[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
A HOLISTIC REVIEW OF REGULATORS:
REGULATORY OVERREACH AND
ECONOMIC CONSEQUENCES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND MONETARY POLICY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 19, 2023
__________
Printed for the use of the Committee on Financial Services
Serial No. 118-48
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
54-179 PDF WASHINGTON : 2024
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, Vice EMANUEL CLEAVER, Missouri
Chairman JIM A. HIMES, Connecticut
TOM EMMER, Minnesota BILL FOSTER, Illinois
BARRY LOUDERMILK, Georgia JOYCE BEATTY, Ohio
ALEXANDER X. MOONEY, West Virginia JUAN VARGAS, California
WARREN DAVIDSON, Ohio JOSH GOTTHEIMER, New Jersey
JOHN ROSE, Tennessee VICENTE GONZALEZ, Texas
BRYAN STEIL, Wisconsin SEAN CASTEN, Illinois
WILLIAM TIMMONS, South Carolina AYANNA PRESSLEY, Massachusetts
RALPH NORMAN, South Carolina STEVEN HORSFORD, Nevada
DAN MEUSER, Pennsylvania RASHIDA TLAIB, Michigan
SCOTT FITZGERALD, Wisconsin RITCHIE TORRES, New York
ANDREW GARBARINO, New York SYLVIA GARCIA, Texas
YOUNG KIM, California NIKEMA WILLIAMS, Georgia
BYRON DONALDS, Florida WILEY NICKEL, North Carolina
MIKE FLOOD, Nebraska BRITTANY PETTERSEN, Colorado
MIKE LAWLER, New York
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee
Matt Hoffmann, Staff Director
Subcommittee on Financial Institutions and Monetary Policy
ANDY BARR, Kentucky, Chairman
BILL POSEY, Florida BILL FOSTER, Illinois, Ranking
BLAINE LUETKEMEYER, Missouri Member
ROGER WILLIAMS, Texas NYDIA M. VELAZQUEZ, New York
BARRY LOUDERMILK, Georgia, Vice BRAD SHERMAN, California
Chairman GREGORY W. MEEKS, New York
JOHN ROSE, Tennessee DAVID SCOTT, Georgia
WILLIAM TIMMONS, South Carolina AL GREEN, Texas
RALPH NORMAN, South Carolina JOYCE BEATTY, Ohio
SCOTT FITZGERALD, Wisconsin JUAN VARGAS, California
YOUNG KIM, California SEAN CASTEN, Illinois
BYRON DONALDS, Florida AYANNA PRESSLEY, Massachusetts
MONICA DE LA CRUZ, Texas
ANDY OGLES, Tennessee
C O N T E N T S
----------
Page
Hearing held on:
September 19, 2023........................................... 1
Appendix:
September 19, 2023........................................... 33
WITNESSES
Tuesday, September 19, 2023
Petrou, Karen, Managing Partner, Federal Financial Analytics,
Inc............................................................ 5
Scott, Hal S., Emeritus Professor, Harvard Law School............ 4
Tahyar, Margaret E., Partner, Davis Polk & Wardwell LLP.......... 7
Valladares, Mayra Rodriguez, Managing Principal, MRV Associates.. 8
APPENDIX
Prepared statements:
Petrou, Karen................................................ 34
Scott, Hal S................................................. 44
Tahyar, Margaret E........................................... 58
Valladares, Mayra Rodriguez.................................. 68
Additional Material Submitted for the Record
Valladares, Mayra Rodriguez:
Written responses to questions for the record from
Representative Barr........................................ 110
A HOLISTIC REVIEW OF REGULATORS:
REGULATORY OVERREACH AND
ECONOMIC CONSEQUENCES
----------
Tuesday, September 19, 2023
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Monetary Policy,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:03 p.m., in
room 2128, Rayburn House Office Building, Hon. Andy Barr
[chairman of the subcommittee] presiding.
Members present: Representatives Barr, Posey, Luetkemeyer,
Williams of Texas, Loudermilk, Rose, Timmons, Fitzgerald, Kim,
De La Cruz, Ogles; Foster, Sherman, Scott, Green, Beatty,
Vargas, and Pressley.
Ex officio present: Representative Waters.
Chairman Barr. The Subcommittee on Financial Institutions
and Monetary Policy will come to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
Today's hearing is entitled, ``A Holistic Review of
Regulators: Regulatory Overreach and Economic Consequences.''
I now recognize myself for 5 minutes to give an opening
statement.
Last week, we began a discussion of the so-called Basel III
Endgame proposal put forward by Federal banking agencies.
Today, we continue that discussion, noting the fact that
numerous other proposals have come out of the Democrat-
appointed Federal banking regulators over the past couple of
months, with promises of more to come. The Basel-related
proposal is incorrectly pushed as a response to the March
banking instability and has been delivered in an underdeveloped
and hurried fashion and, in many crucial areas, is glaringly
arbitrary and capricious.
Following the Basel III and Global Systemically Important
Banks (G-SIB) surcharge proposals from the Federal Reserve,
certain regulatory officials wasted no time in their never-let-
a-crisis-go-to-waste approach to rulemaking and guidance
shifting. Added to the regulatory onslaught have been proposals
on long-term debt and resolution planning. In speeches, agency
officials have signaled that more are on the way. A full-scale
rushed and undeveloped rewrite of the rules of the road for the
U.S. financial system is not warranted. That is especially so
as officials, including those making recent proposals and
stress tests, repeatedly say that U.S. banks are well-
capitalized and resilient.
While multiple proposals have been put forward and more are
likely on the way, Congress and the American people have been
left out of the information flow. Indeed, Members of Congress
on both sides of the aisle have requested quantitative
analysis, including cost-benefit analysis of the Basel-related
capital proposal, but we have been ignored. No one knows
whether or how all of the recent proposals work together, and
we have no indication from the Fed, the FDIC, or the OCC--which
are populated with armies of economists, analysts, supervisors,
and examiners--of their cumulative impact to the U.S. financial
system.
Neither Congress, nor the industry being regulated, nor the
American people, including consumers, families, small
businesses, farmers and ranchers, and municipalities, knows
what to expect from the incredibly complex, interconnected, and
hazy web of what has been proposed. The risks of working
hastily without analytical support are high and systemic. The
process of rolling out the under-analyzed Basel-related capital
proposal shows clear violations of the Administrative Procedure
Act (APA), thereby running counter to the law. That proposal
also contains a repeal by rule writing of the bipartisan S.
2155 tailoring law, done so for partisan reasons.
There are some elements of the proposals for long-term debt
resolution planning and G-SIB surcharges that are worthy of
discussion and analysis, but a shotgun total rewrite of the
regulatory rules of the road is reckless and systemically
risky. And that doesn't even take into account the avalanche of
rules that are coming from the SEC and how they might interact
with the bank regulators here in impairing market liquidity.
The interconnected onslaught of proposals and guidance
overhauls threatens both individual slices and segments of
financial markets and the system as a whole.
We know nothing of whether or not they all fit together, or
what the systemic and other unintended consequences may be.
That requires analysis which the Federal banking regulators, in
their haste, have not done.
Will liquidity and Treasury markets dry up because of the
tangled web of proposals? Will first-time homebuyers be shut
out of the dream of homeownership? Will car and truck buyers no
longer be able to afford personal transportation because auto
credit is too costly for most and not available for many? Will
financial institutions be forced out of entire business lines,
such as provision of auto credit or market making for Treasury
securities, leaving consumer investors to take the hit? Will
financing for new industrial projects and development in each
of our districts dry up? Will municipalities find it even more
costly to finance their communities? Will our loss of
competitiveness in banking and finance resulting from the
regulatory rewrite force U.S. jobs and economic activity to
shift overseas, letting Europe and Asia prosper at a steep cost
to Americans? These are all questions that require answers
before agencies promulgate a rulemaking.
However, Democrat-appointed Federal banking regulators put
forward this myriad of proposals to re-regulate the banking and
financial system and have offered no answers. They may be
belatedly beginning to look as clear flaws in their proposals
are glowing in the dark, but unfortunately, markets have
already begun to price in the changes, given the lack of
clarity on these important questions, threatening a growing
credit crunch.
The recent attempt by Democrat-appointed Federal banking
regulators to design some opaque Dodd-Frank 2.0 exercise on the
cusp of a developing credit crunch needs to end, and it happens
right when interest rates are higher than they have been in
decades. Regulators should replace that process with proposals
that deal with real problems facing our financial system, with
full transparency and ample input allowed. If not, as Full
Committee Chairman McHenry said last week, it will be American
families who ultimately will suffer.
The Chair now recognizes the ranking member of the
subcommittee, the gentleman from Illinois, Dr. Foster, for 4
minutes for an opening statement.
Mr. Foster. Thank you, Mr. Chairman, for this continuation
of an important discussion on bank capital and other
requirements. I was happy to join Chairman Barr, in the letter
to Fed Vice Chair for Supervision Barr, requesting more detail
on the analysis and supporting data that were used to develop
the Basel III Endgame proposals. I believe that having access
to the data and assumptions and methodology would allow for a
more-informed discussion across-the-board here. But I think we
also have to recognize that bank capital requirements and
regulation is never going to be an exact science.
You can reasonably model the costs of any increase or
decrease in bank capital requirements or other things, the cost
of compliance of increased stress testing, and so on, but there
is a part that you will never be able to model, which is, how
do you model the probability of financial crises? How do you
model the cost of these crises, not only for the banks and the
financial players involved but for the broader economy and for
the psychology of the nation that suffered a body blow back in
2008 when a system that we thought was sound fell apart. And
that is why it is important to quantify the things that can be
quantified, where important assumptions have to be made to
actually be clear about those assumptions, and look at what
other regulators around the world are doing for those
comparable important assumptions, and then have a discussion on
that basis.
But I can't resist one closing observation, which is that
the long list of objections we just heard from the ranking
member could have been lifted, almost verbatim, from all of the
objections to the increased capital requirements that were part
of the Dodd-Frank Act. They were talking about how this would
certainly drive the banking offshore and disadvantage U.S.
banks and cause them to be not profitable. In fact, kind of the
reverse has happened. It has been a very good decade for U.S.
banks, especially the largest ones, and I don't know whether
that was a cause or an effect of the very large capital that
they retain. I think that is an important thing to keep in mind
here, that asking a bank to control its risk has real benefits
throughout the economy that cannot be quantified, but are very
real. And we can use our own experience over the last decade to
be pretty sure of that.
