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25–497 PDF 2017

S. HRG. 115–17 

FOSTERING ECONOMIC GROWTH: THE ROLE OF 

FINANCIAL COMPANIES 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE STATE OF THE ECONOMY, THE SERVICES PROVIDED 

BY FINANCIAL COMPANIES TO CONSUMERS AND MARKET PARTICIPANTS, AS WELL AS CONSUMERS’ AND MARKET PARTICIPANTS’ FINANCIAL NEEDS AND THE STATE OF ECONOMIC DEVELOPMENT IN 

COMMUNITIES ACROSS AMERICA 

MARCH 28, 2017 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

MIKE CRAPO, Idaho, Chairman 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

PATRICK J. TOOMEY, Pennsylvania 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

DAVID PERDUE, Georgia 

THOM TILLIS, North Carolina 

JOHN KENNEDY, Louisiana 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

BRIAN SCHATZ, Hawaii 

CHRIS VAN HOLLEN, Maryland 

CATHERINE CORTEZ MASTO, Nevada 

GREGG RICHARD, Staff Director 

MARK POWDEN, Democratic Staff Director 

ELAD ROISMAN, Chief Counsel 

JARED SAWYER, Senior Counsel 

BRANDON BEALL, Professional Staff Member 

GRAHAM STEELE, Democratic Chief Counsel 

LAURA SWANSON, Democratic Deputy Staff Director 

ELISHA TUKU, Democratic Senior Counsel 

DAWN RATLIFF, Chief Clerk 

CAMERON RICKER, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

TUESDAY, MARCH 28, 2017 

Page 

Opening statement of Chairman Crapo ................................................................. 1 

Prepared statement .......................................................................................... 38 

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2 

WITNESSES 

Robert Heller, Former Governor, Board of Governors of the Federal Reserve 

System ................................................................................................................... 4 

Prepared statement .......................................................................................... 38 

Responses to written questions of: 

Senator Brown ........................................................................................... 88 

Donald Powell, Former Chairman, Federal Deposit Insurance Corporation ...... 5 

Prepared statement .......................................................................................... 50 

Responses to written questions of: 

Senator Brown ........................................................................................... 88 

Senator Heller ........................................................................................... 89 

Thomas C. Deas, Jr., Chairman, National Association of Corporate 

Treasurers ............................................................................................................. 7 

Prepared statement .......................................................................................... 55 

Responses to written questions of: 

Senator Brown ........................................................................................... 90 

Senator Toomey ......................................................................................... 91 

Deyanira Del Rio, Coexecutive Director, New Economy Project ......................... 9 

Prepared statement .......................................................................................... 63 

Responses to written questions of: 

Senator Brown ........................................................................................... 92 

William E. Spriggs, Professor of Economics, Howard University, and Chief 

Economist, AFL–CIO ........................................................................................... 11 

Prepared statement .......................................................................................... 81 

Responses to written questions of: 

Senator Brown ........................................................................................... 93 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

‘‘Risk Weights or Leverage Ratio? We Need Both’’, American Banker ................ 95 

(III)

(1) 

FOSTERING ECONOMIC GROWTH: THE ROLE 

OF FINANCIAL COMPANIES 

TUESDAY, MARCH 28, 2017 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 9:34 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of the Committee, 

presiding. 

OPENING STATEMENT OF CHAIRMAN MIKE CRAPO 

Chairman CRAPO. This hearing will come to order. 

This morning we are holding a hearing on ‘‘Fostering Economic 

Growth: The Role of Financial Companies’’. One of our witnesses 

has been held up in traffic, but we are going to go ahead and start, 

and he will join us as traffic allows. 

A strong, vibrant economy is important for American consumers, 

businesses, and the stability of the financial sector. 

Financial companies of all sizes and forms provide critical services to businesses and consumers, helping businesses manage operations, entrepreneurs get funding to start companies, and average 

citizens buy a first home or deal with a financial crisis. 

As policymakers, we must diligently and frequently study the 

state of our economy, our regulatory framework, the use of capital, 

and provision of financial services. 

According to recent studies, since the crisis, large businesses are 

experiencing a more robust recovery than small firms and entrepreneurs. One of the main drivers of underperformance by new and 

small firms compared to their larger counterparts is their limited 

access to credit. 

There are direct links between post-crisis regulation and restricted finance. Data from the St. Louis Federal Reserve shows 

that a mere decade ago, small banks made more business loans 

compared to larger banks. That is no longer the case. 

Consumers, many on the periphery of mainstream banking, are 

seeing certain products and product features disappear. For example, one product line, short-term, small-dollar credit, is expected to 

see a 60- to 70-percent decrease in market size—according to the 

CFPB—with virtually no other avenue for product users to access 

credit. 

These are a few examples that support the need for a thorough 

review of our regulatory framework and the role of financial companies in the country. I have been encouraged by President 

Trump’s Executive orders and memoranda on regulations and core 

2 

principles for regulating the financial system. The Treasury Department has begun its review, and I look forward to seeing the 

recommendations it puts forward on how well existing laws and 

regulations promote or inhibit economic growth. 

In addition, last Monday, Senator Brown and I announced a formal process to receive stakeholder proposals that will help consumers, market participants, and financial companies responsibly 

participate in the economy in a more effective and efficient manner. 

And last Tuesday, the Federal banking regulators released their 

EGRPRA report, which sought to identify regulations or laws that 

are outdated, unnecessary, or unduly burdensome. Taken together, 

these actions will provide a clearer picture of what is working and 

what is not working within our financial regulatory framework. 

Today this Committee will study how financial companies participate in the economy, with a goal of better understanding their 

role in fostering economic growth. Our witnesses have diverse 

backgrounds, and I look forward to hearing their unique perspectives on this issue. 

For example, why are community financial institutions important 

in local communities? And what happens when communities begin 

losing financial institutions? 

What services do financial companies provide businesses of all 

sizes? And are services being deployed in an effective, efficient 

manner? 

How can large financial companies help U.S.-based companies 

compete in global markets? 

Senator Brown and I have started working together on a bipartisan basis to hear the thoughts and concerns of various stakeholders and Members of the Committee. It is my hope that Members will find this to be a thorough, inclusive process, and one that 

is structured for success. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman, for holding this 

hearing. I appreciate the 9:30 start time today, too. And I appreciate the process that you have put in place that you referenced in 

your opening remarks for the Committee to discuss economic 

growth. I hope that with the Committee’s call for proposals we will 

be able to put some new ideas on the table that would gain broad 

and bipartisan support. 

Rolling back Wall Street reform clearly does not fit the bill. Our 

financial system is more stable because of Wall Street reform, 

banks are better able to handle losses, and consumers are better 

protected from the types of predatory loans that led to the crisis. 

