[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
RULES WITHOUT ANALYSIS:
FEDERAL BANKING PROPOSALS UNDER
THE BIDEN ADMINISTRATION
=======================================================================
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
SECOND SESSION
__________
JANUARY 31, 2024
__________
Serial No. 118-72
Printed for the use of the Committee on Financial Services
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
www.govinfo.gov
_______
U.S. GOVERNMENT PUBLISHING OFFICE
56-258 PDF WASHINGTON : 2026
HOUSE COMMITTEE ON FINANCIAL SERVICES
PATRICK McHENRY, North Carolina, Chairman
FRENCH HILL, Arkansas, Vice MAXINE WATERS, California, Ranking
Chairman Member
FRANK D. LUCAS, Oklahoma SYLVIA R. GARCIA, Texas, Vice
PETE SESSIONS, Texas Ranking 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
TOM EMMER, Minnesota EMANUEL CLEAVER, Missouri
BARRY LOUDERMILK, Georgia JAMES A. HIMES, Connecticut
ALEXANDER X. MOONEY, West Virginia BILL FOSTER, Illinois
WARREN DAVIDSON, Ohio JOYCE BEATTY, Ohio
JOHN W. ROSE, Tennessee JUAN VARGAS, California
BRYAN STEIL, Wisconsin JOSH GOTTHEIMER, New Jersey
WILLIAM R. TIMMONS, IV, South VICENTE GONZALEZ, Texas
Carolina SEAN CASTEN, Illinois
RALPH NORMAN, South Carolina AYANNA PRESSLEY, Massachusetts
DANIEL MEUSER, Pennsylvania STEVEN HORSFORD, Nevada
SCOTT FITZGERALD, Wisconsin RASHIDA TLAIB, Michigan
ANDREW R. GARBARINO, New York RITCHIE TORRES, New York
YOUNG KIM, California NIKEMA WILLIAMS, Georgia
BYRON DONALDS, Florida WILEY NICKEL, North Carolina
MIKE FLOOD, Nebraska BRITTANY PETTERSEN, Colorado
MICHAEL LAWLER, New York
ZACHARY NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDREW OGLES, Tennessee
Matthew Hoffman, Staff Director
------
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND MONETARY POLICY
ANDY BARR, Kentucky, Chairman
BARRY LOUDERMILK, Georgia, Vice BILL FOSTER, Illinois, Ranking
Chairman Member
BILL POSEY, Florida AYANNA PRESSLEY, Massachusetts,
BLAINE LUETKEMEYER, Missouri Vice Ranking Member
ROGER WILLIAMS, Texas NYDIA M. VELAZQUEZ, New York
JOHN W. ROSE, Tennessee BRAD SHERMAN, California,
WILLIAM R. TIMMONS, IV, South GREGORY W. MEEKS, New York
Carolina DAVID SCOTT, Georgia
RALPH NORMAN, South Carolina AL GREEN, Texas
SCOTT FITZGERALD, Wisconsin JOYCE BEATTY, Ohio
YOUNG KIM, California JUAN VARGAS, California
BYRON DONALDS, Florida SEAN CASTEN, Illinois
MONICA DE LA CRUZ, Texas
ANDREW OGLES, Tennessee
C O N T E N T S
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Wednesday, January 31, 2024
OPENING STATEMENTS
Page
Hon. Andy Barr, Chairman of the Subcommittee on Financial
Institutions and Monetary Policy, a U.S. Representative from
Kentucky....................................................... 1
Hon. Bill Foster, Ranking Member of the Subcommittee on Financial
Institutions and Monetary Policy, a U.S. Representative from
Illinois....................................................... 3
WITNESSES
Mr. Greg Baer, President and Chief Executive Officer, Bank Policy
Institute...................................................... 5
Prepared Statement........................................... 7
Mr. Bryan Bashur, Director of Financial Policy, Americans for Tax
Reform (ATR)................................................... 23
Prepared Statement........................................... 25
Mr. Randall Guynn, Chair, Financial Institutions, Davis Polk..... 51
Prepared Statement........................................... 53
Mr. Jeremy Kress, Assistant Professor of Business Law, Stephen M.
Ross School of Business, University of Michigan................ 82
Prepared Statement........................................... 84
APPENDIX
ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD
Hon. Blaine Luetkemeyer:
Letters from Georgians....................................... 132
Hon. Andy Barr:
Institute of International Bankers (IIB)..................... 141
Letter sent to the Federal Reserve (FED), Federal Deposit
Insurance Corporation (FDIC), Consumer Financial Protection
Bureau (CFPB) and the Office of Comptroller of the Currency
(OCC) by Hon. Bill Huizenga, Hon. Daniel Meuser and Hon.
Alex Mooney................................................ 144
RESPONSES TO QUESTIONS FOR THE RECORD
Written responses for the record from Mr. Greg Baer.............. 146
Written responses for the record from Mr. Byran Bashur........... 151
Written responses for the record from Mr. Jeremy Kress........... 153
RULES WITHOUT ANALYSIS:
FEDERAL BANKING PROPOSALS UNDER
THE BIDEN ADMINISTRATION
----------
Wednesday, January 31, 2024
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Monetary Policy,
Committee on Financial Services,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m. in
room 2128, Rayburn Office Building, Hon. Andy Barr [Chairman of
the Subcommittee] presiding.
Present: Representatives Barr, Posey, Luetkemeyer, Williams
of Texas, Loudermilk, Rose, Timmons, Norman, Fitzgerald, Kim,
Donalds, De La Cruz, Ogles, Foster, Waters, Sherman, Meeks,
Scott, Green, Beatty, and Casten.
Chairman Barr. The committee will come to order. Without
objection, the Chair is authorized to declare a recess of the
committee at any time.
This hearing is titled ``Rules Without Analysis: Federal
Banking Proposals Under the Biden Administration.'' Without
objection, all members will have 5 legislative days within
which to submit extraneous materials to the Chair for inclusion
in the record.
I now recognize myself for 5 minutes to give an opening
statement.
OPENING STATEMENT OF HON. ANDY BARR, CHAIRMAN OF THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND MONETARY POLICY, A
U.S. REPRESENTATIVE FROM KENTUCKY
An onslaught of significant regulatory proposals has been
put forward, driven by Democrat-appointed regulatory officials
who have unfortunately injected politics into what used to be
an independent rulemaking process. Although Congress has
repeatedly asked, we have not seen any analysis of why the
existing bank-capital framework needs to be overhauled or how
the numerous regulatory proposals over the past year will work
together, or not. Rules without analysis lead to bad policy
outcomes and invite mistakes that will later be called
``unintended consequences.''
The failure to properly analyze proposed rules and follow
administrative procedures represents an abdication of
responsibility on the part of those who have made numerous
significant, but under-analyzed, new regulatory proposals.
The most glaring example of this flawed approach to
regulation is the major, significant, unmotivated, and under-
analyzed Basel III Endgame. This proposal involves trillions of
dollars in resource allocations and will increase regulatory
costs for about $22 trillion in assets, or 80 percent of all
U.S. banking assets.
Despite this substantial impact, the needed analysis seems
to be an afterthought and far too many elements of the proposal
are arbitrary and capricious.
Only recently have Federal bank regulators gathered data
that they should have been obtaining before they proposed the
rule. Only very recently have Congress and the American people
been told that the regulators will do a quantitative impact
study, which may be available after the Basel III Endgame
proposal's comment period has ended. Whether comments will be
accepted and, if so, the timing of the comment period on this
quantitative impact study has not been made clear.
Members of Congress from both chambers and both sides of
the aisle have expressed significant concerns about effects of
the Basel III Endgame proposal, reflecting the lack of analysis
that has been performed to this very day.
Comments on the Basel III Endgame submitted by a wide range
of interests and from across the ideological spectrum also have
expressed far-reaching and widespread concerns. Most comments
express the same concerns we have heard in our committee, and
in this subcommittee, since the proposal was first put forward.
The banking system is well capitalized and resilient in
stress tests, leading to the question of why Democrat-appointed
regulators want to massively ramp up capital requirements and
go far beyond what Basel recommends, and our competitors are
adopting.
The proposal has virtually nothing to do with the March
2023 banking turmoil, even though Democrat-appointed regulators
have unsuccessfully tried to use the March turmoil to justify
massive changes to the already gold-plated U.S. capital
framework.
The Basel III Endgame proposal will reduce credit
availability and increase costs for consumers, homebuyers,
businesses large and small, manufacturers, municipalities,
farmers and ranchers, and more. The proposal will make U.S.
institutions less competitive globally and will chase
activities outside of the regulatory perimeter for banks,
posing threats to financial stability, the functioning of
capital markets, and the abilities to hedge risks.
The bottom line is that the Basel III Endgame proposal
contains fatal flaws across the board, and we know nothing
about how it would ``holistically'' interact with the numerous
other significant recent and prospective regulatory proposals.
Those proposals include, but are not limited to, Long-Term Debt
requirements, the Community Reinvestment Act, resolution
planning requirements, debit card interchange, or Regulation
II, and whatever may be forthcoming regarding liquidity
requirements and stress testing.
My message to the boards at the Federal Reserve (Fed) and
the Federal Deposit Insurance Corporation (FDIC) is that merely
``recalibrating'' treatments of mortgages and green-energy tax
credits in the proposal and reducing the punitive and
unjustified operational risk penalties in the proposal will not
resolve our concerns or fix the remaining significant problem
areas in the proposal.
There are far too many other fatal flaws that need to be
addressed, including treatments of market risk, exposures to
companies with public listings versus non-public listing,
abandonment of internal models, effective repeal-by-regulation
of the tailoring law, and the interplay with stress tests.
The Federal banking regulators should scrap their faulty
Basel III Endgame proposal and reevaluate what, if anything,
may need to be done. At most, the regulators need to start
over, undertake proper analysis, follow proper administrative
procedures, and re-propose a significantly different rule.
As things stand for the onslaught of regulatory proposals,
the regulators must provide proper quantitative analysis,
follow the Administrative Procedure Act, and stop using our
regulatory system to push a political agenda. After all, these
agencies are meant to be independent, and if they continue to
act in a way that threatens this, Congress will act.
Our regulators can and must start over and do better. There
is too much at stake.
The Chair now recognizes the Ranking Member of the
Subcommittee on Financial Institutions and Monetary Policy, the
gentleman from Illinois, Dr. Foster, for 4 minutes for an
opening statement.
OPENING STATEMENT OF HON. BILL FOSTER, RANKING MEMBER OF THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND MONETARY POLICY, A
U.S. REPRESENTATIVE FROM ILLINOIS
Mr. Foster. Thank you, Chairman Barr, and thank you to our
witnesses for being here today.
Recent proposals from Federal banking regulators on the
Basel III Endgame, long-term debt, and the Global Systemically
Important Bank (GSIB) surcharge, aim to bolster the safety and
soundness of our banking system by ensuring that U.S. banks
properly manage and internalize the risks they take on. When I
first joined Congress in March 2008, we were on the edge of a
financial crisis. Excessive leverage and risk-taking by large
U.S. banks and non-banks put the global economy on the brink of
collapse, and the result of this crisis was a Federal bailout,
a debt the MIT Sloan School estimated ultimately cost U.S.
taxpayers nearly half a trillion dollars.
While significant steps have been taken since 2008,
including the passage of the Dodd-Frank Act and the
implementation of new capital rules, the financial landscape is
constantly changing. Rapidly developing financial technologies,
growing geopolitical tensions, and climate change present new
risks, and we must be vigilant.
Today's conversation will focus on the calibration of new
regulations proposed by prudential regulators. Simply put,
there are costs and there are benefits associated with raising
the capital requirements on large banks. Well-capitalized banks
are better able to weather stress and continue lending during
an economic downturn without putting taxpayers at risk of
funding another bailout.
On the other hand, higher capital requirements can increase
the cost of capital for these large banks, which will, to some
extent, increase the cost of loans and potentially create
economic incentives, whose impacts may be difficult to predict.
In this whole discussion there is a part of it that you can
calculate and a part of it that you can probably not calculate.
For example, Vice Chair Barr has opined that the cost of
capital for the large banks will be increased by about three
basis points, 0.03 percent. Others have estimates that may be
two times higher, but it is a small fraction of a percent and
so, that is the part you can calculate.
The part that is difficult to calculate is how that will
trickle through the rest of the economy, what fraction of that
increase in the cost of capital will simply result in a
transferring of business out away from large banks to smaller
banks or to non-banks, and what the implications of the
systemic risk to our banking system will be of that sort of
transfer. Banks will try to optimize their capital deployment
in a different way as we change these rules, and so they will
move their business from one area to another. This is the part
that is difficult to calculate and was hopefully captured in
the data that is being collected by the regulators as they look
at the final update of this rule.
I remember during the lead-up to Dodd-Frank, as we were
writing it, the banking sector argued that all these new
requirements would make the U.S. banks unprofitable and
uncompetitive in comparison to other banks, and we have heard
that effectively the capital levels have been higher for U.S.
large banks than they have for European and other competitors.
However, since then, U.S. banks have continued to earn record
profits and increase their market share around the world; so, I
would be interested in the witnesses' take on why on all of
these previous crying wolf on high capital requirements has,
from a sort of empirical sense, proven so wrong.
For me the key issue is not the straightforward effect, but
it is the knockout effects, and those are difficult to predict.
I have become a great believer in unintended consequences of
regulation, and so this is the area that I have been mainly
focusing on, trying to understand how banks will change their
business in response to these changes in capital requirements,
and that is what I will continue to be focusing my attention on
there.
And I yield back.
Chairman Barr. Thank you. The gentleman yields back.
Today we welcome the testimony of Mr. Greg Baer. Mr. Baer
is the President and CEO of the Bank Policy Institute; Mr.
Bryan Bashur. Mr. Bashur is the Director of Financial Policy
for the Americans for Tax Reform; Mr. Randall Guynn. Mr. Guynn
is the Chair of Financial Institutions at Davis Polk; and
Professor Jeremy Kress. Mr. Kress is Assistant Professor of
Business Law at the Stephen M. Ross School of Business at the
University of Michigan. Congratulations on the national
championship.
We thank each of you for taking the time to be here. Each
of you will be recognized for 5 minutes to give an oral
presentation of your testimony. Without objection, each of your
written statements will be made part of the record.
Mr. Baer, you are now recognized for 5 minutes for your
oral remarks.
STATEMENT OF GREG BAER, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
BANK POLICY INSTITUTE
Mr. Baer. Thanks. Chairman Barr, Ranking Member Foster, and
members of the subcommittee, thanks for the chance to be here
today.
