[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 
                                   *
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    * 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.
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                              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\
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    \1\ See Semiannual Risk Perspective, Fall 2018 (https://occ.gov/
publications/publications-by-type/semiannual-risk-perspective/pub-
semiannual-risk-perspective-fall-2018.pdf).
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    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.
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    \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.
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    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.
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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\
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    \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.
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    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.
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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.
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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.
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    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.
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    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.
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    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.
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    \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.
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    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.
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    \3\ As of December 31, 2018.
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    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.
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    \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.
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    \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).
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    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.
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    \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.
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    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).
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    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.
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    \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.
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    \11\ As of December 31, 2018.
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    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.
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    \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.
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    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\
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    \13\ FDIC Transparency & Accountability (October 4, 2018), 
available at: https://www.fdic.gov/transparency/.
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    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\
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    \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/.
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    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\
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    \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.
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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.
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                                ------                                


  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.
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    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.
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    \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.
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    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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