pose relative to their
    larger, more complex peers.\10\ We published new details of our
    methodology and models, improving public understanding of the program
    and maintaining the integrity of its results.\11\ We announced a new
    stress-testing conference, inviting the broad participation, insight,
    and challenge that are essential for effectiveness.\12\ And, while
    maintaining a rigorous evaluation of capital planning, we committed to
    addressing qualitative deficiencies at most firms through supervisory
    ratings and enforcement actions, rather than through a stand-alone
    qualitative objection.\13\
    ---------------------------------------------------------------------------
        \10\ Board of Governors of the Federal Reserve System, ``Federal
    Reserve Board releases scenarios for 2019 Comprehensive Capital
    Analysis and Review (CCAR) and Dodd-Frank Act stress-test exercises,''
    news release, February 5, 2019, https://www.federalreserve.gov/
    newsevents/pressreleases/bcreg20190205b.htm.
        \11\ Board of Governors of the Federal Reserve System, ``Federal
    Reserve Board finalizes set of changes that will increase the
    transparency of its stress-testing program for Nation's largest and
    most complex banks,'' news release, February 5, 2019, https://
    www.federalreserve.gov/newsevents/pressreleases/bcreg20190205a.htm;
    Board of Governors of the Federal Reserve System, ``Federal Reserve
    Board releases document providing additional information on its stress-
    testing program,'' news release, March 28, 2019, https://
    www.federalreserve.gov/newsevents/pressreleases/bcreg20190328a.htm.
        \12\ See Randal K. Quarles, ``Inviting Participation: The Public's
    Role in Stress Testing's Next Chapter'' (speech at the Council for
    Economic Education, New York, NY, February 6, 2019), https://
    www.federalreserve.gov/newsevents/speech/quarles20190206a.htm.
        \13\ Board of Governors of the Federal Reserve System, ``Federal
    Reserve Board announces it will limit the use of the `qualitative
    objection' in its Comprehensive Capital Analysis and Review (CCAR)
    exercise, effective for the 2019 cycle,'' news release, March 6, 2019,
    https://www.federalreserve.gov/newsevents/pressreleases/
    bcreg20190306b.htm.
    ---------------------------------------------------------------------------
        This core challenge--of keeping our supervisory processes strong,
    while adapting them to evolving circumstances--is not unique to stress
    testing. The Board, OCC, and FDIC face a similar task involving the
    modernization of rules implementing the Community Reinvestment Act
    (CRA). The value of this statute, which affirms the obligation of banks
    to meet the credit needs of their communities, is clear. To meet the
    core objective of the statute, our CRA regulatory framework and
    supervisory processes must evolve, adjusting to a financial sector
    being reshaped by technology, consolidation, and other forces. This
    year, we at the Fed have organized dozens of outreach meetings across
    the country and hosted a research symposium on this subject, in support
    of an interagency effort that includes the OCC's issuance of an Advance
    Notice of Proposed Rulemaking. We intend this effort to ensure that the
    CRA continues to serve low- and moderate-income communities
    effectively.\14\
    ---------------------------------------------------------------------------
        \14\ See Jerome H. Powell, ``Brief Remarks'' (speech at the Just
    Economy Conference sponsored by the National Community Reinvestment
    Coalition, Washington, DC, March 11, 2019), https://
    www.federalreserve.gov/newsevents/speech/powell20190311a.htm; Lael
    Brainard, ``Strengthening the Community Reinvestment Act: What Are We
    Learning?'' (speech at ``Research Symposium on the Community
    Reinvestment Act'' hosted by the Federal Reserve Bank of Philadelphia,
    Philadelphia, PA, February 1, 2019), https://www.federalreserve.gov/
    newsevents/speech/brainard20190201a.htm.
    ---------------------------------------------------------------------------
        Other recent steps support our supervisory and regulatory framework
    by making it simpler and more transparent. A new ratings system for
    large institutions aligns more closely with the supervisory feedback
    they receive, offering greater clarity on our expectations and the
    consequences of falling short.\15\ A new proposal would formalize how
    the Board determines one company's control of another, clarifying and
    inviting feedback on an important concept that, among other things,
    determines the perimeter of the Board's regulatory authority.\16\ We
    continue to monitor other new developments in the industry as well,
    like the impact of new technology on core banking services, third-party
    due diligence processes, cyber risk, and vendor risk management.
    ---------------------------------------------------------------------------
        \15\ Board of Governors of the Federal Reserve System, ``Federal
    Reserve Board finalizes new supervisory rating system for large
    financial institutions,'' news release, November 2, 2018, https://
    www.federalreserve.gov/newsevents/pressreleases/bcreg20181102a.htm.
        \16\ Board of Governors of the Federal Reserve System, ``Federal
    Reserve Board invites public comment on proposal to simplify and
    increase the transparency of rules for determining control of a banking
    organization,'' news release, April 23, 2019, https://
    www.federalreserve.gov/newsevents/pressreleases/bcreg20190423a.htm.
    ---------------------------------------------------------------------------
        Effective and efficient regulation requires collaboration, both at
    home and abroad. We continue to engage with our regulatory counterparts
    overseas, through standard-setting bodies and the Financial Stability
    Board (FSB), where I recently began a 3-year term as Chair. In
    establishing the FSB, the G20, led by the United States, recognized
    that the risks that sparked the financial crisis did not stop at
    national boundaries. International standards for supervision and
    regulation help ensure that U.S. firms can play on a level playing
    field in global competition, foster our own domestic financial
    stability, and help prevent the fragmentation of financial markets. To
    secure the full benefits of these standards, the work we undertake with
    these bodies must also evolve.\17\ We must continue to evaluate the
    post-crisis reforms, address any adverse unintended effects, and
    identify and manage emerging vulnerabilities.
    ---------------------------------------------------------------------------
        \17\ See Randal K. Quarles, ``Ideas of Order: Charting a Course for
    the Financial Stability Board'' (speech at Bank for International
    Settlements Special Governors Meeting, Hong Kong, February 10, 2019),
    https://www.federalreserve.gov/newsevents/speech/quarles20190210a.htm.
    ---------------------------------------------------------------------------
    Conclusion
        The strength of our financial system today rests on the insight,
    patience, and persistence of a decade's work on post-crisis
    reforms.\18\ Those same virtues are essential to preserving that
    strength in the years to come. We must invite ideas and input into our
    regulatory and supervisory activities openly, examine them rigorously
    and objectively, and travel patiently and steadily wherever our
    analysis leads. A diligent, objective, and independent approach is the
    only way to remain vigilant toward new risks and ensure that our
    financial system can continue to address the needs of the U.S. economy.
    Only by thoughtfully evaluating the reforms we have made, and adjusting
    our approach when appropriate, can we preserve and improve the efficacy
    and efficiency of our regulatory framework.
    ---------------------------------------------------------------------------
        \18\ Board of Governors of the Federal Reserve System, ``Federal
    Reserve, OCC, and FDIC release results of the Supervisory Capital
    Assessment Program,'' news release, May 7, 2009, https://
    www.federalreserve.gov/newsevents/pressreleases/bcreg20090507a.htm.
    ---------------------------------------------------------------------------
        Thank you. I look forward to answering your questions.
                                     ______

                    PREPARED STATEMENT OF JELENA McWILLIAMS
                Chairman, Federal Deposit Insurance Corporation
                                  May 15, 2019
        Chairman Crapo, Ranking Member Brown, and Members of the Committee,
    thank you for the opportunity to testify today before the Senate
    Committee on Banking, Housing, and Urban Affairs. As we quickly
    approach my first anniversary as Chairman, I appreciate the opportunity
    to share with the Committee how the Federal Deposit Insurance
    Corporation (FDIC) is working to ensure our regulated institutions are
    serving their communities and how our regulatory and supervisory
    efforts are strengthening the agency's oversight of depository
    institutions of all sizes.
    The Financial Needs of Communities
        Our Nation's banks are the center of economic activity in their
    communities. The ability of these banks to provide safe and secure
    financial products and services to their customers forms the backbone
    of a strong national economy. The FDIC's oversight of these banks is
    critical to financial stability and consumer protection. It is
    incumbent that we exercise this oversight in a manner that recognizes
    an institution's business model and does not impose unnecessary costs
    or burdens on legitimate activities.
        For these reasons, I have focused much of my efforts at the FDIC on
    understanding the needs of our communities and the banks that serve
    them. Our Community Bank Advisory Committee (CBAC), composed of bankers
    from across the Nation, has been a valuable resource in this regard. By
    the end of the summer, I will also be nearly halfway through my 50-
    State listening tour. These meetings with local bankers, State
    supervisors, consumer groups, and our FDIC employees have been
    incredibly informative, and have underscored how important it is to get
    perspectives on our regulatory efforts outside the DC ``beltway.''
        Based on the feedback from our banks and the communities they
    serve, I have challenged the FDIC to increase our efforts to:

        Promote and preserve the Nation's Minority Depository
            Institutions (MDIs);

        Encourage community banking, including the establishment of
            de novo banks in communities of all sizes;

        Provide clarity and consistency to financial institutions
            on their obligations under the Community Reinvestment Act
            (CRA); and

        Ensure that banks can help low- and moderate-income
            households--who are often unbanked or underbanked--meet their
            financial needs safely when confronted with a crisis.
    Minority Depository Institutions
        Many of the institutions overseen by the FDIC are small banks,
    including MDIs, whose communities have unique needs for accessing
    financial services, and our oversight must reflect their critical role
    in our financial system. The FDIC embraces its statutory responsibility
    to preserve and promote the health of MDIs. The vitality of these banks
    is critical given their role in the economic well-being of the minority
    and traditionally underserved communities many MDIs serve.
        The FDIC has a number of initiatives underway to support MDIs:

        In 2018, we appointed a full-time, permanent executive to
            manage our MDI programs across the FDIC, and have increased the
            representation of MDIs on the CBAC from one to three
            institutions, where MDIs now represent one-sixth of CBAC
            members.

        In June of this year, we will host the first of several
            roundtables between MDIs and other FDIC-supervised institutions
            to share expertise and to promote possible collaborative
            opportunities, including direct investments and deposits in
            MDIs.

        In June, the FDIC will publish a research study on MDIs and
            host the 2019 Interagency MDI and Community Development
            Financial Institution (CDFI) Bank Conference.

        We continue to provide technical assistance to groups
            seeking to organize new MDIs, and to existing MDIs to support
            their efforts to acquire failing institutions (including three
            regional roundtables and two webinars over the last few months,
            an additional webinar in the future, and a workshop at our June
            MDI and CDFI conference).

        This fall, we will establish a new MDI subcommittee on the
            CBAC to both highlight the MDIs' efforts in their communities
            and to provide a platform for MDIs to exchange best practices.

    Beyond these outreach efforts, the FDIC is working on a revised policy
    statement to underscore our commitment to the health of MDIs. We will
    continue other technical assistance efforts with these banks, including
    with groups seeking to create new MDIs.
    Streamlining the De Novo Application Process
        Banks--particularly community banks--are the economic heartbeat of
    communities of all sizes across the United States. New financial
    institutions preserve the vitality of the banking sector, fill
    important gaps in banking markets, and provide credit services to
    markets that may be overlooked. The FDIC is open to, and supportive of,
    deposit insurance filings from all firms, including fintechs. All
    applications for deposit insurance must be evaluated under the
    statutory requirements enumerated in Section 6 of the Federal Deposit
    Insurance Act (FDI Act).
        While very few new banks opened in the years following the crisis,
    the FDIC is seeing renewed interest from organizers. To support the
    formation of these new
    institutions, the FDIC is reviewing its processes related to deposit
    insurance applications. For example, we have revised how we receive and
    review draft deposit insurance proposals. Under our new procedures, we
    now provide initial feedback to organizers on draft applications prior
    to formal submission, which helps them develop more actionable
    applications. To solicit additional ideas for improvement, we also
    conducted significant outreach efforts to engage the public, including
    issuing a Request for Information (RFI) last fall and holding seven
    roundtable events across the country.
    CRA
        Last year, the Office of the Comptroller of the Currency (OCC)
    solicited public feedback on how CRA regulations could be modernized to
    improve the effectiveness of the law and provide much needed clarity to
    financial institutions on compliance. The OCC, FDIC, and the Federal
    Reserve Board (FRB) have reviewed the comment letters received by the
    OCC and are working together on a proposal for a revised regulatory
    framework that can help meet these dual goals.
        As these efforts proceed, our focus should include: clarifying what
    activities qualify for CRA consideration; reviewing how we assess
    lending--including digital lending--by banks outside of their main
    offices and branches; and ensuring that CRA investments target those
    most in need in a bank's community.
    Small-Dollar Lending
        According to a recent study by the FRB, nearly 4 in 10 households
    cannot cover a $400 emergency expense with cash.\1\ While some banks
    offer small-dollar lending to help those in need, many banks have
    chosen not to offer such products because of regulatory uncertainty.\2\
    As a result, many families rely on nonbank providers to cover these
    emergency expenses, or their needs go unmet.
    ---------------------------------------------------------------------------
        \1\ Federal Reserve Board Report on the Economic Well-Being of U.S.
    Households in 2017 (May 2018), available at: https://
    www.federalreserve.gov/publications/files/2017-report-economic-well-
    being-us-households-201805.pdf.
        \2\ The three prudential banking agencies have each taken a
    separate approach to small-dollar lending at the institutions they
    regulate. See FDIC FIL-50-2007, Affordable Small-Dollar Loan Guidelines
    (June 19, 2007), available at: https://www.fdic.gov/news/news/
    financial/2007/fil07050.pdf; OCC Bulletin 2018-14, Core Lending
    Principles for Short-Term, Small-Dollar, Installment Lending (May 23,
    2018), available at: https://www.occ.gov/news-issuances/bulletins/2018/
    bulletin-2018-14.html; Federal Reserve Statement on Deposit Advance
    Products (April 25, 2013), available at: https://
    www.federalreserve.gov/supervisionreg/caletters/caltr1307.htm.
        Additionally, the Consumer Financial Protection Bureau has
    promulgated a rule that is now being revisited. See CFPB Notice of
    Proposed Rulemaking to Delay the August 19, 2019 Compliance Date for
    the Mandatory Underwriting Provisions of the 2017 Final Rule to
    November 19, 2020 (February 6, 2019), available at: https://
    files.consumerfinance.gov/f/documents/cfpb_payday_nprm-2019-delay.pdf;
    and CFPB Notice of Proposed Rulemaking to Rescind Certain Provisions of
    its 2017 Final Rule Governing Payday, Vehicle Title, and Certain High-
    Cost Installment Loans (February 6, 2019), available at: https://
    files.consumerfinance.gov/f/documents/cfpb_payday_nprm-2019-
    reconsideration.pdf.
    ---------------------------------------------------------------------------
        To solicit feedback on these products and consumer needs, the FDIC
    issued an RFI last year to learn more about small-dollar credit needs
    and concerns. We have reviewed the more than 60 comments received and
    plan to revisit our 2013 guidance to ensure that it does not impose an
    impediment to banks considering the extension of responsible small-
    dollar credit.
    Appraisal Thresholds
        Last year, the FDIC and our partner agencies finalized a proposal
    to raise the appraisal threshold for federally related commercial real
    estate transactions from $250,000--where it was set in 1994--to
    $500,000. Additionally, the agencies proposed raising the threshold for
    federally related residential real estate transactions from $250,000--
    also set in 1994--to $400,000. These proposed changes balance current
    market realities and price appreciation, including needs in rural
    communities where access to appraisal services can be limited, with the
    need to ensure the safety and soundness of our institutions. We have
    received numerous comments on these proposals and are currently working
    to finalize the rulemaking.
    Regulatory Efforts to Strengthen the Financial System
        The FDIC strives to implement its regulatory approach to Insured
    Depository Institutions (IDIs) in a manner that reflects differences in
    risk profile among industry participants, while achieving our goals for
    a safe, sound, and stable banking system. To support our regulatory
    efforts, FDIC examiners conduct bank examinations using a risk-focused
    examination program, which helps the FDIC identify emerging risks and
    take supervisory or regulatory actions to help mitigate those risks.
    Our ability to effectively supervise larger institutions is a
    particularly critical foundation for our regulatory efforts and to
    ensure that large and complex financial institutions are resolvable in
    an orderly manner.
        The FDIC is the primary Federal regulator for 3,495 State-chartered
    institutions that are not members of the Federal Reserve System.\3\ Of
    this number, 40 have assets above $10 billion. We have adopted a
    comprehensive and uniform supervisory process for oversight of these
    larger institutions. For institutions where the FDIC is the primary
    regulator, we generally apply a continuous examination program with
    dedicated staff conducting ongoing, onsite supervisory examinations and
    offsite institution monitoring. Staff works closely with other
    regulators to identify emerging risks across the agencies' portfolio of
    large institutions, assess the overall risk profile of the
    institutions, and promote consistency in supervisory approach.
    ---------------------------------------------------------------------------
        \3\ As of December 31, 2018.
    ---------------------------------------------------------------------------
        The FDIC's Large Insured Depository Institution (LIDI) Program
    remains a primary tool for offsite monitoring of large IDIs, with the
    exception of the most complex IDIs. The LIDI Program provides a
    comprehensive process to standardize data capture and reporting for
    large institutions nationwide, allowing for quantitative and
    qualitative risk analysis. The LIDI Program supports effective large
    bank supervision by using individual institution information to focus
    resources on higher risk areas, determine the need for supervisory
    action, and support insurance assessments and resolution planning.
        The FDIC regularly monitors the potential risks at all IDIs,
    including those for which it is not the primary Federal supervisor.
    Through close coordination and collaboration with the OCC, FRB, and
    various State-bank regulators, the FDIC monitors all institutions to
    ensure the Deposit Insurance Fund (DIF) is not placed at risk, and when
    necessary, exercises the authority to conduct special (backup)
    examination activities of IDI's where the FDIC is not the primary
    regulator.
        For the most complex firms (the Global Systemically Important
    Banks, or G-SIBs), the FDIC has also established a Systemically
    Important Financial Institution (SIFI) Risk Report that is used to
    identify key vulnerabilities and assess capital sufficiency.
    Appropriately Tailoring Regulatory Efforts
        Given the difference in size and complexity at our Nation's
    financial institutions and the continued evolution of the financial
    services industry and our economy as a whole, it is vital that the FDIC
    continuously evaluate the regulatory framework for IDIs.
        Congress directed specific action with respect to regulatory
    tailoring in the Economic Growth, Regulatory Relief, and Consumer
    Protection Act (EGRRCPA). Beyond EGRRCPA, the FDIC has a responsibility
    to regularly revisit prior regulations and guidance to ensure that we
    are appropriately addressing new risks to the system and are not
    imposing unnecessary regulatory burdens that might impede safe and
    secure banking activities. In addition, under the Economic Growth and
    Regulatory Paperwork Reduction Act of 1996 (EGRPRA), the FDIC has a
    responsibility to review our regulations at least once every 10 years
    to identify any outdated,
    unnecessary, or unduly burdensome requirements. To meet the
    congressional
    mandates of EGRRCPA and EGRPRA and our general regulatory
    responsibilities, the FDIC has taken numerous actions over the past
    year to appropriately tailor our regulatory approach to the risk
    presented by the individual institutions we oversee, while maintaining
    requisite safety and soundness and consumer protection.
    EGRRCPA
        Consistent with the statutory mandates in EGRRCPA, the FDIC has
    undertaken targeted changes to simplify the regulatory regime for
    community banks and small and mid-size regional banks based on their
    risk profiles, while maintaining the most robust capital and liquidity
    standards for our Nation's largest, most systemically important banks.
    The FDIC has made considerable progress in implementing the
    requirements of EGRRCPA. For example, the FDIC has issued:

        An interagency proposal to incorporate exemptions from
            appraisal requirements for certain rural transactions (Section
            103);

        A final rule to except a limited amount of reciprocal
            brokered deposits from being reported in Reports of Condition
            (Section 202);

        An interagency proposal to allow reduced reporting
            requirements in the first and third calendar quarters for
            certain institutions (Section 205);

        An interagency interim final rule to treat certain
            municipal obligations as high-quality liquid assets for
            purposes of calculating the liquidity coverage ratio (Section
            403);

        Two interagency proposals to tailor capital and liquidity
            requirements according to risk-based categories, one for
            domestic and one for foreign banking organizations with total
            consolidated assets of $100 billion (Section 401);

        An interagency proposal to amend the supplemental leverage
            ratio for custodial banking organizations (Section 402); and

        An interagency proposal to revise the definition of a high-
            volatility commercial real estate exposure (Section 214).
    Volcker Rule
        Having observed several years of Volcker Rule compliance by FDIC-
    regulated entities, it has become clear that the rule as originally
    constructed is extremely complex and too subjective, resulting in
    uncertainty and unnecessary burden for smaller, less complex
    institutions.
        To address some of these concerns, Congress exempted from the
    Volcker Rule all banks below $10 billion in consolidated assets that do
    not engage in significant trading activity. The five agencies\4\
    responsible for implementing the Volcker Rule have issued a notice of
    proposed rulemaking to fulfill the requirements of Section 203, which
    we expect to finalize soon.
    ---------------------------------------------------------------------------
        \4\ The agencies responsible for implementation of the Volcker Rule
    include the FDIC, OCC, FRB, the Securities and Exchange Commission, and
    the Commodity Futures Trading Commission.
    ---------------------------------------------------------------------------
        Notwithstanding the proposed changes in EGRRCPA, the five agencies
    issued a separate, additional proposal, broadly referred to as Volcker
    2.0. This proposal sought to simplify the rule and reduce the amount of
    subjectivity in its implementation. Benefiting from a review of 151
    comment letters, we are working with our partner agencies toward
    revisions to the Volcker Rule to provide more clarity, certainty, and
    objectivity to market participants.
    Brokered Deposits Advance Notice of Proposed Rulemaking
        The FDIC is undertaking a comprehensive review of our long-standing
    regulatory approach to brokered deposits and the interest rate caps
    applicable to banks that are less than well capitalized. Since the
    statutory brokered deposit and rate restrictions applicable to less-
    than-well-capitalized banks were put in place in 1989 and amended in
    1991, the financial services industry has seen significant changes in
    technology, business models, and products.
        In December 2018, our Board approved an Advance Notice of Proposed
    Rulemaking (ANPR) to seek public comment on all aspects of the FDIC's
    brokered deposit and interest rate regulations with a comment period
    that closed on May 7. In particular, we have heard concerns about the
    current methodology for calculating national rate caps applicable to
    less-than-well-capitalized banks, and we appreciate the urgency
    surrounding this issue. The FDIC is expediting the rate cap component
    of our review with the goal of issuing a proposal for comment and a
    final rule by the end of the year.
    Community Bank Leverage Ratio
        Efforts to comply with Basel III capital standards have imposed
    substantial compliance costs on community banks. In fact, at the time
    of the U.S. Basel III rulemakings, the FDIC, OCC, and FRB found that
    the vast majority of community banks already maintained sufficient
    capital levels to exceed the new minimum thresholds.\5\ The Basel III
    standards, which were intended for internationally active banks, are
    simply too complex and ultimately unnecessary for community banks.
    ---------------------------------------------------------------------------
        \5\ See OCC and the FRB Regulatory Capital Rules: Regulatory
    Capital, Implementation of Basel III, Capital Adequacy, Transition
    Provisions, Prompt Corrective Action, Standardized Approach for Risk-
    weighted Assets, Market Discipline and Disclosure Requirements,
    Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital
    Rule, 78 FR 198 (October 11, 2013).
    ---------------------------------------------------------------------------
        In September 2017, the FDIC took an initial step to streamline the
    capital regime for small banks by issuing the proposed ``capital
    simplification rule'' under EGRPRA.\6\ This proposed rule would modify
    the treatment of mortgage servicing assets, certain deferred tax
    assets, and investments in unconsolidated financial institutions, such
    as Trust Preferred Securities (TruPS), among other provisions. The FDIC
    will finalize this capital simplification proposal in the next few
    weeks.
    ---------------------------------------------------------------------------
        \6\ See FDIC Notice of Proposed Rulemaking Simplifications to the
    Capital Rule Pursuant to the Economic Growth and Regulatory Paperwork
    Reduction Act of 1996, FIL-45-2017 (September 27, 2017), available at:
    https://www.fdic.gov/news/news/financial/2017/fil17045.pdf.
    ---------------------------------------------------------------------------
        In the meantime, Section 201 of EGRRCPA directed the FDIC to
    provide an optional community bank leverage ratio (CBLR) for qualifying
    community banks. The FDIC, OCC, and FRB issued a proposal to implement
    the CBLR in November 2018.\7\
    ---------------------------------------------------------------------------
        \7\ See OCC, FRB, and the FDIC Notice of Proposed Rulemaking,
    Regulatory Capital Rule: Capital Simplification for Qualifying
    Community Banking Organizations, 84 FR 3062 (February 8, 2019),
    available at: https://www.fdic.gov/news/board/2018/2018-11-20-notice-
    sum-b-fr.pdf.
    ---------------------------------------------------------------------------
        Under the proposed CBLR rule, a qualifying bank with less than $10
    billion in consolidated assets would not have to comply with the
    existing risk-based capital requirements if the bank meets a simple
    ratio of tangible equity to total assets. The proposal includes a
    definition of tangible equity that is designed to be very simple to
    calculate and includes high-quality, loss-absorbing capital. In order
    to qualify under the proposal, banks will need to satisfy certain
    activity-related criteria and calculate a simple leverage ratio. This
    approach is most appropriate for small banks with traditional business
    models. Another key feature of the CBLR proposal is that it is
    optional.
        We estimate that over 80 percent of community banks would be
    eligible for the proposed CBLR based on the proposed calibration and
    qualifying criteria. This was a key priority in designing the
    proposal--to ensure that the simple ratio would be available broadly
    and without too many complex restrictions.
        A key burden reducing aspect of the proposal is that the CBLR would
    require a single page of regulatory reporting, a substantial reduction
    from the 15 pages currently required.
        Since the agencies issued the CBLR proposal, we received numerous
    helpful comments and are carefully reviewing each of them. For example,
    we have heard feedback on the CBLR levels proposed as proxies under the
    Prompt Corrective Action (PCA) framework. These proxies were included
    in the proposal as an option for institutions that fall below the CBLR
    to allow them to continue to use the framework. Reverting to Basel III
    based capital calculations at a time when they should be focused on
    addressing their declining capital position could be resource intensive
    and counterproductive for a small bank. We recognize that this has
    caused some concern and are considering how best to proceed with this
    feature of the proposal based upon the comments.
    Stress Tests
        Section 401(a) of EGRRCPA raised the minimum consolidated asset
    threshold for financial company-run stress tests from $10 billion to
    $250 billion. In July 2018, the FDIC, OCC, and FRB gave immediate
    relief from these requirements to banking organizations with less than
    $100 billion in assets. We expect to finalize the proposed rules to
    implement these statutory changes in the coming months.
        The agencies are also considering amendments to the 2012 Stress
    Testing Guidance that would provide for further tailoring of
    supervisory expectations. In particular, the agencies are considering
    raising the asset threshold in the 2012 Stress Testing Guidance to $100
    billion. Under such an approach, banking organizations under $100
    billion in assets would be expected to use appropriate risk management
    processes to address risks in specific subject matter areas rather than
    undertake a general, comprehensive stress-testing framework more
    appropriate for larger firms.
    Resolution Planning
        The FDIC is tasked with resolving failed banks and, if called upon,
    large bank holding companies or other SIFIs. To support this mandate
    and improve their resolvability, the largest bank holding companies are
    required by law to submit resolution plans outlining how they can fail
    in an orderly way under the Bankruptcy Code.
        Since the resolution planning requirements took effect in 2012,
    large firms have improved their resolution strategies and governance,
    refined their estimates of liquidity and capital needs in resolution,
    and simplified their legal structures. For example, the U.S. G-SIBs
    have developed a single-point-of-entry (SPOE) resolution strategy that
    is intended to enable the functioning of critical operations at key
    subsidiaries, while the parent enters a preplanned bankruptcy
    proceeding designed to facilitate the recapitalization of key
    subsidiaries, preserve going concern value, and protect financial
    stability. These firms have also established clean holding companies
    and issued long-term debt which can be converted to equity in the event
    of a failure. These actions help ensure that market participants--not
    taxpayers--bear the risk of loss.
        In addition to the bankruptcy planning requirements for the largest
    U.S. bank holding companies, the FDIC also reviews resolution plans
    filed by larger IDIs planning for resolution under the FDI Act (IDI
    Rule). This work, along with other measures, has improved our readiness
    for these resolutions.
        Based on experience implementing both rules, the FDIC issued two
    proposals in April to build on progress already made and to make the
    resolution process more efficient and effective. The proposals reflect
    my views that resolution planning for the largest institutions is
    critical, and we can make improvements to the process.
        First, the FRB and the FDIC published for public comment a proposal
    that would modify resolution plan requirements for large bank holding
    companies. This proposal implements changes to resolution planning
    requirements under EGRRCPA, and proposes exempting smaller regional
    banks from the rule. The proposal also seeks to codify a reduction in
    frequency of submissions, reflecting the current 2-year filing schedule
    for the largest domestic bank holding companies, and proposes a 3-year
    filing schedule for other filers. The proposal would also allow firms
    to submit targeted plans focused on the most material topics identified
    by the FDIC and FRB, including capital, liquidity, and material changes
    that have occurred in between full submissions. Still, plans submitted
    would remain subject to rigorous review by both agencies.
        Second, the FDIC published for public comment an ANPR that seeks
    comment on potential changes to the IDI Rule. Among other issues, the
    agency is considering whether to revise the threshold for application
    of the rule and to tier the rule's requirements based on the size,
    complexity, or other characteristics of an IDI. The agency is also
    seeking feedback on ways to streamline plan submissions for larger,
    more complex firms and on whether to replace plan submissions with
    periodic engagement and capabilities testing for smaller, less complex
    firms that are subject to the rule.
    The Role of Guidance
        As a supervisor, our rules and expectations should be clear to
    those we supervise. A key aspect of effective supervision is providing
    a level of certainty surrounding compliance with applicable laws and
    regulations.
        Related to this concept, much has been said about the role of
    guidance in our regulatory and supervisory framework. Under the
    Administrative Procedures Act, a rule is defined, in part, as ``an
    agency statement of general or particular applicability and future
    effect designed to implement, interpret, or prescribe law or
    policy.''\8\
    ---------------------------------------------------------------------------
        \8\ U.S.C.  551(4).
    ---------------------------------------------------------------------------
        Separately, there is supervisory guidance. Supervisory guidance can
    be a helpful tool to provide clarity to our regulated institutions and
    to FDIC supervisory staff on how to operate in a safe and sound manner,
    be fair to consumers, and comply with applicable laws and regulations.
    But supervisory guidance documents are not the same as rules, and
    should not be treated as such.
        In September, the FDIC joined several other agencies to issue a
    statement clarifying to examiners and financial institutions that
    institutions cannot be criticized for ``violations'' of guidance, only
    for violations of law, regulation, or other enforceable conditions. We
    have taken a number of steps to ensure our examiners understand this,
    including written instructions, all-hands examiner calls, and in-person
    training. We also are reviewing our outstanding guidance documents, the
    role such guidance documents play in the examination process, and our
    approach to issuing supervisory guidance going forward, including
    compliance with the Congressional Review Act.
    Supervisory Efforts to Ensure Safety, Soundness, and Consumer
            Protection
        As noted, the FDIC is the primary Federal regulator for 3,495
    institutions.\9\ The FDIC also has backup supervisory responsibilities
    under the FDI Act and the Dodd-Frank Wall Street Reform and Consumer
    Protection Act of 2010.\10\ These supervisory activities (whether as a
    primary regulator or in conjunction with our partner agencies) are
    critical to fulfilling our statutory mandate to protect the DIF and to
    ensure the stability of, and public confidence in, the Nation's
    financial system.
    ---------------------------------------------------------------------------
        \9\ As of December 31, 2018.
        \10\ 12 U.S.C. Sections 1820(b)(3) and 1818(t).
    ---------------------------------------------------------------------------
        Supported by our supervision efforts and a strong economy, our
    Nation's banks are stronger than ever. Over the last 10 years, we have
    replenished the DIF to $102.6 billion,\11\ representing a ratio of 1.36
    percent compared to industry estimates of insured deposits. No
    institutions failed in 2018, and none have failed thus far in 2019. The
    FDIC also decreased the number of receiverships under management by 66
    last year, and has terminated an additional nine receiverships this
    year, leaving 263 receiverships under management at this time.
    ---------------------------------------------------------------------------
        \11\ As of December 31, 2018.
    ---------------------------------------------------------------------------
        Our efforts to investigate bank failures and identify possible
    violations of law and regulation help hold banks accountable, as well
    as their officers, directors, and other employees or contractors.
    During 2018 alone, the FDIC recovered $116.3 million from professional
    liability claims and settlements. Recently, the FDIC concluded a
    historic $335 million settlement, tying a record for the largest
    settlement ever by any plaintiff in an accounting malpractice case.\12\
    Working with the Department of Justice, the FDIC also helped collect
    $8.3 million in criminal restitution and forfeiture orders in 2018.
    ---------------------------------------------------------------------------
        \12\ The aggregate amount of the settlement was $395 million, when
    the additional $60 million settlement against another party in the
    action is counted. FDIC Press Release, FDIC Settles with
    PricewaterhouseCoopers LLP on Audits of a Failed Bank, PR-19-2019
    (March 15, 2019). Available at: https://www.fdic.gov/news/news/press/
    2019/pr19019.html.
    ---------------------------------------------------------------------------
        The FDIC also initiates enforcement actions based on unsafe and
    unsound practices or conditions in institutions, violations of law and
    final agreements, and breaches of fiduciary duty, dishonesty or willful
    disregard by institution-affiliated parties. In that regard, the FDIC
    initiated 100 formal enforcement actions in the last year, which
    included 23 cease-and-desist actions, 52 actions to remove individuals
    from the banking industry, and 25 civil money penalties for illegal
    conduct. More than $20 million was provided in restitution to consumers
    affected by improper practices during the year. Taken together, these
    supervisory and enforcement actions help protect our financial system
    and the customers that rely on financial institutions for safe and
    secure products and services.
    Risk Monitoring
        Our supervision efforts also help to identify and mitigate risks to
    the financial system, working both independently and in partnership
    with our fellow regulators. The FDIC is an active participant in the
    Financial Stability Oversight Council (FSOC), working with other
    regulators to monitor activities and events that could pose risks to
    the financial system. These coordinated efforts help to identify
    emerging risks to the financial system and are particularly salient in
    two areas, leveraged lending and cyber threats.
    Leveraged Lending
        With respect to direct exposure to leveraged loans, banks generally
    hold the revolving portion of leveraged transactions, which tends to be
    less risky than the portion held by institutional investors.
    Nonetheless, risks could flow back into banks through pipeline risk,
    indirect exposure through financing to nonbank lenders, and investment
    in collateralized loan obligations (CLOs). In addition, a significant
    rise in leveraged loan defaults could have broader economic impacts
    that affect both bank and nonbank sponsors of leveraged loans, and is
    something the FDIC is carefully monitoring.
        Moreover, the FDIC continues to monitor the risks posed by
    leveraged lending, including developments in the market, growth in
    leveraged lending, concentrations of exposure at financial
    institutions, and associated underwriting standards. We are engaged in
    a continuous dialogue with other regulatory agencies on this matter.
    Cyber Threats
        The FDIC is also actively monitoring cybersecurity risks in the
    banking industry. FDIC examiners conduct examinations to ensure that
    financial institutions are appropriately managing their exposure to
    cybersecurity risk. Our examiners verify that bank management has
    considered how cyber events could disrupt their operations and has
    designed resilience into their operations. To support banks in this
    regard, we recently added two new scenarios to a tool available on our
    website named ``Cyber Challenge.'' Cyber Challenge is a set of ready-
    to-use scenarios and questions to assist banks as they discuss
    operational risk and the potential impact of information technology
    disruptions on banking functions. Notwithstanding these efforts, the
    risks posed by cyber threats remain persistent, and the fight against
    these threats will require continued joint efforts by the public and
    private sectors.
    Transparency
        The FDIC's responsibilities to preserve and promote confidence in
    the financial system and to protect the DIF also require openness and
    accountability to the public and insured institutions. To support these
    principles, we launched the FDIC's ``Trust through Transparency''
    initiative in 2018 and created a new section on the FDIC's public
    website where we publish FDIC performance metrics.\13\
    ---------------------------------------------------------------------------
        \13\ FDIC Transparency & Accountability (October 4, 2018),
    available at: https://www.fdic.gov/transparency/.
    ---------------------------------------------------------------------------
        The site also contains guidelines and decisions related to appeals
    of material supervisory determinations and deposit insurance
    assessments, as well as policies and procedures for how we conduct our
    work. Additionally, we made publicly available information on how our
    case managers and examiners implement the risk-focused supervision
    program. The FDIC is further reviewing our processes to ensure we have
    the proper balance between protecting confidential information and
    providing public access, and we will add to this website over time.
    BSA/AML Compliance
        Bank Secrecy Act and Anti-Money Laundering (BSA/AML) laws and
    regulations are a vital component of U.S. efforts to prevent unlawful
    financial transactions that help fund criminals, terrorists, and other
    illicit actors. These terrorists and criminals use increasingly
    sophisticated methods to conceal their transactions in an evolving
    financial, technological, and regulatory landscape.
        The FDIC and the institutions we supervise for BSA/AML compliance
    recognize the importance of BSA/AML reporting. Nonetheless, the FDIC
    also recognizes that meeting these compliance obligations imposes
    billions of dollars in compliance costs at regulated institutions.
        Considering these costs, we continue to encourage the Financial
    Crimes Enforcement Network (FinCEN) and our partners in law enforcement
    and the intelligence community to actively communicate the importance
    of this reporting and the impact that it has on their efforts to
    detect, deter, and disrupt criminal and terrorist organizations. At a
    recent CBAC meeting, FinCEN provided just such an eye-opening and
    unclassified briefing to CBAC members.\14\
    ---------------------------------------------------------------------------
        \14\ FDIC Transparency & Accountability (October 4, 2018),
    available at: https://www.fdic.gov/transparency/. FDIC Advisory
    Committee on Community Banking: Archived Videos/Webcast of Advisory
    Committee Meeting (March 28, 2019), available at: http://
    fdic.windrosemedia.com/.
    ---------------------------------------------------------------------------
        In addition to these communication and outreach efforts, the FDIC,
    along with the other Federal banking agencies and the Department of the
    Treasury, including FinCEN, have convened a working group to focus on
    initiatives to improve the efficiency and effectiveness of the BSA/AML
    regulatory regime. The working group has already released statements
    encouraging innovation in BSA/AML compliance and identifying areas
    where banks can share compliance resources.\15\
    ---------------------------------------------------------------------------
        \15\ FRB, FDIC, FinCEN, NCUA, and OCC Interagency Statement on
    Sharing Bank Secrecy Act Resources, FIL-55-2018 (October 3, 2018),
    available at: https://www.fdic.gov/news/news/financial/2018/
    fil18055.pdf.
    ---------------------------------------------------------------------------
    CAMELS Ratings
        Since I arrived at the FDIC, I have sought to review longstanding
    processes and procedures that have not received regulatory scrutiny or
    updating in a decade or more to determine if they warrant
    modernization. One such supervisory tool is the interagency CAMELS
    ratings system that has been in place for more than 20 years and is
    vital to our supervisory efforts. Given its maturity and subsequent
    changes in the industry and technology, it is appropriate to ask for
    the public's views on the existing approach, how it has been
    implemented, whether it has been applied
    consistently to institutions of varying sizes, business models,
    complexity, and risk
    profiles, and the impact of various ratings on supervisory actions,
    including
    enforcement proceedings and application reviews. I have asked staff to
    develop options for working with other Federal Financial Institutions
    Examination Council (FFIEC) members to seek the public's input on this
    topic.
    Reducing Community Bank Examination Burden
        The compliance officer at many of our community banks wears many
    hats, and may also be the Chief Financial Officer, a loan officer, and
    a teller. If we can make compliance at our Nation's community banks
    less complex, while maintaining safety and soundness and consumer
    protections, we can help banks focus resources on the business of
    banking their communities, not dealing with bureaucracies. As an
    example, the FDIC was able to archive nearly 60 percent (493) of 837
    pieces of supervisory guidance just by eliminating outdated and
    duplicative documents that had never been archived in more than two
    decades. We were able to take these steps without compromising the
    safety of the institutions or the stability of the financial system as
    a whole.
        We have also incorporated additional risk-focusing and leveraged
    technology in our examinations to reduce the amount of time we are
    onsite at an institution without sacrificing the quality of our
    examinations. Risk-focusing allows our examiners to review information
    from an institution before an examination begins; to gain a better
    understanding of the institution's business model, complexity, and risk
    profile; and to focus resources during an exam on areas that present
    the most risk to the institution or its customers. Technology has
    allowed our examiners to perform some examination activities at the
    local field office instead of onsite at the institution, and we are
    focusing on additional opportunities to take advantage of technology in
    the examination process.
        In 2018, risk-focusing and leveraging technology for consumer
    compliance exams allowed the FDIC to conduct an average of 62 percent
    of our examination offsite. We have incorporated similar risk-focusing
    and technology in our prudential exams, and have cut onsite days from
    27 in 2010 to 23 in 2018. As we train our examiners more on the use of
    these techniques and incorporate new technology, we will further cut
    the costs of our exams on institutions without compromising on quality.
    Leveraging Technology
        The FDIC supports innovation in the financial services industry,
    with particular focus on community banks. To ensure that we are
    prepared to address the changing landscape in financial services, the
    FDIC has dedicated significant resources to identify and understand
    emerging technologies. In October 2018, I announced that the FDIC would
    be launching an office of innovation, which we have since named the
    FDIC Tech Lab, or FDiTech for short.
        While some banks have spent substantial sums on new technology and
    others have partnered with fintechs to expand their products and
    services, many banks--especially smaller banks--have been reluctant or
    simply unable to invest. We have already engaged with banks to
    understand how they are innovating and to promote technological
    development at community banks with limited funding for research and
    development. We are also looking at policy changes that may be needed
    to encourage innovation, while maintaining safe and secure financial
    services and institutions. Rather than play ``catch up'' with
    technological advances, the FDIC's goal is to stay on the forefront of
    changes through increased collaboration and partnership with the
    industry, to promote increased competition in the financial services
    sector, and to support innovation at community banks, including MDIs.
    Modernizing the FDIC
        As the financial services industry changes, the FDIC must evolve.
        Over the last year, we have made significant investments in new
    technology within the FDIC. Our Chief Information Officer has initiated
    a data management initiative that will promote information sharing
    within the FDIC and will enable the application of advanced analytic
    tools to FDIC data sets, including machine learning and artificial
    intelligence.
        We have also established a Supervision Modernization Subcommittee
    for the CBAC. This subcommittee--composed of banks, technologists,
    legal experts, former regulators, and distance learning leaders--will
    make recommendations to the CBAC for improving our supervision
    activities. These recommendations will support new investments in
    technology and improvements in our supervision processes, including how
    we hire, train, and deploy our workforce.
    Maintaining a Diverse Workforce
        As I explained to the FDIC workforce in my inaugural equal
    employment opportunity policy statement, my personal and professional
    experiences have highlighted the importance of a workplace that is free
    from discrimination and that supports diversity and inclusion. The FDIC
    has a long-standing commitment to diversity. The racial, ethnic, and
    gender diversity of the FDIC workforce continues a steady increase
    since 2010 with minority representation at 29.9 percent and with women
    comprising 44.9 percent of permanent employees. We have continued our
    efforts to promote the participation of Minority and Women-Owned
    Businesses in FDIC contracting actions. We will continue to cultivate
    an FDIC that is accessible, inclusive, and diverse, treating everyone
    with dignity and respect while embracing our differences.
    Conclusion
        Most of my professional life has been focused on the financial
    services industry. Before my tenure at the FDIC, I intuitively
    understood how important our Nation's banks were to the economy. But
    until I had real conversations with bankers, their customers, and State
    supervisors on my 50-State listening tour, I did not fully appreciate
    how our banks--particularly community banks--are so intimately involved
    in the fabric of their communities and customers' lives. Across the
    country, these banks help fund a town's grocery stores, barber shops,
    restaurants, local libraries, and small businesses. In rural
    communities and urban settings, our banks provide a critical lifeline
    for low- and moderate-income customers, while supplementing
    infrastructure and social services.
        The FDIC's role is to provide the confidence needed for customers
    to trust those banks with their deposits. Every day, I am proud to join
    my colleagues at the FDIC in fulfilling our mission to preserve and
    promote public confidence in the U.S. financial system. And I would be
    remiss if I did not mention the 6,000 dedicated FDIC employees who go
    to work every morning laser-focused on protecting the stability and
    integrity or our financial system. To them, I am most grateful for
    their warm welcome and for being open to the accountability,
    transparency, and collegiality that make me proud to run such an
    exceptional agency.
        Thank you for the opportunity to testify today, and I look forward
    to your questions.
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

     RESPONSE TO WRITTEN QUESTION OF CHAIRMAN CRAPO FROM JOSEPH M.
                                 OTTING

    Volcker Rule
    Q.1. In October 2018, six Republican Banking Committee Members
    and I wrote to your agencies expressing our support for your
    interagency efforts to revise the Volcker Rule. We also urged
    you to reexamine and tailor the Volcker Rule further, including
    by using the discretion provided by Congress to revise the
    definition of ``covered fund'' or include additional exclusions
    to address the current definition's overly broad application to
    venture capital, other long-term investments and loan creation,
    and address concerns around the proposed accounting prong.

