[Senate Hearing 117-753]
[From the U.S. Government Publishing Office]
S. Hrg. 117-753
OVERSIGHT OF FINANCIAL REGULATORS: A STRONG BANKING AND CREDIT UNION
SYSTEM FOR MAIN STREET
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING PRUDENTIAL REGULATION AND CONSUMER PROTECTION FOR BANKS,
SAVINGS ASSOCIATIONS, AND CREDIT UNIONS, AND THE AGENCIES' ACTIONS TO
ENSURE THAT FINANCIAL INSTITUTIONS SERVE THEIR CUSTOMERS AND
COMMUNITIES
__________
NOVEMBER 15, 2022
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
_________
U.S. GOVERNMENT PUBLISHING OFFICE
53-699 PDF WASHINGTON : 2023
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
SHERROD BROWN, Ohio, Chairman
JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey RICHARD C. SHELBY, Alabama
JON TESTER, Montana MIKE CRAPO, Idaho
MARK R. WARNER, Virginia TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia KEVIN CRAMER, North Dakota
STEVE DAINES, Montana
Laura Swanson, Staff Director
Brad Grantz, Republican Staff Director
Elisha Tuku, Chief Counsel
Dan Sullivan, Republican Chief Counsel
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Pat Lally, Hearing Clerk
(ii)
C O N T E N T S
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TUESDAY, NOVEMBER 15, 2022
Page
Opening statement of Chairman Brown.............................. 1
Prepared statement....................................... 41
Opening statements, comments, or prepared statements of:
Senator Toomey............................................... 4
Prepared statement....................................... 42
WITNESSES
Michael S. Barr, Vice Chair for Supervision, Board of Governors
of the Federal Reserve System.................................. 6
Prepared statement........................................... 44
Responses to written questions of:
Chairman Brown........................................... 70
Senator Toomey........................................... 73
Senator Tester........................................... 77
Senator Cortez Masto..................................... 83
Senator Smith............................................ 84
Senator Sinema........................................... 86
Senator Warnock.......................................... 87
Senator Rounds........................................... 91
Senator Moran............................................ 93
Senator Daines........................................... 102
Todd M. Harper, Chair, National Credit Union Administration...... 7
Prepared statement........................................... 46
Responses to written questions of:
Chairman Brown........................................... 106
Senator Tester........................................... 108
Senator Cortez Masto..................................... 114
Senator Warnock.......................................... 116
Senator Moran............................................ 119
Martin J. Gruenberg, Acting Chair, Federal Deposit Insurance
Corporation.................................................... 9
Prepared statement........................................... 54
Responses to written questions of:
Chairman Brown........................................... 129
Senator Toomey........................................... 133
Senator Menendez......................................... 140
Senator Tester........................................... 141
Senator Cortez Masto..................................... 146
Senator Warnock.......................................... 149
Senator Moran............................................ 156
Senator Daines........................................... 173
Michael J. Hsu, Acting Comptroller, Office of the Comptroller of
the
Currency....................................................... 10
Prepared statement........................................... 64
Responses to written questions of:
Chairman Brown........................................... 176
Senator Toomey........................................... 179
Senator Tester........................................... 184
Senator Warnock.......................................... 189
Senator Rounds........................................... 194
Senator Moran............................................ 195
Senator Daines........................................... 206
(iii)
OVERSIGHT OF FINANCIAL REGULATORS: A STRONG BANKING AND CREDIT UNION
SYSTEM FOR MAIN STREET
----------
TUESDAY, NOVEMBER 15, 2022
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10 a.m., via Webex and in room 538,
Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of
the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN SHERROD BROWN
Chairman Brown. The Senate Committee on Banking, Housing,
and Urban Affairs will come to order. Welcome to the witnesses
and Committee Members.
We know that most Americans want the same things: a safe,
affordable place to call home, a good-paying job, and a strong,
stable Government which they can trust. Our democratic
institutions are only as strong as the people who empower them.
Our economy works best when we have a free and fair democracy
in which everyone can live their lives with dignity.
For too long, many of these dreams have felt out of reach.
Working families struggle to pay for groceries, to keep gas in
their car, and a roof over their heads. We know the cost of
living and raising kids continues to rise.
Democrats are listening and have delivered for the American
people. We passed legislation to lower prescription drug costs.
We helped families stay in their homes during the height of the
pandemic. We made investments in public transit and our
Nation's infrastructure. For the first time in generations we
have been focused on communities that our Government has turned
their back on, especially, for instance in my State, the State
government. Now we are tackling inflation by taking on
corporate power and consolidation and by reducing our
dependence on foreign oil.
We are doing all that while creating good-paying
manufacturing jobs at home. These jobs, making semiconductors,
electric vehicles, and solar panels, are the jobs of the
future. Those jobs will go to Americans because we passed the
CHIPS Act, the Inflation Reduction Act, and the Bipartisan
Infrastructure Law, with strong Buy America provisions that
Senator Portman and I worked on.
And we are seeing results. Our economic recovery has been
strong. Over the past 2 years, many Americans have built up
more in savings. We have seen robust job growth and, for the
first time in decades we have seen wage gains. Just last week
we began to see signs that inflation is starting to cool. Banks
and credit unions are doing well, thanks to the protections we
put in place in Dodd-Frank and because of the support Congress
and regulators provided during the pandemic.
Too many big corporations, though, have taken advantage of
market concentration, jacking up consumer prices and earning
higher and higher profits. As my colleague Senator Reed has
pointed out, the biggest banks that benefit from higher
interest rates today are not passing on those benefits to their
customers, again penalizing Americans who are trying to buildup
savings.
Workers and small businesses already struggling under the
weight of inflation should not get hit with exorbitant bank
fees, should not lose their money to a crypto scam, should not
have to worry that their savings will disappear overnight if a
mismanaged bank or credit union fails. None of us want a
scenario where risky bets on Wall Street crash the economy
again.
That is why it is so important that we have financial
watchdogs like the four of you, who are empowered to look out
for Main Street, helping more Americans hold on to their hard-
earned money at a time when they need it most.
The banking and credit union regulators are independent
agencies that protect consumers and make sure banks and credit
unions are safe and strong. Your independence matters. It makes
for a more stable financial system and that is essential for
our entire economy.
Our witnesses today all have decades of banking and credit
union regulatory experience. They have spent careers serving
the public and protecting consumers, making sure our banking
and credit union system works for Main Street, not just for
Wall Street.
That is exactly what they continue to do today.
They are modernizing and strengthening an important civil
rights law that will spur new investment in neighborhoods and
communities that have been left on their own. Thank you for
that.
They have taken a closer look at overdraft, nonsufficient
funds, and other ``gotcha'' fees at banks and credit unions to
make sure that consumers are treated fairly, and that these fee
programs do not raise safety and soundness concerns. Thank you
for that.
They are taking a fresh look at the bank merger approval
process, so we do not continue this rubber stamp consolidation
which has big consequences for local economies. Too often big
banks merge and close branches, leaving rural towns and urban
communities without a bank.
They are revisiting the financial safeguards that protect
us from risks at big foreign banks, making sure bank failures
do not leave taxpayers holding the bag. It is important to
remember the superregional banks of today are hundreds of
billions of dollars larger than the largest banks that failed
during the financial crisis. Our financial regulators know that
we need strong capital requirements so that banks and credit
unions can continue to lend to and invest in their communities,
in good times and bad.
They are also overseeing the formation of new institutions
that serve communities that often get left behind. Just last
week, the NCUA chartered a new faith-based credit union, and
the FDIC recently approved the first mutual bank in 50 years,
which will pave the way for more, in Ohio and across the
country. All the agencies are working together to foster new
banks and credit unions, and support the work of MDIs and CDFIs
in their communities.
At the same time, our regulators are looking out for risks
on the horizon--the effects of climate change, the rise in
crypto assets, the risks from shadow banks, and the constant
threat of cyberattacks. They are working with the banking and
credit union industry to prepare for climate-related risks and
bolster cybersecurity protections as criminals become more
sophisticated and geopolitical threats increase. They have
stepped up to protect depositors and consumers when crypto
firms mislead them into thinking their money is safe, when it
is not.
But we must stay vigilant and empower regulators with the
tools to combat these growing risks. Data breaches at banks and
credit unions happen too often, threatening customer data and
exposing our financial system to vulnerability. That is why we
need to pass the bipartisan Improving Cybersecurity of Credit
Unions Act led by Senators Ossoff, Lummis, and Warner.
We need to make sure that banks and credit unions can
partner with third parties in a way that allows banks to stay
competitive without putting consumer money at risk. And we
cannot let big tech companies and risky shadow banks play by
different rules because of special loopholes.
All these things will help strengthen our banking and
credit union system for its core mission: serving Main Street
and workers and families. When workers have more power in the
economy, they find better paying jobs and we have a stronger
labor market. That helps credit unions, which added over 5
million new members over the past year, and drives down the
number of households without a bank account, which dropped to
record lows in 2021.
When Government is on the side of working families more
Americans save money, more Americans build wealth, more
Americans start small businesses, and more Americans
participate in our economy.
Our financial regulators have answered that call--thank you
for that--and I will continue to work with them to make sure
our banking and credit union system works for everyone.
Before I conclude my remarks, I want to thank the witnesses
again for being here today. I also want to especially
congratulate Marty Gruenberg on being nominated by President
Biden to be Chair of the FDIC. Marty is a well-respected and
seasoned regulator who has worked to protect consumers and
preserve confidence in our banking system. He played an
instrumental role in helping implement many of the Dodd-Frank
reforms. With his experienced leadership I have no doubt that
FDIC can continue to address risks to our financial system,
increase access to affordable financial services, and ensure
that banks honor their commitment to communities through the
CRA.
This Committee looks forward to holding a nomination
hearing in the next few weeks for Marty and the other FDIC
nominees.
Senator Toomey.
OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY
Senator Toomey. Thank you, Mr. Chairman, and welcome to our
witnesses.
Throughout this Congress, I have warned about the
politicization of financial regulation. Some bank regulators
are increasingly straying outside their mandates into
politically contentious issues.
Take global warming, for instance. In September, the Fed
announced a, quote, ``pilot climate scenario analysis
exercise,'' end quote, with six of the largest U.S. banks. Now
we are told this is merely an exercise in ensuring that banks
understand their risks. But the data, including the Fed's own
research, shows that there is no physical risk to banks from
severe weather events.
The only other risk is so-called ``transition risk.''
But we also know banks are fully capable of pricing risks
into their business decisions, including risks from changing
customer preferences over time.
So the real risk here is political.
My worry is that an attempt to somehow quantify this
political risk will eventually result in regulations designed
to allocate capital away from carbon-intensive companies.
It appears some bank regulators are already committed to
doing just that. For example, the Fed, FDIC, and OCC have all
joined the ``Network for the Greening the Financial System.''
This is an international group of financial regulators with a
stated aim to, and I quote, ``mobilize mainstream finance to
support the transition toward a sustainable economy,'' end
quote.
In other words, their goal is to allocate capital away from
carbon-emitting industries to those deemed to be sufficiently
green.
And let me emphasize--the Fed, FDIC, and OCC have all
joined this group.
The NCUA has also warned that credit unions, and I quote,
``may need to consider adjustments to their fields of
memberships as well as the types of loan products they offer,''
end quote, and that is because of global warming.
Here is the reality. Some unelected financial regulators
want to accelerate the transition to a lower-carbon economy by
misusing their powers to allocate capital away from traditional
energy companies.
But addressing global warming requires really difficult
political decisions. It involves tradeoffs. And in a democratic
society, these tradeoffs have to be made by elected and
accountable representatives, representatives of the American
people who are held accountable through the political process.
Now I supported Vice Chairman Barr's nomination, despite a
number of policy differences I have with him, based, in part,
on his commitment to stick to the Fed's narrow mandates.
At his confirmation hearing, Vice Chairman Barr stressed
that the Fed, and I quote, ``should not be in the business of
telling financial institutions to lend to a particular sector
or not to lend to a particular sector,'' end quote. I thank him
again for that clarity and I urge him to keep to that
commitment, and one way we could do that is by pulling the Fed
out of the politically contentious issue of global warming.
Federal banking regulators have also been preoccupied, in
some cases, with establishing new rules, the need for which
have been dubious. For example, last month the Fed and FDIC
proposed potential new requirements concerning the
resolvability of regional banks. This proposal seems to be
predicated on the assumption that the only realistic option to
resolve a large regional bank would be to sell it to an even
larger bank.
But it is not at all clear that this assumption is
warranted, or that new requirements are appropriate for
regional banks, for at least two reasons. First, the Fed and
the FDIC have been approving regional bank resolution plans for
nearly a decade, and nowhere do these plans contemplate
wholesale acquisition by larger banks. Second, large regional
banks have more than doubled their most loss-absorbing capital
since the financial crisis, and this dramatically improves
their resiliency and decreases the likelihood they would need
to be resolved.
Maybe some regulators seem to think that benefits of new
requirements always outweigh the costs, but we know regulation
is not without cost. And as regulation increases, financial
activities will continue to migrate out of the banking system,
as they have been doing in recent years.
While some of our banking regulators have been distracted,
they have failed to address real challenges facing the
financial system. For example, last year the Fed, the FDIC, and
the OCC committed to providing greater clarity on the
involvement of banks in crypto activities, such as providing
custody services or issuing stablecoins.
Well, over a year later, they have provided no public
clarity. And during that same period we have seen several high-
profile collapses of crypto companies, including a very
prominent example just last week.
I think it is very possible that customers harmed by these
collapses would have been better off if their crypto assets had
been safeguarded by regulated banks that have been providing
custody services for other kinds of assets for literally
hundreds of years.
But many banks have been pressured--by you--not to provide
crypto-related services until your agencies provide this
clarity, which just has not been forthcoming. I will note,
however, note that Chairman Harper seems not to have pursued
this pressure campaign with credit unions. In fact, he has
issued guidance for credit unions on partnering with crypto
companies, or using distributed ledger technologies.
However, the ambivalence of the remaining agencies has
helped to push crypto activities into foreign jurisdictions
with weaker or no regulatory regimes. As a general matter, it
seems to me the failure of Congress to pass legislation in this
space and the failure of regulators to provide clear guidance
has created ambiguity that has driven developers and
entrepreneurs overseas, where regulations are often lax, at
best.
One other item I would like to highlight before we start
the rest of the discussion, and it is the deteriorating
liquidity in U.S. Treasury market.
In March 2021, the Fed committed to modify the
supplementary leverage ratio, or SLR, in part to facilitate
bank dealers' ability to intermediate in this market. Over 18
months later, the Fed still has not acted.
I understand that Vice Chairman Barr has only been in his
role for 4 months and he has reasonably suggested that
potential amendments to the SLR should be in the context of all
capital requirements. I understand that. But we really should
recognize that a significant decline in Treasury market
liquidity is already occurring, and absent an improvement, I am
afraid that the Fed might 1 day decide it has to intervene by
restarting bond purchases, which would be quite contrary to its
current mission of getting inflation under control.
What I hope to hear from our banking regulators today is
that they will prioritize these and other real challenges and
not stray beyond their mandates into politically contentious
issues or establish unnecessary new regulatory burdens.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Toomey.
I will introduce the four witnesses. Michael Barr took
office as Vice Chair for Supervision of the Board of Governors
of the Federal Reserve system July of 2022 for a 4-year term.
He also serves as a member of the Board of Governors.
Todd Harper was sworn in to serve a full term as the
National Credit Union Administration Board Chair in July of
2022.
Martin Gruenberg has been the Acting Chair of the FDIC
Board of Directors since February of 2022. He has been
previously confirmed to serve as Chair and Vice Chairman of the
FDIC, and has served at the FDIC since 2005.
Michael Hsu became Acting Comptroller of the Currency in
May of 2021.
Mr. Barr, if you would begin your testimony. Thank you.
STATEMENT OF MICHAEL S. BARR, VICE CHAIR FOR SUPERVISION, BOARD
OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Barr. Thank you very much, Chairman Brown, Ranking
Member Toomey, and other Members of the Committee. Thank you
for the opportunity to testify today on the Federal Reserve's
supervisory and regulatory activities.
As Vice Chair for Supervision, my priority is to make the
banking system safer and fairer. The banking system is
constantly evolving, so regulation and supervision must adjust
to respond to new and emerging risks.
Reforms following the global financial crisis have helped
the United States maintain a resilient financial system for
consumers, businesses, and communities. Capital and liquidity
positions remain above regulatory requirements.
But we must ensure we are keeping pace. Many issues at the
forefront of banking regulation today when not prominent
previously, and some of them scarcely even existed. Few
anticipated a global pandemic, and recent events in crypto
markets have highlighted the risks associated with new asset
classes were not accompanied by strong guardrails.
Turning to a number of our priorities at the Federal
Reserve, I am taking a holistic look at the Fed's capital
framework to assess whether it is functioning as intended and
supports a resilient financial system. I believe the capital
framework should be forward looking, should be tiered so that
the highest standards apply to the riskiest firms, and should
support a safer and fairer financial system.
In recent years, merger activity and organic growth have
increased the size of large banks, which could complicate
efforts by regulators to resolve those firms upon failure
without disruption to customers and counterparties. The board
and the FDIC recently invited comment on an advance notice of
proposed rulemaking to enhance regulators' ability to resolve
large banks in an orderly way, should they fail.
The Federal Reserve is also evaluating our approach to
reviewing banks' proposed acquisitions. Mergers are often a
feature of vibrant sectors, but the advantages that firms seek
to gain through mergers must also be weighed against the risks
that mergers can pose to competition, consumers, and financial
stability.
Another priority is monitoring the risk of crypto-asset-
related activities. Crypto-asset-related activity requires
effective oversight that includes safeguards to ensure that
crypto companies are subject to similar regulatory safeguards
as other financial service providers.
We are also working to understand financial risks related
to climate change. At the Fed, our mandate in this area is
important but narrow, and we are focused on our supervisory
responsibilities and our role in promoting a safe and stable
financial system. To that end, the Federal Reserve recently
announced a pilot climate scenario analysis exercise, designed
to enhance the ability of supervisors and firms to measure and
manage climate-related financial risks.
As the banking system continues to evolve, we must ensure
that supervision and regulation keep up with those changes and
are appropriate for the underlying risks. As Vice Chair for
Supervision, I will continue to work to promote a safe and fair
banking system.
Thank you, and I look forward to your questions.
Chairman Brown. Thank you, Mr. Barr.
Mr. Harper, thank you for joining us.
STATEMENT OF TODD M. HARPER, CHAIR, NATIONAL CREDIT UNION
ADMINISTRATION
Mr. Harper. Chairman Brown, Ranking Member Toomey, and
Members of the Committee, thank you for inviting me to discuss
the state of the credit union system.
While the economic fallout of the COVID-19 pandemic, along
with rising interest rates, have influenced credit union
performance over the last year, the credit union industry
overall remains on a solid footing. At the end of the second
quarter, there were just under 5,000 federally insured credit
unions with nearly 133 million members and more than $2.1
trillion in assets.
Notably, the industry's aggregate net worth ratio rose to
10.42 percent, representing a recovery of 40 basis points from
a pandemic low. Further, the National Credit Union Share
Insurance Fund continues to perform well, with no premiums or
distributions expected at this time.
During the last year, the NCUA has undertaken several
notable actions to strengthen capital, enhance cybersecurity,
and support small and minority credit unions. To fortify the
credit union system's ability to better withstand future
crises, the NCUA implemented its risk-based capital rule along
with a simplified compliance option at the start of 2022. The
agency also has begun deployment of its new, scalable
information security examination program, to allow the NCUA to
better evaluate credit union cyber risks.
Further, the agency has increased the resources available
in the field to assist small and minority credit unions, and we
will soon modify our examination procedures for minority credit
unions to better recognize their unique strategies.
Additionally, the NCUA is paying closer attention to
consumer financial protection, which buttresses and complements
our safety and soundness efforts. This year, NCUA examiners are
reviewing compliance with pandemic assistance programs, fair
lending rules, servicemember protections, fair credit reporting
laws, and overdraft programs. We have also increased the
resources for fair lending supervision.
And as we move into 2023, the NCUA is emphasizing that all
credit unions remain vigilant in managing safety and soundness
and consumer financial protection to prepare for rising
interest rates, inflationary pressures, liquidity concerns, and
cybersecurity risks.
Additionally, as the financial services system and credit
unions continue to evolve, especially with many credit unions
growing larger and more complex, the industry's regulatory
framework must keep pace to maintain the strength and stability
of the credit union system.
In response to these changes and to legislation recently
enacted into law, the NCUA has undertaken several rulemakings
and implemented new rules during the last year. These rules
address member expulsion procedures, subordinated debt,
emergency capital investments, and cybersecurity notifications.
Finally, I want to highlight two legislative changes that
would help the agency better fulfill its statutory mission.
Most timely, the NCUA requests a permanent adjustment to the
agent member requirements for the Central Liquidity Facility.
Notably, the extension of this enhancement comes at no cost to
the taxpayer, as scored by the Congressional Budget Office.
Currently, corporate credit unions may serve as an agent
for a subset of their members, but without legislative action,
by year's end, 3 out of every 4 credit unions, including most
minority credit unions, will soon lose their access to an
important Federal liquidity backstop, and the credit union
system's capacity to address liquidity events will shrink by
$10 billion. With growing interest rate risk and rising
liquidity concerns, now is not the time to decrease the access
to the system's liquidity shock absorbers.
The NCUA is also seeking restoration of its ability to
oversee third-party vendors. This statutory change would
provide the NCUA parity with other agencies that supervise and
regulate federally insured depository institutions. This
examination authority is critical, given the system's increased
reliance on third-party vendors and credit union service
organizations. The Government Accountability Office, the
Financial Stability Oversight Council, and the NCUA's Office of
Inspector General have all recommended that Congress restore
the NCUA's vendor authority.
The U.S. House of Representatives has passed legislation as
part of the 2023 National Defense Act to reinstate the NCUA's
vendor authority, and in the Senate, bipartisan legislation has
been introduced for which I would like to thank Senators
Ossoff, Lummis, and Warner. Their bill, the Improving
Cybersecurity of Credit Unions Act, would close a growing
regulatory blind spot.
That concludes my statement. I look forward to your
questions.
Chairman Brown. Thank you, Mr. Harper.
Mr. Gruenberg, welcome.
STATEMENT OF MARTIN J. GRUENBERG, ACTING CHAIR, FEDERAL DEPOSIT
INSURANCE CORPORATION
Mr. Gruenberg. Thank you, Chairman Brown, Ranking Member
Toomey, and Members of the Committee. I very much appreciate
the opportunity to appear today at this hearing on the
oversight of the financial regulators.
In my oral remarks today I would like to focus on the state
of the U.S. banking industry and the outlook for the industry.
To begin with, the U.S. banking industry today has reported
generally positive results for this year amid continued
economic uncertainty. Loan growth strengthened, net interest
income grew, and most asset quality measures improved. Further,
the industry remains well capitalized and highly liquid.
The number of institutions on the FDIC's ``Problem Bank
List'' remained stable in the second quarter of this year, at
40 institutions. That is actually the lowest number since
quarterly reporting of that data began in 1986. Fourteen new
banks opened through October 2022, including the first mutual
bank in 50 years. And additionally, no banks failed during
2021, nor this year as well.
At the same time, the banking industry reported a moderate
decline in net income in the first two quarters of this year
from a year ago, primarily because of an increase in provision
expense at the largest institutions, and that is worth paying
some attention to. The increase in provision expense, that is
the amount set aside by institutions to protect against future
credit losses. It reflects the banking industry's recognition
of risks related to persistent economic uncertainties and
slowing economic growth as well as the increase in loan
balances.
Rising market rates and strong loan growth supported an
increase in the banking industry's net interest margin from the
first to the second quarter. As a result, most banks reported
higher net interest income compared to a year ago.
However, rising interest rates and longer asset maturities
also resulted in unrealized losses on investment securities
held by banks, and there is a significant overhang here. As of
the second quarter of 2022, banks reported $470 billion in
unrealized losses as the market value of securities fell below
the book value. The FDIC expects this trend to be an ongoing
challenge, as interest rates continue to rise in the third
quarter, especially if banks should need to sell investments to
meet liquidity needs.
In summary, despite favorable performance metrics, the
banking industry continues to face significant downside risks
that we need to pay attention to. These risks include the
effects of inflation, rising market interest rates, slowing
economic growth, and continued geopolitical uncertainty. Taken
together, these risks could reduce profitability, weaken credit
quality and capital, and limit loan growth in coming quarters.
Further, as I mentioned, higher market rates have led to
continued growth in unrealized losses in the banking industry's
securities portfolios. Higher rates may also erode real estate
and other asset values as well as hamper borrowers' loan
repayment ability. So these are all matters that we will be
paying, at the FDIC, close attention to over the course of this
year and next.
In my written testimony I provide an overview of the
condition of the FDIC's Deposit Insurance Fund, and the reason
behind the FDIC's decision to increase deposit insurance
assessments by 2 basis points next year, to avoid a potentially
larger, more procyclical increase later, at a less favorable
point in the economic cycle.
I also update the Committee in my written testimony on five
key policy priorities for the FDIC: strengthening the Community
Reinvestment Act; addressing the financial risks that are
likely to affect banking organizations and the financial system
as a result of climate change; reviewing the bank merger
process; evaluating the risks of crypto assets to the banking
system; and finalizing the Basel III capital rules.
I also discuss the FDIC's efforts to support minority
depository institutions and community development financial
institutions, promote a diverse and inclusive workplace at the
FDIC, strengthen cybersecurity and information security within
the banking industry, and the FDIC's recent return to in-person
banking examinations and other in-person activities at every
level of the agency.
I would be glad to respond to questions from the
Committee on these or any other matters. Thank you.
Chairman Brown. Thank you, Mr. Gruenberg.
Mr. Hsu, welcome.
