[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
BANKING INNOVATION OR REGULATORY
EVASION? EXPLORING TRENDS IN
FINANCIAL INSTITUTION CHARTERS
=======================================================================
VIRTUAL HEARING
BEFORE THE
SUBCOMMITTEE ON CONSUMER PROTECTION
AND FINANCIAL INSTITUTIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
APRIL 15, 2021
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-16
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
44-664 PDF WASHINGTON : 2021
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California FRANK D. LUCAS, Oklahoma
GREGORY W. MEEKS, New York BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri STEVE STIVERS, Ohio
ED PERLMUTTER, Colorado ANN WAGNER, Missouri
JIM A. HIMES, Connecticut ANDY BARR, Kentucky
BILL FOSTER, Illinois ROGER WILLIAMS, Texas
JOYCE BEATTY, Ohio FRENCH HILL, Arkansas
JUAN VARGAS, California TOM EMMER, Minnesota
JOSH GOTTHEIMER, New Jersey LEE M. ZELDIN, New York
VICENTE GONZALEZ, Texas BARRY LOUDERMILK, Georgia
AL LAWSON, Florida ALEXANDER X. MOONEY, West Virginia
MICHAEL SAN NICOLAS, Guam WARREN DAVIDSON, Ohio
CINDY AXNE, Iowa TED BUDD, North Carolina
SEAN CASTEN, Illinois DAVID KUSTOFF, Tennessee
AYANNA PRESSLEY, Massachusetts TREY HOLLINGSWORTH, Indiana
RITCHIE TORRES, New York ANTHONY GONZALEZ, Ohio
STEPHEN F. LYNCH, Massachusetts JOHN ROSE, Tennessee
ALMA ADAMS, North Carolina BRYAN STEIL, Wisconsin
RASHIDA TLAIB, Michigan LANCE GOODEN, Texas
MADELEINE DEAN, Pennsylvania WILLIAM TIMMONS, South Carolina
ALEXANDRIA OCASIO-CORTEZ, New York VAN TAYLOR, Texas
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
NIKEMA WILLIAMS, Georgia
JAKE AUCHINCLOSS, Massachusetts
Charla Ouertatani, Staff Director
Subcommittee on Consumer Protection and Financial Institutions
ED PERLMUTTER, Colorado, Chairman
GREGORY W. MEEKS, New York BLAINE LUETKEMEYER, Missouri,
DAVID SCOTT, Georgia Ranking Member
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
BRAD SHERMAN, California BILL POSEY, Florida
AL GREEN, Texas ANDY BARR, Kentucky
BILL FOSTER, Illinois ROGER WILLIAMS, Texas
JUAN VARGAS, California BARRY LOUDERMILK, Georgia
AL LAWSON, Florida TED BUDD, North Carolina
MICHAEL SAN NICOLAS, Guam DAVID KUSTOFF, Tennessee, Vice
SEAN CASTEN, Illinois Ranking Member
AYANNA PRESSLEY, Massachusetts JOHN ROSE, Tennessee
RITCHIE TORRES, New York WILLIAM TIMMONS, South Carolina
C O N T E N T S
----------
Page
Hearing held on:
April 15, 2021............................................... 1
Appendix:
April 15, 2021............................................... 47
WITNESSES
Thursday, April 15, 2021
Brooks, Brian P., former Acting Comptroller of the Currency,
Office of the Comptroller of the Currency (OCC)................ 13
Carrillo, Raul, Deputy Director, LPE Project, and Associate
Research Scholar, Yale Law School.............................. 6
Gerding, Erik F., Professor of Law, and Wolf-Nichol Fellow,
University of Colorado Law School.............................. 8
Johnson, Kristin, Asa Griggs Candler Professor of Law, Emory
University School of Law....................................... 10
Pacheco, Carlos, CEO, Premier Members Credit Union, on behalf of
the National Association of Federally-Insured Credit Unions
(NAFCU)........................................................ 11
APPENDIX
Prepared statements:
Brooks, Brian P.............................................. 48
Carrillo, Raul............................................... 67
Gerding, Erik F.............................................. 93
Johnson, Kristin............................................. 122
Pacheco, Carlos.............................................. 153
Additional Material Submitted for the Record
Perlmutter, Hon. Ed:
Written statement of the American Bankers Association (ABA).. 165
Written statement of the American Financial Services
Association (AFSA)......................................... 173
Written statement of the Bank Policy Institute (BPI)......... 175
Written statement of the Consumer Bankers Association (CBA).. 179
Written statement of the Financial Technology Association
(FTA)...................................................... 181
Written statement of the Independent Community Bankers of
America (ICBA)............................................. 184
Written statement of the National Association of Industrial
Bankers (NAIB), the Utah Bankers Association, and the
Nevada Bankers Association................................. 188
Written statement of VaultLink............................... 194
McHenry, Hon. Patrick:
Written statement of the Bank Policy Institute (BPI)......... 175
Written statement of the Consumer Bankers Association (CBA).. 179
Written statement of the Credit Union National Association
(CUNA)..................................................... 195
Written statement of the Independent Community Bankers of
America (ICBA)............................................. 184
Written statement of the National Association of Industrial
Bankers (NAIB), the Utah Bankers Association, and the
Nevada Bankers Association................................. 188
BANKING INNOVATION OR REGULATORY
EVASION? EXPLORING TRENDS IN
FINANCIAL INSTITUTION CHARTERS
----------
Thursday, April 15, 2021
U.S. House of Representatives,
Subcommittee on Consumer Protection
and Financial Institutions,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:06 a.m.,
via Webex, Hon. Ed Perlmutter [chairman of the subcommittee]
presiding.
Members present: Representatives Perlmutter, Meeks, Scott,
Velazquez, Sherman, Green, Foster, Vargas, Lawson, San Nicolas,
Casten, Pressley, Torres; Luetkemeyer, Lucas, Posey, Barr,
Williams of Texas, Loudermilk, Budd, Kustoff, Rose, and
Timmons.
Ex officio present: Representatives Waters and McHenry.
Also present: Representative Garcia of Illinois
Chairman Perlmutter. Good morning, everyone. The
Subcommittee on Consumer Protection and Financial Institutions
will come to order. Without objection, the Chair is authorized
to declare a recess of the subcommittee at any time. Also,
without objection, members of the full Financial Services
Committee who are not members of this subcommittee are
authorized to participate in today's hearing.
As a reminder, I ask all Members to keep themselves muted
when they are not being recognized by the Chair, to minimize
disturbances while Members are asking questions of our
witnesses.
The staff has been instructed not to mute Members except
where a Member is not being recognized by the Chair, and there
is inadvertent background noise. Members are reminded that all
House rules relating to order and decorum apply to this remote
hearing. If Members wish to be recognized during the hearing,
please identify yourself by name to facilitate recognition by
the Chair.
Members are also reminded that they may participate in only
one remote proceeding at a time. If you are participating
today, please keep your camera on, and if you choose to attend
a different remote proceeding, please turn your camera off.
We are in a very busy time, but we have a subject that I
think is particularly important and really goes to the heart of
our subcommittee's business.
Today's hearing is entitled, ``Banking Innovation or
Regulatory Evasion? Exploring Trends in Financial Institution
Charters.''
I now recognize myself for 4 minutes to give an opening
statement.
In 1863, President Lincoln signed the National Currency Act
into law, taking the first step in establishing the national
banking system. One of the primary goals of the National
Currency Act and the subsequent National Bank Act was the
standardization of currency to protect consumers against
uncertainty in the valuation of bank notes, rampant
counterfeiting, and fraud. In his 1864 address to Congress,
President Lincoln said the fact that the government and the
people will derive great benefit from this change in the
banking systems of the country can hardly be questioned. A
national system will create a reliable and permanent influence
in support of the national credit and protect people against
losses in the use of paper money.
At the heart of our banking system, there is a promise of
consumer protection and benefit to the people. President
Lincoln knew our national banking system needed to be reliable,
stable, honest, consistent across all States, and effective.
Over the last 150 years, the banking system has changed a great
deal, but its core mission to serve the people by taking
deposits, offering credit, and facilitating and intermediating
transactions, remains principally the same.
In recent years, a variety of non-bank and Fintech
companies have sought to engage in the business of banking or
in activities very similar to banking. Few of these companies
have sought traditional banking charters either because they
are wary of the additional regulation and supervision that
comes with being a bank or because the structure of their
business does not fit squarely within a traditional charter.
Many of the unconventional charters do not come with the same
level of regulation and supervision that traditional charters
require.
Despite the innovations of the last 10 years, many of the
questions we will be discussing today are not new. Industrial
loan companies (ILCs) have been around since 1910, and the
debate over the separation of banking and commerce predates
even the National Currency Act. In recent years, the Office of
the Comptroller of the Currency (OCC) has granted Fintech
companies banking charters, but the debate about what
constitutes the business of banking and what makes banks
special is a much older conversation.
We do not want to slow innovation, but it is the Congress'
duty to ensure that change comes at the benefit of, and not to
the detriment of, the people. As the economy continues to
reopen from the pandemic, it is important that our financial
system remains stable and strong and that consumers are treated
fairly and honestly. Most banks and credit unions have been a
source of strength in the pandemic, in part because of the
stringent capital, liquidity, and other regulatory requirements
we place on these financial institutions.
I look forward to the discussion today. I want to
compliment the panel on their very thorough written testimony,
and I will be very interested to see how well all of you can
stick to 5 minutes, based on your written materials. But we are
going to be dealing with financial stability risks, consumer
protection issues, market fairness questions, and the potential
benefits of non-traditional banking charters.
Additionally, I would like to ask both the committee
members and the witnesses today to consider how we can
encourage innovation alongside strong consumer protections,
adversity, and inclusion in our banking system. With that, I
will yield back, and I would like to now recognize the ranking
member of the subcommittee, Mr. Luetkemeyer, for 4 minutes for
his opening statement.
Mr. Luetkemeyer. Thank you, Mr. Chairman, for having this
hearing on this important topic.
And thank you to our witnesses today. I look forward to
your testimony.
As many of you know, before coming to Congress I was
involved in the banking business both as a banker and as a
regulator for many, many years. While it may surprise you to
know I was not around during the Great Depression, I have seen
a lot of changes within the banking industry during my 40 years
as a regulator and a banker. And, Mr. Chairman, you don't need
to be laughing at that. You are not much younger than I am.
I remember the Savings and Loan crisis of the 1980s. I
remember when people thought the innovation of credit and debit
cards would completely eliminate checks. I also remember when
the Community Reinvestment Act (CRA) was signed into law, and,
like everyone at this hearing, I remember the crash of 2008.
Throughout the years, banking has been fluid. It has changed
with the times, adapted to become more capitalized, and adapted
to serve more Americans.
We are having this hearing today because the banking system
is changing once again. In the last decade we have seen a rise
in technology or Fintech companies that have truly pushed the
innovation of the banking industry from mobile payments to
algorithmic lending, and much more. As these entities have
grown significantly in the last decade and become more
permanent in our banking system, they have begun to seek out
chartering options that are consistent with the growth of their
companies. The OCC has been extremely active in this space and
sought to provide a chartering option for Fintechs through a
special purpose national bank charter for Fintechs. However,
that decision has been tied up in the courts in recent years.
The OCC has also discussed the idea of a national charter for
payment companies and separately has approved anchorage for a
national trust charter, making it the first digital asset bank.
We should examine the pros and cons of the OCC's actions,
but we should also examine the role of State banking regulators
and regulation charting of Fintechs. Is the current State
regulatory regime adequate and is it necessary for the program
to get involved?
Another pathway explored by numerous entities to enter the
banking system is the industrial loan company (ILC) charter.
While ILC's are regulated on a Federal level by the FDIC and
supervised by State regulators, the parent company is not
considered a bank holding company by the Bank Holding Company
Act. This is a critical difference between bank holding
companies that are supervised by the Federal Reserve and are
restricted by law in activities closely related to banking. The
separation of banking and commerce has been a key staple of our
dual banking system, and the rise of the ILC approvals and
applications does raise questions of banking and commerce
separation safety and soundness, and privacy, questions which I
look forward to asking today.
However, before Congress acts rashly to eliminate any
chartering options, it is critical to look at the entire
ecosystem of chartering in the banking industry. For example,
since 2010, there have been only 43 de novo banks. In that same
period of time, the number of FDIC-insured depositories has
decreased by roughly 2,000 institutions; that is almost 4 banks
per week.
In addition, the innovation of Fintech companies has
largely increased access to credit and lowered the number of
unbanked and underbanked people in our society. The current
bank-Fintech partnership model has proven extremely successful
not only in providing more services and access to businesses
and consumers, but also significant consumer protections and
oversight to the regulation and supervision of banks. Congress
should examine all of these issues when taking action affecting
the charters of institutions.
I have always said that if you want to be a bank, you need
to be regulated like a bank. If you believe this can be
accomplished while providing a regulatory and chartering
framework that allows Fintech companies to continue to thrive
in the banking industry, while protecting the status of banks
as the bedrock of our financial system, so be it. I look
forward to raising these questions today. And with that, Mr.
Chairman, I yield back. Thank you so much for the hearing.
Chairman Perlmutter. I thank the gentleman.
The Chair now recognizes the Chair of the full Financial
Services Committee, the gentlewoman from California, Chairwoman
Waters, for the balance of our 5 minutes, which I think is
about a minute and 23 seconds.
Chairwoman Waters. Thank you very much, Chairman
Perlmutter, for holding this very important hearing.
The pandemic has accelerated the way people use technology
to bank, obtain a loan, and make payments. At the same time,
State regulators, community banks, credit unions, and consumer
advocates have raised alarms about how new entities, including
Big Tech firms, are receiving unconventional charters and
offering banking products and services while evading
regulations with which most banks, including community banks,
comply.
Additionally, the OCC has overstepped its authority,
pretending that laws signed by Abraham Lincoln were intended to
create charters for Fintech or cryptocurrency. I look forward
to hearing from our panel on how Congress can promote
responsible innovation that does not lead to a regulatory race
to the bottom, where consumers get hurt and the safety and
soundness of our financial system is once again in peril.
I yield back the balance of my time, and I thank you very
much.
Chairman Perlmutter. Thank you. The gentlelady yields back.
Now, I would like to recognize the ranking member of the
Full Committee, the gentleman from North Carolina, Mr. McHenry,
for the balance of his 5 minutes.
Mr. McHenry. Thank you, Mr. Chairman.
And, Mr. Brooks, I want to personally thank you for your
leadership at the OCC and for testifying today. I wish you the
best in your future endeavors.
