[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
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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
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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
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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
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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
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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).
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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.
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\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.
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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.
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\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).
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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\
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\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.
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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\
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\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.
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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\
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\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).
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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.
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\21\ Regulatory Capital Rule: Large Banking Organizations and
Banking Organizations With Significant Trading Activity, 88 FR 64028
(September 18, 2023).
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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\
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\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.
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\23\ Section 18(c)of the FDIC Act, 12 U.S.C. 1828(c).
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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.
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\24\ Request for Information and Comment on Rules, Regulations,
Guidance, and Statements of Policy Regarding Bank Merger Transactions,
87 FR 18368 (March 31, 2022).
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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.
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\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).
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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.
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\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.
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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\
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\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.
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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\
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\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.
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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.
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\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.
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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\
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\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.
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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.
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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.
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\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.
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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.
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\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.
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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.
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\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.
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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.
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\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.
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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\
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\5\ 12 CFR Part 741.12.
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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).
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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).
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\7\ 12 CFR Part 748.
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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.
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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.
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\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/
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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.
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\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.
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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.
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\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).
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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.
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\12\ Pub. L. 117-103 (Mar. 15, 2022).
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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.
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\13\ S.544, 118th Cong. 1st Sess. (2023).
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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\
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\14\ 86 FR 59289.
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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.
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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\
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\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.'').
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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.
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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.
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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.
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\1\ See: Fiscal Year 2024 Bank Supervision Operating Plan, Office
of the Comptroller of the Currency, Committee on Bank Supervision
(occ.gov).
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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.
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\2\ See OCC Bulletin 2023-23, ``Credit Administration: Final
Interagency Policy Statement on Prudent Commercial Real Estate Loan
Accommodations and Workouts''.
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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\
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\3\ See OCC Bulletin 2023-26, ``Bank Secrecy Act/Anti-Money
Laundering: Updated Sections of the FFIEC BSA/AML Examination Manual''.
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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.
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\4\ See OCC News Release 2023-53, ``Agencies Issue Final Guidance
on Third-Party Risk Management''.
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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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