STATEMENT OF MICHAEL J. HSU, ACTING COMPTROLLER, OFFICE OF THE
COMPTROLLER OF THE CURRENCY
Mr. Hsu. Chairman Brown, Ranking Member Toomey, and Members
of the Committee, I am pleased to appear before you today to
provide an update on the activities underway at the OCC.
The mission of the OCC is to ensure that national banks and
Federal savings associations operate in a safe and sound
manner, provide fair access to financial services, treat
customers fairly, and comply with applicable laws and
regulations.
Since my appointment, to fulfill this mission we have
focused on four priorities--guarding against complacency,
reducing inequality in banking, adapting to digitalization, and
managing climate-related financial risks. My written statement
describes the progress the OCC has made on each of these. Here
I would like to focus on how we are helping to ensure that
banks serve the needs of their communities.
First, I want to highlight the OCC's commitment to
community banking. We are taking specific actions to support
community banks, including revitalizing minority depository
institutions, reducing community bank assessments, promoting de
novo startup banks, and tailoring regulation based on size and
complexity.
Second, the OCC continues to encourage the banks we
supervise to improve their products and services, including
overdraft programs, with their customers' financial health in
mind. Many of these banks, including nearly all of the largest
banks, have begun reforming their overdraft programs and
lowering fees. While more work needs to be done, consumers are
benefiting from the efforts of national banks to reduce penalty
fees and the daily number of overdrafts charged, to provide
grace periods before fees are imposed, and to end nonsufficient
funds fees. By some estimates, changes at the largest national
banks could save consumers billions of dollars annually.
Additionally, the OCC has strengthened its supervision of
compliance with fair lending laws. We recently updated our
process for screening bank retail lending activities to provide
more risk-focused fair lending examination strategy to identify
weaknesses or wrongdoing. Where we find evidence of potential
discrimination, we refer those matters to DOJ and HUD, as
applicable. Redlining and other forms of lending discrimination
are unacceptable, especially in this day and age, and we will
not hesitate to take enforcement action, if necessary.
The OCC, in coordination with the Federal Reserve and FDIC,
as well as the DOJ, is also considering updates to the
framework for analyzing mergers under the Bank Merger Act. This
is to ensure that resulting entities continue to meet the
convenience and needs of the community, support financial
stability, enhance competition, and are safe and sound. The OCC
considers each merger application on its merits against these
statutory factors and associated regulatory criteria. We are
planning a public symposium in February to explore this
important issue further.
As the digitalization of banking accelerates and bank-
fintech partnerships grow, the OCC is focused on ensuring that
our expertise and regulatory framework adapts so that safety,
soundness, and fairness of banking is maintained and even
strengthened. We recently announced that we will be
establishing an Office of Financial Technology early next year,
building upon the work and successes of the agency's Office of
Innovation, which was created in 2016. This change will enable
us to engage more substantively with nonbank technology firms
and to better supervise bank-fintech partnerships so that we
can help ensure that consumers of banking services are treated
fairly as well as help maintain a level playing field as the
industry evolves.
With regard to crypto, the OCC has adopted a careful and
cautious approach. Last November, we issued guidance which
reminds the banks we supervise that they are not permitted to
engage in certain crypto activities unless they can perform
these activities in a safe and sound manner. This approach
helped to mitigate the risks of contagion from crypto to the
Federal banking system after the collapse of Terra Luna this
spring as well as more recently with the bankruptcy of FTX.
Finally, let me say a few words on climate-related
financial risks. The OCC's approach is firmly rooted in our
mandate to ensure that national banks operate in a safe and
sound manner. It is not our role to tell bankers who to bank or
not to bank. We do not pick winners and losers. Rather, our
focus is on risk management and making sure banks, especially
large banks, have the necessary capabilities to identify,
measure, and monitor their risks. We are committed to staying
in our safety and soundness lane, not on setting industrial
policy. This is important to our credibility as a safety and
soundness supervisor.
In closing, I remain committed to ensuring that OCC-
supervised banks operate in a safe, sound, and fair manner,
meet the credit needs of their communities, and comply with
applicable laws and regulations.
I look forward to answering your questions. Thank you.
Chairman Brown. Thank you, Mr. Hsu. Thanks to the four of
you.
This year we have seen cryptocurrency values collapse by $2
trillion, two thousand billion dollars, and markets crash,
crypto exchanges implode, file for bankruptcy, investors losing
their money, workers losing their jobs. The parallels to past
financial crises through our history are troubling, from
wildcat money in the mid-1800s to the dot-com bubble burst in
the 1990s to the over-the-counter derivatives that led to the
2007-2008 financial crisis.
Unlike traditional bank or credit union deposits, which
Americans use to get paid, buy necessities, build their
savings, private cryptocurrencies are not backed or protected
by the Government, and they should not be. We have seen them
used for speculation and fraud and scams, sanctions evasion,
outright theft. There does not seem to be anything useful or
beneficial, that hundreds of speculative cryptocurrencies can
be used for.
Since I have been Chairman of this Committee for close to 2
years, many on my side of the aisle have raised warning flags
about this. The last thing we need is for risky new financial
products to crash our financial system. Thank you, those of you
on this panel, for your skepticism about cryptocurrencies, and
we will continue that work.
As all of you pointed out, digital assets pose risks to our
financial system. There are many other risks we need to focus
on to ensure the banking and credit union system is resilient
for consumers and small business owners.
So a question for all four of you. What are the biggest
risks that your agencies see? How could they harm working
families and small businesses on Main Street? What are your
agencies doing to protect against them?
I will begin with Mr. Harper, then Mr. Gruenberg, then Mr.
Hsu, then Mr. Barr. So if you would answer. Each of you take a
moment or so and answer those questions.
Mr. Harper. Certainly. Generally I see four risks that are
coming down the line. First is interest rate risk for the
institution itself, second is liquidity risk, the third is
cybersecurity risk, and something that we are watching on the
horizon would be credit risk that happens, particularly as
unemployment rises. There is a correlation in the numbers that
shows that as unemployment rates go up we often see an increase
in charge-offs and defaults. That is something that we are
going to be watching very closely, moving forward.
Chairman Brown. Thank you. Mr. Gruenberg.
Mr. Gruenberg. Thank you, Mr. Chairman. I think, first and
foremost, as I outlined in my oral statement, I do think we are
at an inflection point here in the economy with the Fed having
shifted the conduct of monetary policy, and we have a rising
interest rate environment. And I do think that presents a
number of potential downside risks to the banking system that I
outlined earlier.
I think our institutions are going to have to pay close
attention to the interest rate risk that is accumulated on
their balance sheet, both through longer-term assets that they
have accumulated. I mentioned in particular the unrealized
losses on securities on their balance sheets. And I also think
there are asset exposures that our institutions have,
particularly in commercial real estate, which we have had
experience with during other times of potential economic and
financial stress, as well as in the mortgage market.
So I think from a supervisory standpoint, with the changing
economic environment as financial regulators and banking
regulators, we are going to have to pay close attention, in
particular, to these developing issues.
Chairman Brown. Thank you. Mr. Hsu.
Mr. Hsu. So I think the greatest risk is the risk of
complacency. The risks that are facing the banking industry are
fairly well known at this point--interest rate risk, credit
risk, operational IT risk, cyber risk. The risk that banks are
facing is that they are not paying sufficient attention and
vigilance to that as we deal with other, more headline risks,
such as crypto.
There are some tail risks that are also out there that we
need to pay attention to, geopolitical in the commodities
space, nonbank financials. There are also well known and have
been identified by the FSOC and others. So I just encourage
banks and supervisors to stay on top of those. Thank you.
Chairman Brown. Thank you. Mr. Barr.
Mr. Barr. Thank you. Like the others, we are paying careful
attention to the way in which supervised institutions are
managing liquidity risk and interest rate risk. Cybersecurity
is always an issue to be watchful for.
We are worried about making sure that financial
institutions are thinking about potential risks if the economy
softens, so particularly as others have said, in commercial
real estate, residential housing, which are the sectors most
often that are leading indicators for risk in that area.
We are paying attention to longer-term risks as well. We
talked, I think all of us, about the longer-term risks with
respect to climate change. Events abroad might cause
disruptions in the United States. The war in Ukraine, Russia's
war in Ukraine obviously is devastating for the people of
Ukraine and also creates enormous potential risks in Europe and
elsewhere.
And we are paying careful attention to risks in China as
well, with slowing growth there and a political turn inward
that may cause additional risk to happen.
And last, we are concerned about the risks that we do not
know about in the nonbank sector. That includes, obviously,
crypto activity but more broadly risks in the parts of the
financial system where we do not have good visibility, we do
not have good transparency, we do not have good data. That can
create risks that blow back to the financial system that we do
regulate, and so we pay careful attention to understanding
those risks as best we can.
Chairman Brown. Thank you. Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman. I want to follow
up on a comment the Chairman made. I think I heard the Chairman
refer to crypto as risky new financial products, and the
insinuation was that they might have the ability to crash our
financial system.
I think there is a really important distinction that I want
to underscore here. If you look at what happened with FTX, what
at least appears to have happened by a very extensive coverage,
this is fundamentally not about the kind of assets that were
held by FTX. It is about what individuals did with those
assets.
There are a lot of corollaries. There are a lot of
analogies here. One comes to mind. In 2011, MF Global, a
commodity brokerage firm that was run by former New Jersey
Senator John Corzine. It collapsed after customer funds were
misappropriated to fill a shortfall caused by the firm's
exposure to some trading that went south. Now nobody suggested
that the problem was the instruments that were used. The
problem was the use of customer funds.
Similarly, the 2008 financial crisis involved disastrous
consequences with what people were doing with mortgages. Did we
decide we have got to ban mortgages? Of course not.
So let us look at FTX. It certainly appears to be an
egregious failure to treat customer assets as segregated
assets. It appears at the leadership there attempted to fill a
hole at an affiliated company, and it occurs to me that this is
a worry that I do not have for one split second about my stocks
or my bonds or my Treasuries when they are held in custody by
American banks.
Mr. Hsu, a predecessor of yours said that there is no need
for any additional guidance. It is a settled matter as to how
banks should custody financial assets, and they do it all the
time, and they have done it forever.
But my understanding is that your office discourages banks
from providing custody services, among other services in the
crypto space. And it seems to me if people had access to
custody services provided by a wide range of institutions,
including regulated financial institutions, they might be able
to sleep more comfortably knowing that those assets were
unlikely to be used for some completely inappropriate purpose.
So is it true that you discourage banks from engaging in
crypto custody services?
Mr. Hsu. We discourage banks from doing things that are not
safe, sound, and fair. And so the custody that you described of
traditional assets, it is true banks have been doing that for a
long time.
Senator Toomey. Right.
Mr. Hsu. They know how to do that. We know how to do that.
The custody of crypto is different. There are some
underlying, fundamental issues and questions regarding what
does it mean to own crypto through a custody, which have not
been fully worked out.
Senator Toomey. So this activity, crypto trading, people
holding crypto assets, has been going on for many years. Why
have you not provided the clarity? Why have you not provided
guidance so that it is clear and we could have customers have
the assurance of having their assets stored by reliable
institutions?
Mr. Hsu. If banks can demonstrate that they can do that
activity in a safe, sound, and fair manner, we are all ears.
Senator Toomey. But I think some of this obligation is on
you to provide some clarity about how that could work, and as I
say, what I am hearing from the industry is that this activity
is being discouraged. And the result is not that the activity
does not occur. It is just that it goes somewhere where the
regulation is often lax.
Let me move on to another aspect of this. Vice Chairman
Barr, you recently said that there are types of crypto-related
activities where the Fed may need to provide guidance to the
banking sector. In your view, is custody a category of crypto
activity that the banking sector can provide and could use some
guidance?
Mr. Barr. Thank you, Senator Toomey. I do think that it
would be useful for us to provide guidance to the banking
sector about how to safely custody crypto assets. It is
something I look forward to working with my colleagues on.
I think we have seen, in the context of recent events, that
if you have a set of firms that are trying to operate outside
the regulatory perimeter, trying to avoid compliance issues,
that can create enormous problems for consumers, for investors.
There are huge problems that these investors experience that I
do not think anyone wants to see happen.
Senator Toomey. Just a quick follow-up here. My
understanding is the SEC has put out guidance recently that
would require issuing firms that custody crypto to put that
crypto on their own balance sheet. Now that is contrary to the
way custody services are treated in every other category of
asset that I can think of, and always has been.
If that were the case, if you are a firm that does not care
about having a bloated balance sheet, maybe you do not care,
but banks have a reason to be very concerned about increases in
their balance sheet because it has capital requirements.
Would this not impose a significant cost on banks if they
are, in fact, obligated to put all of the crypto custody assets
on their balance sheets?
Mr. Barr. Well, we have seen bank operate in a pretty
cautious way to date. There are very few institutions that are
currently seeking to engage in custody activity. Of course, we
require all of our regulated financial institutions to comply
with accounting rules, including accounting interpretations
issued by the SEC. And so publicly traded banks would need to
comply with that rule, and it would have the result that
custody of crypto assets, you would need to hold capital
against----
Senator Toomey. In a way that is not required of any other
category of financial assets.
Mr. Barr. ----in a way that is not required for traditional
custody of non-crypto assets. So that differential would impact
bank decisionmaking.
Senator Toomey. Yeah. Thank you very much.
Senator Reed [presiding]. Thank you, Senator Toomey.
On behalf of the Chairman I will recognize myself.
Gentlemen, thank you for being here today. Vice Chairman
Barr, the Volcker rule prohibits Wall Street banks from making
investments in hedge funds and private equity funds. The
legislation was passed in 2010, with the hope that those
investments could be liquidated quickly. But there are some
that were deemed to be too illiquid or too difficult to be
dispensed with immediately, and so there was an extension to
July 2022, 12 years. And yet there are at least two
institutions that still have not disassociated themselves and
disinvested.
You have given them extra time. Is this going to be an
endless process, or why can they not get it done?
Mr. Barr. Senator Reed, thank you. I agree with you. I
think the time has come for those divestments to happen. The
Volcker rule provided, as you said, until July of this past
year to get that done. Some firms, I believe, were erroneously
relying on a legal interpretation that would not require them
to do those divestitures. I think that is an incorrect legal
interpretation. We will be clear with them that it is time to
get those divestitures done. Some of them may need a small
amount of time to get that done, but we are not going to see
continued extensions beyond that.
Senator Reed. Thank you very much.
Mr. Gruenberg, when the Fed raises interest rates,
historically, banks usually follow with their savings rates. In
fact, according to industry research the deposit rate should
start ticking up when the Fed's target rate hits about 1.33
percent. Well, the Fed's target rate is now 4 percent, and the
national average interest rate on a savings account is now 0.2
percent. But the Nation's biggest banks are even lagging that
average. They are at 0.01 percent.
So why do you think the biggest banks have been lagging so
much in terms of sharing their beneficence with their savers?
Mr. Gruenberg. Thank you, Senator. It is pretty clear that
the banking industry is trying to take advantage of rising
interest rates on the credit product side, to increase
earnings, and it is fair to say what they are paying out on the
deposit side has lagged that. We will see if competitive
pressures within the industry impact what they may offer on
deposit accounts, but right now there is clearly a lag.
Senator Reed. Thank you. Let me follow up with another
question, Mr. Gruenberg. There has been a situation where banks
are partnering with fintech companies. It has been described as
``rent-a-bank,'' where the fintech company comes in and uses
the bank as an intermediate to avoid usury limits and other
restrictions. Many of these are your institutions.
What are you doing to try to stop that?
Mr. Gruenberg. Thank you for the question, Senator. When a
bank partners with a third party and the third party is
providing services on behalf of the bank, including credit
products, as a supervisory matter the offering of services by
the third party are treated as if the bank itself is offering
those services and products, and the bank is supervised
accordingly.
We have a number of institutions that are utilizing
partnerships to benefit from the banking relationship. There
are several institutions I will say we are taking a close look,
particularly at the lending activity going on, to ensure that
the lending activity is being appropriately underwritten and
that it is based on the borrower's ability to pay as well as
consumer protection requirements in terms of disclosure and
transparency are being complied with. And this is a matter of
attention for us, and I appreciate you asking the question.
Senator Reed. Well, thank you very much.
Now, on behalf of Chairman Brown, let me recognize Senator
Rounds.
Senator Rounds. Thank you, Mr. Chairman. Vice Chair Barr,
welcome back to the Committee and congratulations on your
confirmation.
In recent speeches you have announced that you would be
conducting a holistic review of the capital framework for our
financial institutions. Included in that evaluation will be a
review of the supplementary leverage ratio, or SLR, the
countercyclical capital buffer, and stress testing. This review
is long overdue as the Fed has said for months that it would
reassess both the G-SIB surcharge and the SLR.
In the process it is important that we strike a balance
between financial stability and economic growth. In order to
achieve that balance, I believe the Federal Reserve must be
transparent and consider input not only from Congress but from
stakeholders on any adjustments.
When do you expect this review to be complete, and will you
commit to providing a transparent, formal, public process with
a comment period for any resulting adjustments to SLR, the G-
SIB surcharge, stress tests, or countercyclical capital buffer?
Mr. Barr. Thank you, Senator Rounds. We are conducting that
review now. We are in the middle of that. I expect that early
next year we will be able to say more about where we are in
that process.
If any of these parts of the review require us to rethink a
rule, like the eSLR or the countercyclical capital buffer and
the like, we would, of course, seek public comment as part of
that process. We will issue a proposal, get comments in,
evaluate those comments, understand them, and then lead to any
action we took on a final rule. So we would follow normal
process on that.
Senator Rounds. Thank you.
Chair Harper, late last year the NCUA approved its 2022-
2026 Draft Strategic Plan, which included an analysis of the
internal and external environment impacting NCUA and evaluated
the agency's programs and risks. It included language
suggesting that as a result of changing weather
disproportionately affecting farming communities credit unions
should consider adjustments to their membership. This was very
problematic language as it implied that credit unions that
primarily serve agricultural communities may have to alter
their memberships or face increased costs and regulations. As a
result of the actions of Senator Cramer and myself, that
language thankfully was not included in the final draft.
Chair Harper, will you commit to avoiding similar
problematic language in future strategic plans and commit to
not punishing credit unions for supporting their local farmers,
ranchers, and agribusinesses in their communities?
Mr. Harper. Yes.
Senator Rounds. Thank you.
It has been widely reported that the CFPB is planning to
shift liability for peer-to-peer payments that consumers make
to a scammer. Scammers would likely profit from such a policy
because armed with an official Government document they will be
able to induce people to pay them by telling them there is no
risk in sending the money, even if the circumstances are
suspicious. However banks, unlike the consumer, would have no
insight into the transaction to be able to stop it.
My question for Vice Chair Barr, are you concerned there
will be an impact on bank safety and soundness given banks'
inability to identify or stop the fraud the size of potential
fraud losses banks could incur, and furthermore, has there been
any research done to determine how fees would increase and what
new costs consumers would bear if this is implemented?
Mr. Barr. Thank you, Senator Rounds. The regulations that
issue Regulation E are implemented by the Consumer Financial
Protection Bureau, so in the first instance I think it makes
sense for them to figure out what they would like to propose,
if anything, in that area, and then we would be able to
understand the implications of that proposal more broadly. But
I do not have any further insight about it at this time.
Senator Rounds. No existing studies at this point?
Mr. Barr. I do not know the answer to that. None that I am
aware of, but there may be others that exist that I do not
know.
Senator Rounds. Thank you.
Following an influx of deposits generated by Government
stimulus, the FDIC approved an aggressive proposal to uniform
increase bank deposit insurance assessment rates by 2 basis
points until the Deposit Insurance Fund reached a designated
reserve ratio of 2 percent. This proposal has the potential to
disproportionately harm community banks by forcing them to pay
between 5 percent and 25 percent of their pretax income for
insurance assessments. Meanwhile, the OCC recently approved a
40 percent reduction in assessments for OCC-chartered community
banks.
Acting Chair Gruenberg, could you please explain your logic
behind supporting increases to community banks' FDIC deposit
insurance assessment rates well beyond the statutory
requirement, and was a study done to determine the ratio of 2
percent, or is that an arbitrary number?
Mr. Gruenberg. The 2 percent was the subject of careful
analysis and was reached based on the FDIC's experience during
two crises. And just to be clear, if I could take a moment to
explain because it is a little complicated, under the statutory
requirement there is a minimum reserve ratio for our Deposit
Insurance Fund of 1.35 percent, and if that ratio falls below,
the FDIC is required by law to establish a restoration plan to
bring it back up to the 1.35 percent minimum.
As you noted, at the beginning of the pandemic there was an
inflow of insured deposits and it pushed the ratio down, and
the FDIC, back in 2020, adopted a restoration plan that did not
envision increasing assessment rates. That was based on an
expectation, frankly, that as the pandemic progressed the
growth in insured deposits would slow down. And what occurred
is that over the past year, from the second quarter of this
year to the previous, the insured deposit growth rate remained
very high, at 4.3 percent.
So we had projections that envisioned us being able to
restore the reserve ratio fund to the statutory minimum, by the
statutory deadline of 2028. We thought we could do that without
an assessment adjustment. Because the growth rate stayed high
it shifted our projections and really put in question whether
we could get to the minimum in time.
So we had a tricky call to make, and let me be candid, we
could have delayed and hoped that the growth in insured
deposits would slow down and the problem would take care of
itself. The problem there--and I will come quickly to a
conclusion--was that if we were wrong we then might have to
impose a larger assessment on the industry, at a later stage of
the cycle, when the industry would be in a not as good a
position to absorb it. So we opted for a 2-basis-point
increase. That is about 1.2 percent of industry income. We did
not envision that impacting lending or credit availability, but
it would assure us of putting the fund in a solid position,
particularly since we are heading into an uncertain period.
So it was a tricky call, but that was the judgment we made.
Senator Rounds. Thank you, Mr. Chairman, for your
indulgence on that.
Senator Reed. Let me, on behalf of Chairman Brown,
recognize Senator Menendez.
Senator Menendez. Thank you.
The collapse of FTX last week is the latest in a series of
high-profile crypto collapses this year, which have left
investors locked out and facing uncertain prospects for
recovering their money. This should be a renewed call for
Congress to take a serious look at crypto exchanges and lending
platforms, many which engage in risky behaviors while marketing
themselves as safe for consumers.
Mr. Gruenberg, am I correct in saying there are no
cryptocurrency firms backed by the FDIC?
Mr. Gruenberg. That is correct.
Senator Menendez. In fact, at this time FDIC insurance does
not cover cryptocurrency of any kind. Is that correct?
Mr. Gruenberg. That is correct, Senator.
Senator Menendez. Many of these firms are marketing
themselves to consumers as safe and responsible while engaging
in risky behaviors without the guardrails and safety nets that
exist within the traditional financial system. In August, the
FDIC issued letters demanding several crypto firms, including
FTX, cease and desist from misleading consumers into believing
their deposits were insured. The FDIC and Federal Reserve
issued a similar letter in July, to Voyager LLC, which
collapsed earlier that month.
What can we do to combat misinformation like this and
better protect and inform consumers in the crypto space?
Mr. Gruenberg. Thank you, Senator. Listen, this has been a
key priority for us. The strength of the FDIC is the public's
confidence in our deposit insurance system, so if that
confidence is put in question it really puts the system at
risk. And if we have financial players who are engaging in
blatant misrepresentation in regard to deposit insurance
coverage, that is not only a violation of the law by firms that
do that, it really is a threat to the credibility of the FDIC
and our deposit insurance system.
So when we identified some companies, in the crypto space
and others, engaging in misrepresentation, we acted very
forcefully in sending letters demanding that they cease and
desist, and indicating that if they did not comply we have
enforcement authorities available to us under the law that we
can bring to bear. We thought it was important in regard to
those individual actors, and we thought it was important to
send a message to those who would think about engaging in
misrepresentation of deposit insurance coverage.
Senator Menendez. Well, I am glad you did, and I think
these exchanges having these troubles should instigate us and
regulators to look at what regulations are needed to ensure
investors in the overall financial system are protected.
I want to thank all of you for jointly proposing a rule to
modernize the CRA to increase lending in minority communities.
We saw, 2 years ago, an assault on the CRA when the OCC acted
alone and proposed a rule that would have left minority
communities with less credit, and I thank Comptroller Hsu for
withdrawing that rule.
According to the Census Bureau, there are over 26 million
limited English-proficient consumers in the United States, with
17 million of those consumers speaking predominantly Spanish.
So Mr. Barr, Mr. Hsu, Mr. Gruenberg, do you all agree that
language can be a barrier to assessing financial services?
Mr. Gruenberg. Yes.
Mr. Barr. Yes.
Senator Menendez. Would you all agree that, for example,
home mortgage loans and small business lending could increase
in Hispanic communities if banks provided more documents and
in-person services in Spanish?
Mr. Gruenberg. Yes.
Mr. Barr. Yes.
Mr. Hsu. Yes.
Senator Menendez. I hope you will all consider seriously in
your services test an evaluation of a bank's ability to serve
those with limited English proficiency. In August, I joined
Chairman Brown and 17 of our colleagues in a comment letter,
urging you to include this in your final rule. Incentivizing
banks to offer more services in, for example, in Spanish, will
increase banks' ability to diversify their staff, something the
banks still often fail to do. With a $1.8 trillion domestic
marketplace this would make a lot of sense for the banks as
well as for the community. They take their deposits and they
should be also willing to work with them.
Finally, Vice Chair Barr, as you know, the Federal Reserve
has again the opportunity to appoint a Hispanic to a Federal
Reserve bank president at either the Kansas City or Chicago
Federal Reserve bank. In its 108-year history, the Federal
Reserve has never had a Hispanic Federal Reserve bank
president.
During your confirmation process you made a commitment to
develop a transparent process with meaningful public input on
the selection of Federal Reserve leadership. I suggested six
ideas to strengthen the Federal Reserve bank director and
president selection process. You agreed at that time with all
of them. Can you tell me what specific actions have you taken
to implement any of those reforms?
