[Senate Hearing 117-753]
[From the U.S. Government Publishing Office]






                                                        S. Hrg. 117-753


 OVERSIGHT OF FINANCIAL REGULATORS: A STRONG BANKING AND CREDIT UNION 
                         SYSTEM FOR MAIN STREET

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             SECOND SESSION

                                   ON

  EXAMINING PRUDENTIAL REGULATION AND CONSUMER PROTECTION FOR BANKS, 
 SAVINGS ASSOCIATIONS, AND CREDIT UNIONS, AND THE AGENCIES' ACTIONS TO 
     ENSURE THAT FINANCIAL INSTITUTIONS SERVE THEIR CUSTOMERS AND 
                              COMMUNITIES

                               __________

                           NOVEMBER 15, 2022

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




                Available at: https: //www.govinfo.gov /



                             _________
                              
                 U.S. GOVERNMENT PUBLISHING OFFICE
                 
53-699 PDF              WASHINGTON : 2023 



















            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                     SHERROD BROWN, Ohio, Chairman

JACK REED, Rhode Island              PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey          RICHARD C. SHELBY, Alabama
JON TESTER, Montana                  MIKE CRAPO, Idaho
MARK R. WARNER, Virginia             TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts      MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland           THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada       JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota                BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona              CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia                  JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia             KEVIN CRAMER, North Dakota
                                     STEVE DAINES, Montana

                     Laura Swanson, Staff Director

                 Brad Grantz, Republican Staff Director

                       Elisha Tuku, Chief Counsel

                 Dan Sullivan, Republican Chief Counsel

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                        Pat Lally, Hearing Clerk

                                  (ii)



























                            C O N T E N T S

                              ----------                              

                       TUESDAY, NOVEMBER 15, 2022

                                                                   Page

Opening statement of Chairman Brown..............................     1
        Prepared statement.......................................    41

Opening statements, comments, or prepared statements of:
    Senator Toomey...............................................     4
        Prepared statement.......................................    42

                               WITNESSES

Michael S. Barr, Vice Chair for Supervision, Board of Governors 
  of the Federal Reserve System..................................     6
    Prepared statement...........................................    44
    Responses to written questions of:
        Chairman Brown...........................................    70
        Senator Toomey...........................................    73
        Senator Tester...........................................    77
        Senator Cortez Masto.....................................    83
        Senator Smith............................................    84
        Senator Sinema...........................................    86
        Senator Warnock..........................................    87
        Senator Rounds...........................................    91
        Senator Moran............................................    93
        Senator Daines...........................................   102
Todd M. Harper, Chair, National Credit Union Administration......     7
    Prepared statement...........................................    46
    Responses to written questions of:
        Chairman Brown...........................................   106
        Senator Tester...........................................   108
        Senator Cortez Masto.....................................   114
        Senator Warnock..........................................   116
        Senator Moran............................................   119
Martin J. Gruenberg, Acting Chair, Federal Deposit Insurance 
  Corporation....................................................     9
    Prepared statement...........................................    54
    Responses to written questions of:
        Chairman Brown...........................................   129
        Senator Toomey...........................................   133
        Senator Menendez.........................................   140
        Senator Tester...........................................   141
        Senator Cortez Masto.....................................   146
        Senator Warnock..........................................   149
        Senator Moran............................................   156
        Senator Daines...........................................   173
Michael J. Hsu, Acting Comptroller, Office of the Comptroller of 
  the
  Currency.......................................................    10
    Prepared statement...........................................    64
    Responses to written questions of:
        Chairman Brown...........................................   176
        Senator Toomey...........................................   179
        Senator Tester...........................................   184
        Senator Warnock..........................................   189
        Senator Rounds...........................................   194
        Senator Moran............................................   195
        Senator Daines...........................................   206

                                 (iii)

 
 OVERSIGHT OF FINANCIAL REGULATORS: A STRONG BANKING AND CREDIT UNION 
                         SYSTEM FOR MAIN STREET

                              ----------                              


                       TUESDAY, NOVEMBER 15, 2022

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10 a.m., via Webex and in room 538, 
Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of 
the Committee, presiding.

          OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

    Chairman Brown. The Senate Committee on Banking, Housing, 
and Urban Affairs will come to order. Welcome to the witnesses 
and Committee Members.
    We know that most Americans want the same things: a safe, 
affordable place to call home, a good-paying job, and a strong, 
stable Government which they can trust. Our democratic 
institutions are only as strong as the people who empower them. 
Our economy works best when we have a free and fair democracy 
in which everyone can live their lives with dignity.
    For too long, many of these dreams have felt out of reach. 
Working families struggle to pay for groceries, to keep gas in 
their car, and a roof over their heads. We know the cost of 
living and raising kids continues to rise.
    Democrats are listening and have delivered for the American 
people. We passed legislation to lower prescription drug costs. 
We helped families stay in their homes during the height of the 
pandemic. We made investments in public transit and our 
Nation's infrastructure. For the first time in generations we 
have been focused on communities that our Government has turned 
their back on, especially, for instance in my State, the State 
government. Now we are tackling inflation by taking on 
corporate power and consolidation and by reducing our 
dependence on foreign oil.
    We are doing all that while creating good-paying 
manufacturing jobs at home. These jobs, making semiconductors, 
electric vehicles, and solar panels, are the jobs of the 
future. Those jobs will go to Americans because we passed the 
CHIPS Act, the Inflation Reduction Act, and the Bipartisan 
Infrastructure Law, with strong Buy America provisions that 
Senator Portman and I worked on.
    And we are seeing results. Our economic recovery has been 
strong. Over the past 2 years, many Americans have built up 
more in savings. We have seen robust job growth and, for the 
first time in decades we have seen wage gains. Just last week 
we began to see signs that inflation is starting to cool. Banks 
and credit unions are doing well, thanks to the protections we 
put in place in Dodd-Frank and because of the support Congress 
and regulators provided during the pandemic.
    Too many big corporations, though, have taken advantage of 
market concentration, jacking up consumer prices and earning 
higher and higher profits. As my colleague Senator Reed has 
pointed out, the biggest banks that benefit from higher 
interest rates today are not passing on those benefits to their 
customers, again penalizing Americans who are trying to buildup 
savings.
    Workers and small businesses already struggling under the 
weight of inflation should not get hit with exorbitant bank 
fees, should not lose their money to a crypto scam, should not 
have to worry that their savings will disappear overnight if a 
mismanaged bank or credit union fails. None of us want a 
scenario where risky bets on Wall Street crash the economy 
again.
    That is why it is so important that we have financial 
watchdogs like the four of you, who are empowered to look out 
for Main Street, helping more Americans hold on to their hard-
earned money at a time when they need it most.
    The banking and credit union regulators are independent 
agencies that protect consumers and make sure banks and credit 
unions are safe and strong. Your independence matters. It makes 
for a more stable financial system and that is essential for 
our entire economy.
    Our witnesses today all have decades of banking and credit 
union regulatory experience. They have spent careers serving 
the public and protecting consumers, making sure our banking 
and credit union system works for Main Street, not just for 
Wall Street.
    That is exactly what they continue to do today.
    They are modernizing and strengthening an important civil 
rights law that will spur new investment in neighborhoods and 
communities that have been left on their own. Thank you for 
that.
    They have taken a closer look at overdraft, nonsufficient 
funds, and other ``gotcha'' fees at banks and credit unions to 
make sure that consumers are treated fairly, and that these fee 
programs do not raise safety and soundness concerns. Thank you 
for that.
    They are taking a fresh look at the bank merger approval 
process, so we do not continue this rubber stamp consolidation 
which has big consequences for local economies. Too often big 
banks merge and close branches, leaving rural towns and urban 
communities without a bank.
    They are revisiting the financial safeguards that protect 
us from risks at big foreign banks, making sure bank failures 
do not leave taxpayers holding the bag. It is important to 
remember the superregional banks of today are hundreds of 
billions of dollars larger than the largest banks that failed 
during the financial crisis. Our financial regulators know that 
we need strong capital requirements so that banks and credit 
unions can continue to lend to and invest in their communities, 
in good times and bad.
    They are also overseeing the formation of new institutions 
that serve communities that often get left behind. Just last 
week, the NCUA chartered a new faith-based credit union, and 
the FDIC recently approved the first mutual bank in 50 years, 
which will pave the way for more, in Ohio and across the 
country. All the agencies are working together to foster new 
banks and credit unions, and support the work of MDIs and CDFIs 
in their communities.
    At the same time, our regulators are looking out for risks 
on the horizon--the effects of climate change, the rise in 
crypto assets, the risks from shadow banks, and the constant 
threat of cyberattacks. They are working with the banking and 
credit union industry to prepare for climate-related risks and 
bolster cybersecurity protections as criminals become more 
sophisticated and geopolitical threats increase. They have 
stepped up to protect depositors and consumers when crypto 
firms mislead them into thinking their money is safe, when it 
is not.
    But we must stay vigilant and empower regulators with the 
tools to combat these growing risks. Data breaches at banks and 
credit unions happen too often, threatening customer data and 
exposing our financial system to vulnerability. That is why we 
need to pass the bipartisan Improving Cybersecurity of Credit 
Unions Act led by Senators Ossoff, Lummis, and Warner.
    We need to make sure that banks and credit unions can 
partner with third parties in a way that allows banks to stay 
competitive without putting consumer money at risk. And we 
cannot let big tech companies and risky shadow banks play by 
different rules because of special loopholes.
    All these things will help strengthen our banking and 
credit union system for its core mission: serving Main Street 
and workers and families. When workers have more power in the 
economy, they find better paying jobs and we have a stronger 
labor market. That helps credit unions, which added over 5 
million new members over the past year, and drives down the 
number of households without a bank account, which dropped to 
record lows in 2021.
    When Government is on the side of working families more 
Americans save money, more Americans build wealth, more 
Americans start small businesses, and more Americans 
participate in our economy.
    Our financial regulators have answered that call--thank you 
for that--and I will continue to work with them to make sure 
our banking and credit union system works for everyone.
    Before I conclude my remarks, I want to thank the witnesses 
again for being here today. I also want to especially 
congratulate Marty Gruenberg on being nominated by President 
Biden to be Chair of the FDIC. Marty is a well-respected and 
seasoned regulator who has worked to protect consumers and 
preserve confidence in our banking system. He played an 
instrumental role in helping implement many of the Dodd-Frank 
reforms. With his experienced leadership I have no doubt that 
FDIC can continue to address risks to our financial system, 
increase access to affordable financial services, and ensure 
that banks honor their commitment to communities through the 
CRA.
    This Committee looks forward to holding a nomination 
hearing in the next few weeks for Marty and the other FDIC 
nominees.
    Senator Toomey.

         OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY

    Senator Toomey. Thank you, Mr. Chairman, and welcome to our 
witnesses.
    Throughout this Congress, I have warned about the 
politicization of financial regulation. Some bank regulators 
are increasingly straying outside their mandates into 
politically contentious issues.
    Take global warming, for instance. In September, the Fed 
announced a, quote, ``pilot climate scenario analysis 
exercise,'' end quote, with six of the largest U.S. banks. Now 
we are told this is merely an exercise in ensuring that banks 
understand their risks. But the data, including the Fed's own 
research, shows that there is no physical risk to banks from 
severe weather events.
    The only other risk is so-called ``transition risk.''
    But we also know banks are fully capable of pricing risks 
into their business decisions, including risks from changing 
customer preferences over time.
    So the real risk here is political.
    My worry is that an attempt to somehow quantify this 
political risk will eventually result in regulations designed 
to allocate capital away from carbon-intensive companies.
    It appears some bank regulators are already committed to 
doing just that. For example, the Fed, FDIC, and OCC have all 
joined the ``Network for the Greening the Financial System.'' 
This is an international group of financial regulators with a 
stated aim to, and I quote, ``mobilize mainstream finance to 
support the transition toward a sustainable economy,'' end 
quote.
    In other words, their goal is to allocate capital away from 
carbon-emitting industries to those deemed to be sufficiently 
green.
    And let me emphasize--the Fed, FDIC, and OCC have all 
joined this group.
    The NCUA has also warned that credit unions, and I quote, 
``may need to consider adjustments to their fields of 
memberships as well as the types of loan products they offer,'' 
end quote, and that is because of global warming.
    Here is the reality. Some unelected financial regulators 
want to accelerate the transition to a lower-carbon economy by 
misusing their powers to allocate capital away from traditional 
energy companies.
    But addressing global warming requires really difficult 
political decisions. It involves tradeoffs. And in a democratic 
society, these tradeoffs have to be made by elected and 
accountable representatives, representatives of the American 
people who are held accountable through the political process.
    Now I supported Vice Chairman Barr's nomination, despite a 
number of policy differences I have with him, based, in part, 
on his commitment to stick to the Fed's narrow mandates.
    At his confirmation hearing, Vice Chairman Barr stressed 
that the Fed, and I quote, ``should not be in the business of 
telling financial institutions to lend to a particular sector 
or not to lend to a particular sector,'' end quote. I thank him 
again for that clarity and I urge him to keep to that 
commitment, and one way we could do that is by pulling the Fed 
out of the politically contentious issue of global warming.
    Federal banking regulators have also been preoccupied, in 
some cases, with establishing new rules, the need for which 
have been dubious. For example, last month the Fed and FDIC 
proposed potential new requirements concerning the 
resolvability of regional banks. This proposal seems to be 
predicated on the assumption that the only realistic option to 
resolve a large regional bank would be to sell it to an even 
larger bank.
    But it is not at all clear that this assumption is 
warranted, or that new requirements are appropriate for 
regional banks, for at least two reasons. First, the Fed and 
the FDIC have been approving regional bank resolution plans for 
nearly a decade, and nowhere do these plans contemplate 
wholesale acquisition by larger banks. Second, large regional 
banks have more than doubled their most loss-absorbing capital 
since the financial crisis, and this dramatically improves 
their resiliency and decreases the likelihood they would need 
to be resolved.
    Maybe some regulators seem to think that benefits of new 
requirements always outweigh the costs, but we know regulation 
is not without cost. And as regulation increases, financial 
activities will continue to migrate out of the banking system, 
as they have been doing in recent years.
    While some of our banking regulators have been distracted, 
they have failed to address real challenges facing the 
financial system. For example, last year the Fed, the FDIC, and 
the OCC committed to providing greater clarity on the 
involvement of banks in crypto activities, such as providing 
custody services or issuing stablecoins.
    Well, over a year later, they have provided no public 
clarity. And during that same period we have seen several high-
profile collapses of crypto companies, including a very 
prominent example just last week.
    I think it is very possible that customers harmed by these 
collapses would have been better off if their crypto assets had 
been safeguarded by regulated banks that have been providing 
custody services for other kinds of assets for literally 
hundreds of years.
    But many banks have been pressured--by you--not to provide 
crypto-related services until your agencies provide this 
clarity, which just has not been forthcoming. I will note, 
however, note that Chairman Harper seems not to have pursued 
this pressure campaign with credit unions. In fact, he has 
issued guidance for credit unions on partnering with crypto 
companies, or using distributed ledger technologies.
    However, the ambivalence of the remaining agencies has 
helped to push crypto activities into foreign jurisdictions 
with weaker or no regulatory regimes. As a general matter, it 
seems to me the failure of Congress to pass legislation in this 
space and the failure of regulators to provide clear guidance 
has created ambiguity that has driven developers and 
entrepreneurs overseas, where regulations are often lax, at 
best.
    One other item I would like to highlight before we start 
the rest of the discussion, and it is the deteriorating 
liquidity in U.S. Treasury market.
    In March 2021, the Fed committed to modify the 
supplementary leverage ratio, or SLR, in part to facilitate 
bank dealers' ability to intermediate in this market. Over 18 
months later, the Fed still has not acted.
    I understand that Vice Chairman Barr has only been in his 
role for 4 months and he has reasonably suggested that 
potential amendments to the SLR should be in the context of all 
capital requirements. I understand that. But we really should 
recognize that a significant decline in Treasury market 
liquidity is already occurring, and absent an improvement, I am 
afraid that the Fed might 1 day decide it has to intervene by 
restarting bond purchases, which would be quite contrary to its 
current mission of getting inflation under control.
    What I hope to hear from our banking regulators today is 
that they will prioritize these and other real challenges and 
not stray beyond their mandates into politically contentious 
issues or establish unnecessary new regulatory burdens.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Toomey.
    I will introduce the four witnesses. Michael Barr took 
office as Vice Chair for Supervision of the Board of Governors 
of the Federal Reserve system July of 2022 for a 4-year term. 
He also serves as a member of the Board of Governors.
    Todd Harper was sworn in to serve a full term as the 
National Credit Union Administration Board Chair in July of 
2022.
    Martin Gruenberg has been the Acting Chair of the FDIC 
Board of Directors since February of 2022. He has been 
previously confirmed to serve as Chair and Vice Chairman of the 
FDIC, and has served at the FDIC since 2005.
    Michael Hsu became Acting Comptroller of the Currency in 
May of 2021.
    Mr. Barr, if you would begin your testimony. Thank you.

STATEMENT OF MICHAEL S. BARR, VICE CHAIR FOR SUPERVISION, BOARD 
           OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Barr. Thank you very much, Chairman Brown, Ranking 
Member Toomey, and other Members of the Committee. Thank you 
for the opportunity to testify today on the Federal Reserve's 
supervisory and regulatory activities.
    As Vice Chair for Supervision, my priority is to make the 
banking system safer and fairer. The banking system is 
constantly evolving, so regulation and supervision must adjust 
to respond to new and emerging risks.
    Reforms following the global financial crisis have helped 
the United States maintain a resilient financial system for 
consumers, businesses, and communities. Capital and liquidity 
positions remain above regulatory requirements.
    But we must ensure we are keeping pace. Many issues at the 
forefront of banking regulation today when not prominent 
previously, and some of them scarcely even existed. Few 
anticipated a global pandemic, and recent events in crypto 
markets have highlighted the risks associated with new asset 
classes were not accompanied by strong guardrails.
    Turning to a number of our priorities at the Federal 
Reserve, I am taking a holistic look at the Fed's capital 
framework to assess whether it is functioning as intended and 
supports a resilient financial system. I believe the capital 
framework should be forward looking, should be tiered so that 
the highest standards apply to the riskiest firms, and should 
support a safer and fairer financial system.
    In recent years, merger activity and organic growth have 
increased the size of large banks, which could complicate 
efforts by regulators to resolve those firms upon failure 
without disruption to customers and counterparties. The board 
and the FDIC recently invited comment on an advance notice of 
proposed rulemaking to enhance regulators' ability to resolve 
large banks in an orderly way, should they fail.
    The Federal Reserve is also evaluating our approach to 
reviewing banks' proposed acquisitions. Mergers are often a 
feature of vibrant sectors, but the advantages that firms seek 
to gain through mergers must also be weighed against the risks 
that mergers can pose to competition, consumers, and financial 
stability.
    Another priority is monitoring the risk of crypto-asset-
related activities. Crypto-asset-related activity requires 
effective oversight that includes safeguards to ensure that 
crypto companies are subject to similar regulatory safeguards 
as other financial service providers.
    We are also working to understand financial risks related 
to climate change. At the Fed, our mandate in this area is 
important but narrow, and we are focused on our supervisory 
responsibilities and our role in promoting a safe and stable 
financial system. To that end, the Federal Reserve recently 
announced a pilot climate scenario analysis exercise, designed 
to enhance the ability of supervisors and firms to measure and 
manage climate-related financial risks.
    As the banking system continues to evolve, we must ensure 
that supervision and regulation keep up with those changes and 
are appropriate for the underlying risks. As Vice Chair for 
Supervision, I will continue to work to promote a safe and fair 
banking system.
    Thank you, and I look forward to your questions.
    Chairman Brown. Thank you, Mr. Barr.
    Mr. Harper, thank you for joining us.

   STATEMENT OF TODD M. HARPER, CHAIR, NATIONAL CREDIT UNION 
                         ADMINISTRATION

    Mr. Harper. Chairman Brown, Ranking Member Toomey, and 
Members of the Committee, thank you for inviting me to discuss 
the state of the credit union system.
    While the economic fallout of the COVID-19 pandemic, along 
with rising interest rates, have influenced credit union 
performance over the last year, the credit union industry 
overall remains on a solid footing. At the end of the second 
quarter, there were just under 5,000 federally insured credit 
unions with nearly 133 million members and more than $2.1 
trillion in assets.
    Notably, the industry's aggregate net worth ratio rose to 
10.42 percent, representing a recovery of 40 basis points from 
a pandemic low. Further, the National Credit Union Share 
Insurance Fund continues to perform well, with no premiums or 
distributions expected at this time.
    During the last year, the NCUA has undertaken several 
notable actions to strengthen capital, enhance cybersecurity, 
and support small and minority credit unions. To fortify the 
credit union system's ability to better withstand future 
crises, the NCUA implemented its risk-based capital rule along 
with a simplified compliance option at the start of 2022. The 
agency also has begun deployment of its new, scalable 
information security examination program, to allow the NCUA to 
better evaluate credit union cyber risks.
    Further, the agency has increased the resources available 
in the field to assist small and minority credit unions, and we 
will soon modify our examination procedures for minority credit 
unions to better recognize their unique strategies.
    Additionally, the NCUA is paying closer attention to 
consumer financial protection, which buttresses and complements 
our safety and soundness efforts. This year, NCUA examiners are 
reviewing compliance with pandemic assistance programs, fair 
lending rules, servicemember protections, fair credit reporting 
laws, and overdraft programs. We have also increased the 
resources for fair lending supervision.
    And as we move into 2023, the NCUA is emphasizing that all 
credit unions remain vigilant in managing safety and soundness 
and consumer financial protection to prepare for rising 
interest rates, inflationary pressures, liquidity concerns, and 
cybersecurity risks.
    Additionally, as the financial services system and credit 
unions continue to evolve, especially with many credit unions 
growing larger and more complex, the industry's regulatory 
framework must keep pace to maintain the strength and stability 
of the credit union system.
    In response to these changes and to legislation recently 
enacted into law, the NCUA has undertaken several rulemakings 
and implemented new rules during the last year. These rules 
address member expulsion procedures, subordinated debt, 
emergency capital investments, and cybersecurity notifications.
    Finally, I want to highlight two legislative changes that 
would help the agency better fulfill its statutory mission. 
Most timely, the NCUA requests a permanent adjustment to the 
agent member requirements for the Central Liquidity Facility. 
Notably, the extension of this enhancement comes at no cost to 
the taxpayer, as scored by the Congressional Budget Office.
    Currently, corporate credit unions may serve as an agent 
for a subset of their members, but without legislative action, 
by year's end, 3 out of every 4 credit unions, including most 
minority credit unions, will soon lose their access to an 
important Federal liquidity backstop, and the credit union 
system's capacity to address liquidity events will shrink by 
$10 billion. With growing interest rate risk and rising 
liquidity concerns, now is not the time to decrease the access 
to the system's liquidity shock absorbers.
    The NCUA is also seeking restoration of its ability to 
oversee third-party vendors. This statutory change would 
provide the NCUA parity with other agencies that supervise and 
regulate federally insured depository institutions. This 
examination authority is critical, given the system's increased 
reliance on third-party vendors and credit union service 
organizations. The Government Accountability Office, the 
Financial Stability Oversight Council, and the NCUA's Office of 
Inspector General have all recommended that Congress restore 
the NCUA's vendor authority.
    The U.S. House of Representatives has passed legislation as 
part of the 2023 National Defense Act to reinstate the NCUA's 
vendor authority, and in the Senate, bipartisan legislation has 
been introduced for which I would like to thank Senators 
Ossoff, Lummis, and Warner. Their bill, the Improving 
Cybersecurity of Credit Unions Act, would close a growing 
regulatory blind spot.
    That concludes my statement. I look forward to your 
questions.
    Chairman Brown. Thank you, Mr. Harper.
    Mr. Gruenberg, welcome.

STATEMENT OF MARTIN J. GRUENBERG, ACTING CHAIR, FEDERAL DEPOSIT 
                     INSURANCE CORPORATION

    Mr. Gruenberg. Thank you, Chairman Brown, Ranking Member 
Toomey, and Members of the Committee. I very much appreciate 
the opportunity to appear today at this hearing on the 
oversight of the financial regulators.
    In my oral remarks today I would like to focus on the state 
of the U.S. banking industry and the outlook for the industry. 
To begin with, the U.S. banking industry today has reported 
generally positive results for this year amid continued 
economic uncertainty. Loan growth strengthened, net interest 
income grew, and most asset quality measures improved. Further, 
the industry remains well capitalized and highly liquid.
    The number of institutions on the FDIC's ``Problem Bank 
List'' remained stable in the second quarter of this year, at 
40 institutions. That is actually the lowest number since 
quarterly reporting of that data began in 1986. Fourteen new 
banks opened through October 2022, including the first mutual 
bank in 50 years. And additionally, no banks failed during 
2021, nor this year as well.
    At the same time, the banking industry reported a moderate 
decline in net income in the first two quarters of this year 
from a year ago, primarily because of an increase in provision 
expense at the largest institutions, and that is worth paying 
some attention to. The increase in provision expense, that is 
the amount set aside by institutions to protect against future 
credit losses. It reflects the banking industry's recognition 
of risks related to persistent economic uncertainties and 
slowing economic growth as well as the increase in loan 
balances.
    Rising market rates and strong loan growth supported an 
increase in the banking industry's net interest margin from the 
first to the second quarter. As a result, most banks reported 
higher net interest income compared to a year ago.
    However, rising interest rates and longer asset maturities 
also resulted in unrealized losses on investment securities 
held by banks, and there is a significant overhang here. As of 
the second quarter of 2022, banks reported $470 billion in 
unrealized losses as the market value of securities fell below 
the book value. The FDIC expects this trend to be an ongoing 
challenge, as interest rates continue to rise in the third 
quarter, especially if banks should need to sell investments to 
meet liquidity needs.
    In summary, despite favorable performance metrics, the 
banking industry continues to face significant downside risks 
that we need to pay attention to. These risks include the 
effects of inflation, rising market interest rates, slowing 
economic growth, and continued geopolitical uncertainty. Taken 
together, these risks could reduce profitability, weaken credit 
quality and capital, and limit loan growth in coming quarters.
    Further, as I mentioned, higher market rates have led to 
continued growth in unrealized losses in the banking industry's 
securities portfolios. Higher rates may also erode real estate 
and other asset values as well as hamper borrowers' loan 
repayment ability. So these are all matters that we will be 
paying, at the FDIC, close attention to over the course of this 
year and next.
    In my written testimony I provide an overview of the 
condition of the FDIC's Deposit Insurance Fund, and the reason 
behind the FDIC's decision to increase deposit insurance 
assessments by 2 basis points next year, to avoid a potentially 
larger, more procyclical increase later, at a less favorable 
point in the economic cycle.
    I also update the Committee in my written testimony on five 
key policy priorities for the FDIC: strengthening the Community 
Reinvestment Act; addressing the financial risks that are 
likely to affect banking organizations and the financial system 
as a result of climate change; reviewing the bank merger 
process; evaluating the risks of crypto assets to the banking 
system; and finalizing the Basel III capital rules.
    I also discuss the FDIC's efforts to support minority 
depository institutions and community development financial 
institutions, promote a diverse and inclusive workplace at the 
FDIC, strengthen cybersecurity and information security within 
the banking industry, and the FDIC's recent return to in-person 
banking examinations and other in-person activities at every 
level of the agency.
    I would be glad to respond to questions from the
    Committee on these or any other matters. Thank you.
    Chairman Brown. Thank you, Mr. Gruenberg.
    Mr. Hsu, welcome.

