[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]

DODD-FRANK ACT'S EFFECTS ON
FINANCIAL SERVICES COMPETITION

=======================================================================

HEARING

BEFORE THE

SUBCOMMITTEE ON
INTELLECTUAL PROPERTY,
COMPETITION, AND THE INTERNET

OF THE

COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

SECOND SESSION

__________

JULY 10, 2012

__________

Serial No. 112-117

__________

Printed for the use of the Committee on the Judiciary

Available via the World Wide Web: http://judiciary.house.gov

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COMMITTEE ON THE JUDICIARY

LAMAR SMITH, Texas, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin HOWARD L. BERMAN, California
HOWARD COBLE, North Carolina JERROLD NADLER, New York
ELTON GALLEGLY, California ROBERT C. ``BOBBY'' SCOTT,
BOB GOODLATTE, Virginia Virginia
DANIEL E. LUNGREN, California MELVIN L. WATT, North Carolina
STEVE CHABOT, Ohio ZOE LOFGREN, California
DARRELL E. ISSA, California SHEILA JACKSON LEE, Texas
MIKE PENCE, Indiana MAXINE WATERS, California
J. RANDY FORBES, Virginia STEVE COHEN, Tennessee
STEVE KING, Iowa HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona Georgia
LOUIE GOHMERT, Texas PEDRO R. PIERLUISI, Puerto Rico
JIM JORDAN, Ohio MIKE QUIGLEY, Illinois
TED POE, Texas JUDY CHU, California
JASON CHAFFETZ, Utah TED DEUTCH, Florida
TIM GRIFFIN, Arkansas LINDA T. SANCHEZ, California
TOM MARINO, Pennsylvania JARED POLIS, Colorado
TREY GOWDY, South Carolina
DENNIS ROSS, Florida
SANDY ADAMS, Florida
BEN QUAYLE, Arizona
MARK AMODEI, Nevada

Richard Hertling, Staff Director and Chief Counsel
Perry Apelbaum, Minority Staff Director and Chief Counsel
------

Subcommittee on Intellectual Property, Competition, and the Internet

BOB GOODLATTE, Virginia, Chairman

BEN QUAYLE, Arizona, Vice-Chairman

F. JAMES SENSENBRENNER, Jr., MELVIN L. WATT, North Carolina
Wisconsin JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
STEVE CHABOT, Ohio JUDY CHU, California
DARRELL E. ISSA, California TED DEUTCH, Florida
MIKE PENCE, Indiana LINDA T. SANCHEZ, California
JIM JORDAN, Ohio JERROLD NADLER, New York
TED POE, Texas ZOE LOFGREN, California
JASON CHAFFETZ, Utah SHEILA JACKSON LEE, Texas
TIM GRIFFIN, Arkansas MAXINE WATERS, California
TOM MARINO, Pennsylvania HENRY C. ``HANK'' JOHNSON, Jr.,
SANDY ADAMS, Florida Georgia
MARK AMODEI, Nevada

Blaine Merritt, Chief Counsel

Stephanie Moore, Minority Counsel

C O N T E N T S

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JULY 10, 2012

Page

OPENING STATEMENTS

The Honorable Bob Goodlatte, a Representative in Congress from
the State of Virginia, and Chairman, Subcommittee on
Intellectual Property, Competition, and the Internet........... 1
The Honorable Melvin L. Watt, a Representative in Congress from
the State of North Carolina, and Ranking Member, Subcommittee
on Intellectual Property, Competition, and the Internet........ 2
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, Ranking Member, Committee on the
Judiciary, and Member, Subcommittee on Intellectual Property,
Competition, and the Internet.................................. 5

WITNESSES

Ellis L. Gutshall, President and Chief Executive Officer, Valley
Financial Corporation
Oral Testimony................................................. 7
Prepared Statement............................................. 9
Adam J. Levitin, Professor, Georgetown University Law Center
Oral Testimony................................................. 14
Prepared Statement............................................. 16
Alex J. Pollock, Resident Fellow, American Enterprise Institute
Oral Testimony................................................. 23
Prepared Statement............................................. 24

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan, Ranking
Member, Committee on the Judiciary, and Member, Subcommittee on
Intellectual Property, Competition, and the Internet........... 6
Material submitted by the Honorable Melvin L. Watt, a
Representative in Congress from the State of North Carolina,
and Ranking Member, Subcommittee on Intellectual Property,
Competition, and the Internet.................................. 41

DODD-FRANK ACT'S EFFECTS ON
FINANCIAL SERVICES COMPETITION

----------

TUESDAY, JULY 10, 2012

House of Representatives,
Subcommittee on Intellectual Property,
Competition, and the Internet,
Committee on the Judiciary,
Washington, DC.

The Subcommittee met, pursuant to call, at 4:07 p.m., in
room 2141, Rayburn Office Building, the Honorable Bob Goodlatte
(Chairman of the Subcommittee) presiding.
Present: Representatives Goodlatte, Coble, Chabot, Watt,
Conyers, Jackson Lee, Waters, and Johnson.
Staff present: (Majority) Holt Lackey, Counsel; Olivia Lee,
Clerk; and (Minority) Stephanie Moore, Subcommittee Chief
Counsel.
Mr. Goodlatte. Good afternoon. This hearing of the
Subcommittee on Intellectual Property, Competition and the
Internet will come to order.
Today's hearing examines the Dodd-Frank Wall Street Reform
and Consumer Protection Act, better known as ``Dodd-Frank,''
and its effects on competition in the financial services
industry.
The free flow of capital is the linchpin of our capitalist
economy. We must be extremely cautious about any attempts by
the Federal Government to thwart the ability of the private
sector to choose through the allocation of private sector
resources which ideas and businesses are meritorious and which
should be left on the cutting room floor.
Unfortunately, Dodd-Frank injects government bureaucrats
into the decision-making process in the flow of capital. This
raises unnecessary and artificial hurdles to our economic
recovery and distorts competition in the financial services
market.
Even before the 2007-2008 crisis, there was tremendous
concentration in some markets related to the housing bubble and
the toxic securities that brought our economy to the brink of
collapse. The subprime mortgages at the root of the crisis were
repurchased and securitized by the government-sponsored duopoly
of Fannie Mae and Freddie Mac. The mortgage-backed securities
that Fannie and Freddie created were given AAA ratings by the
big three ratings agencies which controlled about 95 percent of
the market. These securities were then purchased by the largest
Wall Street banks which have consolidated an ever-larger share
of the market over the past few decades. Perhaps more
competition in all of these markets would have encouraged more
responsible decision-making and helped to avert or limit the
crisis.
However, instead of fostering more market competition,
Dodd-Frank is likely to entrench current market leaders, making
it harder for small and innovative banks and financial
companies to compete. Dodd-Frank does nothing to decrease the
market power held by Fannie, Freddie, and it will likely have
the unintended effect of encouraging consolidation in banking
and other financial sectors. Dodd-Frank will harm competition
in the financial services industry because its regulations fall
hardest on small banks and credit unions which makes it harder
for them to compete with their larger counterparts.
Regulations always fall harder on small businesses than
large. In the banking sector, the costs of complying with
regulations have historically been two and a half times higher
as a share of operating expenditures for small banks than for
large. If the costs of complying with Dodd-Frank are too great,
it could drive many local community banks out of business or
force them to merge with larger competitors. If Dodd-Frank
results in community banks and credit unions leaving the
market, not only will competition suffer, but so will the
communities and small businesses that these banks serve.
Small and mid-sized banks account for 54 percent of small
business lending. America's small businesses need these loans
so they can create jobs. The government should be doing
everything possible to encourage small businesses to grow and
create jobs. At a time of sustained unemployment and with the
President proposing to raise taxes on America's small
businesses, the last thing we should do is bury the community
banks that finance small businesses beneath a new mountain of
regulation.
The Dodd-Frank Act could also harm competition by
designating certain banks and non-bank financial institutions
as systemically important and creating special liquidation
procedures for them outside of bankruptcy. These special
liquidation procedures treat systemically important companies'
creditors better than the bankruptcy law. As a result,
systemically important institutions, already among the biggest
companies in America, may receive favorable treatment in the
credit markets. This could lead to even more concentration.
The Administration is fond of touting the supposed
reinvigoration of antitrust enforcement out of the Department
of Justice and the Federal Trade Commission, but the Dodd-Frank
Act, like the Administration's other signature legislative
achievement, The Affordable Care Act, will have the effect of
hindering competition in one of the most important sectors of
our economy.
It is now my pleasure to recognize the Ranking Member of
the Subcommittee, the gentleman from North Carolina, Mr. Watt,
for a different perspective.
Mr. Watt. Well, maybe not so. I thought I was in the
Financial Services Committee here for a little bit.
I hope the Chairman will forgive me if I say bluntly at the
outset that I believe this hearing is much ado about nothing.
The Dodd-Frank Wall Street Reform bill, which I often
affectionately call as a Member of the House ``the Frank-Dodd
reform bill,'' was the culmination of years of efforts to rein
in predatory lending and other major abuses in the financial
services sector, and to reduce the prospect that financial
institutions get too big to fail and taxpayers end up getting
stuck with the cost of bailing them out.
The bill establishes an entity for the first time in the
Federal Government, the Consumer Financial Protection Bureau,
that has as its primary purpose protecting consumers of
financial products and erects a comprehensive regulatory regime
designed to reduce the incentives that drove many financial
institutions to pay much more attention to making excessive
profits than to protecting the interests of their customers,
our Nation, or our economy.
I cosponsored the legislation and, as a Member of the House
Financial Services Committee, played a major role in crafting
many of its provisions, and together with Ranking Member
Conyers and our colleague, Ms. Waters, served as a conferee on
the House-Senate conference that produced the final product.
Although I served as a conferee representing the Financial
Services Committee, I also brought to the conference my
antitrust and other policy experiences from this Committee.
I believe the Dodd-Frank bill reflects the goals of both
competition policy and stabilizing our financial institutions.
Mr. Chairman, I think my views on how this Committee
addresses antitrust concerns are well known. While educating
our citizens on pending antitrust matters serves a very
important public good, I generally believe that we should allow
the regulators to do their jobs, especially when they have
access to a wealth of detail that is not in the public domain.
When Congress intervenes to affect the outcome of an
antitrust investigation, I believe it can place undue pressure
on the regulating bodies. But here we are having a hearing on
the Dodd-Frank Act's effects on financial services competition,
effects that have yet to be seen. There are no concrete set of
concerns before us. We are simply relitigating issues that were
carefully studied in crafting the Dodd-Frank legislation.
As for the Act itself, section 6 of the law contains a
specific antitrust savings clause designed to ensure that
antitrust policy continues to have a place within the
regulatory framework. And I quote, ``Nothing in this act or any
amendment made by this act shall be construed to modify,
impair, or supersede the operation of any of the antitrust laws
unless otherwise specified,'' close quote. That is directly
from the Dodd-Frank legislation.
Now, in the past decade, the Supreme Court has issued two
decisions that have called into question the role of antitrust
policy in regulated industries. The Trinko and the Credit
Suisse cases have been the subject of hearings before this
Committee and were not overlooked during the construction of
the Dodd-Frank Act. In Trinko, the Court upheld the effect of a
general antitrust savings clause, but found no violation of the
antitrust laws. In Credit Suisse, the Court refused to give
effect to a broad, nonspecific savings clause, finding instead
that there was an implied antitrust immunity in essence to
avoid conflict between incompatible regulatory regimes.
There are those who question the reach of both Trinko and
Credit Suisse. Are they limited to the regulated industries
involved in the facts of each case, telecommunications and
securities respectively, or do they apply generally to all
regulated industries?
Whatever the answer to those hypothetical questions, the
fact of the matter is that many of the regulations that will
shape our financial sector moving forward have yet to be issued
or implemented. Moreover, the Obama administration adopted the
position when it inherited a financial industry on the brink of
collapse that it would increase antitrust enforcement in
regulated industries and maintain enforcement during the
economic crisis and recovery.
And the Justice Department has conducted four
investigations into the financial services markets since the
rulings in Trinko and Credit Suisse, three of which are ongoing
into the municipal bonds, investment credit, credit derivatives
markets, and the London Interbank Offered Rate, or LIBOR as it
is sometimes called.
The Department of Justice has also been active in the
rulemaking process mandated by Dodd-Frank.
Now, I am sure that there will be testimony today about how
Dodd-Frank disadvantages small and community banks and
advantages large financial institutions that some believe are,
quote, ``too big to fail.'' On this issue, I will simply make
two points.
Number one, small and community banks were disadvantaged
vis-a-vis large financial institutions long before there was a
Dodd-Frank bill. In my view, Dodd-Frank significantly leveled
the playing field between larger and smaller banks, and it
seems to me that a major part of the dissatisfaction with Dodd-
Frank is that we could never absolutely level the playing
field, just as we have not found it possible over the history
of our country to level the playing field between the rich and
poor in this country.
Yes, I keep complaining about that, and I don't begrudge
those who keep complaining about the disparity between large
and small financial institutions. Perhaps we can and should do
more, but I don't find it a very persuasive argument that we
perhaps didn't come up with the perfect solution in Dodd-Frank.
I refuse to let the perfect be the enemy of the good, and when
I do, I should simply resign or leave this institution
immediately.
Second, small and community banks got a lot more than they
gave in the Dodd-Frank bill. The major source of competition
that small and community banks were facing before the passage
of Dodd-Frank was competition from unregulated check cashers,
payday lenders, and other unregulated entities that operated by
no rules while small community banks had to abide by
regulations. Dodd-Frank brought all these unregulated entities
under regulation and, in the process, made them operate by the
same rules that apply to community banks. Most of my community
banks praise that aspect of Dodd-Frank as fostering, not
undercutting, competition and enhancing their ability to
survive.
So while I am happy to hear from the witnesses on this
panel on their various theories on how things may pan out with,
quote, ``too big to fail,'' the fact is that I think a more
appropriate title for this hearing would be, quote, ``too early
to tell.''
I yield back, Mr. Chairman.
Mr. Goodlatte. I thank the gentleman for his comments and
turn now to the Ranking Member of the full Committee, the
gentleman from Michigan, Mr. Conyers.
Mr. Conyers. Thank you, Chairman Goodlatte.
I want to associate myself with the remarks of the Ranking
Member of this Committee, the parts that I understood, because
this is a very complex subject.
I probably won't take the full 5 minutes, but I did want to
put in a mild reservation about why we are holding this hearing
in the first place.
I mean, it seems a little bit uncharacteristic that a bill
that was passed a couple years ago is now being examined as if
it is in full force. I don't think it is yet. But we needed the
Wall Street reform act because ``too big to fail'' policies
foreclose competition. And I am hoping that we will get an
examination of how we got into this ``too big to fail'' and
where it is going to lead and what it has cost us so far since
the 2008 debacle.
Here, Members of the Committee, we have 5,400 banking
mergers between the last 15 years and 74 of them were defined
as mega-mergers. That means that the buyer and the seller each
had more than $10 billion worth of assets.
Now, we need to do more to protect consumers and
competition, and as a friend of the gentleman from
Massachusetts, Mr. Frank, who was once a Member of the
Committee on the Judiciary, I commend and support the Dodd-
Frank bill--law.
I don't think I am the only person on this Subcommittee
that feels that it should have gone further and that we have a
responsibility, when we analyze this, to determine how that can
be responsibly done. Why? Because we need to do more to protect
consumers and competition in this Wall Street business that
goes on. And so while the implementation process still goes on
around Dodd-Frank, it is clear that the legislation is not
enough to protect consumers and that the global market still
remains basically predatory and anticompetitive practices rule
in the financial industry world. JP Morgan Chase lost $2
billion with acknowledged irresponsible bets on the derivatives
market. The British investigation into Barclays' deliberate
inflation of key banking interest rates like the LIBOR have
triggered revelations that Chase, Citigroup, other American
firms may have undertaken similar actions.
And so what I am hoping will happen is that we will now
sleep more comfortably in our beds at night now that title X of
Dodd-Frank has not developed the horrible results that had been
predicted.
I will put my statement in the record, Mr. Chairman, and I
will welcome and await the testimony of our distinguished
witnesses. Thank you.
[The prepared statement of Mr. Conyers follows:]