If adopted, the capital rule proposed by the Federal
banking agencies would have a profound effect on the cost of
credit for nearly every American business and consumer as well
as on the resilience of U.S. capital markets. Given those
stakes, the proposal is remarkable for its lack of analytical
rigor and subversion of the use of relevant data. In almost
every case, the proposed risk weight for a given asset is based
on no historical experience, even where voluminous data is
available. In most cases the proposal simply adopts the risk
weights negotiated by agency staff in Basel over 6 years ago
and then adds arbitrary surcharges. Finally, the proposal fails
completely to acknowledge that in the United States, and the
United States alone, a stress capital charge for most of the
same risks is already imposed by the Fed.
These failings violate both the procedural and substantive
requirements of administrative law.
For credit risk the agency has proposed to eliminate the
advanced approach that employs more granular and adaptable bank
models, even though retention of those models was the core of
the 2017 agreement, and they have, by all accounts, produced
accurate results for well over a decade, overseen by these same
agencies. Then proposal adds a massive new charge for
operational risk, which is estimated would add up to a capital
requirement that is 3.5 times larger than the largest losses
experienced by U.S. banks in any year since 2003.
By our estimate, the total capital increase would be
significantly more than the 16 percent estimated by the
agencies. For the largest, most diversified banks it would be
around 30 percent. The increase for market risk would be an
astonishing 75 percent.
As a bottom line, the proposal effectively finds that U.S.
banks are currently critically undercapitalized, something that
no one in the real world believes for a single moment.
Some examples are telling. For business loans, documented
historical experience suggests that a risk weight of 41 percent
would be sufficient, 30 percent for loans rated investment
grades. Instead, the proposal establishes a requirement of 100
percent, and 65 percent only for firms rated investment grade
and that have listed securities--so two to three times what the
data suggests is necessary, and without explanation.
With regard to market risks, the proposal ignores
completely its overlap with the Federal stress test, which
covers the same risks for the same reasons. Again, there is
nothing about the real-world performance of U.S. banks to
suggest that their trading operations are critically
undercapitalized, and the proposed rule actually makes no
attempt to do so.
Of course, in combination with a variety of other pending
rules the Basel proposal would effectively repeal the tailoring
law passed by Congress.
Now some who have no desire to engage with the details of
the proposal have argued that it is good because it simply
means higher capital, and higher capital is always good because
well-capitalized banks lend more in crisis than
undercapitalized banks. Of course, they do, but they also do
not reenter businesses that they abandoned years earlier
because of high capital requirements. Furthermore, what the
research actually shows is that they lend more only if their
high capital exceeds regulatory minimums, so that they feel
free to draw down on that capital. If the minimums rise, as
they sure would here, that will not happen.
By the same token, sport utility vehicles (SUVs) with 50
airbags are safer in a crash than those with 4, so why not
mandate 50? Because such cars would be very expensive, fuel-
efficient, and no one would build them ex-ante.
The real question is whether large U.S. banks are already
sufficiently well capitalized to continue lending under stress.
We know they are, as demonstrated by consistent post-crisis
experience, including the pandemic and Silicon Valley Bank
(SVB), and through performance under the Fed stress test, which
has that as its explicit purpose.
To minimize the effect of the proposal, as the ranking
member notes, the Fed's vice chair has argued that the proposal
would, on average, raise the cost of loans by only three basis
points. As our economists, I think, first documented, and it is
now not disputed, that estimate omitted over $1 trillion in
operational risk-weighted assets that at least a majority of
which are attributable to lending. More importantly, that 3
basis points is only an average. For some assets, for example
commercial real estate lending to large, listed companies, the
number would actually go down. For others it would go up. We
estimate for credit cards the number is 50 basis points, or
$250 per year in interest on a $5,000 balance. Of course, banks
will shift their business away from the assets that receive the
higher risk weights.
I should note all of this is occurring in a world where
many U.S. banks are trading at or below tangible book value,
despite earning profits, but markets do not look at profits.
They look at return on equity, where banks are at historical
lows in the United States, and where their performance has
tailed just about every industry.
In light of all that, we urge the agencies to withdraw the
proposal, draft a new one, show their work, and seek public
comment.
[Prepared statement of Mr. Baer follows:]
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Chairman Barr. Thank you. Mr. Bashur, you are now
recognized for 5 minutes.
STATEMENT OF BRYAN BASHUR, DIRECTOR OF FINANCIAL POLICY,
AMERICANS FOR TAX REFORM
Mr. Bashur. Chairman Barr, Ranking Member Foster, and
members of the subcommittee, thank you for the invitation to
testify today. My name is Bryan Bashur, and I am the Director
of Financial Policy at Americans for Tax Reform (ATR). ATR is a
nonprofit, 501(c)(4) taxpayer advocacy organization that
opposes all tax increases and supports limited government, free
market policies. In support of these goals, ATR opposes heavy
regulation and taxation of financial services. ATR was founded
in 1985, at the request of President Ronald Reagan.
I am here today to talk about the proposed bank capital
rule, which is based off the Basel Committee on Banking
Supervision's Basel III Endgame framework.
In November, this subcommittee discussed how the Basel
Committee, among other international organizations, has
directly influenced U.S. banking regulation. Now, the
discussion will specifically revolve around a proposal that
circumvents congressional intent, abuses regulators'
discretion, and is arbitrary and capricious.
The Federal Reserve, Federal Deposit Insurance Corporation,
Office of Comptroller of the Currency are proposing to heighten
regulations on banks with at least $100 billion in consolidated
assets. The proposal would force large banks to build up more
capital through retained earnings and additional stock
issuances without any input from Congress.
These new rules will make borrowing more expensive, hamper
dividends and share repurchases, and reduce the availability of
credit cards and mortgage loans, activities and services the
government should not be micromanaging. Banks should remain
private and not regulated to such an extent that they resemble
heavily regulated utilities or other quasi-governmental
entities.
The Basel Committee's influence on banking regulation
across the globe has created a regulatory structure that
circumvents Congress. This is evidenced by the proposal's
direct repudiation of the bipartisan Economic Growth,
Regulatory Relief, and Consumer Protection Act. Congress passed
this legislation with the intent to tailor regulation for bank
holding companies. The proposal eliminates and replaces the
tailored regulation from S. 2155 by applying uniform
regulations to all banks with more than $100 billion in assets.
For example, the proposal expands the inclusion of
accumulated other comprehensive income for available-for-sale
securities to capital calculations for Category III and IV
banks. Category III and IV banks would also be required to
calculate their capital based on both the new expanded risk-
based approach and the existing standardized approach, and then
measure compliance based on the more stringent of the two
ratios. The supplementary leverage ratio and the
countercyclical capital buffer would also be expanded to apply
to Category IV banks.
The proposal also largely eliminates the use of banks'
internal models without any empirical analysis justifying this
prohibition. The blanket application of these requirements
defeats the purpose of S. 2155.
This proposal is arbitrary and capricious, an abuse of
discretion, and exceeds the statutory bounds with which the
regulators are supposed to operate.
Regulators may not expand their authority merely because
they believe their preferred approach would be better policy.
The regulators claim to have broad statutory authority to amend
capital requirements at will. However, Congress does not alter
the fundamental details of a regulatory scheme in vague terms
or ancillary provisions. It does not, one might say, hide
elephants in mouseholes. Congress made it clear in S. 2155 that
there needs to be a regulatory structure that is best tailored
to banks with different services and operations. The proposal
dismisses Congress' intent and moves ahead anyway.
Regulators are justifying the uniform application of
capital regulations to banks in categories I, II, III, and IV
by referring to ``recent events'' or the collapses of Silicon
Valley Bank, Signature Bank, and First Republic Bank. However,
these banks' failures cannot and should not be attributed to
all U.S. banks with more than $100 billion in assets.
The capital requirements dictated by the regulators have
not been condoned by Congress and are arbitrary and capricious
under the Administrative Procedure Act.
The proposal is a classic example of the government
intervening in the operations of private companies by mandating
how they must organize their balance sheets. If finalized, the
proposal has the potential to reduce the availability, or
increase the cost of credit for auto loans, credit cards, small
business loans, and mortgages. One paper describes how the
regulators' unbridled quest for more stringent capital
requirements can make capital allocation more expensive.
According to the paper, ``All else equal, making regulated
banks less risky may actually raise their cost of capital, with
consequent implications for investment and growth.''
At the end of the day, major questions and policy decisions
need to be left to Congress. Unelected bureaucrats should not
be in the business of creating the law.
Thank you again for inviting me to this hearing. I look
forward to answering your questions.
[Prepared statement of Mr. Bashur follows:]
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Chairman Barr. Thank you. Mr. Guynn, you are now recognized
for 5 minutes.
STATEMENT OF RANDALL GUYNN, CHAIR, FINANCIAL INSTITUTIONS,
DAVIS POLK
Mr. Guynn. Thank you Chairman Barr, Ranking Member Foster,
and members of the subcommittee. Thank you for inviting me to
speak today.
Starting last July, the U.S. banking agencies issued a
series of proposed regulations that would significantly
increase the going-concern capital of the largest U.S. banks.
Like an excise tax, this will increase the cost and decrease
the supply of credit to businesses and families. The agencies
would also impose a new gone-concern capital requirement on
large regional banks in the form of long-term debt that is
subordinate to all runnable liabilities.
Let me highlight a few points about this.
First, if you combine the going-concern and the gone-
concern capital requirements those two proposals would fall
most heavily on the regional banks. They would nearly double
the current capital requirements of those banks. This would
substantially eliminate tailoring between the GSIBs and the
regional banks, giving the regional banks a powerful incentive
to grow larger to remain competitive.
Second, the Basel III Endgame proposal would increase the
required capital for market risk by 77 percent. This will
increase the cost and reduce the supply of market making.
Markets will become less liquid. It will become more expensive
for businesses and local governments to raise debt and equity
capital. It will make it more expensive for manufacturers,
farmers, and others to hedge their risks.
Third, the Basel III Endgame would subject U.S. banks to
significantly higher capital requirements than banks in the
U.K., Europe, and Asia. Virtually every other country has
implemented the international framework in a capital-neutral
way, but the U.S. proposal would not. In particular, the
international framework imposes an output floor equal to 72.5
percent of the standardized approach for credit risk, but the
United States would impose a floor of 100 percent. Even if the
U.S. proposal were capital neutral, U.S. banks would be subject
to higher capital requirements than their foreign competitors.
That is because the Fed uses stress testing to set capital
requirements. Foreign banks are subject only to a capital
conservation buffer of 2.5 percent, whereas most large U.S.
banks are subject to a stress capital buffer that is higher
than 2.5 percent and never lower.
Fourth, by imposing a new capital tax on credit risks the
proposal will increase the cost and reduce the supply of
credit. This will result in more and more credit being supplied
to the economy by non-bank financial institutions, where there
is less visibility, less liquidity, and less capital in an
integrated financial system that creates more stability risk,
even for banks. The market share of non-bank financial
institutions has doubled since 1980, from 30 percent to nearly
60 percent of all credit supplied in the U.S. economy, and the
Basel III Endgame proposal would encourage this trend.
Fifth, I cannot recall another rule that would have such a
big effect on the U.S. economy with so little supporting data.
Although the regulators said they performed a holistic review
of capital requirements, they did not release any data from
that review, and certainly no rigorous cost-benefit analysis.
Finally, the opposition to the U.S. proposal is
unprecedented. I cannot recall another proposal that received
so many dissents from agency principals or so many negative
comments from such a diverse cross-section of the public and by
Members of Congress on both sides of the aisle.
I am happy to answer any questions that members of the
subcommittee may have.
[Prepared statement of Mr. Guynn follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Barr. Thank you, Mr. Guynn. Professor Kress, you
are now recognized for 5 minutes.
STATEMENT OF PROFESSOR JEREMY KRESS, ASSISTANT PROFESSOR OF
BUSINESS LAW, STEPHEN M. ROSS SCHOOL OF BUSINESS, UNIVERSITY OF
MICHIGANN
Mr. Kress. Chairman Barr, Ranking Member Foster, members of
the subcommittee, thank you for inviting me to testify at
today's hearing. By way of background, I am an Assistant
Professor of Business Law at the University of Michigan's
Stephen M. Ross School of Business and Co-Faculty Director of
the University of Michigan's Center on Finance, Law, and
Policy. My research focuses on bank regulation, systemic risk,
and financial stability. Prior to entering academia, I was an
attorney at the Federal Reserve Board where, among other
things, I worked on the initial implementation of the Basel III
capital rules.
The Federal banking agencies have recently proposed several
rules that would increase capital levels for the U.S.s' largest
banks. Taken together, these rules will better calibrate large
banks' capital requirements to the risks these banks pose to
society and reduce the likelihood of financial crises that
could devastate the economy.
Regrettably, the banking sector has responded to these
proposals by spreading misinformation in an effort to delay and
defeat them.
I will make three points in my testimony today. First,
higher capital is essential to making the U.S. banking system
safer and more efficient. Over the past 15 years, policymakers
have repeatedly provided public backstops to banks, either
directly or indirectly, through Federal Reserve lending
facilities, fiscal support measures, and equity injections.
Stronger capital requirements will help counter the poor
incentives that these rescues have fostered and reduce the need
for such extraordinary interventions in the future. Ensuring
that large banks maintain sufficient capital is especially
critical in light of questions that have arisen about
authorities' ability to resolve systemic banking organizations
following the disorderly collapse of Credit Suisse and three
U.S. domestic systemically important banks last year.
Second, stronger bank capital levels will promote credit
availability throughout the economic cycle. Better capitalized
banks lend more during economic and financial stress, precisely
when households and businesses need credit the most. Recent
U.S. experience confirms that higher capital is consistent with
sustained credit creation and economic expansion. Indeed, the
Dodd-Frank Act and initial Basel III rules raised bank capital
requirements during what became the longest U.S. expansion on
record, exposing as false banks' contemporaneous warnings about
the potential dire consequences of increased capital. The
pending Basel III Endgame rules will foster, not threaten,
credit availability as most of the proposed capital increase is
associated with large banks' trading and fee-generating
businesses, not their lending activities, and the risk weights
for many categories of traditional loans will actually decrease
under the proposal.
Third, the banking sector is trying to invent new legal
standards in a brazen attempt to defeat these rules. Requiring
banks to fund themselves with more equity will not impair
credit availability but it will modestly reduce bank stop
prices, share buybacks, and executive compensation. To avoid
this outcome, large banks are attempting to hold their
regulators to legal standards that simply do not exist.
