On November 7, the House Financial Services Subcommittee on Financial Institutions and Monetary Policy held a hearing entitled “The Tangled Web of Global Governance: How the Biden Administration is Ceding Authority Over American Financial Regulation.” Witnesses in the hearing were:
- Mr. Thomas Hoenig, Distinguished Senior Fellow, Mercatus Center, George Mason University
- Prof. Christina Parajon Skinner, Assistant Professor of Legal Studies & Business Ethics, Wharton School, University of Pennsylvania
- Mr. Bryan Bashur, Director of Financial Policy, Americans for Tax Reform
- Ms. Renita Marcellin, Advocacy and Legislative Director, Americans for Financial Reform
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 is a summary of the main topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- Republican Members expressed concern with potential risks the U.S. financial system will face if federal regulators such as the Federal Reserve (Fed), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), and the Securities and Exchange Commission (SEC) follow the lead of international standard setters instead of having America lead the globe in terms of financial regulation.
- Questioning largely centered around the Basel III Endgame proposal, in which Republicans raised concerns as to some U.S. regulator’s level of involvement and collaboration with global governance bodies like the Basel Committee. Republicans expressed that the transparency of work between international standard setters and federal regulators is lacking and many suggested bringing forth legislation to create accountability and access of information and reign in their authority. Other Republicans highlighted the costs that will come with Basel III and the negative impact it will have on credit lending.
- Republicans raised concerns with federal regulators’ involvement within the climate-risk space.
- Democratic Members generally showed support for Basel III Endgame and said it will allow well-capitalized banks offer more lending. Many Democrats emphasizes the need for communication between all global governance bodies, and many justified a collaborative response to climate-related policy as it brings international risks.
SUMMARY
Opening Statements and Testimony
Subcommittee Chairman Andy Barr (R-KY)
- The Basel III proposal stems from recommendations made in opaque meetings between the tangled web of global governance bodies. Many global regulators, such as the Network for the Greening of the Financial System (NGFS), have more influence on the goals, intentions, and plans of U.S. regulatory agencies than Congress does. This hearing is about whether it is appropriate or even constitutional of our federal banking regulator regulators to cede U.S. sovereignty and import international standards into our regulatory system.
Subcommittee Ranking Member Bill Foster (D-IL)
- The belief that the Fed, FDIC, OCC, and other U.S. regulators passively attend meetings with their foreign counterparts in these bodies and blindly accept their recommendations without a second thought is highly questionable. U.S. regulators maintain a seat at the table in discussions led by international organizations like the Basel. As their foreign counterparts advocate for the interests of their respective jurisdictions and international discussions, the U.S. does the same. Rising geopolitical tensions present threats to our trading partners and supply chains and climate change poses unique risks in many industrial sectors. The increasingly global nature of the financial system requires a rational response across all jurisdictions.
Committee Ranking Member Maxine Waters (D-CA)
- Given the global structure nature of our financial system, it is important that our regulators engage through international organizations like the Basel Committee. This collaboration will help ensure that the U.S. is providing leadership to avoid a global race to the bottom, and we learn from others to address systemic risks like climate change.
Mr. Thomas Hoenig, Distinguished Senior Fellow, Mercatus Center, George Mason University
- I have long criticized the use of Basel standards as they incorporate a Risk Weighted Capital (RWC) standard that is politicized. When comparing the Leverage Ratio (LR) versus the Basel RWC standard, both used to judge the relative capital strength of a bank, the LR is the clearer, better measure as it is a more dynamic system of measurement and is seldom adjusted by supervisory judgement.
Prof. Christina Parajon Skinner, Assistant Professor of Legal Studies & Business Ethics, Wharton School, University of Pennsylvania
- The standards that emerge from Basel may not always serve the best interests of the U.S. economy and banking sector or be consistent with U.S. law. I worry that participation in Basel and the NGFS may create space for regulators to bring home their own vision of what the U.S. banking structure should look like. Congress needs to exercise oversight of this nexus between international regulatory bodies like NGFS and examine how rule and guidance making in the U.S. is done.
Mr. Bryan Bashur, Director of Financial Policy, Americans for Tax Reform
- U.S. regulators, such as the Fed, FDIC, OCC, and SEC are circumventing Congress and using international consortiums like the Basel Committee as a baseline for determining how to regulate American companies. The marginal benefits for increasing capital requirements do not outweigh the costs it will have on our economy.
Ms. Renita Marcellin, Advocacy and Legislative Director, Americans for Financial Reform
- Governments should collaborate to deal with threats posed by a warming planet and create a more equitable banking system. We commend regulators for their work in addressing climate change and advocate for the implementation of the Basel III endgame.
Discussion
Basel III
Waters (D-CA): Looking at the failure of Silicon Valley Bank, do you think banking regulators made a mistake by deviating from the Basel agreement? Marcellin: Yes, absolutely. We need stronger safety and soundness standards to ensure against bank failures.
Foster (D-IL): Is there a better way we should be setting capital requirements? Hoeing: The Basel model assumes knowledge regulators do not have in terms of operational risk.
Luetkemeyer (R-MO): Has there been a cost-benefit analysis in terms of Basel III? Hoeing: Not to my knowledge, but that would be an expensive measure.
Velázquez (D-NY): How do regulators address small banks and community banks in Basel III? Marcellin: This will lower the capital for credit risk weight for them. In addition, well-capitalized banks do more lending. This proposal is limited to less than fifty banks and is not meant to disadvantage small banks.
Williams (R-TX): Will Basel III create a competitive advantage for European banks? Skinner: It will put U.S. banks on a different competitive field than banks from the EU and the UK.
