[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF PRUDENTIAL REGULATORS:
ENSURING THE SAFETY, SOUNDNESS,
DIVERSITY, AND ACCOUNTABILITY
OF DEPOSITORY INSTITUTIONS
=======================================================================
VIRTUAL HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
MAY 19, 2021
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-25
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
45-077 PDF WASHINGTON : 2022
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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
C O N T E N T S
----------
Page
Hearing held on:
May 19, 2021................................................. 1
Appendix:
May 19, 2021................................................. 61
WITNESSES
Wednesday, May 19, 2021
Harper, Hon. Todd M., Chairman, National Credit Union
Administration (NCUA).......................................... 5
Hsu, Hon. Michael J., Acting Comptroller of the Currency, Office
of the Comptroller of the Currency (OCC)....................... 7
McWilliams, Hon. Jelena, Chairman, Federal Deposit Insurance
Corporation (FDIC)............................................. 8
Quarles, Hon. Randal K., Vice Chairman of Supervision, Board of
Governors of the Federal Reserve System (Fed).................. 10
APPENDIX
Prepared statements:
Harper, Hon. Todd M.......................................... 62
Hsu, Hon. Michael J.......................................... 82
McWilliams, Hon. Jelena...................................... 96
Quarles, Hon. Randal K....................................... 113
Additional Material Submitted for the Record
Waters, Hon. Maxine:
Written statement of the Credit Union National Association
(CUNA)..................................................... 121
Written statement of the National Association of Federally-
Insured Credit Unions (NAFCU).............................. 132
Harper, Hon. Todd M.:
Written responses to questions for the record from
Representative Beatty...................................... 137
Hsu, Hon. Michael J.:
Written responses to questions for the record from
Representative Beatty...................................... 140
Written responses to questions for the record from
Representative Luetkemeyer................................. 143
Written responses to questions for the record from
Representative Rose........................................ 146
Written responses to questions for the record from
Representative Timmons..................................... 147
McWilliams, Hon. Jelena:
Written responses to questions for the record from
Representative Beatty...................................... 150
Written responses to questions for the record from
Representative Davidson.................................... 155
Written responses to questions for the record from
Representative Luetkemeyer................................. 156
Written responses to questions for the record from
Representative Rose........................................ 167
Written responses to questions for the record from
Representative Timmons..................................... 160
Written responses to questions for the record from
Representative Williams.................................... 168
Quarles, Hon. Randal K.:
Written responses to questions for the record from
Representative Hill........................................ 175
Written responses to questions for the record from
Representative Hollingsworth............................... 178
Written responses to questions for the record from
Representative Luetkemeyer................................. 180
Written responses to questions for the record from
Representative Rose........................................ 183
Written responses to questions for the record from
Representative Timmons..................................... 185
OVERSIGHT OF PRUDENTIAL REGULATORS:
ENSURING THE SAFETY, SOUNDNESS,
DIVERSITY, AND ACCOUNTABILITY
OF DEPOSITORY INSTITUTIONS
----------
Wednesday, May 19, 2021
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:04 a.m., via
Webex, Hon. Maxine Waters [chairwoman of the committee]
presiding.
Members present: Representatives Waters, Maloney,
Velazquez, Sherman, Meeks, Scott, Green, Cleaver, Perlmutter,
Himes, Foster, Vargas, Gottheimer, Lawson, Axne, Casten,
Torres, Lynch, Adams, Tlaib, Dean, Garcia of Illinois, Garcia
of Texas, Williams of Georgia, Auchincloss; McHenry, Lucas,
Posey, Luetkemeyer, Huizenga, Stivers, Wagner, Barr, Williams
of Texas, Hill, Emmer, Zeldin, Loudermilk, Mooney, Davidson,
Budd, Kustoff, Hollingsworth, Gonzalez of Ohio, Rose, Steil,
Gooden, and Timmons.
Chairwoman Waters. The Financial Services Committee will
come to order.
Without objection, the Chair is authorized to declare a
recess of the committee at any time.
As a reminder, I ask all Members to keep themselves muted
when they are not being recognized by the Chair. The staff has
been instructed not to mute Members, except when a Member is
not being recognized by the Chair and there is inadvertent
background noise.
Members are also reminded that they may only participate in
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.
Before we begin today's hearing, I would like to take a
moment to congratulate Representative Jake Auchincloss, who has
recently been elected by committee Democrats to serve as the
committee's Vice Chair for this Congress. Mr. Auchincloss has
dedicated his career to public service, having served in the
Marines and then as a three-term city councilman in Newton,
Massachusetts. I know he shares my passion for affordable
housing, and I have been very impressed with his level of
engagement and thoughtfulness on committee issues. So, I am
pleased that he will be serving, as of next week, as the
committee's Vice Chair, and I look forward to working with him
in his new role.
I now recognize myself for 4 minutes to give an opening
statement.
Welcome, Chairman Harper and Acting Comptroller Hsu, and
welcome back, Chairman McWilliams and Vice Chairman Quarles. A
major focus of this committee continues to be the economic
impacts of the COVID-19 pandemic crisis. Today, I expect to
hear from our witnesses about what their agencies are doing to
respond to this ongoing crisis and that they are going to make
sure that banks and credit unions are not further harming
consumers, especially people of color who are already facing
challenges through no fault of their own as a result of the
pandemic, and that those institutions are, instead, helping
consumers and supporting the recovery of communities and people
of color whenever possible.
I have long been critical of the long list of harmful
deregulatory actions taken by the last Administration's
appointees, and, particularly, their actions to roll back key
Dodd-Frank Act reforms and other consumer protections. So, I am
pleased that the Senate has taken bipartisan action to reverse
the OCC's so-called True Lender Rule which would allow non-bank
lenders to skirt State interest rate protections, and I have
called on House leadership to take up that Congressional Review
Act resolution as soon as possible.
I am also pleased that the Biden Administration's
appointees are bringing a better approach to regulation that
prioritizes consumers, and that regulators are starting to take
steps to protect the financial stability of our system against
climate risk and other threats.
Vice Chair Quarles, I am alarmed by reports that the Fed is
planning to weaken its bank merger review process, one that
already amounts to a rubber-stamping process. Additionally, Fed
Governor Brainard has expressed concerns about concentration in
the $250 billion to $700 billion asset size category. And I
would note that this should not be surprising, given the
various rollbacks we have seen on large bank capital,
liquidity, and other safeguards. Regulators must reverse course
immediately to promote financial stability, so I look forward
to hearing about what prudential regulators are doing about
banking deserts, where bank branches have closed, leaving
communities with less access to traditional banking services.
I was pleased to learn that the OCC, under Acting
Comptroller Hsu's leadership, announced yesterday that they are
reconsidering Joseph Otting's harmful Community Reinvestment
Act (CRA) rule. Modern-day redlining has left communities of
color with limited access to much-needed financial services, so
policymakers must act with urgency to address these issues.
I am also eager to hear from the members of the panel
regarding their Agency's efforts on diversity and inclusion in
the banking sector, including their work to support Minority
Depository Institutions (MDIs) and Community Development
Financial Institutions (CDFIs) during this pandemic.
Lastly, I want to make clear that temporary regulated
exemptions or delays for banks that were put in place for the
pandemic must come to an end and be allowed to expire. The
previous Administration attempted to use the pandemic as a
cover to delay or weaken key financial safeguards and
regulations, and those efforts must not be allowed to stand.
I want to thank you, and I look forward to the testimony
from all of our witnesses. And I will now recognize the ranking
member of the committee, the gentleman from North Carolina, Mr.
McHenry.
Mr. McHenry. Thank you, Madam Chairwoman. I would like to
start by welcoming the regulators back today, some familiar
faces and some new. Chair McWilliams, Vice Chair Quarles, I
would like to, again, thank you for your work throughout the
pandemic to ensure our financial system remained strong. Your
quick and decisive actions to provide appropriate flexibility
for financial institutions and consumers set up for us a very
strong economic rebound here in the United States.
Mr. Hsu, I also want to welcome you to the committee in
your new role as Acting Comptroller of the Currency. However, I
think it is safe to say that many of us expected to hear from a
confirmed Comptroller of the Currency at this point. There has
been a lot of speculation about who President Biden's nominee
will be. It seems to be a Goldilocks approach here. First,
Michael Barr was deemed too conservative, if you can call
somebody who helped write Dodd-Frank a conservative. I don't
think so. Then, Mehrsa Baradaran, who advocates for socialized
banking and opposes innovation, well, she seemed to appease the
far left progressives, but still no formal nomination. So, we
are left to wonder who will be deemed as, ``safe and sound,''
at least in the eyes of President Biden, to permanently fill
the role.
But indecision has real-world consequences. As President
Biden tries to cater to his party's political whims at the OCC,
our financial institutions are left without a clear path
forward. That is problematic. Former Comptroller Otting and
former Acting Comptroller Brooks made great strides in a
nonpartisan, nonideological way to remove regulatory roadblocks
and to support financial inclusion through innovation. But now,
these positive steps forward are stuck in limbo, or worse, in
danger of being scrapped altogether for political optics.
This is not the right way to regulate, but I fear this is
just the start of the Democrats' one-party-rule mentality in
practice. We know that Democrats' tendency is to overregulate
when they feel like they need to do something. We saw this in
2009 and 2010 with Dodd-Frank, and we know the negative impact
it had on our financial institutions and our economy. We are
already seeing Democrats treat the COVID pandemic just like the
financial crisis, but the two are not comparable, and our
economy is in a much different place now.
What my Democrat colleagues should take away from the
pandemic is that outsized regulation is problematic, and that
financial technology plays a really important role in our day-
to-day lives and should be embraced. We should use advances in
technology to help bring more unbanked and underbanked
Americans into the fold and to close banking deserts, just as
the Chair says.
The OCC, and the FDIC under Chair McWilliams, worked to
address the overly-burdensome mandates that hindered financial
technology by issuing rules to address the so-called valid-
when-made doctrine. That was positive and helpful to our
economy. The OCC also moved to finalize its True Lender Rule,
creating a much-needed framework for providing affordable
credit to all consumers, particularly those who need it most,
through banks and non-banks. Together, these rules helped bring
more Americans under the banking umbrella. That is good. We
should build on these gains rather than trying to re-litigate
2009. I don't think that is the right approach. So, I look
forward to hearing from each of you on how we can best
accomplish that.
Madam Chairwoman, I yield back.
Chairwoman Waters. Thank you very much.
Mr. Perlmutter. Madam Chairwoman, you muted yourself. Did
you recognize me?
Chairwoman Waters. Yes, Mr. Perlmutter. You are now
recognized for one minute.
Mr. Perlmutter. Thank you very much, and I want to thank
our witnesses for appearing today, and thank you for your
service to the United States of America.
The pandemic served as the ultimate stress test for the
financial system, and I believe, unlike my friend from North
Carolina, that it demonstrated how important Dodd-Frank is for
the stability of our economy. Capital liquidity and other
regulatory requirements we require of financial institutions
helped to weather a period of historic uncertainty and fear,
but I would caution that we are not out of the storm yet. Many
families are struggling to find childcare as parents reenter
the workforce. Supply chain disruptions have slowed outputs,
and we still need to get more Americans vaccinated. Meanwhile,
there has been some volatility and recklessness in the
financial markets. Multiple banks just lost billions by
allowing Archegos to gamble with their money. Retail traders
are battling hedge funds over GameStop, and a $75 billion
cryptocurrency's value fluctuates based on, ``Saturday Night
Live'' guest performances.
Maintaining stability in our financial sector is critical
to a strong and far-reaching recovery, and I urge all of our
witnesses today to keep a close eye on their supervised firms
to ensure that operations of banks and credit unions are safe
and sound. I look forward to the discussion today, and I yield
back.
Chairwoman Waters. I now recognize the gentleman from
Missouri, Mr. Luetkemeyer, for one minute.
Mr. Luetkemeyer. Thank you, Madam Chairwoman. I thank all
of the witnesses for being here as well today, and the four of
you are testifying at a very interesting time in our economy
and within the banking system. As the economy is set to recover
from the pandemic, I have a number of concerns. The enormous
stimulus bill recently passed and continued unemployment
benefits have created threats of inflation in an environment
where small businesses cannot find workers.
Throughout the pandemic, banks have been providing
forbearance to customers to ensure that they can make it
through the pandemic. As much of this forbearance is set to
expire, it is critical that we examine how regulators will
treat these assets going forward. The rise of fintechs has
raised specific questions on the chartering of financial
institutions, the identity of the true lender of a loan, and
whether these entities should be regulated on a Federal level.
Banking regulations are also shifting with a focus on risk
mitigation related to climate risk, which, if unchecked, could
result in a choke-point style impact on legally-operating
companies in the energy sector.
These are just a few of the issues I look forward to
discussing with you today. And with that, Madam Chairwoman, I
yield back.
Chairwoman Waters. Thank you. It is now time to welcome
today's distinguished witnesses to the committee. First, we
have the Honorable Todd Harper, the Chairman of the National
Credit Union Administration. And I understand that today
happens to be Mr. Harper's birthday, so I want to take a moment
to say happy birthday, and to thank you for being with us on
your very special day. I hope this isn't the only celebration
you are planning for today.
Second, we have Mr. Michael Hsu, the Acting Comptroller of
the Currency. Third, we have the Honorable Jelena McAdams, the
Chair of the Federal Deposit Insurance Corporation. And last,
we have the Honorable Randal Quarles, the Vice Chairman of
Supervision for the Board of Governors of the Federal Reserve
System.
Each of you will have 5 minutes to summarize your
testimony. 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.
And without objection, your written statements will be made
a part of the record.
Mr. Harper, you are now recognized for 5 minutes to present
your oral testimony.
STATEMENT OF THE HONORABLE M. TODD HARPER, CHAIRMAN, NATIONAL
CREDIT UNION ADMINISTRATION (NCUA)
Mr. Harper. Chairwoman Waters, Ranking Member McHenry, and
members of the committee, thank you for inviting me to discuss
the credit union industry's performance and NCUA's operations.
As a former Hill staffer who spent more than a decade working
for this committee, I am deeply honored to join you today.
Despite the COVID-19 pandemic's many economic blows, the
overall credit union system has remained on a solid footing
with strong capital levels and sufficient liquidity. If past
recessions are indicative, it seems likely that credit union
performance will trail any labor market improvements by up to 2
years. The NCUA and credit unions should, therefore, prepare
for that eventuality. Once forbearance programs expire, we will
likely experience decreases in credit quality and increases in
delinquencies and charge-offs, which will affect credit union
financial statements, and, if failures occur, could impact the
Share Insurance Fund.
Tragically, the pandemic has disproportionately affected
low-income households, communities of color, and minority-owned
businesses. The NCUA has encouraged credit unions to work with
members experiencing hardship. The NCUA has also instructed
examiners to refrain from criticizing a credit union's efforts
to provide prudent relief for members. Through the Community
Development Revolving Loan Fund, the NCUA is supporting low-
income credit unions during these uncertain times. Although
relatively small, these grants and loans make a big difference.
In all, the NCUA awarded $3.7 million last year to 162 credit
unions to assist in their pandemic response efforts. Although
many more applied for a grant, the Agency could not fund the
demand because of limited appropriations.
The pandemic has also prompted a heightened cybersecurity
stance at our Agency. As part of the larger government-wide
effort, the NCUA will continue bolstering its cybersecurity
posture and provide guidance and resources to assist credit
unions with strengthening their cyber defenses, including
grants, and completing a pilot project to harmonize IT and
cybersecurity exam procedures.
The NCUA is further working to strengthen its Consumer
Financial Protection Program to ensure fair and equitable
access to credit. This year, there is an increased emphasis on
fair lending compliance, and Agency staff are studying methods
for improving consumer financial protection supervision for the
largest credit unions not primarily supervised by the Consumer
Financial Protection Bureau (CFPB). Additionally, since opening
its Office of Minority and Women Inclusion (OMWI) a decade ago,
the Agency has made steady progress in advancing diversity.
Last year, 2 out of every 5 new hires at the NCUA were people
of color, and the Agency achieved parity and executive gender
diversity. The NCUA will continue to invest in diversity and
inclusion by enhancing support from minority depository
institutions and fostering initiatives that close the wealth
gap. These efforts will advance economic equity and justice
within the system and ensure a more equitable recovery.
Finally, I want to highlight three areas where legislative
action would aid the Agency in fulfilling its mission. First,
the Financial Stability Oversight Council (FSOC), the
Government Accountability Office (GAO), and the NCUA's
inspector general have each called for the NCUA to have
examination and enforcement authority over third-party vendors.
The continued transfer of operations to credit union service
organizations and other third parties diminishes the NCUA's
ability to assess risks within the system, leaving thousands of
credit unions, millions of their members, and billions of
dollars in assets potentially exposed to unnecessary risks.
Congress should close this growing regulatory blind spot.
Second, Congress should provide the NCUA with greater
authority to proactively manage the Share Insurance Fund.
Adopting a countercyclical approach to charging premiums would
allow for an increase in insurance reserves during economic
upturns to cover losses during downturns.
And third, Congress should permanently adopt the temporary
enhancements granted to the NCUA's Central Liquidity Facility
(CLF) in the CARES Act. Because of these reforms, the CLF's
borrowing capacity has grown greatly, and 4 out of every 5
credit unions now have access to liquidity if other sources
freeze up. Permanence will strengthen the shock absorbers for
future liquidity events. We will provide the committee with
more information on each of these matters in the coming weeks.
In conclusion, the NCUA remains focused on addressing the
needs and best interests of credit union members, ensuring the
safety and soundness of credit unions, and protecting the Share
Insurance Fund. I look forward to working with the committee in
support of these endeavors. Thank you.
[The prepared statement of Mr. Harper can be found on page
62 of the appendix.]
Chairwoman Waters. Thank you, Mr. Harper.
Next, we will go to Mr. Hsu. You are now recognized for 5
minutes to present your oral testimony.
STATEMENT OF THE HONORABLE MICHAEL J. HSU, ACTING COMPTROLLER
OF THE CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY
(OCC)
Mr. Hsu. Chairwoman Waters, Ranking Member McHenry, members
of the committee, thank you for the opportunity to testify
today. I am honored by Secretary Yellen's confidence to appoint
me to this post of Acting Comptroller of the Currency.
I am a career public servant and a bank supervisor at my
core. During my 19 years of experience in multiple agencies, I
have seen periods of growth, crisis, reform, and recovery. I
have seen benefits that financial innovation and competition
can bring, as well as the harm that excessive risk taking can
inflict on families, businesses, and the economy.
My written testimony shares in more detail my priorities in
the review of key regulatory actions that I initiated upon
taking office. I see four urgent problems requiring immediate
attention: first, guarding against complacency; second,
reducing inequality; third, adapting to digitalization; and
fourth, acting on climate change. Let me briefly describe each.
First, I believe the banking system is at risk of becoming
complacent, especially the large banks. Banks deserve credit
for weathering the pandemic well. I am concerned, however, that
as the economy recovers and pressure to grow returns,
overconfidence leading to complacency is a risk when prudent
risk management is set aside in pursuit of profit. I see the
losses related to Archegos primarily through this lens as
reflective of the broader environment. This requires bank
leaders, boards of directors, and us as supervisors to be
especially vigilant.
