[House Hearing, 119 Congress]
[From the U.S. Government Publishing Office]
RIGHT-SIZING THE U.S. BANK CAPITAL
FRAMEWORK: A RETURN TO TAILORING,
ECONOMIC GROWTH, AND COMPETITIVENESS
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HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINETEENTH CONGRESS
FIRST SESSION
__________
DECEMBER 11, 2025
__________
Serial No. 119-49
Printed for the use of the Committee on Financial Services
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
63-577 PDF WASHINGTON : 2026
=======================================================================
HOUSE COMMITTEE ON FINANCIAL SERVICES
FRENCH HILL, Arkansas, Chairman
BILL HUIZENGA, Michigan, Vice MAXINE WATERS, California, Ranking
Chairman Member
FRANK D. LUCAS, Oklahoma SYLVIA R. GARCIA, Texas, Vice
PETE SESSIONS, Texas Ranking Member
ANN WAGNER, Missouri NYDIA M. VELAZQUEZ, New York
ANDY BARR, Kentucky BRAD SHERMAN, California
ROGER WILLIAMS, Texas GREGORY W. MEEKS, New York
TOM EMMER, Minnesota DAVID SCOTT, Georgia
BARRY LOUDERMILK, Georgia STEPHEN F. LYNCH, Massachusetts
WARREN DAVIDSON, Ohio AL GREEN, Texas
JOHN W. ROSE, Tennessee EMANUEL CLEAVER, Missouri
BRYAN STEIL, Wisconsin JAMES A. HIMES, Connecticut
WILLIAM R. TIMMONS, IV, South BILL FOSTER, Illinois
Carolina JOYCE BEATTY, Ohio
MARLIN STUTZMAN, Indiana JUAN VARGAS, California
RALPH NORMAN, South Carolina JOSH GOTTHEIMER, New Jersey
DANIEL MEUSER, Pennsylvania VICENTE GONZALEZ, Texas
YOUNG KIM, California SEAN CASTEN, Illinois
BYRON DONALDS, Florida AYANNA PRESSLEY, Massachusetts
ANDREW R. GARBARINO, New York RASHIDA TLAIB, Michigan
SCOTT FITZGERALD, Wisconsin RITCHIE TORRES, New York
MIKE FLOOD, Nebraska NIKEMA WILLIAMS, Georgia
MICHAEL LAWLER, New York BRITTANY PETTERSEN, Colorado
MONICA DE LA CRUZ, Texas CLEO FIELDS, Louisiana
ANDREW OGLES, Tennessee JANELLE BYNUM, Oregon
ZACHARY NUNN, Iowa SAM LICCARDO, California
LISA McCLAIN, Michigan
MARIA SALAZAR, Florida
TROY DOWNING, Montana
MIKE HARIDOPOLOS, Florida
TIM MOORE, North Carolina
Ben Johnson, Staff Director
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SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
ANDY BARR, Kentucky, Chairman
BARRY LOUDERMILK, Georgia, BILL FOSTER, Illinois, Ranking
Vice Chairman Member
BILL HUIZENGA, Michigan NYDIA M. VELAZQUEZ, New York
ROGER WILLIAMS, Texas GREGORY W. MEEKS, New York
JOHN W. ROSE, Tennessee DAVID SCOTT, Georgia
WILLIAM R. TIMMONS IV, South BRAD SHERMAN, California
Carolina AL GREEN, Texas
RALPH NORMAN, South Carolina JUAN VARGAS, California
DANIEL MEUSER, Pennsylvania SEAN CASTEN, Illinois
YOUNG KIM, California STEPHEN F. LYNCH, Massachusetts
BYRON DONALDS, Florida JOYCE BEATTY, Ohio
SCOTT FITZGERALD, Wisconsin CLEO FIELDS, Louisiana
MIKE FLOOD, Nebraska
MONICA DE LA CRUZ, Texas
TIM MOORE, North Carolina
C O N T E N T S
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Thursday, December 11, 2025
OPENING STATEMENTS
Page
Hon. Andy Barr, Chairman of the Subcommittee on Financial
Institutions, a U.S. Representative from Kentucky.............. 1
Hon. Bill Foster, Ranking Member of the Subcommittee on Financial
Institutions, a U.S. Representative from Illinois.............. 3
STATEMENTS
Hon. French Hill, Chairman of the Committee on Financial
Services, a U.S. Representative from Arkansas.................. 4
Hon. Maxine Waters, Ranking Member of the Committee on Financial
Services, a U.S. Representative from California................ 5
WITNESSES
Mrs. Margaret Tahyar, Head of Financial Institutions, Davis Polk
& Wardwell LLP................................................. 5
Prepared Statement........................................... 8
Mrs. Amanda Eversole, President and Chief Executive Officer,
Financial Services Forum....................................... 18
Prepared Statement........................................... 20
Mr. Andrew Olmem, Managing Partner and Co-Leader of the Financial
Services Group, Mayer Brown.................................... 36
Prepared Statement........................................... 38
Mr. Mike Flood, Head of Center for Capital Markets
Competitiveness, U.S. Chamber of Commerce...................... 44
Prepared Statement........................................... 46
Mr. Simon Johnson, Professor of Entrepreneurship at the MIT Sloan
School of Management........................................... 54
Prepared Statement........................................... 56
APPENDIX
MATERIALS SUBMITTED FOR THE RECORD
Hon. Andy Barr:
The Mortgage Bankers Association (MBA)....................... 102
RESPONSES TO QUESTIONS FOR THE RECORD
Written responses to questions for the record from Mr. Simon
Johnson
Representative Al Green...................................... 108
LEGISLATION
H.R. 5616, the $2.50 for America's 250th Act..................... 111
H.R. 1761, the Donald J. Trump $250 Bill Act..................... 118
RIGHT-SIZING THE U.S. BANK CAPITAL
FRAMEWORK: A RETURN TO TAILORING,
ECONOMIC GROWTH, AND COMPETITIVENESS
----------
Thursday, December 11, 2025
U.S. House of Representatives,
Subcommittee on Financial Institutions,
Committee on Financial Services,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:09 a.m., in
room 2128, Rayburn House Office Building, Hon. Andy Barr
[chairman of the subcommittee] presiding.
Present: Representatives Barr, Hill, Huizenga, Williams of
Texas, Loudermilk, Rose, Timmons, Kim, Flood, Moore, Foster,
Waters, Velazquez, Scott, Sherman, Green, Vargas, Casten,
Lynch, Beatty, and Fields.
Chairman Barr. The Subcommittee on Financial Institutions
will come to order.
Without objection, the chair is authorized to declare a
recess of the committee at any time.
Today's hearing is titled ``Right-Sizing the U.S. Bank
Capital Framework: A Return to Tailoring, Economic Growth, and
Competitiveness.''
Without objection, all members will have 5 legislative days
within which to submit extraneous materials to the chair for
inclusion in the record.
I now recognize myself for 4 minutes for an opening
statement.
OPENING STATEMENT OF HON. ANDY BARR, CHAIRMAN OF THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS, A U.S. REPRESENTATIVE
FROM KENTUCKY
Today, the subcommittee turns its attention to an issue
that sits at the heart of American economic strength: our bank
capital framework. For years, Washington has layered rule upon
rule on American banks, forcing them to retain capital at
levels that far exceed standards applicable to our global
competitors, and the results have been detrimental to U.S.
firms.
We have a capital system that increasingly gold-plates
international requirements, imposes one-size-fits-all mandates
on institutions with different risk and business profiles, and
undermines the competitiveness of American institutions.
Let me be clear. Republicans on this committee support a
tailored, commonsense capital framework that protects the
safety and soundness of the American financial system, but what
we do not support is a regulatory framework that needlessly
restricts credit, penalizes growth, and places American banks
at a disadvantage against foreign competitors who are held to
lesser standards.
The Basel III Endgame framework should not be solely
focused on international harmonization. It should be focused on
economic growth as well. Capital should be right-sized to
protect the economy, not inflated for ideological reasons, not
used as a tool to achieve political objectives, and not
calibrated without regard to the real-world impacts on lending
liquidity and the economic vitality of local community
institutions.
This is why the Biden Administration's initial Basel III
Endgame proposal was deeply flawed and received bipartisan
criticism. It threatened to elevate capital burdens so far
above international norms that entire categories of banking
business lines, from residential mortgages to market-making,
could have migrated to offshore institutions.
Fortunately, the bipartisan message was clear: The Basel
III Endgame must be reproposed, and that reproposal is not just
an opportunity but a responsibility to get this right.
We need a framework that is proportional, tailored, and
grounded in empirical analysis. We need a framework that
recognizes the diversity of the American banking system. We
must build upon the bipartisan S.2155 to ensure capital
requirements are tailored based on a bank's size, complexity,
and risk profile.
Indeed, a regional bank focused on traditional lending
should not be subject to the same standards intended for
institutions engaged in significant trading, cross-border
activities, or complex market operations.
We must account for growth in the economy by indexing
regulatory and category thresholds. This way banks do not
stifle their growth when it is needed most.
If we get this right, if we right-size capital, eliminate
unnecessary gold-plating, and build a framework that tailors
requirements to actual risk, we can preserve what makes
American banking exceptional.
We do not want a barbell banking system in this country
with a number of small banks and global systemically important
banks (G-SIBs) and nothing in between. Achieving this stems
from a well-calibrated capital framework that incentivizes
growth and competition while maintaining safety and soundness.
We must ensure that community banks continue to serve as
economic anchors in small towns and rural communities. We must
keep U.S. institutions competitive on the global stage, and we
must create a regulatory environment that supports--not
strangles--growth, innovation, and opportunity.
So today I look forward to hearing from our witnesses about
how we can design a capital framework that strengthens
stability without sacrificing competitiveness, that respects
the structure of the American banking system, that promotes the
heterogeneity and diversity of that system, and reins in the
excesses of prior regulatory overreach.
I thank our witnesses for being here today to provide their
valuable insights and perspectives, and I yield back.
Chairman Barr. I now recognize the ranking member of the
subcommittee, Dr. Foster, for 4 minutes for his opening
statement.
OPENING STATEMENT OF HON. BILL FOSTER, RANKING MEMBER OF THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS, A U.S. REPRESENTATIVE
FROM ILLINOIS
Mr. Foster. Thank you, Chairman Barr, and to our witnesses.
I represent Woodstock, Illinois, where the film Groundhog
Day was filmed, and so here we go; going to once again examine
the regulatory capital framework for U.S. banks.
Part of the prudential regulatory umbrella, capital
standards provide a buffer against insolvency when financial
institutions take losses, helping them weather economic
downturns, failed investments, or the missteps of management.
The 2008 financial crisis highlighted flaws in the
regulatory framework for U.S. banks when the true risk of
assets did not match the corresponding capital charge assigned
to them. Supposedly, well-regulated--well-rated, mortgage-
backed securities and off-balance sheet exposures received
little supervisory attention, leading to massive losses and a
crisis of confidence in the banking system when those same
assets dropped by enormous amounts.
In response to this crisis and the taxpayer-funded bailout
of the U.S. financial system, Congress passed the Wall Street--
Dodd-Frank Wall Street Reform and Consumer Protection Act to
enhance the supervision and regulation of the financial system.
Dodd-Frank took a tiered approach applying the most stringent
capital to the largest and most complex banks that posed the
greatest risk to financial stability. The largest banks became
subject to safeguards meant to prevent a similar crisis,
including higher capital ratios, stress testing, resolution
planning, and other prudential requirements.
Following the financial crisis, financial regulators around
the world, including the United States, convened in forums like
the Basel Committee on Banking Supervision to facilitate
cooperation between member countries and enhance financial
stability. These forums are important, as this cooperation
prevents a race to the bottom that would ultimately make the
global financial system much less safe.
Since the enactment of Dodd-Frank, Congress has revisited
several prudential standards to respond to changes in the
banking economy, risks to financial stability, change over
time, and new risks to merge which, for example, everything
having to do with technology that should be our focus today and
unfortunately, instead of repeating the same debate that has
crystallized around 2009 has not changed in almost 15 years.
