Transcripts For CSPAN Financial Regulators Testify On Banks The Economy 20221115

Affordable internet so homework can be just homework. Cox, connect to compete. Cox, along with these other television providers, giving a frontrow seat to democracy. Next, testimony on oversight of the Banking System and the cryptocurrency market held in the wake of the recent collapse of the krips exchange f. T. X. Other topics include the impact of the economy on Banking Systems, lending in rural, native, and minority communities, and banking reform. This is two hours and 10 minutes. Senator brown the Senate Committee on banking, housing, urban affairs will come to order. Welcome to the witnesses and committee members. We know that most americans want the same things, a safe, affordable place to call home a good paying job. A strong stable government which they can trust. Our Democratic Institutions are only as strong as the people who empower them. Our economy works best when we have a free and fair democracy in which everyone can live lives with dignity for too long. Many of these dreams have felt out of reach. Working families struggle to pay for groceries to keep gas in their car to keep a roof over their heads. 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 their homes during the height of the pandemic. We made investments in Public Transit in our nations infrastructure for the first time in generations. We focused on communities that our governments turned their back on, especially for instance, in my state that State Government now were tackling inflation by taking on Corporate Power and consolidation and reducing our dependence on foreign oil. We do that while creating good paying manufacturing jobs at home. These jobs making semiconductors, electric vehicles, solar panels or the jobs of the future. These jobs will go to americans because we pass the chips act, the inflation reduction act. The bipartisan infrastructure law was strong by america that senator portman and i worked on and we see results, our economy recovery, economic recovery has been strong over the past two years. Many americans have build up more in savings. Weve seen robust job growth for the first time in decades. Weve seen wage gains. Just last week, we began to see signs that inflation is starting to cool. Banks and Credit Unions are doing well. Thanks for the protections we put in place in doddfrank and because of the support that congress and regulators provided during the pandemic. Too many big corporations though have taken advantage of market concentration, jacking up consumer prices, earning higher and higher profits. My colleague senator reid has pointed out the biggest banks that benefit from higher Interest Rates today are not passing on those benefits to their customers. Again, penalizing americans who are trying to build up savings. Workers and Small Businesses already struggling under the weight of inflation shouldnt get hit with exorbitant bank fees, shouldnt lose their money on a cryptoscam, shouldnt have to worry that their savings will disappear overnight if a mismanaged bank or 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, helping more americans hold on to hard earned money at a time when they need it. Most banking and credit union regulators or independent agencies that protect consumers, make sure banks and Credit Unions are safe and strong. Their independence, your independence matters. It makes for a more stable Financial System. Its essential for the entire economy. Our Witnesses Today all 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 our banking and Credit Union System works for main street, not just for wall street. Thats exactly what they continue to do today. Theyre modernizing and strengthening an important civil rights law that will spur new investment in neighborhoods and communities that were left on their own. Thank you for that. Theyve taken a closer look at overdraft, nonsufficient funds and other gotcha fees that banks and Credit Unions to make sure customers are treated fairly at these fee programs dont raise safety and soundness concerns. Thank you for that. Theyre taking a fresh look at the bank merger approval process. So we dont continue this rubber stamp consolidation, which has big consequences for local communities. Too often big banks merge and close branches, leaving rural towns in urban communities without a bank. Theyre revisiting the Financial Systems safeguards that protect us from risks that big foreign at 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 lend and invest in communities in good times and bad. Theyre also overseeing the formation of new institutions that serve communities that often get left behind. Just last weekend, a new faithbased credit union fdic recently approved the First Mutual Bank in 50 years, which will pave the way from warren, ohio, and across the country, all the agencies are working together to foster new banks and Credit Unions and support the work at the same time, our regulators are looking out for risks on the horizon. The effects of Climate Change, the rise in Crypto Assets, the risk from shadow banks, the constant threat of cyber attacks. Theyre working with banking and Credit Union Industry to prepare for climate related risks and bolster cybersecurity protections. As criminals become more sophisticated in geopolitical threats increase. They stepped up to protect depositors and consumers when crypto firms mislead them into thinking their money is safe when it isnt. But we must stay vigilant, empower regulators with the tools to combat these growing risks, data breaches at banks and Credit Unions happen too often, threatening consumer Customer Data and exposing our Financial System to vulnerability. Thats why we need to pass the bipartisan improving cybersecurity of Credit Unions act led by senator ossoff and warrener warner. We need to make sure that banks and Credit Unions can partner with third parties in a way that allow banks to stay competitive without putting consumer money at risk. We cant let Big Tech Companies in risky, risky shadow banks play by different rules because of special loopholes. All these things will help 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. We have a stronger labor market that helps Credit Unions which added over five million new members over the past year. It drives down the number of households without a bank account, which dropped to record lows in 2021. When governments on the side of working families, more americans save money, more americans build wealth, more americans start Small Businesses. More americans participate in our economy. Our financial regulators have answered that call. Thank you for that. Ill continue to work with them to make sure our banking and Credit Union System works for everyone. Before i conclude my remarks, i want to thank the witnesses again for being here. Especially congratulate Marty Gruenberg in being nominated by President Biden to be chair of the fdic. Marty is well respected and seasoned regulator whos worked to protect consumers and preserve confidence in our Banking System. Played an instrumental role in helping implement many doddfrank reforms with his experienced leadership. I have no doubt that fdic can continue to address risks in our Financial System and increase access to Affordable Financial Services and ensure that banks honor their commitment to communities through the c. R. A. This committee looks forward to holding the nominations hearing in the next few weeks for marty and other fdic nominees center to me. Senator toomey. Senator toomey thank you, mr. Chairman. Welcome to our witnesses. Throughout this congress, ive warned about the politicization of the financial regulation. Some Bank Regulators are increasingly straying outside of their mandates into politically contentious issues. Take Global Warming. For instance, in september the fed announced a, quote, Pilot Climate Scenario Analysis exercise, end quote, with six of the largest u. S. Banks. Now were told that this is merely an exercise in ensuring that banks understand their risks. But the data, including the feds own research, shows theres no physical risk to banks from Severe Weather events. The only other risk is so called transition risk. We also know that banks are fully capable of pricing risks into their business decisions, including risks from changing customer preferences over time. So the real risk here is political. My worry is that an attempt to somehow quantify this Political Risk will eventually result in regulations designed to allocate capital away from carbon intensive companies. It appears some Bank Regulators are already committed to doing just that. For example, the fed, the fdic and the o. C. C. 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, and i quote, mobilize mainstream finance to support the transition toward a sustainable economy, end quote. In other words, their goal is to allocate capital away from koosh carbon carbonemitting industries to those deemed to be sufficiently green. Let me emphasize the fed, the fdic and the c. C. C. Have all joined this group. The ncua has also warned that Credit Unions, and i quote, may need to consider adjustments to their fields of membership as well as the types of loan products they offer, end quote, and thats because of Global Warming. So heres the reality. Some unelected financial regulators want to accelerate the transition to a low Carbon Economy by misusing their powers to allocate capital away from Traditional Energy companies. But addressing Global Warming requires really difficult political decisions that 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 are held accountable through the political process. And i supported vice chairman barrs nomination despite a number of policy differences i have with him based in part on his commitment to stick to the feds narrow mandate at his confirmation hearing. Vice chairman 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 thank him again for that clarity and i urge him to keep to that commitment. And one way we could 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 the 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 Large Regional Bank would be to sell it to an even larger bank. But 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 the 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 their 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 cost, 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. And while some of our banking regulators have been distracted, they failed to address real challenges facing the Financial System. For example, last year, the fed, the fdic and the o. C. C. Committed to providing greater clarity on the involvement of banks in cryptoactivities, such as providing Custody Services or issuing stable coins. Well over a year later, they still provided no public clarity. And during that same period weve seen several highprofile collapses of Crypto Companies, including a very prominent example just last week. I think its very possible that customers harmed by these collapses would have been better off if their cryptoassets had been Crypto Assets had been safeguarded by regulated banks that have 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 until your agencies provide this clarity, which just hasnt been forthcoming. I