       LWhat are the next steps for considering
            comprehensive revisions to the agencies proposed rule?

    A.1. The next step is to issue a final rule addressing many of
    the comments received on the notice of proposed rulemaking that
    the five Volcker Rule agencies released last year. Agency
    principals, senior management, and staff are actively engaged
    in this rulemaking, and we expect to issue a final rule in
    September 2019.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JOSEPH M.
                                 OTTING

    Meeting Schedule
    Q.1. Please provide to the Committee a detailed list of all
    meetings with individuals or groups not directly affiliated
    with the agency you serve, from the date of your confirmation
    by the Senate to present.

    A.1. To be more efficient and avoid wasteful use of limited
    Government resources, I invite you to be more descriptive of
    any particular items you are interested in reviewing.
    Leveraged lending
    Q.2. In a letter dated May 13, 2019, I asked you to be prepared
    to share detailed responses to the leveraged lending questions
    in my April 11, 2019, letter to Financial Stability Oversight
    Council (FSOC) Chair Mnuchin and to provide supporting data to
    the Committee as part of your testimony. While I understand
    from the OCC's and FDIC's written testimony that they will
    continue to monitor leveraged lending risks, you did not
    provide information in response to my specific questions.
    Please provide detailed responses to the five questions in my
    May 13, 2019, and April 11, 2019, letters.

    A.2. Questions from May 13, 2019, and April 11, 2019, letter:
    `` . . . Regulators must demonstrate that they are responding
    to threats to financial stability before the real economy
    suffers. To that end, please provide me the following . . . ''

            1.-3. Any analyses of the leveraged lending market that
            the Council and its member agencies have performed in
            the last 2 years; any other Council documents
            discussing the risks of leveraged lending and staff
            recommendations to address those risks; and a list of
            all Council meetings where leveraged lending was
            issued, including the dates of those meetings,
            attendees, and materials presented.

            Response: The OCC regularly monitors sources of
            industry-prepared information on the leveraged lending
            market, including data on market volumes and trends,
            market participants, and lending terms and conditions.
            The OCC uses this information, together with
            supervisory findings from institutions within the
            Federal banking system, as a basis for discussions of
            risks within the OCC and with fellow regulators and
            regulated institutions. The information is also used to
            determine whether additional supervisory
            actions are warranted. This information supplements
            discussions held by the OCC's National Commercial
            Credit Committee (NCCC), which informs the OCC's
            National Risk Committee. Leveraged lending has been
            discussed at quarterly NCCC meetings over the past 2
            years.

            In addition, the OCC has discussed leveraged lending in
            the Spring 2019 and Fall 2018 Semiannual Risk
            Perspectives.

               LThe Spring 2019 Semiannual Risk Perspective
            is available at https://occ.gov/news-issuances/news-
            releases/2019/nr-occ-2019-49.html. See page 18.

               LThe Fall 2018 Semiannual Risk Perspective
            is available at https://occ.gov/news-issuances/news-
            releases/2018/nr-occ-2018-131.html. See pages 13-15 and
            24.

            The Treasury Secretary or FSOC staff are best
            positioned to address any FSOC documents discussing
            leveraged lending, staff recommendations, and lists of
            meeting dates, attendees, and materials.

            4. A list of supervisory or other actions that the
            Council and its member agencies have taken at regulated
            institutions in order to address risks in the leveraged
            lending market, especially with regard to weak
            underwriting standards.

            Response: The OCC, together with the Federal Reserve
            System and the Federal Deposit Insurance Corporation
            (the banking agencies), conducts semiannual Shared
            National Credit (SNC) examinations in the first and
            third quarters of the calendar year to provide a
            periodic credit risk assessment of the largest and most
            complex credit facilities owned or agented by
            supervised institutions. The 2018 SNC Report, prepared
            using the results from the 2018 reviews, concluded that
            risks associated with leveraged lending activities are
            building in contrast to the SNC portfolio overall. The
            SNC reviews in 2018 found that many leveraged loan
            transactions possess weakened transaction structures
            and increased reliance upon revenue growth or
            anticipated cost savings and synergies to support
            borrower repayment capacity. The January 2018 SNC
            Report is available at https://occ.gov/news-issuances/
            news-releases/2019/nr-ia-2019-8.html. The 2017 SNC
            Report is available at https://occ.gov/news-issuances/
            news-releases/2017/nr-ia-2017-90.html.

            The banking agencies issue a public report based on SNC
            findings on an annual basis. In addition, the OCC
            issues nonpublic bank specific supervisory letters or
            reports of examination to address findings related to
            leveraged lending. SNC results and other regulatory
            activities relating to leveraged lending are used to
            provide consistent messages to bankers and the banking
            industry.

            The OCC continues to assess leveraged lending risk
            regularly through supervisory activities by applying
            safety and soundness principles and standards for
            prudent risk management. OCC findings show that banks
            have satisfactory risk tolerance, appropriate oversight
            activities, and adequate capital and appropriate loan
            loss allowance levels. Leveraged loan default and loss
            rates also remain low. Despite current indicators of
            banks' strong credit quality, the OCC remains concerned
            about weakened loan underwriting, particularly the
            declining presence of key covenants in first-lien
            leveraged loans and the existence of
            no-covenant loans.

            The OCC is attentive to indirect potential risks
            affecting a leveraged borrower's ability to repay,
            including the indirect impact from a borrower's
            critical vendors or suppliers that are highly leveraged
            even when the borrower is not. The OCC is also
            concerned about the potential systemic impact
            associated with the broader credit market creating more
            risk than can be absorbed through normal market
            activities. The OCC expect banks not only to evaluate
            their individual role but also to additionally monitor
            market conditions that may indicate unacceptable levels
            of credit risk.

            Notably, most of the lower-quality leveraged loan
            exposure is held outside of the regulated banking
            system where there is much less transparency, making it
            difficult for Federal banking supervisors to monitor
            and manage on a systemic basis.

            5. A description of how FSOC is monitoring leveraged
            lending markets and what actions it plans to take to
            protect the economy from threats in credit and lending
            markets.

            Response: The Treasury Secretary or FSOC staff are best
            positioned to address any FSOC documents discussing
            leveraged lending or staff recommendations. Please see
            responses to Questions 1, 2, and 3 above.
    Leveraged lending guidance
    Q.3. Vice Chair Quarles said during the hearing that your
    agencies are concerned about the right regulatory response to
    developments in underwriting of leveraged loans, and have
    identified underwriting practices that need to improve. How
    have you clarified to banks agency expectations for safe and
    sound underwriting practices if the 2013 leveraged lending
    guidance that describes expectations for the sound risk
    management of leveraged lending activities no longer has any
    legal effect? What are your current expectations?

    A.3. While the 2013 guidance never had the force of law or
    rule, it continues to provide sound principles regarding
    prudent risk management practices associated with leveraged
    lending. The OCC has clarified to bankers and examiners that
    guidance should not be the basis of matters requiring attention
    or enforcement actions. OCC supervision continues to assess
    risk and apply safety and soundness principles and standards to
    banks' leveraged lending activities. We expect that banks will
    manage risk in a manner commensurate with the risk of their
    leveraged lending activities and portfolios.
    CRA
    Q.4. During the hearing in response to a question from Senator
    Cortez Masto you discussed an op-ed your Deputy Comptroller for
    Community Affairs wrote in March accusing ``certain
    stakeholders'' of distorting facts and making ``misleading
    claims'' that ``hindered the constructive public dialogue about
    CRA reforms.'' You doubled down on the content of that op-ed in
    a speech to the Consumer Bankers' Association. You said that it
    was ``folklore'' that the OCC wanted to have one metric to
    measure CRA compliance, and that there was one group that
    spread that rumor. But the ANPR the OCC released asked five
    questions about a ``metric-based framework approach,'' and in
    response to a question before this Committee during a previous
    hearing you said that the proposed ratio would start to make a
    CRA determination at a macro level.

    Q.4.a. Do you think it is appropriate for a Federal agency to
    use its official platform to attempt to undermine the
    credibility of comments received in response to an open comment
    period outside of the formal Administrative Procedure Act
    process?

    A.4.a. The OCC welcomes any and all comments related to
    improving CRA regulations and promoting CRA activity to help
    underserved populations. In our letter to Senator Cortez Masto
    (Attachment 1), the OCC detailed its concerns with inaccurate
    public statements made outside the rulemaking process that if
    left uncorrected would lead to additional confusion and
    misinformed perceptions.
        Federal officials have a responsibility to correct
    inaccuracies of public statements and reports that undermine
    policies, programs, and activities that they are responsible
    for conducting. The OCC objects to those who mischaracterize
    the August 2018 Advanced Notice of Proposed Rulemaking (ANPR)
    by wrongly suggesting the ANPR proposed to weaken CRA. The OCC
    seeks to strengthen CRA and make the regulations work better
    for everyone. The ANPR sought comment on 31 questions which
    solicited input from all stakeholders on ways to improve CRA
    regulations.
        The Op-Ed by the Deputy Comptroller for Community Affairs
    and my public statement corrected inaccurate public statements
    made in the press and online about the rulemaking process and
    the OCC's intentions related to modernizing Community
    Reinvestment Act regulations. Those misstatements were made in
    a variety of media and were not exclusive to comments received
    in response to an open comment period outside of the formal
    Administrative Procedure Act process. Comments received in
    response to the ANPR will be addressed in accordance with the
    Administrative Procedure Act process.

    Q.4.b. During the hearing, you told Senator Cortez Masto that
    the group that was the subject of the op-ed was putting out
    ``false information.'' Could you please detail what information
    you believe was false?

    A.4.b. Our letter to Senator Cortez Masto (Attachment 1) lists
    the following examples of false claims made outside the
    rulemaking comment process regarding the OCC's effort to
    modernize CRA regulations and the ANPR issued in August 2018
    that include:

       LFalse claims that the ANPR proposed ``gutting'' the
            Community Reinvestment Act, when the ANPR made no
            proposal at all;\1\
    ---------------------------------------------------------------------------
        \1\ See http://calreinvest.org/press-release/california-community-
    groups-resist-trump-appointees
    -rollback-of-regulations-put-in-place-to-stop-redlining-and-
    discrimination/.

       LFalse claims that the OCC proposed a ``single
            ratio'' that would ``water down requirements,'' when no
            proposal had been made;\2\, \3\
    ---------------------------------------------------------------------------
        \2\ See http://calreinvest.org/press-release/wall-street-and-big-
    banks-set-to-win-big-from-propos-
    ed-rollback-of-redlining-law/.
        \3\ See https://www.nytimes.com/2018/08/28/opinion/trump-mortgage-
    redlining-cra.html.

       LFalse claims that the OCC proposed to eliminate
    ---------------------------------------------------------------------------
            assessment areas and remove the role of branches;

       LFalse claims that the OCC proposal intended to
            reduce CRA activity resulting in the losses of billions
            of dollars that was based on the notion of eliminating
            CRA eligibility entirely, which has never been
            proposed.\4\, \5\
    ---------------------------------------------------------------------------
        \4\ See http://calreinvest.org/press-release/california-community-
    groups-resist-trump-appointees-
    rollback-of-regulations-put-in-place-to-stop-redlining-and-
    discrimination/.
        \5\ See https://ncrc.org/testimony-of-jesse-van-tol-ceo-national-
    community-reinvestment-coalition-
    april-9-2019-consumer-protection-and-financial-institutions-
    subcommittee/.

       LFalse claims that I have pursued an agenda to
            silence community voices by dismantling the CRA, when
            the agency and I have actively sought ideas and
            provided a means for formal input by all.\6\
    ---------------------------------------------------------------------------
        \6\ See http://calreinvest.org/press-release/crc-statement-on-
    joseph-otting-appointment-as-acting-
    director-of-fhfa.

    Q.4.c. Please provide any other examples of a Federal
    regulatory agency attempting to publicly discredit the comments
    received during an open rulemaking before that agency had
    Formally addressed those comments through the Administrative
    ---------------------------------------------------------------------------
    Procedure Act process.

    A.4.c. I am not familiar with other agencies rulemaking
    processes or actions, nor has the OCC attempted to discredit
    comments received in response to any rulemaking.
    HMDA
    Q.5. The last time you were before this Committee you told us
    that when the OCC starts a CRA exam, you review the
    institution's HMDA data. The CFPB has proposed to eliminate
    HMDA reporting requirements for what the CFPB estimates will be
    more than 200 OCC-supervised institutions, and more than 1,700
    institutions across all regulators.
        In the absence of HMDA data, what other specific sources of
    data will provide you the information necessary to evaluate
    institutions' fair lending and CRA performance?

    A.5. Non-HMDA reporting banks are required to identify and
    produce samples of mortgage loan files for review by examiners.
    Examiners then extract and analyze loan data from those files
    in order to evaluate CRA performance or assess compliance with
    fair lending laws.
    Appraisals
    Q.6. In December 2018, the OCC, the Federal Reserve, and the
    FDIC jointly proposed to increase their agencies' appraisal
    threshold on residential mortgage loans from $250,000 to
    $400,000.\7\ Lenders would instead be required to obtain an
    evaluation for any mortgage loan below $400,000 not otherwise
    subject to requirements by the mortgage insurer or guarantor or
    the secondary market.\8\
    ---------------------------------------------------------------------------
        \7\ See ``Real Estate Appraisals,'' 83 FR 63110. December 7, 2018,
    available at https://www.federalregister.gov/documents/2018/12/07/2018-
    26507/real-estate-appraisals.
        \8\ Id.
    ---------------------------------------------------------------------------
        This proposal comes less than 2 years after the OCC, the
    Federal Reserve, the FDIC, and the CFPB rejected an increase in
    the residential loan appraisal threshold based on
    ``considerations of safety and soundness and consumer
    protection'' in their Economic Growth and Regulatory Paperwork
    Reduction Act (EGRPRA) report.\9\ This proposal also goes far
    beyond legislation enacted by Congress to provide appraisal
    exemptions in rural areas.
    ---------------------------------------------------------------------------
        \9\ Joint Report to Congress: Economic Growth and Regulatory
    Paperwork Reduction Act. Federal Financial Institutions Examination
    Council, March 2017. pg. 36, available at http://www.ffiec.gov/pdf/
    2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf.
    ---------------------------------------------------------------------------
        As you know, the Financial Institutions Reform, Recovery,
    and Enforcement Act of 1989, as amended by the Dodd-Frank Wall
    Street Reform and Consumer Protection Act, requires the Federal
    banking regulators charged with setting appraisal exemption
    thresholds to receive concurrence from the CFPB to ensure that
    ``such threshold level provides reasonable protection for
    consumers'' before any amendment.\10\
    ---------------------------------------------------------------------------
        \10\ 12 U.S.C. 3341(h).

    Q.6.a. Did the Federal banking agencies confer with staff or
    leadership at the CFPB or seek CFPB's concurrence before
    issuing the proposal to increase the appraisal exemption
    threshold? If not, at what point in the regulatory process do
    Federal banking agencies seek concurrence with the CFPB on
    ---------------------------------------------------------------------------
    appraisal threshold changes?

    A.6.a. The Federal banking agencies consulted with the CFPB
    throughout the development of the proposed rule. As a member of
    FDIC's board, the CFPB Director voted to adopt the proposed
    rule, reserving the bureau's statutory concurrence
    determination for the final rule. As the Federal banking
    agencies work toward completion of a final rule, we have
    continued to consult with the CFPB concerning the consumer
    issues and CFPB concurrence, and we will obtain CFPB's
    concurrence determination prior to finalization of any rule to
    increase the appraisal exemption threshold, as required by
    Title XI of FIRREA.

    Q.6.b. In the background for the proposed rule, the Federal
    banking agencies stated they did not increase the residential
    real estate appraisal exemption threshold during the EGRPRA
    process because the change would have a ``limited impact on
    burden reduction due to appraisals still being required for the
    vast majority of these transactions pursuant to the rules of
    other Federal Government agencies and the GSEs; safety and
    soundness concerns; and consumer protection concerns.''\11\ Is
    your agency aware of any changes in the real estate market or
    in appraisal or evaluation services that would affect its
    safety and soundness or consumer protection concerns, cited in
    the EGRPRA report, with increasing the residential mortgage
    appraisal threshold above $250,000? If so, please detail these
    changes.
    ---------------------------------------------------------------------------
        \11\ ``Real Estate Appraisals,'' 83 FR 63110, December 7, 2018.

    A.6.b. After issuing the EGRPRA report, the agencies continued
    to receive comments from financial institutions and State-
    banking regulatory agencies about delays in the appraisal
    process and shortages of appraisers in certain regions of the
    country. In December 2018, the agencies issued a proposed rule
    to increase the appraisal threshold for commercial real estate
    transactions that specifically asked whether an increase in the
    residential appraisal threshold would provide meaningful
    regulatory relief.\12\ Based on the comments received, and
    after an analysis of safety and soundness and consumer
    protection factors, the agencies reconsidered their earlier
    view and proposed an increase in the residential appraisal
    threshold to offer burden relief to financial institutions and
    consumers.\13\
    ---------------------------------------------------------------------------
        \12\ Id.
        \13\ See ``Real Estate Appraisals,'' 83 FR 15019 (April 9,
    2018)(final rule).
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM JOSEPH
                               M. OTTING

    Q.1. Earlier this year at an industry event in Los Angeles, you
    said that the OCC was taking the lead on writing a rule to rein
    in risky incentive-based compensation practices at large
    financial institutions that reward senior bank executives for
    irresponsible risk-taking.\1\
    ---------------------------------------------------------------------------
        \1\ https://www.politico.com/newsletters/morning-money/2019/04/30/
    trump-sues-banks-to-block-subpoenas-430188.

    A.1. In contrast to the characterization above, I stated I
    would work to fulfill our statutory obligation to issue an
    ---------------------------------------------------------------------------
    incentive-based compensation as required by the Dodd-Frank Act.

    Q.1.a. Have you initiated meetings or outreach to any regulated
    institutions and stakeholders? If so, did any of these
    regulated institutions receive taxpayer bailouts during the
    financial crisis?

    A.1.a. The OCC has not initiated any such meetings or outreach.

    Q.1.b. Have you held meetings or solicited comments from any
    consumer or taxpayer advocates?

    A.1.b. No. Comments will be solicited as part of the rulemaking
    process.

    Q.1.c. Have all six financial regulators met to discuss
    rulemaking?

    A.1.c. I have met with my counterpart at the SEC and discussed
    with the Federal Reserve Board and FDIC. I look forward to
    working with the heads of the other relevant agencies as we
    develop a proposed rule.

    Q.2. I am also concerned that legal marijuana businesses will
    continue to find themselves unable to access insurance
    products, a necessity for those looking to secure financing.
        Would it be helpful for Congress to consider the role of
    insurance companies as States move toward legalization?

    A.2. The OCC would support a Federal legislative solution that
    would specifically address banking and other financial services
    (including insurance) provided to marijuana-related businesses
    operating in States where marijuana use is legal.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS FROM JOSEPH M.
                                 OTTING

    Q.1. In my State of South Dakota, farmers, ranchers, energy
    producers, and others use derivatives to manage risks and
    fluctuating commodity prices. It is critical for these
    producers to have access to markets and products that are as
    competitive and cost-effective as possible. Not only does this
    benefit agriculture and energy producers, it also benefits
    American consumers across the country who depend on stable
    prices as they go about their daily lives.
        Recently, the CFTC Commissioners submitted the attached
    joint comment letter in response to the SA-CCR proposed
    rulemaking, and I share in the concerns raised by these
    regulators who noted that, in its current form, the
    supplementary leverage ratios (SLR) ``is working
    counterproductively, limiting access to derivatives risk
    management strategies and discouraging the central clearing of
    standardized swap products.''
        The current SLR calculation fails to acknowledge the risk-
    reducing impact of client initial margin in its calculation,
    resulting in an inflated measure of the clearing member's
    exposure for a cleared trade.
        The SA-CCR rulemaking provides an important opportunity to
    address these concerns, and to work with your fellow regulators
    who directly monitor and regulate the derivatives markets.

    Q.1.a. Have you reviewed the attached joint comment letter from
    the CEUC Commissioners?

    A.1.a. The OCC did receive the comment letter from the CFTC
    Commissioners and is reviewing the concerns raised along with
    the other comments received on the notice of proposed
    rulemaking.

    Q.1.b. Have you had any direct conversations with the CFTC
    Commissioners about this matter and the concerns they raised?

    A.1.b. I do not recall having any direct conversations with the
    CFTC Commissioners on the concerns raised in their letter.

    Q.1.c. Will you commit to continuing to work with your fellow
    regulators to address the concerns they have raised about the
    SLR moving forward?

    A.1.c. Yes. OCC is committed to working with our fellow
    regulators to review the comments and consider the
    commentators' concerns as we develop a final rulemaking for SA-
    CCR.
        I strongly support the efforts of the CFTC Commissioners,
    who are in agreement that the SLR must acknowledge the risk-
    reducing impact of client initial margin in its calculation,
    and I urge you to continue working with your fellow regulators
    on this critical issue.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM JOSEPH M.
                                 OTTING

    Q.1. Your agencies regulatory approach to inter-affiliate
    margin transactions is an outlier. The margin requirements have
    the effect of locking up capital that could otherwise be used
    for economic growth and they discourage centralized risk
    management practices among firms. In addition, the current
    approach results in the movement of collateral out of the U.S.
    insured depository institutions. These are all suboptimal
    policy outcomes. Regulatory
    authorities in the European Union, Japan, and most other G20
    jurisdictions each currently provide such an exemption for
    these transactions. You have indicated you are aware of the
    issue but, to date, I've seen no official action from your
    agencies to fix the problem.
        The recognition for the need for an exemption began under
    regulators nominated by President Obama. In 2013, CFTC Chairman
    Gary Gensler provided an exemption for central clearing and
    trade execution. In 2015, CFTC Chairman Tim Massad provided an
    exemption, determining that initial margin was not warranted
    and it was a ``very costly and not very effective way'' to
    enhance risk management. Yet, your agencies did not provide an
    exemption from initial margin in the 2016 margin rules, and as
    a result, as of the end of last year, U.S. banking entities
    collected nearly $50 billion in
    initial margin from their own affiliates. In 2017, the Treasury
    Department noted that this rule puts U.S. firms at a
    disadvantage both domestically and internationally,
    recommending that your agencies provide an exemption consistent
    with the margin requirements of the CFTC.

    Q.1.a. Do you agree that an exemption from initial margin is
    appropriate for inter-affiliate transactions?

    A.1.a. Yes.

    Q.1.b. Will you prioritize a rule to provide an exemption for
    inter-affiliate transactions, separate from any broader
    regulatory effort such as a Regulation W rewrite?

    A.1.b. That is our intent.

    Q.1.c. Please provide an explicit timeline for when your
    agencies will take action.

    A.1.c. I anticipate completing this action this year.

    Q.2. The reason a ``Reg W'' rewrite is suboptimal is that it
    will be counter-productive and slow. This capital needs to be
    released soon because we have geopolitical risk emerging over
    the world that could destabilize markets. If we have a Brexit,
    the number of entities will double and more capital will be
    unfairly sequestered. With potential trade volatility, Middle
    East uncertainty, and other risks, our banks need to be able to
    use capital for risk management, not have it trapped for no
    reason.
        The Current Expected Credit Loss (CECL) accounting standard
    poses significant compliance and operational challenges for
    banks.

    Q.2.a. Roughly how many of institutions that your agency
    supervises will be subject to the new CECL accounting standard?

    A.2.a. Roughly 1,200 OCC-supervised institutions will be
    subject to CECL.

    Q.2.b. What is the overall impact considering their nonbank and
    nonfinancial clients are also subject to the rule--considering
    the indirect impacts such as impairment of trade receivables
    pledged as loan collateral for a medium-sized business?

    A.2.b. CECL does not affect a borrower's cash-flows or the fair
    value of collateral; therefore, CECL should not affect how
    banks assess a borrower's credit worthiness. We expect banks to
    continue to work with borrowers and serve their communities.

    Q.2.c. There are many analyses publicly available related to
    the FASB's CECL proposal, but none have an approximation for
    the number of U.S. GAAP filers who will be affected and the
    overall macro impact--does your agency know the covered
    universe?

    A.2.c. FASB's accounting standards apply to all entities that
    prepare financial statements in accordance with U.S. generally
    accepted accounting principles (GAAP). This includes
    approximately 5,400 FDIC-insured depository institutions.

    Q.2.d. Are you confident that the banks you supervise are ready
    to implement CECL smoothly, given the balance sheet and
    operational costs involved?

    A.2.d. We are actively monitoring institutions' CECL
    implementation readiness through our supervisory process and
    welcome an
    opportunity to discuss our assessment of the industry's overall
    readiness to implement CECL.

    Q.2.e. Other than allowing the banks to integrate CECL reserves
    into regulatory capital over 3 years, are your agencies doing
    anything to assess the impact of CECL on the availability of
    financing?

    A.2.e. Yes. We are actively monitoring the potential impact of
    CECL on the U.S. banking system, including the availability of
    financing. We continue to have ongoing dialogue with
    institutions, their auditors, industry groups, and third-party
    service providers, and conducted a series of educational
    outreach events since the standard was established. We welcome
    an opportunity to discuss our overall observations from these
    monitoring activities.

    Q.2.f. Would you agree that a FASB accounting change should not
    result in either an increase or decrease in the loss absorbency
    a bank holds against any given loan?

    A.2.f. Yes. While the OCC uses GAAP financial statements as a
    starting point for assessing an institution's financial
    condition, the final supervisory judgment on a bank's capital
    adequacy is based on an individualized assessment of numerous
    factors. Institutions should maintain capital commensurate with
    the level and nature of all risks to which the institution is
    exposed.

    Q.3. According to a GAO report (May 2019) entitled ``Bank
    Supervision: Regulators Improved Supervision of Management
    Activities but Additional Steps Needed,'' ``enterprise
    governance and operations'' constituted about 11 percent of all
    OCC MRA concerns. Similarly, internal reports from the U.S.
    Federal bank regulators for 2016 through 2017 showed that
    corporate governance issues were among the most common
    categories for issued supervisory concerns.

    Q.3.a. In the interest of greater transparency and
    accountability in the supervisory process, including, with
    respect to how the agencies use guidance and employ their
    significant discretion in the examination process, please
    describe, on an anonymous basis, some examples of these MRAs,
    and the grounds on which such MRAs were determined to be
    warranted (e.g., what laws, regulations and/or guidance were
    implicated and the risks posed by the corporate governance
    practice at issue).

    A.3.a. MRAs regarding enterprise governance and operations can
    pertain to a bank's audit program, internal controls, financial
    reporting, board and management oversight, and other
    enterprise-wide weaknesses. Regulations such as 12 CFR 30 and
    12 CFR 363 serve as the basis for many enterprise governance
    and operations MRAs.

    Q.3.b. Please describe whether the Interagency Statement
    Clarifying the Role of Supervisory Guidance has had an impact
    on examination practices at your agency and, if so, explain
    how.

    A.3.b. The OCC's practices already aligned with the approach
    explained in the Interagency Statement. Therefore, the
    Interagency Statement served as a reminder to OCC examiners,
    but did not have a significant impact on the OCC's supervision.

    Q.3.c. Is there a review process at your agency to assure that
    there are no instances where examiners have wielded guidance,
    examination handbooks or policy statements with the power
    reserved for rules or laws (i.e., basing MRAs or MRIAs or
    violations on them)?

    A.3.c. Examination conclusions require review and approval by
    authorized OCC officials before conclusions are finalized and
    provided to the bank. The OCC's bank supervision quality
    management programs are designed to ensure that the agency
    achieves its objectives for bank supervision. Last, the OCC's
    bank appeals process provides bankers with an opportunity to
    appeal examination conclusions to the Ombudsman, who is
    independent of the bank supervision units.

    Q.3.d. What assurance do you have that MRAs have not been based
    on guidance examination handbooks, or policy statements?

    A.3.d. I am confident in the assurance provided by the OCC's
    review, quality management, and appeals processes.

    Q.3.e. What type of study/survey/review could the agencies or
    industry permissibly conduct to assess whether examiners have
    wielded guidance, examination handbooks, or policy statements
    with the power typically reserved for rules or laws?

    A.3.e. Such a survey or review is unnecessary based on the
    controls and quality review processes in place.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM JOSEPH M.
                                 OTTING

    Q.1. On May 14, 2019, you sent me a letter about the Office of
    the Comptroller of the Currency's (OCC) plans to review the
    selection of a new Chief Executive Officer (CEO) and President
    at Wells Fargo bank.\1\ In your letter, you informed me that
    the OCC would conduct a review of the new Wells Fargo CEO
    pursuant to the standards of 12 CFR 5.51--regulations, which
    outline the process by which the OCC can disapprove of the
    hiring of senior executive officials at banks in ``troubled
    condition.''\2\ The OCC defines ``troubled condition'' as ``a
    national bank or Federal savings association that . . . is
    subject to a cease and desist order, a consent order, or a
    formal written agreement, unless otherwise informed in writing
    by the OCC.''\3\ Wells Fargo Bank, NA, is also subject to three
    open OCC consent orders from 2015, 2016, and 2018.\4\
    ---------------------------------------------------------------------------
        \1\ Letter from Joseph M. Otting, Comptroller of the Currency, to
    Senator Elizabeth Warren, May 14, 2019.
        \2\ 12 C.F.R.  5.51.
        \3\ Id.
        \4\ Letter from Joseph M. Oiling, Comptroller of the Currency, to
    Senator Elizabeth Warren, April 3, 20l9, http://www.warren.senate.gov/
    imo/media/doc/2019.04.03%20OCC%20Response%
    20to%20Letter%20to%20OCC%20and%20CFPB%20re%20Wells%20Fargo%20Auto%20Lend
    ing%
    20Settlement.pdf.
    ---------------------------------------------------------------------------
        Your letter also stated, however, that Wells Fargo was not
    technically subject to the requirements of 12 CFR 5.51.
    According to your letter, ``[a]t the time of the November 2015
    and September 2016 Consent Orders, the OCC generally did not
    subject banks to troubled condition-related regulatory
    consequences, including 12 CFR. 5.51, in cases where the
    enforcement addressed largely compliance-related deficiencies
    that did not significantly impact the
    financial condition of the bank.''\5\ Then, in November 2017,
    the OCC ``adopted a policy (PPM 5310-12) that formally aligned
    the OCC's policy with that of other Federal banking agency's
    regulatory definitions of troubled condition, which are more
    express in tying a troubled condition designation to the
    financial condition of the institution.''\6\ This policy
    applied to the April 2018 consent order against Wells Fargo.
    ---------------------------------------------------------------------------
        \5\ Id.
        \6\ Id.
    ---------------------------------------------------------------------------
        PPM 5310-12 states that the ``OCC's general policy with
    respect to a bank subject to an enforcement action . . . is to
    inform the bank in writing that it . . . is not in troubled
    condition for purposes of 12 CFR 5.51 . . . unless the
    enforcement action requires the bank to take action to improve
    the financial condition of the bank.''\7\
    ---------------------------------------------------------------------------
        \7\ OCC PPM 5310-12.

    Q.1.a. Why does the OCC limit the application of 12 CFR. 5.51
    to banks facing an enforcement action requiring it to improve
    ---------------------------------------------------------------------------
    the bank's financial condition?

    Q.1.b. In your letter, you noted that the OCC's policy under
    PPM 5310-12 aligns the OCC with the regulations of other
    Federal banking regulators, including the Federal Deposit
    Insurance Corporation (FDIC) and the Federal Reserve, that make
    clear that the term ``troubled condition'' refers to banks
    facing enforcement actions related to their financial
    condition.

    Q.1.c. Does the OCC have plans to rewrite its regulations at 12
    CFR 5.51 to more clearly align its regulations with other
    regulators, or will it continue to rely exclusively on PPM
    5310-12 to justify its policy?

    A.1.a.-c. Initially, it should be noted that the following
    statement from your question above is incorrect ``In your
    letter, you informed me that the OCC would conduct a review of
    the new Wells Fargo CEO pursuant to the standards of 12 CFR
    5.51 . . . '' [emphasis added]. Rather, my May 14, 2019, letter
    (the Letter) to you explains how Wells Fargo Bank, NA (Bank) is
    subject to an April 2018 Consent Order from the OCC that
    amongst other things, ``requires the Bank to obtain a prior
    written determination of no supervisory objection from the OCC
    with respect to the appointment of any individual as a senior
    executive officer, including the President and CEO.''
        Additionally, the Letter explicitly states that: ``As
    described in the Comptroller's Licensing Manual, the OCC will
    disapprove an individual proposed as a senior executive officer
    if the OCC determines, on the basis of the individual's
    `competence, experience, character, or integrity,' that it
    would `not be in the best interests of the bank's depositors or
    the public to permit the individual to be employed by' the
    bank. This is also the standard of review for requests to
    appoint senior executive officers that are required to be filed
    under 12 C.F.R.  5.51.'' These statements from the Letter thus
    distinguish the actual actions the OCC will take pursuant to
    the 2018 Consent Order from your question's conclusory
    statement ``that the OCC would conduct a review of the new
    Wells Fargo CEO pursuant to the standards of 12 CFR 5.51.''
        A bank that is in troubled condition for purposes of 12 CFR
    5.51 is subject to requirements for changes in directors and
    for senior executive officers in 12 CFR 5.51 and restrictions
    on golden parachute payments in 12 CFR 359.\8\ As you noted,
    the OCC generally does not cause a bank to be in troubled
    condition for purposes of 12 CFR 5.51 as a result of an
    enforcement action unless the enforcement action requires
    action to improve the financial condition of the bank. This
    policy is in parity with the regulations of other Federal
    banking agencies and applies troubled condition restrictions to
    those institutions facing financial difficulties, which
    furthers the intended purposes of the troubled condition
    restrictions. The purpose of the regulation restricting golden
    parachutes is to limit and/or prohibit, in certain
    circumstances, the ability of insured depository institutions,
    their subsidiaries and affiliated depository institution
    holding companies to enter into contracts to pay and to make
    golden parachute and indemnification payments to institution-
    affiliated parties.\9\ This regulation thus operates to protect
    the capital of banks by preventing banks with limited capital
    from making payouts to executives when it cannot afford to do
    so. This policy also provides the OCC with flexibility to use
    other supervisory tools, such as enforcement actions, that
    allow more targeted and appropriate application of restrictions
    to those responsible for the regulatory problems.
    ---------------------------------------------------------------------------
        \8\ A bank that is subject to the restrictions on golden parachute
    payments in 12 CFR 359 is required to obtain the approval of the OCC
    and, in most cases, the concurrence of the FDIC prior to making a
    golden parachute payment to any institutionalized party.
        \9\ 61 Fed. Reg. 5930.
    ---------------------------------------------------------------------------
        The OCC is in the process of revising its definition of
    troubled condition at 12 CFR 5.51(c)(7) to align the OCC's
    definition of troubled condition with the definitions of
    troubled condition in regulations of the Federal Reserve and
    FDIC. A revision would provide greater clarity to OCC-
    supervised banks regarding when an enforcement action will
    cause the bank to be in troubled condition.
                                    ------

     RESPONSE TO WRITTEN QUESTION OF SENATOR MORAN FROM JOSEPH M.
                                 OTTING

    Q.1. S. 2155 requires your agencies to establish a community
    bank leverage ratio (CBLR), which Congress envisioned as a
    single, simple capital standard that would provide small
    financial institutions with regulatory relief. However, the
    CBLR you have proposed includes revisions to the Prompt
    Corrective Action (PCA) framework, which would effectively
    raise the PCA thresholds for community banks who choose to
    comply with the CBLR.
        Given the negative regulatory consequences triggered when
    banks fall below the various PCA thresholds, I'm concerned your
    proposal will actually discourage community banks from ever
    opting into the CBLR framework. Are there changes to your CBLR
    proposal that would make it less burdensome and more attractive
    for small community banks?

    A.1. We have received a number of related comments regarding
    this aspect of the proposal and are considering those comments
    as we prepare a final rule. We intend to work closely with the
    other Federal banking agencies to develop a CBLR framework
    consistent with EGRRPCA's objective of meaningfully reducing
    regulatory burden on community banking organizations while
    maintaining safety and soundness and the quality and quantity
    of regulatory capital in the banking system.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ FROM JOSEPH M.
                                 OTTING

    Q.1. When you assess a bank's risk management strategy, how do
    you assess the increased risk of more frequent and severe
    natural disasters and extreme weather events?

    A.1. The OCC expects financial institutions to have risk
    management programs that assess many forms of short- and long-
    term business interruptions, including disruption from extreme
    weather and other natural and manmade disasters. Resiliency of
    business operations is essential to the safety and soundness of
    a financial institution and the important role a bank plays in
    the larger financial market.

    Q.2. Are you confident that the banks that you supervise are
    adequately pricing the cost of those increasing risks from
    climate change?

    A.2. Pricing of risk includes many factors that may include the
    location and age of a property and risk to business models and
    operations. The OCC expects that the banks we supervise price
    products and services consistent with their respective business
    and risk management strategies.

    Q.3. Do you know if the banks the OCC supervises are relying on
    historical trends when they evaluate the risks from extreme
    weather events?

    A.3. Banks use many sources of data to evaluate business
    resiliency to include probabilities of events and trends.

    Q.4. Does the OCC use or consider the data from the National
    Climate Assessment (NCA) as it conducts its supervisory work?
        If yes, how? If no, why not?

    A.4. The OCC does not use the NCA to conduct supervisory
    assessments. The OCC uses risk-based supervision unique to each
    institution, and we expect that supervised institutions
    implement appropriate risk management programs and practices to
    ensure the safety and soundness of the institution, fair
    customer treatment, and fair access to financial services,
    which includes resiliency.

    Q.5. Do you think it would be useful to consider the NCA as a
    guide to the physical risks that could in turn pose economic
    and financial risks for the institutions that the OCC
    supervises?

    A.5. There are many sources of data and analysis to assess
    economic and financial risks to institutions. The majority of
    banks have physically dispersed operations that may be affected
    by various events. Sound risk management practices require
    banks to consider physical threats to key operations and
    develop appropriate resiliency strategies.

    Q.6. Have you attempted to quantify the financial risks from
    changes in the climate itself--not just episodic severe weather
    shocks, but fundamental changes like high temperatures,
    drought, and sea-level rise?
        If yes, how? If no, why not?

    A.6. The OCC's core mission and expertise is to evaluate the
    safety and soundness of each supervised institution and
    identify potential financial systemic events. We will continue
    to leverage other recognized experts in various fields to
    assist in informing our view and potential responses to
    systemic risk issues.

    Q.7. Do you think the financial institutions that the OCC
    supervises face risks from changes in the climate itself?

    A.7. Financial institutions face a myriad of risks. The OCC
    requires banks to implement sound risk management systems that
    identify and respond to these risks based on their physical
    location(s) as well as financial risk on their balance sheet
    and their operations. and position in the financial market.