Second, reducing inequality must be a national priority. As
the recently-published Survey of Household Economics and
Decisionmaking (SHED) report from the Federal Reserve shows,
the pandemic has had a disproportionate impact on vulnerable
groups, especially minority households and businesses. The
recovery threatens to leave them, and rural communities, even
further behind. Historically, many low-income individuals have
been treated by banks as credits to be avoided or credits to be
exploited. The OCC can help address that problem. We must work
to strengthen regulations, in implementing the Community
Reinvestment Act. I have asked staff to review the OCC's 2020
final rule. All options are under consideration, including
rescinding or substantially revising it and working with the
Federal Reserve and the FDIC on a joint proposal.
We must also use all of our supervisory tools to ensure
that banks comply with fair lending and anti-discrimination
laws. Predatory lending has no place in our national banking
system. Finally, we have an opportunity to expand Project
REACh, an OCC-sponsored effort that brings together leaders of
banks, civil rights and community groups, tech companies, and
businesses to solve problems like credit invisibility, the
homeownership gap, and access to capital for minority-owned
businesses.
Third, we, as financial regulators, must collectively adapt
to the digitalization of banking and finance. I am concerned
that the regulatory community is taking a fragmented, agency-
by-agency approach to the technology-driven changes taking
place today. At the OCC, the focus has been on encouraging
responsible innovation. For instance, we updated the framework
for chartering national banks and trust companies, and
interpreted crypto custody services as part of the business of
banking. I have asked staff to review these actions.
With regard to charters, some are concerned that providing
charters to fintechs will convey the benefits of banking
without its responsibilities. Others are concerned that
refusing to charter fintechs will encourage growth of another
shadow banking system outside the reach of regulators. I share
both of these concerns. Recognizing the OCC's unique authority
to grant charters, we must find a way to consider how fintechs
and payment platforms fit into the banking system. And we must
do it in coordination with the FDIC, the Federal Reserve, and
the States.
Finally, we must act on climate change. I believe the OCC
can help with this if it adopts a two-pronged approach. First,
we must engage with and learn from others. I have asked staff
to explore joining the Network for Greening the Financial
System, a group of central banks and supervisors from across
the globe who share best practices.
Second, we must support the development and adoption of
effective climate risk management practices at banks. The OCC's
approach today has been focused on monitoring. I have asked
staff to develop options for taking more concrete action. We
will be proactive in this space and act with a sense of
urgency.
Finally, my testimony outlines the review of key regulatory
standards in pending matters that I initiated upon becoming
Acting Comptroller. Those items include the 2020 CRA final
rule, interpretive letters and guidance related to
cryptocurrencies and digital assets, and pending licensing
decisions. At all stages of the review, I will keep an open
mind. I expect the review to conclude this summer. We will
evaluate findings and determine our next steps.
Thank you again for this opportunity, and I look forward to
your questions.
[The prepared statement of Acting Comptroller Hsu can be
found on page 82 of the appendix.]
Chairwoman Waters. Thank you, Mr. Hsu.
Ms. McWilliams, you are now recognized for 5 minutes.
STATEMENT OF THE HONORABLE JELENA MCWILLIAMS, CHAIRMAN, FEDERAL
DEPOSIT INSURANCE CORPORATION (FDIC)
Ms. McWilliams. Thank you. Chairwoman Waters, Ranking
Member McHenry, and members of the committee, thank you for the
opportunity to testify today.
While banking-sector income for 2020 declined from 2019,
primarily due to higher provision expenses resulting from
climate change implementation and economic uncertainty
associated with the pandemic, 4th quarter net income rose,
reflecting higher non-interest income and lower provision
expenses for credit losses, consistent with economic
improvement and a more optimistic economic outlook. Despite the
challenges of the pandemic, banks increased their capital
levels in 2020 and continued to accommodate a sharp increase in
deposits, reflecting persistently-high savings rates and lower
spending. Banks of all sizes have also continued to support
their communities, including by originating the overwhelming
majority of approximately $800 billion in Paycheck Protection
Program (PPP) loans.
While the rollout of the COVID-19 vaccination program and
the reopening of the economy make us cautiously optimistic that
things will return to normal, whatever this new normal may look
like, we continue to carefully monitor conditions in the
banking sector, from commercial real estate, to agricultural
and consumer lending, to cybersecurity. While we have focused
heavily on ensuring that consumers have access to credit during
the pandemic and that banks continue to operate in a safe and
sound manner, we have continued several regulatory initiatives
along the way as well.
Last December, the FDIC Board approved a final rule
updating our broker deposits regulations to address the
evolution of how banks offer services and products since the
original broker deposits rules were promulgated 30 years ago.
We also finalized a rule to codify legally-enforceable
commitments of insured industrial banks and industrial loan
companies (ILCs) and their parent companies. The rule ensures
that the parent company serves as a source of financial
strength for the ILC, while providing clarity about the FDIC's
supervisory expectations of both of the ILC and its parent
company. And this past January, we finalized guidelines
establishing a new Office of Supervisory Appeals to help
promote consistency among examiners and ensure accountability
at the FDIC.
We continue to promote innovation at the Agency and across
the banking sector because it is necessary. The pandemic has
only amplified how critical innovation is in our everyday
activities, from the way we procure food, to our social
contact, to how and where we work. Our focus on innovation is
aimed at ensuring that American banks remain competitive in a
rapidly-changing world, that American consumers have access to
a broad array of financial products and services, that our
supervisory and risk-monitoring functions can appropriately
align with technological changes in the industry, and that we
can bring unbanked Americans into the financial fabric of this
country and do so in a way that will promote a path to economic
and social inclusion.
My focus on economic inclusion is informed, in no small
part, by my personal experience as a struggling immigrant in
this country. This July will mark my 30th anniversary in the
United States. I can assure you that not a day has gone by
without me thinking of those early years, when putting food on
my table and having a roof over my head required working three
to four minimum wage jobs. It is from this perspective that the
uneven impact of the pandemic and its recovery on different
populations throughout the United States has been especially
worrisome.
Notwithstanding meaningful improvements in recent years in
reaching the last mile of unbanked households in this country,
we know that much remains to be done. To help address these
disparities, the FDIC is using its authorities to support a
safer, fairer, and more inclusive banking system. We have
recently launched a targeted public awareness campaign,
#GetBanked, to inform consumers about the benefits of
developing a banking relationship. In addition, we announced
the establishment of the Mission-Driven Bank Fund to channel
private sector investments to support MDIs and CDFIs. We have
also recently released a new diversity strategic plan with
actionable steps that will guide our work and help measure our
progress over the next few years, and support economic
inclusion in our communities.
As the FDIC makes progress on these issues, we will
continue to fulfill our critical mission of maintaining
stability and public confidence in the nation's financial
system. Thank you again for the opportunity to testify today,
and I look forward to your questions. And happy birthday, Todd.
[The prepared statement of Chair McWilliams can be found on
page 96 of the appendix.]
Chairwoman Waters. Thank you, Ms. McWilliams.
Mr. Quarles, you are now recognized for 5 minutes to
present your oral testimony.
STATEMENT OF THE HONORABLE RANDAL K. QUARLES, VICE CHAIRMAN OF
SUPERVISION, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
(FED)
Mr. Quarles. Last May, my colleagues and I came before you
to discuss our actions to maintain a strong banking sector as a
source of support for consumers, households, and businesses. My
remarks at that time came after the onset of sudden and
pervasive financial stress. Early turmoil in overseas markets
quickly crossed borders, and within days, had reached almost
every asset class and corner of the financial system. A year
ago, the full implications of COVID still remained unclear, and
the costs would continue to mount.
Today, the storm waters are receding. The economy is
beginning a strong recovery to the other side of the COVID
event. And as the Federal Reserve's recent reports detail,
banking organizations have remained an important source of
strength in this recovery, with higher levels of capital and
liquidity, better risk management, and more robust systems.
But banking organizations absorbed an unprecedented shock,
while providing refuge from market instability, delivering
essential public aid, and working constructively to support
borrowers and communities. In short, the full set of post-2008
reforms, as refined and recalibrated by the work of the last 4
years, ensured that this time truly would be different than the
last. Today, the U.S. banking system is actually more liquid
and better-capitalized than it was a year ago, and, on top of
that, has over $100 billion in additional loan loss reserves,
leaving it well-positioned to weather future shocks.
While a strong recovery is underway, it is not yet
complete. Our role as policymakers is to support the financial
system and the economy through the end of this transition back
to normal operations. Our challenge is to do so as
circumstances change and the nation's need for that support
evolves. Most immediately, we have worked to align our
emergency actions with other relief efforts as the economic
situation improves, maintaining or extending some measures,
where appropriate, to preserve household assistance, to promote
continued access to credit, and starting the transition back to
our normal activities, normal supervisory posture, and our
normal rule book.
However, our role and responsibility extends much further
than merely returning to normal. We have an obligation to look
closely at the last year to understand how the financial system
came to experience such severe stress, and to identify and act
on any lessons we find. Any list of lessons must begin with the
strong performance of supervisory stress testing. The Stress
Testing Program not only prepared banks for a period of
prolonged hardship, it also clarified their health and
resilience as the COVID event progressed. This role affirmed
the ways that stress testing has evolved in recent years into a
more flexible, more transparent anchor for the Federal
Reserve's broader capital program.
For example, while it was sensible, given that this was the
first real-world test of the post-2008 system, for us to impose
temporary capital distribution restrictions beyond those that
are built into this system, we now know that the system works,
especially when supplemented and informed by a real-time stress
testing machine. In the future, having learned the lessons of
this real-world test, we will be able to rely on the automatic
restrictions of our carefully-developed framework rather than
impose ad hoc and roughly-improvised limitations.
Other areas, however, are ripe for closer examination.
These include strains in short-term funding markets and the
second destabilizing run on prime money market mutual funds in
roughly a decade, Treasury markets where last year's selling
pressures overwhelmed dealers' willingness or ability to
intermediate, and changing patterns in the use of financial
services by consumers and businesses. These trends pre-date the
COVID event, but the past year accelerated them dramatically,
with important implications for financial stability, safety,
soundness, consumer protection, and underserved communities'
access to safe and fair financial services.
In our work to understand each of these trends, we have
valuable and willing partners in our fellow regulators in other
agencies and in our colleagues abroad, and we are committed to
keeping Congress closely and actively informed of our efforts.
This work is critical, but only in service of a more
fundamental goal: A safe, transparent, and efficient approach
to supervision and regulation, which ensures that the financial
system can withstand even historic shocks. Those values are of
perennial importance. They continue to be the bedrock of the
Federal Reserve's work, animating two of our highest priorities
for this year: finalizing the post-crisis Basel III reforms;
and completing the long-overdue transition away from the London
Interbank Offered Rate (LIBOR).
The COVID event is not behind us, and the vulnerabilities
it exposed are not gone. But as we now follow the path out from
this event, the Fed is working to ensure that the financial
system is resilient enough to support consumers, households,
and businesses, and we recommit ourselves to supporting the
economy through the completion of the recovery. Thank you, and
I look forward to your questions.
[The prepared statement of Vice Chairman Quarles can be
found on page 113 of the appendix.]
Chairwoman Waters. Thank you, Mr. Quarles. I now recognize
myself for 5 minutes for questions.
Chair Harper, I appreciate that early in your tenure at the
NCUA, you stressed the importance of consumer financial
protection. You recently gave a speech cautioning credit unions
to consider the reputational risk they face when they garnish
portions of stimulus checks being deposited in a customer's
account. Specifically, you said, ``As we saw with stimulus
payments last year, some credit unions decided to garnish those
funds instead of stepping up and working with their members.
Credit unions that do this again, should consider the
reputational issues that will come from these practices.'' Have
credit unions been responsive to your message to help their
customers who have been hurt through no fault of their own
during this pandemic?
Mr. Harper. Thank you, Madam Chairwoman, and what I would
say is that in this latest round of the economic stimulus
package, credit unions have been indeed stepping up. I am aware
that both major trade groups within the industry have called on
Congress to: one, work to close the problems related to
garnishment; and two, ensure that individual credit unions are
working to make sure that people can use these funds in order
to pay for shelter, food, and medical needs, which is what
Congress intended.
Chairwoman Waters. Thank you very much. I think I heard you
say that you were concerned about post-pandemic foreclosures
and the possibility that the credit unions are going to be
faced with the situation of homeowners not being able to pay
their mortgages. But what I did not hear was you talk about
loan modifications and how you are going to deal with that.
Mr. Harper. That is a really important question, Madam
Chairwoman. The latest data that we have internally at the
Agency is that there have been 1.3 million forbearance efforts
that have gone on since the start of the pandemic, and that we
have actually worked to modify about $38 billion in loans.
Going forward, we are going to continue to stress to our
examiners and credit unions the need to work with members, and
that prudent workouts can be a win-win both for the consumer as
well as for the credit union, who might have to charge off on
foreclosure costs.
Chairwoman Waters. Thank you very much.
Chairman McWilliams, banks have garnished wages also. Is
that correct?
Ms. McWilliams. I am sure there is a bank that has
garnished wages. I don't know that we have broad data points on
that. But we have encouraged banks to work with their
customers, and we have also identified some activities, such as
waiving fees through process, as eligible for consideration
under the Community Reinvestment Act. As a general matter, we
do not base recommendations on reputational risk, so we have
not, to your point in the question to Mr. Harper, issued any
guidance on that. But we did issue a number of guidance
documents telling banks that they should work with their
borrowers, and also making sure that we, and our examiners, do
not criticize the banks for working with borrowers affected by
COVID in a safe and sound manner.
Institutions generally have not needed to categorize COVID-
related loans and modifications, such as Delinquency and
Default Reasons (DDRs). We have done a number of things to make
sure that borrowers can stay in their homes, and that the issue
of forbearance and loan modifications is not something that
would, I guess, force consumers out of their homes.
Chairwoman Waters. Thank you.
Chair Harper, I am concerned about reports that banks are
closing branches at a record pace, and now, in some areas, the
nearest bank branch might be over 10 miles away. While many
customers bank online, the FDIC found that 83 percent of
customers still met with a teller or bank employee at least
once during 2019, and more than 40 percent of rural customers
made at least 10 visits to a bank. What are these customers
supposed to do when the bank leaves town?
Mr. Harper. Thank you, and I share your concern about
financial deserts, and the need to step in and make sure that
those communities have access to financial services. When a
financial institution leaves a town, it can be really
debilitating. And what I am aware of is many credit unions have
been stepping up through adding underserved areas, particularly
one charter type, multiple common bond, to provide services in
those areas where they might have been left behind. And I think
that is something that we should be continuing to work on with
you, and we are doing that through our Advancing Communities
through Credit, Education, Stability and Support (ACCESS)
initiative currently.
Chairwoman Waters. Quickly, for example, should we allow a
credit union to expand its field of membership to set up a
branch in areas where there are no physical branches?
Mr. Harper. That is something that would certainly be
helpful. The NCUA board and its members have long called upon
Congress to allow not just multiple common bond credit unions
to add underserved areas, but also single common bond, and
community charters. That would be a good way potentially to
help provide service to those areas.
Chairwoman Waters. Thank you very much. The gentlewoman
from Missouri, Mrs. Wagner, is now recognized for 5 minutes.
Mrs. Wagner. Thank you, Madam Chairwoman, and I thank our
prudential regulators. I only wish that we were all in person
in the committee room. It would make this much easier since we
are actually all on the Hill just above or next to the hearing
room in our offices. I have a number of questions, so I would
ask you to please keep your questions brief.
Vice Chair Quarles, as we start to move out of this
pandemic, my constituents are seeing an increase in the cost of
groceries, gas, and many, many other household items.
Manufacturers and other industries are dealing with supply
shortages, workforce shortages, and unprecedented costs for raw
materials. What economic signals give you reason to believe
that these price spikes are only temporary?
Mr. Quarles. The emergence from any sort of a natural
disaster or a suddenly-imposed constraint on economic activity
is historically, generally, accompanied by temporary increases
in prices, sometimes quite significant, in the emergence from
those types of events. This is a very large one, and so we
would expect those types of temporary dislocations to be
substantial. You have asked me to be brief, so I can leave it
at that and see if you want to follow up.
Mrs. Wagner. Yes. I said the supply chain and raw material
costs being so backed up and demand so high, we are questioning
the temporary nature of this, and I would like the Fed to
consider that.
Acting Comptroller Hsu, could you briefly explain your
views on climate change and bank supervision?
[No response.]
Mrs. Wagner. Okay. This isn't going to work, so Comptroller
Hsu, hang on.
Vice Chair Quarles, back to you. What data is necessary to
understand climate risks for supervisory purposes?
Mr. Quarles. There is a range of data, and I can't give you
a comprehensive answer to that question because we are in the
process of sort of very analytically and comprehensively
looking at that question inside the Federal Reserve right now.
Mrs. Wagner. Really?
Mr. Quarles. Yes, we think that the question of risk should
be an analytical one. It should not be solved by a priori
concerns. We should look very closely at what the data actually
show. We are in the early stages of developing a framework in
order to determine what is the right data, how should--
Mrs. Wagner. If I could interrupt, Vice Chair Quarles. How
will an increased focus on climate change impact the Fed's
ability to fulfill its dual mandate of price stability and
maximum employment?
Mr. Quarles. I wouldn't say there has been an increased
focus on climate change. There has been an increased focus from
the outside of the Fed on how we are looking at climate change
as one of the many risks, potential risks to the financial
system that we evaluate. But we have--
Mrs. Wagner. I'm glad to hear that. Thank you. I will leave
it at that.
Chairman McWilliams, in your testimony, you mentioned that
the FDIC will continue to monitor the impact of climate and
other emerging risks on the financial sector. I am wondering
what sort of risk management structure the FDIC has in place to
support a financial institution's risk management practices? In
other words, does the FDIC have the proper tools to assess risk
on climate events, such as hurricanes, tornadoes, droughts, and
floods, to the financial performance of the banks you examine
and supervise?
Ms. McWilliams. Congresswoman Wagner, that is a great
question. FDIC supervisors have long expected financial
institutions to consider and appropriately address potential
climate risks that could arise in their operating environment
as a meaningful safety and soundness--
Mrs. Wagner. If I could interrupt, what is the risk
management structure that you have to support these management
practices?
Ms. McWilliams. We look at whether or not the institutions
and their borrowers have appropriate insurance coverage. Are
they addressing borrowers' cash flow estimates based on reduced
agricultural yields or adverse business conditions? Are they
complying with applicable rules, regulations, and building
codes, especially in areas, for example, where peril of wind
may be a concern? Are economists and financial analysts
conducting internal analysis of factors that affect economic
banking conditions, including the potential implications of
changing environmental conditions? So, we look at all of that.
We also have FDIC regional risk committees that include the
environmental impact--
Mrs. Wagner. I think my time has expired.
Comptroller Hsu, I will try and submit my questions to you
in writing. Hopefully, you can work out your technical
difficulties. This is why we should be in the committee room. I
yield back.
Chairwoman Waters. Thank you very much. Mr. Lynch, you now
have the gavel.
Mr. Lynch. [presiding]. Thank you, Madam Chairwoman. The
Chair now recognizes the gentlewoman from New York, Ms.
