HOUSE FINANCIAL SERVICES COMMITTEE
HEARING ON OVERSIGHT OF PRUDENTIAL REGULATORS
For questions on the note below, please contact the Delta Strategy Group team.
On June 4, the House Committee on Financial Services held a hearing entitled “Oversight of the Prudential Regulators.” The witnesses in the hearing were:
- Michelle Bowman, Vice Chair for Supervision, Board of Governors of the Federal Reserve System
- Jonathan Gould, Comptroller, Office of the Comptroller of the Currency
- Kyle Hauptman, Chairman, National Credit Union Administration
- Travis Hill, Chairman, Federal Deposit Insurance Corporation
Below is a summary of the hearing prepared by Delta Strategy Group, which includes several high-level takeaways, followed by summaries of opening statements and discussion.
KEY TAKEAWAYS
Basel III Capital Reform
- The federal banking agencies published revised Basel III capital proposals in March with a comment period closing June 18th.
- Multiple Republican members and witnesses highlighted that the revised proposal corrects the overreach of the original 2023 endgame, with key improvements including recalibrated mortgage risk weightings, removal of the mortgage servicing asset deduction from common equity tier 1 (CET1), improved loan-to-value sensitivity for on-balance-sheet mortgages, and more appropriate capital treatment for capital market activities.
- The proposal uses nominal gross domestic product (GDP) as an indexing metric for capital thresholds and includes a mark-to-market accumulated other comprehensive income (AOCI) provision relevant to interest rate risk.
- Representative Emmer (R-MN) noted that while the proposal excludes client-facing cleared derivatives from the credit valuation adjustment (CVA) requirements, it does not provide a full CVA exemption for end-users. Bowman acknowledged the issue and welcomed Committee feedback before the June 18th comment deadline.
GENIUS Act and Digital Assets
- Chairman Hill (R-AR) highlighted the administration’s steps to turn the page on the Biden-era approach to digital assets, including withdrawing supervisory non-objection regimes, providing greater clarity for banks using blockchain technology, and implementing the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act to establish a clear framework for payment stablecoins.
- Implementation of the GENIUS Act was named as a top priority for all four agencies.
- Treasury issued an advance notice of proposed rulemaking (ANPRM) in April on the process for evaluating state-level stablecoin regimes under the GENIUS Act.
- Hauptman stated stablecoins strengthen the dollar’s reserve currency status, stimulate Treasury demand, and could enable 24-hour, 365-day settlement.
- Representative Lynch (D-MA) raised concerns about rescinded crypto caution guidance and Kraken’s Fed master account. Bowman stated the Kansas City Reserve Bank approved a limited-purpose, time-limited account, and the 12-month period lapses early next year.
- Representative Casten (D-IL) raised concerns that limited-purpose OCC charters could allow entities to access master accounts, including skinny master accounts, without full anti-money laundering (AML) protections. Gould stated that full Bank Secrecy Act (BSA) and AML compliance is required before a bank opens for business, but not during the preliminary conditional approval phase. Bowman noted the Fed’s master account proposal includes BSA and AML requirements.
Supervision Reform and Regulatory Tailoring
- All four agencies described matters requiring attention (MRA) lookbacks, Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, Sensitivity to Market Risk (CAMELS) framework modernization, and a joint OCC and FDIC proposed rule defining unsafe and unsound practices as core elements of supervision reform.
- Witnesses and multiple members agreed that a one-size-fits-all regulatory approach disproportionately harms community banks, credit unions, and regional institutions.
Fraud, AI, and AML Modernization
- The agencies revised model risk management guidance to provide greater flexibility for banks to adopt artificial intelligence (AI) while maintaining appropriate safeguards.
OPENING STATEMENTS
Chairman Hill (R-AR)
Prudential regulations should foster economic opportunity, support responsible lending, and encourage long-term growth while maintaining confidence across our banking system. A sound prudential framework must be transparent, appropriately tailored, and composed of rules that are clear, efficient, and proportionate to the size, complexity, and risk profile of the institution. A one-size-fits-all approach disproportionately harms community banks, credit unions, and regional institutions. The revised Basel III proposal and the corresponding changes to the standardized approach and the GSIB surcharge will better align capital with risk, address concerns about gold-plating, and increase lending capacity while maintaining a safe and sound banking system. The Trump administration has taken important steps to turn the page on the Biden-era approach to digital assets, including withdrawing supervisory non-objection regimes, providing greater clarity for banks using blockchain technology, and implementing the GENIUS Act to establish a clear framework for payment stablecoins. Clear, predictable rules allow financial institutions to manage compliance, reduce unnecessary costs, expand access to credit, and invest in innovation as our financial system continues to evolve.
Ranking Member Waters (D-CA)
The prudential regulators have weakened megabank capital requirements, stress testing, and other safeguards designed to prevent another financial crisis. They are rubber-stamping bank mergers, rolling back civil rights laws, and loosening guardrails for crypto and fintech businesses that act like banks but do not want to be regulated as such.