The regional banking crisis, for example, in 2023
demonstrated that bank runs following steep losses can occur
much faster than previously thought, and they are going to
become faster when agentic AI makes bank runs possible at the
speed of AI rather than the speed of internet gossip.
I worry that these type of events will be much more common
with a commoditization of AI, the introduction of emerging
volatile assets into the banking system. Banking regulators
have a duty to ensure that the banks and their agencies are
ready to deal with these types of runs and to strengthen
safeguards against rapid withdrawals and dramatic price swings
in various asset classes.
Under President Trump, the banking regulators have taken
steps that undermine this financial stability, namely, by
dismantling the Consumer Financial Protection Bureau, which was
created by Dodd-Frank to stop the very same predatory lending
practices that contributed to the global financial crisis.
They have also moved to weaken stress testing for the
largest banks, cut staffing at the Financial Stability
Oversight Council (FSOC) and its member agencies, and are
pushing firms to engage with digital assets that can experience
extremely high price volatility.
We expect banking regulators will soon propose a revised
rule to implement the principles of the Basel III Endgame.
Under the last iteration of the proposal, members of this
committee raised certain concerns about the proposal related to
the capital treatment of mortgages, small business loans, tax
equity, and derivatives used for risk management.
So I encourage regulators to consider these concerns as
they develop the new proposal and the combined impact of
financial stability with the other changes being advanced on
leverage, stress testing, and other areas.
My colleagues on this committee should call for a robust
cost-benefit analysis for the coming proposal, as they did with
the last proposal, and push regulators to back up their
proposals with data.
Thank you again, Chair Barr, and I yield back.
Chairman Barr. The gentleman yields back.
I now recognize the chairman of the full committee, Mr.
Hill, for 1 minute for an opening statement.
STATEMENT OF HON. FRENCH HILL, CHAIRMAN OF THE COMMITTEE ON
FINANCIAL SERVICES, A U.S. REPRESENTATIVE FROM ARKANSAS
Chairman Hill. Thank you, Chairman Barr.
The U.S. banking system is at a pivotal juncture right now.
Regulators have the opportunity to establish credit and capital
standards that strengthen financial security without unduly
limiting economic growth or a bank's ability to compete on an
international scale.
Even so, small and community banks continue to face
disproportionate compliance and capital burden that were never
intended for institutions of their size. Despite these
challenges, U.S. banks remain, as Chairman Powell has mentioned
many times, well-capitalized, resilient, and able to support
lending, investment, and economic growth.
This does not mean we should ignore the inefficiencies in
the current framework, and particularly under Chairman Barr's
leadership, the Congress must encourage regulators to tailor
capital requirements based on bank size, complexity, and risk
profile, rather than apply a one-size-fits-all approach.
Thoughtful tailoring can free up capital for productive
uses, helping banks support small businesses, home buyers, and
economic expansion across all of our districts.
Thank you, and I yield back.
Chairman Barr. I now recognize the ranking member of the
full committee, Mrs. Waters, for a 1-minute opening statement.
STATEMENT OF HON. MAXINE WATERS, RANKING MEMBER OF THE
COMMITTEE ON FINANCIAL SERVICES, A U.S. REPRESENTATIVE FROM
CALIFORNIA
Ms. Waters. Thank you very much.
I look forward to the testimony as we discuss bank capital.
Trump's regulators and Republicans are tearing down the
safeguards that keep our banks safe to ensure stable economic
growth. Reducing capital for our largest banks will make them
less resilient, less likely to lend during periods of stress,
and more likely to fail.
Weakening these safeguards, these guardrails, leaves
hardworking Americans to bear the consequences. We saw this in
2008 when banks gambled with borrowed money and families,
workers, and small businesses, and whole communities paid the
price.
If we want to strengthen our financial system for the
benefit of small businesses and their workers, as well as
community banks and credit unions, then I hope Chairman Hill
will work with me to advance overdue deposit insurance reforms
and on this issue of capital and the continued efforts by the
Republicans to reduce the capital that the banks should hold,
we are going to have a fight.
Chairman Barr. The gentlelady's time has expired.
Today we welcome the testimony of some outstanding
witnesses. First, Mrs. Margaret Tahyar, head of financial
institutions at Davis Polk; Mrs. Amanda Eversole, president and
chief executive officer of Financial Services Forum; Mr. Andrew
Olmem, managing partner and co-leader of the Financial Services
group at Mayer Brown; Mr. Mike Flood--the other Mike Flood--
head of the Center for Capital Markets Competitiveness at the
U.S. Chamber of Commerce; and Mr. Simon Johnson, professor of
entrepreneurship at the MIT Sloan School of Management.
We thank each of you for taking the time to be here. Each
of you will be recognized for 5 minutes to give an oral
presentation of your testimony. Without objection, your written
statements will be made part of the record.
Mrs. Tahyar, you are now recognized for 5 minutes for your
oral remarks.
STATEMENT OF MARGARET TAHYAR, HEAD OF FINANCIAL INSTITUTIONS,
DAVIS POLK & WARDWELL LLP
Mrs. Tahyar. Chairman Barr, Ranking Member Foster, and
members of the subcommittee, thank you for asking me to
testify.
Capital regulation is long overdue for a rethink, and this
subcommittee should encourage the banking regulators to move
quickly to appropriately implement the Basel III Endgame with
appropriate data, appropriate cost-benefit analysis.
I would like to leave you with three thoughts this morning.
First, capital is very important, but it is not the only
tool in the financial stability kit.
Second, choices about the calibration of capital are
political economy choices that involve credit engineering. They
can also change the regulatory perimeter.
Third, our economy and our banking sector are complex.
Tailoring, as the chairman has noted, is the solution so that
we do not treat large banks the same as community banks.
Capital is an important thing, but it is not everything. We
cannot expect it to be the sole insurance against financial
stability. We should see it as part of an integrated system
that also includes early intervention, resolution planning,
credit concentration, contingency planning, risk management,
total loss-absorbing capacity (TLAC), deposit insurance, and
hands-on supervision and we should understand that capital
absorbs losses, but it is not liquidity regulation, so it does
not help against quick deposit runs.
Capital regulation involves political economy choices. How
much financial stability insurance should a banking
organization be required to purchase? Any increase in bank
capital requirements increases the cost of funding. I think we
can all agree that capital levels going into the great
financial crisis were too low, but today I think we have to ask
whether current capital levels also come at a cost to the real
economy.
Risk weighting for purposes of risk-based capital
requirements is a form of credit engineering. The zero percent
risk weighting for Treasurys, the 50 percent risk weighting for
mortgages, and the international Basel Committee's 1,250
percent risk weighting for crypto assets reflect political
economy choices that are appropriate for this committee to
oversee. For example, if implemented, the crypto assets risk
weighting would seem to be contrary to the Guiding and
Establishing National Innovation for U.S. Stablecoins (GENIUS)
Act.
Another point is that any capital framework will need
updating and renewal from time to time even though the debates
share patterns. That update should be data-driven,
understanding it will never be perfect.
Markets of technology and geopolitics are not waiting
around for the Basel III Endgame. In fact, calling this last--
latest round of rulemaking Basel III Endgame is kind of a
misnomer, implying that, once the next round of rules takes
effect, we are done.
I think we should not think of capital as a Marvel movie
with a tidy ending. The economy, the financial system will
remain in constant flux, and banking regulators should
periodically review capital regulation.
Capital regulation should be tailored. The tailoring
principle is especially critical in the United States given the
complexity of our economy, the largest economy in the world,
the geographic spread. We have a banking sector whose structure
is very different from most other countries with our many
different sizes of banks, and we need to avoid that barbell.
Wisely, the banking regulators did not impose every new
complexity on every banking organization, but it is fair to
question whether we are appropriately tailored and whether
there should be some indexing particularly for--as the economy
grows. All policy choices have tradeoffs, but our focus should
be on the real economy, jobs, American competitiveness, and
wealth creation.
This should not be a red team/blue team issue. We should
approach it in the spirit of bipartisanship as a purple issue
and in that spirit, I am wearing a purple jacket today.
[The prepared statement of Mrs. Tahyar follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Barr. Thank you. Very good.
Mrs. Eversole, you are now recognized for your testimony.
STATEMENT OF AMANDA EVERSOLE, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, FINANCIAL SERVICES FORUM
Mrs. Eversole. Great. Thank you, Chairman Barr, Chairman
Hill, Ranking Member Foster, and Ranking Member Waters, members
of the subcommittee. My name is Amanda Eversole, and I am
president and CEO of the Financial Services Forum, which
represents the eight global systemically important banks, or G-
SIBs, headquartered in the United States.
Every day, forum members and their nearly 700,000 employees
across this Nation provide the capital that fuels America's
economy. Forum members provide nearly half of all consumer
lending by banks in the United States by helping Americans
purchase their first homes, buy a family car, or start a
business.
Forum members also support our vibrant, highly liquid
capital markets, ensuring that they remain the envy of the
world and forum members play a critical role in meeting the
funding needs of other financial institutions, including
community and regional banks.
Above all, we remain committed to ensuring a strong,
stable, and healthy financial sector and economy.
The U.S. G-SIBs have never been more capitalized and more
resilient. They are subject to the most stringent regulatory
standards among both U.S. and foreign competitors. Over the
past 15 years, the U.S. G-SIBs have tripled their capital and
now maintain more than $1 trillion in high-quality capital, but
more capital is not always better. There are economic tradeoffs
to higher requirements. According to academic research, a 3
percent increase in required capital costs can cost the U.S.
economy between $100-and $150 billion per year and it is
critical that we get the balance right.
After years of post-crisis implementation, now is the time
to modernize large bank capital regimes so U.S. banks can
better support American families, small businesses, and our
capital markets.
We appreciate efforts by the administration and regulators
to take a comprehensive approach to capital. There are three
important factors that should be considered as this committee
explores this issue further.
First, capital requirements must be supported by data and
calibrated accordingly. The Basel III Endgame proposal from
2023 serves as a prime example. That proposal and the
regulatory approach to the Basel III Endgame would have
increased capital for forum members by 25 percent without any
clear justification or analysis. More than 97 percent of
commenters raised concerns with the proposals, and 86 percent
of those comments came from outside of the banking industry,
which is an important fact to note.
Capital rules have a clear and significant impact on
homeowners, small businesses, retirees, manufacturers, and
farmers. It is critical that we take the economic impacts into
consideration when determining capital rules, and we look
forward to the revised Basel III Endgame proposal that meets
the needs of the U.S. economy.
Second, several aspects of the large bank capital framework
make it harder for U.S. banks to compete, pushing activity to
foreign banks and less regulated nonbanks. This migration of
risk makes the system less safe and less stable.
The G-SIB surcharge is perhaps the best example of a self-
inflicted disadvantage with our foreign competitors. The U.S.
approach to the G-SIB surcharge is nearly twice that of our
foreign competitors, resulting in an additional $100 billion in
capital that could be deployed into the U.S. economy.
We appreciate the commitment by regulators to review this
rule, and we look forward to a proposal that will harmonize the
U.S. G-SIB surcharge with the international standards to better
meet the needs of U.S. business and hardworking American
families.
Third, enhanced transparency and public accountability is
the bedrock principle of good government. The Federal Reserve's
initiative to improve the transparency of stress testing models
and scenarios will improve bank risk management, reduce
volatility, and allow banks to better serve their clients and
customers. We look forward to providing our comments on this
proposal.
The world has changed over the last 15 years, and
regulations have not kept pace. Thankfully, regulators have
begun to address this problem by recalibrating the enhanced
supplementary leverage ratio, a move that will enable banks to
intermediate the U.S. Treasury market without sacrificing
overall financial stability. We look forward to continued
progress in this important area.
Now is the time to modernize capital requirements so we can
unleash our full economic potential, boost lending to small
businesses and consumers, and drive America's economy forward.
Of course, we can do that while protecting the safety and
soundness of the best financial system in the world.
Thank you for the opportunity to testify today, and I look
forward to your questions.
[The prepared statement of Mrs. Eversole follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Barr. Thank you.
Mr. Olmem, you are now recognized.