Velazquez, for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman. The reason why we
don't have in-person hearings is right here, the list of
Republicans who have not been vaccinated, 97 out of 211. I have
a responsibility, and we all have a responsibility to protect
ourselves and to protect our staff.
Vice Chair Quarles, the Fed's most recent Financial
Stability Report, published earlier this month, found that
vulnerabilities arising from business debt has fallen since the
middle of last year. How have government support programs, like
the PPP, the Fed's Paycheck Protection Program, Liquidity
Facility, and those in the American Rescue Plan, helped to
reduce this vulnerability, stabilize businesses, and improve
the overall economy?
Mr. Quarles. I think it is clear that the various programs
that have been put in place, given the size of the shock that
was experienced last March, we would have experienced a much
deeper and more durable economic contraction, and would have
had more lasting economic scarring with closed businesses and
defaulting obligations had those programs not been put in
place. I think that's inarguable.
Ms. Velazquez. Thank you. Unfortunately, Mr. Quarles, the
report also points out that many small businesses and
households remain financially drained, and job losses over the
past year have been heavily concentrated among our most
financially vulnerable, including many lower-wage workers and
racial and ethnic minorities. What threats does a K-shaped or
uneven recovery pose to financial stability?
Mr. Quarles. I would say to that precise question, what
threat does it pose to financial stability? Obviously, if there
is a significant portion of the populace who experience
economic stress even as the overall economy is doing well, that
can feed into losses on a cohort of exposures in the financial
system that could have consequences. I would say right now,
that question is probably less of a financial stability
question, however, given the nature and size that we see of
that possible effect, and more a question of fairness and
policy as to what should be done about those exposures.
Ms. Velazquez. Do you agree that we need to address
systemic inequities in many aspects of our economy, don't you?
Mr. Quarles. Yes, I think that we do need to ensure that
opportunities are equal and that access to financial services
is fair and equal across the country. That is a high priority
for the Federal Reserve in our supervision of financial
systems.
Ms. Velazquez. Thank you. Acting Comptroller Hsu,
yesterday, the OCC announced that it will reconsider last
year's rule implementing the Community Reinvestment Act, and
that lenders should also start preparing for the regulation to
take effect. Can you explain this decision, and do you plan to
pursue a joint rulemaking with the Fed and the FDIC?
Mr. Hsu. Sure. Can you hear me? I just want to make sure
the audio is okay.
Ms. Velazquez. Yes, I can hear you.
Mr. Hsu. Okay. Great. Upon taking office, we had identified
several standards and pending matters that I thought would be
ripe for some review. And with regards to the CRA specifically,
due to the effects of the pandemic on populations, and due to
the comments on the Federal Reserve's Advance Notice of
Proposed Rulemaking (ANPR) on CRA, and due to some of our
experience with partial implementation of the 2020 rule, we had
enough information to say that this seems like the right time
to reconsider where we are. I initiated a review, but the
review has not been completed yet, so I don't want to get in
front of the conclusions of that. I am saying that I want to
take all of the facts and all of the perspectives into account
before deciding what to do. That could include rescission. That
could include joining the Fed and the FDIC, the overwhelming
comments that we got. So, we are open to those things.
Ms. Velazquez. I would appreciate if you would consider it.
I yield back.
Mr. Lynch. The gentlelady yields back. The Chair now
recognizes the gentleman from Oklahoma, Mr. Lucas, for 5
minutes.
[No response.]
Mr. Lynch. Mr. Lucas?
[No response.]
Mr. Lynch. Okay. Mr. Lucas or Mr. Posey, do you want to
speak or no?
Mr. Posey. I will step up here.
Mr. Lynch. Okay. Great. Thank you.
Mr. Posey. Thank you, Mr. Chairman. Mr. Quarles, just last
week, the April inflation rate was reported at 4.2 percent, the
highest since 2009. The rate in March was 2.6 percent. Are we
paying the price of monetizing a huge debt with what the late
Dr. Friedman and former Chair Bernanke both call, ``helicopter
money?''
Mr. Quarles. I don't think so. If you look at the example
you gave, that the inflation rate last month was the highest
since 2009, I think that is an example of when you come out of
a shock, you can see volatility in the inflation rate. And that
volatility we would generally expect to be temporary and
transitory, given that the size of the shock that we are coming
out of from the COVID event is even larger, materially larger,
than from the financial crisis of 2008. With those sorts of
dislocations, it would not be surprising if they were both
sizable and lasted for some period of time. I believe that is
the correct analysis of the situation.
If we are wrong, do we have the tools to address it as we
see that the world is evolving differently than we expect, and
that is absolutely the case. The Federal Reserve has the tools
to address inflationary concerns should they prove to be more
durable and higher than we currently analyze them to be.
Mr. Posey. Thank you. Given the Fed's commitment to
independence, please describe the condition or scenarios under
which the Fed stops monetizing the debt. How would you make
that decision?
Mr. Quarles. Obviously, I should begin by saying I don't
think we are monetizing the debt currently because of
dislocations that occurred in the Treasury market over the
course of 2020. We are purchasing Treasury debt. We have said
that we will be examining, over the course of this year, the
conditions of the financial markets and when it will be
appropriate for us to end those asset purchases. The Federal
Open Market Committee (FOMC) discusses that regularly, and that
will be the mechanism through which we would make that
decision.
Mr. Posey. Mr. Hsu, the Senate recently made the True
Lender Rule subject to a Congressional Review Act resolution.
How does allowing States to regulate interstate loans promote
interstate commerce, payer choice, and economic welfare?
Mr. Hsu. I'm sorry, Congressman Posey. You broke up a
little bit at the end. Can you repeat the question?
Mr. Posey. I'm sorry. I am having a hard time hearing you.
What was that again now?
Mr. Hsu. You broke up at the end there. Could you repeat
the question quickly?
Mr. Posey. Sure. The Senate recently made the True Lender
Rule subject to a Congressional Review Act resolution. How does
allowing States to regulate interstate loans remote interstate
commerce, greater choice, and economic welfare?
Mr. Hsu. Okay. When I took office, I included the True
Lender Rule as part of the review that we are going to do. And
when the Senate voted to repeal it under the Congressional
Review Act, we paused that review because of the congressional
deliberation, and we are monitoring how the House's
deliberation is going. I don't want to say too much more than
that, given the posture.
Mr. Posey. Right.
Mr. Harper, could you share your experience with us? Will a
higher corporate tax rate attract or discourage investment in
crop growth?
Mr. Harper. Thank you for the question, Congressman. Credit
unions are not subject to taxation, as they are structured as
nonprofit cooperatives that are member-owned, so there would
not be a change for credit unions.
Mr. Posey. Ms. McWilliams, should the prudential regulators
require financial institutions to increase their capital to
protect against the risk of climate change?
Ms. McWilliams. I'm sorry, Congressman. I missed the first
part of your question. I apologize.
Mr. Posey. I am running out of time. Should prudential
regulators require financial institutions to increase their
capital to protect against the risk of climate change?
Ms. McWilliams. Generally, we approach the capital
regulations by basing it on quantitative measures to understand
what is going on, and I think it is premature to make any
conclusions in this space.
Mr. Posey. Thank you. Mr. Chairman, I yield back.
Mr. Lynch. The gentleman yields back. The Chair now
recognizes the gentleman from California, Mr. Sherman.
[No response.]
Mrs. Wagner. I rest my case.
Mr. Lynch. Yes, yes. Let us go back. Mrs. Maloney, would
you like 5 minutes for questioning? I see you--
Mrs. Maloney. Yes, please. Thank you.
Mr. Lynch. Okay. You are now recognized.
Mrs. Maloney. I thank you, Mr. Chairman, and Chairwoman
Waters and Ranking Member McHenry.
Acting Comptroller Hsu, I was planning to ask about the
Community Reinvestment Act (CRA), our nation's law that
requires financial institutions to invest in and meet the
credit needs of all communities, particularly low- and
moderate-income communities, but it is good news. Yesterday,
the OCC announced it would reconsider the 2020 final rule, a
rule that I believe would significantly weaken the CRA and
leave our most-vulnerable communities behind.
I just want to thank you, to begin with. I think that this
is a very positive development.
But Acting Comptroller Hsu, as a follow-up to yesterday's
announcement and to Congresswoman Velazquez's question, do you
believe that our communities would be best served by having one
uniform standard across the banking regulators rather than
different standards for each regulator and their related
financial institutions?
Mr. Hsu. As a general matter, yes. I think that is
definitely the case. I think there are a lot of devils in the
details here, and I am awaiting the review to get that
confirmed. I just want to make sure that I think when the
agencies act together, the effects are stronger and more
sustained. And I think that has been proven many times. So, as
a general matter, yes.
Mrs. Maloney. Okay. And I would like to ask you, what
deficiencies in the final rule led the OCC to make its decision
to reconsider the 2020 rulemaking?
Mr. Hsu. I think it really comes back to those three
factors I cited before, which is that the impacts of the
pandemic have become much more clear, and so the need is
sharpened, and you have more data to support that. The comments
on the Fed's ANPR--I think there are a lot of comments there
that we have been following very closely. So, there is new
information there.
And again, part of our experience with the partial
implementation of the rule, which has had its ups and downs, I
don't know all of the details around that. But the combination
of those factors really prompted me and the staff to say to
say, okay, we need to reconsider this.
Mrs. Maloney. Okay. Changing topics, I want to talk to you
about climate change and gun violence, and particularly the
OCC's so-called, ``fair access rulemaking.'' In the closing
days of the Trump Administration, Acting Comptroller Brooks
rushed through a rule to effectively require financial
institutions to lend to and support manufacturers responsible
for producing the firearms that have devastated our
communities. The rule would also have the effect of requiring
financial institutions to support the fossil fuel industry with
access to banking services, even if those institutions have
voluntarily chosen to stop supporting the financing of carbon
pollution.
On January 19th, I wrote to then-President-Elect Biden,
urging him to block this rulemaking and the harm it would cause
to our communities. I was pleased to see that this rulemaking
was paused the following week. Do you intend to rescind the
OCC's fair access rule?
Mr. Hsu. I have no intent to revisit that rule. It has been
paused. It is not live. I have no intent to revisit it.
Mrs. Maloney. I would say the former Acting Comptroller
used his authority to rush this through, and now it is paused.
But I hope you will use yours to rescind this rulemaking that
will devastate communities.
My time has expired, and I yield back. And I look forward
to further questions and comments on this and more
clarifications on it. I think it should totally be overturned.
Anyway, I yield back. Thank you.
Mr. Lynch. The gentlelady yields back. The Chair now
recognizes the gentleman from Missouri, Mr. Luetkemeyer, for 5
minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Mr. Quarles, a minute ago, you said that there was about
$100 billion of additional loan loss reserves in the system
today, which is good news. Then you made the comment that the
vulnerabilities to our system are not gone. So, I would like
for you to expand on what you think those vulnerabilities are,
number one.
And then, in order to somehow corral those vulnerabilities
or to quantify those vulnerabilities, how effective do we need
to be with regards to forbearance? It would seem that with the
additional reserves that we have, you could take two different
approaches.
One is where you would say, well, we have enough reserves
here, so let's ride this out, let's work with the banks and our
customers because even if things go south, there are plenty of
reserves there. It is not going to impact the quality of the
banks. Or you could go back to a more punitive approach and
say, we have plenty of reserves there. Therefore, let's go in,
clean these things up, and take all of this and apply it to the
reserves, and then we have a clean slate.
Which approach do you think you want to go with, and what
vulnerabilities, I guess, do you believe are still out there?
Mr. Quarles. With respect to the approach to borrowers who
may be under pressure as we emerge from the COVID event, we are
continuing our supervisory stance of saying that banks should
work with those borrowers. It is your former option rather than
the second option of saying since you have the reserves on your
books, take the losses and clean up the loans. That is
definitely not our approach.
We began the pandemic by saying that banks should work with
their borrowers, and that supervisory stance continues to be in
place even as forbearance ends. The information we have from
our supervision of the banks is that the majority of
forbearance hasn't, and customers have resumed paying their
loans.
Mr. Luetkemeyer. I'm sorry to interrupt you, but what
vulnerabilities do you see?
Mr. Quarles. The vulnerabilities, potential vulnerabilities
are that, again, certain cohorts of borrowers might have
difficulty paying their loans as forbearance ends. We haven't
seen that to be an actual fact, as opposed to a potential fact
yet. But if it becomes an actual fact, we are encouraging banks
to continue to work with those borrowers and not simply close
out the loan, where that could be done safely and soundly.
Mr. Luetkemeyer. Very good. Thank you for that.
Chairwoman McWilliams, the FDIC is tasked with reviewing
and approving applications for industrial loan companies
(ILCs). In February of this year, the FDIC issued a final rule
that codified the ILC process and requires nonfinancial
companies applying for an ILC to meet certain conditions
prescribed by the FDIC and enter written agreements with the
FDIC.
I think many members on this committee have concerns with
the commingling of banking and commerce that ILCs represent. Do
you think the rule as written today will prevent the
commingling of banking and commerce in the future?
Ms. McWilliams. I think that our final rule certainly goes
a long way to impose source of strength requirements on the
parent company, which has been a longstanding concern, and this
is consistent with the statutory requirement in Section 616 of
Dodd-Frank. We are confident that we can adequately supervise
ILCs. We have imposed heightened expectations as warranted. We
have higher capital levels in traditional banks on these ILCs.
We have capital liquidity maintenance agreements. And we have
agreements that require the parent company to support the ILC
at a time of distress.
Now, I would say that the same statutory requirements for
all deposit insurance applicants apply, as Congress gave them
to us. I would say we have finalized a rule to require more of
ILCs once they get approved and prior to final approval from
the parent company, and we require supervision of the parent
company. But in the end, we are only working with the rules
that Congress gave us, and those rules are the same whether
applying for a de novo banking charter, insurance--deposit
insurance, or for the ILC charter deposit insurance.
Mr. Luetkemeyer. Your expectation is then to be able to
have some oversight over the parent company as well?
Ms. McWilliams. That is what we codified in our rulemaking.
Again, wanting to make sure that the parent company is liable
to support the ILC and serves as the source of strength, both
as required by Section 616 of Dodd-Frank as well as by our
internal understanding of how ILCs function, et cetera, et
cetera.
I would say that we are comfortable with where we are.
Again, it is up to Congress to decide if that is sufficient or
not. But as a regulator, I am comfortable where we are.
Mr. Luetkemeyer. Thank you for that.
Just a quick question with regards to the proposed tax plan
by the Administration. This plan is going to have devastating
effects on small businesses with regards to doubling capital
gains, and raising the tax rate. A million companies are
structured C Corps. You are looking at the estate tax, the
second estate tax--
Mr. Lynch. The gentleman's time has expired.
Mr. Luetkemeyer. We will submit that for the record then. I
am just curious as to your concerns about the tax plan with
regard to small businesses. So, thank you for that.
Mr. Lynch. The gentleman yields back. The Chair now
recognizes the gentleman from California, Mr. Sherman, for 5
minutes.
Mr. Sherman. Thank you.
We have gone through 2 great domestic crises in the last 2
decades. In 2008, the crisis was caused by the financial
system. This most recent crisis, the financial system didn't
cause it. It was caused by a virus. And the financial system
has shown remarkable resiliency in part because of the
regulatory authorities and rules that we are dealing with here
today and in part because of the tremendous response by
Congress. So, we got something right. The financial rules that
we had in place in 2008, I don't think would have survived the
virus of 2019.
And Mr. Quarles, I want to thank you for mentioning LIBOR,
and I especially want to thank you and the Fed for working with
me to craft legislation to deal with that problem hopefully
well before the problem affects trillions of dollars of
outstanding adjustable rate debt instruments.
As to credit unions, I am pleased that Chairman Harper is
with us. I want to thank Chairwoman Waters for including as
part of today's hearing the discussion draft of a bill that
would expand credit unions' ability to lend to their member
businesses in underserved areas, and the chairwoman's mention
of the fact that perhaps we ought to have credit unions be able
to establish branches in our unfortunately growing financial
deserts.
I want to focus a little bit on the industrial loan
companies, which is a matter of prudential regulation but is
more important than just prudential regulation. We have had a
rule in our economy for a long time of separating financial
services from commerce and industry. Japan went the other
direction, and if you look at their stagnation, particularly in
the 1980s and 1990s, Japan was not served well by mixing the
two together.
While the courts and then Congress have allowed the mixing
of this financial activity with that financial activity, we
have not allowed the mixing of banking and commerce. But we
have had the ILCs. They played a very modest role in our
economy. They are historic. They are doing fine, unless they
are used as a way to blow a hole in what has been this wall for
100 years, or nearly 100 years between commerce and banking.
And we then could end up with Walmart, Amazon, et cetera.
I believe the FDIC should be looking at a moratorium on new
ILC charters to give Congress time to look more closely at the
ILC issue. Would you be open to considering either a temporary
moratorium on ILCs or a temporary moratorium on any ILC that
mixes banking and nonfinancial services?
Ms. McWilliams. Thank you for that question. And I will say
I am open to whatever Congress tells us to do.
Congressman, I want to make sure that you don't
misinterpret my tenacity in making sure that the FDIC follows
the law that Congress gave us for either my love or hate of the
ILCs. I don't have feelings about them. I don't think they are
great. I don't think they are bad. I just look at the statutory
requirements, and I know what Congress has given us. And should
you give us the mandate to put a moratorium in place, we will
do so. Should you give us a mandate to do something different
with the ILCs, we will absolutely do so.
In the meantime, we have done what we can with our
supervisory tools to make sure that there is safety and
soundness in the system, that the parent is on the hook for the
subsidiary for the insured depository institution. And if you--
Mr. Sherman. I doubt very much whether Amazon or Walmart
will be as regulated by the FDIC as banks and bank holding
companies.
I do want to turn to Mr. Quarles. It is critical that we
enforce our anti-money laundering and know-your-customer rules,
especially in light of President Biden's efforts to collect the
hundreds of billions of dollars of uncollected taxes from the
top 1 percent. Chairman Powell has said that the Fed would not
proceed with creating a--
Mr. Lynch. The gentleman's time has expired.
Mr. Sherman. I will make this a question for the record.
Thank you.
Mr. Lynch. I thank the gentleman. The Chair now recognizes
the gentleman from Michigan, Mr. Huizenga, for 5 minutes.
Mr. Huizenga. Thank you, Mr. Chairman.
And I guess I just want to point out with respect to this
one thing from my colleague from New York, another fine piece
of journalism where a non-answer is actually an answer when
they are talking about vaccinations. It's none of their
business.
But I digress. I want to move on to the ILCs. I know this
has suddenly gotten a lot of discussion. And Ms. McWilliams, I
have a quick question for you, I guess. I want to expand on
this a little bit. Is there a widespread problem of the rules
not being followed by ILCs currently?
Ms. McWilliams. I'm sorry. Do you mean with respect to our
rules, the FDIC-mandated rules?
Mr. Huizenga. Yes, I guess so. There are some implications
that somehow there are rules that are currently in place that
aren't being followed. Or I guess maybe the question is, is
there a problem that needs to be solved here by Congress or by
you, as the FDIC? I know you have just finalized the rules on
that. Is there a real problem with ILCs as we currently are
dealing with them?
