Transcripts For CSPAN2 Financial Regulators Testify On Banks The Economy 20221115

[inaudible conversations] [inaudible conversations] Senate Committee on banking, housing, and urban affairs will come to order. Welcome to the witnesses and committee members. We know most americans want the same thing, a safe and affordable place to go home, a good paying job, a strong stable government which they can trust. Our Democratic Institutions are only as strong as a people who are in power. Our economy works best when you have a free and fair democracy in which everyone can live lives with dignity. For too long many of these have felt out of reach working family struggled to pay for groceries to keep yes in a car to keep a roof over their heads in the cost of living and raising kids continues to rise. Democrats are listening and have delivered for the American People. We passed legislation to lower Prescription Drug costs. We help families stay in homes during the height of the pandemic. We made investments in Public Transit in our nations of a structure. For the first time we focus on communities it that governments turned up backs on especially for instance, in my state state government. Now were tackling inflation by taking consolidation of reducing our dependence on foreign oil. We do that while creating good paying manufacturing jobs at home. These jobs making semiconductors, electric vehicles come solar panels are the jobs of the future. These jobs ago two americans because with past the chips act, the inflation reduction act, the bipartisan infrastructure law with strong buy american provisions that senator corker and i worked on. We see results. Our economy recovered. Economic recovery has been strong over the past years Many Americans a built up more in savings. We seen robust job growth. The first time a decade weve seen wage gains. Just last week we begin to see signs of inflation starting to cool. Banks and Credit Unions are doing well thanks to the protections we put in place in doddfrank and because of the support congress and regulators provide during the pandemic. Too many big corporations have taken advantage of market concentration. Jacking up consumer prices, earning higher and higher profits. As my colleague senator reed is pointed out the biggest banks the benefit from higher Interest Rates today are not passing on those benefits to their customers. Again penalizing americans are trying to build up savings. Workers and Small Businesses already struggling under the weight of inflation should not get hit with exorbitant bank fees, should lose a month on a crypto scam, shouldnt have to worry that the savings will disappear overnight. Its a mismanaged make a credit union fails. None of us want a scenario where risky bets on wall street crashed the economy again. Thats why its so important we have financial watchdogs like the four of you empowered to look out for main street in helping more americans hold on to hardearned money in in ae when they need it most. Thanking at credit union regulators are independent agencies that protect consumers, make sure banks and Credit Unions are safe and strong, independence were independence matters. Makes for some more stable Financial System that the center for the entire economy. Our Witnesses Today will have decades of banking and credit union regulatory experience. They spent careers serving the public and protecting consumers making sure banking and Credit Union Systems, making sure a Banking Credit union system works for main street not just for wall street. Thats exactly what they continue to do today. They are modernizing and strengthening important civil rights laws, investments in neighborhoods and community slept in their own can think of the pacific in a close look at overdraft nonsufficient funds at banks and against make sure customers are treated fairly and that these programs dont raise concerns. Thank you for that perfect taking a fresh look at the Bank Approval process so we dont continue this rubberstamp consolidation which has big consequences for local communities. Too often big banks merge and close branches leaving rural towns and urban communities without a bank. They are revisiting Financial Systems safeguards that protect us from risks of big foreign banks making sure Bank Failures dont leave Taxpayers Holding the bag. Its important to remember the super Regional Banks of today are hundreds of billions of dollars larger than the largest banks that failed during the financial crisis. Our financial regulators know we need Strong Capital requirements so banks and Credit Unions can continue to land in investing communities in good times and bad. They are overseeing the formation of new institutions that serve communities that often get left behind. Just last week a new faithbased credit union fdic recently approved the First Mutual Bank in 50 years which will pave the way for more in ohio and across the country. Agencies working together to foster new banks and Credit Unions and support the work of an v. A. s and cdfis in document. The same time our regulars are looking out for fisc on the horizon, the effects of climate change, the ricin cryptor assets, the risk some shouted banks, the constant threat of cyber attacks. There worked with making Credit Union Industry to prepare for climate related risks and bolster cybersecurity protections here scribbles become more sophisticated in geopolitical threats increased. They stepped up to protect depositors and consumers when crypto from smiths lead them into thinking their money is safe, when it isnt. We must a vigilant and empire regulars with the tools to combat these going risk. Data breaches happen too often. Threatening consumer, Customer Data at exposing our Financial System to vulnerability. Thats what we need past the bipartisan improving cybersecurity of Credit Unions act led by senator ossoff and warner. We need make sure banks and credit engines can partner with third parties and with that allow banks to stay competitive without putting consumer money at risk that we cant let Big Tech Companies and risk come risky shadow banks play by different rules because a special dimples. All these things will strengthen our banking and Credit Union System for its core mission serving main street and workers and families. When workers have more power in the economy they find better paying jobs. With a stronger