STATEMENT OF ANDREW OLMEM, MANAGING PARTNER AND CO-LEADER OF
THE FINANCIAL SERVICES GROUP, MAYER BROWN
Mr. Olmem. Chairman Barr, Ranking Member Foster, Ranking
Member Waters, and the members of the subcommittee, I
appreciate the opportunity to testify today on rightsizing U.S.
bank capital framework. My testimony is given in my personal
capacity and not on behalf of Mayer Brown or any of its
clients.
I want to start by commending the subcommittee for holding
this hearing because capital requirements are at the core of
effective bank regulation. They have a major impact on the
safety and soundness of the banking system as well as on the
overall economy and each American household. It is, therefore,
critical that they are appropriately calibrated.
This committee's oversight of the prior Basel III Endgame
proposal played a valuable role in raising bipartisan concerns
about its potential adverse consequences. Those concerns
prompted the banking regulators to pause and reconsider the
proposal. Thanks to this committee's work, the Basel endgame is
moving in a better direction.
As the subcommittee now prepares to evaluate the upcoming
revised Basel III Endgame proposal, I have included in my
written testimony several recommendations for your
consideration. I concur with the prior remarks of my panelists
about the importance of basing capital requirements on the best
data and research available and that choices about capital
requirements are public policy choices.
I would like to highlight three additional points from my
written testimony.
First, it is important to view any capital proposal within
the context of the larger regulatory reforms the banking
regulators are currently undertaking. The most important, in my
view, of these is the ongoing reform of bank supervision.
Effective supervision is an essential companion to capital
requirements because supervisors can identify and address risks
that do not show up on balance sheets. Unfortunately, bank
supervision has become far too bureaucratic, with supervisory
matters lingering for years unresolved. Supervision should be
focused on identifying problematic and material risks,
addressing them, and returning a bank to normal operations.
Reforming bank supervision will facilitate better
compliance with bank capital requirements, as well as faster
resolution of problems with bank capital and other safety and
soundness matters. The banking regulators' efforts to reform
banks' supervision should have Congress' full support.
Second, one-size-fits-all regulation can undermine
competition and the ability of banks to devise unique business
models to serve their communities and customers. As noted, to
address this problem, Congress has statutorily mandated in both
the Dodd-Frank Act and in the Economic Growth, Regulatory
Reform, and Consumer Protection Act, known as S.125, that the
banking regulators tailor enhanced prudential regulation. This
mandate sensibly seeks to prevent a $300 billion bank from
being regulated in the same manner as a $2-, $3-, or $4
trillion bank.
However, changes in the marketplace and inflation can push
banks into inappropriate tailoring categories. Given the clear
congressional mandate, the banking regulators have reasonable
grounds for revising and updating the existing tailoring
categories.
Finally, it is important to consider the vital national
interest at stake in ensuring that the U.S. has the world's
safest, most sophisticated, and technologically advanced
financial regulatory system. The U.S. benefits greatly by being
the world's financial capital, where all major financial
institutions want to participate and invest.
These benefits include lower financing costs for, not only
U.S. consumers and businesses, but also for the Federal
Government's now $38 trillion debt. Furthermore, the dynamic
$30 trillion U.S. economy requires an equally dynamic financial
system that can fund the remarkably diverse and complex needs
of consumers and businesses.
Unfortunately, U.S. bank regulation has diminished the
attractiveness of the U.S. market and made the banking system
less innovative and less adaptable. These trends need to be
corrected; otherwise, Americans will face higher costs of
living in the short run and will build wealth at a slower pace
in the long run.
The finalization of the Basel endgame proposal, updating
the tailoring thresholds, and reforming bank supervision are
important steps for modernizing U.S. bank regulation and
ensuring that the U.S. has the banking system it needs to see
the economy thrive and American households' living standards
rise.
Thank you.
[The prepared statement of Mr. Olmem follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Barr. Thank you.
Mr. Flood, you are now recognized for 5 minutes.
STATEMENT OF MIKE FLOOD, HEAD OF CENTER FOR CAPITAL MARKETS
COMPETITIVENESS, U.S. CHAMBER OF COMMERCE
Mr. Flood of Nebraska. Good morning. Chairman Barr, Ranking
Member Foster, Ranking Member Waters, members of the
subcommittee, thank you for the opportunity to testify on
rightsizing the U.S. bank capital framework. My name is clearly
the other Mike Flood.
With over 27 years of experience in the financial services
industry, I am honored to represent the U.S. Chamber of
Commerce, the world's largest business association representing
businesses of all sizes.
Capital decisions affect every consumer and business in
your district, whether they are a first-time home buyer, a
local tailor, or a new business. Since the release of the
previous Basel III Endgame proposal in 2023, both parties in
Congress, numerous State and local governments, industry and
bank customers have all raised significant concerns.
In reaction, the previous Fed Reserve Vice Chair Barr
recognized that not only raising capital but raising it beyond
global standards should be recalibrated. We applaud the current
leaders of prudential regulators for continuing this process,
including updating the enhanced supplementary leverage ratio
and reforming the stress testing framework.
We thank the members of this committee also for your
continued oversight and engagement.
There are three reasons why businesses care about capital.
First, banks supply a substantial majority of small
business financing. Last year, banks provided 9.1 million small
business loans, of which the G-SIBs comprise 25 percent.
Two, increased capital increases costs or reduces credit
availability. A Chamber survey of over 300 treasurers--not 300
bank treasurers, 300 treasurers--makes clear that capital
increases are felt by businesses and consumers. It found that
87 percent of businesses have been negatively affected by
financial regulation and, more importantly, 40 percent have
decreased services to their customers.
Furthermore, a Basel study stated that for every 1 percent
increase in capital, we should expect a 13 basis point increase
in loan spreads. Think about that if we were to increase
capital by 20 percent.
Furthermore, the Basel Committee itself said higher capital
and liquidity requirements are soon to increase the cost of
bank credit.
Three, more capital is unnecessary. Results in statements
from the regulators themselves do not support increasing
capital.
First, in the past three stress tests reveal that banks can
withstand, quote, a substantial downturn, remain above minimum
capital requirements, and lends to the U.S. economy. Two, bank
capital has more than tripled since 2009 and let us not forget
that coronavirus disease (COVID) was a real-life stress test.
If you do not believe me, let us believe the results from the
Federal Deposit Insurance Corporation (FDIC).
Over the past 5 years, 11 banks have failed equally to a
.052 percent failure rate. At the same time, bank charters have
decreased by 3 percent annually with a mere 45 new charters
granted.
So what is the impact on your constituents? I am going to
give you a few examples of the Chamber's analysis of the
previous proposal found.
One, private companies will pay more than public companies
if we have excessive capital. Despite that 99 percent of U.S.
companies are private companies, they are seen by Basel III
Endgame as more risky than public companies. Quite frankly, it
is hard to imagine, outside of taste, how Five Guys, a private
company, and Shake Shack, a public company, are different.
Two, lines of credit under Basel III Endgame would be more
expensive. This is the monthly lifeblood of nearly any
business. Your local tailor will pay more for the used line of
credit and, oddly, pay more for the unused line of credit.
Again, this is beyond global standards.
Three, mortgages, credit cards, and automotives will cost
more. Especially for constituents with low credit scores and
individuals with low or moderate incomes will be most affected.
In conclusion, at a time of significant affordability
concerns, it is critically important to calibrate the entire
bank capital structure to fit the size and complexity of the
U.S. banking system. This does include all banks--local,
community, regional, super-regional, national, international,
and global banks.
The Chamber appreciates the current regulatory efforts to
update the capital framework and bring supervision back to
materiality. We, therefore, urge regulators to adopt the
following recommendations:
Calibrate any final rule to preserve affordable lending,
market-making liquidity, and a competitive U.S. banking system.
Two, base requirements on robust economic analysis that
considers the impact on lending and economic growth.
Three, update and tailor capital requirements, as well as
thresholds to reflect the size and risk profile of individual
institutions for all categories of banks.
Thank you, and I look forward to answering your questions.
[The prepared statement of Mr. Flood follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Barr. Thank you.
Finally, Mr. Johnson, you are recognized.
STATEMENT OF SIMON JOHNSON, PROFESSOR OF ENTREPRENEURSHIP AT
THE MIT SLOAN SCHOOL OF MANAGEMENT
Mr. Johnson. Thank you.
Chairman Barr, Ranking Member Foster, members of the
subcommittee, thank you for asking me to testify at this timely
and important hearing. My name is Simon Johnson. I am a
professor at MIT. I was previously the chief economist at the
International Monetary Fund. I am a former board member at
Fannie Mae. I am currently co-chair of the Chartered Financial
Analyst (CFA) Institute Systemic Risk Council.
I would like to make three points. The first is about the
numbers. Tier 1 capital, as you know, is the strongest form of
capital because it is fully loss-absorbing; this includes
shareholders' equity and retained earnings.
The supplementary leverage ratio, SLR, calculates the
amount of Tier 1 capital in 13 large banks relative to their
total leverage exposure, which includes total assets and
certain off-balance sheet items, such as derivatives and loan
commitments.
The weighted average SLR for the eight American globally
systemically important banks, the G-SIBs, peaks at close to 7
percent in 2017, and it is now 5.8 percent. That is an increase
in leverage. This is all from that publicly available data as
compiled by the Kansas City Fed.
European and Canadian G-SIBs are more leveraged, with an
average SLR at 4.89 percent. Now, this is exactly the same
relative situation as prevailed before the global financial
crisis of 2008. The biggest European banks are more leveraged
than the biggest U.S. banks, but when a crisis breaks, more
leverage means more vulnerability for individual banks and the
financial system. Thank goodness that the FDIC pre-2008
resisted attempts to allow more leverage in the U.S. banking
system. By insisting on lower leverage, the FDIC under Sheila
Bair, helped protect the taxpayer, limit the fiscal damage, and
reduced the number of jobs lost when the crisis hit.
It is not--and I repeat ``not''--to the European advantage
that their big banks are more leveraged. That is a major
vulnerability for them, exposing their taxpayers and their
workers and their nonfinancial businesses to more risk. Do not
race the Europeans to the bottom.
Second, unfortunately, the FDIC today is in the exact
opposite position to what it was before 2008 and just signed
off, along with the Federal Reserve and the SEC, on reducing
the SLR.
Now, based on the regulators' own calculations, this recent
rule change will allow the SLR--so, again, setting the maximum
leverage for big banks--to reach around 3.8 percent for those
13 mega banks and we are now discussing how to adjust risk-
weighted capital and stress tests and other things that will
allow the banks to move closer to that leverage.
The regulators have clearly signaled that we are heading
back toward the leverage ratios that prevailed before the
crisis of 2008 and we are doing this without a proper cost-
benefit analysis, without any kind of robust economic analysis.
What we need is a careful and complete study from the
regulators of what will happen to the system's stability with
lower capital requirements. They have not provided this despite
repeated requests from responsible parties.
Third, the arrival of artificial intelligence is a game
changer for finance, as was discussed and emphasized at the
House Financial Services Committee hearing yesterday. One
presumed impact is that decisionmaking will speed up globally.
AI agents will rush into trades pushing up asset prices. These
same algorithms will also rush out creating various kinds of
potential runs and fire sales. We are quite likely to
experience, as Dr. Foster said, various forms of AI agentic
runs on our banks. What happened to Silicon Valley Bank will
seem slow by comparison.
Bank capital protects against insolvency. This is the loss-
absorbing buffer. If the world is becoming more unstable, we
should want our big banks to have more loss-absorbing capital.
Instead, the regulators are pushing in a reckless manner toward
allowing less capital.
In summary, capital of the largest banks is eroding. This
undermines our system and our economy. It makes us weaker in
the global economy. In 2008, we barely had enough capital in
our biggest banks. Since 2008, the world has become more
unstable--pandemic, global financial crisis, rise of China, AI.
The U.S. economy needs a resilient banking system. The
regulators are failing you and failing the American people when
they allow leverage to rise to pre-2008 levels.