    Q.8. I was encouraged by your response to my letter from
    January 25, 2019, that the OCC will monitor and take note of
    the Network for Greening the Financial System's progress report
    when it is published this year. That report came out in April
    2019.

    Q.8.a. Have you read the report?

    Q.8.b. What steps or actions is the OCC taking in response to
    the report?

    A.8.a.-b. OCC staff members have read the Greening the
    Financial System report. We will continue to monitor
    developments and recommendations made in the report.

    Q.8.c. Will you consider joining the NGFS?

        If yes, what is the timeline for making that decision? If
    no, why not?

    A.8.c. The OCC is not considering joining NGFS. However, we
    will monitor NGFS developments and recommendations in
    collaboration with our regulatory counterparts, similar to our
    efforts to monitor the input and observations of many other
    groups.

    Q.9. What can you commit to doing in the next 6 months to
    improve how you assess the financial risk of climate change?

    A.9. OCC staff will evaluate various environmental assessments
    and market developments. We will assess financial institution
    risk assessments and resiliency plans for many types of short-
    and long-term risks.
                                    ------

      RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
                            JOSEPH M. OTTING

    Q.1. How are you improving the culture and strengthening the
    compliance division at the financial institutions you regulate,
    to ensure that Suspicious Activities Reports are being filed,
    fake accounts are not created, and customers are treated
    fairly? Do problems with incentive pay practices that incent
    staff to engage in fraud or unfair practices still exist at the
    financial institutions you regulate?

    A.1. Compliance remains a priority for the agency, and
    compliance risk was identified as a key risk theme facing
    national banks and Federal savings associations in our most
    recent Semiannual Risk Perspective. Specifically, compliance
    risk related to Bank Secrecy Act/antimoney laundering (BSA/AML)
    remains high. Banks are challenged to effectively manage money-
    laundering risks in a complex, dynamic global operating, and
    regulatory environment. BSA/AML compliance risk management
    systems should be commensurate with the risk associated with a
    bank's products, services, customers, and geographic footprint.
    The OCC's examiners perform BSA/AML supervisory activities
    during each supervisory cycle for every national bank and
    Federal savings association, as required by 12 U.S.C.
    1818(s)(2). Examiners tailor examination plans and procedures
    based on the risk profile of each bank.
        With regard to fake accounts, the OCC, in coordination with
    other Federal banking regulators, conducted a horizontal review
    of large and mid-sized banks to assess the sufficiency of
    controls with respect to these practices. The review began in
    October 2016, focused on sales practices related to consumer or
    small business deposit, loan, and private banking or wealth
    management product or service for which incentives are offered
    to employees.
        The horizontal review did not identify systemic issues with
    bank employees opening accounts without the customer's consent.
    In those cases where the review identified bank-specific
    instances of accounts being opened without proof of customer
    consent, the underlying root causes varied. Most common factors
    included either short-term sales promotions without adequate
    risk controls, deficient account opening and closing
    procedures, or isolated instances of employee misconduct with
    no clear connection to sales goals, incentives, or quota
    programs.

    Q.2. Will you ensure access to information from community
    reinvestment advocates through the Freedom of Information Act
    with timely responses and without requiring high fees?

    A.2. The OCC will continue to comply with the Freedom of
    Information Act and applicable policies regarding fees and fee
    waivers.

    Q.3. There has been an epidemic of fake comments on
    controversial issues. How will you ensure that comments on
    rules and mergers are accurate and not based on stolen
    identities?

    A.3. The OCC is not familiar with data suggesting an ``epidemic
    of fake comments on controversial issues'' and would welcome
    the opportunity to review such data. While the OCC cannot
    control the advocacy techniques and letter-writing practices
    used by many, the agency reviews each letter submitted.
    Identical letters, often the result of form letters, typically
    do not present additional new information and are easily
    grouped together in responding to those comments.

    Q.4. Recently, the Office of Management and Budget released a
    memorandum reinterpreting the Congressional Review Act to
    include independent regulatory agencies, many of which are your
    agencies. What would be the impact of requiring OMB review of
    proposed rules and guidance on your agency?

    A.4. We are in the process of reviewing the impact of the memo.

    Q.5. When considering bank mergers, will you commit to ensuring
    that advocates seeking investments for working-class
    communities are able to easily comment at the time of the
    merger and are not relegated to a separate Community
    Reinvestment Act process?

    A.5. The OCC will continue to comply with requirements of the
    Community Reinvestment Act and the Bank Merger Act, and will
    follow the procedures and standards set forth in its
    regulations, 12 CFR part 5, subpart C. Under these processes
    and standards, merger applicants provide public notice of the
    filing of their applications, and the public may submit
    comments to the OCC. The OCC then reviews any public comments
    received and addresses them through the licensing or
    supervisory process, as appropriate.

    Q.6. Please provide letters sent by staff of the Office of the
    Comptroller of the Currency to individual commenters or
    organizations disputing comments the individual or organization
    submitted in response to a proposed rulemaking. Please include
    any letter sent by OCC leadership to a commenter on a proposed
    rule in which the OCC disputed the interpretation of the rule
    by a commenter over the past 20 years.

    A.6. The OCC does not send substantive responses to comments
    submitted during the rulemaking process. Instead, the OCC
    addresses the substance of comments in the preamble of a
    proposed or final rule. The OCC may provide updates on the
    procedural status of rulemakings in response to inquiries from
    interested persons. For example, the OCC routinely, in writing,
    acknowledges receipt of comments from members of Congress and
    provides updates on the status of rulemakings (e.g., the agency
    is considering comments; the agency issued a final rule). The
    agency may correspond with any group regarding issues or
    comments made outside the rulemaking process and will correct
    inaccurate information, mis-statements, or misunderstandings
    when appropriate.

    Q.7. Please provide any articles, opinion pieces, or editorials
    in a non-OCC publication written by staff of the Office of
    Comptroller of the Currency, criticizing comments submitted by
    an outside organization in response to a proposed rulemaking.
    Please share any opinion pieces published in a newspaper or
    journal independent of OCC control in the past two decades, in
    which a senior OCC leader complained that a commenter or
    commenters on the rulemaking process was misinformed or
    incorrect in their assessment of an OCC proposed rule.

    A.7. The OCC has published no article nor made any other
    criticism of comments submitted in response to a formal
    rulemaking. The article by Deputy Comptroller of the Currency
    Barry Wides, which was published in the American Banker on
    March 25, 2019, responded to inaccurate public comments made in
    the press, online, and in other public settings. The article is
    available at https://www.americanbanker.com/opinion/setting-
    the-record-straight-on-cra-reform.

    Q.8. The most recent National Climate Assessment said the U.S.
    Southwest could lose $23 billion per year in region-wide wages
    as a result of extreme heat. Are you looking into how extreme
    heat will affect the economy of the Southwest, and how that
    will impact regional financial institutions?

    A.8. Resiliency of business operations is essential to the
    safety and soundness of a financial institution and the
    important role a bank plays in the larger financial market. The
    OCC expects financial institutions to have risk management
    programs that assess many forms of short- and long-term
    business interruptions such as extreme weather and natural and
    manmade disasters. The agency is reviewing what additional
    consideration and analysis to conduct regarding such risks.

    Q.9. As you conduct your supervisory work, are you taking into
    account the evidence that extreme heat is going to get worse?

    A.9. OCC stall will continue to evaluate environmental
    assessments and market developments. We will continue to assess
    financial institution risk assessments and resiliency plans for
    many types of short- and long-term risks, including extreme
    weather and natural and manmade disasters.

    Q.10. What is the status of the Consumer Law Division within
    the Office of the Comptroller of the Currency? What changes
    have been made to that office since you took the helm of the
    agency?

    A.10. In March of 2019, the Consumer Law Division, along with
    three other groups--Legislative Regulatory Activities Division,
    Securities and Corporate Practices Division, and Bank
    Activities and Structure Division--were unified into one new
    group: the Bank Advisory group. This was done as part of the
    first reorganization of the Chief Counsel's Office of the
    Office of the Comptroller of Currency since 1992. This
    reorganization ensures the Chief Counsel's Office is aligned
    with the strategic goals and mission of the OCC so that the
    office can effectively and efficiently meet the current and
    future legal and supervisory needs of the agency.

    Q.11. Please detail how the Office of the Comptroller of the
    Currency has cut $100 million in its costs. Please detail how
    the OCC proposes to cut $20 million this year.

    A.11. The OCC reduced its costs by $100 million by optimizing
    travel, eliminating unused and unneeded space to reduce its
    real estate costs, renegotiating service contracts and
    eliminating redundant or unnecessary services, and eliminating
    overlapping functions. We are also on track to reduce our costs
    by $20 million by continuing that effort of being more
    efficient.

    Q.12. How many financial institutions are participating in the
    small-dollar lending pilot? What has been the impact of the
    pilot? What type of products are they offering?

    A.12. There is not an agency-sponsored small-dollar lending
    pilot program. On May 23, 2018, the OCC issued Bulletin 2018-
    14: Core Lending Principles for Short-Term, Small-Dollar
    Installment Lending, encouraging national banks and Federal
    savings associations to offer responsible short-term, small-
    dollar installment loans.

    Q.13. Please provide a list of the ``more than 1,100 people
    from consumer and community groups, academics, trade
    associations, and banking industry'' that the OCC met with to
    discuss changes to the Community Reinvestment Act. Please share
    which meetings you attended and which were attended by other
    OCC staff. Please report which staff member met with which
    groups or individuals. Please note whether the meetings were
    individual, as in one entity or association, or group meetings.

    A.13. The following is an inexhaustive list of groups that met
    to discuss CRA modernization with OCC officials, including the
    Comptroller, Senior Deputies and staff:

       LAffordable Housing Developers Council

       LAffordable Tax Credit Coalition

       LAmerican Bankers Association

       LAmericans for Financial Reform

       LAssociation for Enterprise Opportunity

       LAssociation for Neighborhood & Housing Development
            (ANHD)

       LCalifornia Bankers Association

       LCalifornia Reinvestment Coalition

       LCenter for Financial Services Innovation

       LCenter for Responsible Lending

       LCommunity Development Bankers Association

       LCommunity Housing Works

       LConference of State Bank Supervisors

       LConnecticut Bankers

       LConsumer Bankers Association

       LDelaware Bankers

       LEconomic Innovation Group

       LEnterprise Community Partners

       LFinancial Services Forum

       LFlorida Bankers Association

       LGeorgia Bankers Association

       LHousing Assistance Council

       LHousing Partnership Network

       LIdaho Bankers Association

       LIndependent Community Bankers Association

       LIndiana Bankers

       LIowa Bankers

       LJunior Achievement

       LKansas Bankers

       LKentucky Bankers Association

       LKresge Foundation

       LLatino Economic Development Center

       LLocal Initiatives Support Corporation (LISC)

       LLos Angeles World Affairs Council

       LLouisiana Bankers

       LMaine Bankers

       LMaryland Consumer Rights Coalition (MCRC)

       LMaryland Bankers

       LMassachusetts Bankers

       LMichigan Bankers Association

       LMissouri Bankers

       LNAACP

       LNational Asian American Coalition

       LNational Association of Affordable Housing Lenders
            (NAAHL)

       LNational ATM Council

       LNational Center for Digital Equity

       LNational Community Reinvestment Coalition (NCRC)

       LNational Council of State Housing Agencies

       LNational Disability Institute

       LNational Diversity Coalition

       LNational Financial Corporation

       LNational Foundation for Credit Counseling

       LNational Housing Conference

       LNational NeighborWorks Association

       LNational Trust Community Investment Corporation
            (NTCIC)

       LNational Urban League

       LNative American Finance Officers Association

       LNevada Bankers Association

       LNew Hampshire Bankers

       LNew Jersey Bankers

       LNew York Bankers Association

       LNorth Carolina Bankers

       LOhio Bankers League (Ohio Bankers)

       LOklahoma Bankers

       LOperation Hope

       LOpportunity Finance Network (OFN)

       LOregon Bankers Association

       LPennsylvania Bankers

       LProsperity Now

       LReinvestment Partners

       LRhode Island Bankers

       LTennessee Bankers

       LThe Clearing House/Bank Policy Institute

       LU.S. Chamber of Commerce

       LU.S. Pan Asian American Chamber of Commerce

       LUnidos US

       LUrban Revitalization Coalition

       LVermont Bankers

       LVermont Municipal Bond Bank

       LVeterans Association of Real Estate Professionals

       LWestern States Bankers Association

       LWashington Bankers

       LWoodstock Institute

       LThe Comptroller and staff also has met with
            numerous members of Congress and their staffs from both
            parties.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR SMITH FROM JOSEPH M.
                                 OTTING

    Q.1. Almost a year ago, the OCC announced that they would begin
    accepting applications for special purpose national bank
    charters from fintech companies that are engaged in some
    banking activities. I have some concerns about how this might
    increase predatory lending risks if this new charter is widely
    used.

    Q.1.a. Should we be worried about how this national charter
    would preempt State consumer protection law's?

    A.1.a. No. State consumer financial laws apply to a special
    purpose national bank in the same way and to the same extent as
    they apply to a full-service national bank. As discussed in the
    ``OCC Policy Statement on Financial Technology Companies'
    Eligibility to Apply for National Bank Charters,'' a fintech
    company, if granted a national bank charter, would be subject
    to the same high standards of safety and soundness and fairness
    as all federally chartered banks as well as, among other
    expectations, a commitment to financial inclusion and
    contingency planning. Applications containing proposals for
    financial products and services that have predatory, unfair, or
    deceptive features or that pose undue risk to consumers, would
    be inconsistent with law and policy and would not be approved
    by the OCC.

    Q.1.b. Why do you think more fintech companies haven't applied
    for this charter in the past year?

    A.1.b. Some fintech companies engaged in the business of
    banking may be temporarily deterred by ongoing litigation.
    Other fintech companies have considered other national bank
    charter options, such as a full-service national bank charter,
    in addition to State licenses and charters and offering their
    products and services through partnering with other existing
    banks.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA FROM JOSEPH M.
                                 OTTING

    Q.1. Cybersecurity is a chief concern for U.S. financial
    institutions and the agencies that regulate them. What is your
    assessment of the current examination process and regulatory
    landscape for regulated institutions with respect to cyber?

    A.1. Cybersecurity continues to be a significant area of
    concern for the Federal banking system. Banks and savings
    associations are generally taking appropriate steps to
    safeguard their institutions from cybersecurity threats,
    however, the continuously changing threat landscape requires
    banks to continually reassess and update security controls
    keeping cybersecurity risk at a high level.
        To effectively supervise for this risk, the OCC has
    established a robust cybersecurity supervision program. Every
    institution is assessed for cybersecurity preparedness as part
    of the standard 12- to 18-month supervision cycle. Key
    components of the supervision process include:

       LEach bank receives an Information Technology
            examination rating. Information security is a key
            component of the IT rating.

       LThe OCC conducts a cybersecurity assessment as part
            of each IT examination, leveraging the FFIEC
            Cybersecurity Assessment Tool (CAT) in our supervision
            program.

       LIn the event concerns are noted during
            cybersecurity assessments, the OCC has a number of
            supervision tools to ensure appropriate corrective
            actions are taken, including Matters Requiring
            Attention and informal and formal enforcement actions.

        As cybersecurity is a continually evolving risk with a
    constantly changing external threat environment, the OCC
    maintains a dedicated critical infrastructure team that is
    responsible for ongoing monitoring of cybersecurity threats to
    inform supervisory policy.

    Q.2. How can Federal agencies improve and help harmonize
    cybersecurity regulations?

    A.2. The OCC collaborates very closely with our domestic and
    international counterparts on working to better improve and
    harmonize cybersecurity supervision and guidance. Examples of
    this collaboration include:

       LThe OCC most closely coordinates with our fellow
            financial intuitions supervisors as part of the FFIEC.
            The FFIEC has developed a joint IT Examination Handbook
            and jointly developed the FFIEC CAT to ensure
            consistency and harmonization of supervisory
            approaches. In addition, the FFIEC sponsors the
            Cybersecurity and Critical Infrastructure Working Group
            (CCIWG) which is an interagency working group focused
            on monitoring cybersecurity threats and sharing
            information among FFIEC members.

       LThe OCC coordinates with other U.S. financial
            sector agencies through Financial and Banking
            Infrastructure Information Committee (FBIIC) sponsored
            by U.S. Treasury. The FBIIC has been focused on
            harmonization of supervisory approaches for
            cybersecurity across the broader U.S. financial sector
            regulatory community.

        The OCC is also active in international bodies that are
    focused on cybersecurity. The OCC participates on the Basel
    Committee on Banking Supervision's Operational Resilience Group
    which is focused on different international approaches to
    cybersecurity supervision in the global banking sector.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO FROM RANDAL K.
                                QUARLES

    Stress Testing
    Q.1. The Federal Reserve recently finalized a set of changes to
    improve the transparency of and models used in stress testing.
    In March 2019, the Federal Reserve also released the Dodd-Frank
    Act Stress Test 2019 Report, which aimed to further increase
    the transparency of supervisory models and improve stress-
    testing results. A critical aspect of S. 2155 was tailoring
    regulations for banks with between $100 billion and $250
    billion in total assets, particularly with respect to the
    stress-testing regime.
        What more can the Federal Reserve do to tailor the stress-
    testing regime for banks with between $100 billion and $250
    billion in total assets, and to further improve transparency
    into the Federal Reserve's stress-testing models?

    A.1. The Federal Reserve Board (Board) invited public comment
    on a framework that would more closely match regulations for
    large banking organizations with their risk profiles.\1\ We
    have received comments on the proposal and are considering the
    most appropriate methods for tailoring our regulations,
    including those relating to the stress-testing regime for the
    largest firms.
    ---------------------------------------------------------------------------
        \1\ See https://www.federalreserve.gov/newsevents/pressreleases/
    bcreg20181031a.htm and https:
    //www.federalreserve.gov/newsevents/pressreleases/bcreg20190408a.htm.
    ---------------------------------------------------------------------------
        The enhanced disclosure of our supervisory models
    represented a considerable increase in the transparency of the
    stress-testing regime. The disclosure provides the public with
    more information about the models but should not give firms
    enough information for banks across the system to simply
    ``clone'' the Board's models in ways that could lead to an
    accumulation of risks around the errors and idiosyncrasies of
    those models. I believe that the recent disclosure of our
    supervisory model methodology strikes a good balance between
    the benefits of enhanced transparency and the risks associated
    with providing firms too much detail about our models.
        Specifically, this disclosure contained more detailed
    descriptions of supervisory models, including important
    equations and lists of key variables that influence the results
    of the models. For the corporate loan and credit card
    portfolios, the disclosure also included modeled loss rates
    grouped by distinct risk characteristics, portfolios of
    hypothetical loans, and the Federal Reserve's estimated loss
    rates associated with the loans in each hypothetical portfolio.
    Similar information will be provided in 2020 for two additional
    material loan portfolios. The Board intends to continue to
    publish enhanced modeled loss rate disclosures for the most
    material loan portfolios over the next several years at an
    expected rate of about two per year. Over time, the Federal
    Reserve will extend enhanced modeled loss rate disclosures to
    nonloan portfolios, such as securities. Finally, as part of our
    June 2019 Dodd-Frank Act Stress Test results publication, we
    disclosed, for the first time, projections of pre-provision net
    revenue components, including net interest income, noninterest
    income, and noninterest expense.
        We continue to seek feedback on our stress tests from a
    wide range of stakeholders and consider options for providing
    additional transparency around the supervisory stress tests. We
    hosted a conference in July that convened a mix of presenters
    with industry, academic, and regulatory backgrounds to discuss
    the transparency and effectiveness of stress testing. The Board
    also is currently considering options to provide additional
    transparency around the design of the stress-test scenarios,
    which is a key driver of stress-test results.
    Internal TLAC
    Q.2. In 2017, the Financial Stability Board (FSB) issued a
    document on ``Guiding Principles on the Internal Total-Loss
    Absorbing Capacity of G-SIBs (Internal TLAC). As you are aware,
    a key
    objective of the TLAC standard is to provide home and host
    authorities with confidence that G-SIBs can be resolved in an
    orderly manner without putting public funds at risk. The FSB
    has noted that this ``should diminish any incentives on the
    part of host authorities to ring-fence assets domestically . .
    . and therefore avoid the adverse consequences of such actions,
    including the global fragmentation of the financial system . .
    . ``Internal TLAC is the loss-absorbing capacity that
    resolution entities have committed to their subsidiaries. The
    FSB requires each material sub-group/subsidiary must maintain
    internal TLAC of 75-90 percent. The Fed has set their internal
    TLAC calibration at the higher end, 89 percent.
        During a speech in May 2018, Vice Chair Quarles, you noted
    that `` . . . I believe we should consider whether the internal
    TLAC calibration for IHCs could be adjusted to reflect the
    practice of other regulators without adversely affecting
    resolvability and U.S. financial stability. The current
    calibration is at the top end of the scale set forth by the
    FSB, and willingness by the United States to reconsider its
    calibration may prompt other jurisdictions to do the same,
    which could better the prospects of successful resolution for
    both foreign G-SIBs operating in the United States, and for
    U.S. G-SIBs operating abroad.''
        What are your next steps for considering whether internal
    TLAC requirements should be adjusted to be consistent with
    other regulators?

    A.2. The Board is monitoring developments closely in other
    jurisdictions related to the implementation of internal total
    loss-absorbing capacity (TLAC). For example, in April 2019, the
    European Union (EU) adopted a final regulation that requires
    subsidiaries of foreign G-SIBs operating in the EU to meet
    internal TLAC requirements calibrated at the 90 percent level
    (EU internal TLAC regulation).\2\ This is slightly higher than
    the internal TLAC requirement the Board has imposed on local
    subsidiaries of foreign G-SIBs operating in the United States
    (89 percent). In addition, in mid-2018, the Bank of England
    issued a policy statement clarifying that internal TLAC would
    be scaled flexibly for the foreign subsidiaries of G-SIBs
    operating in the United Kingdom in the 75 to 90 percent range,
    depending on the reciprocal level of calibration in the firm's
    home jurisdiction and other factors.\3\
    ---------------------------------------------------------------------------
        \2\ See Article 92b, ``European Parliament legislative resolution
    of 16 April 2019 on the proposal for a regulation of the European
    Parliament and of the Council amending Regulation (EU) No 575/2013 as
    regards the leverage ratio, the net stable funding ratio, requirements
    for own funds and eligible liabilities, counterparty credit risk,
    market risk, exposures to central counterparties, exposures to
    collective investment undertakings, large exposures, reporting and
    disclosure requirements and amending Regulation (EU) No 648/2012,''
    (Apr. 16, 2019), http://www.europarl.europa.eu/doceo/document/TA-8-
    2019-0369_EN.pdf.
        \3\ See ``The Bank of England's approach to setting a minimum
    requirement for own funds and eligible liabilities (MREL),'' (June 13,
    2018), https://www.bankofengland.co.uk/-/media/boe/files/paper/2018/
    policy-statement-boes-approach-to-setting-mrel-
    2018.pdf?la=en&hash5DE6B6F
    258D5E9835F9CA6261A9050BFC666D8C4.
    ---------------------------------------------------------------------------
        In addition, Board staff are reviewing the calibration of
    internal TLAC for foreign G-SIBs operating in the United
    States. Further, the Financial Stability Board (FSB), which I
    chair, is looking at issues related to market fragmentation,
    including implementation of standards such as internal TLAC
    across jurisdictions. As part of this ongoing initiative, the
    FSB delivered a report on the potential implications of market
    fragmentation to the G20 this year, and has scheduled a
    workshop in late September, where issues related to
    prepositioning of resources across jurisdictions will be
    discussed further. Staff are actively involved in international
    discussions on these topics and continue to review the
    calibration of internal TLAC for foreign G-SIBs operating in
    the United States.
    The Volcker Rule
    Q.3. In October 2018, six Republican Banking Committee Members
    and I wrote to your agencies expressing our support for your
    interagency efforts to revise the Volcker Rule. We also urged
    you to reexamine and tailor the Volcker Rule further, including
    by using the discretion provided by Congress to revise the
    definition of ``covered fund'' or include additional exclusions
    to address the current definition's overly broad application to
    venture capital, other long-term investments and loan creation,
    and address concerns around the proposed accounting prong.
        What are the next steps for considering comprehensive
    revisions to the agencies' proposed rule?

    A.3. Since proposing amendments to the regulations implementing
    the Volcker Rule in 2018, the Office of the Comptroller of the
    Currency, the Board, the Federal Deposit Insurance Corporation
    (FDIC), the Securities and Exchange Commission, and the
    Commodity Futures Trading Commission (collectively, the
    agencies) have held meetings with and received comments from
    interested parties regarding the treatment of covered funds and
    the definition of a trading account under the proposal. The
    agencies are currently in the process of carefully considering
    all comments received on the proposal, including those related
    to the covered fund provisions and the trading account
    definition. On August 19, 2019, the FDIC adopted a final rule
    addressing many of these comments. The Board will consider this
    rule for adoption in the near future. In addition, the Board is
    considering issuing a separate notice of proposed rulemaking
    related to the covered funds provisions of the Volcker Rule.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM RANDAL K.
                                QUARLES

    Meeting Schedule
    Q.1. Please provide to the Committee a detailed list of all
    meetings with individuals or groups not directly affiliated
    with the agency you serve, from the date of your confirmation
    by the Senate to present.

    A.1. Please see the attached as requested.
    Leveraged lending

    Q.2. In a letter dated May 13, 2019, I asked you to be prepared
    to share detailed responses to the leveraged lending questions
    in my April 11, 2019, letter to Financial Stability Oversight
    Council Chair Mnuchin and to provide supporting data to the
    Committee as part of you testimony. While I understand from the
    OCC's and FDIC's written testimony that they will continue to
    monitor leveraged lending risks, you did not provide
    information in response to my specific questions. Please
    provide detailed responses to the five questions in my May 13,
    2019, and April 11, 2019, letters.

    A.2. Questions from May 13, 2019, and April 11, 2019, letter:
    `` . . . Regulators must demonstrate that they are responding
    to threats to financial stability before the real economy
    suffers. To that end, please provide me the following . . . ''

            1. Any analyses of the leveraged lending market that
            the Council and its member agencies have performed in
            the last 2 years;

            Response: The Federal Reserve has provided oversight of
            leveraged loans in supervised institutions for many
            years, and continues to dedicate substantial resources
            to monitor these loans carefully and to supervise
            institutions with leveraged loan exposures closely
            through processes such as the Shared National Credit
            (SNC) review. In addition, Federal Reserve staff
            performs ongoing analysis to assess and understand the
            risks within the broader leveraged lending market. Our
            analysis has included quantifying bank holdings of
            leveraged loans and assessing the direct and indirect
            exposures of large banking institutions from their
            participation in all aspects of the leveraged loan
            market.

            Our analysis of the broader market seeks to understand
            investor appetite for corporate credit risk, the
            contribution of leveraged lending to the elevated level
            of business debt, and the resilience of the nonbank
            structures that hold leveraged loans. This work
            incorporates information on the terms and underwriting
            standards of newly originated loans, the financial
            condition of U.S. businesses, and regulatory and other
            data on a range of non bank financial institutions.
            These analyses appear in a variety of Federal Reserve
            publications, including the Monetary Policy Report and,
            most comprehensively, the Financial Stability Report
            (FSR) in the following locations:

               LThe November 2018 FSR\1\ discusses
            leveraged lending in Section 1 (Asset Valuation
            Pressures), Section 2 (Borrowing by Businesses and
            Households), Section 3 (Leverage in the Financial
            Sector), and Section 4 (Funding Risk).
    ---------------------------------------------------------------------------
        \1\ See https://www.federalreserve.gov/publications/files/
    financial-stability-report-201811.pdf.

               LThe May 2019 FSR \2\ discusses leveraged
            lending in Section 1 (Asset Valuations), Section 2
            (Borrowing by Businesses and Households), Section 3
            (Leverage in the Financial Sector), and Section 4
            (Funding Risk). In addition, the box on pages 22-25
            discusses how exposures of financial institutions to
            business debt including leveraged loans could amplify
            strains in the financial system in times of stress.
    ---------------------------------------------------------------------------
        \2\ See https://www.federalreserve.gov/publications/files/
    financial-stability-report-201905.pdf.

            As mentioned above, the SNC program is a key
            supervisory program employed by the Federal Reserve and
            the other Federal banking agencies to ensure the safety
            and soundness of the financial system. SNC is a long-
            standing program used to assess credit risks and
            trends, as well as underwriting and risk-management
            practices associated with the largest and most complex
            loans shared by multiple regulated financial
            institutions. The program also provides for uniform
            treatment and increased efficiency in shared credit
    ---------------------------------------------------------------------------
            risk analysis and classification.

            Leveraged lending accounts for a substantial portion of
            the SNC portfolio and remains a key focus in the
            Federal Reserve's broader effort to evaluate overall
            safety and soundness of bank underwriting and risk
            management practices. SNC reviews completed in the
            first and third quarters of 2018 showed risks
            associated with leveraged lending activities are
            building, as contrasted with the SNC portfolio overall.
            Although the specific measures we have taken are
            confidential supervisory information, addressing these
            weaknesses has been an important element of our
            supervisory engagement with the subject firms in these
            SNC exams.

            2. Any other Council documents discussing the risks of
            leveraged lending and staff recommendations to address
            those risks;

            Response: We refer you to the U.S. Department of the
            Treasury for a response to this question.

            3. A list of all Council meetings where leveraged
            lending was discussed, including the dates of those
            meetings, attendees, and materials presented;

            Response: We refer you to the U.S. Department of the
            Treasury for a response to this question.

            4. A list of supervisory or other actions that the
            Council and its member agencies have taken at regulated
            institutions in order to address risks in the leveraged
            lending market, especially with regard to weak
            underwriting standards; and

            Response: The Federal Reserve conducted multiple
            reviews targeted toward assessing leveraged lending
            risk in the past year, including:

               LAn examination in fall 2018 across the
            largest global systemically important banks (G-SIBs)
            which evaluated the accuracy of bank-generated
            financial projections for leveraged borrowers over
            specific time periods and examined how loan structures
            (e.g., terms and conditions) evolved over time.

               LSemiannual SNC examinations (3Q18 and 1Q19)
            focused on leveraged loan underwriting practices and
            the effectiveness of firms' risk management functions
            across the regulated banking system.

               LA 1Q19 examination of several large State
            member banks assessed policies and risk management
            procedures related to underwriting practices.

               LCCAR 2019 included evaluations of banks'
            loss modeling methodologies related to leveraged loan
            exposures.

               LAdditional supervisory activities are
            ongoing or planned for the remainder of 2019, including
            the 3Q19 SNC semiannual examination which also will
            focus on leveraged lending.

            A 3Q19 target exam of large banks will review
            syndicated lending pipeline stress-loss limits. This
            review will assess measurement and management of
            stress-loss exposures in relation to firms' limits.

            5. A description of how FSOC is monitoring leveraged
            lending markets and what actions it plans to take to
            protect the economy from threats in credit and lending
            markets.

            Response: We refer you to the U.S. Department of the
            Treasury for a response to this question.
    Leveraged lending guidance
    Q.3.a. Vice Chair Quarles said during the hearing that your
    agencies are concerned about the right regulatory response to
    developments in underwriting of leveraged loans, and have
    identified underwriting practices that need to improve. How
    have you clarified to banks agency expectations for safe and
    sound underwriting practices if the 2013 leveraged lending
    guidance that describes expectations for the sound risk
    management of leveraged lending activities no longer has any
    legal effect?

    A.3.a. To clarify, the 2013 guidance on leveraged lending (2013
    guidance) remains in effect, but, like all other guidance, it
    does not have, and never has had, the force or effect of law.
    Its status has not changed since its issuance. Rather, the
    agencies in September 2018 re-stated and reconfirmed the role
    of supervisory guidance, including the 2013 guidance. Examiners
    may refer to the principles outlined in the 2013 guidance when
    they assess any impact on a firm's safety and soundness posed
    by leveraged lending activities. Further, the Government
    Accountability Office's determination about the 2013 guidance
    has not affected our ability to supervise firms; we retain the
    ability to evaluate firms' leveraged lending activities and
    issue supervisory findings, where necessary, using our safety-
    and-soundness authority. Examiners have issued supervisory
    findings related to leveraged lending activities in recent
    examinations when individual bank circumstances required them,
    and will continue to do so.
        As you may recall, the agencies issued the 2013 guidance in
    response to observations of increasing risk in leveraged
    lending activities and weakening risk management practices in
    our supervised institutions. The guidance was designed to
    provide greater clarity to the industry on the agencies'
    expectations regarding sound risk management and underwriting
    processes associated with leveraged lending. When assessing
    banks' practices, examiners focus on any weaknesses that could
    affect safety and soundness, taking into account each bank's
    individual circumstances. We have reminded our examiners to be
    clear when communicating with financial institutions in order
    to minimize possible confusion between the principles and sound
    practices described in guidance and the requirements of
    regulations.
        The leveraged loan market continues to warrant attention.
    We are monitoring closely how risks are evolving and the
    potential impact of these risks on the broader financial
    system, as well as assessing the adequacy of bank risk
    management and controls. For instance, during the 1Q19 SNC
    examination, we evaluated policies and risk management
    procedures at several large State member banks. Examiners
    identified some issues during those exams, including for
    deficient loan underwriting governance, risk measurement, and
    independent risk management.

    Q.3.b. What are your current expectations?

    A.3.b. As with all lending activities, supervised banks may
    participate in leveraged lending activities provided such
    activities are conducted in a safe and sound manner. The
    current supervisory expectations we have for sound leveraged
    lending activities are the same ones articulated in the 2013
    guidance. These include expectations related to bank risk
    management and underwriting processes associated with leveraged
    lending that are consistent with safe and sound banking
    practices.

    Q.4.a. During the financial crisis, even banks that did not
    have mortgage-backed securities on their balance sheets were
    exposed to the subprime mortgage crisis, in part because of the
    interconnectedness of banks to other aspects of the financial
    system. In response to a question on leveraged lending, you
    stated that only 12 percent of collateralized loan obligations
    (CLOs) are held on bank balance sheets. In what types of
    entities are the remaining 88 percent held?

    A.4.a. The Federal Reserve contributes to the Financial
    Stability Board's (FSB) review of the leveraged lending market,
    including the effort to better assess potential vulnerabilities
    stemming from leveraged loans for global financial stability.
    At my request, earlier this year the FSB established a working
    group to gather data from a broad range of global regulators to
    determine more precisely where this risk lies. We expect this
    group to complete its work in the coming months. The Federal
    Reserve itself does not collect data that offers a view into
    nonbank holders of collateralized loan obligations (CLO)
    tranches, but various research departments at banks have
    published reports that indicate the various holders are asset
    managers, family offices, hedge funds, insurance companies,
    mutual funds, pension funds, and structured credit funds.

    Q.4.b. To what extent are CLOs held in structured investment
    vehicles or at nonbank affiliates of banks?

    A.4.b. CLOs issue tranches of notes with varying degrees of
    credit risk, and the investor base for each of these tranches
    varies. A high-level analysis of third-party (i.e.,
    nonregulatory) data suggests that domestic and Japanese banks
    are the most prominent investors in the AAA tranche, with
    growing pension fund participation; insurance companies and
    asset managers are most active in the mezzanine tranches (the
    other rated debt tranches); and structured credit funds and
    hedge funds appear to be the most notable CLO equity investors.
        Compared to the pre-crisis CLO investor base, there appears
    to be substantially greater participation by investors with
    relatively stable, long-term sources of capital. Leveraged
    investment vehicles that relied on short-term wholesale funding
    had been meaningful investors in CLOs before the crisis, but
    appear to be no longer to be active in this market.

    Q.4.c. To what extent are banks counterparties to credit
    default swaps that hedge against leveraged loan or CLO
    defaults?

    A.4.c. Based on available data, the largest banks do not have
    material exposure to leveraged loans through derivatives. Bank
    counterparty credit exposures through credit default swaps
    appear to represent a small portion of the overall market.

    Q.4.d. To what extent do banks provide credit to entities that
    own CLOs and under what terms?

    A.4.d. A number of banks serve as CLO arrangers and, in some
    limited cases, as a CLO manager. Banks help arrange CLOs by
    providing warehouse lines of credit, structuring advice, and
    placement of CLO securities. Banks provide credit to a range of
    nonbank financial entities, so it is reasonable to expect that
    some entities that receive credit from banks also own CLO
    securities.

    Q.4.e. Please provide to the Committee any Fed analysis of the
    impact of a significant change in asset prices on default rates
    of credit lines offered by banks to any nonbank entities.

    A.4.e. The Federal Reserve has a number of tools to evaluate
    the risk posed by corporate loans to systemically important
    banks, and one such tool is the supervisory stress-test regime.
    Each year, the Federal Reserve uses the supervisory stress
    tests to evaluate the ability of banks to withstand severe
    economic and financial market stress while continuing to make
    capital distributions to shareholders and lend to households
    and businesses. As part of that evaluation, the Federal Reserve
    projects losses on banks' loan portfolios, which include loans
    to corporations and unfunded credit lines. The 2019 exercise,
    which included a 50 percent decline in
    equity prices and a widening of the spread between yields of
    investment-grade corporate bonds and long-term Treasuries to
    5.5 percent, resulted in a nine-quarter loss rate on commercial
    and industrial loans of 6.3 percent for the banks subject to
    the 2019 stress test.\3\
    ---------------------------------------------------------------------------
        \3\ See pages 26 to 28 and pages 63 to 69 of Dodd-Frank Act Stress
    Test 2019: Supervisory Stress Test Methodology (Washington, DC: Board
    of Governors, March 2019).
    ---------------------------------------------------------------------------
    Leveraged loans
    Q.5.a. According to Bloomberg, as of 2018, U.S. banks were the
    largest leveraged loan underwriters. What percentage of
    leveraged loans are held on banks' balance sheets as opposed to
    securitized and sold as CLOs?

    A.5.a. While banks are the primary underwriters of ``leveraged
    loans'' (defined generally as subinvestment grade syndicated
    term loans), the ultimate credit risk is typically sold to a
    number of nonbanks. As a result, U.S. banks hold about 10
    percent of the roughly $1.1 trillion in total outstanding
    balances of leveraged loans.
        There are, however, additional exposures that both banks
    and nonbanks maintain that have similar risk characteristics as
    leveraged loans. For example, U.S. banks hold funded revolving
    lines of credit and bilateral term loans that have similar risk
    characteristics as leveraged loans in an amount equal to
    roughly $200 billion. For banks, both leveraged loans and these
    other exposures are incorporated into the Federal Reserve's
    stress test, which shows that banks have sufficient capital to
    absorb losses estimated under stressful conditions.

    Q.5.b. What is the percentage of ``covenant-lite'' leveraged
    loans that have limited protection against losses upon default?

    A.5.b. According to third-party data such as that of S&P,
    approximately 80 percent of leveraged loans outstanding are
    covenant-lite, meaning the loan agreement does not feature a
    financial maintenance covenant (i.e., includes a financial
    metric the borrower must meet which, if unmet, would allow
    lenders to re-price the loan repayment risk associated with
    that particular borrower).
    Stress tests
    Q.6.a. In a recent speech, former Federal Reserve Governor
    Daniel K. Tarullo raised concerns about the Federal Reserve's
    recent actions and proposals to weaken the stress-test regime,
    including that the Federal Reserve now provides much more
    information on stress-test models and scenarios in an effort to
    be ``transparent.'' Effectively, this gives banks the answer
    key to the test.
        As former Governor Tarullo said, the ``so-called
    volatility'' in bank capital requirements because of changes in
    stress-test scenarios is ``a necessary feature of a stress-
    testing regime, not a bug to be corrected.''[1]
        By providing banks with additional data on the scenarios
    and models, banks can reverse engineer supervisory models to
    include in their own capital plans and pre-determine the amount
    of capital they will be permitted to distribute through
    dividends and stock buybacks. Did the Federal Reserve intend to
    make it easier for the largest banks to increase shareholder
    value at the expense of financial stability?

    [1] https://ourfinancialsecurity.org/2019/05/speech-former-fed-
    gov
    ernor-tarullo-decries-low-intensity-deregulation/.

    A.6.a. Increasing the transparency of the stress tests helps to
    further build on the credibility of the stress tests, which is
    positive for financial stability. I believe that our recent
    disclosure of the certain aspects of our supervisory model
    methodology provides the public with more information about the
    supervisory stress tests, but does not give firms enough
    information to make modifications to their businesses that
    change the results of the tests without changing the risks they
    face.
        We have made a wide variety of information available about
    our stress tests, but we have not disclosed the full details of
    our models.

    Q.6.b. Will the Federal Reserve's proposals render meaningless
    CCAR, which has been the binding capital constraint for the
    largest banks?

    A.6.b. In its stress capital buffer (SCB) proposal, the Federal
    Reserve Board (Board) seeks to incorporate the stress-test
    regime, a key innovation and essential regulatory tool on which
    Comprehensive Capital Analysis and Review (CCAR) is based, into
    point-in-time capital requirements.
        Under the Federal Reserve's current regulatory capital
    rules, none of the capital buffers are informed by the results
    of the stress test, and firms must separately demonstrate the
    ability to maintain capital ratios above minimum regulatory
    requirements in a post-stress capital assessment.
        The SCB proposal would create a more robust and dynamic
    regulatory capital regime by replacing the current capital
    conservation buffer with a firm-specific buffer requirement
    based on firms' stress-test results and subject to a floor at
    least equal to the current capital conservation buffer of 2.5
    percent.

    Q.6.c. If the Fed provides its stress-testing models to banks
    before evaluating the banks' own models and efforts, how will
    the Fed ensure that systemically important banks are capable of
    modeling risk on their own and appropriately allocating
    retained earnings based on their exposures in adverse economic
    conditions?

