[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF FINANCIAL REGULATORS:
ENSURING THE SAFETY, SOUNDNESS,
DIVERSITY, AND ACCOUNTABILITY
OF DEPOSITORY INSTITUTIONS
DURING THE PANDEMIC
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
__________
NOVEMBER 12, 2020
__________
Printed for the use of the Committee on Financial Services
Serial No. 116-113
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
43-527 PDF WASHINGTON : 2021
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California ANN WAGNER, Missouri
GREGORY W. MEEKS, New York FRANK D. LUCAS, Oklahoma
WM. LACY CLAY, Missouri BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri STEVE STIVERS, Ohio
ED PERLMUTTER, Colorado ANDY BARR, Kentucky
JIM A. HIMES, Connecticut SCOTT TIPTON, Colorado
BILL FOSTER, Illinois ROGER WILLIAMS, Texas
JOYCE BEATTY, Ohio FRENCH HILL, Arkansas
DENNY HECK, Washington TOM EMMER, Minnesota
JUAN VARGAS, California LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina
RASHIDA TLAIB, Michigan DAVID KUSTOFF, Tennessee
KATIE PORTER, California TREY HOLLINGSWORTH, Indiana
CINDY AXNE, Iowa ANTHONY GONZALEZ, Ohio
SEAN CASTEN, Illinois JOHN ROSE, Tennessee
AYANNA PRESSLEY, Massachusetts BRYAN STEIL, Wisconsin
BEN McADAMS, Utah LANCE GOODEN, Texas
ALEXANDRIA OCASIO-CORTEZ, New York DENVER RIGGLEMAN, Virginia
JENNIFER WEXTON, Virginia WILLIAM TIMMONS, South Carolina
STEPHEN F. LYNCH, Massachusetts VAN TAYLOR, Texas
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota
Charla Ouertatani, Staff Director
C O N T E N T S
----------
Page
Hearing held on:
November 12, 2020............................................ 1
Appendix:
November 12, 2020............................................ 65
WITNESSES
Thursday, November 12, 2020
Brooks, Brian P., Acting Comptroller of the Currency, Office of
the Comptroller of the Currency (OCC).......................... 10
Hood, Rodney E., Chairman, National Credit Union Administration
(NCUA)......................................................... 5
McWilliams, Hon. Jelena, Chairman, Federal Deposit Insurance
Corporation (FDIC)............................................. 7
Quarles, Hon. Randal K., Vice Chairman for Supervision, Board of
Governors of the Federal Reserve System (Fed).................. 9
APPENDIX
Prepared statements:
Brooks, Brian P.............................................. 66
Hood, Rodney E............................................... 97
McWilliams, Hon. Jelena...................................... 112
Quarles, Hon. Randal K....................................... 130
Additional Material Submitted for the Record
Waters, Hon. Maxine:
Letter from the Credit Union National Association (CUNA)..... 187
Letter from the Independent Community Bankers of America
(ICBA)..................................................... 195
Letter from the National Association of Federally-Insured
Credit Unions (NAFCU)...................................... 197
Perlmutter, Hon. Ed:
Letter from various undersigned organizations................ 200
Porter, Hon. Katie:
Various inserts for the record............................... 202
Brooks, Brian:
Written responses to questions for the record from Chairwoman
Maxine Waters.............................................. 236
Written responses to questions for the record from
Representative John Rose................................... 245
Written responses to questions for the record from
Representative Anthony Gonzalez............................ 248
Written responses to questions for the record from
Representative Tom Emmer................................... 249
Hood, Rodney:
Written responses to questions for the record from Chairwoman
Maxine Waters.............................................. 250
McWilliams, Hon. Jelena:
Written responses to questions for the record from Chairwoman
Maxine Waters.............................................. 255
Written responses to questions for the record from
Representative Anthony Gonzalez............................ 269
Written responses to questions for the record from
Representative John Rose................................... 270
Written responses to questions for the record from
Representative Roger Williams.............................. 271
Quarles, Hon. Randal:
Written responses to questions for the record from Chairwoman
Maxine Waters.............................................. 273
Written responses to questions for the record from
Representative Anthony Gonzalez............................ 289
Written responses to questions for the record from
Representative Joyce Beatty................................ 291
Written responses to questions for the record from
Representative Stephen Lynch............................... 293
Written responses to questions for the record from
Representative Ben McAdams................................. 295
Written responses to questions for the record from
Representative John Rose................................... 299
OVERSIGHT OF FINANCIAL REGULATORS:
ENSURING THE SAFETY, SOUNDNESS
DIVERSITY, AND ACCOUNTABILITY
OF DEPOSITORY INSTITUTIONS
DURING THE PANDEMIC
----------
Thursday, November 12, 2020
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 12 p.m., via
Webex, Hon. Maxine Waters [chairwoman of the committee]
presiding.
Members present: Representatives Waters, Maloney, Sherman,
Meeks, Clay, Green, Cleaver, Perlmutter, Himes, Foster, Beatty,
Vargas, Gottheimer, Lawson, Tlaib, Porter, Axne, Casten,
McAdams, Wexton, Lynch, Adams, Dean, Garcia of Illinois, Garcia
of Texas, Phillips; McHenry, Lucas, Posey, Luetkemeyer,
Stivers, Barr, Hill, Emmer, Loudermilk, Mooney, Davidson, Budd,
Kustoff, Hollingsworth, Gonzalez of Ohio, Rose, Steil, and
Taylor.
Chairwoman Waters. The Financial Services Committee will
come to order. Without objection, the Chair is authorized to
declare a recess of the committee at any time.
Before we begin today's hearing, I want to remind Members
of a few matters, including some required by the regulations
accompanying House Resolution 965, which established the
framework for remote committee proceedings.
First, Members are reminded to keep their video function on
at all times, even when they are not being recognized by the
Chair. Members are also reminded that they are responsible for
muting and unmuting themselves, and to mute themselves after
they have finished speaking. The staff has been instructed not
to mute Members, except when a Member is not being recognized
by the Chair, and there is inadvertent background noise.
Members are further reminded that they may only attend one
remote hearing at a time. So if you are participating today,
please remain with us during the hearing. Members should try to
avoid coming in and out of the hearing, particularly during the
question period.
If, during the hearing, Members wish to be recognized, the
Chair recommends that Members identify themselves by name so as
to facilitate the Chair's recognition. I would also ask that
Members be patient as the Chair proceeds, given the nature of
the online platform the committee is using.
Finally, Members are reminded that all House rules relating
to order and decorum apply to this remote hearing.
Today's hearing is entitled, ``Oversight of Financial
Regulators: Ensuring the Safety, Soundness, Diversity, and
Accountability of Depository Institutions During the
Pandemic.''
I will now recognize myself for 4 minutes to give an
opening statement.
On November 3rd, America decisively rejected President
Trump, his harmful policies, and his dangerous rhetoric. The
American people have given President-elect Biden a mandate to
govern and reverse the harmful policies of the Trump
Administration, including the many actions that several of our
witnesses have taken to deregulate Wall Street. This mandate is
entirely consistent with recent State referendums in which
voters in red States embraced progressive economic policies.
For example, in Nebraska, voters banned usury, approving a
Statewide interest rate cap of 36 percent. In Florida, voters
approved a $15-an-hour minimum wage. It is clear that Americans
want a financial and economic system that works for them and
not against them.
I was inspired by the words of President-elect Biden on how
he wants to unify the country. As ever, I stand ready to work
with Members on both sides of the aisle, and the incoming Biden
Administration, on reforming our financial system so that
consumers and investors have the protections they need.
President-elect Biden has already begun the work of
building a better future for our nation. On Monday, we
established a coronavirus task force, showing how seriously he
is working on this virus. Make no mistake, the pandemic
continues to take a terrible toll. There have been over 10.2
million U.S. cases, and over 239,000 people have lost their
lives to the virus. We are now seeing over 100,000 new U.S.
cases a day.
From the beginning of this pandemic, I have urged
regulators to focus their efforts on pandemic response, and
halt rulemakings unrelated to addressing the crisis. I am very
concerned that regulators have nonetheless issued numerous
harmful regulatory rules in the midst of the ongoing pandemic.
For example, the Office of the Comptroller of the Currency
(OCC) issued a harmful rule that badly undermines the Community
Reinvestment Act (CRA). Regulators have also moved to weaken
the Volcker Rule, which prevents banks from gambling with
taxpayer money. There have also been a number of troubling
rulemakings to weaken capital and other prudential requirements
for the nation's largest banks.
The last thing the nation needs during this crisis are
actions from regulators that harm communities and make our
financial system insecure and less stable. I am putting our
witnesses on notice that I will be working with the Biden
Administration to roll back these rules. Financial regulation,
and the approach to diversity and inclusion in this country,
are going to change for the better. With the historic election
of this country's first woman and person of color to serve as
Vice President, it is already changing for the better.
Under my leadership, the committee has led the way on
diversity and inclusion, establishing an historic Subcommittee
on Diversity and Inclusion, aptly chaired by Representative
Beatty. Under President Biden's leadership, our financial
regulators will and must be diverse. We are emerging from the
dark days of the Trump Administration into the dawn of a new
progressive America where pro-consumer and pro-investor
policies will always be first on the agenda.
The Chair now recognizes the ranking member of the
committee, the gentleman from North Carolina, Mr. McHenry, for
4 minutes for an opening statement.
Mr. McHenry. Thank you. And I want to thank the regulators
for being here.
I would also note for the Chair that I don't see the
election outcome as this vote for the woke left policy agenda
of House progressives; it was anything but that. We have more
Republicans in the next Congress in the House of
Representatives because, quite frankly, the far left went so
far. And so, while you may have had some successes in the
election, I don't think it is the wide endorsement of a far
left policy agenda that the Chair noted.
In fact, what I would note is that in the middle of this
pandemic, instead of taking political potshots, we should make
a serious, concerted effort to have a serious conversation in
this committee, like we have not had in the midst of this
pandemic. And I think it is a very, very sad thing that we have
not been more focused on financial stability, and the important
work that these regulators who are before us today have been
about this year.
So with that, I would like to thank our witnesses for being
here today, and I want to commend them for the work that they
have put in to address the effects of the pandemic on our
financial system. They have done a fantastic job, a wonderful,
fantastic job, and they all should be commended for the work
that they have put in, tacked decisively at the start of this
crisis to provide the necessary certainty and clarity for our
financial system.
Your quick implementation of the provisions of the
Coronavirus Aid, Relief, and Economic Security (CARES) Act from
March forward provided financial institutions and consumers
appropriate flexibility to accommodate the daily challenges
that they faced in the midst of this pandemic. I would also
encourage you to continue examining the regulations in your
purview to ensure stability in the banking system.
As I have said previously and will repeat again today, our
focus must be on the following: increasing testing; opening
schools safely; and getting people back to work. Last week,
unemployment dropped to just under 7 percent, a rapid
turnaround from the April high of 14.7 percent. This is a good
start. Our economy is rebounding, but more can be done, and I
believe pro-growth regulations and policies are the key to
sustained success. We know that modernizing and right-sizing
regulations will unleash the economy and allow consumers and
small businesses to flourish, and that is what you are doing,
and I appreciate that work that you are about.
A big part of that is regulatory clarity. I want to thank
Acting Comptroller Brooks and Chair McWilliams for their work
to help bring certainty to the legal status of loans made
through banking partnerships. Much of the innovation in
financial services right now is happening within the context of
partnerships between banks and fintech firms. Your efforts have
helped bring greater definition to the regulatory and
supervisory models for these partnerships.
We should also continue to examine the importance of de
novo charters in rural banking. Serving banking deserts is a
necessary aspect of supporting our Main Street rural small
businesses. And I want to commend my colleague from Kentucky,
Congressman Barr, for his work on this important issue.
Now more than ever, technology is going to play an
essential role in our financial future. Innovation is important
for our success. As new policies are considered, we should
ensure that government is not standing in the way of private
sector creativity and helping our people.
I will end where I started. The tone of this hearing does
not bode well for the next Congress. We have the ability to
find good bipartisan solutions to help promote a successful
financial system that is inclusive and addresses the needs of
the American people. Yet, my colleagues continue to choose
divisiveness over bipartisanship, and that is disappointing.
I want to thank all of the witnesses for being here today
and for your solid, good work in the midst of this health
pandemic. Thanks so much.
Chairwoman Waters. The Chair now recognizes the gentleman
from New York, Mr. Meeks, who is also the Chair of our
Subcommittee on Consumer Protection and Financial Institutions,
for 1 minute.
Mr. Meeks. Thank you, Madam Chairwoman.
As we reach the end of the 116th Congress, it is important
to consider all of the accomplishments of this committee, for
which I congratulate our chairwoman and all of the members of
this committee.
As Chair of the Consumer Protection and Financial
Institutions Subcommittee, I set out to focus my work on issues
of discrimination, inequality, and the unbanked and
underbanked. I spent the bulk of my time working on Minority
Depository Institutions (MDIs) and Community Development
Financial Institutions (CDFIs), and thinking that a period of
relative stability in a decade into the expansion that started
under President Obama's leadership was a perfect opportunity to
tackle these issues.
The COVID-19 pandemic and nationwide protests against
police brutality and racial injustice have laid bare the
structural inequalities, and, yes, discrimination across our
system. I would argue that the agenda set in this committee for
the 116th Congress was persistent and laid the foundation of
the urgent priorities that our nation grapples with today, and
it is an inflection point.
And so, therefore, I thank you, Madam Chairwoman, again,
for tackling these issues, and I look forward to continuing to
work with you.
Chairwoman Waters. Thank you.
The Chair now recognizes the subcommittee's ranking member,
Mr. Luetkemeyer, for 1 minute.
Mr. Luetkemeyer. Thank you, Madam Chairwoman.
And thank you to all of the regulators who are here today,
for being here in this critical time for our nation's economy.
As you know, the pandemic caused a blanket shutdown across
the country and threatened tens of millions of American jobs.
But the strength of American businesses and workers responded
with an astounding 33 percent increase in the GDP in the third
quarter. It is clear that Americans have undergone an heroic
effort to adapt to the strain and pressure of the pandemic. And
with recent news of a vaccine, economic recovery is in full
swing.
While this is good news, we must ensure that Congress and
the regulators do not hinder the progress that the economy is
making. To the contrary, regulators should enhance financial
institutions' ability to aid in the economic recovery and
ensure that consumers and businesses can make it to the end of
the pandemic.
Many provisions in the CARES Act, including a Troubled Debt
Restructuring (TDR) provision, are set to expire at the end of
the year. I am very interested to hear what you, the prudential
regulators, are going to allow institutions to do to keep their
customers and communities afloat in this time.
With that, I look forward to discussing these matters, and
I yield back. Thank you.
Chairwoman Waters. Thank you very much.
I would now like to welcome today's distinguished panel:
the Honorable Rodney Hood, Chairman of the National Credit
Union Administration; the Honorable Jelena McWilliams, Chair of
the Federal Deposit Insurance Cooperation; the Honorable Randal
Quarles, Vice Chair of Supervision at the Board of Governors of
the Federal Reserve System; and Brian Brooks, Acting
Comptroller of the Currency at the Office of the Comptroller of
the Currency.
Each of you will have 5 minutes to summarize your
testimony. You should be able to see a timer on your screen
that will indicate how much time you have left, and a chime
will go off at the end of your time. I would ask you to be
mindful of the timer, and quickly wrap up your testimony if you
hear the chime, so we can be respectful of both the witnesses'
and the committee members' time. And without objection, all of
your written statements will be made a part of the record.
Chairman Hood, you are now recognized for 5 minutes to
present your oral testimony.
STATEMENT OF THE HONORABLE RODNEY E. HOOD, CHAIRMAN, NATIONAL
CREDIT UNION ADMINISTRATION (NCUA)
Mr. Hood. Chairwoman Waters, Ranking Member McHenry, and
members of the committee, thank you for the opportunity to
provide an update on the safety, soundness, and diversity of
federally insured credit unions and the NCUA's efforts to
assist them during the ongoing COVID-19 emergency.
Our nation's credit union system was well-capitalized at
the start of the pandemic, and it remains so today. With high
levels of net worth and ample liquidity, this strength has
allowed credit unions to adapt to the operational challenges
resulting from the pandemic. Total assets in federally insured
credit unions rose 15 percent over the year, ending in the
second quarter of 2020 at $1.75 trillion. Credit union shares
and deposits rose by nearly 17 percent, to $1.49 trillion.
Since mid-March, the NCUA has worked diligently to provide
credit unions with regulatory relief and much-needed
flexibility so they can continue to safely serve their member
owners. We have also adjusted our examination program to
protect our staff, and we all continue to work remotely and
effectively.
We continue to examine for compliance with the Bank Secrecy
Act and potential cybersecurity risk, helping to ensure our
credit union system remains secure and resilient. We have
issued 11 interagency statements and 20 guidance letters to the
industry to date, helping credit unions to address emerging
risk, and to implement the regulatory and statutory changes
that have been made in response to the pandemic.
The NCUA has provided over $3.7 million in technical
assistance to small, low-income, and minority credit unions in
the form of our 2020 Community Development Revolving Loan Fund
allocation, which went directly to COVID-19 assistance. The
credit union system's net worth increased 6.8 percent over the
year, to $182.9 billion. The aggregate net worth ratio of the
system stood at 10.46 percent, well above the 7 percent
statutory requirement.
The Share Insurance Fund is also strong, and the equity
ratio remains well within the statutory range under the Federal
Credit Union Act. Accordingly, we believe there is no need to
assess a premium at this time.
Credit unions have continued to provide needed credit and
financial services, with lending rising to an all-time high of
$1.5 trillion in all major loan categories. Credit unions
collectively extended $8.4 billion in loans under the SBA's
Paycheck Protection Program (PPP), with an average loan amount
of $49,000.
Like capital, liquidity is a pillar of strength and the
bedrock upon which the safety and soundness of the credit union
system rests. Congress' decision to increase the flexibility
of, and borrowing authority for, the Central Liquidity Facility
(CLF) in the CARES Act has contributed greatly to bolstering
the availability of liquidity in the credit union system. Since
the Act was signed into law, the NCUA has successfully
encouraged natural person and corporate credit unions to join
the CLF. Today, the Facility's borrowing capacity has exceeded
$32 billion and provides access to nearly 80 percent of all
credit unions.
I am indeed grateful that Congress provided this much-
needed authority in the CARES Act. However, I respectfully
request that these changes be extended for the pandemic's
duration so the credit union system and the NCUA can respond
effectively should the need for emergency liquidity arise.
One important lesson from 2020 is the need for greater
financial inclusion. Lamentably, recent events have revealed
many inequities in our society, not the least of which is that
the pandemic has had a more deleterious impact on communities
of color. At the NCUA, we are proud of the fact that diversity,
equity, and inclusion are part of who we are and how we do
business, and Section 342 of the Dodd-Frank Act has been a
catalyst for growth and change. Indeed, we have made tremendous
progress in this area over the last decade in terms of
recruitment, employee retention, and procurement.
Since becoming the 11th Chairman of the NCUA, I have made
financial inclusion a priority within the agency and the credit
union system as a whole. I recently reinforced that commitment
with the launch of a new financial inclusion initiative called
ACCESS (Advancing Communities through Credit, Education,
Stability, and Support). This initiative will refresh and
modernize regulations, policies, and programs that all support
greater financial inclusion within the agency and the credit
union system and will address the specific needs of diverse
communities. I look forward to working in partnership with the
members of this committee towards this worthy endeavor.
In closing, I would like to thank the committee again for
the opportunity to appear before you, and I look forward to
answering your questions. Thank you.
[The prepared statement of Chairman Hood can be found on
page 97 of the appendix.]
Chairwoman Waters. Thank you, Chairman Hood.
Chair McWilliams, you are now recognized for 5 minutes to
present your oral testimony.
STATEMENT OF THE HONORABLE JELENA MCWILLIAMS, CHAIRMAN, FEDERAL
DEPOSIT INSURANCE CORPORATION (FDIC)
Ms. McWilliams. Thank you, Chairwoman Waters, Ranking
Member McHenry, and members of the committee and staff, and
thank you for the opportunity to testify today. I hope that you
and your families are staying healthy.
When I appeared before you 6 months ago, we were
confronting great uncertainty and volatility due to the COVID-
19 pandemic. Many industries and segments of the economy were
experiencing unprecedented declines in activity, and this shock
was reverberating throughout the financial system. Although
there remains considerable uncertainty about the path of the
economy, the banking system has served as a source of strength
throughout this period. Banks of all sizes have supported their
customers and communities, including by originating nearly $500
billion in Paycheck Protection Program (PPP) loans and
accommodating more than $2 trillion in new deposits over two
quarters.