Anyway, thank you for having this hearing. It is important,
and I look forward to the witnesses' testimony.
Chairman Barr. Thank you. The gentleman yields back. Full
Committee Ranking Member Waters is not here, so we will move on
to testimony.
Today, we welcome the testimony of Mr. Hal Scott, the
Nomura Professor of International Financial Systems at Harvard
Law School; Ms. Karen Petrou, a managing partner at Federal
Financial Analytics, and we would also like to welcome Ms.
Petrou's guide dog, Pete; Ms. Margaret Tahyar, a partner at
Davis Polk & Wardwell, specializing in financial institutions;
and Ms. Mayra Rodriguez Valladares, managing principal at MRV
Associates. Thank you all for being here, and we appreciate
your testimony.
Each of you will be recognized for 5 minutes to give an
oral presentation of your testimony. And without objection,
each of your written statements will be made a part of the
record.
Professor Scott, you are now recognized for 5 minutes to
give your oral remarks.
STATEMENT OF HAL S. SCOTT, EMERITUS PROFESSOR,
HARVARD LAW SCHOOL
Mr. Scott. Thank you, Chairman Barr, Ranking Member Foster,
and members of the subcommittee for inviting me to testify
before you today on the regulatory capital rule, which is going
to be my focus. While my testimony draws on the statement of
the Committee on Capital Markets Regulation regarding Basel
finalization and U.S. bank capital requirements, this testimony
is my own.
The capital proposal would materially increase the capital
requirements for large U.S. banks and other banks with
significant trading activity at a time when such an increase
would be both unnecessary and counterproductive. Across all
banking organizations subject to the capital proposal, the
amount of required common equity tier 1 capital, which is the
best measurement we have of capital, is expected to increase on
average by 16 percent. For the largest banks, the increase is
expected to be 19 percent.
While these are already substantial increases, the
increases for the subset of such banks that focus their
business on supporting our capital markets are likely to be
even more severe. These increases are attributable, in
significant part, to the so-called, ``gold-plating,'' whereby
U.S. regulators have chosen to impose standards on U.S. banks
that are more stringent than what Basel itself requires.
There are three key reasons why U.S. bank regulators should
not increase capital requirements at this time. First, there is
no need for a capital increase to maintain the stability of the
banking system, as U.S. bank capital levels are strong. In
particular, the average Common Equity Tier 1 Capital (CET1)
ratio of U.S. banking organizations for the 2001-2007 period
was 8.25 percent. As of the first quarter of 2023, it increased
by nearly 4 percentage points to 12.81 percent.
Second, there will be significant economic costs from
raising bank capital requirements, as increasing capital
requirements reduce banks' lending and capital market
activities and increase borrowing costs for businesses and
consumers, slowing economic growth. A 2016 report by the Bank
for International Settlements summarized this extensive body of
literature as indicating that for every 1 percentage point
increase in capital ratios, banks tend to cut their lending in
the long run by 1.4 to 3.5 percent. In the case of capital
market activities, empirical evidence demonstrates that
heightened capital requirements can have an even greater
detrimental effect. The U.S. capital markets are the largest
and among the most-liquid and efficient in the world. In the
United States, capital markets' activities have a much larger
role in financing the economy compared to other countries. In
2022, capital markets generated 77.5 percent of debt funding
for non-financial corporations in the United States, whereas
other large economies rely more heavily on bank loans. So,
these negative impacts on the capital markets are of special
concern to the United States.
Third, raising bank capital requirements at this time could
reduce the precision of the Fed's monetary policy and, thereby,
interfere with the Fed's ongoing efforts to fight inflation,
and increasing some bank capital requirements now could pose
problems for the Fed's monetary policy, even after inflation is
contained by counteracting the Fed's efforts at that time to
restore economic growth with lower interest rates.
Although the capital proposal would not become effective
until July 1, 2025, these concerns are not alleviated by
deferring the effective dates of the capital increase to the
future. Banks generally seek to maintain buffers above
anticipated regulatory minimums and respond to future increases
to bank capital requirements when they are announced,
immediately increasing capital even before the implementation.
I will conclude that without significant adjustments, the
increases currently contemplated in the capital proposal will
result in needless economic costs in the form of reduced
lending and capital markets activities, and will unduly
complicate the Fed's use of monetary policy to fight inflation.
Thank you.
[The prepared statement of Mr. Scott can be found on page
44 of the appendix.]
Chairman Barr. Thank you. And now, Ms. Petrou, you are
recognized for 5 minutes for your oral remarks.
STATEMENT OF KAREN PETROU, MANAGING PARTNER,
FEDERAL FINANCIAL ANALYTICS, INC.
Ms. Petrou. Thank you, Chairman Barr. Thank you, Mr.
Foster. It is an honor to----
Chairman Barr. Could you press the button to turn on the
microphone?
Ms. Petrou. There you go. Thank you.
Chairman Barr. Very good. And if you could reset the clock
for our witness, that would be great.
Ms. Petrou. Thank you.
Chairman Barr. Thank you. You may proceed. Thank you.
Ms. Petrou. Thank you. It is an honor to appear again
before this committee. By my count, in my career, so far, this
is the seventh financial crisis where I have had the honor to
appear before this committee, and your colleagues in the
Senate, several times to talk about the key policy responses to
crises and failures, and I think it has been a very important
control on input into the regulatory process. But we are
obviously seeing some of the same problems again, and I would
like to focus my testimony on several key points where lessons
learned the hard way have not yet been fully absorbed by the
banking agencies, and what we see in the array of capital
resolution and pending rules that demonstrates the need for
rapid regulatory process repair, but also suggests several
actions this subcommittee and the Congress could take to try to
quickly remedy them.
I testify for myself. My firm represents major
institutions, global central banks, and others, but this
testimony is solely my own views. I have also recently written
a book called, ``Engine of Inequality: The Fed and the Future
of Wealth in America,'' and I will focus also on the economic
inequality impacts of the pending rules, especially in my
written statement.
What do we know about the rules in the past, and the
proposal so far, and what could go very wrong? First, we know
that thinking about bank profitability and competitiveness is
critical, but only in the context also of safety and soundness.
Banks and their holding companies are unique companies with
taxpayer-provided benefits, and their holding companies are, at
least by law, required to serve as sources of strength for the
subsidiary insured depository, and they are also required not
to engage in activities that endanger it.
We know that the banking agencies' principal focus should
be on safety and soundness, not profit and competitiveness.
However, to the extent that the rules adversely affect profit
and competitiveness, one of the massive problems in all of the
rules after the great financial crisis and the ones we see
today is the quantitative and qualitative assumptions that when
bank business models change due to rules, banks stay the same.
They don't.
As Professor Scott has demonstrated, they adjust, because
they wish to remain viable private companies, and we need to
very carefully align balanced thinking about safety and
soundness with a full understanding of implications for
customers, the financial system, and the macro economy, and the
prospects for shared as well as sustained growth. And I regret
that none of the pending rules attempt to do that. They look at
banks as static entities under simple and often mysterious
scenarios with significant analytical problems.
First, they look at each bank in its own context, rather
than at the system as a whole and, most importantly, at
nonbanks. These rules are promulgated with banking blinders on,
and the United States has the most significant, the largest
non-bank financial intermediation sector of any advanced
nation. To think about not just the bank implications, per se,
but also the financial stability implications without any
attention to non-bank financial intermediation is a mistake, as
demonstrated as early as 2011 as the financial system began to
take shape with far more activity outside the regulatory
perimeter. That is not to say everything should be regulated,
but that which threatens financial safety and soundness needs
to be, especially given the Fed's propensity now to bail banks
as well as nonbanks out at the first sign of trouble.
None of the pending rules looks at broad financial system
implications. None of the pending rules looks at the cumulative
impact of each rule in the context of all of the others. They
fail first to look at each rule and its own likely impact
outside the banks that are directly covered, but also in the
context of all of the other rules. And again, banks are profit-
making businesses. They will optimize and maximize
profitability and competitiveness to the greatest extent
possible. There are profound contradictions in each of the
rules with those already on the books and those to come. And
many of them are counterproductive and actually undermine
safety and soundness by the extent to which they encourage
rapid migration of key activities outside the regulatory
perimeter.
Chairman Barr. Ms. Petrou, I am sorry, but your time has
expired, and we will look forward to getting more amplification
during the Q&A.
Ms. Petrou. Thank you.
[The prepared statement of Ms. Petrou can be found on page
34 of the appendix.]
Chairman Barr. Ms. Tahyar, you are now recognized for 5
minutes to give your oral remarks.
STATEMENT OF MARGARET E. TAHYAR, PARTNER, DAVIS
POLK & WARDWELL LLP
Ms. Tahyar. Chairman Barr, Ranking Member Foster, and
members of the subcommittee, thank you for asking me here
today.
Bottom line: There is no one in the world who understands
how these complex proposals interact with each other or the
economy. Make no mistake, the future of the financial sector
and its structure is at stake. It is wise to make changes in
light of the real lessons learned from the March turmoil, but
it is hard to understand the rush or how these proposals are
informed by the real lessons. There should be a holistic review
of how all of the proposals work together, with a clear vision
of what policy goals are desired and with cost-benefit
analysis. Time is too tight for the public to meaningfully
comment on the many proposals and for Congress to fulfill its
oversight role, even with the 120-day comment period.
There are two important concerns: the international
competitive position of the G-SIBs; and the pressure on
regional banks. The largest U.S. banks are among the most
competitive in the world. Let's not forget that the American
economy and our geopolitical strategy are helped by the
international reach of our G-SIBs, especially at a time when we
are nearshoring and rebuilding our industrial base. And yet,
certain parts of the Basel III Endgame, like operational risks,
would disfavor U.S. global banks. It seems odd to hobble G-SIBs
at this time.
