[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]



                    A HOLISTIC REVIEW OF REGULATORS:
                        REGULATORY OVERREACH AND
                         ECONOMIC CONSEQUENCES

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





                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
                          AND MONETARY POLICY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION
                               __________

                           SEPTEMBER 19, 2023
                               __________

       Printed for the use of the Committee on Financial Services


                           Serial No. 118-48







              [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
                           
              
              
              


                                 ______

                   U.S. GOVERNMENT PUBLISHING OFFICE

54-179 PDF                 WASHINGTON : 2024






























                 HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                   Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas, Vice          EMANUEL CLEAVER, Missouri
  Chairman                           JIM A. HIMES, Connecticut
TOM EMMER, Minnesota                 BILL FOSTER, Illinois
BARRY LOUDERMILK, Georgia            JOYCE BEATTY, Ohio
ALEXANDER X. MOONEY, West Virginia   JUAN VARGAS, California
WARREN DAVIDSON, Ohio                JOSH GOTTHEIMER, New Jersey
JOHN ROSE, Tennessee                 VICENTE GONZALEZ, Texas
BRYAN STEIL, Wisconsin               SEAN CASTEN, Illinois
WILLIAM TIMMONS, South Carolina      AYANNA PRESSLEY, Massachusetts
RALPH NORMAN, South Carolina         STEVEN HORSFORD, Nevada
DAN MEUSER, Pennsylvania             RASHIDA TLAIB, Michigan
SCOTT FITZGERALD, Wisconsin          RITCHIE TORRES, New York
ANDREW GARBARINO, New York           SYLVIA GARCIA, Texas
YOUNG KIM, California                NIKEMA WILLIAMS, Georgia
BYRON DONALDS, Florida               WILEY NICKEL, North Carolina
MIKE FLOOD, Nebraska                 BRITTANY PETTERSEN, Colorado
MIKE LAWLER, New York
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director
                     
                     
























                     
       Subcommittee on Financial Institutions and Monetary Policy

                     ANDY BARR, Kentucky, Chairman

BILL POSEY, Florida                  BILL FOSTER, Illinois, Ranking 
BLAINE LUETKEMEYER, Missouri           Member
ROGER WILLIAMS, Texas                NYDIA M. VELAZQUEZ, New York
BARRY LOUDERMILK, Georgia, Vice      BRAD SHERMAN, California
  Chairman                           GREGORY W. MEEKS, New York
JOHN ROSE, Tennessee                 DAVID SCOTT, Georgia
WILLIAM TIMMONS, South Carolina      AL GREEN, Texas
RALPH NORMAN, South Carolina         JOYCE BEATTY, Ohio
SCOTT FITZGERALD, Wisconsin          JUAN VARGAS, California
YOUNG KIM, California                SEAN CASTEN, Illinois
BYRON DONALDS, Florida               AYANNA PRESSLEY, Massachusetts
MONICA DE LA CRUZ, Texas
ANDY OGLES, Tennessee



























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 19, 2023...........................................     1
Appendix:
    September 19, 2023...........................................    33

                               WITNESSES
                      Tuesday, September 19, 2023

Petrou, Karen, Managing Partner, Federal Financial Analytics, 
  Inc............................................................     5
Scott, Hal S., Emeritus Professor, Harvard Law School............     4
Tahyar, Margaret E., Partner, Davis Polk & Wardwell LLP..........     7
Valladares, Mayra Rodriguez, Managing Principal, MRV Associates..     8

                                APPENDIX

Prepared statements:
    Petrou, Karen................................................    34
    Scott, Hal S.................................................    44
    Tahyar, Margaret E...........................................    58
    Valladares, Mayra Rodriguez..................................    68

              Additional Material Submitted for the Record

Valladares, Mayra Rodriguez:
    Written responses to questions for the record from 
      Representative Barr........................................   110

 
                    A HOLISTIC REVIEW OF REGULATORS:
                        REGULATORY OVERREACH AND
                         ECONOMIC CONSEQUENCES

                              ----------                              

                      Tuesday, September 19, 2023

                          U.S. House of Representatives,
                     Subcommittee on Financial Institutions
                                       and Monetary Policy,
                               Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:03 p.m., in 
room 2128, Rayburn House Office Building, Hon. Andy Barr 
[chairman of the subcommittee] presiding.
    Members present: Representatives Barr, Posey, Luetkemeyer, 
Williams of Texas, Loudermilk, Rose, Timmons, Fitzgerald, Kim, 
De La Cruz, Ogles; Foster, Sherman, Scott, Green, Beatty, 
Vargas, and Pressley.
    Ex officio present: Representative Waters.
    Chairman Barr. The Subcommittee on Financial Institutions 
and Monetary Policy will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Today's hearing is entitled, ``A Holistic Review of 
Regulators: Regulatory Overreach and Economic Consequences.''
    I now recognize myself for 5 minutes to give an opening 
statement.
    Last week, we began a discussion of the so-called Basel III 
Endgame proposal put forward by Federal banking agencies. 
Today, we continue that discussion, noting the fact that 
numerous other proposals have come out of the Democrat-
appointed Federal banking regulators over the past couple of 
months, with promises of more to come. The Basel-related 
proposal is incorrectly pushed as a response to the March 
banking instability and has been delivered in an underdeveloped 
and hurried fashion and, in many crucial areas, is glaringly 
arbitrary and capricious.
    Following the Basel III and Global Systemically Important 
Banks (G-SIB) surcharge proposals from the Federal Reserve, 
certain regulatory officials wasted no time in their never-let-
a-crisis-go-to-waste approach to rulemaking and guidance 
shifting. Added to the regulatory onslaught have been proposals 
on long-term debt and resolution planning. In speeches, agency 
officials have signaled that more are on the way. A full-scale 
rushed and undeveloped rewrite of the rules of the road for the 
U.S. financial system is not warranted. That is especially so 
as officials, including those making recent proposals and 
stress tests, repeatedly say that U.S. banks are well-
capitalized and resilient.
    While multiple proposals have been put forward and more are 
likely on the way, Congress and the American people have been 
left out of the information flow. Indeed, Members of Congress 
on both sides of the aisle have requested quantitative 
analysis, including cost-benefit analysis of the Basel-related 
capital proposal, but we have been ignored. No one knows 
whether or how all of the recent proposals work together, and 
we have no indication from the Fed, the FDIC, or the OCC--which 
are populated with armies of economists, analysts, supervisors, 
and examiners--of their cumulative impact to the U.S. financial 
system.
    Neither Congress, nor the industry being regulated, nor the 
American people, including consumers, families, small 
businesses, farmers and ranchers, and municipalities, knows 
what to expect from the incredibly complex, interconnected, and 
hazy web of what has been proposed. The risks of working 
hastily without analytical support are high and systemic. The 
process of rolling out the under-analyzed Basel-related capital 
proposal shows clear violations of the Administrative Procedure 
Act (APA), thereby running counter to the law. That proposal 
also contains a repeal by rule writing of the bipartisan S. 
2155 tailoring law, done so for partisan reasons.
    There are some elements of the proposals for long-term debt 
resolution planning and G-SIB surcharges that are worthy of 
discussion and analysis, but a shotgun total rewrite of the 
regulatory rules of the road is reckless and systemically 
risky. And that doesn't even take into account the avalanche of 
rules that are coming from the SEC and how they might interact 
with the bank regulators here in impairing market liquidity. 
The interconnected onslaught of proposals and guidance 
overhauls threatens both individual slices and segments of 
financial markets and the system as a whole.
    We know nothing of whether or not they all fit together, or 
what the systemic and other unintended consequences may be. 
That requires analysis which the Federal banking regulators, in 
their haste, have not done.
    Will liquidity and Treasury markets dry up because of the 
tangled web of proposals? Will first-time homebuyers be shut 
out of the dream of homeownership? Will car and truck buyers no 
longer be able to afford personal transportation because auto 
credit is too costly for most and not available for many? Will 
financial institutions be forced out of entire business lines, 
such as provision of auto credit or market making for Treasury 
securities, leaving consumer investors to take the hit? Will 
financing for new industrial projects and development in each 
of our districts dry up? Will municipalities find it even more 
costly to finance their communities? Will our loss of 
competitiveness in banking and finance resulting from the 
regulatory rewrite force U.S. jobs and economic activity to 
shift overseas, letting Europe and Asia prosper at a steep cost 
to Americans? These are all questions that require answers 
before agencies promulgate a rulemaking.
    However, Democrat-appointed Federal banking regulators put 
forward this myriad of proposals to re-regulate the banking and 
financial system and have offered no answers. They may be 
belatedly beginning to look as clear flaws in their proposals 
are glowing in the dark, but unfortunately, markets have 
already begun to price in the changes, given the lack of 
clarity on these important questions, threatening a growing 
credit crunch.
    The recent attempt by Democrat-appointed Federal banking 
regulators to design some opaque Dodd-Frank 2.0 exercise on the 
cusp of a developing credit crunch needs to end, and it happens 
right when interest rates are higher than they have been in 
decades. Regulators should replace that process with proposals 
that deal with real problems facing our financial system, with 
full transparency and ample input allowed. If not, as Full 
Committee Chairman McHenry said last week, it will be American 
families who ultimately will suffer.
    The Chair now recognizes the ranking member of the 
subcommittee, the gentleman from Illinois, Dr. Foster, for 4 
minutes for an opening statement.
    Mr. Foster. Thank you, Mr. Chairman, for this continuation 
of an important discussion on bank capital and other 
requirements. I was happy to join Chairman Barr, in the letter 
to Fed Vice Chair for Supervision Barr, requesting more detail 
on the analysis and supporting data that were used to develop 
the Basel III Endgame proposals. I believe that having access 
to the data and assumptions and methodology would allow for a 
more-informed discussion across-the-board here. But I think we 
also have to recognize that bank capital requirements and 
regulation is never going to be an exact science.
    You can reasonably model the costs of any increase or 
decrease in bank capital requirements or other things, the cost 
of compliance of increased stress testing, and so on, but there 
is a part that you will never be able to model, which is, how 
do you model the probability of financial crises? How do you 
model the cost of these crises, not only for the banks and the 
financial players involved but for the broader economy and for 
the psychology of the nation that suffered a body blow back in 
2008 when a system that we thought was sound fell apart. And 
that is why it is important to quantify the things that can be 
quantified, where important assumptions have to be made to 
actually be clear about those assumptions, and look at what 
other regulators around the world are doing for those 
comparable important assumptions, and then have a discussion on 
that basis.
    But I can't resist one closing observation, which is that 
the long list of objections we just heard from the ranking 
member could have been lifted, almost verbatim, from all of the 
objections to the increased capital requirements that were part 
of the Dodd-Frank Act. They were talking about how this would 
certainly drive the banking offshore and disadvantage U.S. 
banks and cause them to be not profitable. In fact, kind of the 
reverse has happened. It has been a very good decade for U.S. 
banks, especially the largest ones, and I don't know whether 
that was a cause or an effect of the very large capital that 
they retain. I think that is an important thing to keep in mind 
here, that asking a bank to control its risk has real benefits 
throughout the economy that cannot be quantified, but are very 
real. And we can use our own experience over the last decade to 
be pretty sure of that.
    Anyway, thank you for having this hearing. It is important, 
and I look forward to the witnesses' testimony.
    Chairman Barr. Thank you. The gentleman yields back. Full 
Committee Ranking Member Waters is not here, so we will move on 
to testimony.
    Today, we welcome the testimony of Mr. Hal Scott, the 
Nomura Professor of International Financial Systems at Harvard 
Law School; Ms. Karen Petrou, a managing partner at Federal 
Financial Analytics, and we would also like to welcome Ms. 
Petrou's guide dog, Pete; Ms. Margaret Tahyar, a partner at 
Davis Polk & Wardwell, specializing in financial institutions; 
and Ms. Mayra Rodriguez Valladares, managing principal at MRV 
Associates. Thank you all for being here, and we appreciate 
your testimony.
    Each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony. And without objection, 
each of your written statements will be made a part of the 
record.
    Professor Scott, you are now recognized for 5 minutes to 
give your oral remarks.