STATEMENT OF MICHAEL J. HSU, ACTING COMPTROLLER, OFFICE OF THE 
                  COMPTROLLER OF THE CURRENCY

    Mr. Hsu. Chairman Brown, Ranking Member Toomey, and Members 
of the Committee, I am pleased to appear before you today to 
provide an update on the activities underway at the OCC.
    The mission of the OCC 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.
    Since my appointment, to fulfill this mission we have 
focused on four priorities--guarding against complacency, 
reducing inequality in banking, adapting to digitalization, and 
managing climate-related financial risks. My written statement 
describes the progress the OCC has made on each of these. Here 
I would like to focus on how we are helping to ensure that 
banks serve the needs of their communities.
    First, I want to highlight the OCC's commitment to 
community banking. We are taking specific actions to support 
community banks, including revitalizing minority depository 
institutions, reducing community bank assessments, promoting de 
novo startup banks, and tailoring regulation based on size and 
complexity.
    Second, the OCC continues to encourage the banks we 
supervise to improve their products and services, including 
overdraft programs, with their customers' financial health in 
mind. Many of these banks, including nearly all of the largest 
banks, have begun reforming their overdraft programs and 
lowering fees. While more work needs to be done, consumers are 
benefiting from the efforts of national banks to reduce penalty 
fees and the daily number of overdrafts charged, to provide 
grace periods before fees are imposed, and to end nonsufficient 
funds fees. By some estimates, changes at the largest national 
banks could save consumers billions of dollars annually.
    Additionally, the OCC has strengthened its supervision of 
compliance with fair lending laws. We recently updated our 
process for screening bank retail lending activities to provide 
more risk-focused fair lending examination strategy to identify 
weaknesses or wrongdoing. Where we find evidence of potential 
discrimination, we refer those matters to DOJ and HUD, as 
applicable. Redlining and other forms of lending discrimination 
are unacceptable, especially in this day and age, and we will 
not hesitate to take enforcement action, if necessary.
    The OCC, in coordination with the Federal Reserve and FDIC, 
as well as the DOJ, is also considering updates to the 
framework for analyzing mergers under the Bank Merger Act. This 
is to ensure that resulting entities continue to meet the 
convenience and needs of the community, support financial 
stability, enhance competition, and are safe and sound. The OCC 
considers each merger application on its merits against these 
statutory factors and associated regulatory criteria. We are 
planning a public symposium in February to explore this 
important issue further.
    As the digitalization of banking accelerates and bank-
fintech partnerships grow, the OCC is focused on ensuring that 
our expertise and regulatory framework adapts so that safety, 
soundness, and fairness of banking is maintained and even 
strengthened. We recently announced that we will be 
establishing an Office of Financial Technology early next year, 
building upon the work and successes of the agency's Office of 
Innovation, which was created in 2016. This change will enable 
us to engage more substantively with nonbank technology firms 
and to better supervise bank-fintech partnerships so that we 
can help ensure that consumers of banking services are treated 
fairly as well as help maintain a level playing field as the 
industry evolves.
    With regard to crypto, the OCC has adopted a careful and 
cautious approach. Last November, we issued guidance which 
reminds the banks we supervise that they are not permitted to 
engage in certain crypto activities unless they can perform 
these activities in a safe and sound manner. This approach 
helped to mitigate the risks of contagion from crypto to the 
Federal banking system after the collapse of Terra Luna this 
spring as well as more recently with the bankruptcy of FTX.
    Finally, let me say a few words on climate-related 
financial risks. The OCC's approach is firmly rooted in our 
mandate to ensure that national banks operate in a safe and 
sound manner. It is not our role to tell bankers who to bank or 
not to bank. We do not pick winners and losers. Rather, our 
focus is on risk management and making sure banks, especially 
large banks, have the necessary capabilities to identify, 
measure, and monitor their risks. We are committed to staying 
in our safety and soundness lane, not on setting industrial 
policy. This is important to our credibility as a safety and 
soundness supervisor.
    In closing, I remain committed to ensuring that OCC-
supervised banks operate in a safe, sound, and fair manner, 
meet the credit needs of their communities, and comply with 
applicable laws and regulations.
    I look forward to answering your questions. Thank you.
    Chairman Brown. Thank you, Mr. Hsu. Thanks to the four of 
you.
    This year we have seen cryptocurrency values collapse by $2 
trillion, two thousand billion dollars, and markets crash, 
crypto exchanges implode, file for bankruptcy, investors losing 
their money, workers losing their jobs. The parallels to past 
financial crises through our history are troubling, from 
wildcat money in the mid-1800s to the dot-com bubble burst in 
the 1990s to the over-the-counter derivatives that led to the 
2007-2008 financial crisis.
    Unlike traditional bank or credit union deposits, which 
Americans use to get paid, buy necessities, build their 
savings, private cryptocurrencies are not backed or protected 
by the Government, and they should not be. We have seen them 
used for speculation and fraud and scams, sanctions evasion, 
outright theft. There does not seem to be anything useful or 
beneficial, that hundreds of speculative cryptocurrencies can 
be used for.
    Since I have been Chairman of this Committee for close to 2 
years, many on my side of the aisle have raised warning flags 
about this. The last thing we need is for risky new financial 
products to crash our financial system. Thank you, those of you 
on this panel, for your skepticism about cryptocurrencies, and 
we will continue that work.
    As all of you pointed out, digital assets pose risks to our 
financial system. There are many other risks we need to focus 
on to ensure the banking and credit union system is resilient 
for consumers and small business owners.
    So a question for all four of you. What are the biggest 
risks that your agencies see? How could they harm working 
families and small businesses on Main Street? What are your 
agencies doing to protect against them?
    I will begin with Mr. Harper, then Mr. Gruenberg, then Mr. 
Hsu, then Mr. Barr. So if you would answer. Each of you take a 
moment or so and answer those questions.
    Mr. Harper. Certainly. Generally I see four risks that are 
coming down the line. First is interest rate risk for the 
institution itself, second is liquidity risk, the third is 
cybersecurity risk, and something that we are watching on the 
horizon would be credit risk that happens, particularly as 
unemployment rises. There is a correlation in the numbers that 
shows that as unemployment rates go up we often see an increase 
in charge-offs and defaults. That is something that we are 
going to be watching very closely, moving forward.
    Chairman Brown. Thank you. Mr. Gruenberg.
    Mr. Gruenberg. Thank you, Mr. Chairman. I think, first and 
foremost, as I outlined in my oral statement, I do think we are 
at an inflection point here in the economy with the Fed having 
shifted the conduct of monetary policy, and we have a rising 
interest rate environment. And I do think that presents a 
number of potential downside risks to the banking system that I 
outlined earlier.
    I think our institutions are going to have to pay close 
attention to the interest rate risk that is accumulated on 
their balance sheet, both through longer-term assets that they 
have accumulated. I mentioned in particular the unrealized 
losses on securities on their balance sheets. And I also think 
there are asset exposures that our institutions have, 
particularly in commercial real estate, which we have had 
experience with during other times of potential economic and 
financial stress, as well as in the mortgage market.
    So I think from a supervisory standpoint, with the changing 
economic environment as financial regulators and banking 
regulators, we are going to have to pay close attention, in 
particular, to these developing issues.
    Chairman Brown. Thank you. Mr. Hsu.
    Mr. Hsu. So I think the greatest risk is the risk of 
complacency. The risks that are facing the banking industry are 
fairly well known at this point--interest rate risk, credit 
risk, operational IT risk, cyber risk. The risk that banks are 
facing is that they are not paying sufficient attention and 
vigilance to that as we deal with other, more headline risks, 
such as crypto.
    There are some tail risks that are also out there that we 
need to pay attention to, geopolitical in the commodities 
space, nonbank financials. There are also well known and have 
been identified by the FSOC and others. So I just encourage 
banks and supervisors to stay on top of those. Thank you.
    Chairman Brown. Thank you. Mr. Barr.
    Mr. Barr. Thank you. Like the others, we are paying careful 
attention to the way in which supervised institutions are 
managing liquidity risk and interest rate risk. Cybersecurity 
is always an issue to be watchful for.
    We are worried about making sure that financial 
institutions are thinking about potential risks if the economy 
softens, so particularly as others have said, in commercial 
real estate, residential housing, which are the sectors most 
often that are leading indicators for risk in that area.
    We are paying attention to longer-term risks as well. We 
talked, I think all of us, about the longer-term risks with 
respect to climate change. Events abroad might cause 
disruptions in the United States. The war in Ukraine, Russia's 
war in Ukraine obviously is devastating for the people of 
Ukraine and also creates enormous potential risks in Europe and 
elsewhere.
    And we are paying careful attention to risks in China as 
well, with slowing growth there and a political turn inward 
that may cause additional risk to happen.
    And last, we are concerned about the risks that we do not 
know about in the nonbank sector. That includes, obviously, 
crypto activity but more broadly risks in the parts of the 
financial system where we do not have good visibility, we do 
not have good transparency, we do not have good data. That can 
create risks that blow back to the financial system that we do 
regulate, and so we pay careful attention to understanding 
those risks as best we can.
    Chairman Brown. Thank you. Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman. I want to follow 
up on a comment the Chairman made. I think I heard the Chairman 
refer to crypto as risky new financial products, and the 
insinuation was that they might have the ability to crash our 
financial system.
    I think there is a really important distinction that I want 
to underscore here. If you look at what happened with FTX, what 
at least appears to have happened by a very extensive coverage, 
this is fundamentally not about the kind of assets that were 
held by FTX. It is about what individuals did with those 
assets.
    There are a lot of corollaries. There are a lot of 
analogies here. One comes to mind. In 2011, MF Global, a 
commodity brokerage firm that was run by former New Jersey 
Senator John Corzine. It collapsed after customer funds were 
misappropriated to fill a shortfall caused by the firm's 
exposure to some trading that went south. Now nobody suggested 
that the problem was the instruments that were used. The 
problem was the use of customer funds.
    Similarly, the 2008 financial crisis involved disastrous 
consequences with what people were doing with mortgages. Did we 
decide we have got to ban mortgages? Of course not.
    So let us look at FTX. It certainly appears to be an 
egregious failure to treat customer assets as segregated 
assets. It appears at the leadership there attempted to fill a 
hole at an affiliated company, and it occurs to me that this is 
a worry that I do not have for one split second about my stocks 
or my bonds or my Treasuries when they are held in custody by 
American banks.
    Mr. Hsu, a predecessor of yours said that there is no need 
for any additional guidance. It is a settled matter as to how 
banks should custody financial assets, and they do it all the 
time, and they have done it forever.
    But my understanding is that your office discourages banks 
from providing custody services, among other services in the 
crypto space. And it seems to me if people had access to 
custody services provided by a wide range of institutions, 
including regulated financial institutions, they might be able 
to sleep more comfortably knowing that those assets were 
unlikely to be used for some completely inappropriate purpose.
    So is it true that you discourage banks from engaging in 
crypto custody services?
    Mr. Hsu. We discourage banks from doing things that are not 
safe, sound, and fair. And so the custody that you described of 
traditional assets, it is true banks have been doing that for a 
long time.
    Senator Toomey. Right.
    Mr. Hsu. They know how to do that. We know how to do that.
    The custody of crypto is different. There are some 
underlying, fundamental issues and questions regarding what 
does it mean to own crypto through a custody, which have not 
been fully worked out.
    Senator Toomey. So this activity, crypto trading, people 
holding crypto assets, has been going on for many years. Why 
have you not provided the clarity? Why have you not provided 
guidance so that it is clear and we could have customers have 
the assurance of having their assets stored by reliable 
institutions?
    Mr. Hsu. If banks can demonstrate that they can do that 
activity in a safe, sound, and fair manner, we are all ears.
    Senator Toomey. But I think some of this obligation is on 
you to provide some clarity about how that could work, and as I 
say, what I am hearing from the industry is that this activity 
is being discouraged. And the result is not that the activity 
does not occur. It is just that it goes somewhere where the 
regulation is often lax.
    Let me move on to another aspect of this. Vice Chairman 
Barr, you recently said that there are types of crypto-related 
activities where the Fed may need to provide guidance to the 
banking sector. In your view, is custody a category of crypto 
activity that the banking sector can provide and could use some 
guidance?
    Mr. Barr. Thank you, Senator Toomey. I do think that it 
would be useful for us to provide guidance to the banking 
sector about how to safely custody crypto assets. It is 
something I look forward to working with my colleagues on.
    I think we have seen, in the context of recent events, that 
if you have a set of firms that are trying to operate outside 
the regulatory perimeter, trying to avoid compliance issues, 
that can create enormous problems for consumers, for investors. 
There are huge problems that these investors experience that I 
do not think anyone wants to see happen.
    Senator Toomey. Just a quick follow-up here. My 
understanding is the SEC has put out guidance recently that 
would require issuing firms that custody crypto to put that 
crypto on their own balance sheet. Now that is contrary to the 
way custody services are treated in every other category of 
asset that I can think of, and always has been.
    If that were the case, if you are a firm that does not care 
about having a bloated balance sheet, maybe you do not care, 
but banks have a reason to be very concerned about increases in 
their balance sheet because it has capital requirements.
    Would this not impose a significant cost on banks if they 
are, in fact, obligated to put all of the crypto custody assets 
on their balance sheets?
    Mr. Barr. Well, we have seen bank operate in a pretty 
cautious way to date. There are very few institutions that are 
currently seeking to engage in custody activity. Of course, we 
require all of our regulated financial institutions to comply 
with accounting rules, including accounting interpretations 
issued by the SEC. And so publicly traded banks would need to 
comply with that rule, and it would have the result that 
custody of crypto assets, you would need to hold capital 
against----
    Senator Toomey. In a way that is not required of any other 
category of financial assets.
    Mr. Barr. ----in a way that is not required for traditional 
custody of non-crypto assets. So that differential would impact 
bank decisionmaking.
    Senator Toomey. Yeah. Thank you very much.
    Senator Reed [presiding]. Thank you, Senator Toomey.
    On behalf of the Chairman I will recognize myself.
    Gentlemen, thank you for being here today. Vice Chairman 
Barr, the Volcker rule prohibits Wall Street banks from making 
investments in hedge funds and private equity funds. The 
legislation was passed in 2010, with the hope that those 
investments could be liquidated quickly. But there are some 
that were deemed to be too illiquid or too difficult to be 
dispensed with immediately, and so there was an extension to 
July 2022, 12 years. And yet there are at least two 
institutions that still have not disassociated themselves and 
disinvested.
    You have given them extra time. Is this going to be an 
endless process, or why can they not get it done?
    Mr. Barr. Senator Reed, thank you. I agree with you. I 
think the time has come for those divestments to happen. The 
Volcker rule provided, as you said, until July of this past 
year to get that done. Some firms, I believe, were erroneously 
relying on a legal interpretation that would not require them 
to do those divestitures. I think that is an incorrect legal 
interpretation. We will be clear with them that it is time to 
get those divestitures done. Some of them may need a small 
amount of time to get that done, but we are not going to see 
continued extensions beyond that.
    Senator Reed. Thank you very much.
    Mr. Gruenberg, when the Fed raises interest rates, 
historically, banks usually follow with their savings rates. In 
fact, according to industry research the deposit rate should 
start ticking up when the Fed's target rate hits about 1.33 
percent. Well, the Fed's target rate is now 4 percent, and the 
national average interest rate on a savings account is now 0.2 
percent. But the Nation's biggest banks are even lagging that 
average. They are at 0.01 percent.
    So why do you think the biggest banks have been lagging so 
much in terms of sharing their beneficence with their savers?
    Mr. Gruenberg. Thank you, Senator. It is pretty clear that 
the banking industry is trying to take advantage of rising 
interest rates on the credit product side, to increase 
earnings, and it is fair to say what they are paying out on the 
deposit side has lagged that. We will see if competitive 
pressures within the industry impact what they may offer on 
deposit accounts, but right now there is clearly a lag.
    Senator Reed. Thank you. Let me follow up with another 
question, Mr. Gruenberg. There has been a situation where banks 
are partnering with fintech companies. It has been described as 
``rent-a-bank,'' where the fintech company comes in and uses 
the bank as an intermediate to avoid usury limits and other 
restrictions. Many of these are your institutions.
    What are you doing to try to stop that?
    Mr. Gruenberg. Thank you for the question, Senator. When a 
bank partners with a third party and the third party is 
providing services on behalf of the bank, including credit 
products, as a supervisory matter the offering of services by 
the third party are treated as if the bank itself is offering 
those services and products, and the bank is supervised 
accordingly.
    We have a number of institutions that are utilizing 
partnerships to benefit from the banking relationship. There 
are several institutions I will say we are taking a close look, 
particularly at the lending activity going on, to ensure that 
the lending activity is being appropriately underwritten and 
that it is based on the borrower's ability to pay as well as 
consumer protection requirements in terms of disclosure and 
transparency are being complied with. And this is a matter of 
attention for us, and I appreciate you asking the question.
    Senator Reed. Well, thank you very much.
    Now, on behalf of Chairman Brown, let me recognize Senator 
Rounds.
    Senator Rounds. Thank you, Mr. Chairman. Vice Chair Barr, 
welcome back to the Committee and congratulations on your 
confirmation.
    In recent speeches you have announced that you would be 
conducting a holistic review of the capital framework for our 
financial institutions. Included in that evaluation will be a 
review of the supplementary leverage ratio, or SLR, the 
countercyclical capital buffer, and stress testing. This review 
is long overdue as the Fed has said for months that it would 
reassess both the G-SIB surcharge and the SLR.
    In the process it is important that we strike a balance 
between financial stability and economic growth. In order to 
achieve that balance, I believe the Federal Reserve must be 
transparent and consider input not only from Congress but from 
stakeholders on any adjustments.
    When do you expect this review to be complete, and will you 
commit to providing a transparent, formal, public process with 
a comment period for any resulting adjustments to SLR, the G-
SIB surcharge, stress tests, or countercyclical capital buffer?
    Mr. Barr. Thank you, Senator Rounds. We are conducting that 
review now. We are in the middle of that. I expect that early 
next year we will be able to say more about where we are in 
that process.
    If any of these parts of the review require us to rethink a 
rule, like the eSLR or the countercyclical capital buffer and 
the like, we would, of course, seek public comment as part of 
that process. We will issue a proposal, get comments in, 
evaluate those comments, understand them, and then lead to any 
action we took on a final rule. So we would follow normal 
process on that.
    Senator Rounds. Thank you.
    Chair Harper, late last year the NCUA approved its 2022-
2026 Draft Strategic Plan, which included an analysis of the 
internal and external environment impacting NCUA and evaluated 
the agency's programs and risks. It included language 
suggesting that as a result of changing weather 
disproportionately affecting farming communities credit unions 
should consider adjustments to their membership. This was very 
problematic language as it implied that credit unions that 
primarily serve agricultural communities may have to alter 
their memberships or face increased costs and regulations. As a 
result of the actions of Senator Cramer and myself, that 
language thankfully was not included in the final draft.
    Chair Harper, will you commit to avoiding similar 
problematic language in future strategic plans and commit to 
not punishing credit unions for supporting their local farmers, 
ranchers, and agribusinesses in their communities?
    Mr. Harper. Yes.
    Senator Rounds. Thank you.
    It has been widely reported that the CFPB is planning to 
shift liability for peer-to-peer payments that consumers make 
to a scammer. Scammers would likely profit from such a policy 
because armed with an official Government document they will be 
able to induce people to pay them by telling them there is no 
risk in sending the money, even if the circumstances are 
suspicious. However banks, unlike the consumer, would have no 
insight into the transaction to be able to stop it.
    My question for Vice Chair Barr, are you concerned there 
will be an impact on bank safety and soundness given banks' 
inability to identify or stop the fraud the size of potential 
fraud losses banks could incur, and furthermore, has there been 
any research done to determine how fees would increase and what 
new costs consumers would bear if this is implemented?
    Mr. Barr. Thank you, Senator Rounds. The regulations that 
issue Regulation E are implemented by the Consumer Financial 
Protection Bureau, so in the first instance I think it makes 
sense for them to figure out what they would like to propose, 
if anything, in that area, and then we would be able to 
understand the implications of that proposal more broadly. But 
I do not have any further insight about it at this time.
    Senator Rounds. No existing studies at this point?
    Mr. Barr. I do not know the answer to that. None that I am 
aware of, but there may be others that exist that I do not 
know.
    Senator Rounds. Thank you.
    Following an influx of deposits generated by Government 
stimulus, the FDIC approved an aggressive proposal to uniform 
increase bank deposit insurance assessment rates by 2 basis 
points until the Deposit Insurance Fund reached a designated 
reserve ratio of 2 percent. This proposal has the potential to 
disproportionately harm community banks by forcing them to pay 
between 5 percent and 25 percent of their pretax income for 
insurance assessments. Meanwhile, the OCC recently approved a 
40 percent reduction in assessments for OCC-chartered community 
banks.
    Acting Chair Gruenberg, could you please explain your logic 
behind supporting increases to community banks' FDIC deposit 
insurance assessment rates well beyond the statutory 
requirement, and was a study done to determine the ratio of 2 
percent, or is that an arbitrary number?
    Mr. Gruenberg. The 2 percent was the subject of careful 
analysis and was reached based on the FDIC's experience during 
two crises. And just to be clear, if I could take a moment to 
explain because it is a little complicated, under the statutory 
requirement there is a minimum reserve ratio for our Deposit 
Insurance Fund of 1.35 percent, and if that ratio falls below, 
the FDIC is required by law to establish a restoration plan to 
bring it back up to the 1.35 percent minimum.
    As you noted, at the beginning of the pandemic there was an 
inflow of insured deposits and it pushed the ratio down, and 
the FDIC, back in 2020, adopted a restoration plan that did not 
envision increasing assessment rates. That was based on an 
expectation, frankly, that as the pandemic progressed the 
growth in insured deposits would slow down. And what occurred 
is that over the past year, from the second quarter of this 
year to the previous, the insured deposit growth rate remained 
very high, at 4.3 percent.
    So we had projections that envisioned us being able to 
restore the reserve ratio fund to the statutory minimum, by the 
statutory deadline of 2028. We thought we could do that without 
an assessment adjustment. Because the growth rate stayed high 
it shifted our projections and really put in question whether 
we could get to the minimum in time.
    So we had a tricky call to make, and let me be candid, we 
could have delayed and hoped that the growth in insured 
deposits would slow down and the problem would take care of 
itself. The problem there--and I will come quickly to a 
conclusion--was that if we were wrong we then might have to 
impose a larger assessment on the industry, at a later stage of 
the cycle, when the industry would be in a not as good a 
position to absorb it. So we opted for a 2-basis-point 
increase. That is about 1.2 percent of industry income. We did 
not envision that impacting lending or credit availability, but 
it would assure us of putting the fund in a solid position, 
particularly since we are heading into an uncertain period.
    So it was a tricky call, but that was the judgment we made.
    Senator Rounds. Thank you, Mr. Chairman, for your 
indulgence on that.
    Senator Reed. Let me, on behalf of Chairman Brown, 
recognize Senator Menendez.
    Senator Menendez. Thank you.
    The collapse of FTX last week is the latest in a series of 
high-profile crypto collapses this year, which have left 
investors locked out and facing uncertain prospects for 
recovering their money. This should be a renewed call for 
Congress to take a serious look at crypto exchanges and lending 
platforms, many which engage in risky behaviors while marketing 
themselves as safe for consumers.
    Mr. Gruenberg, am I correct in saying there are no 
cryptocurrency firms backed by the FDIC?
    Mr. Gruenberg. That is correct.
    Senator Menendez. In fact, at this time FDIC insurance does 
not cover cryptocurrency of any kind. Is that correct?
    Mr. Gruenberg. That is correct, Senator.
    Senator Menendez. Many of these firms are marketing 
themselves to consumers as safe and responsible while engaging 
in risky behaviors without the guardrails and safety nets that 
exist within the traditional financial system. In August, the 
FDIC issued letters demanding several crypto firms, including 
FTX, cease and desist from misleading consumers into believing 
their deposits were insured. The FDIC and Federal Reserve 
issued a similar letter in July, to Voyager LLC, which 
collapsed earlier that month.
    What can we do to combat misinformation like this and 
better protect and inform consumers in the crypto space?
    Mr. Gruenberg. Thank you, Senator. Listen, this has been a 
key priority for us. The strength of the FDIC is the public's 
confidence in our deposit insurance system, so if that 
confidence is put in question it really puts the system at 
risk. And if we have financial players who are engaging in 
blatant misrepresentation in regard to deposit insurance 
coverage, that is not only a violation of the law by firms that 
do that, it really is a threat to the credibility of the FDIC 
and our deposit insurance system.
    So when we identified some companies, in the crypto space 
and others, engaging in misrepresentation, we acted very 
forcefully in sending letters demanding that they cease and 
desist, and indicating that if they did not comply we have 
enforcement authorities available to us under the law that we 
can bring to bear. We thought it was important in regard to 
those individual actors, and we thought it was important to 
send a message to those who would think about engaging in 
misrepresentation of deposit insurance coverage.
    Senator Menendez. Well, I am glad you did, and I think 
these exchanges having these troubles should instigate us and 
regulators to look at what regulations are needed to ensure 
investors in the overall financial system are protected.
    I want to thank all of you for jointly proposing a rule to 
modernize the CRA to increase lending in minority communities. 
We saw, 2 years ago, an assault on the CRA when the OCC acted 
alone and proposed a rule that would have left minority 
communities with less credit, and I thank Comptroller Hsu for 
withdrawing that rule.
    According to the Census Bureau, there are over 26 million 
limited English-proficient consumers in the United States, with 
17 million of those consumers speaking predominantly Spanish.
    So Mr. Barr, Mr. Hsu, Mr. Gruenberg, do you all agree that 
language can be a barrier to assessing financial services?
    Mr. Gruenberg. Yes.
    Mr. Barr. Yes.
    Senator Menendez. Would you all agree that, for example, 
home mortgage loans and small business lending could increase 
in Hispanic communities if banks provided more documents and 
in-person services in Spanish?
    Mr. Gruenberg. Yes.
    Mr. Barr. Yes.
    Mr. Hsu. Yes.
    Senator Menendez. I hope you will all consider seriously in 
your services test an evaluation of a bank's ability to serve 
those with limited English proficiency. In August, I joined 
Chairman Brown and 17 of our colleagues in a comment letter, 
urging you to include this in your final rule. Incentivizing 
banks to offer more services in, for example, in Spanish, will 
increase banks' ability to diversify their staff, something the 
banks still often fail to do. With a $1.8 trillion domestic 
marketplace this would make a lot of sense for the banks as 
well as for the community. They take their deposits and they 
should be also willing to work with them.
    Finally, Vice Chair Barr, as you know, the Federal Reserve 
has again the opportunity to appoint a Hispanic to a Federal 
Reserve bank president at either the Kansas City or Chicago 
Federal Reserve bank. In its 108-year history, the Federal 
Reserve has never had a Hispanic Federal Reserve bank 
president.
    During your confirmation process you made a commitment to 
develop a transparent process with meaningful public input on 
the selection of Federal Reserve leadership. I suggested six 
ideas to strengthen the Federal Reserve bank director and 
president selection process. You agreed at that time with all 
of them. Can you tell me what specific actions have you taken 
to implement any of those reforms?
    Mr. Barr. Thank you, Senator. First of all, let me just 
start by saying there is a lot more work that has to happen. I 
think it is good that you have pointed out this issue and 
continue to point it out to the Federal Reserve.
    There have been a number of positive steps that I have 
talked through with my colleagues at the Board. There has been 
progress in recent searches on the public posting dissemination 
of position descriptions and webinars and town halls to get 
public input. The public has, in these recent searches, 
undertaken solicitation of nominations, ideas from the public 
for individuals. There has been, in recent searches, engagement 
with public service organizations, with civil rights groups, 
with community organizations.
    There has not yet been progress on one of the items that 
you suggested. That is public release of demographic 
information. And we are also considering the suggestion that 
you made but have not taken action yet with respect to getting 
public input on the process itself at the Board or bank level.
    So we have made some progress but we are still seeing a lot 
more work to do.
    Senator Menendez. Well, let me just close by saying 
anonymized data is something that should not be so hard but 
would give us a window into the process, and the proof, 
ultimately, will be in whether or not there is a selection of a 
qualified individual, for which I believe there are many 
candidates.
    Thank you, Mr. Chairman.
    Chairman Brown [presiding]. Senator Tillis, of North 
Carolina, is recognized.
    Senator Tillis. Thank you, Mr. Chair. I have to start today 
by expressing my concern with President Biden's nomination of 
Mr. Gruenberg to serve as the FDIC chair. Mr. Gruenberg appears 
before us today on an anniversary, 10 years to the day of his 
confirmation to a 5-year term. Despite the fact that his term 
has long expired, Mr. Gruenberg has remained at the FDIC, most 
recently acting as chairman, despite not being confirmed by the 
Senate for a decade.
    During Mr. Gruenberg's tenure as FDIC chairman, the agency 
has had a severely blemished record, most notoriously Operation 
Chokepoint, which sought to debank legal but politically 
disfavored businesses. Additionally, there were reports of 
mistreatment of employees and some allegations of racial 
discrimination in hiring.
    And just last year, while continuing to serve on the FDIC 
board, despite his long-expired term, Mr. Gruenberg helped 
facilitate a partisan power grab of the FDIC board. He, along 
with his fellow Democratic board members, blatantly discarded 
the FDIC's 90-year precedent of allowing the FDIC chairman to 
set the agency's agenda, and in the process forced out Chair 
McWilliams.
    Until last year's coup, all previous FDIC board members, 
Democrat and Republican alike, had followed the agenda-setting 
precedent. That is something Acting Chairman Gruenberg knows 
quite well. At the beginning of the Trump administration, he 
served as FDIC chairman. Although Republicans outnumbered on 
the board, they followed precedent and allowed him to set the 
agency's agenda. However, when the shoe was on the other foot, 
Mr. Gruenberg facilitated the erosion of FDIC independence, not 
unlike attempts here to nuke our Senate filibuster.
    We need nominees, at the FDIC and other agencies, who will 
uphold the long history of bipartisanship and political 
independence at Federal financial regulators. Unfortunately, I 
have drawn the conclusion that Mr. Gruenberg does not fit that 
bill.
    Now, Mr. Barr, by the Fed's own measures in recent 
financial stability report, the bank sector continues to be 
well capitalized. The Fed reports that the results of the 2022 
stress test indicate, I quote, ``large banks would maintain 
capital ratios well above the minimum risk-based requirements, 
even during a substantial economic downturn.''
    But now it is widely expected that the upcoming Basel 
capital proposal will significantly increase capital 
requirements. I am not one of these members who say, ``Give me 
a simple yes-no answer,'' but something close to that to these 
next three questions would really be appreciated.
    Do you believe capital levels are not strong enough?
    Mr. Barr. Thank you, Senator. I am engaged in a holistic 
review of all the capital requirements to see not only whether 
they are strong but whether they are strong enough and how they 
work well together, are they fitting together in a way that 
serves the interests of making the financial system safe. I do 
not have a conclusion yet to that holistic review. I am 
undertaking it now and I will have more to say about it in the 
first quarter of next year.
    Senator Tillis. The analysis of the stress testing, though, 
seems to think that you are reasonably confident that current 
capital ratios are OK. So what is going to ultimately tip the 
scales to a different conclusion and maybe embrace the Basel 
report?
    Mr. Barr. Thank you. We are looking really at all the 
factors, so the stress test is one important input into that. 
It, of course, determines the level of capital, so it is 
setting capital requirements in the course of deciding that the 
capital requirements are sufficient. The reason that it does 
that is because of the presence of the stress capital buffer.
    And so the stress test is one input into that. We are 
modeling, of course, not a prediction about the future but one 
scenario that banks might need to address, and so that is an 
important factor but not the only factor. We need to look at 
risks across the system. As I indicated in my testimony, for 
example, before the global pandemic hit in March of 2020, that 
was not on anybody's list of potential risks to the financial 
system.
    Senator Tillis. Just a quick question. So if economic 
activity continues to slow and we increase capital 
requirements, is there a scenario where that is a good thing?
    Mr. Barr. Well, I am not----
    Senator Tillis. Or what would be a scenario where it is a 
good thing?
    Mr. Barr. ----I am not reviewing capital requirements to 
think about what the right capital level should be tomorrow. I 
am trying to think about how we should set capital requirements 
over time, through economic cycles. For any capital rule there 
is a process. We will do a proposal and we will issue a final 
rule, and then there is an implementation period. So we are not 
trying to think about, you know, what capital should be 
tomorrow. We are trying to think over long periods of time what 
are the right capital levels in the system.
    Senator Tillis. OK. Well, thank you all for being here and 
I will submit other questions for the record. My time has 
expired. Thank you, Mr. Chair.
    Chairman Brown. Senator Tester, of Montana, is recognized.
    Senator Tester. Yeah, thank you, Mr. Chairman. I want to 
thank you all for being here in front of the Committee today. I 
appreciate your leadership and your guidance.
    In particular, I was not going to talk about crypto but I 
particularly appreciate your common-sense approach on safe and 
sound and fairness, especially you, Mr. Hsu. All of you are 
good on this.
    Look, I remember the meltdown in '07, Mr. Chairman talked 
about it, where we had synthetic financial instruments and 
maybe being attached to mortgages, but there was no there, 
there. And it ended up where we cut a pretty damn big check of 
taxpayer dollars to solve that problem. And I am going to tell 
you, if you guys would have given guidance, and you had given 
credibility, we would be cutting another check. And so I just 
want to say thank you. I do not say that as a lawyer or an 
accountant. I say it as a farmer. Thank you. Thank you for what 
you have done.
    During a hearing last year I had talked to Mr. Hsu and 
Chairwoman McWilliams about the Community Reinvestment Act and 
the changes that were going to happen in making sure that rural 
America and our native populations, the investments would be 
made better in those countries. So the comment period has 
ended. It has not taken effect yet. But for Misters Gruenberg 
and Hsu and Barr, could you tell us how the new rules are going 
to ensure investment in rural America? Go ahead, Mr. Gruenberg.
    Mr. Gruenberg. Thank you, Senator. I will say that was a 
real focus of attention for the three agencies in developing 
the rule, how we could utilize CRA to provide incentives for 
increased bank lending and investment in rural communities and 
Native American communities, which are historically underserved 
and lack access to basic banking services.
    We did that through proposed changes in the two key tests 
under CRA, both the lending test and the community development 
test, by providing greater flexibility. We are not limiting the 
lending test just to the traditional branch-based assessment 
areas but we have a statewide dimension to the test which will 
give banks additional credit for serving rural communities as 
well as Native Americans. And we provide significant greater 
flexibility in the community development test, so that banks 
can invest in underserved rural communities and Native American 
communities and get CRA credit for it, even though it is not 
part of their branch network. So these were key flexibilities 
that we think will be helpful.
    Senator Tester. You fellas, anything else you would like to 
add to that? Go ahead.
    Mr. Hsu. I would say, in addition to the CRA, at the OCC, 
Native American issues are a top priority. We have a Project 
Reach, which is to increase financial inclusion. We have had a 
special subcommittee focused on home ownership promotion for 
Native Americans. Because of some of the legal issues it is 
tough for banks, so we held a webinar, trying to move that ball 
forward there.
    And I met recently with Treasurer Malerba, who is the head 
of the Office of Indian Affairs, to see how the OCC and her 
office can work together to promote these issues.
    Senator Tester. Do you see any positive impacts on housing 
with the changes in the CRA in rural America?
    Go ahead, Mr. Barr, if you want to talk.
    Mr. Barr. I think, obviously, the rule is not yet into 
effect, but I think that we would see improvements on housing 
in rural America and on community development in rural America. 
And I also just emphasize the point that both Marty and Mike 
made, that the issues affecting Native American communities' 
access to financial services are longstanding. They have been 
problems for generations. And if we do not take seriously the 
need to fix those problems, including with the reforms of the 
Community Reinvestment Act, Native American communities are 
going to continue to be left behind. So I think it is really a 
critical issue to be working on.
    Senator Tester. So before the pandemic started I talked 
with your predecessors about what I have been hearing from 
bankers in Montana about the ag industry. The previous 
Administration had some pretty silly trade wars and it affected 
ag commodity prices in a big way.
    We have seen ag prices increase dramatically, but we have 
also seen input costs increase dramatically. So based on your 
examiners, what are you seeing from the community banks that 
are serving the agricultural community? How are they doing? Mr. 
Gruenberg, Hsu, or Barr.
    Mr. Gruenberg. I will say, Senator, as a general matter, 
community banks in the United States have been doing quite well 
over the last several years, and that is certainly true as well 
for community banks in the agricultural sector.
    Senator Tester. Have the rest of you seen in the same way? 
Mr. Hsu?
    Mr. Hsu. I am hearing that they are doing quite well. I 
think there are some concerns about some headwinds, which is 
part of the reason why we lowered bank assessments for OCC 
banks and we continue to engage with them. I think that some of 
the drought issues, for some of the banks in some parts of the 
country, luckily there has been crop insurance, but these are 
top-of-mind issues for the bankers and for supervisors.
    Senator Tester. Yeah. Last question, and I want this very 
quick. Mr. Hsu, you talked about geopolitical uncertainty as it 
applied to the commodity space. What commodity are you talking 
about, or commodities are you talking about? Energy?
    Mr. Hsu. I think there have been some broad-based impacts 
across a number of different commodities markets. It depends on 
which time. At one point it was nickel, and that shifted over 
to some other commodities. So it is a broad range.
    Senator Tester. OK. Thank you. Thank you, Mr. Chairman.
    Chairman Brown. Senator Lummis, of Wyoming, is recognized.
    Senator Lummis. Thank you, Mr. Chairman, and thank you all 
for attending today. Mr. Barr, I am going to have question for 
you in a minute about Regulation W.
    But I too want to weigh in a little bit on the FTX 
situation. You know, it is awful, and simultaneously not all 
that surprising. Until June 2021, FTX was offering ordinary 
retail customers outside of the U.S. leverage of about 101 to 
1. That leverage is illegal in the United States because it is 
extremely likely that a customer loses all their money, so no 
big surprise there.
    FTX lent out customer assets for proprietary trading with 
its affiliate, Alameda Research, misusing its custody assets, 
which it did not own, and breaking its promises to its 
customers. So like Senator Toomey I agree. This is a lot like 
MF Global in 2011, and it should be absolutely forbidden.
    My State of Wyoming saw this problem coming in 2019, and 
banned banks engaged in digital asset activities from relending 
customer digital assets. Now that may be surprising to some of 
the witnesses today, but Wyoming has a tough set of rules for 
digital assets, and I hope you will look at those at the Fed.
    There were deep interconnections between FTX and Alameda 
that encouraged both to take big bets with customer assets that 
ultimately brought both down. Banks today are subject to limits 
on affiliate transactions under Regulation W and are required 
to disclose their affiliate relationships. These limits exist 
to prevent special transactions like those that occurred 
between Alameda and FTX.
    So Senator Gillibrand and I incorporated many of those 
ideas into the Responsible Financial Innovation Act, and our 
act would have prevented the FTX bankruptcy by prohibiting 
misuse and lending of customer assets, requiring proof of 
reserves for digital asset exchanges, limiting affiliate 
transactions, and providing clarity for affiliate 
relationships, and clarifying the bankruptcy treatment of 
digital assets so customers get their assets back quickly if an 
exchange fails.
    It is obviously that Congress needs to regulate digital 
assets, and the Lummis-Gillibrand bill is the legislation that 
most comprehensively addresses these issues in a way that 
balances consumer protection and responsible innovation. I am 
confident that we can get good legislation passed in 2023, and 
I look forward to working with my colleagues to do that.
    Now Vice Chair Barr, I want to turn to you again, to talk 
about Regulation W. Why is it important that there be 
transparency on affiliate relationships for banking regulation 
and why should Congress consider that for digital asset 
exchanges?
    Mr. Barr. Thank you, Senator. Regulation W is one of the 
foundation regulations for banking. It is really a quite 
important rule. And it requires not only transparency but also 
substantive limits on the relationship between the bank and its 
affiliates. The basic idea is that we need to protect the 
insured depository from possibility of risks being transmitted 
from the affiliate to the insured depository and therefore 
hurting the customers and the depositors of the bank and 
potentially putting the deposit insurance system or taxpayers 
at risk.
    So those kinds of limits on the kinds of transactions that 
banks can have with their affiliate are really a foundational 
part of banking law.
    Senator Lummis. So applying that to, for example, the FTX 
situation, where there were over 130 related entities, would a 
Regulation W type of regulation have assisted in preventing or 
at least disclosing some of the concerns that developed with 
FTX?
    Mr. Barr. Senator, I only have available the information 
you hear reported about in the press so I am not sure I am in a 
good position to opine on a particular case, a particular firm. 
I do not think that would be prudent. But I can say, in 
general, Regulation W is a really foundational principle and it 
has served the banking industry very well.
    Senator Lummis. Thank you, Mr. Barr. Thank you, Mr. 
Chairman.
    Chairman Brown. Senator Warren, of Massachusetts. I 
apologize, Senator Kennedy. You are next after--I apologize. 
Thank you, Senator Kennedy. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman.
    So since it was created by Congress just over 10 years ago, 
the Consumer Financial Protection Bureau, the CFPB, has forced 
financial institutions to return more than $13 billion directly 
to people they cheated. This is Government that works for the 
people, literally.
    Now the banks do not like losing $13 billion. They do not 
like being forced to shut down scams. So they, and their 
Republican friends, attack the CFPB, and the latest attack has 
come out of the Republican's go-to court, the Fifth Circuit 
Court of Appeals. This court has ruled that the CFPB's funding 
structure is unconstitutional because it does not receive 
annual appropriations from Congress.
    So I just want to test that out a little bit. All of you 
are here today from major regulators that oversee various 
pieces of the financial system--the OCC, the FDIC, the Federal 
Reserve, and the National Credit Union Administration. So let 
me start with you. Acting Comptroller Hsu, is the OCC funded 