Finally, I would like to quote from the National Security
Strategy just released by the White House. Quote starts, We
want a resilient national infrastructure that can withstand
natural disasters, resist and thwart foreign threats, and
prevent or mitigate any events that might harm the American
people or disrupt the American economy. No adversary or danger
should be able to hold America at risk, end quote.
To achieve this goal, as stated in this document, you need
more loss-absorbing equity capital in the bank system, not
less.
Thank you very much.
[The prepared statement of Mr. Johnson follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Barr. Thank you, Mr. Johnson.
We are now going to turn to member questions. I now
recognize myself for 5 minutes for questioning.
Mrs. Eversole, the word of the day in Washington is
affordability and making life easier for the American people by
lowering the cost of living. How can regulatory tailoring and
enhancing U.S. bank competitiveness through right-sizing the
capital framework lower the cost of capital and help lower the
cost of living for Americans?
Mrs. Eversole. Mr. Chairman, thank you very much.
Affordability is a huge issue and I think, as it relates to
bank capital, one size does not fit all. So we have a
sophisticated system. In fact, the best, most highly liquid,
vibrant capital markets in the world, and we have the ability
to make sure that we get it right. I appreciate the fact that
this hearing is happening today.
The Basel III Endgame, getting--making sure we get that
right is a perfect example. If we can have--if we can get that
done, the impacts go to small businesses, Main Street through
lower cost of borrowing, and that helps drive the economy.
Chairman Barr. Yes. Getting this wrong and overregulation
of the banking sector will drive up the cost of credit, period.
That is a simple and absolutely true fact, and that is why we
have got to get this right.
Mr. Flood, miscalibrated capital rules are extremely
burdensome on small institutions that keep credit flowing to
Main Street America community, and reasonable banks are often
the only lenders serving rural towns, family farms, small
manufacturers, and first-time home buyers.
What are the downstream effects of inflated risk weights
under the Biden Administration's Basel III Endgame that would
affect community and regional banks' ability to provide
mortgages, agricultural loans, and small business credit?
Mr. Flood. Thank you for the question. Mr. Barr, when we
surveyed those 300 corporate treasurers, we found that most
small businesses use banks for their financing. They use an
average of four banks. As I think you can see from our
analysis, the number of banks in the country is decreasing.
So the simple answer is, A, your constituency will either
see increased costs or lack of availability of credit at banks.
Second, we also--or, third, we also know that increased
compliance costs affect every bank, and we have seen how that
has led to consolidation at the lowest levels.
Finally, community banks like to replenish their capital.
How do they do that? They sell loans or products to bigger
banks. If those bigger banks have increased costs or increased
risk weights for those same products, they are going to charge
more to your smaller bank. It is a downstream effect.
Chairman Barr. Yes. This is trickle-down regulation. It is
not just about the big banks. It is about community banks and
making sure that the capital framework does not inadvertently
shrink access to credit in underserved markets.
Mrs. Tahyar, in 2023 when the Vice Chair Barr--the other
Barr--proposed the Basel III Endgame, it received bipartisan
and nearly universal criticism from lawmakers and the public.
In fact, more than 97 percent of the comments on the proposal
were negative, with more than 80 percent of those comments
submitted by interested parties outside of the banking sector.
The message was clear that we needed a reproposed endgame
but even under the reproposed endgame, the expectation is that
U.S. banks will face materially higher risk-weighted assets
from revised credit market and operational risk frameworks, yet
the leverage ratio remains unchanged, which creates a potential
for double counting of capital requirements.
How should regulators appropriately account for reforms to
Basel III Endgame to ensure that bank leverage ratios do not
bind institutions during low-risk, high-liquidity environments?
Mrs. Tahyar. Double counting is a real issue, Chairman
Barr, and I am glad you asked the question.
I think what happened in 2023 is that the banking
regulators did not do a bottoms-up data-driven analysis, and
currently it is a bottom-up data-driven analysis that is being
promised by the banking regulators. The leverage ratio became
the binding constraint as Treasury markets expanded given the
fiscal situation.
My own view is that there should be a real rethink of the
leverage ratio which affects, as you know, not just the biggest
banks, but all of the banks.
Chairman Barr. Thank you.
Mr. Olmem, final question. As you know, Fed Vice Chair of
Supervision Michelle Bowman has said that the regulatory
thresholds should not be static, and FDIC Acting Chair Travis
Hill recently finalized a rule that seeks to index regulatory
thresholds on a biennial basis.
I have introduced legislation, the Tailoring and Indexing
Enhanced Regulations (TIER) Act, to ensure that our regulatory
system is not static and that it is designed with growth in
mind, which--while maintaining safety and soundness.
Can you please speak to the importance of indexing
regulatory thresholds and how this will help ensure banks are
holding appropriate capital that accurately corresponds with
their size, risk, and scope of activities?
Mr. Olmem. Thank you for that question, Mr. Chairman Barr.
Put simply, if we do not index the thresholds, eventually
we will not have tailoring because over time, inflation will
move institutions into higher and higher categories.
Already since 2019, when the categories were adopted, we
have seen inflation run at about 25 percent, nominal gross
domestic product (GDP) is up 30 percent that are already
threatening to put institutions into higher categories simply
because of nominal changes in the economy.
Chairman Barr. Thank you.
My time has expired, but I will just note for the record
that when Dr. Foster and I traveled to Basel, Switzerland, it
was interesting to hear the Basel Committee themselves say that
Vice Chair--former Vice Chair Barr's proposal had gold-plated
American capital requirements over and above what they
recommended.
With that, I will now recognize the ranking member of the
subcommittee, Dr. Foster, for 5 minutes for questions.
Mr. Foster. Well, thank you and thank you for referring to
our bipartisan trip to visit all the banking centers.
It was interesting because there was a lot of anxiety in
the European banking sector that, despite their lower capital
requirements, they were being outcompeted by the big banks of
the United States, so that the argument--I think one of the
witnesses here referred to it as a trope, that the regulators
should look at the fact that we are actually increasing market
share in our--with our giant banks compared to our offshore
competitors as something that maybe the regulators should not
look at.
I think if we are losing market share, the regulators
should look at it and the fact that we are increasing market
share, the regulators should consider in whether our capital
requirements are too stringent.
My biggest worry about this is that we are arguing about
the last few basis points of capital requirements when the big
elephant in the room is artificial intelligence, agentic AI,
and everything that is going to disrupt financial services and
the businesses that many banks have loaned money to.
This is something--I was very disappointed that we had--it
was a--I guess it was, I think, Mrs. Eversole's testimony when
she made reference to the commentators on this. You cannot open
any financial journal or anything without seeing people comment
on the bursting of the AI bubble and are we really robust
against that. There is probably no commentator that has not
opined on that.
Yet when we recently wrote a letter to FSOC to say, hey,
could you please have a look at this? We are unable, frankly,
to get any of my Republican colleagues to cosign this, and all
of the Democrats, essentially, signed on to it and so I think
this is why we created FSOC, to keep--to look around the
corner.
Mr. Johnson, you actually mentioned this in your testimony.
Could you say a little bit more about what AI could do to the
stability of our financial system?
Mr. Johnson. Yes. I think, Dr. Foster, you are totally
right, this is the big issue of the day and the days to come.
We do not know, nobody knows exactly what will be the impact of
AI on the American economy or on the financial system, but it
does seem very likely that it will increase volatility, there
will be relatively few foundation models, there will be
relatively few big tech players producing those models.
Everyone will be using some versions, some application of those
models. So there will be a lot of crowding in terms of spotting
opportunity and crowding in. So we may well get more run-ups in
asset prices but also crowding on the way out.
So you referred to the run from Silicon Valley Bank which,
of course, we know was speeded up by social media. No AI was
involved. AI can make decisions much faster than humans can. So
once they spot a weakness or a perceived potential insolvency
because of capital deficiency, it will be seconds, not minutes,
before the deposits run out the door.
Mr. Foster. Yes. Well, in fact, they can respond to rumors.
Many of the AI--personal AI agents will be under standing
orders that if you read a rumor out on Reddit that your bank is
in trouble, get my money the heck out and it will be--things
like customer loyalty will be a thing of the past.
This is not only going to affect banks. It will affect
every business that depends on customer loyalty, because the
personal agents are not going to be loyal; they are going to be
instructed to get the best price, and this is going to squeeze
the profit margin out of every consumer-facing business in the
country. There are going to be a lot of loans that will go bad
because business models will blow up that way. So this is not
the time to lower capital requirements.
This is--in my bipartisan way, I am also wearing a red pin
here. This is the red pin of the 110th Congress where, under a
Republican President and under Republican regulators, this pin,
I had the pleasure of voting for the Troubled Asset Relief
Program (TARP) and there are situations where the Republicans
who voted for the lower capital requirements and deregulation
refused to provide the votes to rescue our economy, and
rescuing our economy had to be done with Democratic votes.
So this is a foundational memory, and many of us on this
side of the aisle who lived through that. We do not repeat
history, but it echoes. We are in a situation when we have a
historically unpopular President once again and regulators who
are--have this mantra of deregulate, deregulate, deregulate,
modernize all of the--all of the words--you can read in 2007,
the exact same mantra.
So there are things that make sense. So we have to--
punishing bank capital because they are holding Treasurys. I
never thought made sense, and that is the sort of thing we
could be looking at. The idea of just lowering capital
requirements in general right now until we understand the
effect I think is premature.
So I would like to thank you all for your testimony. It is
nice to see that the arguments have not changed in 15 years,
but the future is coming at us fast, and we should look
forward, not backward.
Thank you.
Chairman Barr. The gentleman from Michigan, Mr. Huizenga,
is now recognized.
Mr. Huizenga. Thank you, Chairman Barr and good to see our
panel again, or most of you, and welcome, Mrs. Eversole.
Mr. Flood, I am going to start with you. A lot of
discussion this morning has been centering around how higher
capital requirements for financial institutions will be
harmful. Obviously, not everybody agrees with that on the
panel, but I happen to agree with that sentiment that it is or
can be harmful.
What is often overlooked, though, from my perspective, is
Main Street America, and that is really what I am concerned
about those small businesses that are the backbone of local
communities that we all represent.
I am a small business owner myself. Family is in
construction. I have lived through the ups and the downs, and
the downs are tough. We have had to rely on lines of credit. I
recently actually ended my own line of credit because it was
costing me while I was not actually accessing it. My business
partner, my cousin and I, looked at each other and were like,
well, this makes zero sense.
So we have got a lot of issues, as you can see it, as it
pertains to small businesses but just give us your thoughts on
how this affects maybe Main Street in a small entrepreneurial
or, in my case, a third-generation family business.
Mr. Flood. Sure. I imagine your business is a private
business?
Mr. Huizenga. Yes. Huizenga Gravel is not a publicly traded
company, thank goodness, and I have no intention of subjecting
ourselves to the Securities and Exchange Commission (SEC).
Mr. Flood. Well, that puts you at 99 percent of U.S.
companies.
Mr. Huizenga. Yes.
Mr. Flood. I will give you three concrete examples. The
first one was the line of credit, and you have clearly
experienced that. What surprised me is the risk weighting for
both the funded and unfunded increase. There is no reason why
and it goes above gold-plated levels.
So you have just said what happens. One, your line of
credit either gets more expensive or they shrink it. So if you
need more money, you will have to go get another one, and I am
sure they would see that as riskier.
Mr. Huizenga. Not to mention, by the way, when the
regulators come in and say, oh, by the way, even though we
are--we have been banking with the same bank for three
generations, we are not sure of their credit risk.
Mr. Flood. Correct. Simply because--two, simply because you
are a private company, as an example of excessive capital,
Basel III Endgame treats you differently. Let us assume that a
public company has an interest rate of 7 percent and let us
presume a 12 percent return on capital. That same private
company is going to have a 10.5 percent interest rate. That is
how different it is.
Then there is the third part, which is--I want to bring up
something called risk mitigation. It is exactly what it sounds
like, and we mix that up with derivatives a lot. So now let us
think about a farmer who wants to mitigate their crops because
they have seen climate issues. So they go to the bank, and they
say, hey, I want to buy a hedge from you, and the bank should
say, that is great, that makes you less risky to me and me less
risky to you , but somehow, oddly, we have priced that higher.