        STATEMENT OF HAL S. SCOTT, EMERITUS PROFESSOR, 
                     HARVARD LAW SCHOOL

    Mr. Scott. Thank you, Chairman Barr, Ranking Member Foster, 
and members of the subcommittee for inviting me to testify 
before you today on the regulatory capital rule, which is going 
to be my focus. While my testimony draws on the statement of 
the Committee on Capital Markets Regulation regarding Basel 
finalization and U.S. bank capital requirements, this testimony 
is my own.
    The capital proposal would materially increase the capital 
requirements for large U.S. banks and other banks with 
significant trading activity at a time when such an increase 
would be both unnecessary and counterproductive. Across all 
banking organizations subject to the capital proposal, the 
amount of required common equity tier 1 capital, which is the 
best measurement we have of capital, is expected to increase on 
average by 16 percent. For the largest banks, the increase is 
expected to be 19 percent.
    While these are already substantial increases, the 
increases for the subset of such banks that focus their 
business on supporting our capital markets are likely to be 
even more severe. These increases are attributable, in 
significant part, to the so-called, ``gold-plating,'' whereby 
U.S. regulators have chosen to impose standards on U.S. banks 
that are more stringent than what Basel itself requires.
    There are three key reasons why U.S. bank regulators should 
not increase capital requirements at this time. First, there is 
no need for a capital increase to maintain the stability of the 
banking system, as U.S. bank capital levels are strong. In 
particular, the average Common Equity Tier 1 Capital (CET1) 
ratio of U.S. banking organizations for the 2001-2007 period 
was 8.25 percent. As of the first quarter of 2023, it increased 
by nearly 4 percentage points to 12.81 percent.
    Second, there will be significant economic costs from 
raising bank capital requirements, as increasing capital 
requirements reduce banks' lending and capital market 
activities and increase borrowing costs for businesses and 
consumers, slowing economic growth. A 2016 report by the Bank 
for International Settlements summarized this extensive body of 
literature as indicating that for every 1 percentage point 
increase in capital ratios, banks tend to cut their lending in 
the long run by 1.4 to 3.5 percent. In the case of capital 
market activities, empirical evidence demonstrates that 
heightened capital requirements can have an even greater 
detrimental effect. The U.S. capital markets are the largest 
and among the most-liquid and efficient in the world. In the 
United States, capital markets' activities have a much larger 
role in financing the economy compared to other countries. In 
2022, capital markets generated 77.5 percent of debt funding 
for non-financial corporations in the United States, whereas 
other large economies rely more heavily on bank loans. So, 
these negative impacts on the capital markets are of special 
concern to the United States.
    Third, raising bank capital requirements at this time could 
reduce the precision of the Fed's monetary policy and, thereby, 
interfere with the Fed's ongoing efforts to fight inflation, 
and increasing some bank capital requirements now could pose 
problems for the Fed's monetary policy, even after inflation is 
contained by counteracting the Fed's efforts at that time to 
restore economic growth with lower interest rates.
    Although the capital proposal would not become effective 
until July 1, 2025, these concerns are not alleviated by 
deferring the effective dates of the capital increase to the 
future. Banks generally seek to maintain buffers above 
anticipated regulatory minimums and respond to future increases 
to bank capital requirements when they are announced, 
immediately increasing capital even before the implementation.
    I will conclude that without significant adjustments, the 
increases currently contemplated in the capital proposal will 
result in needless economic costs in the form of reduced 
lending and capital markets activities, and will unduly 
complicate the Fed's use of monetary policy to fight inflation. 
Thank you.
    [The prepared statement of Mr. Scott can be found on page 
44 of the appendix.]
    Chairman Barr. Thank you. And now, Ms. Petrou, you are 
recognized for 5 minutes for your oral remarks.

         STATEMENT OF KAREN PETROU, MANAGING PARTNER,
              FEDERAL FINANCIAL ANALYTICS, INC.

    Ms. Petrou. Thank you, Chairman Barr. Thank you, Mr. 
Foster. It is an honor to----
    Chairman Barr. Could you press the button to turn on the 
microphone?
    Ms. Petrou. There you go. Thank you.
    Chairman Barr. Very good. And if you could reset the clock 
for our witness, that would be great.
    Ms. Petrou. Thank you.
    Chairman Barr. Thank you. You may proceed. Thank you.
    Ms. Petrou. Thank you. It is an honor to appear again 
before this committee. By my count, in my career, so far, this 
is the seventh financial crisis where I have had the honor to 
appear before this committee, and your colleagues in the 
Senate, several times to talk about the key policy responses to 
crises and failures, and I think it has been a very important 
control on input into the regulatory process. But we are 
obviously seeing some of the same problems again, and I would 
like to focus my testimony on several key points where lessons 
learned the hard way have not yet been fully absorbed by the 
banking agencies, and what we see in the array of capital 
resolution and pending rules that demonstrates the need for 
rapid regulatory process repair, but also suggests several 
actions this subcommittee and the Congress could take to try to 
quickly remedy them.
    I testify for myself. My firm represents major 
institutions, global central banks, and others, but this 
testimony is solely my own views. I have also recently written 
a book called, ``Engine of Inequality: The Fed and the Future 
of Wealth in America,'' and I will focus also on the economic 
inequality impacts of the pending rules, especially in my 
written statement.
    What do we know about the rules in the past, and the 
proposal so far, and what could go very wrong? First, we know 
that thinking about bank profitability and competitiveness is 
critical, but only in the context also of safety and soundness. 
Banks and their holding companies are unique companies with 
taxpayer-provided benefits, and their holding companies are, at 
least by law, required to serve as sources of strength for the 
subsidiary insured depository, and they are also required not 
to engage in activities that endanger it.
    We know that the banking agencies' principal focus should 
be on safety and soundness, not profit and competitiveness. 
However, to the extent that the rules adversely affect profit 
and competitiveness, one of the massive problems in all of the 
rules after the great financial crisis and the ones we see 
today is the quantitative and qualitative assumptions that when 
bank business models change due to rules, banks stay the same. 
They don't.
    As Professor Scott has demonstrated, they adjust, because 
they wish to remain viable private companies, and we need to 
very carefully align balanced thinking about safety and 
soundness with a full understanding of implications for 
customers, the financial system, and the macro economy, and the 
prospects for shared as well as sustained growth. And I regret 
that none of the pending rules attempt to do that. They look at 
banks as static entities under simple and often mysterious 
scenarios with significant analytical problems.
    First, they look at each bank in its own context, rather 
than at the system as a whole and, most importantly, at 
nonbanks. These rules are promulgated with banking blinders on, 
and the United States has the most significant, the largest 
non-bank financial intermediation sector of any advanced 
nation. To think about not just the bank implications, per se, 
but also the financial stability implications without any 
attention to non-bank financial intermediation is a mistake, as 
demonstrated as early as 2011 as the financial system began to 
take shape with far more activity outside the regulatory 
perimeter. That is not to say everything should be regulated, 
but that which threatens financial safety and soundness needs 
to be, especially given the Fed's propensity now to bail banks 
as well as nonbanks out at the first sign of trouble.
    None of the pending rules looks at broad financial system 
implications. None of the pending rules looks at the cumulative 
impact of each rule in the context of all of the others. They 
fail first to look at each rule and its own likely impact 
outside the banks that are directly covered, but also in the 
context of all of the other rules. And again, banks are profit-
making businesses. They will optimize and maximize 
profitability and competitiveness to the greatest extent 
possible. There are profound contradictions in each of the 
rules with those already on the books and those to come. And 
many of them are counterproductive and actually undermine 
safety and soundness by the extent to which they encourage 
rapid migration of key activities outside the regulatory 
perimeter.
    Chairman Barr. Ms. Petrou, I am sorry, but your time has 
expired, and we will look forward to getting more amplification 
during the Q&A.
    Ms. Petrou. Thank you.
    [The prepared statement of Ms. Petrou can be found on page 
34 of the appendix.]
    Chairman Barr. Ms. Tahyar, you are now recognized for 5 
minutes to give your oral remarks.

