[Senate Hearing 116-]
[From the U.S. Government Publishing Office]
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
FINANCIAL REGULATORY AGENCIES WITH RESPECT TO REGULATORY AND
SUPERVISORY ACTIVITIES FOR FINANCIAL INSTITUTIONS, CREDIT UNIONS, AND
ENTITIES
__________
DECEMBER 5, 2019
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
?
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
Catherine Fuchs, Counsel
Brandon Beall, Professional Staff Member
Sarah Brown, 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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THURSDAY, DECEMBER 5, 2019
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 32
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 3
Prepared statement....................................... 33
WITNESSES
Randal K. Quarles, Vice Chairman for Supervision, Board of
Governors of the Federal Reserve System........................ 5
Prepared statement........................................... 34
Responses to written questions of:
Senator Brown............................................ 79
Senator Tillis........................................... 82
Senator Kennedy.......................................... 85
Senator Tester........................................... 85
Senator Menendez......................................... 90
Senator Warren........................................... 91
Senator Cortez Masto..................................... 112
Senator Cramer........................................... 113
Senator Jones............................................ 115
Jelena McWilliams, Chairman, Federal Deposit Insurance
Corporation.................................................... 7
Prepared statement........................................... 37
Responses to written questions of:
Senator Brown............................................ 116
Senator Rounds........................................... 120
Senator Tillis........................................... 125
Senator Kennedy.......................................... 126
Senator Tester........................................... 128
Senator Moran............................................ 134
Senator Menendez......................................... 135
Senator Warren........................................... 136
Senator Cortez Masto..................................... 149
Senator Cramer........................................... 151
Rodney E. Hood, Chairman, National Credit Union Association...... 8
Prepared statement........................................... 55
Responses to written questions of:
Senator Brown............................................ 153
Senator Rounds........................................... 166
Senator Moran............................................ 172
Senator Tester........................................... 173
Senator Menendez......................................... 175
Senator Warren........................................... 175
Senator Cortez Masto..................................... 177
Senator Cramer........................................... 180
Senator Jones............................................ 180
Additional Material Supplied for the Record
Statement of the Credit Union National Association (CUNA),
submitted by Chairman Crapo and Senator Brown.................. 182
Statement of the National Association of Federally-Insured Credit
Unions (NAFCU), submitted by Chairman Crapo.................... 186
OVERSIGHT OF FINANCIAL REGULATORS
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THURSDAY, DECEMBER 5, 2019
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10 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. The Committee will come to order.
Today we will receive testimony from the Honorable Randal
Quarles, Federal Reserve Vice Chairman for Supervision; the
Honorable Jelena McWilliams, Chairman of the FDIC; and the
Honorable Rodney Hood, Chairman of the NCUA. Welcome to all of
you.
This hearing provides the Committee an opportunity to
examine the current state of and recent activities related to
the regulatory and supervisory activities of these agencies.
It has been over a year now since the enactment of S. 2155,
the Economic Growth, Regulatory Relief, and Consumer Protection
Act, and the work of the agencies to implement most of the
law's provisions, including the tailoring rules for U.S. banks
and U.S. operations of foreign banks.
Your agencies should also carefully review the existing
supervisory frameworks and make any necessary adjustments to
appropriately align them with the tailoring rules and
requirements.
On July 30, 2019, all of the Republican Banking Committee
Members and I sent a letter to the Federal banking regulators
urging your agencies to finalize several outstanding provisions
of S. 2155, such as the Community Bank Leverage Ratio and
short-form call reports, and further tailor regulations to
promote economic growth, including addressing the Current
Expected Credit Losses accounting standard, the Volcker Rule,
the inter-affiliate margin, and Madden.
Thank you for acting on many of these priorities. I
encourage you to continue exploring additional opportunities to
tailor these rules.
In that July letter, as well as an October 2018 letter to
your agencies, several Banking Committee Republicans and I
urged your agencies to revise the Volcker Rule, including using
your discretion granted by Congress to address the current
``covered funds'' overly broad definition.
Although your agencies have joined the SEC and CFTC to
issue a proposal revising several aspects of the Volcker Rule,
which is appreciated, the ``covered funds'' provision was left
relatively untouched.
I encourage your agencies to take quick action to address
the ``covered funds'' issue by revising the definition's overly
broad application to venture capital, other long-term
investments, and loan creation.
Separately, in September, short-term borrowing rates spiked
as a result of a large corporate tax payment coming due and
$300 billion in Treasurys hitting the market, even in light of
banks holding a surplus of cash at the Fed, currently around
$1.4 trillion.
In light of these events, banks could have stepped in to
alleviate the volatility in those markets by lending some of
the excess cash that they hold at the Fed. So why didn't they
do that?
Some have suggested that certain aspects of the Fed's
supervision and regulations imposed after the 2008 financial
crisis may have exacerbated this problem, specifically the
treatment of cash versus Treasurys.
Although the Fed has taken some steps to address the issue
in the short term by buying Treasurys and lending funds, it is
important that the Fed review the details of its current
regulatory and supervisory regime for potential long-term
fixes.
Now, quickly turning to guidance, Senators Tillis, Perdue,
Rounds, Cramer, and I wrote to the GAO in February asking for
its legal opinion as to whether three Federal Reserve
Supervision and Regulation Letters constitute a rule under the
Congressional Review Act.
In its October response, GAO concluded that two of the
letters, including one providing a new supervision framework
for large financial institutions and another related to
recovery planning, are rules under the CRA and are required to
be submitted to Congress for review.
During the Banking Committee's April hearing on this very
issue, I urged your agencies to follow the CRA and submit all
rules to Congress, even if they have not gone through a formal
notice-and-comment rulemaking to continue providing more
clarity about the applicability of guidance.
I encourage the Federal banking regulators to take a more
deliberate approach going forward and take any necessary steps
to rectify informal guidance that has not been submitted to
Congress.
In January 2019, the NCUA announced the portion of
regulations that would be reviewed as a part of the process
through which the agency reexamines all of its existing
regulations every 3 years.
The comment period for that review process has since
closed, and I look forward to learning more about the
regulatory recommendations provided to the NCUA and the road
map for actions going forward.
Finally, the Banking Committee has been exploring digital
currencies over the last few Congresses, especially in light of
the recent development of the Libra digital currency, started
by Facebook.
In July, I asked Federal Reserve Chairman Powell about his
understanding of and the Fed's role in the project.
Although Chairman Powell noted that the Fed has set up a
working group to focus on Libra and is in contact with the
other regulatory agencies, he also said that, ``There is not
any one agency that can stand up and have oversight over
this.''
Given its scope, regulators across the globe continue to
evaluate Libra, its potential impact in the marketplace, and
consider appropriate and necessary regulatory responses.
It seems that digital currencies are inevitable, and the
United States needs to lead by providing clear rules of the
road.
During this hearing, I look forward to learning more about
the status of addressing the overly broad covered funds
definitions in the Volcker Rule, especially with respect to
long-term investments; how the agencies are thinking through
the recent turmoil in the repo market, and what adjustments may
be appropriate for a long-term fix; whether the supervisory
framework that applies to banks currently needs to be updated
to better reflect changes made in the tailoring rules; and how
the agencies are thinking about the Libra project digital
currencies, including what the U.S. regulatory framework merits
consideration to balance innovation and protect users and
privacy.
I thank each of you for your willingness to join the
Committee today to discuss your agencies' regulatory and
supervisory activities and these important issues.
Senator Brown.
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman. Welcome to the
three regulators here.
I want to start by noting that typically when we have the
financial regulators testify, the Comptroller of the Currency
is also here. Mr. Otting had a conflict today. I believe him.
He is expected to announce changes to the Community
Reinvestment Act shortly, changes that the civil rights
community and others are very concerned about. I share those
concerns. I expect that we will have him up before this
Committee, Mr. Chairman, to talk about this proposal and other
activities at the OCC soon.
We all saw how Wall Street's financial schemes hurt regular
people when they blow up in bankers' faces, like they did 11
years ago.
You all saw the devastation of the crisis. Whether you were
a staffer in the Senate, whether you were serving at the agency
you now lead, or whether you were at a private equity firm
after a stint at Treasury, you had a front-row seat. You can
argue about or discuss responsibility. We can talk about that
later.
That is why I am concerned about the collective amnesia you
all appear to have as you make changes in bank rules--changes
that allow Wall Street to go back to its old tricks that I fear
will again cost Americans their jobs, their homes, their life
savings, and wreak the kind of devastation in neighborhoods
like mine in Cleveland the next time that complicated bets blow
up in bankers' faces.
But what is sometimes harder to see are the schemes that
hurt families and the economy even when they work exactly the
way Wall Street intended them to work.
My State is the setting of one of those Wall Street
schemes. Twelve years ago, just before the financial crisis, a
giant private equity firm bought a nursing home company based
in Toledo, Ohio, that operated facilities nationwide.
Soon that nursing home company was being strangled by debt
from risky leveraged loans. It laid off hundreds of staff. It
let its patients suffer under negligent, horrifying conditions.
According to the Washington Post, staffing cuts meant there
were not enough nurses to respond to patients.
Health code violations rose dramatically.
In Pennsylvania, a patient broke her hip and crashed to the
floor when a single staffer tried to do a two-person job and
move her on his own.
Patients faced other living conditions that no human should
have to endure, waiting in soiled clothing and dirty beds for
help that was never going to come.
And all the while, that Wall Street private equity firm was
extracting more and more profits.
Last year, the nursing home company went bankrupt. That did
not stop the private equity firm from making huge profits on
their investment.
That is what happens when leveraged loans, collateralized
loan obligations, and leveraged buyouts work as designed,
designed by Wall Street. Wall Street extracts the profits out
of the company; the rest of us--workers, patients, families,
and communities--pay for it.
Today Wall Street looks for profits anywhere it can find
them. These schemes squeeze money out of every part of the
economy. It is not only health care. It may be a hospital in
Philadelphia, Pennsylvania, or it may be a hospital in
Massillon, Ohio; but it is also manufactured home communities
in Iowa--and I have seen some of those where private equity
came in and raised the rent 50 percent, and people are captive,
having to live there and much higher rent that they did not
expect. Manufactured-home communities in New Hampshire also,
not just harming individual families but entire communities.
Imagine how bad it will be if these complex financial
transactions blow up like the subprime mortgages did in 2008.
This is just one of so many challenges working families
face.
We got a report this week showing that almost half of
American workers are stuck in low-wage jobs. One-in-four
families spend more than half their income on rent and
utilities. I know people sing about this economy, but think of
this 10-year economy where growth has actually declined a bit
in the last couple of years. Think about that. Almost half of
American workers are stuck in low-wage jobs. One-in-four
families spend more than half their income in rent and
utilities, and you know what that means. If one thing goes bad
in their lives, they lose their home. Forty percent of
Americans are so short on cash they would be forced to borrow
money to cover a $400 expense. Those are the people the three
of you work for. You do not work for this President. You do not
work for Wall Street. You do not work for the banks. You work
in part for half the population that cannot come up with--40
percent of the population that cannot come up with $400.
More and more families have to borrow just to get by--
credit card debt, student loan debt, and mortgage debt, all
higher than before the crisis. Wall Street squeezes more out of
every one of their paycheck, adding to their billions.
If regular Americans are struggling 10 years into this so-
called recovery, when the stock market is booming, what will
happen when there is a recession?
This cannot be how the financial system should work.
The regulators' job is not to protect profits for big banks
and big companies. It is to protect our economy and our
financial system and the ordinary families that the system is
supposed to serve, not the other way around.
I guess when the President, when Candidate Trump talked
about ``draining the swamp,'' he really meant betraying workers
and giving Wall Street free rein, as we have seen begin to
happen, betraying workers and giving Wall Street free rein to
prey on them and wring every last cent out of our communities.
The President uses his phony populism--racism, anti-
Semitism, anti-immigrant slander--to divide us, to distract
from all the ways he and his hand-picked cronies have betrayed
working families and left them struggling more than ever.
That is not how a democracy should function. I am deeply
worried that if you as the regulator do not stand up for
workers and families, so much in our economy and our democracy
is at risk.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
We will now turn to our witnesses, and I would ask you to
give your remarks in the order I introduced you. We will turn
to you first, Mr. Quarles.
STATEMENT OF RANDAL K. QUARLES, VICE CHAIRMAN FOR SUPERVISION,
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Quarles. Thank you very much. Chairman Crapo, Ranking
Member Brown, Members of the Committee, thank you for the
opportunity to appear today.
My colleagues and I join you on the cusp of a significant
and shared milestone, which is the full and faithful
implementation of Congress' efforts to improve financial
regulation in the form of the Economic Growth, Regulatory
Relief, and Consumer Protection Act. Today I will briefly
review the steps we have taken toward this milestone, share
information on the state of the banking system, and discuss the
continuing need to ensure our regulatory framework is both
coherent and effective.
The Act was an effort to consolidate a decade of work on
financial reform and a specific targeted response to the
conditions facing today's banking organizations and their
customers. It was also rooted, however, in longstanding
congressional practice of reviewing the work done in the
immediate aftermath of a crisis, of addressing any gaps, and of
ensuring that public and private
resources go toward their best and most efficient use.
The Board's latest Supervision and Regulation Report, which
is delivered in connection with my testimony today, confirms
that we have a stable, healthy, and resilient banking sector,
with robust capital and liquidity positions, stable loan
performance and strong loan growth, steady improvements in
safety and soundness, and several areas of continued
supervisory focus, including operational resiliency and cyber-
related risks.
The banking system is substantially better prepared to
manage unexpected shocks today than it was before the financial
crisis. And now, when the waters are relatively calm, is the
right time to examine the efficiency and effectiveness of our
protection against future storms.
With last year's reform legislation, Congress made a
significant downpayment on that task, and in less than 18
months after the Act's passage, we have implemented all of its
major provisions.
Earlier this year, we completed a cornerstone of the
legislation, tailoring our rules for regional banks, and
building on our existing work that firms with greater risks
should meet higher standards and receive more scrutiny. We
previously relied heavily on a firm's total assets as a proxy
for those risks and for the costs that the financial system
would incur if a firm failed. This simple asset proxy was clear
and critical, was rough and ready. It was neither risk-
sensitive nor complete. Our new rules employ a broader set of
indicators to assess the need for greater supervisory scrutiny
and maintain the most stringent requirements and strictest
oversight for the largest and most complex firms.
We and our interagency colleagues have also worked on a
range of measures to address the issues facing smaller banks,
with particular attention to the community bank business model.
And our goal through this period of intense regulatory activity
has been to faithfully implement Congress' instructions, but
those instructions also speak to a broader need and one central
to our ongoing work, which is to ensure that our regulatory
regime is not only simple and efficient and transparent, but
also coherent and effective.
Financial regulation, like any area of policy, is a product
of history. Each component dates from a particular time and
place, and it was designed, debated, enacted to address a
particular set of needs. No rule can ever be truly evergreen.
Gaps and areas for improvement will always reveal themselves
over time. Our responsibility is to address those gaps without
creating new ones, to understand fully the interaction among
regulations, to reduce complexity where that is possible, and
to ensure that our entire rule book supports the safety,
stability, and strength of the financial system.
My colleagues and I are paying particular attention to
coherence in our capital regime and in the full set of post-
crisis reforms, to a smooth transition away from LIBOR and
other legacy benchmark rates, to sensible treatment of new
financial products and technologies, and to clear, consistent
supervisory communication which reflects and reinforces our
regulations and laws.
My written testimony and the accompanying Supervision and
Regulation Report cover each of these areas in greater detail,
and I appreciate the opportunity to discuss them with you
today.
Thank you, and I look forward to answering your questions.
Chairman Crapo. Thank you very much.
Chair McWilliams.
STATEMENT OF JELENA McWILLIAMS, CHAIRMAN, FEDERAL DEPOSIT
INSURANCE CORPORATION
Ms. McWilliams. Chairman Crapo, Ranking Member Brown,
Members of the Committee, and fellow staff, thank you for the
opportunity to testify today.
Eighteen months ago, I began serving as the 21st Chairman
of the FDIC. During this period, the FDIC has undertaken a
great amount of work with a particular emphasis on three
overarching goals: strengthening the banking system as it
continues to evolve; ensuring that FDIC-supervised institutions
can meet the needs of consumers and businesses; and fostering
technology solutions and encouraging innovation at community
banks and the FDIC.
The FDIC has made significant progress in each of these
areas, and I appreciate the opportunity to share our progress
with this Committee.
Before discussing the FDIC's work to strengthen the banking
system, I would like to begin by providing context regarding
the current state of the industry.
The U.S. banking industry has enjoyed an extended period of
positive economic growth. In July, this expansion became the
longest on record in the United States. By nearly every metric,
the banking industry is strong and well positioned to continue
supporting the United States economy.
While the state of the banking system remains strong, the
FDIC is continuing to monitor changes in the industry and work
to further strengthen the banking system by: modernizing our
approach to supervision, including outdated regulations and
increasing transparency; enhancing resolution preparedness;
assessing new and emerging risks; and creating the workforce of
the future. My written statement details the many actions the
FDIC has taken in each of these areas.
While these efforts are steps toward a stronger banking
system, there are certain areas in which the needs of consumers
and businesses must be addressed by more comprehensive reforms.
We have been working diligently to update our regulations
governing brokered deposits, which were put in place over 30
years ago. In addition, we are working with our fellow
regulators to modernize the Community Reinvestment Act and
provide clarity for banks seeking to offer loans that meet
consumers' small-dollar credit needs.
Finally, perhaps no issue is more important or more central
to the future of banking--and, frankly, to the present--than
innovation. Technology is transforming the business of banking,
both in the way consumers interact with their banks and the way
banks do business. Regulators cannot play ``catch up,'' but
must be proactive in engaging with stakeholders, including
banks, consumer groups, trade associations, and technology
companies, to understand and help foster the safe adoption of
technology across the banking system, especially at community
banks.
Since 1933, the FDIC has played a vital role in maintaining
stability and public confidence in the Nation's financial
system. This mission remains as critical today as it was 86
years ago; but if we are to achieve our mission in the modern
financial environment, the agency cannot be stagnant.
Last year, I began a 50-State listening tour to engage with
State regulators, FDIC-regulated institutions, consumers, and
other stakeholders. At the outset of this effort, I emphasized
the need to reverse the trend of having those affected by our
regulations come to Washington to have their voices heard, and
instead to go and meet with them on their home turf. With 26
State visits in 18 months, I am now more than halfway through
this listening tour, which has been incredibly informative and
has underscored the importance of seeking perspectives outside
of the Washington beltway. I look forward to visiting the
remaining States and learning more about the issues that matter
most to consumers and communities across the Nation.
Thank you again for the opportunity to testify today, and I
look forward to your questions.
Chairman Crapo. Thank you.
STATEMENT OF RODNEY E. HOOD, CHAIRMAN, NATIONAL CREDIT UNION
ASSOCIATION
Mr. Hood. Chairman Crapo, Ranking Member Brown, and Members
of the Committee, as the 11th Chairman of the National Credit
Union Administration, I am honored to appear before you this
morning, and thank you for the invitation. I have written a
very detailed statement that you all have for the record, but
in my brief moment to speak with you this morning for my
opening comments, I would like to talk about three areas where
I think we have mutual interests. One is the current state of
the credit union system; second, I would like to talk about
NCUA efforts to foster greater financial inclusion; and then,
third, I would like to talk about cybersecurity.
Ladies and gentlemen of the Committee, strong growth trends
in federally insured credit unions are continuing in 2019.
Roughly 119 million members are part of America's credit union
system today. That accounts for roughly one-third of America
being a part of a credit union. Credit union assets approximate
$1.54 trillion through the end of the third quarter of 2019.
Credit unions have also recorded a very strong aggregate net
worth ratio of 11.39 percent, roughly 400 basis points above
the 7-percent statutory requirement.
The Credit Union Share Insurance Fund is also healthy at
this time, with roughly assets of $16.7 billion, well above the
$10 billion level that the fund was at just over a decade ago.
We also have posted a very strong equity ratio. Overall, year-
to-date operating results evidence a very healthy and solid
Federal credit union system.
I would now, ladies and gentlemen, like to talk about
NCUA's efforts to foster greater financial inclusion. I deeply
believe that financial inclusion is indeed the civil rights
issue of our time. Inclusion means not only broader access to
financial services, but also to employment and business
opportunities. We at NCUA have just launched the Second Chance
Initiative where our board voted on that final rule just
recently for nonviolent criminal offenders to have employment
opportunities with credit unions. This creates opportunities
for these individuals to climb the economic ladder and have
opportunities for greater financial inclusion and shared
prosperity.
I agree with you, Senator Brown. It is troubling to read in
a recent Federal Reserve survey that nearly 40 percent of
American households cannot afford to pay for a $400 emergency.
Even more troubling is that that percentage increases to 60
percent for families with a disability. This is why I am
definitely pleased that NCUA and its Board has approved PALs
II, a short-term, small-dollar loan product that serves as a
responsible alternative to pernicious payday loans. These loans
that we are creating through the PALs program are often being
coupled with our credit unions financial education, financial
counseling, and coaching, further helping these individuals
achieve access to broader financial services.
Rural America must also be involved and included in
financial expansion and inclusion. That is why I am also
pleased that NCUA has worked to provide guidance to the
agriculture community to help individuals learn how to work
with this emerging business trend and remind them of the
importance of following the FinCEN guidance. Also, we recently
provided regulatory relief regarding the Commercial Real Estate
Appraisal Rule, increasing that appraisal requirement from
$250,000 to $1 million in response to some of the rural
communities not being able to get appraisals done in a timely
manner.
Third, I would like to focus on cybersecurity.
Cybersecurity is a high priority for my chairmanship. Cyber
attacks are, indeed, an acute threat that we as regulators must
combat and face every day. I care about this issue so
passionately that I have appointed a senior adviser to advise
me and the industry on how do we in the credit union industry
safeguard our defense mechanisms and really go to the extra
efforts to protect member-owner data. This individual who is
spearheading this effort is also providing cybersecurity
training and outreach to assist our small credit unions, also
utilizing new tools to better assist our examiners on looking
at the levels of preparation, of cybersecurity preparedness in
our credit unions, and also working in concert with some of the
other Federal regulators here today.
In closing, I would like to inform the Committee that we
are very grateful and appreciative of the work that you all did
in passing Senate bill 2155. I am also pleased to report that
NCUA has met all of the provisions that retain to credit unions
and especially the actions that we could take unilaterally. So
if I look for opportunities to work with you in the days ahead,
I would like to look for opportunities to promote greater
financial inclusion, economic mobility, and shared prosperity
in America's underserved areas.
Thank you.
Chairman Crapo. Thank you very much, Mr. Hood. And as I
begin my questions, I have got a lot of them, more than we will
be able to cover in my 5 minutes, so I ask you--first of all,
you should expect to get some written questions from me
following the hearing; but, second, I ask you to be as precise
as you can in your responses.
The first one is to Chairman Quarles and Chairman
McWilliams, and I hope it will just require a yes answer
quickly from both of you. It is on the covered funds issue, and
I just wanted to ask if each of you--yes, got it already--if
each of you would just commit that you will respond and resolve
this issue quickly.
Ms. McWilliams. Yes.
Mr. Quarles. Yes.
Chairman Crapo. All right. Thank you. We have got a good
start there.
Chairman McWilliams, on Madden, you indicated when the
Madden decision came down that it has interjected uncertainty,
significant uncertainty, into the secondary markets for loan
sales in the Second Circuit and raises safety and security
concerns. How does the FDIC's proposal address the confusion
around the valid-when-made doctrine and support safety and
soundness?
Ms. McWilliams. Thank you for that question. The FDIC's
proposal basically does not change the framework we had before
Madden. Since 1828, there was a Supreme Court precedent that
basically said if a loan is not usurious when made, nothing
subsequently makes that loan usurious. Congress gave national
banks that treatment as well in 1865, and then 115 years later,
in 1980, the FDIC got the opportunity to implement that into
our statute. So we have had long existing guidance implementing
basically exactly that. It is the so-called valid-when-made
doctrine that the Court in Madden frankly ignored. They ignored
almost 200 years of both regulatory and legal history.
And so we were compelled to provide clarity, restating what
we have had in place since 1980 at the FDIC, and our proposal
does not change anything that we have had since 1980.
The concern with Madden is that there are going to be
implications for the secondary market that are frankly going to
undermine safety and stability of the system and the soundness
of our banks. If banks are unable to sell loans in the
secondary market and have the sanctity of the contract carry
over, there is going to be a disruption in the ability of the
banks to basically be able to offload those loans if they need
liquidity at a time of stress. And it is something that we from
the regulatory perspective are quite concerned about.
Chairman Crapo. All right. Thank you, and I appreciate your
attention to this.
Ms. McWilliams. Thank you.
Chairman Crapo. Mr. Hood, this summer you publicly stated
that the NCUA Board intends to release a proposed rule to allow
subordinated debt to be counted as regulatory capital for a
broad range of credit unions by the end of the year. Can you
provide the Committee with a quick update on your progress on
this rulemaking?
Mr. Hood. Yes, thank you for that question, Senator Crapo.
This has proven to be a very complex issue, so we are still
working diligently on the proposal because we really want to
get it right. I really am, though, delighted that our aggregate
network ratio for credit unions today is about 11.39 percent,
so we really do have a strong capital position now, and I want
to introduce other tools to further buttress that level of
capital. But right now we are still studying that and making
sure we get a proposal right before we give it to stakeholders
for comment.
Chairman Crapo. All right. Thank you, and I appreciate your
attention to this as well.
Mr. Hood. Yes, sir.
Chairman Crapo. And finally, Mr. Quarles, we do not have
nearly enough time left to get into this issue as deeply as I
would like to, but I want to talk about digital currencies. I
understand that you are basically the lead at the Fed on
dealing with our other regulators around the globe and working
with others as they look at Libra and, frankly, at the digital
currency issue. Correct?
Mr. Quarles. Yes, the G-20 has given the Financial
Stability Board the task of considering the stablecoin issue,
and as I chair the Financial Stability Board, that is my
responsibility, yes.
Chairman Crapo. Well, I am very concerned. You know, the
Libra issue and Facebook presents one set of issues, but the
digital currency issue is much broader, as I see it. And one of
the big concerns I have is that the potential for digital
currencies based on blockchain technology could ultimately
undermine the role of the U.S. dollar in global markets. Do you
share that concern?
Mr. Quarles. I think that would be a very long-term concern
if you consider the current proposals for stablecoins, those
that rely on a basket of currencies to anchor their value
include a very heavy weight toward the dollar just given the
role of the dollar internationally currently, and that would
not be likely to be the case for some time. But over a long
period of time, that would be an issue we would need to think
about.
Chairman Crapo. Well, if other nations, for example, were
to pursue that, wouldn't that give them the ability to
basically try to start shifting away from the dollar to the
utilization of other currencies?
Mr. Quarles. If other currencies were more useful in the
payment system or more useful forms of payments, again, I think
it would not be an immediate effect, but over a long period of
time, that would be a factor, yes.
Chairman Crapo. All right. Well, thank you. My time is up.
I have got a lot more I want to talk with you about this, so
both in conversation as well as in questions. I will get
further information to you on that. This is something I think
we need to take a really deep dive on, and rapidly. So thank
you.
Chairman Crapo. Senator Brown.
Senator Brown. And I would hope, Mr. Chairman, we can get a
second round, too. Thank you.
The private equity firm I mentioned in my opening
statement, Mr. Quarles, is the one that cut staff, the one that
cut staff at nursing homes and documentation of endangering
patients is your former employer, the Carlyle Group. You were a
partner when this was happening, so I have to assume you were
aware of it as Carlyle reaped huge profits from this.
Do you think a system that allowed the Carlyle Group to
load up a company with debt and extract management fees and cut
corners and put patients at risk is a good system?
Mr. Quarles. I actually was not involved in that
transaction at all, so not wanting to speak about the details
of that transaction, I do think that it is important that we
have a system where private equity is bringing benefits to the
companies it invests in and not otherwise.
Senator Brown. Not otherwise, meaning if they are not
bringing benefits, thy should not be allowed to do it? What do
you mean ``not otherwise?''
Mr. Quarles. We should have a system that creates
incentives so that investors are improving the companies that
they invest in.
Senator Brown. So even though you--I mean, I heard your
involvement in the Bush administration, you did not seem to be
too responsible for the economy imploding in those years. And
now you are saying you were at Carlyle--I mean, the Carlyle
Group benefited financially a great deal in its takeover of
that company, Manor Care, in Toledo. So I guess I would ask
this then: What steps do you take now then at the Fed to rein
in risks and make sure financial companies are investing in the
real economy and creating jobs rather than this
financialization and making reckless bets that hurt families?
Mr. Quarles. Safety and soundness of the financial system
is the responsibility of the Fed. That is an element of our
supervision and examination of firms and I think an appropriate
element.
Senator Brown. That does not seem very proactive. I mention
private equity because they are the biggest users of the
riskiest kind of leveraged loans, as you know, which they dump
on companies that they got for profits. It has been 6 months
since I raised concerns in letters and in hearings over
leveraged lending. You have shifted from it is not a problem,
earlier answers, to we need more data.
What specific abuses that are not already happening in the
leverage lending market would you have to see to convince you
to crack down on these risks?
Mr. Quarles. Well, we have taken supervisory action with
respect to leverage lending, Senator. Earlier, it is not that
we had said that it is not a problem. I think we have been
trying to draw a distinction between is there a financial
somebody risk versus is there a potential contribution to a
future business cycle downturn of current underwriting
practices.
With respect to the latter, a focus of the last two shared
national credit examinations where all of the regulators
together look at the largest loans that are shared among a
number of institutions has focused--a focus has been leverage
lending and the evolution of underwriting practices as to which
we have had a concern. And I think they are familiar to most
people here.
In the first cycle, we indicated which of those practices
we had concerns about, and then in the second cycle, if they
were continuing, we took appropriate supervisory action against
the firms that were underwriting leveraged loans in this
fashion.
Senator Brown. I guess, Mr. Quarles, because of the
background of you and other regulators, because of your
experience prior to these jobs and your general support for
Wall Street, I just do not share in the confidence that you are
going to proactively do something about this. I mean, I
understand you say if it is risk to the financial system, to
the stability, that is one thing. But it is obviously more than
that.
Let me shift to Chairman Hood, if I could for a moment. The
NCUA is an independent Federal agency, right?
Mr. Hood. Yes, sir.
Senator Brown. Independent, OK. Do you agree that you as
Chair of the NCUA must act without control or influence from
the White House?
Mr. Hood. I am deeply committed, sir, to maintaining NCUA's
independence as a regulator.
Senator Brown. From the White House?
Mr. Hood. As an independent regulatory agency, it is my
duty to uphold that.
Senator Brown. Including from the White House?
Mr. Hood. I am committed to ensuring that NCUA----
Senator Brown. You do not seem to want to say yes to that.
OK. I get it.
I sent you a letter in October because I was concerned
about the photo ops you were doing with President Trump at the
White House and at his golf course. Then I got this letter from
your office this past Tuesday. Can you tell me who you were
posing with in those pictures--in the first picture that you
sent to us?
Mr. Hood. I am sorry----
Senator Brown. You have a picture right there. Can you tell
us--it is a letter you sent us as a peculiar, perhaps, but a
response. I am not sure if the letter is supposed to be a
response to my concerns or not. So could you identify the
people in that picture?
Mr. Hood. Oh, these are speaking engagements. What I sent
you, Senator Brown, was a listing of my activities in my first
6 months of meeting with stakeholders to talk about credit
union issues, to foster greater financial inclusion and shared
prosperity. There is a picture of me being sworn in, it looks
like, with one of the leaders of the SBA, and then my swearing-
in was conducted by the Vice President of the United States.
But those are pictures showing stakeholder engagement, but then
I also provided activities of the 7 months of activities where
we have kept America's credit unions safe and sound, and the
letter was meant to be an opportunity to meet with you to talk
about regulatory accomplishments as well as any other issues
you would like to discuss.
Senator Brown. OK. I just am not sure you understand what
``independent regulator'' means from your letter back to us,
from your statements about speaking as a body, from the NCUA as
a body, and from your other activities with the President. So I
hope the lesson you take from that, Chairman Hood, is that you
are, in fact, independent from the person who appointed you,
the Administration that sponsored you, from anybody that might
have influence on you. Thank you.
Chairman Crapo. Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman. Thank you all for
being here, and thank you for giving so much to our country.
I would like to use my first couple of minutes, Madam
Chair, talking to you about industrial loan companies. You know
what those are. They are basically banks, but they are not
regulated like other banks. They are authorized at the State
level. Some of our largest companies are starting to use these
industrial loan companies to take deposits, for example, and I
think competition is good. Competition is a moral good. But I
worry that they are not regulated like the other banks, and I
have a bill called the ``Eliminating Corporate Shadow Banking
Act'' just to make sure that these industrial loan companies
are on a level playing field with everybody else and are
properly regulated, you know, not too hot, not too cold, just
right.
Could you give me about a minute of your thoughts on that?
Ms. McWilliams. I have not had an opportunity to take a
look at your bill, and as a former staffer----
Senator Kennedy. It is a good one. Trust me.
[Laughter.]
Ms. McWilliams. I know your staff, and I believe it is
probably a good bill. Congress gave us authorities to regulate
ILCs, and, frankly, as we look at the ILCs, we only have a
couple dozen ILCs in existence right now. The ILCs of the past
are looking different than probably--well, the applications we
are getting at this point in time, that is true.
At the depository institution level, Congress gave us ample
authorities to regulate the ILCs, and when----
Senator Kennedy. But they are not regulated the same as
banks. Is that correct?
Ms. McWilliams. They have a different regulatory structure,
so we regulate the depository institution that----
Senator Kennedy. Why don't they just have the same
regulatory structure? Wouldn't it save money if you did them
all the same way, just economies of scale?
Ms. McWilliams. From the perspective of the depository
institution, the ILC is regulated the same way as a bank. In
fact, when Congress gave us authorities to approve deposit
insurance for ILCs, it gave us the same statutory standards as
it did for banks.
Senator Kennedy. Let us talk further about this.
Ms. McWilliams. Sure.
Senator Kennedy. I disagree with you on that. I do not
think they are regulated the same, and I just do not understand
why everybody is not treated the same.
I want to go to Chairman Quarles for a second. I think our
community banks are doing very well in large part or in
substantial part as a result of the work of most of the Members
of this Committee when we passed Senate bill 2155. I am still
concerned about our large banks. We all remember 2008. From my
standpoint, in 2008 the leadership of some of our largest banks
took their banks to Hell, and the Government rode shotgun.
They have not been tested. Our economy is much better, and
it is still healthy, but we now at some point we will have a
recession. I think had we not passed the Jobs and Tax Cuts Act,
we would be in a recession now. I think it was Buffett who
said, ``You do not know who is swimming naked until the tide
goes out.''
Mr. Chair, do we still have banks that are too big to fail?
Mr. Quarles. I think that the regulatory response, the
post-crisis body of regulation, will have given future
regulators in the event of stress at a large institution many
more options than they had before to resolve that institution
or to take other actions rather than bailing them out.
Senator Kennedy. Do you think we still have banks that are
too big to fail?
Mr. Quarles. I think that the way that I look at that
question is will regulators in the future, will the Government
in the future, when it is faced with stress at a large
institution, have an option other than providing support for
the continued life of that institution. I think those options
will exist, yes.
Senator Kennedy. Will one of those options be come to
Congress and we appropriate a bucketload of money to bail them
out?
Mr. Quarles. I hope that does not happen. The purpose of
the framework is to ensure that regulators have options so they
do not do that. But unless I am one of them, I will not be able
to control their future actions as to what they might ask for.
I would say now, however, that if they come up and ask you for
that, you should be aware that they will have many other
options in front of them than they had at the time of the last
crisis.
Senator Kennedy. OK. Thank you.
Chairman Hood, if you have a few minutes afterwards, I
would like to get a photo, OK?
[Laughter.]
Chairman Crapo. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Chair McWilliams, I understand that when you first came to
the United States you only had $500 in your pocket.
Ms. McWilliams. I did.
Senator Menendez. And you used that $500 to open a checking
account and, importantly, get a secured credit card. You stated
that, ``With each swipe of that credit card, I felt more
integrated into the very fiber of American society.'' So do
banks get CRA credit for offering a secured credit card?
Ms. McWilliams. To tell you the truth, the answer is not
that simple. You have to go through a complex formula to figure
out what qualifies and not under the CRA, the current CRA----
Senator Menendez. Well, let me share with you that,
according to the Government Accountability Office, banks that
offer secured credit cards designed to establish or rebuild
credit histories receive credit under the CRA. So what we have
here is a real-life example of someone benefiting from the CRA.
You yourself said that this secured credit card opened up ``a
world of opportunities'' for you. So I would hope that as you
decide how to move forward on potential changes to the CRA, you
will take to heart the need to strengthen the CRA so that more
Americans can benefit from this important civil rights law just
as you did when you first came to the United States.
So let me relay one concern I have with how things are
going. Recently, Politico reported that the FDIC could give the
smaller banks it regulates the choice of opting into this new
OCC-led CRA regulatory framework or continuing to be examined
under the current system. That could lead to a situation where
banks themselves choose to participate in the model that gives
them the best grade and not the one that best measures whether
their activities are effectively addressing the needs of their
communities.
If adopted, do you know what percentage of FDIC-regulated
banks would have the choice to opt into the OCC approach?
Ms. McWilliams. So the proposal is still being worked on.
One of the options we considered was the opt-out for small
banks--I am sorry, opt-in, opting into the new regime or
keeping the existing regime. The main reason for the opt-in
opportunity would be to provide an ability for small banks not
to have to change their reporting requirements and how they go
through the analysis of what qualifies for the CRA.
The number of small banks, if they decide to opt in, would
depend on what threshold we pick for the cutoff, so if they----
Senator Menendez. So you do not know yet what number
because you have not decided on the threshold?
Ms. McWilliams. It is not firm. We are looking at numbers
and making sure----
Senator Menendez. But I hope that other than--you know, we
want small banks, yes, to have less necessity in terms of
paperwork, but we do not want them to have less necessity or
obligation in terms of creating a portal of opportunity under
the CRA.
Ms. McWilliams. I agree with you.
Senator Menendez. If most FDIC-regulated banks would be
able to opt in, if that is what happens, then aren't you simply
making a political calculation that best protects the interest
of the banks you are charged with regulating over those who
stand to benefit from a strong CRA rule? Isn't it in essence
the threshold that will determine whether that is the reality
or not?
Ms. McWilliams. No, actually, it is not. The reason that I
am willing to consider reform to the Community Reinvestment Act
is because the Act has not been revisited since 1995 by the
regulators and Congress. You gave us the authority to take a
look at the Act and make sure it serves its intended purpose.
Currently, we have digital delivery channels for banks that are
not necessarily accounted for appropriately in the current
assessment areas. The way the deposit taking now takes place is
everything gets attributed to a branch, and now with the
digital channels, there is a lot of deposit taking that is
taking place outside of this area, and we want to make sure
that under the reform of the CRA, those areas where the digital
banks are functioning and taking deposits and offering services
are covered by the CRA.
Senator Menendez. Well, let me just say that age itself is
not a reason to review the Act. Certainly to improve and
strengthen the Act is something worthy, but you do not want to
at the end of the day use the time in which the Act has not
been reviewed to weaken it. So I am concerned that you are all
trying to have it both ways, not fully endorsing the flawed OCC
plan that allows most of the FDIC-regulated banks to choose
which system they are measured under, but also not standing up
and fighting for a better CRA standard than what Comptroller
Otting has proposed.
So I hope that the end result is that I am wrong on that,
but I am going to be looking with incredible intensity.
Ms. McWilliams. I look forward to proving you wrong,
Senator.
Senator Menendez. I am always happy to be proven wrong when
it is a benefit to consumers.
Vice Chair Quarles, 5 years ago--I want to follow up on
comments that Senator Kennedy raised to you about banks--the
regulators adopted the liquidity coverage ratio to require
banks to hold additional capital that they could draw upon in a
crisis and thereby reduce the risk of another taxpayer bailout.
But in October, the Federal Reserve finalized a rule that would
reduce the liquidity coverage ratio by 15 percent for big Wall
Street banks.
Now, S. 2155 did not require the Federal Reserve to reduce
the LCR, and the banking sector has not gone through a full
economic cycle while the previous LCR rule was in place. So at
a time in which we see record growth among the banks, the
fantastic times, the banking sector reported $62 billion in
profits in the second quarter of 2019, a 4.1-percent jump from
2018, why is now not the time to assure a bank's liquidity, not
reduce it? We saw what happened in the repo market, and I have
real concerns that instead of taking the moment of strength to
strengthen the banks, you are just giving them more running
room to get into trouble.
Mr. Quarles. Do I have time to respond briefly, Chairman?
Chairman Crapo. Yes, please. Briefly.
Mr. Quarles. Thank you. So for the large Wall Street banks,
we did not change their liquidity requirements at all. Those
remain the same for the G-SIBs. S. 2155 did include--while it
gave specific instructions for tailoring under 250, there was
also a mandate, a ``shall,'' that we would tailor for all
institutions, and so for regional banks, not the large Wall
Street banks but below that, we tailored their liquidity
requirements, and then it goes down so that there are lower
liquidity requirements for firms that pose even less risk to
the financial sector.
So the concept of tailoring and I think the instruction in
S. 2155 was to evaluate the risks that different categories of
institutions posed to the financial sector and then tailor for
each of those categories of institutions. It is not a dramatic
reduction in liquidity. All of those institutions still have
much, much more liquidity than they had before the crisis, and
I do not think it is--and the largest institutions, the Wall
Street banks, still have every bit of coverage under the LCR
that they did before S. 2155.
Senator Menendez. Well, I hope we do not have to revisit
what we did in the Great Recession and then remind you of your
comments that, instead of strengthening the liquidity reserves,
we actually weakened them.
Chairman Crapo. Senator Tillis.
Senator Tillis. Thank you, Mr. Chairman.
Mr. Hood, it is great to see somebody that hails from my
neck of the woods in North Carolina. I want to thank you for
the work you have done on affordable housing long before you
got into your current post, and it was all that work you did
for the community that made me proud to have you a member of
the Board of Governors. You were giving back to a great
educational institution.
Mr. Hood. Thank you.
Senator Tillis. You do great work. I have got a picture
with you, but I would be proud to have another one.
Mr. Quarles and Chair McWilliams----
Senator Kennedy. I get to go first.
[Laughter.]
Senator Tillis. First, I want to thank you all for the work
and the progress that we are making on the inter-affiliate
margin. It is going to free up, I think, almost $50 billion in
capital. It is a long time coming. Somebody is going to have to
work hard to make that a partisan issue since that is something
that has been in place under Democrat and Republican
administrations in the past, so thank you for that.
I want to go on to the Community Reinvestment Act and the
update, and specifically, I know that the OCC is taking the
lead. I should also say I am looking forward to the work on the
Volcker Rule. I am trying to get this done and stay within my
time, so I am talking fast.
On the rewrite, Chair Quarles, is the Fed going to play a
role in the CRA rewrite along with the FDIC and the OCC?
Mr. Quarles. We have been very actively engaged with the
OCC and the FDIC in----
Senator Tillis. At the Governor level?
Mr. Quarles. At the Governor level, absolutely. We have
been very actively engaged, and the proposal that is evolving
has benefited from a lot of Fed input.
Senator Tillis. Well, if you look at that, I do not think
that that has been touched since about 1977? Is that about
right? No, no, I am sorry. About 30 years.
Ms. McWilliams. It was 1995.
Senator Tillis. So I was young back then, so hopefully we
can take into account this thing, the Internet has come on
board, online banking, and a number of other changes in the
banking system that hopefully we can modernize, and I look
forward to what you all do there.
Chair McWilliams, I wanted to ask you a question. You in
particular took a fairly aggressive posture in going through
and looking at all the clutter, guidances, one-off advisory
letters, secret memos, facts that have long been used to
regulate and supervise banks. Can you give me an idea of where
we go from here?
Ms. McWilliams. When I took the office of Chairman at the
FDIC, I frankly thought that we could do our supervision in a
more transparent and accountable manner. You know, quite often
we look at the regulations and instructions we give to
companies, and I have been surprised at how many ways we
communicate with the companies, our regulated entities, and not
always make that a standard for everybody, but do one-off
letters here and there. My goal for the staff at the FDIC has
been to comb through and tell us what regulations need
updating, and not only because of the passage of time but
because technology has simply changed, and the way the banks do
business has changed. We also need to take a look at whether we
are being transparent and uniform in our application of the
laws. And to the extent that we are not or that we have done
things that are one-offs, I believe there is an opportunity for
us to, you know, apply the good sunshine policy and go public,
solicit public comment and move forward with rulemakings and
guidances that are applicable to everybody and so people have a
clear road map as to how to do business.
