    [Senate Hearing 118-513]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 118-513

                        OVERSIGHT OF FINANCIAL REGULATORS:
                     PROTECTING MAIN STREET NOT WALL STREET

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

                                    HEARING

                                   BEFORE THE

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

                        ONE HUNDRED EIGHTEENTH CONGRESS

                                 FIRST SESSION

                                       ON

    EXAMINING HOW TO PROTECT OUR BANKING AND CREDIT UNION SYSTEMS ENSURING
                              THEY SERVE EVERYONE

                                   __________

                               NOVEMBER 14, 2023

                                   __________

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

    [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

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

                                   __________

                       U.S. GOVERNMENT PUBLISHING OFFICE
    57-730 PDF                  WASHINGTON : 2025

    -----------------------------------------------------------------------------------

                COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                           SHERROD BROWN, Ohio, Chair

    JACK REED, Rhode Island              TIM SCOTT, South Carolina
    ROBERT MENENDEZ, New Jersey          MIKE CRAPO, Idaho
    JON TESTER, Montana                  MIKE ROUNDS, South Dakota
    MARK R. WARNER, Virginia             THOM TILLIS, North Carolina
    ELIZABETH WARREN, Massachusetts      JOHN KENNEDY, Louisiana
    CHRIS VAN HOLLEN, Maryland           BILL HAGERTY, Tennessee
    CATHERINE CORTEZ MASTO, Nevada       CYNTHIA M. LUMMIS, Wyoming
    TINA SMITH, Minnesota                J.D. VANCE, Ohio
    RAPHAEL G. WARNOCK, Georgia          KATIE BOYD BRITT, Alabama
    JOHN FETTERMAN, Pennsylvania         KEVIN CRAMER, North Dakota
    LAPHONZA R. BUTLER, California       STEVE DAINES, Montana

                         Laura Swanson, Staff Director

                   Lila Nieves-Lee, Republican Staff Director

                           Elisha Tuku, Chief Counsel

                      Amber Beck, Republican Chief Counsel

                          Cameron Ricker, Chief Clerk

                          Shelvin Simmons, IT Director

                           Pat Lally, Assistant Clerk

                                      (ii)

                                C O N T E N T S

                                  ----------

                           TUESDAY, NOVEMBER 14, 2023

                                                                       Page

    Opening statement of Chair Brown.................................     1
            Prepared statement.......................................    44

    Opening statements, comments, or prepared statements of:
        Senator Rounds...............................................     3

                                   WITNESSES

    Michael Barr, Vice Chair for Supervision, Federal Reserve........     5
        Prepared statement...........................................    45
        Responses to written questions of:
            Chair Brown..............................................   107
            Senator Scott............................................   119
            Senator Menendez.........................................   126
            Senators Crapo and Warner................................   128
            Senator Warren...........................................   129
            Senator Cortez Masto.....................................   131
            Senator Fetterman........................................   134
            Senator Rounds...........................................   137
            Senator Kennedy..........................................   139
            Senator Hagerty..........................................   143
            Senator Britt............................................   145
            Senator Daines...........................................   152
    Martin J. Gruenberg, Chair, Federal Deposit Insurance Corporation     7
        Prepared statement...........................................    86
        Responses to written questions of:
            Chair Brown..............................................   156
            Senator Scott............................................   168
            Senator Britt............................................   182
            Senator Cortez Masto.....................................   187
            Senators Crapo and Warner................................   191
            Senator Fetterman........................................   192
            Senator Kennedy..........................................   197
            Senator Lummis...........................................   199
            Senator Menendez.........................................   205
            Senator Rounds...........................................   206
            Senator Warnock..........................................   208
            Senator Warren...........................................   211
    Todd Harper, Chair, National Credit Union Administration.........     8
        Prepared statement...........................................    96
        Responses to written questions of:
            Chair Brown..............................................   216
            Senator Scott............................................   224
            Senator Cortez Masto.....................................   231
            Senators Crapo and Warner................................   233
            Senator Fetterman........................................   234
            Senator Warnock..........................................   236
            Senator Warren...........................................   237

                                     (iii)

    Michael Hsu, Acting Comptroller, Office of the Comptroller of the
      Currency.......................................................     9
        Prepared statement...........................................   103
        Responses to written questions of:
            Chair Brown..............................................   239
            Senator Scott............................................   249
            Senator Cortez Masto.....................................   254
            Senators Crapo and Warner................................   256
            Senator Fetterman........................................   257
            Senator Menendez.........................................   259
            Senator Rounds...........................................   260
            Senator Warnock..........................................   261
            Senator Warren...........................................   262

                  Additional Material Supplied for the Record

    Letter submitted by Americans for Financial Reform...............   265
    ``Strip Clubs, Lewd Photos and a Boozy Hotel: The Toxic
      Atmosphere at Bank Regulator FDIC'', Wall Street Journal, 11/
      13/2023........................................................   269
    ``Our Take: PwC's Financial Services Update'', PwC, October 2023.   283
    Appendices submitted to Responses to Questions for the Record by
      Martin J. Gruenberg can be found in Committee records

      OVERSIGHT OF FINANCIAL REGULATORS: PROTECTING MAIN STREET NOT WALL
                                     STREET

                                  ----------

                           TUESDAY, NOVEMBER 14, 2023

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

                OPENING STATEMENT OF CHAIR SHERROD BROWN

        Chair Brown. Banking, Housing, and Urban Affairs Committee
    has come to order. Thank you all for being here. Senator Rounds
    will serve as Ranking Member again. His future may be cut
    short, I am not sure, but that is for him and his friends to
    work out.
        Senator Rounds. Looking forward to it.
        Chair Brown. Yes. We will hear testimony from the heads of
    the four Federal agencies responsible for protecting our
    banking and credit union system and making sure it serves
    everyone--The Board of Governors of the Federal Reserve,
    Federal Deposit Insurance Corporation, National Credit Union
    Administration, and the Office of Comptroller of the Currency.
    Thanks for being here, all four of you, today.
        Earlier this year, we witnessed three of the largest bank
    failures in U.S. history. These failures reminded us that
    bankers' hubris and greed and negligence continue to pose grave
    threats to our financial system, and perhaps more importantly
    even, to workers and small businesses. This time our system
    bent. Fortunately it did not break. To avoid breaking, however,
    the Treasury Department and your agencies had to intervene and
    invoke the Systemic Risk Exception and guarantee all deposits
    at Silicon Valley Bank and Signature Bank. It should not have
    gotten that far. The bank failures exposed weaknesses in the
    supervision of the banking system, disrupted the financial
    system's stability, and reminded many Americans why they do not
    trust Wall Street.
        A disconcerting finding in the aftermath of the failures
    was that the agencies did in fact identify the risks at these
    institutions. You called them out, but that failed to result in
    real action from bank management to actually do anything to
    mitigate these risks. It is as predictable as it is
    unacceptable after years of lobbying for weaker rules and lax
    oversight, including by SVB and Signature Bank executives
    showing up in the laws of Congress and in your agencies.
        We must turn the lessons of this year into action. It means
    improving bank supervisions. It means holding bank executives
    accountable for risky behavior that does in fact sometimes
    drive their banks into the ground. It means strengthening rules
    so that banks serve their communities, and have the capital
    necessary to continue to serve their community during even
    stressful events. These are things we should agree about. It is
    why in the wake of this bank crash, we worked together to take
    the first real action in more than a decade to rein in risky
    behavior by bank executives. Congress must finish the job and
    pass our bipartisan RECOUP Act that came out of this Committee
    21:-2--everybody on the dais now voted for it--to hold senior
    bank executives accountable when they gamble with customers'
    money.
        The turmoil in the financial industry earlier this year
    reminded us about the policies and actions that continue to
    make the big banks even bigger, and leave the financial system
    vulnerable to the ever-expanding bank balance sheets of the
    largest institutions in our country. We have created a
    financial system where a handful of the largest banks now hold
    $14.75 trillion in assets--$14.75 thousand-billion dollars in
    assets, more than half the Nation's GDP.
        Fewer, larger and larger banks means consumers have less
    choice in the marketplace for banking services. Less
    competition means banks pay depositors less and charge higher
    fees. Mergers and acquisitions serve as justification for
    branch closures, particularly in rural areas and working-class
    communities. We have seen that everywhere. We have seen it far
    too often in Ohio. We know that drives more consumers out of
    the banking system toward high-fee, predatory nonbank financial
    companies like check-cashers and payday lenders and fintech
    apps.
        Banking consolidation also means reduced access to credit
    for small businesses and increased borrowing costs.
    Fundamentally, it means that more power in our economy ends up
    concentrated in the hands of a tinier and tinier number of big
    bankers on Wall Street. We have seen over and over what a
    problem that is and the harm that the Wall Street business
    model does in places like Ohio, encouraging everything from
    inflation to outsourcing to lax safety. Look at East Palestine
    and the rail crash there just 10 months ago. We need strong
    action now from your agencies on this issue, because these
    trends impose real and direct costs on Americans.
        With less competition, with less choice, with less access,
    it is more important than ever that we ensure banks are meeting
    the needs of the entire community. That is why I was encouraged
    to see that the FDIC, the Fed, and the OCC were able to come
    together last month and finalize the new Community Reinvestment
    Act. Thank you for that. The CRA was enacted 46 years ago to
    ensure that banks meet the credit needs of all the communities
    in which they do business. CRA regulations last received a
    significant refresh in 1995. Since '95, the internet and mobile
    technology have fundamentally altered how Americans interact
    with the banking system. This modernization effort is critical
    to ensuring that banks are fulfilling the promise of CRA by
    serving and investing in their communities. I thank your
    agencies for working through this very complex rulemaking and
    delivering a final rule that we all believe will encourage
    banks to meet the credit needs of their entire community.
        In addition to CRA, the FDIC, Fed, and OCC also issued what
    is known as the Basel III Endgame Capital Proposal. For anyone
    not steeped in financial regulation, that is an actual rule
    critical to protecting the economy. It is not the latest video
    game or Marvel movie. These capital rules represent the final
    and long, long overdue plank in the post-financial crisis
    overhaul of our regulatory capital framework, about ensuring
    that the largest banks have enough capital to address the risks
    that are unique to their institution, and weather crises and
    emergencies and other sudden events that affect their banks.
    This proposal also recognizes the systemic importance of banks
    that are large, just not quite as massive as the Wall Street
    megabanks, banks like Silicon Valley before it collapsed.
        As we saw this spring, mismanagement, risky bets at those
    banks still threaten the financial system. They also need to
    have enough capital to prevent this kind of threat to the
    economy we worried about earlier this year. Of course we know
    that complaints are coming; in fact, they started before we
    even saw the proposal. The industry has relentlessly attacked
    it with the same old, tired arguments--compliance will cost too
    much. We will not be competitive. We already have enough
    capital. We will not be able to lend to small business. We have
    heard it; you have heard it before.
        Be clear--the largest banks will need to redirect a tiny
    fraction of their enormous profits over a period of several
    years to get to the new capital levels. Every single bank that
    would be impacted by this proposal has the capacity to comply
    with the new capital levels and extend credit to small
    businesses and working-class and middleclass families, all
    while remaining wildly, in most cases, profitable. I trust your
    agencies see these arguments for what they really are, the same
    old Wall Street whining, and that you will deliver a strong
    capital rule, one that prioritizes the American people and
    their communities over quarterly profits of the banking
    industry.
        Finally, as we have discussed in this Committee, illicit
    finance continues to pose a serious threat to the United States
    and the world. We have seen it most recently with funding Hamas
    was able to raise for its terrorist attacks on Israel. We see
    it every day in our communities with what has happened with
    fentanyl coming into our country. I implore your agencies to be
    vigilant when it comes to all the risks associated with illicit
    finance in the banking and credit union systems. You are all
    public servants. You are all responsible for making sure the
    financial system operates in a safe and sound manner, and works
    for American people. Do not let us down. Ranking Member Rounds.

                    STATEMENT OF SENATOR MIKE ROUNDS

        Senator Rounds. Thank you, Chairman Brown, and thank you to
    our witnesses for appearing before us today. While this group
    comes before the Committee every year, today's hearing feels
    particularly timely given the number and breadth of regulations
    being pushed through by our financial regulators. In the last
    few months alone, your agencies have put forth or finalized
    regulations and guidance that represent the biggest rewrite of
    banking regulations since the passage of Dodd-Frank.
        We have seen regulations on bank capital, long-term debt
    resolution planning, the Community Reinvestment Act, debit card
    interchange fees, and climate risk management, just to name a
    few. These proposals collectively amount to thousands of pages,
    with the Community Reinvestment Act alone standing at almost
    1,500 pages, nearly double the length of the entire Dodd-Frank
    act. Moreover, none of these regulations exist in a vacuum. As
    legislators, my colleagues and I recognize the importance of
    actively considering all possible effects a law might have,
    including its impact on individuals and how we can mitigate
    unintended consequences. Therefore, we find it concerning that
    you have failed to consider how these rules will impact banks
    and businesses of all sizes, ultimately harming the American
    people.
        As a direct result of these regulations and proposals,
    banks will now spend their time complying with more Washington
    bureaucratic red tape instead of investing that time or
    resources into their local communities. Beyond overly
    burdensome compliance costs to financial institutions, we must
    recognize and emphasize that the cost of this rulemaking
    onslaught will ultimately be borne by small businesses and
    wage-earners who are on a fixed income and rely on their local
    banks for loans and access to credit.
        Yesterday, several of the witnesses before us received a
    letter, led by Ranking Member Scott, on the Basel III Endgame
    rule, which was signed by myself and 37 other Republican
    senators. We have heard from countless constituents from all
    walks of life about the harm they will experience should this
    rule go into effect. Our letter emphasized the detrimental
    impacts, such as limiting the availability of credit for
    housing in low- and moderate-income communities, severely
    restricting small business lending, and decreasing the
    retirement savings of hardworking Americans. Vice Chair Barr,
    you recently stated that, and I quote, ``The proposal is
    projected to raise capital for large banks. This may result in
    higher funding costs, but this is only half the story.'' End of
    quote.
        However, I think the other half of the story is the
    millions of hardworking families who will be unable to achieve
    the American dream of home ownership, the tens of thousands of
    small businesses who will be unable to secure a loan, and the
    workers forced to stay on the job past retirement age because
    their pensions are providing less returns. What happens to
    them? We must remember that at the end of each regulation are
    real people, people who care about the safety and security of
    their families, including financial safety and security.
        Results matter. Since the Biden administration took office,
    it now costs the average American family of four over $700 more
    per month to live in this country. It is close to $1,000 in my
    home State of South Dakota. You are adding to that pain. This
    rule would put a strain on all institutions seeking to provide
    services that would help American consumers and businesses
    prosper, like many of those in my home State of South Dakota.
    Due to the scale and breadth of each of these proposals, I
    would support having a hearing dedicated to each and every one
    to understand the impacts that they will have.
        But seeing as my time today is limited, I wanted to call
    attention to another proposal where the regulators are
    operating well outside the mandates given to them by Congress.
    We have heard Federal Reserve officials, including Chair
    Powell, state as recently as last month that the Fed is not and
    will not become a climate policymaker. Yet our regulators are
    mandating that banks must engage in climate scenario analysis.
        Earlier this year, when the Fed conducted a climate
    scenario analysis exercise, officials stated that it would have
    no supervisory implications. But now, banks are being told that
    they will be supervised to make sure they have such programs in
    place. So, which is it? Not a single bank has failed because
    they have failed to account for climate risk. As Governor
    Bowman discussed in her dissent of the climate guidance, this
    action could ultimately lead to negative impacts on low-income
    communities who will have reduced access to capital.
        In your desire to worship at the altar of climate change,
    you are sacrificing the economic well-being and capabilities of
    hardworking Americans. Let me repeat--none of these regulations
    exist in a vacuum, and collectively, these rules paint a
    devastating picture for consumers, especially low- and
    moderate-income communities. At a time when all Americans are
    suffering from persistently high inflation caused by
    Bidenomics, the last thing they need is a bunch of Washington
    bureaucrats upending and rewriting a decade's worth of banking
    rules, which will only serve to restrict capital, harm the
    economy, and punish American families. I think you need to go
    back to the drawing board. Thank you, Mr. Chairman.
        Chair Brown. Thank you, Senator Rounds. Thanks for the
    service, all of you today. Vice Chair Barr, please begin your
    testimony.

    STATEMENT OF MICHAEL BARR, VICE CHAIR FOR SUPERVISION, FEDERAL
                                RESERVE

        Mr. Barr. Chairman Brown, Senator Rounds, and other Members
    of the Committee, thank you for the opportunity to testify on
    the Federal Reserve's supervisory and regulatory activities.
    Our banking system is sound and resilient. The acute stress
    that occurred in March has receded, and banking organizations
    continue to report capital and liquidity ratios above minimum
    regulatory levels. However, some banks have recorded sizable
    declines in the fair value of assets as interest rates have
    increased, putting pressure on tangible capital. These banks
    are actively managing the resulting set of risks, but these
    could take some time to address.
        Additionally, some banks that have high reliance on
    uninsured deposits are using more expensive funding sources to
    manage their liquidity. Looking forward, preserving a sound and
    resilient banking system requires continued attention to
    address identified vulnerabilities, and vigilance to changing
    conditions.
        Starting with supervision, since the bank failures earlier
    this year, the Federal Reserve has been moving forward with
    ways to improve the speed, force, and agility of supervision as
    appropriate. In considering improvements to supervision, we are
    very mindful of the differences in size, risk, and complexity
    of supervised institutions, and the importance of maintaining
    the strength and diversity of banks of all sizes that serve
    communities across the country.
        Furthermore, supervisors have been focused on addressing
    material risks presented by the current economic environment.
    This includes conducting targeted reviews at banks exhibiting
    higher interest rate and liquidity risk profiles, and
    monitoring for potential credit deterioration, particularly
    within the consumer and CRE lending segments. A key component
    of this resilience is capital. Capital allows banks to absorb
    losses on those assets while continuing to serve households and
    businesses.
        In the Global Financial Crisis, the effects of woefully
    undercapitalized banks had a devastating impact on our economy,
    and resulted in the worst recession since the Great Depression.
    It took 6 years for employment to recover, more than 10 million
    people fell into poverty, and 6 million families lost their
    homes to foreclosure. And these costs occurred even with
    substantial support from the Government.
        In the years following the Global Financial Crisis, the
    Board adopted a set of capital reforms, which greatly
    strengthened our banking system, and capital ratios of the
    largest banks have more than doubled since 2009. At the same
    time, the U.S. banking system has grown from $12 trillion in
    assets in 2009 to $23 trillion today, while showing strong
    profitability and overall market valuation.
        U.S. banks have enhanced their position as leaders in
    global capital markets activity. Importantly, these reforms
    have served the U.S. economy well. Our economy has grown
    substantially with the continued support of robust lending from
    a stronger banking system.
        The reforms to the capital requirement framework that the
    banking agencies proposed earlier this year are the last stage
    of these postcrisis capital reforms. It has long been
    recognized that work remains to improve how banks measure risk,
    which is critically important, because the riskier a bank's
    assets are, the more capital it needs to protect against those
    risks. The proposed rules would apply to banks with at least
    $100 billion in assets, fewer than 40 of the over 4,000 banks
    in our banking system. Community banks would not be affected by
    this proposal. The effects for each bank would vary based on
    its activities and risk profile. Notably, the increases would
    be the most substantial for the largest and most complex banks,
    the G-SIBs, and the bulk of the estimated rise is attributed to
    trading and other nonlending activities.
        The comment period is an important part of the rulemaking
    process. We are providing the public nearly 6 months to review
    the proposal so they can provide meaningful comments. We
    welcome all comments that provide the agencies with additional
    data and analysis, to help ensure the rules accurately reflect
    risk.
        I would also like to briefly highlight our long-term debt
    proposal. In August, the agencies proposed a rule that would
    expand long-term debt and resolution planning requirements to
    additional large banks. The proposal's goal is to increase the
    potential options available for resolving depository
    institutions, and to enhance overall financial stability.
    Importantly, the proposed requirements would be calibrated at a
    lower level relative to the largest and most complex banks.
        As with the capital rules, I would like to emphasize that
    these are proposed rules, and we look forward to hearing the
    public's comments. Thank you. I am happy to take your
    questions.
        Chair Brown. Mr. Gruenberg, welcome.

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

        Mr. Gruenberg. Thank you, Mr. Chairman. Chairman Brown,
    Senator Rounds, and Members of the Committee, I am pleased to
    appear at today's hearing on Oversight of Financial Regulators.
    The U.S. banking industry has proven to be quite resilient,
    despite the period of stress earlier this year. In the second
    quarter of this year, key banking industry measures of
    performance remained favorable, net income remained high by
    historical measures, asset quality measures were stable, and
    the industry remained well capitalized. However, banks reported
    lower net interest margins and higher funding pressures for a
    second consecutive quarter. Higher market interest rates caused
    market values for debt to generally fall during the second
    quarter, resulting in higher unrealized losses on securities,
    an issue that became apparent earlier this year.
        In the second quarter, uninsured deposits declined by 2\1/
    2\ percent. That is a significant slowing from the 8 percent
    decline that we experienced in the first quarter. By contrast,
    insured deposits increased by .8 percent during the second
    quarter of this year. In the second quarter also, depositors
    sought higher yields, often at nonbank financial institutions,
    particularly money market mutual funds. Many banks have
    increased deposit rates to compete, resulting in a higher cost
    of funds.
        The banking industry continues to face significant downside
    risks from the effects of inflation, rising market interest
    rates, and geopolitical uncertainty. The economic outlook
    remains uncertain despite relatively solid growth and low
    employment so far this year. These risks could cause credit
    quality and profitability to weaken, loan growth to slow,
    provision expenses to rise, and liquidity to become more
    constrained.
        Commercial real estate loan portfolios, particularly loans
    backed by office properties, face challenges when loans mature,
    as demand for office space remains weak and property values
    continue to soften. Banks have tightened underwriting standards
    over the past year across a range of household and business
    loans, and they may continue to tighten further.
        The failure of three large regional banks this spring
    demonstrated the risk to financial stability that large
    regional banks can pose. The FDIC, along with the Federal
    Reserve and the OCC, proposed rulemakings that would enhance
    the resilience and improve resolvability of large regional
    banks. These include a long-term debt proposal that would
    require a layer of loss-absorbing capacity at large banks to
    take losses before uninsured and insured depositors, thus
    decreasing the incentive for uninsured depositors to run, and
    mitigating the need for a systemic risk exception in a future
    failure.
        In July, the banking agencies issued a Notice of Proposed
    Rulemaking for Basel III. The proposal is a continuation of the
    Federal banking agencies' efforts to revise the regulatory
    capital framework for our Nation's largest, most systemic
    financial institutions following the Global Financial Crisis of
    2008. Notably, it does not apply to community banks. The NPR
    would make important changes to address capital weaknesses
    identified in the 2008 financial crisis, enhance the resilience
    and stability of the banking system, and enable the banking
    system to better serve the U.S. economy.
        In addition, the FDIC is undertaking a comprehensive review
    of its supervision program, with a focus on interest rate risk,
    unrealized losses on securities and loans, uninsured deposits,
    rapid growth, and the need when necessary to escalate
    supervisory matters and take actions to compel compliance. In
    October, the banking agencies adopted a final rule to
    strengthen and modernize the Community Reinvestment Act.
        In closing, if I may, I would like to address a recent news
    report regarding incidents of sexual harassment and misbehavior
    at the FDIC. I am personally disturbed and deeply troubled by
    this report. The FDIC is conducting a comprehensive review,
    including engaging an independent third party, to ensure that
    we understand the nature of these issues and take all
    appropriate actions to address them. Let me underscore, I have
    no higher priority than to ensure that all FDIC employees work
    in a safe environment where they feel valued and respected.
    That concludes my statement, Mr. Chairman.
        Chair Brown. Mr. Harper, welcome.

        STATEMENT OF TODD HARPER, CHAIR, NATIONAL CREDIT UNION
                             ADMINISTRATION

        Mr. Harper. Chairman Brown, Senator Rounds, and Members of
    the Committee, thank you for the invitation to discuss the work
    of the National Credit Union Administration. My remarks here
    will focus on the state of the credit union system, and two
    legislative requests.
        During the last year, the credit union system has largely
    remained stable in its performance, and resilient against
    economic disruptions. At the end of the second quarter, the
    system had $2.2 trillion in assets, and $1.5 trillion in
    outstanding loans. And the system's aggregate net worth ratio
    was 10.6 percent, well above the 7 percent well-capitalized
    leverage ratio required by statute.
        The Share Insurance Fund also continues to perform well,
    with no premiums currently expected. And to better position the
    fund's liquidity in the current economic environment, the NCUA
    has increased overnight investments to $4 billion.
    Nevertheless, we should pay attention to several emerging
    issues and trends. Net charge-off ratios at credit unions have
    risen over the last year, and annualized returns on average
    assets have declined slightly. Increasing liquidity, interest
    rate, and credit risks have also led to a drop in composite
    CAMELS Code ratings to 3s, 4s, and 5s.
        Assets in CAMELS Code-3 institutions, for example,
    increased sizably in the second quarter, especially among those
    complex credit unions with more than $500 million in assets.
    Ultimately, the data from the first half of the year reveal a
    tale of two types of credit union members. The first type are
    those who have shifted their share savings deposits to share
    certificates to capitalize on better rates. In all, time
    deposits have increased approximately 70 percent during the
    last year. Unless carefully managed, this switch from low-
    paying to higher-yielding accounts can expose credit unions to
    greater interest rate and liquidity risks.
        Delinquency rates on most types of loans are also rising,
    and that leads to the second type of members, those with
    growing financial difficulties. Credit card balances are
    elevated and higher than what we should expect in the typical
    second quarter. Additionally, balances on home equity lines of
    credit and other second liens have increased by a third during
    the last four quarters. In some cases, those increases may
    indicate household financial stress. Consequently, credit
    unions must carefully manage their credit risks going forward.
    Early intervention at the onset of a delinquency can improve
    the credit union member's financial footing and prevent a
    charge-off.
        The current economic environment also underscores the
    importance of the NCUA's Central Liquidity Facility, or CLF for
    short, as a liquidity shock absorber. As of September 30th, the
    CLF had $19.8 billion in lending capacity. This figure
    contrasts sharply with 9 months earlier when the CLF had $27.5
    billion in lending capacity. This sizable contraction resulted
    from the expiration of temporary statutory enhancements that
    facilitated the agent membership of corporate credit unions. To
    address this expiration and growing liquidity risks within the
    system, the NCUA Board has unanimously requested that Congress
    restore the CLF's Corporate Credit Union and Agent Member
    Provisions, which the Congressional Budget Office has scored at
    no cost to the taxpayer.
        Additionally, it remains the policy of the NCUA Board to
    restore the NCUA's authority to examine and supervise third-
    party vendors. The Government Accountability Office, the
    Financial Stability Oversight Council, and the NCUA's Office of
    Inspector General have all recommended this reform. Vendor
    authority would allow the NCUA to gain a better understanding
    of all the risks present in the credit union system, and close
    a growing regulatory blind spot. And such legislation would
    reduce the compliance costs, due diligence burdens, and future
    Share Insurance Fund premiums for credit unions.
        In sum, the NCUA stands ready to address the impact of the
    evolving risks within the credit union system, including
    growing liquidity, interest rate, and credit risks. The NCUA
    will also continue to coordinate with other financial
    regulators to ensure the overall resiliency and stability of
    our Nation's financial markets. That concludes my remarks. I
    look forward to your questions.
        Chair Brown. Thank you, Mr. Harper. Mr. Hsu, welcome.