Mr. Barr. Thank you, Senator. First of all, let me just
start by saying there is a lot more work that has to happen. I
think it is good that you have pointed out this issue and
continue to point it out to the Federal Reserve.
There have been a number of positive steps that I have
talked through with my colleagues at the Board. There has been
progress in recent searches on the public posting dissemination
of position descriptions and webinars and town halls to get
public input. The public has, in these recent searches,
undertaken solicitation of nominations, ideas from the public
for individuals. There has been, in recent searches, engagement
with public service organizations, with civil rights groups,
with community organizations.
There has not yet been progress on one of the items that
you suggested. That is public release of demographic
information. And we are also considering the suggestion that
you made but have not taken action yet with respect to getting
public input on the process itself at the Board or bank level.
So we have made some progress but we are still seeing a lot
more work to do.
Senator Menendez. Well, let me just close by saying
anonymized data is something that should not be so hard but
would give us a window into the process, and the proof,
ultimately, will be in whether or not there is a selection of a
qualified individual, for which I believe there are many
candidates.
Thank you, Mr. Chairman.
Chairman Brown [presiding]. Senator Tillis, of North
Carolina, is recognized.
Senator Tillis. Thank you, Mr. Chair. I have to start today
by expressing my concern with President Biden's nomination of
Mr. Gruenberg to serve as the FDIC chair. Mr. Gruenberg appears
before us today on an anniversary, 10 years to the day of his
confirmation to a 5-year term. Despite the fact that his term
has long expired, Mr. Gruenberg has remained at the FDIC, most
recently acting as chairman, despite not being confirmed by the
Senate for a decade.
During Mr. Gruenberg's tenure as FDIC chairman, the agency
has had a severely blemished record, most notoriously Operation
Chokepoint, which sought to debank legal but politically
disfavored businesses. Additionally, there were reports of
mistreatment of employees and some allegations of racial
discrimination in hiring.
And just last year, while continuing to serve on the FDIC
board, despite his long-expired term, Mr. Gruenberg helped
facilitate a partisan power grab of the FDIC board. He, along
with his fellow Democratic board members, blatantly discarded
the FDIC's 90-year precedent of allowing the FDIC chairman to
set the agency's agenda, and in the process forced out Chair
McWilliams.
Until last year's coup, all previous FDIC board members,
Democrat and Republican alike, had followed the agenda-setting
precedent. That is something Acting Chairman Gruenberg knows
quite well. At the beginning of the Trump administration, he
served as FDIC chairman. Although Republicans outnumbered on
the board, they followed precedent and allowed him to set the
agency's agenda. However, when the shoe was on the other foot,
Mr. Gruenberg facilitated the erosion of FDIC independence, not
unlike attempts here to nuke our Senate filibuster.
We need nominees, at the FDIC and other agencies, who will
uphold the long history of bipartisanship and political
independence at Federal financial regulators. Unfortunately, I
have drawn the conclusion that Mr. Gruenberg does not fit that
bill.
Now, Mr. Barr, by the Fed's own measures in recent
financial stability report, the bank sector continues to be
well capitalized. The Fed reports that the results of the 2022
stress test indicate, I quote, ``large banks would maintain
capital ratios well above the minimum risk-based requirements,
even during a substantial economic downturn.''
But now it is widely expected that the upcoming Basel
capital proposal will significantly increase capital
requirements. I am not one of these members who say, ``Give me
a simple yes-no answer,'' but something close to that to these
next three questions would really be appreciated.
Do you believe capital levels are not strong enough?
Mr. Barr. Thank you, Senator. I am engaged in a holistic
review of all the capital requirements to see not only whether
they are strong but whether they are strong enough and how they
work well together, are they fitting together in a way that
serves the interests of making the financial system safe. I do
not have a conclusion yet to that holistic review. I am
undertaking it now and I will have more to say about it in the
first quarter of next year.
Senator Tillis. The analysis of the stress testing, though,
seems to think that you are reasonably confident that current
capital ratios are OK. So what is going to ultimately tip the
scales to a different conclusion and maybe embrace the Basel
report?
Mr. Barr. Thank you. We are looking really at all the
factors, so the stress test is one important input into that.
It, of course, determines the level of capital, so it is
setting capital requirements in the course of deciding that the
capital requirements are sufficient. The reason that it does
that is because of the presence of the stress capital buffer.
And so the stress test is one input into that. We are
modeling, of course, not a prediction about the future but one
scenario that banks might need to address, and so that is an
important factor but not the only factor. We need to look at
risks across the system. As I indicated in my testimony, for
example, before the global pandemic hit in March of 2020, that
was not on anybody's list of potential risks to the financial
system.
Senator Tillis. Just a quick question. So if economic
activity continues to slow and we increase capital
requirements, is there a scenario where that is a good thing?
Mr. Barr. Well, I am not----
Senator Tillis. Or what would be a scenario where it is a
good thing?
Mr. Barr. ----I am not reviewing capital requirements to
think about what the right capital level should be tomorrow. I
am trying to think about how we should set capital requirements
over time, through economic cycles. For any capital rule there
is a process. We will do a proposal and we will issue a final
rule, and then there is an implementation period. So we are not
trying to think about, you know, what capital should be
tomorrow. We are trying to think over long periods of time what
are the right capital levels in the system.
Senator Tillis. OK. Well, thank you all for being here and
I will submit other questions for the record. My time has
expired. Thank you, Mr. Chair.
Chairman Brown. Senator Tester, of Montana, is recognized.
Senator Tester. Yeah, thank you, Mr. Chairman. I want to
thank you all for being here in front of the Committee today. I
appreciate your leadership and your guidance.
In particular, I was not going to talk about crypto but I
particularly appreciate your common-sense approach on safe and
sound and fairness, especially you, Mr. Hsu. All of you are
good on this.
Look, I remember the meltdown in '07, Mr. Chairman talked
about it, where we had synthetic financial instruments and
maybe being attached to mortgages, but there was no there,
there. And it ended up where we cut a pretty damn big check of
taxpayer dollars to solve that problem. And I am going to tell
you, if you guys would have given guidance, and you had given
credibility, we would be cutting another check. And so I just
want to say thank you. I do not say that as a lawyer or an
accountant. I say it as a farmer. Thank you. Thank you for what
you have done.
During a hearing last year I had talked to Mr. Hsu and
Chairwoman McWilliams about the Community Reinvestment Act and
the changes that were going to happen in making sure that rural
America and our native populations, the investments would be
made better in those countries. So the comment period has
ended. It has not taken effect yet. But for Misters Gruenberg
and Hsu and Barr, could you tell us how the new rules are going
to ensure investment in rural America? Go ahead, Mr. Gruenberg.
Mr. Gruenberg. Thank you, Senator. I will say that was a
real focus of attention for the three agencies in developing
the rule, how we could utilize CRA to provide incentives for
increased bank lending and investment in rural communities and
Native American communities, which are historically underserved
and lack access to basic banking services.
We did that through proposed changes in the two key tests
under CRA, both the lending test and the community development
test, by providing greater flexibility. We are not limiting the
lending test just to the traditional branch-based assessment
areas but we have a statewide dimension to the test which will
give banks additional credit for serving rural communities as
well as Native Americans. And we provide significant greater
flexibility in the community development test, so that banks
can invest in underserved rural communities and Native American
communities and get CRA credit for it, even though it is not
part of their branch network. So these were key flexibilities
that we think will be helpful.
Senator Tester. You fellas, anything else you would like to
add to that? Go ahead.
Mr. Hsu. I would say, in addition to the CRA, at the OCC,
Native American issues are a top priority. We have a Project
Reach, which is to increase financial inclusion. We have had a
special subcommittee focused on home ownership promotion for
Native Americans. Because of some of the legal issues it is
tough for banks, so we held a webinar, trying to move that ball
forward there.
And I met recently with Treasurer Malerba, who is the head
of the Office of Indian Affairs, to see how the OCC and her
office can work together to promote these issues.
Senator Tester. Do you see any positive impacts on housing
with the changes in the CRA in rural America?
Go ahead, Mr. Barr, if you want to talk.
Mr. Barr. I think, obviously, the rule is not yet into
effect, but I think that we would see improvements on housing
in rural America and on community development in rural America.
And I also just emphasize the point that both Marty and Mike
made, that the issues affecting Native American communities'
access to financial services are longstanding. They have been
problems for generations. And if we do not take seriously the
need to fix those problems, including with the reforms of the
Community Reinvestment Act, Native American communities are
going to continue to be left behind. So I think it is really a
critical issue to be working on.
Senator Tester. So before the pandemic started I talked
with your predecessors about what I have been hearing from
bankers in Montana about the ag industry. The previous
Administration had some pretty silly trade wars and it affected
ag commodity prices in a big way.
We have seen ag prices increase dramatically, but we have
also seen input costs increase dramatically. So based on your
examiners, what are you seeing from the community banks that
are serving the agricultural community? How are they doing? Mr.
Gruenberg, Hsu, or Barr.
Mr. Gruenberg. I will say, Senator, as a general matter,
community banks in the United States have been doing quite well
over the last several years, and that is certainly true as well
for community banks in the agricultural sector.
Senator Tester. Have the rest of you seen in the same way?
Mr. Hsu?
Mr. Hsu. I am hearing that they are doing quite well. I
think there are some concerns about some headwinds, which is
part of the reason why we lowered bank assessments for OCC
banks and we continue to engage with them. I think that some of
the drought issues, for some of the banks in some parts of the
country, luckily there has been crop insurance, but these are
top-of-mind issues for the bankers and for supervisors.
Senator Tester. Yeah. Last question, and I want this very
quick. Mr. Hsu, you talked about geopolitical uncertainty as it
applied to the commodity space. What commodity are you talking
about, or commodities are you talking about? Energy?
Mr. Hsu. I think there have been some broad-based impacts
across a number of different commodities markets. It depends on
which time. At one point it was nickel, and that shifted over
to some other commodities. So it is a broad range.
Senator Tester. OK. Thank you. Thank you, Mr. Chairman.
Chairman Brown. Senator Lummis, of Wyoming, is recognized.
Senator Lummis. Thank you, Mr. Chairman, and thank you all
for attending today. Mr. Barr, I am going to have question for
you in a minute about Regulation W.
But I too want to weigh in a little bit on the FTX
situation. You know, it is awful, and simultaneously not all
that surprising. Until June 2021, FTX was offering ordinary
retail customers outside of the U.S. leverage of about 101 to
1. That leverage is illegal in the United States because it is
extremely likely that a customer loses all their money, so no
big surprise there.
FTX lent out customer assets for proprietary trading with
its affiliate, Alameda Research, misusing its custody assets,
which it did not own, and breaking its promises to its
customers. So like Senator Toomey I agree. This is a lot like
MF Global in 2011, and it should be absolutely forbidden.
My State of Wyoming saw this problem coming in 2019, and
banned banks engaged in digital asset activities from relending
customer digital assets. Now that may be surprising to some of
the witnesses today, but Wyoming has a tough set of rules for
digital assets, and I hope you will look at those at the Fed.
There were deep interconnections between FTX and Alameda
that encouraged both to take big bets with customer assets that
ultimately brought both down. Banks today are subject to limits
on affiliate transactions under Regulation W and are required
to disclose their affiliate relationships. These limits exist
to prevent special transactions like those that occurred
between Alameda and FTX.
So Senator Gillibrand and I incorporated many of those
ideas into the Responsible Financial Innovation Act, and our
act would have prevented the FTX bankruptcy by prohibiting
misuse and lending of customer assets, requiring proof of
reserves for digital asset exchanges, limiting affiliate
transactions, and providing clarity for affiliate
relationships, and clarifying the bankruptcy treatment of
digital assets so customers get their assets back quickly if an
exchange fails.
It is obviously that Congress needs to regulate digital
assets, and the Lummis-Gillibrand bill is the legislation that
most comprehensively addresses these issues in a way that
balances consumer protection and responsible innovation. I am
confident that we can get good legislation passed in 2023, and
I look forward to working with my colleagues to do that.
Now Vice Chair Barr, I want to turn to you again, to talk
about Regulation W. Why is it important that there be
transparency on affiliate relationships for banking regulation
and why should Congress consider that for digital asset
exchanges?
Mr. Barr. Thank you, Senator. Regulation W is one of the
foundation regulations for banking. It is really a quite
important rule. And it requires not only transparency but also
substantive limits on the relationship between the bank and its
affiliates. The basic idea is that we need to protect the
insured depository from possibility of risks being transmitted
from the affiliate to the insured depository and therefore
hurting the customers and the depositors of the bank and
potentially putting the deposit insurance system or taxpayers
at risk.
So those kinds of limits on the kinds of transactions that
banks can have with their affiliate are really a foundational
part of banking law.
Senator Lummis. So applying that to, for example, the FTX
situation, where there were over 130 related entities, would a
Regulation W type of regulation have assisted in preventing or
at least disclosing some of the concerns that developed with
FTX?
Mr. Barr. Senator, I only have available the information
you hear reported about in the press so I am not sure I am in a
good position to opine on a particular case, a particular firm.
I do not think that would be prudent. But I can say, in
general, Regulation W is a really foundational principle and it
has served the banking industry very well.
Senator Lummis. Thank you, Mr. Barr. Thank you, Mr.
Chairman.
Chairman Brown. Senator Warren, of Massachusetts. I
apologize, Senator Kennedy. You are next after--I apologize.
Thank you, Senator Kennedy. Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
So since it was created by Congress just over 10 years ago,
the Consumer Financial Protection Bureau, the CFPB, has forced
financial institutions to return more than $13 billion directly
to people they cheated. This is Government that works for the
people, literally.
Now the banks do not like losing $13 billion. They do not
like being forced to shut down scams. So they, and their
Republican friends, attack the CFPB, and the latest attack has
come out of the Republican's go-to court, the Fifth Circuit
Court of Appeals. This court has ruled that the CFPB's funding
structure is unconstitutional because it does not receive
annual appropriations from Congress.
So I just want to test that out a little bit. All of you
are here today from major regulators that oversee various
pieces of the financial system--the OCC, the FDIC, the Federal
Reserve, and the National Credit Union Administration. So let
me start with you. Acting Comptroller Hsu, is the OCC funded
from the annual appropriations process?
Mr. Hsu. No.
Senator Warren. Chairman Harper, does NCUA receive most of
its funds from the annual appropriations process?
Mr. Harper. No.
Senator Warren. Acting Chairman Gruenberg, is the FDIC
funded from the annual appropriations process?
Mr. Gruenberg. No.
Senator Warren. And Vice Chair Barr, is the Fed funded from
the annual appropriations process?
Mr. Barr. No.
Senator Warren. So, in fact, I want to focus just a little
bit more on the Fed. Vice Chair Barr, the Fed primarily gets
its funding from earnings and assessments from the Federal
Reserve banks. Is that exactly the same source where the CFPB
gets its funding?
Mr. Barr. Yes.
Senator Warren. So look. There is a good reason why
Congress created independent funding structures for bank
regulators. Your agencies are the cops on the beat that ensure
the safety and the stability of the banking system. Your rules
provide the guidebooks for financial institutions to serve
consumers while acting within the law.
Congress understood this even back in 1863, with the very
first banking regulator, that if the ability of our regulators
to do their jobs fluctuated every time Congress negotiated a
spending bill or every time Congress changed hands, that the
financial markets would be thrown into chaos.
Vice Chair Barr, your job is to make policy, not to worry
about the Fed's budget. But let me ask, does the Fed's
independent funding structure help provide certainty and
stability to banks and financial markets because no one in the
system has to worry about the Fed's ability to do its job or to
have the resources to enforce the rules?
Mr. Barr. Yes, I believe that kind of certainty is quite
important to doing our job effectively.
Senator Warren. Well, unfortunately the Fifth Circuit's
argument implies that because all of you are, and always have
been, funded outside the annual appropriations process, that
all of your agencies are unconstitutional. This would mean that
none of you can do the things that you are doing, from setting
interest rates at the Fed to making sure that when people make
deposits in their banks that they are protected by FDIC
insurance.
And it is not just your agencies. Numerous other Government
entities are also funded outside the appropriations process,
including the Federal Housing Finance Agency, the Farm Credit
Administration, and the Financial Stability Oversight Council.
By the Fifth Circuit's logic, they would also be
unconstitutional. Not only does that make no sense, it is also
not what the Constitution says. The Constitutions says, and I
will quote it here, ``No money shall be drawn from the Treasury
but in consequence of appropriations made by law,'' and no
money is withdrawn from the Treasury to fund any of our
financial regulators.
As Professor Noah Feldman notes, the Supreme Court has
repeatedly and reasonably said that this clause, quote, ``means
simply that no money can be paid out of the Treasury unless it
has been appropriated by an act of Congress.'' For this reason,
the U.S. Court of Appeals for the D.C. Circuit and a slew of
district courts have all upheld the CFPB's funding structure.
Even though this decision out of the Fifth Circuit is not
grounded in law, it could have real consequences for the
stability of our financial system. The Mortgage Bankers
Association understands this risk. In 2019, they warned that if
the CFPB were struck down, quote, ``the results could be
catastrophic for the real estate finance industry.''
The Trump court ruling is not only shockingly dumb, it is
also dangerous. That is what happens when courts play politics
instead of following the law.
Thank you, Mr. Chairman.
Chairman Brown. Thank you, Senator Warren.
Senator Kennedy is recognized, from Louisiana.
Senator Kennedy. Thank you, Mr. Chairman.
Welcome, gentlemen. I think Senator Warren pointed out that
are major financial regulators, and we thank you for your time
today. So let me ask you your opinion.
Would any single one of you hire Sam Bankman-Fried to
manage a food truck? Would any of you?
Would any single one of you hire his girlfriend, Caroline
Ellison, who apparently was trading billions of dollars, to
manage a food truck?
Can you tell me who, in our Federal financial services
regulatory administrative State, was watching FTX to make sure
that no one there stole people's money?
Was anyone watching them, that you know of?
Mr. Gruenberg. Senator, just from dealing with banking----
Senator Kennedy. You are a brave man.
Mr. Gruenberg. I understand. You are dealing here with
banking and credit union regulators, and FTX was not engaged in
the banking business or in credit union business.
Senator Kennedy. No, I am not saying you should be. I am
just asking, you guys are at the top of the food chain in terms
of financial services regulation. Do you know who was watching
these chuckleheads?
Mr. Gruenberg. Well, these folks, I think, were engaging
generally in investment and trading activity, and so in the
first instance if you are thinking about----
Senator Kennedy. It looks to me like some of them were
engaged in stealing.
Mr. Gruenberg. Well, that is under investigation now,
Senator. So I think in the first instance you would probably
want to engage with the market regulators, the SEC and the
CFTC, to talk about the activities and the authorities in this
area, candidly.
Senator Kennedy. All right. I do not have a lot of time. I
want to ask the chairman a few questions about inflation. Mr.
Chairman, Professor Jason Furman--I think you know him--at
Harvard, formerly of President Obama's administration, has said
that he thinks unemployment has to rise by 5 percentage points
for a whole year to bring inflation down a single percent. Do
you agree with that?
Mr. Barr. Thank you, Senator. Let me just start by saying
inflation right now is far too high. We----
Senator Kennedy. Yes, sir, but I am going to run out of
time. Doggone it. And our Chairman, he is fair but he is tough
as a boot, and he is going to cut me off. Do you agree with
Professor Fuhrman?
Mr. Barr. I think that it is the case that we are going to
see significant softening in the economy. I do not have a
projection that precise as Jason Furman to comment on.
Senator Kennedy. All right. Let me ask you about Professor
Larry Summers. He said that unemployment is going to have to
rise to 7.5 percent and stay there for 2 years to get inflation
down 2 percent. Do you agree with that?
Mr. Barr. As I said, I think that we are going to see
softening in the economy, but I do not have a prediction as
precise as that one.
Senator Kennedy. All right. You remember the inflation back
in the 1980s, under President Reagan and President Carter, when
Mr. Volcker was chairman. Can we agree that the only way we got
control of inflation then was on both the fiscal and the
monetary side?
Mr. Barr. Well, at the end of the day it is the
responsibility of the Fed to ensure price stability consistent
with maximum employment, so we are focused on our
responsibility.
Senator Kennedy. I know that. But if you depend on monetary
policy alone, interest rates have to go higher. Let me put it
another way. If Congress cooperated and stopped spending money
like it was ditch water, the Fed would not have to raise rates
as high. Is that a fair statement, to get control of inflation,
of course?
Mr. Barr. I really will not have any comment on fiscal
policy.
Senator Kennedy. Do you think fiscal policy is irrelevant?
Mr. Barr. We take the fiscal policy that elected Members of
Congress and the President enact, and we calculate those in our
decisionmaking, but I do not have a comment on fiscal policy.
Senator Kennedy. You do not have any comment on the
contribution that fiscal policymakes to inflation.
Mr. Barr. I really do not have anything to add about that.
Senator Kennedy. Well, add to what? You have not told me
anything.
Mr. Barr. Add to what I said before.
Senator Kennedy. You are not telling me that fiscal policy
has nothing to do with inflation, are you?
Mr. Barr. I am telling you that at the Fed we take our
monetary policy responsibilities as ours, and we leave to the
elected----
Senator Kennedy. Well, do you not think you have a moral
obligation, if not a legal obligation, if you think fiscal
policy is contributing to the inflation to say something, for
God's sakes?
Mr. Barr. I think it is important for us to respect the
role of the Congress and the President in setting fiscal policy
and then to take that as a given in how----
Senator Kennedy. Can you tell me, given the path we are on,
how high unemployment is going to go in order to get inflation
down?
Mr. Barr. I think we are going to see unemployment go up,
but I do not have a precise answer to your question.
Senator Kennedy. Duh. I think you are right. I do not mean
to make light of you. Can you give me any prediction how high?
I mean, Summers and Furman are saying it is going to have to go
through the roof.
Mr. Barr. I have seen a wide range of predictions about
that, and as I said----
Senator Kennedy. What are those ranges?
Mr. Barr. ----we're going to be data dependent, we are
going to see how the numbers come in, and unemployment is
obviously an important factor we will look at.
Senator Kennedy. Thank you for your indulgence.
Chairman Brown. Thank you, Senator Kennedy.
Senator Van Hollen, of Maryland, is recognized.
Senator Van Hollen. Thank you, Mr. Chairman. I thank all of
you for your service and your testimony here today.
Vice Chair Barr, I want to start with you on FedNow. I have
been a big proponent of moving to a real-time payment system.
As you know, our current lack of real-time payments costs
millions of Americans billions of dollars, especially those
living paycheck to paycheck. In fact, Aaron Klein over at
Brookings, did an estimate that said if the United States had
implemented real-time payments when the Bank of England did,
back in 2007, Americans would have saved over $100 billion in
overdraft, check-cashing, and other fees. And those are mostly
Americans living paycheck to paycheck.
So I understand from a speech you gave a little while ago
you estimate that the FedNow program will be live in May to
July of next year. Are we fully on track with that, because
there have been lots of delays? Are we fully on track, and what
share of Americans that bank do you think will then have
access, at that point in time, to real-time payments?
Mr. Barr. Thank you, Senator Van Hollen, and thank you for
the support of the FedNow program. I do think that FedNow is
going to significantly improve the ability of banks to offer
real-time services to customers. FedNow obviously will sit as
the backbone behind what community banks and others decide to
offer. That will take some time to flow through the system. We
are on track to do that launch in the May to July period, but
it will take time to build the number of institutions that are
well positioned to offer the kinds of services that FedNow will
then allow them to do. So ramp-up time is going to take a
while.
Senator Van Hollen. All right. Well, we look forward to a
very concerted campaign by the Fed to make sure that banks are
aware of their ability to sign up, and help them sign up.
As you all know, there is a lot of volatility in the global
economy these days. The Dodd-Frank legislation authorizes FSOC
to designate a financial market utility as a systemically
important financial institution, the SIFI.
Back in May, Secretary Yellen expressed concerns about some
of the guidance issued under former Treasury Secretary Mnuchin
that she believed unnecessarily limited FSOC's authority in
this area. Do you have concerns about the 2019 guidance that
was issued under the Trump administration, and do you believe
that this should be revisited?
Let me put it more bluntly. If Secretary Yellen asked to
repeal the 2019 guidance, would you support that as members of
the FSOC?
Maybe start with----
Mr. Hsu. Yes.
Mr. Gruenberg. Senator, yes, I would be supportive.
Mr. Harper. Yes.
Mr. Barr. Yes. I think it would be useful to revisit the
guidance and to make sure that it is working. Again, we are
evolving with circumstances. We are taking the risks that might
come in the system in the future into account, and it would be
useful to do it for that reason.
Senator Van Hollen. I appreciate that because I share your
concerns about that guidance.
Now much has been said about cyber currencies and the
collapse of FTX, and a lot have called for regulation. I have
been a proponent of some regulation in this area. But there are
those who make the case that regulation would actually
normalize an area where there is inherent risk and create
potentially the false impression that investment in these areas
is safer than warranted.
So there is a threshold question about regulation here. I
would be interested very quickly in each of your ideas.
Regulate, and that can be any form of regulation, or not
regulate because that creates an impression that things may be
safer than others by giving the Federal Government imprimatur?
Mr. Hsu. Thank you for the question. So first and foremost,
I have responsibility for the safety and soundness of the
national banking system, so I am always going to put that
first.
The devil is in the details, so a lot depends on the
details of that regulation. I think there is a form of it which
could perform its intended objective. I think there are going
to be potentially forums that do not, and that fall into the
trap that you just laid out. So I think a lot really depends on
what those details are.
Senator Van Hollen. Thank you.
Mr. Gruenberg. Senator, I think in one way or another
regulation is going to have to be necessary for the activity. I
think it is important to consider carefully how we approach
that. Talking about the crypto activity, almost all of it now
is really investment and trading activity. So in the first
instance it seems to me it falls to the market regulators, the
SEC and the CFTC.
