[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]


                   OVERSIGHT OF PRUDENTIAL REGULATORS

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION
                               __________

                              MAY 16, 2023
                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 118-22
                           

                   [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]           
                   
                                  
                               __________

                    U.S. GOVERNMENT PUBLISHING OFFICE
                    
52-934 PDF                 WASHINGTON : 2023                   
                   
                                                                       
                 HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas                EMANUEL CLEAVER, Missouri
TOM EMMER, Minnesota                 JIM A. HIMES, Connecticut
BARRY LOUDERMILK, Georgia            BILL FOSTER, Illinois
ALEXANDER X. MOONEY, West Virginia   JOYCE BEATTY, Ohio
WARREN DAVIDSON, Ohio                JUAN VARGAS, California
JOHN ROSE, Tennessee                 JOSH GOTTHEIMER, New Jersey
BRYAN STEIL, Wisconsin               VICENTE GONZALEZ, Texas
WILLIAM TIMMONS, South Carolina      SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina         AYANNA PRESSLEY, Massachusetts
DAN MEUSER, Pennsylvania             STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin          RASHIDA TLAIB, Michigan
ANDREW GARBARINO, New York           RITCHIE TORRES, New York
YOUNG KIM, California                SYLVIA GARCIA, Texas
BYRON DONALDS, Florida               NIKEMA WILLIAMS, Georgia
MIKE FLOOD, Nebraska                 WILEY NICKEL, North Carolina
MIKE LAWLER, New York                BRITTANY PETTERSEN, Colorado
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 16, 2023.................................................     1
Appendix:
    May 16, 2023.................................................    77

                               WITNESSES
                         Tuesday, May 16, 2023

Barr, Hon. Michael S., Vice Chairman, Supervision, Board of 
  Governors of the Federal Reserve System (Fed)..................     5
Gruenberg, Hon. Martin J., Chairman, Federal Deposit Insurance 
  Corporation (FDIC).............................................     6
Harper, Hon. Todd M., Chairman, National Credit Union 
  Administration (NCUA)..........................................     9
Hsu, Michael J., Acting Comptroller, Office of the Comptroller of 
  the Currency (OCC).............................................     8

                                APPENDIX

Prepared statements:
    Barr, Hon. Michael S.........................................    78
    Gruenberg, Hon. Martin J.....................................    85
    Harper, Hon. Todd M..........................................   116
    Hsu, Michael J...............................................   128

              Additional Material Submitted for the Record

Tlaib, Hon. Rashida:
    Slide, ``Timeline of Silicon Valley Bank Failure''...........   138
Barr, Hon. Michael S.:
    Written responses to questions for the record from Chairman 
      McHenry....................................................   140
    Written responses to questions for the record from 
      Representative Barr........................................   143
    Written responses to questions for the record from 
      Representative Davidson....................................   154
    Written responses to questions for the record from 
      Representative Donalds.....................................   156
    Written responses to questions for the record from 
      Representative Garbarino...................................   158
    Written responses to questions for the record from 
      Representative Lawler......................................   162
    Written responses to questions for the record from 
      Representative Lucas.......................................   167
    Written responses to questions for the record from 
      Representative Mooney......................................   169
    Written responses to questions for the record from 
      Representative Nunn........................................   172
    Written responses to questions for the record from 
      Representative Steil.......................................   176
    Written responses to questions for the record from 
      Representative Waters......................................   179
Gruenberg, Hon. Martin J.:
    Written responses to questions for the record from Chairman 
      McHenry....................................................   198
    Written responses to questions for the record from 
      Representative Barr........................................   195
    Written responses to questions for the record from 
      Representative Garbarino...................................   188
    Written responses to questions for the record from 
      Representative Hill........................................   184
    Written responses to questions for the record from 
      Representative Lawler......................................   193
    Written responses to questions for the record from 
      Representative Mooney......................................   181
    Written responses to questions for the record from 
      Representative Steil.......................................   186
Harper, Hon. Todd M.:
    Written responses to questions for the record from 
      Representative Barr........................................   204
    Written responses to questions for the record from 
      Representative Kim.........................................   200
    Written responses to questions for the record from 
      Representative Mooney......................................   202
    Written responses to questions for the record from 
      Representative Rose........................................   205
Hsu, Michael J.:
    Written responses to questions for the record from 
      Representative Barr........................................   210
    Written responses to questions for the record from 
      Representative Kim.........................................   209
    Written responses to questions for the record from 
      Representative Mooney......................................   206

 
                   OVERSIGHT OF PRUDENTIAL REGULATORS

                              ----------                              


                         Tuesday, May 16, 2023

             U.S. House of Representatives,
                    Committee on Financial Services
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Patrick McHenry 
[chairman of the committee] presiding.
    Members present: Representatives McHenry, Sessions, Posey, 
Luetkemeyer, Huizenga, Wagner, Barr, Hill, Loudermilk, Mooney, 
Davidson, Rose, Timmons, Norman, Meuser, Fitzgerald, Garbarino, 
Kim, Flood, Lawler, Nunn, De La Cruz, Houchin, Ogles; Waters, 
Velazquez, Sherman, Meeks, Scott, Lynch, Green, Cleaver, Himes, 
Foster, Beatty, Vargas, Gottheimer, Gonzalez, Casten, Pressley, 
Horsford, Tlaib, Torres, Garcia, Williams of Georgia, Nickel, 
and Pettersen.
    Chairman McHenry. The Financial Services Committee will 
come to order.
    Without objection, the Chair is authorized to declare a 
recess of the committee at any time.
    Today's hearing is entitled, ``Oversight of Prudential 
Regulators.'' And I am now going to recognize myself for 4 
minutes for an opening statement.
    I want to thank our witnesses for testifying today. You are 
here at a pivotal moment for our economy. The recent turmoil in 
the banking sector could not come at a worse time. The Biden 
Administration and many of my colleagues on the other side of 
the aisle and the Capitol want to treat the symptoms rather 
than the disease.
    Our country is suffering from an inflation problem, plain 
and simple. Driven by the economic mismanagement of this 
Administration, inflation is the underlying cause of the 
volatility we are experiencing now.
    My Democratic colleagues will roll their eyes just like 
they did every time Republicans sounded the alarm on 
skyrocketing prices over the past 2 years. But let me walk you 
through it. When Democrats forced through their partisan $2-
trillion so-called American Rescue Plan, they lit the fuse on 
runaway inflation. Instead of addressing this problem, the 
Biden Administration went on a roadshow trying to explain away 
higher prices. They used words like, ``transitory,'' which, to 
be frank, didn't age well.
    The Federal Reserve was late to the game in responding to 
inflation, and they admit it. They had to play catch-up and 
raise interest rates 500 basis points at the fastest pace in 
modern history. This injected heightened interest rate risks 
into the financial system. Regulators and supervisors at the 
Fed were, again, late to react.
    Now, 3 of the 30 largest banks have been shuttered. There 
is still market volatility within regional banking. And we are 
now staring down a credit crunch as banks of all sizes 
anticipate more-onerous regulations and market scrutiny.
    Let me be clear: If Congress and this Administration do not 
respond correctly, we are just at base camp for the economic 
woes our country could face. A one-size-fits-all regulatory 
response to this crisis, which has been signaled by this 
Administration, will work against promoting a vibrant banking 
system, with institutions of all sizes providing a variety of 
services.
    Instead of a balanced system with small, medium, and large 
institutions, it will look more like a barbell banking system 
with dominant, too-big-to-fail banks as anointed by the Dodd-
Frank Act and government backstops on one end, and a scattering 
of very small banks relying on government subsidies to survive 
on the other end. Such a barbell banking system, with a missing 
middle of healthy regional banks, is not good for communities 
across America.
    Vice Chair Barr, you have signaled your desire to go beyond 
reviewing the supervisory failures that contributed to the 
recent bank failures. You have used this crisis to justify 
progressives' long-held priority to increase capital 
requirements and impose new regulations on banks. That predates 
this crisis, but you are using this crisis to justify your 
prebaked ideas.
    The Fed's internal review, along with the FDIC's report and 
recommendations on deposit insurance, lay bare the playbook for 
this Administration's response to this crisis: more regulation, 
more government control, and more spending.
    I know my colleagues across the aisle will use today's 
hearing to discuss the debt ceiling, and I welcome that debate. 
We serve in the only institution that has actually addressed 
the debt ceiling, but frankly, I think what we have now is a 
larger debate about the economy, not just about the debt 
ceiling. And inflation and spending are the reasons why we are 
dealing with the debt ceiling at this time. So, I am glad that 
we acted, and the House of Representatives acted, and the 
President has now finally come to the table to negotiate with 
the Speaker.
    But the out-of-control Washington spending that led to this 
uncertainty that we are feeling in banking, that the American 
families are experiencing, is the result of spending out of 
Washington, and Republicans are working to address that 
spending issue.
    I now recognize the ranking member of the committee, Ms. 
Waters, for 4 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman.
    Good morning, everyone. First, I would like to welcome our 
banking and credit union regulators who are here to testify 
before our committee today.
    On the heels of the collapse of Silicon Valley Bank, 
Signature Bank, and most recently, First Republic, it has been 
the swift action by regulators, in conjunction with the Biden 
Administration, that have not only protected depositors from 
harm but ensured the safety of the United States banking 
system. Americans can continue to rest assured that despite the 
recent events, their money is safe, and that none of the 
actions taken by our regulators will cost U.S. taxpayers a 
single dime.
    Recently-released reports from our nation's regulators 
confirm that Democrats have long been sounding the alarm on a 
toxic combination of Trump-era deregulation, and mismanagement 
by irresponsible bank executives and board members, which 
caused the recent bank failures.
    While regulators must be more aggressive in their 
supervision of banks, it is the responsibility of bank 
executives, first and foremost, to take corrective action when 
regulators identify deficiencies. Since 2018, executives from 
both Silicon Valley Bank and Signature Bank received multiple 
warnings, but they ignored those warnings and did not take 
action. These bank CEOs didn't just run their banks into the 
ground; they also put our nation's depositors and our entire 
economy in jeopardy.
    Unfortunately, rather than take action to hold these bank 
CEOs accountable and work in good faith to get to the bottom of 
the recent failures, Republicans are using this hearing as an 
opportunity to point the finger at regulators. Republicans do 
not appear interested in crafting legislation that would 
address the regulatory gaps and weaknesses exposed by these 
recent failures.
    Instead, they have proposed a slew of bills focused on so-
called transparency, completely and willfully ignoring the fact 
that regulators have published extensive reports and shared 
other materials that take a deep dive into the failures and the 
emergency responses. In addition, several of the Republican 
bills would limit emergency tools regulators just used to 
stabilize the situation, making it harder for them to respond 
to future emergencies.
    However, our committee will finally hold its first hearing 
with the Silicon Valley Bank, Signature Bank, and First 
Republic Bank executives tomorrow, after Democrats repeatedly 
pleaded to Republicans. But I remain deeply disappointed that 
we are holding such an important hearing at the subcommittee 
level, which means fewer Members will be there to get answers 
for their constituents, and there will be fewer questions, and 
a shorter hearing. Unfortunately, my request to Chair McHenry 
to hold this at the Full Committee level has not been 
fulfilled.
    This is a stark difference from the leadership Democrats 
have demonstrated during this time. Through briefings, letters, 
and policy solutions, committed Democrats are the only ones 
working around the clock to get answers for the American people 
and hold the bank CEOs to task. I urge my Republican colleagues 
to finally join us in this effort.
    So, I look forward to this hearing, I thank you, and I 
yield back the balance of my time.
    Chairman McHenry. The Chair now recognizes the gentleman 
from Kentucky, Mr. Barr, who is also the Chair of our Financial 
Institutions Subcommittee, for 1 minute.
    Mr. Barr of Kentucky. Thank you, Mr. Chairman.
    Today's hearing is especially timely, given recent bank and 
supervisory failures. Rather than providing timely responses to 
questions from this committee, the Fed and the FDIC decided to 
produce public-facing reviews of their supervisory shortcomings 
and push inept policy recommendations. Failure to timely 
respond to this committee's questions represents a lack of 
transparency and accountability. As of last night, we still had 
not received responses from Mr. Barr or Mr. Gruenberg from a 
March 29th hearing, even though responses were requested to be 
in by April 28th.
    Regulators should not race to set narratives in the minds 
of the American people. The report by Vice Chairman Barr 
accurately highlighted the idiosyncratic nature of the SVB 
business model, but it does not justify imposing new onerous 
and complex regulations on banks that have experienced deposit 
outflows through no fault of their own.
    In the face of a growing credit crunch and the risk of a 
recession, moving rapidly to increase capital requirements on 
an already-well-capitalized banking system would be a mistake. 
We want to avoid a barbell banking system, with a few too-big-
to-fail banks and a scattering of small banks. To do so, 
regulators should not be blocking mergers and acquisitions, 
imposing excessive----
    Chairman McHenry. The gentleman's time has expired.
    Mr. Barr of Kentucky. ----regulations on regional banks, or 
imposing burdensome requirements that hinder de novo banks. I 
yield back.
    Chairman McHenry. I now recognize the gentleman from 
Illinois, Mr. Foster, who is also the ranking member of our 
Subcommittee on Financial Institutions, for 1 minute.
    Mr. Foster. Thank you.
    In recent years, neuroscientists have understood that the 
human brain does much of its learning not just by living in the 
moment and observing cause and effect, but by replaying events 
of the recent past, both as they occurred and as they could 
have occurred with different behavior of the participants.
    So the questions for today's hearing are not only what 
actually happened during recent bank failures, but also, what 
are the rules and incentives that, had they been in place, 
would have caused these failed banks to diversify their 
depositor base, to appropriately hedge their interest rate 
risk, and to raise capital early while they still could?
    I was also encouraged by Vice Chair Barr's reiteration in 
his written testimony that major rule changes coming out of 
this episode, as well as presumably out of the holistic capital 
review and Basel III Endgame, will take place at a measured 
pace, with opportunity for input from both Congress and 
industry. This is important since the rule changes will have 
large effects not only on safety and soundness, which is your 
bailiwick, but on bank consolidation, which is very much ours.
    Thank you, and I yield back.
    Chairman McHenry. The gentleman yields back.
    Today, we welcome the testimony of the Honorable Michael S. 
Barr, the Vice Chair for Supervision at the Federal Reserve 
Board of Governors; the Honorable Martin J. Gruenberg, the 
Chairman of the Federal Deposit Insurance Corporation; Mr. 
Michael J. Hsu, the Acting Comptroller of the Office of the 
Comptroller of the Currency; and the Honorable Todd M. Harper, 
the Chairman of the National Credit Union Administration.
    We thank each of you for your time. Each of you will be 
recognized for 5 minutes for an oral presentation of your 
testimony. And without objection, each of your written 
statements will be made a part of the record.
    Mr. Barr, you are recognized for 5 minutes.

  STATEMENT OF THE HONORABLE MICHAEL S. BARR, VICE CHAIRMAN, 
 SUPERVISION, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 
                             (FED)

    Mr. Barr. Chairman McHenry, Ranking Member Waters, and 
members of the committee, thank you for the opportunity to 
testify today.
    Overall, the U.S. banking system remains strong and 
resilient, and depositors should feel confident that all 
deposits in our banking system are safe. At the same time, 
recent stress in the banking system shows the need for us to be 
vigilant as we assess and respond to risks.
    My review of Silicon Valley Bank's (SVB's) failure 
demonstrates that there are weaknesses in regulation and 
supervision that should be addressed, and I am committed to 
doing so. I am also committed to maintaining the strength and 
diversity of the banking system so that it can continue to 
provide financial services and access to credit for households 
and businesses.
    As we consider adjustments to our rules and supervisory 
practices, I am sensitive to how changes may affect banks in 
the current economic environment. My written testimony and 
accompanying supervision and regulation report provide details 
on conditions in the banking sector, and supervisory and 
regulatory efforts of the Federal Reserve over the last 6 
months.
    Let me turn to the SVB review. Immediately following SVB's 
failure, I led a review of the Federal Reserve's supervision 
and regulation of the bank. The resulting report takes an 
unflinching look at the conditions that led to the bank's 
failure, including the role of Federal Reserve supervision and 
regulation.
    There are four key takeaways from the report. First, SVB's 
Board of Directors and management failed to manage the bank's 
risks. Second, Federal Reserve supervisors did not fully 
appreciate the extent of the vulnerabilities as SVB was growing 
in size and complexity. Third, when supervisors did identify 
vulnerabilities, they did not take sufficient steps to ensure 
that the bank fixed those problems quickly enough. Fourth, the 
Board's tailoring approach impeded effective supervision by 
reducing standards, increasing complexity, and promoting a 
less-assertive supervisory approach.
    The four key takeaways show failures by SVB's board and 
senior management and failures by the Federal Reserve.
    Next, I will briefly outline how we can strengthen both our 
regulation and supervision based on what we have learned and 
based on the Federal Reserve's existing authorities.
    On the regulatory side, SVB's failure confirms the 
importance of strong levels of bank capital. While the 
approximate cause of SVB's failure was a liquidity run, the 
underlying issue was concern about its solvency. Stronger 
capital will guard against the risks that we may not fully 
appreciate today and will also reduce the costs of bank 
failures.
    In addition, we need to reconsider some of our prudential 
requirements. These include evaluating how we treat available-
for-sale securities in our capital regulations, how we 
supervise and regulate a bank's management of interest rate 
risk, how we supervise and regulate liquidity risk, and how we 
oversee incentive compensation practices.
    Any adjustments to our rules would, of course, go through 
normal notice-and-comment rulemaking and have appropriate 
transition periods.
    I also plan to improve the speed, force, and agility of 
supervision. Supervision should intensify at the right pace as 
a bank grows in size or complexity. Once identified, issues 
should be addressed more quickly, both by the bank and by 
supervisors. Moreover, we need to ensure that we have a culture 
that empowers supervisors to act in the face of uncertainty.
    I want to reiterate that the banking system remains strong 
and resilient. Recent events demonstrate that we, as 
regulators, must do better, and we will.
    Thank you, and I look forward to your questions.
    [The prepared statement of Vice Chairman Barr can be found 
on page 78 of the appendix.]
    Chairman McHenry. I now recognize Chairman Gruenberg for 5 
minutes.

   STATEMENT OF THE HONORABLE MARTIN J. GRUENBERG, CHAIRMAN, 
          FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC)

    Mr. Gruenberg. Thank you, Mr. Chairman.
    Chairman McHenry, Ranking Member Waters, and members of the 
committee, thank you for the opportunity to appear at today's 
hearing on oversight of prudential regulators.
    The U.S. banking industry has proven to be quite resilient 
during this recent period of stress. Early reports from the 
first quarter of 2023 indicate that first-quarter aggregate 
bank net income was roughly unchanged compared to the fourth 
quarter, excluding the effects on acquirers' incomes of their 
acquisitions of failing banks. In addition, asset quality 
metrics remain favorable, and the industry remains well-
capitalized.
    Recent declines in medium- and long-term interest rates 
have reduced somewhat the volume of unrealized losses on 
securities. Still, insured depository institutions will 
continue to face significant challenges in the near term. Risks 
to the outlook include the potential for weakening credit 
quality and profitability that could result in further 
tightening of loan underwriting, slower loan growth, and higher 
provision expenses.
    Commercial real estate loan portfolios, particularly loans 
backed by office properties, face challenges should demand for 
office space remain weak and property values continue to 
soften. The FDIC continues to monitor liquidity closely, 
including deposits trends across the banking industry, and will 
publicly release data for the first quarter of this year as 
part of its Quarterly Banking Profile later this month.
    Last week, the FDIC Board of Directors approved a Notice of 
Proposed Rulemaking providing for the special assessment 
required by law to recover the loss to the Deposit Insurance 
Fund attributable to covering the uninsured deposits of Silicon 
Valley Bank and Signature Bank. Under that proposed rule, the 
FDIC would apply an annual special assessment rate of about 
12.5 basis points to an assessment base that would equal an 
insured institution's estimated uninsured deposits reported as 
of December 31, 2022. The assessment is defined in such a way 
that no banking organizations with total assets under $5 
billion would be subject to the special assessment.
    On May 1st, the California Department of Financial 
Protection and Innovation appointed the FDIC as receiver for 
First Republic Bank. The FDIC was able to market and sell First 
Republic concurrently with its closure by entering into a 
purchase and assumption agreement with JPMorgan Chase following 
a competitive bidding process to assume all of the deposits and 
substantially all of the assets of First Republic. The FDIC 
estimates that the failure of First Republic will cost the 
Deposit Insurance Fund about $13 billion.
    Notwithstanding the 3 recent bank failures, the FDIC 
currently expects that the Deposit Insurance Fund will remain 
on track to meet its statutory reserve ratio by September 30, 
2028, without further adjustments to assessment.
    The FDIC recently released two reports, one on the FDIC's 
supervision of Signature Bank, and one on options for deposit 
insurance reform.
    The report on Signature Bank, conducted by the FDIC's Chief 
Risk Officer, found that the root cause of Signature's failure 
was poor management but also identified areas where the FDIC's 
supervisory efforts could have been more timely, forward-
looking, and forceful, findings that will be matters of close 
attention by the FDIC.
    The report on options for deposit insurance reform 
identified increased targeted coverage for business payment 
accounts as capturing many of the financial stability benefits 
of expanded coverage while mitigating the moral hazard effects.
    Finally, the failures of Silicon Valley Bank and Signature 
Bank demonstrate the implications that banks with assets of 
$100 billion or more can have for financial stability. The 
prudential regulation and supervision of these institutions 
merit additional attention, particularly with respect to 
capital liquidity and interest rate risk.
    My prepared testimony goes into all of these issues in 
considerable detail. The FDIC remains committed to engaging 
with the public, industry stakeholders, and Members of Congress 
on the policies and priorities outlined in the testimony.
    That concludes my statement, and I would be glad to respond 
to questions.
    [The prepared statement of Chairman Gruenberg can be found 
on page 85 of the appendix.]
    Chairman McHenry. Thank you, Mr. Gruenberg.
    Mr. Hsu is now recognized for 5 minutes.

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

    Mr. Hsu. Thank you, Mr. Chairman.
    Chairman McHenry, Ranking Member Waters, and members of the 
committee, I am pleased to appear today to offer my 
observations about the recent market stress and to answer any 
questions you may have regarding the activities and priorities 
of the OCC.
    Since March, I have worked especially closely with my peers 
at the other banking agencies to maintain financial stability 
and confidence in the banking system. Adequate levels of 
capital going into the recent turmoil have helped to limit the 
risk of contagion. Despite the market stress, the Federal 
banking system has remained resilient, and national banks and 
Federal savings associations have remained well-positioned to 
serve their customers.
    None of the four large banks that failed were regulated by 
the OCC. Notwithstanding that, we are closely monitoring the 
conditions of the institutions we supervise and working with 
them to ensure that their liquidity and capital positions 
remain sound so that they are on the balls of their feet with 
regard to risk management.
    Many have taken steps to reduce risk in light of market 
conditions. To date, the vast majority of OCC-supervised banks 
have not experienced stress with regards to their depositors or 
business customers.
    Over the past 2 years, I have consistently emphasized to 
bankers the importance of guarding against complacency and of 
having strong risk management policies and practices in place. 
Most OCC-supervised banks have heeded this message and 
successfully navigated the rise in interest rates and changing 
economic outlook. OCC examiners will continue to actively 
monitor market conditions and engage with banks to help ensure 
that they are prepared to meet future challenges.
    Based on my perspective as Acting Comptroller, and 20 years 
of experience as a financial regulator, I want to share some 
observations on steps that can be taken to restore full 
confidence in the banking system.
    First, supervisors need support to act in a timely and 
effective manner. Supervisors at the OCC and the other banking 
agencies play a critical role in keeping the banking system 
safe and sound by exercising discretion. The degree to which 
supervisors feel empowered to exercise that discretion impacts 
their will to act in a timely and forceful manner. Clear 
support to empower supervisors to exercise discretion and act 
when needed will help keep the banking system safe and sound.
    Second, regulations regarding the resilience and 
resolvability of large banks need to be strengthened. Stronger 
resiliency requirements for large banks with regard to capital 
liquidity would have reduced the probability of recent bank 
failures. Stronger resolvability requirements would have 
facilitated orderly failures with less government involvement. 
The OCC is working closely with the Federal Reserve and the 
FDIC to address these issues.
    Third, deposit insurance coverage should be updated. The 
FDIC's recent report on deposit insurance is worth careful 
consideration, especially its conclusion regarding targeted 
expansion.
    In the meantime, we have been working with our banks, 
especially those with significant levels of uninsured deposits, 
to ensure that their cash-holding and borrowing capacity can 
meet depositor withdrawals. We remain committed to supervising 
banks so that depositors can rest assured that their money is 
safe.
    Finally, the diversity of the banking system must be 
preserved as the industry evolves. The OCC has been working on 
updating the analytical frameworks related to the bank merger 
guidelines that the Federal banking agencies and DOJ must 
follow when considering bank mergers. The recent turmoil has 
increased the urgency of these efforts.
    The OCC is committed to being open-minded when considering 
merger proposals, and to acting in a timely manner on 
applications, consistent with the requirements of the Bank 
Merger Act. As the industry evolves, I strongly believe that we 
must preserve the diversity of the banking system, from 
community banks to mid-sized banks to regional banks.
    Going forward, continued industry and regulatory vigilance 
is critical. Banks and supervisors must be attentive to the 
most salient risks today as well as those beyond the daily 
headlines. That will help ensure that the banking system 
remains a source of strength to the U.S. economy.
    Thank you. I would be happy to answer any questions.
    [The prepared statement of Acting Comptroller Hsu can be 
found on page 128 of the appendix.]
    Chairman McHenry. The Chair now recognizes Chairman Harper 
for 5 minutes.

