[Senate Hearing 118-564]
[From the U.S. Government Publishing Office]
S. Hrg. 118-564
OVERSIGHT OF U.S. FINANCIAL REGULATORS:
ACCOUNTABILITY AND FINANCIAL STABILITY
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING THE AGENCIES THAT ARE RESPONSIBLE FOR PROTECTING
OUR BANKING SYSTEM AND MAKING SURE IT SERVES ALL AMERICANS
__________
MAY 16, 2024
__________
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
60-406 PDF WASHINGTON : 2026
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
Elisha Tuku, Chief Counsel
Catherine Fuchs, Republican Policy Director
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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THURSDAY, MAY 16, 2024
Page
Opening statement of Chair Brown................................. 1
Prepared statement....................................... 36
Opening statements, comments, or prepared statements of:
Senator Scott................................................ 3
Prepared statement....................................... 37
WITNESSES
Michael Barr, Vice Chair for Supervision, Federal Reserve........ 5
Prepared statement........................................... 38
Responses to written questions of:
Senator Scott............................................ 55
Senator Warren........................................... 58
Senator Warnock.......................................... 60
Senator Fetterman........................................ 62
Senator Hagerty.......................................... 62
Senator Britt............................................ 64
Martin J. Gruenberg, Chair, Federal Deposit Insurance Corporation 7
Prepared statement........................................... 40
Responses to written questions of:
Senator Scott............................................ 66
Senator Warren........................................... 76
Senator Warnock.......................................... 81
Senator Hagerty.......................................... 88
Senator Britt............................................ 88
Michael Hsu, Acting Comptroller, Office of the Comptroller of the
Currency....................................................... 8
Prepared statement........................................... 50
Responses to written questions of:
Senator Scott............................................ 89
Senator Warren........................................... 93
Senator Warnock.......................................... 96
Senator Britt............................................ 97
Additional Material Supplied for the Record
Federal Reserve's Semiannual Supervision and Regulation Report... 99
Statement submitted by ACU....................................... 134
Statement submitted by anonymous FDIC employees.................. 143
Letter submitted by DCUC......................................... 144
Letter submitted by IWF and IWV.................................. 148
Letter submitted by Kevin Burnett, former financial institution
examiner....................................................... 151
Letter submitted by Linda Miller, CEO Audient Group, LLC......... 155
Letter submitted by Michael Williams, Senior Executive, FDIC..... 156
(iii)
OVERSIGHT OF U.S. FINANCIAL REGULATORS:
ACCOUNTABILITY AND FINANCIAL STABILITY
----------
THURSDAY, MAY 16, 2024
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10 a.m., via Webex and in room 538,
Dirksen Senate Office Building, Hon. Sherrod Brown, Chair of
the Committee, presiding.
OPENING STATEMENT OF CHAIR SHERROD BROWN
Chair Brown. The Committee on Banking, Housing, and Urban
Affairs will come to order.
We will hear testimony today from three key financial
regulators whose agencies are responsible for protecting our
banking system and making sure it serves all Americans. Hearing
comes 1 week after release of the independent review of sexual
harassment and workplace misconduct at the FDIC.
The review made clear that FDIC has serious, long-running
problems. For far too long its leaders failed to take action to
protect the FDIC's most valuable resource, that is, its
workers. The review details episodes of harassment and
discrimination, other misconduct that no one should ever have
to endure, especially in the workplace, and that can never be
tolerated, period.
Chair Gruenberg, you owe workers at the FDIC, this
Committee, and the American people clear answers and decisive
action. That includes your plan for restoring the FDIC's
culture and regaining the trust of your employees, the steps
you will take to put an end to workplace misconduct,
harassment, and discrimination, and to ensure that victims are
not silenced, and how you will ensure that perpetrators are
finally held accountable.
The FDIC can't fulfil its mission of maintaining stability
and public confidence in the Nation's financial system until
the issues raised in the independent review are fixed. Failure
is not an option.
Chair Gruenberg, I hope you recognize this moment for what
it is: a crisis. Every FDIC employee, every American deserves a
workplace free of harassment and discrimination. And the public
should be able to have confidence that the people at this
agency can focus on their jobs.
When workers face a toxic culture, it hurts the agency, it
hurts its mission. Workers don't speak up when they spot
problems if they are afraid of retaliation. It is not a small,
internal problem, it affects the public.
Most Americans don't think much about the FDIC. They
shouldn't have to. That is the whole point, for people to have
confidence that their money is safe in the bank without having
to give it any thought. And that is why the job of this agency
is so crucial.
The FDIC prevented the Great Recession from becoming a
great depression after the 2008 financial crisis. The FDIC's
action was crucial after the collapse of Silicon Valley Bank
and Signature Bank threated to create a domino effect of bank
failures. We need an effective, strong leader at this agency to
ensure that its workers can continue to protect Americans'
hard-earned money and savings.
Chair Gruenberg, it is up to you to prove to the public and
to your employees that you are that leader and are able to
restore confidence at FDIC. The management challenges at FDIC
only make it that much harder for the agency to focus on the
crucial work it is doing, along with the Federal Reserve and
the OCC.
In the last year since the collapse of SVB and Signature
Bank, your agencies have helped make our banking system safer
and more resilient. The Fed, the FDIC, and OCC issued the Basel
III endgame capital proposal to protect Americans from another
financial crisis.
We must ensure the largest banks have enough capital to
prevent another taxpayer-funded Wall Street bailout. That is
what these rules do, and they make sure that banks can continue
to lend to their communities in good times and in bad.
The proposal recognizes systemic importance of large banks,
like Silicon Valley Bank, that are not as big as Wall Street
megabanks but still can do real damage to our economy when they
fail. Of course, the industry and its allies on Capitol Hill
have trotted out the same old tired, and always well-funded,
arguments.
The reality is that the largest banks have been telling
their shareholders and Wall Street analysts that they will be
able to handle the capital rules without a problem. They have
bragged about how they have remained wildly profitable, all the
while comfortably meeting the projected capital levels required
under the proposed rule.
This all sounds familiar. This Committee hosted the CEOs
from the biggest banks last fall. We have done it now 3 years
in a row. Not a single CEO, not a single CEO of the country's
largest banks told us they would be unable to meet the capital
levels required under the proposal. That is why it is
imperative that your agency finalize a strong capital rule that
protects Americans and doesn't reward Wall Street's whining.
The FDIC and OCC are also working to rein in the risky
incentive-based compensation structures that have time and time
again brought our banking system to the brink of collapse. Wall
Street firms set up a system that rewards traders for exactly
the kind of risky behavior that serves no benefit to the
economy and just puts other people's money at risk.
We saw it in 2008. This model essentially tanked the
economy and ruined people's lives. We saw it again with the
failure of SVB last year. This new rule can't go forward
without the Federal Reserve joining the process.
The Fed must know what is at stake. Its own report on
Silicon Valley Bank noted how incentive-based compensation
encouraged excessive risk-taking that eventually led to the
bank's failure.
Mr. Barr, I look forward to seeing the Fed join this effort
as soon as possible. We have talked extensively about the
importance of that. It is also why the Senate must pass our
RECOUP Act, while this--which this Committee passed last year.
Ranking Member and I and our staffs wrote it together, 21-2, to
ensure reckless executives who wreck their banks race real
accountability.
Finally, we need action to address alarming trends in the
banking industry. Over the last several decades, we have lost
thousands of banks, while the largest ones have grown to
control hundreds of billions, or even now, trillions in assets.
A strong merger review process prevents banks from growing
dangerously through acquisitions or mergers.
Americans can't afford mergers that pave the way for banks
to take out competitors, to close branches, to lay off
employees. We have seen that in Louisiana and North Carolina
and South Carolina and South Dakota--you are South Dakota,
right?--and Ohio, and Nevada.
Wall Street bankers--the FDIC have begun to review the
merger process. I expect them to take steps to fix this. Wall
Street bankers crashed the economy in 2008. Americans are still
paying for it more than a decade-and-a-half later. It is why
your agencies and the women and men who work there remain so
important.
It is vital they are able to do their jobs serving the
public free from fear of harassment, free from workplace
misconduct. And ultimately you as leaders are responsible for
what happens at the agencies which you lead.
I expect to hear from Chair Gruenberg specifically on what
you plan to do to make fundamental changes to the FDIC and its
culture.
Senator Scott.
OPENING STATEMENT OF SENATOR TIM SCOTT
Senator Scott. Thank you, Mr. Chairman, and thank you to
the witnesses for being here today.
There is no greater responsibility that we have as public
servants to make sure that we represent the interests of the
American people and that we do it well, that we do it with
character and with integrity. No greater responsibility.
That responsibility starts here and now in addressing what
your employees, Chairman Gruenberg, describe as a hostile,
abusive, and unprofessional workplace.
And Chairman Brown, I think we actually need a single
hearing solely focused on the concerns that the employees of
the FDIC has with the leadership of Chairman Gruenberg. Because
the men and women of the FDIC working to safeguard our
financial security deserve a healthy workplace. They deserve to
be heard, to be seen. They deserve a safe and equitable
workplace. But most of all, they deserve to be treated with
respect.
We have all seen the 200-plus pages of the special report.
We all saw yesterday morning's grilling across the capitol. And
Marty, you have heard me say this to you directly: you should
resign. Your employees do not have confidence in you.
And this is not a single incident. This spans over a
decade-plus of your leadership at the FDIC. So, I don't need to
go into your failures and the complete lack of management while
you have been at the FDIC. I want to talk about the people,
your employees, and what they have done and what they have had
to go through.
How can you justify allowing supervisors to refer to
disabled veterans as Captain McNasty? We are talking about a
veteran who lost part of his leg in service to our country. And
to work in a hostile work environment where he is referred to
as Captain McNasty is just, not just wrong, but disgusting.
To think about the chilling reports that say employees'
supervisors were permitted to mock the fact that this employee
used a wheelchair. What kind of environment and culture and how
long does it have to go on before it becomes commonplace to
make fun, to goad veterans who served this Nation at great
personal expense?
Or when an employee reported that for a period of 3 years,
a senior examiner would sexualize her every time he could. And
he behaved similarly with other colleagues and bank employees,
including asking to see photos of their daughters and whether
or not those daughters were single.
But it is not just your management team. You yourself set
the example when you were absolutely irate and attacked your
employee. Or another FDIC employee stating that they had a
meeting with you, and it was awful and felt very personal. That
employees are made to cry, as if it is some badge of honor
making your employees cry. And people after person after person
wanting to quit.
Others described your conduct as embarrassing and
inappropriate. And one person said they will likely be demoted.
And if this is what takes, they are out.
One thing I learned from running my own business is that if
you don't take care of your employees, they can't take care of
the customer. And the customers of the FDIC, they are the
American people.
Mr. Gruenberg, during your hearing yesterday, you stated
that it doesn't matter if you believe that you can change the
FDIC's culture, it matters if the employees believe that you
can change the FDIC culture. They don't. Whistleblower after
whistleblower, employee after employee have drawn the same
conclusion.
I would like to submit for the record a statement, Mr.
Chairman, I would like to submit for the record a statement
from a collection of FDIC whistleblowers expressing their lack
of confidence in Mr. Gruenberg's ability to change the toxicity
of the agency and their doubt that he is the right man for the
job.
Chair Brown. Without objection.
Senator Scott. Leadership carries with it the
responsibility of stewardship. Your sheep are lost and your
fields riddled with weeds.
In 2021, President Biden warned his staff, ``If you are
ever working with me and I hear you treat another with
disrespect, I promise I will fire you on the spot'', and he
did. He fired the Inspector General, Martin Dickman, of the
U.S. Railroad Retirement Board for evidence that he created a
toxic work environment and engaged in abusive treatment,
including using crude and inappropriate language like slurs and
belittling employees.
I know I am out of time. And the FDIC and their special
report described you as harsh, aggressive, and interacting with
your staff in a demeaning and inappropriate manner, having a
temper, and causing employees to feel disrespected, disparaged,
and verbally attacked.
I can only conclude with one question. What makes you so
different than the Inspector General? Is it politics? Is it the
fact that you are a necessary and easy vote for the Biden
administration's economic policy agenda? I think the answer is
yes.
Chair Brown. Thank you, Senator Scott. Thank you for your
remarks. I think we can agree that no public employee, whether
in the White House or the FDIC, should ever criticize of make
fun of a disabled veteran.
We will hear testimony today from the heads of three
Federal banking agencies: Michael Barr, Vice Chair for
Supervision at the Board of Governors, the Federal Reserve
System; Martin Gruenberg, Chair of the Federal Deposit
Insurance Corporation; and Michael Hsu, Acting Controller of
Currency. Chairman Todd Harper of the National Credit Union
Administration, excuse me, originally intended to be here but
is unable to join us due to extenuating circumstances.
I ask unanimous consent to enter Chairman Harper's
statement into the record. Without objection, thank you.
Thank you, my colleagues. Thanks for the witnesses for your
service and your testimony.
Vice Chair Barr, please proceed.
STATEMENT OF MICHAEL BARR, VICE CHAIR FOR SUPERVISION, FEDERAL
RESERVE
Mr. Barr. 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, supervisory activities, and some of our recent
regulatory proposals.
Overall, the banking system remains sound and resilient.
Banks continue to report capital and liquidity ratios above
minimum regulatory levels. Overall asset quality remains
generally sound. Capital ratios increased throughout 2023,
leaving the system better positioned to weather potential
losses.
Liquidity conditions overall are stable. Notably, liquid
assets on bank balance sheets remained above their 10-year
average throughout 2023. Additionally, there has been a
decrease in the share of uninsured deposits in the system.
However, both supervisors and banks must remain vigilant and
ready for expected and unexpected stresses, as presently there
are several risks we are monitoring.
For example, delinquency rates are rising among certain
commercial real estate loans, such as those backed by offices,
and some consumer loan sectors. CRE delinquencies are now at a
5-year high. Credit card and auto loan delinquencies have been
rising. In response to rising delinquencies, banks have
increased loan loss provisions.
On this basis, combined with their capital positions, the
banking sector as a whole should be prepared to absorb loan
losses that may materialize and continue fulfilling its vital
role providing credit to households and businesses. The Federal
Reserve continues to monitor these conditions carefully.
It has been a little over a year since the sudden failure
of SVB and ensuing stress in the banking system, events that
highlighted the need to improve the speed, force, and agility
of supervision to better align with the risk, size, and
complexity of supervised banks, as appropriate. We have been
making progress on these goals.
First, we are working to ensure supervision intensifies at
the right pace as a bank grows in size and complexity. Second,
we are modifying supervisory processes so that once issues are
identified, they are addressed quickly by both banks and
supervisors. Third, we are finding ways to better incorporate
forward-looking risk analysis into supervision.
The lessons learned from SVB are not only applicable to our
supervisory framework. Certain aspects of the failure show that
enhancements to our regulatory framework would benefit the
safety and soundness of our banking system.
One of these enhancements was already in process several
months before SVB's failure through an advanced notice of
proposed rulemaking--expanding the application of long-term
debt requirements to additional large banks. Subsequently, the
Board, the FDIC, and the OCC followed up with a proposed rule
that would increase the options available within the resolution
process and enhance financial stability. We are going through
comments now that we received on this proposal carefully.
Another important area is liquidity risk management. A
striking feature of last year's bank stress was that SVB,
Signature, and First Republic struggled to cope with
unprecedented deposit outflows. Banks found it difficult to
monetize their held-to-maturity securities through repo
transactions under severe stress and were not adequately
prepared to utilize the Federal Reserve's discount window. We
are exploring targeted adjustments to our regulatory framework
that would address each of these concerns.
The Federal Reserve's lending to banks through the discount
window plays an important role in supporting the liquidity and
stability of the banking system and the effective
implementation of monetary policy. We are reaching out to a
wide range of depository institutions of all sizes to learn
from their experiences with the discount window in order to
improve our operations.
Turning to capital, a safe and sound banking system is
crucial to a healthy economy and capital is foundational to
safety and soundness. A well-capitalized banking system reduces
the probability that stressful conditions result in financial
crises, which inflict devastating economic costs and suffering
for families and businesses all across the country.
Since my last testimony, we have received numerous and
meaningful comments on our capital proposal. We also received
additional data. We are closely analyzing this information and
I expect we will have a set of broad, material changes to the
proposal that allow us to have a broad consensus in moving the
proposal forward. The changes will enable us to have a safer
financial system that better serves American households and
businesses.
Thank you.
Chair Brown. Thank you, Mr. Barr.
Mr. Gruenberg, welcome. Proceed, please.
STATEMENT OF MARTIN J. GRUENBERG, CHAIR, FEDERAL DEPOSIT
INSURANCE CORPORATION
Mr. Gruenberg. Thank you, Mr. Chairman.
Chairman Brown, Ranking Member Scott, and Members of the
Committee, thank you for the opportunity today to appear before
you today. I would like to focus my remarks on the FDIC's
ongoing efforts to transform its workplace culture.
Let me begin by saying that I am deeply committed to the
FDIC and its mission, as well as to the people on whom that
mission depends. That is why when news reports of sexual
harassment, discrimination, and other misconduct surfaced last
year, it was essential to gain a deeper understanding of the
agency's workplace culture.
At my direction, the FDIC initiated an independent third-
party review to determine the depth and extent of these issues.
Last week, the results of that review, which was conducted by
the law firm of Cleary Gottlieb, were released. The review
found that for an extended period of time, the FDIC has failed
to provide a workplace safe from sexual harassment,
discrimination, and other personal misconduct.
I accept the findings of the report, and as chairman, I
take full responsibility. To anyone who experienced sexual
harassment, discrimination, or other misconduct at the FDIC, I
again want to apologize and express how deeply sorry I am. I
also acknowledge my own failures as chairman, both in failing
to recognize how my temperament in meetings impacted others,
and for not having identified deeper cultural issues at the
FDIC sooner.
I am personally committed to addressing these issues. We
accept all the recommendations of this report and are
incorporating them into our existing action plan for a safe,
fair, inclusive work environment.
To restore credibility with our workforce, we must act
swiftly on the report's recommendations and demonstrate a
commitment to making fundamental change. For this reason, we
have already begun implementing several key recommendations of
the report.
The report recommends that we identify and appoint a
transformation monitor who will monitor, audit, and report on
our implementation of the recommendations. We have already
begun that process and will issue a request for proposals as
early as this week.
The report also recommends that we engage an independent
third-party expert to support our efforts. We have begun that
process and will also issue a request for proposals as early as
this week.
The report recommends fundamental change to the agency's
structure and procedures for receiving and investigating
complaints and taking disciplinary action against misconduct in
light of the failures of the existing offices delegated those
duties.
We will do this by proposing the establishment of an
independent Office of Professional Conduct, which will report
directly to the FDIC Board of Directors. It will be charged
with fulfilling these responsibilities, including through the
use of outside third parties to conduct investigations. The
transformation monitor and independent third-part expert will
advise us on this proposal.
Since December of last year, the FDIC has been focused on
implementing its action plan to address all aspects of the
issues raised in the news reports last year. The plan
represents an agencywide effort. Many of the recommendations
outlined in the report recently received are already
encompassed in the agency's action plan.
The plan is focused around three core elements: providing
more support and resources to victims, strengthening our
process for reporting and investigating complaints, and
improving accountability for anyone who is found to engage in
misconduct, including through separation from the agency. The
proposal to establish an independent Office of Professional
Conduct would advance all of these goals.
It is my privilege to lead and work alongside everyone at
the FDIC. Our people are extraordinarily dedicated to the
agency and its mission. They deserve to have a workplace where
all feel safe, valued, and respected. There is no higher
priority for me than delivering on that commitment.
Thank you.
Chair Brown. Thank you, Mr. Gruenberg.
Mr. Hsu, welcome.
STATEMENT OF MICHAEL HSU, ACTING COMPTROLLER, OFFICE OF
COMPTROLLER OF THE CURRENCY
Mr. Hsu. Thank you, Chairman Brown.
Chairman Brown, Ranking Member Scott, and Members of the
Committee, I am pleased to appear today to provide an update on
the activities and priorities of the OCC.
The overall condition of the Federal banking system is
sound. OCC-supervised banks, in aggregate, continue to have
strong levels of regulatory capital and sufficient liquidity
buffers, though risks from commercial real estate and interest
rate exposure continue to warrant attention.
Banks and supervisors need to remain on guard against
complacency, one of my top priorities for the agency. The OCC's
bank supervision operating plan for 2024 highlights asset
liability management, credit risk and allowance for credit
losses, cybersecurity, operational risk, and consumer
compliance risk as our key areas of focus.
Another priority for the OCC has been promoting fairness in
banking. This April marked the 1-year anniversary of OCC
guidance to assist banks in managing risks associated with
overdraft protection programs. Since the OCC's heightened
attention on overdrafts began, the overdraft fees charged by
OCC-regulated banks in aggregate have fallen over 40 percent.
Adapting to digitalization has been a third priority for
the agency. We recognize, for instance, that community banks
may face hurdles in risk-managing their third-party
relationships, including with fintechs. Earlier this month, the
OCC, Federal Reserve, and FDIC published a third-party risk
management guide for community banks with examples of
innovative approaches to conducting due diligence and assessing
new fintech companies.
The OCC supports the diverse and dynamic banking system and
continues its focus on updating our bank merger analytical
frameworks. We remain committed to working with our interagency
peers, including the Department of Justice, on this effort. To
increase transparency, on January 29, we released for comment a
proposed policy statement on bank mergers. We recently extended
the comment period to June 15.
My written testimony provides greater detail and other
activities of the OCC.
As cochair of the FDIC's special review committee, I would
like to address briefly the recently released independent
report on harassment and misconduct at the FDIC. The top
priority for us all must be protecting the staff of the FDIC
and putting people first.
The harassment and misconduct detailed in the report are
totally unacceptable. The number and scope of allegations, the
patterns of misconduct, and the longstanding culture revealed
by the review are highly disturbing and need to be fixed
immediately.
The root causes and recommendations cited in the report
provide a clear roadmap for what needs to be done and why. That
is where our attention must be focused to ensure the FDIC is a
safe workplace for all of its employees.
As a member of the FDIC board, I am committed to the
transformation called for in the report. I am especially
supportive of the report's recommendation to engage an external
expert and establish an independent monitor to ensure that the
agency's efforts are tracked and that accountability is
enforced.
I also believe that Chairman Gruenberg has accepted
responsibility for his and the FDIC's past failings, and that
he is fully committed to lead the agency in taking the actions
necessary to make it a safe place for everyone to work.
Thank you, I'd be happy to answer any questions.
Chair Brown. Thank you, Mr. Hsu.
Chair Gruenberg, you offered an action plan last year to
fix the agency, but last week's report made clear much more is
needed. One particularly concerning item is the third-party
report that some employees don't believe that last year's
action plan will bring about real results. They said, They
reported experiencing or observing interpersonal misconduct by
a number of the managers currently participating in the action
plan. Pretty egregious statement.
Yes or no, can you commit to you today that you will review
any accusations of misconduct against the managers, the
managers charged with developing the action plan and take
strong, appropriate action to hold them accountable?
Mr. Gruenberg. Yes, Mr. Chairman.
Chair Brown. OK, thank you. What do you say to the
employees who, understandably considering that years of
history, this agency, what do you say to the employees who
don't trust the steps you're taking to reform the agency?
Mr. Gruenberg. Mr. Chairman, we are committed to
implementing the recommendations of the new report and to
making fundamental structural change in the way misconduct is
addressed at the FDIC.
Most fundamentally, and I think this gets to the core of
the issues raised, we have to cut the good old boys' network
that is serving as an impediment to employees coming forward
and reporting experiences of abusive treatment. And we can do
that by establishing a new, independent office at the FDIC
outside of the existing organizational structure, accountable
directly to the board, that would assume all of the
responsibilities for dealing with misconduct at the FDIC.
That would include receiving complaints from employees,
providing employees the support and protection and assurance
against any concerns about retaliation that is necessary for
employees to come forward. It would assure independent
investigations of complaints by outside third parties. And it
would impose a strengthened disciplinary process that would be
swift and sure and transparent and have only one focus: justice
for the victim.
And if we can do--when we do those three things, that will
make a dramatic impact on how these matters are handled at the
FDIC. We have, as the report notes, existing offices with those
responsibilities. Those offices have failed. And we need to
move to a new office outside of the existing structure that
will provide the kind of independence and assurance that our
employees need to hold individuals accountable for misconduct
that may occur.
Chair Brown. Understand that your credibility starts by
ensuring that managers accused of wrongdoing are not allowed to
police their own behavior. It starts with that. You understand
that?
Mr. Gruenberg, as you know, making the fundamental changes
necessary to repair FDIC's reputation, more important than the
culture, equally important to culture, is going to take input
and action from everyone at the agency.
How do you plan to engage regularly with the entire
workforce, particularly employees who have reported harassment,
reported discrimination, reported other misconduct to make sure
you bring about lasting change in this good old boy network you
mentioned, this toxic culture that permeates the agency?
Mr. Gruenberg. From the outset of our efforts last December
to address these issues, we have made this an agencywide
effort. We have invited employees across the agency through
expressions of interest to volunteer to participate in our
efforts to address this issue.
We have had significant response from employees both in
Washington and in our regional offices. And we are committed, I
think it is critical for employees across the agency to
participate and have a sense of ownership in terms of our
efforts to address these issues. I think that is critical.
And we have worked closely with all of our employee
resource groups. They have had direct input and participation
in developing our action plan and in our response to the
recommendations of the new report. So, this will be, has been,
and will continue to be an agencywide effort.
Chair Brown. And you, that means you will commit to
bringing all the major policy changes necessary to implement
the recommendations of this report, including steps you've
outlined here today, to the board for input and approval?