Ms. McWilliams. I will tell you from a regulatory and
supervisory perspective, we do not see a problem with our
authorities to appropriately supervise the ILCs. Again, as I
mentioned, we impose the same standards as they get approved as
we do for banks, and then once they are approved, we actually
impose heightened expectations as warranted based on the risk
model and the business profile of the entities themselves.
This can include significantly higher capital levels than
traditional banks. We also add them to entering the so-called
Capital and Liquidity Maintenance Agreements (CALMA), where the
parent has to not only agree to our supervision, but also be
willing to put in money, capital to support the insured
depository, and we also have the parent company agreements
along the same lines.
So, I would say that you have given us adequate tools to
appropriately supervise ILCs from that perspective.
Mr. Huizenga. Okay. Let us move on to LIBOR. Vice Chair
Quarles, I would like to follow up on our various conversations
that we have had on LIBOR. I am hearing from a number of
financial institutions of various sizes across the country
regarding this transfer away from LIBOR. Many have expressed
concerns with the Secured Overnight Financing Rate (SOFR) and
what that means, this sort of one-size-fits-all benchmark that
may be out there.
What are the specific challenges facing the Federal Reserve
regarding LIBOR to SOFR transfer, and does the Fed still
believe that SOFR is actually the best fallback rate?
Mr. Quarles. The fundamental position of the Fed with
respect to the LIBOR transition is that LIBOR is ending. It
will not be able to be used. We believe it is a safety and
soundness concern for it to be used for new contracts after the
end of this year. We will supervise firms so that their new
contracts cannot be written on it.
Firms have to be prepared for that transition. There will
be a significant amount of legacy contracts that will need
transition. Federal legislation is likely to be appropriate in
that context to help with the legacy.
As for SOFR--
Mr. Huizenga. With all due respect, we know all that. I
need to know--my time is very short here.
Mr. Quarles. As for SOFR, SOFR is a robust rate developed
by a comprehensive--
Mr. Huizenga. Is it the best way? Because I am hearing from
some others that they think that there may be some different
directions that this should go.
Mr. Quarles. The position of the Federal Reserve is that
banks need to prepare for the transition, not that they must
transition to a particular rate.
Mr. Huizenga. Okay. Acting Comptroller Hsu, what is going
on at the OCC? The Administration can't seem to get it quite
right on the appointments. But the OCC finalized a rule, the
True Lender Rule, and then a few weeks ago, your predecessor
came out and supported that rule. And then, shortly after your
appointment, the Senate and the White House opposed the rule.
Is the changing position suggesting that this is a
political decision, or is this decision based on data and what
is right for consumers?
Mr. Hsu. With regard to True Lender, we were going to
review it. But once the Senate voted to repeal it under CRA, we
basically stepped back, because now it is under congressional
deliberation. So, we are just monitoring Congress'
deliberations on the matter.
Mr. Huizenga. Okay. We will follow up on some questions as
well. Thank you.
Mr. Lynch. The gentleman yields back. The Chair now
recognizes the gentleman from Georgia, Mr. Scott, for 5
minutes.
Mr. Scott. Thank you very much. The first thing I want to
say is, happy birthday to Chairman Todd Harper. Happy birthday,
my friend.
Mr. Chairman, yesterday, the House of Representatives
passed my bill on financial inclusion, thanks to a helping hand
from Reverend Cleaver, and my good friend, French Hill of
Arkansas. And I am deeply concerned about our consumers, as you
are, unbanked and underbanked who are just out here subject to
the whims and the ravages of payday lenders. And I was
interested to learn of NCUA's payday alternative loan program
that you have, which allows Federal credit unions to offer
lending products that are safer and more affordable than payday
lenders. I want you to give me an update on these lending
products.
Mr. Harper. Certainly, Congressman. The payday alternative
loan rule, or PALS for short, has been part of the NCUA's rules
for more than a decade now. And what we have found is that many
credit unions are using it quite prudently. They can lend up to
28 percent, which is slightly higher than the 18 percent cap
imposed for all loans, and they also need to work these loans
into an amortized basis.
Our payday alternative loan program is working well, and it
is something that we have certainly seen a number of credit
unions use during this crisis. I will also just note very
quickly that many credit unions are offering small dollar loans
well under the 18 percent cap outside of the payday lending
program, so they are stepping up to serve their members.
Mr. Scott. Let me ask you this, because I have sort of an
Achilles Heel in this moment, and my concern comes back to the
unbanked and underbanked. And although this product that you
have is available to credit union members, how do consumers who
are not members of a credit union have access to a product like
this? How do we get it down to those who need it the most?
Mr. Harper. I appreciate the question and the desire to
expand access to financial services. I know that former
Chairman Hood, now Board Member Hood at the Agency, has spoken
often about financial inclusion.
One of the ways and things we could do is to step up--and
we have Agency staff working on this right now--to improve our
database to help consumers find a particular loan or an
institution, a credit union which they could join. That is
certainly one way in which we can attack this problem.
Mr. Scott. And certainly, our bill passing the House
yesterday brings in the consumer financial protection services.
And I would like for you to help us to get the word out on
that, getting our bill passed, because while yours is targeted
to folks who need the help, it is exclusive only to credit
union members, correct?
Mr. Harper. That is correct, if I understand the question,
yes.
Mr. Scott. Okay. Now, Ms. McWilliams, let me ask you this,
I think I may have a moment. How are your regulated banks
preparing to handle loans emerging from forbearance? We have
passed the American Rescue Plan, and we have a piece in there
that would allow loan forbearance for those impacted from the
pandemic hardships. What steps are you taking to ensure that
these loans remain sound?
Ms. McWilliams. Thank you for that question. We have done a
number of things at the FDIC to make sure that banks actually
appropriately modify loans, and we also went to great lengths
to make sure that loans modified for the purposes of the
pandemic that were performing before the pandemic that were
modified in a safe and sound manner actually do not qualify as
troubled debt restructuring.
Mr. Scott. Thank you, ma'am.
Mr. Lynch. The gentleman's time has expired. The Chair now
recognizes the gentleman from Kentucky, Mr. Barr.
Mr. Barr. Thank you, Mr. Chairman.
And I want to thank Chairwoman Waters--I don't know if she
is still here--but I want to thank her for raising a question
about the decline in physical bank branches in rural and
underserved areas. That may be why the Majority attached to
this hearing a bill requiring a study on de novo bank
formation.
I think we can all agree that reversing the trend in
lackluster de novo formation is a worthy policy goal and could
address the decline in rural bank branches, as Chair McWilliams
knows very, very well. But we can do better than a study.
My bill, the Promoting Access to Capital in Underbanked
Communities Act, is a straightforward solution endorsed by the
Independent Community Bankers of America (ICBA), allowing for a
phase-in of capital requirements for de novo institutions,
including some provisions targeted toward underserved rural
areas and several other common-sense provisions to promote bank
access in unbanked communities.
Rather than simply study the issue, let's do something
about it. I will put my request to Chairwoman Waters formally
in a letter, but I would encourage the Majority, everyone on
this Zoom call in the Congress, to consider my bill at the next
markup. There is no reason why this shouldn't be a bipartisan
effort.
Now, my first question is to Vice Chair Quarles. As you and
I have discussed, vocal advocates on the left and some members
of this committee continue to push the Fed to inject climate
scenarios into stress tests and capital requirements. Earlier
this month, the Center for American Progress suggested that
regulators could address climate change by risk-weighting
carbon-intensive assets and capital requirements.
Proponents suggest that regulators should use bank capital
requirements to make the financial system more resilient and
force the transition away from fossil energy. The problem is
that will do nothing to change the demand side of the equation.
People will still need to drive cars, turn on their lights, and
heat their homes. It will just disrupt the supply side by
shifting financing for those industries to less regulated,
nonbank lenders, drive up the cost of capital, and in turn,
raise prices for consumers.
Vice Chair Quarles, is the Fed's role to devise and
implement climate change policy, and more specifically, is it
the Fed's job to accelerate the transition away from fossil
energy?
Mr. Quarles. Our role is to ensure that the financial
system is resilient to risks. Those logically could include
climate risks, and so we need to analyze how that could happen.
But it is not our job to use the financial system as a tool of
broader climate policy. That is, we don't have that mandate.
Mr. Barr. It is encouraging to hear that confirmation on
the record, and I would encourage you to share that with Mr.
Stiroh and the Supervision Climate Committee. And I would
encourage you to continue to vocally express that viewpoint to
Governor Brainard and others at the Fed, that you do not have
the legal authority to implement environmental policy.
Let me turn to Acting Comptroller Hsu. I continue to be
troubled by the trend of politicization of access to capital,
whereby perfectly legal businesses are denied financing because
they are industries that are politically unfashionable. That is
why I was pleased to see the OCC finalize the fair access rule
in January.
Acting Comptroller Hsu, given that the OCC announced that
it will not enforce the fair access rule, how do you intend to
prevent national banks from discrimination and redlining? How
do you intend to ensure that regulated entities extend
financing on a fair and equitable basis without regard to
political or public relations pressure?
And in the context of your prepared testimony, sir, your
emphasis on reducing inequality in banking sounds like hollow
rhetoric and an empty gesture, considering your decision to not
enforce fair access. Can you comment on that and the
inconsistency of that testimony with your decision and the
OCC's decision to not move forward and implement fair access?
Mr. Hsu. Sure. I will start with reducing inequality. The
components of reducing inequality really focus, first and
foremost, on the Community Reinvestment Act. So, I am not going
to take up time with that.
Mr. Barr. Yes, I hear you. But you know what I am talking
about. It is a philosophically-inconsistent position to say
that you are for equality in banking when you will not enforce
a fair access rule and you will not prevent discrimination
against whole categories of customers because of the
politically-incorrect status. It is intellectually
inconsistent.
Mr. Hsu. I guess I would disagree with that.
Mr. Barr. I can tell.
Mr. Hsu. We are not in the business of telling banks whom
to bank. We are in the business of safety and soundness, of
treating customers fairly, and of ensuring that there is access
to financial services, especially to those who are underbanked
and unbanked. That is our mission.
Mr. Barr. Right. My time has expired. But if redlining is
wrong, redlining is wrong. End of story.
I yield back.
Mr. Lynch. The gentleman yields back. The Chair now
recognizes the gentleman from New York, Mr. Meeks, for 5
minutes.
Mr. Meeks. Thank you, Mr. Chairman.
Let me address my first question to Chair McWilliams. There
are approximately 250 FDIC-insured MDIs and CDFIs that serve
minority, low- and moderate-income communities. These
institutions are pillars for the communities that they serve
because unlike traditional larger banks, CDFIs or MDIs provide
a significantly larger percentage of lending and services to
these communities. While MDIs and CDFIs are assisted in
receiving deposits, without the necessary capital investment,
these entities are unable to fully serve their communities to
the best of their ability.
The FDIC's mission-driven fund seeks to help in this area
by providing a framework for an investment fund that will
support these crucial financial institutions. The fund will
allow for investment pitches for banks and help set up fund
management.
However, what is puzzling to me is that it is my
understanding that the FDIC will be taking a hands-off approach
after setting up the framework. If that is the case, how will
the FDIC ensure that the fund is actually successful at
achieving its mission?
Ms. McWilliams. Thank you for that question, and I welcome
the opportunity to talk about the mission-driven bank fund
because that is something that, frankly, is novel to us. It is
something that we came up with as a result of extensive
outreach with minority depository institutions to understand
what particular issues they are facing.
And to your point, because they do disproportionately serve
the low- and moderate-income communities, it is important that
they have good access to capital. And almost inevitably, most
of them define capital, access to capital, as one of the
greatest impediments to their ability to serve their
communities.
The mission-driven bank fund is going to be set up in a way
that we as a Federal Government Agency can set it up, which is
basically to put our name, our brand behind it. We have worked
extensively with our MDIs as well as with outside consultants
to understand how to structure this fund.
I am not sure that we have the requisite authorities
necessarily to manage the fund and be the fund manager, per se,
as you would think about a fund manager in the financial sense.
But we are hoping that the fund manager that gets picked by the
anchor investors is focused on kind of the benefits of the
investments, and has a long-term strategy of understanding the
nature of these institutions and making sure that the capital
deployed to the fund is actually producing even more benefits
on the ground than dollar for dollar.
That is something that we are going to completely continue
to work on and stress about to make sure that people understand
this, to make sure that the anchor investors understand that.
Our hope, and this is why I appreciate the opportunity to talk
about it in a public forum, is to actually attract between $250
million to $500 million in this fund and get it started. We
have a $100 million commitment from Microsoft, for which we are
very grateful. And we are hoping that is going to be a
significant fund with meaningful long-term benefits to the very
communities that I believe you are concerned about.
Mr. Meeks. Yes, and I am hoping the same. I just want to
make sure that you don't take a hands-off approach, because we
just have to stay hands-on to make sure we accomplish the
mission. And we are dependent upon the FDIC to not just not
take your hands off, but to stay focused on it, because this is
tremendously important and could be groundbreaking.
So, we will be watching, and I hope that you stay actively
involved in that regard with the FDIC. Thank you for that.
Ms. McWilliams. Congressman Meeks, I can assure you that I
am not a hands-off regulator.
Mr. Meeks. Thank you.
And let me go to Mr. Hsu. Mr. Hsu, I am hearing that you
have been punting this question recently. But you know that the
Senate recently voted to overturn the OCC's True Lender Rule--
and I know you are punting on True Lender--which was introduced
to clarify the status of loans made through bank-fintech
partnerships. However, the Trump Administration's process for
promulgating the rule was rushed and lacked adequate
stakeholder input, including input from Congressional Democrats
like me.
Still, the rule did attempt to address a legitimate public
policy problem. If the House votes to overturn the rule and the
President signs, will the OCC have the legal authority to put
forth a new rule that brings long called-for legal supervisory
certainty and enhanced consumer protections to the bank
partnerships model?
Mr. Hsu. Congressman Meeks, if the True Lender Rule is
repealed, I cannot say at this time exactly what we would do
and how much litigation would actually come with that. But what
I can say is that we are fully committed to the mission of the
agency, which is to ensure access to financial services,
especially to those who are underbanked and unbanked, and that
customers are treated fairly, which includes not having a place
for predatory lending in rates charters.
I think we still we need to review that. We need to study
that carefully. I can't speak to that, but I can commit to the
mission.
Mr. Meeks. Thank you. My time has expired.
Thank you. I yield back.
Mr. Lynch. The gentleman yields back. The Chair now
recognizes the gentleman from Texas, Mr. Williams, for 5
minutes.
Mr. Williams of Texas. Thank you, Mr. Chairman.
Chairman McWilliams, it is good to see you again. I want to
thank you for all of the work that you and your team at the
FDIC have done regarding the brokered deposits rulemaking. As
you know, that is something that I have been working on for
many Congresses, and it is nice to see the regulatory regime
moving in the right direction.
And while you have done your job at the Agency level, I
think we should have a legislative solution. I want to give you
the opportunity to briefly discuss the brokered deposits
rulemaking and the benefits it will have within the banking
space, and that I would hope to secure a commitment on if you
are willing to work with my office in crafting a more permanent
legislation fix, which I think is very important.
Ms. McWilliams. Thank you, Congressman. I really appreciate
an opportunity to talk about the broker deposit rule. As you
well know, and I know I have spent a lot of time thinking about
this issue, the rule, the original rule was about 30 years old.
And there has not been a meaningful update to that rule, even
though the way consumers bank now and the way that banks
interact with their customers and the products they offer have
been vastly different than they were in the past when the rule
was initially promulgated.
What we did with our framework is we tried to create
something that can have a longer-lasting impact to accommodate
the flexibility in the technological changes that may not even
be anticipated by us at this time. Our rule provides more
certainty as to who is a deposit broker. It basically provides
a roadmap to how one can be a deposit broker, as well as
provides certainty to the marketplace as consumers look to
engage with different financial institutions.
I will say that however great our rule is, it is not
perfect. And namely, it is not perfect because we can never
adequately appreciate and anticipate technological changes that
are going to be developing in the world of banking and how
consumers and banks interact. And I believe, as I mentioned in
my written testimony, that congressional action would be
beneficial and preferred, frankly, to the current approach,
including putting an asset growth cap on troubled institutions
versus putting restrictions on broker deposits and labeling an
entire category of assets in a negative light.
I am more than willing to work with you on coming up with a
permanent and lasting congressional solution that would allow
us to move forward with technological advances and innovation
in the banking sector, while making sure that consumers are
protected, and banks understand how these things are done, and
that gives us an ability as a regulatory agency to
appropriately monitor the risk in the system.
Mr. Williams of Texas. Thank you for that, and we will work
together.
Ms. McWilliams. Thank you.
Mr. Williams of Texas. Acting Comptroller Hsu, a few weeks
ago, I asked your predecessor, Brian Brooks, while he was in
front of this committee, about the True Lender Rule and if it
would be a good deal to repeal it through the Congressional
Review Act. He told us he disagreed with not only the
justification behind repealing it from a policy standpoint,
since the rule specifically prohibits a rent-a-bank scheme, but
he also said that it would hamstring the OCC from crafting a
substantially similar rule in the future.
Our colleagues on the Senate side did not listen to your
predecessor and went ahead and passed the CRA anyway.
Comptroller Hsu, how do you plan on proceeding if the rule is
overturned and industry participants are left without the
clarity that they need to continue serving their customers?
Mr. Hsu. I am not exactly sure. I can't say exactly at this
time how we would proceed, and I can't--we don't know right now
what litigation risks that would attach to how we would
proceed. But I can commit that we would pursue our mission, and
the mission is to ensure that there is access to financial
services for everybody and that everybody is treated fairly.
And that is our compass that we would be utilizing, and we
will do that in accordance with the law.
Mr. Williams of Texas. Okay. Vice Chairman Quarles, the
Federal Reserve took some extraordinary actions when the
pandemic began, since there was so much uncertainty surrounding
the virus. Now that we are finally seeing the light at the end
of the tunnel in some places, and life seems to be getting back
to normal, I am concerned that some of the temporary measures
are going to become common practices at the Federal Reserve.
It is hard to show restraint and not pull out every tool at
your disposal when the economy begins to look a little shaky.
Vice Chairman, what checks are in place at the Federal Reserve
so that they only take these extraordinary measures during true
emergencies?
Mr. Quarles. The governance around the use of these actions
is designed to ensure that. There needs to be a majority on the
Board to institute--you have to get a majority of the Board for
a number of special actions during a crisis.
Mr. Williams of Texas. Okay. I yield back.
Mr. Lynch. The gentleman yields back. The Chair now
recognizes the gentleman from Texas, Mr. Green, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman, and I thank the
witnesses for appearing. I especially thank Chairwoman Waters
for deciding to hold this hearing. It is exceedingly important.
Mr. Quarles, as Vice Chair of the Fed, I am concerned about
your desire to work with MIT--the Boston Reserve working with
MIT to create a central bank digital currency pilot project. I
think that is a great idea. My concern, however, emanates from
knowing that if you are successful, we still have the other
cryptocurrencies that will be available to those who seem to
see this as a means of facilitating a criminal enterprise.