It is clear that my colleagues on the other side of the
aisle want to relive old debates here in the committee, and
this is certainly an old debate. In framing this discussion, I
will have to go back to my talking points in my notes from
2005, 2006, and 2007. I have used this quote before, but to
quote Talleyrand in speaking about the Bourbon dynasty, ``They
had learned nothing and forgotten nothing.'' It is all the same
here, yet consumers and businesses have preferences and
continue to evolve.
The private sector is innovating in new ways to meet the
needs of all of our consumers, and we should be encouraging our
regulators to seek regulatory requirements that fit these
advancements, not hinder them. Republicans support promoting an
up-to-date regulatory framework that sets clear rules of the
road for all participants. We want, and will continue to work
for, the most inclusive financial system possible. And I yield
back.
Chairman Perlmutter. The gentleman yields back, and that is
the first time I have heard about Talleyrand in 11 or 12 years,
so thank you very much, Mr. McHenry.
I am now pleased to welcome each of our witnesses, and to
introduce the panel. And I will let you all know that there are
three Coloradans on this panel, which makes it a particularly
outstanding group to testify before the committee.
First, we have Raul Carrillo, who is the deputy director of
the LPE Project, and an associate research scholar at Yale Law
School. Mr. Carrillo's work focuses on the legal foundations of
money, banking, and finance as a legal technology and mode of
governance. Prior to joining the LPE Project, Mr. Carrillo was
policy counsel at the Demand Progress Education Fund and a
fellow at the Americans for Financial Reform Education Fund.
Second, we have Erik Gerding, who is a law professor and a
Wolf-Nichol Scholar at the University of Colorado Law School.
Professor Gerding's research interests include banking law, the
regulation of financial products and institutions, payment
systems, and corporate governance. He has written extensively
on the interaction between asset price bubbles and financial
regulation. Professor Gerding previously taught at the
University of New Mexico School of Law, and he has practiced
law in New York and Washington.
Our third panelist is Kristin Johnson, who is the Asa
Griggs Candler Professor of Law at Emory University School of
Law. Ms. Johnson's recent work includes a focus on emerging
technologies such as distributed digital ledger technologies,
which have enabled the creation of digital assets and
intermediaries. Prior to her work at Emory University School of
Law, Ms. Johnson served as the McGlinchey Stafford Professor of
Law and Associate Dean for Faculty Research at Tulane
University Law School.
Our fourth panelist is Carlos Pacheco, who is the CEO of
Premier Members Credit Union in Colorado, testifying on behalf
of the National Association of Federally-Insured Credit Unions
(NAFCU). Mr. Pacheco has been CEO of Premier Members Credit
Union since 2011, and he also serves as the board director for
the Denver Boulder Better Business Bureau, and the cabinet
campaign chair for the Foothills United Way.
Finally, we have former Comptroller of the Currency Brian
Brooks, a native Coloradan from Pueblo, Colorado. Mr. Brooks
served as Acting Comptroller of the OCC from May 29, 2020, to
January 14, 2021, after serving as Senior Deputy Comptroller
and Chief Operating Officer at the OCC, where he oversaw bank
supervision, systemic risk identification support, innovation,
and other issues. Prior to his work at the OCC, Mr. Brooks
served as chief legal officer of Coinbase Global, a
cryptocurrency exchange.
Oh, and I should say to the two panelists not from
Colorado, we would be happy and honored if you chose to come to
Colorado.
Witnesses are reminded that your oral testimony will be
limited to 5 minutes. You should be able to see a timer on your
screen that will indicate how much time you have left and a
chime will go off at the end of your time. I would ask you to
be mindful of the timer and quickly wrap up your testimony if
you hear the chime so we can be respectful of both the
witnesses' and the committee members' time. And without
objection, your written statements will be made a part of the
record.
Once the witnesses finish their testimony, each Member will
have 5 minutes to ask questions.
We will begin with Mr. Carrillo. You are now recognized for
5 minutes to give an oral presentation of your testimony.
STATEMENT OF RAUL CARRILLO, DEPUTY DIRECTOR, LPE PROJECT, AND
ASSOCIATE RESEARCH SCHOLAR, YALE LAW SCHOOL
Mr. Carrillo. Thank you, Chairman Perlmutter, for the
invitation. And thank you to Chairwoman Waters, Ranking Member
McHenry, Ranking Member Luetkemeyer, and all of the members of
the subcommittee. I offer my testimony as an associate research
scholar at Yale Law School, but most of my principles here were
created or developed by me as an attorney fighting and building
on behalf of low-income and no-income clients in New York City,
along with a group called New Economy Project.
I echo my remarks to the Financial Technology Task Force
last September and humbly request that everyone consider the
deeper impacts of Fintech on democracy. There is now a need for
serious stewardship. The pandemic response and the actions by
regulators have cast into relief the fundamental ways in which
governments shape money and markets. There is no taking
politics out of tech because there is no taking the law out of
tech or vice versa. Like physical tools, humans create and use
legal tools with certain ideas for their use in mind.
This morning, I have the luxury of presenting alongside
Professor Johnson, and Professor Gerding, and I will thus defer
to them on many issues or otherwise point to my written
testimony. I would like to focus on one underemphasized
dimension of Fintech here today, and that is privacy and
security. I hope to stress that the mass perpetual preemptive
and predictive surveillance that is perpetuated by both the
Government and private technology companies, often very much in
partnership, including Fintech companies, should be of deep
concern to everyone, regardless of party affiliation.
Civil rights and civil liberties including our fundamental
freedoms under the Fourth Amendment, the First Amendment, and
general law, warrants the parliament and the commoners won
against the tyranny of King George. Certain invasive products
and partnerships should not be allowed in our system regardless
of whether they are considered to be arbitrage or not by
regulators. Treating innovation as an unqualified good does not
lead us to equitable, sustainable, cooperative innovation that
allows us to truly prosper together.
As Vanderbilt Law Professor Morgan Ricks has stressed, and
President Lincoln might agree, money is infrastructure. As
scholars like Christine Dezan and Lev Menand stress, money is
also part of our constitutional order, and regulation flows
from Congress' authority over the public purse.
On the corporate side, surveillance has now become the
business model of Fintechs and many other companies. Congress
should shift the burden of privacy protection away from
consumers by establishing a short list of permissible purposes
for data collection and banning all others. This is envisioned
by Senator Brown's Data Act of 2020. This is especially
important because the government currently deputizes financial
institutions as anti-money laundering (AML) cops on the beat.
In 1992, Congress required the filing of suspicious
activity reports (SARs), relevant to any possible violation of
the law. This has incentivized unburdened firms who must act as
cops on the beat and send data, often automatically, to
government ``fusion centers.'' At these ``fusion centers,''
which serve as data platforms for local and Federal law
enforcement, Peter Thiel's Palantir aggregates information and
shares it more widely with law enforcement around the world.
Unfortunately, there is a hole in Fourth Amendment
doctrine. The court has claimed that we cannot have an
expectation of privacy in anything shared with a business. This
means, as the crypto community will tell you, that there is no
privacy in finance. Our infrastructure has no place for privacy
within it. This impinges not only on our Fourth Amendment
rights, but on our First Amendment values of freedom of
association and freedom of speech, especially for certain
vulnerable communities.
In this context, it is deeply troubling to me that Fintech
promotes financial inclusion via increasingly invasive
biometric data. Moreover, an app or a bank account is not the
answer to every problem. As Berkeley Law Professor Abbye
Atkinson has recently stressed in concert with community
advocates, credit is not a structural cure for poverty. It has
downsides. People need better wages and better benefits.
Just as importantly, we should not consign everyday folks,
including necessarily ourselves, to unnecessary and dangerous
invasions of their privacy, our privacy, in order to
participate in the payment system. We deserve to be one in the
crowd. SARs have not made us safer. It is true that money
laundering often occurs without notice. The most notorious
example is HSBC's actions in laundering money for the Sinaloa
cartel in Mexico.
Between 2010 and 2012, 18 financial institutions have
received deferred prosecution agreements. At least four of them
have broken the same AML law again and simply received another
fine. BuzzFeed news and the International Consortium of
Investigative Journalists recently released thousands of FinCEN
files showing that the system does not work by its own logic,
and again, does not make us safer.
I see the evolution of digital cash as a middle ground
between privacy technology like crypto and folks who want the
banking system to spy on all of us. I join Morgan Ricks, Lev
Menand, John Crawford, Mehrsa Baradaran, Bob Hawkins, Holly
Marova, and many others in advocating for public bank accounts
at the Federal level. And I also join the activists fighting
for this on the State and local level. Just as importantly,
though, we need cash wallets that replicate the true privacy
that a closed container for our cash has created.
The lead technologist on this and the best work is coming
from Rohan Grey who is privacy lead at the International
Telecommunications Union--
Chairman Perlmutter. Mr. Carrillo?
Mr. Carrillo. --and is very important for future security.
Thank you.
[The prepared statement of Mr. Carrillo can be found on
page 67 of the appendix.]
Chairman Perlmutter. The gentleman's time has expired.
Thank you, sir.
Professor Gerding, you are now recognized for 5 minutes to
give an oral presentation of your testimony.
STATEMENT OF ERIK F. GERDING, PROFESSOR OF LAW, AND WOLF-NICHOL
FELLOW, UNIVERSITY OF COLORADO LAW SCHOOL
Mr. Gerding. Thank you, Chairman Perlmutter, Ranking Member
Luetkemeyer, Chairwoman Waters, Ranking Member McHenry, and
members of the subcommittee for inviting me to testify today.
My name is Erik Gerding. I am a law professor at the University
of Colorado, where my research focuses on banking and
securities laws. I will focus my testimony today on three
things: first, the FDIC decision to reopen applications for
deposit insurance for industrial loan companies; second, the
OCC's radical new Fintech charter; and third, and more broadly,
why banking law separates banking from commerce and commercial
firms from banking.
That last issue came to a head in 2005 when Walmart applied
to the FDIC for deposit insurance for a new ILC that Walmart
was seeking to charter. Walmart's applications set off a
political and legal firestorm. This firestorm is now
threatening to re-erupt now that the FDIC and the OCC are
reopening Pandora's Box through charters that would confer the
powers and privileges of banks on non-banks. It is important
that this committee look not just at initial applicants for
charters because it is hard to see how the FDIC or OCC would
come up with legally defensible distinctions that would keep
out bigger companies like Amazon, Apple, Google, and Walmart
from one or both of these non-bank bank charters.
But why do we separate banking from commerce? What is the
harm in endowing banks with the powers and privileges of
banking? The concerns are not just progressive but also deeply
conservative concerns. We should worry about commercial firms
using bank charters to undercut rivals without charters. We
should worry about conglomerates in retail and tech using the
powers and privileges of banks to entrench market-dominant
positions. We should worry about small retailers and small
startup tech firms not being able to compete with well-
resourced and politically connected firms that have the powers
of a government charter behind them.
We should worry equally about banking conglomerates
competing unfairly in non-bank markets. We should also worry
about whether small banks and credit unions can face distorted
competition. Most troubling, we should worry about a banking
system that could quickly devolve into being dominated by the
three bigs: Big Wall Street; Big Tech; and Big Retail. We
should, in short, worry about the core reasons that we separate
commerce and banking: to prevent concentrations of economic and
political power; to prevent distortions in commercial markets
that allow unfair government-subsidized competition; and to
prevent distortions in banking markets that could leave banking
markets destabilized and without the smallest community banks
and credit unions. Non-bank charters could thus undermine one
of the core missions they are purported to serve: offering
greater access to financial services for underserved
communities. There are better ways to serve that goal.
I will turn quickly to the FDIC charter, because one thing
I want the committee to understand is that it is important that
ILC's are not subject to consolidated supervision by the
Federal Reserve. Consolidated supervision is the cornerstone
that allows bank regulators to ensure that large financial
conglomerates, or large commercial conglomerates, are not
playing games with subsidies that come with deposit insurance
or the other powers and privileges of banking. Consolidated
supervision is a world away from the ordinary supervision that
the FDIC and the OCC apply to individual firms and
institutions. That critical distinction is something that the
committee must remember.
I would urge the committee to reverse the power grab by the
OCC, and foreclose and preclude the OCC from issuing any new
charters to institutions that do not accept deposits. I would
also urge the committee to close the ILC loophole and pursue
other options for greater access to banking by underserved
communities.
[The prepared statement of Professor Gerding can be found
on page 93 of the appendix.]
Chairman Perlmutter. Thank you, Professor, and the chime
didn't go off, so you hit it right on 5 minutes. And obviously,
the testimony of all of our panelists--they are dealing with
the purpose of the banking system, the history of the banking
system, and the future of the banking system. So, this is a
very comprehensive and complex subject that we all have, and I
would recommend to the committee that they really look deeply
into the materials that have been provided.
Professor Johnson, you are now recognized for 5 minutes to
give an oral presentation of your testimony.
STATEMENT OF KRISTIN JOHNSON, ASA GRIGGS CANDLER PROFESSOR OF
LAW, EMORY UNIVERSITY SCHOOL OF LAW
Ms. Johnson. Thank you so much. Good morning, Chairwoman
Waters, Chairman Perlmutter, Ranking Member Luetkemeyer, and
members of the committee and the subcommittee. Thank you for
inviting me to this hearing examining banking innovation and
regulatory evasion, and trends in financial institution
charters.
As the Chair mentioned, I am the Asa Griggs Candler
Professor of Law at Emory University Law School where I teach
courses on corporations securities law, emerging technologies,
and financial markets, including the mouthful distributed
digital ledger technologies, which we commonly describe as
blockchain technologies, as well as the assemblage of
technologies commonly described as artificial intelligence.
I previously served as the McGlinchey Stafford Professor of
Law and Associate Dean of Faculty Research at Tulane
University. That was also noted, but I also served as director
of the program on financial market stability at the Center for
Law and the Economy. And if I may, I am a reformed capital
markets and mergers acquisitions lawyer and served as in-house
counsel and an analyst at two of the largest investment banks
in global financial markets. My research promotes transparent,
inclusive, responsible innovation, and focuses on the core
values of financial markets regulation: promoting consumer
protection maintaining fair and orderly markets; and ensuring
the safety and soundness of financial markets.
Over the last decade, a growing number of digital startups
have launched bids to lure business away from the financial
services industry. Increasingly, large technology platforms
engaged in essentially commercial activities, as well as social
media platforms, seek opportunities to conduct bank-like
activities. Amazon, Google, and Facebook, among others, have
launched a dizzying array of consumer credit and financial
services.
To echo Mr. Carrillo, and also my colleague, Professor
Gerding, these firms comprise a small subset of a burgeoning
spectrum of businesses integrating complex technologies and
financial services armed with vast quantities of data and
sophisticated algorithms that would be supervised and
unsupervised machine learning platforms. These are algorithms
inspired also by the creation and potential of blockchain-based
technologies. These Fintech firms have revived long-standing
debates regarding the architectural design, regulatory
framework, and role of the financial services industry.