 STATEMENT OF THE HONORABLE TODD M. HARPER, CHAIRMAN, NATIONAL 
               CREDIT UNION ADMINISTRATION (NCUA)

    Mr. Harper. Chairman McHenry, Ranking Member Waters, and 
members of the committee, thank you for the invitation.
    My written testimony outlines the state of the credit union 
industry, some of the NCUA's recent efforts to strengthen the 
system, and several legislative requests. So, I will focus here 
on only a few key issues.
    Overall, the performance of federally-insured credit unions 
remains stable. Total loans, assets, insured shares, and 
deposits all increased during the last year. The system's 
aggregate net worth ratio also rose to 10.75 percent, 
representing a recovery of 73 basis points from its pandemic 
low. What's more, 91 percent of total share deposits within the 
system are insured, which has contributed to stability within 
the credit union sector in recent months.
    The NCUA's Share Insurance Fund also continues to perform 
well. Although the fund's equity ratio is 3 basis points below 
the desired operating level, no premiums are expected at this 
time. That is because the system is currently well-positioned 
to handle any dislocation resulting from a moderate recession.
    Nevertheless, during the last year we have experienced 
growing interest rate and liquidity risks within the system, 
including at several billion-dollar-plus institutions. 
Aggregate cash positions have declined and are below pre-
pandemic levels as well. Further, unrealized losses in 
securities limit their utility as a source of liquidity.
    The recent increase in these risks underscores the value of 
the NCUA's Central Liquidity Facility (CLF), which acts as a 
shock absorber to contain or avert liquidity crises before they 
escalate. However, with the termination of the temporary CLF 
statutory enhancements last December, more than 3,000 credit 
unions with less than $250 million in assets lost access to the 
CLF, contracting the facility's capacity by almost $10 billion. 
With risks rising within the financial system and at individual 
credit unions, now is not the time to cut a liquidity lifeline.
    As such, the NCUA board fully supports restoring the 
ability of corporate credit unions to serve as a CLF agent on 
behalf of a subset of their members. Notably, the Congressional 
Budget Office has scored this at no cost to the taxpayer.
    Additionally, with increased concentration, intensifying 
cyber threats, and greater outsourcing of core business 
functions, the Government Accountability Office (GAO), the 
Financial Stability Oversight Council (FSOC), and the NCUA's 
Inspector General have all recommended congressional action to 
restore the NCUA's statutory examination authority over third-
party vendors. I fully agree and respectfully request that 
Congress close this growing regulatory blind spot.
    Lastly, the NCUA defers to Congress on determining what 
statutory changes, if any, should be made to deposit insurance 
coverage levels and account types. But if Congress does act in 
this area, the NCUA has two requests. First, we ask that 
Congress maintain parity between the share insurance coverage 
provided by the NCUA and the deposit insurance coverage 
provided by the FDIC.
    And second, because an expansion in coverage will generally 
increase resolution costs, the NCUA requests greater 
flexibility for administering the Share Insurance Fund. This 
flexibility, which would be more in line with the FDIC's 
current administrative powers, includes allowing the NCUA board 
to establish a higher normal operating level, and modifying the 
current limitations on assessing premiums. Together, these 
changes would better enable the NCUA to build reserves during 
economic upturns so that sufficient money is available during 
economic downturns.
    In sum, the credit union system currently remains well-
capitalized, stable, and well-positioned to handle a relatively 
broad range of economic outcomes, and the NCUA stands ready to 
respond to any economic uncertainty and will continue to work 
through the supervisory process with individual credit unions 
experiencing problems.
    Consumers, therefore, should remain confident that their 
insured share deposits at federally-insured credit unions are 
safe. And the NCUA stands ready to work with Congress on any 
legislative reforms to safeguard and strengthen the system.
    Thank you again. I look forward to your questions.
    [The prepared statement of Chairman Harper can be found on 
page 116 of the appendix.]
    Chairman McHenry. Thank you. And I want to thank the panel 
for their testimony.
    I now recognize myself for 5 minutes for questions.
    Vice Chair Barr, you created a report in which your 
supervisory staff reviewed the decisions of the supervisory 
staff in responding to these bank failures. What was the 
directive you gave to staff?
    Mr. Barr. I asked staff who are not involved in the 
supervision of SVB to look at what went wrong. I told them that 
they would have full access to any materials they needed to 
make that assessment. I gave them full discretion to find the 
facts----
    Chairman McHenry. Will you provide those same materials to 
the ranking member and me?
    Mr. Barr. We have been working with your staff on a 
cooperative basis to provide materials, and we are happy to 
continue----
    Chairman McHenry. It doesn't feel cooperative quite yet, 
but we will follow up on that. And so you are saying, yes, you 
will provide those internal documents?
    Mr. Barr. We would be happy to continue to provide those 
documents. We have been providing them on an ongoing basis to 
committee staff.
    Chairman McHenry. Okay. So, how did you select the staff?
    Mr. Barr. The lead staff person for the report is the 
former head of New York supervision, the Federal Reserve Bank 
of New York supervision----
    Chairman McHenry. What divisions were involved in that?
    Mr. Barr. ----who has more than 25 years of experience, and 
he assembled a team from throughout the System, other than the 
San Francisco Fed.
    Chairman McHenry. How many staffers worked on this report?
    Mr. Barr. I'm sorry, sir?
    Chairman McHenry. How many staffers worked on this report?
    Mr. Barr. Approximately 20.
    Chairman McHenry. Okay. From what divisions?
    Mr. Barr. From throughout the Board and assistant 
supervision other than San Francisco Fed.
    Chairman McHenry. Were other Reserve Banks involved?
    Mr. Barr. Yes. Reserve Banks and Board staff were involved 
in the report.
    Chairman McHenry. Okay. So, given that two of the three 
bank failures occurred under the San Francisco Fed's purview, 
is there a specific review of the San Francisco Fed's 
supervision?
    Mr. Barr. We were reviewing Silicon Valley Bank. The other 
banks that failed were not subject to Federal Reserve 
supervision, so neither of those were part of our report. We 
were reviewing our supervision of Silicon Valley Bank only.
    Chairman McHenry. In light of that, did the Board vote on 
this report? Did you give the Board a review of your report?
    Mr. Barr. No, it is a report of the Vice Chair for 
Supervision under my statutory authorities. It was not a report 
of the Board.
    Chairman McHenry. It was provided to the Board?
    Mr. Barr. The Chair and other Board members were given a 
copy of it in advance.
    Chairman McHenry. So, this is not something that the Board 
would vote on?
    Mr. Barr. Correct.
    Chairman McHenry. But other supervisory matters are taken 
to the Board for a Board vote?
    Mr. Barr. It depends on the nature of the supervisory 
action. Daily course kind of examination work and so on don't 
rise up to that level. But if there is a formal enforcement 
action, for example, that would go to the Board for a vote.
    Chairman McHenry. In your report, you talk about a cultural 
shift in supervision. How did you ascertain that there is a 
cultural shift?
    Mr. Barr. The staff, as part of this review, spoke with the 
supervisors involved in this and with others in the system, and 
one aspect of one of the four findings of the report was that 
there was a shift in the tone of supervision.
    Chairman McHenry. Was that done through, for example, an 
opinion survey of staff?
    Mr. Barr. There was no survey. It was a set of interviews 
that were conducted as part of the report.
    Chairman McHenry. Okay. So, you opine that there was a 
cultural change, and this is based off of a few interviews from 
a few staff from the San Francisco Fed in light of Silicon 
Valley Bank. And you report that there is a cultural change in 
supervision across the Federal Reserve in light of just this 
one regional bank. That is the conclusion you draw in your 
report.
    Mr. Barr. The report's findings are solely related to 
Silicon Valley Bank.
    Chairman McHenry. But you opine that there is a general 
cultural shift on supervision, and it is one of the key talking 
points coming out of the report. Does this mean that 
supervisors felt impeded from reporting up that there was a 
problem at a bank?
    Mr. Barr. The report found that supervisors were more 
reluctant than they had been to escalate issues, yes, sir.
    Chairman McHenry. Did they actually show up in the bank? Is 
that a bit of the problem, too, that the cultural shift could 
be that they are not in the banks on a regular basis, that 
there is more--could that be a part of the cultural shift?
    Mr. Barr. One of the findings of the report is that the 
pandemic contributed to a reduction in supervisory intensity. 
That is a finding of the report.
    Chairman McHenry. I would like to hear how you are going to 
remedy this, and we will have ongoing questions about this.
    Obviously, in light of the tightness in the credit markets, 
and your additional capital requirements, we are going to have 
a lot more questions about that holistic review of capital.
    With that, I recognize the ranking member of the committee, 
Ms. Waters, for 5 minutes.
    Ms. Waters. Thank you, Mr. Chairman.
    Vice Chair Barr, while Republicans try to downplay any role 
that deregulation played in these regional bank failures, I was 
pleased when one of their witnesses at last week's hearing, Ms. 
Margaret Tahyar, conceded that there were regulatory 
improvements that should be considered. She commended the Fed's 
report on SVB's failure, and she specifically stated her 
support for two recommendations to address issues that were 
identified by the report: first, eliminating the delay when 
enhanced prudential requirements took effect after banks 
crossed the $100-billion threshold; and second, eliminating the 
bank opt-out from holding capital regarding their Accumulated 
Other Comprehensive Income, (AOCI), which includes a bank's 
securities portfolios with unrealized losses.
    So, Vice Chair Barr, do you agree with these 
recommendations? Would you explain how this AOCI issue 
artificially inflates SVB's capital levels, making them appear 
safer than they really were?
    Mr. Barr. Thank you very much, Ranking Member Waters.
    I will speak to each of those in turn.
    With respect to the issue of AOCI, this is basically a 
question of whether gains and losses on available-for-sale 
securities should flow through to the capital treatment of a 
bank. The initial rules that the Federal Reserve had in place 
applied those rules to a broader set of firms, beginning in 
2013. That was narrowed to just being the G-SIBs in 2019, and 
the question is, what is the right way of addressing that going 
forward?
    We are carefully considering making a change for firms over 
$100 billion that would pass that unrealized loss or gain 
through the capital treatment to more accurately reflect their 
financial condition. Any such rule change that we propose would 
go through normal notice-and-comment rulemaking and would have 
an appropriate transition period for implementation.
    I also agree with the second issue you raised, which is 
about how to think about applying the heightened standards when 
a firm crosses the threshold. For example, in this case, with 
respect to SVB, the Federal Reserve's transition rules were 
themselves very complicated, and there was discussion among 
staff, supervisory staff, as well as the bank, about when those 
rules would actually apply.
    And the effect of that was there was a significant delay in 
when enhanced prudential standards applied to the firm even 
under the tailoring approach, and that complexity and delay 
contributed, I think, to having weaker standards apply to the 
firm. So, we are quite focused on simplifying the transition 
rules and making sure that firms, when they cross that 
threshold, are able to be ready to apply those thresholds, 
those new standards when they cross the threshold.
    Ms. Waters. Thank you very much.
    What you are referring to is basically how S. 2155 was 
crafted, and I want to know how much flexibility did you have 
in dealing with the deregulatory S. 2155 legislation?
    Mr. Barr. The Federal Reserve has the discretion we need to 
change the approach we are using for firms over $100 billion in 
size. There is authority under the statute for us to make those 
changes, and we intend to use that authority as appropriate to 
make adjustments to our supervisory framework.
    Ms. Waters. So you are indicating that you don't need 
additional legislation to do that?
    Mr. Barr. That is correct.
    Ms. Waters. And you agree with what has been said by Ms. 
Tahyar, in essence, that there is a need for us to deal with 
the whole issue of deregulation?
    Mr. Barr. I do think it is important for us to look at the 
tiering approach that had been used for institutions of this 
size. Given what we just experienced with two FDIC-supervised 
institutions, these institutions had lower standards applied to 
them, so I think it is important for us to look at that and see 
what changes need to be made.
    Ms. Waters. Are you looking at that now with our regionals 
and particularly our small regionals?
    Mr. Barr. We are looking at firms, generally speaking, of 
$100 billion and above with respect to these changes.
    Ms. Waters. That have reached that level already?
    Mr. Barr. I'm sorry?
    Ms. Waters. That have reached the level of $100 billion and 
above?
    Mr. Barr. Correct.
    Ms. Waters. Thank you. I yield back.
    Chairman McHenry. Mr. Hill is now recognized for 5 minutes.
    Mr. Hill. Thank you, Mr. Chairman.
    And I want to thank the panel for their engagement with the 
committee and for your work with each of us on both sides of 
the aisle over the last few weeks in light of these recent 
failures.
    Before I get to my questions, I think picking up where the 
ranking member left off is absolutely ideal in discussing S. 
2155, and a lot of argument in this City that somehow it was a 
contributing factor to the failure of Silicon Valley Bank and 
potentially others. I think that argument just falls on its 
face. I base that on not only my work here in Congress, but on 
40 years of being involved in regulated institutions.
    It is just a talking point, not a material assessment. And 
Vice Chair Barr has absolutely just simply demonstrated to the 
whole committee precisely why that argument is not accurate, 
which is that the supervision of our financial system rests in 
the hands of these agencies, and they have full discretion to 
use their best judgment to deliver that supervision on a daily 
basis, whether it is in a particular regional bank in 
California or on a macro basis. And the Vice Chair says the 
statute has the authority to facilitate the proper execution of 
those statutory obligations, notwithstanding the modest reforms 
to Dodd-Frank that S. 2155 sought to make.
    And we shouldn't throw the baby out with the bathwater on 
this issue about tailoring, because one of the complaints on 
both sides of the aisle about Dodd-Frank was that it was one-
size-fits-all, and it did not tailor the capital, liquidity, 
and leverage requirements based on bank size and, more 
importantly, the risk profile of a bank.
    Here, Silicon Valley is a large institution, but its risk 
profile was what was, I think, shocking when we look at the 
facts. The bottom line is we have real diversity in banking in 
our country. This is a strength. It differentiates our banking 
system from those around the world, and we need to preserve and 
enhance the diversity and strength of our banking system.
    Crisis politics, trying to return to one-size-fits-all 
approaches to prudential regulation, in my view, will just 
exacerbate this challenge and make it harder to have a broad, 
diverse system. So, in my view, it wasn't S. 2155 or passing 
legislation--not passing that legislation would have in any way 
prevented this. It was clearly a failure of supervision and 
management.
    Let me turn to a couple of areas of interest. First, 
Comptroller Hsu, you talked about having management up on the 
balls of their feet assessing the marketplace. How do we have a 
sense of urgency among supervisors where they are up on the 
balls of their feet, which clearly they weren't in the case of 
Silicon Valley?
    Mr. Hsu. We have been on the balls of our feet. And at the 
OCC, every year we issue a Semiannual Risk Perspectives report, 
which highlights key risks that bankers, examiners should heed. 
And that report covers many of the risks that have been 
discussed in these hearings, as well as in the reports issued 
by the Fed and the FDIC.
    Mr. Hill. Thank you. I appreciate that.
    Looking at reconciliation of these institutions, Chairman 
Gruenberg, let me talk to you about source of strength. Holding 
companies deliver a major source of strength to their 
depository institutions, right?
    Mr. Gruenberg. Yes, sir.
    Mr. Hill. We take that for granted to some degree. Is that 
true, that we just accept that that holding company is there?
    Mr. Gruenberg. Not all institutions, as you know, have 
holding companies.
    Mr. Hill. Right.
    Mr. Gruenberg. But the system is set up for those that do. 
The holding companies expect----
    Mr. Hill. Silicon Valley had a holding company?
    Mr. Gruenberg. It did.
    Mr. Hill. Do you have a written agreement that that holding 
company provides a source of strength to the depository bank?
    Mr. Gruenberg. We were not the supervisor of Silicon 
Valley, and the Fed, as you know, is the holding company 
regulator. So, I think they would be----
    Mr. Hill. No, but don't you have to have, as the FDIC, a 
written agreement with that bank holding company to provide a 
source of strength to the bank?
    Mr. Gruenberg. I believe that is a regulatory standard, 
Congressman, not something that we would have some sort of----
    Mr. Hill. Can you provide me with a yes or no in writing 
about whether you and the Federal Reserve had a written 
supervisory agreement that the holding company of all the banks 
that have over 50 percent of their deposits in uninsured 
accounts--that they have a written agreement with the holding 
company? If they have a holding company to be a supervisor.
    Mr. Gruenberg. I would be glad to.
    Mr. Hill. Yes, thank you.
    I yield back.
    Chairman McHenry. The gentlewoman from New York, Ms. 
Velazquez, is now recognized for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman.
    As all four of you are aware, Senator Van Hollen and I 
recently wrote to each of you regarding your rulemaking 
responsibilities under Section 956 of Dodd-Frank.
    Vice Chair Barr, and Acting Comptroller Hsu, I am still 
awaiting your responses. And Chairman Harper, and Chairman 
Gruenberg, I found your responses to be a little lacking. So, 
let me ask each of you directly, since the fall of Silicon 
Valley and Signature Banks, what steps have each of your 
agencies taken to finalize this rule? Have your agencies met 
with one another and the other regulators? And do you think the 
rule will be finalized by the end of the year?
    Mr. Barr?
    Mr. Barr. The agencies have met to discuss how to make 
progress on the Section 956 rulemaking.
    Ms. Velazquez. Have you met with each other?
    Mr. Barr. Yes, I'm sorry. The agencies have met together to 
discuss that matter. In terms of timing, the rule would need to 
go through a proposal and then a rulemaking.
    Ms. Velazquez. I know. It has been 11 years already, 11 
years. So, Mr. Gruenberg?
    Mr. Gruenberg. Yes, Congresswoman. As you know, there are 
six agencies involved in this rulemaking, the four that are 
represented at the table here, plus the SEC and the FHFA. I 
believe there is a strong commitment across the six agencies 
from the principal level on down to follow through and 
implement this rulemaking. Staffs of all six of the agencies 
have been meeting regularly, and I think there is a commitment 
to follow through on this.
    As you pointed out, the Notice of Proposed Rulemaking 
(NPRM) has been outstanding since 2016. So given the time that 
has passed, we will probably have to repropose an NPRM and then 
follow through with a rulemaking. I think it is realistic to 
believe we can get an NPRM done this year. I don't know that we 
can get to the final rule this year, but I believe there is a 
strong commitment across the six agencies together.
    Ms. Velazquez. Let me just say this: We cannot wait 11 more 
years and see more bank failures before you actually do 
something, and I am not kidding. Write the rule.
    Chair Gruenberg, on April 3rd, the FDIC issued a press 
release regarding the upcoming sale of Signature Bank's loan 
portfolio in New York City, which includes a pool of single-
family and multi-family properties. As you know, the FDIC has a 
statutory obligation to maximize the preservation of affordable 
housing for low- and moderate-income (LMI) individuals. How is 
the FDIC working to meet that obligation in this sale?
    Mr. Gruenberg. Thank you for that question, Congresswoman.
    This is something I address in my written testimony. And as 
you may know, the FDIC has been working closely with New York 
City and New York State, as well as with local community 
organizations, on the disposition of this very large portfolio 
of multi-family housing. We are actually meeting with the City 
and the State on a weekly basis, and regularly with the 
interested community organizations to ensure a disposition of 
these properties in a way that will be sustainable and maintain 
the housing in good condition for the residents and serve well 
the local communities where those properties are located.
    So, this is a key priority for us. We would be glad to 
follow up with you and work with you on it.
    Ms. Velazquez. Great. It would be a travesty to hard-
working families in New York City and other places who are 
facing an affordable housing crisis to lose on this one.
    Vice Chair Barr, I have been investigating the rapid speed 
at which Silicon Valley Bank grew in size and complexity, and I 
am considering legislation on this issue. The Fed's report 
stated a similar concern. How is the Fed considering reforming 
its supervisory framework to ensure that if a bank grows in 
size and complexity, particularly over a short time, heightened 
regulatory and supervisory standards are applied more quickly?
    Mr. Barr. You raise an important point, and we are looking 
at the tiering framework we have to see whether it should be 
adjusted, both with respect to regulation and supervision, and 
part of that is making sure that we don't just focus on asset 
size as part of that change. We want to look at risk factors 
such as the one you identified.
    Ms. Velazquez. I yield back. Thank you.
    Chairman McHenry. The gentleman from Texas, Mr. Sessions, 
is now recognized for 5 minutes.
    Mr. Sessions. Mr. Chairman, thank you very much.
    And I want to thank our panel of witnesses. This is not 
your first time to be here. We hope you do well enough to get 
invited back. We appreciate your feedback.
    It is my understanding all four of you were nominated and 
appointed by the President of the United States. Is that 
correct?
    Mr. Gruenberg. Yes, sir.
    Mr. Sessions. Let the record reflect all four were. The 
organizations which you subscribe to, going up to either the 
Fed or the Treasury, at the highest level of those two 
organizations, they described what lay ahead for America as, 
``transitory.'' Things were not going to get worse. America was 
going to go back to work. We were not going to have inflation.
    Yet, something happened. Why are you trying to say that 
supervisors made a mistake when they were listening to, in 
essence, their boss' boss' boss to say this is not a problem? 
Transitory inflation and the problems which you are having, why 
do we now turn around later and act like, well, the supervisors 
made a mistake not following up with the bank, and the bank 
made a mistake because even though they were listening to the 
Fed and to the Treasury Secretary, this isn't going to happen.
    Mr. Barr, why are you now holding them responsible when you 
said, well, one of the four things that happened that were 
takeaways was that supervisors saw the problem and they did not 
follow up properly. Who are they supposed to listen to if 
everybody up and down that line says everything is okay? It is 
only those darned Republicans or history that say we are wrong, 
but we are right.
    Why are we now dumping on supervisors?
    Mr. Barr. Thank you, Mr. Sessions.
    The report is looking honestly and frankly at the way in 
which the bank managed interest rate and liquidity risks and 
the way that supervisors assessed that. We expect, as part of 
our supervisory expectations for banks, that they manage their 
interest rate risk, whether that is in a falling environment or 
in a rising environment.
    Mr. Sessions. But the highest level of financial integrity 
comes from the Fed and the Treasury Secretary. They were 
arguing against what you just said, this factor. So, is that 
really why they didn't follow up? Because they said it, but we 
know that is not going to happen?
    At some point, somebody has to accept responsibility that 
they were misled at the top of your organization. And 
officially, in front of this Financial Services Committee, we 
were told repeatedly that it was not going to happen. 
Everything was okay. You guys were overstating it. And now, you 
come and blame them.
    Mr. Barr. Let me just say the essential facts. I joined the 
Federal Reserve Board in July 2022, at a time when the Federal 
Reserve was clearly raising interest rates and had been raising 
interest rates for some time. This was before my time on the 
Board, but my understanding was that it was quite clear from 
the fall of 2021 that interest rates were going to go up. The 
bank, during this period when the Federal Reserve was already 
raising interest rates and had said that they were going to 
continue to raise interest rates, decided to remove its 
interest rates hedges that protected it from a rising interest 
rate environment.
    So, I think the findings are clear on that point.
    Mr. Sessions. I remain skeptical, and I know that I have 
heard the testimony today. Everything is okay. We have gone 
back and double-checked everything. Nothing bad is going to 
happen. It is all taken care of.
    My point would be, I think somebody needs to accept the 
blame for the fact that the advice that they were given from 
the very top of the organization was that it was transitory, 
and I fail to see that in this report. I fail to see that the 
advice given from the very top was, in fact, incorrect. And 
some of the down management decision-making, including the 
Board's, was they became--they made decisions based upon the 
top of the deck.
    I am not crying over spilled milk. I am crying over the 
fact that there should have been some history to understand 
that if you raise spending $3 trillion and then do what has 
happened out of Treasury, you are going to have a problem.
    I want to thank all four of you for being here. And Mr. 
Chairman, I yield back.
    Chairman McHenry. The gentleman's time has expired. The 
gentleman from California, Mr. Sherman, is now recognized for 5 
minutes.
    Mr. Sherman. Mr. Harper, I agree with you. We need parity 
for credit unions, both as to the level of depositor insurance 
and as to access to liquidity facilities.
    The banks are not doing what we need them to do. We need 
them to make business loans. We don't need them to buy Treasury 
bills. Everybody in the world does that. Yet, less than 15 
percent of bank investments are in business loans. They are 
buying marketable securities. They are buying mortgages. We 
have a good system for financing corporate bonds. We have a 
good system for financing marketable securities.
    A big part of this is our accounting system and the system 
