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



                   OVERSIGHT OF PRUDENTIAL REGULATORS

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               __________


                           NOVEMBER 15, 2023

                               __________

       Printed for the use of the Committee on Financial Services


                           Serial No. 118-57




                 [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]




                               ______
                                 

                 U.S. GOVERNMENT PUBLISHING OFFICE

55-096 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








                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    November 15, 2023............................................     1
Appendix:
    November 15, 2023............................................    43

                               WITNESSES
                      Wednesday, November 15, 2023

Barr, Hon. Michael S., Vice Chair for Supervision, Board of 
  Governors of the Federal Reserve System (Fed)..................     4
Gruenberg, Hon. Martin J., Chairman, Federal Deposit Insurance 
  Corporation (FDIC).............................................     6
Harper, Hon. Todd M., Chairman, National Credit Union 
  Administration (NCUA)..........................................     9
Hsu, Michael J., Acting Comptroller of the Currency, Office of 
  the Comptroller of the Currency (OCC)..........................     7

                                APPENDIX

Prepared statements:
    Barr, Hon. Michael S.........................................    44
    Gruenberg, Hon. Martin J.....................................    52
    Harper, Hon. Todd M..........................................    78
    Hsu, Michael J...............................................    90

              Additional Material Submitted for the Record

McHenry, Hon. Patrick:
    Letter to Fed Chair Powell, FDIC Chair Gruenberg, and Acting 
      Comptroller Hsu re: Basel III Endgame, dated November 15, 
      2023.......................................................   100
Sessions, Hon. Pete:
    Wall Street Journal article, ``Strip Clubs, Lewd Photos and a 
      Boozy Hotel: The Toxic Atmosphere at Bank Regulator FDIC,'' 
      dated November 13, 2023....................................   103
Barr, Hon. Michael S.:
    Written responses to questions for the record from 
      Representative Barr........................................   118
    Written responses to questions for the record from 
      Representative Beatty......................................   134
    Written responses to questions for the record from 
      Representative Donalds.....................................   137
    Written responses to questions for the record from 
      Representative Fitzgerald..................................   141
    Written responses to questions for the record from 
      Representative Garbarino...................................   145
    Written responses to questions for the record from 
      Representative Gonzalez....................................   149
    Written responses to questions for the record from 
      Representative Gottheimer..................................   152
    Written responses to questions for the record from 
      Representative Hill........................................   156
    Written responses to questions for the record from 
      Representative Kim.........................................   160
    Written responses to questions for the record from 
      Representative Luetkemeyer.................................   165
    Written responses to questions for the record from 
      Representative Nickel......................................   168
    Written responses to questions for the record from 
      Representative Nunn........................................   172
    Written responses to questions for the record from 
      Representative Sherman.....................................   185
    Written responses to questions for the record from 
      Representative Steil.......................................   189
    Written responses to questions for the record from 
      Representative Timmons.....................................   193
    Written responses to questions for the record from 
      Representative Vargas......................................   196
    Written responses to questions for the record from 
      Representative Nikema Williams.............................   199
Gruenberg, Hon. Martin J.:
    Written responses to questions for the record from 
      Representative Barr........................................   202
    Written responses to questions for the record from 
      Representative Beatty......................................   229
    Written responses to questions for the record from 
      Representative Donalds.....................................   221
    Written responses to questions for the record from 
      Representative Fitzgerald..................................   216
    Written responses to questions for the record from 
      Representative Gonzalez....................................   218
    Written responses to questions for the record from 
      Representative Hill........................................   231
    Written responses to questions for the record from 
      Representative Kim.........................................   223
    Written responses to questions for the record from 
      Representative Nickel......................................   213
    Written responses to questions for the record from 
      Representative Nunn........................................   239
    Written responses to questions for the record from 
      Representative Sherman.....................................   235
    Written responses to questions for the record from 
      Representative Timmons.....................................   214
    Written responses to questions for the record from 
      Representative Tlaib.......................................   250
Harper, Hon. Todd M.:
    Written responses to questions for the record from 
      Representative Barr........................................   253
    Written responses to questions for the record from 
      Representative Beatty......................................   256
    Written responses to questions for the record from 
      Representative Gonzalez....................................   255
    Written responses to questions for the record from 
      Representative Hill........................................   257
    Written responses to questions for the record from 
      Representative Kim.........................................   260
    Written responses to questions for the record from 
      Representative Nunn........................................   261
    Written responses to questions for the record from 
      Representative Sherman.....................................   259
Hsu, Michael J.:
    Written responses to questions for the record from 
      Representative Barr........................................   267
    Written responses to questions for the record from 
      Representative Beatty......................................   282
    Written responses to questions for the record from 
      Representative Donalds.....................................   280
    Written responses to questions for the record from 
      Representative Fitzgerald..................................   276
    Written responses to questions for the record from 
      Representative Gonzalez....................................   278
    Written responses to questions for the record from 
      Representative Hill........................................   284
    Written responses to questions for the record from 
      Representative Nickel......................................   273
    Written responses to questions for the record from 
      Representative Nunn........................................   291
    Written responses to questions for the record from 
      Representative Sherman.....................................   288
    Written responses to questions for the record from 
      Representative Timmons.....................................   274







 
                   OVERSIGHT OF PRUDENTIAL REGULATORS

                              ----------                              


                      Wednesday, November 15, 2023

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 9:36 a.m., in 
room 2128, Rayburn House Office Building, Hon. Patrick McHenry 
[chairman of the committee] presiding.
    Members present: Representatives McHenry, Lucas, Sessions, 
Posey, Luetkemeyer, Huizenga, Wagner, Williams of Texas, Hill, 
Loudermilk, Davidson, Rose, Steil, Timmons, Norman, Meuser, 
Fitzgerald, Kim, Donalds, Flood, Nunn, De La Cruz, Ogles; 
Waters, Velazquez, Sherman, Meeks, Scott, Lynch, Green, 
Cleaver, Himes, Foster, Vargas, Casten, Pressley, Horsford, 
Tlaib, Garcia, Williams of Georgia, Nickel, and Pettersen.
    Chairman McHenry. The Financial Services Committee will 
come to order.
    Without objection, the Chair is authorized to declare a 
recess of the committee at any time.
    Today's hearing is entitled, ``Oversight of Prudential 
Regulators.''
    And just for everyone's situational awareness, we have 
votes here at roughly 10:30 this morning, so we will get as far 
into this hearing as we possibly can, and when one Democrat and 
one Republican return to the committee after those votes, we 
will commence questioning once again. We are going to try to 
get in as many questions with the time we have for these four 
important regulators, for them to submit to their oversight 
function, obviously, but to also be able to get back to work at 
their agencies, because there is much work to be done.
    I now recognize myself for 5 minutes for an opening 
statement.
    Good morning. I appreciate our witnesses being here today. 
The last time you appeared before this committee, we were 
facing significant turmoil in our regional banking system. 
Since then, you have employed a never-let-a-crisis-go-to-waste 
mantra. Attempting to use recent uncertainty to justify your 
sweeping rewrite of regulations for U.S. financial institutions 
doesn't go unnoticed; nobody is buying that spin, by the way.
    The most significant proposals, including the Basel III 
Endgame, are overwhelmingly dominated by provisions that have 
nothing to do with what happened in March. Rather, it appears 
that the onslaught of your agencies' regulatory proposals are 
intended to turn private banks and financial institutions into 
public utilities. This would put unelected bureaucrats in 
charge of balance sheets, credit flows, and evaluation of what 
is and is not considered risky.
    Let's start with the Basel III Endgame proposal, which 
involves hundreds of billions or even trillions of dollars of 
resource allocation. This initiative was put forward with no 
convincing rationale, no credible motivation, and a shocking 
lack of supportive quantitative economic analysis. Even worse, 
the Basel III Endgame would stifle economic growth both here in 
America and globally, limiting lending and hindering the 
American Dream of homeownership for families across the 
country.
    Additionally, banking regulators appear to have abandoned 
even the slightest notion of promoting American interests. 
Instead, you have ceded your authority over U.S. financial 
regulation to opaque, unelected, and unaccountable global 
governance bodies and nongovernmental organizations (NGOs), 
allowing European counterparts to set the agenda and put our 
financial system at a competitive disadvantage.
    One need only look at the recently-proposed Principles for 
Climate-Related Risk Management for Large Financial 
Institutions. These principles align closely with those being 
pushed by global governance bodies rather than the best 
interests of our financial system, or even the effects of 
climate change here in the United States. Regardless of whether 
you call it guidance or regulation, these principles are 
significant and did not go through the appropriate process, as 
governed by the Administrative Procedure Act (APA). That is why 
I will ask the Government Accountability Office (GAO) to 
examine whether these principles constitute a rule and would be 
subject to the Congressional Review Act (CRA).
    Similarly, and a win for consumer protection, the GAO 
recently ruled that the SEC's Staff Accounting Bulletin No. 121 
(SAB 121), does meet the Administrative Procedure Act's 
definition of a rule, making it subject to the CRA. It seems 
the only area where Biden financial regulators don't take their 
cues from foreign counterparties is digital assets. While other 
jurisdictions implement robust consumer protections and clear 
regulatory frameworks, we continue to fall behind, especially 
this Administration.
    I will finish with this: There appears to be a desire to 
remake the American financial system to better align with 
regulators' political preferences rather than to dutifully 
implement the laws enacted by Congress. These supposedly 
independent regulators are blindly following orders from the 
White House and political activists, leading to gross 
mismanagement of their agencies and the American economy. Just 
this week, alleged widespread and entrenched misconduct by FDIC 
employees was reported by The Wall Street Journal, which was 
covered in yesterday's hearing. This misconduct is a severe 
departure from the agency's operations to execute its mission.
    We often hear in the halls of Congress that things will 
happen because someone has the votes to make it happen. 
Unelected banking regulators seem to be using a similar 
political calculus to push their partisan agendas. Whether it 
is at the FDIC or at the Federal Reserve for regulatory policy, 
the stakes are way too high to take your eyes off the ball or 
to play political games. You must focus on the long-term 
safety, soundness, and stability of our financial system for 
the benefit of the American people and American families and 
American workers rather than focusing on partisanship, 
misleading rhetoric, or short-term political gains.
    This isn't about politics. This is about doing what is 
right for the American economy for the long term. It is about 
safety and soundness in the long run, and it seems like these 
proposals we are seeing for bank capital are about policy 
preferences, and not driven by economic analysis. That is 
concerning, and, Vice Chair Barr, that should be concerning to 
you at the Federal Reserve. I think the importance of the 
Federal Reserve's independence for monetary policy cannot be 
overstated, and you are jeopardizing it by your regulatory 
actions. I yield back.
    I now recognize the ranking member of the committee, the 
gentlewoman from California, Ms. Waters, for 4 minutes for an 
opening statement.
    Ms. Waters. Good morning, and thank you, Mr. Chairman, for 
holding this hearing, continuing the tradition that Democrats 
started in holding semiannual hearings to provide oversight of 
our prudential regulators. I want to take this opportunity to 
applaud our nation's regulators. After the failures of Silicon 
Valley Bank, Signature Bank, and First Republic Bank, which 
marked the second-, third-, and fourth-largest bank failures in 
our history, it was our nation's regulators and President 
Biden's Treasury Department that protected our nation's 
economy. Now, they are taking steps to address weaknesses in 
our nation's banking system, including by strengthening capital 
requirements, and this makes sense because well-capitalized 
banks lend more.
    Committee Democrats are also doing our part to prevent 
another banking crisis. We have introduced a wave of bills to 
address gaps exposed by the bank values, such as strengthening 
bank executive accountability. Several of these bills are 
advancing with broad bipartisan support in the Senate, and I 
urge House Republicans to take them up as well. I am hoping we 
can discuss legislation today to strengthen deposit insurance 
to better protect small businesses and their employees.
    I also want to applaud our banking regulators for 
finalizing the Community Reinvestment Act (CRA) rule, something 
that had not been updated in nearly 3 decades. Under my 
leadership, Committee Democrats led the way in protecting the 
CRA when the Trump Administration tried to gut it, including by 
crashing FDIC board meetings, so I am pleased that the 
regulators are taking action to combat modern-day redlining. I 
look forward to learning more about how our regulators will 
implement this final rule and stand ready to craft legislation 
that may be necessary to bolster this effort.
    Finally, before I conclude, I want to say that I am very 
troubled by recent reports of sexual harassment and a toxic 
workplace culture at the FDIC. All of our nation's regulators 
should provide safe work environments that are free from 
discrimination, harassment, and unfairness. So, I look forward 
to learning more today about what is being done at the FDIC and 
the other banking agencies to ensure that everyone feels safe 
and respected in their place of work, and that wrongdoers are 
held to account. I thank you very much, Mr. Chairman, and I 
yield back.
    Chairman McHenry. The gentlelady yields back. I will now 
recognize the ranking member of our Subcommittee on Financial 
Institutions, Mr. Foster, for 1 minute.
    Mr. Foster. Thank you, Mr. Chairman. As many of our 
witnesses said before the Senate yesterday, and in their 
written testimony for this hearing, the American banking system 
is sound and resilient. The bank failures earlier this year 
were contained, but they demonstrated that the risk taken on by 
a small number of firms, if not appropriately managed, can 
result in contagion at financial businesses across the economy 
and, consequently, the Americans who depend on them for 
essential financial services.
    While the stress from these bank failures earlier this year 
has seemingly, to both traditional and emerging risk, 
persisted, traditional financial risks like interest rate risk, 
and developing risks such as rising geopolitical tension, cyber 
risks, climate change, artificial intelligence, and emerging 
technologies present new risks that must be managed 
appropriately. Our prudential regulators have advanced 
proposals in recent months meant to address lessons learned 
from both the global financial crisis and from recent bank 
failures. These proposals will have an effect not only on the 
banking system but on the overall U.S. economy, and it is our 
job to understand them. Thank you. I yield back.
    Chairman McHenry. The gentleman yields back.
    Today, we welcome the testimony of the Honorable Michael S. 
Barr, Vice Chair for Supervision at the Federal Reserve Board 
of Governors; the Honorable Martin J. Gruenberg, Chairman of 
the Federal Deposit Insurance Corporation; Mr. Michael Hsu, 
Acting Comptroller of the Currency at the Office of the 
Comptroller of the Currency; and the Honorable Todd Harper, 
Chairman of the National Credit Union Administration. We thank 
each of you for taking the time to be here.
    We will recognize each of you for 5 minutes for an oral 
presentation of your testimony, and without objection, each of 
your written statements will be made a part of the record.
    We will begin with you, Vice Chair Barr. You are now 
recognized for 5 minutes.