labor market. That helps Credit Unions which added over 5 million new members the past year. It drives down the number of households without a bank account which dropped to record lows in 2021. When government is on the side of working families more americans save money, more americans build wealth, more american start Small Businesses, more americans strengthen our economy. Our financial regulars advance to have answered that call. I will continue to work with them to make sure our banking and Credit Union System works for everyone. Before i conclude on what you think the witnesses again for being here especially congratulate Marty Gruenberg in the nominated by President Biden to be chair of the fdic. Marty is well respected regulator was work to protect consumers, preserve confidence in our Banking System, playedn instrumental role in helping implement many doddfrank reforms with his experience leadership ive no doubt that fdic can continue to address risks in our Financial System and increase access to Affordable Financial Services and ensure banks honor their commitment to communities through the cra. This committee looks for to holding a nomination hearing at the next few two weeks for d of fdic nominees. Senator toomey. Thank you, mr. Chairman. And welcome to our witnesses. Throughout this congress i went about the politicization of the Financial Regulation works en banc regulators are increasingly straying outside the mandates into politically contentious issues. Take Global Warming for instance. Instance. In september the fed announced a quote, Pilot Climate Scenario Analysis exercise, end quote. With respect to the largest u. S. Banks. Were told this is been an exercise of ensuring that banks understand the risks. But the data including the feds own Research Shows there is no physical risk to banks from Severe Weather events. The only other risk is socalled transition risk here we also know that banks are fully capable of pricing risks into the Business Decisions including risk from changing customer preferences over time. So the real risk here is political. My worry is an attempt to somehow quantify this Political Risk would eventually result in regulations designed to allocate capital away from carbon intensive companies. It appears some Bank Regulators are already committed doing just that. For example, the fed, the fdic and the occ have all joined the network for the greening of the Financial System. This is an International Group of financial regulators with the stated aim to come and a quote, mobilized mainstream finance to support the transition toward a sustainable economy, end quote. In other words, their goal is to allocate capital away from carbon emitting industries to those deemed to be sufficiently green. Let me emphasize, the fed, the fdic and the occ have all joined this group. The ncua is also what one t unions and i quote, may need to consider adjustments to their fields of membership as well as the types of loan products that offer, end quote, thats because of Global Warming. So heres a reality. Some unelected financial regulars want to accelerate the transition to a low Carbon Economy by misusing their powers to allocate capital away from Traditional Energy companies. In addressing Global Warming requires really difficult political decisions. It involves tradeoffs and in a Democratic Society these kinds of tradeoffs have to be made by elected and accountable representatives, representatives of the American People who were held accountable through the political process. I supported vice chairman bar nomination despite a number of policy differences i have with him based in part on his commitment to stick to the feds narrow mandate and is at his conflation vice chair barr stressed that the fed and i quote should not be in the business of telling Financial Institutions to lend to a particular sector or not to lend to a particular sector, end quote. I thanked him again for the clarity and i urge him to keep to that commitment and one way we do that is by pulling the fed out of the politically contentious issue of Global Warming. Federal banking regulators have also been preoccupied in some cases with establishing new rules, the need for which have been dubious. For example, last month the fed and fdic proposed potential new requirements concerning the resolvability of Regional Banks. Now this proposal seems to be predicated on the assumption that the only realistic option to resolve a larger Regional Bank would be to sell it to an even larger bank. That its not at all clear that that assumption is warranted or that new requirements are appropriate for Regional Banks for at least two reasons. First, the fed and fdic have been approving Regional Bank resolution plans for nearly a decade. Nowhere do those plans contemplate wholesale acquisition by larger banks. Second, large Regional Banks have more than doubled their loss absorbing capital since the financial crisis, and this dramatically improves the resiliency and dramatically decreases the likelihood that they would need to be resolved. Now, maybe some regulators seem to think that benefits of new regulations always outweigh the costs, but we know that regulation is not without cost. And as regulation increases, financial activities will continue to migrate out of the Banking System as they have been doing in recent years. Now while some of our banking regulators have been distracted, they fail to address real challenges facing the Financial System. Last year the fed and the fdic and the occ committed to providing greater clarity on the involvement of banks and cryptor activities such as providing Custody Services or issuing stablecoins. Well over a year later they still provided no public clarity, and during that same time weve seen several highprofile collapses of Crypto Companies including a very prominent example just last week here i think its very possible that customers harmed by these collapses wouldve been better off if their cryptor assets had been safeguarded by regulated banks that had been providing Custody Services for other kinds of assets for literally hundreds of years. But many banks have been pressured by you, not to provide crypto related services into your agencys provide this clarity which just hasnt been forthcoming. I will note, however, chairman harper seems not to have pursued this Pressure Campaign with Credit Unions. In