We also have a strong regional banking sector, which is
unique. Most other developed countries have chosen a banking
oligopoly. Congress, as recently as 2018 and on a bipartisan
basis, endorsed the concept of tailoring for regional banks. We
learned in March and must deal with the fact that mid-sized
regional banks can pose systemic risks, but the March problems
were largely about liquidity, not really primarily about
capital. So, why the large increases in capital now? If the
goal of the banking agency is that the U.S. economy should have
a barbell banking sector where only community banks and G-SIBs
survive, is that their goal, or is it the goal of the banking
agencies that a strong, vibrant regional banking sector is good
for our large and diverse economy?
Mixed signals are being sent. On the one hand, mergers
among regional banks are being discouraged by the uncertain
future of bank merger policy and by the high regulatory risk
related to required approvals. On the other hand, the over-
calibration of the long-term debt requirements and increases in
capital seem to be pushing these banks towards mergers.
I want to touch a little bit on planning for bank failures.
Living wills work. As former Treasury Secretary Geithner once
said, ``Plan beats no plan,'' but they should not be expected
to prevent bank failures or ensure that a bank failure brings
no pain. Even today, U.S. Army officers are taught that no plan
completely survives first contact with the enemy. It is the
same for living wills. The way to think about living wills is
as a successful, decade-long collaboration between the banking
sector and the regulators that is designed to make the
informational flows, operational processes, and around-the-
clock work flow more smoothly.
Some of the wisest changes in the proposals involve
improvements in the content and capabilities. That said, these
proposals could be improved. A missing element is to update the
playbooks at the FDIC and to test agency capabilities as well
as bank capabilities. There are worries about the timing of
agency feedback. Congress should be concerned with the fact
that there are two different living wills regimes. Congress
should also be concerned with the different standards for
credibility and the sudden link to supervisory testing and
possible enforcement. Every system can be improved after it has
had contact here with the enemy of financial instability, and I
hope we end up with sensible reform in this space.
There has been unusual public disagreement by the
principals and the agencies, which is a tell that something is
not quite right. I want to extend admiration and respect to the
principals, whom I believe are acting in good faith, and to the
incredibly hard work of the agency staff in a very difficult
year. But once put in place, this framework will be in place
for generations. There are too many proposals happening at the
same time, with too many unintended consequences, the
interactions of which we do not understand. Let's make sure
that someone is watching over the system as a whole. Thank you.
[The prepared statement of Ms. Tahyar can be found on page
58 of the appendix.]
Chairman Barr. Thank you. Ms. Rodriguez Valladares, you are
now recognized for 5 minutes.
STATEMENT OF MAYRA RODRIGUEZ VALLADARES, MANAGING
PRINCIPAL, MRV ASSOCIATES
Ms. Valladares. Chairman Barr, and distinguished members of
the Subcommittee on Financial Institutions and Monetary Policy,
thank you for the opportunity to appear before you.
For 3 decades, I have consulted and trained professionals
at banks and financial institutions as well as financial
regulatory agencies in over 30 countries on risks that can
threaten financial institution safety. It has only been 15
years since Lehman Brothers collapsed and globally wreaked
havoc on people's lives. It is way too early to say this time
is different. It never is. Poorly-managed financial
institutions fail all too often, painfully disrupting our way
of life. Financial instability often follows periods when
financial institutions like investors and policymakers
underestimate risks.
Since 2010, when Basel III and Dodd-Frank rules started
being implemented incrementally, U.S. banks have benefited from
those rules. U.S. banking assets have almost doubled. U.S.
banks' net income has risen by 225 percent. Publicly-traded
banks have paid out dividends at record highs, and banks'
contributions to political campaigns have risen 150 percent.
With those returns on wealth and income, an overwhelming
majority of U.S. taxpayers would volunteer themselves to be
regulated. Imagine how much better-capitalized U.S. banks would
be or how much more they could lend to individuals and
businesses if, in the last 2 decades, their misdeeds had not
cost them over a quarter of a trillion dollars in fines due to
violations in the areas of securities trading, consumer
protection, anti-trust laws, fraud, money laundering, economic
sanctions, and terrorism financing.
U.S. banks were resilient between 2020 and February 2023,
even while being impacted during the unprecedented economic
stress brought on by COVID-19. Basel III and the Dodd-Frank
capital liquidity stress test, and living low requirements were
critical in helping banks survive unexpected losses. Even as
robust as those frameworks are, however, they probably wouldn't
have been enough. Fiscal and monetary stimuli bolster banks'
balance sheets and were critical to the stability of the United
States.
Risks always differ because the size and complexity of
markets and banks continually change. In addition to
operational and financial risks, banks now also face
cybersecurity, climate change, rising civil unrest
domestically, and geopolitical threats. Unfortunately, those
risks are barely covered by existing or proposed rules. Banks
are not at historically-high levels of capital. By updating
changes to Basel III and Dodd-Frank, U.S. bank regulators are
fulfilling their mission of ensuring the safety and soundness
of the American banking system. Large banks can meet the
updated capital and bank resolution requirements.
In addition to issuing equity and subordinated debt, and
reducing dividend payouts and share buybacks, banks have a
myriad of other tools to lower their risk weights, known as
risk optimization. Examples of such tools include improving
data quality to more accurately calculate risks. Banks can
reduce holdings of tailored derivatives and illiquid
alternative investments. Other risk mitigation techniques
include selling loans into special purpose vehicles and using
credit derivatives to reduce risk weights.
Regulators' proposed rules will not be final until next
year, and the implementation would begin 1 to 2 years
thereafter. Banks have plenty of time to conduct gap analysis
to determine what personnel or technological resources they
need to comply. Banks have known for over 5 years that updated
Basel III rules were coming, especially since the United States
is a longstanding and influential member of the Basel Committee
on Banking Supervision. U.S. regulators gave the industry over
120 days to comment on the proposed rules. Normally, it is only
90 days. Under no circumstances should regulators withdraw any
of the proposed rules. The rule process is working as it
should, given that the regulators are taking industry feedback
as well as feedback from the public at large.
The protection of American citizens is at the heart of why
I am here today, and I hope that legislators and regulators
share this value as well. Thank you.
[The prepared statement of Ms. Valladares can be found on
page 68 of the appendix.]
Chairman Barr. Thank you. And now, I would just make an
announcement that votes have been called and Members will be
required to depart to cast votes on the House Floor. But before
we recess for votes, I would like to recognize the gentlelady
from California, the ranking member of the full Financial
Services Committee, Ranking Member Waters, for 1 minute.
Ms. Waters. Thank you very much. Here we go again. Instead
of marking up sensible bills that have bipartisan support to
strengthen the banking system following the three major bank
failures earlier this year, Republicans are holding another
hearing to attack the Fed, the FDIC, and the OCC for
strengthening our banking system.
The hearing title suggests this is a holistic review, but
rather than looking at the whole picture, Republicans are
focusing exclusively on how proposed changes from regulators
will impact Wall Street, not consumers who pay when large banks
fail. Millions of people lost their homes, jobs, and savings in
2008. Hundreds of startups almost got wiped out when Silicon
Valley Bank failed. Regulators should strengthen, not weaken,
these critical banking rules to protect consumers from future
bank failures. I yield back the balance of my time.
Chairman Barr. The gentlelady yields back, and as I
indicated, votes have been called, so this committee will need
to recess for votes, and we will reconvene after the final vote
has concluded. So if you could, if you want to participate,
please come back to the hearing room.
The subcommittee stands adjourned until votes have
concluded.
[recess]
Chairman Barr. The subcommittee is back in order and we
will now turn to Member questions.
The Chair now recognizes himself for 5 minutes for
questioning.
But first, without objection, I would like to enter into
the record a letter from the Kentucky Bankers Association
expressing deep concerns about the recent Basel proposal.
And let me start with Professor Scott. The Basel III
Endgame proposal will result in a 75-percent increase in
capital of a bank's trading activities, which will be
dramatically more significant in the U.S. given the depth and
liquidity of our capital markets. Punitive capital charges for
capital markets activities disproportionately target the U.S.,
where 75 percent of equity and debt financing for non-financial
companies comes from the capital markets and only 10 percent
from bank lending. In Europe, those numbers are essentially
reversed.
Professor Scott, do you think that the capital markets'
impact will be more significant in the U.S., particularly given
the additional layer of rulemaking coming out of the Securities
and Exchange Commission, and can you quantify that impact on
end users?
Mr. Scott. I agree with your assessment. We will have a
very severe impact here. I would point out it is not just the
market risk rules. It is also the operational risk rules that
affect the capital markets because they affect the banks that
support the markets, like custody banks, which are going to
look at an increase for operational risk, and these are banks
that are involved in the capital markets. They are not trading,
but they are supporting it or providing clearing and settlement
services, and that kind of thing.
So, you are quite right that our economy is really very
different than Europe and the rest of the world because of the
importance of the capital markets to the ability of companies
to finance themselves. They go to the capital markets. They
don't go to the banks, like they do most other places. And I
also agree that when you combine the capital impact that you
have described with the 47 substantive rulemakings of the SEC
affecting the capital markets, and in many ways very
significantly, that the combination of these two puts in danger
our crown jewel, in a sense, of having the world's best capital
market.
Chairman Barr. I agree with you. I think it would be hugely
damaging to our economy.
Ms. Tahyar, I am concerned about the onslaught of proposals
recently put forward that effectively repeal the S. 2155
tailoring law. The Basel III Endgame proposal will massively
increase capital requirements on banks of almost all sizes,
$100 billion and up. Added to that, we have this G-SIB
surcharge proposal and proposals for long-term debt
requirements, resolution plans, and promises of even more to
come. Do we know about the quantitative and economic impacts of
all of these proposals and how they work together, the
cumulative impact, not to mention the issue of the capital
markets?
Ms. Tahyar. We don't have any idea, and I don't think
anybody does. I think that the folks who work on capital
endgame aren't necessarily the same folks who work on
resolution planning, and that is the same at the agencies and
at the banks. There are some overlaps, and I think a lot of the
banks, particularly the regional banks, don't have dozens of
people working on this, so the answer is, we don't know.