Senator Tillis. Well, I appreciate the very thoughtful and
assertive approach that you have used there. I think that it is
a model that a number of regulatory agencies even outside of
the banking space should take note of, because it is a way that
we can take needless burdens off of business and put that back
into making houses more affordable, making banking more
affordable, and making the private sector grow.
Vice Chairman Quarles, you testified on the House side
yesterday, and I believe you were asked about the concerns the
private sector system could have in discriminatory pricing for
the payment system. The private sector has made a commitment in
writing to have flat pricing. If the Fed is concerned about
discriminatory pricing, pricing that would disadvantage smaller
banks, why has the Fed refused to make the same commitment to
flat pricing for the FedNow platform? And why does that make
sense?
Mr. Quarles. So, as you know, Senator, the Federal Reserve,
in connection with standing up operations in the payment
system, is required by law to recover our costs, and I think as
the proposal evolves and as we continue to develop the faster
payment system that we have committed to undertake, we will
have a better sense of exactly what will be required in order
to recover all of those costs, and at that time we will be able
to evaluate what the pricing will be.
Senator Tillis. Thank you. I yield back 3 seconds.
Chairman Crapo. Thank you.
Senator Warner.
Senator Warner. Thank you, Mr. Chairman. Great to see the
witnesses.
Vice Chairman Quarles, I want to start with you again and
pick up on some of the line of questioning about CRA. I think
you have been quoted as saying you feel like the CRA is a
little formulaic and ossified, and I tend to agree that it is--
you know, since 1995, I do not think we have taken a major look
at how we need to be modernized.
I am concerned, as I think other colleagues are, with the
notion that the OCC and the FDIC would move forward on a
regulation without the Fed's impact, and I think that would be
a huge mistake because we would leave a series of the community
out.
Yesterday during the House Financial Services Committee,
you were asked a question, but I do not think I got--at least
in my review of the question, I did not get a full answer about
whether you feel like you will be proceeding and will be
participating in the OCC's modernization efforts. And I wish
Comptroller Otting was here, where he has basically said he
thought the Fed was not going to be involved.
So, for the record and for my colleagues, can you clear up
whether you intend to have the Fed involved in this much-needed
reform process?
Mr. Quarles. Well, this is a continuing effort to look at
CRA modernization. There is agreement among all the agencies as
well as everyone who considers the issue--community groups, the
banks, I think among many here--that the implementation of the
Community Reinvestment Act can be improved given evolution in
the banking industry and given, you know, as I have said, kind
of the ossification of practice over time. The Federal Reserve
is committed to that and has been working together with the
other agencies as part of this process.
Now, the issue that is immediately at hand is when will a
Notice of Proposed Rulemaking come out, but that is an interim
step to any final rule. At the outset of the process, the OCC
went forward independently of both the FDIC and the Fed with an
Advance Notice of Proposed Rulemaking. We all benefited from
the information that they received. The Fed also had a broad
information-gathering process at all of our Reserve Banks. At
the same time as that Advance Notice of Proposed Rulemaking was
happening, the FDIC had its separate process. And all of that
has come into now the consideration of the Notice of Proposed
Rulemaking.
So while it has not 100 percent been decided yet whether at
this next step, the Notice of Proposed Rulemaking, all three
agencies will go together or some may go separately, in the
same way as that first step was done separately by each of the
agencies but it was all part of a joint process, I would not
draw too much from if that is again one or two agencies going
separately on the Notice of Proposed Rulemaking because we will
continue to be working together on trying to get to a final
rule, and my expectation is still that when we get to that
final rule, it will be all three agencies together.
Senator Warner. Because, you know, obviously if we have OCC
and FDIC, you guys not involved, we end up with a new set of
rules and regulations that would cover 80 percent of the market
but not the very critical component that you guys cover, you
know, we are not going to be able to bring that consistency
modernization in what I think is a very, very important role
that CRA plays.
Mr. Quarles. I completely agree.
Senator Warner. So I am going to take your answer as yes,
you guys will be involved; there will not be a hodgepodge of
rules; there will be a uniform final answer that will include
all three regulatory agencies.
Mr. Quarles. That is the objective.
Senator Warner. OK. So that is a yes, as I tried to put as
many words as possible in your mouth, it will be all three?
Mr. Quarles. Well, ``yes'' would be one of the words that I
would say. But, yes, that is the objective, that we are aiming
to get to a final rule all together, and if it happens that the
interim steps happen at different speeds, I would not draw too
much from that.
Senator Warner. One of the things that I know also is, in
your role as chair of the Financial Stability Board, I know you
have been conducting this in-depth analysis of CLOs, and
obviously we have seen the numbers grow. We realize this has
both a national but also international implication in terms of
involved with the G-20. When do you think that study is going
to be done? When we are going to get a chance to look at that?
Mr. Quarles. We should be making that public very shortly,
I think early in the new year. It is being circulated among the
members of the Financial Stability Board, the results of it
currently, for final sign-off.
Senator Warner. My time has expired, although I could not
get away without my colleagues being here and saying there is a
broad bipartisan work being done on this Committee on what we
call the ``Illicit Cash Act,'' which deals with AML, beneficial
ownership, I think issues that have been long in need of
review. The Chair and the Ranking Member are going to, I know,
take some of the work that we have done and buildupon it. My
really strong hope is that we can move sooner than later on
that really long overdue piece of reform and regulation.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Shelby.
Senator Shelby. Thank you.
I will pose this question to all of you as regulators: What
is your current assessment of the overall health of the U.S.
financial system compared to conditions, say, in 2007-08? We
will start with you, Chairman Quarles.
Mr. Quarles. Absolutely. It is a much healthier banking
system. We have significantly higher levels of capital and
liquidity. We have a focus on the resolvability of institutions
to address the too big to fail question that was not there
before. Financially, it is much stronger.
Senator Shelby. Chairman McWilliams?
Ms. McWilliams. Absolutely much stronger, both for the
large banks and small banks. In the meantime, the regulators
have put in a number of capital and liquidity rules on these
banks, and the capital levels are at a healthier level than
they were, a much healthier level than they were before the
crisis.
Senator Shelby. And what about the credit unions?
Mr. Hood. Yes, Senator Shelby, the credit union system is
strong and robust. I mentioned a lot of that in the opening
remarks. Capital now is at 11.39 percent, far beyond the 7-
percent capital requirement, and also we have a very strong
Insurance Share Fund of $16.7 billion, which is far beyond the
$10 billion coming out of the recession.
Senator Shelby. As regulators, have any of you ever known a
financial institution to fail, to go under, that is well
capitalized, well managed, and well regulated?
Mr. Quarles. It would be difficult for it to fail if it
were well capitalized, absolutely.
Senator Shelby. Well capitalized is important to the health
of a situation, also liquidity, being liquid at times, right?
Mr. Quarles. Exactly.
Senator Shelby. Ms. McWilliams?
Ms. McWilliams. Nothing comes to mind.
Mr. Hood. Nothing comes to mind at the moment.
Senator Shelby. So there is no substitute for capital, in a
sense, when something is under stress, or liquidity. Is that
right?
Mr. Quarles. Capital is key, although it is a useful factor
of the post-crisis framework that we also focus on liquidity.
But we do have that focus now on liquidity, and the two
together are key.
Senator Shelby. Would you say that the overall health of
our banking system is as good as you have known it in the last
20 years or more?
Mr. Quarles. I would go farther and say I think my career
has lasted for about 35 years, and it is as good as it has been
during that entire time--better, much better.
Senator Shelby. Do you agree?
Ms. McWilliams. I agree, and I am fortunate to be the
Chairman of the FDIC at this time.
Senator Shelby. Well, I commend all of you for trying to
keep it that way, too.
Vice Chairman Quarles, how do we maintain simplicity in
financial regulation considering that the scope and complexity
has just grown so much? How do you balance that?
Mr. Quarles. So I think, you know, all the points that you
have just raised, because we have such a resilient and strong
financial sector now, we have the benefit to take some time and
to look at the overall structure of regulation and to determine
where we can make it simpler and more efficient while still
maintaining that resilience.
One of the things we proposed at the Federal Reserve, for
example, is to take our 24 different measures of loss
absorbance, resiliency, various capital measures, TLAC, et
cetera, and to combine them into our stress capital buffer that
would be much simpler and yet retain exactly the same level of
resiliency.
Senator Shelby. Ms. McWilliams, do you have a comment on
that?
Ms. McWilliams. I think it is important that we are able to
maintain a level of liquidity and capital that functions well
for the market and the financial stability overall. There is
always a balance. It is a see-saw of how much capital and
liquidity do you need versus how much should you release in the
economy to ensure that the economy is stable, because in the
end if the economy is not stable, these banks are not going to
be stable. So there is a symbiotic relationship, and we are
constantly monitoring the levels at which these banks need to
be in terms of capital and liquidity. And to your prior
question, I would add that it is capital, liquidity, and
management. I believe good management is key to the success of
a bank.
Senator Shelby. Do you have a comment, sir?
Mr. Hood. I was just going to say I agree with Chairwoman
McWilliams wholeheartedly. It is about balancing capital with
liquidity. Balance sheet management is key.
Senator Shelby. Thank you for what you do.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Schatz.
Senator Schatz. Thank you, Mr. Chairman. Thank you all for
being here.
Vice Chair Quarles, at the last oversight hearing, we
talked about the financial risks caused by climate change, and
we discussed the prospect of the Fed joining the group of now
42 central bankers and regulators thinking about and working on
accurately accounting for the risks related to climate change.
Do you have any updates on that?
Mr. Quarles. Thank you, Senator. As we discussed, as I
think I mentioned at that last hearing, we have been
exploring--I wanted us to explore joining the Network for
Greening the Financial System. For a variety of reasons under
their charter, that requires some adjustments in order for us
to join as an observer, but we are continuing to discuss with
them how that can be done. In the meantime, we have attended
meetings, sort of auditing the class before formally
registering with the NGFS, and I think that is entirely
appropriate.
Senator Schatz. Is there a timeframe?
Mr. Quarles. They have a meeting, their annual general
meeting or the equivalent of an annual general meeting, in
April, which is when they would be able to address some of
these governance issues, if they are able to address them. So I
think, you know, it is over that time. But what I would stress
is that in the meantime we are engaged with them, involved in
attending working groups, et cetera.
Senator Schatz. The U.K. regulator recently issued guidance
that recommends steps that banks take to demonstrate that they
are taking climate risks seriously. They are encouraged to
assign a senior manager the responsibility for managing climate
risks and to demonstrate in writing how the firms' risk
management practices address climate risks.
Are you asking banks to do anything similar? And if yes,
could you elucidate? If not, why not?
Mr. Quarles. So we do ask banks that are exposed to severe
weather events, which can be generated by climate change, to
account for us their risk management practices around that. And
as you know, we continue to do a lot of research on the effect
of climate change on the financial sector as to how that is
likely to evolve, and as we continue to learn from that, we
incorporate that into our supervisory practices.
We have also been very closely engaged; I was just in
London a couple weeks ago talking with them about how they are
looking at climate change regulation and supervision.
Senator Schatz. The challenge, I think, for both investors
and for firms is that it is not yet apples to apples--right?--
in terms of how the disclosures go because everyone is puzzling
through it, including the Fed, including the Network for the
Greening of the Financial System. And so I think as soon as
possible, for the sake of investors having clarity across the
market, we are going to need some kind of common instrument to
understand, and I think that has got to come from you, because
companies, firms, investors are all trying to figure out how to
account for climate financial risk, but they are all doing it
in unique ways, which makes it super difficult, if you are an
investor, to figure out who is accounting for it accurately and
how to compare one investment opportunity from the other.
Mr. Quarles. Yeah, I think that those are very good points.
One of the things at the Financial Stability Board that we have
done--it was a process that was begun before I began to chair
the Financial Stability Board, but that I re-upped when I took
over the chairmanship--is this TCFD, which is under the aegis
of the Financial Stability Board. Private sector companies are
encouraged to think about what climate change risks they may
face and then to disclose how they are addressing them if they
see them. And we are learning from that. We will be able to
learn from that. I think we will be able to take that
information and see, OK, well, are there best practices? Is
there a common thread that we are beginning to see out of all
of this that will be helpful to everyone?
Senator Schatz. But you agree that at some point we are
going to need a common platform?
Mr. Quarles. Well, I think that would be useful. You know,
at the moment I do not know either what the forum would be or
certainly what the content would be of that common platform
because, as you note, all of this is in pretty early stages.
Even the Bank of England, which is--the Bank of England, I
would say, and the Dutch central bank are probably sort of the
most committed or have done the most thinking, are farthest
along in their thinking about this, and even both of them are
really at quite early stages as to concretely how you would
address this. And you would need something concrete in order to
have a common platform.
Senator Schatz. Thank you.
Chairman Crapo. Senator Cortez Masto.
Senator Cortez Masto. Thank you.
Vice Chairman Quarles, let me start with you, and thank you
for visiting with me earlier. We know that the Russian
government continues to attack our Nation with a device of
inaccurate propaganda in order to weaken Western democracies,
and I know just this morning the U.S. and the U.K. law
enforcement officials announced charges against two Russians
allegedly responsible for what DOJ deemed ``two of the worst
computer hacking and bank fraud schemes of the past decade.''
The Treasury Department's Office of Foreign Assets Control
announced sanctions against the gang, these two that they
dubbed ``Evil Corporation''--that is the name that the two have
taken on--led by one of the Russians who also provides direct
assistance to the Russian government's malicious cyber efforts,
highlighting the Russian government's enlistment of cyber
criminals for its own malicious purposes.
So I guess my question to you is: If Russia does not stop
these attacks on our Nation, should we work with our allies to
ban Russian financial institutions from using the SWIFT
interbank payment system?
Mr. Quarles. I would say I have not given any thought to
that question, whether that would be an appropriate remedy. In
our enforcement practices at the Fed with respect to financial
institutions and the abuse of the financial system, we do work
closely with the Department of Justice. Frequently Department
of Justice actions arise from referrals from us of things that
we see with respect to the financial system. So that is
something that we are--the issue is something that we are
heavily engaged with, but I would be happy to talk with you
more about that.
Senator Cortez Masto. I would appreciate that. I know it
just broke this morning, so thank you.
Then just for purposes of follow-up on the Chairman's
conversation with digital currency, this is also something I am
very, very interested in as well. Can you just talk a little
bit about what you are doing in this space right now or what
you anticipate looking at when it comes to digital currency, if
anything?
Mr. Quarles. So that is at very early stages. I would say
that until the recent international focus on stablecoins, there
was a general sense among most of the central banks of the
advanced financial economies, with isolated exceptions such as
Sweden, that digital currencies would not--you know, were not
really necessary. They were not addressing a serious need in
those economies. They would be something that might be more
rapidly adopted in emerging markets for a variety of reasons,
maybe the same way as emerging markets sort of jumped over
landlines to cell phones, but that we would--however, since the
focus on stablecoins, we have geared up a process to think
through the issues. There are a lot of issues, some of the
technological, some of them, you know, having to do with
monetary policy, some of them having to do with other types of
regulatory policy that would have to be worked through,
international coordination with respect to it. We are at early
stages there in part because up until, I would say, this
summer, it was an assessment, and I think the right ex ante
assessment, that it was not sort of a high priority for the
United States, and most advanced financial economies shared
that view.
Senator Cortez Masto. OK. But it is something that is
obviously--and here is my concern. I appreciate that it is in
its initial stages, but I do not think it is something we can
assume nothing is going to happen with, and so we at least have
to put resources behind it to start looking at and addressing
this. And that is what I am hearing you are doing.
Mr. Quarles. Absolutely.
Senator Cortez Masto. Great.
Mr. Quarles. Absolutely.
Senator Cortez Masto. Thank you.
Chairwoman McWilliams, studies show that without the
Community Reinvestment Act the homeownership rate in our
country, and especially for Latinos and African Americans,
would be much lower. And I understand the FDIC is considering
proposed changes to the Community Reinvestment Act. So how
would proposed changes to the CRA close the racial, ethnic
homeownership gap? And is that something that is on your radar
as you look at making these changes?
Ms. McWilliams. It is absolutely on my radar as we are
looking to make the changes. I think the Act frankly can be
revised to do more for those communities, and it can do a whole
lot more for rural communities, for small businesses, small
farms, family farms, Indian Country. The Act has not been
updated since 1995, and all I am asking from folks is to be
open-minded when these proposed changes come through, and give
us feedback. If there is something that you are concerned about
that is not in the proposal, let us know. The intent of the
proposal is basically to solicit comment from stakeholders,
including Members of Congress and their constituents. The
intent here is not to undermine the purpose of the Act and what
Congress intended. In fact, the intent, my personal intent, is
to strengthen it and make sure that the things that were not
existent in 1995 but that do actually help low- and moderate-
income and minority communities get enhanced credits under the
CRA and are accounted for appropriately. And, you know, Senator
Menendez had a line of questions. I was a member of the low-
and moderate-income community, and it is not with any malice or
bad intent that I would like to take a look at this Act, but
more so to make sure that the banks, especially large banks--
national banks account for about 70 percent of the CRA
activity--are doing their part and doing it in a way that makes
sense and clarity for them, but also gets added benefit to
those communities.
Senator Cortez Masto. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. I thank all of
you for your testimony today.
Vice Chairman Quarles, I know you and I have a difference
of opinion on this, but since I have raised it in all the
hearings we have had with your colleagues, I do want to say
that I fully support the overall decision of the Fed to move
forward on a real-time payment system under the FedNow
umbrella. And I hope that you will all move with speed on that
effort.
Mr. Quarles. That is the intention, Senator.
Senator Van Hollen. Thank you.
Chair McWilliams, I have some questions related to the
issue of rent-a-bank schemes to evade State usury laws. I know
this was an issue addressed in the House yesterday and here in
this hearing a little bit. I understand that the OCC and FDIC
proposed the rule to supposedly provide clarity on this issue
in the wake of the Second Circuit decision in Madden v.
Midland.
My view is that it is probably premature to move forward. I
think in the preamble of that rule, you say the FDIC is not
aware of any widespread or significant negative effects on
credit availability or securitization markets having occurred
at this point as a result of the Madden decision. And what I
worry about--and I know that your fellow Commissioner Marty
Gruenberg shared my concern--is that you have sort of put your
foot on the scale in a blunt way, which I think will be
interpreted by some to give a green light to some of these
schemes.
You stated in the House yesterday that your only purpose
was to address a longstanding principle Congress gave that when
a loan is made and the interest rates are not usurious at the
time the loan was made, that subsequent events do not make
those loans usurious, right? But my question is this: Would it
be usurious at the time of the loan if the sole purpose of that
loan was to evade the interest rates under State laws of the
entities' licensing State?
Ms. McWilliams. It is a great question. The position we
have taken at the FDIC under our existing authorities is that
we basically determine what is the home State for the bank, and
there is a test we go through. This is the issue that I think
people are convoluting, the so-called true lender issue versus
value-when-made, which are two different, separate legal
doctrines.
The proposal we issued literally took what we had pre-
Madden and put it on paper and opened it up for public comment,
and that is all we did. So this is based on the authorities
Congress gave to the FDIC in 1980, gave to the OCC in 1865, and
the language I quoted yesterday--probably poorly--on usurious
rates is from a Supreme Court case from 1828.
Senator Van Hollen. Here is the issue, if I may. There is a
report that one of the--and this problem has gotten worse
because we have a lot of nonbank lenders now who are taking
advantage of the current system. So a CEO for one of those
nonbank lenders said on an earnings call recently, and I
quote--he was talking about a California law:
As you know, in California a piece of legislation would limit
the amount of interest that could be charged on loans from
$2,500 to $10,000. Similar to our recent experience in Ohio, we
expect to be able to continue to serve California consumers via
bank sponsors that are not subject to the same proposed State-
level rate limitations.
Clearly telling folks on his earnings call that they were
going to use this scheme to evade State usury laws.
So my question is: Why not provide guidance in your rule as
to what the test is, instead of just sort of sending a green
light that is saying, you know, go for it? Because that is the
way a lot of people are interpreting it. Why not provide some
standard for what you would believe does not constitute a valid
loan, a loan that does violate State usury laws?
Ms. McWilliams. A couple of things on that, and those
people who are saying that we gave them a green light, go for
it, are mistaken both on legal principle and the regulatory
framework we have, including congressional language that was
given to us in 1980.
States have an opportunity to opt out under Section 27 of
the FDI Act, 27(a) in fact. Congress gave States an opportunity
to opt out of the interest rate portability regime. That is,
again, not an issue for the FDIC or the issue that we have
addressed in this rulemaking.
And the second thing is that we actually specifically said
in the preamble to our rule that we look unfavorably upon the
so-called rent-a-bank charter, as you referenced it. The
purpose here is not to evade the law, and we are not going to
allow banks to evade the law.
Senator Van Hollen. But saying you are going to look at
something unfavorably without specifying exactly what standard
you are going to apply in determining whether it is unfavorable
it seems to me creates a green light. That is the concern. You
are going to look unfavorably, but you do not clarify what the
standard there may be. You know, I understand someone can bring
a case and spend a lot of time trying to dig up the evidence,
but a rule from all of you would be helpful, it seems to me, in
clarifying this.
Mr. Chairman, I have some questions on the CRA, but I will
submit them for the record.
Chairman Crapo. Thank you.
Senator Tester.
Senator Tester. Thank you, Mr. Chairman. Thanks for holding
the hearing, to you and Senator Brown. And I want to thank all
of you for being here. I appreciate your work.
I will say leading off that I am disappointed Mr. Otting is
not here. I think it is critically important we hear from all
the regulators. I have no dog or fight with him. I voted for
all you guys, and I voted for him, too, and it would be nice to
have him here. I think it is important.
Chairman Crapo. We will get him here.
Senator Tester. OK. For the last 18 months, I have heard
from bankers that come into my office that, Montana being a
State where agriculture is the number one industry, if things
do not change with the ag prices at the farm gate, people are
going to be in trouble in the next 18 months or at the end of
that 18-month period. And we still see ag commodity prices in
the tank. We still see these silly trade wars going on that I
do not think are going to end up doing anything different than
we had to begin with. But that is just a sidebar. That is not
your problem.
But what is a problem for us and you is the fact that there
are farms right now--and I say this as just a matter of fact--
that have been in families for generations and generations and
generations. It is more than a job. It is part of who they are
as human beings. And they are going to go broke, and the banks
are not going to be able to do much about it. But I do want to
pose a question to you. What can they do about it? When the
prices are down and your collateral goes down because land
prices go down with the commodity prices if they stayed down
for a period of time, is there anything that the banks can do
and still remain viable in times where the prices are at lows--
I have been in the business for 42 years. If you want to use
inflation-adjusted, they are way, way, way lower than they have
ever been. Any ideas? Who wants to be first? And, by the way,
Rodney does not have to respond to this because I do not think
it is in his bailiwick, but if you want to, you can. Go ahead.
Mr. Quarles. Obviously, what you are describing is a
serious issue. It is one that we do give a lot of thought to at
the Federal Reserve. As I think most of you know, I come from
the West. I come from an agricultural family. That is something
that I think about personally a lot as well.
We have at the Federal Reserve a long history, a lot of
experience with the cyclicality of the agricultural economy and
the special problems that that raises for agricultural banks.
We have examiners that are, you know, specialty focused on
those issues. We stand ready to work with banks that are
working with their borrowers during periods, so it is a
different sort of response than if we had a bank that had a
non-agricultural borrower, you know, a different history, a
different industry that might be in the same financial
position. Just as a matter of risk management, a different
response might be appropriate. And so we do have a lot of
experience with that. As you have identified, the situation is
as bad as it has ever been, and obviously if it goes on long
enough, the institution will be required to take the steps that
it needs to in order to recover on the loan. But we do not
require agricultural banks to do that without any sort of
consideration of the circumstances and, again, with a lot of
long experience in how to handle that cyclicality.
Senator Tester. OK. Do you want to comment?
Ms. McWilliams. I have a couple of things I think I can add
to the discussion. We do a quarterly banking profile where we
collect call report data from banks on a quarterly basis, and
we have seen a modest decline in the agricultural sector, and
some of these ag businesses and farmland businesses have gone
from net depositors to net borrowers.
Senator Tester. Right.
Ms. McWilliams. And as we look at that we looked at what
can be done, what can we do, and our examiners were instructed
to encourage banks to do workouts in conformance with the
safety and soundness standards. But also I think there is an
opportunity for us under the existing framework that Congress
gave us in the Community Reinvestment Act to do a little bit
more, provide more credit for the investments that go to small
farms, family farms, rural areas, small businesses, Indian
Country. So there is more we can do, I think, frankly, for
farmers through the CRA, and that has been one of my
instructions to staff as we are considering proposals.
Senator Tester. Right. So what I am really concerned about
here moving forward is just the whole viability of our food
system, and family farm agriculture is the basis. You know
that. And as we cut bigger checks and farmers become more
dependent on the Federal Government--which I do not think any
of them want to do, and we can talk about socialism all we
want, but that is socialism. And it is just not healthy. You
have to deal with the results of poorly thought-out trade wars,
but the fact of the matter is, when it comes to losing the
farm, it is a big deal.
I have got some questions that I want to give to the record
on affordable housing because I think it is one of the biggest
barriers we have in this country today, and just there is a lot
of stuff going on. But I would love to get your opinion on what
we can do to make affordable housing more available across the
board, because it is a big issue in urban areas, it is a big
issue in rural areas, too.
Senator Tester. Thank you, Mr. Chairman.
Chairman Crapo. Thank you. And before we wrap up, Senator
Brown has asked to have another 5 minutes for questions.
Senator Brown. Thank you. And I concur with what Senator
Tester said. Housing is everything.
This is a question for Vice Chair Quarles and for Chair
McWilliams, if I could. When we were considering the Chairman's
bill, S. 2155, to deregulate the largest banks, Federal Reserve
Chairman Powell promised the bill did not require getting rid
of rules for foreign mega banks. Your agencies then loosened
the rules on foreign banks, anyway, including on bad actors
like Deutsche Bank, which is by all indications President
Trump's ATM.
Did the bill require you to loosen rules--this goes first
to you, Ms. McWilliams, then Mr. Quarles. Did the bill require
you to loosen the rules for those banks? Yes or on.
Ms. McWilliams. The FDIC only has backup provisions for the
largest banks, including foreign banks.
Senator Brown. I understand.
Ms. McWilliams. What I have instructed staff is to look at
different capital and liquidity rules that cross-reference
sections that are referenced in S. 2155. And to the extent that
the agencies rely on, say, the authorities in Section 165, this
would be with the Federal Reserve on those rulemakings to tell
me if there is an opportunity to amend it and to amend those
rules as well.
Senator Brown. Mr. Quarles, did the bill require you to do
that with----
Mr. Quarles. S. 2155 did not itself instruct or require
that we make those adjustments. Other elements of the banking
law do require that we take national treatment into account.
But in taking it into account, that does not mean that the
frameworks will be the same, and they are not identical. There
are some material
differences between the two frameworks for domestic and foreign
banks, although, again, in accordance with the law, we have
tried to ensure that it is--you know, that we do take national
treatment into account with respect to those frameworks.
Senator Brown. I think a lot of us were surprised by that
action, especially after Chairman Powell said it to a number of
us personally and said it to the Committee.
Let me ask a follow-up. One of my Republican colleagues
asked about too big to fail. And, again, to the two of you, Ms.
McWilliams and Mr. Fall, you had recently relaxed requirements
for living wills. Dodd-Frank requires the largest banks to
submit living wills that demonstrate they can credibly be
resolved under normal bankruptcy procedures without harming the
economy.
I will start with you, Mr. Quarles. Do you believe that
every bank holding company in the United States, even Bank of
America, JPMorgan Chase, Citi, can be resolved in an ordinary
bankruptcy without harming the economy?
Mr. Quarles. I think that the honest answer to that has to
be similar to the answer that I gave to Senator Kennedy
earlier, which is I believe that there are many more options
for the resolution even of the largest institutions than
existed before. I think that the work that has been done on
resolvability has been useful. I think that it could be
possible. They are complex institutions, and the situation in
which that issue would arise in the future is difficult to
describe precisely, and so I would not want to say that you
would always be able to do it. But I think we are closer to
being able to do it, much closer than we were before.
Senator Brown. Ms. McWilliams?
Ms. McWilliams. So bankruptcy is the preferred route.
Actually, it is a statutory mandate as well. We have to
consider bankruptcy first. Congress gave the FDIC additional
authorities in Title II of Dodd-Frank through the Orderly
Liquidation Authority, and a fund I never hope to use and I
never want to use, the Orderly Liquidation Fund, to resolve
these large banks. But, generally, bankruptcy would be our
preferred route, and we have engaged a number of bankruptcy
judges in understanding exactly how that would be done and
could be done for some of these large entities.
Senator Brown. Thank you both. The point of the law a
decade ago was to make giant banks simpler and smaller so they
could go through an orderly bankruptcy. The point was not to
make bankruptcy more complicated or special for mega banks. We
are seeing not only the biggest banks, even bigger than before
the crisis, your agencies just approved another big merger. The
merger creates a bank twice as large as Washington Mutual was
at that time when it caused the biggest loss to the Deposit
Insurance Fund in history, and I think we need to be cautious.
One last statement, Mr. Chairman. I heard the comment
earlier about the most--your 35 years of experience, Mr.
Quarles, and the banking system is, you said, bigger, stronger,
more stable. It is certainly more profitable, but the more
profitable should not be the measure of any of our work. The
measure should be the safety and soundness of the financial
system with all that that means. And as you continue to move
toward less regulation, it is hard to believe it is making it
stronger. It seems to me your agencies are making the market
less competitive by weakening rules for the largest banks,
allowing them to make risky leveraged bets rather than
requiring them to provide banking services in the places where
it is needed most, and weakening and gutting regulations, you
claim to be making the economy work better for small businesses
and farmers and workers and small banks, but your actions pave
the way for mega banks and Wall Street to make the same risky
bets that shut our businesses and banks, and those action I
think betray this economy.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator Brown, and I again
appreciate our witnesses and the attention that you have
brought to these issues here today. And as I said at the
outset, I appreciate the work you have been doing to
effectively implement Senate bill 2155 and also basically frame
our regulatory approach in the ways that best strengthen our
economy, strengthen our opportunities for strong housing and
for jobs and benefits and growth in our economy. And I look
forward to the next time we have an opportunity to bring you
before us.
Again, thank you for being here. This hearing is adjourned.
[Whereupon, at 11:34 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follows:]
PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
Today we will receive testimony from: the Honorable Randal Quarles,
Federal Reserve Vice Chairman for Supervision; the Honorable Jelena
McWilliams, Chairman of the FDIC; and the Honorable Rodney Hood,
Chairman of the NCUA.
This hearing provides the Committee an opportunity to examine the
current state of and recent activities related to the regulatory and
supervisory activities of these agencies.
It has been over a year now since the enactment of S. 2155, the
Economic Growth, Regulatory Relief and Consumer Protection Act, and the
work of the agencies to implement most of the law's provisions,
including the tailoring rules for U.S. banks and U.S. operations of
foreign banks.
Your agencies should also carefully review the existing supervisory
frameworks and make any necessary adjustments to appropriately align
them with the tailoring rules and requirements.
On July 30, 2019, all of the Republican Banking Committee Members
and I sent a letter to the Federal banking regulators urging your
agencies to finalize several outstanding provisions of S. 2155, such as
the Community Bank Leverage Ratio and short-form call reports, and to
further tailor regulations to promote economic growth, including
addressing the Current Expected Credit Losses accounting standard, the
Volcker Rule, inter-affiliate margin and Madden.
Thank you for acting on many of these priorities. I encourage you
to continue exploring additional opportunities to tailor rules.
In that July letter, as well as an October 2018 letter to your
agencies, several Banking Committee Republicans and I urged your
agencies to revise the Volcker Rule, including using your discretion
granted by Congress to address the current covered funds overly broad
definition.
Although your agencies joined the SEC and CFTC to issue a proposal
revising several aspects of the Volcker Rule, the `covered funds'
provision was left relatively untouched.
I encourage your agencies to take quick action to address the
``covered funds'' issue by revising the definition's overly broad
application to venture capital, other long-term investments and loan
creation.
Separately, in September, short-term borrowing rates spiked as a
result of a large corporate tax payment coming due, and $300 billion in
Treasuries hitting the market, even in light of banks holding a surplus
of cash at the Fed, currently around $1.4 trillion.
In light of these events, banks could have stepped in to alleviate
the volatility in those markets by lending some of the excess cash that
they hold at the Fed. So, why did they not do that?
Some have suggested that certain aspects of the Fed's supervision
and regulations imposed after the 2008 financial crisis may have
exacerbated this problem, specifically the treatment of cash versus
treasuries.
Although the Fed has taken some steps to address the issue in the
short-term by buying Treasuries and lending funds, it is important that
the Fed review the details of its current regulatory and supervisory
regime for potential long-term fixes.
Now quickly turning to guidance, Senators Tillis, Perdue, Rounds,
Cramer and I wrote to GAO in February asking for its legal opinion as
to whether three Federal Reserve Supervision and Regulation Letters
constitute a rule under the congressional Review Act (CRA).
In its October response, GAO concluded that two of the letters,
including one providing a new supervision framework for large financial
institutions and another related to recovery planning, are rules under
the CRA, and are required to be submitted to Congress for review.
During the Banking Committee's April hearing on this very issue, I
urged your agencies to follow the CRA and submit all rules to Congress,
even if they have not gone through a formal notice-and-comment
rulemaking to continue providing more clarity about the applicability
of guidance.
I encourage the Federal banking regulators to take a more
deliberate approach going forward, and take any necessary steps to
rectify informal guidance that has not been submitted to Congress.
In January 2019, the NCUA announced the portion of regulations that
would be reviewed as a part of the process through which the agency
reexamines all of its existing regulations every 3 years.
The comment period for that review process has since closed, and I
look forward to learning more about the regulatory recommendations
provided to the NCUA and its roadmap for actions going forward.
Finally, the Banking Committee has been exploring digital
currencies over the last few Congresses, especially in light of the
recent development of the Libra digital currency, started by Facebook.
In July, I asked Federal Reserve Chairman Powell about his
understanding of and the Fed's role in the project.
Although Chairman Powell noted that the Fed has set up a working
group to focus on Libra and is in contact with the other regulatory
agencies, he also said that ``There is not any one agency that can
stand up and have oversight over this.''
Given its scope, regulators across the globe continue to evaluate
Libra, its potential impact in the marketplace, and consider
appropriate and necessary regulatory responses.
It seems that digital currencies are inevitable, and the United
States needs to lead by providing clear rules of the road.
During this hearing, I look forward to learning more about the
status of addressing the overly broad covered funds definitions in the
Volcker Rule, especially with respect to long-term investments; how the
agencies are thinking through the recent turmoil in the repo market,
and what adjustments may be appropriate for a long-term fix; whether
the supervisory framework that applies to banks currently needs to be
updated to better reflect changes made in the tailoring rules; and how
the agencies are thinking about the Libra project, including what U.S.
regulatory framework merits consideration to balance innovation and
protect its users and privacy.
I thank each of you for your willingness to join the Committee
today to discuss your agencies' regulatory and supervisory activities,
and these important issues.
______
PREPARED STATEMENT OF SENATOR SHERROD BROWN
Thank you, Mr. Chairman. I want to start by noting that typically
when we have the financial regulators testify, the Comptroller of the
Currency is also here. Mr. Otting had a conflict today. He is expected
to announce changes to the Community Reinvestment Act shortly, changes
that the civil rights community and others are very concerned about. I
share those concerns, and I expect that we will have him up before this
Committee to talk about this proposal and other activities at the OCC
soon.
We all saw how Wall Street's financial schemes hurt regular people
when they blow up in bankers' faces, like they did in 2008.
You all saw the devastation of the crisis. Whether as a staffer in
the Senate, while serving at the agency you now lead, or at a private
equity firm after a stint at Treasury--you had a front row seat.
That's why I'm concerned about the collective amnesia you all
appear to have as you make changes to the bank rules--changes that
allow Wall Street to get back to its old tricks, and that I fear will
cost Americans their jobs, homes, and savings the next time complicated
bets blow up in bankers' faces.
But what is sometimes harder to see are the schemes that hurt
families and the economy even when they work exactly how Wall Street
intends.
Unfortunately, Ohio is the setting of one of these Wall Street
schemes. Twelve years ago, just before the financial crisis, a giant
private equity firm bought a nursing home company based in Toledo that
operated facilities nationwide.
Soon that nursing home company was being strangled by debt from
risky leveraged loans. It laid off hundreds of staff and let its
patients suffer under negligent, horrifying conditions.
According to the Washington Post, staffing cuts meant there weren't
enough nurses to respond to patients.
Health code violations rose dramatically.
In Pennsylvania, a patient broke her hip and crashed to the floor
when a staffer tried to do a two-person job and move her on his own.
Patients faced other living conditions that no human should have to
endure, waiting in soiled clothing and dirty beds for help that was
never going to come.
And all the while, that Wall Street private equity firm was
extracting more profits.
Last year, the nursing home company went bankrupt. But that didn't
stop the private equity firm from making huge profits on their
investment.
This is what happens when leveraged loans, collateralized loan
obligations, and leveraged buyouts work as designed. Wall Street
extracts all the profits out of the company, and the rest of us--
workers, patients, our families--we pay for it.
Today Wall Street is looking for profits anywhere it can find them,
and these schemes squeeze money out of every part of the economy--from
hospitals in Philadelphia, Pennsylvania, and Massillon, Ohio, to
manufactured home communities in Iowa and New Hampshire--not just
harming individual families, but entire communities.
Imagine how bad it will be if these complex financial transactions
blow up like the subprime mortgage ones did in 2008.
This is just one of so many challenges working families are facing.
We got a report this week showing that almost half of all American
workers are stuck in low-wage jobs. One-in-four families spend more
than half of their income on rent and utilities. Forty percent of
Americans are so short on cash they would be forced to borrow money to
cover a $400 expense.
More and more families have to borrow just to get by--credit card
debt, student loan debt, and mortgage debt--are all higher than before
the crisis. Wall Street squeezes more out of every paycheck, adding to
their billions.
If regular Americans are struggling 10 years into a so-called
recovery--when the stock market is booming--what will happen in a
recession?
This can't be how the financial system should work.
The regulators' job isn't to protect profits for big banks and big
corporations. It's to protect our economy and our financial system, and
the ordinary families that the system is supposed to serve.
I guess when the President says ``draining the swamp,'' he really
means betraying workers and giving Wall Street free rein to prey on
them and wring every last cent out of profit of our communities.
This President uses his phony populism--racism, antisemitism, anti-
immigrant slander--to divide us, to distract from all the ways he and
his hand-picked cronies have betrayed working families and left them
struggling.
That's not how a democracy should function, and I am deeply worried
that if you don't stand up for workers and families, so much in our
economy and our democracy is at risk.
Thank you, Mr. Chairman.
______
PREPARED STATEMENT OF RANDAL K. QUARLES
Vice Chair for Supervision
Board of Governors of the Federal Reserve System
December 5, 2019
Chairman Crapo, Ranking Member Brown, Members of the Committee,
thank you for the opportunity to appear today, alongside my colleagues
from the regulatory community. We join you on the cusp of a significant
and shared milestone: the full and faithful implementation of
Congress's efforts to improve financial regulation, in the form of the
Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA).\1\ Today, I will briefly review the steps we have taken
toward this milestone; share information on the state of the banking
system, from the report that accompanies my testimony; and discuss the
continuing need to ensure our regulatory framework is both coherent and
effective.\2\
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\1\ EGRRCPA, Pub. L. No. 115-174, 132 Stat. 1296 (2018).
\2\ Board of Governors of the Federal Reserve System, ``Supervision
and Regulation Report,'' November 26, 2019, https://
www.federalreserve.gov/publications/files/201911-supervision-and-
regulation-report.pdf.
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Roughly 18 months ago, Congress passed legislation to consolidate a
decade of work on financial reform, and to better tailor financial
regulation and supervision to the risks of the institutions being
regulated. The EGRRCPA was a specific, targeted response to the
conditions facing today's banking organizations and their customers. It
was also rooted, however, in longstanding congressional practice: of
reviewing the work done in the immediate aftermath of a crisis; of
addressing any gaps; and of ensuring that public and private resources
go toward their best, most efficient use. This approach informed the
Banking Acts of 1933 and 1935, on issues from shareholder liability to
deposit insurance.\3\ It informed the bills passed after the savings-
and-loan crisis, requiring ``prompt corrective action'' at struggling
firms and reducing the examination burden at strong ones.\4\ And it
continues to inform our efforts now, from the passage of the Dodd-Frank
Wall Street Reform and Consumer Protection Act to today.\5\
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\3\ See Gary Richardson, Alejandro Komai, and Michael Gou,
``Banking Act of 1935,'' Federal Reserve History (website), Federal
Reserve Bank of Richmond, November 22, 2013, https://
www.federalreservehistory.org/essays/banking-act-of-1935.
\4\ See Noelle Richards, ``Federal Deposit Insurance Corporation
Improvement Act of 1991,'' Federal Reserve History (website), Federal
Reserve Bank of Richmond, November 22, 2013, https://
www.federalreservehistory.org/essays/fdicia.
\5\ Dodd-Frank Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).
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The Board's latest Supervision and Regulation Report, which we
published last week, confirms the current health of the banking system.
It depicts a stable, healthy, and resilient banking sector,
with robust capital and liquidity positions.
It details stable loan performance and strong loan growth,
particularly among regional banks, whose share of overall bank
lending continues to grow.
It describes steady improvements in safety and soundness,
with a gradual decline in outstanding supervisory actions at
both the largest and smallest organizations.
And it identifies areas of continued supervisory focus,
including operational resiliency and cyber-related risks, which
are among our top priorities for the year to come.
The banking system is substantially better prepared to manage
unexpected shocks today than it was before the financial crisis. Now,
when the waters are relatively calm, is the right time to step back and
examine the efficiency and effectiveness of our protection against
future storms. With the EGRRCPA, Congress made a significant down
payment on that task. In less than 18 months after the Act's passage,
we implemented all of its major provisions.
Earlier this year, we completed a cornerstone of the legislation to
tailor our rules for regional banks, which was entirely consistent with
a principle at the heart of our existing work: firms that pose greater
risks should meet higher standards and receive more scrutiny. Our
previous framework relied heavily on a firm's total assets as a proxy
for these risks and for the costs the financial system would incur if a
firm failed. This simple asset proxy was clear and critical, rough and
ready, but neither risk-sensitive nor complete. Our new rules employ a
broader set of indicators, like short-term wholesale funding and off-
balance-sheet exposures, to assess the need for greater supervisory
scrutiny.\6\ They maintain the most stringent requirements and
strictest oversight for the largest, most complex organizations--the
collapse of which would do the most harm.
---------------------------------------------------------------------------
\6\ Board of Governors of the Federal Reserve System, ``Federal
Reserve Board Finalizes Rules That Tailor Its Regulations for Domestic
and Foreign Banks to More Closely Match Their Risk Profiles; news
release, October 10, 2019, https://www.federalreserve.gov/newsevents/
press
releases/bcreg20191010a.htm.
