On March 21, the House Financial Services Committee held a hearing entitled “Importing Global Governance: Examining the Dangers of Ceding Authority Over American Financial Regulation.” The witnesses in the hearing were:
· Dr. Michael Gibson, Director of Supervision and Regulation, Board of Governors of the Federal Reserve System (Fed)
· Mr. Ryan Billingsley, Deputy Director of Capital Markets and Accounting Policy, Division of Risk Management Supervision, Federal Deposit Insurance Corporation (FDIC)
· Ms. Grovetta Gardineer, Senior Deputy Comptroller for Bank Supervision Policy, Office of the Comptroller of the Currency (OCC)
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways from both panels, followed by summaries of opening statements and witness testimonies and a summary of the Q&A portion of the hearing.
Key Takeaways
The following is a summary of the main topics explored in today’s hearing. Each is discussed in further detail in the discussion section below.
- Today’s hearing focused on climate related financial risk and the Basel III Endgame Proposal, specifically, concerning regulators’ participation in regulatory recommendations proposed by the Basel Committee on Banking Supervision (BCBS).
- Republicans and some Democrats expressed concerns that Basel III is not fit for the American financial system as our banking system is well-capitalized and stronger than most European banking systems. Many Republicans criticized the Basel III proposal for going beyond the BCBS’s Basel III agreement.
- Representative Zach Nunn (R-IA) said the final Basel III proposal must consider the concerns of agricultural end-users. Representative David Scott (D-GA) expressed concerns with the Fed’s implementation of Basel III, and specifically how the Fed plans to adjust the proposal accounting for public comments.
SUMMARY
Opening Statements and Testimony
Committee Chairman Patrick McHenry (R-NC)
- Currently, there is little visibility into the dealings between our federal regulators and international standard setters. This includes the Bank for International Settlements, BCBS, and the Network for Greening the Financial System (NGFS). Lack of transparency and accountability raises concerns about the extent to which other countries are influencing financial regulation. The most glaring example of Federal banking agencies taking cues from international governance bodies is Basel III. Members on both sides of the aisle express concern about the impact of increased capital requirements on families, communities, and small businesses. Basel III would strengthen the competitiveness of foreign financial institutions at the expense of our own.
Committee Ranking Member Maxine Waters (D-CA)
- President Biden, Secretary Yellen, and banking regulators have helped our economy avert a banking crisis and protected our nation’s depositors. As our banking regulators move to write rules that would address weaknesses in our banking system, including on bank capital and related to the climate crisis, Republicans are attacking any effort to collaborate with other countries that face the same problems. Big banks are spending millions of dollars to gut the proposed Basel III endgame rule to increase capital.
Representative Andy Barr (R-KY)
- Congress knows little about how U.S. regulatory agencies negotiate deals with international bodies. For example, no elected official negotiated or signed Basel III. It appears that unelected bureaucrats and global governance bodies can bypass Congress, U.S. law, and even governing boards of U.S. federal financial regulators.
Representative Bill Foster (D-IL)
- The argument that our regulators, by participating in these international regulatory organizations, are somehow ceding their authority to the international community is misguided. U.S. regulators have no obligation to adopt any standards developed by these organizations. Any regulatory proposal informed by their participation must adhere to the legal and procedural requirements of any other proposal.
Dr. Michael Gibson, Director of Supervision and Regulation, Board of Governors of the Federal Reserve System
- Engagement with international organizations has been an effective and efficient means for understanding and sharing information on global financial risks, as well as an opportunity for the Fed to help shape international standards and recommendations to the nature and needs of the U.S. financial system. International standards and recommendations are not binding on any jurisdiction or member, including the U.S. and the Fed. Any changes to the regulations that apply to U.S. firms would be proposed by the Fed and go through the usual public notice and comment process.
Ryan Billingsley, Deputy Director of Capital Markets and Accounting Policy, Division of Risk Management Supervision, FDIC
- The FDIC is a member of the BCBS and participates in most of its working groups. It is important to note that the BCBS does not have legal force. Any implementation of standards is subject to the notice and comment rulemaking process in the U.S. FDIC will continue to work closely with the BCBS to strengthen the banking sector.
Grovetta Gardineer, Senior Deputy Comptroller for Bank Supervision Policy, OCC
- The OCC is a member of BCBS and participates in policy discussions. U.S. regulators persuaded other jurisdictions through the BCBS to incorporate a leverage ratio into international standards. This promotes international financial stability and ensures that regulated institutions around the globe are subject to a non-risk-based measure that serves as a backstop to their risk-based capital requirements. Weaker banking standards can have long-term adverse consequences for U.S. global institutions, financial markets, or consumers in the form of international banking crises or large foreign bank failures.