The hearing today will allow us to explore the impact that the
Dodd-Frank Act is having on financial service competition.
First, we needed the Dodd-Frank Act because too big to fail
policies foreclosed competition.
Market concentration in the financial sector limits consumer
choice, lowers quality, and raises prices.
Between 1990 and 2005, more than 5400 banking mergers occurred,
including 74 mega-mergers where both the buyer and seller had more than
$10 billion in assets. When the Bush-era financial crisis began, the
ten largest banks controlled 55% of domestic financial assets and 45%
of domestic deposits.
The TARP bailout and related Treasury Department actions occurred
precisely because the market was so destabilized by the lack of
competition in the financial sector.
Second, more needs to be done to protect consumers and competition.
While the law is still in the implementation process, it is clear
that the legislation was not enough to protect consumers and the global
market from remaining predatory and anti-competitive practices of the
financial industry.
JP Morgan Chase lost $2 billion with irresponsible bets on the
derivatives market. And the British investigation into Barclay's
deliberate inflation of key banking interest rates like the Libor have
triggered revelations that Chase, Citigroup, and other American firms
may have undertaken similar actions.
We are still seeing the negative impact that big banks are having
on the banking industry. With incentive structures rewarding short-term
risk-taking, Wall Street has been in the business of getting bigger and
more complex, and taking greater risks.
I will continue to fight for consumers especially those with
financial hardships. Antitrust laws must remain in place to protect our
economic freedoms against monopolization and anticompetitive restraints
on trade. We must now refocus and bring back into the spotlight the
need for change and aid to those who have fallen victim during these
financially perilous times.
__________

Mr. Goodlatte. I thank the gentleman.
Without objection, all other opening statements will be
made a part of the record.
And we are now pleased to turn to our witnesses. We have a
very distinguished panel of witnesses today, and each of the
witnesses' written statements will be entered into the record
in its entirety. I ask each witness to summarize his testimony
in 5 minutes or less. To help you stay within that time, there
is a timing light on your table. When the light switches from
green to yellow, you will have 1 minute to conclude your
testimony. When the light turns red, it signals that the
witness' 5 minutes have expired.
Before I introduce our witnesses, as is the custom of this
Committee, I would like to ask them to stand and be sworn.
[Witnesses sworn.]
Mr. Goodlatte. Thank you very much. Please be seated.
Our first witness today is Mr. Ellis Gutshall, President
and CEO of Valley Financial Corporation and Valley Bank. Valley
Bank was founded in 1995 in my hometown of Roanoke, Virginia,
where Mr. Gutshall has worked as a banker since 1976. Mr.
Gutshall is the current chairman of the Virginia Association of
Community Banks. He is a graduate of Washington and Lee
University and of the ABA Stonier Graduate School of Banking. I
am proud to call him my constituent and friend.
Our second witness is Professor Adam Levitin, a visiting
professor at Harvard Law School and a professor at Georgetown
University Law Center where he teaches courses in financial
regulation. Professor Levitin served as Sspecial Counsel to the
Congressional Oversight Panel supervising the Troubled Asset
Relief Program. Professor Levitin holds a J.D. from Harvard Law
School and two Master's degrees from Columbia University and a
Bachelor's degree from Harvard College.
Our third and final witness is Mr. Alex Pollock, Resident
Fellow at the American Enterprise Institute. After 35 years in
banking, Mr. Pollock joined AEI where he focuses on financial
policy issues. Prior to joining AEI, he served as President and
CEO of the Federal Home Loan Bank of Chicago from 1991 to 2004.
Mr. Pollock holds Master's degrees from Princeton University
and the University of Chicago and a B.A. from Williams College.
I welcome all the witnesses and we will begin with you, Mr.
Gutshall. Welcome.

TESTIMONY OF ELLIS L. GUTSHALL, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, VALLEY FINANCIAL CORPORATION

Mr. Gutshall. Chairman Goodlatte, Vice Chairman Quayle,
Ranking Member Watt, and Members of the Subcommittee, my name
is Ellis Gutshall, President and CEO of Valley Financial
Corporation and its wholly-owned subsidiary, Valley Bank. My
banks is a 17-year-old community bank headquartered in Roanoke,
Virginia, and we have invested over $1 billion in our community
in the form of loans during the 17-year period. Our company has
assets of approximately $800 million and eight offices serving
the Greater Roanoke MSA.
Well, thank you for inviting me to testify on the effects
of Dodd-Frank on financial services competition.
We all appreciate the importance of regulation that
protects the safety and soundness of our institutions and
protects the interests of our customers. We know that there
will always be regulations that control our business, but the
reaction to the financial crisis has layered on regulation
after regulation that does nothing to improve safety or
soundness and only raises the cost of providing banking
services, both credit and depository-related.
While community banks pride themselves on being quick to
adapt to changing environments and determined to meet any
challenge head on, there is a tipping point beyond which
community banks will find it impossible to compete. During the
last decade, the regulatory burden for community banks has
multiplied 10-fold with more than 50 new rules in the 2 years
before Dodd-Frank. Over the last decade, 1,500 community banks
have disappeared from our communities.
Without quick and bold action to relieve regulatory
burdens, we will witness an appalling contraction of the
banking industry at a pace much faster than we have witnessed
over the last decade. Holding oversight hearings like this one
is critical to ensure that banks are allowed to do what they do
best, namely, that is to meet the financial needs of our
communities.
There are three key points I would like to make today.
First, the costs to implement new regulations are
substantial and weigh most heavily on community banks. Make no
mistake about it. That burden is keenly felt by all banks.
However, many small banks do not have the resources to manage
all the new regulations and the changes in existing ones.
Besides the real, hard-dollar costs, there are important
opportunity costs related to products and services that either
cannot be offered or will be offered only at higher cost to our
customers.
For our bank in 2011, we estimate that we spent over
$500,000 in hard-dollar compliance costs. That translates to
roughly 7 cents per common share to our shareholders.
Historically, the cost of regulatory compliance as a share of
operating expenses is two and a half times greater for small
banks than for large banks. And I fear that gap may widen even
more once Dodd-Frank is fully implemented.
For the industry as a whole, a very conservative estimate
of all the hard-dollar compliance costs will be around $50
billion annually, and that is about 12 percent of total
operating expenses.
Secondly, the lost opportunity costs are significant for
community banks, their communities, and their customers.
Excessive regulation saps staff and resources that should have
gone to meeting the needs of our customers. Even a small
reduction in the cost of compliance would free up millions of
dollars that could facilitate lending activity and other
banking services. If we are forced to become more internally
focused in an attempt to deal with the avalanche of
regulations, we will lose the competitive advantage that we
have created and that has been so well received by our
customers. Customer service levels will decline, and it is the
customer who will be disadvantaged by all of these actions.
Thirdly, unintended consequences of Dodd-Frank have far-
reaching effects on the very ones the legislation was designed
to help and protect. Congress must be diligent in its oversight
of the efforts to implement Dodd-Frank and to ensure that rules
are adopted only if they result in a benefit that clearly
outweighs the burden.
One unintended consequence occurring right now in our
industry is the effort to find new and additional revenues to
offset the rising costs of new regulations. Banks are
increasing service-related fees in an attempt to generate the
needed revenues to offset these rising costs. Free checking and
no minimum balance products are disappearing from the
marketplace, and it is happening at the mega-banks and
community banks as well.
There are many other unintended consequences of Dodd-Frank,
such as a host of mortgage lending rules, a burdensome
municipal advisor rule, swaps provisions that will hurt my
commercial customers, and the largely unknown direction of the
Consumer Financial Protection Bureau--what direction that will
take.
In conclusion, the consequences of excessive regulation are
real. Costs are rising and will continue to rise. With the
regulatory overreaction, piles of new laws, and uncertainty
about government's role in the day-to-day business of banking,
meeting local community needs is proving difficult at best.
This scenario leads us to a banking industry with far fewer
competitors than we have today which may be the largest
unintended consequence of all from Dodd-Frank.
I thank you again for allowing me to appear before you
today.
[The prepared statement of Mr. Gutshall follows:]