       STATEMENT OF MARGARET E. TAHYAR, PARTNER, DAVIS 
                    POLK & WARDWELL LLP

    Ms. Tahyar. Chairman Barr, Ranking Member Foster, and 
members of the subcommittee, thank you for asking me here 
today.
    Bottom line: There is no one in the world who understands 
how these complex proposals interact with each other or the 
economy. Make no mistake, the future of the financial sector 
and its structure is at stake. It is wise to make changes in 
light of the real lessons learned from the March turmoil, but 
it is hard to understand the rush or how these proposals are 
informed by the real lessons. There should be a holistic review 
of how all of the proposals work together, with a clear vision 
of what policy goals are desired and with cost-benefit 
analysis. Time is too tight for the public to meaningfully 
comment on the many proposals and for Congress to fulfill its 
oversight role, even with the 120-day comment period.
    There are two important concerns: the international 
competitive position of the G-SIBs; and the pressure on 
regional banks. The largest U.S. banks are among the most 
competitive in the world. Let's not forget that the American 
economy and our geopolitical strategy are helped by the 
international reach of our G-SIBs, especially at a time when we 
are nearshoring and rebuilding our industrial base. And yet, 
certain parts of the Basel III Endgame, like operational risks, 
would disfavor U.S. global banks. It seems odd to hobble G-SIBs 
at this time.
    We also have a strong regional banking sector, which is 
unique. Most other developed countries have chosen a banking 
oligopoly. Congress, as recently as 2018 and on a bipartisan 
basis, endorsed the concept of tailoring for regional banks. We 
learned in March and must deal with the fact that mid-sized 
regional banks can pose systemic risks, but the March problems 
were largely about liquidity, not really primarily about 
capital. So, why the large increases in capital now? If the 
goal of the banking agency is that the U.S. economy should have 
a barbell banking sector where only community banks and G-SIBs 
survive, is that their goal, or is it the goal of the banking 
agencies that a strong, vibrant regional banking sector is good 
for our large and diverse economy?
    Mixed signals are being sent. On the one hand, mergers 
among regional banks are being discouraged by the uncertain 
future of bank merger policy and by the high regulatory risk 
related to required approvals. On the other hand, the over-
calibration of the long-term debt requirements and increases in 
capital seem to be pushing these banks towards mergers.
    I want to touch a little bit on planning for bank failures. 
Living wills work. As former Treasury Secretary Geithner once 
said, ``Plan beats no plan,'' but they should not be expected 
to prevent bank failures or ensure that a bank failure brings 
no pain. Even today, U.S. Army officers are taught that no plan 
completely survives first contact with the enemy. It is the 
same for living wills. The way to think about living wills is 
as a successful, decade-long collaboration between the banking 
sector and the regulators that is designed to make the 
informational flows, operational processes, and around-the-
clock work flow more smoothly.
    Some of the wisest changes in the proposals involve 
improvements in the content and capabilities. That said, these 
proposals could be improved. A missing element is to update the 
playbooks at the FDIC and to test agency capabilities as well 
as bank capabilities. There are worries about the timing of 
agency feedback. Congress should be concerned with the fact 
that there are two different living wills regimes. Congress 
should also be concerned with the different standards for 
credibility and the sudden link to supervisory testing and 
possible enforcement. Every system can be improved after it has 
had contact here with the enemy of financial instability, and I 
hope we end up with sensible reform in this space.
    There has been unusual public disagreement by the 
principals and the agencies, which is a tell that something is 
not quite right. I want to extend admiration and respect to the 
principals, whom I believe are acting in good faith, and to the 
incredibly hard work of the agency staff in a very difficult 
year. But once put in place, this framework will be in place 
for generations. There are too many proposals happening at the 
same time, with too many unintended consequences, the 
interactions of which we do not understand. Let's make sure 
that someone is watching over the system as a whole. Thank you.
    [The prepared statement of Ms. Tahyar can be found on page 
58 of the appendix.]
    Chairman Barr. Thank you. Ms. Rodriguez Valladares, you are 
now recognized for 5 minutes.