Today, I will provide an update on five areas in which the
FDIC has made significant progress: responding to economic
risks related to COVID-19; enhancing our resolution readiness;
supporting communities in need; prompting diversity and
inclusion at the FDIC; and fostering technology solutions and
encouraging innovation. My written statement provides greater
detail in each of these areas, but I would like to briefly
touch on each of them, starting with how we responded to the
economic risks related to the pandemic.
Beginning in early March, the FDIC and our fellow
regulators undertook a series of actions that helped maintain
stability in financial markets. In addition to providing
flexibility for banks to work with their borrowers, we made
many targeted, temporary regulatory changes to facilitate
lending and other financial intermediation. We continue to
monitor conditions and receive feedback from supervising
institutions, and we will consider additional guidance as
appropriate.
As the FDIC responded to the immediate impact of the
pandemic, we also focused on enhancing our resolution readiness
in several ways. Although we entered the pandemic with a
historically low number of bank failures, we recognize that the
absence of failure could not last forever. Accordingly, the
FDIC approved our resolution-related capabilities by, among
other actions, centralizing our supervision and resolution
activities for the largest banks, establishing a new approach
to bank closing activities to help protect the health of our
employees during the pandemic, and carrying out targeted
engagement and capabilities testing with select firms on an as-
needed basis.
We are particularly mindful that minority and low- and
moderate-income (LMI) communities have suffered
disproportionately during this pandemic. Shaped by my personal
experiences and guided by commitments to increasing financial
inclusion in traditionally underserved communities, one of my
priorities as FDIC Chairman has been expanding our engagement
and collaboration in support of Minority Depository
Institutions (MDIs).
One of the options we are exploring is a framework that
would match MDIs and CDFIs with investors interested in the
particular challenges and opportunities facing these
institutions and their communities. We are in the process of
creating a vehicle through which investors' funds will be
channeled to make investments in or with MDIs and CDFIs. We are
still developing the details but expect to release more
information in the near future.
The FDIC is deeply committed to fostering a diverse
workplace and an inclusive work environment. Although we are
not yet satisfied with our progress or the pace of change, we
have taken meaningful steps in furtherance of this goal and we
will not stop.
The racial, ethnic, and gender diversity of the FDIC
workforce continues to steadily increase. At the end of 2019,
minorities represented over 30 percent of the permanent
workforce, and women accounted for approximately 45 percent.
The FDIC has also increased diversity across our leadership.
Minorities hold 22 percent of the management level positions,
and women hold 39 percent, up from almost 16 percent and 30
percent, respectively, 10 years ago. Likewise, my senior
leadership team comprises a diverse set of individuals.
Notwithstanding, we know more needs to be done, and we are
fully committed to doing it.
As we consider additional ways to create a more inclusive
banking system, we must recognize the tremendous benefits that
financial innovation can deliver to consumers. Our recent
biennial survey on household use of banking and financial
services shows that individuals are increasingly moving to
digital banking. To enable this evolution, we established an
office of innovation, FDiTech, and began working on several
initiatives. Notably, we recently sought feedback on a
groundbreaking approach to facility technology partnerships
within banks and fintechs which aims to reduce the cost and
uncertainty associated with the introduction of new technology
at an institution.
Thank you again for the opportunity to testify today, and I
look forward to your questions.
[The prepared statement of Chair McWilliams can be found on
page 112 of the appendix.]
Chairwoman Waters. Thank you, Chair McWilliams.
Vice Chairman Quarles, you are now recognized for 5 minutes
to present your oral testimony.
STATEMENT OF THE HONORABLE RANDAL K. QUARLES, VICE CHAIRMAN OF
SUPERVISION, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
(FED)
Mr. Quarles. Thank you.
Thank you, Chairwoman Waters, Ranking Member McHenry, and
members of the committee, for the opportunity to testify today
on the Federal Reserve supervisory activities.
My last appearance before this committee in May followed a
period of historic financial stress. The emergence of COVID-19
and the measures taken in response added a deep strain of
uncertainty to financial markets, which prompted a sharp and
global flight from riskier, more volatile asset classes and a
retreat to the safety of cash. That retreat demanded immediate,
extraordinary, and concerted public intervention to ensure
stability, restore calm, and see the nation through an
unfolding crisis.
The Federal Reserve's intervention spanned a wide range of
intermediaries and markets, including the banking sector.
Strengthened by a decade of improvements in capital, liquidity,
and risk management, including the refinement and recalibration
of the last 3 years, banking organizations became an important
shelter from financial distress. Our goal was to ensure that
this shelter stood fast, that banks could respond to the
emergency and address consumer, business, and community needs
without jeopardizing their own safety and soundness.
The report accompanying my testimony lists these actions in
detail, and we have extended several of them as the COVID event
has continued. They include temporary adjustments to capital
and reserve measures, compliance requirements. They include
offsite examination activity. [inaudible] They clarify beyond
doubt that safety and soundness are no impediment to working
constructively with borrowers and other customers in times of
strain.
Together with monetary, financial stability, and fiscal
actions, these regulatory measures helped calm the waters. The
initial wave of market stress has passed, and the recovery has
begun much sooner than expected. This speaks to the country's
tenacity, ingenuity, and spirit in responding to even the
greatest of shocks.
The challenge we face now is distinct, formidable, and
complex. The surprise of the COVID event is gone, replaced by a
clearer view of its economic consequences. The burdens facing
households and businesses are better understood, but they are
no less significant, and they are not evenly borne. I am
confident that we will work through them together, support
those hardest hit, and ensure that our economic wounds do not
become scars.
The Federal Reserve remains committed to using our full
range of tools to support the economy for as long as needed. A
strong, resilient banking system is an essential element of
such support. A durable recovery demands banks that lend
actively, confront gains and losses honestly, withstand
unexpected shocks, and help customers rebuild and adapt. Our
task as supervisors is to ensure that the country's banks
continue to meet that exacting standard.
The Federal Reserve's earliest COVID-related guidance
encouraging banks to work constructively with the borrowers was
an important step toward this goal. Since then, working with
our colleagues in other financial regulatory agencies, from
principles to guide COVID-related credit accommodation through
a clearer statement on Community Reinvestment Act consideration
of COVID-related activities, to steps that make it easier for
banks to participate in emergency lending programs. It also
includes the use of flexibility in our stress testing apparatus
to better understand the effects of the COVID event shock on
the strength of banking organizations.
As our report shows, that strength is still intact.
Liquidity and capital remain high and, indeed, have increased
at our largest banks over the course of the COVID event. Firms
have sharply increased their reserves, setting aside resources
today against possible losses tomorrow. Banks are well-
positioned to serve as a bulwark against broader financial and
economic stress.
It is worth recognizing how things might have been
different. This foundation would not exist after a once-in-a-
century shock, if not for a decade of work by officials and the
banks themselves to make banks stronger and more stable and to
make banking supervision fairer, more efficient, and more
transparent. Those values are not contingent only for an
economic boom. They represent an ethic and a commitment to
addressing the most pressing supervisory and regulatory issues
in the most effective ways that are even more critical during a
crisis. That ethic has steered the Federal Reserve through the
last 7 months and will continue to guide us through the
recovery.
COVID-19 changed many aspects of the Federal Reserve's
work. It also affirmed the values and priorities that remain
the same, those that will continue to guide us in our support
for the financial system, the economy, and the country long
after the COVID event has passed.
Thank you for your time, and I look forward to answering
your questions.
[The prepared statement of Vice Chairman Quarles can be
found on page 130 of the appendix.]
Chairwoman Waters. Thank you, Vice Chairman Quarles.
Acting Comptroller Brooks, you are now recognized for 5
minutes to present your oral testimony.
STATEMENT OF BRIAN P. BROOKS, ACTING COMPTROLLER OF THE
CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY (OCC)
Mr. Brooks. Chairwoman Waters, Ranking Member McHenry, and
members of the committee and staff, thank you so much for the
opportunity to update you today on the OCC's work ensuring that
the Federal banks operate in a safe, sound, and fair manner and
remain sources of strength for their communities.
Over the past 8 months, the OCC has supported the orderly
function of our banking system through an extraordinary time.
Fortunately, banks and savings associations entered this period
with near historic high levels of capital and liquidity. Asset
quality was strong, and the economy had enjoyed the longest
expansion on record. And then, as part of the national response
to COVID-19, economic activity was suspended. Regulators at
this table collaborated to provide banks the flexibility
necessary for them to use that strength to support their
customers and to sustain economic activity. My testimony today
will provide detail on the actions the agency has taken on this
front.
Now, today, we continue to monitor the effects of shutting
down the economy. While banks remain sound, we see potential
for troubled assets ahead in commercial and residential real
estate, small business and consumer lending, and travel and
hospitality sectors. Banks, particularly those with
concentrations in those assets, must take a sober view of their
risks and work with customers to the maximum extent possible
consistent with safety and soundness.
The recent OCC semiannual risk perspective highlights the
credit, operational, and compliance risks in the system, which
we will focus our supervisory efforts on in the months ahead.
Prudent risk management today can avoid the need for more
extreme loss mitigation tomorrow. Having said that, we also see
reasons for cautious optimism about the future based on strong
third quarter GDP growth, continuing reduction in unemployment,
strong consumer and small business sentiment, and better-than-
expected news about the near-term availability of effective
COVID-19 vaccines.
While the economy and banks clearly face uncertainty as to
the length and depth of the pandemic's trough, I also want to
highlight what gives me optimism for the future of banking and,
frankly, for the future of the country.
During the social unrest that followed the killing of
George Floyd this summer, it became clear that the protesters
were angry, among other reasons, because too many Americans
have been left out of our national wealth creation engine for
far too long. The OCC founded Project REACh for just this
purpose, to convene bankers, civil rights leaders, innovators,
and business people to promote full, fair, and equal
participation in our economy.
The Project is working to eliminate obstacles to credit for
45 million people with no usable credit score, to expand
affordable housing for those who cannot afford high down-
payment requirements, and to reinvigorate minority banks that
serve often neglected communities. And we have now kicked off
regional REACh efforts, including one serving the greater Los
Angeles areas, Chairwoman Waters, that you and I both call
home. And we have hosted events on access to capital and credit
in places ranging from South Carolina to Colorado.
I have been humbled by the momentum among the industry,
community and civil rights advocates, and our staff. Indeed,
Project REACh has become a movement to tear down barriers so
that all may pursue their American Dream.
Another reason for my optimism comes from innovators within
banks and elsewhere who are excited about improving banking and
financial services to consumers, businesses, and communities.
We are seeing new products and better ways of delivering them
and much more efficient ways of operating. Ultimately, this
progress will benefit consumers and businesses as people have
greater choice and more autonomy over their financial well-
being.
At the OCC, we believe that consumers, businesses, and the
economy are best served when this innovation can occur within
the banking system and the system is allowed to evolve as
consumer preferences evolve. Now, we think this for several
reasons. First, the banking system is among our most strictly
regulated and most closely supervised industries. Those who
fear that innovation may harm consumers should consider the
possibility that innovation might be safer in a supervised
environment than it is under the current, largely unsupervised
one.
The same is true for those focused on prudential risk. Over
the last decade, it is clear that large market shares of
lending and payments have migrated from the commercial banks
into less-regulated shadow banks. This trend reduces our
collective ability to spot and manage issues early on. And, of
course, we should not underestimate the risk of a status quo in
which incumbents seek protection from competition and, thus,
delay the delivery of innovative financial services that are
already available in other parts of the world.
The OCC has been a leader in this area since coining the
phrase, ``responsible innovation,'' in 2015. We remain
committed to encouraging responsible efforts to deliver more
choice and more economic opportunities in safe, sound, and fair
ways within the Federal banking system to benefit consumers and
businesses across the country.
Thank you again for this opportunity. I am very proud to
have served as Acting Comptroller of the Currency and to
support the agency's important mission. I look forward to your
questions.
[The prepared statement of Acting Comptroller Brooks can be
found on page 66 of the appendix.]
Chairwoman Waters. Thank you very much.
I will now recognize myself for 5 minutes for questions.
First, let me just ask each of you about the deregulatory
efforts that you have made during this pandemic, despite the
fact that this committee specifically asked you not to do that.
I won't go into all of the deregulations, but simply, I would
like to ask each of you, would you commit to freezing these
deregulatory actions? Let's go right down the row on this and
ask each of you if you would agree to freeze the deregulatory
actions that you have taken. We will start with Mr. Brooks.
Mr. Brooks. Chairwoman Waters, thank you for the question.
I guess I don't perceive what we have done at the OCC as
particularly deregulatory. We have regulated a true lender in
ways that solve the rent-a-charter problem by holding banks
accountable for their marketplace lending partnerships. We have
provided lists of community reinvestment activities to make
clear which things will count. We have fined banks record
numbers of dollars and fined individual bank executives in ways
that have never been done before to hold them accountable.
Chairwoman Waters. Okay. Reclaiming my time here, you are
saying that no, you don't feel that you have done anything that
is deregulatory. I hear that.
Chair McWilliams, what about you?
Ms. McWilliams. Chairwoman, I am afraid that you don't want
us to stop, because some of the things that we have done
actually have ensured that borrowers and consumers, especially
low- and moderate-income people, can stay in their homes. We
have done a number of things to either satisfy the role of
Congress that you implemented through the CARES Act or to
ensure that our regulated entities have an opportunity to work
with their borrowers proactively and not have a repeat of the
2008 financial crisis.
Chairwoman Waters. Okay. So, you are saying no, also. You
don't feel that what you have done is deregulatory.
Vice Chair Quarles?
Mr. Quarles. Yes. The changes that we have made have been
designed to ensure that the right incentives are in place to
ensure we have a resilient financial system. And I think as we
consider the resiliency of the financial system, we should be
willing to do what is necessary to keep it safe and sound.
Chairwoman Waters. Thank you.
Chair Hood?
Mr. Hood. Yes, ma'am. All of our efforts have been to
provide regulatory relief and flexibility so credit unions can
serve their members during the time of the pandemic. Every
action I have taken to date is to do things such as providing
the loan forbearance. In fact, credit unions have now made over
1.7 million loan forbearance loans to the amount of $55
billion.
Chairwoman Waters. Okay. Thank you. If I may interrupt, you
don't feel that you have done anything that is deregulatory, is
that right?
Mr. Hood. Only to aid the credit union member owners.
Chairwoman Waters. Thank you very much.
I want to just go now to Chair McWilliams. We talk a lot
about diversity and inclusion, and I am very interested in what
is happening with our small banks, some of the community banks.
Is it true that we have banks that are basically closing down,
they are leaving banking, or is that just a rumor?
Ms. McWilliams. Chairwoman, when you say banks closing down
and--
Chairwoman Waters. Community banks.
Ms. McWilliams. Community banks. There has been a great
consolidation trend for years now. And as you are probably
aware, we lose about 200 to 220 community banks to mergers
every year. So, yes, banks or community banking--
Chairwoman Waters. Of any of those banks that you described
as having merged, have you had the opportunity to interact with
Blacks or Latinx about bank ownership and acquisition of banks
that are being merged?
Ms. McWilliams. Yes, we have. And, actually, one of the key
components of our MDI outreach efforts, in pursuit of our
mandates to preserve and promote them, has been to look at the
ways that would provide that an entity that is being sold, that
is either failing or about to be sold--
Chairwoman Waters. Have you been involved in any
acquisitions by MDIs or Latinx bankers?
Ms. McWilliams. We are in constant discussions with our MDI
banks--
Chairwoman Waters. Have you been successful at any? Do you
know of any acquisitions that have been made by MDIs or Latinx
bankers?
Ms. McWilliams. Yes.
Chairwoman Waters. Would you tell me which ones they are,
please? We don't know of any, and I am really interested in
this.
Ms. McWilliams. I would be happy to provide you that
information. I don't have the information in front of me, but I
am in active discussions with a number of MDI banks to make
sure that they have an opportunity to acquire failing MDI
banks.
Chairwoman Waters. That is my question, and if you have
been successful, I want to know about it, because we are
talking about wealth building and we are talking about opening
up opportunities that have not been available in the financial
system. And so, I want to know more about this and whether or
not you actually have a program by which you will be
outreaching to ensure that these opportunities are opening up
to MDIs. So, I want to thank you very much.
And I now recognize the ranking member of the committee,
Mr. McHenry, for 5 minutes.
Mr. McHenry. Thank you, Madam Chairwoman.
And what I would like to first say to this group of
regulators is that this committee has followed very closely
your actions since this unprecedented pandemic has hit this
country and the world. And I have great confidence that the
actions that you have taken have made a very challenging
situation, a very challenging health situation that has become
a challenging economic situation, that because of your actions,
we have been able to prevent a financial crisis. And without
your concerted action, until the final moment that you are in
your seats, the American people would be in a tougher position
than they are currently in.
So what I want to ask you to do and to commit to do is, to
the fullness of your terms of office, that you do the business
that you have set out to do to ensure the safety and soundness
of institutions, that the American people can have confidence
that their regulators are on the job, watching out for them,
and taking every action necessary to prevent bad outcomes. And
so I commend you for that action, but I also urge you to
continue this good work.
To that end, the work of the Federal Reserve has been
foremost in this discussion. And so, Chair Quarles, I want to
commend you for the actions of the Federal Reserve since March
especially, but we also need to know this process going
forward. And so, as I have mentioned before and raised with you
before, we want a clear understanding of the path forward on
the London Interbank Offered Rate (LIBOR). This is an important
rate for a number of financial products, looking at over $200
trillion notional value for contracts, and we know that LIBOR
is ending at the end of 2021. So can you give us some assurance
about your process going forward?
Mr. Quarles. Yes, I would be happy to do that. The issue
that you raised, I think, is an important one from a stability
point of view, which is that there are a lot of legacy
contracts that current rely on LIBOR, but that we need to
define a path forward for them after the end of 2021. The
transition for new contracts is going pretty smoothly. The
legacy contract is the big issue there.
I think finding a way to allow those legacy contracts to
continue for at least some period, to allow the bulk of those
legacy contracts to mature on their existing terms without a
significant change, would probably be the best way forward, and
we are working on a method to do that. There are a variety of
different ways one could do that, but I would expect over the
next couple of months to be able to publicly define the way
forward to address that.
Mr. McHenry. Thank you, Vice Chair Quarles. And at this
point, do you have a legislative request or a need for
legislative action by the Congress?
Mr. Quarles. I think that the ultimate transition will
ultimately require some legislative element, but at this point,
I think the answer would be no, because I think it's good to--I
think what we want to try to do is find a way to allow those
contracts to mature before we have a legislative solution for
the so-called hard tail.
Mr. McHenry. Yes. Thank you.
Chair McWilliams, I want to commend you for the action you
have taken to modernize the FDIC, to focus on financial
innovation and to use technology to keep your people safe and
secure, and also, our institutions safe and secure.
Mr. Brooks, I want to commend you for the actions you have
taken on OCC's true lender rulemaking to provide certainty and
clarity on those partnerships that are very important for our
current economy. Can you, Mr. Brooks, at the top line describe
how that rule will work in practice and why it is a good thing?
Mr. Brooks. Ranking Member McHenry, thanks for the
question. Two quick top lines. First of all, the purpose of the
rule is to redress what happened in light of the Madden rule,
which reduced the availability of credit to low- and moderate-
income Americans by as much as 64 percent. And so, allowing
banks to leverage their balance sheets will solve that. We have
also addressed the rent-a-charter problem by making clear that
banks that do those partnerships are accountable for all
consumer compliance obligations.
Mr. McHenry. Thank you. Thanks for your testimony. Thank
you all for being here or being wherever you are. Thanks so
much.
Chairwoman Waters. Thank you very much.
Mrs. Maloney of New York, you are now recognized for 5
minutes.
Mrs. Maloney. Thank you, Madam Chairwoman, and
congratulations on your reelection, and to all of my
colleagues, it is great to be back in business.
My question is for FDIC Chairwoman McWilliams. The COVID
crisis is a threat to our economy. It will not go away until we
have a vaccine, sto we should be using every tool at our
disposal to guarantee the safety of our banking system. During
the Great Depression, over 400 banks failed, and one of the
most important lessons we learned from that time was the need
for banks to shore up sufficient capital to withstand severe
economic downturns.
And, Chairwoman Williams, my question for you is, given the
positive correlation between economic downturns and bank
failures, are you expecting an increase in bank failures at
this time?