will note however, that chairman harper seems not to have pursued this Pressure Campaign with Credit Unions. In fact, hes issued guidance for Credit Unions on partnering with Crypto Companies or using distributed ledger technologies. However, the ambivalence of the remaining agencies has helped to push crypto activities into foreign jurisdictions with weaker or no regulatory regimes. And as a general matter, it seems to me the failure of congress to pass legislation in the space and the failure of regulators to provide clear guidance has created ambiguity that has driven developers and entrepreneurs overseas, where regulations are often lax at best. One other item i want to highlight before we start the rest of the discussion and its the deteriorating liquidity in the u. S. Treasury market. In march of 2021, the fed committed to modify the supplementary leverage ratio or s. L. R. , in part to facilitate bank dealers ability to intermediate in this market. Over 18 months later, the fed still has not act. I understand vice chairman barr has only been in this role for four months and he has reasonably suggested that potential amendments to the s. L. R. Should be in the context of reviewing all Capital Requirements. I understand that but we really should recognize that a significant decline and treasury in treasury market liquidity is already occurring and absent and improvement, im afraid that the fed might one day decide it 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 regulators today is that they will prioritize these and other real challenges and not stray beyond their mandates into politically contentious issues or establish unnecessary new regulatory burdens. Thank you. Senator brown thank you, senator toomey. Ill introduce the four witnesses. Michael barr took office as vice chair for supervision of the board of governors of the Federal Reserve system july of 22 for a fouryear term. He also serves as a member of the board of governors. Todd harpers was sworn in to serve a full term. At the National Credit Union Administration board chair in july of 2022. Martin gruenberg has been acting chair of the fdic board of director since february of 22. Hes been previously confirmed a Service Chair and vice chairman of the fdic and has served at the fdic since 2005. Michael hsu became acting comptroller of the currency in may of 2021. Mr. Barr, if you can begin your testimony. Mr. Barr 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 supervisory and regulatory activities. As vice chair for supervision, my priority is to make the Banking System safer and fairer. The Banking System is constantly evolving. So regulation and supervision must adjust 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 a Global Pandemic. And recent events in crypto markets have highlighted the risks associated with new Asset Classes were not accompanied by strong guardrails. Turning to a number of our priorities at the Federal Reserve, im taking a holistic look at the feds capital framework to assess whether it is functioning as intended and supports a resilient Financial System. I believe the capital framework should be forward looking should should be tiered so that the highest standards apply to the riskiest firms and should support a safer and fairer Financial System. In recent years, merger activity and organic growth have increased the size of large banks, which could complicate efforts by regulators to resolve those firms upon failure without disruption to customers and counter parties. The board and the fdic recently invited comment on an advanced 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 advantage is that firms seek to gain through mergers must also be weighed against the risk that mergers can pose to competition, consumers and Financial Stability. Another priority is monitoring the risk of crypto asset related activities. Crypto asset related activity requires effective oversight that includes safeguards. To ensure that Crypto Companies are subject to similar regulatory safeguards as other Financial Service providers. We are also working to understand Financial Risks related to Climate Change. At the fed, our mandate in this area is important but narrow and we are focused on our supervisory responsibilities and our role in promoting a safe and stable Financial System. To that end, the Federal Reserve recently announced a Pilot Climate Scenario Analysis exercise designed to enhance the ability of supervisors and firms to measure and manage climate related 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. Ill continue to work to promote a safe and fair Banking System. Thank you and i look forward to your questions. Senator brown thank you. Mr harper, thank you for joining us. Mr. Harper chairman brown, Ranking Member toomey and members of the committee, thank you for inviting me to discuss the state of the Credit Union System. While the economic fallout of the covid19 pandemic, along with rising Interest Rates, have influenced 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 5,000 federally insured Credit Unions with nearly 133 million members and more than 2. 1 trillion in assets. Notably, the industrys aggregate net worth ratio rose to 10. 42 , representing a recovery of 40 basis points from a pandemic low. Further the National Credit union Share Insurance Fund further the National Credit union Share Insurance Fund continues to perform well with no premiums or distributions expected at this time. During the last year the n. Ncoa has undertaken several notable actions to strengthen capital, enhanced cybersecurity and support small and minority Credit Unions to fortify the Credit Union Systems ability to better withstand future crises. The ncoa implemented its risk based capital rule along with a simplified compliance option. At the start of 2022. The agency also has begun deployment of its new scalable Information Security Examination Program to allow the n. Ncoa to better evaluate credit union cyber risks. Further the agency has increased the Resources Available in the field to assist small and minority Credit Unions and we will soon modify our examination procedures for minority Credit Unions to better recognize their unique strategies. Additionally the ncoa is paying closer attention to Consumer Financial protection, which buttresses and complements our safety and soundness efforts this year ncoa examiners are reviewing compliance with pandemic assistance programs, fair lending rules, Service Member protections, fair credit reporting laws and overdraft programs. We have also increased the resources for fair lending supervision and as we move into 2023. The ncoa is emphasizing that all Credit Unions remain vigilant in managing safety and soundness and Consumer Financial protection to prepare for rising Interest Rates, inflationary pressures, liquidity concerns and cybersecurity risks. Additionally as the Financial Services system and Credit Unions continue to evolve especially with many Credit Unions growing larger and more complex, the industrys 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 n coa has undertaken several rule makings or implemented new rules during the last year. These rules address member expulsion procedures, subordinated debt emergency Capital Investments and cybersecurity notifications. Finally i want to highlight two legislative changes that would help the agency better fulfill its statutory mission. Most timely, the ncoa requests a permanent adjustment to the agent member requirements for the central liquidity facility. Notably the extension of this enhancement comes at no cost to the taxpayer as scored by the congressional budget office. Currently corporate Credit Unions may serve as an agent for a subset of their members but without legislative action. By years end 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 events will shrink by 10 billion. With growing Interest Rate risk and rising liquidity concerns now is not the time to decrease the access to the systems liquidity shock absorbers. The ncoa is also seeking restoration of its ability to oversee Third Party Vendors. This statutory change would provide the ncoa with parity with other agencies that supervise and regulate federally insured depository institutions. This Examination Authority is critical given the systems increased reliance on Third Party Vendors and Credit Union Service organizations. The Government Accountability office, the Financial Stability Oversight Council and ncoas office of Inspector General have all recommended that Congress Restore the ncoa vendor authority. The u. S. House of representatives has passed legislation as part of the 2023 National Defense act to reinstate the ncoa vendor authority. And in the Senate Bipartisan legislation has been introduced for which i would like to thank senators ossoff, lummis and warner their bill, the improving cybersecurity of Credit Unions act would close a growing regulatory blind spot that concludes my statement. I look forward to your questions. Sen. Brown thank you, mr. Harper. Mr. Greenberg. Mr. Greenberg thank you, chairman brown. Ranking member toomey, and members of the committee. I very much appreciate the opportunity to appear today at this hearing on the oversight of the financial regulators in my oral remarks today id 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 results for this year amid continued Economic Uncertainty, loan growth strengthened Net Interest Income grew and most asset quality measures improved. Further, the industry remains well capitalized and highly liquid. The number of institutions on the fdics Problem Bank List remained stable in the Second Quarter of this year at 40 institutions. Thats actually the lowest number since quarterly reporting began in 1986. 