from the annual appropriations process?
    Mr. Hsu. No.
    Senator Warren. Chairman Harper, does NCUA receive most of 
its funds from the annual appropriations process?
    Mr. Harper. No.
    Senator Warren. Acting Chairman Gruenberg, is the FDIC 
funded from the annual appropriations process?
    Mr. Gruenberg. No.
    Senator Warren. And Vice Chair Barr, is the Fed funded from 
the annual appropriations process?
    Mr. Barr. No.
    Senator Warren. So, in fact, I want to focus just a little 
bit more on the Fed. Vice Chair Barr, the Fed primarily gets 
its funding from earnings and assessments from the Federal 
Reserve banks. Is that exactly the same source where the CFPB 
gets its funding?
    Mr. Barr. Yes.
    Senator Warren. So look. There is a good reason why 
Congress created independent funding structures for bank 
regulators. Your agencies are the cops on the beat that ensure 
the safety and the stability of the banking system. Your rules 
provide the guidebooks for financial institutions to serve 
consumers while acting within the law.
    Congress understood this even back in 1863, with the very 
first banking regulator, that if the ability of our regulators 
to do their jobs fluctuated every time Congress negotiated a 
spending bill or every time Congress changed hands, that the 
financial markets would be thrown into chaos.
    Vice Chair Barr, your job is to make policy, not to worry 
about the Fed's budget. But let me ask, does the Fed's 
independent funding structure help provide certainty and 
stability to banks and financial markets because no one in the 
system has to worry about the Fed's ability to do its job or to 
have the resources to enforce the rules?
    Mr. Barr. Yes, I believe that kind of certainty is quite 
important to doing our job effectively.
    Senator Warren. Well, unfortunately the Fifth Circuit's 
argument implies that because all of you are, and always have 
been, funded outside the annual appropriations process, that 
all of your agencies are unconstitutional. This would mean that 
none of you can do the things that you are doing, from setting 
interest rates at the Fed to making sure that when people make 
deposits in their banks that they are protected by FDIC 
insurance.
    And it is not just your agencies. Numerous other Government 
entities are also funded outside the appropriations process, 
including the Federal Housing Finance Agency, the Farm Credit 
Administration, and the Financial Stability Oversight Council.
    By the Fifth Circuit's logic, they would also be 
unconstitutional. Not only does that make no sense, it is also 
not what the Constitution says. The Constitutions says, and I 
will quote it here, ``No money shall be drawn from the Treasury 
but in consequence of appropriations made by law,'' and no 
money is withdrawn from the Treasury to fund any of our 
financial regulators.
    As Professor Noah Feldman notes, the Supreme Court has 
repeatedly and reasonably said that this clause, quote, ``means 
simply that no money can be paid out of the Treasury unless it 
has been appropriated by an act of Congress.'' For this reason, 
the U.S. Court of Appeals for the D.C. Circuit and a slew of 
district courts have all upheld the CFPB's funding structure.
    Even though this decision out of the Fifth Circuit is not 
grounded in law, it could have real consequences for the 
stability of our financial system. The Mortgage Bankers 
Association understands this risk. In 2019, they warned that if 
the CFPB were struck down, quote, ``the results could be 
catastrophic for the real estate finance industry.''
    The Trump court ruling is not only shockingly dumb, it is 
also dangerous. That is what happens when courts play politics 
instead of following the law.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Warren.
    Senator Kennedy is recognized, from Louisiana.
    Senator Kennedy. Thank you, Mr. Chairman.
    Welcome, gentlemen. I think Senator Warren pointed out that 
are major financial regulators, and we thank you for your time 
today. So let me ask you your opinion.
    Would any single one of you hire Sam Bankman-Fried to 
manage a food truck? Would any of you?
    Would any single one of you hire his girlfriend, Caroline 
Ellison, who apparently was trading billions of dollars, to 
manage a food truck?
    Can you tell me who, in our Federal financial services 
regulatory administrative State, was watching FTX to make sure 
that no one there stole people's money?
    Was anyone watching them, that you know of?
    Mr. Gruenberg. Senator, just from dealing with banking----
    Senator Kennedy. You are a brave man.
    Mr. Gruenberg. I understand. You are dealing here with 
banking and credit union regulators, and FTX was not engaged in 
the banking business or in credit union business.
    Senator Kennedy. No, I am not saying you should be. I am 
just asking, you guys are at the top of the food chain in terms 
of financial services regulation. Do you know who was watching 
these chuckleheads?
    Mr. Gruenberg. Well, these folks, I think, were engaging 
generally in investment and trading activity, and so in the 
first instance if you are thinking about----
    Senator Kennedy. It looks to me like some of them were 
engaged in stealing.
    Mr. Gruenberg. Well, that is under investigation now, 
Senator. So I think in the first instance you would probably 
want to engage with the market regulators, the SEC and the 
CFTC, to talk about the activities and the authorities in this 
area, candidly.
    Senator Kennedy. All right. I do not have a lot of time. I 
want to ask the chairman a few questions about inflation. Mr. 
Chairman, Professor Jason Furman--I think you know him--at 
Harvard, formerly of President Obama's administration, has said 
that he thinks unemployment has to rise by 5 percentage points 
for a whole year to bring inflation down a single percent. Do 
you agree with that?
    Mr. Barr. Thank you, Senator. Let me just start by saying 
inflation right now is far too high. We----
    Senator Kennedy. Yes, sir, but I am going to run out of 
time. Doggone it. And our Chairman, he is fair but he is tough 
as a boot, and he is going to cut me off. Do you agree with 
Professor Fuhrman?
    Mr. Barr. I think that it is the case that we are going to 
see significant softening in the economy. I do not have a 
projection that precise as Jason Furman to comment on.
    Senator Kennedy. All right. Let me ask you about Professor 
Larry Summers. He said that unemployment is going to have to 
rise to 7.5 percent and stay there for 2 years to get inflation 
down 2 percent. Do you agree with that?
    Mr. Barr. As I said, I think that we are going to see 
softening in the economy, but I do not have a prediction as 
precise as that one.
    Senator Kennedy. All right. You remember the inflation back 
in the 1980s, under President Reagan and President Carter, when 
Mr. Volcker was chairman. Can we agree that the only way we got 
control of inflation then was on both the fiscal and the 
monetary side?
    Mr. Barr. Well, at the end of the day it is the 
responsibility of the Fed to ensure price stability consistent 
with maximum employment, so we are focused on our 
responsibility.
    Senator Kennedy. I know that. But if you depend on monetary 
policy alone, interest rates have to go higher. Let me put it 
another way. If Congress cooperated and stopped spending money 
like it was ditch water, the Fed would not have to raise rates 
as high. Is that a fair statement, to get control of inflation, 
of course?
    Mr. Barr. I really will not have any comment on fiscal 
policy.
    Senator Kennedy. Do you think fiscal policy is irrelevant?
    Mr. Barr. We take the fiscal policy that elected Members of 
Congress and the President enact, and we calculate those in our 
decisionmaking, but I do not have a comment on fiscal policy.
    Senator Kennedy. You do not have any comment on the 
contribution that fiscal policymakes to inflation.
    Mr. Barr. I really do not have anything to add about that.
    Senator Kennedy. Well, add to what? You have not told me 
anything.
    Mr. Barr. Add to what I said before.
    Senator Kennedy. You are not telling me that fiscal policy 
has nothing to do with inflation, are you?
    Mr. Barr. I am telling you that at the Fed we take our 
monetary policy responsibilities as ours, and we leave to the 
elected----
    Senator Kennedy. Well, do you not think you have a moral 
obligation, if not a legal obligation, if you think fiscal 
policy is contributing to the inflation to say something, for 
God's sakes?
    Mr. Barr. I think it is important for us to respect the 
role of the Congress and the President in setting fiscal policy 
and then to take that as a given in how----
    Senator Kennedy. Can you tell me, given the path we are on, 
how high unemployment is going to go in order to get inflation 
down?
    Mr. Barr. I think we are going to see unemployment go up, 
but I do not have a precise answer to your question.
    Senator Kennedy. Duh. I think you are right. I do not mean 
to make light of you. Can you give me any prediction how high? 
I mean, Summers and Furman are saying it is going to have to go 
through the roof.
    Mr. Barr. I have seen a wide range of predictions about 
that, and as I said----
    Senator Kennedy. What are those ranges?
    Mr. Barr. ----we're going to be data dependent, we are 
going to see how the numbers come in, and unemployment is 
obviously an important factor we will look at.
    Senator Kennedy. Thank you for your indulgence.
    Chairman Brown. Thank you, Senator Kennedy.
    Senator Van Hollen, of Maryland, is recognized.
    Senator Van Hollen. Thank you, Mr. Chairman. I thank all of 
you for your service and your testimony here today.
    Vice Chair Barr, I want to start with you on FedNow. I have 
been a big proponent of moving to a real-time payment system. 
As you know, our current lack of real-time payments costs 
millions of Americans billions of dollars, especially those 
living paycheck to paycheck. In fact, Aaron Klein over at 
Brookings, did an estimate that said if the United States had 
implemented real-time payments when the Bank of England did, 
back in 2007, Americans would have saved over $100 billion in 
overdraft, check-cashing, and other fees. And those are mostly 
Americans living paycheck to paycheck.
    So I understand from a speech you gave a little while ago 
you estimate that the FedNow program will be live in May to 
July of next year. Are we fully on track with that, because 
there have been lots of delays? Are we fully on track, and what 
share of Americans that bank do you think will then have 
access, at that point in time, to real-time payments?
    Mr. Barr. Thank you, Senator Van Hollen, and thank you for 
the support of the FedNow program. I do think that FedNow is 
going to significantly improve the ability of banks to offer 
real-time services to customers. FedNow obviously will sit as 
the backbone behind what community banks and others decide to 
offer. That will take some time to flow through the system. We 
are on track to do that launch in the May to July period, but 
it will take time to build the number of institutions that are 
well positioned to offer the kinds of services that FedNow will 
then allow them to do. So ramp-up time is going to take a 
while.
    Senator Van Hollen. All right. Well, we look forward to a 
very concerted campaign by the Fed to make sure that banks are 
aware of their ability to sign up, and help them sign up.
    As you all know, there is a lot of volatility in the global 
economy these days. The Dodd-Frank legislation authorizes FSOC 
to designate a financial market utility as a systemically 
important financial institution, the SIFI.
    Back in May, Secretary Yellen expressed concerns about some 
of the guidance issued under former Treasury Secretary Mnuchin 
that she believed unnecessarily limited FSOC's authority in 
this area. Do you have concerns about the 2019 guidance that 
was issued under the Trump administration, and do you believe 
that this should be revisited?
    Let me put it more bluntly. If Secretary Yellen asked to 
repeal the 2019 guidance, would you support that as members of 
the FSOC?
    Maybe start with----
    Mr. Hsu. Yes.
    Mr. Gruenberg. Senator, yes, I would be supportive.
    Mr. Harper. Yes.
    Mr. Barr. Yes. I think it would be useful to revisit the 
guidance and to make sure that it is working. Again, we are 
evolving with circumstances. We are taking the risks that might 
come in the system in the future into account, and it would be 
useful to do it for that reason.
    Senator Van Hollen. I appreciate that because I share your 
concerns about that guidance.
    Now much has been said about cyber currencies and the 
collapse of FTX, and a lot have called for regulation. I have 
been a proponent of some regulation in this area. But there are 
those who make the case that regulation would actually 
normalize an area where there is inherent risk and create 
potentially the false impression that investment in these areas 
is safer than warranted.
    So there is a threshold question about regulation here. I 
would be interested very quickly in each of your ideas. 
Regulate, and that can be any form of regulation, or not 
regulate because that creates an impression that things may be 
safer than others by giving the Federal Government imprimatur?
    Mr. Hsu. Thank you for the question. So first and foremost, 
I have responsibility for the safety and soundness of the 
national banking system, so I am always going to put that 
first.
    The devil is in the details, so a lot depends on the 
details of that regulation. I think there is a form of it which 
could perform its intended objective. I think there are going 
to be potentially forums that do not, and that fall into the 
trap that you just laid out. So I think a lot really depends on 
what those details are.
    Senator Van Hollen. Thank you.
    Mr. Gruenberg. Senator, I think in one way or another 
regulation is going to have to be necessary for the activity. I 
think it is important to consider carefully how we approach 
that. Talking about the crypto activity, almost all of it now 
is really investment and trading activity. So in the first 
instance it seems to me it falls to the market regulators, the 
SEC and the CFTC.
    There is some interest, limited interest, in the banking 
sector, and to the extent there is interest among banks that 
will fall to us. As a general matter, I think we have 
authorities now to deal with the safety and soundness and 
consumer protection risks of bank engagement with crypto 
activities.
    I do think that the stablecoin issue is a bit more 
complicated, and we do have existing authorities in that 
scenario, there there may be a case for considering 
legislation. But I think more thought needs to be given there.
    Senator Van Hollen. Thank you.
    Mr. Harper. I will agree that regulation is needed in this 
area. Sort of building on what the acting comptroller said, the 
devil is in the details, and an important detail for me would 
be transparency. Having lived through the financial crisis of 
2008, it really impressed upon me the need for better 
transparency in our financial markets.
    Senator Van Hollen. Thank you.
    Mr. Barr. I would similarly suggest that the market 
regulators are the sort of first place to start in this space. 
They have existing authorities. We want to make sure those are 
fully utilized. Some of the activity, that was going on in this 
space was purporting to go on in a way that was designed to 
evade supervision and regulation. I think we have seen the 
enormous human costs of that kind of activity that investors 
and consumers who were so badly hurt by the recent events in 
the crypto space.
    In the banking sphere, just to reiterate what Director 
Gruenberg said, we do have the authorities we need in the 
banking space to get the job done in banking.
    And last, I do think there is quite an important need for 
developing a prudential framework for stablecoins with strong 
Federal approval and supervision and regulation and 
enforcement.
    Senator Van Hollen. Thank you. Thank you all.
    Chairman Brown. Thank you. Senator Hagerty, of Tennessee, 
is recognized.
    Senator Hagerty. Thank you, Chairman Brown, Ranking Member 
Toomey, and thanks to all of our panelists for being here 
today.
    I want to follow up on the line of questions that my 
colleagues have brought up, particularly around the astonishing 
set of events that led to the collapse of FTX last week. I 
think a number of people are calling for this incident to be a 
rationale or a reason to call cryptocurrency regime nothing but 
a Ponzi scheme, that we should regulate it very swiftly, put 
heavy-handed regulations in place to deal with it. Several of 
you seem to agree that regulation is appropriate.
    But I want to acknowledge that some of the blame for this 
catastrophe has got to be place on lawmakers here in the United 
States, and it should not go unaddressed. The fact of the 
matter is that crypto, much like all of finance, is not 
beholden to a specific country or a specific legal system. And 
by not acting and by failing to provide legal clarity here in 
the United States, Congress only incentivizes activity to 
migrate outside of our country's borders.
    Further, it is important to recognize that whatever 
happened with a bad actor running a centralized exchange and 
defrauding customers, that had nothing to do with the 
technology underpinning crypto itself.
    We should not take the wrong message from what happened 
last week. No amount of poorly considered, knee-jerk over-
regulation here in the U.S. would have prevented a foreign-
domiciled company like FTX from doing what it did. Instead, we 
should focus on accelerated but thoughtful efforts to provide 
clear incentives for companies to domicile here, under laws 
that would prevent the billions of dollars of losses like those 
just incurred by FTX's unsuspecting customers.
    So Acting Comptroller Hsu, I would like to come to you. 
Last month you said, in a speech, that you were also concerned 
about the lack of clarity in crypto regulation here in the 
United States. Do you agree that with a clearer regulatory 
construction in America more cryptocurrency companies would be 
encouraged to operate here rather than offshore, where 
regulatory frameworks are obviously inadequate to prevent 
large-scale fraud?
    Mr. Hsu. It could. I am more concerned, though, there are 
some basic foundational elements of the cryptocurrency 
technology and the industry which are not sound currently. And 
so regardless of the regulation, there are some issues with, 
for instance, ownership is not clear. And so if you do not have 
clarity about what you own then, you know, a market where 
property rights are unclear is a market built on sand. Those 
issues are outside of any kind of regulatory discussion. The 
state of the crypto industry is not mature, and I think that is 
a factor that has to be taken into account as we kind of work 
through what to do next.
    Senator Hagerty. Yeah. From my view, the maturity of our 
markets, though, and our regulatory system is much stronger 
than some of the markets where these companies are domiciled 
right now, and our view, if I understand all of you sharing a 
view that regulation is appropriate, is that the appropriate 
level of regulation that would give clarity and would help us 
deal with this would be more appropriate happening here onshore 
than again pushing this overseas.
    Mr. Hsu. Well, at least speaking as a bank regulator, to 
the extent that the activity takes place in the national 
banking system, it has to be safe, sound, and fair. People need 
to understand that. We need to make sure that we maintain that 
level, that standard for the activity.
    Senator Hagerty. I agree, and I look forward to continuing 
working with you toward that end.
    Vice Chairman Barr, can I turn to you for a moment please? 
The Fed's own stress test results and financial stability 
reports recognize the strength of the U.S. banking system, not 
to mention the fact that our banks just supported our economic 
through the pandemic. And yet it seems that you are planning to 
layer yet more costly reforms on our banking system just as the 
U.S. navigates a recession and as the Fed fights the highest 
inflation that we have seen in generations.
    Part of this plan appears to be by raising capital 
requirements on midsized banks with a heightened leverage 
requirement. Under current market conditions, these 
requirements seem inconsistent with S. 2155 and the statutory 
mandate for capital requirements to be countercyclical.
    So my question for you, Vice Chairman Barr, why is the Fed 
reversing course now and considering punitive new leverage and 
capital requirements for regional banks that could impede their 
ability to support the economy? Would you not agree that 
raising capital requirements now is not countercyclical?
    Mr. Barr. Thank you, Senator. We are undertaking a holistic 
review of capital requirements for firms. That includes issues 
about the globally systemically important bank surcharge, the 
countercyclical capital buffer, the enhanced supplementary 
leverage ratio, stress testing, and the like, to make sure that 
the capital rules are fitting well together.
    We are not trying to design a capital system for tomorrow 
morning. We are trying to think about what the capital rules 
should be over the cycle. So that involves, if we change the 
rules, undergoing a proposal and then a final rule and then an 
implementation period.
    Senator Hagerty. Just for clarity--I am running out of 
time--I just want to ask this and make it clear. Would 
increasing capital requirements right now, in the environment 
that we are in, amidst a recession, be procyclical or 
countercyclical?
    Mr. Barr. Well, Senator, in technical terms there is not a 
recession right now. We are in a slower period of economic 
growth.
    Senator Hagerty. If you ask the people of Tennessee I can 
tell you we are in very tough times.
    Mr. Barr. Very tough times. I agree.
    Senator Hagerty. Is this the time to be following the rule 
of law and have our requirements be countercyclical, or do you 
want to accelerate the process and push us further into 
recession?
    Mr. Barr. As I said, I think it is important that we have 
capital rules that are good for the whole cycle, and that is 
the approach that I am trying to take.
    Senator Hagerty. Well, I certainly hope that you will take 
strong note of the fact that I am concerned about any move that 
might be procyclical in the situation that we are heading into 
a recession, which I believe we are. Thank you.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you. Senator Smith, from Minnesota, 
is recognized from her office.
    Senator Smith. Thank you, Mr. Chair, and thanks to all of 
our panelists for being with us today.
    I would like to start out by asking a question about 
climate. So climate change can cause severe economic 
disruptions and risks to our economy. We see this in Minnesota 
and the impacts on agriculture and tourism and forestry, and 
lord knows we have seen it in Florida and places like Florida 
over this last fall. And our financial system is not immune 
from this risk and disruption.
    So banks recognize this climate risk and are taking steps 
to manage it, and given the severity and the scope of the 
threats that we face, many of us think that we do need clear 
guidance from regulators on how to approach this problem.
    So I want to direct this first to Mr. Gruenberg and Mr. 
Hsu. Your agencies took a step forward by issuing draft 
principles to help larger banks manage climate-related risks. I 
realize that you received, as I understand it, thousands of 
comments in response. But I wonder if each of you could briefly 
tell us what is the general reception that you have gotten so 
far.
    Mr. Gruenberg. I think, Senator, if I may, I think the 
industry is receptive to guidance from the agencies in regard 
to managing the financial risks of climate change. I think the 
actions taken by the OCC and the FDIC were really an initial 
effort on our part to lay out a basic framework to incorporate 
the financial risks of climate change into the risk management 
framework that our institutions are familiar with. We have been 
engaging with the Federal Reserve as well.
    So I think it is our intention, and we believe this is 
important, for the three agencies to act together so that the 
guidance is consistent across the banking system, and this 
would be a first step to offer guidance. As you know, the focus 
of this initial guidance is on institutions with assets over 
$100 billion.
    Senator Smith. Thank you. Mr. Hsu, could you respond as 
well, and maybe let us know a bit about when you anticipate 
next steps?
    Mr. Hsu. Sure. So just to echo what Acting Chairman 
Gruenberg said, I think for the larger banks this has been 
generally welcomed, and it has been welcomed because especially 
those who are internationally active, they have been having to 
deal with some of this from abroad, which is how do we 
identify, measure, monitor, and manage risks from climate 
change? So I do not think that is a new thing.
    I think for smaller banks there has been a bit more of a 
kind of variation in responses, and this is something that I 
have been focused on, is trying to engage with community banks 
as to what the issues are and listening, making sure that we 
understand where they are coming from, what their concerns are 
with all of this.
    One pitch I try to make is not only are there risks to 
manage, there are opportunities. And there is a saying, the 
better a car's brakes, the faster you can safely drive the car. 
And I think that applies in spades here to climate risk, where 
some of these risks are novel, they are new, and if banks can 
get good at managing those it also presents some opportunities 
for them.
    In terms of your timing question, just to echo something 
that Marty said, we are working together and we are trying to 
prioritize making sure that the three agencies work together on 
that. That is taking a little bit of time, but I am pretty sure 
we will get there in the not-too-distant future.
    Senator Smith. Thank you so much. Mr. Barr, you have spoken 
about your intention to work with FDIC and OCC on guidance in 
this area. Would you care to comment on this and sort of how 
you see this working in conjunction with the scenario analysis 
exercise that the Fed is going to be doing next year?
    Mr. Barr. Thank you, Senator. Yes, we intend to join with 
the FDIC and the OCC in issuing climate guidance with respect 
to firms that are over $100 billion in assets, the largest 
firms in the country. I think it will be helpful to them to 
have that guidance. So we expect to join the other agencies in 
doing that.
    And then as you noted, we are also engaged with a pilot of 
climate scenario analysis that we are conducting with six of 
the globally systemically important banks. That will be 
conducted next year, and we expect to learn a lot from that 
exercise about how firms are managing the financial risks of 
climate change and how they are assessing those risks. So an 
important learning exercise for us in the coming year.
    Senator Smith. That is great. Thank you. I appreciate very 
much all of your agencies working together on this. I think 
having clear input from banks of all the different sizes, from 
community banks to the large, systemically important banks is 
extremely important. And it sounds like what you are finding so 
far is highlighting what we already know, that banks appreciate 
this risk, that they want some good, clear rules of the road 
for how to work with it and how to manage it. So I am grateful 
for all of your work on this.
    Mr. Chair, I have another question on bank consolidation 
but I will pursue that with a question for the record. Thank 
you.
    Chairman Brown. Thank you, Senator Smith.
    Senator Moran, from Kansas, is recognized.
    Senator Moran. Mr. Chairman, thank you. Thank you all for 
being here.
    Mr. Gruenberg, let me begin with you. I am going to 
express, in a polite way, my dissatisfaction with the demise of 
the Office of Supervisory Appeals. Despite a multiyear effort 
by the FDIC to establish, fund, staff, and operationalize the 
newly minted Office of Supervisory Appeals, which included a 
robust public comment process, you chose to dismantle this more 
independent supervisory appeal process just months after it 
became fully operational, and it was one of your first actions 
as acting chair.
    Moreover, you did so through a summary agenda vote, without 
any substantive discussion or prior public notice, providing 
only a 30-day comment period after the effective date of its 
demise.
    How do you justify such an arbitrary was of FDIC resources 
with a total disregard for process and transparency?
    Mr. Gruenberg. Thank you, Senator. This is an important 
issue, as you indicate. A law was passed in 1994, requiring all 
of our agencies to establish internal appeals processes, to 
consider appeals by our regulated institutions of supervisory 
determinations. And shortly after the enactment of that law, 
the FDIC established a board-level committee, a Supervisory 
Appeals Review Committee, to consider appeals.
    It was a determination that at the end of the day the 
appeals process is very important. Any bank that believes that 
an examiner has made an inappropriate decision or a wrong 
decision should have the right to have that decision reviewed 
by an appropriate process. And I think the view of the FDIC, 
from the time the requirement was established, was that a 
board-level review, which is the highest authority within the 
agency, is an important matter for board accountability. At the 
end of the day, the board is responsible for the decisions of 
our supervisors. If there are issues raised in regard to a 
supervisory determination, that ultimately should rise to the 
level of a board review.
    You accurately indicate that a change was made and an 
Office of Supervisory Appeals was adopted, utilizing 
individuals from outside of the FDIC and did not necessarily 
have experience working at the FDIC. But they had supervisory 
experience of some kind, to sit in judgment of these 
supervisory determinations.
    I think our view was that board-level accountability was, 
frankly, very important in this area, and the Office of 
Supervisory Appeals had not yet begun functioning. The 
Supervisory Appeals Review Committee, the board-level 
committee, had a longstanding history and experience, so we did 
set aside the Office of Supervisory Appeals and continued the 
operation of the board-level committee, and then sought 
comment.
    We received quite a bit of thoughtful comment, and we have 
now issued a new request for comment, incorporating into the 
proposal some of the suggestions we received in the comments, 
including placing our ombudsman, who is a neutral part, a 
nonvoting member of the board-level committee, giving appealing 
institutions the right to get access to all of the memos and 
documents relating to the supervisory determination that they 
are appealing, and also the right to request a stay of the 
supervisory determination until the appeals process is 
completed.
    So it may not be fully satisfactory, but we have tried to 
take a balanced approach to this, Senator.
    Senator Moran. And do you place any importance upon--you 
used the word ``neutral.'' I would use the word 
``independent.'' But whatever that is, is there a value to 
having somebody independent or neutral, compared to the board?
    Mr. Gruenberg. I think so, and that is why we added the 
ombudsman to the appeals committee, Senator.
    Senator Moran. Thank you for your answer.
    My second question is really to the panel. The Federal 
Housing Finance Agency's tangible capital rules is inconsistent 
with the Federal prudential regulators' capital rules for 
accessing advances from the Federal home loan bank system. As 
this interest rate environment continues to escalate with more 
unrealized losses on typically high-quality treasures and 
mortgage-backed securities expected, we will likely see an 
increasing number of, quote, ``well-capitalized institutions'' 
lose access to key sources of liquidity due to this disparity 
in the regulatory framework.
    Although FHFA is well aware of the issue, the default has 
been for affected Federal home loan bank members to seek 
waivers in writing from their prudential regulators instead of 
what I would assume would be a far easier fix aligning those 
capital rules.
    Do you have thought about the desire of aligning those 
capital rules, is the first question, and in the absence of 
that, what is the process for member institutions seeking a 
waiver from each of your agencies?
    Mr. Gruenberg.
    Mr. Gruenberg. Thank you, Senator. It is an important 
issue, and this is an FHFA rule that we are dealing with. FHFA 
has a requirement that if a bank has negative tangible equity, 
under GAAP accounting, the bank is not allowed access to new 
Federal Home Loan Bank loans. It can roll over existing loans 
but it does not have access to new loans until it addresses its 
negative tangible equity position.
    Senator Moran. That is a different standard or rule than 
any of the agencies sitting at the table.
    Mr. Gruenberg. The banks have regulatory capital in 
addition, and that regulatory capital does not count in the 
unrealized losses that result under--and this gets pretty 
technical, as you know--under GAAP accounting, puts it into a 
negative tangible equity position. But it is an underlying risk 
management issue for the institution if it has negative 
tangible equity under GAAP.
    So we are engaging with FHFA and the banking institutions. 
As a threshold, we are looking at the banks, addressing their 
risk management issue resulting from the unrealized losses on 
their balance sheet, and we will see if we can work this 
through.
    Senator Moran. Thank you. Are you suggesting you do not 
expect it to be a problem then for those banks to access 
Federal home loan?
    Mr. Gruenberg. I am speaking for myself. I think we are 
looking for the institutions to address the underlying issue, 
which is the unrealized losses and their negative capital 
position under GAAP, in order to gain access to Federal Home 
Loan Bank loans.
    Senator Moran. Let me then ask the question about----
    Chairman Brown. Last question, Senator Moran. You are way 
over, but go ahead.
    Senator Moran. I have sat here from the beginning, Mr. 
Chairman----
    Chairman Brown. I know you have.
    Senator Moran. ----with you and the Ranking Member.
    Chairman Brown. There is a reward for that.
    Senator Moran. Thank you, plus our longstanding friendship.
    Is there a process by which a waiver is obtainable from the 
prudential regulators, as the Federal home loan bank system 
suggests--I did not say that right--as FHFA suggests?
    Mr. Hsu. So for us it is basically using the regular way 
supervisory process is the way to address that.
    Just to echo a point that Marty made, we also see this as 
fundamentally a risk management issue, and the alignment 
question is really a question for FHFA to address.
    Mr. Harper. And if I could, just on a couple of things, 
first of all like the OCC we would look at it through the 
supervision process overall. I think it is important to 
remember, though, that when liquidity is provided by a Federal 
home loan bank there are assets pledged as collateral for that, 
and there is a super-lien that attaches to that. So we, as an 
insurer of the deposits at our credit unions, would be placed, 
potentially, depending on what the asset was pledged, we could 
have a higher liquidation cost if the institution were to 
ultimately fail.
    I think that is even more important why Congress needs to 
move ahead with the agent-member relationship that we currently 
do with the corporate credit unions through the central 
liquidity facility. It is a Federal liquidity backstop, and 
that is another way to deal with this issue.
    Chairman Brown. Thank you. Thank you, Senator Moran.
    Senator Ossoff, I believe, is the last questioner, from his 
office, from Georgia.
    Senator Ossoff. Thank you, Mr. Chairman, and thank you to 
our panelists for your service.
    Mr. Barr, first question for you, please. What do you 
assess to be the most significant threats to financial 
stability today?
    Mr. Barr. Thank you, Senator. We are looking broadly across 
the financial sector to look at risks. I mentioned earlier in 
our hearing we are looking at, in part, the risks that we do 
not fully understand, risks in the nonbank financial sector. We 
are certainly exploring and analyzing the risk that has been 
going on in the crypto sector.
    We are, as always, attentive to risks abroad, from the war 
in Ukraine, the situation in China, and looking at what is 
happening in interest rate risk and liquidity risk in the 
system as interest rates rise.
    And then as the economy is softening we are attentive to 
credit risk, particularly with respect to commercial real 
estate and residential housing, which tend to be leading 
indicators of potential problems in other areas.
    So those are the kinds of risks we are looking at.
    Senator Ossoff. Thank you, Mr. Barr. How confident are you 
that Federal regulators have adequate visibility into potential 
exposure in the nontraditional financial institutions to risks 
that could pose a threat systemically to financial stability, 
and where are the blind spots?
    Mr. Barr. We have good insight into the regulated banking 
system. We have very good, sound information not only about the 
banking system but about the relationship of banks to other 
entities.
    Where we do not have as good of information is what is 
going on in the nonbank sector. We have increased information, 
more than we did a decade ago, about what is happening in hedge 
funds, so that is an advance, but still more information would 
be useful in that space.
    We have very little visibility into institutions that are 
not directly connected to banks, so very little information, 
for example, about the risks of the kind that we saw recently 
in the crypto sector, where our visibility is much, much lower.
    Senator Ossoff. Secretary Yellen, Mr. Barr, stated last 
month she was, quote, ``worried about a loss of adequate 
liquidity in the Treasury market.'' I have also queried the Fed 
chair about this. Do you share her concerns, and can you 
characterize them, please?
    Mr. Barr. Thank you. I do think that we are seeing higher 
volatility in Treasury markets and in many other markets that 
are associated with the period of rising interest rates and 
economic uncertainty, both in the United States and globally. 
And with that increased volatility has come a reduction in 
liquidity of the type that you would expect given the 
volatility in the market.
    So, you know, we are watching it very closely, as always, 
and it is something we are attentive to in thinking about the 
risks that lie ahead.
    Senator Ossoff. I appreciate that, attentive to it. Are you 
worried about it? Secretary Yellen said she was ``worried about 
a loss of adequate liquidity in the Treasury market.'' Others 
have characterized this as a potential threat to financial 
stability. Do you have a different view, sir?
    Mr. Barr. Well, I would say, as always, we are attentive to 
issues that might arise throughout the financial sector, 
including in Treasury markets. I think it is appropriate to be 
attentive to it, and we are attentive to it.
    Senator Ossoff. Thank you.
    Mr. Gruenberg, I would like to ask you the same question, 
please. What do you assess to be the most significant threats 
to financial stability?
    Mr. Gruenberg. I generally concur to the observations that 
Michael made. I do think the rising interest rate environment, 
and important to recognize that it is a global phenomenon, that 
it is not just the U.S. as a jurisdiction that sees rising 
rates but other major jurisdictions as well. And so both from a 
national and international perspective the potential financial 
stability risk is there.
    Senator Ossoff. Yeah. Mr. Gruenberg, forgive me. My time is 
running out. I want to just frame this question as precisely as 
I can. Of course, there are threats to growth, and I am really 
focused here on threats to financial stability. I think the 
most constructive follow-up I can ask you is, what do you think 
are the mechanisms of action or the forms of exposure that will 
translate higher rates, potentially, into destabilizing 
financial shocks? That will be my last question.
    Mr. Gruenberg. Yeah. I think the other point that Michael 
made that I would concur with, and you raised it as well, I 
believe, Senator, is the nonbank financial sector and the 
potential leverage in that sector and the risks that can pose, 
both for the risks of those institutions as well as their 
connectedness to the banking system----
    Senator Ossoff. Who are the counterparties for that 
leverage?
    Mr. Gruenberg. Well, and the counterparties may be banks. 
And we do not have as good of a line of sight into the inner 
workings of the nonbank financial firms as we do with the 
banking institutions. And so it is both the risk we know and 
the risk we do not know, and that, I think, really needs to be 
the focus of attention.
    Senator Ossoff. Thank you. I thank you for your testimony 
and I yield back, Mr. Chairman.
    Chairman Brown. Thank you, Senator Ossoff.
    Throughout today's testimony we have heard over and over 
how these regulators, the four of you, are protecting Main 
Street, watching out for risks facing our Nation, no matter how 
small or large. We have heard a lot of concern about crypto 
risks today, a reversal from Trump regulators who let crypto 
run wild, as you all recognize. My Democratic colleagues and I 
warned of the risks to consumers and investors, have been for 
months and months and months, years in some cases. I am 
confident our witnesses today will continue to watch out for 
those risks, to protect people and communities, not to protect 
Wall Street, like we have seen in past years.
    I thank the four of you for being here, for providing 
testimony. For Senators who wish to submit questions for the 
record they are due 1 week from today, Tuesday, the 22nd of 
November. To the witnesses, you have 45 days from receipt to 
respond to those questions.
    Thank you again. The hearing is adjourned.
    [Whereupon, at 12:13 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]
              PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
    We know that most Americans want the same things--a safe, 
affordable place to call home, a good-paying job, and a strong, stable 
Government that they can trust. Our democratic institutions are only as 
strong as the people who empower them. Our economy works best when we 
have a free and fair democracy in which everyone can live their lives 
with dignity.
    For too long, many of these dreams have felt out of reach. Working 
families struggle to pay for groceries, to keep gas in their car and a 
roof over their heads. We know the cost of living and raising kids 
continues to rise.
    Democrats are listening and have delivered for the American people. 
We passed legislation to lower prescription drug costs. We helped 
families stay in their homes during the height of the pandemic. We made 
investments in public transit and our Nation's infrastructure. For the 
first time in generations we've been focused on communities that our 
Government has turned their back on, especially the State government in 
my State. Now we are tackling inflation by taking on corporate power 
and consolidation and by reducing our dependence on foreign oil.
    We're doing all that while creating good-paying manufacturing jobs 
here at home. These jobs, making semiconductors, electric vehicles, and 
solar panels, are the jobs of the future. Those jobs will go to 
Americans because we passed the CHIPS Act, the Inflation Reduction Act, 
and the Bipartisan Infrastructure Law.
    And we're seeing results. Our economic recovery has been strong and 
continues to grow. Over the past 2 years, many Americans have built up 
more in savings. We've seen robust job growth and, for the first time 
in decades, wage gains for workers. And just last week we began to see 
signs that inflation is starting to cool. Banks and credit unions are 
doing well, thanks to the protections we put in place in the Dodd-Frank 
Act and because of the support Congress and regulators provided during 
the pandemic.
    But too many big corporations have taken advantage of market 
concentration, jacking up consumer prices and earning higher and higher 
profits. As my colleague Senator Reed has pointed out, the biggest 
banks that benefit from higher interest rates today are not passing on 
those benefits to their customers, penalizing Americans who are trying 
to build up their savings.
    Workers and small businesses who are already struggling under the 
weight of inflation shouldn't get hit with exorbitant bank fees, lose 
their money to a crypto scam, or worry that their savings will 
disappear overnight if a mismanaged bank or credit union fails. And 
none of us want a scenario where risky bets on Wall Street crash the 
economy again.
    That's why it's so important that we have financial watchdogs who 
are empowered to look out for Main Street, helping more Americans hold 
on to their hard-earned money at a time when they need it most.
    The banking and credit union regulators are independent agencies 
that protect consumers and make sure banks and credit unions are safe 
and strong. Their independence matters. It makes for a more stable 
financial system and that's essential for our entire economy.
    Our witnesses today all have decades of banking and credit union 
regulatory experience. They have spent their careers serving the public 
and protecting consumers, making sure our banking and credit union 
system works for Main Street, not just for Wall Street.
    That is exactly what they continue to do today.
    They are modernizing and strengthening an important civil rights 
law that will spur new investment in neighborhoods and communities that 
have been left on their own.
    They've taken a closer look at overdraft, nonsufficient funds, and 
other ``gotcha'' fees at banks and credit unions to make sure that 
consumers are treated fairly, and that these fee programs don't raise 
safety and soundness concerns.
    They are taking a fresh look at the bank merger approval process, 
so we don't just rubber stamp consolidation when it can have big 
consequences for local economies--too often big banks merge and close 
branches, leaving rural towns and urban communities without a bank.
    They are revisiting the financial safeguards that protect us from 
risks at big foreign banks. They are making sure bank failures don't 
leave taxpayers holding the bag. It's important to remember the 
superregional banks of today are hundreds of billions of dollars bigger 
than the largest banks that failed during the financial crisis. Our 
financial regulators know that we need strong capital requirements so 
that banks and credit unions can continue to lend to and invest in 
their communities, in good times and bad.
    They are also overseeing the formation of new institutions that 
serve communities that often get left behind. Just last week, the NCUA 
chartered a new faith-based credit union, and the FDIC recently 
approved the first mutual bank in 50 years, which will pave the way for 
more, in Ohio and across the country. All the agencies are working 
together to foster new banks and credit unions, and support the work of 
MDIs and CDFIs in their communities.
    At the same time, our regulators are looking out for risks on the 
horizon--the effects of climate change, the rise in crypto assets, the 
risks from shadow banks, and the constant threat of cyberattacks. 
They're working with the banking and credit union industry to prepare 
for climate-related risks and bolster cybersecurity protections as 
criminals become more sophisticated and geopolitical threats increase. 
They've stepped up to protect depositors and consumers when crypto 
firms mislead them into thinking their money is safe . . . when it 
isn't.
    But we must stay vigilant and empower regulators with the tools to 
combat these growing risks. Data breaches at banks and credit unions 
happen too often, threatening customer data and exposing our financial 
system to vulnerability. That's why we need to pass the bipartisan 
Improving Cybersecurity of Credit Unions Act led by Senators Ossoff, 
Lummis, and Warner.
    We need to make sure that banks and credit unions can partner with 
third parties in a way that allows banks to stay competitive without 
putting consumer money at risk.
    And we can't let big tech companies and risky shadow banks play by 
different rules because of special loopholes.
    All these things will help strengthen our banking and credit union 
system for its core mission: serving Main Street and workers and 
families. When workers have more power in the economy, they find better 
paying jobs and we have a stronger labor market. That helps credit 
unions, which added over 5 million new members over the past year, and 
drives down the number of households without a bank account, which 
dropped to record lows in 2021.
    When Government is on the side of working families--more Americans 
save money, build wealth, start small businesses, and participate in 
our economy.
    Our financial regulators have answered that call, and I will 
continue to work with them to make sure our banking and credit union 
system works for everyone.
    Before I conclude my remarks, I want to thank all our witnesses for 
being here today. I also want to congratulate Marty Gruenberg on being 
nominated by President Biden to be Chair of the FDIC. Marty is a well-
respected and seasoned regulator who has worked to protect consumers 
and preserve confidence in our banking system. As many of you know, 
Marty played an instrumental role in helping implement many of the 
Dodd-Frank reforms needed to enhance financial stability and manage 
risks to our banking system. With Marty's experienced leadership, I 
have no doubt that FDIC can continue to address risks to our financial 
system, increase access to affordable financial services, and ensure 
that banks honor their commitment to communities across the country 
through the Community Reinvestment Act.
    This Committee looks forward to holding a nominations hearing in 
the next few weeks for Marty and the other FDIC nominees.
                                 ______
                                 
            PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
    Today, we'll hear from our banking regulators about their recent 
regulatory activities.
    Throughout this Congress, I have warned about the politicization of 
financial regulation.
    Some bank regulators are increasingly straying outside their 
mandates into politically contentious issues.
    Take global warming: In September, the Fed announced a ``pilot 
climate scenario analysis exercise'' with six of the largest U.S. 
banks.
    Now, we're told this is merely an exercise in ensuring that banks 
understand their risks.
    But the data--including the Fed's own research--show that there's 
no physical risk to banks from severe weather events.
    The only other risk is so-called ``transition risk.''
    But we know banks are fully capable of pricing risks into their 
business decisions, including risks from changing customer preferences 
over time.
    The real risk here is political.
    My worry is that an attempt to somehow quantify political risk will 
eventually result in regulations designed to allocate capital away from 
carbon-intensive companies.
    It appears some bank regulators are already committed to doing just 
that.
    For example, the Fed, FDIC, and OCC have all joined the ``Network 
for the Greening the Financial System,'' an international group of 
financial regulators with a stated aim to ``mobilize mainstream finance 
to support the transition toward a sustainable economy.''
    In other words, its goal is to allocate capital away from carbon-
emitting industries to those deemed to be sufficiently green.
    And let me emphasize: the Fed, FDIC, and OCC have all joined this 
group.
    The NCUA has also warned that credit unions ``may need to consider 
adjustments to their fields of memberships as well as the types of loan 
products they offer'' because of global warming.
    Here is the reality: some unelected financial regulators want to 
accelerate the transition to a lower-carbon economy by misusing their 
powers to allocate capital away from traditional energy companies.
    But addressing global warming requires difficult political 
decisions involving tradeoffs. In a democratic society, these tradeoffs 
must be made by elected representatives accountable to the American 
people through a transparent and deliberative legislative process.
    I supported Vice Chair Barr's nomination, despite our policy 
differences, based, in part, on his commitment to stick to the Fed's 
narrow mandates.
    At his confirmation hearing, Vice Chair Barr stressed that the Fed 
``should not be in the business of telling financial institutions to 
lend to a particular sector or not to lend to a particular sector.
    I urge him to keep that commitment by pulling the Fed out of the 
politically contentious issue of global warming.
    Federal banking regulators have also been preoccupied with 
establishing new rules, the need for which are, in some cases, dubious.
    For example, last month the Fed and FDIC proposed potential new 
requirements concerning the resolvability of regional banks. This 
proposal is predicated on the assumption that the only realistic option 
to resolve a large regional bank would be to sell it to an even larger 
bank.
    It's not at all clear that this assumption is warranted, or that 
new requirements are appropriate for regional banks, for at least two 
reasons.
    First, the Fed and FDIC have approved regional bank resolution 
plans for nearly a decade. And nowhere do these plans contemplate 
wholesale acquisition by larger banks.
    Second, large regional banks have more than doubled their most 
loss-absorbing capital since the financial crisis. This dramatically 
improves their resilience and decreases the likelihood they'd need to 
be resolved.
    Some regulators seem to hold the misguided view that the benefits 
of new requirements always outweigh the costs.
    But we know regulation isn't without cost.
    As regulation increases, financial activities will continue to 
migrate out of the banking system.
    While some of our banking regulators have been distracted, they've 
failed to address real challenges facing the financial system.
    For example, last year the Fed, FDIC, and OCC committed to 
providing greater clarity on the involvement of banks in crypto 
activities, such as providing custody services and issuing stablecoins.
    Over a year later, they've provided no public clarity.
    During that same period, we've seen several high-profile collapses 
of crypto companies, including one prominent example last week.
    It's very possible that customers harmed by these collapses 
would've been better off if their crypto assets had been safeguarded by 
regulated banks that have been providing custody services for hundreds 
of years.
    But many banks have been pressured--by you--not to provide crypto-
related services until your agencies provide clarity, leaving them in a 
state of limbo. I will, however, note that Chairman Harper has not 
pursued this pressure campaign with credit unions. In fact, he has 
issued guidance for credit unions on partnering with crypto companies, 
or using distributed ledger technologies.
    However, the ambivalence of the remaining agencies has helped to 
push crypto activities into foreign jurisdictions with weaker or no 
regulatory regimes. As a general matter, the failure of Congress to 
pass legislation in this space and the failure of regulators to provide 
clear guidance has created ambiguity that has driven developers and 
entrepreneurs overseas. And we've just once again seen how that ends.
    There is one other item I'd like to highlight before we start: the 
deteriorating liquidity in the market for U.S. Treasuries.
    In March 2021, the Fed committed to modify the supplementary 
leverage ratio--or SLR--in part to allow bank dealers to intermediate 
in this market. Yet, over 18 months later, the Fed has failed to act.
    I understand that Vice Chair Barr has only been in his role for 4 
months and has reasonably suggested that potential amendments to the 
SLR should be considered in the context of other capital requirements. 
But we should recognize that a significant decline in Treasury market 
liquidity is already occurring.
    Absent an improvement, I fear that Fed might one day intervene by 
restarting its bond purchases, which would undermine its objective of 
fighting inflation.
    What I hope to hear from our banking regulators today is that 
they'll: prioritize these and other real challenges and not stray 
beyond their mandates into politically contentious issues or establish 
unnecessary new regulatory burdens.
                                 ______
                                 