Discussion
Basel III
McHenry (R-NC): How does the Fed reconcile agreeing to the BCBS decision to relax European large bank capital surcharges and later agree to increase U.S. capital surcharges on our domestic banks? Gibson: The Fed collaborated with BCBS on things like the Global Systemically Important Bank (GSIB) Surcharge, but regulations are ultimately implemented according to our domestic rulemaking process.
McHenry (R-NC): Who engages with the BCBS from the Fed, and how are matters at the BCBS voted on? Gibson: I attend the BCBS meetings on behalf of the Fed, and matters are not voted on. Decisions are made through consensus among members.
Waters (D-CA): Would Basel III help avoid bank failures like Silicon Valley Bank (SVB)? Gibson: That is what the Fed has proposed, and we are reviewing the comments.
Hill (R-AR): The U.S. has stronger banking capital requirements than European banks, correct? Gibson: Yes.
Hill (R-AR): How many positive comments did you receive on the Basel III proposal? Gibson: Most were negative.
Sherman (D-CA): How will Basel III impact private mortgage insurance? Gibson: Basel III will change the risk weight for banks; Billingsley: FDIC received many comments about Basel III’s impact on mortgages.
Lucas (R-OK): Are you aware if the BCBS discussion during meetings is publicly available? Gibson: BCBS publishes information on their meetings.
Lucas (R-OK): Does the Fed consider the implication of Basel standards by our international counterparts? Gibson: The Fed examines the competitive international landscape.
Lucas (R-OK): The Fed has committed to the implementation of Basel III. During the rulemaking process, how much weight does the Fed give to its past commitments? Gibson: The Fed focuses on what is best for our domestic markets.
Scott (D-GA): Does the Fed have the discretion to decide which parts of Basel III will work for our economy? Gibson: Yes.
Scott (D-GA): What changes is the Fed considering from the submitted public comments and what is the path forward? Gibson: The Fed is examining all comments submitted and is considering changes to Basel III.
Luetkemeyer (R-MO): I am concerned with Russia and China’s involvement with our international financial regulatory framework, and specifically how it is impacting the Fed’s decision to implement Basel III.
Barr (R-KY): I have concerns that the Fed does not have the interests of American energy producers in mind when negotiating with global governance bodies. Does the Fed represent American interests at BCBS meetings? Gibson: Yes, and we do not direct banks to lend to any particular customer, energy providers or not.
Vargas (D-CA): Is anything discussed at BCBS binding? Gibson: No, and there is transparency within these committee meetings.
Davidson (R-OH): I worry that Basel III will impact our housing markets in rural areas. Is the Fed’s participation and implementation of Basel III voluntary? Gibson: Yes.
Davidson (R-OH): Will Basel III be implemented by the end of the year? Gibson: The Fed is reviewing all comments and ensuring that Basel III is fit for American financial institutions before implementation.
Loudermilk (R-GA): Basel III exceeds international standards as American banking systems are strong as is.
Meuser (R-PA): Opposition to Basel III has been consistent across the financial sector, from big and small banks. How does your organization prioritize American financial interest in discussing the implementation of international standards? Gibson: The Fed is not bound by international standards, and any regulation produced domestically has the U.S. interests in mind; Gardineer: The OCC is focused on promoting American interests through our engagement with industry participants.
Fitzgerald (R-WI): I have concerns with how Basel III with impact new home buyers, as it will disincentive bank lending and credit availability.
Torres (D-NY): Basel III seems unnecessary as American banks are well-capitalized. The Fed should not be following European financial standards that do not fit our financial system. Do you agree that the U.S. banking system is well-capitalized? Gibson: Yes.
Horsford (D-NV): I am concerned that Basel III will impact marginalized communities, and the Fed should be very mindful when it considers implementation.
Kim (R-CA): There needs to be greater transparency in discussions involving Basel III. Does Basel III, as proposed, harmonize the global banking system? Gibson: The Fed will only do what is appropriate for our American financial standards. The Fed does not blindly accept recommendations from BCBS.
Nunn (R-IA): Will the final Basel III proposal address concerns regarding its potential impact on end-users of derivatives? Gibson: The Fed is reviewing all comments submitted, including those submitted by agricultural end-users of derivatives products.
Nickel (D-NC): Is it important for the Fed to engage with international standard-setting bodies? Gibson: Yes.
Climate Related Risk
Waters (D-CA): How is the OCC addressing climate related financial risk? Gardineer: In our engagement with the NGFS and BSBC, the OCC is learning more about what international bodies are approaching risk management regarding climate change.
Huizenga (R-MI): Does the FDIC agree with the BCBS that it should be considering climate related risk? Billingsley: Yes.
Barr (R-KY): How is the NGFS financed? Gibson: NGFS is supported by voluntary contributions.
Nunn (R-IA): Is the Fed a climate regulator? Gibson: No.
Banking Failures
Hill (R-AR): What mistakes did SVB make leading up to its failure? Gibson: They did not manage their interest rate risk or liquidity risk.