Ms. McWilliams. Thank you for that question. The bottom
line is that fortunately, and fortunately for me at this time,
we entered the pandemic and the related financial crisis caused
by the government shutdowns with banks very well-capitalized,
with high liquidity levels, and the lowest number of banks on
the problem bank list. Thus far this year, we have had four
banks fail. Historically, when we look at our data, during good
times, we have about five banks fail a year. So I would say we
are on trend for just a normal year thus far, which surely
shows the resiliency of the financial system as highlighted by
Vice Chairman Quarles in his opening statement.
We are grateful for the efforts of the banks to shore up
their capital balances and liquidity during the good times, and
we are certainly monitoring conditions on the ground to make
sure that they can do what they need to do. But I also want to
highlight that I am not sure that we would be in as good of a
place as we are right now if we did not take a number of
regulatory actions over the past few months to make sure that
banks can stay in the business of banking and that, for
example, loans that were modified for the purposes of the
pandemic, that were performing before the pandemic, would not
constitute troubled debt restructuring.
And if I can just highlight briefly, during the 2008
crisis, the reason banks were not really eager to modify loans
up front is because they weren't sure how the regulators were
going to treat those loans, and they didn't want to have
nonperforming loans and impaired debt on their books. So, it
was imperative for us to act quickly and promptly to make sure
that we have good banks that are serving their communities,
that consumers can stay in their homes and that, frankly, the
FDIC doesn't have to jump into action with more bank closures
than absolutely necessary.
Mrs. Maloney. Some countries have prohibited dividend
payments to shield their banks. Do you believe that prohibiting
dividend payments would help our banks shield them from
failure, forcing them to hold onto more of their capital?
Ms. McWilliams. Sure. That's a great question. And I will
tell you, with respect to small banks, community banks, a lot
of those banks are privately held. Their investors are friends
and family. They are local farmers, schoolteachers, et cetera,
who sit on the boards of those banks and actually have
ownership in the banking system. So having a blunt cut
instrument such as just across the board dividend, I would say,
would probably hurt those communities and the investors in
community banks.
We have supervisory tools where we can manage dividend
payouts if we are concerned about the bank's capital position,
and we have certainly utilized those tools in the past as
appropriate.
Mrs. Maloney. I have a question for Vice Chair Quarles, if
I have the time. Your latest stress test found that several
banks could be at risk of reaching minimum capital levels. As a
result, the Fed banned stock buybacks, but only limited
dividend payments by the largest banks to safeguard their
solvency. So given the continued uncertainty of, really, the
crisis with COVID, do you think that the Fed should have
prohibited dividend payments entirely?
Mr. Quarles. During this period, given the capital
conservation measures that we put in place, the capital
positions of the largest banks have actually increased even
while they have been taking record levels of provisions. And we
are running stress tests currently in light of the events of
the spring and the effects of that on bank balance sheets in
order to determine at the granular bank level what we think the
effects of potential [inaudible] losses might be. So, I think
we have been in a pretty good position. I think, though, that
events have demonstrated that the measures we have taken have
been effective.
Mrs. Maloney. I believe my time has expired, and I yield
back. Thank you.
Chairwoman Waters. Thank you very much.
I now recognize Mr. Lucas for 5 minutes.
If Mr. Lucas is not available, I will go to Mr. Posey for 5
minutes.
Mr. Posey. Thank you very much, Madam Chairwoman.
During times of stress for our financial institutions and
markets, we have the obligation to temper safety and soundness
so that our potential fears over an event like this pandemic
will not goad us into adopting such stringent prudential
standards that we exacerbate the stress. I have the same
concerns related to the troubled debt restructuring and
associated accounting standards during our recovery from the
financial crisis.
Madam Chairwoman, you and I co-sponsored a bill to address
these concerns during the recovery from the financial crisis.
As you know, the bill placed common-sense parameters around
putting loan modifications, often called troubled debt
restructuring, or TRD, into nonaccrual status. That status
negatively impacts capital requirements and it pushes banks
away from working with customers facing difficulties and more
toward extreme solutions such as foreclosure.
I was so pleased that this committee worked together in a
bipartisan manner to mitigate the impacts of accounting
practices on troubled debt restructuring in the CARES Act. We
need to extend that relief for a while longer, though I have
concerns about tying that extension to sweeping expansion of
consumer forbearance for a wide variety of credit such as
credit cards and installment loans.
As we know, forbearance for one entity in the chain of
financial transaction creates yet another potential liquidity
crisis for subsequent people. And we have other bills here
today, like a treatment of PPP loans, that I believe have
merit.
For Mr. Quarles, as I mentioned, there is legislation
before the committee to extend the pandemic-related relaxation
of accounting standards associated with the troubled debt
restructuring. This provision was included in the CARES Act.
The language allowed banks and credit unions to provide relief
to consumers and businesses by temporarily removing the
burdensome troubled debt restructuring classification
requirement. Financial institutions that will actually take
advantage of this provision will be required to provide
forbearance to consumers for a wide variety of loans, including
installment debt and credit cards. Small businesses will also
be afforded forbearance for a wide array of loans.
The bill would impose conditions of how the loan balances
deferred in forbearance could be repaid. I am interested in
your candid evaluation. What would be the first concerns about
such forbearance, if any?
Mr. Quarles. Thank you. Thanks for that question. I think
the current forbearance provisions, as you know, obviously,
will allow any changes that the adjustments were made before
the end of this year be for whatever length that the bank and
borrower would agree, so the forbearance doesn't really end at
the end of this year. It is the ability to make new changes
that ends at the end of this year.
I do think that in general, it is good for us to move as
promptly as possible to regular order where the challenges that
are facing banks, given the position of their borrowers, are at
least recognized. So at least what we are seeing right now is
not a--as banks begin to understand the fact that the
forbearance that is available under the law doesn't end at the
end of the year, but simply that they must make their decisions
by the end of the year. We aren't getting a lot of pressure, at
least at the Federal Reserve, for that extension, but
ultimately, that would be a decision for Congress.
Mr. Posey. Thank you.
Madam Chairwoman, I have a couple more questions, but by
the time I ask the questions, there is not going to be time to
answer them, so I will yield back the balance of my time.
Chairwoman Waters. Ms. Velazquez, you are recognized for 5
minutes.
If Ms. Velazquez is not available, we will go on to Mr.
Luetkemeyer for 5 minutes.
Mr. Luetkemeyer. Thank you, Madam Chairwoman. I would be
willing to yield to Mr. Lucas, who is above me in ranking here,
because I think he missed his mute button a while ago. If he
has found his mute button, he can take the spot, and I will
follow up in a moment.
Chairwoman Waters. Thank you.
Mr. Lucas, you are recognized for 5 minutes.
Mr. Lucas?
Mr. Luetkemeyer. Apparently, he hasn't found the mute
button yet, but--
Chairwoman Waters. We will let him continue to look as we
go on, Mr. Luetkemeyer.
Mr. Luetkemeyer. Okay. Thank you very much. Thank you,
Madam Chairwoman.
Before I begin my questioning, I would like to applaud all
of you, the regulators this morning, for proposing to codify
the 2018 interagency statement on guidance and place a binding
rule on the agencies that supervisory guidance does not have
the force and effect of law. This has been something that I
have consistently worked on in Congress, and I look forward to
continuing to work with you all to draw a clear line between
rule and guidance and what is enforceable and what is not. So I
appreciate your attention to that and I look forward to
continuing to work with you.
To follow up on Mr. Posey's conversation with regards to
troubled debt restructuring, I have a bill out there to do this
as well. And I am very concerned that at the end of the year
when we run out of--when the CARES Act sunsets, the TDR
provision that is in there, that regulators will have minimal
options to--nothing to point to legislatively or any sort of
other law to say that they can take a different approach on
this. I can tell you from discussing this with the banking
industry folks and the credit union folks, that they are very
concerned about having to rely on guidance, having to rely on
something like that to make these decisions in order to give
forbearance to their customers, whether it be for home loans,
car loans, or their business loans.
Chair McWilliams, you and I have talked about this at
length, but just to get you on record here with what we are
talking about, where are you and what are your plans with
regards to TDR guidance and how you want to work with your set
of regulators and the people they regulate, which are the
banks, and hopefully their customers will be impacted by those
decisions?
Ms. McWilliams. Thank you. Thank you for that question. As
you know from our discussions back in March, I was really
concerned about loans not being modified and banks being
concerned about having impaired debt and driven by the examples
from 2008 where some of these loans, once modified, were
treated as impaired debt or troubled debt restructuring. They
are still performing now 10 years later, 20 years later, but
they are still on the books as troubled debt, which doesn't
bode well for the bank.
So driven by that, we have worked with--amongst these
regulatory bodies here at the table, I would say, but on the
screen--we have worked with the financial accounting standards
boards to make sure that our banks can modify loans that were
performing prior to the pandemic and not have TDRs on the
books. And then subsequently, Congress enacted similar
provisions in the CARES Act.
So I would say that is probably one of the main reasons
that you have seen homeowners stay in their homes and small
businesses have access to credit during very, very tumultuous
months in March and April. And we are certainly open to
considering what additional actions Congress may come up with
to make sure that we can enable banks to work with their
borrowers.
Mr. Luetkemeyer. Thank you for that. I can assure you that
the institutions desperately need to have certainty on this on
forbearance, because if they are not able to get it from the
regulators, it is going to be very difficult for them to give
it to their customers. So, we thank you for that.
Chairman Hood, you had an article, I think last week in
your Credit Union Times magazine, with regards to Current
Expected Credit Losses (CECL). And I appreciate that position
you took, again, indicating that CECL is going to be
detrimental to the credit union folks. It needs to be done away
with. It is going to be procyclical.
And I know, Mr. Quarles, you and I have talked about this
as well, quite a bit. And we are three quarters into the year
here now with CECL data. I know the bigger banks, at the very
beginning of the year, actually had to roll over another 30 to
35 percent into the reserves, and while that is fine,
eventually that stresses out the income. So would you like to
comment on it just a little bit, please?
Mr. Hood. As you know, we have immediately, as a result of
the COVID event, extended the transition periods for smaller
banks. They will be insulated from the capital effects of CECL
for 2 years, and then a 3-year phasing will begin. I do think
that gives us the ability to understand what has happened and
what the implications of CECL are, particularly as we see it
operating with the larger banks, and we can then make any
permanent adjustments that we think are necessary.
Mr. Luetkemeyer. I see my time is up. Thank you very much.
I appreciate Chairman Hood's position on it as well. I yield
back.
Chairwoman Waters. I now recognize Mr. Sherman for 5
minutes.
Mr. Sherman. Thank you. I have a couple of comments.
Ranking Member Luetkemeyer said in his statement that our
economy grew 33 percent. The more accurate way to say that is
that we grew 8 percent during the third quarter. I don't know
if you can extrapolate that. And, of course, that was only a
halfway bounceback from a terrible second quarter.
This crisis continues. During this crisis, it makes sense
to have limits on the stock buybacks and the dividends paid by
large banks. That is why I wrote you, Mr. Quarles, back in
early March, urging that you prohibit dividends and stock
repurchases by megabanks during this crisis.
You have, in fact, taken some action, and particularly on
stock buybacks, and I hope that we can count on you to continue
to limit stock buybacks and dividends as well until this crisis
is over so that we are not confronted with the need to or the--
at least the asserted need to bail out huge financial
institutions.
We have talked about the troubled debt restructuring
relief, which allows banks to restructure their debt to aid
consumers and small businesses without being penalized. This
CARES Act provision expires at the end of this year, though we
have heard testimony that it could be applied next year to
forbearance agreed to this year, that there may be forbearance
agreed to next year.
So I would ask, Mr. Brooks, do you have the authority to
extend this loan modification flexibility for loan
modifications made during the 2021 part of this COVID crisis,
and if you do, do you plan to exercise that authority?
Mr. Brooks. Congressman Sherman, thank you for that
question. These are really important issues. And what I would
tell you is, there are certain aspects of this where without an
extension of the CARES Act, we would have statutory inability
to do certain things, and that is because we are statutorily
required to hold banks accountable for gap financial reporting.
On the other hand, we have significant flexibility to
protect banks from the impact of TDR treatment under various
categories, and I think we have communicated some of these to
your colleagues in writing. These include things, for example,
like determining what TDR impact is immaterial, which is then
excluded from the gap TDR standards. It also includes things
like making determinations about when banks would be required
to refile a call report or not, and so, there are a number of
things we can do to mitigate effects.
Mr. Sherman. I hope very much that we will pass additional
legislation. I know that even before we passed legislation, you
had a regulation project, which means you had the authority
before we acted. Hopefully you will have that authority after
our actions are no longer effective, unless, of course, we are
able to extend them, which, I hope, the wisdom will perhaps
arise in the United States Senate. Anything is possible.
As to LIBOR, we have $2 trillion of legacy LIBOR. Most of
those instruments do not provide a replacement rate to be used
in calculating the amount of interest payable once LIBOR is no
longer published at the end of next year. Some of those
instruments provide that the lender gets to pick the rate,
which would be an outrage if you are the borrower, and all of a
sudden some new rate is imposed on you, and that is why the
National Consumer Law Center, the Student Borrower Protection
Group, et cetera, are very concerned about this as is, I think,
the financial services community.
I know there is some discussion as to whether legislation
is necessary. I clearly think it is, in that I don't know how,
if the instrument does not indicate how interest is to be
calculated, anything other than legislation could solve that
problem. I have put forward a discussion draft, and it reflects
the suggestions of the Alternative Reference Rates Committee.
What would be the consequence, Mr. Quarles, of simply not
having any regulatory or legislative solution? Would this
result in an awful lot of class-action lawsuits, et cetera?
Mr. Quarles. If there were no solution at all, yes, when
we--when LIBOR stops, there would be significant disruption. I
think that there is a way, as I indicated in my answer to Mr.
McHenry, that we can combine current measures that allow the
bulk of the existing contracts to mature on their existing
terms and then save legislation for the hard tail, when we have
had more time to think about it. That may work best.
Chairwoman Waters. The gentleman's time has expired.
Mr. Sherman. I think we need to act on it. I yield back.
Chairwoman Waters. Thank you. I will now recognize Mr.
Meeks for 5 minutes.
Mr. Meeks. Thank you, Madam Chairwoman. First, I want to
thank you, Madam Chairwoman, as well as Ranking Member McHenry,
for your active engagement on the bills that I drafted, which I
believe were some of the most impactful bills that supported
MDIs and CDFIs in a generation.
Similarly, I want to thank, with an expressed gratitude,
each of the regulatory agencies present here today who offered
constructive input into these bills. We haven't always agreed,
and, in fact, we have had some deep, deep, deep disagreements.
But I believe with conviction that these bills matter, and that
the collaborative approach is critical as we seek to redress
structural discrimination and systemic inequalities that hold
back too many families across our country. MDIs and CDFIs are
essential pillars to tackling the systemic problems that we
seek to solve.
Chairwoman McWilliams, would you agree that MDIs and CDFIs
are key pillars to addressing the issues of inequality and
discrimination in our banking system? And also, I guess, would
you thereby commit that the FDIC would work actively to
implement the provisions of this legislation if signed into
law?
Ms. McWilliams. Thank you for that question. I will say
that community banks serve their communities. That is why they
are called community banks. But, in particular, minority
depository institutions are at the very forefront of serving
their communities, and those communities happen to be low- and
moderate-income people and people of color. So I would say that
they are not just pillars in their community, but in many
cases, they are the only vehicle to get financial services for
the communities that have traditionally been underserved and
underrepresented in the banking system.
So we are working very hard to make sure that those banks
can sustain themselves, that we do what we can at the FDIC to
make sure that they have regulatory flexibility. And the
creation of the fund that I briefly discussed in the opening
statement would hopefully help MDIs and CDFIs get additional
capital. They really need capital.
And so, we thought about, we can do a number of things on
the regulatory side, but they seem to be getting deposits from
known MDIs, they seem to be getting some assistance on the
technical side, but they really need capital. So the idea
behind this fund is to provide resources and have others invest
into MDIs and CDFIs so that they can continue to serve their
communities.
Mr. Meeks. I couldn't agree with you more. And I think that
your initiatives, which are supporting aspiring minority
investors in MDIs so that they can strengthen their capacity,
but it is also the case to strengthen the capacity of MDIs to
acquire branches or operations of failing institutions.
Now, I think this is key, because without de novo banks, we
are on a path to the disappearance of minority banks, which is
what I am afraid of, because I fear that minority banks and MDI
investors are being steered solely to the most challenging
markets or failing institutions.
Can you elaborate a little bit more on how we can expand
the number of de novo minority banks and support them in
expanding and achieving scale? Because we see the numbers
dwindling, and even as they merge, they dwindle more so that
there will be less communities or less banks that are available
throughout the United States of America. So what can we do to
expand, so that more MDIs are created?
Ms. McWilliams. That is a great question. And really, your
question has two components. One is, what can we do to make
sure that the failing banks, or the branches that are being
sold off MDI banks go to MDIs, so that those communities
continue to be served by MDIs?
And I ran a little bit out of time when Chairwoman Waters
asked the question, but we have changed the way that MDIs can
bid and give technical assistance on failing MDIs so that they
have additional time, they have 2 extra weeks, when we open up
the books of the failing bank only to MDIs, while known MDIs
have to wait for their time, 2 weeks later.
But we want to give them that advantage, that window of
time for them to analyze and prepare bids for the failing MDI,
which, frankly, is going to result in more MDIs that are
failing or selling partially. Their businesses are offered an
opportunity to go to other MDIs.
On the de novo front, I couldn't agree more with you. We
need more new banks, and, frankly, some of these communities,
rural communities in particular, and MDIs, there just aren't
enough of them.
And, so, we have done a number of things at the FDIC to
ensure that we have changed the way that we process and approve
de novo applications for deposit insurance, so that there is an
increased ability in the agility of investors and the
organizers to have new banks. I would be happy to give you more
information in detail, as I understand our time here may be up,
but thank you for that question.
Mr. Meeks. Thank you. I look forward to following up with
you.
Ms. McWilliams. Thank you.
Chairwoman Waters. Mr. Lucas is recognized for 5 minutes.
Mr. Lucas. Let's try one more time, Madam Chairwoman. Can
you hear my voice?
Chairwoman Waters. Okay. Mr. Lucas, are you available for
your 5 minutes?
Mr. Lucas. Yes, ma'am. If you can hear me, I am available.
Chairwoman Waters. Okay. You are recognized.
Mr. Lucas. Thank you, Madam Chairwoman.
PPP is a very important program in my district, and I think
it is very important to the survival of all businesses across
this great country. And throughout the course of the pandemic,
the banking system has served as a source of strength and a
lifeline for struggling businesses across the country. And
those banks have played a critical role in supporting small
businesses through that Paycheck Protection Program
distributing more than $0.5 billion.
As a result, many banks are at risk of crossing asset-based
regulatory thresholds. What discretionary authorities do the
Federal Reserve, the FDIC, and the OCC have to ensure that
banks do not face additional regulatory burdens as a result of
doing the important thing of participating in PPP?
I first turn to you, Vice Chairman Quarles, and then
Chairman McWilliams, and then Comptroller Brooks, please, for
your observations.
Mr. Quarles. Thank you, and thanks for that question. Yes,
we have been looking at that issue. I think you are exactly
right. The various thresholds for the imposition of various
regulatory measures exist for what are intended to be sort of
durable and permanent changes in the status of a bank and
temporary expansion of their positions, particularly in a time
of stress and when they are supporting their customers. I think
we need to look at how to address that. We do have the ability
to provide temporary exemptions for most of these, and we are
considering doing that.
Ms. McWilliams. And I would just add to that, to the extent
that the FDIC has sole authority over some of these things, we
have already acted, and we will continue to act. I would say
that it shows that the financial system has served as a source
of strength. The fact that over $1 trillion of new deposits
have flocked to banks for each quarter since the beginning of
the year in Q1 and Q2--we haven't gotten the data yet from Q3,
and as soon as we have it completed, we will analyze it and
provide it to the public.
But we are talking about over $2 trillion. And so what we
have done at the FDIC is exempt from the deposit assessment any
assets that have come to banks by virtue of their originations
of the PPP loans through the Fed Facility. And we will continue
to work with our fellow regulators to continue to do so.
Mr. Lucas. Absolutely. Comptroller?