Prepared Statement of Ellis L. Gutshall, President and
Chief Executive Officer, Valley Financial Corporation

Chairman Goodlatte, Vice Chairman Quayle, Ranking Member Watt, and
members of the Subcommittee, my name is Ellis Gutshall, President and
CEO of Valley Financial Corporation and its wholly-owned subsidiary,
Valley Bank. My bank is a 17-year-old community bank, headquartered in
Roanoke, Virginia. The Roanoke Region is the largest metropolitan area
in Western Virginia and home to more than 300,000 residents. Our
Company has assets of approximately $800million and eight offices
serving the Greater Roanoke MSA. I also serve as the 2012 Chairman of
the Virginia Association of Community Banks and as a Director of the
Virginia Bankers Association Benefits Corporation. Our Bank is a member
of the American Bankers Association and the Independent Community
Bankers of America, both of which represent banks of all sizes and
charters and are the voices of the nation's $13 trillion banking
industry and its two million employees.
To begin with a brief background, in 1993, Dominion Bank, a 100-
plus year old institution with over $10 Billion in assets headquartered
in Roanoke, merged with First Union Corporation. During its heyday,
Dominion Bank dominated the banking arena in the Roanoke Valley,
controlling roughly one-half of the deposits in the marketplace. With
the demise of Roanoke's community bank, the organizers of Valley Bank
felt that a region as large and important as the Roanoke Region needed
to have a locally owned and locally managed community bank if it were
to continue to grow and prosper.Valley Bank opened for business in May
of 1995 and in just 17 years, we have grown to the #4 market share in
terms of deposits, surpassing even Bank of America, within the Roanoke
MSA. I make this point to demonstrate just how critically important
community banking is to communities all across this nation and how
community banks such as Valley Bank can effectively compete against the
much larger mega-banks. During this 17-year period, our share of the
MSA deposit base has grown to nearly 10% while the leader's share, the
former Dominion Bank which is now Wells Fargo after the merger with
Wachovia, has declined to 27%. For decades, community banks have been
the backbone of all the Main Streets across America, and for the
Roanoke Region in particular, Valley Bank's presence has provided a
strong catalyst to the economic growth, health, and vitality of our
community as we have invested over $1 Billion of investment into our
community in the form of loans during our 17-year history. It is our
vision and mission to continue this role for many, many years to come.
Unfortunately, the cumulative impact of years of new regulations is
threatening the very existence of community banks.
We all appreciate the importance of regulation that protects the
safety and soundness of our institutions and protects the interests of
our customers. We know that there will always be regulations that
control our business--but the reaction to the financial crisis has
layered on regulation after regulation that does nothing to improve
safety or soundness and only raises the cost of providing banking
services, both credit and depository related, to our customers. New
rules, regulations, guidance and pronouncements flood in to our bank
almost daily. With Dodd-Frank alone, there are3,894 pages of proposed
regulations and 3,633 pages of final regulations (as of April 13) and
we're only a quarter of the way through the 400-plus rules that must be
promulgated.
While community banks pride themselves on being agile, quick to
adapt to changing environments and determined to meet any challenge
head on, there is a tipping point beyond which community banks will
find it impossible to compete. During the last decade the regulatory
burden for community banks has multiplied tenfold, with more than 50
new rules in the two years before Dodd-Frank.Over the last decade1,500
community banks have disappeared from communities. Each new law or
regulation in isolation might be manageable, but wave after wave, one
on top of another, will certainly over-run many more community banks.
Without quick and bold action to relieve regulatory burdens we will
witness an appalling contraction of the banking industry, at a pace
much faster than we've witnessed over the last decade.
Congress must be vigilant in overseeing regulatory actions. Ifleft
unchecked excessive regulation will surely negatively affect community
banks' ability to effectively compete. Holding oversight hearings like
this one is critical to ensure that banks are allowed to do what they
do best--namely, meet the financial needs of their communities.
There are three key points I would like to make today.

b The costs to implement new regulations weigh most heavily on
community banks making it difficult to compete with the mega-
banks, tax-exempt credit unions and nonbank financial firms

b The lost opportunity costs are significant for community
banks, their communities and their customers

b Unintended consequences of Dodd-Frank have far-reaching
effects on the very ones the legislation was designed to help
and protect

I. The Costs to Implement New Regulations are Substantial and Weigh
Most Heavily on Community Banks Making it Difficult to Compete
with the Mega-Banks, Tax-Exempt Credit Unions and Nonbank
Financial Firms

Make no mistake about it, this burden is keenly felt by all banks,
however,many small banks do not have the resources to manage all the
new regulations and the changes in existing ones. Besides the real,
hard dollar costs, there are important opportunity costs related to the
products and services that either cannot be offered or will be offered
only at higher costs to our customers.
For our bank, in 2011, we estimate that we spent over $500,000 in
hard dollar compliance costs. That translates to roughly 7 cents per
common share to our shareholders.This includes salaries attributable to
compliance, annual bank-wide compliance training, legal and compliance
consulting services, compliance software and other IT expenses,
printing expenses and privacy mailing costs, and various record-keeping
requirements. And there are other costs that we simply cannot capture.
We have several dedicated compliance officers just to handle all the
legal and paperwork requirements and, in addition, estimate that
another one-half of our total staff have some compliance obligations
they must fulfill. Historically, the cost of regulatory compliance as a
share of operating expenses is two-and-a-half times greater for small
banks than for large banks. I fear that gap may widen even more once
Dodd-Frank is fully implemented.
Changes in existing regulations and the new regulatory requirements
that will flow from Dodd-Frank have necessitated the need for us to add
another full-time compliance person. That cost, plus many other
ancillary costs of these new changes, will add another $75,000 to the
overall cost. Of course, we are only in the early stages of the Dodd-
Frank implementation, so we are bracing for additional costs that must
somehow be borne. All these extra expenses could have been more
productive if they were devoted to providing services to our customers.
As an $800 Million asset bank, we are better able to spread some of
the compliance costs than our smaller brethren. In 2006, at a time when
we were approaching $500 Million in assets, I made the decision to
create an enterprise-wide risk management department that would be
responsible for assessing and monitoring risks associated with all of
the bank's compliance and non-credit operating units. Looking back now,
this was one of the most significant things we could have done as we
had fully developed a risk management department and staff prior to
Dodd-Frank. I seriously doubt we would be able to do what we are doing
now in terms of compliance and training without this enterprise-wide
risk management group. However, this group has quickly been stretched
to their limits. We will not be able to continue our high level of
compliance expertise without additional staffing and training. The
rising costs are just not in-house staffing requirements, but also the
high costs of attending conferences and seminars, the many
subscriptions to legal and accounting services that we feel we have to
have just to make sure we do not miss anything, IT software up-grades
to monitor our activities and the additional regulatory burden
associated with proving we have complied with the new laws. The
regulatory agencies want to see independent third-party confirmation,
so besides internal audits, banks now have to have outside audits for
compliance which is a significant expense for smaller banks. For the
median-sized bank in this country with $166 million in assets and 38
employees, the burden is magnified tremendously. For larger banks,
Dodd-Frank imposes significant changes that are already driving an
entire reevaluation of business lines and models. Together with the new
Basel capital and liquidity rules, these added costs likely will total
in the hundreds of millions of dollars.
For the industry, a very conservative estimate of all the hard
dollar costs would be about $50 billion annually, or about 12 percent
of total operating expenses.This expense ratio is only surpassed by the
salaries & benefits we pay to our employees.
We at Valley Bank have taken great pride during our 17-year history
in the fact that our noninterest expense management has placed us in
the top performing quartile of our FDIC peer group. In 2011, our
personnel expenses were 22% below the peer average and our total
noninterest expenses were 17% below the peer average. At the same time,
our employees were managing $5.8 Million in assets per employee
compared to $4.6 Million for the peer average, a 26% positive variance
and a strong demonstration of the superior productivity of our staff.
Our low overhead framework coupled with high productivity ratios have
enabled our bank to effectively compete head-to-head with the mega-
banks in our market and actually take market share away while also
producing the levels of profitability our shareholders demand.However,
new regulations just keep being piled on top of older outdated
requirements and we are clearly experiencing expense ratios that are
increasing much more rapidly than our ability to increase revenues.

II. The Lost Opportunity Costs Are Significant for Community Banks,
Their Communities and Their Customers

The direct out-of-pocket expenses are just part of the story when
one realizes the significance of the opportunity costs. Instead of
teaching staff to reach out to new markets, trainers are bringing the
employees up to speed on the latest regulations. Instead of employee
time and focus being used to invest our precious capital to support
loans to hardworking people and businesses in our communities, it is
being spent interacting withconsultants, lawyers, and auditors. Instead
of investing our time and efforts to develop new products and solutions
to meet the ever-changing demands and needs of our customers, we are
spending our time analyzing changes to software to assure compliance
with all the new changes. Excessive regulation saps staff and resources
that should have gone to meeting the needs of our customers. Even a
small reduction in the cost of compliance would free up billions of
dollars that could facilitatelending activity and other banking
services. The differentiating factors that set community banks apart
from the mega-banks are a) that ability to focus our complete attention
on our local community and the local customer, and b) to provide local
operational support and local decisions. These factors are customer-
centric and customer driven. If we are forced to become more internally
focused in an attempt to deal with the avalanche of regulations, we
will lose the competitive advantage that we have created and that has
been so well received by our customer base. Customer service levels
will decline and it is the customer who will be disadvantaged by these
actions. As I mentioned earlier, Valley Bank's presence has provided a
strong catalyst to the economic growth, health, and vitality of our
community as we have invested over $1 Billion of investment into our
community in the form of loans during our 17-year history. We would
like this to be our role for many, many years to come. If banks,
especially community banks, find themselves so internally-focused on
compliance related activities that they cannot attend to the job of
extending credit,any hopes for a sustained economic recovery in this
country will fade quite rapidly.

III. Unintended consequences of Dodd-Frank have far-reaching effects
on the very ones the legislation was designed to help and
protect