    A.6.c. As noted, we have not provided the stress-test models to
    the banks, nor do we intend to do so. In considering whether
    any additional disclosures are appropriate, we will be mindful
    of the risks that can arise.
        In addition, we will continue to assess the stress-test
    modeling practices as part of our annual review of each of the
    largest firms' capital plans to determine whether the firms'
    stress-testing models and assumptions appropriately capture
    their unique business models and risk profiles.
    BB&T/SunTrust/Stress Tests
    Q.7. Suspending stress testing for SunTrust and BB&T means that
    regulators will not have 2019 stress-test results prior to
    their planned merger to become a $442 billion bank at the end
    of 2019. Your agencies have indicated that you will continue to
    review the capital planning and risk-management practices of
    these institutions through the regular supervisory process.
    Please explain what aspects of the current supervisory process
    are sufficient replacements for stress testing to ensure that
    these types of large institutions could withstand an adverse
    economic shock.

    A.7. While I cannot discuss firm-specific information, I can
    give you a sense of our capital planning requirements and
    supervisory expectations for large firms.
        Under the Federal Reserve's capital plan rule, firms with
    material changes to their business or risk profile, as would be
    the case in the planned merger of SunTrust and BB&T, must
    update and submit a capital plan to the Federal Reserve for its
    review, including an updated quantitative post-stress capital
    assessment. This stipulation in the capital plan rule is
    independent of the Federal Reserve's recent decision to move
    less complex firms subject to the stress tests from an annual
    to a 2-year stress-test cycle. These institutions will continue
    to be subject to ongoing supervision.
    Faster payments
    Q.8.a. In November 2018, the Federal Reserve published in the
    Federal Register a request for public comment on Potential
    Federal Reserve Actions to Support Interbank Settlement of
    Faster Payments.
        What progress has the agency made in reviewing comments?

    A.8.a. The Federal Reserve received and analyzed over 400
    comment letters from a broad range of market participants,
    interest groups and consumer groups in response to the 2018
    Federal Register Notice (2018 FRN). An analysis of the input
    received in response to the 2018 FRN has been completed.

    Q.8.b. When does the Federal Reserve anticipate further action
    on this issue?

    A.8.b. The Board announced on August 5, 2019, that the Reserve
    Banks will develop a new real-time payment and settlement
    service, called the FedNowSM Service, to support
    faster payments in the United States. In assessing its criteria
    for new payment services, the Board considers input from the
    public, historical experience, and its own analysis to assess
    whether such services can be expected to generate public
    benefits that private-sector services alone may be unable to
    achieve.\4\ Although my fellow Governors concluded that the
    development of the FedNowSM Service is appropriate
    at this time, I did not see strong justification for the
    Federal Reserve to move into this area and crowd out innovation
    when viable private-sector alternatives are available. As a
    result, I voted against this action.
    ---------------------------------------------------------------------------
        \4\ The Board considered whether private-sector real-time gross
    settlement (RTGS) services for faster payments alone could be expected
    to provide an infrastructure for faster payments with reasonable
    effectiveness, scope, and equity, and further, if private-sector
    services are likely to face significant challenges in extending
    equitable access. The Board also considered whether the development of
    the FedNowSM Service will likely yield clear and substantial
    benefits to the safety and efficiency of faster payments in the United
    States.
    ---------------------------------------------------------------------------
    Household Debt
    Q.9.a. You have said that household borrowing is at low levels,
    but according to the Federal Reserve Bank of New York,
    household debt hit a record high last year, reaching $13.5
    trillion at year-end 2018. How are you addressing the
    ballooning consumer debt as a potential risk to the banking
    industry?

    A.9.a. While household debt reached an all-time high at the end
    of 2018, measures of household debt relative to gross domestic
    product (GDP) and to household income show that household
    credit advanced roughly in line with these measures of economic
    activity. In fact, household borrowing remains at a modest
    level relative to income, with the household debt-to-GDP ratio
    declining in the past several years.
        Other factors indicate that consumer debt is not a
    significant potential risk to the banking system. For example,
    loans to households on banks' books tend to be concentrated
    among prime borrowers, compared to loans in the nonbank sector.
    In addition, banks hold only about one-third of outstanding
    auto loans, and the vast majority of student loans are either
    originated or guaranteed by the Federal Government.
        Delinquency rates for prime and near-prime borrowers have
    been relatively flat, at historical lows. While overall
    delinquencies for subprime borrowers rose over the past year,
    they generally remain at levels at or below their pre-crisis
    values.
        We assessed the systemic vulnerabilities from household
    debt as low to moderate in the most recent Financial Stability
    Report. The Board continues to monitor household debt and will
    update that assessment if conditions change.

    Q.9.b. How are you addressing banks' exposure to levels of
    household debt that is 21 percent above the post-financial
    crisis low in 2013?

    A.9.b. Banks' exposure to household debt varies across
    different types of loans, with the majority of exposure in
    mortgage debt, with much smaller exposure to credit card and
    auto loan debt. Banks have limited exposure to student loan
    debt.
        Loan performance has been solid, on balance, across these
    three loan categories as banks focus on prime borrowers.
    Regarding mortgages, responses to the Federal Reserve's Senior
    Loan Officer Opinion Survey indicate that underwriting
    standards are much tighter now than they were prior to the
    financial crisis, especially for subprime loans, jumbo loans,
    and home equity lines of credit (HELOCs). In addition, bank
    exposures to HELOCs have declined since the crisis, as banks
    have less appetite for making such loans, partly due to higher
    capital requirements for these risky loans. Similarly, in the
    credit card and auto loan markets, banks have tightened
    significantly their underwriting standards since the crisis,
    reporting that their standards are at the tighter end of the
    range since 2005, especially to subprime borrowers. Currently,
    banks do not foresee a significant deterioration in household
    credit quality, as suggested by measures of loan-loss
    provisions, which are comparable to pre-crisis levels.
    Furthermore, the largest banks today are highly capitalized,
    more liquid, and less reliant on short-term wholesale funding.
    Taken together, all these indicators suggest that U.S. banks
    are well equipped to manage potential stresses in household
    lending markets.
    FBOs
    Q.10.a. You testified that the liquidity requirements on U.S.
    operations of foreign banks as a result of the foreign banking
    organization proposal are almost 4 percent higher, based on Fed
    estimates. Please elaborate. What aspect of the proposed rule
    requires FBOs to have 4 percent more liquidity than currently
    required?

    A.10.a. The estimates previously provided were based on the
    Federal Reserve's April 2019 proposals to tailor prudential
    standards, including liquidity requirements, for foreign bank
    organizations (FBO). The estimated impact on liquidity
    requirements was based primarily on two elements of the
    proposals. First, the liquidity coverage ratio (LCR) rule
    applied only to a U.S. intermediate holding company if it had
    control over a bank. The proposals would have adjusted this
    requirement and applied the LCR rule to a U.S. intermediate
    holding company regardless of whether it had control over a
    bank. Second, the proposals would have applied LCR requirements
    to a foreign bank's U.S. intermediate holding company based on
    the risk profile of the foreign bank's combined U.S.
    operations, which would have included the FBO's branch
    operations outside of the intermediate holding company in
    determining the relevant risk profile even though the
    regulations themselves would apply only to the intermediate
    holding company.
        On October 10, 2019, the Board approved final rules to
    tailor prudential standards for large domestic and foreign
    banks. As proposed, the final rules apply LCR requirements to a
    U.S. intermediate holding company regardless of whether the
    U.S. intermediate holding company has control over a bank. In a
    change from the proposals, however, the final rules apply LCR
    requirements to a U.S. intermediate holding company of a
    foreign bank based on the risk profile of the U.S. intermediate
    holding company only. The Board believes this approach helps to
    enhance the focus and efficiency of LCR requirements relative
    to the proposals, because LCR requirements that apply to a U.S.
    intermediate holding company are based on the U.S. intermediate
    holding company's own risk profile. To the extent that the
    Board wishes to address the potential liquidity needs or other
    aspects of an FBO's branch operations, this would be more
    efficiently handled through measures directed to the branch
    itself, and--given the legal structure of branch operations--
    should be the subject of international agreement to ensure such
    measure's effectiveness. While the Board estimates that, under
    the final rules, liquidity requirements for the portion of FBO
    operations accounted for by intermediate holding companies
    would decrease by $5 billion, we are pursuing discussions of
    branch liquidity regulation at the FSB, which I chair.

    Q.10.b. Please provide for the Committee a detailed analysis
    and Fed estimates of the changes in all liquidity and capital
    standards for foreign Global Systemically Important Banks with
    operations in the United States, as well as changes to the
    intervals between any regulatory filing requirements or
    supervisory exercise like stress tests, under the proposal.
    Please also provide to the Committee any cost-benefit analysis
    performed weighing the risks to the economy of weakening
    regulations on foreign bank organizations against the
    additional consumer and small business lending expected to be
    gained from such deregulation.

    A.10.b. Materials produced as a part of the public release of
    the final rule provide a detailed summary of the requirements
    that would apply under each category of standards under the
    final rule, as well as a list of foreign banks, including U.S.
    intermediate holding companies, by projected category.\5\ The
    materials include the categories of standards that would apply
    based on the risk profile of a U.S. intermediate holding
    company of a foreign bank. For capital and standardized
    liquidity standards, a firm would be assigned a category--and
    thus a set of applicable requirements--based on the risk
    profile of the foreign bank's U.S. intermediate holding
    company. For internal liquidity stress testing, a foreign bank
    would be assigned a category based on the risk profile of a
    foreign bank's combined U.S. operations.
    ---------------------------------------------------------------------------
        \5\ See the Board's public website at https://
    www.federalreserve.gov/aboutthefed/boardmeetings
    /20191010open.htm.
    ---------------------------------------------------------------------------
        Please refer to the visuals that were released with the
    final rules to see a list of projected categories for large
    foreign banking organizations and their U.S. intermediate
    holding companies, as applicable.\6\ Impact assessments also
    are included in the final rules. All of these materials can be
    accessed on the Board's public website.\7\
    ---------------------------------------------------------------------------
        \6\ See https://www.federalreserve.gov/aboutthefed/boardmeetings/
    files/tailoring-rule-visual-20
    191010.pdf.
        \7\ See https://www.federalreserve.gov/aboutthefed/boardmeetings/
    20191010open.htm.

    Q.10.c. Please provide to the Committee any legal analysis
    performed by the Fed regarding national treatment and equality
    of competitive opportunity of FBOs as it relates to changes in
    treatment of domestic banks required by S. 2155. Please
    specifically note any elements of the April proposal that were
    justified under this rationale due to the implementation of S.
    ---------------------------------------------------------------------------
    2155.

    A.10.c. The final rules issued in October 2019 use similar
    categories of standards, risk-based thresholds, and stringency
    of standards for domestic and foreign banks with similar risk
    profiles in the United States. By using consistent indicators
    of risk, the final rules facilitate a level playing field
    between foreign and domestic banks operating in the United
    States, in furtherance of the principle of national treatment
    and equality of competitive opportunity.
        Section 165(b)(2) of the Dodd-Frank Wall Street Reform and
    Consumer Protection Act requires that, in applying enhanced
    prudential standards to a foreign-based bank holding company or
    Federal Reserve-supervised foreign nonbank financial company,
    the Federal Reserve ``shall (A) give due regard to the
    principle of national treatment and equality of competitive
    opportunity; and (B) take into account the extent to which the
    foreign financial company is subject on a consolidated basis to
    home country standards that are comparable to those applied to
    financial companies in the United States.'' The Board has
    interpreted section 165(b)(2) to generally mean that foreign
    banking organizations operating in the United States should be
    treated no less favorably than similarly situated U.S. banking
    organizations and should generally be subject to the same
    restrictions and obligations in the United States as those that
    apply to the domestic operations of U.S. banking organizations.
        Differences in the measurement of risk-based indicators and
    in the application of standards between domestic and foreign
    banks take into account structural differences in the operation
    and organization of foreign banks, as well as the standards to
    which foreign banks on a consolidated basis may be subject. For
    example, the final rules tailor the stringency of the
    prudential standards applicable to a foreign bank based on the
    risk profile of its U.S. operations instead of the foreign
    bank's global operations.

    Q.11. In December 2018, the OCC, the Federal Reserve, and the
    FDIC jointly proposed to increase their agencies' appraisal
    threshold on residential mortgage loans from $250,000 to
    $400,000.[1] Lenders would instead be required to obtain an
    evaluation for any mortgage loan below $400,000 not otherwise
    subject to requirements by the mortgage insurer or guarantor or
    the secondary market.[2]

        This proposal comes less than 2 years after the OCC, the
    Federal Reserve, the FDIC, and the CFPB rejected an increase in
    the residential loan appraisal threshold based on
    ``considerations of safety and soundness and consumer
    protection'' in their Economic Growth and Regulatory Paperwork
    Reduction Act (EGRPRA) report.[3] This proposal also goes far
    beyond legislation enacted by Congress to provide appraisal
    exemptions in rural areas.

        As you know, the Financial Institutions Reform, Recovery,
    and Enforcement Act of 1989, as amended by the Dodd-Frank Wall
    Street Reform and Consumer Protection Act, requires the Federal
    banking regulators charged with setting appraisal exemption
    thresholds to receive concurrence from the CFPB to ensure that
    ``such threshold level provides reasonable protection for
    consumers'' before any amendment.[4]

    [1] ``Real Estate Appraisals,'' 83 FR 63110, December 7, 2018,
    available at https://www.federalregister.gov/documents/2018/12/
    07/2018-26507/real-estate-appraisals.

    [2] Id.

    [3] Joint Report to Congress: Economic Growth and Regulatory
    Paperwork Reduction Act, Federal Financial Institutions
    Examination Council, March 2017, pg. 36, available at https://
    www.ffiec.gov/pdf/2017_FFIEC_EGRPRA_Joint-
    Report_to_Congress.pdf.

    [4] 12 U.S.C. 3341(b).

    Q.11.a. Did the Federal banking agencies confer with staff or
    leadership at the CFPB or seek CFPB's concurrence before
    issuing the proposal to increase the appraisal exemption
    threshold? If not, at what point in the regulatory process do
    Federal banking agencies seek concurrence with the CFPB on
    appraisal threshold changes?

    A.11.a. In order for the Board, Office of the Comptroller of
    the Currency, and Federal Deposit Insurance Corporation (the
    agencies) to set an appraisal threshold for residential
    transactions, the Consumer Financial Protection Bureau (CFPB)
    must concur that the threshold level provides reasonable
    protection for consumers who purchase 1-4 unit single-family
    residences. In this regard, staff of the agencies conferred
    with CFPB staff before issuing the proposal and continued to
    consult with CFPB staff as the agencies worked to finalize the
    proposed threshold increase. On August 5, 2019, the CFPB
    concurred that the new residential threshold provides
    reasonable protection for consumers who purchase 1-4 unit
    single-family residences.

    Q.11.b. In the background for the proposed rule, the Federal
    banking agencies stated they did not increase the residential
    real estate appraisal exemption threshold during the EGRPRA
    process because the change would have a ``limited impact on
    burden reduction due to appraisals still being required for the
    vast majority of these transactions pursuant to the rules of
    other Federal Government agencies and the GSEs; safety and
    soundness concerns; and consumer protection concerns.''[5] Is
    your agency aware of any changes in the real estate market or
    in appraisal or evaluation services that would affect its
    safety and soundness or consumer protection concerns, cited in
    the EGRPRA report, with increasing the residential mortgage
    appraisal threshold above $250,000? If so, please detail these
    changes.

    [5] ``Real Estate Appraisals,'' 83 FR 63110, December 7, 2018.

    A.11.b. The agencies' decision to propose an increase to the
    residential appraisal threshold was based on several factors:
    public feedback, our analysis of the safety and soundness
    implications on financial institutions, market factors such as
    changes in house prices since the threshold was last increased,
    the potential for regulatory burden reduction, and our
    supervisory experience with appraisals and evaluations.
        During the Economic Growth and Regulatory Paperwork
    Reduction Act (EGRPRA) process, as well as the rulemaking
    process to raise the threshold for commercial real estate
    loans, the agencies received numerous comments suggesting a
    residential threshold increase would produce regulatory relief
    for institutions. Following the EGRPRA process, the agencies
    conducted further analysis on the impact of a change to the
    residential appraisal threshold. The agencies considered market
    conditions by looking at changes in housing prices since 1994,
    when the threshold was last changed. In addition, the agencies
    analyzed Home Mortgage Disclosure Act data, which suggested
    that, though the impact on the total dollar volume of exempted
    transactions would be limited, the number of exempted
    transactions would increase materially and would provide cost
    savings and regulatory relief for financial institutions.
        We also analyzed safety and soundness implications
    regarding a threshold increase for residential transactions,
    including available data and supervisory experience with
    appraisals and evaluations. Based on this analysis, the
    agencies determined that the threshold increase would not
    threaten the safety and soundness of financial institutions.
    The rule also requires evaluations that are consistent with
    safe-and-sound banking practices for transactions under the new
    threshold, as is required for transactions under other
    applicable appraisal thresholds. Based on our supervisory
    experience with evaluations, we believe evaluations are an
    effective valuation tool when an institution appropriately uses
    the evaluation.
        As discussed in the preamble to the final residential
    appraisal threshold rule, the agencies considered potential
    consumer impact of the threshold increase, including
    protections that would continue to apply to exempted
    transactions. The agencies also consulted with the CFPB
    throughout the development of the proposal and final rule and,
    as required by statute, received concurrence from the CFPB that
    the final residential threshold provides reasonable protection
    for consumers who purchase 1-4 unit single-family residences.
    Insurance
    Q.12.a. As Chair of FSB you will lead the implementation of the
    IAIS global Insurance Capital Standard (ICS). Field testing for
    the proposed ICS will begin in November. Can you provide us
    your analysis of implementation of the current ICS in the
    United States?

    A.12.a. In 2017, the International Association of Insurance
    Supervisors (IAIS) announced that it would release the ICS in
    two phases: a 5-year monitoring period beginning in 2020,
    followed by implementation as a prescribed capital requirement.
    Also in 2017, at the recommendation of the U.S. members, the
    IAIS committed to data collection and analysis of an
    aggregation method, an alternative approach to determining
    capital resources and capital requirements for a group-wide
    capital standard. The IAIS released a public consultation
    document on ICS Version 2.0 in 2018 and is planning to release
    ICS Version 2.0 in 2019 for use during the 5-year monitoring
    period.
        The U.S. members of the IAIS as well as certain U.S.
    companies have concerns about the ICS that, as the ICS is
    currently developed, include a valuation method and other
    requirements that may not be optimal for the U.S. insurance
    market and may lead to unintended consequences. The current
    ICS's valuation method may be prone to volatility, which can
    especially affect long-term contracts and impair the ability of
    insurers to provide long-term life insurance and retirement
    planning products.

    Q.12.b. In your view, will ICS implementation lead to outcomes
    that conflict with State-based supervision and solvency
    standards in the United States?

    A.12.b. For an ICS to be considered successful as an
    international standard, it must be appropriate for the U.S.
    insurance market, the largest in the world. Many elements of
    the developing standard have not been thoroughly tested, and
    key areas remain unresolved. The reference method within the
    ICS is not based on U.S. generally accepted accounting
    principles (U.S. GAAP) or the National Association of Insurance
    Commissioner's (NAIC) Statutory Accounting Principles,
    introduces excessive volatility, and permits excessive reliance
    on supervised firms' internal models. As a result,
    implementation of ICS Version 2.0 as proposed would pose
    challenges to U.S. firms.

    Q.12.c. If there are conflicts, do you plan to take steps to
    ensure that ICS outcomes are compatible with the State-based
    supervision and solvency standards under United States law?

    A.12.c. In light of these implementation challenges, the
    Federal Reserve, together with other U.S. members of the IAIS
    (the Federal Insurance Office and the NAIC) continue to
    advocate for an aggregation alternative, and the use of an
    alternative valuation method using U.S. GAAP, in the ICS. It is
    our intent that the Federal Reserve's development of the
    Building Block Approach, a proposed capital standard for
    insurance holding companies under the Federal Reserve's
    consolidated supervision, together with the development of the
    Group Capital Calculation by the NAIC, will assist with
    advocacy for the aggregation method. Furthermore, it is our
    goal to have the aggregation method recognized as equivalent to
    the ICS. Through these efforts, we have created space in the
    international dialogue for U.S. approaches to insurance capital
    to be recognized as providing comparable outcomes.
        It is important to recall that the ICS, or any standard
    produced by the IAIS, is a voluntary standard that is not
    binding, and would not apply in a jurisdiction unless adopted
    voluntarily by the jurisdiction in accordance with applicable
    domestic laws.
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM RANDAL
                               K. QUARLES

    Q.1.a. The Federal Reserve's latest financial stability report
    highlights a number of increased risks to the financial
    system.[1] But in March, the Federal Reserve Board voted four-
    to-one against raising the countercyclical buffer,[2] which
    requires large banks to hold more capital when elevated risks
    start to appear.
        These are fantastic times for financial institutions, but
    we may be on the precipice of a downturn. Several observers
    believe that we are near the end of the business cycle. This is
    exactly when countercyclical measures should be taken and when
    capital requirements should be increased.
        If countercyclical measures aren't appropriate now, when
    would they ever be?

    [1] https://www.federalreserve.gov/publications/2019-may-finan-
    cial-stability-report-purpose.htm.

    [2] https://www.federalreserve.gov/newsevents/pressreleases/
    bcrcg
    20190306c.htm.

    A.1.a. The Federal Reserve Board's (Board) framework for
    setting the countercyclical capital buffer (CCyB) indicates
    that the CCyB would move above zero when we judge that
    vulnerabilities in the financial system have become
    meaningfully above normal, and that we would progressively
    raise the CCyB level as vulnerabilities become more severe.\1\
    ---------------------------------------------------------------------------
        \1\ See https://www.federalreserve.gov/newsevents/pressreleases/
    bcreg20160908b.htm.
    ---------------------------------------------------------------------------
        As I have stated and as described in our latest Financial
    Stability Report,\2\ we assess four major types of financial
    vulnerabili-
    ties: asset valuations and risk appetite, household and
    business debt, leverage of financial institutions, and funding
    risk. As you correctly point out, our May report highlighted
    that we are closely monitoring vulnerabilities related to the
    high level of business leverage as well as significant
    valuation pressures in some asset markets. Those concerns are
    balanced by the relatively modest growth of household debt in
    recent years, and its concentration in households with strong
    credit histories. Moreover, our financial institutions are much
    better capitalized than they were a decade ago, and other post-
    crisis reforms have decreased the probability of destabilizing
    runs in short-term funding markets. In particular, the largest
    banks that are subject to the CCyB have high levels of capital
    and high-quality liquid assets relative to their historical
    values, while simultaneously strengthening the resiliency of
    their other funding sources.
    ---------------------------------------------------------------------------
        \2\ See https://www.federalreserve.gov/publications/financial-
    stability-report.htm.
    ---------------------------------------------------------------------------
        Taking all of that into account, it remains my judgment
    that the level of system-wide vulnerabilities is within what
    can be considered a normal range. It is important to keep in
    mind that this is a financial stability assessment, not an
    assessment of the business cycle or of macroeconomic risks.
    Given the issues we are watching, it is certainly possible that
    developments in one or more areas could exacerbate any future
    business downturn even if they do not threaten financial
    stability. The threshold assessment of the type of risks that
    may be emerging is important, however, in determining the most
    effective response. If we thought risks to financial stability
    were elevated, turning on the CCyB would be an appropriate
    tool. If, instead, we see risks to the macroeconomic outlook, a
    different set of responses could be appropriate. For example,
    in the most recent Shared National Credit Examinations, our
    supervisors, together with those of the other Federal banking
    agencies, paid specific attention to underwriting practices for
    leveraged loans and have notified banks to improve those
    practices where needed to support stronger credit quality.
    Nonetheless, we are vigilant and will continue to monitor
    potential vulnerabilities to financial stability.

    Q.1.b. Why did the board fail to find consensus on this issue
    when it admits in its report that increased risks may be on the
    horizon?

    A.1.b. The Board engages in a comprehensive assessment of all
    available information in determining the appropriate level of
    the CCyB. My colleagues and I will, at times, reach different
    conclusions about the level of vulnerabilities or the potential
    interactions between existing vulnerabilities and the broader
    economy, while adhering to the same general framework. Overall,
    I think our content CCyB framework is serving us well. That
    said, it is useful to have debate and research on a wide range
    of ideas so we can advance our understanding of how best to
    achieve our goals.

    Q.2. My home State of New Jersey is moving toward legalization
    of recreational marijuana, and I have concerns that these new
    businesses as well as the existing medical marijuana businesses
    in the State will continue to find themselves shut out of the
    banking system. And when these businesses are forced to operate
    exclusively in cash, they create serious public safety risks in
    our communities.
        Comptroller Otting and Chair Powell have previously
    expressed support for legislative clarity on the marijuana
    banking issue, and I would like to understand Chair McWilliams,
    Vice Chair Quarles, and Chair Hood's position as well.
        Do you agree that financial institutions need legislative
    clarity on this issue?

    A.2. Yes. Only Congress can provide financial institutions with
    statutory clarity on the conflict between Federal and some
    States' laws on the legal status of marijuana and whether banks
    can serve marijuana businesses that are legal under State law.

    Q.3. I am also concerned that legal marijuana businesses will
    continue to find themselves unable to access insurance
    products, a necessity for those looking to secure financing.
        Would it be helpful for Congress to consider the role of
    insurance companies as States move toward legalization?

    A.3. Consideration of the role insurance companies play with
    regard to marijuana businesses would be at the discretion of
    Congress. Federal Reserve staff will track any new developments
    in this area.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS FROM RANDAL K.
                                QUARLES

    Q.1. In my State of South Dakota, farmers, ranchers, energy
    producers, and others use derivatives to manage risks and
    fluctuating commodity prices. It is critical for these
    producers to have access to markets and products that are as
    competitive and cost-effective as possible. Not only does this
    benefit agriculture and energy producers, it also benefits
    American consumers across the country who depend on stable
    prices as they go about their daily lives.
        Recently, the CFTC Commissioners submitted the attached
    joint comment letter in response to the SA-CCR proposed
    rulemaking, and I share in the concerns raised by these
    regulators who noted that, in its current form, the
    supplementary leverage ratios (SLR) ``is working
    counterproductively, limiting access to derivatives risk
    management strategies and discouraging the central clearing of
    standardized swap products.''
        The current SLR calculation fails to acknowledge the risk-
    reducing impact of client initial margin in its calculation,
    resulting in an inflated measure of the clearing member's
    exposure for a cleared trade.
        The SA-CCR rulemaking provides an important opportunity to
    address these concerns, and to work with your fellow regulators
    who directly monitor and regulate the derivatives markets.

       LHave you reviewed the attached joint comment letter
            from the CFTC Commissioners?

       LHave you had any direct conversations with the CFTC
            Commissioners about this matter and the concerns they
            raised?

       LWill you commit to continuing to work with your
            fellow regulators to address the concerns they have
            raised about the SLR moving forward?

        I strongly support the efforts of the CFTC Commissioners,
    who are in agreement that the SLR must acknowledge the risk-
    reducing impact of client initial margin in its calculation,
    and I urge you to continue working with your fellow regulators
    on this critical issue.

    A.1. The public comment process often provides valuable
    information about proposed rulemakings. The comment period for
    the proposal to implement the standardized approach for
    calculating the exposure amount of derivative contracts closed
    on March 18, 2019, and the Board of Governors of the Federal
    Reserve System (Board), the Federal Deposit Insurance
    Corporation, and the Office of the Comptroller of the Currency
    (collectively, the agencies) are considering the letter from
    the Commodity Futures Trading Commission along with other
    public comments received on the proposal in the course of
    developing any final rule.

    Q.2.a. Under the recent foreign bank tailoring proposal, the
    Federal Reserve Board would apply liquidity requirements to an
    intermediate holding company (IHC) based on the risk profile of
    a foreign banking organization's combined U.S. operations. The
    Board
    estimates these proposed changes would represent, in the
    aggregate, an increase of up to 4 percent in total liquidity
    requirements for IHCs.
        Given that the IHC is a distinct legal entity from the U.S.
    branch and funding between the entities is not fungible,
    wouldn't it be more efficient to tailor liquidity requirements
    on the IHC based on the IHC risk profile and separately on the
    branch based on the branch risk profile?

    A.2.a. The proposal would determine the applicability and
    stringency of certain requirements--including the liquidity
    coverage ratio, proposed net stable funding ratio, and single-
    counterparty credit limits--to a U.S. intermediate holding
    company of a foreign bank based on the risk profile of the
    foreign bank's combined U.S. operations. As stated in the
    proposal, this approach provides a way to address the potential
    for liquidity risks to spread across all segments of a banking
    organization and the risks posed by foreign banks with
    significant U.S. operations to financial stability. As you
    note, an alternative approach could determine the applicability
    of IHC-level requirements based on the risk-based indicators of
    the IHC, and there is much to commend this approach as well.
        This proposal was issued for public comment, and the Board
    is carefully reviewing and considering all comments received.
    We will make a determination of which approach to follow based
    upon this comprehensive review.

    Q.2.b. Why are existing restrictions on funding transfers
    between the IHC and branch (such as Section 23A of the Federal
    Reserve Act, Regulation W, asset and liquidity maintain
    requirements, and Regulation YY) insufficient?

    A.2.b. The proposals would determine liquidity coverage ratio
    (LCR) and the proposed net stable funding ratio (NSFR)
    requirements for a foreign bank's U.S. intermediate holding
    company based on the risk profile of the foreign bank's
    combined U.S. operations, which includes its U.S. intermediate
    holding company, if any, and its U.S. branches and agencies.
    This approach would not require a U.S. intermediate holding
    company of a foreign bank to hold liquid assets based on
    projected outflows at U.S. branches of the foreign bank, or to
    maintain stable funding at the U.S. intermediate holding
    company to supply assets outside of the U.S. intermediate
    holding company.
        Accordingly, while restrictions on transfers of assets
    between a U.S. intermediate holding company or an insured
    depository institution of a foreign bank and its U.S. branches,
    such as the limits under section 23A of the Federal Reserve
    Act, are important, they do not necessarily address the same
    risks that are the focus of the proposals.

    Q.3. How does the Board know if it is calibrating the
    application of the proposed Net Stable Funding Ratio (NSFR)
    rule appropriately before it has finalized the requirement and
    analyzed the full impact of the requirement on foreign banking
    organizations, given that this was absent in the proposal and
    the NSFR was not intended for a subsidiary of a consolidated
    organization?

    A.3. The foreign bank tailoring proposals would amend the scope
    of application of the Federal banking agencies' LCR and
    proposed NSFR rule. Under the NSFR proposed rule issued in
    2016, an NSFR requirement or a modified NSFR requirement would
    apply to U.S. intermediate holding companies of foreign banking
    organizations that are depository institution holding companies
    with total assets of $50 billion or more. The foreign bank
    tailoring proposals would modify the proposed NSFR rule's scope
    of application to include other U.S. intermediate holding
    companies and change the NSFR rule's applicability thresholds
    based on the size and risk
    profile of a foreign bank's combined U.S. operations. The
    foreign bank tailoring proposals generally seek to apply a
    consistent framework to foreign banking organizations as would
    apply to domestic firms, in order to provide consistent
    treatment of risks across firms and a level playing field.
        The agencies proposed the NSFR rule in 2016 and received a
    number of comments on the overall requirement, as well as on
    specific aspects of the rule. The Board has been working with
    the other Federal banking agencies to consider those comments
    and will consider all comments on the foreign bank tailoring
    proposals as the agencies work to develop a final rule.

    Q.4. The Board has proposed the same risk-based indicators to
    tailor requirements on foreign banks as the Board proposed for
    domestic banks. Since foreign banks' structures are different
    (i.e., they are subsidiaries of a global parent and not a top-
    tier institution), why has the Board chosen not to exclude
    certain intercompany transactions that pose a low run risk,
    including transactions with non-U.S. affiliates, from the risk-
    categorization metrics?

    A.4. The proposals would apply a consistent framework across
    U.S. and foreign banking organizations in order to promote a
    level playing field and consistent treatment of risks across
    firms. In some cases, the proposals would include adjustments
    to the risk-based indicators used to determine a firm's
    prudential standards based on the structure of foreign banks'
    operations in the United States, including with respect to
    intercompany transactions. For example, the proposed cross-
    jurisdictional indicator would exclude intercompany liabilities
    and certain collateralized intercompany claims. The proposals
    also request comment on whether to exclude additional
    intercompany claims from this indicator.
        For the weighted short-term wholesale funding indicator,
    the proposals would not exclude exposures between the U.S.
    operations of a foreign bank and non-U.S. affiliates, because
    reliance on short-term wholesale funding from affiliates can
    contribute to a firm's funding vulnerability in times of
    stress.
        The Board has received a number of comments on the proposed
    indicators, and we are in the process of considering them now.

    Q.5.a. Supervising large, globally active banking
    organizations--such as those covered by the Federal Reserve's
    Large Institution Supervision Coordinating Committee (LISCC)--
    are among your agency's most important responsibilities. While
    supervision traditionally relates to areas such as lending,
    credit risk, and capital and liquidity risk, many of the
    operational risks that larger banks manage are in areas
    unrelated to traditional banking services and functions.
        I am concerned that as these areas become a larger
    potential source of risk, supervisory teams may not have the
    technical expertise to properly oversee these complex financial
    institutions. Without proper supervision, the end result for
    the United States and the world economy could be disastrous.
        Do you agree that it is critical that supervisory staff
    have the requisite technical expertise to understand and review
    the cyber and technology risks of large financial institutions?

    A.5.a. I agree that examiners should have the requisite
    experience and technical expertise to provide the necessary
    supervisory oversight of large financial institutions. The
    Board has augmented its IT examination staff with cybersecurity
    risk specialists who perform cyber-focused exams at large
    financial institutions. The cybersecurity risk specialists are
    experienced subject matter experts and assess cybersecurity and
    operations risk management programs, IT operations, and
    management information systems to ensure they are operating in
    a safe and sound manner. We will continue to give focused
    attention to this in the evolution of our hiring practices for
    supervisory personnel.

    Q.5.b. How do you make certain that your field supervisory
    teams possess the requisite amount of technical experience in
    areas like cybersecurity and technology to oversee banks in the
    LISSC portfolio?

    A.5.b. The Federal Reserve System has an established framework
    to direct the recruitment, hiring, and assignment of
    cybersecurity risk specialist examiners. The Federal Reserve
    also has established minimum education and experience
    requirements for prospective cyber examiners focused on
    technology related post-secondary education, familiarity using
    industry-standard risk frameworks, prior regulatory experience,
    and industry certifications in information security. The Board,
    in conjunction with the Federal Reserve Banks, conducts
    training for cyber examiners based on the latest known threats
    to the financial services sector. For example, the Federal
    Reserve has held training sessions on operational resilience,
    which combines cybersecurity, business continuity, and IT
    operational controls. The Federal Reserve also maintains an IT
    and information security learning platform available to all
    supervisory staff in the Federal Reserve System, In addition,
    IT and cyber examiners regularly participate in the Federal
    Financial Institutions Examination Council annual IT
    Conference.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM RANDAL K.
                                QUARLES

    Q.1. Your agencies regulatory approach to inter-affiliate
    margin transactions is an outlier. The margin requirements have
    the effect of locking up capital that could otherwise be used
    for economic growth and they discourage centralized risk
    management practices among firms. In addition, the current
    approach results in the movement of collateral out of the U.S.
    insured depository institutions. These are all suboptimal
    policy outcomes. Regulatory authorities in the European Union,
    Japan, and most other G20 jurisdictions each currently provide
    such an exemption for these transactions. You have indicated
    you are aware of the issue but, to date, I've seen no official
    action from your agencies to fix the problem.
        The recognition for the need for an exemption began under
    regulators nominated by President Obama. In 2013, CFTC Chairman
    Gary Gensler provided an exemption for central clearing and
    trade execution. In 2015, CFTC Chairman Tim Massad provided an
    exemption, determining that initial margin was not warranted
    and it was a ``very costly and not very effective way'' to
    enhance risk management. Yet, your agencies did not provide an
    exemption from initial margin in the 2016 margin rules, and as
    a result, as of the end of last year, U.S. banking entities
    collected nearly $50 billion in initial margin from their own
    affiliates. In 2017, the Treasury Department noted that this
    rule puts U.S. firms at a disadvantage both domestically and
    internationally, recommending that your agencies provide an
    exemption consistent with the margin requirements of the CFTC.

    Q.1.a. Do you agree that an exemption from initial margin is
    appropriate for inter-affiliate transactions?

    A.1.a. The Federal Reserve Board (Board) is actively discussing
    this aspect of the rule with the other prudential regulators to
    assess what, if any, changes can be made consistent with the
    statutory directive that margin requirements help to ensure the
    safety and soundness of covered swap entities and are
    appropriate for the risk associated with noncleared swaps.

    Q.1.b. Will you prioritize a rule to provide an exemption for
    inter-affiliate transactions, separate from any broader
    regulatory effort such as a Regulation W rewrite?

    A.1.b. The current discussions with the other prudential
    regulators are separate and apart from any broader regulatory
    efforts.

    Q.1.c. Please provide an explicit timeline for when your
    agencies will take action.

    A.1.c. The Board is working to address this issue as soon as
    possible.

    Q.2. The reason a ``Reg W'' rewrite is suboptimal is that it
    will be counterproductive and slow. This capital needs to be
    released soon because we have geopolitical risk emerging over
    the world that could destabilize markets. If we have a Brexit,
    the number of entities will double and more capital will be
    unfairly sequestered. With potential trade volatility, Middle
    East uncertainty, and other risks, our banks need to be able to
    use capital for risk management, not have it trapped for no
    reason.
        The Current Expected Credit Loss (CECL) accounting standard
    poses significant compliance and operational challenges for
    banks.

    Q.2.a. Roughly how many of institutions that your agency
    supervises will be subject to the new CECL accounting standard?

    A.2.a. The Board is responsible for the supervision and
    regulation of bank holding companies, savings and loan holding
    companies (SLHCs), State-chartered banks that are members of
    the Federal Reserve System, and U.S. operations of foreign
    banking organizations. As of December 2018, there were
    approximately 5,200 organizations supervised by the Board.
        Institutions subject to Board supervision fulfill
    regulatory reporting requirements using financial statements
    and information prepared in accordance with U.S. generally
    accepted accounting principles (GAAP) (with limited exceptions
    for SLHCs that exclusively use statutory accounting principles
    for insurance activities). Accordingly, nearly all supervised
    institutions that file financial statements with the Federal
    Reserve System will be subject to the Current Expected Credit
    Losses (CECL) accounting standard.

    Q.2.b. What is the overall impact considering their nonbank and
    nonfinancial clients are also subject to the rule--considering
    the indirect impacts such as impairment of trade receivables
    pledged as loan collateral for a medium-sized business?

    A.2.b. CECL applies to all financial assets subject to credit
    losses that are measured at amortized costs and certain off-
    balance sheet credit exposures, including loans held-for-
    investment, securities held-to-maturity, and trade and lease
    receivables. CECL applies to all entities that follow U.S. GAAP
    reporting.
        Various economists, institutions, and independent
    organizations have produced impact analyses concerning CECL,
    with varying conclusions. We have reviewed these analyses and
    also performed internal analyses. Our internal analyses show
    that CECL is modestly counter-cyclical relative to the incurred
    loss standard.

    Q.2.c. There are many analyses publicly available related to
    the FASB's CECL proposal, but none have an approximation for
    the number of U.S. GAAP filers who will be affected and the
    overall macro impact--does your agency know the covered
    universe?

    A.2.c. As indicated above, CECL applies to all entities that
    follow U.S. GAAP reporting. This includes all banks, savings
    associations, credit unions, and financial institution holding
    companies, regardless of size, that file regulatory reports for
    which the reporting requirements conform to U.S. GAAP. We
    expect CECL to affect substantially all Board-supervised
    institutions (approximately 5,200 institutions) that fulfill
    regulatory reporting requirements using financial statements
    and information prepared in accordance with U.S. GAAP.

    Q.2.d. Are you confident that the banks you supervise are ready
    to implement CECL smoothly, given the balance sheet and
    operational costs involved?

    A.2.d. The effective date applicable to an institution depends
    on the institution's characteristics. The new accounting
    standard currently provides three different effective dates.
    U.S. Securities and Exchange Commission (SEC) filers must
    implement CECL by 2020, and non-SEC filers must implement it in
    2021 or 2022. On July 17, 2019, the FASB voted to issue a
    proposal for 30-day public comment that would reduce the number
    of effective dates for CECL to two. Under this proposal, SEC
    filers that are not smaller reporting companies would implement
    CECL by 2020 and all other entities would adopt it by 2023.
        We believe that CECL needs to be viewed as scalable to an
    institution's size and complexity and that banking
    organizations (including community banks) can implement CECL
    without the use of costly or complex modeling techniques.
        We recognize that the implementation of CECL continues to
    be an area of concern for community banks. We are focused on
    the burden on community banks and are committed to ensuring
    that the implementation of CECL is operational for community
    banks and that our supervisory expectations are appropriate
    given the size and complexity of such firms.

    Q.2.e. Other than allowing the banks to integrate CECL reserves
    into regulatory capital over 3 years, are your agencies doing
    anything to assess the impact of CECL on the availability of
    financing?

    A.2.e. We are committed to closely monitoring implementation
    and studying the effect of CECL on the banking system--
    including on the availability of financing--to determine if
    future changes to the regulatory framework are appropriate.

    Q.2.f. Would you agree that a FASB accounting change should not
    result in either an increase or decrease in the loss absorbency
    a bank holds against any given loan?

    A.2.f. We do believe that the current loss-absorbing capacity
    of the industry is appropriate. To address concerns about the
    CECL accounting standard's potential initial impact on
    regulatory capital at supervised institutions, the Board
    approved a final rule in December 2018, which provides
    institutions the option to phase in any day-one regulatory
    capital effects of CECL over a 3-year period. The transition
    period will allow us to monitor the impact of the standard
    before the full initial effect on regulatory capital is
    required to be recognized. If we do see the outsize initial
    effects on reserve levels that some have modeled, we have the
    regulatory tools we need to mitigate those effects. The phase-
    in period will give us time to deploy those tools, if needed.