So the hardest thing for our businesses to understand is--
--
Mr. Huizenga. So lowering risk is actually going to cost me
more than if I had just maintained the status quo?
Mr. Flood. Those are some of the confounding things in the
regs that we have.
Mr. Huizenga. Okay. Mrs. Eversole, I want to touch base on
you. You represent the largest of the banks. Does the current
framework disadvantage U.S.-based institutions compared to
their international peers?
Mrs. Eversole. Thank you very much, Congressman, for the
question.
Indeed, it does. The fact of the matter is, even if you
look at something like the G-SIB surcharge, we are twice that
of our international competitors and I think that we are in----
Mr. Huizenga. We just heard that is necessary and maybe we
do not have enough capital.
Mrs. Eversole. Respectfully, I would--I would disagree with
that premise. I think it is a perfectly appropriate
conversation to ask the question, is more always better?
To your earlier question, it does not--it is not free. It
comes at a cost, and the cost is borne by consumers, the very
people that need these----
Mr. Huizenga. It is not the banks?
Mrs. Eversole. I think from a consumer perspective. You can
see the cost of credit is increased by higher capital.
Mr. Huizenga. Mrs. Tahyar, let me switch slightly on this.
What are the macro effects on the economy of this one-size-
fits-all approach?
Mrs. Tahyar. Well, I think what it is doing is it is
leaning us toward the dreaded barbell. I think the statement
was made that our biggest banks are more competitive than the
EU banks. That is clearly right. They are outcompeting. If we
look at the mid-size range banks, say from 10 up to about 250
or more, they are--they and the community banks are the engines
of growth for small-and medium-sized enterprises, for religious
entities, for non-governmental organizations (NGOs) in smaller
towns, and the macro impact on them--and then we are now at a
place where we want to have a lot of more credit in the
heartland of the country--Michigan, where you and I are both
from--and that is going to be hard to get if we insist on gold-
plating of capital standards.
Mr. Huizenga. Mr. Chairman, I am just afraid that we are
losing the other end of that barbell with the smaller community
banks and those regional banks.
So with that, I yield back.
Chairman Barr. The gentleman yields.
The gentlewoman from California, Ms. Waters, is now
recognized.
Ms. Waters. Thank you very much.
Professor Johnson, while Republicans may want to roll back
capital requirements, I think there is a much more important
and bipartisan policy that Congress should consider.
In 2023, after Silicon Valley Bank had the fastest bank run
in the United States history, many businesses got nervous about
their payroll accounts being held by smaller banks and moved
their funds to the mega banks thinking they were too big to
fail. A year later, a much smaller bank in Oklahoma failed as
well but their failure was too small for regulators to use
emergency tools to protect depositors. The failure resulted in
small businesses, churches, and other customers with more than
$250,000 to losing some of their money. It was the 37th time
uninsured depositors lost money in a bank failure since 2007.
To sum up, small businesses that banked at Silicon Valley
Bank were protected, while those that banked at this Oklahoma
bank lost money. How is that fair?
My bill, H.R. 4551, the Employee Paycheck and Small
Business Protection Act, would address this problem with a
data-driven approach to expand deposit insurance in a
deliberate way, considering the benefits and costs to ensure a
higher threshold is set so community banks and credit unions
can compete with small business deposits in their communities,
and those businesses and their workers are better protected.
My bill would also provide for emergency transaction
account guarantee, or TAG, authority allowing the FDIC to
temporarily insure deposits for up to 9 months without needing
congressional approval first.
I appreciate that Chairman Hill held the hearing to
consider my bill, and we had a good discussion.
Are these reasonable reforms that this committee should act
on for the benefit of community banks, credit unions, and the
communities they serve, Mr. Johnson?
Mr. Johnson. Yes, Congresswoman. Those are very reasonable,
highly well-informed proposals, and I do think further study--
the data-driven approach that you are recommending is exactly
the right way to go about it.
Ms. Waters. Well, thank you very much. We have been in
considerable discussion, and much of the discussion is around
how much more should be protected. I hope we get to some
resolution on it because I think it is very important.
Let me move on and talk a little bit about bank capital.
Professor Johnson, over the course of our Nation's history, we
have routinely seen banks fail due to capital inadequacy,
whether it was the savings and loan crisis of the 1980s and
1990s or the 2008 global financial crisis that cost our economy
trillions of dollars and cost millions of families their jobs,
homes, and life savings. Moreover, research shows that better
capitalized banks lend more, including in times of stress,
compared to weak banks that lend less.
Would you briefly discuss why strong capital requirements
are so important and who suffers when capital levels are
reduced too much?
Mr. Johnson. Capital levels are important, Congresswoman,
because that is the buffer against losses. When an individual
bank is in trouble and faces potential insolvency, that is what
causes a potential bank run. If those fears are spread across
the broader economy, then you have a financial crisis just like
the one we experienced in 2008 and that is devastating to small
businesses, that is devastating to communities everywhere. The
costs of that for economic growth are absolutely, absolutely
enormous.
So bank capital is a way that we attempt to reduce those
risks. You cannot reduce them to zero, but we attempt to reduce
the risk of devastating economic collapse.
Ms. Waters. Well, I want you to know that they tell us that
if you require too much capital, we will not have the money to
lend to all of the small businesses that need money. Yet we do
not see any real loans going to small businesses.
What do you know about that?
Mr. Johnson. Well, I think providing credit to small
businesses is tremendously important, and that is why we have
the Federal Reserve, and that is why the Federal Reserve sets
interest rates and otherwise determines monetary policy,
because they are affecting credit conditions. That is their
responsibility.
I think what we need from the banks is to retain strong
community banks, strong credit unions, exactly with a deposit
guarantee extension that you are proposing and the TAG. I think
that combination will strengthen lending to those communities.
If you are just going--providing support in crisis to too-
big-to-fail banks--which is why they have a low cost of debt--
that is not helping communities across America.
Ms. Waters. Well, thank you very much.
We had a markup on the floor yesterday, Incentivizing New
Ventures and Economic Strength Through Capital Formation
(INVEST) Act, and we were talking about capital formation. At
some point in time, we need to talk about the responsibility of
the banks instead of looking all over the world for more
capital for small banks.
I yield back.
Chairman Barr. The gentlelady's time has expired.
The gentleman from Texas, Mr. Williams, is now recognized.
Mr. Williams of Texas. Thank you, Mr. Chair, and thank all
of you for being here today. Good to see my friends.
I am a small business owner in the great State of Texas. I
am a car dealer, and the previous Basel III Endgame proposal
would have pushed capital standards well beyond what a strong,
stable banking system requires. As chairman of the Small
Business Committee here in Congress, I am concerned that the
proposal would limit credit access for small businesses,
especially giving differing risk weights for loans to public
versus nonpublic firms.
So, Mrs. Eversole, what changes to the Basel III proposal
would ensure equal credit access for small businesses like
mine, or of all sizes, and why is this so important to get it
right?
Mrs. Eversole. Congressman, thank you very much for your
question.
Look, you have outlined it correctly. We need to update and
change the risk weighting because there should not be a thumb
on the scale for public companies versus private companies.
There is an impact on more capital on the end users. What we
need to do is ensure that we continue to have a strong economy,
and you know full well that starts with small businesses.
So we need to--we look forward to seeing that proposal. We
appreciate the leadership of the vice chairman of supervision
at the Fed, and we look forward to getting that right.
Mr. Williams of Texas. Ninety-nine percent of the
businesses are small right now in America.
Mr. Flood, when regulators raise capital requirements,
banks are forced to redirect more of their balance sheet toward
meeting these requirements instead of supporting new lending--
we have been talking about that--and that shift reduces the
pool of credit available to small businesses that rely on
steady access for financing day-to-day operations and growth,
needing to mention payrolls. Even modest increases in required
capital can drastically change a bank's lending capacity,
tightening credit exactly where it is needed most.
So for a small business trying to renew a line of credit or
finance equipment, how directly would these higher capital
changes translate into fewer dollars available to lend to the
main thing we are talking about, Main Street America?
Mr. Flood. Great question. Just to give you an idea, for
the drawn part--just using, again, Basel III Endgame as example
of excessive capital--for the drawn part of your line of
capital, the risk weighting increases by 10 percent, again,
above and beyond global standards. Oddly, for the undrawn part,
it goes from 20 to 50 percent.
So even for the money you are not using, it increases by 30
percent. So likely your line shrinks or you pay more.
Mr. Williams of Texas. Mrs. Tahyar, when government rules
and regulations become overly complex, banks must dedicate
significant time and effort to compliance rather than serving
borrowers and strengthening their businesses, sometimes keeps
you from making the loan. This can be especially challenging
for institutions competing in global markets where other banks
may face simpler or more modernized frameworks, and these
burdens can affect everything from product development to long-
term strategic planning.
So my question to you, Mrs. Tahyar, does increasing the
complexity of the Federal framework force U.S. banks to divert
resources away from innovation, technology, and customer
service, and does, at the end of the day, this reduce their
ability to compete internationally?
Mrs. Tahyar. Yes, sir, it does. In fact, if we look back,
there are many wonderful changes that came out of the financial
crisis, but the intense internal investment at banks in
compliance personnel, risk personnel, technology to support
them--and the same thing happening at the regulators--has
massively increased complexity in the system.
Makes it harder for Congress to engage in appropriate
oversight, and AI may well change these things, but AI is
something that we are going to have to look at carefully, and
it needs to be controlled.
It is just so hard to get the full weight of the internal
bureaucracies that have been created at the banks, which just
take away from the main mission.
If I may, one minor, just quick comment. Capital absorbs
losses, but it is not liquidity. A deposit run, which I agree,
AI is going to make riskier, that is not going to be capital
absorbing that loss. That is liquidity regulation or deposit
insurance. Capital does not solve liquidity.
Mr. Williams of Texas. Main Street America, keep it simple.
Let it grow, employ people, pay taxes.
I yield my time back. Thank you.
Chairman Barr. The gentlewoman from New York, Ms.
Velazquez, is now recognized.
Ms. Velazquez. Thank you, Mr. Chairman.
Mr. Johnson, I heard discussion this morning about
affordability. I am glad to hear this because I never thought
that it was a hoax.
Can you talk about affordability for working class families
in times of economic stress if the banks fail?
Mr. Johnson. Absolutely, Congresswoman. So I think it is
one of the great tragedies actually of our generation, the
current America, that we went through this massive financial
crisis in 2008, that was absolutely devastating to communities.
It destroyed businesses. It completely disrupted the
housing market. Many of the problems that we are struggling
with today in terms of providing goods through competition and
at reasonable prices with reasonable supplies, are because of
that financial crisis.
We did not build 4 million housing units after the crisis,
and we have never built them, Congresswoman. We have never
caught up.
So for ordinary Main Street America, the financial crisis
of 2008 was absolutely devastating and when we say there is a
bailout, a bailout was provided--let us be very clear--it was a
bailout to the creditors, particularly of large banks.
The shareholders got a pretty good deal too, but the
workers across the economy, the people who run nonfinancial
businesses, the people outside of the financial sector were
crushed. They were crushed because our banks took on too much
risk. They did not have enough capital. We did not have the
kind of protection that Chairwoman Waters was talking about in
terms of the deposit insurance, not sufficiently.
That combination is absolutely toxic to ordinary Americans,
and we see it now reflected exactly in today's affordability
crisis.
Ms. Velazquez. We should not forget the lessons of COVID-
19. Banks were sitting in capital, trillions of dollars in
capital reserve, and yet, small businesses were not getting
loans.
It was Ranking Member Maxine Waters, myself, and Speaker
Pelosi who called the Secretary of the Treasury, and we put a
set-aside of $60 billion to be lent to underserved communities.
Professor Johnson, you testified before this subcommittee
last February. As part of your testimony, you stated, ``Over
the business credit cycle, well-capitalized banks are better
able to sustain lending than banks with relatively little
capital, that fund themselves with more debt relative to
equity.''
Can you explain this statement, and what does the research
tell us?