Mr. Gruenberg. Yes. The board will be the oversight and
governance, oversee the governance of this whole effort.
Chair Brown. I will be watching, this Committee will be
watching, Senator Scott will be watching. I was told by a Fed
Reserve Governor some years ago that, he said watch what I am
doing and make sure you know I am watching you are watching
what I'm doing. That's loud and clear, thank you.
Senator Scott.
Senator Scott. Thank you, Mr. Chairman.
Let me turn my attention to Vice Chair Barr for a minute
here on the, I think the importance of Basel III being
reproposed. Honestly, I think slicing it, dicing it, trying to
figure out how to make some changes and put it back on the
market. I think that is probably the wrong strategy, the wrong
approach. From my perspective it would be much better to have a
full re-proposal, allowing people to have another window of
opportunity to actually have input in the process of the
changes.
Frankly, Basel III to me, thankfully, Fed, you, Chairman
Powell have made a prudent decision to take another look at the
proposal. That is a prudent decision.
I think a better approach is to actually put it back out on
the market for comment so that more people have a better
engagement in this process. I think anything other than that I
think is nibbling around the edges and will not produce the
type of product that is in America's best interest.
Thoughts?
Mr. Barr. Thank you very much, Senator Scott. We are really
focused right now on the substance. We had a lot of deep and
thoughtful comments on the proposal. We are trying to work our
way through that substance now, reach agreement across the
agencies and with my board on the substance.
And after we are done with that process of understanding
where we want to go on the substance, we will then determine
what process we think is appropriate. If a re-proposal ends up
being appropriate, we will do that. We are not yet at the stage
where we're thinking about precisely what process we will use.
Senator Scott. I certainly think the more, just obviously
you understand this, but for the Americans watching C-SPAN for
reasons that go beyond my ability to comprehend, I think it is
important for us to note that the capital standards within
Basel III park so much capital on the sidelines that those
Americans perhaps watching C-SPAN looking for their first
mortgage will have less capital to actually become a part of
the American dream to actually earn equity in this Nation by
having a home.
Those small businesses like me that changed my financial
life and the life of my family, specifically my mom's, by
starting a business and being successful, that capital that
allows folks like me coming from poverty to experience the
American dream because you have the ability to get a loan.
Parking more capital on the sidelines really is a way of
disenfranchising more Americans and not necessarily making the
system more fair.
Thank you for your comments and thank you for the call and
having a conversation about this really important underlying
issue that will have real impact on our economy.
To Chairman Gruenberg, the offices haven't failed. You
have. It is that simple. An environment that is so corrosive,
so toxic that employees, I just want to read this from the
report, because the level of intimidation that is embedded in
the culture after a decade of your leadership, you can't just
unravel it. You can unscramble that egg.
The going to classes and looking for ways to have anger
management and solve that problem, if it takes you a decade to
recognize that, perhaps you need a whole few years away from
the FDIC to figure that out on your own. But why punish the
FDIC and the American people, and frankly, the employees?
Here is a quote from one employee. Nobody trusts those in
charge. And even though it is not getting into the hands of
senior executive, I am using VPN and someone else's cell phone
to write this. I still fear that talking will come back to
haunt me.
Those are chilling words. It is--I have so many complaints
and concerns through the report that it is just hard to read
them all. A woman learned that a field office supervisor had
romantic feelings for her and would send her flowers. He would
demand to know who she was talking to and what she was talking
about.
He called and texted her at work and at home. During
mandatory telework, he would insist that she stay on Teams,
Team videos for hours on end, directing her to leave the video
on when she left to use the restroom. She became so fearful she
went to the police and considered seeking a restraining order.
She hesitated to file the complaint with the FDIC because she
believed the agency would believe him over her if she reported
it.
Eventually when she did work up the courage to file, she
said managers dismissed her concerns. The report concludes, She
continues to live in fear.
You got 5,000 employees, plus, and the strategy is to give
them more pay, more promotion, and a transfer for folks maybe
in leadership. If after a decade of toxicity and corrosion,
5,000 employees, the best we can do is find a scapegoat and
shift the blame, you should resign.
Chair Brown. Thank you, Senator Scott.
Senator Cortez Masto is recognized.
Senator Cortez Masto. Thank you, thank you, Mr. Chairman.
Thank you, gentlemen, for being here. I am going to focus
my questions today with Director Gruenberg.
I appreciate you coming in to visit with me. Let me start
here, and you are hearing this constantly. Obviously, this is
an opportunity to do right by the employees of the FDIC.
There's almost 6,000 employees of the FDIC. And there is no
doubt that an environment, a workplace that is--has
longstanding misconduct, harassment, discrimination, and lack
of full accountability at the FDIC is absolutely unacceptable.
Now here is the concern that I have: this has been
longstanding. This has been longstanding, and words are not
enough now. You can come here and testify and talk about what
you want to do, but we have heard that before. I have heard
that under previous Administrations, previous chairs, previous
leadership.
In fact, we have a previous report that came out that
absolutely, from the Office of Inspector General, July 2020,
identified these issues. Recommendations were made. And I will
say even at that time, the leadership, it wasn't you, but the
leadership at the FDIC questioned some of those
recommendations.
Now fast forward, we still have an issue. It is not just
about structural change; it is about a workplace culture that
we need to address. And I do believe that if you are paying
attention to what is happening here and you have read the root
analysis, you have read the report from Cleary Gottlieb, and
you have read the recommendations, there is a clear blueprint
for what to do.
And our goal here and mine is to hold you accountable for
that. And the entire board and the entire leadership. Because
now is the time to focus on the employees and their workplace.
Let me just say this: the root cause analysis, lack of
accountability, failure to hold employees accountable for
misconduct, that was addressed in a previous report. It still
hasn't been addressed.
Employees do not see individuals alleged to have engaged in
misconduct face any consequences. They also develop doubts
about the integrity of the disciplinary process itself. Fear of
retaliation. And that is just the structural changes we need to
make.
Now we have workplace issues. Let me just say, the
workplace culture has to be addressed. And you are going to
have to come forward and tell us how you are going to do that.
Let me just note this, though. In the report, it notes that
the FDIC and its leadership have not sufficiently focused on
and prioritized workplace culture. And historical efforts to
address it have not been sustained in any way to make lasting
changes. It is not the case, as some have expressed, that
problems related to the workplace culture, including with
respect to sexual harassment, only came apparent through the
recent media reports.
There have been prior cultural change and improvement
initiatives that the FDIC have instituted in part because of
some of the same issues identified in the report, going back to
2008. This is a systemic failure, over the years, over the
years. And it is time to take action.
So, my first question to you is based on the
recommendations from this report, do you anticipate, and I hope
you say yes to every single one, that you are going to
implement every single recommendation that is in this report,
this Gottlieb report?
One of the recommendations to address the cultural
transformation is to hire an independent individual to monitor
and audit any recommendations the FDIC adopts. Do you agree to
that?
Mr. Gruenberg. Well----
Senator Cortez Masto. Let me just say, OK, that second
there is also a recommendation that the FDIC should retain an
independent third party with substantial and credible
experience in topics recovered by this--uncovered by this
report to advise in the implementation of the recommendations.
That is a separate independent third party. Do you agree to
that?
Mr. Gruenberg. Yes, and we have begun the process of
implementing both of those recommendations, Senator.
Senator Cortez Masto. So how do you anticipate--let me ask
both of you, because Director Hsu, you are on the--you are on
the board. How do you anticipate not just the cultural changes
and the structural changes, excuse me, the structural changes
that you were talking about, how do you anticipate changing the
culture?
This is not about words anymore; this is about showing
action to the Federal employees there that you are doing
something about it. So, what are you specifically going to do?
Mr. Gruenberg. If I may start, and maybe then Mike could
add. Those are the hardest because you have to change people's
attitudes and behaviors, which is the hardest part of this
work. I believe the structural changes are critical, both in
independence and giving employees a sense of confidence and
protection to utilize them.
We have a key additional structural issue, which is the
decentralized nature of our organizational structure. With
3,000 banks, we supervise 70 field offices around the country.
Getting control----
Senator Cortez Masto. Let me ask you this, cut to the chase
because my time is running out. Have you held anybody
accountable so far?
Mr. Gruenberg. Yes, four employees have been separated this
year, and we have made management changes. And as a result of
this establishing a new office, there will be additional
management changes.
And we have started a program of training, in-person
training, for all 6,000 employees at the FDIC. We began with
the managers of those 70 field offices, which is the, in some
sense, the locus of the issue. We have had all of our senior
executives, including myself, go through that training. And we
are now working through the rest of our workforce. By November
of this year, we will complete that in-person training for
every employee.
So, at a minimum, we will have a baseline of understanding
for every employee. What is sexual harassment, how to recognize
it, and most importantly----
Senator Cortez Masto. I appreciate that, Mr. Gruenberg----
Mr. Gruenberg. Yes.
Senator Cortez Masto. But it is more than just training.
Mr. Gruenberg. I understand.
Senator Cortez Masto. It is more than just training. That
is the start of it.
Mr. Gruenberg. I'I agree.
Senator Cortez Masto. So, you have got to do more. And I
apologize, I am going over my time. But this is such an
important issue.
And Mr. Hsu, you are on the board. What are your thoughts
on this? Because there has to be a change in the workplace
culture. It is more than just training for individuals.
Mr. Hsu. It is imperative that every single recommendation
be carried out in full, in a timely manner, immediately. And
those have to be actions that are credible to the staff of the
FDIC. In particular, the fear of retaliation creates a cycle.
Because if there is a fear of retaliation, there is no
reporting. If there is no reporting, there is no action.
And so, this is made very clear in the report. And I agree
with you, this is all dependent on actions and outcomes. And I
think that is where the focus has to be.
Senator Cortez Masto. Well, I am done, and I thank you for
allowing me to go over my time. I am just going to say this:
this should be the last report we deal with on this particular
issue, and we are going to hold you accountable.
The entire board, the entire management FDIC, you need to
make changes. And this is something that clearly has happened
over years and decades unfortunately, but it is time to make
the change, and we need to hold you accountable. From my
perspective, I am not going to let go. This has to change, has
to change.
Chair Brown. Thank you, Senator Cortez Masto.
Senator Rounds of South Dakota is recognized.
Senator Rounds. Thank you, Mr. Chairman.
Mr. Gruenberg, yesterday, my House colleagues and today my
Senate colleagues have all been taking you to task on how under
your 19-year tenure, you have failed to protect employees and
create a culture of professionalism at the FDIC.
Instead of your--instead of that, your agency is known as a
place that fosters a culture that is, in their words,
misogynistic, patriarchal, and outdated. A place where
favoritism is common and senior executives with well-known
reputations of inappropriate workplace behavior enjoy long
careers with no consequences.
You, in fact, are one of those senior executives who have
subjected employees to bullying and your explosive temper,
which are detailed in multiple pages of this report, 91, 92,
93, and 94 are all included. And yet you have faced no
consequences.
Culture starts at the top. Now, those aren't my words, Mr.
Chair, those are the words of the employees at the FDIC, and
you can read that on page 6 of the report. Your employees
clearly have no faith that you can meaningfully lead for
changes at the FDIC, and quite frankly, neither do I. I think
that you should resign for the good of the institution.
Mr. Barr, in agreement with the Chairman Powell, you have
stated on page 5 of your written testimony that you expect a
series of broad, material changes to the Basel III endgame
proposal. I think myself and many Members of this Committee
would welcome that.
Do you agree that each section of the proposal, covering
all three risk stripes of the market risk, operational risk,
credit risk, that they need broad and material revisions based
on the comments that you have received?
Mr. Barr. Yes, I think if you look across all three areas,
I do expect some significant changes in the proposal.
Senator Rounds. And by definition, the material meaning
material in this particular case does mean significant change.
Would you say the commenters that have made, and I think--and
there has been a lot of comments made, do you think you would
be able to anticipate all of the potential changes that you are
considering?
Mr. Barr. We are going through the substantive work now. If
we find an area where the Administrative Procedures Act would
suggest that we haven't met that standard, that would be one of
the factors we would think about about process going forward.
But right now, we really are just focused on the substance,
making sure we get the substance right. And then we will turn
to the question of what is the right next step in the process.
Senator Rounds. But fair to say, and I believe probably 97
percent of all of the comments that you receive were not
favorable to the proposal that you were making. The vast
majority of them wanted you to simply eliminate it, or they
wanted substantive, significant changes within those proposed
regulations. Would that be fair to say?
Mr. Barr. I haven't done that calculation. I have heard
that number reported before, but I haven't myself looked at
that.
Senator Rounds. And actually, the reason why I am asking
the question, and I think you are on it, is that you may very
well have to withdraw and repropose that proposed regulation if
these are significant changes, so that there could be other
comments made in the future. Would you agree with that?
Mr. Barr. As I said, we haven't reached the question yet of
what the right process is. We are really focused on the
substance. We are working our way through that. After we reach
a conclusion about the substance, we will turn to the question
of what the appropriate process is from that point on.
Senator Rounds. But you do expect, as I think both you and
the chairman have indicated, that you would probably have
significant changes to the proposal.
Mr. Barr. Yes, Chair Powell and I have both said we expect
broad, material changes.
Senator Rounds. And I noticed that you indicated that that
would require--it would trigger additional administrative--or
actions under administrative procedures at this time.
Mr. Barr. What I said, Senator, is that we haven't made any
decision about the process. We will follow the Administrative
Procedures Act. We will take care of whatever the appropriate
process is. But we haven't reached any judgment about the
process at this time.
Senator Rounds. OK. And then just, I am just curious, I
think yesterday with the House Financial Services Committee,
you indicated that policy changes to the proposal, just as you
have indicated here today, that they haven't been finalized
yet.
But as you go through and you are trying to identify this,
has there been a framework or a term sheet or some sort of a
layout laying out the differences or the contours to changes
that other agencies that you are working with, that they have
been able to see and to work over?
Mr. Barr. We are working very closely, I am working very
closely with my sister agencies at the FDIC and OCC on a set of
reforms to that proposal, and also in discussions with my
board.
Senator Rounds. If you do have that, would that be
available to this Committee for review as well?
Mr. Barr. That is not a normal process that we would
conduct. We go through the process among the agencies. We
develop whatever substantive proposal we are, and then put it
out for the public to comment.
And then of course we welcome, as we have in this instance,
comments from Senators and from Members of Congress. Those
comments that we get from this Committee and from others are
part of the comments that we review when we evaluate our
proposal.
Senator Rounds. Well, most certainly as substantive as this
may be for changes, it seems like it would be appropriate for
this oversight committee to at least have access to the
questions that you may very well be asking other committees. Or
at least if there is a working sheet, a worksheet of some sort,
it seems like that would be fair game to at least share with us
as well.
Mr. Barr. Senator, as I said, the normal process year in
administrative rulemaking is to conduct it the way we are
conduct it the way we are conducting it. And I expect we are
going to continue to conduct it according to the normal
process.
Senator Rounds. Thank you.
Chair Brown. Thanks everyone.
Senator Warner from Virginia is recognized.
Senator Warner. Thank you, Mr. Chairman.
Mr. Gruenberg, I'm not going to echo what all my colleagues
have said. Behavior has got to change. It needs to be a
meaningful plan, and I think some of us have withheld full
comments or full calls the way some of my colleagues have. But
the plan has to be real and credible. So far, we've not seen
that.
Mr. Barr, I'm somewhat aware of where Senator Rounds was
going. You know, I've written you separately on the Basel III
Accord. I think the reason why there's been such pushback is
that, at least early on, there was not kind of the evidence-
based documentation of what would be the cumulative effect of
these rules, these rule changes, particularly in terms of
credit availability.
So, I hope, before the final rules come out, you would make
those estimates public. I think, again, echoing what Senator
Rounds says, we need that from an oversight standpoint. And I
do hope, again, that there will be an evidence-based indication
of the risks and benefits of these proposed rules.
I know you're going through a reworking process. I know it
has probably caused lots of consternation. I've talked to you
and Marty and others about this. But, wherever you come down,
we're going to need that evidence-based approach. And I don't
think in the initial rule proposal it was there.
This is going to be mostly directed at Mr. Hsu, since I
heard from Mr. Barr and Mr. Gruenberg. I asked this the last
time. I think one of the things, as we deal with thinking about
a world structure for our banks, particularly around liquidity
problems the way we saw with SVB, you know, it really taught us
that the whole notion of stability deposits and the notion of
internet-based runs, you know, that we're way behind where
technology has taken us.
Obviously, we need to make sure that we have ability to
prevent temporary liquidity issues from turning into solvency
crises. And one of the things that has bothered me--and I've
shared this with all of you; I've shared it with my colleagues
on the Committee--is, you know, the whole beginning of the Fed,
the discount window was set up exactly for this circumstance.
But what we have seen, at least recently, is it has very rarely
played that role.
And I say this to my colleagues on both sides of the aisle.
I'm going to be soon introducing a bill--and I've been talking
to some of my Republican colleagues, and welcome my Democratic
colleagues as well--to reform the discount window to fight the
so-called stigma that goes about utilization if you use it.
I think this really ought to be--back to the beginnings of
the Fed--a more often used tool. Now, the bill will implement a
mandatory discount window, test borrowing with different tiers,
and an exemption for those institutions under a billion dollars
in assets, and again, other safeguards to make sure we don't
put too much undue burdens on small depositories.
But it would also require that institutions demonstrate
that they can use the window. The SVB didn't even know how,
didn't even have procedures set up. And then, give regulators,
allow them to give proper credit in liquidity evaluations for
institutions that do that.
I think we need to look at how we keep the liquidity window
open at a longer basis. And I'm wide open on how we can do
other things to try to remove the stigma issue.
And what the legislation will also try to do is promote a
more harmonized process across the Federal Reserve Banks and
better coordination between the Fed and the Home Loan Bank
Boards--again, to make sure that we can get this right.
I've gotten your colleagues' comments on this. We've had a
private conversation on this, but I would like you to share,
Mr. Hsu, whether you think this kind of approach, in terms of
making the liquidity window, destigmatizing it, making sure
institutions know how to use it, and modernizing it, would be a
step in the right direction.
Mr. Hsu. Absolutely. You know, I think it helps to step
back and remember what the problem we're trying to solve is,
which is that bank runs are faster. And because bank runs are
faster, that ability to be able to use the discount window,
when a bank has appropriate amounts of collateral in a safe and
sound manner--is critical.
So, all the steps you laid out, we are happy to continue
engaging with you as to how to frame that, so that it's
effective. It's a tricky problem to solve, but we're committed
to working with you to solve this problem, because we do need
to solve this if we're going to address the speed of bank runs.
Senator Warner. Well, I have no more time to describe it,
but I would invite any of my colleagues to join me on this. I
think, before we start adding new regs and rules, we ought to
make sure some of the tools that were set up in the first place
are more fully used.
Thank you, Mr. Chairman.
Chair Brown. Thank you, Senator Warner.
Senator Kennedy of Louisiana is recognized.
Senator Kennedy. I hope Senator Al Franken is watching
today. If it weren't for double standards around this place,
there wouldn't be any standards at all.
Mr. Gruenberg, have you ever heard the expression ``A fish
rots from the head down''?
Mr. Gruenberg. Yes, Senator.
Senator Kennedy. I listened carefully to your testimony. Do
I understand you to assert that you believe you're the person
to clean up the FDIC?
Mr. Gruenberg. I do, Senator.
Senator Kennedy. Do you also believe that Elvis is alive?
Mr. Gruenberg. Not to my knowledge, Senator.
Senator Kennedy. Do you also believe in Bigfoot?
Mr. Gruenberg. No, sir.
Senator Kennedy. Have you read this report?
Mr. Gruenberg. Yes, sir.
Senator Kennedy. You've been the chairman of the FDIC 10 of
the last 13 years, haven't you?
Mr. Gruenberg. Yes, I have.
Senator Kennedy. And you've been there for 20 years almost,
haven't you?
Mr. Gruenberg. Nearly, yes, sir.
Senator Kennedy. And this sleaze has been going on for
decades, has it not?
Mr. Gruenberg. I think the report makes that finding,
Senator.
Senator Kennedy. Did you read the report, the part of the
report, where one of your supervisors described one of your
young female employees as being, quote, like a grizzly bear
with tits, close quote?
Mr. Gruenberg. I've read the report, Senator.
Senator Kennedy. Did you read the part of the report where
one of your supervisors asked a young female employee, quote,
Does your husband eat you? Did you read that?
Mr. Gruenberg. I have read the report, Senator.
Senator Kennedy. Did you read the part of the report where
one young employee said her supervisor sent her a text? Do you
know what the text said? Quote, Get naked, bitch. Did you read
that?
Mr. Gruenberg. Yes, sir.
Senator Kennedy. Did you read the part of the report where
one of your supervisors turned to one of your Hispanic
employees and asked him to recite the Pledge of Allegiance to
prove that he is an American? Did you read that?
Mr. Gruenberg. I read it, sir.
Senator Kennedy. You're not going to be able to clean up
the FDIC because you're going to be too busy defending yourself
in court.
I'm going to introduce a bill to extend the statute of
limitations to allow every employee at the FDIC to file suit
over the sexual abuse and the sexual discrimination and this
racism. And you're going to be spending all your time in court.
Now, the Cleary Gottlieb report doesn't think you're the
person to clean up the FDIC, does it?
Mr. Gruenberg. I don't know that the report reaches that
conclusion, but it certainly has critical comments in regard to
me, Senator.
Senator Kennedy. Well, I mean, the FDIC report says that,
it says that, even your senior leaders feel, quote,
disrespected, disparaged, and treated unfairly by you. Did I
quote that correctly?
Mr. Gruenberg. Yes, I have read the report, Senator.
Senator Kennedy. And the Cleary Gottlieb report, it goes on
to say that your long tenure and reputation for losing your
temper and bullying people, quote, presents unique challenges,
close quote, for you to change the agency. Did you read that
part?
Mr. Gruenberg. I have read it, Senator.
Senator Kennedy. And the Cleary Gottlieb report also says,
it questions whether you have the, quote, moral authority to do
so. Is that correct?
Mr. Gruenberg. I have read the report, Senator.
Senator Kennedy. Yes. You fixing this agency, Mr.
Gruenberg, is like asking--it's like asking Alec Baldwin to
conduct a course in gun safety. You ought to be ashamed of
yourself.
And, Mr. Hsu, you ought to be ashamed of yourself for
acting like a lickspittle here today, trying to defend this
gentleman.
Have you ever read a worse report, Mr. Gruenberg, in all
your years?
Mr. Gruenberg. It's a bad report, Senator.
Senator Kennedy. Yeah, it's bad.
Look, I could go through this report. I'm embarrassed to
have to even read some of these, some of these allegations.
These folks on the first row behind you, are they FDIC
employees?
Mr. Gruenberg. Some of them are, Senator, yes.
Senator Kennedy. Would you like to turn around and
apologize to the female employees sitting behind you at the
FDIC?
Mr. Gruenberg. I have, Senator.
Senator Kennedy. Would you like to do that now?
Mr. Gruenberg. If you ask me to, I will.
Senator Kennedy. I think you should.
Mr. Gruenberg. I apologize.
Senator Kennedy. And now, I think you ought to resign.
I'm done, Mr. Chair.
Chair Brown. Senator Smith from Minnesota is recognized.
Senator Smith. Thank you, Mr. Chair.
It's ironic to me that my Republican colleague thinks that
Chair Gruenberg can't do his job because he will be in court,
when the candidate, his candidate for President, is currently
facing multiple indictments and is actually in court.
Chair Gruenberg, you and I have had a conversation about
the FDIC. And as I said to you when we last spoke, I believe
that it can be your legacy to repair the damage that has been
done to employees at the FDIC. And knowing the agency as you
do, you have the potential to make the changes that need to be
made in this agency for the good of everybody there, and for
this agency that I do believe that you care deeply about. And
as you have heard, we will all hold you accountable to that.
Mr. Barr, I wanted to direct a question to you, and really
to everybody on the panel. And this has to do with what is
happening with insurance, home insurance rate surges around the
country.
So, homeowners have seen their insurance rates surge in
recent years. And why is this happening? It's happening because
of bigger, more destructive, and more frequent severe weather
events. And this, of course, is the cost of climate change, and
it's hitting homeowners hard.
A recent study by LexisNexis found that 97 percent of
catastrophic losses to homeowners in 2022 were caused by hail
and wind and weather-related events. Now, so you're probably
thinking this is a big problem for States like Florida or
Louisiana or South Carolina, and, of course, it is. It is a
huge economic problem.
But you may not know that it is a huge issue in the
Midwest. From 2016 to 2022, my home State of Minnesota incurred
the highest loss cost of any State for severe weather events.
And so, what does this mean? It means that insurance companies
are not keeping up, and the cost of this rolls down to
homeowners in the form of massive rate hikes, high costs to pay
for improvements on their properties, or worse case, they just
lose their property insurance.
So, my question is, obviously, these spiking costs for
property and casualty insurance are an issue for homeowners,
but it also seems like it could be a big issue for financial
institutions who need to manage this risk. Would you agree with
that? And just tell me how you see this issue panning out as a
systemic risk?
Mr. Barr. Thank you, Senator. It's an excellent question.
We do look carefully at the way in which the largest banks
are managing these kinds of risks. We recently went through an
exercise with six of the largest banks to understand their risk
measurement and risk management practices.
And one of the things that the banks learned through that
process, many of them, is that they did not have complete
information about how their properties were covered or not
covered----
Senator Smith. Yes.
Mr. Barr. ----by property and casualty insurance. And that,
of course, affects losses to the banking sector. So, it is a
really, I think, quite critical issue.