Mr. Brooks. Congressman, thank you for that question. I
guess, the other examples I would add on to what has already
been said are, first of all, we made changes in the way that
the supplemental leverage ratio was calculated, specifically to
make it easier for banks to not have capital impacts of these
kinds of things.
And in addition to that, there is ongoing interagency work
across our three agencies to make sure that regulatory burdens
that get tripped at different asset thresholds starting at $500
million, get a temporary exclusion of these kinds of assets so
that banks below $10 billion don't find themselves in a harder
regulatory climate. We haven't rolled those out yet, but we are
hard at work on that at the staff level, and I expect we will
roll that out before the end of the year.
Mr. Lucas. Ever so briefly, Chairman Hood, can you speak to
the effect of PPP loans on the credit union balance sheets?
Mr. Brooks. Yes. All of the PPP loans receive a zero-
percent risk rating in calculating the net worth. And I would
also add that we, by statute, could only assess Share Insurance
Fund premiums based on credit union insured shares and not
assets, so therefore, they don't have an impact on the balance
sheets as well. And in addition, credit unions originated over
171,000 PPP loans, so I am glad that we, as a board, were able
to make those provisions.
Mr. Lucas. Thank you, Chairman.
And I want to thank the chairwoman for her indulgence, and
to thank Ranking Member Luetkemeyer for his efforts to help me
as I worked through my technical issues.
I would offer one final thought, and that is, to all of my
colleagues, be healthy, and be safe. While some of my children
may think I was around for the 1930 election, on election night
the Republicans had 218 seats, a majority. By the time Congress
organized in March, through deaths and special elections, the
Democrats had a 219-seat majority.
If a podcast of a nonpartisan news source was correct that
I listened to this morning, and the difference will be three
seats, we are in that kind of an environment, 1930 all over
again. Just a thought to my friends in the Majority and the
Minority.
I yield back, Madam Chairwoman.
Chairwoman Waters. Thank you very much, and we will count
on those three seats to be there when we need them.
Mr. Clay, you are now recognized for 5 minutes.
Mr. Clay. Thank you, Madam Chairwoman. And let me say that
80 years ago was a little while, or 90 years ago was a little
while for Mr. Lucas and me.
But my first question is for Vice Chair Quarles. With
coronavirus cases surging this fall, our economy is still in a
precarious position. Moody's projects that default rates for
corporations could rise to as much as 15 percent next quarter.
States and cities are facing estimated budget shortfalls of $1
trillion, and New York City recently saw its debt downgraded.
All of this creates the possibility that financial markets
will be very volatile, and we may see a return to the
disruption that we saw in the municipal bond market in March.
With all of this in mind, do you believe it would be
appropriate to eliminate the Municipal Liquidity Facility at
the end of this year?
Mr. Quarles. The data that you have provided are clearly
correct, and I agree with that. We are not out of the woods on
the [inaudible] of the economy. The economy has been coming
back more quickly than we expected, but the unemployment rate
is still high. There are still a lot of burdens on small
businesses.
So we are looking very closely at what the acquisition
ought to be with respect to all of the Facilities, including
the Municipal Facility, at the end of this year. We haven't
come to a decision yet. The situation continues to evolve, and
we will make that decision towards the end of the year, but we
are very mindful of the facts you have cited.
Mr. Clay. What about the Main Street lending program? Is
that in the same precarious position or--
Mr. Quarles. All of the Facilities will expire at the end
of this year, unless it is ended [inaudible]. I think it is
true for all of them, certainly the [inaudible]. And so, we are
looking at all of them, as to this question of whether they
should be extended or not, and we are very mindful of the
current environment.
Mr. Clay. Are small businesses out of the woods yet, or do
we still have some concerns?
Mr. Quarles. No, I think there is certainly reason to be
concerned about the pressures on small businesses. They have
performed better--the stimulus that was provided in the spring,
both from the Fed and from the Treasury, has been longer
lasting than expected, but obviously, it is not going to last
forever. I think that households are probably in better shape
than small businesses, as you look at the economic performance
currently. So, again, those are issues that we are looking at.
Mr. Clay. Thanks for your response.
Mr. Hood, can you tell us what your agency is doing--and
this is a follow-up to Mr. Sherman's question--to encourage
your credit unions to do all that they can to help consumers
and small business owners that need forbearance on their
obligations?
Mr. Hood. Credit unions have a long history, for almost a
century, Representative Clay, of helping their member owners
during times of adversity. We are encouraging our credit unions
to do just that. I'm very proud of the fact that they have, to
date, already been able to provide over 1.7 million
forbearances, up to a total amount of $55 billion.
We continue to let them also know that in addition to our
encouragement to help their member owners, that they will not
have any of these actions held against them when our examiners
come to do their examinations in the year ahead. That gives the
credit unions great certainty in knowing that they will not be
penalized for taking prudent and pragmatic approaches to
helping their member owners survive this challenging
environment.
Mr. Clay. Thank you for that response.
Ms. McWilliams, is FDIC--are they doing anything to
encourage your institutions to help small business owners and
families with their forbearance obligations?
Ms. McWilliams. Absolutely. We have done a number of things
to encourage our financial institutions to work with their
borrowers, and we have instructed our examiners to show utmost
flexibility when they are looking at the books of these banks
for the next exam.
We have done a number of things to make sure that the PPP
loans, as we discussed earlier, get processed for small
businesses. We have issued a statement on the use of
alternative data, which should help small businesses that
usually have trouble getting traditional credit reporting
metrics, et cetera. And I am happy to provide you additional
information on what we have done.
Mr. Clay. I see my time has expired, Madam Chairwoman, and
I thank the witnesses for their responses.
Chairwoman Waters. Thank you very much.
Mr. Barr, you are recognized for 5 minutes.
Mr. Barr. Thank you, Madam Chairwoman. It's good to see all
of my colleagues, and I look forward to seeing all of you in
person next week.
Chair McWilliams, according to a recent study by the FDIC,
citizens in rural communities are much more likely than people
in urban or suburban areas to visit bank branches for their
financial needs. Unfortunately, those branches are becoming
scarce in rural communities across the country. A recent Fed
study found that a total of 794 rural counties lost a combined
1,553 bank branches over the last 8 years, a 14-percent
decline. And I worry that this decline has only accelerated as
a result of the pandemic.
And while more and more people nationwide are turning to
online banking and mobile banking, this trend is slower among
the rural population because of a diminishing number of not
only bank branches, but also the lack of adequate broadband
internet, which reduces their access to safe and reliable
banking services. I have introduced bills to combat both of
these issues, but the problems are exacerbated by the pandemic.
So, Chair McWilliams, given this data, how has the pandemic
affected rural populations' access to banking services compared
to their urban and suburban counterparts? And what can Congress
do to ensure rural populations aren't cut off from the banking
system?
Ms. McWilliams. It is an excellent question, Congressman,
and, frankly, it is a question that we have struggled with for
some time, recognizing that there is rural depopulation as more
of the, I would say, younger folks are moving to urban areas
where there are more jobs.
And I have done extensive outreach with our rural bankers
to make sure I understand what is going on in those
communities. Frankly, we don't have good metrics yet on the
impact of the pandemic on the rural bank branches and banking
services. We are hoping to do that postmortem, when we are past
the dire straits.
But I would say that I have heard anecdotally that rural
communities, in particular, have been hard-hit, not only by the
pandemic itself, but that the economic shutdowns have affected
them disproportionately, because there is a smaller number of
businesses operating in those communities per capita. So when
those businesses close, fewer people are able to get the
benefit of being able to visit that business, and the ability
of the workforce to get paid.
So I would say that anything that Congress can do to help
rural communities in their time of need would be welcome, in
the banking sector in particular. We will continue monitoring
where we have branch closures. We will continue thinking about
innovation and how technology and innovation can serve those
communities, especially in areas where there is a single bank
branch or no branch at all.
And we certainly think there is an opportunity for the
Community Reinvestment Act to focus on these issues, as was
done in the proposal that the FDIC joined the OCC on. And
certainly, with broadband issues, we have highlighted that
there should be CRA credit given for the broadband access
expansion in rural communities so that banks know this, as
well.
Mr. Barr. Yes, that is a great idea, Chair McWilliams.
And I noted Chairman Meeks' interest in the de novo charter
issue. I want to work with him in a bipartisan way. Maybe we
can combine my interest in rural banks and his interest in
minority depository institutions, and do some good for all of
these banking deserts.
Acting Comptroller Brooks, you and I have discussed this
topic at length. I look forward to welcoming you to Kentucky
next month to discuss access to capital in rural areas with
community lenders and lenders in my district. How have the
OCC's efforts, since the onset of the pandemic, including the
updated CRA, attempted to mitigate the negative impacts of
COVID on rural communities?
Mr. Brooks. Congressman, thank you for the question. And as
a two-time Kentucky Colonel, I am excited to come home to the
Bluegrass State and do that event with you, so thank you for
the invitation.
I would say there are two things that we can do together on
this to make an impact quickly. The first is picking up on what
Chairman McWilliams just noted, and that is, one of the main
points of our CRA reform was to make lending and investment in
rural communities a more attractive financial proposition for
banks.
And so, what we did in the CRA reform that had never been
done before, is we allowed banks to count loans made in small
family-farming communities toward their CRA obligations,
regardless of whether those areas were in their geographic
assessment areas. So all of a sudden, we have used regulatory
power to make those loans more economically attractive to banks
that have ignored those communities for far too long.
And then the second thing, as you and I talked about, is it
has simply taken too long to approve any kind of bank charter
over the last 10 years, whether it is de novo in rural America,
whether it is an MDI in an inner city somewhere or any other
kind of bank.
And so, one of the things we have done inside the OCC in
the last 6 months is to develop a new process designed to cut
the timeline for getting bank charters in half from an average
of about 18 months to an average of about 9 months. Once we can
do that, I think you will find that organizers of banks in
small-town Kentucky will have a much easier time seeing an end
date for that and getting it across the line.
Mr. Barr. Thank you. My time has expired. I look forward to
seeing you in Kentucky next month.
Mr. Brooks. Thank you.
Mr. Barr. I yield back.
Chairwoman Waters. Thank you.
I now recognize Mr. Green for 5 minutes.
Mr. Green. Thank you, Madam Chairwoman, and thank you also,
Mr. Ranking Member.
I would like to visit with Mr. Brooks for just a moment.
Mr. Brooks, you have your Project REACh, and within Project
REACh, you have an alternative credit-scoring initiative. With
reference to this initiative, I have some information
indicating that you have said that you find promise in factors
such as, do other people in your ecosystem or family have
homes. I am curious as to how this will aid a person in paying
bills. Could you kindly give me a response?
Mr. Brooks. Sure. Congressman, there is nothing in Project
REACh remotely about that. I have been asked questions in media
events about the way that artificial intelligence in the future
could be used to assess people's creditworthiness, and I have
speculated that there are unknown factors, social factors and
others that might be predictive.
Project REACh has nothing to do with that. What we are
looking at in Project REACh is the inclusion of rent payments,
utility payments, and bank cash flow data as a way of including
people in the credit system and, especially in the wealth-
building system where they have been excluded for years.
And I would just comment that of the 45 million Americans
who don't have a credit score, Blacks are about 10 times as
likely as Whites relative to their proportion of the population
to not have a credit score. So we think finding a way to
predict creditworthiness, particularly for African Americans,
is one of the most important things we are doing at the OCC
today.
Mr. Green. Thank you very much. I am pleased to have you
clarify, and sometimes people do make mistakes in reporting on
this. I have, on many occasions, had this happen to me.
I am also very pleased to hear you mention rental payments.
Would you also include light bills, gas bills, phone bills? All
of these things, if they are paid timely, would be indicative
of a person's ability to not only be responsible, but also to
meet obligations. Your thoughts?
Mr. Brooks. Absolutely. This is an issue I have been
working on for 25 years in my career, and it is a travesty that
it has taken us this long to realize that a person's payment of
a recurring obligation is predictive of their likelihood of
paying a mortgage. So we need to fix this, and I think it is
easier than people thought. I think we are going to be able to
fix this quicker than people would believe.
Mr. Green. My hope is that you will get it repaired as
quickly as possible, since you seem to have a good sense of
what it is all about, and I appreciate it greatly.
I have some legislation, H.R. 123. It is styled the,
``Alternative Data for Additional Credit FHA Pilot Program
Reauthorization Act.'' And I would like to commend it to you. I
would like to get this to you for your perusal, because I am
interested in your input. Would you allow me to do so, and I
will see if I can get the appropriate person on your team to
get this to you?
Mr. Brooks. Congressman, I wish you would, and I would love
to talk to you about that personally when you have an
opportunity.
Mr. Green. I promise you, we will have that conversation
and it means a lot to me.
Now, let me go on to the MDIs, the minority depository
institutions, if I may. I make it my business to try to
understand what is happening with them, and a lot of what is
happening with them is the lack of capital. It is true. But
also, they have very small staffs, and when the OCC comes in to
do what you normally do in terms of testing, it takes up a lot
of the time that they have.
I am really interested in finding out how we can streamline
this process so that it doesn't take up all of the time of the
few people that they have who are having a hands-on experience
with making the loans, so that they can stay in business while
you are there doing what you do as a regulator?
Mr. Brooks. This is a real conundrum, and I think there are
two or three different prongs to the solutions. The first is,
let's just talk about their small staffs for a moment. That is
absolutely one of the reasons that MDIs fail at a rate far
exceeding the rate of normal banks.
And that is why in our MDI component of Project REACh, one
of the issues we have asked big banks to pledge as part of
their participation is not only that they will fund capital
inside of these institutions, but that they will also do
management rotations and exchange programs so that big banks
can send some of their employees to work inside of MDIs, not
only so they can learn about MDIs, but so that they can provide
boots on the ground in a way that they don't have today. That
is a critical component of success.
The second thing has to do with, it is far too hard for
banks and especially small banks to onboard technology
solutions to outsource some of the functions that they now do
manually. We have seen this as an issue in our vendor
management guidance where it takes forever for banks to do
that, so we will make that easier as well.
Mr. Green. My time is up. I have another question, but,
Madam Chairwoman, I do thank you for your kindness, and I yield
back.
Chairwoman Waters. You are very welcome.
Mr. Hill is now recognized for 5 minutes.
Mr. Hill. Thank you, Madam Chairwoman.
My best wishes to all of my colleagues. I look forward to
being with you next week, and thanks for this excellent panel
on a very timely set of topics.
Mr. Quarles, let me start with you and talk about Central
Bank digital currency, not something in your bailiwick per se,
but very important to financial services and the regulated side
of our sector, as well as our economy and American
competitiveness.
Dr. Bill Foster and I wrote to Chairman Powell back in 2019
about, is the Fed considering a digital dollar, and we got a
note back from Chairman Powell about a month later saying,
``Not really.'' But since that time, Fed Governor Brainard and
others have become very active in thinking through the idea of
a digital dollar, and, of course, your colleagues around the
world are heavily focused on this.
Could you give us an update of what changed? Why is the Fed
now recognizing that a digital dollar is an appropriate
priority for the Central Bank?
Mr. Quarles. I think it would be accurate to say that
understanding the implications of Central Bank digital currency
is something that we have always been focused on at the Fed. It
is fair to say that focus has increased over the course of last
year. It has increased internationally.
I think we have seen with some of the proposals from a
variety of quarters for different types of payment systems that
have raised some regulatory and supervisory issues
internationally, that has put a premium on our tending to our
own payment system, and a Central Bank digital currency could
be a part of that solution. So, we are actively engaged in
understanding this.
I still think it would be premature to say that we believe
that this is a solution that the United States would need to
implement. We are doing a lot of research. We are weighing the
pros and cons. We have pilot projects in place. And the
international study of this is picking up as well. The
Financial Stability Board (FSB) will also be looking at this.
But this is still in the early stages. It is a very important
issue. But I wouldn't say yet we have changed our stance, and
now believe that it is something that the United States needs
and it is a question of when.
Mr. Hill. I certainly agree it is not imminent, but it is
certainly a matter of national security as the world preserves
currency, that we consider it. And I commend you for the work
that your team is doing with MIT. I think that kind of research
is important. But I do believe that this is a critical element
for American competitiveness in the years ahead, and I want to
urge on the work of the Fed's team.
Let me switch gears to my friend from Missouri,
Representative Clay's, line of questioning about the Section
13(3) Facilities and the use of the Treasury's Exchange
Stabilization Fund. I heard your answer, but I just want to be
clear, so let me ask it a different way: Will the Board of
Governors and the Treasury Secretary ask Congress, by some date
here just in the next few days, for legislative authority to
extend the CARES Act exchange stabilization funding?
Mr. Quarles. That is not something that we have decided
yet, but we are actively considering the pros and cons of that.
Mr. Hill. Do you think that the Fed and the Treasury have
adequate resources since the economy is reopening, and there
has been very little significant uptick since the height of the
crisis back in March on those Facilities, do you think you have
sufficient resources under existing 13(3) powers, and the Fed
with their existing non-CARES Exchange Stabilization Fund? Do
you think that could be sufficient as you look at 2021?
Mr. Quarles. We don't need new congressional authority to
extend the Facilities. It is an existing law that we can extend
them. And I am sure you are all aware that there are
significant unused resources currently for the Facilities they
have. They have served a very useful purpose, but principally
as a backstop to private sector activity. But it really would
be, I think, a decision for Congress whether those amounts
should be supplemented.
Mr. Hill. I look forward to following up with you on this.
Thanks for your time. I appreciate the panel.
Thank you, Madam Chairwoman. I yield back.
Chairwoman Waters. Thank you. And I will now recognize Mr.
Cleaver for 5 minutes.
Mr. Cleaver. Thank you, Madam Chairwoman. And I would like
to just say how pleased I am that you will be the Chair of this
committee for another 2 years.
But let me go on and follow through on some questions that
actually, Mr. Clay, and I think, Mr. Green, already spoke of.
But, Ms. McWilliams, thank you for your willingness to serve
our country, first and foremost. And some of you will be going
on after January 20th in your positions. There is some overlap.
And you are one, Ms. McWilliams.
Before I left my apartment here in Washington this morning,
we looked at the cases of COVID around the country, and I
looked at the midwest, where I live in, Kansas City, Missouri,
and Missouri and Kansas are both blood red in terms of the new
cases. It is frightening. I have just been meeting with our
hospitals, trying to figure out if we need to prepare for field
hospitaling in our City.
So, it is a big issue. And we had over 700,000 people file
for unemployment. And based on conversations with Fed
officials, I understand that unemployment declines may
represent people completely dropping out of the workforce.
So when you consider all of these things, and how we need
to have a strong fight against COVID and trying to also recover
the economy, are you involved in any way at this point in some
kind of engagement with the Biden-Harris transition team so
that the FDIC can play its historic role, have it continue
without any disruption?
Ms. McWilliams. Congressman Cleaver, thank you for your
kind words, and I am grateful for your service as well, and I
look forward to seeing you in the next Congress.
But I will say that we have abided by all of the
requirements of government agencies that are imposed on us, and
we have certainly engaged to the extent that is feasible and
possible with planning, et cetera, for the new Administration
starting in January. I have not had any discussions with the
Biden transition team.
Mr. Cleaver. Okay. I am troubled by the fact that--we need
to have a seamless move in some of these important areas, and,
of course, the FDIC is one of those critically important
institutions. Let me ask you, are you preparing for a
transition in terms of being able to present the new
Administration with information that would allow for the
seamless transition that I think all Americans, regardless of
their political stripe, would like to see? I don't want you to
ignore--I am a little frustrated because I am not sure I
understood what you just said. Are you preparing for the
transition? Let me just ask you that.
Ms. McWilliams. I can assure you, Congressman, that any
transition to the new Administration is going to be seamless.
None of our critical functions are going to be affected. We
stand ready to work with whomever is in the White House come
January, and you have my commitment that I will work with
whomever is on my board, and I intend--I will even share this
with you, I intend to fulfill the remainder of my term.
Mr. Cleaver. Okay. Let me move on. Mr. Quarles, let me
follow up on something that my long-time friend and colleague,
whom I will miss dearly, William Lacy Clay, with issues that he
raised earlier about expanding the lending programs for the
Federal Reserve and Treasury. I am a former mayor, and so, I
have always--oh, my goodness. I guess my time is up. I'm sorry.
Thank you, Madam Chairwoman. My time expired. I heard the
beep, so--
Chairwoman Waters. Yes, your time has expired, Mr. Cleaver.
Thank you very much.
Mr. Emmer, you are now recognized for 5 minutes. Is Mr.
Emmer available?