There is some interest, limited interest, in the banking
sector, and to the extent there is interest among banks that
will fall to us. As a general matter, I think we have
authorities now to deal with the safety and soundness and
consumer protection risks of bank engagement with crypto
activities.
I do think that the stablecoin issue is a bit more
complicated, and we do have existing authorities in that
scenario, there there may be a case for considering
legislation. But I think more thought needs to be given there.
Senator Van Hollen. Thank you.
Mr. Harper. I will agree that regulation is needed in this
area. Sort of building on what the acting comptroller said, the
devil is in the details, and an important detail for me would
be transparency. Having lived through the financial crisis of
2008, it really impressed upon me the need for better
transparency in our financial markets.
Senator Van Hollen. Thank you.
Mr. Barr. I would similarly suggest that the market
regulators are the sort of first place to start in this space.
They have existing authorities. We want to make sure those are
fully utilized. Some of the activity, that was going on in this
space was purporting to go on in a way that was designed to
evade supervision and regulation. I think we have seen the
enormous human costs of that kind of activity that investors
and consumers who were so badly hurt by the recent events in
the crypto space.
In the banking sphere, just to reiterate what Director
Gruenberg said, we do have the authorities we need in the
banking space to get the job done in banking.
And last, I do think there is quite an important need for
developing a prudential framework for stablecoins with strong
Federal approval and supervision and regulation and
enforcement.
Senator Van Hollen. Thank you. Thank you all.
Chairman Brown. Thank you. Senator Hagerty, of Tennessee,
is recognized.
Senator Hagerty. Thank you, Chairman Brown, Ranking Member
Toomey, and thanks to all of our panelists for being here
today.
I want to follow up on the line of questions that my
colleagues have brought up, particularly around the astonishing
set of events that led to the collapse of FTX last week. I
think a number of people are calling for this incident to be a
rationale or a reason to call cryptocurrency regime nothing but
a Ponzi scheme, that we should regulate it very swiftly, put
heavy-handed regulations in place to deal with it. Several of
you seem to agree that regulation is appropriate.
But I want to acknowledge that some of the blame for this
catastrophe has got to be place on lawmakers here in the United
States, and it should not go unaddressed. The fact of the
matter is that crypto, much like all of finance, is not
beholden to a specific country or a specific legal system. And
by not acting and by failing to provide legal clarity here in
the United States, Congress only incentivizes activity to
migrate outside of our country's borders.
Further, it is important to recognize that whatever
happened with a bad actor running a centralized exchange and
defrauding customers, that had nothing to do with the
technology underpinning crypto itself.
We should not take the wrong message from what happened
last week. No amount of poorly considered, knee-jerk over-
regulation here in the U.S. would have prevented a foreign-
domiciled company like FTX from doing what it did. Instead, we
should focus on accelerated but thoughtful efforts to provide
clear incentives for companies to domicile here, under laws
that would prevent the billions of dollars of losses like those
just incurred by FTX's unsuspecting customers.
So Acting Comptroller Hsu, I would like to come to you.
Last month you said, in a speech, that you were also concerned
about the lack of clarity in crypto regulation here in the
United States. Do you agree that with a clearer regulatory
construction in America more cryptocurrency companies would be
encouraged to operate here rather than offshore, where
regulatory frameworks are obviously inadequate to prevent
large-scale fraud?
Mr. Hsu. It could. I am more concerned, though, there are
some basic foundational elements of the cryptocurrency
technology and the industry which are not sound currently. And
so regardless of the regulation, there are some issues with,
for instance, ownership is not clear. And so if you do not have
clarity about what you own then, you know, a market where
property rights are unclear is a market built on sand. Those
issues are outside of any kind of regulatory discussion. The
state of the crypto industry is not mature, and I think that is
a factor that has to be taken into account as we kind of work
through what to do next.
Senator Hagerty. Yeah. From my view, the maturity of our
markets, though, and our regulatory system is much stronger
than some of the markets where these companies are domiciled
right now, and our view, if I understand all of you sharing a
view that regulation is appropriate, is that the appropriate
level of regulation that would give clarity and would help us
deal with this would be more appropriate happening here onshore
than again pushing this overseas.
Mr. Hsu. Well, at least speaking as a bank regulator, to
the extent that the activity takes place in the national
banking system, it has to be safe, sound, and fair. People need
to understand that. We need to make sure that we maintain that
level, that standard for the activity.
Senator Hagerty. I agree, and I look forward to continuing
working with you toward that end.
Vice Chairman Barr, can I turn to you for a moment please?
The Fed's own stress test results and financial stability
reports recognize the strength of the U.S. banking system, not
to mention the fact that our banks just supported our economic
through the pandemic. And yet it seems that you are planning to
layer yet more costly reforms on our banking system just as the
U.S. navigates a recession and as the Fed fights the highest
inflation that we have seen in generations.
Part of this plan appears to be by raising capital
requirements on midsized banks with a heightened leverage
requirement. Under current market conditions, these
requirements seem inconsistent with S. 2155 and the statutory
mandate for capital requirements to be countercyclical.
So my question for you, Vice Chairman Barr, why is the Fed
reversing course now and considering punitive new leverage and
capital requirements for regional banks that could impede their
ability to support the economy? Would you not agree that
raising capital requirements now is not countercyclical?
Mr. Barr. Thank you, Senator. We are undertaking a holistic
review of capital requirements for firms. That includes issues
about the globally systemically important bank surcharge, the
countercyclical capital buffer, the enhanced supplementary
leverage ratio, stress testing, and the like, to make sure that
the capital rules are fitting well together.
We are not trying to design a capital system for tomorrow
morning. We are trying to think about what the capital rules
should be over the cycle. So that involves, if we change the
rules, undergoing a proposal and then a final rule and then an
implementation period.
Senator Hagerty. Just for clarity--I am running out of
time--I just want to ask this and make it clear. Would
increasing capital requirements right now, in the environment
that we are in, amidst a recession, be procyclical or
countercyclical?
Mr. Barr. Well, Senator, in technical terms there is not a
recession right now. We are in a slower period of economic
growth.
Senator Hagerty. If you ask the people of Tennessee I can
tell you we are in very tough times.
Mr. Barr. Very tough times. I agree.
Senator Hagerty. Is this the time to be following the rule
of law and have our requirements be countercyclical, or do you
want to accelerate the process and push us further into
recession?
Mr. Barr. As I said, I think it is important that we have
capital rules that are good for the whole cycle, and that is
the approach that I am trying to take.
Senator Hagerty. Well, I certainly hope that you will take
strong note of the fact that I am concerned about any move that
might be procyclical in the situation that we are heading into
a recession, which I believe we are. Thank you.
Thank you, Mr. Chairman.
Chairman Brown. Thank you. Senator Smith, from Minnesota,
is recognized from her office.
Senator Smith. Thank you, Mr. Chair, and thanks to all of
our panelists for being with us today.
I would like to start out by asking a question about
climate. So climate change can cause severe economic
disruptions and risks to our economy. We see this in Minnesota
and the impacts on agriculture and tourism and forestry, and
lord knows we have seen it in Florida and places like Florida
over this last fall. And our financial system is not immune
from this risk and disruption.
So banks recognize this climate risk and are taking steps
to manage it, and given the severity and the scope of the
threats that we face, many of us think that we do need clear
guidance from regulators on how to approach this problem.
So I want to direct this first to Mr. Gruenberg and Mr.
Hsu. Your agencies took a step forward by issuing draft
principles to help larger banks manage climate-related risks. I
realize that you received, as I understand it, thousands of
comments in response. But I wonder if each of you could briefly
tell us what is the general reception that you have gotten so
far.
Mr. Gruenberg. I think, Senator, if I may, I think the
industry is receptive to guidance from the agencies in regard
to managing the financial risks of climate change. I think the
actions taken by the OCC and the FDIC were really an initial
effort on our part to lay out a basic framework to incorporate
the financial risks of climate change into the risk management
framework that our institutions are familiar with. We have been
engaging with the Federal Reserve as well.
So I think it is our intention, and we believe this is
important, for the three agencies to act together so that the
guidance is consistent across the banking system, and this
would be a first step to offer guidance. As you know, the focus
of this initial guidance is on institutions with assets over
$100 billion.
Senator Smith. Thank you. Mr. Hsu, could you respond as
well, and maybe let us know a bit about when you anticipate
next steps?
Mr. Hsu. Sure. So just to echo what Acting Chairman
Gruenberg said, I think for the larger banks this has been
generally welcomed, and it has been welcomed because especially
those who are internationally active, they have been having to
deal with some of this from abroad, which is how do we
identify, measure, monitor, and manage risks from climate
change? So I do not think that is a new thing.
I think for smaller banks there has been a bit more of a
kind of variation in responses, and this is something that I
have been focused on, is trying to engage with community banks
as to what the issues are and listening, making sure that we
understand where they are coming from, what their concerns are
with all of this.
One pitch I try to make is not only are there risks to
manage, there are opportunities. And there is a saying, the
better a car's brakes, the faster you can safely drive the car.
And I think that applies in spades here to climate risk, where
some of these risks are novel, they are new, and if banks can
get good at managing those it also presents some opportunities
for them.
In terms of your timing question, just to echo something
that Marty said, we are working together and we are trying to
prioritize making sure that the three agencies work together on
that. That is taking a little bit of time, but I am pretty sure
we will get there in the not-too-distant future.
Senator Smith. Thank you so much. Mr. Barr, you have spoken
about your intention to work with FDIC and OCC on guidance in
this area. Would you care to comment on this and sort of how
you see this working in conjunction with the scenario analysis
exercise that the Fed is going to be doing next year?
Mr. Barr. Thank you, Senator. Yes, we intend to join with
the FDIC and the OCC in issuing climate guidance with respect
to firms that are over $100 billion in assets, the largest
firms in the country. I think it will be helpful to them to
have that guidance. So we expect to join the other agencies in
doing that.
And then as you noted, we are also engaged with a pilot of
climate scenario analysis that we are conducting with six of
the globally systemically important banks. That will be
conducted next year, and we expect to learn a lot from that
exercise about how firms are managing the financial risks of
climate change and how they are assessing those risks. So an
important learning exercise for us in the coming year.
Senator Smith. That is great. Thank you. I appreciate very
much all of your agencies working together on this. I think
having clear input from banks of all the different sizes, from
community banks to the large, systemically important banks is
extremely important. And it sounds like what you are finding so
far is highlighting what we already know, that banks appreciate
this risk, that they want some good, clear rules of the road
for how to work with it and how to manage it. So I am grateful
for all of your work on this.
Mr. Chair, I have another question on bank consolidation
but I will pursue that with a question for the record. Thank
you.
Chairman Brown. Thank you, Senator Smith.
Senator Moran, from Kansas, is recognized.
Senator Moran. Mr. Chairman, thank you. Thank you all for
being here.
Mr. Gruenberg, let me begin with you. I am going to
express, in a polite way, my dissatisfaction with the demise of
the Office of Supervisory Appeals. Despite a multiyear effort
by the FDIC to establish, fund, staff, and operationalize the
newly minted Office of Supervisory Appeals, which included a
robust public comment process, you chose to dismantle this more
independent supervisory appeal process just months after it
became fully operational, and it was one of your first actions
as acting chair.
Moreover, you did so through a summary agenda vote, without
any substantive discussion or prior public notice, providing
only a 30-day comment period after the effective date of its
demise.
How do you justify such an arbitrary was of FDIC resources
with a total disregard for process and transparency?
Mr. Gruenberg. Thank you, Senator. This is an important
issue, as you indicate. A law was passed in 1994, requiring all
of our agencies to establish internal appeals processes, to
consider appeals by our regulated institutions of supervisory
determinations. And shortly after the enactment of that law,
the FDIC established a board-level committee, a Supervisory
Appeals Review Committee, to consider appeals.
It was a determination that at the end of the day the
appeals process is very important. Any bank that believes that
an examiner has made an inappropriate decision or a wrong
decision should have the right to have that decision reviewed
by an appropriate process. And I think the view of the FDIC,
from the time the requirement was established, was that a
board-level review, which is the highest authority within the
agency, is an important matter for board accountability. At the
end of the day, the board is responsible for the decisions of
our supervisors. If there are issues raised in regard to a
supervisory determination, that ultimately should rise to the
level of a board review.
You accurately indicate that a change was made and an
Office of Supervisory Appeals was adopted, utilizing
individuals from outside of the FDIC and did not necessarily
have experience working at the FDIC. But they had supervisory
experience of some kind, to sit in judgment of these
supervisory determinations.
I think our view was that board-level accountability was,
frankly, very important in this area, and the Office of
Supervisory Appeals had not yet begun functioning. The
Supervisory Appeals Review Committee, the board-level
committee, had a longstanding history and experience, so we did
set aside the Office of Supervisory Appeals and continued the
operation of the board-level committee, and then sought
comment.
We received quite a bit of thoughtful comment, and we have
now issued a new request for comment, incorporating into the
proposal some of the suggestions we received in the comments,
including placing our ombudsman, who is a neutral part, a
nonvoting member of the board-level committee, giving appealing
institutions the right to get access to all of the memos and
documents relating to the supervisory determination that they
are appealing, and also the right to request a stay of the
supervisory determination until the appeals process is
completed.
So it may not be fully satisfactory, but we have tried to
take a balanced approach to this, Senator.
Senator Moran. And do you place any importance upon--you
used the word ``neutral.'' I would use the word
``independent.'' But whatever that is, is there a value to
having somebody independent or neutral, compared to the board?
Mr. Gruenberg. I think so, and that is why we added the
ombudsman to the appeals committee, Senator.
Senator Moran. Thank you for your answer.
My second question is really to the panel. The Federal
Housing Finance Agency's tangible capital rules is inconsistent
with the Federal prudential regulators' capital rules for
accessing advances from the Federal home loan bank system. As
this interest rate environment continues to escalate with more
unrealized losses on typically high-quality treasures and
mortgage-backed securities expected, we will likely see an
increasing number of, quote, ``well-capitalized institutions''
lose access to key sources of liquidity due to this disparity
in the regulatory framework.
Although FHFA is well aware of the issue, the default has
been for affected Federal home loan bank members to seek
waivers in writing from their prudential regulators instead of
what I would assume would be a far easier fix aligning those
capital rules.
Do you have thought about the desire of aligning those
capital rules, is the first question, and in the absence of
that, what is the process for member institutions seeking a
waiver from each of your agencies?
Mr. Gruenberg.
Mr. Gruenberg. Thank you, Senator. It is an important
issue, and this is an FHFA rule that we are dealing with. FHFA
has a requirement that if a bank has negative tangible equity,
under GAAP accounting, the bank is not allowed access to new
Federal Home Loan Bank loans. It can roll over existing loans
but it does not have access to new loans until it addresses its
negative tangible equity position.
Senator Moran. That is a different standard or rule than
any of the agencies sitting at the table.
Mr. Gruenberg. The banks have regulatory capital in
addition, and that regulatory capital does not count in the
unrealized losses that result under--and this gets pretty
technical, as you know--under GAAP accounting, puts it into a
negative tangible equity position. But it is an underlying risk
management issue for the institution if it has negative
tangible equity under GAAP.
So we are engaging with FHFA and the banking institutions.
As a threshold, we are looking at the banks, addressing their
risk management issue resulting from the unrealized losses on
their balance sheet, and we will see if we can work this
through.
Senator Moran. Thank you. Are you suggesting you do not
expect it to be a problem then for those banks to access
Federal home loan?
Mr. Gruenberg. I am speaking for myself. I think we are
looking for the institutions to address the underlying issue,
which is the unrealized losses and their negative capital
position under GAAP, in order to gain access to Federal Home
Loan Bank loans.
Senator Moran. Let me then ask the question about----
Chairman Brown. Last question, Senator Moran. You are way
over, but go ahead.
Senator Moran. I have sat here from the beginning, Mr.
Chairman----
Chairman Brown. I know you have.
Senator Moran. ----with you and the Ranking Member.
Chairman Brown. There is a reward for that.
Senator Moran. Thank you, plus our longstanding friendship.
Is there a process by which a waiver is obtainable from the
prudential regulators, as the Federal home loan bank system
suggests--I did not say that right--as FHFA suggests?
Mr. Hsu. So for us it is basically using the regular way
supervisory process is the way to address that.
Just to echo a point that Marty made, we also see this as
fundamentally a risk management issue, and the alignment
question is really a question for FHFA to address.
Mr. Harper. And if I could, just on a couple of things,
first of all like the OCC we would look at it through the
supervision process overall. I think it is important to
remember, though, that when liquidity is provided by a Federal
home loan bank there are assets pledged as collateral for that,
and there is a super-lien that attaches to that. So we, as an
insurer of the deposits at our credit unions, would be placed,
potentially, depending on what the asset was pledged, we could
have a higher liquidation cost if the institution were to
ultimately fail.
I think that is even more important why Congress needs to
move ahead with the agent-member relationship that we currently
do with the corporate credit unions through the central
liquidity facility. It is a Federal liquidity backstop, and
that is another way to deal with this issue.
Chairman Brown. Thank you. Thank you, Senator Moran.
Senator Ossoff, I believe, is the last questioner, from his
office, from Georgia.
Senator Ossoff. Thank you, Mr. Chairman, and thank you to
our panelists for your service.
Mr. Barr, first question for you, please. What do you
assess to be the most significant threats to financial
stability today?
Mr. Barr. Thank you, Senator. We are looking broadly across
the financial sector to look at risks. I mentioned earlier in
our hearing we are looking at, in part, the risks that we do
not fully understand, risks in the nonbank financial sector. We
are certainly exploring and analyzing the risk that has been
going on in the crypto sector.
We are, as always, attentive to risks abroad, from the war
in Ukraine, the situation in China, and looking at what is
happening in interest rate risk and liquidity risk in the
system as interest rates rise.
And then as the economy is softening we are attentive to
credit risk, particularly with respect to commercial real
estate and residential housing, which tend to be leading
indicators of potential problems in other areas.
So those are the kinds of risks we are looking at.
Senator Ossoff. Thank you, Mr. Barr. How confident are you
that Federal regulators have adequate visibility into potential
exposure in the nontraditional financial institutions to risks
that could pose a threat systemically to financial stability,
and where are the blind spots?
Mr. Barr. We have good insight into the regulated banking
system. We have very good, sound information not only about the
banking system but about the relationship of banks to other
entities.
Where we do not have as good of information is what is
going on in the nonbank sector. We have increased information,
more than we did a decade ago, about what is happening in hedge
funds, so that is an advance, but still more information would
be useful in that space.
We have very little visibility into institutions that are
not directly connected to banks, so very little information,
for example, about the risks of the kind that we saw recently
in the crypto sector, where our visibility is much, much lower.
Senator Ossoff. Secretary Yellen, Mr. Barr, stated last
month she was, quote, ``worried about a loss of adequate
liquidity in the Treasury market.'' I have also queried the Fed
chair about this. Do you share her concerns, and can you
characterize them, please?
Mr. Barr. Thank you. I do think that we are seeing higher
volatility in Treasury markets and in many other markets that
are associated with the period of rising interest rates and
economic uncertainty, both in the United States and globally.
And with that increased volatility has come a reduction in
liquidity of the type that you would expect given the
volatility in the market.
So, you know, we are watching it very closely, as always,
and it is something we are attentive to in thinking about the
risks that lie ahead.
Senator Ossoff. I appreciate that, attentive to it. Are you
worried about it? Secretary Yellen said she was ``worried about
a loss of adequate liquidity in the Treasury market.'' Others
have characterized this as a potential threat to financial
stability. Do you have a different view, sir?
Mr. Barr. Well, I would say, as always, we are attentive to
issues that might arise throughout the financial sector,
including in Treasury markets. I think it is appropriate to be
attentive to it, and we are attentive to it.
Senator Ossoff. Thank you.
Mr. Gruenberg, I would like to ask you the same question,
please. What do you assess to be the most significant threats
to financial stability?
Mr. Gruenberg. I generally concur to the observations that
Michael made. I do think the rising interest rate environment,
and important to recognize that it is a global phenomenon, that
it is not just the U.S. as a jurisdiction that sees rising
rates but other major jurisdictions as well. And so both from a
national and international perspective the potential financial
stability risk is there.
Senator Ossoff. Yeah. Mr. Gruenberg, forgive me. My time is
running out. I want to just frame this question as precisely as
I can. Of course, there are threats to growth, and I am really
focused here on threats to financial stability. I think the
most constructive follow-up I can ask you is, what do you think
are the mechanisms of action or the forms of exposure that will
translate higher rates, potentially, into destabilizing
financial shocks? That will be my last question.
Mr. Gruenberg. Yeah. I think the other point that Michael
made that I would concur with, and you raised it as well, I
believe, Senator, is the nonbank financial sector and the
potential leverage in that sector and the risks that can pose,
both for the risks of those institutions as well as their
connectedness to the banking system----
Senator Ossoff. Who are the counterparties for that
leverage?
Mr. Gruenberg. Well, and the counterparties may be banks.
And we do not have as good of a line of sight into the inner
workings of the nonbank financial firms as we do with the
banking institutions. And so it is both the risk we know and
the risk we do not know, and that, I think, really needs to be
the focus of attention.
Senator Ossoff. Thank you. I thank you for your testimony
and I yield back, Mr. Chairman.
Chairman Brown. Thank you, Senator Ossoff.
Throughout today's testimony we have heard over and over
how these regulators, the four of you, are protecting Main
Street, watching out for risks facing our Nation, no matter how
small or large. We have heard a lot of concern about crypto
risks today, a reversal from Trump regulators who let crypto
run wild, as you all recognize. My Democratic colleagues and I
warned of the risks to consumers and investors, have been for
months and months and months, years in some cases. I am
confident our witnesses today will continue to watch out for
those risks, to protect people and communities, not to protect
Wall Street, like we have seen in past years.
I thank the four of you for being here, for providing
testimony. For Senators who wish to submit questions for the
record they are due 1 week from today, Tuesday, the 22nd of
November. To the witnesses, you have 45 days from receipt to
respond to those questions.
Thank you again. The hearing is adjourned.
[Whereupon, at 12:13 p.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
We know that most Americans want the same things--a safe,
affordable place to call home, a good-paying job, and a strong, stable
Government that they can trust. Our democratic institutions are only as
strong as the people who empower them. Our economy works best when we
have a free and fair democracy in which everyone can live their lives
with dignity.
For too long, many of these dreams have felt out of reach. Working
families struggle to pay for groceries, to keep gas in their car and a
roof over their heads. We know the cost of living and raising kids
continues to rise.
Democrats are listening and have delivered for the American people.
We passed legislation to lower prescription drug costs. We helped
families stay in their homes during the height of the pandemic. We made
investments in public transit and our Nation's infrastructure. For the
first time in generations we've been focused on communities that our
Government has turned their back on, especially the State government in
my State. Now we are tackling inflation by taking on corporate power
and consolidation and by reducing our dependence on foreign oil.
We're doing all that while creating good-paying manufacturing jobs
here at home. These jobs, making semiconductors, electric vehicles, and
solar panels, are the jobs of the future. Those jobs will go to
Americans because we passed the CHIPS Act, the Inflation Reduction Act,
and the Bipartisan Infrastructure Law.
And we're seeing results. Our economic recovery has been strong and
continues to grow. Over the past 2 years, many Americans have built up
more in savings. We've seen robust job growth and, for the first time
in decades, wage gains for workers. And just last week we began to see
signs that inflation is starting to cool. Banks and credit unions are
doing well, thanks to the protections we put in place in the Dodd-Frank
Act and because of the support Congress and regulators provided during
the pandemic.
But too many big corporations have taken advantage of market
concentration, jacking up consumer prices and earning higher and higher
profits. As my colleague Senator Reed has pointed out, the biggest
banks that benefit from higher interest rates today are not passing on
those benefits to their customers, penalizing Americans who are trying
to build up their savings.
Workers and small businesses who are already struggling under the
weight of inflation shouldn't get hit with exorbitant bank fees, lose
their money to a crypto scam, or worry that their savings will
disappear overnight if a mismanaged bank or credit union fails. And
none of us want a scenario where risky bets on Wall Street crash the
economy again.
That's why it's so important that we have financial watchdogs who
are empowered to look out for Main Street, helping more Americans hold
on to their hard-earned money at a time when they need it most.
The banking and credit union regulators are independent agencies
that protect consumers and make sure banks and credit unions are safe
and strong. Their independence matters. It makes for a more stable
financial system and that's essential for our entire economy.
Our witnesses today all have decades of banking and credit union
regulatory experience. They have spent their careers serving the public
and protecting consumers, making sure our banking and credit union
system works for Main Street, not just for Wall Street.
That is exactly what they continue to do today.
They are modernizing and strengthening an important civil rights
law that will spur new investment in neighborhoods and communities that
have been left on their own.
They've taken a closer look at overdraft, nonsufficient funds, and
other ``gotcha'' fees at banks and credit unions to make sure that
consumers are treated fairly, and that these fee programs don't raise
safety and soundness concerns.
They are taking a fresh look at the bank merger approval process,
so we don't just rubber stamp consolidation when it can have big
consequences for local economies--too often big banks merge and close
branches, leaving rural towns and urban communities without a bank.
They are revisiting the financial safeguards that protect us from
risks at big foreign banks. They are making sure bank failures don't
leave taxpayers holding the bag. It's important to remember the
superregional banks of today are hundreds of billions of dollars bigger
than the largest banks that failed during the financial crisis. Our
financial regulators know that we need strong capital requirements so
that banks and credit unions can continue to lend to and invest in
their communities, in good times and bad.
They are also overseeing the formation of new institutions that
serve communities that often get left behind. Just last week, the NCUA
chartered a new faith-based credit union, and the FDIC recently
approved the first mutual bank in 50 years, which will pave the way for
more, in Ohio and across the country. All the agencies are working
together to foster new banks and credit unions, and support the work of
MDIs and CDFIs in their communities.
At the same time, our regulators are looking out for risks on the
horizon--the effects of climate change, the rise in crypto assets, the
risks from shadow banks, and the constant threat of cyberattacks.