Too many Americans still have not recovered from the 2008 financial crisis—and this is important to remember—when 9 million 

workers lost jobs, 5 million homeowners were foreclosed upon, people lost trillions of dollars from their retirement saving. Remember 

that: 9 million lost jobs, 5 million homes foreclosed on, people lost 

trillions from their retirement savings. 

This crisis came on top of economic policies that, since the 1970s, 

have shrunk the middle class. Minority communities, particularly 

African Americans, were hit even harder by the crisis and have 

3 

had the most difficulty rebuilding wealth and buying homes and 

saving for retirement and reentering the labor force. 

I understand why so many Americans are angry. Nearly a decade 

after the financial crisis, the wealthy have pocketed almost all of 

the gains, but wages for most Americans have been stagnant. Wall 

Street is once again making record profits, and many indicators— 

stock prices, business lending, consumer lending—are at pre-crisis 

levels or higher. 

Wages of Wall Street employees have increased 70 percent since 

the 1980s when they were comparable to the wages of those in 

other industries. During that same period, good financial jobs disappeared as a result of trade and tax policies that favored investors 

over workers. Even within the financial sector, the gains have been 

far from even. Bank workers at the low end of the pay scale saw 

their real wages decline from 2000 to 2013. One-third, fully onethird, of bank tellers working for banks are on Government assistance. One-third of bank tellers working for banks where executive 

compensation has skyrocketed, one-third of them are on Government assistance. The CEOs of the top five banks make 470 times— 

a ratio of 470 times—the annual salary of the median front-line 

bank worker. 

Hard work is not paying off for so many Americans the way it 

used to. It is true for all workers across industry at any income levels. Whether you punch a time sheet or you make a salary or you 

rely on tips, whether you are a contract worker or a temp, whether 

you work in a call center or a factory floor or in a bank, one of the 

best ways financial services companies can help economic growth 

is to pay their workers a living wage and provide decent benefits. 

It should come as no great shock the demand for housing and other 

goods and services is tepid—the demand for those services is tepid. 

Too many Americans are struggling to make ends meet. 

The response from this Administration is not encouraging. It has 

been stocked with Wall Street executives who want to do a number 

on the law that holds their former firms accountable. Its budget 

would eliminate much of the Federal efforts to promote economic 

development opportunities in communities both rural and urban 

across our country. So far, there is no sign of the promised, much 

heralded $1 trillion infrastructure program extolled at almost every 

stop by Candidate Trump. 

If Americans do not have reliable housing or transit systems to 

get to work or even access to meals, how do we expect to have a 

healthy and productive workforce? How will we get to a growing 

economy? Financial companies have an important role to play in 

our economy to the extent that they support the rest of the economy. 

Finance is a means to an end, not an end in itself. Trading paper 

among a few large financial companies or making the wealthiest 1 

percent of Americans even wealthier simply does not grow our 

economy. 

Earlier this year, in Columbus at the John Glenn School, I outlined a broad plan to restore the value of work in four key ways: 

one, raise wages and benefits; two, give workers more power in the 

workplace; three, make it easier for more workers to save and employers to make matching contributions for retirement, something 

4 

Senator Crapo and I as members of the Finance Committee have 

partnered one and worked together on; and, four, encourage companies to invest in their workforce. 

When we talk about economic growth, we need to talk about policies that help Americans’ pocketbooks, their savings, their job security, empowering the middle class and those who aspire to the middle class. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you very much, Senator Brown. 

We will proceed with our testimony from the witnesses at this 

point. 

First, we will receive testimony from the Honorable Robert Heller, former Governor of the Federal Reserve. 

Next we will hear from the Honorable Donald Powell, former 

Chairman of the Federal Deposit Insurance Corporation. 

He will be followed by Mr. Thomas Deas, Jr., chairman of the 

National Association of Corporate Treasurers. 

And then we will go to Deyanira Del Rio, who is the codirector 

of the New Economy Project. 

And Mr. Spriggs will go last if he is able to make it here. He is 

a professor economics at Howard University and chief economist at 

the AFL–CIO. 

Mr. Heller, you may proceed. 

STATEMENT OF ROBERT HELLER, FORMER GOVERNOR, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. HELLER. Chairman Crapo, Honorable Member Brown, and 

Senators, thank you very much for inviting me to speak and to testify on the contribution made by financial institutions to foster economic growth and the role of these organizations in that context. 

Economic growth tends to parallel financial growth, and a strong 

economy needs to be supported by a dynamic financial system, just 

like a healthy body needs to be nurtured by vigorous blood flow. 

Two important changes occurred in the 1980s and 1990s that 

modernized our banking system and brought it up to world standards. First of all, there was the Riegle–Neal Interstate Banking 

legislation which allowed nationwide branching; and then the 

Gramm–Leach–Bliley Act, which removed the barriers between 

commercial and investment banking, thereby allowing for greater 

product diversification. 

These two innovative congressional acts allowed banks to serve 

their retail and wholesale customers better and increased bank 

safety by allowing for greater diversification along geographic and 

product lines. 

The banking crisis of 2008–09 was primarily triggered, as was 

pointed out, by irresponsible and excessive subprime mortgage 

lending and resulted in a major economic crisis, validating the 

strong nexus between financial and economic activity. 

In response, the Dodd–Frank Act enacted hundreds of new regulations that imposed virtual straitjackets on the banks. As a result 

of these regulations, as well as the prolonged zero interest rate policy by the Federal Reserve, new bank formation came to a virtual 

standstill. It is no surprise that the economy experienced the slowest recovery on record since World War II. 

5 

I think there are two ways in which banks can be made safer: 

through tighter regulation and by holding more capital. Based on 

my experience, as the Chairman of the Committee on Bank Supervision and Regulation at the Fed, and my banking experience, I 

would argue that strong capital requirements are generally more 

effective and efficient than a myriad of detailed regulations. 

Regulations are a straitjacket that constrains each and every 

banking activity and by the imposition of inflexible rules that are 

more appropriate for a rigid, centrally planned command economy. 

Moreover, regulations call for an army of supervisors to enforce 

all the rules, as well as an expensive compliance staff on behalf of 

the banks. In contrast, capital requirements are a flexible buffer 

that can protect the shareholders, depositors, and taxpayers alike. 

And at the same time, it provides an incentive to engage only in 

economically rewarding activities. Thereby it kills two birds with 

one stone. 

An innovative case to ease the regulatory burden for financial institutions is proposed in the Financial CHOICE Act. It rewards 

banks that are well managed and protected through high levels of 

capital with considerable regulatory relief. 

Let me close with one more suggestion that will considerably 

lower the costs to the banks as well as to the Government and the 

taxpayers, and that is the elimination or consolidation of overlapping regulatory agencies in the financial sector. 

Among the Federal regulators alone, we have the Federal Reserve System, the Comptroller of the Currency, the FDIC, the SEC, 

the newly formed CFPB, and the CFTC. In fact, there are now so 

many regulators that there are even agencies to coordinate the regulators. For instance, the FFIEC, of which I was a member in my 

days at the Federal Reserve, is tasked with coordinating the rulemaking and examination processes by the various agencies. 