Subcommittee on Financial Institutions Chairman Barr (R-KY)
Ensuring a well-functioning regulatory system also requires tailoring requirements appropriately to the financial institution’s size and risk profile. Regulators have listened to bipartisan calls from this Committee and applied these principles at their agencies, including in the recently revised Basel III proposal.
Subcommittee on Financial Institutions Ranking Member Foster (D-IL)
U.S. banks and credit unions are operating during a time of unprecedented change. Financial systems, consumers, and markets are moving faster than ever, with improved access to information, 24-hour banking, the reduced friction of modern payment systems, and soon, personal agentic AI financial agents. Fintech partnerships, remote innovation, and competition bring opportunity but come with unique risks. Preparing for liquidity risks, bank runs driven by social media, and cyber threats from emerging AI tools should be a top priority, and regulatory bodies need to maintain the necessary technology and resources to do so effectively.
Michelle Bowman, Fed
The Basel III proposals clarify requirements, align them with actual risks, reduce overlaps, and support credit extension while preserving strong capital levels. Innovation is essential to meeting customer expectations and maintaining a dynamic banking industry. The Fed is employing a forward-looking approach that encourages innovation while maintaining appropriate safeguards. We are recalibrating thresholds across our regulatory framework to account for economic growth and inflation. We are developing stablecoin issuer regulations as Congress directed in the GENIUS Act. We are strengthening liquidity requirements to support banking system stability and promote sound liquidity management. Our work follows a single fundamental principle: appropriately calibrated regulations strengthen banking conditions, financial stability, and economic growth, while maintaining the robust safeguards the American people expect and deserve.
Jonathan Gould, OCC
Our job is to facilitate, not stymie, responsible innovation. We are working to respond to comments on our GENIUS Act proposal and finalize it. The GENIUS Act and our rule will help ensure appropriate consumer protections for stablecoin users, ensuring that all OCC-regulated institutions are able to satisfy their obligations, including both deposits and stablecoins. The OCC is also working to facilitate innovation beyond the GENIUS Act. Along with the other federal banking agencies, we revised our model risk management guidance to avoid impeding banks’ use of AI. We also plan to seek public input on what additional guidance would be helpful. Our banking system will only remain relevant and trusted if it resists pressure to deny access based on political or religious beliefs or lawful business activity.
Kyle Hauptman, NCUA
As digital currency and stablecoins reshape the global financial system, credit unions have an opportunity to embrace this transformation from a solid foundation of safety and soundness. Stablecoins can make payments faster, cheaper, and more inclusive. We announced a proposed rulemaking for permitted payment stablecoin issuers, our second rulemaking required under the GENIUS Act. This rule puts credit unions on equal footing with banks. Credit unions are well-positioned to benefit from this long-overdue update to America’s payment system. As stablecoins become more widely adopted, Americans may no longer need to speak in terms of business days for payment settlement. Every day is a business day with stablecoins. Beyond the consumer benefits, the broader benefit of stablecoins is maintaining the U.S. dollar’s global status. The GENIUS Act will stimulate demand for Treasuries, thereby lowering costs for both the U.S. government and consumers. Even repo rates on Treasuries may fall, all else being equal, given that the GENIUS Act allows for investing in Treasury reverse repos, making Treasuries more attractive when they can be used to obtain cheap financing. For all the debate about the effect on deposits held at domestic banks and credit unions, a large portion of the money flowing into stablecoins is expected to come from abroad. Over eighty percent of existing dollar stablecoin usage is outside the U.S. When Americans use the phrase dollar stablecoins, we tend to focus on the stablecoin part, because stablecoins are a much better settlement token. For people abroad, it is the dollar part of the phrase that matters. We as Americans may have grown so accustomed to the dollar’s global dominance that we do not notice what an advantage we have. The GENIUS Act and dollar-denominated stablecoins are ways of pushing back against those in Beijing, Tehran, and Moscow who continually work to make the U.S. dollar less important, less ubiquitous, and less useful.
Travis Hill, FDIC
In the area of digital assets, implementation of the GENIUS Act remains a top priority. We have issued proposed rules to establish an application framework, prudential requirements, and BSA and sanctions compliance for FDIC-supervised stablecoin issuers. We are advancing other important policy initiatives, including modernizing BSA and AML program requirements, updating our information disclosure rules, and revising model risk and third-party risk management guidance to remove unnecessary barriers and encourage appropriate use of new technologies.
SUMMARY
Basel III Capital Reform
The Basel III proposal drew questioning from members on both sides of the aisle and discussion from all four witnesses. The through line across Republican questioning was that the original 2023 endgame proposal was a significant policy mistake that imposed costs on everyday Americans without demonstrating a clear safety and soundness rationale, and that the 2026 revised proposal represents a meaningful correction. Bowman, Gould, and Hill affirmed that characterization.