Congress must be vigilant in its oversight of the efforts to
implement the Dodd-Frank Act to ensure that rules are adopted only if
they result in a benefit that clearly outweighs the burden. There is an
unintended consequence that is occurring right now in our marketplace
and most likely throughout all of America. In an effort to find new and
additional revenues to offset the rising costs of new regulations,
banks of all sizes are reviewing and analyzing their service charges
and fees associated with both loan and deposit products and services.
Due to relatively weak loan demand and compressing net interest
margins, the traditional spread income most banks, and especially
community banks, relied on to support noninterest expense growth is not
growing. Therefore, banks are increasing service related fees in an
attempt to generate the needed revenues to offset these rising costs.
Free checking and ``no minimum'' balance products are disappearing from
the marketplace, and it is not just happening at the mega-banks.
Additionally, banks are utilizing their customer profitability systems
to a much higher degree to determine which customers are profitable and
which ones are not. The result will surely be an effort to improve
profitability throughout the spectrum which will result in either
increased fees or decreased availabilityof services. In either case,
the customer will be paying more or choosing not to use the service at
all.
Another unintended consequence we are facing lies in residential
mortgage lending. Following the residential mortgage meltdown that
essentially obliterated the mortgage broker network, banks once again
were viewed as a potential resource for home buyers and homeowners
throughout the country. Banks were quite willing to jump in and fill
this void and many banks immediately began the process of expanding
residential mortgage loan operations. Our bank did exactly that.
However, we are finding some rules under Dodd-Frank, if done
improperly, could literally drive banks out of the mortgage business.
These new rules on mortgage lending and on mortgage originator
compensation are particularly problematic provisions.
One of the changes required in the Dodd-Frank Act is that lenders
must show that borrowers meet an ``ability to repay'' test--which can
be challenged in court for the entire life of the loan, raising the
risk of litigation tremendously. It also imposes broad risk retention
requirements on most loans sold into the secondary market. These
requirements have the potential to make it much more costly for banks
to make loans and could have the unintended consequence of denying
quality loans to creditworthy borrowers. Dodd-Frank does provide that
banks can show they have met the ability to repay test by making loans
that fall into a category known as a Qualified Mortgage or QM. The QM
is intended to be a category of loans with certain low risk features
made to borrowers shown to be creditworthy and able to meet the payment
terms. The Consumer Financial Protection Bureau (CFPB) is tasked with
finalizing a rule setting forth exactly what will qualify as a QM, but
a number of concerns have arisen with regard to the approach which the
CFPB may take. If the QM category is made too narrow by excluding too
many loan types or by requiring borrowers to meet too high a standard
of creditworthiness, then credit will contract and potential borrowers
will be denied credit for which they would otherwise qualify.
How these exceptions are defined will dramatically impact the
willingness and ability of banks to make mortgage loans, and of
consumers' ability to qualify for credit.
The thought of quality institutions being forced from the mortgage
market and of otherwise creditworthy borrowers being denied credit
because of overly broad regulations is chilling--especially at a time
when our housing economy has been severely battered and is just
beginning to show signs of recovery.
There are many other issues raised in Dodd-Frank that will affect
the competitiveness of banks and that will also negatively affect
customers of banking services. Below, I describe two of those issues.
The municipal advisor proposal would limit services to
municipalities by local community banks.
Banks offer public sector customers banking services and are
regulated closely by several government agencies. It is generally
believed that Dodd-Frank intended to establish a regulatory scheme for
unregulated persons providing advice to municipalities with respect to
municipal derivatives, guaranteed investment contracts, investment
strategies or the issuance of municipal securities. The Securities and
Exchange Commission has proposed a very broad definition of
``investment strategies'' that would cover traditional bank products
and services such as deposit accounts, cash management products and
loans to municipalities. This means that community banks would have to
register as municipal advisors and be subject to a whole new layer of
regulation on bank products for no meaningful public purpose.
Such regulation would be duplicative and costly. Consequently,
community banks would not be able to offer services to municipalities
at a price that would be competitive. As a result, many banks may
decide not to provide banking services to their local municipalities--
forcing these local and state entities to look outside of their
community for the services they need. This proposal flies in the face
of the President's initiative to streamline federal oversight and avoid
new regulations that impede innovation, diminish U.S. competitiveness,
and restrain job creation and economic expansion.
We urge Congress to oversee this implementation and ensure that the
rule addresses unregulated parties and that neither Section 975 of
Dodd-Frank nor its implementing regulation reaches through to
traditional bank products and services.
The swaps push-out provision would create competitive imbalances
between U.S. banks and foreign counterparties.
Section 716 of Dodd-Frank, will prohibit swap dealers from
receiving various forms of federal assistance including FDIC insurance
and access to the Federal Reserve discount window. This provision will
essentially require banks that are swap dealers to ``push out'' many
swaps transactions to a nonbank affiliate. We support repealing the
push-out provision because failing to do so would have a negative
impact on bank and bank customer risk management practices and create
competitive imbalances between U.S. and foreign banks.
Banks currently have the ability to centralize risk management for
each customer relationship by conducting a customer's swaps
transactions together with that customer's other transactions. In other
words, banks can assess the credit risk of the customer and negotiate
loan, swap, collateral and other credit terms as part of a complete
package. Customers benefit because they can receive more attractive
loan terms or a higher credit limit if the bank can net and setoff
different exposures from each of the customer's transactions. If the
push-out provision is not repealed, bank customers will face higher
costs and reduced credit availability.
Many customers also prefer to have a bank as a swap counterparty
because it enables customers to centralize their own risk management of
loans and other forms of credit. Customers now have ``one stop
shopping'' for all of their credit needs, including swaps that may
offset their credit risk. Swap customers may also prefer to have a bank
as a counterparty from a credit risk standpoint. If banks have to push
out some swaps transactions into a separate affiliate, then customers
will not be able to centralize credit risk management with a bank even
if it is their preferred swap counterparty.
The push-out provision would also create competitive imbalances
between U.S. banks and their foreign counterparties. To date, it does
not appear that other countries are considering adopting ``push-out''
requirements. Therefore, it is likely that foreign banks will still be
able to offer integrated credit and risk management products in one
entity. Customers who still want ``one stop shopping'' for their credit
needs--including swaps--may choose to move their business to foreign
banks. This may not ever affect my community bank in a direct manner,
but letting our larger banks lose larger US customers to foreign banks
concerns me greatly as I hope it does you.
If banks have to create a separate affiliate to conduct swaps
transactions, then the affiliate also will have to be funded separately
and meet separate capital requirements. The capital requirements for
the affiliate may be entirely different from bank capital requirements
if the swap transactions are done through a broker-dealer affiliate.
Bank customers would have to sign new credit agreements with the bank
and its affiliate. Considering all of these costs and complexities, it
is likely that only large financial institutions would be able to
create, fund, and capitalize a separate affiliate to conduct swaps
activities that need to be ``pushed out'' of a bank. My own bank uses
swaps as part of our commercial lending process, so this is a critical
competitive issue for community banks as well as large banks.

CONCLUSION

The consequences of excessive regulation are real. Costs are rising
and will continue to rise. To offset these rising costs, banks must
find new and additional revenue sources, most likely from increased
service fees, or cut back the services they provide. Both of these
actions will adversely affect the customer.With the regulatory
overreaction, piles of new laws, and uncertainty about government's
role in the day-to-day business of banking, meeting local community
needs is proving difficult at best.
My bank's philosophy--shared by community banks everywhere--has
always been to treat our customers with respect and to strive to
provide the best possible financial solutions to create economic growth
and wealth creation. We will continue to do this, but with the many new
hurdles being placed in our way, our customers' most basic banking
needs will inevitably be more costly, more time consuming to complete
and less beneficial to them as the end result.
In my view, there will be three scenarios that will evolve for the
community banks of this country. There will be those community banks
that will just be unwilling or unable to take on these hurdles and they
will move to partner with others in the short term. There will be a
second group of community banks that will accept the challenge but
eventually fail to produce the return on investment their shareholders
demand, and they will ultimately partner up as well. And finally, there
will be a much smaller group of banks that are able to successfully
navigate the regulatory landscape and be able to also providethe return
on investment that just may ensure their independence for the
foreseeable future. These scenarios lead us to a banking industry with
far fewer competitors than we have today, which may be the largest
unintended consequence of all from Dodd-Frank.
Thank you for allowing me to appear before you today.
__________

Mr. Goodlatte. Thank you, Mr. Gutshall.
Professor Levitin, welcome.

TESTIMONY OF ADAM J. LEVITIN,
GEORGETOWN UNIVERSITY LAW CENTER

Mr. Levitin. Thank you. Good afternoon, Mr. Chairman
Goodlatte, Ranking Member Watt, and Members of the
Subcommittee. Thank you for inviting me to testify at this
hearing.
My name is Adam Levitin. I am a Professor of Law at
Georgetown University and Visiting Professor at Harvard Law
School. Financial regulation is a major focus of my teaching
and scholarship.
I wish to make two points about the effect of the Dodd-
Frank Act on competition in the financial services industry.
The first point is on ``too big to fail,'' and the second point
is on regulatory compliance costs.
The ``too big to fail'' problem long predates the Dodd-
Frank Act. The Dodd-Frank Act is the first step in addressing
the ``too big to fail'' problem. The Dodd-Frank Act's approach
to ``too big to fail'' is to identify systemically important
financial institutions, or SIFI's, and then subject them to
increased regulatory scrutiny and requirements. Critically--and
I want to emphasize this point--the identification of financial
institutions as SIFI's does not make the institution
systemically important. It merely recognizes a preexisting
reality.
There are two types of financial institutions that are
designated as systemically important by the Dodd-Frank Act.
First are all bank holding companies with over $50 billion in
consolidated net assets. Second are non-bank financial holding
companies designated as systemically important by a two-thirds
majority vote of the newly created Financial Stability
Oversight Council, and that vote has to also include the
affirmative vote of the Treasury Secretary. To date, the
Financial Stability Oversight Council has not designated any
firms as systemically important. It has only published a final
rule detailing how it will make such a determination.
The Dodd-Frank Act subjects the systemically designated
firms, non-banks and large bank holding companies, to
heightened regulatory requirements. These include risk-based
capital requirements, the leverage limits, liquidity
requirements, overall risk management requirements, the
development of risk resolution plans known as living wills,
credit exposure report requirements, and concentration limits.
All of this will have the effect of increasing regulatory costs
on ``too big to fail'' firms. We don't know how much it is
going to increase the costs, but the Federal Reserve Board has
recently proposed a set of standards that include 100 to 350
basis point capital surcharge on these large institutions.
The goal of the increased regulation of the systemically
important financial institutions is two fold.
First, it aims to ensure that there is better upfront
prudential regulation of the financial institutions that pose
the most risk.
And second, increased regulation of these systemically
important institutions may ultimately discourage financial
institutions from becoming ``too big to fail'' by
counterbalancing the funding benefits of being ``too big to
fail'' with increased regulatory costs. If implemented
correctly, the Dodd-Frank Act will make it unprofitable to be
``too big to fail'' and investors will demand the ``too big to
fail'' firms break themselves up. This is a conceptually sound
approach that should have the collateral effect of leveling the
competitive playing field between ``too big to fail'' firms and
smaller financial institutions.
Regarding regulatory costs, there is no doubt that
regulatory burdens for all banks, large and small, have
increased in recent years with provisions like the Safe
Mortgage Licensing Act that predate Dodd-Frank. What is
important to emphasize, though, is that the Dodd-Frank Act
itself imposes very few regulatory burdens specifically on
community banks. While the Dodd-Frank Act has become the
flagship of financial regulatory reform, most of its provisions
have little or no bearing on small banks. Thirteen of the acts
16 titles are unlikely to affect most small financial
institutions.
Of the few provisions that do affect small banks, many have
yet to go into effect, so they cannot be blamed for small
banks' travails. For example, title X of the Dodd-Frank Act
created the Consumer Financial Protection Bureau. Virtually all
of the CFPB's rulemakings in progress could have been
undertaken before Dodd-Frank by Federal bank regulators. The
rulemakings are under preexisting powers. Yet, had that
occurred, it would have been without the CFPB's required small
business impact review under the Small Business Regulatory
Enforcement Fairness Act, or SBREFA, and without the cost-
benefit analysis required by the CFPB for rulemaking.
All in all, then Dodd-Frank is actually creating more
protections for small financial institutions rather than
creating problems for them.
The Dodd-Frank Act, in sum, is likely to help level the
playing field between large and small financial institutions by
imposing regulatory costs on ``too big to fail'' firms that
will help offset their funding advantage from their implicit
government guarantee. The creation of the CFPB will level the
playing field between banks and non-banks, and it will give
small financial institutions a voice in the regulatory process
through SBREFA.
To be sure, there are general regulatory costs imposed by
Dodd-Frank that are likely to be harder for small financial
institutions to absorb, but overall, it would seem that the
Dodd-Frank Act helps level the competitive playing field
between large and small financial institutions.
Thank you.
[The prepared statement of Mr. Levitin follows:]

__________

Mr. Goodlatte. Thank you, Professor Levitin.
Mr. Pollock, we are pleased to have your testimony as well.