So I think the time has come to simplify this regulatory jungle. 

If we need special councils to coordinate the regulators, we have a 

few regulators too many, and one layer of bureaucracy should be 

eliminated. 

Thank you very much, Mr. Chairman, for inviting me and giving 

me the opportunity to express my views on this important topic. 

Chairman CRAPO. Thank you, Mr. Heller. 

Mr. Powell. 

STATEMENT OF DONALD POWELL, FORMER CHAIRMAN, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. POWELL. Chairman Crapo, Ranking Member Brown, Members of the Committee, thank you for the opportunity to testify. 

I have spent 40 years plus working in the financial services industry. My experience includes serving as an employee, CEO, 

owner, and board member of various small- and mid-sized banks. 

Additionally, I have served as a banking regulator as Chairman of 

the FDIC. Furthermore, I have served on the board of one of the 

world’s largest financial institutions. 

All of these experiences have caused me to understand and respect the critical role a bank has in the success of a community, 

State, and in our Nation. The quality of life in a community has 

a direct link to the bank’s activities and services, including the creVerDate Nov 24 2008 12:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\03-28 ZZDISTILLER\32817.TXT JASON
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ation of jobs, the caliber of education, the excellence of health care, 

and the general prosperity of a community. The bank is the alter 

ego of a community. Banks, both large and small, contribute to the 

well-being of a community. Most banks have a culture that demands that all of its employees participate and provide leadership 

in all that is good within the community. 

The data is overwhelming as to the role banks play in economic 

activity, and when banks are not engaged in lending or in providing other services, the local, State, and the national economy 

suffers and economic growth becomes anemic. Thus, it is important 

that the Nation have viable, safe, and sound banks serving this 

great country. Part of the confidence placed in banks is a result of 

the depository protection offered by the FDIC and of the supervision of each insured institution. Confidence in the soundness of 

an institution is critical to the success of the banking system and, 

thus, the free enterprise system. 

During my career, I have experienced good and bad economic 

times and have observed the various reactions to these cycles by 

the marketplace, policymakers, regulators, and other stakeholders. 

I have studied the cause and effect of each downturn. After each 

downturn, Congress, as well as banking regulators, have attempted 

to address the issues attributed to the slump in our banking system. All of the banking supervisors have reacted by creating more 

stringent rules and a tougher oversight process. 

Today’s examination and supervisory process includes, as expected, more focus on threats to our way of life and to treating 

every potential customer in a fair, transparent, and forthright manner. Laws and supervision oversight may be fluid depending upon 

the latest threats, risk, and conditions within the banking industry. 

There has been discussion, supported by data, that banks today, 

especially smaller banking institutions, are not the vehicle that 

breathes economic life into a community because of the unnecessary burden of the examination process and of certain regulations. 

Often, after a downturn, the tone, attitude, and trust between 

banks and regulators become strained, which results in negative 

energy and a nonproductive environment. It is important to understand the cost of regulation and to distinguish between sound policy and unnecessary rules, laws, and policies that stifle economic 

activity. The overriding issue is how does this policy, law, or regulation support economic activity without burdening the consumer, 

small business owner, or other business ventures? 

I remain active in the financial services industry and have direct 

knowledge of the supervisory process and would offer some guiding 

principles rather than specific regulations, policies, and laws that 

are valid in all seasons. Without these principles, laws, policies, 

and regulations might be neutered or weakened. 

One, every banking regulator must be fiercely independent and 

cannot be politically influenced. The independence includes no political agenda, and activity must follow the mission established by 

law. Accountability is balanced with term limits and oversight from 

an independent Inspector General. Regulators should not be intimidated by any force of direct or indirect influences and should not 

be a political tool for any agenda. 

7 

Second, leadership at the various regulator agencies is critical. 

As with any enterprise, leadership sets the tone and mood for the 

entity. The ability to work with all stakeholders without compromising the mission should be a tenet for all leaders. Obviously the 

confirmation process should measure leadership that is validated 

by life’s experiences. 

Three, disputes must have a due process path. Without a trustworthy, reliable, and transparent due process, an American core 

principle is lost. There is not a valid due process existing today to 

resolve disputes between regulator and banker. I have offered a solution, and the paper is attached for the record. 

Four, rulemaking should be transparent, and common sense and 

judgment should prevail. Experience is vital to an understanding 

of the banking industry, and the process should be deliberate and 

seek input from all interested parties. Rulemaking does not include 

making laws or incorporating a political agenda into the regulation. 

Five, accountability follows authority and a vigorous review process is important; proper oversight by a responsible IG is important. 

While there are certain core principles to a safe and sound banking system, banking cannot be commoditized as every community 

market is different and judgment must be part of the process. 

Banking laws and regulations must be followed, but policymakers 

must understand the cost, burden, and intention of these laws and 

amend them when necessary. Today’s data indicates that there is 

more emphasis on compliance than on safety and soundness. It is 

important to understand that without the soundness of a bank, a 

community cannot thrive. We must get compliance with laws, safety and soundness all collaborated to the benefit of the community. 

Finally, after experiencing several banking crises firsthand and 

participating in mistakes and questioning myself and industry 

leaders, my conclusion is that there will continue to be cycles and 

new risks will emerge. But these common themes are present in 

those entities that survive: sufficient capital, liquidity to support 

the apparent risk and the unexpected events, and management 

that understands risk and provides oversight with the proper balance between serving the community, return on capital, and commitment to the basics without complexity. 

Thank you. 

Chairman CRAPO. Thank you, Mr. Powell. 

And before we go to Mr. Deas, I want to welcome Mr. Spriggs 

here. We understand the traffic is terrible out there today. As you 

had not quite made it yet, I told Ms. Del Rio she would go after 

Mr. Deas, and so we will let you go cleanup after Ms. Del Rio. 

Thank you very much. 

Mr. Deas. 

STATEMENT OF THOMAS C. DEAS, JR., CHAIRMAN, NATIONAL 

ASSOCIATION OF CORPORATE TREASURERS 

Mr. DEAS. Chairman Crapo, thank you very much, Ranking 

Member Brown, and the other Members of this Committee. Thank 

you for the opportunity to testify at this important hearing focusing 

on our country’s future economic growth. I am Tom Deas, recently 

retired vice president and treasurer of FMC Corporation and the 

current chairman of the National Association of Corporate TreasVerDate Nov 24 2008 12:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\03-28 ZZDISTILLER\32817.TXT JASON
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urers. NACT is an organization of treasury professionals from several hundred of the largest public and private companies in the 

country. I also represent NACT on the Steering Committee of the 

Coalition for Derivatives End Users. The coalition is comprised of 

several hundred companies whose treasurers employ derivatives to 

manage risks in their day-to-day business activities. 