You might recall that with the Colonial Pipeline, there was
a request and a requirement that the ransom, as it were, be
paid in a certain cryptocurrency. We will still have this
problem to deal with, assuming you are successful in creating a
central bank digital currency.
I am curious, and would like to know, how do you see us
managing these other currencies? Do we go so far as to declare
them unconstitutional in some way, ban them in some way, make
them counterfeit? What do we do with these other currencies
that will still be available to us?
Mr. Quarles. It is a complicated question because there are
a range of types of instruments that count as cryptocurrencies.
Mr. Green. If I may, then to help us narrow it, let us just
talk about the type that is used by these criminal enterprises
to facilitate the transaction of money in an anonymous fashion.
Mr. Quarles. The use of those payments mechanisms for
illegal purposes is illegal and should be prosecuted. We are in
the process at the Fed of studying the various ways to try to
address this issue, whether a central bank digital currency,
although that is very early on, thinking about the proper
regulatory framework for these cryptocurrencies, which I do
believe, as with any payment mechanism, it is possible to craft
regulatory frameworks that--
Mr. Green. Give me some sense of how we can regulate them,
please?
Mr. Quarles. I think it would be premature to say that, but
to give a concrete regulatory framework, we have developed--
Mr. Green. Excuse me. Give me an example that is not
concrete. I am trying to get some sense of what we can do. This
is a serious issue for those of us who are charged with the
responsibility of making hard choices about these issues. So,
we need your expertise. Give us some sense, please?
Mr. Quarles. Financial institutions that engage with these
cryptocurrencies will need to comply with all applicable
requirements, including anti-money laundering requirements. We
supervise them for that currently.
MR. Green. How do you know your customers?
Mr. Quarles. We require the bank to know their customer,
and if the instrument itself doesn't allow that, they need to
have another mechanism. It is as if the person comes in with
cash, the cash itself doesn't identify the customer, but the
bank needs to know the customer, and we have rules around that.
There is more work that needs to be done, and we are eager
to engage with those who are interested in the question. But I
do think the question is thinking through a right regulatory
framework, and that central regulatory framework can be
creative.
Mr. Green. And assuming that we succeed with a central bank
digital currency, is that currency going to be one that will be
readily available to those who not only want it for legitimate
means, but also for some untoward means? Meaning, will we be
able to, in your opinion, circumvent the use of it for paying
ransom, for want of better terminology?
Mr. Quarles. Were we to have a central bank digital
currency, we would clearly design it to prevent its use for
those purposes. However, whether we would have a central bank
digital currency is too premature to say at this point.
Mr. Green. My time is up, and I thank you for indulging me.
I yield back.
Mr. Lynch. The gentleman yields back. The Chair now
recognizes the gentleman from Arkansas, Mr. Hill, for 5
minutes.
Mr. Hill. Thank you, Mr. Chairman, and thanks for having
our Agency heads come before us today for this discussion. It
is very helpful.
Let me start with my friend, the Vice Chairman of the Fed,
Mr. Quarles. Our community banks in Arkansas have raised this
issue among themselves quite a bit, which is with the 28
percent increase in the money supply over the last year and so
much liquidity, both from monetary policy action and fiscal
action pouring into the banks, a lot of our community banks are
concerned about the impact of this liquidity on their capital
ratios.
How are you looking at that, and what kind of regulatory
problems does that create?
Mr. Quarles. We are monitoring the evolution of that
phenomenon across the banking system. The principal issue is
that the capital ratio constraint that arises when you have
this large increase in deposits is from the leverage ratio,
which is a non-risk sensitive ratio.
And if the binding capital constraint on an institution is
not risk-sensitive, then that will encourage risk taking by the
institution at the margins. We want the leverage ratios to be
backstops, but not the capital ratio that institutions look at
in the first instance.
That is as the amount of reserves in the banking system, as
the amount of deposits in the banking system grow, and they
will continue to grow over the course of this year and have
grown substantially over 2020, that is something that we have
to be taking a look at. We are monitoring it closely.
Right now, it doesn't seem to call for a change, but that
is something we will be looking at very closely in the coming
months.
Mr. Hill. Thank you.
Chairwoman McWilliams, you have testified before Congress
before and expressed your concerns about credit unions buying
community banks. And obviously, that is something that
community banks in Arkansas have raised with me. Recently, a
$1.6 billion bank was purchased by an out-of-State, $10 billion
credit union.
Do you still have those concerns, and how does the FDIC
look at this from an approval point of view, and do you have
the tools to adequately assess it?
Ms. McWilliams. Thank you, Congressman, for that question.
I have heard about the same concerns from banks, which is
why I commented to a question that was presented to me in a
prior hearing. I would say that we always have a lot of
questions when there is an acquisition of a community bank, in
particular, and I would say especially if that community bank
is located in a rural area or an area where the banking deserts
are more likely to exist than not.
During my first year as Chairman of the FDIC, in what I
like to call the peace time, when the economy was doing
superbly well, we had 220 banks merged into other banks and/or
credit unions, which is a large and significant number of the
community banks that disappeared from America's landscape. And
if that trend continues during my 5 years as Chairman, we would
have over 1,000 fewer banks in the United States of America.
Now as you know, consolidation has been a longstanding
issue. It has been going on for 30-plus years now. I don't know
what the appropriate number of banks is in the United States,
but I do have concerns that some communities--farming
communities, inner-city communities, rural communities, et
cetera--are not necessarily appropriately served by the number
of entities in their area, and any consolidation, any merger
presents an issue for us from that perspective.
I would say my concerns have not changed. If anything, we
have just even been more alerted to consolidation, given the
pandemic and its disproportionate impact on those communities.
Mr. Hill. Thank you. Thank you for that.
Let me turn quickly to one final topic. Let me go back to
you, Mr. Quarles. I talked to the OCC at a Capital Markets
Subcommittee hearing recently, and this was about the
transition away from LIBOR. And some community banks are
concerned about going to SOFR versus another rate.
My question is, in looking at Mr. Sherman's draft bill, he
seems to imply that SOFR is the only legal certainty default in
a contract to LIBOR. Does the Fed support a variety of
alternatives in that approach to replace LIBOR?
Mr. Quarles. I think that we don't support every
alternative because the rate has to be essentially not readily
susceptible to manipulation. But we don't support a single
alternative.
Mr. Hill. Thank you. I yield back, Mr. Chairman.
Mr. Lynch. The gentleman yields back. The Chair now
recognizes the gentleman from Missouri, Mr. Cleaver, for 5
minutes.
Mr. Cleaver. Thank you, Mr. Chairman, and I appreciate this
hearing, and it is very timely. Let me try to get into it and
get as much as I can in here.
Mr. Harper, I am very pleased and excited about the update
that OCC did or issued a new rule so that now banks can get
credit for digital inclusion, and that is an update which meets
one of our needs. Some of us, like me--I represent Kansas City,
Missouri, which is the largest City in the State of Missouri.
But then, I also represent Mayview, which has 225 people, and
we obviously have some digital needs there. So, I am pleased
with that.
What is the flexibility that banks would have to do a CRA-
like digital inclusion? I don't know how you came up with that
decision or how the OCC came up with that decision, but I
thought it was right on time. So, what is the flexibility?
Mr. Hsu. Congressman, I am not sure if that question was
for NCUA Chair Harper, or for me, at the OCC.
Mr. Cleaver. Anyone can answer.
Mr. Hsu. I guess I can say that financial inclusion is
extremely important. This is a top priority. We have a number
of initiatives focused on it. I would be happy to kind of talk
through the details. I know time is limited.
But we have both through rules, a rule reconsideration and
programs. We have lots of things that are in the hopper that we
would be happy to talk about with your staff.
Mr. Cleaver. Okay. The reason I am bringing this up is
because I think CRA--I have said this, and I think a lot of my
colleagues agree we need a complete update on CRA. And as you
may know, our chairperson and probably, hopefully, the
overwhelming majority of the members of this committee are in
strong support of trying to do something significant as it
relates to affordable housing.
And maybe a different way that CRA could be handled is
making investments in some of the projects that might be
brought forward by HUD or community organizations in concert
with HUD. And so, maybe something new, not just making a loan
in a difficult neighborhood.
But do you think that there can be some creative ways in
which CRA can be involved economically in the production of
affordable homes?
Any of you?
Mr. Hsu. I will take a stab at it. Affordable housing is a
huge problem. We have been focused on it from a couple of
angles. One, through Project REACh, where you have to help the
borrower, so there is a program dealing with down payment
assistance. That can be quite helpful.
The other is to increase the supply of available housing so
that it is more affordable because there are supply-demand
dynamics in the pandemic which have put things out of whack.
These are very complicated underneath, but we would be happy to
kind of--and we are open to all ideas on this.
Mr. Cleaver. Okay. My time is probably about up. I don't
think I want to do anything and I don't think anybody else
wants to do anything that would not be consistent with safe and
sound banking practices. But I think that if CRA is going to
continue to be a benefit, it has to change with the issues that
are at this time significant. And right now, affordable housing
is a problem in just about every community, including rural
America, which I represent.
Anyway, thank you very kindly. I yield back, Mr. Chairman.
Mr. Lynch. The gentleman yields back. The Chair now
recognizes the gentleman from Minnesota, Mr. Emmer, for 5
minutes.
Mr. Emmer. Thank you. And thank you to all of the witnesses
for your attendance.
These oversight hearings are a great opportunity for
Members of Congress to touch base with regulators and determine
how we can best serve the financial interests of the American
people. I look forward to advancing this interest as the
ranking member of the Subcommittee on Oversight and
Investigation.
Mr. Hsu, I also greatly appreciate the mention you made in
your testimony of the work previously done by the OCC to
clarify crypto custody services by banks. This type of
guidance, which allows businesses to know the rules of the
road, is key to enabling the United States OCC Acting
Comptroller to continue to thrive as a technology leader.
Now to all of you--Mr. Hsu and all of the other witnesses--
countries around the world are looking to blockchain technology
to transform industry. Consider China, for example, with its
digital yuan. While there is much to work through as our
government considers the benefits of this technology and
potentially issues a digital dollar on blockchain, I hope that
each of your agencies are developing expertise in digital
currency policy.
To that end, please describe briefly--if each of you will
do this, please describe briefly for me what actions you are
taking to increase your Agency's fluency in this emerging
policy area. And will you please provide our office with the
names and titles of staff in your Agency who are leading these
efforts?
I will start with Vice Chair Quarles.
Mr. Quarles. I think that we have probably, as was recently
mentioned--we have the central bank digital currency (CBDC)
pilot with MIT, which is being led through our Boston Federal
Reserve Bank in conjunction with MIT. There is general policy
work around the system, in addition to that pilot project and
thinking about central bank digital currency and what the
approach to that ought to be, and whether it is something that
is appropriate for the United States.
I think those would be the major points right now.
Mr. Emmer. Right. And if you could provide us with some
contact folks in your office?
Mr. Quarles. Oh, absolutely. We would be delighted to be
engaged with your office on that.
Mr. Emmer. Excellent. Chairwoman McWilliams?
Ms. McWilliams. Absolutely. Thank you for that question.
As you may know, the FDIC does not insure deposits
denominated in a cryptocurrency, but we recognize that the use
of virtual currencies and digital assets has been growing
rapidly in recent years among the banks, and that some banks,
including some of our banks, are starting to explore a number
of different potential uses for their digital assets.
And because this is a null area, because we need to know
what is going on in this space, we decided to issue a request
for information to solicit feedback regarding what banks are
doing, and how they are doing it. What do we as a supervisor
need to know, as a deposit insurer need to know, as a
resolution authority need to know?
And I have personally tasked a number of individuals at the
FDIC with handling this issue for us, including my Chief
Operating Officer Brandon Milhorn, Chief Innovation Officer
Sultan Meghji, Chief Counsel Nick Podsiadly, and one of our
attorneys, Chris Ledoux. And that is just the tip of the
iceberg. We can provide other names, and I am sure they will be
happy to talk to your people on this important issue.
Mr. Emmer. Excellent. Thank you very much.
Acting Comptroller Hsu?
Mr. Hsu. Sure. This is a really, really important issue. I
think that the rise of crypto has garnered a lot of attention.
Prior to this meeting, Vice Chair Quarles, Chair McWilliams,
and I have talked about potentially putting together an
interagency policy sprint team just on crypto because of
exactly the concerns you describe.
I would be happy to share the names of the OCC leaders on
that, and to work with your staff on that.
Mr. Emmer. Great. Chair Harper?
Mr. Harper. Thank you. And just as the financial services
world innovates, we need to adjust to that. We actually, as
part of this year's budget, created a new unit focused on
financial technology and innovation. One of the charges of that
unit is cryptocurrency. We are currently advertising for a
director, and we are going to be coming out similar to the FDIC
with a request for information on this.
I know that this has been an important issue for Vice
Chairman Kyle Hauptman, and the Board is going to be definitely
working further on this matter.
Mr. Emmer. Great. Can we get some contact information?
Mr. Harper. Absolutely.
Mr. Emmer. Thank you, Mr. Chairman. And thanks to the
witnesses.
Mr. Lynch. The gentleman yields back. The Chair now
recognizes the gentleman from Colorado, Mr. Perlmutter, for 5
minutes.
Mr. Perlmutter. Thank you, Mr. Lynch. You are doing a great
job as Chair.
Mr. Lynch. You are very kind.
Mr. Perlmutter. First, I would like to thank our panelists
for your service to our country in a very difficult time. And I
really want to salute you, your Agencies and your staff.
That doesn't mean that at some point, I'm not going to come
down like a ton of bricks on all of you, but I really do want
to thank you for your service. This has been a very difficult
time for everybody, and your staff has done a great job.
Second, just to let you know, Mr. Davidson is on the Zoom
with me, and he was one of my prime sponsors on the SAFE
Banking Act, the marijuana and banking. We got it out of the
House with a huge bipartisan number. It will be in the Senate
Banking, and hopefully, Sherrod Brown in the Senate will take
it up in some fashion or another, and ultimately, we can deal
with the public safety hazards that are caused by so much cash
being accumulated by these businesses and the robberies that
occur. I just want to alert you all to be ready for that.
Mr. Hsu, in your testimony, you highlighted a concern about
overconfidence leading to complacency as a potential that risk
regulators need to watch for in the banking sector. One of the
examples you used was Archegos, which resulted in $10 billion
in cumulative losses.
Can you explain how the OCC and other regulators can
promote stronger risk management by these financial
institutions?
Mr. Hsu. Sure. It is primarily, first and foremost, through
the examination process. I think what Archegos shows was a
lapse of risk management at a set of institutions, and that
risk management is generally well-understood and applied in
most cases. I think the risk is that in some instances, there
is a bit of a looking askance or weakening of that risk
management where there are profits to be made.
That is not everywhere, and that is not every institution.
Part of my call for vigilance is both within banks themselves
and for supervisors to be vigilant in examining and calling
that out and making sure that those weaknesses are identified
early before they turn into big losses.
Mr. Perlmutter. Thank you. And Mr. Harper, it is a long way
from the Financial Services Committee to chairing the NCUA. So,
congratulations to you, sir, and happy birthday, by the way.
I would like to ask you about the NCUA's supervision
ability as it relates to cybersecurity. You have answered it a
little bit in some previous questions, but it is my
understanding that NCUA's authority to supervise credit unions'
third-party vendors with respect to cybersecurity may have
expired in 2001. Is that right?
Mr. Harper. Yes. We had temporary authority granted as part
of the Y2K issue, where we could go in and examine and take
enforcement actions against vendors. That authority expired
after we got through the Year 2000 event, and we have not had
that authority since.
I would say this, that in juxtaposition to our sister
Agencies, we are the only one without vendor authority, and the
FSOC, and the GAO, as well as our own Inspector General here at
the NCUA, have called for us to get the vendor authority so
that we can oversee matters like cybersecurity, but also safety
and soundness matters, AML, Bank Secrecy Act matters, as well
as consumer financial protection.
Mr. Perlmutter. Thank you, and I would just encourage all
of you, there is what is called the NIST protocol from the
National Institute of Standards and Technology that we hope to
get many businesses, the third-party vendors, to start using to
try to minimize the potential for hacking and cyber ransomware
and all of that stuff.
Again, thank you for your service, and Mr. Chairman, I
yield back to you.
Mr. Lynch. I thank the gentleman. The Chair recognizes the
gentleman from Ohio, Mr. Davidson, for 5 minutes.
Mr. Davidson. I thank the chairman, I thank our witnesses,
and I appreciate this hearing today.
Vice Chairman Quarles, in your testimony, you mentioned
that the Fed is transitioning back to its normal activities and
to its normal rulebook, of course, following substantial
intervention to provide stability in this past year. Of course,
the Fed's primary objectives are to promote low inflation and
maximum employment. I would like to focus on the Fed's
objective to achieve maximum employment.
Vice Chairman Quarles, the latest economic data from April
shows that the labor force participation rate is just under 62
percent. This has been an ongoing challenge, with persistent
declines in participation this century, and we have never
really fully recovered to the level of participation prior to
the 2008 financial crisis.
Furthermore, this is 5 percentage points lower, and has
been hard to overcome even in 2017 to 2019. Besides distorting
the unemployment data, what are the implications about this
lower participation rate for our economy, and how will it
influence the Fed moving forward?
Mr. Quarles. The participation rate is obviously one of the
employment measures that we look at closely. For an extended
period of time, that participation rate has been under downward
pressure just as a result of demographics. As the Baby Boomers
age, and age out of the workforce, the overall labor force
participation rate is inevitably going to trend downwards.
At the Fed, we have adopted monetary policy both before the
COVID event and during the COVID event with an effort to try to
support employment as much as would be possible, and we have
succeeded in that I think the policies we have adopted
moderated, indeed, for a period halted, even minorly reversed
that downward trend in the labor force participation rate,
notwithstanding the heavy downward pressure from demography.
Mr. Davidson. I thank you for your answer, and I really
would look forward to a more extended discussion. As you
appreciate, time goes quickly in these hearings. But really,
without more participation, we are having to have massive gains
in productivity. Otherwise, we can't see GDP growth.
I appreciate the answer, and I just think it is one of the
underappreciated metrics that if we rightly look at the labor
participation as one of the keys to the mandate, we can see
maybe a different policy set. And I think it is also important
for my colleagues to consider the implication of many of our
fiscal policies on labor force participation.
Some States are wisely rejecting some of the toxic Federal
policies that are handicapping our recovery as we seek to
rebuild our economy. Some of the bank regulatory policies put a
handcuff on being able to make loans to otherwise creditworthy
individuals.
Let me transition towards that point. Mr. Hsu, in light of
your comments about Archegos Capital today, and other comments
today, whom do you believe that regulators should block access
to banking or markets? Who should be blocked who would
otherwise have lawful access?
Mr. Hsu. I don't believe we should be in the position of
picking who should be and who shouldn't be blocked. Our focus
is on mismanagement and compliance. So, under sound risk
management and compliance, we expect firms--because their
business models differ. Different banks, different players, we
expect them to do due diligence and know who they are dealing
with and how they deal with them. And that should be the
mechanism through which those decisions are made.