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

        Mr. Hsu. Thank you, Mr. Chairman. Chairman Brown, Senator
    Rounds, Members of the Committee, I am pleased to testify today
    to provide an update on the activities of the Office of the
    Comptroller of the Currency. Despite the significant market
    stresses earlier this year and the challenging interest rate
    environment, the overall condition of the Federal banking
    system is sound. OCC-supervised banks in the aggregate have
    strong levels of regulatory capital and healthy levels of
    profitability, while maintaining sufficient liquidity buffers.
        The OCC engages directly with the institutions it
    supervises to ensure that they are being vigilant in managing
    their risks. Our recently released Bank Supervision Operating
    Plan for 2024 summarizes the agency's examiNation priorities
    for next year and highlights asset liability management, credit
    risk and allowance for credit losses, cybersecurity,
    operational risk, and consumer compliance risk, among others,
    as key areas of focus.
        My written statement provides an update on the agency's
    work advancing its key priorities of guarding against
    complacency, reducing inequality, adapting to digitalization,
    and managing climate-related financial risks at the largest
    banks. I will highlight some of these efforts here.
        Despite the relative calm in the market today, the OCC has
    urged the banks it supervises to stay on the balls of their
    feet with regards to risk management. To assist banks, the OCC
    has updated guidance for the industry. For example, in response
    to increasing risk in commercial real estate, the OCC and other
    regulators published the Policy Statement on Prudent Commercial
    Real Estate Loan Accommodations and Workouts, which updates
    existing interagency supervisory guidance on CRE loan workouts,
    and reminds banks to work prudently and constructively with
    credit-worthy borrowers during times of financial stress.
        Ensuring that financial services are offered responsibly
    and fairly takes continued effort and vigilance by banks,
    regulators, and other stakeholders. On October 24th, 2023, the
    Federal banking agencies issued an interagency final rule
    implementing the Community Reinvestment Act. The CRA was
    enacted in 1977 to prevent redlining and to encourage banks and
    savings associations to help meet the credit needs of the
    communities in which they operate, especially low- and
    moderate-income neighborhoods and individuals.
        The final rule modernizes the CRA by recognizing banking
    activities that take place beyond physical branches and ATMs,
    being significantly more data-driven and objective, and
    providing for greater transparency. It strengthens the CRA by
    addressing concerns related to grade inflation in CRA ratings,
    and by better incentivizing CRA lending and investments in LMI
    communities. The rule tailors evaluations and data collections
    to bank size so that community banks do not have additional
    burdens.
        Banks' relationships with third parties, including
    financial technology companies, continue to expand. The use of
    third parties has significant potential benefits, but poor
    third-party risk management can hurt consumers, weaken banks,
    and contribute to an unlevel playing field. Recently, the OCC
    and other regulators jointly issued Interagency Guidance on
    Third-Party Relationships: Risk Management, reminding banks of
    their responsibility to operate in a safe and sound manner, and
    in compliance with applicable laws and regulations, regardless
    of whether their activities are performed in-house or
    outsourced.
        The OCC also recognizes the considerable interest by the
    banking industry in artificial intelligence. To date, banks
    have generally approached machine learning and AI cautiously,
    across a range of use cases. The potential benefits of more
    widespread adoption of AI are significant, but so are the
    risks, which we expect banks to continue to manage
    appropriately.
        In the digital asset space, attention is shifting from
    crypto to the tokenization of real-world assets and
    liabilities. In contrast to crypto, tokenization is driven by
    solving real-world settlement problems, and can be developed in
    a safe, sound, and fair manner. Next February, the OCC will
    host a public symposium on tokenization to take stock of
    developments, help enable strong foundations, and promote
    public discussion.
        This fall, the OCC, along with the Federal Reserve and the
    FDIC, approved principles for climate-related financial risk
    management for large banks. The principles are focused
    exclusively on risk management and do not tell bankers what
    customers or businesses they may or may not bank, but clarify
    how large banks can maintain effective risk management and keep
    their balance sheets sound so they can continue to be a source
    of strength to their customers and communities through a range
    of severe weather scenarios.
        In closing, the OCC continues to be engaged in a range of
    efforts to ensure that OCC-supervised banks operate in a safe,
    sound, and fair manner, meet the credit needs of their
    communities, treat all customers fairly, and comply with laws
    and regulations now and into the future. Thank you. Happy to
    take your questions.
        Chair Brown. Thank you, Mr. Hsu. Chair Gruenberg, I will
    start with you. Yesterday--you mentioned this--reported that
    pervasive sexual harassment, misogyny, lack of accountability
    have created a toxic environment for female bank examiners.
    These allegations, to say the least, are troubling. When the
    FDIC IG highlighted these problems more than 3 years ago, the
    FDIC agreed to changes but disagreed that its anti-harassment
    program was inadequate. What are you doing now to address these
    problems?
        Mr. Gruenberg. Thank you, Mr. Chairman. As I indicated, the
    report yesterday was deeply disturbing and troubling, and it is
    quite clear that we have had employees at the FDIC subjected to
    horrendous experiences that simply are unacceptable and cannot
    be tolerated. And it is really going to be incumbent on the
    agency to take all actions necessary to come to grips with this
    and to address it effectively. We are engaging a third party,
    an independent third party to do an agency-wide review, both of
    Washington as well as our regional and field offices, to inform
    us on the nature of the challenge here and how we may be able
    to address it effectively.
        I think the core issue here, if I may say--you know, we
    have appropriate policies and procedures in place--the issue is
    it is really on management to instill the confidence in our
    employees to utilize those procedures and policies in a way
    that they can feel safe and secure, and that their information
    is kept confidential. And that is not an easy thing to do. I
    mean we can work on the policies and the procedures, but on the
    part of management, giving employees the sense of confidence
    that they can actually utilize these mechanisms to protect
    themselves if they are treated improperly, and also to have
    processes to hold individuals accountable who engage in
    misconduct, that is the core challenge that we are going to
    work on, through all the resources of the agency to try to
    address. We will be transparent as we proceed with this
    process. We will report out to you, and glad to keep you
    informed as we----
        Chair Brown. Thank you.
        Mr. Gruenberg. ----as we work.
        Chair Brown. As you said, perhaps not an easy thing to do,
    but we expect you to create a safe and welcoming workplace for
    all employees, examiners and others. It is also why we must
    confirm the FDIC Inspector General who was marked up in this
    Committee last week.
        Second question, now for Vice Chair Barr. Capital allows
    banks to lend in good times and bad. It prevents taxpayers from
    having to bail out Wall Street banks again that take on too
    much risk. Briefly, why is this capital proposal needed?
        Mr. Barr. Thank you, Mr. Chairman. I agree; capital is key
    to a resilient banking system and to a thriving economy. We
    need our banking system to serve households and businesses.
    Strong capital helps them do that, as you said, in good times
    and in bad. Capital is key to preventing financial crises and
    reducing their cost. This proposal only applies to the largest
    banks, fewer than 40 out of the more than 4,000 in this
    country. The proposal focuses on having stronger capital rules
    for trading and other nonlending activities where banks have
    had large losses.
        The proposed changes for credit and the operational risk
    associated with credit are very small compared to the current
    rules. Overall, the proposal makes our capital system more
    consistent, more transparent, and more risk-sensitive. That
    said, we recognize that the rule may not appropriately capture
    all risks. We welcome all comments on all aspects of the rule.
    We will take these comments seriously to improve the rule going
    forward.
        Chair Brown. Thank you, Mr. Vice Chair. This spring, we saw
    that the weakened rules demanded by the Trump administration
    resulted in three of the four largest bank failures in our
    Nation's history. Starting with you, Comptroller Hsu, how has
    OCC revised--and I will ask each of you, so I will ask them all
    and then please answer in the last few seconds--how has OCC
    revised its supervisory approach to address the gaps that the
    prior administration created and the bank failures earlier this
    year exposed. Chair Harper, has NCUA implemented any changes in
    its approach to supervision in response to those bank failures?
    And then Chair Gruenberg of the FDIC, and Vice Chair Barr at
    the Federal Reserve. And since I am over my time, be as brief
    as you can. Thank you.
        Mr. Hsu. Sure. At the OCC, we have got strong processes in
    place. None of the bank failures that happened earlier this
    year were national banks. That being said, we have carefully
    reviewed all of the post mortems of those and identified areas
    where we can strengthen the agility and the speed with which we
    supervise, and the intensity of our supervision.
        Mr. Harper. Briefly, we have increased our assessments of
    liquidity within individual credit unions. We are also looking
    at commercial real estate, as we know that that is a rising
    concern. Fortunately, we had recently implemented our risk-
    based capital rules, which are increasing the capital to
    strengthen the system. And last, within the credit union
    system, 90 percent of deposits are insured, and so we did not
    see the instability necessarily that was seen in the banks.
        Chair Brown. Mr. Gruenberg.
        Mr. Gruenberg. Thank you, Mr. Chairman. We learned some
    hard lessons from the experience earlier this year. We have
    issued guidance for our examiners, focused on some of the key
    lessons from that experience--managing interest rate risk,
    concentrations of unrealized losses on loans and securities,
    uninsured deposit concentrations, rapid growth, and the need
    when necessary to escalate matters in regard to an institution,
    and to compel compliance if an institution is not responsive.
        Chair Brown. Mr. Barr.
        Mr. Barr. Thank you. We have been focused on improving the
    speed, force, and agility of supervision as appropriate for the
    institutions we supervise. We are working on ensuring that we
    have appropriately intensified our supervision of the highest-
    risk firms. We are working to make sure that the assessment of
    risk appropriately influences supervisory activities. We are
    making sure that issuance of supervisory findings and
    enforcement actions are timely, and that they provide bank
    management and board of directors with the necessary
    information and incentives to remediate deficiencies quickly.
    And we are working to align the intensity of supervision with
    the institution's size, complexity, and business model,
    appropriately addressing rapid growth, for example, and other
    risk factors. As with other agencies, we are currently focused
    on issues such as interest rate risk, liquidity risk, risk to
    the credit profile of institutions, particularly CRE office
    risk, and also cyber risks.
        Chair Brown. Thank you. The senator from South Dakota,
    Senator Rounds.
        Senator Rounds. Thank you, Mr. Chairman. Mr. Chairman, as
    you have indicated earlier, yesterday the Wall Street Journal
    did publish a concerning article about the toxic atmosphere at
    bank regulator FDIC. I would like to enter a copy of this
    article in the record.
        Chair Brown. Without objection, so ordered.
        Senator Rounds. Thank you.
        Chair Gruenberg, were you aware of these allegations before
    the publication? A simple yes or a no would do.
        Mr. Gruenberg. As a general matter, no, Senator.
        Senator Rounds. After the publication of this report
    yesterday, I understand, as you have stated before the
    Committee a few minutes ago, that you have informed the FDIC
    staff that the FDIC would hire an independent firm to conduct
    an assessment of these concerning allegations. It is also my
    understanding that there may be additional press reports coming
    as well. Are you going to be the object of any of these future
    reporting issues on this matter?
        Mr. Gruenberg. In terms of the agency's work? Not that I am
    aware of.
        Senator Rounds. You personally, Mr. Gruenberg, are you
    going to be the object of any of these reports?
        Mr. Gruenberg. For news reports?
        Senator Rounds. Yes.
        Mr. Gruenberg. I mean I cannot speak to that. You would
    really have to speak to the news organization, Senator.
        Senator Rounds. Thank you, Mr. Gruenberg. Vice Chair Barr,
    as I detailed in my opening remarks, I do have deep concerns
    about the impacts that the Basel III Endgame Proposal will have
    on consumers and small businesses across the country. In fact,
    Vice Chair Jefferson asked at the time of the proposal, and I
    will quote, ``Can you give me a sense of how and to what degree
    these higher capital requirements could constrain a bank's
    ability to lend to businesses and individuals? I am very
    concerned about these impacts.'' End of quote.
        I echo Vice Chair's concerns and have yet to see any proof
    that this rule would not be incredibly harmful to businesses
    and individuals. My question for you is, how many days did you
    give your colleagues to review your holistic review before
    providing them the rulemaking?
        Mr. Barr. Senator, I do not have the exact number of days
    in my head; we can get back to you on that. They had quite a
    long period of time to review the proposal----
        Senator Rounds. I would appreciate----
        Mr. Barr. ----and to provide input on that proposal.
        Senator Rounds. Yes, I would appreciate it for the record--
    --
        Mr. Barr. It was----
        Senator Rounds. ----as to how much time that you provided
    them on that.
        Mr. Barr. I would be happy to provide that. There was an
    extensive period of time for review of the proposal before its
    issuance.
        Senator Rounds. OK. When will this holistic review be
    released to the public, or at least to this Committee?
        Mr. Barr. Senator, I was referring to the proposal that we
    put forward. The proposal itself is what goes through the
    normal notice and comment rulemaking process. The holistic
    review preceded that. It is what my predecessor did. It is what
    the person before in that job did. It is a chance to wrap our
    arms around the whole system before deciding whether to move
    forward with a proposal. The proposal follows the normal notice
    and rulemaking comment, the normal engagement with board
    members, normal engagement from the public.
        Senator Rounds. So, you are saying----
        Mr. Barr. We very much welcome those comments.
        Senator Rounds. ----that holistic review is out already?
        Mr. Barr. The holistic review preceded the work to engage
    in----
        Senator Rounds. And is----
        Mr. Barr. ----a public proposal.
        Senator Rounds. ----is it public today?
        Mr. Barr. The holistic review is an internal review----
        Senator Rounds. And is that----
        Mr. Barr. ----that I undertook in order to engage in this
    activity. I published remarks saying that as a result of that
    review, I thought the overall framework was sound.
        Senator Rounds. But would that not have been something that
    would have been shared with other Members----
        Mr. Barr. In the----
        Senator Rounds. ----holistic review?
        Mr. Barr. I am sorry; with other members of the Board?
        Senator Rounds. Would other members of the Board not have
    had a chance to look at that review?
        Mr. Barr. Other members of the Board have a normal chance
    to engage with the rulemaking process.
        Senator Rounds. Well, but----
        Mr. Barr. I have had many discussions----
        Senator Rounds. ----but you did not share this holistic
    review with other members of--other members did not see it?
        Senator Rounds. I had many discussions with other members
    of the Board about this capital rule and about my views on the
    capital process overall. So, I have been engaging with my
    fellow board members quite extensively.
        Senator Rounds. So, you did not give your colleagues a copy
    of, or give them an opportunity to review, your holistic review
    before providing them the rulemaking.
        Mr. Barr. There is not a document that is the holistic
    review, sir. That is not----
        Senator Rounds. OK.
        Mr. Barr. ----the result of that process. The work that is
    the result of that process is a decision about whether to move
    forward with a proposal. That proposal is the Basel III Endgame
    Proposal that we put forward, and the long-term debt rule that
    we put forward. Those proposals are fully public, and I have
    been engaging with----
        Senator Rounds. Without a written analysis?
        Mr. Barr. No, they contain a detailed written analysis in
    both cases as part of----
        Senator Rounds. The detailed----
        Mr. Barr. ----the proposal.
        Senator Rounds. The detailed analysis, then--what you are
    saying is the rulemaking itself contains the detailed analysis?
        Mr. Barr. Correct.
        Senator Rounds. So, the detailed analysis, as a part of the
    rulemaking, comes out at the same time the rulemaking does,
    without any preliminary data being laid out before the rest
    of----
        Mr. Barr. Sir, the rulemaking has followed the normal
    administrative rulemaking process, which is to include in the
    proposed rule all the analysis that supports the rule. We
    followed that exact same process here. It is the process we
    have used for rulemaking during the Fed's history. So, it is no
    different process; it is the same process that we always
    follow.
        Senator Rounds. Thank you. My time has expired. Thank you,
    Mr. Chairman.
        Chair Brown. Senator Reed of Rhode Island is recognized.
        Senator Reed. Well, thank you very much, Mr. Chairman, and
    I would note that the Federal Reserve recently approved
    synthetic risk transfers in which banks use derivatives to
    reduce their capital requirements by shifting recent losses
    onto private equity funds and hedge funds. Having survived with
    2008 and Dodd-Frank, when I hear derivative, I get nervous.
    When I hear it is synthetic, I get very nervous.
        Mr. Barr, what are the risks of the financial stability of
    banks that are permitted to engage in these synthetic risk
    transfers on a significant scale, and what guardrails are
    appropriate to protect the financial system and ensure that we
    do not relive the past?
        Mr. Barr. Thank you, Senator. It is an important question.
    We looked carefully at these sets of transactions. The
    transactions are different from transactions that we permit by
    rule under the existing authorities to offset credit risks that
    banks might face. We wanted to take a careful and cautious
    approach with respect to these transactions, so we have
    approved them on a case-by-case basis, subject to limitations.
    We are going to wait and see how those instruments perform. If
    they perform as intended, then they might be more generally
    available. If we see risks arising in those transactions, then
    we would limit their use for capital mitigation.
        Senator Reed. How much visibility do you have in the
    private equity and hedge funds that are involved in these
    transactions?
        Mr. Barr. We have very strong visibility into the bank side
    of the transaction, that is, how the bank engages with third
    parties with respect to these risks. We will be monitoring
    those risks. We have, of course, much less visibility into
    hedge funds and private equity funds. That is a longstanding
    issue in supervision.
        Senator Reed. Well, you know, I think you have to have a
    really good perception of both sides of the transaction to
    conduct these, because there is a possibility that a private
    equity firm could be undercapitalized, mismanaged, and the
    transactions would fail.
        Mr. Barr. In these particular transactions, Senator, the
    transaction that we approve, the cash is actually provided up
    front to the bank, and then it diminishes over time as the, as
    the credit continues to perform. So, in these particular
    transactions--I agree with you that that is a general concern--
    but in these particular transactions, the cash is actually
    provided at the beginning of the transaction rather than at the
    end of the transaction.
        Senator Rounds. Thank you. Mr. Gruenberg and Mr. Hsu, do
    you see any risk to the financial system in these types of
    synthetic risk transfers?
        Mr. Gruenberg. I think there is considerable uncertainty,
    and we need to approach it with great caution and attention,
    Senator.
        Senator Reed. Thank you. Mr. Hsu.
        Mr. Hsu. I agree. They do require heightened attention,
    especially when risk transfer is thought of as risk
    elimination, which it is not. However, when done appropriately,
    in a safe and sound manner with controls, it can help to be
    part of an effective risk management program, but that does
    require a careful look.
        Senator Reed. Let me turn to another situation, the rent-a-
    bank situation in which banks partner with nonbanks to provide
    deposits and loans, and these arrangements can facilitate
    evasion of State usury limits and other important consumer
    protections. In fact, I think that is why they have these rent-
    a-bank arrangements. Mr. Gruenberg and Mr. Hsu, can you provide
    an update on what you are doing with respect to these rent-a-
    bank situations? Mr. Gruenberg.
        Mr. Gruenberg. Yes, thank you, Senator. You raise an
    important risk management issue for banks. These third-party
    relationships carry a lot of risk, and when a bank partners
    with a third party and that third party is carrying out
    services of the bank, it is as if the bank itself is doing that
    directly, and the bank is accountable for it. So, the
    management of those third-party relationships are really quite
    important and carry a lot of risk with it.
        The challenge here in part is the ability of States to
    export their interest rates to other States and circumvent the
    usury laws, and that is something we are giving some attention
    to.
        Senator Reed. OK. Mr. Hsu, quickly?
        Mr. Hsu. Yes. So, predatory lending has no place in the
    national banking system, whether done directly by banks or in
    partnership with fintechs, and we have made sure of that.
        Senator Reed. Thank you very much. Thank you, Mr. Chairman.
        Chair Brown. Thank you, Senator Reed. Senator Tillis of
    North Carolina is recognized.
        Senator Tillis. Thank you, Mr. Chairman. Mr. Gruenberg, in
    response to Senator Rounds' question about whether or not you
    had any knowledge prior to the publication of the report, you
    said, as a general matter, no. Should I read anything into
    that, or did you not know about any of these activities before
    the report?
        Mr. Gruenberg. Yes, I did not know about the individual
    cases. I would not in the normal course of things, Senator.
        Senator Tillis. OK, thank you. Mr. Barr, the thing I have
    admired about the Fed, I think the thing that the industry has
    admired about the Fed is it has a long history of consensus-
    driven decisionmaking. You clearly at this point do not have
    consensus on some of the notice of public rulemaking, the
    endgame for Basel III; I know of maybe some questions or
    concerns that Mr. Jefferson had raised, Mr. Powell, and others.
    Do you intend to move forward with this if you do not have
    consensus among the Board?
        Mr. Barr. Thank you, Senator Tillis. I will be working to
    achieve broad consensus of the Board in----
        Senator Tillis. What if you do not?
        Mr. Barr. ----the final rule. As with all rules, we try
    very hard to get as close to full consensus. I would like to
    get broad consensus. I do not know whether I will be able to
    get full consensus----
        Senator Tillis. And what would broad consensus look like?
        Mr. Barr. Broad consensus would be that most of the Board
    believes that this is an appropriate step. You know, most of
    the activities that we have put forward over the last year and
    a half since I have been on the Board--not quite a year and a
    half, but 15 months--most of those have been full-consensus
    items. We have had about 50 substantive supervision and
    regulation matters come before the Board. Almost all of them
    every Board member has voted in favor of. I very much
    appreciate and value the collegial nature of the Board and the
    consensus----
        Senator Tillis. Well, if time allows, I want to get to some
    of the areas, particularly the cost and putting us at a
    competitive disadvantage, but I want to move on to something
    else. The Chair talked about--and this has been suggested
    before--that Silicon Valley Bank and Signature Bank failed
    because of Senate Bill 2155, bipartisan regulatory reform that
    we implemented in the Trump administration, with the support of
    the Democrat members in this Committee. Have we passed a law
    since Silicon Valley Bank failed that has increased your
    supervisory authority?
        Mr. Barr. No, Senator.
        Senator Tillis. No. But you did say you have stepped up and
    you have intensified supervision. I am assuming you did part of
    that by using the optionality in Senate Bill 2155 to actually
    increase your MRAs and MRIAs. Is that accurate?
        Mr. Barr. As I have indicated in previous testimony, we
    have the legal authority we need to----
        Senator Tillis. So, I guess that----
        Mr. Barr. ----engage in this----
        Senator Tillis. ----it is just odd to me to think that we
    had a bill that has been more than once pointed to as a reason
    for the failure. We have not changed a line of regulatory
    legislation. You are intensifying your supervisory functions,
    which you should if they are founded on banking activities that
    you think represent a risk. So, I just do not get it. You had
    that optionality. One of the reasons why I think Signature
    failed is because someone was asleep at the switch in the
    supervisory function, and a management failure. But I just
    cannot let that go unchecked, because you are stepping up, and
    it relates to another question I have.
        I sent a letter back in September when there was a news
    report talking about seven different financial institutions and
    their dramatically increased--specific institutions--
    dramatically increased MRAs and MRIAs. I cannot imagine that
    those seven banks just went to the press and said, hey, we are
    getting a lot more impact. That sounds like someone from the
    Fed or a supervisor had to have leaked confidential supervisory
    information. We copied you on the letter, but can you tell me
    whether or not there is any investigation underway to figure
    out how that information got out? I cannot imagine it came from
    the industry. It just does not make sense for any reporter to
    have that specific information on seven institutions to serve
    as a basis for a report.
        Mr. Barr. Senator, I also was upset by that article. I did
    not think that it was appropriate. We do have strict rules on
    confidential supervisory information. I am not aware of the
    source of that article, but I do find it upsetting.
        Senator Tillis. Yes, and I think somebody needs to be
    tracked down and terminated for doing it. Mr. Chair, I would
    like to seek unanimous consent to introduce this article. It
    was written by my alma mater, by PricewaterhouseCoopers--``A
    Financial Services Update, Basel III Endgame, Outsized
    Operational Risk Impact''.
        Chair Brown. Without objection, so ordered.
        Senator Tillis. Thank you. I have only got 20 seconds left,
    so we are going to have to submit questions for the record. I
    believe, in its current form--and that is why I hope that you
    can find consensus--in its current form, I think we are going
    to disadvantage banking institutions in terms of global
    competition. I think the operational risk is outsized, and we
    have got a lot of questions, and I do not have any more time.
    Thank you.
        Senator Tester of Montana is recognized.
        Senator Tester. Yes, thank you, Chairman, Ranking Member,
    and I want to thank everybody for testifying today. Marty, the
    article that came out in the paper is damning, very damning. I
    guess the question is, it says in this article that folks were
    demoted, but nobody was fired. But the things, if true, the
    stuff in here, do you see them as a fireable offense?
        Mr. Gruenberg. You really have to look at the individual
    cases, Senator. We have had cases in the past where individuals
    are separated from the agency. We have had cases in which other
    disciplinary actions short of separation have been utilized. It
    depends on the facts of the case, and the law, and you really
    have to look at the individual cases.
        Senator Tester. And I understand that, but I will tell you
    that this is so pervasive that 20 women have quit. I know you
    have got a big agency so that might not be a lot, but man, I
    think if you are going to change behavior, the best way to do
    it would be to deal with these folks very severely. And I know
    you need probably more regulators than you have now, but the
    truth is is that what was represented in that Wall Street
    Journal article is absolutely, as you already pointed out,
    unacceptable.
        I want to talk about Basel. It is the same line of
    questions as has been talked about here from both sides of the
    aisle. Look, I am concerned about small businesses, because
    Montana is a small business State. They have to have access to
    capital. These rules do not affect any banks in Montana, but
    they do affect the big guys that affect Montana, OK? And if you
    look at our system, it has worked incredibly well, especially
    when you compare it to what folks in other countries have
    access to, but I do have some concerns about the proposed
    changes and how its impact will be on workers and households
    and small businesses, and access to credit and overall vibrancy
    of our capital markets. So, the question is is, how are you
    guys--and I am talking Barr and Hsu and Gruenberg--how are you
    evaluating the impact of these proposal changes on the
    consumers? Go ahead.
        Mr. Barr. Thank you very much, Senator Tester. First of
    all, let me just say we share your same concerns. We want a
    capital system, a banking system that works for households, it
    works for businesses, works for small businesses around the
    country that are really the lifeblood of their communities. The
    way we have analyzed this rule, we do not believe that this
    will have significant negative effects on small businesses. The
    credit provisions in the rule are quite similar to existing,
    binding provisions, and we welcome comment if we can improve
    the rule in that regard.
        Senator Tester. We will stick with you, Michael. And so you
    are in the process of taking in comments that go until the end
    of January, correct, or end of January, somewhere in that----
        Mr. Barr. That is correct, January 16th.
        Senator Tester. And so can you tell me, have you looked at
    those comments yet, and do any of them talk about the issue
    that I am talking about, about how this is going to affect
    consumers?
        Mr. Barr. We expect most comments to come in in mid-
    January, but we already have heard in the public discourse a
    concern in this regard, and we are paying very, very close
    attention to that. And as I said, if there are areas that we
    can improve the rule, we are very open to doing that.
        Senator Tester. And so you are open to improving, a.k.a.
    rewriting the rule, if the comments reflect that?
        Mr. Barr. We very much welcome all of those comments. We
    have to look at the substance of them, but we want to make sure
    the rule works right for households and businesses, and if we
    need to make adjustments to the rule to make sure that that is
    the case, we will do it.
        Senator Tester. OK. So, not to beat this horse anymore, but
    I will just tell you that from a small business standpoint, if
    this rule does not work, it is going to raise hell with the
    economy of my State, so that is all I need to tell you.
        I have also had a conversation about how potentially this
    could push activities into the nonbank sector that is not
    regulated. And I will stick with you, Michael, because I do not
    have enough time to go down the line. How do you consider those
    larger impacts, based off the rule that is going to be put out?
    Because as most of us at this side, all of this side, I mean we
    remember what happened in '08 pretty vividly. Jack referred to
    it. Could you tell me how you weigh this stuff out? Because if
    we are pushing stuff to the nonbank--and I am sorry I am over
    time--but if we are pushing stuff to the nonbank, that is not a
    good thing. Talk to me.
        Mr. Barr. Thank you, Senator Tester. I share your concern.
    It is an issue that we take very seriously, will continue to
    take seriously as we get in comment. If it looks like in the
    mix of things that we are increasing risk, we obviously would
    not want to do that. We want to make sure that we are reducing
    risk with the capital proposal. We want to make sure we have
    good, strong regulation of the nonbank sector, and we want
    good, strong rules in the banking sector, because we need a
    vibrant banking sector to support the American economy.
        Mr. Tester. It is absolutely critical. Without access to
    capital, we are dead in the water. Thank you, Mr. Chairman.
        Chair Brown. Thank you. Senator Britt from Alabama is
    recognized.
        Senator Britt. Thank you, Mr. Chairman. Thank you all for
    being here today. Since your last appearance before this
    Committee in May, banks of all sizes have yet again proven
    their strength and ability to withstand unexpected volatility.
    In fact, quickly I would like to just go down the row, and each
    of you please answer with yes or no. Do you believe that the
    U.S. banking system at large is strong? Vice Chair Barr, we
    will start with you.
        Mr. Barr. Yes, I do.
        Mr. Gruenberg. Yes, Senator.
        Mr. Harper. Yes.
        Mr. Hsu. Yes.
        Senator Britt. Great, thank you. So, for the record, all of
    you believe the U.S. banking sector is strong, yet over the
    last several months, we have seen a wholesale attempt to
    fundamentally alter our banking system. Not only do your
    agencies' recent proposed rules undermine the proven strength
    of our banking sector, but they risk making it weaker, and it
    is Main Street America that will ultimately be punished. I have
    spoken directly with dozens of banks and credit unions of all
    sizes. It is clear that your proposed rules are so wide-
    reaching that they leave no financial institution untouched.
        Even more concerning, it is apparent that the lack of
    effort from you as regulators to engage these institutions is
    startling. Along with the absence of any stated rationale for
    making these key decisions, I want to start with the Basel
    Endgame rule. Let me follow up on a question that Senator
    Rounds asked. Vice Chair Barr, how long did your fellow Board
    members have to review the proposed rule prior to it being
    issued?
        Mr. Barr. They had an extensive period of time. I will get
    you the exact number of days, but it was many, many weeks. I
    believe--well, anyway, I do not want to guess. I will tell you
    the exact number of days for the record, but it was many weeks
    to review.
        Senator Britt. Many weeks. So, many weeks would be longer
    than 2, then.
        Mr. Barr. Correct.
        Senator Britt. OK. So, your colleague Governor Cook
    testified in this Committee on June 21 that she had not yet
    seen the Basel III proposal, so that just 2 weeks later, the
    proposal was rolled out. So, does that mean that your
    colleagues had less than 2 weeks to actually to review the
    rule, or was she mistaken in that testimony?
        Mr. Barr. Each Governor can decide how much they want to
    engage in the process----
        Senator Britt. But she had been given----
        Mr. Barr. ----they are available----
        Senator Britt. ----the opportunity and then chose not to, I
    guess?
        Mr. Barr. I cannot speak specifically to what Governor Cook
    chose to do, but every Governor was given the opportunity to
    meet with staff and to be briefed on the proposal in detail.
        Senator Britt. OK. Well, the rule assumes that banks are
    significantly undercapitalized for operational risk, but yet
    cites no evidence to support this assumption. Not only are
    these risks already accounted for in stress testing, but the
    new standardized approach is not tailored to the varying
    business models of various banks. Vice Chair Barr, would you
    say you have done a thorough analysis to understand the impacts
    of the proposed operational risk requirements, and what they
    would have on availability of mortgages, on small businesses,
    small business loans, and retail credit to consumers?
        Mr. Barr. Thank you, Senator. The analysis goes into detail
    in the preamble on these items. As I suggested, with respect to
    credit risk, whether that is for mortgages or small businesses
    or consumers, just the combination of the credit risk proposal
    and operational risk is very, very small in relation to current
    rules.
        Senator Britt. So, obviously that is a yes. The way that I
    view this, the Basel Proposal is over 1,000 pages, with fewer
    than 20 pages dedicated to actual economic analysis. Also
    absent is a study of the combined impacts of other concurrent
    proposals, like the long-term debt proposal and debit fee caps,
    despite the fact that each of these proposals will actually
    clearly overlap. And it raises the question if you are unable