At the outset, I would like to thank you, Chairman Crapo, for 

your efforts to make sure that end users are able to engage in prudent risk management activities without facing costs that would 

make such activities prohibitively expensive. We appreciate your 

efforts to move a bill, enacted in the last Congress, to exempt end 

users from unnecessary margin requirements. 

The financial system is critical to the day-to-day business activities of end-user companies. As a corporate treasurer, I can tell you 

that I interacted with our financial counterparties every day 

through such critical tasks as collecting payments from our customers; concentrating cash collections in a secure depository institution; sending cash safely from where it was collected and concentrated to wherever it is needed to meet the company’s day-today business obligations; also borrowing or investing to meet temporary or longer-term cash shortfalls or surpluses; managing the 

company’s capital structure with adequate committed credit and 

appropriate amounts of debt and equity capital; and also identifying and hedging the company’s financial risks from exposures to 

such factors as changes in interest rates, foreign exchange rates, 

and commodity prices. 

Let me give you a real-world example, if I may. Companies use 

commodity derivatives to help structure cross-border bartering 

transactions. Consider a U.S. agricultural chemicals company selling into Brazil. With financial markets far less developed in Brazil, 

the U.S. company can access the derivatives market in ways unavailable to the Brazilians. The customer in Brazil needs crop protection chemicals at planting time, but can only pay 6 months in 

the future, at harvest time. During this period, the Brazilian farmer has commodity price risk and currency risk. The U.S. manufacturer arranges a barter trade where the Brazilian farmer agrees to 

pay in bushels of soybeans 6 months in the future at harvest time 

for the chemicals it needs to apply at planting time. The farmer 

has thereby transferred the price risk to the U.S. chemicals manufacturer, which can lay off that risk in a customized commodity derivative locking in the U.S. dollar price 6 months in the future, 

thereby hedging its risk. 

By reducing the overall volatility of its business results, the enduser corporate treasurer contributes to the stability and predictability of his business. But we cannot do this without our bank 

counterparties, and we also cannot do it if the pricing is too high. 

And while I and the end-user community support smart regulation 

of financial services, we are concerned about overregulation, which 

can increase our costs and make risk management activities prohibitively expensive. 

European policymakers, for example, have implemented capital 

charges on derivatives positions significantly more favorable to 

their end users than have the U.S. prudential banking regulators. 

The European approach recognizes that end-users’ hedging activiVerDate Nov 24 2008 12:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\03-28 ZZDISTILLER\32817.TXT JASON
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ties are, in fact, risk reducing and, accordingly, exempts end-user 

derivatives transactions from the credit valuation adjustment, 

which would otherwise require the bank counterparty to hold additional capital to mitigate counterparty credit risk in a derivatives 

transaction. The absence of a U.S. exemption puts American companies at a meaningful competitive disadvantage compared to our 

European competitors. In fact, the CVA charge may force end users 

to post collateral to offset banks’ CVA capital requirements, subtracting from funds available for business investment. This is an 

example of overregulation harming end users while benefiting foreign competitors. 

We need a regulatory system that allows Main Street companies 

to use the financial system to hedge day-to-day commercial risks, 

securely manage their cash-flows, fund their businesses in the most 

cost-effective way, and play on a level field with their foreign competitors. By having a regulatory system that allows businesses to 

improve their planning and forecasting, manage unforeseen and, 

indeed, at times uncontrollable events, offer more stable prices to 

consumers, end users can more readily contribute to economic and 

employment growth. 

Thank you. I will do my best to answer any questions you may 

have. 

Chairman CRAPO. Thank you, Mr. Deas. 

Ms. Del Rio. 

STATEMENT OF DEYANIRA DEL RIO, COEXECUTIVE 

DIRECTOR, NEW ECONOMY PROJECT 

Ms. DEL RIO. Chairman Crapo, Ranking Member Brown, and 

Members of the Committee, thank you for the invitation to testify 

today at this hearing. My name is Deyanira Del Rio, and I am the 

codirector of New Economy Project. We are an economic justice center based in New York City, and for more than 20 years, we have 

worked with community, labor, civil rights, and many other groups 

throughout New York to press for fair lending and economic inclusion, as a matter of racial justice and equitable neighborhood development. I am pleased to share our experiences and perspective 

about the vital role that responsible financial institutions play in 

fostering economic growth and opportunity, but also the devastating and destabilizing impact that abusive and unregulated 

lending has on communities and the economy. 

My testimony is additionally informed by my 15 years as a board 

member and currently the board chair of the Lower East Side People’s Federal Credit Union. We are a not-for-profit regulated credit 

union and Treasury-certified community development financial institution that primarily serves a membership of low-income and immigrant New Yorkers. 

I have two overarching points to frame the testimony that I am 

delivering today. First, we believe that eliminating barriers to fair 

banking and credit access is critical to ensuring economic inclusion 

and opportunity for all. And, indeed, unequal access to credit has 

historically fueled housing segregation, racial disparities in homeownership and business ownership, and vast deepening wealth inequality across the country. 

10 

Although affordable and appropriate financial services is critical 

to a healthy economy, as you heard, we reject the notion that consumer credit and credit in itself is a solution to deeper structural 

inequities in our economy. Exploitative credit and debt, as we have 

seen, can worsen these inequities, as we saw with subprime mortgages that led to the foreclosure crisis and undid, wiped out hardwon gains in homeownership for families of color, as well as payday 

loan debt traps that exploit working families that struggle to make 

ends meet, and rather than help them make ends meet, they throw 

them a brick to entrap them in debt. So in terms of the short-term 

and small-dollar loans known as ‘‘payday loans’’ decreasing, we 

would say that that would be something to celebrate. And the point 

of all of that is to say that regulations and policies that address 

root causes of economic insecurity are fundamental and cannot be 

replaced by simply providing credit to help people cover expenses 

that they should be able to cover through fair wages and other 

kinds of protections. 

It must also be said up front that efforts by this Administration 

and Congress to dismantle our financial reform laws, if successful, 

will inevitably lead to new crises and further erode Americans’ 

trust in the financial system, which we have seen firsthand is already pretty low. We believe it is critical to preserve existing reforms and consumer protections and begin to work toward fundamental change in our system so that we can create a financial services sector that serves the real economy and not a financialized 

economy that is extractive and often exploitative. 

Three quick points. 

One, the financial crisis inflicted enormous costs on communities, 

the economy, and on responsible financial institutions—with repercussions that continue today. Communities of color are especially 

hard hit and continue to reel from the crisis. 

Just a couple of statistics are that fully half of the collective 

wealth of black families and two-thirds of the wealth of Latino families was lost in 3 years, from 2007 to 2010. And the big banks, it 

needs to be reminded, fueled this wave of predatory lending 

through securitization and creating the market that fueled 

subprime loans and allowed that sector to reach crisis proportions. 