TESTIMONY OF ALEX J. POLLOCK, RESIDENT FELLOW, AMERICAN
ENTERPRISE INSTITUTE

Mr. Pollock. Thank you, Mr. Chairman and Ranking Member
Watt, Chairman Conyers, Members of the Subcommittee.
I believe all major expansions of financial regulation have
effects on competition, even though they are principally
addressed to controlling risk, and in fact, they are often more
successful at changing competition than they are at controlling
risk.
For example, after the financial crises of the 1980's there
were three major acts of Congress expanding regulation. It was
predicted at the time that this would ensure we would never
again have a financial crisis--a poor prediction, needless to
say, but arguably among their effects was the dominance of
Fannie Mae and Freddie Mac in the market for mortgages.
It is my view that similarly the Dodd-Frank Act will not
prevent another crisis although, of course, proof awaits the
unknowable future. However, it is certain and is universally
agreed that Dodd-Frank has and will continue to expand the
regulatory burden on financial businesses, including community
banks.
The disagreement is about whether this expanded burden is
worth it. My view is that it is not worth it, and among its
effects will be competitive disadvantages for smaller banks. As
the Chairman said, if complex, expensive regulatory
requirements are placed on all competitors, the burden will be
disproportionately heavier for small competitors and large
firms will be relatively advantaged. Consider in this context
the total staff of a median-sized bank, which is 37 employees.
Further, it is not unreasonable to think that Dodd-Frank's
effects will impede the ability of small banks to raise capital
as has been suggested by the Conference of State Bank
Examiners.
Professor Amar Bhide has proposed that we reinstate, ``old-
fashioned banking where bankers know their borrowers and have
case-by-case local knowledge.'' I bet that is a proposition we
would all agree to, but contrast this to top-down regulatory
formulas in mortgage lending as a key example, which reduce
community banks' natural local advantages.
Regulation itself is one of the most important procyclical
factors in credit markets, especially in the down cycle when
regulators, reacting to past mistakes, clamp down forcefully.
This contracts credit further than the crisis already has, as
we have once again experienced.
Community banks can be very successful managers of
residential mortgage credit to their own customers in their own
towns. A healthy, competitive residential mortgage sector, in
my opinion, should feature mortgage credit risk widely
dispersed among knowledgeable local lenders, who also have the
ability to share credits among themselves.
But what did the American GSE-centric mortgage system
create instead? As we all know, a duopoly system of Fannie and
Freddie with mortgage risk concentrated on the banks of the
Potomac. One of the most important competitive effects of Dodd-
Frank is its well-known failure to address the duopoly system
of Fannie and Freddie in any way.
In the meantime, all actors in the residential mortgage
market await and debate the QRM, or qualified residential
mortgage, rules. These rules will determine when mortgage
competitors are required to retain credit risk in mortgages
which are securitized. This is the ``skin in the game'' idea.
Now, I think having mortgage lenders retain credit risk in the
loans they make is an excellent idea as long as the risk
retention is a voluntary market transaction. The Dodd-Frank
idea by contrast is not a voluntary market arrangement, but a
mandatory and formulaic requirement.
Now, as has been said by many others, a notable provision
of Dodd-Frank is the designation of systemically important
financial institutions, or SIFI's. As has also been said,
SIFI's will be subject to special regulatory requirements and
oversight--a burden. But on the other hand, with regulators
having devoted so much special effort to making them safe, the
failure of a SIFI would be the obvious failure of the
regulators themselves.
The logical conclusion for a potential creditor, large
depositor, or counterparty of any kind to draw is that they
will be safer with a SIFI, all political protestations to the
contrary notwithstanding. Remember how various government
officials tried to claim that Fannie and Freddie were not
guaranteed by the government. But buyers of GSE debt and MBS
did not believe such claims and they were right.
So what is the difference between a SIFI and a GSE? In my
opinion, not much. Effectively creating more GSE's will tend to
make the financial markets more consolidated and concentrated.
I want to just mention rating agencies, if I may, Mr.
Chairman, because they are in Dodd-Frank. We are addressing a
competitive issue, namely, a previous government-sponsored
duopoly in the credit ratings business. My written testimony
recommends a simple amendment to Dodd-Frank regarding the
credit rating agency provisions which would create a more pro-
competitive approach.
In conclusion, it is my belief that all proposed financial
regulations should specifically take account of their effects
on competition, just as this hearing is considering.
Thank you for the opportunity to share these views.
[The prepared statement of Mr. Pollock follows:]

Prepared Statement of Alex J. Pollock, Resident Fellow,
American Enterprise Institute

Mr. Chairman, Ranking Member Watt, and members of the Subcommittee,
thank you for the opportunity to be here today. I am Alex Pollock, a
resident fellow at the American Enterprise Institute, and these are my
personal views. Before joining AEI, I was the President and CEO of the
Federal Home Loan Bank of Chicago for 13 years, where the customers
were about 800 member financial institutions, most of them community
banks. In all I spent 35 years working in financial services, and have
extensively studied and written on the problems of financial cycles.
After every over-optimistic credit expansion comes the ensuing
bust. After every bust, come legislation and expanded regulation to try
to prevent the next crisis from happening--but it always happens
anyway. For example, after the financial crises of the 1980s, we had
the Financial Institutions Reform, Recovery and Enforcement Act of
1989, the FDIC Improvement Act of 1991, and the very ironically named
Federal Housing Enterprises Financial Safety and Soundness Act of 1992.
It was predicted at the time that this would ensure we would ``never
again'' have a financial crisis--a poor prediction, needless to say,
including the fact that Fannie Mae and Freddie Mac proved to be the
opposite of safe and sound.
After the corporate accounting scandals of 2001-2002, we had the
Sarbanes-Oxley Act, which attempted, among other things, to ensure
business risks were controlled by expanded rules and procedures. They
obviously were not.
After the great housing bubble and the collapse of 2007-2009, we
got the Dodd-Frank Act. It is my view that the greatly increased
bureaucracy and regulation mandated by this act will not prevent
another crisis--to know whether this is correct we have to await the
unknowable future. However, it is certain and universally agreed that
Dodd-Frank has and will continue to significantly expand the regulatory
burden on financial businesses, including community banks. The
disagreement is about whether this expanded burden is worth it or not.
About this there are of course conflicting views--my view is that it is
not, especially considering the negative effects on overall competition
in financial services.
I believe the central question posed by this hearing is excellent--
indeed we should be required to ask and answer about every regulation:
what are its effects on competition?
regulatory burden falls disproportionately on smaller competitors
As a general principle, if complex, expensive regulatory
requirements are placed on all competitors, the burden will be
disproportionately heavier for small competitors and large firms will
be relatively advantaged. Large firms already have internal
bureaucracies accustomed to complicated paperwork, reporting and
regulatory relationships, the costs of which they spread over large
business volumes. These economies of scale are not available to small
competitors.
Congress recognized this general problem in Dodd-Frank itself, when
it reduced the burden on small public companies of the notorious
bureaucracy of Sarbanes-Oxley's Section 404.
As Tom Hoenig (then President of the Federal Reserve Bank of Kansas
City and now a Director of the FDIC) said, ``Dodd-Frank has raised the
cost of financial transactions in America and that encourages
consolidation because it's the only way you can spread the costs over
larger assets.''
The CEO of M&T Bank, a well-managed regional bank, said last year
that the paperwork of Dodd-Frank had so far required 18 full-time
employees--that is before implementation of many other regulations now
in some stage of development, including whatever the Consumer Financial
Protection Bureau mandates, and before the arrival of the complicated
new risk-based capital requirements. Compare this to the total staff of
the median bank: 37 employees.
The complex new risk-based capital requirements, which are being
applied to all banks, large and small, are an interesting case of the
problem. Banking consultant Bert Ely concluded that ``the highly
granular features of many specific provisions in the regulatory capital
proposal will mandate a substantial increase in the number of both
financial and non-financial data items banks will have to collect on
individual assets in order to generate the numbers. Data of the type
now generally found in a bank's accounting records will not be
sufficient. Inadvertent compliance errors, when calculating capital
ratios, will increase.'' Ely speculates that these costs ``could drive
[smaller] banks to exit lines of business.''
It is not unreasonable to think that Dodd-Frank's effects will
impede the ability of small banks to raise capital. ``Investors are
concerned with a smaller bank's ability to respond to regulatory
obligations,'' wrote the Conference of State Bank Examiners. ``As
investors vote with their money on the regulatory burden issue,
policymakers should take notice that this is a very real issue with a
potentially adverse economic impact.''
Fletcher School Professor Amar Bhide has published an intriguing
discussion of financial reform entitled A Call for Judgment. He points
out the economic potency of competitive economies in which
decentralization gives ``many individuals the autonomy to make
subjective judgments,'' and in which they must live with the results of
their judgments. ``Specifically,'' he writes, ``I propose we reinstate
old-fashioned banking, where bankers know their borrowers'' and have
``case by case local knowledge.'' Thus they confront ``the
unquantifiable uncertainty that is an important feature even of
seemingly routine lending decisions.''
Obviously, he is describing the competitive advantage of well-run
community banks and recommending a system of decentralized credit
decision-making and credit risk bearing. Top-down regulatory formulas,
for example in mortgage lending, reduce this advantage, while complex,
expensive regulations create relative advantages for large
institutions.

THE EFFECTS OF DODD-FRANK ON MORTGAGE FINANCE

Regulation itself is one of the most important procyclical factors
in credit markets--a problem well known to theoreticians of financial
regulation. This is especially true in the down cycle, where we still
are in housing finance, as the regulatory efflorescence mandated by
Dodd-Frank continues. Reflecting each bust, including the most recent
one, regulators, afraid of being criticized, seeing the depletion or
disappearance of their deposit insurance fund, and reacting to the past
mistakes now so apparent in hindsight, clamp down forcefully on banks,
including refusing to charter new entrants which would bring unburdened
new capital to the sector. This contracts credit further than the
crisis already has, as we have once again experienced, this time in the
residential mortgage market.
Community banks can be very successful managers of residential
mortgage credit to their own customers in their own towns. A healthy,
competitive residential mortgage sector, in my opinion, should feature
mortgage credit risk widely dispersed among knowledgeable local lenders
of the kind Bhide pictures, who also have the ability to share credits
among themselves.
What did the American GSE-centric mortgage system create instead? A
dupoly system of Fannie and Freddie, with mortgage credit risk
concentrated on the banks of the Potomac, a system once claimed in
Congressional testimony and elsewhere to be ``the envy of the world.''
The result was that Fannie and Freddie lost every penny of all the
profits they had made in the 35 years from 1971 to 2006, plus another
$150 billion. They have been transformed in substance from insolvent
GSEs to government housing banks, but they are still there and more
dominant than before in mortgage finance.
One of the most important competitive effects of Dodd-Frank results
from a lack of action: its well-known failure to address the
concentrated, duopoly system of Fannie and Freddie in any way. Thus
concentration in the mortgage business and mortgage credit risk bearing
continues and grows. Indeed, some people are now calling for Fannie and
Freddie to be combined into a single mortgage securitizer--to turn
their conforming mortgage duopoly into a monopoly. I do not favor this
proposal.
In the mean time, all actors in the residential mortgage market,
including the community banks, are involved in the continuing complex
development of two mortgage regulations in particular, arising from the
requirement of Dodd-Frank: the ``QM'' (Qualified Mortgage) and ``QRM''
(Qualified Residential Mortgage) rules. By establishing top-down
formulas and escalating the legal risks to the lender of making
mortgage loans, these regulations will certainly increase the burdens
and reduce the role of local judgment in the mortgage business.
The QRM rule will determine whether mortgage competitors are
required to retain credit risk in mortgages sold into securitizations--
the ``skin in the game'' idea (the regulations will exempt loans sold
to Fannie and Freddie--another boost to concentrating mortgage risk in
them). I think having mortgage lenders retain credit risk in the loans
they make, when they are paid for so being in the mortgage credit
business, is an excellent idea--as long as the risk retention is a
voluntary, market transaction. In fact, for a community bank, bearing
credit risk in your own loans to your own customers, even if they are
being funded by the securitization market, is a logical business. It is
the basis of the Mortgage Partnership Finance program which we invented
15 years ago, when I was at the Chicago Federal Home Loan Bank--a
program which has had very good credit performance from 1997 to now,
and which definitely helps community banks compete in the mortgage
business.
The Dodd-Frank idea is not a voluntary market arrangement, but a
mandatory and formulaic requirement. The better approach would be to
facilitate and encourage mortgage credit risk retention by lenders, but
not mandate it.