  STATEMENT OF THE HONORABLE MICHAEL S. BARR, VICE CHAIR FOR 
 SUPERVISION, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 
                             (FED)

    Mr. Barr. Thank you, Chairman McHenry, Ranking Member 
Waters, and members of the committee. Thank you for the 
opportunity to testify on the Federal Reserve's supervisory and 
regulatory activities.
    Our banking system is sound and resilient. The acute stress 
that occurred in March has receded, and banking organizations 
continue to report capital and liquidity ratios above minimum 
regulatory levels. However, some banks have recorded sizable 
declines in the fair value of certain assets as interest rates 
have increased, putting pressure on tangible capital. These 
banks are actively managing the resulting set of risks, but 
these risks could take some time to address. Additionally, some 
banks that have a high reliance on uninsured deposits are using 
more-expensive funding sources to manage their liquidity. 
Looking forward, preserving a sound and resilient banking 
system requires continued attention to address identified 
vulnerabilities, and vigilance to changing conditions, starting 
with supervision.
    Since the bank failures earlier this year, the Federal 
Reserve has been moving forward with ways to improve the speed, 
force, and agility of supervision as appropriate. In 
considering improvements to supervision, we are very mindful of 
the differences in size, risk, and complexity of supervised 
institutions, and the importance of maintaining the strength 
and diversity of banks of all sizes that serve communities 
across the country. Furthermore, supervisors have been focused 
on addressing material risks presented by the current economic 
environment. This includes conducting targeted reviews at banks 
exhibiting higher interest rate and liquidity risk profiles, 
and monitoring for potential credit deterioration, particularly 
within the consumer and commercial real estate (CRE) lending 
segments.
    A key component of this resilience is capital. Capital 
allows banks to absorb losses on those assets while continuing 
to serve households and businesses. In the global financial 
crisis, the effects of woefully-undercapitalized banks had a 
devastating impact on our economy and resulted in the worst 
recession since the Great Depression. It took 6 years for 
employment to recover, more than 10 million people fell into 
poverty, and 6 million families lost their homes to 
foreclosure, and these costs occurred even with substantial 
support from the government. In the years following the global 
financial crisis, the Board adopted a set of capital reforms 
which greatly strengthened our banking system, and capital 
ratios of the largest banks have more than doubled since 2009.
    At the same time, the U.S. banking system has grown from 
$12 trillion in assets to $23 trillion today, while showing 
strong profitability and overall market valuation. U.S. banks 
have enhanced their position as leaders in global capital 
markets activity. Importantly, these reforms have served the 
U.S. economy well. Our economy has grown substantially with the 
continued support of robust lending from a stronger banking 
system. The reforms to the capital requirement framework that 
the banking agencies proposed earlier this year are the last 
stage of these post-crisis capital reforms. It has long been 
recognized that work remains to improve how banks measure risk, 
which is critically important because the riskier a bank's 
assets are, the more capital it needs to protect against those 
risks.
    The proposed rules would apply to banks with at least $100 
billion in assets, which is fewer than 40 of the over 4,000 
banks in our banking system. Community banks would not be 
affected by this proposal. The effects for each bank would vary 
based on its activities and risk profile. Notably, the 
increases would be most substantial for the largest and most 
complex banks, the global systemically important banks (G-
SIBs), and the bulk of the estimated rise is attributable to 
trading and other non-lending activities.
    The comment period is an important part of the rulemaking 
process. We are providing the public nearly 6 months to review 
the proposal so they can provide meaningful comments. We 
welcome all comments that provide the agencies with additional 
data and perspectives to help ensure the rules accurately 
reflect risk.
    I would also like to briefly highlight our long-term debt 
proposal. In August, the agency proposed a rule that would 
expand long-term debt and resolution planning requirements to 
additional large banks. The proposal's goal is to increase the 
potential options available for resolving depository 
institutions and to enhance overall financial stability. 
Importantly, the proposed requirements would be calibrated at a 
lower level relative to the largest and most-complex banks in 
recognition of the lower systemic risk profiles of applicable 
banks. As with the capital rules I mentioned above, I would 
like to emphasize that these are proposed rules, and we look 
forward to reviewing the public comments.
    Thank you, and I am happy to answer your questions.
    [The prepared statement of Vice Chair Barr can be found on 
page 44 of the appendix.]
    Chairman McHenry. I will now recognize Mr. Gruenberg.

   STATEMENT OF THE HONORABLE MARTIN J. GRUENBERG, CHAIRMAN, 
          FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC)

    Mr. Gruenberg. Thank you, Mr. Chairman. Chairman McHenry, 
Ranking Member Waters, and members of the committee, I am 
pleased to appear at today's hearing on oversight of prudential 
regulators.
    The U.S. banking industry has proven to be quite resilient, 
despite the period of stress earlier this year. In the second 
quarter, key banking industry measures of performance remained 
favorable. Net income remained high by historical measures, 
asset quality measures were stable, and the industry remained 
well-capitalized. However, banks reported lower net interest 
margins and higher funding pressures for a second consecutive 
quarter. Higher market interest rates caused market values for 
debt to generally fall during the second quarter, resulting in 
higher unrealized losses on securities.
    In the second quarter, uninsured deposits declined by 2.5 
percent. That is a significant slowing from the 8-percent 
decline reported in the first quarter. By contrast, insured 
deposits increased by 0.8 percent during the second quarter, 
and also, in the second quarter, depositors sought higher 
yields, often at non-bank financial institutions, particularly 
money market mutual funds. Many banks have increased deposit 
rates to compete, resulting in a higher cost of funds.
    The banking industry continues to face significant downside 
risks from the effects of inflation, rising market interest 
rates, and geopolitical uncertainty. The economic outlook 
remains uncertain, despite relatively solid growth and low 
unemployment so far this year. These risks could cause credit 
quality and profitability to weaken, loan growth to slow, 
provision expenses to rise, and liquidity to become more 
constrained. Commercial real estate loan portfolios, 
particularly loans backed by office properties, face challenges 
when loans mature as demand for office space remains weak and 
property values continue to soften. Banks have tightened 
underwriting standards over the past year across a range of 
household and business loans, and they may continue to tighten 
further this year.
    The failure of three large regional banks this spring 
demonstrated the risk to financial stability that large 
regional banks can pose. The FDIC, along with the Federal 
Reserve, and the OCC, proposed rulemakings that would enhance 
the resilience and improve the resolvability of large regional 
banks. These include a long-term debt proposal that would 
require a layer of loss-absorbing capacity at large banks to 
take losses before uninsured and insured depositors, thus 
decreasing the incentive for uninsured depositors to run, and 
mitigating the need for a systemic risk exception in a future 
failure.
    In July, the banking agencies issued a notice of proposed 
rulemaking (NPRM) for Basel III. The proposal is a continuation 
of the Federal banking agencies' efforts to revise the 
regulatory capital framework for our largest financial 
institutions following the global financial crisis of 2008. 
Notably, it does not apply to community banks. The NPRM would 
make important changes to address capital weaknesses identified 
in the 2008 financial crisis, enhance the resilience and 
stability of the banking system, and enable the system to 
better serve the U.S. economy.
    In addition, the FDIC is undertaking a comprehensive review 
of a supervision program with a focus on interest rate risk, 
unrealized losses on securities and loans, uninsured deposits, 
rapid growth, and the need, when necessary, to escalate 
supervisory matters and take action to compel compliance. In 
October, the banking agencies adopted a final rule to 
strengthen and modernize the Community Reinvestment Act (CRA), 
and in my written statement, I provide an overview of the 
Deposit Insurance Fund and an update on our resolution on asset 
sale activities.
    In closing, I would like to address a recent news report 
regarding incidents of sexual harassment and misbehavior at the 
FDIC. As I have indicated, I am personally disturbed and deeply 
troubled by the report. The FDIC is conducting a comprehensive 
review, including engaging an independent third party, to 
ensure that we understand the nature of the issues, and we will 
take all appropriate actions to address them. Let me underscore 
that I have no higher priority than to ensure that all FDIC 
employees are in a safe environment where they feel valued and 
respected.
    Thank you very much, Mr. Chairman. I will be glad to answer 
questions.
    [The prepared statement of Chairman Gruenberg can be found 
on page 52 of the appendix.]
    Chairman McHenry. I now recognize Mr. Hsu.

    STATEMENT OF MICHAEL J. HSU, ACTING COMPTROLLER OF THE 
   CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY (OCC)

    Mr. Hsu. Thank you, Mr. Chairman. Chairman McHenry, Ranking 
Member Waters, and members of the committee, I am pleased to 
testify today to provide an update on the activities underway 
at the OCC.
    Despite the significant market stresses earlier this year 
and a challenging interest rate environment, the overall 
condition of the Federal banking system is sound. OCC-
supervised banks, in the aggregate, have strong levels of 
regulatory capital and healthy levels of profitability, while 
maintaining sufficient liquidity buffers. The OCC engages 
directly with the institutions it supervises to ensure that 
they are being vigilant in managing their risks.
    Our recently-released Fiscal Year 2024 Bank Supervision 
Operating Plan summarizes the agency's examination priorities 
for next year and highlights asset liability management, credit 
risk and allowance for credit losses, cybersecurity, 
operational risk, and consumer compliance risk, among others, 
as key areas of focus. My written statement provides an update 
on the agency's work in advancing its key priorities: guarding 
against complacency, reducing inequality, adapting to 
digitalization, and managing climate-related financial risks at 
the largest banks. I will highlight some of these efforts.
    Despite the relative calm in the market today, the OCC has 
urged the bank's supervisors to stay on the balls of their feet 
with regards to risk management. To assist banks, the OCC has 
updated guidance for the industry. For example, in response to 
increasing risk in commercial real estate, the OCC and other 
regulators published the Policy Statement on Prudent Commercial 
Real Estate Loan Accommodations and Workouts, which updates 
existing interagency supervisory guidance on CRA loan workouts, 
and reminds banks to work prudently and constructively with 
creditworthy borrowers during times of financial stress, 
ensuring that financial services are offered responsibly and 
fairly, which requires continued effort and vigilance by banks, 
regulators, and other stakeholders.
    On October 24th, the Federal banking agencies issued an 
interagency final rule implementing the Community Reinvestment 
Act (CRA). The CRA was enacted in 1977 to prevent redlining and 
encourage banks and savings associations to help meet the 
credit needs of the communities in which they operate, 
especially low- and moderate-income individuals and 
neighborhoods.
    The final rule modernizes the CRA by recognizing banking 
activities that take place beyond the physical branches and 
ATMs, being significantly more data-driven and objective, and 
providing for greater transparency. It strengthens the CRA by 
addressing concerns related to grade inflation and CRA ratings 
by better incentivizing CRA lending and investments in low- and 
moderate-income (LMI) communities. The rule tailors evaluations 
and data collection to bank size, so that community banks do 
not have additional burdens.
    Banks' relationships with third parties, including 
financial technology companies, continue to expand. The use of 
third parties has significant potential benefits, but poor 
third-party risk management can hurt consumers, weaken banks, 
and contribute to an unlevel playing field. Recently, the OCC 
and other regulators jointly issued interagency guidance on 
third-party risk management, reminding banks of their 
responsibility to operate in a safe and sound manner, and in 
compliance with applicable laws and regulations, regardless of 
whether their activities are performed in-house or outsourced.
    The OCC also recognizes the considerable interest by the 
banking industry in artificial intelligence (AI). To date, 
banks have generally approached machine learning and AI 
cautiously across a range of use cases. The potential benefits 
of more widespread adoption of AI are significant, but so are 
the risks, which is why we expect banks to continue to manage 
it appropriately. In the digital asset space, attention is 
shifting from crypto to the tokenization of real-world assets 
and liabilities. In contrast to crypto, tokenization is driven 
by solving real-world settlement problems, and can be developed 
in a safe, sound, and fair manner. Next February, the OCC will 
host a public symposium on tokenization to take stock of 
developments, help enable strong foundations, and promote 
public discussion.
    This fall, the OCC, along with the Federal Reserve and the 
FDIC, approved the Principles for Climate-Related Financial 
Risk Management for Large Financial Institutions. The 
Principles are focused exclusively on risk management and do 
not tell bankers what customers or businesses they may or may 
not bank, but simply clarify how large banks can maintain 
effective risk management and keep their balance sheet sound so 
they can continue to be a source of strength to their customers 
and communities in a range of severe weather scenarios.
    In closing, the OCC continues to be engaged in a range of 
efforts to ensure that OCC-supervised banks operate in a safe, 
sound, and fair manner, meet the credit needs of their 
communities, treat all customers fairly, and comply with laws 
and regulations now and in the future. Thank you. I would be 
happy to answer your questions.
    [The prepared statement of Acting Comptroller Hsu can be 
found on page 90 of the appendix.]
    Chairman McHenry. I will now recognize Chairman Todd 
Harper.