This important hearing explores the nature of relationships
among banking and non-banking financial institutions as well as
the promise and peril or perils of extending special purpose
non-bank charters to non-depository Fintech firms that do not
engage in certain activities quintessentially understood as
core banking functions as well as commercial firms seeking to
obtain licenses to operate as industrial banks. As this
committee discussed previously in a hearing in the fall, where
Mr. Raul Castillo, who is here, and Professor Wilmart
testified, the National Bank Act clearly limits the scope of
the OCC's authority to issue Fintech charters to non-depository
institutions.
To quote others who have written extensively and researched
the history of banking regulation and the canons of statutory
interpretation, ``non-depository national bank'' is an
oxymoron. I am happy to say more, citing the National Bank Act,
in particular Section 24, the OCC's authority to extend
charters. But I believe much of that is covered in the written
testimony provided by witnesses today.
Coupled with the movement by the OCC to expand charters,
the industrial loan companies chartering question has emerged
as an essential issue in today's hearing as well as in
conversations and debates. Finally, this hearing, as the Chair
has noted, covers a scope of financial technology firms and
capture States that are issuing or distributing licenses for
blockchain-based financial institutions or institutions
custodying financial assets known as crypto assets also, so
bank licenses to those entities as well.
In my remaining time, I want to point out just the
following issue that is of tremendous concern. These entities
are operating with the promise of inclusion, but this promise
is often inaccurate, misleading, and in some instances, a
misrepresentation. Where the promise of inclusion attaches to
vulnerable unbanked and underbanked populations, consumers who
are, in many instances, families in fragile financial
circumstances, it is critical for us to carefully examine the
truths behind the promises that have been made, and install
guard rails which would ensure that any entity operating in the
banking space is subject to sufficient regulatory oversight.
For families with fragile financial circumstances, as Mr.
Carrillo pointed out, credit may serve as a lifeline, enabling
consumers to meet short-term debt obligations and to pay for
education, transportation, housing, medicine, child care, and
even food. Without access to credit on fair and reasonable
terms, it can be extraordinarily expensive to be poor.
I would also point out the surveillance questions and
highlight that COVID-19 has amplified these concerns. In the
remaining time, I just encourage the committee to support the
limitation on banking charters and ILC licenses.
[The prepared statement of Professor Johnson can be found
on page 122 of the appendix.]
Chairman Perlmutter. Thank you, Professor.
Mr. Pacheco, you are now recognized for 5 minutes to give
an oral presentation of your testimony. Thank you.
STATEMENT OF CARLOS PACHECO, CEO, PREMIER MEMBERS CREDIT UNION,
ON BEHALF OF THE NATIONAL ASSOCIATION OF FEDERALLY-INSURED
CREDIT UNIONS (NAFCU)
Mr. Pacheco. Good morning, Chairman Perlmutter, Ranking
Member Luetkemeyer, and members of the subcommittee. My name is
Carlos Pacheco. I am the CEO of Premier Members Credit Union
headquartered in Boulder, Colorado. I am pleased to be joining
you today on behalf of NAFCU to share our views on the trends
in financial institution charters.
The nation's approximately 5,000 federally-insured credit
unions serve a different purpose and have a fundamentally
different structure than other types of financial institutions.
As not-for-profits existing solely to provide financial
services to our members, we are pleased to be on the front
lines working with our members to help them survive the
economic uncertainty from the pandemic.
The growth of financial technology in recent years offers
new opportunities for the delivery of financial services. The
use of Fintech can have a positive effect on credit union
membership. Many credit unions embrace innovations and
technology in order to improve member relationships and NAFCU
believes that this is important for regulators like the
National Credit Union Association (NCUA) to ensure that credit
unions have the proper authority in this space under their
charters.
However, the growth of Fintech also presents threats and
challenges as new entities emerge in an environment that can be
underregulated or undersupervised. As such, when Fintechs
compete with regulated financial institutions, they must do so
on a level playing field. While many Fintechs are still subject
to various consumer protection and other laws, they are not
examined, nor do they face the same oversight as other players
in the financial services marketplace, creating cracks in the
system that could pose risks to both consumers and the
financial system.
For example, underregulation of Fintech companies can place
a greater burden on credit unions' efforts to protect deposit
accounts. As a primary financial institution for our members,
we are often the preferred party for resolving issues involving
unauthorized transactions even when they occur on other
platforms. While credit union consumer complaint processes are
overseen by regulators, there is no comparable oversight for
Fintech companies that facilitate payment transactions, even in
instances where they share responsibility for resolving errors
under Reg E. A minimally staffed call center may be all it
takes to steer financial Fintech users to the credit union if
there is a problem, and that alone can create competitive
imbalance.
There has been a recent trend in which Fintech companies
are enjoying liberalization of banking charter rules to either
acquire or become banks. Recent developments with both the
OCC's new chartering options and the FDIC's chartering and
approval of deposit insurance for a new wave of industrial loan
companies also present problems. In each case, a non-bank
company can potentially evade regulation under the Bank Holding
Company Act (BHCA) either because of a statutory loophole
unique to ILCs, or because the entity is seeking a limited-
purpose charter and will not accept deposits.
Lack of BHCA coverage raises concerns regarding the quality
and extent of supervision for these specialized banking
entities. In certain cases, specialized limited-purpose bank
charters may allow a Fintech to operate with national banking
privileges, but without the same prudential safeguards that
apply to traditional banks and credit unions. While some may
characterize these chartering initiatives as innovative, they
invite the potential for underregulation of novel risks and
could create an uneven playing field.
Depending on the scale or risk of activities, which might
involve facilitating cryptocurrency transactions, lack of
consolidated supervision by the Federal Reserve could create
additional financial stability risks. To address these
concerns, NAFCU supports steps such as imposing a moratorium on
new ILC charter approvals by the FDIC and closing the Bank
Holding Company Act loophole for existing ILCs. It is also
important that existing charters, such as those for credit
unions, are kept up-to-date to meet member needs. Congress
should also ensure that the data security and privacy
requirements for financial institutions in the Gramm-Leach-
Bliley Act, including supervision for compliance, apply to all
who are handling consumer financial transactions.
Regulators also have an important role to play. For
example, the Consumer Financial Protection Bureau (CFPB) should
use its ``larger participants'' authority to regulate and
supervise technology firms and Fintech companies that enter
into the financial services marketplace. New chartering ideas
should also be subject to the notice and comment rulemaking
process. Congress should also consider creating a Federal
Financial Institutions Examination Council (FFIEC) subcommittee
on emerging technology to monitor the risks posed by Fintech
companies and develop a joint approach for facilitating
innovation and identifying regulatory gaps between new and
existing charter options.
In conclusion, credit unions look forward to continuing to
experience growth in the technology space as a way for us to
better serve our members. However, as technology companies
expand and new charters emerge to compete in the financial
services marketplace, it is important that they compete on a
level playing field of regulation and supervision. Finally, it
is important that Congress ensures that laws are modernized to
allow credit unions to keep up and compete with technological
advances. I thank you for the opportunity to appear before you
today, and I welcome any questions you may have.
[The prepared statement of Mr. Pacheco can be found on page
153 of the appendix. ]
Chairman Perlmutter. Thank you, Mr. Pacheco. Is it snowing
in Colorado?
Mr. Pacheco. Not at this hour, but maybe in the next hour.
Chairman Perlmutter. Okay. Thank you.
Mr. Brooks, you are now recognized for 5 minutes for your
oral testimony.
STATEMENT OF BRIAN P. BROOKS, FORMER ACTING COMPTROLLER OF THE
CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY (OCC)
Mr. Brooks. Chairwoman Waters, Ranking Member McHenry, my
fellow Coloradan, Chairman Perlmutter, and Ranking Member
Luetkemeyer, thank you so much for the opportunity to speak
today. I will say at the outset, I am the only representative
of southern Colorado here, so we can have that conversation
afterwards.
Let me just say we are fortunate to live in a moment of
extraordinary innovation that I believe can actually expand
access to credit, provide consumers greater economic
opportunity, and provide a more just and robust economy. As
policymakers and participants in this evolution of the
financial services industry, we have a responsibility to
encourage responsible innovation while maintaining necessary
safeguards to ensure that our system operates in the safest,
soundest, and fairest way possible.
Now, while my testimony goes into greater detail regarding
what is driving the changes in our financial system and the
implications for chartering innovative financial companies, I
want to highlight a few thoughts in these remarks.
First, the rise of non-bank financial services providers,
and in particular Fintechs, is the result of market forces that
include the dramatic reduction of banks and branches, as has
been noted already, which is felt most in rural and urban, low-
and moderate-income communities. And at the same time as
consolidation, regulatory forces made certain consumer lending
less attractive for traditional banks, and that business
migrated toward non-bank providers such as payday lenders. It
is against that backdrop that we think that innovative
technology emerged, allowing Fintech companies to develop
solutions that provide consumers better alternatives to
traditional banks on the one hand, and strip mall financiers
like payday lenders on the other. The new products provide more
convenience, greater accessibility, and are often tailored more
closely to consumers' personal needs and situations. Fintechs
also emerged to provide back-office solutions such as payments
processing that operate more efficiently than comparable
systems in the legacy of banks.
As a result, many products, services, and activities that
were once exclusive to banks now occur outside of the banking
system. Where once that activity was watched closely by bank
regulators, today much of it goes on outside their view. The
questions that this hearing asks are whether those companies,
which undeniably are providing banking products and services
that historically were provided by banks, should have an equal
means to compete with incumbent banks as chartered institutions
and whether providing a path for these service providers to
become banks can be done in a safe, sound, and fair manner.
Based on my experience and analysis, it is both necessary
and advantageous to support a dual banking system of State and
Federal banks in which companies with novel and unique business
models, powered by ever-improving technology, can compete with
incumbents on a level playing field. By providing a path and
allowing choice for innovators to become part of the chartered
banking system, the system avoids stagnation, evolves to better
meet consumer preferences, and to address business and
community needs.
That view previously enjoyed bipartisan champions, because
it is a safe and sound and thoughtful position that puts the
good of the nation first, and recognizes that the failure to
encourage responsible innovation and to welcome new
participants into the banking system, stifles the system,
making it both anachronistic and concentrated in the hands of
legacy large institutions, which have been criticized on a
bipartisan basis as well. After all, Fintechs have not emerged
because the status quo had satisfactorily met all the needs of
the economy or all the needs of consumers.
I am optimistic about the progress being made to overcome
bias and irrational fears toward innovative ways of meeting
consumers' financial needs, including progress made in
transforming cryptocurrencies and blockchain applications from
exotic concepts to more mainstream financial and economic
tools. I am proud to have been involved in chartering the first
true Fintech company, Varo Bank, which has helped clarify
national bank regulations as they relate to digital assets and
stable coins. These actions have expanded services to
consumers, they have allowed existing banks to explore how
emerging technologies can be incorporated into their strategies
of serving their customers, and they have helped provide a
meaningful counterweight to the concentrated power of the
largest banks in our system.
Still, more rigorous [inaudible] needs to be done on other
important issues, particularly the appropriate measure of a
sustainably profitable Fintech's contribution and obligation to
its community whether it becomes a chartered bank or not. While
depositories, for example, are subject to the Community
Reinvestment Act (CRA) and its important civil rights
provisions, Congress did not apply the CRA to non-depository
financial services providers. Policymakers thinking about
chartering these non-depositories should explore alternatives
to the CRA that consider other advantages that federally-
chartered or State-licensed non-depository financial companies
enjoy, and what obligation that may entail to meet the
important economic justice and civil rights spirit of the CRA.
Recognizing that the economic inequities of the nation
require the removal of barriers in addition to reinvestment, I
founded Project REACH at the OCC in July 2020 to explore ways
that technology innovators, banks, and civil rights leaders can
work together to solve the structural issues behind race
disparities, including the fact that large numbers of
minorities lack usable credit scores and have more difficulty
than others in saving for a house down payment. Fintech has
something to say about all of these things, and if we believe
that an unregulated Fintech poses challenges, we should welcome
them into the regular system. Thank you, Mr. Chairman.
[The prepared statement of Mr. Brooks can be found on page
48 of the appendix.]
Chairman Perlmutter. Thank you, Mr. Brooks.
And thank you to all of our panelists.
I now recognize myself for 5 minutes for questions. I
guess, obviously, just looking at the written materials that
you all provided and coupled with your testimony, we really are
dealing with the length and breadth of the financial services
system, the banking system, its purpose, its history, and its
future. And maybe we need to have a couple of follow-on
hearings after this because each of us is going to come at this
with our life experience.
I am coming at it as a bankruptcy lawyer of 25 years, who
saw a lot of cycles where businesses failed and banks failed,
in Colorado and Texas. Mr. Williams, we saw pretty much every
single savings and loan fail. But then we saw things grow and
expand again, and we saw another cycle. And so I disagree with
Mr. McHenry that, gee whiz, we are doing this all over again.
It is because the system grows and shrinks, and it gets
excesses and not, and we have to just determine how, as a
policy matter--and I don't think this breaks along any party
lines as to whether you're conservative about the system or you
want to see it expand and take on some additional risk. All of
us need to chart the path we want to see our banking system
follow over the next 10 to 15 years. And I think that is the
purpose of today's hearing, and as we go forward.
One of the big questions on industrial loan companies
(ILCs) is about the separation of banking and commerce. And in
2005-2006, Walmart and Home Depot unsuccessfully pursued ILC
charters. There was a great deal of scrutiny from lawmakers in
the public about large retail corporations offering banking
services and what it could mean for market fairness and
financial stability. Last December, the FDIC published a rule
on ILCs, clarifying that the parent company of the industrial
bank must serve as a source of strength for the industrial
bank.
Professor Gerding, how well-suited is the FDIC, or any
other regulator, to assess the strength of a commercial
company, and do you have concerns about the continued blending
of commerce and banking?
Mr. Gerding. Thank you, Chairman Perlmutter. I have grave
concerns about the ability of the FDIC to supervise ILCs and
their parents. This goes back to what I said at the end of my
remarks. The FDIC does not have the authority to conduct
consolidated supervision over not just the ILC and its parent,
but all other entities within the corporate group. And that
lack of consolidated supervisory power does not allow the FDIC
to see potential gains that conglomerates are playing with FDIC
subsidized financing. It also does not allow the FDIC to see
the buildup of risks within the conglomerate. And this became a
problem when in the financial crisis when we saw the parents of
several ILCs require billions of dollars of government
assistance; Goldman Sachs, CIT, Merrill Lynch, Morgan Stanley,
GE Capital, and GMAC all had ILCs. All of those parents did not
serve as a source of strength for their ILCs, and then, by
contrast, actually required billions of dollars of government
intervention. So, I don't think that the source-of-strength
argument gives us much comfort.