Mr. Davidson. Okay. As Mr. Perlmutter highlighted, we
needed to pass the SAFE Banking Act, which we think we did here
in the House. We are counting on the Senate getting it across
the finish line so that banks can bank people who are engaged
in lawful activities in their own States. But that is just the
tip of the iceberg.
We have seen bank regulatory policies, under Operation
Choke Point, block access to all sorts of markets. And sadly,
America has this unfortunate history of people saying,
including many regulators, well, you are not going to bank
those people, are you? Now, this label of who, ``those
people,'' are shifts over time, but I strongly believe that
regulators should be, first, consolidated, so that we have one
prudential bank regulator, not this whole panel, with due
respect to the representation here.
But I think, second, that regulators need to limit their
activity to enforcing lawful practices and not creating the
force of law with backdoor pressure tactics that might not be a
ban or a block, but they have the same effect. We talked a lot
about systemic practices. This is certainly systemic.
Ms. McWilliams, as you know, the OCC has conditionally
approved a few crypto trust banks. The next logical step would
be for these types of institutions to eventually operate as
depository institutions. With that in mind, Ms. McWilliams,
could you speak to how--
Mr. Lynch. The gentleman's time has expired.
Mr. Davidson. --prudential regulators could be on the same
page with regulating this space? If you could, please respond
in writing, since my time has expired.
Thanks.
Ms. McWilliams. I will.
Mr. Lynch. The gentleman yields back. The Chair now
recognizes the gentleman from Illinois, Mr. Foster, for 5
minutes.
Mr. Foster. Thank you, Mr. Chairman.
I would like to follow up a little bit more on central bank
digital currencies and related things as it refers to the need
for a secure digital identity. No matter what your vision is
for what a central bank digital currency should look like--
whether they are FedAccounts, whether they are a pure crypto
asset or whatever--you will still need to know who it is that
is transacting.
You need to know this not only in the United States, but if
you intend central bank digital currencies to be transacted
around the world, you need to have some agreement for an
internationally-operative central bank digital currency.
Mr. Quarles, what is the state of international
negotiations on how that might work?
Mr. Quarles. Extremely embryonic. These questions about a
digital currency are important, and we are engaging in them,
and we are engaging in them with our international colleagues
as well through the various central bank fora that exist. But
in any jurisdiction, they are quite embryonic, and they raise a
number of technical questions such as the one that you have
raised here that need to be thought through.
I think we need to do a very careful study of that, not
just in this jurisdiction, but globally as well before we would
even begin to go down that path.
Mr. Foster. But I am sort of struck by the fact that NIST
and the international standards organizations actually have
fairly advanced technical specifications for how a digital ID
might work. These are often called, ``Mobile IDs,'' and that,
in fact, some States are rolling those out, as simply a
mechanism for putting your REAL ID-compliant driver's license
onto your cell phone, using that as a very powerful second-
factor authentication.
Internationally, those are working very well, so I am a
little bit surprised that you are not trying to leverage that.
Mr. Quarles. I would say the discussion, again, among the
central banks as to whether that would be a mechanism for a
central bank digital currency certainly may be sensible, but
very premature. We have not been engaging in going down that
road, or not going down that road. We are still considering all
of these questions.
Mr. Foster. Yes. I urge you to proceed with the digital
identity problem in parallel with the technical structure of
the central bank digital currency. They are really almost
separable problems. You have to solve both, and solving them
one at a time is not the most efficient way. We have to respond
to China and their advance into this area.
Does anyone have any other comments on digital identity?
One near-term thing, actually, that we will have to be facing
is when we--I think we have a bipartisan agreement to have
essentially access to an Internet connection as a guarantee,
and the government will be putting many tens of billions of
dollars to make sure that is a reality, with one of the main
benefits being that you are going to have 30 million more
people connected to the Internet.
And one of the big benefits from that is simply to have
access, have them now potentially be instead of underbanked or
unbanked, they will actually be banked. But of course, these 30
million newbies on the Internet will be ripe targets for fraud.
And so, again, it enforces the real need for a coherent
approach to digital identification.
Do any of our other witnesses have any comments on how that
problem looks, these 30 million newly-banked individuals with
rather thin files? Is there a plan for how that is going to
work smoothly so we don't see just a torrent of identity fraud?
Mr. Quarles. I think you can tell from the enthusiastic
response of the regulators that you have identified an issue on
which we should focus.
Mr. Foster. Okay. I'm happy to be of service here, and I
will be very interested in following up with your staff. I am
surprised and pleased at how far industry has gotten ahead of
regulators in terms of the technical standards for high-quality
digital ID. And I urge you to try to piggyback on top of that.
My time is now running out, and I would be happy to follow
up.
Mr. Lynch. The gentleman yields back. The Chair now
recognizes the gentleman from New York, Mr. Zeldin, for 5
minutes.
Mr. Zeldin. Thank you to the witnesses for being here
today, and thank you, Chairwoman Waters and Ranking Member
McHenry, for holding this hearing.
I am going to start off by reading the mission statements
taken from each prudential regulator's website. The FDIC's
mission is to, ``maintain stability and public confidence in
the nation's financial system.''
The OCC's mission is to, ``ensure that national banks and
Federal savings associations operate in a safe and sound
manner, provide fair access to financial services, treat
customers fairly, and comply with applicable laws and
regulations.''
The NCUA's mission is to, ``provide through regulation and
supervision a safe and sound credit union system, which
promotes confidence in a national system of cooperative
credit.''
The Federal Reserve System's mission is to, ``foster the
stability, integrity, and efficiency of the nation's monetary,
financial, and payment systems so as to promote optimal
macroeconomic performance.''
Chairman McWilliams, Vice Chairman Quarles, Acting
Comptroller Hsu, and Chairman Harper, would any of you like to
share briefly your views on fair access in financial services
for legal businesses?
Ms. McWilliams. I am happy to start, so long as the others
follow. Our regulatory response, frankly, to banks serving all
legal businesses, as mentioned earlier, has had a little bit of
a hiccup in the past, and we have learned from that hiccup,
frankly. Our job as regulators is to implement the laws passed
by Congress and provide a supervisory framework that considers
safety and soundness and consumer protection laws and
regulations.
We encourage institutions to serve all legal businesses and
individuals in their communities. We have even issued a
statement on providing banking services that encourages our
institutions to take a risk-based approach in assessing
individual customer relationships rather than declining to
provide banking services to entire categories of customers
without regard to the risks present.
I would say that we have done a lot of work, including
extensive examiner training in this area, to make sure that
where our examiners look at banks and how banks provide
services to different entities is appropriate with the
safeguards Congress gave us. And we certainly don't want to be
in the business of managing whom the banks choose to bank, so
long as they follow the law.
Mr. Zeldin. And Chairwoman McWilliams, on that point, there
is a local business in Suffolk County, New York, my
congressional district, the First Congressional District of New
York is in Suffolk. They are in the firearms industry, and they
have provided to my office letters from multiple lenders all at
the same time right now terminating accounts, refusing to
extend credit because of a review of business practices.
What is the answer to a lawful business out there in
Suffolk County, New York, having multiple lenders terminating
their accounts because they are in the firearms business?
Ms. McWilliams. I would think that those decisions are left
at the level of individual banks and how they decide to manage
their risk exposures, reputational risk, and everything else.
That is not something that we tell them to do or not to do.
I am more than happy to engage with your office to
understand exactly--you don't even have to give me the name of
the client, but maybe the names of the banks and the notices
that have been provided with the name of the bank redacted to
make sure that we understand whether this came from the FDIC-
supervised banks or one of our sister agencies. I am happy to
follow up with you separately.
Mr. Zeldin. I appreciate that. The four mission statements
I read all mention either integrity, confidence, or fair access
in financial markets. There can't be true integrity or
confidence in the financial system if individuals and
businesses are being discriminated against, whether the
discrimination is based on an immutable characteristic or a
decision to conduct commerce in a completely legal industry.
The financial institutions that are indirectly regulating
the livelihoods of legal business owners need to consider the
irrevocable damage they are causing to the integrity and
confidence in our financial markets, not to mention to those
operating businesses themselves.
The public power granted to banks and credit unions in the
form of charters and deposit insurance makes perfect sense when
it enables the financial services needed for lawful commerce
and a functioning economy. But this power is being misused when
banks try to regulate downstream markets.
There are legitimate reasons for financial institutions to
reassess relationships with customers. These include credit
risks or risks related to money laundering. But a political
difference or, worse yet, fear of progressive backlash from
outside groups is not a good reason. The Second Amendment, as
just one example, is not a suggestion. De-banking businesses
that legally sell firearms in order to regulate the industry
indirectly is wrong.
This is an important issue that requires all of your
attention. I yield back.
Mr. Lynch. The gentleman yields back. The Chair now
recognizes the gentleman from California, Mr. Vargas, for 5
minutes.
Mr. Vargas. Mr. Chairman, thank you very much, and you are
doing a great job, Mr. Lynch. I appreciate it. I can hear your
voice quite clearly, which is great.
I want to thank all of the witnesses again. I appreciate
very much you being here.
I joined this committee about 6\1/2\ years ago, and when I
did, about the only thing that my Republican colleagues wanted
to talk about was Dodd-Frank, how Dodd-Frank was awful, Dodd-
Frank was terrible. For a while there, I thought that they
thought it was the spawn of Satan or something like that
because they thought it was so terrible, horrible.
And I wasn't able to listen to all of my colleagues today
because there is another hearing going on in the House Foreign
Affairs Committee, but I haven't heard Dodd-Frank come up, at
least I don't think--I certainly haven't. Maybe it did before.
But Mr. Vice Chairman, Mr. Quarles, you, however, I think
bring it up without saying it. On page 1 of your testimony,
``Entering the COVID event, the banking system was fortified by
over 10 years of work to improve safety and soundness from both
regulators and banks themselves.'' And you go on to describe
how we are able to kind of go through this COVID because of
some of the rules.
Now what were you referring to when you were talking about
this? Was it Dodd-Frank?
Mr. Quarles. Principally, the higher levels of capital and
liquidity that were put into the system post-2008. Some of that
was work from the international regulatory community that was
coordinated in Basel. Some of that was work at the Federal
Reserve. Some of it was mandated in the Dodd-Frank Act.
It was a set of measures. But really, for me, the key
issues were the extra capital and liquidity that were in the
banking system.
Mr. Vargas. And I appreciate that very much. Again, it is
interesting that we don't hear much about those requirements.
Now, the reason I bring that up is because I think the next big
one is not Dodd-Frank; I think it is going to be climate
change.
When we first started talking about climate change, my
friends on the other side of the aisle would first deny that it
was going on. Then they started saying, well, it is the cows
farting, or I don't know what it was, some ridiculous thing.
But now they are starting to accept that it is there, but I
don't think they really understand the risk. I don't think we
understand the risk.
Chairwoman McWilliams, however, you talk about that. On
page 4 of your testimony, you say, ``The FDIC expects financial
institutions to consider the appropriately addressed potential
climate risks that could arise in our operating environment.
This includes physical risks associated with extreme weather
events such as hurricanes, floods, storms, tornadoes, droughts,
and fires.'' And you go on.
So, you do understand some of these risks then, and you do
think they are real?
Ms. McWilliams. Yes. They are basic safety and soundness
practices. And while I would like to think that we are a great
regulator, I am pretty confident that both the OCC and the Fed
require the same of their supervised institutions.
Mr. Vargas. And Acting Comptroller Hsu, you wrote,
``Climate change possesses new risks and challenges for banks,
and we need to make sure they understand those risks and are
capable of managing them.'' I think that is a quote from you?
Mr. Hsu. Correct.
Mr. Vargas. Could you expand on that?
Mr. Hsu. Yes, of course. I think it is just as Chairman
McWilliams noted, that for safety and soundness purposes, we
expect banks to stay on top of these emerging risks. And I
think, as you had noted earlier, there are many dimensions to
this. For both physical and transition risks, it is
complicated. And it is different for different institutions.
I think we in the front need to spend some time investing
and understanding what that is to identify, measure, and manage
those risks.
Mr. Vargas. I appreciate that. Again, I appreciate that you
are taking this very seriously because I also think, obviously,
there are risks and there are opportunities. In California, we
are trying to take a look at both because there are
opportunities in this transition to a low-carbon economy.
But anyway, I appreciate the work that you have done. I
appreciate very much that you are looking at this. It is a big
issue. I do have an Environmental, Social & Governance (ESG)
bill and others have bills working on the environment issues.
And again, I appreciate that you are doing this because I
think, a lot like Dodd-Frank, we are going to see that the
risks here are real, and we are going to be able, hopefully, to
find solutions for them so we don't run into huge problems down
the road.
Again, I thank you. I have 8 seconds left, so I will yield
back--
[Pause.]
Mr. Vargas. --to somebody. I am yielding back to somebody.
Mr. Lynch. Thank you. The gentleman yields back. The Chair
now recognizes the gentleman from North Carolina, Mr. Budd, for
5 minutes.
Mr. Budd. Thank you, Mr. Chairman. And again, I thank the
panel for being here.
Acting Comptroller Hsu, the OCC has received a number of
applications for crypto trust banks, and after conditionally
approving three--I believe it was three, you can correct me on
that if it is a different number; I think they were Anchorage,
Protego, if I have pronounced that correctly, and Paxos. What
is the timetable for approving the remaining charters that are
out there?
Mr. Hsu. I don't know the timetable right now. It is under
review. It is under discussion. I just got here. This is my
10th day, I believe. So, we have this in the pipeline to look
at. We are not going to drag it out, that I can say. But as
that timeline becomes clearer, we can get in contact with your
office to let you know.
Mr. Budd. I would love to stay in touch with you on that. I
understand that mastery comes between Day 11 and 12, so good
luck with the rest of this. Thanks for what you do.
Another question, and maybe, hopefully, this isn't a Day
11-question, but just your thoughts on blockchain? It offers
the possibility of significantly reducing the cost of mortgage
origination and consumer lending.
In mortgage origination, we have a company called Figure,
and they have applied for a bank charter. And since Figure
proposes to take deposits, there is no issue with the
litigation over non-depository bank charters. Is that
application--if you know about this yet, or if not, we can
continue to discuss a few other things. But do you know if that
application is on course so that we can set a precedent for
other low-cost, blockchain-based financial products?
Mr. Hsu. That application is definitely part of the set of
applications that are under review. We have had some
preliminary discussions about it, but I need to learn more
before kind of signaling where that is going. But that is very
much under our review.
Mr. Budd. Very good. I think there is a lot of promise from
lowering the cost to consumers, and I look forward to this and
to having more discussions on this.
Switching to Vice Chair Quarles, recent media accounts
suggest that the Federal Reserve may not grant payment system
access to OCC-chartered banks that don't pay deposits, or in at
least one case, to State-chartered banks that originated in the
crypto industry. Doesn't the Fed grant access to the payment
system to non-depository trust banks today, and if so, what is
the basis for denying new banks of the same charter type now?
Mr. Quarles. We do grant access to non-depository trust
companies. We recently issued a set of principles to govern
account access really for all institutions as a recognition
that there is an increasing variety of institutions that are
potentially interested in account access. We put those out for
comment and are getting comments on them now.
I think what is important--and we haven't made a decision
with respect to account access until we develop this framework.
We put these principles out. We will get input on them. We will
be very transparent about what the rules are. I think that is
what is important as these new institutions come for account
access.
Mr. Budd. Very good. Thank you.
Second question, there is a lot of regulatory ambiguity
revolving around crypto, and lots of different definitions used
by all of the subagencies and respective agencies just adds to
that ambiguity. Will you at the Federal Reserve commit to
working on a unified definition for what is considered a
cryptocurrency?
Mr. Quarles. As Comptroller Hsu just mentioned, we are
engaged with the other agencies in a joint effort to think
through some of these crypto definitions and the application of
our regulations in crypto areas. I am sure that will be part of
it.
Mr. Budd. There are a lot of joint efforts in this. Do you
think you are going to end up coming up with a definition for
what is a cryptocurrency? Because that is part of the problem
right now, that people don't know exactly what it is, they have
different definitions.
Mr. Quarles. Yes, I think so. We are sort of focused very
intently on these crypto issues with the aim of having answers
fairly quickly, joint views fairly quickly. I am sure that will
be achievable.
Mr. Budd. I thank each of you for your time. I yield back.
Mr. Lynch. The gentleman yields back. The Chair now
recognizes the gentleman from Florida, Mr. Lawson, for 5
minutes.
Mr. Lawson. Thank you, Mr. Chairman. And I would like to
thank Chairwoman Waters and Ranking Member McHenry for hosting
this important hearing today.
Mr. Hsu, in your written testimony, you noted that the OCC
had been monitoring increasing concerns about racial bias in
appraisals, particularly in residential lending. I understand
the OCC is working with the stakeholders to raise awareness and
ensure that banks have the valuation and data to fairly and
objectively underwrite these loans. This is very concerning to
me.
Can you tell me more about the OCC's work to remedy
inherent bias, and what we can do as Members of Congress to
make sure that we provide assistance in this endeavor?
Mr. Hsu. Thank you. This is a really important issue. I
think it has gotten some added press recently, which I think
really adds an important--it puts a higher profile on it.
I think this is going to take a lot of work because it is
not something that we, the OCC, can directly affect by
ourselves. There have been some interagency discussions and
some stakeholder discussions, but I don't have all of the
details on this. I would be happy to get the folks on my staff
who are very knowledgeable on this, who have been monitoring
this very closely, to work with folks on your staff to explore
options and how to make some progress on it.
Mr. Lawson. Okay, thank you very much. Because in some
instances where an African-American female is getting a house
appraised, and you probably know about it--
Mr. Hsu. Yes.
Mr. Lawson. --and she had one of her friends who was a
White female go over, and the appraisal was altogether
different. And it shouldn't have been that way.
Ms. McWilliams, the COVID-19 virus is having a profound
impact on every aspect of American life and the U.S. economy. I
saw much of the impact on States, counties, and municipalities.
This landscape is to serve that is quoted by the community
financial institutions that are part of the Federal Home Loan
Bank System: savings and loan; credit unions; Community
Development Financial Institutions; and some insurance
companies.
In looking at the funding of infrastructure, would broader
participation by this nation's Financial Institutions improve
the leverage of Federal funding dedicated to infrastructure if,
for instance, aligned FDIC-insured institution to put a Federal
infrastructure bond to the FHL banks as collateral.
Ms. McWilliams. Congressman, I'm sorry, there was a little
bit of a sound issue, but as far as I understood your question,
you are asking about the bonds and how much the FDIC can assist
in pledging it as collateral.
It is an issue that, frankly, I don't know how much
authority we have in this space, and I am happy to circle back
with your office once I can explore that authority and
understand the full crux of the question.
Mr. Lawson. Okay. But anyway, it might be a little more
complicated, more than I can acknowledge. It would be great if
you can get back to me with some information.
But I would like to go back to Mr. Hsu. I am happy to see
in your testimony that while the OCC's 2020 final rule on the
Community Reinvestment Act (CRA) took an important step in
attempting to improve upon the framework put in place in 1995,
you believe there is significant room for improvement.
What necessary steps can the OCC take to strengthen the
regulation implemented in the CRA, including options for
rescinding and substantially revising the current rules and
working with the Federal Reserve and the FDIC on a joint
proposal?
Mr. Hsu. Thanks for the question.