 STATEMENT OF THE HONORABLE TODD M. HARPER, CHAIRMAN, NATIONAL 
               CREDIT UNION ADMINISTRATION (NCUA)

    Mr. Harper. Chairman McHenry, Ranking Member Waters, and 
members of the committee, thank you for the invitation to 
discuss the recent work of the National Credit Union 
Administration. My remarks here will focus on the state of the 
credit union system and two legislative requests.
    During the last year, the credit union system has largely 
remained stable in its performance and resilient against 
economic disruptions. At the end of the second quarter, the 
system had $2.2 trillion in assets and $1.5 trillion in loans 
outstanding, and the system's aggregate net worth ratio was 
10.6 percent, well above the 7-percent well-capitalized 
leverage ratio required by statute. The Share Insurance Fund 
also continues to perform well, with no premiums expected at 
this time. And to better position the Fund's liquidity in the 
current economic environment, the NCUA has increased overnight 
investments to $4 billion.
    Nevertheless, we should pay attention to several emerging 
issues and trends. Net charge-off ratios at credit unions have 
risen over the last year and the annualized returns on average 
assets have declined slightly. Increasing liquidity, interest 
rate, and credit default risks have also led to a drop in 
composite CAMELS (capital adequacy, asset quality, management, 
earnings, liquidity, and sensitivity) code ratings to 3's, 4's 
and 5's. Assets and CAMEL codes at three institutions, for 
example, increased sizably in the second quarter, especially 
among complex credit unions with more than $500 million in 
assets.
    Ultimately, the data from the first half of the year reveal 
a tale of two types of credit union members. The first type are 
those who have shifted their share-saving deposits to share 
certificates to capitalize on better rates, and all-time 
deposits have increased approximately 70 percent during the 
last year. Unless carefully managed, this switch from low-
paying to higher-yielding accounts can expose credit unions to 
greater interest rate and liquidity risks.
    And the second type of members are those with growing 
financial difficulties. Delinquency rates amongst most loan 
types are rising. Credit card balances are elevated and higher 
than what we should expect in the typical second quarter, and 
balances on home equity lines of credit and other second liens 
have increased by a third during the last four quarters. In 
some cases, those increases may indicate household financial 
stress. Consequently, credit unions must carefully manage their 
credit risks going forward. Early intervention at the onset of 
a delinquency can improve the credit union members' financial 
footing and prevent a charge-off.
    The current economic environment also underscores the 
importance of the NCUA's Central Liquidity Facility, or CLF for 
short, as a liquidity shock absorber. As of September 30th, the 
CLF had $19.8 billion in lending capacity. This figure 
contrasts sharply with 9 months earlier, when the CLF had $27.5 
billion in lending capacity. This sizable contraction resulted 
from the exploration of temporary statutory enhancements that 
facilitate the agent member access of corporate credit unions. 
To address this exploration and growing liquidity risks, the 
NCUA Board has unanimously requested that Congress restore the 
CLF's corporate credit union and agent member provisions, which 
the Congressional Budget Office (CBO) has scored at no cost to 
the taxpayer.
    Additionally, it remains the policy of the NCUA Board to 
restore the NCUA's authority to examine and supervise third-
party vendors. The Government Accountability Office (GAO), the 
Financial Stability Oversight Council (FSOC), and the NCUA's 
Office of Inspector General have all recommended this reform. 
Vendor authority would allow the NCUA to gain a better 
understanding of the risks present in the credit union system 
and to close a growing regulatory blind spot. And such 
legislation would reduce the compliance costs, due diligence 
burdens, and future Share Insurance Fund premiums for credit 
unions.
    In sum, the NCUA stands ready to address the impact of the 
evolving risks within the credit union system, including 
growing liquidity, interest rate, and credit risks. The NCUA 
will also continue to coordinate with other financial 
regulators to ensure the overall resiliency and stability of 
our nation's economy.
    That concludes my remarks. I look forward to your 
questions.
    [The prepared statement of Chairman Harper can be found on 
page 78 of the appendix.]
    Chairman McHenry. Thank you all for your testimony. We will 
now turn to Member questions, and I will recognize myself for 5 
minutes.
    I reached out to all of your agencies via letter about the 
influence of global governance bodies, in particular, the Basel 
Committee on Banking Supervision (BCBS), the Bank for 
International Settlements (BIS), and the Network for Greening 
the Financial System (NGFS).
    Vice Chair Barr, are Federal Reserve officials and staff 
from the Board and from district banks compensated when they 
attend these meetings abroad?
    Mr. Barr. Sorry, sir. I couldn't hear the last part of your 
sentence. Are officials what?
    Chairman McHenry. Compensated.
    Mr. Barr. The staff at the agencies who conduct all of the 
activities on behalf of the agencies receive their----
    Chairman McHenry. Let me ask this again: When you attend 
any of these three international governance bodies, meetings 
with them, are you compensated, and are Board Members of the 
Fed compensated?
    Mr. Barr. We are compensated by the Federal Reserve for 
conducting all of our----
    Chairman McHenry. But not from these global bodies? You 
would not receive a payment from the Basel Committee or from 
the Bank for International Settlements?
    Mr. Barr. No. When we participate on behalf of the Federal 
Reserve, we are compensated by the Federal Reserve.
    Chairman McHenry. Okay. So, there is no additional income 
that would come from those meetings?
    Mr. Barr. No.
    Chairman McHenry. Acting Comptroller Hsu, how is Treasury's 
and your office's work with global governance bodies 
documented?
    Mr. Hsu. How is it documented? I am not sure. We keep 
track, obviously, of what people are doing in terms of 
participation in these bodies, and all of that goes through the 
appropriate procedures internally, making sure it is all 
appropriate and aligned with our mission, which is focused on 
safety and soundness and fairness. I apologize--I am not sure 
what you are asking.
    Chairman McHenry. So, you attend the Basel meeting?
    Mr. Hsu. Correct.
    Chairman McHenry. You make decisions there. What is the 
reporting mechanism for Congress to know your actions there? 
Are there reports held internally?
    Mr. Hsu. The agendas of the meetings are something that are 
actively discussed and shared within the agency and across 
agencies to the extent that we attend these things together. I 
think that may be the closest to what your----
    Chairman McHenry. Yes, is there paperwork, and where would 
that paperwork be held?
    Mr. Hsu. We have records retention requirements, and we 
abide by all of those.
    Chairman McHenry. And is that the same for you, Mr. Barr, 
for the Fed?
    Mr. Barr. With respect to retention of records, yes, we 
retain all government records.
    Chairman McHenry. Of meetings with these international 
bodies?
    Mr. Barr. Of any activity----
    Chairman McHenry. So, if we had document requests, you all 
would provide those to us?
    Mr. Barr. We would be happy to work with you and your staff 
on any document requests, as we usually do.
    Chairman McHenry. Okay. Is there compensation for your 
participation in these international bodies, Mr. Hsu?
    [Nonverbal response.]
    Chairman McHenry. These are the things that we don't know. 
They have not been attested to previously.
    Vice Chair Barr, about the Federal Reserve Board's 
announced results of the 2023 stress test in June of this year, 
you concluded, and the report confirmed, that the banking 
system remains strong and resilient. What economic analysis did 
you conduct to support the significant change in capital 
requirements that you are proposing?
    Mr. Barr. Thank you, Mr. Chairman. The preamble to the rule 
and the rule itself discusses in detail the analysis that went 
into each provision of the rule with respect to risk 
calculation. The rule is designed to improve the calibration of 
risk for things like trading activity and operational risks, 
and improve the calibration of our standardized approach with 
respect to credit risk, and the details of that are discussed 
in the rule.
    Chairman McHenry. But those are objectives, and you 
outlined the objectives. I am asking for economic analysis. 
When we met, this is what I said I was going to ask you about.
    Mr. Barr. Yes, in the rule itself, we went through in 
detail for each calibration why we thought the calibration was 
appropriate. And then for the rule as a whole, the rule 
addresses the economic costs and benefits of the approach and 
finds that the economic benefits of reducing risk----
    Chairman McHenry. Certainly they do, as all agencies do. 
They conduct an economic analysis and say the benefits far 
exceed the costs, but there is no math you provide in that 
report that justifies your actions. These are political 
decisions you are making--that is my view of it--without any 
backup economic analysis. That is what the public is to 
conclude.
    Mr. Gruenberg, there is a lot of discussion about your 
agency. I was just wondering, since you have run the agency, 
have been there for 20 years, have you ever been investigated 
for inappropriate conduct during your time at the FDIC?
    Mr. Gruenberg. No, Mr. Chairman.
    Chairman McHenry. Well, I appreciate your candor. I believe 
the workplace culture starts at the top.
    With that, I will go to the ranking member, Ms. Waters.
    Ms. Waters. Thank you very much, Mr. Chairman. Chairman 
Gruenberg, it was troubling to learn of the sexual harassment 
reports stretching back more than a decade at the FDIC, with 
many of those harmed feeling like they had nowhere they could 
turn to get help. It was reported that you have launched a 
comprehensive review, and you had an independent firm 
contribute to that effort. But what other steps is your agency 
taking today to ensure that all employees understand that it 
really is a top priority to provide a safe work environment, 
and to hold individuals who engage in these shameful acts of 
harassment, misogyny, and discrimination fully accountable for 
their misdeeds?
    Mr. Gruenberg. Thank you, Congresswoman, for that question. 
This is the top priority for the FDIC now to get a handle on 
these issues and address them effectively. As I indicated, I 
was deeply disturbed and troubled. It is quite clear that there 
have been FDIC employees who have experienced horrendous 
treatment, and it needs to be addressed because it is 
completely unacceptable. You indicated we have engaged an 
independent third party to do an agency-wide review, both of 
our Washington offices and our regional and field offices. And 
in addition, we will be looking at all of our policies and 
procedures to ensure that they are as easy as possible for any 
employee who believes that they have experienced improper 
conduct to file a complaint, and file it securely, and to know 
that they will be protected, as well as looking at our 
processes for holding individuals who engage in misconduct 
accountable based on the facts and the law.
    Ms. Waters. Thank you, Chairman Gruenberg. Would you commit 
to providing us with a detailed written plan on the steps the 
FDIC plans to take to address this issue in the next 15 days, 
as well as a written report of the findings from your 
comprehensive review of the matter when that concludes?
    Mr. Gruenberg. Yes, Congresswoman, we would be glad to do 
that, and to be entirely transparent with you and the committee 
as we proceed here.
    Ms. Waters. Thank you. I fear we would be naive to think 
these cases are isolated to the FDIC. So, Vice Chairman Barr, 
Chair Harper, and Acting Comptroller Hsu, would you each commit 
to developing a written plan that you will send to us in 15 
days describing how your agency will review your sexual 
harassment policies and procedures, as well as engage with your 
workers and outside experts to identify steps your agency can 
take to better ensure that you have a safe workspace where all 
workers are respected, and have meaningful ways to get help 
when they have been harmed?
    Vice Chair Barr?
    Mr. Barr. We would be happy to provide the committee with 
our detailed policies and procedures. We have strict procedures 
on these matters, and we would be happy to provide those to the 
committee.
    Ms. Waters. In 15 days?
    Mr. Barr. Yes.
    Ms. Waters. Thank you. Chair Harper?
    Mr. Harper. In recent years, the NCUA has worked to 
strengthen its anti-harassment policies, including for sexual 
harassment, and we will provide those policies and procedures 
and look at what more we can do.
    Ms. Waters. In 15 days?
    Mr. Harper. In 15 days.
    Ms. Waters. Thank you. Acting Comptroller Hsu?
    Mr. Hsu. Yes. Absolutely, yes.
    Ms. Waters. And you will do what?
    Mr. Hsu. We will do everything that you requested in terms 
of the commitment to review everything that we have----
    Ms. Waters. In how many days?
    Mr. Hsu. In 15 days.
    Ms. Waters. Thank you. Fair enough.
    With that, I yield back.
    Chairman McHenry. Well, it is good to know these agencies 
can comply quickly with oversight requests, if only universal. 
We will now go to the Vice Chair of the committee, Mr. Hill, 
for 5 minutes.
    Mr. Hill. Thank you, Mr. Chairman. Gosh, that is so 
inspirational. I may start straight away with Chairman 
Gruenberg. You have bank merger and acquisition applications 
pending before your agency. Could you provide us a list of 
those pending applications?
    Mr. Gruenberg. We would be glad to, Congressman.
    Mr. Hill. And also just note on there how long since their 
application was accepted; I just want to know the length of 
time. Thank you so much.
    And, Mr. Harper, on the same sort of topic of just 
information, I was looking at the statistics last year, and 
there have been 16 banks bought by credit unions in the last 
year. That is of interest to both sides of the dais up here on 
what that means. Are these taxpaying companies that are now 
converted to non-taxpaying cooperatives? Do they convert their 
deposits to shares? I don't think there is enough information 
for this committee. Could you send me a memo on that?
    Mr. Harper. We would be happy to.
    Mr. Hill. That would be very helpful. Thank you.
    Comptroller Hsu, you are aware the committee has been 
working on stablecoin legislation under Chairman McHenry's 
leadership and Ranking Member Waters' leadership for a couple 
of years now, and your staff has been really helpful, and I 
want to say thank you for that. Congress gave the OCC the 
authority to charter non-depository trust banks that limit 
operations to just those of a trust company and related 
activities. Under existing laws, a national trust bank can 
issue stablecoins, and the OCC clearly has the legal authority 
to charter such a bank. Do you agree with that?
    Mr. Hsu. I agree with the authority. It has to be done in a 
safe, sound, and fair manner. Those are the standards for any 
national bank, Federal savings association.
    Mr. Hill. Right. There are 60 or so of those non-depository 
trust companies under your charter authority. Isn't that right?
    Mr. Hsu. I would have to look at the details, but that 
sounds about right.
    Mr. Hill. Yes. And as the primary Federal regulator for 
those, do you think the OCC staff, exam team and supervisory 
team, are capable of supervising if they were to issue 
stablecoins? Do you think you are competent at doing that?
    Mr. Hsu. The staff is extremely capable, yes.
    Mr. Hill. Very good. I think you do have that obligation to 
make sure they operate in a safe and sound manner, but I have 
heard some controversy that somehow you can't do that 
effectively. And I think you probably can, so I wanted to 
verify that with you.
    Let me stick with you. The SEC has a new custody rule, 
which has concerned, again, Members on both sides of this dais. 