Representative Emmer (R-MN) raised concerns about the treatment of CVA capital requirements for end users. He stated that while the proposal excludes client-facing cleared derivatives from CVA requirements, it does not provide a full CVA exemption for end users, resulting in a 96 percent capital increase on certain transactions. Representative Emmer outlined how this is critically important for farmers and agricultural businesses that depend on derivatives to hedge risk effectively, and asked Bowman about the agencies’ thinking. Bowman acknowledged it as a significant issue, stated the comment period closes June 18th, and added that the agencies would welcome feedback from the Committee. Representative Emmer asked whether the agencies would remain open to additional input even beyond the formal comment process, and Bowman stated they would.
Representative Nunn (R-IA) raised a related concern about agriculture and commodity lending specifically, asking how the revised standardized approach better captures actual risk profiles in that sector. Bowman acknowledged agriculture and commodities as one of the important areas identified in the 2023 proposal and welcomed further comment.
Gould outlined a broader national security framing for the capital reform work, citing Secretary Bessent’s recent speech at the Reagan Economics Summit linking economic security and national security, and discussed that restoring banks to their proper role of promoting economic growth is essential to both.
Multiple Republican Representatives outlined that requirements designed for GSIBS should not be applied to community institutions, regional banks, or agricultural lenders with fundamentally different risk profiles. Bowman, Gould, and Hill discussed that the original 2023 proposal and the post-crisis framework more generally failed to account for differences in size, complexity, and business model across institutions, and that the revised proposal reflects a more appropriately calibrated, risk-sensitive approach.
GENIUS Act, Digital Assets, and Stablecoins
Chairman Hill framed the administration’s approach to digital assets as a clean break from the Biden era, citing the withdrawal of supervisory non-objection regimes, the provision of greater clarity for banks using blockchain technology, and the GENIUS Act itself as evidence of a commitment to supporting innovation while preserving consumer protection and orderly markets.
Witnesses described active GENIUS Act rulemaking. Gould stated the OCC received over 300 comments on its proposed rulemaking and is working as quickly as possible to review and respond to them, drawing an analogy to the National Bank Act’s role in ending wildcat banking in the 1800s.
Representative Haridopolos (R-FL) raised whether the OCC will meet the statutory deadline, Gould declined to commit, stating the agency is working hard but cannot in good faith guarantee it.
Hill described the FDIC’s proposed rules covering the application framework, prudential requirements, and BSA and AML compliance for FDIC-supervised stablecoin issuers. Bowman described the Fed’s work to develop stablecoin issuer regulations and noted the agencies updated capital treatment for tokenized securities to be technology-neutral.
Representative Flood (R-NE) raised the dual federal and state regulatory pathway under the GENIUS Act, describing Treasury’s April ANPRM on the process for evaluating state-level stablecoin regimes. He noted that he passed a bill making Nebraska the second state to allow state-chartered banks to custody digital assets and argued that states are laboratories for democracy, with significant innovation happening at the state level. He asked Bowman whether she or Chair Waller would represent the Fed on the Stablecoin Certification Review Committee. Bowman stated the matter has not yet been discussed with Chair Waller.
Representative Lynch raised concerns about the convergence of traditional banking and crypto and the supervisory gap created by the rescission of prior guidance cautioning banks about the speculative nature of crypto assets. He noted the recent crypto downturn and asked about the Kraken master account, which he stated was approved before a framework was in place. Bowman described it as a limited-purpose, time-limited account approved by the Kansas City Reserve Bank that lapses early next year, and characterized it as an opportunity to understand how similar entities might use such accounts going forward. Bowman acknowledged that the prior guidance was broader than the single issue Representative Lynch raised and noted that the Fed is working with banks to ensure innovation is adopted in a safe and sound manner as the GENIUS Act framework develops.
Representative Casten asked about the intersection of the OCC’s chartering process, master account access, and AML protections. He noted that limited-purpose OCC charters do not require CRA compliance or subject parent companies to the Bank Holding Company Act, and questioned whether entities with such charters could access skinny master accounts without the full suite of AML protections required of traditional chartered banks. Gould clarified the two-phase chartering process, explaining that a fully operational BSA and AML compliance program is required before a bank opens for business, but not during the preliminary conditional approval phase, describing this as common sense that allows an applicant to build out its compliance infrastructure after receiving an initial indication of viability. Bowman added that the Fed’s recently published master account proposal includes BSA and AML requirements and that a chartered entity is not necessarily required to qualify for a master account.
Fraud, AI, and AML Modernization
Multiple members raised the threat of AI-driven fraud and the need for the regulatory framework to keep pace. Gould described the OCC’s joint agency fraud request for information (RFI) as having highlighted the need for increased data sharing and the limits of what the banking agencies can address alone, noting the problem requires a whole-of-government approach. He cited President Trump’s recent executive order on AI and described AI as both an opportunity for improved supervision at large banks and a risk given the ability of frontier models to identify vulnerabilities across critical infrastructure.
Representative Nunn discussed AML modernization, stating that from his background as an intelligence officer, the current framework produces an enormous volume of reports with little actionable intelligence, and calling for a fundamental shift from quantity to quality. Gould and Hauptman committed verbally to supporting modernization. The agencies issued a joint AML and countering the financing of terrorism (CFT) proposed rule in April.