                 PREPARED STATEMENT OF MICHAEL S. BARR
 Vice Chair for Supervision, Board of Governors of the Federal Reserve 
                                 System
                           November 15, 2022
    Chairman Brown, Ranking Member Toomey, and other Members of the 
Committee, thank you for the opportunity to testify today on the 
Federal Reserve's supervisory and regulatory activities.
    Earlier this year, I was honored to be sworn in as the Board's Vice 
Chair for Supervision. In this role, my priority is to make the banking 
system safer and fairer. That requires active and careful analysis of 
risks. The banking system is constantly evolving, so regulation and 
supervision must also adjust to respond to new and emerging risks. I am 
also committed to making the financial system fairer, which is 
fundamental to financial oversight. Households and businesses need 
access to safe and reliable banking services as they make their 
financial decisions. While safety and fairness may seem distinct, they 
are interwoven. Financial instability disproportionately harms those 
who are economically vulnerable, so making the financial system safer 
is making it fairer, and unfair practices can make the financial system 
riskier, as we saw in the Global Financial Crisis. I look forward to 
pursuing both of these goals during my time as Vice Chair for 
Supervision.
    Accompanying my testimony today is the Federal Reserve's 
Supervision and Regulation Report detailing the current state of the 
banking system from our supervisory and regulatory perspective. My 
testimony will offer you an overview of the banking system's current 
conditions and highlight efforts to monitor and mitigate 
vulnerabilities. I will also provide updates on a number of priority 
issues that the Federal Reserve is seeking to address.
Current Conditions
    Reforms following the Global Financial Crisis have helped the 
United States maintain a resilient financial system for consumers, 
businesses, and communities. Capital and liquidity positions remain 
above regulatory requirements. The Federal Reserve's supervisory stress 
test, conducted earlier this year, showed that large banks had 
sufficient capital to maintain their lending to support the economy 
through the stressful conditions simulated by the stress test.
    But as I mentioned, we must ensure we are keeping pace. Many issues 
at the forefront of banking regulation today were not prominent five or 
10 years ago, and some of them scarcely even existed. For instance, few 
anticipated a global pandemic, even economists who used epidemiological 
approaches to model financial contagion. Further, the recent events in 
crypto markets, while mostly occurring outside the banking sector, have 
highlighted the risks to investors and consumers associated with new 
and novel asset classes and activities when not accompanied by strong 
guardrails.
    In addition, despite the data depicting a generally healthy U.S. 
banking system, the domestic economic outlook has weakened amid tighter 
financial conditions and increased uncertainty. A weaker economy could 
put stress on households and businesses and, thus, on the banking 
system as a whole. Uncertainty has led to increased financial market 
volatility and may also reveal pockets of excess leverage and liquidity 
risk in the nonbank financial sector, which risks spillovers to the 
banking system and the real economy. We saw a host of such risks with 
the disruptions in the United Kingdom's gilt markets. The Federal 
Reserve will be heightening its focus on liquidity, credit, and 
interest-rate risks as supervised institutions manage the changing 
financial conditions.
    In the wake of the pandemic, the global recovery is uneven, 
inflation is far too high, and geopolitical events pose downside risks 
to the U.S. and other economies around the world. Russia's war of 
aggression is devastating for the people of Ukraine, and is also 
disrupting commodities, energy, and food markets, and pushing up 
inflation around the world. And these factors--along with China's 
economic slowing, associated with its inward turn, pandemic shutdowns, 
and contraction in its real estate sector--are weighing on global 
economic growth. We remain attentive to these and other developments 
and are closely supervising our regulated institutions to assess 
potential risks and implications for the stability of the U.S. and 
global financial systems.
Supervisory and Regulatory Priorities
Capital Review
    Turning to a number of our priorities at the Federal Reserve, I am 
taking a holistic look at the Fed's capital framework to assess whether 
it is functioning as intended and supports a resilient financial 
system. Robust capital and liquidity requirements make it more likely 
that banks are able to absorb losses and continue their vital role 
supporting households and businesses. This is especially important for 
the largest and most complex banks, which pose the greatest risk to 
U.S. financial stability. We are taking a look at the G-SIB surcharge, 
the enhanced supplementary leverage ratio, stress testing, the 
countercyclical capital buffer, and other measures. Within this 
context, I am committed to working with my colleagues at the other 
Federal bank regulatory agencies in implementing enhanced regulatory 
capital requirements known as the ``Basel III endgame'' standards. \1\
---------------------------------------------------------------------------
     \1\ https://wwwfederalreserve.gov/newsevents/pressreleases/
bcreg20220909ahtm
---------------------------------------------------------------------------
    When considering improvements to the regulatory capital framework, 
I will be guided by a few key principles: the capital framework should 
be forward-looking, should be tiered so that the highest standards 
apply to the riskiest firms, and should support a safer and fairer 
financial system. We will look at design choices that help to further 
these goals.
Resolution
    In recent years, merger activity and organic growth have increased 
the size of large banks, which could complicate efforts by regulators 
to resolve those firms upon failure without disruption to customers and 
counterparties. The Board recently invited comment on an advance notice 
of proposed rulemaking to enhance regulators' ability to resolve large 
banks in an orderly way, should they fail. We look forward to the 
comments we will receive.
Merger Review
    The Federal Reserve is also evaluating our approach to reviewing 
banks' proposed acquisitions. Mergers are often a feature of vibrant 
sectors, but the advantages that firms seek to gain through mergers 
must be weighed against the risks that mergers can pose to competition, 
consumers, and financial stability. A merged institution may be able to 
provide a wider range of products and services at lower prices. But if 
there is concentration, mergers could also reduce competition and 
access to financial services through higher prices or a reduced range 
of services. In addition, mergers of larger, more complex firms may 
pose risks to financial stability. We are also required to evaluate 
whether a merger would meet the convenience and needs of the community. 
The Federal Reserve--along with the Office of the Comptroller of the 
Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC)--is 
reviewing the issues to see if any adjustments to our approach would be 
appropriate.
Crypto Activity
    Another priority is monitoring the risk of crypto-asset-related 
activities. Over the last several years, we have seen crypto-asset 
activity grow rapidly and experience periods of significant stress. 
Some financial innovations offer opportunities, but as we have recently 
seen, many innovations also carry risks--which can include liquidity 
runs, the rapid collapse of asset values, misuse of customer funds, 
fraud, theft, manipulation, and money laundering. These risks, if not 
well controlled, can harm retail investors and cut against the goals of 
a safe and fair financial system. Most of this activity is occurring 
outside of the ambit of banking regulation. But recent events remind us 
of the potential for systemic risk if interlinkages develop between the 
crypto system that exists today and the traditional financial system. 
Crypto-asset-related activity, requires effective oversight that 
includes safeguards to ensure that crypto companies are subject to 
similar regulatory safeguards as other financial services providers.
    I would note with some humility that striking the right balance 
between creating an environment that supports innovation and managing 
related risks to businesses, households, and the stability of the 
financial system is no easy task. We do not want to stifle innovation, 
but when regulation is lax or behind the curve, it can facilitate risk 
taking and a race to the bottom that puts consumers, businesses, and 
the economy in danger and discredits new products and services with 
consumers and investors. I believe everyone has a stake in getting the 
regulatory balance right.
    We are working closely with the OCC and the FDIC to assess the 
risks and opportunities posed by a range of crypto-asset-related 
activities, and to clarify which activities are legally permissible and 
can be conducted by banks in a manner that is consistent with safety 
and soundness, consumer protection, and overall stability of the 
financial system.
    Before leaving the topic of crypto assets, I would like to touch on 
stablecoins. Stablecoins, which like other instruments that purport to 
be available on demand at par value, can be subject to destabilizing 
runs and require strong Federal prudential oversight to mitigate their 
potential for economic harm. That is especially the case for 
stablecoins that aim to function as private money. Legislative action 
on crypto assets in general, and stablecoins in particular, would help 
promote responsible innovation and protect the financial system.
Climate-Related Financial Risks
    We are also working to understand financial risks related to 
climate change. At the Federal Reserve, our mandate in this area is 
important, but narrow, and we are focused on our supervisory 
responsibilities and our role in promoting a safe and stable financial 
system. To that end, the Federal Reserve recently announced a pilot 
climate scenario analysis exercise designed to enhance the ability of 
supervisors and firms to measure and manage climate-related financial 
risks.
    Scenario analysis--in which the resilience of financial 
institutions is assessed under different hypothetical climate 
scenarios--is an emerging tool to assess climate-related financial 
risks. The pilot climate scenario analysis exercise, which is distinct 
and separate from bank stress tests, will be exploratory in nature and 
not have capital consequences. It is also our intention to work with 
the OCC and the FDIC to provide guidance to large banks on how we 
expect them to identify, measure, monitor, and manage the financial 
risks of climate change.
Operational Resilience
    The last priority I will mention is operational resilience. 
Financial institutions face significant challenges from a wide range of 
disruptive events. These include technology-based failures, cyber 
incidents, pandemics, and natural disasters. Such events, combined with 
banks' growing reliance on third-party service providers, expose them 
to a range of operational risks, which are often difficult to 
anticipate. When they manifest, these risks can affect the safety and 
soundness of affected banks and pose risks to U.S. financial stability 
by limiting market functioning or undermining trust in the system. We 
at the Federal Reserve will continue to work in this area to help 
ensure that banks understand and manage these complex and evolving 
challenges and that consumers remain protected. Additionally, we are 
committed to working closely with other domestic agencies and 
international authorities to coordinate on supervisory approaches to 
operational resilience.
Conclusion
    As the banking system continues to evolve, we must ensure that 
supervision and regulation keeps up with those changes and are 
appropriate for the underlying risks. Over the coming months and years, 
it will be crucial to examine new risks to the banking system and 
whether and how the real economy, including consumer needs and access 
to financial services, may change. As vulnerabilities appear, a strong 
banking system will help households and businesses weather those 
challenges. As Vice Chair for Supervision, I will continue to work to 
promote a safe and fair banking system.
    Thank you, and I look forward to your questions.
                                 ______
                                 
                  PREPARED STATEMENT OF TODD M. HARPER
              Chair, National Credit Union Administration
                           November 15, 2022
    Chairman Brown, Ranking Member Toomey, and Members of the 
Committee, thank you for inviting me to discuss the state of the credit 
union system and provide an update on the operations, programs, and 
initiatives of the National Credit Union Administration.
    In the Federal Credit Union Act, Congress charged the NCUA with 
overseeing the credit union system to ``make more available to people 
of small means credit for provident purposes through a national system 
of cooperative credit, thereby helping to stabilize the credit 
structure of the United States.'' The NCUA is committed to fulfilling 
this charge by protecting the system of cooperative credit and its 
member-owners through effective chartering, supervision, regulation, 
and insurance.
    To further these important policy objectives, the NCUA Board in 
March 2022 unanimously adopted a 5-year strategic plan with three core 
goals. \1\ Those strategic goals are:
---------------------------------------------------------------------------
     \1\ See https://www.ncua.gov/files/agenda-items/strategic-plan-
20220317.pdf.

    Ensuring a safe, sound, and viable system of cooperative 
---------------------------------------------------------------------------
        credit that protects consumers;

    Improving the financial well-being of individuals and 
        communities through access to affordable and equitable 
        financial products and services; and

    Maximizing organizational performance to enable mission 
        success.