---------------------------------------------------------------------------
We and our interagency colleagues also have worked on a range of
measures addressed to smaller banks, with particular attention to
better capturing and reflecting the characteristics of the community
bank business model. These include elements of last year's legislation,
and other steps we have taken in the same spirit, intended to help
community banking organizations survive and thrive:
We adjusted the scope of our supervisory assessments, our
stress-testing requirements, our appraisal regulations, and the
Volcker rule--all aimed at the activities of large, complex
institutions, not small local banks.\7\
---------------------------------------------------------------------------
\7\ Board of Governors of the Federal Reserve System, Federal
Deposit Insurance Corporation, and Office of the Comptroller of the
Currency, ``Agencies Issue Final Rule to Exempt Residential Real Estate
Transactions of $400,000 or Less from Appraisal Requirements,'' news
release, September 27, 2019, https://www.federalreserve.gov/newsevents/
pressreleases/bcreg20190927
a.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 Finalize Changes to Simplify Volcker Rule,''
news release, October 8, 2019, https://www.federalreserve.gov/
newsevents/pressreleases/bcreg2019
1008a.htm; Board of Governors of the Federal Reserve System, ``Federal
Reserve Board Finalizes Rules That Tailor Its Regulations for Domestic
and Foreign Banks to More Closely Match Their Risk Profiles,'' news
release, October 10, 2019, https://www.federalreserve.gov/news
events/pressreleases/bcreg20191010a.htm; Board of Governors of the
Federal Reserve System, ``Federal Reserve Board Invites Public Comment
on Proposal That Would Modify Company-Run Stress Testing Requirements
to Conform with Economic Growth, Regulatory Relief, and Consumer
Protection Act,''news release, January 8, 2019, https://
www.federalreserve.gov/news
events/pressreleases/bcreg20190108a.htm; and Board of Governors of the
Federal Reserve System, ``Federal Reserve Board Issues Statement
Describing How, Consistent with Recently Enacted EGRRCPA, the Board
Will No Longer Subject Primarily Smaller, Less Complex Banking
Organizations to Certain Board Regulations,'' news release, July 6,
2018, https://www.fed
eralreserve.gov/newsevents/pressreleases/bcreg20180706b.htm.
We clarified our capital treatment of commercial real
estate loans, which are central to the credit books of many
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community banks.
We detailed our approach to anti-money-laundering exams,
and our goal of prioritizing high-risk activities over routine
matters.\8\
\8\ Board of Governors of the Federal Reserve System, Federal
Deposit Insurance Corporation, and Office of the Comptroller of the
Currency, ``Agencies Propose Rule Regarding the Treatment of High
Volatility Commercial Real Estate,'' news release, September 18, 2018,
https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20180918a.htm; and 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 Bank Regulatory Agencies
and FinCEN Improve Transparency of Risk-Focused BSA/AML Supervision,''
news release, July 22, 2019, https://www.federalreserve.gov/newsevents/
pressreleases/bcreg20190722a.htm.
We expanded eligibility for our small bank holding company
policy statement, opening the door to simpler funding
requirements for a broader range of small banking firms.\9\ We
also increased the scope of banks eligible for longer
examination cycles.\10\
---------------------------------------------------------------------------
\9\ 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.
\10\ 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/bcreg20181221c.htm.
We revised a management-interlock rule for the first time
since 1996, removing a governance barrier for more small banks
and their holding companies.\11\
---------------------------------------------------------------------------
\11\ Board of Governors of the Federal Reserve System, Federal
Deposit Insurance Corporation, and Office of the Comptroller of the
Currency, ``Agencies Issue Final Rule to Update Management Interlock
Rules,'' news release, October 2, 2019, https://www.federalreserve.gov/
newsevents/pressreleases/bcreg20191002a.htm.
We made our short-form call report shorter, removing items
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that were often ancillary to filers' core lending activities.
And we finalized a new community bank leverage ratio,
giving small, strong banking organizations a much simpler way
to meet their capital requirements.\12\
---------------------------------------------------------------------------
\12\ Board of Governors of the Federal Reserve System, Federal
Deposit Insurance Corporation, and Office of the Comptroller of the
Currency, ``Federal Bank Regulatory Agencies Issue Final Rule to
Simplify Capital Calculation for Community Banks,'' news release,
October 29, 2019, https://www.federalreserve.gov/newsevents/
pressreleases/bcreg20191029a.htm.
Our goal, through this period of intense regulatory activity, has
been to faithfully implement Congress's instructions. However, those
instructions also speak to a broader need, and one central to our
ongoing work: to ensure our regulatory regime is not only simple,
efficient, and transparent, but also coherent and effective.\13\
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\13\ Randal K. Quarles, ``Early Observations on Improving the
Effectiveness of Post-Crisis Regulation'' (speech at the American Bar
Association Banking Law Committee Annual Meeting, Washington, DC,
January 19, 2018), https://www.federalreserve.gov/newsevents/speech/
quarles20180119a.htm.
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Financial regulation, like any area of policy, is a product of
history. Each component dates from a particular time and place, and it
was designed, debated, and enacted to address a particular set of
needs. No rule can be truly evergreen; gaps and areas for improvement
will always reveal themselves over time. Our responsibility--among the
most challenging and essential we have--is to address those gaps
without creating new ones; to understand fully the interaction among
regulations; to reduce complexity where possible, before it becomes its
own source of risk; and to ensure our entire rulebook supports the
safety, stability, and strength of the financial system.
Looking ahead, my colleagues and I are paying particular attention
to coherence in our capital regime. We are reviewing public input into
proposed changes to the stress capital buffer, which would simplify our
regime by integrating our stress-test and point-in-time capital
requirements and maintain our current strong levels of capital.\14\ As
we move forward, we also understand the need to thoughtfully finalize
implementation of Basel III, in a way that preserves aggregate capital
and liquidity levels at large banking organizations, avoids additional
burden at smaller ones, and upholds our standards for transparency and
due process.
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\14\ Randal K. Quarles, ``Refining the Stress Capital Buffer''
(speech at the Program on International Financial Systems Conference,
Frankfurt, Germany, September 5, 2019), https://www.federalreserve.gov/
newsevents/speech/quarles20190905a.htm; and Randal K. Quarles, ``Stress
Testing: A Decade of Continuity and Change'' (speech at the ``Stress
Testing: A Discussion and Review'' research conference sponsored by the
Federal Reserve Bank of Boston, July 9, 2019), https://
www.federalreserve.gov/newsevents/speech/quarles20190709a.htm.
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We also understand the need to ensure a smooth transition away from
LIBOR, and other legacy benchmark rates, so institutions can manage
risks comprehensively and effectively.\15\ And we understand the need
for clear, consistent supervisory communication on these and other
matters, which invites dialogue, reflects and reinforces our
regulations and laws, and gives banks necessary transparency into
supervisory views on safety and soundness.\16\
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\15\ Randal K. Quarles, ``The Next Stage in the LIBOR Transition''
(speech at the Alternative Reference Rates Committee Roundtable,
cohosted by the Alternative Reference Rates Committee and the New York
University Stern School of Business and Its Salomon Center for the
Study of Financial Institutions, New York, June 3, 2019), https://
www.federalreserve.gov/newsevents/speech/quarles20190603a.htm.
\16\ Randal K. Quarles, ``Law and Macroeconomics: The Global
Evolution of Macroprudential Regulation'' (speech at the ``Law and
Macroeconomics'' conference at Georgetown University Law Center,
Washington, DC, September 27, 2019), https://www.federalreserve.gov/
newsevents/speech/quarles20190927a.htm.
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We also understand the need to thoughtfully address new financial
products and technologies. Innovation has the potential to improve
access to financial services, lower costs, and support the competitive
health of the banking sector. Its promise, however, inevitably comes
with risk--and as the financial crisis showed, risks that lie outside
the banking system can have consequences within it. Our approach to
innovation should be both open and careful, engaging thoughtfully with
both the public and private sectors, to understand the benefits and
costs that such fundamental changes can bring.
Finally, we understand the need for coherence across borders. Over
the last decade, working with supervisors around the world, we have
built a common understanding of the crisis, its causes, and its
consequences. Now, as the full set of post-crisis reforms comes into
effect, we should renew our focus on assessing their implementation and
their overall impact. The financial system is truly global, and the
structures and incentives that govern it are critical to its stability
and resilience.\17\ The regulatory community has started significant
work to examine those structures and incentives as a whole, from their
effect on ``too-big-to-fail'' subsidies to their impact on market
fragmentation.\18\ We are participating actively in that work, as a way
to ensure the global financial system supports, rather than inhibits,
American growth.
---------------------------------------------------------------------------
\17\ Randal K. Quarles, ``Government of Union: Achieving Certainty
in Cross-Border Finance'' (speech at the Financial Stability Board
Workshop on Pre-Positioning, Ring-Fencing, and Market Fragmentation,
Philadelphia, September 26, 2019), https://www.federalreserve.gov/
newsevents/speech/quarles201909?6a.htm.
\18\ Randal K. Quarles, ``The Financial Stability Board at 10
Years--Looking Back and Looking Ahead'' (speech at the European Banking
Federation's European Banking Summit, Brussels, Belgium, October 3,
2019), https://www.federalreserve.gov/newsevents/speech/quarles2019
1003a.htm; see also, Financial Stability Board, ``FSB Launches
Evaluation of Too-Big-to-Fail Reforms and Invites Feedback from
Stakeholders,'' news release, May 23, 2019, https://www.fsb.org/2019/
05/fsb-launches-evaluation-of-too-big-to-fail-reforms-and-invites-
feedback-from-stakeholders/; and Financial Stability Board, ``FSB
Publishes Report on Market Fragmentation,'' news release, June 4, 2019,
https://www.fsb.org/2019/06/fsb-publishes-report-on-market-
fragmentation/.
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I appreciate the chance to discuss this work with you, and I look
forward to answering your questions. Thank you.
______
PREPARED STATEMENT OF JELENA McWILLIAMS
Chairman, Federal Deposit Insurance Corporation
December 5, 2019
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
thank you for the opportunity to testify before the Senate Committee on
Banking, Housing, and Urban Affairs.
Exactly 18 months ago, I began serving as the 21st Chairman of the
Federal Deposit Insurance Corporation (FDIC). During this period, the
FDIC has undertaken a significant amount of work with a particular
emphasis on three overarching goals:
Strengthening the banking system as it continues to evolve;
Ensuring that FDIC-supervised institutions can meet the
needs of consumers and businesses; and
Fostering technology solutions and encouraging innovation
at community banks and the FDIC.
The FDIC has made significant progress in each of these areas, and I
appreciate the opportunity to share with the Committee how we will
continue to move each of them forward.
I. State of the U.S. Banking Industry
Before discussing the FDIC's work to strengthen the banking system,
I would like to begin by providing context regarding the current state
of the industry.
The U.S. banking industry has enjoyed an extended period of
positive economic growth. In July, the economic expansion became the
longest on record in the United States. By nearly every metric--net
income, net interest margin, net operating revenue, loan growth, asset
quality, loan loss reserves, capital levels, and the number of
``problem banks''--the banking industry is strong and well-positioned
to continue supporting the U.S. economy.
With respect to profitability, banks of all sizes are performing
well. In the third quarter of 2019, the 5,256 FDIC-insured banks and
savings institutions reported net income of $57.4 billion.\1\ Nearly 62
percent of institutions reported annual increases in net income, and
only about 4 percent of institutions were unprofitable. Notably,
community banks reported net income of $6.9 billion, an increase of 7.2
percent from a year earlier. Net interest margin also remained stable,
with an average of 3.35 percent across the industry and a particularly
strong average of 3.69 percent among community banks. Finally, net
operating revenue totaled over $208 billion, an increase of 2.2 percent
from a year earlier.
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\1\ See FDIC Quarterly Banking Profile, Third Quarter 2019,
available at https://www.
fdic.gov/bank/analytical/qbp/2019sep/qbp.pdf. Unless otherwise
indicated, all statistics are derived from this report as of the third
quarter of 2019.
---------------------------------------------------------------------------
Key balance sheet indicators are similarly robust. Total loan
balances increased by 4.6 percent, up from the 4.5 percent growth rate
reported the previous quarter. Again, community banks performed
particularly well in this area, with an annual rate of loan growth that
was stronger than the overall industry. Asset quality also remained
strong, as the rate of noncurrent loans (i.e., loans that are 90 days
or more past due) declined to 0.92 percent. Finally, the industry's
capacity to absorb credit losses improved from a year earlier, as the
reserve coverage ratio (i.e., loan-loss reserves relative to total
noncurrent loan balances) rose to 131 percent.
Although the current interest rate environment may result in new
challenges for banks in lending and funding, the industry is well-
positioned to remain resilient throughout the economic cycle,
principally as a result of greater and higher-quality equity capital.
Equity capital across the industry rose to $2.1 trillion, up $3.5
billion from the previous quarter. This capital increase translated to
an aggregate common equity tier 1 capital ratio of 13.25 percent.
The number of institutions on the FDIC's ``Problem Bank List''
declined from 56 to 55, the lowest number since the first quarter of
2007, and four new banks opened during the third quarter for a total of
10 new banks in 2019.
Four banks failed during 2019--the first failures since December
2017. It is important to recognize that, even in a healthy economy,
some banks will inevitably fail. The economic expansion we have
experienced resulted in an anomalous stretch in which there were zero
bank failures. This expansion and consequent absence of failures cannot
endure forever. It is normal--and indeed expected--for some banks to
fail, and our job at the FDIC is to protect depositors and ensure that
banks can fail in an orderly manner.
The key to the FDIC's ability to protect depositors is the
administration of the Deposit Insurance Fund (DIF), which increased to
a record $108.9 billion in the third quarter.\2\ The DIF's reserve
ratio (i.e., the fund balance as a percent of estimated insured
deposits) increased to 1.41 percent, the highest level since 1999.
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\2\ See FDIC Deposit Insurance Fund Trends, Third Quarter 2019,
available at https://www.fdic.gov/bank/analytical/qbp/2019sep/
qbpdep.html.
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In 2010, Congress instituted the DIF Restoration Plan, which
required the FDIC to raise the DIF minimum reserve ratio from 1.15
percent to 1.35 percent by September 30, 2020. Although we continue to
work toward our 2 percent target, the FDIC has met the statutory
requirement and formally exited the DIF Restoration Plan. Accordingly,
we have awarded $764.4 million in credits to banks with less than $10
billion in assets for the portion of their assessments that contributed
to the increase.\3\
---------------------------------------------------------------------------
\3\ Id.
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In addition, the FDIC recently proposed a rule \4\ that would amend
our deposit insurance assessment regulations to continue to apply small
bank credits as long as the DIF remains at least 1.35 percent rather
than the current 1.38 percent. This proposal seeks to make the
application of small bank credits to quarterly assessments more stable
and predictable for smaller institutions and simplify the FDIC's
administration of these credits without impairing our ability to
maintain the required minimum reserve ratio of 1.35 percent.
---------------------------------------------------------------------------
\4\ See Assessments, 84 Fed. Reg. 45443 (Aug. 29, 2019), available
at https://www.govinfo.gov/content/pkg/FR-2019-08-29/pdf/2019-
18257.pdf.
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The FDIC will continue to manage the DIF prudently and responsibly
in pursuit of our statutory mission to maintain stability and public
confidence in the Nation's financial system.
II. Strengthening the Banking System
While the state of the banking system remains strong, the FDIC is
not standing idly by. We continue to monitor changes in the industry
and work to further strengthen the banking system by:
Modernizing our approach to supervision and increasing
transparency;
Tailoring regulations;
Enhancing resolution preparedness;
Assessing new and emerging risks; and
Creating the workforce of the future.
I will address each of these efforts in turn.
A. Modernizing Supervision and Increasing Transparency
As the primary supervisor of the majority of the Nation's small and
medium-size banks, the FDIC oversees a segment of the banking system
that plays a vital role in communities across the country.\5\ Through
our back-up examination authority, the FDIC also has the ability to
examine the Nation's largest banks.
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\5\ As of September 30, 2019, the FDIC insures the deposits of
5,256 institutions and acts as the primary supervisor of 3,384 State-
chartered institutions that are not members of the Federal Reserve
System.
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Having worked both as a regulator and at a regulated entity before
arriving at the FDIC, I have spent a great deal of time thinking about
effective supervision and examination. Our supervisory approach should
achieve the following objectives: (1) ensure that institutions are safe
and sound; (2) provide clear rules of the road; (3) be consistent in
its application; (4) be fair, effective, and holistic in the
consideration of regulatory issues; (5) be timely and contemporary in
providing feedback; (6) respect the business judgment of an
institution's management team; and (7) promote an open, two-way
dialogue between the regulated and the regulators.
In furtherance of these objectives, the FDIC has undertaken a
number of reforms to modernize our approach to supervision and increase
the transparency of our programs.
1. CAMELS Ratings
The FDIC and the Federal Reserve Board (FRB) recently issued a
notice and request for comment on the consistency of ratings assigned
under the Uniform Financial Institutions Rating System (UFIRS),
commonly known as CAMELS ratings because of the six evaluation
components (i.e., Capital, Asset Quality, Management, Earnings,
Liquidity, and Sensitivity to Market Risk).\6\ This system, which was
established in 1979, is critical to our supervisory efforts. Despite
vast changes in technology, industry practices, and regulatory
standards, the system has not been materially updated in nearly 25
years. We are seeking feedback on how CAMELS ratings are assigned to
supervised institutions and the implications of such ratings in the
application and enforcement action processes. This request is
consistent with our commitment to increase transparency, improve
efficiency, support innovation, and provide opportunities for public
feedback. We look forward to receiving public comments and engaging
further with stakeholders and the other banking agencies on this
effort.
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\6\ See Request for Information on Application of the Uniform
Financial Institutions Rating System, 84 Fed. Reg. 58383 (Oct. 31,
2019), available at https://www.govinfo.gov/content/pkg/FR-2019-10-31/
pdf/2019-23739.pdf.
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2. ``Trust through Transparency''
With the goal of increasing the transparency of our supervisory
programs, my first major initiative as Chairman was ``Trust through
Transparency,'' which builds upon the agency's solid foundation of
public trust and accountability by fostering a deeper culture of
openness. As part of this initiative, we launched a new public section
of our website where we publish FDIC performance metrics, including
turnaround times for examinations and bank charter applications, call
center usage and response times, and data on the status of supervisory
and assessment appeals.\7\
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\7\ See FDIC Transparency & Accountability, available at https://
www.fdic.gov/transparency.
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This program is not just about publishing more information.
Instead, we are using the heightened public scrutiny of our work to
hold ourselves publicly accountable to high standards, and our effort
is already yielding positive results.
3. Supervision Modernization
As part of our efforts to modernize supervision, FDIC examination
teams are leveraging technology to reduce the amount of time they spend
onsite at supervised institutions. This reduces the compliance burden
for institutions--especially community banks--without sacrificing the
quality of our supervision.
As a result, our examination turnaround time (i.e., the time from
when field work begins to when the examination report is sent to the
bank) has significantly improved. During the 12 months ended September
30, 2019, more than 87 percent of safety and soundness examinations
were conducted within our 75-day goal and more than 96 percent of
consumer compliance and Community Reinvestment Act (CRA) examinations
were conducted within our 120-day goal. Similarly, examination report
processing time (i.e., the time from when field work is complete to
when the report is sent to the bank) has improved, with more than 92
percent of safety and soundness reports and more than 98 percent of
consumer compliance and CRA reports processed within our 45-day goal.
We recently established a new Subcommittee on Supervision
Modernization--which reports to our Community Bank Advisory Committee
(CBAC)--to make recommendations for improving our supervisory
activities. The Subcommittee, which is comprised of 15 bankers,
technologists, former regulators, and legal experts, is tasked with
considering how the FDIC can further leverage technology and refine its
processes to improve the efficiency of the examination program, while
managing and training a geographically dispersed workforce.
4. De Novo Application Process
Another key focus of our supervisory modernization effort has been
the de novo application process. De novo banks are an important source
of new capital, talent, and ideas, and many offer products and services
to underserved communities and fill gaps in overlooked markets. The
need for these institutions is underscored by the uneven distribution
of banking offices across the country. As of June 30, 2019, 620
counties--or 20 percent of the counties across the Nation--were served
only by community banking offices, 127 counties had only one banking
office, and 33 counties had no banking offices at all.\8\
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\8\ See FDIC Summary of Deposits, available at https://
www7.fdic.gov/SOD.
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In the decade immediately following the financial crisis, very few
new banks opened due to the challenging economic environment and
regulatory constraints. During my first year as Chairman, the FDIC
emphasized the need for greater de novo activity, and the FDIC has
taken several actions to support this objective, including:
Revising our process for reviewing deposit insurance
proposals to provide initial feedback to organizers on draft
applications prior to submission;\9\
---------------------------------------------------------------------------
\9\ See FDIC FIL-82-2018, Review Process for Draft Deposit
Insurance Proposals (Dec. 6, 2018), available at https://www.fdic.gov/
news/news/financial/2018/fil18082.html.
Updating two manuals related to the deposit insurance
application process;\10\
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\10\ See FDIC FIL-83-2018, FDIC Issues an Update to its Publication
Entitled Applying for Deposit Insurance--A Handbook for Organizers of
De Novo Institutions, Finalizes its Deposit Insurance Applications
Procedures Manual, and Establishes a Designated Applications Mailbox
(Dec. 6, 2018), available at https://www.fdic.gov/news/news/financial/
2018/fil18083.html.
Issuing a request for information to solicit additional
ideas for improvement;\11\ and
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\11\ See Request for Information on the FDIC's Deposit Insurance
Application Process, 83 Fed. Reg. 63868 (Dec. 12, 2018), available at
https://www.govinfo.gov/content/pkg/FR-2018-12-12/pdf/2018-26811.pdf.
Engaging with stakeholders at seven roundtables across the
---------------------------------------------------------------------------
country.
Results we have seen thus far are encouraging. Organizers have
expressed renewed interest in de novo charters, and we approved 14 de
novo banks in 2018--more than the total number of approvals in the
eight previous years combined.\12\ This momentum has continued
throughout 2019, and we have approved eight de novo banks thus far.
---------------------------------------------------------------------------
\12\ See FDIC Decisions on Bank Applications, available at https://
www.fdic.gov/regulations/laws/bankdecisions/depins/index.html.
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5. Interagency Statement on Alternative Data
Earlier this week, the FDIC, FRB, Office of the Comptroller of the
Currency (OCC), Consumer Financial Protection Bureau (CFPB), and
National Credit Union Administration (NCUA) jointly issued a statement
\13\ encouraging the responsible use of alternative data (i.e., data
not typically found in the consumer's credit files of the nationwide
consumer reporting agencies or customarily provided as part of
applications for credit) for use in credit underwriting.
---------------------------------------------------------------------------
\13\ See Federal Regulators issue joint statement on the use of
alternative data in credit underwriting (Dec. 3, 2019), available at
https://www.fdic.gov/news/news/press/2019/pr19117.html.
---------------------------------------------------------------------------
The agencies recognize that the use of alternative data may improve
the speed and accuracy of credit decisions and may help firms evaluate
the creditworthiness of consumers who currently may not obtain credit
in the mainstream credit system. The statement also emphasizes that, if
firms choose to use alternative data, they must comply with applicable
consumer protection laws, including fair lending laws and the Fair
Credit Reporting Act.
6. Federal Interest Rate Authority
Our push for modernization is not limited to supervision and
examination programs, but also includes work to provide clarity on key
legal issues. One specific example of this approach is an ongoing
effort to address marketplace uncertainty regarding the enforceability
of the interest rate terms of loan agreements following a bank's
assignment of a loan to a nonbank. In 2015, the United States Court of
Appeals for the Second Circuit issued a decision \14\ that called into
question such enforceability by holding that 12 U.S.C. Sec. 85--which
authorizes national banks to charge interest at the rate permitted by
the law of the State in which the bank is located, regardless of other
States' interest rate restrictions--does not apply following assignment
of a loan to a nonbank. Although this decision concerned a loan made by
a national bank, the statutory provision governing State banks'
authority with respect to interest rates is patterned after and
interpreted in the same manner.\15\
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\14\ See Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir.
2015), cert. denied, 136 S. Ct. 2505 (2016).
\15\ 12 U.S.C. Sec. 1831d.
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Last month, we proposed a rule \16\ that would clarify the law
governing the interest rates State banks may charge. Among other
things, the proposal would provide that whether interest on a loan is
permissible under section 27 of the Federal Deposit Insurance Act (FDI
Act) would be determined at the time the loan is made, and interest on
a loan permissible under section 27 would not be affected by subsequent
events, such as a change in State law, a change in the relevant
commercial paper rate, or the sale, assignment, or other transfer of
the loan.
---------------------------------------------------------------------------
\16\ See FDIC Proposes New Rule Clarifying Federal Interest Rate
Authority (Nov. 19, 2019), available at https://www.fdic.gov/news/news/
press/2019/pr19107.html.
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7. Cooperation with State Regulators
In an effort to facilitate and increase dialogue between the FDIC
and our State regulatory partners on a host of important regulatory
issues, the FDIC approved the establishment of a new Advisory Committee
of State Regulators (ACSR).\17\ The committee will allow the FDIC and
State regulators to discuss a variety of current and emerging issues
that have potential implications for the regulation and supervision of
State-chartered financial institutions. Once fully established, ACSR
will facilitate discussions of: safety and soundness and consumer
protection issues; the creation of new banks; the protection of our
Nation's financial system from risks such as cyberattacks or money
laundering; and other timely issues.
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\17\ See FDIC Board Approves Establishment of Advisory Committee of
State Regulators (Nov. 19, 2019), available at https://www.fdic.gov/
news/news/press/2019/pr19105.html.
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B. Tailoring Regulations
As we continue to think about ways to strengthen the banking
system, the appropriate calibration of our regulatory framework remains
a top priority. Given the wide range of risk profiles across banking
organizations, it is critical that regulators continuously evaluate
whether our rules are being applied properly and not imposing
unnecessary regulatory burdens that might impede safe and sound banking
activities. As such, the FDIC has taken numerous actions to tailor our
regulatory framework while maintaining safety and soundness, financial
stability, and consumer protection.
1. Enhanced Prudential Standards
In May 2018, Congress enacted the Economic Growth, Regulatory
Relief, and Consumer Protection Act (EGRRCPA),\18\ which set forth
specific legislative instructions for regulatory tailoring, including
by raising the statutory asset threshold for the application of
enhanced prudential standards to $250 billion (while giving the FRB the
discretion to apply such standards to firms with assets between $100
billion and $250 billion). Last month, the FDIC, FRB, and OCC finalized
a rule that implements a key part of EGRRCPA by establishing four risk-
based categories for determining capital and liquidity
requirements.\19\ Under the rule, requirements for Category I firms
(i.e., U.S. global systemically important banks, or G-SIBs) are
unchanged, and these institutions remain subject to the most stringent
standards. Requirements for Category II, Category III, and Category IV
firms (i.e., all other banking organizations with greater than $100
billion in assets) are tiered based on each bank's risk profile.
---------------------------------------------------------------------------
\18\ Pub. L. 115-174 (May 24, 2018), available at https://
www.govinfo.gov/content/pkg/PLAW-115publ174/pdf/PLAW-115publ174.pdf.
\19\ See Changes to Applicability Thresholders for Regulatory
Capital and Liquidity Requirements, 84 Fed. Reg. 59230 (Nov. 1, 2019),
available at https://www.govinfo.gov/content/pkg/FR-2019-11-01/pdf/
2019-23800.pdf.
---------------------------------------------------------------------------
Beyond the tailoring rule, the FDIC has completed all of its
EGRRCPA-mandated rules. Appendix A to this testimony contains a full
list of these rules.
2. Company-Run Stress Testing
Just as EGRRCPA raised the asset threshold for the application of
enhanced prudential standards from $50 billion to $250 billion, it
raised the asset threshold for company-run stress testing requirements
from $10 billion to $250 billion. We recently finalized a rule \20\ to
reflect this statutory change. We are also working on amendments to our
interagency stress testing guidance \21\ that would further tailor
supervisory expectations. Specifically, we are considering raising the
asset threshold under the guidance to $100 billion in assets, among
other potential changes.
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\20\ See Company-Run Stress Testing Requirements for FDIC-
Supervised State Nonmember Banks and State Savings Associations, 84
Fed. Reg. 56929 (Oct. 24, 2019), available at https://www.govinfo.gov/
content/pkg/FR-2019-10-24/pdf/2019-23036.pdf.
\21\ See Supervisory Guidance on Stress Testing for Banking
Organizations With More Than $10 Billion in Total Consolidated Assets,
77 Fed. Reg. 29458 (May 17, 2012), available at https://
www.govinfo.gov/content/pkg/FR-2012-05-17/pdf/2012-11989.pdf.
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3. Resolution Planning
In 2011, the FDIC and FRB finalized a rule \22\ establishing new
resolution planning requirements. Over the past 8 years, large firms
have improved their resolution strategies and governance, refined their
estimates of liquidity and capital needs in resolution, and simplified
their legal structures. Consistent with the new statutory asset
threshold under EGRRCPA and the agencies' experience with resolution
planning, the FDIC and FRB recently issued a final rule \23\ to improve
the efficiency and effectiveness of the process and exempt smaller
regional banks from the requirements. Under the rule, our underlying
standards for reviewing resolution plans will not change. With respect
to timing, the rule formalizes the agencies' existing practice of
requiring U.S. G-SIBs to submit resolution plans every 2 years and
requiring other filers to submit plans every 3 years. The rule also
introduces a new ``targeted resolution plan'' that will allow filers to
submit a subset of information required by a full resolution plan. Such
targeted plans will be submitted every other cycle.
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\22\ See Resolution Plans Required, 76 Fed. Reg. 67323 (Nov. 1,
2011), available at https://www.govinfo.gov/content/pkg/FR-2011-11-01/
pdf/2011-27377.pdf.
\23\ See Resolution Plans Required, 84 Fed. Reg. 59194 (Nov. 1,
2019), available at https://www.govinfo.gov/content/pkg/FR-2019-11-01/
pdf/2019-23967.pdf.
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4. Incentive-Based Compensation
In June 2010--a month prior to the enactment of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (Dodd-Frank Act)\24\--the
FDIC, FRB, and OCC issued guidance \25\ to help ensure that incentive
compensation policies at banking organizations do not encourage
imprudent risk-taking and are consistent with the safety and soundness
of the organization. In connection with the guidance, then-FRB Governor
Daniel Tarullo noted that many large banking organizations had
already implemented certain changes in their incentive compensation
policies.\26\ Section 956 of the Dodd-Frank Act subsequently directed
the FDIC, FRB, OCC, NCUA, Securities and Exchange Commission (SEC), and
Commodity Futures Trading Commission (CFTC) to jointly prescribe,
within 9 months of the enactment of the law, regulations or guidelines
that prohibit any types of incentive-based pay arrangement that
encourages inappropriate risks, based on the standards established in
the FDI Act.\27\ Proposals to implement this statute were issued in
2011 \28\ and 2016,\29\ but neither was finalized. Although the banking
agencies' 2010 guidance remains fully intact--and firms have made
further changes to their incentive compensation policies following this
guidance--the agencies continue to engage in discussions regarding how
best to implement the statute.
---------------------------------------------------------------------------
\24\ Pub. L. 111-203 (July 21, 2010), available at https://
www.govinfo.gov/content/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf.
\25\ See Guidance on Sound Incentive Compensation Policies, 75 Fed.
Reg. 36395 (June 25, 2010), available at https://www.govinfo.gov/
content/pkg/FR-2010-06-25/pdf/2010-15435.pdf.
\26\ See Federal Reserve, OCC, OTS, FDIC Issue Final Guidance on
Incentive Compensation (June 21, 2010), available at https://
www.federalreserve.gov/newsevents/pressreleases/bcreg20100621a.htm.
\27\ Section 956(c) of the Dodd-Frank Act specifically requires the
regulators to ``take into consideration standards described in section
39(c) of the FDI Act'' (12 U.S.C. 2 1831p-1 and 12 U.S.C. 1831p-9
1(c)).in establishing standards.
\28\ See Incentive-Based Compensation Arrangements, 76 Fed. Reg.
21170 (Apr. 14, 2011), available at https://www.govinfo.gov/content/
pkg/FR-2011-04-14/pdf/2011-7937.pdf.
\29\ See Incentive-Based Compensation Arrangements, 81 Fed. Reg.
37670 (June 10, 2016), available at https://www.govinfo.gov/content/
pkg/FR-2016-06-10/pdf/2016-11788.pdf.
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5. Volcker Rule
One of the most challenging post-crisis reforms for regulators and
institutions to implement has been the Volcker Rule, which restricts
banks from engaging in proprietary trading and from owning hedge funds
and private equity funds. As written and originally implemented, the
rule was so complex that it required regulators to issue 21 responses
to frequently asked questions (FAQs) within 3 years of its adoption.
This complexity has resulted in uncertainty and unnecessary burden,
especially for smaller, less-complex institutions.
To address some of these concerns, EGRRCPA exempted from the
Volcker Rule all banks below $10 billion in consolidated assets that do
not engage in significant trading activity. Earlier this year, the five
agencies responsible for implementing the Volcker Rule finalized a rule
\30\ to codify this exemption.
---------------------------------------------------------------------------
\30\ See Revisions to Prohibitions and Restrictions on Proprietary
Trading and Certain Interests In, and Relationships With, Hedge Funds
and Private Equity Funds, 84 Fed. Reg. 35008 (July 22, 2019), available
at https://www.govinfo.gov/content/pkg/FR-2019-07-22/pdf/2019-
15019.pdf.
---------------------------------------------------------------------------
In addition, the agencies issued a larger set of revisions \31\ to
the Volcker Rule--sometimes referred to as ``Volcker 2.0''--that tailor
the rule's compliance requirements by establishing three tiers of
banking entities based on level of trading activity for purposes of
applying compliance requirements: (1) significant trading assets and
liabilities, (2) moderate trading assets and liabilities, and (3)
limited trading assets and liabilities.
---------------------------------------------------------------------------
\31\ See Prohibitions and Restrictions on Proprietary Trading and
Certain Interests in, and Relationships With, Hedge Funds and Private
Equity Funds, 84 Fed. Reg. 61974 (Nov. 14, 2019), available at https://
www.govinfo.gov/content/pkg/FR-2019-11-14/pdf/2019-22695.pdf.
---------------------------------------------------------------------------
Banking entities with significant trading assets and liabilities,
which hold approximately 93 percent of total trading assets and
liabilities across the U.S. banking system, will continue to be subject
to the most stringent compliance standards. The revisions also provide
greater clarity, certainty, and objectivity about what activities are
prohibited under the Volcker Rule. These changes, which apply
specifically to the Volcker Rule's proprietary trading prohibition,
will improve compliance with the rule and reduce unnecessary burdens
while maintaining the statutory prohibition on proprietary trading by
covered banking entities.
Additionally, the agencies are currently working on a forthcoming
proposal to address the overly broad restrictions associated with
covered funds, which the agencies plan to issue for comment as soon as
possible.
6. Appraisals
Last year, the FDIC, FRB, and OCC finalized a rule \32\ that raised
the appraisal threshold for federally related commercial real estate
transactions from $250,000--the threshold established in 1994--to
$500,000. Earlier this year, the agencies
finalized a related rule \33\ that raised the appraisal threshold for
federally related residential real estate transactions from $250,000--
also the threshold established
in 1994--to $400,000. These 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.
---------------------------------------------------------------------------
\32\ See Real Estate Appraisals, 83 Fed. Reg. 15019 (Apr. 9, 2018),
available at https://www.govinfo.gov/content/pkg/FR-2018-04-09/pdf/
2018-06960.pdf.
\33\ See Real Estate Appraisals, 84 Fed. Reg. 53579 (Oct. 8, 2019),
available at https://www.govinfo.gov/content/pkg/FR-2019-10-08/pdf/
2019-21376.pdf.
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C. Enhancing Resolution Preparedness
In addition to supervising small and medium-sized banks and
appropriately tailoring regulations for banks of all sizes, one of the
FDIC's most important responsibilities for strengthening the banking
system is ensuring that, in the event of financial distress, large and
complex banks are resolvable in a rapid and orderly manner under the
Bankruptcy Code. In furtherance of this critical goal, we have taken
several steps to enhance resolution preparedness.
1. New FDIC Division
Earlier this year, we announced the centralization of our
supervision and resolution activities for the largest and most complex
banks in a new Division of Complex Institution Supervision and
Resolution (CISR).\34\ This move is more than just an organizational
realignment. Rather, combining these key functions will create a
stronger, more coherent approach for bank resolution and supervision by
enabling us to take a more holistic approach. On the supervision side,
CISR is responsible for overseeing banks with more than $100 billion in
assets for which the FDIC is not the primary Federal regulator. On the
resolution side, CISR is responsible for executing the FDIC's
resolution planning mandates for these institutions. In conjunction
with this new division, we established a new position--Deputy to the
Chairman for Financial Stability--to focus on financial stability
issues, including the resolvability of large banks.
---------------------------------------------------------------------------
\34\ See FDIC to Centralize Key Aspects of Its Large, Complex
Financial Institution Activities (June 27, 2019), available at https://
www.fdic.gov/news/news/press/2019/pr19056.html.
---------------------------------------------------------------------------
2. Cross-Border Cooperation
Given the cross-border activities of the largest, most systemically
important banks, we continue to work with our international
counterparts on resolution preparedness. For example, earlier this year
we hosted a series of exercises with senior officials in the United
States, United Kingdom, and European Banking Union to strengthen
coordination on cross-border resolution and enhance understanding of
one another's resolution regimes for G-SIBs.\35\ In addition, we have
established Crisis Management Groups that have brought together firms
and home and host authorities to discuss resolution planning. We have
developed information-sharing
arrangements to support this work and engaged in a number of
international operational exercises to test and improve our readiness.
---------------------------------------------------------------------------
\35\ See United States, European Banking Union, and U.K. Officials
Meet for Planned Coordination Exercise on Cross-Border Resolution
Planning (Apr. 9, 2019), available at https://www.fdic.gov/news/news/
press/2019/pr19033.html.
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D. Assessing New and Emerging Risks
The FDIC has a long tradition of identifying, analyzing, and
addressing key risks in the economy, financial markets, and the banking
industry. Through numerous publications, including an annual Risk
Review, we advance the goal of strengthening the banking system by
highlighting risks at a stage when policymakers, bankers, and the
public can act to mitigate their scope and impact.
1. Cyber and Resiliency
The FDIC continues to actively monitor 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.
Working with our regulatory partners through the Federal Financial
Institutions Examination Council (FFIEC), we recently issued an updated
Business Continuity Management booklet, which describes key principles
and practices in this area.\36\ The booklet also helps examiners to
evaluate the adequacy of an entity's business continuity management
program and to determine whether management adequately addresses risks
related to the availability of critical financial products and
services. The FDIC will continue to engage with other regulators and
the private sector to monitor and respond to the risks posed by cyber
threats.
---------------------------------------------------------------------------
\36\ See FDIC FIL-71-2019, Updated FFIEC IT Examination Handbook--
Business Continuity Management Booklet (Nov. 14, 2019), available at
https://www.fdic.gov/news/news/financial/2019/fil19071.html.
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2. Bank Secrecy Act/Anti-Money Laundering (BSA/AML)
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. As these actors use increasingly
sophisticated methods to conceal their transactions in an evolving
financial, technological, and regulatory landscape, the FDIC continues
to work with other regulators and the law enforcement and intelligence
communities to help supervised institutions respond to these threats.
At the same time, BSA/AML laws and regulations impose significant
compliance costs on the entire system and on the individual
institutions that shoulder the
reporting burdens. For example, although the information gathered by
suspicious activity reports (SARs) can be useful, it can be burdensome
for institutions--particularly community banks--to file SARs. Federal
regulatory agencies are working to develop better ways to communicate
the value of SARs to the bankers that incur the reporting cost. The
government also must continue to examine the rules it imposes to ensure
that the system is effective and the obligations imposed on
institutions are not unduly burdensome. It is also essential that we
support the use of technology to both prevent illicit activity and to
strengthen the collaboration among banks, regulators, and the law
enforcement and intelligence communities.
To advance the parallel goals of cost effectiveness and greater
system-wide efficiency, the FDIC, FRB, OCC, NCUA, and the U.S.
Department of Treasury's Financial Crimes Enforcement Network (FinCEN)
jointly issued a statement \37\ to address instances in which banks may
decide to enter into collaborative arrangements to share resources to
manage their BSA/AML obligations more efficiently and effectively. For
example, banks use such arrangements to pool human, technology, or
other resources to reduce costs, increase operational efficiencies, and
leverage specialized expertise. In addition, the FDIC, FRB, OCC, NCUA,
and FinCEN issued a statement \38\ to encourage banks to consider,
evaluate, and, where appropriate, responsibly implement innovative
approaches to meet their BSA/AML obligations. The agencies recognized
that innovation has the potential to help banks address these risks.
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\37\ See FDIC FIL-55-2018, Bank Secrecy Act: Interagency Statement
on Sharing Bank Secrecy Act Resources (Oct. 3, 2018), available at
https://www.fdic.gov/news/news/financial/2018/fil18055.html.
\38\ See FDIC FIL-79-2018, Bank Secrecy Act: Interagency Statement
on Innovative Efforts to Combat Money Laundering and Terrorist
Financing (Dec. 3, 2018), available at https://www.fdic.gov/news/news/
financial/2018/fil18079.html.
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3. Leveraged Lending and Corporate Debt
Nonfinancial corporate debt as a share of gross domestic product
(GDP) has reached a record level of 49.6 percent.\39\ The increase has
been driven by corporate bonds and leveraged loans, which have grown
faster than other types of corporate debt. Although banks do not hold a
significant amount of corporate bonds, direct bank exposure to
corporate debt is concentrated in leveraged loans, collateralized loan
obligations (CLOs), commercial and industrial loans, and commercial
mortgages. In addition, indirect exposures, such as those arising from
loans to CLO arrangers, could transmit stress from the corporate sector
into the banking system. The FDIC is carefully monitoring these risks.
We recently published a paper \40\ discussing the growth in corporate
debt and examining bank exposure to the growth of leveraged loans and
continue to engage with other regulatory agencies on this issue.
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\39\ See FDIC Annual Publication Examines Potential Credit and
Market Risks (July 30, 2019), available at https://www.fdic.gov/news/
news/press/2019/pr19070.html.
\40\ See Leveraged Lending and Corporate Borrowing: Increased
Reliance on Capital Markets, With Important Bank Links, available at
https://www.fdic.gov/bank/analytical/quarterly/2019-vol13-4/fdic-v13n4-
3q2019-article2.pdf.
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4. Growth in Nonbank Mortgage Origination and Servicing
As the FDIC remains vigilant to the risks facing banks, we also
monitor the evolution of the financial system, including the migration
of certain financial activities to nonbanks. Perhaps the most prominent
example of this shift has been in mortgage origination and servicing.
We recently published a paper \41\ analyzing this dynamic and
associated risks. Among other things, the paper finds that the growth
of nonbanks in mortgage origination and servicing has largely been
attributed to the rapid expansion by nonbanks, mortgage-focused
business models and technological innovation of nonbanks, litigation
regarding financial crisis-era legacy portfolios at the largest bank
originators, large bank sales of legacy servicing portfolios, and
changes to the capital treatment of mortgage servicing assets
applicable to banks. As regulators and policymakers seek to better
understand the implications of this migration, we must consider both
the benefits and the risks.
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\41\ Trends in Mortgage Origination and Servicing: Nonbanks in the
Post-Crisis Period, available at https://www.fdic.gov/bank/analytical/
quarterly/2019-vol13-4/fdic-v13n4-3q2019-article3.pdf.
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E. Creating the Workforce of the Future
It goes without saying that the FDIC's ability to fulfill its
mission depends on having an experienced, knowledgeable, and agile
workforce. To this end, I am honored to work alongside 6,000 dedicated
FDIC employees who come to work every day focused on protecting
consumers and strengthening the banking system. As banks have evolved
with the use of new technology and delivery channels, however, so
should the FDIC's workforce. In order to maintain and reinforce the
quality of our workforce--and improve its diversity--in this constantly
changing environment, we have taken several steps I would like to
highlight.
1. Retention
We are seeking to bolster retention by striving to reduce our
examiners' travel time, which is one of the primary reasons examiners
leave the agency. When I joined the FDIC, safety and soundness
examiners spent an average of 89 nights per year away from home. We are
striving to reduce that number, and our supervision modernization
efforts will help. Employing better technology provides our team the
flexibility to perform significant portions of the examination offsite,
whether at home while teleworking or in a local field office. Using
enhanced technology will help us strike the right balance between
onsite and offsite supervision activities, thereby providing better
work-life balance for employees and reducing the supervisory burden for
institutions.
2. Recruiting
To support our supervision modernization efforts, we looked at how
to build the workforce of the future. Our goal is to attract, retain,
and promote a diverse and engaged workforce with the knowledge, skills,
and abilities to effectively execute the mission of the FDIC, keeping
pace with industry changes. Examiners represent about one-third of our
workforce and are tasked with performing the core business function of
the agency.
Until recently, we typically hired generalists into a commissioned
examiner training program. That program did not meet our business
needs; attrition outpaced our commissioning process, the protracted
speed-to-commissioning time resulted in significant attrition, and we
were challenged to get our work done.
This year, we pulled together a team of executives to conduct a
review of our entry-level examiner hiring and corporate perspective
training to recommend changes to improve efficiency and effectiveness.