    to do a cumulative impact and put that actually in the rule, or
    are you just unwilling to do that?
        Mr. Barr. We continue to study impacts of the rule. We
    welcome public comment, both on the long-term debt proposal and
    on the capital proposal. If analysis is coming from the public
    that is helpful, we are happy to include that----
        Senator Britt. I think it is----
        Mr. Barr. ----in improving the rule.
        Senator Britt. ----critically important--and I am almost
    out of time. We have to look at how these things work together,
    because it is clear that there is a trickledown effect, and I
    think we have got to do a better job of stating that.
        Mr. Barr or Chair Gruenberg, what is the Cumulative Impact
    Study, and have you conducted that and actually put that in in
    writing?
        Mr. Barr. The Quantitative Impact Study is a study that we
    did prior to release of the rule. It was done by the Board in
    2021.
        Senator Britt. OK.
        Mr. Barr. That was included in the proposal, and now in
    addition to that, we are updating that Quantitative Impact
    Study with a new study that will gather information to make
    sure we have the most up-to-date information as we proceed to
    finalize the rule.
        Senator Britt. And last before I run out of time, do you
    plan to grant a comment period extension for the proposal on
    long-term debt and resolution planning?
        Mr. Barr. That is a simpler rule, a pretty straightforward
    rule compared to the Basel Proposal, but if there are concerns
    that----
        Senator Britt. I think there are concerns----
        Mr. Barr. ----people need more time----
        Senator Britt. Absolutely, and----
        Mr. Barr. ----we are happy to consider such matters.
        Senator Britt. Well, thank you so much. I hope that you
    will do that. Look forward to it. Thank you.
        Chair Brown. Senator Cortez Masto from Nevada.
        Senator Cortez Masto. Thank you, thank you. Gentlemen,
    thank you for being here. Chairman Gruenberg, let me start with
    you. Thank you for reaching out to talk about the concerns. I
    think we all are alarmed by what we are reading in the Wall
    Street Journal regarding the sexual harassment at FDIC, so I
    appreciate you reaching out. I also appreciate the fact that
    you have talked here today about doing a comprehensive review,
    an independent third-party, agencywide review. Thank you for
    that. I guess my question is, one, how long will that review
    take, and two, in the meantime, what do employees do if they
    want to come forward and feel confident in coming forward with
    a complaint?
        Mr. Gruenberg. That work is just beginning, Senator. I
    think we would hope to get it done as soon as possible, 90 days
    or less if we can, but we are just starting on that. In the
    interim, I mean we do have a range of processes that employees
    can take advantage of if they want to report some experience
    that is problematic. We obviously want to look at that and see
    how effective that is, and how we can make the system--give
    employees as much confidence as possible to be able to utilize
    it effectively.
        Senator Cortez Masto. Thank you, and I look forward to
    working with you as we follow up on this review to make sure
    this is addressed.
        Mr. Gruenberg. Thank you, Senator.
        Senator Cortez Masto. So, I appreciate the comments today.
    Let me jump to the Community Reinvestment Act. I want to say
    congratulations on the new CRA. First question is, how will
    this new rule improve lending and investments in low- and
    moderate-income communities? And let me just start with the
    Comptroller. Thank you.
        Mr. Hsu. Sure. Thank you so much for that question. So, the
    CRA, the final rule that was just adopted both modernizes and
    strengthens the CRA implementing rules, and it modernizes it by
    basically taking into account a lot of these banking activities
    that take place outside of traditional branches and the ATMs.
    That is an important part of the rule. You know, banks do
    activities outside of those areas, and so now they, under the
    rule, have to meet the needs of all of those, including LMI
    communities in those locations. It also strengthens the rule by
    putting in more objective thresholds and benchmarks for their
    activities, which should lead to an increase in CRA lending and
    investment activities across both retail and community
    development.
        Senator Cortez Masto. Thank you. Chairman Gruenberg,
    anything else to add?
        Mr. Gruenberg. Yes, I would add that there is a lot in this
    rule, but a third really critical point is that it gives banks
    the flexibility to engage in community development financing,
    whether lending or investment in any LMI community across the
    country and can get CRA credit for it, so it really helps
    address the issue of banking deserts, communities that lack
    access to banks in their local area will now be able to seek
    support from banks anywhere, and those banks will get credit if
    the lending and investment activity takes place in an LMI
    community. This will benefit rural areas, Native lands, and
    other severely underserved communities.
        Senator Cortez Masto. And thank you for bringing that up.
    My next question was our Native lands, our Tribes, because I
    know they are so challenged, and I am hopeful that we are also
    focusing on ensuring we are bringing access to the central
    finance there as well.
        Mr. Gruenberg. That is very much a focus of that, Senator.
        Senator Cortez Masto. Thank you. And I do not know; Vice
    Chair Barr, do you have any additional comments?
        Mr. Barr. Thank you. I do think that the rules implementing
    CRA have been updated in an important way. I think it will
    provide additional transparency and consistency in evaluation,
    across the agencies and across the country, that will help both
    banks and communities. I do think this is a win-win final rule.
    It will work better for banks in helping them to serve
    communities. It will work better for communities themselves.
        I also wanted to just particularly call out the
    consideration that is given for investments in loans and
    support for community development financial institutions and
    minority depository institutions. I think that is a critical
    part of the rule, along with the clarity that is provided for a
    range of community development activities.
        Senator Cortez Masto. I do as well. We are challenged in
    Nevada with a lack of CDFIs and different opportunities to
    ensure we are bringing access to capital and financial means to
    individuals in Nevada, in our rural and urban areas. So, this
    is a big, really a positive change, and I just hope as the
    implementation and follow-through, we are seeing the intent
    here at the end of the day, so thank you.
        Comptroller Hsu, can you describe how Project REACh is
    promoting home ownership for Latinos, African Americans, and
    those on Tribal lands?
        Mr. Hsu. Sure. So, in Project REACh, the OCC functions as a
    convener. We bring together leaders of banks, community
    organizations, civil rights organizations, technology
    companies. They have identified in the home ownership
    workstream very some specific issues and problems and
    challenges with home ownership on Tribal lands, because a lot
    of the ownership issues are quite different. So, brought that
    together, really produced a set of materials to enable banks
    and community groups to engage, and hosted a webinar; I think
    there were several hundred people that joined that webinar. A
    lot of it is about education. So, there is no excuse, because
    before, there was the sense of, oh, this is too hard. We have
    now made that much easier.
        Senator Cortez Masto. Thank you. Thank you, Mr. Chair.
        Chair Brown. Thank you, Senator Cortez Masto. Senator
    Kennedy from Louisiana is recognized.
        Senator Kennedy. Thank you, Mr. Chairman. Mr. Gruenberg,
    what the hell is going on at the FDIC?
        Mr. Gruenberg. That is a troubling question, Senator. I
    read the report as you did. As I indicated earlier, it is
    deeply disturbing and troubling, and we are going to bring all
    the resources of the FDIC to bear to understand what is going
    on, what has occurred, and how we can most effectively address
    it.
        Senator Kennedy. How long have you been at the FDIC?
        Mr. Gruenberg. I joined the Board as a member in August of
    2005.
        Senator Kennedy. OK. Almost 20 years, then, huh?
        Mr. Gruenberg. Yes, sir.
        Senator Kennedy. Have you ever sexually harassed an
    employee at the FDIC?
        Mr. Gruenberg. No, sir.
        Senator Kennedy. Apparently you are the only one. I mean I
    just find this incredible. A former female employee recalled
    her male colleague saying women needed to use sex to get ahead
    at the FDIC, as they stared at her. Did you read that?
        Mr. Gruenberg. I did, Senator.
        Senator Kennedy. Quote, ``According to one young woman, it
    was just an accepted part of the culture.'' One of the female
    examiners received a photo of a colleague's penis. During lunch
    with an examiner, another young female employee, who had become
    friendly with this person she was having lunch with, the guy
    she was having lunch with complained to her about his marriage,
    telling her he was not having enough sex. And then he said to
    the young woman, ``Obviously, if I walk into this office and
    you were naked, I'd `f' you right here.'' Did you read that?
        Mr. Gruenberg. I did, Senator.
        Senator Kennedy. Did you read the 2020 Inspector General's
    report when it said that the people at the FDIC were acting
    like they were in Animal House or Porky's Revenge? Did you read
    that report?
        Mr. Gruenberg. I read the Inspector General's report, sir.
        Senator Kennedy. And what did you do about it?
        Mr. Gruenberg. Well, I was not chairman at that time. There
    were 15 recommendations, if I may say, 15 recommendations in
    that report, and I believe the agency addressed all 15 of
    those.
        Senator Kennedy. What did you do about it personally? What
    was your position----
        Mr. Gruenberg. I was a member of the Board at the time, but
    I was not----
        Senator Kennedy. And what did you do about it personally?
        Mr. Gruenberg. At that time, I did not have the
    responsibility of----
        Senator Kennedy. You did not do anything, did you?
        Mr. Gruenberg. Not at that time, Senator, no.
        Senator Kennedy. OK. Did any of your fellow Board members
    do anything?
        Mr. Gruenberg. As a general matter, that falls to the
    chairman, who is responsible for the day-to-day management----
        Senator Kennedy. It was somebody else's problem, not yours.
        Mr. Gruenberg. No, I was a member of the Board to the
    extent that we were consulted, but in this matter it is really
    a management----
        Senator Kennedy. You did not think you had a fiduciary
    obligation to those young women and to the organization, and to
    the banks that put up the money?
        Mr. Gruenberg. Well, certainly as a Board we had that
    obligation, but it really falls to the chairman to take the
    lead on this.
        Senator Kennedy. Oh. Somebody else's fault.
        Mr. Gruenberg. Well, it was the chairman----
        Senator Kennedy. I mean that is what you are saying, is it
    not, Mr. Chairman?
        Mr. Gruenberg. No, I think the Board----
        Senator Kennedy. Sounds to me like it.
        Mr. Gruenberg. Senator, if I may say, the Board certainly
    has oversight responsibility, but in the day-to-day management
    of the agency, which matters like this would fall to, I think
    it is reasonable to expect the chairman to take the lead.
        Senator Kennedy. Well, when the banks last spring screwed
    up out in California, you blamed it on their Board, did you
    not?
        Mr. Gruenberg. I think the report that was done on the
    failure found that the root cause of the issue was the
    management of the institution.
        Senator Kennedy. Right.
        Mr. Gruenberg. It also found accountability for the
    supervisors----
        Senator Kennedy. The Board was blameless, is that right? Is
    that what you are saying?
        Mr. Gruenberg. No, I think the agency----
        Senator Kennedy. Kind of like the Board at the FDIC is
    blameless?
        Mr. Gruenberg. If I may say, Senator, the report found, and
    I think I would indicate, that we shared responsibility as a
    supervisor.
        Senator Kennedy. You and your colleagues ought to hide your
    head in a bag. This is no country for creepy old men, and they
    have got no place at the FDIC. And this was not a news flash
    for you. You had a 2020 report, and you sat on the Board, and
    you did not do anything. And your colleagues did not do
    anything.
        Mr. Barr, let me ask you about Basel III Endgame. I know
    you know this--about half of our credit now in America comes
    from nonbanks. Is your increase in capital requirements not
    just going to make credit more expensive for banks, and push
    people in the nonregulated, nonbank financial system?
        Mr. Barr. Senator, the capital increases mostly affect
    trading activity of banks and other nonlending activities of
    banks. With respect to credit, we expect the proposal to have
    only a very modest effect on the price of credit. For example,
    if all of the operational credit risk----
        Senator Kennedy. You would stake your reputation on that?
        Mr. Barr. I believe that the analysis is correct in the
    proposal to the rule, but we are----
        Senator Kennedy. OK. If I could ask one more question, Mr.
    Chairman, if that is OK.
        Mr. Barr. ----but we are very open to comment on the
    proposal. So, if people have other analysis that would help us
    make a better judgment about that, we are very open to it.
        Senator Kennedy. The banks out West and elsewhere that went
    broke last spring, would this change have prevented that?
        Mr. Barr. The banks that suffered losses, suffered losses
    primarily because of interest rate risk. In this proposal----
        Senator Kennedy. It would not have prevented it?
        Mr. Barr. Sorry----
        Senator Kennedy. I am going to get cutoff.
        Chair Brown. Senator Kennedy, last question. This is it.
        Senator Kennedy. If you could just answer my question. My
    time----
        Mr. Barr. I am trying to, sir. Yes, it would directly
    address that, because for large banks, their interest rate risk
    would be brought into the capital rule. Their unrealized losses
    and gains would be reflected in capital, so it does directly
    address the kind of risk that we saw.
        Chair Brown. Senator Menendez is recognized.
        Senator Menendez. Thank you, Mr. Chairman. The United
    States is facing a housing crisis, and affordable housing
    advocates I have heard from are concerned that the new capital
    requirements proposed by your agencies may make the problem
    worse. And analysis from the Urban Institute indicates that
    banks affected by your proposal account for more than half of
    all mortgage originations. The Urban Institute's analysis
    further indicates that the proposal will disproportionately
    increase costs for Black, Hispanic, and low- and moderate-
    income borrowers, so one effect of this proposed rule seems to
    be in direct conflict with the goal I and many members of this
    Committee share, to close the racial home ownership gap and
    make housing more affordable for first-time homebuyers,
    particularly buyers of color.
        Vice Chair Barr, Chairman Gruenberg, Comptroller Hsu, as
    you work to finalize this rule, what do you say to Black and
    Hispanic communities who are concerned that your proposal could
    make the dream of home ownership even more difficult to
    achieve?
        Mr. Barr. Senator, first let me say we take these concerns
    very seriously. We are quite open to comment, and we want to
    improve the rule before we get to a final rule. This is one
    area where we have heard there may be concerns that the
    mortgage rules are over-calibrated. Of course, the proposal
    leaves the same rules governing mortgages that are issued by
    FHA or that are insured by Fannie and Freddie, or they are
    guaranteed by Fannie and Freddie, agricultural loan, VA loan,
    so those rules do not change. Those are most mortgages in the
    country, but we do care very much about access to credit for
    low- and moderate-income borrowers. We hear those concerns, and
    we will very much take those into account as we work to
    finalize the rule.
        Mr. Gruenberg. If I may say, Senator, we are deeply
    sensitive to this issue. The preamble to the rule actually asks
    a couple of questions and outlines alternative approaches for
    risk weights in regard to mortgages, and I am hopeful that we
    will be able to address this issue in the final rule in a
    satisfactory way.
        Mr. Hsu. I agree with what Vice Chair Barr and Chairman
    Gruenberg said.
        Senator Menendez. Well, I appreciate your desire to
    maintain safety and soundness in the financial system, but I
    would encourage you to also ensure that we keep enough capital
    flowing so hardworking borrowers can become homeowners. And
    while it is true that some of those other entities, FHA and
    others, may not be affected by this, not everybody is
    necessarily going to fall in that category to qualify, so it is
    really important.
        I want to thank you all on the work on the updated CRA
    rule. I think the changes make a strong step toward more
    accurately evaluating and encouraging banks' engagement with
    low- and moderate-income and majority-minority communities that
    for far too long have faced barriers to financial inclusion.
    However, even the strongest of rules will not have an impact
    unless they are accompanied by appropriate supervision and
    enforcement.
        We saw earlier this year with the collapses of SVB and
    Signature Bank what can happen when regulators fail to properly
    supervise their charges and enforce our banking laws. So, Vice
    Chair Barr, Chairman Gruenberg, Comptroller Hsu, as you work to
    implement the updated rule, what will you do to ensure your
    supervisory teams are fully trained and properly evaluating
    banks under the new guidelines?
        Mr. Barr. Senator, you raise a very important point. Having
    an effective rule is only effective if you have effective
    implementation. We are going to be taking the next 2 years, as
    the rule comes into place in 2 years from now, to make sure
    that we have good, strong training for examiners, that we have
    good guidelines for examiners, that we make sure we are working
    very closely with banks and communities in partnership on
    implementation so we have an implementation approach that works
    for banks, that works for communities, that provides the
    clarity that both banks and communities want. We are going to
    be developing online tools to help banks be able to comply with
    the rule at lower cost, and to provide transparency to
    consumers and households that want to know how banks are
    performing under the rule.
        Mr. Gruenberg. Senator, I would underscore that the three
    banking agencies worked collaboratively to finalize this rule,
    and we do think the final rule is a strong one. And I think we
    are all committed to work together in a coordinated way on the
    effective implementation. As Vice Chair Barr said, the rule is
    only as meaningful as its implementation will be, and I think
    we are all entirely focused on that.
        Mr. Hsu. And I can say that staff are already working on
    implementation as we speak.
        Senator Menendez. All right. Well, I look forward to seeing
    the actual implementation in the way it is meant. Finally, Vice
    Chair Barr, you and I have spoken about the broken process for
    selecting Federal Reserve Bank presidents, which in 109 years
    has never resulted in a Hispanic or Latino bank president. And
    during the confirmation process, you made a commitment to
    develop a transparent process with meaningful public input on
    the selection of Federal Reserve leadership. I suggested six
    ideas to you. Since then, we have had a series of openings at
    Kansas City, Chicago; there is one ongoing in St. Louis. Can
    you give us an update on your efforts to reform the selection
    process? What changes have you made, and how have they impacted
    the recent and ongoing searches?
        Mr. Barr. Thank you, Senator. First let me say I share your
    view that diversity among Reserve Bank presidents and among the
    staff of the Federal Reserve, and among the Federal Reserve
    Board and the FOMC is an important part of making sure that the
    Federal Reserve as an organization hears lots of perspectives
    and makes good decisions. There have been improvements in the
    process for selection of Reserve Bank presidents, improved
    transparency, improved outreach, but I think we have more that
    we need to do in that regard.
        Chair Brown. Thank you, Senator Menendez. Senator Lummis of
    Wyoming is recognized.
        Senator Lummis. Thank you, Mr. Chairman. Chairman
    Gruenberg, I came down on you when you were here before with
    regard to the fact that you and CFPB Director Chopra and Acting
    Comptroller Hsu voted to oust your predecessor. She was a
    highly qualified woman. So, you ousted her, and now you are the
    chairman. You have been there for 18 years, at an agency that
    now has been exposed as having a hostile work environment
    toward women, that women are denied opportunities for
    advancement, they are denied opportunities to travel on the
    road so this disgusting behavior can continue among your
    colleagues, people who work for you, under your direction.
        We know that some of the employees who harassed women at
    the FDIC found employment at other agencies. Great, send them
    elsewhere instead of oust them from the system. The careers of
    women have been stalled out, and the culture is skanky at the
    FDIC. It is disgusting. So, what reforms to Civil Service do
    you need to remove bad employees from positions of public
    trust, instead of shuffling them to the Fed or the OCC? And
    further, what are you specifically going to do about this?
        Mr. Gruenberg. Senator, thank you for the question. As I
    indicated earlier, we are undertaking a comprehensive review of
    the agency, both Washington, the regional offices, and the
    field offices, to try to get a handle on the nature of this
    issue. We are utilizing an independent third party to assist us
    in that, and to try to get at the underlying issues that you
    raise. And the issues will go to both management providing
    confidence to employees that they can, in a safe, secure, and
    confidential way register complaints if----
        Senator Lummis. Yes, but tell me why you have not done
    anything, since you became Chair, about this. Did it take a
    Wall Street Journal article so you were publicly outed for this
    disgusting work culture? Why when you had the earlier report in
    your hands did you not do anything about it?
        Mr. Gruenberg. Well, Senator, if I may say, that earlier
    report had 15 recommendations, all of which the agency resolved
    to the satisfaction of the IG.
        Senator Lummis. Did it change the culture?
        Mr. Gruenberg. No, I think it probably did not, and I think
    candidly that is the underlying issue here. And I raised that
    earlier, that it is not simply a matter of policies and
    procedures, but trying to get at the underlying issues that
    make it challenging for employees to utilize them, and that
    management has a responsibility to enable employees to do that,
    and I think that is what we want to focus on.
        Senator Lummis. OK, so you know that people were either
    puking off of roofs and peeing in elevators, or vice versa.
        Mr. Gruenberg. Well, that was certainly in the report, and
    that is certainly things we will be looking at.
        Senator Lummis. OK, you are--you know, if that happened in
    my office, I would be doing a lot more than looking at it.
        Mr. Gruenberg. Well, we----
        Senator Lummis. I mean that is so far beyond the pale of
    what would be acceptable human behavior anywhere, let alone in
    what is supposed to be a respected Federal agency, that just
    looking at it, or having a third party come in and evaluate,
    that is bureaucratic mumbo-jumbo for we are doing nothing, and
    nothing is going to improve. And I think this is so far beyond
    the pale that I am just going to say, you sure as heck better
    do something about this.
        Now I want to switch and ask one question about Basel III.
    The largest banks have already said that these onerous
    restrictions will decrease their lending activity. So, to all
    of you, what is more likely, that overall consumer lending will
    drop, such as people who want to buy a house or a small
    business, or that lending will migrate to nonbank entities that
    are more opaque?
        Mr. Barr. Senator, our expectation is that given the very
    small nature of the credit changes in the rule, that credit
    would not significantly change under the rule. But we are open
    to public comment on this, and we are happy to receive comment.
    Earlier, the gentleman mentioned one such comment. We are open
    to all comments, and we would be happy to take them into
    account.
        Senator Lummis. Thank you. My time has expired. Thank you.
        Thank you, Senator Lummis. Senator Warner from Virginia.
        Senator Warner. Well, thank you, Mr. Chairman, and it is
    great to see all of you. Thank you all very much for your
    service. I think about the fact that when I first got on this
    Committee when Chris Dodd was chairman, we got right into the
    middle of a financial crisis, and I would actually argue to all
    of my colleagues that the resulting legislation of Dodd-Frank
    actually has stood the test of time. We went through COVID. We
    have gone through SVB. We have gone through digital asset
    issues. But I also think one of the things we at least learned
    from SVB is, you know, there is no single tool that is going to
    solve all the banking crises, and particularly when you have
    got a run in a 6-hour period that takes 25 cents on every
    depository dollar, frankly, no capital requirements in the
    world are going to meet that.
        Chair Gruenberg and Vice Chair Barr, I have met with you
    and want to continue meeting with you. I have raised privately,
    I am going to raise publicly some of my concerns now with the
    Basel III rule, not only in terms of the capital required--I do
    want to get into more of the comments some of you have made
    that are number of the major G-SIBs are already meeting those
    new capital requirements--but I do feel like this could be the
    moment of a perfect storm, where you have got the challenges
    around rising interest rates, you have got quantitative
    tightening, you have the challenge that I have been concerned
    about for some time is that this may actually result in pushing
    more lending outside the regulatory perimeter. Layer on top of
    that we have got a lot of geopolitical risk, and I do think--
    and I appreciate what you have both said to me, that you are
    going to look very carefully at the comments. I worry a little
    bit about the schedule, that the comments may not come in until
    after the rule gets close to finalization, and again I really
    want to make sure that you are listening to legitimate
    concerns.
        Let me also acknowledge to my friends on the Banking side
    of the house that anytime--I have heard since I have been on
    this Committee that no matter what happens, any new regulation
    is going to lead to this dramatic decline in lending, that
    Chicken Little approach that every new regulation is going to
    be the end of lending on Main Street, really lessens your
    cause, when this may actually be the time when--and as we have
    seen from some of the civil rights organizations, real concerns
    about that lack of lending in the mortgage field. So, I do want
    to also bring to the table an issue I do not think that has
    been really raised yet, and that is as we think about how we
    strengthen our system, and before we think about adding a whole
    lot of new tools, one of the things I think we really ought to
    look at are some of the tools that frankly have not been used.
    You know, back when the Federal Reserve was created, we created
    the discount window, and in many cases, usage of that by banks
    could have potentially alleviated this crisis. Particularly SVB
    was clear; they did not even know how to do it. And I think it
    has been clear that the idea that kind of instead of using the
    discount window, we are going to go to the Federal Home Loan
    Bank, that is just not a good enough alternative.
        So, I appreciate what the Fed put out this summer in terms
    of encouraging more usage. One of the things I have raised with
    both of you--and I know I am going about asking Mr. Barr and
    Mr. Gruenberg to comment--should we go beyond this
    encouragement of using the discount window and actually require
    some level of mandating. How you do that, the devil would be in
    the details. But unless we can make this a normal course of
    operation--and I do not have any sympathy for banks who then
    say, well, that would put us under the stigma from the market.
    Well, you cannot complain about regulations and then not use
    the tools that are already in existence. So, how much further
    could we go to make sure that the discount window, in terms of
    liquidity issues, is used in a more effective way? And I would
    ask both of you to comment.
        Mr. Barr. Thank you very much, Senator, and I have very
    much enjoyed our conversations over the many years now on these
    sets of topics. I have learned a great deal and continue to
    learn. We look forward to the comments on all of the aspects of
    the rule that you have indicated. With respect to the discount
    window, we really are encouraging banks to use the discount
    window, as well as the Bank Term Funding Program that we set up
    during the March banking stress. Both of those kinds of
    programs are really essential for providing liquidity to the
    system, and use of the discount window and the BTFP really
    calmed the situation down in March and prevented the kind of
    massive liquidity flows.
        We are looking broadly at our liquidity rules to see
    whether we might make improvements. We are looking at the kinds
    of issues you raised with respect to making sure that banks are
    prepared to use the discount window, they have good contingency
    funding plans, they test those plans, and they use the discount
    window. So, I think you raise an excellent point.
        Senator Warner. Mr. Chairman, I have got 20 seconds more. I
    would like to go, but just go ahead quickly, Marty, if you----
        Mr. Gruenberg. Senator, I agree with the points that Vice
    Chair Barr just made. I think the discount window is the
    reliable source of liquidity for short-term liquidity under
    stress. We want to try to address any stigma attached to it.
    Management of collateral and timely management of collateral to
    access the window is critical. And the notion that you raise
    about either prepositioning collateral or requiring some
    periodic use to demonstrate the capability to utilize the
    discount window is something we might take a look at.
        Senator Warner. Thank you both, and I will not ask another
    question, but I do want to make one quick point. I have spent a
    whole lot of time on artificial intelligence, maybe not as much
    as Senator Rounds. I cannot think of a subject that is less
    linear, at least for me, in terms of time spent. Does not mean
    I am getting smarter on it, but one of the issues--and Senator
    Kennedy has agreed to work with me on this--is I am
    extraordinarily concerned that AI could lead to massive market
    manipulation now. And if there was ever an issue that seems
    tailor-made for FSOC, and I would love to come back at a
    different time and pose that to you all. Thank you, Mr.
    Chairman.
        Chair Brown. Senator Daines from Montana is recognized.
        Senator Daines. Chairman, thank you. I want to talk a bit
    about what is going on in the current economy, certainly a
    historic moment. Inflation, saw a better report here this
    morning, which is encouraging. Still a long ways to go.
    Combating inflation, as we have seen what the Fed has done in
    the last couple of years. They had no choice but to raise
    interest rates and attempt to counteract what was happening. We
    talked at length in several committees. It was kind of a blue
    jersey/red jersey exercise before some of these massive
    spending bills were passed here in Washington that this would
    be a potential inflation risk, and the chickens did come home
    to roost.
        So, on top of that, we saw the bank failures earlier this
    year, I believe in large part due to regulators being asleep at
    the switch. As we have probed in great depth in many of these
    failures, it is clear these failures were not due to
    insufficient capital. Nevertheless, you are moving forward with
    a flawed Basel III Endgame Proposal. This proposal will limit
    credit availability to small businesses. I am hearing it in
    both ears from our businesses back home, across Montana. We had
    four Montana small business owners in the office here this
    morning who flew in to express their frustration with this
    regulation. Look, we are from a State that is a small business
    State. We are not the land of massive C Corps. We are the land
    of small businesses. In fact, 99 percent of our businesses are
    small businesses. I think we have one of the highest
    percentages of small businesses in the Nation. And when they
    take a hit, they have to pass these increased costs on to
    consumers or they go under. So, we are either looking at higher
    inflation or loss of jobs, which is two very difficult
    outcomes.
        I am happy to have joined nearly 40 Republican senators,
    including every Republican Member of this Committee, urging
    this proposal to be withdrawn. Vice Chair Barr, if banks are
    required to keep even more money on the sidelines, as this
    proposal requires, that is going to have a direct impact on
    businesses across my State. We are hearing it from our banks.
    Additionally--and by the way, these are not the G-SIBs; we are
    hearing it from the little, the smaller banks. Additionally,
    the public listing requirements will further exacerbate the
    problem, as most small businesses are not publicly traded
    companies. They do not have massive compliance departments.
    Other jurisdictions, such as the EU and the U.K., have seen the
    negative consequences firsthand, and they have dropped the
    public listing requirements.
        Has there been any cost-benefit analysis for this, and why
    are you continuing to push something that has already been
    proven to be so detrimental? Vice Chair Barr.
        Mr. Barr. Thank you, Senator. First of all, let me just say
    we take these concerns seriously. We want a capital rule that
    works for small businesses. We want a capital rule that works
    all over the country, for different kinds of communities. We do
    not anticipate that this current rule will have adverse effects
    on small businesses, based on the analysis. A very small part
    of the rule actually affects credit. Most of it is about
    trading and derivative activities. But we do pay attention to
    these issues. We appreciate the comments. If we can improve the
    rule such as you suggested with respect to the listing
    requirement, we will do that. Under the rule, for the first
    time, small businesses----
        Senator Daines. I mean, so--thanks for that. So, you will
    do that, or you will look at doing that?
        Mr. Barr. We will have to review the comments. We are in a
    public----
        Senator Daines. OK, I heard you say you will do that. OK.
    All right.
        Mr. Barr. We are in a public comment period.
        Senator Daines. OK.
        Mr. Barr. If it turns out that the comments show that we
    should make changes to the rule based on small business input,
    we will do that. So, I need to of course be completely open,
    and am completely open to hearing those comments. I will not
    prejudge the outcome of those comments.
        Senator Daines. I wonder how many small businesses are
    cheering this on right now. I would be curious if you kind of
    looked at the, you know, poll the audience here. I cannot
    imagine too many small businesses saying, this is a great idea.
        Mr. Barr. You know, as I have said, Senator, in response to
    other questions, this rule only affects the largest 37 banks in
    the country. It does not affect any banks in Montana, does not
    affect any community banks. The small business provisions of
    the rule actually provide more flexibility for a lower risk
    weight than is currently under the law. Right now, our current
    rules have 100 percent risk weight for small businesses. Under
    this proposal, which is more risk-sensitive, small businesses
    can actually have a lower risk weight. That means banks hold
    less capital against them than they do now.
        Senator Daines. Yes. It is getting harder and harder, say
    for our banks back home--having spent most of my career not in
    a suit and tie here but as part of small businesses, it is
    getting harder and harder to get capital at the moment. It just
    is, and this is a real concern about when they look for
    alternatives to find capital--they cannot get it with local
    banks--this becomes a real issue for businesses to keep growing
    here, and I have heard it again, very clearly, articulated
    well, from my small businesses.
        Last question, I know I am out of time. You yourself have
    said many times the U.S. financial system is strong and well
    capitalized. In fact, that is the consensus from everyone on
    this panel today. Chair Powell has rightly stressed that the
    Fed is and should be a consensus organization. However, it
    appears that despite wide disagreement on the scope of their
    proposal, you are determined to see it through, regardless of
    the impact this will have on the financial system, which I
    might add has not even been sufficiently studied, given the
    lack of consensus. I mean hopefully, you would try to get
    consensus, but this is turning into a very, very partisan kind
    of outcome, and it is dividing versus uniting. Are you going to
    be substantially altering or resubmitting the Basel III
    Proposal to better reflect the concerns of other members of the
    Board, in the spirit of trying to get consensus?
        Mr. Barr. Thank you, Senator Daines. As I have said
    previously, I am a big believer in trying to reach broad
    consensus on the Board. I do not know that we can get unanimity
    on every rule, but broad consensus. Of the 50 rules or
    supervisory actions that have come up since I have been at the
    board, of those 50, almost all of them have been unanimous
    decisions. So, I do very much value that, but it is an issue
    that I will continue to work on.
        Senator Daines. Chairman, thank you.
        Chair Brown. Senator Warren from Massachusetts is
    recognized.