    This strategic plan and its goals will guide the agency's work 
through 2026.
    In my testimony today, I will discuss the state of and the factors 
impacting the credit union system, review the NCUA's efforts to 
strengthen the credit union system and protect consumers, highlight 
several of the agency's recent rulemakings, and outline two key 
legislative requests.
State of the Credit Union System
    While the COVID-19 pandemic's economic fallout and a rising 
interest rate environment have impacted credit union performance over 
the past year, federally insured credit unions (credit unions), the 
National Credit Union Share Insurance Fund (Share Insurance Fund), and 
the Central Liquidity Facility (CLF) have all remained on a solid 
footing. \2\
---------------------------------------------------------------------------
     \2\ The information contained in this testimony neither includes 
nor applies to privately insured credit unions.
---------------------------------------------------------------------------
Credit Union System Performance
    As of June 30, 2022, there were 4,853 credit unions with 132.6 
million members. \3\ The system's aggregate total assets were $2.1 
trillion. Additionally, the system's net worth ratio rose to 10.42 
percent, representing a recovery of 40 basis points from a pandemic low 
of 10.02 percent. Notably, at the end of the second quarter, credit 
unions recorded a 16.2 percent year-over-year increase in loans.
---------------------------------------------------------------------------
     \3\ See https://www.ncua.gov/files/publications/analysis/
quarterly-data-summary-2022-Q2.pdf.
---------------------------------------------------------------------------
    During the last decade, the credit union system has also 
experienced growth in size and complexity. Based on the most recent 
quarterly data, the number of credit unions with assets of at least $1 
billion has more than doubled to 412 in the second quarter of 2022, 
compared to 193 in 2012. Together, these billion-dollar-plus credit 
unions held $1.6 trillion in assets--three out of every four dollars 
within the credit union system. These credit unions also reported the 
most growth in loans, membership, and net worth over the year ending in 
the second quarter of 2022.
    Nevertheless, the credit union system continues to encompass mostly 
smaller institutions. Nearly two-thirds of all credit unions have less 
than $100 million in total assets. Smaller credit unions play an 
important role in providing safe, fair, and affordable financial 
products and services, particularly in rural areas, within communities 
of color, and to other underserved places across the country. Smaller 
credit unions also often face challenges to their long-term viability 
including lower returns on assets, declining membership, higher loan 
delinquencies, increasing non-interest expenses, and a lack of 
succession planning for boards and key personnel. \4\
---------------------------------------------------------------------------
     \4\ To address the issue of succession planning, the NCUA Board 
currently has under consideration a proposed rule to require boards of 
directors at Federal credit unions to establish and adhere to processes 
for succession planning. See https://www.regulations.gov/docket/NCUA-
2022-0016/document.
---------------------------------------------------------------------------
    Moving forward, all credit unions must remain diligent in managing 
safety and soundness and prepare for rising interest rates, 
inflationary pressures, and liquidity concerns. Through examinations 
and supervision, the NCUA continues to monitor economic conditions and 
these challenges, and the agency stands ready to act expeditiously, 
when needed, to address identified risks.
External Factors Impacting the System
    In the coming year, the NCUA expects credit union performance to be 
influenced by several external factors. Forecasters expect modest 
economic growth resulting from inflation and tighter credit conditions. 
Job growth is also expected to slow, placing moderate upward pressure 
on the unemployment rate.
    Expected changes in the interest rate environment suggest the term 
spread could turn negative next year, squeezing credit union net 
interest margins. Therefore, the outlook for credit union loan growth 
and loan performance is uncertain. Modest growth in automobile and home 
sales is projected for next year, which should support continued growth 
in credit union loan balances.
    Delinquency rates may drift higher--moving closer to prepandemic 
levels--but should stay relatively low. However, weaker-than-expected 
economic conditions or a downturn could produce less favorable outcomes 
for credit unions. Inflation may remain elevated as well due to 
geopolitical events, supply chain disruption, and material shortages.
    Given rising interest rates, the NCUA updated its supervisory 
guidance in September to address market and interest rate risk. 
Specifically, the agency issued a letter to credit unions outlining 
changes to how it plans to supervise for interest rate risk and 
clarifying when the issuance of a document of resolution would be 
warranted. \5\ Going forward, the NCUA will continue to monitor the 
interest rate environment and take further action, if needed.
---------------------------------------------------------------------------
     \5\ See SL No. 22-01, Updates to Interest Rate Risk Supervisory 
Framework.
---------------------------------------------------------------------------
Performance of the National Credit Union Share Insurance Fund
    The Share Insurance Fund continues to perform well, with no 
premiums or distributions expected at this time.
    By law, the NCUA Board is required to maintain a strong Share 
Insurance Fund, which is backed by the full faith and credit of the 
United States. This fund insures individual accounts up to $250,000. As 
of June 30, 2022, the Share Insurance Fund protected nearly $1.7 
trillion in insured shares and deposits across all States, the District 
of Columbia, and U.S. territories. The Share Insurance Fund also 
reported a net income of $19.2 million and a net position of $20.3 
billion for the second quarter ending June 30, 2022.
    The Share Insurance Fund's equity ratio is the overall 
capitalization of the insurance fund to protect against unexpected 
losses. When the equity ratio falls below--or is projected within 6 
months to fall below--1.20 percent, the NCUA Board must assess a 
premium or develop a restoration plan. Conversely, when the equity 
ratio exceeds the normal operating level--or the desired equity level 
of the Share Insurance Fund set between 1.20 percent and 1.50 percent--
the Share Insurance Fund pays a distribution if the other statutory 
requirements are met.
    At the end of the second quarter of 2022, the equity ratio stood at 
1.26 percent. For the period ending December 31, 2022, NCUA projects 
the equity ratio for the Share Insurance Fund will be 1.30 percent, 
slightly below the 1.33 percent normal operating level set by the NCUA 
Board.
State of the Central Liquidity Facility
    The NCUA remains concerned about access to liquidity for credit 
unions given rising interest rates and the increased probability of a 
liquidity event, combined with the expiration of previously approved 
statutory enhancements to the NCUA's CLF at the end of 2022.
    Established by statute, the CLF is a mixed-ownership government 
corporation designed to improve financial stability by providing credit 
unions with a source of loans to meet seasonal, short-term, and 
protracted liquidity needs. \6\ The CLF's ability to respond rapidly to 
events helps contain or avert liquidity crises before they escalate. 
For example, during the Great Recession and financial crisis of 2008, 
the NCUA's deployment of the CLF and Share Insurance Fund enabled many 
credit unions to survive.
---------------------------------------------------------------------------
     \6\ See https://www.ncua.gov/support-services/central-liquidity-
facility.
---------------------------------------------------------------------------
    Currently, corporate credit unions--or credit unions serving other 
credit unions--play a critical role to the system by subscribing to 
capital stock in the CLF to provide access to liquidity for smaller 
credit unions. While corporate credit unions may act as agent members 
to purchase capital stock of the CLF, the enhancements that allow for 
their ability to do so for a subset of credit union members will expire 
at the end of 2022, unless Congress acts to extend these authorities. 
Expiration of this provision will make agent membership in the CLF for 
corporate credit unions cost prohibitive, and it will increase the 
administrative burden of smaller credit unions to use the CLF for their 
liquidity needs.
    To address this expiration, the NCUA Board has strongly advocated 
for permanent statutory authority--or at minimum, an extension--to 
allow corporate credit unions and other agent members of the CLF to 
purchase capital stock for a subset of credit unions served. Smaller 
credit unions are more likely to need access to emergency funds should 
a systemic liquidity event occur. These statutory CLF enhancements make 
the facility a more affordable option for corporate credit unions to 
subscribe to on behalf of their smaller credit union members.
    If the CLF agent-member provision is not permanently reinstated or 
extended, there could be a reduction of $9.7 billion in reserve 
liquidity for the credit union system. Given increasing liquidity 
concerns within the credit union system, now is not the time to shrink 
access to an emergency liquidity resource.
NCUA's Efforts To Strengthen the Credit Union System
    Over the last year, the NCUA has undertaken several actions to 
strengthen capital standards, improve the examination process, enhance 
cybersecurity, protect consumers, preserve Minority Depository 
Institutions (MDIs), and advance diversity, equity, and inclusion.
Strengthening Capital Standards
    The NCUA recognizes that all financial institutions backed by 
Federal share and deposit insurance, including credit unions, should 
hold capital commensurate with their risks. In 2015, the NCUA Board 
initially approved a risk-based capital rule (RBC rule) to update, 
consistent with the Federal Credit Union Act, the risk-based net worth 
requirement for complex credit unions. \7\ The intent was to reduce the 
likelihood of a small number of high-risk outliers exhausting their 
capital and causing losses to the Share Insurance Fund.
---------------------------------------------------------------------------
     \7\ 12 U.S.C. 1790d(b)(1).
---------------------------------------------------------------------------
    Effective January 1, 2022, all federally insured, consumer credit 
unions defined as complex must comply with the RBC rule. The RBC rule 
defines a complex credit union as one having more than $500 million in 
assets. Should one of these credit unions fail, the additional capital 
buffer afforded by this framework would protect surviving credit 
unions, their members, and the taxpayers who ultimately guarantee the 
Share Insurance Fund.
    To provide a simplified alternative framework to the risk-based 
capital requirements, the NCUA Board approved the Complex Credit Union 
Leverage Ratio final rule (CCULR rule) in December 2022. The CCULR rule 
relieves complex credit unions that satisfy certain eligibility 
criteria from calculating the risk-based capital ratio. In exchange, 
these credit unions must maintain a higher net worth ratio than 
otherwise required for the well-capitalized classification.
    The CCULR rule provides complex credit unions with a risk-based 
capital framework comparable to those developed by the Federal banking 
agencies and consistent with the Federal Credit Union Act. The rule 
also strengthens the system's capital levels while providing complex 
credit unions with a streamlined approach to managing their capital.
    Together, the CCULR and RBC rules promote responsible capital 
levels across the credit union system and reduce the Share Insurance 
Fund premiums surviving credit unions would pay if a large, complex 
credit union failed. The rules also strengthen the credit union 
system's ability to better withstand future crises with minimal 
disruption to credit union members.
Upgrading Legacy Examination Tool
    As part of the NCUA's innovation efforts, the agency has developed 
a new examination tool to modernize the examination process and offer 
examiners enhanced analytics capabilities. The NCUA officially rolled 
out its new Modern Examination and Risk Identification Tool (MERIT) in 
2022 after conducting training for State and Federal credit union 
examiners in 2021. This cloud-based examination platform replaced the 
NCUA's Automated Integrated Regulatory Examination System (AIRES), a 
25-year-old legacy examination application. The NCUA expects MERIT will 
help examiners more efficiently perform their functions and apply 
better analytics, which should result in fewer onsite examination 
hours.
Maintaining Cybersecurity
    Over the last year, the NCUA has continued to reinforce the credit 
union system's ability to withstand potential cyberattacks and 
strengthen the cybersecurity of credit unions and the NCUA. One of the 
agency's notable actions includes warning credit unions about potential 
threats stemming from malicious cyber activity against the United 
States in response to sanctions imposed on Russia for its war in 
Ukraine. The NCUA has also completed the development of a new IT 
examination tool, encouraged credit union use of the Automated 
Cybersecurity Evaluation Toolbox (ACET), and offered cybersecurity 
grants to eligible low-income credit unions.
    To protect the credit union system from the cyberattacks of foreign 
adversaries and other bad actors, the NCUA has regularly provided 
guidance and resources to credit unions regarding these potential 
threats. \8\ As part of this guidance, the NCUA recommends credit 
unions report cyber incidents to the NCUA, the Federal Bureau of 
Investigation, and the Department of Homeland Security's Cybersecurity 
and Infrastructure Security Agency (CISA). The NCUA has also directed 
credit unions to CISA's Shields-Up website, \9\ which provides 
information about cybersecurity threats, resources, and mitigation 
strategies.
---------------------------------------------------------------------------
     \8\ See https://www.ncua.gov/regulation-supervision/regulatory-
compliance-resources/cybersecurity-resources.
     \9\ See https://www.cisa.gov/shields-up.
---------------------------------------------------------------------------
    Additionally, the prevalence of ransomware, malware, supply-chain 
vulnerabilities, social engineering, insider threats, and other forms 
of cyber intrusion are continuing to create challenges at credit unions 
of all sizes. These threats require ongoing measures for rapid 
detection, protection, response, and recovery and are likely to 
accelerate in the future. In response, the NCUA will soon begin 
deployment of its new Information Security Examination (ISE) program. 
ISE is a scalable, risk-focused examination system that focuses on 
compliance with the NCUA's information system regulations.
    The NCUA has also created ACET for credit unions to use when 
evaluating their levels of cybersecurity preparedness. ACET works in 
tandem with ISE, giving credit unions a better understanding of the 
cybersecurity issues the NCUA will address during the examination 
process. ACET is a downloadable, standalone application developed to be 
a holistic cybersecurity resource for credit unions. ACET incorporates 
standards and practices established for financial institutions across 
the cybersecurity discipline, like the Federal Financial Institutions 
Examination Council's IT Examination Handbooks and the National 
Institute of Standards and Technology's Cybersecurity Framework.
    Finally, to help improve digital services and cybersecurity, the 
NCUA provides Community Development Revolving Loan Fund (Revolving Loan 
Fund) grants and loans to low-income-designated credit unions. Congress 
created the Revolving Loan Fund to stimulate economic development in 
low-income communities served by credit unions. During the 2022 grant 
round, 52 grants totaling $484,165 were specifically provided for 
digital services and cybersecurity projects.
Ensuring Consumer Financial Protection
    Consumer financial protection is an NCUA supervisory priority, 
equally important as safety and soundness. This year, NCUA examiners 
are reviewing credit union compliance with COVID-19 consumer-assistance 
programs, fair lending rules, servicemember protections, and fair 
credit reporting laws. The NCUA is also conducting more fair lending 
examinations and reviews than in prior years. Of note, the NCUA has 
found compliance management system weaknesses during recent fair 
lending examinations and reviews.
    In addition, the NCUA has included a review of credit union 
overdraft programs as a supervisory priority. In particular, the agency 
is focusing on credit unions' use of overdraft protection programs and 
the safety-and-soundness issues that can occur with over-reliance on 
these programs. Further, the overdraft fees charged by some credit 
unions can be detrimental to members and inconsistent with the system's 
mission. For that reason, examiners are requesting information about 
overdraft policies and procedures and audits of credit union overdraft 
programs. The agency is also reviewing credit union communications with 
members about these programs. The information gathered this year may be 
used for a more thorough review of credit unions' overdraft programs in 
2023.
    Ultimately, the NCUA recognizes that a strengthened consumer 
compliance program is in the best interest of the system and its 
members.
Supporting MDIs and Low-Income Designated Credit Unions
    The NCUA is also developing more tailored examination procedures 
for MDI and low-income designated credit unions to assist examiners in 
supervising these institutions based on their unique strategies and 
member needs.
    MDI and low-income credit unions are important to providing access 
to safe, fair, and affordable financial services and products, 
particularly to underserved individuals and communities. As of June 30, 
2022, 507 credit unions had the MDI designation, and 412 MDI credit 
unions held the low-income designation. In all, MDI credit unions 
served more than 5 million members and held more than $65 billion in 
assets.
    Despite the ongoing challenges to the economy and the financial 
system resulting from the COVID-19 pandemic, MDI credit unions 
generally saw improved financial performance in 2021. While the number 
of MDIs declined slightly, membership, assets, and loans grew. For 
example, the total amount of MDI credit union lending rose by $2.9 
billion during 2021, an increase of more than 9 percent over the prior 
year and a higher growth rate than credit unions overall. \10\
---------------------------------------------------------------------------
     \10\ See https://www.ncua.gov/files/publications/2021-mdi-
congressional-report.pdf.
---------------------------------------------------------------------------
    Additionally, a critical component of the NCUA's efforts to support 
credit unions is the low-income designation. To qualify as a low-income 
designated credit union, a majority of the credit union's membership 
(50.01 percent) must meet certain income thresholds based on data from 
the Census Bureau and requirements outlined in the NCUA's rules and 
regulations. As of the end of the second quarter of 2022, more than 
2,600 credit unions with low-income designations served more than 68 
million members and held in excess of $1 trillion in assets.
Advancing Diversity, Equity, and Inclusion
    The NCUA is committed to fostering diversity, equity, and inclusion 
within the agency and the credit union system. The agency understands 
that diversity, equity, and inclusion drive fairness, employee 
engagement, and effective decision making. Additionally, organizations 
that embrace diversity, equity, and inclusion often experience higher 
workforce engagement, greater employee retention, and increased 
organizational productivity and earnings.
    As noted in the NCUA's 2021 OMWI Report to Congress, \11\ the 
agency's diversity, equity, and inclusion efforts helped attract, hire, 
and retain a diverse workforce; led to an increase in hiring of 
employees with disabilities; and led to an increase in contracting 
dollars awarded to minority- and women-owned businesses. In 2021, two 
of every five new hires were people of color; more than half the 
participants in leadership development programs were female; and nearly 
4 out of every 10 contract dollars went to minority- and women-owned 
businesses.
---------------------------------------------------------------------------
     \11\ See https://www.ncua.gov/files/publications/2021-omwi-
congressional-report.pdf.
---------------------------------------------------------------------------
    Despite this progress, the NCUA recognizes that Hispanic and Latino 
professionals remain underrepresented within the agency's ranks. The 
agency also needs to improve its performance in hiring and retaining 
women. As such, the NCUA is developing recruitment and development 
strategies to increase representation of both these demographic groups.
    Lastly, the NCUA's annual voluntary Credit Union Diversity Self-
Assessment (CUDSA) results showed improvements over the last year. \12\ 
In 2021, 240 credit unions participated in the survey--a 28 percent 
increase from 2020. Among the highlights for 2021, 61 percent of 
responding credit unions reported a leadership and organizational 
commitment to diversity, 56 percent reported taking steps to implement 
employment practices to demonstrate that commitment, and 31 percent 
reported monitoring and assessing their diversity policies and 
practices. As part of the 2022 CUDSA cycle, the NCUA has also made 
several improvements to enhance security, ensure data integrity, and 
improve the overall user experience.
---------------------------------------------------------------------------
     \12\ See https://www.ncua.gov/files/publications/2021-cudsa-
report.pdf.
---------------------------------------------------------------------------
    Finally, the agency hosted its third industrywide summit on 
diversity, equity, and inclusion at the start of November. \13\ The in-
person and online hybrid event attracted hundreds of diversity, equity, 
and inclusion advocates and practitioners. Going forward, the NCUA will 
continue to host similar summits annually and encourage more credit 
unions to complete the CUDSA.
---------------------------------------------------------------------------
     \13\ See https://www.ncua.gov/news/dei-access-summit-2022.
---------------------------------------------------------------------------
Rulemaking and Guidance
    As the financial services system and credit unions continue to 
evolve--especially with many credit unions growing larger and more 
complex--the regulatory framework must keep pace to maintain the 
strength and stability of the credit union system. In response to these 
changes and to legislation enacted into law, the NCUA has undertaken 
several rulemakings or implemented new rules during the last year that 
address member expulsion, subordinated debt, emergency capital 
investments, and cybersecurity notifications. The NCUA has also issued 
guidance on the use of distributed ledger technologies.
Member Expulsion
    On September 22, 2022, the NCUA Board unanimously approved a 
proposed rule to develop a policy by which a Federal credit union 
member may be expelled for cause by a two-thirds vote of a quorum of 
the Federal credit union's board of directors. \14\ This proposal would 
implement the Credit Union Governance Modernization Act, passed by 
Congress in March 2022. \15\ Comments on the proposed rule are due 
December 2, 2022.
---------------------------------------------------------------------------
     \14\ See https://www.regulations.gov/document/NCUA-2022-0132-0001.
     \15\ Pub. L. 117-103 (Mar. 15, 2022).
---------------------------------------------------------------------------
Subordinated Debt/Secondary Capital Rule
    Effective January 1, 2022, the NCUA Board adopted a final 
subordinated debt rule that replaced the previous secondary capital 
rule. \16\ The final rule allows eligible credit unions to issue 
subordinated debt under the statutory authority to borrow from any 
source.
---------------------------------------------------------------------------
     \16\ See https://www.regulations.gov/docket/NCUA-2020-0016/
document.
---------------------------------------------------------------------------
    Among the changes included in the final rule were increased 
categories of credit unions eligible to use subordinated debt for 
purposes of regulatory capital treatment. This rule now permits low-
income-designated credit unions, as well as complex credit unions that 
are not low-income-designated, to count qualifying subordinated debt to 
meet certain capital requirements. This rule also enables newly 
chartered credit unions to use subordinated debt to support their 
startup phase.
    Subordinated debt, as defined by NCUA's regulation, can help 
increase regulatory capital levels to protect against future losses and 
enable credit unions to provide lending and other member services to 
under-resourced communities.
Emergency Capital Investment
    In December 2021, the Board approved amendments to the Subordinated 
Debt rule to address Emergency Capital Investment Program (ECIP) 
secondary capital applications approved and scheduled for funding after 
the final rule went into effect. \17\ This change benefits eligible MDI 
or Community Development Financial Institutions credit unions that are 
either participating in the U.S. Department of Treasury's ECIP or other 
programs administered by the U.S. Government.
---------------------------------------------------------------------------
     \17\ See https://www.regulations.gov/docket/NCUA-2022-0040/
document.
---------------------------------------------------------------------------
    Credit unions, for the most part, have completed receiving 
approximately $2 billion in ECIP investments. It is expected upon 
completion that close to 80 credit unions will have received ECIP 
investments. ECIP funding will provide long-term, low-cost regulatory 
capital for participating institutions to support low-income and 
minority communities. Such efforts are consistent with the statutory 
mission of credit unions to serve the credit and savings needs of their 
members, especially those of modest means.
Cyber Incident Notification
    As part of the NCUA's cybersecurity efforts, the agency proposed a 
cyber incident notification rule that would require a credit union to 
notify the agency as soon as possible, but no later than 72 hours, 
after it reasonably believes a reportable cyber incident has occurred. 
\18\ The rule would provide an early alert to the NCUA and other 
agencies, allowing the Government and the private sector to react to 
threats before they become systemic.
---------------------------------------------------------------------------
     \18\ See https://www.regulations.gov/docket/NCUA-2022-0099/
document.
---------------------------------------------------------------------------
    To that end, the proposed rule would set parameters for what 
constitutes a reportable incident and the minimum notification 
requirements. The proposed rule is intended to align where possible 
with the Cyber Incident Reporting for Critical Infrastructure Act 
signed into law in March. \19\ The proposed rule would also bring the 
NCUA's cyber incident reporting framework into general alignment with 
the Federal banking agencies.
---------------------------------------------------------------------------
     \19\ Pub. L. 117-103 (Mar. 15, 2022).
---------------------------------------------------------------------------
Use of Distributed Ledger Technologies
    The NCUA recognizes that the maturing of financial technology is 
creating opportunities for credit unions to increase speed of service, 
improve security, and expand products and services. To assist credit 
unions regarding financial technology adoption in a safe-and-sound 
manner, the NCUA issued a letter to credit unions that clarifies 
expectations for credit unions contemplating the use of new or emerging 
distributed ledger technologies (DLT). \20\ The letter specifies that 
while the NCUA does not prohibit credit unions from developing, 
procuring, or using DLT, the technology used must be deployed for 
permissible activities and in compliance with State and Federal laws 
and regulations.
---------------------------------------------------------------------------
     \20\ See 22-CU-07, Federally Insured Credit Union Use of 
Distributed Ledger Technologies.
---------------------------------------------------------------------------
Legislative Requests
    The NCUA recognizes that laws and regulations must evolve to 
reflect changes in the economic environment and technological advances. 
Accordingly, there are two legislative changes that I would like to 
highlight. The first change relates to the CLF agent-membership 
requirements mentioned earlier in this testimony. Extension of this 
provision by Congress would allow the CLF to continue to provide a 
shock absorber that will allow the credit union system to better 
withstand liquidity events. The second change concerns restitution of 
the agency's vendor authority. Action by Congress on this legislative 
recommendation would close a growing regulatory blind spot. Enactment 
of both legislative proposals would facilitate the ability of the NCUA 
to fulfill its statutory mission.
Central Liquidity Facility Permanency
    Most timely, the NCUA requests Congress permanently adjust the CLF 
agent-member requirements to allow agent members to purchase capital 
stock for a subset of credit unions served. Permanent agent membership 
would make it economically feasible for agent members, such as 
corporate credit unions, to participate in the CLF. The statutory 
change would protect the taxpayer at no cost, provide a buffer for the 
Share Insurance Fund, maintain immediate access to emergency liquidity 
for more than 3,600 credit unions with assets under $250 million, and 
support the financial services sector in a liquidity event.
    If the current CLF enhancements--which expire at year's end--are 
not permanently adopted by Congress or if a statutory extension is not 
provided, there will be a decline in the CLF's capitalization and 
funding capacity as corporate credit unions are ``priced out.'' Given 
the prohibitive cost of the stock purchase for all institutions a 
corporate credit union serves, many corporate credit unions have 
already announced plans to terminate membership at the end of this 
calendar year if the agent-member provision is not extended or made 
permanent.
    Permanence would provide regulatory certainty for smaller credit 
unions and strengthen the system's ability to respond to future 
emergencies. The House Financial Services Committee has favorably 
reported H.R. 3958, the Central Liquidity Facility Enhancement Act, and 
the language to renew this expiring enhancement for an additional year 
is contained in the House-passed 2023 National Defense Authorization 
Act.
Restoration of Third-Party Vendor Authority
    The NCUA also seeks the restoration of statutory examination and 
enforcement authority over third-party vendors--including credit union 
service organizations (CUSOs)--that expired at the end of 2001. This 
statutory change would give the NCUA parity with other agencies that 
supervise and regulate federally insured depository institutions.
    Currently, the NCUA may only review credit union third-party 
vendors with their permission, and often, vendors decline these 
requests. Vendors and CUSOs may also reject NCUA recommendations to 
implement appropriate corrective actions that mitigate identified 
risks. The NCUA needs visibility into these entities for several 
reasons, including the credit union system's growing reliance on 
digital services, increased credit union outsourcing of core business 
functions and resulting concentration risks, and cybersecurity, which 
could be a national security risk given this lack of oversight.
    For these reasons, the Government Accountability Office, the 
Financial Stability Oversight Council, and the NCUA's Office of 
Inspector General have each recommended that Congress pass legislation 
to restore the NCUA's vendor authority. The preamble to the CUSO final 
rule adopted in October 2021 also noted the NCUA Board's ``continuing 
policy to seek third-party vendor authority for the agency from 
Congress.'' \21\ If the NCUA's third-party vendor authority is 
reauthorized, the agency will adopt a program that prioritizes 
examinations based on risk to the Share Insurance Fund, cybersecurity, 
consumer financial protection, Bank Secrecy Act/Anti-Money Laundering 
compliance, and national security issues.
---------------------------------------------------------------------------
     \21\ See https://www.ncua.gov/files/agenda-items/
AG20211021Item2b.pdf.
---------------------------------------------------------------------------
    The U.S. House of Representatives passed legislation to provide 
NCUA third-party vendor authority within the 2023 National Defense 
Authorization Act. In the Senate, bipartisan legislation has been 
introduced, which if enacted, would enable the NCUA to develop a risk-
focused examination program for CUSOs and third-party vendors. \22\
---------------------------------------------------------------------------
     \22\ See https://www.congress.gov/bill/117th-congress/house-bill/
7900.
---------------------------------------------------------------------------
    I would like to extend my appreciation to the Committee for its 
continued support and thank Senators Ossoff, Lummis, and Warner for 
introducing S. 4698, the Improving Cybersecurity of Credit Unions Act, 
to restore the NCUA's third-party vendor examination authority. The 
enactment of this legislation would close this regulatory blind spot 
the NCUA continues to confront.
Conclusion
    Thank you again for the invitation to testify about the NCUA's work 
and the state of the credit union system. As the NCUA continues to 
navigate through a challenging and changing economic environment, the 
NCUA will stay focused on protecting credit union members, ensuring the 
safety and soundness of credit unions, and insulating the Share 
Insurance Fund from losses. By attending to these issues, the NCUA 
Board and staff will keep the credit union system strong and ensure 
greater access to safe, fair, and affordable financial products and 
services for all Americans, including those of modest means. I look 
forward to your questions.
                                 ______
                                 