If not, we will go to Mr. Loudermilk of Georgia for 5
minutes. You are recognized. Mr. Loudermilk? Is Mr. Loudermilk
on the platform?
If not, we will go to Mr. Mooney for 5 minutes.
If Mr. Mooney is not available, we will go to Mr. Davidson
for 5 minutes.
Mr. Davidson. Thank you, Madam Chairwoman.
And I thank our guests for your work in this tough field,
and really a period that has seen some important steps by the
people represented here today. So, without spending much time,
I want to get to as many as I can.
Acting Comptroller Brooks, I want to commend you for the
work you have done promoting innovation at the OCC,
particularly within the digital asset space. I am particularly
encouraged by the OCC's July interpretive letter related to
banks being able to provide custody services for digital
assets, especially focused on holding the unique cryptographic
keys.
I appreciate the approach, and it echoes custody language
in my bipartisan bill, the Token Taxonomy Act. Action by the
OCC was much-needed, especially as States such as Wyoming, have
already provided legal clarity, for example with the special
purpose charter for Kraken Financial.
My main concern within this space is that we do not have
sufficient legislative clarity and regulatory clarity that will
enable digital assets to truly be adopted and to provide the
safeguards that markets and consumers and investors need. Do
you believe that digital assets could benefit from the
certainty that comes from legislation signed into law? In
particular, could you address this with respect to the custody
issue?
Mr. Brooks. First of all, Congressman, thank you for the
question, and I have always appreciated your deep engagement on
these issues going back many years together.
What I would tell you is, on the custody side, I think that
clarity around what constitutes a qualified custodian and what
assets are permitted to be custody would be a good thing. And I
think as you noted in your Token Taxonomy Act, and which some
companion legislation kicking around has also recognized, there
is a lack of securities law clarity that needs legislation.
At the same time, what we have concluded at the OCC, and
this is work that began long before I got here, is that digital
assets are analogous to other kinds of assets that have entered
the system over the years and that the banking system normally
has been the vehicle for transmitting that stuff across the
system.
And so, picking up on a discussion that Congressman Hill
and Vice Chair Quarles had just a few minutes ago, your basic
view is that blockchains are essentially private payment
networks. There are other private payment networks in the
world, like the Automated Clearing House (ACH) system. That is
a private payment network. It is just owned by a very small
number of big banks, and it is only open to banks, versus
blockchains are payment systems that anybody can join, right.
They are open for everyone. They are free and equal to
everyone, and in that sense, may be superior, in other ways, to
existing networks.
That is really what our work in this space is about, is the
recognition that what crypto and blockchain are fundamentally
about is changing the way that people interact with each other
in the world of finance in the same way that the internet
changed the way that people interact with each other for
internet information.
And so, I would thank you for your leadership on that. I
think that securities clarity and custody clarity would be
great as an act of Congress, but I also think that the OCC has
a fair amount of existing statutory authority to clarify banks'
role in that overall part of the financial ecosystem.
Mr. Davidson. I agree with your viewpoint, and thanks for
really clarifying what you are doing and how you view it. I
hope my colleagues will take note that there really is
underlying support for this, that is not partisan. And I am
encouraged by the recent--some of the hearings that we have had
in the FinTech Task Force.
So I hope we can continue that progress, and maybe even
codify some of this into law. And as you alluded to, securities
law, there is certainty that is desperately needed there, and,
frankly, sometimes I feel like the SEC is wandering further off
course. Hopefully, Hester Peirce will continue to be a voice of
reason and people will listen to her more clearly, going
forward.
So, thanks for that. I do have to move on to a couple of
other topics. We recently launched the Sound Money Caucus with
some colleagues, and we are at a period where we are printing
money. We are not really borrowing it truly. We owe it. It is
borrowed in that sense. It counts as debt. But inherently, that
dilutes the value of all of the other money.
So, Vice Chair Quarles, what is your level of concern about
the long-term consequences for America's debt, and in a related
topic, the size of the Fed's balance sheet? How will we know
when we have crossed a limit where we could really undermine
the essential liquidity that was able to be provided? We
provided some stability. These are all good things. But in the
long run, isn't there a level of debt that would be concerning
for you?
Mr. Quarles. I think history would show that for any
country, there is a level of debt that should be concerning.
The United States is in a special position given our wealth and
our status as a reserve currency. So I don't think that is upon
us soon, but that is definitely something that as we look at
the overall economics and financial situation that we face
[inaudible].
Mr. Davidson. Yes. Thanks, and it is hard to state
specifically but, the consequence of some of the growth of the
Fed's balance sheet is a related way. It was a lifeline, and I
think will be a case study for years on the value of a Central
Bank in a time of crisis, the last part of March. But there are
a lot of regulatory policies that are having some real economic
distortion, and I look forward to working with you and others
there. Thanks for your work and I wish we had more time to
collaborate. And I yield back.
Mr. Perlmutter. I think I am up next, but I have to get
recognized first.
Okay. I will begin.
To our panel, thank you very much for your service at this
difficult moment in American history. I think that the banking
system and the financial system has proven itself strong, but I
would just state to everybody, we are not out of this. And in
Colorado, just as in Kansas, we have seen a terrible spike in
the infection rate. A month ago, less than one in 1,000 had the
infection. Two weeks ago, we were at less than one in 300; and
last week, one in 200.
Madam Chairwoman, I went ahead and started, if that is okay
with you?
Chairwoman Waters. Yes. We had a little technical
difficulty. Thank you for getting started. Go right ahead. You
have 5 minutes.
Mr. Perlmutter. Okay. And so, the infection rate now is
less than 1 in 100 in Colorado. Our hospitalizations are higher
than they have been at any time since the beginning of this,
and we had terrible hospitalization rates back in March and
April. Our death rate is starting to rise again, and we thought
we had this in hand. This virus is a very nefarious, insidious
thing.
And so, to the regulators and to my colleagues, I would say
we are not out of this. And as strong as it has been, I think
that this pandemic is not over, and it will have a long tail.
Madam Chairwoman, I would like to offer a letter from the
Mortgage Bankers Association and other industry partners to be
submitted to the record.
Chairwoman Waters. Without objection, is is so ordered.
Mr. Perlmutter. Thank you.
One of the things that Mr. Luetkemeyer and a number of my
colleagues have mentioned is that we took certain steps in the
CARES Act to make sure that there could be flexibility from the
regulators to the banks, from the banks to the borrowers, the
landlords, for instance, from the landlords to the tenants. And
I think that flexibility is going to have to remain in place.
For instance, we limited the troubled debt restructuring
kinds of assets to 6 months for modified loans, and only
through the end of the year. So I would ask all of the
panelists, do any of you plan to update this guidance to allow
these COVID loan modifications to extend beyond 6 months, and
extend well into next year, given the state of the pandemic?
And I will start with you, Chair McWilliams.
Ms. McWilliams. Certainly, and thank you for that question.
We have worked hard to reach a compromise with the Financial
Accounting Standards Board (FASB), and I would say we are
willing to do--I can't speak for others, but I will say, I am
willing to do what it takes to make sure that our banks can
continue to be strong and resilient and that homeowners and
small businesses can continue to have access to credit to stay
in their homes and operate their businesses.
As with many, many other things, it takes two to tango, and
in this case it takes a village of us, and you only have a part
of that village here on this panel. We will have to work with
FASB to make sure that they also are willing to accommodate the
extension of what we have agreed to back in March.
Mr. Perlmutter. Thank you.
Mr. Brooks, how about you?
Mr. Brooks. Congressman, thanks for the question. I echo
what Chair McWilliams says, and I guess I would go a little bit
further and say that I think that accounting treatment is just
one part of the puzzle for banks.
In our world, one of the most important exposures is on the
residential mortgage side. And those large banks that I have
spoken to, specifically about how they are doing loan
modifications and forbearances, tell me that they learned a lot
from the Home Affordable Modification Program (HAMP) coming out
of the financial crisis, and they understand that even
irrespective of accounting treatment, it is better to maximize
the net-present value of these loans by keeping existing
borrowers in those loans as long as there is a future ability
to repay.
So I think that there is a commitment on the part of both
banks and regulators to work there. But on the technical issue
of TDRs, there is some more to do so with FASB, I agree with
that.
Mr. Perlmutter. While we are on that subject, in the Health
and Economic Recovery Omnibus Emergency Solutions (HEROES) Act
that we proposed, we had some substantial housing assistance
pieces in there. My concern is, and I would ask how you look at
this from a regulatory standpoint, we have forbearances, or we
have moratoria on evictions. But then these tenants are going
to have to come up with several months' worth of rent. How do
you analyze that? Do you think they are going to be able to do
that without assistance from us, the United States Government?
Mr. Brooks. Congressman, I would say rent is a little bit
more complex than mortgage. I think the good news is in the
CARES Act, it was fairly clear on the mortgage side that when a
borrower comes out from forbearance, the loan is contractually
current on the first day out of forbearance.
Mr. Perlmutter. Yes, but let me stop you. But the landlord
is eventually going to have to pay the bank, and you are
eventually going to have to analyze that bank.
Mr. Brooks. Yes. That is my point, that rent is more
complicated, and I think it is worth looking at it
legislatively, as you say.
Mr. Perlmutter. Okay. Thank you.
And thanks, Madam Chairwoman, for the time. I yield back.
Chairwoman Waters. Thank you.
Mr. Emmer, you are now recognized for 5 minutes.
Mr. Emmer. Thank you, Madam Chairwoman, for hosting this
important hearing during this uncertain time. As we close out
the 116th Congress, we have a lot to be thankful for because of
the nonpartisan efforts to educate and inform Members on the
financial technology issues on the FinTech Task Force. I want
to take a moment to thank Representative Lynch for his efforts
in leading the task force.
As we have seen over the past 2 years, fintech issues are
only rising to higher prominence. It is my hope that next
Congress, we will continue that nonpartisan dedication to
fintech issues, whether that be on the task force or an even
stronger focus on the issues through perhaps a subcommittee.
One thing is for sure, the opportunities that fintech
innovations present for all Americans and, indeed, the entire
world are not going away. Thank you to both sides of the aisle
for their ongoing focus on these issues.
And thank you also to Vice Chairman Quarles, Chairman
McWilliams, Chairman Hood, and Acting Comptroller Brooks for
all of your work over the past couple of years. In particular,
Mr. Brooks and Chairman McWilliams, you have both demonstrated
a strong commitment to crafting a regulatory environment that
encourages innovation and growth in the fintech space. As we
know, with more competition, products, and services in banking,
the American people are afforded with more choice, fairer
prices, and control over their financial future.
Chairman McWilliams, thank you for dedicating resources to
developing a financial technology strategy that works with
industry to craft smart and considerate regulations for
financial technology, allowing more consumers to access the
banking system. And, Mr. Brooks, thank you for providing the
necessary certainty for banks to provide custody of
cryptocurrency assets, and all you have done to ensure that the
Federal Government remains supportive of new technologies and
is capable of adapting regulations to suit our country's
continuing investments in innovation. I am hopeful that
additional regulators will come on board and provide support
for these technologies.
Vice Chairman Quarles, Chairman Powell informed us in a
previous committee hearing that private sector individuals and
innovations may not have a place in the Fed's consideration of
a digital dollar. This is concerning. So far, private actors
have been responsible for the entirety of these innovations and
are advancing implementation of these technologies with or
without the Fed. I urge the Fed to make additional efforts to
make public their considerations regarding the digital dollar
and to involve private sector innovators to craft a digital
dollar that is sound, safe, and protective of individual
privacy.
Acting Comptroller Brooks, during your short but impactful
tenure at the OCC, you have made extraordinary inroads into
providing guidance necessary for OCC-regulated financial
institutions to engage with digital assets such as Bitcoin and
Stablecoins. What difficulties or obstacles do you encounter
when promoting regulatory or supervisory guidance related to
digital assets to OCC-regulated financial institutions, and how
can that be improved? And I guess when you are done answering
that, I have a couple more for you.
Mr. Brooks. Congressman, first of all, thanks so much, and
thanks so much for your partnership on this over the years. I
really do appreciate your vision, and it is great to be part of
this team.
What I would tell you is on the institution side, there are
very few impediments. You can see that very, very shortly after
we gave our guidance on crypto custody, the nation's largest
bank, JPMorgan, announced it was going to launch a crypto
custody business in partnership with Fidelity Digital Assets,
which is the crypto arm of Fidelity Investments, a company that
we are all familiar with. This recognizes the fact that
somewhere between 50 and 60 million Americans own this stuff.
And some of us might be excited about it, and some of us might
be less excited about it, but the point is, a gigantic
proportion of our society believes it is the future for various
reasons. That part is important.
I think the other thing that is a bit of a challenge is, as
a country, we haven't yet recognized the important
competitiveness aspect of this. When you see that China has
already issued the e-Renminbi--China has adopted a digital
currency of their national fiat currency that is now
transacting on a blockchain--and in this country, we are still
years away from a national real-time payment system, I come to
the conclusion that you come to, which is that the best
solution is to win the way America has always won, by
unleashing the power of our innovative, dynamic, risk-taking
private sector. We have built private Stablecoins in this
country that already have a market cap in the tens of billions
of dollars. These things are transacting daily, they are
growing rapidly, and they are used for broad commercial
purposes.
I don't think, in this country, we need to wait to build a
command and control government solution. I think the private
sector is on it, and I think the role of the regulators on this
panel is to provide a framework to make sure there aren't bank
runs or other problems that consumers would be affected by. I
am sorry for eating up your time.
Mr. Emmer. That is okay. Thank you. I look forward to
continuing the conversation.
Thank you, Madam Chairwoman.
Chairwoman Waters. Mr. Himes, you are recognized for 5
minutes.
Mr. Himes. Thank you, Madam Chairwoman, and a hearty
welcome back to my colleagues on the committee. I look forward
to working with you. And welcome to all of our regulators. It
is good to see you, too.
I cut my teeth in the Congress starting in 2009, when we
were experiencing a just brutal meltdown of another type, very
different, of course, than what we are seeing today. But I
think what we are seeing today, the economic effects of the
pandemic and the economic shutdown, therefore, is not something
we would have predicted.
And to give credit where credit is due, I appreciate the
actions that you have taken, especially the Federal Reserve,
working with Treasury, with the authorities granted to it by
the Congress under the CARES Act. My hope is that this was
handled well.
I give credit where credit is due to the Dodd-Frank Act,
too. I was a freshman when we crafted that legislation. And
when it was done, it was appreciated by pretty much nobody on
the left or the right, but here we are where the dog that
didn't bark, of course, was a major dislocation in our
financial system despite the dramatic dislocation to our
economy.
So, Mr. Quarles, my questions are to you, and hopefully I
will give you enough time to answer them. Obviously, the crisis
has uncovered a number of things that are concerning, and I
would like you to, if you would, just address each one. And,
obviously, you won't be able to do so comprehensively, but if
you could try.
Number one, the dislocation in the Treasury market in mid-
March gave an awful lot of us heartburn. Number two, a number
of you have mentioned concerns with the commercial credit
market. Could this be something that at the end of the day,
causes a significant problem within the banks? And then, if
COVID has done one thing, it has really uncovered the
disparities that exist in our society. And while I have heard a
lot of back and forth, I actually haven't heard the regulators
offer suggestions on how we might increase the bank population
and make credit available to more Americans.
I know that is a tall order, Mr. Quarles, but you have the
remainder of my time to address those three issues.
Mr. Quarles. Thank you. Thanks for that, and I will be
brief. I could take the remainder of the hearing on those three
issues.
On the Treasury market, there clearly was dysfunction in
March. It was severe dysfunction for a few days that was caused
by the Treasury market trading infrastructure essentially being
overwhelmed by sales orders on the parts of many different
participants. You had a variety of people who were looking for
cash liquidity, given the severe uncertainty that there was in
the middle of March, and that overwhelmed the infrastructure of
the systems' ability to handle that.
We are currently looking at a variety of factors. We are
working multilaterally with other domestic agencies. We are
working internationally because this was a problem
internationally. One of the significant issues was foreign
sellers selling in order to get dollars for their dollar needs
in this time of--in this dash for cash. And I think that there
are things that we will need to look at about the structure of
the Treasury market in order to improve its operation under
stress. It would be premature to say what they would be.
The commercial credit market--given the nature of this
stress, an element of the solution has been increasing debt on
the parts of many companies that had severe revenue
restrictions in the spring. The corporate sector was already
reasonably highly indebted going into this, and so that is
something we need to look at. We are running bank stress tests
currently to see how we think that could roll up into the
financial system. Those will be very granularly run, and we
will release in the middle of December results for each bank,
public results of how they performed in this, that I think will
give us more clarity into that issue.
On disparities, just to be very quick, I think that the
actions that we have taken at the Fed to improve a more rapid
return to economic health--and we aren't there yet, obviously.
We have learned at the Fed, over the course of the last few
years, that when we allow the economy, and particularly allow
the unemployment rate to fall faster and to fall further than
the Fed has been comfortable allowing it in the past, that
benefits particularly those who are most disadvantaged in
society, and that is something that we can do. The Fed doesn't
have a lot of distributive tools, but we have seen that there
are distributive effects to that that are important. And that
was one of the reasons why we changed our framework as we did
recently announce.
Chairwoman Waters. Thank you. The gentleman's time has
expired.
Mr. Loudermilk, you are recognized for 5 minutes.
Mr. Loudermilk. Thank you, Madam Chairwoman. I appreciate
the opportunity to be online with you here today.
And, Vice Chairman Quarles, let me first thank you for
aligning the Fed's supervision with the tailoring regime by
applying Large Institution Supervision Coordinating Committee
(LISCC) only to Category 1 firms, and moving smaller and less
risky firms into the large and foreign banking organizations
with provision portfolio. I think this rightly refocuses the
LISCC supervisory portfolio by recognizing substantially
reduced size and risk of Category 3 firms and does not change
the capital liquidity requirements for firms not in the LISCC
portfolio. We really appreciate your efforts there.
On another topic, lenders did an outstanding job of issuing
PPP loans to support small businesses and their employees, but
PPP loans remain an asset on lenders' balance sheets until the
loans are forgiven, and forgiveness is taking longer than we
all expected. That means a number of financial institutions are
on the verge of crossing an asset-based regulatory threshold
because of PPP loans which are guaranteed by the SBA and are
designed to have a zero credit risk to the lender. I recently
sent a letter with 13 of my colleagues on this committee asking
you all to address this issue.
I also introduced a bipartisan bill with Congressman David
Scott that would exclude PPP loans from asset-based regulatory
thresholds of $10 billion and under. Madam Chairwoman, thank
you for including the bill in our discussions during this
hearing today.
Chairman McWilliams, I appreciate that the FDIC has
addressed the $500 million and $1 billion asset thresholds, and
I hope you can address the others.
Chairman Hood, thank you for addressing this issue for
credit unions.
Now, to my questions. Acting Comptroller Brooks, I
understand the banking agencies are discussing how to proceed
with this on an interagency basis. Can you share what you are
planning?
Mr. Brooks. Yes, Congressman, and thank you for the
question. We are not final on this yet, but I can definitely
give you some parameters of what is being discussed amongst us.
The idea is there are, first of all, the need to identify each
of the asset thresholds that trips you into a new regulatory
regime, and there are many of them, just being the government.
So, there is a threshold at $500 million, a threshold at $600
million, a threshold at $1 billion and $2.5 billion and $10
billion, et cetera.
The basic parameters, I believe, are that for a period of 1
year, which could, of course, be extended by the agencies, but
to Vice Chair Quarles' point earlier, we want to get to normal
as soon as we can get to normal. So for a period of 1 year, we
would exclude PPP assets from each of those asset thresholds,
up to and including the $10 billion threshold but not above
that. Our theory is that we want to do surgery here. We don't
want to act with a meat cleaver. We want to be very careful,
and we don't want to dislocate the agency's ability to manage
risk, but I think that we will settle out somewhere pretty
close to that.
Mr. Loudermilk. Okay. We appreciate your efforts, and if
you could please keep us updated as you move forward, because
you are right, there is a myriad of regulations and tripwires
along the way.
Vice Chairman Quarles, does the Federal Reserve plan to
address these regulatory thresholds?
Mr. Quarles. Yes. There is an active--we are obviously
engaged in very active interagency discussions, and I would
subscribe to what Comptroller Brooks said and I think we will
have something to report pretty quickly, actually.