        Senator Warren. Thank you, Mr. Chairman. I should not have
    to say this in 2023--sexual harassment is never all right,
    never. It is important that the FDIC leadership gets to the
    bottom of this and holds harassers accountable. Now last
    spring, the second- and third- and fourth-biggest bank failures
    in United States history occurred. Those failures cost the FDIC
    over $30 billion. In other words, the investors and executives
    took on big risks, they made big money, and then they left the
    U.S. Government on the hook when they could not cover the
    outstanding deposits. That is not supposed to happen.
        After the crash of 2008, regulators were supposed to put in
    place rules to require big banks to have enough capital to
    cover financial shocks so that taxpayers will not have to do
    that. And now here we are 15 years later, and regulators are
    finally, finally near the finish line. In July, they put out
    proposed rules for stronger capital requirements, including the
    so-called Basel III Endgame rules. But Wall Street executives
    do not want to have to put up more capital. Higher capital
    standards make banks safer, but they also nip into profits and
    make it harder for CEOs to pull in multimillion-dollar bonuses.
        So, the CEOs and their big-time investors have hired an
    army of lobbyists to stop the new capital standards from ever
    seeing the light of day. Their leading argument right now is
    that stronger capital requirements would hurt lending to small
    businesses all across America. I think we have heard some of
    that this morning. Vice Chair Barr, how many insured depository
    institutions would the rule apply to?
        Mr. Barr. Thirty-seven.
        Senator Warren. Thirty-seven. So, there are almost 4,700
    insured depository institutions in the United States. If I have
    my math right, that means the capital rules for more than 99
    percent of the Nation's banks, including the community banks,
    that serve small businesses, farms, and American families,
    those rules are not going to change one bit. So, Vice Chair
    Barr, for the 1 percent of banks that are covered by these
    rules, will stronger capital requirements make it harder for
    them to extend credit to small businesses?
        Mr. Barr. We do not believe so under the current proposal.
    The effects on the credit side of the house are very, very
    small as a portion of this rule, but we are of course open to
    comment on that issue.
        Senator Warren. So, am I understanding that you are saying
    that most of the capital standards are related to non-credit
    activity, that is, not to small business lending?
        Mr. Barr. That is correct. Most of the increases result
    from trading and derivative activities, and operational risk
    associated from nonlending activities.
        Senator Warren. OK. So, the lobbyists for the big-bank CEOs
    claim that stronger capital standards will really hurt lending,
    which just is not true. But where are the lobbyists for the
    American people? Remember, if we do not get tougher capital
    requirements, the next time there is a problem, it is taxpayers
    who will be forced to pick up the slack. As I read the new
    capital standards, they apply, for example, to trading in risky
    financial products, like derivatives. They also apply to things
    like operational risks for fraud or processing errors.
        Vice Chair Barr, have big banks ever lost money on risky
    financial products and activities?
        Mr. Barr. Yes, Senator, they have. You know, for example,
    in the worst quarter of the financial crisis, banks lost about
    $38 billion from those kinds of trading losses.
        Senator Warren. OK, and what about operational risks? Have
    big banks ever lost money because of those?
        Mr. Barr. Yes, unfortunately banks have lost significant
    sums from operational risks, rogue trading activity, activity
    related to illegal sales practices, misselling practices in
    retail brokerage and otherwise.
        Senator Warren. And that is where you have focused the
    increased capital standards. Am I right?
        Mr. Barr. That is correct.
        Senator Warren. So, the Fed is focused with surgical
    precision on raising capital standards for the 1 percent of
    banks that pose the biggest risk to the economy, and on the
    specific banking activities that pose substantial risks. I
    understand that the lobbyists for that 1 percent of banks do
    not like it, but we do not work for them. The proposed rule is
    now 15 years overdue. I urge you to finalize it and put strong
    capital requirements in place as soon as possible. Thank you.
        Chair Brown. Thank you, Senator Warren. Senator Warnock of
    Georgia is recognized.
        Senator Warnock. Thank you very much, Mr. Chair. I share
    the concerns raised by my colleagues of these awful reports we
    are hearing, and I look forward to working with the Chair to
    address the culture of sexual harassment and unconscionable
    behavior.
        Mr. Gruenberg. Thank you, Senator.
        Senator Warnock. People across the country are facing
    higher borrowing costs to purchase homes, to start businesses,
    as a result of rising interest rates. Many large banks have
    made minimal adjustments to the interest that they pay
    customers on deposits, and families' checking and savings
    accounts. This means that while borrowing has clearly become
    more expensive for families, banks continue to borrow cheaply
    from their depositors to lend out at these higher rates that
    all of us are seeing in the marketplace. So, families are not
    getting more for their money. Mr. Barr, why have banks kept the
    interest rates they pay the customers so low?
        Mr. Barr. Thank you, Senator. Banks are paying up a bit in
    relation to the rising interest rates that we see. The rates
    that we are seeing follow a kind of normal pattern, which is
    that banks do not fully pass through interest rate increases to
    consumers, but we are seeing essentially somewhat of a paying-
    up in that environment.
        Senator Warnock. Are you satisfied with the increases that
    they are passing on to their customers?
        Mr. Barr. We do not get involved in any way, either
    positively or negatively, with respect to pricing decisions of
    banks. That is a----
        Senator Warnock. So, let me ask you a different question.
    Are these spreads abnormally large compared to high interest
    periods that we have seen in the past?
        Mr. Barr. They are about in line with prior historical
    experience.
        Senator Warnock. Are you taking measures to encourage banks
    to offer better yields?
        Mr. Barr. As I said, we do not get involved in any way in
    pricing decisions that banks make.
        Senator Warnock. All right. Let me just say that I think it
    is unfair that families are facing higher borrowing costs while
    banks enjoy the advantage of borrowing at low rates from the
    public, and we need a system where both consumers and banks
    share costs and the benefits proportionately.
        I am going to move on to another topic. I mean these same
    banks are finding other ways to increase their pay at the cost
    of customers. As of last week, customers at several of the
    largest banks in the country were still unable to access their
    paychecks after a payment processing error on November 2nd
    disrupted the direct deposit process. Mr. Barr, who was
    responsible for this error that has left too many Americans
    without access to their deposits, and in many cases without the
    ability to pay their rent or their bills?
        Mr. Barr. My understanding, Senator, is that a private
    payment clearinghouse was responsible for the error. We have
    urged banks that have affected customers to work with those
    customers, given that error.
        Senator Warnock. Thank you so much. As Chair of the
    Financial Institutions and Consumer Protections Subcommittee,
    last year I held a hearing to examine the consequences of bank
    overdraft fees on working families, and I am proud to say that
    after our hearing, four of the twenty largest commercial banks
    in the United States reduced or eliminated their overdraft
    fees. This summer, I convened a separate hearing to examine the
    tactics used by unscrupulous financial institutions to extract
    more money from consumers using surprise and unnecessary junk
    fees.
        Today I am concerned that customers affected by the recent
    ACH payment processing error may be stuck in a difficult
    financial crunch through no fault of their own. I am concerned
    that banks may unfairly penalize them by charging overdraft
    fees or nonsufficient fund fees when they try to pay for basic
    living expenses using money from their hard-earned paychecks
    that they reasonably expected to receive, but may not be there
    due to a processing error clearly out of their control.
        Mr. Hsu, Mr. Gruenberg, Mr. Barr, if we could just go down
    the line with a quick yes or no. The Baptist preacher is the
    one senator who is going to stay within his time. Yes or no,
    are you encouraging banks to waive their overdraft and
    nonsufficient fund fees for customers affected by this
    processing error?
        Mr. Hsu. We do encourage banks to work with their customers
    and make sure that their issues are addressed----
        Senator Warnock. Yes.
        Mr. Hsu. So, my understanding is that they are working with
    them.
        Senator Warnock. Great.
        Mr. Gruenberg. Senator, the answer is yes, and I believe
    the banks are doing that.
        Mr. Barr. The same response.
        Senator Warnock. Thank you so much.
        Chair Brown. Senator Butler of California is recognized.
        Senator Butler. Thank you so much, Mr. Chair, and let me
    just start by appreciating our conversation yesterday, Chairman
    Gruenberg. It was almost immediate that you and I were on the
    phone talking about the toxic culture, sexual harassment
    challenges that have long been, according to the report, long
    been alleged as a part of the FDIC environment. I look forward
    to our follow-up conversations, particularly as a number of the
    complaints were emanating out of the California offices, and
    the regional investigation and review that emerges, I do look
    forward to us staying in conversation.
        Mr. Chairman, I am going to try to keep my questions brief
    and relative to one topic. On November 5th, there was a New
    York Times article that outlined and made reference to
    challenges that customers were facing with their accounts being
    closed because of algorithmic and/or other technology
    challenges that prevented, on another instance prevented
    depositors from being able to access their funds, pay their
    bills. Here is a first-start question. Can each of you talk
    about any steps your agency has taken to examine its risk
    management practices that would ensure that banks and credit
    unions are not, unintentionally or intentionally, closing the
    accounts of customers who are engaged truly in lawful
    activities?
        Mr. Hsu. Thank you very much----
        Senator Butler. They are all looking at you, sir.
        Mr. Hsu. Yes, that is OK. Thank you very much for the
    question, Senator Butler. I am not exactly sure which article
    you are referring to. There is a couple of different issues
    that have arisen recently. I will say if it is related to the
    issue that Senator Warnock rose with regards to the payments,
    TCH, we understand the root cause analysis of that is ongoing,
    but we understand that that was the responsibility of a
    particular private entity that serves as a clearinghouse for
    payments. It does highlight the importance of operational risk
    management and operational resiliency. And that is something
    that we expect all banks to have appropriate risk management
    around those issues. That is very, very important, especially
    as banks increasingly rely on technology for those processes.
        Senator Butler. And let me just follow up, Mr. Hsu, because
    I appreciate you raising that, the operational risk management
    and the highlight there. Is it your intention, then, to issue
    new guidance or revise current guidance that would help the
    institutions to actually alleviate these kinds of practices, or
    better manage this kind of risk?
        Mr. Hsu. Sure. So, there is existing guidance right now in
    terms of operational resilience in risk management. We promote
    those, and we support those. We are constantly thinking about,
    do we need to take steps to strengthen that? And that is a
    conversation that we have internally, and as well across the
    agencies.
        Mr. Gruenberg. Senator, if I may say, I think you raise a
    very important issue. Algorithmic lending activity can have,
    let us say, unintended consequences, both in terms of cutting
    off people from their access, as well as having fair lending
    issues associated with it as well. And it is the subject of
    supervisory attention in the course of our examination process,
    and I think it is a growing issue and one we need to pay
    attention to.
        Senator Butler. Thank you for picking up on the point,
    Chair Gruenberg, that was mentioned by my colleagues earlier,
    the growth and breadth of the influence of artificial
    intelligence. And there have been many hearings and
    conversations in this building, and in others, about the
    potentially unintentional bias built into the artificial
    intelligence tools. And to take into consideration how that
    bias shows up in our financial systems I think is an important
    place for us to do some real work to maintain the trust of our
    consumers as we move our economy forward. Thank you, Mr. Chair.
        Chair Brown. Senator Smith of Minnesota is recognized.
        Senator Smith. Thank you, Mr. Chair. Thanks to all of you
    for being here. I want to talk a little bit about the impact of
    technology on what happens when there is a crisis. And Chair
    Gruenberg, you and I talked about this a little bit when we
    spoke a day or so ago. So, the smartphone era appears to have
    given new meaning to the term bank run. Social media and mobile
    banking certainly was not the cause of the failures of Silicon
    Valley Bank and Signature Bank, and as both the Fed and the
    FDIC noted in your reports, both banks had far deeper issues,
    yet technology did help to facilitate the unprecedented speed,
    both of the runs on both banks and kind of the impact of it.
    And it seems to me that this is something that we should be
    looking at as regulators and banks reckon with this.
        So, Vice Chair Barr and Chair Gruenberg, could you tell me
    how you are rethinking or thinking about your regulatory
    approach in light of your findings, and what we need to do
    looking forward to manage the impact of this technology risk?
        Mr. Barr. Thank you, Senator Smith. I think you raise an
    important point. I agree with you that the underlying issues at
    these institutions were deeper, but of course in the moment of
    crisis, there was a very, very quick set of bank runs. So, we
    are looking across the range of tools we have, our supervisory
    tools. We want to make sure that banks are prepared with good,
    sound contingency funding plans. We want to make sure that
    those plans, where appropriate, include access to the discount
    window. If the contingency funding plan includes access to the
    discount window, that they are testing that, that they make
    sure that they understand how to use the discount window. And
    many institutions have responded to this by prepositioning
    collateral at the discount window, which is a very strong and
    good and prudent risk management practice we are encouraging
    institutions to do.
        We are going to look more broadly at our liquidity rules,
    our approach to liquidity management, and I expect we will have
    more to say about that in the coming months.
        Senator Smith. Thank you very much. Chair Gruenberg.
        Mr. Gruenberg. Senator, we learned a lot about liquidity
    risk earlier this year. We learned about concentrations of
    uninsured deposits and how quickly they can run. We learned how
    large depositors can withdraw those deposits at the push of a
    button, and we have also seen how social media can amplify
    concerns about institutions very quickly. And the last one was
    probably a secondary but contributing factor. I do think it is,
    in a sense, a new kind of liquidity risk that both the banks
    and the regulators need to pay attention to. A bank really
    needs to monitor what is being said about it on social media.
    It may be accurate, or it may not. And similarly, as
    regulators, we need to monitor what is being said about the
    institutions we supervise on social media, and we actually are
    looking at utilizing different means of technology to try to do
    that, but I do think that is an additional liquidity risk
    challenge that we are presented with.
        Senator Smith. So, it is interesting; you both see this as
    a different kind of liquidity risk and something that we need
    to monitor and plan for. And it also seems to me that with the
    proliferation of misinformation and disinformation, that the
    financial institutions are also potentially vulnerable to a
    malign effort to disrupt their operations with something that
    just is not true. Mr. Harper, did you want to join in?
        Mr. Harper. I was just going to add to what Chairman
    Gruenberg said. This underscores the importance for the NCUA of
    having an enhanced Central Liquidity Facility, because
    institutions below $250 million generally do not belong to the
    liquidity facility. Statutory enhancements would help that also
    to--we do have issues with our ability to assess third-party
    vendors, and technology; unlike the other regulators, we do not
    have that authority. Certainly getting that authority from
    Congress would help us to have better oversight of this area
    and better protect the Share Insurance Fund.
        Senator Smith. Great, thank you. Thank you very much. I
    want to just bring up one thing quickly before I close out. I
    know you have all been here for quite a while. I was really
    happy to see the Fed and the FDIC and OCC issue their final
    Community Reinvestment Act rulemaking last month. You all know
    that this is something I am quite interested in, and I gather
    that it has come up a little bit today. My view of it is this
    is a very important update to CRA regulations, and it addresses
    decades of changes and of evolution in the banking sector, and
    I think helps to bring the core purposes of the CRA back into
    focus.
        Just maybe quickly, my question is, given that it has taken
    so long to get this update done, have you given thought to
    establishing some sort of a process to review and update these
    regulations more regularly so that this does not become a thing
    again?
        Mr. Barr. Let me just say, right now we are really focused
    on the implementation of these rules. We want to make sure to
    get that right. I think the final rule is really a win for
    banks and a win for communities. We want to keep that
    partnership going through the implementation stage, make sure
    that banks and communities have the online tools they need to
    be effective and efficient in deploying the rule. Make sure
    that examiners have the training and guidance they need. So,
    really our focus is on that, and we have set up a process to
    make sure that as questions come in on the rule, you know, is
    this activity covered, is it not covered, that we provide
    clarity on that.
        Senator Smith. Sort of a real-time way of getting feedback
    so that banks can understand what it means to get the rules
    right. Yes. I know, Mr. Chair, my good colleague from Maryland
    is eager to ask his questions, so thank you very much.
        Thank you, Senator Smith. Senator Van Hollen of Maryland is
    recognized.
        Senator Van Hollen. Thank you, Mr. Chairman. Great to see
    all of you. I am actually going to start where Senator Smith
    left off, really, in commending all of you for working
    together, all those involved with updating the CRA rule.
    Because as we all know, the banking system has evolved
    dramatically since it was first passed, and it is very
    important that we have rules that adapt to the changes so that
    we meet the original intent of the CRA.
        I also do want to commend you for just earlier this month
    removing the Trump-era barriers to designating nonbank system
    entities as SIFIs, as systemically risky, if it bears that out.
    That is something I have been urging for a long time, and I was
    very glad to see all of those agencies represented here who
    have a vote, vote to clear the way so that we can move in that
    direction, and look forward to talking with all of you further
    about that.
        I do want to say something about real-time payments and
    FedNow, something I have been pushing for for years. A number
    of us introduced legislation to try to accelerate that effort.
    According to Aaron Klein of Brookings, had the United States
    implemented real-time payments when the Bank of England did in
    2007, lower-income consumers, people living paycheck to
    paycheck, would have saved over $100 billion on overdraft fees,
    check-cashing, and payday lending. That is a $100 billion tax
    on people who can least afford it, so I am glad this is finally
    kicking into gear. Mr. Barr, if you could just speak to what
    you are doing to make sure that banks fully participate so that
    we can maximize this benefit.
        Mr. Barr. Thank you, Senator, and thanks for your long-time
    support of this initiative. As you noted, FedNow launched this
    summer. We expect it will take some time to build full bank
    participation. We have built the underlying rails; we really
    need banks now to come in and participate. We think it will be
    a very attractive option for many banks to join in to be able
    to offer this service to their customers and businesses. We
    have a very active outreach program, working with banks to
    encourage them to participate. We have a very active outreach
    program to third-party service providers that work with
    particularly community banks. But I think this is something we
    are going to have to keep at month after month after month. It
    is going to take a long time to get right, and we promise we
    are going to stick to it.
        Senator Van Hollen. Well, I appreciate that. Any help you
    need pushing from here, from the Senate, let us know, because
    again, we were late to this game. We were late getting started,
    and now we have to maximize our efforts to get participation.
        If I could just raise some of my concerns with a certain
    aspect of the Basel III regulations as they relate to
    potentially being a drag on the deployment of clean energy.
    Last month, the three banking oversight agencies represented
    here issued joint principles with respect to climate risks and
    the transition from a fossil fuel economy to a clean energy
    economy. And of course one of the devices we use to try to
    accelerate and manage that transition has been clean energy tax
    credits, so I have been concerned with the treatment of those
    tax credits in the most recent Basel III discussions. Mr. Hsu,
    we talked about this prior to the hearing. Do you share those
    concerns, and if so, what efforts are underway to address them?
    And then I would just like a brief response from the others.
        Mr. Hsu. So, we have also heard those concerns and that
    feedback, and we are going to be very open-minded to the
    comments. We are in the comment period now, and so we look
    forward to getting those comments and the analysis, and we will
    take that into consideration as we move forward.
        Mr. Gruenberg. Senator, I think this is a pretty good
    example of why you have a public comment period. I think we
    have received comments that raise attention to this issue that
    we may not have fully appreciated, and I am hopeful. We
    obviously are going to review all the comments so we can be
    responsive and address this on the final rulemaking.
        Senator Van Hollen. Thank you.
        Mr. Barr. Thank you, Senator. I also look forward to the
    comments on this. The kinds of comments that are most helpful
    on this and in other areas are comments that let us understand
    better the underlying risk. So, some people have said, for
    example, that these tax credits are lower risk because
    investors are being repaid from a stream of the tax credits.
    That is the kind of information that is useful to us as we
    analyze whether changes would be appropriate in this
    circumstance.
        Senator Van Hollen. Well, thank you. I am going to
    interpret those responses in a positive way, and let me leave
    it this way--if you are not going to address some of these
    concerns, I would appreciate the opportunity to weigh in before
    any final decisions are made. And I thank you all.
        Chair Brown. Thank you. Senator Fetterman of Pennsylvania
    is recognized.
        Senator Fetterman. Thank you, Mr. Chairman. Thank you. And
    thank you for allowing me the opportunity to talk to people
    much, much smarter than I am. And today's meeting, it is
    Protecting Main Street Over Wall Street. So, I want to talk
    about Silicon Valley Bank, because it does not seem like they
    were protecting Main or Wall Street, quite honestly. And I am
    astonished, because it does not seem like there are a lot of
    people talking about this, and this almost effectively was
    going to blow up the economy, you know, and it is astonishing.
    And as far as I know--I have not read about any kind of charges
    or anything like that, and you know, that dude was back to
    Hawai`i, to his gigantic house. And again, it is astonishing
    that there seems to be more outrage on that as well, too. And
    to me, it is also astonishing that you can have one bank, one
    bank could crash the entire economy, and once they realized
    what was available, is that the White House and everybody all
    agreed that we have to act very decisively and quickly as well.
        Blows my mind that that is even made possible, and my
    question to anyone on here--and I do not mean that to be
    aggressive; it is an honest question, because I, I really do
    not know--so what was behind Silicon Valley Bank's crash? Was
    it greedy? Was it incompetent? Or they do not care, because the
    Government is going to be there to clean up this kind of a
    mess? Or is it one, some, or all of them or whatever, honestly?
    Because I do not understand what it actually is, so I want
    people, experts and much smarter than me, to know what it was.
        Mr. Barr. Senator, first of all let me say I appreciate
    your, and agree with your outrage about what happened with
    respect to Silicon Valley Bank. There was significant bank
    mismanagement of interest rate risk and----
        Senator Fetterman. Yes, that is a wonderful euphemism.
        Mr. Barr. ----liquidity risk.
        [Laughter.]
        Senator Fetterman. Mismanagement, you know. But yes, I am
    sorry.
        Mr. Barr. And they engaged in activities such as
    eliminating hedges that would have helped them deal with
    interest rate risk in order to increase short-term profits.
    Their incentive compensation was not appropriate. It was not
    aligned with making sure that they took care of risk. There
    were enormous failures at that institution, and I share your
    outrage about the conduct.
        Mr. Gruenberg. Senator, I think the short answer to your
    question is all of the above. I mean this bank touched all the
    bases----
        Senator Fetterman. All of the above? Right, OK, yes.
        Mr. Gruenberg. ----and it was positioned so that when it
    experienced stress because of its reliance on uninsured
    deposits, that had a contagion effect on other institutions
    that really did for a moment put the system at risk, and that
    was the larger issue that was revealed here, I think.
        Mr. Harper. I will just say that I generally agree with
    both of my colleagues here on the panel. Certainly the events
    of March were a reminder to us all of the need to be risk-
    focused and ready to act expeditiously.
        Mr. Hsu. The only thing I would add is that there was very
    aggressive growth at that institution, without the commensurate
    controls, and that is why we as safety and soundness credential
    supervisors, we pay very special attention to that and put a
    lot of emphasis on that.
        Senator Fetterman. I want to clarify. So, there was
    aggressive growth. Is that greed, a nice way of saying greed?
    Because it seems to me, and I am not meaning that, you know.
    But I guess my last question, because I have less than a minute
    left, but it is like should one relatively kind of a smaller
    bank be in the position to crash the economy? It is astonishing
    that, one, that is even possible, but now when it has actually
    happened, you know, why is this not like every day until we
    make sure this can never happen again? And I mean I guess you
    effectively agree. I am assuming that, but of course I am
    asking.
        Mr. Barr. Senator, I agree with you. I think it is a wakeup
    call that we need strong capital in the system. We need strong
    liquidity in the system. We need strong supervision. I think
    the kind of contagion we saw suggests that there is a higher
    probability of default and loss given default in our banking
    system because of that contagion. We need to have strong
    capital, and we need to have strong liquidity.
        Mr. Gruenberg. And Senator, it also underscores the
    interconnectedness of the banking system. So, we had a bank--
    $200 billion is not little, but it is not near the top,
    either--but it was in a position to cause real financial
    stability risk.
        Senator Fetterman. Another 30 seconds, Mr. Chairman?
        Chair Brown. Of course.
        Senator Fetterman. Thank you, sir. And for the other--I am
    very, honestly interested in--yes?
        Mr. Harper. Certainly Marty is right on the
    interconnectedness issue within the system. It also highlights
    the need for us on the Financial Stability Oversight Council to
    coordinate and ensure that we are effectively working to
    protect against the risks so that one institution does not
    bring down the system.
        Mr. Hsu. I think the incident underscores the importance of
    us keeping our eye on the ball with regard to safety and
    soundness. That is what drives our missions. That is where we
    need to drive toward.
        Senator Fetterman. And thank you, Mr. Chairman.
        Chair Brown. Thank you, Senator Fetterman. I think Senator
    Fetterman's last question and the summary from each of you
    really summarizes the hearing as well, so John, thank you for
    that. Thanks to the witnesses. We will continue to work to
    strengthen our financial system. Senators who wish to submit
    questions for the hearing record, those questions are due 1
    week from today, Tuesday, November 21st. To the agencies,
    please submit your responses to questions for the record 45
    days from the day you receive them. Thanks again for your
    testimony and for your public service. The Committee is
    adjourned.
        [Whereupon, at 12:19 p.m., the hearing was adjourned.]
        [Prepared statements, responses to written questions, and
    additional material supplied for the record follow:]
                   PREPARED STATEMENT OF CHAIR SHERROD BROWN
        Today we'll hear testimony from the heads of the four Federal
    agencies responsible for protecting our banking and credit union system
    and making sure it serves everyone: the Board of Governors of the
    Federal Reserve System, the Federal Deposit Insurance Corporation or
    FDIC, the National Credit Union Administration or NCUA, and the Office
    of the Comptroller of the Currency or OCC.
        Welcome to you all and thank you for being here today.
        Earlier this year, we witnessed three of the largest bank failures
    in U.S. history.
        These failures reminded us that bankers' hubris, greed, and
    negligence continue to pose grave threats to our financial system, and
    to American workers and small businesses.
        This time our system bent, but fortunately it did not break.
        To avoid breaking, however, the Treasury Department and your
    agencies had to intervene and invoke the systemic risk exception and
    guarantee all deposits at Silicon Valley Bank and Signature Bank.
        It should never have gotten that far.
        The bank failures exposed weaknesses in the supervision of the
    banking system, disrupted the financial system's stability, and
    reminded many Americans that they just don't trust Wall Street.
        A disconcerting finding in the aftermath of the failures was that
    your agencies did identify the risks at these institutions, and you
    called them out. But that failed to result in real action from the
    banks' management to actually do anything to mitigate those risks.
        It's as predictable as it is unacceptable, after years of lobbying
    for weaker rules and lax oversight, including by SVB and Signature Bank
    executives.
        We must turn the lessons of this year into action.
        That means improving bank supervision and holding bank executives
    accountable for risky behavior that drives their banks into the ground.
    And it means strengthening rules, so that banks are serving their
    communities and have the capital necessary to continue serving their
    communities during stress events.
        These are things that we should all agree about.
        It's why, in the wake of this bank crash, we worked together to
    take the first real action in more than a decade to rein in risky
    behavior by bank executives.
        Congress must finish the job and pass our bipartisan RECOUP Act, to
    hold senior bank executives accountable when they gamble with
    customers' money.
        The turmoil in the financial industry earlier this year reminded us
    about the policies and actions that continue to make the biggest banks
    even bigger, and leave the financial system vulnerable to the ever-
    expanding balance sheets of the largest institutions in the country.
        We have created a financial system where just a handful of the
    largest banks now hold $14.75 trillion in assets--more than half the
    Nation's GDP.
        Fewer and larger banks mean consumers have less choice in the
    marketplace for banking services.
        Less competition means banks pay depositors less and charge higher
    fees.
        Mergers and acquisitions also serve as justification for branch
    closures, particularly in rural areas and working-class communities.
    We've seen that far too often in Ohio.
        And we know that drives more consumers out of the banking system
    toward high-fee, predatory nonbank financial companies--like check
    cashers and payday lenders and fintech apps.
        Banking consolidation also means reduced access to credit for small
    businesses and increased borrowing costs.
        And fundamentally, it means that more power in our economy ends up
    concentrated in the hands of a tinier and tinier number of big bankers
    on Wall Street.
        We've seen over and over what a problem that is, and the harm the
    Wall Street business model does in places like Ohio--encouraging
    everything from inflation to outsourcing to lax safety.
        We need strong action now from your agencies on this issue, because
    these trends impose real and direct costs on Americans.
        With less competition, less choice, and less access, it is more
    important than ever that we ensure banks are meeting the needs of their
    entire community.
        That is why I was encouraged to see that the FDIC, Federal Reserve,
    and OCC were able to come together last month and finalize the new
    Community Reinvestment Act rules.
        The Community Reinvestment Act was enacted in 1977 to ensure that
    banks meet the credit needs of all the communities in which they do
    business.
        The CRA regulations last received a significant refresh in 1995.
        Since 1995, the internet and mobile technology have fundamentally
    altered how Americans interact with the banking system.
        This modernization effort is critical to ensuring that banks are
    fulfilling the promise of the Community Reinvestment Act by serving and
    investing in their communities.
        I thank your agencies for working through this very complex
    rulemaking and delivering a final rule that will encourage banks to
    meet the credit needs of their entire community.
        In addition to the Community Reinvestment Act, the FDIC, Federal
    Reserve, and OCC also issued what's known as the Basel III Endgame
    capital proposal--for anyone not steeped in financial regulations,
    that's an actual rule critical to protecting the economy, not the
    latest video game or Marvel movie.
        These capital rules represent the final--and long, long overdue--
    plank in the post-Financial Crisis overhaul of our regulatory capital
    framework.
        It's about ensuring that the largest banks have enough capital to
    address the risks that are unique to their institutions, and weather
    crises and emergencies and other sudden events that affect their banks.
        The proposal also recognizes the systemic importance of banks that
    are large, just not quite as massive as the Wall Street megabanks--
    banks like Silicon Valley, before it collapsed. As we saw this spring,
    mismanagement and risky bets at those banks can still threaten the
    financial system--they also need to have enough capital to prevent the
    kind of threat to the economy we worried about earlier this year.
        Of course, we know the complaints that are coming--in fact, they
    started before we even saw the proposal.
        The industry has relentlessly attacked it with the same old tired
    arguments.
        Compliance will cost too much, we won't be competitive, we already
    have enough capital, we won't be able to lend to small business.
        We've heard it all before.
        Let's be clear: The largest banks will need to redirect a tiny
    fraction of their enormous profits over a period of several years to
    get to the new capital levels.
        Every single bank that would be impacted by this proposal has the
    capacity to comply with the new capital levels and extend credit to
    small businesses and working class and middle class families--all while
    remaining wildly profitable.
        I trust that your agencies see these arguments for what they are:
    the same old Wall Street whining.
        And that you will deliver a strong capital rule--one that
    prioritizes the American people and their communities over quarterly
    profits of the banking industry.
        Finally, as we have discussed on this Committee, illicit finance
    continues to pose a serious threat to the United States and the world.
    We've of course seen it most recently with the funding Hamas was able
    to raise for its terrorist attacks on Israel.
        I implore your agencies to be vigilant when it comes to all the
    risks associated with illicit finance and the banking and credit union
    system.
        You are all public servants, responsible for making sure that the
    financial system operates in a safe and sound manner and works for the
    American people.
        Do not let us down.
                                     ______