Just a note about the impact on responsible regulated financial 

institutions like my credit union, which played no part in the crisis, 

in creating the crisis. We were not spared the effects, nor were our 

communities. And one of the reasons that our institution has supported financial regulation at the State and Federal level and we 

supported and have weighed in on the Consumer Financial Protection Bureau and its rulemaking and enforcement is because we feel 

like we have learned that the effects, the cost to our institutions 

and our communities of not having sound regulations that prevent 

wealth stripping in our communities has presented to our institution far greater risks than the marginal and short-term costs of 

compliance with new regulations. 

A second point. Again, strong prudential regulation and consumer protections—including a robust and independent CFPB—is 

crucial to avert future crises. Congress enacted Dodd–Frank in the 

wake of undeniable regulatory failure and destructive lending and 

created requirements that include such basic tenets of responsible 

11 

lending as that lenders must assess a borrower’s ability to repay 

loans. And the fact that that is controversial, something that our 

institution and many others, my credit union, believe is just basic 

to responsible underwriting and lending has been lost shows the 

need for these regulations. 

The CFPB has so far returned $12 billion to 29 million Americans and has brought payday lenders, credit reporting agencies, 

and other powerful sectors under meaningful supervision for the 

first time. The fact that banks and others are pushing relentlessly 

to weaken the CFPB to us demonstrates its effectiveness and its 

independence. 

Finally, community development financial institutions have 

played vital roles in meeting credit and financial services needs in 

communities as banks become more consolidated and further removed from communities across the country. The proposed gutting 

of the Federal CDFI Fund, the elimination of its budget, puts these 

institutions, which are supporting economic growth in the real 

economy—would be greatly harmed by these cuts, and we hope 

that they are promptly restored. 

I know I am out of time, so I am happy to elaborate on anything 

else in the Q&A and to answer any questions. Thank you again. 

Chairman CRAPO. Thank you. 

Mr. Spriggs. 

STATEMENT OF WILLIAM E. SPRIGGS, PROFESSOR OF ECONOMICS, HOWARD UNIVERSITY, AND CHIEF ECONOMIST, 

AFL–CIO 

Mr. SPRIGGS. Thank you, Chair Crapo and Ranking Member 

Brown, for the this invitation to speak today, and I do apologize, 

Chair, that I was running behind and missed some of the earlier 

testimony and your opening remarks. I apologize for that. 

My name is William Spriggs, and I am here representing the 

AFL–CIO, which is America’s house of labor. It represents the 

working people of the United States. I am also here as a professor 

of economics at Howard University. Howard has produced three 

U.S. Senators. We are very proud at the Department of Economics 

of the third one because Senator Kamala Harris is a graduate of 

the Department of Economics at Howard. 

I want to take my testimony in a slightly different direction than 

what you have just heard. Clearly, sound financial systems are necessary for growth. When you look at U.S. economic history prior to 

the Glass–Steagall Act, you see episode after episode after episode 

of financial crisis, bank failures, and the type of event that did not 

take place between the Glass–Steagall Act and 2008. 

So we understand that having a sound fiscal system can do away 

with very great variations and downturns, and it is important so 

that we can continue a progress of growth. But, more importantly, 

I want you to focus on the real growth. Growth actually occurs in 

the real economy. And if we really are concerned about business 

formation, if we really are concerned about economic growth, then 

we have to think about labor force growth, labor force productivity, 

an we have to think about investment and productive capital that 

increases the productivity of those workers. 

12 

A financial system that serves the purpose of taking excess capital and moving it to productive capital is the point. If it is doing 

something else, it is diverting funds. Deepening of the financial sector does not necessarily mean moving excess savings to productive 

capital. 

How did we grow so successfully from 1946 to 1979? There are 

a couple of things that correlate with that. Primary is an agreement between Republicans and Democrats that we had to invest in 

the American people and we had to invest in America. It was a belief by both parties that if you invest in America and you invest 

in Americans, it will always—always—pay high dividends. So 

whether it was the effort of Dwight Eisenhower, a Republican 

President, to give us the National Student Defense Loan system 

that propelled many Americans into the high-tech sector, gave us 

the teachers that taught the people who produced the Internet and 

produced the micro computer, or whether it was Eisenhower giving 

us the Interstate Highway System, the infrastructure that is still 

the backbone of our Nation’s transportation system. 

These were bipartisan beliefs that Government played a key role 

in providing the means by which America could pay dividends to 

its citizens and to the world. It created a growth pattern that was 

equal so that we saw all income portions grow. Whether you were 

at the bottom of the income distribution or at the top, everyone 

grew together. The key element there is that what matters in economics is the customer market. When all incomes grow, then the 

budget line for all households grows, and everyone is a potential 

new customer. Businesses grow from new customers. And so if you 

want innovation, if you want faster growth, you have to have 

broad-based income growth. That is what we had from 1946 to 

1979 from that consensus and that belief, and the role of Government to foster that kind of investment and to believe in broadbased income growth. 

Since then, we have departed. We have had massive inequality. 

Those at the bottom have not benefited as those at the top, and our 

customer base is not expanding. The result is we have had slower 

new business formation, and that has been key at slowing our 

growth. 

Sound fiscal systems are necessary for the stability of that 

growth, systems that do not continue to foster huge banks. Small 

businesses have succeeded as the economy has rebounded because 

of small banks. That is where the majority of small businesses are 

now getting their funding. 

So we need a competitive banking system, we need a sound 

banking system, and we need to remember, as we were just reminded, the very high cost of this economic downturn. The costs of 

regulation against the trillions of dollars that our economy lost 

from the financial collapse have to be weighed. Those trillions of 

dollars we have not yet regained. 

Thank you. 

Chairman CRAPO. Thank you, Mr. Spriggs. And as we begin the 

question period, I remind all Senators to please honor the 5-minute 

rule. As usual, we are under some time pressures here. 

Senator Brown has a real time pressure, so I am going to let him 

go first. 

13 

Senator BROWN. Thank you, Mr. Chairman. I will honor the 5 

minutes and set the pace, so thank you for that. 

I will start with Dr. Spriggs. Thank you for your testimony, all 

five of you. Most public companies seem to have become beholden 

to the quarterly earnings report. One survey of financial executives 

found that 78 percent would sacrifice economic value of their own 

company just to meet financial reporting targets. That is no way, 

obviously, to grow our economy. Families do not think in terms of 

3-month earning quarters. They think in terms of school years. 

They think in terms of 30-year mortgages. They think in terms of 

years left to save for retirement. 

Why is it important for Congress to focus on workers and consumers when trying to foster economic growth? 

Mr. SPRIGGS. Well, thank you, Senator. It is very important to 

focus on consumers and workers because that is the real economy, 

and we do not want to lose sight of that. And the real economy 

grows when we have customer bases grow. So we need workers, all 

workers, to have raises, to have their wages match productivity 

growth, so that we can see a dynamic business environment. 