We changed the way we recruit, hire, and train to meet the needs of a
changing industry and workforce and to speed the time to commission by
up to 1 year.
3. Specialists
Earlier this year, the FDIC established a new office of innovation,
the FDIC Tech Lab (FDiTech), with a focus on how to best utilize
technology to meet consumer demands while maintaining safety,
soundness, and consumer protection. The success of this office will
depend on the caliber of its personnel. We are seeking a wide range of
technologists to join the agency, including a Chief Innovation Officer,
data scientists, process engineers, software developers, and network
security experts who can reshape our supervisory approach in a rapidly
evolving digital world.
We are also supplementing our examiner cadre with specialists and
analysts in both information technology and loan review. These
individuals will complement our workforce by providing assistance on
critical areas of the examination. Although they will never replace
commissioned examiners as our primary hiring target, they will
contribute significantly to our supervision program.
4. Diversity
My personal and professional experiences have underscored the
importance of a workplace that is free from discrimination and that
supports diversity and inclusion. In furtherance of the FDIC's
longstanding commitment to diversity and inclusion, we have created an
executive-level taskforce on diversity. The taskforce will help to
ensure our recruiting resources, hiring decisions, interviewing
processes, retention efforts, and advancement pools reflect a
purposeful and intentional effort to leverage diversity to maintain a
high-performing examination workforce.
The racial, ethnic, and gender diversity of the FDIC workforce
continues a steady increase since 2010 with minority representation at
nearly 30 percent and with women comprising nearly 45 percent of
permanent employees. We have also continued our efforts to promote the
participation of Minority and Women-Owned Businesses in FDIC
contracting actions. We will work to consistently improve the
representation of women and minorities at all levels of the agency and
seamlessly integrate veterans and people with disabilities. We will
continue to foster an environment without barriers in which all
employees feel welcomed, valued, respected, and engaged.
5. New Compensation Agreement and New Benefits
Earlier this year, the FDIC and the National Treasury Employees
Union (NTEU) reached a new compensation agreement that includes two
significant new benefits to enhance work-life balance for employees.
First, the FDIC will provide 6 weeks of paid parental leave for the
birth, adoption, or foster care of a child.\42\ This benefit, which
will be in addition to any leave entitlement under the Family and
Medical Leave Act, will enable growing families to thrive and help to
ensure that no FDIC employee feels forced to choose between work and
family. I am proud that the FDIC is a leader in this space as one of
the first Federal Government agencies to offer this benefit.
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\42\ See FDIC Announces New Paid Parental Leave Benefit for
Employees (Oct. 9, 2019), available at https://www.fdic.gov/news/news/
press/2019/pr19089.html.
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Second, the agreement calls for a Pilot Student Loan Repayment
Program, which will target commissioned examiner employees over a 3-
year period. During these 3 years, up to 100 employees each year will
be eligible to have their student loans paid directly, up to $500 per
month for a total of up to $18,000 per employee. The pilot is designed
to provide meaningful financial assistance to employees and contribute
to FDIC retention goals. If successful, the FDIC will consider
expansion of the program to other categories of positions with
recruitment or retention challenges.
In addition to these work-life benefits, the agreement includes
compensation increases for the next 3 years and shifts a portion of an
employee's annual pay increase to a bonus component, which will help
the FDIC reward its highest performers in a sustainable and fiscally
responsible manner. To improve performance management and support the
new bonus component of pay, the agreement also provides for a
simplified, two-level performance management system, which will replace
the current five-level rating system. The new system will be designed
to enhance communication between employees and their supervisors, and
it will also help identify and reward outstanding performance under the
new bonus structure.
III. Ensuring That FDIC-Supervised Institutions Can Meet the Needs of
Consumers and Businesses
Economic growth across the Nation is predicated on the ability of
banks to provide safe and secure financial products and services to
consumers and businesses. Although modernizing our supervisory and
enforcement programs and tailoring regulations based on an
institution's risk profile are matters of good government and steps
toward a stronger banking system, there are certain areas in which the
needs of consumers and businesses must be addressed by more
comprehensive reforms.
I have embarked on a 50-State listening tour to hear from banks
directly about their challenges and to learn about the needs of the
consumers and businesses that banks serve. At the outset of this
effort, I emphasized the need to reverse the trend of having those
affected by our regulations come to Washington to have their voices
heard, but instead to meet them on their home turf. With 26 State
visits, I am now more than halfway through this listening tour, which
has provided valuable feedback and has underscored the importance of
seeking perspectives outside of the ``beltway.'' The following issues
represent an attempt to address some of the concerns that have been
brought to our attention.
A. Brokered Deposits and Interest Rate Caps
The FDIC is undertaking a comprehensive review of our longstanding
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 February, we issued an
advance
notice of proposed rulemaking (ANPR)\43\ to seek public comment on all
aspects of these regulations.
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\43\ See Unsafe and Unsound Banking Practices: Brokered Deposits
and Interest Rate Restrictions, 84 Fed. Reg. 2366 (Feb. 6, 2019),
available at https://www.govinfo.gov/content/pkg/FR-2019-02-06/pdf/
2018-28273.pdf.
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After considering feedback from the ANPR, we expedited the interest
rate cap component of this review and proposed a rule \44\ that would
amend the methodology for calculating the national rate and national
rate cap for specific deposit products. Under the proposal, the
national rate cap for particular products would be set at the higher of
the 95th percentile of rates paid by insured depository institutions
(IDIs) weighted by each institution's share of total domestic deposits,
or the proposed national rate plus 75 basis points. The proposed rule
would also greatly simplify the current local rate cap calculation and
process by allowing less than well capitalized institutions to offer up
to 90 percent of the highest rate paid on a particular deposit product
in the institution's local market area.
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\44\ See Interest Rate Restrictions on Institutions That Are Less
Than Well Capitalized, 84 Fed. Reg. 46470 (Sep. 4, 2019), available at
https://www.govinfo.gov/content/pkg/FR-2019-09-04/pdf/2019-18360.pdf.
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We have also been working to propose a rule regarding our brokered
deposits framework. We are preparing an updated framework with several
goals in mind, including encouraging innovation to allow banks to reach
customers using emerging technology and through new channels,
minimizing risk to the DIF, consistency with the statute, and
establishing a transparent, consistent process. We expect to issue that
proposal later this month.
B. CRA Regulations
The regulations implementing the CRA have not been updated in 20
years. During this period, the banking industry has undergone
transformative changes. As the industry continues to evolve, many
stakeholders believe that the current regulations implementing the CRA
do not fully achieve their statutory purpose (i.e., encouraging banks
to help meet the credit needs of the communities they serve, including
low- and moderate-income areas). As part of an effort to update these
regulations, the OCC issued an ANPR \45\ last year seeking feedback on
how the CRA could be modernized to improve the effectiveness of the law
and provide much needed clarity to financial institutions on what
activities receive CRA ``credit.'' The banking agencies have reviewed
the comment letters received by the OCC, and the FDIC is currently
engaged with the OCC and FRB on how to revise the regulatory framework
that can help meet these dual goals.
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\45\ See Reforming the Community Reinvestment Act Regulatory
Framework, 83 Fed. Reg. 45053 (Sept. 5, 2018), available at https://
www.govinfo.gov/content/pkg/FR-2018-09-05/pdf/2018-19169.pdf.
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C. Small-Dollar Lending
According to a recent FRB study, nearly 4-in-10 households cannot
cover a $400 emergency expense with cash.\46\ Moreover, according to
our unbanked and underbanked study, over 20 million households in
America are underbanked and over 8 million are unbanked.\47\ While some
banks offer small-dollar lending to help those in need, many banks have
chosen not to offer such products, in part, due to regulatory
uncertainty.\48\ As a result, many families rely on nonbank providers
to cover these emergency expenses, or their needs go unmet. To solicit
feedback on these products and consumer needs, the FDIC issued a
request for information \49\ last year to learn more about small-dollar
credit needs and concerns. We have reviewed more than 60 comments and
are reviewing our existing guidance and policies to ensure that they do
not impose impediments to banks considering the extension of
responsible small-dollar credit to consumers.
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\46\ See 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.
\47\ See 2017 FDIC National Survey of Unbanked and Underbanked
Households, available at https://www.fdic.gov/householdsurvey/2017/
2017report.pdf. A household is classified as unbanked if no one in the
household has a checking or savings account. A household is classified
as underbanked if it has a checking or savings account and used one of
the following products or services from an alternative financial
services provider in the past 12 months: money orders, check cashing,
international remittances, payday loans, refund anticipation services,
rent-to-own services, pawn shop loans, or auto title loans.
\48\ The FDIC, FRB, and OCC have taken separate approaches to
small-dollar lending at the institutions they regulate. See FDIC Issues
Final Guidance Regarding Deposit Advance Products (Nov. 21, 2013),
available at https://www.fdic.gov/news/news/press/2013/pr13105.html;
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.
\49\ See Request for Information on Small-Dollar Lending, 83 Fed.
Reg. 58566 (Nov. 20, 2018), available at https://www.govinfo.gov/
content/pkg/FR-2018-11-20/pdf/2018-25257.pdf.
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D. Initial Margin
In the aftermath of the financial crisis, Congress mandated that
regulators establish capital and margin requirements for noncleared
swaps. In 2015, the banking agencies adopted regulations implementing
these requirements.\50\ In addition to requiring the exchange of
initial and variation margin with unaffiliated counterparties, the rule
requires that IDIs collect initial and variation margin from
affiliates. After carefully reviewing these regulations, the agencies
issued a proposal \51\ to repeal the requirement that IDIs collect
initial margin from affiliates while retaining the requirement that
IDIs exchange variation margin with affiliates. The proposal, which
would harmonize the banking agencies' framework with the rules
finalized by international regulators, the SEC, and the CFTC, does not
change the margin requirements for transactions with unaffiliated
counterparties, but covers only transactions between an IDI and its
affiliates. The removal of the inter-affiliate initial margin
requirement would provide banking organizations with additional
flexibility for internal allocation of collateral. We believe that such
risk management practices often improve the safety and soundness of a
covered swap entity.
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\50\ See Margin and Capital Requirements for Covered Swap Entities,
80 Fed. Reg. 74840 (Nov. 30, 2015), available at https://
www.govinfo.gov/content/pkg/FR-2015-11-30/pdf/2015-286
71.pdf.
\51\ See Margin and Capital Requirements for Covered Swap Entities,
84 Fed. Reg. 59970 (Nov. 7, 2019), available at https://
www.govinfo.gov/content/pkg/FR-2019-11-07/pdf/2019-235
41.pdf.
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E. Minority Depository Institutions
Preserving and protecting minority depository institutions (MDIs)
remains a priority for the FDIC, and we have undertaken a number of
initiatives to support MDIs, with a specific emphasis on partnerships.
In June, we hosted a roundtable in Washington with 10 large banks and
seven minority banks.\52\ Each participant outlined in advance the
types of partnerships they were seeking and, during the roundtable,
MDIs and large banks met one-on-one to explore partnership
opportunities. Following the roundtable, several large banks expressed
appreciation for the opportunity to find mutually beneficial
partnerships and eagerness to begin working with MDIs to help them have
a greater impact on their communities. One of the large banks drafted a
proposal to expand its partnerships beyond the seven MDIs at the
roundtable, and one of the MDIs reported that it had partnered with
three larger banks from the event on a variety of technical assistance
efforts. This is exactly the type of outcome we were hoping for, and
the FDIC stands ready to serve as a resource for any MDI that wants to
partner with large banks--or any other bank that wants to partner with
MDIs--and has questions about next steps. Based on the success of the
June event, the FDIC held similar roundtables in Atlanta and Chicago
this year and plans to host additional events in the Midwest and on the
West Coast next year.
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\52\ See FDIC Hosts Roundtable on Collaborations with Minority
Depository Institutions (June 27, 2019), available at https://
www.fdic.gov/news/news/press/2019/pr19057.html.
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In addition, the FDIC appointed additional minority bankers to our
CBAC and established a new MDI Subcommittee to the CBAC to highlight
MDI efforts in their communities and to provide a platform for MDIs to
exchange best practices.\53\
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\53\ See FDIC Hosts Interagency Conference Focusing on Minority
Depository Institutions (June 25, 2019), available at https://
www.fdic.gov/news/news/press/2019/pr19054.html.
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Like many other community banks, MDIs face challenges from the
evolving financial services landscape. The boards and management of
institutions must successfully navigate economic, technological,
competitive, and regulatory circumstances to be profitable and serve
their communities. For many MDIs, these challenges can be amplified if
they serve economically distressed communities that do not fully
recover during economic growth cycles. As the supervisor of nearly 100
MDIs--two-thirds of all MDIs nationwide--the FDIC is committed to
promoting and sustaining the
vibrant role these banks play in their communities. Increasing our
engagement with MDIs enables us to understand their unique needs and
provide tools and resources so they can help create jobs, grow small
business, and build wealth in their communities.
IV. Fostering Technology Solutions and Encouraging Innovation at
Community Banks
While the modernization efforts I have discussed are critical,
perhaps no issue is more important--or more central to the future of
banking--than innovation. Technology is transforming the business of
banking, both in the way consumers interact with their bank and the way
banks do business. I recently discussed several important ways
technology could further transform banking, including digitization,
data access and open banking, machine learning and artificial
intelligence, and personalization.\54\ Given these and other
developments, regulators cannot play ``catch up,'' but must be
proactive in engaging with all stakeholders, including banks, consumer
groups, trade associations, and technology companies to understand and
help foster the safe adoption of technology across the banking system,
especially at community banks.
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\54\ See FDIC Chairman Jelena McWilliams, ``The Future of
Banking,'' speech before the Federal Reserve Bank of St. Louis (Oct. 1,
2019), available at https://www.fdic.gov/news/news/speeches/
spoct0119.html.
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A. Encouraging Innovation and Partnerships
Banks know that if they do not innovate, they will lose in the long
run. At the FDIC, we have asked, if banks know that they must innovate,
why more community banks are not developing or utilizing new
technologies.
We have received two principal explanations: (1) cost and (2)
regulatory uncertainty. In many cases, the cost to innovation is
prohibitively high for community banks, which often lack the expertise,
information technology, and research and development budgets to
independent develop and deploy their own technology. As a result,
partnerships with financial technology companies, or fintechs, that
have already developed, tested, and rolled out new technology are often
critical for these banks and their communities. Yet, if our regulatory
framework does not evolve with technological advances in a manner that
enables partnerships between banks and fintechs, such innovation may
not occur at community banks.
Regulatory modernization is not optional for the FDIC. We must lay
this foundation because the survival of our community banks depends on
it. These banks face challenges from industry consolidation, economies
of scale, and competition from their community bank peers, larger
banks, credit unions, fintechs, and nonbanks lenders. My goal is for
the FDIC to lay the foundation for the next chapter of banking by
encouraging innovation and partnerships, allowing banks and their
communities to benefit from new products and services that improve
people's lives.
With this goal in mind, FDiTech, the FDIC's new office of
innovation, will collaborate with community banks on how to deploy
technology in delivery channels and back office operations to better
serve customers. Many of the institutions we supervise are already
innovating, but a broader adoption of new technologies will allow
community banks to stay relevant in the increasingly competitive
marketplace.
We have identified three key ways in which FDiTech can work to
encourage innovation and partnerships at community banks. First,
through engagement and technical assistance we can help eliminate the
regulatory uncertainty that prevents some banks from adopting new
technologies. Second, through tech sprints--which are designed to
challenge innovators to develop technological solutions to address
specific challenges--we can help encourage the market to develop
technology that improves the operations of financial institutions and
how the FDIC functions as a regulatory agency. Third, through pilot
programs we can work with developers to pilot products and services for
truly innovative technologies. Over the coming months, the FDIC will
play a convening role to encourage community bank consideration of how
technological developments could impact their businesses and to ensure
community bank perspectives are considered in industry-led efforts to
establish standards. We will also host a series of community bank-
focused stakeholder roundtables on digitization, data access and
ownership, machine learning and artificial intelligence, and
personalization of the banking experience.
B. Reducing Regulatory Burden
As we consider these medium-to-long-term ways to encourage
innovation and partnerships, we have simultaneously taken important
short-term steps to reduce the regulatory burden at community banks.
These changes should enable innovation at community banks by allowing
them to spend less time navigating complex regulatory issues and more
time managing their businesses.
Last month, the FDIC, FRB, and OCC finalized a rule \55\ that
implements EGRRCPA by establishing a simple leverage ratio for
qualifying community banks. Under the rule, qualifying banks that elect
to maintain a leverage ratio of greater than 9 percent will be
considered to have satisfied the generally applicable risk-based and
leverage capital requirements in the agencies' capital rules and, if
applicable, will be considered to have met the well-capitalized ratio
requirements for purposes of section 38 of the FDI Act. Notably, the
agencies estimate that over 80 percent of community banks will qualify
to use the community bank leverage ratio. The rule provides meaningful
regulatory compliance burden relief by allowing these banks to avoid
complex risk-based capital calculations and reporting.
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\55\ See Regulatory Capital Rule: Capital Simplification for
Qualifying Community Banking Organizations, 84 Fed. Reg. 61776 (Nov.
13, 2019), available at https://www.govinfo.gov/content/pkg/FR-2019-11-
13/pdf/2019-23472.pdf.
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Earlier this year, the FDIC, FRB, and OCC finalized a separate rule
\56\ that implements EGRRCPA by simplifying the Call Report for
community banks for the first and third calendar quarters and expanding
the eligibility to file the most streamlined Call Report to include
most IDIs with less than $5 billion in total assets.
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\56\ See Reduced Reporting for Covered Depository Institutions, 84
Fed. Reg. 29039 (June 21, 2019), available at https://www.govinfo.gov/
content/pkg/FR-2019-06-21/pdf/2019-12985.pdf.
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V. Conclusion
Since 1933, the FDIC has played a vital role in maintaining
stability and public confidence in the Nation's financial system. This
mission remains as critical today as it was more than 86 years ago, but
if we are to achieve our mission in the modern financial environment,
while still allowing the industry to evolve and innovate, the agency
cannot be stagnant.
Thank you again for the opportunity to testify today, and I look
forward to answering your questions.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM RANDAL K.
QUARLES
Q.1. In November 2019, the Federal Reserve issued a report on
bank branch access in rural communities.[1] The report found
that most rural counties experienced a significant decline in
bank branches between 2012 and 2017, but small businesses and
certain consumers prefer using local banks and cannot find
comparable financial products and services elsewhere. How does
the decline in bank branches or loss of all banks in a
community affect the local economy? What policy steps will the
Federal Reserve take to address the decline in bank branches?
How did this analysis affect the Board's decision on the BB&T-
SunTrust merger that will result in more branch closures?
[1] https://www.federalreserve.gov/publications/files/bank-
branch-access-in-rural-communities.pdf.
A.1. As noted in the report, the takeaways from the listening
sessions indicated that the loss of a bank branch in a
community appears to have a community-level effect that goes
beyond the effects on particular individuals or businesses.
Examples of such effects included declines in access to local
financial advice, loss of important civic leadership, and the
loss of a banker's personal touch. Research cited in the report
also noted that when local bank branches close there is a
negative effect on access to credit for local small businesses.
To the extent that this decrease in credit access causes those
businesses to reduce their overall level of economic activity,
such a bank branch closure could have a corresponding negative
effect on the local economy. Further research would be needed
to assess the economic impacts of the loss of branches on local
communities.
As with all merger applications, the Federal Reserve Board
(Board) considered comments on the proposal from the public,
including comments expressing concerns that the proposal could
result in branch consolidations and closures. The Board's
analysis with respect to these comments is detailed in the
Board's order.\1\
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\1\ FRB Order No. 2019-16, pgs. 29-53 (November 19, 2019).
Q.2.a. Recently, the Federal Reserve approved the merger of
BB&T and SunTrust--two institutions with a significant
overlapping branch footprint. Many commenters on the
application expressed concern that the proposal would result in
branch consolidations and closures, which could negatively
affect LMI and rural communities. The Federal Reserve's Order
Approving the Merger states that BB&T has committed that Truist
Bank would not have any merger-related branch closures for 1
year and would not have any merger-related branch closures in
rural areas with populations under 2,500 for 3 years following
consummation of the merger. BB&T also represented that Truist
Bank would seek to open at least 15 new branches throughout its
footprint in LMI and/or majority-minority census tracts through
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2022.
LHow does the Federal Reserve plan to enforce these
commitments and representations? Will Truist be subject
to any similar restrictions after 2022? Will the
Federal Reserve reject any application to close a
branch submitted by Truist Bank under these parameters?
Will the Federal Reserve take action against Truist
Bank if it does not open at least 15 new branches in
LMI and majority-minority census tracts?
A.2.a. Truist Bank is a State nonmember bank supervised by the
Federal Deposit Insurance Corporation (FDIC), so the
appropriate Federal supervisory agency for purposes of the
branch closure requirements and Community Reinvestment Act
examination is the FDIC.
Q.2.b. In addition, please provide a list of the rural areas
with populations under 2,500 described in the Order.
A.2.b. As indicated, BB&T represented that it will not close
branches within rural communities of 2,500 or fewer persons, as
determined by the U.S. Census Bureau, for 3 years. The Federal
Reserve has not compiled a list of all such communities in the
Truist service area. Any branch that Truist proposes to close
in the future can be evaluated at that time to determine
whether it is in keeping with the commitment. See Appendix A.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM RANDAL K.
QUARLES
Q.1. The U.S. regulatory agencies with jurisdiction over the
Volcker Rule (the ``Volcker Agencies'') have long recognized
the problems under the covered funds provisions for so-called
``foreign excluded funds.'' Specifically, these funds that are
not ``covered funds'' under the Volcker Rule because they are
organized and operated outside the United States by a Foreign
Banking Organization. However, foreign exempt funds are treated
as banking entities to the extent they are controlled by a bank
subject to the Volcker Rule. The Volcker Agencies have taken
several steps, through FAQs and time-limited relief, to address
this issue. In the July 2019 final rulemaking, the Volcker
Agencies state that they are considering how to more
permanently address the treatment of foreign excluded funds as
part of the ongoing covered fund proposal and rulemaking.
Q.1.a. Therefore, as part of any forthcoming proposal on
Volcker Covered Funds, will you provide relief for ``foreign
excluded funds'' on a permanent basis?
A.1.a. On January 30, 2020, the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Agency,
the Office of the Comptroller of the Currency, the Securities
and Exchange Commission, and the Commodity Futures Trading
Commission (the Agencies) jointly issued a notice of proposed
rulemaking (NPR)\1\ addressing the covered funds provisions of
the Volcker Rule regulations. The NPR, which was developed
jointly by the Agencies,
includes provisions that would give banking entities increased
flexibility to invest in and sponsor venture capital funds and
funds that extend credit.
---------------------------------------------------------------------------
\1\ See https://www.federalreserve.gov/aboutthefed/boardmeetings/
files/volcker-rule-fr-notice-
20200130.pdf.
Q.1.b. Additionally, it is known that the prohibition of bank
investment into venture capital funds has reduced the amount of
capital available to American entrepreneurs and resulted in a
disproportionate impact on communities located outside of
Silicon Valley and other traditional tech hubs. It has also
---------------------------------------------------------------------------
considerably hurt GDP and investment.
Q.1.c. Should venture capital be included in the definition of
a ``covered fund''?
A.1.a.-c. The January 30, 2020, NPR includes provisions that
would give banking entities increased flexibility to invest in
and sponsor venture capital funds. The Agencies welcome public
comment on the NPR, including potential effects on startup
investment and economic impact.
Q.1.d. Is the Fed considering startup investment and economic
impact during this reform process?
A.1.d. Please see the response to question 1.c.
Q.2. In 2014, Congress passed and the President signed the
Insurance Capital Standards Clarification Act of 2014 (S. 2270)
that amended section 171 of the Dodd-Frank Act to permit the
Fed to create a tailored nonbank centric capital regime for Fed
supervised insurance groups. Under S. 2270, banking activities
of insurers are subject to bank capital rules, but the law
states that insurance standards should apply to insurance
activities. However, the Fed continues to ignore the direction
of Congress and the letter of the law and wants to apply a
consolidated, bank centric capital requirement on Fed
supervised insurance groups (section 171 calculation). The
Fed's other group capital standard for Fed supervised insurers,
the Building Blocks Approach (BBA), is tailored to the business
of insurance.
Q.2.a. Why is the Fed pursuing an additional ``section 171
calculation'' that will apply in addition to the BBA
calculation, when section 171 itself does not require this
additional calculation?
Q.2.b. This layering approach increases complexity for no
reason or gain and is a drag on economic growth. Please explain
how the Fed will act in compliance with the Insurance Capital
Standards Clarification Act of 2014.
A.2.a.-b. Section 171 of the Dodd-Frank Act requires the Board
to establish minimum risk-based capital requirements for
depository institution holding companies on a consolidated
basis. The Insurance Capital Standards Clarification Act of
2014 (the Clarification Act) amended section 171 to permit the
Board to exclude State-regulated insurers from this
consolidated minimum risk-based capital requirement. The
Clarification Act, however, does not allow a blanket exemption
for an entire holding company structure. In particular, it
explicitly does not allow the Federal Reserve to exempt a
depository institution holding company from calculating its
capital requirements for non-insurance entities in the
corporate chain.
In September 2019, the Board issued a proposal on risk-
based capital requirements for certain depository institution
holding companies significantly engaged in insurance activities
(the proposal). The proposal would establish an enterprise-wide
risk-based capital framework, known as the Building Block
Approach, which is intended to facilitate the assessment of
overall risk-based capital adequacy for a depository
institution holding company that is significantly engaged in
insurance activities by measuring aggregate capital while
taking into consideration State insurance capital requirements.
The proposal also includes a minimum risk-based capital
requirement for the non-insurance entities within the holding
company structure required by section 171, as amended by the
Clarification Act (section 171 calculation). The section 171
calculation would use the flexibility afforded by the
Clarification Act and exclude State-regulated insurers from
minimum risk-based capital requirements to the extent permitted
by law.
The Board recently invited public comment on all aspects of
the proposal, including the section 171 calculation. Consistent
with the Administrative Procedure Act, the Board will consider
this and other comments before making a final rule.
Q.3. In your testimony before the House Financial Services
Committee you stated that the Fed is currently considering how
best to implement the remainder of the international Basel III
agreement and that the Fed is aware that the impact of
implementing Basel III revisions into the U.S. framework may
result in ``significantly raising the aggregate level of
capital in the industry.'' You also stated that the Fed
``regularly looks at the calibration of the G-SIB surcharge and
we are considering it in the context of the overall body of
regulation.'' Additionally, Chair McWilliams noted that the
Basel Committee conducted a quantitative impact study in 2009
at one of the worst times for banks' balance sheets that
included only 14 U.S. banks. Chair McWilliams suggested that
she would support an analysis focused on a more specific impact
in the United States. I strongly agree that a holistic and
comprehensive review of the capital framework in the United
States is necessary to ensure that capital levels are
calibrated appropriately to maintain a level playing field with
our international counterparts, especially given the many post-
crisis reforms that we have discussed.
Q.3.a. When does the Fed plan to complete the comprehensive
review and publish the results so that they may be made
available to lawmakers and to the public?
Q.3.b. If the nature of the review is ongoing and long-term,
when can we expect an initial set of findings to be released
based on provisions that are currently being implemented?
A.3.a.-b. As noted, I think it is important for the Board to
consider the remaining elements of the Basel III framework
(especially the operational risk element and the fundamental
review of the trading book) as a whole, and then examine that
whole in the context of the existing framework. As a number of
my colleagues and I have noted, the existing regulatory regime
has established a robust level of loss-absorbing capacity for
the industry. Thus, if a sensible calibration of these final
elements of Basel III would result in a material increase in
the industry's aggregate capital level, that could suggest that
some of the existing elements may be appropriately re-
calibrated to the international norms. We will not be able to
make a judgment about whether these final elements of Basel III
would materially increase capital levels or, if they do, about
which elements of the existing framework (if any) might merit
reconsideration until we have done the very detailed work of
preparing the regulatory text for all the remaining elements of
Basel III, which is a large task.
At the beginning of the year, I had hoped that we might be
in a position to propose NPRs for comment on this package of
issues by the end of the year--although such a schedule would
have been quite aggressive and well in advance of the
internationally agreed timetable for implementation of the
remaining Basel III measures. That aspirational schedule has
now necessarily been delayed by the need to focus staff
resources on responding to the economic distress created by
Government isolation measures intended to address current
public health concerns. As the depth and duration of the
Government constraint of the economy remains highly uncertain,
I cannot now estimate when I will be able to ask Federal
Reserve staff to reengage on the preparation of NPRs for the
implementation of Basel III. The Basel Committee itself has
extended the internationally agreed implementation timeline by
a full 2 years. I do not believe that the U.S. process will
need to be delayed this long, and it remains a high priority of
mine to resume this process, and complete it as a package for
the United States well in advance of the international
deadline.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR KENNEDY FROM RANDAL
K. QUARLES
Q.1.a. In response to my question Chairman McWilliams noted
that the FDIC regulates banks the same way it regulates ILCs.
From the FDIC perspective that may be accurate, but ILCs are
not subject to regulation or supervision at the parent holding
company level. ILCs may be owned by a nonfinancial company not
subject to the BHC Act, which introduces important policy
questions. In particular, the lack of capital and liquidity
standards at the holding company, no real requirements that the
holding company act as a source of strength to the ILC, no
ongoing supervision or regulation, and no other prudential and
risk management standards applied to the holding company can
really expose the financial system and Deposit Insurance Fund
to risk.
Aside from what the FDIC does, what potential concerns do
these regulatory gaps present?
A.1.a. In general, institutions that are similar to one another
in function should be subject to similar regulation. When the
same economic activity can be conducted through different legal
structures subject to different regulatory restrictions, this
can create an incentive for risky activities to concentrate in
specific parts of the financial system, rather than to be
distributed across a variety of institutions with the attendant
resilience that such diversity usually promotes. Congress has
provided a statutory exemption from the Bank Holding Company
Act for industrial loan companies (ILC) which places those
institutions outside of the Federal Reserve Board's supervision
and regulation. Thus, whether and ILC is subject to
substantially similar regulation as a bank holding company
(BHC) when they engage in similar activities will be a function
of the Federal Deposit Insurance Corporation's (FDIC) oversight
of these firms, including any commitments made by the firms to
the FDIC as part of the FDIC's approval of the ILC's
application for deposit insurance.
Q.1.b. What are some of the supervisory issues that could be
left unaddressed if an especially large commercial firm gets
access to an ILC charter absent Fed supervision, which is a
standard feature for large bank holding companies?
A.1.b. As noted above, whether the relevant activities of an
ILC will be subject to substantially similar supervision and
regulation as those of a BHC engaged in the same activities
will be a function of the FDIC's oversight. There is no
inherent reason that the FDIC cannot impose appropriate
conditions to the approval of an ILC's application for deposit
insurance that would address some of the key disparities that
you cite in your letter. Federal Reserve supervision of holding
companies is complex, however, and it would be difficult to
replicate the regulatory framework fully to create a truly
level playing field between BHCs and ILCs.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER FROM RANDAL K.
QUARLES
Q.1.a. Montana, and many areas of the country, face challenges
of housing availability, affordability, and aging housing
stock. As you know, this is a significant issue for rural as
well as urban areas and is one of the largest barriers to
success nationally. In Montana, lack of workforce housing is
one of the greatest inhibitors of economic development.
What can be done to increase workforce housing and
encourage more affordable housing to be built?
A.1.a. A wide range of factors and policies outside of the
purview of the Federal Reserve Board (Board) affect the
availability and affordability of housing in the United States.
The Board monitors developments in housing and labor markets to
assist in our understanding of the broader economy.
Since 2008, the number of housing units constructed in the
United States has remained well below historical averages
resulting in a shortage of two million to three million units.
Various industry reports cite shortages and rising costs in the
factors of production. Regulation also reportedly restricts new
construction in many parts of the country and we are aware that
many State and local governments are now pursuing various
interventions (such as subsidies, land grants, zoning changes,
and other incentives) to encourage the production of new
housing units.
In light of the evolving impacts of the current public
health crisis, the Board is monitoring housing and related
conditions through surveys and outreach to gain insight into
new challenges that may be arising with regard to building
workforce and affordable housing in rural communities.
Q.1.b. What do you see as the largest barrier to affordable
housing, particularly in rural areas?
A.1.b. The cost of housing does appear to weigh on the budgets
of households living in rural areas. For example, almost half
of households that rent in rural areas are ``cost-burdened,''
meaning they spend more than 30 percent of their income on
rent.\1\ Among owner-occupied households in rural areas, the
cost-burdened share is much lower, though home ownership may
still feel unaffordable for households with low income, low
wealth, or imperfect credit histories. One potential barrier to
affordable housing in rural areas is constraints on the
production of new housing. For example, construction sector
data and various industry reports suggest that construction
labor for the country as a whole is in short supply. Regulation
or constraints on other construction inputs may also restrict
new construction in rural areas. These constraints may be
pushing up the cost of housing. Indeed, median gross rent in
rural areas increased 64 percent between 2000 and 2017, far
more than inflation.\2\
---------------------------------------------------------------------------
\1\ See https://ipums.org. Calculation from the 2017 American
Community Survey. Rural areas are areas that are not in an identifiable
metropolitan area, as defined by the Office of Management and Budget.
\2\ Id. Calculations from the 2000 Census and 2017 American
Community Survey.
---------------------------------------------------------------------------
Another barrier to affordable housing is stagnant incomes
for many households. Inflation-adjusted median household income
among both rural and nonrural households changed little between
2000 and 2017. A variety of factors, many related to
developments in the labor market, have weighed on income growth
for the typical household. Even if rents in rural areas had not
grown as robustly as they did over the past couple decades,
many households likely would have still faced housing
affordability pressures due to a lack of income growth.
Preliminary data suggests that employment losses due to the
COVID-19-induced economic slowdown have disproportionately
affected sectors primarily comprised of low-wage workers,
including retail sales and hospitality. We know that workers in
these sectors faced significant affordability challenges even
prior to the current downturn. We are closely monitoring
ongoing changes in employment and housing markets to assess the
effects of these developments on overall housing affordability,
including with an eye toward understanding new or increasing
disparities that may exist for certain vulnerable groups.
Q.1.c. How has the [Fed/FDIC/NCUA] worked to support housing?
Where is there room for additional efforts?
A.1.c. Over the last several years, the Board and Reserve Banks
have conducted research to help shed light on obstacles in the
marketplace, as well as highlight innovative approaches aimed
at overcoming roadblocks. Examples of the Board's research into
the increasing prevalence of housing affordability issues
include staff papers entitled ``Rural Affordable Rental
Housing: Quantifying Need, Reviewing Recent Federal Support,
and Assessing the Use of Low Income Housing Tax Credits in
Rural Areas''\3\ and ``Rental Housing Affordability in the
Southeast: Data from the Sixth District.''\4\ Board economists
have also researched the effect of State and local regulatory
impediments, as published in a piece entitled ``Regulation and
Housing Supply.''\5\ Additionally, the Board has brought
together local, State, and national stakeholders to discuss
potential causes of, and solutions for addressing, the current
high incidence of housing affordability challenges.
Furthermore, in light of the impact on household finances
related to COVID-19, staff are working to conduct research,
field surveys, and engage with a broad cross-section of
stakeholders to gain insight into the implications for housing
markets.
---------------------------------------------------------------------------
\3\ See Dumont, Andrew; Rural Affordable Rental Housing:
Quantifying Need, Reviewing Recent Federal Support, and Assessing the
Use of Low Income Housing Tax Credits in Rural Areas, at https://
www.federalreserve.gov/econres/feds/files/2018077pap.pdf.
\4\ See Carpenter, Ann; White, Douglas; Hirt, Mary; Assessing the
Use of Low Income Housing Tax Credits in Rural Areas and Rental Housing
Affordability in the Southeast: Data from the Sixth District, at
https://www.frbatlanta.org/community-development/publications/
discussion-papers/2018/02-rental-housing-affordability-in-the-
southeast-2018-07-19.aspx.
\5\ See Gyourko, Joseph E., and Raven Molloy (2015). ``Regulation
and Housing Supply,'' in Duranton, Gilles, J. Vernon Henderson, and
William C. Strange eds., Handbook of Regional and Urban Economics.
Volume 5B. Handbook of Regional and Urban Economics. Amsterdam; San
Diego and Oxford: Elsevier, pp. 1289-1337.
Q.2. I appreciated the responses to my questions during the
hearing, and the focus on supporting our farmers and ranchers
and their families through the current challenges facing the
agriculture sector while continuing to prioritize the safety
and soundness of our community financial institutions.
Is there anything that you would like to add on this topic?
A.2. The Federal Reserve continuously monitors agricultural
conditions, loan volumes, and agricultural credit risk
indicators as well as how conditions affecting the agriculture
sector may impact the banks and bank holding companies we
supervise. As conditions evolve, the Board will continue to
monitor developments in agriculture and the potential for
implications in other segments of the national or regional
economy. Prior to the emergence of global economic developments
related to COVID-19, growth in farm lending continued to show
signs of slowing. We recognize that the sector-related weakness
we had seen has been compounded by COVID-19, and that
agricultural borrowers may experience hardships in meeting all
of their contractual obligations. Our long-standing practice
has been to encourage financial institutions to work
constructively and proactively with borrowers, including
agricultural borrowers, and to consider prudent loan
modifications consistent with safe and sound lending practices
to strengthen the credit and mitigate credit risk.
As a complement to our ongoing monitoring of agricultural
conditions and lending, and routine supervisory activities, the
Federal Reserve also hosts biannual National Agricultural
Credit (NAC) conferences. The NAC conferences serve as an
exchange of information in Washington, DC. and across all of
the Federal Reserve Districts on developments in agricultural
finance among institutions involved in various aspects of
agricultural lending, regulation, and research. Among other
conferences focused on the agriculture sector, the NAC meetings
serve as an important source of information and have been of
great value. The Washington meetings concentrate on policy-
related matters that have an effect on agricultural finance
conditions and lending. Discussions may focus on a wide range
of policies, including farm, energy, trade, regulatory,
monetary or other areas as conditions evolve. The Federal
Reserve District meetings focus on agricultural and lending
conditions within the region that a meeting takes place, and
include academic researchers focusing on issues related to
agricultural finance.
Q.3. I recently wrote to Comptroller Otting, with colleagues on
this Committee, to express the importance of considering the
many unique challenges in accessing financial services in rural
America. It is imperative that the CRA work for communities
throughout America, and that the process for potential reforms
to this vital rule should reflect that. Any updates to the CRA
should be done in coordination between your three agencies, and
must be consistent with the original purpose of this Civil
Rights-era law to bringing financial services and credit access
to low- and moderate-income and underserved communities
throughout our country.
As you consider changes to the Community Reinvestment Act,
how are you considering and engaging rural America?
A.3. As we have explored Community Reinvestment Act (CRA)
reform options, we have engaged with rural stakeholders in a
number of ways. First, we partnered with the Federal Reserve
Banks to hold 29 external roundtables in 2018 and early 2019
with attendees that included representatives of consumer and
community organizations and banks. The Board published a
summary of the key findings from these roundtables in June of
2019.\6\ These roundtables also included organizations and
financial institutions focused on rural concerns and reflected
a number of recommendations related to rural communities.
---------------------------------------------------------------------------
\6\ Board of Governors of the Federal Reserve System,
``Perspectives from Main Street: Stakeholder Feedback on Modernizing
the Community Reinvestment Act,'' (PDF) (Washington: Board of
Governors, June 2019).
---------------------------------------------------------------------------
We also continue to conduct research that helps inform our
understanding of rural issues. For example, a Federal Reserve
report issued in November 2019 focused on branch access in
rural areas and helped inform our CRA regulatory approach on
retail services.\7\ This report found that just over 40 percent
of rural counties lost bank branches between 2012 and 2017,
with 39 rural communities being ``deeply affected'' by the loss
of more than half of their bank branches.
---------------------------------------------------------------------------
\7\ Board of Governors of the Federal Reserve System,
``Perspectives from Main Street: Bank Branch Access in Rural
Communities,'' (PDF) (Washington: Board of Governors, November 2019).
---------------------------------------------------------------------------
The Federal Reserve also reviewed the more than 1,500
comments submitted in response to the Advance Notice of
Proposed Rulemaking (ANPR) that the Office of the Comptroller
of the Currency (OCC) published in 2018. A number of the
comments submitted in response to the ANPR focused on ways to
improve the CRA to better meet the needs of rural communities.
In considering any CRA reforms, we will continue to focus on
ensuring the needs of rural communities are well-served. We are
reviewing the comments that have been submitted to the OCC and
Federal Deposit Insurance Corporation on their Notice of
Proposed Rulemaking (NPR), and we expect to learn much--
including much related to the aspects of the NPR that reflect
our own input--from the review.
Q.4. I would like an update on an issue I've followed and
written to the Federal Reserve and FDIC about, the ``covered
funds'' definition in the Volcker Rule. As drafted, banks are
prevented from activities that they are regularly allowed to do
directly on their balance sheets. Oftentimes clients, such as
large pension funds, want their banks to provide long-term
investments or loans in these fund structures to have some skin
in the game. I continue to strongly support the Volcker Rule's
purpose of preventing speculative trading that is at odds with
the public interest. As your agencies continue their process
here, I encourage you to work toward an outcome that allows
capital for growing and innovating companies and the ability to
invest in long-term investment vehicles, while keeping a focus
on preventing the activities that the rule is intended to stop.
As your agencies look at the impact of rules and any
potential changes, will you consider activities that are
considered safe and allowable elsewhere in banks? And
especially the impact on the availability of funding for
companies in the middle of America looking to grow?
A.4. On January 30, 2020, the Board, the Federal Deposit
Insurance Corporation, the OCC, the Securities and Exchange
Commission, and the Commodity Futures Trading Commission (the
Agencies) jointly issued a notice of proposed rulemaking (NPR)
\8\ addressing the covered funds provisions of the Volcker Rule
regulations. The NPR, which was developed jointly by the
Agencies,
includes provisions that would give banking entities increased
flexibility to invest in and sponsor venture capital funds and
funds that extend credit.
---------------------------------------------------------------------------
\8\ See https://www.federalreserve.gov/aboutthefed/boardmeetings/
files/volcker-rule-fr-notice-20200130.pdf.
Q.5. Thank you all for your updated guidance on providing
financial services to the hemp industry. As you know, this is
an issue that has been very important to me. Montana leads the
country in hemp production, and this guidance will help our
producers and the financial institutions that are now able to
---------------------------------------------------------------------------
serve them.
Q.5.a. What will your agencies be doing to educate your
examiners and the institutions that you oversee to adapt to
working with hemp-related businesses?
A.5.a. The Federal Reserve will provide training to examiners
on this topic through our regular Systemwide Bank Secrecy Act
(BSA) trainings, as well as in conjunction with the other
Federal banking regulators through classes and seminars
provided by the Federal Financial Institutions Examination
Council.
Q.5.b. Are there areas that you anticipate will require
additional guidance?
A.5.b. As stated in the December 3, 2019, statement,\9\ the
Financial Crimes Enforcement Network (FinCEN) will issue
additional guidance on BSA requirements for hemp businesses
after further reviewing and evaluating the U.S. Department of
Agriculture interim final rule. Some banks, for example, have
asked questions that involve interpretations of FinCEN's
customer due diligence rule with respect to hemp (e.g., a
bank's obligation to determine whether a hemp producer in a
customer's supply chain is operating lawfully).
---------------------------------------------------------------------------
\9\ See https://www.fincen.gov/sites/default/files/2019-12/
Hemp%20Guidance%20 %28Final% 2012-3-19%29%20FINAL.pdf.
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM RANDAL
K. QUARLES
Q.1. Earlier this year, Comptroller Otting said that the Office
of the Comptroller of the Currency (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. Additionally, at
a House Financial Services Committee hearing in May, Otting
said that the OCC shared its proposal with the Securities and
Exchange Commission (SEC).
Chair McWilliams and Vice Chair Quarles, has Comptroller
Otting shared the OCC's proposal with either of your agencies?
LIf yes, what does the proposal contain?
LIf yes, are all six regulators on board with the
proposal?
LIf yes, when can we expect to see a notice of
proposed rulemaking posted?
A.1. Section 956 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act requires the Federal Reserve Board,
Office of the Comptroller of the Currency, Federal Deposit
Insurance Corporation, Federal Housing Finance Agency,
Securities and Exchange Commission, and National Credit Union
Agency (the agencies) to jointly establish regulations or
guidelines that require disclosure related to incentive
compensation arrangements, and that prohibit incentive
compensation arrangements that could provide excessive
compensation or lead to material financial loss. Federal
Reserve staff has been working with staff from these other
agencies to draft a regulation that would meet this statutory
mandate.