Senator Smith. The prospect of trillions of dollars of
properties becoming uninsurable because of this risk seems to
me to be something of significant concern. And I think it's
very important that, as regulators, you look at this issue and
you think clearly about what that might mean in terms of a
systemic risk.
I also want to ask you about the Community Reinvestment
Act. You know that this is something that I've been paying a
lot of attention to. I care a lot about this. I think that the
recently finalized updates to the CRA were important and long
overdue.
And so, I am dismayed, of course, that the rulemaking has
been struck down by this activist judge in a case where I think
plaintiffs were clearly shopping for a friendly judge. I'm not
asking you to comment on that and I understand, with pending
litigation, you can't comment on that. But I wonder if you
could maybe clarify a few things about the rulemaking itself.
First, it is true that this was the first update to CRA
regulations in about 29 years, is that right?
Mr. Barr. That's correct.
Senator Smith. And since the first, since those old rules,
there have been many significant changes in banking, correct? I
mean, a big shift to mobile and online banking is just one
example.
Mr. Barr. Yes, Senator.
Senator Smith. And these new rules take into account how
remote lending works, is that correct?
Mr. Barr. Yes, the rule does do that.
Senator Smith. And is it also true that these new rules are
not, they are not overly inclusive? So, for example, they don't
pull in community banks that still largely operate locally?
Mr. Barr. Well, the particular provision with respect to
outside lending areas applies to large banks that don't have
large branch bases.
Senator Smith. Right.
Mr. Barr. So, they're doing a lot of remote lending.
Senator Smith. Right. Thank you.
I think that it is just important that we understand that a
very thoughtful, in my view, and tailored approach has been
taken with these CRA rules that reflects the realities of
banking today, and I hope that they will be allowed to go into
effect.
Thank you, Mr. Chair.
Chair Brown. Thank you, Senator Smith.
Senator Hagerty of Tennessee is recognized.
I will give you five extra seconds, Senator Hagerty.
Senator Hagerty. Vice Chairman Barr, I understand that last
week you spoke to graduates of American University. And I would
like to call up part of your remarks for the group today.
Quote: When things go wrong, it's your responsibility. It's
not somebody on your team's fault. Having the ability to not
point a finger at other people, and to point it at yourself,
and understand that you are accountable and responsible is an
important part of being a leader.
Does that advice extend beyond college graduates to leaders
of Federal agencies?
Mr. Barr. Yes, Senator.
Senator Hagerty. I agree. I agree. And when a leader's team
or agency is fundamentally broken, serious decisions have to be
taken--decisions that will provide a stark test of what
leadership really is.
So, Chair Gruenberg, I'd like to turn to you to talk about
accountability and leadership.
During the independent investigation of your agency,
roughly, 1 in 10 FDIC employees reported, quote, experiences of
sexual harassment, discrimination, and other interpersonal
misconduct. Just the sheer volume of complaints demonstrates
serious managerial issues. A workplace culture like this
doesn't evolve overnight. This is shaped by years of senior
management.
The report even says--and I quote--culture starts at the
top. Well, you've been at the FDIC for nearly 20 years. Ten of
the past 13 years, you've led the agency.
So, my question is this: if the FDIC's culture is the
problem, and you've established this culture for nearly two
decades, how could you possibly be the most capable person to
fix this rot?
Mr. Gruenberg. Senator, I have indicated that I take full
responsibility. I've also indicated that one of my failures was
not recognizing the deep-seated cultural challenge the agency
has previously.
Since last December----
Senator Hagerty. Previously? You've been there for 20
years. I don't know how you could not recognize it.
Mr. Gruenberg. Since last December when these reports came
forward, we have devoted all the resources of the agency in an
agencywide effort to address them. The third-party report that
was released last week was the result of my direction to have
an independent third-party review look at the agency as a
whole, both Washington and the regions, to try to develop an
in-depth understanding of the nature of the challenges the
agency has----
Senator Hagerty. Well, let's get beyond the reports and
understanding. Just yesterday--I'm very concerned about this--a
report emerged that contains a statement from FDIC employees
that very clearly says--and these are employees across the
political spectrum--they don't believe current leadership can
affect the necessary changes. They even left it unsigned
because they're afraid of reprisal. That's precisely one of the
issues, one of the deep cultural issues, that we're trying to
address here.
Leadership is necessary to do it. They don't believe you
can provide it. You know, this is just extraordinarily hard
for, I think, all of us to understand.
I want to ask you a different question. If you were to
resign your role, who would take your place?
Mr. Gruenberg. I think, under the statute, the Vice
Chairman would become Acting Chairman.
Senator Hagerty. Is the Vice Chairman a Republican?
Mr. Gruenberg. I believe so, Senator.
Senator Hagerty. So, I think now we're getting to the very
core of what's happening here. This is what's going on. Just
yesterday, in a House hearing, Representative Pressley from
Massachusetts said the quiet part out loud. She said that, if
you were to resign, it would, quote, jeopardize critical
regulations pending finalization at this agency. Just let that
sink in.
The need for immediate leadership change here is so
obvious. The independent report here is beyond disturbing. It
describes abuse, discrimination based on race and sex,
uncontrolled anger and retaliation. It even reports instances
of sexual harassment and rape that occurred at the so-called
FDIC hotel across the river in Virginia.
It's truly remarkable that anybody on this Committee would
be willing to ignore this report and what it so obviously
requires--all for a few regulations in the Federal Reserve.
Does the Me Too movement now have an exception for technical
regulations?
Chair Gruenberg, is saving your job more important than
protecting the staff and the integrity of the agency that you
lead?
Mr. Gruenberg. Senator, I have no higher priority than
addressing these issues and protecting the employees of the
FDIC.
Senator Hagerty. They don't believe you can do it.
Mr. Gruenberg. We've been working----
Senator Hagerty. I don't believe you can do it.
Mr. Gruenberg. I believe we can. We have been working on it
and it has been an agencywide effort.
Senator Hagerty. This is the most damning report I have
ever seen. And I can't believe there's a willingness of anybody
on this Committee to brush this under the table just to get a
regulatory agenda to pass.
Thank you, Mr. Chairman.
Chair Brown. Senator Butler of California is recognized.
Senator Butler. Thank you, Mr. Chairman, for holding
today's hearing.
And thank you to all of our witnesses.
First, I do want to note and appreciate, Chair Gruenberg,
the number of conversations that you and I have been able to
have. And I want to state again that the findings of this
report are deeply disturbing and unacceptable.
Now, as has been noted from everyone on the dais today,
these are cultural challenges and experiences that have been
happening for decades across multiple Administrations--
Republicans and Democrat.
The examples that have been provided in the appendix to the
Gottlieb report are truly jaw-dropping. Women, people of color,
the LGBTQ employees, among others, have been harassed, have
been abused--all during their employment.
You've heard from my colleagues that we're expecting more
from you, and we expect that you will doing the work and taking
the steps to right the ship and to restore the credibility of
the agency.
I also expect that my colleagues from both sides of the
aisle will be consistent in their commitment to investigating
and holding perpetrators to account, perpetrators of sexual
harassment to account, and abuse, whether they serve at the
FDIC or they seek to occupy the Oval Office.
It's been interesting and a bit perplexing to listen to my
colleagues mention the notion of double-standards, but also
experience how they have not, and will not, call out the
behavior of the former President, who not only is in court
today, but finds himself having already been found liable for
sexual assault.
It simply cannot be that this behavior is disgusting and
unacceptable for a manager at the FDIC, but it's wilfully
ignored, and therefore, excused for a person who hopes to
actually be the next President of the United States. What
incredible hypocrisy.
I do have a question for you, Chair Gruenberg, on the
report. As I noted, one of the many tragic elements of this
situation is that I fear it sets us back in the progress that
we've made to bring more women and people of color into senior
roles in banking and financial services.
What are your specific efforts, as a part of the action
plan, that speak to those women and people of color and members
of the LGBTQ+ community that the FDIC is a safe place for them
to work?
Mr. Gruenberg. Thank you, Senator. That's a crucially
important question from my standpoint.
As part of our action plan, as you may know, we have a task
force of female leaders at the FDIC developing a strategy for
strengthening our recruitment efforts, specifically, for women
and employees of color. They have been working diligently on
that. It's a supplement to our existing efforts, and we've had
extensive recruitment efforts. It's been a priority of mine
since I've been at the FDIC to expand diversity and inclusion
at the FDIC, and it's a core objective of our action plan.
Senator Butler. Thank you for that.
I have noted to you in our previous conversations that, in
my opinion and experience, plans are only valuable when they
make their way off the shelf. And the oversight that is
required, I would expect that we would hear from you, the
monitor, and other independent oversight agents that you are
employing as a part of the report, to be reporting back to this
Committee, whether formally at the table or in writing, much
more frequently, as the implementation moves forward.
Mr. Barr, I would like to offer a question, moving from my
responsibility as a national representative here to truly
focusing on the people of California.
When the Silicon Valley Bank failed in March of 2023,
millions of dollars in loans for community projects, including
affordable housing projects across California, were
jeopardized. After purchasing SVB, First Citizens Bank
committed to expanding its community support in California,
including the provision of community reinvestment grants for an
affordable home mortgage subsidy program.
Can you talk about how the Fed has been working with the
San Francisco branch to ensure that those supervisory failures
are actually moving forward in your way as oversight to ensure
that those commitments to those affordable housing projects are
being followed through?
Mr. Barr. Thank you.
We are taking several steps to improve supervision across
the Federal Reserve, including making sure that our risk
profile feeds into the way in which institutions are
supervised. So that, as institutions grow in size and
complexity, they are supervised more intently. We are working
on our escalation framework to ensure that matters are
escalated promptly and that banks and supervisors take action
quickly when that happens.
So, these are the kinds of measures that we're undertaking
to make sure that supervision is improved in the future.
Senator Butler. Thank you.
Chair Brown. Thanks, Senator Butler.
Senator Vance from Ohio.
Senator Vance. Thank you, Mr. Chair, for hosting the
hearing.
And thanks to the three witnesses for being here.
I know that most of my colleagues have focused their
attention on the report. There's some pretty troubling--pretty
troubling--personnel management over at the FDIC, from sexual
harassment on down. And I share their concerns.
And what I want to focus on today is whether some of the
problems that have been identified at the FDIC, Chair
Gruenberg, actually make it harder for the FDIC to do its very
important job in our financial system.
And to pick a particular hobby horse, something I've been
focused on, as you know in our private conversations and in our
public conversations, we have a massive, massive problem and a
divergence in public information/public reporting on the
failure of First Republic and how it was sold to JPMorgan. And
unfortunately, we also have a troubling lack of forthrightness
from your agency about some of the underlying justifications
for why JPMorgan was allowed to purchase First Republic instead
of some of the regional banks that were interested in
purchasing it, or instead of another option, more specifically,
liquidation.
So, I want to sort of just drill in on something. So, in
public and in some of our conversations, Chair Gruenberg, you
have said that the difference between the loss, if First
Republic went to JPMorgan versus a regional bank, the loss
spread was $20 billion, is that correct?
Mr. Gruenberg. That was one estimate, Senator.
Senator Vance. That's one estimate. Other estimates that
have been out there have the loss ratio or the loss spread at a
billion dollars or substantially smaller. And one of the things
that I did with Senator Warren, one of the rare acts of
bipartisanship on the Banking Committee, is that we sent your
office a letter trying to sort of better understand what
estimates and what data points went into the least-cost
analysis that you used to give or to ensure that JPMorgan was
allowed to buy First Republic Bank.
Now, Chair Gruenberg, what was the FDIC's loss estimate for
First Republic's single family residential portfolio? Do you
remember that?
Mr. Gruenberg. Not offhand, Senator.
Senator Vance. OK.
Mr. Gruenberg. But I would be glad to follow up with you on
it.
Senator Vance. So, happy to jog your memory. So, FDIC staff
turned over information that suggested your estimate for the
single-family residential portfolio of First Republic, the loss
there was $30.3 billion--a massive, obviously, a massive amount
of money.
Now, based on information that my staff has uncovered--
sometimes with cooperation of the FDIC and sometimes, Chair
Gruenberg, with the absence or the opposite of cooperation from
the FDIC--we think there's a good amount of evidence that the
actual loss in First Republic's single family residential unit
was closer to $11 or $12 billion. In fact, a number of the
regional banks who made purchase inquiries for First Republic
thought it was it was closer to $11 or $12 billion.
So, if you, on the one hand, think that the loss in that
one portfolio was $30 billion, and the actual answer was more
like $11 or $12 billion, would that lead to a significant
difference in how you evaluate the least-cost test?
Mr. Gruenberg. It might, Senator. I don't know offhand the
basis for the two estimates. We'd, obviously, have to evaluate
that.
Senator Vance. So, one thing I just sort of want to drill
down on is your estimate for the loss from liquidation was
$16.2 billion and JPMorgan's was--the JPMorgan acquisition was
$13.6 billion. Now, that's a difference of less than $3
billion. But if you assume that the loss in the residential
portfolio was $11 billion, or even $15 billion, instead of $30
billion, the least-cost test would have led you to liquidation.
And here's the thing that I worry most about: so, Chair
Gruenberg, why haven't you responded? Why hasn't the FDIC, why
hasn't your staff, responded to so many of the inquiries that
we've made?
Some of the information that I just read back to you is
based on conversations with your staff. Some of it is based on
conversations with banks or with other offices or with other
financial regulators--because the FDIC won't actually answer
our questions.
And to sort of make this point more specifically, I worry
that the culture you've created at the FDIC makes people
terrified to answer honestly, and if they're not answering
honestly, it's impossible for us to do our job of overseeing
the regulation you guys do in the financial sector.
So, a very basic question: why haven't you guys been more
forthright in some of the questions? Are you just ignoring us?
Are you just waiting for more time?
Because this is important. I would actually like to know
what happened, and I can't figure out what happened because
your agency won't give me the answers.
Mr. Gruenberg. I appreciate the question, Senator.
I believe, as you've indicated, we've had exchanges. I
believe we've tried to respond in writing to the questions
you've raised. If they haven't been satisfactory, I'm sorry.
We're prepared to engage with you and your staff further, if
that would be helpful.
Senator Vance. Certainly, and I would appreciate that.
But, just to recap here, Mr. Chairman--and I know I'm over
my time, so give me, if you would, just a minute here. So, to
recap, in March of 2023, you and Treasury Secretary Yellen
worked with JPMorgan to inject $30 billion into First Republic
in a bid to save the bank. It was in complete failure. A month
later, First Republic failed, anyway.
You, then, allowed the concentration in the financial
sector by allowing JPMorgan to purchase First Republic, based
on a wildly off-base estimate of some of the losses that
existed in First Republic. And when our offices actually tried
to get information to better understand this, very often, we've
been steamrolled.
If that doesn't suggest a problem in the culture at the
FDIC, I don't know what does. And I certainly would love to
work with your staff on this, Mr. Gruenberg. I just don't know
if you share that commitment.
Thank you.
Chair Brown. Senator Van Hollen of Maryland is recognized.
Senator Van Hollen. Chairman, I am going to defer to
Senator Warnock.
Chair Brown. Senator Warnock of Georgia is recognized.
Senator Warnock. Thank you so very much. I appreciate the
kindness of Senator Van Hollen.
Thank you, Chair Brown.
Chair Gruenberg, when we spoke last week, I was clear with
you that I find this report deeply disturbing regarding the
workplace environment at the FDIC, the kind of harassment that
employees have experienced there. Among other concerning
conclusions, the report details the sexual harassment that
happens there; culture that certainly didn't seem to push back
hard enough; racial discrimination reported by many FDIC
employees.
When we last spoke, you told me that you were unaware of
these allegations until The Wall Street Journal article was
published in November of 2023. I have to say to you that I'm
confused by this timeline and how that's possible.
Can you clarify this for me? What aspects of this toxic
culture at the FDIC were you unaware of before the article? And
what, specifically, did The Wall Street Journal shed light on?
Mr. Gruenberg. Thank you, Senator.
I was certainly aware that the FDIC has processes for
employees to make complaints, have them investigated, and
disciplinary action result if misconduct has taken place.
What I--and I acknowledged that this was a failure on my
part--what I did not recognize was that there was a deep-seated
workplace culture at the FDIC underlying this. And prior to
those news reports, frankly, I did not recognize that. Those
news reports brought that to light.
When those reports came forward, we immediately took
action. I requested the third-party review to get a deep-seated
understanding of the issue, and that report has just come
forward. And we also developed a detailed action plan that we
have been working on since last December.
But the deep-seated cultural issues that are really at the
base of this, that have really now been discussed in the
report, I had not appreciated previously.
Senator Warnock. Yes, I agree that it's clearly a cultural
issue and it's deep-seated. Not only has this kind of workplace
sexual harassment and racial discrimination not been
discouraged, but one could well argue, when you consider the
response, that it's been encouraged, which is, clearly,
concerning--not only to me, but anybody who is looking at this.
From 2015 to 2023, of the 92 harassment complaints made
through the FDIC's Anti-Harassment Program, not a single one
resulted in removal, reductions in grade or pay, or any
discipline more serious than a suspension. Of those 92, just 2
resulted in suspensions and 2 in letters of reprimand.
So, one could argue that this encourages abuse; this
encourages harassment, which is a very serious issue. So, the
FDIC, clearly, needs a culture shift to be an effective
regulator. This has implications for the important work that we
count on you to do.
Reporting following last year's regional banking crisis
detailed a brain drain from the FDIC, and your agency even
admits that its persistent staffing shortages have harmed its
ability to supervise banks. It's not a nice place to work for a
lot of folks.
And so, you can't succeed if your employees experience a
toxic working environment. So, I will have more oversight
questions for you to answer in writing.
Senator Warnock. But, as Chair of the FDIC--I'm sorry--the
Financial Institutions and Consumer Protection Subcommittee,
which has oversight jurisdiction over your agency, I want to
ask about accountability going forward.
This report offered multiple recommendations--all of which
you've accepted--but I need a commitment from you to provide me
and my Subcommittee a written progress report and briefing on
these recommendations within the next 90 days.
Mr. Gruenberg. We would be happy to do that, Senator.
Senator Warnock. Thank you so much. I wish we had more
time. This is a critical issue, but it's important that we all
remain vigilant.
Mr. Gruenberg. Agree.
Senator Warnock. Thank you.
Chair Brown. Thanks, Senator Warnock.
Senator Britt from Alabama is recognized.
Senator Britt. Thank you, Mr. Chairman.
Oh, let's get right to it. As a woman, the findings of the
FDIC report are particularly disturbing. Hundreds of instances
of gender discrimination, unsolicited sexual advances,
harassment and assault, and even difficulty being promoted
after having children.
Let me repeat that individuals within a United States
agency denied opportunities for women because they chose to
have a family. One employee recounted being told by her
supervisor, You're a mother now. You don't belong in the
workplace. That is completely and totally unacceptable.
In the 234-page report, I do want to point out a few
things.
In 2013, OPM analysis said, quote, The culture at the FDIC
permits discrimination and in-group favoritism in relation to
promotions and job assignments.
Mr. Gruenberg, who was the Chair of the FDIC in 2013?
Mr. Gruenberg. I was, Senator.
Senator Britt. Yes, sir.
In 2015, a female employee was sent an explicit photo by
her supervisor. She didn't report it after being warned, quote,
You don't report; you don't say anything, because you end up
getting fired. End quote.
Mr. Gruenberg, who was the Chair of the FDIC in 2015?
Mr. Gruenberg. I was, Senator.
Senator Britt. In 2017, a report of, quote, a subtle and
not so subtle bias against women in the FDIC, particularly
women who speak out or dare to ask a question. This woman is
going to dare to ask a question.
Mr. Gruenberg, who was the Chair of the FDIC in 2017?
Mr. Gruenberg. I was, Senator.
Senator Britt. I could go on, but you get the point.
The FDIC was created to promote confidence in the American
financial sector.
Mr. Hsu, do you believe that an agency described as
misogynistic, abusive, toxic instils trust and confidence in
the American people?
Mr. Hsu. All the recommendations----
Senator Britt. Yeah, yes or no? Does that, if it is
described as that--and you have said that you feel like this
was an unbiased, nonpolitical report; I have read your words.
So, my question to you is: do you believe an agency described
as misogynistic, abusive, or toxic instils trust and confidence
in the American people?
Mr. Hsu. I believe the right, the issues highlighted in----
Senator Britt. No, the question is: do you think that
instills confidence if that's the way something is described?
The answer is no. Can you not say, No? Can you say, No? Can you
do that?
Mr. Hsu. We need----
Senator Britt. No, no, no. I heard----
Mr. Hsu. ----to protect the people of the FDIC.
Senator Britt. No, I heard you earlier. This is actually
really disturbing. I didn't expect to have to go back and forth
with you on this. It is an easy answer.
If an agency is described as those things, the answer is it
does not instill trust in the American people. It does not
create a culture where women feel like they want to work there,
can work there, can succeed--which means there is a competency
issue at the FDIC.
That means, when you just heard Senator Warnock talk about
the brain drain, the brain drain is because of the culture.
What woman would want to go work under these circumstances? The
answer is zero.
If we want to create a place where women can thrive, where
women in the workforce feel like they can balance having a
family and contributing to the greater good, it is an honor to
work at any of the places that you all work--and the answer to
the question is no.
So, let's try this again, Vice Chair Barr. Do you believe
that the agency described as misogynistic, abusive, or toxic
instills trust or confidence in the American public?
Mr. Barr. I think the problems in that report are deeply
troubling and unacceptable.
Senator Britt. So, it's no. Do you agree? No?
Mr. Barr. I agree that the agency has deep problems that
they need to resolve.
Senator Britt. That is--this is really frustrating.
Chair Gruenberg, you have been either the Chair, the Acting
Chair, or Vice Chair about 15 of the last 18 years, or 18 years
maybe, I guess those three things. And then, the 3 years you
weren't one of those three things, you were a member of the
Board.
Mr. Gruenberg. Yes, Senator.
Senator Britt. As the FDIC Chair, FDIC Chairman, your
responsibility is the day-to-day management of this
organization. As the Vice Chair, it's to advise the Chairman.
As the Board, it's to ensure the day-to-day operations of a
qualified management.
It is clear that we need wholesale change, and I hope that
these people will stop putting your career above the very
people that you all serve. You said this is about people; this
is about employees.
In order to restore confidence, literally, it starts at the
top. We need a change. The American people deserve a change.
The FDIC was actually created to give them confidence in the
financial system, and we need a wholesale change starting at
the top.
Chair Brown. Senator Warren of Massachusetts is recognized.
Senator Warren. Thank you, Mr. Chairman.
Everyone deserves a workplace that is free of
discrimination and harassment.
Chairman Gruenberg, the Republicans who have called today
for your resignation are engaged in a purely political
exercise. They want to replace you with Vice Chairman Travis
Hill, who is the righthand man to your Republican predecessor,
who allowed the culture problems at the agency to fester. Your
resignation would do nothing to improve the toxic culture at
the FDIC, but it would give Republicans a veto over bank
policy.
Culture starts at the top, and it is your responsibility to
fix this. So, let me ask, do you commit to implementing all of
the recommendations from the action plan and the independent
review?
Mr. Gruenberg. Yes, Senator.
Senator Warren. We will be watching you to make sure that
you keep your word on this.
So, let me turn to the purpose of this hearing. 2023 was
the biggest year for bank collapses in our Nation's history. In
a span of 2 months, we saw the second-, third-, and fourth-
largest bank failures ever.
Each of you has unfinished business needed to strengthen
our financial rules and to prevent another crisis.
First, executive compensation. The CEOs of the banks that
failed walked away with millions of dollars each--after they
ran their banks into the ground.
The FDIC, under Chair Gruenberg's leadership, and the OCC,
under Acting Comptroller Hsu, have finally revived a Dodd-Frank
rule that would reform CEO pay packages so they do not
incentivize excessive risk-taking, but the Fed has not joined
in that.
Vice Chair Barr, will the Fed follow the law and join the
FDIC and the OCC's proposed rulemaking on incentive-based
compensation?
Mr. Barr. We're committed to following the law, to having
an implementing rule under Section 956----
Senator Warren. OK.
Mr. Barr. ----but we have further work to do.
Senator Warren. Let's get it done. Your statutory deadline
passed 13 years ago. So, I hope you do not allow Chair Powell
to stop you from following the law.
Second, let's take a look at mergers. Your agencies have
allowed the industry to create more too-big-to-fail banks than
after.
Acting Comptroller Hsu, the OCC's new proposal on mergers
said nothing about how the OCC will evaluate a merger's impact
on competition, which kind of misses the point. Will you
strengthen your proposal, so that it actually addresses
competition the way the FDIC's proposal does?
Mr. Hsu. We're working with the FDIC, the Fed, and the DOJ
on exactly that, and we will continue to work on that. We're
committed to that.
Senator Warren. Good. You have a job to do. I think it's
really important that we get this done.
Vice Chair Barr, the Fed hasn't put out any update on
mergers. When can we expect the Fed to follow through on the
President's Executive order to strengthen bank merger
guidelines?
Mr. Barr. Senator, we're working with the FDIC and the OCC
and the Department of Justice on that matter. I don't
anticipate us putting out a separate proposal on this. We're
working with the other agencies.
Senator Warren. OK. Tick tock, we've got to get this done.
Finally, bank capital. These giant banks threaten our
entire economy when they collapse, but strong capital
requirements allow them to better absorb shocks without needing
a bailout from the taxpayers. The Fed released a proposal to
strengthen capital requirements on the 37 biggest banks, but
the bank lobby has launched an unprecedented campaign to weaken
it.
Vice Chair Barr, are you still committed to finalizing a
strong rule this fall?
Mr. Barr. I am committed to doing that.
Senator Warren. Good.