Chairman Perlmutter. Thank you.
Professor Johnson, I would like to ask you a question. In
2019, the State of Wyoming enacted a series of laws related to
cryptocurrency, including one authorizing the chartering of
special purpose depository institutions (SPDIs). Last year,
Wyoming approved the first SPDI charters for Kraken Bank and
Ivani Bank, two cryptocurrency custodial firms planning to
offer services.
It seems many cryptocurrency companies are eager for a
legal framework in which to operate. Do you believe bank
charters are the appropriate framework for these firms?
Ms. Johnson. Thanks so much for the question, Mr. Chairman.
I would echo Professor Gerding's comments and amplify them.
During the financial crisis of 2008, we not only saw these
challenges that were endogenous with respect to regulated
firms, but exogenous challenges as well that triggered systemic
risks that created losses across financial markets. I would
encourage a very careful evaluation of any extension of
charters to cryptocurrency-based firms because of the
endogenous and exogenous shocks that could create systemic
risks and destabilize financial markets.
Chairman Perlmutter. Thank you, Professor.
My time has expired. I now recognize the ranking member of
the subcommittee, the gentleman from Missouri, Mr. Luetkemeyer,
for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman, and just as a
comment, the title of this hearing is, ``Banking Innovation or
Regulatory Evasion? Exploring Trends in Financial Institution
Charters,'' and yet we have no representation from the banks
here today. We have several bank think-tank guys and professors
and whatever, but we have nobody representing any of the
associations or any of the banks themselves. I am kind of
wondering about that. But anyway, it is always nice to have
somebody from the real world.
Chairman Perlmutter. If the gentleman would yield for one
second, I think that is why we we may have to have a couple
more hearings on this.
Mr. Luetkemeyer. Okay. That would be great. We look forward
to having a real-world aspect on this as well, besides the
theoretical part of this.
Mr. Brooks, I want to start with you. Again, I appreciate
your service to our country as a Comptroller. I think you did a
fantastic job and I look forward to continuing to work with you
on the private sector side here.
In your testimony, you discussed how the scope of a bank
charter can adjust to accommodate the safe and sound delivery
of traditional banking products and services by companies that
are not charters banks today. Do you think there is a way to
provide a level playing field for traditional depositories and
non-banks that are providing the same services and products
without requiring the non-banks to get a full national bank
charter and follow all the rules and regulations?
Mr. Brooks. Let me just say, Mr. Luetkemeyer, first of all,
I very much appreciated your engagement. During my time at the
OCC, we have had some of these conversations privately, and let
me just expand on that and answer your question. I think the
answer is that we have seen on a fairly secular basis over the
last 10 years an unbundling of financial services that used to
be delivered together, and people want them delivered
differently today. So the question really isn't, do we need to
create some new frameworks, the question is, if you have
activities that have always been conducted by banks and are
clearly permissible to banks and are part of the core of
banking services, then the question is, why do they stop being
banks when they choose to only offer some financial services?
The way I think about the level-playing-field question is
if Bank of America offers a payment-processing service that is
subject to an examination module that the OCC has for payment
processors, and if Square is also providing a payment-
processing service, it ought to be allowed to elect to be
subject to the very same supervision.
I think the red herring in the discussion often is the idea
that somehow it is not a level playing field because Square
wouldn't also be subject to deposit regulation or any of a
suite of other regulations. But what I think of when I think of
that issue is, when I was a kid growing up in Pueblo, Colorado,
I had my bank account at a small thrift in Pueblo called
American Federal Savings. American Federal Savings was a bank.
They were regulated by the Office of Thrift Supervision (OTS),
but somehow they weren't subject to commodities and derivatives
regulation like JPMorgan was, not because there was an unlevel
playing field, but because American Federal Savings didn't
offer commodities and derivatives. So for what they did, they
were subject to the very same rules and regulations as the
analogous services provided at JPMorgan, but there were some
things they elected not to provide, so they weren't subject to
those things, and that is not an unlevel playing field.
My belief is that anything that is a banking service can be
accommodated inside of one of the several existing bank
charters without the need for radical innovation. To me, that
is common sense.
Mr. Luetkemeyer. Okay. Dr. Gerding made a comment here a
minute ago with regards to the separation of banks from
commerce. In his written testimony, he says that preventing
consolidation of credit, the concentration of economic power,
and the concentration of political power--and to me, this is
why we had this situation for 60 years, and we have slowly
gotten away from it. And to me, this is where you get the
question on the ILCs, do we want to allow another commercial
entity to own a banking entity, financial services entity, and
let them creep into, from the commercial side of this, the
banking sector? [Inaudible] to address that? Give me your
thoughts on that?
Mr. Brooks. Yes. This is another place where I apologize.
Were you asking me, Representative Luetkemeyer, or were you
asking Professor Gerding?
Mr. Luetkemeyer. Mr. Brooks, yes. I cornered Mr. Gerding
because it really, I think, encapsulizes the concerns that some
of the folks like myself have, that for 60 years, we kept the
banking and commercial stuff apart, and now we are allowing it
to get mingled together, and every day it gets mingled more and
more. And I think the ILC question is one that really
solidifies this question of, do you allow the commercial folks
to get into the banking or not?
Mr. Brooks. Yes. What I have always said about that is it
is a very different question to ask, should Walmart be able to
get an ILC, versus should a firm or Brex, which are lending
companies, be able to get an ILC charter? I don't think the
Walmart question is presented. I am not personally comfortable
with that, and I think throwing the babies out with the
bathwater on that might be a mistake.
Mr. Luetkemeyer. Okay. Thank you very much.
I yield back, Mr. Chairman.
Chairman Perlmutter. Thank you. The gentleman's time has
expired.
And I would say to Mr. Brooks, it is a good thing you don't
have an account at American Federal, because it is one of the
many savings and loans that failed back in the late 1980s and
early 1990s.
Mr. Brooks. Very true.
Chairman Perlmutter. I now turn to the former chairman of
our subcommittee, Mr. Meeks from New York, for 5 minutes.
Mr. Meeks. I want to thank you, Mr. Chairman, and Ranking
Member Luetkemeyer, for having this very important and critical
hearing. Just listening to the testimony of the witnesses and
some of the early questions from both you and Mr. Luetkemeyer
is really important. And I understand, also, that there is a
debate as to whether the National Bank Act requires nationally
chartered institutions to take deposits. I know the courts will
decide that, but look, I go back and forth myself, because one
of the things that I know is that sometimes what we did 20, 30,
or 40 years ago because of technology or because of changes, we
have to look at it again and figure out, how do we do certain
things that push us forward?
And I get the questions, and I want to make sure that we
still have regulatory authority so that people don't run away
with, in an unprotected way with--because of technology, but I
also want to make sure that access to capital is available to
many small businesses like the small businesses in my
community. I talk to many minority-owned small businesses, et
cetera, and they tell me that the number-one issue that they
have is access to capital.
I have seen the banking industry consolidate over the last
20 years while technology is now allowing for new entrants in
the financial services area. And there are serious concerns
that the Big Tech companies could enter the financial system by
the ILC regime, concerns that I definitely share with banks and
consumer groups alike. And then, if the large non-financial
companies can receive ILC charters, these companies could
potentially receive all of the banking privileges without
having to answer to the same prudential standards as
traditional banks including, for example, Minority Depository
Institutions (MDIs) and Community Development Financial
Institutions (CDFIs).
I also have the anti-trust concerns when it comes to the
prospect of large, non-financial companies entering the system
through ILC regimes. I will start with Mr. Gerding, and then
maybe Mr. Pacheco can jump in also. Given that the FDIC is
beginning to accept applications for new ILCs for deposit
insurance, can you speak to whether and how such entrants would
have a competitive advantage over, for example, credit unions
or minority banks?
Mr. Gerding. They have an advantage in several ways. On the
one hand, they would get the benefits of FDIC deposit
insurance, which would allow them a cheaper cost of financing,
which they could then spread to other parts of their corporate
conglomerate. That kind of gain with FDIC insurance would allow
them to undercut commercial rivals. It would also allow them to
enter into a banking realm with all of the powers and
privileges of banking, then undercut credit, and small credit
unions, and small community banks. And again, they would not be
subject, as you said, Representative Meeks, to the same level
of prudential regulation and that same all-important
consolidated supervision that traditional banks are subject to.
Mr. Meeks. Thank you.
I am going to come to you, Mr. Pacheco, but let me go to
Mr. Brooks really quickly to ask, how do you counter that, what
Mr. Gerding just said?
Mr. Brooks. The issue I see, Congressman Meeks, is the idea
that I think all of us here on the panel today are concerned
about the level of concentrated power that the biggest banks
have. And so, I am a believer that new entrants, whether they
are Fintechs or other kinds of companies, as long as they meet
the statutory requirements, are a counterbalance to that. So
again, one of the points of Project REACH was to find ways of
bringing technology companies into the solution for, why isn't
there more capital available in inner-city neighborhoods, and
why have banks pulled more branches out of inner-city
neighborhoods than out of rich suburbs? Somebody has to fill
that void. It hasn't been the big banks, so it needs to be
somebody. And to me, the safest way to do that is not to allow
Fintechs to do it on a completely unsupervised and unregulated
basis; it is to bring them into the fold subject to
supervision. That is sort of the common-sense solution.
Mr. Meeks. Let me allow Mr. Pacheco to jump in there,
Mr. Pacheco. I appreciate that. Thank you for the question,
Congressman. I would say that I agree with some of the
testimony from Professor Gerding and Mr. Brooks. My one
deviation from that is that organizations like credit unions my
size, a small organization with just a billion and a half in
assets, is out there going into those communities that might
have been left behind by other institutions. We are out there
building relationships in places like Pueblo and other parts of
Colorado.
Mr. Meeks. I am out of time.
Thank you, Mr. Chairman.
Chairman Perlmutter. Thank you, Mr. Meeks.
The Chair recognizes the gentleman from Kentucky, Mr. Barr,
for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman. And as my friend, Mr.
Meeks, focused on urban banking deserts, let me ask a few
questions about rural banking deserts, and in particular, the
decline in de novo charters. Since the financial crisis, de
novo formation has slowed significantly. There were 181
charters granted in 2007, but between 2010 and 2019, fewer than
10 new banks, on average, opened per year. More than half of
the counties in the United States saw net declines in the
number of bank branches between 2012 and 2017. These declines
in bank branches disproportionately hit rural communities.
The negative financial impacts on rural counties of bank
branch closures are perpetuated by continuing difficulties due
to burdensome regulations and other roadblocks of de novo
community bank formation. These trends leave residents of rural
counties without access to much-needed financial services and
also have negative downstream impacts on those communities. I
am trying to remedy that by introducing today the Promoting
Access to Capital in Underbanked Communities Act, which would
encourage formation of new banks in locations where bank
branches are scarce. It would give de novo banks more time to
meet capital requirements and ease other regulatory burdens on
new community financial institutions.
Mr. Brooks, I share Mr. Luetkemeyer's appraisal of your
service at the OCC; I also enjoyed working with you. Can you
tell us what some of the biggest roadblocks are to de novo bank
formation?
Mr. Brooks. Thank you, Congressman Barr. I very much have
appreciated our relationship and your mentorship and guidance,
so thanks for the opportunity. I would just begin by saying
that as in many things, process in government is everything.
And so, when I first arrived at the OCC and looked at the bank
chartering process, the process flow involved, doing that
involved something like 58 steps. I am making that number up.
It was a huge number of steps where multiple committees had to
review charter applications more than one time and that was
just one of the three agencies that charter banks. So I think
part of the problem is that we have to streamline the process
by making clear how one gets a de novo charter and making clear
what the timeline expectations are for getting those things
approved even just inside of the charter agencies of the OCC.
The second thing I would say to this committee is we have
an incredibly complicated process where three different
agencies have full discretion over whether to approve or not
approve banks, because once you have a national bank charter
approved at the FDIC, you still need deposit insurance
approval, and nowadays the Federal Reserve is exercising
extraordinary oversight over whether something that has been
approved by those two agencies should be allowed to become a
FIN member. That is why it took Varo Bank nearly 3 years from
initial approach to charter grant, and we can't have the kind
of system we had in the 1980s and 1990s if we are going to take
3 years to charter every bank.
So I share your concern that finding ways to shortcut that
process, not in the sense of shortcutting important substantive
requirements, but shortcutting bureaucratic red tape, which
takes an enormous amount of time for a good purpose is really
important.
The other thing I would tell you is in rural communities,
Fintechs are the main source of credit, in certain respects. If
you want to get a mortgage in Versailles, Kentucky, you are not
going to get it at a local branch. What you are going to do is
find it on LendingTree, and that is why it is more important
that those companies be encouraged and regulated, so that they
can deliver those services more effectively in places where
banks don't have branches.
Mr. Barr. That is good feedback. I will note a recent study
from the FDIC which found that citizens in rural communities
are more likely than people in urban or suburban areas to visit
bank branches. Obviously, you mentioned some online
opportunities. Of course, rural broadband is a challenge for
mobile banking. I have introduced bills to combat both of these
issues, but the problems have been exacerbated by the pandemic.
Is there anything else we can do to increase access to the
banking system for rural populations?
Mr. Brooks. I would say, Congressman, that consistent with
the bill that you are introducing today, we need to have a
concept kind of like a CRA-type of concept, where if you are
serving an underbanked community, there needs to be a fast
track to approval. And I think you and I have talked before
about the fact that there are rural communities in Kentucky and
Mississippi and other parts of the south where the nearest bank
branch is 75 miles away. So the only way you are going to allow
those local community leaders to form new branches, is if there
is a fast-track option. And we should see that as community
reinvestment--
Mr. Barr. Really quickly, Mr. Brooks, in my final few
seconds, can you address Professor Johnson's analysis that a
non-depository national bank is an oxymoron?
Mr. Brooks. In the National Bank Act, deposit taking is a
power of a bank, not a requirement. It is a requirement in the
Bank Holding Company Act, but it is a power, not a requirement
in the National Bank Act.
Mr. Barr. My time has expired. I appreciate the answers,
and I yield back.
Chairman Perlmutter. I thank the gentleman for his
questions.
I now recognize the gentleman from California, Mr. Sherman,
for 5 minutes.
Mr. Sherman. Thank you. I would like to first talk about
the industrial loan company loophole to what has been in this
country--can I be heard?
Chairman Perlmutter. You are live and loud.
Mr. Sherman. Live and loud. Thank you.
I would like to first look at the industrial loan company
loophole to what has been a prohibition in this country of
mixing industry and commerce on the one hand, and financial
services on the other. Now, a couple of decades ago, we did
allow different types of financial services companies to be
under one roof. An insurance company can also own a bank or
vice versa.