WHAT'S THE DIFFERENCE BETWEEN A SIFI AND A GSE?

A notable and much-debated provision of Dodd-Frank is the
designation of very large financial firms as ``SIFIs''--Systemically
Important Financial Institutions. What will the competitive effects of
this be?
SIFIs will be subject to special regulatory requirements and
oversight--a burden. But on the other hand, this will cause them to be
perceived as safer. Moreover, they will most probably benefit from
being designated as of special interest and significance to the whole
financial system and to the government. Having devoted so much special
attention to making them safe, the failure of a SIFI would be the
obvious failure of the regulators themselves, and a crisis will induce
their normal bailout strategy. So in my view, becoming designated as a
SIFI effectively makes a competitor a GSE--and we know to what lengths
the government will go to protect the creditors of GSEs.
The logical conclusion for a potential creditor, large depositor,
or counterparty of any kind, to draw is that they will be safer with a
SIFI--all political protestations to the contrary notwithstanding.
Remember how various government officials tried to claim that Fannie
and Freddie were not guaranteed by the government. But buyers of GSE
debt and MBS did not believe such claims, and the investors were right
to believe instead that they were guaranteed by the taxpayers. I
believe similar beliefs will apply to SIFIs.
So what's the difference between a SIFI and a GSE? Not much.
That means, as has been pointed out by many observers (and
contested by others, but incorrectly, in my view) that SIFIs will be
even more advantaged in the amount and cost of funding and deposits
available to them, and will be preferred counterparties for financial
transactions, compared to smaller competitors. This will tend to make
the financial markets more consolidated.
An interesting comparison in this contest is the much more
concentrated banking system of Canada, which has received a lot of
praise over the last few years. Canadian banking is entirely dominated
by five big, universal, nationwide banks, all of which are certainly
SIFIs. Oligopolies are arguably more stable than competitive markets.
Should we trade our 7,000 banks for such an oligopolistic structure? I
wouldn't.

RATING AGENCIES

A pro-competitive provision of Dodd-Frank, one I firmly support,
was to prohibit regulatory agencies from making the use of the ratings
of credit rating agencies be required by regulation. This helps break
up what was previously a government-sponsored duopoly in the credit
ratings sector. However, the provision went too far, and has now caused
a competitive issue for smaller banks.
Community banks have an advantage in local credit judgments, but a
natural disadvantage in credit analysis of nationally-traded
securities, as a matter of knowledge and scale. It makes perfect sense
to allow them, without requiring them, to use credit ratings for their
investment and money market portfolios. The Independent Community
Bankers of America have proposed allowing use of external credit
ratings, and I have been told that regulators have privately expressed
the desire to gain flexibility in this matter by an amendment of the
Dodd-Frank Act.
The problem is that Dodd-Frank provides (in Section 939A) that
regulators must ``remove any reference to or requirement of reliance of
credit ratings.'' The fix is simple: delete the phrase '' reference to
or.'' The provision would then read that regulators must ``remove any
requirement of reliance on credit ratings.'' In other words, no
requirements allowed, but use could be approved in the appropriate
circumstances if proposed by the bank--this would remove an unintended
competitive disadvantage for smaller banks.
promoting entry and competition
A British Member of Parliament and former banker has recently
recommended the following principle: ``Regulators must have a specific
objective to reduce barriers to entry and promote competition.'' A good
idea. Proposed regulations, including those arising from Dodd-Frank,
should specifically take account of their effects on competition among
their costs and benefits--just as this hearing is considering.
Thank you again for the opportunity to share these views.
__________