Chairman Barr. As you know, Vice Chair Barr, the other
Barr, claims that the Basel III proposal will make the U.S.
banking system safer and stronger, but is it true that as
government-assigned risk weights go up, a bank's capacity to
make certain types of loans is reduced?
Ms. Tahyar. That is true.
Chairman Barr. And will this, in turn, lead to reduced
choices for borrowers and greater uniformity in underwriting
standards?
Ms. Tahyar. That is correct, and banks will risk optimize,
which means they will get out of certain businesses or reduce
their scope.
Chairman Barr. And as a result, will a borrower have a
harder time shopping for loans as each bank subject to these
rules will increasingly make similar choices on availability
and pricing on certain loan types?
Ms. Tahyar. Yes. I think the loan types that are going to
be most affected are non-listed private companies, and that is
a range of small to mid-sized enterprises all the way up to the
unicorns, and certain mortgages where there is a lower down
payment.
Chairman Barr. When these rules force greater uniformity
and pricing on certain loan types, does this decrease systemic
resiliency because there is less diversity in the lending?
Ms. Tahyar. I think that depends, but it is both an issue
on systemic resiliency and also an issue on the profitability
of banks. Folks think that banks have done super well, but they
are trading below book, so that is telling us something.
Chairman Barr. My time has expired, but I think conforming
risk standards will reduce consumer choices and access to
credit and actually will increase systemic risk because you are
going to have a less-diverse banking system overall.
My time has expired, and I now recognize the ranking member
of the subcommittee, Dr. Foster, for 5 minutes.
Mr. Foster. Thank you, Mr. Chairman, and thank you to our
witnesses. I am becoming increasingly worried about the
potential for internet-driven bank runs in trying to obviously
generate instability. Americans connected by social media and
armed with 24-hour banking tools pulled more than $40 billion
in deposits out of Silicon Valley Bank in the course of about
10 hours on March 8th. So, how should we think about the
capital and liquidity requirements to deal with that? Part of
this was driven by the rumor that the capital had been expended
due to bad interest rate bets, and there are issues there
having to do with acknowledging mark-to-market losses. But
despite the fact that we seem to have that under control and
the contagion seems to be contained, I am worried that this is
going to happen again.
How do we handle this? For example, is there any way to
conduct a stress test to model the behavior of Reddit or short
sellers or just bad rumors out on the internet, and what are
the lines of defense that we should be putting in place for
that?
Ms. Valladares, do you want to have a first shot at that?
Ms. Valladares. I think your point, Dr. Foster, is
excellent, in that risks are not static. There are always the
so-called, ``unknown unknowns,'' to quote Mr. Rumsfeld. And
there are many ways in which you can run simulations for all of
these different kinds of things, i.e., how might artificial
intelligence affect portfolios? How might the use of social
media cause an explosion of rumors?
Mr. Foster. But how do you even model?
Ms. Valladares. You can run various----
Mr. Foster. How do you model short sellers?
Ms. Valladares. You can run various simulations as to what
kind of an effect it would have, and then you can do
simulations as to how quickly might deposits leave and leave a
bank illiquid. However, it is precisely because--I would hate
to say it to somebody who comes from a STEM field--you can only
quantify so much. At the end of the day, there will be both
quantitative and qualitative assumptions, so you cannot
perfectly calculate the exact extent. And that is exactly why
rules need to be periodically revisited because while on
occasion it may look like banks are really well-capitalized,
that can turn on a dime. And that is why I think that this kind
of hearing to have these kinds of discussions is so important.
You have to continually revise and update the rules.
Mr. Foster. Ms. Tahyar, do you have any idea on how we
should reflect that in the capital and liquidity?
Ms. Tahyar. I agree with you, and I am terrified. I think
we have a much stronger risk of internet deposit runs than we
had before March. Silicon Valley Bank was tech companies, but I
think a lot of local small and mid-sized enterprises that are
run by really clever people, by early April, were also
multibank, so we have a greater risk.
My own view is that is liquidity, that starts as liquidity
and becomes capital. And what we don't have before us are
proposals to change liquidity, and what we don't have before us
are proposals, and this would be Congress, to reform deposit
insurance. I think there is no appetite for that or to give the
FDIC back the temporary power that it had before Dodd-Frank to
temporarily, for a fee, insure uninsured deposits. We didn't
have these deposit runs in the great financial crisis and we
should ask ourselves why, because now with the Internet and all
small and mid-sized enterprises being multibank, it is very
scary.
Mr. Foster. Yes. Ms. Petrou, do you have any thoughts on
that?
Ms. Petrou. I think that the question is really important.
And one of the reasons why cumulative impact analysis is so
critical is because the way the liquidity rules work now is
that based on how much liquidity is required under the various
ratios, banks have to have large amounts of, ``high-quality
liquid assets,'' such as Treasury securities. It is one of the
reasons why you have seen the large portfolios of held-to-
maturity Treasury obligations grow at banks, and that has
created one of the perverse incentives to the challenges that
we saw at Silicon Valley Bank, because the capital rules didn't
recognize Accumulated Other Comprehensive Income (AOCI). They
proposed to do that, but there are a lot of moving pieces here.
And the tougher the liquidity rules, the more high-quality
liquid assets banks have to hold, the higher their capital
requirements go. And there are some profound sort of
interactions there that, as has been said, these rules seem to
be made in silos, and there is no indication from any of the
agencies how they think about ultimately, could we deal with
liquidity another way, as has been said in the model.
Mr. Foster. Thank you. I guess my time is up, so when you
figure that out, let me know.
Chairman Barr. Thank you. The gentleman's time has expired.
The gentleman from Florida, Mr. Posey, is recognized for 5
minutes.
Mr. Posey. Thank you, Mr. Chairman.
Mr. Scott, should a cost-benefit analysis be required for
all new regulations?
Mr. Scott. Yes.
Mr. Posey. Thank you. What does your research say about the
cumulative impacts on credit availability and gross domestic
product of the current Biden surge in bank regulations?
Mr. Scott. We really haven't done that. I think we should
do that, but the agencies are the first people that should do
that. When rules are proposed, there should be a cost-benefit
analysis. Now, given the subject of this committee, everybody
doing their own cost-benefit analysis on a given rule doesn't
get the whole picture, doesn't get the holistic picture, but
you are never really going to get the whole picture. We should
do a lot better on the mini-pictures before we worry about the
whole.
With this Basel rule, there is no complete cost-benefit
analysis there. With something that is going to have such a
profound impact on our economy, you would think we would
require that. We should. The Fed has some kind of ambiguous
obligation to do cost-benefit analyses. That should be
strengthened, in my view.
Mr. Posey. What is a lender-of-last-resort function of the
Federal Reserve, and of what benefit would it have been in the
Silicon Valley Bank case?
Mr. Scott. Now, you are talking about my real interest,
Congressman. We created the Fed in 1913 for a single reason: to
be the lender of last resort. We have given up on depending on
JPMorgan to do that. It wasn't going to live forever. We had a
number of recessions and economic downturns, runs, which
JPMorgan stemmed, but we needed an institution to do this. We
created the Fed, not for monetary policy in 1913, but as a
lender of last resort.
I have actually published a paper, which I am happy to give
to the committee, analyzing what the Fed did during the SVB
crisis as lender of last resort for SVB, which was zero until
SVB actually got into an insolvency procedure. And the Fed, for
the first time that I know of, lent to SVB in insolvency but
never lent to SVB before they got there. Now, why was that the
decision? There were operational issues. They cut off the Fed
wire at 4:00, so if somebody wanted to get money from the Fed
or transfer collateral to the Fed, they couldn't do it. Once
they realized that wasn't a great thing, they changed that.
There was testimony that the Secretary of the Treasury and
Fed Vice Chair Michael Barr didn't even know about the problem
until 4:00 Eastern Standard Time on Thursday. Banks were closed
on Friday. You would think there were danger signals going on
all over the place that this was going to be a problem. They
went out to try to raise capital. They couldn't do it. Moody's
was going to downgrade them and so forth. There was a real
possibility of a run.
There should be a war room over there at the Fed in this
internet world where things can happen so quickly, where red
flags go up, and we now closely monitor the situation. And in
my view, the Fed, if it had had better process, could have lent
to SVB and probably could have stemmed the run. SVB had plenty
of capital by accounting standards, and by the way, everybody
knew that the real value of the held-to-maturity (HTM)
portfolio was a lot less than they were carrying. It was
disclosed, so I think the Fed should tell us, should write a
report. They wrote a supervision report. How about writing a
report of how they acted or did not act as lender of last
resort in the crisis and why?
Mr. Posey. Thank you. Treasury Secretary Yellen testified
that she found out about the crisis at the Silicon Valley Bank
on Thursday, the day before it actually happened on Friday.
What does that suggest about the vigilance of the Federal
Government to prevent financial crises?
Mr. Scott. Actually, she found out about it at 4:00 on
Thursday, and the bank was closed Friday morning, so, it was
basically all over by the time she found out about it. The same
with the Fed, so I come back to my point that that shouldn't
happen. They should be online when red flags go off and danger
signals go off. The Fed should be right on top of that and be
able to act quickly.
Mr. Posey. I see my time is about to expire, so I yield
back, Mr. Chairman.
Chairman Barr. The gentleman yields back. The gentlewoman
from Ohio, Mrs. Beatty, is recognized for 5 minutes.
Mrs. Beatty. Thank you, Mr. Chairman, and thank you to our
ranking member. I am going to start with you, Ms. Rodriguez
Valladares, and I want to talk about Basel III. Let me start by
saying I strongly support well-capitalized banks in making sure
that we have a financially stable banking system. And
certainly, as you will recall, Democrats passed Dodd-Frank at a
time of crisis because we wanted to ensure that the financial
system was strong and resilient, and I think we would all agree
that our banks are the better for it.
However, as a former small business owner, I know the
challenges that entrepreneurs have and that startups face, and
I know my colleagues and I are working hard to tear down the
barriers and to encourage greater access to credit for small
businesses in our districts and communities, especially women-
and minority-owned businesses. While there has been a lot of
concern that the new capital requirements will force banks to
cut back on lending, or if they don't cut back, we know what
happens. The cost will be passed on to our customers. Can you
tell me how this proposal would impact small businesses and the
cost and availability of credit?