for regulating banks. Under the Current Expected Credit Losses 
(CECL) system, we penalize every bank, every time they make a 
good business loan. On the day they make the loan, profits go 
down. And under our nonrecognition of an unrealized losses 
system, for the most part, we tell every bank officer if you 
invest in marketable securities and they go down in value, it 
is easy to hide the loss, and it doesn't count against your 
income. And you keep your bonus.
    And if those marketable securities go up, you can sell them 
at a profit, increase the profits of the bank, and your bonus 
goes up. So, why would anybody make business loans when the way 
to maximize bonuses is to invest in marketable securities?
    The Chair, perhaps unfortunately, wanted to say that this 
is a problem created by Democrats. Yes, we have had inflation 
recently. Almost all of the spending has been bipartisan due to 
the COVID crisis. There was one Democratic bill that spent $2 
trillion, that was not bipartisan, and there was one Republican 
tax bill that cut revenues by $2 trillion, that was not 
bipartisan.
    I would say that it is better to have spent $2 trillion 
helping people in desperate need from COVID effects than to 
spend $2 trillion subsidizing billionaires. But the big issue 
here for us is, how do we have a banking system strong enough 
so that it can survive interest rates going up and interest 
rates going down? Because you know what? Interest rates go up, 
and interest rates go down.
    And this is not a 100-year event. We had 16-percent 
interest rates back when I had hair, and we will have 16-
percent interest rates hopefully before--or I hope we don't 
have 16, but interest rates go up, and interest rates go down.
    We passed these strong standards with Dodd-Frank. We 
weakened those standards precisely when the Republican bill 
weakened the standards for $100-billion to $250-billion 
institutions, and those are the exact institutions that have 
this problem. And the regulators actually implemented the law 
the way it was intended to be implemented, which was to 
deregulate and nonstress test these medium-sized banks.
    Now, we blame them because they did what the Republican 
Congress told them to do. And particularly pernicious about 
that bill in 2018 was that it was wrapped in veterans' benefits 
so as to force or trick, or get some Members into voting for it 
for that reason. It never went through a real committee 
process.
    Mr. Barr, banks can avoid a good part of the oversight 
simply by not having a holding company. Should we have a 
loophole where you can structure your bank differently and 
choose what level of regulation you are going to have?
    Mr. Barr. I think it is important for the system to have an 
approach where the same risks and the same institutional 
structures are governed by the same kind of supervision and 
regulation. In other words, I think not having a holding 
company as an additional layer of protection so that you can 
see across all activities of affiliated entities is a concern.
    Mr. Sherman. We would not have designed our system this 
way, with so many different regulators, pick your regulator. I 
wish I could have picked my IRS department when I filed my 
return. I would have picked the one that would have been less 
rigorous on me.
    I am going to ask the bank regulators, now that we have 
seen what happened this spring, are we being more vigorous in 
looking at interest rate risk and are we requiring banks to 
take prompt corrective action when they face those risks?
    Mr. Gruenberg. I think the answer to that, Congressman, is 
yes. I think interest rate risk management is probably job one 
right now, from a supervisory standpoint.
    Chairman McHenry. The gentleman's time has expired. The 
panel can respond in writing for the record.
    We will now recognize Mr. Posey for 5 minutes.
    Mr. Posey. Thank you, Mr. Chairman. Vice Chairman Barr, 
Barron's estimated that the undeclared loss on Silicon Valley's 
bonds due to the rapid run-up in interest rates starting in 
March 2022 would have wiped out nearly all of the bank's $16-
billion equity capital base at the year end of 2023. Two of our 
witnesses at our May 4th hearing said that regulatory capital 
was not the problem, and that the bank was well-capitalized. Do 
you agree with that statement?
    Mr. Barr. The bank was well-capitalized under a standard 
that omitted the pass-through of gains and losses on available-
for-sale securities. So, I would say that the bank did have 
solvency issues. The bank was well-capitalized under our 
existing rules, but those rules permitted them to opt out of 
the AOCI pass-through. If they had to record that pass-through, 
the capital impact would have been $2 billion. Because the 
depositors saw the solvency of the firm as a concern, that is 
why they ran. So, I do think both solvency and liquidity risks 
are intertwined in this case.
    Mr. Posey. One of our previous witnesses also said that it 
is particularly hard to understand why the Federal Reserve 
failed to regulate interest rate risk when it was the Federal 
Reserve's monetary policy that created the risk. The Federal 
Reserve was raising interest rates for nearly a year before the 
wave of bank distress set in.
    Was there a breakdown in communication or strategy between 
the monetary policy and the supervision weighing at the Federal 
Reserve?
    Mr. Barr. In this case, what the report found is that 
supervisors identified that there were interest rate problems 
at the bank. For example, the bank had an interest rate stress 
model that was not appropriately showing the actual interest 
rate stress that the firm was experiencing, and called that out 
to the firm.
    So there was not a problem in identifying that risk, but 
the firm did not take action promptly enough to fix the 
interest rate issues before it failed. In fact, it ended up 
doing the opposite, as I mentioned. It took off interest rate 
risk hedges in March through July of 2022, at a time when rates 
were rising. That would have helped protect it from some of the 
risks of those rising interest rates.
    Mr. Posey. What did the Federal Open Market Committee 
(FOMC) do to identify interest rate risk as a likely outcome of 
their monetary policy, and to alert the supervisors to remain 
vigilant?
    Mr. Barr. The Federal Reserve was quite attentive to 
interest rate risks. Really, it is a core part of supervision. 
Interest rate risk and liquidity risk are kind of bread-and-
butter issues in bank supervision. Those were intensified 
during 2022. As interest rates were rising, supervisors were 
told and did engage in more aggressive looks at interest rate 
risk in the banking system. And those efforts, as it turned out 
with respect to Silicon Valley Bank, did not result in the bank 
changing its behavior.
    As I said, the bank was really undoing some of the 
protections it actually had and was not taking steps to protect 
itself from that risk. They were doing the same on the 
liquidity side. Instead of looking at their liquidity risks, 
and when they found a problem with their liquidity stress 
testing, they changed the test to make it less conservative. 
So, it would seem like the measured risk to the bank was lower 
when the actual risk was higher.
    Those are the kinds of things the bank was engaging in that 
were really the opposite of what you would want a bank to do 
when it is facing interest rate and liquidity risk.
    Mr. Posey. Thank you. Did the Federal Open Market Committee 
(FOMC) issue any communications to bank supervisors related to 
the likely impending interest rate, and what are some examples 
if they did?
    Mr. Barr. The Federal Reserve made it clear, and the FOMC 
made it clear really in the fall of 2021, that interest rates 
were going to need to rise, there would be quantitative 
tightening going on in terms of shrinking the balance sheet. 
And as I mentioned, supervisors throughout 2022 were focused on 
interest rate risk as one of the bread-and-butter issues to 
address, along with liquidity risk and, as some of my 
colleagues have mentioned, issues with respect to credit risk, 
particularly in the commercial real estate space.
    Mr. Posey. Thank you, Mr. Chairman. My time is about to 
expire, so I yield back.
    Chairman McHenry. We will now recognize the gentleman from 
New York, Mr. Meeks, for 5 minutes.
    Mr. Meeks. Thank you, Mr. Chairman. Chair Gruenberg, in 
your May 1st report outlining options for deposit insurance 
reform, I actually was pleased to see that the FDIC favored 
targeted coverage for business payment accounts. As you said in 
your written report, ``Targeted coverage captures many of the 
financial stability benefits of expanded coverage while 
mitigating many of the undesirable consequences.''
    And one of the things that has been on my mind for some 
time is whether or not we should bifurcate it or have a tiered 
system of insurance to create different categories for 
individuals and small businesses, which we discussed, I think 
it was the last time that you testified before us.
    So, the big question is, because with these businesses, if 
they cannot pay it is going to damage our economy, what is the 
appropriate level of deposit insurance for business payment 
accounts and how would it be paid for? What do you think?
    Mr. Gruenberg. Thank you, Congressman. It is an important 
question that we need to think through. First, it would require 
a legislative change to increase deposit insurance coverage for 
business payment accounts, and as we indicated, as you noted, 
in our report, of the options available we thought that was the 
one that perhaps made the most sense because it addresses a 
potential financial stability risk with these accounts, but the 
moral hazard is really limited because these accounts are 
business payment accounts. You cannot utilize them across 
multiple banks but you really keep them in one institution in 
order for the operational convenience of the payment account.
    I think if the decision is made to increase coverage for 
this targeted purpose account, it is really a judgment of how 
high to go, and realizing that the higher the coverage, the 
higher the assessment costs will be for the industry. I think 
that is a balancing judgment that would go into the 
consideration of any legislation that might be needed to do 
this.
    Mr. Meeks. And I would like at some point later to discuss 
with you some thoughts that you have on what role the FDIC 
could play in helping us think through it as Members of 
Congress.
    Let me to go to Vice Chair Barr quickly. You have been 
steadfast in your remarks that the banking systems remains 
strong and resilient. While much of the focus has been on the 
large regional banks, I want to discuss briefly the vibrancy of 
our community banks, especially what I am passionate about, 
which is our Minority Depository Institutions (MDIs), and our 
Community Development Financial Institutions (CDFIs), which 
play a huge role, as far as I am concerned, in both rural and 
urban areas.
    What I am concerned about is that it is common for the 
large regional banks to make investments and deposits into the 
community institutions. In your estimation, will the recent 
bank failures and associated special assessments have, for lack 
of a better word, a trickle-down impact on community banks, and 
should we begin to brace for something happening to community 
banks as a result?
    Mr. Barr. Thank you, Congressman. I share your view that 
community banks are sound and resilient. They are providing 
essential services to communities across the country, including 
the community banks that are CDFIs and MDIs. They are 
disproportionately responsible for investing in and supporting 
small business lending and local communities. So, they are just 
absolutely a vibrant part of our banking system and one that 
all of us fully support.
    The community banks--many Members have said this to me, and 
you are hearing it in your districts--are doing well in serving 
their communities but are concerned about the broader 
ramifications of the economic situation and the banking stress. 
It is something we are quite attentive to. We want to make sure 
that we have a diverse range of financial institutions in our 
economy--small institutions, regional institutions, and large 
institutions. And we are quite attentive to that in this 
current environment, making sure that the problems don't affect 
their ability to lend.
    Mr. Meeks. I have 10 seconds left, and I hoping that you 
will have a holistic review of the capital framework and take 
into consideration the ability and willingness of these 
investments from those larger banks because of these----
    Chairman McHenry. The gentleman's time has expired. We will 
now recognize the gentleman from Missouri, Mr. Luetkemeyer, for 
5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman, and I thank the 
witnesses for being here today.
    Mr. Barr, in your own report, you say that the Federal 
Reserve did not take sufficient steps to ensure that Silicon 
Valley fixed its problems. You indicated again this morning 
that the Fed did not take sufficient actions. Just a minute 
ago, you made the comment to my colleague here, Mr. Posey, that 
one of the core responsibilities of an examiner is to review 
interest rate risk and liquidity risk. What happened?
    Mr. Barr. Thank you, Congressman. The report found that the 
interest rate and liquidity risks were identified by 
supervisors. They called attention to the things like changing 
the test on----
    Mr. Luetkemeyer. Mr. Barr, it is well-documented in the GAO 
study that I am referring to here that you continuously 
monitored the situation and found a number problems with 
liquidity and interest rate risks. Why didn't you do something? 
Why didn't your examiners do something about it?
    Mr. Barr. I think that is exactly right. What the report 
found is that risks were identified, but supervisors did not 
escalate concern about those issues promptly enough and not 
forcefully enough, and that is one of the reasons why we need 
to really look internally at our own system of oversight and--
--
    Mr. Luetkemeyer. I appreciate that comment. I am sure that 
you guys fired the management team of Silicon Valley when you 
went in and replaced them, told them to get lost. Has anybody 
at the Fed lost their job yet as a result of this, since it is 
a core responsibility of the examiners to do interest rate risk 
review and liquidity risks, and they did nothing about it?
    Mr. Barr. The report found that they acted on it but they 
did not escalate it sufficiently to change----
    Mr. Luetkemeyer. Is anybody going to lose their job, Mr. 
Barr, because they were incompetent in doing their job?
    Mr. Barr. We are looking across the System at our system of 
supervision. We want to make sure we have the right personnel 
in place----
    Mr. Luetkemeyer. So, the answer is no.
    Mr. Barr. ----responsible for doing that.
    Mr. Luetkemeyer. Okay. Mr. Gruenberg, in the same GAO 
report, your agency took a hit as well with regard to Signature 
Bank. Management failed to take adequate steps to mitigate the 
bank's longstanding liquidity and management issues before the 
bank's failure. The FDIC lacked urgency, despite seeing 
Signature Bank's repeated failures, and when Signature Bank 
failed to do what you asked them to do, you did nothing. Tell 
me how this happens?
    Mr. Gruenberg. Congressman, I think that is the core issue 
here, and to a certain degree is common in both of these. The 
examiners identified the issues, they provided supervisory 
guidance and direction. We had an institution here, unlike most 
banks, quite frankly, that are quite responsive to guidance 
from supervisors. In the case of this institution, they were 
not.
    I think the core issue was the failure on the part of 
examiners to compel compliance. When issues were identified, 
guidance was given, and they were not addressed over a period 
of time.
    Mr. Luetkemeyer. No, no. Let me interject here. As a former 
examiner, whenever you see that these two banks were outliers, 
significantly, for the rest of the banking industry, and you 
are suddenly going to let them continue to do things that you 
know are dangerous, not only to themselves but to the system, 
it is incompetent. You cannot let that continue to go on.
    Mr. Gruenberg, is anybody at the FDIC going to lose their 
job over this?
    Mr. Gruenberg. I think this episode requires us--as you 
know, our Chief Risk Officer did an internal review in addition 
to the GAO report. I think it is incumbent on us to do a 
comprehensive review of our supervision program, including our 
staffing structure. We are going to have to identify 
deficiencies and be prepared to----
    Mr. Luetkemeyer. I appreciate that comment. We will see if 
anything happens. Hopefully, by the next time you come here, we 
will have some action that would have been taken that would be 
very prudent.
    I appreciate your comment this morning, Mr. Gruenberg, that 
the industry remains well-capitalized, since there seems to be 
a discussion about having to raise more capital. I think better 
supervision would be a better idea than raising more capital.
    Mr. Barr, the Federal Reserve has gotten itself underwater 
in its own situation with this interest rate situation. Chair 
Powell was here the other day, and he admitted that he is not 
making any money. He is losing money because his interest rates 
on his investments are upside down as well. If he is not making 
any money, how is he paying the bills for the Consumer 
Financial Protection Bureau (CFPB), because technically, the 
law says he is supposedly paying it out of revenues? Since 
there are no revenues to pay it out of, how is he paying the 
CFPB's bills?
    Mr. Barr. The CFPB is being paid in the same way that the 
rest of the Federal Reserve System is being paid, identically 
in approach.
    Mr. Luetkemeyer. If that is the case, then they are 
printing money, because that was the response of Chair Powell. 
If anyone asked him the question, ``How are you paying your 
bills?'', he said, ``We are printing more money.''
    With that, Mr. Chairman, I yield back. Thank you.
    Chairman McHenry. The gentleman from Georgia, Mr. Scott, is 
recognized for 5 minutes.
    Mr. Scott. Thank you very, very much, Mr. Chairman.
    Vice Chair Barr, the Fed's recent Financial Stability 
Report found a number of pressure points emerging in the 
commercial real estate market, correct?
    Mr. Barr. Yes.
    Mr. Scott. And also, you had a survey that accompanied that 
report, and commercial real estate was mentioned as, ``a 
possible trigger for systemic risk.'' Correct?
    Mr. Barr. Yes. We are looking quite carefully at commercial 
real estate risks. Banks are an important part of that market, 
but they are not the only part. There are lots of non-bank 
investors as well.
    Mr. Scott. But I think what we are concerned about is the 
fact that these commercial risk markets represent only a small 
part of the total assets held by the larger banked community. 
However, these mortgages represent one-fifth of total assets 
held by our nation's smaller banks. That is what we have to be 
concerned about. And your own staff at the Fed wrote that the 
rising interest rates over the past year will increase the risk 
that commercial borrowers will not be able to refinance their 
loans when the loans reach the end of their term. That is the 
real story of where we are.
    So, my first question to you is, do you believe that 
smaller and regional banks have a right to be very wary of 
pressure related to the commercial real estate market?
    Mr. Barr. I think it is important for commercial real 
estate risk to be well-understood and mitigated by banks. Many 
community banks and smaller regional banks are more 
concentrated in commercial real estate than the larger banks, 
so it is important for them to understand their risks and to 
appropriately mitigate those risks, as institutions are doing.
    Mr. Scott. It is my understanding, then, that your office 
has expanded what we refer to as examination procedures for 
banks with significant exposure to commercial real estate. 
Would you say this is directly related to the sharp jump in 
borrowing costs over the past year?
    Mr. Barr. The risks in the commercial real estate sector 
arise from several sources. One of those is that there are much 
lower vacancy rates in downtown office buildings in many cities 
because of the response to the pandemic. There are a lot fewer 
people in office buildings working. That has also put some 
pressure on retail. We are seeing some pressure in the multi-
family space, especially given rising interest rates. And then, 
rising interest rates make it harder to refinance, and that 
adds additional pressure.
    Mr. Scott. My time is expiring, and I have to get your 
attention focused on this area too, affecting our low- and 
moderate-income borrowers, especially as we continue to hear 
about the credit tightening. As you conduct your holistic 
review of capital and long-term debt requirements, are you 
fully analyzing the impact this change could have for low- and 
moderate-income communities and small businesses?
    Mr. Barr. We do look at the overall impact of our capital 
rules, including on low-income communities and on small 
businesses as part of how we think about the overall effect 
that capital has. Right now we are seeing, with strong capital 
in the system, that that is a place that we continue to look.
    Mr. Scott. And do you anticipate that these new 
requirements could make it more difficult and costly for those 
on the margins to get a loan?
    Mr. Barr. Our experience is that strong capital 
requirements make it possible for institutions to serve all 
their communities through times of stress.
    Chairman McHenry. The gentleman's time has expired. I now 
recognize the gentleman from Michigan, Mr. Huizenga, who is 
also the Chair of our Oversight and Investigations 
Subcommittee, for 5 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman. And witnesses, I 
appreciate it today. I am going to jump right in. Mr. 
Gruenberg, I would like to start with you. I appreciate the 
cooperation so far, but I will note that anything you can do to 
speed up the production of the requested material from the 
chairman and myself would be much appreciated.
    I do want to dig into the bid process that the FDIC uses 
when they have taken a bank into receivership and look to sell 
it. In a recent Bloomberg article, Director McKernan was quoted 
as saying, ``The FDIC is hindering the ability of nonbanks to 
participate in these auctions because they are not given the 
same terms as bank bidders with respect to loss share 
arrangements and deal financing.'' And I would like to submit 
that article for the record, Mr. Chairman.
    Chairman McHenry. Without objection, it is so ordered.
    Mr. Huizenga. Thank you. Is Director McKernan wrong when he 
says that non-bank participation is, ``really in name only?''
    Mr. Barr. We have made a considerable effort for all three 
of the failed institutions.
    Mr. Huizenga. So, you believe he is wrong?
    Mr. Barr. I may just answer to say that I think we have 
made a significant effort to invite both bank and non-bank 
interested parties to participate in the bidding process, and 
they have.
    Mr. Huizenga. Okay. Vice Chair Barr, last week one of your 
colleagues, Governor Bowman, called for a third-party review of 
the actions of the Fed in connection with Silicon Valley Bank's 
failure. Will you commit to facilitating a third-party review 
of the Fed's actions?
    Mr. Barr. I thought it was important for us to start with a 
self-assessment. Obviously, the Congress is looking at these 
issues. The Inspector General is looking at these issues. The 
GAO is looking at these issues.
    Mr. Huizenga. So, do we count as a third party?
    Mr. Barr. I do not know what Governor Bowman meant by that, 
but to me, you are not part of the Federal Reserve.
    Mr. Huizenga. Okay. Do you believe there needs to be a 
third-party, independent review outside of the congressional 
review and your own internal review?
    Mr. Barr. I think there are such reviews going on already.
    Mr. Huizenga. Will you commit to providing the committee 
with full access to the documents and employees needed to 
conduct our own assessment?
    Mr. Barr. We have been cooperating with your staff on that, 
and we will continue to do so.
    Mr. Huizenga. I think I will echo what I told Mr. 
Gruenberg: Anything you can do to speed that up would be much 
appreciated. As the Chair had quoted about this culture shift, 
he had noted that you included that prominently in your report. 
Did you hear about these, ``culture shift,'' concerns prior to 
conducting your internal review, or was that news to you until 
the review?
    Mr. Barr. I had heard similar reports before the staff 
conducted this review.
    Mr. Huizenga. Okay. GAO testified before my Oversight and 
Investigations Subcommittee last week about their own review of 
the bank failures, and in response to a question, the GAO 
witness stated that, ``no such culture shift,'' was raised in 
their own interviews with the Fed staff. So, why are you 
keeping it a secret? If it is that big of a concern, why is it 
a secret that you are not telling the GAO about? And, in fact, 
the GAO's testimony confirmed that a slow escalation of 
supervisory concerns has been noted in their reports since 
1991.
    Here is what I would like to ask you. You said there were 
about 20 individuals who were interviewed for your internal 
report. Will you provide the committee with a list of those 
employees whom you interviewed for the report?
    Mr. Barr. The 20 I was mentioning in my testimony are the 
people who are conducting the review.
    Mr. Huizenga. Okay. How many interviews were done for that 
report?
    Mr. Barr. I would be happy to continue to work with your 
staff, and have our staff work with them on all of the requests 
that you have made. That is part of our ongoing operation.
    Mr. Huizenga. Okay. Is that a yes, you will commit to 
allowing us to identify the staff and then allowing us to speak 
to them?
    Mr. Barr. I think that there are some tradeoffs involved in 
that, that I would like our staff to discuss with your staff.
    Mr. Huizenga. What tradeoffs? You are telling me that you 
are not sure whether there should be an independent, third-
party review, that we are not part of the Fed so we should be 
doing a review. We are trying to do the review, but you are 
telling us we may not be able to talk to the people who might 
actually have the information that would be helpful to the 
review.
    Mr. Barr. As the chairman of the subcommittee, you are, of 
course, welcome, in the end, to decide to whom you want to talk 
and get cooperation from them.
    Mr. Huizenga. We are getting closer. Okay.
    Mr. Barr. I am just pointing out that there is a tradeoff 
in terms of making sure that in the future, when we do reviews, 
we have staff who are----
    Mr. Huizenga. I have one last thing. Just as we, and you, I 
would assume, expect management failures to be owned up to by 
the management, do you take full responsibility for supervisory 
failures at the Fed under your watch?
    Mr. Barr. Yes, I do.
    Mr. Huizenga. Okay. A lack of enforcement on your part does 
not mean a need for more regulation.
    Chairman McHenry. The gentleman's time has expired.
    Mr. Huizenga. It means stronger follow-through by the 
regulators.
    Chairman McHenry. I will now recognize Mr. Lynch of 
Massachusetts for 5 minutes.
    Mr. Lynch. I thank the Chair. Chair Gruenberg, I just want 
to start off by saying thank you on behalf of the people of 
Brockton, Massachusetts, for your willingness to come to 
Brockton and to listen to their concerns about the failure of 
Silicon Valley Bank and the impact that it could potentially 
have on the creation of affordable housing in that City. I can 
say that my constituents asked me to say thank you to you 
publicly, and your staff, for your willingness to come to 
Brockton.
    Mr. Barr, every bank in American had to deal with rising 
interest rates, but Silicon Valley Bank was doing something 
very, very different. They concentrated on startups, venture 
capital-funded startups. And early-stage startups are probably 
more prone to failure and volatility than mature businesses. 
SVB also did deposits, because they went after these companies. 
Their deposits went from $60 billion to $180 billion in 2 
years, so very fast growth there.
    The thing that puzzles me is that they bought $91 billion 
in T-bills at a time when the interest on T-bills was very, 
very low, and they were long duration. Did that contribute--