14 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 and thats worth paying some attention to. The increase in provision expense is the amount set aside by institutions to protect against future credit losses, reflects the Banking Industrys recognition of risks related to persistent economic uncertainties and slowing Economic Growth as well as the increase in loan balances. Rising market rates and strong loan growth supported an increase in the Banking Industrys Net Interest Margin from the first to the Second Quarter. As a result, most banks reported higher Net 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 and theres a significant overhang here. As of the Second Quarter of 2022 banks reported 470 billion in unrealized losses. As the market value of securities fell below 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. Liquidity needs. In summary, despite favorable performance metrics, the 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, slowing Economic Growth and continued geopolitical uncertainty. Taken together, these risks could reduce profitability, weaken credit quality and capital and limit loan growth in coming quarters. Further as i mentioned, higher market rates have led to continued growth and unrealized losses in the Banking Industry, securities portfolios, higher rates may also erode real estate and other asset values as well as hamper borrowers, loan repayment ability. Borrowers loan repayment ability. So these are all matters that will be paying at the fdic close attention to over the course of this year and next. In my written testimony, i provide an overview of the condition of the fdic s. Condition of the fdics deposit Insurance Fund and the reason behind the fdics decision to increase deposit insuranceessments by two basis points next year to avoid a potentially larger, more pro cyclical increase later and 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, reviewing the bank merger process, evaluating the risks of Crypto Assets to the Banking System and finalizing the basel three capital rules. I also discussed the fdics efforts to support minority depository institutions and Community Development. Financial institutions promoted diverse, promote a diverse and inclusive workplace at the fdic strengthen cybersecurity and Information Security within the Banking Industry and the fdics recent return to in person examine a banking examinations and other in person activities at every level of the agency. Id be glad to respond to questions from the committee on these or any other matters. Thank you. Sen. Brown thank you, build mr. Mr. Su, welcome. Mr. Su chairman brown, Ranking Member to me and members of the committee. Im pleased to appear before you today to provide an update on the activities underway at the o. C. C. The mission of the o. C. C. Is to ensure that National Banks and federal savings associations operate in a safe and sound manner, provide fair access to Financial Services treat customers fairly and comply with applicable laws and regulations. Since my appointment to fulfill this mission, we have focused on four priorities guarding against complacency, reducing inequality and banking, adapting to digitalization and managing climate related Financial Risks. My written statement describes the process the o. C. C. Has 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 o. C. C. s commitment to Community Banking. We are taking specific actions to support Community Banks including revitalizing minority depository institutions, reducing Community Bank assessments, promoting de novo startup banks and tailoring regulation based on size and complexity. Second, the o. C. C. Continues to encourage the banks we supervise to improve their products and Services Including overdraft programs with their customers, Financial Health 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 overdrafts charged, to provide grace periods before fees are imposed and to end non sufficient funds fees. By some estimates changes at the largest National Banks could save consumers billions of dollars annually. Additionally, the o. C. C. Has strengthened its supervision of compliance with fair lending laws. We recently updated our process for screening bank Retail Lending activities to provide more risk focused fair lending examination strategy to identify weaknesses or wrongdoing. Where we find evidence of potential discrimination, we refer those matters to doj and hud as applicable. Redlining and other forms of lending discrimination are unacceptable, especially in this day and age, and we will not hesitate to take enforcement action if necessary. The o. C. C. , in coordination with the Federal Reserve and fdic as well as the doj, is also considering updates to the framework for analyzing mergers under the bank merger act. This is to ensure that resulting entities continue to meet the convenience and needs of the community, support Financial Stability, enhance competition and are safe and sound. The o. C. C. Considers each merger application on its merits against the statutory factors in associated regulatory criteria. We are planning a public symposium in february to explore this important issue further as the further. As the digitalization of banking accelerates and bank fintech partnerships grow, the o. C. C. Is focused on ensuring that our expertise and Regulatory Framework adapts so that safety soundness and fairness of banking is maintained and even strengthened. We recently announced that we will be establishing an office of Financial Technology early next year, building upon the work and successes of the agencys office of innovation, which was created in 2016. This change will enable us to engage more substantively with non Bank Technology firms and to better supervise bank and tech partnerships so that we can help ensure that consumers of Banking Services are treated fairly as well as help maintain a level Playing Field as the industry evolves. With regards to crypto, the o. C. C. 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 helped to mitigate the risk of contagion from crypto to the federal Banking System after the collapse of terra luna this spring, as well as more recently with the bankruptcy of f. T. X. Finally let me say a few words on climate related Financial Risks. The o. C. C. s approach is firmly rooted in our in our mandate to ensure that National Banks operate in a safe and sound manner. It is not our role to tell bankers 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 their risks. We are committed to staying in our safety and soundness lane not on setting industrial policy. This is important to our credibility as a safety and soundness supervisor. In closing i remain committed to ensuring that o. C. C. Supersreutzed banks oklahomasupersraoeutzed banks operate in the safe, sound and fair manner meet the credit needs of their communities and comply with applicable laws and regulations. I look forward to answering your questions. Thank you. Sen. Brown thank you. Mr. Hsu, thanks, to the four of you. This year weve seen cryptocurrency values collapse by two trillion 2000 billion. And markets crash Crypto Exchanges implode file for bankruptcy investors losing their money, workers losing their jobs. The parallels to past financial crises through our history are troubling from wildcat money in the mid 1800, to the dotcom bubble burst in the 1990s, to the overthecounter derivatives that led to the 20072008 financial crisis. Unlike Traditional Bank or credit union deposits, which americans used to get paid by necessities build their 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, sanctions evasion, outright theft. There doesnt seem to be anything useful or beneficial that hundreds of speculative crystal cryptocurrencies can be used for. Since ive been chairman of this committee for close to two years, many on my side of the aisle have raised warning flags about this. The last thing we need is for risky new Financial Products to crash our Financial System. Thank you. Uh those of you on this panel for your skepticism about crypto currencies and we will continue that work. As all of you pointed out, Digital Assets pose risk to our Financial System. There are many other risks we need to focus on to ensure banking and Credit Union System is resilient for consumers and Small Business owners. So, question for all four of you, what are the biggest risks that your agencies see . How could they harm working families and Small Businesses on main street . What are your agencies doing to protect against them . Ill begin with mr. Harper and then mr. Gruenberg, mr. Hsu and mr. Barr. Mr. Harper certainly. Generally, i see four risks that are coming down the line. Uh first is Interest Rate risk uh for the institution uh itself, second is Liquidity Risk. The third is cybersecurity risk and something 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 see an increase in charge offs and defaults. Thats something that were going to be watching very closely. Moving forward. Sen. Brown thank you. Mr. Gruenberg. Mr. Grueberg thank you, mr. Chairman. First and foremost, as i outlined in my oral statement, i do think were at an Inflection Point here in the economy with the fed having shifted the conduct of Monetary Policy and we have a rising Interest Rate environment and i do think that presents a number of potential Downside Risks to the Banking System that i outlined earlier. I think our institutions are going to have to pay close attention to the um Interest Rate risk thats accumulated on their Balance Sheet both through longer term assets that theyve accumulated. And i mentioned in particular the unrealized losses on securities on their Balance Sheets. And i also think there are asset exposures that our institutions have, particularly in commercial real estate which weve 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, were going to have to pay close attention in particular to these developing issues. Thank you. Sen. Brown mr. Hsu. Mr. Hsu so i think the greatest risk is the risk of complacency. The risks that they are facing in the Bank Industry are fairly well known at this point. Interest rate risk, credit risk operational i. T. Risk cyber risk. The risk that banks are facing is that they are not paying sufficient attention and vigilance to that as we deal with other more headline risk such as crypto. There are some tail risks that are also out there that we need to Pay Attention to global uh geopolitical and in the commodity space non bank financials. These are also well known and have been identified by the f sock and other, so just encourage banks and supervisors to stay on top of those. Thank you. Mr. Barr thank you. Like the others were 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. Were worried about making sure that Financial Institutions are, are thinking about potential risks if the economy softened. So, particularly as others have said in commercial real estate residential housing, which are the sectors most often that are leading indicators for for risk in that area, were paying attention to longer term risks as well. We talked, i think all of us about the longer term risks with events abroad, might cause disruptions in the United States. So the war in ukraine, russias war in ukraine obviously is devastating for the people of ukraine and also creates enormous potential risks in europe and elsewhere. And were paying careful attention to risks in china as well, with slowing growth there and a political turn inward that may cause additional risk to happen. Lastly, were concerned about the risk that we dont know about in the non bank sector, uh that that includes, obviously crypto activity, but more broadly risk in the parts of the Financial System where 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 do regulate. And so we pay careful attention to understanding those risks as best we can. Sen. Brown thank you. Senator toomey. Sen. Toomey thank you, mr. Chairman. I want to follow up on a comment the chairman made. I think i heard the chairman referred 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 ftx, at least what appears to have happened by a very extensive coverage, this is fundamentally not about the kind of assets that were held by f. T. X. Its about what individuals did with those assets. There are a lot of corollaries. There are a lot of analogies here. One comes to mind. In 2011 mf global commodity brokerage firm, it was run by former new jersey senator jon corzine. It collapsed after customer funds were misappropriated to fill a shortfall caused by the 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. Did we decide we gotta ban mortgages . Of course not. So lets look at f. T. X. 