       STATEMENT OF MAYRA RODRIGUEZ VALLADARES, MANAGING  
                    PRINCIPAL, MRV ASSOCIATES

    Ms. Valladares. Chairman Barr, and distinguished members of 
the Subcommittee on Financial Institutions and Monetary Policy, 
thank you for the opportunity to appear before you.
    For 3 decades, I have consulted and trained professionals 
at banks and financial institutions as well as financial 
regulatory agencies in over 30 countries on risks that can 
threaten financial institution safety. It has only been 15 
years since Lehman Brothers collapsed and globally wreaked 
havoc on people's lives. It is way too early to say this time 
is different. It never is. Poorly-managed financial 
institutions fail all too often, painfully disrupting our way 
of life. Financial instability often follows periods when 
financial institutions like investors and policymakers 
underestimate risks.
    Since 2010, when Basel III and Dodd-Frank rules started 
being implemented incrementally, U.S. banks have benefited from 
those rules. U.S. banking assets have almost doubled. U.S. 
banks' net income has risen by 225 percent. Publicly-traded 
banks have paid out dividends at record highs, and banks' 
contributions to political campaigns have risen 150 percent.
    With those returns on wealth and income, an overwhelming 
majority of U.S. taxpayers would volunteer themselves to be 
regulated. Imagine how much better-capitalized U.S. banks would 
be or how much more they could lend to individuals and 
businesses if, in the last 2 decades, their misdeeds had not 
cost them over a quarter of a trillion dollars in fines due to 
violations in the areas of securities trading, consumer 
protection, anti-trust laws, fraud, money laundering, economic 
sanctions, and terrorism financing.
    U.S. banks were resilient between 2020 and February 2023, 
even while being impacted during the unprecedented economic 
stress brought on by COVID-19. Basel III and the Dodd-Frank 
capital liquidity stress test, and living low requirements were 
critical in helping banks survive unexpected losses. Even as 
robust as those frameworks are, however, they probably wouldn't 
have been enough. Fiscal and monetary stimuli bolster banks' 
balance sheets and were critical to the stability of the United 
States.
    Risks always differ because the size and complexity of 
markets and banks continually change. In addition to 
operational and financial risks, banks now also face 
cybersecurity, climate change, rising civil unrest 
domestically, and geopolitical threats. Unfortunately, those 
risks are barely covered by existing or proposed rules. Banks 
are not at historically-high levels of capital. By updating 
changes to Basel III and Dodd-Frank, U.S. bank regulators are 
fulfilling their mission of ensuring the safety and soundness 
of the American banking system. Large banks can meet the 
updated capital and bank resolution requirements.
    In addition to issuing equity and subordinated debt, and 
reducing dividend payouts and share buybacks, banks have a 
myriad of other tools to lower their risk weights, known as 
risk optimization. Examples of such tools include improving 
data quality to more accurately calculate risks. Banks can 
reduce holdings of tailored derivatives and illiquid 
alternative investments. Other risk mitigation techniques 
include selling loans into special purpose vehicles and using 
credit derivatives to reduce risk weights.
    Regulators' proposed rules will not be final until next 
year, and the implementation would begin 1 to 2 years 
thereafter. Banks have plenty of time to conduct gap analysis 
to determine what personnel or technological resources they 
need to comply. Banks have known for over 5 years that updated 
Basel III rules were coming, especially since the United States 
is a longstanding and influential member of the Basel Committee 
on Banking Supervision. U.S. regulators gave the industry over 
120 days to comment on the proposed rules. Normally, it is only 
90 days. Under no circumstances should regulators withdraw any 
of the proposed rules. The rule process is working as it 
should, given that the regulators are taking industry feedback 
as well as feedback from the public at large.
    The protection of American citizens is at the heart of why 
I am here today, and I hope that legislators and regulators 
share this value as well. Thank you.
    [The prepared statement of Ms. Valladares can be found on 
page 68 of the appendix.]
    Chairman Barr. Thank you. And now, I would just make an 
announcement that votes have been called and Members will be 
required to depart to cast votes on the House Floor. But before 
we recess for votes, I would like to recognize the gentlelady 
from California, the ranking member of the full Financial 
Services Committee, Ranking Member Waters, for 1 minute.
    Ms. Waters. Thank you very much. Here we go again. Instead 
of marking up sensible bills that have bipartisan support to 
strengthen the banking system following the three major bank 
failures earlier this year, Republicans are holding another 
hearing to attack the Fed, the FDIC, and the OCC for 
strengthening our banking system.
    The hearing title suggests this is a holistic review, but 
rather than looking at the whole picture, Republicans are 
focusing exclusively on how proposed changes from regulators 
will impact Wall Street, not consumers who pay when large banks 
fail. Millions of people lost their homes, jobs, and savings in 
2008. Hundreds of startups almost got wiped out when Silicon 
Valley Bank failed. Regulators should strengthen, not weaken, 
these critical banking rules to protect consumers from future 
bank failures. I yield back the balance of my time.
    Chairman Barr. The gentlelady yields back, and as I 
indicated, votes have been called, so this committee will need 
to recess for votes, and we will reconvene after the final vote 
has concluded. So if you could, if you want to participate, 
please come back to the hearing room.
    The subcommittee stands adjourned until votes have 
concluded.
    [recess]
    Chairman Barr. The subcommittee is back in order and we 
will now turn to Member questions.
    The Chair now recognizes himself for 5 minutes for 
questioning.
    But first, without objection, I would like to enter into 
the record a letter from the Kentucky Bankers Association 
expressing deep concerns about the recent Basel proposal.
    And let me start with Professor Scott. The Basel III 
Endgame proposal will result in a 75-percent increase in 
capital of a bank's trading activities, which will be 
dramatically more significant in the U.S. given the depth and 
liquidity of our capital markets. Punitive capital charges for 
capital markets activities disproportionately target the U.S., 
where 75 percent of equity and debt financing for non-financial 
companies comes from the capital markets and only 10 percent 
from bank lending. In Europe, those numbers are essentially 
reversed.
    Professor Scott, do you think that the capital markets' 
impact will be more significant in the U.S., particularly given 
the additional layer of rulemaking coming out of the Securities 
and Exchange Commission, and can you quantify that impact on 
end users?
    Mr. Scott. I agree with your assessment. We will have a 
very severe impact here. I would point out it is not just the 
market risk rules. It is also the operational risk rules that 
affect the capital markets because they affect the banks that 
support the markets, like custody banks, which are going to 
look at an increase for operational risk, and these are banks 
that are involved in the capital markets. They are not trading, 
but they are supporting it or providing clearing and settlement 
services, and that kind of thing.
    So, you are quite right that our economy is really very 
different than Europe and the rest of the world because of the 
importance of the capital markets to the ability of companies 
to finance themselves. They go to the capital markets. They 
don't go to the banks, like they do most other places. And I 
also agree that when you combine the capital impact that you 
have described with the 47 substantive rulemakings of the SEC 
affecting the capital markets, and in many ways very 
significantly, that the combination of these two puts in danger 
our crown jewel, in a sense, of having the world's best capital 
market.
    Chairman Barr. I agree with you. I think it would be hugely 
damaging to our economy.
    Ms. Tahyar, I am concerned about the onslaught of proposals 
recently put forward that effectively repeal the S. 2155 
tailoring law. The Basel III Endgame proposal will massively 
increase capital requirements on banks of almost all sizes, 
$100 billion and up. Added to that, we have this G-SIB 
surcharge proposal and proposals for long-term debt 
requirements, resolution plans, and promises of even more to 
come. Do we know about the quantitative and economic impacts of 
all of these proposals and how they work together, the 
cumulative impact, not to mention the issue of the capital 
markets?
    Ms. Tahyar. We don't have any idea, and I don't think 
anybody does. I think that the folks who work on capital 
endgame aren't necessarily the same folks who work on 
resolution planning, and that is the same at the agencies and 
at the banks. There are some overlaps, and I think a lot of the 
banks, particularly the regional banks, don't have dozens of 
people working on this, so the answer is, we don't know.
    Chairman Barr. As you know, Vice Chair Barr, the other 
Barr, claims that the Basel III proposal will make the U.S. 
banking system safer and stronger, but is it true that as 
government-assigned risk weights go up, a bank's capacity to 
make certain types of loans is reduced?
    Ms. Tahyar. That is true.
    Chairman Barr. And will this, in turn, lead to reduced 
choices for borrowers and greater uniformity in underwriting 
standards?
    Ms. Tahyar. That is correct, and banks will risk optimize, 
which means they will get out of certain businesses or reduce 
their scope.
    Chairman Barr. And as a result, will a borrower have a 
harder time shopping for loans as each bank subject to these 
rules will increasingly make similar choices on availability 
and pricing on certain loan types?
    Ms. Tahyar. Yes. I think the loan types that are going to 
be most affected are non-listed private companies, and that is 
a range of small to mid-sized enterprises all the way up to the 
unicorns, and certain mortgages where there is a lower down 
payment.
    Chairman Barr. When these rules force greater uniformity 
and pricing on certain loan types, does this decrease systemic 
resiliency because there is less diversity in the lending?
    Ms. Tahyar. I think that depends, but it is both an issue 
on systemic resiliency and also an issue on the profitability 
of banks. Folks think that banks have done super well, but they 
are trading below book, so that is telling us something.
    Chairman Barr. My time has expired, but I think conforming 
risk standards will reduce consumer choices and access to 
credit and actually will increase systemic risk because you are 
going to have a less-diverse banking system overall.
    My time has expired, and I now recognize the ranking member 
of the subcommittee, Dr. Foster, for 5 minutes.
    Mr. Foster. Thank you, Mr. Chairman, and thank you to our 
witnesses. I am becoming increasingly worried about the 
potential for internet-driven bank runs in trying to obviously 
generate instability. Americans connected by social media and 
armed with 24-hour banking tools pulled more than $40 billion 
in deposits out of Silicon Valley Bank in the course of about 
10 hours on March 8th. So, how should we think about the 
capital and liquidity requirements to deal with that? Part of 
this was driven by the rumor that the capital had been expended 
due to bad interest rate bets, and there are issues there 
having to do with acknowledging mark-to-market losses. But 
despite the fact that we seem to have that under control and 
the contagion seems to be contained, I am worried that this is 
going to happen again.
    How do we handle this? For example, is there any way to 
conduct a stress test to model the behavior of Reddit or short 
sellers or just bad rumors out on the internet, and what are 
the lines of defense that we should be putting in place for 
that?
    Ms. Valladares, do you want to have a first shot at that?
    Ms. Valladares. I think your point, Dr. Foster, is 
excellent, in that risks are not static. There are always the 
so-called, ``unknown unknowns,'' to quote Mr. Rumsfeld. And 
there are many ways in which you can run simulations for all of 
these different kinds of things, i.e., how might artificial 
intelligence affect portfolios? How might the use of social 
media cause an explosion of rumors?
    Mr. Foster. But how do you even model?
    Ms. Valladares. You can run various----
    Mr. Foster. How do you model short sellers?
    Ms. Valladares. You can run various simulations as to what 
kind of an effect it would have, and then you can do 
simulations as to how quickly might deposits leave and leave a 
bank illiquid. However, it is precisely because--I would hate 
to say it to somebody who comes from a STEM field--you can only 
quantify so much. At the end of the day, there will be both 
quantitative and qualitative assumptions, so you cannot 
perfectly calculate the exact extent. And that is exactly why 
rules need to be periodically revisited because while on 
occasion it may look like banks are really well-capitalized, 
that can turn on a dime. And that is why I think that this kind 
of hearing to have these kinds of discussions is so important. 
You have to continually revise and update the rules.
    Mr. Foster. Ms. Tahyar, do you have any idea on how we 
should reflect that in the capital and liquidity?
    Ms. Tahyar. I agree with you, and I am terrified. I think 
we have a much stronger risk of internet deposit runs than we 
had before March. Silicon Valley Bank was tech companies, but I 
think a lot of local small and mid-sized enterprises that are 
run by really clever people, by early April, were also 
multibank, so we have a greater risk.
    My own view is that is liquidity, that starts as liquidity 