fact, hes issued guidance for Credit Unions on partner with Crypto Companies or using distributed ledger technologies. The ambivalence of the remaining agencies has helped to push cryptor activities into foreign jurisdictions with weaker or no regulatory regimes. As a general matter seems to me the failure of congress to pass legislation in this space and the failure of regulators to provide clear guidance has created ambiguity that is driven developers and entrepreneurs overseas when regulations are often lacks at best. One other item i i want to highlight before we start. The rest of the discussion. Its the de jure liquid in u. S. Treasury market. In march 2021 the fed committed to modify the supplementary leverage ratio or slr, in part to facilitate bank dealers ability to intermediate in this market. Over 18 months later the fed still has not acted. I understand vice chairman bardsley been in this role for four months and he has recently suggested that potential and in the city slr should be in the context of reviewing all Capital Requirements or understand that. What we really should recognize the significant decline in treasury market liquidity is already occurring and absent an improvement im afraid the fed might one day the site has to intervene by restarting bond purchases which would be quite contrary to its Current Mission of getting inflation under control. What i hope ill hear from our banking regulars today is that they will prioritize these and other real challenges, and not stray beyond their mandates into politically contentious issues or establish a necessary new regulatory burden. Thank you, mr. Chairman. Thank you, senator toomey. I have entered is the format but is it that michael barr took office as vice chair for supervision of the board of governors of the Federal Reserve system july at 20 to 44 year term. It also serves as as a membef the board of governors. Todd harper was sworn in to serve a full term as the Financial Credit Union Administration Board chair of july 2020. Martin gruenberg has been the acting chair of the fdic board of directors since february of 22. Hes been confirmed to serve as chair and chairman of the fdic and is the service at the fdc since 2005. Michael hsu became acting comptroller of the currency in may 2021. Mr. Barr if you begin your testimony. Thank you. Thank you very much chairman brown, Ranking Member toomey and other members of the committee. Thank you for the opportunity to testify today on the Federal Reserve supervisor regulatory activities. As vice chair for supervision my priorities to make the Banking System safer and fair. The Banking System is costly evolving so regulation and supervision must address to respond to new and emerging risks. Reforms following the Global Financial crisis have helped the United States maintain a resilient Financial System for consumers, businesses and communities. Capital and liquidity positions remain above regulatory requirements. But we must ensure we are keeping pace. Many issues at the forefront of banking regulation today were not prominent previously and some of them scarcely even existed. Few anticipated the global pandemic, and recent events in crypto markets have highlighted the risks associate with new Asset Classes when not accompanied by strong guardrails. Turning to a number of our priorities at the Federal Reserve, i am taking a holistic look the feds capital framework to assess whether it is functioning as intended and support to his own Financial System. I believe the capital framework should be forwardlooking, should be tiered so the highest standards apply to the riskiest verbs and should support a safer and fair Financial System. In recent years merger activity and organic growth have increased the size of large banks which should come to get efforts by regulated to resolve those firms upon failure without disruption to customers and counterparties. The board any fdic recently invited comment on advance notice of proposed rulemaking to enhance regulators ability to resolve large banks in an orderly way, should they fail. The Federal Reserve is also evaluating our approach to reviewing banks proposed acquisitions. Mergers are often a feature of vibrant sectors, but the advantages that firms seek to gain the mergers must also be weighed against the risks that mergers can post to competition, consumers, and Financial Stability. Another priority is monitoring the risk of crypto asset related activities. Crypto asset related activity requires affected oversight that includes safeguards to ensure that Crypto Companies are subject to similar regulatory safeguards as of the Financial Service providers. We are also working to understand financial risk related to climate change. At the fed are our mandate y is important but narrow and where focus on our supervisory responsibilities and her role in promoting a safe and stable Financial System. To that in the Federal Reserve recently announced a Pilot Climate Scenario Analysis exercise designed to enhance the ability of supervisors and firms to measure and manage climaterelated Financial Risks. As the Banking System continues to evolve we must ensure that supervision and regulation keep up with those changes and are appropriate for the underlying risks. As vice chair for supervision i will continue to work to promote a safe and fair Banking System. Thank you and i look forward to your questions. Mr. Harper. Chairman brown, Ranking Member toomey and members of the committee, thank you for inviting me to discuss state of the Credit Union System that was economic fallout of the covid19 pandemic along with rising Interest Rates have influence Credit Union Performance over the last year the Credit Union Industry overall remains on a solid footing. At the end of the Second Quarter there were just under 5000 federally insured Credit Unions with nearly 133 million members and more than 2. 1 trillion in assets. Notably, the industries aggregate net worth ratio rose to 10. 