Congress has subjected rulemaking by some agencies,
including the Securities and Exchange Commission, to various
forms of cost-benefit analysis. However, Congress has not
imposed any cost-benefit requirement on the Federal banking
agencies, and for good reasons. Quantifying the benefits of a
banking crisis averted is a nearly impossible task. The law
that does govern rulemaking by the Federal banking agencies,
the Administrative Procedure Act, requires only reasoned
decisionmaking, a standard that current proposals assuredly
meet. Indeed, the level of analysis in the current proposals is
at least equal to, and many cases exceeds, prior Federal
banking agency rules. Make no mistake: if the current proposals
are legally deficient, so too are the vast majority of the
deregulatory rule adopted under the Trump Administration with
far less reasoned analysis.
In sum, the current proposals will strengthen large banks'
capital cushions, reduce the likelihood of future financial
crises, and position large banks to remain a source of credit
to households and businesses throughout the economic cycle. The
banking agencies should finalize these proposals without delay
and without materially weakening their provisions.
Thank you, and I look forward to your questions.
[Prepared statement of Mr. Kress follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Barr. We will now turn to member questions. The
chair now recognizes himself for 5 minutes for questioning.
You know, I just fail to, at the outset, understand the
logic of this idea that in order to protect the economy and
financial stability we have to destroy the economy. That does
not make sense to me. I note with interest that many of my
colleagues on the other side of the aisle, and stakeholders
from across the ideological spectrum, have expressed
significant concerns with many aspects of the Basel III
Endgame.
There is a reason why there is bipartisan concern, because
on a bipartisan basis we do not believe, Congress does not
believe that the way to protect the economy is to destroy the
economy. Many comments on the proposal relate to treatment of
mortgages or green energy tax credits. Both issues are examples
of unintended consequences from a proposal that contained
shocking deficient analysis.
Yet concerns and comments have been expressed from a wide
variety of stakeholders, covering far more issues than just
mortgages and tax credits, including issues concerning market
risks, abandonment of internal models, and more.
The bottom line for commenters is concern about the unknown
and unestimated negative effects on credit availability and
costs from the proposal from homebuyers, consumers,
manufacturers, disadvantaged communities, municipalities, and
businesses, large and small.
Mr. Baer, can you touch on the treatment of market risk in
the Basel III proposal and talk about likely impacts?
Mr. Baer. Thank you, Congressman, Mr. Chairman. I mean,
market risk is a very complicated subject. It is very difficult
to measure, but it can and is measured in the proposal.
The problem is it is covered twice. After the financial
crisis there was a realization that value-at-risk models, which
cover problems that happen most of the time but not all of the
time, were not a sufficient measure, and you needed to actually
look into the tail of risk and cover the worst case. The United
States did that, the Federal Reserve, through the global market
shock, and basically had stresses worse than the global
financial crisis.
The rest of the world did not adopt a stress test like the
Fed. Instead, it went off and worked on a market risk add-on or
supplement to Basel, which it called, oddly, the Fundamental
Review of the Trading Book. That did effectively the same thing
as the global market shock, and now everywhere else in the
world they are going to adopt the Fundamental Review of the
Trading Book as the measure for market risk, and only in the
United States are we apparently on a path to adopting both and
doing a pure double count.
I should say there are some other issues within the
Fundamental Review of the Trading Book. There are some
assumptions that do not make a whole lot of sense. There is an
expected shortfall method that really disqualifies the use of
models in a lot of cases where they ought to be used. There is
something called things that cannot be modeled, and you then
get a punitive stress test or standardized charge.
There are problems within the Basel proposal, but the
largest problem is the overlap.
Chairman Barr. Yes. This double counting, I think, is
really at the core of why this proposal would make our economic
system less competitive internationally.
Mr. Baer, can you quickly also discuss the proposed
abandonment of internal models and whether in doing so
financial institutions' risk profiles and portfolios will be
homogenized and thereby actually threaten financial stability?
Mr. Baer. Sure. It is an excellent point. In the United
States for the largest banks, we are currently using what is
called the advanced approach, is well named, whereby granular
bank models are used as opposed to just lumping together
classes of loans that do not have a lot in common, which is
what standardized approaches do. That system has been in
operation since 2011, under extraordinarily stringent guidance
from the agencies, and they have at no point between then and
now raised any concerns about the accuracy. There has never
been an action against a bank.
More importantly, when Basel, when it adopted its
standardized approach, it assumed that standardized approach
would have applied at 72.5 percent of where it landed because
banks would be able to use internal models. Only in the United
States are they proposing to eliminate the use of models and
effectively set the standardized charge at 100 percent. That
will certainly herd banks, as you know, into asset classes that
are favored by the standardized approach.
Chairman Barr. Mr. Guynn, really quick. Vice Chair Barr has
argued that the effects of this onerous proposal are modest,
amounting to increased average loan costs of just a few basis
points. Can you discuss whether you believe that there would be
a more substantial impact through this proposal?
Mr. Guynn. I do think that other economists have looked at
this and suggested that there is going to be a much bigger
impact. Certainly the biggest impact is operational risk that
will affect the cost of loans as well, and the market risk,
although it is not directed at lending, it is directed at
raising debt and equity capital in the capital markets, and it
will increase the cost there.
Chairman Barr. Mr. Guynn, how important is it for the Fed
to provide the public and regulated institutions with
sufficient time to comment on the rule's quantitative impact
study.
Mr. Guynn. I think that is incredibly important. I think
one of the surprises here is that they did not do the
quantitative impact study at the same time they released the
rule but I think people need 60 to 90 days, I think, to
actually absorb it and comment on it appropriately.
Chairman Barr. My time has expired, but again, I mean, it
is possible to prevent disease by killing the patient, but I do
not think we should kill the patient.
With that I yield and recognize the ranking member for 5
minutes.
Mr. Foster. Thank you, Mr. Chair, and to our witnesses.
This is your chance to go on the record with a prediction.
Which of you--and I will not go down the line here--would
predict that if this proposal goes ahead essentially as
proposed, that large U.S. banks will no longer be competitive
and no longer be increasing their market share? Are you
predicting that if we go ahead and adopt rules that will
require slightly higher capital requirements for large U.S.
banks that they will become uncompetitive and lose market
share?
Mr. Baer. Ranking Member Foster, I think that will be line
of business by line of business. We have seen them losing
market share for some time now in mortgage lending----
Mr. Foster. In the whole. In the whole, do you expect--
because we had these predictions as we were writing Dodd-Frank
that if we went ahead like this that they would be crushed by
offshore competitors. That has not happened. Are you predicting
it will happen if this goes ahead now, in the whole. Will an
aggregate effect make U.S. banks lose market share?
Mr. Baer. Yes. If----
Mr. Foster [continuing]. they will decline. Okay.
Mr. Baer. Certainly, capital markets----
Mr. Foster. Mr. Bashur----
Mr. Baer [continuing]. across the board.
Mr. Bashur. I think it would definitely put a lot of strain
on them.
Mr. Foster. No. Will they become uncompetitive compared to
offshore banks--that is the question--which are held to lower
capital requirements?
Mr. Bashur. I think that the strain, over time, could make
them much more uncompetitive.
Mr. Foster. But you are not predicting it will. Okay. Next?
Mr. Guynn. I think their costs will go up relative to the
foreign competitors, but there are a lot----
Mr. Foster. Do you think that is different--but that is a
double-edged sword. Will the net effect----
Mr. Guynn [continuing]. but there are a lot of factors that
affect whether you are competitive or not, and I think that
they will continue to be competitive, but they will face higher
costs because of this capital proposal.
Mr. Kress. Capital makes us strong. U.S. banks will
continue outperforming their international competitors, just as
they did after the Dodd-Frank Act I 2010, despite complaints
about gold-plating that we heard from the banking sector.
Mr. Foster. No, another issue that gets brought up a lot is
this issue of double counting, that the stress test already
counts them, but the choice of the stress conditions is a tough
one. If you could take very realistic near-term stress
conditions, will banks remain well capitalized? For example, if
China invades Taiwan, the supply of integrated circuits is shut
down to the world, there is a worldwide blockade on China, and
every business in the United States relies on importing Chinese
goods, marking them up. They will find supply chain--they are
shut down.
You know how many banks will fail under that circumstance?
Is that a realistic test? It is my impression that the stress
tests do not even come close to that level of stress, and yet
it is a quite plausible geopolitical possibility,
unfortunately.
When you talk about double counting, in a situation where
you have not actually stressed the banks as much as they
plausibly could, by worst case geopolitical events, how do you
think about that?
Mr. Baer. Sure. Both the Fundamental Review of the Trading
Book (FRTB), under Basel, and the Fed's Global Modeling Studies
(GMS), global market shock, are agnostic as to the cause of the
stress. Basically they look at how much are spreads going to
blow out across all types of securities and then how much
illiquidity is there going to be, that is, for how long will
the institution be unable to see that security. Now that could
be because of war, pestilence, you name it.
Both of them are pretty calibrated around the worst moments
of the global financial crisis, and then some. I think it is a
reasonable assumption that if there were the upsets of the type
that you saw, it is difficult to imagine a worse upset than we
saw in 2009, and it is also difficult to imagine that you want
to capitalize market making for U.S. capital market on that
assumption. At that point perhaps there is a role for the
government, but it is certainly not a reason to capitalize the
banks every day for a scenario significantly worse than the
worst moments of 2009, and then do it twice.
Mr. Foster. Okay.
Mr. Kress. Thank you, Ranking Member Foster. I think two
points. One, the banking of last year demonstrated that we
absolutely need more variability in our stress test scenarios.
The Federal Reserve had not stress tested against a rising
interest rate environment, and we saw what happened, so;
looking at implementing more variety in the scenarios is
definitely something the Federal Reserve should do.
Second, on the issue of double counting, I just want to
emphasize that minimum capital requirements and the stress
tests do different things. Minimum capital requirements are
calibrated to ensure that banks remain solvent, that their
assets exceed their liabilities. The stress test, on the other
hand, is designed to ensure that banks remain above their
minimums, even during times of stress, because we know when
banks approach their minimums, or go below their minimums, that
is when they pull back on lending.
I do not think it is fair to characterize it as double
counting because the mechanisms are supposed to do different
things.
Mr. Foster. Thank you. My time is up, and I yield back.
Chairman Barr. The gentleman from Florida, Mr. Posey, is
now recognized.
Mr. Posey. Thank you, Mr. Chairman, and I thank the
witnesses for appearing here today.
Mr. Baer, Mr. Bashur, Mr. Guynn, in early December, JP
Morgan's CEO, Jamie Dimon, told the Senate Banking Committee
that under the new capital rules, mortgages and small business
loans would be more expensive, saving for retirement or college
will be harder, consumer prices will rise, and the government
infrastructure projects and corporate development will become
more expensive. What do your research and experience suggest?
Mr. Baer. Let me just give mortgages as an example. I think
the others are similar. Again, if you assume a 100 percent risk
weight that basically means a $100 loan, $8 of capital, if you
assume 8 is about the average. Under the current rules the risk
weight for mortgages is 50 percent, so $4. Under the advanced
approaches being used by the largest banks, which are a more
accurate gauge, it is 25 percent. Under Basel, as proposed, and
agreed to in 2017, and for the rest of the world, the risk
weight is 25 percent. Under the U.S. proposal for loan-to-value
ratios (LTVs) between 80 and 90 percent--so good, solid, highly
collateralized loans--it is 95 percent if you include the
stress capital buffer from the Fed, and for loans sold to the
Government-Sponsored Enterprise (GSE) it is 150 percent.
We are talking 3, 4, 5 times current rates under the
advanced approaches and what has been agreed to at Basel.
Again, back to a theme here, there is no analysis in that
proposal to demonstrate why those levels of capital are
necessary, no historical losses to justify that outcome.
Mr. Posey. Incredible.
Mr. Guynn. Greg focused on mortgages. Let me focus on small
and medium-sized enterprises and infrastructure. The principal
provision that affects the small businesses is one that
basically says you have 100 percent risk weight unless you
actually are investment grade and you have publicly listed
securities, in which case it is a 65 percent risk weight; so,
that means that the lending to the company that has listed
securities will be cheaper than what it is to the small and
medium-sized enterprise (SME). Most SMEs do not have listed
securities, so they cannot qualify for the 65 percent risk
weight. They will be borrowing at the 100 percent risk weight.
For infrastructure, the cause of the increased cost is the
extremely high increase in capital requirements for market
risk, which is an increase of 77 percent according to the
agency's own estimate. That will substantially increase the
cost and reduce the supply of market making. That makes markets
less liquid. That makes it more expensive for local or even the
Federal Government to finance its infrastructure because they
will have to pay more of a risk premium when they borrow money
to do those, and also it will be harder to hedge the risks of
those.
Mr. Posey. Thank you. Mr. Bashur?
Mr. Bashur. I am very concerned about credit cards and the
expansion of the supplementary leverage ratio because credit
cards will be considered an off-balance-sheet exposure that
would be in the denominator of the supplementary leverage ratio
(SLR). Now, all of a sudden that is going to impact Category IV
banks and their availability to issue new credit and then also
the effect on retirees that are invested in collective
investment trusts.
I think that the market risk capital requirements are going
to significantly hamper liquidity there and then on top of
that, if we are talking about double counting, I think just
inherent in the proposal itself the application of the
operational risk charges to every facet of every service that
these banks offer is questionable.
Mr. Posey. Thank you. When Silicon Valley Bank failed,
Secretary Yellen kept repeating over and over and over that the
banking system is well capitalized, which made me wonder about
the need for Basel III. Mr. Kress, was she telling the truth?
Mr. Kress. Congressman, I think there is a difference
between the legal definition of well capitalized--10 percent
equity--versus the normative question----
Mr. Posey. Was she telling the truth?
Mr. Kress. Legally, the banking system is well capitalized.
Mr. Posey. Okay.
Mr. Kress. That does not answer the question of whether it
is well capitalized enough----
Mr. Posey. I am running out of time.
Mr. Kress [continuing]. for us to be comfortable with the
activities that the banking sector is engaging in today.
Mr. Posey. I would like to hear from the other gentlemen.
Do you agree?
Mr. Baer. Yes. I do not think she was mincing words.
Mr. Bashur. I agree.