But, Mr. Carrillo, last month it was reported that Walmart
had hired a Goldman Sachs head of consumer banking and
announced a partnership with Reddit Capital, trying to expand
into financial services. Walmart and other major retailers
have, at various times, sought State-issued industrial loan
company charters. Just as the Trump Administration was on its
way out the door in December of last year, the FDIC adopted
rules that paved the way for non-banks to own ILC-chartered
banks, and here is the key part, without being subject to the
same regulatory oversight requirements that are applied to
traditional bank holding companies.
Do you see inconsistencies in these regulatory
requirements, and is it a good idea for us to copy a system
that has done tremendous damage to Japan of having groups of
companies that are in both industry and commerce on the one
hand, and financial services on the other?
Mr. Carrillo. Thank you for your question, Congressman
Sherman. I believe that the Japanese example does provide some
lessons. They call Rakuten, ``Japan's Amazon,'' and it has
integrated into financial services in a way that it will never
be untwisted at this point. I do want to highlight one
dimension regarding the ILC issue that Professor Gerding and
Professor Johnson did not hit on, although I believe they both
point to it, at least in the general way, in their testimony as
well. It is that a lot of these companies that will come
through this loophole will be subject to different data
collection requirements. They will not be subject to Regulation
Y or the regulations of the BHCA in the same way, and they
won't even provide the limited privacy protections that current
banks do to their customers.
So, in many ways, this is replicating the problems of the
past, as Ranking Member McHenry said, in the sense that we are
creating things that look like deposits, act like deposits,
walk like deposits, and talk like deposits, but we don't treat
them like deposits. And in the other sense, this is totally new
and [inaudible]
Mr. Sherman. And following up on that, we have a few very
small, old ILCs out there, but if Amazon exploits this, they
are going to be enormous; they don't do anything small. And the
question then would be, would they be subject to the Financial
Stability Oversight Council (FSOC) if they were of systemic
importance to our financial system?
Mr. Carrillo. Yes. There are all of these giant macro
questions, which I believe Professor Gerding outlined quite
well. And the issue, to me, is certainly one of power even
behind that. And, Congressman Sherman, the issue is that
entities like Amazon and Facebook and Walmart, which launched
the Fintech, as you said, and has hired people from outfits
that don't respect privacy to come in under the cloak of
providing access to credit or financial inclusion even, but to
do so in a way that fundamentally depends upon mass
surveillance and a violation of our constitutional rights
consistently.
There are other ways to do this in which we respect
privacy. There are other ways even for private sector companies
to do this, let alone the government itself, and we are not
addressing those ways. I would be really interested to hear
what, for instance, former acting Comptroller Brooks has to say
about the Fourth Amendment, and again, the necessary violation
of privacy that is the business model of these companies
[inaudible].
Mr. Sherman. I do want to go on to one other issue, and
Professor Gerding, I am probably going to ask you to respond
for the record. But we see that the State of Wyoming is moving
toward cryptocurrencies and the OCC has granted preliminary
approval to the Anchorage Trust Company to become a national
trust bank, and Anchorage, of course, claims to be a
cryptocurrency asset custodian. I have looked at Bitcoin and
wondered whether there was a big enough market among terrorists
and drug dealers, and it didn't seem to be enough. And then, I
realized, when the IRS Commissioner testified to one trillion
dollars every year of unreported taxes, chiefly from the
wealthy that--and I made up a little advertising sign that may
help Anchorage: ``Bitcoin, it is not just for terrorists
anymore; it is for tax evaders, too.'' That is the market for
Bitcoin. I yield back.
Chairman Perlmutter. The gentleman yields back.
The gentleman from Texas, Mr. Williams, is recognized for 5
minutes.
Mr. Williams of Texas. Thank you, Mr. Chairman. I think one
of the greatest exports America has are the products and
services that our entrepreneurs and businesses bring to the
marketplace and share with the world. I do not want to run the
risk of losing our position as the world leader in innovation.
That being said, I do not think we should have to, or quite
frankly need to, add additional risk into the financial system
to help foster the business-friendly regulatory environment
that we meet.
Mr. Brooks, I also want to add thank you for your service
to our country, and I also would address my first question to
you: How would eliminating access to chartering options like an
ILC impact Fintech companies from innovating and creating new
products and services, and do you believe that these companies
would just move to other jurisdictions outside of the U.S. that
provide a more modernized regulatory system?
Mr. Brooks. Congressman, I really appreciate that question,
and I guess I would answer in two different ways. Before we
talk about offshoring technology, which is a real risk, let's
just talk about the actual companies that are actually applying
for ILC charters today. They are not Walmart. They are not
Google. They are financial companies. They are a firm, which is
a point-of-sale lending company that is one of the largest
companies in that space today and all they do is make loans.
That is their entire business. They would like to be an ILC.
So, you have two choices in that world. That company can
come into the ILC world and be supervised by a State regulator
and by the FDIC or not. Okay? And the question is, which is a
riskier scenario? Letting them in the system so they can be
supervised, and remember that the federally-supervised entities
fail at about half the rate of non-federally supervised
entities, or we can keep them out of the system. Today, I would
argue that it is riskier.
Now, if the U.S. adopts the anti-tech posture, and I think
one of the comments made earlier is that we can't take the
politics out of tech, what you already see is significant
aspects of tech moving offshore primarily to Asia, but even to
markets with somewhat more unified financial regulation like
the U.K.
Comments have been made about cryptocurrency. Obviously, I
disagree that the market for Bitcoin is terrorists and tax
evaders; we could have that conversation separately. But the
position we have taken in this country thus far about
blockchain and its opportunities has been a position that has
led many exchanges to leave the United States.
Now, there is optimism, because of the Coinbase IPO
yesterday, that the U.S. markets are very welcoming of that
business, but increasingly that activity is going to the U.K.,
the EU, and Singapore. And those are countries that still have
an idea that perhaps responsible innovation with an appropriate
amount of risk oversight is a good thing, not a bad thing. So I
think we need to think carefully about that.
Mr. Williams of Texas. I appreciate that answer. My office
has been contacted by a variety of stakeholders talking about
the importance of the True Lender Rule. The fact that it is
being discussed as something that could be invalidated with the
Congressional Review Act has already caused some market
participants to get nervous as they are working to provide
services to banks with which they have partnered. I think that
when some of my Democratic colleagues try to simplify the rule
down to saying it is just a rent-a-charter scheme, it missed
the intention of the rule.
So, Mr. Brooks, again, can you talk to us about how the
True Lender Rules assist the OCC in protecting the safety and
stability of our nationally chartered banks?
Mr. Brooks. Congressman that is a great question. And there
were two motivations behind the True Lender Rule and its
companion rule, the Valid When Made Rule. The first idea was
that when the Madden decision came down in the Second Circuit
Court of Appeals, lending to low- and moderate-income people
living in New York and Connecticut, the States subject to that
rule, fell by 64 percent. Let me just say that again. When you
don't have the Valid When Made Rule, the people who get hurt
are poor people. And the point of the rule was to reinstate
access to credit for those low- and moderate-income Americans,
our brothers and sisters, who were cut off from credit when
banks weren't allowed to sell loans in the secondary market.
That was the first reason.
The second thing we did in that rule is make very clear
that rent-a-charter schemes of the past, which were all about
the idea that nobody was accountable for those loans, not the
bank and not the Fintech marketing partner, those were over.
What we said in our rule was that in the True Lender regime, if
the bank is the True Lender on the loan, it will be responsible
for all disclosure, all anti-discrimination rules, all consumer
protections. We eliminated rent-a-charter in that rule. So, it
is a nice talking point to say that somehow this incentivizes
rent-a-charter, but in fact, the text of the rule solves rent-
a-charter and staff and career--supervisors at the agency
worked very hard to make sure that was the case.
Mr. Williams of Texas. Thank you for that.
And, Mr. Chairman, I yield back.
Chairman Perlmutter. Thank you, Mr. Williams.
Another gentleman from Texas, Mr. Green, is recognized for
5 minutes.
Mr. Green. Thank you, Mr. Chairman. I greatly appreciate
the opportunity to be heard, and I greatly appreciate you
having this hearing; it is very valuable to me. Let me start
with Coinbase and their predicate for where I would like to
ultimately start. Coinbase made its market debut on Wednesday,
and its reference price was $250. It ended up closing at
$328.28. The value of the company is at $85.7 billion. For
those, I am sure you know, but some may not know that Coinbase
is a business that allows its clients, its customers, to buy
and sell digital currency.
I mention this, because it is just a matter of coincidence
I suppose, and I don't want to demean anybody but Mr. Bernie
Madoff--and he passed yesterday. Mr. Bernie Madoff, for those
who may have forgotten, was the father of a $20 billion Ponzi
scheme. A lot of people have consternation about digital
currency, cryptocurrency, because they are concerned that it
might end up being a Ponzi scheme. This is a fear that people
have, people who don't understand maybe, but some who do
understand are very much concerned.
But my concern is this. When Mr. Madoff made off with this
money, persons who, generally speaking, could care less about
what Congress does as long as Congress kind of stays out of
their business, made their way to Congress and they wanted
Congress to help. They thought we should have regulated to the
extent that this fraud should not have occurred. And I think
that a lot of our concern and consternation with cryptocurrency
emanates from people who saw what happened and still are
concerned about what may happen.
So, here is my first question, and I would like to direct
this question to Mr. Brooks. Is cryptocurrency an asset class
or is it a substitute for currency? How do you see it? And can
you just give me a quick answer? Maybe 10, 15 seconds, because
I have another question for you.
Mr. Brooks. Sure. Congressman Green, I really appreciate
the question. I separate crypto into two worlds: Bitcoin and
everything else. Bitcoin, I think of as an asset class. It is
an anti-inflationary asset class that some people believe is a
counterweight to inflationary monetary policy by governments.
All of the other cryptocurrencies that exist out there are
designed to create networks. They are essentially inducements
to create internets on which various values can be exchanged. I
am happy to talk more about that, but it is an internet
protocol that has nothing to do with Ponzi schemes. And tell me
how much time you want; I can give you more information on
that.
Mr. Green. I appreciate what you have said thus far, but
let me move forward. The American dollar is backed by the full
faith and credit of the United States of America. That is a
fair statement I think. Cryptocurrencies seem to be backed by
the people who hold cryptocurrency. Is that a fair statement?
Mr. Brooks. I don't think so, actually. I think I probably
disagree with both of those statements.
Mr. Green. Explain, please?
Mr. Brooks. Okay. So, what is backed by the full faith and
credit of the United States is U.S. debt. A dollar bill is not
U.S. debt. A dollar bill is just a unit of exchange which you
use to buy things. If you look at what has happened in monetary
policy over the last 12 months, the U.S. has increased the M2
money supply by 40 percent, which inherently devalues the
amount of the purchasing power of the dollar. You saw that in
the inflation reports that were in this morning's newspapers.
So, that is an example of the dollar not being backed by the
full faith and credit; it is backed by American monetary policy
at any given moment. So. there is that.
Mr. Green. What about the cryptocurrency, if you would,
please?
Mr. Brooks. Right. So cryptocurrency, and again, put
Bitcoin aside for just a moment. What cryptocurrency is about
is the belief that a particular network will gain adoption. So
when you buy an Ethereum token, an Eth token, that is like
saying, I believe this network, which is a smart contract
protocol for building financial applications, basically apps
like on your cell phone, is going to have value. So if you
think Google stock has value, because you think internet
traffic is going to go up and Google is a tracking stock for
the internet, buying Eth tokens is like believing that the
Ethereum protocol will become the default protocol for
financial applications. That is what it is backed by, adoption
rates of that protocol.
Mr. Green. But if it is backed by the belief, and I do
concur with this, is there the possibility of believers at some
point no longer believing they can take it to zero?
Mr. Brooks. Sure. Just as believers, in general, can say,
that was the past, and this is the future, so I am dumping my
General Motors stock. That can happen, too.
Mr. Green. Thank you very much. My time has expired.
Mr. Carrillo. Representative Green, may I clarify a point
of law?
Mr. Green. Well, the chairman would have to allow you to do
so. My time is--
Chairman Perlmutter. Without objection, you have 30
seconds.
Mr. Carrillo. Thank you. Former Acting Comptroller Brooks
said that the U.S. dollar is not government debt. That is
incorrect. It is an issue of the U.S. Federal Reserve. It is
classified as a liability on its balance sheet. It comes from
an instrumentality of Congress, although it is not considered
under the debt ceiling to be treated the same way as a U.S.
Treasury. It is very much a debt of the United States
Government. It is money we owe to ourselves. It is our main
payment tool constitutionally and administratively. Thank you.
Chairman Perlmutter. I thank the gentleman.
Next, we have the gentleman from Georgia, Mr. Loudermilk,
for 5 minutes.
Mr. Loudermilk. Thank you, Mr. Chairman.
And, Mr. Brooks, before I get in my questions I just want
to know if you needed a moment or a few seconds to respond to
the previous gentleman?
Mr. Brooks. Yes. I guess all I would say on that is that
dollars are created by government credit operations, and so the
underlying thing that is an obligation is the credit, it is the
buying and selling of government debt. But the dollar that you
have in your pocket, and any of us old enough to remember the
1970s knows this, is only as valuable as American monetary
policy. I remember in 1980 when interest rates were 13 percent
and it cost 21 percent to take out a mortgage. Your dollar
wasn't very valuable then and nobody guaranteed its value.
Mr. Loudermilk. Okay. I appreciate the clarification of
that. In fact, recently I was at a restaurant and the waitress
had just taken cash, and she handed me a bill, and she said can
you tell me if this is legal? It was a silver certificate. I
said, I'll tell you what, I will give you a bill of equal
value, and I will take it.
So, I do want to follow up on the questions of Mr. Williams
regarding Fintech and True Lender. Bank partnerships have
continued to grow and the question of which entity is the True
Lender is the subject of numerous court cases. And it has been
resolved on a case-by-case basis in a lot of instances. Some
courts have developed complicated multi-factor tests to
determine who is the True Lender, but that causes significant
confusion and uncertainty in lending markets.
So, Mr. Brooks, could you discuss why the OCC's True Lender
Rule is important to give clarity and certainty to the lending
markets?
Mr. Brooks. Congressman, it is a great question, and it is
all about how important you think clarity is. The philosophy I
have, which I articulated at the OCC many times, was to quote
Justice Brandeis' famous statement when he said, ``Sometimes,
it is more important that a question be settled than it be
settled right.'' And so, my belief is that lending contracts,
in a big global economy like the American economy, need a rule.