The first thing we need to do is to carefully study our
options. I have instructed staff to consider all options, and
one of those options could include rescinding the rule and
putting it back out for comment. We have some comments as to
how to strengthen it.
And in that process, we could join forces with the Federal
Reserve and the FDIC so it is a joint rulemaking. But before we
get to that stage, I need to see the analysis about how that
can be put out and what the pros and cons of doing that would
be.
I want to make sure that all of this is taken into account,
and we are just doing it in a measured, deliberative way,
because I think everyone agrees that we want to strengthen the
CRA. So now, it is a matter of, how do we do that, and how do
we do that in a way that is consistent with the Administrative
Procedure Act (APA), consistent with the process, and that we
hear voices from everybody. It is very important.
Mr. Lawson. Okay, thank you very much.
And Mr. Chairman, I yield back.
Mr. Lynch. The gentleman yields back, and the Chair now
recognizes the gentleman from Georgia, Mr. Loudermilk, for 5
minutes.
Mr. Loudermilk. Thank you, Mr. Chairman. I appreciate the
opportunity. I thank the panel for being here as well.
And it is once again disappointing to see the Majority
continuing its anti-fintech agenda by proposing legislation
that eliminates the OCC's True Lender Rule. A few weeks ago,
some of my colleagues were outraged that the Acting Comptroller
dared to do his job and defend the Agency's rule, as any Agency
leader would.
But what is most ironic about this effort to eliminate the
True Lender Rule is that it would hurt the very people whom the
Majority supposedly want to help. The biggest beneficiaries of
bank-fintech partnerships are consumers with subprime credit or
a lack of credit history who don't qualify for a traditional
bank loan.
It appears the Majority now supports things that were
questionable in the past, like payday loans, because without
the fintech, that is what those consumers would be left with if
they succeed in their attempts to eliminate marketplace
lending. Or in States like Georgia, where payday lending is
illegal, there may be no options for these people.
Acting Comptroller Hsu, if the rule is overturned, I hope
you will take action to address the legal confusion that will
result. I just wanted to make that statement.
Moving on to another topic, Chairman McWilliams, I would
like to discuss the FDIC and the other agencies' request for
intelligence, the information on financial institutions that
used artificial intelligence (AI). I appreciate that this is
being done on an interagency basis so that AI policy can be
coordinated, which is extremely important in the technology
era.
The question is, Chairman McWilliams, what do you hope to
accomplish with this request for information?
Ms. McWilliams. Really, the request is pretty broad, and
the request is aimed at understanding exactly what is happening
in this space, what do we need to be aware of?
I would say it is a learning expedition where we try to and
hope to get a lot of public input to understand what we should
be focusing on and how exactly artificial intelligence can be
beneficial, and what risks it carries with it. I would say that
it is a broad mandate that we hope to accomplish with this
interagency product, and we are hoping to be able to implement
it in our regulatory standards to allow banks to rely on
artificial intelligence to improve their supervision policy,
but also how they serve their customers and consumers.
Mr. Loudermilk. I appreciate that. And artificial
intelligence is a very beneficial tool if it is used in the
right way, and it does give the proper results and that we can
test those results as well.
Former Democratic Treasury Secretary Larry Summers recently
said that central banks are bending to political pressure and
stretching beyond their statutory mandate by focusing on
climate change in order to be relevant on a current political
topic. I actually agree with him on this. The Fed is not
supposed to be influenced by political pressure, nor is the Fed
the proper venue for climate policy to be made.
Vice Chairman Quarles, do you agree with former Secretary
Summers that central banks are engaging in mission creep when
it comes to these climate initiatives?
Mr. Quarles. No, I don't actually think so. Again, I think
there has been more made of what is happening on climate
change. It is a potential risk that faces the financial sector.
As a regulator, we should look at that risk and see what the
potential effects on financial stability might be.
Develop, again, an analytical framework so that we don't
respond to political pressure, so that we don't respond to
headlines, but develop a careful, data-driven framework for
looking at a potential risk. That is what we are in the process
of doing.
Mr. Loudermilk. I would disagree with you on some of these
issues because being on the House Science, Space, & Technology
Committee, we have heard from many scientists saying that in
today's era, while we have done well with climate policies, in
the past--I remember in the 1980s, in Los Angeles, you could
hardly breathe. It is not that way anymore.
But it isn't the United States of America that is the
problem. We are one of the cleanest of the industrialized
nations. It is nations such as China and others that are the
problem. And I think that is where our focus needs to be. If we
are truly interested in local climate issues, then we need to
be holding partners overseas accountable, not punishing
American businesses in a nation that has done tremendously well
in cleaning the environment.
And with that, Mr. Chairman, I will yield back the balance
of my time.
Mr. Lynch. The gentleman yields back. The Chair now
recognizes the gentleman from Illinois, Mr. Casten, for 5
minutes.
Mr. Casten. Thank you, Mr. Chairman. And thank you to our
panelists.
I would like to stay with you, Vice Chair Quarles, and stay
on the subject of climate. I am delighted to hear you are
focused on the risk being analytical and data-driven. I want to
put my friend Mr. Barr at easex, when he said that the Fed
doesn't have the authority to regulate environmental policy. I
just want to talk about numbers, and I just want to talk about
the financial system.
As you know, the rest of the world is leading, and we are
now in a following mode. And it is time for us to get back into
a leading mode. I would like to just understand a couple of
issues, to understand what you all are going to do
analytically.
We know from the House Science, Space & Technology
Committee, which I serve on with Mr. Loudermilk, that we have
significant sea level rise measured in feet, not inches, that
is highly likely within the time horizon of current mortgages.
As you do your analysis, can you commit to us that you will be
factoring in what impact that will have on the banks, on
Government-Sponsored Enterprises (GSEs), and on the insurance
industry?
Mr. Quarles. The answer is, yes, because we have long taken
into account in supervising institutions in particular
geographic locations, the risks of those geographic locations.
As we continue to get more data and to learn more about the
evolution of the environment as additional risks become clear,
we will ensure that institutions are including them in their
risk management and that we include that in our supervision of
their risk management.
Mr. Casten. I just want to point out that, and I understand
we are all being cautious because these are uncertainties,
there is a real gap when I sit on the Science Committee, and I
ask, ``What cities are you concerned about?'' And they say,
``The entire Eastern Seaboard.'' And then, I move to the
Financial Services Committee, and they say,`` We are thinking
about it.'' These changes are coming, and we have to grapple
with them.
Second question, S&P announced in January that it was
placing 13 major oil and gas companies on credit watch,
negative credit watch due to energy transition risks. Will your
analysis consider the debt and equity risk if that goes away,
and what is going to happen to the holdings within the banks
you regulate?
Mr. Quarles. We are developing the framework currently to
be comprehensive, but any placing of any institution's
exposures on credit watch is and will be taken into account in
supervision of institutions that are exposed to those firms.
Mr. Casten. Okay. My concern, having come from the energy
industry, is that there is some measurable cyclicality in the
energy industry. And you can kind of watch like clockwork that
the holdings in the regulated banks when there is a negative
cyclicality get moved into their non-bank holdings, and all of
a sudden, the bank says, ``I have an opportunity for you to
invest in energy special projects Fund V.'' And we all
understand what they are doing, but that gets it out of some of
the areas in which you might have direct regulatory
supervision.
As you do this analysis, will you be looking to make sure
that those assets that are encumbered as banks try to move risk
into areas that may not be subject to Dodd-Frank supervision or
the regulatory regimes, can you commit to making sure that we
keep an eye on those non-bank actors as well to understand
where money is moving throughout the entire economy?
Mr. Quarles. That is because the Federal Reserve is a
holding company, an umbrella supervisor. It does look at the
overall organization and not only the depository institution
subsidiary. So, yes, when we take a look at the capital
position or the overall position of the firm, we take into
account the risk position of the firm. We look at the overall
firm.
Mr. Casten. Okay. I would welcome the chance to work with
your office on that. We are spending a lot of time thinking
about it. And as I said at the start, I think we ought to get
behind the eight ball.
Acting Comptroller Hsu, you mentioned in your opening
comments that you--I think you have been joining the Network
for Greening the Financial System. Can you just share with us a
little bit of why that is so important, and what kind of
leadership you are seeing in an international framework that we
need to get up-to-speed on in our country?
Mr. Hsu. I think the primary purpose is to learn. That
forum was created in order to allow and to facilitate central
bank supervisors from around the world, and they have a lot of
members who come and say, here is what we are seeing, here are
some best practices, here is what we are dealing with. And the
idea for us is we don't want to reinvent the wheel. If someone
else has come up with a good approach to these risks that we
have been talking about, we want to leverage that as quickly as
possible, kind of integrate that and apply it in a tailored
fashion to our institutions which are going to have to deal
with these risks.
Mr. Casten. Thank you, and I will yield 11 seconds back to
the Chair. I appreciate your time.
Mr. Lynch. I thank the gentleman. The Chair now recognizes
the gentleman from Oklahoma, Mr. Lucas, for 5 minutes.
Mr. Lucas. Thank you, Mr. Chairman. I appreciate the
opportunity to visit with our panelists today. And I also
appreciate the opportunity to follow a couple of my colleagues
on the Science Committee.
In her March testimony before this committee, Secretary
Yellen highlighted, following along on these lines, that
climate change is a top priority for the Biden Administration
and that regulators should be assessing risk to financial
institutions. As any regulator who has appeared before this
committee for the last 26 years knows, the Third Congressional
District of Oklahoma, which I have the proud privilege of
representing, is a commodity-driven economy, centered on
agriculture, and centered on energy.
The actions of the Fed, the FDIC, and the OCC have a real
and significant impact on the businesses in my district which
are capital-intensive. We have to have major resources to do
the kind of amazing things we do.
I will start with Acting Comptroller Hsu. In your
testimony, you explain that the OCC will act on the climate
issue or risk with a sense of urgency. Can you describe to me
the ways in which addressing climate risk could manifest
themselves in your supervisory and regulatory requirements?
What is coming toward my constituents?
Mr. Lynch. Could the gentleman suspend?
Mr. Lucas. Absolutely.
Mr. Lynch. Mr. Lucas, could you turn your camera on? Under
the House Rules--
Mr. Lucas. I'm sorry, Mr. Chairman, and I apologize for
that. I thought I had it on.
Mr. Lynch. Okay.
Mr. Lucas. Sorry, Mr. Chairman.
Mr. Lynch. The witness may proceed. Thank you.
Mr. Hsu. Different financial institutions will be exposed
to climate risk differently. And what we want to ensure is that
they are appropriately--that they know what their risks are. In
some cases, there will be a lot. In some cases, there will be a
little.
It really depends--and some of these are physical risks,
and some of these are what they call transition risks. What was
highlighted earlier, that these are real things, and we just
want to make sure that banks are identifying those and
measuring those not with the desire or an eye toward putting
the thumbs on the scale for different industries.
Mr. Lucas. But how you identify those risks, how you put
your thumb on the scale, all regulators, has a dramatic effect
on the cost and availability of capital. We can drive capital
decisions in this country away from very successful, ever more
efficient environmentally conducting themselves sectors by how
we do this.
I have watched this before. That is why I asked my
question, and I ask all of you to be very careful in what you
do. The goal is not to use financial regulation to create
someone's version of the world. The goal is to assess the risk
so that the market economy can incorporate the demand from the
public for a cleaner environment and proceed in that direction.
That's just an observation from someone who is mildly
sensitive about the effects of the Federal Government on his
constituents going back to the 1930s.
Next question, some sectors of the U.S. economy are seeing
a surge in consumer prices. It is a result of high demand
outpacing supply. This could be temporary, or these price
pressures could continue to build.
Vice Chairman Quarles, in September of last year, a market
survey conducted by the Federal Reserve Bank of New York showed
that less than 25 percent of the respondents cited inflation as
a risk for economic stability. If we would do that survey right
now, do you suspect the results might be a little different?
And I come at this as a person who was in college in the
late 1970s and early 1980s who was starting to farm, who went
through that inflationary period. If you are under 40, you
don't remember how bad it can be.
Touch on that for a moment, if you would, Mr. Vice
Chairman?
Mr. Quarles. It is kind of you to implicate in any way that
I might be under 40. I do remember that heavy inflation.
I don't think I want to speculate on what a poll currently
would say, but I will say that we do expect to see inflationary
pressures over the course probably of the next year, certainly
over the coming months. Again, I think that our best analysis
is that those pressures will be temporary, even if significant,
but if they turn out not to be, we do have the ability to
respond to them.
Mr. Lucas. I just remember the vicious correction that went
on in the early 1980s, as the economy picked up and the
velocity of the economy increased and the dramatic expansion of
the monetary supply. We have only put, what, $8 trillion of
extra money into the economy in the last year-and-a-half? You
have to survive whatever comes.
I yield back the balance of my time, Mr. Chairman.
Mr. Lynch. The gentleman yields back. The Chair recognizes
himself for 5 minutes of questioning.
Acting Comptroller Hsu, you said in your testimony that the
OCC will undertake a review of recent actions that the OCC has
taken in the fintech space, and that includes actions on
cryptocurrency assets and [inaudible] systems.
And specifically, you state that you have a concern that
providing the special purpose charters that were proposed by
your predecessor in part--
Ms. Garcia of Texas. Excuse me. Mr. Chairman, we are having
trouble hearing you. There is an echo.
Mr. Lynch. --will convey the benefits of banking without
commensurate responsibility. What are your thoughts?
Mr. Hsu. I didn't catch your whole question, but I think I
have the gist of it.
I believe that we do have a risk where on the one hand,
there is a thought that if we simply charter the institutions,
if we bring them into the regulatory prism, it will be fine,
that that is the proper thing to do. I think there is a risk
with that. I think that is easier said than done.
At the same time, I do feel like there is a strand of
thought that, well, we just won't charter any of them, right?
We will stick by our guns as to where things are. And I don't
think that is the right answer either because it is not going
to make it go away. It is simply going to happen outside of the
regulatory purpose.
We need to figure out a way where we can do this in a safe
and sound way, where we can adapt to the innovation. The
innovation is happening, whether we want it to or not. So, I
believe we need to approach that smartly, which is why we are
kind of re-reviewing this to make sure that balance is being
struck in the right way and that we are doing it together.
Because this is happening not just at the OCC, it is
happening in other spaces as well.
Mr. Lynch. That is great to hear. That is very comforting.
And I think I can speak for the other Members in saying there
is a real spectrum of opinion with respect to fintech and the
impacts of banking and how fintech fits into the existing
banking infrastructure and how it serves our constituents.
But one thing I do want to point out is that in the past, I
don't think the other Comptrollers of the Currency have really
engaged Congress. They certainly haven't engaged this
committee. I Chair our Task Force on Financial Technology, and
there are a lot of people on this committee who are well-
informed, I think, and excited about the possibilities. So, if
I could just offer a bit of advice, please engage us.
I think it would help with the thoroughness and the
precision that we all need on that issue, and also you would
garner the perspectives of all of the members on this committee
in devising the solutions that we all believe we need. We have
a wonderful financial system. The United States markets are the
envy of the world. We would like to make progress without
damaging the existing integrity that we have going forward.
That is all I have, and I will yield back.
The gentleman from Tennessee, Mr. Kustoff, is now
recognized for 5 minutes.
Mr. Kustoff. Thank you, Mr. Chairman, and thanks to the
witnesses for appearing today. Vice Chair Quarles, if I could
go back to you and maybe follow up a little bit on Congressman
Lucas' questioning, we saw last month, in April, a 4.2-percent
increase, pursuant to the Department of Labor report, in
consumer prices. You all in your last discussion have termed
inflation, ``transitory.'' Let me, if I can, follow up and ask
you to characterize, if we see rates, inflation continue as it
has for the next several months, at what point does inflation
cease to be transitory or, the corollary, how long do you
expect inflation to remain transitory?
Mr. Quarles. I don't and we don't have a projection for how
long is too long. I do think that it is important for us all to
keep in mind, as was mentioned earlier in the hearing, that
last month's very high inflation reading was the highest since
2009, and yet after 2009, we went through an extended period of
extremely low inflation, well under the Fed's target. I don't
think that we can say that 1 month, or 1 quarter, or 2 quarters
or more is necessarily too long. We do expect to see higher
inflation for some period of time.
Now, it is possible that going through a period even of
transitory inflationary pressures over that kind of a period
could lead to some change in expectations. I don't expect it,
but if it were to happen that a change in expectations led to a
more durable inflationary environment, then the Fed has the
tools to address it. For me, it is a question of risk
management. This is the best analysis we have currently:
inflation will be temporary. What if we are wrong? If we are
wrong, do we have the means to keep it from getting out of
hand? We do, and history would tell us that the economy is
unlikely to undergo these inflationary pressures for a long
period of time.
Mr. Kustoff. You referenced, ``some period of time,'' so I
am going to ask you to further define what, ``some period of
time'' is. And I will give you one particular point of context,
and that is from my REALTOR and home building community in my
district in West Tennessee. And I suspect this is similar to
what 434 other Members of Congress are hearing, that their real
estate market is red hot, that they get multiple offers for
different listings, and that is for existing homes. The home
builders say that lack of labor and rapidly-increasing cost of
lumber, up 300 percent over the past year, makes it almost
prohibitive to build homes. With the response you just gave me,
how much longer can we expect that to continue, and at what
point does the Fed need to say, enough is enough?
Mr. Quarles. I can't give you a projection for how much
longer that is going to continue because we are coming out of
an unprecedented event. There is not sort of a series of
historical experiences that one could point to to say, this is
how long inflationary pressures last after you have shut down
the economy in the face of something like COVID. The question
is, what should the Fed do about it? Our experience over the
course of the last decade coming out of the financial crisis is
that a couple of times we thought we wanted to stay ahead of
inflationary pressures, and increased interest rates. It was
premature, and I don't think actually that it would be good for
the industries that we want to see thriving as the recovery
continues, for us to close off that recovery prematurely trying
to stay ahead of inflation when, again, our best estimate is
that we are not behind.
But we could be wrong because this is an unprecedented
situation. For me, the question is, are we prepared in case
this turns out to be a more durable event, and I think the
answer is, ``yes,'' but I do think that if we were to try now
to stay ahead of the inflation curve, we could end up
significantly constraining the recovery curve.
Mr. Kustoff. That is the end of my time. I yield back, and
I appreciate your response.
Mr. Lynch. The gentleman yields back. The Chair now
recognizes the gentlelady from Texas, Ms. Garcia, for 5
minutes.
Ms. Garcia of Texas. Thank you, Mr. Chairman, and thank you
to all of the witnesses who are joining us today.
Access to the banking system is a critical step in building
access to credit and, thereby, access to wealth building, but
there is still a high percentage of unbanked individuals. My
district is 77-percent Latino, and it includes many people
whose preferred language is not English. Last week, my bill
that would make it easier for borrowers to get their mortgage
loan service in their preferred language passed out of this
committee. The Improving Language Access in Mortgage Servicing
Act, is just the first step. There is much more work to be
done. As Americans, it is important that we work to facilitate
economic inclusion at all levels, including, but not limited
to, language diversity. We must continue providing resources so
that institutions can better serve their diverse populations.