Mr. Goodlatte. Thank you, Mr. Pollock.
And we will now turn to questions from Members of the
Committee, and I will start with a question for you, Mr.
Gutshall.
Does Valley Bank compete in Roanoke with branches of large
banks covered by titles I and II of the Dodd-Frank Act?
Mr. Gutshall. Yes, we do.
Mr. Goodlatte. And to the extent that these ``too big to
fail'' institutions receive a funding advantage, how does that
affect your ability to compete to offer loans in Roanoke?
Mr. Gutshall. Well, it does make it difficult. The larger
banks do have better access to funding not only from depositors
but from other sources. So their cost of funds are less than
ours, in most cases as much as 50 basis points today, which is
a huge hurdle to get over.
We do compete. We compete on price, but we compete on
service primarily. And we get most of our customers because
they want to deal with somebody like our bank, somebody who
understands their business and willing to spend time with them.
So we cannot compete. I don't think we will ever be able to
compete with the Wells Fargos and BB&Ts of the world on pricing
and cost, but we have to do it on service and that is the way
we do it. We have taken market share from everybody in the
Roanoke MSA. That is why we have grown to $800 million. And I
think we are a shining example of what a community bank can do.
Mr. Goodlatte. When a small bank is forced to spend a
dollar on complying with regulations, is that a dollar the bank
is unable to use to finance small businesses that could create
jobs?
Mr. Gutshall. Now, we see a dollar of compliance cost or
any other expense as a dollar against the profit, profits that
flow to the bottom line. We can use those, leverage them up
tenfold. Every dollar of capital should produce somewhere
around $10 worth of loans and investments. So it is a 10 to 1
ratio.
Mr. Goodlatte. And a higher percentage of your bottom line
is going to pay for regulations that diminish that bottom line
than a larger institution competing with you. Is that generally
true?
Mr. Gutshall. Well, I think just from economy of scale
concept, for us to comply with roughly the same regulations,
maybe not to the same degree, but we have to do that as well
and leverage that over $800 million in assets. A BB&T has got
$155 billion in assets to do the same thing. We cannot afford
in-house counsel or accountants on staff to help us with this.
We have to go outside. We have to pay their fees to advise us
on compliance issues. So a lot of that what we have to do, we
have to go outside to get and it is more expensive.
Mr. Goodlatte. Now, Professor Levitin says that a lot of
these Dodd-Frank regulations don't apply to small banks like
yours and that a lot of them haven't taken effect yet. But what
impact is the concept of best management practices having in
terms of bank regulators taking the regulations that they are
required by Dodd-Frank to impose on larger banks and which they
may not have to impose on a smaller bank, but do they anyway?
Mr. Gutshall. Well, we realize we are exempt from quite a
bit of Dodd-Frank, and we certainly appreciate that. A lot of
these things that flow through to the Federal Reserve, to other
regulatory agencies, they find their way down to us as well. I
mean, it is a best practices concept, and if it is deemed best
practice, then we will see it I think without a doubt.
Mr. Goodlatte. Mr. Pollock, are the risks of creating
disparities in the cost of doing business particularly acute in
the banking industry in which large and community banks have to
compete not only for customers by also for investor dollars?
Mr. Pollock. Mr. Chairman, I think it does include investor
dollars, but in particular it is money market funding dollars,
large deposits which are not guaranteed by the government, and
also all businesses in which you are a counterparty in various
kinds of transactions, be they securities or derivatives
transactions. In all those, as I said in my testimony, I think
the large banks have an advantage which will be increased, in
my judgment, by the SIFI role that has been defined by the Act.
Mr. Goodlatte. If the banking industry became more
concentrated and oligopolistic, would that harm the typical
American consumer, and if so, how?
Mr. Pollock. If you look around the world, Mr. Chairman, we
have an unusual banking system because it still has 7,000 banks
in it. Most countries have very concentrated, more
oligopolistic systems. I hope we don't move in that way. Big
banks have an obvious competitive role to play, but I do think
there is a special advantage in this country from keeping a
vibrant, robust community bank sector.
Mr. Goodlatte. What if we fail to do that? What is the
impact on consumers going to be?
Mr. Pollock. I think it takes away a major consumer and
business alternative, which is dealing in a local way based on
the banker who really knows his customers and knows the local
conditions. That is very important in maintaining a well
functioning and growing entrepreneurial economy.
Mr. Goodlatte. Thank you.
The gentleman from North Carolina, Mr. Watt, is recognized.
Mr. Watt. Mr. Chairman, I think I will defer to the other
Committee Members since they may have someplace to go. I got to
stay.
Mr. Goodlatte. I will yield next to the gentleman from
Michigan, Mr. Conyers, for 5 minutes.
Mr. Conyers. Thank you, Chairman Goodlatte, and thank you,
Ranking Member Watt.
Gentlemen, this is a very academic discussion of a problem
that has some other dimensions. For example, can any of you
explain to us about the amount of loss in the 2008 financial
crisis in general?
Mr. Pollock. I will take a try at that, Mr. Chairman.
Mr. Conyers. Thanks, Professor Pollock.
Mr. Pollock. Chairman Conyers, I have thought a lot about
that. I have written a book on financial cycles called ``Boom
and Bust,'' which has the advantage of being short, if you ever
want to look at it.
Mr. Conyers. I am more interested than ever. [Laughter.]
Mr. Pollock. Financial cycles are apparent in all of
financial history. They repeat. They always have multiple
occasions. They always arise out of an over-optimistic group-
think, you might say.
In our case, we have the interaction, as is often in a
bubble, between asset prices in houses----
Mr. Conyers. How much was lost?
Mr. Pollock. Oh, do you want a dollar number? It is many,
many hundreds of billions of dollars.
Mr. Conyers. It didn't reach the trillions.
Mr. Pollock. And the losses of Fannie and Freddie alone
were $250 billion.
Mr. Conyers. Right.
Mr. Pollock. So it is bigger than that.
Mr. Conyers. And do any of you have something that you can
tell us about the fact that in many countries around the
planet, there is action being considered against the biggest
banks, including UBS, JP Morgan, Citigroup? I mean, this was a
worldwide collapse of our financial system, Professor Levitin,
that seemed to have taken economists by surprise. But now that
we look back on it, there is less justification for the
surprise. Is that a fair statement?
Mr. Levitin. Well, not being an economist, I can't speak
for it. But I think if you look back and place the Dodd-Frank
Act into context, we saw a financial crisis, the likes of which
certainly have not been seen in my lifetime, and you have to go
back to the Great Depression to find anything like it. If
anything, I think what the Dodd-Frank Act does on ``too big to
fail'' is too modest. I think the approach is sound
conceptually, but it leaves a lot to the regulatory
implementation.
You asked about the cost of the crisis. I think it is very
important that we be cognizant of--that we compare the costs
imposed by financial crises with the costs that may be imposed
by regulation. And if you are at all risk-averse, I think this
is not even a close one, that the regulatory costs here are a
small insurance premium for making sure that we do have not
have an economic collapse.
Mr. Conyers. Now, JP Morgan Chase, $2 billion loss,
irresponsible bets in the derivatives market. You say it was $9
billion. My colleague says it was not $2 billion. It was $9
billion.
Barclays' deliberate inflation of key banking interest
rates like LIBOR have triggered revelations that Chase,
Citigroup, and others may have undertaken similar actions. Is
that too drastic an accusation to be made publicly?
Mr. Levitin. I don't think so. I think it has been all over
the newspapers. And I would say with that $9 billion, I think
it is $9 billion and counting. We haven't seen the end of it
unfortunately. I think that we are just starting to learn the
extent of financial institution malfeasance before and after
the financial crisis.
Mr. Conyers. Could I get 15 seconds, Mr. Chairman, to ask--
--
Mr. Goodlatte. Without objection, the gentleman is
recognized for an additional minute.
Mr. Conyers. Mr. Pollock his impressions of this line of
discussion?
Mr. Pollock. Adam and I were discussing before the hearing,
Mr. Chairman, this very interesting situation. One of the most
interesting aspects of it is the potential involvement of the
regulators and the central banks themselves. There are
allegations that the Bank of England or the government were
possibly encouraging or even directing the banks to do this. It
was said today that the Federal Reserve Bank of New York was
aware of this several years ago.
When we discuss any financial crisis, what we find is that
it isn't true that regulation protects us. Adam, you and I may
disagree on this. The regulators and the central banks are part
and parcel of the problems. Everybody is all mixed together.
That is what makes them so hard to anticipate and to manage.
That is true in this LIBOR case as well, apparently.
Mr. Conyers. Thank you, Chairman Goodlatte.
Mr. Goodlatte. I thank the gentleman.
The gentleman from Ohio, Mr. Chabot, is recognized for 5
minutes.
Mr. Chabot. Thank you, Mr. Chairman.
Mr. Gutshall, if I could ask you a question. I agree with
you that our community-based financial service providers, both
community banks like yours and credit unions for that matter,
are absolutely essential pillars in the American banking
system. It is clear that community banks and credit unions are
facing an increasing amount of regulatory burden in terms of
the breadth and pace of rulemaking from the CFPB and other
regulators. Regulators including all of those that sit on the
Financial Stability Oversight Council have a responsibility to
information-share and coordinate with each other in an effort
to make the post-Dodd-Frank environment as manageable as
possible for those institutions serving Main Street.
You mentioned in your testimony that Valley Bank has
invested over $1 billion of investment loans during your 17-
year history. You also mentioned the significant opportunity
costs that come from Dodd-Frank compliance.
My question is if you had had to comply with Dodd-Frank
over your entire 17-year history, approximately how much do you
think that Dodd-Frank compliance would have cost you out of
that $1 billion?
Mr. Gutshall. That is a very good question and a very tough
one to answer as well. Typically if we are allocating somewhere
close to 8 to 10 basis points of our earning assets for
compliance issues, that would have taken 10 cents off of every
dollar. So that $1 billion could have shrank to, say, $6
billion or $7 billion--$600,000 or $700,000 per year. So it
could have cut our lending by about 3 or 4 percent.
Mr. Chabot. And, Mr. Pollock, let me ask you. The name of
your book again was ``Boom and Bust''?
Mr. Pollock. ``Boom and Bust.''
Mr. Chabot. ``Boom and Bust,'' okay. You get it on Amazon
or where is it available?
Mr. Pollock. If I am allowed to say this, you can buy it on
Amazon for $9.95. [Laughter.]
Mr. Chabot. I think you are allowed to say that.
And like Mr. Conyers, the fact that it was short kind of
appealed to me as well. But that is what I would like to read.
And with your knowledge about the financial cycles that we
have seen over the years repeated again and again--and most of
that time was, obviously, not during Dodd-Frank's existence. We
now have it. Are there things that could have been done that
would have made sense, that could have dealt with the financial
meltdown and other things short of Dodd-Frank or different from
Dodd-Frank? Or do you have an opinion on that?
Mr. Pollock. Yes, Congressman, I do. With regard to
mortgages in particular, I actually have published a list of 10
things that one could have done or should have done. Of course,
notable among them is dealing with Fannie Mae and Freddie Mac.
Fannie and Freddie I think played a role which is often not
understood, which was allowing large amounts of foreign money
to drive up the prices in American real estate without taking
any risk. I think a general principle is if you want to invest
your money and take the risk, that is fine, but by the
government guarantees, as I said, denied, but nonetheless real,
they allowed large amounts of money to come in, drive up real
estate prices, drive up risk, but not take any risk themselves.
Investors have their risk now being paid for by ordinary
taxpayers as they provide the money to pay off Fannie's and
Freddie's obligations.
So the biggest thing would have been to deal with them in
restructuring the mortgage finance market which was the center
of the problem in what became in the bubble the insidious
interplay of rising asset prices and ever-expanding credit.
They were major factors in that credit expansion.
Mr. Chabot. Thank you. My time is rapidly expiring. Just
let me ask you one more question, if I could, Mr. Pollock.
The Community Reinvestment Act. Do you have an opinion as
to the relationship between that and the ultimate financial
crisis that we found ourselves in in this country?
Mr. Pollock. Anytime one is directed to make loans that
look riskier to you in order to fulfill a regulation, I believe
that is a mistake. Loans ought to be made as objectively as
possible to good credits in order to create good credit, and
the more we have a system like that, the better it will be.
Mr. Chabot. Thank you.
Mr. Goodlatte. I thank the gentleman.
The gentlewoman from California, Ms. Waters, is recognized
for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman.
Let me just start off by saying that I agree with Mr. Watt
that this hearing is quite unnecessary, but we know what is
going on. As we approach the 2-year anniversary of the passage
of the Dodd-Frank Wall Street Reform and Consumer Protection
Act, some of my colleagues on the other side of the aisle want
to mark this occasion by trying to make the case for repeal of
the Act or otherwise try to undermine the regulation of an
industry that nearly brought our economy to its knees in 2008.
And I don't think we need to go into what happened during the
crisis and what caused the crisis. We all know what the
subprime meltdown was all about.
But we put a lot of time and effort into Dodd-Frank and we
listened to everybody that had something to say about it. And
we have a bill that really does attempt to reform the industry.
But since Dodd-Frank passed, the Republican efforts to
undermine Dodd-Frank have been extraordinary. They have passed
legislation to try and defund regulators, repeal the orderly
liquidation of authority, repeal risk retention, delay
derivatives regulations for 2 years, repeal liability for
credit rating agencies, prohibit CFTC and SEC regulation of
international swaps, all of this while we are witnessing some
other kinds of actions that are taking place that should cause
us all concern. We should be concerned about MF Global. We
should be concerned about the Bickwell in London and the
proprietary trading that we attempt to try and deal with with
the Volcker Rule. We should be concerned about the LIBOR
manipulations, et cetera.
So here is what I would like to say to the community banks.
You have a lot of friends in Congress, and we know that Dodd-
Frank really doesn't have a lot to do with the fact that you
are at some disadvantage with the big banks. We understand
that. And a lot of people, even in Dodd-Frank, as we were going
through the conference committee, took actions to try and
relate to some of the problems of the community banks.
I just feel really strange about community banks being
roped into these antics of my friends on the opposite side of
the aisle as they attempt to dismantle Dodd-Frank piece by
piece. And I would suggest to you that if you have not seen the
FDIC White Paper entitled ``Impact of Dodd-Frank Act on
Community Banks,'' that you ought to read it. You ought to read
it because if you read this paper and if you are not familiar
with a lot of what was done with Dodd-Frank that is to your
advantage, I think that you may change your mind about joining
with people who have other agendas that may not be in the best
interest of community banks.
Let me just ask quickly about some of the white paper that
describes the impact of Dodd-Frank on community banks.
Assessment base. As a result of Dodd-Frank, FDIC
assessments will now be based on average consolidated assets,
less average tangible equity, rather than total domestic
deposits. Is this helpful to community banks?
Mr. Gutshall. Absolutely.
Ms. Waters. That is.
Secondly, the offset of effect of increased reserve ratio.
In addition, Dodd-Frank increased the minimum reserve ratio for
the Deposit Insurance Fund from 1.15 percent of estimated
insured deposits to 1.35 percent. Is that helpful to community
banks? Mr. Pollock, you know everything. What do you have to
say?
Mr. Pollock. I try to pretend like I know everything.
Ms. Waters. I know.
Mr. Pollock. No, I don't think that is. That suggests a
higher deposit insurance premium for community banks, in fact,
which is an increased expense.
Ms. Waters. Okay. Let's go to increased deposit insurance
coverage. Dodd-Frank permanently increased the FDIC's basic
insurance coverage limits to $250,000. This higher coverage
level should help community banks attract and retain core
deposits. Is that helpful to you, Mr. Gutshall?
Mr. Gutshall. That is helpful, yes.
Ms. Waters. All right.
And in ``too big to fail,'' as with the increased deposit
insurance coverage, the end of ``too big to fail'' will make it
easier for smaller institutions to compete with larger
institutions. A level playing field will help to eliminate the
subsidy that ``too big to fail'' banks have enjoyed and
encourage market discipline. Do you think that is true? Is that
a statement that you could agree with, Mr. Gutshall?
Mr. Gutshall. Well, I believe that the ``too big to fail''
has obviously benefitted the larger banks. I mean, a lot of
customers feel more comfortable with their money in those
banks, and I think the TAG program that we all participate in,
which we hope will be extended, is a huge issue for community