They're working with the banking and credit union industry to prepare
for climate-related risks and bolster cybersecurity protections as
criminals become more sophisticated and geopolitical threats increase.
They've stepped up to protect depositors and consumers when crypto
firms mislead them into thinking their money is safe . . . when it
isn't.
But we must stay vigilant and empower regulators with the tools to
combat these growing risks. Data breaches at banks and credit unions
happen too often, threatening customer data and exposing our financial
system to vulnerability. That's why we need to pass the bipartisan
Improving Cybersecurity of Credit Unions Act led by Senators Ossoff,
Lummis, and Warner.
We need to make sure that banks and credit unions can partner with
third parties in a way that allows banks to stay competitive without
putting consumer money at risk.
And we can't let big tech companies and risky shadow banks play by
different rules because of special loopholes.
All these things will help strengthen our banking and credit union
system for its core mission: serving Main Street and workers and
families. When workers have more power in the economy, they find better
paying jobs and we have a stronger labor market. That helps credit
unions, which added over 5 million new members over the past year, and
drives down the number of households without a bank account, which
dropped to record lows in 2021.
When Government is on the side of working families--more Americans
save money, build wealth, start small businesses, and participate in
our economy.
Our financial regulators have answered that call, and I will
continue to work with them to make sure our banking and credit union
system works for everyone.
Before I conclude my remarks, I want to thank all our witnesses for
being here today. I also want to congratulate Marty Gruenberg on being
nominated by President Biden to be Chair of the FDIC. Marty is a well-
respected and seasoned regulator who has worked to protect consumers
and preserve confidence in our banking system. As many of you know,
Marty played an instrumental role in helping implement many of the
Dodd-Frank reforms needed to enhance financial stability and manage
risks to our banking system. With Marty's experienced leadership, I
have no doubt that FDIC can continue to address risks to our financial
system, increase access to affordable financial services, and ensure
that banks honor their commitment to communities across the country
through the Community Reinvestment Act.
This Committee looks forward to holding a nominations hearing in
the next few weeks for Marty and the other FDIC nominees.
______
PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
Today, we'll hear from our banking regulators about their recent
regulatory activities.
Throughout this Congress, I have warned about the politicization of
financial regulation.
Some bank regulators are increasingly straying outside their
mandates into politically contentious issues.
Take global warming: In September, the Fed announced a ``pilot
climate scenario analysis exercise'' with six of the largest U.S.
banks.
Now, we're told this is merely an exercise in ensuring that banks
understand their risks.
But the data--including the Fed's own research--show that there's
no physical risk to banks from severe weather events.
The only other risk is so-called ``transition risk.''
But we know banks are fully capable of pricing risks into their
business decisions, including risks from changing customer preferences
over time.
The real risk here is political.
My worry is that an attempt to somehow quantify political risk will
eventually result in regulations designed to allocate capital away from
carbon-intensive companies.
It appears some bank regulators are already committed to doing just
that.
For example, the Fed, FDIC, and OCC have all joined the ``Network
for the Greening the Financial System,'' an international group of
financial regulators with a stated aim to ``mobilize mainstream finance
to support the transition toward a sustainable economy.''
In other words, its goal is to allocate capital away from carbon-
emitting industries to those deemed to be sufficiently green.
And let me emphasize: the Fed, FDIC, and OCC have all joined this
group.
The NCUA has also warned that credit unions ``may need to consider
adjustments to their fields of memberships as well as the types of loan
products they offer'' because of global warming.
Here is the reality: some unelected financial regulators want to
accelerate the transition to a lower-carbon economy by misusing their
powers to allocate capital away from traditional energy companies.
But addressing global warming requires difficult political
decisions involving tradeoffs. In a democratic society, these tradeoffs
must be made by elected representatives accountable to the American
people through a transparent and deliberative legislative process.
I supported Vice Chair Barr's nomination, despite our policy
differences, based, in part, on his commitment to stick to the Fed's
narrow mandates.
At his confirmation hearing, Vice Chair Barr stressed that the Fed
``should not be in the business of telling financial institutions to
lend to a particular sector or not to lend to a particular sector.
I urge him to keep that commitment by pulling the Fed out of the
politically contentious issue of global warming.
Federal banking regulators have also been preoccupied with
establishing new rules, the need for which are, in some cases, dubious.
For example, last month the Fed and FDIC proposed potential new
requirements concerning the resolvability of regional banks. This
proposal is predicated on the assumption that the only realistic option
to resolve a large regional bank would be to sell it to an even larger
bank.
It's not at all clear that this assumption is warranted, or that
new requirements are appropriate for regional banks, for at least two
reasons.
First, the Fed and FDIC have approved regional bank resolution
plans for nearly a decade. And nowhere do these plans contemplate
wholesale acquisition by larger banks.
Second, large regional banks have more than doubled their most
loss-absorbing capital since the financial crisis. This dramatically
improves their resilience and decreases the likelihood they'd need to
be resolved.
Some regulators seem to hold the misguided view that the benefits
of new requirements always outweigh the costs.
But we know regulation isn't without cost.
As regulation increases, financial activities will continue to
migrate out of the banking system.
While some of our banking regulators have been distracted, they've
failed to address real challenges facing the financial system.
For example, last year the Fed, FDIC, and OCC committed to
providing greater clarity on the involvement of banks in crypto
activities, such as providing custody services and issuing stablecoins.
Over a year later, they've provided no public clarity.
During that same period, we've seen several high-profile collapses
of crypto companies, including one prominent example last week.
It's very possible that customers harmed by these collapses
would've been better off if their crypto assets had been safeguarded by
regulated banks that have been providing custody services for hundreds
of years.
But many banks have been pressured--by you--not to provide crypto-
related services until your agencies provide clarity, leaving them in a
state of limbo. I will, however, note that Chairman Harper has not
pursued this pressure campaign with credit unions. In fact, he has
issued guidance for credit unions on partnering with crypto companies,
or using distributed ledger technologies.
However, the ambivalence of the remaining agencies has helped to
push crypto activities into foreign jurisdictions with weaker or no
regulatory regimes. As a general matter, the failure of Congress to
pass legislation in this space and the failure of regulators to provide
clear guidance has created ambiguity that has driven developers and
entrepreneurs overseas. And we've just once again seen how that ends.
There is one other item I'd like to highlight before we start: the
deteriorating liquidity in the market for U.S. Treasuries.
In March 2021, the Fed committed to modify the supplementary
leverage ratio--or SLR--in part to allow bank dealers to intermediate
in this market. Yet, over 18 months later, the Fed has failed to act.
I understand that Vice Chair Barr has only been in his role for 4
months and has reasonably suggested that potential amendments to the
SLR should be considered in the context of other capital requirements.
But we should recognize that a significant decline in Treasury market
liquidity is already occurring.
Absent an improvement, I fear that Fed might one day intervene by
restarting its bond purchases, which would undermine its objective of
fighting inflation.
What I hope to hear from our banking regulators today is that
they'll: prioritize these and other real challenges and not stray
beyond their mandates into politically contentious issues or establish
unnecessary new regulatory burdens.
______
PREPARED STATEMENT OF MICHAEL S. BARR
Vice Chair for Supervision, Board of Governors of the Federal Reserve
System
November 15, 2022
Chairman Brown, Ranking Member Toomey, and other Members of the
Committee, thank you for the opportunity to testify today on the
Federal Reserve's supervisory and regulatory activities.
Earlier this year, I was honored to be sworn in as the Board's Vice
Chair for Supervision. In this role, my priority is to make the banking
system safer and fairer. That requires active and careful analysis of
risks. The banking system is constantly evolving, so regulation and
supervision must also adjust to respond to new and emerging risks. I am
also committed to making the financial system fairer, which is
fundamental to financial oversight. Households and businesses need
access to safe and reliable banking services as they make their
financial decisions. While safety and fairness may seem distinct, they
are interwoven. Financial instability disproportionately harms those
who are economically vulnerable, so making the financial system safer
is making it fairer, and unfair practices can make the financial system
riskier, as we saw in the Global Financial Crisis. I look forward to
pursuing both of these goals during my time as Vice Chair for
Supervision.
Accompanying my testimony today is the Federal Reserve's
Supervision and Regulation Report detailing the current state of the
banking system from our supervisory and regulatory perspective. My
testimony will offer you an overview of the banking system's current
conditions and highlight efforts to monitor and mitigate
vulnerabilities. I will also provide updates on a number of priority
issues that the Federal Reserve is seeking to address.
Current Conditions
Reforms following the Global Financial Crisis have helped the
United States maintain a resilient financial system for consumers,
businesses, and communities. Capital and liquidity positions remain
above regulatory requirements. The Federal Reserve's supervisory stress
test, conducted earlier this year, showed that large banks had
sufficient capital to maintain their lending to support the economy
through the stressful conditions simulated by the stress test.
But as I mentioned, we must ensure we are keeping pace. Many issues
at the forefront of banking regulation today were not prominent five or
10 years ago, and some of them scarcely even existed. For instance, few
anticipated a global pandemic, even economists who used epidemiological
approaches to model financial contagion. Further, the recent events in
crypto markets, while mostly occurring outside the banking sector, have
highlighted the risks to investors and consumers associated with new
and novel asset classes and activities when not accompanied by strong
guardrails.
In addition, despite the data depicting a generally healthy U.S.
banking system, the domestic economic outlook has weakened amid tighter
financial conditions and increased uncertainty. A weaker economy could
put stress on households and businesses and, thus, on the banking
system as a whole. Uncertainty has led to increased financial market
volatility and may also reveal pockets of excess leverage and liquidity
risk in the nonbank financial sector, which risks spillovers to the
banking system and the real economy. We saw a host of such risks with
the disruptions in the United Kingdom's gilt markets. The Federal
Reserve will be heightening its focus on liquidity, credit, and
interest-rate risks as supervised institutions manage the changing
financial conditions.
In the wake of the pandemic, the global recovery is uneven,
inflation is far too high, and geopolitical events pose downside risks
to the U.S. and other economies around the world. Russia's war of
aggression is devastating for the people of Ukraine, and is also
disrupting commodities, energy, and food markets, and pushing up
inflation around the world. And these factors--along with China's
economic slowing, associated with its inward turn, pandemic shutdowns,
and contraction in its real estate sector--are weighing on global
economic growth. We remain attentive to these and other developments
and are closely supervising our regulated institutions to assess
potential risks and implications for the stability of the U.S. and
global financial systems.
Supervisory and Regulatory Priorities
Capital Review
Turning to a number of our priorities at the Federal Reserve, I am
taking a holistic look at the Fed's capital framework to assess whether
it is functioning as intended and supports a resilient financial
system. Robust capital and liquidity requirements make it more likely
that banks are able to absorb losses and continue their vital role
supporting households and businesses. This is especially important for
the largest and most complex banks, which pose the greatest risk to
U.S. financial stability. We are taking a look at the G-SIB surcharge,
the enhanced supplementary leverage ratio, stress testing, the
countercyclical capital buffer, and other measures. Within this
context, I am committed to working with my colleagues at the other
Federal bank regulatory agencies in implementing enhanced regulatory
capital requirements known as the ``Basel III endgame'' standards. \1\
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\1\ https://wwwfederalreserve.gov/newsevents/pressreleases/
bcreg20220909ahtm
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When considering improvements to the regulatory capital framework,
I will be guided by a few key principles: the capital framework should
be forward-looking, should be tiered so that the highest standards
apply to the riskiest firms, and should support a safer and fairer
financial system. We will look at design choices that help to further
these goals.
Resolution
In recent years, merger activity and organic growth have increased
the size of large banks, which could complicate efforts by regulators
to resolve those firms upon failure without disruption to customers and
counterparties. The Board recently invited comment on an advance notice
of proposed rulemaking to enhance regulators' ability to resolve large
banks in an orderly way, should they fail. We look forward to the
comments we will receive.
Merger Review
The Federal Reserve is also evaluating our approach to reviewing
banks' proposed acquisitions. Mergers are often a feature of vibrant
sectors, but the advantages that firms seek to gain through mergers
must be weighed against the risks that mergers can pose to competition,
consumers, and financial stability. A merged institution may be able to
provide a wider range of products and services at lower prices. But if
there is concentration, mergers could also reduce competition and
access to financial services through higher prices or a reduced range
of services. In addition, mergers of larger, more complex firms may
pose risks to financial stability. We are also required to evaluate
whether a merger would meet the convenience and needs of the community.
The Federal Reserve--along with the Office of the Comptroller of the
Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC)--is
reviewing the issues to see if any adjustments to our approach would be
appropriate.
Crypto Activity
Another priority is monitoring the risk of crypto-asset-related
activities. Over the last several years, we have seen crypto-asset
activity grow rapidly and experience periods of significant stress.
Some financial innovations offer opportunities, but as we have recently
seen, many innovations also carry risks--which can include liquidity
runs, the rapid collapse of asset values, misuse of customer funds,
fraud, theft, manipulation, and money laundering. These risks, if not
well controlled, can harm retail investors and cut against the goals of
a safe and fair financial system. Most of this activity is occurring
outside of the ambit of banking regulation. But recent events remind us
of the potential for systemic risk if interlinkages develop between the
crypto system that exists today and the traditional financial system.
Crypto-asset-related activity, requires effective oversight that
includes safeguards to ensure that crypto companies are subject to
similar regulatory safeguards as other financial services providers.
I would note with some humility that striking the right balance
between creating an environment that supports innovation and managing
related risks to businesses, households, and the stability of the
financial system is no easy task. We do not want to stifle innovation,
but when regulation is lax or behind the curve, it can facilitate risk
taking and a race to the bottom that puts consumers, businesses, and
the economy in danger and discredits new products and services with
consumers and investors. I believe everyone has a stake in getting the
regulatory balance right.
We are working closely with the OCC and the FDIC to assess the
risks and opportunities posed by a range of crypto-asset-related
activities, and to clarify which activities are legally permissible and
can be conducted by banks in a manner that is consistent with safety
and soundness, consumer protection, and overall stability of the
financial system.
Before leaving the topic of crypto assets, I would like to touch on
stablecoins. Stablecoins, which like other instruments that purport to
be available on demand at par value, can be subject to destabilizing
runs and require strong Federal prudential oversight to mitigate their
potential for economic harm. That is especially the case for
stablecoins that aim to function as private money. Legislative action
on crypto assets in general, and stablecoins in particular, would help
promote responsible innovation and protect the financial system.
Climate-Related Financial Risks
We are also working to understand financial risks related to
climate change. At the Federal Reserve, our mandate in this area is
important, but narrow, and we are focused on our supervisory
responsibilities and our role in promoting a safe and stable financial
system. To that end, the Federal Reserve recently announced a pilot
climate scenario analysis exercise designed to enhance the ability of
supervisors and firms to measure and manage climate-related financial
risks.
Scenario analysis--in which the resilience of financial
institutions is assessed under different hypothetical climate
scenarios--is an emerging tool to assess climate-related financial
risks. The pilot climate scenario analysis exercise, which is distinct
and separate from bank stress tests, will be exploratory in nature and
not have capital consequences. It is also our intention to work with
the OCC and the FDIC to provide guidance to large banks on how we
expect them to identify, measure, monitor, and manage the financial
risks of climate change.
Operational Resilience
The last priority I will mention is operational resilience.
Financial institutions face significant challenges from a wide range of
disruptive events. These include technology-based failures, cyber
incidents, pandemics, and natural disasters. Such events, combined with
banks' growing reliance on third-party service providers, expose them
to a range of operational risks, which are often difficult to
anticipate. When they manifest, these risks can affect the safety and
soundness of affected banks and pose risks to U.S. financial stability
by limiting market functioning or undermining trust in the system. We
at the Federal Reserve will continue to work in this area to help
ensure that banks understand and manage these complex and evolving
challenges and that consumers remain protected. Additionally, we are
committed to working closely with other domestic agencies and
international authorities to coordinate on supervisory approaches to
operational resilience.
Conclusion
As the banking system continues to evolve, we must ensure that
supervision and regulation keeps up with those changes and are
appropriate for the underlying risks. Over the coming months and years,
it will be crucial to examine new risks to the banking system and
whether and how the real economy, including consumer needs and access
to financial services, may change. As vulnerabilities appear, a strong
banking system will help households and businesses weather those
challenges. As Vice Chair for Supervision, I will continue to work to
promote a safe and fair banking system.
Thank you, and I look forward to your questions.
______
PREPARED STATEMENT OF TODD M. HARPER
Chair, National Credit Union Administration
November 15, 2022
Chairman Brown, Ranking Member Toomey, and Members of the
Committee, thank you for inviting me to discuss the state of the credit
union system and provide an update on the operations, programs, and
initiatives of the National Credit Union Administration.
In the Federal Credit Union Act, Congress charged the NCUA with
overseeing the credit union system to ``make more available to people
of small means credit for provident purposes through a national system
of cooperative credit, thereby helping to stabilize the credit
structure of the United States.'' The NCUA is committed to fulfilling
this charge by protecting the system of cooperative credit and its
member-owners through effective chartering, supervision, regulation,
and insurance.
To further these important policy objectives, the NCUA Board in
March 2022 unanimously adopted a 5-year strategic plan with three core
goals. \1\ Those strategic goals are:
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\1\ See https://www.ncua.gov/files/agenda-items/strategic-plan-
20220317.pdf.
Ensuring a safe, sound, and viable system of cooperative
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credit that protects consumers;
Improving the financial well-being of individuals and
communities through access to affordable and equitable
financial products and services; and
Maximizing organizational performance to enable mission
success.
This strategic plan and its goals will guide the agency's work
through 2026.
In my testimony today, I will discuss the state of and the factors
impacting the credit union system, review the NCUA's efforts to
strengthen the credit union system and protect consumers, highlight
several of the agency's recent rulemakings, and outline two key
legislative requests.
State of the Credit Union System
While the COVID-19 pandemic's economic fallout and a rising
interest rate environment have impacted credit union performance over
the past year, federally insured credit unions (credit unions), the
National Credit Union Share Insurance Fund (Share Insurance Fund), and
the Central Liquidity Facility (CLF) have all remained on a solid
footing. \2\
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\2\ The information contained in this testimony neither includes
nor applies to privately insured credit unions.
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Credit Union System Performance
As of June 30, 2022, there were 4,853 credit unions with 132.6
million members. \3\ The system's aggregate total assets were $2.1
trillion. Additionally, the system's net worth ratio rose to 10.42
percent, representing a recovery of 40 basis points from a pandemic low
of 10.02 percent. Notably, at the end of the second quarter, credit
unions recorded a 16.2 percent year-over-year increase in loans.
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\3\ See https://www.ncua.gov/files/publications/analysis/
quarterly-data-summary-2022-Q2.pdf.
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During the last decade, the credit union system has also
experienced growth in size and complexity. Based on the most recent
quarterly data, the number of credit unions with assets of at least $1
billion has more than doubled to 412 in the second quarter of 2022,
compared to 193 in 2012. Together, these billion-dollar-plus credit
unions held $1.6 trillion in assets--three out of every four dollars
within the credit union system. These credit unions also reported the
most growth in loans, membership, and net worth over the year ending in
the second quarter of 2022.
Nevertheless, the credit union system continues to encompass mostly
smaller institutions. Nearly two-thirds of all credit unions have less
than $100 million in total assets. Smaller credit unions play an
important role in providing safe, fair, and affordable financial
products and services, particularly in rural areas, within communities
of color, and to other underserved places across the country. Smaller
credit unions also often face challenges to their long-term viability
including lower returns on assets, declining membership, higher loan
delinquencies, increasing non-interest expenses, and a lack of
succession planning for boards and key personnel. \4\
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\4\ To address the issue of succession planning, the NCUA Board
currently has under consideration a proposed rule to require boards of
directors at Federal credit unions to establish and adhere to processes
for succession planning. See https://www.regulations.gov/docket/NCUA-
2022-0016/document.
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Moving forward, all credit unions must remain diligent in managing
safety and soundness and prepare for rising interest rates,
inflationary pressures, and liquidity concerns. Through examinations
and supervision, the NCUA continues to monitor economic conditions and
these challenges, and the agency stands ready to act expeditiously,
when needed, to address identified risks.
External Factors Impacting the System
In the coming year, the NCUA expects credit union performance to be
influenced by several external factors. Forecasters expect modest
economic growth resulting from inflation and tighter credit conditions.
Job growth is also expected to slow, placing moderate upward pressure
on the unemployment rate.
Expected changes in the interest rate environment suggest the term
spread could turn negative next year, squeezing credit union net
interest margins. Therefore, the outlook for credit union loan growth
and loan performance is uncertain. Modest growth in automobile and home
sales is projected for next year, which should support continued growth
in credit union loan balances.
Delinquency rates may drift higher--moving closer to prepandemic
levels--but should stay relatively low. However, weaker-than-expected
economic conditions or a downturn could produce less favorable outcomes
for credit unions. Inflation may remain elevated as well due to
geopolitical events, supply chain disruption, and material shortages.
Given rising interest rates, the NCUA updated its supervisory
guidance in September to address market and interest rate risk.
Specifically, the agency issued a letter to credit unions outlining
changes to how it plans to supervise for interest rate risk and
clarifying when the issuance of a document of resolution would be
warranted. \5\ Going forward, the NCUA will continue to monitor the
interest rate environment and take further action, if needed.
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\5\ See SL No. 22-01, Updates to Interest Rate Risk Supervisory
Framework.
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Performance of the National Credit Union Share Insurance Fund
The Share Insurance Fund continues to perform well, with no
premiums or distributions expected at this time.
By law, the NCUA Board is required to maintain a strong Share
Insurance Fund, which is backed by the full faith and credit of the
United States. This fund insures individual accounts up to $250,000. As
of June 30, 2022, the Share Insurance Fund protected nearly $1.7
trillion in insured shares and deposits across all States, the District
of Columbia, and U.S. territories. The Share Insurance Fund also
reported a net income of $19.2 million and a net position of $20.3
billion for the second quarter ending June 30, 2022.
The Share Insurance Fund's equity ratio is the overall
capitalization of the insurance fund to protect against unexpected
losses. When the equity ratio falls below--or is projected within 6
months to fall below--1.20 percent, the NCUA Board must assess a
premium or develop a restoration plan. Conversely, when the equity
ratio exceeds the normal operating level--or the desired equity level
of the Share Insurance Fund set between 1.20 percent and 1.50 percent--
the Share Insurance Fund pays a distribution if the other statutory
requirements are met.
At the end of the second quarter of 2022, the equity ratio stood at
1.26 percent. For the period ending December 31, 2022, NCUA projects
the equity ratio for the Share Insurance Fund will be 1.30 percent,
slightly below the 1.33 percent normal operating level set by the NCUA
Board.
State of the Central Liquidity Facility
The NCUA remains concerned about access to liquidity for credit
unions given rising interest rates and the increased probability of a
liquidity event, combined with the expiration of previously approved
statutory enhancements to the NCUA's CLF at the end of 2022.
Established by statute, the CLF is a mixed-ownership government
corporation designed to improve financial stability by providing credit
unions with a source of loans to meet seasonal, short-term, and
protracted liquidity needs. \6\ The CLF's ability to respond rapidly to
events helps contain or avert liquidity crises before they escalate.
For example, during the Great Recession and financial crisis of 2008,
the NCUA's deployment of the CLF and Share Insurance Fund enabled many
credit unions to survive.
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\6\ See https://www.ncua.gov/support-services/central-liquidity-
facility.
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Currently, corporate credit unions--or credit unions serving other
credit unions--play a critical role to the system by subscribing to
capital stock in the CLF to provide access to liquidity for smaller
credit unions. While corporate credit unions may act as agent members
to purchase capital stock of the CLF, the enhancements that allow for
their ability to do so for a subset of credit union members will expire
at the end of 2022, unless Congress acts to extend these authorities.
Expiration of this provision will make agent membership in the CLF for
corporate credit unions cost prohibitive, and it will increase the
administrative burden of smaller credit unions to use the CLF for their
liquidity needs.
To address this expiration, the NCUA Board has strongly advocated
for permanent statutory authority--or at minimum, an extension--to
allow corporate credit unions and other agent members of the CLF to
purchase capital stock for a subset of credit unions served. Smaller
credit unions are more likely to need access to emergency funds should
a systemic liquidity event occur. These statutory CLF enhancements make
the facility a more affordable option for corporate credit unions to
subscribe to on behalf of their smaller credit union members.
If the CLF agent-member provision is not permanently reinstated or
extended, there could be a reduction of $9.7 billion in reserve
liquidity for the credit union system. Given increasing liquidity
concerns within the credit union system, now is not the time to shrink
access to an emergency liquidity resource.
NCUA's Efforts To Strengthen the Credit Union System
Over the last year, the NCUA has undertaken several actions to
strengthen capital standards, improve the examination process, enhance
cybersecurity, protect consumers, preserve Minority Depository
Institutions (MDIs), and advance diversity, equity, and inclusion.
Strengthening Capital Standards
The NCUA recognizes that all financial institutions backed by
Federal share and deposit insurance, including credit unions, should
hold capital commensurate with their risks. In 2015, the NCUA Board
initially approved a risk-based capital rule (RBC rule) to update,
consistent with the Federal Credit Union Act, the risk-based net worth
requirement for complex credit unions. \7\ The intent was to reduce the
likelihood of a small number of high-risk outliers exhausting their
capital and causing losses to the Share Insurance Fund.
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\7\ 12 U.S.C. 1790d(b)(1).
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Effective January 1, 2022, all federally insured, consumer credit
unions defined as complex must comply with the RBC rule. The RBC rule
defines a complex credit union as one having more than $500 million in
assets. Should one of these credit unions fail, the additional capital
buffer afforded by this framework would protect surviving credit
unions, their members, and the taxpayers who ultimately guarantee the
Share Insurance Fund.