Chair Gruenberg, are you committed?
Mr. Gruenberg. Yes, Senator.
Senator Warren. And are you committed, Acting Comptroller
Hsu?
Mr. Hsu. Yes.
Senator Warren. Good. I'm going to hold each of you
accountable for finishing your unfinished business. The
American people need you to get this done. Thank you.
Thank you, Mr. Chairman.
Chair Brown. Senator Daines is recognized from Montana.
Senator Daines. Chairman, thank you.
On day one of his Administration, President Biden said, and
I quote, ``If you're ever working with me and I hear you treat
another colleague with disrespect, talk down to someone, I
promise you I will fire you on the spot--no if or buts.'' End
quote.
It's interesting, given the findings of a recent
investigation into the workplace culture at the FDIC, that,
Chair Gruenberg, I find you're still sitting here, still with a
job, before this Committee.
How do you reconcile what President Biden said with what's
been going on at the FDIC and the fact you still hold your job?
Mr. Gruenberg. As I've indicated, I accept all the findings
of the recent report, including in regard to my conduct. I've
committed to addressing the issue personally, as well as to
having our workforce on a confidential basis regularly give me
feedback, as well as engaging an executive coach and any
necessary counselling. I'm prepared to take responsibility on
my part for the findings of the report.
Senator Daines. So, how do you resolve your boss here
saying, ``I promise I'll fire you on the spot.''? Let me start,
first of all, with, who's been fired so far at the FDIC?
Mr. Gruenberg. I can tell you, Senator, that this year
there have been four employees separated from the agency for
misconduct. We have had changes of senior management
responsible in this area.
Senator Daines. Just to make sure I know what separated
means, define that.
Mr. Gruenberg. It means they've either received termination
notices from the agency or, before the disciplinary action
takes effect, they've resigned or retired, which they're
allowed to do under the law.
Senator Daines. How many have terminated, been terminated?
Mr. Gruenberg. I would want to get back to you, but it's
several of them, but not all of them. I mean, all of them
either received termination notices or other disciplinary
action. Before that action took place, at least not--some of
them voluntarily left the agency.
Senator Daines. What I find revealing is that some of the
same Senate Democrats who have fought, who have sought to stake
their political identities on fighting against sexual
harassment and discrimination are sitting here today, and
frankly, turning a blind eye to the very same abuses that are
happening under your leadership at the FDIC. And I think it's
another example on full display for the American people of the
Biden administration and Senate Democrats talking out of both
sides of their mouth.
If President Biden was serious about the pledge that he
made on day one, he would have already called for a change in
leadership at the FDIC. However, it's clear that the President
and his Party would rather ignore these damning findings out of
political expediency. Because, without you, Chair Gruenberg,
they lose a key figure in their rush to radically expand the
regulatory State for little purpose, other than to target
politically disfavored entities.
Chairman Gruenberg, as I alluded in my opening remarks, an
independent report investigating the workplace culture at the
FDIC found the agency you have led longer than any other FDIC
Director in history has been plagued--plagued--with sexual
harassment, assault, bullying, discrimination, brazen
misconduct.
Additionally, according to interviews with FDIC employees,
you were described as someone who is incapable of controlling
their temper, and subordinates regularly describe interactions
with you--and I quote--as being extremely difficult and
volatile.
The findings made clear that serious and systemic reforms
are desperately needed at the FDIC. Given your long tenure
leading the agency, and your clear inability or unwillingness
to address these issues, how is it you can sit here and make
the case you have the moral authority to continue leading the
agency? If we were consistent, if the President were consistent
with what he said about firing people on the spot, this issue
would have been addressed a long time ago. But how do you have
the moral authority to continue leading the agency with the
incredible list of behaviors and allegations--brazen?
Mr. Gruenberg. Senator, we have been engaged since the news
stories came out last year in an all-agency effort, engaging
employees across the agency in addressing these deeply, deeply
troubling issues. We have a comprehensive action plan we're in
the process of implementing.
We've accepted all the findings of the new report and
committed to implementing all of the recommendations. We've
already started that process. We have engaged, as I've
indicated, a broad participation in the agency. We are
committed to following through, and I think I can provide the
leadership to do that.
Senator Daines. Has the President asked you to resign?
Chair Brown. Senator----
Senator Daines. Yes, but just one last question.
Has the President asked you to resign?
Chair Brown. Senator Van Hollen, you're recognized for 5
minutes.
Senator Van Hollen. Thank you, Mr. Chairman.
Welcome, everybody.
And, Mr. Gruenberg, let me start with you. And I associate
myself with all the deep concerns expressed in the findings of
the report, including those expressed by Senator Warnock.
I have been listening to your testimony over C-SPAN before
I got here. And I think each of us who asks you this question
are repeating the question because we want your personal
commitment to following through right away in implementing all
of the recommendations. And I just want to say I think we are
going to be watching like a hawk to make sure that this
happens.
So, do I have your personal commitment that you will
immediately implement these reforms, so that we can change the
culture at the FDIC?
Mr. Gruenberg. Yes, Senator.
Senator Van Hollen. I think you hear loudly and clearly
that that is going to be an absolute requirement going forward.
Vice Chair Barr, I just want to pick up on a couple of
questions that some of my colleagues have asked.
And I want to start with the issue of implementation of
Dodd-Frank Section 956. As you know, this was required under
the bill that passed over a decade ago now. I'm glad to see the
NCUA signal their intent to propose this rule. I know the SEC
has indicated they're moving forward.
I've not seen any Notice of Proposed Rule from the Fed. Can
we get your commitment today that the Fed will quickly begin
the process of implementing this law by issuing a Notice of
Proposed Rule in short order?
Mr. Barr. Senator, in discussions with my colleagues, it
became apparent that, at the Board, we believe we need to
conduct some further analysis before deciding what steps to
take. We are committed to following the law, to implementing
Section 956, but we have further work to do.
Senator Van Hollen. Well, I know you haven't been at the
Fed for the duration of this period, but it has been--we're
close to two decades. And you agree that this is a requirement
of the law, correct?
Mr. Barr. Yes, Senator, I agree it is required by the law
and we are committed to following the law.
Senator Van Hollen. And isn't 20 years way too long to be
making good on a legal requirement?
Mr. Barr. Yes, in this case, the exact time period is
shorter than that, but it is still a very, very long time.
Senator Van Hollen. Yes, right. Yes, as a matter of years
here.
I just want to be clear; this is a case where noncompliance
with the requirement is a real problem, and a lot of us have
lost patience. So, I hope you'll communicate that back to folks
on the Board and your colleagues.
Mr. Barr. I will, Senator.
Senator Van Hollen. On the issue--I think Senator Smith
raised the issue of the CRA and the fact that, you know, we've
seen a lawsuit filed, a lot of forum shopping going on these
days.
But could each of you just take a moment to describe the
due diligence you each went through in coming up with a rule?
Obviously, this rule was way outdated. A lot of changes have
occurred in the banking system. And it's also my understanding
that you looked at the comments from all the stakeholders
before issuing the rule.
So, if you could just emphasize what process you went
through and why you think this upgrade was necessary, starting
with you, Mr. Barr?
Mr. Barr. Thank you, Senator.
The Community Reinvestment Act has been absolutely critical
for helping low- and moderate-income communities all across the
United States. And the rule that we finalized really took into
account comments from communities all over the country--from
banks of all sizes, from community organizations and civil
rights groups.
Staff worked for several years overall on this process
really to get that input in advance and to take it during the
comment process. And I think the final rule is really a win for
everybody. It really will help bring communities along in ways
that have been really just essential for the future of our
country. So, I think the staff and the agencies did really
extraordinary work to make sure that it was a lawful rule and
an impactful rule.
Senator Van Hollen. Thank you.
Just very briefly from the other witnesses.
Mr. Gruenberg. Yes, Senator. After 25 years and all the
changes in the banking industry over that period, it was
absolutely essential to modernize and strengthen the Community
Reinvestment Act to make it relevant to the changing nature of
the banking market today. Failure to do that would make CRA
increasingly irrelevant to expanding access to credit,
investment, and basic financial services to low- and moderate-
income communities and communities of color across the United
States.
And the process that went into developing that rule was
extraordinary. We went through an Advance Notice of Proposed
Rulemaking that was developed by the Fed and took public
comment, and then, went through a Notice of Proposed
Rulemaking, when we, again, took broad comment. There was an
extraordinary review done of every comment received, careful
consideration in the final rulemaking, and it is a sound,
balanced, and strong rule that will really make a difference in
low- and moderate-income communities across the country.
Senator Van Hollen. Thank you.
Mr. Hsu.
Mr. Hsu. The only thing I would add is that the efforts of
staff on this particular rulemaking were extraordinary. I've
seen a lot of different efforts, and I think it's fair to say
that a lot of thought and deliberation went into that along
with all the efforts that both Vice Chair Barr and Chairman
Gruenberg mentioned.
Senator Van Hollen. Thank you.
Thank you, Mr. Chairman.
Chair Brown. Thanks, Senator Van Hollen.
Thank you to our witnesses for joining us today. I look
forward to working with you to strengthen our financial system.
For Senators who wish to submit questions for the hearing
record, those questions are due 1 week from today, Thursday,
the 23rd of May.
To the agencies, please submit responses to questions for
the record within 45 days from the day you receive them.
Thank you again for your testimony.
The Committee is adjourned.
[Whereupon, at 12:03 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 three key financial regulators
whose agencies are responsible for protecting our banking system and
making sure it serves all Americans.
This hearing comes 1 week after the release of the independent
review of sexual harassment and workplace misconduct at the FDIC.
The review made clear that the FDIC has serious, long-running
problems.
For far too long, its leaders failed to take action to protect the
FDIC's most valuable resource: its workers.
The review details episodes of harassment, discrimination, and
other misconduct that no one should ever have to endure, especially in
their workplace, and that can never be tolerated. Period.
Chair Gruenberg, you owe workers at the FDIC, this Committee, and
the American people clear answers and decisive action.
That includes your plan for restoring the FDIC's culture and
regaining the trust of your employees.
The steps you will take to put an end to workplace misconduct,
harassment, and discrimination, and to ensure that victims aren't
silenced.
And how you will ensure that perpetrators are finally held
accountable.
The FDIC cannot fulfill its mission of maintaining stability and
public confidence in the Nation's financial system until the issues
raised in the independent review are fixed.
Failure is not an option.
Chair Gruenberg, I hope you recognize this moment for what it is--a
crisis.
Every FDIC employee--every American--deserves a workplace free of
harassment and discrimination.
And the public should be able to have confidence that the people at
this agency can focus on their jobs.
When workers face a toxic culture like this, it hurts the agency
and its mission. Workers don't speak up when they spot problems if
they're afraid of retaliation.
This is not a small, internal issue. It affects the public.
Most Americans don't think much about the FDIC. They shouldn't have
to. That's the whole point--for people to have confidence their money
is safe in the bank, without ever having to give it any thought.
And that's why the job of this agency is so crucial.
The FDIC prevented the Great Recession from becoming a Great
Depression, after the 2008 financial crisis.
The FDIC's action was crucial after the collapse of Silicon Valley
Bank and Signature Bank threatened to create a domino effect of bank
failures.
We need an effective leader at this agency to ensure its workers
can continue to protect Americans' hard-earned money and savings.
Chair Gruenberg, it's up to you to prove to the public and to your
employees that you are that leader, and are able to restore confidence
in the FDIC.
The management challenges at the FDIC only make it that much harder
for the agency to focus on the crucial work it is doing, along with the
Federal Reserve and the OCC.
In the last year--since the collapse of SVB and Signature Bank--
your agencies have helped make our banking system safer and more
resilient.
The FDIC, Federal Reserve, and OCC issued the Basel III Endgame
capital proposal to protect Americans from another financial crisis.
We must ensure that the largest banks have enough capital to
prevent another taxpayer-funded Wall Street bailout.
That's what these rules do, and they make sure that banks can
continue to lend to their communities in good times and in bad.
The proposal also recognizes the systemic importance of large
banks, like Silicon Valley Bank, that are not as big as Wall Street
megabanks--but can still do real damage to our economy when they fail.
Of course, the industry and its allies on Capitol Hill have trotted
out the same old tired--and always well-funded--arguments.
But the reality is that the largest banks have been telling their
shareholders and Wall Street analysts that they will be able to handle
the capital rules without a problem.
They've bragged about how they have remained wildly profitable, all
while comfortably meeting the projected capital levels required under
the proposed rule.
And if this all sounds familiar, this Committee hosted the CEOs
from the biggest banks last fall and not a single CEO told us they
would be unable to meet the capital levels required under the proposal.
That is why it is imperative that your agencies finalize a strong
capital rule that protects Americans and doesn't reward Wall Street's
whining.
The FDIC and OCC are also working to rein in the risky incentive-
based compensation structures that have time and time again brought our
banking system to the brink of collapse.
Wall Street firms set up a system that rewards traders for exactly
the kind of risky behavior that serves no benefit to the economy and
just puts other people's money at risk.
We saw this in 2008--when this model essentially tanked the economy
and ruined people's lives.
And we saw it again with the failure of Silicon Valley Bank last
year.
This new rule can't go forward without the Federal Reserve joining
the process.
The Fed must know what's at stake here. Its own report on Silicon
Valley Bank noted how incentive-based compensation encouraged excessive
risk-taking that eventually led to the bank's failure.
Mr. Barr, I look forward to seeing the Fed join this effort as soon
as possible.
This is also why the Senate must also pass our RECOUP Act, which
this Committee passed last year with overwhelming bipartisan support,
21-to-2, to ensure reckless executives who wreck their banks face real
accountability.
Finally, we need action to address alarming trends in the banking
system.
Over the last several decades, we've lost thousands of banks, while
the largest ones have grown to control hundreds of billions or
trillions in assets.
A strong merger review process prevents banks from growing
dangerously through acquisitions or mergers.
Americans can't afford mergers that pave the way for banks to take
out competitors, close branches, and lay off employees.
The OCC and FDIC have begun to review the merger process, and I
expect the Federal Reserve to take steps to ensure it has its own
robust review process.
Wall Street bankers crashed the economy in 2008. Americans are
still paying for it, more than a decade and a half later.
That is why your agencies--and the women and men who work there--
remain so important.
It is vital that they are able to do their jobs serving the public,
free from fear of harassment and workplace misconduct.
And ultimately you, as leaders, are responsible for what happens at
the agencies you lead.
I expect to hear from Chair Gruenberg, specifically, on what you
plan to do to make fundamental changes to the FDIC and its culture.
______
PREPARED STATEMENT OF SENATOR TIM SCOTT
Thank you, Mr. Chairman. And thank you to the witnesses for being
here today. There's no greater responsibility that we have as public
servants to make sure that we represent the interests of the American
people, that we do it well, and that we do it with character and with
integrity. No greater responsibility.
That responsibility starts here and now in addressing what your
employees, Chairman Gruenberg, describe as a ``hostile, abusive, and
unprofessional'' workplace.
And Chairman Brown, I think we actually need a single hearing
solely focused on the concerns that the employees of the FDIC have with
the leadership of Chairman Gruenberg.
Because the men and women of the FDIC, working to safeguard our
financial security, deserve a healthy workplace.
They deserve to be heard, to be seen. They deserve a safe and
equitable workplace. But most of all--they deserve to be treated with
respect.
We've all seen the 200-plus pages of the special report. We all saw
yesterday morning's grilling across the Capitol. And Marty--you've
heard me say this to you directly--you should resign.
Your employees do not have confidence in you. And this is not a
single incident. This spans over a decade-plus of your leadership at
the FDIC.
So I don't need to get into your failures and the complete lack of
management while you've been at the FDIC.
I want to talk about the people, your employees, and what they have
done and what they have had to go through.
How, how can you justify allowing supervisors to refer to disabled
veterans as ``Captain McNasty?''
We're talking about a veteran who lost part of his leg in service
to our country. And to work in a hostile work environment, where he is
referred to as ``Captain McNasty,'' is just--not just wrong--but
disgusting.
To think about the chilling reports that say employees, supervisors
``permitted to mock the fact that this employee used a wheelchair.''
What kind of environment or culture, and how long does it have to go
on, before it comes commonplace to make fun, goad veterans who served
this Nation at great personal expense.
Or when an employee reported that for a period of 3 years, a senior
examiner would ``sexualize [her] every time he could,'' and he behaved
similarly with other colleagues and bank employees, including asking to
see photos of their daughters and whether or not those daughters were
single.
But it's not just your management team, you, yourself, set the
example when you were ``absolutely irate and attacked'' your employee.
Or another FDIC employee stating that they had a meeting with you
and ``it was awful and felt very personal.'' That employees are made to
cry--as if it's some badge of honor making your employees cry. And
people--after person after person wanting to quit.
Others described your conduct as ``embarrassing and
inappropriate,'' and one person said ``they'll likely be demoted,'' and
if ``this is what it takes, they're out.''
One thing I learned from running my own business is that if you
don't take care of your employees, they can't take care of the
customer. And the customers of the FDIC, they are the American people.
Mr. Gruenberg, during your hearing yesterday, you stated that it
doesn't matter if you believe that you can change the FDIC's culture--
it matters if the employees believe that you can change the FDIC
culture.
They don't. Whistleblower after whistleblower. Employee after
employee have drawn the same conclusion.
I would like to submit for the record a statement, Mr. Chairman,
I'd like to submit for the record a statement from a collection of FDIC
whistleblowers expressing their lack of confidence in Mr. Gruenberg's
ability to change the toxicity of the agency and their doubt that he is
the right man for the job.
Leadership carries with it the responsibility of stewardship. Your
sheep are lost, and your fields riddled with weeds.
In 2021, President Biden warned his staff, ``If you're ever working
with me and I hear you treat another with disrespect . . . I promise I
will fire you on the spot.''
And he did, he fired the Inspector General, Martin Dickman, of the
U.S. Railroad Retirement Board for evidence that he ``created a toxic
work environment and engaged in abusive treatment, including using
crude and inappropriate language like slurs, and belittling
employees.''
I know I'm out of time.
At the FDIC, and their special report, described you as ``harsh,''
``aggressive,'' and ``interacting with staff in a demeaning and
inappropriate manner,'' ``having a temper,'' and causing employees to
feel disrespected, disparaged, and verbally attacked.
I can only conclude with one question, what makes you so different
from the inspector general?
Is it politics? Is it the fact that you are a necessary and easy
vote for the Biden administration's economic policy agenda? I think the
answer is yes.
______
PREPARED STATEMENT OF MICHAEL BARR
Vice Chair for Supervision, Federal Reserve
May 16, 2024
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, supervisory activities, and some of our recent
regulatory proposals.
Banking Conditions
Overall, the banking system remains sound and resilient. Banks
continue to report capital and liquidity ratios above minimum
regulatory levels. Overall asset quality remains generally sound.
Lending continues to grow but has slowed from the rapid pace of 2022,
reflecting decreased demand and tighter lending standards.
Capital ratios increased throughout 2023, leaving the system better
positioned to weather potential losses, such as those from defaults on
loans, or declines in the fair value of investment securities, which
continued to accumulate at some banks this past year.
Liquidity conditions overall are stable. Notably, liquid assets on
bank balance sheets remained above their 10-year average throughout
2023, largely the result of a significant buildup in cash positions.
Aggregate deposits were generally stable in the second half of 2023 and
have been steadily increasing in the first 3 months of 2024, reaching a
level not seen since before the stress of March of last year.
Additionally, there has been a decrease in the share of uninsured
deposits in the system.
However, both supervisors and banks must remain vigilant and ready
for expected and unexpected stresses, and presently there are several
risks we are monitoring. For example, delinquency rates are rising
among certain commercial real estate (CRE) loans, such as those backed
by offices, and some consumer loan sectors. CRE delinquencies are now
at a 5-year high. Credit card and auto loan delinquencies have been
rising. In response to rising delinquencies, banks have increased loan
loss provisions. On this basis, combined with their capital positions,
the banking sector as a whole should be prepared to absorb loan losses
that may materialize and continue fulfilling its vital role providing
credit to households and businesses. The Federal Reserve continues to
monitor these conditions closely.
The recovery from the acute stress experienced in March of last
year is in no small part due to the success of the Bank Term Funding
Program (BTFP). This program was established shortly after the failure
of Silicon Valley Bank (SVB) to help assure the stability of the
banking system and to support the economy. The BTFP helped to alleviate
liquidity pressures, particularly for banks that had experienced
significant declines in the value of securities. The BTFP ceased making
new loans as scheduled in March without any related liquidity stress in
the banking system.
Supervision
It has been a little over a year since the sudden failure of SVB
and ensuing stress in the banking system--events which prompted
questions about how banks manage risks and how we at the Federal
Reserve and other agencies supervise that risk-taking. As noted in my
testimonies last year, these events highlighted the need to improve the
speed, force, and agility of supervision to align better with the
risks, size, and complexity of supervised banks, as appropriate.
As the banking system changes, supervision must adapt with it and
appropriately account for banks of different sizes and levels of
complexity. Risks can materialize quickly and come from various
sources, and in March of last year, we saw that these risks can lead to
failure more quickly than ever. Therefore, supervisors must take timely
action as risks build up; deploy supervisory tools and escalation
effectively; account for changes in market, economic, and financial
conditions in their examination priorities and supervisory conclusions;
and identify new and different patterns of risks. We have been making
progress on these goals.
First, we are working to ensure supervision intensifies at the
right pace as a bank grows in size and complexity. This involves more
frequently assessing the condition, strategy, and risk management of
large and complex banking organizations and engaging more frequently
with these firms through the supervisory process. Additionally,
supervisors are encouraging growing regional banking organizations to
enhance their risk capabilities commensurately with their risk profiles
so that the transition to higher standards is more of a gradual slope
rather than a cliff.
Second, we are modifying supervisory processes so that once issues
are identified, they are addressed more quickly by both banks and
supervisors. For example, examiners have been conducting additional
supervisory activities for firms with large unrealized losses on
securities, high CRE exposures, or other material vulnerabilities.
Where weaknesses in risk management have been identified, examiners are
requiring firms to address these weaknesses promptly and encouraging
them to bolster their capital and liquidity positions.
Third, we are finding ways to better incorporate forward-looking
analysis into supervision. A forward-looking view supports the goal of
identifying and addressing material risks before they become serious
issues. Forward-looking risk analysis also may help to challenge
supervisory assessments and foster meaningful action where risks are
underappreciated.
Regulation
The lessons learned from SVB are not only applicable to our
supervisory framework.
Certain aspects of the failure showed that enhancements to our
regulatory framework would benefit the safety and soundness of our
banking system.
Long-Term Debt
One of these enhancements was already in process several months
before SVB's failure through an advance Notice of Proposed Rulemaking--
expanding the application of long-term debt requirements to additional
large banks. Subsequently, the Federal Reserve Board, the Federal
Deposit Insurance Corporation, and the Office of the Comptroller of the
Currency (collectively, the agencies) followed up with a proposed rule
calibrated to reflect the lower risk profiles of such banks as compared
to the largest and most complex. The proposal would increase the
options available within the resolution process and enhance financial
stability. Losses to the Deposit Insurance Fund related to the bank
failures last year could have been mitigated in part by the proposed
requirements. We are going through comments we received on this
proposal carefully.
Liquidity
Another important area is liquidity risk management. A striking
feature of last year's bank stress was that SVB, Signature Bank, and
First Republic struggled to cope with unprecedented deposit outflows
arising from a loss of confidence by their uninsured depositors. Other
banks that experienced spillovers during this period struggled with
insufficiently robust liquidity risk management. Banks found it
difficult to monetize their held-to-maturity securities through repo
transactions under severe stress and were not adequately prepared to
utilize the Federal Reserve's discount window. Additionally, the stress
revealed that some forms of deposits--such as those from venture
capital firms, high-net-worth individuals, crypto firms, and others--
may be more prone to faster runs than previously assumed. We are
exploring targeted adjustments to our regulatory framework that would
address each of these concerns: deposit outflows, held-to-maturity
monetization, and discount window preparedness.
Discount Window Operations
Discount window preparedness is essential. The Federal Reserve's
lending to banks through the discount window plays an important role in
supporting the liquidity and stability of the banking system and the
effective implementation of monetary policy. By providing ready access
to funding, the discount window helps depository institutions manage
their liquidity risks.
Providing liquidity in this way is one of the original purposes of
the Federal Reserve System. It is important that we continue to work to
improve this tool. To that end, we are reaching out to a wide range of
depository institutions of all sizes to learn from their experiences
with the discount window. From this outreach, we will identify and
prioritize changes to operations that can improve the efficacy of our
liquidity provision.
Capital
A safe and sound banking system is critical to a healthy economy,
and capital is foundational to safety and soundness. Well-capitalized
banks have more capacity to support the economy by continuing to lend
to households and businesses through stressful conditions. A well-
capitalized banking system reduces the probability that stressful
conditions result in financial crises, which inflict devastating
economic costs and suffering for families and businesses all across the
country. Strong capital also reduces the risk that the Government would
need to intervene in unusual and exigent circumstances.
This brings me to the agencies' proposal to enhance capital
requirements. Since my last testimony, we have received numerous and
meaningful comments on the proposal. We also received additional data
from a special data collection. We are closely analyzing this
information, and I expect we will have a set of broad, material changes
to the proposal that allow us to have a broad consensus in moving the
proposal forward. The changes will enable us to have a safer financial
system that better serves American households and businesses.
Thank you. I am happy to take your questions.
______
PREPARED STATEMENT OF MARTIN J. GRUENBERG
Chair, Federal Deposit Insurance Corporation
May 16, 2024
Chairman Brown, Ranking Member Scott, and Members of the Committee,
I am pleased to appear at today's hearing on ``Oversight of U.S.