and becomes capital. And what we don't have before us are 
proposals to change liquidity, and what we don't have before us 
are proposals, and this would be Congress, to reform deposit 
insurance. I think there is no appetite for that or to give the 
FDIC back the temporary power that it had before Dodd-Frank to 
temporarily, for a fee, insure uninsured deposits. We didn't 
have these deposit runs in the great financial crisis and we 
should ask ourselves why, because now with the Internet and all 
small and mid-sized enterprises being multibank, it is very 
scary.
    Mr. Foster. Yes. Ms. Petrou, do you have any thoughts on 
that?
    Ms. Petrou. I think that the question is really important. 
And one of the reasons why cumulative impact analysis is so 
critical is because the way the liquidity rules work now is 
that based on how much liquidity is required under the various 
ratios, banks have to have large amounts of, ``high-quality 
liquid assets,'' such as Treasury securities. It is one of the 
reasons why you have seen the large portfolios of held-to-
maturity Treasury obligations grow at banks, and that has 
created one of the perverse incentives to the challenges that 
we saw at Silicon Valley Bank, because the capital rules didn't 
recognize Accumulated Other Comprehensive Income (AOCI). They 
proposed to do that, but there are a lot of moving pieces here.
    And the tougher the liquidity rules, the more high-quality 
liquid assets banks have to hold, the higher their capital 
requirements go. And there are some profound sort of 
interactions there that, as has been said, these rules seem to 
be made in silos, and there is no indication from any of the 
agencies how they think about ultimately, could we deal with 
liquidity another way, as has been said in the model.
    Mr. Foster. Thank you. I guess my time is up, so when you 
figure that out, let me know.
    Chairman Barr. Thank you. The gentleman's time has expired. 
The gentleman from Florida, Mr. Posey, is recognized for 5 
minutes.
    Mr. Posey. Thank you, Mr. Chairman.
    Mr. Scott, should a cost-benefit analysis be required for 
all new regulations?
    Mr. Scott. Yes.
    Mr. Posey. Thank you. What does your research say about the 
cumulative impacts on credit availability and gross domestic 
product of the current Biden surge in bank regulations?
    Mr. Scott. We really haven't done that. I think we should 
do that, but the agencies are the first people that should do 
that. When rules are proposed, there should be a cost-benefit 
analysis. Now, given the subject of this committee, everybody 
doing their own cost-benefit analysis on a given rule doesn't 
get the whole picture, doesn't get the holistic picture, but 
you are never really going to get the whole picture. We should 
do a lot better on the mini-pictures before we worry about the 
whole.
    With this Basel rule, there is no complete cost-benefit 
analysis there. With something that is going to have such a 
profound impact on our economy, you would think we would 
require that. We should. The Fed has some kind of ambiguous 
obligation to do cost-benefit analyses. That should be 
strengthened, in my view.
    Mr. Posey. What is a lender-of-last-resort function of the 
Federal Reserve, and of what benefit would it have been in the 
Silicon Valley Bank case?
    Mr. Scott. Now, you are talking about my real interest, 
Congressman. We created the Fed in 1913 for a single reason: to 
be the lender of last resort. We have given up on depending on 
JPMorgan to do that. It wasn't going to live forever. We had a 
number of recessions and economic downturns, runs, which 
JPMorgan stemmed, but we needed an institution to do this. We 
created the Fed, not for monetary policy in 1913, but as a 
lender of last resort.
    I have actually published a paper, which I am happy to give 
to the committee, analyzing what the Fed did during the SVB 
crisis as lender of last resort for SVB, which was zero until 
SVB actually got into an insolvency procedure. And the Fed, for 
the first time that I know of, lent to SVB in insolvency but 
never lent to SVB before they got there. Now, why was that the 
decision? There were operational issues. They cut off the Fed 
wire at 4:00, so if somebody wanted to get money from the Fed 
or transfer collateral to the Fed, they couldn't do it. Once 
they realized that wasn't a great thing, they changed that.
    There was testimony that the Secretary of the Treasury and 
Fed Vice Chair Michael Barr didn't even know about the problem 
until 4:00 Eastern Standard Time on Thursday. Banks were closed 
on Friday. You would think there were danger signals going on 
all over the place that this was going to be a problem. They 
went out to try to raise capital. They couldn't do it. Moody's 
was going to downgrade them and so forth. There was a real 
possibility of a run.
    There should be a war room over there at the Fed in this 
internet world where things can happen so quickly, where red 
flags go up, and we now closely monitor the situation. And in 
my view, the Fed, if it had had better process, could have lent 
to SVB and probably could have stemmed the run. SVB had plenty 
of capital by accounting standards, and by the way, everybody 
knew that the real value of the held-to-maturity (HTM) 
portfolio was a lot less than they were carrying. It was 
disclosed, so I think the Fed should tell us, should write a 
report. They wrote a supervision report. How about writing a 
report of how they acted or did not act as lender of last 
resort in the crisis and why?
    Mr. Posey. Thank you. Treasury Secretary Yellen testified 
that she found out about the crisis at the Silicon Valley Bank 
on Thursday, the day before it actually happened on Friday. 
What does that suggest about the vigilance of the Federal 
Government to prevent financial crises?
    Mr. Scott. Actually, she found out about it at 4:00 on 
Thursday, and the bank was closed Friday morning, so, it was 
basically all over by the time she found out about it. The same 
with the Fed, so I come back to my point that that shouldn't 
happen. They should be online when red flags go off and danger 
signals go off. The Fed should be right on top of that and be 
able to act quickly.
    Mr. Posey. I see my time is about to expire, so I yield 
back, Mr. Chairman.
    Chairman Barr. The gentleman yields back. The gentlewoman 
from Ohio, Mrs. Beatty, is recognized for 5 minutes.
    Mrs. Beatty. Thank you, Mr. Chairman, and thank you to our 
ranking member. I am going to start with you, Ms. Rodriguez 
Valladares, and I want to talk about Basel III. Let me start by 
saying I strongly support well-capitalized banks in making sure 
that we have a financially stable banking system. And 
certainly, as you will recall, Democrats passed Dodd-Frank at a 
time of crisis because we wanted to ensure that the financial 
system was strong and resilient, and I think we would all agree 
that our banks are the better for it.
    However, as a former small business owner, I know the 
challenges that entrepreneurs have and that startups face, and 
I know my colleagues and I are working hard to tear down the 
barriers and to encourage greater access to credit for small 
businesses in our districts and communities, especially women- 
and minority-owned businesses. While there has been a lot of 
concern that the new capital requirements will force banks to 
cut back on lending, or if they don't cut back, we know what 
happens. The cost will be passed on to our customers. Can you 
tell me how this proposal would impact small businesses and the 
cost and availability of credit?
    Ms. Valladares. Thank you for that question. These updated 
rules absolutely should not lead to a decrease in lending. A 
much bigger problem at banks is that they often have poor data, 
no data, or poor processes in trying to understand the needs of 
small businesses. Empirical data from the World Bank, the Basel 
Committee, and a number of academic studies that I included in 
my written testimony shows that actually the better capitalized 
the bank is, it creates a lot more faith. That is what these 
markets are: credit to believe in.
    So, when you have banks that are better-capitalized, they 
are safer, their cost of borrowing goes down, and their ratings 
go up, so there is no reason for them to reduce the lending. 
They sometimes do that precisely because they are looking for 
other opportunities that are more profitable. If they work on 
what is called risk optimization, meaning that they can reduce 
their investments in illiquid, hard-to-value securitizations or 
very tailored derivatives, if they lower their credit risk 
weights, that is the denominator, right? You can also work on 
the numerator by issuing common equity. You can reduce the 
dividend payouts, so there is no reason why the lending should 
go down. Moreover, the historical data actually shows how the 
assets of American banks have exploded precisely because they 
were in much better condition than the European banks and 
others.
    Mrs. Beatty. Let me do a little follow-up, but let me also 
thank you. In your written testimony, you pointed out to us an 
article on, ``A Brief History of Bank Capital,'' and you made a 
strong statement that banks are not at historically-high levels 
of capital. And you went on to explain to us that current 
measures of capital do not include all risk, and I want to 
thank you for that.
    My next question is, we have heard a lot about the negative 
impacts of Basel III Endgame on access to credit, borrowing 
costs, and banks' balance sheets. Can you address what positive 
impacts there are of this rulemaking, other than greater 
financial stability?
    Ms. Valladares. Financial stability is very important, but 
one big advantage is if we stop having so many banking crises, 
you wouldn't have all of the challenge to Americans. I don't 
know if any of you here have ever lost your job because of a 
crisis. I have, and I am fortunate to be very well-educated. I 
have the privilege of an American education. I know a lot of 
people, especially if they don't have a college degree, every 
time there is a crisis or a threat of a crisis, it causes 
incredible emotional instability for them, and it is hard. I 
like this idea of doing the economic impact studies on what 
regulations mean.
    I really think that we need to require the banks to do a 
serious quantitative impact study of what happens when people 
become unemployed, what happens to all of the emotional and 
mental anguish that they go through and that they pass on to 
their kids when they can't get a job, and that shouldn't be 
happening. We have great diversity of minds at the regulatory 
entities and at the banks, and the heart of everything that we 
do should be to protect Americans who have absolutely nothing 
to do with the financial profits at banks.
    Mrs. Beatty. Thank you. Mr. Chairman, my time is up.
    Chairman Barr. The gentlelady's time has expired. The 
gentleman from Tennessee, Mr. Rose, is recognized.
    Mr. Rose. Thank you, Chairman Barr, for holding the hearing 
today, and thank you to our witnesses for your time and 
patience with us. I would like to go ahead and dive straight 
in.
    Ms. Tahyar, in the long-term debt proposal, unexpectedly, 
bank regulators decided to propose the debt issuance 
requirement both on the insured depository institution and the 
bank holding company, not for the G-SIBs but for smaller 
regional banks. Can you discuss how it could be problematic for 
regional banks to comply with this?
    Ms. Tahyar. I will start with, we are in a rising interest 
rate environment, and the regional banks and the holding 
companies and the banks don't have as much debt in proportion 
as the G-SIBs do. It wasn't really a marginal increase on the 
G-SIBs when we went to long-term debt and total loss-absorbing 
capacity (TLAC). With respect to the regional banks, it might 
make sense for some of them. We have had some CEOs come out and 
say that it is going to increase their interest costs at a time 
when we are looking at a credit crunch.
    And I think there are some difficult choices to be made 
about whether it should be at the holding company and at the 
bank, and there are difficult choices to be made in terms of 
transition, but bottom line, well-done and appropriately 
calibrated because it is calibrated too high now. Long-term 
debt and TLAC is a layer that protects the uninsured depositors 
and the insured depositors, a/k/a the Deposit Insurance Fund. I 
guess I would say that it could work, but it has been 
calibrated way too high, and I think there should be deep 
concerns about transition periods.
    Mr. Rose. Thank you. I appreciate that insight. Shifting 
gears, Professor Scott, I came across some of the work that 
your firm did on the pace of the SEC's rulemaking agenda. As 
you are aware, the SEC, under Chair Gensler, has embarked on a 
rulemaking agenda for which the scope, scale, and speed are 
wholly unwarranted by any congressional mandate. There are 
serious concerns that many of these proposals will be thrown 
out in court following the decision in West Virginia v. EPA. 
Professor Scott, does the SEC, in its economic analysis, factor 
into its rulemaking the costs associated with potential 
litigation?
    Mr. Scott. Costs to the SEC of litigation or to the general 
economy?
    Mr. Rose. To the general economy.
    Mr. Scott. No. A bigger picture answer to your question is 
that the cost-benefit analysis that the SEC kind of focuses on 
is the cost to institutions, how much is it going to cost a 
bank to comply with XYZ rule? Actually, a small part of what we 
should be worried about in cost is the cost to the economy, how 
are these rules going to affect the economy? And that is almost 
never done, or if it is done, it is not done very well. I have 
been through all of the cost-benefit analyses of all these 
rules, and it is woeful. It is woeful.
    Mr. Rose. Professor Scott, isn't it true that Chair Gensler 
is issuing a large number of rulemakings that are not required 
by statute?
    Mr. Scott. Yes. I have the numbers on that in our report. I 
think he has issued 47, and only 8 are mandated by statute. You 
can go back to Chair Shapiro, who had a number of rules during 
the implementation of Dodd-Frank, and 44 percent of her rules 