The rate at which new businesses are being created in the 

United States has slowed down, and instead of new businesses, the 

way that companies are getting new customers is through consolidation. They buy each other out. And this phenomenon that you 

mention is part of that. Part of that is the financialization of our 

system. 

So for a CEO, I can actually get higher pay, not by taking capital 

to invest in my company and increase my capital, but by simply 

buying back my stock. Billions of dollars have been spent simply 

buying back stock, simply bidding up the price of stock, which is 

the barometer by which the CEOs declare that they have been successful to the stockholders. 

That is not adding to the productive capacity of the economy. It 

is not feeding back into training workers. It is not feeding back into 

higher wages. It is not feeding back into making us more competitive. 

So this is why Congress has to be concerned with this type of 

practice, and the growth of inequality means that Congress has to 

be concerned about the growth of the consumer base. 

Senator BROWN. Thank you. 

Ms. Del Rio, you spoke of community development financial institutions, CDFI. I want to ask you a question about that. East Liverpool, Ohio, a small city, used to be the center of the pottery industry in the United States, a county on the Ohio River in eastern 

Ohio. The Progress Fund, a CDFI, worked with American Mug and 

Stein, a small manufacturer, many of them—they were hiring. 

They hired in many cases people who needed a second chance, 

former offenders. The CDFI restructured its debt after it was 

turned down by a traditional lender. Starbucks is now a steady 

customer of their mugs. It has doubled its workforce. The Administration’s ‘‘skinny budget’’ eliminates CDFI Fund grants, but CDFIs 

play an important role in rural and urban communities in Appalachia and New York City and communities in every State. I would 

add that the area where this company is was a huge—President 

14 

Trump, Candidate Trump, won a huge majority in that county, as 

he did along the Ohio River. 

Ms. Del Rio, tell us who CDFIs serve, whether the private market can meet the needs of these communities, and how the Administration proposed cuts to CDFI grants would impact urban and 

rural communities. 

Ms. DEL RIO. Sure. Thank you for that question. So CDFIs can 

be loan funds, credit unions, many other kinds of institutions. My 

primary experience is with credit union CDFIs, so that is what I 

will focus on. But all CDFIs serve economically distressed communities. That is their focus, and that is why they are certified by 

Treasury as such, and they receive investments through CDFI 

Fund. 

One note is that I think there is a misunderstanding about what 

the CDFI Fund does. It does not make grants. It is not charity. It 

provides capital grants, capital investments into institutions that 

then get leveraged at rates of $12 to $23 per every CDFI dollar invested. And so it is actually an investment in financial services to 

support economic growth. 

CDFIs make loans to support affordable housing, small business 

development, jobs, commercial and community spaces, to expand 

access to child care, and many, many other services. And they have 

their ear to the ground. They are truly community-based, and that 

is their focus, as in the example that you provided. 

There are 8 million people served by credit union CDFIs across 

the country in 46 different States, and my credit union is one of 

them. And we have used CDFI Fund and other support that we 

have been able to receive to expand business lending in our community, to provide a whole range of services that we would not otherwise be able to do. And, critically, it has enabled us to grow. 

So for small institutions, when you bring in a lot of deposits or 

you make a lot of loans, in the short term your net worth decreases. Your capital ratio decreases. So for a small credit union or 

any institution that is serving a low-income population that does 

not have a lot of resources, these infusions of capital are critical to 

enable us to meet the loan demand in our communities. We would 

not be able to make the volume of loans—we are 100 percent 

loaned out in terms of our member deposits right now. We could 

not do that if we were not able to get these infusions of investments. 

And one of the things that we are really proud of in New York 

City is that we are one of the sole lenders—banks do not make 

these loans—to low-income housing cooperatives. They are low-income, limited-equity cooperatives, and they represent one of the 

last remaining affordable homeownership options for low-income 

New Yorkers, and we have been able to extend $18 million in loans 

to these buildings themselves and to individuals that are purchasing in those buildings. And to give you a sense of that, some 

people are able to purchase their apartments for as low as $5,000 

in New York City. These are limited equity. People cannot flip 

them to make a profit, and so they are not sort of on the market. 

They are not something that lots of investors or lenders want to be 

involved in. But it is something that we do as a CDFI that we are 

really proud of. 

15 

Senator BROWN. Thank you so much. 

Thanks, Mr. Chairman. 

Chairman CRAPO. Thank you. 

And I will continue to forgo my questioning, and we will go next 

to Senator Kennedy. 

Senator KENNEDY. Thank you, Mr. Chairman. Thanks to all of 

you for coming today. I have learned a lot listening to you. I particularly want to thank Mr. Powell. Mr. Powell was in charge of recovery in Louisiana after Katrina. You did an extraordinary job, 

and the people in my State owe a great debt of gratitude to you, 

and I wanted to recognize that. 

I wanted to ask each of you a question about Dodd–Frank and 

community banks. I am defining a community bank or a community credit union as being $10 billion or less. My understanding is 

that those institutions comprise about 98 percent of all of our financial institutions. 

The Chairwoman of the Federal Reserve talked to us a few 

weeks ago. I asked her directly what did the community banks do 

to contribute to the meltdown in 2008, and she said, ‘‘Nothing.’’ 

I would like your thoughts, given the regulatory costs and the 

impact on lending and the forced consolidation that has gone on in 

community banking, I would like your thoughts on whether you 

think it would be appropriate to exempt community banks, $10 billion or less, from the regulations of Dodd–Frank. We will just start 

at the end, if that is OK. 

Mr. HELLER. I think that is a very good idea that really needs 

to be explored. I am in favor of exempting them from the regulations as long as they are well managed, as determined by the regulators, and that they have a good, sound level of capital. Those are 

two things that I would require and then you ease up on the rules 

so that you do not have that enormous regulatory burden. In our community bank—I am on the board of a $2 billion 

bank—we have doubled our compliance staff over the last 10 years, 

and that does not do anybody any good. 

Mr. POWELL. Senator, I think without question that there is an 

extraordinary amount of burden upon community banks. They do 

not have the cost structure to comply with some of the burdens of 

Dodd–Frank. 

Having said that, obviously, Dodd–Frank was implemented for 

certain purposes, but I am on a community bank board, and I was 

just reflecting, as you were speaking, about our last board meeting. 

We reviewed 50-some-odd policies as it relates to compliance with 

Dodd–Frank. That takes a lot of effort, a lot of cost. I think it is 

appropriate to review those and to eliminate some of those, specifically on these issues. The qualified mortgage issue as it relates to 

community banks is a big handicap in serving their customers. I 

understand the rationale behind qualified mortgage, but we have 

got to get away from customizing—we are getting away from judgment. 

And so these community banks really know their community and 

they know their customers. And the last thing they want to do is 

make a bad loan. We forget that. We forget that nobody wants to 

make a bad loan. So a qualified mortgage, we have commoditized 

these products, and you cannot do that in a community bank. 

