On May 16, the Senate Banking Committee held a hearing entitled “Oversight of U.S. Financial Regulators: Accountability and Financial Stability.” The witnesses in the hearing were:
- The Honorable Michael Barr, Vice Chair for Supervision, Federal Reserve
- The Honorable Martin Gruenberg, Chair, Federal Deposit Insurance Corporation
- Mr. Michael Hsu, Acting Comptroller, Office of the Comptroller of the Currency.
Below is a summary of the hearing prepared by Delta Strategy Group. It contains several high-level takeaways from the hearing, followed by opening statements and witness testimony, and a summary of the Q&A portion.
Key Takeaways
The following is a summary of some of the 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 changes or even its withdrawal and reproposal. Senator Mark Warner (D-VA) and Senator Tim Scott (R-SC) both questioned the necessity of the proposal and expressed concerns regarding its broader impact on market activity.
SUMMARY
Opening Statements and Testimony
Chairman Sherrod Brown (D-OH)
- Banks need to be appropriately capitalized, and Basel III will ensure the strength of our markets. The banks can handle Basel III capital requirements without problems, but they are too focused on their profits to think of what is best for the American public.
Ranking Member Tim Scott (R-SC)
- The FDIC, under Chairman Gruenberg’s leadership, is not a well-functioning agency. Chairman Gruenberg should resign.
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 financial system 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 Fed 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
Basel III
Scott (R-SC): The Fed should repropose Basel III as a whole. What are your thoughts on that? Barr: The Fed is focused on the substance of the proposal. Once the Fed and other agencies agree on the changes we need to make, we will consider whether to repropose.
Rounds (R-SD): Do you agree that Basel III needs broad and material changes? What will those changes be? Barr: Yes, and the Fed is focused on the substance of the proposal now.
Warner (D-VA): There must be an evidence-based indication of the risks and rewards of Basel III.
Warren (D-MA): Strong capital requirements will allow banks to better absorb economic losses. Are you committed to finalizing a strong rule this fall? Barr: Yes. Gruenberg: Yes.