were mandated by it, so this is discretionary. These rules do 
not have to be done, and I am looking for sort of what is the 
problem we are trying to solve? Our capital markets are very 
strong. They are performing very well. What is the problem?
    Mr. Rose. And, Professor Scott, stress tests generate 
binding capital requirements in the stress capital buffer, but 
the Fed, to date, has failed to publicly disclose, let alone 
issue for public comment by rulemaking, the models, 
mathematical formulas, and other decisional methodologies that 
it uses to calculate firms' legally stressed capital buffer 
requirements. Do you believe this violates the Administrative 
Procedure Act?
    Mr. Scott. Yes.
    Mr. Rose. Thank you.
    Mr. Scott. You're welcome.
    Mr. Rose. I see my time is expiring, so I yield back.
    Chairman Barr. The gentleman's time has expired. The 
gentlewoman from Massachusetts, Ms. Pressley, is now 
recognized.
    Ms. Pressley. Thank you, Mr. Chairman. The 2008 financial 
crisis led to a recession that stunted a generation of economic 
growth. When Congress passed the Dodd-Frank Act, the purpose 
was clear, which was to prevent something like the 2008 
financial crisis from happening again. These regulations were 
intentional and responsive to catastrophic mistakes. 
Consequently, it comes really as no surprise that after 
Republicans undid those regulations, rolling back aspects of 
the Dodd-Frank law in 2018, we are seeing financial collapses 
like the SVB failure earlier this year.
    Ms. Rodriguez Valladares, isn't it true that as a result of 
the 2018 Republican deregulation bill, SVB was allowed to opt 
out of capital requirements relating to AOCI?
    Ms. Valladares. S. 2155 was incredibly detrimental in the 
sense that banks that were in that $100-billion to $250-billion 
were no longer systemically important, and that's absolutely 
critical. Hence, not only did they not have to do the level of 
stress test, they also did not have to cover, they did not have 
to calculate, or worse yet publish the liquidity coverage 
ratio, so that part of the law was incredibly detrimental. Mind 
you, that bank was poorly mismanaged and the evidence was 
there. Since 2016, they had repeatedly violated anti-money 
laundering processes and a whole bunch of other processes, so 
the size of banks needs to be considered systemically 
important. It is critical for the American economy, and they 
need to be better supervised, no matter where we are in the 
interest rate environment.
    I am a little concerned hearing that we may or may not like 
a rule because of the elevated interest rate environment. Right 
now, we are at an elevated interest rate environment. We 
weren't 20 years ago, and we are not likely to be there in 2 
years, so we have to think of these rules across various 
economic cycles, not just right now. And on the stress test, 
the minute that the Fed were to disclose the design of the 
model and the formula, it then becomes a plugging in of the 
numbers. So if there were to be some kind of a requirement that 
the Fed has to disclose the models, then it would be absolutely 
imperative that the banks disclose their models, because it is 
the banks that design the models and choose what quantitative 
inputs to put, based, of course, on Fed scenarios.
    Ms. Pressley. Thank you for your expertise and also for 
sharing your lived experience and underscoring the human impact 
here. And, again, this did result in SVB seeming better-
capitalized than it actually was, considering the large, 
unrealized losses in their securities portfolio. In fact, the 
Fed estimated that because of the AOCI opt-out, SVB's capital 
ratio was inflated by nearly 2 percent. Banking regulators are 
trying to fix a very real problem, a problem that directly 
contributed to this year's bank failures.
    Ms. Tahyar, when you testified before the committee in May, 
you stated that, ``The not passing through AOCI in capital, 
which is something that has been on the books since 2013, 
should be revisited.'' Ms. Tahyar, do you still stand by your 
statement in May? Yes or no? I agree with those comments that 
you made on the record.
    Ms. Tahyar. Yes, of course, I stand by them.
    Ms. Pressley. Okay. Thank you for reiterating that, and I 
certainly agree with the comments that you made on the record 
in May. The regulators are revisiting it, and the proposed rule 
would require regional banks with more than $100 billion in 
total assets to include AOCI in the regulatory capital. Lack of 
adequate capital was absolutely a contributing factor in the 
three bank failures this year, and I support the regulators in 
strengthening them. My colleagues across the aisle are not 
serious about preventing future bank crises, even when it comes 
to stress tests, which are critical for evaluating the safety 
and soundness of banks. They complain the stress testing is, 
``too opaque.''
    Ms. Rodriguez Valladares, the purpose of any test is to 
find both strengths and weaknesses, correct?
    Ms. Valladares. Yes, absolutely, and stress tests are 
critical. Please understand that regulators have not only 
capital stress tests, they also have liquidity stress tests, 
but if you don't require a bank to measure the liquidity 
coverage ratio, then the regulators don't have that 
information. Those of us in the industry can take the balance 
sheet information from SVB and do our own simulations, but they 
are never going to have the level of granularity that would be 
really, really helpful to all of us.
    Ms. Pressley. After witnessing some of the largest bank 
failures in our history earlier this year, our response must 
resemble how we acted after the 2008 financial crisis. We need 
stronger capital requirements and meaningful stress tests for a 
safer financial system. Thank you.
    Chairman Barr. The gentlelady's time has expired. The 
gentleman from Wisconsin, Mr. Fitzgerald, is now recognized.
    Mr. Fitzgerald. Thank you, Mr. Chairman, and thank you to 
the witnesses. Chairman Barr expressed a desire to assess how 
the Federal Reserve performs analysis on bank mergers. This 
follows the DOJ plans to update guidelines on banking mergers 
to provide more-robust scrutiny. I strongly believe antitrust 
analysis should be governed by the rule of law, not the 
individual views of those who, at any particular point in time, 
had the relevant agency. I am concerned any change in that 
analysis that would depart from long-existing and widely-
accepted standards may not reflect actual changes in the 
competitive environment. Further, the capital proposal from the 
Fed and other financial regulators, on top of other recent 
regulatory proposals, is bound to lead to some type of 
consolidation to overcome the compliance burden of these 
rulemakings.
    Ms. Tahyar, what do you believe will be the net effect of 
the Biden Administration and its regulators sharply increasing 
the regulatory burden on banks with more than $100 billion in 
assets, while simultaneously making mergers between those banks 
more difficult to close?
    Ms. Tahyar. I think we have a very unhealthy market for 
bank mergers, as I said in my testimony. The regulators are 
sending mixed signals. The bank merger guidelines have not been 
updated since 1995. That is not only pre-internet, that is pre-
fax. It is virtually pre-email, and not everyone had email back 
in those days. The world has really changed, and these bank 
merger guidelines have kind of been in the air now for almost 2 
years, and nothing is happening. And it is high regulatory risk 
for any banking management to go to their board and say, we 
want to sell, so I think this is going to have an adverse 
impact. I think we are better off with a healthy regional bank 
market where the strong can buy the weak. That is going to have 
less banking crises. I think sharply raising capital on 
regional banks at this moment is the wrong move at the wrong 
time. And I will just stop by saying that AOCI is not Basel III 
Endgame. It is something very different. There is not a trail 
of breadcrumbs from revisiting AOCI to all of the many other 
changes. I hope I have responded to all of your questions.
    Mr. Fitzgerald. Yes, and under the capital requirement 
proposal, corporate entities must have securities, and they 
must be listed on an exchange to benefit from a reduced risk 
weighting. So, this whole approach ignores smaller, non-public 
companies who rely on banks for funding, right?
    Ms. Tahyar. I completely agree with that. It ignores a 
range of companies. We have some really large, major tech 
unicorns that are stable, to which we should be encouraging 
banks to lend. Then, we have the kind of small and mid-sized 
enterprises that are the backbone of our economy, particularly 
in smaller market cities. And then, we have my son's micro 
production company in Los Angeles that probably should get a 
higher risk weighting, since it is a mini company from a very 
young guy. But to treat my son's company the same as name your 
favorite tech unicorn, or a contracting company in Raleigh, 
North Carolina, that has been there for 100 years, makes no 
sense.
    Mr. Fitzgerald. Thank you. In the 1 minute I have left, the 
proposal from the Fed and the other financial regulators would 
obviously impose huge costs on regional and mid-sized banks, 
with little to no trading books to adapt the governance and 
data processes.
    Ms. Petrou, can you discuss how the Basel standard just is 
poorly suited for these smaller banks?
    Ms. Petrou. I think that will be extremely difficult, 
partly because the new proposals, as you know, impose market 
and operational risk requirements. And I think buried in the 
bowels of the proposal is a request for comment on whether or 
not the market risk rule should apply only to banks which have 
material market risk. That is a really important point because, 
otherwise, for these smaller banks, and this is true also in a 
different way for operational risk, you are going to be doing a 
tremendous amount of work and ultimately holding unnecessary 
capital that could go to lending to underserved borrowers for 
risks they are not even really running, that aren't material to 
safety and soundness.
    Mr. Fitzgerald. Thank you. I yield back.
    Chairman Barr. The gentleman's time has expired. The 
gentlewoman from California, Mrs. Kim, is now recognized.
    Mrs. Kim. Thank you, Mr. Chairman, and thank you to the 
witnesses for being with us today. I am deeply concerned that 
the Basel III Endgame and the other proposals would make credit 
more expensive for small businesses, as they will reduce 
lending for low- to moderate-income households and put our 
banks at an international competitive disadvantage. 
Furthermore, these proposals do nothing to prevent future 
failures like SVB.
    It has been reported that certain European countries want 
carveouts on their own Basel III Endgame proposals to protect 
their banks from the increased costs of higher capital 
requirements, and in Asia, 3 of top 10 companies in the world 
are giant-sized. State-owned Chinese banks there aren't 
planning to implement the Basel framework anytime soon.
    Ms. Tahyar, in your written testimony you speak of the 
competition between our banks and European and Asian banks. Can 
you describe how the changes to operational risk and the 
surcharge could put the U.S. banks at a competitive 
disadvantage with banks headquartered in Asia, and in Europe?
    Ms. Tahyar. I think the impact is going to be mostly on our 
largest banks, the G-SIBs that operate internationally and are 
in direct competition with their European and Asian peers. You 
are clearly right about the Chinese banks. They are not going 
to be subject to anything near the same set of rules. The 
European banks have very much a fundamentally different 
business model, less reliant on fee income, and there is less 
regulatory intensity, for better or for worse. So, there are 
far fewer regulatory fines, which will have a long tail even 
after the problem has been solved. And as I said in my written 
testimony, I don't know why we're trying to hobble our hugely-
competitive banking sector right now, particularly with the 
geopolitical situation we are in. In terms of small and mid-
sized enterprises, I am deeply worried.
    Mrs. Kim. Thank you. Let me turn to domestic implications 
of the proposals. One of the best ways to build wealth and 
reach the American Dream is to own a home. Unfortunately, high 
interest rates and inflation are making homeownership and the 
American Dream unattainable, and we know that because mortgage 
origination is at a 28-year low.
    Ms. Tahyar, in your view, what kind of homebuyers would be 
pushed out of the housing market with the new risk weight for 
mortgages?
    Ms. Tahyar. When I was young and just starting out, I put 
down 5 percent on my first house. My starter house was 5 
percent, so I would be priced out of that market now. And I 
think that it is going to be mostly low- and moderate-income 
buyers who do not have parental help, because we know that so 
many young buyers these days only do it with parental help. But 
for people who are making their way up the ladder, they are 
more likely providing income to their parents, rather than 
getting parental help. Those are the kinds of people who are 
going to be disproportionately affected here.
    Mrs. Kim. That may include my children, too.
    Mr. Scott, in your testimony, you say that the regulators' 
proposals could reduce U.S. gross domestic product (GDP) by 
more than $67 billion per year. Out of the plethora of 
proposals, which proposal would you say will have the highest 
negative GDP costs?
    Mr. Scott. I wish I could answer that. I was citing a study 
by BPI which came up with this number, and I don't know in 
which particular regulations underneath this. But in terms of 
looking just at my instinct on this kind of in my testimony, I 
think the market risk and operational risk parts of Basel have 
such an impact on our capital markets, which, as I have 
testified, are very important to financing in this country. I 
will look there.
    Mrs. Kim. Then, let me ask you another question. Can you 
talk about how the stress test and stress capital buffer 
already account for risks associated with the operational 