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 at an affiliated company. And it occurs to me that this is a worry that i dont have for one split second about my stocks or my bonds or my treasuries when theyre held in custody by american banks. Mr. Hsu, a predecessor of yours said that theres no need for any additional guidance. Its 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 had 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. So is it true that you discourage banks from engaging in crypto Custody Services . Mr. Hsu we discourage banks from doing things that are not safe, sound and fair. And so the custody that you described of traditional assets, it is true banks have been doing that for a long time. We know they know how to do that. We know how to do that. The custody of crypto is different. There are some underlying fundamental issues and questions regarding what does it mean to own custody through a custody, uh, crypto through customs, which have not been fully worked out. Sen. Toomey so this activity, crypto trading, People Holding Crypto Assets, has been gone for many years. Why havent you provided the clarity, why havent you provided guidance so that it is clear and we could have customers have the assurance of having their assets stored by reliable institutions. Mr. Hsu if banks can demonstrate that they can do that activity in a safe sound and fair manner, were all ears. Sen. Toomey 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 the activity doesnt occur, its just that it goes somewhere where the regulation is often lax. Let me, let me move on. Another aspect of this. Vice chairman barr, 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. Mr. Barr thank you, senator toomey. I do think that it would be useful for for us to provide guidance to the Banking Sector about how to safely custody Crypto Assets, something i look forward to working with my colleagues on. I think weve 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 a huge um, problems that these investors experience that i dont think anyone wants to see happen. Sen. Toomey a quick followup here. My understanding is the s. E. C. Has put out 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 Services are treated in every other category of asset that i can think of, and always has been. If that were the case, if youre a firm that doesnt care about having a bloated Balance Sheet, maybe you dont care. Very concerned about increases in their Balance Sheet, because it has Capital Requirements. Wouldnt this impose a significant cost on banks if they are in fact obligated to put all of the custody assets at crypto custody assets on their Balance Sheets . Mr. Barr weve seen banks operate in a pretty cautious way to date. There 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 interpretations issued by the s. E. C. , and so publicly traded banks would need to comply with that rule. And it would have the result that custody of Crypto Assets, would you need to capital in a way against in a way that is not required for traditional custody of nonCrypto Assets. And so that that differential would impact a Bank Decision making. Sen. Toomey thank you very much. Sen. Brown thank you, senator toomey. On behalf of the chairman, ill recognize myself. Gentlemen, thank you for being here today. Vice chairman barr. The volcker rule prohibits wall street banks for making investments in hedge funds and private equity funds. The legislation was passed in 2010 with the hope that those investments can be liquidated quickly. But there are 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. And yet theres two institutions that are still have not disassociate themselves and disinvested. Youve given them extra time. Is this going to be an endless process . Done . Mr. Barr senator reed, thank you. I agree with you. I think the time has come for those divestments 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. Legal interpretation, well be clear with them that its time to get those divestitures done. Some of them may need a small amount of time to get that done . But were not going to see continued extensions beyond that. Thank you very much. Mr. Tkpwraoupbberg. The fed raises Interest Rates, historically, banks usually follow with their savings rates. In fact, in court, the Industry Research the deposit rate should start ticking up when the feds target rate hits about 1. 33 . Well, the fed socket rate is now 4 . And a national average, Interest Rate on a saving account is now. 2 . But the nations biggest banks, theyre even lagging that average. Theyre at. 1 . So, what do you think the biggest banks have been lagging so much in terms of sharing their beneficence with their sabers . Savers . Mr. Gruenberg thank you, senator. Its pretty clear that the Banking Industry is trying to take advantage of rising Interest Rates and on the credit product side, to increase earnings and fair to say that what youre paying out on the deposit side has lagged. That well see if Competitive Pressures within the, within the industry, you know, impact what they may offer on deposit accounts. But right now, theres clearly a lag, thank you. Sen. Reed thank you. Let me follow up with another question. There has been a situation where banks are partnering with fintech companies. Its been described as rentabank. Where a Fintech Company comes in and uses the bank as an intermediate to avoid use free user limits and other restrictions. And many of these are your institutions. What are you doing to try to stop that . Mr. Gruenberg thank you for the question, senator. When a Bank Partners with a third party and the third party is providing services on behalf of the bank, including credit products. Products, as a supervisory matter, the offering of services by the third party 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. Theres several institutions, i will say we are taking a close look, particularly at the lending activity going on, to ensure that the lending activity is being appropriately underwritten and then its 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 active appreciate you asking the question. Sen. Reed well, thank you very much. Now on behalf of chairman brown, let me recognize senator rounds. Sen. Rounds thank you, mr. Chair. Vice chair barr, welcome back to the committee. 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 supplementary leverage ratio or slr the countercyclical capital buffer and stress testing. This review is long overdue. As the fed has said for months that it would reassess both the g sib 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 consider input not only from congress but from stakeholders on any adjustments. When do you expect this review to be complete . And will you commit to providing a transparent formal public process with a Comment Period for any resulting adjustments to s. L. R. And the g6 surcharge, stress tests or countercyclical capital buffer . Mr. Barr thank you, senator rounds. Were kublgting that review now conducting that review now. Were in the middle of that. I expect that early next year well 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 capital buffer and the like we would of course seek Public Comment as part of that process. We will issue a proposal. Get comments in evaluate those comments, understand them and then lead to any action we took on a final rule. So we would follow a normal process on that. Sen. Rounds thank you. Late last year the ncua approved its 20222026 draft Strategic Plan which included an analysis of the internal and external environmental environment impacting n. Ncua and evaluated the agencys programs and risks. It 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 as it implied that Credit Unions that primarily serve agricultural communities may have to alter their memberships or face increased costs and regulations as a regulations. As a result of the actions of senator kramer and myself, that language thankfully was not included in in the final draft. Chair harper, will you commit to avoiding similar problematic language in future Strategic Plans and commit to not punishing Credit Unions for supporting their local farmers, ranchers and agribusiness is in their communities . Mr. Harper yes. Sen. Rounds thank you. It has been widely reported thatle cfpb is planning to shift liability for peer to peer payments that consumers make to a scammer. Scammers would likely profit from such a policy because armed with an official government document they will be able to induce people to pay them by telling them there is no 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 . Are you concerned there will be an impact on bank safety and soundness given banks inability to identify or stop the fraud and the size of potential fraud and losses that banks could incur . And furthermore, has there been any Research Done to determine how fees would increase and what new cost consumers would bear if this is implemented . Mr. Barr thank you, senator rounds. The regulations at issue, regulation e, are implemented by the Consumer Financial protection bureau. So in the first instance i think it makes sense for them to figure out what they would like to propose if anything in that at that area. And then wed be able to understand the implications of that proposal more broadly. But i dont have any further insight about it at this time. Sen. Rounds no existing studies at this point . Mr. Barr dont know the answer to that. None that im aware of but there may be others that exist that i dont know. Sen. Rounds thank you. Following an influx of deposits generated by government stimulus, the fdic approved an aggressive proposal to uniformly increased Bank Deposit Insurance assessment rates by two basis points until the deposit Insurance Fund reaches a designated reserve ratio of 2 . This proposal has the potential to disproportionately harm Community Banks by forcing them to pay between 5 and 25 of their pretax income for insurance assessments. Meanwhile, the o. C. C. Recently approved a 40 reduction in assessments for o. C. C. Chartered Community Banks. Acting chair, could you please explain your logic behind supporting increases to Community Banks, fdic assessment rate, well beyond the statutory requirement . And was a study done to determine the ratio between 2 or is that an arbitrary number . Mr. Gruenberg the 2 was the subject of careful analysis and was reached based on the fdics experience during two crises. And just to be clear if i could take a moment to explain because its a little complicated. Under the statutory requirement, theres a minimum reserve ratio for our deposit Insurance Fund of 1. 35 . And if that ratio, if that ratio falls below the fdic is required by law to establish a restoration plan to bring it back up to the 1. 35 minimum. As you noted at the beginning of the pandemic, there was an inflow of insured deposits and it pushed the ratio down and the fdic back in 2020 adopted a restoration plan that did not envision increasing assessment rates. And we expected that was based on an expectation frankly that as frankly the pandemic progressed, the growth and insured deposits would slow down. And what occurred is that over the past year from the Second Quarter of this year to the previous, the insured deposit growth rate remained very high at 4. 