Financial Regulators: Accountability and Financial Stability''. 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 (IDIs).
My statement reports on the state of the banking industry and the
condition of the FDIC's Deposit Insurance Fund (DIF). The testimony
provides an update on FDIC resolution activities and discusses the
release of a paper reaffirming the FDIC's preparedness to apply the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act) Title II \1\ framework in the resolution of a global systemically
important bank (GSIB). In addition, I discuss improvements in
regulation and bank supervision that could help prevent bank failures
like those that occurred in the spring of 2023 or mitigate their impact
in the future, such as initiatives to improve banks' management of
liquidity and funding risks and a rulemaking to strengthen corporate
governance at larger banks.
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\1\ 12 U.S.C. 5381, et seq.
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My testimony discusses other important regulatory activities at the
FDIC, including an update on the Basel III Notice of Proposed
Rulemaking, the release of an FDIC request for information and comment
on revisions to the FDIC's Statement of Policy on Bank Merger
Transactions, and steps taken to initiate a joint rulemaking on
incentive-based compensation.
First and foremost, my testimony will discuss my top priority,
addressing workplace culture issues at the FDIC.
FDIC Workplace Culture
I am deeply committed to the FDIC and its mission, as well as to
the people on whom that mission depends. I love this agency, and its
people must be protected.
That is why, when news reports of harassment, discrimination, and
other misconduct first surfaced last year, it was essential to gain a
deeper understanding of the agency's workplace culture. At my
direction, the FDIC initiated an independent, third-party review to
determine the depth and extent of these issues. Last week, the results
of that review, which was conducted by the law firm of Cleary Gottlieb,
were released. \2\ The review found that for an extended period of
time, the FDIC has failed to provide a workplace safe from sexual
harassment, discrimination, and other personal misconduct.
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\2\ See PR-35-2024, ``FDIC Special Review Committee Releases
Independent Report on Workplace Misconduct and Culture'' (May 7, 2024)
available at https://www.fdic.gov/news/press-releases/fdic-special-
review-committee-releases-independent-report-workplace-misconduct.
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I accept the findings of the report and, as Chairman, I take full
responsibility. To anyone who has experienced sexual harassment or
other misconduct at the FDIC, I again want to apologize and express how
deeply sorry I am. I also acknowledge my own failures as Chairman, both
in failing to recognize how my temperament in meetings impacted others
and for not having identified deeper cultural issues at the FDIC
sooner. I am personally committed to addressing these issues. We accept
all of the recommendations of this report and are incorporating them
into our existing Action Plan for a Safe, Fair, and Inclusive Work
Environment. \3\
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\3\ See ``Action Plan for a Safe, Fair, and Inclusive Work
Environment'' (Updated December 4, 2023), available at: https://
www.fdic.gov/about/diversity/pdf/action-plan-12-4-23-v1.pdf.
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To restore credibility with our workforce, we must act swiftly on
the report's recommendations and demonstrate a commitment to making
fundamental change. For this reason, we have already begun implementing
several key recommendations.
The report recommends that we identify and appoint a transformation
monitor who will monitor, audit, and report on our implementation of
the recommendations. We have already begun that process and will issue
a Request for Proposals for this purpose as early as this week.
The report also recommends that we engage an independent third-
party expert to support our efforts. We have begun that process and
will also issue a Request for Proposals for this purpose as early as
this week.
The report recommends fundamental change to the agency's structure
and procedures for receiving and investigating complaints, and taking
disciplinary action against misconduct in light of the failures of the
existing offices delegated those duties. We will do this by proposing
the establishment of an independent Office of Professional Conduct,
which will report directly to the FDIC Board of Directors. It will be
charged with fulfilling these responsibilities, including through the
use of outside third-parties to conduct investigations. The
transformation monitor and independent third-party expert will advise
us on this proposal.
Since December, the FDIC has been focused on implementing its
Action Plan to address all aspects of the issues raised in the news
reports. The Action Plan represents an agencywide effort, with
participation by employees at all levels.
Many of the recommendations outlined in the report are already
encompassed by the agency's Action Plan, and in some instances, our
Action Plan goes beyond the recommendations in the report. The Action
Plan is focused around three core elements--providing more support and
resources to victims, strengthening our process for reporting and
investigating complaints, and improving accountability for anyone who
is found to engage in misconduct, including through separation from the
agency. The proposal to establish an independent Office of Professional
Conduct would advance all of these goals.
It is my privilege to lead and work alongside everyone at the FDIC.
Our employees are extraordinarily dedicated to the agency and its
mission. The work they do day-in and day-out is critical to maintaining
stability and confidence in our banking system, whether by
strengthening the safety and soundness and resolvability of U.S.
financial institutions, responding to the bank failures of last year,
or through financial literacy and inclusion efforts. They deserve to
have a workplace where all feel safe, valued, and respected. There is
no higher priority for me than delivering on that commitment.
State of the Banking Industry
The banking industry has shown resilience after a period of
liquidity stress in early 2023. Full-year 2023 net income remained well
above levels reported before the pandemic, overall asset quality
metrics were favorable, and the industry's liquidity was stable as of
the end of 2023. However, banks reported lower net interest margins and
higher funding pressures. Some loan portfolios, such as credit cards,
auto loans, and non-owner-occupied commercial real estate loans, are
exhibiting increasing delinquency and charge-off rates. Although
unrealized losses on securities declined in the fourth quarter, they
remain elevated compared to historical levels. While the FDIC Quarterly
Banking Profile data will not be available until later this month,
early reports from the first quarter of 2024 indicate that net interest
margin pressures continued, and higher market interest rates likely
have reduced bank securities values, increasing unrealized losses.
In the fourth quarter of 2023, domestic deposits increased for the
first time in seven quarters, driven by growth in time deposits. The
industry's insured deposits increased by 0.5 percent. Uninsured deposit
growth was masked by one large bank that eliminated a significant
amount of intercompany deposits. Excluding that bank from the
calculations, the industry increased uninsured deposits in the quarter
by $92 billion, or 1.4 percent, and growth was widespread among bank
size groups. This would have been the industry's first increase in
uninsured deposit levels after seven consecutive quarters of decline.
The banking industry continues to face significant downside risks
from the continued effects of inflation, volatility in market interest
rates, and geopolitical uncertainty. Moreover, the economic outlook
remains uncertain, despite sustained economic growth in 2023 that
exceeded expectations. 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. The FDIC will continue to
closely monitor these risk as well as the broader prevailing trends in
the banking industry over the coming year.
Condition of the Deposit Insurance Fund
As of December 31, 2023, the Deposit Insurance Fund (DIF) balance
declined to $121.8 billion, down $6.4 billion (5.0 percent) from year-
end 2022, primarily resulting from an increase in loss provisions
associated with five bank failures during the year. \4\ Following the
failure of two large banks in March of 2023, the banking industry
experienced outflows of total deposits, but also experienced strong
insured deposit growth. This growth in insured deposits, coupled with
the decline in the DIF balance, resulted in a decline in the reserve
ratio of 10 basis points from 1.25 percent as of December 31, 2022, to
1.15 percent as of December 31, 2023. \5\
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\4\ The decline in the DIF balance does not include the cost of
protecting uninsured depositors pursuant to the systemic risk
determination announced following the failures of Silicon Valley Bank
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).
\5\ 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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Philadelphia-based Republic First Bank was closed on April 26,
2024, resulting in an estimated loss of $667 million. This is the only
bank to fail so far in 2024 and is not reflected in the DIF balance
stated as of December 31, 2023. A total of five banks failed in 2023,
resulting in a combined estimated loss at December 31, 2023, of $40.4
billion. \6\ As of December 31, 2023, the FDIC estimated the cost for
the failures of Silicon Valley Bank (SVB) and Signature Bank to total
$23.6 billion. Of that estimated total cost, the FDIC estimates that
approximately $20.4 billion was attributable to the cost of covering
uninsured depositors as a result of the systemic risk determination
made on March 12, 2023, following the closures of SVB and Signature
Bank. By statute, that estimated $20.4 billion cost of covering
uninsured depositors must be recovered through a special assessment,
which was finalized in November 2023. \7\ Accordingly, the impact on
the DIF from the five bank failures in 2023 is estimated as a loss of
$20 billion as of December 31, 2023, \8\ which excludes the cost of
protecting uninsured depositors as a result of the systemic risk
determination. It should be noted that as with all failed bank losses,
loss estimates are periodically adjusted as the FDIC, as receiver of
the failed banks, sells assets, satisfies liabilities, and incurs
receivership expenses. The final cost will be determined when the FDIC
terminates the receiverships.
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\6\ Information on all bank failures is available at: https://
www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/.
\7\ See ``Final Rule on Special Assessment Pursuant to Systemic
Risk Determination'', available at https://www.govinfo.gov/content/pkg/
FR-2023-11-29/pdf/2023-25813.pdf.
\8\ Only the remaining estimated loss from SVB and Signature Bank
of $3.2 billion, combined with the estimated losses of the three other
banks that failed in 2023, directly impact the December 31, 2023, DIF
balance. The three other banks that failed in 2023 include First
Republic Bank of San Francisco, CA, at an estimated loss of $16.7
billion, Heartland Tri-State Bank of Elkhart, KS, at an estimated loss
of $54.2 million and Citizens Bank of Sac City, IA, at an estimated
loss of $14.8 million. Loss estimates are as of December 31, 2023.
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As required by the Federal Deposit Insurance Act (FDI Act), \9\ the
FDIC has been operating under a restoration plan since September 15,
2020, \10\ which aims to restore the DIF to the statutory minimum
reserve ratio of 1.35 percent within 8 years. Notwithstanding the
growth in insured deposits and recent losses due to bank failures,
including the April 2024 failure of Republic First Bank, 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. \11\
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\9\ 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.
\10\ 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.
\11\ Section 7(b)(3)(E) of the FDI Act, 12 U.S.C. 1817(b)(3)(E).
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Bank Receiverships
Republic First Bank
On April 26, 2024, Republic First Bank (doing business as Republic
Bank), Philadelphia, Pennsylvania, was closed by the Pennsylvania
Department of Banking and Securities, which appointed the FDIC as
receiver. As of January 31, 2024, Republic Bank had approximately $6
billion in total assets and $4 billion in total deposits. To resolve
the bank, the FDIC entered into a Purchase and Assumption Agreement
with Fulton Bank, National Association of Lancaster, Pennsylvania, to
assume substantially all of the deposits and purchase substantially all
the assets of Republic Bank.
2023 Regional Bank Receiverships
Since last appearing before the Committee in November 2023, the
FDIC, as Receiver, has continued to make progress in managing and
selling the assets retained in receiverships of the three regional
banks that failed in 2023. \12\ The following highlights some
significant recent asset transactions.
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\12\ On March 20, 2023, the FDIC entered into a purchase and
assumption agreement for substantially all deposits and certain loan
portfolios of Signature Bridge Bank, National Association, by Flagstar
Bank, National Association, Hicksville, NY, a wholly owned subsidiary
of New York Community Bancorp, Inc., Westbury, NY. On March 26, 2023,
the FDIC entered into a purchase and assumption agreement for all
deposits and loans of Silicon Valley Bridge Bank, National Association,
by First-Citizens Bank & Trust Company, Raleigh, NC . On May 1, 2023,
the FDIC entered into a purchase and assumption agreement with JPMorgan
Chase Bank National Association, Columbus, OH, to assume all the
deposits and substantially all the assets of First Republic Bank, San
Francisco, CA.
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Silicon Valley Bank
On January 11, 2024, the FDIC, as Receiver, successfully completed
a structured sale of a $36 billion purchase money note issued to the
receivership by the acquiring institution, as well as a structured sale
of approximately $12.4 billion of Ginnie Mae Project Loan Securities to
the Federal Financing Bank (FFB), a Government corporation under the
general supervision and direction of the Secretary of the Treasury.
These transactions generated approximately $42 billion in net proceeds,
which were paid to the DIF, the most senior claimant in the
receivership. In brief, the FDIC, as Receiver, retained approximately
$90 billion of assets and, as of March 31, 2024, has disposed of
approximately $85 billion of assets.
Signature Bank
In December 2023, the FDIC, as Receiver, completed the disposition
of approximately $33 billion in commercial real estate (CRE) loans from
Signature Bank. This portfolio represents substantially all remaining
loans retained in the Signature receivership, which totaled
approximately $60 billion at the time Signature failed. The majority of
the $33 billion in 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 are secured by multifamily
residences that are rent controlled or rent stabilized (RCRS).
To complete the disposition, the FDIC, as Receiver, conveyed the
majority of Signature Bank's CRE loans to joint ventures, three of
which included the RCRS loans. The joint venture structure allows the
FDIC, as Receiver, to retain a majority ownership interest in the
future cash flows of loans contributed to the joint venture. A portion
of the equity in each joint venture (between 5 and 20 percent) was
widely marketed to banks and nonbank financial institutions through the
FDIC's financial advisor, Newmark & Company Real Estate Inc. The
winning bidders for each joint venture are responsible for the
management, servicing and disposition of loans in the joint venture.
The FDIC, as Receiver, disposed of Signature Bank's CRE portfolio
in accordance with its statutory obligations required in the
disposition of receivership assets, including the obligations to
maximize the net present value return from the sale or disposition of
such assets; and, in the case of the RCRS joint ventures, to maximize
the preservation of the availability and affordability of residential
real property for low-and moderate-income individuals. \13\ The winning
bidder for the RCRS joint ventures is obligated to facilitate the
financial and physical preservation of the underlying collateral,
subject to comprehensive monitoring by the FDIC, as Receiver.
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\13\ See 12 U.S.C. 1811(d)(13)(E).
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In brief, the FDIC, as Receiver, retained approximately $87 billion
of assets and, as of March 31, 2024, has disposed of approximately $58
billion of assets.
Resolutions Under Title II of the Dodd-Frank Act
The ability of the FDIC and other regulatory authorities to manage
the orderly resolution of large complex financial institutions remains
foundational to the stability of the U.S. financial system. While
recognizing the progress that has been made toward enabling such a
resolution and ending ``too big to fail,'' the FDIC also recognizes
that the resolution of a GSIB has not yet been undertaken. When it
becomes necessary to do so, carrying out such a resolution will come
with a unique set of challenges and risks. However, an orderly
resolution is far more preferable to the alternatives, particularly the
alternative of resorting to public support to prop-up a failed
institution or to bail-out investors and creditors. Last month, the
FDIC released a paper entitled, ``Overview of Resolution Under Title II
of the Dodd-Frank Act'', \14\ which reaffirms that, should the need
arise, the FDIC is prepared to apply the resolution framework that it
has worked so hard to develop in cooperation with other domestic and
global regulatory authorities. Setting out clear expectations regarding
how the FDIC will handle its role in managing failures of systemically
important financial institutions is itself a key component supporting
the execution of an orderly resolution. The FDIC stands ready to engage
with all interested parties to address questions and build further
understanding of the FDIC's plans and preparedness for executing our
Title II Dodd-Frank Act resolution responsibilities for GSIBs.
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\14\ See ``Overview of Resolution Under Title II of the Dodd-Frank
Act'' (April 2024); available at https://www.fdic.gov/sites/default/
files/2024-04/spapr1024b-0.pdf.
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Efforts To Strengthen the Regulation and Supervision of Banks
Improving the Management of Liquidity and Funding Risks by Banks
Since the regional bank failures in the spring of 2023, the FDIC
has focused on several initiatives to improve liquidity and funding
risk management at insured financial institutions. The agency continues
to emphasize the importance of sound liquidity risk management
practices and robust contingency funding planning for institutions to
manage through liquidity stress. Institutions are expected to assess
the stability of their funding and maintain a broad range of funding
sources that can be accessed during adverse conditions. Contingency
funding plans should consider a range of stress scenarios. The FDIC
encourages institutions to incorporate the Federal Reserve's discount
window as part of their contingency funding arrangements. Effective
contingency funding planning encompasses the development of operational
capability to use secondary sources, including the discount window,
testing these arrangements regularly, and ensuring that collateral is
available. Finally, institutions should revise their contingency plans
periodically and more frequently as conditions and strategic
initiatives change. To underscore and reemphasize these points, the
FDIC issued an update to the Interagency Policy Statement on Funding
and Liquidity Risk Management in July 2023. \15\
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\15\ See ``Updated Guidance: Interagency Policy Statement on
Funding and Liquidity Risk Management on the Importance of Contingency
Funding Plans'' (July 28, 2023) available at https://www.fdic.gov/news/
financial-institution-letters/2023/fil23039.html.
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Additionally, the FDIC continues efforts to improve the supervision
of interest rate and liquidity risk management, asset growth, and
reliance on uninsured and less stable deposits. While the FDIC has
regularly monitored uninsured deposit trends across the banking
industry, the 2023 bank failures highlight the potential
vulnerabilities posed by elevated reliance on uninsured deposits.
Across the large regional banks, the FDIC relies on a combination of
off-site monitoring and on-site supervisory activities to monitor
uninsured deposit concentrations. Since the 2023 bank failures, the
FDIC has continued to expand our suite of tools using regulatory
reporting data to assess deposit trends across individual banks,
develop views of risk posed by uninsured deposits to individual banks,
and prioritize supervisory activities. The FDIC has observed many large
regional banks reassessing uninsured deposit outflow assumptions used
in internal liquidity stress testing informed by the outflow
experiences of the bank failures in 2023. Other observations include
the establishment by large regional banks of more granular depositor
concentration monitoring and efforts to evaluate the impact of social
media and new technologies on deposit stability.
Examiner guidance has been updated to be more explicit about
analyses of uninsured deposit concentrations and reemphasize to
examiners the importance of forward-looking indicators of risk, such as
high growth rates and breaches of internal risk limits. The agency also
provided examiner training and guidance on interest rate risk and
liquidity risk management, including information on discount window
operations. \16\ The FDIC continues to coordinate with the Federal
banking agencies and other financial regulators on liquidity and
interest rate risk supervision, training, and policy responses to the
stress encountered in the spring of last year.
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\16\ 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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Strengthening Corporate Governance
The financial crisis of 2008 and the 2023 regional bank failures
have taught us that, among other things, IDIs with poor corporate
governance and risk management practices are more likely to fail.
Reports examining the underlying causes of the 2023 failures noted that
poor corporate governance and risk management practices were
contributing factors. \17\ It is important to note that the failure of
an IDI usually imposes costs on the DIF and negatively affects its
customers, employees, shareholders, and the public as a whole.
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\17\ The FDIC report on the failure of Signature Bank in 2023
found that the root cause of the failure was poor management without
adequate risk management practices and controls. The institution's
management did not prioritize good corporate governance practices
(FDIC's Supervision of Signature Bank, April 28, 2023, p. 2; available
at: https://www.fdic.gov/sites/default/files/2024-03/pr23033a.pdf.) The
Board of Governors of Federal Reserve System's report on the failure of
Silicon Valley Bank also identified governance and risk management
deficiencies that led to the failure. (Review of the Federal Reserve's
Supervision and Regulation of Silicon Valley Bank, April 2023, p. 1;
available at: https://www.federalreserve.gov/publications/review-of-
the-federal-reserves-supervision-and-regulation-of-silicon-valley-
bank.htm.) Similar findings are contained in the Office of the
Inspector General, Board of Governors of the Federal Reserve System,
Consumer Financial Protection Bureau's September 25, 2023 Material Loss
Review of Silicon Valley Bank; available at: https://
oig.federalreserve.gov/reports/board-material-loss-review-silicon-
valley-bank-sep2023.htm.
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In October 2023, the FDIC published a Notice of Proposed Rulemaking
to add a new Appendix C to the FDIC's safety and soundness regulation,
12 CFR 364 (Corporate Governance NPR), \18\ to incorporate guidelines
on corporate governance and risk management for FDIC-supervised IDIs
with consolidated assets of $10 billion or more. \19\ The FDIC accepted
public comments through February 9, 2024, and is currently reviewing
the comments received.
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\18\ 88 FR 70391 (October 11, 2023).
\19\ The NPR was issued under the safety and soundness authority
provided by Section 39 of the Federal Deposit Insurance Act, which
authorizes the FDIC to take formal action if an institution fails to
submit and implement, upon FDIC request, an acceptable plan to achieve
compliance with safety and soundness standards.
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An effective governance framework is necessary for an IDI to remain
profitable, competitive, and resilient through changing economic and
market conditions. The FDIC's current safety and soundness standards
for FDIC-supervised IDIs, as set forth in Appendix A of the safety and
soundness regulation and supervisory guidance on corporate governance
and risk management, provide baseline corporate governance and risk
management expectations for IDIs of all sizes.
However, the FDIC believes larger, more complex IDIs require more
sophisticated and formal corporate governance and risk management
structures and practices. The proposed guidelines would clarify the
FDIC's longstanding expectation that corporate governance and risk
management frameworks need to evolve along with the growth, complexity
and changing business models and risk profiles of larger IDIs.
In drafting the Corporate Governance NPR, staff studied both the
OCC's and the Federal Reserve Board's rules and guidance, and these
Proposed Guidelines are intended to be generally consistent with the
goals communicated through the Office of the Comptroller of the
Currency's (OCC) \20\ and Federal Reserve Board's \21\ published
issuances in an effort to harmonize corporate governance and risk
management requirements for covered institutions that present a higher
risk profile with those applicable to entities supervised by the other
Federal banking agencies. A notable difference is in the application of
the requirements to IDIs over of $10 billion where the other agencies'
apply requirements to entities over $50 billion. While the FDIC has
long expected that larger banks do need more sophisticated risk
management and governance systems and should not wait to develop them,
the FDIC is aware and will consider commenters' thoughtful views on
this important topic and others before finalizing the guidelines.
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\20\ See ``OCC Guidelines Establishing Heightened Standards for
Certain Large Insured National Banks, Insured Federal Savings
Associations, and Insured Federal Branches; Integration of
Regulations'', 79 FR 54518 (Sept. 11, 2014), https://
www.federalregister.gov/documents/2014/09/11/2014-21224/occ-guidelines-
establishing-heightenedstandards-for-certain-large-insured-national-
banksinsured; OCC, Comptroller's Handbook-Corporate and Risk
Governance, https://www.occ.gov/publications-and-resources/
publications/ comptrollers-handbook/files/corporate-riskgovernance/
index-corporate-and-riskgovernance.html.
\21\ See 12 CFR 252.22, subpart C-Risk Committee Requirements for
Bank Holding Companies With Total Consolidated Assets of $50 Billion or
More and Less Than $100 Billion. The Federal Reserve Board initially
set the application of risk committee requirements under Regulation YY,
among other requirements, for banks with total consolidated assets of
$10 billion or more pursuant to Section 165 of the Dodd-Frank Act of
2010. 79 FR 17239, 17248 (Mar. 27, 2014). This threshold was raised
from $10 billion to $50 billion pursuant to changes made under the
Economic Growth, Regulatory Relief, and Consumer Protection Act of
2018. 84 FR 59032, 59055 (Nov. 1, 2019). See SR 16-11: Supervisory
Guidance for Assessing Risk Management at Supervised Institutions With
Total Consolidated Assets Less Than $100 Billion (June 8, 2016; revised
and reposted February 17, 2021, p. 3). SR letter 95-51, Rating the
Adequacy of Risk Management Processes and Internal Controls at State
Member Banks and Bank Holding Companies (Nov. 14, 1995; revised Feb.
26, 2021) remains applicable to State member banks and bank holding
companies with $100 billion or more in total assets.
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The experience of the three large IDI failures last spring
demonstrate the need for meaningful action to improve the corporate
governance and risk management processes of large IDIs. The governance
and risk management standards put forward in this Corporate Governance
NPR would be a significant step in that direction.
Basel III Proposal
On September 18, 2023, the FDIC, the OCC and the Federal Reserve
published a Notice of Proposed Rulemaking (Basel III NPR) that would
revise and strengthen the capital requirements applicable to the
largest banking organizations. \22\
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\22\ 88 FR 64018 (September 18, 2023).
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The Basel III 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. \23\ 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 remained areas of the regulatory
capital framework that need improvement.
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\23\ See, for example, ``Regulatory Capital Rules'', etc., 78 FR
55340 (September 10, 2013).
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The Basel III 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. Taken together, these changes would bolster the
financial resilience of our Nations' largest banking organizations.
The agencies extended the comment period until January 16, 2024, to
allow interested parties additional time to analyze the issues and
prepare their comments. \24\ The agencies have received over 400 unique
comments. The comments have been very helpful in identifying areas of
the proposal that may warrant changes in a final rule. For example,
concerns have been raised 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 FDIC continues to consider the comments and
engage with our fellow regulators in developing a final rule.
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\24\ 88 FR 73770 (October 27, 2023).
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Long-Term Debt and Resolution Planning Proposals
The FDIC, together with the Federal Reserve and the OCC, issued a
Notice of Proposed Rulemaking on September 19, 2023, entitled Long-Term
Debt Requirements for Large Bank Holding Companies, Certain
Intermediate Holding Companies of Foreign Banking Organizations, and
Large Insured Depository Institutions (LTD Proposal). \25\ The proposed
long-term debt requirement could mitigate resolution challenges
encountered in the failure of large regional banks and bolster
financial stability. Long-term debt would absorb losses before the
depositor class--uninsured depositors and the FDIC--take losses. This
would decrease the incentive for uninsured depositors to run. Long-term
debt would protect the DIF, helping to make large regional bank
resolutions more orderly, and creating additional options for the FDIC
in resolution. Long-term debt would make it more likely that a
resolution transaction could satisfy the statutory least-cost
requirement without the need for a systemic risk exception, whether by
a closing weekend sale or the use of a bridge depository institution.
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\25\ 88 FR 64524 (September 19, 2023).