Mr. Guynn. None of the agencies have put forward any
evidence to say that it is not sufficiently capitalized, and if
you look at the recent history the banks have been a source of
strength during coronavirus disease 2019 (COVID-19) and other
things. There does seem to be plenty of evidence that they are
well capitalized.
Mr. Posey. Thank you. My time has expired, Mr. Chairman. I
yield back. Thank you.
Chairman Barr. The gentleman yields.
The gentleman from California, Mr. Sherman, is recognized.
Mr. Sherman. Nothing is free. If we have maximum capital
standards we reduce economic growth and hurt small business and
first-time homebuyers. If we minimize the capital requirements
then we increase economic risk, and we saw, in 2008, how first
our economy was shaken to the core and then with the bailout
our constitutional system and social contract was shook to the
core.
What I think we can agree on is that poorly tailored
regulations are bad. They reduce economic growth without
reducing the bailout risk. I commend the regulators for trying
to strengthen our banking system, but there are some poorly
tailored regulations. One example that I will get to later is
giving no credit for private mortgage insurance and thereby
hurting first-time home buyers and people of color
disproportionately.
These regulations are being sold as we are going to
harmonize with Europe. It is Basel. It is something the whole
world is doing, when, in fact, these regulations go far beyond
Basel, in most cases. This is not harmony with Europe. This is
an attempt to move toward higher standards than Europe has.
One area that sees where these regulations are inadequate,
which might put me to the left of Mr. Kress, and that is on
interest rate risk. Before 2019, banks with over $250 million,
I believe, had to recognize unrealized losses on available-for-
sale securities. That is what the bill I have introduced, the
Bank Safety Act, would require for all banks over $100 billion.
What about the held-to-maturity securities? Silicon Valley
Bank proved to us that you can bankrupt a bank by investing in
long-term debt, and it does not matter which category you put
it in, held-to-maturity or available-for-sale. If you buy
enough of them you cannot just have a liquidity problem, you
can have a solvency problem. Your bank can be bankrupt, and
these regulations inadequately deal with that.
When it comes to stress testing, I have proposed the
Effective Bank Regulation Act to say that the bank's stress
testing should look at interest rates going down as one of the
possible stresses. The response from bank regulators sitting
right there was no, interest rates going down only helps banks
because we have these stupid depositor profit centers.
Depositors will leave their money.
They do not, and Silicon Valley Bank went under.
Mortgage servicing rights are hurt by these proposals, and
that is going to hurt home borrowers, and especially those
first-time homebuyers.
I am concerned about the effect this will have on our
capital markets. At a time when we passed the Bipartisan
Infrastructure Act this is going to hurt municipal bonds and
make it harder to do the very projects that we united to be in
favor of.
As I mentioned, you have no credit for private mortgage
insurance, and I want to thank Representatives Meeks and Beatty
and Vargas and Horsford and others for joining me in sending a
letter saying they need to reconsider that.
As Mr. Guynn put it out, this regulation advantages the big
borrowers with listed securities and penalizes banks for doing
the one damn thing we want them to do, and that is to lend to
local businesses, particularly on Ventura Boulevard. I cannot
imagine why they did that.
Finally, as to the clean energy tax credits, this gives
them zero value while preserving the value for the very
analogous low-income housing credits.
We have a regulation that does nothing to learn from the
Silicon Valley Bank, and it encourages banks, if they want to
make a profit, to engage in risky, perhaps profitable, but
risky bets on long-term, non-interest-rate-adjustable bonds
without an interest rate hedge, and then it hurts first-time
homebuyers, small businesses, and the environment.
Can I sneak in a question?
Chairman Barr. The gentleman's time has expired.
The gentleman from Missouri, Mr. Luetkemeyer, is now
recognized for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman, and I certainly
appreciate and want to associate myself with the remarks of Mr.
Sherman. He nailed one point after another that is problematic
with this rule. He articulated not only the problem but the
effect that it could have on our small businesses, in
particular, and the different markets he was talking about. I
applaud him for his remarks this morning.
As somebody who was a former regulator for a couple of
years, and in the banking business for another 40-plus, I
appreciate higher capital. I believe in higher capital. I think
it is important. It solves a lot of problems but there is a
limit, as Mr. Sherman just said, as to where that line should
be.
After Dodd-Frank--I am not a big fan of Dodd-Frank but it
actually worked from the standpoint of having the banks have
more capital, and I think the ultimate stress test was about 3
or 4 years ago when we had the pandemic, and we survived that.
Our banking system survived that. Our economy survived that, a
result of strong banks. Now we are trying to go out here and
put more capital in the banks, or in my mind, trying to appease
the foreign folks. As Mr. Sherman has articulated, we are going
beyond what they really want us to do.
I think part of this is a result of the three banks that
failed last spring. It was not that the banks were under-
capitalized. They would have had to have 25 to 30 percent
capital. They were under-regulated. This rule, to me, tells me
that the regulators are not doing their job, and I told them,
when they were sitting in your chairs right there, this fiasco
that happened last spring is 50 percent your fault, because you
allowed a business model to exist, go unchecked. You knew it
was wrong, your reports showed it was wrong, and yet you did
nothing. This rule is a way for them to cover their rear ends.
It looks like to me.
I asked myself the question, what problem are we trying to
solve here? Mr. Baer, can you give me an answer to that
question? What problem is this rule trying to solve?
Mr. Baer. Well, I will try to be kind.
Mr. Luetkemeyer. You do not have to be. That is all right.
Mr. Baer. No, I think the genesis of this is that in 2017,
agency staff agreed to Basel, and now they are getting around,
belatedly, to implementing it and there are good arguments for
having international standards and some similarities among
capital requirements.
What I find is so perplexing and concerning about this
proposal is that it is not really what they have done. They
have added, in almost every case, to the Basel which they
agreed to. The securities listing requirement that Randy talked
about that disqualifies small businesses from access even to a
65 percent risk weight when the numbers show it should be 30 to
40. Well, that was jettisoned by both the European Union and
the U.K. Of course, here we have the stress tests they do not
have.
I understand the spirit--let us get Basel done--but this is
not Basel.
Mr. Luetkemeyer. Mr. Bashur, if you would answer that
question as well, but considering this fact. I was in the Small
Business Committee hearing and Vice Chairman of the Small
Business Committee, and the other day we had a very, very
respected economist there, and he said that this administration
proposes about $150 billion a year in new rules and
regulations, costs that have to be assimilated into the budgets
and the services and products that are sold by these
businesses, especially small businesses. This is a huge barrier
for them, a huge burden for them, and there is no
Administrative Procedures Act requirement here, supposedly,
that forces them to do any kind of a study.
How difficult is this to really be able to implement this,
and should this be part of an economic study, with regards to--
or should be a requirement of the Administrative Procedures
Act?
Mr. Bashur. I think that this rule lacks a substantive
economic analysis that needs to be analyzed much more
substantively, and I think that the effect on small businesses
will be substantial. In fact, when I talked about credit cards
earlier I think there could be an effect on actual spending
which could impact small businesses.
In general, I think that with this proposal--and does this
solve anything--this is a perfunctory measure. They are trying
to follow through with what Basel has proposed, but again, that
gets to the problem of why we are listening to Basel and not to
you all.
I do admit that there are certain places in statute where
Congress has said let's do a capital requirement. There is one
for 50 percent for certain residential mortgages, but as a
whole that is not the case. I still think that because of the
uniform application of these rules across Categories I through
IV banks that is in direct contradiction to S. 2155.
Mr. Luetkemeyer. Thank you, and I see my time has expired.
I yield back, Mr. Chairman.
Chairman Barr. The gentleman's time has expired.
The gentleman from Georgia, Mr. Scott, is recognized.
Mr. Scott. Thank you very much.
Professor Kress, I have expressed my deep frustration with
this situation in our previous meeting on Basel III, and it
seems like the Fed is being pulled in two directions. On the
one hand, protecting the soundness of our banking system, and
on the other hand, preserving the ability for millions of
borrowers to buy a home. That is the situation we are in.
In your testimony you highlight, it seems to me, an
openness by regulators to make some adjustments in the
proposal. With respect to high loan-to-value residential
mortgages, tell me, have you seen any recent indication of this
happening? Please excuse my cold.
Mr. Kress. Thank you, Congressman. I think this is a great
example of the public notice and comment process working as
intended. The agencies following the Administrative Procedure
Act put the notice out for an initial 120-day period. They
later extended that. The public has had now 173 days in which
to comment, and they heard, as you noted, a lot of feedback on
the residential mortgages front, and the agencies have
indicated that they will take that into account.
The initial proposal laid out three different options for
how to address residential mortgages, and it is too early to
say what option they will use when they finalize.
Mr. Scott. Let me ask you this. If enacted, the provisions
affecting mortgage lending in the Basel III Endgame proposal
will require our Nation's largest banks to hold significantly
more capital against certain mortgage loans, like those of
borrowers with less than 20 percent down payment. Does that
trouble you?
Mr. Kress. Congressman, I think it is important to
contextualize the businesses that these banks are in. The
proposal affects the 37 largest banks in the country, out of
4,500. The depository institutions, the financial institutions
that are providing loans to low-and moderate-income communities
are primarily smaller community banks, credit unions, and in
some cases non-depository institutions.
I do not want to overstate the effect because so much of
the mortgage lending that you are concerned about is not being
done by the 37 affected banking organizations.
Mr. Scott. Mr. Baer, let me come to you. What would be the
impact of risk weights for mortgage loans if they are
compounded with the operational risk charge and the Federal
Reserve's stress tests?
Mr. Baer. Sure. I mean, obviously the effect would be
profound, as I gave some numbers earlier. I mean, you are
talking about a capital charge of probably three, four, maybe
more times higher than historical loss experience would suggest
and that Basel agreed to. You know, you have already seen the
market share of banks in mortgage decline precipitously over
the last 10 years. There was a little bit of an uptick last
year but I think you can expect that trend to continue.
It is important not only because banks tend to offer good
loans, good prices, but also they have much more of an
incentive to work with borrowers who get into trouble.
Actually, that is also punished in the proposal. If you do a
workout, that is considered a default.
In the nooks and crannies of this proposal there are a lot
of other provisions that are at low-and moderate----
Mr. Scott. What about for mortgage loans intended to be
sold to the government-sponsored enterprises?
Mr. Baer. I mean, I think this was probably unintended, but
it is a good example of how disruptive the operational risk
requirement is. You do not think of that as operational risk,
but basically when a bank sells to the GSEs they only hold it
for 60, 90 days. When they sell it they get a fee. That is not
credit risk, but under the proposal that is operational risk
because fee income is supposed to be a proxy for operational
risk. So there you have a mammoth operational risk charge,
which again results in a 150 percent risk----
Mr. Scott. Well----
Mr. Baer [continuing]. sell to the GSEs, which I assume
they are going to fix.
Mr. Scott. You see, I am not the only one on this committee
who is very frustrated with what is going on here. Tell me, why
are they doing this?
Mr. Baer. I mean, in general, again, I think it is Basel
adherence, but again with a lot of add-ons. The U.S. mortgage
market, particularly with regard to mortgages, the mortgage
market is different. U.S. banks are much more dependent on fee
income than foreign banks, and so I do not think that got a lot
of attention in Basel. U.S. banks are uniquely hit by the
operational risk charges.
Mr. Scott. Thank you very much.
Chairman Barr. The gentleman's time has expired.
The gentleman from Georgia and vice chair of the
subcommittee, Mr. Loudermilk, is now recognized.
Mr. Loudermilk. Thank you, Mr. Chairman. Thank you all for
attending today. A very important conversation we are having.
Very timely as well.
Before I get into my questions, though, I just want to
reiterate something my colleagues have said before. The
overhaul of banking regulations before us today is not just
about the globally, systemically important banks. The proposal
will affect regional and mid-sized banks as well as their
customers but I do not think it is going to stop there either.
During the limited public comment period, the regulators
heard from Georgians on all sides of the political spectrum who
were concerned about this proposal. I have a few of their
comments right here. I would love to read them all aloud, but
we do not have time for that; so, I would like to insert all of
those for the record.
Chairman Barr. Without objection.
[The information referred to can be found in the appendix.]
Mr. Loudermilk. Thank you, Mr. Chairman.
Following the 2008 financial crisis, Georgia lost more
small and community banks than any other State. After Dodd-
Frank and the regulations that were imposed, since I have been
in Congress, we were very slow to see de novo banks and
community banks reinstated. In fact, when I first came onto
this Committee a few years ago we still had 15 counties in
Georgia that did not have a small or community-owned bank, and
there were two that had no bank whatsoever, and a lot of that
was because of the regulation.
Now I have a whole suite of questions, but really I think I
can summarize this. What you have heard today, on both sides of
the aisle, there are a lot of problems with this regulation.
Mr. Baer, I ask you first, would there be a downside to
entirely withdraw this proposal, and given all the problems to
reintroduce it in a way that addresses a lot of the concerns
that you have heard about here today?
Mr. Baer. Yes, Congressman, I think that is completely
appropriate and necessary in this case. Some of the changes
that need to be made, based on the data and the analysis, were
not even within the scope of the proposal. We have talked a
little bit about the fact that the cost-benefit analysis, which
is actually legally required--and I will get to that in a sec--
is going on through a belated Quantitative Investment Strategy
(QIS), where we are never really going to get a chance to
analyze what those costs and benefits are. That also seems to
merit re-proposal.
I would note, in answer to Professor Kress, that the
Supreme Court has held, even though there is no explicit cost-
benefit requirement in a statute, that does not mean that you
do not consider the costs and benefits. In Michigan v. EPA in
2015, the Supreme Court actually ruled in a statute that said
that the regulations should be appropriate and necessary. That
included a cost-benefit analysis. In fact, the Court said,
quote, Agencies have long treated costs as a centrally relevant
factor when deciding whether to regulate. Consideration of
costs reflects the understanding that reasonable regulation
ordinarily requires paying attention to the advantages and the
disadvantages of agency decisions, end quote.
I think that is what is necessary here and really did not
happen in the first go-around.
Mr. Loudermilk. Okay. Thank you. Mr. Guynn, do you have
thoughts on this? I mean, one of my concerns is seeing what
happened post 2008, and a lot of that was because of capital
requirements. I really do not want to see rural areas of
Georgia go without local community banks and basically those
areas be taken over just by the big players.
Same question to you. Would there be a downside to
withdrawing the proposal entirely and then reissuing something
that addresses these concerns?
Mr. Guynn. I think that could be a good--well, I actually
want to address also the question you asked at the beginning of
your series of questions, which is will this have an impact on
smaller banks or will it be limited to the large banking
organizations.