failures? Do you think a separate capital requirement for 
operational risks, as called for in the intended Basel III 
Endgame proposal, is necessary or is it duplicative, that is, 
could there be some double counting going on?
    Mr. Scott. Yes, I think there is double counting, and there 
are two ways to eliminate it: take it out of the stress test; 
or take it out of Basel; or some combination of the two. That 
should be done.
    Mrs. Kim. Thank you. With that, I yield back.
    Chairman Barr. The gentlelady yields back. The gentlewoman 
from Texas, Ms. De La Cruz, is now recognized.
    Ms. De La Cruz. Thank you, Mr. Chairman, for holding 
today's hearing, and thank you to the witnesses for appearing 
today. Professor Scott, you heard Ms. Rodriguez Valladares say 
that massively raising capital requirements as contemplated by 
the Basel III Endgame proposal will not decrease bank lending. 
Do you agree or disagree?
    Mr. Scott. I disagree with that. There are numerous studies 
from the Bank for International Settlements (BIS), which is a 
widely-acclaimed source. It is neutral, it is not political, 
and it says that higher capital decreases lending. The question 
is, how much? You can argue 1 percent, or 4 percent, but it 
certainly decreases.
    Ms. De La Cruz. And besides the studies, have you also been 
able to speak to institutions, regional institutions on how 
they feel it would affect their lending?
    Mr. Scott. Yes. I haven't done a scientific survey, but I 
do talk to banks, and I think any banker I have ever talked to 
has said that higher capital increases, decrease lending.
    Ms. De La Cruz. I am concerned about the cost to my 
constituents that the recent bank regulatory proposals will 
generate. And that is especially the case for the so-called 
Basel III Endgame proposal to massively raise these capital 
requirements as just discussed, and that it would choke off 
credit availability and increase credit costs to families and 
small businesses in my district and across the country.
    Ms. Tahyar, do we know how all the recent complex and wide-
ranging proposals, with maybe more on the way, will have an 
effect on consumers and small businesses?
    Ms. Tahyar. We know there will be an effect on small 
businesses, for sure. On consumers, I think that is a little 
bit less clear. The key thing we don't know is how all of these 
proposals interact with one another, and where all the 
unintended consequences will be.
    Ms. De La Cruz. And what kind of effects do you think they 
will have on small businesses?
    Ms. Tahyar. I think that the lack of a preferential weight 
for small businesses which are unlisted, and even larger 
businesses which are unlisted in a time period where our 
economy is increasingly reliant on unlisted companies, and we 
know where many of the jobs come from, which is small and mid-
sized companies, it is not going to be a good story for credit 
to those companies.
    Ms. De La Cruz. Have the regulators making the proposals 
provided any solid analysis of what these effects may be?
    Ms. Tahyar. I don't think so.
    Ms. De La Cruz. My district is heavily agricultural and 
ranchers, farmers being a large part of my constituents. 
According to a USDA report, nearly 50,000 U.S. farms use 
futures or options to hedge risk.
    Mr. Scott, due to increased market risk capital 
requirements imposed on banks, are all of the farmers and 
ranchers going to be subject to higher costs when hedging risk?
    Mr. Scott. Yes, because if we increase the capital 
associated with taking a position and a derivative, it is going 
to increase the costs.
    Ms. De La Cruz. By increasing the cost, is it fair to say 
that this will put a burden on our American farmers?
    Mr. Scott. Yes.
    Ms. De La Cruz. That being said, farm security, food 
security is national security, so this is of great concern for 
me. Again, my district is largely served by regional and small 
banks. These banks are critical to our economy and to the 
banking ecosystem in my area.
    Ms. Tahyar, what impact will the recent proposals have on 
regional banks and banks, even below $100 billion, seeking to 
grow?
    Ms. Tahyar. I think $100 billion and up is going to be a 
sharp increase in their costs, interest rate costs, capital 
costs. It is a very good question that you are asking about 
$100 billion and below because if you think about the $50 
billion to $100 billion, those are regional banks that are in 
one State or two. What I understand, anecdotally, from my 
regional bank clients is that they provide loans to small 
businesses in smaller towns, smaller markets to agriculture.
    Chairman Barr. I'm sorry. The gentlelady's time has 
expired.
    Ms. De La Cruz. I yield back.
    Chairman Barr. Sorry to cut you off, but the time has 
expired, and now the gentleman from Texas, Mr. Williams, is 
recognized.
    Mr. Williams of Texas. Thank you, Mr. Chairman, and this 
would be to you, Ms. Petrou. Ms. Rodrigues Valladares testified 
that the bipartisan regulatory tailoring law, S. 2155, 
contributed to the bank failures in March of 2023. Were those 
bank failures more about interest rate risk and deposit 
concentration risk, or did SVB fail because it was not 
subjected to one-size-fits-all capital requirements?
    Ms. Valladares. Sorry. Are you addressing it to me?
    Mr. Williams of Texas. No. It is to Ms. Petrou.
    Ms. Valladares. That is why I wanted to wait.
    Ms. Petrou. I think, first of all, the banking agencies had 
tremendous discretion under that law to set standards based on 
risk, and, in fact, importantly, they have reserved their right 
to regulate banks, regardless of the tailoring, if they saw 
risk forthcoming. I think the problem was far more supervision 
than it was tailoring because the banking agencies didn't 
tailor that much and they hardly supervised at all.
    Mr. Williams of Texas. Okay. Thank you. The Federal 
Reserve, the FDIC, and the OCC have been bombarding our 
financial system with excessive regulations and dangerous 
proposals like Basel III Endgame, long-term debt requirements, 
resolution planning, and G-SIB surcharges. It is concerning 
that many of our Federal banking agencies are rolling out these 
proposals one by one in a rushed fashion without considering 
how these combined regulation requirements will impact 
innovation, limit access to capital, and threaten economic 
stability. So, regulators should provide an analysis of the 
potential effects on any proposal that makes significant 
changes to our financial regulatory framework. Our mission and 
the mission of regulators should be to allow the economy to 
thrive, not tighten their grip on the financial system.
    Ms. Tahyar, do you believe the cost-benefit and impact 
analyses conducted by the agencies for these proposed rules 
adequately address the negative consequences of potential 
ramifications, and have regulators properly considered how 
these proposals will interact with one another?
    Ms. Tahyar. No, I don't think the cost-benefit analysis 
goes as far as it needs to, although, particularly in Basel III 
Endgame, they have tried very hard, but there are a lot of 
untested assumptions and very little empirical study. There is 
nothing out there, nothing that looks at the proposals, across 
the proposals, and thinks about them overall.
    Mr. Williams of Texas. Okay. Thank you. As we have 
discussed, over the past few meetings of this committee, the 
Basel III Endgame proposal will severely reduce financing and 
access to capital for small businesses. Federal regulators are 
continuing to try and place banks at a disadvantage and use the 
bank failure from earlier this year as a weak justification for 
this rewrite of bank capital regulations without fully 
considering their impacts. These proposed changes will 
dramatically affect the banking community, and there is 
legitimate concern that the Basel revisions will have broad 
impacts on Americans' ability to access reliable credit and 
increase overall borrowing costs for individuals and small 
businesses. These increases in costs will make it harder for 
Americans to obtain a loan, whether they want to start their 
own business, expand current business operations, or buy their 
own home. Small businesses and everyday Americans rely heavily 
on loans and credit lines from banks of all sizes to access the 
capital that they need to do so.
    When I meet with Texans back in my district--and I am a 
borrower myself--I am constantly hearing about how scared they 
are of regulators' out-of-touch proposals, and they have a fear 
about what this Administration will do next to continue the 
attack on the financial industry, and, frankly, on Main Street 
America.
    Mr. Scott, could you elaborate on how the Basel III Endgame 
proposal impacts bank lending and the cost of credit for 
borrowers, and what does this mean for Americans trying to 
obtain a loan?
    Mr. Scott. That is not a good story. It will increase costs 
for the banks. They either will exit certain activities because 
of their cost or raise their fees. That will mean higher cost 
to borrowers and consumers and, overall, will not be good for 
Texas' economy, or the economy of the United States.
    Mr. Williams of Texas. We know it is all passed down to the 
consumer.
    Mr. Scott. That is correct
    Mr. Williams of Texas. It eventually gets into the cost of 
goods sold, and drives people out of the markets.
    With that, Mr. Chairman, I yield back.
    Chairman Barr. The gentleman yields back, and the gentleman 
from California, Mr. Sherman, is now recognized.
    Mr. Sherman. Thank you. We are looking at cost-benefit 
analysis by those who think that we should have lower capital 
standards. And one of the reasons for that is when you do the 
cost-benefit analysis, you leave out the social costs, the 
political costs, the cost to the fabric of our society.
    Going back to what caused Basel III, namely, the 2008 
meltdown, if you just look at the economics, you can say, hey, 
we actually made money bailing out the banks, with no cost-
benefit analysis. That may be true. We lost some money bailing 
out the auto companies, maybe we should have held the stock a 
little longer, but that is a side issue. The reason for that 
was that they came to us with the Troubled Asset Relief Program 
(TARP), and a lot of us put some pressure on, and they ended up 
buying preferred stock rather than the toxic assets.
    Had they bought the toxic assets, we would have lost 
hundreds of billions and that is the effect. But even with us 
not losing any money on the bank bailout, the damage to the 
social contract--how many of us have been told by every group 
that wants anything, well, you gave it to the banks, so give it 
to us? And this was added to by the Silicon Valley Bank and the 
New Republic problem, which just added to this idea that banks 
are bailed out, nothing really is fair in our society, so give 
me mine. We are told that we can't possibly know the effect of 
these new regulations, and we can't, but we also possibly can't 
possibly know the effect of not adopting these regulations. 
That is the thing about the future.
    Now, I am concerned, Ms. Valladares, about the effect this 
is going to have on initial public offerings (IPOs). How will 
these standards discourage banks from participating in IPOs and 
otherwise in the capital market?
    Ms. Valladares. The question is, for whom?
    Mr. Sherman. For you.
    Ms. Valladares. Oh, right. There is no reason it would 
discourage IPOs.
    Mr. Sherman. Do the other witnesses agree?
    Ms. Tahyar. No.
    Mr. Sherman. Okay. I will hear from both sides then, 
quickly.
    Ms. Valladares. Okay. There is an initial public offering 
right now. In fact, for many companies, many of them might 
prefer it because of the elevated interest rate environment. 
So, there is no proof that having banks that are safer is going 
to impact IPOs. Banks that are safer----
    Mr. Sherman. Right, but if you particularly raise the 
capital requirements on that segment, it is going to cause the 
banks to do less than that segment.
    Ms. Valladares. It wouldn't.
    Mr. Sherman. I will ask the witness next to you whether she 
has a quick comment, because I have to go on to another 
subject.
    Ms. Tahyar. Sure. Thank you, sir. We are in a secular 
decline for IPOs. Over the last 10 years, we have to understand 
we have fewer and fewer public companies. The pressure on from 
many parts that there will be greater operational risk and fee 
capital, and, I think, imbalance that is going to be more than 
the lack of preferential weights on unlisted companies.
    Mr. Sherman. Okay.
    Ms. Tahyar. So, I think it is a risk.
    Mr. Sherman. Thank you. I want to go on to another thing, 
which is that raising capital standards is the bluntest way to 
ensure banks don't go under. The better way to do it is to look 
at the individual assets and do good bank examinations, and 
that is where I think our regulators have failed us because 
they have ignored interest rate risk.
    Now, when you pay attention to credit risk, that is a 
reason not to make a loan to a local government. When you pay 
attention to interest rate risk, that is a reason to not buy a 
30-year Treasury. Silicon Valley Bank was famous for loaning 
money to startups, and yet they lost their money by buying 30-
year Treasuries. And we still see a situation where, and I have 
legislation on this, stress tests don't look at the number-one 
stressors, what happens if interest rates go up? As a matter of 
fact, they once did a stress test about what happens if 
interest rates go down, which isn't a bad stress test, but 
isn't so bad.
    One illustration of how poorly-crafted regulations can 
necessitate higher capital rates is they are going to give no 
credit to private mortgage insurance. In what world is private 
mortgage insurance irrelevant to the creditor? As a matter of 
fact, the creditor is the one that makes sure that the 
homebuyer gets the private mortgage insurance. I would have a 
lot more faith in these rules if they didn't use the blunt 
instrument of just raising the rates, and instead looked at 
better bank examinations. I yield back.
    Chairman Barr. Thank you. The gentleman yields back. The 
gentleman from Tennessee, Mr. Ogles, is recognized.