3 . So we had projections that envisioned us being able to restore the reserve ratio of fun to the statutory minimum by the statutory deadline of 2028. We thought we could do that without an assessment adjustment because the growth rate stayed high. It shifted our projections and really put in question whether we could get to the minimum in time. So we had a tricky call to make and ill just be candid we could have delayed and hoped that the would slow down and the problem would take care of itself. The problem there, and ill come quickly to a conclusion, was that if we were wrong, we then might have to impose a larger assessment on the industry at a later stage of the cycle when the industry would be in a not as good a position to to absorb it. So, we opted for a two basis point increase. Thats about 1. 2 of industry income. We did not envision that impacting lending or credit availability, but it would assure us of putting the fund in a solid position, particularly since were heading into a uncertain period. So it was a tricky call, but that that was the judgment we made. Thank you. Sen. Rounds thank you. Thank you very much. Let me recognize senator me menendez. Sen. Menendez thank you. The collapse of f. D. X. Last week is the latest in a series of high profile crypto collapses this year, which have left investors locked out and facing uncertain prospects for recovering their money. This should be a renewed call for congress to take a serious look at Crypto Exchanges and lending platforms, many which engage in risky behaviors while marketing themselves as safe for consumers. Mr gruenberg, am i correct in saying there are no Cryptocurrency Firms backed by the fdic . Mr. Gruenberg thats correct. In fact, at thisc insurance does not cover cryptocurrency of any kind. Is that correct . Mr. Gruenberg thats correct, senator. Now, many of these firms are marketing themselves to consumers as safe and responsible while engaging in risky behaviors without the guardrails and safety nets that exist within the traditional Financial System. In august the fdic issued letters demanding several crypto firms, including f. T. X. , cease and desist from misleading consumers into believing their deposits were insured. The fdic and Federal Reserve issued a similar letter in july voya llc, which collapsed earlier that month. What can we do to combat misinformation like this and better protect and inform consumers in the crypto space . Thank you, senator. Listen, this is this has been a a key priority for us. The the strength of the fdic is the publics confidence in our deposit insurance system. So if that confidence is put in question, it really puts the system at risk. And if we have financial players who are engaging in blatant misrepresentation in regard to deposit insurance coverage. Thats not only a violation of the law by firms that do that, it really um is a threat to the credibility of the fdic in our deposit insurance system. So when we identified some companies in the crypto space and others engaging in misrepresentation we acted very forcefully in sending letters demanding that they cease and desist and indicating that if they did not comply we have enforcement authorities available to us under the law that we can bring to bear. We thought it was important in regard to those individual actors and we thought it was important to send a message to those who would think about engaging in misrepresentation of deposit insurance. Sen. Menendez im glad you did. And i think these exchanges having these troubles should instigate us and regulators to look at what regulations are needed to ensure investors in the overall Financial System are protected. I want to thank all of you for jointly proposing a rule to modernize the c. C. R. A. To increase lending in minority communities. We saw two years ago an assault on the c. C. R. A. When the oklahoma acted alone and o. C. C. Acted alone and proposed a rule that would have left minority communities with less credit. And i thank controlar su for and i thank comptroller hsu for withdrawing that rule. According to the Census Bureau there are over 26 Million Limited English Proficient consumers in the United States with 17 million of those consumers speaking predominantly spanish. So mr. Barr, mr. Hsu, mr. Gruenberg, do you all agree that language can be a barrier to assessing Financial Services . Yes. Yes. Would you all agree that, for example, Home Mortgage loans and Small Business lending could increase in hispanic communities if banks provided more documents and in Person Services in spanish . Yes. Yes. Yes. Sen. Menendez so i hope youll all consider seriously in your services, test and evaluation of the banks ability to serve those with limited english proficiency. In august i joined chairman brown and 17 of our colleagues in a comment letter urging you to include this in your final rule, incentivizing banks to offer more services and for example, spanish will increase banks ability to diversify their staffs, something the bank still often fail to do with a 1. 8 trillion domestic marketplace. This would make a lot of sense for the banks as well as for the community and they take their deposits. They should be also willing to work with them. Finally, vice chair bar, as you know, the Federal Reserve has again, the opportunity to appoint a hispanic to a Federal Reserve Bank President at either the kansas city or chicago. Federal reserve bank in its 108 year history, the Federal Reserve has never had a hispanic. Federal reserve bank. President. During your confirmation process, you made a commitment to develop a transparent process with meaningful public input on the selection of Federal Reserve leadership. I suggested six ideas to strengthen the Federal Reserve Bank Director and president selection process. You agreed at that time with all of them. Can you tell me what specific actions have you taken to implement any of those reforms . Thank you. Mr. Barr thank you, senator. First of all, let me just start by saying theres theres a lot more work that has to happen. I think its good that youve pointed out this issue and and continue to point it out to the Federal Reserve. There there have been a number of positive steps that ive talked through with my colleagues at the board. Theres been progress in recent searches on the public posting dissemination of position descriptions and webinars and town halls to get public input. The public is in these recent searches undertaken solicitation of of nominations, ideas from the public for individuals. Theres been in recent searches, engagement with Public Service organizations, with civil Rights Groups with community organizations. There has not yet been progress on one of the items that you suggested. Thats a public release of demographic information. And were also considering the suggestion that you made but havent taken action yet with respect to getting public input on the process itself at the board or bank level. So weve made some progress but were still seeing a lot more work to do. Sen. Menendez well, let me just close by saying anonymized data is something that shouldnt be so hard but would give us a window into the process and the proof. Ultimately it will be in whether or not there is a selection of a qualified individual for which i believe there are many candidates. Sen. Reed thank you. Senator tillis of North Carolina is recognized. Sen. Tillis thank you, mr. Chair. I have to start today by expressing my concern with President Bidens nomination of mr gruenberg to service the fdic chair. Mr gruenberg appears before us today on an anniversary 10 years to the day of his confirmation to a five year term despite the fact that his term has long expired. Mr gruenberg has remained at the fdic most recently acting as chairman despite not being confirmed by the senate for a decade during mr gruenberg seniors fdic chairman. The agency has had a severely blemish record, most notoriously operation chokepoint, which sought to debank legal but politically disfavored businesses. Additionally, there were reports of mistreatment of employees and some allegations of Racial Discrimination in hiring and just last year while continuing to serve on the fdic board despite his long expired term, mr gruenberg helped facilitate a partisan power grab of the fdic board. His fellow democrat Board Members, he, along with his fellow democratic Board Members blatantly disregarded the fdics 90year precedent of allowing the fdic chairman to set the agenda. The agencys agenda and in the process forced out chair mcwilliams until last years mcwilliams. Until last years coup, all previous fdic Board Members democrat and republican alike had followed the Agenda Setting president. Thats something acting chairman gruenberg knows quite well. At the beginning of the trump he served as fdic chairman, although republicans outnumbered him on the board, they followed president and allowed him to set the agencys agenda. However, when the shoe was on the other foot, mr gruenberg facilitated the erosion of fdic independence. Not unlike attempts here to new car senate filibuster, we need nominees at the fdic and other agencies who will uphold the long history of bipartisanship and political independence at federal financial regulators. Unfortunately, ive run the conclusion that mr gruenberg does not fit that bill. Now, mr barr, by the feds on measures in recent Financial Stability report, the bank sector continues to be well capitalised. The fed reports that the results of the 2022 stress test indicate, i quote, large banks would remain would maintain capital ratios well above the minimum riskbased requirements, even during a substantial economic downturn. But now its widely expected that the upcoming basel capital proposal will significantly increase Capital Requirements. Im not one of these members who say give me a simple yes no answer, but something close to that to these next three questions would really be appreciated. Do you believe capital levels are not Strong Enough. Mr. Gruenberg thank you, senator. Mr. Barr im engaged in a holistic review of all the Capital Requirements to see not only whether theyre strong or but whether theyre Strong Enough and how they work well together. Are they fitting together in a way that that serves the interests of making the Financial System safe . So i dont have a conclusion yet to that holistic review. Im undertaking it now and i have more to say about it in the First Quarter of next year. Sen. Tillis the analysis of the stress testing though, seems to think the analysis of the stress testing though, seems to think that youre reasonably confident that confident that current capital ratios are okay. So what what whats going to ultimately tip the scales to a different conclusion and maybe embrace the basel report. Mr. Barrow thank you. Were looking at all the factors. So the stress test is one important input into that. It of course determines the level of capital. So its setting Capital Requirements in the course of deciding that the Capital Requirements are sufficient. The reason that it does that is because of the presence of the stress capital buffer. And so the stress test is one input into that were modeling, of course not a prediction about the future, but one scenario that might banks might need to address. And and so thats an important factor, but not the only factor we need to look at risks across the system. As i indicated in my testimony, for example, you know, before the Global Pandemic kit in march of 2020. That wasnt on anybodys list of potential