Q.2. Have all six regulators (FDIC, Fed, NCUA, SEC, OCC, and
FHFA) sat down together to discuss this rulemaking?
LIf yes, when did these discussions take place?
LIf yes, have all six regulators decided to move
forward with a proposed rule?
A.2. Staff of all six regulators have been meeting regularly to
determine a way to move forward. These discussions are
continuing.
Q.3. If the OCC decides to move forward on executive
compensation rule without all six regulators, are you concerned
the OCC will create two different standards, encouraging banks
to shop for the regulator with the weakest requirements?
A.3. There is a longstanding practice of Federal financial
regulators working together on issues related to incentive-
based compensation. For example, the Federal banking agencies
jointly issued Guidance on Sound Incentive Compensation
Policies in June 2010. The agencies also jointly issued
proposed rules on incentive-based compensation in 2011 and
2016, and are working together on recent discussions concerning
these issues. We fully anticipate that the agencies will
continue to work jointly on this topic.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM RANDAL K.
QUARLES
BB&T-SunTrust Merger
Competitive Effects
Q.1. The Fed evaluated how the transaction would affect
competition in 81 geographic markets.[1] These geographic
markets are the areas used to measure the concentration of the
relevant banking products. Were the definitions of any
predefined markets altered from the time the merger application
was filed to the time of the merger approval?
[1] Federal Reserve System, ``Order Approving the Merger of
Bank Holding Companies,'' https://www.federalreserve.gov/
newsevents/pressreleases/files/orders20191119a1.pdf.
A.1. In evaluating merger proposals, Federal Reserve staff
considers whether pre-existing geographic market definitions
are
appropriate. It is common for Federal Reserve staff to consider
redefining markets as part of its review of merger proposals.
The Federal Reserve evaluates its existing geographic market
definitions under the relevant legal standard set out in
Supreme Court precedents, which require that the relevant
geographic market reflect the area where ``the effect on
competition will be direct and immediate.''\1\ In reassessing
its geographic markets, the Federal Reserve looks to demand and
substitution--that is, possible consumer responses to changes
in rates, fees, or other characteristics of banking
services.\2\ Local conditions, including commuting patterns and
economic activity, are closely evaluated as part of this
analysis. For this merger proposal, the Board examined
available data for the relevant geographic markets and, as a
result, redefined 16 markets to more accurately reflect current
local competitive conditions, including with respect to
commuting patterns and consumer economic activity. Some markets
increased in concentration, while others decreased, as a result
of the market re-definitions. Three markets were absorbed by
other markets due to updated commuting data.
---------------------------------------------------------------------------
\1\ See Philadelphia National Bank and Phillipsburg National Bank &
Trust Co., supra note . . . [sic].
\2\ See Federal Reserve and Department of Justice Frequently Asked
Questions, question 10, available at https://www.federalreserve.gov/
bankinforeg/competitive-effects-mergers-acquisitions-faqs.htm#faq10.
Q.2. Approval Order mentions that the ``Board has considered
the relative shares of total deposits in insured depository
institutions that BB&T would control.''[2] Did the Fed conduct
a competitive analysis of any other product markets, such as
small business lending or home mortgage lending? If not, why
---------------------------------------------------------------------------
not?
[2] Id.
A.2. As required by Supreme Court precedent, the Board
considered the cluster of products and services provided by
commercial banks--that is, commercial banking--in evaluating
the proposal by BB&T.\3\ According to the Supreme Court in
Philadelphia National Bank, ``the cluster of products (various
kinds of credit) and services (such as checking accounts and
trust administration) denoted by the term `commercial bank' . .
. composes a distinct line of commerce.''\4\ Indeed, the
Supreme Court in Phillipsburg National Bank & Trust Company
explicitly rejected ``submarkets'' in the product market for
evaluating the effect of competition of a merger between
commercial banks because they were ``not a basis for the
disregard of a broader line of commerce that has economic
significance.''\5\ In light of this precedent, the Board
focused its competition review of the BB&T-SunTrust merger
proposal on the commercial banking line of commerce.
---------------------------------------------------------------------------
\3\ See Philadelphia National Bank, supra n. Error! Bookmark not
defined . . . [sic]; see also United States v. Connecticut National
Bank, 418 U.S. 656 (1974); Phillipsburg National Bank & Trust Co.,
supra n. Error! Bookmark not defined . . . [sic]
\4\ Philadelphia National Bank, supra n. Error! Bookmark not
defined . . . [sic] at 356.
\5\ Id. at 360. In Phillipsburg, the Supreme Court overturned a
lower court decision, which focused its attention on ``different
groupings within'' the commercial banking line of commerce.
---------------------------------------------------------------------------
While the Board is required to focus its competitive
inquiry in bank merger applications on the cluster of products
and services that constitute commercial banking, it may
investigate the competitive effects in submarkets if the
parties or outside commenters raise a specific submarket as a
potential issue. In the BB&T-SunTrust merger proposal, the
Board reviewed competitive effects in mortgage lending in
response to concerns raised by a commenter.
Q.3. According to the Approval Order, in 13 of the geographic
markets, the Herfindahl Hirschman Index (HHI) levels for
deposits would exceed one or both of the 1800/200 thresholds,
meaning that the expected change in market concentration is
significant.[4]
[4] Id.
Q.3.a. For the six markets where credit unions or thrifts
mitigated the competitive concerns, please identify which
credit unions and thrifts were included in the analysis, the
dollar amount of their deposits, and any weights used for these
institutions.
LNorth Lake-Sumter, Florida: Four credit unions were
included at 50 percent weight:
LSuncoast Credit Union: $120 million
LInsight Credit Union: $103 million
LCampus USA Credit Union: $79 million
LCentral Florida Educators Federal Credit Union:
$75 million
LAtlanta, Georgia: Two thrifts were included at 100
percent weight and six credit unions were included at
50 percent weight:
LNewton Federal Bank (thrift): $219 million
LCornerstone Bank (thrift): $209 million
LDelta Community Credit Union: $4.5 billion
LGeorgia's Own Credit Union: $1.8 billion
LAssociated Credit Union: $1.2 billion
LIBMSECU: $431 million
LFirst Tech Federal Credit Union: $196 million
LWings Financial Credit Union: $156 million
LMilledgeville Area, Georgia: Two credit unions were
included at 50 percent weight:
LRobins Financial Credit Union: $97 million
LMidsouth Community Credit Union: $50 million
LLexington, Virginia: Two credit unions were
included at 50 percent weight:
LDuPont Community Credit Union: $24 million
LBeacon Credit Union, Inc.: $18 million
LNorfolk-Portsmouth, Virginia-North Carolina: One
thrift was included at 100 percent and eight credit
unions were included at 50 percent:
LDollar Bank (thrift): $131 million
LChartway Federal Credit Union: $1.1 billion
LLangley Federal Credit Union: $567 million
LABNB Federal Credit Union: $482 million
LBayPort Credit Union: $437 million
LNAE Federal Credit Union: $110 million
LNorthern Star Credit Union: $72 million
LBronco Federal Credit Union: $55 million
L1st Advantage Federal Credit Union: $43 million
LRichmond, Virginia: One credit union was included
at 50 percent weight:
LVirginia Credit Union, Inc.: $2.3 billion
Unlike banks and thrifts, credit unions are not required to
report deposits on a branch-level. Please indicate how the Fed
obtained the deposit levels for credit union branches. If
estimates were used, please describe the methodology.
A.3.a. As a general matter, when the Federal Reserve includes
credit unions as a mitigating factor in its competitive
analysis, it takes the total deposits of the credit union and
divides the deposits by the total number of branches of the
credit union to estimate the deposits held at each branch.
However, in some cases, the Department of Justice (DOJ) obtains
specific information about deposits held at branches by
particular credit unions. When exact deposit information is
available, the Board relies on that more specific information
in its competitive analysis.
Q.3.b. For the seven markets with divestitures, do any of these
markets still approach either of the HHI thresholds even after
considering the divestitures? If so, please indicate the
geographic market and the HHI-levels before and after the
merger.
A.3.b. The competitive effects of the proposal in these seven
markets are described in extensive detail in the Board's public
order. Each of these markets satisfied the DOJ Bank Merger
Guidelines taking into consideration the divestitures--in each
market the HHI increase would be less than 200 points or the
pro forma HHI would be less than 1800 points. Specifically,
pages 17 through 24 of the Board's order provide the pro forma
HHI calculations and increase in HHI in each of the seven
markets with divestitures. The pro forma HHI calculations are
reproduced below for each of these markets:
LEastern Shore, Virginia (page 19 of the Board's
order): HHI increase of 3 points to 2043.
LMartinsville, Virginia (page 19 of the Board's
order): HHI would decrease by 2 points to 2125.
LSouth Boston, Virginia (page 20 of the Board's
order): HHI would increase 1 point to 1638. The Board
required a divestiture in this market while the DOJ did
not require a divestiture.
LLumpkin County, Georgia (page 21 of the Board's
order): HHI would decrease by 36 points to 2248.
LWayne County, Georgia (page 22 of the Board's
order): HHI would increase 4 points to 2057. The Board
required a divestiture in this market while the DOJ did
not require a divestiture.
LWinston-Salem, North Carolina (page 23 of the
Board's order): HHI would increase by 30 points to
6429.
LDurham-Chapel Hill, North Carolina (page 24 of the
Board's order): HHI would increase 29 points to 2162.
Financial, Managerial, and Other Supervisory Conditions
Q.4. Please describe the process by which the Fed evaluated the
financial soundness of the resulting institution.
A.4. Staff thoroughly reviewed the information provided in the
application, as well as supplemental information provided by
the
organizations. Staff also considered the Federal Reserve's
supervisory reviews, follow-up work, and ongoing monitoring
activities. In addition, staff consulted with relevant
financial supervisory agencies and reviewed confidential
supervisory information, including examination reports on the
bank holding companies and the depository institutions
involved. Staff also reviewed the financial condition of the
organizations on both parent-only and consolidated bases, as
well as information regarding the financial condition of the
subsidiary depository institutions and the organizations'
significant nonbanking operations. The review included, but was
not limited to, the capital adequacy, asset quality, liquidity,
and earnings performance of both BB&T and SunTrust.
Additionally, staff considered the future prospects of the
combined organization, its pro forma financial condition, the
proposed business plan, and its ability to absorb the costs of
the proposal and effectively integrate the institutions'
operations. Staff also considered an updated capital plan
provided by BB&T and the ability of the combined company to
maintain adequate capital levels in baseline and stressed
conditions.
Q.5. Please describe the process by which the Fed evaluated the
management of the resulting institution.
A.5. Staff considered information provided by BB&T relative to
its proposed personnel appointments, managerial structure, and
oversight plans, to assess managerial resources and plans for
operating the combined organization. Similar to our financial
analysis, staff reviewed the confidential supervisory records
of BB&T, SunTrust, and their subsidiary depository
institutions, including assessments of their management, risk-
management systems, operations, and compliance with banking
laws and regulations. Staff also considered the policies,
procedures, and controls in place at the organizations, as well
as the risk-management program under development for the
combined organization, the proposed integration plans, and the
combined organization's ability to meet the enhanced regulatory
requirements applicable to bank holding companies with $250
billion or more in total consolidated assets.
Q.6. On the same day the merger was approved, the Federal
Reserve issued a consent order against SunTrust as a result of
misleading or inaccurate statements to business customers about
the operation and billing of certain add-on products.
Q.6.a. Are any executives who were in the chain of command
responsible for these violations in a leadership position of
the new Truist Bank?
A.6.a. As noted on pages 52-53 of the Board's order, a newly
hired Chief Compliance Officer (CCO) at Truist Bank reports
directly to Truist's Chief Risk Officer (CRO), formerly the
BB&T CRO, who leads the Truist Bank risk management function.
The CRO and CCO's direct report, the leader of the Fair Lending
and Responsible Banking team, also a legacy BB&T employee, is
primarily responsible for unfair and deceptive practices (UDAP)
compliance, as well as implementation of an enhanced, firm-wide
compliance risk management program. For these reasons, and
other reasons explained in the Board's approval order, the
Board found that the UDAP compliance program of the combined
company would be consistent with approval of the proposal.
Q.6.b. In the last 5 years, SunTrust was the subject of
multiple enforcement actions, including by the Fed, the
Securities and Exchange Commission, the CFPB, the DOJ and
multiple State attorneys general.[5] Are any executives who
were in the chain of command responsible for these violations
in leadership positions of the new Truist Bank?
[5] Good Jobs First, https://
violationtracker.goodjobsfirst.org.
A.6.b. The enforcement actions brought by the Board and other
financial regulators were taken against SunTrust or its
subsidiaries, rather than any individuals. Individuals may be
subject to enforcement actions by the Board, if the relevant
legal standards are met. Please see response to question 3(a)
above regarding leadership at Truist Bank.
Q.6.c. In the last 5 years, BB&T has been the subject of five
enforcement actions by the Securities and Exchange
Commission.[6] Are any executives who were in the chain of
command responsible for these violations in leadership
positions of the new Truist Bank?
[6] Good Jobs First, https://
violationtracker.goodjobsfirst.org.
A.6.c. The enforcement actions brought by the Securities and
Exchange Commission were taken against BB&T subsidiaries,
rather than any individuals. Individuals may be subject to
enforcement actions by the Board if the relevant legal
standards are met.
Convenience and Needs Considerations
Q.7. The Fed is required by the Bank Holding Company Act to
note and consider each institution's performance under the
Community Reinvestment Act (CRA). As stated in the Approval
Order, while BB&T has an outstanding record of meeting
community credit needs, SunTrust only has a satisfactory
record. ``With respect to SunTrust Bank, [CRA] examiners noted
that some branch closures and consolidations by SunTrust Bank
may have adversely affected the accessibility of banking
services in some of the bank's [Assessment Areas].''[7] This
effect on accessibility included eight branch closures in low-
income tracts and 21 closures in moderate-income tracts.
[7] Id.
Q.7.a. Does the Fed find it appropriate to reward an
institution for failing to meet the credit needs of the
communities it serves?
A.7.a. As indicated in the Board's order, SunTrust had a
satisfactory CRA record, including high satisfactory ratings
for the Lending and Investment tests. More importantly, BB&T,
the successor institution, has an overall outstanding CRA
rating.
Q.7.b. How will the Fed ensure that Truist does not engage in
similar practices in the future?
A.7.b. As indicated in the Board's order, the Federal banking
supervisory agencies evaluate a bank's record of opening and
closing branches, particularly branches located in LMI
geographies or primarily serving LMI individuals, as part of
the CRA examination process.\6\
---------------------------------------------------------------------------
\6\ See, e.g., 12 CFR 228.24(d)(2). In addition, the Board noted
that the FDIC, as the primary Federal supervisor of Truist Bank, would
continue to evaluate the bank's branch closures in the course of
conducting CRA performance evaluations.
Q.7.c. During the merger review process, BB&T and SunTrust
agreed to a ``3-year, $60 billion community benefits plan,''
that will ``increase financial resources for low- and moderate-
income (LMI) communities across the eastern United States.''
How will the Fed ensure that Truist complies with this
---------------------------------------------------------------------------
agreement?
A.7.c. Neither the CRA nor the Federal banking agencies' CRA
regulations require depository institutions to make pledges or
enter into commitments or agreements with any organization.\7\
Lending, investments, or services that Truist Bank provides,
including those in furtherance of its community benefits plan,
will be taken into account as part of the FDIC's CRA evaluation
of Truist Bank.
---------------------------------------------------------------------------
\7\ See, e.g., CIT Group, Inc., FRB Order No. 2015-20 at 24 n.54
(July 19, 2015); Citigroup Inc., 88 Federal Reserve Bulletin 485
(2002); Fifth Third Bancorp, 80 Federal Reserve Bulletin 838, 841
(1994).
Q.7.d. Of all the merger applications that have been withdrawn,
how many were withdrawn because of a bank's CRA performance
---------------------------------------------------------------------------
record?
A.7.d. The Federal Reserve System has released publicly its
approach to applications that may not satisfy requirements for
approval or that otherwise raise supervisory or regulatory
concerns.\8\ Potential applicants with supervisory issues,
including with respect to CRA or consumer compliance, may
therefore choose not to file applications until the issues are
resolved.\9\ Applications can be withdrawn at the request of
the applicant for any number of reasons. For example, an
applicant may withdraw for technical or procedural reasons, for
reasons regarding the statutory factors that must be considered
by the Federal Reserve that could include supervisory issues,
or because an applicant has decided not to pursue the
application for business or strategic reasons. In many cases,
applicants do not provide specific reasons for withdrawing
filings and are not required to do so. As a result, the Board
does not have sufficient information to provide the number of
cases withdrawn due to CRA considerations.
---------------------------------------------------------------------------
\8\ This approach is reflected in SR 14-2 supra n. Error! Bookmark
not defined . . . [sic]
\9\ For example, financial holding companies with less-than-
satisfactory CRA ratings are prohibited from acquiring companies
engaged in financial activities in reliance on section 4(k) of the BHC
Act. 12 U.S.C. 1843(l)(2).
Q.8. The Approval Order states that ``several commenters
alleged that BB&T and SunTrust were not meeting the credit
needs of minority and LMI communities and borrowers,
particularly in Florida and Durham, North Carolina, or unbanked
and underbanked populations. One commenter alleged that BB&T
made a disproportionately low number of home purchase loans to
African American and Latino borrowers in the Houston, Texas,
New York, New York, and Charleston, West Virginia, areas based
---------------------------------------------------------------------------
on data reported for 2017 under HMDA.''[8]
[8] Id.
Following this statement, the Approval Order explains how
BB&T denies the commenters' allegations. It later states that
``The Board is concerned when HMDA data reflect disparities in
the rates of loan applications, originations, and denials among
members of different racial or ethnic groups in local areas.
These types of disparities may indicate weaknesses in the
adequacy of policies and programs at an institution for meeting
its obligations to extend credit fairly. However, other
information critical to an institution's credit decisions is
not available from HMDA data.''[9]
[9] Id.
Q.8.a. Did the Fed rely on BB&T's denials to determine that
these allegations of lending discrimination not take place?
A.8.a. In evaluating bank applications, the Federal Reserve
relies on the banks' overall compliance record, including
recent fair lending examinations. In addition, the Federal
Reserve considers the CRA records of the relevant depository
institutions, assessments of other relevant supervisors, the
supervisory views of examiners, and information provided by the
applicant and public commenters. Regarding the BB&T-SunTrust
application, the Board considered all comments, including the
specific allegations raised by the commenters that you
reference. To evaluate the comments, as well as to consider
whether the relevant institutions are helping to meet the
credit needs of their communities and the potential effects of
the proposal on the convenience and needs of the communities to
be served, the Board considers the information provided by the
applicant, public comments, and the institutions' examination
records, including fair lending.
Q.8.b. Does HMDA data indicate that these disparities do exist?
If so, what information was used to reach the conclusion that
these concerns did not warrant further scrutiny and denial of
the merger?
A.8.b. As indicated in the Board's order, Home Mortgage
Disclosure Act (HMDA) data disparities must be evaluated in the
context of other information regarding the lending record of an
institution. Publicly available HMDA data do not provide a
sufficient basis for conclusively determining whether an
institution has engaged in discriminatory practices.\10\ Public
2017 HMDA data available for the evaluation of this application
did not include consumer credit scores, debt-to-income ratios
and loan-to-value ratios.
---------------------------------------------------------------------------
\10\ Lee v. Board, supra n. Error! Bookmark not defined . . . [sic]
at 915 (holding that the Board carefully considered the concerns
expressed by the commenters and properly resolved the HMDA data-related
allegations).
---------------------------------------------------------------------------
In evaluating bank applications, the Federal Reserve relies
on the banks' overall compliance record, including recent fair
lending examinations, assessments of other relevant
supervisors, and the supervisory views of examiners.
Q.8.c. What additional information that is ``critical to an
institution's credit decision'' would the Fed have needed to
make a
decision about whether BB&T was ``meeting its obligations to
extend credit fairly?''
A.8.c. As mentioned above, public 2017 HMDA data available for
the evaluation of this application did not include consumer
credit scores, debt-to-income ratios and loan-to-value ratios.
When warranted by risk factors, examiners obtain additional
information when conducting fair lending examinations to
evaluate an institution's compliance with fair lending laws and
regulations.
Q.9. On the same day the merger was approved, the Federal
Reserve issued a consent order against SunTrust as a result of
misleading or inaccurate statements to business customers about
the operation and billing of certain add-on products.[10]
[10] United States of America before the Board of Governors of
the Federal Reserve System, ``Consent Order,'' https://www.fed-
eralreserve.gov/newsevents/pressreleases/files/orders201911
19a2.pdf.
Q.9.a. When did the Fed first become aware of the activities
SunTrust was engaging in that led to the consent order being
issued?
A.9.a. Federal Reserve staff became aware of the practices
addressed in the Consent Order beginning in 2016.\11\ Those
practices were terminated by SunTrust Bank around the same
time.
---------------------------------------------------------------------------
\11\ See In the Matter of SunTrust Bank, Docket No. 19-028-B-SM
(Nov. 19, 2019), available at https://www.federalreserve.gov/
newsevents/pressreleases/files/orders20191119a2.pdf.
Q.9.b. When was it decided that it would be appropriate to
publicly release the consent order at the same exact time as
the announcement of the Fed approval of the merger? Who made
---------------------------------------------------------------------------
that decision?
A.9.b. The Consent Order and merger application were voted on
and approved by the Board at the same time. Staff's
investigation of the matters underlying the Consent Order was
completed prior to the Board's consideration of action on the
application. Further, aligning the processing of these two
matters was reasonable because the issues identified in the
Consent Order needed to be addressed as part of the Board's
consideration of the statutory factors for determining whether
to approve the application.
Q.10. In assessing the convenience and needs factor, the Fed
considered the supervisory views of the Consumer Financial
Protection Bureau.[11]
[11] Federal Reserve System, ``Order Approving the Merger of
Bank Holding Companies,'' https://www.federalreserve.gov/
newsevents/pressreleases/files/orders20191119a1.pdf.
Q.10.a. What were those views?
A.10.a. As indicated in the Board's order, the Board considered
the views of the CFPB regarding the consumer compliance records
of both Branch Banking and Trust Company (Branch Bank) and
SunTrust Bank. These interagency discussions and views are
considered confidential supervisory information. The CFPB
Director voted to approve the merger in the Director's capacity
as a member on the FDIC board of directors.
Q.10.b. Did the Fed review the Bureau's Consumer Complaint data
base in evaluating the merger?
A.10.b. As mentioned above, the Board considered the views of
the CFPB regarding the consumer compliance records of both
Branch Bank and SunTrust Bank.
Q.10.c. A recent study has shown that SunTrust and BB&T ranked
third and 12th in the most consumer complaints that year.[12]
Does the Fed find those statistics concerning?
[12] American Banker, ``BankThink: CFPB should have a say in
bank mergers,'' Jeremy Kress, September 03, 2019, https://
www.americanbanker.com/opinion/cfpb-should-have-a-say-in-bank-
mergers.
A.10.c. Consumer complaints are taken seriously by the Federal
banking agencies. Complaints that implicate fair lending and
other consumer protection laws and regulations are taken into
account as part of the assessment of an institution's consumer
compliance record. The Board considered the views of the FDIC
and the Federal Reserve Bank of Atlanta regarding the consumer
compliance record of Branch Bank and SunTrust Bank,
respectively. In addition, the Board considered the views of
the CFPB regarding the consumer compliance records of both
Branch Bank and SunTrust Bank.
Financial Stability Factor
Q.11. The Approval Order states that ``In light of all the
facts and circumstances, this transaction would not appear to
result in meaningfully greater or more concentrated risks to
the stability of the U.S. banking or financial system.''
Q.11.a. Countrywide was a $200 billion institution when it
failed.[13] Washington Mutual was $307 billion.[14] Together,
they had the potential to do significant damage to the deposit
insurance fund. Why does the Fed believe that the failure of a
$450 billion institution would not present risks to the
financial system?
[13] New York Times, ``Bank of American to buy Countrywide,''
Gretchen Morgenson and Eric Dash, January 11, 2008, https://
www.nytimes.com/2008/01/11/business/worldbusiness/lliht-bofa.
3.9157464.html.
[14] M. Reuters, ``WaMu is largest bank failure,'' Elinor
Comlay and Jonathan Stempel, https://www.reuters.com/article/
us-wash
ingtonmutual-jpmorgannews1/wamu-is-largest-u-s-bank-failure-idU
STRE48P05I20080926.
A.11.a. As described in detail on pages 54-60 of the Board's
public order, the Board conducted an extensive analysis of the
risks to stability of the United States banking and financial
system. In particular, the Board considered the combined
organization's size, the extent to which BB&T and SunTrust
engaged in activities that were critical to the functioning of
the U.S. financial system and whether there would be adequate
and timely substitute providers of such activities, data
regarding potential financial instability being transmitted to
other institutions or markets within the U.S. banking and
financial system, the extent to which the combined organization
would contribute to the overall complexity of the U.S. banking
or financial system, and the cross-border activities of each of
BB&T and SunTrust.
Based on each of these factors individually and in
combination, the Board concluded that the transaction would not
appear to result in meaningfully greater or more concentrated
risks to the stability of the U.S. banking or financial system.
In particular, the Board noted that the combined organization
would have a de minimis share of payment activities, assets
under custody, and underwriting activities; have limited
reliance on wholesale funding; have limited over-the-counter
derivatives exposures and holdings of Level 3 assets; and
engage in limited cross-border activities. In addition, the
Board noted that both BB&T and SunTrust were predominately
engaged in retail commercial banking activities with little
reliance on short-term funding. The Board found that the
combined organization would have minimal cross-border
activities and would not exhibit an organizational structure,
complex interrelationships, or unique characteristics that
would complicate resolution of the firm in the event of
financial distress. In addition, the Board found that the
combined organization would not be a critical services provider
or so interconnected with other firms or the markets that it
would pose significant risk to the financial system in the
event of financial distress.
Q.11.b. In a July 2018 speech advocating for deregulation of
regional banks, you favorably cited Fed research showing that
the failure of a single $250 billion bank would be far worse
for the economy than the failure of five $50 billion banks
failed separately. And yet you concluded last month that the
$450 billion BB&T-SunTrust merger would not materially increase
risks to financial stability. Was this research considered in
the context of the BB&T-SunTrust merger?[15]
[15] ``Remarks by Randal K. Quarles, Vice Chairman for
Supervision, Board of Governors of the Federal Reserve System
at American Bankers Association Summer Leadership Meeting,''
July 18, 2018.
A.11.b. The Board considers the resulting size of a financial
institution when assessing the risks to financial stability,
because larger financial firms generally pose a greater risk to
the financial system and broader economy than smaller financial
firms. However, asset size itself is not dispositive, and the
Board considers additional factors to evaluate the potential
threat to financial stability, including interconnectedness,
complexity, cross-border activity, and substitutability for
critical services.\12\ Each of these factors was discussed in
detail on pages 54-60 of the Board's order.
---------------------------------------------------------------------------
\12\ See supra n. Error! Bookmark not defined . . . [sic]
---------------------------------------------------------------------------
The July 2018 speech discussed tailoring regulation
applicable to banks in the United States to reflect the variety
of business models and risk profiles of those institutions. In
particular, the Board's framework for supervision and
regulation is designed to increase in stringency in tandem with
the firm's size and systemic footprint. To offset risk, the
Board requires larger firms to be subject to additional
supervisory and regulatory requirements. In its consideration
of the BB&T application, the Board considered these additional
regulatory standards and requirements that would apply to the
combined organization given the size of its total assets. As
noted in the Board's order, BB&T represented that it had
allocated additional staff resources to satisfy the additional
regulatory requirements that would apply to bank holding
companies with $250 billion or more in total consolidated
assets. In addition, the combined organization would be subject
to annual supervisory stress tests, company-run stress tests
every other year, the countercyclical capital buffer, a
supplementary leverage ratio, a liquidity coverage ratio
requirement, and other reporting and liquidity requirements.
These requirements would be more stringent than the
requirements that would have applied to each of BB&T and
SunTrust on a standalone basis.
Q.11.c. Please describe the extent to which the Fed considered
the cost of failure of the merged institution in its review.
A.11.c. As noted in the Board's order, the Board considered the
degree of difficulty in resolving the resulting firm. The Board
noted that BB&T and SunTrust do not engage in complex
activities, such as being a core clearing and settlement
organization for critical financial markets, that might
complicate the resolution process by increasing the complexity,
costs, or timeframes involved in a resolution. Because the
structure and scope of activities at the combined organization
were not complex, the resulting firm would not engage in
significant cross-border activities, and the combined
organization would be predominately engaged in retail
commercial banking activities, the resolution of the firm would
be less complicated than that of the largest U.S. financial
institutions.\13\
---------------------------------------------------------------------------
\13\ See BB&T Corporation, FRB Order No. 2019-16, at 59-60 (Nov.
19, 2019).
Q.12. The Approval Order also listed various metrics considered
when evaluating the financial stability factor, including size
and the availability of substitute providers. For each metric,
please indicate if the Fed has established numeric thresholds
to evaluate whether or not it is triggered. If so, please
identify the thresholds. If not, please describe how those
---------------------------------------------------------------------------
factors were evaluated?
A.12. As required by statute, the Federal Reserve considers the
impact on financial stability of every bank holding company
merger proposal.\14\ The metrics discussed in the Board's order
are evaluated in every proposal. Specifically, these metrics
include measures of the size of the resulting firm, the
availability of substitute providers for any critical products
and services offered by the resulting firm, the
interconnectedness of the resulting firm with the banking or
financial system, the extent to which the resulting firm
contributes to the complexity of the financial system, and the
extent of the cross-border activities of the resulting
firm.\15\ Because these categories are not exhaustive, the
Board may consider additional categories to inform its
decision. In addition to using quantitative measures, the Board
also considers qualitative factors, such as the opaqueness and
complexity of an institution's internal organization, that are
indicative of the relative degree of difficulty of resolving
the resulting firm.
---------------------------------------------------------------------------
\14\ 12 U.S.C. Sec. 1842(c)(7).
\15\ See Capital One Financial Corp., supra n. Error! Bookmark not
defined . . . [sic]
---------------------------------------------------------------------------
In this case, the Board also considered the Globally
Systemic Important Bank (``G-SIB'') Surcharge score of the
combined organization. The G-SIB Surcharge score is a measure
of a firm's systemic importance.\16\ On consummation of the
proposal, the combined organization would have a G-SIB method 1
score of approximately 30 basis points, well below the minimum
threshold (130 basis points) that identifies a financial
institution as a G-SIB.
---------------------------------------------------------------------------
\16\ See 80 Fed. Reg. 49082 (Aug. 14, 2015).
---------------------------------------------------------------------------
Transparency
This bank merger is the largest to occur since the
financial crisis and consumers deserve to have a complete
understanding of the decisionmaking process that led to its
approval.
Q.13. The depository data used for the anticompetitive analysis
is nonconfidential information. As such, when will the Fed be
publishing the full anticompetitive analysis it undertook when
reviewing the merger?
A.13. The full anticompetitive analysis for review of the
merger is published on pages 7-24 and 63-80 of the Board's
order.
Q.14. American Banker published an interview with the top
executives of BB&T and SunTrust in which Truist's chairman and
CEO, Kelly King stated, ``I was told by several senior
regulators there was no legal reason to object to the
deal.''[16]
[16] American Banker, ``Truist rising: With mega-merger clone,
pressure to deliver,'' Paul Davis, December 9, 2019, https://
www.americanbanker.com/news/truist-rising-with-mega-merger-
done-pressure-on-to-deliver.
LWere you one of those senior level regulators?
LDid any Fed staff have conversations with the
executives, or their representatives of either
institution before the merger application was filed?
LIf so, please disclose the date, participants,
and substance of the conversation.
LDid the Fed provide any comment regarding the
likelihood of the approval of the deal, including
whether the Fed anticipated there being any legal
barriers to approval?
A.14. The quote from Mr. Kelly King was published in an article
on December 9, 2019, and appears to have been made after the
Board's approval on November 19, 2019.\17\ The Board concluded
that all statutory factors that it was required to consider
were consistent with approval based on its analysis of the
application record.
---------------------------------------------------------------------------
\17\ See supra n. Error! Bookmark not defined . . . [sic]
---------------------------------------------------------------------------
As explained in Section III of my letter to you dated May
8, 2020, prospective applicants sometimes request to meet with
Board staff before filing an application or prefiling and the
Board considers it appropriate for staff to grant these
requests. At the request of BB&T and SunTrust, members of Board
staff met with representatives of the companies on February 22,
2019. Representatives from BB&T and SunTrust included members
of senior management as well as external counsel for each
company. Representatives from the Board included staff from the
Division of Consumer and Community Affairs, the Division of
Supervision and Regulation, the Division of Research and
Statistics, and the Legal Division. BB&T and SunTrust
representatives presented high-level information on a number of
topics, including pro forma financial projections, information
on geographic overlap, considerations related to the
convenience and needs of affected communities, and early stage
risk management and technology integration plans. Board staff
listened to the presentation and shared absolutely no
information regarding the likelihood of approval or legal
barriers to approval.
In addition, members of Board staff attended a meeting at
the DOJ on February 19, 2019, wherein representatives of BB&T
and SunTrust presented their competitive analysis and initial
proposed divestitures. Meeting participants included
representatives from senior management at BB&T and SunTrust,
BB&T's external counsel, SunTrust's external counsel, staff at
the DOJ, and Board staff from the Legal Division and the
Division of Research and Statistics. Once again, Board staff
listened to the presentation made by BB&T and SunTrust
representatives and shared absolutely no information regarding
the likelihood of approval or legal barriers to approval.
Community Investment Act Reform
In response to questioning during the December 5, 2019,
hearing, you stated that the proposal to modify the Community
Reinvestment Act (CRA) released this week by the FDIC and OCC
``has benefited from a lot of Fed input.''
Q.15. Please describe which aspects of the proposal were based
on input from the Fed.
A.15. The Federal Reserve has shared detailed analysis, data,
and proposals related to possible metrics-based approaches with
our counterparts at the Federal Deposit Insurance Corporation
(FDIC) and the Office of the Comptroller of the Currency (OCC)
in an effort to forge a common approach. The FDIC and OCC have
considered this information and included in their proposal
multiple metrics at the assessment level. For example, the OCC/
FDIC metrics would evaluate a bank's distribution of the number
of its retail loans to low-income tracts and low-income
households.
Q.16. Please describe why the Federal Reserve declined to join
the FDIC and the OCC in their proposed rulemaking.
Specifically:
Q.16.a. Did career Fed staff disagree with or were otherwise
unable to independently verify the analysis on the expected
effects of the proposal?
A.16.a. We have had considerable engagement with the FDIC and
OCC throughout the CRA reform process and have conducted
research and analysis of various proposals. We are committed to
getting CRA reform right and that is why we have focused so
much on understanding the underlying data and potential impact
of any proposal. We continue to believe the best outcome would
be a joint interagency final rule which strengthens the CRA
regulations to help banks better meet the credit needs of the
local low- and moderate-income communities they serve and more
closely align with changes in the ways financial products and
services are delivered.
Q.16.b. Does the Fed believe the proposed rule could negatively
impact credit availability and affordability among low-income
and minority populations?
LIf so, which aspects of the proposal trigger those
negative effects? Please include any qualitative or
quantitative analysis done by the Fed.
A.16.b. We are focused on developing a set of CRA reform ideas
that are consistent with a few key principles. Specifically, we
believe that revisions to the CRA regulations should reflect
the credit needs of local communities and work consistently
through the business cycle. They should be tailored to banks of
different sizes and business strategies. They should provide
greater clarity in advance about how activities will be
evaluated. They should encourage banks to seek opportunities in
distressed and underserved areas. And, they should recognize
that the CRA is one of several related laws to promote an
inclusive financial sector.
Q.16.c. When in the rulemaking process did the Fed determine
that it would not join the proposal? Were there any issues not
addressed by the questions above that contributed to the
proposal?
A.16.c. While the Board did not join the FDIC and the OCC in
their Notice of Proposed Rulemaking (NPR) revising elements of
CRA regulation, the Board shared detailed analysis and
proposals on CRA reform with our counterparts at the OCC and
FDIC in the preparation of the NPR, and the NPR reflects much
input from the Board. We are reviewing the comments that have
been submitted to the FDIC and OCC on the NPR, and we expect to
learn much--including much related to the aspects of the NPR
that reflect our own input--from the review. As a result, it
would be premature to identify any specific areas of
disagreement--rather, we are all in the process of working to
determine the best path forward. We continue to view a common
approach as the best outcome, but we have not yet determined
the best next steps to achieve that outcome.
Q.17. Will the Fed be releasing a separate reform proposal? Is
it a possibility that the Fed will join the agencies in issuing
a final rule? If so, what assurances would the Fed need to feel
comfortable joining?
A.17. Please see the response to question 16.c.
Q.18. What are the consequences of different banks having a
different set of CRA requirements to follow based on their
regulator?
How would CRA changes impact the Fed's review of CRA-
performance for bank mergers? If CRA-ratings are based on
different sets of standards for each regulator, how will the
Fed be able to objectively compare CRA-performance among the
banks?
A.18. We continue to view a common approach to CRA reform as
the best outcome. The proposed regulatory changes would not
change how the Federal Reserve reviews CRA performance for bank
mergers. The CRA statute requires the Board to take into
account the CRA performance record of an institution in mergers
and acquisitions applications and the Board will continue to
abide by this requirement, consistent with the law.
Climate Change Risk
Q.19. On January 25, I signed a letter to Chairman Jay Powell
regarding information on the Federal Reserve's steps to
identify and manage climate-related risks in the U.S. financial
system.[17] Chairman Powell's response on April 18 was
disappointing, deferring responsibility to climate-related
actions to other agencies.[18]
[17] Letter from 20 Senators to Chairman of the Board of
Governors of the Federal Reserve System Jerome Powell, January
25, 2019, https://www.schatz.senate.gov/imo/media/doc/
Letter%20to
%20Federal%20Reserve,%20OCC,%20FDIC%20re%20Climate%20
Change.pdf.
[18] Letter from Chairman of the Board of Governors of the
Federal Reserve System Jerome Powell to Senator Warren, April
18, 2019. https://www.schatz.senate.gov/imo/media/doc/
Chair%20Powell
%20to%20Sen.%20Schatz%204.18.19.pdf.
Chairman Powell's April 18 response stated, ``The Board's
framework provides a systemic way to assess financial
stability; however, some potential risks do not fit neatly into
that framework.''[19] However, central banks around the world,
including the Bank of England are far more aggressive in is
taking steps to incorporate climate-related risks in their
financial stress tests.[20] The Network for Greening the
Financial System, a group of 18 central banks and bank
supervisors has also acknowledged that ``climate-related risks
are a source of financial risk [and it is] within the mandates
of Central Banks and Supervisors to ensure the financial system
is resilient to these risks.''[21]
[19] Id.
[20] Reuters, ``BOE to stress test its financial system against
`climate pathways': Carney,'' Kanishka Singh, October 8, 2019,
https://www.reuters.com/article/us-climate-change-boecarney/
boe-to-stress-test-its-financial-system-against-climate-
pathways-carney
idUSKBN1WN0GS.
[21] Network for Greening the Financial System, ``NGFS First
Progress Report,'' October 2018, https://www.banque-france.fr/
sites/default/files/media/2018/10/11/818366-ngfs-firstprogress-
report-20181011.pdf.
Please explain why the Federal Reserve System's framework
does not currently incorporate climate-related risks in
assessing financial stability, despite other international
efforts to do so.
A.19. It is not correct to say that the Federal Reserve's
framework for assessing financial stability does not
incorporate climate-related risks or that we are disconnected
from international efforts in this area.
First, staff across the Federal Reserve System conduct
extensive research on a range of issues related to the effects
of climate change, including how climate-related risks can be
amplified by the financial system. Through their research,
staff are exploring new sources of climate-related data and
developing methods to link this climate data with existing
financial data. This research helps inform our supervision and
outreach to market participants by enhancing our understanding
of connections between climate risks and financial stability.
These efforts involve nearly every division of the Board of
Governors, as well as several Reserve Banks. These efforts
improve our ability to assess the ways climate-related risks
may affect the economy, financial stability, and the safety and
soundness of financial institutions.
Second, Federal Reserve personnel contribute integrally to
efforts by the Financial Stability Board (FSB), which I chair,
and other standard-setting bodies to assess climate-related
financial risks. The FSB's Standing Committee on the Assessment
of Vulner-
abilities evaluates as part of its mandate the potential for
technological and policy shocks related to climate change. I
have directed the FSB to continue its sponsorship of the Task
Force for Climate-related Disclosures, which engages with
companies to promote consistent public disclosures related to
the risks of climate change. And the G20 has made the FSB
responsible for coordinating the work of these international
bodies related to the effect of climate change on the financial
sector, recognizing that a patchwork of sector-specific groups
could miss the emergence of critical financial vulnerabilities.
Federal Reserve staff and I remain in frequent contact with our
supervisory colleagues in other jurisdictions, following
closely their own climate-related projects.
Third, in addition to this work on the long-term analysis
of climate-change risk, the Federal Reserve's near-term
supervisory framework captures a series of potential near-term
risks related to severe weather events. One example includes
the possibility of large losses to property and casualty
insurers from historically atypical timing, intensity, or
frequency of severe weather damages. The loss-absorbing
capacity of insurers and their connections to the broader
financial system is an important part of our financial
stability framework. In addition, we look at the potential
operational disruptions at large financial institutions,
including network outages or other weather-related
disturbances, which could present a near-term risk to financial
stability.
With regard to the Network for Greening the Financial
System (NGFS), as I have stated publicly for over a year,
including twice at previous hearings of the Senate Banking
Committee, I have urged the NGFS to accept comprehensive
participation from the Federal Reserve. Federal Reserve staff
have attended many NGFS discussions and will continue to do so.
We are exploring how the NGFS might allow us to participate
further in a way that is consistent with the full range of our
responsibilities.
Q.20. On November 8, the Federal Reserve Bank of San Francisco
held a conference on ``The Economics of Climate Change,'' which
focused on ``[discussing] quantifying the climate risk faced by
households, firms, and the financial system; measuring the
economic costs and consequences of climate change; accounting
for the effects of climate change on financial asset prices;
and understanding the potential implications of climate change
for monetary, supervisory, and trade policy.''[22]
[22] Federal Reserve Bank of San Francisco, ``The Economics of
Climate Change,'' November 8, 2019, https://www.frbsf.org/
economicresearch/events/2019/november/economics-of-climate-
change/.
Q.20.a. In her speech at the conference, President and Chief
Executive Officer of the Federal Reserve Bank of San Francisco
Mary Daly stated, ``The Federal Reserve's job is to promote a
healthy, stable economy. This requires us to consider current
and future risks--whether we have a direct influence on them or
not. Climate change is one of those risks.''[23]
[23] Federal Reserve Bank of San Francisco, ``Why Climate
Change Matters to Us,'' Mary Daly, November 8, 2019, https://
www.frbsf.org/our-district/press/presidents-speeches/maryc-
daly/2019/november/why-climate-change-matters-to-us/.
LDoes the Board of Governors of the Federal Reserve
System disagree with President Daly's remarks that
state that Federal Reserve is required to consider
climate-related risks?
LIf so, please explain the position that the
Federal Reserve is not required to consider climate-
related risks.
LIf not, why has the Federal Reserve System not
considered climate-related risks in its oversight of
the financial system thus far?
A.20.a. Please see the response to question 19.
Q.20.b. During the conference, Federal Reserve Governor Lael
Brainard stated that ``Climate risks are projected to have
profound effects on the U.S. economy and financial system,''
and that the ``Federal Reserve has important responsibilities
for safeguarding the stability of our financial system so that
it can continue to meet household and business needs for
financial services when hit by negative shocks. Similar to
other significant risks, such as cyberattacks, we want our
financial system to be resilient to the effects of climate
change.''[24]
[24] Board of Governors of the Federal Reserve System, ``Why
Climate Change Matters for Monetary Policy and Financial
Stability,'' Lael Brainard, November 8, 2019, https://
www.federalreserve.gov/newsevents/speech/brainard20191108a.htm.