    Q.3. Thank you for your response last week to my questions from
    October and November regarding the margin eligibility of
    certain over-the-counter (OTC) securities. The response to my
    question was very brief, since three paragraphs in the response
    were dedicated to a background and history of the issue rather
    than what the Federal Reserve (Fed) might do to address the
    issue. I have several follow-up questions to help me better
    understand what the Fed is planning to do since doing nothing
    would be damaging to our capital markets and economy.
        Your response states, ``Any expansion of the types of
    securities that are margin eligible would require careful
    consideration by the Fed of the benefits of such an approach
    weighed against potential increased burden on banks and other
    lenders.'' I disagree with this statement. Holders of
    marginable securities can borrow against them, which increases
    the utility of owning those securities, improves market quality
    and increases the value for investors. This can have a direct
    impact on small company capital formation, which is something
    Members of the Senate Banking Committee have been looking to
    improve.

    Q.3.a. Is the Fed also examining how the lack of updating the
    margin list affects the issuers and investors?

    Q.3.b. What is the timing for when the Fed will complete its
    review and make a decision on changes to margin eligibility for
    OTC securities? We cannot have an unending review with no
    action taken. If the Fed is not willing to take any action, I
    will look at transferring this authority to the SEC, which may
    be where this authority belongs.

    A.3.a.-b. You raise a number of important considerations, and
    we are currently reviewing policies related to margin
    eligibility of certain over-the-counter securities. I
    appreciate your concerns about the timing of this work, and I
    assure you we are diligently working on this issue.

    Q.4. Your May 8th response indicates that Fed staff has been
    monitoring OTC market developments since the publication of the
    OTC margin list ceased. It is my understanding that OTC
    platforms have been tiered in a way to clearly distinguish
    between companies, including a tier that requires the companies
    to meet high financial standards, follow best practice
    corporate governance, be current in their disclosures, and are
    not penny stocks, shell companies or in bankruptcy.
        What efforts have Fed staff taken to review these and other
    market developments since NASDAQ became an exchange in 2006?

    A.4. Please see response to question 3.

    Q.5. I think you would agree an appropriately tailored
    regulatory framework is important to maintain safety and
    soundness in our banking system, and promote economic growth.
    The Trump administration also has recognized these principles
    in Treasury's policy reports and Executive Order 13772. In
    2017, Congress passed an important overhaul of our tax system
    and provided important tax relief for Americans across the
    country. One provision, the Base Erosion and Anti-Abuse Tax, or
    BEAT, has the ability to damage many foreign banking
    organizations with significant presence and commitment in the
    United States if the BEAT rules are not implemented correctly.

    Q.5.a. Would you agree that bank regulatory policy and tax
    policy should be aligned to the greatest extent possible and
    avoid working counter to each other?

    A.5.a. It is desirable for tax and regulatory policy to not
    work counter to each other, but inevitably there will be
    instances when they are not altogether aligned because the
    objectives of these policies are different. Regulatory policy
    is aimed at ensuring the safety and soundness of financial
    institutions, as well as the stability of the financial system.
    Tax policy, on the other hand, is aimed at raising revenue in
    an equitable and fair manner. These goals are not inherently in
    conflict, but at times, tax policy may have a
    consequence that has the potential to thwart the intent of
    regulatory policy and vice versa.

    Q.5.b. If so, can you describe how the Fed engaging with
    Treasury to educate them on bank regulatory policy and
    structure as they are implementing the BEAT rules?

    A.5.b. The Federal Reserve works closely with the U.S. Treasury
    Department on areas of mutual interest. A key part of the
    dialogue is education of the other party on the goals of policy
    decisions and discussion of possible unintended consequences.

    Q.6. I am concerned about the risk sensitivity of some of the
    indicators that the Fed uses in its tailoring proposals. In
    particular, the arbitrary and crude threshold for nonbank
    assets is a metric that does not even reflect actual risk and
    that seems biased against business models focused on capital
    market activities even though many broker-dealers hold assets
    (Treasuries, agency securities) that are more liquid and high-
    quality than many bank assets (construction loans, subprime
    consumer loans). The Fed has stated that it considers nonbank
    activities indicative of risks like liquidity,
    interconnectedness, and complexity. However, the Fed has
    provided no empirical evidence to support this proposition.
    Moreover, the proposals deploy other indicators that actually
    address the particular risks that the Fed cites (weighted
    short-term wholesale funding for liquidity risk). Based on this
    strong evidence, I hope the Fed considers eliminating this
    flawed, short sighted, and dangerous indicator.
        If not eliminated, shouldn't the nonbank assets indicator
    at least be adjusted (by risk weighting these assets or
    excluding high quality liquid assets from the calculation) so
    that firms aren't disincentivized from holding Treasuries and
    other high quality liquid assets?

    A.6. In general, the tailoring proposals aim to strike a
    balance between simplicity and risk-sensitivity in the
    selection of risk-based indicators, using indicators that
    reflect risks to the safety and soundness of a firm and to U.S.
    financial stability. To promote transparency and
    predictability, as well as to reduce compliance costs, the
    proposals would use indicators that are already captured in the
    Board's regulatory framework and that are publicly reported by
    firms.
        The Board has received a number of comments on the proposed
    indicators, including the proposed nonbank assets indicator,
    and we are carefully considering them as we work to develop a
    final rule.

    Q.7. Under the recent foreign bank tailoring proposal, the Fed
    would apply liquidity and SCCL requirements to an IHC based on
    the assets and activities of its combined U.S. operations. And
    while the Fed requires FBOs with significant U.S. operations to
    move their U.S. subsidiaries under a single IHC, branches of
    foreign banks are separate foreign legal entities and cannot be
    held under the IHC. Furthermore, due to regulations such as
    Regulation W, funding between the U.S. branch of an FBO and its
    IHC are not fungible.

    Q.7.a. What is the rationale for determining regulation at the
    IHC inclusive of its parent's branch activities?

    Q.7.b. Would it not be more efficient to tailor these
    regulations to the IHC based on IHC risk profile alone, and to
    separately tailor requirements to the branch?

    A.7.a.-b. The proposal would determine the applicability and
    stringency of certain requirements--including the liquidity
    coverage ratio, proposed net stable funding ratio, and single-
    counterparty credit limits--to a U.S. intermediate holding
    company of a foreign bank based on the risk profile of the
    foreign bank's combined U.S. operations. As stated in the
    proposal, this approach provides a way to address the potential
    for liquidity risks to spread across all segments of a banking
    organization and the risks posed by foreign banks with
    significant U.S. operations to financial stability. As you
    note, an alternative approach could determine the applicability
    of Intermediate Holding Company (IHC) level requirements based
    on the risk-based indicators of the IHC, which has a different
    set of advantages and disadvantages.
        This proposal was issued for public comment, and the Board
    is carefully reviewing and considering all comments received.

    Q.8. I have concerns with the Fed entering the market for
    faster payments as a direct competitor of the private sector.
    My understanding is that the Fed seeks to justify this
    potential action in part on a perceived need for
    ``resiliency.'' The notion that having two systems would
    provide resiliency necessarily assumes that every bank in the
    country (or at least an overwhelming majority of them) would
    have to connect to two systems: the private sector system and
    the yet-to-be-built Government-run system, which would create
    enormous inefficiencies and impose needless costs on the
    American taxpayer and the private sector.

    Q.8.a. Have you done any cost-benefit analysis, particularly in
    light of the other faster payment options currently in the
    market that already serve as near substitutes, like payments
    over the card networks, same-day ACH, PayPal, Venmo, Zelle,
    Fedwire Funds Service itself, to determine whether or not this
    proposal makes any sense?

    A.8.a. The Board announced on August 5, 2019, that the Reserve
    Banks will develop a new real-time payment and settlement
    service, called the FedNowSM Service, to support
    faster payments in the United States. The Board's evaluation of
    Reserve Bank service proposals, such as the FedNowSM
    Service, is subject to the requirements of the Federal Reserve
    Act, the Monetary Control Act, and longstanding Federal Reserve
    policies and processes. The Board's policy for evaluating new
    services was carefully tailored to consider factors that are
    most relevant in assessing the costs and benefits of the
    service. Specifically, the Board assesses whether the Federal
    Reserve will achieve full cost recovery over the long run,
    whether the service will yield a clear public benefit, and
    whether the service is one that other providers alone cannot be
    expected to provide with reasonable effectiveness, scope, and
    equity. In addition, the Board performs a competitive impact
    analysis when considering an operational or legal change to a
    Reserve Bank service or price that would have a direct and
    material adverse effect on the ability of others to compete
    with the Reserve Banks. The Board's analysis on these matters,
    including associated costs and benefits, is described in
    greater detail in Part One of the Board's Federal Register
    Notice announcing the decision.\2\ Although my fellow Governors
    concluded that the development of the FedNowSM
    Service is appropriate at this time, I did not see a strong
    justification for the Federal Reserve to move into this area
    and crowd out innovation when viable private-sector
    alternatives are available. As a result, I voted against this
    action.
    ---------------------------------------------------------------------------
        \2\ See https://www.federalregister.gov/documents/2019/08/09/2019-
    17027/federal-reserve-actions-to-support-interbank-settlement-of-
    faster-payments.

    Q.8.b. Doesn't the Fed already regulate and supervise the
    private sector real-time payments operator, which we understand
    has an impressive track record for resiliency, operating with
    multiple data centers, redundant systems, etc.? Are you
    contending that your regulatory and supervisory powers over the
    private sector operator are deficient in terms of your
    ---------------------------------------------------------------------------
    supervising the private sector's plans to ensure resiliency?

    A.8.b. One of the factors that has complicated the Board's
    consideration of the real-time payments issue is that--unlike
    many central banks around the world--the Board does not have
    plenary regulatory or supervisory authority over the U.S.
    payment system. Rather, the Board has limited authority to
    influence private-sector payment systems in specific
    circumstances. The Bank Service Company Act (BSCA) grants the
    Board (and the other Federal banking agencies) the authority to
    regulate and examine third-party service providers, but only
    for the performance of certain covered services and only when
    services are performed for depository institutions under the
    agency's supervision. The BSCA, however, does not grant
    enforcement authority to the Board or other Federal banking
    agencies over third-party service providers.

    Q.8.c. In light of the recent Fedwire Funds outage, which we
    understand came at a critical part of the day when private
    sector settlement relies on Fedwire, should the Fed's
    resiliency focus perhaps be on the Fedwire Funds system, which
    has vital systemic importance, rather than committing time and
    resources to standing up new infrastructure that may or may not
    provide resiliency?

    A.8.c. Maintaining and enhancing the resilience of the Fedwire
    Funds Service is, and will continue to be, an area of focus for
    the Board. The Board, through its oversight of the Reserve
    Banks, holds the Fedwire Funds Service to high standards, which
    include robust operational resilience expectations.
        The Fedwire Funds Service has historically provided a high
    level of operational reliability. Having addressed the outage's
    immediate cause, efforts are underway to identify, understand,
    and respond to the outage's root causes so that the same high
    levels of operational reliability will continue in the future.
        That being said, as indicated in my response to question
    8.a., I did not support the Board's decision regarding the
    FedNowSM Service. We would be better served by
    focusing our resources on enhancing the resiliency of the
    current Fedwire Funds Service.

    Q.9. According to a GAO report (May 2019) entitled ``Bank
    Supervision: Regulators Improved Supervision of Management
    Activities but Additional Steps Needed,'' ``corporate
    governance'' was the largest of 26 categories of MRAs issued by
    the Fed between 2012--2016, constituting approximately 19
    percent of all MRAs. This was by far the largest category in
    terms of MRAs issued by the Fed. Similarly, internal reports
    from the U.S. Federal bank regulators for 2016 through 2017
    showed that corporate governance issues were among the most
    common categories for issued supervisory concerns.

    Q.9.a. In the interest of greater transparency and
    accountability in the supervisory process, including, with
    respect to how the agencies use guidance and employ their
    significant discretion in the examination process, please
    describe, on an anonymous basis, some examples of these MRAs,
    and the grounds on which such MRAs were determined to be
    warranted (e.g., what laws, regulations and/or guidance were
    implicated and the risks posed by the corporate governance
    practice at issue).

    A.9.a. Good corporate governance is vital to firms' safety and
    soundness and encompasses a wide-range of issues, such as risk
    management, internal controls, internal audit, effective
    management oversight, and compliance with laws, including the
    Bank Secrecy Act/Anti-money Laundering (BSA/AML). The Board
    believes that it is important for forms to address corporate
    governance issues because they can involve violations, or
    potential violations, of a statute or regulation and often be
    precursors to more serious issues that can adversely affect
    firms' financial conditions and safety and soundness. While the
    Board and the Federal Financial Institutions Examination
    Council (FFIEC) have issued guidance to regulated films on a
    variety of corporate governance topics, this guidance does not
    form the basis for Matters Requiring Attention (MRA) or Matters
    Requiring Immediate Attention (MRIAs).
        Below are examples of some recent MRAs that are among the
    subset referenced by the Government Accountability Office
    report:

       LDirecting a firm to address identified issues in
            its liquidity risk management processes as defined
            under 12 CFR 252.34(f)(2) (ii), because it could not
            demonstrate an ability to manage its liquidity
            positions satisfactorily, which could lead to acute
            problems in the firm's financial condition and impair
            its safety and soundness.

       LDirecting a firm to address noncompliance with
            certain risk management and risk committee
            requirements, including having a risk management expert
            serve on its risk committee, as required under 12 CFR
            252.33.

       LDirecting a firm to strengthen and maintain a
            satisfactory and sustainable system of internal
            controls and procedures to ensure compliance with
            certain BSA/AML laws and regulations, as required under
            31 CFR 1010.311, 1010.312, and 1010.314.

       LDirecting a firm to address deficiencies in its
            information security program, as those deficiencies
            present an increased risk of cyber attack, data
            breaches, compromise of customer information, damage to
            internal systems, and potentially the firm's overall
            safety and soundness.

    Q.9.b. Please describe whether the Interagency Statement
    Clarifying the Role of Supervisory Guidance has had an impact
    on examination practices at your agency and, if so, explain
    how.

    A.9.b. The Interagency Statement Clarifying the Role of
    Supervisory Guidance (Statement) emphasizes administrative law
    principles and clarifies that supervisory guidance does not
    have the force and effect of law. Since the issuance of the
    Statement, Board staff have held several training sessions with
    Federal Reserve System staff (including a mandatory session),
    developed internal materials examiner's reference, and
    followed-up with Reserve Banks regarding processes that are in
    place to ensure staff practices align with the Statement.

    Q.9.c. Is there a review process at your agency to assure that
    there are no instances where examiners have wielded guidance,
    examination handbooks or policy statements with the power
    reserved for rules or laws (i.e., basing MRAs or MRIAs or
    violations on them)?

    A.9.c. All MRAs and MRIAs identified by examiners undergo a
    review processes involving various levels of staff and
    management before they are issued to the firm to ensure that
    they are issued appropriately. The specific review process
    varies based on the size of the firm and the issues presented.
    In addition, an appeals process exists for firms who wish to
    challenge MRAs and MRIAs.

    Q.9.d. What assurance do you have that MRAs have not been based
    on guidance, examination handbooks, or policy statements?

    A.9.d. In addition to the processes described above, the Board
    periodically conducts reviews of Reserve Bank practices as part
    of its oversight responsibilities articulated in the Federal
    Reserve Act.

    Q.9.e. What type of study/survey/review could the agencies or
    industry permissibly conduct to assess whether examiners have
    wielded guidance, examination handbooks, or policy statements
    with the power typically reserved for rules or laws?

    A.9.e. Supervisors regularly work to maintain an open dialogue
    with supervised institutions, including to hear concerns or
    critiques from those institutions about specific topics or
    about supervisory processes. Supervised institutions may also
    appeal material supervisory determinations that they receive
    from the Federal Reserve. Further, as noted in responses to
    other parts of this question, the
    Federal Reserve periodically reviews its internal guidance and
    processes to promote compliance with the law. This includes
    maintaining processes to assist in mitigating instances where
    guidance could be used improperly. We will always welcome any
    information from the industry or any other source that can help
    us ensure our supervisors are acting in compliance with the
    limitations on the role and use of guidance and other
    nonregulatory supervisory engagement.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER FROM RANDAL K.
                                QUARLES

    Q.1. When Chairman Powell appeared before our Committee the
    last time, he was asked about the Fed's proposal to potentially
    establish a Real-Time Gross Settlement (RTGS) system that would
    compete directly with private sector payment services
    providers. Chairman Powell stressed, however, that before
    entering this market, the Fed must first ``find that the
    services [it] provide[s] are . . . not something that the
    private sector can adequately provide.'' In other words, the
    Fed must first identify a market failure. Over the last several
    years, the private sector has, in fact, developed--in close
    collaboration with the Fed--a real-time interbank payment
    system that is already up and running, is already supervised
    the Fed, and was expressly designed to satisfy the functional,
    operational, and other criteria articulated by the Fed's Faster
    Payments Task Force. I understand that this private sector
    system can already reach more than half of the country's demand
    deposit accounts and that new participants--both banks and
    nonbanks--continue to connect, as the private sector works to
    reach the Fed's goal of establishing ubiquitous private sector
    real-time payments by the end of next year. Accordingly, it
    would appear that the private sector is well on its way to
    reaching this goal.

    Q.1.a. Has the Fed identified an existing or potential private
    sector market failure in real-time payments and, if so, on what
    basis was this determination made?

    A.1.a. The Board announced on August 5, 2019, that the Reserve
    Banks will develop a new real-time payment and settlement
    service, called the FedNowSM Service, to support
    faster payments in the United States.
        In assessing its criteria for new payment services, the
    Board considers input from the public, historical experience,
    and its own analysis to assess whether such services can be
    expected to generate public benefits that private-sector
    services alone may be unable to achieve.\1\ Although my fellow
    Governors concluded that the development of the
    FedNowSM Service is appropriate at this time, I did
    not see a strong justification for the Federal Reserve to move
    into this area and crowd out innovation when viable private-
    sector alternatives are available. As a result, I voted against
    this action.
    ---------------------------------------------------------------------------
        \1\ The Board considered whether private-sector real-time gross
    settlement (RTGS) services for faster payments alone could be expected
    to provide an infrastructure for faster payments with reasonable
    effectiveness) scope, and equity, and further, if private-sector
    services are likely to face significant challenges in extending
    equitable access. The Board also considered whether the development of
    the FedNowSM Service will likely yield clear and substantial
    benefits to the safety and efficiency of faster payments in the United
    States.

    Q.1.b. If you don't believe you have to officially make that
    determination until you decide affirmatively to move forward
    with the creation of a Fed-run real-time payment system,
    presumably you gave this some thought before you issued the
    October request for information. Otherwise, why even propose to
    create a new real-time payments system if you didn't believe
    there has been, or likely will be, a market failure in the
    ---------------------------------------------------------------------------
    provision of real-time payments?

    A.1.b. Please see the response to question 1.a.

    Q.2. In justifying the need for the Fed to potentially enter
    the market for real-time interbank clearing and settlement
    services, Fed officials have suggested that a Fed-operated
    real-time payments system would provide market ``resiliency.''
    While I suppose that the existence of two or more real-time
    payment systems could, in theory, provide some degree of market
    resiliency, that theoretical resiliency would only exist if
    banks were connected to two completely redundant systems, at
    enormous cost and inefficiency.
        Given that every bank in the country would have to join at
    least two systems: the private sector system and the yet-to-be-
    built Government-run system, which would be hugely inefficient,
    very costly for the private sector and, ultimately, the U.S.
    taxpayer, couldn't the Fed address any resiliency concerns
    through the exercise of its supervisory authority over the
    existing real-time payment system--as has been the approach in
    almost all other countries around the world?

    A.2. Please see the response to question 1.a.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM RANDAL K.
                                QUARLES

    Note: In the case that Vice Chair Quarles is unable to respond
    to the questions below because of his recusal from matters
    involving Wells Fargo, we request that another member of the
    Board of Governors of the Federal Reserve System respond to
    these questions in full.

    As you are aware, I have voluntarily recused myself from voting
    on, or participating by decision or recommendation in, matters
    specifically involving Wells Fargo. The answers below describe
    matters of general applicability or public record and are
    consistent with my recusal decision.

    Q.1. Federal banking regulators have the power to veto the
    hiring of new senior executives and board members at
    underperforming banks. 12 U.S.C. Sec.  1831i requires any
    ``insured depository institution or depository institution
    holding company'' that is ``not in compliance with the minimum
    capital requirement applicable to such institution or is
    otherwise in a troubled condition'' to ``notify the appropriate
    Federal banking agency of the proposed addition of any
    individual to [their] board of directors or the employment of
    any individual as a senior executive officer . . . before such
    addition or employment becomes effective.''[1] 12 U.S.C. Sec.
    1813 defines the ``appropriate Federal banking agency,'' in the
    case of ``any bank holding company and any subsidiary . . . of
    a bank holding company'' as ``the Board of Governors of the
    Federal Reserve System.''[2]
        The Federal Reserve requires any ``regulated institution''
    (a ``State member bank or a bank holding company''[3]) that is
    ``not in compliance with all minimum capital requirements
    applicable to the institution'' or that ``is in troubled
    condition'' to ``give the Board 30 days' written notice''
    before: (1) ``adding or replacing any member of its board of
    directors''; (2) ``employing any person as a senior executive
    officer of the institution;'' or (3) ``changing the
    responsibilities of any senior executive officer so that the
    person would assume a different senior executive officer
    position.''[4] The Federal Reserve defines ``troubled
    condition'' as an institution that ``is subject to a cease-and-
    desist order or formal written agreement that requires action
    to improve the financial condition of the institution, unless
    otherwise informed in writing by the Board or Reserve
    Bank.''[5] Under 12 C.F.R. 225.72 and 225.73, the Federal
    Reserve has the power to ``disapprove'' of a proposed senior
    executive officer if it ``finds that the competence,
    experience, character, or integrity of the individual with
    respect to whom the notice is submitted indicates that it would
    not be in the best interest'' of the bank or the public ``for
    the individual to be employed by, or associated with,'' the
    bank.
        Wells Fargo & Company is a registered bank holding company
    that ``owns and controls Wells Fargo Bank, NA,'' a ``national
    bank,'' that is currently subject to a cease and desist order
    from the Board of Governors of the Federal Reserve System.[6]
    Wells Fargo Bank, NA, is also subject to three open OCC consent
    orders.[7]

    [1] 12 U.S.C. Sec.  1831i.

    [2] 12 U.S.C. Sec.  1813.

    [3] 12. C.F.R. 225.71.

    [4] 12. C.F.R. 225.72.

    [5] 12. C.F.R. 225.71.

    [6] https://www.federalreserve.gov/newsevents/pressreleases/
    files/enf20180202al.pdf.

    [7] Letter from Joseph M. Otting, Comptroller of the Currency,
    to Senator Elizabeth Warren, April 3, 2019, https://www.warren.
    senate.gov/imo/media/doc/2019.04.03%20OCC%20Response%20-
    to%20Letter%20to%20OCC%20and%20CFPB%20re%20Wells%20
    Fargo%20Auto%20Lending%20Settlement.pdf.

    Q.1.a. Does the Federal Reserve consider Wells Fargo & Company
    and/or Wells Fargo Bank, NA, to be in a ``troubled condition''
    under 12 C.F.R. 255.71? If not, please explain why not.

    A.1.a. The finding of a troubled condition is confidential
    supervisory information and privileged under the Rules
    Regarding Availability of information of the Federal Reserve
    Board (Board) at 12 CFR part 261. It is the Board's general
    policy not to disclose confidential supervisory information to
    the public.

    Q.1.b. Does the Federal Reserve consider Wells Fargo & Company
    to be ``in compliance with all minimum capital requirements
    applicable to the institution?'' If so, please explain why.

    A.1.b. As of March 31, 2019, Wells Fargo & Company reported the
    following capital ratios on its Federal Reserve reporting form
    Y-9C.\1\ Each reported ratio exceeds the minimum ratio required
    under the Board's capital rule:
    ---------------------------------------------------------------------------
        \1\ https://www.ffiec.gov/npw/FinancialReport/
    ReturnFinancialReportPDF?rpt=FRY9C&id=
    1120754&dt=20190331.

       LCommon equity tier 1 capital ratio: reported 11.92
    ---------------------------------------------------------------------------
            percent (requirement is 4.5 percent);

       LTier 1 risk-based capital ratio: reported 13.64
            percent (requirement is 6.0 percent);

       LTotal risk-based capital ratio: reported 16.74
            percent (requirement is 8.0 percent);

       LTier 1 leverage ratio: reported 9.15 percent
            (requirement is 4.0 percent); and

       LSupplementary leverage ratio: reported 7.78 percent
            (requirement is 3.0 percent).

    On June 27, 2019, the Federal Reserve announced the results of
    its 2019 Comprehensive Capital Analysis and Review (CCAR)
    exercise and did not object to the capital plan of Wells Fargo
    & Company.

    Q.2. On March 28, 2019, Wells Fargo announced that its CEO, Tim
    Sloan, was departing the bank.[1] According to C. Allen Parker,
    Wells Fargo's interim CEO and President, the bank is actively
    engaging in ``an external search . . . for the company's new
    CEO and [P]resident.''[2]

    [1] Wells Fargo, ``Wells Fargo CEO and President Tim Sloan to
    Retire; Board of Directors Elects Allen Parker as Interim CEO
    and President,'' March 28, 2019, https://newsroom.wf.com/press-
    release/corporate-and-financial/wells-fargo-ceo-and-president-
    tim-sloan-retire-board.

    [2] Id.

    Q.2.a. Does the Federal Reserve plan to conduct a review, as
    outlined in 12 C.F.R. 225.73, of the new Wells Fargo CEO and
    President selected by the bank at the conclusion of its search?
    If not, why not?

    A.2.a. As noted in Question 1, whether an institution is in a
    troubled condition under 12 C.F.R. 225.71 is confidential
    supervisory information and cannot be disclosed publicly. If a
    firm is in troubled condition, then the Federal Reserve would
    review the film's written notice and follow the requirements in
    the regulations.

    Q.2.b. What factors does the Federal Reserve consider in
    assessing an individual's ``competence, experience, character
    or integrity,'' as described in 12 C.F.R. 225.73? What
    information about an individual's competence, experience,
    character, or integrity'' would be considered disqualifying for
    a senior executive or board member?

    A.2.b. In each case, the Board conducts a review of these
    factors by collecting biographical and financial information
    regarding the individual, including criminal, administrative
    and other history. While the Board considers each notice in
    light of the facts and circumstances presented, the Board
    consistently has viewed certain derogatory information such as
    criminal conviction for a crime involving dishonesty, causing
    substantial harm or loss to a financial institution or the
    deposit insurance fund, or refusal to disclose similar
    biographical or financial information, as a basis for objection
    to a notice. The Board may consider other factors disqualifying
    in light of the facts and circumstances.

    Q.2.c. What factors does the Federal Reserve consider in
    assessing what would be ``in the best interests of . . .
    depositors . . . or the best interests of the public''?

    A.2.c. In each case, the Board considers these factors in light
    of the facts and circumstances presented. In reviewing notices
    to appoint senior executive officers or directors, the Board
    has consistently considered ensuring the safe and sound
    operations and future prospects of the banking organization to
    be in the best interests of depositors or the best interests of
    the public.
                                    ------

     RESPONSE TO WRITTEN QUESTION OF SENATOR MORAN FROM RANDAL K.
                                QUARLES

    Q.1. S. 2155 requires your agencies to establish a community
    bank leverage ratio (CBLR), which Congress envisioned as a
    single, simple capital standard that would provide small
    financial institutions with regulatory relief. However, the
    CBLR you have proposed includes revisions to the Prompt
    Corrective Action (PCA) framework, which would effectively
    raise the PCA thresholds for community banks who choose to
    comply with the CBLR.
        Given the negative regulatory consequences triggered when
    banks fall below the various PCA thresholds, I'm concerned your
    proposal will actually discourage community banks from ever
    opting into the CBLR framework. Are there changes to your CBLR
    proposal that would make it less burdensome and more attractive
    for small community banks?

    A.1. The Federal Reserve Board (Board), the Office of the
    Comptroller of the Currency (OCC), and the Federal Deposit
    Insurance Corporation (FDIC) (collectively, the agencies)
    jointly issued a proposal that would allow community banking
    organizations, which meet certain qualifying criteria, to opt-
    in to a leverage-based capital framework, the Community Bank
    Leverage Ratio (CBLR). This framework would implement section
    201 of the Economic Growth, Regulatory Relief, and Consumer
    Protection Act of 2018 (EGRRCPA). Firms that use the framework
    would not be subject to risk-based capital requirements.
        The proposal seeks to provide material burden relief, in
    the form of significantly simpler capital requirements and
    shorter reporting schedules, while maintaining safety and
    soundness in the banking system. The proposal included a proxy
    Prompt Corrective Action framework for less-than-well-
    capitalized community banking organizations. Under the
    proposal, firms that have elected to opt-in to the CBLR
    framework would have the option to revert to the current risk-
    based capital requirements at any time rather than be subject
    to the proposed proxy Prompt Corrective Action framework.
        The Board is reviewing the comments received in response to
    the proposal and also has consulted with State-bank
    supervisors. Many commenters have raised concerns that the
    proposed proxy Prompt Corrective Action framework would
    unnecessarily increase complexity and could create a
    disincentive for firms to adopt the CBLR framework. As we move
    forward in the rulemaking process, we intend to work closely
    with the OCC and the FDIC to respond to the concerns of
    commenters and to develop a CBLR framework consistent with the
    objective of meaningfully reducing regulatory burden on
    community banking organizations, while maintaining safety and
    soundness.
        We appreciate your feedback on this important issue, and
    the Board will carefully consider ways to ensure the CBLR
    framework effectively reduces regulatory burden for qualifying
    community banking organizations as we proceed through the
    rulemaking process. The implementation of section 201 of
    EGRRCPA is a priority of the Board.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ FROM RANDAL K.
                                QUARLES

    Q.1. In our exchange during the hearing, you informed me that
    the financial risks from changes in the climate itself, such as
    high temperatures, drought, and sea-level rise, do not factor
    into the Federal Reserve's supervisory processes.

    Q.1.a. Why do these risks not factor into the Federal Reserve's
    current supervisory processes?

    Q.1.b. Do you think it would be appropriate to consider how
    changes in the climate, in addition to the increased risk from
    severe weather events, present financial risks to the
    institutions that you supervise?

    A.1.a.-b. The Federal Reserve Board (Board) requires that
    institutions understand, assess, manage, and hold both capital
    and reserves against a range of risks material to their
    operations. When potential risks arising from climate change
    are sufficiently salient for an institution, these same
    requirements apply. The ways that an institution satisfies
    these requirements, as well as more specific regulatory risk
    management requirements, may sometimes vary
    according to the characteristics of the institution. For
    example, the size of a banking institution, its location, and
    the composition of its activities could all affect the specific
    risks that it faces and the appropriate data and processes for
    managing them. In some cases, these risks could include risks
    associated with severe weather events, such as flooding or
    wildfires; if so, we expect institutions to establish a robust
    process for managing those risks.

    Q.2. In our exchange, I asked if you take into account the
    relationship between climate change and increasing severe
    weather risks in the Federal Reserve's supervisory processes.
    You responded that the Federal Reserve evaluates banks' risk
    management systems, not their particular conclusions.
        How does the Federal Reserve ensure that banks' risk
    management systems are adequately pricing in the risk from
    climate change?

    A.2. Broadly speaking, the Board, together with other Federal
    and State supervisory authorities, works to ensure the safety
    and soundness of financial institutions, as well as the fair
    and equitable treatment of consumers in transactions with these
    institutions. During safety and soundness examinations, staff
    assess the nature of a banking institution's operations, the
    adequacy of its internal controls, and its compliance with
    relevant legal and regulatory requirements.
        These confidential examinations are typically an
    ``iterative process of comment by the regulators and response
    by the bank,'' as described by the U.S. Court of Appeals for
    the District of Columbia Circuit. If that iterative process
    reveals that a banking institution has inadequate risk
    management processes, examiners can and would pursue a range of
    options, ranging from an examination finding to a formal
    enforcement action, to remedy the issue. This process provides
    the flexibility to address the specific circumstances an
    institution faces, and ensure compliance with laws and
    regulations.

    Q.2.b. For example, how do Federal Reserve supervisors make
    sure that banks are not relying only on historical trends when
    they assess their risk from severe weather events in the
    future?

    A.2.b. During the examination process, the Board generally
    requires an institution to use a range of data, where relevant
    and available, to understand adequately, assess, manage, and
    hold capital and reserves against a range of material risks.
    Because the nature of that data may vary according to the
    nature and activities of the institution, the Board does not
    generally prescribe the use of specific data sources through
    regulation. However, firms are always encouraged to
    appropriately assess their risks using the best information
    available, which may, or may not, include historical data
    trends.

    Q.2.c. Do Federal Reserve supervisors specifically discuss the
    financial risks from climate change with the institutions that
    they supervise?

    A.2.c. As mentioned above, the banking examinations that the
    Federal Reserve conducts are an iterative, confidential, and
    candid process of comment and response. In the cases where we
    find an institution lacks an adequate process to address the
    financial risks it faces, we do not hesitate to either say so
    or require remediation as appropriate. Though the circumstances
    an institution faces and the scope of an examination discussion
    can vary, where risks associated with climate, severe weather,
    and other events are relevant, they would figure into such a
    discussion.

    Q.3. I was encouraged to hear that you are ``looking very
    closely at'' and ``actively encouraging that [the Federal
    Reserve] examine'' the work of the Network for Greening the
    Financial System, the working group of 36 central banks and
    bank regulators that are developing analytic tools and best
    practices for incorporating the financial risks from climate
    change into bank supervisory processes.
        Are you considering joining the group? If so, what is the
    timeline for making that decision?

    A.3. At this point, no decision has been made on joining the
    Network for Greening the Financial System (NGFS). The Board is
    monitoring closely the activity of other central banks and
    supervisors on this issue, including activity taking place
    through the NGFS.

    Q.4. I was also encouraged that we agree that the Federal
    Reserve should be engaged in learning more about risks to the
    financial sector, including the risks from climate change.
        What next steps can you commit to taking in the next 6
    months to further the Federal Reserve's understanding of the
    financial risks from climate change and to incorporate that
    information into the Federal Reserve's supervisory work?

    A.4. Congress has entrusted agencies other than the Board with
    the primary responsibility of addressing climate change.
    However, we are aware of the emerging body of research and
    analysis on the financial risks associated with climate, and on
    improved measurement of the relationship between economic
    forecasts and climatologic projections. We are following the
    development of this research closely, particularly its
    application to the financial sector, and can commit to
    continuing to do so. Over the last several years, Federal
    Reserve economists have produced over 30 papers on the
    relationship of climate change to the economy and the financial
    sector, which continue to inform us as supervisory practices
    evolve. The Board also is a member of the Financial Stability
    Board, which I chair and which established the Task Force on
    Climate-related Financial Disclosures (Task Force) in 2016 to
    develop voluntary and consistent climate-related financial
    disclosures for private companies. The Task Force is voluntary
    and comprised entirely of private sector participants. Since
    2016, the Task Force has produced annual reports summarizing
    the uptake of its recommendations by the private sector and
    areas to improve disclosure of climate-
    related business risks.

      RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
                           RANDAL K. QUARLES

    Q.1.a. How are you improving the culture and strengthening the
    compliance division at the financial institutions you regulate,
    to
    ensure that Suspicious Activities Reports are being filed, fake
    accounts are not created, and customers are treated fairly?

    A.1.a. We regularly examine financial institutions under our
    supervision for general safety and soundness, Bank Secrecy Act/
    Anti-money Laundering (BSA/AML) compliance, and consumer
    compliance.
        Our supervisory expectations include that a financial
    institution's board of directors would focus on setting the
    types and levels of risk the firm is willing to take, make
    certain that senior management effectively carries out the
    firm's strategy within the established risk tolerances, and
    hold management accountable for its actions, including
    responsibility for effective risk management and compliance.
        The examination process may highlight deficiencies that
    need to be remediated regarding actions the board of directors
    could take, for example, to enhance oversight of compliance
    risk management, deficiencies that require management to
    enhance policies and procedures regarding the firm's BSA/AML
    risk assessment, or findings of violations of law for failure
    to file suspicious activity reports. Supervisory findings for
    weak risk management may be based upon concerns that a
    particular institution is not managing risks related to safety
    and soundness standards appropriately, as well as BSA/AML and
    consumer compliance laws and regulations. An institution's
    failure to address those concerns could lead to findings of
    safety or soundness concerns or violations of laws or
    regulations.
        Through this process, we seek to ensure that the compliance
    at financial institutions under our supervision is strong; that
    the financial institutions' boards of directors and management
    have a demonstrated commitment to compliance; and that those
    institutions are complying with regulatory requirements such as
    filing appropriate Suspicious Activity Reports.

    Q.1.b. Do problems with incentive pay practices that incent
    staff to engage in fraud or unfair practices still exist at the
    financial institutions you regulate?

    A.1.b. The Federal Reserve Board's (Board) supervisory process
    continues to monitor firms' progress at evaluating risk in
    their incentive compensation programs. Any unsafe and unsound
    practices that are identified are dealt with through
    established supervisory channels.
        The Guidance on Sound Incentive Compensation Policies
    (guidance),\1\ issued in June 2010, is anchored by three
    principles: balance between risks and results, processes and
    controls that reinforce balance, and effective corporate
    governance. Well-structured incentive compensation arrangements
    should take into account the full range of current and
    potential risks. Poorly structured incentive compensation
    arrangements that provide executives and
    employees with incentives to take inappropriate risks are not
    consistent with the guidance and the long-term health of the
    institution.
    ---------------------------------------------------------------------------
        \1\ See 75 FR 36395 (June 25, 2010).

    Q.2. Will you ensure access to information from community
    reinvestment advocates through the Freedom of Information Act
    ---------------------------------------------------------------------------
    with timely responses and without requiring high fees?

    A.2. The Freedom of Information Act sets forth the process for
    releasing agency information to the public, the permissible
    exemptions to the release of information, and the rules
    regarding permissible fees. All requests are processed in
    conjunction with these
    statutory requirements. The Board makes every effort to provide
    timely and complete responses, including requests from
    community reinvestment advocates. Frequently, no fees are
    charged. The Board will continue to work to ensure that all
    requests, including those from groups such as community
    reinvestment advocates, are answered in a timely manner.

    Q.3. There has been an epidemic of fake comments on
    controversial issues. How will you ensure that comments on
    rules and mergers are accurate and not based on stolen
    identities?

    A.3. Any comment made under a stolen identity is a matter that
    the Board takes seriously in its public comment process. The
    Board generally accepts and considers all comments but allows
    individuals whose identity has been stolen to remove those
    illicitly published comments from the Board's website. It is
    the substance of the argument contained in a comment letter
    that contributes most to an agency's consideration of an issue,
    not the identity of the commenter.

    Q.4. Recently, the Office of Management and Budget released a
    memorandum reinterpreting the Congressional Review Act to
    include independent regulatory agencies, many of which are your
    agencies. What would be the impact of requiring OMB review of
    proposed rules and guidance on your agency?

    A.4. The Board takes seriously its responsibilities with
    respect to the Congressional Review Act (CRA). The CRA applies
    to all Federal agencies, including independent agencies. Under
    the CRA, before a rule can take effect, the rule must be
    submitted to Congress and the Government Accountability Office.
    The CRA only applies to final rules.
        On April 11, the Office of Management and Budget (OMB)
    issued a memorandum to the heads of the executive departments
    and agencies providing new guidance on how agencies, including
    independent agencies, should submit rules to the OMB to
    facilitate its determination of whether a rule is major under
    the CRA. We are currently reviewing OMB's guidance.

    Q.5. The most recent National Climate Assessment said the U.S.
    Southwest could lose $23 billion per year in region-wide wages
    as a result of extreme heat. Has the Federal Reserve conducted
    any research on how extreme heat will affect the economy of the
    Southwest and the broader United States, and how that will
    impact regional financial institutions?

    A.5. We are aware of the emerging body of research and analysis
    on the financial risks associated with climate, and on improved
    measurement of the relationship between economic forecasts and
    climatological projections. We are following the development of
    this research closely, particularly in its application to the
    financial
    sector, and can commit to continuing to do so. Over the last
    several years, Federal Reserve economists have produced over 30
    papers on the relationship of climate change to the economy and
    the financial sector, which continue to inform us as
    supervisory practices evolve. The Board also is a member of the
    Financial Stability Board, which I chair and which established
    the Task Force on Climate-related Financial Disclosures (Task
    Force) in 2016 to develop voluntary and consistent climate-
    related financial disclosures for private companies. Since
    2016, the Task Force has produced annual reports summarizing
    the uptake of its recommendations by the private sector and
    areas to improve disclosure of climate-related business risks.

    Q.6. As you conduct your supervisory work, are you taking into
    account the evidence that extreme heat is going to get worse?

    A.6. As stated in the response to question 5, we are following
    the development of relevant research closely, particularly in
    its application to the financial sector. In the course of its
    supervisory work, the Board does use its authorities and tools
    to prepare financial institutions for a wide range of risks.
    Supervisors work with institutions to ensure they understand
    and manage effectively a wide range of risks, including those
    associated with severe weather events. To the extent these
    risks increase, we expect financial institutions to adjust
    their risk management strategies accordingly.

    Q.7. In your testimony to Senator Schatz, you stated that the
    Federal Reserve requires banks to look at a ``broad range'' of
    data. What data do you require financial institutions to use
    when calculating climate-based risk?

    A.7. The Board requires institutions to understand, assess,
    manage, and hold both capital and reserves against a range of
    risks material to their operations. The most appropriate way
    for an institution to meet these requirements--and the most
    relevant information it uses to do so--may vary according to
    the characteristics and activities of the institution. The
    banking institutions we regulate are all expected to measure
    the risks associated with their businesses, including loans.
    Large institutions typically gather data on the probability of
    default or loss given default of their loans. Over time,
    factors related to climate change would be expected to affect
    these measurements.

    Q.8. Does the Federal Reserve request banks to utilize climate
    change data when calculating risk? If so, how does the Federal
    Reserve ensure that the data and methodology are accurate?

    A.8. The Board requires that institutions employ a range of
    appropriate data in order to adequately understand, assess,
    manage, and hold capital and reserves against a range of
    material risks. The nature of that specific data can vary
    according to the circumstances a specific institution faces,
    and such data typically comes from both internal and external
    sources to an institution. In order to preserve flexibility to
    address the specific situation an institution faces, the Board
    does not generally prescribe the use of specific data sources
    through regulation.