16 

I think the second issue is that data collection, we really need 

to review that in a community bank. Why do you need all the data 

collection? I recognize and understand that, but it is a real burden 

upon a community bank. A community bank, you have got to remember, they are a reflection and they are the alter ego of the community. They want to serve their community. But they know their 

customers probably better than anybody else in the community. 

They have lived with them; they work with them. They go to school 

with them; they go to church with them. 

So the burden of the Dodd–Frank I think needs to be exempt to 

these smaller institutions, without compromising capital ratios, not 

compromising liquidity. Safety and soundness is clearly an issue. 

Senator KENNEDY. OK. Mr. Deas. 

Mr. DEAS. Senator, I can only say as an end user and a large 

company corporate treasurer, I have dealt mostly with larger 

banks, but I will say that with the efforts of Members of this Committee in the last Congress, there was a bipartisan consensus to exempt end users from some of the regulations under Dodd–Frank 

that would outweigh the benefits of those regulations. And so by 

analogy, I would think that if community banks whose function is 

to take funds from where they are generated, redeploy them where 

they are needed in their community, are being unduly burdened by 

these regulations, that we should relieve them of that burden. 

Senator KENNEDY. OK. I have got 12 second—no. I think I am 

over. I am sorry, Mr. Chairman. 

Chairman CRAPO. Well, we will let the remaining witnesses provide written responses to this question as well. 

And thank you very much, Senator Kennedy, for paying attention to the clock. 

Senator Reed. 

Senator REED. Well, in order to—Mr. Spriggs, why don’t you answer that question? It was a very good question posed by Senator 

Kennedy, and then Ms. Del Rio briefly. 

Mr. SPRIGGS. Thank you, and I will be brief to respect your clock, 

Senator. 

I think that flexibility has already been shown to the smaller 

banks. They do play the vital role, as I mentioned; close to 70 percent of the small business loans were from small banks, and so 

they provide the backbone for helping businesses grow. 

But we have to think about what those regulations do in total. 

The greatest threat to the community banks is that we continue to 

have banks too big to fail that dominate the market and continue 

to present too great a systemic risk to our economy. We need them 

broken up so that that will create more space for community banks 

to thrive and to prosper. Their greatest enemy right now are these 

huge banks. 

Senator REED. Ms. Del Rio. 

Ms. DEL RIO. As a small institution, the credit union I am on the 

board of has $51 million in assets. We already have certain accommodations for us under Dodd–Frank. An example is that we are supervised for compliance with consumer protection laws by our existing Federal regulator, the National Credit Union Administration. 

17 

Additionally, since we are CDFI certified in certain CFPB rules, 

including the qualified residential mortgage rule, there are exemptions made for institutions like ours. 

I think that there has been thoughtful consideration of how to 

accommodate smaller institutions. Our experience is that community banks are a spectrum. They are not all wonderful. They are 

not—and there are problematic practices at some of these institutions, so a wholesale exemption is not something that I would support. 

Senator REED. Well, thank you. And let me thank Senator Kennedy or the wonderful question. It helped me. Thank you. 

Mr. Spriggs, one of the issues that we are struggling with here 

is the cost-benefit analysis. Obviously, you do not want to burden 

any system with costs in excess of benefits or derive short-term 

benefits at huge cost. And we saw in 2008–09 extraordinary costs 

to the system, and I do not think the community banks were immune from the economic chaos. And as a result, part of Dodd– 

Frank is to sort of avoid another catastrophic event. 

Again, does the current system help insulate us from that shock 

of another catastrophe? It could be improved a bit, but isn’t it a 

vast improvement over what we had before the crash? 

Mr. SPRIGGS. Yes, Senator, it is a vast improvement, and all previous bank failures, as I gave the whole history for the U.S., we 

have had Congress respond, and this time Congress did respond. 

Now, we still have banks that are too big to fail, and we still have 

to address that. But we do have to remind ourselves the tremendous cost in trillions of dollars—almost our entire GDP, one might 

argue, in cost—lost banks; community banks that got swallowed 

up, not because of something they did; pension funds, the costs to 

municipalities when pension funds collapse because of this financial crisis. Many of our cities and State governments ran into huge 

problems because their pension funds collapsed. 

You have to look at the loss from the household sector in terms 

of homeownership wealth, in terms of pension wealth. All of this 

cost, the cost to the global system, the collapse of international 

trade that took place, the loss to potential GDP of the United 

States. When you look at projections that were made in 2001 

through 2005 of what our economy would look like, when you add 

all that up, almost 1 year’s worth of GDP after you add it all up, 

you have to say that a few cautionary measures by banks to prevent that has to be worth it. 

Senator REED. Thank you. Just one point that you made, Ms. Del 

Rio, in your testimony—and you alluded to it—is the Consumer Financial Protection Bureau, and one of the impressions I have is 

that, again, looking back at the crisis, some of the difficulties were 

caused by these nonbank banks, entities that were chartered by 

States, not as financial institutions, not regulated properly, et 

cetera, but were competing in the mortgage market and competing 

in other markets. And one thing that the CFPB does to protect particularly smaller institutions is they actually have some authority 

to regulate these nonbank banks. 

Have you found that to be helpful or impactful on your credit 

union? 

18 

Ms. DEL RIO. Extremely so, and in my work as well as New 

Economy Project. I think that that is what is so crucial about the 

CFPB, is that it is the first Federal agency with the mission of— 

its core mission of protecting consumers in this marketplace. This 

was a piece of lots of different agencies’ responsibility, but inevitably, it was not a priority. The priority was on other regulations 

and prudential regulation, which, ironically, helped to lead to the 

sort of regulatory failure, because in the short term subprime lending was extremely lucrative until the crash happened. Payday lending is extremely lucrative. 

So, you know, there are a lot of practices that can be profitable 

for an institution and good for their bottom line, but that are harmful and present systemic risk as well as harming consumers and 

communities, and that is the key to strong financial—why financial 

regulation in addition to capital requirements and skin in the game 

is needed. 

Senator REED. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Perdue. 

Senator PERDUE. Thank you, Mr. Chairman. I will do this standing up, if that is OK. 

Chairman CRAPO. Sorry about that. 

[Laughter.] 

Senator PERDUE. No. It is fine. 

This is a topic that is at the forefront, I think, of what we need 

to be talking about in Congress. Look, there is no question that 

parts of the financial industry got ahead of itself leading up to 

2008–09, but let us remember that the basic instrument that 

caused that was created by the desire back in the late 1990s to increase homeownership, and things like no-income and low-income 

verification loans were created that started defaulting almost immediately in the 40-percent range. But rating agencies and all that, 

that is not the direction I want to go in today. 

Dr. Spriggs, I could not agree with you more. Your testimony 

today I thought was pretty much right on. I agree with most of it. 