Ms. Valladares. Thank you for that question. These updated
rules absolutely should not lead to a decrease in lending. A
much bigger problem at banks is that they often have poor data,
no data, or poor processes in trying to understand the needs of
small businesses. Empirical data from the World Bank, the Basel
Committee, and a number of academic studies that I included in
my written testimony shows that actually the better capitalized
the bank is, it creates a lot more faith. That is what these
markets are: credit to believe in.
So, when you have banks that are better-capitalized, they
are safer, their cost of borrowing goes down, and their ratings
go up, so there is no reason for them to reduce the lending.
They sometimes do that precisely because they are looking for
other opportunities that are more profitable. If they work on
what is called risk optimization, meaning that they can reduce
their investments in illiquid, hard-to-value securitizations or
very tailored derivatives, if they lower their credit risk
weights, that is the denominator, right? You can also work on
the numerator by issuing common equity. You can reduce the
dividend payouts, so there is no reason why the lending should
go down. Moreover, the historical data actually shows how the
assets of American banks have exploded precisely because they
were in much better condition than the European banks and
others.
Mrs. Beatty. Let me do a little follow-up, but let me also
thank you. In your written testimony, you pointed out to us an
article on, ``A Brief History of Bank Capital,'' and you made a
strong statement that banks are not at historically-high levels
of capital. And you went on to explain to us that current
measures of capital do not include all risk, and I want to
thank you for that.
My next question is, we have heard a lot about the negative
impacts of Basel III Endgame on access to credit, borrowing
costs, and banks' balance sheets. Can you address what positive
impacts there are of this rulemaking, other than greater
financial stability?
Ms. Valladares. Financial stability is very important, but
one big advantage is if we stop having so many banking crises,
you wouldn't have all of the challenge to Americans. I don't
know if any of you here have ever lost your job because of a
crisis. I have, and I am fortunate to be very well-educated. I
have the privilege of an American education. I know a lot of
people, especially if they don't have a college degree, every
time there is a crisis or a threat of a crisis, it causes
incredible emotional instability for them, and it is hard. I
like this idea of doing the economic impact studies on what
regulations mean.
I really think that we need to require the banks to do a
serious quantitative impact study of what happens when people
become unemployed, what happens to all of the emotional and
mental anguish that they go through and that they pass on to
their kids when they can't get a job, and that shouldn't be
happening. We have great diversity of minds at the regulatory
entities and at the banks, and the heart of everything that we
do should be to protect Americans who have absolutely nothing
to do with the financial profits at banks.
Mrs. Beatty. Thank you. Mr. Chairman, my time is up.
Chairman Barr. The gentlelady's time has expired. The
gentleman from Tennessee, Mr. Rose, is recognized.
Mr. Rose. Thank you, Chairman Barr, for holding the hearing
today, and thank you to our witnesses for your time and
patience with us. I would like to go ahead and dive straight
in.
Ms. Tahyar, in the long-term debt proposal, unexpectedly,
bank regulators decided to propose the debt issuance
requirement both on the insured depository institution and the
bank holding company, not for the G-SIBs but for smaller
regional banks. Can you discuss how it could be problematic for
regional banks to comply with this?
Ms. Tahyar. I will start with, we are in a rising interest
rate environment, and the regional banks and the holding
companies and the banks don't have as much debt in proportion
as the G-SIBs do. It wasn't really a marginal increase on the
G-SIBs when we went to long-term debt and total loss-absorbing
capacity (TLAC). With respect to the regional banks, it might
make sense for some of them. We have had some CEOs come out and
say that it is going to increase their interest costs at a time
when we are looking at a credit crunch.
And I think there are some difficult choices to be made
about whether it should be at the holding company and at the
bank, and there are difficult choices to be made in terms of
transition, but bottom line, well-done and appropriately
calibrated because it is calibrated too high now. Long-term
debt and TLAC is a layer that protects the uninsured depositors
and the insured depositors, a/k/a the Deposit Insurance Fund. I
guess I would say that it could work, but it has been
calibrated way too high, and I think there should be deep
concerns about transition periods.
Mr. Rose. Thank you. I appreciate that insight. Shifting
gears, Professor Scott, I came across some of the work that
your firm did on the pace of the SEC's rulemaking agenda. As
you are aware, the SEC, under Chair Gensler, has embarked on a
rulemaking agenda for which the scope, scale, and speed are
wholly unwarranted by any congressional mandate. There are
serious concerns that many of these proposals will be thrown
out in court following the decision in West Virginia v. EPA.
Professor Scott, does the SEC, in its economic analysis, factor
into its rulemaking the costs associated with potential
litigation?
Mr. Scott. Costs to the SEC of litigation or to the general
economy?
Mr. Rose. To the general economy.
Mr. Scott. No. A bigger picture answer to your question is
that the cost-benefit analysis that the SEC kind of focuses on
is the cost to institutions, how much is it going to cost a
bank to comply with XYZ rule? Actually, a small part of what we
should be worried about in cost is the cost to the economy, how
are these rules going to affect the economy? And that is almost
never done, or if it is done, it is not done very well. I have
been through all of the cost-benefit analyses of all these
rules, and it is woeful. It is woeful.
Mr. Rose. Professor Scott, isn't it true that Chair Gensler
is issuing a large number of rulemakings that are not required
by statute?
Mr. Scott. Yes. I have the numbers on that in our report. I
think he has issued 47, and only 8 are mandated by statute. You
can go back to Chair Shapiro, who had a number of rules during
the implementation of Dodd-Frank, and 44 percent of her rules
were mandated by it, so this is discretionary. These rules do
not have to be done, and I am looking for sort of what is the
problem we are trying to solve? Our capital markets are very
strong. They are performing very well. What is the problem?
Mr. Rose. And, Professor Scott, stress tests generate
binding capital requirements in the stress capital buffer, but
the Fed, to date, has failed to publicly disclose, let alone
issue for public comment by rulemaking, the models,
mathematical formulas, and other decisional methodologies that
it uses to calculate firms' legally stressed capital buffer
requirements. Do you believe this violates the Administrative
Procedure Act?
Mr. Scott. Yes.
Mr. Rose. Thank you.
Mr. Scott. You're welcome.
Mr. Rose. I see my time is expiring, so I yield back.
Chairman Barr. The gentleman's time has expired. The
gentlewoman from Massachusetts, Ms. Pressley, is now
recognized.
Ms. Pressley. Thank you, Mr. Chairman. The 2008 financial
crisis led to a recession that stunted a generation of economic
growth. When Congress passed the Dodd-Frank Act, the purpose
was clear, which was to prevent something like the 2008
financial crisis from happening again. These regulations were
intentional and responsive to catastrophic mistakes.
Consequently, it comes really as no surprise that after
Republicans undid those regulations, rolling back aspects of
the Dodd-Frank law in 2018, we are seeing financial collapses
like the SVB failure earlier this year.
Ms. Rodriguez Valladares, isn't it true that as a result of
the 2018 Republican deregulation bill, SVB was allowed to opt
out of capital requirements relating to AOCI?
Ms. Valladares. S. 2155 was incredibly detrimental in the
sense that banks that were in that $100-billion to $250-billion
were no longer systemically important, and that's absolutely
critical. Hence, not only did they not have to do the level of
stress test, they also did not have to cover, they did not have
to calculate, or worse yet publish the liquidity coverage
ratio, so that part of the law was incredibly detrimental. Mind
you, that bank was poorly mismanaged and the evidence was
there. Since 2016, they had repeatedly violated anti-money
laundering processes and a whole bunch of other processes, so
the size of banks needs to be considered systemically
important. It is critical for the American economy, and they
need to be better supervised, no matter where we are in the
interest rate environment.
I am a little concerned hearing that we may or may not like
a rule because of the elevated interest rate environment. Right
now, we are at an elevated interest rate environment. We
weren't 20 years ago, and we are not likely to be there in 2
years, so we have to think of these rules across various
economic cycles, not just right now. And on the stress test,
the minute that the Fed were to disclose the design of the
model and the formula, it then becomes a plugging in of the
numbers. So if there were to be some kind of a requirement that
the Fed has to disclose the models, then it would be absolutely
imperative that the banks disclose their models, because it is
the banks that design the models and choose what quantitative
inputs to put, based, of course, on Fed scenarios.
Ms. Pressley. Thank you for your expertise and also for
sharing your lived experience and underscoring the human impact
here. And, again, this did result in SVB seeming better-
capitalized than it actually was, considering the large,
unrealized losses in their securities portfolio. In fact, the
Fed estimated that because of the AOCI opt-out, SVB's capital
ratio was inflated by nearly 2 percent. Banking regulators are
trying to fix a very real problem, a problem that directly
contributed to this year's bank failures.
Ms. Tahyar, when you testified before the committee in May,
you stated that, ``The not passing through AOCI in capital,
which is something that has been on the books since 2013,
should be revisited.'' Ms. Tahyar, do you still stand by your
statement in May? Yes or no? I agree with those comments that
you made on the record.
Ms. Tahyar. Yes, of course, I stand by them.
Ms. Pressley. Okay. Thank you for reiterating that, and I
certainly agree with the comments that you made on the record
in May. The regulators are revisiting it, and the proposed rule
would require regional banks with more than $100 billion in
total assets to include AOCI in the regulatory capital. Lack of
adequate capital was absolutely a contributing factor in the
three bank failures this year, and I support the regulators in
strengthening them. My colleagues across the aisle are not
serious about preventing future bank crises, even when it comes
to stress tests, which are critical for evaluating the safety
and soundness of banks. They complain the stress testing is,
``too opaque.''
Ms. Rodriguez Valladares, the purpose of any test is to
find both strengths and weaknesses, correct?
Ms. Valladares. Yes, absolutely, and stress tests are
critical. Please understand that regulators have not only
capital stress tests, they also have liquidity stress tests,
but if you don't require a bank to measure the liquidity
coverage ratio, then the regulators don't have that
information. Those of us in the industry can take the balance
sheet information from SVB and do our own simulations, but they
are never going to have the level of granularity that would be
really, really helpful to all of us.