                       PREPARED STATEMENT OF MICHAEL BARR
                  Vice Chair For Supervision, Federal Reserve
                               November 14, 2023
        Chairman Brown, Ranking Member Scott, and other Members of the
    Committee, thank you for the opportunity to testify on the Federal
    Reserve's supervisory and regulatory activities. Accompanying my
    testimony is the Federal Reserve's semiannual Supervision and
    Regulation Report. Today, I will discuss current conditions in the
    banking sector, supervision, and some of our recent regulatory
    proposals.
    Banking Conditions
        Our banking system is sound and resilient. The acute stress that
    occurred in March has receded, and banking organizations continue to
    report capital and liquidity ratios above minimum regulatory levels.
    Earnings performance has remained solid and in line with prepandemic
    levels, despite recent pressure on net interest margins.
        Regulatory capital ratios increased during the first half of 2023.
    While liquidity levels have come down from their peak in 2021, they
    remain above prepandemic levels and, as applicable, above minimum
    regulatory levels, leaving the banking system well positioned to
    mitigate liquidity pressures that may arise.
        The failures of Silicon Valley Bank, Signature Bank, and First
    Republic Bank reflected, to varying degrees, excessive interest rate
    risk in their long-duration assets and an over-reliance on uninsured
    deposits. While the three failed banks were extreme cases, there are
    other banks that invested heavily in fixed-rate, long-duration assets
    when long-term interest rates were low. These banks have recorded
    sizable declines in the fair value of those assets as interest rates
    have increased, putting pressure on tangible capital. The banks are
    actively managing the resulting set of risks, but these could take some
    time to address. Additionally, some banks that have high reliance on
    uninsured deposits are using more expensive funding sources to manage
    their liquidity risk.
        Lending has continued to grow this year, albeit at a slower pace
    relative to 2022, due in large part to both reduced loan demand and
    tighter lending standards, according to respondents to the recent
    Federal Reserve Senior Loan Officer Opinion Surveys. Loan delinquency
    rates remain low overall, and banks have increased credit loss
    provisions to mitigate potential future losses in response to increased
    delinquencies for loans related to commercial real estate (CRE) and
    some consumer sectors.
        Looking forward, preserving a sound and resilient banking system
    requires continued attention to address identified vulnerabilities and
    vigilance to changing conditions.
    Supervision
        Starting with supervision, since the bank failures earlier this
    year, the Federal Reserve has been moving forward with ways to improve
    the speed, force, and agility of supervision as appropriate.
    Supervision must intensify at the right pace, especially as a firm
    grows in size or complexity, and critical issues that present safety
    and soundness concerns should be addressed quickly by banks and
    supervisors. In considering improvements to supervision, we are very
    mindful of the differences in size, risk, and complexity of supervised
    institutions and the importance of maintaining the strength and
    diversity of banks of all sizes that serve communities across the
    country.
        Furthermore, supervisors have been focused on addressing material
    risks presented by the current economic environment as well as the
    rapid pace of innovation. This includes conducting targeted reviews at
    banks exhibiting higher interest rate and liquidity risk profiles and
    conducting focused training and outreach on supervisory expectations
    about these risks. The Federal Reserve is also monitoring for potential
    credit deterioration, particularly within the consumer and CRE lending
    segments. Additionally, the Federal Reserve has implemented a new novel
    bank supervision program to improve oversight of banks engaged in
    nontraditional financial-technology-related activities.
        However, neither banks nor supervisors can anticipate all emerging
    risks. That is why it is also important to help ensure that our
    regulatory framework sets a strong baseline for resilience, regardless
    of how or where the risk originates.
    Capital
        A key component of this resilience is capital. Banks rely on both
    debt (such as deposits) and capital to fund loans and other assets.
    Capital allows banks to absorb losses on those assets while continuing
    to serve households and businesses. Additionally, capital is loss-
    absorbing regardless of the source of the loss. That is, whatever the
    vulnerability or the shock, capital is able to absorb the resulting
    losses and, if sufficient, allows banks to keep serving their critical
    role in the economy.
        In the Global Financial Crisis, the effects of woefully
    undercapitalized banks had a devastating impact on our economy and
    resulted in the worst recession since the Great Depression. It took 6
    years for employment to recover, more than 10 million people fell into
    poverty, and 6 million families lost their homes to foreclosure. And
    these costs occurred even with substantial support from the Government.
        In the years following the Global Financial Crisis, the Federal
    Reserve Board (Board) adopted a set of reforms to increase the quantity
    and quality of capital, ran annual supervisory stress tests, and set a
    capital surcharge on global systemically important banks (G-SIBs) to
    reflect the greater risk these firms pose to U.S. financial stability.
    These reforms have greatly strengthened our banking system, and capital
    ratios of the largest banks have more than doubled since 2009. At the
    same time, the U.S. banking system has grown from $12 trillion in
    assets in 2009 to $23 trillion today, while showing strong
    profitability and overall market valuation. U.S. banks have enhanced
    their position as leaders in global capital markets activity.
    Importantly, these reforms have served the U.S. economy well. Our
    economy has grown substantially with the continued support of robust
    lending from a stronger banking system.
        The reforms to the capital requirement framework we proposed
    earlier this year are the last stage of those postcrisis capital
    reforms. It has been long recognized that work remains to improve how
    banks measure risk, which is critically important because the riskier a
    bank's assets are, the more capital it needs to protect against those
    risks. To address these and other issues, the Board, along with the
    Office of the Comptroller of the Currency (OCC) and the Federal Deposit
    Insurance Corporation (FDIC), proposed a rule in July that would
    further reduce the likelihood of future financial crises. The proposed
    rules would apply to banks with at least $100 billion in assets, less
    than 40 of the over 4,000 banks in our banking system. Community banks
    would not be affected by this proposal.
        First, for a firm's lending activities, the proposed rules would
    end the practice of relying on each bank's own internal estimates of
    its credit risk and instead use a standardized, risk-based measure of
    credit risk. Standardized credit risk approaches are designed to
    approximate observed risks through economic cycles, which internal
    models tend to underestimate. Such an approach also ensures consistency
    across banks to avoid the material variability that has been identified
    with internal models across institutions. Variability reduces
    transparency and comparability and results in the same loan being
    treated differently among banks. The proposed standardized approach to
    credit risk is generally consistent with--but more risk-sensitive
    than--the standardized approach the banking agencies have been using
    for decades.
        Second, for operational losses--losses from inadequate or failed
    processes, such as from fraud, illegal conduct, or cyberattacks--the
    proposed rules would replace the use of banks' internal models to
    measure operational risk with a standardized measure.
        Third, for a firm's trading activities, where modeled approaches
    are more reliable, the proposed rules would require more granular
    methods for measuring market risk, which is the risk of loss from
    movements in market prices, to correct for gaps in the current rules
    and improve risk capture. For instance, the current market-risk
    framework could result in capital requirements increasing during stress
    rather than requiring a higher amount of capital in advance of stress.
        Fourth, the proposal would improve the capital requirements for the
    credit risk of derivatives activities by introducing a standardized,
    risk-sensitive measure.
        Most aspects of this proposal have been under development for many
    years. Partly in response to the bank stress this spring, the proposal
    would extend the requirement of including unrealized gains and losses
    from available-for-sale securities in capital ratios beyond the
    largest, most complex banks to all large banks above $100 billion in
    assets.
        The proposed rules are anticipated to increase capital requirements
    for large banks, but the effects for each bank would vary based on its
    activities and risk profile. Notably, the increases would be most
    substantial for the largest and most complex banks, and the bulk of the
    estimated rise is attributable to trading and other nonlending
    activities.
        The comment period is an important part of the rulemaking process.
    I want to reiterate that we are interested in public input. We have
    recently announced an extension of the comment period. With this
    extension, we are providing the public nearly 6 months to review the
    proposal, so they can provide meaningful comments. We have already
    heard concerns that the proposed risk-based capital treatment for
    mortgage lending, tax credit investments, trading activities, and
    operational risk might overestimate the risk of these activities. We
    welcome all comments that provide the agencies with additional data and
    perspectives to help ensure the rules accurately reflect risk.
    Long-Term Debt
        I would also like to highlight our long-term debt proposal. In
    October of last year, the agencies issued an advance notice of proposed
    rulemaking requesting comments about possible extension of long-term
    debt requirements to more banking organizations beyond the largest and
    most complex. The failures of three large banks in the spring resulted
    in losses to the deposit insurance fund and financial stability
    concerns that could have been mitigated in part by requirements for
    additional long-term debt.
        Following those events, in August, the agencies proposed a rule
    that would expand long-term debt and resolution planning requirements
    to additional large banks. The proposal's goal is to increase the
    potential options available for resolving depository institutions and
    to enhance overall financial stability. Importantly, the proposed
    requirements would be calibrated at a lower level relative to the
    largest and most complex banks in recognition of the lower systemic
    risk profiles of applicable banks. Additionally, because these banks
    already issue some long-term debt and the proposal provides for a long
    phase-in period, banks generally would only need to issue debt
    incrementally to meet the proposed requirements.
        As with the capital rules I mentioned above, I would like to
    emphasize that these are proposed rules, and we look forward to hearing
    the public's comments.
    Community Reinvestment Act
        As for other material rulemakings, the agencies recently finalized
    a rule that strengthens and modernizes the regulations that implement
    the Community Reinvestment Act (CRA). The revised rule will better
    encourage banks to help meet the credit needs of their entire
    communities, including low- and moderate-income neighborhoods.
        The final rule is the result of many years of public engagement and
    several rounds of rulemaking by the Board, FDIC, and OCC. I appreciate
    the level of engagement from both banks and community and civil rights
    stakeholders. The many perspectives we have heard have assisted the
    agencies in further refining the approach from the proposed to final
    rule.
        Key elements of the final rule include supporting minority
    depository institutions and community development financial
    institutions as well as adapting the rule to mobile and online banking.
    Fair lending is safe and sound lending. The new CRA regulations will
    encourage financial inclusion in important ways, helping to make the
    financial system safer and fairer.
        Thank you. I am happy to take your questions.
        [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