LHas the Federal Reserve System formally assessed
the systemic risks that climate change could pose to
the financial system? If so, what tools and models does
the Federal Reserve System use to inform those
assessments?
LHas the Federal Reserve System assessed if the
financial system is resilient to climate-related risks
or taken any actions to increase the financial system's
resilience to climate change?
A.20.b. As I stated previously, the Federal Reserve's framework
for monitoring financial stability assesses several potential
vulnerabilities to the financial system. These vulnerabilities,
in turn, could be susceptible to a series of near-term climate-
related risks. Assessments of the resilience of the U.S.
financial system conducted by Federal Reserve staff are
published biannually in our Financial Stability Report.
For the Federal Reserve's near-term macroeconomic analysis,
we do take into account information on the severity of weather
events. When a severe weather event occurs, we closely monitor
the effects on local economies, assess the implications for
broader measures of economic production and employment, and
adjust our economic forecasts accordingly.
For example, our staff has relied on data from the Federal
Emergency Management Agency and the Department of Energy to
gauge the disruptions to oil and gas extraction, petroleum
refining, and petrochemical and plastic resin production in the
wake of hurricanes that have affected the Gulf region. Our
staff regularly uses daily measures of temperatures and
snowfall from the National Oceanic and Atmospheric Association
weather stations to better understand how severe weather may be
affecting measured and real economic activity in specific
areas.
Our understanding of which economic activities will be
affected by a severe weather event depends critically on data
produced by the Federal statistical agencies, such as the
Census Bureau's County Business Patterns data, as those data
provide information on economic activity in different
geographic locations. In addition, our staff uses credit and
debit card transactions data for gauging how specific types of
severe weather might be affecting consumer spending in areas
affected by those events.
At present, neither we, or any other major central bank,
directly models how changes in temperatures over long periods
of time affect economic activity (modeling being a separate
matter from the extensive economic analysis of this question
that we do). But given that--the evolution of climate over time
affects the economic data on which our models are built--
including the trends and the cyclical behavior of investment,
consumption, production, and employment--then climate change is
incorporated in our macroeconomic analysis.
Other Topics
Q.21. A report released by the Financial Stability Board, of
which you are currently chair, highlighted the risks of
technology companies entering the banking sphere to the broader
financial system.
Q.21.a. Can you please describe how both the FSB on an
international level and the Federal Reserve on a domestic level
are monitoring and evaluating these risks?
A.21.a. The FSB has published multiple reports on financial
stability topics related to technology companies' roles in the
financial sector. These include notes on cloud service
provision, ``BigTech'' financial service provision, and use of
decentralized financial technologies.\18\ The FSB's 2020 work
plan includes further work on BigTech service provision in
emerging markets, a stock-take of financial regulators' and
supervisors' use of technology, an update to the FSB's crypto-
asset monitoring framework to incorporate stablecoins, and
continuance of work underway on the Regulatory Issues of
Stablecoins (RIS).\19\ The RIS work was mandated by the G20 and
will examine the regulatory issues of so-called ``stablecoins''
with the potential to reach a global scale--such as the Libra
initiative--and will advise on multilateral responses as
needed. This work picks up from the G7 Working Group on
Stablecoins 2019 report.\20\ The RIS working group issued a
consultative document in April and is scheduled to submit a
final report to the G20 during the third quarter of 2020.
---------------------------------------------------------------------------
\18\ https://www.fsb.org/2019/12/third-party-dependencies-in-cloud-
services-considerations-on-financial-stability-implications/; https://
www.fsb.org/2019/12/bigtech-in-finance-market-developments-and-
potential-financial-stability-implications/; https://www.fsb.org/2019/
02/fintech-and-market-structure-in-financial-services-market-
developments-and-potential-financial-stability-implications/; https://
www.fsb.org/2019/06/decentralised-financial-technologies-report-on-
financial-stability-regulatory-and-governance-implications/.
\19\ https://www.fsb.org/wp-content/uploads/P171219.pdf.
\20\ https://www.bis.org/cpmi/publ/d187.pdf.
---------------------------------------------------------------------------
In addition to contributing to FSB work, Federal Reserve
staff are also active participants in work on related topics
being conducted by the Basel Committee on Banking Supervision
and the Committee on Payments and Market Infrastructures.
Domestically, Federal Reserve staff from multiple functions
are following the interaction between banks and technology
companies, including partnerships and third-party
relationships, to assess potential consumer protection risks;
risks to banks' safety and soundness; and financial stability
risks.
In 2016, the Federal Reserve created two working groups
with the task of with monitoring and analyzing financial
technology (``fintech'') and related emerging technology trends
and undertaking related market intelligence. These working
groups also conduct research related to our supervisory and
payment system responsibilities. Several of the Board's
divisions now have staff dedicated to policy and research
around fintech and digital innovations in their respective
areas of focus.
The Federal Reserve also coordinates regularly with the
other Federal banking agencies on innovation-related matters in
the supervision area. Our Consumer and Community Affairs
division has convened an interagency fintech discussion forum
to facilitate information sharing between Federal banking
regulators on fintech consumer protection and financial
inclusion issues. The Federal Reserve also engages in
interagency discussion of fintech-related issues through the
FFIEC's Task Force on Supervision and its Task Force on
Consumer Compliance. One current area of focus is the Federal
banking agencies' existing guidance on controls around
partnerships and third-party relationships aimed at ensuring
those activities are conducted in a manner consistent with safe
and sound banking practices. The Federal Reserve staff are
reviewing this guidance to determine whether any adjustments or
clarifications would be helpful to promote responsible
innovation.
Additionally, as noted by Chair Powell previously in
congressional testimony, the Board has set up a
multidisciplinary working group to analyze risk and policy
implications of the Libra initiative which would help organize
Federal Reserve input into the work of the FSB in this area.
Areas of focus include monetary policy, payment system risks,
consumer protection, Bank Secrecy Act/Anti-money Laundering
compliance, and financial stability. The working group also has
been meeting with other regulators, both domestic and
international.
Last, Federal Reserve staff routinely meet with technology
companies and banks, engaging with these companies to better
understand how their products work and the associated risks.
The Federal Reserve held its first in a series of office hour
sessions with banks and financial technology companies to
provide two-way learning opportunities for the companies and
Federal Reserve staff.\21\ Given the impact of the current
economic stress, future office hour sessions have been
postponed temporarily.
---------------------------------------------------------------------------
\21\ https://www.federalreserve.gov/newsevents/pressreleases/
other20191217a.htm.
Q.21.b. Does the Federal Reserve have the sufficient tools to
monitor and address these risks under the current regulatory
---------------------------------------------------------------------------
framework?
A.21.b. The FSB report highlighted a diverse set of potential
benefits and risks from the provision of financial services by
large technology firms. The Board has tools to monitor and
address certain of the identified potential risks, while others
fall outside of the authorities of the Federal Reserve.
As a general matter, the Federal Reserve does not directly
regulate or supervise technology companies. Our regulatory and
supervisory authority generally focuses on State member banks
and bank holding companies.
However, the Federal Reserve does have some authority over
technology companies that provide certain financial services
to, or in partnership with, banks we supervise. Of most
relevance is the Bank Service Company Act, which grants the
Board (and the other Federal banking agencies) the authority to
regulate and examine third-party service providers that perform
certain services for depository institutions we supervise.
Also, under the Federal Deposit Insurance Act, the Board has
the enforcement authority to address unsafe and unsound
practices, violations, and breaches of fiduciary duty by
depository institutions we supervise and their institution-
affiliated parties.
From a broader financial stability perspective, the Federal
Reserve monitors risks to the financial system and works,
usually with agencies at home and abroad, to help ensure the
system supports a healthy economy for U.S. households,
communities, and businesses. This monitoring includes
vulnerabilities assessments, extensive research, and
collaboration with other domestic agencies directly and through
the Financial Stability Oversight Council (FSOC) to monitor
risks to financial stability and to undertake supervisory and
regulatory efforts to mitigate the risks and consequences of
financial instability.
Q.22. On the Frequently Asked Questions page regarding the
proposed FedNow services, it states that additional analysis is
required to fully evaluate the relevant operational, risk, and
policy considerations for both the Federal Reserve Banks and
service participants.
When does the Fed expect to complete this analysis?
A.22. This language refers to the expansion of the Fedwire
Funds Service and National Settlement Service (NSS) hours. The
Federal Reserve Board (Board) is currently analyzing an
expansion of operating hours for the National Settlement
Service (NSS) and the Fedwire Funds Service, up to 24x7x365, to
support a wide range of payment activities, including liquidity
management for faster retail payments. As part of its analysis,
the Board is engaging with industry participants in order to
understand the industry's specific needs and readiness related
to expanded hours.
In addition, the Board intends to publish at least two
Federal Register notices in order to seek public comment on
issues related to, and potential approaches for, expanding the
Fedwire Funds Service and NSS operating hours, and announce its
progress and any decisions related to expanded hours. The
timeline for the Board's analysis will depend in part on the
diversity and complexity of issues that the Board identifies
during its review. Given the systemic importance of the Fedwire
Funds Service, any decisions on expanding hours could have
significant effects on market participants. The Board is
committed to carefully evaluating the potential benefits,
risks, and costs of any decision to expand hours of the Fedwire
Funds Service and NSS.
As the Board considers expanding operating hours for NSS
and the Fedwire Funds Service broadly, the Board will continue
to assess the appropriateness of incremental changes to
relevant operating hours in response to specific industry
needs. For example, the Board recently completed analysis of an
expansion of operating hours for NSS and the Fedwire Funds
Service in order to allow for a third same-day automated
clearinghouse (ACH) processing and settlement window. In
December 2019, the Board announced an expansion of operating
hours for NSS and the Fedwire Funds Service that will be
implemented in March 2021 in order to add a third sameday ACH
processing and settlement window.\22\
---------------------------------------------------------------------------
\22\ See https://www.federalreserve.gov/newsevents/pressreleases/
other20191223a.htm.
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
RANDAL K. QUARLES
Q.1.a. This spring, the Office of Management and Budget issued
a memorandum that for the first time required independent
regulatory agencies such as yours to submit final rules to the
Administration before publishing them.
Has the Federal Reserve submitted its final rules and
guidance to OMB? If so, which ones?
A.1.a. Pursuant to the Congressional Review Act (Act), the
Federal Reserve Board (Board) requests a determination from the
Office of Information and Regulatory Affairs (OIRA), which is
within the Office of Management and Budget (OMB), as to whether
a rule is a major rule for purposes of the Act (i.e., does the
rule have an $100 million annual effect, or other substantial
effect, on the economy). We submit these requests to OIRA for
all final regulations that the Board issues, with the exception
of regulations that fall within one of the exemptions under the
Act.
The Board is currently reviewing OMB's 2019 memorandum on
compliance with the Act with regard to the suggested procedures
for submitting rules to OIRA in connection with its major rule
determinations. We are considering how the 2019 memorandum
applies to the Board's procedures for submitting rules under
the Act. More broadly, in consultation with the other Federal
banking agencies, we continue to assess the scope of
supervisory guidance documents to send to OIRA and Congress
under the Act.
Q.1.b. Did OMB ask you to make changes to any rulemaking?
A.1.b. With regard to requests submitted to OIRA pursuant to
the Act, OIRA has not asked the Board to make any changes to
any rulemakings.
Q.2. Without the Community Reinvestment Act, the homeownership
rate in our country, and especially for Latinos and African
Americans, would be much lower. UnidosUS published a report,
Latino Homeownership 2007-2017: A Decade of Decline for
Latinos, which found that that the CRA helped facilitate
between 15 percent to as much as 35 percent of home loans to
Latinos. How would proposed changes to CRA close the racial and
ethnic homeownership gap?
A.2. As you noted, the Community Reinvestment Act (CRA) is an
important law that ensures banks help meet the credit needs in
all of the communities they serve. Throughout the reform
process, the Federal Reserve has emphasized a set of core
principles to guide our work and I believe that carrying out
CRA reform consistent with these principles could help address
homeownership credit needs for underserved families, including
for communities of color. For example, any revisions to the CRA
regulations should reflect the credit needs of local
communities and work consistently through the business cycle.
They should be tailored to banks of different sizes and
business strategies. They should provide greater clarity in
advance about how activities will be evaluated. They should
encourage banks to seek opportunities in distressed and
underserved areas. And they should recognize that the CRA is
one of several related laws to promote an inclusive financial
sector.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAMER FROM RANDAL K.
QUARLES
Q.1. One issue impacting banks in rural areas of my State are
the limitations Regulation O places on the financial
institution being able to serve the banking needs of their
senior leadership. The regulation put in place in the late
1970s and its $100,000 limitation on extensions of credit to
executives is most problematic. In most cases, a boat loan and
an agriculture loan leave an officer in violation of this rule.
An employee's children could not have all their car loans--or
credit cards--with the bank that employs them. These banks have
executive officers who have had to take out loans at other
financial institutions because they've crossed the threshold,
which is unfortunate. It is like forcing a Nike employee to
wear Under Armor to work.
Because this issue affects so few individuals, it likely
doesn't get much attention. Where does the Fed stand on
modernizing this 40-year-old regulation by simply raising the
threshold from the current $100,000 to $500,000, or an
increased limit based on percentage of capital held by the
bank--when inflation alone from the 1970s would place the limit
well above these suggestions?
A.1. Regulation O (which implements sections 22(h) and (g) of
the Federal Reserve Act) is intended to address the potential
for conflicts of interest and self-dealing by bank executive
officers. As you know, extensions of credit to executive
officers of banks are limited because these individuals are in
a position to have significant influence over the bank's credit
decisions which can be improperly used to benefit the executive
officer to the detriment of the bank. There is currently some
important flexibility to the rule: banks are able to lend to
executive officers to finance a child's education or to
purchase or improve a home without limit, and the $100,000
lending limit only applies to loans for other purposes when the
loans are not secured by liquid assets. Nonetheless, the
problems you identify definitely merit our attention.
The Federal Reserve Board (Board) periodically reviews
regulations to ensure that regulatory thresholds are set at an
appropriate amount to support the objective of the rule. The
Board expects to review Regulation O and as part of that
review, it will consider whether the applicable threshold for
extensions of credit to executive officers warrants adjustment.
Obviously, any proposed change in the threshold would involve
consultations with the other banking agencies.
Q.2. According to recent news accounts, the Federal Reserve
does not plan to join the OCC and the FDIC in issuing a
proposed rule to modernize CRA.
Q.2.a. Does the Fed believe that the CRA regulations should be
updated? If so, how do you plan to proceed?
A.2.a. It is important to strengthen the Community Reinvestment
Act (CRA) regulations to help banks better meet the credit
needs of the local low- and moderate-income communities they
serve, provide more clarity and consistency in our evaluations
of banks, and more closely align with changes in the ways
financial products and services are delivered.
The Board has shared detailed analysis and proposals with
our counterparts at the Office of the Comptroller of the
Currency (OCC) and the Federal Deposit Insurance Corporation
(FDIC) in an effort to forge a common approach on CRA reform.
We have spent a lot of time on research and analysis, and we
are working to determine the best path forward. We continue to
view a common approach as the best outcome, however, at this
time, the Board has made no decisions regarding next steps.
Q.2.b. Do you believe that a consistent, interagency CRA
regulation is preferable? Since the Fed does not plan to join
the OCC/FDIC proposal, what is the likelihood that the Fed will
be able to join its sister agencies in issuing an interagency
final rule?
A.2.b. I continue to believe that a strong common set of
interagency standards is the best outcome. As we work to
develop a common regulatory approach, all of the agencies will
benefit from the public comments on the current OCC and FDIC
notice of public rulemaking.
Q.3. This Committee is considering legislation that would aim
at providing some regulatory certainty to banks working with
cannabis-related companies in the 47 States that have taken
various steps toward legalization. Would legislation such as
the SAFE Banking Act be a constructive step toward providing a
framework for financial institutions to serve companies that
comply with State cannabis laws?
A.3. In general, questions about legislative policy are the
purview of Congress. It is our understanding that the Secure
and Fair Enforcement Banking Act would provide that a bank that
offers services to a marijuana-related business in a State that
has legalized marijuana may not be held liable under Federal
law solely for providing those services. Such legislation could
provide financial institutions with some legislative clarity on
the conflict between Federal and some State laws related to the
legalization of marijuana. However, other aspects of Federal
law and State law would likely
remain in conflict, such as, for example, laws concerning
certain types of use and distribution of marijuana.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR JONES FROM RANDAL K.
QUARLES
Q.1. The Federal Reserve conducts the Small Business Credit
Access Survey every year. The Survey shows that many small
business owners use personal credit cards to pay for business
expenses. Small businesses have struggled to receive loans from
traditional institutions and some have turned to online based
loan servicers to fulfill their financing needs.
How have small businesses utilized financing from loan
providers that are exclusively online? Are small businesses
likely to return to traditional financial institutions after
successfully receiving financing from internet based
businesses?
A.1. As documented in the Federal Reserve Banks' Small Business
Credit Survey, small business applications to online lenders
have been increasing over the past few years.\1\ The 2018
report \2\ found that approximately 14 percent of all employer
films, or 32 percent of those employer firms that had applied
for financing over the previous 12 months, applied to at least
one online lender. These data in the 2018 report demonstrate an
increase from the data in the 2017 report, which found that
approximately 10 percent of all employer firms, or 24 percent
of those employer firms that had applied for credit in the
previous year, applied to an online lender. This increase may
reflect a growing awareness among small business owners of the
existence of online lenders as a potential source of funding.
---------------------------------------------------------------------------
\1\ It is important to note that the Small Business Credit Survey
is conducted using a convenience sample of small firms rather than a
random sample.
\2\ See 2018 Small Business Credit Survey: Rep ort on Employer
Firms at https://www.newyorkfed.org/smallbusiness/small-business-
credit-survey-2018.
---------------------------------------------------------------------------
A more detailed analysis of the 2018 Small Business Survey
data with respect to use of online lenders is provided in a
report published by the Federal Reserve Bank of Cleveland.\3\
---------------------------------------------------------------------------
\3\ See Click, Submit 2.0: An Update on Online Lender Applicants
from the Small Business Credit Survey at https://www.clevelandfed.org/
en/community-development/reports-by-topic/small-business.aspx.
---------------------------------------------------------------------------
Nearly two-thirds of small businesses that applied to an
online lender during the previous year also applied for credit
from a traditional lender during the same period. Small
businesses that applied to online lenders differ from those
that applied only to traditional lenders along several
dimensions. Businesses that applied to online lenders tended to
be younger (but at least 3 years old), smaller with regard to
both revenue and number of employees, less profitable, and
riskier (as measured by self-reported credit scores) than small
businesses that applied only to traditional lenders. Businesses
seeking funding from online lenders were much more likely than
those applying only to traditional lenders to report that they
sought funds to cover operating expenses.
Applicants with medium- or high-credit risk were more
likely to have their applications approved by online lenders
than by small banks or large banks. Survey respondents reported
that the most important factors leading them to apply for loans
from online lenders were the speed with which they would be
provided a decision regarding their application or would
receive funding, the probability of obtaining funding, and the
absence of a collateral requirement.
We do not have data to respond to the question of whether
small businesses that receive loans from online lenders are
likely to subsequently apply for loans from traditional
financial institutions.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JELENA
McWILLIAMS
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 May 15, 2019, 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/chairmansched
ule.html.
Q.2. Recently, the FDIC approved the merger of BB&T and
SunTrust--two institutions with a significant overlapping
branch footprint. In November 2019, the Federal Reserve issued
a report on bank branch access in rural communities.\1\ The
report found that most rural counties experienced a significant
decline in bank branches between 2012 and 2017, but small
businesses and certain consumers prefer using local banks and
cannot find comparable financial products and services
elsewhere.
---------------------------------------------------------------------------
\1\ https://www.federalreserve.gov/publications/files/bank-branch-
access-in-rural-communities.pdf.
---------------------------------------------------------------------------
The FDIC's Order and Basis for Corporation Approval of the
merger states that the bank did not identify specific branches
that would be closed or consolidated as a consequence of the
merger, but have committed that Truist Bank would not have any
merger-related branch closures for one year and would not have
any merger-related branch closures in rural areas with
populations under 2,500 for three years following consummation
of the merger. How does the FDIC plan to enforce this
commitment? Will the FDIC reject any application to close a
branch submitted by Truist Bank under these parameters? In
addition, please provide a list of the rural areas with
populations under 2,500 described in the Order.
A.2. In evaluating any merger, section 18(c)(5) of the Bank
Merger Act (BMA) directs the FDIC to consider the convenience
and needs of the community to be served. In addition, the
Community Reinvestment Act (CRA) requires the FDIC to take into
account the CRA records of the institutions involved in the
transaction.
The FDIC found that Truist Bank's (Truist) ability to meet
the convenience and needs of the community to be served
supported approval of the application. This finding was
informed by, among other things, Truist's commitment to not
pursue any merger-related branch closures for one year and to
not pursue any merger-related branch closures in rural areas
with populations under 2,500 for three years following
consummation of the merger.
The FDIC has an inventory of Truist branches located in
such rural communities (attached), which will enable the FDIC
to monitor the continued operation of these branches over the
next three years as part of the FDIC's continuous examination
program.\2\ A failure to satisfy commitments made to the FDIC
in connection with an application could give rise to adverse
findings made in the examination process. In addition, as
described below, the FDIC may make adverse findings and/or take
appropriate enforcement action against an FDIC-supervised
institution for failing to comply with the branch closing
notice requirements of section 42 of the Federal Deposit
Insurance Act (FDI Act).
---------------------------------------------------------------------------
\2\ See Appendix A: Response to Question 2 from Ranking Member
Sherrod Brown.
---------------------------------------------------------------------------
Insured depository institutions (IDIs) must provide notice
of proposed branch closings to customers and the appropriate
Federal banking agency, but such closings are not subject to
application requirements or regulatory approval. Section 42 of
the FDI Act requires IDIs to give written notice to customers
and the appropriate Federal banking agency no later than 90
days prior to the date of the proposed branch closing.\3\
---------------------------------------------------------------------------
\3\ 12 U.S.C. 1831r-1(a)-(b). IDIs must also post a notice on the
premises of a branch proposed to be closed for a period of at least 30
days prior to the proposed closing. 12 U.S.C. 1831r-1(b)(2)(A).
---------------------------------------------------------------------------
Section 42 imposes additional notice requirements on
interstate banks that propose to close any branch in a low- or
moderate-income (LMI) area, and, under certain circumstances,
authorizes the appropriate Federal banking agency to take
action to convene a meeting of stakeholders in the affected
area.\4\ However, section 42 clarifies that such action may not
affect the authority of the bank to close the branch so long as
the notice requirements of section 42 are satisfied.\5\ The
FDIC is the primary Federal regulator for Truist and, as such,
will ensure through its examination and supervisory processes
that Truist satisfies the notice requirements of section 42,
consistent with the Interagency Policy Statement Concerning
Branch Closing Notices and Policies (Policy Statement).\6\ As
noted above, the FDIC may make adverse findings and/or take
appropriate enforcement action against an FDIC-supervised
institution for its failure to comply with the requirements of
section 42.
---------------------------------------------------------------------------
\4\ 12 U.S.C. 1831r-1(d).
\5\ 12 U.S.C. 1831r-1(d)(3).
\6\ See Branch Closings, 64 Fed. Reg. 34845 (June 29, 1999),
available at https://www.govinfo.gov/content/pkg/FR-1999-06-29/pdf/99-
16471.pdf.
---------------------------------------------------------------------------
Consistent with the Policy Statement, the FDIC will examine
Truist for compliance with section 42 to determine whether it
has adopted a branch closing policy and whether it has provided
the required notices in connection with any applicable branch
closings. In this regard the FDIC will examine Truist for
compliance with section 42 just as it would with respect to any
of its supervised institutions. As appropriate, the FDIC will
take action to convene stakeholder meetings in connection with
the proposed closings of branches in LMI areas in response to
requests made in accordance with section 42.
Q.3. The FDIC's proposed rule on Federal Interest Rate
Authority states that it is not based on the claimed common law
``valid-when-made'' doctrine, merely consistent with it.\7\ In
Director McWilliams' December 4, 2019, testimony before the
House Financial Services Committee, however, she stated that
the proposed rule is just codifying ``long-standing
principles.'' What long-standing principles is the FDIC
codifying if the proposed rule is not based on ``valid-when-
made'' doctrine?
---------------------------------------------------------------------------
\7\ 84 Fed. Reg. 66845, 66848 (Dec. 6, 2019).
A.3. On December 6, 2019, the FDIC published a notice of
proposed rulemaking that would clarify the law governing the
interest rates State banks may charge,\8\ which Congress put in
place for FDIC-regulated institutions in 1980.\9\ This
provision of the FDI Act has been interpreted in two published
opinions of the FDIC's General Counsel in 1998.\10\ The
proposed rule would codify the guidance provided in those
published opinions, which has been in effect for over 20 years.
The proposal would provide that whether interest on a loan is
permissible under section 27 of the FDI Act would be determined
at the time the loan is made, and interest on a loan
permissible under section 27 would not be affected by
subsequent events, such as a change in State law, a change in
the relevant commercial paper rate, or the sale, assignment, or
other transfer of the loan. In addition, the proposed rule is
consistent with the common law ``valid when made'' doctrine
(i.e., usury must exist at the inception of the loan for a loan
to be deemed usurious), which the Supreme Court has recognized
for nearly 200 years.\11\
---------------------------------------------------------------------------
\8\ See Federal Interest Rate Authority, 84 Fed. Reg. 66845 (Dec.
6, 2019), available at https://www.govinfo.gov/content/pkg/FR-2019-12-
06/pdf/2019-25689.pdf.
\9\ See Section 2[27(b)] of the Act of September 21, 1950 (Pub. L.
No. 81-797), effective September 21, 1950, as added by section 521 of
title V of the Act of March 31, 1980 (Pub. L. No. 96-221; 94 Stat.
164), effective March 31, 1980, provides that ``[i]in order to prevent
discrimination against State-chartered insured depository institutions,
including insured savings banks, or insured branches of foreign banks
with respect to interest rates, if the applicable rate prescribed in
this subsection exceeds the rate such State bank or insured branch of a
foreign bank would be permitted to charge in the absence of this
subsection, such State bank or such insured branch of a foreign bank
may, notwithstanding any State constitution or statute which is hereby
preempted for the purposes of this section, take, receive, reserve, and
charge on any loan or discount made, or upon any note, bill of
exchange, or other evidence of debt, interest at a rate of not more
than 1 per centum in excess of the discount rate on 90-day commercial
paper in effect at the Federal Reserve bank in the Federal Reserve
district where such State bank or such insured branch of a foreign bank
is located or at the rate allowed by the laws of the State, territory,
or district where the bank is located, whichever may be greater.''
\10\ See FDIC General Counsel's Opinion No. 10, 63 Fed. Reg. 19258
(Apr. 17, 1998); FDIC General Counsel's Opinion No. 11, 63 Fed. Reg.
27282 (May 18, 1998).
\11\ See Nichols v. Fearson, 32 U.S. (7. Pet.) 103, 109 (1833) (``a
contract, which in its inception, is unaffected by usury, can never be
invalidated by any subsequent usurious transaction''); see also Gaither
v. Farmers & Merchants Bank of Georgetown, 26 U.S. 37, 43 (1828)
(``[T]he rule cannot be doubted, that if the note free from usury, in
its origin, no subsequent usurious transactions respecting it, can
affect it with the taint of usury.'')
Q.4. On November 19, 2019, the FDIC announced a new rule on
Federal Interest Rate Authority to ``clarify the Federal law
governing interest rates State-chartered banks may charge their
customers.''\12\ As justification for the proposed rule, the
FDIC claims it is necessary because of ``uncertainty'' created
by the Second Circuit's decision in Madden v. Midland Funding,
LLC, 786 F.3d 246 (2d Cir. 2015).\13\ The proposed rule,
however, only discusses potential impact of ``uncertainty''
does not establish that there has been any actual impact. For
example, the FDIC claims in the proposed rule that
``uncertainty regarding the enforceability of interest rate
terms may hinder or frustrate loan sales, which are crucial to
the safety and soundness of State banks'' and ``uncertainty has
the potential to chill State banks' willingness to make the
types of loans affected by the proposed rule.''\14\
---------------------------------------------------------------------------
\12\ https://www.fdic.gov/news/news/press/2019/pr19107.html.
\13\ https://www.fdic.gov/news/board/2019/2019-11-19-notice-dis-c-
fr.pdf.
\14\ 84 Fed. Reg. 66845, 66850 (Dec. 6, 2019).
Q.4.a. Does the FDIC have any quantifiable evidence of actual
uncertainty resulting from the Second Circuit's decision in
---------------------------------------------------------------------------
Madden? If so, please provide that evidence.
Q.4.b. Does the FDIC have any quantifiable evidence of actual
impact--positive or negative--resulting from the Second
Circuit's decision in Madden? If so, please provide that
evidence.
A.4.a.-b. The preamble explained that an important benefit of
the proposed rule is to uphold long-standing principles
regarding the ability of banks to sell loans, an ability that
has significant safety-and-soundness implications, and included
an extensive discussion of the FDIC's legal reasoning. Further,
one way the FDIC fulfills its mission to maintain stability and
public confidence in the Nation's financial system is by
carrying out all of the tasks triggered by the closure of an
FDIC-insured institution. This includes attempting to find a
purchaser for the institution and the liquidation of the assets
held by the failed banks.
As it stands, the Madden decision could significantly
impact the losses to the Deposit Insurance Fund (DIF) in a
failed bank resolution and disposition of assets. Following a
bank closure, the FDIC as Conservator or Receiver (FDIC-R) is
often left with large portfolios of loans. The FDIC-R has a
statutory obligation to maximize the net present value return
from the sale or disposition of such assets and minimize the
amount of any loss, both in order to protect the DIF.\15\
---------------------------------------------------------------------------
\15\ Federal Deposit Insurance Act (FDI Act), 12 U.S.C. 1821(d).
---------------------------------------------------------------------------
The DIF would be significantly impacted in a large bank
failure scenario if the FDIC-R were forced to sell loans at a
large discount to account for impairment in the value of those
loans as a result of legal uncertainty. This uncertainty would
also increase legal and business risks to potential purchasers
of bank loans, which in turn would likely reduce overall
liquidity in loan markets, further limiting the ability of the
FDIC-R to sell loans.
The proposal also discusses concerns of market observers
and ratings agencies regarding the liquidity and marketability
of certain types of bank loans, and noted published research on
potential effects on credit availability in the Second
District.\16\ The comment period closed on February 4, 2020,
and the FDIC has received
numerous comments expressing concerns about the potential
effects on financial markets and concerns regarding
availability of credit for high-risk consumers.
---------------------------------------------------------------------------
\16\ See Michael Marvin, ``Interest Exportation and Preemption:
Madden's Impact on National Banks, the Secondary Credit Market, and P2P
Lending,'' Columbia Law Review, Vol. 116 (January 15, 2016), available
at https://ssrn.com/abstract=2753899 (focusing on the potentially
deleterious effects of Madden on credit availability and the pricing of
instruments tied to debt originated by a national bank in the secondary
credit market); see also Colleen Honigsberg, Robert J. Jackson Jr., and
Richard Squire, ``How Does Legal Enforceability Affect Consumer
Lending? Evidence from a Natural Experiment,'' The Journal of Law and
Economics 60, number four (November 2017): 673-712, available at
https://www.journals.uchicago.edu/doi/abs/10.1086/695808, (finding that
the decision in Madden not only reduced credit availability for higher-
risk borrowers in the Second Circuit's jurisdiction, but affected the
pricing of certain notes in the secondary market); see also Piotr
Danisewicz and Ilaf Elard, ``The Real Effects of Financial Technology:
Marketplace Lending and Personal Bankruptcy,'' July 5, 2018, available
at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3208908 (finding
that Madden led to an increase in bankruptcy rates arising
predominately from changes in marketplace lending).
Q.5. You have stated that FDIC takes an ``unfavorable'' view of
predatory rent-a-bank arrangements. If so, why has the FDIC
failed to take action against Republic Bank and FinWise Bank
for their rent-a-bank arrangements with Elevate Financial, and
Bank of Lake Mills, Wisconsin, for its rent-a-bank arrangement
---------------------------------------------------------------------------
with World Business Lenders, LLC?
Q.6. What is the FDIC's position on bank partnership
transactions that are primarily designed to enable nonbanks to
originate or purchase loans at interest rates that are illegal
under State usury laws and which they could not have made
themselves?
A.5.-A.6. The proposed rule affirms that the FDIC views
unfavorably entities that partner with a State bank with the
sole goal of evading a lower interest rate established under
the law of the entity's licensing State(s). Although I am
unable to address any confidential supervisory information or
provide institution-specific information, I would note that the
FDIC issued a public enforcement action \17\ in October 2018
against Republic Bank & Trust Company for failing to clearly
and conspicuously disclose required information related to the
bank's Elastic line of credit product offered pursuant to a
contract with Elevate@Work, L.L.C. The FDIC will continue to
examine supervised institutions for compliance with all
applicable laws and regulations.
---------------------------------------------------------------------------
\17\ See FDIC Makes Public October Enforcement Actions, PR-89-2018
(November 30, 2018) available at https://www.fdic.gov/news/news/press/
2018/pr18089.html.
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS FROM JELENA
McWILLIAMS
Q.1. As members of the Financial Stability Oversight Council
(FSOC), I would like to express my gratitude for FSOC's
finalization of its revised interpretive guidance on nonbank
financial company designations. As the lead sponsor of the
Financial Stability Oversight Council Improvement Act of 2019,
I am well aware of the need to reform the process for
designating financial institutions as systemically important
financial institutions (SIFIs). Although no revised guidance or
regulation can take the place of reforming the ill-conceived
designation process that came about as a result of Dodd-Frank,
I am nonetheless grateful that FSOC has taken a step to this
end.
LThe Financial Stability Oversight Council
Improvement Act of 2019 shares many goals with the
guidance. Can you expand on why you chose to prioritize
an activities-based approach?
A.1. On December 30, 2019, the FSOC issued its final
interpretive guidance on nonbank financial company
designations, which describes the approach the Council intends
to take in prioritizing its work to identify and address
potential risks to U.S. financial stability using an
activities-based approach.\1\ This approach reflects two
priorities: (1) identifying and addressing potential risks and
emerging threats on a system-wide basis, thereby reducing the
potential for competitive distortions among financial companies
and in markets that could arise from entity-specific
determinations; and (2) allowing relevant financial regulatory
agencies, which generally possess greater information and
expertise with respect to company, product, and market risks,
to address potential risks. The FSOC expects that, in many
cases, relevant financial regulatory agencies will have
authority to address risks identified by the Council under the
activities-based approach.
---------------------------------------------------------------------------
\1\ See Authority to Require Supervision and Regulation of Certain
Nonbank Financial Companies, 84 Fed. Reg. 71740 (Dec. 30, 2019),
available at https://www.govinfo.gov/content/pkg/FR-2019-12-30/pdf/
2019-27108.pdf.
Q.2. As one of the original sponsors of the Improving
Laundering Laws and Increasing Comprehensive Information
Tracking of Criminal Activity in Shell Holdings (ILLICIT CASH)
Act, I am well aware of the pitfalls associated with our
current anti-money laundering systems as well as the challenges
that financial services institutions have in complying with
current antimoney laundering rules and regulations.
Financial institutions trying to understand and comply with
our existing anti-money laundering rules frequently rely on the
Federal Financial Institutions Examination Council's (FFIEC)
Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) Examination
Manual. This manual was last updated in November 2014, before
substantial changes like the finalization of the Customer Due
Diligence Rule.
Q.2.a. When will the manual be updated to reflect changes made
after November 2014?
A.2.a. The FFIEC released the Customer Due Diligence (CDD) and
Beneficial Ownership sections of the Bank Secrecy Act (BSA)/
Anti-Money Laundering (AML) Examination Manual (Manual) on May
11, 2018.\2\ These updates to the Manual were released in
conjunction with the compliance date for the CDD and Beneficial
Ownership rules to promote transparency in the examination
process.
---------------------------------------------------------------------------
\2\ See FFIEC, ``FFIEC Issues New Customer Due Diligence and
Beneficial Ownership Examination Procedures'' (May 11, 2018), available
at https://www.ffiec.gov/press/pr051118.htm.
---------------------------------------------------------------------------
Currently, the FFIEC plans to release several updated
sections and related examination procedures to the Manual
during the second quarter of 2020. The revised sections will
provide instructions to examiners for assessing banks' BSA/AML
compliance programs as well as the risk assessment process. The
Federal banking agencies, State banking representatives, FinCEN
and the Office of Foreign Assets Control (OFAC) continue to
review and revise the remaining sections of the Manual.
Q.2.b. In future updates, how will the manual promote
consistency among each of the regulatory agencies that are
members of the FFIEC?
A.2.b. The development of the Manual is a collaborative effort
of the Federal and State banking agencies to ensure consistency
in the assessment of banks' compliance with and application of
the BSA/AML requirements. The FFIEC member entities are
responsible for maintaining current instructions for examiners
and accomplishing that objective through the Manual. Updates
are completed in collaboration with FinCEN, the administrator
of the BSA, and OFAC. FinCEN and OFAC contribute directly to
the sections that address compliance with the regulations and
sanctions programs that FinCEN and OFAC administer and enforce.
Q.3. When Congress gave the Federal Deposit Insurance
Corporation (FDIC) the ability to regulate brokered deposits
with the
enactment of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA), there was concern about
brokers moving significant amounts of unstable deposits or
``hot money'' from bank to bank. One key exception in FIRREA
excludes certain categories of deposits like prepaid accounts
from the definition of brokered deposit.
Prepaid accounts in particular were rightfully excluded
from the definition of brokered deposit until 2015 when the
FDIC released its Frequently Asked Questions on Brokered
Deposits (FAQs). The FAQs, which were written prior to your
assumption of the duties of Chairman of the FDIC, disrupted
nearly 30 years of established policy regarding the treatment
of brokered deposits. More specifically, the FAQs' findings
that prepaid deposits are generally brokered, and the increased
supervisory and deposit insurance thresholds inherent therein,
are burdensome and will have the effect of both stifling
innovation and limiting consumer access to these financial
products.
Q.3.a. Under the FDIC's forthcoming brokered deposits rule,
will a prepaid provider, fintech, or digital bank that partners
with a traditional financial institution to accept deposits be
considered a broker because of how they reach consumers? With
the pace of innovation disrupting traditional methods of
banking, many entrepreneurs partner with traditional financial
institutions to expand the reach of new products and services.
Q.3.b. Lack of clarity with respect to the ``primary purpose
exception'' could result in an unacceptable outcome in which
any third-party relationship that results in a deposit could be
considered brokered. This unintended outcome is particularly
problematic because many innovative fintech products are
structured in a similar fashion or built on similar
technologies. That could, in turn, result in classifying
practically all payment solutions not issued directly by a bank
as brokered deposits.
LAre deposits into regulated prepaid accounts
through mobile wallets brokered deposits under the
FDIC's current definition?
LWill that change with the forthcoming rule on
brokered deposits?
Q.3.c. As you're aware, according to the FDIC's latest National
Survey of Unbanked and Underbanked Households, 6.5% of American
households or about 8.4 million total households are totally
unbanked while an additional 18.7% of American households or
24.2 million total households are underbanked. An overly broad
definition of brokered deposits, particularly as it applies to
prepaid accounts, will cause depository institutions to stop
offering these products to millions of low-income consumers who
find them to be helpful tools with which to manage their day-
to-day banking needs.
LHow will the FDIC mitigate these concerns in its
forthcoming proposal?
A.3.a.-A.3.c. On December 12, 2019, the FDIC approved a notice
of proposed rulemaking (NPR)\3\ that would modernize its
brokered deposit regulations. Among the goals of this
rulemaking process are to (1) develop a framework that
encourages innovation, and (2) provide more clarity and
consistency in what is and what is not a brokered deposit.\4\
The accessibility of banking services to unbanked and
underbanked populations is a key motivation of the proposal.
---------------------------------------------------------------------------
\3\ See Unsafe and Unsound Practices: Brokered Deposits
Restrictions, 85 Fed. Reg. 7453 (Feb. 10, 2020), available at https://
www.govinfo.gov/content/pkg/FR-2020-02-10/pdf/2019-282
75.pdf.
\4\ See FDIC Chairman Jelena McWilliams, ``Brokered Deposits in the
Fintech Age,'' speech before the Brookings Institution (Dec. 11, 2019),
available at https://www.fdic.gov/news/news/speeches/spdec1119.html.
---------------------------------------------------------------------------
Under the NPR, a prepaid provider, fintech, or digital bank
that partners with an insured depository institution will not
be considered a deposit broker if (1) the third-party entity is
not engaged in the business of placing deposits or engaged in
the business of facilitating the placement of deposits, based
on the criteria laid out in the proposal, or (2) the third-
party entity satisfies one of the exceptions to the deposit
broker definition, one of which is the primary purpose
exception. The NPR proposes a new interpretation of the primary
purpose exception that focuses on the business relationship
between the third-party entity and its customers. In addition,
in the NPR, the FDIC proposes that certain business
relationships, including those in which a third-party places
funds into transactional accounts to enable payments, would be
deemed to meet the primary purpose exception (subject to
certain criteria and an application process). My staff would be
happy to discuss the proposal in further detail, and we look
forward to receiving robust comments on the proposal.
Q.4. When does the FDIC intend to finalize its insured
depository institution resolution planning rule? The lack of
clarity about when the rule is to be finalized is problematic
given that many institutions have been left wondering whether
or not resolution plans will be required in 2020. The FDIC's
finalization of this rule in early 2020 would leave
institutions that are required to submit resolution plans with
only a short amount of time to prepare.
A.4. On April 22, 2019, the FDIC issued an advance notice of
proposed rulemaking (ANPR) seeking comment on potential changes
to the resolution planning rule for IDIs.\5\ The next step is
to issue a notice of proposed rulemaking (NPR). Following the
issuance of the NPR, the FDIC will provide a period of time for
the public to comment, and then the FDIC will review comments
prior to issuing a final rule. In connection with approving the
ANPR last year, the FDIC Board voted to delay the next IDI
resolution plans until the rulemaking process is completed.
Once a final rule is issued, the FDIC will ensure that firms
have adequate time to prepare and submit any required
resolution plans.
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\5\ See Resolution Plans Required for Insured Depository
Institutions With $50 Billion or More in Total Assets, 84 Fed. Reg.
16620 (Apr. 22, 2019), available at https://www.govinfo.gov/content/
pkg/FR-2019-04-22/pdf/2019-08077.pdf.
Q.5. I've taken note of legislation introduced in the House
that would preempt State legislation and impose price controls
on virtually all types of consumer credit, from small dollar
loans to revolving credit. This would represent an unacceptable
expansion of Government control into the financial services
sector that could prevent consumers from obtaining the types of
products they need to establish, build, or re-build credit--
including the credit card that you mentioned obtaining when you
were a newly arrived immigrant in the United States.
While I empathize with the sponsors of the House
legislation in wanting to promote consumers' access to credit
products that are affordable, I'm concerned that the
legislation being contemplated could do the exact opposite and
hurt the already underbanked and unbanked. My concern is driven
particularly by a test program the FDIC ran in 2008 that
studied the ability for banks to offer small dollar loans with
a 36% interest rate cap. Unfortunately, banks that participated
in the test found that such loans were unprofitable and thus
unsustainable.
LIs capping interest rates a good idea?
LWhat are the consequences of the caps contemplated
by the legislation I've referenced?
A.5. I defer to Congress on whether legislation should be
adopted to address this matter. The FDIC is looking for ways to
encourage banks to meet consumers' small-dollar credit needs in
a manner that makes sense for both the bank and the consumer.
The FDIC issued a request for information \6\ in November 2018
to learn more about small-dollar credit needs. We received more
than 60 comment letters, including a response \7\ from former
FDIC Chairman Sheila Bair noting that the FDIC's two-year pilot
program on small-dollar lending in 2008-2009 showed that
``flexibility on pricing is necessary'' for short-term, small-
dollar loans and that rates above 36% ``may be necessary for
loans of just a few hundred dollars to stimulate more
competition.'' We are reviewing our existing guidance and
considering steps to address this issue in a manner that does
not limit credit availability for borrowers.
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\6\ Request for Information on Small-Dollar Lending, 83 Fed. Reg.
58566 (Nov. 20, 2018), available https://www.govinfo.gov/content/pkg/
FR-2018-11-20/pdf/2018-25257.pdf.