It is very interesting because when the long-term debt
requirement was first proposed, it currently only applicable to
the GSIBs. Now my colleagues and I warned other banks that
sometimes these requirements at the top have a tendency of
coming to a theater near you, and now they are actually coming
to a theater near the large regional banks.
If high standards are good over time, they seem to be good
for everybody, both big banks and small banks; and I think
there is a risk that they will sort of be imposed downward.
Also there is this $100 billion level, right? There is a
cliff effect. If you are a smaller bank, and the economy may
actually encourage you, and want you to grow larger and become
more competitive, you will be deterred to do that because if
you cross the $100 billion threshold all of a sudden you are
subject to all these increased capital long-term debt
requirements.
Mr. Loudermilk. Thank you. Mr. Chair, I see I am out of
time, and I yield back.
Chairman Barr. The gentleman's time has expired.
The gentleman from Illinois, Mr. Casten, is recognized.
Mr. Casten. Thank you, Mr. Chairman. Thanks to everybody
for being here.
As a general matter, I do not think there is any problem
with regulators saying we need to evaluate the risk of banks
and make sure there is appropriate capital for the risk. I do
have a concern when we are weighting things that are comparably
risky in different ways. I have been pretty consistent on this,
specifically with respect to the tax equity provisions, that
the rules say that if you are using tax equity for new market
housing it has one level of risk profile. If you are using it
for energy investing it has four times the risk. Essentially
banks would have to increase their capital holding by four
times.
Mr. Baer, because I see you nodding your head, do you want
to just give us a quick understanding of why banks use tax
equity and how that is used to deploy energy projects?
Mr. Baer. Yes. Actually, I would commit to anybody. Matt
Levine is a journalist who wrote a terrific explanation of the
whole bank financing of energy tax credits, and it is sort of
interesting, sort of legally, how it works. In effect it is a
loan but it qualifies for equity tax credits but there is no
question that it is a helpful thing.
What it really gets down to, as sort of an example of the
proposal as a whole, what is the loss experience? The proposal
includes no data on the loss experience for that business?
Mr. Casten. Yes, and I want to avoid speculating but--I
just wanted, like--the comment that this is loan-like I think
is the material part, because if I am buying your depreciation,
if I am buying your interest payments on that, if I am buying
your investment tax credit, I am buying something that is a
known commodity. It is a fixed coupon, right----
Mr. Baer. Yes.
Mr. Casten [continuing]. effectively, and it looks like a
loan; so, we are getting agreement on that.
Earlier this week the Bank of New York Mellon's CFO said
that if the rule were to go ahead it will severely reduce, or
even eliminate, the capacity of banks to invest in renewable
energy projects. Are you hearing that from other members of
yours as well?
Mr. Baer. Yes, I mean, I think actually some of our banks
have commented to that effect. I mean, quadrupling the price of
anything is going to affect the supply, and I do not think
these are terrifically profitable.
Mr. Casten. Okay. Mr. Kress, I know you were involved in a
lot of the early work back in your Fed days, and I hope nobody
asks me for my memory for like what I was doing 10 years ago.
As you recall, was there a discussion in drafting up some of
these early Basel rules when you were at the Fed about how this
was going to affect clean energy markets, the risk experience
of those clean energy tax credits?
Mr. Kress. Based on my experience at the Fed, this is a
perfectly normal part of the notice and comment process. You
put a proposal out, receive comment, and then make changes, if
necessary, consistent with safety and soundness. It happens all
the time. It happened in the initial Basel III implementation.
It happened in many other Dodd-Frank rules. This is an
indicator that notice and comment is working as intended, that
the Administrative Procedures Act is being followed.
I just want to contextualize the tax equity issue, though
very important is such a very small part of the overall Basel
III Endgame package. Even if were changed it would not
materially weaken the overall impetus of ensuring that we have
strongly capitalized banks.
Mr. Casten. Yes, no, I appreciate you saying that because I
do think that this is not an issue that dramatically changes
the intent of Basel III, but it does dramatically change
because if I am understanding you right you all were not
thinking about this back in 2014 timeframe.
We also did not have the Inflation Reduction Act, and I
would love to live in a world where we actually, if we decide
that it is worth spending taxpayer money on something, we do
not only afford that opportunity to people who have tax
liability and good tax accountants, and that is a long
conversation about why we consistently use the tax code to
engineer our society.
As long as that remains true, let us not pass the biggest
climate bill in the history of any government anywhere that is
meaningfully changing the deployment of clean energy in this
country, is meaningfully putting us on a trajectory to leave a
better planet than the one we inherited from our parents for
our kids, and then cut it off at the knees. Even though this is
a small piece of the Basel III rules, it is a big deal for the
clean energy industry that is basically making decisions to
invest right now based on whether or not they can monetize the
tax credit that we passed last term.
I hope we can fix it. I have led several letters with my
colleagues to push it. I hope that notice and comment period is
factored in.
Thank you all for your time. I yield back.
Chairman Barr. It is always good when the gentleman from
Illinois and I can find common ground.
With that I yield to my friend, the gentleman from
Tennessee, Mr. Rose.
Mr. Rose. Thank you, Chairman Barr, for holding this
hearing, and thank you to our witnesses for taking time to be
with us today.
The flawed Basel III proposal will have harmful impacts on
consumers and small businesses. Simply put, the proposal's
indiscriminate, one-size-fits-all approach undermines consumer
lending and will result in less access, increased cost, and
reduced innovation for consumer credit and small business
loans. The impacts of the proposed rule will be
disproportionately borne by regional, mid-sized U.S. banks and
their customers who are typically low-income consumers and
those new to credit as well as small businesses that invest in
the creation and growth of jobs in local communities. By
statute, these institutions are supposed to have their
regulatory requirements appropriately tailored to their
business model and risk levels.
Mr. Guynn, due to inflation, the ability of working class
Americans to finance essential purchases such as a house, car,
or home improvements has become more costly and challenging.
Would not the disproportionate and unfounded capital
constraints created by the Basel proposal further restrict
access to credit, increase consumer credit prices, and
exacerbate inflationary impacts for working Americans?
Mr. Guynn. It certainly will. I mean, that just follows
from basic economic analysis, give that capital has an
equivalent impact to a tax and; so, it will reduce the supply
and increase the cost.
Now if the capital levels were lower you might say that
cost is worth it because the benefits, in terms of increased
resiliency, is worth it, but the agencies have not put forward
any evidence to say that the massive increases in capital have
not been sufficient. I think they need to do that before the
proposal is finalized with a substantial increase in capital,
as the proposal would do.
Mr. Rose. Thank you, and I agree with your analysis.
Tennessee prides itself in being a destination for foreign
direct investment in the United States. We are home to more
than 1,000 foreign-based businesses that have chosen to invest
more than $47 billion in our economy in Tennessee, and create
more than 160,000 jobs. These foreign-based companies like
Nissan, Bridgestone, Aviagen, and many others rely on cross-
border financing from global banks, including foreign banking
organizations, or FBOs, operating in the United States to drive
their expansion in Tennessee.
I fear that the prudential regulatory proposals, including
Basel III Endgame and long-term debt rule, risk making the
United States a less attractive market for global banks, which
largely finance foreign direct investment. Mr. Baer, how would
the Basel III Endgame and long-term debt proposals adversely
impact global banks' financing of foreign direct investment in
the United States?
Mr. Baer. Sure. I mean, foreign banks now generally operate
in the United States under two business models, a few with an
overlap. Some are effectively just regional banks--certainly
all the large Canadian banks and some of the European banks--
and they will suffer just as American regional banks do under
the credit provisions, op risk, and all of that.
With regard to their market operations--and a lot of them
operate either through subsidiaries or branches in the United
States--they will certainly be seeing the extraordinarily high
market risk charges that U.S. GSIBs, in particular, will be
seeing.
I think we have already seen a scaling back of European
operations in the United States, partly because of capital but
also they are facing an extraordinarily stringent examination
regulatory regime, where they are effectively having to
duplicate their risk management in the United States versus
abroad. Even though it is a consolidated risk management
process, they are subject through what is known as the Credit
Union Service Organization (CUSO) rules to a whole nother layer
of examination, regulation, compliance burden in the United
States, and generally do not get a lot of credit for that back
home, on the capital front as well as others.
Mr. Rose. Thank you. As the owner of a family farm, I know
that the Basel III Endgame could have devastating ramifications
for the agriculture industry. Mr. Bashur, what might we expect
to see in the ag industry if Basel III Endgame is enacted?
Mr. Bashur. I think liquidity would definitely dry up, both
because a bank could operate as an intermediary or as a
counterparty in those transactions. I think it is important for
ag producers to be able to hedge interest rates or commodity
prices. In particular corn and soybean will be affected, since
I believe the majority of futures and swaps that are used are
by those two industries.
Mr. Rose. Thank you. I see my time is expiring, and I yield
back, Mr. Chairman.
Chairman Barr. The gentleman yields. The gentleman from
Texas, Mr. Green, is recognized.
Mr. Green. Thank you, Mr. Chairman. I thank the ranking
member as well, and I thank the witnesses for appearing.
If you would, kindly indulge me. I would like to acquire
some intelligence from each of you. I see that you are all very
prominent personalities, well educated. First question to all
of you, and if you would kindly extend a hand into the air if
the answer is yes, I would greatly appreciate it.
Do you have women working in the business you are in? If
you do, raise your hand, please.
[Show of hands.]
Mr. Green. Let the record reflect that all have raised
their hands.
Are there women in your business who are capable,
competent, and qualified enough to appear here today? If so,
raise your hand, please. Thank you.
[Show of hands.]
Mr. Green. Is it fair to say that among you there is not
one person who would identify as a woman? If this is true,
raise your hand, please.
[Show of hands.]
Mr. Green. Thank you. Let the record reflect that once
again we have an all-male panel. Let the record reflect that my
visual observation indicates to me that these are all white
males. If you have identified yourself as something other than
a white male, perhaps on some survey, census report, would you
kindly extend a hand into the air?
Let the record reflect that no hands have been extended
into the air.
I still believe that women are capable, competent, and
qualified enough to sit on these panels. My friend, the chair,
and I have discussed this. There are some times when we seem to
do better than others. This is one of those days when we are
not doing well.
Let me move on to the questions at hand. Let us talk first
about banks in this country. There are only 67, approximately
67 banks in the country with more than $1 billion in assets. In
fact, of the 4,500 banks that will be impacted by this rule,
that could be impacted by this rule, only 37 will be impacted.
Is this a true statement, Mr.--is it Kress?
Mr. Kress. Correct, yes.
Mr. Green. Is this true?
Mr. Kress. That is true.
Mr. Green. All of what I said?
Mr. Kress. Correct.
Mr. Green. Is it true that banks that are well capitalized
lend money?
Mr. Kress. Absolutely.
Mr. Green. Is it true that they lend more when they are
well capitalized than when they are less capitalized?
Mr. Kress. That is correct.
Mr. Green. Is it true that what we are proposing, by way of
a rule, Basel, is going to benefit banks in that they will be
able to lend more?
Mr. Kress. I am sure if you asked Mr. Baer he would say
that it does not benefit banks. I think what is important to
note is capital is a choice, right. It is choice about how we
allocate the risk of bank failures and how we allocate the risk
of financial crises. Strong capital rules force banks and bank
shareholders and bank executives to internalize those costs.
Weak capital rules externalize the costs of bank failure and
bank crises on the rest of society. We know when those costs
are externalized that they hit the most vulnerable among us.
Black and Hispanic workers were hit hard. In 2008, Black and
Hispanic families lost 45 percent of their household wealth,
compared to 26 percent for White families. So bank capital is
very much a social and racial justice issue.
Mr. Green. It is true that not one community bank will be
impacted by this?
Mr. Kress. That is correct.
Mr. Green. I ask because there is a lot of consternation
emanating from my friends across the aisle. They seem to think
that this will wipe out the community banks.
Mr. Kress. This is 37 banks all with more than $100 billion
in assets.
Mr. Green. Would you repeat that, please?
Mr. Kress. Thirty-seven banks, all with more than $100
billion in assets.
Mr. Green. Let me close with this. I was here in 2008, when
Secretary Paulson came before this committee, indicating that
there was some troubled waters ahead. I was here when we voted
on the $700 billion bailout package. We bailed the banks out.
We imposed rules to capitalize them well, but now we see that
there is a need to do more.
I do not want to participate in another bailout. I am not
prognosticating. I am not saying that this is a harbinger of
things to come. What I am saying is it seems to me that rules
that do not hurt banks, that cause them to be better
capitalized, are not going to hurt those people who have their
life savings in banks.
Mr. Kress, would you quickly respond in the last 5, 6
seconds?
Mr. Kress. Over the past 15 years, we have seen repeated
public backstops at the banking system. This is a practice of
privatizing gains----
Chairman Barr. The gentleman's time has expired.
Mr. Kress. Capital will----
Mr. Green. Thank you, Mr. Chairman.
Chairman Barr. The gentleman's time has expired. He can
submit the remaining answer for the record.
The gentleman from Texas, Mr. Williams, is now recognized.
Mr. Williams of Texas. Thank you, Mr. Chairman, and thank
you all for being here.
Over the last year our Nation's Federal banking agencies
have been bombarding our financial system with excessive
regulations and dangerous proposals like Basel III Endgame,
long-term debt requirements, and climate risk management
standards. It is alarming that our banking agencies are rolling
out these types of proposal in a rushed fashion without
considering how these combined regulations and requirements
might impact innovation, limit access to capital, and threaten
economic stability.
We have heard our Federal regulators make false claims that
these harmful onslaughts of regulatory proposals have a
meaningful cost analysis. However, from what I see, many of the
rules proposed since March of last year are hundreds to
thousands of pages long, but all of these proposals lack an
adequate quantitative analysis to ensure that the cost of these
new rules would not negatively impact financial institutions,
businesses--and I am a small business owner in Texas--or the
overall economy. There is no question that these burdensome
rules will increase compliance costs to already struggling
businesses.
Mr. Baer, did Federal banking regulators analyze and
estimate interactive effects of the thousand-page Basel III
Endgame proposal, long-term debt proposal, or the 1,500-page
Community Reinvestment Act proposal?
Mr. Baer. Congressman, they made almost no effort to do
that individually, and certainly no effort to do that
collectively.
Actually, I am glad you mentioned the long-term debt. I
mean, for regional banks, that is an extraordinary requirement.
