[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
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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
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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).
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\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.
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\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.
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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.
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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).
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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.
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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\
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\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\
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\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.
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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\
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\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.
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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.
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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.
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\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.
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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.
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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\
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\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\
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\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).
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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\
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\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.
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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.
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\4\ See https://www.federalreserve.gov/newsevents/pressreleases/
files/bcreg20181003a1.pdf.
\5\ See https://www.federalreserve.gov/newsevents/pressreleases/
files/bcreg20181203a1.pdf.
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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:
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\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.
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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.
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\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\
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\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.
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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\
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\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.
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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\
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\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.
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\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.
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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.
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------
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.
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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\
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\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\
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\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.
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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\
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\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.
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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.
---------------------------------------------------------------------------
\1\ https://www.ncua.gov/files/letters-credit-unions/
SupervisoryLetter_TaxiMedallion.pdf.
---------------------------------------------------------------------------
To ensure NCUA guidance accurately reflects the taxi
medallion market, should the NCUA provide updated national
guidance for taxi medallion loans?
A.1. After reviewing the existing supervisory guidance against
the current landscape, I believe it remains relevant. The NCUA
issued its 2014 Supervisory Letter in response to elevated risk
associated with taxi medallion lending.\2\ To clarify the
NCUA's expectations, the agency issued supplemental guidance in
May 2015, and continues to address taxi medallion secured
lending through direct supervision of affected credit unions.
This guidance is based on sound commercial lending principles
addressed by a host of other related agency and interagency
guidance issued over the years. It provides information
specific to taxi medallion secured lending on evaluating a
borrower's repayment ability in normal and adverse economic
climates. The guidance also discusses proven collateral
valuation approaches for use in loan underwriting that applies
across the spectrum of economic environments.
---------------------------------------------------------------------------
\2\ See NCUA Supervisory Letter 14-04, Taxi Medallion Lending, at
Taxi Medallion Lending--National Credit Union Administration.
---------------------------------------------------------------------------
The NCUA's existing regulations and guidance on loan
workouts remain relevant to credit unions with taxi medallion
secured loans. Credit unions have significant flexibility to
offer distressed borrowers a variety of loan modification and
restructuring options. With respect to valuation methodologies,
federally insured credit unions are required to follow
Generally Accepted Accounting Principles (GAAP). Credit unions
with taxi medallion secured loans, and taxi medallions that
have been foreclosed, need to consult with their CPA regarding
acceptable methodologies for valuing the loans and collateral
for loan loss reserving and financial reporting purposes. The
NCUA provides credit unions with a variety of reference
information on applicable accounting standards.
Q.2. There is currently no uniform risk rating policy in place
to monitor the credit risk of taxi medallion loans. Without a
uniform risk rating system, it is difficult to quantify risks
and manage or monitor these risks according to the threat they
pose to different institutions. Should the NCUA consider
issuing updated guidance for taxi medallion loans that includes
risk rating policies?
A.2. No single credit risk rating system is best for all credit
unions. The scope and scale of a credit risk rating system will
depend on the variety in a credit union's commercial credit
product types, and complexity of the commercial loan
portfolio.\3\ NCUA addresses the effectiveness of a credit
union's risk rating system through direct supervision and
guidance.\4\ NCUA has issued comprehensive guidance which
outlines the expectations for a risk rating system. Therefore,
the agency does not impose a specific risk rating system.
---------------------------------------------------------------------------
\3\ See the Commercial and Member Business Loans section of the
NCUA Examiner's Guide (Commercial and Member Business Loans >
Commercial Risk Rating Systems). https://publishedguides.ncua.gov/
examiner/Pages/default.htm.
\4\ See the Commercial and Member Business Loans section of the
NCUA Examiner's Guide (Commercial and Member Business Loans >
Commercial Risk Rating Systems). https://publishedguides.ncua.gov/
examiner/Pages/default.htm.
---------------------------------------------------------------------------
With regard to the credit unions with material exposure to
taxi medallion secured loans, the NCUA has other methods of
quantifying and assessing the risks they pose to each
institution. For credit unions that have material exposure to
taxi medallion loans, examiners also have the assistance of
regional lending specialists. These specialists are experts in
supervising commercial credit risk and have had extensive
training in evaluating risk rating systems. Their objective is
to evaluate the effectiveness of the credit union's overall
commercial loan risk management, especially as it relates to
rating credit risk.