\7\ https://www.fdic.gov/regulations/laws/federal/2018/2018-small-
dollar-lending-3064-za04-c-049.pdf
Q.6. Following up on my previous question, I understand the
FDIC is participating in a forthcoming rulemaking on small-
dollar lending. It's encouraging to see our regulators taking a
proactive approach to extending credit to underserved
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consumers.
LWhen will your joint rule be proposed?
LWill it include a recession of the FDIC's guidance
on small dollar loans that was issued in 2013?
A.6. According to the FDIC's unbanked and underbanked study,
over 20 million households in America are underbanked and over
8 million are unbanked.\8\ While some banks offer small-dollar
lending to help those in need, many banks have chosen not to
offer such products, in part, due to regulatory uncertainty \9\
As a result, many families rely on nonbank providers to cover
these emergency expenses, or their needs go unmet. To solicit
feedback on these products and consumer needs, the FDIC issued
a request for information \10\ in November 2018 to learn more
about small-dollar credit needs and concerns. We have reviewed
more than 60 comments and are reviewing our existing policies,
including the 2013 guidance on deposit advance products. On
March 26, 2020, the FDIC, OCC, FRB, NCUA, and CFPB issued a
statement to encourage financial institutions to offer
responsible small-dollar loans to consumers and small
businesses.\11\ We continue working closely with the other bank
regulatory agencies to coordinate policies and plan to take
additional action in this area in the near future.
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\8\ See 2017 FDIC National Survey of Unbanked and Underbanked
Households, available at https://www.fdic.gov/householdsurvey/2017/
2017report.pdf. A household is classified as un
banked if no one in the household has a checking or savings account. A
household is classified as underbanked if it has a checking or savings
account and used one of the following products or services from an
alternative financial services provider in the past 12 months: money
orders, check cashing, international remittances, payday loans, refund
anticipation services, rent-to-own services, pawn shop loans, or auto
title loans.
\9\ The FDIC, FRB, and OCC have taken separate approaches to small-
dollar lending at the institutions they regulate. See FDIC Issues Final
Guidance Regarding Deposit Advance Products (Nov. 21, 2013), available
at https://www.fdic.gov/news/news/press/2013/pr13105.html; 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.federal-
reserve.gov/supervisionreg/caletters/caltr1307.htm.
\10\ Request for Information on Small-Dollar Lending, 83 Fed. Reg.
58566 (Nov. 20, 2018), available https://www.govinfo.gov/content/pkg/
FR-2018-11-20/pdf/2018-25257.pdf.
\11\ See FDIC FIL-26-2020, Statement Encouraging Responsible Small-
Dollar Lending to Consumers and Small Businesses in Response to COVID-
19 (March 26, 2020), available at: https://www.fdic.gov/news/news/
financial/2020/fil20026.pdf.
Q.7. South Dakotans have been closely monitoring developments
in Madden v. Midland, including the recently released proposed
rules from the FDIC and OCC that would provide additional
certainty surrounding the valid-when-made doctrine. Critics of
your proposal claim that it could serve as a vehicle for
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nonbanks to evade State interest rate caps.
LHas the FDIC discussed this scenario in the past?
If so, what was the outcome?
LDoes the FDIC have the legal authority necessary to
prevent this from occurring?
A.7. The proposed rule affirms that the FDIC views unfavorably
entities that partner with a State bank with the sole goal of
evading a lower interest rate established under the law of the
entity's licensing State(s). Although I am unable to address
any confidential supervisory information or provide
institution-specific information, I would note that the FDIC
issued a public enforcement action \12\ in October 2018 against
Republic Bank & Trust Company for failing to clearly and
conspicuously disclose required information related to the
bank's Elastic line of credit product offered pursuant to a
contract with Elevate@Work, L.L.C. The FDIC will continue to
examine supervised institutions for compliance with all
applicable laws and regulations.
---------------------------------------------------------------------------
\12\ See FDIC Makes Public October Enforcement Actions, PR-89-2018
(November 30, 2018) available at https://www.fdic.gov/news/news/press/
2018/pr18089.html.
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------
RESPONSE TO WRITTEN QUESTION OF SENATOR TILLIS FROM JELENA
McWILLIAMS
Q.1. Thank you for your ongoing study of the FDIC-brokered
deposit rules. As you continue to consider amendments to how
these rules impact brokerage cash sweeps, can you comment on
establishing a level playing field between broker-dealers
affiliated with banks and brokerage firms without bank
affiliates? Will these brokerage sweeps receive equal treatment
under any future rule?
A.1. On December 12, 2019, the FDIC issued a notice of proposed
rulemaking \1\ that would modernize its brokered deposit
regulations. The proposal does not differentiate between third
parties that offer cash sweep accounts that are affiliated with
banks and third parties that offer cash sweep accounts that are
not affiliated with banks. An entity that applied for a primary
purpose exception would be analyzed based on the same criteria
regardless of whether or not the entity is affiliated with a
bank.
---------------------------------------------------------------------------
\1\See Unsafe and Unsound Practices: Brokered Deposits
Restrictions, 85 Fed. Reg. 7453 (Feb. 10, 2020), available at https://
www.govinfo.gov/content/pkg/FR-2020-02-10/pdf/2019-282
75.pdf.
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The FDIC looks forward to receiving comments on the
proposal and finalizing the rule.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR KENNEDY FROM JELENA
McWILLIAMS
Q.1. In response to my question you noted that the FDIC
regulates banks the same way it regulates ILCs. From the FDIC
perspective that may be accurate, but ILCs are not subject to
regulation or supervision at the parent holding company level.
ILCs may be owned by a nonfinancial company not subject to the
BHC Act, which introduces important policy questions. In
particular, the lack of capital and liquidity standards at the
holding company, no real requirements that the holding company
act as a source of strength to the ILC, no ongoing supervision
or regulation, and no other prudential and risk management
standards applied to the holding company can really expose the
financial system and Deposit Insurance Fund to risk.
a. LAside from what the FDIC does, what potential concerns do
these regulatory gaps present?
b. LDo you view any risks to approving ILCs that do not have
a nexus to the financial services industry?
c. LHow does the FDIC plan to address or mitigate these risks
as it considers what we understand to be a high volume
of interest in potentially applying for an ILC charter?
d. LWhat is the FDIC's plan to ensure that ILC charter
applicants have robust data protection and privacy
standards akin to the ones that bank holding companies
are subject to?
e. LWhat kind of governance requirements will the FDIC impose
on ILC applicants for proper cyber security processes,
protocols and controls?
f. LWhat risks do commercial firms pose to the Deposit
Insurance Fund?
g. LDoes the FDIC have sufficient personnel to supervise a
potentially large platform technology firm with
international operations?
h. LHow would the FDIC work with the State regulators or
other regulators to address potential consumer risks?
A.1. Industrial loan companies (ILCs) and Industrial Banks are
State-chartered, FDIC-supervised financial institutions that
can be owned by financial or commercial firms.\1\ Congress
authorized Federal deposit insurance for ILCs and Industrial
Banks in 1982,\2\ and exempted ILCs and Industrial Banks from
the definition of ``bank'' under the Bank Holding Company Act
(BHCA) in 1987.\3\ As of December 31, 2019, there were 23 ILCs
and Industrial Banks with approximately $141 billion in
aggregate total assets. These ILCs and Industrial Banks are
subject to the same FDIC statutory standards as other insured
depository institutions (IDIs) for which the FDIC is the
primary supervisor.
---------------------------------------------------------------------------
\1\ See FDIC Supervisory Insights, Supervision of Industrial Loan
Companies (Summer 2004), available at https://www.fdic.gov/regulations/
examinations/supervisory/insights/sisum04/sisu
m04.pdf.
\2\ See Garn-St Germain Depository Institutions Act of 1982, Pub.
L. No. 97-320, 96 Stat. 1469 (1982).
\3\ See Competitive Equality Banking Act of 1987, Pub. L. No. 100-
86, 101 Stat. 552 (Aug. 10, 1987).
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In determining whether to grant deposit insurance to an ILC
or Industrial Bank, the FDIC must consider the same statutory
factors under section 6 of the Federal Deposit Insurance Act
(FDI Act)\4\ that it considers for all other applications for
deposit insurance, including traditional banks: (1) the
financial history and condition of the depository institution;
(2) the adequacy of its capital structure; (3) future earnings
prospects; (4) the general character and fitness of management;
(5) the risk presented by such depository institution to the
DIF; (6) the convenience and needs of the community to be
served by the depository institution; and (7) whether the
depository institution's corporate powers are consistent with
the purposes of the FDI Act. The FDIC must also consider
whether the parent company can serve as a source of strength to
the IDI, as required by Section 616 of the Dodd-Frank Act.
---------------------------------------------------------------------------
\4\ 12 U.S.C. 1816.
---------------------------------------------------------------------------
Although a financial or commercial firm that owns an ILC or
Industrial Bank is not subject to regulation or supervision by
the Federal Reserve Board at the parent holding company level
because of the exemption from the BHCA, an ILC or Industrial
Bank is required to enter into legally enforceable commitments
with the FDIC as a required condition of approval for an ILC or
Industrial Bank and their parent companies. Beginning in 2000,
the FDIC has required ILCs or Industrial Banks and their parent
companies to enter into Capital and Liquidity Maintenance
Agreements (CALMAs) and Parent Company Agreements (PAs), which
have proven to be useful as part of a comprehensive supervisory
strategy to protect the IDI and address potential risks to the
DIF.
CALMAs are designed to ensure that the parent financially
supports the IDI and serves as a source of strength in terms of
capital and/or liquidity. CALMAs require that capital
contributions be made in the form of cash unless other assets
are approved. Liquidity provisions in a CALMA require financial
support to meet any ongoing liquidity obligations, and may
require the top-tier parent company to establish a line of
credit on which the IDI can draw. As a general matter, ILCs and
Industrial Banks have higher capital and liquidity requirements
than traditional de novo community banks.
PAs are designed to address a variety of circumstances
regarding corporate governance and control exercised over the
IDI and include consent of the nonbank parent to agree to
examination by the FDIC. Among other items, PAs help ensure
that the IDI's board and executive officers are independent of
the parent company and any affiliates, that the IDI operates
under a separate and distinct business plan, and that the IDI
maintains separate books and records. The PAs also require the
ILC or Industrial Bank to abide by the limitations on
transactions with affiliates under Section 23A and 23B of the
Federal Reserve Act and Regulation W. Further, the FDIC
requires the ILC or Industrial Bank to adhere to the anti-tying
requirements under the BHCA, insider lending limitations under
Regulation O, and restrictions on conflicts of interest.
In addition to the requirements under the PA and CALMA,
FDIC examiners conduct supervisory examinations of both the ILC
or Industrial Bank focusing on safety and soundness, Bank
Secrecy Act and Anti-Money Laundering (BSA/AML) compliance,
information technology (including cybersecurity), and consumer
protection. With regard to consumer protection, all ILCs and
Industrial Banks are subject to the same consumer protection
laws the FDIC supervises and enforces compliance with for all
FDIC State nonmember banks.
For example, ILCs and Industrial Banks are subject to
Section 5 of the Federal Trade Commission Act (FTC Act), which
provides that unfair and deceptive acts and practices (UDAPs)
affecting commerce are illegal.\5\ Under Federal Trade
Commission (FTC) and FDIC precedent, supervisory enforcement
actions require companies to take reasonable and appropriate
measures to protect consumers' personal data. The FTC and FDIC
actions have focused on consumer deception either through false
representations of data security or misappropriations of
private data and failure to properly protect consumer data from
data breaches. Further, the Gramm-Leach-Bliley Act (GLBA)
applies to all companies that provide financial services, so if
it is any type of financial service provider (which is broadly
defined), it is subject to Federal privacy and data security
standards. Additionally, ILCs and Industrial Banks are subject
to fair lending laws, including fair credit reporting, truth in
lending, and the Community Reinvestment Act (CRA).
---------------------------------------------------------------------------
\5\ See 15 U.S.C. 45(a) (Section 5 FTC Act).
---------------------------------------------------------------------------
On March 17, 2020, the FDIC Board unanimously approved a
proposed rule \6\ that would impose these required conditions
on all future ILC applicants.
---------------------------------------------------------------------------
\6\ See Parent Companies of Industrial Banks and Industrial Loan
Companies, 85 Fed. Reg. 17771 (Mar. 31, 2020), available at https://
www.govinfo.gov/content/pkg/FR-2020-03-31/pdf/2020-06153.pdf.
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------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER FROM JELENA
McWILLIAMS
Q.1. Montana, and many areas of the country, face challenges of
housing availability, affordability, and aging housing stock.
As you know, this is a significant issue for rural as well as
urban areas and is one of the largest barriers to success
nationally. In Montana, lack of workforce housing is one of the
greatest inhibitors of economic development.
Q.1.a. What can be done to increase workforce housing and
encourage more affordable housing to be built?
Q.1.b. What do you see as the largest barrier to affordable
housing, particularly in rural areas?
Q.1.c. How has the [Fed/FDIC/NCUA] worked to support housing?
Where is there room for additional efforts?
A.1.a.-A.1.c. The FDIC's mission of promoting stability and
public confidence in the Nation's financial system is
accomplished by, among other things, encouraging financial
institutions to help meet the credit needs of the communities
they serve and by promoting laws, regulations, policies, and
programs that protect and inform consumers. Every year, the
FDIC's Community Affairs branch conducts numerous events
focused on affordable mortgage lending. In 2019, FDIC Community
Affairs convened, hosted, and facilitated 50 events and
activities nationwide, drawing about 800 intermediaries. These
events addressed Affordable Single Family Housing, Community
Stabilization, Affordable Mortgage Credit, Affordable Housing
(Rental and Single Family), Disaster Recovery and Rural
Housing, and the Community Reinvestment Act (CRA).
In addition, FDIC Community Affairs complements the work of
FDIC bank examiners and helps to enhance FDIC-supervised banks'
understanding of potential CRA community collaboration
opportunities related to housing. The FDIC's Affordable
Mortgage Lending Center (AMLC)\1\ serves as a resource for
community banks. The AMLC helps banks to identify the steps
necessary to expand or initiate affordable mortgage lending and
compares affordable mortgage programs from Federal, State,
Federal Home Loan Banks, and other sources. The AMLC is updated
regularly and the number of subscribers has grown steadily with
about 18,000 subscribers to date. Other FDIC venues to educate
consumers on affordable mortgage lending are provided through
the FDIC's free financial education curriculum Money Smart \2\
and Consumer News publications, including articles for multiple
consumer segments focused on home buying or renting.
---------------------------------------------------------------------------
\1\ See FDIC, Community Affairs--Affordable Mortgage Lending
Center, available at https://www.fdic.gov/consumers/community/
mortgagelending/index.html.
\2\ See FDIC, Money Smart--A Financial Educational Program,
available at https://www.fdic.gov/consumers/consumer/moneysmart/
index.html.
---------------------------------------------------------------------------
Mortgage lending is an important element of many community
banks' business and CRA strategies, and the FDIC aims to help
strengthen the role of community banks in the affordable
mortgage market by amplifying awareness of current programs and
highlighting innovative practices. Examples of affordable
housing efforts by FDIC Community Affairs include the
following:
LThe FDIC San Francisco Regional Office hosted an
interagency Banker Roundtable regarding affordable
housing solutions, where participants discussed
strategies such as amending local policy to increase
Accessory Dwelling Units and Transit Oriented
Development.
LThe FDIC Dallas Regional Office, along with the
Oklahoma Affordable Housing Coalition, hosted five
regional forums regarding the assessment of the
affordable housing needs of each county in the State.
The information gathered in these forums led to
programs in targeted geographies and evolved into an
annual Housing Conference where stakeholders continue
to learn and collaborate to address the specific needs
of their Oklahoma communities.
LThe FDIC Atlanta Regional Office co-sponsored an
Innovative Housing Symposium in Panama City, Florida,
aimed at identifying housing strategies to retain the
workforce and strengthen the housing stock.
More generally, the FDIC also addresses specific economic
inclusion challenges in Indian Country, Appalachia, and rural
areas and identifies opportunities for targeted resources to
assist and educate Minority Depository Institutions and
community banks serving rural areas and Indian Country.
Q.2. I appreciated the responses to my questions during the
hearing, and the focus on supporting our farmers and ranchers
and their families through the current challenges facing the
agriculture sector while continuing to prioritize the safety
and soundness of our community financial institutions.
Is there anything that you would like to add on this topic?
A.2. I deeply appreciate the challenging environment faced by
farmers and ranchers and the community banks that serve them.
The FDIC is the primary Federal regulator for most agricultural
banks and thus understands these challenges firsthand. For
example, between 1980 and 2010, more than half of all rural
counties across the United States lost population, and the
rural counties that experienced outflows lost 14.8 percent of
their population on average.\3\ Although community banks in
depopulating areas have been resilient in meeting the
challenges posed by these demographic trends, the eroding size
of the local customer base makes it harder to raise deposits
and attract loan customers.
---------------------------------------------------------------------------
\3\ See FDIC, Long-Term Trends in Rural Depopulation and Their
Implications for Community Banks, available at https://www.fdic.gov/
bank/analytical/quarterly/2014-vol8-2/article2.pdf.
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The FDIC continues to focus on agricultural lending and the
ability for farm banks, which represent nearly one-quarter of
all FDIC-insured institutions, to manage amid changing industry
conditions.\4\ In June 2019, the FDIC hosted an Agriculture
Banking Conference in Kansas City, which brought together
regulators, bankers, policymakers, academics, and industry
participants to discuss short-term risks and long-term
challenges across the industry.\5\ In addition, the FDIC
recently issued an advisory \6\ regarding the prudent
management of agricultural lending during economic cycles. The
FDIC will continue to engage with farm banks and other
stakeholders on this issue.
---------------------------------------------------------------------------
\4\ See FDIC 2019 Risk Review, available at https://www.fdic.gov/
bank/analytical/risk-review/full.pdf.
\5\ See FDIC Agriculture Banking Conference, available at https://
www.fdic.gov/bank/analytical/ag/.
\6\ See FDIC FIL-5-2020, Advisory: Prudent Management of
Agricultural Lending During Economic Cycles (January 28, 2020),
available at https://www.fdic.gov/news/news/financial/2020/
fil20005.html.
Q.3. In response to my question during the hearing you included
that you believe there are ways to benefit small family farms,
rural small businesses, rural areas, and Indian Country through
increased CRA credit.
Can you expand on this?
A.3. The FDIC recognizes that small businesses, farms, and
other entrepreneurs play a vital role in supporting the
economic growth of rural communities. Such organizations and
individuals, in turn, can only play such a role if banks lend
and invest in these areas. The rule\7\ recently proposed by the
FDIC and OCC to modernize the CRA would incentivize greater
lending and investment in areas in need of financial resources,
with a particular emphasis on rural areas and Indian Country.
We know that these areas often have the greatest need for
financial services, and the proposal seeks to encourage banks
to increase their engagement in these communities across our
Nation. For example, under the proposal, the size of loans to
small businesses and small farms that would qualify for CRA
credit would be increased to $2 million. By increasing the loan
size for small loans to farms, which was last updated 25 years
ago, and increasing the revenue size threshold for small farms,
the proposed rule would encourage economic development and job
creation and help the U.S. agricultural industry survive. In
addition, the proposal would provide CRA credit for retail and
community development activities in Indian Country. The FDIC
believes that these provisions will help to create greater
lending and investment in these communities.
---------------------------------------------------------------------------
\7\ See Community Reinvestment Act Regulations, 85 Fed. Reg. 1204
(Jan. 9, 2020), available at https://www.govinfo.gov/content/pkg/FR-
2020-01-09/pdf/2019-27940.pdf.
Q.4. I recently wrote to Comptroller Otting, with colleagues on
this Committee, to express the importance of considering the
many unique challenges in accessing financial services in rural
America. It is imperative that the CRA work for communities
throughout America, and that the process for potential reforms
to this vital rule should reflect that. Any updates to the CRA
should be done in coordination between your three agencies, and
must be consistent with the original purpose of this Civil
Rights-era law to bringing financial services and credit access
to low- and moderate-income and underserved communities
throughout our country.
As you consider changes to the Community Reinvestment Act,
how are you considering and engaging rural America?
A.4. I recognize the unique challenges in accessing financial
services facing many rural areas, especially given the
continuing trend of depopulation that makes it more difficult
for community banks headquartered in these areas to grow their
balance sheets.\8\ In addition, as of June 30, 2019, 620
counties--or 20 percent of the counties across the Nation--were
served only by community banking offices, 127 counties had only
one banking office, and 33 counties had no banking offices at
all.\9\
---------------------------------------------------------------------------
\8\ See FDIC, Long-Term Trends in Rural Depopulation and Their
Implications for Community Banks, available at https://www.fdic.gov/
bank/analytical/quarterly/2014-vol8-2/article2.pdf.
\9\ See FDIC Summary of Deposits, available at https://
www7.fdic.gov/SOD.
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The interagency process to modernize the CRA seeks to
address the need for greater lending and investment in rural
communities by incentivizing CRA activity in these areas. This
process has included extensive outreach and engagement with
community banks and consumers in rural America. I have
personally embarked on a 50-State listening tour \10\ to hear
from banks directly about challenges they face and to learn
about the needs of the consumers and businesses that banks
serve. In my conversations with rural bankers and their
customers, I have often heard concerns that the current CRA
framework fails to incentivize CRA activity in many rural areas
and that assessment areas have not kept pace with how consumers
bank and how banking services are delivered today.
---------------------------------------------------------------------------
\10\ See Transparency and Accountability--FDIC Chairman State
Visits (Last Updated 02/20/2020), available at https://www.fdic.gov/
transparency/visits.html.
---------------------------------------------------------------------------
The proposal approved by the FDIC and OCC in December 2019
reflects this extensive outreach and engagement. The proposal
seeks to address these concerns by encouraging banks to lend
and invest in these communities across our Nation and requiring
banks to add assessment areas where they have significant
concentrations of retail domestic deposits. The agencies will
continue to engage with all stakeholders throughout the
rulemaking process.
Q.5. I would like an update on an issue I've followed and
written to the Federal Reserve and FDIC about, the ``covered
funds'' definition in the Volcker Rule. As drafted, banks are
prevented from activities that they are regularly allowed to do
directly on their balance sheets. Oftentimes clients, such as
large pension funds, want their banks to provide long-term
investments or loans in these fund structures to have some skin
in the game. I continue to strongly support the Volcker Rule's
purpose of preventing speculative trading that is at odds with
the public interest. As your agencies continue their process
here, I encourage you to work towards an outcome that allows
capital for growing and innovating companies and the ability to
invest in long-term investment vehicles, while keeping a focus
on preventing the activities that the rule is intended to stop.
As your agencies look at the impact of rules and any
potential changes, will you consider activities that are
considered safe and allowable elsewhere in banks? And
especially the impact on the availability of funding for
companies in the middle of America looking to grow?
A.5. On January 30, 2020, the FDIC Board approved a proposed
rule\11\ that would amend the regulations implementing Section
619 of the Dodd-Frank Act (the Volcker Rule) by modifying and
clarifying the ``covered fund'' provisions. Among other things,
the proposal would establish a new exclusion from the covered
fund definition for venture capital funds, which would allow
banking entities to acquire or retain an ownership interest in,
or sponsor, certain venture capital funds to the extent the
banking entity is permitted to engage in such activities under
otherwise applicable law. This proposed exclusion would help
ensure that banking entities can fully engage in this important
type of development and investment activity, which may
facilitate capital formation and provide important financing
for small businesses, particularly in areas where such
financing may not be readily available.
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\11\ See Prohibitions and Restrictions on Proprietary Trading and
Certain Interests in, and Relationships With, Hedge Funds and Private
Equity Funds, 85 Fed. Reg. 12120 (Feb. 29, 2020), available at https://
www.govinfo.gov/content/pkg/FR-2020-02-28/pdf/2020-02707.pdf.
Q.6.a. Thank you all for your updated guidance on providing
financial services to the hemp industry. As you know, this is
an issue that has been very important to me. Montana leads the
country in hemp production, and this guidance will help our
producers and the financial institutions that are now able to
serve them.
What will your agencies be doing to educate your examiners
and the institutions that you oversee to adapt to working with
hemp-related businesses?
A.6.a. In 2019, the FDIC conducted internal training for all
commissioned safety and soundness bank examiners, case
managers, management, and large bank staff. Among other things,
the training addressed the legal status, commercial growth, and
production of hemp, as well as Customer Due Diligence (CDD)
requirements for hemp-related customers, which is consistent
with other commercial customers. During 2019, the FDIC also
provided two hemp-related informational sessions for members of
the Advisory Committee on Community Banking. Those sessions
were webcast and are available to augment formal examiner
training. Going forward, the FDIC will continue to provide
internal training that will include examiner instruction for
assessing a bank's BSA/AML compliance program when providing
services to hemp-related businesses.
In December 2019, the Federal banking agencies and FinCEN,
in consultation with the Conference of State Bank Supervisors,
issued a statement on hemp-related businesses.\12\ The
statement highlighted that hemp is no longer a Schedule I
controlled substance under the Controlled Substances Act, and
as such, banks are not required to file a Suspicious Activity
Report (SAR) on customers solely because they are engaged in
the growth or cultivation of hemp in accordance with applicable
laws and regulations.\13\ The statement also emphasized that it
is generally a bank's business decision as to the types of
permissible services and accounts to offer.
---------------------------------------------------------------------------
\12\ See FDIC, ``Agencies Clarify Requirements for Providing
Financial Services to Hemp-Related Businesses'' (Dec. 3, 2019),
available at https://www.fdic.gov/news/news/press/2019/pr19115.html.
\13\ See FDIC FIL-5-2015, Statement on Providing Banking Services
(January 28, 2015), available at https://www.fdic.gov/news/news/
financial/2015/fil15005.html.
Q.6.b. Are there areas that you anticipate will require
---------------------------------------------------------------------------
additional guidance?
A.6.b. I have heard about this issue during every single State
visit I have made so far. I recognize that banks have been put
in a difficult position between complying with Federal law and
what is permissible at a State level. We understand that FinCEN
may be developing more comprehensive guidance with respect to
the hemp industry. We are also referring some inquiries to the
U.S. Department of Agriculture (USDA) for up-to-date
information regarding the national regulatory structure
governing hemp growth and cultivation. The USDA issued an
interim final rule in October 2019, and maintains hemp-related
information on its public website. We have also referred
matters to the U.S. Food and Drug Administration (FDA) when
they apply to the FDA's authority (such as hemp infused
``medication'' or food products).
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN FROM JELENA
McWILLIAMS
Q.1. We've had positive Committee discussions of late about the
prospect of marking up legislation on bills introduced with
bipartisan support and one which I hope will fall within that
category is S. 2649, dealing with the bank examination review
process.
We continue to hear from community banks that the
examination process is cumbersome and largely without any
practical review or appeal process, with the regulators'
Ombudsmen Offices often not utilized in this regard as a
result. S. 2649 seeks to update this process with greater
transparency and due process. Do you have any thoughts on this
issue and what the FDIC is doing to improve the examination
process and opportunity for meaningful review?
A.1. I recognize that the FDIC's appeals process for bank
examinations can be improved, and we are actively working on
this issue. The FDIC recently hosted a series of listening
sessions to solicit feedback on the supervisory appeals and
dispute resolution process, where we received a number of
valuable suggestions.
With respect to the examination process, the FDIC has taken
numerous steps to modernize its supervision and examination
programs, including by leveraging technology to reduce the
amount of time examination teams spend onsite at supervised
institutions. This reduces the compliance burden for
institutions--especially community banks--without sacrificing
the quality of our supervision. As a result, our examination
turnaround time (i.e., the time from when field work begins to
when the examination report is sent to the bank) has
significantly improved. During the 12 months ended November 30,
2019, nearly 88 percent of safety and soundness examinations
were conducted within our 75-day goal and 97 percent of
consumer compliance and CRA examinations were conducted within
our 120-day goal. Similarly, examination report processing time
(i.e., the time from when field work is complete to when the
report is sent to the bank) has improved markedly, with nearly
93 percent of safety and soundness reports and more than 98
percent of consumer compliance and CRA reports processed within
our 45-day goal.\1\
---------------------------------------------------------------------------
\1\ See FDIC Transparency & Accountability--Bank Examinations,
available at https://www.fdic.gov/transparency/examination.html.
Q.2. I applaud the OCC and the FDIC for issuing proposed rules
last month that would provide certainty that an interest rate
that is valid when the loan is made by a bank remains valid
when the loan is transferred or sold. Since the Second Circuit
issued its decision in Madden v. Midland Funding, I have had
serious concerns that the decision discourages use of loan
assignments and securitization to manage liquidity and
concentration risk and may decrease consumers' access to
credit.
Some have criticized your action, claiming that it would
permit nonbanks to evade a State's interest rate cap. I believe
this criticism is without merit.
LHave you not been crystal clear that a nonbank may
not partner with a bank ``with the sole goal of evading
a lower interest rate established under the law of the
entity's licensing State(s)''?
LIs it not true that your agencies can use
supervision and enforcement to ensure that banks do not
enter into ``rent-a-bank'' partnerships with nonbanks
with the sole goal of evading a State's interest rate
cap?
A.2. The FDIC's notice of proposed rulemaking\2\ published on
December 6, 2019, affirms that the FDIC views unfavorably
entities that partner with a State bank with the sole goal of
evading a lower interest rate established under the law of the
entity's licensing State(s). Although I am unable to address
any confidential supervisory information or provide
institution-specific information, I would note that the FDIC
issued a public enforcement action\3\ in October 2018 against
Republic Bank & Trust Company for failing to clearly and
conspicuously disclose required information related to the
bank's Elastic line of credit product offered pursuant to a
contract with Elevate@Work, L.L.C. The FDIC will continue to
examine supervised institutions for compliance with all
applicable laws and regulations.
---------------------------------------------------------------------------
\2\ See Federal Interest Rate Authority, 84 Fed. Reg. 66845 (Dec.
6, 2019), available at https://www.govinfo.gov/content/pkg/FR-2019-12-
06/pdf/2019-25689.pdf.
\3\ https://orders.fdic.gov/sfc/servlet.shepherd/document/download/
069t00000037a32AA
A?operationContext=S1.
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM JELENA
McWILLIAMS
Q.1. Earlier this year, Comptroller Otting said that the Office
of the Comptroller of the Currency (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. Additionally, at
a House Financial Services Committee hearing in May, Otting
said that the OCC shared its proposal with the Securities and
Exchange Commission (SEC).
Chair McWilliams and Vice Chair Quarles, has Comptroller
Otting shared the OCC's proposal with either of your agencies?
LIf yes, what does the proposal contain?
LIf yes, are all six regulators on board with the
proposal?
LIf yes, when can we expect to see a notice of
proposed rulemaking posted?
Q.2. Have all six regulators (FDIC, Fed, NCUA, SEC, OCC, and
FHFA) sat down together to discuss this rulemaking?
LIf yes, when did these discussions take place?
LIf yes, have all six regulators decided to move
forward with a proposed rule?
Q.3. If the OCC decides to move forward on executive
compensation rule without all six regulators, are you concerned
the OCC will create two different standards, encouraging banks
to shop for the regulator with the weakest requirements?
A.1.-A.3. In June 2010--one month prior to the enactment of the
Dodd-Frank Act--the FDIC, Federal Reserve Board (FRB), Office
of the Comptroller of the Currency (OCC), and Office of Thrift
Supervision (OTS) issued guidance to help ensure that incentive
compensation policies at banking organizations do not encourage
imprudent risk-taking and are consistent with the safety and
soundness of the organization.\1\ Section 956 of the Dodd-Frank
Act subsequently directed the FDIC, FRB, OCC, NCUA, SEC, and
FHFA (``six agencies'') to jointly prescribe, within nine
months of the enactment of the law, regulations or guidelines
that prohibit incentive-based pay arrangements that the six
agencies determine encourage inappropriate risks. Section 956
mandates that the six agencies ensure that the standards are
``comparable'' to the standards established under section 39 of
the Federal Deposit Insurance Act (FDI Act) and specifically
take into consideration the compensation standards described in
section 39(c). Under section 39(c), the Federal banking
agencies are required to prohibit compensation arrangements
that provide excessive compensation or could lead to material
financial loss to an insured depository institution (IDI).
Section 39(c) was promulgated by Congress in 1991 and has been
in effect for IDIs since then.
---------------------------------------------------------------------------
\1\ See Federal Reserve, OCC, OTS, FDIC Issue Final Guidance on
Incentive Compensation (June 21, 2010), available at https://
www.federalreserve.gov/newsevents/pressreleases/bcreg
20100621a.htm.
---------------------------------------------------------------------------
While the banking agencies' 2010 guidance remains fully
intact, the six agencies continue to engage in discussions
regarding how best to implement the statute. In the meantime,
the FDIC continues to review compensation policies and
practices of supervised institutions in accordance with the FDI
Act and the 2010 guidance to ensure that institutions have
appropriate risk management frameworks in place, including
appropriate oversight and governance by the Board of Directors
and sound operational controls.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM JELENA
McWILLIAMS
BB&T-SunTrust Merger
The FDIC's Statement of Policy for merger approvals
pursuant to the Bank Merger Act lists various standards that
the FDIC will apply when evaluating a merger transaction.\1\
While the FDIC released the Order and Basis for Corporation
Approval along with the press release that the merger had been
approved, the document is only 19 pages long and does not
provide sufficient details warranted by a transaction that
created the sixth largest commercial bank in the United States
and the largest bank regulated by the FDIC.\2\
---------------------------------------------------------------------------
\1\ Federal Deposit Insurance Corporation, ``FDIC Law, Regulations,
Related Acts,'' https://www.fdic.gov/regulations/laws/rules/5000-
1200.html#fdic5000fdicso2.
\2\ Federal Deposit Insurance Corporation, ``Order and Basis for
Corporation Approval,'' https://www.fdic.gov/news/news/press/2019/
pr19111a.pdf.
---------------------------------------------------------------------------
Competitive Factors
Q.1.a. The FDIC evaluated how the transaction would affect
competition in 81 geographic markets.\3\ These geographic
markets are the areas used to measure the concentration of the
relevant banking products.
---------------------------------------------------------------------------
\3\ Id.
---------------------------------------------------------------------------
How were these geographic markets defined? Are these the
same geographic market definitions that the FDIC has used in
evaluating previous merger applications?
Q.1.b. Were the definitions of any predefined markets altered
from the time the merger application was filed to the time of
the merger approval?
Q.2. According to the Statement of Policy, the FDIC considers
the extent of existing competition ``in the relevant product
market(s) within the relevant geographic market(s).'' However,
in the Approval Order, the FDIC only discussed the
concentration levels of deposits, rather than the full
complement of relevant product markets.
Q.2.a. What product markets did the FDIC use for its
concentration analysis?
Q.2.b. For each product market, please describe the source of
the data used for the analysis. If proxies or estimates were
used, please specify.
Q.3. According to the Approval Order, in 14 of the geographic
markets that the FDIC considered, the Herfindahl-Hirschman
Index (HHI) levels for deposits would exceed one or both of the
1800/200 thresholds, meaning that the expected change in market
concentration is significant.
Q.3.a. For the six markets where credit unions or thrifts
mitigated the competitive concerns, please identify which
credit unions and thrifts were included in the analysis, the
dollar amount of their deposits, and any weights used for these
institutions.
LUnlike banks and thrifts, credit unions are not
required to report deposits on a branch-level. Please
indicate how the FDIC obtained the deposit levels for
credit union branches. If estimates were used, please
describe the methodology.
Q.3.b. For the eight markets with divestitures, do any of these
markets still approach either of the HHI thresholds even after
considering the divestitures? If so, please indicate the
geographic market and the HHI-levels before and after the
merger.
A.1.a.-A.3.b. Section 18(c)(5)(A) of the Bank Merger Act (BMA)
prohibits the FDIC from approving a merger transaction that
would result in, or would be in furtherance of, any combination
or conspiracy to monopolize or to attempt to monopolize the
business of banking in any part of the United States.\4\
Similarly, section 18(c)(5)(B) of the BMA prohibits the FDIC
from approving a merger transaction if the effect of the
proposed merger transaction in any section of the country may
be to substantially lessen competition, or tend to create a
monopoly, or would in any other manner be in restraint of
trade, unless the FDIC finds that the anticompetitive effects
of proposed transaction are clearly outweighed in the public
interest by the probable effect of the transaction in meeting
the convenience and needs of the community to be served.\5\
---------------------------------------------------------------------------
\4\ 12 U.S.C. 1828(c)(5)(A).
\5\ 12 U.S.C. 1828(c)(5)(B).
---------------------------------------------------------------------------
Although the BMA requires the FDIC to make an independent
determination on the competitive effects of a proposed merger
transaction, section 18(c)(4) of the BMA directs the Attorney
General of the United States to furnish to the appropriate
Federal banking agency a report on the competitive factors
involved in a merger transaction subject to the BMA upon the
request of the FDIC.\6\ The FDIC Statement of Policy on Merger
Transactions states, as required by law, that the FDIC will
request a report on the competitive factors involved in a
proposed merger transaction from the Attorney General. This
report must ordinarily be furnished within 30 days, and the
applicant upon request will be given an opportunity to submit
comments to the FDIC on the contents of the competitive factors
report. Similarly, it is the practice of the Federal Reserve
Board (FRB) to request such a report from the Attorney General
in connection with bank holding company transactions subject to
section 3 of the Bank Holding Company Act. Accordingly, the
FDIC, FRB, and U.S. Department of Justice (DOJ) coordinated
their review of the competitive effects of the proposal.\7\
---------------------------------------------------------------------------
\6\ 12 U.S.C. 1828(c)(4). See also FDIC, ``FDIC Statement of
Policy on Bank Merger Transactions,'' available at https://
www.fdic.gov/regulations/laws/rules/5000-1200.html.
\7\ See Federal Reserve and Department of Justice, ``How do the
Federal Reserve and the U.S. Department of Justice, Antitrust Division,
analyze the competitive effects of mergers and acquisitions under the
Bank Holding Company Act, the Bank Merger Act and the Home Owners' Loan
Act?'' available at https://www.federalreserve.gov/bankinforeg/
competitive-effects-mergers-acquisitions-faqs.htm; and Department of
Justice, ``Bank Merger Competitive Review--Introduction and Overview
(1995),'' available at https://www.justice.gov/sites/default/files/atr/
legacy/2007/08/14/6472.pdf.
---------------------------------------------------------------------------
Geographic Markets
It is the longstanding practice of the Federal banking agencies
and DOJ to first assess the competitive effects of a proposed
bank merger transaction by calculating concentration levels
under the Herfindahl-Hirschman Index (HHI), a commonly accepted
measure of market concentration.\8\ Generally, the Federal
banking agencies and DOJ view a transaction that does not
result in a post-merger HHI result of more than 1800 points and
an increase of more than 200 points within a geographic market
as not raising competitive concerns. Transactions that exceed
both thresholds typically warrant further review.
---------------------------------------------------------------------------
\8\ The HHI is calculated by summing the squares of the market
shares of each participant in a relevant geographic market.
---------------------------------------------------------------------------
In evaluating the competitive effects of the proposal, FDIC
staff, in coordination with FRB and DOJ staff, considered how
the transaction would affect competition in the 81 geographic
markets where both BB&T and SunTrust operate. These banking
markets are subject to periodic updates, and the FDIC's
competitive analysis of the transaction was based on the most
recent market definitions. Although the FDIC is not bound to
use these predefined markets, it is consistent with the long-
standing practices of the FDIC and other Federal banking
agencies and DOJ to do so, and the FDIC considers FRB-defined
banking markets to be presumptively reasonable for the purposes
of its competitive review of merger transactions.
Product Markets
With regard to calculating market share in the relevant
product market, the FDIC (consistent with the other Federal
banking agencies and DOJ), uses deposit market share based on
FDIC-generated summary of deposit (SOD) data. This focus on
deposits recognizes that deposits represent a proxy for the
full ``cluster'' of banking products and services provided to
households and small businesses.\9\ For this reason, deposit
market share guides the competitive review of bank merger
transactions. The FDIC's competitive review was also informed
by additional information, including business lending
information, as contemplated in the ``FDIC Statement of Policy
on Bank Merger Transactions,''\10\ as well as FRB and DOJ FAQs
addressing the competitive review of merger transactions.\11\
---------------------------------------------------------------------------
\9\ See FDIC, ``FDIC Statement of Policy on Bank Merger
Transactions,'' available at https://www.fdic.gov/regulations/laws/
rules/5000-1200.html. ``In many cases, total deposits will adequately
serve as a proxy for overall share of the banking business in the
relevant geographic market(s); however, the FDIC may also consider
other analytical proxies.'' See also United States v. Philadelphia
National Bank, 374 U.S. 321, 356 (1963) (holding that the relevant
product market in a bank merger is the ``cluster'' of products and
services provided by commercial banks).
\10\ Id.
\11\ See FRB and DOJ, ``How do the Federal Reserve and the U.S.
Department of Justice, Antitrust Division, analyze the competitive
effects of mergers and acquisitions under the Bank Holding Company Act,
the Bank Merger Act and the Home Owners' Loan Act?'' available at
https://www.federalreserve.gov/bankinforeg/competitive-effects-mergers-
acquisitions-faqs.htm.
---------------------------------------------------------------------------
Outcome
As noted above, a transaction that does not result in a
post-merger HHI of more than 1800 points and an increase of
more than 200 points within a geographic market does not
generally raise competitive concerns. Using the FRB-defined
markets as the relevant geographic markets, and SOD data as a
proxy for the relevant product market, the FDIC found that the
HHI levels in 67 of the 81 markets fell below one or both of
these thresholds, and that the HHI levels in the 14 remaining
markets approached or exceeded both thresholds.
In 6 of these 14 markets, the FDIC found that the presence
of competitively viable credit unions mitigated the competitive
concerns associated with the increased concentration levels.
After incorporating such institutions into the market
concentration calculations in these six markets, the FDIC found
the resulting HHIs to be at acceptable levels.\12\
---------------------------------------------------------------------------
\12\ These markets include North Lake/Sumter, Florida; Atlanta,
Georgia; Milledgeville, Georgia; Lexington, Virginia; Norfolk-
Portsmouth, Virginia; and Richmond, Virginia. Although not exceeding
the HHI thresholds, staff also scrutinized the following markets and
found that no additional mitigation was needed to address increased
concentration: Citrus County, Florida; Daytona Beach Area, Florida;
Savannah, Georgia; Lynchburg, Virginia; Newport News-Hampton, Virginia;
and Winchester, VA-WV.
---------------------------------------------------------------------------
Consistent with the approach outlined in the FRB and DOJ
FAQs, the determination of whether to include credit unions in
market concentration calculations was based on whether such
institutions have the capacity to exert competitive pressures
on banks within the relevant market. The FDIC incorporated into
its analysis those credit unions with fields of membership
extending to all or almost all of a relevant market's
population and that had branches easily accessible to the
general public. Because credit unions do not report branch-
level deposits, the FDIC approximated such deposits in each
relevant market based on available data. To avoid potentially
overstating the competitive power of the included credit
unions, the FDIC reduced the deposits attributed to the credit
unions by 50 percent.
With respect to the eight remaining markets presenting
heightened concentration levels, the primary mechanism to
mitigate the competitive effects of the proposed merger was the
divestiture of 30 SunTrust branches to a third-party acquirer.
With the consummation of the divestiture and the inclusion of
competitively viable credit unions, the concentration levels
within the eight remaining markets result in an HHI level near
or below 1800 points or an increase of fewer than 200
points.\13\
---------------------------------------------------------------------------
\13\ The HHI calculation in certain markets factored in additional
adjustments as appropriate, such as the exclusion of certain centrally
booked deposits.
---------------------------------------------------------------------------
The applicants agreed to divest every SunTrust branch in
the following six markets: Lumpkin County and Wayne County,
Georgia; Winston-Salem, North Carolina; and Eastern Shore,
Martinsville, and South Boston, Virginia. The ``clean sweep''
of SunTrust branches from these markets effectively neutralizes
any change to the respective markets' HHIs as a result of the
merger.\14\ In the remaining two markets, Durham-Chapel Hill,
North Carolina, and Roanoke Virginia, the applicants committed
to partial divestiture of SunTrust branches. The FDIC found
that the divestitures adequately mitigated the competitive
effects of the proposed merger.\15\ The FRB and DOJ
determinations were substantially similar.
---------------------------------------------------------------------------
\14\ The HHIs in each of these six mergers exceeded 1800 HHI points
on both a pre- and post-transaction basis, but the ``clean sweep'' of
SunTrust branches in these markets result in a de minimis change to the
total HHI.