Mr. Johnson. Well, the research and the practical
experience, and what we have seen from around the world over a
hundred years, is that when investors are concerned that a bank
is deficient in capital, when they think there is a probability
of insolvency--that is what happened with Silicon Bank, there
was concern about insolvency; then you get a run that is again
what happened in Silicon Valley Bank; and then the run spreads
across other supposedly similar institutions.
At the moment, humans make those decisions, but as Dr.
Foster said, very soon it is going to be agentic AI making that
kind of decision. So then we have concerns about insolvency
becoming a systemwide run.
If we do not have adequate tools, the authorities do not
have adequate tools to respond to that, then you have a major
financial crisis as we saw in 2008.
So the best way, Congresswoman, to withstand that, the best
way to ensure the kind of national security that the White
House is talking about, is precisely to have a well-
capitalized, resilient banking system to prevent this from
happening.
Ms. Velazquez. Is it not true that even after the first
part of the Basel III capital regime was implemented in 2016,
U.S. banks continued to lend and make record profits while the
economy continued to grow?
Mr. Johnson. Absolutely, Congresswoman. I am looking here
at the data provided, or compiled, by the Kansas City Fed, and
we can see that--exactly when you are discussing, in the mid-
2010s--there was a lot less leverage in the big banks than
there is today.
By the way, the smaller community banks have maintained
less leverage throughout this period than the big banks. That
is their choice. That is not what is forced on by regulation.
That is sensible, big--big practice.
It is the big banks that have a large implicit guarantee
from the U.S. taxpayer. That is what ``too big to fail'' means.
Their debt is subsidized implicitly by the American taxpayer.
That is ``too big to fail.''
They, of course, want as much leverage as they can get,
because their debt is super cheap because of the subsidy that
they get from the U.S. Government.
Ms. Velazquez. Thank you. I yield back.
Chairman Barr. The gentleman from Tennessee, Mr. Rose, is
now recognized for 5 minutes.
Mr. Rose. I thank you, Chairman Barr and Ranking Member
Foster, for holding this important hearing, and thank you to
all of our witnesses for taking time to be with us today and
lend your expertise.
Mr. Olmem, the 2023 Basel III Endgame proposal would have
raised capital requirements by 16 percent on average, with some
banks seeing increases over 20 percent. The proposal received
overwhelming criticism and was ultimately withdrawn.
As regulators prepare a revised proposal, what are the most
important principles they should follow to ensure the final
rule appropriately balances risk weighting with the statutory
mandate from Congress to tailor requirements based on bank size
and risk profile?
Mr. Olmem. Thank you for that question. Well, first of all,
making sure that the risk weights are based on the best
available data. Capital should correspond to risk. That is the
first one.
Two is simplicity. Capital requirements have become simply
too complex and hard to really understand. I think it makes it,
as Margaret was referring to, hard for the public to understand
even what capital requirements are. It makes it very difficult
for Congress to evaluate and also banks to comply with. So
making them simpler is better.
Certainly many banks are complex institutions, and there is
a limit on how much simplicity we can get out of the system,
but certainly any efforts in that direction are beneficial.
I would also note too that it is really important to take a
view of the totality of all the regulations that are going on.
I think that is one of the things that I think Mr. Johnson
misses, is that this is not 2008, and I think back in a way, I
would have shared some of his concerns about capitalization
levels but that is not where we are today.
We have, in addition to all the reforms that have happened
over the last 15 years--and we need to make sure they all work
together--we have stress testing now, we have additional
leverage ratios, we have the Volcker Rule, risk retention
rules, right? We have a 2,000-page Dodd-Frank Act of rules on
banks that have substantially changed their risk profiles.
What the regulators are really doing right now is trying to
make it all work together in a more efficient way so that the
banking system is certainly safe and sound, but that it is--the
distortions in credit allocation that are occurring because of
the lack of coordination amongst this system, are diminished.
Mr. Rose. Thank you.
Mr. Flood, increased capital requirements have already
driven banks out of certain business lines. Residential
mortgages dropped from 81 percent bank origination in 2007, to
just 39 percent by 2022.
In your testimony, you discuss how the original Basel III
Endgame would have particularly affected lines of credit and
warehouse lending. Can you explain what happens to credit
availability and pricing when capital requirements increase for
these specific products?
Mr. Flood. Absolutely. Couple things to think about. Again,
when we Basel III Endgame which, in many cases, goes above and
beyond global standards, with a line of credit--I think I had
explained before--the funded part goes from 100 to 110 percent,
and the unfunded goes--risk weighting moves from 20 to 50
percent.
So two things will happen. You either will pay more for
your line of credit, or you will have a smaller line of credit
so that when you need more, you will have to get another and
pay more.
Two--and, again, I will keep repeating this--a private
company, 99 percent will pay more than a public company. My
example again is, if you take a loan to the public company at 7
percent and you assume a 12 percent return on equity, the
private company is going to pay a 10 percent loan. It is a
significant difference.
Finally, the last one I would say is, there is a 10 percent
capital charge on all retail. So put credit cards on the list,
put autos on the list, and put mortgages on the list, and they
all increase.
Mr. Rose. Wow. Thank you.
Mr. Olmem, you make the point in your testimony that
capital is critically important, but it is not the only option
in the regulatory tool kit. You note in your testimony that the
banking regulators are undertaking important reforms to the
supervisory process.
Why is getting supervision right just as important as
getting capital requirements right, and how do these work
together to promote both safety and soundness and economic
growth?
Mr. Olmem. Thank you for that important question.
Supervision can spot those risks that are not on the balance
sheet, right? It is the way supervisors can exercise judgment
and understand how a bank, its management, is addressing risks.
The only way you can see that is knowing who the bank
managers are, understanding their strategies, and working with
them to understand how they are managing those risks.
I think if you look at any major bank fail, supervision is
usually at the core of the problems. Supervision also is an
effective and efficient way to make sure that banks are
properly regulated without excessive regulation.
Mr. Rose. Thank you. My time is expired. I yield back.
Chairman Barr. The gentleman's time is expired.
The gentleman from Georgia, Mr. Scott, is now recognized.
Mr. Scott. Thank you, Mr. Chairman.
Ladies and gentlemen, this is a very important hearing but
especially to our farmers--sectors like agriculture, that rely
heavily on access to credit, risk management tools, and
functioning derivative markets.
Mrs. Eversole, let me come to you first. Our farmers
operate in a world of volatility--from supply chain
disruptions, fluctuating global demands, and extreme weather.
There is no other sector of our economy that is as serious
in terms of reseeing these obstacles. So let me just ask you
this: Large banks play a key role in providing risk management
for agriculture producers through futures options and swaps.
Now, if Basel III makes it less attractive for our banks to
provide these hedging services, what will be the direct effect
on our farmers?
Mrs. Eversole. Congressman, thank you very much for the
question. I am also from the great State of Georgia, so I
deeply appreciate the concern about farmers here.
I mean, the reality is, it is going to make it more
expensive and--I mean, you know very well how hard it is to
manage risk. Is there enough rain, how is the--and that all has
an impact on the crops.
The ability to manage risk and understand where you are
coming out of this, the Basel III Endgame has an impact on
that, and it is not just about the farmers. It is about where
those products go. They end up on store shelves.
It also impacts the price of fuel, when you think about
biofuels and ethanol and so, we need to get this right,
Congressman.
Mr. Scott. We have a good audience listening.
Do you anticipate certain particular products would become
less available to our farmers, particularly customized or
longer-term derivatives?
Mrs. Eversole. If we do not do this right, they will impact
not only the cost but also the availability, and so we look
forward to making sure that we get this proposal right and
provide the certainty to America's farmers, especially in the
great State of Georgia.
Mr. Scott. Absolutely and go, Dogs.
Mrs. Eversole. Go, Dogs. Thank you so much, sir.
Mr. Scott. Excuse me. Cold.
Let me turn to you, Mr. Johnson. Do you believe that
farmers, businesses, face any disadvantages if foreign
competitors, operating under slightly different capital rules,
have lower hedging costs?
Mr. Johnson. I think, Congressman, it is very important to
study this question, and to examine exactly what kinds of
market facilities and also subsidies are available to farmers
and other competitors in other parts of the world.
Sure, if there are unfair forms of competition, those
should be looked at, and there are various, as you know, legal
and regulatory remedies available under those circumstances.
However, Congressman, I do think that having a strong,
resilient banking system of our own, including community banks,
including credit unions, including those which are just focused
on farmers, is incredibly important.
When I look at how much capital those institutions choose
to have--they choose to have it; this is not what they are
required to have--they have substantially less leverage than
the ``too big to fail'' banks.
So I think that we have some fantastic and very important
financial institutions serving those communities, Congressman,
and I think we should aim to strengthen them. They are,
themselves, choosing not to over-leverage, which I really
commend them.
Mr. Scott. Finally, will U.S. farmers and businesses face
any disadvantages from these foreign countries?
Mr. Johnson. Unfair foreign competition is a problem,
Congressman, and it needs to be addressed in a careful, well-
regulated way, and we have a long tradition of doing that in
the United States.
I do think, though, that what we have currently, as a
result of the reforms after 2008, with regard to strengthening
the financial system and lowering the leverage--at least we
lowered it until 2016, 2018--I think that was helpful to
farmers. Allowing the big banks to become over-leveraged is not
helpful to farmers.
Mr. Scott. Thank you very much.
Chairman Barr. The gentleman from Georgia's time is
expired. I will just have to say, as the husband of a Georgia
Bulldog, even though I am a Kentucky Wildcat, to you and Mrs.
Eversole, go, Dogs.
Mr. Scott. Way to go.
Chairman Barr. The gentlewoman from California, Mrs. Kim,
is now recognized for 5 minutes.
Mrs. Kim. Thank you, Chairman and Ranking Member, for
hosting today's hearing, and I want to thank our witnesses for
being here. Thank you.
As you may know, I have been keenly focused on modernizing
the community bank leverage ratio to uplift our community
banks. According to prudential regulators, around 85 percent of
our community banks qualify for community bank leverage ratio
(CBLR), yet only 45 percent of them actually use it.
That is why I introduced Community Bank Leverage
Improvement and Flexibility for Transparency (LIFT) Act that
will modernize CBLR, to ensure that more community banks in
California are focused on consumers, rather than regulatory red
tape.
Mrs. Tahyar, when you look at tailoring, do you agree that
there is still more fine-tuning to be done regarding the
community bank leverage ratio?
Mrs. Tahyar. Yes, I think there is. The vice chair and the
board have come out with a proposal, as you know, which would
take it to 8 percent and also importantly, would give a longer,
four-credit, grace period.
It is not entirely clear to me exactly why only 40 percent
of the community banks could benefit from it, but I think the
cliff effect of a two-quarter grace period, which for a
community bank is way, way, way, too swift, is part of the
concern there.
I also think in terms of tailoring, picking up on something
that Andrew said, with growth in the economy and inflation, in
a tailored system, that growth and that inflation will simply
have banks grow into the next asset threshold when they really
should not be there.
Mrs. Kim. Thank you.
Today we heard a lot about the leverage of large banks
today. So Mrs. Tahyar, can you explain how low-risk activities
like Treasury market intermediation are impacted by binding
leverage requirements?
Mrs. Tahyar. So--and this was obviously worse before the
recent change in the enhanced supplementary leverage ratio
(eSLR), but it is still part of the leverage ratio.
The market for Treasurys has simply exploded with the
increase in the deficit. That means that you have an impact on
the market for Treasurys because those entities that would have
been trading in Treasurys, if the leverage ratio becomes
binding on them, they are going to stay out of the Treasury
market.
Now we are more dependent on non-banks or on foreign actors
in the market for Treasurys. Maybe stablecoins will eventually
make a difference. I know that is part of the hope, but what we
have experienced in some of the kerfuffles in the Treasury
market is certainly bound up with the fact that the classic
players just have not been playing the way that they used to.
Mrs. Kim. Thank you.
As we continue to evaluate tailoring and capital
requirements, the impact on small businesses must be kept top
of mind. Many small businesses rely on affordable and reliable
credit from regulated banks to grow and manage day-to-day
operations.