To provide a simplified alternative framework to the risk-based
capital requirements, the NCUA Board approved the Complex Credit Union
Leverage Ratio final rule (CCULR rule) in December 2022. The CCULR rule
relieves complex credit unions that satisfy certain eligibility
criteria from calculating the risk-based capital ratio. In exchange,
these credit unions must maintain a higher net worth ratio than
otherwise required for the well-capitalized classification.
The CCULR rule provides complex credit unions with a risk-based
capital framework comparable to those developed by the Federal banking
agencies and consistent with the Federal Credit Union Act. The rule
also strengthens the system's capital levels while providing complex
credit unions with a streamlined approach to managing their capital.
Together, the CCULR and RBC rules promote responsible capital
levels across the credit union system and reduce the Share Insurance
Fund premiums surviving credit unions would pay if a large, complex
credit union failed. The rules also strengthen the credit union
system's ability to better withstand future crises with minimal
disruption to credit union members.
Upgrading Legacy Examination Tool
As part of the NCUA's innovation efforts, the agency has developed
a new examination tool to modernize the examination process and offer
examiners enhanced analytics capabilities. The NCUA officially rolled
out its new Modern Examination and Risk Identification Tool (MERIT) in
2022 after conducting training for State and Federal credit union
examiners in 2021. This cloud-based examination platform replaced the
NCUA's Automated Integrated Regulatory Examination System (AIRES), a
25-year-old legacy examination application. The NCUA expects MERIT will
help examiners more efficiently perform their functions and apply
better analytics, which should result in fewer onsite examination
hours.
Maintaining Cybersecurity
Over the last year, the NCUA has continued to reinforce the credit
union system's ability to withstand potential cyberattacks and
strengthen the cybersecurity of credit unions and the NCUA. One of the
agency's notable actions includes warning credit unions about potential
threats stemming from malicious cyber activity against the United
States in response to sanctions imposed on Russia for its war in
Ukraine. The NCUA has also completed the development of a new IT
examination tool, encouraged credit union use of the Automated
Cybersecurity Evaluation Toolbox (ACET), and offered cybersecurity
grants to eligible low-income credit unions.
To protect the credit union system from the cyberattacks of foreign
adversaries and other bad actors, the NCUA has regularly provided
guidance and resources to credit unions regarding these potential
threats. \8\ As part of this guidance, the NCUA recommends credit
unions report cyber incidents to the NCUA, the Federal Bureau of
Investigation, and the Department of Homeland Security's Cybersecurity
and Infrastructure Security Agency (CISA). The NCUA has also directed
credit unions to CISA's Shields-Up website, \9\ which provides
information about cybersecurity threats, resources, and mitigation
strategies.
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\8\ See https://www.ncua.gov/regulation-supervision/regulatory-
compliance-resources/cybersecurity-resources.
\9\ See https://www.cisa.gov/shields-up.
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Additionally, the prevalence of ransomware, malware, supply-chain
vulnerabilities, social engineering, insider threats, and other forms
of cyber intrusion are continuing to create challenges at credit unions
of all sizes. These threats require ongoing measures for rapid
detection, protection, response, and recovery and are likely to
accelerate in the future. In response, the NCUA will soon begin
deployment of its new Information Security Examination (ISE) program.
ISE is a scalable, risk-focused examination system that focuses on
compliance with the NCUA's information system regulations.
The NCUA has also created ACET for credit unions to use when
evaluating their levels of cybersecurity preparedness. ACET works in
tandem with ISE, giving credit unions a better understanding of the
cybersecurity issues the NCUA will address during the examination
process. ACET is a downloadable, standalone application developed to be
a holistic cybersecurity resource for credit unions. ACET incorporates
standards and practices established for financial institutions across
the cybersecurity discipline, like the Federal Financial Institutions
Examination Council's IT Examination Handbooks and the National
Institute of Standards and Technology's Cybersecurity Framework.
Finally, to help improve digital services and cybersecurity, the
NCUA provides Community Development Revolving Loan Fund (Revolving Loan
Fund) grants and loans to low-income-designated credit unions. Congress
created the Revolving Loan Fund to stimulate economic development in
low-income communities served by credit unions. During the 2022 grant
round, 52 grants totaling $484,165 were specifically provided for
digital services and cybersecurity projects.
Ensuring Consumer Financial Protection
Consumer financial protection is an NCUA supervisory priority,
equally important as safety and soundness. This year, NCUA examiners
are reviewing credit union compliance with COVID-19 consumer-assistance
programs, fair lending rules, servicemember protections, and fair
credit reporting laws. The NCUA is also conducting more fair lending
examinations and reviews than in prior years. Of note, the NCUA has
found compliance management system weaknesses during recent fair
lending examinations and reviews.
In addition, the NCUA has included a review of credit union
overdraft programs as a supervisory priority. In particular, the agency
is focusing on credit unions' use of overdraft protection programs and
the safety-and-soundness issues that can occur with over-reliance on
these programs. Further, the overdraft fees charged by some credit
unions can be detrimental to members and inconsistent with the system's
mission. For that reason, examiners are requesting information about
overdraft policies and procedures and audits of credit union overdraft
programs. The agency is also reviewing credit union communications with
members about these programs. The information gathered this year may be
used for a more thorough review of credit unions' overdraft programs in
2023.
Ultimately, the NCUA recognizes that a strengthened consumer
compliance program is in the best interest of the system and its
members.
Supporting MDIs and Low-Income Designated Credit Unions
The NCUA is also developing more tailored examination procedures
for MDI and low-income designated credit unions to assist examiners in
supervising these institutions based on their unique strategies and
member needs.
MDI and low-income credit unions are important to providing access
to safe, fair, and affordable financial services and products,
particularly to underserved individuals and communities. As of June 30,
2022, 507 credit unions had the MDI designation, and 412 MDI credit
unions held the low-income designation. In all, MDI credit unions
served more than 5 million members and held more than $65 billion in
assets.
Despite the ongoing challenges to the economy and the financial
system resulting from the COVID-19 pandemic, MDI credit unions
generally saw improved financial performance in 2021. While the number
of MDIs declined slightly, membership, assets, and loans grew. For
example, the total amount of MDI credit union lending rose by $2.9
billion during 2021, an increase of more than 9 percent over the prior
year and a higher growth rate than credit unions overall. \10\
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\10\ See https://www.ncua.gov/files/publications/2021-mdi-
congressional-report.pdf.
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Additionally, a critical component of the NCUA's efforts to support
credit unions is the low-income designation. To qualify as a low-income
designated credit union, a majority of the credit union's membership
(50.01 percent) must meet certain income thresholds based on data from
the Census Bureau and requirements outlined in the NCUA's rules and
regulations. As of the end of the second quarter of 2022, more than
2,600 credit unions with low-income designations served more than 68
million members and held in excess of $1 trillion in assets.
Advancing Diversity, Equity, and Inclusion
The NCUA is committed to fostering diversity, equity, and inclusion
within the agency and the credit union system. The agency understands
that diversity, equity, and inclusion drive fairness, employee
engagement, and effective decision making. Additionally, organizations
that embrace diversity, equity, and inclusion often experience higher
workforce engagement, greater employee retention, and increased
organizational productivity and earnings.
As noted in the NCUA's 2021 OMWI Report to Congress, \11\ the
agency's diversity, equity, and inclusion efforts helped attract, hire,
and retain a diverse workforce; led to an increase in hiring of
employees with disabilities; and led to an increase in contracting
dollars awarded to minority- and women-owned businesses. In 2021, two
of every five new hires were people of color; more than half the
participants in leadership development programs were female; and nearly
4 out of every 10 contract dollars went to minority- and women-owned
businesses.
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\11\ See https://www.ncua.gov/files/publications/2021-omwi-
congressional-report.pdf.
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Despite this progress, the NCUA recognizes that Hispanic and Latino
professionals remain underrepresented within the agency's ranks. The
agency also needs to improve its performance in hiring and retaining
women. As such, the NCUA is developing recruitment and development
strategies to increase representation of both these demographic groups.
Lastly, the NCUA's annual voluntary Credit Union Diversity Self-
Assessment (CUDSA) results showed improvements over the last year. \12\
In 2021, 240 credit unions participated in the survey--a 28 percent
increase from 2020. Among the highlights for 2021, 61 percent of
responding credit unions reported a leadership and organizational
commitment to diversity, 56 percent reported taking steps to implement
employment practices to demonstrate that commitment, and 31 percent
reported monitoring and assessing their diversity policies and
practices. As part of the 2022 CUDSA cycle, the NCUA has also made
several improvements to enhance security, ensure data integrity, and
improve the overall user experience.
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\12\ See https://www.ncua.gov/files/publications/2021-cudsa-
report.pdf.
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Finally, the agency hosted its third industrywide summit on
diversity, equity, and inclusion at the start of November. \13\ The in-
person and online hybrid event attracted hundreds of diversity, equity,
and inclusion advocates and practitioners. Going forward, the NCUA will
continue to host similar summits annually and encourage more credit
unions to complete the CUDSA.
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\13\ See https://www.ncua.gov/news/dei-access-summit-2022.
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Rulemaking and Guidance
As the financial services system and credit unions continue to
evolve--especially with many credit unions growing larger and more
complex--the regulatory framework must keep pace to maintain the
strength and stability of the credit union system. In response to these
changes and to legislation enacted into law, the NCUA has undertaken
several rulemakings or implemented new rules during the last year that
address member expulsion, subordinated debt, emergency capital
investments, and cybersecurity notifications. The NCUA has also issued
guidance on the use of distributed ledger technologies.
Member Expulsion
On September 22, 2022, the NCUA Board unanimously approved a
proposed rule to develop a policy by which a Federal credit union
member may be expelled for cause by a two-thirds vote of a quorum of
the Federal credit union's board of directors. \14\ This proposal would
implement the Credit Union Governance Modernization Act, passed by
Congress in March 2022. \15\ Comments on the proposed rule are due
December 2, 2022.
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\14\ See https://www.regulations.gov/document/NCUA-2022-0132-0001.
\15\ Pub. L. 117-103 (Mar. 15, 2022).
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Subordinated Debt/Secondary Capital Rule
Effective January 1, 2022, the NCUA Board adopted a final
subordinated debt rule that replaced the previous secondary capital
rule. \16\ The final rule allows eligible credit unions to issue
subordinated debt under the statutory authority to borrow from any
source.
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\16\ See https://www.regulations.gov/docket/NCUA-2020-0016/
document.
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Among the changes included in the final rule were increased
categories of credit unions eligible to use subordinated debt for
purposes of regulatory capital treatment. This rule now permits low-
income-designated credit unions, as well as complex credit unions that
are not low-income-designated, to count qualifying subordinated debt to
meet certain capital requirements. This rule also enables newly
chartered credit unions to use subordinated debt to support their
startup phase.
Subordinated debt, as defined by NCUA's regulation, can help
increase regulatory capital levels to protect against future losses and
enable credit unions to provide lending and other member services to
under-resourced communities.
Emergency Capital Investment
In December 2021, the Board approved amendments to the Subordinated
Debt rule to address Emergency Capital Investment Program (ECIP)
secondary capital applications approved and scheduled for funding after
the final rule went into effect. \17\ This change benefits eligible MDI
or Community Development Financial Institutions credit unions that are
either participating in the U.S. Department of Treasury's ECIP or other
programs administered by the U.S. Government.
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\17\ See https://www.regulations.gov/docket/NCUA-2022-0040/
document.
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Credit unions, for the most part, have completed receiving
approximately $2 billion in ECIP investments. It is expected upon
completion that close to 80 credit unions will have received ECIP
investments. ECIP funding will provide long-term, low-cost regulatory
capital for participating institutions to support low-income and
minority communities. Such efforts are consistent with the statutory
mission of credit unions to serve the credit and savings needs of their
members, especially those of modest means.
Cyber Incident Notification
As part of the NCUA's cybersecurity efforts, the agency proposed a
cyber incident notification rule that would require a credit union to
notify the agency as soon as possible, but no later than 72 hours,
after it reasonably believes a reportable cyber incident has occurred.
\18\ The rule would provide an early alert to the NCUA and other
agencies, allowing the Government and the private sector to react to
threats before they become systemic.
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\18\ See https://www.regulations.gov/docket/NCUA-2022-0099/
document.
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To that end, the proposed rule would set parameters for what
constitutes a reportable incident and the minimum notification
requirements. The proposed rule is intended to align where possible
with the Cyber Incident Reporting for Critical Infrastructure Act
signed into law in March. \19\ The proposed rule would also bring the
NCUA's cyber incident reporting framework into general alignment with
the Federal banking agencies.
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\19\ Pub. L. 117-103 (Mar. 15, 2022).
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Use of Distributed Ledger Technologies
The NCUA recognizes that the maturing of financial technology is
creating opportunities for credit unions to increase speed of service,
improve security, and expand products and services. To assist credit
unions regarding financial technology adoption in a safe-and-sound
manner, the NCUA issued a letter to credit unions that clarifies
expectations for credit unions contemplating the use of new or emerging
distributed ledger technologies (DLT). \20\ The letter specifies that
while the NCUA does not prohibit credit unions from developing,
procuring, or using DLT, the technology used must be deployed for
permissible activities and in compliance with State and Federal laws
and regulations.
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\20\ See 22-CU-07, Federally Insured Credit Union Use of
Distributed Ledger Technologies.
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Legislative Requests
The NCUA recognizes that laws and regulations must evolve to
reflect changes in the economic environment and technological advances.
Accordingly, there are two legislative changes that I would like to
highlight. The first change relates to the CLF agent-membership
requirements mentioned earlier in this testimony. Extension of this
provision by Congress would allow the CLF to continue to provide a
shock absorber that will allow the credit union system to better
withstand liquidity events. The second change concerns restitution of
the agency's vendor authority. Action by Congress on this legislative
recommendation would close a growing regulatory blind spot. Enactment
of both legislative proposals would facilitate the ability of the NCUA
to fulfill its statutory mission.
Central Liquidity Facility Permanency
Most timely, the NCUA requests Congress permanently adjust the CLF
agent-member requirements to allow agent members to purchase capital
stock for a subset of credit unions served. Permanent agent membership
would make it economically feasible for agent members, such as
corporate credit unions, to participate in the CLF. The statutory
change would protect the taxpayer at no cost, provide a buffer for the
Share Insurance Fund, maintain immediate access to emergency liquidity
for more than 3,600 credit unions with assets under $250 million, and
support the financial services sector in a liquidity event.
If the current CLF enhancements--which expire at year's end--are
not permanently adopted by Congress or if a statutory extension is not
provided, there will be a decline in the CLF's capitalization and
funding capacity as corporate credit unions are ``priced out.'' Given
the prohibitive cost of the stock purchase for all institutions a
corporate credit union serves, many corporate credit unions have
already announced plans to terminate membership at the end of this
calendar year if the agent-member provision is not extended or made
permanent.
Permanence would provide regulatory certainty for smaller credit
unions and strengthen the system's ability to respond to future
emergencies. The House Financial Services Committee has favorably
reported H.R. 3958, the Central Liquidity Facility Enhancement Act, and
the language to renew this expiring enhancement for an additional year
is contained in the House-passed 2023 National Defense Authorization
Act.
Restoration of Third-Party Vendor Authority
The NCUA also seeks the restoration of statutory examination and
enforcement authority over third-party vendors--including credit union
service organizations (CUSOs)--that expired at the end of 2001. This
statutory change would give the NCUA parity with other agencies that
supervise and regulate federally insured depository institutions.
Currently, the NCUA may only review credit union third-party
vendors with their permission, and often, vendors decline these
requests. Vendors and CUSOs may also reject NCUA recommendations to
implement appropriate corrective actions that mitigate identified
risks. The NCUA needs visibility into these entities for several
reasons, including the credit union system's growing reliance on
digital services, increased credit union outsourcing of core business
functions and resulting concentration risks, and cybersecurity, which
could be a national security risk given this lack of oversight.
For these reasons, the Government Accountability Office, the
Financial Stability Oversight Council, and the NCUA's Office of
Inspector General have each recommended that Congress pass legislation
to restore the NCUA's vendor authority. The preamble to the CUSO final
rule adopted in October 2021 also noted the NCUA Board's ``continuing
policy to seek third-party vendor authority for the agency from
Congress.'' \21\ If the NCUA's third-party vendor authority is
reauthorized, the agency will adopt a program that prioritizes
examinations based on risk to the Share Insurance Fund, cybersecurity,
consumer financial protection, Bank Secrecy Act/Anti-Money Laundering
compliance, and national security issues.
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\21\ See https://www.ncua.gov/files/agenda-items/
AG20211021Item2b.pdf.
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The U.S. House of Representatives passed legislation to provide
NCUA third-party vendor authority within the 2023 National Defense
Authorization Act. In the Senate, bipartisan legislation has been
introduced, which if enacted, would enable the NCUA to develop a risk-
focused examination program for CUSOs and third-party vendors. \22\
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\22\ See https://www.congress.gov/bill/117th-congress/house-bill/
7900.
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I would like to extend my appreciation to the Committee for its
continued support and thank Senators Ossoff, Lummis, and Warner for
introducing S. 4698, the Improving Cybersecurity of Credit Unions Act,
to restore the NCUA's third-party vendor examination authority. The
enactment of this legislation would close this regulatory blind spot
the NCUA continues to confront.
Conclusion
Thank you again for the invitation to testify about the NCUA's work
and the state of the credit union system. As the NCUA continues to
navigate through a challenging and changing economic environment, the
NCUA will stay focused on protecting credit union members, ensuring the
safety and soundness of credit unions, and insulating the Share
Insurance Fund from losses. By attending to these issues, the NCUA
Board and staff will keep the credit union system strong and ensure
greater access to safe, fair, and affordable financial products and
services for all Americans, including those of modest means. I look
forward to your questions.
______
PREPARED STATEMENT OF MARTIN J. GRUENBERG
Acting Chair, Federal Deposit Insurance Corporation
November 15, 2022
Chairman Brown, Ranking Member Toomey, and Members of the
Committee, I am pleased to appear today at this hearing on ``Oversight
of Financial Regulators: A Strong Banking System for Main Street''.
The core mission of the Federal Deposit Insurance Corporation
(FDIC) is to maintain stability and public confidence in the U.S.
financial system. The FDIC carries out this mission through its
responsibilities for deposit insurance, banking supervision, and the
orderly resolution of failed banks, including systemically important
financial institutions. Banking supervision encompasses safety and
soundness and consumer protection, both of which are essential to this
important responsibility. I appreciate the opportunity to report on the
agency's work in carrying out these responsibilities and to address the
specific issues raised by the Committee in its letter of invitation.
My written testimony will begin with an overview of the condition
of the banking industry and the FDIC's Deposit Insurance Fund (DIF). I
will then update the Committee on five key policy priorities for 2022:
strengthening the Community Reinvestment Act (CRA); addressing the
financial risks that are likely to affect banking organizations and the
financial system as a result of climate change; reviewing the bank
merger process; evaluating the risks of crypto assets to the banking
system; and finalizing the Basel III capital rules. I will then discuss
the FDIC's efforts to support Minority Depository Institutions (MDIs)
and Community Development Financial Institutions (CDFIs), as well as to
promote a diverse and inclusive workplace at the FDIC. Finally, I will
describe the FDIC's work to strengthen cybersecurity and information
security within the banking industry and our return to in-person bank
examinations and other in-person activities at every level of the FDIC.
State of the Banking Industry
The banking industry has reported generally positive results this
year, amid continued economic uncertainty. Loan growth strengthened,
net interest income grew, and most asset quality measures improved.
Further, the industry remains well-capitalized and highly liquid. \1\
The number of institutions on the FDIC's ``Problem Bank List'' remained
stable in the second quarter at 40, the lowest number in the FDIC's
Quarterly Banking Profile history. Fourteen new banks opened through
October 2022, including the first mutual bank in 50 years.
Additionally, no banks failed during 2021 nor this year.
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\1\ See FDIC Quarterly Banking Profile: Second Quarter 2022
(September 8, 2022) available at https://www.fdic.gov/analysis/
quarterly-banking-profile/.
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At the same time, the banking industry reported a moderate decline
in net income in the first two quarters of this year from 1 year ago,
primarily because of an increase in provision expense at the largest
institutions. The increase in provision expense--the amount set aside
by institutions to protect against future credit losses--reflects the
banking industry's recognition of risks related to persistent economic
uncertainties, and slowing economic growth, as well as the increase in
loan balances. Net income also declined year-over-year at community
banks. Unlike results for the industry as a whole, an increase in
compensation costs led the decline in net income at community banks.
Rising market interest rates and strong loan growth supported an
increase of 26 basis points in the banking industry's net interest
margin (NIM) from the first to the second quarter of this year to 2.80
percent. Most banks reported higher net interest income compared with a
year ago as a result.
However, rising interest rates and longer asset maturities also
resulted in unrealized losses on investment securities held by banks.
As of the second quarter 2022, banks reported $470 billion in
unrealized losses, as the market value of securities fell below the
book value. The FDIC expects this trend to be an ongoing challenge as
interest rates continued to rise in the third quarter, especially if
banks need to sell investments to meet liquidity needs.
Despite several favorable performance metrics, the banking industry
continues to face significant downside risks. These risks include the
effects of inflation, rapidly rising market interest rates, and
continuing geopolitical uncertainty. Taken together, these risks may
reduce profitability, weaken credit quality and capital, and limit loan
growth in coming quarters. Furthermore, higher market interest rates
have led to continued growth in unrealized losses in the banking
industry's securities portfolios. Higher interest rates may also erode
real estate and other asset values as well as hamper borrowers' loan
repayment ability. These will be matters of ongoing supervisory
attention by the FDIC.
Condition of the Deposit Insurance Fund
Extraordinary growth in insured deposits during the first half of
2020 caused the DIF reserve ratio to decline below the statutory
minimum of 1.35 percent as of June 30, 2020. The reserve ratio of the
DIF is the DIF balance as a percent of the banking industry's estimated
insured deposits.
On September 15, 2020, the FDIC adopted a Restoration Plan as
required by law to restore the reserve ratio to the statutory minimum
of 1.35 percent within the statutory 8-year period, ending on September
30, 2028. \2\ The Restoration Plan maintained the assessment rate
schedules in place at the time and required the FDIC to update its
analysis and projections for the DIF balance and reserve ratio at least
semiannually.
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\2\ See Federal Deposit Insurance Corporation Restoration Plan, 85
FR 59306 (published September 21, 2020).
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While the DIF balance increased by about $1.3 billion over the
first half of 2022 to $124.5 billion, continued elevated levels of
insured deposits have caused the reserve ratio to remain low at 1.26
percent as of June 30, 2022, well below the statutory minimum.
While insured deposits have shown signs of possibly normalizing,
the banking industry continued to report strong insured deposit growth
through June 2022, outpacing growth in the DIF. Projections of the
reserve ratio under different scenarios indicated that the reserve
ratio was at risk of not reaching 1.35 percent by the statutory
deadline. Consequently, the FDIC Board amended the Restoration Plan to
incorporate an increase in assessment rate schedules of 2 basis points
for all insured depository institutions, and concurrently approved a
notice of proposed rulemaking to implement this increase. \3\
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\3\ See Federal Deposit Insurance Corporation Amended Restoration
Plan, 87 FR 39518 (published July 1, 2022).
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The increase in assessment rate schedules is intended to improve
the likelihood that the reserve ratio will reach the statutory minimum
of 1.35 percent by the statutory deadline. It will also support growth
in the DIF in progressing toward the FDIC's long-term goal of a 2
percent Designated Reserve Ratio, and will increase the likelihood of
the DIF remaining positive throughout periods of significant losses due
to bank failures, consistent with the FDIC's long-term fund management
plan.
Following careful consideration of the comments received on the
proposal, and based on updated projections and analysis, on October 18,
2022, the FDIC adopted a final rule implementing the increase in
assessment rate schedules of 2 basis points. \4\ Under the final rule,
the new assessment rate schedules will take effect on January 1, 2023.
Assessments will be calculated at the end of the first quarter of 2023
and will be payable by June 30, 2023. Banks will have ample time to
plan for the new assessment rates. The FDIC projects the increase in
assessment rates will have an insignificant effect on institutions'
capital levels and estimates the new rates will reduce income only
slightly by an annual average of 1.2 percent. The FDIC does not expect
the increase to impact lending or credit availability in any meaningful
way.
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\4\ 87 FR 64348 (published October 24, 2022).
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As noted previously, the banking industry's current performance is
strong, but it faces significant downside risks. It is better to take
prudent but modest action earlier in the statutory 8-year period to
reach the minimum reserve ratio of the DIF while the industry is in a
strong position than to delay and potentially have to consider a
procyclical assessment increase. In the event that the industry
experiences a downturn before the FDIC has exited its current
Restoration Plan, the FDIC might have to consider even larger
assessment increases to meet the statutory requirement in a more
compressed timeframe and under less favorable conditions.
Strengthening the Community Reinvestment Act
The Community Reinvestment Act seeks to address one of the most
intractable challenges of our financial markets--access to credit,
investment, and basic banking services for low- and moderate-income
communities and borrowers, both urban and rural.
The provisions of CRA as originally enacted in 1977 were
deceptively simple but groundbreaking. \5\ The key operative provision
of the Act states, ``In connection with its examination of a financial
institution, the appropriate Federal financial supervisory agency shall
\6\ . . . assess the institution's record of meeting the credit needs
of its entire community, including low- and moderate-income
neighborhoods . . . .''
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\5\ Community Reinvestment Act of 1977, Pub. L. No. 95-128, title
VIII, (1977).
\6\ Id. at Sec. 802.
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Since its enactment, CRA has become the foundation of responsible
finance for low- and moderate-income communities in the United States.
While the rule implementing CRA has not undergone a major revision
since 1995, the banking industry has evolved dramatically over that
time. On May 5, the three Federal banking agencies--the Federal Reserve
Board (Federal Reserve), the Office of the Comptroller of the Currency
(OCC), and the FDIC adopted a Notice of Proposed Rulemaking (NPR) in an
effort to adapt CRA to that evolution and to strengthen and enhance its
effectiveness in achieving its core mission. \7\ There is a lot in this
NPR, but in the interest of brevity, I would like to focus on four key
elements of the proposed rule.