They are being subject to the same requirement as GSIBs, even
though it is for an entirely different purpose. For GSIBs it is
to facilitate a resolution where everything below stays open
and operating. For regionals it is--which is somewhat
understandable--to just have another layer of loss absorbency,
but same requirement. For regional banks it will be more
expensive for them to issue debt than large banks, the largest
banks, which are constantly in the market. The market gives a
liquidity premium, which the regional banks will not enjoy, so
it will cost more.
Also I think the agencies, to your point on holistic
review, simply did not understand the interplay between that
rule and a liquidity rule called the Liquidity Coverage Ratio,
which for reasons I can explain to you over a beer means that
they are going to have to issue even more debt than projected.
That was, I think, a classic case of failing to understand
the interplay of all these rules.
Mr. Williams of Texas. Thank you for that. One of the
greatest concerns I have, along with many others, is that Basel
III Endgame proposal will put American last and create
disadvantages for American businesses and consumers and by
making U.S. standards more stringent than what was recommended
to other international countries. U.S. regulators are picking
winners, they are picking losers in the global market, and
forcing institutions that they regulate to end up being the
losers.
Bad actors like China will surely not be placing their
financial system under such standards, so we must not allow our
banks to not be able to compete on a global scale.
Again, Mr. Baer, could you elaborate on the competitive
disadvantages that U.S. banks, businesses, and consumers will
face due to this proposal? I mean, what is wrong with being an
American?
Mr. Baer. Yes, Congressman. Obviously it is going to vary.
I think as I responded to the ranking member, business line by
business line. I mean, obviously for credit cards, U.S. banks
do not compete with banks in France or other places. The
biggest impact would be in financial markets, in capital
markets, where again, U.S. banks have done terrifically well.
I think, though, as you look at some of the risk weights
here--and again, it is very technical--there are areas,
particularly in dealing with a funds business, where U.S. banks
could be looking at capital charges three, four times higher
than overseas competitors, I think you would see migration
there. I think the GSIB surcharges continues to be an issue for
the very largest banks.
I think the bigger concern is not even competitiveness. It
is just lack of capital markets liquidity. We have already seen
inventory depth declining, even as the amount of bonds floating
in the market has increased dramatically. So the ratio of
market-making capacity to the need for market-making capacity
is completely out of whack, and this would certainly worsen
that.
Yes, at the margin certainly a competitiveness issue, but I
think more an issue just about the resiliency of U.S. capital
markets.
Mr. Williams of Texas. Regulations just choke small
businesses. No question about it. I have limited time so I am
going to ask you a quick question, Mr. Bashur. Can you
elaborate on how the Basel III proposal will impact small
businesses' ability to grow and thrive in the economy? As I
said, I am a small business owner so I am interested in what
you say.
Mr. Bashur. I think it will be a detrimental impact on
small business because of the retail exposure provision in this
proposal. On top of that you have the operational risk
provision in the proposal. I think that especially talking
about community banks, I think community banks are actually
affected in this because of the credit card interplay here,
because a lot of them have to use larger issuers to issue their
cards. I would just like to note that 82 percent of U.S.
households have at least one credit card, so it is a large
swath of Americans that will be affected.
Mr. Williams of Texas. My----
Chairman Barr. The gentleman yields. The gentlewoman from
Ohio, Mrs. Beatty, is recognized.
Mrs. Beatty. Thank you, Mr. Chairman, and again, thank you
to all of our witnesses.
Professor Kress, I would like to start by taking about
Basel III capital requirement proposal. Let me just say I agree
with your written testimony acknowledging the importance of
strong capital requirements to avoid financial crises and to
protect our economy. Like many of us and others of my colleague
have said, we remember the financial crisis of 2008, as an
elected official, as a small business going through that. I
also remember, in 2009, under a new President, President Barack
Obama, that Congress passed almost an $800 billion American
Recovery and Reinvestment Act.
Capital is unquestionably our first line of defense, and I
want to make sure that I am on the record saying that. I
applaud the regulators' efforts to strengthen capital so that
our financial system is safe and secure. We all know, whether
it is small businesses or not, what happens when we go into a
financial crisis.
At the same time, I want to also be a champion of access to
capital, particularly for underserved and minority communities.
We just heard what can happen to small businesses. We also know
that, historically, minority and underserved businesses have
experienced unequal access to loans and other banking services.
I think we can do both at the same time; We can increase
capital reserves at large financial institutions while also
promoting credit accessibility for low- and moderate-income
(LMI) communities and communities of color.
I would like to now turn to small business credit and
affordability. Professor Kress, does the Basel III proposal
decrease risk weights for all small businesses or just a
subset?
Mr. Kress. There is a different treatment in the credit
risk framework, depending on whether the company is publicly
traded. For non-publicly traded small businesses the risk
weight is 100 percent, which is the same as the risk weight
under the existing capital rules; so, the credit risk framework
would not change for non-publicly traded businesses. It would
drop to 65 percent, from 100 percent, for publicly traded
businesses.
Mrs. Beatty. What was the reasoning behind the different
risk weights for these types of businesses, and what changes
can we make in the final rule to achieve the same goal without
disadvantaging small businesses?
Mr. Kress. I will note that U.S. regulators are under
statutory constraints. In section 939A of Dodd-Frank, Congress
told the regulators that they cannot use credit ratings to set
risk weights for businesses as is done internationally by most
other countries. This attempt by regulators is an attempt to
use a standardized, non-credit-ratings-based methodology to
assess riskiness.
As with green energy tax credits and residential mortgages,
this is an area where the regulators have received public
comment. In another example of the public comment process
working, they have indicated an openness to considering
alternatives.
Mrs. Beatty. Let me continue with this. Some claimed that
Basel III Endgame proposal runs afoul of the Administrative
Procedures Act. Can you set the record straight for us and
explain the steps that regulators took prior to issuing the
proposal to conduct a thorough analysis and to meet all of the
standards and requirements?
Mr. Kress. Thank you for this question because I feel like
I have been living in an alternate universe, hearing the
descriptions of how this rule allegedly runs afoul of
administrative law.
The quantitative impact analysis done in the Basel III
Endgame proposal is more substantial than in any banking rule I
have witnessed. The banking agencies have already conducted a
QIS. That is why we know that the risk-weighted assets for
market risk will increase, more than double the increase in
lending-related risk-weighted assets. That is how we know that
the capital requirements for the largest GSIBs will increase
almost three times as much as the capital requirements for mid-
sized banks.
The proposal has been put out for comment for 173 days
already. Regulators have promised to do another quantitative
impact study, release that study for public comment. This is
way more than was done, for example, in the initial
implementation of the Basel III rules, when I was at the
Federal Reserve, and it is a quantum leap over what was done to
comply with administrative law with the deregulatory rules
established under the Trump Administration. If you look back at
the tailoring rule, for example, there was no effort to
quantify impacts on the economy, other than a conclusory
statement that it would not materially impact----
Chairman Barr. The gentlewoman's time has expired.
Mr. Kress. We know now that is false.
Mrs. Beatty. Thank you so much. Thank you, Mr. Chairman.
Chairman Barr. The gentlewoman's time has expired.
The gentleman from Wisconsin, Mr. Fitzgerald, is now
recognized.
Mr. Fitzgerald. Thank you, Mr. Chairman.
Before I get into the questions that I had, Professor
Kress, you mentioned earlier that the Basel proposal would only
apply to a small group of 37 banks. I just wanted to get, Mr.
Baer, your comment on that number, and could you respond to
that. Do you think that is accurate or close?
Mr. Baer. Sure, Congressman. It is correct but perhaps a
trifle misleading is those banks hold, I think, approximately
85 percent of U.S. banking assets.
Mr. Fitzgerald. Got you. Thank you for verifying that.
I have been pleased to see that some of my colleagues on
the other side, it sounds like some of them are seeing some at
least significant issues or problems with the implementation of
the proposal. However, rather than going back to kind of the
initial, everything on the initial drawing board, some of my
colleagues on the other side are pushing only for this narrow
carveout from increased capital requirements for green energy
tax credits from the Inflation Reduction Act.
Mr. Bashur, if such a carveout is granted to address only
one of the many problems in the regulators' proposal, while
much of it would still be intact, what message would that send,
not just on the independence of the Federal Reserve but to
families who may have more difficulty getting a mortgage or, as
said before, small businesses who would see the reduction in an
access to credit?
Mr. Bashur. I think it would send a bad message because
there are so many provisions in this proposal that contravene
S. 2155 and apply uniform regulation over categories I through
IV, one of them being the tax equity piece, but then again,
with supplementary leverage ratio, accumulated other
comprehensive income (AOCI) for available-for-sale (AFS)
securities among others. I think that it has to be--and the
fact that we do not have detailed cost-benefit analysis,
economic analysis, I think it warrants reconsideration
altogether.
Mr. Fitzgerald. Very good. Despite the unnecessarily drawn-
out process that has kind of characterized bank mergers under
this administration so far, yesterday Acting Comptroller Hsu
announced changes to the merger process that would make the
process slower and probably less transparent. This follows the
Department of Justice's (DOJ's) plan to update guidelines on
banking mergers to provide more robust scrutiny, and Vice Chair
Barr's expressed desire to assess how the Federal Reserve
platform performs analysis on bank mergers.
If you believe antitrust analysis should follow the rule of
law and not the individual views of those who, at any
particular point in time, had the relevant agencies, 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 the other recent regulatory proposals is bound to
lead to consolidation to overcome the compliance burden of this
rulemaking.
To Mr. Guynn, if the Biden Administration insists on
throwing up obstacles to bank mergers while sharply increasing
the regulatory burden on banks, is it time for Congress to step
in and ensure there is a transparent, defined timeline for
approving or denying a merger?
Mr. Guynn. Thank you very much, Congressman. It is
interesting because I actually think that the administration's
policy that disfavors bank mergers is at war with its policy on
Basel III Endgame, because Basel III Endgame has the biggest
economic impact on the regional banks, and that will actually
give them a powerful economic incentive to become much larger.
Otherwise, they become uncompetitive. If you then say, well,
you cannot merge, there is a risk that they will become weaker
and weaker financially, and that will cause a problem for the
system. Basically, that will increase the risk of failure and
force mergers into FDIC receivership.
I guess in answer to your question, I think it would
actually be useful for Congress to propose a bill to reform and
make more rational, more predictable, more transparent the bank
merger approval process.
Mr. Fitzgerald. Thank you. I am going to try and sneak in
one more question here real quick.
Small businesses are increasingly turning to credit cards
as a key source of funding. Research shows 30 percent of small
businesses have used credit cards as their primary source of
funding, and another 22 percent relied on a loan or line of
credit.
Mr. Baer, at a time when small businesses are facing
tighter monetary policies, particularly when it comes to
securing loans from traditional and non-traditional lenders,
would revised bank capital students under Basel Endgame further
limit small business credit?
Mr. Baer. Absolutely, Congressman. I mean, first because
they do not qualify for a favorable risk weight because they do
not have listed securities, even though our research, which we
published, and I would commend to you, shows that for a bank
that rates a business investment grade internally, whether that
company has listed securities or not, is entirely nonprobative
of default and loss given default. There is no justification in
the proposal for it, and we have demonstrated it is entirely
spurious.
Chairman Barr. The gentleman's time has expired.
The gentlewoman from California, the ranking member of the
committee, Ms. Waters, is recognized.
Ms. Waters. Thank you so very much for this hearing that we
are doing today.
I am a bit irritated here because it seems as if we have
forgotten, in such a short period of time, what has happened in
this country as it relates to this struggle to increase more
capital in our largest bank. I would like to just raise a
question here about what took place with our banks.
Last year we saw the second-, third-, and fourth-largest
bank failures in the U.S. history. It started when Silicon
Valley Bank sold its securities at a loss. Is that correct?
Mr. Kress. Correct, Ranking Member.
Ms. Waters. Investors and customers lost confidence in
Silicon Valley Bank and pulled their money, resulting in the
biggest bank run. Is that correct?
Mr. Kress. Correct.
Ms. Waters. We later saw that Silicon Valley Bank was
exempt from certain bank capital requirements, pursuant to a
Trump regulatory rollback, when they should have held 2 percent
more capital for the security portfolio that they sold at a
loss. Is that correct?
Mr. Kress. That is correct, and I would note that
regulatory rollback was done with no impact analysis.
Ms. Waters. This Basel III Endgame rule could fix that
problem. Is that correct?
Mr. Kress. That is what it is proposed.
Ms. Waters. In 2018, Trump signed 2155 into law to
deregulate large regional banks, and Trump's regulators, that
law was a blank check to roll back all kinds of requirements on
banks like Silicon Valley Bank. Is that correct?
Mr. Kress. Correct.
Ms. Waters. They claimed this deregulation would not
undermine financial stability, and Silicon Valley Bank proved
that was a lie. Is that correct?
Mr. Kress. Absolutely.
Ms. Waters. Now we have all of our regulatory agencies
working together--FDIC, OCC, the Federal Reserve--all saying
this rule is very important, that because of Basel III Endgame
that we should raise that capital so that we will not again
witness what we witnessed with the failure of not only Silicon
Valley Bank but with Signature Bank and First Republic Bank,
three of these banks that had a run on them. It all had to do
with a lack of capital when the run took place, and they did
not have the capital to make sure that they took care of their
depositors. Is that right?
Mr. Kress. Yes, ma'am.
Ms. Waters. With the Federal banking regulators jointly
issuing a proposal to strengthen capital requirements for the
biggest banks, known as Basel III Endgame, should that not be
what the Members of Congress are doing in order to avoid the
catastrophe that took place with Silicon Valley Bank and
Signature Bank and First Republic? Is that not what we should
be doing?
This proposal will help prevent future financial crises
like the 2008 financial crisis, when Lehman Brothers and other
large financial institutions failed, costing the U.S. economy
$22 trillion and resulting in massive taxpayer bailout. We
bailed them out, and we said we would never do that to our
taxpayers again. The way to do that is to ensure that they have
the capital that is needed to avoid what happened with Lehman
and Silicon Valley Bank and Signature Bank and First Republic
Bank. Is that correct?
Mr. Kress. Yes, ma'am.
Ms. Waters. The Dodd-Frank Act required the largest banks
to hold more capital, but Trump-era deregulation reversed much
of that, causing the failures of Silicon Valley Bank, Signature
Bank, and First Republic Bank, three of the largest bank
failures in U.S. history.
Capital is not locked away. Rather, it is safe funding that
banks can redeploy, which is why better-capitalized banks lend
more, not less, to consumers, in good times and bad. Is that
correct?