Mr. Loudermilk. Okay. I appreciate that, because a lot of
the small banks are really left hanging out there. We actually
have a bank in our district. It has two branches, a small bank,
which issued more PPP loans than one of the largest banks in
the nation did nationwide. And so, you can see how that could
really negatively affect this bank that stepped up. It is
Vinings Bank. They stepped up, and they took on a lot because
they are a community bank, and their community was riding on
the needs of having these PPP loans.
And my final question is, Chairman McWilliams, do you
anticipate that the FDIC will provide additional relief as
well?
Ms. McWilliams. Yes. We have already excluded PPP loans
from the deposit assessments for banks, but we are now working
with the other regulators as mentioned to make sure that we--to
the extent that we don't have the clear statutory authority to
change thresholds, to maybe freeze the total consolidated
assets as of a prior date for those thresholds. So we are
trying to be, I would say, as flexible as possible to make sure
that banks have a venue to proceed with helping stimulate the
economy and make sure that borrowers can stay in their homes.
Mr. Loudermilk. Thank you very much. Because I mentioned
this has been a collaborative effort between the private
industry and government as well, and so we need to make sure
that we are covering them as well.
So, Madam Chairwoman, that is all the questions I have. I
know it is unusual for me to yield back time.
Chairwoman Waters. Thank you. I appreciate it.
Mr. Foster, you are recognized for 5 minutes.
Mr. Foster. Thank you, Madam Chairwoman, and to our
witnesses. And I would like to get started by just seconding
the comments of my colleague, French Hill, regarding Central
Bank digital currencies.
Vice Chair Quarles, you just spoke and have spoken before
about the dysfunction that occurred in our Treasury bond
markets in March, and noted that the sheer volume in that
market may have, ``outpaced'' the ability of the private market
infrastructure to support stress of any sort there.
Under normal circumstances, the Treasury market is the
deepest and most liquid fixed income market in the world. It
serves as a critical benchmark for the mortgage corporate loan
and mini bond markets that are essential to the flow of credit
in our economy, and it allows the U.S. dollar to operate as the
world's dominant reserve currency. And that is why it is
crucial that these financial pipes continue to function well,
even in stressed and volatile conditions, and especially as we
continue to fight COVID-19 and work to provide fiscal relief to
millions of struggling families and small businesses.
Now, when the Fed has to step in to support the markets for
Treasury bonds, I view it as sort of the financial equivalent
of our military going to DEFCON 2. When that happens, it is our
duty in Congress to see what sort of technical changes could
prevent this in the future.
One straightforward solution to this issue would be a
simple requirement that all secondary market Treasury
transactions be subject to central clearing. Today,
participants in the markets for Treasuries face a centrally
cleared counterparty in less than a quarter of all
transactions. By comparison, because of the Dodd-Frank Act,
central clearing covers virtually 100 percent of the exchanged
traded derivatives and equities and a majority of the swap
market transactions. And despite a fair amount of squealing at
the time, I believe that this is now widely viewed as one of
the many successful reforms of Dodd-Frank.
So, Vice Chair Quarles, could you explain to us your view
of why requiring central clearing of Treasuries might be
beneficial to market functioning? And what are the drawbacks
and tradeoffs, if any, of this approach?
Mr. Quarles. As we look at the lessons from the Treasury
market in March, we have been looking closely at this issue of
central clearing of Treasuries. The advantage would be that
central clearing would reduce pressure on dealer balance
sheets. The current system requires the dealers to basically
take those Treasuries onto their balance sheets, and when there
isn't another side to the trade, that is obviously a
significant strain.
The cons are really the cons of any [inaudible] It is a
complex risk management problem. And so, we want to think that
through carefully for a market that is as large and as central
as you have correctly identified the Treasury market as being.
The pros are attractive. We are looking through this carefully
with an interagency group.
I would say just as an additional thought, though, that
could lead to improved Treasury market functioning generally.
What we saw in March, though, was simply that everyone was
selling and no one was buying. And there was a period of a few
days when there just wasn't another side to the transaction.
So, a smoother mechanism for matching buyers and sellers
probably would not have addressed the March issue because the
question was that there just wasn't a buyer. But that doesn't
mean that it is not a useful wakeup call for thinking about the
structure of the Treasury market in that particular situation.
Mr. Foster. So you anticipate for situations like that,
there is no substitute for having the Federal Reserve have some
pathway in to support things? And is there a merit, if we have
to go down that road, to actually have a legislative clarity on
the circumstances and making sure that the taxpayer is never on
the hook in that sort of intervention?
Mr. Quarles. Let's hope that situations like that are as
rare as this one was, which is once a century, if not longer. I
think the Fed has the authority to do what it is that we need
here and that our strong and reasonable expectation is that
something like this is not going to be repeated in our
lifetime.
Mr. Foster. Well, my goal is to die before we ever have a
crisis like we have been going through. So, thank you. My time
is up. I yield back.
Chairwoman Waters. Thank you very much.
Mr. Mooney, you are recognized for 5 minutes.
Mr. Mooney. Thank you.
So, direct questions for Vice Chairman Quarles. Let me just
start by saying that insurance is normally State-run, and so,
Vice Chairman Quarles, under the oversight of the Financial
Stability Board, they have adopted a holistic framework to
identify and proactively address systemic risk in the global
insurance market. Can you explain how the U.S. insurance
regulatory regime has performed in minimizing systemic risk,
and more specifically, how this performance compares to other
regulatory systems for insurance around the world?
Mr. Quarles. I think we have seen in the current stress,
which has been severe, that the insurance industry, which is
regulated by the States in the United States and has been since
the McCarran-Ferguson Act, has performed quite well. And, in
general, over the history of our industry, compared to
industries abroad and other forms of regulation, I think that
regulatory system has stood up well. It has passed the
practical test of what works.
As we look at insurance regulatory reform more broadly,
which the International Association of Insurance Supervisors
(IAIS), which is a member of the FSB, is considering in the
United States, the so-called team in the U.S., which is the
Federal Reserve and the National Association of Insurance
Commissioners (NAIC) and the Treasury, have worked to ensure
and have been successful in ensuring that there is scope in
that process for the U.S. system to be recognized
internationally, and I expect we will [inaudible] process comes
to completion several years from now.
Mr. Mooney. That kind of leads to my follow-up question. I
agree with you, first off, that it has worked well and the
States regulating it and we have worked well, better comparable
to other countries. But given that our U.S. insurance
regulatory system produces comparable results to foreign
frameworks, how is the Federal Reserve planning to make the
case that the American system is, ``outcome equivalent,'' with
the IAIS insurance capital standard?
Mr. Quarles. There is a monitoring process that is going on
at the IAIS of their proposed global standard. We have created
space in that standard for the U.S. framework to be viewed as
equivalent as a solution that works within the IAIS project.
That monitoring process has a fair ways to run yet. It will be
incumbent on us in the United States to put forward a well-
articulated framework for how a global consolidated insurance
regulatory framework could work.
The Fed has done its piece with respect to our building
block approach for how insurance companies that include a
depository institution can be regulated. The NAIC is working
hard on its group capital approach, and again, I am pretty
confident that as we put those forward in the international
discussions, the equivalent will be viewed positively and that
the effort will be successful.
Mr. Mooney. Thank you, Vice Chair Quarles.
And let me just close--I don't know how much time I have
left. Let me just close by saying, as we discussed, here in the
United States, insurance has been regulated primarily at the
State level for over a century, so, ``If it ain't broke, don't
fix it.'' We have a system that works well here. The needs of
West Virginia are different than the needs of Massachusetts and
California. You can't have a one-size-fits-all standard that is
going to work in this country. If we are forced to adopt an
insurance capital standard at European centric set of rules
for--
Chairwoman Waters. The gentleman's time has expired.
Mrs. Beatty, you are recognized for 5 minutes.
Mrs. Beatty. Thank you. Madam Chairwoman, let me start by
thanking you for your stellar leadership, for all of the work
that we have gotten done during this very difficult time, a
difficult time in this nation, and certainly as we have been
confronted with COVID-19, all of the work that we did in
helping save lives, through what we have gone through with our
economic problems and with PPP and housing. I just think it is
very important for me to recognize your work.
With that said, to our witnesses, thank you for being here
today.
Many of my colleagues have talked about where we are, and
related it to the problems we have had or the successes that we
have had with PPP. We have also talked about the greater
financial portfolio. We have talked about capital and liquidity
and, certainly, access to capital. But as I look to the title
of this full committee virtual hearing, we talk about
oversight, and we talk about it as it relates to the
departments that our witnesses oversee. We talk about it, as we
should, in ensuring safety and the soundness of diversity.
Certainly, you all know, as Chair of our Subcommittee on
Diversity and Inclusion, I like to devote much of my time to
that, because I think it is most appropriate when we talk about
the economic downturn, when we talk about the COVID-19 crisis,
and we talk about social injustices. Why? Because when we look
at the disparities and how African Americans and others are
disproportionately affected, it is a clarion sound bell that is
in the financial services area.
Mr. Brooks, I am going to start with you, and this will be
very quick. All of the other witnesses have been asked this
question. I take great honor that I have had the opportunity to
be in the forefront with the Offices of Minority and Women
Inclusion (OMWIs), so I don't want to break my tradition by not
asking you, do you know what OMWI is, have you met with your
OMWI Director, and who is your Director?
Mr. Brooks. My Director, Joyce Cofield, I consider to be a
close friend and mentor. She and I meet for an hour every
single week and have really leaned into a number of important
initiatives here, which I am happy to talk about if you like.
Mrs. Beatty. Thank you very much. She has done a great job
on that.
Let me go to my next question. And, if so, we can come
back, or offline, I can ask you some things.
I was very disturbed when, on September 22nd, the President
issued Executive Order 18950, which seeks to halt certain forms
of diversity and inclusion training in contracting with
programs in the Federal Government. So to each one of you, yes
or no, are you familiar with this? And the second question, yes
or no, have you ceased diversity training in your department?
I will start with you, Mr. Quarles.
Mr. Quarles. Thank you. I am somewhat familiar with it,
although that order does not apply to the Federal Reserve,
given the nature of the agency, and we have not changed our
practices.
Mrs. Beatty. Thank you. And while independent agencies
don't necessarily have to comply with the Executive Order, we
also know that many of you have been known to voluntarily
comply with the order.
Mr. Quarles. We haven't changed our practices with respect
to diversity.
Mrs. Beatty. Thank you.
We will just go down the line. Mr. Brooks?
Mr. Brooks. I am familiar with the order. We are obviously
a unit of the Treasury Department. There is a review process
for our diversity programs, but we continue to provide
diversity programs that don't run into any of the issues in
that order. For other things, we go through a review process as
required by the order.
Mrs. Beatty. Okay. Thank you.
Ms. McWilliams. And I will say that like the Fed, we are an
independent agency, and we generally comply with the spirit of
the Executive Orders. We have been able to continue our
diversity in training as we have done in the past.
Mr. Hood. Representative Beatty, at NCUA, we often strive
to comply with the spirit of Executive Orders. In this case,
this has been turned over to our general counsel for review,
but I assure you we are continuing to have outreach and
engagement opportunities. In fact, I have spoken at over 20
diversity, equity, and inclusion events, especially following
the murder of George Floyd. It has been my responsibility to
ensure that our employees have a safe space to talk and hear
from me directly during this challenging time.
Mrs. Beatty. Thank you very much.
I yield back my remaining 5 seconds.
Mr. Green. [presiding]. Thank you. The gentlelady's time
has expired.
Mr. Budd is now recognized for 5 minutes.
Mr. Budd. Thank you, Mr. Chairman.
Just to clarify, I heard a mention earlier in this hearing
about President-elect Biden. To my knowledge, none of the
States in question have certified their results, and their
State electors have met, so there is really no President-elect.
So we are asking for the same courtesies and the legal
processes that were extended to Vice President Gore in the year
2000 be extended to President Trump in 2020.
As you are aware, Democrats lost seats in this body, and
that is evidence enough that the American people recognize the
failure of the far left socialist policies. Now, this gives me
concern regarding the next Congress, but we have several
opportunities before us to seek more bipartisan solutions and
to reject the extreme.
So, I want to thank the panel for being here. And as we
continue to weather this pandemic, I appreciate that you and
all of your agencies have worked with our banks and our credit
unions to provide some flexibility so that they can provide
access to credit and financial services to creditworthy
consumers and creditworthy businesses. All of you have shown
your ability to work with our banks and credit unions, but it
is now time for Congress to help out those consumers and those
same businesses as well.
And that is why I am pleased to be an original co-sponsor
of H.R. 7777, the Paycheck Protection Small Business
Forgiveness Act. This bipartisan bill would not only help
millions of small businesses by forgiving all loans under
$150,000 with a simple, one-page forgiveness form, but it would
also free up countless hours and resources for our banks and
our credit unions, allowing them to focus on the core of
banking: providing access to credit and financial services to
individuals and businesses. As a result, some banks are
crossing asset thresholds that subject them to greater
regulatory burdens.
So, my question is this: What are you all doing to ensure
that these financial institutions aren't faced with potentially
costly regulatory burdens just because they helped with
implementing a relief program? Chair McWilliams, I will start
with you in reference--I think you may have made some comments
to my colleague, Mr. Loudermilk, in relation to that, so I will
start with you, Chair McWilliams.
Ms. McWilliams. Sure. We are doing a number of things to
make sure that these thresholds do not provide a disincentive
for banks to engage with their borrowers, individual consumers,
and small businesses. We are going through an interagency
process to ascertain what all we need to do to address those
thresholds and to make sure that banks need to do what we want
them to do, which is continue to stimulate the economy and be
there for their consumers and customers.
And with respect to the FDIC, we have also done a number of
things, including a change in what counts for the audit
purposes thresholds as well as excluding PPP Facility assets
from the deposit assessments for banks that have engaged in
extensive PPP lending.
Mr. Budd. Thank you very much.
Comptroller Brooks, if you would, please comment on that?
Mr. Brooks. Congressman, thank you for the question. I
would endorse what Chairman McWilliams said; we are obviously
part of the FDIC's process on that.
The one other thing I would comment on is, like the other
agencies, we excluded PPP assets from our assessments of the
first half of the year, and we also adopted a supplemental
leverage ratio of rule with the two other banking agencies to
make sure that banks could exclude pandemic-related deposit
inflows from messing around with their capital ratios and with
their leverage ratios. I think all of those things create a
safe space for banks to proceed.
Mr. Budd. Thank you.
Vice Chair Quarles, during your testimony earlier this week
on the Senate side, before the Senate Banking Committee, you
were asked about the Fed's plan to extend the exclusion that
was made for the supplementary lending ratio (SLR) to the
global systemically important bank (G-SIB) surcharge in order
to ensure that capital is not increased at the end of this
year. I think your response to that question was that the Fed
has not heard concerns about this from the impacted banks. So,
I am looking for clarification to that response, because as I
understand it, the Fed has discussed the likelihood of a
capital increase with the banks themselves.
I am sure you are aware, along with every Republican member
of this committee--we sent you a letter requesting action on
this because we have been hearing from the banks that an
increase in the G-SIB scores could impact their ability to
support the economy when we need it most. Any comments on that?
Mr. Quarles. Yes. The way the G-SIB calculation works--and
I didn't get into this with the Senate, but it is probably good
that you have given me the chance to do that here. The way the
G-SIB calculation works is that there is not an immediate
capital consequence for a firm going over, moving up a bucket
in the G-SIB framework. Instead, that capital consequence would
take place after a year. And the framework is designed
specifically so that temporary changes would not have the
effect that you and we are concerned about here. This will give
us the chance, if we think that the changes are likely to be
durable, to consider whether there should be adjustments made
over the course of time.
So, what I was saying was that there is not an immediate
capital consequence. We are not hearing that there is an
immediate capital consequence, that is not how the framework
works, and we have time to think this through should we
discover that the effect is going to be more durable.
Mr. Budd. Thank you. I yield back.
Mr. Green. The gentleman's time has expired.
Mr. Vargas of California is recognized for 5 minutes.
Mr. Vargas. Thank you very much, Mr. Chairman. Can you hear
me?
Mr. Green. Quite well, Mr. Vargas.
Mr. Vargas. Thank you. It is a pleasure to be here again.
And I want to thank all of the witnesses today. I
appreciate very much their testimony. It is a very difficult
time, and I think they are working very hard on behalf of the
American people.
Now, I have to say, at the beginning of this hearing, we
Democrats were lectured on the issue of divisiveness, and now
we were just lectured on the notion of who won the election. I
think that we won, not only at the President level, but also at
the congressional level. So I find it interesting that somehow
the winners are the ones who are saying we were somehow
rejected by the American people when we won.
I would also remind people that 4 years ago when Mr. Trump
was running for President, and Mr. Trump won about the same
amount of electoral votes as Vice President Biden has now, we
didn't like it, but of course, we acknowledged it and we had a
transition. Now, to hear that we are in the same situation and
we are not supposed to acknowledge that Vice President Biden
has won is really rather ridiculous, just to be frank.
Also to divisiveness. I have to say this. I have been on
this committee for 4 years. From he previous chairman, all I
heard was divisiveness, mostly around the issue of Dodd-Frank,
and other things too but especially Dodd-Frank; it was
demonized, in particular. And I think I heard today from the
witnesses how well Dodd-Frank has worked. Did I mishear or did
I hear correctly that Dodd-Frank, in fact, was very beneficial
during this time?
Vice Chair Quarles, why don't you respond to that? Has it
been helpful, Dodd-Frank?
Mr. Quarles. I think the increases in capital and liquidity
that were put in place after the 2008 crisis have been very
helpful.
Mr. Vargas. Anyone else disagree with that? How about
Acting Comptroller Brooks?
Mr. Brooks. No. I would echo the Vice Chairman's comments.
Mr. Vargas. Now, I have to say, that was--when I first got
on this committee, it was a far left sort of bill. They told me
how unhelpful it was going to be, and I believe most of you
were appointed by President Trump. So anyway, I--again, what
becomes demonized and far on the left all of sudden becomes
very helpful in the middle. So, again, I hope that we can work
together and get away from this divisiveness and name calling.
I don't think it works. And I do think we have a lot of work to
do together, and we should work together.
Now, I do have some concerns about COVID-19 and where we
are today. COVID-19, of course, is a virus, and this virus, as
all viruses, has seasonality. In fact, recently, I think one of
the medical groups said that you would see during the summer, a
diminution of COVID, and then in the autumn, it would come
back, and then in the winter, it would spike. I am very
concerned about where we are here.
In fact, recently here, very recently, I heard from both
Jerome Powell, the Fed Chair, as well as Christine Lagarde, the
president of the European Central Bank, that they are very
concerned too about this. Could you comment on that? Because I
do have great concerns that this is roaring back and we are
going to be in trouble.
Mr. Quarles, don't you comment first? Were they wrong?
Mr. Quarles. I think there is a great deal of uncertainty
about how the situation will evolve, and so we shouldn't be
complacent about that as [inaudible] ability and within the
Fed's [inaudible] economic support as well.
Mr. Vargas. Mr. Brooks?
Mr. Brooks. Congressman, I think that the watch word here
is, ``uncertainty.'' There is a lot of negative information out
there, including increases in cases and hospitalizations. There
is also a lot of positive news out there, including the
approval of new therapeutics, the reduction in the length of
hospitalizations, and effective vaccines. So, I think a lot of
it depends on our reaction to it at this point.
Mr. Vargas. I think that they took that into account too
when they commented. In fact, they still say the uncertainty is
something that worries them.
How about Chair McWilliams? What do you think about that? I
don't know if you heard their statement, but their statement
was concerning to me.
Ms. McWilliams. We are certainly monitoring the conditions
on the ground to make sure we understand what related business
closures may be happening in different jurisdictions. We are
working closely with our regional offices to make sure that we
are appropriately addressing any issues that may come up for
our banks that are trying to help consumers stay in their homes
and small businesses continue to operate. So, I would say that
certainly we are very careful about analyzing the numbers and
understanding what our regulatory response should be.
Mr. Vargas. Thank you.
I guess my time has almost expired. What I would say is,
let's try to work together. I think that is important. And
let's get away from this divisiveness. Let's acknowledge what
happened, too, in this Presidential race.
Thank you very much, Mr. Chairman. My time has expired.
Mr. Green. The gentleman's time has expired.
Mr. Kustoff is now recognized for 5 minutes.
Mr. Kustoff. Mr. Chairman, I want to thank all of the
witnesses for appearing today. And I do want to echo the
comments of the ranking member and so many others this
afternoon, who have talked about the incredible work that all
of you have done, the witnesses, in protecting the soundness of
our financial system over these last 8 months. I think you have
probably given a lot of stability to people across the nation.