well, let me fast forward. When Chair Powell announced, for 
months and months and months, that he was going to increase 
interest rates and then began to do so, that $91 billion at 
Silicon Valley Bank, the value of those T-bills and Treasuries 
plummeted to $21 billion, and that is when people started to 
pull their money out.
    What was the responsibility of the Fed in light of the 
unwise decision on the part of the management of Silicon Valley 
Bank to operate in that way?
    Mr. Barr. The Federal Reserve supervisors looked at these 
issues and found that the bank had been mismanaging its 
interest rate risk and its liquidity risk. It had removed 
hedges that would have protected it from a rising interest rate 
environment. It had changed its interest rate sensitivity test 
in order to make it less conservative. It changed its liquidity 
test to make it less conservative. It failed to fully 
understand the risk from its concentrated depositor base or the 
risk associated with the venture capital fund deposits.
    The supervisors pointed those out, but the bank failed to 
correct those issues. So, as I said, it was fundamental 
interest rate and liquidity risk mismanagement on the part of 
the bank. Where we fell down on the job was not forcing them to 
make those changes fast enough, and that is outlined in the 
report.
    Mr. Lynch. So that was the point of failure, really, where 
they got themselves into trouble and somebody did not compel 
them to change their--I am not even sure at that point, where 
they had lost so much money, I am not sure what you could have 
done. But what are the tools that you might have availed 
yourself of, if you had them, to prevent a total meltdown like 
we saw?
    Mr. Barr. One example I will cite for you is that generally 
speaking at the Federal Reserve, we do not put in place 
immediately mitigants or incentives on a firm, so higher 
capital, for example, or higher liquidity, or limits on 
incentive compensation, or limits on capital distributions. And 
those kinds of tools might be appropriate in some cases where 
you have a firm that is not responding fast enough to 
significant issues at their bank. That might have made a 
difference here.
    And obviously, we are also looking more broadly and 
structurally--this firm grew very rapidly at a time when it was 
subject to much lower regulatory and supervisory standards. If 
we had had in place those higher standards, the firm might have 
had more significant risk management infrastructure in place, 
and stronger capital and liquidity in place. So, we are really 
looking across the board at both supervision and regulation to 
see where we might make improvements.
    Mr. Lynch. Okay. Mr. Chairman, my time has expired. I yield 
back. Thank you.
    Chairman McHenry. The gentleman has time to yield back. I 
thank the gentleman.
    We will now recognize the gentlelady from Missouri, Mrs. 
Wagner, who is also the Chair of our Capital Markets 
Subcommittee, for 5 minutes.
    Mrs. Wagner. Thank you, Mr. Chairman.
    Vice Chair Barr, when you testified before this committee 
in March, I asked you why the Fed had not considered escalating 
any of the supervisory concerns at SVB into more formal 
enforcement actions. Your response was that you would be 
looking into it. It has now been 2 months since these failures 
occurred and your report has been released.
    So, I will ask the question again. After dozens of 
supervisory determinations were issued, over many years, that 
went unanswered by SVB's management, what prevented the Fed 
from escalating its supervisory actions against the bank, and 
why didn't the Fed recommend any formal enforcement actions 
against the bank?
    Mr. Barr. That is detailed in our report. It is 114 pages, 
basically, laying out the problem that you explicitly asked 
about and that was addressed in our last hearing. And what we 
found is that supervisors were essentially too timid and too 
slow to raise those standards in a timely enough way.
    Mrs. Wagner. It was years. These citations, these 
supervisory determinations were handed out over years. Where is 
the management? Where is the supervision of the regulators?
    Mr. Barr. Some of those issues that were identified many 
years ago, the bank responded to, and those issues were closed. 
But new issues were opened, and the bank was not timely in 
responding to those. So, it is a problem of getting our 
supervisory teams to be acting with more agility.
    Mrs. Wagner. I hope there are going to be repercussions for 
this, because this has obviously now escalated into a much 
broader concern. Do you agree that escalating supervisory 
actions should have happened sooner, sir?
    Mr. Barr. Yes. That is consistent with the report's 
findings.
    Mrs. Wagner. Thank you. Based on the Fed's report and the 
GAO's independent review of agency actions, there is just a 
decades-long, slow-to-act pattern that we are seeing when it 
comes to enforcement. It is clear that these failures could 
have been prevented if our regulators acted more forcefully 
with bank management to mitigate risk.
    I raised three children, and when I told them to stop doing 
something and they kept doing it, I did not take them out for 
ice cream, sir. I put them in time-out. These banks needed to 
have been supervised more closely, and action needed to be 
taken.
    Vice Chair Barr, in your SVB report you stated that, ``SVB 
failed because of a textbook case of mismanagement by the bank 
and that Federal Reserve supervisors failed to take forceful 
enough action.'' You also stated that, ``Our banking system is 
sound and resilient, with strong capital and liquidity.'' Yet, 
instead of addressing the identified failures in a timely 
fashion, you somehow concluded that you need to bolster 
financial resiliency by layering on more regulations, 
specifically, capital requirements, but the implementation of 
the Basel III Endgame rules.
    Shouldn't your first priority, sir, be ensuring that 
existing prudential regulations are effectively enforced before 
layering on more regulations? If bank regulators, supervisors, 
and examiners do not properly enforce existing rules, putting 
more rules in place does not fix anything.
    Mr. Barr. I think that we need to do both. I think we need 
to enhance our system of supervision to make it more agile, and 
more quick. We need to also improve our system of regulation so 
that we have the kind of resiliency we need, with capital and 
liquidity in the system. We have been working together, the 
other regulators and I, on a Basel III Endgame package since I 
arrived at the Board in July of 2022, and----
    Mrs. Wagner. It has been going on for years, decades. What 
I am trying to get at is you have to effectively enforce the 
rules and regulations that are on the books now, before 
layering on more onerous capital requirements and regulations.
    What analyses have you done to demonstrate that had the 
Basel III Endgame rules been in place, the SVB failure would 
have been avoided? And will you provide those to the committee?
    Mr. Barr. What we are looking at in the Basel III Endgame 
rule is capital resiliency for the very-largest firms as a 
whole. We are not trying to target it to SVB.
    Chairman McHenry. The gentlelady's time has expired.
    We will now recognize the gentleman from Missouri, Mr. 
Cleaver, for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman. I want to direct my 
conversation to Mr. Hsu, and to Mr. Harper, and it will not 
surprise you where I am going. In 1977, your agencies did 
something that I think we might not be able to have happen now, 
and that is to create the Community Reinvestment Act (CRA). A 
lot of people think Congress created it. Congress has amended 
it, but Congress did not create it. And over the past few 
years, we have had amendments from time to time. We have not 
had anything since, I think, about 1995. And I know all of the 
agencies have been working over the past few months, because I 
have been chatting with all of you and others about CRA.
    One of the things that I am concerned about is that Gramm-
Leach-Bliley made, I think, some corrections so that the 
smaller banks would have fewer examinations for CRA exams. I 
have a bill, the Community Reinvestment Reform Act, that would 
subject independent mortgage companies to CRA exams, codify 
community benefit agreements, specify endowments, and create an 
improvement plan, and require disclosure of deposits from low- 
to moderate-income communities.
    Is that one of the changes that you think would be 
compatible with the direction you are going?
    Mr. Hsu. Representative Cleaver, thank you for that 
question. Anything that can be done to strengthen and modernize 
the CRA would be welcome. I think that is something that we are 
all committed to, so I would be happy to engage with your staff 
on the proposal that you just discussed.
    Mr. Cleaver. Mr. Harper?
    Mr. Harper. CRA does not apply currently to credit unions, 
although some States have applied CRA to State-chartered credit 
unions.
    Mr. Cleaver. So, you do not think we could do that? I guess 
the last thing I want to do is get involved with credit unions. 
I have been around for a while, and that is a headache I cannot 
just ignore, put it out of the way.
    CDFIs and MDIs, which serve small businesses and 
communities, are feeling the pinch of tighter credit standards, 
and they are also feeling the pinch of their own with investors 
and larger banks pulling back on lending. Does this trend 
signal that we need a stronger incentive, such as through the 
Community Reinvestment Act, so that banks are encouraged to 
make investments in those communities' financial institutions?
    Mr. Hsu. I will start, and I think my colleagues will be 
happy to jump in. Yes, having strong MDIs and CDFIs is an 
important objective. I think we all agree on that. Within the 
proposal, the joint proposal for the CRA that was put out by 
the OCC, the FDIC, and the Fed, under the proposal, it was to 
improve the speed and to make it easier for banks to invest in 
and support CDFIs and MDIs. We are in the process of finalizing 
that, so I cannot get ahead of our finalization. But that is an 
objective, and we got a lot of comments on that from the public 
and we will be incorporating that as we make that finalization.
    Mr. Cleaver. You used the word, ``comments.'' I know you 
went through the comment period. And I am sure that all of the 
big banks were very kind and cooperative in their comments to 
your work. Am I wrong?
    Mr. Hsu. I think there were a range of reactions, and we 
are taking all of those into account as we finalize the rule.
    Mr. Cleaver. I yield back, Mr. Chairman.
    Chairman McHenry. The gentleman yields back.
    I will now recognize the gentleman from Kentucky, Mr. Barr, 
for 5 minutes.
    Mr. Barr of Kentucky. Thank you. Vice Chairman Barr, the 
independent GAO report concluded that the Federal Reserve 
identified risks and took supervisory actions but did not 
adequately escalate actions prior to SVB's failure. Do you 
agree with that conclusion?
    Mr. Barr. Yes. That is the same conclusion we reached in 
our own report.
    Mr. Barr of Kentucky. Yes, you did, and I appreciate that, 
and I have your report here. On page 8 of that report, you 
pointed out that SVB moved from the regional bank portfolio to 
the large bank portfolio in February of 2021, approximately 2 
years before Silicon Valley Bank failed. You also noted on the 
same page of your report that the Fed Board provided the 
Federal Reserve of San Francisco team, the supervisors here, a 
waiver to delay the initial set of ratings under the large 
financial institution rating system by 6 months, to August 
2022.
    I think the reason why both reports conclude that the Fed 
failed to adequately escalate is because the Fed itself is 
delaying implementation of the enhanced supervisory standards. 
So, I don't think this is a failure of regulation. I think both 
reports are acknowledging that it is not regulation, that the 
bank was subject to enhanced regulation 2 years before the bank 
failed.
    I do want to revisit the issue of the policy 
recommendations of more regulations, but I also want to ask why 
the report, your report, says nothing that I can see about 
monetary policy mistakes? Do you acknowledge that the Fed was 
wrong, in 2021, to conclude that rapidly-rising inflation was 
transitory?
    Mr. Barr. The report is focused on the supervisory failings 
and the Federal Reserve's----
    Mr. Barr of Kentucky. Sure. I know that.
    Mr. Barr. ----and the staff is not----
    Mr. Barr of Kentucky. No, no, no. I know that. But do you 
acknowledge that the Fed should have started to normalize 
monetary policy and raise interest rates earlier, in light of 
excess fiscal stimulus and persistently-high inflation?
    Mr. Barr. I was not on the Federal Reserve Board at the 
time.
    Mr. Barr of Kentucky. I know you weren't. But I want to 
know why the report doesn't talk about this. The divorcing of 
monetary policy from supervision is a problem. Do you 
acknowledge that interest rate management would be easier and 
supervision of these institutions would have been easier had 
monetary policy tightening started earlier, and had been 
implemented gradually as opposed to precipitously?
    Mr. Barr. The responsibility of bank management is to take 
the monetary policy, the interest rate world around it, and to 
respond with appropriate risk metrics, and they didn't do that.
    Mr. Barr of Kentucky. I understand that. But here is the 
problem. The argument for why regulation and monetary policy 
are both at the Fed is that it is supposed to inform each 
other. Supervisory policy should inform monetary policy. And 
the reason why the Fed has always argued that they should 
retain their supervisory authority is because it informs 
monetary policy. They are intertwined. And the failure of the 
Fed to acknowledge that monetary policy errors are the 
underlying cause of bank instability is very revealing.
    Let me quickly ask you on capital review, two scenarios, 
Vice Chair Barr. Bank One has 94-percent uninsured deposits. It 
reports $91 billion held-to-maturity securities with a market 
value of $76 billion, and an unrecognized loss of $15 million. 
Its cash-out at the Fed represents approximately 5 percent of 
its uninsured deposits, and a single industry represents more 
than 50 percent of the institution's customer base. That is 
institution one.
    Bank number two has just 14 percent of its deposits 
uninsured. It holds zero held-to-maturity securities, 
approximately 93 percent of its liquidity is in cash held at 
the Fed, and that cash represents more than 100 percent of its 
uninsured deposits. The bank has a large and diverse customer 
base with tens of millions of individual and small business 
customers.
    Do you understand the differences between the banks I have 
just described?
    Mr. Barr. I think in general terms, although, of course, I 
was not following your math with precision.
    Mr. Barr of Kentucky. You generally understand the vast 
difference between those institutions, but they are the same 
size, the exact same size. Do you believe these two 
institutions should be subject to an identical bank capital 
regime?
    Mr. Barr. I think our capital regime and our liquidity 
regime should take account of the risk profile of the firm.
    Mr. Barr of Kentucky. That is good, because the Basel 
Committee on Banking Supervision does not. So my question to 
you is, will you commit to deviating from the Basel 
recommendation that fails to tailor the capital charges for 
operational risk?
    Mr. Barr. I would be happy to follow up with you to discuss 
your concerns in greater detail.
    Mr. Barr of Kentucky. I would like to do that, because 
operational risk differences should inform bank capital 
regulatory changes.
    Chairman McHenry. The gentleman's time has expired.
    The gentleman from Illinois, Mr. Foster, is recognized.
    Mr. Foster. Thank you.
    Acting Comptroller Hsu, you emphasized the importance of 
regulatory discretion in your remarks, which is a lot of what 
we are wrestling with right here. And there is obviously a fine 
line between regulatory discretion and regulatory capture, 
which is one of the risks. And discretion, we are learning, 
again, can also be very dangerous if banks come to rely on 
discretion instead of actually solving the problem. So, are 
there instances that you can think of where less discretion 
might actually be a benefit that would provide more leverage in 
your negotiation with a bank that is not really complying?
    Mr. Hsu. Thank you for the question. Ultimately, what we 
want and what we need is a safe and sound and fair banking 
system. That is the goal. The way to achieve that is through a 
balance of regulation and supervision, in equal parts. The 
regulations provide clear rules of the road, clear speed 
limits, so to speak. Supervision, really strong supervision 
entails the exercise of that discretion, to know when to call 
out particular issues, to identify risks, to escalate them, and 
to act. And I think that is what a lot of the conversation has 
been about today. So, we have to do both in equal parts.
    Mr. Foster. For example, if there was a rule that you had 
mandatory escalation whenever a bank was approaching mark-to-
market insolvency due to interest rates, instead of the way we 
have been not handling that, would that have been an advantage 
in these banks' situations?
    Mr. Hsu. Mechanisms like that can help. I think it really 
depends on the context of the issues. But that is something 
that we think about internally for different types of issues 
within our internal policies and procedures, what fits within a 
particular mechanism of automatic escalation versus that which 
requires some judgment. It depends.
    Mr. Foster. Any other comments on this from any of the 
other witnesses?
    Mr. Gruenberg. Congressman, the issue you described is a 
constant tension, I think, in the supervisory process. I have 
had meetings with bankers and I had one banker say, ``There 
needs to be consistency across supervisors.'' And I had another 
banker say, ``Supervisors have to be able to exercise judgment 
in looking at my institution.'' And they would both be in 
agreement at the same time, that the comments suggest 
attention, and I think that is something you sort of have to 
work through in the supervisory process. You obviously want 
consistency, but you want examiners, based on their experience, 
to be able to exercise judgment as well. And I think that is 
part of the challenge of thoughtful supervision, quite frankly.
    Mr. Foster. Yes.
    Mr. Barr. I would just add to the conversation that I do 
think we need to make it clear to supervisors that they have 
all the tools they need to use that discretion in the 
appropriate place. I mentioned the example that we generally do 
not use supervisory tools that we could use--limits on 
incentive compensation, limits on capital distributions, 
requiring additional capital, requiring additional liquidity--
even when we see a serious issue. And we could flip the 
presumption----
    Mr. Foster. So, why do you decide not to do that?
    Mr. Barr. ----so that those tools are more readily 
available to supervisors, but that is not----
    Mr. Foster. By default, for capital distributions and 
bonuses or whatever, would not be allowable if you are in 
violation of hard and fast requirements.
    Mr. Barr. That could be an approach that provides the 
appropriate toolbox----
    Mr. Foster. It might get the attention of the bank board 
and the CEOs in ways that seem to have failed here.
    Vice Chair Barr, could you say a little bit about the 
timeline you anticipate for the holistic capital review, any 
rule changes that might come out of this episode, and so on? 
How does that look? When can Congress expect to see some 
presentations? When can we expect preliminary and final 
rulemakings on all of these?
    Mr. Barr. Thank you. I expect this summer that we will be 
able to present my thinking on this, and that the three 
agencies working together will be able to come forward with a 
Basel III Endgame proposal for public comment.
    As I have said before, any changes here would go through 
the normal rulemaking, so there would be a proposal, get public 
comment, and then a final rule, and then a transition period 
for banks to come into compliance.
    Mr. Foster. And I hope there would be a role for Congress 
in that, in particular early on, when you have concluded the 
direction you want to go for these, to actually have a 
discussion with Congress and allow industry time to react 
before things are fully baked, because this is not purely a 
safety and soundness thing, as I mentioned in my opening 
remarks.
    Thank you, and I yield back.
    Chairman McHenry. The gentleman yields back. The gentleman 
from Ohio, Mr. Davidson, is now recognized for 5 minutes.
    Mr. Davidson. I thank the chairman. And I thank the folks 
who comprise the majority of our bank regulatory framework for 
being here today and for the attention you are giving, 
particularly in the wake of the failures that we are talking 
about today, to make sure that we do have a safe and sound 
system, and frankly not just to write reports about it but to 
actually do stuff. I think my takeaway from the report that you 
authored, Vice Chairman Barr, was that it wasn't really a 
failure of the regulation itself, it was a failure of the 
regulators to actually take action on what they may have 
observed.
    And when I look at Silicon Valley Bank, in particular, what 
really triggered it was a run on the bank. And my question is, 
what triggered the run on the bank? Did you look into the wires 
out? Who was moving the money? How many individuals or entities 
were actually moving the money in the weeks leading up to the 
run?
    Mr. Barr. Thank you for the question. The fundamental issue 
at the bank before there was a run was that they mismanaged 
their interest rate and liquidity risk.
    Mr. Davidson. I understand that. I do not know any 
individuals who managed their interest rate risk worse than 
Silicon Valley Bank. But my question is, what led to the run on 
the bank? Who was moving the money out?
    Mr. Barr. Obviously, for privacy reasons, we don't 
generally look at transaction accounts of individual customers. 
We can see the dollar flows. The dollar flows were enormous. 
Thursday afternoon: $42 billion in withdrawals. Lined up the 
next morning: another $100 billion in withdrawals. And that was 
over 80 percent of the deposits in the bank.
    Mr. Davidson. I think it is important when we look at the 
other part of our capital markets, that this bank was shorted. 
This was a publicly-traded bank. There were a lot of shorts in 
the bank. We are looking right now at a lot of pressure on our 
committee to try to say, oh, you guys have to ban short 
selling. Well, no, we don't. There are some issues with naked 
shorts and people actually having custody of the shares, and 
more shares being lent than are actually available. There are 
some things that are still unaddressed post-GameStop on the 
shorting of publicly-traded companies.
    But the problem here is who led the short, and is that in 
any way correlated to the people who were moving the money out. 
We have asked for that data and we haven't gotten it, and we 
can look at it in the most confidential setting. I respect the 
fact that we shouldn't publish it online for everyone to see. 
But someone is looking into this, correct?
    Mr. Barr. I don't actually have access to individual 
transaction-level data. The SEC is responsible, obviously, for 
market integrity issues, so that is a question that should be 
directed to them.
    Mr. Davidson. Okay. So if the Fed doesn't, does the OCC 
have access to this data?
    Mr. Hsu. For the short-selling data, no.
    Mr. Davidson. No, no. Not short sellers. I know you are not 
a securities regulator. You are a banking regulator. Who moved 
the money? Was it one person? Was it 2,000 people? How many 
different entities and individuals were behind what caused the 
cascade effect? It built momentum.
    Mr. Hsu. SVB was not an OCC-regulated bank, so I can't 
answer that question.
    Mr. Davidson. Okay. So if you look down at the State 
regulators, the State regulator would have these records, 
right?
    Mr. Barr. I do not believe so, sir, no.
    Mr. Davidson. So, you think this will be an unsolved 
mystery?
    Mr. Barr. As I said, the SEC has jurisdiction over market 
integrity issues. It is really----
    Mr. Davidson. We are not talking about market integrity. We 
are talking about a bank run, which you guys are supposed to 
make sure doesn't happen. Does the FDIC have transaction data?
    Mr. Gruenberg. I would want to check on that, Congressman, 
and get back to you. We may have some ability to look. The 
issue is deposit withdrawals and who was responsible for the 
largest deposit withdrawals that may have contributed to a 
particular bank failure. That is something we could----
    Mr. Davidson. If you look strategically, the risk of a 
major run on a bank is something to which we should pay a lot 
of attention. How would this be engineered? There could be a 
malicious intent behind a bank run. There could be a 
coordinated effort behind multiple entities to cause bank runs. 
And that would be a real problem. Would that be a problem if 
that were to happen, Vice Chairman Barr?
    Mr. Barr. Depending on the facts and circumstances, it 
could be, if there was----
    Mr. Davidson. I think the answer is simple, yes, it would 
be. Does anyone object and think it would not be a problem?
    I just think when you look at market risk, the other thing, 
there are a lot of people pushing for more government. It seems 
like in every kind of situation, the solution is more 
government.
    As most of you probably know, almost half of privately-
insured credit unions are in my State of Ohio, a very big 
presence for credit unions in Ohio. Do you have any plans to 
give them access to the Bank Term Funding Program?
    Mr. Barr. I see my time has expired. May I answer?
    Chairman McHenry. Time enough to answer that.
    Mr. Davidson. A yes or no would be----
    Chairman McHenry. A yes or no would be respectful to the 
committee in a bare minimum way.
    Mr. Barr. The Bank Term Funding Program was set up 
immediately in response to the----
    Mr. Davidson. I understand the history. It is really yes or 
no.
    Mr. Barr. We don't currently have plans----
    Mr. Davidson. Okay.
    Chairman McHenry. The gentleman's time has expired.
    Mr. Davidson. Yes or no. Okay, thank you.
    Chairman McHenry. Let me just ask the panel to try to 
answer the questions. I think Members appreciate that and get 
less aggravated, on a bipartisan basis. It also makes it go 
quicker for all of us. Thanks.
    With that, I will now recognize the gentlelady from Ohio, 
again Ohio, Mrs. Beatty, for 5 minutes
    Mrs. Beatty. Thank you, Mr. Chairman, and thank you to the 
witnesses.
    Let me start by saying, earlier one of my colleagues wanted 
to point out you were appointed by President Biden. Mr. 
Gruenberg, is the name, Jelena McWilliams, familiar to you, and 
who is she?
    Mr. Gruenberg. She was the former Chair of the FDIC.
    Mrs. Beatty. And was appointed by----
    Mr. Gruenberg. President Trump, I believe.
    Mrs. Beatty. Okay. And I could probably go down the list 
and do the same thing with you, with the National Credit Union 
Association. Does the name, Rodney Hood, mean anything to you, 
Mr. Harper?
    Mr. Harper. Yes. He is currently a board member on the NCUA 
board and was previously chairman.
    Mrs. Beatty. And he was appointed by----
    Mr. Harper. President Trump at the time.
    Mrs. Beatty. Thank you. Also, Dodd-Frank was mentioned 
earlier. Let me remind you, as I recall Dodd-Frank, if we go 
back more recently, it was President Trump who signed the law 
to roll back some of those critical parts of Dodd-Frank. And 
many believe had that rollback not happened, of rolling back 
the stricter oversight, since we are talking about oversight 
today, maybe SVB and Signature would not have released those 
stronger rules and oversight, which would have made them 
subject to stronger liquidity and capital requirements, maybe 
just to withstand some of the financial shocks they took. And 
they would have been required to have regular stress tests to 
expose them to their weaknesses. That was just a statement and 
not a question for you all.
    Now, let me ask you, Mr. Gruenberg, I have been very 
interested in the deposit insurance reform in the wake of the 
recent bank failures. Back in March, you will probably recall 