                   PREPARED STATEMENT OF MARTIN J. GRUENBERG
                  Chair, Federal Deposit Insurance Corporation
                               November 14, 2023
        Chairman Brown, Ranking Member Scott, and Members of the Committee,
    I am pleased to appear at today's hearing on ``Oversight of Financial
    Regulators: Protecting Main Street Not Wall Street''. I appreciate the
    opportunity to report on the Federal Deposit Insurance Corporation's
    (FDIC) recent work in protecting insured deposits, supervising State
    chartered banks that are not members of the Federal Reserve system for
    safety and soundness and consumer protection, and in resolving failed
    insured depository institutions.
        My statement discusses the lessons learned from the regional bank
    failures this spring and proposed improvements in regulation and bank
    supervision that could help prevent similar bank failures or mitigate
    their impact in the future. In addition to proposals focused on large
    regional banks, my testimony discusses other important regulatory
    activities at the FDIC, including the publication of the Basel III
    Notice of Proposed Rulemaking (NPR) and the adoption of the final rule
    modernizing and strengthening the Community Reinvestment Act (CRA).
    Finally, I will discuss the FDIC's efforts to support Minority
    Depository Institutions (MDIs) and Community Development Financial
    Institutions (CDFIs).
    State of the Banking Industry
        The banking industry has proven to be quite resilient despite the
    period of stress earlier this year. In the second quarter, key banking
    industry measures of performance remained favorable. Net income
    remained high by historical measures, asset quality measures were
    stable, and the industry remained well capitalized. \1\ However, banks
    reported lower net interest margins and higher funding pressures for a
    second consecutive quarter. Higher market interest rates and mortgage
    rates caused market values for debt to generally fall during the second
    quarter, resulting in higher unrealized losses on securities. \2\ While
    the FDIC Quarterly Banking Profile data will not be available until
    later this month, early reports from third quarter 2023 indicate that
    the banking industry remains profitable and well-capitalized, that
    asset quality metrics continue to normalize from the historic lows
    reached during the pandemic, and that funding cost challenges have
    persisted, especially for small- and mid-sized banks.
    ---------------------------------------------------------------------------
         \1\ In the second quarter, the banking industry's net income was
    $70.8 billion, a decrease of $9.0 billion from first quarter. But after
    excluding nonrecurring accounting gains on failed bank acquisitions
    that occurred in the first and second quarters, net income was roughly
    flat from the prior quarter--and in fact from fourth quarter 2022 as
    well. See ``FDIC Quarterly Banking Profile: Second Quarter 2023'',
    available at https://www.fdic.gov/analysis/quarterly-banking-profile/.
         \2\ Unrealized gains (losses) on securities solely reflect the
    difference between the market value as of quarter-end and the book
    value of nonequity securities.
    ---------------------------------------------------------------------------
        As of June 30, 2023, deposits continued to decline for the fifth
    consecutive quarter, as depositors continue to seek higher yields.
    However, deposit outflows moderated substantially from the large
    outflows reported in the first quarter when the industry experienced
    significant stress and two regional banks failed. In the second
    quarter, uninsured deposits declined by 2.5 percent, far less than the
    8 percent decline reported in the first quarter. By contrast, insured
    deposits increased by 0.8 percent during the second quarter, driven by
    higher insured brokered deposits and reciprocal deposits.
        There has been a great deal of discussion about deposit flows to
    the Nation's larger banks, primarily under the assumption that deposits
    have flowed from regional banks to the largest banks. While deposit
    balances may have suggested that such flows occurred on a limited basis
    toward the end of the first quarter, that does not appear to have been
    the case in the second quarter. The Nation's global systemically
    important banks reported a decline in total deposits, primarily driven
    by a decline in uninsured deposits. Rather than a simple story of
    deposits flowing to the largest banks, the second quarter's deposit
    story appears to have been more about depositors seeking higher yields,
    often at nonbank financial institutions, particularly money market
    mutual funds. Many banks have increased deposit rates to compete,
    resulting in higher cost of funds.
        In addition, higher interest rates reduce the value of assets that
    yield a fixed interest rate. Loans and securities with longer
    maturities and locked-in lower yields may pressure earnings in coming
    quarters. These longer-term balance sheet holdings further limit the
    ability of banks to lend, raise capital, or restructure. Market rates
    continued to increase through the third quarter, likely putting
    downward pressure on the value of securities portfolios.
        The banking industry continues to face significant downside risks
    from the effects of inflation, rising market interest rates, and
    geopolitical uncertainty. Moreover, the economic outlook remains
    uncertain, despite relatively solid growth and low unemployment so far
    this year. These risks could cause credit quality and profitability to
    weaken, loan growth to slow, provision expenses to rise, and liquidity
    to become more constrained. Commercial real estate (CRE) loan
    portfolios, particularly loans backed by office properties, face
    challenges when loans mature as demand for office space remains weak
    and property values continue to soften. Banks have tightened
    underwriting standards over the past year across a range of household
    and business loans, and they may continue to tighten further this year.
    \3\
    ---------------------------------------------------------------------------
         \3\ Federal Reserve Senior Loan Officer Opinion Survey on Bank
    Lending Practices, July 2023. https://www.federalreserve.gov/data/
    sloos/sloos-202307.htm
    ---------------------------------------------------------------------------
        The FDIC will continue to monitor prevailing trends in the banking
    industry and will publicly release data for the third quarter of this
    year as part of the Quarterly Banking Profile. \4\
    ---------------------------------------------------------------------------
         \4\ See FDIC Quarterly Banking Profile available at https://
    www.fdic.gov/analysis/quarterly-banking-profile/.
    ---------------------------------------------------------------------------
    Condition of the Deposit Insurance Fund
        As of June 30, 2023, the Deposit Insurance Fund (DIF) balance
    totaled $117.0 billion, down $11.3 billion (8.8 percent) from year-end
    2022, primarily resulting from an increase in loss provisions
    associated with the failures of Silicon Valley Bank (SVB), Santa Clara,
    California; Signature Bank (Signature), New York, New York; and First
    Republic Bank (First Republic), San Francisco, California, in the first
    half of 2023. \5\ The decline in the DIF balance coupled with strong
    growth in estimated insured deposits resulted in a decline in the
    reserve ratio of 15 basis points from 1.25 percent as of December 31,
    2022, to 1.10 percent as of June 30, 2023. \6\
    ---------------------------------------------------------------------------
         \5\ The decline in the DIF balance does not include the cost of
    protecting uninsured deposits pursuant to the systemic risk
    determination announced following the failures of SVB and Signature
    Bank in March 2023, as the FDIC is required by statute to recover those
    losses through special assessments. See 12 U.S.C. 1823(c)(4)(G)(ii).
         \6\ The reserve ratio is calculated as the ratio of the net worth
    of the DIF (fund balance) to the value of the aggregate estimated
    insured deposits at the end of a given quarter. See 12 U.S.C.
    1813(y)(3).
    ---------------------------------------------------------------------------
        A total of five banks have failed so far in 2023, resulting in a
    combined estimated loss of $34.2 billion. \7\ As of June 30, 2023, the
    FDIC estimated the cost for the failures of SVB and Signature Bank to
    total $18.5 billion. \8\ Of that estimated total cost of $18.5 billion,
    the FDIC estimated that approximately $15.8 billion was attributable to
    the cost of covering uninsured deposits as a result of the systemic
    risk determination made on March 12, 2023, following the closures of
    SVB and Signature Bank. As with all failed bank receiverships, losses
    will be periodically adjusted as assets are sold, liabilities are
    satisfied, and receivership expenses are incurred.
    ---------------------------------------------------------------------------
         \7\ Estimated loss as of the end of the second quarter of 2023,
    except for Heartland Tri-State Bank which closed in July 2023 and
    resulted in an estimated $54.2 million loss in the third quarter (FDIC
    PR-58-2023), and Citizens Bank which closed in November 2023 and
    resulted in an estimated $14.8 million loss in the fourth quarter (FDIC
    PR-91-2023).
         \8\ Descriptions of the loss estimates for SVB and Signature Bank
    and the estimated special assessment amount are available on page 32696
    of the Notice of Proposed Rulemaking on Special Assessments Pursuant to
    Systemic Risk Determination, available at https://www.fdic.gov/news/
    board-matters/2023/2023-05-11-notice-dis-a-fr.pdf.
    ---------------------------------------------------------------------------
        By statute, the FDIC is required to recover the $15.8 billion
    estimated loss through one or more special assessments. \9\
    Accordingly, the FDIC issued a proposed rule to implement this special
    assessment. \10\ In implementing the special assessment, the law
    requires the FDIC to consider the types of entities that benefit from
    any action taken or assistance provided as well as economic conditions,
    the effects on the industry, and other factors deemed appropriate and
    relevant. \11\ In general, large banks with large amounts of uninsured
    deposits benefitted the most from the systemic risk determination.
    Under the proposal, the FDIC would apply an annual special assessment
    rate of approximately 12.5 basis points to an assessment base that
    would equal an insured depository institution's (IDI) estimated
    uninsured deposits reported as of December 31, 2022, adjusted to
    exclude the first $5 billion in estimated uninsured deposits from the
    IDI, or at the banking organization level for IDIs that are part of a
    holding company with one or more subsidiary IDIs. Under the proposal,
    no banking organizations with total assets under $5 billion would pay
    the special assessment. Under the proposal, the FDIC estimates banking
    organizations with total assets over $50 billion would pay over 95
    percent of the special assessment. The effect of the proposed special
    assessment on the dollar amount of Tier 1 capital is estimated to be
    minimal, measuring less than one percent, on average. The FDIC Board
    will consider a final rule later this week.
    ---------------------------------------------------------------------------
         \9\ 12 U.S.C. 1823(c)(4)(G)(ii)(I).
         \10\ See Notice of Proposed Rulemaking on Special Assessments
    Pursuant to Systemic Risk Determination, available at https://
    www.fdic.gov/news/board-matters/2023/2023-05-11-notice-dis-a-fr.pdf.
         \11\ 12 U.S.C. 1823(c)(4)(G)(ii)(III).
    ---------------------------------------------------------------------------
        The remaining estimated loss from the failures of SVB and Signature
    Bank of $2.7 billion and additional estimated losses of $15.6 billion
    from the May 2023 closure of First Republic Bank, directly impacted the
    DIF balance in the first half of 2023. \12\
    ---------------------------------------------------------------------------
         \12\ For estimated cost of the failure of First Republic Bank, see
    page 31 of the ``FDIC Quarterly Banking Profile: Second Quarter 2023'',
    available at https://www.fdic.gov/analysis/quarterly-banking-profile/
    qbp/2023jun/qbp.pdf#page=1.
    ---------------------------------------------------------------------------
        Despite recent outflows for total deposits, accelerated by the
    stress experienced in the banking industry in March, insured deposit
    balances increased by 2.2 percent in the first quarter and 0.8 percent
    during the second quarter, bringing year-over-year insured deposit
    growth to 4.7 percent, slightly above the long-term historical average
    of 4.5 percent. \13\ As required by the Federal Deposit Insurance Act
    (FDI Act), \14\ the FDIC has been operating under a Restoration Plan
    since September 15, 2020, \15\ which aims to restore the DIF to the
    statutory minimum reserve ratio of 1.35 percent within 8 years.
    Notwithstanding the recent losses due to bank failures and growth in
    insured deposits, the DIF remains on track to meet the statutory
    minimum reserve ratio of 1.35 percent by the 8-year deadline of
    September 30, 2028. \16\
    ---------------------------------------------------------------------------
         \13\ Long-term historical average is from 1991 through 2019.
         \14\ Section 7(b)(3)(E) of the Federal Deposit Insurance Act, 12
    U.S.C. 1817(b)(3)(E), available at https://www.fdic.gov/regulations/
    laws/rules/1000-800.html#fdic1000sec.7b.
         \15\ 2020 FDIC Restoration Plan, 85 FR 59306 (Sept. 21, 2020),
    available at https://www.fdic.gov/news/board-matters/2020/2020-09-15-
    notice-dis-a-fr.pdf.
         \16\ Section 7(b)(3)(E) of the FDI Act, 12 U.S.C. 1817(b)(3)(E),
    available at https://www.fdic.gov/regulations/l/rules/1000-
    800.html#fdic1000sec.7b.
    ---------------------------------------------------------------------------
    Update on Resolution Activities
    Regional Bank Receiverships
        The FDI Act requires the FDIC, when acting as a receiver, to manage
    and market assets in a manner that: maximizes returns and minimizes
    losses; ensures adequate competition and fair and consistent treatment
    of potential buyers of assets; prohibits discrimination in the sales
    process; and maximizes the preservation of the availability and
    affordability of residential real property for low- and moderate-income
    individuals. To date, the FDIC has made progress toward meeting these
    statutory obligations in all five of the receiverships from this past
    year.
        Silicon Valley Bank--The FDIC retained securities with a face value
    of $87 billion (approximately $75 billion market value) and an
    additional $3 billion of other assets including assets of SVB's foreign
    branches. To date, the FDIC has collected $1.1 billion in regular
    principal payments by securities issuers and undertaken a gradual and
    orderly sale of nearly $74 billion (face value) of the securities while
    minimizing the potential for adverse impact on market functioning by
    taking into account daily liquidity and trading conditions. The FDIC
    expects to substantially conclude sales of the securities by the end of
    the year. The FDIC is also monitoring the shared loss agreement with
    the acquiring institution covering approximately $61 billion of
    outstanding commercial loans and up to approximately $50 billion of
    unfunded commitments.
        Signature Bank--With respect to the resolution of Signature Bank,
    approximately $60 billion of the bank's loans and $27 billion in
    securities were retained by the FDIC. Receivership staff have been
    overseeing the servicing and collection of the retained loans and have
    collected approximately $13 billion in principal and interest payments
    from borrowers since March 2023, net of advances made to borrowers over
    the same period. The FDIC has completed the competitive sales of two
    Signature loan portfolios totaling approximately $19 billion,
    recovering over 99 percent of the book value of an $18 billion
    portfolio of ``capital call'' loans to investment funds and receiving
    over 85 percent of the book value of a $631 million pool of loans to
    technology and life science companies backed by venture capital
    sponsors.
        In addition, on September 5, 2023, the FDIC announced the start of
    a marketing process for the approximately $33 billion commercial real
    estate (CRE) loan portfolio. This portfolio represents substantially
    all remaining loans retained in the Signature receivership. Marketing
    of the former Signature Bank's CRE portfolio is taking place over the
    fourth quarter of 2023.
        The majority of the CRE loan portfolio is comprised of multifamily
    properties, primarily located in New York City. A large portion
    (approximately $15 billion) of the CRE loans is secured by multifamily
    residences that are rent stabilized or rent controlled. As mentioned,
    the FDIC has a statutory obligation to maximize the preservation of the
    availability and affordability of residential real property for low-
    and moderate-income individuals. Since March, the FDIC has been working
    closely with city and State authorities, as well as with community
    organizations where the properties securing these loans are located, to
    inform them of the FDIC's efforts and seek their input as it develops
    its marketing and disposition strategy. To help fulfill this
    obligation, the FDIC will place the rent stabilized or rent controlled
    loans into one or more joint ventures (JV) with the FDIC retaining a
    majority equity interest in the JV.
        Aside from loans, FDIC retained securities of Signature Bank with a
    face value of approximately $27 billion. The FDIC has conducted a
    gradual and orderly sale of approximately $24 billion (face value) of
    these securities, as of October 5, 2023.
        FDIC also competitively marketed Signature's equity investment,
    trademarks, and contracts related to the ``Signet'' platform, a
    blockchain-based digital payments platform. The FDIC sold the
    trademarks and preferred stock to the highest bidders for a total of
    $152,000. Bidders included banks as well as nonbank financial firms. No
    bids were received for the master servicing contract, so it was
    subsequently repudiated by the Receiver to extinguish the liability.
        First Republic Bank--In the resolution of First Republic, the FDIC
    transferred essentially all of the assets to an assuming institution,
    which also assumed all of the deposits of the failed bank. The FDIC
    retained $4 billion of First Republic's assets and entered into a
    Shared Loss Agreement with the assuming institution, JPMorgan Chase
    Bank, N.A. (JPMC), on the First Republic loans that JPMC purchased. The
    Shared Loss Agreement covers approximately $164 billion of commercial
    and residential loans and $46 billion of unfunded loan commitments.
        Heartland Tri-State Bank--Heartland Tri-State Bank of Elkhart,
    Kansas, was closed by the Kansas Office of the State Bank Commissioner
    on July 28, 2023, and the FDIC was appointed as receiver. As of March
    31, 2023, Heartland Tri-State Bank had approximately $139 million in
    total assets and $130 million in total deposits. To resolve the bank,
    FDIC entered into a Purchase and Assumption Agreement with Dream First
    Bank, National Association, of Syracuse, Kansas, to assume all of the
    deposits and essentially all of the assets of Heartland Tri-State Bank.
    The FDIC estimates that the cost to the DIF will be $54 million.
        Citizens Bank--Citizens Bank, Sac City, Iowa, was closed on
    November 2, 2023, by the Iowa Division of Banking, which appointed the
    FDIC as receiver. As of September 30, 2023, Citizens Bank had
    approximately $66 million in total assets and $59 million in total
    deposits. To resolve the bank, the FDIC entered into a Purchase and
    Assumption Agreement with Iowa Trust & Savings Bank, Emmetsburg, Iowa,
    to assume all of the deposits and essentially all the assets of
    Citizens Bank. The FDIC estimates that the cost to the DIF will be
    $14.8 million.
    Efforts To Improve Regional Bank Resilience and Resolvability
        The failure of three large regional banks this spring demonstrated
    clearly the risk to financial stability that large regional banks can
    pose. The Federal banking agencies are taking action to address these
    vulnerabilities with jointly proposed rulemakings that would facilitate
    the readiness and resolvability of insured depository institutions in
    the event of their insolvency and improve the protection of depositors
    in the event of a failure.
        On August 29, 2023, the FDIC Board approved three complementary
    proposals that together will greatly strengthen the ability of the FDIC
    to manage a resolution of a large complex financial institution: Long-
    Term Debt Requirements for Large Bank Holding Companies, Certain
    Intermediate Holding Companies of Foreign Banking Organizations, and
    Large Insured Depository Institutions; \17\ Resolution Plans Required
    for Insured Depository Institutions With $100 Billion or More in Total
    Assets; Informational Filings Required for Insured Depository
    Institutions With at Least $50 Billion But Less Than $100 Billion in
    Total Assets; \18\ and Guidance for Resolution Plan Submissions of
    Domestic Triennial Full Filers \19\ and Foreign Triennial Full Filers.
    \20\
    ---------------------------------------------------------------------------
         \17\ Long-Term Debt Requirements for Large Bank Holding Companies,
    Certain Intermediate Holding Companies of Foreign Banking
    Organizations, and Large Insured Depository Institutions, 88 FR 64524
    (September 19, 2023).
         \18\ Resolution Plans Required for Insured Depository Institutions
    With $100 Billion or More in Total Assets; Informational Filings
    Required for Insured Depository Institutions With at Least $50 Billion
    But Less Than $100 Billion in Total Assets, 88 FR 64579 (September 19,
    2013).
         \19\ Guidance for Resolution Plan Submissions of Domestic
    Triennial Full Filers, 88 FR 64626 (September 19, 2023).
         \20\ Guidance for Resolution Plan Submissions of Foreign Triennial
    Full Filers, 88 FR 64641 (September 19, 2023).
    ---------------------------------------------------------------------------
        The Long-Term Debt proposal, published jointly with the Board of
    Governors of the Federal Reserve System (Federal Reserve) and the
    Office of the Comptroller of the Currency (OCC), would require a layer
    of loss-absorbing capacity at large IDIs. This long-term debt
    requirement can mitigate the resolution challenges encountered in the
    failure of large regional banks and bolster financial stability. The
    long-term debt absorbs losses before the depositor class--uninsured
    depositors and the FDIC--take losses. This lowers the incentive for
    uninsured depositors to run. Protecting depositors and the DIF, helping
    to make their resolution more orderly, and creating additional options
    for the FDIC in resolution makes it more likely that a closing weekend
    sale could comply with the statutory least-cost test and avoid the need
    for a systemic risk exception.
        The revised resolution plan regulation for IDIs under the FDI Act
    would improve the FDIC's knowledge of a troubled large IDI and
    preparation for the resolution of the large IDI. The revised resolution
    plan regulation would require an IDI with at least $100 billion in
    assets to provide a strategy that is not dependent on an over-the-
    weekend sale, including by explaining how the IDI could be placed into
    a bridge depository institution, how operations could continue while
    the IDI separates itself from its parents and affiliates, and the
    actions that would be needed to stabilize a bridge depository
    institution, among others. The revised resolution plan regulation would
    also require all IDIs subject to the rule to demonstrate capabilities
    essential to an orderly resolution, such as establishing a virtual data
    room and populating it with enough information for interested parties
    to bid on the bank or certain of its assets and operations.
        Finally, guidance for resolution plans required under Title 1 of
    the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
    Frank Act), proposed with the Federal Reserve, would allow Title 1
    resolution planning to better reflect the lessons learned in dealing
    with domestic and foreign financial firms that are just below the size
    threshold of the U.S. Global Systemically Important Banks (G-SIBs). The
    proposed guidance addresses certain capabilities that are essential for
    firms to have to effect an orderly resolution such as those necessary
    to project the capital and liquidity needed to carry out their plan;
    operational capabilities related to payment, clearing and settlement
    activities; collateral; management information systems; and shared and
    outsourced services.
        All of these proposals, individually and taken together, are
    tailored to account for the differences that exist among institutions
    while leveraging the improvements and advances to resolution
    preparedness and planning that have been made since the financial
    crisis of 2008. The comment period for these proposals closes on
    November 30, 2023.
    Basel III Notice of Proposed Rulemaking
        On July 27, 2023, the FDIC Board approved a Notice of Proposed
    Rulemaking (NPR) that would revise and strengthen the capital
    requirements applicable to the largest banking organizations. \21\ The
    proposed framework would generally be consistent with international
    capital standards issued by the Basel Committee on Banking Supervision,
    commonly known as the Basel III reforms. The NPR was also approved by
    the Federal Reserve and the OCC.
    ---------------------------------------------------------------------------
         \21\ Regulatory Capital Rule: Large Banking Organizations and
    Banking Organizations With Significant Trading Activity, 88 FR 64028
    (September 18, 2023).
    ---------------------------------------------------------------------------
        The NPR is a continuation of the Federal banking agencies' efforts
    to revise the regulatory capital framework for our Nation's largest
    financial institutions, which were found to be undercapitalized and
    over-leveraged during the global financial crisis of 2008. Following
    the 2008 crisis, the Federal banking agencies strengthened the banking
    system through an initial set of revisions to the capital framework.
    Those revisions raised the quality and quantity of risk-based capital
    and included the introduction of an enhanced supplementary leverage
    ratio for our largest, most systemic banking organizations. However,
    there remain areas of the regulatory capital framework that need
    improvement.
        The NPR would make important changes to address the capital
    weaknesses identified in the 2008 financial crisis, enhance the
    resilience and stability of the banking system, and enable the banking
    system to better serve the U.S. economy. For example, the proposal
    would address critical areas of the risk-based capital framework
    related to credit risk, operational risk, market risk, and financial
    derivative risk. For credit risk, the proposal would eliminate the use
    of banking organizations' internal models to set regulatory capital
    requirements and in its place apply a simpler, standardized framework.
    Similarly, for operational risk, the proposal would introduce a
    standardized framework in lieu of the existing model-based approach,
    thereby enhancing transparency and comparability. With respect to
    market risk, the proposal includes a more robust methodology to capture
    potential stress events, using a so-called expected shortfall
    methodology. This is in response to significant losses incurred in
    large banking organizations' trading portfolios during the global
    financial crisis. Lastly, the proposal would strengthen capital
    requirements with respect to financial derivative risk. Taken together,
    these changes would bolster the financial resilience of our Nations'
    largest banking organizations.
        A key consideration with respect to these revisions is the scope of
    application--in other words, which banks are subject to the proposed
    rule. Historical experience has demonstrated the impact individual
    banking organizations can have on the stability of the U.S. banking
    system, in particular large banking organizations. With this in mind,
    the proposal would apply to banking organizations with total assets of
    $100 billion or more and to other banking organizations with
    significant trading activity. Consistent with this scope of
    application, the proposal would also align the calculation of
    regulatory capital for large banking organizations; that is, all
    banking organizations with more than $100 billion in total assets would
    include net unrealized holding losses on securities categorized as
    available-for-sale in the calculation of regulatory capital. As the
    agencies have learned from recent experience with bank failures, this
    change would help ensure that the regulatory capital ratios of large
    banking organizations better reflect their capacity to absorb losses.
    Notably, the NPR would not change the capital requirements applicable
    to community banks.
        By addressing weaknesses in the existing regulatory framework, the
    proposal is expected to increase capital requirements in the aggregate.
    It is estimated that the proposal would increase common equity tier 1
    capital requirements by 16 percent for holding companies and 9 percent
    for insured depository institutions. A change to capital requirements
    comes with associated costs and benefits. The FDIC, together with the
    other banking agencies, is carefully considering these trade-offs to
    inform the various components of the rule.
        It is expected that the impact would vary meaningfully by
    institution, depending on each banking organization's activities and
    risk profile. The majority of banks that would be subject to the
    proposed rule currently have enough capital to meet the proposed
    requirements. For those large holding companies with shortfalls, we
    estimate that these banking organizations would be able to achieve
    compliance with the revisions through earnings over a short timeframe,
    even while maintaining their dividends.
        The proposed changes would be phased in over a 3-year transition
    period. Any final rule, following careful consideration of comments
    received, is not expected to take effect until July 1, 2025. Taking the
    effective date and transition period together, the capital requirements
    under a final rule would not be fully effective until the second half
    of 2028.
        The NPR included a 120-day comment period ending November 30, 2023.
    The agencies have already started receiving comments from the industry
    and other related parties and have also begun meeting with industry
    representatives. For example, we have heard concerns related to the
    proposed treatment for residential mortgage exposures, certain tax
    credit equity investments, trading activities, and banking activities
    that generate large amounts of fee-based revenue. The agencies recently
    announced an extension of the comment period until January 16, 2024, to
    allow interested parties more time to analyze the issues and prepare
    their comments. The feedback to-date has been extremely helpful, and
    the FDIC looks forward to receiving additional comments and feedback.
    Other Enhancements to the Supervision of Large Regional Banks
        The three regional banks that failed this spring had different
    business models and various common attributes that made them vulnerable
    to disruptions: overreliance on uninsured deposits; rapid growth, and
    weak interest rate and liquidity risk management; and for two of the
    banks, unrealized losses. In response to the failures, the FDIC is
    reviewing options to improve the supervision of these key areas. For
    example, we are updating examiner guidance to be more explicit about
    analyses of uninsured deposit concentrations and have reemphasized to
    examiners the importance of forward-looking indicators of risk, such as
    high growth rates and breaches of internal risk limits. Additionally,
    we have strengthened our instructions for examiners on timely
    escalation of supervisory responses when management has been unable or
    unwilling to effect corrective action, or when financial conditions
    deteriorate rapidly, or both. All of these options are consistent with
    the areas for consideration outlined by the FDIC's Chief Risk Officer
    in his reports on the failed FDIC-supervised institutions. \22\
    ---------------------------------------------------------------------------
         \22\ See ``FDIC's Supervision of Signature Bank (April 28,
    2023)'', available at: https://www.fdic.gov/news/press-releases/2023/
    pr23033a.pdf, and ``FDIC's Supervision of First Republic Bank
    (September 8, 2023)'' available at https://www.fdic.gov/news/press-
    releases/2023/pr23073a.pdf.
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    Other Regulations and Guidance
    Modernizing and Strengthening the Community Reinvestment Act
        On October 24, 2023, the FDIC, the Federal Reserve, and the OCC
    adopted a final rule to strengthen and modernize the CRA. The final
    rule represents an ambitious effort to adapt CRA to the dramatically
    changed nature of the banking business since the law's enactment in
    1977 and the last major rule change in 1995.
        To begin with, banks today no longer serve their customers
    exclusively through a branch-based network around which CRA assessment
    areas are currently drawn. While bank branches continue to play a
    critical role in serving communities, some banks have only one branch
    or no branch at all. Yet, they engage in large scale lending across the
    country. Banks increasingly interact with customers either online or
    through mobile phones in areas in which the banks may not have a
    physical presence. Lending by banks in such areas is not currently
    subject to a CRA evaluation.
        This final rule adapts to this new banking reality by requiring
    large banks to establish Retail Lending Assessment Areas (RLAAs) in
    those geographies outside of their physical footprint where they
    originate significant numbers of closed-end mortgage loans or small
    business loans.
        Under the final rule, the loans in these new assessment areas will
    be subject to CRA review and evaluation for the first time, ensuring
    that large banks serve all segments of the communities in which they
    are chartered to do business, including low- and moderate-income
    communities, as the law requires. This represents a critically
    important adaptation of CRA to the changing nature of the business of
    banking.
        Consistent with this objective, the final rule will give banks
    credit for community development activities on a nationwide basis, not
    just in their traditional, branch-based assessment areas. This will
    recognize banks for their community development financing activities in
    rural and other underserved areas, including Native Land areas, many of
    which are so-called ``banking deserts.'' This final rule will give
    them, for the first time, consideration for channeling capital into
    areas that may be particularly desperate for banking services.
        Second, the final rule establishes a series of metrics and
    benchmarks against which banks will be measured for CRA performance for
    lending and community development. This will add important rigor to the
    CRA evaluation process. It will allow the banking agencies to establish
    specific standards for bank performance to achieve a particular CRA
    rating that will provide an incentive for increased lending to
    underserved communities. It will also provide greater clarity,
    transparency, and predictability for the banks and the public, as well
    as consistency among the agencies.
        Third, the final rule tailors CRA evaluations and data collection
    to bank size, complexity, and business type. All banks are not the
    same, and all communities are not the same. The final rule tailors the
    CRA tests and data collection to each bank size category--small,
    intermediate, and large. For instance, small banks would continue to be
    evaluated under the existing regulatory framework but would have the
    option to be evaluated under aspects of the new regulation.
        There would be no new data collection or reporting requirements for
    small or intermediate banks. Overall, the agencies sought to leverage
    existing data as much as possible. However, large banks with assets
    over $2 billion will have to collect and report community development
    data, and large banks over $10 billion in assets will have additional
    data requirements relating to deposits and retail banking products.
        Fourth, the final rule recognizes the importance of minority
    depository institutions (MDIs), Treasury Department-certified Community
    Development Financial Institutions (CDFIs), Women's Depository
    Institutions (WDIs), and Low Income Credit Unions (LICUs) in providing
    financial access to underserved consumers and communities.
        For example, the final rule creates a specific community
    development definition for eligible activities, such as investments,
    loan participations, and other ventures conducted by all banks with
    these institutions, including by other MDIs, WDIs, or CDFI banks. All
    community development activities conducted by banks with these entities
    will get credit under the final rule.
        Fifth, in furtherance of the agencies' objective to promote
    transparency, the final rule will require the disclosure of the
    distribution of home mortgage loan originations and applications of
    large banks in each of the bank's assessment areas by income, race and
    ethnicity utilizing publicly available data under the Home Mortgage
    Disclosure Act (HMDA). This aspect of the final rule is intended to
    provide transparent information to the public in regard to the bank's
    lending to communities of color. Although the data disclosed would not
    have an impact on the CRA ratings of the bank, it would allow the
    public to compare lending by a bank in those communities to other
    communities, as well as allow comparisons to other banks.
        Sixth, while we know that technology has led to significant changes
    in the provision of bank services, bank branches continue to play a
    crucial role for consumers and communities. For example, just over
    three-quarters of closed-end mortgages originated by large banks in
    recent years were located in branch-based assessment areas. These
    branch-based assessment areas remain a foundation of CRA. Under the
    final rule, each banking agency will be required to evaluate a bank's
    record of opening and closing branches to inform the degree of
    accessibility of banking services to low and moderate income
    communities.
        Further, access involves more than the availability of a branch. A
    consumer must also have access to products and services that are
    affordable and responsive to their needs. Expanding consumer access to
    federally insured banks has been a priority of the FDIC. The final rule
    will provide positive CRA consideration to large banks for the offering
    and demonstrated consumer usage of low-cost transaction accounts--
    accounts with low or no minimum balance requirements and no overdraft
    fees--such as Bank On Certified accounts.
        Finally, the rule gives credit to community development activities
    designed to strengthen disaster preparedness and weather resiliency in
    low- and moderate-income communities.
        Examples of eligible activities could include supporting the
    establishment of flood control systems in a flood prone area; and
    retrofitting affordable housing to withstand future disasters or
    climate-related events.
        Since its enactment, CRA has become the foundation of responsible
    financing for low- and moderate-income communities in the United
    States. This final rule will significantly expand the scope and rigor
    of CRA and will assure its continued relevance for the next generation.
    Reviewing the Bank Merger Process
        Although there has been a significant amount of consolidation in
    the banking sector over the last 30 years, facilitated in part by
    mergers and acquisitions, there has not been a significant review of
    the implementation of the Bank Merger Act (BMA) \23\ by the banking
    agencies in that time. Additionally, the prospect for continued
    consolidation among both large and small IDIs remains significant.
    ---------------------------------------------------------------------------
         \23\ Section 18(c)of the FDIC Act, 12 U.S.C. 1828(c).
    ---------------------------------------------------------------------------
        On March 31, 2022, the FDIC published a Request for Information and
    Comment on Rules, Regulations, Guidance, and Statements of Policy
    Regarding Bank Merger Transactions (RFI) \24\ that solicited comments
    regarding the effectiveness of the existing bank merger application
    framework. The comment period ended on May 30, 2022. The FDIC is
    evaluating and considering the comments received as it considers
    changes to the merger review framework, as appropriate.
    ---------------------------------------------------------------------------
         \24\ Request for Information and Comment on Rules, Regulations,
    Guidance, and Statements of Policy Regarding Bank Merger Transactions,
    87 FR 18368 (March 31, 2022).
    ---------------------------------------------------------------------------
        Finally, the FDIC is coordinating with the Federal Reserve, the
    OCC, and the Department of Justice regarding an interagency review of
    the existing laws, regulations, guidance and processes used by the
    Federal banking agencies under the BMA. These discussions, which are
    ongoing, are consistent with Presidential Executive Order on Promoting
    Competition in the American Economy.
    Evaluating Financial Risks Posed by Climate Change
        On October 24, 2023, the FDIC, Federal Reserve, and OCC adopted
    interagency guidance on principles for climate-related financial risk
    management for large financial institutions. \25\ The guidance provides
    a high-level framework for the safe and sound management of exposures
    to climate-related financial risks and is designed to help financial
    institutions make progress toward incorporating climate-related
    financial risks into risk management frameworks in a manner consistent
    with safe and sound practices. They provide general principles with
    respect to governance; policies, procedures, and limits; strategic
    planning; risk management; data, risk measurement, and reporting; and
    scenario analysis. They also provide guidance on how climate-related
    financial risks can be addressed in the management of traditional risk
    areas, such as credit, liquidity, operational risk, and legal and
    compliance risks.
    ---------------------------------------------------------------------------
         \25\ See Interagency Guidance of FDIC, OCC and FRB ``Principles
    for Climate-Related Financial Risk Management for Large Financial
    Institutions'', 88 FR 74183 (October 30, 2023).
    ---------------------------------------------------------------------------
        Although all financial institutions, regardless of size, may have
    material exposures to climate-related financial risks, these principles
    are intended for the largest financial institutions, those with over
    $100 billion in total consolidated assets. The FDIC understands smaller
    institutions, including community banks, may have limited resources and
    may experience the impacts of climate-related financial risks in a
    manner that differs from large financial institutions.
        The FDIC's role with respect to climate change is centered on the
    financial risks that climate change may pose to the banking system, and
    the extent to which those risks impact the FDIC's core mission and
    responsibilities. As stated in the interagency guidance, the FDIC will
    not be involved in determining firms or sectors with which financial
    institutions should do business. These types of credit allocation
    decisions are the responsibilities of financial institutions. Financial
    institutions should fully consider climate-related financial risks--as
    they do all other risks--and continue to take a risk-based approach in
    assessing individual credit and investment decisions. The FDIC expects
    financial institutions to manage climate-related financial risks in a
    manner that will allow them to continue to prudently meet the financial
    services needs of their communities, including low- and-moderate-income
    and other underserved consumers and communities.
    Evaluating the Risk of Crypto Assets to the Banking System
        The FDIC, in coordination with the other Federal banking agencies,
    has taken steps to closely monitor crypto-asset-related activities of
    banking organizations. For example, the FDIC has issued statements to
    assist banking organizations in ensuring that they have put in place
    appropriate measures and controls to identify and manage risks and
    comply with all relevant laws.
        More specifically, in April 2022, the FDIC issued a financial
    institution letter \26\ and requested that all FDIC-supervised
    institutions that are considering engaging in, or are already engaged
    in, crypto-asset-related activities notify the FDIC and provide all
    necessary information that would allow the FDIC to assess the safety
    and soundness, consumer protection, anti-money laundering/countering
    the financing of terrorism, and financial stability risks in order to
    provide supervisory feedback to the institution.
    ---------------------------------------------------------------------------
         \26\ See FDIC, ``Notification and Supervisory Feedback Procedures
    for FDIC-Supervised Institutions Engaging in Crypto-Related
    Activities'', (April 7, 2022), available at https://www.fdic.gov/news/
    financial-institution-letters/2022/fil22016.html.
    ---------------------------------------------------------------------------
        In addition, the FDIC issued an advisory letter to all FDIC-insured
    institutions in July 2022 to address concerns about the risks of
    consumer confusion or harm arising from crypto assets offered by,
    through, or in connection with insured depository institutions. These
    concerns were elevated as a result of certain misrepresentations about
    FDIC deposit insurance by some crypto companies. \27\ Inaccurate
    representations about deposit insurance by nonbanks, including crypto
    companies, may confuse the customers and cause them to mistakenly
    believe that these investments are protected by deposit insurance.
    Along with the advisory letter, the FDIC also released consumer
    education materials advising the public that crypto assets are not
    deposits insured by the FDIC. \28\ Over the course of 2022 and 2023,
    the FDIC has issued several cease and desist letters that resulted in
    companies removing misrepresentations about the insured status of
    crypto products. \29\
    ---------------------------------------------------------------------------
         \27\ See FDIC, ``Advisory to FDIC-Insured Institutions Regarding
    FDIC Deposit Insurance and Dealings with Crypto Companies'' (July 29,
    2022), available at https://www.fdic.gov/news/financial-institution-
    letters/2022/fil22035.html.
         \28\ See FDIC, ``FDIC Issues a Fact Sheet to the Public on FDIC
    Deposit Insurance and Crypto Companies'', (July 29, 2022), available at
    https://www.fdic.gov/news/press-releases/2022/pr22058.html; see also
    FDIC Consumer News, ``The Importance of Deposit Insurance and
    Understanding Your Coverage'', (August 2022), available at https://
    www.fdic.gov/resources/consumers/consumer-news/2022-08.html; see also
    FDIC Podcasts Episode 22, ``Deposit Insurance Explained (Part One)'',
    (August 17, 2022), available at https://www.fdic.gov/news/podcasts/.
         \29\ See, for example, FDIC, ``FDIC Issues Cease and Desist
    Letters to Five Companies for Making Crypto-Related False or Misleading
    Representations About Deposit Insurance'', (August 19, 2022), available
    at https://www.fdic.gov/news/press-releases/2022/pr22060.html.
    ---------------------------------------------------------------------------
        More recently, in early 2023, the FDIC, along with the Federal
    Reserve and the OCC, issued two joint statements on crypto-assets. The
    first, issued in January 2023, addressed ``Crypto-Asset Risks to
    Banking Organizations,'' and it enumerated several risks posed by
    crypto-assets that banking organizations should be aware of including
    significant volatility in crypto-asset markets; risk management and
    governance practices in the crypto-asset sector exhibiting a lack of
    maturity and robustness; and inaccurate or misleading representations
    or disclosures by crypto-asset companies. This joint statement listed
    several additional risks. \30\ In the second joint statement, issued in
    February 2023, the agencies highlighted key liquidity risks associated
    with certain sources of funding from crypto-asset-related entities of
    which banking organizations should be aware. \31\
    ---------------------------------------------------------------------------
         \30\ See ``Joint Statement on Crypto-Asset Risks to Banking
    Organizations'', (January 3, 2023), available at https://www.fdic.gov/
    news/press-releases/2023/pr23002.html.
         \31\ See ``Joint Statement on Liquidity Risks to Banking
    Organizations Resulting From Crypto-Asset Market Vulnerabilities'',
    (February 23, 2023), available at https://www.fdic.gov/news/financial-
    institution-letters/2023/fil23008.html.
    ---------------------------------------------------------------------------
        The agencies continue to emphasize that banking organizations are
    neither prohibited nor discouraged from providing banking services to
    customers of any specific class or type, as permitted by law or
    regulation.
    Supporting Minority Depository Institutions and Community Development
            Financial Institutions
        The preservation and promotion of MDIs remains a long-standing
    priority for the FDIC. \32\ The FDIC supervises approximately two-
    thirds of the 312 FDIC-insured MDIs and CDFIs (collectively, mission-
    driven banks). In addition to its supervisory activities, the FDIC's
    Office of Minority and Community Development Banking supports the
    agency's ongoing strategic and direct engagement with MDIs and CDFIs.
    ---------------------------------------------------------------------------
         \32\ See Section 308 of the Financial Institutions Reform,
    Recovery, and Enforcement Act of 1989, Pub. L. 101-73, title III, 308.
    Aug 9, 1989, as amended by Pub. L. 11-203, title III, 367(4), July 21,
    201, 124 Stat. 1556, codified at 12 U.S.C. 1463 note.
    ---------------------------------------------------------------------------
        Over the past 5 years, six de novo MDIs opened their doors (two
    Asian, one Native American, one African American, and two multiracial)
    and 17 existing institutions became newly designated MDIs due to
    changes in control or in board composition. These additions to the MDI
    list mostly offset removals from the list due to mergers, changes in
    control, or other events that caused institutions to lose their MDI
    eligibility, resulting in the total number of FDIC-insured MDIs
    decreasing from 152 to 147. In support of its statutory requirement to
    encourage the creation of new MDIs, in 2022 the FDIC issued a Financial
    Institution Letter that outlines the process by which FDIC-supervised
    institutions or applicants for deposit insurance can make a request to
    be designated as an MDI. \33\
    ---------------------------------------------------------------------------
         \33\ FDIC Financial Institution Letter, FIL-24-2022, Minority
    Depository Institution (MDI) Designation (May 19, 2022) available at
    https://www.fdic.gov/news/financial-institution-letters/2022/
    fil22024.html.
    ---------------------------------------------------------------------------
        As significant new sources of private and public funding have
    become available to support FDIC-insured MDIs and CDFIs, the FDIC has
    supported these institutions access to this funding through regulatory
    changes \34\ and technical assistance training.
    ---------------------------------------------------------------------------
         \34\ See FDIC, ``Federal Bank Regulators Issue Rule Supporting
    Treasury's Investments in Minority Depository Institutions and
    Community Development Financial Institutions'', available at https://
    www.fdic.gov/news/press-releases/2021/pr21018.html.
    ---------------------------------------------------------------------------
        This week the FDIC is hosting an interagency conference with the
    OCC and the Federal Reserve to facilitate potential partnerships among
    FDIC-insured MDIs and CDFIs and large and regional banks supervised by
    the FDIC, OCC, and Federal Reserve. The conference will feature an
    overview of the new CRA rule and benefits for partnering with mission-
    driven banks. More than 100 FDIC-insured MDIs and CDFI banks are
    participating, in addition to over 65 FDIC-insured large and regional
    banks.
    Conclusion
        I appreciate the opportunity to provide you with an update of the
    FDIC's efforts to fulfill its core mission to maintain stability and
    public confidence in the U.S. financial system through its
    responsibilities for deposit insurance, banking supervision, and the
    orderly resolution of failed banks.
        The FDIC remains committed to engaging with the public, industry
    stakeholders, and members of Congress on the policies and priorities
    outlined in my testimony. I look forward to answering your questions.
                                     ______