Ms. Pressley. After witnessing some of the largest bank
failures in our history earlier this year, our response must
resemble how we acted after the 2008 financial crisis. We need
stronger capital requirements and meaningful stress tests for a
safer financial system. Thank you.
Chairman Barr. The gentlelady's time has expired. The
gentleman from Wisconsin, Mr. Fitzgerald, is now recognized.
Mr. Fitzgerald. Thank you, Mr. Chairman, and thank you to
the witnesses. Chairman Barr expressed a desire to assess how
the Federal Reserve performs analysis on bank mergers. This
follows the DOJ plans to update guidelines on banking mergers
to provide more-robust scrutiny. I strongly believe antitrust
analysis should be governed by the rule of law, not the
individual views of those who, at any particular point in time,
had the relevant agency. I am concerned any change in that
analysis that would depart from long-existing and widely-
accepted standards may not reflect actual changes in the
competitive environment. Further, the capital proposal from the
Fed and other financial regulators, on top of other recent
regulatory proposals, is bound to lead to some type of
consolidation to overcome the compliance burden of these
rulemakings.
Ms. Tahyar, what do you believe will be the net effect of
the Biden Administration and its regulators sharply increasing
the regulatory burden on banks with more than $100 billion in
assets, while simultaneously making mergers between those banks
more difficult to close?
Ms. Tahyar. I think we have a very unhealthy market for
bank mergers, as I said in my testimony. The regulators are
sending mixed signals. The bank merger guidelines have not been
updated since 1995. That is not only pre-internet, that is pre-
fax. It is virtually pre-email, and not everyone had email back
in those days. The world has really changed, and these bank
merger guidelines have kind of been in the air now for almost 2
years, and nothing is happening. And it is high regulatory risk
for any banking management to go to their board and say, we
want to sell, so I think this is going to have an adverse
impact. I think we are better off with a healthy regional bank
market where the strong can buy the weak. That is going to have
less banking crises. I think sharply raising capital on
regional banks at this moment is the wrong move at the wrong
time. And I will just stop by saying that AOCI is not Basel III
Endgame. It is something very different. There is not a trail
of breadcrumbs from revisiting AOCI to all of the many other
changes. I hope I have responded to all of your questions.
Mr. Fitzgerald. Yes, and under the capital requirement
proposal, corporate entities must have securities, and they
must be listed on an exchange to benefit from a reduced risk
weighting. So, this whole approach ignores smaller, non-public
companies who rely on banks for funding, right?
Ms. Tahyar. I completely agree with that. It ignores a
range of companies. We have some really large, major tech
unicorns that are stable, to which we should be encouraging
banks to lend. Then, we have the kind of small and mid-sized
enterprises that are the backbone of our economy, particularly
in smaller market cities. And then, we have my son's micro
production company in Los Angeles that probably should get a
higher risk weighting, since it is a mini company from a very
young guy. But to treat my son's company the same as name your
favorite tech unicorn, or a contracting company in Raleigh,
North Carolina, that has been there for 100 years, makes no
sense.
Mr. Fitzgerald. Thank you. In the 1 minute I have left, the
proposal from the Fed and the other financial regulators would
obviously impose huge costs on regional and mid-sized banks,
with little to no trading books to adapt the governance and
data processes.
Ms. Petrou, can you discuss how the Basel standard just is
poorly suited for these smaller banks?
Ms. Petrou. I think that will be extremely difficult,
partly because the new proposals, as you know, impose market
and operational risk requirements. And I think buried in the
bowels of the proposal is a request for comment on whether or
not the market risk rule should apply only to banks which have
material market risk. That is a really important point because,
otherwise, for these smaller banks, and this is true also in a
different way for operational risk, you are going to be doing a
tremendous amount of work and ultimately holding unnecessary
capital that could go to lending to underserved borrowers for
risks they are not even really running, that aren't material to
safety and soundness.
Mr. Fitzgerald. Thank you. I yield back.
Chairman Barr. The gentleman's time has expired. The
gentlewoman from California, Mrs. Kim, is now recognized.
Mrs. Kim. Thank you, Mr. Chairman, and thank you to the
witnesses for being with us today. I am deeply concerned that
the Basel III Endgame and the other proposals would make credit
more expensive for small businesses, as they will reduce
lending for low- to moderate-income households and put our
banks at an international competitive disadvantage.
Furthermore, these proposals do nothing to prevent future
failures like SVB.
It has been reported that certain European countries want
carveouts on their own Basel III Endgame proposals to protect
their banks from the increased costs of higher capital
requirements, and in Asia, 3 of top 10 companies in the world
are giant-sized. State-owned Chinese banks there aren't
planning to implement the Basel framework anytime soon.
Ms. Tahyar, in your written testimony you speak of the
competition between our banks and European and Asian banks. Can
you describe how the changes to operational risk and the
surcharge could put the U.S. banks at a competitive
disadvantage with banks headquartered in Asia, and in Europe?
Ms. Tahyar. I think the impact is going to be mostly on our
largest banks, the G-SIBs that operate internationally and are
in direct competition with their European and Asian peers. You
are clearly right about the Chinese banks. They are not going
to be subject to anything near the same set of rules. The
European banks have very much a fundamentally different
business model, less reliant on fee income, and there is less
regulatory intensity, for better or for worse. So, there are
far fewer regulatory fines, which will have a long tail even
after the problem has been solved. And as I said in my written
testimony, I don't know why we're trying to hobble our hugely-
competitive banking sector right now, particularly with the
geopolitical situation we are in. In terms of small and mid-
sized enterprises, I am deeply worried.
Mrs. Kim. Thank you. Let me turn to domestic implications
of the proposals. One of the best ways to build wealth and
reach the American Dream is to own a home. Unfortunately, high
interest rates and inflation are making homeownership and the
American Dream unattainable, and we know that because mortgage
origination is at a 28-year low.
Ms. Tahyar, in your view, what kind of homebuyers would be
pushed out of the housing market with the new risk weight for
mortgages?
Ms. Tahyar. When I was young and just starting out, I put
down 5 percent on my first house. My starter house was 5
percent, so I would be priced out of that market now. And I
think that it is going to be mostly low- and moderate-income
buyers who do not have parental help, because we know that so
many young buyers these days only do it with parental help. But
for people who are making their way up the ladder, they are
more likely providing income to their parents, rather than
getting parental help. Those are the kinds of people who are
going to be disproportionately affected here.
Mrs. Kim. That may include my children, too.
Mr. Scott, in your testimony, you say that the regulators'
proposals could reduce U.S. gross domestic product (GDP) by
more than $67 billion per year. Out of the plethora of
proposals, which proposal would you say will have the highest
negative GDP costs?
Mr. Scott. I wish I could answer that. I was citing a study
by BPI which came up with this number, and I don't know in
which particular regulations underneath this. But in terms of
looking just at my instinct on this kind of in my testimony, I
think the market risk and operational risk parts of Basel have
such an impact on our capital markets, which, as I have
testified, are very important to financing in this country. I
will look there.
Mrs. Kim. Then, let me ask you another question. Can you
talk about how the stress test and stress capital buffer
already account for risks associated with the operational
failures? Do you think a separate capital requirement for
operational risks, as called for in the intended Basel III
Endgame proposal, is necessary or is it duplicative, that is,
could there be some double counting going on?
Mr. Scott. Yes, I think there is double counting, and there
are two ways to eliminate it: take it out of the stress test;
or take it out of Basel; or some combination of the two. That
should be done.
Mrs. Kim. Thank you. With that, I yield back.
Chairman Barr. The gentlelady yields back. The gentlewoman
from Texas, Ms. De La Cruz, is now recognized.
Ms. De La Cruz. Thank you, Mr. Chairman, for holding
today's hearing, and thank you to the witnesses for appearing
today. Professor Scott, you heard Ms. Rodriguez Valladares say
that massively raising capital requirements as contemplated by
the Basel III Endgame proposal will not decrease bank lending.
Do you agree or disagree?
Mr. Scott. I disagree with that. There are numerous studies
from the Bank for International Settlements (BIS), which is a
widely-acclaimed source. It is neutral, it is not political,
and it says that higher capital decreases lending. The question
is, how much? You can argue 1 percent, or 4 percent, but it
certainly decreases.
Ms. De La Cruz. And besides the studies, have you also been
able to speak to institutions, regional institutions on how
they feel it would affect their lending?
Mr. Scott. Yes. I haven't done a scientific survey, but I
do talk to banks, and I think any banker I have ever talked to
has said that higher capital increases, decrease lending.
Ms. De La Cruz. I am concerned about the cost to my
constituents that the recent bank regulatory proposals will
generate. And that is especially the case for the so-called
Basel III Endgame proposal to massively raise these capital
requirements as just discussed, and that it would choke off
credit availability and increase credit costs to families and
small businesses in my district and across the country.
Ms. Tahyar, do we know how all the recent complex and wide-
ranging proposals, with maybe more on the way, will have an
effect on consumers and small businesses?
Ms. Tahyar. We know there will be an effect on small
businesses, for sure. On consumers, I think that is a little
bit less clear. The key thing we don't know is how all of these
proposals interact with one another, and where all the
unintended consequences will be.
Ms. De La Cruz. And what kind of effects do you think they
will have on small businesses?
Ms. Tahyar. I think that the lack of a preferential weight
for small businesses which are unlisted, and even larger
businesses which are unlisted in a time period where our
economy is increasingly reliant on unlisted companies, and we
know where many of the jobs come from, which is small and mid-
sized companies, it is not going to be a good story for credit
to those companies.
Ms. De La Cruz. Have the regulators making the proposals
provided any solid analysis of what these effects may be?
Ms. Tahyar. I don't think so.
Ms. De La Cruz. My district is heavily agricultural and
ranchers, farmers being a large part of my constituents.
According to a USDA report, nearly 50,000 U.S. farms use
futures or options to hedge risk.
Mr. Scott, due to increased market risk capital
requirements imposed on banks, are all of the farmers and
ranchers going to be subject to higher costs when hedging risk?
Mr. Scott. Yes, because if we increase the capital
associated with taking a position and a derivative, it is going
to increase the costs.
Ms. De La Cruz. By increasing the cost, is it fair to say
that this will put a burden on our American farmers?
Mr. Scott. Yes.