that right after the SVB collapse, I asked all of the witnesses 
at that time, of the three reform options, which they thought 
were best. Now, let me fast-forward to last week when I asked 
that same question of all of our witnesses, and they all said, 
``targeted approach,'' whether they were a Democrat witness or 
a Republican witness. Would it make sense, do you believe, to 
focus on small businesses with that kind of approach?
    Mr. Gruenberg. Yes, and that is what we suggested in the 
report that we released, Congresswoman.
    Mrs. Beatty. Okay. Thank you. Mr. Harper, knowing that 
credit unions have a deposit insurance scheme, I would like you 
to weigh in on the discussion about deposit insurance reforms. 
What were your recent reactions to that FDIC report, and did 
any particular option resonate with you, in particular?
    Mr. Harper. First, if there are changes made in the Deposit 
Insurance Fund, which the FDIC administers, we believe that 
there should be parallel changes made for parity in the Share 
Insurance Fund that the Credit Union Administration manages.
    Of the options presented, certainly, the targeted option 
was the better option and there can be some real policy reasons 
behind why you might want to do that. I will also note that our 
small business accounts tend to be very small.
    We recently did a survey, and typically, they are between 
$7,000 and $15,000 at our largest credit unions where we have 
checked that data. But there are certainly some accounts where 
they are much higher.
    Mrs. Beatty. Okay. Thank you. Let me continue with you. 
Just last month, we opened a new Black-owned MDI in Columbus, 
and the first in the great State of Ohio. And while I was proud 
of the achievement, the fact still remains that there are only 
19 Black-owned MDIs in the United States, and that is a 43-
percent decline just since 2001, and over the past 10 years, we 
have seen a number of MDIs decline by 20 percent.
    Is there anything you can tell me that you are doing to 
help preserve MDIs?
    Mr. Harper. First, I think when you said 19 MDIs, I think 
that is--
    Mrs. Beatty. 19 Black-owned MDIs.
    Mr. Harper. Black-owned MDIs, but that is on the bank side. 
On the credit union side, we have in total 503 MDIs, and I 
believe nearly 300 of them are actually Black-owned. So, it is 
a sizable portion of our MDI marketplace.
    One of the things we did most recently was to change our 
examination procedures. We have to recognize that there is a 
different business model that MDIs have in working with the 
community, and sometimes that means that there are higher 
expenses.
    They shouldn't necessarily be penalized in their exam 
reports by being compared to non-MDI peer metrics. So, we have 
done that. Also, thanks to Congress, we are now----
    Mrs. Beatty. I think my time is up, but we can continue 
this later. And let me just say thank you to all of the 
witnesses for being here, and also for making appointments to 
see me. Thank you.
    Chairman McHenry. The gentleman from Tennessee, Mr. Rose, 
is recognized for 5 minutes.
    Mr. Rose. Thank you, Chairman McHenry, and thanks to 
Ranking Member Waters, and thank you to our august guests for 
being with us today.
    Acting Comptroller Hsu, last year Senator Elizabeth Warren 
sent you a letter urging you to block the TD Bank-First Horizon 
deal, and reports suggest the deal fell apart 2 weeks ago 
because the 2 banks were not given a timetable for regulatory 
approvals. First Horizon stock is down 50 percent since the 
failed merger with TD Bank. As I am sure you are aware, markets 
can handle good news, and markets can handle bad news. But what 
markets can't handle is inconsistency.
    So, Acting Director Hsu, what impact did Senator Warren's 
letter have on your decision to slow-walk this merger?
    Mr. Hsu. Thank you for the question.
    On every merger application, we follow the law. We follow 
our guidelines. We follow our policies and procedures. We have 
the Bank Merger Act. There are a list of statutory factors that 
a merger must--we have to consider the impacts on competition, 
on the convenience needs of the community, on financial 
stability, on the financial and managerial resources of the 
entity, on Bank Secrecy Act/Anti-Money Laundering (BSA/AML) 
compliance.
    We have to take all those into account for statutory 
purposes. Under our guidelines, the Comptroller's Licensing 
Handbook, which is public, we list out the framework we apply 
to evaluate those and we do that in every single case.
    Mr. Rose. I am wondering, you testified that the OCC is 
committed to being open-minded when considering merger 
proposals and to acting in a timely manner on applications. 
What about the OCC's actions during the TD Bank-First Horizon 
merger was timely?
    Mr. Hsu. Every case is different. We have to evaluate each 
case on its merits and we do so applying those standards 
equally. But as I said, I can't speak to individual 
transactions. What I can say is that different transactions 
have different features, and some of them can be dealt with 
more quickly than others.
    Mr. Rose. How long should banks expect it to take for the 
OCC to typically approve a merger? Is it 6 months? Is it 12 
months? Is it 24 months?
    U.S. Bank and Union Bank, and Bank of Montreal and Bank of 
the West, each waited over a year for their mergers to be 
approved, and TD Bank and First Horizon waited over a year 
without an answer.
    There is an old saying in the law that justice delayed is 
justice denied. Do you have enough staff at the OCC to review 
these things in a timely manner?
    Mr. Hsu. We do have enough staff. The closer that a merger 
hews to the statutory factors I just listed out, the faster 
that approval will go. I think this does highlight that the 
frameworks that we use to apply the statutory factors are old. 
They have been around since 1995.
    We have been working across the agencies, not just the OCC 
but with the Fed, the FDIC, and with the DOJ to try to update 
those to current times. That is a project we are working on 
because we want to make sure that is updated and modernized for 
today's environment.
    Mr. Rose. I must say I am skeptical about the timeline, and 
I wonder, how do you balance the need to promote competition in 
the banking industry with the need to allow banks to grow and 
innovate?
    Mr. Hsu. Again, we take each case on its own merits. We 
evaluate those against the statutory factors and against our 
guidelines. It is hard to generalize because each one of these 
cases is a little bit different.
    Mr. Rose. Chairman Gruenberg, as part of the deal to 
acquire First Republic, the FDIC provided JPMorgan with a $50-
billion note. I know you are familiar with that. What was the 
interest rate agreed to on that note?
    Mr. Gruenberg. I think it was 3-some percent. I would have 
to double-check that, Congressman.
    Mr. Rose. So is that the going market rate for a loan of 
that size?
    Mr. Gruenberg. I believe it was the market rate but I can 
double-check that for you as well.
    Mr. Rose. Do you believe that financing at this rate 
satisfies the FDIC's obligation to resolve banks in a way that 
is least costly to the Deposit Insurance Fund?
    Mr. Gruenberg. In this case, yes, Congressman. We had a 
number of bids. The bid from JPMorgan was the least costly, and 
these were the terms we were able to negotiate.
    Mr. Rose. Vice Chair Barr, in your view, would the interest 
rate risk that led to large mark-to-market losses on SVB's 
assets have occurred without the high inflation that the United 
States has experienced since April of 2021, and the rapid rate 
increases engineered by the Federal Reserve to address runaway 
inflation?
    Mr. Barr. The interest rate risk that it faced in the 
particular moment was related to the rapidly rising rates, yes.
    Mr. Rose. Thank you. I yield back.
    Chairman McHenry. The gentleman's time has expired.
    I will now recognize the gentleman from Illinois, Mr. 
Casten, for 5 minutes.
    Mr. Casten. Thank you, Mr. Chairman.
    Mr. Barr, as we have been in this hearing, the former CEO 
of SVB, Mr. Becker, has released his written statement for our 
upcoming hearing. In that statement, he indicates that in April 
of 2022, he led the effort to fire their chief risk officer, 
Laura Izurieta, in part based on feedback from regulators. I am 
just wondering if you can confirm that regulators did raise 
specific concerns with Ms. Izurieta, and whether that had an 
mpact on her termination.
    Mr. Barr. My understanding is that supervisors concurred in 
the judgment of the CEO that the CRO was not up to the job.
    Mr. Casten. Okay. SVB did not publicly disclose that they 
were without a risk officer until almost a year later. Were the 
supervisors aware that that information was not made publicly 
available?
    Mr. Barr. I don't know the answer to that question. 
Generally speaking, bank supervisors are not in charge of 
providing advice to banks about disclosable or nondisclosable 
events. That is handled by the bank as part of its obligations 
under the securities laws.
    Mr. Casten. Okay. But presumably, you would appreciate that 
risks to equity risk and risks to deposit risk all get 
intermingled in the mind of the CEO. During that period between 
when their risk officer was fired and they disclosed to the 
public they didn't have a risk officer, they sold off $2 
billion of interest rate hedges.
    Were you aware that they had sold that off? Were you in any 
way consulted, you or your office consulted in, essentially, 
the deinsurancification of their interest rate exposure?
    Mr. Barr. I arrived at the Federal Reserve Board in July of 
2022. I was not aware of any of the particular matters with 
respect to SVB until an information report in February of this 
year.
    Mr. Casten. Does anybody else want to comment? I want to 
understand. They didn't have a risk officer. We knew they 
didn't have a risk officer. We knew that they hadn't disclosed 
to the public that they didn't have a risk officer, and that 
they were selling off interest rate hedges. Were the 
supervisors who had a role in getting the risk officer 
terminated aware of that change in their hedging strategy?
    Mr. Barr. The supervisors became aware of the removal of 
those interest rate hedges. I don't know precisely at what 
moment they became aware of that, and they recognized that as a 
risk that the firm had incurred.
    Mr. Casten. Okay. I really do appreciate your candor here, 
particularly in the report that you sent before. I think it is 
appropriate to sort of acknowledge where we had some failures. 
We will be judged not by what we did in hindsight but what we 
do, going forward.
    As of right now, the spread between the ask yield on 
Treasuries with a due date of May 31st and June 15th is a 
hundred basis points and, of course, the credit to swap default 
swaps on U.S. Treasuries are priced about 8 times as high as 
they were a few months ago.
    Given what we have just learned about banks, SVB in 
particular, not maintaining a robust hedging strategy, are you 
monitoring the changes in interest rate hedging among the banks 
you supervise?
    Mr. Barr. We are intensively supervising all banks for 
interest rate risk and liquidity risk. We look at all the ways 
that they measure interest rate risk and all the steps that 
they take to mitigate that risk. That could include, for 
example, hedging.
    Mr. Casten. Are you compelling them to be more aggressive 
in light of the potential default on U.S. Treasuries that is 
coming up in a few weeks?
    Mr. Barr. We are calling attention, really, to the broad 
range of interest rate risk. There is a heightened risk with 
respect to the debt ceiling that is part of that interest rate 
risk.
    Mr. Casten. Are you going beyond the systemically important 
financial institutions (SIFIs) or do you not have the 
jurisdiction to supervise at that level?
    Mr. Barr. The interest rate reviews that we do are for all 
of our banks. There is more intensive supervision and 
regulation of the global systemically important banks (G-SIBs), 
the largest firms. There is less-intensive but still quite 
active supervision on interest rate risks with respect to other 
firms.
    Mr. Casten. Okay. If we blow up, and I would remind my 
colleagues that we expanded the debt limit every time when 
Trump was President, and every time in the last decade when 
Republicans have controlled the House, and when there has been 
a Democratic President, they have played suicide with the 
economy, and the last time we did downgrade our debt.
    If we do that again, as we seem to be on a trajectory to 
do, and U.S. Treasuries are no longer a zero-risk security, how 
much capital will the banks have to raise instantly in order to 
be compliant with Dodd-Frank?
    Mr. Barr. The obligation, obviously, is on Congress and the 
Executive Branch to work out an arrangement on the debt ceiling 
to raise it.
    Mr. Casten. I understand that, and I hope we do, but the 
adults are not in charge. If we don't, are we going to force 
the banks to raise that capital? I don't like the politics of 
this any more than I think any of us do.
    But my fear is that if we find ourselves with our 
prudential regulators and a choice of saying, do we provide 
stability to the banking sector and blow up the economy, or 
vice versa, none of us are going to like----
    Mr. Timmons. [presiding]. The gentleman's time has expired.
    The Chair now recognizes the gentleman from South Carolina, 
Mr. Norman, for 5 minutes.
    Mr. Norman. I think you all have been here twice, and you 
have gotten a sense that there has not been a sense of urgency 
when it comes to the regulators or, as you put it, your 
supervisors.
    With SVB, you had a bank that went from $71 billion to $200 
billion in 36 months. You had a case where 94 percent of their 
deposits were above the limits of what it had insured. You had 
a risk-based officer who was not there. Who supervises the 
supervisors?
    Mr. Barr, and then I will ask Mr. Gruenberg.
    Mr. Barr. It is ultimately my responsibility to make sure 
we have effective supervision. We did not in this case and we 
are going to fix it.
    Mr. Norman. Was anybody fired?
    Mr. Barr. Not at this time. No, sir.
    Mr. Norman. Not at this time. You have 22,000 employees. 
Nobody was fired. And taxpayers are going to suffer the 
consequences.
    Mr. Gruenberg, you have, if my math is right, close to 
2,800 examiners. Was anybody fired on this case?
    Mr. Gruenberg. No.
    Mr. Norman. Nobody was fired?
    Mr. Gruenberg. Nobody has been fired. As I indicated, we 
have had the GAO report.
    Mr. Norman. I get all that.
    Mr. Gruenberg. And we are in the process of doing a 
comprehensive review of our supervision program, including our 
staffing structure.
    Mr. Norman. Could you walk me through, Mr. Gruenberg, your 
decision to backstop all of SVB's and Signature Bank's 
uninsured deposits? I get the systemic designation, but why was 
that decision made so quickly? And if you could do it quickly, 
because I have a question I want to ask Mr. Harper and Mr.----
    Mr. Gruenberg. I think this evolved over the weekend when 
Silicon Valley Bank failed. As you will recall, on Friday 
morning it became apparent to the FDIC as well as the State 
supervisor in New York that Signature Bank would probably be 
unable to open on Monday. So, we really had a circumstance--and 
the failure of Signature appears to have been prompted by a 
contagion effect from the failure of SVB. We also had 
information that other institutions were coming under 
significant stress.
    Mr. Norman. I can tell you there is a good bit of stress 
that is going on right now. Is it both of your opinions that 
the banking system is in good shape right now?
    Mr. Gruenberg. I think we would both characterize it as 
resilient and stable.
    Mr. Norman. So, it is in good shape?
    Mr. Gruenberg. I think it is in----
    Mr. Norman. Okay. So, you don't have any concerns?
    Mr. Gruenberg. No. I made it clear in my written statement 
and in my oral statement that there are significant downside 
risks to which we are paying close attention.
    Mr. Norman. Okay. Mr. Barr, are the banks in good shape 
now?
    Mr. Barr. I would repeat also that overall, the banking 
system is sound and resilient. There are stresses in the system 
that were carefully marked.
    Mr. Norman. Will they be acted upon? Will the supervisors 
show a sense of urgency? When you see the headwinds that these 
banks, SVB and others, have had, would you act a lot quicker 
now with the same--since no one has been fired, you have the 
same people in charge----
    Mr. Barr. We would act with greater speed and agility and 
force.
    Mr. Norman. Okay. Try to head this off, which would be a 
good thing. Okay.
    Mr. Harper, the National Credit Union Association released 
a request for information on climate-related financial risk, 
which posed 38 questions about fiscal risk, transition risk, 
governance, and other topics. Is it appropriate for an agency 
to do this when it hasn't been approved by Congress?
    Mr. Harper. Our interest in this matter is, we are looking 
at all material risks to credit unions. We are gathering 
information related to climate----
    Mr. Norman. What I am asking is, are you comfortable that 
none of what you are requesting has gone through the 
congressional review process?
    Mr. Harper. The congressional review process would not 
apply to a request for information, as I understand it.
    Mr. Norman. Why?
    Mr. Harper. We have not adopted a rule and it would apply--
--
    Mr. Norman. You are still making them--I don't know how 
many employees you have----
    Mr. Harper. We have about 1,200.
    Mr. Norman. Yes, 1275, okay.
    So, I guess you are comfortable without any direction of 
Congress requesting this information. You have the time and are 
putting your staff through answering these types of questions 
with climate risk.
    Mr. Harper. We passed this particular request for 
information on a 2-1 vote. The two was actually a bipartisan 
vote, if that is your concern. In addition to that, though, we 
are looking to gather information so that we can better 
understand what are the risks to this----
    Mr. Norman. Do you know what the cost of this is to your 
bank?
    Mr. Harper. I'm sorry?
    Mr. Norman. Do you know what the cost of complying and 
answering all these questions is to your bank?
    Mr. Harper. A credit union can choose to not answer it or 
to answer it.
    Mr. Norman. Okay. So, it is voluntary?
    Mr. Harper. Yes.
    Mr. Norman. Okay. I yield back.
    Chairman McHenry. Thank you. The gentlewoman from 
Massachusetts, Ms. Pressley, is now recognized for 5 minutes.
    Ms. Pressley. Thank you so much to our witnesses for 
joining us.
    Since Vice Chair Barr and FDIC Chair Gruenberg last 
testified in front of this committee, as we all know, another 
bank has collapsed. So that is three bank failures this year, 
and the Federal Reserve's report on the collapse of SVB 
underscores that bank executives committed, ``textbook 
failures,'' in managing interest rate risk and regulators 
failed to understand the depth of the problem and to react 
appropriately.
    Certainly, the 2008 financial crisis gave us all a front-
row seat. The entire nation learned in that moment that we 
cannot solely rely on the decision-making of executives to 
ensure systemic stability. So, this is not a new issue. There 
is no epiphany here.
    Chair Gruenberg, as you well know, and I want the public to 
know, banks are subsidized by the government through the 
Deposit Insurance Fund and their access to the Fed's liquidity 
backup facilities. Banks perform what is essentially a 
delegated public responsibility including providing 
transactional accounts, operating payment systems, and serving 
as channels of monetary policy.
    So, Chair Gruenberg, bearing this in mind, would it be fair 
to say that banks operate similarly to a public-private 
partnership?
    Mr. Gruenberg. They certainly have a public charter and a 
set of public responsibilities that comes with their charter 
and the provision of public support and that is also why they 
incur the obligations relating to both supervision for safety 
and soundness as well as consumer protection and community 
reinvestment.
    Ms. Pressley. Very good. Thank you. I think it is an 
accurate characterization. However, it is a skewed public-
private partnership because the profits are enjoyed by the 
private bank but the losses are borne by the public.
    For too long, banks have been content, really, to chase 
profits irresponsibly and then to turn to the government to 
bear the risk when they collapse. If the American public is 
going to suffer the consequences of poor corporate governance, 
then maybe it is time for the American public to have a seat at 
the table.
    One proposal that would do exactly that is to give the 
government a special government share, or what some would call 
a, ``golden share.'' The way it would work is simple. The 
Federal Government would receive a unique share in large banks 
that are considered systemically important, which would allow 
for a government-appointed director to join the bank's board 
and be responsible for representing the public interest.
    Now, under normal circumstances the director would keep an 
eye on proceedings and not interfere with the day-to-day 
affairs, but when credible concerns arise that the bank is 
mismanaging its risk and threatening our economy, then the 
director can act as an early action system to prevent a 
potential crisis.
    So, Vice Chair Barr, it is my opinion that having a 
government-appointed director at SVB could have helped to avoid 
the now-obvious mistakes and errors and repeat of history here. 
Do you agree that a board member with a unique public mandate 
would support remedial measures, early intervention, and then 
the director would have been more ideally positioned to spot 
and flag the problems with unhedged interest rate risk and 
overreliance on wholesale deposits that the executives were 
willing to ignore?
    Mr. Barr. The system we have for that now is that the board 
of directors has that responsibility. They are required to 
oversee the management of the firm in a way that takes into 
account appropriate risk management, and in this case, the 
board failed to do that. The senior officers at the bank also 
failed to appropriately manage their risks, and as we outlined 
in a report, the supervisors called out those risks, cited them 
for the risks, but did not----
    Ms. Pressley. My time is elapsing. I am so sorry. Well, 
actually, I don't apologize. I am just going to reclaim my 
time.
    You said, ``failed,'' there several times and I think that 
is the point, that we don't want this to happen again. The 
swift government intervention to insure all deposits and 
prevent a systemic crisis showed us once again that the 
profitable business of banking is deeply intertwined with 
public interest.
    The golden share proposal would allow an appointee on the 
board of large banks to safeguard the public interest. The 
recurring bank failures demonstrate that bank executives are 
not making decisions in the best interest of the people. The 
American people deserve a seat at the table. Thank you.
    Mr. Timmons. [presiding]. The gentlewoman's time has 
expired.
    I now recognize myself for 5 minutes.
    Mr. Barr, I know we have talked about this a lot today but 
do you believe that banks in the United States are well-
capitalized?
    Mr. Barr. I have said repeatedly that banks, according to 
our rules, are well-capitalized today. Our banking system is 
sound and resilient.
    Mr. Timmons. So if you do believe that banks in the U.S. 
are well-capitalized, what is the point of your capital review?
    Mr. Barr. The capital review is to look at whether the 
capital rules are appropriately meeting their objectives, 
whether despite the fact that the capital of the system is 
strong, it might be the case that it needs to be stronger, and 
that the banking system might need additional capital to be 
more resilient, precisely because we don't know the nature of 
the kinds of ways we might experience shocks to the system as 
has happened with these recent bank failures.
    Mr. Timmons. So, it is your contention that the current 
regulatory framework is somehow inadequate. But you just said 
that you believe that banks are well-capitalized.
    SVB did not fail because of inadequate regulatory capital. 
SVB failed because of a massive deposit run fueled by a social 
media blitz from some of the SVB's own depositors, concentrated 
uninsured deposits, and large volumes of assets bearing 
interest rate risks that the Fed missed.
    So you, as the Vice Chair of Supervision, missed all of 
that until it was too late. How can anyone expect any framework 
of regulation to work if the regulators don't implement and 
enforce it?
    Mr. Barr. We do need to focus on both. We need to focus on 
strengthening our system of supervision so that it is more 
agile, it is speedier, and it is more forceful, and we also 
need to make sure that we have the right resiliency in place in 
the system.
    Ultimately, the depositors at SVB ran because they felt 
that the firm was not solvent. So, capital and liquidity issues 
are really intimately intertwined and that is why we are 
looking at capital standards.
    Mr. Timmons. Well, it wasn't solvent. They were right. It 
wasn't solvent. But it was your job to make sure that they 
maintained solvency and I just don't understand how we are 
going to reassess capital requirements if the previous ones 
weren't faithfully implemented, and I don't see how this is 
productive.
    Mr. Barr. The previous capital requirements were, in fact, 
faithfully implemented. The question is whether they were 
robust enough. For example, in SVB's case, had they been 
required to record their unrealized losses and gains on 
available-for-sale securities, that would have had a $2-billion 
impact.
    Mr. Timmons. We are going full circle now. The first 
question I asked you is, are banks in the U.S. well-
capitalized? It seems like the answer to that is possibly, no.
    Mr. Barr. I am using the----
    Mr. Timmons. You can't have it both ways. You can't say the 
banks are well-capitalized and also say that we need to 
reassess capital requirements.
    Mr. Barr. We use the term, ``well-capitalized,'' to 
describe a bank that exceeds our capital requirements as they 
currently exist. It doesn't make a comment with respect to 
whether those are the appropriate rules and that is what we are 
exploring as part of this review, and part of the joint work 
that the three agencies are undertaking with respect to the 
Basel III Endgame is, do we have capital requirements that 
appropriately measure risk and are those measurements robust 
enough to the kinds of shocks that we might experience in the 
future?
    Mr. Timmons. The size of the runs on the banks that have 
failed would not be sustainable by any bank of their size. So, 
I don't see any capital requirement that could be imposed for 
certain banks that would address the concern. We are just going 
to move on.
    Recent bank failures were prompted by poor interest rate 
risk management and asset liability management. To put it 
simply, failing at basic Banking 101 these banks did not 
appropriately recognize or manage the interest rate risk 
associated with a high proportion of unstable deposits and 
longer duration assets. This was widely recognized in recent 
post-mortem reports across your agencies.
    Chair Gruenberg, why did the FDIC decide to base this 
recent special assessment solely off of uninsured deposits 
rather than use a risk-based assessment unique to each bank 
like traditional deposit insurance?
    Mr. Gruenberg. First of all, as you know, it is required 
under law to impose a special assessment to recover the cost of 
the Deposit Insurance Fund of this systemic risk exception. The 
systemic risk exception covered uninsured deposits. That is 
what it was used to do, and we have authority under the law to 
impose a special assessment on the institutions that benefited 
from the systemic risk exception.
    As our staff reviewed it, we thought the most appropriate 
way to try to link the benefit of the systemic risk exception 
to the institutions that benefited was to track it with the 
amount of uninsured deposits.
    Mr. Timmons. Thank you. I yield back.
    And the gentleman from New York, Mr. Torres, is now 
recognized for 5 minutes.
    Mr. Torres. Thank you, Mr. Chairman.
    The latest bank failures have held up a mirror to the two-
tiered banking system in the United States. If your bank is 