                       PREPARED STATEMENT OF TODD HARPER
                  Chair, National Credit Union Administration
                               November 14, 2023
        Chairman Brown, Ranking Member Scott, and Members of the Committee,
    thank you for inviting me to discuss the work of the National Credit
    Union Administration (NCUA).
        The NCUA insures deposits at federally insured credit unions,
    protects credit union members, and charters and regulates Federal
    credit unions. The NCUA also protects the safety and soundness of the
    credit union system by identifying, monitoring, and managing risks to
    the National Credit Union Share Insurance Fund (Share Insurance Fund).
    In my testimony today, I will discuss the state of the credit union
    system, recent efforts by the agency to strengthen the system, and
    several legislative requests.
    State of the Credit Union System
        The credit union system over the last year has remained largely
    stable in its performance and relatively resilient against economic
    disruptions. However, during the last few quarters, the NCUA has seen
    growing signs of financial strain on credit union balance sheets and in
    household budgets. Economists are also forecasting an economic slowdown
    as the lagged effects of elevated interest rates take hold. Each of
    these developments could affect credit union performance in the coming
    quarters.
        Over the same period, the NCUA has also seen growing stress within
    the system because of a rise in interest rate and liquidity risks. In
    fact, this financial stress is reflected in the increasing number of
    composite CAMELS code 3, 4, and 5 credit unions. \1\ Assets in
    composite CAMELS code 3 institutions increased sizably in the second
    quarter, especially among those complex credit unions with more than
    $500 million in assets. Such increases may well continue in future
    quarters. We have additionally seen more credit unions fall into the
    composite CAMELS code 4 and 5 ratings during the second quarter.
    ---------------------------------------------------------------------------
         \1\ The CAMELS rating system is based upon an evaluation of six
    critical elements of a credit union's operations: Capital adequacy,
    Asset quality, Management, Earnings, Liquidity and Sensitivity to
    market risk. The CAMELS rating system is designed to consider and
    reflect all significant financial, operational, and management factors
    examiners assess in their evaluation of a credit union's performance
    and risk profile.
    ---------------------------------------------------------------------------
    Credit Union System Performance
        As of June 30, 2023, the system's net worth ratio stood at 10.63
    percent. There was continued year-over-year growth in assets and
    lending, with system assets surpassing $2.2 trillion and outstanding
    loans at more than $1.5 trillion. Although insured shares and deposits
    decreased slightly compared to the previous quarter, they stood almost
    2 percent higher than one year earlier.
        Second quarter data also demonstrate some indications of growing
    consumer financial stress. The delinquency rate for loans rose slightly
    to 63 basis points, although it remains below historic averages. Credit
    cards and automobile loans, however, show increased delinquency levels
    at 154 and 67 basis points, respectively. Additionally, net charge-off
    levels have risen over the last year, returning to prepandemic
    averages.
        Additionally, funding costs for credit unions have increased
    significantly in the rising interest rate environment. Credit unions
    have increased their issuances of time deposits, leading to total
    interest expenses growing substantially over the year. However, the
    industry's return on average assets remains sound at 79 basis points.
    Together, these numbers show the credit union system continues to rest
    on a solid footing.
    External Factors Affecting the System
        The NCUA is closely monitoring the financial markets and the
    economy as the current environment has created challenges for some
    consumers and credit unions. Inflation and interest rates are affecting
    household budgets, which could lead to an increase in credit risk in
    future quarters. In addition, the prevalence of hybrid work
    environments has placed pressure on commercial real estate lending.
    While the credit union system overall has modest exposure to this type
    of lending, the NCUA is closely monitoring individual credit unions
    with material exposure to commercial real estate.
        The rise in interest rates has also increased liquidity and
    interest rate risks in the credit union system, including at several of
    the 421 federally insured credit unions with more than $1 billion in
    assets. Accordingly, the NCUA has emphasized the importance of
    liquidity risk management and contingency planning in its industry
    communications and will continue to ensure credit unions conduct
    liquidity and asset-liability management planning to address current
    challenges and future uncertainties.
        With respect to all these risks and to protect the Share Insurance
    Fund against potential losses, the NCUA will continue to vigilantly
    monitor credit union performance through the examination process,
    offsite monitoring, and tailored supervision. The NCUA will also, when
    appropriate, take action to protect credit union members and their
    deposits.
    Share Insurance Fund Performance
        Backed by the full faith and credit of the United States, the Share
    Insurance Fund provides insurance coverage for individual accounts at
    federally insured credit unions up to $250,000. \2\ As of June 30,
    2023, the Share Insurance Fund insured $1.7 trillion in deposits and
    shares. Notably, the Share Insurance Fund protects nearly 92 percent of
    total share deposits in the credit union system. In comparison,
    uninsured shares and deposits equaled approximately $160 billion in the
    second quarter or 8 percent of total share deposits.
    ---------------------------------------------------------------------------
         \2\ As established in statute, the Share Insurance Fund insures
    individual accounts at federally insured credit union up to $250,000,
    and a member's interest in all joint accounts combined is insured up to
    $250,000. The Share Insurance Fund also separately protects IRA and
    KEOGH retirement accounts up to $250,000. The fund is administered by
    the NCUA and is backed by the full faith and credit of the United
    States. See https://ncua.gov/files/publications/guides-manuals/
    NCUAHowYourAcctInsured.pdf.
    ---------------------------------------------------------------------------
        The Share Insurance Fund continues to perform well, with no
    premiums currently expected. As of June 30, 2023, the Share Insurance
    Fund reported a year-to-date net income of $79 million, a net position
    of $20.3 billion, and an equity ratio of 1.27 percent. \3\ The NCUA
    projects that the equity ratio of the Share Insurance Fund will end the
    year at 1.27 percent, which is sufficient but below the 1.33 percent
    normal operating level target set by the NCUA Board.
    ---------------------------------------------------------------------------
         \3\ The equity ratio is the overall capitalization of the Share
    Insurance Fund to protect against unexpected losses from the failure of
    credit unions. When the equity ratio falls, or is projected within 6
    months to fall, below 1.20 percent, the Federal Credit Union Act
    requires the NCUA Board to assess a premium or develop a restoration
    plan. When the equity ratio exceeds the normal operating level and
    available assets ratio at year-end, the Share Insurance Fund pays a
    distribution.
    ---------------------------------------------------------------------------
        Given the liquidity events in 2023, economic conditions, and the
    growing stress in the credit union system from liquidity and interest
    rate risks, the NCUA Board decided to build up the liquidity position
    of the Share Insurance Fund to a targeted amount of $4 billion. The
    Share Insurance Fund reached that target in September. The NCUA Board
    continues to monitor liquidity in the Share Insurance Fund.
    State of the Central Liquidity Facility
        The COVID-19 pandemic, inflationary pressures, interest rate
    volatility, and liquidity risk have all underscored the importance of
    the NCUA's Central Liquidity Facility (CLF). \4\ The CLF is an
    important tool and acts as a shock absorber when unexpected liquidity
    events occur.
    ---------------------------------------------------------------------------
         \4\ Established by statute, the CLF is a mixed-ownership
    Government corporation created to improve the general financial
    stability of credit unions by serving as a liquidity lender to credit
    unions experiencing unusual or unexpected liquidity shortfalls. Member
    credit unions, which may include both federally insured and non-
    federally insured credit unions, own the CLF, which exists within the
    NCUA. The CLF's president manages the facility under the oversight of
    the NCUA Board.
    ---------------------------------------------------------------------------
        Under the NCUA's regulations, credit unions with assets more than
    $250 million must have access to a Federal emergency liquidity source
    as part of their contingency funding plans. This Federal emergency
    liquidity backstop can be the CLF, the Federal Reserve's Discount
    Window, or both. Credit unions with less than $250 million in assets
    are not required to have membership with a contingent Federal liquidity
    source; however, they must identify external sources as part of their
    liquidity policy. \5\
    ---------------------------------------------------------------------------
         \5\ 12 CFR Part 741.12.
    ---------------------------------------------------------------------------
        As of September 30, 2023, the CLF had 399 consumer credit union
    members, providing $19.8 billion in lending capacity. These credit
    unions range in asset size from less than $50 million to more than $10
    billion. Their access to the CLF helps protect approximately $360
    billion in credit union members' assets.
        The more members the CLF has, the more effective it is as a
    liquidity facility. As of December 2022, the CLF had a much greater
    total membership of 3,673 consumer credit unions with a combined $537
    billion in member assets and a lending capacity of $27.5 billion. This
    rapid decline in membership assets followed the expiration of the
    temporary statutory enhancements that:

        Increased the CLF's maximum legal borrowing authority;

        Permitted access for corporate credit unions, as agent
            members, to borrow for their own needs;

        Provided greater flexibility and affordability to agent
            members to join the CLF to serve smaller groups of their
            covered institutions; and

        Gave the NCUA Board the clarity and flexibility about the
            loans it can approve by removing the phrase, ``the Board shall
            not approve an application for credit the intent of which is to
            expand credit union portfolios.''

        Among other benefits, these statutory provisions facilitated agent
    membership of corporate credit unions. These enhancements, however,
    ended on January 1, 2023, resulting in 3,322 credit unions with less
    than $250 million in assets losing access to the CLF. Consequently, the
    CLF's borrowing capacity has decreased by almost $10 billion.
        To address this expiration and growing liquidity risks, the NCUA
    Board has unanimously requested that Congress allow corporate credit
    unions to purchase capital stock in the CLF to help smaller credit
    unions access to the facility. This change would make the CLF more
    affordable for corporate credit unions subscribing for a subset of
    their members. The Congressional Budget Office has scored the CLF
    reforms at no cost to taxpayers. \6\
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         \6\ S.544, 118th Cong., 1st Sess. (2023).
    ---------------------------------------------------------------------------
    NCUA's Efforts To Protect and Strengthen the Credit Union System
        In recent months, the NCUA has undertaken several actions to
    respond to cybersecurity risk; support minority depository
    institutions; enhance the credit union system's and the NCUA's
    diversity, equity, and inclusion efforts; and consider and adopt new
    rules to strengthen the system.
    Enhancing Cybersecurity
        Cybersecurity threats within the financial services industry are
    high and expected to remain so for the foreseeable future. To maintain
    vigilance against these threats, the NCUA is committed to ensuring
    consistency, transparency, and accountability in its cybersecurity
    examination program and related activities.
        Earlier this year, the NCUA deployed its updated, scalable, and
    risk-focused Information Security Examination (ISE) procedures. The ISE
    examination initiative offers flexibility for credit unions while
    providing examiners with standardized review steps to facilitate
    advanced data collection and analysis. Together with the agency's
    voluntary Automated Cybersecurity Evaluation Toolbox maturity
    assessment, the new ISE procedures will assist the NCUA in protecting
    the credit union system from cyberattacks.
        In addition, the NCUA's recently implemented cyber incident
    reporting rule has proven to be helpful to the agency and credit union
    industry. \7\ The final rule requires a federally insured credit union
    to report a substantial cyber incident to the NCUA as soon as possible
    but no later than 72 hours after the credit union reasonably believes a
    reportable cyber incident has occurred. In the first 30 days after the
    rule became effective, the NCUA received 146 incident reports, more
    than it had received in total in the previous year. More than 60
    percent of these incident reports involve third-party service providers
    and credit union service organizations (CUSOs).
    ---------------------------------------------------------------------------
         \7\ 12 CFR Part 748.
    ---------------------------------------------------------------------------
        The NCUA also actively communicates with credit unions about the
    increased likelihood of cyberattacks resulting from geopolitical and
    other cyber events. Credit unions of all sizes are a part of the U.S.
    critical infrastructure and should implement appropriate controls in
    the technology they use to deliver member services.
    Maintaining Consumer Financial Protection
        An important part of the NCUA's mission is to examine credit unions
    with less than $10 billion in assets for compliance with consumer
    financial protection laws. The agency's consumer compliance efforts are
    integral to maintaining a safe-and-sound credit union system.
        In 2023, the agency's consumer financial protection supervisory
    priorities have included overdraft protection, fair lending,
    residential real estate appraisal bias, and Truth in Lending Act and
    Fair Credit Reporting Act compliance. The NCUA also prioritized
    examining credit union compliance with the Flood Disaster Protection
    Act, including disclosure requirements.
        In addition, the agency increased its review of overdraft programs
    and nonsufficient funds fee practices at credit unions to assess
    whether providing those services and charging the fees are potentially
    unfair practices. The NCUA's supervision of the services aims to create
    a more equitable system that supports financial stability for credit
    union members, improves transparency, and advances the statutory
    mission of credit unions to meet the credit and savings needs of their
    members, especially those of modest means. \8\
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         \8\ 12 U.S.C. 1751.
    ---------------------------------------------------------------------------
        Furthermore, the NCUA conducts targeted fair lending examinations
    and supervision at Federal credit unions to assess compliance with
    Federal fair lending laws and regulations. These reviews are critical
    to identifying discrimination and fostering financial inclusion. In
    August 2023, the NCUA encouraged the industry to review and comply with
    previously issued guidance addressing prohibited discriminatory
    practices in automated underwriting systems. Specifically, the agency
    encouraged credit unions to review system parameters to ensure
    compliance with the Equal Credit Opportunity Act and its implementing
    regulation.
        In addition to appraisal bias oversight examinations, the NCUA
    joined with the other Federal Financial Institution Examination Council
    agencies in June to issue proposed guidance for reconsideration of
    value for residential real estate valuations. The proposed guidance
    advises on policies that financial institutions may implement to allow
    consumers to provide information that may not have been considered
    during an appraisal or if deficiencies are identified in the original
    appraisal.
        As part of its consumer financial protection efforts, the NCUA's
    Consumer Assistance Center also resolves consumer complaints against
    Federal credit unions with total assets up to $10 billion and, in
    certain instances, federally insured, State-chartered credit unions. In
    2022, the Consumer Assistance Center responded to 10,589 written
    complaints, 1,842 inquiries, and 30,232 telephone calls from consumers
    and credit unions concerning consumer financial protection regulations.
        Finally, the NCUA regularly presents webinars promoting financial
    literacy and financial inclusion. Over the past year, the agency has
    hosted webinars on appraisal bias, elder financial abuse, and minority
    depository institutions. In addition, the agency participates in
    national financial literacy initiatives, including the interagency
    Financial Literacy and Education Commission.
    Supporting Minority Depository Institutions
        Supporting minority depository institution (MDI) credit unions is a
    longstanding priority for the NCUA. MDI credit unions represent
    approximately 10 percent of federally insured credit unions, and there
    are presently 498 such credit unions. These MDIs have more than five
    million members and exceed $66 billion in assets.
        In 2015, the NCUA established its MDI Preservation Program and has
    since sought new ways to assist MDI credit unions, their members, and
    the communities they serve. In 2022, the NCUA launched the Small Credit
    Union and MDI Support Program, allocating resources to assist MDIs in
    addressing operational challenges such as staff training, examinations,
    and improving earnings. In 2023, the NCUA allocated 10,000 staff hours
    across its three regional offices for the program.
        This year, the agency also issued customized guidance to examiners
    to provide insights into MDIs' unique business models and members'
    needs. The guidance assists examiners in understanding MDIs' distinct
    business model compared to other mainstream financial institutions by
    providing instruction on how to use MDI peer metrics instead of
    traditional peer metrics.
        Notably, while MDIs tend to be smaller institutions, they have
    relatively strong financial performance. As of the end of the second
    quarter of this year, MDIs averaged about $133 million in total assets,
    yet their return on average assets and net worth ratios were higher
    than federally insured credit unions overall and equal to credit unions
    with assets exceeding $1 billion. Meanwhile, their charge-off levels
    were consistent with the levels reported for both larger credit unions
    and credit unions overall.
        Congress recently authorized all MDIs to be eligible for Community
    Development Revolving Loan Fund grants and loans. Previously, MDIs
    required the low-income credit union designation to qualify. In the
    2023 grant round, 42 MDIs received more than $1.4 million in technical
    assistance grants. The amount of funding MDIs received was a five-fold
    increase from the level of funding provided in 2022.
        Finally, the NCUA in October hosted an MDI Symposium that discussed
    how the agency can better serve these institutions. The MDI Symposium
    brought together MDI credit unions and industry stakeholders to learn
    about the challenges faced by MDIs. Sessions included case studies of
    successful MDI business models for replication. The NCUA plans to
    leverage this information to further support its MDI Preservation
    Program. And, as part of the NCUA's Diversity, Equity, and Inclusion
    Summit for credit unions in early November, the NCUA held a session
    that discussed MDI challenges and strategies for success.
    Advancing Diversity, Equity, and Inclusion
        The NCUA is fully committed to fostering diversity, equity, and
    inclusion (DEI) within the agency and the credit union system.
        The agency uses data from the Federal Employee Viewpoint Survey,
    including the Office of Personnel Management's Diversity, Equity,
    Inclusion, and Accessibility index, to inform its data-driven DEI
    strategies and activities. \9\ The agency's internal practices to
    promote DEI are also wide-ranging. For example, the NCUA's employee
    resource groups serve more than 30 percent of agency staff, surpassing
    the industry standard membership goal of 10 percent. Further, the
    NCUA's special emphasis program educates staff on cultural diversity
    and provides dedicated support for employees and managers with
    disabilities.
    ---------------------------------------------------------------------------
         \9\ Office of Personnel Management, ``U.S. Office of Personnel
    Management Releases Government-wide Diversity, Equity, Inclusion, and
    Accessibility Annual Report'', news release, February 15, 2023. https:/
    /www.opm.gov/news/releases/2023/02/release-us-office-of-personnel-
    management-releases-government-wide-diversity-equity-inclusion-and-
    accessibility-annual-report/
    ---------------------------------------------------------------------------
        In addition, the NCUA routinely recruits employees with diverse
    backgrounds and seeks to ensure broad applicant pools for vacancies.
    These diversity recruitment efforts are aimed at attracting and
    retaining highly qualified individuals from underrepresented groups,
    including Hispanics and candidates with disabilities. In 2023, the NCUA
    conducted a targeted barrier analysis to identify hiring and retention
    challenges for women and Hispanic employees. In addition, the agency
    has consistently exceeded the Federal employment rate goals for
    employees with disabilities and targeted disabilities since 2017. \10\
    Slightly more than 59 percent of the NCUA's managers are women.
    ---------------------------------------------------------------------------
         \10\ The Office of Personnel Management defines ``targeted
    disabilities'' on Standard Form-256, Self-Identification of Disability.
    Targeted disabilities include developmental disabilities (e.g., autism
    spectrum disorder; traumatic brain injury); deaf or serious difficulty
    hearing (e.g., benefiting from American Sign Language, CART, hearing
    aids, a cochlear implant and/or other supports); blind or serious
    difficulty seeing even when wearing glasses; missing extremities (arm,
    leg, hand and/or foot); significant mobility impairments that benefit
    from the use of a wheelchair, scooter, walker, leg brace(s) and/or
    other supports; partial or complete paralysis; epilepsy or other
    seizure disorders; intellectual disabilities; significant psychiatric
    disorders (e.g., bipolar disorder, schizophrenia, PTSD, or major
    depression; dwarfism; and significant disfigurement (e.g., caused by
    burns, wounds, accidents, or congenital disorders). See https://
    www.opm.gov/forms/pdf-fill/sf256.pdf.
    ---------------------------------------------------------------------------
        The NCUA has additionally built a diverse supplier network to
    obtain innovative solutions and the best value, particularly in
    technology and IT solutions. During 2022, the agency awarded $32.8
    million of reportable contract dollars to minority and women-owned
    businesses. That figure represents 45 percent of the agency's
    contracting dollars, an increase of 8 percentage points from the prior
    year.
        Credit unions may also assess their DEI policies and programs
    through a voluntary credit union diversity self-assessment offered
    annually. \11\ Credit union submissions of their self-assessment have
    no bearing on their CAMELS rating, and examiners cannot access the
    data. The NCUA reports credit union diversity data only in the
    aggregate. The agency encourages credit unions to use this tool to
    support their DEI efforts.
    ---------------------------------------------------------------------------
         \11\ The NCUA developed the voluntary Credit Union Diversity Self-
    Assessment in 2016 to comply with Section 342 of the Dodd-Frank Wall
    Street Reform and Consumer Protection Act of 2010, which requires
    certain agencies to assess the diversity and inclusion practices of
    their respective regulated entities (credit unions, in the NCUA's
    case).
    ---------------------------------------------------------------------------
        In 2022, 481, or 10 percent of all credit unions, submitted a self-
    assessment. The figure represents an all-time high for submissions to
    the NCUA. Of those submissions, 302 were federally chartered credit
    unions, 178 were federally insured and State-chartered, and one was a
    non-federally insured, State-chartered credit union. The number of
    CUDSA responses in 2022 is twice as much as the 240 self-assessments
    submitted in 2021.
        Finally, to support credit union accomplishments in DEI and provide
    further guidance, the NCUA hosted its fourth DEI Summit in Washington,
    DC, in early November. This now annual event provided a forum for
    hundreds of credit union stakeholders to network, share best practices,
    and meet with thought leaders on ways to expand their DEI efforts. The
    event also highlighted the importance of allyship in helping to achieve
    the NCUA's and credit unions' DEI goals and improve the financial
    prospects and futures of families across the country.
    Rulemaking Activities
        Since May, the NCUA Board has engaged in several rulemakings on
    topics like MDI preservation, member expulsion, financial innovation,
    fair hiring, and charitable donations. These rulemakings have aimed to
    implement laws required by Congress and strengthen the credit union
    system.
        In May, the NCUA Board approved a proposed rule that would add
    ``war veterans' organizations'' to the definition of a ``qualified
    charity'' that a Federal credit union may contribute to using a
    charitable donation account. The NCUA Board approved the proposed rule
    noting the attributes of ``veterans' organizations'' as defined by
    section 501(c)(19) of the Internal Revenue Code are aligned with the
    purposes of the current charitable donation account rule. A ``qualified
    charity'' is a section 501(c)(3) entity defined by the Internal Revenue
    Code and must be both a nonprofit and be organized for a charitable
    purpose. The final rule will be considered on November 16.
        In June, the NCUA Board approved proposed changes to the
    interpretive ruling and policy statement on the agency's Minority
    Depository Institution Preservation Program. The proposal would amend
    an existing interpretive ruling and policy statement to update the
    program's features, clarify the requirements for a credit union to
    receive and maintain an MDI designation, and reflect the transfer of
    the MDI Preservation Program administration from the agency's Office of
    Minority and Women Inclusion to its Office of Credit Union Resources
    and Expansion. Proposed amendments to the interpretive ruling and
    policy statement also include incorporating recent program initiatives,
    providing examples of technical assistance an MDI may receive,
    establishing a new standard for MDIs to assess their designation
    periodically, and updating how the NCUA will review an MDI's
    designation status, among other changes. This rule is pending.
        Additionally, the Board finalized a rule in July to implement
    requirements of the Credit Union Governance Modernization Act of 2022.
    \12\ This regulation streamlines procedures for credit unions to expel
    a member in cases of serious misconduct.
    ---------------------------------------------------------------------------
         \12\ Pub. L. 117-103 (Mar. 15, 2022).
    ---------------------------------------------------------------------------
        In September, the NCUA Board approved a financial innovation final
    rule that provides flexibility for federally insured credit unions to
    utilize advanced technologies and opportunities offered by the
    financial technology sector. The final rule specifically provides
    credit unions with options to participate in loans acquired through
    indirect lending arrangements and financial technology. With the
    adoption of this final rule, the limits previously found in the NCUA's
    regulations are replaced with policy, due diligence, and risk-
    management requirements that can be tailored to match each credit
    union's risk levels and activities.
        Lastly, the NCUA Board in October approved a proposed rule that
    would incorporate the NCUA's Second Chance Interpretive Ruling and
    Policy Statement, and statutory prohibitions imposed by Section 205(d)
    of the Federal Credit Union Act into the agency's regulations. This
    proposed rule would allow people convicted of certain minor offenses to
    work in the credit union industry without applying for the NCUA Board's
    approval. It would also amend requirements governing the conditions
    under which newly chartered or troubled federally insured credit unions
    must notify the NCUA of proposed changes to their board of directors,
    committee members, or senior executive staff. The comment period closes
    on January 8, 2024.
    Legislative Requests
        While the credit union system continues to perform well overall,
    several amendments to the Federal Credit Union Act would provide the
    NCUA with greater flexibility to effectively regulate the credit union
    system and protect the Share Insurance Fund in light of an evolving
    economic environment, a changing marketplace, and technological
    advancements.
    Central Liquidity Facility Reforms
        As noted previously, the NCUA Board unanimously supports a
    statutory change to restore the ability of corporate credit unions to
    serve as CLF agents on behalf of a subset of their member credit
    unions. Such legislation would better allow the CLF to serve as a shock
    absorber for liquidity events within the credit union system.
        On February 28, 2023, lawmakers introduced bipartisan legislation
    that would allow corporate credit unions to purchase CLF capital stock
    on behalf of a subset of their members. \13\ This legislation would
    permit corporate credit unions to contribute capital to provide
    coverage for smaller members with less than $250 million in assets.
    Liquidity risks within the credit union system are rising, and timely
    consideration of this bill would better protect the credit union system
    from future liquidity events.
    ---------------------------------------------------------------------------
         \13\ S.544, 118th Cong. 1st Sess. (2023).
    ---------------------------------------------------------------------------
    Restoration of Third-Party Vendor Authority
        The risks resulting from the NCUA's lack of vendor authority are
    real, expanding, and potentially dangerous for the Nation's financial
    infrastructure. Other independent entities, including the Government
    Accountability Office, the Financial Stability Oversight Council, and
    the NCUA's Office of Inspector General, have identified this deficiency
    as inhibiting the NCUA from fulfilling its mission to safeguard credit
    union members and the financial system. And, it is the NCUA Board's
    continuing policy to seek third-party vendor authority from Congress.
    \14\
    ---------------------------------------------------------------------------
         \14\ 86 FR 59289.
    ---------------------------------------------------------------------------
        The agency is working within its current authority to address this
    growing regulatory blind spot, but it is evident that additional
    authority is needed. There has also been a shift in credit union
    leaders' understanding of the value of the NCUA having the same vendor
    authority as the Federal banking agencies. The benefits include credit
    union access to NCUA examination information when conducting due
    diligence of vendors, fewer requests from the NCUA to credit unions to
    intervene with vendors experiencing problems, and fewer losses to the
    Share Insurance Fund.
        The potential for such resulting losses to the Share Insurance Fund
    is real. The NCUA's Office of Inspector General stated that between
    2008 and 2015, nine CUSOs contributed to material losses to the Share
    Insurance Fund. The report noted one of the CUSOs caused losses in 24
    credit unions, some of which failed. According to NCUA staff
    calculations, at least 73 credit unions incurred losses between 2007
    and 2020 as losses at CUSOs roll onto credit union ledgers and lead to
    liquidations. \15\
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         \15\ Office of Inspector General, OIG-20-07, ``Audit of the NCUA's
    Examination and Oversight Authority Over Credit Union Service
    Organizations and Vendors'', www.ncua.gov/files/audit-reports/oig-
    audit-cusos-vendors-2020.pdf.
    ---------------------------------------------------------------------------
        The absence of third-party vendor examination authority limits the
    NCUA's ability to assess and mitigate potential risks associated with
    these vendors. Vendors typically decline these requests or refuse to
    implement recommended actions. This limitation exacerbates any exposure
    credit unions have to the operational, cybersecurity, and compliance
    risks that can arise from these relationships. Without the authority to
    enforce recommended corrective actions, the NCUA is unable to
    effectively protect credit unions and their members.
        Furthermore, the growing reliance on third-party services in the
    credit union industry poses a systemic risk to the credit union system.
    Five core banking processors, for example, handle more than 90 percent
    of the credit union system's assets. A failure of one of these critical
    third parties could cause hundreds of credit unions and potentially
    tens of millions of their members to lose access to their funds
    simultaneously. Such a vendor failure, in turn, may result in a loss of
    confidence in the financial sector. Ensuring proper oversight is
    imperative, as CUSOs and third-party vendors are poised to capitalize
    on financial institutions' growing appetite for artificial intelligence
    and real-time payment services.
        If granted third-party vendor authority, the NCUA would implement a
    risk-based examination program focusing on services that relate to
    safety and soundness, cybersecurity, Bank Secrecy Act and Anti-Money
    Laundering Act compliance, consumer financial protection, and areas
    posing significant financial risk for the Share Insurance Fund.
    Additional Flexibility for Administering the Share Insurance Fund
        The recent turmoil in the banking sector, growing liquidity risks
    within the credit union system, and rising interest rate risk all
    highlight the need for the NCUA to have additional flexibility for
    administering the Share Insurance Fund.
        Specifically, the NCUA requests amending the Federal Credit Union
    Act to remove the 1.50 percent ceiling for the Share Insurance Fund's
    equity ratio from the current statutory definition of ``normal
    operating level,'' which limits the ability of the Board to establish a
    higher normal operating level for the Share Insurance Fund. A statutory
    change should also remove the limitations on assessing Share Insurance
    Fund premiums when the equity ratio of the Share Insurance Fund is
    greater than 1.30 percent and if the premium charged exceeds the amount
    necessary to restore the equity ratio to 1.30 percent. \16\
    ---------------------------------------------------------------------------
         \16\ As part of the Federal Deposit Insurance Reform Act of 2006,
    Congress ended the prohibition on the FDIC's charging of risk-based
    premiums to well-capitalized institutions (which constituted most of
    the industry) when the reserve ratio was at or above its target. See
    section 2107(a) of Pub. L. No. 109-171 (Feb. 8, 2006). Compare with
    1782(c)(2)(B) (providing in relevant part: ``The [NCUA] Board may
    assess a premium charge only if--(i) the [Share Insurance] cont'd--
    Fund's equity ratio is less than 1.30 percent; and (ii) the premium
    charge does not exceed the amount necessary to restore the equity ratio
    to 1.30 percent.'').
    ---------------------------------------------------------------------------
        Together, these amendments would bring the NCUA's statutory
    authority over the Share Insurance Fund more in line with the FDIC's
    authority as it relates to administering the Deposit Insurance Fund.
    These amendments would also better enable the NCUA Board to proactively
    manage the Share Insurance Fund by building reserves during economic
    upturns so that sufficient money is available during economic
    downturns. This more countercyclical approach to managing the Share
    Insurance Fund would better ensure that credit unions will not need to
    impair their one percent contributed capital deposit or pay premiums
    during times of economic stress, when they can least afford it.
    Conclusion
        The NCUA stands ready to address the impact of the evolving
    economic and business cycles within the credit union system. The NCUA
    will continue to monitor credit union performance and coordinate with
    other Federal financial institution regulators, as appropriate, to
    ensure the overall resiliency and stability of our Nation's financial
    services system and economy.
        Thank you again for the invitation to testify about the NCUA's
    programs and operations. I look forward to your questions.
                                     ______

                       PREPARED STATEMENT OF MICHAEL HSU
         Acting Comptroller, Office of the Comptroller of the Currency
                               November 14, 2023
    Introduction
        I am pleased to testify before the Committee on Banking, Housing,
    and Urban Affairs to provide an update on the activities underway at
    the Office of the Comptroller of the Currency (OCC) as we seek to
    ensure that national banks and Federal savings associations operate in
    a safe and sound manner, provide fair access to financial services,
    treat customers fairly, and comply with applicable laws and
    regulations.
    ---------------------------------------------------------------------------
        Statement Required by 12 U.S.C. 250: The views expressed herein
    are those of the Office of the Comptroller of the Currency and do not
    necessarily present the views of the President.
    ---------------------------------------------------------------------------
        The OCC charters, supervises, and regulates more than 1,050
    national banks, Federal savings associations and Federal branches and
    agencies of foreign banks (collectively, ``banks''). These institutions
    range in size from very small community banks to the largest, most
    globally active banks operating in the United States. The vast majority
    of these institutions have less than $1 billion in assets, while 55
    have greater than $10 billion in assets. Together, OCC-supervised
    financial institutions hold more than $15 trillion in assets--almost 66
    percent of all assets held in commercial U.S. banks.
        My written statement provides a general overview of the State of
    the Federal banking system, an update on the OCC's work to advance the
    four critical agency priorities that I initiated after becoming Acting
    Comptroller more than 2 years ago, and a description of recent key
    regulatory developments.
    State of the Federal Banking System
        The overall condition of the Federal banking system is sound.
    Despite the significant market stresses earlier this year which started
    with the failures and liquidation of several State-chartered banks and
    a challenging interest rate environment, banks in the aggregate
    continue to have strong levels of regulatory capital and healthy levels
    of profitability while maintaining sufficient liquidity buffers.
        The OCC closely monitors the condition of the institutions it
    supervises and engages directly with them to ensure they are
    appropriately managing their risks. The OCC provides heightened
    supervisory attention to banks with elevated levels of risk, such as
    high levels of unrealized losses and uninsured deposits, or a
    significant concentration in commercial real estate exposure.
        Banks must remain vigilant in managing risk. The OCC's Bank
    Supervision Operating Plan for 2024 \1\ summarizes the agency's exam
    priorities for next year and highlights asset liability management,
    credit risk and allowance for credit losses, cybersecurity, operational
    risk, and consumer compliance risk, among others, as key areas of
    focus.
    ---------------------------------------------------------------------------
         \1\ See: Fiscal Year 2024 Bank Supervision Operating Plan, Office
    of the Comptroller of the Currency, Committee on Bank Supervision
    (occ.gov).
    ---------------------------------------------------------------------------
    Update on Agency Priorities
    Guarding Against Complacency by Banks
        Guarding against complacency is essential to building and
    maintaining trust in the banking system. It has been a priority for the
    OCC since I took over as the Acting Comptroller in May of 2021.
        The large bank failures in the spring of this year and resulting
    market disruption serve as a reminder that stress at banking
    organizations can affect financial stability and public trust in the
    Nation's financial system. In particular, this highlighted the dangers
    of complacency by bank management and boards of directors.
        While there has been relative calm since then, the OCC expects the
    banks we supervise to remain vigilant and stay ``on the balls of their
    feet'' regarding risk management. Banks need to successfully manage
    traditional, ``blocking-and-tackling'' risks, such as credit,
    liquidity, and interest rate risks, as well as prepare for emerging
    risks and tail risk events.
        To assist banks, the OCC has updated guidance and provided
    transparency around our expectations. For example, in response to
    increasing risk in commercial real estate, the OCC, Federal Reserve
    Board, the FDIC, and the National Credit Union Administration, in
    consultation with State bank and credit union regulators, published the
    ``Policy Statement on Prudent Commercial Real Estate (CRE) Loan
    Accommodations and Workouts''. \2\ The statement replaces the 2009
    interagency guidance on CRE loan workouts and reflects the OCC's
    commitment to build trust by collaborating with other agencies to
    ensure consistent supervision and to provide timely guidance that
    reflects current best practices.
    ---------------------------------------------------------------------------
         \2\ See OCC Bulletin 2023-23, ``Credit Administration: Final
    Interagency Policy Statement on Prudent Commercial Real Estate Loan
    Accommodations and Workouts''.
    ---------------------------------------------------------------------------
        In addition, the Federal Financial Institutions Examination Council
    (FFIEC) also updated several sections of the FFIEC BSA/AML Examination
    Manual to reinforce the risk-focused approach to BSA/AML examinations.
    The updates reflect my commitment, as the current Chair of the FFIEC,
    to improving the effectiveness of the BSA/AML and reducing undue
    burdens on banks. \3\
    ---------------------------------------------------------------------------
         \3\ See OCC Bulletin 2023-26, ``Bank Secrecy Act/Anti-Money
    Laundering: Updated Sections of the FFIEC BSA/AML Examination Manual''.
    ---------------------------------------------------------------------------
    Reducing Inequality in Banking
        Another priority essential to building and maintaining trust in the
    banking system is reducing inequality in banking. Ensuring that
    financial services are offered responsibly and fairly takes continued
    effort and vigilance by banks, regulators, members of the public and
    other stakeholders. Public trust in banks can enable a virtuous cycle
    between banks and the communities they serve.
        On October 24, 2023, the Federal banking agencies issued an
    interagency final rule implementing the Community Reinvestment Act
    (CRA). The CRA was enacted in 1977 to prevent redlining and to
    encourage banks and savings associations to help meet the credit needs
    of all segments of the communities in which they operate, especially
    low- and moderate-income (LMI) neighborhoods and individuals. The final
    rule adopted by the Federal banking agencies modernizes and strengthens
    the CRA. It modernizes the CRA by recognizing banking activities that
    take place beyond physical branches and ATMs, being significantly more
    data driven and objective, and providing for greater transparency. It
    strengthens the CRA by addressing concerns related to ``grade
    inflation'' in CRA ratings, and by better incentivizing CRA lending and
    investments in LMI communities.
        The rule will provide clarity and consistency for all banks, but
    also tailors evaluations and data collection to bank size so that
    community banks do not have additional burden. The agencies also
    responded to commenters by providing a 24-month phase-in period to
    allow banks and regulators time to prepare for it. The OCC will now
    turn its efforts to perhaps the most important step toward reducing
    inequality, which is the implementation of the new rule.
        Earlier this year, we issued guidance to address the risks
    associated with overdraft protection programs. These programs can
    present a variety of risks, including compliance, operational,
    reputation, and credit risks. In particular, the guidance highlighted
    certain practices that may present heightened risk of violating Federal
    prohibitions against unfair or deceptive acts or practices. These
    include assessing overdraft fees on ``authorize positive, settle
    negative'' transactions and charging a fee each time an item is
    presented for payment after being returned for nonsufficient funds. It
    also describes practices that may help banks control risks with
    overdraft programs, as well as provides information about programs that
    assist consumers in meeting short-term liquidity and cash-flow needs.
        This fall, the OCC hosted a public Special Purpose Credit Program
    (SPCP) Roundtable with the Department of Housing and Urban Development,
    the Federal Housing Finance Agency, and the Consumer Financial
    Protection Bureau to highlight the availability of SPCPs to help meet
    the credit needs of eligible individuals. The roundtable brought
    together diverse stakeholders for a discussion about how SPCPs can help
    meet the credit needs of underserved consumers and reduce the racial
    wealth gap. SPCPs are a long-established tool under the Equal Credit
    Opportunity Act and its implementing Regulation B, and a way for
    creditors to expand access to credit for economically or socially
    disadvantaged consumers and commercial enterprises. The roundtable
    served to support banks' exploration around the establishment or
    expansion of such programs.
        I also want to recognize the continued progress of the OCC's
    Project REACh--or Roundtable for Economic Access and Change--which is
    focused on removing barriers to financial inclusion. For instance,
    initiatives targeting credit invisibles are bringing new entrants into
    the mainstream financial system and providing them with credit scores
    and access to credit. Investments of talent and financial resources in
    Minority Depository Institutions have resulted in increased
    partnerships, exchange programs, training and capital. Efforts to
    promote home ownership for the underserved and for those on tribal
    lands are underway, as are investments in minority small businesses and
    awareness of special purpose credit programs.
    Adapting to Digitalization
        Banks' relationships with third parties, including financial
    technology (fintech) companies, continue to expand. The use of third
    parties has significant potential benefits, but poor third-party risk
    management can hurt consumers, weaken banks, and contribute to an
    unlevel playing field.
        Recently, the OCC and other regulators jointly issued ``Interagency
    Guidance on Third-Party Relationships: Risk Management''. \4\ This
    document builds on the OCC's guidance from 2013 and reminds banks of
    their responsibility to operate in a safe and sound manner and in
    compliance with applicable laws and regulations regardless of whether
    their activities are performed in-house or outsourced. The guidance
    also recognizes that not all third-party relationships reflect the same
    level of risk and therefore not all require the same level of risk
    management.
    ---------------------------------------------------------------------------
         \4\ See OCC News Release 2023-53, ``Agencies Issue Final Guidance
    on Third-Party Risk Management''.
    ---------------------------------------------------------------------------
        The OCC recognizes the considerable interest by the banking
    industry in artificial intelligence (AI). To date, banks have generally
    approached machine learning and AI cautiously across a range of use
    cases The potential benefits of more widespread adoption of AI are
    significant, but so are the risks, which we expect banks to manage
    appropriately.
        In the digital asset space, attention is shifting from crypto to
    the tokenization of real-world assets and liabilities. In contrast to
    crypto, tokenization is driven by solving real-world settlement
    problems and can be developed in a safe, sound, and fair manner. Next
    February, the OCC will host a public symposium on tokenization to take
    stock of developments, help enable strong foundations, and promote
    public discussion.
    Managing Climate-Related Financial Risks to the Federal Banking System
        On September 24, 2023, the OCC, along with the Federal Reserve and
    FDIC, approved principles for climate-related financial risk management
    for large banks. These principles build upon the OCC's initiative as
    the first U.S. Federal banking agency to propose for public comment
    principles for large banks nearly 2 years ago.
        The principles are focused exclusively on risk management of
    climate-related financial risks. They are needed because the increased
    frequency and severity of extreme weather events impact individuals,
    businesses, and communities. As with all risks, large banks need to be
    ready and to have effective risk management capabilities. At the same
    time, these principles recognize and respect that industrial policy and
    climate policy are outside of the scope of bank safety and soundness.
    The principles do not tell bankers what customers or businesses they
    may or may not bank. Rather, they clarify how large banks can maintain
    effective risk management and keep their balance sheets sound and
    continue to be a source of strength to their customers and communities
    through a range of scenarios.
        To date, the OCC has worked with the large banks it supervises to
    better understand their work to identify, manage and control climate-
    related financial risks. Going forward, we plan to monitor the
    development of large banks' climate-related financial risk framework
    for safety and soundness and engage with bank management and other
    regulators to better understand the challenges banks face in this
    effort.
        As with all emerging risks, it is critical that banks prepare for
    climate-related financial risks. They should not wait for disaster to
    strike before they act--prudence demands that regulators and the
    industry adapt as risks emerge. This philosophy underpins these
    principles, as well as prudent risk management and our mission to
    ensure bank safety and soundness.
    The OCC Supports Community Banks and MDIs
        The OCC is committed to promoting a vibrant and diverse banking
    system to match and support the diversity of the U.S. economy. The
    banking system needs to be diverse in order to meet the wide range of
    individual consumer and community financial needs across this country.
    A diverse banking system also enables healthy competition and the
    ability to adapt to change and adversity. A vibrant and diverse system
    is comprised of a broad spectrum of institutions, including community
    banks and minority depository institutions, community development
    financial institutions, mutual savings associations, and FSAs.
    Supporting them is critical to our mission and vision.
        We are mindful of concerns from community bankers that requirements
    for large banks should not trickle down to smaller banks, as such
    requirements can pose an undue burden and unnecessarily tie up scarce
    personnel and other resources. The OCC will remain diligent in guarding
    against such outcomes and tailor our supervisory expectations while
    ensuring the Federal banking system remains safe, sound, and fair. We
    plan to continue to engage directly with each community bank that we
    supervise, and our two Federal Advisory Committees, the Minority
    Depository Institution Advisory Committee, and the Mutual Savings
    Association Advisory Committee, will continue to assist in this effort.
    Additional Recent Key Regulatory Developments
        The OCC has been engaged in developing and finalizing several
    proposals to promote the resiliency, resolvability, and inclusiveness
    of the Federal banking system.
    Revisions to Capital Rules for Large Banks
        Last July, the OCC joined the Federal banking agencies to issue a
    proposal to update the risk-based capital requirements applicable to
    large banking organizations and banking organizations with significant
    trading activity. This so-called ``Basel endgame'' NPR is intended to
    replace the current risk-based capital framework, which was adopted in
    response to the 2008-2009 financial crisis and helped facilitate the
    recapitalization of large banks after the crisis. The purpose of the
    NPR is to finish the job by establishing a durable risk-based capital
    framework for large banks that adequately captures all material risks
    and utilizes methodologies that are consistent and reliable.
        Like building codes, we need our capital framework to be prudent
    and robust, so that large banks--like large buildings--can withstand a
    wide range of shocks and stresses. Gathering public input on the
    proposal is critical. We will consider all comments, including
    alternative approaches. The comment period for the proposal was
    recently extended until January 16, 2024.
    Enhancements to Long-Term Debt Requirement for Large Banks
        On August 29, 2023, I approved an interagency proposal to establish
    a long-term debt requirement for large banks with $100 billion or more
    in assets. The purpose of the rule is to help ensure that a large
    bank's losses are borne by its investors in the first instance. The
    failures of Silicon Valley Bank and Signature Bank earlier this year
    highlight the importance of securing this safeguard for all large
    banks, not just the global systemically important banks (G-SIBs). As
    with the Basel endgame NPR, I look forward to reviewing the comments
    provided on this rulemaking.
    Conclusion
        I am committed to ensuring that OCC-supervised banks operate in a
    safe, sound, and fair manner, meet the credit needs of their
    communities, treat all customers fairly, and comply with laws and
    regulations. As we work to ensure that the Federal banking system
    remains a source of strength to the U.S. economy, we will continue to
    advance key agency priorities to ensure the Federal banking system is
    well positioned to respond to community and consumer needs well into
    the future.
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