And under that rule, bank custodians now have to hold client 
cash off-balance sheet. Isn't that a fundamental shift in 
practice with the material impact on bank balance sheets, if 
that were to be implemented?
    Mr. Hsu. Yes. It would be a shift.
    Mr. Hill. Have you considered how mandatory cash 
segregation as proposed by the SEC would impact bank 
operations?
    Mr. Hsu. We have looked into it, yes.
    Mr. Hill. Do you agree with the SEC's approach?
    Mr. Hsu. We have some concerns.
    Mr. Hill. You have some concerns.
    Vice Chair Barr, do you share those concerns with the SEC's 
approach to this custody rule?
    Mr. Barr. I think it would be a significant change in 
custody practices at banks. We have shared that with the SEC.
    Mr. Hill. Yes. I think many here on this panel have. We 
just don't really understand, and we know they are all chasing 
their concerns about digital assets, but they have swept up the 
whole common law and State statutory and Federal statutory 
custody practices, and I personally oppose it quite 
significantly. I think it is, I would use a technical term, 
``dumb,'' the way they describe their rule.
    Vice Chair Barr, in August, Mr. McHenry, Mr. Huizenga, and 
I sent a letter about the novel activities rule, and you were 
very prompt in helping send your staff up to brief our staff on 
how that is working. I want to talk a little bit about the 
intent of that. First, does the Fed plan on responding to our 
letter that we sent you?
    Mr. Barr. Mr. Hill, if we haven't responded to your letter, 
then we will certainly respond. I am not aware of the status of 
the correspondence.
    Mr. Hill. Okay. Tell me about this nonobjection status. If 
it proves to disincentive member banks from participating in 
stablecoin activities or other fintech activities, isn't that a 
problem? We want innovation in our banking system.
    Mr. Barr. We definitely want innovation in our banking 
system. Innovation has been critical to having a thriving 
financial sector and a thriving economy. We want to do that in 
a way that makes sure we provide clarity and certainty to banks 
participating in novel activities, with clear guardrails on 
safety and soundness and consumer protection.
    Mr. Hill. I would ask you to follow up with the letter and 
follow up with this idea of the justification you have for the 
risk to the safety and soundness. There were no footnotes. 
There was no detail. Obviously, it was a very short letter to 
Members, so if you could follow up in writing, I would 
appreciate it. I yield back. Thank you, Mr. Chairman.
    Chairman McHenry. We will now go to the gentlewoman from 
New York, Ms. Velazquez, who is also the ranking member of the 
House Small Business Committee, for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman. Vice Chair Barr, 
you and I spoke recently about the Basel III proposal's 
potential impact on small business lending. While I am 
supportive of the reforms, I am always concerned about the 
ability of small businesses to access capital. What economic 
analysis has the Fed conducted to ensure small business lending 
won't be constricted or that the cost of origination won't 
dramatically increase because of this proposal, particularly in 
a high interest rate environment?
    Mr. Barr. Thank you, Congresswoman, for the question. We 
agree that we want a thriving small business sector. Small 
businesses are the lifeblood of their local communities. The 
rule that we have proposed would not make significant changes 
with respect to the cost of credit for small businesses. Under 
the proposal, small businesses would have, generally speaking, 
the same risk weight that they have under current rules, but it 
would provide the ability for small businesses to have a lower 
risk weight if they meet specified criteria.
    Ms. Velazquez. And have you factored in the interest rate 
environment today?
    Mr. Barr. We are trying to develop a proposal and then 
finalize a rule that would be appropriate throughout the 
economic cycle.
    Ms. Velazquez. Have you met with any financial institutions 
covered by this proposal about the potential impact on their 
small business lending portfolios?
    Mr. Barr. We do welcome comments from all banks. We have 
met with banks on the proposal, and we have met with other 
members of the public, and we welcome those comments.
    Ms. Velazquez. And if presented with credible evidence from 
these institutions about any potentially negative effects when 
it comes to their small business lending portfolios 
specifically, would the Fed be open to adjusting the proposal?
    Mr. Barr. We are open to all kinds of improvements to the 
rule. We welcome comments on the rule. We want to make sure we 
get the proposal right. We would welcome that input.
    Ms. Velazquez. Vice Chair Barr, as you know, 40 percent of 
all small business loans are originated by community banks, and 
just to be clear, so there is no disagreement, community banks 
are exempt from this proposal, correct?
    Mr. Barr. That is correct. Community banks are exempt from 
this proposal. It only covers the top 37 banks in the country.
    Ms. Velazquez. Thank you. Chair Gruenberg, when you and 
your colleagues appeared before this committee in May, you 
stated that it was realistic to believe that a notice of 
proposed rulemaking on Section 956 of the Dodd-Frank Act would 
be released by the end of the year. Is that still your 
expectation?
    Mr. Gruenberg. Congresswoman, I don't know if we are going 
to be able to act on that by the end of this year. I will tell 
you that this is a joint rulemaking involving six agencies. It 
has had intense principal-level attention of all six agencies. 
I think we are in general alignment, and I think we are going 
to move toward a re-proposed rule. It may not come until the 
early part of next year to get everybody----
    Ms. Velazquez. Hasn't that been the case for the last 12 
years?
    Mr. Gruenberg. Yes. No, I understand, believe me.
    Ms. Velazquez. As I have said to each of you before, the 
statute requires a completed rulemaking within 9 months, and it 
has been 12 years. And just so you are all aware, I will 
continue asking for updates on this at every future hearing 
until the rule is written. It is well past time you get this 
done.
    Thank you, Mr. Chairman. I yield back.
    Chairman McHenry. We will now go to the gentleman from 
Texas, Mr. Sessions, for 5 minutes.
    Mr. Sessions. Mr. Chairman, thank you very much. Mr. 
Chairman, there has been a lot of discussion this morning about 
the integrity of these organizations that sit in front of you. 
I would like to put into the record a copy of a Wall Street 
Journal article that more specifically outlines----
    Chairman McHenry. Without objection, it is so ordered.
    Mr. Sessions. ----what this is, and I find it 
incomprehensible that someone would really not be able to 
understand this and put an immediate response out, but, rather, 
to hire somebody outside and ask that they look at the whole 
organization. It may take months and months rather than issuing 
a direct response to that. And, Mr. Chairman, I do know that 
Ranking Member Waters was most explicit to ask for that back in 
15 days. I want to thank her for that because I think she, like 
this whole committee, is disgusted at that performance level. 
Not making friends and success with your employees is a 
difficult task.
    Gentlemen, I am looking at the OCC Bulletin 2023-29, issued 
August 29, 2023, ``Long-Term Debt Requirements for Large Bank 
Holding Companies, Certain Intermediate Holding Companies of 
Foreign Banking Organizations, and Large Insured Depository 
Institutions: Notice of Proposed Rulemaking.'' And as I go 
through this, not for the first time, but the first time in a 
couple of days--as I look at this, it is rather extensive. You 
are telling them how to run their bank. You are even giving 
them, in some instances, several years to get where you want to 
go. I have a problem with this, when I believe the 
organizations that might be the Fed and the FDIC Boards might 
not even agree with this. What was their feedback for you 
before you issued on August 29, 2023, Mr. Gruenberg?
    Mr. Gruenberg. The feedback from the institutions?
    Mr. Sessions. From the FDIC Board?
    Mr. Gruenberg. Oh. I believe our Board actually voted 
unanimously in favor of this proposal. It had been the subject 
of a long, deliberative process. We actually had an advance 
notice of proposed rulemaking, I think back in 2022, to seek 
comments on the whole concept before initiating a rulemaking 
process.
    Mr. Sessions. So, this long discussion was back in, let's 
say, March?
    Mr. Gruenberg. No, it actually preceded that, Congressman.
    Mr. Sessions. It actually preceded that, and the catalyst 
for moving forward from these discussions was in March?
    Mr. Gruenberg. No. I think it perhaps reinforced the value 
of considering the proposal, but I think it is something that 
the three agencies, certainly the Fed and the FDIC, have been 
focused on previously. We were concerned before the events this 
spring.
    Mr. Sessions. Concerned because of instability?
    Mr. Gruenberg. No, about the challenges relating to the 
failure of a large regional bank. We had been very focused on 
that in the past.
    Mr. Sessions. Did your regular reviews of these banks also 
come up with that conclusion? You are in institutions every 
day.
    Mr. Gruenberg. Yes.
    Mr. Sessions. You started seeing something when you would 
come in and your examiners would be there, and that is what led 
you to this conclusion?
    Mr. Gruenberg. It was an issue really relating to the 
resolvability of these institutions and how they could be 
resolved in an orderly way, minimizing costs to the Deposit 
Insurance Fund, and focused, prior to the events of this 
spring, on the risks related to concentrations of uninsured 
deposits at large regional banks, and the value of having a 
buffer of long-term debt held at these institutions because----
    Mr. Sessions. That would mean they would then move back on 
their lending ability and save more, in essence, as a buffer 
against what might be that risk?
    Mr. Gruenberg. No, we didn't see an impact on lending. What 
we did see was replacing----
    Mr. Sessions. But if you are requiring them to hold more, 
wouldn't that mean that there is less available for them for 
growing the economy?
    Mr. Gruenberg. Again, Congressman, this is not capital. It 
is a debt instrument and, in effect, long-term debt would 
replace some of the uninsured deposits that have a higher 
liquidity risk. This would be longer-term debt, and then 
longer-term debt would take losses ahead of uninsured and 
insured deposits----
    Chairman McHenry. The gentleman will finish the answer in 
writing for the record.
    Mr. Gruenberg. If I may, and had reduced the run risk of 
the uninsured deposits, which we actually obviously saw earlier 
this year and also would reduce the resolution process.
    Chairman McHenry. Okay. The gentleman's time has expired. 
We will now go to Mr. Sherman.
    Mr. Sessions. Thank you, Mr. Chairman.
    Chairman McHenry. Chair Gruenberg, if you would finish 
answering in writing for the record, we would appreciate that.
    We will now go to Mr. Sherman of California, and then, I 
think we will get one or two more questioners in before we have 
to go to the Floor. Mr. Sherman?
    Mr. Sherman. I am surprised to hear Republicans criticizing 
you for visiting Europe, because European standards are lower 
than American standards and more in tune with what they are 
advocating for you to adopt. If our standards are too low, we 
end up with bailouts and bankruptcies, but if our standards are 
unnecessarily high, we slow economic growth. It concerns me to 
hear your opening testimony when you describe how these 
regulations are a response to the 2008 crisis. It is a little 
late to be writing regulations in response to the 2008 crisis.
    The question is, will I still be alive when you write 
regulations responding to the 2023 crisis? And that 2023 crisis 
is a direct result of you underestimating the problems of 
interest rate risk. You worked hard on these regulations, but 
as I will point out to you, they discriminate against the 
environment, they discriminate against first-time homebuyers, 
and they discriminate against small businesses. One of the ways 
they discriminate against small businesses is that with a small 
business, the bank has very little interest rate risk, their 
short-term loans, or their adjustable rate. You buy a 30-year 
bond that might be very creditworthy, might not have any credit 
risk. It has all that interest rate risk.
    I am flabbergasted that it has taken until now for you to 
propose regulations to say that banks have to recognize 
unrealized losses on held-for-sale securities. It is 
flabbergasting to think that you would take an asset that the 
bank paid a million dollars for, that the market tells you it 
is worth only $600,000, and count it as a million dollars, but 
half of the securities are in that hold-to-maturity account. 
And you are not doing anything about it or any of you thinking 
of causing banks to recognize unrealized losses. And I urged 
this when you were here back in March, just a few days after 
Silicon Valley Bank, on all mark-to-market, the losses on all 
securities. Are any of you considering that? Mr. Barr?
    Mr. Barr. Thank you, Mr. Sherman. You raise an important 
question. First of all, as I said at the beginning, we are open 
for comments on all of the issues that you have raised, 
otherwise----
    Mr. Sherman. You have just heard my comments.
    Mr. Barr. And with respect to unrealized losses, the 
proposal is focused on available-for-sale securities, as you 
point out; it is the rule we have for G-SIBs. We don't have 
that for other large banks. This would apply that approach to 
other large banks.
    Mr. Sherman. Okay. You are doing a tiny step forward when 
you had a massive crisis thought to be a risk to our entire 
economy, and you invoke that law, and you are taking this tiny 
step. And you are leaving on the balance sheet assets at a 
million dollars that you know are worth $600,000, but in doing 
so, you are discriminating against small businesses. Every time 
a bank is incentivized to buy that long-term debt on a 
securities market, that is money they can't lend to a local 
pizzeria.
    Speaking of discriminating against, I mentioned first-time 
homebuyers, and first-time homebuyers often need mortgage 
insurance. Your current rules recognize that mortgage insurance 
may not be perfect, but it is useful. Can any of you raise your 
hand if you want to defend the idea of having a zero value for 
mortgage insurance?
    [No response.]
    Mr. Sherman. I see no hands going up.
    Mr. Barr. Mr. Sherman, just to clarify, under the proposal 
our treatment of private mortgage insurance doesn't change, so 
it is the same approach now. Under our guidelines, private and 
mortgage insurance can be one factor----
    Mr. Sherman. Can be one factor.
    Mr. Barr. ----of several factors that contribute to a 
mortgage being considered prudently under----
    Mr. Sherman. I would hope that you would write your 
regulations more clearly, because many people have written 
them. I believe that you are going to assign a zero value and 
if you intend to do otherwise, Congress spends a lot of money 
providing these clean energy credits, and you undermine their 
value. You undermine congressional policy. With the tax equity 
investments, you are going to go from 100 percent to 400 
percent, making them far less valuable to banks. Is there 
anyone here who thinks that is in the interest of the 
environment? Yes?
    Mr. Gruenberg. If I may just comment, Congressman, that is, 
in essence, the reason we have a comment period. We have 
received a lot of thoughtful comments on this subject, and we 
are going to give them careful consideration in the final rule.
    Mr. Sherman. I am glad you are hearing our comments, and I 
hope that you would have stress tests that look at interest 
rates going up and down. That is the lesson of 2023. I yield 
back.
    Chairman McHenry. The gentleman yields back. A novel 
concept of both up and down. We will now go to the gentleman 
from Missouri, Mr. Luetkemeyer, for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. And welcome to 
our guests this morning. Perhaps the greatest threat to our 
financial stability is our economic ties to China and the 