Q.3. Despite changes in the market, many taxi medallion loans
continue to perform. This is especially true where credit
unions have worked with owners to adjust the terms of their
loans to ensure they are affordable. Where a medallion loan is
not performing, credit unions and NCUA examiners should clearly
treat the loan differently. However, I have heard concerns that
NCUA examiners are approaching both scenarios identically,
forcing credit unions to lower the value of taxi medallion
loans immediately regardless of cash-flows and whether they are
performing.
LDoes the NCUA treat both types of taxi medallion
loans (performing and nonperforming) the same? If so,
why?
LIf not, should the NCUA provide clarity to credit
unions on how examiners treat performing taxi medallion
loans in comparison to nonperforming taxi medallion
loans?
A.3. Performing and nonperforming loans should not necessarily
be treated the same. Credit considerations vary from loan to
loan, and each borrower's unique financial condition and
circumstances could result in different outcomes. Therefore, it
is not possible to achieve consistency in the resolution of
problem loans. As well, it is important to note that credit
unions must follow generally accepted accounting principles
(GAAP) when valuing the loans for financial reporting purposes.
While we cannot discuss specific cases, the NCUA is working
with borrowers. These efforts are complicated by the
fluctuating value of the medallions that were used as
collateral to secure the loans and, in some cases, the high
levels of cash taken out to finance other purchases--such as
residential real estate, automobiles or education--when the
loans were refinanced.
Each of these borrowers is an individual, and the NCUA is
treating each loan individually. Behind many taxi loans are
drivers and families affected by the harsh reality of the
current taxi medallion market. There is not a one-size-fits-all
approach to resolving these challenges.
However, the agency must balance the needs of borrowers
alongside its responsibility--mandated under Federal law--to
minimize losses to the National Credit Union Share Insurance
Fund, which protects 117 million credit union account holders.
This is a delicate balancing act and requires careful and
judicious decisionmaking.
Credit unions are founded on the principle of people
helping people. The NCUA is working hard to find solutions to
borrowers' needs without compromising the agency's obligations
to maintain the safety and soundness of the credit union system
under Federal law, and we are steadfastly committed to that
goal.
Q.4. My home State of New Jersey is moving toward legalization
of recreational marijuana, and I have concerns that these new
businesses as well as the existing medical marijuana businesses
in the State will continue to find themselves shut out of the
banking system. And when these businesses are forced to operate
exclusively in cash, they create serious public safety risks in
our communities.
Comptroller Otting and Chair Powell have previously
expressed support for legislative clarity on the marijuana
banking issue, and I would like to understand Chair McWilliams,
Vice Chair Quarles, and Chair Hood's position as well.
Do you agree that financial institutions need legislative
clarity on this issue?
A.4. Legislative clarity would help financial institutions
understand the rules of the road and operate with greater
confidence and certainty in this space.
Q.5. I am also concerned that legal marijuana businesses will
continue to find themselves unable to access insurance
products, a necessity for those looking to secure financing.
Would it be helpful for Congress to consider the role of
insurance companies as States move toward legalization?
A.5. As Congress considers this issue, it would be helpful to
consider the role of all stakeholders, including insurance
companies, who may be impacted by changes in this space or that
could play a role in making these financial transactions more
secure.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
RODNEY E. HOOD
Q.1. How are you improving the culture and strengthening the
compliance division at the financial institutions you regulate,
to ensure that Suspicious Activities Reports are being filed,
fake
accounts are not created, and customers are treated fairly? Do
problems with incentive pay practices that incent staff to
engage in fraud or unfair practices still exist at the
financial institutions you regulate?
A.1. Credit unions are cooperative, not for profit, member
service oriented financial institutions. As such, the vast
majority of credit unions strive to protect their members and
serve them well. One of the primary goals of the NCUA's
examination programs is to ensure credit unions follow the
various laws and regulations applicable to them. At every
examination, field staff are directed to review the credit
union's compliance with the Bank Secrecy Act, the compliance
management program, and internal controls. Examiners also
review as needed any incentive pay programs in place at the
credit union to ensure they comply with applicable
regulatory requirements and do not misalign the individual's
and the organization's incentives.