42 representing a recovery of 40 basis points from a pandemic level. For the Company Credit union Share Insurance Fund continued to perform well with no premiums or distributions expected at this time. During the last year the ncua has undertaken several notable actions to strengthen capital, and at cybersecurity, and support small and minority Credit Unions. To fortify the Credit Union Systems ability to better withstand future crises, the ncua and amend its riskbased capital rule along with a simple five compliant option at the start of 2022. The agency also has begun deployment of its new scalable Information Security Examination Program to allow the ncua to better evaluate Credit Union Side risk. Further, the agency is increase the Resources Available in the field to assist small and minority Credit Unions, and we will soon modify our examination procedures for minority credit union to better recognize their unique strategies. Additionally the ncua at glencoe closer attention to the consumer fringe of protection which buttresses and covenants are safety and soundness efforts. This year ncua examiners are reached reviewing assistance programs can fair lending rules, servicemember protections come there credit reporting law and overdraft programs. We have also increased resources for fair lending supervision and as we move into 2023 the ncua is emphasizing all Credit Unions remain vigilant and managing safety and soundness and Consumer Financial protection jewelry prepare for a rising Interest Rates, liquidity concerns and cybersecurity risks here additionally, as a Financial Services system and Credit Unions continue to evolve especially with many Credit Unions growing larger and more complex, the industry for Regulatory Framework must keep pace to maintain the strength and stability of the Credit Union System. In response to these changes and to legislation recently enacted into law, the ncua has undertaken several makings or implement new rules during the last year there is rules address member expulsion procedures, subordinated debt, emergency Capital Investment and cybersecurity notifications. Finally, i want to highlight two legislative changes that would help the agency better fulfill its statutory mission. Most timely, the ncua requested permit adjustment to the agent member requirement for the central liquidity facility. Notably, the extension of this enhancement comes at no cost to the taxpayer. Currently, corporate Credit Unions may serve as an agent for a subset of their members but without legislative action bayous in three out of every four Credit Unions including most minority Credit Unions will soon lose their access to an important federal liquidity backstop. And the Credit Union Systems capacity to address liquidity b0 billion with growing Interest Rate risk and price liquidity concerns now is not the time to decrease the access to the systems liquidity shock absorbers. The ncua is seeking restoration of its ability to oversee thirdparty vendors. This statutory change would provide the ncua with parity with other agencies the supervisor and regulate federally insured depository institutions. This Examination Authority is critical given the systems increased reliance on thirdparty vendors and Credit Union Service organizations. The Government Accountability office, the Financial Stability Oversight Council and the office of Inspector General have all recommended that congress restored the ncua Vendor Authority. The u. S. House of representatives has passed legislation as part of the 2023 National Defense act to reinstate the ncua Vendor Authority and in the Senate Bipartisan legislation has been introduced for which id like to thank senator ossoff, senator warner. Theyre built the improving cybersecurity of Credit Unions act would close a growing regulatory blind spot. Second is my statement i look forward to your questions. Thank you mr. Harper. Mr. Green will, thank you. Rachel brand, Ranking Member toomey, members, i appreciate the opportunity to appear today at the setting on the oversight of the financial regulators. In my oral remarks today i would like to focus on the state of the u. S. Banking industry and the outlook for the industry. To begin with, the u. S. Banking industry today has reported generally positive result for this year amid continued economic uncertainty. Growth strength income net income grew and most asset quality measures improved. Further, the industry remains wellcapitalized and highly liquid. The number of institutions on fdics Problem Bank List remained stable in the Second Quarter of this year at 40 institutions. Its actually the lowest number since quarterly reporting of that data began in 1986. For being new banks opened through october 2022, including the First Mutual Bank in 50 years. And additionally, no banks failed during 2021 nor this year as well. At the same time, the Banking Industry reported a moderate decline in net income in the first two quarters of this year from a year ago, primarily because of an increase in provision expense at the largest institutions, and that is worth paying some attention to. The increase in provision expense, thats the amount set aside by institutions to protect against future credit losses, reflects the Banking Industries recognition of risks related to persistent economic uncertainties, a slowing Economic Growth, as well as the increase in loan balances. Rising market rates and strong loan growth supported an increase in the Banking Industries Net Interest Margin from the first to the Second Quarter as a result most banks reported higher Interest Income compared to a year ago. However, rising Interest Rates and longer asset maturities also resulted in unrealized losses on Investment Securities held by banks. This is significant overhang here. As of the Second Quarter of 2022, banks reported 470 billion in unrealized losses, as the market value of security cell hello the book value. The fdic expects this trend to be an ongoing challenge as Interest Rates continue to rise in the third quarter, especially if banks should need to sell investments to meet liquidity needs. In summary, despite favorable performance metrics, Banking Industry continues to face significant Downside Risks that we need to Pay Attention to. These risks include the effects of inflation, rising market Interest Rates come slowing Economic Growth, and continued geopolitical uncertainty. Taken together, these risks could reduce profitability, we can credit quality and capital, and limit loan growth in coming quarters. Further, as i mentioned higher market rates have led to continued growth in unrealized losses in the security portfolios come higher rates may also erode real estate that of asset values as well as hamper borrowers loan repayment of italy. So these are all matters