Chinese Communist Party (CCP). Recently, I met with a market 
expert about this unlikely scenario that China will invade 
Taiwan by 2027 and the U.S. sanctions that will immediately be 
put on those folks, and will follow that action. His analysis 
shows that our market will immediately drop 50 to 80 percent. I 
understand none of you are directly responsible for U.S. 
sanctions policy, but the effects of those sanctions will have 
a direct impact on the American institutions that you regulate.
    Mr. Hsu, how often do you meet with Treasury Secretary 
Yellen, Department of Defense officials, intelligence 
officials, and leaders of industry to develop a plan that will 
mitigate the fallout from this apparent inevitability?
    Mr. Hsu. There are regular conversations at different 
levels to assess risks to the banking system, and those span a 
range of topics. Sometimes, it is through discussions about 
cybersecurity, which is often the focus for a lot of those 
kinds of interactions, but they also span some of the issues 
that you are talking about.
    Mr. Luetkemeyer. Okay. Do you put together a plan? Are you 
working with our allies with regards to a set of sanctions that 
will be put in place whenever the Chinese invade?
    Mr. Hsu. Our expectation is that banks are prepared for a 
range of scenarios, especially those banks with global 
operations that may be impacted by issues such as----
    Mr. Luetkemeyer. Okay. My question is, and I have asked 
this question to Treasury Secretary Yellen and Fed Chairman 
Powell in this committee, and we talked to the Under Secretary 
of the Treasury the other day about this as well--should this 
happen, have we decided and are we working with a set of allies 
on the kind of sanctions that we put in place, as per what 
happened with Russia? It took us 2 or 3 months to put our 
sanctions in place. If we don't have this ready immediately, 3 
or 4 weeks is going to be too late. It is all going to be over.
    So my question is, and you have answered it with regards to 
having some discussions across-the-board, but are you putting 
in place a set of plans or a set of sanctions that you will put 
in place immediately when that action takes place?
    Mr. Hsu. Sanctions policy is not in our jurisdiction. 
Communication and coordination for the kinds of events that you 
described are critical, and we focus a lot of attention on 
ensuring that we have those channels of communication and 
coordination.
    Mr. Luetkemeyer. Okay. Mr. Harper, are you involved in 
those discussions at all?
    Mr. Harper. No.
    Mr. Luetkemeyer. Are you concerned at all about the impact 
that would have on credit unions across this country whenever 
that action takes place?
    Mr. Harper. Certainly, I am concerned about all material 
actions, regardless of the source of them.
    Mr. Luetkemeyer. Mr. Gruenberg, are you concerned about it 
at all? Are you involved in discussions about this?
    Mr. Gruenberg. You raise a critical issue, Congressman. 
There are contingency plans, but for me to respond, if you 
don't mind, I would like to get back to you. I want to be----
    Mr. Luetkemeyer. Because, as you all know, the interest 
rate risk problem that you dealt with back in March is going to 
be a teeny-tiny thing compared to what this would be. So, I 
think we need to be thinking about this in terms of how we can 
address this for the protection of our whole system, not just 
individual banks.
    Okay. Mr. Barr, last year, the Durbin debit rule was cited 
by the Government Accountability Office as causing significant 
damage to checking account access. Research is conclusive that 
merchants never lowered consumer prices in response to the 
Fed's rule, and community banks and credit unions have borne 
the brunt of this harmful regulation. I believe the number is 
98 percent of the money did not go back to consumers as they 
had promised, and, in fact, I have, from February 2011, in an 
investor call, the Home Depot CFO reported that the rule would 
increase their profits by $35 million in that year. Obviously, 
they didn't intend to give the money back either. Are you 
concerned by the result of consumers paying more for services 
and small banks having to merge or close as a result of losing 
this income stream?
    Mr. Barr. Thank you very much for the question. The rule 
does not affect community banks. The rule, as Congress 
provided, affects institutions over $10 billion in asset size. 
The Congress has directed the Federal Reserve to ensure that 
debit card interchange fees are reasonable and proportionate to 
a set of specified costs.
    Mr. Luetkemeyer. We are looking now at regular credit 
cards, sir. And with all due respect, I just got done talking 
to a bank recently that said the examiners were telling him 
that. Yes, I realize it doesn't apply to you, but it is a good 
idea if you start working on rural and start thinking about 
that. The next time I have a story like that, I want to come 
back to you, sir.
    Mr. Barr. Please, do.
    Mr. Luetkemeyer. This has to stop. Mr. Harper, are you 
concerned about that rule at all with regards to the impact on 
credit unions?
    Mr. Harper. I am not familiar with the study that you 
cited, but certainly we look at everything that does affect 
credit unions. Generally, as Mr. Barr pointed out, the rule 
applies to those institutions of $10 billion----
    Mr. Luetkemeyer. No, there is going to be a discussion 
about this. People are trying to put it together in the Senate. 
It is going to come over here. We have to put a stop to this. 
It is not the panacea that people think it is. It is going to 
be a direct cost to the consumers, and it is going to hurt the 
small banks especially, regardless of whether you think it is 
only going to be the ones over $100.
    With that, Mr. Chairman, I yield back.
    Chairman McHenry. The gentleman yields back. We will now go 
to the gentleman from Georgia, Mr. Scott, who is also the 
ranking member of the House Agriculture Committee, for 5 
minutes, and then we will break for votes.
    Mr. Scott. Thank you very much, Mr. Chairman. Vice Chairman 
Barr, I want you to know that I have some serious concerns with 
the bank capital requirements that you are proposing, not only 
with the impact it will have on our smaller farmers and their 
ability to access capital, but also on the increases to the 
costs of derivatives transactions, meaning higher prices for 
everyday consumers.
    Vice Chairman Barr, also, American companies such as 
manufacturers and airlines, in addition to our small farmers 
and retailers, all rely on derivatives to responsibly hedge 
their risk for commodity fluctuations for fuel costs, and 
interest rates increasing. This is deep into the very soul of 
our business and our total economy, and all of these inherent 
costs and imbalances impact the average consumer, so we have a 
big problem here. I fear that making these hedges more costly 
for all of these major industries--airlines, the manufacturers, 
as I mentioned--will only make the cost of goods and services, 
food prices and our grocery stores, airline tickets, gasoline 
at our station, our very everyday American households more 
expensive. So you see, I have some very pressing concerns about 
your proposal.
    Vice Chair Barr, did your analysis for the Basel III 
Endgame proposal include the impact on the broader economy if 
American companies cannot afford to hedge their risk with the 
variable tool of derivatives?
    Mr. Barr. Thank you, Mr. Scott. We do think that the 
derivatives proposals, as part of this package of capital 
reforms, will improve the resilience of banks that need to 
provide the kinds of services that you have just described. It 
is important for the economy, it is important for farmers, it 
is important for businesses, and it is important for those who 
rely on derivatives that banks can be healthy and strong in 
providing those services, and that is the reason for increasing 
resilience of the banking sector in that way.
    Mr. Scott. I have received some very pressing concerns 
about the impact of what you are doing, and are you aware of 
this? And if so, are there adjustments that you might make in 
your proposal?
    Mr. Barr. We are open for any comments on the rule, 
including with respect to derivatives and users that would help 
us better understand the costs and the benefits of the rule, 
and we are open to improving the rule in all ways.
    Mr. Scott. I hope so. And as our chairman mentioned, I am 
the ranking member of the House Agriculture Committee, as you 
may know, and our farmers are very concerned about this. I 
think you are aware of this, but it is good to hear that you 
are willing to make some adjustments, because this is of great 
concern to many people in our nation. Thank you. I yield back.
    Chairman McHenry. The gentleman yields back. We will now 
recess until votes end, which will be close to noon, but when 
two Members reappear, we will consult with both staffs and try 
to get things rolling as quickly as we can when we get back. 
With that, the committee stands in recess.
    [recess]
    Chairman McHenry. The committee will come back to order. 
Thank you all for accommodating our vote series. That should be 
the end of the vote series today.
    Chairman Gruenberg, I understand that you would like to 
correct the record?
    Mr. Gruenberg. If I may, Mr. Chairman. Thank you. You asked 
me a question earlier, and just to be specific and for 
clarification, in 2008 I was interviewed pursuant to a review 
done in response to a concern raised by an employee, and I am 
not aware of anything that came out of that review. But since 
you asked the question earlier, I just wanted to respond 
clearly for the record and would be glad to provide you with 
any additional information related to that.
    Chairman McHenry. Thank you, and thank you for consulting 
with counsel and coming back and correcting the record. Anybody 
else? I am trying to be lighthearted. Okay. We will get back to 
order here.
    Next up is the gentleman from Michigan, Mr. Huizenga, who 
is also the Chair of our Oversight and Investigations 
Subcommittee, for 5 minutes.
    Mr. Huizenga. Thank you, Mr. Chairman, and Mr. Gruenberg, I 
appreciate that clarification. You have had a long career at 
the FDIC, and a long career in Congress as a staffer on the 
Senate side. As a former staffer myself, I know sometimes that 
is both good and bad. But I was going to ask, and I am going to 
continue to ask, because many of those incidents that were 
reported in The Wall Street Journal happened under your watch--
2011 to 2018 was your first go-round at the FDIC as Chair, and 
the article listed incidents in 2013, 2015, 2017, and 2018. 
Were you made aware of the misconduct that was going on at the 
time referenced in those articles when you were Chairman?
    Mr. Gruenberg. No, Congressman. When cases like that come 
up in which there is a complaint filed and then a review done, 
an investigation done and disciplinary action taken, that will 
be done through our legal division in----
    Mr. Huizenga. So, the legal division does not talk to you 
at all? Does that seem right to you? It seems a little odd to 
me.
    Mr. Gruenberg. I think the notion is that to the extent 
these were adjudicatory matters between employees, the Board is 
generally kept out of that.
    Mr. Huizenga. Okay. I think the real question and the 
assertion behind this article is the systemic element of this. 
You initiated an independent review after that article came 
out. That was kind of interesting. In your opening statement, 
you said you have no higher priority than ensuring that FDIC 
employees work in a safe environment and feel valued. To 
Ranking Member Waters, you responded that you want to hold 
individuals accountable and, ``we will be entirely 
transparent.'' You weren't really transparent earlier, but you 
have corrected the record now on that.
    I am not going to ask you some of the salacious things that 
Senator Kennedy did, but I do intend to ask you to clarify and 
amplify what happened, I think, as you said, in 2008, because, 
Mr. Chairman, my experience is that culture starts at the very 
top. And you are saying that there were some accusations and 
reviews and presumably a report of some behavior, is that 
correct? Was there a report that was issued?
    Mr. Gruenberg. I believe so, Congressman.
    Mr. Huizenga. Okay. And you would be willing to share that, 
have us be able to go to the legal department, and Human 
Resources, and the Inspector General, and whomever else we need 
to talk to?
    Mr. Gruenberg. Yes, sir.
    Mr. Huizenga. Okay. Was there a non-disclosure agreement 
(NDA) signed with that or a settlement that was a part of that?
    Mr. Gruenberg. No, sir.
    Mr. Huizenga. So, there was no cash settlement? There was 
no nondisclosure that came out of that?
    Mr. Gruenberg. No.
    Mr. Huizenga. So, we can talk to whomever made the 
accusation as well?
    Mr. Gruenberg. Yes.
    Mr. Huizenga. Okay. I appreciate that. We intend to do 
that, so thank you for that clarification. In my remaining 
time, I want to turn to Mr. Barr. Yesterday, along with my 
colleagues, Representative Meuser and Representative Mooney, we 
sent you a letter about the totality of the rules currently 
being proposed or finalized by the Federal Reserve and other 
regulators. This is something that we talk about with the Chair 
of the SEC on a regular basis.
    As a quick example, the Basel III rule is more than 1,000 
pages long, with very little of it focused on the aggregate 
effect of these proposals on the ability of financial 
institutions to serve their customers and to support economic 
growth. Do you, or anyone at the Fed, for that matter, have a 
sense of the cumulative impact that the massive number of 
regulations that have been recently finalized or that are in 
the pipeline will have on consumers' access to bank loan 
products? And if you are not familiar with the letter, I have a 
copy here; I know it was sent yesterday.
    Mr. Barr. I did take a look at the letter very quickly, so 
I don't have a detailed response for you, but we do look at the 
overall effect of our rules. We don't anticipate that the 
capital rules that we proposed are going to have a significant 
effect on credit conditions, on lending in the United States.
    Mr. Huizenga. Who is actually doing that? Who is giving 
serious thought to all of these changes that are going to 
happen at the same time, how they will affect banks, and how 
they will fit into the economy? Is that you? Do you have 
economists who are looking at it? Who is actually providing 
that analysis?
    Mr. Barr. I am ultimately responsible for that. I do have 
many staff people who are working on analysis of all----
    Mr. Huizenga. And I think this was something that was 
pursued yesterday at the Senate. Will you share that analysis 
with us, not just what you put in the report, but the actual 
analysis that leads you to those conclusions? Will you provide 
that to us? That is what we have asked for repeatedly.
    Mr. Barr. The analysis that is in the proposal is the 
analysis that supported the rule. We will, of course, continue 
to do that work. We are gathering comments and information. We 
will analyze that, and we will make that information----
    Mr. Huizenga. That is not the answer, but I am glad to hear 
we are going to have 15-day responses, Mr. Chairman, as with 
the ranking member, and we look forward to receiving those. 
Thank you.
    Chairman McHenry. Well, the ranking member set the tempo. 
We will now go to the gentleman from Missouri, Mr. Cleaver, for 
5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman. You probably don't 
get a lot of this, but I would like to thank the Federal 
Reserve, the OCC, and the FDIC for the work that you have done 
on the CRA. I have had a chance to meet with all of you to 
discuss my concerns and also look for ways in which CRA could 
be updated and be more of a factor in affordable housing. And I 
appreciate all of the work that you have done, the 
collaboration that has occurred, and I am excited about it.
    As you know, the Trump Administration, or the OCC, had 
attempted to unilaterally impose a harmful rule that would have 
undermined the Community Reinvestment Act, and it would have 
been just a paper tiger in terms of its ability to combat 
modern-day redlining, so thank you very much for all of the 
hard work that you have done. I appreciate it very much.
    I am probably the foremost monster expert in Congress. I 