    Q.9. What data do you require financial institutions to use
    when calculating exposure to severe weather events?

    A.9. The financial institutions that the Board regulates retain
    an obligation to understand, assess, manage, and hold capital
    and reserves against the material risks to which they are
    exposed. Depending on the circumstances an institution faces,
    the data that are relevant to doing so may differ--depending,
    for example, on whether an institution's credit exposures are
    secured by coastal or plain property, or are tied to business
    revenues in agriculture or construction. We expect institutions
    to use a range of risk-management data appropriate to their
    activities, and our supervisors retain the flexibility to
    determine whether the use of such data conforms with safety and
    soundness requirements.

    Q.10. In supervisory exams, how does the Federal Reserve
    analyze whether banks are adequately accounting for severe
    weather exposure to book their risk and ensure that the data
    and methodology is accurate?

    A.10. Credit risk examinations generally focus on the adequacy
    of an institution's policies and procedures for managing the
    risks associated with its credit portfolio, including the risk
    of credit losses. In addition to a review of those policies and
    procedures, examiners may conduct a review of loan files for
    conformance with rules related to loss estimation with the
    priority of preserving the integrity of the allowance for loan
    and lease losses. The Board's examination manuals and related
    guidance outline our approach to such reviews in greater
    detail.

    Q.11. What metrics will show that deregulatory actions such as
    easing the supplementary leverage ratio, deploying a
    countercyclical buffer, and easing standards for large bank
    resolution plans and foreign banks, will result in increased
    risk to financial stability?

    A.11. Post-crisis reforms relating to capital, liquidity,
    stress testing, and resolution planning have resulted in
    significant gains in resiliency for individual banking
    organizations and for the financial system as a whole. Recent
    Board proposals would maintain the most stringent standards for
    the largest and most complex banking organizations, while
    reducing costs for smaller, less risky, and less complex firms
    that engage in more traditional banking activities.
        For example, the proposal to revise the enhanced
    supplementary leverage ratio (eSLR) standard for U.S. global
    systemically important banks would not result in a material
    reduction in capital at these firms' top-tier holding
    companies. The Board (together with the Federal Deposit
    Insurance Corporation (FDIC) and the Office of the Comptroller
    of the Currency (OCC)) also issued a proposal to implement
    section 402 of S. 2155, which requires the agencies to revise
    the supplementary leverage ratio to exclude central bank
    deposits of custody banks. We are considering comments on the
    section 402 proposal before taking further action on last
    year's eSLR proposal, with the goal of not materially reducing
    the level of regulatory capital in the banking system.
        The more recent proposed changes to the framework for
    determining prudential standards for large domestic and foreign
    banking organizations would represent modest refinements. In
    particular, Board staff estimates that while these proposals
    would
    result in a small reduction in required capital under current
    economic conditions, the impact should be roughly neutral
    measured over the economic and credit cycle. For liquidity, the
    proposals would moderately reduce requirements for firms with
    the lowest indicators of risk, and modestly increase
    requirements for certain foreign banking organizations with
    higher indicators of risk. With respect to resolution planning,
    the tailoring proposal would modify the content and frequency
    of resolution plans, but it would not reduce the substantive
    standards used to review resolution plans, and the Board may
    always request information between submissions. All of these
    proposals have been issued for public comment, and the Board is
    carefully reviewing and considering the comments that were
    received.
        The Board assesses continually whether the financial system
    has reached a state where additional capital would be required
    through the activation of the countercyclical capital buffer.
    Most recently, the Board found that meaningful vulnerabilities
    related to asset valuations and commercial borrowing are
    balanced by more modest vulnerabilities associated with
    household debt as well as the historically low levels of bank
    leverage and funding risk.

    Q.12. Is it still the case that nearly 20 percent of
    outstanding supervisory findings relate to weaknesses in Bank
    Secrecy Act (BSA) and Anti Money Laundering (AML) programs?

    A.12. Outstanding supervisory findings vary across supervisory
    areas from year to year. For large firms, in particular, sound
    governance and controls are especially important, given the
    increased size, complexity, and scope of operations, as well as
    the challenges that arise from managing such large entities
    effectively across their various business areas.
        The November 2018 Supervision and Regulation Report
    included information on supervisory ratings and outstanding
    supervisory findings. For example, the report indicated that,
    for community banking organizations and regional banking
    organizations, roughly between 10 and 20 percent of outstanding
    supervisory findings relate to BSA/AML compliance.\2\ As
    indicated in the May 2019 report,\3\ there have not been
    significant changes to this information since last November.
    ---------------------------------------------------------------------------
        \2\ See Supervision and Regulation Report, Board of Governors of
    the Federal Reserve System, pp. 26-28 (Nov. 2018) (available at https:/
    /www.federalreserve.gov/publications/files/201811-supervision-and-
    regulation-report.pdf.
        \3\ See https://www.federalreserve.gov/publications/files/201905-
    supervision-and-regulation-report.pdf.
    ---------------------------------------------------------------------------
        Our interest is in being clear and transparent with our
    firms regarding our supervisory expectations and findings. When
    we issue a supervisory finding, we are committed to providing
    early supervisory feedback that encourages institutions to
    remedy weaknesses promptly to avoid more serious compliance or
    safety and soundness issues.

    Q.13. What is the Federal Reserve's next step following the
    joint guidance on BSA/AML published late last year?

    A.13. Last year there were two joint statements regarding BSA/
    AML requirements: On October 3, 2018, an Interagency Statement
    on Sharing Bank Secrecy Act Resources \4\ was issued to address
    instances in which banks may decide to enter into arrangements
    to share resources to manage their BSA/AML obligations more
    efficiently and effectively, particularly for banks with a
    community focus, less complex operations, and lower-risk
    profiles for money laundering or terrorist financing. On
    December 3, 2018, a Joint Statement on Innovative Efforts to
    Combat Money Laundering and Terrorist Financing was issued
    encouraging banks to take innovative approaches to meet BSA/AML
    compliance obligations.\5\ Banks with effective compliance
    programs will not be criticized if they choose not to take
    innovative approaches.
    ---------------------------------------------------------------------------
        \4\ See https://www.federalreserve.gov/newsevents/pressreleases/
    files/bcreg20181003a1.pdf.
        \5\ See https://www.federalreserve.gov/newsevents/pressreleases/
    files/bcreg20181203a1.pdf.
    ---------------------------------------------------------------------------
        Federal Reserve staff is working cooperatively with the
    U.S. Treasury, the Financial Crimes Enforcement Network, the
    National Credit Union Administration, as well as the other
    Federal banking agencies to review the broader BSA/AML regime
    to determine what improvements can be made. The agencies are
    considering, among other topics: (1) ways to improve
    transparency of the risk-focused approach to the BSA/AML
    examination process; and (2) further clarification to our BSA/
    AML supervision and enforcement process.

    Q.14. Do you expect to sec more bank mergers this year and next
    year than in previous years? How much of merger activity is due
    to changes from S. 2155 and other regulatory actions?

    A.14. Merger activity is affected by a number of factors,
    including economic environment, industry outlook, and factors
    unique to particular institutions or business models. As such,
    the Board cannot draw conclusions on the effect of S. 2155 or
    other regulatory actions at this time. Following the
    implementation of S. 2155, the volume of merger applications
    submitted to the Federal Reserve System declined compared to
    the volume of applications submitted during the same period in
    2017. In fact, the number of merger applications submitted to
    the Board is currently lower than in the years before the
    financial crisis.

    Q.15.a. Beyond the impacts on the customer, what are the risks
    to communities when banks merge?

    A.15.a. The integration of systems relating to risk management,
    information technology, BSA/AML, and compliance with consumer
    protection laws and the Community Reinvestment Act (CRA) could
    present merged institutions with increased operational risks.
    In reviewing bank merger and acquisition proposals, the Board
    considers the applicant's plans for implementing the proposal
    and its capacity to do so effectively.
        The Board carefully weighs the impact on communities in
    assessing bank merger and acquisition proposals. In considering
    such proposals, the Board evaluates the applicant's current and
    pro forma financial condition and future prospects, managerial
    resources, the convenience and needs of the communities to be
    served, public benefits, and the effects of the proposal on the
    financial stability of the United States. The Board also must
    analyze the competitive effects of the proposal, including
    whether the proposal would substantially lessen competition in
    any section of the country. In addition, the Board considers
    the applicant institution's business model, its marketing and
    outreach plans, the institution's plans following consummation
    of the proposal, and other relevant information.

    Q.15.b. Are you concerned about a loss of branches? Types of
    products? Jobs?

    A.15.b. In evaluating convenience and needs factors in bank
    acquisition and merger proposals, the Board considers all
    relevant information, including the addition of new products,
    extended hours of service, or additional branch locations that
    will be subsequently available to the public. With respect to
    branch closures, banks are required to adhere to Federal
    Deposit Insurance Act public notice requirements before closing
    branches.\6\ This Act provides that:
    ---------------------------------------------------------------------------
        \6\ Section 42 of the Federal Deposit Insurance Act (12 U.S.C.
    1831r-1), as implemented by the Joint Policy Statement Regarding Branch
    Closings (64 Fed. Reg. 34844 (1999). The Joint Policy Statement
    Regarding Branch Closings states that the Federal banking agencies will
    examine for compliance with branch closure requirements in accordance
    with each agency's consumer compliance examination procedures.

       LThe bank is required to provide the public with at
            least 30 days' notice, and the appropriate Federal
            supervisory agency with at least 90 days' notice,
    ---------------------------------------------------------------------------
            before the date of a proposed branch closing.

       LThe bank also is required to provide reasons and
            other supporting data for the closure, consistent with
            the institution's written policy for branch closings.

       LFor branches to be closed in low- or moderate-
            income geographies, affected persons have the ability
            to request a public meeting to explore the feasibility
            of obtaining adequate alternative facilities and
            services for the area.

        A pattern of branch closures in minority communities may
    also be relevant in determining whether a bank is in compliance
    with fair lending laws, for example, in determining whether a
    bank is engaging in redlining whereby a lender provides unequal
    access to credit, or unequal terms of credit, because of the
    race, color, national origin, or other prohibited
    characteristic(s). In a redlining analysis, branching is one of
    the factors that is considered, along with CRA assessment area,
    lending, marketing, and outreach practices. In evaluating
    branching for these purposes, we analyze whether there are bank
    branches in majority-minority census tracts.
        The Board considers the applicant's plans for products and
    services to be offered by the combined institution, including
    significant anticipated changes to products and services
    currently offered by the individual institutions and plans to
    offer new, replacement, or enhanced products and services. Many
    acquiring banks plan to offer the products and services of both
    the acquiring bank and the target bank throughout the footprint
    of the combined bank, resulting in increased availability of
    products and services for customers of each bank.
        The Board reviews applications pursuant to the applicable
    statutory factors.

    Q.16. You recommended revisions to the liquidity coverage
    ratio, but outsiders have raised concerns that this change will
    weaken buffers. How will the Federal Reserve ensure that banks
    have enough capital on hand to withstand a downturn?

    A.16. The Board's liquidity framework for large banking
    organizations has two general components: standardized
    measures, such as the liquidity coverage ratio rule or net
    stable funding ratio proposed rule, and firm-specific measures,
    such as liquidity risk management requirements and internal
    stress-testing requirements.
        The recent proposals to further tailor prudential standards
    would reduce or remove standardized liquidity requirements for
    some firms, but they would retain the firm-specific measures
    for all domestic firms with $100 billion or more in total
    assets and foreign banking organizations with $100 billion or
    more in combined U.S. operations. As a result, the proposals
    would continue to require these firms to meet liquidity risk
    management standards, conduct internal liquidity stress tests,
    and hold a buffer of highly liquid assets sufficient to meet
    projected 30-day stressed cashflow needs under internal stress
    scenarios. The proposals would also require these firms to
    maintain regulatory reporting of key liquidity data, which
    facilitates the Board's supervision of liquidity-related risks.
    In addition, the Federal Reserve will continue to assess the
    safety and soundness of firms through the normal course of
    supervision.
        Taken together, these firm-specific standards and data
    reporting requirements will allow supervisors to continue to
    achieve regulatory objectives but improve upon the simplicity,
    transparency, and efficiency of the framework. In this manner,
    the proposals build on the agencies' existing practice of
    tailoring regulatory requirements based on the size,
    complexity, and overall risk profile of banking organizations.
        The core reforms put in place after the financial crisis--
    stronger capital and liquidity requirements, stress testing,
    and resolution planning--have made our financial system more
    resilient, and I would not want to see any material weakening
    of these reforms. The objective of the proposals is to tailor
    prudential standards to the risks of large banking
    organizations without undermining the significant steps the
    Board and other agencies have made toward improving financial
    stability. Firms with the most significant risk profiles would
    remain largely subject to existing requirements.

    Q.17. As you move from regulation based on firm size to
    regulation based on firm activity, tailoring rules gets more
    complicated. How will you design the scenarios to assess
    potential risks?

    A.17. On November 29, 2013, the Board adopted a final policy
    statement on its scenario design framework for stress testing
    (policy statement). This policy statement outlines the
    considerations and procedures that underlie the formulation of
    the supervisory scenarios and specifies how the Board designs
    the supervisory scenarios to assess potential risks firms
    face.\7\ The Board adheres to the scenario design framework
    each year.
    ---------------------------------------------------------------------------
        \7\ The policy statement was most recently amended to limit
    procyclicality in the stress test through scenario design and clarify
    the Board's approach to setting the path of the unemployment rate and
    house prices in the macroeconomic scenarios. See 84 FR 6651 (February
    28, 2019).
    ---------------------------------------------------------------------------
        The macroeconomic scenario developed by the Board each year
    features a severe economic downturn that would affect all firms
    subject to stress tests in a given year. In addition, the Board
    applies two additional scenario components relating to trading
    and counterparty exposures to only the largest and most complex
    firms. Separately, firms are expected to test their
    vulnerabilities to idiosyncratic shocks in their stress tests.
        The scenario design framework allows for the inclusion of
    salient risks in the economic and financial environment. While
    the recession component of scenario design is developed
    according to quantitative guides described in the Board's
    policy statement on scenario design, the salient risk aspect is
    developed after an annual assessment.
        Each year, the Board identifies risks to the financial
    system and domestic and international economic outlooks that
    appear more elevated than usual using internal analysis and
    supervisory information. The Board consults with the FDIC and
    OCC in identifying appropriate salient risks to incorporate in
    the scenario.

    Q.18. Regarding stress tests, if the Federal Reserve provides
    the ``study guide for the exam'' ahead of time, how do you
    ensure that your staff have all the answers? What are you
    giving up when you eliminate the requirement that banks devise
    their own stress tests prior to complying with the Fed's tests?

    A.18. The Board is committed to increasing the transparency of
    its stress-testing process, and we have and will continue to
    guard against the risk that firms manage to the test. We have
    made additional information about our stress tests available,
    but importantly, we have not disclosed the full details of our
    models. I agree that we need to protect against gaming of the
    stress tests, which would make them less effective and would
    undermine the financial stability gains we have made.
        The enhanced disclosure of our supervisory models
    represented a considerable increase in the transparency of the
    stress-testing regime. The disclosure provides the public with
    more information about the models but should not give firms
    enough information for banks across the system to simply
    ``clone'' the Board's models in ways that could lead to an
    accumulation of risks around the errors and idiosyncrasies of
    those models. I believe that the recent disclosure of our
    supervisory model methodology strikes a good balance between
    the benefits of enhanced transparency and the risks associated
    with providing firms too much detail about our models.
        To the second point, the largest and most complex firms are
    still required to develop their own stress tests. The Board
    recently proposed to remove this requirement for firms with
    total consolidated assets below $250 billion as required under
    the Economic Growth, Regulatory Relief, and Consumer Protection
    Act. In this proposal, the Board invited public comment on a
    framework that would more closely match regulations for large
    banking organizations with their risk profiles.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR SMITH FROM RANDAL K.
                                QUARLES

    Q.1. What are you doing to ensure that no consumer will be
    forced to pay a higher interest rate under a LIBOR replacement
    than under LIBOR?

    A.1. The Federal Reserve Board (Board) has taken a number of
    steps to address the transition away from the London Inter-bank
    Offered Rate (LIBOR). For example, the Board has participated
    in discussions of the Alternative Reference Rates Committee
    (ARRC). The ARRC is a diverse group of private sector firms and
    institutions that has widespread support from the U.S. official
    sector. In addition to the Board, the Consumer Financial
    Protection Bureau (CFPB), the Commodity Futures Trading
    Commission, the Federal Deposit Insurance Corporation, the
    Federal Housing Finance Authority (FHFA), the Federal Reserve
    Bank of New York, the Office of the Comptroller of the
    Currency, the Office of Financial Research, the Securities and
    Exchange Commission, and the U.S. Treasury Department, all act
    as ex officio members of the ARRC. The ARRC is addressing
    issues related to consumer borrowing products that are
    currently based on LIBOR through its Consumer Products Working
    Group. This group includes a wide set of consumer advocates,
    lenders, investors, and servicers as members. The group also
    includes representatives of the Federal Reserve, CFPB,
    Conference of State Bank Supervisors, and FHFA, as ex officio
    members.
        The work of this group is focused both on (1) proposing
    models for new loans that are based on the Secured Overnight
    Financing Rate (SOFR), the ARRC's recommended alternative to
    LIBOR, and (2) crafting fallback strategies for loans that
    reference LIBOR in order to ensure any replacement rates are
    determined in a fair, transparent, and objective manner. These
    initiatives are voluntary--the ARRC does not have authority to
    force either use of SOFR or its suggested replacement
    strategies for LIBOR. However, the guiding principles set out
    by the ARRC for this working group, the active participation of
    consumer advocacy groups, and the involvement of prudential
    regulators, are all designed to ensure that any ARRC proposals
    for new products based on SOFR can both meet the needs of
    consumers and be competitively priced, and that ARRC proposals
    for replacement rates in products referencing LIBOR are fair
    for consumers, and are chosen and communicated transparently.

    Q.2. There may be significant costs for LIBOR transition--
    rewriting potentially millions of contracts and changing
    complex systems. Who will bear those costs? Will it be the
    large banks that broke the LIBOR index? Or will it be
    consumers, small banks, and credit unions who played no role in
    the LIBOR manipulation scandal?

    A.2. The costs of rewriting contracts and changing internal
    systems will necessarily be borne by the lenders and issuers of
    LIBOR instruments. Large banks, which are much more active in
    derivatives markets (representing an estimated 95 percent of
    all LIBOR exposures) and which also have large lending books
    based on LIBOR, will therefore bear much of these costs. Small
    banks and credit unions tend to have much smaller exposures to
    LIBOR, and the ARRC is working to provide tools that can help
    to minimize the costs they may face, both by proposing clear
    contract language that these institutions can use as they
    rewrite contracts and by working with vendors to make sure that
    the systems they offer to these institutions can accommodate
    the move from LIBOR.

    Q.3. How do you assess the current state of industry
    preparation for LIBOR transition? Are there areas of concern
    with the transition? If so, what areas?

    A.3. The ARRC has made significant progress since SOFR was
    established a little over a year ago. Over that period, we have
    seen new derivatives and debt markets based on this new rate
    emerge. SOFR futures, which did not exist a year ago, have seen
    more than $7 trillion in cumulative notional volumes, and firms
    have issued $136 billion in SOFR-linked debt issued over the
    past year.
        While the progress of transition has been good, at the same
    time, we have only a little over two and a half years until the
    point at which LIBOR could end, and the transition needs to
    continue to accelerate. The public officials have tried to be
    clear that market participants cannot assume that they will be
    able continue to rely safely on LIBOR. If the private sector
    does not take on this responsibility and begin to move away
    from LIBOR at a greater speed over the next year, then that
    would be a concern.
        The largest banks supervised by the Federal Reserve, have
    already put in place organized programs to manage the
    transition. The Federal Reserve will expect to see an
    appropriate level of preparedness at the banks we supervise,
    and that level must increase as the end of 2021 grows closer.
    Our supervisory approach will continue to be tailored to the
    size of institutions and the complexity of LIBOR exposure, but
    the largest firms should be prepared to see our expectations
    for them increase.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA FROM RANDAL K.
                                QUARLES

    Q.1.a. In 2015, regulators created new collateral requirements
    for swaps made between affiliates of the same company, known as
    inter-affiliate margin requirements. These requirements are
    inconsistent with international regulators and have tied up $40
    billion in capital, putting U.S. banks at a competitive
    disadvantage and freezing up investment back into the economy.
    In the past, you've stated that resolving inter-affiliate
    margin requirements should be a priority.
        Is this still your view?

    A.1.a. Yes. The Federal Reserve Board (Board) is actively
    discussing this aspect of the rule with the other prudential
    regulators to assess what, if any, changes can be made
    consistent with the statutory directive that margin
    requirements help to ensure the safety and soundness of covered
    swap entities and are appropriate for the risk associated with
    noncleared swaps.

    Q.1.b. Can you provide a timeline for when the issue will be
    addressed?

    A.1.b. The Board is working to address the issue as soon as
    possible.

    Q.2.a. Cybersecurity is a chief concern for U.S. financial
    institutions and the agencies that regulate them. What is your
    assessment of the current examination process and regulatory
    landscape for regulated institutions with respect to cyber?

    A.2.a. Cybersecurity remains a top supervisory priority, as it
    has implications for the safe and sound operations of financial
    institutions as well as financial stability. To that end,
    significant supervisory work has been conducted to assess
    cybersecurity risk management at financial institutions of all
    sizes, as well as across the financial sector. The Board uses a
    variety of examination processes based on the size and
    complexity of financial institutions. As cyber threats continue
    to evolve, further work will be needed within the Board and
    among regulators to evolve with the dynamic cyber risks at
    individual institutions and across the financial sector.
        At the Board, work is well underway to streamline our risk-
    based examination programs by tailoring examination guidance to
    financial institutions' risk profiles and standardizing
    processes and work programs. The goal of this work is to enable
    more effective and efficient examinations of financial
    institutions, for example leveraging interagency examinations
    of service providers to minimize the burden on financial
    institutions that outsource their significant IT functions.
        Additionally, in an effort to reduce regulatory burden, we
    are working with the other prudential regulators to identify
    instances where we can better work together on examinations and
    concentrate appropriate resources to address cyber risk. We
    also have broadened our engagements with the private and public
    sector to strengthen our shared understanding of operational
    resilience within the financial services sector.

    Q.2.b. How can Federal agencies improve and help harmonize
    cybersecurity regulations?

    A.2.b. The Board is working with other Federal regulatory
    agencies to streamline and harmonize cybersecurity guidance
    across the financial sector in a manner that aligns with the
    National Institute of Standards and Technology Cybersecurity
    Framework, which was developed in consultation with Government
    and the private sector. For example, through venues such as the
    Financial and Banking Information Infrastructure Committee, the
    Board, the Commodity Futures Trading Commission, the Federal
    Deposit Insurance Corporation, the Office of the Comptroller of
    the Currency, and the Securities and Exchange Commission are
    engaged in cybersecurity regulatory harmonization activities
    designed to identify opportunities to further coordinate
    cybersecurity supervisory activities for firms that are subject
    to the authority of multiple regulators.
                                    ------

     RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN CRAPO FROM JELENA
                               McWILLIAMS

    Operation Choke Point
    Q.1. Operation Choke Point and other similar initiatives began
    in the Obama administration as a part of the supervisory
    process. I have repeatedly expressed concern over the lack of
    accountability in the supervisory process. On November 7, 2018,
    several of my
    Republican Banking Committee colleagues and I wrote to you
    about Operation Choke Point. On November 15, 2018, you
    responded saying that you asked an outside law firm to review
    the FDIC's prior actions regarding Operation Choke Point so
    that you can better determine the effectiveness of your
    response to the matter. Furthermore, you referenced guidance in
    a 2015 Financial Institutions Letter, policies from a 2015
    memorandum to Regional Directors, additional training for
    examination staff and your ``Trust through Transparency''
    initiative.
        Can you provide an update on the results so far of the
    steps taken by the FDIC as outlined in the letter, as well as
    any additional steps taken to address concerns around Operation
    Choke Point (and any similar initiatives), including any
    changes to the FDIC's approach to the supervisory process?

    A.1. Since beginning my tenure, I have made clear that
    employees' personal views should have no place in how they
    supervise the banks overseen by the FDIC. I have personally
    reinforced this message to our staff on multiple occasions,
    including a global message sent to all FDIC employees on
    November 16, 2018.
        In response to Congressional inquiries, the FDIC retained
    an outside law firm to conduct a review of the previous
    examinations into the FDIC's involvement in ``Operation Choke
    Point.'' As part of its retention, the law firm has reviewed
    the findings from prior reports regarding this matter,
    including an audit performed by the FDIC's Office of Inspector
    General,\1\ a report by the U.S. House of Representatives
    Committee on Oversight and Government Reform,\2\ as well as
    other public documents. The law firm's review is nearing
    completion and I expect to receive the results in the coming
    weeks.
    ---------------------------------------------------------------------------
        \1\ See FDIC Inspector General Audit: The FDIC's Role in Operation
    Choke Point and Supervisory Approach to Institutions that Conducted
    Business with Merchants Associated with High-Risk Activities, AUD-15-
    008 (September 2015), available at https://www.fdicoig.gov/sites/
    default/files/publications/15-008AUD.pdf.
        \2\ See Report of the U.S. House of Representatives Committee on
    Oversight and Government Reform: Federal Deposit Insurance
    Corporation's (FDIC) Involvement in ``Operation Choke Point,''
    (December 8, 2014), available at https://republicans-
    oversight.house.gov/report/federal-deposit-insurance-corporations-fdic-
    involvement-operation-choke-point/.
    ---------------------------------------------------------------------------
        To ensure that every FDIC examiner understands our policy
    and does not deviate from it, we instituted a new examiner
    training program in April that we expect every examiner to
    complete by the end of the year. The new program focuses on the
    FDIC's policy that banks are neither prohibited nor discouraged
    from providing banking services to any customer operating in
    compliance with applicable State and Federal law and the rare
    and limited circumstances under which examiners may recommend
    that institutions terminate account relationships.
        On May 22, 2019, the FDIC made public its internal policy
    that sets forth the process required to be followed by FDIC
    employees for any situation in which the FDIC may recommend
    that a financial institution terminate a customer's deposit
    account, and reiterated outstanding public guidance established
    in January 2015 to financial institutions about providing
    banking services and carrying out Bank Secrecy Act (BSA)
    obligations.\3\ Before recommending that a financial
    institution terminate a customer's deposit account, an examiner
    must consult with his or her Regional Counsel and
    receive the approval of his or her Regional Director. Regional
    Directors are required to report any recommendations for
    account termination to the Directors of the Divisions of Risk
    Management Supervision and Depositor and Consumer Protection on
    a quarterly basis, who in turn report these statistics to the
    FDIC Board of Directors each quarter. Since January 2015, when
    these policies were first established to govern recommendations
    to close deposit accounts, FDIC staff have not made any
    recommendations to FDIC-supervised banks to close deposit
    accounts.
    ---------------------------------------------------------------------------
        \3\ See FDIC Statement Summarizing FDIC Polices and Guidance, with
    Accompanying Letter to Plaintiffs (May 22, 2019), available at https://
    www.fdic.gov/news/news/press/2019/pr19
    040a.pdf.
    ---------------------------------------------------------------------------
    The Volcker Rule
    Q.2. In October 2018, six Republican Banking Committee Members
    and I wrote to your agencies expressing our support for your
    interagency efforts to revise the Volcker Rule. We also urged
    you to reexamine and tailor the Volcker Rule further, including
    by using the discretion provided by Congress to revise the
    definition of ``covered fund'' or include additional exclusions
    to address the current definition's overly-broad application to
    venture capital, other long-term investments and loan creation,
    and address concerns around the proposed accounting prong.
        What are the next steps for considering comprehensive
    revisions to the agencies' proposed rule?

    A.2. The comment period for the Volcker Rule Notice of Proposed
    Rulemaking (Volcker 2.0 NPR) ended on October 17, 2018, and
    approximately 151 comment letters were received by the five
    agencies responsible for implementing the Volcker Rule (i.e.,
    the Office of the Comptroller of the Currency (OCC), the
    Federal Reserve Board (FRB), the FDIC, the Securities and
    Exchange Commission (SEC), and the Commodities Futures Trading
    Commission (CFTC); collectively, the ``agencies'').\4\ Since
    the end of the comment period for the Volcker 2.0 NPR, the
    agencies have been carefully considering those comments,
    including your letter from October 2018, and working towards
    the goal of issuing a final rule in the coming months. Some
    aspects of the proposal, such as the definition of ``covered
    fund'' and specific exclusions from that definition, may need
    to be reissued for public comment. A reissuance may be
    necessary because in the Volcker 2.0 NPR the agencies did not
    propose new exclusions from the definition of covered fund but
    instead requested comment on how to better define covered fund
    to address the concerns you raised, among other matters.\5\
    ---------------------------------------------------------------------------
        \4\ See OCC, FRB, FDIC, SEC, and CFTC Notice of Proposed
    Rulemaking: Proposed Revisions to Prohibitions and Restrictions on
    Proprietary Trading and Certain Interests in, and Relationships With,
    Hedge Funds and Private Equity Funds, 83 Fed. Reg. 33432 (proposed July
    17, 2018) (to be codified at 17 C.F.R. Part 75), available at https://
    www.govinfo.gov/content/pkg/FR-2018-07-17/pdf/2018-13502.pdf, and OCC,
    FRB, FDIC, SEC, and CFTC Extension of Comment Period for Proposed
    Revisions to Prohibitions and Restrictions on Proprietary Trading and
    Certain Interests in, and Relationships With, Hedge Funds and Private
    Equity Funds, 83 Fed. Reg. 45860 (proposed September 11, 2018),
    available at https://www.govinfo.gov/content/pkg/FR-2018-09-11/pdf/
    2018-19649.pdf.
        \5\ Ibid.
    ---------------------------------------------------------------------------
                                    ------

      RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JELENA
                               McWILLIAMS

    Meeting Schedule
    Q.1. Please provide to the Committee a detailed list of all
    meetings with individuals or groups not directly affiliated
    with the agency you serve, from the date of your confirmation
    by the Senate to present.

    A.1. The FDIC Chairman's official calendar is available through
    the FDIC's website and is updated on a periodic basis. It can
    be viewed at https://www.fdic.gov/about/freedom/
    chairmanschedule.
    html.
    Leveraged lending
    Q.2. In a letter dated May 13, 2019, I asked you to be prepared
    to share detailed responses to the leveraged lending questions
    in my April 11, 2019, letter to Financial Stability Oversight
    Council Chair Mnuchin and to provide supporting data to the
    Committee as part of your testimony. While I understand from
    the OCC's and FDIC's written testimony that they will continue
    to monitor leveraged lending risks, you did not provide
    information in response to my specific questions. Please
    provide detailed responses to the five questions in my May 13,
    2019, and April 11, 2019, letters.

    A.2. Questions from May 13, 2019, and April 11, 2019, letter:
    `` . . . Regulators must demonstrate that they are responding
    to threats to financial stability before the real economy
    suffers. To that end, please provide me the following:

            1.-5. Any analyses of the leveraged lending market that
            the Council and its member agencies have performed in
            the last 2 years; any other Council documents
            discussing the risks of leveraged lending and staff
            recommendations to address those risks; a list of all
            Council meetings where leveraged lending was discussed,
            including the dates of those meetings, attendees, and
            materials presented; a list of supervisory or other
            actions that the Council and its member agencies have
            taken at regulated institutions in order to address
            risks in the leveraged lending market, especially with
            regard to weak underwriting standards; and a
            description of how FSOC is monitoring leveraged lending
            markets and what actions it plans to take to protect
            the economy from threats in credit and lending markets.

            Response: Leveraged lending has been a topic of
            discussion by the Financial Stability Oversight Council
            (FSOC) over the past 2 years. While the Treasury
            Department and FSOC staff are the most appropriate
            sources for details regarding the council's work in
            this area, information regarding several analyses
            presented over the past 2 years is publicly available,
            including:

       LAn update on nonfinancial corporate credit
            presented at the March 6, 2019, FSOC meeting in
            Executive Session (https://home.treasury.gov/system/
            files/261/March
            062019_minutes.pdf. Ted Berg, Senior Financial Analyst
            at the Office of Financial Research (OFR); Dan Li,
            Section Chief of Financial Intermediaries Analysis in
            the Division of Monetary Affairs at the Federal
            Reserve; and Charles Press, Senior Financial
            Institution and Policy Analyst in the Division of
            Monetary Affairs at the Federal Reserve, addressed: (1)
            four key vulnerabilities that have emerged due to the
            low interest-rate environment and the long-credit
            cycle, and (2) the increasing importance of nonbank
            lenders, particularly in leveraged loans, and exposures
            of banks to corporate credit markets. (Discussion
            begins on page 3.)

       LAn update on nonfinancial corporate credit and
            leveraged lending presented at the May 30, 2019, FSOC
            meeting (https://home.treasury.gov/system/files/261/
            May302019
            _readout.pdf). Craig Phillips, then Counselor to the
            Treasury Secretary, described recent market
            developments and highlighted the ongoing collaboration
            among financial regulators on this topic.

       LFSOC Annual Reports (from 2011 to 2018). Each
            report has discussed leveraged lending, especially
            related to reaching for yield in low interest-rate
            environments.

         L2018 Annual Report (available at https://
            home.treasury.
            gov/system/files/261/FSOC2018AnnualReport.pdf)
            discusses leveraged lending in Section 4.3 (Corporate
            Credit) and Section 4.13.5 (Alternative Funds). In
            addition, FSOC discussed the 2018 Annual Report,
            including leverage issues, at its December 19, 2018,
            meeting (https://home.treasury.gov
            /system/files/261/December192018_minutes.pdf).

         L2017 Annual Report (available at https://
            www.treasury.
            gov/initiatives/fsoc/studies-reports/Documents/FSOC_201
            7Annual_Report.pdf) discusses leveraged lending in
            Section 4.3 (Corporate Credit), Section 4.13.5
            (Alternative Funds), and Section 4.11 (Bank Holding
            Companies and Depository Institutions).

         L2016 Annual Report (available at https://
            www.treasury.
            gov/initiatives/fsoc/studies-reports/Documents/FSOC%20
            2016%20Annual%20Report.pdf again noted that the 2015
            Shared National Credit (SNC) review indicated liberal
            underwriting standards in leveraged lending. (See page
            34.)

         L2015 Annual Report (available at https://
            www.treasury.
            gov/initiatives/fsoc/studies-reports/Documents/2015%20
            FSOC%20Annual%20Report.pdf) reported that FSOC had
            considered issues related to leveraged lending, finding
            that it warranted continued monitoring as the 2014 SNC
            review found serious deficiencies in underwriting
            standards and risk management practices. (See pages 3
            and 10.)

         L2014 Annual Report (available at https://
            www.treasury.
            gov/initiatives/fsoc/studies-reports/Pages/2014-Annual-
            Report.aspx) stated that a sharp increase in interest
            rates could increase the risk of default of leveraged
            loans. In addition, a focused review of leveraged loans
            during the SNC review for 2013 found material
            widespread weaknesses in underwriting practices,
            including excessive leverage, inability to amortize
            debt over a reasonable period, and lack of meaningful
            financial covenants. (See page 40.) The report noted
            that the trend in weak underwriting ``heightened the
            agencies' concern, and [the] agencies reiterated that
            they expect financial institutions to properly evaluate
            and monitor underwritten risk in leveraged loans, and
            ensure borrowers have sustainable capital structures.''

         L2013 Annual Report (available at https://
            www.treasury.gov/initiatives/fsoc/Documents/
            FSOC%202013%20Annual%20
            Report.pdf) discussed that continued yield-seeking was
            increasing leveraged lending, but noted that on March
            21, 2013, the banking agencies adopted, after notice
            and comment, updated guidance for leveraged lending by
            the banking agencies' supervised entities. (See page
            114.)

         L2012 Annual Report (available at https://
            www.treasury.gov/initiatives/fsoc/studies-reports/
            Documents/2012%20Annual
            %20Report.pdf) recommended continued monitoring and
            discussed the banking agencies' issuance of proposed
            leveraged lending guidance for public comment.

         L2011 Annual Report (available at https://
            www.treasury.gov/initiatives/fsoc/Documents/
            FSOCAR2011.pdf) noted that loosened underwriting
            standards may have led to heightened risks in leveraged
            loans. (See pages 12 and 105 (Section 5.4.3--Loans).)

       LShared National Credit (SNC) Program Review Report.
            The SNC Program Review Report is issued jointly by FRB,
            FDIC, and OCC each year, and discusses the results of
            the SNC program, which is an interagency review and
            assessment of risk in the largest and most complex
            credits shared by multiple regulated financial
            institutions. The SNC Program is governed by an
            interagency agreement among the FRB, FDIC, and OCC.
            Leveraged lending currently represents a significant
            portion of the credits reviewed through the SNC
            Program.

         LThe 2018 SNC Program Review Report is available
            at https://www.fdic.gov/news/news/press/2019/
            pr19004.html.

         LThe 2017 SNC Program Review Report is available
            at https://www.fdic.gov/news/news/press/2017/
            pr17058html.

         LUntil 2016, the SNC Review was performed
            annually; currently, the agencies conduct SNC reviews
            in the first and third calendar quarters with some
            banks receiving two reviews and others receiving a
            single review each year. The agencies issue a single
            statement annually that includes combined findings from
            the previous 12 months.

       LTreasury's ``Study of the Effects of Size and
            Complexity of Financial Institutions on Capital Market
            Efficiency and Economic Growth (March 2016)''
            (available at https://www.treasury.gov/initiatives/
            fsoc/studies-reports/Documents/
            Final%20Section%20123%20Report%20March%2025%202016
            .pdf.) Although not specifically about leveraged
            lending, this study contains a general discussion of
            the effects of leverage. The study was issued pursuant
            to Section 123 of the Dodd-Frank Wall Street Reform and
            Consumer Protection Act, and updates the previous study
            issued in 2011.

            One of FSOC's statutorily established duties is to
            monitor the financial services marketplace.\6\ To do
            so, FSOC has established a committee structure, with
            committee members drawn from its member agencies.\7\
            Several of its committees are particularly relevant to
            monitoring risk issues, including risks relating to
            leveraged lending, such as the FSOC Deputies Committee
            and the Systemic Risk Committee. The purpose of the
            Systemic Risk Committee is to support the FSOC in
            identifying risks to, and in responding to emerging
            threats to, the stability of the U.S. financial system,
            including by monitoring and analyzing financial
            markets, the financial system and issues related to
            financial stability, such as issues like leveraged
            lending.\8\ That Committee takes direction from and
            reports to the Deputies Committee which also considers
            such matters. The work of the FSOC and all of its
            committees is reflected in the FSOC's Annual Report.
    ---------------------------------------------------------------------------
        \6\ See 12 U.S.C.  5322(a)(2)(C)(2019).
        \7\ See Financial Stability Oversight Council Bylaws, Rules of
    Organization of the Financial Stability Oversight Council  XXX.7
    (adopted October 1, 2010; amended and restated on April 24, 2018),
    available at https://home.treasury.gov/system/files/261/
    The%20Council%26%2
    3039%3Bs%20Bylaws.pdf.
        \8\ See Financial Stability Oversight Council, Charter of the
    Systemic Risk Committee of the Financial Stability Oversight Council,
    available at https://www.treasury.gov/initiatives/fsoc/governance-
    documents/Documents/The%20Council%27s%20Committee%20Charters.pdf.

            The FDIC has also participated in a recent meeting of
            the President's Working Group on Financial Markets that
            discussed Corporate Debt and Leveraged Loans. The
            meeting participants discussed leveraged lending and
            corporate debt markets from the differing perspectives
            of each Federal financial regulatory agency. As an
            outcome of that meeting, the FDIC is participating in a
            supervisory initiative along with the FRB and OCC to
            review current leverage lending exposures both inside
    ---------------------------------------------------------------------------
            and outside the financial services industry.

            Individually, the FDIC examines the risk presented to
            regulated institutions from their various credit
            activities, including leveraged lending. In this
            regard, the FDIC ensures that banks are conducting the
            activity in a safe and sound manner and in accordance
            with applicable laws and regulations, including
            Appendix A to Section 364 of the FDIC Rules and
            Regulations, Standards for Safety and Soundness
            (Interagency Safety and Soundness Standards).\9\
    ---------------------------------------------------------------------------
        \9\ 12 C.F.R.  364.100, et seq. (2019), available at https://
    www.ecfr.gov/cgi-bin/text-idx?SID=
    ee7d5a8a43c57d350f4e9f6dd4febb41&mc=true&node=ap12.6.364_1101.a&rgn=div9

            If the FDIC determines there are deficiencies in
            internal controls, risk assessments, or loan
            underwriting, documentation, administration, or
            monitoring at an institution, it will take appropriate
            action. Depending on the severity of the deficiency,
            the action may range from supervisory recommendations
            in an examination report, to informal or formal
            enforcement action. Informal enforcement actions are
            not publicly posted and might include a Memorandum of
            Understanding with the institution. Formal enforcement
            actions are publicly posted and can include: requiring
            a corrective plan under Section 39 of the Federal
            Deposit Insurance Act, cease-and-desist orders, civil
            money penalties, and other actions.
    Leveraged lending guidance
    Q.3. Vice Chair Quarles said during the hearing that your
    agencies are concerned about the right regulatory response to
    developments in underwriting of leveraged loans, and have
    identified underwriting practices that need to improve. How
    have you clarified to banks agency expectations for safe and
    sound underwriting practices if the 2013 leveraged lending
    guidance that describes expectations for the sound risk
    management of leveraged lending activities no longer has any
    legal effect? What are your current expectations?