Ms. De La Cruz. That being said, farm security, food
security is national security, so this is of great concern for
me. Again, my district is largely served by regional and small
banks. These banks are critical to our economy and to the
banking ecosystem in my area.
Ms. Tahyar, what impact will the recent proposals have on
regional banks and banks, even below $100 billion, seeking to
grow?
Ms. Tahyar. I think $100 billion and up is going to be a
sharp increase in their costs, interest rate costs, capital
costs. It is a very good question that you are asking about
$100 billion and below because if you think about the $50
billion to $100 billion, those are regional banks that are in
one State or two. What I understand, anecdotally, from my
regional bank clients is that they provide loans to small
businesses in smaller towns, smaller markets to agriculture.
Chairman Barr. I'm sorry. The gentlelady's time has
expired.
Ms. De La Cruz. I yield back.
Chairman Barr. Sorry to cut you off, but the time has
expired, and now the gentleman from Texas, Mr. Williams, is
recognized.
Mr. Williams of Texas. Thank you, Mr. Chairman, and this
would be to you, Ms. Petrou. Ms. Rodrigues Valladares testified
that the bipartisan regulatory tailoring law, S. 2155,
contributed to the bank failures in March of 2023. Were those
bank failures more about interest rate risk and deposit
concentration risk, or did SVB fail because it was not
subjected to one-size-fits-all capital requirements?
Ms. Valladares. Sorry. Are you addressing it to me?
Mr. Williams of Texas. No. It is to Ms. Petrou.
Ms. Valladares. That is why I wanted to wait.
Ms. Petrou. I think, first of all, the banking agencies had
tremendous discretion under that law to set standards based on
risk, and, in fact, importantly, they have reserved their right
to regulate banks, regardless of the tailoring, if they saw
risk forthcoming. I think the problem was far more supervision
than it was tailoring because the banking agencies didn't
tailor that much and they hardly supervised at all.
Mr. Williams of Texas. Okay. Thank you. The Federal
Reserve, the FDIC, and the OCC have been bombarding our
financial system with excessive regulations and dangerous
proposals like Basel III Endgame, long-term debt requirements,
resolution planning, and G-SIB surcharges. It is concerning
that many of our Federal banking agencies are rolling out these
proposals one by one in a rushed fashion without considering
how these combined regulation requirements will impact
innovation, limit access to capital, and threaten economic
stability. So, regulators should provide an analysis of the
potential effects on any proposal that makes significant
changes to our financial regulatory framework. Our mission and
the mission of regulators should be to allow the economy to
thrive, not tighten their grip on the financial system.
Ms. Tahyar, do you believe the cost-benefit and impact
analyses conducted by the agencies for these proposed rules
adequately address the negative consequences of potential
ramifications, and have regulators properly considered how
these proposals will interact with one another?
Ms. Tahyar. No, I don't think the cost-benefit analysis
goes as far as it needs to, although, particularly in Basel III
Endgame, they have tried very hard, but there are a lot of
untested assumptions and very little empirical study. There is
nothing out there, nothing that looks at the proposals, across
the proposals, and thinks about them overall.
Mr. Williams of Texas. Okay. Thank you. As we have
discussed, over the past few meetings of this committee, the
Basel III Endgame proposal will severely reduce financing and
access to capital for small businesses. Federal regulators are
continuing to try and place banks at a disadvantage and use the
bank failure from earlier this year as a weak justification for
this rewrite of bank capital regulations without fully
considering their impacts. These proposed changes will
dramatically affect the banking community, and there is
legitimate concern that the Basel revisions will have broad
impacts on Americans' ability to access reliable credit and
increase overall borrowing costs for individuals and small
businesses. These increases in costs will make it harder for
Americans to obtain a loan, whether they want to start their
own business, expand current business operations, or buy their
own home. Small businesses and everyday Americans rely heavily
on loans and credit lines from banks of all sizes to access the
capital that they need to do so.
When I meet with Texans back in my district--and I am a
borrower myself--I am constantly hearing about how scared they
are of regulators' out-of-touch proposals, and they have a fear
about what this Administration will do next to continue the
attack on the financial industry, and, frankly, on Main Street
America.
Mr. Scott, could you elaborate on how the Basel III Endgame
proposal impacts bank lending and the cost of credit for
borrowers, and what does this mean for Americans trying to
obtain a loan?
Mr. Scott. That is not a good story. It will increase costs
for the banks. They either will exit certain activities because
of their cost or raise their fees. That will mean higher cost
to borrowers and consumers and, overall, will not be good for
Texas' economy, or the economy of the United States.
Mr. Williams of Texas. We know it is all passed down to the
consumer.
Mr. Scott. That is correct
Mr. Williams of Texas. It eventually gets into the cost of
goods sold, and drives people out of the markets.
With that, Mr. Chairman, I yield back.
Chairman Barr. The gentleman yields back, and the gentleman
from California, Mr. Sherman, is now recognized.
Mr. Sherman. Thank you. We are looking at cost-benefit
analysis by those who think that we should have lower capital
standards. And one of the reasons for that is when you do the
cost-benefit analysis, you leave out the social costs, the
political costs, the cost to the fabric of our society.
Going back to what caused Basel III, namely, the 2008
meltdown, if you just look at the economics, you can say, hey,
we actually made money bailing out the banks, with no cost-
benefit analysis. That may be true. We lost some money bailing
out the auto companies, maybe we should have held the stock a
little longer, but that is a side issue. The reason for that
was that they came to us with the Troubled Asset Relief Program
(TARP), and a lot of us put some pressure on, and they ended up
buying preferred stock rather than the toxic assets.
Had they bought the toxic assets, we would have lost
hundreds of billions and that is the effect. But even with us
not losing any money on the bank bailout, the damage to the
social contract--how many of us have been told by every group
that wants anything, well, you gave it to the banks, so give it
to us? And this was added to by the Silicon Valley Bank and the
New Republic problem, which just added to this idea that banks
are bailed out, nothing really is fair in our society, so give
me mine. We are told that we can't possibly know the effect of
these new regulations, and we can't, but we also possibly can't
possibly know the effect of not adopting these regulations.
That is the thing about the future.
Now, I am concerned, Ms. Valladares, about the effect this
is going to have on initial public offerings (IPOs). How will
these standards discourage banks from participating in IPOs and
otherwise in the capital market?
Ms. Valladares. The question is, for whom?
Mr. Sherman. For you.
Ms. Valladares. Oh, right. There is no reason it would
discourage IPOs.
Mr. Sherman. Do the other witnesses agree?
Ms. Tahyar. No.
Mr. Sherman. Okay. I will hear from both sides then,
quickly.
Ms. Valladares. Okay. There is an initial public offering
right now. In fact, for many companies, many of them might
prefer it because of the elevated interest rate environment.
So, there is no proof that having banks that are safer is going
to impact IPOs. Banks that are safer----
Mr. Sherman. Right, but if you particularly raise the
capital requirements on that segment, it is going to cause the
banks to do less than that segment.
Ms. Valladares. It wouldn't.
Mr. Sherman. I will ask the witness next to you whether she
has a quick comment, because I have to go on to another
subject.
Ms. Tahyar. Sure. Thank you, sir. We are in a secular
decline for IPOs. Over the last 10 years, we have to understand
we have fewer and fewer public companies. The pressure on from
many parts that there will be greater operational risk and fee
capital, and, I think, imbalance that is going to be more than
the lack of preferential weights on unlisted companies.
Mr. Sherman. Okay.
Ms. Tahyar. So, I think it is a risk.
Mr. Sherman. Thank you. I want to go on to another thing,
which is that raising capital standards is the bluntest way to
ensure banks don't go under. The better way to do it is to look
at the individual assets and do good bank examinations, and
that is where I think our regulators have failed us because
they have ignored interest rate risk.
Now, when you pay attention to credit risk, that is a
reason not to make a loan to a local government. When you pay
attention to interest rate risk, that is a reason to not buy a
30-year Treasury. Silicon Valley Bank was famous for loaning
money to startups, and yet they lost their money by buying 30-
year Treasuries. And we still see a situation where, and I have
legislation on this, stress tests don't look at the number-one
stressors, what happens if interest rates go up? As a matter of
fact, they once did a stress test about what happens if
interest rates go down, which isn't a bad stress test, but
isn't so bad.
One illustration of how poorly-crafted regulations can
necessitate higher capital rates is they are going to give no
credit to private mortgage insurance. In what world is private
mortgage insurance irrelevant to the creditor? As a matter of
fact, the creditor is the one that makes sure that the
homebuyer gets the private mortgage insurance. I would have a
lot more faith in these rules if they didn't use the blunt
instrument of just raising the rates, and instead looked at
better bank examinations. I yield back.
Chairman Barr. Thank you. The gentleman yields back. The
gentleman from Tennessee, Mr. Ogles, is recognized.
Mr. Ogles. Thank you, Mr. Chairman, and thank you all for
being here, and our apologies for having votes and kind of
getting you stuck. But Ms. Tahyar, my colleague, Ms. De La
Cruz, had asked you a question and you were cut off because
time ran out, but the answer, which you were not able to
complete, is of interest to me because I have multiple regional
banks in my district and in Tennessee in general. Please
continue. I think you dropped off at $50 to $100 billion.
Ms. Tahyar. Sure. Thank you very much, sir. I think the
question was about the pressure on regional banks of $50 to
$100 billion, and then $100 billion and up. And I think even
aside from the capital rules, the increase in deposit run risk
has put a lot of pressure on those banks. Those banks also have
to have a lot of technology investment, and then there is the
increased intensity of supervision as well.
What we are seeing is a sector of the economy which makes
the most loans to farms, makes the most loans to small and mid-
sized enterprises in smaller markets, and which really takes
the most deposits from counties and States, et cetera, et
cetera, is under enormous pressure. We are a big, diverse
economy. We have a regional banking sector. We are among the
only countries in the world to have it. I think we should be
very, very careful before we say we want to put extra pressure
on this portion of the banking sector.
Mr. Ogles. When you look at additional pressures and you
have the regulatory regime, and there is additional cost, is it
fair to say that as a bank takes on more or additional costs,
those costs are going to be passed on to the consumer?