that will be paying at the atsc close attention to over the course of this year and next. In my written testimony i provide an overview of the condition of the fdics deposit Insurance Fund, and the reason behind the fdic decision to increase deposit insurance assessments by two basis points next year to avoid a potentially larger, more pro cyclical increase later at a less favorable point in the economic cycle. I also update the committee in my written testimony on five key policy priorities for the fdic. Strengthening the Community Reinvestment act, addressing the Financial Risks that are likely to affect banking organizations in the Financial System as a result of climate change, redoing the bank merger process, he probably would the risks of cryptor assets to the Banking System, and finalizing basel iii capital rules. I also discussed the fdics efforts to support minority depository institutions into development Financial Institutions, promote a diverse and inclusive workplace at the fdic, strength and cybersecurity and Information Security within the Banking Industry, and the fdics recent return to in person examined, banking examination and of an person activities at every level of the agency. I would be glad respond to questions from the committee on these or in other matters. Thank you, mr. Grunwald. Mr. Hsu,. Chairman brown, Ranking Member toomey and members of the committee im please to appear before you today to provide an update on the activities underway at the occ. The mission of the occ is to International Banks and federal savings associations operate in a safe and sound manner, provide their access to Financial Services treat customers fairly and comply with applicable laws and regulations. Since my appointment to fill this Mission Refocus on four priorities. Fighting is complacent to reducing inequality and banking adapting to digitalization and managing climaterelated financial risk. My written statement describes the progress the occ is made on each of these. Here i would like to focus on how were helping to ensure that banks serve the needs of their communities. First, i want to highlight the occs commitment to Community Banking. Were taking specific action to support Community Banks including revitalizing minority depository institutions, reducing Community Bank assessments, promoting the number started banks and tailoring regular and based on size and complexity. Second, the occ catoosa encourage the banks we supervise to improve the products and Services Including overdraft programs with the customers financial help in mind. Many of these banks including nearly all of the largest banks have begun reforming their overdraft programs and lowering fees. While more work needs to be done, consumers are benefiting from the efforts of National Banks to reduce penalty fees and the daily number of overdraft charge. To provide grace periods before fees are imposed and two and nonsufficient funds fees. By some estimates changes at the largest National Banks could save consumers billions of dollars annually. Additionally, the occ strengthened supervision of compliance with their lending laws. We recently updated our process for screening bank retailing activities to provide more risk focused their limit examination strategy to identify weaknesses of wrongdoing. When we find evidence of potential discrimination we refer the matter to doj and hud as applicable. Redlining and of the forms of lending discrimination are unacceptable especially in this danish and we will not hesitate to take enforcement action if necessary. The occ and coronation with the Federal Reserve and fdic as well as doj is also considering updates to the framework for analyzing mergers under the bank merger act. This is to ensure resulting entities continue to meet the convenient and needs of the community. Support Financial Stability, enhance competition and are safe and sound. The occ considers each merger application on its merits against the statutory factors and associated regulatory criteria. We are planning a public symposium in february to explore this important issue further. At the digitization of baking mg accelerates and banks and tech partnerships grow the occ is focus on assuring their expertise and bigotry framework adapts so that safety, soundness and fairness of banking is maintained and even strengthened. We recently announced will be establishing an office of Financial Technology early next year. Building upon the work at successes of the Agencies Office of information which was great and 2016. This change will enable us to engage more substantively with nonbank Technology Firms and to better supervise banks and tech partnerships so we can help ensure that consumers of Banking Services are treated fairly as well as help maintain a level Playing Field as industry evolves. With regards to crypto, the occ has adopted a careful and cautious approach. Last november we issued guidance which reminds the banks we supervise that they are not permitted to engage in certain crypto activities unless they can perform these activities in a safe and sound manner. This approach help to mitigate the risk of contagions from cryptor to the federal Banking System after the collapse of terra linda this spring as those more recently the bankruptcy of ftx. Finally let me say a few words on climaterelated Financial Risks. The occs approach is firmly rooted in our mandate to ensure the National Banks operate in a safe and sound manner. It is not unbolted help makers who to bank or not to bank. We do not pick winners and losers. Rather our focus is on Risk Management and making sure banks especially large banks have the necessary capabilities to identify, measure and monitor the risks. Were committed to staying in our safety and soundness lane, not on setting and social policy. This is important to our credibility as a safety and soundness supervisor. In closing i remain committed to ensuring occ supervise banks operate in a safe sound and fair manner. To meet the credit needs of the community and comply with applicable laws and regulations if i look forward to answering your questions, thank yous with tanks to the four of you. This year weve seen crypto currency values collapse by two trojan and markets crashed them cryptor exchanges implode, file for bankruptcy, investors losing the medical workers losing their jobs. The parallels to pass financial