too-big-to-fail, it has an implicit guarantee of unlimited 
deposit insurance.
    But if your bank is too small to have an implicit guarantee 
of unlimited insurance then, in some sense, it becomes too-
small-to-succeed.
    Vice Chair Barr, how do you solve the problem of a two-
tiered banking system in the absence of unlimited deposit 
insurance?
    Mr. Barr. Let me start by saying that overall, our banking 
system is sound and resilient. Our community banks are serving 
their community. They are vibrant. They have been engaging and 
will engage in efforts to make sure that they are safe. All 
depositors should feel that they are safe if you look at the 
actions that banks have taken recently to make that the case 
and regulators have as well.
    So, I don't think that we have a structure where depositors 
should feel differently about their deposits depending on the 
size of the institution.
    Mr. Torres. But it is fair to say there have been outsized 
deposit flows to the biggest banks based on a perception of a 
two-tiered banking system?
    Mr. Barr. We did have a period of time in the acute stress 
moment in March where there were significant deposit outflows 
from some regional institutions to larger institutions.
    With the announcements that the agencies made and the 
establishment of the Bank Term Funding Program, deposit 
outflows for almost all institutions normalized to what they 
had been prior to that stressful incident.
    Mr. Torres. I want to speak about a new source of stress. 
New York City has the largest commercial real estate (CRE) 
market in the United States. Commercial real estate, 
particularly office space, is confronting the worst of both 
worlds: declining property values; and rising borrowing costs.
    The combination of work from home and rapidly rising 
interest rates has been a calamity for office real estate, 
particularly Class B and Class C--$270 billion in CRE mortgages 
are reaching maturity in 2023, and a third of those mortgages 
are office.
    Vice Chair Barr, or Chair Gruenberg, how high is the risk 
of commercial real estate causing a new wave of bank failures?
    Mr. Barr. We are looking carefully at commercial real 
estate risks. As you point out, there are some downtown office 
commercial real estate deals that are especially vulnerable.
    We are in a somewhat better position than in prior 
downturns in the sense that the loan-to-value ratios prior to 
the reset in pricing were muted, so in the price resets that we 
are likely to see, there is more capital than there had been in 
prior crises to absorb that.
    There is also a lot of heterogeneity around the United 
States in terms of how exposed different banks are to those 
risks. So, I would say----
    Mr. Torres. Do you think any loan restructuring can or 
should be undertaken to prevent a cascade of defaults in the 
CRE market?
    Mr. Barr. I do think that banks already are in the process 
of working out commercial real estate loans where they see 
those risks in appropriate places.
    Mr. Torres. For the Comptroller, before the creation of the 
OCC, there was no uniform national currency, only a cacophony 
of currencies. Each local bank could issue its own bank note, 
creating more confusion than clarity and ultimately ending in 
failure, hence the OCC.
    In January of 2022, you gave a speech analogizing 
stablecoins to pre-Civil War banknotes. Left unmentioned in 
your speech, however, is the obvious difference between the 
fact that stablecoins, particularly dollar stablecoins, are 
pegged to a uniform national currency like the dollar.
    Is it fair to say that a stablecoin system based on a 
uniform national currency like the dollar is qualitatively 
different from a pre-Civil War banking system that had no basis 
and no uniform national currency at all?
    Mr. Hsu. Thank you for the question. I think the uniformity 
has multiple dimensions to it. One is what it is pegged to, the 
one that you highlighted. I think that is one form of 
uniformity that is important----
    Mr. Torres. Which was absent from the pre-Civil War banking 
system?
    Mr. Hsu. I think that historians may debate that. In the 
pre-Civil War banking era, the issues where there was not 
uniformity was in the chartering and the supervision of the 
different banks and I think that is the case with stablecoins. 
The chartering, the supervision, and the standards to which 
stablecoins hold themselves are not consistent, and I think 
that is something to be wary of.
    Mr. Torres. Dollar stablecoins or----
    Mr. Hsu. I think all stablecoins.
    Mr. Torres. So if you had a fully-reserved stablecoin that 
is pegged to the dollar, in your mind, that is equivalent to a 
bank note that had no national banking system and no national 
uniform currency?
    Mr. Hsu. I think that is one important element of having a 
stablecoin that is prudent.
    Mr. Timmons. The gentleman's time has expired.
    Mr. Hsu. But I think there are other elements to which we 
want to pay attention.
    Mr. Timmons. The gentleman from Wisconsin, Mr. Fitzgerald, 
is now recognized for 5 minutes.
    Mr. Fitzgerald. Thank you, Mr. Chairman.
    The NCUA recently released a request of information on 
climate-related financial risk, posing 38 questions about 
physical risk, transition risk, governance, and other topics.
    Chairman Harper, regardless of the responses that you get 
back on this, I am just wondering where this came from and do 
you think it is appropriate for the agency to regulate in this 
area? There doesn't seem to be any clear directive from 
Congress along those lines.
    Mr. Harper. There are three things here. First, we have 
seen credit unions that have gone under. For example, we lost 
two credit unions after Hurricane Katrina went through that are 
related to climate-related financial risk.
    Second, all of the regulators have been issuing requests 
for information (RFIs) in this area to gather information. If 
this were a definitive step forward towards regulation, we 
could have released it as an Advance Notice of Proposed 
Rulemaking. We didn't. We are gathering information so that we 
can help credit unions better understand what are the material 
risks on their balance sheets related to climate.
    We know that certain institutions which are located in 
areas where there are greater risks have certain risks and they 
need to think about how do they mitigate those risks and offlay 
those risks.
    Also, one of the things that the agency has done 
exceptionally well over the years is to develop tools for small 
credit unions to use, for example, our simplified CECL 
spreadsheet, as well as our automated cybersecurity evaluation 
tool. Both of those have helped credit unions to comply and to 
bring in and make sure that they are doing the right things in 
this area. We may well develop a tool, not necessarily 
regulation, in this area. But it is worthy of exploration.
    Mr. Fitzgerald. I think the concern is--and I think many 
Members of Congress hear this on a regular basis--whether you 
have a group of credit unions in your office here in D.C. or 
back in the district, any time one of these requirements is put 
in place, for them, it is something they have to react to, and 
oftentimes, maybe even hire a full-time person to react to 
this.
    And I am wondering, do you ever do kind of a look back on 
that to see just what type of impact you are having on credit 
unions?
    Mr. Harper. Certainly. One of the things that has been an 
agency principle for many years is looking at the size, scale, 
and scope of our regulations. We know that 3 out of 5 credit 
unions are less than $100 million in assets. They need to be 
focusing on their local communities and lending in their 
communities and making sure that the loans are getting paid on 
time and supporting the community.
    Therefore, for credit unions under $100 million, we have 
scaled the regulations so that they have fewer things with 
which to comply. It is only as you grow in size and scope that 
you become subjected to more regulations.
    For example, on our liquidity rules, credit unions above 
$250 million in assets are required to have access to a Federal 
backstop, either our Central Liquidity Facility or the Federal 
Reserve's discount window. We adjust accordingly because we do 
recognize the burden on communities.
    Mr. Fitzgerald. Very good. Thank you.
    Vice Chair Barr, after the questions asked by the Federal 
Reserve and the FDIC in the joint proposed rulemaking on the 
large bank resolution, we have heard some concerns that 
institutions could be assigned a bank category that does not 
necessarily match up with kind of the risk-based indicators 
that are out there. I am wondering if you have any comment on 
that, or if you are aware of this?
    Mr. Barr. I am not sure I fully understand the concern. But 
we are taking into account and thinking about the proposal with 
respect to long-term debt requirements, and the risk profiles 
of institutions, so that does go into our thinking. I think 
what we saw----
    Mr. Fitzgerald. And on capital standards that would be 
required, right?
    Mr. Barr. Correct. We think about the risk basis for 
capital requirements as part of the work that we are doing 
together as agencies.
    Mr. Fitzgerald. Okay. So, how many Matters Requiring 
Attention did SVB receive from the San Francisco Fed? Do you 
know what that number was?
    Mr. Barr. At the time that the bank failed, it had 
outstanding 31 Matters Requiring Attention or Matters Requiring 
Immediate Attention, which is about triple the average for that 
peer group, so quite a lot.
    Mr. Fitzgerald. But of those 31, none of them really played 
a role in the downfall of the bank ultimately, right?
    Mr. Barr. The issues that were raised in a number of those 
related to basic governance risk and controls, interest rate 
risk, and liquidity risk----
    Mr. Timmons. The gentleman's time has expired.
    Mr. Fitzgerald. Very good. Thank you, Mr. Chairman. I yield 
back.
    Mr. Timmons. The gentlewoman from Colorado, Ms. Pettersen, 
is now recognized for 5 minutes.
    Ms. Pettersen. Thank you, Mr. Chairman. This hearing is 
timely and necessary now that we have more detailed information 
about what led up to the failures of Silicon Valley Bank and 
Signature Bank, the third and fourth largest bank failures in 
our nation's history.
    Between Friday, March 10th, and Sunday, March 12th, the 
FDIC, the OCC, and the Fed acted as swiftly as they could to 
take stock of the assets, seek buyers, and then, when no 
suitable purchaser could be found, they quickly insured all 
depositors. Once again, I want to thank you for your timely 
action and for protecting small businesses and individuals 
throughout our country and in my district.
    But a common theme today is that regulators were clearly 
able to identify problems with the risk management practices at 
Silicon Valley Bank and Signature Bank several years before 
their collapse. However, attempts at corrective action were 
slow and inconsistent.
    Vice Chair Barr, you have said that you have the tools that 
you need to act differently in the future and you have also 
said that we need a culture that empowers supervisors. Were the 
delays and inconsistencies with the regulatory flags in part 
because of worrying about the backlash you might face from the 
industry and even some of my colleagues here in Congress if you 
actually utilized those tools?
    What did you mean by stating that we need a culture that 
empowers supervisors?
    Mr. Barr. We need to set up a system such that supervisors, 
when they are faced with uncertainty, act, and when they see a 
bank not responding promptly enough, they feel empowered to 
escalate those matters with putting in place, for example, 
limitations on capital distributions, incentive compensation, 
putting in place higher capital or liquidity requirements, and 
escalating matters to enforcement at a prompter speed.
    I think that is a really important part of the kinds of 
reforms that we need to undertake.
    Ms. Pettersen. Thank you very much. That leads me to my 
next question.
    The FDIC issued warnings to SVB in 2019, 2020, and on 4 
separate occasions in 2021. And then in 2022, SVB was 
prohibited from acquiring any other banks. In hindsight, we 
know that prohibition was insufficient.
    Then in 2023, just 2 weeks before the bank failed, the CEO 
sold $3.5 million in stock. The employees of SVB received their 
annual bonuses on Friday, March 10th, just hours before the 
bank failure.
    We will hear more from the executives tomorrow about this 
and it is concerning for me. But if regulators identify 
problems with risk management policies in capital and liquidity 
issues, do you think their executives should be able to sell 
stock and receive bonuses before the regulatory flags are 
addressed?
    Would anyone like to take that?
    Mr. Barr. I would be happy to address it.
    I share your concern. I thought the fact that bonuses were 
paid the day the bank failed was outrageous. We are 
investigating that. We will take full action, depending on the 
findings of that investigation.
    With respect to the stock sales, that is, generally 
speaking, an issue for the SEC and I would defer to them on it.
    Mr. Gruenberg. Congresswoman, I would add that in addition 
to the authorities that the Fed has in regard to SVB, as part 
of our resolution of SVB the FDIC has a legal obligation to 
investigate the board and management of the institution for any 
misconduct that may have occurred, and we have considerable 
authorities, including ordering restitution and also banning 
individuals from the business of banking if our investigation 
finds appropriate misconduct, and those investigations are 
underway now.
    Ms. Pettersen. Thank you for that information.
    Quickly, Mr. Hsu, you have said that our deposit insurance 
should be updated and you have also recognized the balance 
between higher coverage and higher costs.
    What considerations should we be making when we look at 
balancing the increased cost with protecting depositors and the 
risks that bank runs pose to our entire economy? Should we be 
treating individual depositors differently than small 
businesses, and what could a tiered approach look like? You 
have 30 seconds.
    [laughter]
    Mr. Hsu. Well, thank you for the question.
    The FDIC report on deposit insurance lays out the tradeoffs 
really well, so I encourage folks to look at that. There are 
some hard balances to be made between financial stability and 
some of the moral hazard issues that are out there. I think the 
report does a really good job of laying that out and we look 
forward to working with you and others on working through that.
    Ms. Pettersen. Great. Thank you all so much for being here. 
I yield back.
    Mr. Timmons. The gentleman from New York, Mr. Garbarino, is 
now recognized for 5 minutes.
    Mr. Garbarino. Thank you, Mr. Chairman.
    Chairman Harper, in addition to serving on this committee, 
I am also the Chair of the Cybersecurity and Infrastructure 
Protection Subcommittee of the House Homeland Security 
Committee. One thing that I have continually heard from 
industry is that there is a need to harmonize cyber regulations 
across the Federal Government.
    As I am sure you are aware, the National Credit Union 
Administration board approved its final rule on cyber incident 
reporting requirements this past February. It is my 
understanding that while not fully implemented, this rule 
directly conflicts with congressionally-mandated cyber incident 
reporting for the Cyber Incident Reporting for Critical 
Infrastructure Act (CIRCIA) that we passed and was signed into 
law last year.
    Did the NCUA work with Director Easterly at the 
Cybersecurity and Infrastructure Security Agency (CISA) or any 
other Federal entity on the development of this proposal, and 
did you analyze how your 72-hour rule interacts with existing 
regulations and laws?
    Mr. Harper. Certainly, we did fully consider the CISA 
rules, and in fact, we aligned ours with the 72-hour limit to 
be with theirs. What we see is this should be a hand-in-glove 
work.
    We don't want any conflict between the two, and if there is 
conflict, we will work to resolve it. But it is my 
understanding, according to staff, that we have resolved that 
already and there is no conflict.
    Mr. Garbarino. Okay. Someone from the American Bankers 
Association came in front of my subcommittee and said that 40 
to 50 percent of their employees' or cyber employees' time is 
spent dealing with regulations. So if there is conflict, which 
I believe there is some, I think it would be great if you 
worked with CISA to make sure that whatever reporting they have 
to do is not duplicative and that these cyber employees need to 
focus on defense instead of----
    Mr. Harper. No, I fully agree.
    Mr. Garbarino. And it is also my understanding that the 
NCUA will provide additional guidance prior to the final rule 
going into effect but it is yet to be provided. Do you have a 
date on when that will be available?
    Mr. Harper. The rule itself goes into effect in September. 
We are working to set up the reporting systems, and once we 
have those details ironed out, we will provide that additional 
guidance.
    In fact, we will be having a card with reportable/not 
reportable to help make it much easier to understand what 
instances would arise.
    Mr. Garbarino. I appreciate that. Thank you.
    Mr. Gruenberg, I have a question about the FDIC special 
assessment.
    Unlike traditional deposit insurance, which leverages a 
risk-based assessment unique to each bank, the FDIC's proposed 
special assessment rulemaking leverages uninsured deposits as a 
mechanism to assess banks.
    To what extent is there a variation in the overall 
stability of uninsured deposits and to what extent would this 
framework differentiate across uninsured deposits that may have 
different characteristics?
    Mr. Gruenberg. I think the proposed special assessment is 
really based on the amount of uninsured deposits that a 
particular institution has because the extraordinary action 
that was taken under the systemic risk authority was really 
focused on protecting uninsured deposits.
    So, the assessment would be across-the-board, based on the 
amount of uninsured deposits an institution has, but there is 
an exception built in, so all institutions with less than $5 
billion of uninsured deposits would be exempted. That way, 
community banks are exempted from the application, and the 
burden really falls principally on institutions with assets 
over $50 billion.
    Mr. Garbarino. So, you are saying that the special 
assessment is purely based off of the amount of uninsured 
deposits and it doesn't matter? That was the only reasoning----
    Mr. Gruenberg. Yes.
    Mr. Garbarino. ----is because of what just----
    Mr. Gruenberg. That is what was protected under the 
systemic risk exception. The statute gives us the authority to 
target the special assessment on the institutions that 
benefited from the systemic risk action and that was really the 
basis.
    Mr. Garbarino. Because uninsured deposits were protected, 
that is the only reason we are basing the assessment off of 
uninsured deposits, moving forward?
    Mr. Gruenberg. That is correct, Congressman.
    Mr. Garbarino. Okay. Thank you.
    Mr. Barr, just quickly, separating recent bank failures 
from changes to capital requirements, recent reports show that 
the Basel III revisions proposal could result in a 20-percent 
increase in capital levels for the largest banks, marking 
arguably the most comprehensive overhaul of the regulatory 
framework, for which the industry would only have a few years 
to comply.
    According to economic literature by the Basel Committee on 
Banking Supervision, a one point increase in capital 
requirements could potentially reduce annual GDP by up to 16 
basis points. What impact on lending in the real economy do you 
think such swift and strident requirements will have and how 
are you controlling this?
    Mr. Barr. Any rule changes we make would go through the 
notice-and-comment rulemaking process and have appropriate 
transition. So, we are not talking about something that is 
immediately effective.
    Mr. Timmons. The gentleman's time has expired. The 
gentleman from New Jersey, Mr. Gottheimer, is now recognized 
for 5 minutes.
    Mr. Gottheimer. Thank you, Mr. Chairman.
    Since the rapid bank failures we witnessed in March, there 
has been a wave of uncertainty rippling through the banking 
system. Regulators took action following those failures to help 
protect depositors and ensure their funds were safe in other 
well-managed banks that do not suffer from the same issues that 
plagued Silicon Valley and Signature Banks.
    Following the collapse of those two banks, however, I have 
heard reports from small, medium-sized, and regional banks 
coming under pressure from short sellers hoping to benefit from 
the turmoil in the banking sector by driving down the value of 
banks in the same asset class as those who failed.
    Vice Chair Barr, if I can start with you. I sent a letter 
to the SEC today encouraging the Commission to monitor for 
illegal and abusive short-selling practices and to use 
appropriate authorities to prevent misconduct in financial 
markets. In the SVB report, you wrote that despite recent 
events, our banking system is sound and resilient with strong 
capital and liquidity.
    Are there wider systemic issues at play threatening the 
competitiveness of small and regional banks or is it your sense 
that these short sellers are trying to make a quick buck by 
taking advantage of uncertainty in the banking sector?
    Mr. Barr. I do think the banking system is sound and 
resilient. There are a number of banks that have come under 
recent stress. Some of that has to do with a rapid decline in 
their stock price, which is a function of short interest and 
also a decline in long interest, and those factors together 
have reduced the market value of those firms, and that puts 
additional pressure and stresses on the banking system.
    Mr. Gottheimer. Do you think social media is also at play 
there?
    Mr. Barr. I do think the role of social media has been 
intensified. Certainly, with respect to Silicon Valley Bank, 
the speed with which the bank failed was something that had not 
been seen before and that is a function, in part, of social 
media and part of the highly networked concentrated depositor 
base of that institution.
    Mr. Gottheimer. Thank you. Do you think the SEC should do 
everything in its power to identify sort of misconduct in 
financial markets like those and block that kind of activity or 
abusive trading strategies? There are, of course, short and 
long markets. But what if we are seeing abusive practices?
    Mr. Barr. As you mentioned, that is a matter for the SEC.
    Mr. Gottheimer. Thank you. In reading your report on SVB, I 
found it alarming that the Fed was aware of many factors that 
ultimately led to the bank's collapse as, obviously, others 
have pointed out today, but failed, in my opinion, to move 
quickly and forcefully enough to prevent its failure.
    In the report, you outline recommended changes for the Fed 
Board to consider related to its supervision and regulation of 
the banks. As you consider changes to the Fed's oversight of 
the banking system, how will you ensure that small, medium-
sized, and regional banks remain competitive?
    Mr. Barr. We are looking very carefully at the impact that 
any change would have on our banking system. As I mentioned at 
the outset, I think having a diversity of institutions is 
absolutely critical for our country. We are well served by 
having a wide range of community-based institutions, regional 
banks of different sizes, as well as our largest institutions.
    So, the kinds of approaches that we are taking in the main 
will be focused on larger institutions, institutions over $100 
billion in size. We haven't seen these difficulties with 
respect to our smaller institutions, so the approach we are 
taking will be one that is really focused on that risk.
    Mr. Gottheimer. Right, and we need those smaller 
institutions----
    Mr. Barr. Absolutely. As many of you know, in your own 
communities, community banks play a vital role in their local 
communities with small business lending, support for community 
activities, and engagement in the community. They really know 
their market and serve it well.
    Mr. Gottheimer. Thank you so much. Small and medium-sized 
banks, I agree, play a crucial role in our communities, so I am 
grateful for your comments.
    Chairman Gruenberg, earlier this month the FDIC released a 
set of recommendations for reforming deposit insurance. You 
listed three main options for reform: limited, unlimited, and 
targeted coverage of deposits. Can you briefly explain these 
options for reform and potential implications for the 
competitiveness of small and medium-sized banks in particular?
    Mr. Gruenberg. Thank you, Congressman.
    We did lay out three broad options. The first option is 
essentially keeping the system the same as today with possible 
upward adjustment of the coverage across-the-board, but not 
full coverage. The second option would be full coverage. And 
the third option is what we call targeted coverage, which is 
particularly focused on business payment accounts.
    Of the three, we thought the one that best balanced the 
objectives of enhancing financial stability while mitigating 
moral hazard was the third option, the targeted approach on 
business payment accounts.
    Mr. Gottheimer. How do you think that would affect, if you 
could just in the last 20 seconds here, the implications for 
competitiveness of small and medium-sized banks, and regional 
banks, in particular?
    Mr. Gruenberg. To the extent that they particularly serve 
small businesses, small businesses rely on those business 
payment accounts. Investor Relations coverage would actually be 
of benefit to smaller institutions in that regard.
    Mr. Gottheimer. Thank you. I yield back.
    Chairman McHenry. The gentlelady from California, Mrs. Kim, 
is now recognized for 5 minutes.
    Mrs. Kim. Thank you.
    And thank you all for being here. The recent bank failures 
have been anything but transitory. Since SVB's failure, I have 
reached out to many of my contacts--regional banks, community 
banks, and countless executives from small and medium-sized 
financial institutions in my region--to first gather input and 
to check in on them and get their thoughts on those bank 
turmoils and the proposals being debated.
    Smaller financial institutions agree that they don't want 
the Federal Government to use the recent crisis as an excuse to 
increase regulations and reduce liquidity in the market through 
stronger capital requirements.
    Vice Chair Barr. I know you assumed the office in July of 
2022, so from the time you took office to the time of SVB's 
failure, you had been sworn in for nearly 8 months. Could you 
please tell the committee what your top priorities were during 
those first 8 months in office?
    Mr. Barr. The bulk of my time was spent looking at a 
holistic review of capital, which we conducted and are in the 
process of completing, working with the very largest firms, the 
G-SIBs, looking at putting in place a long-term debt 
requirement for firms to enhance their resiliency, looking at 
the ways in which we could improve the way that we look at 
bread-and-butter issues like interest rate risk and liquidity 
risk.
    Mrs. Kim. Sure. Bread-and-butter issues.
    Mr. Barr, thank you so much. But I know a lot has been said 
about the interest rates too. With interest rates increasing as 
a result of high inflation, did you and your office ever make 
the interest rate risk or bank mismanagement a priority during 
those first few months in office?
    Mr. Barr. Yes. As I mentioned, interest rate risk and 
liquidity risk are bread-and-butter issues of supervision. The 
staff has increased attention on that as a result of increases 
in interest rates.
    We issued a report in the fall of last year that 
highlighted interest rate risk as a core risk. So, there has 
been an ongoing process to make sure that interest rate risk is 
appropriately addressed by supervisors.
    Mrs. Kim. It is alarming that the Fed knew of the alarming 
interest rate risk through the forward guidance. Yet, according 
to some reports, not since 2015 has a stress test involved 
rising interest rates. Instead, the Fed interest rate scenarios 
assumed a fall to near zero in every case. So, to me, it seems 
that the Fed is focused on addressing the risks of the past 
when we must be focusing on the risk of the present.
    Last month, NFIB also said that small businesses were 
