On November 15, the House Financial Services Committee held a hearing entitled “Oversight of Prudential Regulators.” The witnesses in the hearing were:
- Michael Barr, Vice Chairman for Supervision, Federal Reserve (Fed)
- Martin Gruenberg, Chairman, Federal Deposit Insurance Corporation (FDIC)
- Todd Harper, Chairman, National Credit Union Administration (NCUA)
- Michael Hsu, Acting Comptroller, office of the Comptroller of the Currency (OCC)
Below are some key takeaways from the hearing followed by high-level takeaways on some of the commentary in the hearing prepared by Delta Strategy Group.
Key Takeaways
The following is a summary of some of the topics explored in today’s hearing.
- The key focus of today’s hearing was the Basel III endgame proposal and the impact that it will have on the banking system and the economy as a whole. Republicans and Democrat leaders alike challenged the problem that the proposal is trying to solve.
- Both Republicans and Democrats focused on the impact that increased capital requirements will have on derivatives markets by increasing the cost of hedging risk for commercial end users. Representative Frank Lucas (R-OK) urged the Fed to work with the CFTC to ensure that these new requirements do not impact the ability for end-users to hedge their risks.
Discussion
Chairman Patrick McHenry (R-NC)
- Recent proposals such as the Basel III endgame are being justified by claims that they address recent bank volatility concerns, but this is clearly just an excuse to create more federal control over financial institutions, and there is no credible rationale for their implementation. Basel III would stifle economic growth in America and damage our competitiveness. It will hinder lending and bank services. Banking regulators have abandoned any notion of supporting American capital markets, instead allowing European counterparts to put us at a competitive disadvantage. Climate principles laid out in this proposal are significant and did not go through the appropriate process of the Administrative Procedures Act. Regulators should be implementing the laws written by Congress, not creating regulations based off the administration’s preferences in an opaque manner.
Ranking Member Maxine Waters (D-CA)
- Regulators are taking steps to address weaknesses in our nation’s banking system by strengthening capital requirements because well-capitalized banks lend more. We are doing our part to avoid future bank failures.
Representative David Scott (D-GA)
- I am highly concerned about proposed increased capital requirements and the impact that they will have on derivatives markets and the ability of commercial end users to responsibly hedge their risk for commodities.
Representative French Hill (R-AR)
- Based on a new SEC rule, banks have to hold client cash off balance sheet, and this is a fundamental shift with a material change to bank balance sheets.
Representative Frank Lucas (R-OK)
- I agree with Representative Scott that these capital requirements will increase the costs of hedging risks for commercial end users. The Fed should work with the CFTC to ensure that these rules do not impose undue burdens on the derivatives industry.
Representative Ann Wagner (R-MO)
- Basel III capital requirements will significantly impact banks’ ability to conduct their business and could impact market making activities. It would also impact banks’ activity in the derivatives markets.
Michael Barr, Vice Chairman for Supervision, Fed
- Interest rate increases have put pressure on tangible capital. We must preserve a sound and resilient banking system by maintaining careful attention to address identified vulnerabilities. We are considering several ways to improve supervision of banks. Capital allows banks to survive losses on the value of their assets while still serving their customers. In the global financial crisis, we saw the impact of woefully undercapitalized banks on our economy. Our proposed capital requirements will only apply to forty or so of our largest banks.
- We have shared concerns with the SEC’s custody rule, and it would be a significant change to bank custody practices.
Martin Gruenberg, Chairman, FDIC
- Our banks have remained well capitalized, but we are seeing declines in uninsured debt, and we have seen strains on our banking system. Banks have also imposed higher costs on customers, and the system faces heightened downside risks from the effects of inflation and rising interest rates. Economic outlook remains uncertain despite economic growth and recovery. The failure of several banks this year demonstrates the stability risks that even regional banks can pose to our banking system.
Todd Harper, Chairman, NCUA
- We must pay attention to emerging issues such as liquidity, interest rate, and credit default risks.
Michael Hsu, Acting Comptroller, OCC
- In issuing guidance on climate risk, we are not attempting to tell banks that they cannot interact with certain industries or customers. We are simply giving an indication to banks about the relative risks associated with some of the business that banks are engaging in.
- We have concerns with the SEC’s custody rule, and it would be a significant change to bank custody practices.