crises throughout our history troubling from wildcat mining in the mid 80 next to the dot com bubble burst to the over counter derivatives that led to the 20078 financial crisis unlike Traditional Bank or credit Union Deposit which americans used to get paid by necessities builder savings, private cryptocurrencies are not backed up or not backed or protected by the government and they shouldnt be. Weve seen them used for speculation and fraud and scams come sanction efficient and outright theft. There doesnt seem to be anything useful or beneficial that hundreds of speculative cryptocurrencies can be used for. For. Since i been chairman of this committee for close to two years, many on my side of the aisle have been raised, have raised warning flags about this. The last thing we need is a risky new Financial Products to crash our Financial System. Thank thank you, those of ys panel for your skepticism about about cryptocurrencies, and well continue that work. As all of you pointed at Digital Assets pose risk to our Financial System. There are many of the risks we need to focus on two major banking and Credit Union Systems resilient for consumers and Small Business owners, so a question for four of you. What are the biggest risks that your agencys see . How can the hardworking families and Small Businesses on main street . What are your agencys and to protect against them . I would begin with mr. Harper, then mr. Gruenberg, and mr. Hsu and then mr. Barr. So if you would answer each of you take a moment or so and answer those questions. Certainly. Generally, i see four risks coming down the line. First is Interest Rate risk for the institution. It fell second and Liquidity Risk. The third is cybersecurity risk, and that were watching on the horizon would be credit risk that happens particularly as unemployment rises. There is a correlation in the numbers that shows that as unemployment rates go up we often seen increasing chargeoffs and default if thats something we will be watching very closely moving forward. Thank you. Mr. Gruenberg. Thank you, mr. Chairman. I think, i think first and foremost as i outlined in my oral statement, i do think we are at an Inflection Point mccue in the economy with the fed having shifted the conduct of monetary policy, and we have a rising Interest Rate environment. At a do think that presents a number of potential Downside Risks to the Banking System that it outlined earlier. I think our institutions are going to have to pay close attention to the Interest Rate risk that has accumulated on the Balance Sheet both through longerterm assets that they have accumulated, and a mention in the unrealized losses on securities on their Balance Sheets and i also think there are a set exposure that our institutions have, particularly in commercial real estate which we had experience with during other times of potential economic and Financial Stress as well as in the mortgage market. So i think from a supervisory standpoint with the changing economic environment as financial regulators and banking regulators we are going to have to pay close attention in particular to these developing issues. Thank you. Mr. Hsu. So think the greatest risk is a risk of complacency. The risks that are facing the Bank Industry fairly well known at this point are Interest Rate risk and credit risk and operational id risk am cyber risk. The risk that banks are facing is there nothing sufficient attention and efficient to that as we deal with other more headline risk such as crypto. There are some tail risk also out there we need to Pay Attention to, global, geopolitical in the commodity space, nonbank financial stick these are also well known and have been identified by the fsoc and others so encourage banks and supervisors to stand up with those. Mr. Barr. Thank you. Like the others, we are paying careful attention to the way in which supervised institutions are managing Liquidity Risk and Interest Rate risk. Cybersecurity is always an issue to be watchful for. We are worried about making sure that Financial Institutions are thinking about potential risks if the economy softens, so particularly as others have said in commercial real estate, Residential Housing which are the sectors most often that are leading indicators for risk in that area. We are paying attention to longerterm risks as well. We talked i think all of us about the longerterm risks with respect to climate change. Events abroad might cause disruption to the United States, so the war in ukraine, russia and ukraine in creates enormous risk in europe and elsewhere. We are paying careful attention to risks in china as well with slowing growth there and political turning that may cause additional risks to happen. And lastly, we are concerned about the risks that we dont know about in the nonbank sector. That includes obviously crypto activity but more broadly risks in the parts of the Financial System we dont have good visibility, we dont have good transparency, we dont have good data. That can create risks that blow back to the Financial System that we deregulate and so we pay careful attention to understand those risks as best we can. Thank you to senator toomey. Thank you, mr. Chairman. I want to follow up on a comment the chairman made. I think i heard the chairman refer to crypto as risky new Financial Products and the insinuation was that they might have the ability to crash our Financial System. I think theres a really important distinction that i want to underscore here. If you look at what happened with fdx, at least what appears to have happened by a very expensive coverage, this is fundamentally not about the kind of assets that were held by fdx. Its about what individuals did with those assets. There are a lot of corollaries, a lot of analogies here. When comes to mind. In 2011 mf global, commodity Brokerage Firm that was run by former new jersey senator jon corzine, it collapsed after customer funds were misappropriated to fully shortfall caused either firms exposure to some trading that went south. Now, nobody suggested that the problem was the instruments that were used. The problem was the use of customer funds. Similarly, the 2008 financial crisis involved disastrous consequences with what people were doing with mortgages to did we decide have to ban mortgages . Of course not. So lets look at fdx. It certainly appears to be an egregious failure to