facing more difficulty getting a loan than at any time in the 
past decade. We already have a very fragile economy where small 
businesses need reliable and affordable access to credit.
    I am going to ask you a couple of questions all at once. 
How are you assessing the tradeoffs between higher capital and 
strong economic activity and credit, and have you engaged with 
small business stakeholders to fully understand the impact that 
the conclusions of your review will have on them?
    Mr. Barr. Thank you very much.
    First, with respect to stress testing, I agree there should 
be multiple scenarios for stress testing, including testing 
rising rate environments. We are doing a pilot test of that 
this year with respect to a market shock and we intend to issue 
a proposal about multiple shocks, going forward. So, I agree 
with you about that.
    With respect to capital requirements, we are looking at 
proposals that will go through notice-and-comment rulemaking 
and then have a transition period for them.
    So, we are thinking about capital requirements that apply 
well out into the future. We are not thinking about or we are 
focused on today because the capital requirements would apply 
after an appropriate transition period.
    Mrs. Kim. Do you have a timeline for those holistic reviews 
and when do you plan to release the timeline?
    Mr. Barr. I expect that this summer, the holistic review 
will be complete, and the interagency process with respect to 
the Basel III Endgame will also be complete and we will be able 
to speak about those issues in detail, and then the public can 
comment on those and we can take feedback.
    Mrs. Kim. Okay. Mr. Hsu, in a bulletin issued on April 
26th, the OCC stated that because----
    Chairman McHenry. The gentlelady's time has expired.
    Mrs. Kim. Mr. Chairman, thank you so much. I yield back.
    Chairman McHenry. The gentlelady's time has expired. The 
gentleman from Nevada, Mr. Horsford, is recognized for 5 
minutes.
    Mr. Horsford. Thank you to the chairman and the ranking 
member for the hearing today and to our panelists for 
testifying.
    I want to begin by discussing Community Development 
Financial Institutions (CDFIs) and Minority Depository 
Institutions (MDIs), and what we are doing to expand and to 
protect them.
    According to the latest list of federally-certified CDFIs 
from April 14th, 2023, Nevada has only two CDFIs: the Greater 
Nevada Credit Union; and the Rural Nevada Development 
Corporation.
    Additionally, based on data available, there are zero 
chartered in the State of Nevada. This is completely 
unacceptable. It is something that I have been working with the 
Deputy Secretary of the Treasury on, and I hope that I can 
enlist your support today, particularly because Nevada is one 
of the most diverse and growingly diverse States. With a vital 
mission of supporting capital investments to historically-
excluded communities, these institutions are immense drivers of 
economic mobility.
    I know that the CDFI Fund has taken steps to overhaul its 
certification process after concerns were raised that certain 
firms were not truly focused on uplifting the communities that 
they are meant to serve. I think these need to be decertified, 
in fact.
    Vice Chair Barr, CDFIs and MDIs which serve small 
businesses and communities are feeling the pinch of tighter 
credit standards, and are also feeling a pinch of their own 
with investors and larger banks pulling back on lending. Does 
this trend signal to you that we need stronger incentives such 
as the Community Reinvestment Act so that banks are encouraged 
to make investments in those community financial institutions 
that I mentioned?
    Mr. Barr. Yes, I think you raise an important issue, and I 
have been working on ways to support the Community Development 
Financial Institution field and the MDI field for more than 25 
years. I think that they do absolutely critically-important 
work in serving their communities. The joint interagency 
proposal on the Community Reinvestment Act does increase the 
incentives on banks to serve local communities, including 
through support for CDFIs and MDIs, and I look forward to 
working with my colleagues here to finalize that rule.
    Mr. Horsford. Thank you.
    Chair Gruenberg, banking agencies are required under the 
law to preserve and promote Minority Depository Institutions. 
Are there reforms that the FDIC and Congress can consider to 
ensure resolution planning and resolution procedures provide 
better opportunities for MDIs to participate in the acquisition 
of a failing bank, perhaps through a joint bid or being able to 
take part of the business being sold?
    Mr. Gruenberg. Thank you, Congressman.
    That is an important issue to which we have devoted 
considerable attention. When we have had instances in which an 
MDI is going to come under stress and has a risk of failure, 
our resolution division works with other MDIs to see if we 
could facilitate an acquisition of the troubled institution by 
another MDI to ensure it continues its status and mission as a 
Minority Depository Institution.
    In regards to when a larger institution may enter 
resolution, there is an opportunity for MDIs to partner with 
other larger banks that may be interested in making the 
acquisition in order to participate, and that is something we 
also make part of our resolution process.
    Mr. Horsford. Thank you.
    Acting Comptroller Hsu, I read your written statement and I 
agree with your assessment on the importance of revitalizing 
MDIs. 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. You stated that the number 
of MDIs has decreased, and they have historically faced 
challenges with accessing capital, adopting new technology, and 
modernizing their infrastructures.
    In July of 2022, the OCC issued an updated policy statement 
on MDIs that reaffirms the agency's commitment to these 
institutions and describes the range of the programs in place 
to support MDIs. I am also aware of the Project REACh program 
that you have initiated. Can you elaborate on any other efforts 
the OCC has underway to support MDIs?
    Mr. Hsu. Sure. If I can just say a quick word on Project 
REACh, as part of that program, one of the four major 
workstreams is revitalizing MDIs. And one of the main tools we 
have used is a pledge from larger banks to commit capital and 
to commit technical assistance to MDIs as combined with the 
Emergency Capital Investment Program (ECIP) money and others. 
There is basically wind at the backs of some MDIs now, and we 
are looking to capitalize on that, working with larger 
institutions partnering with MDIs.
    Chairman McHenry. The gentleman's time has expired.
    The gentleman from Nebraska, Mr. Flood, is recognized for 5 
minutes.
    Mr. Flood. Thank you, Mr. Chairman.
    We have spent a lot of time today examining the specifics 
of the Federal Reserve's report on the collapse of the Silicon 
Valley Bank. That is a very important topic, no doubt. But I 
would like to focus my questions today on the FDIC's report on 
deposit insurance.
    Chairman Gruenberg, the FDIC's report on options for 
deposit insurance reform recommended an expansion of deposit 
insurance for business payment accounts. If business payment 
accounts were fully covered under deposit insurance, can you 
speak to how the FDIC would change banks' assessments to pay 
for the increased insurance?
    Mr. Gruenberg. Depending on the increase in the Deposit 
Insurance Fund, assessments would have to be increased to 
account for that, and that is really one of the tradeoffs here. 
If you are going to consider ways of expanding the coverage of 
deposit insurance, you really have to balance it against the 
cost to the industry of increased assessments.
    It is one of the reasons that among the options we 
reviewed, we thought that a targeted approach focused on 
business payment accounts, which is valued by businesses, 
valued by the banks for the relationships that they can develop 
with businesses, has particular promise because of the impact 
the failure of a bank with business accounts could impose; it 
could have financial stability implications. But because of the 
narrow nature of the account, if a bank has a business payment 
account, where they are a small business, it is really not in a 
position to open up multiple accounts. They really need the one 
account with the one bank.
    Mr. Flood. For the payroll, basically?
    Mr. Gruenberg. Yes, for the payroll. In terms of moral 
hazard, it is mitigated. In terms of financial stability, it is 
meaningful. So if you are going to look at increasing coverage, 
that was the place we thought it might make the most sense.
    Mr. Flood. And when you explain this, how are you thinking 
about community banks when it comes to these assessments? 
Obviously, Nebraska is full of really healthy, good community 
banks. They are talking to us about how they are going to 
weather this storm with potential assessments. How do you see 
that happening with this change in FDIC insurance?
    Mr. Gruenberg. Look, I think this kind of account would 
arguably be particularly beneficial to smaller institutions 
because they have close working relationships with small 
businesses. It is really their bread and butter, so being able 
to offer higher coverage for these business payroll accounts 
might have particular appeal.
    You really have to think through the costs associated in 
terms of, we want to go down this path where you might----how 
high you might want to go, how high the coverage might be.
    Mr. Flood. So when you go in and conduct an examination on 
one of these banks, do you have the resources now to be able to 
look at when your examiners go in there, and they start sifting 
through all of the different depositors of an institution, do 
you have the resources you need now to be able to effectively 
regulate this change in FDIC insurance? Or do you need more 
people for that?
    Mr. Gruenberg. Yes, that is an important question, and we 
highlight this in the report. If you are going to go down the 
path of considering higher coverage for business payment 
accounts, there is an issue of definition, and you want to be 
sure you have clarity so that we are covering the kinds of 
accounts that we are really intending to and, in a sense, don't 
broaden deposit insurance coverage for other kinds of accounts 
that really don't serve the purpose.
    So there will be, I think, an operational challenge in 
implementing it, and that is something to which our examiners 
would have to be attentive. It is one of the issues we would 
have to work through if we wanted to go down this road, and it 
would require a legislative change.
    Mr. Flood. And the last thing I wanted to talk about is if 
you make these changes, you have to regulate, you have to 
examine. I worry about increased compliance burden on the 
banks, on the insured institutions. I would caution that we 
have to remember these small community banks serve rural 
America very, very well, and any additional compliance 
expectations make it hard for a lot of these--take chartered 
banks that are serving an agricultural community--to exist.
    I will just give you a chance to react to that.
    Mr. Gruenberg. No, we are keenly attentive to that, and we 
do have some experience, as we outlined in the report. During 
the aftermath of the 2008 crisis, we did implement the 
Transaction Account Guarantee (TAG) program, which was a 
variation of this type of account, and it was extensively used, 
particularly by smaller community banks. And they found it 
quite beneficial.
    Mr. Flood. My apologies. My time has expired.
    I yield back.
    Chairman McHenry. The gentlelady from Michigan, Ms. Tlaib, 
is now recognized for 5 minutes.
    Ms. Tlaib. Thank you so much, Mr. Chairman.
    Everyone keeps talking about, could the regulators have 
been faster and more forceful? Absolutely. Did the Trump-era 
deregulation shield Silicon Valley from enhanced supervision 
oversight? No doubt about it.
    However, at the end, I want to talk about the real root 
cause of Silicon Valley's failure: It was their mismanagement 
and personal greed. And if you look at the timeline, 
gentlemen--I really want us to look at this--at the end of the 
day, as you can see, some of the decisions made by senior bank 
employees led to their downfall. And partly, these decisions 
were all shaped by compensation packages that incentivized 
unsound risk-taking. Would you agree, Vice Chair Barr?
    Mr. Barr. Yes, I do think that bank mismanagement was at 
the core of this.
    Ms. Tlaib. Yes.
    Mr. Barr. And in the incentive compensation plans that the 
board put forward, risk management was not included in that at 
the time the bank failed.
    Ms. Tlaib. Yes. Look at last year. The CEO's salary was 
roughly, what, $1 million? But then, he enjoyed over $5 million 
in stock awards and $2 million in stock options. During that 
time, did they get something from the Federal Government that 
said, hey, something is going on here? Didn't they, around that 
time? When did they get contacted by the Fed?
    Mr. Barr. With respect to their risk management issues?
    Ms. Tlaib. Yes.
    Mr. Barr. They were contacted throughout this period of 
time, beginning early in 2019, and in 2020, 2021, and 2022.
    Ms. Tlaib. That is right. So, in 2021, this is what he 
does. I was just asking because I am literally looking for the 
money. I am like, ``cha-ching, cha-ching.'' All I can see is 
personal gain here.
    This is not even on the table. There wasn't room for it 
regarding the $5 million, I think, stock exchange. But Mr. 
Becker has also earned $6 million since 2020 from bonuses based 
on the net income. In 2021, that meant an extra $3 million.
    As depicted in the slide, last year the Silicon Valley Bank 
unwound billions of dollars' worth of interest rate swaps. Is 
that correct?
    Mr. Barr. Yes, they did. They removed interest rate hedges.
    Ms. Tlaib. This does not make any sense in terms of 
protecting against rising interest rates, but it does make 
sense when your compensation depends on the bank's net income, 
or what we call in Detroit, ``a.k.a. personal gain for bank 
executives.''
    Terminating the swaps may have left them even more 
vulnerable to rate increases, but it boosted the bottom line 
likely out of red and into black. Why do you think they did 
that, Chairman Gruenberg?
    Mr. Gruenberg. For financial benefit, Congresswoman.
    Ms. Tlaib. That is right. No, I really want to make the 
American people understand what exactly happened because 
everybody is so focused on what you all did or did not do. But 
at the end, they didn't respond. Did they respond to any 
inquiries that you put in, Vice Chair Barr?
    Mr. Barr. The bank did respond to regulator citations but 
those responses were insufficient. They were not sufficiently-
timely and sufficiently-aggressive.
    Ms. Tlaib. My colleagues did talk about Section 956, and I 
know all of you are working on it. Correct? You all agreed that 
you are working on it, which is important. Because I really 
think you actually have the capacity and probably the legal 
authority to go ahead and claw back.
    Do you agree that part of this proposal that you are 
looking at in regards to implementing Dodd-Frank's Section 956 
regarding extreme compensation, bonuses, and so forth, is going 
to include a clawback?
    Mr. Barr. The proposal that was drafted in 2016 included a 
claw-back provision and----
    Ms. Tlaib. Are you all talking, yes or no, is a clawback 
going to be one of the things that you are going to include in 
your proposal?
    Mr. Barr. I will say personally I think having that kind of 
provision makes a lot of sense. We haven't reached a 
determination as a group.
    Ms. Tlaib. Yes. American people want you to do the 
clawback. Trust me.
    How about you, Chairman Gruenberg?
    Mr. Gruenberg. Yes, Congresswoman.
    Mr. Hsu. I think it is very important that we have a strong 
executive accountability. So, yes.
    Ms. Tlaib. Chairman Harper?
    Mr. Harper. Yes on clawback, and we need to make sure that 
it would have applied in those situations you described.
    Ms. Tlaib. Oh, absolutely. I think it is important because 
I am working on a bill right now, because, not that I don't 
trust you all, but I saw what happened in 2016. And so, I am 
working on a bill because it has been 12 years.
    And I want to work on establishing rules that literally 
curb the incentive compensation structures that also will help 
create kind of like a fund almost, and again, I would welcome 
your feedback. But it basically would require senior bank 
employees' compensation to be set aside to deferral funds and 
clawed back if executives break the law.
    Because this is like a scam. I know you all are not allowed 
to use that word, but I am going to use it. That is a scam. And 
no one is focused on the bank. They are focused on, oh, what 
should we do here?
    This is not the last bank that will do this because of 
greed, and we, the American people, are going to have to pay.
    Thank you. I yield back.
    Chairman McHenry. The gentleman from Ohio, Mr. Nunn, is now 
recognized for 5 minutes.
    Mr. Nunn. Thank you, Mr. Chairman. And I will submit that 
it is the great State of Iowa.
    Chairman McHenry. I'm sorry. The gentleman from Iowa.
    Mr. Nunn. Absolutely.
    Chairman McHenry. My apologies for the Chair's mumbling. 
The gentleman from Des Moines, Iowa, Mr. Nunn, is recognized.
    Mr. Nunn. Mr. Chairman, it's very much a privilege.
    And we are going to talk a little bit about Des Moines, 
Iowa, today. As a freshman on this committee, in the last 3 
months we have seen 3 massive bank failures.
    Last week, I got to take my 16-year-old out to get a first 
car loan. The scariest thing about your 16-year-old driving 
shouldn't be the question of, is my bank going to be there next 
month as a result of what has been going on here?
    I want to highlight the fact that everyone has now 
concluded on this committee that it is not fair for my small 
mom-and-pop bank in a place like Creston, Iowa, which has 96 
percent of its depositors insured, to pay for this risky 
lending behavior, particularly by banks like Silicon Valley 
Bank, where just over 1 percent were insured.
    So I want to begin, first of all, by applauding Chairman 
Gruenberg for heeding the advice of this bipartisan committee, 
as well as the work that you have done to ensure that small 
banks were not punished by the FDIC's special assessment.
    Mr. Chairman, I want to go a level deeper here. Do you 
think that, going forward, regular deposit insurance 
assessments should also factor in the unusually large levels of 
uninsured deposits? Why or why not?
    Mr. Gruenberg. I think the answer, frankly, is probably 
yes. It is one of the things we identify in our report on 
deposit insurance. One of the tools we have is risk-based 
pricing. And in light of this episode, we may want to consider 
increasing risk-based pricing based on levels of uninsured 
deposits. That is certainly something we have the authority to 
do and something we can look at.
    Mr. Nunn. And I appreciate you looking at that. I am going 
to take it to the next level then.
    Why should banks that are under more-conservative 
management or higher FDI like my rural guys in Iowa have to pay 
the same pro rata premium assessments as those banks that take 
on this greater risk?
    Mr. Gruenberg. They shouldn't, and we do have a risk-based 
pricing system. The challenge here is getting the risk-based 
pricing right. And for uninsured deposits, there may be a risk 
factor of which we need to take better account.
    Mr. Nunn. So is the FDIC prepared to take a more serious 
look at some of the risk-based calculations, and do you have a 
plan for how you are going to do that?
    Mr. Gruenberg. That was outlined in our report, and it is 
something on which we are going to follow through.
    Mr. Nunn. I am heartened by that, and again, I thank you 
for taking a holistic approach to that.
    Vice Chair Barr, last Friday, your fellow Governor, 
Michelle Bowman, gave a speech where she stated, ``We should be 
careful and intentional about any significant changes to the 
regulatory framework, including imposing new requirements that 
will materially increase funding costs like higher capital 
requirements.''
    She has agreed with many of us here on this committee that 
the bank failures that we saw were the direct result of 
mismanagement and supervision, not the current capital 
regulatory requirements that some on the other side of the 
aisle may say. Do you agree or disagree with Governor Bowman on 
her assessment?
    Mr. Barr. I agree that we should be careful and prudent in 
thinking about how to make capital changes. I do think it is 
appropriate for us to look at whether capital requirements for 
firms $100 billion and above are appropriate in the current 
circumstance.
    One area we are looking at in particular, for example, is 
whether we should use the rule that changes in the value of 
available-for-sale securities should be taken into account in 
the capital requirements. If we do make such a change, we would 
do that through a normal notice-and-comment rulemaking process 
with appropriate transitions. That is one example.
    Mr. Nunn. And I respect that example. My concern here is 
that, in the words of Winston Churchill, ``never let a good 
crisis go to waste.'' And I am concerned that the Fed 
specifically is looking at exploiting what has happened over 
the course of the last 3 months with these 3 banks as an 
opportunity to really open up the regulatory channels and start 
governing by fiat in a way that, really, it should be in the 
role of Congress.
    Would you agree that you are going to be caging yourself 
after this series of committees on what I think is really some 
regulatory overreach, given that there are three very unique 
banks here that don't reflect the larger financial sector?
    Mr. Barr. We will be looking at capital in the system as a 
whole. I began a holistic review of our capital requirements in 
July when I arrived. I think that it would be prudent for me 
and for my fellow regulators to take into account what just 
happened to our banking system rather than to close our eyes to 
that. So, I do think it is important----
    Mr. Nunn. I appreciate that, but I think Governor Bowman 
said it very clearly here. You have the capability to go after 
these banks. When Silicon Valley Bank took out a massive level 
of risk, when they had the opportunity to have a risk officer 
who was asleep at the switch or not even existent for 8 months, 
we had a diversity of other positions included, you had the 
ability to go after SVB. And as even my colleagues on the 
Democratic side have highlighted, those safeguards were not 
protected.
    So, I have a real concern when we think about exploiting a 
crisis to have more regulatory authority when you have those 
tools already in your toolkit.
    With that, I will yield back.
    Chairman McHenry. The gentleman from North Carolina, Mr. 
Nickel, is now recognized for 5 minutes.
    Mr. Nickel. Thanks so much to our witnesses for your 
testimony today. I appreciate you coming back, those of you who 
did, for the second time in 2 months.
    Vice Chair Barr, Chairman Gruenberg, I also want to thank 
you for your hard work in reviewing the recent bank failures 
and keeping the committee informed, and for being here for 
quite a while today. I know we are near the end, and it has 
certainly been a long day.
    As I told you the last time you were here, my constituents 
are worried about making ends meet, and the last thing they 
need to worry about is their bank failing. I am looking for 
more accountability. That is really the focus of my first set 
of questions here, Vice Chair Barr. My constituents deserve to 
know that we will hold bank executives and regulators 
accountable and ensure that this doesn't happen again.
    Vice Chair Barr, the Fed's report says that supervisors, 
``did not fully appreciate the extent of the vulnerabilities as 
Silicon Valley Bank grew in size and complexity and did not 
take sufficient steps to ensure that SVB addressed its problems 
quickly.'' And I asked you this the last time about 
accountability, who was asleep at the wheel? Now that you have 
had more time to review this matter, can you tell me about 
individual accountability?
    Mr. Barr. Ultimately, I am accountable for ensuring that 
our supervision and regulation is effective. It was not in this 
case. And I can tell you I am committed to making significant 
changes to make sure that doesn't happen again.
    Mr. Nickel. Was anyone fired?
    Mr. Barr. There have not been any employees of the Federal 
Reserve fired as a result of this. We did not find any 
unethical conduct. We did find judgments that could have been 
better and actions that could have been stronger, and as I 
said, I am committed to fixing that.
    Mr. Nickel. Thank you. I would like to move on to capital 
requirements.
    This morning, I received your answers to my questions for 
the record from our last hearing, and I have some follow-ups. 
Access to capital for small businesses, especially minority-
owned businesses, is one of my top priorities. There is a 
thriving community of startups in my district. Many of the 
biotechnology companies which are saving, extending, and 
improving lives rely on banks for capital.
    I am alarmed by increasing reports of a credit crunch, 
particularly for small business owners and minority business 
owners who are likely to be hit hardest by this. The Basel III 
Endgame rule expected later this year will materially increase 
the capital requirements for banks. This will limit these 
banks' ability to lend into the economy and support capital 
formation in areas like mine in North Carolina.
    Just to be clear, Vice Chair Barr, banks under $100 billion 
will not be subject to increased capital requirements?
    Mr. Barr. That is right. The focus of our reform efforts 
with respect to capital is on banks over $100 billion in size, 
and the potential significant increases in capital requirements 
are really focused on very large firms with very large trading 
operations, not with respect to smaller firms serving small 
businesses.
    Mr. Nickel. Have you considered the impact that higher 
capital requirements might have specifically on minority-owned 
businesses that already face significant barriers to accessing 
capital?
    Mr. Barr. Yes. We look at the impact of a rule across-the-
board, including its effect on small business lending, when 
making adjustments. As I said, the adjustments we are thinking 
about with respect to the Basel III Endgame that the agencies 
together are considering are primarily about significant 
adjustments to the trading book for the very largest financial 
institutions in the country. They are not about small 
businesses' access to credit.
    Mr. Nickel. Specifically, though, I am asking about the 
impact capital requirements will have on minority small 
business owners. Have you conducted any analysis in your 
holistic review on this?
    Mr. Barr. We don't currently anticipate that the kinds of 
changes that we are talking about would affect the institutions 
you are talking about. We are really focused on capital 
requirements on the largest institutions in the country which 
have very active trading books and that is primarily driving 
the changes in Basel III Endgame.
    Mr. Nickel. When we consider the structural barriers for 
minority entrepreneurs--the rising rate environment, inflation, 
and again, reports of a credit crunch--do you think this is 
really the best time to get into raising capital requirements?
    Mr. Barr. As I have said, any rulemaking that the agencies 
do would be a formal notice-and-comment rulemaking with an 
appropriate transition period. So, we are not trying to design 
capital requirements for tomorrow. We are thinking about in 
several years, what should capital requirements look like when 
fully implemented?
    Mr. Nickel. Thank you so much. And Mr. Chairman, I yield 
back.
    Chairman McHenry. The gentleman yields back. The 
gentlewoman from Texas, Ms. De La Cruz, is recognized for 5 
minutes.
    Ms. De La Cruz. Thank you so much, Mr. Chairman.
    And thank you to all the witnesses for being here today.
    I would like to start with Vice Chair Barr. One of your 
Federal Reserve colleagues, Governor Bowman, echoed some 
concerns in recent remarks when she said, ``The unique nature 
and business models of the banks that have recently failed, in 
my view, do not justify imposing new and overly-complex 
regulatory and supervisory expectations on a broad range of 