               PREPARED STATEMENT OF MARTIN J. GRUENBERG
          Acting Chair, Federal Deposit Insurance Corporation
                           November 15, 2022
    Chairman Brown, Ranking Member Toomey, and Members of the 
Committee, I am pleased to appear today at this hearing on ``Oversight 
of Financial Regulators: A Strong Banking System for Main Street''.
    The core mission of the Federal Deposit Insurance Corporation 
(FDIC) is to maintain stability and public confidence in the U.S. 
financial system. The FDIC carries out this mission through its 
responsibilities for deposit insurance, banking supervision, and the 
orderly resolution of failed banks, including systemically important 
financial institutions. Banking supervision encompasses safety and 
soundness and consumer protection, both of which are essential to this 
important responsibility. I appreciate the opportunity to report on the 
agency's work in carrying out these responsibilities and to address the 
specific issues raised by the Committee in its letter of invitation.
    My written testimony will begin with an overview of the condition 
of the banking industry and the FDIC's Deposit Insurance Fund (DIF). I 
will then update the Committee on five key policy priorities for 2022: 
strengthening the Community Reinvestment Act (CRA); addressing the 
financial risks that are likely to affect banking organizations and the 
financial system as a result of climate change; reviewing the bank 
merger process; evaluating the risks of crypto assets to the banking 
system; and finalizing the Basel III capital rules. I will then discuss 
the FDIC's efforts to support Minority Depository Institutions (MDIs) 
and Community Development Financial Institutions (CDFIs), as well as to 
promote a diverse and inclusive workplace at the FDIC. Finally, I will 
describe the FDIC's work to strengthen cybersecurity and information 
security within the banking industry and our return to in-person bank 
examinations and other in-person activities at every level of the FDIC.
State of the Banking Industry
    The banking industry has reported generally positive results this 
year, amid continued economic uncertainty. Loan growth strengthened, 
net interest income grew, and most asset quality measures improved. 
Further, the industry remains well-capitalized and highly liquid. \1\ 
The number of institutions on the FDIC's ``Problem Bank List'' remained 
stable in the second quarter at 40, the lowest number in the FDIC's 
Quarterly Banking Profile history. Fourteen new banks opened through 
October 2022, including the first mutual bank in 50 years. 
Additionally, no banks failed during 2021 nor this year.
---------------------------------------------------------------------------
     \1\ See FDIC Quarterly Banking Profile: Second Quarter 2022 
(September 8, 2022) available at https://www.fdic.gov/analysis/
quarterly-banking-profile/.
---------------------------------------------------------------------------
    At the same time, the banking industry reported a moderate decline 
in net income in the first two quarters of this year from 1 year ago, 
primarily because of an increase in provision expense at the largest 
institutions. The increase in provision expense--the amount set aside 
by institutions to protect against future credit losses--reflects the 
banking industry's recognition of risks related to persistent economic 
uncertainties, and slowing economic growth, as well as the increase in 
loan balances. Net income also declined year-over-year at community 
banks. Unlike results for the industry as a whole, an increase in 
compensation costs led the decline in net income at community banks.
    Rising market interest rates and strong loan growth supported an 
increase of 26 basis points in the banking industry's net interest 
margin (NIM) from the first to the second quarter of this year to 2.80 
percent. Most banks reported higher net interest income compared with a 
year ago as a result.
    However, rising interest rates and longer asset maturities also 
resulted in unrealized losses on investment securities held by banks. 
As of the second quarter 2022, banks reported $470 billion in 
unrealized losses, as the market value of securities fell below the 
book value. The FDIC expects this trend to be an ongoing challenge as 
interest rates continued to rise in the third quarter, especially if 
banks need to sell investments to meet liquidity needs.
    Despite several favorable performance metrics, the banking industry 
continues to face significant downside risks. These risks include the 
effects of inflation, rapidly rising market interest rates, and 
continuing geopolitical uncertainty. Taken together, these risks may 
reduce profitability, weaken credit quality and capital, and limit loan 
growth in coming quarters. Furthermore, higher market interest rates 
have led to continued growth in unrealized losses in the banking 
industry's securities portfolios. Higher interest rates may also erode 
real estate and other asset values as well as hamper borrowers' loan 
repayment ability. These will be matters of ongoing supervisory 
attention by the FDIC.
Condition of the Deposit Insurance Fund
    Extraordinary growth in insured deposits during the first half of 
2020 caused the DIF reserve ratio to decline below the statutory 
minimum of 1.35 percent as of June 30, 2020. The reserve ratio of the 
DIF is the DIF balance as a percent of the banking industry's estimated 
insured deposits.
    On September 15, 2020, the FDIC adopted a Restoration Plan as 
required by law to restore the reserve ratio to the statutory minimum 
of 1.35 percent within the statutory 8-year period, ending on September 
30, 2028. \2\ The Restoration Plan maintained the assessment rate 
schedules in place at the time and required the FDIC to update its 
analysis and projections for the DIF balance and reserve ratio at least 
semiannually.
---------------------------------------------------------------------------
     \2\ See Federal Deposit Insurance Corporation Restoration Plan, 85 
FR 59306 (published September 21, 2020).
---------------------------------------------------------------------------
    While the DIF balance increased by about $1.3 billion over the 
first half of 2022 to $124.5 billion, continued elevated levels of 
insured deposits have caused the reserve ratio to remain low at 1.26 
percent as of June 30, 2022, well below the statutory minimum.
    While insured deposits have shown signs of possibly normalizing, 
the banking industry continued to report strong insured deposit growth 
through June 2022, outpacing growth in the DIF. Projections of the 
reserve ratio under different scenarios indicated that the reserve 
ratio was at risk of not reaching 1.35 percent by the statutory 
deadline. Consequently, the FDIC Board amended the Restoration Plan to 
incorporate an increase in assessment rate schedules of 2 basis points 
for all insured depository institutions, and concurrently approved a 
notice of proposed rulemaking to implement this increase. \3\
---------------------------------------------------------------------------
     \3\ See Federal Deposit Insurance Corporation Amended Restoration 
Plan, 87 FR 39518 (published July 1, 2022).
---------------------------------------------------------------------------
    The increase in assessment rate schedules is intended to improve 
the likelihood that the reserve ratio will reach the statutory minimum 
of 1.35 percent by the statutory deadline. It will also support growth 
in the DIF in progressing toward the FDIC's long-term goal of a 2 
percent Designated Reserve Ratio, and will increase the likelihood of 
the DIF remaining positive throughout periods of significant losses due 
to bank failures, consistent with the FDIC's long-term fund management 
plan.
    Following careful consideration of the comments received on the 
proposal, and based on updated projections and analysis, on October 18, 
2022, the FDIC adopted a final rule implementing the increase in 
assessment rate schedules of 2 basis points. \4\ Under the final rule, 
the new assessment rate schedules will take effect on January 1, 2023. 
Assessments will be calculated at the end of the first quarter of 2023 
and will be payable by June 30, 2023. Banks will have ample time to 
plan for the new assessment rates. The FDIC projects the increase in 
assessment rates will have an insignificant effect on institutions' 
capital levels and estimates the new rates will reduce income only 
slightly by an annual average of 1.2 percent. The FDIC does not expect 
the increase to impact lending or credit availability in any meaningful 
way.
---------------------------------------------------------------------------
     \4\ 87 FR 64348 (published October 24, 2022).
---------------------------------------------------------------------------
    As noted previously, the banking industry's current performance is 
strong, but it faces significant downside risks. It is better to take 
prudent but modest action earlier in the statutory 8-year period to 
reach the minimum reserve ratio of the DIF while the industry is in a 
strong position than to delay and potentially have to consider a 
procyclical assessment increase. In the event that the industry 
experiences a downturn before the FDIC has exited its current 
Restoration Plan, the FDIC might have to consider even larger 
assessment increases to meet the statutory requirement in a more 
compressed timeframe and under less favorable conditions.
Strengthening the Community Reinvestment Act
    The Community Reinvestment Act seeks to address one of the most 
intractable challenges of our financial markets--access to credit, 
investment, and basic banking services for low- and moderate-income 
communities and borrowers, both urban and rural.
    The provisions of CRA as originally enacted in 1977 were 
deceptively simple but groundbreaking. \5\ The key operative provision 
of the Act states, ``In connection with its examination of a financial 
institution, the appropriate Federal financial supervisory agency shall 
\6\ . . . assess the institution's record of meeting the credit needs 
of its entire community, including low- and moderate-income 
neighborhoods . . . .''
---------------------------------------------------------------------------
     \5\ Community Reinvestment Act of 1977, Pub. L. No. 95-128, title 
VIII, (1977).
     \6\ Id. at Sec. 802.
---------------------------------------------------------------------------
    Since its enactment, CRA has become the foundation of responsible 
finance for low- and moderate-income communities in the United States.
    While the rule implementing CRA has not undergone a major revision 
since 1995, the banking industry has evolved dramatically over that 
time. On May 5, the three Federal banking agencies--the Federal Reserve 
Board (Federal Reserve), the Office of the Comptroller of the Currency 
(OCC), and the FDIC adopted a Notice of Proposed Rulemaking (NPR) in an 
effort to adapt CRA to that evolution and to strengthen and enhance its 
effectiveness in achieving its core mission. \7\ There is a lot in this 
NPR, but in the interest of brevity, I would like to focus on four key 
elements of the proposed rule.
---------------------------------------------------------------------------
     \7\ See Joint Notice of Proposed Rulemaking: Community 
Reinvestment Act, 87 FR 33884 (published June 3, 2022), available at 
https://www.govinfo.gov/content/pkg/FR-2022-06-03/pdf/2022-10111.pdf.
---------------------------------------------------------------------------
    First, the NPR would establish new retail lending assessment areas 
to allow for CRA evaluation in communities where a bank may be engaging 
in significant lending activity but where the bank does not have a 
branch. Currently, CRA assessment areas are tied to bank branches. Bank 
lending in communities in which the bank does not have a physical 
presence is generally not subject to CRA. While bank branches continue 
to play a critical role in serving communities, technology has made 
possible an increasing portion of bank lending activity unrelated to 
the branch network. Some banks have only one branch or no branch at 
all, yet engage in large scale lending.
    These new retail lending assessment areas are a means of subjecting 
that lending activity to a CRA review. They represent a critically 
important adaptation of CRA to the changing nature of the banking 
business, and they do so in a manner that is neutral with regards to 
the business model of the bank. In addition, under the new community 
development test in the NPR, a bank could earn community development 
credit under the CRA evaluation for activity outside of the traditional 
branch-based assessment areas. This provides an incentive for bank 
activity in rural communities, Native lands, areas of persistent 
poverty, and underserved areas--so-called credit deserts.
    Second, the NPR incorporates detailed metrics on bank lending 
activity. This provides an improved line of sight into bank lending and 
allows for the consideration of higher standards for bank lending 
performance under CRA. The objective here is to provide an incentive 
for increased bank lending to underserved communities.
    Third, the availability of metrics will allow for greater 
transparency and certainty for banking institutions in meeting their 
CRA responsibilities under the retail lending and the community 
development financing tests. This is an objective on which the banking 
industry has placed a high value.
    Finally, the NPR is tailored to the size and complexity of banking 
institutions with different standards for small, intermediate, and 
large institutions. For example, the NPR raises the thresholds for 
defining both ``Small Bank'' and ``Intermediate Bank.'' This will 
maintain or reduce the requirements for hundreds of community banks 
with regards to CRA data collection and reporting.
    In addition to these four core elements of the NPR, the proposed 
rule provides greater transparency on lending to communities of color 
utilizing publicly available information. It also provides enhanced 
incentives for bank collaboration with MDIs and CDFIs, bank investments 
in disaster preparedness and climate resilience in low- and moderate-
income neighborhoods, and bank lending, investment, and services in 
rural communities and Native lands.
    Taken together this NPR represents a major revision of CRA intended 
to strengthen its impact and increase its transparency and 
predictability. The three banking agencies received approximately one 
thousand unique comments from a wide range of stakeholders, many of 
which are quite detailed and thoughtful. \8\ The staffs of the three 
agencies are working diligently to review those comments and consider 
possible changes to the NPR in response to those comments in crafting a 
final rule.
---------------------------------------------------------------------------
     \8\ Comment submission closed on August 5, 2022. Comments received 
on the proposed changes to the Community Reinvestment Act are available 
at https://www.regulations.gov/docket/OCC-2022-0002/comments.
---------------------------------------------------------------------------
Addressing the Financial Risks Posed by Climate Change
    There is broad consensus among financial regulatory bodies, both 
domestically and abroad, that the effects of climate change and the 
transition to reduced reliance on carbon-emitting sources of energy 
present unique and significant economic and financial risks, and 
therefore, an emerging risk to the financial system and the safety and 
soundness of financial institutions.
    The role of the FDIC with respect to climate change is limited to 
the financial risks that climate change may pose to the banking system 
and the extent to which those risks impact the FDIC's core mission and 
responsibilities. The FDIC is not responsible for climate policy. As 
such, we will not be involved in determining which firms or business 
sectors financial institutions should do business with. These types of 
credit allocation decisions are the responsibility of financial 
institutions. We want financial institutions to fully consider climate-
related financial risks--as they do all other risks--and continue to 
take a risk-based approach in assessing individual credit and 
investment decisions.
    The financial system has always had severe weather events to 
contend with and, thus far, the banking industry has handled these 
events well. Agricultural banks know well the effects that drought 
conditions can have on farming communities; banks in the west 
understand the impacts of wildfires; and coastal banks have long 
responded to the annual threat of tropical storms and hurricanes.
    However, changing climate conditions are bringing with them 
challenging trends and events, including rising sea levels, increases 
in the frequency and severity of extreme weather events, and other 
natural disasters. \9\ These trends challenge the future resiliency of 
the financial system and, in some circumstances, may pose safety and 
soundness risks to individual banks. The goal of the FDIC's work on 
climate-related financial risk is to ensure that the financial system 
continues to remain resilient despite these rising risks.
---------------------------------------------------------------------------
     \9\ See Intergovernmental Panel on Climate Change (2021; in 
press), ``Summary for Policymakers'', in V. Masson-Delmotte, P. Zhai, 
A. Pirani, S.L. Connors, C. Pean, S. Berger, N. Caud, Y. Chen, L. 
Goldfarb, M.I. Gomis, M. Huang, K. Leitzell, E. Lonnoy, J.B.R. 
Matthews, T.K. Maycock, T. Waterfield, O. Yelekci, R. Yu, and B. Zhou, 
eds., Climate Change 2021: The Physical Science Basis. Contribution of 
Working Group I to the Sixth Assessment Report of the Intergovernmental 
Panel on Climate Change (Cambridge, UK: Cambridge University Press).
---------------------------------------------------------------------------
    In order to understand and address the financial risks that climate 
change poses to financial institutions and the financial system, it is 
important to foster an open dialogue with our counterparts in the U.S. 
and international financial regulatory bodies, and especially with 
stakeholders throughout the banking industry. It is for these reasons 
that the FDIC established an internal, cross-disciplinary working group 
to assess the safety and soundness and financial stability 
considerations associated with climate-related financial risk and to 
develop an agencywide understanding of climate-related financial risk. 
The FDIC is also coordinating with our interagency peers and is 
participating on the Financial Stability Oversight Council's (FSOC) 
Climate-related Financial Risk Committee. Further, as climate change is 
an international problem, the FDIC, along with the Federal Reserve and 
the OCC, have joined the Network of Central Banks and Supervisors for 
Greening the Financial System (NGFS) to foster collaboration and share 
best practices in addressing climate-related financial risks on a 
global basis. This complements our existing work with the Basel 
Committee's Task Force on Climate-related Financial Risks and other 
appropriate international organizations.
    While the FDIC remains in the early stages of addressing climate-
related financial risk, regulators need to work with the banking 
industry now to support financial institutions as they develop plans to 
identify, monitor, and manage the risks posed by climate change. This 
should be done in a manner that is flexible enough to allow for change 
as knowledge is gained, data are developed, and new methodologies and 
tools are explored. Consistent with this, the FDIC issued a request for 
comments in April on draft principles that would provide a high-level 
framework for the safe and sound management of exposures to climate-
related financial risks for large financial institutions. \10\ This 
request for comments is substantively similar to the principles that 
were issued by the OCC in December of last year. \11\ Comments received 
on the proposed principles are currently under review and 
consideration. \12\ The FDIC and OCC are also collaborating with the 
Federal Reserve to bring the three agencies into alignment on the 
principles.
---------------------------------------------------------------------------
     \10\ See Statement of Principles for Climate-Related Financial 
Risk Management for Large Financial Institutions, 87 FR 19507 
(published April 4, 2022).
     \11\ OCC Bulletin 2021-62, Risk Management: Principles for 
Climate-Related Financial Risk Management for Large Banks; Request for 
Feedback (December 16, 2021). https://www.occ.gov/news-issuances/
bulletins/2021/bulletin-2021-62.html.
     \12\ Comment submission closed on June 3, 2022. Comments received 
are available at https://www.fdic.gov/resources/regulations/federal-
register-publications/2022/2022-statement-principles-climate-related-
financial-risk-management-3064-za32.html.
---------------------------------------------------------------------------
    I want to stress that the FDIC is still in the beginning stages of 
our work on climate-related financial risks, and we will continue to 
expand our efforts to address these risks through a thoughtful and 
measured approach. We will emphasize risk-based assessments and 
collaboration with other supervisors as well as with stakeholders in 
the banking industry, and our actions will complement actions that have 
been taken domestically and internationally. Importantly, the FDIC will 
continue to encourage financial institutions to consider climate-
related financial risks in a manner that allows banks to prudently meet 
the financial services needs of their communities.
Reviewing the Bank Merger Process
    The Bank Merger Act of 1960 (BMA) established a framework that 
requires, in general, approval by the Federal Reserve and the OCC, or 
the FDIC, as appropriate, of bank mergers. \13\ FDIC approval is also 
required for a bank merger with a noninsured entity. \14\ The statute 
generally requires the banking agencies to consider several factors 
when reviewing a merger application including whether a proposed merger 
would substantially lessen competition or tend to create a monopoly, 
the financial and managerial resources and future prospects of the 
existing and proposed institutions, the convenience and needs of the 
community to be served, and the risk to the stability of the United 
States banking or financial system. \15\ The FDIC has adopted a rule 
and a policy statement implementing the statutory requirements but 
neither yet address the financial stability factor, which was added to 
the BMA under the Dodd-Frank Act of 2010. \16\
---------------------------------------------------------------------------
     \13\ Bank Merger Act, Pub. L. 86-463, 72 Stat. 129 (1960); Bank 
Merger Act Amendments of 1966, Pub. L. 89-356, (codified as amended at 
12 U.S.C. 1828(c)(2018)), available at https://www.fdic.gov/
regulations/laws/rules/1000-2000.html#1000sec.18c.
     \14\ 12 U.S.C. 1828(c)(1) and (2).
     \15\ 12 U.S.C. 1828(c)(5).
     \16\ 12 CFR part 303, available at https://www.fdic.gov/
regulations/laws/rules/2000-250.html and 63 FR 44762, August 20, 1998, 
effective October 1, 1998; amended at 67 FR 48178, July 23, 2002; 67 FR 
79278, December 27, 2002; and FDIC Statement of Policy on Bank Merger 
Transactions,73 FR 8871, February 15, 2008, available at https://
www.fdic.gov/regulations/laws/rules/5000-1200.html. See also Dodd-Frank 
Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 
section 604(f), 124 Stat. 1376, 1602 (2010) (codified at 12 U.S.C. 
1828(c)(5)), available at https://www.govinfo.gov/app/details/PLAW-
111publ203.
---------------------------------------------------------------------------
    Although there has been a significant amount of consolidation in 
the banking sector over the last 30 years, facilitated in part by 
mergers and acquisitions, there has not been a significant review of 
the implementation of the BMA by the agencies in that time. 
Additionally, the prospect for continued consolidation among both large 
and small banks remains significant. In light of these circumstances, a 
review of the regulatory framework implementing the BMA is both timely 
and appropriate.
    In March, the FDIC Board submitted to the Federal Register a 
Request for Information and Comment on Rules, Regulations, Guidance, 
and Statements of Policy Regarding Bank Merger Transactions (RFI). \17\ 
The RFI requested comment on the four statutory factors the FDIC must 
consider in reviewing bank merger applications: competition, prudential 
risk, the convenience and needs of the communities affected, and 
financial stability.
---------------------------------------------------------------------------
     \17\ Request for Information and Comment on Rules, Regulations, 
Guidance, and Statements of Policy Regarding Bank Merger Transactions, 
87 FR 18740 (published March 31, 2022).
---------------------------------------------------------------------------
    The comment period closed on May 31, 2022, with 31 comments 
received. \18\ The FDIC is considering updates to its BMA Statement of 
Policy in light of the comments received. Moreover, the FDIC is working 
collaboratively with the other banking agencies and the Department of 
Justice on an interagency review of the bank merger application 
process.
---------------------------------------------------------------------------
     \18\ Comments received are available at https://www.fdic.gov/
resources/regulations/federal-register-publications/2022/2022-rfi-
rules-regulations-statements-of-policy-regarding-bank-merger-
transactions-3064-za31.html.
---------------------------------------------------------------------------
Evaluating the Risk of Crypto Assets to the Banking System
    The recent growth in the crypto asset industry has corresponded 
with an increasing interest on the part of some banks to engage in 
crypto asset activities. \19\ Crypto assets bring with them novel and 
complex risks that, like the risks associated with the innovative 
products in the early 2000s, are difficult to fully assess, especially 
with the market's eagerness to move quickly into these products.
---------------------------------------------------------------------------
     \19\ ``The Impact of COVID-19 on Cryptocurrency Markets: A Network 
Analysis Based on Mutual Information'', available at https://
journals.plos.org/plosone/article?id=10.1371/journal.pone.0259869.
---------------------------------------------------------------------------
    The recently published digital asset report by the FSOC describes 
crypto assets as private sector digital assets that depend primarily on 
the use of cryptography and distributed ledger or similar technologies. 
\20\ Crypto assets such as Bitcoin are not backed by physical assets, 
but rather they purport to establish value by their scarcity or 
utility. As such, the value of these crypto assets at any point is 
driven in large part by market sentiment. This has resulted in a highly 
volatile marketplace.
---------------------------------------------------------------------------
     \20\ Financial Stability Oversight Council Report on Digital Asset 
Financial Stability Risks and Regulation 2022, available at https://
home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf.
---------------------------------------------------------------------------
    While the FDIC had been generally aware of the rising interest in 
crypto asset related activities through its normal supervision process, 
as this interest has accelerated, it became clear that more information 
was needed to better understand the risks associated with these 
activities as well as which banks have been engaging in, or are 
interested in engaging in, crypto asset related activities.
    To address that gap, the FDIC issued a Financial Institution Letter 
(FIL) in April of this year asking the banks the FDIC supervises to 
notify the FDIC if they are engaging in, or planning to engage in, 
crypto asset related activities. \21\ If so, we asked banks to provide 
us enough details to allow us to work with them to assess the safety 
and soundness, consumer protection, and BSA/AML risks associated with 
the activities and the appropriateness of their proposed governance and 
risk management processes associated with the activity. The other 
Federal banking agencies have issued similar requests to their 
supervised institutions. \22\
---------------------------------------------------------------------------
     \21\ Federal Deposit Insurance Corporation, Financial Institution 
Letter 16-2022: Notification of Engaging in Crypto-Related Activities, 
FDIC (April 7, 2022) available at https://www.fdic.gov/news/financial-
institution-letters/2022/fil22016.html.
     \22\ See OCC, Interpretive Letter 1179 (November 18, 2021); 
Federal Reserve SR 22-6 / CA 22-6: Engagement in Crypto-Asset-Related 
Activities by Federal Reserve-Supervised Banking Organizations (August 
16, 2022).
---------------------------------------------------------------------------
    Once the FDIC develops a better understanding of activities planned 
or already active, we will provide the institution with case-specific 
supervisory feedback. \23\ As the FDIC and the other Federal banking 
agencies develop a better collective understanding of the risks 
associated with these activities, we expect to provide broader industry 
guidance on an interagency basis.
---------------------------------------------------------------------------
     \23\ Notifications under the FIL and knowledge of engagement or 
potential engagement that we learn through the supervisory process is 
confidential supervisory information, but we are aware of approximately 
80 FDIC-supervised institutions that are engaging in or are interested 
in engaging in crypto asset activities, and approximately two dozen 
that appear to be actively engaged in activities described in the FIL. 
The FDIC is providing various types of supervisory feedback, depending 
upon the activity involved, the status of the activity (active or 
planned), and the institution's risk management framework, among other 
things.
---------------------------------------------------------------------------
    These risks of crypto assets are very real. After the bankruptcies 
of crypto asset platforms that have occurred this year, there have been 
numerous news stories of consumers who have been unable to access their 
funds or savings. \24\
---------------------------------------------------------------------------
     \24\ See, https://www.washingtonpost.com/business/2022/07/06/
voyager-bankruptcy-three-arrows/, https://www.washingtonpost.com/
business/2022/07/13/crypto-bankruptcy-celsius-depositors/.
---------------------------------------------------------------------------
    The FDIC will continue to work with our supervised banks to ensure 
that any crypto-asset-related activities that they engage in are 
permissible banking activities that can be conducted in a safe and 
sound manner and in compliance with existing laws and regulations. If 
so, we will work with banks to ensure that they have put in place 
appropriate measures and controls to identify and manage risks and can 
ensure compliance with all relevant laws, including those related to 
anti-money laundering and consumer protection and we will do this in 
collaboration with our fellow banking agencies.
    In addition, crypto firms have used false and misleading statements 
concerning the availability of Federal deposit insurance for their 
crypto products in violation of the law. In response, the FDIC issued 
letters demanding that the firms cease and desist from using misleading 
statements with regard to deposit insurance. \25\ The FDIC also issued 
an Advisory in July of this year reminding insured banks of the risks 
that could arise related to misrepresentations of deposit insurance by 
crypto-asset companies. \26\
---------------------------------------------------------------------------
     \25\ See ``FDIC and Federal Reserve Board Issue Letter Demanding 
Voyager Digital Cease and Desist From Making False or Misleading 
Representations of Deposit Insurance Status'', July 28, 2022, available 
at https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20220728a.htm and ``FDIC Issues Cease and Desist Letters to Five 
Companies for Making Crypto-Related False or Misleading Representations 
About Deposit Insurance'', August 19, 2022, available at https://
www.fdic.gov/news/press-releases/2022/pr22060.html.
     \26\ See Advisory to FDIC-Insured Institutions Regarding Deposit 
Insurance and Dealings with Crypto Companies, FIL-35-2022 (July 29, 
2022), available at https://www.fdic.gov/news/financial-institution-
letters/2022/fil22035.html.
---------------------------------------------------------------------------
    One closely related issue that has been a focus of policymakers 
both at the agencies and the Congress is stablecoins. As investors 
traded in and out of various crypto assets, a desire arose for a crypto 
asset with a stable value that would allow investors to transfer value 
from one crypto asset into another without the need for converting into 
and out of fiat currencies. This gave rise to the development of 
various so-called stablecoins.
    Unlike Bitcoin and similar crypto assets, most stablecoins are 
represented as backed by a pool of assets or utilize other methods to 
help maintain a stable value. Currently, the most prominent stablecoins 
are purported to be backed by financial assets such as currencies, U.S. 
Treasury securities, or commercial paper.
    Thus far stablecoins have predominantly been used as a vehicle to 
buy and sell crypto assets for investment and trading purposes--there 
has been no demonstration so far of their value in terms of the broader 
payments system. However, the distributed ledger technology upon which 
they are built may prove to have meaningful applications and public 
utility within the payments system. This raises a host of important 
policy questions that will be the subject of careful attention by all 
of the Federal financial regulators.
Finalizing the Basel III Capital Rules
    After the global financial crisis of 2008, the FDIC, OCC and 
Federal Reserve sought to strengthen the banking system through changes 
to the regulatory capital framework. This work has been based largely 
on two sets of standards issued by the Basel Committee on Banking 
Supervision (BCBS), known as Basel III. \27\ The agencies' initial 
revisions in 2013 included an increase in the overall quality and 
quantity of capital. The agencies are now turning to the second set of 
BCBS standards to finalize the implementation of Basel III.
---------------------------------------------------------------------------
     \27\ See Basel III, International Framework for Banks, available 
at https://www.bis.org/bcbs/basel3.htm.
---------------------------------------------------------------------------
    On September 9, the three agencies reaffirmed their commitment to 
implementing enhanced regulatory capital requirements that align with 
the final set of Basel III standards issued by the BCBS. \28\ These 
standards, issued by the BCBS in 2017, include ways to strengthen 
capital requirements for market risk exposures, improve the capital 
requirement for financial derivatives, and simplify the measurement of 
operational risk for regulatory capital purposes.
---------------------------------------------------------------------------
     \28\ See FDIC Press Release, PR-65-2022, Agencies Reaffirm 
Commitment to Basel III Standards (September 9, 2022) available at 
https://www.fdic.gov/news/press-releases/2022/pr22065.html.
---------------------------------------------------------------------------
    The agencies plan to seek public input on the new capital standards 
for large banking organizations and are currently developing a joint 
proposed rule for issuance as soon as possible. Importantly, community 
banks, which are subject to different capital requirements, would not 
be impacted by the proposal, given their limited overall size and 
trading activities.
Supporting Minority Depository Institutions and Community Development 
        Financial Institutions
    The preservation and promotion of MDIs remains a long-standing 
priority for the FDIC. \29\ The FDIC's research study, Minority 
Depository Institutions: Structure, Performance, and Social Impact, 
\30\ found that FDIC-insured MDIs have played a vital role in providing 
mortgage credit, small business lending, and other banking services to 
minority and low- and moderate-income communities. Similarly, banks 
designated as CDFIs by the Treasury's CDFI Fund provide financial 
services in low-income communities and to individuals and businesses 
that have traditionally lacked access to credit.
---------------------------------------------------------------------------
     \29\ See Section 308 of the Financial Institutions Reform, 
Recovery, and Enforcement Act of 1989, Pub. L. 101-73, title III, 308. 
Aug 9, 1989, as amended by Pub. L. 11-203, title III, 367(4), July 21, 
201, 124 Stat. 1556, codified at 12 U.S.C. 1463 note.
     \30\ See FDIC, Minority Depository Institutions: Structure, 
Performance, and Social Impact, available at https://www.fdic.gov/
regulations/resources/minority/2019-mdi-study/full.pdf.
---------------------------------------------------------------------------
    MDIs and CDFIs are anchor institutions in their communities and 
play a key role in building a more inclusive financial system. The FDIC 
supervises approximately two-thirds of the approximately 280 FDIC-
insured MDIs and CDFIs. In addition to its supervisory activities, the 
FDIC's Office of Minority and Community Development Banking supports 
the agency's ongoing strategic and direct engagement with MDIs and 
CDFIs.
    In support of its statutory requirement to encourage the creation 
of new MDIs, this past May the FDIC issued a FIL that outlines the 
process by which FDIC-supervised institutions or applicants for deposit 
insurance can make a request to be designated as an MDI. \31\
---------------------------------------------------------------------------
     \31\ FDIC Financial Institution Letter, FIL-24-2022, Minority 
Depository Institution (MDI) Designation (May 19, 2022) available at 
https://www.fdic.gov/news/financial-institution-letters/2022/
fil22024.html.
---------------------------------------------------------------------------
    In 2021, the FDIC designated five new institutions as MDIs, and, to 
date in 2022, one new FDIC-supervised de novo MDI opened for business. 
Three other existing institutions have been designated as MDIs, and the 
FDIC approved a conditional application for deposit insurance for a de 
novo MDI that is now raising capital.
    Since 2020, significant new sources of private and public funding 
have become available to support FDIC-insured MDIs and CDFIs, known 
collectively as mission-driven banks. The FDIC issued a publication, 
Investing in the Future of Mission-Driven Banks: A Guide To 
Facilitating New Partnerships, \32\ to connect those who wished to 
support and partner with these institutions. Numerous large banks, 
technology companies, and others have invested hundreds of millions of 
dollars into mission-driven banks over the past 2 years. The FDIC also 
initiated the creation of the Mission-Driven Bank Fund, a private 
investment fund that will invest in FDIC-insured MDIs and CDFIs. \33\ 
We understand that the anchor investors, Truist Financial Corporation 
and Microsoft, are poised to select the fund manager in the coming 
weeks.
---------------------------------------------------------------------------
     \32\ See FDIC, ``Investing in the Future of Mission-Driven Banks: 
A Guide To Facilitating New Partnerships'', available at https://
www.fdic.gov/regulations/resources/minority/mission-driven/guide.html.
     \33\ See FDIC, Mission-Driven Bank Fund webpage, available at 
https://www.fdic.gov/regulations/resources/minority/mission-driven/
index.html.
---------------------------------------------------------------------------
    The Federal Government has provided new funding to these 
institutions through nearly $8.3 billion in the U.S. Treasury's 
Emergency Capital Investment Program (ECIP) and up to $3 billion in 
CDFI Fund programs, including up to $1.2 billion set aside for minority 
lending institutions. The banking agencies issued new regulations that 
revised capital rules to provide that Treasury's investments under the 
program qualify as regulatory capital of insured MDIs and CDFIs and 
holding companies. \34\ The FDIC developed a Capital Estimator Tool and 
a Regulatory Capital Guide to enable mission-driven banks to 
approximate the impact of additional capital on various capital ratios. 
At the request of mission-driven banks, the FDIC developed a technical 
assistance program to help ECIP recipients understand supervisory 
expectations for the significant new growth that this capital will 
support over the coming years.
---------------------------------------------------------------------------
     \34\ See FDIC, ``Federal Bank Regulators Issue Rule Supporting 
Treasury's Investments in Minority Depository Institutions and 
Community Development Financial Institutions'', available at https://
www.fdic.gov/news/press-releases/2021/pr21018.html.
---------------------------------------------------------------------------
    The FDIC also benefits from a number of MDI and CDFI bank 
executives serving on its Advisory Committee on Community Banking 
(CBAC), the MDI Subcommittee of the CBAC, and the Advisory Committee on 
Economic Inclusion. These bankers bring the voices of mission-driven 
banks to the FDIC board and senior executives, and they have provided 
input on important policy initiatives.
Diversity, Equity, Inclusion, and Accessibility Priorities of the FDIC
    Fostering diversity, equity, inclusion, and accessibility (DEIA) 
continues to be a top priority for the FDIC. \35\ Our goal is to have a 
workforce that is talented, diverse, and committed to fostering a safe, 
fair, and inclusive workplace and banking system. The agency is 
focusing on three strategic areas in 2022: (1) implementing strategic 
initiatives focused on the workplace; (2) Hispanic recruitment and 
retention, an area identified as needing special attention by an 
analysis of our employment data; and (3) financial institution 
diversity.
---------------------------------------------------------------------------
     \35\ The agency's corporate strategy is outlined in the FDIC 
Diversity, Equity and Inclusion; 2021-2023 Strategic Plan, available at 
https://www.fdic.gov/about/diversity/pdf/dei2021.pdf.
---------------------------------------------------------------------------
Workplace Initiatives
    A diverse and inclusive workforce, reflecting a variety of 
experiences and perspectives, is central to accomplishing the mission 
of the FDIC. Promoting DEIA within the FDIC workforce and the broader 
financial industry is a key priority for 2022, and was established as 
one of the seven FDIC Performance Goals. \36\ Recruitment and hiring 
diversity initiatives, support for first-generation professionals and 
career development programs for the next generation of leaders are 
among several other employee initiatives.
---------------------------------------------------------------------------
     \36\ See FDIC 2022 Annual Performance Plan, p. 92.
---------------------------------------------------------------------------
    The FDIC has worked to engage employees at all levels across the 
agency in strategic initiatives. The Diversity and Inclusion Executive 
Advisory Council (EAC), comprised of the FDIC's most senior leaders, 
meets monthly to discuss DEIA matters. Regional Directors discuss DEIA 
strategies with regional and field office employees. Each month a 
representative from a diverse identity employee resource group meets 
with the EAC to share perspectives. In addition, I meet regularly with 
employee resource groups.
    Over recent years, the FDIC has made progress toward improving the 
diversity of its workforce to better reflect the demographics of the 
civilian labor force (CLF). The percentage of women hired into entry-
level examiner positions, the agency's largest occupational group, 
increased to 41 percent. In 2021, minority representation at the 
executive level increased to 23 percent and minority representation 
across all management levels increased to 24 percent. Persons with 
disabilities increased to 13 percent of the workforce, above the 12 
percent Federal benchmark. Veterans increased to 9 percent of the 
workforce with veterans representing almost 13 percent of new hires in 
fiscal year 2021.
    One area where the FDIC is placing increased emphasis toward 
improving diversity is with individuals who self-identify as Hispanic. 
At less than 5 percent, Hispanic representation is well below the CLF 
percentage of almost 10 percent based on 2010 census data. By contrast, 
the agency's workforce who identify as American Indian/Alaska Native, 
Asian, Black/African American, or Native Hawaiian/Pacific Islander 
exceeds the CLF.
    In an effort to improve the agency's representation with this part 
of the workforce, the FDIC established an executive level task force to 
address challenges for Hispanic recruitment and retention. While the 
agency is focusing efforts to reach individuals that identify as 
Hispanic, the FDIC will continue recruiting strategically to reach all 
available talent in the labor market, providing upward mobility 
opportunities to current employees, and supporting employee engagement 
at all levels.
Financial Institution Diversity
    Since 2016, the FDIC's Financial Institution Diversity Self-
Assessment (Diversity Self-Assessment) program has supported the 
efforts of supervised institutions to create and grow their diversity 
programs, which allow them to build strong relationships with their 
clients and communities, maximize workforce representation, and develop 
and implement inclusion efforts. The FDIC developed the diversity self-
assessment framework based on the Joint Standards for Assessing our 
Regulated Entities' Diversity Policies and Practices that were 
established with five other Federal agencies. \37\ To increase 
awareness of the agency's Financial Institution Diversity Program, in 
2021 the FDIC expanded its outreach with banking organizations and 
individual banks and launched a social media campaign. For the 2021 
reporting period, 172 or 22 percent of 774 FDIC supervised banks with 
100 or more employees submitted their Diversity Self-Assessments. This 
represented a 16 percent increase over 2020 submissions.
---------------------------------------------------------------------------
     \37\ See ``Final Interagency Policy Statement Establishing Joint 
Standards for Assessing the Diversity Policies and Practices of 
Entities Regulated by the Agencies'', 80 FR 33016 (June 10, 2015).
---------------------------------------------------------------------------
Cybersecurity
    Threats from malicious cyber actors continue to be a significant 
and evolving risk for banks and their service providers. Evaluating 
cybersecurity practices continues to be a high-priority focus of the 
FDIC's supervision program. In its 2022 Report on Cybersecurity and 
Resilience, \38\ the FDIC highlighted several components of our 
cybersecurity program including our relevant safety and soundness 
standards, periodic guidance, alerts and advisories, technical 
assistance, and other outreach efforts. The report also discussed the 
agency's efforts to enhance the cybersecurity education of our 
examination force and the creation of examiner work programs related to 
particular threats. Our report also highlights interagency work related 
to cyberthreats.
---------------------------------------------------------------------------
     \38\ See FDIC, ``2022 Report on Cybersecurity and Resilience'', 
available at https://www.fdic.gov/regulations/resources/cybersecurity/
2022-cybersecurity-financial-system-resilience-report.pdf.
---------------------------------------------------------------------------
    The FDIC recently examined the ransomware attacks against FDIC-
supervised institutions and their service providers to learn about the 
techniques that were most helpful in defending against those attacks. 
Our examination of ransomware attacks suggests significant 
vulnerabilities exist. While we did not discover new categories of 
controls that need to be communicated to financial institutions, our 
examinations did reveal that those institutions that dedicate resources 
to implement appropriate controls can effectively defend against these 
attacks.
    The FDIC is now piloting technical examination aids that will help 
our examiners focus on the controls we found to be most effective in 
defending against these attacks. Examples of effective controls include 
high quality multifactor authentication to control access to systems 
and network segmentation to limit the ability of a malicious actor to 
move laterally in a network. Where we find these controls to be 
missing, our feedback and a bank or service provider's response could 
make a big difference in the company's cybersecurity effectiveness.
    Of course, ransomware is one threat among many. We continue to 
highlight the value of banks and service providers staying aware of the 
range of threats and vulnerabilities by using the services of entities 
like the Financial Services Information Sharing and Analysis Center, 
the U.S. Department of the Treasury, the Federal Bureau of 
Investigation, and the Cybersecurity and Infrastructure Security 
Agency. The FDIC will also periodically amplify messages from the 
intelligence, law enforcement, and other security agencies regarding 
threats and vulnerabilities that appear particularly critical and 
actionable.
The FDIC's Pandemic Response and Current Operations of the FDIC
    When the FDIC instituted mandatory telework in response to the 
pandemic on March 13, 2020, the agency could not have imagined that it 
would be 2\1/2\ years before we returned. The FDIC was fortunate, 
however, in that the foundations for conducting offsite bank 
examination operations were laid in 2016. Based on work begun in 2017, 
the FDIC began testing offsite review processes in early 2018. Staff 
continued to test new tools, and by year-end 2019, we had increased the 
percentage of safety and soundness examination work completed offsite 
to 47 percent, an increase from the 2016 level of 32 percent.
    The FDIC operated under mandatory telework until this past April, 
when we moved to the second phase of our Return to the Office Plan, or 
maximum telework. During this period, staff were permitted, but not 
required, to return to the office. On September 6, 2022, the FDIC was 
able to move to Phase 3 of its Return to the Office Plan. This hybrid 
work environment expanded flexibilities to all FDIC staff that were 
offered to our examination staff prepandemic, allowing staff to work 
from home when they did not need to be at a financial institution or in 
the office.
    The FDIC conducted a limited number of in-person examination 
activities over the past 2\1/2\ years. In the current Phase 3 of 
operations, we have returned to having an in-person component for each 
safety and soundness and consumer compliance examination. In this 
hybrid work environment not every examination team member may work 
onsite at the bank. Some may work from the field office or from home. 
In designing this new approach, the FDIC drew from lessons learned from 
our work during mandatory and maximum telework as well as through 
internal reviews and consideration of responses to a request for 
information from the banking industry.
Conclusion
    In conclusion, the banking industry enters this period of 
significant economic uncertainty and downside risk in a relatively 
strong position. It is well-capitalized, has ample liquidity, good 
credit quality, and is continuing to experience strong loan growth. In 
its supervisory work, the FDIC will be focused on asset exposures of 
the banks that could be vulnerabilities in an economic downturn, such 
as commercial real estate, and interest rate risk in a rising interest 
rate environment, including unrealized losses on investment securities 
held by banks.
    The FDIC will also be focused on key policy initiatives on CRA, the 
financial risk of climate change, a review of the bank merger process, 
crypto asset related financial risks, the Basel III capital rules, and 
maintaining a strong DIF in compliance with statutory requirements.
    In addition, the FDIC will continue its work on other key 
priorities including supporting MDIs and CDFIs; fostering diversity, 
equity, inclusion, and accessibility in its workforce; addressing 
cybersecurity risk at FDIC-supervised institutions; and managing the 
FDIC's return to the office.
                                 ______
                                 