A recent study on Latino entrepreneurs found that only 20
percent of Latino-owned businesses that applied for a national
bank loan over $100,000 obtained funding, compared to 50
percent of White-owned businesses. This lack of capital has
forced many Latino-owned businesses to take on riskier loans
against their will, and this problem must be addressed now
because the Latino market for financial services is growing
every single day. Latino-owned businesses have grown 34 percent
over the last 10 years. We need to make sure that diverse
consumers have equal access to capital.
I look forward to seeing the enactment of Dodd-Frank
Section 1071 and an updated CRA, but I want to take a holistic
approach at financial inclusion in our society. My first
question is for Vice Chair Quarles. Can you talk about the
cultural, systematic, or language barriers that prevent large
banks from making room for diverse consumers?
Mr. Quarles. First, ensuring that there is broad access to
financial services for all customers is an important part of
our supervisory responsibilities as regulators. Language access
is clearly an important part of that. In areas where there are
significant parts of the population who don't speak English, we
do that and we include that in our supervision. And we have
data collection from small businesses as well for information
on the overall access to the economy of those whose first
language is not English.
Ms. Garcia of Texas. Right. What steps are you all taking
to make sure that there is access to capital?
Mr. Quarles. As I said, that is part of our supervisor
engagement with firms to ensure that all of the issues that may
be obstacles to making financial services available on a fair
basis to all consumers in an area are addressed, and language
accessibility would be part of that.
Ms. Garcia of Texas. Right. I'm sorry. I know that is your
role and it is your responsibility. My question is, what
exactly are you doing to meet that responsibility?
Mr. Quarles. We supervise the firms to ensure that they
address the question of language accessibility.
Ms. Garcia of Texas. Okay. And in your supervision, what is
it that you look for? What is it that you raise a red flag on?
What is it that you use as a good model for others to follow?
Could you give me some examples of what you do in your
supervisory role to make sure that there is diversity in
language inclusion?
Mr. Quarles. It sounds as though you want a level of
concreteness that we will send something up to you on. It is
part of our fair lending and CRA examinations on every
institution, but we could send you something at a more granular
level.
Ms. Garcia of Texas. Right, and remember--
Mr. Quarles. I don't do supervisions myself, so we should
have the supervisors provide you with detailed analysis and
what it is that we do.
Ms. Garcia of Texas. Great. I look forward to receiving it.
And, Mr. Chairman, I only have about 20 seconds, so I just
wanted to ask quickly, Chairwoman McWilliams, what is it that
we could be doing more of to ensure that the programs, like the
Mission-Driven Fund, are targeted to communities with language
barriers?
Ms. McWilliams. Oh, thank you for the question, and it may
come as no surprise to you that I have a little bit of
experience reading forms in a non-native language on a daily
basis.
Ms. Garcia of Texas. That makes two of us.
Ms. McWilliams. So, you know my pain. I am happy to provide
a response in writing to you, or even meet, if you want to meet
on this topic.
Ms. Garcia of Texas. Thank you. I yield back, Mr. Chairman.
I have run out of time.
Mr. Lynch. The gentlelady yields back. The Chair now
recognizes the gentleman from Indiana, Mr. Hollingsworth, for 5
minutes.
Mr. Hollingsworth. I appreciate the attention and I
appreciate all of the witnesses for being here today. Vice
Chair Quarles, I wanted to come back to your answer to Mr.
Kustoff's question earlier. I thought you put it extremely well
in making sure that you are finding the right balance between
not constraining the recovery, but also, down the field, paying
attention to the inflation risk should it become durable. I
think that is very, very important. I know there is a lot of
concern about this right now. I hope that concern remains
transient, but I think that your focus on ensuring that this
robust recovery that we are seeing continues unabated is
really, really important. So, thank you for that very
thoughtful answer.
I wanted to turn my attention to a potential proposal that
is being discussed by my colleagues across the aisle. I noted
that in your testimony, you said the banking system is more
liquid and better capitalized compared to last year. Certainly,
I have heard a lot of concerns from borrowers, and I have heard
a lot of concerns from lenders over the last couple of months.
One thing I haven't heard about, though, is the significant
excess of bank lending that has led to a disconcerting
weakening in the creditworthiness that they are underwriting.
Yet, I understand that one of the bills being considered by my
friends across the aisle is one that would tie mechanistically,
without discretion, increases in the counter-cyclical capital
buffer to the increases in the Fed Funds Rate.
I really oppose this effort, and I wondered if you might
talk a little bit about what you are seeing out in the
environment right now, and talk a little about the variety of
reasons you might increase the Fed funds rate, not specifically
correlated with excess bank lending or a weakening of
creditworthiness of sponsors, et cetera.
Mr. Quarles. Yes, I think that both prudential and macro-
prudential supervision, while there are connections, they
aren't algorithmically related to our monetary policy. And
there may be circumstances in which a change in monetary policy
could lead to developments in the financial sector that would
cause us to say, okay, time to take some macro-prudential
steps, but others when they would not.
We were making changes in monetary policy in the lead-up to
March of 2020. We have done that. It would have been a mistake
at that time to turn on the Countercyclical Capital Buffer
(CCyB) to be concrete because when we went into the event, the
problem was not a shortage of capital. The problem was, in
fact, that we needed to turn down some of our capital measures
in order to allow the system to use the capital that it had to
continue to support the economy through that stress.
Mr. Hollingsworth. I think just to summarize what you very
articulately put, though, is that moves in the rate may be
correlated with weakening in credit standards by depository
institutions, but that correlation is not perfectly done, and
there are a panoply of reasons why you might raise rates that
are unrelated to weakening credit standards or excess bank
lending. Is that fair?
Mr. Quarles. Yes, absolutely.
Mr. Hollingsworth. Great. My second question I just wanted
to ask quickly is, earlier this year I sent a letter with a few
of my colleagues asking for an update on margin eligibility
requirements for a segment of OTC securities. As you know--we
have talked about it many times--these rules haven't been
updated since 1999. I know that you sent me a response. That
response was, ``We are going to get around to it.'' We have
been waiting for a long time for you to get around to it. Do
you think that we are going to see progress on updating the
proposal for updated margin eligibility requirements?
Mr. Quarles. We are continuing the interagency discussions
around that. As you know, one of the elements of the statutory
framework is that we also consult with the SEC. I think there
are some additional recent events around sort of margin
exposures on securities, and the general review of the
margining framework has caused us to think that we need to
incorporate this into that. So, it is not falling behind the
refrigerator and been forgotten about, but it is, I think, part
of a larger discussion.
Mr. Hollingsworth. Great. Last question, and it may be a
little bit lengthier one, but for the time we have, is there is
a real reason to believe that with economic growth in excess of
6 percent, and although we are seeing inflation on the rise,
hopefully, in a transient sense, that the experience for the
consumer, as wages continue to rise, even in the face of
prices, that people are really mostly concerned about the real
differential between their wages and inflation, not just
concerned about kind of what the inflation rate is in an
absolute sense?
Mr. Quarles. I think that is part of the expectations
question: Are inflationary expectations being affected by the
pressures that we will see over the course of the next several
months on prices and wages? It is a possibility. I continue to
think that it is not the probability.
Mr. Hollingsworth. Thank you for your time. I yield back.
Mr. Lynch. The gentleman yields back. The Chair now
recognizes the gentleman from New York, Mr. Torres, for 5
minutes.
Mr. Torres. Thank you. I have a question for the regulators
regarding the Archegos collapse. When I think about the
collapse, it raises the question of how so many banks can give
so much leverage to one financial institution betting on so few
underlying stocks. And I am wondering, in light of the Archegos
collapse, are any of you planning to put in place rules
requiring greater disclosure in relation to derivatives, in
general, and credit swaps, in particular?
Mr. Quarles. I can start on that. We certainly, in light of
the events that we saw, are reviewing both our regulatory and
our supervisory framework to ensure that it would be hard for
that to happen here. I do think that it is important to keep in
mind that the great bulk of the losses that were incurred in
connection with Archegos occurred outside the United States.
They were not within the U.S. regulatory perimeter. The firms
that were within the U.S. regulatory perimeter did not lose,
one firm did, but the great bulk of the firms did not lose
money, which indicates that our supervisory stance, with
respect to those firms and our regulation of those firms, is
actually probably not materially deficient.
But whenever you see something like that, even if it occurs
in another part of the world, you want to make sure that you--
Mr. Torres. If I could interject, why not have greater
transparency? As a layperson, I ask myself, is it responsible
as a matter of risk management for banks to enter into credit
swaps with Archegos without knowing all of the credit swaps
that Archegos had entered into, and without knowing that
Archegos had bet on only a few stocks? In all of those credits
swap contracts, it seems, to me, financial institutions have an
interest in knowing whether a company like Archegos is
sufficiently capitalized and excessively leveraged.
Mr. Quarles. But that is exactly what we are looking at.
The point that I was making is that those are perfectly
reasonable points. We are looking at them currently. They did
not result in material losses in the U.S. financial system. Our
supervision and regulation of these firms did not result in
those losses, but it's perfectly fair to ask, what can we learn
from the fact that it happened elsewhere? Are there changes we
should make? Those are perfectly fair questions, and we are
looking closely at it.
Mr. Torres. Do you think if there had been greater
disclosure around the over-leveraged position of Archegos, that
those losses could have been prevented?
Mr. Quarles. As part of the risk management of the firms, I
do think that the prime brokers should have a clear view of,
when they are taking collateral against something, are there
risks to that collateral position that can't be told simply
from their own exposure? And it does appear that these firms,
although that wasn't something that was happening, again,
within the U.S. regulatory perimeter, that does appear to be
something that these firms, where they took the losses, were
not doing.
Mr. Torres. I know that Archegos, as a family office and as
a result of the credit swaps, was exempt from the Section 13(f)
reporting requirements, but the banks that bought stocks on
behalf of Archegos were subject to those requirements. Did your
office review the 13(f) filings, and did you notice that
multiple banks were buying an unusually large volume of the
same stock? Did you see those red flags in advance of the
collapse?
Mr. Quarles. Since the exposures were not within the U.S.
regulatory perimeter, no, it would not have been possible for
us to. That was something that was happening elsewhere, but it
is something that we are looking at how to ensure that were
something like that to happen within the U.S. regulatory
perimeter, that we are on top of it.
Mr. Torres. And Archegos was a family office. Do you think
the failure of Archegos should lead us to rethink how we
approach family offices with respect to financial regulation? I
know there was a carveout for family offices within Dodd-Frank
based on the assumption that family offices would make
conservative investments, but there was nothing conservative
about the behavior of Archegos. Should our approach be re-
thought in light of this experience?
Mr. Quarles. I would think it would be premature to say
that. If the banks that had exposure to Archegos had themselves
done a better job of risk management, they would have known
what those exposures were. They would have extended less credit
on the basis of any particular collateral. That is not within
the Federal Reserve's sort of regulatory ambit. It would be
something for others to look at, but I wouldn't jump to that
conclusion from this event. I would jump more to a conclusion
that the bank needs to manage its procedures.
Mr. Lynch. The gentleman's time has expired. The Chair now
recognizes the gentleman from Ohio, Mr. Gonzalez, for 5
minutes.
Mr. Gonzalez of Ohio. Thank you, Mr. Chairman, for holding
this hearing today, and I certainly appreciate the testimony of
our witnesses. Mr. Quarles, I am going to stay with you with my
line of questions and stick to the LIBOR topic, and I know the
Fed has a strong focus on ensuring effective transition away
from LIBOR to alternative reference rates. As you know better
than most, this is a fairly complex undertaking, but one that
is proceeding, which is nice to see. I also understand the Fed
supports the recently-announced proposed extension of U.S.
LIBOR, which will provide us with a transition. Alongside the
extension, I personally believe there is more that we can do
with respect to these legacy contracts, and I think you share
that view. Can you please elaborate on your plan, moving
forward, to facilitate greater certainty with respect to this
long-tail legacy issue, and do you believe that, ultimately,
congressional action is necessary?
Mr. Quarles. The short answer to the last question is, yes,
I do think congressional action will be necessary. The
extension of the provision of LIBOR that you noted will allow
the bulk of the legacy LIBOR contracts to run off between the
end of this year and 2023 because we are insisting now that
firms not write new LIBOR contracts after the end of this year,
but by bulk, that is probably about 60 percent. Maybe it is a
little more than 60 percent, so at least 30 to 40 percent of
legacy contracts will need to be renegotiated, and that
renegotiation could be difficult. They may have existing
fallback language, but fallback language may not be
satisfactory, and there is really no way to address that other
than legislation.
There is New York legislation, but not every contract is
under New York law. There are some questions about how that
works with some contracts that raise SEC issues. Federal law
would be an important part of how to address that tough legacy.
Mr. Gonzalez of Ohio. Thank you. And in terms of fallback
language, where contracts are silent or where a new reference
rate has not been agreed to between the parties, presumably, in
our Federal legislation, we would want one standard, correct?
We wouldn't want a set of standards necessarily because we want
certainty in the market, or do you have a different position on
that?
Mr. Quarles. We want clarity. I suppose, conceptually, you
could obtain clarity in a number of ways. I do think that when
you are trying to deal with something as complex as the LIBOR
transition, a single standard is helpful just as a matter of
logistics. I wouldn't want to say in this context that you
can't think of another way to provide the necessary clarity.
Mr. Gonzalez of Ohio. Thank you. And then I want to switch
to central bank digital currency (CBDC). I would love to hear
your perspective. Obviously, China started rolling out theirs.
I don't know if you saw this morning--I am sure you did--their
announcements with respect to cryptocurrencies broadly and the
effect that is having on those crypto markets. How do you see
the central bank digital currency question vis-a-vis the United
States and our role as the global reserve currency, but also
its role in the financial system?
Mr. Quarles. Beginning with the caveat that those are
complicated questions that I wouldn't want my answer today to
be viewed as final or definitive on, I think that the factors
that cause the dollar to be the world's clearly central reserve
currency will not be significantly affected were we to develop
a central bank digital currency. I don't think that we are
falling behind China or having the role of our currency
internationally threatened by the measures that China is taking
currently to digitalize their currency. We want to stay on top
of that. We want to understand what other jurisdictions are
doing. We want to understand what the role of a CBDC could be
in our own domestic economy. There are a lot of things to study
there. We could end up doing it, but I don't think that the
driver of that decision should be that we think that there is a
live threat from the technology around the currency to the
dollar's reserve status.
Mr. Gonzalez of Ohio. What do you think would drive that
decision ultimately?
Mr. Quarles. I think we need to see whether there are
efficiencies in the payment system, both domestically and
internationally, that could uniquely be addressed or very
usefully be addressed by the central bank providing a digital
currency. In many cases, that might not be. We do have a very
heavily electronic and, in many ways, [inaudible] payment
system.
Mr. Gonzalez of Ohio. Thank you, and I yield back.
Mr. Lynch. The gentleman yields back. The Chair recognizes
the gentlelady from North Carolina, Ms. Adams.
Ms. Adams. Thank you, Mr. Chairman. Chairwoman McWilliams,
as you know, the FDIC is known by many for its role in insuring
deposits, but it also plays a key role in consumer protection.
The FDIC has stated that it is responsible for evaluating
supervised instructions for compliance with consumer
protection, anti-discrimination, and community investment laws,
among other duties. However, it appears that FDIC-supervised
banks are now skirting the line of compliance with consumer
protection. So let me ask you, given the FDIC's stated role in
the identification and the elimination of dangerous and
discriminatory practices, what steps is the FDIC taking to make
sure that banks are not using partnerships with fintech
companies as a back door to reintroduce predatory tactics?
Ms. McWilliams. I can assure you, Congresswoman, that we
don't take consumer protection lightly, and I would be more
than happy to engage with your office to understand the
specific instances where you believe that FDIC-supervised banks
have been able to skirt consumer protection laws with impunity,
because I can assure you, that has not been the case, at least
not under my chairmanship.
I think there is a lot of misinformation about the fintech
partnerships. I think one of the prior colleagues of yours
mentioned the benefits of having fintech partnerships in terms
of the benefits to consumers. We have a large proportion of the
United States population who cannot afford $400 on a monthly
basis for family emergencies, and in those cases, you want to
have access to credit available to them. And quite often, the
fintechs are able to provide different methodologies to be able
to bank consumers with lower credit scores, so I think there
are a lot of benefits.
What I believe you may be referring to is a rulemaking that
we promulgated, which is the Value-When-Made Rule, and this
particular rule, I believe there has been a lot of
misinformation about it. It does not expand paydown lending in
FDIC-regulated banks. It does not authorize the use of a bank
charter for other arrangements. And we have spoken very openly
about viewing unfavorable entities that partner with a State
bank to evade, so if that is what you are talking about, I am
happy to engage in explaining the rule.
Ms. Adams. Okay. We will do that. Thank you so much. Acting
Comptroller Hsu, as you know, the OCC plays a key role in
ensuring that banks by the rules. However, recent reports
indicate that banks are rapidly expanding their partnerships
with financial technology companies that may rely on predatory
lending practices. We have some examples, but let me ask you,
does it concern you when a national bank you regulate teams up
with another company to engage in risky lending that has been
shown to generate discriminatory outcomes?
Mr. Hsu. Yes, absolutely. Discriminatory outcomes should
not be an outcome for any bank, especially for a national bank,
so, yes. Now, I do think there are some partnerships that are
healthy, and there are some partnerships that are unhealthy.
And our role is to ensure that those partnerships that are
healthy, that they are not leaning towards predatory lending or
those kinds of outcomes.
Ms. Adams. Okay. Would you be concerned if a national bank
partnered with a fintech lender that claimed its products are
neither loans nor credit in an attempt to evade Federal and
State consumer financial laws?
Mr. Hsu. I think it depends a lot on the facts and
circumstances. If there are particular instances, we would be
happy to look at those and make sure that they are doing the
right thing.
Ms. Adams. Okay. Actually, Comptroller Hsu, do you have any
reservations that a bank under your supervision is renting out
its charter so that tech startups can employ these risky
practices?
Mr. Hsu. Yes. I should reiterate, predatory lending and
rent-a-charter, there is no place for that in the national
banking system.
Ms. Adams. Okay. In light of what we have discussed today,
do I have your commitment to carefully examine partnerships
between banks and fintech startups, and, in particular, to
scrutinize instances in which banks and new student loan
companies are maybe teaming up to make an end run around
consumer protections?
Mr. Hsu. On student loans, I need to check with my staff as
to the specifics on that, but, in general, yes. My
understanding is that there is guidance and there are rules
around this, and we would expect banks to follow those, and our
examiners would examine for that.
Ms. Adams. Okay. Thank you.
Thank you very much. Mr. Chairman, I yield back.
Mr. Lynch. The gentlelady yields back. By prior agreement
between Chairwoman Waters and the witnesses, we have a hard
stop at 1:30, and we are just past that right now. First of
all, I want to thank our Members for their really thoughtful
questions. This was a great hearing. I also want to thank our
distinguished witnesses for their insightful answers and for
their testimony today.
The Chair notes that some Members may have additional
questions for these witnesses, 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.
And with that, this hearing is now adjourned. Thank you.
[Whereupon, at 1:35 p.m., the hearing was adjourned.]
A P P E N D I X
May 19, 2021
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