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\7\ See Joint Notice of Proposed Rulemaking: Community
Reinvestment Act, 87 FR 33884 (published June 3, 2022), available at
https://www.govinfo.gov/content/pkg/FR-2022-06-03/pdf/2022-10111.pdf.
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First, the NPR would establish new retail lending assessment areas
to allow for CRA evaluation in communities where a bank may be engaging
in significant lending activity but where the bank does not have a
branch. Currently, CRA assessment areas are tied to bank branches. Bank
lending in communities in which the bank does not have a physical
presence is generally not subject to CRA. While bank branches continue
to play a critical role in serving communities, technology has made
possible an increasing portion of bank lending activity unrelated to
the branch network. Some banks have only one branch or no branch at
all, yet engage in large scale lending.
These new retail lending assessment areas are a means of subjecting
that lending activity to a CRA review. They represent a critically
important adaptation of CRA to the changing nature of the banking
business, and they do so in a manner that is neutral with regards to
the business model of the bank. In addition, under the new community
development test in the NPR, a bank could earn community development
credit under the CRA evaluation for activity outside of the traditional
branch-based assessment areas. This provides an incentive for bank
activity in rural communities, Native lands, areas of persistent
poverty, and underserved areas--so-called credit deserts.
Second, the NPR incorporates detailed metrics on bank lending
activity. This provides an improved line of sight into bank lending and
allows for the consideration of higher standards for bank lending
performance under CRA. The objective here is to provide an incentive
for increased bank lending to underserved communities.
Third, the availability of metrics will allow for greater
transparency and certainty for banking institutions in meeting their
CRA responsibilities under the retail lending and the community
development financing tests. This is an objective on which the banking
industry has placed a high value.
Finally, the NPR is tailored to the size and complexity of banking
institutions with different standards for small, intermediate, and
large institutions. For example, the NPR raises the thresholds for
defining both ``Small Bank'' and ``Intermediate Bank.'' This will
maintain or reduce the requirements for hundreds of community banks
with regards to CRA data collection and reporting.
In addition to these four core elements of the NPR, the proposed
rule provides greater transparency on lending to communities of color
utilizing publicly available information. It also provides enhanced
incentives for bank collaboration with MDIs and CDFIs, bank investments
in disaster preparedness and climate resilience in low- and moderate-
income neighborhoods, and bank lending, investment, and services in
rural communities and Native lands.
Taken together this NPR represents a major revision of CRA intended
to strengthen its impact and increase its transparency and
predictability. The three banking agencies received approximately one
thousand unique comments from a wide range of stakeholders, many of
which are quite detailed and thoughtful. \8\ The staffs of the three
agencies are working diligently to review those comments and consider
possible changes to the NPR in response to those comments in crafting a
final rule.
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\8\ Comment submission closed on August 5, 2022. Comments received
on the proposed changes to the Community Reinvestment Act are available
at https://www.regulations.gov/docket/OCC-2022-0002/comments.
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Addressing the Financial Risks Posed by Climate Change
There is broad consensus among financial regulatory bodies, both
domestically and abroad, that the effects of climate change and the
transition to reduced reliance on carbon-emitting sources of energy
present unique and significant economic and financial risks, and
therefore, an emerging risk to the financial system and the safety and
soundness of financial institutions.
The role of the FDIC with respect to climate change is limited to
the financial risks that climate change may pose to the banking system
and the extent to which those risks impact the FDIC's core mission and
responsibilities. The FDIC is not responsible for climate policy. As
such, we will not be involved in determining which firms or business
sectors financial institutions should do business with. These types of
credit allocation decisions are the responsibility of financial
institutions. We want financial institutions to fully consider climate-
related financial risks--as they do all other risks--and continue to
take a risk-based approach in assessing individual credit and
investment decisions.
The financial system has always had severe weather events to
contend with and, thus far, the banking industry has handled these
events well. Agricultural banks know well the effects that drought
conditions can have on farming communities; banks in the west
understand the impacts of wildfires; and coastal banks have long
responded to the annual threat of tropical storms and hurricanes.
However, changing climate conditions are bringing with them
challenging trends and events, including rising sea levels, increases
in the frequency and severity of extreme weather events, and other
natural disasters. \9\ These trends challenge the future resiliency of
the financial system and, in some circumstances, may pose safety and
soundness risks to individual banks. The goal of the FDIC's work on
climate-related financial risk is to ensure that the financial system
continues to remain resilient despite these rising risks.
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\9\ See Intergovernmental Panel on Climate Change (2021; in
press), ``Summary for Policymakers'', in V. Masson-Delmotte, P. Zhai,
A. Pirani, S.L. Connors, C. Pean, S. Berger, N. Caud, Y. Chen, L.
Goldfarb, M.I. Gomis, M. Huang, K. Leitzell, E. Lonnoy, J.B.R.
Matthews, T.K. Maycock, T. Waterfield, O. Yelekci, R. Yu, and B. Zhou,
eds., Climate Change 2021: The Physical Science Basis. Contribution of
Working Group I to the Sixth Assessment Report of the Intergovernmental
Panel on Climate Change (Cambridge, UK: Cambridge University Press).
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In order to understand and address the financial risks that climate
change poses to financial institutions and the financial system, it is
important to foster an open dialogue with our counterparts in the U.S.
and international financial regulatory bodies, and especially with
stakeholders throughout the banking industry. It is for these reasons
that the FDIC established an internal, cross-disciplinary working group
to assess the safety and soundness and financial stability
considerations associated with climate-related financial risk and to
develop an agencywide understanding of climate-related financial risk.
The FDIC is also coordinating with our interagency peers and is
participating on the Financial Stability Oversight Council's (FSOC)
Climate-related Financial Risk Committee. Further, as climate change is
an international problem, the FDIC, along with the Federal Reserve and
the OCC, have joined the Network of Central Banks and Supervisors for
Greening the Financial System (NGFS) to foster collaboration and share
best practices in addressing climate-related financial risks on a
global basis. This complements our existing work with the Basel
Committee's Task Force on Climate-related Financial Risks and other
appropriate international organizations.
While the FDIC remains in the early stages of addressing climate-
related financial risk, regulators need to work with the banking
industry now to support financial institutions as they develop plans to
identify, monitor, and manage the risks posed by climate change. This
should be done in a manner that is flexible enough to allow for change
as knowledge is gained, data are developed, and new methodologies and
tools are explored. Consistent with this, the FDIC issued a request for
comments in April on draft principles that would provide a high-level
framework for the safe and sound management of exposures to climate-
related financial risks for large financial institutions. \10\ This
request for comments is substantively similar to the principles that
were issued by the OCC in December of last year. \11\ Comments received
on the proposed principles are currently under review and
consideration. \12\ The FDIC and OCC are also collaborating with the
Federal Reserve to bring the three agencies into alignment on the
principles.
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\10\ See Statement of Principles for Climate-Related Financial
Risk Management for Large Financial Institutions, 87 FR 19507
(published April 4, 2022).
\11\ OCC Bulletin 2021-62, Risk Management: Principles for
Climate-Related Financial Risk Management for Large Banks; Request for
Feedback (December 16, 2021). https://www.occ.gov/news-issuances/
bulletins/2021/bulletin-2021-62.html.
\12\ Comment submission closed on June 3, 2022. Comments received
are available at https://www.fdic.gov/resources/regulations/federal-
register-publications/2022/2022-statement-principles-climate-related-
financial-risk-management-3064-za32.html.
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I want to stress that the FDIC is still in the beginning stages of
our work on climate-related financial risks, and we will continue to
expand our efforts to address these risks through a thoughtful and
measured approach. We will emphasize risk-based assessments and
collaboration with other supervisors as well as with stakeholders in
the banking industry, and our actions will complement actions that have
been taken domestically and internationally. Importantly, the FDIC will
continue to encourage financial institutions to consider climate-
related financial risks in a manner that allows banks to prudently meet
the financial services needs of their communities.
Reviewing the Bank Merger Process
The Bank Merger Act of 1960 (BMA) established a framework that
requires, in general, approval by the Federal Reserve and the OCC, or
the FDIC, as appropriate, of bank mergers. \13\ FDIC approval is also
required for a bank merger with a noninsured entity. \14\ The statute
generally requires the banking agencies to consider several factors
when reviewing a merger application including whether a proposed merger
would substantially lessen competition or tend to create a monopoly,
the financial and managerial resources and future prospects of the
existing and proposed institutions, the convenience and needs of the
community to be served, and the risk to the stability of the United
States banking or financial system. \15\ The FDIC has adopted a rule
and a policy statement implementing the statutory requirements but
neither yet address the financial stability factor, which was added to
the BMA under the Dodd-Frank Act of 2010. \16\
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\13\ Bank Merger Act, Pub. L. 86-463, 72 Stat. 129 (1960); Bank
Merger Act Amendments of 1966, Pub. L. 89-356, (codified as amended at
12 U.S.C. 1828(c)(2018)), available at https://www.fdic.gov/
regulations/laws/rules/1000-2000.html#1000sec.18c.
\14\ 12 U.S.C. 1828(c)(1) and (2).
\15\ 12 U.S.C. 1828(c)(5).
\16\ 12 CFR part 303, available at https://www.fdic.gov/
regulations/laws/rules/2000-250.html and 63 FR 44762, August 20, 1998,
effective October 1, 1998; amended at 67 FR 48178, July 23, 2002; 67 FR
79278, December 27, 2002; and FDIC Statement of Policy on Bank Merger
Transactions,73 FR 8871, February 15, 2008, available at https://
www.fdic.gov/regulations/laws/rules/5000-1200.html. See also Dodd-Frank
Wall Street Reform and Consumer Protection Act, Pub. L. 111-203,
section 604(f), 124 Stat. 1376, 1602 (2010) (codified at 12 U.S.C.
1828(c)(5)), available at https://www.govinfo.gov/app/details/PLAW-
111publ203.
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Although there has been a significant amount of consolidation in
the banking sector over the last 30 years, facilitated in part by
mergers and acquisitions, there has not been a significant review of
the implementation of the BMA by the agencies in that time.
Additionally, the prospect for continued consolidation among both large
and small banks remains significant. In light of these circumstances, a
review of the regulatory framework implementing the BMA is both timely
and appropriate.
In March, the FDIC Board submitted to the Federal Register a
Request for Information and Comment on Rules, Regulations, Guidance,
and Statements of Policy Regarding Bank Merger Transactions (RFI). \17\
The RFI requested comment on the four statutory factors the FDIC must
consider in reviewing bank merger applications: competition, prudential
risk, the convenience and needs of the communities affected, and
financial stability.
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\17\ Request for Information and Comment on Rules, Regulations,
Guidance, and Statements of Policy Regarding Bank Merger Transactions,
87 FR 18740 (published March 31, 2022).
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The comment period closed on May 31, 2022, with 31 comments
received. \18\ The FDIC is considering updates to its BMA Statement of
Policy in light of the comments received. Moreover, the FDIC is working
collaboratively with the other banking agencies and the Department of
Justice on an interagency review of the bank merger application
process.
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\18\ Comments received are available at https://www.fdic.gov/
resources/regulations/federal-register-publications/2022/2022-rfi-
rules-regulations-statements-of-policy-regarding-bank-merger-
transactions-3064-za31.html.
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Evaluating the Risk of Crypto Assets to the Banking System
The recent growth in the crypto asset industry has corresponded
with an increasing interest on the part of some banks to engage in
crypto asset activities. \19\ Crypto assets bring with them novel and
complex risks that, like the risks associated with the innovative
products in the early 2000s, are difficult to fully assess, especially
with the market's eagerness to move quickly into these products.
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\19\ ``The Impact of COVID-19 on Cryptocurrency Markets: A Network
Analysis Based on Mutual Information'', available at https://
journals.plos.org/plosone/article?id=10.1371/journal.pone.0259869.
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The recently published digital asset report by the FSOC describes
crypto assets as private sector digital assets that depend primarily on
the use of cryptography and distributed ledger or similar technologies.
\20\ Crypto assets such as Bitcoin are not backed by physical assets,
but rather they purport to establish value by their scarcity or
utility. As such, the value of these crypto assets at any point is
driven in large part by market sentiment. This has resulted in a highly
volatile marketplace.
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\20\ Financial Stability Oversight Council Report on Digital Asset
Financial Stability Risks and Regulation 2022, available at https://
home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf.
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While the FDIC had been generally aware of the rising interest in
crypto asset related activities through its normal supervision process,
as this interest has accelerated, it became clear that more information
was needed to better understand the risks associated with these
activities as well as which banks have been engaging in, or are
interested in engaging in, crypto asset related activities.
To address that gap, the FDIC issued a Financial Institution Letter
(FIL) in April of this year asking the banks the FDIC supervises to
notify the FDIC if they are engaging in, or planning to engage in,
crypto asset related activities. \21\ If so, we asked banks to provide
us enough details to allow us to work with them to assess the safety
and soundness, consumer protection, and BSA/AML risks associated with
the activities and the appropriateness of their proposed governance and
risk management processes associated with the activity. The other
Federal banking agencies have issued similar requests to their
supervised institutions. \22\
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\21\ Federal Deposit Insurance Corporation, Financial Institution
Letter 16-2022: Notification of Engaging in Crypto-Related Activities,
FDIC (April 7, 2022) available at https://www.fdic.gov/news/financial-
institution-letters/2022/fil22016.html.
\22\ See OCC, Interpretive Letter 1179 (November 18, 2021);
Federal Reserve SR 22-6 / CA 22-6: Engagement in Crypto-Asset-Related
Activities by Federal Reserve-Supervised Banking Organizations (August
16, 2022).
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Once the FDIC develops a better understanding of activities planned
or already active, we will provide the institution with case-specific
supervisory feedback. \23\ As the FDIC and the other Federal banking
agencies develop a better collective understanding of the risks
associated with these activities, we expect to provide broader industry
guidance on an interagency basis.
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\23\ Notifications under the FIL and knowledge of engagement or
potential engagement that we learn through the supervisory process is
confidential supervisory information, but we are aware of approximately
80 FDIC-supervised institutions that are engaging in or are interested
in engaging in crypto asset activities, and approximately two dozen
that appear to be actively engaged in activities described in the FIL.
The FDIC is providing various types of supervisory feedback, depending
upon the activity involved, the status of the activity (active or
planned), and the institution's risk management framework, among other
things.
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These risks of crypto assets are very real. After the bankruptcies
of crypto asset platforms that have occurred this year, there have been
numerous news stories of consumers who have been unable to access their
funds or savings. \24\
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\24\ See, https://www.washingtonpost.com/business/2022/07/06/
voyager-bankruptcy-three-arrows/, https://www.washingtonpost.com/
business/2022/07/13/crypto-bankruptcy-celsius-depositors/.
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The FDIC will continue to work with our supervised banks to ensure
that any crypto-asset-related activities that they engage in are
permissible banking activities that can be conducted in a safe and
sound manner and in compliance with existing laws and regulations. If
so, we will work with banks to ensure that they have put in place
appropriate measures and controls to identify and manage risks and can
ensure compliance with all relevant laws, including those related to
anti-money laundering and consumer protection and we will do this in
collaboration with our fellow banking agencies.
In addition, crypto firms have used false and misleading statements
concerning the availability of Federal deposit insurance for their
crypto products in violation of the law. In response, the FDIC issued
letters demanding that the firms cease and desist from using misleading
statements with regard to deposit insurance. \25\ The FDIC also issued
an Advisory in July of this year reminding insured banks of the risks
that could arise related to misrepresentations of deposit insurance by
crypto-asset companies. \26\
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\25\ See ``FDIC and Federal Reserve Board Issue Letter Demanding
Voyager Digital Cease and Desist From Making False or Misleading
Representations of Deposit Insurance Status'', July 28, 2022, available
at https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20220728a.htm and ``FDIC Issues Cease and Desist Letters to Five
Companies for Making Crypto-Related False or Misleading Representations
About Deposit Insurance'', August 19, 2022, available at https://
www.fdic.gov/news/press-releases/2022/pr22060.html.
\26\ See Advisory to FDIC-Insured Institutions Regarding Deposit
Insurance and Dealings with Crypto Companies, FIL-35-2022 (July 29,
2022), available at https://www.fdic.gov/news/financial-institution-
letters/2022/fil22035.html.
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One closely related issue that has been a focus of policymakers
both at the agencies and the Congress is stablecoins. As investors
traded in and out of various crypto assets, a desire arose for a crypto
asset with a stable value that would allow investors to transfer value
from one crypto asset into another without the need for converting into
and out of fiat currencies. This gave rise to the development of
various so-called stablecoins.
Unlike Bitcoin and similar crypto assets, most stablecoins are
represented as backed by a pool of assets or utilize other methods to
help maintain a stable value. Currently, the most prominent stablecoins
are purported to be backed by financial assets such as currencies, U.S.
Treasury securities, or commercial paper.
Thus far stablecoins have predominantly been used as a vehicle to
buy and sell crypto assets for investment and trading purposes--there
has been no demonstration so far of their value in terms of the broader
payments system. However, the distributed ledger technology upon which
they are built may prove to have meaningful applications and public
utility within the payments system. This raises a host of important
policy questions that will be the subject of careful attention by all
of the Federal financial regulators.
Finalizing the Basel III Capital Rules
After the global financial crisis of 2008, the FDIC, OCC and
Federal Reserve sought to strengthen the banking system through changes
to the regulatory capital framework. This work has been based largely
on two sets of standards issued by the Basel Committee on Banking
Supervision (BCBS), known as Basel III. \27\ The agencies' initial
revisions in 2013 included an increase in the overall quality and
quantity of capital. The agencies are now turning to the second set of
BCBS standards to finalize the implementation of Basel III.
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\27\ See Basel III, International Framework for Banks, available
at https://www.bis.org/bcbs/basel3.htm.
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On September 9, the three agencies reaffirmed their commitment to
implementing enhanced regulatory capital requirements that align with
the final set of Basel III standards issued by the BCBS. \28\ These
standards, issued by the BCBS in 2017, include ways to strengthen
capital requirements for market risk exposures, improve the capital
requirement for financial derivatives, and simplify the measurement of
operational risk for regulatory capital purposes.
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\28\ See FDIC Press Release, PR-65-2022, Agencies Reaffirm
Commitment to Basel III Standards (September 9, 2022) available at
https://www.fdic.gov/news/press-releases/2022/pr22065.html.
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The agencies plan to seek public input on the new capital standards
for large banking organizations and are currently developing a joint
proposed rule for issuance as soon as possible. Importantly, community
banks, which are subject to different capital requirements, would not
be impacted by the proposal, given their limited overall size and
trading activities.
Supporting Minority Depository Institutions and Community Development
Financial Institutions
The preservation and promotion of MDIs remains a long-standing
priority for the FDIC. \29\ The FDIC's research study, Minority
Depository Institutions: Structure, Performance, and Social Impact,
\30\ found that FDIC-insured MDIs have played a vital role in providing
mortgage credit, small business lending, and other banking services to
minority and low- and moderate-income communities. Similarly, banks
designated as CDFIs by the Treasury's CDFI Fund provide financial
services in low-income communities and to individuals and businesses
that have traditionally lacked access to credit.
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\29\ See Section 308 of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989, Pub. L. 101-73, title III, 308.
Aug 9, 1989, as amended by Pub. L. 11-203, title III, 367(4), July 21,
201, 124 Stat. 1556, codified at 12 U.S.C. 1463 note.
\30\ See FDIC, Minority Depository Institutions: Structure,
Performance, and Social Impact, available at https://www.fdic.gov/
regulations/resources/minority/2019-mdi-study/full.pdf.
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MDIs and CDFIs are anchor institutions in their communities and
play a key role in building a more inclusive financial system. The FDIC
supervises approximately two-thirds of the approximately 280 FDIC-
insured MDIs and CDFIs. In addition to its supervisory activities, the
FDIC's Office of Minority and Community Development Banking supports
the agency's ongoing strategic and direct engagement with MDIs and
CDFIs.
In support of its statutory requirement to encourage the creation
of new MDIs, this past May the FDIC issued a FIL that outlines the
process by which FDIC-supervised institutions or applicants for deposit
insurance can make a request to be designated as an MDI. \31\
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\31\ FDIC Financial Institution Letter, FIL-24-2022, Minority
Depository Institution (MDI) Designation (May 19, 2022) available at
https://www.fdic.gov/news/financial-institution-letters/2022/
fil22024.html.
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In 2021, the FDIC designated five new institutions as MDIs, and, to
date in 2022, one new FDIC-supervised de novo MDI opened for business.
Three other existing institutions have been designated as MDIs, and the
FDIC approved a conditional application for deposit insurance for a de
novo MDI that is now raising capital.
Since 2020, significant new sources of private and public funding
have become available to support FDIC-insured MDIs and CDFIs, known
collectively as mission-driven banks. The FDIC issued a publication,
Investing in the Future of Mission-Driven Banks: A Guide To
Facilitating New Partnerships, \32\ to connect those who wished to
support and partner with these institutions. Numerous large banks,
technology companies, and others have invested hundreds of millions of
dollars into mission-driven banks over the past 2 years. The FDIC also
initiated the creation of the Mission-Driven Bank Fund, a private
investment fund that will invest in FDIC-insured MDIs and CDFIs. \33\
We understand that the anchor investors, Truist Financial Corporation
and Microsoft, are poised to select the fund manager in the coming
weeks.
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\32\ See FDIC, ``Investing in the Future of Mission-Driven Banks:
A Guide To Facilitating New Partnerships'', available at https://
www.fdic.gov/regulations/resources/minority/mission-driven/guide.html.
\33\ See FDIC, Mission-Driven Bank Fund webpage, available at
https://www.fdic.gov/regulations/resources/minority/mission-driven/
index.html.
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The Federal Government has provided new funding to these
institutions through nearly $8.3 billion in the U.S. Treasury's
Emergency Capital Investment Program (ECIP) and up to $3 billion in
CDFI Fund programs, including up to $1.2 billion set aside for minority
lending institutions. The banking agencies issued new regulations that
revised capital rules to provide that Treasury's investments under the
program qualify as regulatory capital of insured MDIs and CDFIs and
holding companies. \34\ The FDIC developed a Capital Estimator Tool and
a Regulatory Capital Guide to enable mission-driven banks to
approximate the impact of additional capital on various capital ratios.
At the request of mission-driven banks, the FDIC developed a technical
assistance program to help ECIP recipients understand supervisory
expectations for the significant new growth that this capital will
support over the coming years.
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\34\ See FDIC, ``Federal Bank Regulators Issue Rule Supporting
Treasury's Investments in Minority Depository Institutions and
Community Development Financial Institutions'', available at https://
www.fdic.gov/news/press-releases/2021/pr21018.html.
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The FDIC also benefits from a number of MDI and CDFI bank
executives serving on its Advisory Committee on Community Banking
(CBAC), the MDI Subcommittee of the CBAC, and the Advisory Committee on
Economic Inclusion. These bankers bring the voices of mission-driven
banks to the FDIC board and senior executives, and they have provided
input on important policy initiatives.
Diversity, Equity, Inclusion, and Accessibility Priorities of the FDIC
Fostering diversity, equity, inclusion, and accessibility (DEIA)
continues to be a top priority for the FDIC. \35\ Our goal is to have a
workforce that is talented, diverse, and committed to fostering a safe,
fair, and inclusive workplace and banking system. The agency is
focusing on three strategic areas in 2022: (1) implementing strategic
initiatives focused on the workplace; (2) Hispanic recruitment and
retention, an area identified as needing special attention by an
analysis of our employment data; and (3) financial institution
diversity.
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\35\ The agency's corporate strategy is outlined in the FDIC
Diversity, Equity and Inclusion; 2021-2023 Strategic Plan, available at
https://www.fdic.gov/about/diversity/pdf/dei2021.pdf.
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Workplace Initiatives
A diverse and inclusive workforce, reflecting a variety of
experiences and perspectives, is central to accomplishing the mission
of the FDIC. Promoting DEIA within the FDIC workforce and the broader
financial industry is a key priority for 2022, and was established as
one of the seven FDIC Performance Goals. \36\ Recruitment and hiring
diversity initiatives, support for first-generation professionals and
career development programs for the next generation of leaders are
among several other employee initiatives.
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\36\ See FDIC 2022 Annual Performance Plan, p. 92.
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The FDIC has worked to engage employees at all levels across the
agency in strategic initiatives. The Diversity and Inclusion Executive
Advisory Council (EAC), comprised of the FDIC's most senior leaders,
meets monthly to discuss DEIA matters. Regional Directors discuss DEIA
strategies with regional and field office employees. Each month a
representative from a diverse identity employee resource group meets
with the EAC to share perspectives. In addition, I meet regularly with
employee resource groups.
Over recent years, the FDIC has made progress toward improving the
diversity of its workforce to better reflect the demographics of the
civilian labor force (CLF). The percentage of women hired into entry-
level examiner positions, the agency's largest occupational group,
increased to 41 percent. In 2021, minority representation at the
executive level increased to 23 percent and minority representation
across all management levels increased to 24 percent. Persons with
disabilities increased to 13 percent of the workforce, above the 12
percent Federal benchmark. Veterans increased to 9 percent of the
workforce with veterans representing almost 13 percent of new hires in
fiscal year 2021.
One area where the FDIC is placing increased emphasis toward
improving diversity is with individuals who self-identify as Hispanic.
At less than 5 percent, Hispanic representation is well below the CLF
percentage of almost 10 percent based on 2010 census data. By contrast,
the agency's workforce who identify as American Indian/Alaska Native,
Asian, Black/African American, or Native Hawaiian/Pacific Islander
exceeds the CLF.