Ms. Tahyar. Yes, sir. They will be.
Mr. Ogles. Would it affect their ability and perhaps their
liquidity on investing in their community, whether it is farms
or small businesses or mortgages?
Ms. Tahyar. They will come under pressure. It may well be
that some consolidation on that sector makes sense, but I do
think we want to stop before we get to a place where we only
have 12 financial institutions in the country.
Mr. Ogles. What we are seeing, and this is kind of a broad
statement, is the onslaught of proposals from our Democrat-
appointed Federal banking regulators being pushed out in a
hurry with little to no supporting analysis, and that has been
touched on rather extensively here. Many are being pushed as a
response to bank failures and stresses in March, but the wide
range of the proposals goes far beyond anything that could
reasonably be associated with March.
And I would agree with my colleague, Mr. Sherman, that
blunt instruments or one-size-fits-all-type solutions are
problematic. So, whether it is the regulatory regime, whether
it is Basel III, it has been touched on here that when you look
at the banking sector of Europe, it is entirely different than
what we have here in the United States, versus the types of
loans and liquidity that are offered. And I have concerns that
we are subjugating ourselves to an agreement that--Mr. Scott,
are we held to Senate confirmation on this agreement?
Mr. Scott. That has been a longstanding question about what
Congress' supervision should be over this entire Basel process.
But I must say, given its impact, I think there should be much
more legislative control over this process than has existed in
the past.
Mr. Ogles. So, you are aware. When you look at the benefit
analysis that has been produced by the Federal banking
regulators in trying to justify their proposals, and Ms.
Tahyar, you touched on it as well, I have concerns when you
look at the analysis, when you look at proposals added
together, the downstream impact, whether it is on small
businesses, the regional banks.
We have just a few seconds left, so what is your primary
concern with the Basel III, Mr. Scott? And you may get the last
40 seconds.
Mr. Scott. My primary concern is, and I agree with
Congressman Sherman, that we need to take all costs and all
benefits into account here.
Mr. Ogles. Such as interest rate risk, liquidity, et
cetera?
Mr. Scott. Everything, okay? The point has been made that
we are not even looking into the stress test today and interest
rate risk, which is what caused these three banks to fail. We
need to do a much better analytical job of evaluating these
proposals.
Mr. Ogles. Thank you all again for your time. Mr. Chairman,
I yield back.
Chairman Barr. The gentleman yields back. The gentleman
from South Carolina, Mr. Timmons, is recognized.
Mr. Timmons. Thank you Mr. Chairman. The FDIC's proposed
rule on long-term debt aims to enhance the financial stability
of specific large banking organizations that are not classified
as globally systemically important. And while I acknowledge the
rule's intention of safeguarding the financial system and
depositors, I believe there are several critical issues that
require more in-depth consideration before its enactment, as
well as the proposed rule's general real-world effectiveness.
One of my most ever-present concerns, that the rule does
not adequately consider short-term transition costs, the
potential interaction with Basel III reforms, and other
indirect and unintended effects on borrowers. I am particularly
concerned with how Basel III capital requirements may
exacerbate the strain on bank capital availability, compounding
the effects of this proposed limited rule, not to mention the
fact that billions of dollars of commercial real estate
projects must be refinanced in the next 36 months. And not all
of those projects will be profitable when their mortgage
payments more than double and banks are prevented from
extending additional credit due to increases in capital
requirements and an unfavorable interest rate environment. That
is the looming crisis that we need to be preparing for, not
further restricting capital availability.
It is imperative that these unaddressed aspects undergo a
thorough evaluation to prevent unintended adverse consequences.
We need to know what the harm could be and assess the impact of
real-world modeling. But in July of this year, Fed Vice Chair
Barr stated his support for the upcoming proposed rule on long-
term debt during a speech at the Bipartisan Policy Center,
stating, ``If SVB had had enough long-term debt outstanding, it
might have reduced the risk of a run by uninsured depositors,
and it might have given the FDIC more options to resolve the
bank or merge it with a healthy institution.''
Ms. Tahyar, do you concur with Vice Chair Barr's
assessment? Do you believe that the limited requirement, in its
current state, would have prevented the failure of SVB, given
the scale and speed of deposit withdrawals that the bank faced?
Ms. Tahyar. I partly agree, and I partly disagree. I think
Silicon Valley Bank happened so fast that nothing could have
saved it. But I do agree with Vice Chair Barr that a properly
calibrated, with an appropriate transitioned long-term debt
requirement, can be a helpful layer between that, which would
protect depositors. I just worry that what we have here is not
well-calibrated and has too quick a transition.
Mr. Timmons. But you do agree that if this proposal were in
effect at the time, it would not have caused SVB to be fine. I
think that is the----
Ms. Tahyar. No, there is nothing that would have caused SVB
to be fine.
Mr. Timmons. If Congress hadn't spent $7 trillion that we
didn't have on increased inflation resulting in increased
interest rates, SVB would still be fine, but that is neither
here nor there.
Mr. Scott, we actually have a real-world example from
earlier this year to study on the subject. In Switzerland,
authorities imposed significant losses on certain Credit Suisse
bondholders as part of their efforts to resolve the failing
bank and consummated merger with UBS. Can you comment on those
instruments and whether those instruments would have proved
effective in resolving Credit Suisse, had they been honored as
intended?
Mr. Scott. The answer is, no, I can't, because as you
probably know, that is a subject of a lot of back and forth
about what the actual terms of those long-term debt agreements
were and whether the Swiss authorities were acting correctly in
imposing losses on those people. You know what happens in
Switzerland, and their rules would be very different than ours,
so I really can't fully answer that question.
Mr. Timmons. Okay. In March, the Federal banking regulators
couldn't stomach imposing even fractional losses on extremely
large uninsured depositors at SVB and Signature Bank, forcing
the American taxpayer to bail out their uninsured depositors.
Going forward, do you think Federal banking agencies will
actually impose real losses on bondholders of a failing bank as
instructed by their long-term debt proposal, or do you think
they will go the Swiss route and bail them out again?
Mr. Scott. Quite frankly, Congressman, I think we have a
history of not wanting to see what happens when we don't bail
out banks. That was the whole message of 2007 and 2008. We
didn't want to see it. We did it with Lehman. Oh my god, look
what happened. We shouldn't do that again. So, I am skeptical
whether all of these resolution procedures will actually be
used when people contemplate the contagion consequences to the
economy of using that.
Mr. Timmons. I hear you. It just seems that Washington
keeps creating crisis after crisis, and then creating a
solution for the crisis that it created, and we have to stop
the cycle. Thank you, Mr. Chairman. I yield back.
Chairman Barr. The gentleman yields back. The gentleman
from Texas, Mr. Green, I think you are the caboose.
Mr. Green. Thank you, Mr. Chairman, and let me thank you
for having a panel that is more reflective of society and of
the capable, competent, and qualified persons who are available
to serve as witnesses, and I thank the witnesses for appearing
as well.
Friends, we have empirical evidence indicating that there
is a need for us to give some additional assurances that we
won't have another Silicon Valley Bank, or Wells Fargo. We are
all aware of what happened there, so I don't have to go through
the details. But how would we adjust for some of these
egregious circumstances being simply a part of doing business,
if we allow things to continue, just a part of doing business?
So, you build into your business model a cost for these
egregious circumstances, and if you don't get caught, nothing
happens. You will live happily ever after with a coffer that is
overflowing with dollars or cash, and if something does happen,
well, you have already considered this in your business model.
Ms. Rodriguez Valladares, would you respond, please, to my
thoughts?
Ms. Valladares. I think, unfortunately, there is incredible
recidivism. You have banks that over the last 2 decades, have
ended up being fined over a quarter of a trillion U.S. dollars.
That is just here. I have worked on a trading floor, and I work
with banks all the time, and I have seen fraud firsthand, I
have seen misuse of data, I have seen all kinds of cover ups,
and it has to do with enforcement, right?
When the Barr report came out, I actually didn't read his
report because I knew he wasn't there and I knew that he wasn't
a bank examiner. I first read the CAMELS reports, which rate
capital adequacy, asset quality, management, earnings,
liquidity, and sensitivity to market risk. SVB was having
problems, serious problems with violations of anti-money
laundering processes. To me, that is always a signal that if
you can't even get your processes right for anti-money
laundering, when you know that the Fed could come in, you are
going to have problems with everything else. There were
problems with modeling. There were problems with data. They
weren't measuring interest rate risk properly. They were
basically illiquid.
If you read those reports carefully, the examiners did
their jobs. But where was the enforcement? I advocated in May
over at the Senate Banking Committee that we need an
independent analysis of what happened with SVB. We don't know
what happened. Why wasn't enforcement escalated? No amount of
capital, no amount of proposed rules are going to help if once
examiners detect a problem, they are ignored. If there is no
enforcement, then I am going to be here hopefully in a couple
more years, and it is going to be another quarter of a trillion
in terms of fines. Banks need to be accountable.
Mr. Green. Do you think that in addition to what you have
said, that some of these large businesses with these huge
profits are amenable to taking the risk because they know that
the enforcement is not there, and if they succeed, they have
enhanced their coffer, and if they do not succeed, they are
prepared to pay these fines that you have called to our
attention and move on?
Ms. Valladares. Absolutely. Executive compensation
absolutely has to be reformed. When I worked at JPMorgan, I was
paid not only on what I did, but also how the rest of the bank,
how all the traders around me did. So, the incentives are
really, really messed up, because what that means is that even
when somebody at a bank is trying to do the right thing, and
they see that somebody over there is taking on too much risk
and may cause the bank to implode, they are not going to tell
anybody because their bonus would be impacted. Does that make
sense? So, you really have to reform how people are paid at
these banks, especially executives. If the rest of us did what
the SVB CEO did, we would all be in jail. He went to Hawaii.
Mr. Green. Thank you. Thank you, Mr. Chairman. I yield
back.
Chairman Barr. The gentleman's time has expired, and that
will do it. I want to thank our witnesses for their testimony
today.
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.
This hearing is now adjourned.
[Whereupon, at 5:02 p.m. the hearing was adjourned.]
A P P E N D I X
September 19, 2023
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