You could pick a different rule, but our point was to say
someone needs to be responsible, there needs to be a clear
bright-line test when a consumer takes out a loan as to whom he
or she is taking the loan out from. And our belief was, we will
have a two-sentence rule. The bank is the lender if its name is
on the note, or the bank is the lender if it has funded the
note on the date of origination, period, and we will take
enforcement action against any bank who is the True Lender who
violates the law. It's hard to see how that is not a good
thing.
Mr. Loudermilk. Right. And some on the other side, as you
have heard over and over again today, have alluded that the
True Lender Rule will allow predatory lenders to engage in
rent-a-charter schemes, and that is a concern of even some
State-level bank examiners or directors. Can you explain how
that rule does not allow for that?
Mr. Brooks. The first thing is, we need to sort of take the
adjectives and adverbs out of this discussion and start
defining some terms. So when people call a loan a, ``predatory
loan,'' the question is, what do they mean by that? And what
they generally mean is it was a loan that was originated at an
interest rate that exceeds the borrower's home State's usury
cap.
So if that is what you mean by predatory lending, Congress
and the Supreme Court, between 1978 and 1980, made it clear
that banks, both national banks and State banks, have the
ability to export their home State's interest rate to other
States. And why was that important as a policy matter? Because
again, in the late 1970s, the market rate of money was in the
high double digits and the State usury cap in some States was
in the single digits, meaning that if you lived in that State
and you didn't have interest rate exportation, you literally
couldn't borrow money. That is not a good thing in the market
cycle, right?
And I think the argument is when Congress decided that
banks can export their interest rate, they decreed that was not
predatory lending. So the question is, why does it become
predatory lending when a loan that was legal when made is sold
to somebody else?
The analogy I give is, if you are renting an apartment and
you have a lease that says you have to pay $500 a month, and
then the building owner sells it to a different owner and your
lease is still $500 a month, what has changed? Did that rent
suddenly become unaffordable? Did it suddenly become usurious?
No. You live in the same apartment and you contracted to pay
that amount. And in the 1970s and 1980s, we all recognized it
was a good thing.
In my testimony, I talk about what a bipartisan consensus
that was to allow rate exportation. All True Lender does is
make those markets work better, provide clarity, reduce
litigation, and make credit more available. Remember, in the 2
States that [inaudible] rule for 5 years, credit to low- and
moderate-income people fell by 64 percent. That can't be what
we want.
Mr. Loudermilk. Access to credit is really what the issue
is, especially in a recovering economy when people are trying
to get back into the workforce or become an entrepreneur and
start a new business. And as you know, bank-Fintech
partnerships have resulted in tremendous expansion of the
availability of credit, not just for those who have good
credit, but also for those with a limited credit history. Can
you explain why adding more uncertainty in the lending markets
will reduce access to credit for consumers and businesses?
Mr. Brooks. I would ask the chairman--
Chairman Perlmutter. The gentleman's question--look, I gave
30 seconds last time, so you have another 30 seconds. Sorry.
Mr. Brooks. Thank you, Mr. Chairman.
I would just quickly say that if a bank can't engage in
Fintech and other partnerships to sell loans in the secondary
market, the bank's ability to provide credit is limited by the
size of its own balance sheet, because it can't sell that loan
and then use the proceeds to make the next loan. When a bank is
limited by the size of its own balance sheet, not surprisingly,
it is going to focus on the safest and most profitable loans,
which means loans to the richest people and the people with the
best credit scores. So, the first people who get hurt when
credit starts getting rationed are poor people.
Again, the Federal Reserve has done multiple studies
showing that more credit equals less poverty, and my philosophy
is that making credit markets work for everybody ought to be
our highest priority.
Mr. Loudermilk. Well said.
And I yield back the remaining time I no longer have.
Chairman Perlmutter. The gentleman's time has expired, and
if we get a chance, maybe we will do a lightning round for
everybody after this. But we are basically dealing with the
whole banking system and a number of different issues related
to it.
I now recognize the gentleman from Illinois, Dr. Foster,
for 5 minutes.
Mr. Foster. I would like to ask a couple of questions about
what is going on in Wyoming, which seems to be a State that has
more Senators than they have actual people. But in 2019, the
State of Wyoming enacted a series of laws related to
cryptocurrency, including one authorizing the charter of
special purpose depository institutions (SPDIs). And in
September, Wyoming approved the first SPDI application for
Kraken Bank, which is a digital asset company based in
Cheyenne. The bank plans to offer services such as digital
asset custody, demand deposit accounts, and wire transfer
services, and, at this time, it seems that Kraken is not
seeking deposit insurance from the FDIC. Instead, the bank has
promised that it will maintain 100 reserves of deposits in fiat
currency and in liquid assets.
Now, the rules of the Wyoming Banking Division define
liquid assets to include investment-grade corporate debt,
investment-grade U.S. State and municipal securities, and other
investment-grade Federal or State Government agency securities.
So, under stressful events, some of these instruments would
make that arrangement inherently unstable, such as when you
have an interest rate swing and Treasury bond prices would
fall, or corporate credit risk might increase, causing capital
losses.
Ms. Johnson, do you have concerns that this model of
capitalization may not be robust enough to withstand periods of
economic stress?
Ms. Johnson. Thank you so much, Representative, for the
question. I do have strong concerns, and I would like to sort
of situate this conversation in reference to the 2008 financial
crisis. At the moment, it may not be the case that Kraken is
soliciting Federal deposit insurance, however, should Kraken or
other--as was referenced earlier with Coinbase--cryptocurrency
exchanges or platforms operating in this space, and experience
significant solvency crises, we should not assume that they
would not be eligible for some type of relief.
I would point in this moment to the Fed's discount window
being made available to AIG, and in the moment that the Fed's
discount window was being made available to AIG, to an earlier
point in conversation, I was leaving a position as associate
general counsel at JPMorgan Chase. It was within weeks of us
acquiring another bank, now defunct, but which had a long
history, Bear Stearns. And I would like to just underscore that
there is more than sufficient evidence in the cryptocurrency
space already that exchanges not only experience solvency
crises, but they are subject to cyberattacks that have left
them unable to satisfy customer deposits. They have also been
subject to any number of scams and misconduct, more broadly.
Mr. Foster. Thank you. And I would like to also talk a
little bit about their capitalization. The Wyoming SPDI capital
guidance states that a prospective SPDI should consider one-
and-a-quarter to one-and-three-quarter percent of proposed
asset under management or assets on, or assets under custody or
$10 million, whichever is greater, as an appropriate minimum
requirement for chartering. However, these requirements will be
developed on a case-by-case basis. The banks, under supervision
of a Federal banking agency, are required to maintain basic
minimum capital requirements that translate to a percentage of
assets. And furthermore, traditional banks have other key
protections such as deposit insurance or access to a lender of
last resort.
Professor Gerding, since the SPDIs do not have deposit
insurance or a lender of last resort, would you consider SPDIs
to be adequately capitalized under the Wyoming Banking
Division's general formula?
Mr. Gerding. It is very difficult to say, Representative
Foster, because of that critical phrase that you mentioned in
your remarks: ``a case-by-case basis.'' It is hard to know
whether the way in which Wyoming regulators will actually look
at applicants for these charters in a consistent way, and in a
way that actually makes sure that they are well-capitalized.
And I worry that a lot of these decisions are going to be made
on a case-by-case basis and in a very non-transparent way.
Mr. Foster. Okay. That is actually a valuable thing to keep
our eyes on, so I appreciate that.
Just a quick question, one big issue with crypto generally,
Fintech generally, is the whole business of, Know Your Customer
(KYC), and the ability for customers to basically prove who
they are online. And there are proposals that are being made,
and actually done in some States, that consumers will have
access to so-called digital drivers' licenses to prove who they
are online. Do you have any comments on how that may make the
whole, Know-Your-Customer/Anti-Money Laundering (KYC/AML)
situation improved no matter what charter you adopt?
Chairman Perlmutter. The gentleman's question will require
a long time to answer, and I would ask that either we do it in
the lightning round, or you submit it in writing, and the
panelists can answer your question in writing for the record.
Mr. Foster. I appreciate that, Mr. Chairman. I yield back.
Chairman Perlmutter. The gentleman's time has expired.
Thank you.
The gentleman from Tennessee, Mr. Kustoff, is recognized
for 5 minutes.
Mr. Kustoff. Thank you, Mr. Chairman. Thank you for holding
today's hearing, and I do want to thank the witnesses for
appearing, as well.
Mr. Pacheco, if I can, to you, obviously, the last 12 to 13
months have created a lot of new normals, a lot of new habits.
Can you talk about, from your customers' perspective, what you
have seen in terms of changing of preference and maybe changing
of habits accelerated by the pandemic?
Mr. Pacheco. Sure. Thank you for the question, Congressman.
The last 12 to 14 months have been very disruptive. It has been
disruptive for in-lobby transactions and traffic, and we have
had to shift to other avenues and sources and solutions, and
that includes things like mobile banking, online banking,
desktop banking, certainly a higher utilization of telephone
banking, and, in a last-resort perspective, utilizing drive-
thru banking. So, it has been very disruptive.
And in each of those cases, we have used solutions that we
have partnered with other companies on. Our mobile banking
platform would be a great example. I think that some of the
current things we are doing relative to technology innovation
to be able to drive that, and then also including mobile
deposits on that platform. And so, the partnerships that we
have had have been a welcome benefit to our membership during
the pandemic.
Mr. Kustoff. Thank you, Mr. Pacheco.
Mr. Brooks, I do want to echo other people who thanked you
for your prior service to the government. I appreciate your
opening statement. I also appreciate your written statement.
Can you talk about, kind of following up on Mr. Pacheco, the
change in the way customers now operate in this environment and
what does it say about the future of the financial industry?
Mr. Brooks. Congressman, that is a great question, and I
appreciate Mr. Pacheco's comments as well. I think one of the
reasons it is great to have a credit union representative on
this panel is that it shows that in order to meet the credit
needs of Americans, particularly in a post-pandemic sort of
contactless environment, it is going to take all-hands-on-deck.
So the answer clearly is not that the biggest banks alone can
solve all of our credit problems. Indeed, Jamie Dimon just said
in his annual investor letter last week that the role and
relevance of banks in the economy is the smallest it has been
at any time in the last number of decades, because customers
preferences have changed.
I think Congressman Barr has it right, that there is a real
urban-rural divide on this, but most people in the United
States have elected not to visit bank branches. I'll just ask
any of you, when was the last time you went into a branch for a
significant transaction? And the pandemic has accelerated that
kind of thing, so you have a combination of how many people
want to do things from home, like we are doing this hearing
today. Many people don't want to interact with other people
that they don't know in day-to-day interactions, and a
significant amount of capital has fled the banking system for
other applications. This is why Fintech valuations are now
higher than bank valuations on a revenue multiple basis over
the last five-year period.
And so, in that world where capital has left banking and
consumer preferences have shifted to other kinds of platforms,
the policy question is, how do we make sure the system is still
safe and sound, and consumer protections are respected? That is
the question. There is no one answer. It is not going to be to
keep all Fintechs out of banking; that is not going to be the
answer. It is not going to be to say crypto must be banned
because it is a source of terrorism financing now that it is a
two-and-a-half trillion dollar market.
What it is going to be is an all-hands-on-deck attempt to
make sure that we regulate similar activities similarly,
regardless of whether that activity takes place on a legacy
bank platform, a Fintech platform, a crypto platform, or
whatever. If you are doing payments, you should be subject to
payments regulation. If you are engaging in credit, you should
be subject to the fair lending laws, and it shouldn't matter
whether you are a legacy depository or something else. Consumer
preferences change and the system you all regulate has to
evolve with that.
Mr. Kustoff. Thank you. You mentioned Congressman Barr, and
I want to follow up on his line of questioning and also the
comments that you made in your written statement, at least
about the de novo banks and the lack thereof over the last
``X'' number of years and the closure of bank branches.
In my district, I represent part of Memphis, but also a
fairly rural part of Tennessee. I travel across the district
quite a bit, and what I hear is that we have a lack of rural
broadband. And as we talk about the continued emergence of
Fintech, how do we mesh that together? How can the Fintechs
fill the void of some of these closures, and yet our
communities not have broadband?
Mr. Brooks. Congressman that is the all-hands-on-deck
point. We need a combination of, it needs to be easier to
charter new banks and it needs to be easier for Fintechs to
fill voids. We need all of that.
Mr. Kustoff. Thank you very much.
My time is up, and I yield back. Thank you very much.
Chairman Perlmutter. Thank you, Mr. Kustoff.
The gentleman from Florida, Mr. Lawson, is recognized for 5
minutes,
Mr. Lawson. Thank you, Mr. Chairman. I would like to
welcome everybody to the committee. There has been a very good
discussion today. Now, I will probably, if I have time, go back
to Mr. Brooks, and the reason why I said that is because I have
a lot of students in my district, and they are much younger and
they don't want to go in the banks. But some of the other
citizens around my age still want to go in these branch banks
and sit down and talk to somebody. I really need to get this
message across, so I hope I can come back to you.
I noticed that Professor Gerding, in his earlier testimony,
stated that he wrote in the separation between banking and
commerce proposed risk for financial stability, and consumer
protection are threatened to distort a financial market by
allowing commercial firms that can obtain banking power and
privilege to compete unfairly with the firms that cannot. And
secondly, distort banking markets by allowing non-banks to
offer banking services without facing the same degree of
supervision and regulation as banks which, in turn, would
create incentives for banks to take more risks, lobby for
deregulation. Can you please explain those three points for me,
sir?
Mr. Gerding. Thank you. Let me explain the last piece
first. When you undermine the bank charter, when you allow
competitors to unfairly compete with banks without being
subject to the same set of regulations, and you give all of the
powers and privileges of a bank to a non-bank, that has an
effect on bank behavior as well. And it is just core banking
economics. When you undermine the bank charter and allow unfair
competition, banks are going to respond by taking more risk,
and that is partially what we have seen in the last 20 years,
and a big part of what we saw in the global financial crisis.
So, that is the effect on the banking sector.
The commercial sector, by allowing non-banks to get powers
and privileges of banks including exemptions from a whole host
of State laws, which Mr. Brooks has not really mentioned, you
are allowing the firms that have charters to basically undercut
their rivals in commercial markets. And by allowing commercial
firms and non-banks to have access to things like Federal
Reserve emergency loans and the Federal Reserve payment systems
without being subject to the same set of regulations and the
same duties of banks and functions of banks, you are basically
distorting commercial markets, non-banking markets.
Mr. Lawson. That is incredible.