However, increased capital requirements, such as those
proposed under Basel III and through the G-SIB surcharge, can
raise the cost of lending and reduce credit availability.
I want to ask you, Mrs. Eversole--yes, Eversole--how are
these capital rules impacting small businesses' ability to
access credit today, and what adjustments should regulators
consider to ensuring that credit remains affordable for Main
Street without compromising safety and soundness?
Mrs. Eversole. Congresswoman, thank you very much for the
question. I would note that my member companies have more than
$100 billion in outstanding loans to small businesses today,
and that is really important because we know that small
businesses are the economic engine for growth in this country.
The Basel III Endgame, as proposed in 2023, would have had
inappropriate risk weighting that would have impacted small
businesses negatively through the form of higher capital.
I think, as I have mentioned today, higher capital is not
always better, and it comes at a cost. I think the question
about getting this right, making sure that in the proposal we
look forward to from the Federal Reserve, hopefully as soon as
possible, getting it right really matters.
We want to make sure that America's small businesses are
protected, but also can borrow money at a fair cost, so they
can get to the business of growing their businesses.
Mrs. Kim. I could not agree with you more. Thank you.
Let us shift gears now. In today's era of banking, it
appears that the success of your bank will not be dictated by
innovation or competitive product offerings but rather by how
you can handle the compliances costs as your financial
institution continues to grow.
We are almost forced to either defend Dodd-Frank as banks
fail around us, or we find ways to tailor regulations to serve
the dynamic economic rules that these financial institutions
play.
I am running out of time, but hopefully you will have time
to answer this, Mr. Olmem.
Has Dodd-Frank created the accurate, precise regulation
that was expected, or has it created more regulation with
little or to no benefit?
Chairman Barr. Mr. Olmem, you are going to have to submit
that answer in writing. The gentlewoman's time is expired.
Mrs. Kim. Thank you.
Chairman Barr. The gentleman from California, Mr. Sherman,
is now recognized.
Mr. Sherman. Thank you, Mr. Chairman. I think we all agree,
if capital standards are too low, we face the risk of needing
bailouts. If they are too high, our economy is smaller than it
otherwise would be, but we should also agree that if you
discriminate against certain borrowers and help other
borrowers, you pick winners and losers.
What is worse is if you pick the wrong winners and the
wrong losers. Banking is too important to just focus on the
bank. It allocates capital in a society dedicated to
capitalism.
Now, there is real risk in loaning money to Jack's Pizzeria
in Tarzana, and we should state that fairly and have adequate
reserves but we should not understate that risk just because
the pizza is delicious. We should not understate that risk just
because we love small business.
When we look at Basel III's current configuration, we see a
system designed to oppress, to discriminate against small
business, new home buyers, and all home buyers, and U.S.
taxpayers, for absolutely irrational reasons except for the
fact that the people in Basel all just feel really comfortable
with giant corporations and their long-term bonds.
The first is to home buyers. First, there is a proposal
here to increase the risk weight beyond the Basel levels for
all home mortgages. Then, as I have commented before in this
room, they ignore private mortgage insurance.
So you have a system that discriminates against all home
buyers, and then doubly discriminates against the first-time
home buyers with the low downpayment that needs the private
mortgage insurance.
I have heard no defense of this. It is just people who jump
up and down and say Basel, Basel, wonderful town, let us just
do what is in the document, do not read it too carefully.
Then we have intentional discrimination against small
businesses in two ways: As Mr. Flood points out, if it is a
public company, we discriminate in favor of them and against
the private company.
Second, small businesses do not pose an interest rate risk
because they tend to have floating rates or short-term loans.
The 30-year fixed-rate bond, is discriminated in favor of
because we do not mark-to-market. Had we done that, we would
have realized that Silicon Valley Bank had $17 trillion in
unrealized losses.
Even after that, we have got a system that discriminates
against the small business and in favor of the competing 30-
year corporate bond that is not mark-to-market.
Then Mrs. Tahyar says we should also discriminate in favor
of the crypto billionaire bubble creators. I just say, you do
not have to be a genius to recognize that crypto assets are
very volatile and then in the area of long-term bonds, we
discriminate in favor of the corporate bond and against the
Treasury bond by treating them both the same, even though the
Treasury bond does not have the risk and the corporate bond
does.
So we have a system here, designed to unfairly discriminate
against home buyers, particularly first-time home buyers, small
business as opposed to publicly traded, big business, and the
U.S. Government, its taxpayers. Gee, what could go--what is the
matter with that?
Mrs. Eversole, the Basel III Endgame proposal for 2023
included higher risk weights for mortgages than recommended by
the Basel Committee. As I pointed out, it discriminates in
favor of publicly traded companies.
How do your banks take capital requirements into
consideration when making a small business loan or a home loan,
and would the consequences of this be fewer loans for home
buyers and small businesses?
Mrs. Eversole. Congressman, you said it very well. The
impact is straightforward. It would reduce the amount of loans
made, and it would make the ones that are made more expensive.
It was a bad, flawed proposal, and we need to see--we look
forward to seeing the re-proposal that we expect as soon as
possible.
Mr. Sherman. Mr. Olmem, we have got a system that pretty
much ignores private mortgage insurance (PMI). It does not
follow the Federal Housing Finance Agency (FHFA) Enterprise
Regulatory Capital Framework that Fannie and Freddie use.
What should the Basel--what should this regulation do with
regard to mortgages?
Mr. Olmem. I think the risk weights that were originally
put in the original proposal were too high and need to be
revised.
Mr. Sherman. Thank you.
Chairman Barr. The gentleman's time is expired.
We are going to just go out of order just for a minute for
a parliamentary request from the gentleman from Texas.
Mr. Green. Thank you, Mr. Chairman. Mr. Chairman, because I
have three hearings taking place today, I ask unanimous consent
that I be allowed to place questions in the record for the
witnesses, and I beg that I be excused to take care of the many
things that I have to do.
Chairman Barr. Without objection----
Mr. Green. Thank you very much.
Chairman Barr [continuing]. so ordered.
The gentleman from Georgia, Mr. Loudermilk--a lot of
Georgia Bulldogs here today--the gentleman from Georgia, Mr.
Loudermilk, is now recognized for 5 minutes.
Mr. Loudermilk. Well, thank you, Mr. Chairman, and I
appreciate everybody being here today.
While all of America is likely not glued to their
television watching this hearing, as they may be some other
high-profile hearings. Nonetheless, the subject matter that we
are discussing here is extremely important to all Americans and
their livelihood and their financial stability going forward,
so.
For too long, financial regulators have taken one-size-
fits-all approach to regulation, applying the same regulatory
standards to small-and mid-sized institutions as they would to
large and well-resourced institutions.
While the biggest banks often have the resources to comply
with the regulations, small firms and even some mid-size firms
might struggle to meet these same regulatory requirements.
So I am glad to see us focusing on this topic, and I am
proud of the work that this committee and the Trump
Administration are doing to right-size regulations on financial
institutions of all sizes.
Mrs. Tahyar, I have a bill entitled the Taking Account of
Institutions with Low Operation Risk (TAILOR) Act, which would
require that all future regulations be tailored to the risk
profile of the regulated institution.
Are there other proposals out there that you believe would
provide the right balance between safety and soundness and
minimizing harm to community banks?
Mrs. Tahyar. Yes, I think so. There are a number of
challenges that community and smaller banks face, among which
is succession planning, because many of them are family owned--
they are private companies--and making kind of M&A applications
easier and more certain, I think would be helpful for community
banks.
We do not want the barbell, but we have got 4,000 banks and
4,000 credit unions. So some degree of consolidation seems to
me to be fruitful.
Other elements on tailoring are indexing the tailoring, and
then I think the shift that the vice chair has put in place,
away from process-oriented supervision, which just takes so
much--a community bank may have 15 people at the bank. A
regional bank is not going to have the hundreds of thousands
that a large bank has.
So moving away from process checklists just to show things
just to show things, minutes of meetings that--so that someone
can look at them and check whether they did things. I think we
will focus banks back on what they need to do and will focus
the supervisors on material, financial, and operational risks.
Mr. Loudermilk. I have had community bankers tell us that
what they face is a death of a thousand cuts----
Mrs. Tahyar. Yes.
Mr. Loudermilk [continuing]. because of the requirements.
With that in mind, are community banks at a structural
disadvantage compared to large banks, who can have teams of
compliance specialists when implementing these complex capital
frameworks?
Mrs. Tahyar. They are, and I think that is what the
community bank leverage ratio is about, which has not been
taken up as much as it could be. It is very much a structural
disadvantage for smaller banks.
To make a mortgage the paperwork looks like this.
Mr. Loudermilk. Right, right.
Mrs. Tahyar. That was not the way it was before, but
mortgages were what community banks did in the small
communities. They knew the people. They could make the
mortgages.
Now, it has been much, much harder, since Dodd-Frank, for
community banks to make mortgages, and we have seen this flow
out of mortgages from the banking sector to the non-banking
sector.
Mr. Loudermilk. That is interesting you bring up mortgages.
One of the first bills that I passed after coming on this
committee was to exempt institutions that have zero-interest
mortgages, such as the nonprofits, Habitat for Humanity, to
exempt them from this massive regulatory framework just to
issue a zero-interest mortgage anyhow.
In your testimony, you write that any capital framework
will need updating and renewal from time to time as markets and
technology change.
Do you have any thoughts as to how the framework like that
should be structured and how often those reviews should occur?
Mrs. Tahyar. Well, under the regulations, they are supposed
to be reviewed every 10 years, and that is very much not
honored and that is for all of the banking regulations.
I do not want to front-run whatever we are going to see a
Basel III proposal from the banking regulators--quite soon, I
hope--and so I do not want to make suggestions about what
should happen in the onward, onward.
What I did want to open folks' minds to is, we call it
endgame----
Mr. Loudermilk. Right.
Mrs. Tahyar [continuing]. but it is not the end of the
game. There have been mentions of agentic AI and various other
changes. I just want us to keep in mind that there is no
endgame. There is no end to keeping up with what is happening
in technology in the market.
Mr. Loudermilk. Right.
Thank you, Mr. Chairman. I yield back.
Chairman Barr. The gentleman yields back.
The gentleman from Massachusetts, Mr. Lynch, is now
recognized for 5 minutes.
Mr. Lynch. Thank you very much, Mr. Chairman. I want to
thank the witnesses for your help this morning.
Mr. Johnson, earlier Mr. Olmem said, correctly, ``We are
not in 2008.'' However, I was here in 2008 on this committee,
and so we had--the reason we are not in 2008 is because of
Dodd-Frank.
We put in enhanced capital requirements. We put in greater
prudential standards. We stopped the banks from engaging in
some very risky activity.
Now, if you listen to Michelle Bowman, the vice chair of
the Fed for supervision, we are seeing a market change. We are
moving away from those--the more demanding stress tests that we
put in place. We are relaxing--well, there is a recommendation
to relax the supplemental leverage ratio. We are not doing--
like I said, we are not doing the stress testing, and again,
those prudential standards are dropping.
With all of that--let me also add, Vice Chair Bowman also
gave a speech in Madrid last month where she said that banks
should be able to compete with non-banks in cryptocurrencies
and digital assets, which introduces a whole pile of risk into
the banking industry.
I think we are all in agreement that, as others have
stated, capital requirements should reflect the risk that is
being engaged in.
So with all that, are we not heading back toward 2008?
Mr. Johnson. Well, we are heading back towards a financial
crisis of the magnitude or bigger than 2008, absolutely,
Congressman. So you are right that Dodd-Frank helped a great
deal, and that is what reduced leverage in the bank system, all
of those measures combined.
We can see, from the data provided through the Kansas City
Fed, that leverage was at its lowest point in the mid-2010s,
and since then, there has been an erosion, as you say, on
multiple fronts. Vice Chair Bowman seems to be determined,
along with the other regulators--the FDIC and the Office of the
Comptroller of the Currency (OCC)--to allow more leverage.
At the same time, the world around our financial system has
become a lot more dangerous--financial panics repeatedly--
including Silicon Valley Bank--the pandemic, the rise of
China--absolutely transformative--the arrival of AI.