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The LTD Proposal's comment period was extended to January 16, 2024.
\26\ The agencies received 48 comments on the LTD Proposal, which FDIC
staff is considering as we work with our colleagues at the Federal
Reserve and OCC to finalize this proposal.
---------------------------------------------------------------------------
\26\ 88 FR 83364 (November 29, 2023).
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In addition to comments received on the LTD proposal, the FDIC is
carefully considering comments related to proposed changes to IDI
resolution plans, \27\ and with the Federal Reserve, the FDIC is
carefully considering comments related to proposed guidance for certain
firms that submit Title I resolution plans. \28\
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\27\ 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,
2023).
\28\ Guidance for Resolution Plan Submissions of Domestic
Triennial Full Filers, 88 FR 64626 (September 19, 2023); and ``Guidance
for Resolution Plan Submissions of Foreign Triennial Full Filers'', 88
FR 64641 (September 18, 2023).
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Other Regulatory Initiatives
Reviewing the Bank Merger Process
On March 21, 2024, the FDIC Board approved a revised Statement of
Policy on Bank Merger Transactions (Proposed Statement of Policy) for
publication in the Federal Register for a 60-day comment period. \29\
\30\ The Proposed Statement of Policy would update, strengthen, and
clarify the FDIC's policies related to the evaluation of bank merger
applications subject to FDIC approval under the Bank Merger Act (BMA).
\31\ The Proposed Statement of Policy reflects legislative and other
developments that have occurred since the last amendment in 2008,
including the establishment of the statutory factor regarding the risk
to the stability of the United States banking or financial system. The
Proposed Statement of Policy is more principles based; addresses each
statutory factor separately; and highlights other relevant matters and
considerations, such as related statutes pertaining to interstate
mergers, and applications from nonbanks or banks that are not
traditional community banks.
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\29\ FDIC Press Release ``FDIC Seeks Public Comment on Proposed
Revisions to Its Statement of Policy on Bank Merger Transactions''
(March 21, 2024); available at: https://www.fdic.gov/news/press-
releases/2024/pr24017.html.
\30\ In a separate Federal Register notice, the FDIC, as part of
its obligations under the Paperwork Reduction Act of 1995, invited
comment on the renewal of the existing information collection found in
the FDIC Supplement to the Interagency Bank Merger Act application
form. 89 FR 17848 (March 12, 2024).
\31\ Section 18(c) of the FDIC Act, 12 U.S.C. 1828(c).
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The Proposed Statement of Policy reflects consideration of comments
received in response to the FDIC's 2022 Request for Information and
Comment on Rules, Regulations, Guidance, and Statements of Policy
Regarding Bank Merger Transactions (2022 RFI). \32\ The 2022 RFI
solicited comments regarding the effectiveness of the existing
framework of the laws, practices, rules, regulations, guidance, and
statements of policy in meeting the statutory requirements of the BMA.
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\32\ See 87 FR 18740 (March 31, 2022).
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Rulemaking Implementing Section 956 of Dodd-Frank--Preventing
Misaligned Incentive-Based Compensation
Section 956 of the Dodd-Frank Act \33\ addresses an important
lesson from the financial crisis of 2008: poorly designed financial
institution compensation programs can provide incentives for short-term
risk taking that can jeopardize the safety and soundness of the
institution. Misaligned incentive-based compensation for executives
continues to play a role in the failure of banks. Material Loss Reviews
of the 2023 regional bank failures identified common weaknesses that
included an excessive focus on growth and short-term profitability, and
a lack of risk metrics in compensation policies and practices that may
have encouraged excessive risk taking. \34\
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\33\ Pub. L. No. 111-203, 124 Stat. 1376 (2010).
\34\ See, for example, ``FDIC Office of Inspector General's
Material Loss Review of Signature Bank of New York'' (October 23,
2023), available at https://www.fdicoig.gov/sites/default/files/
reports/2023-10/EVAL-24-02.pdf.
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This month, the FDIC took steps to initiate a joint rulemaking
implementing Section 956 by approving for publication a notice of
proposed rulemaking (Section 956 NPR), as required by statute. \35\
Implementation of the section will provide a critical tool to control
excessive risk taking by financial institution executives by aligning
their compensation with the long-term safety and soundness of their
institutions rather than short-term profits.
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\35\ Section 956 of the Dodd-Frank Act requires the FDIC, OCC,
Federal Reserve, National Credit Union Administration, Securities
Exchange Commission and Federal Housing Finance Agency to jointly issue
regulations or guidelines to implement the provision. Once all six
agencies have approved the Section 956 NPR, it will be published in the
Federal Register with a comment period of 60 days following
publication.
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The Section 956 NPR re-proposes the rule text previously proposed
in June 2016, \36\ along with proposed alternatives and questions in
the preamble. The proposal uses a tiered approach corresponding to the
size of the institution. \37\ One of the key provisions applicable to
larger covered institutions would require deferral of a certain minimum
amount of compensation of senior executive officers and other employees
who can expose the institution to material levels of risk, known as
significant risk-takers. The proposal would also require those deferred
amounts to be considered for forfeiture and downward adjustment and
clawback, in the event of undue risk taking. Deferral provides an
important mechanism to discourage inappropriate risk-taking by allowing
time to pass to evaluate the outcomes of risk-taking behavior and to
adjust incentive-based compensation accordingly. The FDIC looks forward
to reviewing and considering public comments on the Section 956 NPR.
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\36\ 81 FR 37670 (June 10, 2016).
\37\ ``Covered financial institutions'' are financial institutions
with at least $1 billion in assets. Section 956(e) of the Dodd-Frank
Act.
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Implementing the CRA Final Rule
On October 24, 2023, the FDIC, together with the Federal Reserve
and the OCC, finalized the first comprehensive rewrite of the Community
Reinvestment Act (CRA) Regulations in 25 years. The CRA, since its
enactment in 1977, has been the foundation of access to credit,
investment, and basic banking services on a responsible basis for low-
and moderate-income communities and communities of color in the United
States. The new CRA rule issued by the Federal banking agencies adapts
CRA to the changing nature of the banking business and strengthens its
provisions to carry out its critically important public purpose. The
FDIC is firmly committed to the support of the rule and believe it is
entirely consistent with the statute.
Protecting Consumers From Misrepresentations About Deposit Insurance
To protect consumers from misrepresentations by some crypto
companies regarding FDIC insurance, in 2022, the FDIC issued an
advisory to FDIC-insured institutions and published consumer
educational materials on deposit insurance. \38\ In December 2023, the
FDIC updated its regulation entitled, Advertisement of Membership,
False Advertising, Misrepresentation of Insured Status, and Misuse of
the FDIC's Name or Logo. \39\ The regulation requires the use of signs
that differentiate insured deposits from nondeposit products and that
disclose that ``nondeposit products'' are not insured by the FDIC, are
not deposits, and may lose value. Among other changes, the amended
regulation now includes crypto assets in the regulatory definition of
``nondeposit product.''
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\38\ See ``Advisory to FDIC-Insured Institutions Regarding Deposit
Insurance and Dealings With Crypto Companies'', FIL-35-2022; available
at: https://www.fdic.gov/news/financial-institution-letters/2022/
fil22035.html; and ``Fact Sheet: What the Public Needs To Know About
FDIC Deposit Insurance and Crypto Companies''; available at https://
www.fdic.gov/news/fact-sheets/crypto-fact-sheet-7-28-22.html.
\39\ 12 CFR 328 ``Advertisement of Membership, False Advertising,
Misrepresentation of Insured Status, and Misuse of the FDIC's Name or
Logo''.
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In connection with crypto-related activities, in 2023 and 2024, the
FDIC issued a number of direct letters demanding persons or entities
cease and desist from making false or misleading representations about
the existence of deposit insurance, misusing the name or logo of the
FDIC, or knowingly misrepresenting the extent and manner of deposit
insurance. \40\
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\40\ See, for example, ``FDIC's Letter to Organo Payments, Inc.''
(January 19, 2024): https://www.fdic.gov/resources/regulations/laws/
section-18a4-of-fdi-act/letters/2024-01-19-ogpay.pdf; and FDIC's Letter
to Horizon Globex GmbH (January 19, 2024): https://www.fdic.gov/
resources/regulations/laws/section-18a4-of-fdi-act/letters/2024-01-19-
upstream.pdf.
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Eliminating Unnecessary Regulatory Burden--the EGRPRA Process
The FDIC remains keenly aware of the regulatory burden that
community banks currently face. In its assessment of regulatory burden
in the current environment, the FDIC is cognizant of the importance of
balancing safety and soundness and consumer protection regulation with
the legitimate business interest of the banks. The FDIC, together with
the OCC and the Federal Reserve, initiated the third decennial review
under the Economic Growth and Regulatory Paperwork Reduction Act
(EGRPRA) \41\ that requires the agencies to review their regulations to
identify those that are outdated, unnecessary, or unduly burdensome and
to eliminate such requirements to the extent appropriate.
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\41\ 12 U.S.C. 3311.
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To facilitate this review, the agencies divided their regulations
into 12 categories. On February 6, 2024, the agencies published a
solicitation for comment on three categories of regulations:
Applications and Reporting, Powers and Activities, and International
Operations, \42\ asking the public to identify regulations they believe
are outdated, unnecessary, or unduly burdensome. The comment period
remained open for 90 days and closed on May 6, 2024. Over the next 2
years, the agencies will request comment on the regulations in the
remaining categories. In addition, the agencies also plan to hold
outreach meetings where interested parties may comment on applicable
regulatory requirements directly to the agencies.
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\42\ 89 FR 8084 (February 6, 2024).
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At the conclusion of the review, the agencies will publish in the
Federal Register a summary of the comments received, identifying and
discussing the significant issues raised; and submit a report to
Congress shortly thereafter. The report will address any significant
issues raised by the public, the relative merits of such issues, and
whether the agencies have the ability to address regulatory burden
through regulation, or whether such burdens must be addressed by
legislative action. The FDIC stands ready to address the issues raised
during this process in a manner consistent with bank safety and
soundness, the protection of consumers, and financial stability.
Enhancing Examiner Resources
In the FDIC Chief Risk Officer's report on the FDIC's supervision
of Signature Bank, the Chief Risk Officer identified examiner resources
as one of the challenges affecting the timeliness and quality of
examinations of Signature Bank. Since the issuance of the Chief Risk
Officer Report, to insure adequate examination resources going forward,
the FDIC has taken a number of actions. To enhance the attractiveness
of dedicated examiner positions, the FDIC elevated several positions
and instituted incentive payments for certain key staff. To address the
high cost of living in San Francisco, New York, Seattle, and Los
Angeles, the FDIC is offering a payment supplement in those areas.
Additionally, to address higher attrition rates among pre-commissioned
examiners in 2021 and 2022, the FDIC increased the commissioning
payment in return for a 2-year service commitment. Finally, the FDIC is
making use of retention payments to retain its retirement-eligible
examiner cadre while staffing is bolstered.
These steps are showing positive results, with reduced attrition
among pre-commissioned examiners in 2023. The FDIC has also continued
to see strong interest among candidates for entry level positions with
two of the largest groups of qualified applicants received in the last
6 months. The FDIC continues to bring in a substantial class of
examiner candidates each year.
Conclusion
I appreciate the opportunity to appear before you today to report
on our efforts to address the workplace culture of the FDIC, create a
workplace where every FDIC employees feels safe, valued and respected,
and fulfill the FDIC's 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.
I look forward to answering your questions.
______
PREPARED STATEMENT OF MICHAEL HSU
Acting Comptroller, Office of the Comptroller of the Currency
May 16, 2024
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) 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 1,000
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,
representing nearly 65 percent of all the assets held in commercial
U.S. banks.
My written statement provides an 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 set forth after becoming Acting
Comptroller, and a description of recent key regulatory developments.
State of the Federal Banking system
The overall condition of the Federal banking system is sound. OCC-
supervised banks in aggregate continue to have strong levels of
regulatory capital and sufficient liquidity buffers, though risks from
commercial real estate (CRE) and interest rate exposure warrant
attention.
The OCC closely monitors the financial condition of the
institutions it supervises and engages directly with them to ensure
they are appropriately managing their risks. The OCC's Semiannual Risk
Perspective \1\ highlights the critical elements of credit, market,
operational, and compliance risks that banks are expected to manage.
The OCC's Bank Supervision Operating Plan for 2024 \2\ identifies the
agency's current examination priorities 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 ``OCC Semiannual Risk Perspective'' (Fall 2023).
\2\ 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
It is critical to build and maintain trust in the Federal banking
system that national banks and Federal savings associations guard
against complacency. As noted above, key areas banks are expected to
manage include capital and liquidity levels and commercial real estate
exposures. In recent months, regional and community banks have been
particularly vulnerable to risks associated with CRE concentrations and
exposures. At the same time, the OCC expects the banks we supervise to
remain vigilant and focused on risk management. Banks need to
successfully manage traditional risks, such as credit, liquidity, and
interest rate risks, as well as prepare for emerging risks and tail
risk events.
Another critical area for banks to address is operational
resilience, which ensures that banks can adapt to and withstand or
recover from disruptions. Both the number of potential disruptions and
their possible impact are increasing, and may result from external
events like natural disasters, malicious actors, pandemics, or global
conflicts, or from weak internal systems, controls, or risk management.
These disruptions may impede services, like payments, clearing, and
settlement, or adversely impact systems or corrupt data. Ensuring that
critical operations and banking services can withstand or recover from
disruptive events requires planning, prudent investment, well designed
systems, and regular testing. To this end, the Federal banking agencies
have been engaged in discussions to consider potential changes to the
operational resilience framework.
Promoting Fairness
Ensuring fairness and addressing discrimination in the Federal
banking system is an important OCC objective, part of our mission, and
critical to safeguarding trust in banks. We remain committed to using
all our tools to ensure the institutions we supervise are aware of and
comply with their obligations to operate safely, soundly, and fairly.
This April marked the 1-year anniversary of OCC guidance to assist
banks in managing the various risks associated with overdraft
protection programs. \3\ The guidance identified two practices--
authorize positive, settle negative and representment--that can result
in heightened risk exposure. It also highlighted sound risk management
and proconsumer practices that banks can employ to strengthen their
overdraft protection programs. Since the beginning of the OCC's
heightened attention on overdrafts, the overdraft fees charged by OCC-
regulated banks in aggregate have fallen over 40 percent, from $6.5
billion in 2021 to $4 billion in 2023. \4\ Current supervisory data
continue to show declines in overdraft fees quarter over quarter. \5\
Among large banks, many have reduced fees and adopted pro-consumer
features, such as grace periods.
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\3\ See OCC Bulletin 2023-12, ``Overdraft Protection Programs:
Risk Management Practices'', April 26, 2023.
\4\ Call report data are available on the Federal Financial
Institutions Examination Council (FFIEC) Central Data Repository's
Public Data Distribution site. Call report data exclude overdraft-
related service charges generated by banks with assets of $1 billion or
less as of the reporting quarter, which are not required to report
overdraft-related service charges as a separate line item in their call
report data. The data also exclude overdraft-related service charges
generated by all credit unions.
\5\ Banks under $1 billion in assets do not report overdraft fee
income on the call report, so the data presented do not include those
banks.
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Importantly, all OCC-supervised large banks have stopped assessing
authorize positive, settle negative fees or insufficient funds fees and
most have discontinued collecting sustained overdraft fees. OCC-
regulated midsize and community banks have made or are in the process
of making various pro-consumer changes to their overdraft protection
programs. For example, most have eliminated representment fees or
started offering de minimis grace amounts or grace periods. This
includes those community banks that derive an outsized amount of
revenue from overdrafts. Progress with regard to representment has been
more challenging due to the critical role played by the core
processors. We understand the largest core processors are taking steps
that will allow banks to identify and address representment practices.
As those plans develop, we will continue to encourage banks and the
core processors to take steps to protect and empower consumers.
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. Initiatives
targeting credit invisibles have resulted in more than 100,000 new
entrants into the mainstream financial system who now have credit
scores and access to credit. Investments of more than $500 million in
Minority Depository Institutions (MDIs) have resulted in increased
partnerships, exchange programs, training, and capital. On May 29-30,
2024, the OCC will host the Project REACh Financial Inclusion Summit at
our headquarters in Washington, DC, to discuss progress made on several
workstreams, as well as to launch new initiatives to increase economic
mobility within financially underserved and under-resourced
communities.
In February, the Federal Financial Institutions Examination Council
(FFIEC) released a statement on ``Examination Principles Related to
Valuation Discrimination and Bias in Residential Lending'', \6\ which
provides principles for the examination of institutions' residential
property appraisal and evaluation practices to mitigate risks that may
arise due to potential discrimination or bias in those practices and to
promote credible valuations. The OCC will consider these principles in
the context of consumer compliance and safety and soundness
examinations when assessing banks' residential real estate valuation
programs.
---------------------------------------------------------------------------
\6\ See FFIEC News Release ``FFIEC Issues Statement on Examination
Principles Related to Valuation Discrimination and Bias in Residential
Lending''.
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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.
Last year, the OCC and other regulators jointly issued
``Interagency Guidance on Third-Party Relationships: Risk Management'',
\7\ to remind 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 thus do not require
the same level of risk management.
---------------------------------------------------------------------------
\7\ See OCC News Release 2023-53, ``Agencies Issue Final Guidance
on Third-Party Risk Management''.
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Effective risk management of third-party relationships is
challenging for financial institutions of all sizes, but we recognize
that community banks, including MDIs and Community Development
Financial Institutions Funds (CDFIs), may need to navigate additional
hurdles. Last month, the OCC, Board of Governors of the Federal Reserve
System (Federal Reserve), and the Federal Deposit Insurance Corporation
(FDIC) sought to address this by publishing ``Third-Party Relationships
Risk Management: A Guide for Community Banks''. \8\ This guide provided
community banks with examples of innovative approaches to conducting
due diligence and assessing new fintech companies.
---------------------------------------------------------------------------
\8\ See OCC News Release 2024-46, ``Agencies Issue Guide To Assist
Community Banks To Develop and Implement Third-Party Risk Management
Practices''.
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The OCC expects banks to approach and manage the use of artificial
intelligence (AI) consistent with principles of safety, soundness, and
fairness. To date, banks have generally approached machine learning
prudently across a range of use cases, though we are starting to see a
notable increase in the number of generative AI pilots at some of the
larger banks we supervise. AI has the potential to enable improvements
across a range of domains, but it also has the potential to perpetuate
and exacerbate the biases, discrimination, and unfairness that are
embedded in the data feeding AI systems. To guard against this, banks
need to have appropriate oversight and governance of the models they
use. In addition, banks must be attentive to the risk of AI-enabled
fraud.
The OCC also has focused on exploring 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, fair, and compliant manner. Earlier this year, the
OCC hosted a public symposium on tokenization to discuss developments,
explore legal and risk management foundations, and promote public
debate. The symposium sparked robust discussion on these issues and
highlighted the innovative potential of tokenization.
Managing Climate-Related Financial Risks
Consistent with the OCC's safety and soundness mandate, the agency
has continued to be engaged with the large banks it supervises to
better understand their climate-related financial risk management
capabilities and their efforts to identify, manage and control these
risks. In 2023, the OCC initiated discussions with banks with over $100
billion in total assets to understand their climate-related financial
risk management programs.
In general, the OCC has observed that large banks have been making
progress to incorporate climate-related financial risks into their risk
management frameworks and policies. In light of the withdrawal of
insurers from higher-risk markets and rising insurance costs, we have
recently observed that large banks are considering the impacts of
changes in insured limits or deductibles, premium increases, and lack
of insurance coverage in credit risk assessments for commercial and
residential real estate portfolios in their risk management work. The
OCC is committed to open dialogue and constructive engagement with the
large banks it supervises around climate-related financial risk
management.
Update on Other Regulatory Initiatives
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
The OCC remains actively engaged with the Federal Reserve and the
FDIC to consider all stakeholder comments received in response to the
July 2023 proposal to update the risk-based capital requirements
applicable to large banking organizations with significant trading
activity. Establishing an appropriate capital framework that adequately
captures all of the material risks of these large banks is critically
important to the health of the Nation's financial system, and the
agencies must get it right. The OCC has welcomed the broad range of
thoughtful comments received and continues to approach this rulemaking
with an open mind.
Community Reinvestment Act Final Rule
Last October, the Federal banking agencies issued an interagency
final rule implementing the Community Reinvestment Act (CRA), which 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.
On February 5, 2024, trade groups filed a lawsuit in Federal court
against the OCC, FDIC, and Federal Reserve, seeking to block the
implementation of the final rule. On March 29, 2024, the presiding
district court judge issued a preliminary injunction that currently
prevents the Federal banking agencies from enforcing the final rule and
extends the effective and applicability dates of the final rule while
the injunction is in place. The agencies filed a notice of appeal of
this injunction with the U.S. Court of Appeals on April 18, 2024, which
is currently pending. At this time, the OCC continues to assess banks'
CRA performance under its previous regulatory framework.
Business Combinations Under the Bank Merger Act
The OCC is committed to working with our interagency peers to
update our bank merger analytical frameworks, which includes
collaboration with the Department of Justice (DOJ) on the competition
prong of the Bank Merger Act. This work is ongoing.
In addition, on January 29, 2024, the OCC released a proposal to
increase the transparency of the standards that apply to the agency's
review of business combinations involving national banks and Federal
savings associations. The proposal would amend the OCC's procedures and
add a policy statement summarizing the principles the OCC uses when it
reviews proposed bank merger transactions under the Bank Merger Act.
To provide greater clarity to financial institutions and
transparency to the public, the proposed policy statement would outline
general principles the agency uses in its review of applications under
the Bank Merger Act and the OCC's consideration of the financial
stability, financial and managerial resources and future prospects, and
convenience and needs factors. The policy statement would also discuss
the criteria informing the OCC's decision on whether to hold a public
meeting on an application subject to the Bank Merger Act. We recently
extended the comment period on the proposal until June 15, 2024, and we
encourage all stakeholders to provide comments.
Incentive Compensation
On May 6, the OCC, FDIC, and the Federal Housing Finance Agency
(FHFA) approved a notice of proposed rulemaking (NPR) to fulfill
Congress' mandate through the Dodd-Frank Act to address excessive
incentive compensation and compensation that could lead to material
financial loss. The NPR is based on the proposed rule text issued in
2016, which was supported by six Federal agencies, with a new preamble
that acknowledges developments and supervisory learnings and is
intended to initiate renewed public dialogue on this topic. While the
NPR has not been adopted by all six agencies to inform a joint
rulemaking as required by statute, we are accepting comments on the
proposal and look forward to continuing to engage our interagency peers
and the public on how we can most effectively curtail problematic
incentive compensation practices.
The OCC Supports Community Banks and Minority Depository Institutions
More than 80 percent of the institutions supervised by the OCC are
community banks and Federal savings associations. These institutions
play a crucial role in providing consumers and small businesses with
essential financial services and are a source of credit that is
critical to economic growth and job expansion.
We recognize that small institutions face challenges as they work
to stay competitive in today's increasingly high-tech financial
marketplace. Digitalization has put a premium on online and mobile
engagement, customer acquisition, customization, big data, fraud
detection, artificial intelligence, machine learning, and cloud
management. These activities require expertise and economies of scale
that many banks, especially community banks and MDIs, may not have
access to. We are also aware of the impact of fraud on community banks
and in particular, delays in receiving timely responses to their
requests for reimbursements associated with fraudulent returns. The OCC
recently initiated a process to receive information from community
banks about delays in reimbursements resulting from check fraud so we
can determine a supervisory response.
Earlier this year, the OCC, Federal Reserve, and FDIC published the
first notice requesting comment on specific regulations pursuant to the
Economic Growth and Regulatory Paperwork Reduction Act of 1996
(EGRPRA). EGRPRA requires the agencies to review their regulations
every 10 years to identify outdated, unnecessary, or unduly burdensome
regulations applicable to insured depository institutions. This review
will include a series of Federal Register notices as well as public
meetings inviting stakeholder comments for agency consideration. I look
forward to a robust EGRPRA process and support a fulsome review of our
regulations with the goal of eliminating unnecessary regulatory burden
on community banks.
Conclusion
I am committed to ensuring 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.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
FROM MICHAEL BARR
Q.1. During the hearing, you responded to me that the joint
agencies working on Basel III Endgame were still working on
changes to the substance of the rule and that you could not yet
say if a re-proposal of the rule would be necessary. Yet, later
in the hearing, you indicated to Sen. Warren that a final rule
would be published this fall.
Please clarify--are you still considering substantive
changes to the proposed rule?
If yes, please explain how you can commit to any timeline
for the final rule being published, especially with a timeline
of ``the fall'' placing limits on how quickly a re-proposal
could be processed by your agency.
A.1. As I said in my testimony, given the comments we received,
I expect we will have a set of broad and material changes to
the proposal. We are currently focused on the substance of the
proposed rule and, once that work is complete, we will then
determine the appropriate process moving forward.
Q.2. On October 20, 2023, the Federal Reserve launched an
information gathering effort to conduct a quantitative impact
study (QIS) in order to ``clarify the estimated effects of the
proposal and inform any final rule''. \1\ Why was a QIS
necessary for Basel, but not for any other proposed rules and
regulations issued by your agency?
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\1\ https://www.federalreserve.gov/newsevents/pressreleases/
bowman-statement-20231024b.htm
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At what threshold do prudential agencies deem a QIS
necessary?
Why was a QIS conducted after an NPR, and not as part of an
ANPR?