How soon we forget. How soon we want to run away from 2155,
when it became apparent what had happened when deregulation
took place. Now we have others who wish to ignore what our
regulators are saying and not go along with Basel III Endgame
that says we must have 2 percent more capital. I do not
understand it. Do you?
Mr. Kress. No, madam.
Ms. Waters. Thank you. I yield back.
Chairman Barr. The gentlewoman yields back.
The gentlewoman from California, Mrs. Kim, is now
recognized.
Mrs. Kim. Thank you, Chairman. I want to thank our
witnesses for being here today. Since our ranking member
mentioned, the failure of the Silicon Valley Bank--and I am
also from California--just to be clear, I would like to state
for the record that SVB's failure was about liquidity, not
capital, and I think it also had to do with the mismanagement
of the banks and the failure of the regulators.
I want to start by coming back to the focus of our hearing
and make a couple of observations.
One, I am deeply concerned that the Basel III Endgame and
the other proposals will make credit more expensive for small
businesses and it would reduce mortgage lending to low-to
moderate-income households and put our banks at a competitive
disadvantage abroad.
I am also concerned that the current proposal, as written,
does not enjoy broad consensus from the Federal Reserve Board.
It has been reported that certain European countries want
carveouts on their own Basel III Endgame proposals to protect
their banks from the increased cost of higher capital
requirements. In Asia, 3 of the top 10 companies in the world
are giant-sized, state-owned Chinese banks that, to my
knowledge, are not planning to implement the Basel framework
any time soon.
A question to you, Mr. Baer. One of the Basel Committee on
Bank Supervision's core mission is to harmonize regulatory
standards to bring other international jurisdictions up to the
U.S. regulatory standards. In your view, what will happen to
the competitiveness of our banking industry if U.S. capital
standards are not harmonized with other international
jurisdictions?
Mr. Baer. Yes, I mean, it is a great point, Congresswoman.
Actually, at the time that the 2017 agreement on Basel was
announced, they said they did not expect an increase in capital
requirements. They published a quantitative index study showing
it would not result in an increase in capital requirements.
Around the world you see that basically being the trend. The
Bank of England has implemented with a 3 percent increase in
capital requirements, compared to, I think, the initial
estimate from the U.S. regulators was 16 percent. I think when
they are done with their QIS it is going to be closer to 20.
Clearly if the desire is consistency, we are failing
utterly. We have a U.S.-only GSIB surcharge methodology, which
is roughly double the global standard. We have a U.S.-only
stress test and stress capital charge, which again largely
duplicates the op risk and market risk charges in Basel. It
just goes on and on, and it is noted, even for small
businesses, although they do not directly compete, but just as
a measure of rationality, both the U.K. and the EU have
abandoned the securities listing requirement.
Mrs. Kim. Yes, so Mr. Baer, if the financial regulatory
agencies move forward with the Basel III Endgame proposal,
would you say that credit will be more expensive for our small
businesses, manufacturers, and families when compared to other
countries in the United States and Asia?
Mr. Baer. Absolutely, Congresswoman. I mean, the capital
charge for a loan to a U.S. small business would be
significantly higher than for small businesses----
Mrs. Kim. You know, our country is the envy of the world
because we have more banks than anywhere in the world. In fact,
more than 4,000 banks provide credit to most corners of our
society.
A question to you, Mr. Guynn. In your testimony you state
that under the proposals large regional banks will have strong
economic incentive to consolidate to better compete against
U.S.' GSIBs. Can you elaborate on how the proposals will push
banks to consolidate, and can you also tell the committee how
greater consolidation will impact credit for small businesses
and households?
Mr. Guynn. Yes, Okay. The reason there is a
disproportionate impact on the regional banks is they are
subject to the increase in capital by the Basel III Endgame,
and a rule that currently only applies to the GSIBs will now be
extended to them, where they are now going to be subject to
subordinated, long-term debt requirement.
Subordinated debt is just a different name for an
additional capital requirement. When you add those two together
basically they will now be subject to nearly two times the
amount of capital that they are currently subject to. That will
be very expensive for them. They are smaller than the GSIBs.
They will feel a need to have larger scale to be able to spread
those costs over a larger base. So they will have a powerful
incentive to merge and consolidate.
Also I do think that, as a sort of separate issue on small
businesses, I think the real issue for the small businesses is
I think the regional banks will continue lending to small and
medium-sized businesses, which they focus on, but the risk
weights will now disincentivize that because they will say,
well, I only am charged a capital equal to 65 percent of a loan
that I make to a large business that is publicly listed, but I
have to have 100 percent charge for a small business.
Chairman Barr. The gentlelady's time has expired.
The gentleman from New York, Mr. Meeks, is recognized.
Mr. Meeks. Thank you, Mr. Chairman and Ranking Member
Foster.
Let me just say, while I think many of us feel like we have
had ample opportunity to discuss the Basel III Endgame
implementation proposal in this committee, I really do
appreciate having a forum to look at the proposal and
rulemaking process to see what improvements could be made. Now
that the comment period has ended for the Basel implementation
proposal, I want to express how much I have valued being able
to weigh in with the regulators about concerns that I and many
of my colleagues have about unintended consequences of the
proposal.
In my meetings with the regulators I have actually found a
genuine willingness to discuss how the proposal could be
improved to address the issues that have been raised. I also
believe that they share in our broader goals of addressing
historical disparities and access to home ownership, which is a
primary function of mine of having access to home ownership,
which helps close a wealth gap, particularly in communities of
color, as well as in credit scores and credit. I believe in the
important role that Community Development Financial
Institutions (CDFIs) and Minority Depository Institutions
(MDIs) play in our communities and our ecosystem, and I want to
make sure that they are also taken care of and not become
victims of something that was unintended. My hope is that they
will take into account the wide variety of comments received in
order to have a comprehensive view of the various changes that
need to be made.
Now I have been here long enough--in fact, I was sitting in
this committee during the 2008 financial crisis, and I
witnessed the ensuing devastation that it caused in communities
across this country, and I never want to see something like
that happen ever again. I believe that the safety and soundness
of our banking system is paramount, as evidenced as recently as
just this past March. I never want there to be confusion that
raising concerns about potential impacts means that I do not
support and understand the regulators' intent. Their intent is
to do the right thing, and we are trying to make sure, I am
trying to make sure that the intent is met and we do not have
any unintended consequences, which is the reason why I thought
it was very important for me and others to ask the questions
that we ask.
I will ask Dr. Kress, in your testimony you acknowledge
that high loan-to-value residential mortgages are an area where
adjustments to the proposal may be appropriate, and data shows
that LMI borrowers and LMI communities and black and Hispanic
borrowers are disproportionately represented in the highest LTV
categories.
Do you believe that, as written, the proposal will
translate into higher costs for borrowers in the highest LTV
categories, and could you identify the targeted changes you
referenced in this area?
Mr. Kress. Thank you, Congressman, and I am heartened to
hear that you have productive conversations with the
regulators. That is an example of the notice and comment
process working as intended, having those productive
conversations in contrast to the threats to sue, to block the
rule that we are hearing from the banking sector.
As I noted earlier, the regulators laid out three
possibilities for how to address residential mortgage risk
weights in the proposal. I know that they have received
comments on all of them, and they have indicated openness to
perhaps changing their prioritization of those options. I am
sure those are conversations they are having within the
building, and I know that they share your goal of protecting
the safety and soundness of the banking system while ensuring
access to credit.
Mr. Meeks. Thank you. In my little time, Mr. Baer, I wonder
if you could speak to how those various regulatory proposals
could interact with one another and what it could ultimately
mean for the consumer.
Mr. Baer. Sure, Congressman. Clearly that is one of the
concerns here is that even within the Basel proposal the
overlay between operational risk and credit risk has not been
considered. We have not even talked about securitization today,
where there are punitive charges which will affect the ability
to make mortgage, auto, credit card loans, including to low-and
moderate-income people, and distribute that risk.
The charges here are roughly double the current, whereas
around the world it is actually----
Chairman Barr. The gentleman's time has expired.
The gentleman from Florida, Mr. Donalds, is recognized.
Mr. Donalds. Thank you, Chairman. Gentlemen, thanks for
coming here today.
Mr. Guynn, Vice Chair Barr knows that the U.S. banking
system became significantly more capitalized following the
great financial crisis, which is true. With that he is trying
to sell the idea that greater capitalization, that better
capitalized U.S. banks experience lower funding costs are more
profitable and have gained more market shares in global markets
for financial products relative to their global competitors.
Are you aware of any study that has shown a casual
connection between U.S. banks' capitalization and their global
competitiveness?
Mr. Guynn. I am not aware of any such study at all,
Congressman.
Mr. Donalds. What is Vice Chairman Barr talking about?
Mr. Guynn. I think he is speculating. He said he did a
holistic review of capital requirements, but he is yet to
release what the data and what the conclusions of that are.
Maybe he will actually release those after he has the data from
the banks, that I guess they are now looking at. I hope that
they do because there does need to be a lot more justification
for why capital needs to be raised.
As you know, and as was discussed earlier in this hearing,
it is a tradeoff. You can have perfectly safe banks but no
lending to the--and other banking services--or you can have
unsafe banks and a lot of lending and other banking services.
What we are trying to do is we are trying to hit the right
balance, and the question is, we have been increasing capital
now for a number of years. Are we at that right balance or do
we need to have still more capital? It is not cost free,
despite what some people say. In our view, until someone shows
that the benefits of that increased capital is higher than the
extra cost then I do not think that this proposal should go
forward.
Mr. Donalds. Let me ask you this question. I think it was
raised earlier in this hearing that U.S. banks are still
competitive compared to their international counterparts, even
with the extended regulatory and capital requirements that we
have enacted in the United States since 2008. A different way
of looking at that, are U.S. banks more competitive to other
ways of raising capital, i.e., private equity, venture cap
funds, other private endeavors that actually do not have to
deal with Basel requirements or have to deal with the burden of
the regulatory system in the United States?
Mr. Guynn. Yes, that is a very good question, and in fact,
one of the consequences of this will be to continue the trend
of having non-bank financial institutions have a greater and
greater share of the credit provided in the U.S. economy. In
1980, that was about 30 percent. It is now close to 60 percent
and as you increase----
Mr. Donalds. Mr. Guynn, I do not want to cut you off, but
we are in a congressional hearing. Sometimes we have to restate
these things.
Mr. Guynn [continuing]. Okay. No problem.
Mr. Donalds. In 1980, private access to credit, meaning not
through the banking system, was 30 percent. It is now 60
percent. I mean, Mr. Baer, do you agree with this assessment
that the more we do this it is actually going to continue to
shrink the regulated banking system in the United States
because people are smart and they are just going to say, ``Why
am I doing business this way? I will just do it another way and
get around the Federal Government.''
I will add before you answer that, Mr. Baer, my problem
with the government overall is that the government has become
omnipotent busybodies who think they know everything, and they
do not. Silicon Valley Bank is a testament to that, Mr. Baer.
Mr. Baer. Sometimes I think of myself as an omnipotent
busybody, but I will not take that personally.
No, I mean, certainly we have seen, in certain asset
classes, an incredible rise in private equity, private debt,
certainly non-bank mortgage. Some would say, oh, that is a
problem because they are not regulated like banks. I mean, that
may be a problem.
I think the larger problem, and we have seen this, is that
they are not durable lenders like banks. The reason we have
banks is because they take in deposits, which are relatively
stable funding. They have access to a discount window, which is
emergency funding, and that lets them lend money cheaper, and
it lets them lend money under stress.
The question is, regulation aside, what is going to happen
under stress with these lenders when they do not have any real
stable funding to do that? What I think we are going to see,
and we have already seen in capital markets, is it is actually
the government that steps in. We saw that in the Treasury
market, which forever had been advertised as the most liquid
market in the world, and we had the Fed intervene as the
market-maker of last resort. A phrase that did not exist pretty
long ago, in both 2019 and 2020, and began trading the bonds.
I think the draft from banks is a concern, initially
because of cost and stability, but then also because of
government.
Mr. Donalds. Mr. Baer--real quick, Chairman. I know I have
15 seconds. Mr. Kress, thank you for being here. In your
opening statement you essentially said that, and I am
paraphrasing, that because of the fact that the U.S. Government
has stepped into the position of bailing out banks it is also
the position of the U.S. Government to make sure that banks are
appropriately capitalized so we do not have to go into that
business again. Is that correct?
Mr. Kress. That is correct.
Mr. Donalds. Mr. Chairman, if you indulge me? Will you
indulge me real quick, Mr. Chairman?
Chairman Barr. We can have him submit the answer for the
record.
Mr. Donalds. I will just pose this question to the witness.
The question is this. If that is the premise, then why we do
not stop bailing out banks, and why we do not actually look at
the regulatory system itself so banks are in a position----
Chairman Barr. The gentleman's time has expired.
Mr. Donalds. I yield.
Chairman Barr. You can submit that for the record. The
gentleman yields back.
We now go to the gentlewoman from Texas, Ms. De La Cruz.
Ms. De La Cruz. Thank you. Thank you, Mr. Chairman, for
holding this important hearing, and thank you to the witnesses
for appearing before us today.
Mr. Baer, this question is for you. Many people in my
district rely on regional banks. Have regulators provided an
analysis on what Basel III's regional bank customer impact will
be?
Mr. Baer. Yes, Congresswoman, that is one of the failings
of the proposal. There is very little data analysis, very
little cost-benefit analysis.
Ms. De La Cruz. So, the answer is no.
Mr. Baer. No.
Ms. De La Cruz. Now, Mr. Baer, have the regulators provided
analysis of the impact that the effective repeal of S. 2155
will have on regional banks and the customers that rely on
them?
Mr. Baer. No, Congresswoman.
Ms. De La Cruz. Mr. Baer, have the regulators provided
analysis for the impact on rural area, if regional banks are
not able to lend because they do not want to cross the $100
billion mark and become subject to Basel III?
Mr. Baer. Not that I am aware of.
Ms. De La Cruz. Mr. Baer, in October I sent a letter with
other members of this subcommittee to the regulators, and we
highlighted the impact Basel III would have on our farmers and
our ranchers. Have the regulators provided an analysis for what
the impact will be to our farming and ranching community?
Mr. Baer. No, and I would add that is not just lending.
Securities markets, a lot of farmers and ranchers want to hedge
their risks. There are punitive capital charges around end
users' use of derivatives products. There are any number of
impacts on folks like that, that are not quantified.