risks. Sen. Tillis just a quick followup. If Economic Activity continues to slow, um, and we increase Capital Requirements, is there a scenario where thats a good thing . Or what would be a scenario where its a good thing . Mr. Barr im not reviewing Capital Requirements to think about what the right capital level should be tomorrow. Im trying to think about how we should set Capital Requirements over time through, through economic cycles. For any, you know, capital rule, theres a process, well do a proposal, welll issue a final rule. Then theres an implementation period. So were not trying to think about, you know, what, what capital should be tomorrow. Were trying to think over over long periods of time. Sen. Tillis thank you. Sen. Tester thank you, mr. Chairman. I want to thank you all for being in front of the committee today. I appreciate your leadership and guidance. I wasnt gonna talk about crypto, but i particularly appreciate your common sense approach on safe and sound and fairness. Especially mr. Hsu. All of you are good on this. Look, i remember the meltdown of 2007. Where we had synthetic Financial Instruments and maybe an attached two mortgages but there was no there there and it ended up where we cut a pretty damn big check of taxpayer dollars to up where we cut a pretty damn big check of taxpayer dollars to solve that problem. And and im gonna tell you if if you guys would have given guidance and you had given credibility wed be cutting another check. And so i just want to say thank you. I dont say that as a lawyer or an accountant. I say it as a farmer. Thank you thank you for what youve done. Uh during a hearing last year i had talked to mr su and mr. Hsu and chairwoman mcwilliams about the Community Reinvestment act and the changes that were going to happen and making sure that Rural America in our native populations would be better. The investments will be made better in those countries. So the Comment Period has ended. Um it has not taken effect yet but for mr gruenberg ensue. Mr. Grueberg and hsu and barr, could you tell us how the new rules are going to ensure investment in Rural America . Mr. Gruenberg thank you, senator. I will say that was a real focus of attention for the three agencies in developing the rule , how we could utilize c. R. A. To provide incentives for increased bank lending and investment in Rural Communities and native American Communities which are historically underserved and lack access to basic Banking Services. We did that through proposed changes in the two key tests under c. R. A. , both the lending test and the Community Development test by providing greater flexibility. Were not limiting the lending test just to the traditional branchbased assessment areas. But we have a statewide dimension to the test which will give banks additional credit for serving Rural Communities as well as native americans. And we provide significant greater flexibility in the Community Development test so that banks can invest in underserved Rural Communities and native American Communities and get c. R. A. Credit for it, even though its not part of their branch network. So these were key flexibilities that we think will be helpful. Do you fellas have anything youd like to add to that . Native american issues are a top priority. And we have a project reach which is to increase financial inclusion. Weve had a special subcommittee focused on homeownership promotion for native americans because of some of the legal issues there are tough for banks. So we held a webinar trying to move that ball forward there. And i met recently with treasure malaria whos the head of the office of Indian Affairs to see how the o. C. C. And her office can Work Together to work on these issues. Do you see any positive impacts in housing with these changes . Go ahead, mr. Barr. Mr. Barr i think, obviously the rule is not yet into effect or i think we would see improvements in housing in Rural America and Community Development in Rural America. And also just you know emphasize the point that both marty and mike made that the issues affecting native American Communities access to Financial Services are longstanding. Theyve been problems for generations. And if we dont take seriously the need to fix those problems including with the reforms of the Community Investment act, native American Communities are going to continue to be left behind. So i think its really a critical issue to be working on. Sen. Tester before the pandemic started i talked with your predecessors about what ive been hearing from bankers in montana about egg industry. Previous administration had some pretty silly trade wars and it affected Commodity Prices in a big way. We have seen egg prices increase dramatically but weve also seen input costs increase dramatically. So based on your examiners, what are you seeing from the Community Banks that are serving the Agricultural Community . How are they doing . Gruenberg, hsu or barr . Mr. Gruenberg i will say as a general matter, Community Banks in the United States have been doing quite well over the last several years. And thats certainly true as well for Community Banks in in the agricultural sector. Sen. Tester the rest of you see it the same way . Mr. Hsu . Mr. Hsu im hearing they are doing quite well. I think theres some concerns about some headwinds which is part of the reason why we lowered Bank Assessments for o. C. C. Banks and we continue to engage with them. I think that the some of the drought issues for some of the banks in some parts of the country, luckily theres been crop insurance, but these are top of mind issues for the bankers and for supervisors last supervisors. Sen. Tester what commodities are you talking about . Energy . Mr. Hsu i think there have been broadbased impacts across a number of different commodities marketses. Its a broad range. Sen. Tester thank you. Thank you, mr. Chairman. Senator lummis of wyoming is recognized. Hrao upl hrao upl thank you, mr. Chairman mrs. Lummis thank you, mr. Chairman. And thank you all for attending today mr. Barr, im going to have a question for new a minute about regulation w. But i too want to weight in a little bit on the f. T. X. Situation. You know, its awful and simultaneously not all that surprising. Until june, 2021, f. T. X. Was offering ordinary retail customers outside of the u. S. Leverage of about 1011. That leverage is illegal in the United States. Because its extremely likely that a customer loses all of their money. So, no big surprise there. F. T. X. Lent out customer assets for proprietary trading with its aphysicallate, almeda research. Misusing its custody asset, which it did not own, and breaking its promises to its customers. So like senator too manyy, i agree, toomey, i agree, this is a lot like m. F. Global in 2011 and it should be absolutely my saw this coming and engaged in activities from relending customer Digital Assets. That may be surprising to some of the Witnesses Today but wyoming has a rule for digital rule and i hope you look at those at the fed. There were deep interconnections between f. T. X. Andalla immediata and banks today are subject to limits under regulation w and required to disclose their affiliate relationships. These limits exist to prevent special transactions that occurred between almeida and ftx, senator gillibrand and i incorporated those ideas into the responsible innovation act and our act would have prevented the f. T. X. Bankruptcy by prohibiting misuse, requiring proof of reserves, limiting affiliate transactions and providing clarity and clarifying the bankruptcy treatment of Digital Assets so customers get their assets back quickly if an exchange fails. Its obvious that Congress Needs to regulate Digital Assets and the bill is the legislation that most comprehensively addresses these issues in a way that balances Consumer Protection and responsible innovation. I am confident that we can get good legislation passed in 2023 and looking forward to do that. Vice chair, why is it important there are be transparency on afilth affiliate and why should congress consider that snr. Ms. Barragan regulation w is one of the regulations for banking and quite an important rule and it requires not only transparency but also substantive limits on the relationship between the bank and its affiliates. The basic idea is that we need to protect the insured depository from possibility of risks being transferred and therefore hurting the customers and didntors at the bank and putting the taxpayers at risk. Those kinds of limits on the kinds of transactions that banks can have with their affiliates is a part of Foundation Banking law. Senator lummis applying that to the ftx situation where there were over 130 related entities would regulationw hype type regulation assisted in preventing or at least disclosing some of the concerns that developed with f. T. X. . Ms. Barragan mr. Barr im not in a position to comment on a particular case. But i can say in general, regulation w is serving the Banking Industry very well. Senator warner since it. Senator warren they have returned more than 13 billion directly to people they cheated. This is government that works for the people, literally. Banks dont like losing 13 billion or being forced to shutdown scams and they and the republican friends attack. And the latest attacks has come out of the fifth Circuit Court of appeals. It has ruled that the funding structure is unconstitutional because it did not receive annual appropriations from congress. I want to test that out a little bit. All of you are here today from major regulateors that oversee various pieces of the Financial System. The Federal Reserve and the National Credit Union Administration. Let me start with you, is the o. C. C. Funded from the annual appropriations process . Mr. Hsu no. Senator warren is the f. D. I. C. Funded from the annual appropriations process . And vice chair bower is the fed funded from the appropriations process . Ms. Barragan no. Senator warren the fed gets its earnings and assistance from the Federal Reserve bank, is that exactly the same source where they get their funding . Yes. Senator warren there is a good reason why congress created independent funding structures for bank regulateors. Your agencies are the cops on the beat to ensure the stability of the Banking System. Your rules provide the guide books for Financial Institutions to serve consumers while acting within the law. Congress understood this even back in 1863 with the very first banking regulator to do their jobs fluctuated every Time Congress negotiated a spending bill or congress changed hands that the Financial Markets would be thrown into chaos. Let me ask, does the feds independent funding structure provide certainty and stability to banks and Financial Markets because no one in the system has to worry about the feds ability to do its job or to have the resources to enforce the rule . Ms. Barragan that is important mr. Barr that is important. Senator warren because all of you are and always have been funded outside the annual appropriations process, that all of your agencies are unconstitutional. This would mean that none of you could do the things that you are doing, from setting Interest Rates at the fed, to making sure that when people make deposits in their banks that they are protected by fdic insurance