have studied them all, and Frankenstein, of course, is unique. 
Mary Shelley created him in the early 1800s, it is a gothic 
novel, but I won't go into too much detail. I know you are 
interested, but I am not going to go into detail. And Mary 
Shelley talks about how this monster was created and made, and 
then turned on the villagers. And about 15 years ago, the 
chairman, the ranking member, and I were here when Frankenstein 
walked through that door--this one--and told us we were on the 
verge of a worldwide economic collapse.
    And we had created that monster by lackadaisical views of 
what was going on with the big banks, and so, he came in to 
wreak havoc. And then, a few months ago, the Silicon Valley 
Bank caused me to think that people are trying to piece back 
together Frankenstein again. I think if banks are 
insufficiently capitalized, particularly banks that are just 
dealing with these tech companies, these startups, they can 
create Frankenstein. I just want to find out from you if you 
think that banks are sufficiently capitalized, and that 
Frankenstein is not going to return. The next book was, ``The 
Return of Frankenstein.'' You probably didn't know that, but--
--
    Mr. Barr. Thank you very much for the question. I do think, 
overall, that the banking system is sound. We have identified 
areas that are in our capital proposal where we think banks 
should be more resilient even than they are now. We hope to see 
these proposals through the comment process to gather 
information, and to learn more about what people think about 
the capital rules. But in general, we think these risks are not 
appropriately addressed with risk calibration in our current 
approach, and they could be improved.
    Mr. Cleaver. Are you saying that the Silicon Valley issue, 
those three large regional banks that, in my estimation, could 
have brought down or are bringing down this economy again, are 
you all saying that is not going to happen, that everything is 
now at a level, even though the large banks, as you probably 
know, are on the low end of what is socially optimal in terms 
of the costs and benefits to prevent such a thing in the 
future? So even though they are dropping, you are still 
comfortable?
    Mr. Barr. In the case of Silicon Valley Bank, the 
depositors looked at the bank and judged it to be insolvent. 
And one of the steps they were taking in this capital rule is 
to provide a rule that says unrealized losses on available-for-
sale securities need to be included in capital, so that 
provision of this package would address the concerns in that 
particular case.
    Mr. Cleaver. I yield back. Thank you, Mr. Chairman.
    Chairman McHenry. Thank you, and we will now go to the 
gentlelady from Missouri, Mrs. Wagner.
    Mrs. Wagner. Thank you, Mr. Chairman. Vice Chair Barr, your 
Basel III Endgame proposal would significantly increase capital 
requirements on the capital market activities of the largest 
U.S. financial institutions. These increases will negatively 
impact U.S. banks' ability to conduct critical market-making 
activities, further harming the U.S. economy. Considering that 
the largest U.S. banks make up roughly 50 percent of securities 
underwriting, what specific analysis did you conduct to 
determine the impact that your proposal would have on 
securities underwriting?
    Mr. Barr. Thank you very much for the question. The 
analysis and the rule supports a better risk calibration of a 
range of trading activities that the largest banks conduct. The 
risk calibration would make those banks more resilient so that 
they are able to actually provide the services that you 
described that are so vital for our economy. We are open to 
comments from banks and from the public. If they believe that 
the risk calibration is not correct, we very much welcome 
comments on that.
    Mrs. Wagner. I think that everyone thinks it is not 
correct. Your proposal would also limit U.S. banks' ability to 
participate in derivatives, securitization, and securities 
lending. Why place these punitive capital requirements on the 
trading desks of banks?
    Mr. Barr. Thank you very much for the question. What we 
have learned over the course of seeing the experience of how 
banks manage these risks is that some of these risks can cause 
serious losses to the banking sector and harm the American 
economy, as we saw in the global financial crisis. We want to 
make sure that all of the activities a bank undertakes, 
including the activities that you described, are done in a safe 
and sound way. And capital is the absolutely essential element 
to have to make sure that banks are operating safely.
    Mrs. Wagner. And your proposal is going to limit that 
greatly. Access to credit or loans essentially is a key driver 
of the innovative and competitive nature of the American 
economy. Credit helps start businesses. It allows them to grow 
and to invest in everything from new equipment, to facilities, 
to technology. It helps create jobs that would not have existed 
otherwise.
    Chairman Gruenberg, do you agree that the Basel III Endgame 
proposal will lead, as we have even heard from left-leaning and 
progressive commentators, to higher costs of credit and less 
credit availability for low-income and traditionally-
underserved communities?
    Mr. Gruenberg. Thank you for the question, Congresswoman. 
First of all, I think it is important to recognize that this is 
a proposed rule, that we are receiving comment on a range of 
these issues, and we will certainly give them careful 
consideration. And I certainly expect----
    Mrs. Wagner. I am aware of that. Could you answer my 
question, please?
    Mr. Gruenberg. I think we are going to address some of the 
concerns raised, specifically on the credit side in the final 
rulemaking----
    Mrs. Wagner. I'm very concerned about the credit side and 
availability for the low-income and traditionally-underserved 
communities.
    Mr. Gruenberg. And that has been, if I may say, 
particularly raised in regard to the risk weights for 
mortgages. We have received comments on that. We actually have 
language in the preamble discussing that issue, with 
alternatives to be considered that we are seeking comments on, 
and that will be a focus of attention in the final----
    Mrs. Wagner. I hope so. Vice Chair Barr, the U.S. 
implementation of the Fundamental Review of the Trading Book 
(FRTB), along with the global market shock component of the Fed 
stress tests are essentially a double count of capital 
requirements, forcing U.S. banks to have enough market risk 
capital to survive two financial crises in a row, whereas 
European banks only must have enough market risk capital for 
one. Does the Federal Reserve believe that U.S. markets are 
twice as risky as Europe or that European banks are 
undercapitalized?
    Mr. Barr. Thank you for the question. The proposal does not 
double count risks in the banking system. The risk-weighted 
asset proposal that we use under this proposal is used to set 
minimum capital levels, and the stress test is used to set a 
stress capital buffer. Those are done independently. It is not, 
in my judgment, a double count.
    Mrs. Wagner. But cumulatively, it is a double count. You 
have the Fed stress test, along with the FRTB, so it is a 
double count for U.S. banks and puts us at a competitive 
disadvantage, sir.
    Mr. Barr. As under our current rules, the risk-weighted 
approach, the static approach is used to set minimum 
requirements, and the stress test is used to measure the stress 
capital buffer, not double counting.
    Mrs. Wagner. My time has expired, but I hope you are going 
to take this into consideration, because you are putting us at 
an extreme competitive disadvantage with Europe. I yield back, 
Mr. Chairman.
    Chairman McHenry. And if the witness would answer for the 
record, we would appreciate it.
    We will now go to the gentleman from Illinois, Mr. Casten, 
for 5 minutes.
    Mr. Casten. Thank you, Mr. Chairman, and thank you, Mr. 
Vargas, for your perennial graciousness. I appreciate the work 
that all of you were doing on the Basel proposals. Obviously, 
we are keen to see the final details, but I am generally 
supportive of a robust and well-capitalized banking sector. But 
I do have some concerns I want to raise about the tax equity 
provisions, specifically as they relate to clean energy. I see 
some heads nodding, so, hopefully, this is not new information 
for any of you, but just for the millions of viewers we have 
right now.
    The proposed rule would quadruple the capital requirements 
for banks that make tax equity investments, and I am 
particularly concerned about that as it may frustrate the 
intent of the Inflation Reduction Act, since the clean energy 
provisions relied so heavily on tax credits.
    Chairman Gruenberg, Mr. Hsu, Vice Chair Barr, I think I see 
you all nodding, but are you all familiar with this provision 
of the proposal? Yes? Okay.
    The record will show vigorously nodding heads.
    Can any of you speak to whether you contemplated the 
renewable energy development consequences when you were 
developing those provisions of the clean energy tax equity 
credits?
    Mr. Barr. I would be happy to address the question. We 
don't have special provisions in the capital rules for 
different kinds of either renewable energy credits or other 
types of things. The tax credits are treated the same as other 
private equity investments. Now, we are open to receiving 
public comment on this. We have heard a lot already about it. 
The kinds of comments people have been saying to us, which are 
the kinds of comments that are appropriate for us to take into 
account, is that these types of instruments have lower risk 
than other equity investments because the investor is repaid 
through the proceeds of the tax credit.
    Mr. Casten. Okay.
    Mr. Barr. That is the kind of evidence that we would 
consider in thinking about whether the calibration is 
appropriate.
    Mr. Casten. I want to agree with the second half of what 
you said and just challenge the first half a little bit, 
because under the proposal, if you use tax equity to fund tax 
credits for low-income community housing support, there is no 
change in the risk weighting from the current 100-percent 
level. If you use tax equity to fund tax credits for clean 
energy development, there is a 4 times increase in risk 
weighting. So, I would challenge the assertion that all tax 
equity is treated the same way. There are some differences 
within the tax equity universe.
    Mr. Barr. Yes, there is a separate statutory provision with 
respect to low-income housing tax credits that are treated 
differently under the rule for that reason.
    Mr. Casten. Okay. Let me come back to that because, Mr. 
Hsu, I just want to clarify something with you. In 2021, the 
OCC established specific criteria for tax equity which said 
that tax equity investments are, ``the functional equivalent of 
a loan in order to qualify under OCC guidance.'' Do I have that 
right, from the 2021 OCC guidance?
    Mr. Hsu. I think so, but I would like to get back to you on 
that.
    Mr. Casten. I am reading from a report that the OCC issued 
which essentially said that in order for tax equity to be 
treated, it had to be the functional equivalent of a loan. So, 
it seems like under OCC guidance, that has already been 
established as the comparable point.
    Mr. Gruenberg, you had something you wanted to add?
    Mr. Gruenberg. I just wanted to comment that in terms of 
the renewable energy tax credit, I think this is a pretty good 
example of the value of a comment period. I am not sure that 
when crafting the proposed rule, we fully appreciated the 
impact here, and I think the feedback we have received has been 
helpful and I think will----
    Mr. Casten. That is great.
    Mr. Gruenberg. ----influence the final one on that.
    Mr. Casten. I am glad to hear that, and I just hope you 
will all commit to considering alternatives that accurately 
reflect the risk and are consistent with prior OCC guidance. I 
see heads nodding on that as well, so I am glad to hear that.
    The last thing I want to raise in the little time I have 
left is in talking with clean energy developers and talking 
with banks, we are hearing that banks are already starting to 
slow down their investments in clean energy in this space 
because they are anxious about the potential need to build 
capital reserves. I am curious if you all are hearing that in 
the pushback, because we are certainly hearing it from the 
industry.
    Mr. Barr. I don't know the answer to that question.
    Mr. Gruenberg. For what it is worth, I have not heard that, 
but we can----
    Mr. Casten. Okay. I hope that shows up in the comment 
record then and not just people calling their friendly Member 
of Congress to push back on it, but I raised that because I 
understand you have a process, I understand there is a phase-in 
to go through, but given the slowdown already, an affirmative 
statement of intent earlier on would be very helpful.
    Chairman McHenry. The gentleman's time has expired.
    Mr. Casten. Thank you. I yield back.
    Chairman McHenry. We will now go to the gentleman from 
Texas, Mr. Williams, who is also the Chair of the House Small 
Business Committee,
    Mr. Williams of Texas. Thank you, Mr. Chairman, and I thank 
all of you for being here today. I am a small business owner 
from Texas, and I have been in business for 52 years. I am a 
car dealer. Every day I have been involved, I owe money to a 
bank every single day for all that period of time, and I am 
really worried about where we are taking our banking system 
that would affect Main Street. I am worried about my bank being 
able to loan me money when I need it.
    Over the last year, our nation's Federal banking agencies 
have been bombarding our financial system with excessive 
regulations and dangerous proposals like Basel III, long-term 
debt requirements, and climate risk management standards. It is 
also alarming that our banking agencies are rolling out these 
types of proposals in a rushed fashion without considering how 
these combined regulations and requirements might impact 
innovation, limit access to capital for Main Street, for small 
business, and threaten economic stability.
    Vice Chair Barr, you claim that Basel III proposals contain 
meaningful analysis. However, from what I see, the Basel 
proposal is over 1,000 pages long, and less than 20 of those 
pages cover an economic analysis. Given that the proposal will 
overlap with numerous other existing requirements, I find these 
20 pages insufficient for a complex proposal like Basel. So, 
why do you keep ignoring Congress' request for a full economic 
analysis?
    Mr. Barr. I believe that the proposal contains economic 
analysis that supports the rule. We obviously are open for and 
welcome comments, and we're happy to receive analysis if people 
disagree with us, and to take that into account in our normal 
notice-and-comment rulemaking process.
    Mr. Williams of Texas. I have been actively working with 
members on this committee and the Committee on Small Business 
to be the voice for Main Street in the rulemaking process, Main 
Street America, what our country is all about.
    Mr. Barr, earlier this year I sent you a letter with my 
colleague from Pennsylvania, Mr. Meuser, which expressed our 
legitimate concerns that Basel III will significantly impact 
Americans' ability to access reliable credit and will increase 
overall borrowing costs. In a time where interest rates are 
already making it harder for small businesses to access 
capital, this proposal would be disastrous, and coupled with 
the economy we have now, it would stop things. Again, to you, 
Vice Chair Barr, will you abandon the provisions calling for 
elimination of banks' use of supervised internal models in 
determining capital requirements?
    Mr. Barr. Thank you for the question. We do not believe 
that the proposal will have a significant effect on credit 
conditions. Most of the proposal deals with trading and other 
non-lending activity. Small banks are not part of this 
proposal. They are responsible for doing lots of small business 
lending. And even with respect to the small business lending 
that big banks are doing, the proposal keeps the current 
approach with respect to capital treatment for small banks and 
provides some opportunities to get a lower risk weight if small 
bank lending is part of a diversified portfolio, for example.