Ms. De La Cruz. What I have heard is no to every question
that I have given, that there has been no analysis made, and it
is clear comprehensive benefit analysis has not been done for
Basel III Endgame.
Mr. Baer, could you share with me, how should the
regulators move forward in light of this?
Mr. Baer. I am glad you asked. I mean, we talked earlier
about it, and I think Mr. Kress mentioned that they did a
quantitative impact study and they said how much it is going to
go up. I think they were off a little bit. Even taking that,
the question, though, is not how much did it go up. The
question is why did it go up and is the benefit of it going up
worth the cost of it going up?
They did a little bit on the first question, they are going
to do a little bit more, but we have not begun to answer the
second and third question. The second question is all around
what are the relative risks to these assets. I would also just
object to the notion that the banking industry is putting out
disinformation and threatening to sue.
My institute has probably published two dozen academic-
quality research notes on every aspect of this proposal, from
market risk to credit risk to operational risk, published by
Ph.D. economists, subject to comment by anybody who wants to
comment. We have filed probably a total of 200 pages of comment
letters on this proposal, with rigorous data, rigorous
analysis. We have not heard any challenge from those who
instead would prefer ad hominems.
This is very serious business. It has real impacts for the
U.S. economy, and the fact that there is no data analysis
behind this is a real problem.
Ms. De La Cruz. What I am hearing is that putting a rule
forward where there has not been any kind of analysis, no cost-
benefit analysis, when all we are hearing from communities,
from securities communities to farming and ranching and rural
communities like mine, south Texans will be affected if this
rule goes into place, and the repercussion of it could be
crippling local economies like mine that are rural and that are
largely Hispanic.
Thank you so much, Mr. Baer. I yield back.
Chairman Barr. The gentlewoman yields back.
We now recognize the gentleman from Tennessee, Mr. Ogles,
for 5 minutes.
Mr. Ogles. Thank you, Mr. Chairman, and thank you all for
being here.
One of my colleagues posed a question, considering--as my
colleague also pointed out--little data or analysis has been
done. Should this proposal be withdrawn as it stands, Mr. Baer?
Mr. Baer. Yes, I think certainly parts of it, but then at
that point maybe you do the whole thing. Yes, there are clearly
aspects here where they are way off the mark and to the extent
that they adjust when they see the new impacts, it is not just
the banking industry that should have the right to comment on
that.
I mean, one virtuous thing here--and think the
Congresswoman was sort of hinting at this--is it is not the
banking industry who is filing all these comment letters. It is
civil rights groups, community groups, end users, and the buy
side on capital markets, small business groups; so, folks are
getting the message that this is not a banking issue. This is
an American economic issue. I think if there are going to be
major changes made to the proposal it is not just the banks
that have the right to comment on that but everybody else.
Mr. Ogles. Mr. Bashur?
Mr. Bashur. I think the lack of economic analysis and the
fact that this is clearly an abuse of their discretionary
authority warrants withdrawal of the rule in its entirety. I
think they do not have unbridled authority, and I think that
this rule is just an example of we just want to do what we want
to do, without any consultation with Congress. My goal here is
I want the elected representatives to make these
determinations. I do not like the bureaucrats to be making what
Code of Federal Regulations (CFRs) are effectively law. So I
think that this needs to be coming from you all, ultimately.
Mr. Ogles. Yes, no, you make an important point there.
Mr. Bashur, on January 12 your organization, along with
other industry organizations filed a comment letter on Basel
III Endgame proposal. In the letter your organization noted
there were significant violations of the Administrative
Procedure Act as it relates to the proposal.
Can you touch on that because it kind of gets back to where
should the authority lie? For example, I have the Stop Basel
Endgame Act that essentially just pulls it back. I mean, when
you look at a set of proposals that is trying to make us, quite
frankly, more like Europe, when we have a different type of
banking system that is much more resilient than the rigidity
that you see in Europe, and a lack of free market influences
that you see from Russia and China, both of which had input
into the Basel Endgame, why would we want to comply with their
ideas when we have an entirely different banking system, based
off a different free market model, and make ourselves less
competitive?
I will stop there and let you answer the question.
Mr. Bashur. Yes, I may quibble with you a little bit there.
I mean, I do think that there is virtue in having common
standards across the nations with which we compete in banking
and finance. Actually, I mean, one of the ironies here is if
they had proposed something more like what has been adopted as
Basel in Europe and the U.K., I do not think there would be
nearly as many concerns. It is all the add-ons. It is the
additional charges for mortgage, small business.
Mr. Ogles. That is right. I will reclaim my time. That is
the issue that I see here, is that it is not the same. Again,
maybe over a cup of coffee we can quibble back and forth. I
would argue that our banking system is much different than that
of Europe's, and that there is more free market component.
Now the problem is when you look at the regulatory regime,
when you look at the bank failures of New York and California,
that was management failure. That was a regime that did not do
its job. There should have been not just red flags but there
should have been flares going off that these banks were in
trouble. Again, this is a failure, so now you have this, not
just reaction but overreaction in the marketplace of putting
more layers and more burdens.
Look, I come from southern middle Tennessee, so a lot of my
district is rural and suburban. When I see more regulations
being layered on top of banks and credit unions, that is
affecting the access to capital, that someone who is suddenly
eligible for a $300,000 or $350,000 mortgage, they are not
qualified for that anymore. That small HVAC company that
requires that line of credit to make payroll in the lean
months, suddenly that is being lowered or not renewed.
So it is having an impact on my economies all because you
have an administration that whether it is the CFPB, the Fed,
you name it, any agency, they have gone too far, too fast, and
they have done so without any quantitative analysis to back up
their presumptions. You and I become the guinea pigs on their
theories on how this is great for America. When I would say
when you look at their failed policies, whether it is
immigration, whether you look at the terrorists that are coming
across this country--and I sure as heck do not trust them with
the economy or the banking system--enough is enough, and it is
time for Congress to take back its authority to truly control
the purse and put this administration in its place.
With that, Mr. Chairman, I yield back.
Chairman Barr. The gentleman yields back.
We now recognize the gentleman from South Carolina, Mr.
Timmons, for 5 minutes.
Mr. Timmons. Thank you, Mr. Chairman.
The Basel III Endgame proposal has generated the lion's
share of attention throughout this administration's regulatory
onslaught, but the Federal financial regulators have put
forward many other proposals related to bank capital
requirements, including proposals for long-term debt
requirements.
In November, I, along with Chairman Barr and many other
members of this committee, authored a letter expressing
concerns with the long-term debt proposal and asked for a
comment period extension. The extension was granted, but many
of the underlying concerns still persist. Due to these
underlying concerns, it is my belief that this proposal is far
too prescriptive and should be withdrawn.
However, we must accept the reality of the situation and
work to get the proposal to the best place possible for
Americans. This includes doing away with the regulators' one-
size-fits-none approach and prioritizing tailoring for banks
based on their risk profiles and size.
Mr. Baer, how can Federal regulators tweak or, let us say,
recalibrate the LTV proposal to reduce the potential for
negative consequences on the banking sector?
Mr. Baer. Congressman, thank you for that question. I mean,
I think on the long-term debt requirement that the solution
there is actually relatively simple compared to Basel. It is
simply to reduce the calibration. I mean, instead of 6 percent
it should be a fraction of that.
Again, as I noted earlier, it is for a different purpose.
For regional banks it is basically to add another layer of loss
observancy because the regional bank has almost all of its
assets in the bank and will be resolved by the FDIC. The reason
for that requirement for the GSIBs is entirely different. There
is a large broker-dealer. It is going to be resolved at the
holding company level through a bankruptcy or a Title II, and
there you need to recapitalize at the holdco and you need to
keep the subsidiaries open and operating.
Again, the cost to the regionals are disproportionate. They
do not have as greater of an access to liquidity as the large
banks because they simply do not issue as much debt. If it were
6 they would have to probably issue 7, 8, 9 percent because
they need to be in the market all the time.
As I noted earlier, and it is quite complex, it is not easy
to just substitute a deposit from the holdco to the bank since
there is a separate bank-level requirement, with more long-term
debt because then the holding company has to go out and issue
more.
I think without really realizing the repercussions they
have imposed the requirement for regionals both at the holdco
and the bank level, something not done for GSIBs, again because
that is a holding company strategy. I think they thought that
was a relatively simple matter, and in fact it is fantastically
expensive to the regional banks.
Mr. Timmons. Sure. Thank you for that. Given the extremely
prescriptive manner in which the proposal seeks to distribute
the debt there is a real risk that the issuance of significant
amounts of bank debt, without regard for macroeconomic or
market conditions, in a compressed timeframe, will potentially
result in decreased appetite for these assets. As such, the
value of this debt could be severely negatively impacted.
Considering the short, 3-year compliance runway, what risks
are presented when such an artificial amount of LTV floods the
market, and how will banks have to react to mitigate that risk?
Mr. Baer. Yes, exactly. As noted, they are not volume
issues so that would be more difficult. There is also a sort of
a technical issue with the proposal that we hope will be
corrected, where there is a $400,000 minimum issuance
requirement. The goal there was, well, let us make sure that
this debt is not sold to mom-and-pop investors.
It turns out even in institutional markets the debt is
usually significantly smaller increments than $400,000--50,
100,000; so, saying it has to be $400,000 and more would not
just prevent retail customers from buying it. It would prevent
a lot of institutional customers from buying it. Of course,
retail customers, mom and pop, widows and orphans, whatever you
want to call it, they are not going to be buying long-term debt
from a regional bank in $50,000 increments; so, that needs to
come down if it is going to be feasible for them to issue this
debt.
Mr. Timmons. That was actually my next question. How do you
think Federal regulators came to this number, $400,000? It
seems pulled out of thin air.
Mr. Baer. I do not know how they came to that. I know it is
speaking to a lot of bankers and investment bankers that it is
unworkable. I also think--I mean, I give them credit--maybe
this is an example of, as Mr. Kress notes, of the comment
process working. I do think that sanity will win out here.
Mr. Timmons. Thank you. Our banks are capitalized at the
highest levels in our Nation's history. Time and time again
regulators are touting the health of our banking systems. Yet
they are trying to implement policies that will unnecessarily
restrict access to capital and make life in President Biden's
economy even more of a challenge.
Thank you to the witnesses for their expertise today. I
yield the rest of my time. Thank you.
Chairman Barr. The gentleman yields back.
We now recognize the gentleman from South Carolina, Mr.
Norman, for 5 minutes.
Mr. Norman. I am in the real estate business. I have been
in housing for a long time. The Basel III, I guess the Endgame,
the best way I can describe it, is going to negatively affect
the housing market. Some of the rules that have been put in
place, like the risk-based assignments of mortgages,
disallowing banks to use private insurance to lower the risk
for those who put less down payments into a home, is going to
dramatically affect the banks.
How do you all see this? Mr. Baer, I will ask you.
Mr. Baer. I mean, again, it just comes down, for me, to
what is the data and the evidence here. As I think I mentioned
earlier in the hearing, if you think about mortgages the
current risk rate is 50 percent. The advanced approach, which
is the better measure, is 25 percent. Basel is effectively 25
percent, and we are looking here at 95 percent if it is on the
balance sheet, and even more if it is sold to a GSE. That is
really hard to understand.
This rule is so complex, and it is why it is so
disappointing there was not a more analytical rule applied to
it.
Commercial real estate actually does well under this
proposal. People do not realize that. I think they actually do
better than the current standardized, but you have to really
take it asset by asset and ask yourself the hard questions
about what is the loss experience and what is the appropriate
charge for this? That is really the work that was not done
here.
Mr. Norman. The analytical firepower is there. Why are they
not using that? I mean, it does not take a rocket scientist to
figure this out.
Mr. Baer. Yes, I mean, it is not just the analytical
firepower but there is incredible amounts of data on this that
the banking agencies have through their own call reports but
also exist in the private market. We have tapped operational
risk loss data, which they did not use, which is freely
available. They did not cite their own operational risk loss
data; so, it is very difficult to understand.
I mean, I think some of this was simply, as I think we have
discussed a few times, well, we will just take whatever we
agreed to in Basel as a compromise with the rest of the world.
Again, what is harder to understand is why all of that has now
been added to with surcharges, and again, with no recognition
that there is going on in the background a Fed stress test that
nobody else in the world is running and, which is effectively
double counting a lot of these risks.
Mr. Norman. So goes housing, so goes the economy and all
these regulations, and everything else this administration is
doing to trainwreck this country is astounding.
Does anybody else want to comment on this?
Mr. Bashur. I would just say that with regard to the
mortgage piece, ultimately what it comes down to is it is
arbitrary. The new risk weight is arbitrary. I think that,
again, that just plays into the fact that the economic analysis
has not been properly done here. There has been no disclosure,
there has been no communication, and we need to get to the
bottom of it.
Mr. Kress. Congressman, I would ask my fellow panelists to
identify any banking rules in the past two decades that would
meet their standards for the types of analysis that ought to be
done here. The Basel III Endgame rule has already gone through
one set of quantitative impact assessments. The agency has put
it out in the proposed rule. That is far more than was done in
Dodd-Frank 15 years ago, and that is quantum leaps more than
what was done under the Trump Administration, while the Trump
Administration was deregulating.
They are trying to establish a high standard that is not
found anywhere in the law in an effort to protect bank share
prices, share buybacks, and executive compensation.
Mr. Norman. Would you not admit this is a different time
and this is a different era? I am in South Carolina. People are
moving there but with the energy policies--just to give you an
example--the energy policies, that is trainwrecking my
industry, in South Carolina, with people coming there. What you
are just saying makes no sense.
Mr. Kress. I think two things have changed. One is a
collective amnesia that Ranking Member Waters pointed out. We
forget the consequences of financial crises. Two, we have seen
a movement in the judiciary to put up new barriers to
administrative rulemaking. The banking sector appears to be
taking advantage of that, again to protect share prices and
executive compensation.
Mr. Norman. It is not protecting the economy. It is not
protecting the industry that is the bellwether for the economy
and it is really a sad day that this is taking place. You can
make all the, I guess, excuses, but the results will be what
the results will be, and it will not be pleasant.
I yield back.
Chairman Barr. The gentleman yields back.
I would like to thank our witnesses for their testimony
today. Without objection, all members will have 5 legislative
days within which to submit additional written questions for
the witnesses to the chair, which will be forwarded to the
witnesses for their response. I ask our witnesses to please
respond as promptly as you are able.
This hearing is adjourned.
[Whereupon, at 12:19 a.m., the subcommittee was adjourned.]
A P P E N D I X
January 31, 2024
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