    A.3. Due to its nature as guidance, the Interagency Guidance on
    Leveraged Lending \10\ never had any legal effect nor was it
    viewed by the FDIC to be legally enforceable. As stated in the
    guidance: ``This guidance outlines for agency-supervised
    institutions high-level principles related to safe-and-sound
    leveraged lending activities.''
    ---------------------------------------------------------------------------
        \10\ Available at https://www.fdic.gov/news/news/press/2013/FR-LL-
    Preamble-and-Guidance.
    pdf.
    ---------------------------------------------------------------------------
        The FDIC examines the risk presented to regulated
    institutions from their various credit activities, including
    leveraged lending. In this regard, the FDIC ensures that banks
    are conducting the activity in a safe and sound manner and in
    accordance with applicable laws and regulations, including
    Appendix A to Section 364 of FDIC Rules and Regulations,
    Standards for Safety and Soundness (Interagency Safety and
    Soundness Standards).\11\
    ---------------------------------------------------------------------------
        \11\ 12 C.F.R. Part 364.100, et seq. (2019), available at https://
    www.ecfr.gov/cgi-bin/text-
    idx?SID=ee7d5a8a43c57d35Of4e9f6dd4febb41&mc=true&node=ap12.6.364_1101.a&
    rgn=div9.
    ---------------------------------------------------------------------------
        Among other requirements set forth in the Interagency
    Safety and Soundness Standards that are applicable to credit
    activities, including leveraged lending, insured depository
    institutions (IDIs) must:

       LHave appropriate internal controls;

       LHave effective risk assessment;

       LHave loan documentation practices that ensure the
            loan is legally enforceable and that assess the ability
            of the borrower to repay the indebtedness in a timely
            manner;

       LDemonstrate appropriate administration and
            monitoring of a loan;

       LEstablish and maintain prudent credit underwriting
            practices, including the borrower's overall financial
            condition and resources, the financial responsibility
            of any guarantor, the nature and value of any
            underlying collateral, and the borrower's character and
            willingness to repay as agreed; and

       LEstablish and maintain a system to identify problem
            assets and prevent deterioration in those assets, with
            independent, ongoing credit review and appropriate
            communication to management and to the board of
            directors.

        If the FDIC determines there are deficiencies in internal
    controls, risk assessment, or loan underwriting, documentation,
    or monitoring at an institution, it will take appropriate
    action. Depending on the severity of the deficiency, the action
    may range from supervisory recommendations in an examination
    report, to informal or formal enforcement action. Informal
    enforcement actions may include a Memorandum of Understanding
    with the institution. Formal enforcement actions may include
    requiring a corrective plan under Section 39 of the Federal
    Deposit Insurance Act, cease-and-desist orders, civil money
    penalties, and other actions. Individual credits may also be
    criticized or adversely classified. Please refer to the 2017
    and 2018 Shared National Credit Review Reports:

       LThe 2018 SNC Program Review Report available at
            https://www.fdic.gov/news/news/press/2019/pr19004.html.

       LThe 2017 SNC Program Review Report available at
            https://www.fdic.gov/news/news/press/2017/pr17058.html.
    BB&T/SunTrust/Stress Tests
    Q.4. Suspending stress testing for SunTrust and BB&T means that
    regulators will not have 2019 stress-test results prior to
    their planned merger to become a $442 billion bank at the end
    of 2019. Your agencies have indicated that you will continue to
    review the capital planning and risk-management practices of
    these institutions through the regular supervisory process.
    Please explain what aspects of the current supervisory process
    are sufficient replacements for stress testing to ensure that
    these types of large institutions could withstand an adverse
    economic shock.

    A.4. The FDIC granted temporary relief to BB&T to submit their
    stress test to the FDIC for 2019. BB&T elected to conduct a
    stress test at both the bank and bank holding company for
    internal risk management purposes. The bank applied two
    idiosyncratic scenarios and also included the 2019 Supervisory
    Severely Adverse scenario in its stress test. While the bank
    was not required to submit a stress test, it prepared the test
    and FDIC staff reviewed the results. In addition, the FDIC
    supervisory process includes onsite assessment and offsite
    monitoring of each institution's risk profile. The FDIC's
    dedicated team reviewed the process and results of the stress
    test as part of the supervisory program.
        Part 364 of the FDIC Rules and Regulations establishes
    interagency guidelines for safety and soundness standards,
    including internal controls and information systems that are
    appropriate to the size of the institution and the nature,
    scope, and risk of its activities. These controls and systems
    should provide for, among other things, effective risk
    assessment and procedures to safeguard and manage assets.
    Understanding how an institution's balance sheet will respond
    to adverse economic scenarios is an important risk management
    function, and, as part of the supervisory program at BB&T, the
    FDIC reviews and assesses the adequacy of internal bank risk
    management processes.
        For merger transactions, Section 18(c) of the Federal
    Deposit Insurance Act requires that the FDIC consider the
    financial and managerial resources and future prospects of the
    existing and proposed institution. Capital planning practices,
    including stress tests, are evaluated in the consideration of
    merger transactions.
        Additionally, as part of the ongoing review of the pending
    application under the Bank Merger Act, the FDIC has been
    seeking further information and clarification on a number of
    matters from BB&T and SunTrust. Through this process, the FDIC
    has requested additional information on a variety of matters,
    including but not limited to, risk management, capital
    planning, stress testing, resolution planning, and legal entity
    structures. Similar additional information requests have been
    sent by the FRB as well, and responses to those requests have
    been shared between the agencies and will be taken into
    consideration during the application process.
    Appraisals
    Q.5. In December 2018, the OCC, the Federal Reserve, and the
    FDIC jointly proposed to increase their agencies' appraisal
    threshold on residential mortgage loans from $250,000 to
    $400,000.\12\ Lenders would instead be required to obtain an
    evaluation for any mortgage loan below $400,000 not otherwise
    subject to requirements by the mortgage insurer or guarantor or
    the secondary market.\13\
    ---------------------------------------------------------------------------
        \12\ ``Real Estate Appraisals,'' 83 FR 63110, December 7, 2018,
    available at https://www.federalregister.gov/documents/2018/12/07/2018-
    26507/real-estate-appraisals.
        \13\ Ibid.
    ---------------------------------------------------------------------------
        This proposal comes less than 2 years after the OCC, the
    Federal Reserve, the FDIC, and the CFPB rejected an increase in
    the residential loan appraisal threshold based on
    ``considerations of safety and soundness and consumer
    protection'' in their Economic Growth and Regulatory Paperwork
    Reduction Act (EGRPRA) report.\14\ This proposal also goes far
    beyond legislation enacted by Congress to provide appraisal
    exemptions in rural areas.
    ---------------------------------------------------------------------------
        \14\ Joint Report to Congress: Economic Growth and Regulatory
    Paperwork Reduction Act, Federal Financial Institutions Examination
    Council, March 2017, pg. 36, available at https://www.ffiec.gov/pdf/
    2017_FFIEC_EGRPRA_Joint-Report_to_Congress.pdf.
    ---------------------------------------------------------------------------
        As you know, the Financial Institutions Reform, Recovery,
    and Enforcement Act of 1989, as amended by the Dodd-Frank Wall
    Street Reform and Consumer Protection Act, requires the Federal
    banking regulators charged with setting appraisal exemption
    thresholds to receive concurrence from the CFPB to ensure that
    ``such threshold level provides reasonable protection for
    consumers'' before any amendment.\15\
    ---------------------------------------------------------------------------
        \15\ 12 U.S.C. 3341(b).

    Q.5.a. Did the Federal banking agencies confer with staff or
    leadership at the CFPB or seek CFPB's concurrence before
    issuing the proposal to increase the appraisal exemption
    threshold? If not, at what point in the regulatory process do
    Federal banking agencies seek concurrence with the CFPB on
    ---------------------------------------------------------------------------
    appraisal threshold changes?

    A.5.a. Yes. The Federal banking agencies initiated and engaged
    in ongoing consultations with Consumer Financial Protection
    Bureau (CFPB) staff throughout the development of the proposal
    to raise the residential appraisal threshold and have continued
    to do so while working to finalize the rule. Additionally, the
    acting CFPB Director at the time, Mick Mulvaney, voted to
    approve the proposal in his capacity as FDIC Board member in
    December 2018. The agencies will seek CFPB concurrence prior to
    finalizing any rule to increase the residential appraisal
    threshold.

    Q.5.b. In the background for the proposed rule, the Federal
    banking agencies stated they did not increase the residential
    real estate appraisal exemption threshold during the EGRPRA
    process because the change would have a ``limited impact on
    burden reduction due to appraisals still being required for the
    vast majority of these transactions pursuant to the rules of
    other Federal Government agencies and the GSEs; safety and
    soundness concerns; and consumer protection concerns.''\16\ Is
    your agency aware of any changes in the real estate market or
    in appraisal or evaluation services that would affect its
    safety and soundness or consumer protection concerns, cited in
    the EGRPRA report, with increasing the residential mortgage
    appraisal threshold above $250,000? If so, please detail these
    changes.
    ---------------------------------------------------------------------------
        \16\ ``Real Estate Appraisals,'' 83 FR 63110, December 7, 2018.

    A.5.b. Following the completion of the regulatory review
    process required by the Economic Growth and Regulatory
    Paperwork Reduction Act (EGRPRA) in early 2017,\17\ the
    agencies issued a final rule to raise the commercial appraisal
    threshold.\18\ In the proposal, the agencies asked for
    information and views about the residential threshold.\19\ The
    proposal to raise the residential threshold was not based upon
    specific changes in the real estate market or appraisal or
    evaluation services that would affect safety and soundness or
    consumer protection concerns since the EGRPRA report was
    issued. Rather, it was based on comments received on the
    commercial threshold proposal; additional feedback received
    from financial institutions and State-bank regulatory agencies
    stating that increasing the residential appraisal threshold,
    which has not been raised in 25 years, would provide meaningful
    burden relief; and analysis regarding safety and soundness and
    consumer protection factors related to the proposal.\20\ The
    FDIC is currently considering comments received.
    ---------------------------------------------------------------------------
        \17\ See FFIEC, Joint Report to Congress: Economic Growth and
    Regulatory Paperwork Reduction Act (March 2017), available at https://
    www.ffiec.gov/pdf/2017_FFIEC _EGRPRA_Joint-Report _to_Congress.pdf.
        \18\ See OCC, FRB, and FDIC Final Rule: Real Estate Appraisals, 83
    Fed. Reg. 15019 (finalized April 9, 2018) (to be codified at 12 C.F.R.
    Part 323), available at https://www.govinfo.gov/content/pkg/FR-2018-04-
    09/pdf/2018-06960.pdf.
        \19\ See OCC, FRB, and FDIC Proposed Rule: Real Estate Appraisals,
    82 Fed. Reg. 35478 (proposed July 31, 2017) (to be codified at 12
    C.F.R. Part 323), available at https://www.govinfo.gov/content/pkg/FR-
    2017-07-31/pdf/2017-15748.pdf.
        \20\ See OCC, FRB, and FDIC Proposed Rule: Real Estate Appraisals,
    83 Fed. Reg. 63110 (proposed December 7, 2018) (to be codified at 12
    C.F.R. Part 323), available at https://www.govinfo.gov/content/pkg/FR-
    2018-12-07/pdf/2018-26507.pdf.
    ---------------------------------------------------------------------------
    Receivership activities
    Q.6. Despite readiness efforts that took place pre-crisis, the
    FDIC was not fully prepared for the scale and scope of the
    2007-2008 financial crisis. The agency was understaffed and had
    to divert
    already scarce resources from resolution activities to
    establishing offices, contracts, and IT systems.
        The FDIC's 2019 Budget cuts receivership funding by 22
    percent from 2018. If another crisis occurs, is the FDIC
    prepared to resolve failed banks? Do you have plans in place if
    there is an increase in bank failures? What are those plans?
    Where does the FDIC plan to find the staff to resolve banks if
    necessary? Does the FDIC have standing agreements with
    contractors that could be invoked quickly in the case of a
    crisis?

    A.6. As an initial consideration, it is important to emphasize
    that a reduction in the receivership portion of the FDIC's 2019
    annual budget in no way reflects a lack of commitment on the
    part of FDIC management to ensure readiness for future failure
    activity. The budget receivership funding reduction in 2019
    resulted largely from the FDIC's projection that it would be
    spending much less on current failure activity due to the
    financial strength of the banking industry. No banks failed in
    2018 or through the first 4 months of 2019. Additionally, the
    FDIC has successfully reduced the pool of residual assets and
    trailing liabilities from bank failures that occurred prior to
    2018, which has reduced the need for resources to manage that
    activity. Both of these factors contributed to the need for
    less money in the 2019 receivership portion of the budget.
        Nonetheless, the FDIC remains actively engaged in a wide
    range of activities to ensure readiness for the next banking
    crisis. These activities are rooted in the lessons learned from
    past crises, while recognizing the importance of being
    flexible, since the characteristics of any future crises maybe
    much different from those of the past.
        The FDIC's ability to quickly obtain critical resources and
    skillsets is the first line of defense to ensure a strong
    response and to maintain financial stability. The FDIC uses
    both temporary
    Federal staff and contractor resources to meet these demands.
    Surge Staffing Plans have been developed to outline the
    responsibilities and procedures that many parts of the FDIC
    will need to engage into successfully obtain these temporary
    staffing and contractor resources. To date, two facilitated
    table top discussions have taken place to review these plans,
    and a simulation exercise is planned for later this year, which
    will provide another opportunity to identify areas for further
    refinement, such as the identification of priority functional
    areas where resources will be needed; steps to expedite the
    hiring, security clearance, and onboarding processes; and
    delivery of just-in-time training. In addition to temporary
    Federal staff, the FDIC maintains a robust alumni network that
    enables the agency to quickly tap a qualified pool of FDIC
    retirees and former temporary employees who can be placed into
    duty quickly with minimal refresher training. The use of
    retirees proved very effective during the last crisis.
        The FDIC has also significantly improved access to
    contracting resources in support of an increase in resolution
    activity. Currently, there are 81 active contracts in place, 62
    of which are Basic Ordering Agreements with multiple vendors to
    allow for rapid scalability. These contracts cover a vast array
    of functions, including pre-closing and closing functions, such
    as the Receivership Assistance and Call Center, receivership
    activities for marketing and management of failed bank assets,
    and other technical support and data collection/processing
    services. In the event of large bank resolution activity,
    additional contracts are in place covering functions such as
    executive search services, claims financial advisors, crisis
    communications, and complex accounting. These. additional
    service contracts will greatly enhance the FDIC's ability to
    execute the resolution of a large, complex financial
    institution.
        To further promote readiness among our current permanent
    staff, we sponsor multiple job rotations and developmental
    details to enhance the skills of our employees through cross-
    training. Training and developmental opportunities were also
    provided to employees interested in career advancement and
    movement into management positions, in order to ensure
    successful future succession planning. In addition, the FDIC
    continues to improve and modernize critical information
    technology systems, which are crucial to the resolution
    process.
    IDI Resolution Plans
    Q.7. The FDIC recently issued an Advance Notice of Proposed
    Rulemaking (ANPR) to consider reducing requirements and
    decreasing the frequency and content of insured depository
    institution (IDI) resolution plan submissions. The ANPR also
    includes a proposal to raise the $50 billion applicability
    threshold. Even though S. 2155 did not require this change, the
    ANPR cites the increased minimum asset threshold for resolution
    planning requirements under section 165(d) of the Dodd-Frank
    Act from $50 billion to $250 billion as the reason for the IDI
    rule's asset threshold to be revisited. The ANPR acknowledges
    that the FDIC's sole experience resolving a failed institution
    over the current $50 billion asset threshold was Washington
    Mutual Bank.

    Q.7.a. What was the total asset size of Washington Mutual Bank
    at failure and how much did its resolution cost the Deposit
    Insurance Fund? On what other bank failure data does the FDIC
    rely in proposing this increase to the asset threshold for IDI
    plans?

    A.7.a. At the time of its failure, Washington Mutual Bank
    reported $299 billion in assets. It presented no loss to the
    Deposit Insurance Fund (DIF).
        The Advance Notice of Proposed Rulemaking (ANPR) you
    reference does not propose an increased asset threshold for
    requiring IDI plans, but rather solicits public comment on a
    number of issues, including the appropriateness of a $50
    billion threshold.\21\ The FDIC's openness to considering a
    higher threshold is based on our experience across several
    initiatives.
    ---------------------------------------------------------------------------
        \21\ See FDIC Advance Notice of Proposed Rulemaking, Resolution
    Plans Required for Insured Depository Institutions with $50 Billion or
    More in Total Assets, 84 Fed. Reg. 16620 (proposed Apri122, 2019)(to be
    codified at 12 C.F.R. Part 360) available at https://www.govinfo.gov/
    content/pkg/FR-2019-04-22/pdf/2019-08077.pdf.
    ---------------------------------------------------------------------------
        First, while the FDIC's recent experience administering
    resolutions greater than $50 billion is limited to Washington
    Mutual, the FDIC has also prepared to resolve some larger
    institutions that ultimately did not fail. These near-failure
    preparations typically do not provide the full experience that
    a resolution does, but valuable insights can be gleaned.
        Second, the FDIC has devoted significant resources across
    several years to being better prepared to administer the failed
    bank claims administration processes for both qualified
    financial contracts and deposits. These are some of the most
    challenging functions that need to occur as part of a
    successful resolution. These initiatives have been conducted
    outside of the resolution plan review process using programs
    established under Parts 370 and 371, and section 360.9 of the
    FDIC's Rules and Regulations. These programs are being used to
    develop essential large resolution capabilities that were not
    in place during the financial crisis and provide valuable
    insights on the institution-specific challenges that large
    resolutions present.
        Finally, the FDIC's experience with administering both the
    Federal Deposit Insurance Act and the Dodd-Frank Wall Street
    Reform and Consumer Protection Act resolution plan review
    processes over several years has made it evident that certain
    aspects of the IDI plan review process could be streamlined or
    improved, while maintaining or potentially improving the value
    derived by the FDIC from this work. In keeping with the spirit
    of the Administrative Procedure Act rulemaking process, the
    FDIC thought it would be appropriate to solicit feedback on
    these concepts through an ANPR.

    Q.7.b. The FDIC also indefinitely suspended the deadlines for
    IDIs to submit their next resolution plans, which would have
    been due on or before July 1, 2020, until amendments to the IDI
    Rule are finalized. Will you commit to reinstituting IDI
    resolution plan submissions if a proposal is not finalized by
    July 1, 2020?

    A.7.b. The FDIC is revising the IDI Rule in order to
    appropriately tailor its approach to the risk presented by
    individual IDIs. The FDIC is committed to a process that offers
    ample opportunity for public input as it recognizes that
    greater transparency and participation in the rulemaking
    process benefit the public and aid Congressional oversight.
        The FDIC remains committed to a robust planning process for
    the resolution of the largest IDIs and believes that input from
    those institutions is essential. The FDIC Board, in approving
    the ANPR, voted to delay the next resolution plan submissions
    until the rulemaking process is completed. Public comments on
    the ANPR were due by June 21, 2019.\22\ The FDIC is committed
    to revising the IDI rule in a timely manner and will make every
    effort to complete the process and issue a revised rule
    promptly.
    ---------------------------------------------------------------------------
        \22\ Ibid.
    ---------------------------------------------------------------------------
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM JELENA
                               McWILLIAMS

    Q.1. My home State of New Jersey is moving toward legalization
    of recreational marijuana, and I have concerns that these new
    businesses as well as the existing medical marijuana businesses
    in the State will continue to find themselves shut out of the
    banking system. And when these businesses are forced to operate
    exclusively in cash, they create serious public safety risks in
    our communities.
        Comptroller Otting and Chair Powell have previously
    expressed support for legislative clarity on the marijuana
    banking issue, and I would like to understand Chair McWilliams,
    Vice Chair Quarles, and Chair Hood's position as well.
        Do you agree that financial institutions need legislative
    clarity on this issue?

    A.1. I defer to Congress on whether additional legislative
    clarity is needed to address this issue. As part of my
    commitment to travel to every State to meet with bankers, their
    customers and State regulators, I have repeatedly heard
    concerns from bankers over the uncertainty in providing banking
    services to marijuana-related businesses in addition to other
    businesses that provide services to those marijuana-related
    businesses. The Financial Crimes Enforcement Network (FinCEN)
    issued guidance in 2014 to address the Bank Secrecy Act
    obligations when serving these customers. While financial
    institutions say they understand FinCEN's guidance, the
    guidance addresses BSA obligations, and does not address
    uncertainties related to law enforcement.

    Q.2. I am also concerned that legal marijuana businesses will
    continue to find themselves unable to access insurance
    products, a necessity for those looking to secure financing.
        Would it be helpful for Congress to consider the role of
    insurance companies as States move toward legalization?

    A.2. I defer to Congress on how best to address risks attendant
    to other businesses that indirectly serve marijuana-related
    businesses, like insurance companies and others.
                                    ------

     RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS FROM JELENA
                               McWILLIAMS

    Q.1. In my State of South Dakota, farmers, ranchers, energy
    producers, and others use derivatives to manage risks and
    fluctuating commodity prices. It is critical for these
    producers to have access to markets and products that are as
    competitive and cost-effective as possible. Not only does this
    benefit agriculture and energy producers, it also benefits
    American consumers across the country who depend on stable
    prices as they go about their daily lives.
        Recently, the CFTC Commissioners submitted the attached
    joint comment letter in response to the SA-CCR proposed
    rulemaking, and I share in the concerns raised by these
    regulators who noted that, in its current form, the
    supplementary leverage ratios (SLR) ``is working
    counterproductively, limiting access to derivatives risk
    management strategies and discouraging the central clearing of
    standardized swap products.''
        The current SLR calculation fails to acknowledge the risk-
    reducing impact of client initial margin in its calculation,
    resulting in an inflated measure of the clearing member's
    exposure for a cleared trade.
        The SA-CCR rulemaking provides an important opportunity to
    address these concerns, and to work with your fellow regulators
    who directly monitor and regulate the derivatives markets.

    Q.1.a. Have you reviewed the attached joint comment letter from
    the CFTC Commissioners?

    A.1.a. Yes.

    Q.1.b. Have you had any direct conversations with the CFTC
    Commissioners about this matter and the concerns they raised?

    A.1.b. I have discussed this issue with then Chairman Giancarlo
    and understand the importance of central clearing to the
    stability of the derivatives market overseen by the CFTC. I
    also understand their concerns regarding the impact that the
    SLR could have on central clearing.

    Q.1.c. Will you commit to continuing to work with your fellow
    regulators to address the concerns they have raised about the
    SLR moving forward?

    A.1.c. Yes. The FDIC is working with the banking regulators and
    will take these concerns into account as we move forward with
    the SA-CCR proposal.
                                    ------

     RESPONSES TO WRITTEN QUESTIONS OF SENATOR PERDUE FROM JELENA
                               McWILLIAMS

    Supplemental Leverage Ratio
    Q.1. Chairwoman McWilliams, in February, the CFTC
    Commissioners--both Republican and Democratic Commissioners I
    should note--submitted a unified comment letter to the Fed,
    FDIC and OCC raising concerns about a proposed rulemaking
    related to bank capital rules associated with derivatives
    transactions.
        These concerns surround the calculation of the
    supplementary leverage ratio (or SLR). Currently, the SLR fails
    to recognize the risk reducing nature of segregated client
    margin in these transactions. Studies referenced in the comment
    letter note that this has led to rising costs and less
    competition in the derivatives markets for commodity producers
    seeking to hedge risks in the markets.

    Q.1.a. Are you aware of this joint comment letter from the CFTC
    commissioners--the market regulators who directly oversee these
    markets?

    A.1.a. Yes.

    Q.1.b. Has your staff briefed you on these concerns?

    A.1.b. Yes.

    Q.1.c. Have you had discussions with the Commissioners
    personally about this topic?

    A.1.c. Yes. I have discussed this issue with then Chairman
    Giancarlo and understand the importance of central clearing to
    the stability of the derivatives market overseen by the CFTC. I
    also understand their concerns regarding the impact the
    Supplemental Leverage Ratio (SLR) could have on central
    clearing.
        The FDIC is working with the banking regulators and will
    take these concerns into account as we move forward with the
    Standardized Approach for Counterparty Credit Risk (SA-CCR)
    proposal.
    Brokered Deposits
    Q.2. Chairwoman McWilliams, as you know, the current statutory
    framework around deposits labeled as brokered deposits was
    created in 1989 and the regulation in 1991. While some
    additional guidance has been published since then, I think you
    would agree the rules in this area fail to adequately consider
    modern banking--things like online banks, fintech bank
    subsidiaries, and overnight sweep accounts. We applaud you on
    the recent request for public input on how these regulations
    should be updated.

    Q.2.a. I would like to know your timeline for considering those
    comments and putting out a proposal?

    A.2.a. As you mention, the financial services industry has seen
    significant changes since the statutory restrictions on
    brokered deposits were put into place. As a result, the FDIC is
    undertaking a comprehensive review of our approach to brokered
    deposits and the interest rate caps applicable to banks that
    are less than well capitalized. On December 18, 2018, the FDIC
    Board approved an ANPR inviting comment on all aspects of the
    FDIC's brokered deposit and interest rate regulations (12
    C.F.R.  337.6).\1\ The ANPR was published in the Federal
    Register on February 6, 2019, with comments accepted for 90
    days (until May 7, 2019).\2\ The FDIC received more than 100
    comments, which are currently being reviewed and will be
    carefully considered in determining next steps.
    ---------------------------------------------------------------------------
        \1\ See FDIC Financial Institution Letter: Reciprocal Deposit
    Rulemaking and Request for Comments on Brokered Deposit and Interest
    Rate Restriction Issues, FIL-87-2018 (December 19, 2018), available at
    https://www.fdic.gov/news/news/financial/2018/fill8087.pdf.
        \2\ See FDIC Advance Notice of Proposed Rulemaking and Request for
    Comment: Unsafe and Unsound Banking Practices: Brokered Deposits and
    Interest Rate Restrictions, 84 Fed. Reg. 2366 (proposed February 6,
    2019) (to be codified at 12 C.F.R. Part 337), available at https://
    www.fdic.gov/news/board/2018/2018-12-18-notice-sum-i-fr.pdf.
    ---------------------------------------------------------------------------
        In particular, commenters expressed urgency concerning the
    current methodology for calculating the national rate cap
    applicable to less-than-well-capitalized banks. Given the
    urgency surrounding this issue, the FDIC is expediting that
    component of our review with the goal of issuing a proposal
    addressing this issue for comment and a final rule by the end
    of the year. For issues relating to brokered deposits
    generally, we are currently reviewing comments with a goal of
    issuing a proposal for comment by the end of the year.

    Q.2.b. Additionally, this Committee has demonstrated in the
    past a strong bipartisan interest in modernizing aspects of the
    brokered deposit law. Would you be willing to work with the
    Committee to look at what statutory changes might be necessary
    and helpful as we look to move a bill this year?

    A.2.b. Yes. While the FDIC intends to consider changes to its
    brokered deposit regulation through the notice-and-comment
    rulemaking process, we recognize that certain areas must be
    addressed through legislation. The FDIC would be happy to work
    with the Committee to consider appropriate changes to modernize
    the brokered deposit law, including the interest rate
    restrictions.
                                    ------

     RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM JELENA
                               McWILLIAMS

    Q.1. Your agencies regulatory approach to inter-affiliate
    margin transactions is an outlier. The margin requirements have
    the effect of locking up capital that could otherwise be used
    for economic growth and they discourage centralized risk
    management practices among firms. In addition, the current
    approach results in the movement of collateral out of the U.S.-
    insured depository institutions. These are all suboptimal
    policy outcomes. Regulatory authorities in the European Union,
    Japan, and most other G20 jurisdictions each currently provide
    such an exemption for these transactions. You have indicated
    you are aware of the issue but, to date, I've seen no official
    action from your agencies to fix the problem.
        The recognition for the need for an exemption began under
    regulators nominated by President Obama. In 2013, CFTC Chairman
    Gary Gensler provided an exemption for central clearing and
    trade execution. In 2015, CFTC Chairman Tim Massad provided an
    exemption, determining that initial margin was not warranted
    and it was a ``very costly and not very effective way'' to
    enhance risk management. Yet, your agencies did not provide an
    exemption from initial margin in the 2016 margin rules, and as
    a result, as of the end of last year, U.S. banking entities
    collected nearly $50 billion in initial margin from their own
    affiliates. In 2017, the Treasury Department noted that this
    rule puts U.S. firms at a disadvantage both domestically and
    internationally, recommending that your agencies provide an
    exemption consistent with the margin requirements of the CFTC.

    Q.1.a. Do you agree that an exemption from initial margin is
    appropriate for inter-affiliate transactions?

    A.1.a. I recognize the concerns with initial margin
    requirements for inter-affiliate transactions and am committed
    to addressing them. The agencies are actively working on
    addressing such concerns.

    Q.1.b. Will you prioritize a rule to provide an exemption for
    inter-affiliate transactions, separate from any broader
    regulatory effort such as a Regulation W rewrite?

    A.1.b. I recognize that inter-affiliate margin is a significant
    concern and I am committed to working with my fellow regulators
    to address the issues you have raised.

    Q.1.c. Please provide an explicit timeline for when your
    agencies will take action.

    A.1.c. The agencies have been actively discussing inter-
    affiliate margin requirements and expect to seek comment on
    this issue in the near term. Addressing the issue is a priority
    for the FDIC.

    Q.2. The reason a ``Reg W'' rewrite is suboptimal is that it
    will be counter-productive and slow. This capital needs to be
    released soon because we have geopolitical risk emerging over
    the world that could destabilize markets. If we have a Brexit,
    the number of entities will double and more capital will be
    unfairly sequestered. With potential trade volatility, Middle
    East uncertainty, and other risks, our banks need to be able to
    use capital for risk management, not have it trapped for no
    reason.
        The Current Expected Credit Loss (CECL) accounting standard
    poses significant compliance and operational challenges for
    banks.

    Q.2.a. Roughly how many of institutions that your agency
    supervises will be subject to the new CECL accounting standard?

    A.2.a. The Current Expected Credit Loss (CECL) accounting
    standard applies to all entities, including the 3,441 banks and
    savings associations supervised by the FDIC (as of May 28,
    2019).

    Q.2.b. What is the overall impact considering their nonbank and
    nonfinancial clients are also subject to the rule--considering
    the indirect impacts such as impairment of trade receivables
    pledged as loan collateral for a medium-sized business?

    A.2.b. It is very difficult to determine the overall impact the
    CECL accounting standard will have on banks' nonbank and
    nonfinancial clients that will be subject to this accounting
    standard. The impact on these clients will depend on a variety
    of factors, such as the extent of the clients' holdings of
    assets and off-balance-sheet credit exposures within the scope
    of CECL and the characteristics of these items. Furthermore,
    the impact will also depend on what methodology an institution
    uses to estimate credit losses. However, we are committed to
    closely monitoring the direct and indirect impacts of CELL.

    Q.2.c. There are many analyses publicly available related to
    the FASB's CECL proposal, but none have an approximation for
    the number of U.S. GAAP filers who will be affected and the
    overall macro impact--does your agency know the covered
    universe?

    A.2.c. The CECL accounting standard applies to all entities and
    to specified items, including financial assets measured at
    amortized cost (e.g., loans held for investment, held-to-
    maturity debt securities, trade receivables, reinsurance
    recoverables, and receivables that relate to repurchase
    agreements and securities lending agreements), a lessor's net
    investments in leases, and off-balance-sheet credit exposures
    not accounted for as insurance (e.g., loan commitments, standby
    letters of credit, and financial guarantees that are not
    unconditionally cancelable by the issuer).
        Therefore, the universe of entities that prepare financial
    statements in accordance with U.S. generally accepted
    accounting principles (GAAP) that would be affected by the CECL
    accounting standard includes all entities that hold assets or
    off-balance-sheet credit exposures that fall within the scope
    of the standard, as summarized above.

    Q.2.d. Are you confident that the banks you supervise are ready
    to implement CECL smoothly, given the balance sheet and
    operational costs involved?

    A.2.d. As I discussed at the hearing, CECL is one of the
    primary issues I hear about from community banks as I travel
    around the country. I understand implementation is a concern at
    many institutions, and the FDIC has been working with the
    industry on educational initiatives to help institutions
    understand and prepare for CECL. During examinations, our
    examiners discuss CECL implementation progress with
    institutions, taking into account the size and complexity of
    the institution being examined and the CECL effective date
    applicable to the institution. The majority of FDIC-supervised
    institutions have until 2022 to implement CECL, and the FDIC
    has communicated its expectation to supervised institutions
    that they undertake good faith efforts to implement the CECL
    accounting standard in a sound and reasonable manner. The FDIC
    will be monitoring the impact of CECL on institutions required
    to implement the standard prior to 2022 to better understand
    the impact CECL may have on community banks supervised by the
    FDIC that implement the standard in 2022.

    Q.2.e. Other than allowing the banks to integrate CECL reserves
    into regulatory capital over 3 years, are your agencies doing
    anything to assess the impact of CECL on the availability of
    financing?

    A.2.e. The FDIC is committed to monitoring the effects of the
    CECL accounting standard as it is implemented, including the
    review of relevant data provided by institutions. We will
    respond, as appropriate, to any impact that CECL may have on
    institutions' lending practices.

    Q.2.f. Would you agree that a FASB accounting change should not
    result in either an increase or decrease in the loss absorbency
    a bank holds against any given loan?

    A.2.f. While the banking agencies do not exercise jurisdiction
    over accounting changes, the banking agencies do thoroughly
    analyze the effects of any change in U.S. GAAP. With respect to
    the implementation of CECL, the agencies have modified their
    capital rules to provide banks with a 3-year transition period
    to phase-in the impact CECL. During this period, the agencies
    will actively monitor banks' implementation of the new
    accounting standards and its impact on regulatory capital, and
    will continually evaluate whether any additional adjustments to
    the capital rules are appropriate.
                                    ------

       RESPONSE TO WRITTEN QUESTION OF SENATOR MORAN FROM JELENA
                               McWILLIAMS

    Q.1. S. 2155 requires your agencies to establish a community
    bank leverage ratio (CBLR), which Congress envisioned as a
    single, simple capital standard that would provide small
    financial institutions with regulatory relief However, the CBLR
    you have proposed includes revisions to the Prompt Corrective
    Action (PCA) framework, which would effectively raise the PCA
    thresholds for community banks who choose to comply with the
    CBLR.
        Given the negative regulatory consequences triggered when
    banks fall below the various PCA thresholds, I'm concerned your
    proposal will actually discourage community banks from ever
    opting into the CBLR framework. Are there changes to your CBLR
    proposal that would make it less burdensome and more attractive
    for small community banks?

    A.1. The FDIC continues to have a goal of making the community
    bank leverage ratio (CBLR) as simple as possible, while
    ensuring that it is broadly available for community banking
    organizations. Since the agencies (i.e., the FDIC, FRB, and
    OCC) issued the CBLR proposal, we received numerous comments
    and are carefully reviewing each of them. Specifically, we have
    received feedback on the CBLR levels proposed as proxies under
    the Prompt Corrective Action (PCA) framework when a community
    bank falls below the ``well capitalized'' PCA measure in the
    CBLR proposal. These PCA proxies were included in the proposal
    as an option for institutions that fall below the well
    capitalized PCA measure in the CBLR to allow them to continue
    to use the CBLR.
        Reverting to Basel III-based capital calculations at a time
    when a small bank should be focused on addressing its declining
    capital levels could be resource-intensive during a narrow
    period of time and, therefore, counterproductive. The FDIC is
    considering how best to proceed in the CBLR final rule to
    address this concern, taking into account the feedback received
    on the proposed PCA proxies.
                                    ------

     RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ FROM JELENA
                               McWILLIAMS

    Q.1. When you assess a bank's risk management strategy, how do
    you assess the increased risk of more frequent and severe
    natural disasters and extreme weather events?

    A.1. The FDIC expects financial institution management to be
    aware of and prepare for potential risks that could arise in
    their operating environment. These could include physical risks
    associated with extreme weather events, such as hurricanes,
    floods, storms, tornadoes, droughts, and fires. In this regard,
    the FDIC's longstanding practice is to assess institutions'
    efforts to mitigate the impact of extreme weather events
    relative to their ongoing operations and ability to provide
    financial services to their customers.
        The FDIC has established expectations for financial
    institutions to develop, test, and implement appropriate
    business continuity plans to maintain operational capabilities
    during and after any event that leads to operational
    disruptions. These plans are assessed as part of the FDIC's
    bank examination process.
        In addition, financial institutions obtain different types
    of insurance coverage, such as business interruption, wind, and
    flood insurance; to repair or replace damaged premises and
    equipment; or to mitigate potential losses if they are
    temporarily unable to operate. The management of FDIC-
    supervised institutions may also require some customers to
    maintain certain levels of disaster or flood insurance
    coverage. The FDIC examines a financial institution's
    compliance with the National Flood Insurance Act, which
    requires certain residential mortgage borrowers to maintain
    flood insurance.

    Q.2. Are you confident that the banks that you supervise are
    adequately pricing the cost of those increasing risks from
    climate change?

    A.2. The FDIC expects the management of FDIC-supervised
    financial institutions to mitigate the risks of adverse climate
    or weather-related events common to particular areas of the
    country. Such activities may include ensuring the financial
    institution and its borrowers have appropriate insurance
    coverage, adjusting borrowers' cash-flow estimates based on
    reduced agricultural yields or adverse business conditions,
    having customers obtain certain minimum levels of insurance
    coverage, and complying with rules, regulations, and building
    codes. Such activities ensure that financial institutions are
    adequately considering and pricing the cost of potential risks
    from climate change relative to their impact on operations.

    Q.3. Do you know if the banks the FDIC supervises are relying
    on historical trends when they evaluate the risks from extreme
    weather events?

    A.3. FDIC-supervised institutions typically do not rely on
    historical trends when they evaluate the risks from extreme
    weather events. Bank management generally strives to prepare
    for various ``worst case'' scenarios that could reasonably
    arise due to adverse weather-related events that are more
    common in the area of the United States in which they operate.

    Q.4. Does the FDIC use or consider the data from the National
    Climate Assessment (NCA) as it conducts its supervisory work?
        If yes, how? If no, why not?

    A.4. The FDIC's supervisory processes assess how well the
    management of financial institutions is informed of and has
    implemented appropriate mitigation efforts for the unique
    climate change-related risks in their local area.
        The NCA is a useful resource that FDIC staff and
    institution management may review when considering the physical
    risks of adverse weather-related events that could pose
    economic and financial risks common to a particular area of the
    United States.

    Q.5. Do you think it would be useful to consider the NCA as a
    guide to the physical risks that could in turn pose economic
    and financial risks for the institutions that the FDIC
    supervises?

    A.5. The NCA is a useful resource that FDIC staff and
    institution management can review when considering the physical
    risks of adverse weather-related events that could pose
    economic and financial risks common to a particular area of the
    United States. Many of the concerns raised in the NCA are
    addressed, as a practical matter, in the FDIC's Guidelines for
    an Environmental Risk Program.\1\
    ---------------------------------------------------------------------------
        \1\ FDIC Guidelines for an Environmental Risk Program, available at
    https://www.fdic.gov/regulations/laws/rules/5000-4900.html.

    Q.6. Have you attempted to quantify the financial risks from
    changes in the climate itself--not just episodic severe weather
    shocks, but fundamental changes like high temperatures,
    drought, and sea-level rise?
        If yes, how? If no, why not?

    A.6. FDIC economists and financial analysts conduct analyses of
    a range of factors that .affect economic and banking
    conditions, including the potential implications of changing
    environmental conditions.

    Q.7. Do you think the financial institutions that the FDIC
    supervises face risks from changes in the climate itself?

    A.7. While bankers managing FDIC-supervised financial
    institutions are generally accustomed to the risks associated
    with adverse weather-related events common in their market
    area, adverse weather-related events can have a pronounced
    negative economic impact, particularly in a local area. A
    continuation of severe weather conditions could result in
    greater risks to FDIC-supervised financial institutions from
    adverse weather-related events.

    Q.8. Will you consider joining the NGFS? If yes, what is the
    timeline for making that decision? If no, why not?

    A.8. The FDIC is not considering joining the NGFS, but will
    continue to monitor NGFS recommendations as they are developed.
    The FDIC expects supervised institutions to establish
    appropriate policies and procedures for the type of investment
    and financing activities in which they engage, and as mentioned
    above, to manage risks associated with adverse weather-related
    events.

    Q.9. What can you commit to doing in the next 6 months to
    improve how you assess the financial risk of climate change?

    A.9. The FDIC will continue its longstanding risk-focused
    practice to assess financial institutions' efforts to mitigate
    the impact of extreme weather-related events that maybe
    prevalent in the geographical areas in which they are located
    to ensure they can recover their operational activities in a
    timely manner and continue to provide financial services to
    their customers.
                                    ------

      RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
                           JELENA McWILLIAMS

    Q.1. How are you improving the culture and strengthening the
    compliance division at the financial institutions you regulate,
    to ensure that Suspicious Activities Reports are being filed,
    fake accounts are not created, and customers are treated
    fairly? Do problems with incentive pay practices that intent
    staff to engage in fraud or unfair practices still exist at the
    financial institutions you, regulate?

    A.1. FDIC examinations include a careful evaluation of a bank's
    compliance with the Bank Secrecy Act (BSA) and implementing
    regulations, including a review of suspicious activity
    monitoring and reporting, account opening procedures, and
    customer due diligence. In terms, of evaluating account opening
    procedures and customer due diligence, we evaluate documents
    and information collected by banks, policies and procedures to
    validate customers' identities, and the methodologies used to
    establish customers' money laundering (and other illicit
    financial) risk profiles.
        FDIC examinations also include a review of pay practices to
    evaluate whether incentive arrangements are consistent with
    safety and soundness and in accordance with applicable laws and
    regulations, including Appendix A to Section 364 of the FDIC
    Rules and Regulations, Standards for Safety and Soundness
    (Interagency Safety and Soundness Standards).\1\
    ---------------------------------------------------------------------------
        \1\ 12 C.F.R. Part 364.100, et seq. (2019), available at https://
    www.ecfr.gov/cgi-bin/
    textidx?SIDee7d5a8a43c57d350f4e9f6dd4febb41&mc=true&node=ap12.6.364_1101
    .a&rgn=div9.
    ---------------------------------------------------------------------------
        With respect to compensation, the Interagency Safety and
    Soundness Standards prohibit excessive compensation as an
    unsafe and unsound practice.\2\ Compensation shall be
    considered excessive when amounts paid are unreasonable or
    disproportionate to the services performed by an executive
    officer, employee, director, or principal shareholder,
    considering the following:
    ---------------------------------------------------------------------------
        \2\ Ibid 6.