Mr. Brooks, before my time runs out, you talk about the
change in marketing the way individuals like to do banking and
really don't, sir--where, when people aged 50 to 60 and above,
I don't know whether you address those groups, but maybe they
are coming along as much as the younger people, because I
noticed in a lot of where we have a lot of students and stuff
in my area, maybe 50,000 or 60,000 of them, it is a whole
different story in terms of how they go into banks in the
future. And so, I don't know whether you have time to comment
on that, and looking at the trends, but I better stop right now
before my time runs out and give you a chance to respond.
Mr. Brooks. Absolutely. Congressman Lawson, I really
appreciate the question. I would make a couple of comments.
First of all, there are clearly generational changes and
preferences. I am the youngest person I know who still writes
checks. Nobody does that anymore. My kids aren't aware of what
a check is. So, there is a little bit of that where people just
like doing things on their phones.
But there is also something that is more fundamental going
on here, which is that banks, as part of a business model
division, have retreated from areas that they used to serve
better than they do today. So, for example, more consumer
lending happens outside of banks than inside of banks. That
would have been shocking 25 years ago, but today the percentage
of consumer funds being delivered is being done on Fintech and
other non-bank platforms not supervised by the OCC or any other
Federal regulator.
So, why is that? It is because the cost involved in a big
bank underwriting somebody for a $5,000 personal loan to
replace their hot water heater isn't worth the input cost, and
so they have abandoned that. And what I find interesting about
the discussion is they seem to believe the legacy banks are
somehow the only legitimate source of financing, and yet the
market tells us otherwise. They are not serving the needs of
sort of average Americans the way that they used to, and so
Fintechs and others have come in to fill the gap.
My belief is that activity ought to be supervised. It ought
to be safe and sound the way that other things are, and we
shouldn't fetishize what the word, ``bank,'' has historically
conjured up. It is not what the statute says. It is not the way
it has always been, and [inaudible] in the market.
Mr. Lawson. I yield back, Mr. Chairman.
Chairman Perlmutter. Thank you, Mr. Lawson.
Now, we will go to Mr. Rose from Tennessee for 5 minutes.
Mr. Rose. Good morning, and thank you, Chairman Perlmutter
and Ranking Member Luetkemeyer, for holding this hearing today.
Mr. Brooks, welcome back to the committee, and thank you to
all of our witnesses for being here with us today. As we
discuss financial institution charters, I think it is important
that we avoid revisiting outdated regulations and instead look
to the future. Technology and innovation have increased access
to financial services for many Americans, and it is important
that we provide clear rules of the road to allow for continued
growth in this space. A large portion of my district in middle
Tennessee is rural. In addition to having to travel farther
distances to obtain banking services, rural communities have
seen increased costs in accessing financial services, in part
due to branch closures.
As of the third quarter of 2020, there were 13,000 fewer
banks in rural communities than in the 1980s, and although our
community banks are doing their absolute best to serve our
communities, rural areas continue to face the long-term effects
of these closings. Mr. Brooks, could you discuss how Fintechs
could step in to try and fill those gaps in rural communities?
Mr. Brooks. Yes, absolutely. Congressman, first of all, I
will just say, and no offense to the chairman, that although I
am from Colorado, I did spend my first 5 years living just
outside of Paris, Tennessee. So these issues actually sort of
resonate with me in a personal way. And I would also say that
Fintech is not the solution for every problem under the sun,
but it is a solution as part of an all-hands-on-deck approach.
The thing about Fintechs is that Fintechs are able to bring
capital sources that are outside of your community into your
community. And historically, the way that a rural area would be
served is you would have a local community bank that would have
a couple of branches, its deposits would all have been sourced
from the local community, and then those deposits would be
reinvested into loans to borrowers, whether they were
agricultural loans to farmers or small-business loans to the
mom-and-pop cafe on Main Street.
The problem with that is, as America has disinvested from
rural communities over the last 30 years on kind of a long-term
basis, that kind of capital, even if you had a bank branch, is
probably not sufficient to serve the credit needs of places
like your district. So, one of the advantages that Fintech
offers, and I would argue actually over the long term one of
the advantages that crypto offers, is that it unlocks sources
of capital that are far, far away from your communities, and it
is able to deliver them over the internet to any creditworthy
person who happens to live in middle Tennessee. I guess, my
main point is that there may not be enough capital there to
justify a de novo bank, and yet, there may be creditworthy
people who need to access capital sourced elsewhere.
Mr. Rose. During your time at the OCC, you focused on
increasing access to charters for Fintechs. Could you describe
the barriers to entry for new firms looking to get into
payments or lending?
Mr. Brooks. Yes. If you put aside the bank charter, and you
wanted to start a payments company--let's say you wanted to
start Stripe today. The first thing you have to do is you have
to go and obtain 50 money transmitter licenses in all 50
States, and that takes a lot of time, and it is incredibly
expensive. The legal compliance costs that are different from
State to State become very difficult because some States
mandate things that are literally prohibited in another State.
And so, finding a way to do that is extremely difficult.
Generally speaking, and I guess I do want to speak for a
moment to the State law preemption point that was raised a
moment ago just so that I can say that I spoke to it. Back in
the early days of the Republic, when there was a debate about
whether the Federal Government should assume the State's
revolutionary war debts or whether we should have the First
Bank of the United States, we had this discussion, and the
reason that Alexander Hamilton won that debate as opposed to
the Jeffersonians is because of a belief that if we are going
to have a big economy, big enough to compete with the powers of
Europe, or in these days, the powers of Asia, we don't have the
luxury of suffocating our businesses, our big businesses
anyway, with different State-by-State regulations.
That is why in the 1970s, Congress enacted rate
exportation, because of a belief that you don't want Illinois
to be able to kill commerce because it--and I am just making up
Illinois--has a different view of interest rates or banking
charters or anything else compared to Indiana, right? That
doesn't make sense. We are a big, unified nation and as
companies grow and operate on an interState basis, the idea of
getting 50 State charters to operate your payment company
doesn't really make a ton of sense. I don't think Hamilton
would think it made a ton of sense.
Mr. Rose. In the few moments that I have left, if you will,
I will ask this question. In your testimony, you emphasized how
there has been a lack of new bank charters in 10 years. Can you
explain the benefits of increasing the number of charters,
whether for traditional or online banks?
Mr. Brooks. Sure. Most Americans still feel most
comfortable opening up their account in a bank branch. There
are certain transactions for which they need to talk to a
banker. It is not fair to see how we have lost the [inaudible].
Mr. Rose. Thank you.
Mr. Chairman, I yield back.
Chairman Perlmutter. Thank you very much.
We will now go to the gentleman from Illinois, Mr. Casten,
for 5 minutes, so he can defend his State.
[laughter]
Mr. Casten. Thank you, Mr. Chairman. This has really been a
great hearing. I think you undersold it when you said we are
trying to learn about the whole banking industry. We are also
trying to learn about monetary theory. It is hard to do all
this in 5 minutes.
I want to just start with sort of two statements that I
think we all agree with on this panel. Number one, there has
been a tremendous amount of good and necessary and
entrepreneurial innovation in the Fintech space, which is
fantastic, so let's make sure we don't squelch that. Number
two, there isn't a company in the world that comes before us
and says, I would like to have more regulation.
And I mention that because particularly with some of the
emerging Fintech players, we hear all the time, when they come
before us, what they are not. ``I am not an ETF.'' ``I am not a
bank.'' ``I am not a credit rating agency.'' ``I am not a
credit card company.'' We very rarely hear them say what they
are, because for them to say what they are would be for them to
implicitly say, ``Therefore, I would like to be regulated under
the following structure.'' And I think the value of this
hearing is getting some clarity on what they actually are.
Ms. Johnson, I have two kind of big questions for you, and
I preface that by saying I am probably going to cut you off
before you finish the first one, and I apologize in advance for
that. But in your remarks, you said that the OCC and the FDIC
created steps to allow firms to engage in banking activities
while being subject to less regulation and supervision, and
that the OCC lacks the authority to charter non-depository
national banks.
Now, if we think just about sort of the distinction between
those Fintech firms that are doing one small thing as Mr.
Brooks mentioned, maybe a payment processing firm, and those in
the Big Tech space that are doing this whole array of consumer
credit, financial transaction services, setting aside the
current legal authority, who do you think should regulate
those, and how would you think about that and in a minute or
so, so I can get to my next question?
Ms. Johnson. Representative Casten, I think that is a great
question. I think the first point is the one you made. What
exactly is being regulated? I think we must pin the firms down,
and at the very least, require them to describe the regulatory
regime they believe they should be subject to based on their
activities. Otherwise, they engage in regulatory arbitrage,
which is the purpose of this hearing. You can evade tax. You
can invade securities law if you arbitrage your activities in a
manner that avoids the application of regulation to your point.
Mr. Casten. Thank you, and if you have more thoughts, I
would love to follow up with you, because that is sort at the
core of all of these conversations.
The second question gets into, and I said at the start that
we are having conversations that are really almost about
monetary theory right now. I think there is a lot of the
underlying logic for what Bitcoin is; they are old hard-money,
gold-bug kind of arguments and we don't need to get into all
that right now. But we have a financial regulatory structure
that is designed to ensure that there is sufficient liquidity
in the market and in your bank so that when you go to withdraw
something, the cash is there. If you deposit tulip bulbs in
your bank, the bank doesn't loan out 80 of your tulip bulbs,
they make sure it is all there, in a safe deposit box.
But as we have had things like this recent situation in
this bank in Anchorage that is essentially a crypto company,
how should we be thinking about what the role of the regulator
is to ensure that holding increasingly volatile assets on a
balance sheet doesn't compromise the liquidity of the system,
particularly as the volume of those assets grows?
Ms. Johnson. Representative, I think this is a great
question, and I think we only have to look at the movement in
the price of Bitcoin from the moment that COVID-19 was declared
a global pandemic to today and watch the movement and the value
of that single asset in an asset class to identify an example
of the problem you just described. If we are allowing banks to
hold and count or calculate reserves based on this asset class,
I think we really have to fundamentally revisit, interrogate,
and clearly understand how we set those valuations and the
rules and regulations that apply to this new asset class. I say
that as a student, as a teacher, and as a former practitioner
engaged in the development of credit derivatives, which--credit
default swaps specifically were at the heart of the most recent
financial crisis. And part and parcel of the problem there was
a misunderstanding, a fundamental misunderstanding of the
potential liability that this new class of assets could create.
Mr. Casten. Thank you. And I would love to follow up on
that as well.
Mr. Carrillo, with the few seconds I have left here, did
you have any follow-up thoughts on that?
Mr. Carrillo. Yes. I would just like to note that this is
all an environment for volatility and instability, as Professor
Johnson said. We keep hearing about going back to the good old
days of the 1980s, but that is when banking was especially wild
to me and it hurt marginalized communities specifically.
Mr. Casten. Thank you.
And I yield back.
Chairman Perlmutter. The gentleman's time has expired. Mr.
Budd from North Carolina is recognized for 5 minutes.
Mr. Budd. I thank the Chair.
Mr. Brooks, today we are seeing a lot of innovative
products in the form of digital assets, decentralized finance,
which could be revolutionary for the banking system. We had
Coinbase's direct listing yesterday, so it is obvious that this
technology isn't going away and we are now at the crossroads of
embracing this technology or falling behind other countries.
One of my great concerns is that we get surpassed by other
countries that are more willing to engage on this.
So, Mr. Brooks, my question is, do you see a world where we
can have an intersection of legacy banking, what we know of as
banking, and also DeFi by allowing banks to use blockchain
protocols and use that to eliminate inefficiencies and offer
better products and services to consumers?
Mr. Brooks. Congressman, thank you for the question, and
also thank you for all of your engagement during my time at the
OCC. I have always loved these conversations, and I have
learned a lot from them.
Let me start with the legacy bank part of things. One of
the reasons that the OCC started focusing on crypto-regulatory
issues is because of the fact that two or three of the largest
banks in the United States were already exposed to various
crypto activities to the tune of billions of dollars.
For example, at the time that I walked into the OCC,
JPMorgan had deposits exceeding a billion dollars backing a
stablecoin project, but there was no Federal guidance on how
stablecoins ought to be thought about. State Street was doing
likewise for another stablecoin project, and there were smaller
banks, Silvergate and Cross River and some others, that were
providing other kinds of support services for crypto assets.
So, it is very clear that there is a lot of interest from
traditional companies in crypto. And you see that from the fact
that Intercontinental Exchange has started its own crypto
exchange, that Goldman Sachs is now restarting their crypto
desk, and that Fidelity has created a digital asset custodian.
And Anchorage, another bank that, by the way, doesn't have
these assets on their balance sheet, they are a custody bank
that holds those assets for third parties, that is a fee-for-
service business, not an asset-heavy business. But the point of
all of those things is to say that banks have traditionally
provided the role of safeguarding and safekeeping their clients
assets and crypto is another asset that has come along in the
last 10 years and has now achieved scale. So, clearly, the
legacy institutions have a role to play.
In terms of technologies like DeFi and payments in the form
of stablecoins and other kinds of things, these are the kinds
of technologies that bring internet technology to finance the
way that the original internet brought those decentralization
benefits to information sharing first and to regular commerce
second.
I think one of the biggest misunderstandings about crypto,
which I think is really important to understand, is that we are
building a second internet here. The whole point of crypto
tokens having value is to induce people to provide computing
power to maintain a decentralized network that otherwise would
be maintained by Google and Facebook. And the way to induce
regular people to connect computers to maintain those ledgers
is to let them take a native token that has value on it, so
that is why we have a decentralized ledger. It is not built for
terrorism financing; it is built to allow us to have a truly
decentralized internet. That is what it is all about.
And so, if you believe that American soft power in the
world has a lot to do with the fact that we control the
Internet Corporation for Assigned Names and Numbers (ICANN) and
the internet protocol, I would think you would feel similarly
about the use of these internet protocols in in financial
services. DeFi is one example of where having open source
software that is allocating credit versus having a credit
officer sitting in an office--these are ways of making sure
that there is not some renegade employee who is discriminating
or taking risks because the algorithm is visible for everybody
to see and can be changed by other people on the network. To
me, that is a more optimistic view of the future than a future
that holds onto the idea of individual bank credit officers
allocating capital in our society.
Mr. Budd. You are giving some examples of promoting very
forward-thinking structures and policies rather than revisiting
outdated regulations, which I don't think benefits consumers.
But in order to maintain the supremacy of U.S. financial
markets, we have to work on modernizing charters and finding
ways to increase competition innovation. Many modern financial
services providers and Fintech companies today face the choice
of either relying on regulated partners or seeking existing
charter options that limit technology development.
You have other governments like Singapore, the U.K., and
the EU which provide modernized regulatory options on top of
traditional banking charters, which allows for more innovation.
So, what are some of the ways that that we can navigate this
system and promote innovation?