You provided relief to businesses that, frankly, have struggled
initially, and to those individuals who struggle. So, thank you
for all of your hard work.
Comptroller Brooks, back in May, the OCC completed and
updated the Community Reinvestment Act. Obviously, these were
important changes that were made that weren't trivial changes.
It was a complete regulatory overhaul.
Under the new framework, banks are going to be assigned a
CRA grade based on whether they meet certain benchmarks and
community development minimums. But when the rule was adopted,
the OCC didn't necessarily define what the benchmarks would be.
As I understand it, and the way I interpret it, you wanted a
separate rulemaking process for setting those benchmarks.
Now, of course, here we are about 6 months later, and the
OCC still has not started the second rulemaking process. Can
you talk to us about your plan, what the OCC's plan is, and how
you are going to provide banks with the certainty regarding
their responsibilities under the regulation?
Mr. Brooks. Congressman, absolutely, and thank you for that
question.
First of all, I would tell you that we are just a few days
away from releasing the notice of proposed rulemaking on
performance standards, so you will see that very shortly, I
would expect by next week. In terms of the work that we have
done, one of the things that we were able to do after adopting
the original CRA rule was to bring on board one of the world's
leading banking economists, Dr. Charles Calomiris, to lead our
economics function. And Dr. Calomiris has had a significant
role in helping us think through what the performance
assessments ought to look like.
So, the onboarding of a new economics leadership team has
been one of the reasons it took us a few extra weeks beyond
what we would have hoped. But the good news is, we now have
that level of input to make sure we get it right.
What I can tell you that you will see in the rule when it
comes out in just a few days is a couple of things. First of
all, we are going to be moving from a highly relativistic
standard under the old rule, where we basically had banks
compete with each other to see who got the A grade, so it was
both subjective and relativistic. And we are hoping to move
toward a more objective and predictable kind of standard so you
will know that you have to hit this threshold in order to get
an ``outstanding,'' this threshold in order to get a
``satisfactory,'' et cetera. That is a significant change from
in the olden days. The way that I like to put it is we want to
see CRA as more like a math test and less like an English test.
``Satisfactory'' shouldn't be in the eye of the beholder; it
should be predictable so banks know how to meet what we expect
of them.
And the other thing we have said is that we will be holding
banks accountable for meeting or exceeding their previous
levels of CRA contributions. We know that one of the concerns
expressed by commenters in the original rule was that somehow
our new framework was going to result in a reduction of CRA
activity. We are confident it isn't, and the performance
standards will speak to that issue in terms of who gets a pass
and who doesn't.
Mr. Kustoff. Thank you very much. I appreciate that.
Vice Chairman Quarles, there was some discussion earlier,
during questioning from Congressman Barr about de novo banks.
And I think we are all concerned that we have not seen the
creation of de novo banks over the last 10 years, like we did
prior to 2008. If you can, just to set the stage, what are the
primary factors that led to the lack of de novo banks over the
last decade? And what, if anything, can we as Congress do to
facilitate de novo banks?
Mr. Quarles. I think the primary factor is more of a
question of mindset. There had been, leading up to the 2008-
2009 crisis, a significant spate of de novo banks approved,
particularly in some jurisdictions. Many of those banks failed,
and that has resulted in a caution over the course of the last
decade in the regulatory system generally about the approval of
de novo banks.
Myself, I think that is a little bit of a question of a
matter of a cat that sat on a hot stove. It won't do it again,
but it won't sit on a cold stove either, and that there are
things we can do and have done to improve and streamline the
regulatory environment for small banks to help make, establish
[inaudible].
Mr. Green. The gentleman's time has expired.
Mr. Lawson of Florida is now recognized for 5 minutes.
Mr. Lawson. Thank you very much, Mr. Chairman. And I would
also like to thank the panel on the Hill for this discussion
today.
I know that there have been a lot of things that have
occurred since we have been through this pandemic, and so I
want to ask Vice Chairman Quarles, the Federal emergency COVID-
19 Facilities are created to support a broad cross-section of
the financial market and economy supporting the availability of
credit for households, small and medium-sized businesses, to
maintain their payroll and employees through new and expanded
loans providing credit to larger employees so that they are
able to pay supplies and maintain their business operation.
However, the Facilities are set to expire at the end of 2020.
Do you know if the Fed and the Treasury has already created
a plan to help these businesses maintain on their feet and meet
payroll, as COVID will still be a concern next year?
Mr. Quarles. Certainly, the Section 13(3) Facilities that
we put in place in conjunction with Treasury have been very
helpful in restoring market function and the availability of
credit across a broad swath of the economy, as you note. The
question of whether, in light of the performance of the economy
since the spring, they should be extended, is one that we are
currently engaged on.
And while the economic progress since the spring has been
better than many people, including we at the Fed, expected that
it might, we are still a long ways away from being on the other
side of the COVID event. Unemployment is too high. Small
businesses are under credit pressure. So, we want to take all
of that into account as we consider this question. We haven't
made a decision on it yet. We are talking with Treasury about
it, but obviously, we need to decide that before the end of the
year.
Mr. Lawson. Okay. Thank you. And it will be interesting to
see what happens with your conversation with the Treasury,
because it is a major problem. When I travel throughout my
district and so forth, I get more questions about that than
anything else, because there are still a great deal of dilemmas
there.
But, Mr. Vice Chairman, I have one other thing. In
September of 2020, the Fed banned stock buybacks and
constrained dividends payment by large banks to safeguard their
wealth against COVID-19. However, I think, is it safe to say
that the Fed officially doesn't want to repeat the history by
using government funds to capitalize banks rights? So why did
the Fed prohibit dividend payment entirely, given the economy
activity will likely be constrained until the pandemic is over?
Mr. Quarles. Thank you for that. As you note, we did
constrain dividends. We prevented them from being increased
[inaudible] An income test. Most importantly, we prohibited
share repurchases, which is for our large banks, how 70 percent
of their capital distributions are made. So, the great bulk of
capital distributions have been suspended.
The result of that is that during this COVID event, even
while the banks have been taking very large provisions,
particularly in the second quarter for expected credit losses,
capital at these institutions has actually increased. It
increased in the second quarter and it has increased in the
third quarter.
We are now running detailed stress tests with two different
scenarios, given the uncertainty as to how the world might
evolve. And we will release publicly the results of those
stress tests before the end of the year, which will give us
much more insight into the banks' resilience in light of the
economic circumstances that we are facing. And then we will
make a decision as to whether we should extend or modify in any
way the capital constraints that we have implemented.
Mr. Lawson. Okay. Thank you.
And, Mr. Chairman, with that, I yield back.
Mr. Green. The gentleman yields back.
Mr. Hollingsworth is now recognized for 5 minutes.
Mr. Hollingsworth. Good afternoon. I want to thank all of
the panelists as well for being here today. My first question
goes to Mr. Quarles. I know Mr. Budd touched on this a little
bit earlier, but I want to come back to it and put a finer
point on it. I was, admittedly, a little bit stymied, I say
respectfully, by your answer to Senator Rounds yesterday when
he asked about the G-SIB surcharge and some of the effects that
our largest institutions, because of an increase in deposits,
are seeing on moving into the next category in terms of the G-
SIB surcharge.
You said in response to Senator Rounds' question, ``We are
not hearing from the large firms that changes in their balance
sheet over the period of the COVID event might lead them to
being pushed up into a higher bucket.'' I just wanted to
confirm to you that I certainly am hearing from those
institutions that this will be a challenge. They are certainly
telling their investors that this will be a challenge.
Recently, JPMorgan's CFO said, ``In the absence of rate
calibration, which we remain hopeful about, managing that back
down--she means back down to a lower category G-SIB surcharge--
will certainly be challenging.''
It's certainly something that she is already thinking
about, and something that JPMorgan is already planning on. And
I recognize that you have sufficient time to still make news on
this next year, but many of those capital allocation decisions
are already being made. I and every other Republican member on
this committee also sent a letter a couple of weeks ago asking
about this same thing.
I just wanted to confirm to you and hear your confirmation
that this is an important issue. This is something that you are
hearing about that I am hearing about that others or the Fed
are hearing about and will at least begin to think about.
Mr. Quarles. Yes. Absolutely. My reference to Senator
Rounds' to apple of buckets as opposed to the G-SIB surcharge
buckets. And as I explained, there is a--we have a year
timeframe in which to see what the consequences are.
You are absolutely right that if banks aren't sure
whether--what accommodations will be made or how they see their
balance sheets evolving organically, that they will need to
take steps well before a year from now in order to manage their
G-SIB position. But we do have time to think that question
through because of the way the G-SIB framework is structured.
Mr. Hollingsworth. I understand. And certainly, I don't
want you to not think it through. Please don't think I am a
proponent of that. But I just want to make sure that it is
being thought about and that we all recognize collectively that
this is a real issue, and it is going to start having
meaningful impacts on our large institutions even earlier than
a year from now.
Mr. Quarles. Absolutely. Unquestionably.
Mr. Hollingsworth. Perfect. Wonderful.
To you, Chair McWilliams, I wanted to ask about your FDIC
rule modernizing the regulatory framework for broker deposits.
You said, I think earlier today or perhaps yesterday, that this
should be finalized before the end of the year. Is that
correct?
Ms. McWilliams. That is correct.
Mr. Hollingsworth. Wonderful. I know I sent a letter, along
with many others, about how we can work through the
facilitating portion of that rule. I know that I expressed some
real concern that the restrictive nature of how you thus far
had defined, ``facilitating'' might lead to an adverse impact
on some of our community banks.
As a part of finalizing that role before the end of the
year, do you expect there to be changes to the facilitating
definition, enabling our community banks to use third-party
servicers for some of their critical technology and
infrastructure?
Ms. McWilliams. I can't engage in the specifics of what the
final rule will look like, but I can certainly tell you that
the reason we have the notice in common process is to solicit
the type of feedback that you and others have provided so that
we can improve the rulemaking before it becomes finalized.
Mr. Hollingsworth. Wonderful. I certainly appreciate that.
I certainly understand that. Please know that from my
perspective, and so many of the community institutions all the
way across our districts and all the way across the country,
this is something that really concerns them. They utilize these
third-party vendors to enable them to compete with larger
institutions that have that technology, have those capabilities
in-house. They don't want to see themselves be deprived of
those infrastructure pieces so that they can compete for
consumer attention, for consumer deposits, for more
opportunities for them and their consumers. So please know, at
least from our standpoint, that is an important thing to tweak.
And with that, Mr. Chairman, I yield back.
Mr. Green. Thank you. The gentleman yields back.
Ms. Tlaib is now recognized for 5 minutes.
Ms. Tlaib. Thank you so much, Mr. Chairman, and thank you
all so much for being with us.
I know in the financial stability report released this
week, the Board had acknowledged that climate change is a
financial stability risk. I represent Wayne County, which has
one of the poorest air qualities in Michigan, and hasn't met
the Clean Air Act standards in over a decade, so I do want to
talk specifically about Marathon Petroleum Refinery, which is
in my district. They have repeatedly had a number of violations
recognized by the State of Michigan, and the residents who live
near that refinery continue to have a number of concerns and
issues that they bring to my office almost daily.
Marathon bonds are also owned right now by the Fed,
basically the public, $15 million worth of bonds that we own
right now. And you all know I wrote a letter to the Board where
I highlighted how long [inaudible] Marathon nearly 20 percent
of the Fed's secondary market Corporate Credit Facility
portfolio is bonded--is bonds from the energy--for the energy
and utility companies.
So, I would like to ask Vice Chair Quarles, what do I tell
my constituents about this? When they see this and they see the
various headlines, when they find out that the public's
resources and our money and the risk on us, it is not
investment into State and local governments but instead,
invested in the very companies that are in their communities,
that are responsible for bad air quality in their community?
Mr. Quarles. Thank you for that. The Federal Reserve
Facilities--we do have a Facility for State and local
governments that has been serving a useful market support
function--
Ms. Tlaib. But how many cities have benefited from
[inaudible]?
Mr. Quarles. I am getting that information now, because I
want to respond precisely. Three issues that--the MLF about
three issues, but its principal function is to restore the
capacity of private markets, and many markets have healed
across-the-board. But for those Facilities to do their job, we
at the Fed can't be involved in credit allocation. We establish
broad parameters, and the allocated decisions as opposed to the
market support decisions are really for Congress.
Ms. Tlaib. I do want to get very centered on--the report
came from you, the Financial Stability Report that acknowledges
the risk of climate change, how it poses a financial--kind of,
it poses instability in our economy. What are the Board's plans
to change the Corporate Credit Facility's account of those
risks? Are we just ignoring them? And I still want an answer as
to how many cities you all helped through the MLF program?
Mr. Quarles. There were three purchases. I said that. But
the new Facility operates mostly through its effect on the
broad market, and the broad market has healed substantially. So
with respect to climate, we are looking at that from a broad
systemic point of view as opposed to specific purchases.
Ms. Tlaib. Doesn't holding these millions of dollars in
bonds in Marathon Refinery create instability? It is like you
are trying to create stability, but your own report says
climate change is posing financial instability. Then, why
aren't we just basically saying, ``Hey, we are going to move
away from this, and maybe focus on local and State
Governments?''
Mr. Quarles. No, that was not the conclusion of the report
at all that we should--
Ms. Tlaib. What was it saying? Wasn't it saying that there
is a climate change issue?
Mr. Quarles. I do think that there is a climate change
issue, but we have certainly not concluded that the mechanism
to address climate change is credit allocation. That should not
come from the Federal Reserve. If there is a credit allocation
decision to be made, that is a decision for Congress, to be
debated by the public's representatives.
Ms. Tlaib. Yes, I agree. I understand. And I am working on
that, as you probably know.
Why aren't we helping local and State Governments more? It
sounds like we only helped one or two States. What cities have
benefited from the MLF program so far? We are in a pandemic.
They were in survivor mode prior to this pandemic. They
literally are the frontline communities, Vice Chair Quarles--
literally, the frontline communities that are stopping the
spread of COVID, and you don't even know how many cities have
been helped.
Mr. Green. [presiding]. The gentlelady's time has expired.
We will accept the answer in the record.
Mr. Quarles. Thank you.
Mr. Green. I am advised by the chairwoman to announce that
we have a hard stop at 3:30, and that I am to get to as many
Members as possible between now and 3:30. With that said, the
gentleman from Ohio, Mr. Gonzalez, is recognized for 5 minutes.
Mr. Gonzalez of Ohio. Thank you, Mr. Chairman.
And thank you to our panel for being here.
I want to start my questions with Mr. Quarles, and go back
to the Secured Overnight Financing Rate (SOFR) conversation a
bit and try to put some fine points on some of your earlier
comments. First question, how has SOFR stood up from a
stability and suitability standpoint during the pandemic?
Mr. Quarles. Our experience with SOFR during the pandemic
is that as a reference rate, it has stood up quite well.
Mr. Gonzalez of Ohio. Great. And then just a more direct
question: At this point, is there any reason to believe that
SOFR would not be a suitable replacement for LIBOR, going
forward?
Mr. Quarles. No, particularly for capital markets and
derivatives transactions, which are the bulk of the
transactions that use LIBOR as a preference rate.
Mr. Gonzalez of Ohio. Great. And then, could you clarify
what you meant when you said earlier that the plan is to allow
existing contracts to mature on the LIBOR rate without needing
a congressional solution, given that so many of the contracts
would, in fact, expire after LIBOR would go away? Could you
just kind of clarify that one for us?
Mr. Quarles. Yes. The issue that we have had is that
extensions of LIBOR, which there have been a couple of over the
course of the last decade, after it became clear that it would
be going away, results in the writing of new contracts, so, the
problem just perpetuates itself.
I think that the best solution would be a framework in
which we allow the existing contracts--we create an environment
in which the existing contracts could mature on their current
basis without renegotiation, without change to a different
rate, but that new contracts would not be written. And over a
relatively short period of time, the bulk of existing contracts
would run off. These are not usually long-term contracts.
There is a hard tail of contracts that would require a
longer time, and legislation could be useful to help with
those. I think once it became clearer what the nature of that
hard tail was, and we had more time to think it through,
therefore, potential legislative responses, that the
combination of some mechanism to allow the bulk of the existing
contracts to mature with time over the course of the next year,
year and a half, to think about the legislative solution for
those that won't would be the best approach.
Mr. Gonzalez of Ohio. Thanks. And then with respect to that
hard tail, how soon would you suspect we would need to act,
congressionally or otherwise, before we would start to see
implications in the broader economy, in the real economy?
Mr. Quarles. Sorry. I think we are still working through
that issue currently. It is not a long time. I think probably a
year, or a year-and-a-half. This is something that we should be
engaged with the folks who are concerned [inaudible].
Mr. Gonzalez of Ohio. I hope to work with you and your
office on that. I personally think we need to act a bit sooner
than a year and a half, but I am sure we can hammer that out.
I want to shift now to Chair McWilliams. One of the things
we have talked about is the difficulty of MDIs and community
banks in adopting technology. This year, the FDIC issued a
Request for Information (RFI) for public input on the idea of
fostering the creation of a public/private standard-setting
organization for technology vendors and models seeking to work
with community banks.
The idea is that small banks need to be able to adopt the
technology developed by third parties, but those organizations
need to meet standards to be sure tools are effective, secure,
and compliant. Can you just talk a bit in my last minute about
what your vision for this program is, what problems you are
trying to solve, and how this will make our community banks
more competitive?
Ms. McWilliams. Sure. And you have a minute, so I am going
to get all of this in, in a minute. I realized early in my
tenure that one of the elements for survivability of community
banks will be to engage with third-party source providers,
primarily fintechs and technology companies, that can help them
deliver better products, more products, and reach more
customers, especially in rural areas as discussed earlier in
the hearing.
And I reached out to several Silicon Valley firms. I went
and I met with them, technology firms, and to partner with
banks, and I asked them, ``What can be done to help you partner
up with these banks more quickly?'' We don't regulate these
firms. And fintechs, budget, through the third-party service
arrangements, were able to provide this feedback to us.
And they said that in the beginning, when they approach a
bank, to be on-boarded with a bank, they have to go through the
same due diligence process with each and every bank. So we
said, why don't we kind of cut out that process and make it
very simple where they get certified to this public/private
partnership, and then use that certification to ease the burden
on the banks, and use the burden on the fintechs when they
partner up.
Mr. Gonzalez of Ohio. I think that is a fantastic idea. I
yield back.
Mr. Green. The gentleman's time has expired. The Chair now
recognizes Ms. Porter.
Not hearing from Ms. Porter, I will now recognize Ms.
Wexton.
Ms. Wexton. Thank you, Mr. Chairman. And thank you to the
witnesses for appearing today.
I want to switch gears and talk a little bit about
something that I kind of see as a potential ticking time bomb
in our financial system, and that is the commercial real estate
market. Chairwoman McWilliams, there has been a rapid growth in
CRA exposure, especially for smaller banks. Is that correct?
Ms. McWilliams. They have had high concentrations in CRA
portfolios, and it was one of the primary concerns we had in
the last crisis as well.
Ms. Wexton. And currently, the FDIC considers at least 356
banks as concentrated in the commercial real estate bank
market. Is that correct?
Ms. McWilliams. That number sounds right. I don't know
how--it may be slightly outdated.
Ms. Wexton. So what do you mean by, ``concentrated?''
Ms. McWilliams. The majority of their portfolio, or a very
large number of their portfolio--we don't have a magic number.
We don't tell them it is X percentage has exposure and is
heavily concentrated in the CRA market.
Ms. Wexton. But that means that by, ``concentrated,'' you
mean that they are exceeding the FDIC's regulatory criteria or
your recommended proportion of a portfolio being made up of
commercial real estate portfolios?
Ms. McWilliams. We don't have a clear-cut number, where--it
depends on the individual institution, and we are trying not to
manage our institutions with that kind of a blunt-cut
instrument by telling them it is X percentage. But we will look
at each individual institution, look at their risk management
profile, capital levels, their CAMEL ratings, management
experience, do they know how to manage this, did they go
through the last crisis with these issues as well and how did
they fare?
So I would say we have more of an individual ad hoc
bespoke, if you like, approach to how we look at commercial
real estate exposures at individual community banks.
Ms. Wexton. But it is fair to say that these are
institutions that are more likely to fail if we see commercial
loans go bad in large numbers. Is that correct?
Ms. McWilliams. I would say that it would be one of the
factors that could lead to their failure if it is not managed
appropriately and the management doesn't have experience in how
to deal with it.