    Mr. Ogles. Thank you, Mr. Chairman, and thank you all for 
being here, and our apologies for having votes and kind of 
getting you stuck. But Ms. Tahyar, my colleague, Ms. De La 
Cruz, had asked you a question and you were cut off because 
time ran out, but the answer, which you were not able to 
complete, is of interest to me because I have multiple regional 
banks in my district and in Tennessee in general. Please 
continue. I think you dropped off at $50 to $100 billion.
    Ms. Tahyar. Sure. Thank you very much, sir. I think the 
question was about the pressure on regional banks of $50 to 
$100 billion, and then $100 billion and up. And I think even 
aside from the capital rules, the increase in deposit run risk 
has put a lot of pressure on those banks. Those banks also have 
to have a lot of technology investment, and then there is the 
increased intensity of supervision as well.
    What we are seeing is a sector of the economy which makes 
the most loans to farms, makes the most loans to small and mid-
sized enterprises in smaller markets, and which really takes 
the most deposits from counties and States, et cetera, et 
cetera, is under enormous pressure. We are a big, diverse 
economy. We have a regional banking sector. We are among the 
only countries in the world to have it. I think we should be 
very, very careful before we say we want to put extra pressure 
on this portion of the banking sector.
    Mr. Ogles. When you look at additional pressures and you 
have the regulatory regime, and there is additional cost, is it 
fair to say that as a bank takes on more or additional costs, 
those costs are going to be passed on to the consumer?
    Ms. Tahyar. Yes, sir. They will be.
    Mr. Ogles. Would it affect their ability and perhaps their 
liquidity on investing in their community, whether it is farms 
or small businesses or mortgages?
    Ms. Tahyar. They will come under pressure. It may well be 
that some consolidation on that sector makes sense, but I do 
think we want to stop before we get to a place where we only 
have 12 financial institutions in the country.
    Mr. Ogles. What we are seeing, and this is kind of a broad 
statement, is the onslaught of proposals from our Democrat-
appointed Federal banking regulators being pushed out in a 
hurry with little to no supporting analysis, and that has been 
touched on rather extensively here. Many are being pushed as a 
response to bank failures and stresses in March, but the wide 
range of the proposals goes far beyond anything that could 
reasonably be associated with March.
    And I would agree with my colleague, Mr. Sherman, that 
blunt instruments or one-size-fits-all-type solutions are 
problematic. So, whether it is the regulatory regime, whether 
it is Basel III, it has been touched on here that when you look 
at the banking sector of Europe, it is entirely different than 
what we have here in the United States, versus the types of 
loans and liquidity that are offered. And I have concerns that 
we are subjugating ourselves to an agreement that--Mr. Scott, 
are we held to Senate confirmation on this agreement?
    Mr. Scott. That has been a longstanding question about what 
Congress' supervision should be over this entire Basel process. 
But I must say, given its impact, I think there should be much 
more legislative control over this process than has existed in 
the past.
    Mr. Ogles. So, you are aware. When you look at the benefit 
analysis that has been produced by the Federal banking 
regulators in trying to justify their proposals, and Ms. 
Tahyar, you touched on it as well, I have concerns when you 
look at the analysis, when you look at proposals added 
together, the downstream impact, whether it is on small 
businesses, the regional banks.
    We have just a few seconds left, so what is your primary 
concern with the Basel III, Mr. Scott? And you may get the last 
40 seconds.
    Mr. Scott. My primary concern is, and I agree with 
Congressman Sherman, that we need to take all costs and all 
benefits into account here.
    Mr. Ogles. Such as interest rate risk, liquidity, et 
cetera?
    Mr. Scott. Everything, okay? The point has been made that 
we are not even looking into the stress test today and interest 
rate risk, which is what caused these three banks to fail. We 
need to do a much better analytical job of evaluating these 
proposals.
    Mr. Ogles. Thank you all again for your time. Mr. Chairman, 
I yield back.
    Chairman Barr. The gentleman yields back. The gentleman 
from South Carolina, Mr. Timmons, is recognized.
    Mr. Timmons. Thank you Mr. Chairman. The FDIC's proposed 
rule on long-term debt aims to enhance the financial stability 
of specific large banking organizations that are not classified 
as globally systemically important. And while I acknowledge the 
rule's intention of safeguarding the financial system and 
depositors, I believe there are several critical issues that 
require more in-depth consideration before its enactment, as 
well as the proposed rule's general real-world effectiveness.
    One of my most ever-present concerns, that the rule does 
not adequately consider short-term transition costs, the 
potential interaction with Basel III reforms, and other 
indirect and unintended effects on borrowers. I am particularly 
concerned with how Basel III capital requirements may 
exacerbate the strain on bank capital availability, compounding 
the effects of this proposed limited rule, not to mention the 
fact that billions of dollars of commercial real estate 
projects must be refinanced in the next 36 months. And not all 
of those projects will be profitable when their mortgage 
payments more than double and banks are prevented from 
extending additional credit due to increases in capital 
requirements and an unfavorable interest rate environment. That 
is the looming crisis that we need to be preparing for, not 
further restricting capital availability.
    It is imperative that these unaddressed aspects undergo a 
thorough evaluation to prevent unintended adverse consequences. 
We need to know what the harm could be and assess the impact of 
real-world modeling. But in July of this year, Fed Vice Chair 
Barr stated his support for the upcoming proposed rule on long-
term debt during a speech at the Bipartisan Policy Center, 
stating, ``If SVB had had enough long-term debt outstanding, it 
might have reduced the risk of a run by uninsured depositors, 
and it might have given the FDIC more options to resolve the 
bank or merge it with a healthy institution.''
    Ms. Tahyar, do you concur with Vice Chair Barr's 
assessment? Do you believe that the limited requirement, in its 
current state, would have prevented the failure of SVB, given 
the scale and speed of deposit withdrawals that the bank faced?
    Ms. Tahyar. I partly agree, and I partly disagree. I think 
Silicon Valley Bank happened so fast that nothing could have 
saved it. But I do agree with Vice Chair Barr that a properly 
calibrated, with an appropriate transitioned long-term debt 
requirement, can be a helpful layer between that, which would 
protect depositors. I just worry that what we have here is not 
well-calibrated and has too quick a transition.
    Mr. Timmons. But you do agree that if this proposal were in 
effect at the time, it would not have caused SVB to be fine. I 
think that is the----
    Ms. Tahyar. No, there is nothing that would have caused SVB 
to be fine.
    Mr. Timmons. If Congress hadn't spent $7 trillion that we 
didn't have on increased inflation resulting in increased 
interest rates, SVB would still be fine, but that is neither 
here nor there.
    Mr. Scott, we actually have a real-world example from 
earlier this year to study on the subject. In Switzerland, 
authorities imposed significant losses on certain Credit Suisse 
bondholders as part of their efforts to resolve the failing 
bank and consummated merger with UBS. Can you comment on those 
instruments and whether those instruments would have proved 
effective in resolving Credit Suisse, had they been honored as 
intended?
    Mr. Scott. The answer is, no, I can't, because as you 
probably know, that is a subject of a lot of back and forth 
about what the actual terms of those long-term debt agreements 
were and whether the Swiss authorities were acting correctly in 
imposing losses on those people. You know what happens in 
Switzerland, and their rules would be very different than ours, 
so I really can't fully answer that question.
    Mr. Timmons. Okay. In March, the Federal banking regulators 
couldn't stomach imposing even fractional losses on extremely 
large uninsured depositors at SVB and Signature Bank, forcing 
the American taxpayer to bail out their uninsured depositors. 
Going forward, do you think Federal banking agencies will 
actually impose real losses on bondholders of a failing bank as 
instructed by their long-term debt proposal, or do you think 
they will go the Swiss route and bail them out again?
    Mr. Scott. Quite frankly, Congressman, I think we have a 
history of not wanting to see what happens when we don't bail 
out banks. That was the whole message of 2007 and 2008. We 
didn't want to see it. We did it with Lehman. Oh my god, look 
what happened. We shouldn't do that again. So, I am skeptical 
whether all of these resolution procedures will actually be 
used when people contemplate the contagion consequences to the 
economy of using that.
    Mr. Timmons. I hear you. It just seems that Washington 
keeps creating crisis after crisis, and then creating a 
solution for the crisis that it created, and we have to stop 
the cycle. Thank you, Mr. Chairman. I yield back.
    Chairman Barr. The gentleman yields back. The gentleman 
from Texas, Mr. Green, I think you are the caboose.
    Mr. Green. Thank you, Mr. Chairman, and let me thank you 
for having a panel that is more reflective of society and of 
the capable, competent, and qualified persons who are available 
to serve as witnesses, and I thank the witnesses for appearing 
as well.
    Friends, we have empirical evidence indicating that there 
is a need for us to give some additional assurances that we 
won't have another Silicon Valley Bank, or Wells Fargo. We are 
all aware of what happened there, so I don't have to go through 
the details. But how would we adjust for some of these 
egregious circumstances being simply a part of doing business, 
if we allow things to continue, just a part of doing business? 
So, you build into your business model a cost for these 
egregious circumstances, and if you don't get caught, nothing 
happens. You will live happily ever after with a coffer that is 
overflowing with dollars or cash, and if something does happen, 
well, you have already considered this in your business model.
    Ms. Rodriguez Valladares, would you respond, please, to my 
thoughts?
    Ms. Valladares. I think, unfortunately, there is incredible 
recidivism. You have banks that over the last 2 decades, have 
ended up being fined over a quarter of a trillion U.S. dollars. 
That is just here. I have worked on a trading floor, and I work 
with banks all the time, and I have seen fraud firsthand, I 
have seen misuse of data, I have seen all kinds of cover ups, 
and it has to do with enforcement, right?
    When the Barr report came out, I actually didn't read his 
report because I knew he wasn't there and I knew that he wasn't 
a bank examiner. I first read the CAMELS reports, which rate 
capital adequacy, asset quality, management, earnings, 
liquidity, and sensitivity to market risk. SVB was having 
problems, serious problems with violations of anti-money 
laundering processes. To me, that is always a signal that if 
you can't even get your processes right for anti-money 
laundering, when you know that the Fed could come in, you are 
going to have problems with everything else. There were 
problems with modeling. There were problems with data. They 
weren't measuring interest rate risk properly. They were 
basically illiquid.
    If you read those reports carefully, the examiners did 
their jobs. But where was the enforcement? I advocated in May 
over at the Senate Banking Committee that we need an 
independent analysis of what happened with SVB. We don't know 
what happened. Why wasn't enforcement escalated? No amount of 
capital, no amount of proposed rules are going to help if once 
examiners detect a problem, they are ignored. If there is no 
enforcement, then I am going to be here hopefully in a couple 
more years, and it is going to be another quarter of a trillion 
in terms of fines. Banks need to be accountable.
    Mr. Green. Do you think that in addition to what you have 
said, that some of these large businesses with these huge 
profits are amenable to taking the risk because they know that 
the enforcement is not there, and if they succeed, they have 
enhanced their coffer, and if they do not succeed, they are 
prepared to pay these fines that you have called to our 
attention and move on?
    Ms. Valladares. Absolutely. Executive compensation 
absolutely has to be reformed. When I worked at JPMorgan, I was 
paid not only on what I did, but also how the rest of the bank, 
how all the traders around me did. So, the incentives are 
really, really messed up, because what that means is that even 
when somebody at a bank is trying to do the right thing, and 
they see that somebody over there is taking on too much risk 
and may cause the bank to implode, they are not going to tell 
anybody because their bonus would be impacted. Does that make 
sense? So, you really have to reform how people are paid at 
these banks, especially executives. If the rest of us did what 
the SVB CEO did, we would all be in jail. He went to Hawaii.
    Mr. Green. Thank you. Thank you, Mr. Chairman. I yield 
back.
    Chairman Barr. The gentleman's time has expired, and that 
will do it. I want to thank our 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 5:02 p.m. the hearing was adjourned.]
    
    
    
    
    
    
    
    
    
    
    
    
    

                            A P P E N D I X






                           September 19, 2023
                           
                           
                           
                           
                           
                           

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