treat customer assets as segregated assets. It appears that the leadership there attempted to fill a hole in an affiliated company, and it occurs to me that this is a worry that i dont have for one split second about my stocks are my bonds or my treasurys when they are held in custody by american banks. Mr. Hsu, a predecessor of yours said that theres no need for any additional guidance. It settled matter as to how banks should custody financial assets. And they do it all the time and theyve done it forever. But my understanding is that your office discourages banks from providing Custody Services, among other services, in the crypto space. And it seems to me if people have access to Custody Services provided by a wide range of institutions, including regulated Financial Institutions, they might be able to sleep more comfortably knowing that those assets were unlikely to be used for some completely inappropriate purpose. Is it true that you discourage banks from engaging in crypto Custody Services . We discourage banks of doing things that are not safe, sound and fair. And so the custody that you described of additional assets, it is true banks have been doing that for a long time. They no had to do that. We know how to do that. The custody of crypto is different. There is some underlying fundamental issues in question regarding what does it mean to own custody to own crypto through custody which is not been fully worked out. So its not clear. So this activity crypto trading, holding crypto, why have two provided declared . Why havent you provided guidance so it is clear and we could have customers have the assurance of having to assets stored by reliable institution . If banks can demonstrate that they can do that activity in a safe sound and fair manner, we are all ears. But i think some of this obligation is on you to provide some clarity about how that could work. And as i say what im hearing from the industry is that this activity is being discouraged, and the result is not that activity doesnt occur. Its just that it goes somewhere where the regulation is often lacks. Let me move on another aspect of this. Vice chairman warner, you recently said that there are types of crypto related activities where the fed may need to provide guidance to the Banking Sector. In your view is custody a category of crypto activity that the Banking Sector can provide and could use some guidance . Thank you, senator toomey. I do think that it would be useful for us to provide guidance to the Banking Sector about how to safely custody crypto assets. Something i look forward to work with my colleagues on. I think we have seen in the context of recent events that if you have a set of firms that are trying to operate outside the regulatory perimeter trying to avoid compliance issues, that can create enormous problems for consumers, for investors. Theres huge problems that these investors experienced that it dont think anyone wants to see happen. Let me do a quick follow up here. My understanding is the fcc is put up the guidance recently that would require issuing firms that custody crypto to put that crypto on their own Balance Sheet. Now that is contrary to the way Custody Service are true in every other category of asset that i can think of, and always has been. If that were the case, if you are a firm that doesnt care about having a bloated Balance Sheet, maybe you dont care. But banks have reason to be very concerned about increases in the Balance Sheet because of Capital Requirements. Wouldnt this impose a significant cost on banks if they are, in fact, obligated to put all of the custody assets, the crypto custody assets on the Balance Sheet. Was well, weve seen banks operate in a brick cautious way to date. They are very few institutions that are currently seeking to engage in custody activity. Of course we require all of our regulated Financial Institutions to comply with accounting rules, including accounting interpretation issued by the fcc. So publicly traded banks would need to comply with that rule, and it would have the result that custody of crypto assets, you would need to hold capital against in in a way that is not reqd of any other category. In a way that is not required for traditional custody of noncrypto assets, and so that differential would impact a bank decisionmaking. Thank you very much. Thank you, senator toomey. On behalf of the chairman of the recognize myself. Gentlemen, thank you for being here today. Vice chair barr, the volcker rule prohibits wall street banks for making investments in hedge funds and private equity funds. Legislation was passed in 2010 with the hope that those investments could be liquidated quickly, but there were some that were deemed to be too illiquid or too difficult to be dispensed with immediately. And so there was an extension to july 2022, 12 years 12 years, and yet there are institutions that are still not get disassociate himself and disinterested. Youve given them extra time. Is this going to be an endless process . Why cant they get it done . Senator reed, thank you. I agree with you. I think the time has come for those investments to happen. The volcker rule provided as you said until july of this past year to get that done. Some firms i believe were erroneously relying on illegal interpretation that would not require them to do those divestitures. I think that isnt incorrect legal interpretation. We will be clear with them that it is time to get those divestitures done. Some of them may need a small amount of time to get that done but were not quite as he continued extensions be on the. Thank you very much. Mr. Grunwald, the fed raises interest banks, usually banks follow with their savings rates. In fact, industry deposit rate should be picking up on the rate about 1. 