banks.
    ``If we allow this to occur, we will end up with a system 
of significantly fewer banks serving significantly fewer 
customers. Those who will likely bear the burden of this new 
banking system are those at the lower end of the economic 
spectrum, both individuals and businesses.''
    Do you agree with her assessment?
    Mr. Barr. I don't agree with that assessment. I think that 
capital in general is facilitating strong lending to all 
communities, and having strong capital in the system is 
critical for doing that.
    Of course, for any changes that we propose, we are talking 
about the largest institutions in the country, institutions 
with over $100 billion in assets. The kinds of capital 
requirements that we are talking about are requirements that 
would help those firms better account in their capital for 
their actual risk, such as making changes in the way unrealized 
losses and gains from securities are treated for capital 
purposes.
    And the kinds of changes that we are talking about would be 
implemented after a formal notice-and-comment rulemaking and 
with appropriate----
    Ms. De La Cruz. I reclaim my time. How long has Governor 
Bowman served in this capacity?
    Mr. Barr. I actually don't know when she arrived at the 
Board.
    Ms. De La Cruz. Okay. Let me move on to something else, 
because I am on a time crunch here.
    In your assessment and in the report that you gave, you 
made a comment that supervisors recognized a gradual increase 
in liquidity and market risk, but they did not fully appreciate 
the risks associated with the concentrated deposit base or 
SVB's investment portfolio strategy.
    Vice Chair Barr, what did you mean by, ``did not fully 
appreciate?''
    Mr. Barr. I think you can see from the findings of our 
report that supervisors saw, for example, the procedural 
problems with interest rate testing and liquidity testing but 
did not see fully the vulnerability of the firm as a whole. And 
that is an area in which I think we need to do better.
    Ms. De La Cruz. You said nobody has been fired for their 
lack of appreciation, is that correct?
    Mr. Barr. Yes, at this time, nobody has been fired. As I 
mentioned, we are looking across our supervisory system to make 
sure that it is functioning well, and that we have the right 
tools at the supervisors' disposal.
    Ms. De La Cruz. Sure, I did hear that, and I thank you for 
your comment. I think, as a small business owner myself, when 
someone makes a mistake of this magnitude, we need to act 
quickly. And someone not fully appreciating the problem cost 
American taxpayers. It has put us all here today. And it is a 
situation where someone does need to be fired for their lack of 
appreciation.
    With that, I yield back.
    Chairman McHenry. The gentlelady yields back.
    We have a vote series on the House Floor. That is two 
votes, PQ and Rule. We will take a brief recess until 
immediately following votes.
    The committee stands in recess.
    [recess]
    Chairman McHenry. The committee will come to order. And I 
want to thank the panel for waiting, and I hope they were able 
to get a brief lunch break during that long vote series.
    We will now go to Ms. Williams of Georgia for 5 minutes.
    Ms. Williams of Georgia. Thank you, Mr. Chairman.
    And thank you to all of our witnesses here today.
    It is not lost on me that on the other side of the Capitol, 
the executives of the failed Silicon Valley Bank and Signature 
Bank have been testifying before our colleagues in the Senate 
and sharing their different perspectives from the regulators 
before us today.
    From my relatively short time in Congress, I have learned 
that conversations often happen in silos, while powerful 
stakeholders point fingers and the most-marginalized become 
collateral damage. I hope today's hearing connects the dots and 
paints a more complete picture for my constituents and all 
Americans who are concerned about the stability of the banking 
sector.
    Mr. Barr, the former CEO of SVB, Greg Becker, testified in 
the Senate that SVB's growth accelerated because of the 
government stimulus measures in response to the COVID-19 
pandemic and near-zero interest rates designed to stimulate 
economic activity during the pandemic. Becker also pointed to 
the Fed's perceived signaling that they would keep rates low as 
the reason why his institution invested in U.S. Treasuries, 
which lost value when the Fed raised rates rapidly.
    Essentially, Mr. Becker argued that the Fed's monetary 
response to the pandemic influenced the decisions SVB made, and 
those decisions were to blame for the sizable hole that 
developed on SVB's balance sheet.
    As a Member of Congress who received text messages from 
constituents worried about meeting payroll on March 15th, I 
want to ensure that we don't lose sight of the impact that 
these failures have had and can still have on marginalized 
communities. We should thoroughly investigate this matter to 
understand what went wrong so that we can take steps to ensure 
that this does not happen again.
    Mr. Barr, do you agree with Mr. Becker's assertions that 
the government's pandemic response and the Fed's monetary 
policy forced his bank to rapidly double in size? And if this 
were true, why didn't all other banks experience rapid asset 
growth and double in size?
    Mr. Barr. Thank you very much for the question.
    SVB's growth was significantly in excess of the sector's 
average over that time period. They grew dramatically for a 
wide variety of reasons, but the basic point is that as they 
were growing, they failed to manage their risks. They failed to 
manage interest rate risk. They failed to manage liquidity 
risk. Those are the obligations of the bank to undertake, and 
they failed to do that.
    Ms. Williams of Georgia. Others have raised concerns that 
two very important Fed functions, its monetary policymaking and 
its bank supervision, were not successfully communicating, 
which can have obvious implications for ordinary Americans who 
rely on a healthy banking system, especially when there is a 
crisis that ultimately disproportionately impacts vulnerable 
and marginalized consumers.
    For example, the Fed conducted regular stress testing of 
the largest banks but rarely tested the rising interest rate 
environment that we have been in in the past year. Mr. Barr, 
what steps can the Fed take to better manage their dual 
responsibilities of bank regulation and monetary policy?
    Mr. Barr. Thank you for that.
    Obviously, when we are looking at monetary policy, we 
consider the economic impacts of bank stress. We anticipate, 
for example, that there will be additional credit tightening 
coming into the system. We take that into account with respect 
to monetary policy. And on the supervision side, supervisors 
are, of course, well aware and have been well aware since the 
fall of 2021 that we are and will be in a rising interest rate 
environment.
    It is the responsibility of bank managers to take that 
circumstance into account in managing their interest rate risk. 
Supervisors did test for interest rate risk at Silicon Valley 
Bank. Silicon Valley Bank was failing its own internal stress 
test for interest rate risk, and rather than adequately 
mitigating that, they tried to change their test so it would be 
less conservative. They took off their interest rate hedges 
that would have helped to protect them somewhat from rising 
rates.
    And so it is just, as I have said, a textbook case of bank 
mismanagement.
    Ms. Williams of Georgia. I want to zoom out and look at 
this a bit more broadly. Mr. Barr, how often and with what 
level of scrutiny does the Fed consider impacts of its 
supervisory and monetary decisions broadly on marginalized 
consumers and people of color?
    Mr. Barr. We do take those considerations into account when 
thinking about our monetary policy. Obviously, there are 
differential unemployment effects, for example, in Black and 
Brown communities compared to White communities. But that is 
part of our thinking about how the economy is doing as a whole.
    And similarly, with respect to supervision, particularly 
when we are looking at performance under the Community 
Reinvestment Act, we are looking at how well banks are serving 
low- and moderate-income communities.
    Ms. Williams of Georgia. Mr. Barr, and the rest of our 
witnesses, I am going to run out of time here, but in most 
hearings I bring up the fact that Atlanta is the City with the 
largest racial wealth gap in the country. And if you all are 
tired of hearing me talk about it, I can assure you that Black 
Atlantans are tired of living it.
    So, I have more questions that I would very much like 
answers to in writing for the record.
    Thank you so much, and I yield back, Mr. Chairman.
    Chairman McHenry. I thank the gentlelady for yielding back. 
We will now recognize the gentleman from Tennessee, Mr. Ogles, 
for 5 minutes.
    Mr. Ogles. Mr. Chairman, thank you.
    And to our panelists, our guests, we appreciate you. I know 
it has been a long day. And obviously, it has been a tough few 
months.
    Just jumping right in, Mr. Gruenberg, in remarks you made 
in March to the Institute of International Bankers, you noted 
that the banks had suffered unrealized losses to the tune of 
about $620 billion in their held-to-maturity assets. In your 
review of the FDIC's supervision of Signature Bank, did you 
find that the supervisors were aware of the unusual scale of 
the interest rate risk and the liquidity risk in the banking 
system?
    Mr. Gruenberg. Yes, Congressman. I think the report done by 
the Chief Risk Officer of the FDIC identified that the 
examiners were aware of the issues, and provided guidance and 
direction to the institution. And the report acknowledges that 
the institution was not timely or responsive.
    I think the issue raised is when you have an institution, 
unlike most, that is not responsive to supervisory guidance and 
direction, your supervisors need to take the next steps in 
order to compel compliance to deal with unsafe and unsound 
matters. And I think in this case that didn't happen, and I 
think that is perhaps the key finding of the report.
    Mr. Ogles. Yes, sir. And then, Mr. Barr, same question as 
pertains to SVB. Were they aware of the unusual risk at hand?
    Mr. Barr. Yes. The SVB report that we issued found that 
supervisors identified interest rate risk and liquidity risk 
that the bank was vulnerable to and conveyed to the firm the 
necessity of addressing those risks. The bank did not respond 
in a timely way, and supervisors did not escalate that matter 
quickly enough before the bank failed.
    Mr. Ogles. And that is kind of the point that I want to hit 
on for the two of you. Is there anything in current regulation 
that would have prohibited the ability for supervisors to 
escalate and/or compel compliance?
    Mr. Barr. No, they are not restricted under our current 
approach from doing that. I think the question is whether we 
can better design our supervisory system so that they have both 
the skills and the tools and the incentives to do that 
promptly.
    Mr. Ogles. Mr. Gruenberg?
    Mr. Gruenberg. I agree with that, Congressman. Examiners 
had the authority. It was a matter of exercising it.
    Mr. Ogles. Obviously, we have regulations, and we have 
rules. Is there anything in the rules that prohibited the 
escalation or the compliance?
    Mr. Barr. With respect to our regulatory structure, the 
standards that supervisors were meant to apply to the firms 
changed as the firm grew. So in the early phases of its growth, 
the supervisory standards by our rules were lower. Those would 
have, in effect, delayed application of higher standards by 
about 3 years----
    Mr. Ogles. Until they met that threshold, right?
    Mr. Barr. I'm sorry?
    Mr. Ogles. Until they met that threshold, that next level, 
right?
    Mr. Barr. Until they met that threshold. And then, partly 
because of our rules, there was a transition period in the 
rules that was both complex and perhaps too long that made it 
difficult for supervisors and the bank to know precisely when 
they should meet that higher standard.
    Mr. Ogles. And that is a great point. I think as we look at 
the regulatory structure, the rules between the--obviously, we 
are talking about California and New York, and I want to 
caution any request for further regulation or for further 
rulemaking when I think what we need to do is do a deep 
analysis of, how do we improve the current system?
    I think I have said it once, and I will say it again, and I 
will probably use it over and over again: President Reagan 
cautioned that the scariest phrase in the English language is, 
``I am from the government, and I am here to help.''
    And oftentimes, when we take action or take action by rule, 
there are unintended consequences. We have a system in place, 
and you have two different agencies that, quite frankly, failed 
to escalate under the current environment, right? You have 
trillions of dollars going into the economy. You know that 
there is going to be the risk of capital flight because of the 
change in the bond and interest rates. Where were the 
regulators? They were asleep at the wheel, quite frankly.
    What can we do to create a culture and an environment--
maybe, it is more training. I don't know what it is. That is 
your job, right? But I just want to say that you don't ask for 
more authority when, quite frankly, in my opinion, you didn't 
leverage the authority you had appropriately, and now we have 
this huge systemic loss amongst the top tier of our banking 
system, which is creating uncertainty amongst all the banks.
    I have urban, suburban, and rural areas in my district, and 
my community banks are worried about what you all may do with 
that downward pressure, not to mention the whole tightening of 
the credit market.
    Mr. Chairman, I yield back.
    Mr. Meuser. [presiding]. The gentleman yields back. The 
gentleman from Texas, Mr. Green, is now recognized for 5 
minutes.
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Chairman, I am just amazed at the language that I am 
hearing here today. We are an oversight committee for banks, 
and one would think that we are of the opinion that the way you 
perform oversight is to punish the regulator. I am just amazed 
that we should take actions to deter bankers from taking 
unreasonable risks and then walking away with the reward. That 
is what we should be doing.
    Making speeches about regulatory overreach is not going to 
prevent this kind of unreasonable behavior. Talking about 
regulators being accountable won't do it, or firing regulators. 
There is no talk about firing bankers for unreasonable 
behavior. No talk about punishment for bankers for what they do 
to create the crisis.
    Ultimately, the bankers were the people who committed the 
offense. They are the ones who are exposed to liability. The 
regulators have a job to do, but their job is not that of 
banking themselves. It is the bankers who have to be held 
accountable and liable. Regulators have no liability here.
    I am just amazed. This whole hearing has been about 
maintaining the status quo, a status quo that has given us what 
we have today that is causing us to be here. Don't overreach. I 
don't know, is there a term, ``underreach?'' It seems as though 
we are proposing to make sure we underreach.
    Don't do anything to create a means by which bankers might 
be punished. No talk about how will this committee work toward 
improving fines and regulations such that bankers can be 
punished for this kind of behavior.
    The public wants to know what is going to happen to the 
bankers, the people who took this unreasonable risk. There is 
no evidence that anything will happen, if you listen to this 
body today. And these are my friends. I love them all, but they 
are wrong.
    At some point, reality has to become a part of a hearing, 
and the reality is the bankers knew of the risk, didn't have 
risk management facility in place, made a lot of money by 
giving themselves bonuses at or near the time the bank failed, 
by the way, and they walked away. And they are probably out 
getting other jobs. There is no talk about what is going to 
happen to them.
    I am just amazed. So, here is where I land on this. If we 
fail to do what is necessary to claw back this money that they 
received as bonuses at or near the time the bank failed, we 
will have done the public a disservice. We will have done 
banking a disservice. That is our job. We are not here to 
protect the bankers, to make sure that they get off scot-free.
    It is time for us to do our job. Let me just simply ask 
this one question. The GAO official who was before us recently 
said as much, but I want to find out if you agree. He said, 
ultimately, at the end of the day, it is the bank that is 
responsible for what happened. At the end of the day, the bank 
is responsible for what happened.
    And I would add that the bank is liable. Do you agree with 
this, that the banks are responsible for what happened? Since 
my time is about to expire, if you agree that the banks are 
responsible, just do this, extend a hand into the air, it 
doesn't matter whether it is your right or left hand.
    [Show of hands.]
    Mr. Green. Let the record reflect that all of the members 
of the panel extended a hand into the air.
    The banks are responsible. And as responsible agents, they 
have to be put in check. That is our job, and I plan to do my 
job.
    Mr. Chairman, I will yield back to you some 5 seconds.
    Mr. Meuser. The gentleman yields back. I now recognize 
myself for 5 minutes.
    Thank you again, gentlemen.
    Mr. Barr, may I ask you, do you feel the San Francisco Fed 
did a good job related to SVB?
    Mr. Barr. The report that we released suggests that both 
the Board in Washington and the San Francisco Fed did not hold 
up the bank with enough pressure, did not force the bank to act 
with enough pressure to act quickly enough.
    Mr. Meuser. Okay. Did anyone at the bank or at the Fed--
there is a lot of blame to be put on S. 2155. Do you think S. 
2155 is to blame? And at the same time, isn't it true that when 
there are red flags waving like they were from SVB, the Fed has 
discretion to investigate further, regardless of S. 2155?
    Mr. Barr. The 2018 law does give the Federal Reserve 
significant discretion to implement the law. And in the case of 
the 2019 tailoring rules that resulted, the report found that 
it did inhibit the Federal Reserve's ability to take action in 
a prompt enough way, and that is why we are looking at changing 
those rules. But we can do that within our existing authority.
    Mr. Meuser. You said two things. But the fact is that the 
Fed had discretion when you see significant problems taking 
place, regardless of S. 2155?
    Mr. Barr. Yes, I agree with that, and the report finds as 
much.
    Mr. Meuser. And Mr. Barr, you also stated earlier how 
important it is to have a full range of banks--community, 
regional, super-regional, mega.
    Mr. Gruenberg, do you agree with that?
    Mr. Gruenberg. I do, Congressman.
    Mr. Meuser. Okay. We are hearing even from some large banks 
that, ``The problem with regional banks is that regulators 
think we are too-big-to-fail, but too-small-to-succeed.''
    What do you say about that statement, Mr. Gruenberg?
    Mr. Gruenberg. As a general matter, the regional bank 
sector in the United States is highly competitive and has done 
quite well and really fills a very important niche in the 
financial market. We have had issues with these institutions 
which are very serious, but as a general proposition, I think 
the regional banks are a source of strength for our banking 
system as a whole.
    Mr. Meuser. Do you feel the FDIC is doing much or doing 
anything to give regional banks equal treatment to the 
megabanks?
    Mr. Gruenberg. Yes. And if anything, I think the prudential 
requirements that apply to the so-called G-SIBs, or the largest 
institutions, on balance are a bit more stringent than on the 
regional institutions.
    Mr. Meuser. Okay. Regarding the special assessment proposed 
plan, I was reviewing it, and I have a couple of questions. We 
understand that under $5-billion bank deposits are exempt. 
Okay, that is very good. Community banks really appreciate 
that.
    Let us say there is a regional bank--and I am just being 
hypothetical here--that has $205 billion in deposits. The new 
fee on top of the current fees is 12.5 basis points or 0.125. 
So, basically, that bank of $205 billion in deposits is now 
looking at a quarterly payment on 0.125 percent of $200 
billion, which is $240 million.
    The same bank, again, hypothetical, usually makes about 10 
percent, so their net income is about $2.5 billion. So, this 
new assessment is nearly 10 percent of the net income of that 
hypothetical regional bank I just outlined. They are paying for 
SVB's malfeasance, First Republic's terrible mismanagement, and 
Signature, for whatever occurred there. That is a significant 
hit, nearly 10 percent of their annual net income.
    Mr. Gruenberg. I would have to go through the arithmetic of 
your example. I can tell you as a general proposition, we 
estimate that the special assessment will have a 1-quarter 
impact on earnings of the affected institutions on average of 
17.5 percent, and then the payment would be stretched out over 
an 8-quarter period. So, the liquidity impact----
    Mr. Meuser. I have some questions there. First, did you get 
any feedback from the regionals as to something like, could 
they handle this? Second, why not an extended period of time as 
opposed to four quarters? And third, why not a graduated or 
progressive fee, which might be more fair?
    Mr. Gruenberg. One, this actually is a proposal, and we 
have put it out for public comment. So, there will be an 
opportunity for all banks to comment on the proposal, and we 
will get their feedback and that will be important. And then, 
the payment is stretched out actually over 8 quarters, over a 
2-year period.
    Mr. Meuser. Okay. My time has expired.
    The gentlewoman from Indiana, Mrs. Houchin, is now 
recognized for 5 minutes.
    Mrs. Houchin. Thank you, Mr. Chairman.
    Vice Chairman Barr, companies across the country, including 
in southern Indiana, have been dealing with the inflationary 
effects of rampant spending. When combined with supply chain 
issues and the lingering aftereffects of the pandemic, 
businesses are currently navigating what is already a fragile 
economy.
    Given these realities, do you believe that increasing 
borrowing costs through higher capital requirements for 
regional banks is a good thing?
    Mr. Barr. Thank you very much for the question.
    We are talking about changes to our capital rules that 
would take many years to be fully effective. We are not looking 
to change capital rules tomorrow. We are talking about issuing 
a proposal, a notice for comment that would then lead to a 
final rule and a phase-in and implementation period. In 
general, strong capital requirements for banks leads to more 
lending throughout the cycle, not less.
    Mrs. Houchin. Have you taken any feedback or engaged with 
small business stakeholders to determine the impact on jobs and 
economic growth that your holistic review of capital will have?
    Mr. Barr. Any rule that we propose would, of course, be a 
proposal, and then we would get feedback from the public, 
including if the small business community wanted to provide 
comment on that rule, we would be able to receive that comment 
and respond appropriately to it.
    Mrs. Houchin. Vice Chairman Barr, there are privately-
insured credit unions in communities across the country, 
including in Indiana. While these financial institutions play 
an important role in their communities, they do not have access 
to the Fed's Bank Term Funding Program (BTFP) if they face an 
unexpected demand for deposit withdrawals. All financial 
institutions are susceptible to liquidity issues, but not all 
financial institutions are able to access this liquidity.
    Mr. Barr, as my colleague asked you earlier, was there a 
reason why these institutions were left out of consideration 
for the Fed's BTFP?
    Mr. Barr. At the time of the announcement, we were quite 
focused on federally-insured institutions and the stresses that 
they were under. We are not currently contemplating changing 
that facility at this time.
    Mrs. Houchin. My next question is, do you have plans to 
open access to BTFP to privately-insured credit unions? It 
sounds like you don't have any plans to do that. Why not?
    Mr. Barr. Changing the facility would require a new 
determination, and we haven't seen evidence with respect to 
privately-insured credit unions that would justify that kind of 
movement at this time.
    Mrs. Houchin. Is it something you would consider if they 
faced the same types of liquidity issues we have seen?
    Mr. Barr. I don't really want to get into hypotheticals 
about what the facts and circumstances might be.
    Mrs. Houchin. Chairman Gruenberg, last week the FDIC issued 
a proposed rule on the special assessment that was made 
necessary by the systemic risk exception for the SVB and 
Signature Bank failures. Would you provide insight on how the 
FDIC Board determined the parameters for this proposed special 
assessment to replenish the Deposit Insurance Fund?
    Mr. Gruenberg. Yes, Congresswoman, thanks for the question.
    The proposal was really developed by our Division of 
Insurance and Research at the FDIC, which is responsible for 
managing the Deposit Insurance Fund. And they developed the 
proposal, I think with a couple of things in mind.
    Under the statute, we are required to impose a special 
assessment to make up for the cost to the Deposit Insurance 
Fund under the systemic risk exception, and we have the 
authority to target the special assessment on those 
institutions that benefitted the most from the systemic risk 
exception. The systemic risk exception was targeted on 
uninsured deposits. So, I think in crafting the special 
assessment, that was really the baseline. The institutions that 
had the most uninsured deposits would pay the most out. 
Although built into that was an exception for the first $5 
billion of uninsured deposits, because it was pretty clear that 
community banks were really not part of the issue here. And as 
a general matter, they have a lower concentration of uninsured 
deposits.
    So, that was really the framework that was then proposed to 
the board, and that we acted on.
    Mrs. Houchin. Thank you. I was certainly glad to see that 
smaller community banks, which had nothing to do with SVB or 
Signature Bank failures, were not on the hook for the failures 
of management or supervisors. Thank you for that. I encourage 
you to continue in that regard.
    Quickly going back to Mr. Barr, on this issue of privately-
insured credit unions, why are they being held to a different 
standard or provided with less opportunity than other 
institutions?
    Mr. Barr. As I said, at the time the stress in the banking 
system that we were faced with was focused in federally-insured 
depositories.
    Mrs. Houchin. How are they different? My time is expiring.
    Mr. Harper. Congresswoman, if I could, just for one second? 
The Central Liquidity Facility at the NCUA is another option. 
Privately-insured credit unions are eligible at that facility, 
although I recognize that the Bank Term Funding Program has a 
better underwriting system simply because collateral is pledged 
at par as opposed to discounted for unrealized losses.
    Mrs. Houchin. Thank you. I would encourage you to allow the 
privately-insured credit unions to participate.
    Thank you. I yield back.
    Chairman McHenry. I want to thank the panel for being here 
today for a long day. I would encourage each of you, if you 
would, to please respond to Members' questions for the record 
in a timely fashion.
    Mr. Barr, we are still waiting for your responses from the 
last hearing. As you know, I mentioned this on the phone call 
yesterday: With college, work begets more work. And if you get 
behind, it is tough to catch up. I want you to catch up.
    But we commend you all for the responsiveness to our 
Members, and I want to thank all of you.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    And I would ask our witnesses to respond no later than June 
16th.
    I want to thank the panel again for your testimony, and 
this hearing is adjourned.
    [Whereupon, at 2:54 p.m., the hearing was adjourned.]

                            A P P E N D I X



                              May 16, 2023
                              
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