and it is not just your agencies, numerous other Government Entities are funded outside the appropriations process, including the federal Housing Finance agency, the foreign Credit Administration and the Financial Stability Oversight Council. By the fifth circuits logic they would also be unconstitutional. It is not what the constitution says. The constitution says, no money shall be drawn from the treasury but in consequence of appropriations made by law and no money is withdrawn from the treasury to fund any of our financial regulateors as a professor notes the Supreme Court has repeatedly and h. R. Reasonably said that this clause, quote, means that no money can be paid out of the treasury unless it has been appropriated by an act of congress. U. S. Court of appeals for the d. C. Circuit and a slew of District Courts have upheld the funding structure. It could have real consequences of our Financial System. The Mortgage Banking Association understands this risk. In 2019 they warned if the cfpb were struck down, the results could be catastrophic for the Real Estate Finance industry. This is not only dumb but dangerous. This is what happens when courts play politics instead of following the law. Mr. Brown senator kennedy is recognized. Senator kennedy i think senator warren pointed out you are major financial regulateors and thank you for your time today. Let me ask you a, question. Would you hire sam brink man to do a food truck. Would any of you hire his girlfriend who was trading billions of dollars to manage a food truck . Can you tell me who in our federal Financial Services regulatory Administrative State was watching f. T. X. To make sure no one there stole peoples money. Was anyone watching them . , that you know of . Just senator kennedy you are a brairve man. Dealing with ftx is not in the banking business. Senator kennedy you guys are up at the top of the food chain in terms of Financial Services regulation. You know who were watching these chuckleheads . I think they were engaging generally investment and trading activity. In the first instance, thinking about senator kennedy some of them were engaged in stealing. Thats under investigation now. In the first instance, you engage with the s. E. C. To talk about the activities and the authorities in this area. Senator kennedy i want to ask the chairman a few questions about inflation. Mr. Chairman, professor jason furman has said that he thinks unemployment has to rise for five Percentage Points for a whole year to bring inflation down a single percent, do you agree with that . Inflation right now is far too high. Senator kennedy im running out of time, dog gone it. And our chairman is fair but he is going to cut me off. Do you agree with the professor . I think we will see significant softening in the economy and i dont have a projection as precise as jason furman. Senator kennedy let me about Professor Larry summers and said unemployment has to rise to 7. 5 and stay there for two years to get inflation down to 2 . Ms. Barragan mr. Barr i dont have a prediction. Senator kennedy you remember the inflation back in the 180s under president reagan and president carter and when mr. Volker was chairman. Can we agree that the only way we got control with inflation then was on the fiscal and monetary side . Mr. Barr its the responsibility to focus on our responsibility senator kennedy i know that. If you depend on Monetary Policy alone, Interest Rates have to go higher. Another way, if congress cooperated and stops spending money like it was ditch water, the fed wouldnt have to raise rates as high, is that a fair statement . Mr. Barr i dont have any comment on fiscal policy. Senator kennedy you think it is iter . Mr. Barr fiscal policy that elected members in congress and president and we calculate those. But i dont have a comment on fiscal policy. Senator kennedy you dont have any comment what fiscal policy has on inflation . Mr. Barr i dont have anything to add to what i said senator kennedy you arent telling me that fiscal policy has anything to do with inflation . Mr. Barr we take the responsibility as ours. Senator kennedy dont you think you have a moral or legal obligation if you think fiscal policy is contributing to the inflation, for gods sake. Mr. Barr respect the role of the president and congress senator kennedy can you tell me the path we are on, how high unemployment is going to go in order to get inflation down . Mr. Barr we will see unemployment go up. Senator kennedy duh. Can you give me a prediction how high . They said its going to go through the roof. Mr. Barr i have seen a wide range of predictions. Data independent and see how senator kennedy thank you. Mr. Brown senator van hollen of maryland ills recognized. Senator van hollen as you know, our current lack of realtime payments cost billions of dollars especially those link paycheck to paycheck, aaron kline said if the United States implemented realtime payments when the bank of england did back in tworch prerch. And those are mostly americans link paycheck to paycheck. I understand from a speech you gave a little while ago, you estimate that the fed program will be until july of next year. There are lots of delays. Are we fully on track and what share of americans the bank will have access at that point in time to realtime payments . I thank you and support of the fed now program. I think it will improve the ability of banks to offer realtime services. It will sit as the backbone i behind what Community Banks decide to offer. You. Senator van hollen we look forward to a Concerted Campaign by the fed that banks have the ability to sign up and help them sign up. There is a lot of volatility in the Global Economy these days. The doddfrank legislation authorizes f sop to designate utility. Back in may, secretary yellen expressed concerns about some of the guidance issued under former secretary new hampshirein that mnuchin. Do you have concerns about the 2019 guidance that was issued under the Trump Administration . And do you believe it should be revisited. If secretary yellen asked to repeal the 2019 guidance, would you support that . Yes. Yes, i would be supportive. Yes, i would be supportive. It would be useful to revisit the guidance and evolving with circumstances were taking the risks that might come in the system in the future and would be useful to do that for that reason. Thank you for the question. First and foremost, i have responsibility for the safety of the national Banking System. A lot depends on the devil. Devil is in the details. I think there is a form of it which could perform an objective and fall into the trap that you just laid out. And a lot depends on what those details are. Regulations are going to be necessary for the activity. I think its important tore consider how we approach that. Talking about the crypto activity, almost all of it now is really investments in trading activity. So in the first instance, it seems to me, it falls to the market regulators. There is some limited interest in the Banking Sector and to the point there is interest, it will fall to us. We have authorities to deal with the safety and soundness and Consumer Protection risks of banking engagement with crypto activitiest i do think that stable coin issue is a bit more complicated and have existing authorities in that scenario, where there may be a case for considering legislation and more thought needs to be given there. I agree that regulation is need dollars in this area and building on what the acting comptroller, the delve devil is in the details. I really impressed upon the need for better transparency in our Financial Markets. I would similarly suggest that the market regulators are the first place to start in this space. They have existing authorities and make sure those are fully utilized. Some of the activity that was going on was purporting to go in a way designed to evade supervision in regulation. We have seen the enormous costs that investors and consumers were so badly hurt by the recent events in the crypto space. In the banking speaker spear. We can get the job done in banking and i think there is quite a need for developing a network for stable coins with strong federal approval and supervision and regulation and enforcement. Mr. Brown senator haggerty is recognized. Senator hagerty so would you agree that regulation is appropriate. Some of this has to be placed on lawmakers in the United States. The fact of the matter is that crypto much like all of finance isnt be hold ento a specific. Congress only incentivizees activity to migrate. Whatever happened with the bad actor in defrauding customers, that had nothing to do with the technology. We shouldnt take the wrong message. No amount of overregulation would have prevented a Foreign Company from doing what it said. We should look at clear incentives under laws that would prevent the billions of losses just incurred by f. T. X. Customers. You were concerned about the lack of clarity and crypto regulation. With the clear more Cryptocurrency Companies would be able to operate here to prevent largescale fraud . Mr. Hsu it could. There is some foundational elements of the Cryptocurrency Technology and the industry which are not sound. Regardless of the regulation. There are issues ownership is not clear. And if you dont have clarity about what you own, a market where Property Rights are unclear, those issues are outside any kind of regulatory and the state is not mature. We work through. Senator hagerty the maturity is much stronger than where these companies aredom sealed right now. If i understand regulation is appropriate, appropriate would help us deal with us and pushing this overseas. Mr. Hsu shoe to the fact that it takes place, it has to be safe, sound and fair and maintain that level or standard of activity. Senator hagerty feds own stress test recognizes the strength of the Banking System and the banks supported through the pandemic and you are layering more costly reforms. And the fed fights the highest inflation we have seen in generations. This is by racing Capital Requirements. These requirements seem inconsistent and the statutory mandate for Capital Requirements. My question to you is, why is the fed reversing course now for reasonable banks that could impede their ability to support the economy . Would you agree that raising rates are not counter sick lickal. It includes issue about the important banks, and the buffer. Stress test and the like, to make sure capital rules are fitting well together. We are not trying to design a capital system tomorrow morning and what it should be over the cycle. If we change the rules undergoing a proposal and then a final rule and iment flementtation period. Senator hagerty would increasing Capital Requirements in the environment we are cyclical or Counter Cyclical . We are in a slower period of Economic Growth. We are in very tough times and following the rule of law and have our requirements be Counter Cyclical . It is important that we have rules that are good for the it. Senator hagerty im concerned about any move that would be considered pro cyclical. Senator smith is recognize. I would like to start out by asking a question about our climate. Climate can Climate Change can cause severe economic disruptions and we see it in minnesota and agriculture and tourism and forestry