                  PREPARED STATEMENT OF MICHAEL J. HSU
     Acting Comptroller, Office of the Comptroller of the Currency
                           November 15, 2022
Introduction
    Chairman Brown, Ranking Member Toomey, and Members of the 
Committee,* I am pleased to testify today before the Senate Committee 
on Banking, Housing, and Urban Affairs. I will provide an update on the 
activities underway at the Office of the Comptroller of the Currency 
(OCC) as we seek to ensure that national banks and Federal savings 
associations operate in a safe, sound, and fair manner.
---------------------------------------------------------------------------
     * Statement Required by 12 U.S.C. 250: The views expressed herein 
are those of the Office of the Comptroller of the Currency and do not 
necessarily represent the views of the President.
---------------------------------------------------------------------------
    The OCC charters, supervises, and regulates nearly 1,100 national 
banks, Federal savings associations and foreign branches (collectively, 
``banks'') that range in size from very small community banks to the 
largest, most globally active banks operating in the United States. The 
vast majority of the institutions we supervise (over 780) have less 
than $1 billion in assets, while 54 have greater than $10 billion in 
assets. Together, OCC-supervised financial institutions hold $15.2 
trillion in assets-almost 65 percent of all the assets held in 
commercial U.S. banks.
    As Acting Comptroller, I have a responsibility to address issues 
facing the OCC and the Federal banking system. Our 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. To 
meet this mission, last year I identified four priorities for the 
agency: (1) guarding against complacency by banks, (2) reducing 
inequality in banking, (3) adapting to digitalization, and (4) managing 
climate-related financial risks.
    I am pleased with the progress the OCC has made to advance these 
priorities and will provide an update on each in my testimony below. I 
will also discuss our efforts to promote the long-term health and 
viability of the community banks and minority depository institutions 
(MDIs) that the agency supervises.
(1) Guarding Against Complacency by Banks
    The Federal banking system remains healthy, despite challenges from 
the pandemic, current geopolitical events, and rising interest rates. 
Bank financial conditions and capital levels have been sound for 
several years and bank liquidity levels have been strong, supporting 
increases in loan demand, especially in consumer lending. The uncertain 
economic outlook, however, highlights the importance of not becoming 
complacent. Vigilance, especially with regards to risk management, is 
required. For instance, elevated interest rates are leading to 
unrealized losses on banks' investment portfolios. Although this 
development does not impact regulatory capital levels for most banks, 
it warrants careful monitoring. In addition, while credit risk in 
aggregate remains modest, we are starting to hear about deteriorating 
credit performance for certain segments. In this environment, proactive 
risk management, including stress testing at large banks and 
preparedness for a slowing economy, can help ensure that banks remain 
strong and able to meet the credit needs of their customers through a 
range of scenarios.
    The OCC also remains mindful of the risks associated with IT 
operations and cybersecurity, and we have encouraged banks to stay 
abreast of new technology and threats. Banks need to make appropriate 
investments to guard against these risks notwithstanding the temptation 
to postpone updating legacy IT systems or to defer maintenance of 
existing technology.
    Finally, and as I have said previously, we should update the 
framework for analyzing mergers under the Bank Merger Act. \1\ Bank 
mergers should serve communities, support financial stability and 
industry resilience, enhance competition, and enable diversity and 
dynamism within the banking industry. The OCC considers each merger 
application on its merits and determines whether the proposed 
transactions meet the statutory and regulatory criteria. At the same 
time, we need to ensure that these criteria are applied in a manner 
that does not lead to the formation of a new class of too-big-to-fail 
banks.
---------------------------------------------------------------------------
     \1\ See: Acting Comptroller of the Currency Michael J. Hsu Remarks 
at Brookings on Bank Mergers and Industry Resiliency, May 9, 2022 
(occ.gov).
---------------------------------------------------------------------------
    I was pleased to support the recent Advance Notice of Proposed 
Rulemaking (ANPR) issued by the Federal Deposit Insurance Corporation 
(FDIC) and the Board of Governors of the Federal Reserve System (FRB) 
on resolution-related resource requirements for large banking 
organizations. The joint ANPR represents a concrete step in addressing 
large banks' financial stability and competition issues. Reevaluating 
the resolvability risks and requirements for these firms will help to 
mitigate the risks they may pose to the financial system and the 
communities they serve.
    The OCC is also working closely with our Federal banking agency 
peers and the Department of Justice (DOJ) to review bank merger 
frameworks consistent with the President's Executive order on promoting 
competition. The OCC recently announced a public symposium on bank 
mergers to take place next February that will invite discussion among 
thought leaders, academics, community groups, and the banking industry 
on factors such as competition, financial stability, and community 
impact.
    Banks that remain vigilant and guard against complacency in these 
and other areas will promote a safe, sound, and fair banking system 
that continues to support the individuals, communities, and businesses 
they serve.
(2) Reducing Inequality in Banking
    Persistent economic inequality can erode trust in the banking 
system. Americans who lack access to traditional financial products and 
services or feel exploited by banks may conclude that the system is 
working against them, rather than for them. The OCC is focused on 
several initiatives to address this problem.
    The OCC, FRB, and FDIC are working together to modernize and 
strengthen the Community Reinvestment Act (CRA). The recent interagency 
notice of proposed rulemaking builds on the history of the CRA as 
critical to motivating bank lending and investment to help meet the 
credit needs of low- and moderate-income individuals, families, and 
communities. The proposal also aims to adjust to changes in the banking 
industry, including internet and mobile banking. The agencies received 
hundreds of detailed and thoughtful comments on the NPR, including from 
Members of this Committee, and we are working together to quickly and 
thoughtfully consider the suggestions.
    The OCC continues to support the removal of structural barriers to 
financial inclusion through Project REACh, or the Roundtable for 
Economic Access and Change. Through Project REACh, the OCC convenes 
leaders from banking, business, technology, and civil rights 
organizations to reduce specific barriers that prevent full, equal, and 
fair participation in the Nation's economy by all consumers. Project 
REACh's work is divided into four national workstreams addressing (1) 
affordable homeownership, (2) inclusion for credit invisibles, (3) 
revitalization of minority depository institutions, and (4) access to 
capital for small and minority-owned businesses. Significant progress 
has been made and in July we celebrated the program's second 
anniversary with a national symposium and discussions that provided 
progress reports regarding each workstream. Recognizing the local 
nature of barriers to inclusion, several REACh initiatives have been 
launched to focus efforts on individual communities, including Los 
Angeles, Dallas, Washington, DC, Detroit, and Milwaukee.
    The OCC also is pleased to be a member of the Property Appraisal 
and Valuation Equity (PAVE) task force sponsored by the Department of 
Housing and Urban Development (HUD) to address discrimination in 
appraisals. The OCC supports the actions recommended by the Task Force 
to ensure greater Federal oversight and effective monitoring for 
discrimination in residential property appraisals and technology-based 
valuation. We are enhancing our supervisory methods for identifying 
discrimination in appraisals, taking steps to ensure that consumers 
know of their rights regarding appraisals, and supporting research that 
may lead to new ways to address the undervaluation of housing in 
communities of color caused by decades of discrimination.
    This year, the OCC began efforts to focus on measuring and 
improving the financial health of consumers. This outcomes-based 
approach should help in the evaluation of consumer banking products and 
services, and in addressing inequality and barriers to financial 
inclusion. In April, the OCC launched a video series entitled 
``Financial Health: Vital Signs'', which includes interviews and panel 
discussions with leading voices to raise awareness of opportunities for 
the industry and other stakeholders to take action to increase support 
for consumer financial health.
    In addressing inequality, it is important to recognize that it is 
expensive to be poor. Overdrafts can be part of that expense. I have 
been encouraging banks to improve their overdraft programs with their 
customers' financial health in mind. \2\ As noted in a June 21, 2022, 
PEW Research article, the largest U.S. banks have made changes to their 
overdraft policies that could save consumers more than $4 billion 
annually. \3\ The savings are coming from banks lowering penalty fees 
for overdrafts, reducing the daily maximum number of overdraft fees 
that are charged, adding a grace period or buffer amount before fees 
kick in, or eliminating nonsufficient funds fees or overdraft transfer 
fees. Changes at the largest national banks could save consumers 
billions of dollars annually. \4\ The OCC has observed significant 
decreases in overdraft fee revenue in 2022 at the large banks we 
supervise which should have outsized benefits for Black and Hispanic 
customers who, as the June PEW article notes, are more likely to incur 
overdrafts. I am optimistic that the positive changes made by these 
large banks are inspiring more banks to make similar pro-consumer 
changes to their overdraft programs. For instance, community banks with 
outsized revenue from overdrafts have also begun to reform their 
overdraft programs in ways that are pro-consumer and reduce each bank's 
reliance on such fees.
---------------------------------------------------------------------------
     \2\ See: ``Don't Be the Last Banker To Update Your Overdraft 
Program'', American Banker, March 28, 2022.
     \3\ See: ``Large Banks Improve Overdraft Policies and Cut Fees'', 
The Pew Charitable Trusts (pewtrusts.org).
     \4\ ``America's Largest Banks Make Major Overdraft Changes That 
Will Help Consumers'', The Pew Charitable Trusts (pewtrusts.org).
---------------------------------------------------------------------------
    Additionally, the OCC continues to strengthen its supervision 
processes and enhance its resources devoted to compliance with fair 
lending laws. For example, the OCC updated its annual process for 
screening bank retail lending activities to provide a more targeted 
fair lending examination strategy and to better deploy resources to 
identify weaknesses or wrongdoing. If the OCC's fair lending 
examinations find evidence of a potential pattern or practice of 
discrimination, the OCC makes referrals to the DOJ and/or HUD, as 
required by law. In October 2021, the OCC reaffirmed its obligation to 
refer potential fair lending violations to the DOJ and share our 
extensive examiner, economist, and legal findings to ensure a unified 
and unmitigated focus on the supervision and enforcement of fair 
lending laws. \5\ It is not acceptable that redlining and other forms 
of lending discrimination continue in the year 2022, and the OCC will 
not hesitate to take enforcement action if necessary.
---------------------------------------------------------------------------
     \5\ Remarks by Acting Comptroller Michael J. Hsu at the Department 
of Justice, Combatting Redlining Initiative Announcement (occ.gov), 
Oct. 22, 2021.
---------------------------------------------------------------------------
    Within the banking industry specifically, there is opportunity to 
improve upon diversity and inclusion at every level--from the board 
rooms to leadership teams to employees. Diversity of background and 
thought will make these institutions stronger, fairer, and more 
representative of their communities. Data would help banks, regulators, 
and the public recognize improvements and benefits. Currently, banks 
may voluntarily report diversity data to the Federal banking regulators 
although less than 20 percent of banks choose to do so. Increasing 
participation in this reporting would provide greater visibility into 
the diversity of the banking industry and identify where banks can make 
better progress.
    The OCC is also doing its part to improve our own diversity and 
inclusion. Over the past 10 years, the OCC's total minority workforce 
has become more reflective of the country as a whole, and manager and 
senior-level manager positions held by minorities and women also have 
increased. \6\ While this trend is positive it is clear that more needs 
to be done.
---------------------------------------------------------------------------
     \6\ The OCC's minority population has increased from 30 to 36 
percent. Manager positions held by minority and female populations 
increased from 21 to 28 percent and 37 to 39 percent respectively. 
Senior level manager positions held by minority and female employees 
increased from 20 to 25 percent and 27 to 30 percent respectively. The 
Executive Committee of the agency is now 50 percent female and 50 
percent non-White.
---------------------------------------------------------------------------
    Additionally, the OCC has nine employee network groups, \7\ 
administered by our Office of Minority and Women Inclusion, to support 
diversity and inclusion throughout the agency by sponsoring programs to 
help attract, develop, and retain the best talent regardless of race, 
national origin, gender, physical abilities, or age. These groups help 
to attract and retain employees from diverse backgrounds and to create 
an inclusive work environment that promotes a sense of belonging. In 
addition, in furtherance of our support of military members and their 
families, the agency is now a partner with the Department of Defense 
Military Spouse Employment Partnership (MSEP) which is an initiative 
around targeted recruitment and employment.
---------------------------------------------------------------------------
     \7\ These employee network groups are the Coalition of African-
American Regulatory Employees (CARE); Generational Crossroads; HOLA; 
Network of Asian Pacific Americans (NAPA); Native American Tribes & 
Indigenous Voices (NATIVe) PRIDE; The Women's Network (TWN); Veterans 
Employee Network (VEN); and the Differently Abled Workforce Network 
(DAWN).
---------------------------------------------------------------------------
    For the fourth consecutive summer, the OCC hosted its High School 
Scholars Internship Program (HSSIP), a 6-week paid internship for 
minority students from public and charter high schools in the District 
of Columbia. This program provides an opportunity for students to 
explore a variety of career paths at the OCC, gain an understanding of 
the financial services industry, and engage in enrichment activities on 
financial literacy and leadership fundamentals. Since its inception, 
the program has expanded beyond the OCC and now includes interns at the 
Federal Housing Finance Agency, the Securities and Exchange Commission, 
and the National Credit Union Administration. In addition to our HSSIP 
program, the OCC has provided minority college students with paid 
internship opportunities for more than a decade through its National 
Diversity Internship Program.
(3) Adapting to Digitalization.
    Like many industries, the business of banking is becoming 
increasingly digitalized. This is occurring as technology firms expand 
into financial services and, to a lesser degree, via developments with 
cryptocurrencies. While cryptocurrency matters have received the most 
visibility over the past year, especially recently, I believe that 
financial technology generally, and fintech and big technology 
companies specifically, will warrant much more of our attention going 
forward.
    Increasingly, retail banking is being conducted online and through 
mobile phones. Similar to other industries, financial services that 
were integrated and contained within the banking industry are being 
compartmentalized and offered by a greater number of entities, 
including technology firms. Digitalization has put a premium on online 
and mobile engagement, customer acquisition, customization, big data, 
fraud detection, artificial intelligence, machine learning, and cloud 
management. As a result, bank-fintech partnerships have grown 
exponentially and become more complicated, driving changes to banks' 
risk profiles.
    The OCC has adjusted its bank information technology (BIT) 
examinations in response to these technological innovations. Today, 
these examinations include assessments of ransomware, artificial 
intelligence, cloud computing, and distributed ledger technology. In 
addition, the OCC is focused on ensuring banks have an effective risk 
management framework in place for fintech partnerships generally and, 
more specifically, digitalization. Currently, a majority of our 
supervisory concerns relate to fundamental elements of risk management, 
e.g., board oversight, governance, and internal controls. Common issues 
involve insufficient information security controls, change management 
issues, particularly with emerging products and services, and IT 
operational resilience.
    Our recently released 5-year Strategic Plan \8\ also acknowledges 
the increase in digitalization and the need to be agile and credible in 
addressing them. We are building on the excellent work of staff over 
the last 5 years in the fintech/crypto space with regards to policy and 
service providers and related to IT and operational resilience 
supervision. We are also working closely with our interagency peers and 
engaged in ongoing dialogue to help ensure that we have a shared 
understanding of how the financial system is evolving and to minimize 
opportunities for regulatory arbitrage and races to the bottom.
---------------------------------------------------------------------------
     \8\ See: ``OCC Releases Strategic Plan for Fiscal Years 2023-
2027'', OCC.
---------------------------------------------------------------------------
    Much more work remains. My sense is that we are still in the early 
stages of a significant shift in how banking services will be provided 
in the future. Last month, I announced the creation of the Office of 
Financial Technology, which will be established in 2023. This new 
office will help ensure the OCC continues to be a leader in developing 
expertise in financial technology and the financial technology 
landscape. It will expand upon the significant work and considerable 
successes of the OCC's Office of Innovation, which was established in 
2016 to coordinate the agency's efforts around responsible innovation. 
By expanding our aperture, engaging more substantively with nonbank 
technology firms, and mapping out bank-fintech relationships and risks, 
we can help ensure that banking remains trusted and safe, sound, and 
fair as the system evolves.
    In addition, the OCC has adopted a ``careful and cautious'' 
approach to crypto in the Federal banking system. This is reflected in 
Interpretive Letter 1179, \9\ which establishes guardrails to clarify 
that the institutions we supervise should not engage in certain crypto 
activities unless they demonstrate that the activities can be performed 
in a safe, sound, and fair manner. This approach has proven to be 
prudent following the Terra stablecoin collapse in May and more 
recently with the bankruptcy of FTX. Despite contagion across 
cryptocurrencies and several crypto platforms, the federally regulated 
banking system has, for the most part, been largely unaffected.
---------------------------------------------------------------------------
     \9\ See: Interpretive Letter 1179 (occ.gov).
---------------------------------------------------------------------------
(4) Managing Climate-Related Risk to the Federal Banking System
    The OCC's focus on climate-related financial risk is firmly rooted 
in our mandate to ensure that national banks operate in a safe and 
sound manner. It is not our role to tell bankers what customers or 
legal businesses they may or may not have as customers. We do not pick 
winners or losers. Rather, we are committed to staying in our safety 
and soundness lane, which means focusing on banks' risk management of 
climate-related financial risks, not on setting industrial policy.
    Climate-related financial risks pose novel challenges to 
traditional risk management. We have taken several steps to build our 
expertise and capacity to meet those challenges. Shortly after my 
appointment, the OCC joined the Network for the Greening of the 
Financial System and established a Climate Risk Officer position at the 
agency to focus on these issues.
    In December, we issued for comment Principles for Climate-Related 
Financial Risk Management for Large Banks. The draft principles focus 
on the climate-related risk management capabilities of large banks, 
i.e., those with at least $100 billion in consolidated assets. Our 
focus on large banks is intentional, as that is where the risks are 
most complex and material. We are continuing to consider the comments 
and working with our interagency colleagues to determine the next steps 
in this area.
    Community banks have expressed concern about the scope of our 
climate risk-related efforts. I have made a concerted effort to meet 
with community bankers and have traveled across the country to listen 
to them and hear from them directly about their communities and 
experiences handling acute weather events. I believe that earning their 
trust on this issue is vitally important. As such, I am committed to 
continued dialogue and constructive engagement with all stakeholders, 
including community bankers, as we build our climate risk management 
expertise.
(5) The OCC Supports Community Banks and MDIs
    Overseeing the safety and soundness of community banks is central 
to the mission of the OCC. The OCC is committed to fostering an 
environment that allows well-managed community banks to grow and 
thrive. In particular, we are taking specific actions to support 
community banks in five areas: (1) revitalizing minority depository 
institutions (MDIs), (2) reducing bank assessments, (3) promoting de 
novos, and (4) tailoring regulation based on size and complexity.
    Revitalizing of Minority Depository Institutions--MDIs are on the 
front lines of serving low-income, minority, rural, and other 
underserved communities and are a critical source of credit for them. 
However, MDIs have fallen in number and, until recently, faced 
challenges with accessing capital, adopting new technology, and 
modernizing their infrastructures. In July, the OCC issued an updated 
policy statement on MDIs \10\ that reaffirms the agency's commitment to 
these institutions and describes the range of programs in place to 
support MDIs. The policy statement serves to focus the agency's efforts 
to ensure MDIs remain a bedrock of financial access and inclusion.
---------------------------------------------------------------------------
     \10\ See: ``OCC Updates Policy Statement on Minority Depository 
Institutions'', OCC.
---------------------------------------------------------------------------
    The OCC's Project REACh has helped to expand relationships between 
larger banks and MDIs through capital investments dedicated to 
improving the technological infrastructure of MDIs. Since 2020, 26 
banks signed Project REACh's pledge to support MDIs \11\ to provide 
dedicated technical assistance for MDI staff talent development, 
diversification of product offerings, and nearly $500 million in 
investments to MDIs.
---------------------------------------------------------------------------
     \11\ See: ``Project REACh Pledge Released To Promote Vitality of 
Minority Depository Institutions'', OCC.
---------------------------------------------------------------------------
    Reducing Bank Assessments--Effective March 2023, the OCC will make 
a 40 percent reduction in assessments for a bank's first $200 million 
in assets and a 20 percent reduction for bank assets between $200 
million and $20 billion. This recalibration will result in a $41.3 
million reduction in assessments for community banks. We are hopeful 
that this reduction will provide community banks with extra capacity to 
invest and seize opportunities related to digitalization, compliance, 
cybersecurity, and personnel.
    Promoting De Novo--A healthy community bank industry needs a 
pipeline of new entrants and start-ups. The OCC was pleased to charter 
a de novo community bank minority depository institution in Houston, 
Texas, in May of this year. This was the first de novo MDI that the OCC 
has chartered since before the financial crisis and a welcome addition 
to the Houston communities it will serve. The OCC is also actively 
engaged with our Mutual Savings Association Advisory Committee to 
understand the impediments to the chartering and formation of de novo 
mutual savings associations.
    Regulation Based on Size and Complexity--It is imperative that 
regulatory expectations for banks are differentiated based on their 
size and complexity. We are mindful of concerns from community bankers 
that requirements for large banks should not trickle down to smaller 
banks as such requirements can be excessive and tie up scarce personnel 
and other resources. The OCC will remain diligent in guarding against 
such outcomes. Direct engagement with each community bank that we 
supervise, and our two Federal Advisory Committees: The Minority 
Depository Institution Advisory Committee and the Mutual Savings 
Association Advisory Committee will continue to assist in this effort.
Conclusion
    I am committed to ensuring that OCC-supervised banks operate in a 
safe, sound, and fair manner, meet the credit needs of their 
communities, treat all customers fairly, and comply with laws and 
regulations. As we work to ensure that the Federal banking system 
remains a source of strength to the U.S. economy, we will continue to 
advance key agency priorities to ensure the Federal banking system is 
well positioned to respond to community and consumer needs well into 
the future.  



[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]