In an effort to improve the agency's representation with this part
of the workforce, the FDIC established an executive level task force to
address challenges for Hispanic recruitment and retention. While the
agency is focusing efforts to reach individuals that identify as
Hispanic, the FDIC will continue recruiting strategically to reach all
available talent in the labor market, providing upward mobility
opportunities to current employees, and supporting employee engagement
at all levels.
Financial Institution Diversity
Since 2016, the FDIC's Financial Institution Diversity Self-
Assessment (Diversity Self-Assessment) program has supported the
efforts of supervised institutions to create and grow their diversity
programs, which allow them to build strong relationships with their
clients and communities, maximize workforce representation, and develop
and implement inclusion efforts. The FDIC developed the diversity self-
assessment framework based on the Joint Standards for Assessing our
Regulated Entities' Diversity Policies and Practices that were
established with five other Federal agencies. \37\ To increase
awareness of the agency's Financial Institution Diversity Program, in
2021 the FDIC expanded its outreach with banking organizations and
individual banks and launched a social media campaign. For the 2021
reporting period, 172 or 22 percent of 774 FDIC supervised banks with
100 or more employees submitted their Diversity Self-Assessments. This
represented a 16 percent increase over 2020 submissions.
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\37\ See ``Final Interagency Policy Statement Establishing Joint
Standards for Assessing the Diversity Policies and Practices of
Entities Regulated by the Agencies'', 80 FR 33016 (June 10, 2015).
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Cybersecurity
Threats from malicious cyber actors continue to be a significant
and evolving risk for banks and their service providers. Evaluating
cybersecurity practices continues to be a high-priority focus of the
FDIC's supervision program. In its 2022 Report on Cybersecurity and
Resilience, \38\ the FDIC highlighted several components of our
cybersecurity program including our relevant safety and soundness
standards, periodic guidance, alerts and advisories, technical
assistance, and other outreach efforts. The report also discussed the
agency's efforts to enhance the cybersecurity education of our
examination force and the creation of examiner work programs related to
particular threats. Our report also highlights interagency work related
to cyberthreats.
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\38\ See FDIC, ``2022 Report on Cybersecurity and Resilience'',
available at https://www.fdic.gov/regulations/resources/cybersecurity/
2022-cybersecurity-financial-system-resilience-report.pdf.
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The FDIC recently examined the ransomware attacks against FDIC-
supervised institutions and their service providers to learn about the
techniques that were most helpful in defending against those attacks.
Our examination of ransomware attacks suggests significant
vulnerabilities exist. While we did not discover new categories of
controls that need to be communicated to financial institutions, our
examinations did reveal that those institutions that dedicate resources
to implement appropriate controls can effectively defend against these
attacks.
The FDIC is now piloting technical examination aids that will help
our examiners focus on the controls we found to be most effective in
defending against these attacks. Examples of effective controls include
high quality multifactor authentication to control access to systems
and network segmentation to limit the ability of a malicious actor to
move laterally in a network. Where we find these controls to be
missing, our feedback and a bank or service provider's response could
make a big difference in the company's cybersecurity effectiveness.
Of course, ransomware is one threat among many. We continue to
highlight the value of banks and service providers staying aware of the
range of threats and vulnerabilities by using the services of entities
like the Financial Services Information Sharing and Analysis Center,
the U.S. Department of the Treasury, the Federal Bureau of
Investigation, and the Cybersecurity and Infrastructure Security
Agency. The FDIC will also periodically amplify messages from the
intelligence, law enforcement, and other security agencies regarding
threats and vulnerabilities that appear particularly critical and
actionable.
The FDIC's Pandemic Response and Current Operations of the FDIC
When the FDIC instituted mandatory telework in response to the
pandemic on March 13, 2020, the agency could not have imagined that it
would be 2\1/2\ years before we returned. The FDIC was fortunate,
however, in that the foundations for conducting offsite bank
examination operations were laid in 2016. Based on work begun in 2017,
the FDIC began testing offsite review processes in early 2018. Staff
continued to test new tools, and by year-end 2019, we had increased the
percentage of safety and soundness examination work completed offsite
to 47 percent, an increase from the 2016 level of 32 percent.
The FDIC operated under mandatory telework until this past April,
when we moved to the second phase of our Return to the Office Plan, or
maximum telework. During this period, staff were permitted, but not
required, to return to the office. On September 6, 2022, the FDIC was
able to move to Phase 3 of its Return to the Office Plan. This hybrid
work environment expanded flexibilities to all FDIC staff that were
offered to our examination staff prepandemic, allowing staff to work
from home when they did not need to be at a financial institution or in
the office.
The FDIC conducted a limited number of in-person examination
activities over the past 2\1/2\ years. In the current Phase 3 of
operations, we have returned to having an in-person component for each
safety and soundness and consumer compliance examination. In this
hybrid work environment not every examination team member may work
onsite at the bank. Some may work from the field office or from home.
In designing this new approach, the FDIC drew from lessons learned from
our work during mandatory and maximum telework as well as through
internal reviews and consideration of responses to a request for
information from the banking industry.
Conclusion
In conclusion, the banking industry enters this period of
significant economic uncertainty and downside risk in a relatively
strong position. It is well-capitalized, has ample liquidity, good
credit quality, and is continuing to experience strong loan growth. In
its supervisory work, the FDIC will be focused on asset exposures of
the banks that could be vulnerabilities in an economic downturn, such
as commercial real estate, and interest rate risk in a rising interest
rate environment, including unrealized losses on investment securities
held by banks.
The FDIC will also be focused on key policy initiatives on CRA, the
financial risk of climate change, a review of the bank merger process,
crypto asset related financial risks, the Basel III capital rules, and
maintaining a strong DIF in compliance with statutory requirements.
In addition, the FDIC will continue its work on other key
priorities including supporting MDIs and CDFIs; fostering diversity,
equity, inclusion, and accessibility in its workforce; addressing
cybersecurity risk at FDIC-supervised institutions; and managing the
FDIC's return to the office.
______
PREPARED STATEMENT OF MICHAEL J. HSU
Acting Comptroller, Office of the Comptroller of the Currency
November 15, 2022
Introduction
Chairman Brown, Ranking Member Toomey, and Members of the
Committee,* I am pleased to testify today before the Senate Committee
on Banking, Housing, and Urban Affairs. I will provide an update on the
activities underway at the Office of the Comptroller of the Currency
(OCC) as we seek to ensure that national banks and Federal savings
associations operate in a safe, sound, and fair manner.
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* Statement Required by 12 U.S.C. 250: The views expressed herein
are those of the Office of the Comptroller of the Currency and do not
necessarily represent the views of the President.
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The OCC charters, supervises, and regulates nearly 1,100 national
banks, Federal savings associations and foreign branches (collectively,
``banks'') that range in size from very small community banks to the
largest, most globally active banks operating in the United States. The
vast majority of the institutions we supervise (over 780) have less
than $1 billion in assets, while 54 have greater than $10 billion in
assets. Together, OCC-supervised financial institutions hold $15.2
trillion in assets-almost 65 percent of all the assets held in
commercial U.S. banks.
As Acting Comptroller, I have a responsibility to address issues
facing the OCC and the Federal banking system. Our mission is to ensure
that national banks and Federal savings associations operate in a safe
and sound manner, provide fair access to financial services, treat
customers fairly, and comply with applicable laws and regulations. To
meet this mission, last year I identified four priorities for the
agency: (1) guarding against complacency by banks, (2) reducing
inequality in banking, (3) adapting to digitalization, and (4) managing
climate-related financial risks.
I am pleased with the progress the OCC has made to advance these
priorities and will provide an update on each in my testimony below. I
will also discuss our efforts to promote the long-term health and
viability of the community banks and minority depository institutions
(MDIs) that the agency supervises.
(1) Guarding Against Complacency by Banks
The Federal banking system remains healthy, despite challenges from
the pandemic, current geopolitical events, and rising interest rates.
Bank financial conditions and capital levels have been sound for
several years and bank liquidity levels have been strong, supporting
increases in loan demand, especially in consumer lending. The uncertain
economic outlook, however, highlights the importance of not becoming
complacent. Vigilance, especially with regards to risk management, is
required. For instance, elevated interest rates are leading to
unrealized losses on banks' investment portfolios. Although this
development does not impact regulatory capital levels for most banks,
it warrants careful monitoring. In addition, while credit risk in
aggregate remains modest, we are starting to hear about deteriorating
credit performance for certain segments. In this environment, proactive
risk management, including stress testing at large banks and
preparedness for a slowing economy, can help ensure that banks remain
strong and able to meet the credit needs of their customers through a
range of scenarios.
The OCC also remains mindful of the risks associated with IT
operations and cybersecurity, and we have encouraged banks to stay
abreast of new technology and threats. Banks need to make appropriate
investments to guard against these risks notwithstanding the temptation
to postpone updating legacy IT systems or to defer maintenance of
existing technology.
Finally, and as I have said previously, we should update the
framework for analyzing mergers under the Bank Merger Act. \1\ Bank
mergers should serve communities, support financial stability and
industry resilience, enhance competition, and enable diversity and
dynamism within the banking industry. The OCC considers each merger
application on its merits and determines whether the proposed
transactions meet the statutory and regulatory criteria. At the same
time, we need to ensure that these criteria are applied in a manner
that does not lead to the formation of a new class of too-big-to-fail
banks.
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\1\ See: Acting Comptroller of the Currency Michael J. Hsu Remarks
at Brookings on Bank Mergers and Industry Resiliency, May 9, 2022
(occ.gov).
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I was pleased to support the recent Advance Notice of Proposed
Rulemaking (ANPR) issued by the Federal Deposit Insurance Corporation
(FDIC) and the Board of Governors of the Federal Reserve System (FRB)
on resolution-related resource requirements for large banking
organizations. The joint ANPR represents a concrete step in addressing
large banks' financial stability and competition issues. Reevaluating
the resolvability risks and requirements for these firms will help to
mitigate the risks they may pose to the financial system and the
communities they serve.
The OCC is also working closely with our Federal banking agency
peers and the Department of Justice (DOJ) to review bank merger
frameworks consistent with the President's Executive order on promoting
competition. The OCC recently announced a public symposium on bank
mergers to take place next February that will invite discussion among
thought leaders, academics, community groups, and the banking industry
on factors such as competition, financial stability, and community
impact.
Banks that remain vigilant and guard against complacency in these
and other areas will promote a safe, sound, and fair banking system
that continues to support the individuals, communities, and businesses
they serve.
(2) Reducing Inequality in Banking
Persistent economic inequality can erode trust in the banking
system. Americans who lack access to traditional financial products and
services or feel exploited by banks may conclude that the system is
working against them, rather than for them. The OCC is focused on
several initiatives to address this problem.
The OCC, FRB, and FDIC are working together to modernize and
strengthen the Community Reinvestment Act (CRA). The recent interagency
notice of proposed rulemaking builds on the history of the CRA as
critical to motivating bank lending and investment to help meet the
credit needs of low- and moderate-income individuals, families, and
communities. The proposal also aims to adjust to changes in the banking
industry, including internet and mobile banking. The agencies received
hundreds of detailed and thoughtful comments on the NPR, including from
Members of this Committee, and we are working together to quickly and
thoughtfully consider the suggestions.
The OCC continues to support the removal of structural barriers to
financial inclusion through Project REACh, or the Roundtable for
Economic Access and Change. Through Project REACh, the OCC convenes
leaders from banking, business, technology, and civil rights
organizations to reduce specific barriers that prevent full, equal, and
fair participation in the Nation's economy by all consumers. Project
REACh's work is divided into four national workstreams addressing (1)
affordable homeownership, (2) inclusion for credit invisibles, (3)
revitalization of minority depository institutions, and (4) access to
capital for small and minority-owned businesses. Significant progress
has been made and in July we celebrated the program's second
anniversary with a national symposium and discussions that provided
progress reports regarding each workstream. Recognizing the local
nature of barriers to inclusion, several REACh initiatives have been
launched to focus efforts on individual communities, including Los
Angeles, Dallas, Washington, DC, Detroit, and Milwaukee.
The OCC also is pleased to be a member of the Property Appraisal
and Valuation Equity (PAVE) task force sponsored by the Department of
Housing and Urban Development (HUD) to address discrimination in
appraisals. The OCC supports the actions recommended by the Task Force
to ensure greater Federal oversight and effective monitoring for
discrimination in residential property appraisals and technology-based
valuation. We are enhancing our supervisory methods for identifying
discrimination in appraisals, taking steps to ensure that consumers
know of their rights regarding appraisals, and supporting research that
may lead to new ways to address the undervaluation of housing in
communities of color caused by decades of discrimination.
This year, the OCC began efforts to focus on measuring and
improving the financial health of consumers. This outcomes-based
approach should help in the evaluation of consumer banking products and
services, and in addressing inequality and barriers to financial
inclusion. In April, the OCC launched a video series entitled
``Financial Health: Vital Signs'', which includes interviews and panel
discussions with leading voices to raise awareness of opportunities for
the industry and other stakeholders to take action to increase support
for consumer financial health.
In addressing inequality, it is important to recognize that it is
expensive to be poor. Overdrafts can be part of that expense. I have
been encouraging banks to improve their overdraft programs with their
customers' financial health in mind. \2\ As noted in a June 21, 2022,
PEW Research article, the largest U.S. banks have made changes to their
overdraft policies that could save consumers more than $4 billion
annually. \3\ The savings are coming from banks lowering penalty fees
for overdrafts, reducing the daily maximum number of overdraft fees
that are charged, adding a grace period or buffer amount before fees
kick in, or eliminating nonsufficient funds fees or overdraft transfer
fees. Changes at the largest national banks could save consumers
billions of dollars annually. \4\ The OCC has observed significant
decreases in overdraft fee revenue in 2022 at the large banks we
supervise which should have outsized benefits for Black and Hispanic
customers who, as the June PEW article notes, are more likely to incur
overdrafts. I am optimistic that the positive changes made by these
large banks are inspiring more banks to make similar pro-consumer
changes to their overdraft programs. For instance, community banks with
outsized revenue from overdrafts have also begun to reform their
overdraft programs in ways that are pro-consumer and reduce each bank's
reliance on such fees.
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\2\ See: ``Don't Be the Last Banker To Update Your Overdraft
Program'', American Banker, March 28, 2022.
\3\ See: ``Large Banks Improve Overdraft Policies and Cut Fees'',
The Pew Charitable Trusts (pewtrusts.org).
\4\ ``America's Largest Banks Make Major Overdraft Changes That
Will Help Consumers'', The Pew Charitable Trusts (pewtrusts.org).
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Additionally, the OCC continues to strengthen its supervision
processes and enhance its resources devoted to compliance with fair
lending laws. For example, the OCC updated its annual process for
screening bank retail lending activities to provide a more targeted
fair lending examination strategy and to better deploy resources to
identify weaknesses or wrongdoing. If the OCC's fair lending
examinations find evidence of a potential pattern or practice of
discrimination, the OCC makes referrals to the DOJ and/or HUD, as
required by law. In October 2021, the OCC reaffirmed its obligation to
refer potential fair lending violations to the DOJ and share our
extensive examiner, economist, and legal findings to ensure a unified
and unmitigated focus on the supervision and enforcement of fair
lending laws. \5\ It is not acceptable that redlining and other forms
of lending discrimination continue in the year 2022, and the OCC will
not hesitate to take enforcement action if necessary.
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\5\ Remarks by Acting Comptroller Michael J. Hsu at the Department
of Justice, Combatting Redlining Initiative Announcement (occ.gov),
Oct. 22, 2021.
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Within the banking industry specifically, there is opportunity to
improve upon diversity and inclusion at every level--from the board
rooms to leadership teams to employees. Diversity of background and
thought will make these institutions stronger, fairer, and more
representative of their communities. Data would help banks, regulators,
and the public recognize improvements and benefits. Currently, banks
may voluntarily report diversity data to the Federal banking regulators
although less than 20 percent of banks choose to do so. Increasing
participation in this reporting would provide greater visibility into
the diversity of the banking industry and identify where banks can make
better progress.
The OCC is also doing its part to improve our own diversity and
inclusion. Over the past 10 years, the OCC's total minority workforce
has become more reflective of the country as a whole, and manager and
senior-level manager positions held by minorities and women also have
increased. \6\ While this trend is positive it is clear that more needs
to be done.
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\6\ The OCC's minority population has increased from 30 to 36
percent. Manager positions held by minority and female populations
increased from 21 to 28 percent and 37 to 39 percent respectively.
Senior level manager positions held by minority and female employees
increased from 20 to 25 percent and 27 to 30 percent respectively. The
Executive Committee of the agency is now 50 percent female and 50
percent non-White.
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Additionally, the OCC has nine employee network groups, \7\
administered by our Office of Minority and Women Inclusion, to support
diversity and inclusion throughout the agency by sponsoring programs to
help attract, develop, and retain the best talent regardless of race,
national origin, gender, physical abilities, or age. These groups help
to attract and retain employees from diverse backgrounds and to create
an inclusive work environment that promotes a sense of belonging. In
addition, in furtherance of our support of military members and their
families, the agency is now a partner with the Department of Defense
Military Spouse Employment Partnership (MSEP) which is an initiative
around targeted recruitment and employment.
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\7\ These employee network groups are the Coalition of African-
American Regulatory Employees (CARE); Generational Crossroads; HOLA;
Network of Asian Pacific Americans (NAPA); Native American Tribes &
Indigenous Voices (NATIVe) PRIDE; The Women's Network (TWN); Veterans
Employee Network (VEN); and the Differently Abled Workforce Network
(DAWN).
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For the fourth consecutive summer, the OCC hosted its High School
Scholars Internship Program (HSSIP), a 6-week paid internship for
minority students from public and charter high schools in the District
of Columbia. This program provides an opportunity for students to
explore a variety of career paths at the OCC, gain an understanding of
the financial services industry, and engage in enrichment activities on
financial literacy and leadership fundamentals. Since its inception,
the program has expanded beyond the OCC and now includes interns at the
Federal Housing Finance Agency, the Securities and Exchange Commission,
and the National Credit Union Administration. In addition to our HSSIP
program, the OCC has provided minority college students with paid
internship opportunities for more than a decade through its National
Diversity Internship Program.
(3) Adapting to Digitalization.
Like many industries, the business of banking is becoming
increasingly digitalized. This is occurring as technology firms expand
into financial services and, to a lesser degree, via developments with
cryptocurrencies. While cryptocurrency matters have received the most
visibility over the past year, especially recently, I believe that
financial technology generally, and fintech and big technology
companies specifically, will warrant much more of our attention going
forward.
Increasingly, retail banking is being conducted online and through
mobile phones. Similar to other industries, financial services that
were integrated and contained within the banking industry are being
compartmentalized and offered by a greater number of entities,
including technology firms. Digitalization has put a premium on online
and mobile engagement, customer acquisition, customization, big data,
fraud detection, artificial intelligence, machine learning, and cloud
management. As a result, bank-fintech partnerships have grown
exponentially and become more complicated, driving changes to banks'
risk profiles.
The OCC has adjusted its bank information technology (BIT)
examinations in response to these technological innovations. Today,
these examinations include assessments of ransomware, artificial
intelligence, cloud computing, and distributed ledger technology. In
addition, the OCC is focused on ensuring banks have an effective risk
management framework in place for fintech partnerships generally and,
more specifically, digitalization. Currently, a majority of our
supervisory concerns relate to fundamental elements of risk management,
e.g., board oversight, governance, and internal controls. Common issues
involve insufficient information security controls, change management
issues, particularly with emerging products and services, and IT
operational resilience.
Our recently released 5-year Strategic Plan \8\ also acknowledges
the increase in digitalization and the need to be agile and credible in
addressing them. We are building on the excellent work of staff over
the last 5 years in the fintech/crypto space with regards to policy and
service providers and related to IT and operational resilience
supervision. We are also working closely with our interagency peers and
engaged in ongoing dialogue to help ensure that we have a shared
understanding of how the financial system is evolving and to minimize
opportunities for regulatory arbitrage and races to the bottom.
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\8\ See: ``OCC Releases Strategic Plan for Fiscal Years 2023-
2027'', OCC.
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Much more work remains. My sense is that we are still in the early
stages of a significant shift in how banking services will be provided
in the future. Last month, I announced the creation of the Office of
Financial Technology, which will be established in 2023. This new
office will help ensure the OCC continues to be a leader in developing
expertise in financial technology and the financial technology
landscape. It will expand upon the significant work and considerable
successes of the OCC's Office of Innovation, which was established in
2016 to coordinate the agency's efforts around responsible innovation.
By expanding our aperture, engaging more substantively with nonbank
technology firms, and mapping out bank-fintech relationships and risks,
we can help ensure that banking remains trusted and safe, sound, and
fair as the system evolves.
In addition, the OCC has adopted a ``careful and cautious''
approach to crypto in the Federal banking system. This is reflected in
Interpretive Letter 1179, \9\ which establishes guardrails to clarify
that the institutions we supervise should not engage in certain crypto
activities unless they demonstrate that the activities can be performed
in a safe, sound, and fair manner. This approach has proven to be
prudent following the Terra stablecoin collapse in May and more
recently with the bankruptcy of FTX. Despite contagion across
cryptocurrencies and several crypto platforms, the federally regulated
banking system has, for the most part, been largely unaffected.
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\9\ See: Interpretive Letter 1179 (occ.gov).
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(4) Managing Climate-Related Risk to the Federal Banking System
The OCC's focus on climate-related financial risk is firmly rooted
in our mandate to ensure that national banks operate in a safe and
sound manner. It is not our role to tell bankers what customers or
legal businesses they may or may not have as customers. We do not pick
winners or losers. Rather, we are committed to staying in our safety
and soundness lane, which means focusing on banks' risk management of
climate-related financial risks, not on setting industrial policy.
Climate-related financial risks pose novel challenges to
traditional risk management. We have taken several steps to build our
expertise and capacity to meet those challenges. Shortly after my
appointment, the OCC joined the Network for the Greening of the
Financial System and established a Climate Risk Officer position at the
agency to focus on these issues.
In December, we issued for comment Principles for Climate-Related
Financial Risk Management for Large Banks. The draft principles focus
on the climate-related risk management capabilities of large banks,
i.e., those with at least $100 billion in consolidated assets. Our
focus on large banks is intentional, as that is where the risks are
most complex and material. We are continuing to consider the comments
and working with our interagency colleagues to determine the next steps
in this area.
Community banks have expressed concern about the scope of our
climate risk-related efforts. I have made a concerted effort to meet
with community bankers and have traveled across the country to listen
to them and hear from them directly about their communities and
experiences handling acute weather events. I believe that earning their
trust on this issue is vitally important. As such, I am committed to
continued dialogue and constructive engagement with all stakeholders,
including community bankers, as we build our climate risk management
expertise.
(5) The OCC Supports Community Banks and MDIs
Overseeing the safety and soundness of community banks is central
to the mission of the OCC. The OCC is committed to fostering an
environment that allows well-managed community banks to grow and
thrive. In particular, we are taking specific actions to support
community banks in five areas: (1) revitalizing minority depository
institutions (MDIs), (2) reducing bank assessments, (3) promoting de
novos, and (4) tailoring regulation based on size and complexity.
Revitalizing of Minority Depository Institutions--MDIs are on the
front lines of serving low-income, minority, rural, and other
underserved communities and are a critical source of credit for them.
However, MDIs have fallen in number and, until recently, faced
challenges with accessing capital, adopting new technology, and
modernizing their infrastructures. In July, the OCC issued an updated
policy statement on MDIs \10\ that reaffirms the agency's commitment to
these institutions and describes the range of programs in place to
support MDIs. The policy statement serves to focus the agency's efforts
to ensure MDIs remain a bedrock of financial access and inclusion.
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\10\ See: ``OCC Updates Policy Statement on Minority Depository
Institutions'', OCC.
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The OCC's Project REACh has helped to expand relationships between
larger banks and MDIs through capital investments dedicated to
improving the technological infrastructure of MDIs. Since 2020, 26
banks signed Project REACh's pledge to support MDIs \11\ to provide
dedicated technical assistance for MDI staff talent development,
diversification of product offerings, and nearly $500 million in
investments to MDIs.
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\11\ See: ``Project REACh Pledge Released To Promote Vitality of
Minority Depository Institutions'', OCC.
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Reducing Bank Assessments--Effective March 2023, the OCC will make
a 40 percent reduction in assessments for a bank's first $200 million
in assets and a 20 percent reduction for bank assets between $200
million and $20 billion. This recalibration will result in a $41.3
million reduction in assessments for community banks. We are hopeful
that this reduction will provide community banks with extra capacity to
invest and seize opportunities related to digitalization, compliance,
cybersecurity, and personnel.
Promoting De Novo--A healthy community bank industry needs a
pipeline of new entrants and start-ups. The OCC was pleased to charter
a de novo community bank minority depository institution in Houston,
Texas, in May of this year. This was the first de novo MDI that the OCC
has chartered since before the financial crisis and a welcome addition
to the Houston communities it will serve. The OCC is also actively
engaged with our Mutual Savings Association Advisory Committee to
understand the impediments to the chartering and formation of de novo
mutual savings associations.
Regulation Based on Size and Complexity--It is imperative that
regulatory expectations for banks are differentiated based on their
size and complexity. We are mindful of concerns from community bankers
that requirements for large banks should not trickle down to smaller
banks as such requirements can be excessive and tie up scarce personnel
and other resources. The OCC will remain diligent in guarding against
such outcomes. Direct engagement with each community bank that we
supervise, and our two Federal Advisory Committees: The Minority
Depository Institution Advisory Committee and the Mutual Savings
Association Advisory Committee will continue to assist in this effort.
Conclusion
I am committed to ensuring that OCC-supervised banks operate in a
safe, sound, and fair manner, meet the credit needs of their
communities, treat all customers fairly, and comply with laws and
regulations. As we work to ensure that the Federal banking system
remains a source of strength to the U.S. economy, we will continue to
advance key agency priorities to ensure the Federal banking system is
well positioned to respond to community and consumer needs well into
the future.
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