and places like florida. And our Financial System is not immune from this risk and disruption. Banks are recognizing the climate risk and the severity and many of those things that we need clear guidance how to approach this problem. Your agency took a step forward to draft to manage. And realize and thousands of comments and response. I wonder if you could tell us what is the general reception you have gotten so far . Just to echo what acting chairman said. I think of larger banks, this has been generally welcome and those who are internationally active to deal with some of this from abroad is how do we identify, measure, monitor and manage risk in Climate Change. I dont think thats a new thing. For smaller banks, it is a variation in response. This is something that i have been trying to engage with Community Banks and listening where we understand where they are coming from and what their concerns are. One pitch i try to make, there are opportunities. And there is a saying, the better cars break, that applies to climate risk. And that is taking a little bit of time and will get there in the not to distant future. Mr. Barr, you are working on guidance in this area and how we see this working in conjunction with the scenario that the fed is going to be doing next year . We intend to join with the ftic and o. C. C. In issuing climate gadance with respect to firms that are over 100 billion in assets and it will be helpful to have that guidance and we expect to join other agencies. We are engaged with a bite of climate Scenario Analysis that we are conducting with six of the important banks and will be conducted next year and we expect to learn a lot about how firms are managing the risks of Climate Change and how they are assessing those risks. Important learning exercise for us in the coming year. I appreciate on all of the agencies working together. Having clear input from Community Banks and to large banks is largely important. And they want some good clear rules of the road of how to work with it and manage it. Im grateful for all of your work. Mr. Chair, i have another question on Bank Consolidation and i will pursue that with a question for the record. Mr. Brown senator more and moran from kansas. Senator moran despite a multi year effort by the fdic to fund, staff which included a robust comment process you dismantled this process just months after it became fully operational and one of your first actions as acting chair. Moreover, you did so through a vote providing only a 30day Comment Period after the Effective Date of its did he mys. How do you say that with a total disregard for process and transparency . This is an important issue as you indicate. Requiring all of our agencies to establish internal appeals processes to consider appeals by our regulated to supervisory determinations and shortly and the fdic accomplished a Supervisory Review Committee to committee appeals. It was the determination that at the end of the day, the review, the appeals process is very important. Any bank that thinks it believes that an examiner has made an inappropriate decision or wrong decision should have the right to have that decision reviewed by appropriate process. And i think in view of the ftic was that a boardlevel review which is the highest authority within the agency is an important matter for board accountability. The board is responsible for the decisions of our supervisors if there are issues raised with regard to a supervisory determination that ultimately should rise to the level of a board review. You indicate that a change was made and office of supervise voar appeals was adopted, utilizing individuals from outside the fdic didnt have experience working at the fd inch c but had supervisory i think our view was board level accountability was frankly very important in this area and the office of supervisory appeals have not get begun functioning. The Board Level Committee had a longstanding history and experience and we did set aside the office and continued the operation of the boardlevel committee and sought comment. And we have now issued a new request for comment incorporating in the proposal some of the suggestions we have received in the comments including placing our ombudsman who is a neutral party, a nonvoting member of the boardlevel committee giving are institutions the right to access to all of the memos and documents relating to the supervisory determination they are appealing and the right to request a string of the supervisory determination until the appeals process is completed. It may not be fully satisfactory but have taken a balanced approach. You use the word neutral, i would use the word independent. Is there a value of having someone independent or neutral compared to the board . I think so and thats why we added the ombudsman to the appeals committee. Senator moran my second question, the federal Housing Agency tangible capital rules is inconsistent with the federal regulators by accepting federal home loan Banking System. If this continues to escalate with more unrealized losses on typically and expected, we will likely see a number of well capatalized institutions lose access to liquidity due to this disparity in the Regulatory Framework. And fhfa is well aware of the issue and members have sicked waivers instead of what i would assume be a far easier fix aligning those capital rules. Do you have thoughts about the desire of aligning those capital rules is the first question. In the absence of that, whats the process for member institutions seeking a waiver from each of your agencies . There is a fhfa rule we are dealing with. And bank has negative tangible equity under g. A. P. Accounting. The bank is not allowed access to new federal home bank loans. We are looking at the banks addressing the Risk Management resulting from the unrealized losses on their Balance Sheet and see if we can work this through. Are you suggesting you dont expect it to be a problem for those banks . I think speaking for myself, i think we are looking for the institutions to address the underlying issue, which is the unrealized losses and negative position under g. A. P. In order to gain access. Mr. Brown last question. Senator moran i have sat here since the beginning. Mr. Brown there is reward for that. Senator moran is there a process by which a waiver is obtainable as the Federal Home Loan Bank system suggests . As fh suggests . For us, its basically using the regular process is the way to address that and echo a point that marty made. And this is a Risk Management issue and this is a question for fhfa to address. We would look at it through the supervision process overall. It is important to remember that when liquidity is provided by the Federal Home Loan Bank there are assets pledged as collateral for that and there is something attached to that. We as a shared insurer we would place, depending on the assets pledged, we could have a higher liquidation cost if the institution were to fail. It is important why Congress Needs to move ahead with the relationship that we do with the corporate Credit Unions. Is it a federal liquidity backstop. Mr. Brown senator osoff is the last questioner from his office, from georgia. Senator osoff thank you to our panelists tore your service. Mr. Barr, what do you assess to be the most significant threats to Financial Stability today . Ms. Barragan we are mr. Barr we are looking at Financial Risks and part of the risks we dont understand. And certainly exploring and annualizing the risks that has been going on in the crypto sector. And abroad from the war in ukraine and situation in china and in looking at what is happening in Interest Rate risk and Liquidity Risk as Interest Rates rise. We are attendant with respect to commercial real state and potential problems in other areas. Those are the kinds of risks we are looking at right now. Senator osoff how confident are you that federal regulators have adequate to exposure in the nonFinancial Institutions that could pose a threat to financial instability . We have good insight and good sound information not only about the Banking System but about the relationship of banks to other entities, what we dont have good information is what is going on in the nonbank sector. Increased information about what is happening in hedge funds so thats an advance. But still more information would be useful in that space and very little instability in the institutions that are not connected to banks and very Little Information about the risks of the kind we saw in the crypto sector where our visibility is much, much lower. Secretary yellen was concerned about loss of liquidity in the Financial Markets and i asked questions about this. Do you share her concerns . I think we are seeing higher volatility in treasury markets that is associated with the period of rising Interest Rates and Economic Uncertainty both in the United States and globally and with that increased volatility has come rejection in liquidity given what you expect. We are watching it very closely as always and something we are attempting to in thinking about the risks that. Secretary yellen said she was concerned about the loss and others say it is a potential threat to viable stability . We are attentive toll issues that might rise including in treasury markets. We are attentive toll it. Mr. Gruenberg, what do you assess to be the most significant threats to Financial Stability . Mr. , gruenberg he i concur in the observations that michael made. I do think that the larger Interest Rate environment and important to recognize it is a global fenmon fenonmon. And major jurisdictions as well. And International Perspective and financial risk there. I want to frame this question as precisely as i can, there are threats to growth and im focused on threats to Financial Stability. The most constructive followup i can ask you, what do you think are the mechanisms of action or the forms of exposure that will translate higher rates . The other point that michael made and the nonbank financial sector. And the potential leveraging in that sector and the risks that compose both for the risks of those institutions as well as your connectiveness. Who are the counterparties for that leveraging snr. It may be banks and we dont have as good a line of sight into the inner workings of the nonbank Financial Firms as we do with the banking institutions. And i think it needs to be focus of attention. I thank you for your testimony. Mr. Brown we have heard how these regulators are protecting main street and we have heard a lot of concern about crypto risks and reversal from trump regulators that led crypto run wild and we warned of the risks that for months and months and years and im confident these witnesses will watch out for these risks to protect people and communities. I thank the four of you for providing p answers to senators. One week from today, tore witnesses, you have 45 days from receipt to respond to those questions. Thank you again. This hearing is adjourned. Captioning performed by the national captioning institute, whh is responsible for its caption content and accuracy. Visit ncip. Org. Former President Trump will make aampaign announcement at his estate and talk about a plans 2024 White House Run beginning at 9 00 eastern on cspan. 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