banks.
Ms. Waters. Well, let me just----
Mr. Goodlatte. The time of the gentlewoman has expired.
Ms. Waters. Unanimous consent for at least 30 more seconds.
Mr. Goodlatte. Without objection, the gentlewoman is
recognized for an additional minute.
Ms. Waters. Mr. Pollock, exemption from section 404 of
Sarbanes-Oxley. For many years, community banks expressed
concerns about the auditor attestation requirements in section
404 of Sarbanes-Oxley for publicly traded companies. Dodd-Frank
effectively exempts public companies with less than $75 million
in capitalization from these requirements which cover many
publicly traded community banks. Is that helpful, Mr. Pollock?
Mr. Pollock. Congresswoman, the exemption from the onerous
bureaucracy of section 404 for small companies was a pro-
competitive provision in Dodd-Frank, which I applaud.
Ms. Waters. Which you applaud. Say it loudly so everybody
can hear you, Mr. Pollock.
I have a whole list of things here that is identified in
this white paper that is helpful.
Let me just say this as I wrap up, that again, you have a
lot of friends on both sides of the aisle who want to be
helpful to community banks. I don't want you to get caught up
in something else that is going on here which is not helpful to
community banks. I believe that what we have done----
Mr. Goodlatte. The time of the gentlewoman has expired.
Ms. Waters [continuing]. In Dodd-Frank--we will continue to
work with community banks because we think you have real value
in the community. We think people prefer to deal with you. We
think it is customer-friendly and all of those things. So let's
be careful about being, you know, right up here to deal with
these issues in the way that you are dealing with them because
I don't think it helps your cause. It hurts rather than helps.
I yield back the balance of my time if I have any left.
Mr. Goodlatte. The gentlewoman is well aware that she does
not.
And the gentleman from Georgia is recognized for 5 minutes.
Mr. Johnson. Thank you, Mr. Chairman.
Yes, I myself am also rather disturbed that you, Mr.
Gutshall, would be here to testify on this issue, Dodd-Frank.
You are not a bank that is too large to fail, but you are a
community bank and a darned good one, I would say, one that is
a 17-year-old community bank, assets of $800 million. You are
the number four in terms of market share with respect to
deposits in the Roanoke Metropolitan Statistical Area,
surpassing even Bank of America within that area. So for a 17-
year-old bank to do that, I think if we have banks that are the
backbones of the Main Streets throughout America that are as
well run as yours, America would be in great shape. So I do
appreciate you and I appreciate community banks in general. In
fact, when I was a practicing lawyer, my accounts were at a
local community bank. So I am a community bank guy.
And I don't understand why the majority, or the folks on
the other side, would bring a community banker up here to help
in the effort to get rid of Dodd-Frank which is mostly
concerned with banks that are ``too big to fail''. And I know
that community banks have a lot of regulations that they have
to abide by, and there are certainly more regulations that have
been applied to the ``too big to fail'' entities. And I think
they should be the ones up here to talk about over-regulated
they are in the face of $9 billion losses like JP Morgan has
admitted to, finally. I think they are the ones who should be
here sitting in your chair. We should be talking about
community banks specifically, how we can help them become more
competitive with these ``too big to fail'' entities, which it
seems like that is basically who my colleagues on the other
side of the aisle are concerned about. So why bring you up here
as a sheep in wolf's clothing kind of? We don't buy that. We
really don't buy that.
But, look, what impact did the repeal of Glass-Steagall
have on this ``too big to fail'' problem that it seems like it
is getting even larger with a $9 billion loss? It was $2
billion just a few weeks ago when it was announced. It was
announced, I think, on Friday and then on Monday it was a $3
billion loss, and now several weeks, it is a $9 billion loss
and no end in sight is what I am hearing. What impact did the
Glass-Steagall repeal have on Wall Street and the ``too big to
fail'' phenomenon, Mr. Pollock?
Mr. Pollock. Congressman, with specific reference to the JP
Morgan trading embarrassment, I think the answer is none as far
as----
Mr. Johnson. Well, I am talking about----
Mr. Pollock [continuing]. Activity could be done----
Mr. Johnson. I am talking about on Wall Street in general,
the Wall Street meltdown back in----
Mr. Pollock. I understand.
Mr. Johnson. Yes.
Mr. Pollock. And with respect to----
Mr. Johnson [continuing]. Contribute to Freddie Mac and
Fannie Mae.
Mr. Pollock. Glass-Steagall had little or nothing that I
can think of to do with Fannie Mae and Freddie Mac.
Mr. Johnson. Did Fannie Mae and Freddie Mac trade in
derivatives, by the way?
Mr. Pollock. Yes. They were major users of derivatives and,
as you know, had a large accounting scandal about derivatives
that cost the management their jobs.
Mr. Johnson. And we need to regulate that kind of trading
especially when it is for the account of the entity itself. Is
that not correct?
Mr. Pollock. Well, all of these things are happening inside
regulated entities, Congressman. I think overall if you look--
--
Mr. Johnson. But not in the community banking sector,
though, is it?
Mr. Pollock. It certainly isn't. They have their own and
different----
Mr. Johnson. They do it the old-fashioned way.
Mr. Pollock. Well, if they do it right, it is old-
fashioned, and that is another thing I applaud.
And if I could just say so also, Congresswoman, in the
couple thousand pages of Dodd-Frank, there are only two
provisions which I fully support.
Ms. Waters. Say it real loud. [Laughter.]
Mr. Johnson. You already had your 10 minutes,
Congresswoman. [Laughter.]
But anyway, Professor Levitin----
Mr. Goodlatte. The time of the gentleman has expired.
Without objection, the gentleman is recognized for 1 additional
minute.
Mr. Johnson. Thank you.
Professor.
Mr. Levitin. Regarding Glass-Steagall?
Mr. Johnson. Yes.
Mr. Levitin. I think there are two effects that are
important to note.
First, Glass-Steagall separated investment banking from
commercial banking. Putting them back together exposes insured
deposits--in other words, the government ultimately--to risk
taking that banks do in investment banking, and that is a
problem.
Secondarily, and I think----
Mr. Johnson. Subject to the $250,000 per account.
Mr. Levitin. Yes.
Mr. Johnson. Yes.
Mr. Levitin. Secondarily--and I think often overlooked on
this--is a political effect that was lost. Glass-Steagall
divided the financial services industry. And if you go back 30
years or so, 40 years, you would see that the commercial banks
and the investment banks and the life insurance companies
didn't get along. They would fight with each other. They would
fight with each other on legislation. They would fight about
regulations and they would litigate. And this affected the way
their lobbying worked because they were not presenting a
unified lobbying front that if you took a position that was
adverse to the commercial banks, the investment banks would
love you and vice versa.
What has happened is that they have found that it is easier
to unite and be a united front, and what that does is it makes
it much harder, I think, politically for Members of Congress
and for regulators to prevent deregulation. What we have seen
with the demolishment of Glass-Steagall is really a politically
united financial services industry, and I think that is a huge
impact that really has not been noticed.
Mr. Goodlatte. The time of gentleman has expired.
The gentlewoman from Texas, Ms. Jackson Lee, is recognized
for 5 minutes.
Ms. Jackson Lee. I thank the Chairman and the Ranking
Member for this hearing.
And I would like to start out, I think as many have started
out, to indicate to the panelists that I appreciate their
testimony and I appreciate Mr. Gutshall's representation of
community banks. And just for the record, I want to acknowledge
the vital role that community banks play and the interest and
commitment that your customers, clients, have. They love their
banks. I love my community banks that are in my constituency
and work very closely with them. And I want to see them as
strong--and as I noted by one of my colleagues, your record is
certainly strong in terms of assets. Many others have strong
assets.
And so as we are debating the health care repeal--and you
would ask the comparison--I always recognized that bills passed
are not in their most perfect form. And we work through the
legislative initiatives to ensure that we do address concerns
needing to be concerned. I certainly don't want to see a repeal
of the Affordable Care Act. I want to see the bill implemented
to save lives.
Dodd-Frank has the same basis. One might not say saving
lives, but those who have fell victim to some of the excesses
of some of our huge, multinational banks might think that they
are in fear of their lives. They have lost their assets. Small
businesses don't have access to resources. Major foreclosures,
still an epidemic, if you will, in the financial structure
where people's homes are still being foreclosed.
Not having heard your testimony--and I apologize for being
delayed in another hearing, but I will be posing a question to
you as to singularly some item that might be responsive to some
of the concerns. As you well know, you are a bigger community
bank. There are certainly a lot smaller ones that many of us
work with, but we do believe you are enviable to an asset to
the financial system.
So I am first going to go, however, to Dr. Levitin. And
tell me, as you look at the FSOC and its intent--and I just
want to read its name into the record because maybe if we heard
its name, Financial Stability Oversight Council, that is a
good-sounding purpose, at least if you take the words
literally. But it has gotten in the eye of the storm. The
President had to do a response through his own presidential
authority, which I support. But tell me what good can come to
Mr. Gutshall with this kind of structure, even though it seems
to focus on--it seems to have a consumer protection element, of
course, but what is your perspective on that?
Mr. Levitin. I want to make sure that we are speaking about
the same thing: the Financial Stability Oversight Council or
the Consumer Financial Protection Bureau?
Ms. Jackson Lee. I want to speak about both of them. So let
me start with the Consumer Protection Bureau first. Thank you.
Mr. Levitin. Sure.
With the Consumer Financial Protection Bureau, the first
good thing that can come to community banks is the creation of
the CFPB levels the regulatory playing field between banks and
non-banks. Non-banks compete in all kinds of consumer finance
activities, and before the creation of the CFPB, they were very
thinly regulated. Now they are subject to examinations just
like community banks are, and this means that they are going to
have to bear the same kind of regulatory costs as community----
Ms. Jackson Lee. Could you pause for a moment? Mr.
Gutshall, does that help you?
Mr. Gutshall. It does. I think that is a step in the right
direction, and they were the ones who should have been looked
at at the beginning.
Ms. Jackson Lee. And those are entities that deal in real
estate matters and other things or financial products, let me
just say, that would overlap.
Mr. Gutshall. Most of the overlap--I think where we saw
problems was in the mortgage business. The brokerage outfits
did push the banks, especially community banks, out of the
mortgage business.
Ms. Jackson Lee. I see common ground. Let me move on to the
Financial Stability Oversight Council, Professor.
Thank you, Mr. Gutshall.
Mr. Levitin. The Financial Stability Oversight Council you
can think of sort of a justice league of regulators, that it is
a collection of various financial regulators. And I think the
real benefit for community banks from having the Financial
Stability Oversight Council is that the FSOC is going to
designate which institutions it believes are systemically
important, and then it is required to impose additional
regulation on those institutions.
Ms. Jackson Lee. So let's get to the bottom line. Can we
find common ground for a banking structure of the community
banks, juxtaposed to ``too big to fail,'' as compatible with
Dodd-Frank? Would you find that they can actually find common
ground and find a positive response to their needs as opposed
to a negative response?
Mr. Levitin. I would think that there are numerous
provisions in Dodd-Frank that would be good for community
banks. There is some increased regulatory burdens. There is no
question about that. But there is also a lot of things that
help community banks by leveling the playing field between
either community banks and ``too big to fail'' banks or
community banks and non-banks. And I think those things are
really good for----
Ms. Jackson Lee. Is the regulatory scheme one that can be
ironed out, for lack of a better term? Is it something that we
should be looking at there critiquing and not undermine the
bill but be able to respond to it?
Mr. Levitin. I think that if community banks have
particular provisions in Dodd-Frank that they are concerned
about, those provisions should be examined, but concerns about
community banks are not an excuse for a wholesale repeal of
Dodd-Frank.
Ms. Jackson Lee. I would just conclude by saying, Mr.
Gutshall, we look forward to working with you. You have great
value. I am glad to hear that are some components that work for
you. Can we not work with the association that represents many
community banks and look at it as to how we structure some of
the review--and I have no commitment that anyone would want to
review it--but some of the review to constructively make sure
we have this structure in place but respond to your concerns?
Mr. Gutshall. I think we can and I appreciate that. Most
community bankers are concerned about the commoditization of
banking. And a lot of times when we win customers, it is
because we are more agile. We offer more options. It is just
not plain vanilla cookie cutter stuff, and it is very important
that community banks be allowed to continue to do that not only
in the residential mortgage business but also in the business-
related credit.
Ms. Jackson Lee. Discretion is important in your business.
It really is.
Mr. Chairman, I believe that I missed getting Mr. Pollock,
but I am sure he has absorbed the Q&A that I just engaged in
and he finds common ground to be able to support Dodd-Frank and
sees its great value. So I am sorry, Mr. Pollock, I did not get
a chance to seek any answers from you. [Laughter.]
But I have already gotten agreement and I am going to yield
back right now. Thank you. I yield back.
Mr. Goodlatte. The time of the gentlewoman has expired, and
the Ranking Member, the gentleman from North Carolina is
recognized.
Mr. Watt. Thank you, Mr. Chairman, and I thank my
colleagues for being here for the hearing.
I guess I better give Mr. Pollock a chance to tell us which
two provisions in the Dodd-Frank bill---- [Laughter.]
He considers good. I am just doing cleanup now since I
deferred to all the other Members till last. So go ahead and
let's put that in the record here.
Mr. Pollock. Thank you, Ranking Member Watt.
One is, as previously discussed, the exemption from
Sarbanes-Oxley, another regulatory expansion bill. For small
public companies, I think that was a very good idea. I am in
support of that.
The other is not allowing bank regulation to require the
use of credit ratings by credit rating agencies since credit
rating agencies were, as I said, a government-sponsored duopoly
with Standard & Poor's and Moody's. However, that second
provision actually needs a slight amendment which I recommend
in my written testimony to help----
Mr. Watt. I will be sure and take a look at that. And I
assume we would be taking that up in Financial Services not in
Judiciary. So I am glad to get those two points into the
record.
I want to publicly agree with Mr. Pollock that we never
thought that Dodd-Frank would prevent any future financial
crises. History, based on the research we were doing, and all
of the studies, when we were doing Dodd-Frank, indicated that
every 27 years or so, there is going to be a crisis because you
regulate and then you deregulate, and the profit motive becomes
a lot more salient than the regulatory motive. And over time,
that is what has happened throughout the history of our
country. So we are figuring Dodd-Frank is good for maybe 27
years if we are lucky. So I agree with you.
The final point I want to make is also something that you
said. You seem to applaud the value of ``know your customer''
in one of your comments. I just wanted to remind you that I was
the Chair of one of the Subcommittees when we were dealing with
``know your customer,'' and it requires substantial
regulations. All of the banks were complaining about the
regulations that went with ``know your customer.'' So the good,
old days ain't as good as they seem sometimes.
So I appreciate all of you being here. I didn't think much
of the hearing, as I said in my opening statement, but you
know, sometimes even good things come out of bad hearings.
I yield back, Mr. Chairman.
Mr. Goodlatte. I thank the gentleman for his admission that
good things come out of the hearings that are scheduled in this
Committee, and I happen to agree with that.
And I would like to thank our witnesses for their testimony
today.
And without objection, all Members will have 5 legislative
days to submit to the Chair additional written questions for
the witnesses which we will forward and ask the witnesses to
respond as promptly as they can so that their answers may be
made a part of the record.
Without objection, all Members will have 5 legislative days
to submit any additional materials for inclusion in the record.
And with that, I again thank the witnesses.
Mr. Watt. Mr. Chairman, might I ask that we just put into
the record the study that Ms. Waters was making reference to so
that we get that preserved in the record?
Mr. Goodlatte. Certainly. Without objection, the study will
be made a part of the record.
Ms. Waters. It is entitled ``Impact of the Dodd-Frank Act
on Community Banks.''
Mr. Goodlatte. Great. If you will provide a copy of that to
Committee staff, we will make sure it is made a part of the
record.
[The information referred to follows:]

__________

Mr. Goodlatte. And I thank the witnesses and declare the
hearing adjourned.
[Whereupon, at 5:32 p.m., the Subcommittee was adjourned.]