33 . The fed rate is down 4 and a National Average Interest Rate on a saving account is now. 2 . But the nations biggest banks are even lagging that average. They are at. 1 . Why do you think the biggest banks have been lagging so much in terms of sharing with their savers . Thank you, senator. Its pretty clear that the Banking Industry is trying to take advantage of rising Interest Rates on the credit product side to increase earnings, and fair to say that what they are paying out on the Positive Side has lagged that. We will see if Competitive Pressures within the Industry Impact what they may offer on deposit accounts. But for right now theres clearly a lag. Thank you. Let me follow up on another question, mr. Greenberg. Gruenberg. Theres been a situation where banks are parting with fintech companies. Its been described as rent a bank where the Fintech Company comes in and uses the bank as an intermediate to avoid limits and other restrictions. Many of these are your institutions. What are you doing to try to stop that . Thank you for the question, senator. When a Bank Partners with a thirdparty and the thirdparty is providing services on behalf of the bank, including credit products, as a supervisory matter the offering of services by the thirdparty are treated as if the bank itself is offering those services and products. And the bank is supervised accordingly. We have a number of institutions that are utilizing partnerships to benefit from the banking relationship to theres several institutions. I will say were taking a close look particularly at the lending activity going on to ensure that the lending activity is being appropriately underwritten, and it is based on the borrowers ability to pay as well as Consumer Protection requirements in terms of disclosure and transparency are being complied with, and this is a matter of extra attention for us. Appreciate you asking the question. Thanks very much. Now on behalf of chairman brown let me recognize senator rounds. Thank you, mr. Chair. Vice chair barr, welcome back to the committee and congratulations on your confirmation. In recent speeches youve announced that you would be conducting a holistic review of the capital framework for our Financial Institutions, included in that evaluation will be a review of the subcommittee level of racial or as as a lark ofe car cyclical capco offer and stress testing because review is long overdue as a fit of said for months that it would reassess both the gsib surcharge and the slr. In the process it is important that we strike a balance between Financial Stability and Economic Growth in order to achieve that balance i believe the Federal Reserve must be transparent and considering but not only from congress but from stakeholders on any adjustments. When do you expect this review to be complete and we commit to providing a transparent, formal, public process with a Comment Period for any resulting adjustments to slr, the gsib surcharge can stress test or countercyclical capital buffer . Thank you, senator rounds. Were conducting that review now. We are in the middle of that. I expect that early next year we will be able to say more about where we are in that process. If any of these parts of the review require us to rethink a rule like the slr, the countercyclical counter buffer and the like, we of course would seek public, as part of that process. We will issue a proposal, get comics income peaked on what those comments, understand them and then lead to any action we took on final rule. So we would follow normal process on that. Thank you. Share harper, late last year the ncua approved its 20222026 draft Strategic Plan which included an analysis of internal and external environmental, and if im impacting ncua and evaluate the agencies programs and risks. They included language suggesting that as a result of changing weather disproportionately affecting farming communities Credit Unions should consider adjustments to their membership. This was very problematic language at it implied that Credit Unions that primarily serve agricultural communities may have to alter their memberships will face increased costs and regulations. As a result of the actions of senator cramer and myself, that language thankfully was not included in the final draft. Share harper, when you commito avoiding similar problematic language in future Strategic Plans and commit to not punishing Credit Unions for supporting the local farmers, ranchers and agribusinesses in their communities pgh yes. Thank you. It is the widely reported that the cfpb is planning to shift liability for peertopeer payments that consumers make to a scammer. Scammers scamps would lim such a policy because however official government a dog they can induce people to pay them by telling them there is the risk in sending the money, even if the circumstances are suspicious. However, banks, unlike the consumer would have no insight into the transaction to be able to stop it. My question for vice chair barr, are you concerned to the impact en banc safety and sound is given banks in the building to identify or stop the fraud and the size of potential fraud losses banks could incur . And furthermore, has to be in any Research Done to determine how fees will increase and what new costs consumers would bear if this is estimated . Thank you, senator rounds. The regulations at issue, regulation e, r and permitted by the Consumer Financial protection bureau. So when the first instance i think it makes sense for them to figure out what they would like to propose if anything in that area and then we would be able to understand the implications of that proposal more broadly but i dont have any further insight about it at this time. No existing studies at this point . I dont know the answer to that. None that i am aware of, but, but there may be others that exist that i dont know. Thank you. Following an influx of deposits generally by government stimulus, the fdic approved an aggressive proposal to you m increased Bank Deposit Insurance assessment rates high two basis points until the deposit Insurance Fund reaches a designated reserve ratio of 2 . This proposal has the potential to disproportionally harm Community Banks by forcing them to pay between 5 and 25 of the pretax income for insurance assessment. Meanwhile, the occ the occ recently approved a 40 reduction in assessment for occ chartered Community Banks. Banking chair greenberg, could you please expand a lot of between supporting increases to come into banks fdic deposit insurance assessment rates will be on the statutory requirement and was a study done to determine the ratio of 2 2 s that an arbitrary number . The 2 was the subject of careful analysis and was reached speeded we will be this hearing here to take you live now to the floor of the u. S. Senate. You can continue watching if you go to our website cspan. Org. The senate is about to gavel in for the day and work on a judicial nomination. Life now to the floor of the u. S. Senate here on cspan2