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House Financial Services Committee Hearing

May 30, 2024 Financial Services

On May 15, the House Financial Services Committee held a hearing entitled “Oversight of Prudential Regulators.” The witnesses in the hearing were:

Legislation noticed for the hearing included:

  • H.R. 8287, “Stress Testing Accountability and Transparency Act”
  • H.R. 8264, “Bank Supervision Appeals Improvement Act”
  • H.R. 8288, “Bringing the Discount Window into the 21st Century Act”
  • H.R. 4346, “Small Bank Holding Company Relief Act”

Below is a summary of the hearing prepared by Delta Strategy Group.  It includes several high-level takeaways, followed by summaries of opening statements and witness testimonies and a summary of the Q&A portion of the hearing.

Key Takeaways

The following summarizes the main topics explored in today’s hearing.  Each is discussed in further detail in the Discussion section below.  

  • Today’s hearing largely focused on the Basel III Endgame Proposal and concerns regarding the FDIC’s leadership.
  • There was bipartisan concern regarding the flaws of the Basel III proposal, with calls for significant changes or even its withdrawal and reproposal.  Members generally raised concerns about its potential impact on market access and competitiveness, as well as its implications for small businesses and the overall economy.  Representative Frank Lucas (R-OK) said that prudential regulators should be careful not to reduce market access, particularly while the Securities and Exchange Commission (SEC) is mandating clearing in the Treasury market.  He raised concerns that Basel III will disincentive central clearing? as a risk-reducing function for the market.
  • Vice Chair Barr said the Fed is currently working to sort through comments and finalize the substance of Basel III.

SUMMARY

Opening Statements and Testimony

Committee Chairman Patrick McHenry (R-NC)

  • Deep institutional changes at the FDIC are necessary.  The Biden administration’s banking regulators are busy pursuing partisan agendas. These policies do not support the economy, the safety and soundness of the financial system, or the needs of American families.  Fed Chair Jay Powell has testified that the Basel III Endgame Proposal would undergo significant changes.  I view that as quite promising.

Committee Ranking Member Maxine Waters (D-CA)

  • I am concerned with the past leadership of the FDIC more than the current leadership under Chairman Gruenberg.

Representative Andy Barr (R-KY)

  • The FDIC is mismanaged, and the recent independent evaluation report makes that clear.  On the issue of Basel III, I want to make my ongoing position clear that the fundamentally flawed proposal must be scrapped.

The Honorable Michael Barr, Vice Chairman for Supervision, Board of Governors of the Federal Reserve System

  • Overall, the banking system remains sound and resilient.  Banks continue to report capital and liquidity ratios above minimum regulatory levels.  Overall asset quality remains generally sound.  The Fed is exploring targeted adjustments to the regulatory framework that would address deposit outflows, held-to-maturity monetization, and discount window preparedness.  The Fed has received numerous meaningful comments on the Basel III proposal, and we are careful analyzing this information.  I expect to have a set of broad, material changes to the proposal that allow us to have a broad consensus in moving the proposal forward.  The changes will enable us to have a safer financialsystem that better serves American households and businesses.

The Honorable Martin Gruenberg, Chairman, FDIC

  • Comments submitted regarding Basel III have helped identify areas of the proposal that may warrant changes in the final rule.   For example, concerns have been raised related to the proposed treatment for residential mortgage exposures, certain tax credit equity investments, trading activities, and banking activities that generate large amounts of fee-based revenue.

The Honorable Michael Hsu, Acting Comptroller, OCC

  • The OCC remains actively engaged with the Federal Reserve and the FDIC to consider all stakeholder comments received in response to Basel III. Establishing an appropriate capital framework that adequately captures all of the material risks of these large banks is critically important to the health of the nation’s financial system, and the agencies must get it right.  The OCC has welcomed the broad range of thoughtful comments received and continues to approach this rulemaking with an open mind.

Discussion

Bank Capital Proposals

McHenry (R-NC):  Will you commit to reproposing Basel III for notice and comment if changes are made?  Barr:  The Fed has not decided on that, but we are focused on getting the substance right.

Hill (R-AR):  Has the Fed decided to tweak the capital proposals and repropose?  Barr:  The Fed has not decided.

Sherman (D-CA):  I have concerns about how higher capital requirements will impact our capital markets.

Lucas (R-OK):  Prudential regulators should be careful not to reduce market access, particularly while the SEC is mandating clearing in the Treasury market.  Clearing is a risk-reducing function for the market, but Basel III actively penalizes that activity.  How do you reconcile this policy contradiction?  Gruenberg:  The FDIC is carefully considering those comments;  Barr:  I agree that central clearing is crucial for market risk reduction, and Basel III is a work in progress.

Barr (R-KY):  Why has the Fed not withdrawn Basel III?  Barr:  The Fed is focused on the substance of the proposal now and will consider withdrawing or reproposing when we figure out the substance.

Barr (R-KY):  Are you concerned that Basel III will put American markets at a disadvantage?  Barr:  The Fed is addressing all comments, but strong capital requirements make markets more competitive.

Himes (D-CT):  When will Basel III be finalized?  Barr:  The Fed is still going through comments and determining what broad and material changes will be made.

Williams (R-TX):  Has the OCC had conversations with small businesses regarding Basel III?  Hsu:  Yes, and the OCC is looking at all comments very seriously.

Casten (D-IL):  Can Congress expect to see Basel III finalized by August?  Barr:  The Fed has not made any decisions about the substantive changes to the proposal.

Torres (D-NY):  The Basel III proposal must objectively identify the optimal level of capital in the banking system.  Is the banking system well-capitalized?  Barr:  The banking system is sound, but Basel III is designed to improve our banking systems.

Timmons (R-SC):  Basel III should be withdrawn.  

Meuser (R-PA):  How will the state of the economy impact your decision-making on Basel III?  Barr:  Inflation has come down in the past few years, and the Fed is deciding how Basel III will fit into the longer-term picture.

Garbarino (R-NY):  How is the Fed planning to implement the Global Systemically Important Banks (GSIB) Surcharge Proposal?  Barr:  The Fed is examining several technical adjustments to consider how to calculate the GSIB surcharge. 

Kim (R-CA):   Will the FDIC repropose Basel III?  Gruenberg:  Prudential regulators are focused on agreeing on the substance of the proposal.

FDIC Oversight

McHenry (R-NC):  I am concerned with the workplace environment and efficiency of the FDIC.  The FDIC needs significant structural changes, and I can say with confidence that the FDIC’s workplace issues played a role in recent bank failures.

Waters (D-CA):  Will the FDIC commit to addressing its workplace issues?  Gruenberg:   Yes.