    We do not anticipate the kind of effects that you are 
describing, but we are, of course, open in the comment period 
to hearing that. If we need to make adjustments to our 
approach, we are very open to doing that if it is supported by 
the analysis that we get.
    Mr. Williams of Texas. The good analysis is talking to Main 
Street America. The banks are nervous. The banks are already 
getting scared to death of this. The Federal Reserve recently 
released the Community Reinvestment Act Rule, which was nearly 
1,500 pages. This is a massive overhaul for smaller banks in my 
district that do not have the legal and compliance teams to 
deal with the undertaking that comes with a 1,500-page rule. 
Community banks are already struggling under the current 
regulatory agenda. We should not be adding more burdensome 
rules that will increase compliance costs. They are hiring more 
compliance officers than loan officers. Again, it affects Main 
Street. We should be focused on allowing these banks to thrive, 
not trying to regulate them to death, and, frankly, let them 
compete.
    Quickly, Mr. Gruenberg, could you explain how Federal 
banking agencies are working to educate smaller community banks 
on compliance and not just throw a thousand-plus page rule at 
them and expect them to perfectly comply, because what will 
happen is, like all small businesses, they will decide to get 
smaller rather than bigger because they fear all of these 
regulations. And again, that affects Main Street, that affects 
me, and it affects being able to hire people, et cetera. Could 
you please answer that question?
    Mr. Gruenberg. Yes, Congressman. Thank you. Thank you for 
the question. We were quite sensitive in the Community 
Reinvestment Act rulemaking to its impact on community banks. 
So, all community banks with assets under $600 million, which 
is over 3,000 community banks, will have no regulatory change 
from their current treatment under CRA. The new rulemaking will 
not impact them at all. And for banks between $600 million and 
$2 billion, which, frankly covers most of the additional 
community banks, they would have only a marginal change and no 
additional recordkeeping. I think as a general proposition, for 
banks under $2 billion, which is the large majority of 
community banks in the United States, there should not be a 
consequence----
    Chairman McHenry. The gentleman's time has expired.
    Mr. Williams of Texas. Time is up. Thank you very much.
    Chairman McHenry. The gentleman from Connecticut, Mr. 
Himes, is recognized for 5 minutes.
    Mr. Himes. Thank you, Mr. Chairman, and thank you all for 
being here. Vice Chair Barr, it is good to see you again. You 
are sensing and hearing a lot of confusion on the part of 
Members around the proposed rule. I want to limit my comments 
to the question of additional capital, and I am going to hand 
you the bulk of my time, but I want to guide how you answer 
this.
    We are in a world of confusion here. We saw a Governors' 
vote that was split. We heard the Chair himself elucidate some 
very serious concerns. The first line of your testimony today 
was that our banking system is sound and resilient. So, a lot 
of us are struggling to see the clear need for additional 
capital. And, by the way, having lived through 2009-2010, if 
that need isn't clear, you will have an ally sitting right here 
on that issue, but we are struggling to see the need. And I 
heard what you said to the chairman. It is there in the 
preamble. I have read the preamble a whole bunch of times. It 
refers both to quantitative impact studies as well as to the 
preponderance of literature.
    We deal with flood insurance. I am struggling for analogies 
here. This committee is used to seeing proposed FEMA flood 
maps, where in a hundred-year flood, and we get what a hundred-
year flood is, the water gets to here, and that is bad, because 
this house is there. I think we need that kind of specificity. 
You will have, I guess, run scenarios, and I am thinking of 
those flood maps. And what we really need to hear is that if we 
saw conditions that mimic 75 percent of the adverse change in 
2008, this is what would happen.
    Again, just to guide the 3 minutes I am about to hand you, 
it would really be great to hear, described in terms that we 
can understand, the quantitative indications, but also save a 
little bit of time to talk about the academic literature. 
Academic literature can be chosen to support lots of things. 
Give us a sense for how we can have confidence that the 
academic literature also supports the case for additional 
capital?
    Mr. Barr. Thank you very much for the question and the 
opportunity, and I will start with the broad frame. As you 
know, capital is really key to a resilient banking system, one 
that can serve households and businesses both in good times and 
in bad times. Banks with strong capital lend more throughout 
the economic cycle, and capital helps to prevent financial 
crises and to mitigate their impact. Financial crises can crush 
American households and shatter American small businesses. The 
costs of a financial crisis range from 20 percent to 100 
percent of GDP, or $5 trillion to $25 trillion for the United 
States.
    The proposal we put forward focuses on stronger capital 
rules for trading and other non-lending activities where banks 
have had large losses. Operational risk capital covers risks 
from the loss, for example, from rogue traders, from fraud, 
from other illegal activity and securitizations, illegal sales 
practices, brokerage, and other activities where banks have had 
large losses.
    On the trading side, banks have had significant losses from 
trading and other derivatives activities. In the global 
financial crisis, as you know, for example, in just one quarter 
of the global financial crisis, banks lost $38 billion from 
their trading and derivatives activities. On the credit side, 
the approach takes a standardized but risk-sensitive approach 
to credit. We don't believe that will result in significant 
changes overall on the credit side of the house.
    If you look overall at the proposal, it is about a 2 
percentage point increase in required capital, and 30 basis 
points, or 0.3 percent of that, relates to credit. That would 
translate, for an average loan, to about a 0.03 percentage 
point increase in funding if all of the cost of that additional 
capital were passed through, if there was no competition at 
all. That is what the result would be.
    Overall, we think that this approach is a reasonable one. 
Because of management buffers, most banks already meet the 
capital requirements today. The ones that don't could build 
capital within 2 years while maintaining dividends. So in our 
judgment, the proposal makes the capital system more 
consistent, more transparent, and more risk-sensitive. At the 
same time, we recognize that people have different views. That 
is why we are all here today.
    Mr. Himes. Mr. Barr, let me cut you off, because I only 
have 20 seconds left. I hear everything you just said and I 
understand--I have been through a bunch of these crises--that 
more capital will make a safer system, and to some extent, the 
burden is on the regulator. If you start your testimony with, 
``our banking system is sound and resilient,'' period, no 
comma, we didn't hear it articulated, but we are so hungry for, 
which is why the optimal capital proposal involves considerably 
more capital. And I would just ask you please to sort of try to 
resolve some of the arguments here, to provide whatever 
quantitative analysis indicates that more capital would be 
better. I yield back the balance of my time.
    Chairman McHenry. The gentleman yields back. The gentleman 
from Ohio, Mr. Davidson, is recognized for 5 minutes.
    Mr. Davidson. I thank the chairman, and I thank all of our 
witnesses for your patience as we were voting. I am glad this 
resulted in me getting to make it this far into the queue.
    We spent a little bit of time already talking about the 
amount of reserves that are being required, but, Mr. Barr, my 
question is for the Federal Reserve. Do you consider payment of 
interest on excess reserves a monetary policy or regulatory 
policy?
    Mr. Barr. Just to clarify, the proposal we have in front of 
us with respect to Basel is not a proposal that would increase 
reserves in any way.
    Mr. Davidson. That's not my question.
    Mr. Barr. I'm sorry.
    Mr. Davidson. My question is, when the Federal Reserve pays 
interest on excess reserves, which they do over and above what 
they are requiring, they pay interest on it for the deposits, 
do you consider that monetary policy or regulatory policy?
    Mr. Barr. It is clearly monetary policy.
    Mr. Davidson. Okay. Thanks for your interpretation. What is 
the status of your work on a central bank digital currency 
(CBDC)?
    Mr. Barr. We are in a very early phase of research, 
exploring different aspects of a central bank digital currency. 
We have not made any decision at all about whether to recommend 
a retail central bank digital currency. If we were to have such 
a recommendation, we would come see the Congress and the 
Executive Branch to get your authorization to proceed.
    Mr. Davidson. Yes. I guess I took notice and a lot of 
people did when the Federal Reserve was actually hiring 
developers to write code. Is there a design for what you are 
trying to build? Is this, ``Death Star,'' already built, or is 
it just under consideration?
    Mr. Barr. As I said, we have made no decision to move 
forward with a retail CBDC. If we did, we would seek 
authorizing legislation for that. We are conducting basic 
research to try and understand the technology and to make sure 
that we can wrap our arms around it.
    Mr. Davidson. Okay. Thank you.
    Acting Comptroller Hsu, you clarified your position that 
banks may provide digital asset custody services, hold 
stablecoin reserve deposits, and allow banks to use ledger 
technology and stablecoins to engage in payment activity. The 
OCC provided several firms with conditional approvals, which 
have now expired under your leadership. Can you comment on the 
impact of these expirations? What kind of impact have they had 
on banks and firms that invested in developing the ability to 
provide services to digital asset companies?
    Mr. Hsu. Sure. Thank you very much for the question. Our 
mission and our job is to ensure that all activities done in 
the Federal banking system by national banks or Federal savings 
associations is safe, sound, and fair, and that includes any 
crypto-related activities. Crypto, as you know, has a number of 
risks associated with it, so part of that interpretive letter 
was just to highlight that there are some risks with that. If 
you or a national bank are going to engage in that, you have to 
demonstrate that it can be done safely and soundly and fairly.
    Mr. Davidson. Okay. We will continue to have input on that. 
Obviously, our committee has done some work on digital assets. 
We would like to provide more clarity, but frankly, I would 
have liked to have seen the continuity that was there in the 
space, and I think it would have been great for our markets. 
When you look at things that are good for our markets, the FDIC 
and the Fed have both been busy shoring up some of the credit 
risk that has been out there. My State of Ohio is home to 
almost half of the privately-insured credit unions. Are there 
plans to give them access to the Bank Term Funding Program that 
is available for banks but not credit unions currently?
    Mr. Barr. We do not have any plans to change the terms of 
the Bank Term Funding Program at this time.
    Mr. Davidson. Thanks. I think the last thing I will 
conclude on, Mr. Barr, is that certain things that the Federal 
Reserve is involved in heavily are the regulatory lane, of 
course, your lane, and this is a prudential bank regulator 
hearing. The four of you are lined up there.
    And I really feel like the function of the prudential 
regulatory activities of the Fed should be separated from the 
monetary policy functions. I think it should be clearly subject 
to appropriations. We are working on the Federal Reserve 
Oversight Accountability Act that would do just that. And 
historically, folks who have held your role haven't favored 
that approach because it will provide more accountability to 
Congress, and an actual appropriations process and whatnot, but 
what is your take on that as a path?
    Mr. Barr. I think congressional oversight is absolutely 
essential, but I would not pursue the particular legislation 
that you have described.
    Mr. Davidson. Thank you. My time has expired, and I yield.
    Chairman McHenry. I now recognize the gentleman from New 
York, Mr. Meeks, who is also the ranking member of the House 
Foreign Affairs Committee.
    Mr. Meeks. Thank you, Mr. Chairman. I am concerned about 
the impact that the Basel III Endgame proposal will have on 
access to mortgage options for first-time minority and low- to 
moderate-income homebuyers.
    Vice Chair Barr, during your testimony before the Senate 
Banking Committee yesterday, you acknowledged that you are 
mindful of the concerns raised about the impact that risk 
weight proposals could have on mortgage access for prospective 
Black and Brown homeowners who may be creditworthy but may not 
be able to afford the traditional 20-percent down payment. How 
do you plan to address the potential intensification of unequal 
access to mortgage credit for minority and low- and moderate-
income (LMI) households brought on by the proposal?
    Mr. Barr. Thank you, Mr. Meeks. We are in the middle of a 
proposal phase, and we are gathering public comments. We are 
open to looking at all of the ways that the rule might be 
improved, including the ways that you have described. We very 
much welcome public comments. We asked for particular questions 
in the preamble of the rule to make sure that we got good 
public comments on how to address that. We will have to wait 
and see the actual comments and make an analysis and evaluation 
of those comments before making any decisions about how the 
final rule should address it, but I very much hear the concerns 
and appreciate the public comments on them.
    Mr. Meeks. I just want to bring up other issues that could 
come up that is a less obvious aspect of the proposal that 
could have, similarly, a dramatic effect and consequences to 
mortgage access, because I am concerned about mortgage access 
completely. I will give this as an example. Banks which often 
make affordable mortgages and go on to sell them to Government-
Sponsored Enterprises (GSEs) for a fee will be punitively 
treated by operational risk capital requirements associated 
with that income. Can you speak to that issue?
    Mr. Barr. The proposal does require operational risk for a 
range of market activities, including securitization 
activities. The underlying credit with respect to mortgages 
sold to Fannie Mae or Freddie Mac does not change from current 
law. And we are, of course, open to hearing concerns in this 
space, as we are throughout the rule, and if there need to be 
adjustments, we know how to make those adjustments, so I 
appreciate the comment.
    Mr. Meeks. Yes, and I hope that you will commit to 
conducting a truly holistic review that considers the impact of 
the proposal's risk weights and the operational risk 
requirements posed for affordable mortgage lending. I think 
that is tremendously important. Can you do that?
    Mr. Barr. Yes, we are committed--I can speak for myself. We 
are open to all kinds of comments on all aspects of the rule, 
including the one that you just made.
    Mr. Meeks. Mr. Hsu, you and Vice Chair Barr both referenced 
the modernization of the CRA in your testimony. And I am 
curious how you view the intent of the new CRA interacting with 
the proposed changes to capital requirements?
    Mr. Hsu. I think about them separately in the sense that 
the purpose of the CRA is really to address redlining. As you 
know, the law was passed in 1977, and the modernization is 
really to catch that up to where the banking system is today 
and how it operates. And I think we feel pretty good that this 
final rule that we recently adopted will help do that. I want 
to echo what Vice Chair Barr said with regards to the Basel 
proposal; we hear the concerns with regards to mortgages, and 
we are open to all the comments on that and making improvements 
as warranted.
    Mr. Meeks. I just want to just say it is absolutely key and 