Williams (R-TX): How will Basel III impact bank’s lending habits and their calculations of risk and the cost of credit for borrowers? Bashur: It will increase the cost of credit, and it will make it much more expensive for borrowers to access the credit.
Sherman (D-CA): Basel III will increase the costs associated with the tax equity investments for green energy by four hundred percent. Is there a reason we should adopt regulations that penalize banks for being involved in green energy tax credits? Marcellin: While mitigating climate change is important, and I would not characterize it as penalizing them.
Casten (D-IL): Is it your opinion that there is a difference in the risk profile of the different classes of tax equity that matches with the differential treatment under the new Basel rules? Marcellin: Regulators are in the best place to determine the specific risk weights to that manner.
Fitzgerald (R-WI): How would U.S. regulators weigh compliance with an international standard of Basel? Skinner: Historically, the U.S. has either been exactly compliant or close to compliant with Basel.
Kim (R-CA): How compliant is the U.S. already with Basel standards? Skinner: In the history of Basel, the U.S. has either complied or gone above compliance.
Kim (R-CA): How are U.S. banks different from those in the EU? Skinner: We have a three-tiered banking system, making it possible to address the many needs of Americans through local and regional lending.
Green (D-TX): Do banks that are well-capitalized perform better than those that are not? Marcellin: Research has shown they do before better when they have more capital.
Rose (R-TN): Given that China sits on the Basel committee, how can we ensure they are not playing an outsized role in setting international standards? Bashur: It is possible they are playing a large role and we just do not know.
Ogles (R-TN): Would it be possible for foreign countries like Russia and China to impact these international standards being made? Bashur: Yes, and we need legislation to see if that is actually occurring.
Congressional Oversight of Federal Regulators
Barr (R-KY): Can you speak to how regulators’ participation with these international bodies could circumvent Congress? Skinner: If standards are agreed to at meetings between international regulators, oftentimes they will create what is perceived to be or what is actually a default for regulation. Those standards anchor conversations around what the Fed, OCC, or the FDIC should do to be compatible with them in the U.S., meaning they make these decisions, not Congress.
Luetkemeyer (R-MO): How are federal regulators justifying adopting these international rules? Skinner: They are using the Doff-Frank Act, but there is no statutory basis for their actions; Bashur: They do not have a clear working justification.
Foster (D-IL): What statutory mandate to U.S. regulators have to implement global guidance? Marcellin: They have none.
Foster (D-IL): What value is there in having U.S. regulators at the tables of these international discussions? Marcellin: There is great value in this. The supplemental leverage ratio was a result of U.S. participation and input.
Vargas (D-CA): Will Basel III make it more difficult for individuals seeking a loan? Skinner: It is unclear as there has not been a meaningful cost-benefit analysis, but it will shift the market structure.
Rose (R-TN): How can Congress improve its oversight of U.S. engagement with international standard setters? Bashur: You should require them to submit minutes and engage with Congress in meetings.
Rose (R-TN): How can Congress assert its status as the sole legislator? Skinner: Congress should insist that there must be a clear statutory basis for these regulators approaching these forms and developing these standards. I think Congress may wish to set some parameters for regulatory authority or push back on the regulators’ participation in some of these forums in certain contexts.
Timmons (R-SC): Do you think the Fed has already overstepped their narrow jurisdiction? Skinner: Not yet, but I do think there is a risk that as its supervisory mandate is the least well defined.
Fitzgerald (R-WI): Should Congress look at restricting the power of federal regulators at this point? Bashur: Yes, Congress needs to reign in the regulators.
Transparency of Federal Regulators
Barr (R-KY): Should global governance bodies play a predominant role in federal banking law? Bashur: No because they are not transparent enough.
Barr (R-KY): In your experience at the FDIC and Fed, did you have full information about deliberations and negotiations with regulators like Basel? Hoeing: The staff is sent to Basel and world-wide to hold discussions. When they come back, individuals may or may not brief the board.
Barr (R-KY): Can you speak to the lack of transparency in these regulatory institutions? Skinner: Transparency is given up for agility and flexibly and it is an intentional choice.
Posey (R-FL): Is it fair to let global standards dictate our domestic regulatory standards? Bashur: No, it is not. The Basel accords are not a treaty or accord and there is no reason the Fed should be adopting these standards in the same way; Hoeing: The system is opaque, and the industry can adapt to these changes much better than a centralized authority; Skinner: No, it is inappropriate to cede this authority to regulators and it is incredibly difficult to reign in the authority.
Skinner: Norman (R-SC): How do you think we should increase transparency within these federal decisions being made? Hoeing: It could be good to require minutes of these meetings that the public can access; Bashur: We should have a record of which countries are advocating for which positions.
Climate Risk
Waters (D-CA): How can regulators best address climate related risk? Marcellin: We must consider counterparty risk with climate change, so we must engage in these global standard setting bodies.
Williams (R-TX): What are the consequences of the Fed becoming political as a climate policy maker? Bashur: There are grave concerns as the Fed continues to produce regulations and guidance than we do not want to see the banking sector in a situation where they become utilities.
Timmons (R-SC): What risks will we face if federal regulators follow the lead of international standard setters in green policy initiatives? Skinner: Over the longer term, there are risks to the institutional legitimacy of the Fed as the more they weight into politically contested value judgments, the less support there will be for its overall independence.
De La Cruz (R-TX): What control does the U.S. have over the NGFS? Bashur: The Fed is a member of the Basel Committee, but I do not know about their level of control.