       LThe combined value of all cash and noncash benefits
    ---------------------------------------------------------------------------
            provided to the individual;

       LThe compensation history of the individual and
            other individuals with comparable expertise at the
            institution;

       LThe financial condition of the institution;

       LComparable compensation practices at comparable
            institutions, based upon such factors as: asset size,
            geographic location, and the complexity of the loan
            portfolio or other assets;

       LFor post-employment benefits, the projected total
            cost and benefit to the institution;

       LAny connection between the individual and any
            fraudulent act or omission, breach of trust or
            fiduciary duty, or insider abuse with regard to the
            institution; and

       LAny other factors the agencies determine to be
            relevant.

    Additionally, compensation that could lead to material
    financial loss to an institution is prohibited as an unsafe and
    unsound practice.
        With respect to unauthorized accounts, beginning in 2016
    and concluding in 2017, the FDIC conducted a comprehensive
    horizontal review of sales practices at 17 FDIC-supervised
    institutions with total assets greater than $10 billion. This
    review was part of a collaborative effort among the FDIC, OCC,
    FRB, and CFPB. FDIC staff also participated in reviews of OCC-
    supervised institutions. The agencies met frequently during
    this process to ensure consistency in the supervisory approach
    and to share draft findings.
        No systemic weaknesses were identified by FDIC supervisory
    staff in terms of opening accounts without customer consent.
    The FDIC issued supervisory letters to all FDIC-supervised
    institutions included in this review. These letters provided
    detail on institution-specific findings, supervisory
    recommendations, and horizontal conclusions across all
    institutions reviewed. Supervisory recommendations focused
    primarily on enhancing incentive compensation programs or risk
    management practices to help prevent sales practice weaknesses.
    Many of the institutions were in the process of conducting
    self-assessments and identifying similar findings. Examination
    staff have conducted follow-up work as necessary to assess each
    institution's remediation efforts and the principles outlined
    above continue to be embedded in the FDIC's examination
    processes.

    Q.2. Will you ensure access to information from community
    reinvestment advocates through the Freedom of Information Act
    with timely responses and without requiring high fees?

    A.2. The FDIC is committed to full compliance with the Freedom
    of Information Act (FOIA) and supports the FOIA's objective of
    ensuring an open and transparent Government. The FOIA is a
    Federal statute (5 U.S.C. Part 552) that affords any person the
    right to obtain Federal agency records unless the records (or a
    part of the records) are protected from disclosure by any of
    the nine exemptions contained in the law or by one of three
    special law enforcement record exclusions. The FDIC has issued
    Regulation 12 C.F.R. 309.5, implementing the FOIA, which
    includes provisions on the time to respond to a FOIA request
    and the payment of fees.

    Q.3. There has been an epidemic of fake comments on
    controversial issues. How will you ensure that comments on
    rules and mergers are accurate and not based on stolen
    identities?

    A.3. To date, the FDIC has not identified a circumstance in
    which comments received have been suspected of coming from
    individuals or entities using illegitimate identities. While
    the FDIC has not yet identified such problems, the agency
    remains cognizant of this issue and is aware that it has arisen
    at other agencies. Anomalies in comments, whether observed
    within a specific comment or across a group of comments, would
    be subject to additional evaluation from which a determination
    is made regarding the disposition of the comment(s).

    Q.4. Recently, the Office of Management and Budget released a
    memorandum reinterpreting the Congressional Review Act to
    include independent regulatory agencies, many of which are your
    agencies. What would be the impact of requiring OMB review of
    proposed rules and guidance on your agency?

    A.4. The FDIC submits all final rules to OMB for major rule
    determinations, as required by the Congressional Review Act,
    and follows an established practice for complying with the
    Act's requirements. As part of that practice, the FDIC requests
    determinations from the Office of Information and Regulatory
    Affairs (OIRA) at OMB as to whether a final rule is ``major''
    in accordance with the Act. Such a request is typically sent to
    OIRA shortly before the FDIC's Board of Directors considers the
    final rule, and includes the FDIC's view on whether it is a
    major rule. OMB Memorandum M-19-14, entitled ``Guidance on
    Compliance with the Congressional Review Act,'' seeks to
    provide guidance on how such requests should be made in the
    future, clarifying timeframes and identifying useful features
    in agency analyses supporting recommended major rule
    determinations.\3\
    ---------------------------------------------------------------------------
        \3\ Executive Office of the President, Office of Management and
    Budget memorandum for the Heads of Executive Departments and Agencies,
    Guidance on Compliance with the Congressional Review Act, M-19-14
    (April 11, 2019), available at https://www.whitehouse.gov/wp-content/
    uploads/2019/04/M-19-14.pdf.
    ---------------------------------------------------------------------------
        Some final guidance documents may be considered rules for
    purposes of the Congressional Review Act. If an FDIC guidance
    document is a rule for Congressional Review Act purposes, the
    FDIC will seek a major rule determination from OIRA and submit
    the document to Congress pursuant to the statutory
    requirements. The Congressional Review Act applies only to
    final agency rules; the FDIC does not submit proposed rules or
    guidance to OIRA for major rule determinations or substantive
    review.

    Q.5. The most recent National Climate Assessment said the U.S.
    Southwest could lose $23 billion per year in region-wide wages
    as a result of extreme heat. Are you looking into how extreme
    heat will affect the economy of the Southwest, and how that
    will impact regional financial institutions?

    A.5. FDIC economists and financial analysts conduct analyses of
    a range of factors that affect economic and banking conditions,
    including the potential implications of changing environmental
    conditions. Several FDIC Regional Risk Committees include
    environmental factors in their regular analysis. One of these
    factors is drought in the western States.
        Senior management and boards of directors at FDIC-
    supervised financial institutions are generally familiar with
    the risks associated with adverse weather-related events common
    in the areas in which they operate, including those that are
    long-term or display a pattern. The FDIC's supervisory process
    assesses how well bank management is informed of and has
    implemented appropriate mitigation efforts for the unique risks
    facing the institution, including environmental risks in its
    market area.

    Q.6. As you conduct your supervisory work, are you taking into
    account the evidence that extreme heat is going to get worse?

    A.6. The FDIC expects the management of FDIC-supervised
    financial institutions to mitigate the risks of adverse climate
    or weather-related events. Such activities may include ensuring
    the financial institution and its borrowers have appropriate
    insurance coverage or adjusting borrowers' cash-flow estimates
    based on reduced agricultural yields or adverse business
    conditions.
                                    ------

     RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA FROM JELENA
                               McWILLIAMS

    Q.1. In 2015, regulators created new collateral requirements
    for swaps made between affiliates of the same company, known as
    inter-affiliate margin requirements. These requirements are
    inconsistent with international regulators and have tied up $40
    billion in capital, putting U.S. banks at a competitive
    disadvantage and freezing up investment back into the economy.
    In the past, you've stated that resolving inter-affiliate
    margin requirements should be a priority.

    Q.1.a. Is this still your view?

    A.1.a. Yes. The FDIC is committed to continuing to work with
    the other bank regulators (i.e., the FRB, OCC, Farm Credit
    Administration (FCA), and Federal Housing Finance Agency
    (FHFA)) to consider the most effective way to address inter-
    affiliate margin requirements in the most effective manner
    possible.

    Q.1.b. Can you provide a timeline for when the issue will be
    addressed?

    A.1.b. The agencies have been actively discussing inter-
    affiliate margin requirements and expect to seek comment on
    this issue in the near term. Addressing the issue is a priority
    for the FDIC.

    Q.2. Cybersecurity is a chief concern for U.S. financial
    institutions and the agencies that regulate them. What is your
    assessment of the current examination process and regulatory
    landscape for regulated institutions with respect to cyber?
        How can Federal agencies improve and help harmonize
    cybersecurity regulations?

    A.2. The FDIC, as a member of the Financial and Banking
    Information Infrastructure Committee (FBIIC), is working to
    harmonize cybersecurity oversight. For example, the FBIIC is
    identifying how cybersecurity examinations could be better
    coordinated to reduce burden without reducing effectiveness,
    and the FDIC has been an active member of these discussions.
    Additionally, we have worked with other FBIIC agencies to
    create a shared lexicon of cyber terms that should be used
    consistently to reduce confusion. We have been using the
    National Institute of Standards and Technology (KIST)
    Cybersecurity Framework as the foundation for our cybersecurity
    harmonization efforts, which should further reduce burden and
    confusion.
        Additionally, the FDIC has supported the industry's own
    efforts to harmonize and otherwise improve cybersecurity
    assessments. In 2018, the Financial Services Sector
    Coordinating Council published a cybersecurity assessment that
    is sufficiently scalable and extensible to be useful to
    financial institutions of all types for internal and external
    cyber risk management.\1\ This profile adds to the choices an
    institution has for assessing cybersecurity maturity, such as
    the Federal Financial Institutions Examination Council's
    (FFIEC's) Cybersecurity Assessment Tool, as well as assessments
    available from the private sector.
    ---------------------------------------------------------------------------
        \1\ Available at https://www.fsscc.org/Financial-Sector-
    Cybersecurity-Profile.
    ---------------------------------------------------------------------------
        The FDIC does not mandate the use of any particular
    assessment and recognizes that entities of varying complexity
    benefit from the availability of a variety of assessments.
    However, there are benefits to using a standardized approach
    for identifying, assessing, and managing cybersecurity risk,
    and the agencies continue to encourage institutions in this
    regard. For example, institutions that use a standardized
    approach can better track their progress through time, and
    compare their performance to peers that are using the same
    approach. Regulators can be more effective and efficient
    examining institutions when they are familiar with the
    standardized approach an institution is using.
        Finally, the FDIC collaborates through the FFIEC to provide
    consistent examiner training and procedures across FFIEC
    agencies. We are currently improving booklets within the IT
    Examination Handbook and expect to release an update on
    business continuity management soon. The FFIEC provides a
    useful forum for harmonization and helps create a level playing
    field with regard to cybersecurity examination across bank
    charter types.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM RODNEY E.
                                  HOOD

    Meeting Schedule
    Q.1. Please provide to the Committee a detailed list of all
    meetings with individuals or groups not directly affiliated
    with the agency you serve, from the date of your confirmation
    by the Senate to present.
    A.1.:
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Leveraged lending
    Q.2. In a letter dated May 13, 2019, I asked you to be prepared
    to share detailed responses to the leveraged lending questions
    in my April 11, 2019, letter to Financial Stability Oversight
    Council Chair Mnuchin and to provide supporting data to the
    Committee as part of you testimony. While I understand from the
    OCC's and FDIC's written testimony that they will continue to
    monitor leveraged lending risks, you did not provide
    information in response to my specific questions. Please
    provide detailed responses to the five questions in my May 13,
    2019, and April 11, 2019, letters.

    A.2. Questions from May 13, 2019, and April 11, 2019, letter:
    `` . . . Regulators must demonstrate that they are responding
    to threats to financial stability before the real economy
    suffers. To that end, please provide me the following . . . ''

            1. Any analyses of the leveraged lending market that
            the Council and its member agencies have performed in
            the last 2 years;

            Response: The other banking agencies referenced in your
            April 11, 2019, letter issued guidance regarding
            leveraged lending in 2013. The NCUA was not a party to
            that guidance. Leveraged loans represent a small
            portion, if any, of total assets of credit unions.
            Total commercial lending, including commercial real
            estate lending, represents only about 7 percent of
            total loans for credit unions. Any leveraged lending
            would be a subset of these loans. As a result, the NCUA
            does not believe that direct exposure to leveraged
            lending is material for credit unions. However, we do
            continually monitor the larger macroeconomic space for
            any signs of indirect exposures into the credit union
            system.

            2. Any other Council documents discussing the risks of
            leveraged lending and staff recommendations to address
            those risks;

            Response: Due to the confidential and sensitive nature
            of many Council documents, please contact the Council
            regarding release of any documents responsive to this
            request.

            3. A list of all Council meetings where leveraged
            lending was discussed, including the dates of those
            meetings, attendees, and materials presented;

            Response: Since the Council maintains minutes on all
            Council meetings, please contact the Council regarding
            release of information responsive to this request.

            4. A list of supervisory or other actions that the
            Council and its member agencies have taken at regulated
            institutions in order to address risks in the leveraged
            lending market, especially with regard to weak
            underwriting standards; and

            Response: As noted above, while we remain vigilant
            regarding any potential indirect impacts, credit unions
            do not have material direct exposure to leveraged
            lending. The NCUA's regulations for commercial lending
            require the loan risk assessment to be sufficient to
            fully understand the borrower's needs, confirm the
            borrower's ability to meet debt service requirements
            for a properly structured loan, obtain sufficient
            collateral to offset the risk, and in most cases,
            requires the personal guarantee of the principal(s) as
            part of the loan underwriting process.

            5. A description of how FSOC is monitoring leveraged
            lending markets and what actions it plans to take to
            protect the economy from threats in credit and lending
            markets.

            Response: Due to the confidential and sensitive nature
            of much of the Council's work, including the discussion
            of supervisory and other market-sensitive data, please
            contact the Council directly for this information.
    CU fees and interest rates
    Q.3. Last year, the New York Times reported on high fees and
    interest rates charged to members of the Marriott Employees'
    Federal Credit Union, a credit union with a low-income
    designation meaning 50 percent of its members have family
    incomes of less than 80 percent of the median income in the
    areas it serves. Meanwhile, some of the executives and
    management of Marriott who also use the credit union received
    million dollar mortgages and car loans at below-market interest
    rates. In response to a written question during your nomination
    hearing, you committed to reviewing credit unions' fees and
    working to prevent the collection of fees that are inconsistent
    with the credit union system's mission of providing affordable
    financial services to working families. You also pledged to
    ensure that fees do not ``needlessly penalize the underserved
    and those of lesser means.''
        During this hearing, you called on Congress to allow
    Federal credit unions with a community or single common-bond
    charter the opportunity to add underserved areas to their field
    of membership in order to open up access for unbanked and
    underbanked households. In line with this effort, would you
    also advocate for limits on high fees and interest rates for
    underserved customers?

    A.3. Since my confirmation hearing, I have met with the
    Agency's senior staff to ensure that our examination and
    supervision system provides proper oversight of consumer
    protection laws and fulfills the NCUA's responsibility toward
    underserved communities and low-to-moderate income households.
    This area is a priority for me, and I continue to assess ways
    in which the NCUA can do more to best serve unbanked and
    underbanked households.
        Credit unions are not-for-profit organizations that exist
    to serve their members' financial needs by providing a safe
    place to save and borrow at reasonable rates. In the event that
    credit union members feel their institution is not adequately
    offering services and products that are responsive to their
    needs they are empowered to advocate for changes. The concept
    of one member one vote, regardless of the member's financial
    standing, is unique to the credit union system and should not
    be taken for granted. Any credit union member who may be
    dissatisfied with the direction of their credit union, the
    composition of the Board, the financial products and services
    offered, the credit union's priorities, or any other grievance
    is empowered by their vote and the votes of other like-minded
    members to fashion an institution that is more receptive to the
    needs of its members. Many credit unions today are a reflection
    of the advocacy of their members.
        In addition, to the one-member-one-vote philosophy, the
    Federal Credit Union Act explicitly caps the interest rate on
    Federal credit union loans at 15 percent, with Agency
    discretion to raise that limit if interest-rate levels could
    threaten the safety and soundness of credit unions. The current
    18-percent ceiling has remained in place since May 1987. The
    18-percent cap applies to all Federal credit union lending
    except originations made under NCUA's Payday Alternative Loan
    (PAL) program, which are capped at 28 percent, far lower than
    the triple-digit interest rates charged by payday loan
    purveyors.
        In addition, the NCUA's regulations require Federal credit
    unions to establish written policies regarding the overdraft
    fees and interest rates, if any, that they charge their
    members. Excessive reliance on fees to generate income is a
    factor that the NCUA's examinations process is designed to
    capture. The vast majority of credit unions strive to protect
    their members and serve them well. In individual cases, the
    extent to which some credit union members access certain fee-
    based services will vary and the cumulative cost to those
    members could, therefore, be relatively higher than for other
    members. Just as they continually reassess other business
    decisions they make, credit unions should be regularly
    reviewing the impact their fees have on their member base and
    what they can do to tailor their product offerings to support
    their members' financial health.
        To the extent that Congress is contemplating additional
    limits, I would be glad to discuss this issue further.
    Board member reimbursement
    Q.4. During your nomination hearing, you pledged that you would
    understand the NCUA's expense reimbursement policy and ensure
    that it is in alignment with other financial regulators after
    the Washington Post reported on excessive spending by agency
    officials. What has the NCUA done to address this issue? What
    is the current policy on executive and employee spending and
    reimbursement? Is it similar to that of the other financial
    regulators?

    A.4. In March 2019, the NCUA Executive Director completed a
    review, independent of the NCUA Board, of the travel and
    expense policies that apply to its political appointees and
    their staff. The review concluded that the NCUA's policies are
    materially consistent with the Federal Travel Regulation (FTR)
    issued by the General Services Administration and comparable to
    the Federal banking agencies \1\ in the key expense categories.
    ---------------------------------------------------------------------------
        \1\ The banking agencies whose policies were considered for
    purposes of the review are the Consumer Financial Protection Bureau,
    the Federal Deposit Insurance Corporation, the Federal Reserve Board,
    and the Office of the Comptroller of the Currency.
    ---------------------------------------------------------------------------
        With regard to reimbursement for representation events, the
    Executive Director's review found that all the banking
    agencies, and many nonbanking agencies, have varying levels of
    representation funds. The NCUA is not equipped with a dining
    facility or regular catering services and very little money is
    spent on reimbursement for meals and beverages during
    representation events. From 2015 through 2018, the combined
    average annual payment for meals and beverages across all board
    offices was $9,700. Thus, despite the potential scrutiny of
    individual meal claims, the review concluded that no changes
    should be made to the current policy. With regard to the
    Agency's alcohol reimbursement policy, the review concluded
    that reimbursement, while legal, should be eliminated. Thus,
    the NCUA no longer considers alcohol a reimbursable expense for
    representation events. This change creates full consistency
    with the Agency's travel policy, which already deems alcohol to
    be nonreimbursable.
        With regard to ground transportation, the Agency's review
    found that, unlike the NCUA, every banking agency has full-time
    dedicated vehicles and drivers that transport their political
    appointees and agency employees at a cost of approximately
    $100,000 annually for a single dedicated car and driver for the
    Washington metropolitan area. Anecdotal information available
    on various appropriated Federal agencies indicates that this
    arrangement is common across the Federal Government. By
    contrast, all NCUA staff, including political appointees,
    arrange for taxi or ride-sharing services for each
    transportation event. From 2015 through 2018, the NCUA board
    offices spent a combined average of $14,400 on all ground
    transportation services, including outside of the Washington
    metropolitan area. While not consistent with the other banking
    agencies, the NCUA policy continues to rely on taxis or ride-
    sharing services for each transportation event.
        Finally, with regard to air travel, the review concluded
    that the NCUA's policy is almost identical to the standards
    outlined in the FTR and is more conservative than two of the
    four banking regulators. Thus, no changes were recommended in
    this area.
    Appraisals
    Q.5. Last year, prior to your confirmation as Chairman, NCUA
    proposed to raise the current appraisal exemption for
    commercial real estate loans from $250,000 to $1 million. NCUA
    characterized this as a ``significant increase'' in the
    threshold and noted that the percentage of commercial loans
    exempted from appraisals would increase from 27 percent to 66
    percent.\2\
    ---------------------------------------------------------------------------
        \2\ ``Real Estate Appraisals,'' 83 FR 49857, October 3, 2018,
    available at https://www.
    govinfo.gov/content/pkg/FR-2018-10-03/pdf/2018-20946.pdf.

    Q.5.a. NCUA states that ``appropriate prudential and
    supervisory oversight'' can offset the potential risk of
    raising the appraisal threshold.\3\ What types of prudential
    and supervisory changes are necessary to offset any risk not
    just to the credit union itself but to members and to the
    commercial real estate market?
    ---------------------------------------------------------------------------
        \3\ Id.

    A.5.a. We estimate that commercial real estate transactions not
    covered by an appraisal by a certified appraiser will be less
    than 1 percent of assets in the credit union system. Also,
    total commercial real estate loans made by credit unions
    represent only 2.7 percent of all commercial real estate
    lending in federally insured financial institutions. As 75
    percent to 90 percent of this amount is estimated to still
    require an appraisal, only about one quarter to three quarters
    of 1 percent would not be covered.
        And, transactions below $1 million not otherwise exempt
    will still require written estimates of market value conducted
    by qualified individuals independent of the lending process.
    The final rule increases the standards for written estimates.
    The agency is also party to the December 2, 2010, Interagency
    Appraisal and Evaluation Guidelines that establish safety and
    soundness expectations for prudent appraisal and evaluation
    policies, procedures, and practices.
        Further, under the NCUA's commercial loan rule, credit
    unions must use collateral valuation methods that are
    appropriate for the particular type of collateral.
    Specifically, ``the current collateral value must be
    established by prudent and accepted commercial lending
    practices and comply with all regulatory requirements.'' 12 CFR
     723.2 and 723.4.
        In addition, the agency's commercial loan rule requires all
    loans to have a strong foundation--to be solidly underwritten
    and backed by adequate cash-flow. The proposed rule does not
    change these basic requirements. Also, credit unions have a
    long history of tailoring loans and other services so they are
    in the best interests of their member-owners.
        Therefore, increasing the commercial real estate appraisal
    threshold only results in small incremental risk to the credit
    union system and the insurance fund, is not material to the
    overall commercial real estate market, and provides adequate
    protection for the borrower.
        I also note there is a small subset of credit unions that
    individually have large positions in commercial real estate
    relative to their size and capital levels. One of the agency's
    top supervisory priorities is addressing concentrations of
    credit risk in individual credit unions. Examiners will focus
    on large concentrations of loan products and concentrations of
    specific risk characteristics. A more robust examination
    quality control process was implemented this year with
    increased emphasis on concentration risk issues forthcoming.
    Also, an update to examination scoping procedures requiring
    examiners to ensure credit unions analyze a borrower's ability
    to repay is scheduled to be effective with the release of the
    2020 examination program. Even credit unions with an exception
    to the statutory cap on member business lending are covered
    under these enhanced examination and quality control
    procedures.

    Q.5.b. In the Regulatory Flexibility Analysis, NCUA noted that
    it did not have sufficient information to determine what sizes
    of credit unions would benefit from any reduced regulatory
    burden from the change in appraisal requirements.\4\ Without
    this information, how will NCUA assess the impact of any
    potential rule change on credit unions' regulatory cost,
    lending behavior, and loan outcomes? Does NCUA intend to begin
    collecting this information?
    ---------------------------------------------------------------------------
        \4\ Id.

    A.5.b. The increase to the appraisal threshold will reduce the
    burden on all credit unions, including small credit unions, as
    the threshold for commercial appraisals increases from $250,000
    to $1 million. The appraisal threshold increase will likely
    lower transaction costs for credit unions and their borrowers
    due to the estimated difference in cost between a written
    estimate of market value and an appraisal. Further, written
    estimates of market value may take less time to complete than
    appraisals, thereby reducing transaction time for credit unions
    and their borrowers. Accordingly, under the Regulatory
    Flexibility Analysis, the NCUA certifies the rule will not have
    a significant economic impact on a substantial number of small
    credit unions.
        With the upcoming replacement of its legacy examination
    system, the agency will collect additional information during
    the examination process about commercial lending in credit
    unions. This will allow the NCUA to better monitor and evaluate
    any impact on lending behavior and outcomes.

    Q.5.c. In addition to the reduction in regulatory burden, what
    other factors, if any, will NCUA consider in deciding whether
    or not to increase the commercial appraisal exemption threshold
    for credit unions?

    A.5.c. In particular, the NCUA considered the extent to which
    this regulatory relief could be provided safely and without
    undue risk to the share insurance fund. The current $250,000
    threshold limit has been in place for nearly 20 years. Real
    estate values have changed dramatically over that time, as a
    result of demand, inflation and growth. Some adjustment to the
    appraisal threshold for commercial real estate is warranted on
    those terms alone. Also, based on the very small level of
    commercial real estate loan activity in credit unions, the
    Board concluded the change only results in small incremental
    risk to the credit union system and the insurance fund, and
    other regulatory and supervisory requirements provide adequate
    mitigation.
        The agency also considered the extent to which the change
    might affect the market. The NCUA estimates the change in the
    commercial real estate appraisal threshold for credit unions
    will affect less than three-quarters of 1 percent of the
    commercial real estate market. Therefore, the change is not
    expected to have a material impact on the overall market.
        The NCUA also considered the impact on borrowers. The rule
    increases the standards for the use of written estimates of the
    property value, which must be conducted by a qualified person
    independent of the transaction, such as a licensed appraiser.
    And, credit unions will still be responsible for adhering to
    the appropriate risk management practices for underwriting
    commercial real estate loans. This provides adequate protection
    for the borrower. In fact, the change is expected to enable
    credit unions to safely, and when in the best interests of
    their member-owners, provide more borrowers--especially small
    businesses--with lower costs and quicker turnaround times for
    commercial property loans, especially in underserved and rural
    areas.
    Taxi Medallion Loans
    Q.6. Recently, the New York Times reported that predatory taxi
    medallion loans trapped working taxi drivers with debt while
    creating huge profits and compensation for credit unions and
    their executives. Eventually, the financial condition of these
    credit unions deteriorated because of heavy losses on the
    loans, which were poorly underwritten, exceeded regulatory
    lending limits, and lacked board and management oversight.
    According to an Office of Inspector General (OIG) Material Loss
    Review, NCUA was aware of the risks, but failed to take timely
    action.\5\
    ---------------------------------------------------------------------------
        \5\ NCUA Office of Inspector General, Material Loss Review of
    Melrose Credit Union, LOMTO Federal Credit Union, and Bay Ridge Federal
    Credit Union, Mar. 29, 2019, https://www.ncua.gov/files/audit-reports/
    oig-material-loss-review-march-2019.pdf.

    Q.6.a. In addition to the recommendations in the OIG's Material
    Loss Review of Melrose Credit Union, LOMTO Federal Credit
    Union, and Bay Ridge Federal Credit Union, how will you improve
    your examination and enforcement procedures to ensure that
    known risks to credit unions are identified and corrected?
    Specifically, how will you strengthen the examination and
    enforcement of credit union compliance with member business
    loan requirements under 12 CFR Part 723, even where a credit
    ---------------------------------------------------------------------------
    union qualifies for an exception from the aggregate limit?

    A.6.a. I strongly agree with the OIG's recommendations, and the
    NCUA is working diligently to implement them. In January of
    this year, the agency issued its annual examination scope
    instruction to field staff. This instruction re-emphasized the
    importance of reviews of concentrations of risk. Also in
    January, the NCUA issued a letter to all insured institutions
    outlining the agency's supervisory priorities for the year. One
    of the top supervisory priorities discussed is concentrations
    of credit risk, noting examiners will focus on large
    concentrations of loan products and concentra-
    tions of specific risk characteristics. The letter also
    referred to the
    existing supervisory guidance regarding concentration risk,
    NCUA Letter to Credit Unions 10-CU-03.
        The NCUA's enterprise risk management council has recently
    reviewed the current state of concentration risk in the credit
    union industry, and this group of senior executives is working
    closely with the national examination program office to
    implement a standing review process. A more robust examination
    quality control process was implemented this year with the
    increased emphasis on concentration risk issues forthcoming.
    The update to examination scoping procedures requiring
    examiners to ensure credit unions analyze a borrower's ability
    to repay is scheduled to be effective with the release of the
    2020 examination program. Even credit unions with an exception
    to the statutory cap on member business lending are covered
    under these enhanced examination and quality control
    procedures.
        The agency will also emphasize guidance to staff regarding
    the escalation of actions to resolve repeat findings. The
    agency's National Supervision Policy Manual details the process
    staff must follow in applying administrative remedies for
    identified issues.

    Q.6.b. In January 2019, the NCUA approved PenFed's acquisition
    of Progressive Federal Credit Union, another credit union
    heavily concentrated in taxi medallion loans. To what extent
    did NCUA investigate PenFed's and Progressive's compliance with
    executive compensation regulations, lending requirements, and
    consumer protection laws before approving the merger?

    A.6.b. On September 28, 2018, Pentagon Federal Credit Union
    (PenFed) submitted an application for an unassisted merger with
    Progressive Credit Union. The NCUA's Eastern Region worked
    closely with the NCUA's Office of National Examination and
    Supervision, the Office of the General Counsel, and the Office
    of Examinations & Insurance to ensure the subject merger
    complied with all regulatory requirements. Lending and consumer
    protection laws were reviewed during the supervision process
    and the incoming merger request addressed CEO compensation,
    including ``golden parachute'' payments that are prohibited
    under section 750 of the NCUA's regulations.
                                    ------

    RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM RODNEY
                                E. HOOD

    Q.1. The landscape has drastically changed since NCUA issued
    its 2014 Supervisory Letter on taxi medallion lending,\1\ with
    ridesharing services taking up more of the market share.
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        \1\ https://www.ncua.gov/files/letters-credit-unions/
    SupervisoryLetter_TaxiMedallion.pdf.
    ---------------------------------------------------------------------------
        To ensure NCUA guidance accurately reflects the taxi
    medallion market, should the NCUA provide updated national
    guidance for taxi medallion loans?

    A.1. After reviewing the existing supervisory guidance against
    the current landscape, I believe it remains relevant. The NCUA
    issued its 2014 Supervisory Letter in response to elevated risk
    associated with taxi medallion lending.\2\ To clarify the
    NCUA's expectations, the agency issued supplemental guidance in
    May 2015, and continues to address taxi medallion secured
    lending through direct supervision of affected credit unions.
    This guidance is based on sound commercial lending principles
    addressed by a host of other related agency and interagency
    guidance issued over the years. It provides information
    specific to taxi medallion secured lending on evaluating a
    borrower's repayment ability in normal and adverse economic
    climates. The guidance also discusses proven collateral
    valuation approaches for use in loan underwriting that applies
    across the spectrum of economic environments.
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        \2\ See NCUA Supervisory Letter 14-04, Taxi Medallion Lending, at
    Taxi Medallion Lending--National Credit Union Administration.
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        The NCUA's existing regulations and guidance on loan
    workouts remain relevant to credit unions with taxi medallion
    secured loans. Credit unions have significant flexibility to
    offer distressed borrowers a variety of loan modification and
    restructuring options. With respect to valuation methodologies,
    federally insured credit unions are required to follow
    Generally Accepted Accounting Principles (GAAP). Credit unions
    with taxi medallion secured loans, and taxi medallions that
    have been foreclosed, need to consult with their CPA regarding
    acceptable methodologies for valuing the loans and collateral
    for loan loss reserving and financial reporting purposes. The
    NCUA provides credit unions with a variety of reference
    information on applicable accounting standards.

    Q.2. There is currently no uniform risk rating policy in place
    to monitor the credit risk of taxi medallion loans. Without a
    uniform risk rating system, it is difficult to quantify risks
    and manage or monitor these risks according to the threat they
    pose to different institutions. Should the NCUA consider
    issuing updated guidance for taxi medallion loans that includes
    risk rating policies?

    A.2. No single credit risk rating system is best for all credit
    unions. The scope and scale of a credit risk rating system will
    depend on the variety in a credit union's commercial credit
    product types, and complexity of the commercial loan
    portfolio.\3\ NCUA addresses the effectiveness of a credit
    union's risk rating system through direct supervision and
    guidance.\4\ NCUA has issued comprehensive guidance which
    outlines the expectations for a risk rating system. Therefore,
    the agency does not impose a specific risk rating system.
    ---------------------------------------------------------------------------
        \3\ See the Commercial and Member Business Loans section of the
    NCUA Examiner's Guide (Commercial and Member Business Loans >
    Commercial Risk Rating Systems). https://publishedguides.ncua.gov/
    examiner/Pages/default.htm.
        \4\ See the Commercial and Member Business Loans section of the
    NCUA Examiner's Guide (Commercial and Member Business Loans >
    Commercial Risk Rating Systems). https://publishedguides.ncua.gov/
    examiner/Pages/default.htm.
    ---------------------------------------------------------------------------
        With regard to the credit unions with material exposure to
    taxi medallion secured loans, the NCUA has other methods of
    quantifying and assessing the risks they pose to each
    institution. For credit unions that have material exposure to
    taxi medallion loans, examiners also have the assistance of
    regional lending specialists. These specialists are experts in
    supervising commercial credit risk and have had extensive
    training in evaluating risk rating systems. Their objective is
    to evaluate the effectiveness of the credit union's overall
    commercial loan risk management, especially as it relates to
    rating credit risk.

    Q.3. Despite changes in the market, many taxi medallion loans
    continue to perform. This is especially true where credit
    unions have worked with owners to adjust the terms of their
    loans to ensure they are affordable. Where a medallion loan is
    not performing, credit unions and NCUA examiners should clearly
    treat the loan differently. However, I have heard concerns that
    NCUA examiners are approaching both scenarios identically,
    forcing credit unions to lower the value of taxi medallion
    loans immediately regardless of cash-flows and whether they are
    performing.

       LDoes the NCUA treat both types of taxi medallion
            loans (performing and nonperforming) the same? If so,
            why?

       LIf not, should the NCUA provide clarity to credit
            unions on how examiners treat performing taxi medallion
            loans in comparison to nonperforming taxi medallion
            loans?

    A.3. Performing and nonperforming loans should not necessarily
    be treated the same. Credit considerations vary from loan to
    loan, and each borrower's unique financial condition and
    circumstances could result in different outcomes. Therefore, it
    is not possible to achieve consistency in the resolution of
    problem loans. As well, it is important to note that credit
    unions must follow generally accepted accounting principles
    (GAAP) when valuing the loans for financial reporting purposes.
        While we cannot discuss specific cases, the NCUA is working
    with borrowers. These efforts are complicated by the
    fluctuating value of the medallions that were used as
    collateral to secure the loans and, in some cases, the high
    levels of cash taken out to finance other purchases--such as
    residential real estate, automobiles or education--when the
    loans were refinanced.
        Each of these borrowers is an individual, and the NCUA is
    treating each loan individually. Behind many taxi loans are
    drivers and families affected by the harsh reality of the
    current taxi medallion market. There is not a one-size-fits-all
    approach to resolving these challenges.
        However, the agency must balance the needs of borrowers
    alongside its responsibility--mandated under Federal law--to
    minimize losses to the National Credit Union Share Insurance
    Fund, which protects 117 million credit union account holders.
    This is a delicate balancing act and requires careful and
    judicious decisionmaking.
        Credit unions are founded on the principle of people
    helping people. The NCUA is working hard to find solutions to
    borrowers' needs without compromising the agency's obligations
    to maintain the safety and soundness of the credit union system
    under Federal law, and we are steadfastly committed to that
    goal.

    Q.4. My home State of New Jersey is moving toward legalization
    of recreational marijuana, and I have concerns that these new
    businesses as well as the existing medical marijuana businesses
    in the State will continue to find themselves shut out of the
    banking system. And when these businesses are forced to operate
    exclusively in cash, they create serious public safety risks in
    our communities.
        Comptroller Otting and Chair Powell have previously
    expressed support for legislative clarity on the marijuana
    banking issue, and I would like to understand Chair McWilliams,
    Vice Chair Quarles, and Chair Hood's position as well.
        Do you agree that financial institutions need legislative
    clarity on this issue?

    A.4. Legislative clarity would help financial institutions
    understand the rules of the road and operate with greater
    confidence and certainty in this space.

    Q.5. I am also concerned that legal marijuana businesses will
    continue to find themselves unable to access insurance
    products, a necessity for those looking to secure financing.
        Would it be helpful for Congress to consider the role of
    insurance companies as States move toward legalization?

    A.5. As Congress considers this issue, it would be helpful to
    consider the role of all stakeholders, including insurance
    companies, who may be impacted by changes in this space or that
    could play a role in making these financial transactions more
    secure.
                                    ------

      RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
                             RODNEY E. HOOD

    Q.1. How are you improving the culture and strengthening the
    compliance division at the financial institutions you regulate,
    to ensure that Suspicious Activities Reports are being filed,
    fake
    accounts are not created, and customers are treated fairly? Do
    problems with incentive pay practices that incent staff to
    engage in fraud or unfair practices still exist at the
    financial institutions you regulate?

    A.1. Credit unions are cooperative, not for profit, member
    service oriented financial institutions. As such, the vast
    majority of credit unions strive to protect their members and
    serve them well. One of the primary goals of the NCUA's
    examination programs is to ensure credit unions follow the
    various laws and regulations applicable to them. At every
    examination, field staff are directed to review the credit
    union's compliance with the Bank Secrecy Act, the compliance
    management program, and internal controls. Examiners also
    review as needed any incentive pay programs in place at the
    credit union to ensure they comply with applicable
    regulatory requirements and do not misalign the individual's
    and the organization's incentives.

    Q.2. Will you ensure access to information from community
    reinvestment advocates through the Freedom of Information Act
    with timely responses and without requiring high fees?

    A.2. NCUA provides all Freedom of Information Act (FOIA)
    requesters with access to information consistent with FOIA
    requirements and its FOIA regulation, including requirements
    regarding timeliness and fees.

    Q.3. There has been an epidemic of fake comments on
    controversial issues. How will you ensure that comments on
    rules and mergers are accurate and not based on stolen
    identities?

    A.3. The NCUA diligently reviews all of the comments it
    receives and bases its evaluation of the comments on their
    substance. Any abnormalities discovered are assessed as part of
    this evaluation.

    Q.4. Recently, the Office of Management and Budget released a
    memorandum reinterpreting the Congressional Review Act to
    include independent regulatory agencies, many of which are your
    agencies. What would be the impact of requiring OMB review of
    proposed rules and guidance on your agency?

    A.4. The NCUA's General Counsel recommended that we comply with
    the spirit of the OMB memo, and I decided to implement that
    recommendation. We believe it is consistent with most of the
    other FIRREA agencies. This is simply a good Government
    practice and has not affected the agency's rulemaking or
    guidance.

    Q.5. In your witness testimony, you highlighted the need for
    the NCUA to have the legal authority to correct systemic
    cybersecurity risks presented by vendors. Please elaborate on
    what the risks presented by third-party vendors and credit
    union service organizations (CUSOs) are.

    A.5. The financial sector, including banks and credit unions,
    increasingly rely on third-party service providers (vendors) to
    provide and or support technology-related functions. These
    functions span a wide range of activities, including internet
    banking, transaction processing, and funds transfers. There are
    a number of risks that may arise from a credit union's use of
    third parties. Some of the risks are associated with the
    underlying activity itself, similar to the risks faced by an
    institution directly conducting the activity. Other potential
    risks arise from, or are heightened by, the involvement of a
    third party. Failure to manage these risks can expose an
    institution to regulatory action, financial loss, litigation,
    reputation damage, and may even impair the institution's
    ability to establish new or service existing customer
    relationships.

    Q.6. In your witness testimony, you state that NCUA can examine
    CUSOs and third-party vendors with their permission and that
    CUSOs are required to provide access to their books and
    records. What information would expanded examination authority
    provide that you do not have now?

    A.6. While the NCUA has access to CUSO books and records
    through a regulation imposed on the investing credit unions,
    this does not provide access to examine all of the CUSO's
    operations. For example, reviewing books and records alone may
    not provide sufficient information to determine if deficiencies
    exist in internal controls or overall governance. Additionally,
    this requirement only applies to CUSOs and does not provide the
    NCUA with the ability to review the books and records of other
    third-party vendors that credit unions may be doing business
    with.

    Q.7. Which of NCUA's recommendations have the CUSOs rejected?

    A.7. Due to the lack of supervisory authority over third-party
    vendors, we do not have recent examples of recommendations that
    have been rejected.

    Q.8. Are you familiar with the practice of the real estate
    title insurance underwriters to hire or contract off-shore
    employees or firms to perform domestic property searches?

    A.8. The NCUA is generally aware this practice may exist.

    Q.9. There are protections in this country for the security of
    home buyer's personal information. Are there protections in
    place for
    information sent to a researcher in another country? How are
    these protections reviewed and enforced?

    A.9. The protections in place for information sent to a
    researcher in another country are derived from the United
    States laws imposed on the institution, such as the Gramm-
    Leach-Bliley Act (GLBA). The ability for institutions to
    monitor and enforce the
    adherence to these protections depends on their contractual
    provisions and service-level agreements with their vendors, and
    the extent to which they are affected by questions of
    jurisdiction and
    enforcement.

    Q.10. Do you think home buyers should be told when the title
    insurance they paid for is being done by a researcher or title
    examiner in another country?

    A.10. The process title insurance companies used to research a
    home's ownership and lien history should be transparent.

    Q.11. Are you concerned that credit unions might be making
    loans based on inaccurate title searches that were performed by
    off-shore companies?

    A.11. I would certainly be concerned about any inaccuracies in
    title insurance policies. However, I am not aware of any
    notable problems credit unions have experienced as a result of
    inaccurate title searches.
                                    ------

     RESPONSE TO WRITTEN QUESTION OF SENATOR SINEMA FROM RODNEY E.
                                  HOOD

    Q.1. Cybersecurity is a chief concern for U.S. financial
    institutions and the agencies that regulate them. What is your
    assessment of the current examination process and regulatory
    landscape for regulated institutions with respect to cyber?
        Cybersecurity is one of my top priorities as Chairman of
    the NCUA. The NCUA has developed and implemented a
    comprehensive examination program for cybersecurity. Last
    month, I appointed a cybersecurity advisor who provides me with
    strategic counsel on cybersecurity policy and engages with
    other Federal
    financial regulators and external stakeholders. Under my
    leadership, the agency will continue to advance and improve how
    we regulate and supervise credit unions with respect to
    cybersecurity.
        How can Federal agencies improve and help harmonize
    cybersecurity regulations?

    A.1. The NCUA's cybersecurity program leverages the Federal
    Financial Institutions Examination Council's work on the
    Cybersecurity Assessment Tool, as well as the National
    Institute of Technology and Standards (NIST) framework. Further
    improving and harmonizing the cybersecurity regulatory
    framework starts with ensuring all Federal regulatory agencies
    have similar foundational authorities.

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