Q.2. Will you ensure access to information from community
reinvestment advocates through the Freedom of Information Act
with timely responses and without requiring high fees?
A.2. NCUA provides all Freedom of Information Act (FOIA)
requesters with access to information consistent with FOIA
requirements and its FOIA regulation, including requirements
regarding timeliness and fees.
Q.3. There has been an epidemic of fake comments on
controversial issues. How will you ensure that comments on
rules and mergers are accurate and not based on stolen
identities?
A.3. The NCUA diligently reviews all of the comments it
receives and bases its evaluation of the comments on their
substance. Any abnormalities discovered are assessed as part of
this evaluation.
Q.4. Recently, the Office of Management and Budget released a
memorandum reinterpreting the Congressional Review Act to
include independent regulatory agencies, many of which are your
agencies. What would be the impact of requiring OMB review of
proposed rules and guidance on your agency?
A.4. The NCUA's General Counsel recommended that we comply with
the spirit of the OMB memo, and I decided to implement that
recommendation. We believe it is consistent with most of the
other FIRREA agencies. This is simply a good Government
practice and has not affected the agency's rulemaking or
guidance.
Q.5. In your witness testimony, you highlighted the need for
the NCUA to have the legal authority to correct systemic
cybersecurity risks presented by vendors. Please elaborate on
what the risks presented by third-party vendors and credit
union service organizations (CUSOs) are.
A.5. The financial sector, including banks and credit unions,
increasingly rely on third-party service providers (vendors) to
provide and or support technology-related functions. These
functions span a wide range of activities, including internet
banking, transaction processing, and funds transfers. There are
a number of risks that may arise from a credit union's use of
third parties. Some of the risks are associated with the
underlying activity itself, similar to the risks faced by an
institution directly conducting the activity. Other potential
risks arise from, or are heightened by, the involvement of a
third party. Failure to manage these risks can expose an
institution to regulatory action, financial loss, litigation,
reputation damage, and may even impair the institution's
ability to establish new or service existing customer
relationships.
Q.6. In your witness testimony, you state that NCUA can examine
CUSOs and third-party vendors with their permission and that
CUSOs are required to provide access to their books and
records. What information would expanded examination authority
provide that you do not have now?
A.6. While the NCUA has access to CUSO books and records
through a regulation imposed on the investing credit unions,
this does not provide access to examine all of the CUSO's
operations. For example, reviewing books and records alone may
not provide sufficient information to determine if deficiencies
exist in internal controls or overall governance. Additionally,
this requirement only applies to CUSOs and does not provide the
NCUA with the ability to review the books and records of other
third-party vendors that credit unions may be doing business
with.
Q.7. Which of NCUA's recommendations have the CUSOs rejected?
A.7. Due to the lack of supervisory authority over third-party
vendors, we do not have recent examples of recommendations that
have been rejected.
Q.8. Are you familiar with the practice of the real estate
title insurance underwriters to hire or contract off-shore
employees or firms to perform domestic property searches?
A.8. The NCUA is generally aware this practice may exist.
Q.9. There are protections in this country for the security of
home buyer's personal information. Are there protections in
place for
information sent to a researcher in another country? How are
these protections reviewed and enforced?
A.9. The protections in place for information sent to a
researcher in another country are derived from the United
States laws imposed on the institution, such as the Gramm-
Leach-Bliley Act (GLBA). The ability for institutions to
monitor and enforce the
adherence to these protections depends on their contractual
provisions and service-level agreements with their vendors, and
the extent to which they are affected by questions of
jurisdiction and
enforcement.
Q.10. Do you think home buyers should be told when the title
insurance they paid for is being done by a researcher or title
examiner in another country?
A.10. The process title insurance companies used to research a
home's ownership and lien history should be transparent.
Q.11. Are you concerned that credit unions might be making
loans based on inaccurate title searches that were performed by
off-shore companies?
A.11. I would certainly be concerned about any inaccuracies in
title insurance policies. However, I am not aware of any
notable problems credit unions have experienced as a result of
inaccurate title searches.
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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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