\15\ After accounting for divestiture and appropriate weightings
for thrifts and credit unions, the change in HHI to the Roanoke market
exceeded 200 points, but the resulting HHI in Roanoke, Virginia, was
below the 1800 threshold. After accounting for divestiture, appropriate
weightings for thrifts and credit unions, and adjustments for centrally
booked deposits, the change in HHI in Durham-Chapel Hill, North
Carolina, was less than 200 points to a level below 1800.
---------------------------------------------------------------------------
As described above, the FDIC's competitive review of the
transaction was consistent with its approach to other merger
transactions, and was guided by the review framework outlined
in the FDIC's Statement of Policy on Bank Merger Transactions,
the FRB and DOJ FAQs on merger transactions, and the DOJ's bank
merger guidelines. After thoroughly reviewing the competitive
effects of the merger, considering deposit concentration
levels, business lending data, market dynamics in each
geographic market, and the branch divestitures, the FDIC
determined the merger transaction would not result in a
monopoly in any part of the United States, and would not
substantially lessen competition, tend to create a monopoly, or
otherwise be in restraint of trade in any section of the
country. This finding was consistent with the conclusions
reached by the FRB in its review of the proposal under the Bank
Holding Company Act, and with the concurrence of DOJ in
authorizing the transaction.
Prudential Factors
Q.4. Please describe the process by which the FDIC evaluated
the financial soundness of the resulting institution.
Q.5. Please describe the process by which the FDIC evaluated
the management of the resulting institution.
A.4.-A.5. The FDIC has established a comprehensive risk-focused
supervisory process for insured depository institutions. For
large banks directly supervised by the FDIC, a continuous
examination program is employed, whereby dedicated staff
conducts on-site supervisory examinations and ongoing
institution monitoring to monitor risk, assign supervisory
ratings, and take other required supervisory action.
FDIC staff is also dedicated to large institutions for
which the FDIC is not the primary Federal regulator, and these
individuals work closely with the primary Federal regulator to
identify and monitor risk. FDIC staff also conducts quarterly
risk assessments of large institutions and assigns an
independent rating that considers vulnerability to asset and
funding stress, as well as potential loss severity. Given these
well-established supervisory processes, FDIC staff had a sound
understanding of both institutions' risk profiles and risk
management activities prior to considering the merger
application.
Analysis of Statutory Factors, Generally
In evaluating a merger transaction, section 18(c)(5) of the
BMA directs the FDIC to consider the financial and managerial
resources and future prospects of the existing and proposed
institutions.
As noted in the FDIC's Statement of Policy on Bank Merger
Transactions, the FDIC will normally approve a proposed merger
transaction where the resulting institution meets existing
capital standards, continues with satisfactory management, and
whose earnings prospects, both in terms of quantity and
quality, are sufficient. In evaluating management, the FDIC
will rely to a great extent on the supervisory histories of the
institutions involved and of the executive officers and
directors that are proposed for the resultant institution.
The FDIC's analyses include an assessment of the overall
condition of each institution involved in the proposed merger,
as well as the combined financial resources. Available holding
company support is also considered, as is the source of
funding.
The FDIC will also assess the managerial resources,
including the active management of each institution as well as
the combined institution. Analyses are conducted of each
institution's corporate governance practices as well as a
review of managements' past responsiveness to regulatory
recommendations. Any significant management changes are
addressed.
Outcome
In evaluating the statutory factors, staff analyzed
historical, current, and projected financial data and business
models, as well as management capabilities, public comments,
and other relevant matters. Both BB&T and SunTrust were in
satisfactory financial condition, based on supervisory
information and financial reports. Both institutions
demonstrated acceptable earnings and asset quality, strong
capital, and sufficient liquidity. Over the past 20 years, BB&T
has reported positive annual net income every year, while over
the same period SunTrust reported positive net income for every
year except 2009. Additionally, the institutions were viewed to
have complementary business models and to pose moderate risk,
given their community focus and largely traditional business
lines, which Truist Bank--the bank formed by the merger of BB&T
and SunTrust--is expected to continue.
The management team has documented experience and expertise
regarding large regional bank operations and has been
responsive to regulatory concerns. Directors and officers have
held similar positions within the respective institutions prior
to the merger, and proposed management officials have been
associated with these institutions for a substantial period of
time.
Convenience and Needs Factor
Q.6.a. The FDIC is required by the BMA to note and consider
each institution's performance under the CRA. As stated in the
Approval Order, while BB&T has an outstanding record of meeting
community credit needs, SunTrust has a satisfactory record.
On the same day the merger was approved, the Federal
Reserve issued a consent order against SunTrust as a result of
misleading or inaccurate statements to business customers about
the operation and billing of certain add-on products.
Did the FDIC consider the compliance records of both
entities with respect to consumer finance laws in their review
of the merger? Did the FDIC consult with the CFPB or look at
CFPB examination data to determine whether the banks had
adequate records of compliance with consumer protection laws?
Q.6.b. At what point in the merger review process did the FDIC
become aware of the practices that led to the Federal Reserve
consent order against SunTrust? How were they discovered?
A.6.a.-A.6.b. In evaluating a merger transaction, section
18(c)(5) of the BMA directs the FDIC to consider the
convenience and needs of the community to be served. In
addition, the CRA requires that, when evaluating a BMA
application, the FDIC take into account the CRA records of the
institutions involved in the transaction.
The FDIC considered the CRA and compliance record of both
institutions. As stated in the Order and Basis for Corporation
Approval,\16\ the FDIC took ``into account Truist Bank's branch
distribution, the CRA record of performance for BB&T and
SunTrust, the commitments articulated in the applicants'
Community Benefits Plan, public comments received on the
Application, the consumer compliance records of both banks, and
the products and services to be provided by Truist Bank.''
---------------------------------------------------------------------------
\16\ See FDIC, ``Branch Banking and Trust Company, Winston-Salem,
North Carolina, Application for Consent to Merge with SunTrust Bank,
Atlanta, Georgia, and to Establish Associated Branches,'' available at
https://www.fdic.gov/news/news/press/2019/pr19111a.pdf.
---------------------------------------------------------------------------
Throughout the application review process, the FDIC was in
contact with the Consumer Financial Protection Bureau (CFPB)
regarding both institutions' compliance records and with the
FRB
regarding SunTrust's compliance record.
The FDIC became aware of the issues set forth in the FRB's
Consent Order early in the application review process. The
agencies had ongoing discussions regarding the substance and
status of the FRB's review and, as a condition of approval of
the application, the applicants agreed that Truist Bank will
take all necessary and appropriate action to fully and timely
comply with the Consent Order issued by the FRB on November 19,
2019, against SunTrust Bank, Atlanta, Georgia.
Financial Stability Factor
Q.7. The Approval Order states that ``Though Truist Bank would
be among the largest insured depository institutions in the
United States, the proposed merger would effectuate such an
increase in size by combining into one large institution
products, services, and interconnections that do not generally
present financial stability risks.''
LCountrywide was a $200 billion institution when it
failed.\17\ Washington Mutual was $307 billion.\18\
Together, they had the potential to do significant
damage to the deposit insurance fund. Why does the FDIC
believe that the failure of a $450 billion institution
would not present risks to the financial system?
---------------------------------------------------------------------------
\17\ New York Times, ``Bank of American to buy Countrywide,''
Gretchen Morgenson and Eric Dash, January 11, 2008, https://
www.nytimes.com/2008/01/11/business/worldbusiness/11iht-
bofa.3.9157464.html.
\18\ Reuters, ``WaMu is largest bank failure,'' Elinor Comlay and
Jonathan Stempel, https://www.reuters.com/article/us-washingtonmutual-
jpmorgannews1/wamu-is-largest-u-s-bank-failureidUSTRE48P05I20080926.
LPlease describe the extent to which the FDIC
considered the cost of failure of the merged
institution in its review. How would Truist be wound
---------------------------------------------------------------------------
down if it failed?
Q.8. The Approval Order also listed five quantitative metrics
considered when evaluating the financial stability factor,
including interconnectedness and complexity. For each metric,
please indicate if the FDIC has established numeric thresholds
to evaluate whether or not it is triggered. If so, please
identify the thresholds. If not, please describe how those
factors were evaluated?
A.7.-A.8. The Dodd-Frank Act amended the BMA to require the
FDIC, in assessing a proposed merger transaction, to consider
the risk to the stability of the United States banking or
financial system.\19\ However, the Dodd-Frank Act did not
prescribe any specific metrics or standards to be used in
consideration of this statutory factor. Rather, the drafters of
the law left it to the discretion of the Federal banking
agencies to use appropriate and relevant metrics and standards
based on the agencies' significant supervisory experience.
---------------------------------------------------------------------------
\19\ Pub. L. No. 111-203, 604(f), 124 Stat. 1376, 1602 (2010).
---------------------------------------------------------------------------
In evaluating the potential impact of the proposed
transaction on the stability of the U.S. banking or financial
system, the FDIC considered quantitative and qualitative
metrics, each of which aims to assess whether Truist Bank's
systemic footprint would be such that its failure or financial
distress would compromise the overall stability of the U.S.
banking or financial system. In developing the financial
stability analysis used for evaluating the merger transaction,
the FDIC took into consideration related initiatives on
financial stability of the FDIC and the other Federal banking
agencies to the extent appropriate.
The quantitative metrics considered with respect to the
transaction include: (1) the size of Truist Bank; (2) the
availability of substitute providers for any critical products
and services to be offered by Truist Bank; (3) the degree of
interconnectedness of Truist Bank with the U.S. banking or
financial system; (4) whether Truist Bank would contribute to
the complexity of the U.S. banking or financial system; and (5)
the extent of cross-border activities of Truist Bank. No
``bright line'' thresholds have been established. Rather, all
factors are considered individually and in the aggregate with
respect to the particular facts and circumstances of the
proposed transaction, with no single factor being determinative
or carrying greater weight than another. The following
summarizes the FDIC's approach to evaluating each of these
factors:
LSize of the Resulting Institution: The distress or
failure of an insured depository institution is more
likely to negatively impact the banking or financial
system if its activities comprise a relatively large
share of system-wide activities. In the case of Truist
Bank, the FDIC concluded that, although Truist Bank
would be the sixth largest insured depository
institution in the United States, its share of system-
wide activities would be comparable to that of its
regional bank peers, and would be significantly less
than that of Global Systemically Important Banks (G-
SIBs).
LThe Availability of Substitute Providers for any
Critical Products and Services: The purpose of
considering the availability of substitute providers
for any critical products and services to be supplied
by the resulting institution is to assess the degree to
which market participants rely on those products and
services, to determine those products and services for
which there are no ready substitutes, and to understand
where an inability or unwillingness by the resulting
institution to continue providing those products or
services could be disruptive to the U.S. banking or
financial systems.
LInterconnectedness of the Resulting Institution
with the Banking or Financial System: The purpose of
considering interconnectedness is to assess the degree
to which the resulting institution may be engaged in
transactions with other financial system participants
and the risk that these interconnections could affect
the stability of the U.S. banking or financial systems.
LResulting Institution Contribution to the
Complexity of the Financial System: This factor focuses
on the degree to which the complexity of an
institution's product offerings, activities, practices,
or structure could contribute to, or transmit, risk to
the U.S. banking or financial systems.
LCross-Border Activities: The purpose of considering
cross-border activities is to assess the degree to
which coordination of the resulting institution's
supervision and resolution could be complicated by
differing legal requirements, geopolitical events, or
competing national interests, leading to increased
potential for spillover effects.
Additionally, a qualitative assessment of potential resolution-
related complexities was considered, including: the resulting
institution's organizational structure; challenges regarding
operational continuity if a bridge bank should be necessary;
saleability and separability in resolution; and potential
resolution-related challenges associated with its holdings of
uninsured deposits.
In factoring in the cost of a potential failure of the
resulting institution, the FDIC notes that it has several
powers and tools to effectively resolve failed banks. The
precise resolution strategy and tools chosen for any bank
failure depend upon the circumstances present at the time of
failure.
Additionally, the passage of the Federal Deposit Insurance
Corporation Improvement Act (FDICIA) in 1991 requires that the
FDIC choose the method which is the least costly option to the
Deposit Insurance Fund when resolving a failing financial
institution.
The Dodd-Frank Act amended the Federal Deposit Insurance
Act by adding the systemic risk exception to authorize, subject
to certain requirements, other approaches to resolution if the
least cost requirements of FDICIA would have serious adverse
effects on economic conditions or financial stability.
Transparency
While the FDIC Policy Statement does not contain an
explicit transparency requirement, you have placed a
significant emphasis on transparency during your year-and-a-
half at the FDIC.
Q.9. The depository data used for the anticompetitive analysis
is nonconfidential information. Please provide the full
anticompetitive analysis it undertook when reviewing the
merger?
Q.10. During a speech at the 2019 Bank Policy Institute
conference, you stated that BB&T and SunTrust made it ``very
difficult to decline their merger.''\20\ Please clarify why you
found it ``very difficult'' to decline the merger.
---------------------------------------------------------------------------
\20\ Tweet by Victoria Guida, November 20, 2019, https://
twitter.com/vtg2/status/11972137144
88811520.
Q.11. On November 19, 2019 at 10:00 am, the FDIC held a Board
meeting in which they considered a variety of matters in an
open session. Later that day, it was revealed that the FDIC
Board approved the merger in a closed session, despite the fact
that this action was creating the largest FDIC-supervised
institution and is the largest bank merger since the 2008
---------------------------------------------------------------------------
financial crisis.
LWhy was the merger considered under a closed
session?
LWas any confidential information discussed during
the closed session?
LWho was in attendance during the closed session?
Please include Board members and non-Government
officials, if applicable.
LPlease provide a transcript of the closed meeting.
Q.12. American Banker published an interview with the top
executives of BB&T and SunTrust in which Truist's chairman and
CEO, Kelly King stated, ``I was told by several senior
regulators there was no legal reason to object to the
deal.''\21\
---------------------------------------------------------------------------
\21\ American Banker, ``Truist rising: With mega merger done,
pressure to deliver,'' Paul Davis, December 9, 2019, https://
www.americanbanker.com/news/truist-rising-with-mega-merger-done
-pressure-on-to-deliver.
---------------------------------------------------------------------------
LWere you one of those senior level regulators?
LDid any FDIC staff have conversations with the
executives, or their representatives of either
institution before the merger application was filed?
LIf so, please disclose the date, participants,
and substance of the conversation.
LDid the FDIC provide any comment regarding the
likelihood of the approval of the deal?
A.9.-A.12. The FDIC's competitive analyses utilized a variety
of public data sources, including SOD data, but was also
informed by additional data sources that represent institution-
specific sensitive, confidential business and supervisory
information that the FDIC does not disclose.
It is customary for the FDIC Board to consider
applications, including merger applications, in closed session.
The consideration of such applications often includes the
discussion of institution-specific sensitive, confidential
business and supervisory information that the FDIC does not
disclose.
The FDIC's long-established standards regarding disclosure
of information are embodied in Part 309 of the FDIC's Rules and
Regulations, which provides that the FDIC will disclose final
opinions, including concurring and dissenting opinions, as well
as final
orders and written agreements made in the adjudication of
cases. The FDIC has publicly released the final order
associated with the subject bank merger application.
Part 309 also provides that certain records are exempt from
disclosure, including records containing or related to:
LTrade secrets and commercial or financial
information obtained from a person that is privileged
or confidential;
LInteragency or intra-agency memoranda or letters
that would not be available by law to a private party
in litigation with the FDIC; and
LExamination, operating, or condition reports
prepared by, on behalf of, or for the use of the FDIC
or any agency responsible for the regulation or
supervision of financial institutions.
With regard to cited statements regarding the lack of a
basis for denying the application, the BMA directs the FDIC to
consider specific statutory factors when evaluating a merger
application. To the extent that the particular facts and
circumstances of a particular application lead to a favorable
finding on all of these specific statutory factors, there would
be no basis on which to deny the application under the BMA.
Because BB&T satisfied specific statutory requirements, the
FDIC application was approved unanimously by the FDIC Board.
Subsequently, the FRB unanimously approved the holding company
application.
Prior to the public announcement, BB&T management
communicated with FDIC staff and management (as primary Federal
regulator of the bank) on several occasions to provide notice
that the proposed transaction would be announced in the near
future. The contacts involved management and staff of the
FDIC's Atlanta Regional Office, which is assigned primary
supervisory responsibility for BB&T, and the FDIC's Washington
Office. Specifically, from February 1, 2019, until the proposal
was publicly announced on February 7, 2019, the following
contacts took place:
LOn February 1, 2019, BB&T Chairman and Chief
Executive Officer (CEO) Kelly King informed Chairman
Jelena McWilliams by telephone that BB&T would contact
FDIC staff regarding a possible merger transaction.
LOn February 2, 2019, BB&T Chief Risk Officer (CRO)
Clarke Starnes emailed FDIC staff to request a meeting
on February 4, 2019.
LOn February 4, 2019, CRO Starnes met with the
FDIC's Examiner-In-Charge (EiC) of BB&T and other
agency representatives, and provided notification of
the proposed merger.
LOn February 4, 2019, Doreen Eberley, Director of
the FDIC's Division of Risk Management Supervision,
spoke with BB&T Chairman and CEO King.
LOn February 6, 2019, CRO Starnes emailed the FDIC's
EiC of BB&T regarding the proposed announcement date.
Valid-When-Made-Doctrine
Q.13. Under current law, is a payday lender able to issue a
loan with a 160 percent APR and sell that loan to a bank to
avoid certain State interest rate caps?
Q.14. Under the proposed rule, would a payday lender be able to
issue a loan with a 160 percent APR and sell that loan to a
bank to avoid certain State interest rate caps?
Q.15. The proposal states that the FDIC would unfavorably view
the practice of a nonbank lender using banks for the purpose of
avoiding State interest rate caps. Please describe what
concrete protections the proposed rule contains to ensure that
this practice does not occur.
Would the FDIC pursue enforcement actions against banks
that assist nonbank lenders in avoiding State interest rate
caps?
A.13.-A.15. On December 6, 2019, the FDIC published a notice of
proposed rulemaking that would clarify the law governing the
interest rates State banks may charge.\22\ The proposed rule
would provide that whether interest on a loan is permissible
under section 27 of the Federal Deposit Insurance Act would be
determined at the time the loan is made, and interest on a loan
permissible under section 27 would not be affected by
subsequent events, such as a change in State law, a change in
the relevant commercial paper rate, or the sale, assignment, or
other transfer of the loan.
---------------------------------------------------------------------------
\22\ See Federal Interest Rate Authority, 84 Fed. Reg. 66845 (Dec.
6, 2019), available at https://www.govinfo.gov/content/pkg/FR-2019-12-
06/pdf/2019-25689.pdf.
---------------------------------------------------------------------------
The proposed rule affirms that the FDIC views unfavorably
entities that partner with a State bank with the sole goal of
evading a lower interest rate established under the law of the
entity's licensing State(s). Although I am unable to address
any confidential supervisory information or provide
institution-specific information, I would note that the FDIC
issued a public enforcement action \23\ in October 2018 against
Republic Bank & Trust Company for failing to clearly and
conspicuously disclose required information related to the
bank's Elastic line of credit product offered pursuant to a
contract with Elevate@Work, L.L.C. The FDIC will continue to
examine supervised institutions for compliance with all
applicable laws and regulations.
---------------------------------------------------------------------------
\23\ See FDIC Makes Public October Enforcement Actions, PR-89-2018
(November 30, 2018), available at https://www.fdic.gov/news/news/press/
2018/pr18089.html.
Q.16. The proposed rule does not contain a single quantitative
estimate to estimate the impact of the change on consumers. The
rule explicitly claims that ``in jurisdictions affected by
Madden, to the extent the proposed rule results in the
preemption of State usury laws, some consumers may benefit from
the improved availability of credit from State Banks. For these
consumers, this additional credit may be offered at a higher
---------------------------------------------------------------------------
interest rate than otherwise provided by relevant State law.''
LIs the FDIC conducting a quantitative cost-benefit
analysis to evaluate the costs of loans being offered
at higher interest rates against the benefit of these
loans being available?
LHas the FDIC conducted any cost-benefit analysis to
justify the proposed rule? If not, what is the
justification for moving forward with the proposed rule
if the FDIC ``is not aware of any broad effects on
credit availability as a result of Madden,'' as stated
in the proposal?
A.16. The preamble explained that an important benefit of the
proposed rule is to uphold longstanding principles regarding
the ability of banks to sell loans, an ability that has
significant safety-and-soundness implications, and included an
extensive discussion of the FDIC's legal reasoning. Further,
one way the FDIC fulfills its mission to maintain stability and
public confidence in the Nation's financial system is by
carrying out all of the tasks triggered by the closure of an
FDIC-insured institution. This includes attempting to find a
purchaser for the institution and the liquidation of the assets
held by the failed banks.
As it stands, the Madden decision could significantly
impact the losses to the DIF in a failed bank resolution and
disposition of assets. Following a bank closure, the FDIC as
Conservator or Receiver (FDIC-R) is often left with large
portfolios of loans. The FDIC-R has a statutory obligation to
maximize the net present value return from the sale or
disposition of such assets and minimize the amount of any loss,
both in order to protect the Deposit Insurance Fund (DIF).\24\
---------------------------------------------------------------------------
\24\ Federal Deposit Insurance Act (FDI Act), 12 U.S.C. 1821(d).
---------------------------------------------------------------------------
The DIF would be significantly impacted in a large bank
failure scenario if the FDIC-R was forced to sell loans at a
large discount to account for impairment in the value of those
loans as a result of legal uncertainty. This uncertainty would
also increase legal and business risks to potential purchasers
of bank loans, which in turn would likely reduce overall
liquidity in loan markets, further limiting the ability of the
FDIC-R to sell loans.
The proposal also discusses concerns of market observers
and ratings agencies regarding the liquidity and marketability
of certain types of bank loans, and noted published research on
potential effects on credit availability in the Second
District.\25\ The comment period closed on February 4, 2020,
and the FDIC has received numerous comments expressing concerns
about the potential effects on financial markets and concerns
regarding availability of credit for high-risk consumers.
---------------------------------------------------------------------------
\25\ See Michael Marvin, ``Interest Exportation and Preemption:
Madden's Impact on National Banks, the Secondary Credit Market, and P2P
Lending,'' Columbia Law Review, Vol. 116 (January 15, 2016), available
at https://ssrn.com/abstract=2753899 (focusing on the potentially
deleterious effects of Madden on credit availability and the pricing of
instruments tied to debt originated by a national bank in the secondary
credit market); see also Colleen Honigsberg, Robert J. Jackson Jr., and
Richard Squire, ``How Does Legal Enforceability Affect Consumer
Lending? Evidence from a Natural Experiment,'' The Journal of Law and
Economics 60, number four (November 2017): 673-712, available at
https://www.journals.uchicago.edu/doi/abs/10.1086/695808, (finding that
the decision in Madden not only reduced credit availability for higher-
risk borrowers in the Second Circuit's jurisdiction, but affected the
pricing of certain notes in the secondary market); see also Piotr
Danisewicz and Ilaf Elard, ``The Real Effects of Financial Technology:
Marketplace Lending and Personal Bankruptcy,'' July 5, 2018, available
at https://
papers.ssrn.com/sol3/papers.cfm?abstract_id=3208908 (finding that
Madden led to an increase in bankruptcy rates arising predominately
from changes in marketplace lending).
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
JELENA McWILLIAMS
Q.1. This spring, the Office of Management and Budget issued a
memorandum that for the first time required independent
regulatory agencies such as yours to submit final rules to the
Administration before publishing them.
LDid the FDIC get approval from OMB for any of your
final rules or guidance--Volcker rule, alternative
data, real estate appraisals, community bank leverage
ratio, etc.? If so, which rules were submitted?
LDid OMB make any changes to your rule? If so, what
changes did OMB request?
A.1. The FDIC will continue to meet its statutory mission as an
independent regulatory agency while abiding by all applicable
laws, including the requirements set forth by Congress under
the Congressional Review Act. As required under the
Congressional Review Act, the FDIC has historically submitted
and continues to submit final rules published in the Federal
Register to the Office of Management and Budget (OMB). The FDIC
has been evaluating whether other documents meet the definition
of a rule under the Congressional Review Act, in which case
such documents will be submitted to OMB and to Congress, as
required under the Congressional Review Act. For example, the
FDIC recently submitted to OMB and to Congress an advisory
regarding the prudent management of agricultural lending during
economic cycles.\1\ The FDIC continues to review whether
additional principles should be adopted to improve transparency
and accountability to Congress with respect to the rulemaking
process.
---------------------------------------------------------------------------
\1\ See FDIC FIL-5-2020, Advisory: Prudent Management of
Agricultural Lending During Economic Cycles (January 28, 2020),
available at https://www.fdic.gov/news/news/financial/2020/
fil20005.html.
Q.2. Without the Community Reinvestment Act, the homeownership
rate in our country, and especially for Latinos and African
Americans, would be much lower. UnidosUS published a report,
Latino Homeownership 2007-2017: A Decade of Decline for
Latinos, which found that that the CRA helped facilitate
between 15% to as much as 35% of home loans to Latinos. How
would proposed changes to CRA close the racial and ethnic
---------------------------------------------------------------------------
homeownership gap?
A.2. On December 12, 2019, the FDIC and the Office of the
Comptroller of the Currency (OCC) approved a notice of proposed
rulemaking\2\ that would modernize the regulations implementing
the CRA, which have not been substantively updated for nearly
25 years. The proposed rule is intended to increase bank
activity in low- or moderate-income (LMI) communities where
there is significant need for credit, encourage more
responsible lending, and promote improvements to critical
infrastructure. The proposal, like the existing rules,
continues to evaluate banks on the 18 mortgage loans made to
LMI individuals. The proposal sets forth numerous questions on
ways in which the rule can be improved.
---------------------------------------------------------------------------
\2\ See Community Reinvestment Act Regulations, 85 Fed. Reg. 1204
(Jan. 9, 2020), available at https://www.govinfo.gov/content/pkg/FR-
2020-01-09/pdf/2019-27940.pdf.
---------------------------------------------------------------------------
The proposal would (1) clarify and expand what qualifies
for CRA credit, (2) expand where CRA activity counts; (3)
provide an objective method to measure CRA activity; and (4)
revise data collection, recordkeeping, and reporting
requirements.
With respect to the first set of changes, the proposal
would establish clear criteria for the type of activities that
qualify for CRA credit, require the agencies to publish
periodically an illustrative list of examples of qualifying
activities, and establish a process for banks to seek agency
confirmation that an activity is a qualifying activity. These
changes would address current impediments to engaging in CRA
activities and provide banks with greater certainty and
predictability regarding whether certain activities qualify for
CRA credit. Specifically, by providing banks with greater
confidence that activities qualify for CRA credit before they
invest time and resources in those activities, the proposed
rule would incentivize banks to more readily engage in
innovative projects that have a significant impact on the
community. Moreover, by allowing stakeholders to confirm that
activities qualify, the proposal would eliminate the
uncertainty in the current regulations that potentially limited
the scope and type of banks' CRA activities that will benefit
banks' communities, particularly LMI individuals and areas.
In addition to providing transparency, the proposed
qualifying activities criteria would expand the types of
activities that qualify for CRA credit to recognize that some
banks are currently serving community needs in a manner that is
consistent with the statutory purpose of CRA but are not
receiving CRA credit for those activities. This expansion would
ensure that banks help meet the needs of their entire
communities, particularly LMI neighborhoods and other areas and
populations of need. The expanded qualifying activities
criteria would focus on economically disadvantaged individuals
and areas in banks' communities. For example, the proposed
qualifying activities criteria would expand the activities that
qualify in areas that have traditionally lacked sufficient
access to financial services, such as (1) distressed areas; (2)
underserved areas, including areas where there is a great need
for banking activities but few banks that engage in activities
(known as banking deserts); and (3) Indian country. Moreover,
to maintain a focus on LMI individuals, the proposal would, for
example, no longer permit a mortgage loan to a high-income
individual living in a low-income census tract to qualify for
CRA credit.
As with any comprehensive set of reforms, the agencies rely
on stakeholder feedback. The agencies will continue to engage
with regulated institutions, community and consumer groups,
members of Congress, and other stakeholders through the
rulemaking process, including with respect to the issue of
homeownership rates.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAMER FROM JELENA
McWILLIAMS
Q.1. The FDIC is the largest regulator of community banks.
These institutions would not be in business if they are not
serving their community. What steps are you considering in the
CRA modernization process to ensure that the burden of
regulatory change for community banks will not be
disproportionate to the benefits of updated regulations?
A.1. On December 12, 2019, the FDIC and the Office of the
Comptroller of the Currency (OCC) approved a notice of proposed
rulemaking \1\ that would modernize the regulations
implementing the CRA, which have not been substantively updated
for nearly 25 years. The proposed rule is intended to increase
bank activity in low- or moderate-income (LMI) communities
where there is significant need for credit, encourage more
responsible lending, and promote improvements to critical
infrastructure. The proposal would ensure that small banks are
not overly burdened by the need to overhaul their existing
systems or collect and report extensive data to comply with the
new framework. Specifically, the proposal would allow small
banks (i.e., those with $500 million or less in total assets)
to choose to be evaluated under the current rules or to opt in
to the new performance standards.
---------------------------------------------------------------------------
\1\ See Community Reinvestment Act Regulations, 85 Fed. Reg. 1204
(Jan. 9, 2020), available at https://www.govinfo.gov/content/pkg/FR-
2020-01-09/pdf/2019-27940.pdf.
---------------------------------------------------------------------------
Moreover, the proposal would add a criterion for activities
that help finance or support another bank's community
development (CD) loans, CD investments, or CD services.
Including this criterion and expanding the definition of CD
loan and investments to include certain commitments to lend and
invest would address the fact that community banks understand
community needs best but often are unable to provide the
necessary funding or service alone. In these cases, large banks
may finance the project, benefiting from community banks'
efforts to identify areas of need. This criterion would address
stakeholders' recommendations that the CRA regulatory framework
do more to encourage inter-bank collaboration and allow
community banks to remain involved in projects that they
identified and enabled.
Q.2. I appreciate that the FDIC and OCC have publicly
encouraged banks to expand their small-dollar lending. I
understand--and appreciate--that the Fed, FDIC and OCC are
working together on a regulatory action that would remove
barriers that discourage banks from entering or deepening their
presence in the market for small dollar credit.
LWhat is your timeframe for issuing a regulatory
action on small dollar lending?
LIn conjunction with that effort, does the FDIC plan
to rescind the FDIC's 2013 guidance that imposed
prescriptive underwriting expectations on small dollar
loans?
A.2. According to the FDIC's unbanked and underbanked study,
over 20 million households in America are underbanked and over
8 million are unbanked.\2\ While some banks offer small-dollar
lending to help those in need, many banks have chosen not to
offer such products, in part, due to regulatory uncertainty.\3\
As a result, many families rely on nonbank providers to cover
these emergency expenses, or their needs go unmet.
---------------------------------------------------------------------------
\2\ See 2017 FDIC National Survey of Unbanked and Underbanked
Households, available at https://www.fdic.gov/householdsurvey/2017/
2017report.pdf. A household is classified as unbanked if no one in the
household has a checking or savings account. A household is classified
as underbanked if it has a checking or savings account and used one of
the following products or services from an alternative financial
services provider in the past 12 months: money orders, check cashing,
international remittances, payday loans, refund anticipation services,
rent-to-own services, pawn shop loans, or auto title loans.
\3\ The FDIC, FRB, and OCC have taken separate approaches to small-
dollar lending at the institutions they regulate. See FDIC Issues Final
Guidance Regarding Deposit Advance Products (Nov. 21, 2013), available
at https://www.fdic.gov/news/news/press/2013/pr13105.html; 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.
---------------------------------------------------------------------------
To solicit feedback on these products and consumer needs,
the FDIC issued a request for information\4\ in November 2018
to learn more about small-dollar credit needs and concerns. We
have reviewed more than 60 comments and are reviewing our
existing policies, including the 2013 guidance on deposit
advance products. As you note, we are working closely with the
OCC and Federal Reserve Board (FRB) to coordinate policies and
plan to take action in the near future. While the interagency
process for joint rulemakings and guidance documents takes
longer to complete than if one agency acted alone, the FDIC's
engagement with the OCC and FRB is based on an understanding
that the three agencies are committed to act as expeditiously
as the process would allow.
---------------------------------------------------------------------------
\4\ Request for Information on Small-Dollar Lending, 83 Fed. Reg.
58566 (Nov. 20, 2018), available at https://www.govinfo.gov/content/
pkg/FR-2018-11-20/pdf/2018-25257.pdf.
Q.3. This Committee is considering legislation that would aim
at providing some regulatory certainty to banks working with
cannabis-related companies in the 47 States that have taken
various steps towards legalization. Would legislation such as
the SAFE Banking Act be a constructive step toward providing a
framework for financial institutions to serve companies that
---------------------------------------------------------------------------
comply with State cannabis laws?
A.3. As part of my commitment to travel to every State to meet
with bankers, their customers, and State regulators, I have
repeatedly heard concerns regarding the uncertainty in
providing banking services to cannabis-related businesses as
well as other businesses that provide services to those
cannabis-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 uncertainty related to law enforcement. I defer to
Congress on how best to address this uncertainty.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM RODNEY E.
HOOD
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 May 15, 2019 to present.
A.1.:
May 15, 2019--Wednesday
LSenate Hearing--Committee on Banking, Housing,
and Urban Affairs ``Oversight of Financial Regulators''
May 16, 2019--Thursday
LCommittee on Financial Services Hearing
``Oversight of Prudential Regulators: Ensuring the
Safe, Sound, and Accountable Conduct of Megabanks and
Other Depository Institutions''
May 20, 2019--Monday
LOtoe-Missouria FCU Charter Ceremony, Red Rock, OK
May 22, 2019--Wednesday
LMeeting with Andrew Moss, OCC, Outreach and
External Relations Program Manager--MDI
LAndrew Young Presents: The Color of Money--OCC
May 29, 2019--Wednesday
LPhone call with--Andrew Moss, Outreach and
External Relations Program Manager, OCC
May 30, 2019--Thursday
LLunch Meeting with CFPB Director Kraninger
LFSOC Principles Meeting--Treasury
May 31, 2019--Friday
LRemarks before the Hope Global Forum--Atlanta, GA
June 3, 2019--Monday
LFederal Reserve Bank of Atlanta Meeting (Dr.
Raphael Bostic)--Atlanta, GA
LFederal Home Loan Bank of Atlanta Meeting--
Atlanta, GA
June 4, 2019--Tuesday
LMeet--Cities for Financial Empowerment Fund--CFE
Fund, NYC
June 5, 2019--Wednesday
LHSBC Financial Innovation Center Meeting with
Jeremy Balkin--HSBC Midtown Office
LAdam Connaker--Rockefeller Foundation Center for
Innovation
June 6, 2019--Thursday
LInclusiv Meeting with Cathie Mahon--NYC
LMeeting with National Urban League President Marc
Morial--NUL Headquarters
June 7, 2019--Friday
LGeopolitics of Cyber Technology Breakfast
Briefing--Deutsche Bank Innovation Lab
June 10, 2019--Monday
LFFIEC Briefing with Secretary Judy Dupree, Kaelin
Browne, and Rosanna Piccirilli
LCredit Union National Association (CUNA)
Meeting--CUNA Office DC
June 11, 2019--Tuesday
LFintech Meeting with Jeff Bandman, Bandman
Advisors
LCato Institute Call with Moderator
LMedia Training Beverly Hallberg, District Media
Group
June 12, 2019--Wednesday
LCATO Summit on Financial Regulation Fire Side
Chat--Cato Institute
LMeet with Jovita Carranza Treasurer--Treasury
June 13, 2019--Thursday
LCriminal re-entry event--White House
LMeeting with NWCUA's Troy Stang--City Center--DC
June 17, 2019--Monday
LInteragency Principals +1 BSA Meeting / Follow-Up
Law Enforcement Briefing--Treasury
LVirginia ARP (VA ARP) Meeting
June 18, 2019--Tuesday
LMeeting with National Disability Institute--
Michael Morris and Mark Richert (Director of Public
Policy)
LFarm Credit Administration Meeting with Board
Member and Acting CEO Jeff Hall and his EA Kevin Kramp
June 19, 2019--Wednesday
LExchequer Club Meeting Luncheon--Mayflower Hotel
June 20, 2019--Thursday
LMaryland/DC Credit Union Association Meet and
Greet
LCooperative Credit Union Association Meet and
Greet
LMeeting with State Employees CU CEO, Mike Lord
June 21, 2019--Friday
LNEC Meeting
June 25, 2019--Tuesday
LCybersecurity Threat Monitoring, Tools &
Resources--Workshop--Interagency MDI & CDFI Bank
Conference--FDIC
LInteragency MDI & CDFI Bank Conference
Reception--FDIC
June 27, 2019--Thursday
LFFIEC Principles Meeting--Consumer Financial
Protection Bureau
LCeremonial Swearing In by Vice President Pence-
Eisenhower Executive Office Building
July 9, 2019--Tuesday
LCNBC's Capital Exchange: The Economy 2020--AJAX
DC
LMeeting with former Comptroller Tom Curry,
currently at Nutter
LMeeting with Stephanie Ortoleva--Founding
President and Executive Director, Women Enabled
International
July 10, 2019--Wednesday
LMeeting with Larry Blanchard
LMeeting with National Association of Credit Union
Service Organizations (NACUSO)
LMeeting with Navy FCU President/CEO Mary McDuffie
July 11, 2019--Thursday
LJa'Ron Smith--Director of Urban Affairs and
Revitalization at Executive Office of the President--
White House
LPALs Group Meeting with Lauren Saunders, Michael
Calhoun, Chris Peterson, Rob Randhava
July 12, 2019--Friday
LFFIEC Conference Call--FFIEC Appraisal
Subcommittee
July 15, 2019--Monday
LLunch Meeting with HUD Secretary Carson--U.S.
Department of Housing and Urban Development
LCooperative Credit Union Alliance
July 17, 2019--Wednesday
LMeeting with Boyce Adams, Banktel Systems
LMeeting with Senator Crapo
July 18, 2019--Thursday
LGrand Opening of Hope Inside Destinations Credit
Union--Baltimore, MD
July 19, 2019--Friday
LMedia Training with Beverly Hallberg
July 22, 2019--Monday
LSmall Business Matters Summit
July 23, 2019--Tuesday
LInteragency Principals +1 BSA Meeting--OCC
July 24, 2019--Wednesday
LPEW Meeting--Chairman to call in
LCarolinas Credit Union League Meet & Greet--
Columbia, SC
LDinner with League members after Meet & Greet in
SC
July 25, 2019--Thursday
LCarolinas Credit Union League--North Carolina
Meet & Greet--Raleigh, NC
July 26, 2019--Friday
LNational Urban League Conference--IN
July 27, 2019--Saturday
L2019 National Urban League Small Business Matters
Summit ``How to Become Bankable'' Workshop--IN
LNational Urban League Small Business Matters
Entrepreneurship Summit--National Urban League
(Panel)--IN
July 29, 2019--Monday
LLunch with the Indiana League--IN
July 31, 2019--Wednesday
LMeeting with Mark Zelden--The Center for Faith
and Opportunity Initiatives, Department of Labor
LMeeting with Andrew Giuliani, White House Office
of Public Liaison
August 1, 2019--Thursday
LCall with Anthony Hernandez (Defense Credit Union
Council)
LVictoria Guida--Politico
August 2, 2019--Friday
LDavid Baumann--CU Times
LJohn Reosti--CU Journal
LRay Birch--CU Today
August 6, 2019--Tuesday
LMeeting with Jerry Buckley--Buckley LLP
August 7, 2019--Wednesday
LMeet and Greet--UNC Center for Community
Capital--North Campus
August 8, 2019--Thursday
LAfrican American Credit Union Coalition (AACUC)
Roundtable with NCUA Chairman Hood--AACUC--Charlotte,
NC
August 9, 2019--Friday
LChairman--Speaker at African American Credit
Union Coalition Conference--Charlotte, NC
LCUNA Podcast On-site at African American Credit
Union Coalition--Charlotte, NC
LAfrican American Credit Union Coalition--
Receptions (2) and Awards Dinner--Charlotte, NC
August 12, 2019--Monday
LMeeting with Provident CU--Redwood City, CA
LMeeting at Provident CU w/ CA League--Redwood
City, CA
LMeeting with Robinhood Financial LLC--Menlo Park,
CA
LDinner with Peter Shiner--Menlo Park, CA
August 13, 2019--Tuesday
LMeeting with SF Fed Reserve--Gerry Tsai (Fintech
Team)--Federal Reserve Bank of SF
LVISA Meeting--Innovation Lab--San Francisco, CA
LBrief call with Treasurer Jovita Carranza
LFHLB of San Francisco Meeting and Dinner--San
Francisco, CA
August 14, 2019--Wednesday
LNational Association of State Credit Union
Supervisors (NASCUS) Speech--San Francisco, CA
LBrief Meeting with Katie Averill (Iowa Regulator)
August 15, 2019--Thursday
LAsian Real Estate Association of America Advisory
Council Meeting--Chairman Speaks--Sonoma, CA
LAsian Real Estate Association of America Board
Retreat--Chairman--Sonoma, CA
LCall with Bimal Patel Assistant Secretary for
Financial Institutions at U.S. Department of the
Treasury
August 16, 2019--Friday
LCall Chris Pilkerton, Acting Administrator, SBA
LMeeting with Self-Help Credit Union--Napa, CA
LSelf-Help--Lunch with Steve Zuckerman and
leadership team
August 20, 2019--Tuesday
LChairman Speaking--Defense Credit Union Council
Annual Conference--Chicago, IL
LDefense Credit Union Council 20th Annual Hall of
Honor Awards Dinner--Chicago, IL
August 21, 2019--Wednesday
LMeet with South Side Community FCU--Chicago, IL
August 28, 2019--Wednesday
LWSJ Interview Prep with Beverly Hallberg
LPhone interview with Lalita Clozel, Wall Street
Journal
August 29, 2019--Thursday
LTaped TV Interview with The Armstrong Williams
Show
LWhite House Digital Meeting--White House
August 30, 2019--Friday
LCall with Patrick La Pine, Southeastern Credit
Unions
LDinner with Bogdon Chmielewski, Polish Credit
Union CEO and Zbigniew Rogalski, Maspeth Branch
Manager--NYC
August 31, 2019--Saturday
LMeeting and Brief Tour of Exhibit with Krzysztof
Matyszczyk, Chairman of the Board; Bogdon Chmielewski,
Polish Credit Union CEO and Maciej Golubiewski, Consul
General of Poland in NYC--NYC
LOpening of ``Fighting and Suffering. Polish
Citizens during World War II'' Exhibit (Chairman giving
remarks)--NYC
LLunch with Representatives of the Polish and
Slavic FCU Board of Directors, Supervisory Committee
and Executive Management--NYC
LCall to Daniel Schline, North Carolina/South
Carolina League President, re: Tropical Storm Dorian
September 3, 2019--Tuesday
LInteragency Principals Law Enforcement Briefing
by FinCEN--FinCEN
September 4, 2019--Wednesday
LFSOC Meeting--Treasury Department
September 5, 2019--Thursday
LLunch Meeting with Undersecretary Mandelker--
Treasury
LPhone call with Clark Akers, Hall Capital
LMeeting with Emory Cox, National Economic Council
September 9, 2019--Monday
LChairman speaking to Truliant Federal Credit
Union--DC
LMeeting with and remarks 11 Presidents of Federal
Home Loan Banking System--DC
September 10, 2019--Tuesday
LChairman Speaking to National Association of
federally Insured Credit Unions Congressional Caucus--
DC
LMeeting with Mick Mulvaney, Acting Chief of Staff
to President Trump--DC
LIn-person interview with Melissa Angell, CU
Journal (immediately following NAFCU speaking)
LMeeting with John Fenton, CEO of Affinity FCU (+
4)--DC
LInteragency Conference Call re: Model Risk
Management
LMeeting with Kinecta Federal Credit Union Board's
Supervisory Committee--DC
September 11, 2019--Wednesday
LLunch with Bimal Patel, Assistant Secretary of
Treasury for Financial Institutions--Treasury
Department
LDinner with State Liaison Committee of the
FFIEC--DC
September 12, 2019--Thursday
LFFIEC Principals Meeting--CFPB
LLunch with CFPB Director Kathy Kraninger--FDIC