A.2. We included impact analysis in the proposal, and then also
asked for and received updated data to better evaluate the
capital proposal. Doing so allowed us to gather additional,
updated data specific to what was being proposed and further
evaluate the proposal's impact. We conducted this additional
exercise voluntarily to ensure a thoughtful and transparent
approach to this proposal. We are closely analyzing this data
and are planning to make it available to the public, with an
opportunity for comment.
Q.3. Last October, the Fed took the unprecedented step of
issuing principles for climate-related financial risk
management. The ``principles'' function as guidance,
instructing financial institutions on how they should be
conducting business as it relates to with climate risks.
Governor Bowman warned when voting against the guidance, `` . .
. I am concerned that the guidance could be used by the Federal
Reserve and other Federal banking agencies to pursue climate
policies leveraging the opacity of the supervisory process.''
\2\
---------------------------------------------------------------------------
\2\ https://www.federalreserve.gov/newsevents/pressreleases/
bowman-statement-20231024b.htm
---------------------------------------------------------------------------
What safeguards are in place to ensure that this new
guidance will not be abused by regulators to push political
climate agendas?
A.3. The Federal Reserve neither prohibits nor discourages
financial institutions from providing banking services to
customers of any specific class or type, as permitted by law or
regulation. The decision regarding whether to make a loan or to
open, close, or maintain an account rests with the financial
institution, so long as the financial institution complies with
applicable laws and regulations. In October 2023, the Federal
Reserve, jointly with the Federal Deposit Insurance Corporation
and the Office of the Comptroller of the Currency, finalized
Principles for Climate-Related Financial Risk Management for
Large Financial Institutions (the principles) that provide a
high-level framework for the safe and sound management of
exposures to climate-related financial risks for large
financial institutions, those with $100 billion or more in
total assets. The principles are squarely focused on prudent
and appropriate risk management, reflecting that the Federal
Reserve's responsibilities with respect to climate change are
narrow and tightly linked to our responsibilities for bank
supervision. The Federal Reserve is not--nor do we seek to be--
a climate policymaker.
Q.4. According to the Federal Reserve's (Fed) own review of the
failure of Silicon Valley Bank (SVB), Fed examination staff
failed to identify some risks within the bank, and failed to
take appropriate action to address some risks which were
identified. Since the failure of SVB, have any members of the
examination team assigned to SVB, or other Fed staff been fired
for those failures?
What specific actions have been taken to address the
failings of those staff and to prevent this failure from
reoccurring?
A.4. The Federal Reserve has not dismissed any staff member
because of the events leading to the failure of Silicon Valley
Bank. We are focused on addressing structural problems in
supervision and regulation.
Q.5. The Federal Reserve (Fed) announced in October 2023 that
it would undertake a supplemental data collection to better
understand the effects of the Basel III Endgame proposal.
Subsequently, during a fireside chat on January 9, 2024, Vice
Chair Barr indicated that the public would have an opportunity
to comment of the results of the Fed's analysis of the data.
\3\
---------------------------------------------------------------------------
\3\ https://whfdc.org/events/EventDetails.aspx?id=1812706&group=
---------------------------------------------------------------------------
Does the Fed intend to reopen the comment period on the
Basel III Endgame rule to allow for comments on the data
results? If not, how does the Fed plan to provide the public
with an opportunity to comment?
What, if any, data does the Fed plan to release as part of
the results?
Will independent analysis of the data collected be
possible?
A.5. As noted in previously, we included impact analysis in the
proposal, and then also asked for and received updated data to
better evaluate the capital proposal. Doing so allowed us to
gather additional, updated data specific to what was being
proposed and further evaluate the proposal's impact. We
conducted this additional exercise voluntarily to ensure a
thoughtful and transparent approach to this proposal. We are
closely analyzing this data and are planning to make it
available to the public, with an opportunity for comment.
Given the comments we received on the proposal, I expect we
will have a set of broad and material changes to the proposal.
We are currently focused on the substance of the proposed rule
and, once that work is complete, we will then determine the
appropriate process moving forward.
Q.6. On February 15, 2024, the Federal Reserve released for the
first time four hypothetical scenarios in addition to its
annual stress tests. The Fed contends that these hypothetical
scenarios will help provide insight into the resiliency of the
U.S. banking system and will not have an impact on bank capital
requirements.
Will the results of these scenarios be used by bank
examiners in the supervisory process?
Will the results of these scenarios factor into a firm's
CAMELs ratings?
A.6. In February 2024, the Federal Reserve Board released the
hypothetical scenarios for its annual stress test, which helps
ensure that large banks can lend to households and businesses
even in a severe recession. Additionally, for the first time,
the Board released four hypothetical elements designed to probe
different risks through its exploratory analysis of the banking
system. The elements of the exploratory analysis will
complement the 2024 stress test by providing aggregate banking
system results against different economic and financial
conditions. The exploratory analysis can inform supervisory
analysis and deepen our understanding of the resilience of the
banking system. The exploratory analysis will not determine
capital requirements or firms' ratings.
Q.7. Given the independent report compiled by Cleary Gottlieb
which found that the FDIC is rife with sexism, discrimination,
and a toxic workplace, do you believe that Chairman Gruenberg
is the right person to lead the agency, even if just for a
period of months, during the time when a successor can be named
and confirmed?
If similar reports came to light about staff under your
leadership at the Federal Reserve, would you resign?
If an identical report was published about a bank under
your supervision, would you push to have senior executives
removed from power?
If yes, would you require that removal to be immediate?
If no, please explain why you would not push for removal.
What other actions might you take in this situation?
Would this type of report result in a bank's CAMELs rating?
If yes, please detail.
A.7. Sexual harassment has no place in our society. At the
Federal Reserve Board, we have a zero-tolerance policy for all
discriminatory harassment, including sexual harassment. This
means that we prohibit all sexual harassment, even if the
behavior does not violate the law. We require supervisors and
managers to report sexual harassment if they become aware of it
and encourage all other employees to report such behavior. We
investigate such reports promptly and we discipline employees
who violate our zero-tolerance policy. Discipline can--and
has--included separating employees who violate our policy.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM MICHAEL BARR
Q.1. Earlier this month, the Federal Reserve released the
results from its 2023 pilot scenario analysis, intended to
inform regulators and the public as to how America's largest
banks ``are using climate scenario analysis to explore the
resiliency of their business models to climate-related
financial risks.'' \1\ Unfortunately, the results revealed deep
gaps in six large banks' understanding of the risks posed to
them from climate change, including Wells Fargo, Bank of
America, and JPMorgan Chase. ``For example, participants noted
a lack of comprehensive and consistent data related to building
characteristics, insurance coverage, and counterparties' plans
to manage climate-related risks. In many cases, participants
relied on external vendors to fill data and modeling gaps.''
\2\
---------------------------------------------------------------------------
\1\ Board of Governors of the Federal Reserve System, ``Federal
Reserve Board Releases Summary of the Exploratory Pilot Climate
Scenario Analysis (CSA) Exercise That It Conducted With Six of the
Nation's Largest Banks'', press release, May 9, 2024, https://
www.federalreserve.gov/newsevents/pressreleases/other20240509a.htm.
\2\ Board of Governors of the Federal Reserve System, ``Pilot
Scenario Exercise, Summary of Participants' Risk-Management Practices
and Estimates'', May 2024, https://www.federalreserve.gov/publications/
files/csa-exercise-summary-20240509.pdf.
---------------------------------------------------------------------------
Additionally, last month, Bloomberg reported significant
rifts between American regulators and European Central Bank
officials on efforts to tackle climate risk in the global
financial system. \3\ According to the Bloomberg report,
``European central bankers have been advocating for the Basel
Committee on Banking Supervision (BCBS) to agree on requiring
lenders to disclose their strategies for meeting green
commitments,'' but ``[i]n closed-door meetings, U.S. officials
have'' pushed back against these suggestions. \4\ These efforts
have reportedly been seen by some regulators as an American
attempt to ``not push for a policy that could accelerate a
transition away from fossil fuels.'' \5\
---------------------------------------------------------------------------
\3\ Bloomberg, ``Fed Blocks Tough Global Climate Rules for Wall
Street Banks'', Alastair Marsh, April 3, 2024 https://
www.bloomberg.com/news/articles/2024-04-03/fed-blocks-tough-global-
climate-risk-rules-for-wall-street-banks.
\4\ Id.
\5\ Id.
---------------------------------------------------------------------------
Please describe your agency's authority and responsibility
to combat climate-related financial risks to the financial
system.
A.1. Consistent with our statutory mandates, the Federal
Reserve's goal is to help ensure supervised institutions are
resilient to all material risks, including financial risks
related to climate change.
The Federal Reserve is not a climate policymaker and does
not prohibit or discourage financial institutions from
providing services to law-abiding customers of any specific
class or type, as permitted by statute or regulation.
Q.2. Please describe your agency's position on the Basel
Committee on Banking Supervision (BCBS) negotiations in the
Task Force on Climate-related Financial Risks (TFCR) and
provide a list of all meetings related to these negotiations.
A.2. In light of the cross-border nature of climate-related
financial risks, the Federal Reserve has been engaging with a
wide range of domestic and international stakeholders,
including foreign supervisors and international bodies, to
better understand the potential impacts of climate-related
financial risks on supervised institutions. This includes
engagement with the Task Force on Climate-related Financial
Risks, which is tasked with undertaking the Basel Committee on
Banking Supervision's (BCBS) work on climate-related financial
risks.
The BCBS is a consensus-driven organization. As a member,
we work with other members to achieve consensus, taking into
account that members have different mandates, roles, and
financial systems in their respective countries. The Federal
Reserve approaches these engagements through the lens of our
existing mandates and authorities. We recognize the benefit of
engaging with other regulatory agencies, central banks, and
international bodies on these issues while accounting for the
important differences across jurisdictions and our own domestic
mandates.
It is important to note that standards or recommendations
agreed to in international organizations are not binding on any
jurisdiction or member, including the United States and the
Federal Reserve. The Federal Reserve makes decisions about
policy on the basis of its own domestic statutory mandates and
responsibilities.
Q.3. The BCBS's mandate is to ``strengthen the regulation,
supervision and practices of banks worldwide with the purpose
of enhancing financial stability.'' Your agency is a member of
FSOC, which describes climate change as a systemic risk. Did
representatives from your agency express concern that the BCBS
was overstepping its mandate with its climate work?
A.3. Please see my response to Question 2.
Q.4. Did representatives from your agency advocate to remove
the word ``guidance'' from TFCR's climate transition plans?
A.4. Please see my response to Question 2.
Q.5. Did representatives from your agency advocate to stop work
on Pillar I and implementation monitoring for the BCBS
principles for effective management and supervision of climate-
related financial risks?
A.5. Please see my response to Question 2.
Q.6. Did representatives from your agency advocate to remove
financed emissions from the proposed disclosure framework for
banks and advocate for key disclosure standards to be
discretionary?
A.6. Please see my response to Question 2.
Q.7. Why did the United States decline to contribute to the
BCBS's analysis on incorporating climate risk into credit-risk
assessments? Why should U.S.-based Globally Systemic Important
Banks be exempt from Globally Systemic Important analyses?
A.7. Please see my response to Question 2.
Q.8. How do you plan to monitor banks' improvements in climate-
related financial risk management in light of the Fed's recent
pilot scenario analysis?
A.8. The Federal Reserve conducted a pilot climate scenario
analysis (CSA) exercise in 2023 and 2024 to learn about large
banking organizations' climate risk-management practices and
challenges and to enhance the ability of large banking
organizations and supervisors to identify, estimate, monitor,
and manage climate-related financial risks. The pilot CSA
exercise was exploratory in nature and does not have
consequences for bank capital or supervisory implications.
The Federal Reserve issued a report in May 2024 summarizing
the results of the pilot CSA exercise and lessons learned. The
report also discusses how participating financial institutions
are using climate scenario analysis to explore the resilience
of their business models to climate-related financial risks.
Drawing on lessons learned from the exercise, the Federal
Reserve Board will continue to engage with participating banks
regarding their capacity to measure and manage climate-related
financial risks.
Q.9. Please describe what authorities your agency has to
improve access to data for banks to address insurance-related
data gaps.
A.9. Insurance plays an important role in transferring risk to
the financial sector participants best positioned to manage and
hold it. While the Federal Reserve does not regulate the way
insurance is provided or the types of insurance provided, a
significant erosion in the availability and affordability of
insurance could have adverse effects on the broader economy.
Gaps in insurance protection can have consequences for
homeowners, businesses, and State and local governments, as
well as for the value of their assets. These effects in turn
may impact the safety and soundness of supervised institutions,
the stability of the financial system, and the broader economy.
We continue to monitor trends in the availability and
affordability of insurance closely and to assess their
implications for the safety and soundness of the financial
institutions we regulate, as well as the broader economy. We
meet frequently with external stakeholders to better understand
insurance market dynamics and to hear their perspectives on the
potential implications of climate change for the insurance
sector. We are working closely with other regulatory agencies,
including through the Financial Stability Oversight Council, to
understand how developments within the insurance sector could
flow through various parts of the financial system.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
FROM MICHAEL BARR
Q.1. On May 10, 2024, U.S. Treasury Secretary Janet Yellen
called on Congress \1\ to establish a fund for troubled nonbank
mortgage companies ahead of the approval of Financial Stability
Oversight Council (FSOC)'s report on risks these companies pose
to the financial system. \2\
---------------------------------------------------------------------------
\1\ Katy O'Donnell, ``Yellen Calls on Congress To Establish Fund
for Nonbank Mortgage Companies'', Politico (May 10, 2024), https://
subscriber.politicopro.com/article/2024/05/yellen-calls-on-congress-to-
establish-fund-for-nonbank-mortgage-companies.
\2\ ``Report on Nonbank Mortgage Servicing'', Financial Stability
Oversight Council (May 10, 2024), https://home.treasury.gov/system/
files/261/FSOC-2024-Nonbank-Mortgage-Servicing-Report.pdf.
---------------------------------------------------------------------------
What structural risks do nonbank mortgage companies pose to
the U.S. financial system, particularly during economic
turmoil?
A.1. Nonbank mortgage companies perform critical mortgage
servicing functions for the mortgage market. Borrowers,
guarantors, investors, insurers, and local governments depend
on servicers to carry out a wide range of loan administration
duties in an accurate and timely way. For example, servicers
collect and record payments from borrowers and distribute those
payments to investors and other parties. Servicers also work
with borrowers who are having trouble making their payments and
consider whether a loss mitigation plan might allow a borrower
to remain in their homes.
Nonbank mortgage companies have increased their share of
the mortgage servicing market significantly since 2008,
especially for mortgages funded by securitizations guaranteed
by Fannie Mae, Freddie Mac, and Ginnie Mae. Nonbank mortgage
servicers now handle the servicing on about $6 trillion in
mortgage balances on behalf of Fannie Mae, Freddie Mac, and
Ginnie Mae. In times of market turmoil, nonbank mortgage
companies could face difficulties in carrying out these
servicing responsibilities.
Q.2. Are additional Congressional authorities necessary to
implement recommendations issued by FSOC?
A.2. The Financial Stability Oversight Council report contains
several recommendations that can be implemented under existing
authorities. In addition, it identifies areas for Congress to
consider to ensure that these crucial servicing
responsibilities continue even at times of market turmoil. \3\
---------------------------------------------------------------------------
\3\ See https://home.treasury.gov/system/files/261/FSOC-2024-
Nonbank-Mortgage-Servicing-Report.pdf.
Q.3. On April 29, 2024, the FDIC, OCC, NCUA, and FHUA noticed a
proposed rulemaking entitled ``Incentive-based Compensation
Arrangements''. \4\ The Federal Reserve Board (FRB) has not yet
acted on this proposal, as was required by section 956 of the
Dodd-Frank Wall Street Reform and Consumer Protection Act. \5\
---------------------------------------------------------------------------
\4\ Notice of Proposed Rulemaking on Incentive-based Compensation
Arrangements, FDIC, OCC, NCUA, and FHFA (April 29, 2024), https://
www.fdic.gov/sites/default/files/2024-05/2024-05-03-incentive-based-
compensation-agreements.pdf.
\5\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Pub. L. No. 111-203.
---------------------------------------------------------------------------
Why did the FRB not jointly issue this proposed rulemaking
with the other prudential regulators?
Is there a timeframe for the FRB to act?
A.3. Incentive compensation practices before the global
financial crisis were flawed and an important post-crisis
lesson was that compensation programs should provide incentives
for employees to act in the long-term interest of the firm.
Senior management should be held accountable for managing risks
in a manner consistent with the long-term health of the
organization. To this end, the Federal Reserve Board (Board),
among other Federal banking agencies, provided robust
supervisory guidance for banks on incentive compensation to
assist them in improving their compensation practices.
Section 956 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act requires six agencies--the Board, the
Office of the Comptroller of the Currency, the Federal Deposit
Insurance Corporation, the Federal Housing Finance Agency, the
National Credit Union Administration, and the Securities and
Exchange Commission--to jointly issue regulations or guidelines
implementing prohibitions on certain incentive compensation
arrangements at supervised financial institutions and requiring
firms to disclose relevant information related to incentive
compensation arrangements. The Board is committed to
implementing section 956. However, further work on this issue
should be based on updated analysis to reflect current banking
conditions and practices. We are focused on conducting this
analysis to determine the best path forward.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR FETTERMAN FROM MICHAEL BARR
Q.1. How much money has been sent through FedNow to date?
A.1. A diverse group of banks and credit unions across the
country have adopted the FedNowr Service. These institutions
are in the early stages of implementing new instant payment
services for their customers and adjusting to round-the-clock
operations. Accordingly, the number of transactions and dollar
amounts sent on the FedNow Service since July 2023 is modest,
which is in line with what we expected for a new service. Our
intention is to publish volume and value information in the
future for the FedNow Service as we do for our other payment
services. From a longer-term perspective, we expect transaction
volumes will follow the typical trajectory of a new payment
service and grow steadily over time.
Q.2. When will the Federal Reserve release to the public the
dollar amount flowing through FedNow?
A.2. Please see my response to Question 1.
Q.3. Is the Federal Reserve tracking the markups banks charge
to customers above and beyond their costs for using FedNow?
A.3. Banks and credit union can use the FedNow Service to
deliver new instant payment services for their customers. These
could include new payment features on mobile apps, banking
websites, or other interfaces such as those used for business
payments. The payment products that banks and credit unions
offer their customers and potential associated fees are within
the domain of the private sector. While we do not
systematically track this information, our understanding from
years of industry engagement is that the market for financial
institution payment services is competitive, and institutions
often provide consumer-facing payment services at low or no
cost.
Q.4. What action is the Federal Reserve taking to keep costs
low for customers and reduce excessive bank markups for using
FedNow?
A.4. Please see my response to Question 3.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGERTY
FROM MICHAEL BARR
Q.1. The Federal Housing Finance Agency (FHFA) is evaluating
Freddie Mac's proposal to purchase and guarantee single-family
closed-end second mortgages. \1\ According to preliminary
estimates, this proposal could lead Freddie Mac--and likely
Fannie Mae--to finance hundreds of billions in additional
equity extraction.
---------------------------------------------------------------------------
\1\ https://www.fhfa.gov/SupervisionRegulation/Rules/Pages/
Freddie-Mac-Proposed-Purchase-of-Single-Family-Closed-End-Second-
Mortgages-Comment-Request.aspx
---------------------------------------------------------------------------
Has the Federal Reserve assessed how such significant
equity extraction could finance spending and consumption and
thereby counteract the effects of tighter monetary policy and
contribute to inflation?
Please describe all engagement between the Federal Reserve
and the FHFA on this proposal.
A.1. The Federal Reserve was not involved in the development of
the Federal Housing Finance Agency's (FHFA) proposal. Questions
about the proposal are best directed to the FHFA.
Q.2. Chairman Powell has stated that ``policies to address
climate change are the business of elected officials. The Fed
has received no such charge.'' \2\
---------------------------------------------------------------------------
\2\ https://www.federalreserve.gov/newsevents/speech/
powell20240403a.htm
---------------------------------------------------------------------------
Is the Federal Reserve Board's exploratory pilot Climate
Scenario Analysis (CSA) exercise \3\ consistent with the
Chairman's statement?
---------------------------------------------------------------------------
\3\ https://www.federalreserve.gov/publications/files/csa-
exercise-summary-20240509.pdf
A.2. Consistent with our statutory mandates, the Federal
Reserve's goal is to help ensure supervised institutions are
resilient to all material risks, including financial risks
related to climate change. The Federal Reserve is not a climate
policymaker and does not prohibit or discourage financial
institutions from providing services to law-abiding customers
of any specific class or type, as permitted by statute or
regulation.
The Federal Reserve conducted a pilot climate scenario
analysis (CSA) exercise in 2023 and 2024 to learn about large
banking organizations' climate risk-management practices and
challenges and to enhance the ability of large banking
organizations and supervisors to identify, estimate, monitor,
and manage climate-related financial risks. The pilot CSA
exercise was exploratory in nature and does not have
consequences for bank capital or supervisory implications.
Q.3. The Board's CSA exercise uses the SSP2-4.5/RCP 4.5 and
SSP5-8.5/RCP 8.5 climate pathways as reference scenarios for
physical risk shocks. \4\
---------------------------------------------------------------------------
\4\ Ibid.
---------------------------------------------------------------------------
The RCP 8.5 climate pathway assumes a fivefold increase in
the use of coal by 2100. However, the U.S. Energy Information
Administration has found that coal consumption has declined in
most years since 2005. \5\ On what basis does the Board believe
that current trends in coal use will reverse to such a
significant degree?
---------------------------------------------------------------------------
\5\ https://www.eia.gov/energyexplained/coal/use-of-coal.php
A.3. The scenarios selected for the pilot CSA exercise were
neither forecasts nor policy prescriptions. They did not
necessarily represent the most likely future outcomes or a
comprehensive set of possible outcomes. Rather, they were
chosen to represent a range of future outcomes that could help
build understanding of how certain climate-related financial
risks could manifest for large banking organizations and how
these risks may differ from the past.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BRITT
FROM MICHAEL BARR
Q.1. On January 17, 2024, I sent a letter with nine of my
colleagues to the Federal Reserve, FDIC, and OCC outlining
significant concerns regarding the long-term debt (LTD)
proposed rule. Specifically, that the LTD proposal is not
tailored as required by S. 2155, the Economic Growth,
Regulatory Relief, and Consumer Protection Act. S. 2155
provides that if the Federal Reserve applies enhanced
prudential standards to firms with between $100 billion and
$250 billion in assets, then it ``shall . . . differentiate
amongst companies on an individual basis or by category,'' in
prescribing such prudential standards. Moreover, the Federal
banking agencies are required to make a formal determination
that the proposed application is appropriate to prevent or
mitigate risks to U.S. financial stability, or to promote
safety and soundness of the bank.
Did the Federal Reserve make this formal determination? If
so, can you share it?
The letter also urges your agencies to conduct, and
publicly release for comment, a comprehensive economic impact
and cost-benefit analysis of the LTD proposal in conjunction
with the Basel III endgame proposal and other expected
rulemakings before pursuing a LTD requirement for Category II-
IV banks. Does the Federal Reserve plan to conduct this type of
comprehensive economic impact and cost-benefit analysis? If so,
when will the findings be available? If not, why?
Additionally, in the preamble to the LTD proposal, the
agencies state that if adopted as proposed, the Basel III
endgame changes would ``lead mechanically to increased
requirements for LTD under the LTD proposal.'' While we
continue to believe the Basel III endgame proposal should be
withdrawn and rewritten, if this is the case, do you believe it
is premature to pursue interrelated rulemakings, like the LTD
proposal, until the capital impacts can be calculated after the
proposal is finalized?
A.1. I am committed to maintaining the strength and diversity
of the banking system, so that it can continue to provide
financial services and access to credit for households and
businesses. Community and regional banks serve important
sectors of the economy that are often not the focus of many
other financial institutions, including small businesses,
middle market businesses, and consumers in rural communities. I
am attentive to making sure we retain this diversity, and that
our regulation and supervision reflect the size and risks
associated with different firms.
The long-term debt (LTD) proposal only applies to firms
over $100 billion and preserves significant regulatory
differences among the firms that would be subject to the rule
and global systemically important banks (GSIBs). For example,
the firms subject to the proposal would be required to hold a
lower level of LTD than GSIBs. In addition, the firms subject
to the proposal would have no total loss-absorbing capacity
minimum requirements. The calibration of the proposed LTD
requirement also increases in stringency based on the size and
risk profile of the assets held by a bank that would be subject
to the proposal. All else equal, institutions are required to
issue more LTD when they increase in size or their assets
become riskier.
The proposal invited the public to comment on the Board of
Governor's (Board) proposed differentiation of the LTD
requirements, and whether the Board should adjust the proposed
application and scope of the rule. The Board is carefully
reviewing feedback from the public on these issues.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
FROM MARTIN J. GRUENBERG
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM MARTIN J. GRUENBERG
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
FROM MARTIN J. GRUENBERG
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF SENATOR HAGERTY
FROM MARTIN J. GRUENBERG
Q.1. On March 21, the FDIC approved a notice of proposed
rulemaking for a Statement of Policy on Bank Merger
Transactions. The proposal states the FDIC may require
divestitures before allowing a transaction to be consummated.
If a proposed merger does not take place, the divestiture
requirement could possibly pose a material financial risk to
the divesting party. On what grounds should a party be required
to irrevocably reduce its footprint in anticipation of a
transaction that may or may not take place?
A.1. Pursuant to the Bank Merger Act (BMA), the FDIC may not
approve any proposed merger transaction which would result in a
monopoly, or which would be in furtherance of any combination
or conspiracy to monopolize or to attempt to monopolize the
business of banking in any part of the United States, or any
other proposed merger transaction whose effect in any section
of the country may be substantially to lessen competition, or
to tend to create a monopoly, or which in any other manner
would be in restraint of trade, unless it finds that the
anticompetitive effects of the proposed transaction are clearly
outweighed in the public interest by the probable effect of the
transaction in meeting the convenience and needs of the
community to be served.