Of course, you are right to emphasize crypto. Whatever we
think about the future of crypto, whether it is bright or not,
it is certainly highly volatile. If the regulators are allowing
the banks to become more intertwined, either directly with the
cryptocurrency or with an entity as itself speculating on
cryptocurrencies, then that is a lot more risk.
The only way to handle risk, from a financial system
stability point of view, is to have more capital. The banks do
not want to do it, Congressman, because they have these massive
subsidies, the ``too big to fail'' subsidies.
They love the leverage. Bank executives for the big banks
get paid on the basis of return on equity unadjusted for risk.
So they want to load up on risk. They do not want to care about
capital. They want to shove the costs onto the taxpayer. They
get the upside. The taxpayer and regular Americans get the
downside. So that is 2008 again.
Mr. Lynch. Yes. Let me ask you about, there is much faith
being put on AI, but from this committee's perspective, we are
seeing a small handful of AI firms that are really going to
dominate, and so, their products will be used by hundreds,
maybe thousands of banks. So they are all going to be operating
off the same--the same recommendations, the same algorithms.
Does that not create a concentration risk if multiple
banks, perhaps hundreds of banks, are actually making decisions
based on the same recommendations?
Mr. Johnson. Yes. We will see concentration risk exactly
there where banks make decisions, but also what Dr. Foster was
talking about, which was agentic AI on the part of investors.
So investors will be coming into assets and leaving assets
really very fast. They will be interacting with other AI. They
will be gaming the system. This is all volatility, Congressman,
and the only way to ensure the system against volatility is
with more capital, not less.
Mr. Lynch. Right. So with all these added elements,
especially with the crypto piece of this, and the President--
certainly the White House--is inducing banks to get more
involved with crypto, would not it make sense to increase the
capital requirements for those firms that are engaging in
crypto activities?
Mr. Johnson. Yes, absolutely. Crypto is dangerous and I
would point out that the leverage is going down in community
banks and regional banks. It is the ``too big to fail'' banks
that are leveraging up, and they are the ones who want to pile
into crypto. It makes no sense. It is super dangerous.
Mr. Lynch. Thank you, Mr. Chairman. I yield back.
Chairman Barr. The gentleman yields back.
The gentleman from Nebraska, the other Mr. Flood, is
recognized for 5 minutes.
Mr. Flood of Nebraska. Thank you, Mr. Chairman, and to our
stenographer, the record should reflect that I do represent the
people of Nebraska. The other Mike Flood, though, is welcome to
do all my town halls next year in Lincoln.
I will afford you that opportunity.
With that, Mrs. Eversole and Mr. Flood, as chairman of the
Subcommittee on Housing and Insurance, I am concerned that
over-calibrated capital requirements are limiting consumers'
access to affordable and reliable mortgages.
What reforms should we consider to ensuring that consumers
continue to access safe, reliable products and services such as
mortgages?
Mrs. Eversole. Thanks very much for the question. I think
it is important to note, as we have reflected on changes since
2008. In 2008, only 20 percent of mortgages were made outside
of the banking system, and today, more than 60 percent are made
outside of the banking system.
When we think about risk, we know that America has a highly
regulated, safe, sound, banking system, and when we are pushing
things outside of the banking system, we should ask the
question: Is this because of regulatory arbitrage, or is this
because of a good, sound, competitive marketplace? I think that
is point one.
Point two is, it is time to see a Basel III Endgame
proposal that gets this right because the cost to first-time
home buyers, to small businesses, we should not be placing
inappropriate risk weighting on that.
We look forward to the new proposal.
Mr. Flood of Nebraska. Mr. Flood.
Mr. Flood. I would just add a couple comments. I clearly
agree with Mrs. Eversole about making sure that the risk
matches the product.
One thing that I would point out as you consider
affordability. When we look at Basel, a lot of times, it will
treat, especially on the commercial side, a privately done,
affordable deal with no backing, differently than one that is
supported by the GSEs.
I get the concept, but if we are going--as you well know,
if we need all hands in the boat on affordability, that is
definitely an area that should be looked at, and clearly the
risk weights for residential mortgages as well.
Mr. Flood of Nebraska. To Mrs. Eversole's point, like, we
have this fantastic banking system. It is diverse. It is better
than anything Europe has. We have Federal banks, State banks,
community banks, regionals, G-SIBs but what kind of connection
will they have to Main Street if, like you say, 60 percent of
this is done--and we are going to be talking about GSE reform
sometime in this Congress--is it a capital requirements issue?
Like, Mrs. Tahyar, like, is it a capital requirements
issue? Can we make changes so that banks are more incentivized
to get into the mortgage business because I think they are
going to lose their link to Main Street if they do not have
that relationship with the consumer?
Mrs. Tahyar. I strongly agree with that, and I think it is
more than a capital requirement. I mean, what small banks have
to do, to do a mortgage loan to somebody in their community who
they have known for 30 years, since Dodd-Frank, has become
enormously complex.
Obviously, there were problems in the financial crisis with
the liars' loans and not checking income. What we have done
basically is, we have made it too hard for community banks to
do what was done for my aunt 30 years ago, which is--she was in
the State Department. She was stationed in a foreign country.
She needed to have a home equity loan.
The guy from the community bank, from the mortgage she had
already paid off, walked down to the house, walked around the
house, came back and told her what he could give her.
I do not think that would happen today.
Mr. Flood of Nebraska. Right.
Mr. Flood. Mr. Flood, if I may, I think there are three
concrete things that should be looked at in the Basel rules:
One, mortgage servicing rights, servicing----
Mrs. Tahyar. Exactly.
Mr. Flood [continuing]. while the chamber has absolutely no
bias towards who wins in competition between banks and non-
banks, a level playing field is important.
I think we have seen the migration of servicing out of
banks, into non-banks, and I think the reason is entirely for
capital reasons. So we should think about whether we are
biasing one form toward another.
Another would be warehouse lines. You should look at that.
Finally, of course, the risk weights around mortgages
themselves.
Mr. Flood of Nebraska. Very good. I will finish up here
quickly, but Mr. Olmem and Mrs. Tahyar, do you think that the
complexity of bank capital requirements can drive further bank
consolidation?
I mean, I have banks in my district, in the largest city,
that are afraid to grow because they are bumping up against a
new assessment that is going to be painful.
You do not want that. When that happens, they will be more
likely to say, ``Oh, we will sell to a big regional.''
What do you think?
Mrs. Tahyar. It is the cliff effect of thresholds which
have created that adverse incentive, and it is certainly
something that the current supervisors are looking at.
Mr. Olmem. Yes, I fully agree. I think this is one of the
key issues at stake with these reforms, is whether or not we
are going to be able to have regional banks in the United
States going forward.
Mr. Flood of Nebraska. We need them and want them, and with
that, I will yield back.
Chairman Barr. The gentleman yields.
The gentleman from North Carolina, Mr. Moore, is now
recognized.
Mr. Moore. Thank you, Mr. Chairman.
During the last administration, banking regulators drifted
away from their core statutory mission of protecting safety and
soundness toward subjective judgments and political priorities.
That shift has created uncertainty and imposed
disproportionate burdens on the community and mid-sized
institutions that drive credit formation.
Now we finally have an opportunity to restore some
regulatory discipline and return to a framework where
requirements are truly risk-based and proportional.
We are working to revive this principle of regulatory
tailoring because the requirements should match an
institution's actual risk profile, as several of the witnesses
have already testified to.
Mrs. Tahyar, we have emphasized the need to strengthen
tailoring, especially across categories 2, 3, and 4 banks. What
specific changes to capital and liquidity requirements should
be made to ensure mid-size and regional banks are not subjected
to requirements that simply do not match their actual risk?
Mrs. Tahyar. So I think you have got, in the tailoring
statute, you have got $100 billion, but there are other numbers
that are not in the statute, and I think they should all be
revisited.
There is a proposed TLAC proposal that is out there that
would calibrate a long-term debt requirement for mid-size banks
really as high as what the G-SIBs have, and I think there
should be data-driven thinking to bring that calibration of
TLAC down.
Then I think there should be, in the same way as the
community bank leverage ratio a bank that hits $100 billion has
to start its large bank program when it is at $75-, $80 billion
and then there is this enormous kind of process, checklist kind
of thing, and I think that more efficient supervision and more
transition periods as thresholds are met, as well as the
indexing of thresholds, would all be wise.
Mr. Moore. Thank you.
Charlotte that is in my district, is home to some of the
most strategically important banks in our country. These
institutions do not just compete domestically, but also with
major foreign institutions subject to very different regulatory
schemes.
Mrs. Eversole, how do U.S. capital proposals compare
internationally, and what risk do you see if the United States
ends up materially higher, with these requirements, than our
global peers.
Mrs. Eversole. Thank you very much for the question,
Congressman.
Just for the eight largest banks, one of which is
headquartered in Charlotte we pay twice--we owe twice the
capital as a consequence of the G-SIB surcharge in using method
two, versus our international counterparts applying method one.
It really does not have to be that way. That does not drive
additional safety and soundness to the system and so it is in
all of our interests to ensure that we have the safest, most
liquid, most vibrant capital markets and we serve our customers
in the very best possible way, but gold-plating simply does not
make sense, and we should revisit that.
Mr. Moore. Thank you. We need to get back to a capital
framework that supports growth and competition, both at home
and abroad. So I will go to Mr. Olmem.
Currently only about 40 percent of eligible community banks
opt in to the community bank leverage ratio. How should the
CBLR be reformed so that it truly reduces burden, and can be
used by qualifying banks?
Mr. Olmem. Thank you for that question. The current
proposal that has been out to revise the community bank
leverage ratio, I think is a good step in the right direction.
It will lower the overall leverage ratio to 8 percent, but
also it will allow--it will exempt institutions from having to
still calculate the risk-based as well, which is pretty
expensive. Oftentimes institutions, if they have to calculate
it, they will just go ahead and comply because a lot of the
compliance costs are there. Removing that requirement also
should help take-up. So I am hopeful that the existing proposal
should approve the take-up rate.
Mr. Moore. When the Biden Administration released the
original Basel III Endgame proposal, they received an
overwhelming number of critical comments.
One analysis found that 97 percent of commenters opposed
the proposal, and more than 85 percent came from outside the
banking industry, including farmers, small businesses, housing
advocates, and manufacturers, all citing concerns about higher
costs for goods, services, and lending, that, of course, we
have seen impact on the economy.
So, Mrs. Eversole, what are the impacts of increased bank
capital requirements beyond just the balance sheets?
Mrs. Eversole. Right. At the end of the day, there are
consequences to more capital. It does not come--it does not
come for free.
The consequences, as you articulate them from the prior
proposal on the Basel III Endgame, would have had a
disproportionate impact on privately held companies, like small
businesses across America, America's farmers, America's savers,
America's retirees.
We need to get the proposal right, and we look forward to
the proposal that is coming out.
Mr. Moore. So regulators had determined that capital levels
were about right in 2020. What changed?
Chairman Barr. I am going to have to ask you to respond for
the record because----
Mr. Moore. I believe we are out of time. Thank you, Mr.
Chairman. Appreciate it and appreciate the witnesses.
Chairman Barr. Thank you, Mr. Chairman, and I want to thank
all of our witnesses for their testimony today, and I request
unanimous consent to enter into the record an op-ed that I
authored in support of H.R. 1761, legislation noticed for this
hearing, that I am leading with Representative Wilson of South
Carolina, celebrating the 250th anniversary of our Republic,
cited as the Donald J. Trump $250 Bill Act that directs the
Secretary of Treasury to print Federal Reserve notes in the
denomination of $250, featuring a portrait of Donald J. Trump.
[The information referred to was not submitted prior to
printing.]
Without objection, all members will have 5 legislative days
to submit additional written questions for the witnesses to the
chair. The questions will be forwarded to the witnesses for
their response.
Witnesses, please respond no later than January 15, 2026.
[The information referred to can be found in the appendix.]
This hearing is adjourned.
[Whereupon, at 11:58 a.m., the subcommittee was adjourned.]
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