Ms. Wexton. What are some of the indicators or warning
signs that we are seeing now in the commercial real estate
sector that give you pause for concern in the FDIC?
Ms. McWilliams. We are certainly looking at a number of
buildings. And there was just an article this morning that
folks are subletting their leases. They are realizing they
don't need the high level of occupancy in the square footage
that they have seen in the past. And so, we are working with
our banks to make sure they understand what the exposure is.
This is not a--kind of a snapshot-in-time exposure. Most of
these leases are multi-year, in some case, multi-decade leases.
And we want to make sure that small banks, in particular, have
the ability to manage those portfolios, are working proactively
with their borrowers, they understand where the companies that
own these buildings are in their economic cycle, and also
reaching out to both regulators, us, and their examiners to
charge if they foresee any issues.
Ms. Wexton. But these losses are slow to materialize
because of the duration of those loans and everything else? For
example--
Ms. McWilliams. I'm sorry. The first part of the--
Ms. Wexton. --and they didn't peak until 3 years after the
2009 recession. Is that correct?
Ms. McWilliams. I'm sorry, the question--it broke up in the
first part of the question. Can you repeat it, please?
Ms. Wexton. I was just saying that it takes a while for
these losses to materialize because of the duration of the
loans.
Ms. McWilliams. It generally does, yes.
Ms. Wexton. Right. But the fallout when these loans go bad
won't just be contained to the banking sector, because--can you
talk a little bit about the exposure to pension funds and
others and what that will mean?
Ms. McWilliams. Sure, and it truly is an ecosystem. The
reason that some of those folks who are renting commercial
space are unable to make their payments is because the
commercial activity has subsided, which is generally a sign of
the economic downturn. And so, that is something we have tried
frankly to prevent with some of the actions we have taken over
the past few months.
Certainly, the ecosystem doesn't stop with the borrower and
the lender. There are investors in the banks that have exposure
here as well. To the extent that these commercial real estate
loans get securitized, we have exposure in the secondary
market, as you mentioned. So it is not a simple formula whether
it is--
Ms. Wexton. I am running out of time, and so I just would
ask, other than banks increasing their reserves to absorb loan
losses, what else should we be doing to head off this
situation? Is there anything else that you would recommend?
Ms. McWilliams. I can tell you from our perspective, we are
working with individual banks that have high concentrations in
the affected industries, including commercial real estate
throughout the country. I can't think of any recommendations
right off the bat. If we exhaust our regulatory discretion in
how we can address and work with these, I will certainly let
you know. But the best thing we could do is--
Ms. Wexton. In my last 15 seconds--I am sorry to interrupt
you, but do you think that you have the authority to extend the
troubled debt restructuring theory beyond 6 months as a
regulatory matter of course, or do you need statutory
authorization to do that?
Ms. McWilliams. There are two different TDRs: one in the
CARES Act: and the other is our personal individual FASB to
take concurrent by FASB to do so for us.
Mr. Green. The gentlelady's time has expired. The Chair now
recognizes Ms. Porter for 5 minutes.
Ms. Porter. Thank you.
Mr. Quarles, the Fed is largely responsible for dispensing
the $500 billion in taxpayer money that Congress provided as a
bailout for corporate America, the biggest bailout in our
country's history, potentially. Using taxpayer dollars to buy
bank debt was never part of that plan. In fact, the Federal
Reserve stated, explicitly in this document, that it would not
be purchasing bank debt. What happened?
Mr. Quarles. I couldn't quite tell. I am on the grid, but I
couldn't quite see what the document was, so I am not quite
sure what document you are referring to.
Ms. Porter. It was the Federal Reserve's own rules
regarding the frequently asked questions for the Primary Market
Corporate Credit Facility. And what it says, in fact, is that--
what bonds will be included. And it says, those that are issued
by an issuer that is not an insured depository institution
holding company or subsidiary of a depository holding company,
in other words, a bank. So, the Secondary Market Liquidity
Facility--
Mr. Quarles. Yes.
Ms. Porter. The Corporate Credit Facility and the Secondary
Market Corporate Credit Facility said they weren't going to be
buying bank debt. That is in the FAQs, which I am going to put
into the record, so what happened then? Why are you buying--why
is the Fed bailing out the big banks?
Mr. Quarles. Yes. I understand the question now. No, we
haven't bought bank debt in those Facilities. To begin the--
Ms. Porter. Mr. Quarles, reclaiming my time, has the Fed,
as part of a coronavirus bailout, purchased bank debt, yes or
no?
Mr. Quarles. No. We have purchased--
Ms. Porter. Okay. What is an exchange-traded fund (ETF),
Mr. Quarles?
Mr. Quarles. As I was getting ready to say, we have
purchased exchange-traded funds at the very beginning of the
process in order to jump-start the reignition of the economy,
and we stopped purchasing exchange-traded funds several months
ago.
Ms. Porter. Exchange-traded funds, for everyone who is
watching, are just baskets basically of stocks issued by a
variety of companies. And is it not correct that the Fed bought
$1.3 billion in ETFs?
Mr. Quarles. That number sounds right.
Ms. Porter. Okay. So, this is our--
Mr. Quarles. But that is not $1.3 billion of bank debt.
Ms. Porter. Okay. No, so it is $1.3 billion in exchange-
traded funds. And my question for you is, how much of that was
bank debt in those exchange-traded funds?
Mr. Quarles. Yes. I can get that information for you. I
don't have the numbers in front of me.
Ms. Porter. Well, it was a lot, right? The bank money that
is in these exchange-traded funds, this is companies like
JPMorgan Chase. Their debt is in there. And it is a big problem
that you did this.
A White Paper published by the Yale School of Management
showed that, in fact, 15 percent of all that ETF purchased was
for big banks, and ultimately, to the tune of more than $2
billion in taxpayer money.
Mr. Quarles. I am not--
Ms. Porter. This is a headline from Bloomberg, ``Despite
Stated Exclusion, the Fed Is Buying Bank Debt.'' Would you like
to revise your statement about--your earlier answer when I
asked you whether or not the Fed had purchased bank debt as
part of coronavirus relief?
Mr. Quarles. No. That answer was entirely accurate. We have
not purchased bank debt. We purchased ETFs. Those ETFs--
Ms. Porter. Do those ETFs contain bank debt?
Mr. Quarles. The ETFs contain a portion of bank debt. We
stopped buying the ETFs several months ago. It was important to
buy the ETFs in order to jump-start the general process of
restoring the economy, which has benefited everyone.
Ms. Porter. So, what happened here is you said you wouldn't
buy bank debt. Then, you crafted a loophole using ETFs so the
Fed could buy bank debt, a loophole buried in a subparagraph of
rules on the Fed's website, and this loophole essentially
swallowed up $2 billion in taxpayer money during COVID to bail
out big banks, even as you told the public that the money could
not go to any bank?
Mr. Quarles. We did not purchase any bank debt. If we had
not purchased the ETFs, we would have had a credit market
implosion that would have been devastating to the economy. No
one would have wanted that. As soon as that was no longer
necessary, we stopped purchasing ETFs.
Ms. Porter. Reclaiming my time, who is the world's largest
issuer of ETFs?
Mr. Quarles. I don't know, off the top of my head.
Ms. Porter. BlackRock.
Mr. Quarles. Probably BlackRock.
Ms. Porter. BlackRock, yes. I think you do know that.
BlackRock. Who is Larry Fink?
Mr. Quarles. Larry Fink is the CEO of BlackRock.
Ms. Porter. Did the Fed hire Larry Fink and BlackRock to
advise it--and this seems beyond belief to me--to buy
BlackRock's own ETF products?
Mr. Quarles. I'm sorry, the alarm had gone off.
Mr. Green. The gentlewoman's time has expired. The answer
may be submitted for the record.
Mr. Quarles. Thank you.
Ms. Porter. Mr. Chairman, may I submit these documents for
the record?
Mr. Green. Without objection, it is so ordered.
Ms. Porter. Thank you.
Mr. Green. Mr. Rose is now recognized for 5 minutes.
Mr. Rose. Thank you, Chairwoman Waters and Ranking Member
McHenry, and thank you to our witnesses for being here today.
Like many of my colleagues, I also want to thank you for the
great work done by our regulators throughout this pandemic
response. Your swift efforts to accommodate regulatory and
supervisory policies were extremely important, and moving
forward, I urge you to continue to be flexible to ensure a
strong economic recovery.
Nearly 60 percent of the automated teller machines in the
United States are independent, nonbank terminals. It is those
ATMs that are typically found in low-income communities and
thinly-populated rural areas in which there are few, if any,
bank offices or bank-owned ATMs.
The widespread closures and denials of bank accounts to
businesses within the independent nonbank ATM industry present
a serious threat to the financial stability, not only of
consumers who live in the area served almost exclusively by
independent nonbank ATMs, but also the tens of thousands of
retail and service businesses serving these consumers on a
daily basis.
In a Financial Services hearing on February 15, 2018, the
National ATM Council's Tim Baxter testified about the,
``widespread and severe consequences that in, recent years,
have resulted from financial institutions' practice of de-
risking,'' and I might add, the prejudicial treatment that was
a direct result of Federal regulators' implementation of
Operation Choke Point in 2013.
He noted that it is impossible for ATM operators to do
business without having a bank account. But even with the end
of the Operation Choke Point initiative, independent ATM
providers were increasingly being notified by their banks,
without explanation, that their deposit accounts were to be
closed, or, in some cases, already had been closed.
My question for you, Chairman McWilliams, Vice Chair
Quarles, and Acting Comptroller Brooks, is, could each of you
describe what the regulators are doing to address the fallout,
the ongoing fallout from Operation Choke Point and its effect
on ATM owners and the operators who are still having their
accounts closed? Chair McWilliams, you may begin.
Ms. McWilliams. Sure. And I suspected the question was
coming my way, so I reached out for the pronouncements we have
issued in the past. Certainly, we have made, I would say, very
concentrated and concerted efforts to make sure that our
institutions understand and offer services to the businesses in
their communities, including businesses that might have been
ostracized in the past by so-called Operation Choke Point.
I have a statement I issued in November of 2018 telling our
colleagues at the FDIC to make sure that when we examine banks,
we were clear in our communication. We have resolved a lawsuit
that was pending against the FDIC in connection with Operation
Choke Point, even though that operation wasn't necessarily
named Operation Choke Point by the FDIC.
But in any case, we have issued a statement basically
saying that financial institutions should have the ability to
assess the risk profile of individual clients, and do so in
accordance with their risk appetite and management practices.
And then, we have a statement that we issued in 2015,
basically saying that the FDIC encourages institutions to take
a risk-based approach in assessing individual customer
relationships, rather than declining to provide banking
services to entire categories of customers without regard to
the risks presented by an individual customer or the bank's
ability to manage the risk.
I don't know what else to say, to tell you the truth, to
make sure that it resonates down to individual institution's
level that they should not shut out the entire industry, or the
entire type of business, but that they should manage that risk
based on their risk appetite and management's experience in
handling the type of risk that they may be concerned about.
Mr. Rose. Thank you, Chair McWilliams.
And I see our time is about to expire. I recently led a
bipartisan letter to the three of you, Chair McWilliams, Vice
Chair Quarles, and Comptroller Brooks, and I would just
encourage you, the three of you, to respond to that in a timely
manner.
And thank you for your answer, Chair McWilliams.
And with that, I yield back the balance of my time. Thank
you.
Mr. Green. The gentleman's time has expired. Mr. Taylor is
now recognized for 5 minutes.
Mr. Taylor. Thank you, Mr. Chairman. I appreciate this
hearing. I think this is important.
I wanted to dig down on forbearance with our banking
institutions. I recall the March 13th guidance that came out
about forbearance for banks. This question, by the way, Mr.
Brooks, is for you in your capacity as Acting Comptroller of
the OCC. My question is, at what point are you going to start
telling banks you have forbeared long enough, it is time that
you start looking at foreclosure for assets?
This borrower cannot pay. How are you thinking about the
end of forbearance? And I will say that forbearance is
extremely important. We have seen real trouble in the
commercial real estate space, building on what Ms. Wexton was
talking about earlier, where you have CMBS loans that don't
have a forbearance mechanism in them that the OCC has been able
to guide for banks.
So, that has made banks much more flexible as a credit
facility, but at some point, that flexibility ends. Where do
you think it will end, Mr. Brooks?
Mr. Brooks. Congressman, that is a great and really
important point. I would start by saying, one of the lessons we
learned in the financial crisis is that two things in a
downturn like this are equally important: one is making sure
that you provide loss mitigation guidance and forbearance for
everybody during a crisis; and the other is unwinding all of
that as soon as the crisis abates.
And the reason I say that is so important is that the data
in the financial crisis shows that those States that extended
long eviction moratoriums and long foreclosure prevention
programs long after the immediate crisis was there had the most
sustained real estate downturns, the longest term unemployment,
and the most sustained sort of decline in overall real estate
prices relative to States that came back to normal faster.
So our basic view is it was appropriate to put forbearance
programs in place right away, as soon as the pandemic was
recognized as a crisis, but it will be equally important to go
back to normal with not one moment to spare, lest we repeat the
mistakes of kind of the 2012, 2013, 2014 era post-financial
crisis.
And so, the way we look at things is basically this: First
of all, banks learned in the financial crisis that it is in
their interest to make net present value positive loan
modifications. They get that. And every CEO I talk about is
fully aware of the fact that anybody who reasonably can repay
should be kept in the loan or kept in the property until such
point as they are able to start doing that.
There will come a time, almost certainly, where there will
be some amount of long-term permanent economic damage here. And
in those circumstances, we are not doing anybody a favor by
pretending like those assets are still assets on the balance
sheet of a property.
The reason that mortgages and secured loans are a lot
cheaper than credit card loans and unsecured loans, obviously,
is because they are secured by collateral, and at a certain
point the safety and soundness of the system requires that
execution against the collateral occur.
I don't think we are there yet. It is very clear that at
this point, we are still in the midst of the late stages of the
pandemic, but I would be surprised if in one or two quarters,
given the vaccine, the therapeutics, and the economic upturn,
that at some point, the data will suggest that a return to
normal is required, and at that point, we are going to need to
go back to normal treatment of collateral.
Mr. Taylor. Okay. That is helpful. So you are sort of
saying one to two quarters. And then are you--as you go and do
your inspections with banks, with institutions, when it is
clear to you, look, this company is in bankruptcy, or their
customer base is completely gone, there is just no way they
are--they are not coming back any time in the near future, are
you pushing those institutions to start to foreclose and move
with the collateral, or are you still saying, just keep it on
your books, forbear, let's just keep your balance sheets strong
or make it look strong even though it is not strong?
Mr. Brooks. No, Congressman, I say just the opposite. One
thing I have been very clear about, and I have been speaking to
State bank trade associations about this twice a week for the
last 6 or 8 weeks, is that we are not blaming any banks for
originated good credits that went south in the pandemic. But
what we are very focused on is making sure that banks are
classifying loans as it becomes clear that they are not going
to repay so that we can assess that risk, they can take
provisions and they can prepare to do charge offs and
foreclosures on the back end of that. We have been very focused
on that.
Having said that, there is good news still in the system,
and this picks up on a point that Vice Chair Quarles made a
couple of hours ago, which is, there is still some amount of
dry powder in the system from the PPP program, a series of
other programs put in place. So we can still see in bank--in
deposit accounts that there is enough runway, even for some
small businesses that are not currently doing business to
continue to make payments out of the proceeds of those loans.
That runway, obviously, will expire, and when it expires
and there is no reasonable prospect of those customers going
back in business, there will be foreclosures and defaults at
that point. It is one of the reasons that I emphasize the need
to look at--
Mr. Taylor. My time has expired. Thank you, Mr. Brooks. I
yield back.
Mr. Green. The gentleman's time has expired.
And I must announce at this time that Mr. Casten will be
the last person to ask questions. Mr. Casten, you are now
recognized for 5 minutes.
Mr. Casten. Thank you, Mr. Chairman. And thank you all for
being here.
As those on this committee know, I am here in Congress
because I am deathly concerned about climate change. It affects
every aspect of our lives, our health, our national security,
and our financial system. And the effects of climate change,
both physically and financially, are nonlinear, but our human
brains think in linear patterns, which makes us prone to
massive undershoot, which is what we have done over the last 30
years.
In that context, I was very pleased to see that the Fed
finally listed climate change among risks in its biannual
Financial Stability Report, and I was happy to hear that the
Fed is going to join the Network for Greening the Financial
System (NGFS), reversing its earlier position.
I want to start with just a quick yes or no across the
panel. Do you believe that climate change poses a significant
financial risk, yes or no, Vice Chair Quarles?
Mr. Quarles. I believe that it certainly poses a risk that
we need to understand. I should state that we did not reverse
our position on joining the NGFS. We have always--
Mr. Casten. I understand.
Mr. Quarles. --been talking with them about joining.
Mr. Casten. Well, participating, but were not joining. Yes
or no, Chair Hood, do you believe climate change poses a
significant financial risk?
Mr. Hood. I believe it is a risk that is worth
understanding more so we can get better clarity and so we can
really try to mitigate it.
Mr. Casten. Chair McWilliams, yes or no?
Ms. McWilliams. It's a risk we have asked our banks to take
into account when underwriting loans and considering risk
management in general.
Mr. Casten. Acting Comptroller Brooks, yes or no, does it
present a significant financial risk?
Mr. Brooks. I would echo the comments of my colleagues.
Mr. Casten. Okay. I am a little troubled that you all seem
to be hedging on the word, ``significant,'' but moving on from
there, Vice Chair Quarles, the Fed has previously said to your
point that they would stay on the sidelines in the NGFS, but
this week announced that you would request membership. Can you
give any color on what prompted the change in approach, Vice
Chair Quarles?
Mr. Quarles. There was no change in the approach. We have
been talking with the NGFS about joining them for some time.
They had indicated that would not be possible until recently.
Mr. Casten. Okay. Well, I am glad that you joined.
About an hour ago, I was pleased that Chairman Powell,
said, ``We do think that central banks and we here at the Fed
have a contribution to make. The focus is on incorporating
climate change risk into financial stability and bank
regulation.'' And, ``It follows from our assigned legal
mandates that we do this work.''
Vice Chair Quarles, do you believe that we currently have
enough insight into banks' climate risks to appropriately
assess the overall health of the banks and the financial system
as a whole?
Mr. Quarles. I think we can always improve it, but we do
have mechanisms to understand risk of the banks, including
[inaudible]--
Mr. Casten. Do you believe that the Fed has the existing
authority to stress test financial institutions for potentially
systemic risks, including, but not limited to, climate change,
in the absence of congressional mandate?
Mr. Quarles. Oh, yes, but we certainly don't need a
congressional mandate to do that. There is a great deal of work
that would be needed to do that properly. The Bank of England
is probably--has done most of the--has probably most advanced
in thinking about that, and they are still very preliminary in
doing that. They have had [inaudible] Their approach on stress
testing for climate.
Mr. Casten. I don't know if there was a difference of
opinion in the way that you all answered the question at the
start, but let me be very clear: There is a significant risk
associated with climate change. There are hundreds of billions
of dollars of loss in assets.
If you were to agree with me that there is a significant
risk to the financial system, do you believe you have the
obligation to stress-test the financial institutions for those
potentially systemic risks?
Mr. Quarles. We will stress-test all of the risks that are
modelable. We do that.
Mr. Casten. I hope that you can appreciate my question. We
have huge amounts of loss on coastal properties, huge amounts
of loss from forest fires across the country. We are going to
be through the Greek alphabet pretty soon and into the Hebrew
alphabet if we are not careful on the hurricanes that are
hitting our shores this year. I don't know actually if the
Hebrew alphabet follows the Greek alphabet; I just know that we
are getting near the end of the first one.
But if what it takes is congressional direction to act,
then the bill that I have been leading with Senator Schatz, the
Climate Change Financial Risk Act, is necessary. But I would
hope that you all are willing and able and have the obligation
to do that beforehand because these risks are massive, and as I
said at the start, our human brains don't do very well with
nonlinear change. Albert Einstein's great line was that the
most amazing thing ever invented was compound interest, and we
are in a very nonlinearly changing world.
Thank you, and I yield back my time.
Mr. Green. The gentleman's time has expired.
On behalf of the chairwoman, I would like to thank our
distinguished witnesses for their testimony today.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
This hearing is now adjourned.
[Whereupon, at 3:34 p.m., the hearing was adjourned.]
A P P E N D I X
November 12, 2020
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