On September 17, 2024, the FDIC Board of Directors approved
a final Statement of Policy on Bank Merger Transactions (Final
Statement). \1\ For proposed transactions where the FDIC may
not be able to recommend approval based on potential anti-
competitive concerns, the Final Statement discusses
divestitures as a means to mitigate competitive concerns before
allowing the merger to be consummated. For example, the FDIC
may require divestitures of business lines, branches, or
portions thereof as a means to mitigate competitive concerns.
However, it is important to note that any divestitures would
occur following regulatory approval. When appropriate,
divestitures will be included as a condition that must be
addressed prior to consummation of the merger. The fact that
any divestitures would be conducted after the transaction is
approved, but before the transaction is consummated, reduces
risk. Any divestitures would not delay the merger application
submission, review, and approval processes; as such, the length
of time for regulatory review and adjudication is not expected
to change.
---------------------------------------------------------------------------
\1\ See ``FDIC Board of Directors Approves Final Statement of
Policy on Bank Merger Transactions'', Pr-79-2024 (September 17, 2024),
available at FDIC Board of Directors Approves Final Statement of Policy
on Bank Merger Transactions, FDIC.
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BRITT
FROM MARTIN J. GRUENBERG
Q.1. On January 17, 2024, I sent a letter with nine of my
colleagues to the Federal Reserve, FDIC, and OCC outlining
significant concerns regarding the long-term debt (LTD)
proposed rule. Among the various concerns outlined, is the lack
of a comprehensive economic impact and cost-benefit analysis,
including to assess the combined impacts of other concurrent
rulemakings. Specifically, the letter urges your agencies to
conduct, and publicly release for comment, a comprehensive
economic impact and cost-benefit analysis of the LTD proposal
in conjunction with the Basel III endgame proposal and other
expected rulemakings before pursuing a LTD requirement for
Category II-IV banks.
Does the FDIC plan to conduct this type of comprehensive
economic impact and cost-benefit analysis? If so, when will the
findings be available? If not, why?
A.1. The Federal banking agencies have received a significant
number of comments on both the Basel III endgame and the Long-
Term Debt proposals. They were deeply substantive, and we
continue to review and analyze them both internally among staff
at the FDIC and in collaboration with staff at the Federal
Reserve and OCC. That review and analysis includes considering
the interactions between rulemakings. While we have not made
any procedural decisions yet as we are focused on the
substance, we will continue to follow the Administrative
Procedure Act.
Q.2. Additionally, in the preamble to the LTD proposal, the
agencies state that if adopted as proposed, the Basel III
endgame changes would ``lead mechanically to increased
requirements for LTD under the LTD proposal.'' While we
continue to believe the Basel III endgame proposal should be
withdrawn and rewritten, if this is the case, do you believe it
is premature to pursue interrelated rulemakings, like the LTD
proposal, until the capital impacts can be calculated after the
proposal is finalized?
A.2. Overall, we consider the potential effects of any
rulemaking as part of our process. We continue to work through
the comments received on both the Basel III and Long-Term Debt
proposals. We will carefully consider all relevant factors when
finalizing the Long-Term Debt rule and analyzing the impact, in
accordance with the Administrative Procedure Act.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
FROM MICHAEL HSU
Q.1. In March of 2024, the FDIC Special Committee of the Board
of Directors, which at the time was comprised of just yourself
and Vice Chair McKernan, announced the appointment of three
nonvoting members to the Committee. Six weeks later, the Cleary
Gottlieb report was released.
What lead to the selection of each of the three nonvoting
members?
A.1. The FDIC Board's resolution establishing the Special
Review Committee authorized the cochairs to appoint up to three
additional nonvoting members. The nonvoting members brought a
wealth of executive management and board-level experience
across the Government and private sector, promoting a diversity
of views.
Q.2. How were each of the three nonvoting members selected?
A.2. The three nonvoting members were selected to promote a
diversity of perspectives based on their executive management
and board-level experience across the Government and private
sector. After agreeing to serve on the Special Review
Committee, each nonvoting member went through a check for
conflicts of interest before joining the committee.
Q.3. Did the three nonvoting members have an opportunity to
provide input on the scope of Cleary's investigation?
A.3. The scope of the independent review was well-defined in
the FDIC Board resolution establishing the Special Review
Committee--to review allegations of sexual harassment and
interpersonal misconduct at the FDIC, including allegations of
hostile, abusive, unprofessional, or inappropriate conduct and
any FDIC management response thereto, and the FDIC's workplace
culture, including any practices that might discourage or
otherwise deter the reporting of, or appropriate response to,
such misconduct. When the nonvoting members joined the
committee, Cleary Gottlieb provided the nonvoting members with
a summary of the review plan and briefing on work completed to-
date.
Q.4. How many times did the full special committee meet,
including with the three nonvoting members?
A.4. The full special committee, with all five members, was
briefed by Cleary after the nonvoting members joined the
committee. In addition, the full special committee held two
formal meetings.
Q.5. Of the three nonvoting members, did any of them present
statements for the record to you?
A.5. Yes, all three submitted written statements that were
added to the record of the closed FDIC Board meeting on April
30, 2024.
Q.6. Of the three nonvoting members, did any of them have a
dissenting view of the report's finding and/or recommendations?
A.6. The Special Review Committee received the first draft of
the factual findings, root causes, and recommendations from
Cleary Gottlieb in early April. Committee members reviewed the
findings, asked questions, and offered feedback. Drawing on
their experiences, the nonvoting members provided the cochairs
insightful structural comments and input to strengthen
recommendations. While all three nonvoting members agreed
overall with the report's findings and recommendations, one
member expressed disappointment that certain specific measures
were not adopted as recommendations in the report.
Q.7. During your testimony, you indicated that you stand by
FDIC Chairman Gruenberg and think he is right man for the job.
In light of Chair Brown's lack of confidence in the Chairman
and the Chairman's commitment to resign once a new Chairman is
confirmed, do you still believe that Chairman Gruenberg is the
right man for the job? If not, please explain what prompted the
change in your perspective.
A.7. As I noted in my recent testimony to the House Financial
Services Committee, my support for Chairman Gruenberg is
conditional on his delivering on his commitment to implementing
the recommendations in a timely manner.
Q.8. On October 3, 2023, you voted to advance the FDIC's
proposed guidelines establishing standards for corporate
governance and risk management, which include prescriptive
requirements for bank boards of directors, including ethical
standards. Should this rule be finalized similarly to the
proposal, and if the FDIC Board was subject to the rule, what
type of sanctions would be imposed upon you as a member of the
FDIC Board?
Asked another way, if a bank under FDIC supervision had an
identical independent report published about its toxic
workplace, what sanctions should the Board of that bank expect
under the proposal?
A.8. The FDIC sought public comments on the proposed
guidelines. FDIC staff is currently reviewing and assessing the
comments. It would not be appropriate at this time to speculate
on the application of the proposed guidelines to any specific
fact pattern.
Q.9. On May 6, the FDIC and the OCC, issued a proposal on
Section 956 of Dodd-Frank. \1\ Section 956 of Dodd-Frank
requires that six Federal agencies jointly issue a rule, a fact
that is acknowledged in your agency's press releases. Now your
agency is asking the public to submit comments directly to each
of your websites, as the rule is not being published in the
Federal Register.
---------------------------------------------------------------------------
\1\ https://www.occ.treas.gov/news-issuances/bulletins/2024/
bulletin-2024-12.html
---------------------------------------------------------------------------
Why did your agency move forward with this action without
the other legally required agencies?
A.9. Section 956 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) requires the agencies
to prescribe regulations or guidelines addressing incentive-
based compensation no later than 9 months after July 21, 2010.
The OCC approved the proposed rule in an effort to fulfill that
statutory mandate.
Q.10. Did your agency move forward with this effort as an
attempt to pressure the other agencies to promulgate their own
versions of Sec. 956, or to adopt your proposal?
A.10. The OCC approved the proposed rule in an effort to
fulfill its statutory mandate. We welcome engagement from the
other agencies as we work toward completing this rulemaking.
Q.11. On October 20, 2023, the Federal Reserve launched an
information gathering effort to conduct a quantitative impact
study (QIS) in order to ``clarify the estimated effects of the
proposal and inform any final rule'' for the Basel III Endgame
proposal. \2\ Why was a QIS necessary for Basel III Endgame,
but not for any other proposed rules and regulations issued by
your agency?
---------------------------------------------------------------------------
\2\ https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20231020b.htm
---------------------------------------------------------------------------
At what threshold do prudential agencies deem a QIS
necessary?
Why was a QIS conducted after an NPR, and not as part of an
ANPR?
A.11. The below is an integrated response to both parts of the
question.
The Federal banking agencies consider many factors when
assessing whether a quantitative impact study or supplemental
data collection should be conducted. One consideration is the
granularity and availability of data in existing regulatory
reports.
It is a core principle of the administrative process that
Federal agencies be open to considering additional data as part
of a rulemaking to ensure that a proposal is designed to
achieve its intended objectives. For this reason, agencies
regularly solicit the public for data that could inform a
proposed rulemaking.
For the Basel III Endgame proposal, the Federal Reserve
Board undertook a supplemental data collection to further
clarify the estimated effects of the proposal. The Federal
banking agencies will utilize the information from the Federal
Reserve Board's supplemental data collection, together with
input from commenters on the proposal, to inform any final
rule.
Q.12. In January, the OCC promulgated an NPR on business
combination under the bank merger act, which included,
``Applications that are consistent with approval . . . The
resulting institution will have total assets less than $50
billion . . . '' \3\
---------------------------------------------------------------------------
\3\ https://www.occ.gov/news-issuances/federal-register/2024/
89fr10010.pdf
---------------------------------------------------------------------------
Can you explain why the OCC chose $50 billion as the
threshold?
A.12. The OCC's Notice of Proposed Rulemaking (NPR) states that
the general principles of OCC review are based on the OCC's
experience with business combination applications. Generally,
the proposed threshold comports with other OCC regulations. For
example, the ``OCC Guidelines Establishing Heightened Standards
for Certain Large Insured National Banks, Insured Federal
Savings Associations, and Insured Federal Branches'', 12 CFR 30
App. D, has a $50 billion threshold.
Q.13. Can you explain why the OCC believes that mergers
resulting in an institution in excess of $50 billion are not
consistent with approval?
A.13. The NPR identifies features of applications that are
likely to be consistent with approval, including where the
acquiring bank has satisfactory supervisory ratings, no open
enforcement actions, and no fair lending, Community
Reinvestment Act (CRA), Bank Secrecy Act (BSA), or consumer
compliance concerns, and the resulting institution will have
total assets less than $50 billion. The NPR also notes that on
the other end of the spectrum, applications where the acquirer
has unsatisfactory supervisory ratings, open or pending BSA
enforcement actions, poor CRA ratings, or other supervisory
concerns are highly unlikely to receive approval unless and
until such concerns are resolved. The OCC anticipates that most
mergers are likely to fall in the middle, and applications that
do not raise supervisory or regulatory concerns may ultimately
be consistent with approval.
Q.14. During the hearing, you indicated that the OCC was
working with the FDIC, the Fed, and the DOJ on the OCC's merger
NPR.
Which agency has been the primary advocate for advancing
this proposal?
A.14. The OCC's NPR is a proposal solely by the OCC. OCC staff
have discussed bank merger policy with staff of the Federal
Deposit Insurance Corporation and the Board of Governors of the
Federal Reserve System as all three agencies process
applications under the Bank Merger Act for institutions under
their jurisdiction. Likewise, OCC staff have discussed
competition issues with staff from the Department of Justice.
Q.15. Which agency has taken the primary lead on the substance
of this proposal?
A.15. The OCC's NPR is a proposal solely by the OCC.
Q.16. In response to Senator Warren, you stated that you were
committed to finalizing the Basel III Endgame proposal this
fall despite Vice Chair for Supervision Barr's admission that
there would be ``broad and material'' changes and that
regulators were still working through substance issues before
determining the next process steps for compliance with the
Administrative Procedures Act (APA).
How can you commit to finalizing the rule by a specific
date when significant changes to the substance may require
additional procedural steps?
A.16. For all rulemakings, the OCC follows the Administrative
Procedure Act (APA) (See, e.g., 5 U.S.C. 553(c)). The OCC and
other Federal banking agencies are carefully reviewing all
comments received and considering next steps, consistent with
the requirements of the APA.
Q.17. Do you believe that ``broad and material'' changes to the
Basel III Endgame proposal would require a re-proposal to be
compliant with the APA?
A.17. The OCC greatly values public comments and the Federal
banking agencies extended the comment period to allow
stakeholders additional time to analyze the issues and prepare
their feedback. In addition, the Federal Reserve Board
undertook a supplemental data collection to further clarify the
estimated effects of the proposal.
Once the Federal banking agencies have completed review of
the comments and identified any changes to the proposed rule,
we will analyze those changes consistent with the APA to
determine whether any such changes warrant the issuance of a
new proposal or a final rule.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM MICHAEL HSU
Q.1. Earlier this month, the Federal Reserve released the
results from its 2023 pilot scenario analysis, intended to
inform regulators and the public as to how America's largest
banks ``are using climate scenario analysis to explore the
resiliency of their business models to climaterelated financial
risks.'' \1\ Unfortunately, the results revealed deep gaps in
six large banks' understanding of the risks posed to them from
climate change, including Wells Fargo, Bank of America, and
JPMorgan Chase. ``For example, participants noted a lack of
comprehensive and consistent data related to building
characteristics, insurance coverage, and counterparties' plans
to manage climate-related risks. In many cases, participants
relied on external vendors to fill data and modeling gaps.''
\2\
---------------------------------------------------------------------------
\1\ Board of Governors of the Federal Reserve System, ``Federal
Reserve Board Releases Summary of the Exploratory Pilot Climate
Scenario Analysis (CSA) Exercise That It Conducted With Six of the
Nation's Largest Banks'', press release, May 9, 2024, https://
www.federalreserve.gov/newsevents/pressreleases/other20240509a.htm.
\2\ Board of Governors of the Federal Reserve System, ``Pilot
Scenario Exercise, Summary of Participants' Risk-Management Practices
and Estimates'', May 2024, https://www.federalreserve.gov/publications/
files/csa-exercisesummary-20240509.pdf.
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Additionally, last month, Bloomberg reported significant
rifts between American regulators and European Central Bank
officials on efforts to tackle climate risk in the global
financial system. \3\ According to the Bloomberg report,
``European central bankers have been advocating for the Basel
Committee on Banking Supervision (BCBS) to agree on requiring
lenders to disclose their strategies for meeting green
commitments,'' but ``[i]n closed-door meetings, U.S. officials
have'' pushed back against these suggestions. \4\ These efforts
have reportedly been seen by some regulators as an American
attempt to ``not push for a policy that could accelerate a
transition away from fossil fuels.'' \5\
---------------------------------------------------------------------------
\3\ Bloomberg, ``Fed Blocks Tough Global Climate Rules for Wall
Street Banks'', Alastair Marsh, April 3, 2024, https://
www.bloomberg.com/news/articles/2024-04-03/fed-blocks-tough-global-
climate-risk-rules-for-wall-streetbanks.
\4\ Id.
\5\ Id.
---------------------------------------------------------------------------
Please describe your agency's authority and responsibility
to combat climate-related financial risks to the financial
system.
A.1. Climate-related financial risks have the potential to
affect the safety and soundness of banks in the form of
physical and transition risks. The OCC's attention as the
prudential supervisor of national banks and Federal savings
associations is focused on the safety and soundness
implications of climate-related financial risks. The OCC's role
is to ensure that national banks and Federal savings
associations understand their climate-related financial risks
and develop risk management frameworks and capabilities to
identify, measure, monitor, and control those risks
commensurate with their risk profile.
Q.2. Please describe your agency's position on the Basel
Committee on Banking Supervision (BCBS) negotiations in the
Task Force on Climate-related Financial Risks (TFCR) and
provide a list of all meetings related to these negotiations.
A.2. The OCC participates in the TFCR and contributes to its
work. This allows us to exchange knowledge relating to areas of
common interest and, where appropriate, to discuss common
standards, practices, and policies.
TFCR held the following meetings in the past year:
May 14, 2024
March 26-27, 2024
January 22, 2024
December 11, 2023
October 17-18, 2023
September 8, 2023
June 20, 2023
May 15, 2023
Q.3. The BCBS's mandate is to ``strengthen the regulation,
supervision and practices of banks worldwide with the purpose
of enhancing financial stability.'' Your agency is a member of
FSOC, which describes climate change as a systemic risk. Did
representatives from your agency express concern that the BCBS
was overstepping its mandate with its climate work?
A.3. The OCC has not taken the position that the BCBS has acted
outside of its mandate with respect to its climate-related
financial risk work.
Q.4. Did representatives from your agency advocate to remove
the word ``guidance'' from TFCR's climate transition plans?
A.4. The OCC, with other U.S. banking agencies, participates in
the TFCR and contributes to its work. The standards and
frameworks published by the BCBS are developed by consensus and
are not legally binding. Individual jurisdictions may choose to
implement different standards through their own legislative and
regulatory processes.
Q.5. Did representatives from your agency advocate to stop work
on Pillar I and implementation monitoring for the BCBS
principles for effective management and supervision of climate-
related financial risks?
A.5. The OCC, with other U.S. banking agencies, participates in
the TFCR and contributes to its work. The standards and
frameworks published by the BCBS are developed by consensus and
are not legally binding. Individual jurisdictions may choose to
implement different standards through their own legislative and
regulatory processes.
Q.6. Did representatives from your agency advocate to remove
financed emissions from the proposed disclosure framework for
banks and advocate for key disclosure standards to be
discretionary?
A.6. The OCC, with other U.S. banking agencies, participates in
the TFCR and contributes to its work. The standards and
frameworks published by the BCBS are developed by consensus and
are not legally binding. Individual jurisdictions may choose to
implement different standards through their own legislative and
regulatory processes.
Q.7. Why did the United States decline to contribute to the
BCBS's analysis on incorporating climate risk into credit-risk
assessments? Why should U.S.-based Globally Systemic Important
Banks be exempt from Globally Systemic Important analyses?
A.7. The OCC has been conducting range of practice reviews at
its largest banks (those with over $100 billion total assets)
to better understand the banks' climate-related financial risk
management programs and how these banks manage and monitor
climate-related credit risks.
Q.8. How do you plan to monitor banks' improvements in climate-
related financial risk management in light of the Fed's recent
pilot scenario analysis?
A.8. As laid out in the OCC's FY 2024 Bank Supervision
Operating Plan, for national banks, Federal savings
associations, and foreign banking organizations with over $100
billion in consolidated assets and any branch or agency of a
foreign banking organization that individually has total assets
of over $100 billion, examiners should monitor the development
of 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, including data and metrics, governance and
oversight, policies, procedures, limits, strategic planning,
and scenario analysis capabilities and techniques.
Q.9. Please describe what authorities your agency has to
improve access to data for banks to address insurance-related
data gaps.
A.9. The OCC's mission is 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. We generally do not view data collection on behalf
of banks (on this or any other topic) as part of that mission.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
FROM MICHAEL HSU
Q.1. On May 10, 2024, U.S. Treasury Secretary Janet Yellen
called on Congress \1\ to establish a fund for troubled nonbank
mortgage companies ahead of the approval of Financial Stability
Oversight Council (FSOC)'s report on risks these companies pose
to the financial system. \2\
---------------------------------------------------------------------------
\1\ Katy O'Donnell, ``Yellen Calls on Congress To Establish Fund
for Nonbank Mortgage Companies'', Politico (May 10, 2024), https://
subscriber.politicopro.com/article/2024/05/yellen-calls-on-congress-to-
establish-fund-fornonbank-mortgage-companies.
\2\ ``Report on Nonbank Mortgage Servicing'', Financial Stability
Oversight Council (May 10, 2024), https://home.treasury.gov/system/
files/261/FSOC-2024-Nonbank-Mortgage-Servicing-Report.pdf.
---------------------------------------------------------------------------
What structural risks do nonbank mortgage companies pose to
the U.S. financial system, particularly during economic
turmoil?
A.1. Nonbank mortgage companies (NMCs) play an important role
in the mortgage market, including through performing critical
functions like loan origination and servicing. However, they
are subject to vulnerabilities, such as market, liquidity,
leverage, and operational risk, and interconnections with other
NMCs, that could be transmitted to financial institutions and
Government sponsored enterprises (GSEs).
These vulnerabilities can amplify shocks to the mortgage
market and thereby contribute to a disruption in critical
functions of the broader mortgage market, and a deterioration
in financial stability. NMCs now originate and service a
majority of mortgages in the United States. NMCs are also
interconnected with the broader financial system through
various lending and servicing functions, increasing the
potential for wider financial stability risk. The Federal
Government has significant exposure to NMCs through mortgage
securitizations that are both guaranteed by the GSEs and
serviced by NMCs.
Q.2. Are additional Congressional authorities necessary to
implement recommendations issued by FSOC?
A.2. FSOC's 2024 Report on Nonbank Mortgage Servicing details
several recommendations to promote safe and sound operations of
NMCs, address liquidity pressures on NMCs in market stress
events, and ensure the continuity of NMCs' mortgage servicing
operations. Some of those recommendations would require
additional authorities, including recommendations that Congress
consider legislation supporting information sharing between
Federal and State entities, providing the Federal Housing
Finance Agency and Ginnie Mae with the ability to set safety
and soundness standards and have supervisory authorities for
NMC counterparties, and expanding an existing liquidity
facility. As you note in your question, the report also
recommends Congress establish a liquidity backstop fund to
facilitate operational continuity of a distressed NMC's
servicing obligations until those obligations can be
transferred in an orderly fashion and the NMC is restructured,
wound down, or sold.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BRITT
FROM MICHAEL HSU
Q.1. On January 17, 2024, I sent a letter with nine of my
colleagues to the Federal Reserve, FDIC, and OCC outlining
significant concerns regarding the long-term debt (LTD)
proposed rule. Among the various concerns outlined, is the lack
of a comprehensive economic impact and cost-benefit analysis,
including to assess the combined impacts of other concurrent
rulemakings. Specifically, the letter urges your agencies to
conduct, and publicly release for comment, a comprehensive
economic impact and cost-benefit analysis of the LTD proposal
in conjunction with the Basel III endgame proposal and other
expected rulemakings before pursuing a LTD requirement for
Category II-IV banks.
Does the OCC plan to conduct this type of comprehensive
economic impact and costbenefit analysis? If so, when will the
findings be available? If not, why?
A.1. The OCC appreciates the importance of considering the
economic impact of a rulemaking proposal as well as potential
interactions with other rulemakings, such as the regulatory
capital proposal. As part of the long-term debt proposal, the
Federal banking agencies assessed the benefits and costs of the
proposed rule. The discussion of this economic impact
assessment can be found in the preamble to the proposal at 88
FR 64549 (September 19, 2023). For all rulemakings, the OCC
also performs an additional regulatory impact analysis pursuant
to the Regulatory Flexibility Act and consistent with the
Unfunded Mandates Reform Act of 1995. This analysis considers
estimated costs and benefits, including implementation costs.
The OCC's regulatory impact analysis for the long-term debt
proposal is publicly available at https://www.regulations.gov/
document/OCC-2023-0011-0008.
As part of the rulemaking process, the OCC encourages all
stakeholders to submit comments and data. The long-term debt
proposal includes 67 questions where specific feedback was
requested, including its possible interactions with other
rulemakings. The OCC carefully reviews and considers all
comments received in response to its proposals consistent with
the requirements of the Administrative Procedure Act (see,
e.g., 5 U.S.C. 553(c)). If the OCC determines that it is
appropriate to issue a final rule after it has considered the
comments received and made revisions as appropriate, the OCC
will update and finalize its Regulatory Flexibility Act and
Unfunded Mandates Reform Act analysis.
Q.2. Mid-size and regional banks play a pivotal role in the
U.S. economy, often extending credit and financial services
where larger institutions do not. How are you working to ensure
that the LTD proposal doesn't impose unnecessary burdens on
these financial institutions?
A.2. The OCC appreciates the importance of considering the
effect the proposal could have on financial institutions,
consumers, and businesses. The Federal banking agencies are
carefully considering all comments received on the LTD
proposal, consistent with the requirements of the
Administrative Procedure Act (see, e.g., 5 U.S.C. 553(c)). As
noted in the NPR, the agencies are aware that a LTD requirement
could generate additional costs for in-scope mid-size and
regional banks. The agencies are carefully considering ways to
minimize these costs while still achieving the objectives of
the rulemaking.
Q.3. Additionally, in the preamble to the LTD proposal, the
agencies state that if adopted as proposed, the Basel III
endgame changes would ``lead mechanically to increased
requirements for LTD under the LTD proposal.'' While we
continue to believe the Basel III endgame proposal should be
withdrawn and rewritten, if this is the case, do you believe it
is premature to pursue interrelated rulemakings, like the LTD
proposal, until the capital impacts can be calculated after the
proposal is finalized?
A.3. The OCC appreciates the importance of considering the
potential interactions with other rulemakings, including the
regulatory capital proposal. The long-term debt proposal
included 67 questions where specific feedback was requested,
including its possible interactions with other rulemakings. The
OCC received a number of comments on the timing of an LTD final
rule and the interaction between the LTD proposal and other
proposed rules. The OCC is carefully considering these, and all
other, comments consistent with the requirements of the
Administrative Procedure Act (see, e.g., 5 U.S.C. 553(c)).
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