Mr. Brooks. That is a great question. One obvious example
is to ask the question, why in the United States do we only
allow banks, but not other financial systems or companies, to
access the payment system? In the U.K., and in other places
that have open banking and e-money licenses, any payment
company can access the payment rails. In the U.S., though, we
fetishize and protect incumbent banks. That is a complete
disadvantage.
Mr. Budd. Thank you, and I yield back.
Chairman Perlmutter. Thank you, Mr. Budd, and I would just
remind everybody that 10, 12 years ago, everybody was relying
on our Federal Reserve and our banking system to help kind of
correct the global banking system.
Mr. Torres, who is the newest member of our committee, was
looking forward to this primer on the banking system and
currency, and I don't think he has been disappointed. I now
yield to the gentleman from New York, Mr. Torres, for 5
minutes.
Mr. Torres. Thank you, Mr. Chairman. It has certainly been
a primer. I am new to these issues. Obviously, one of the
issues before us is the separation of banking and commerce.
Blurring the line between banking and commerce, as ILCs do,
raises concerns about systemic risk, moral hazard, and market
concentration. And my question is, have we seen any or all of
these concerns borne out by the experience of other countries
that allow for the intermingling of banking and commerce? What
lessons can we learned from the experience of those countries?
And anyone who knows the answer can feel free to answer, to
weigh in.
Mr. Carrillo. I am happy to speak to that issue,
Congressman Torres. I would say that a good example of the sort
of thing of the dangerous conglomeration that can occur when we
have loopholes in the broader depository infrastructure, or
allow things to exist like stablecoins that act like deposits
but are not regulated like deposits, is to be found in China,
where the company Tencent has been brought further into the
system, but in a particular way that is not particularly good
for users or the people of China, especially when it comes to
privacy and surveillance.
Of course, this is generally touted as being efficient, but
intermingling, in Tencent's case, the social media platform
with banking has led to, again, an unprecedented amount of
power that we have perhaps not seen in human history because of
the way the data collection and surveillance works now. Wedding
that further to our monetary infrastructure here does not bode
well. Thanks.
Mr. Gerding. I could add to that, Representative Torres,
that in banking in both Japan and South Korea, there is an
intermingling of banking and commerce. The problem there in
both of those countries is that that intermingling has served
to entrench financial and business conglomerates in both of
those countries. So if we want our economies to have that high
degree of concentration that we have in Korea and Japan, then
we would need to start to think about eroding the wall between
commerce and banking.
Ms. Johnson. I would just add to that, Representative
Torres, if I may, that we should also be really mindful,
specifically not just about the theoretical issues here, but
the practical prudential regulatory oversight that Professor
Gerding raised earlier.
I also think is it imperative to think about who is
participating in which actions. This committee, and all of
Congress, in fact, has been thoughtful about the implications
of certain large technology firms and their continued
consolidation and growth in the industry. I would like to
underscore a point that my colleague on the panel, Mr.
Carrillo, pointed out, which is not solely a matter of the
prudential regulation that we were talking about in the moment,
the separation of commerce and banking, but also the specific
consumer protection concerns that will impact citizens in every
one of your districts without fail and without exclusion.
Rural, urban, big city, small town, all across the nation,
these companies monetize and commodify data about citizens, and
we are now thinking about giving them access to data regarding
the financial transactions of all citizens. And this is in a
moment when we are unsure about what exact data protections
exist for consumer financial data. This is an impending and
continuing conversation, and I don't want to take all of your
time. I just want to underscore that consumer financial data
protection, alongside the broader prudential regulatory issues,
I believe, should be important to everyone without respect to
partisanship.
Mr. Torres. I know that much of the regulation of these
bank-like entities happens at the State level, but a case could
be made that as a general rule, it is much better to have
uniformity in the law than to have a cacophony of widely varied
State laws. So it seems sensible to have a Federal framework
for regulating Fintechs and cryptocurrencies and blockchain.
What is the argument against uniformity of the law?
Mr. Gerding. I could address that, if you would like.
Mr. Torres. Sure.
Mr. Gerding. I think there is an interest in uniformity,
and Mr. Brooks mentioned money transmission statutes. It is
difficult for payment systems or payment companies to comply
with 50 different payment statutes in 50 different States. The
better way to do that is to have Congress act to create or
promote uniformity in statutes, not to have the OCC do that in
a backdoor manner and basically preempt State laws with a four-
page policy document that created a radical Fintech charter.
Mr. Torres. Well, the District Court agrees with you. Thank
you.
Chairman Perlmutter. The gentleman's time has expired.
The gentleman from Minnesota, Mr. Emmer, is now recognized
for 5 minutes.
Mr. Emmer. Thank you, Chairman Perlmutter, and Ranking
Member Luetkemeyer. I appreciate that you are hosting what is a
very important hearing in which we have been able to examine
our unique dual banking system through a nonpartisan
[inaudible].
As financial innovation advances, it is important that we
work to provide appropriate and considerate regulatory avenues
for Fintech companies and financial institutions to best serve
their customers. As we know, access to financial services
greatly impacts the American consumer in terms of financial
literacy, fair prices for financial services, and convenience.
Competitive Fintech companies that offer these affordable
services to anyone with a cell phone should not be held back
from deploying their services to any and every American, which
is why I appreciate the testimony we have heard today. In
support as policymakers, we must keep this focus at the
forefront of our attention. It is my hope that the FinTech Task
Force will be renewed for the 117th Congress, and I look
forward to carrying out these policy issues further on that
task force.
With that, Mr. Brooks, it is great to see you again. Thank
you for all of your work over the past couple of years at the
OCC, as the Comptroller of the Currency. You demonstrated a
strong commitment to creating a regulatory environment that
encourages innovation and growth in this Fintech space and you
have been a leader in providing the industry with the clarity
that is so necessary to make sure they can innovate
confidently.
Mr. Brooks, during your tenure at the OCC, the agency
issued interpretive letters clarifying that national banks
could offer services such as custody for digital assets that
they historically offer for traditional assets, and that
national banks could participate in independent node-
verification networks to facilitate payments. Why do you
believe these issues require clarification, and what impact do
you believe these new technologies will have on the banking
system?
Mr. Brooks. Congressman, first of all, your partnership and
guidance on these issues dating back long before I came to the
OCC has been one of the joys of my life. I really appreciate
all of the dialogue that we have had over the years about all
of these issues. I would answer in two basic ways. First of
all, it became clear a year ago, a year and a half ago, that
crypto assets had grown to a scale that bank customers--I hear
there is some background noise, so maybe we could mute our
phones just so you can all hear me.
Chairman Perlmutter. Somebody, I think Mr. Emmer, maybe,
you need to mute.
Mr. Emmer. Okay.
Mr. Brooks. Great. So the point is that crypto is now a
two-plus trillion dollar asset class, and the customers who own
crypto assets are the same people who are also depositors and
checking account customers and mortgage borrowers, et cetera,
of banks. And so, it was no longer possible for us to ignore
the fact that the assets that were growing in size and scale on
the crypto side were lacking a safe place to be custodied or a
safe place to be exchanged for value the way that all other
assets can transact on a bank. So, the first reason that we
launched down the path was the recognition that the market had
grown and that banks traditionally provide a safe custody
location and safe transaction rails for people engaged in those
things.
But as we thought more deeply about that over time, what
also became clear, and this comes back to my point about how we
sort of tend to fetishize legacy banks over other people who
are performing the same services in a different way--it became
clear at a certain point that one of the things that
blockchains are, is they are payment networks. They are a set
of technologies for transmitting value from person A to person
B.
As I said, in the United States, unlike in our global
competitor countries, we only allow banks, as defined, to
connect to the government payment system at the Federal Reserve
or to connect to the automated clearinghouse, which is
essentially the bank cartel that runs its own payment system.
We don't allow other companies.
And at the OCC, our basic view was, well, wait a minute.
There is nothing magic about Fedwire. There is nothing magic
about ACH. The point is, banks have a statutory power to
process payments. That is the paying checks power in 12 U.S.C.
Sec. 24.
And so if a new technology has arisen, which is an open
blockchain platform for transmitting payments, there is no
reason banks shouldn't be allowed to take advantage of the
faster, more secure, and more certain environment of blockchain
if they can also connect to Fedwire or SWIFT or ACH. That is
the point of what innovation is always about.
And by the way, the OCC has always used interpretive
letters to clarify the way that existing bank powers can be
conducted on new technology platforms. Think back to the 1960s,
when the Comptroller at the time issued an interpretive letter
which said that banks can engage in data processing. No one
thought Congress had to act at that time, but the point is that
computers had been invented, and now a new internet of finance
called blockchain has been invented, and the OCC will always
lead and help bank technology.
Mr. Emmer. Thank you. My time has expired. Thank you, Mr.
Chairman.
Chairman Perlmutter. Thank you, Mr. Emmer.
The gentleman from Illinois, Mr. Garcia, is recognized for
5 minutes.
Mr. Garcia of Illinois. Thank you, Chairman Perlmutter, and
Ranking Member Luetkemeyer, for convening this hearing. And
thanks to all of our witnesses today for shedding light on a
complicated, but important topic.
I represent a working-class, largely immigrant district,
and my district in Illinois needs the same things as any other
district. We need investment in our neighborhoods and
institutions. We need opportunities for growth, and all too
often, these things are out of reach for communities like mine.
Unfortunately, that is not new. But every time a company wants
to get out of regulations, they say that they are going to
change, they say that they are going to help if they can just
sell a certain type of product or market in a certain way. That
is not new either.
What I am worried about is that the business model of many
companies we are discussing today is either take advantage of
consumers or take advantage of regulated competitors. Since my
colleagues mentioned the True Lender Rule, I want to clarify
that I introduced the resolution to repeal the rule for that
very reason. The Rule undermines the ability of States like
mine and more than a dozen others to protect consumers from
predatory lending, but I turned back.
Mr. Gerding, let's say a retail company like Walmart or
Amazon offered financial services through an ILC. All of a
sudden, they know a lot about you. They know how much money you
have or whether you can pay your credit card bill. They know
what you buy. So, should consumers worry about this kind of
blending of commercial and financial companies, and would these
companies have a competitive advantage over other businesses
that don't have this kind of data about their customers?
Mr. Gerding. Absolutely. Representative Garcia, they should
be worried. One of the things that the other panelists have
mentioned earlier is that you have to worry not only about
financial stability, but data privacy. And a lot of the Big
Tech and Big Retail companies already have enormous amounts of
information about consumers. Being able to combine that with
payment services, banking services, and financial information
about customers would exacerbate those problems.
I should note that there is one way of dealing with that.
The Gramm-Leach-Bliley Act, one of the bright spots of that Act
was introducing privacy regulation. But privacy rules under
Gramm-Leach-Bliley only apply to financial institutions. So if
large conglomerates are going to be entering into the banking
space and being given bank charters, I think we need to start
thinking about expanding and applying the Gramm-Leach-Bliley
privacy provisions to a whole host of larger institutions and
larger conglomerates.
Mr. Garcia of Illinois. Thank you, sir.
Mr. Carrillo, in your testimony you discussed how companies
and laws that claim to expand financial access for underserved
communities can end up preying on those communities. Can you
tell us about the risks of allowing new Fintech companies to
offer unregulated services, and how can Congress promote
economic inclusion without leaving our constituents vulnerable
to exploitation?
Mr. Carrillo. Thank you very much, Representative Garcia. I
want to zoom out and say that to your point in this war between
the neo-Hamiltonians and the neo-Jeffersonians was lost as the
actual people who currently use the U.S. financial system. And
people do not need to be included. If they are included in a
predatory structure, they do not need to be given access to
credit if what they are given access to is something that
actually hurts. The way that, for instance, the former Acting
Comptroller talks about credit, you would think that it had no
downside, and he still has not addressed the privacy issues nor
have any of the Republican members of this panel, despite the
fact that they go to our very constitutional protections, which
should be important to everyone in this room. I would
appreciate it if we did not look at this debate with one eye.
Thank you.
Mr. Garcia of Illinois. Thank you, sir.
Mr. Chairman, I yield back.
Ms. Johnson. Representative, may I just add one tiny line
to what Professor Gerding just offered regarding privacy
protections in the Gramm-Leach-Bliley Act? The Dodd-Frank Act
also contains, in Section 1033, an opportunity area for this
Congress to act and to protect consumer financial data. I
really think that your commentary is accurate. The
marginalized, hard-working, low-income or no-income, struggling
middle-class families in many of the districts represented by
the members of this committee would be most vulnerable if some
of the conglomerates existing in Big Tech gain access to
additional information. In fact, they will form surveillance
capitalism and that will most affect Black and Brown
individuals, just to be blunt and honest.
Mr. Garcia of Illinois. Thank you for chiming in, Professor
Johnson.
Thank you. I yield back, Mr. Chairman.
Chairman Perlmutter. Thank you, Mr. Garcia.
I think you are the last member to be here and to want to
ask questions. We have gone on for 2\1/2\ hours now, so I want
to bring this to a close. This has been very interesting, and
to the ranking member's point, I think we are just really
beginning to get some idea of this subject and the need for
innovation, as Mr. Brooks has talked about, so that people who
use the services and businesses don't skirt around the edges of
the system where there is no regulation whatsoever, but also
the detriments, whether it is privacy or some kind of abusive
approaches that a company may take to an individual or to a
business.
There is nothing new under the sun. It might happen faster
or something might happen in a different way, but we need to
make sure that we have prudential regulations that allow for
businesses and individuals to transact things without being
harmed. And so I think, Mr. Ranking Member, I am going to try
to convince the committee that we have another couple of
hearings on this subject.
And I would like to thank our panelists here. Your
testimony, both your oral testimony and your written testimony,
is outstanding. I wish Mr. Torres was here, because if you read
all of those papers that you have all written, you will learn
just about everything there is about the banking system from
Hamilton and Jefferson to today.
Without objection, I would like to enter statements into
the record from the following organizations: the American
Bankers Association; the American Financial Services
Association; the Bank Policy Institute; the Consumer Bankers
Association; the Independent Community Bankers of America; and
the National Association of Industrial Bankers.
I am surprised that nobody mentioned Glass-Steagall in the
commerce and banking kind of context today, but obviously, as
we came through the Depression, we wanted to make sure that we
didn't mix commerce and banking. I want to thank all of the
witnesses for their testimony and for sharing their time, their
talent, and their expertise with this subcommittee. Your
testimony today will help advance the work of our subcommittee
and of the U.S. House of Representatives.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
Thank you all very much for your testimony. To the
Coloradans, it was good to have you here, but to those of you
not from Colorado, we are very happy that you participated as
well. And with that, this hearing is adjourned.
[Whereupon, at 12:27 p.m., the hearing was adjourned.]
A P P E N D I X
April 15, 2021
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