essential. There are so many individuals, low- and moderate-
income families with great credit ratings who just can't afford 
the 20-percent down payment. And to deny them that is to deny 
them the American Dream and the access to create wealth, 
because for most people, a home is the greatest investment that 
they will make, and it is something that helps reduce the 
income gaps and helps build wealth. I would hope that we make 
sure that you take every consideration as you are looking at 
the proposal to make sure that is included and not bypassed and 
not looked at because it is absolutely key for many Americans. 
And I yield back the balance of my time.
    Chairman McHenry. I now recognize the gentleman from 
Tennessee, Mr. Rose, for 5 minutes.
    Mr. Rose. Thank you, Chairman McHenry, and thank you to our 
witnesses for taking the time to be here with us today. Mr. 
Barr, as I am sure you are aware, there are multiple Chinese 
entities that are members of the Basel Committee, such as the 
China Banking Regulatory Commission. Given that Chinese 
entities sit on the Basel Committee, how can we be sure that 
the Government of China is not playing an outsized role in 
setting international standards that could ultimately be 
adopted by the Biden Administration-appointed U.S. regulators 
like yourself?
    Mr. Barr. Thank you for the question. The United States 
participates in these organizations. In general, those 
organizations operate by broad consensus. If we found that 
there were any issues with respect to international approaches 
to an issue that we didn't think makes sense in the United 
States, we would not implement them in the United States.
    Mr. Rose. Thank you for that perspective. Mr. Barr, the 
Basel Committee on Banking Supervision uses peer-reviewed 
processes to monitor whether jurisdictions are complying with 
the Basel Committee's recommendations. The Federal banking 
agencies participate in these reviews. For example, the Federal 
Reserve is peer-reviewed by officials from some foreign 
regulatory institutions for compliance, and the Federal Reserve 
devotes resources to participate in the compliance regime. Are 
you aware of any publications or reports from any of the 
Federal banking agencies informing the public or Congress about 
this peer-review process?
    Mr. Barr. I am not sure I know the answer to the question. 
I will have to get back to you.
    Mr. Rose. Thank you. Please do.
    It appears that the government has created moral hazard by 
encouraging banks to take more risks with deposits they 
receive, given the decision to provide blanket deposit 
insurance for failed banks using the systemic risk exception.
    Mr. Gruenberg, do you agree with that, and can you explain 
why?
    Mr. Gruenberg. Thank you, Congressman. It is a very 
important question, if I may say so. I think the answer is, 
yes. The decision to protect those uninsured deposits at the 
two banks that failed in March was a consequential decision. 
Those were uninsured deposits. Those depositors made those 
deposits without an expectation of deposit insurance. The law 
does provide authority to the Federal Reserve and the FDIC, 
together with the Treasury, in consultation with the President, 
to set that aside and protect those uninsured deposits if we 
believe there is a genuine risk to financial stability.
    And I think the fact is we had a tough judgment to make 
back in March, whether or not to protect those uninsured 
deposits and run the risk of a contagion effect impacting other 
institutions with potentially additional failures, or to 
intervene, utilizing this extraordinary authority in a limited 
way for these two institutions. And I think the judgment at the 
time was that the financial stability risk was real, that the 
contagion effect was impacting other institutions, and that 
this was the prudent thing to do.
    In retrospect, I think that was probably the right call. I 
think the system has stabilized since. I think there are 
consequences to that decision, which is really why it is quite 
important for us to follow up in regard to a number of 
regulatory matters to try to offset the moral hazard created by 
that decision. It was a tough call, but in retrospect, I think 
it was the right decision.
    Mr. Rose. In light of the regulatory failures that perhaps 
were made evident by those failures, and so, hopefully, that 
leads to better, more careful scrutiny going forward. But what 
other things might you all do to limit that moral hazard?
    Mr. Gruenberg. We learned some big lessons about liquidity 
risk from this episode. I think we are now all quite focused on 
supervisory attention to interest rate risk, to uninsured 
deposits, to accumulations of unrealized losses on the balance 
sheets of banks, and on rapid growth, and the need to escalate 
supervisory matters and to compel compliance if the 
circumstances require. I think there are a number of 
supervisory actions we can take to mitigate the consequences of 
the decision. I do think the long-term debt rule of----
    Mr. Rose. Thank you. My time has expired, and thank you for 
that answer. If you want to expand on it in writing for the 
record, we certainly would appreciate it. Thank you. I yield 
back.
    Chairman McHenry. The gentleman from Illinois, Mr. Foster, 
is recognized for 5 minutes.
    Mr. Foster. Thank you, Mr. Chairman, and thank you to our 
witnesses. Vice Chair Barr, I am going to have another stab at 
doing something as quantitative as I can squeeze out of the 
panel here having to do with the Basel III Endgame.
    You gave a speech in Nashville to the American Bankers 
Association recently where you had what I thought were very 
interesting numbers on this. And you ended up by concluding 
that the proposed increase in capital standards would only 
amount to a rise of 1.5 to 3 basis points in the cost to fund 
each dollar of a typical loan portfolio. Basis points are known 
to scientists as 10 to the minus 4 is 1 basis point, so 3 basis 
points is 0.03 percent, for those who deal in percentages.
    And I was just wondering if you can sort of walk us through 
the chain of logic and the numbers because I hear on one hand 
that, oh, it is a 20-percent increase in the capital standards, 
and then somehow, that ends up in the conclusion of your speech 
to be 1.5 to 3 basis points. So if you could sort of walk us 
through those numbers slowly enough that we can follow the 
numbers, that would be great.
    Mr. Barr. Thank you very much for the question. If you take 
overall the capital increases in the proposal, they amount to 
about 200 basis points or 2 percent. Of that 2 percent, 30 
basis points is----
    Mr. Foster. Okay. Just a minute. So, the 20 percent that 
gets quoted means it is 20 percent of the capital that is 
sitting around 10 percent now?
    Mr. Barr. Right. The overall average increase is 16 percent 
of 12 percent, so about 200 basis points.
    Mr. Foster. Right.
    Mr. Barr. Of that 200 basis points, about 30 basis points 
are associated either directly with credit or with the 
operational risk that comes with credit provision, so that 
together is 30 basis points. That would be the increased risk-
weighted assets, or you can translate it into capital terms. If 
you assume that the cost of equity is about 10 percentage 
points higher than the cost of debt, which is----
    Mr. Foster. Okay. Now, is that a standard assumption, or is 
that something you made up?
    Mr. Barr. It is a conservative assumption. You could say it 
is a little bit higher or a little bit lower, but it is a 
conservative assumption.
    Mr. Foster. Okay.
    Mr. Barr. So, if debt were 4 percent, equity would be 14 
percent.
    Mr. Foster. Okay. And that pretty much just comes from the 
fact that the bank can make the loan, but you can force them to 
either issue equity instead of issuing debt to----
    Mr. Barr. That is correct. It is just a choice.
    Mr. Foster. And the banks prefer----
    Mr. Barr. The loan is funded----
    Mr. Foster. Yes. Banks prefer to issue debt because you pay 
interest, whereas with equity, you pay dividends, and then 
there are tax implications and so on. That is a generally 
reasonable number, this 10-percent increase when you force them 
to issue new equity instead of new debt to----
    Mr. Barr. Yes, that is correct.
    Mr. Foster. That is the 10 percent? Okay.
    Mr. Barr. That is correct. If you took 10 percent of 30 
basis points, that is point 0.03 percentage points. So, an 
average loan in that portfolio would cost 0.03 percentage 
points more if there were no competition at all and the bank 
fully passed through that increased cost to the borrower.
    Mr. Foster. Okay. In reality, I guess, there are sort of 
two numbers there, and this only applies to the largest banks?
    Mr. Barr. Yes, the 37 largest banks.
    Mr. Foster. Thirty-seven banks, three dozen, okay, and yes, 
to a scientist's level of accuracy. Then presumably, some of 
that business will just shift to smaller banks or to non-bank 
entities?
    Mr. Barr. It is possible. It could be that some of the cost 
is passed through. It could be that competition forces the bank 
to internalize that cost. It could be that some smaller banks 
do more small business lending.
    Mr. Foster. Right. And then, there is also the Modigliani-
Miller effect where presumably, if a bank is forced to carry 
more capital, then whomever loans them money will charge them a 
smaller interest rate. Is that included in this, or is that 
another factor that will----
    Mr. Barr. That is not included in this calculation. If you 
took a pure view of the Modigliani-Miller theorem, you would 
say that the bank should be indifferent between debt and 
equity, and as equity grows, the debt becomes cheaper, but that 
is not in this calculation.
    Mr. Foster. Okay. And just in my last 20 or so seconds, 
Acting Comptroller Hsu, you gave remarks talking about your 
need to have visibility over not only third-party vendors, but 
deeper into the stack. Can you just say a few words about that?
    Mr. Hsu. Sure. The banking system and the provision of 
banking services is evolving quite a bit, especially with 
regards to banks and non-bank partners like fintechs, and then 
the fintechs themselves also have partners. And currently, we 
have a lot of good visibility into bank-fintech partnerships, 
and we recently put out some guidance in our agency regarding 
risk management practices for that. But as the system evolves 
and this landscape evolves quickly, we do need to keep an eye 
on these longer chains, if you will, almost like supply chains 
for banking services, to make sure that the banking system is 
safe, sound, and fair.
    Chairman McHenry. The gentleman's time has expired, and we 
are pushing up a hard stop, and 1:30 is a hard stop. We have 
Members in the room who still want to ask questions, but we 
will accommodate you in the next hearing. And we will now go to 
the gentleman from Oklahoma, Mr. Lucas, who is also the Chair 
of the House Science Committee, for the last question.
    Mr. Lucas. Thank you, Mr. Chairman. And as a courtesy from 
one committee chairman to another, I yield whatever time you 
may need, to you from me.
    Chairman McHenry. I thank you. Vice Chair Barr, I just 
wanted to give you an opportunity, if you wanted to correct the 
record about compensation. Have you attended any Bank for 
International Settlements (BIS) meetings?
    Mr. Barr. I have attended Basel Committee meetings, so that 
is----
    Chairman McHenry. Okay, Basel. We had an answer from Chair 
Powell that said the Board does receive, in this answer, Bank 
for International Settlements compensation related to 
attendance at boards of directors meetings. I am just trying to 
figure out what this is.
    Mr. Barr. I apologize, sir. I don't know anything about 
that.
    Chairman McHenry. So, you didn't receive any compensation 
for your participation at Basel? No reimbursements from them or 
compensation from them?
    Mr. Barr. Correct.
    Chairman McHenry. Okay.
    Mr. Barr. I don't know the BIS rules and procedure.
    Chairman McHenry. We are trying to figure it out. That is 
why we ask these questions. We will have follow up on that, 
obviously. Thank you.
    Chairman Lucas, I yield back to you.
    Mr. Lucas. In my remaining time, the Federal Reserve has 
maintained that the U.S. banking system is sound and resilient 
with strong levels of capital liquidity. The Basel III Endgame 
proposal is set to substantially raise capital requirements, 
which has been discussed here, and that will increase costs and 
reduce access to capital. Chairman Powell even discussed in the 
Fed's Board meeting that the proposal exceeds what is required 
by the international Basel agreement and goes further than 
other jurisdictions around the world.
    Vice Chairman Barr, since the Basel proposal has not been 
directed by Congress, is there a particular weakness in the 
banking system that this proposal is attempting to address? 
What are we trying to fix?
    Mr. Barr. Thank you very much. What we have experienced is 
that the risk calibration that is used for certain bank 
activities doesn't really match the kind of risks that we have 
seen in the past through historical experience. That is 
particularly the case for things, for example, like the trading 
desks and derivatives activities where the risk calibration 
doesn't really cover tail risk from extreme events like those 
we saw in the global financial crisis. So, the rule is tailored 
to try and address those kinds of risks.
    Mr. Lucas. When financial regulators implement massive 
policy changes under a new Administration, it creates 
significant uncertainty with businesses and consumers. Again, 
Vice Chair Barr, you have indicated that the final Basel 
package will have broad support across the Board of Governors, 
and you have reassured the public that the Federal Reserve is a 
consensus-driven organization. After reviewing the comments and 
doing the appropriate revisions, is it your intention that the 
final rule will have unanimous support of the Board?
    Mr. Barr. I can't promise what my fellow Board Members will 
do. I hope to seek broad consensus across the Board. But each 
individual Governor and, of course, the Chair, makes his or her 
own decisions about whether to support a rule or not support a 
rule.
    Mr. Lucas. I would like to shift my focus to one aspect of 
the Basel proposal, the impact on end users, like small 
businesses and agricultural producers, that employ derivatives 
to manage risk. The proposal would impose higher standardized 
capital requirements on derivative transactions, despite 
Congress and this committee consistently acting in a bipartisan 
basis to protect derivatives end users from increased cost. My 
colleague, David Scott, discussed this with you earlier today. 
It seems like you are willing to study the impact on the 
agriculture and energy sectors. Will you commit to coordinating 
the analysis with the Commodity Futures Trading Commission 
(CFTC) and engaging us throughout the process, and are you 
willing to make the appropriate revisions?
    Mr. Barr. We are very open to comments, including from 
Members of Congress and from other agencies. We take those 
comments very seriously.
    Mr. Lucas. Mr. Chairman, I believe I have gone as far as I 
can go in the limited time, and I yield back.
    Chairman McHenry. I thank the gentleman. And without 
objection, I would like to enter into the record a letter 
initiated by the gentleman from Wisconsin, Mr. Fitzgerald, to 
Chairman Powell, Chairman Gruenberg, and Acting Comptroller Hsu 
regarding the Basel III Endgame.
    And with that, I would like to thank our panel, Vice Chair 
Barr, Chairman Gruenberg, Mr. Hsu, and Chairman Harper, 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.
    I ask the witnesses to respond no later than December 15th.
    And I encourage everyone in the room to take conversations 
outside as we turn this room over for our 2 p.m. hearing.
    I hope everybody has a nice Thanksgiving, and thank you all 
for your testimony, and for your engagement. And I thank all 
the Members for accommodating this very long 10-week stretch 
that Congress has been in session. Hopefully, we will come back 
in better stead.
    With that, the hearing is adjourned.
    [Whereupon, at 1:32 p.m., the hearing was adjourned.]

                            A P P E N D I X

                           November 15, 2023


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