But I want to come back to a question about small businesses. It 

looks to me like over the last 70 years, since 1946, as you well 

called out, Dr. Spriggs, our economic miracle—which, by the way, 

is the largest in the history of humankind for all Americans, basically—was created by innovation, capital formation, and the rule of 

law. Ms. Del Rio, I agree, though, that there was an imbalance in 

that growth, and it had to do with a lot of things—geographic 

issues, racial issues, et cetera, et cetera. But, by and large, those 

were the three things that created this. 

Today, unfortunately, I think that our unilateral chase toward 

Basel III when these other countries are not doing that as well, we 

required our small and regional banks to have capital requirements 

that are well beyond any reasonable level that would require—that 

they should be required to be protected. They did not have anything to do with the debacle of 2009. They were not levered up 67 

times like some of those guys were. And today the impact on small 

businesses—and this is the question I have for Dr. Heller first. 

Small business today, we have around 650,000 missing, as I calVerDate Nov 24 2008 12:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\03-28 ZZDISTILLER\32817.TXT JASON
19 

culate it, small businesses today, and this is from the Bureau of 

Census, that if you take the jobs created from 1977 through 2007 

and extrapolate that forward to the number of small businesses 

that we should have today, we have about 650,000 fewer businesses today. And that is a steep fall from 2009. 

I would argue that that is probably caused mostly by a lack of 

capital. Innovation has not fallen off. The rule of law has not been 

changed much. So it is basically access to capital in small communities that I am so familiar with. 

Can you address that? You are on the board of a community 

bank. You just answered the question about Dodd–Frank. But I 

would like to know about the capital requirements for not just 

small community banks but also regional banks that had no part 

in the debacle of 2009. Could you address that first? 

Mr. HELLER. It is a very serious problem, as you say. First of all, 

community banks with about $300 to $400 million in asset size, 

they have a very, very hard time surviving, and they are merging 

incessantly. They are going out of existence, and they get swallowed up by either like-sized institutions or by larger banks that 

are acquiring them. 

Senator PERDUE. In my State alone, we have lost 90 banks, small 

banks, since 2009, and it had nothing to do with their financial position. It had to do with the cost of compliance, and it made them 

an extremely attractive target for a bigger bank. So it looks to me 

like what we have done is incented the consolidation of an industry 

where we want to break up larger banks in theory. But the reality, 

the unintended consequences, we have done just the opposite. Do 

you agree or—— 

Mr. HELLER. And to make it worse, Senator, every year typically 

we have between 150 and 200 new banks being formed, and that 

stopped totally with the imposition of Dodd–Frank. Since then, 

there have been virtually no new bank formations. In the last 5 

years, there were two new banks, according to the last statistics 

available from the FDIC. So no new banks are replacing the ones 

that are disappearing, and so you get exactly the effect that you 

point out. Small bank lending to small corporations, to small customers, that has come mostly to a standstill. And recently we have 

seen for the first time in U.S. history that the exit of small corporations was larger than the formation of new corporations. So there 

is no new lifeblood coming into the country because more companies are exiting than entering, paralleling the scene on the bank 

side. 

Senator PERDUE. Mr. Powell, estimates have been made that this 

is somewhere around $2 trillion that is not at work in the economy 

right now, that is on the balance sheets of small regional banks. 

I do not know if you have seen that number. Do you agree that 

there s a significant amount of capital that should be released into 

these small communities? 

Mr. POWELL. That is a complex question. I think capital will follow opportunity. I think in the community banks that capital is not 

an issue. I think they have plenty of capital to loan, and I think 

they have money to loan. 

I think the issue is more complex than that, Senator. I think part 

of it is the regulator oversight, the tone, the mood, the environVerDate Nov 24 2008 12:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\03-28 ZZDISTILLER\32817.TXT JASON
20 

ment, they have to be very, very careful. I think complying with 

certain standards, complying with certain laws and regulations is, 

in fact, a burden. And I might add that the small business person 

has the same thing. 

So one of the reasons that people are not creating new businesses 

is not necessarily for the lack of capital, because they can get the 

capital from outside banks. 

Senator PERDUE. So you think the regulatory environment has 

something to do with that? 

Mr. POWELL. Yes, sir. 

Senator PERDUE. So here is the final question. I am out of time, 

but I would like to see this answered in writing, if you all do not 

mind. That is, the true cost of compliance is lack of jobs in local 

communities, and I would love to know what we can do, what are 

the priorities you guys all see on all sides of what we could do that 

does not change the intent of what we needed to do after the 2009 

debacle to fix the problems we had there, but that would release 

some of the problems we have with the unintended consequences 

in these small communities? 

Thank you very much. Thanks to all of you. 

Chairman CRAPO. Senator Heitkamp—oh, wait a minute. I did 

not realize. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. 

Senator HEITKAMP. I should have jumped in. 

Senator WARREN. You should have. You should have. You lost it 

there. 

[Laughter.] 

Senator WARREN. But I do want to get this in, and thank you for 

holding this hearing. 

It is clear that a robust, well-functioning financial sector can help 

grow the economy, and a healthy financial sector helps officially allocate capital and manage risk, and that is good for consumers, and 

that is good for businesses. 

But according to a number of recent research papers, a growing 

financial sector does not necessarily mean a growing economy. In 

fact, after a certain point, growth in the financial sector can hurt 

the overall economy, and it can hurt it a lot. 

A 2015 paper from the International Monetary Fund found that 

an economy too dominated by the financial sector is less productive 

and less efficient at allocating capital. And a 2015 paper from the 

Bank for International Settlements found that after a certain point, 

financial sector growth sucks money away from the real economy, 

particularly hurting industries that depend most on research and 

development. 

And here is the kicker. According to that 2015 IMF research report, which gathered empirical data from countries around the 

world, America’s financial sector is too big a part of our economy. 

In other words, the economy would be more productive if we scaled 

back the financial services industry and reoriented it to making investments in the real economy. 

Now, Mr. Spriggs, a lot of the discussion today has been about 

how to make life easier for banks, how to encourage them to grow 

and engage in more activities, with the assumption that economic 

21 

growth will follow. As banks get bigger, do they necessarily help 

the economy grow? 

Mr. SPRIGGS. Thank you for the question, Senator, and by grow, 

I think more specifically what we found is as they grow as a share 

of the economy and, very importantly, as a share of the workforce, 

oddly, productivity increases have kept the share of Americans in 

manufacturing declining, just as with agriculture, the share of people in agriculture has declined because of productivity increases. 

With computers, with advances that we have in technology, one 

would well imagine that the financial sector, therefore, should 

shrink as a share of the economy because very smart people working with very smart computers should be able to do it with fewer 

people. Remarkably, they do it with more people. 

Senator WARREN. Right. 

Mr. SPRIGGS. It is the one sector that does not reflect this productivity growth. So right there is your hint that maybe this is not 

the way to go. 

Senator WARREN. All right. 

Mr. SPRIGGS. I would just give you one anecdotal evidence of 

stealing from the productive sector. Fortunately, many Howard 

University students work for the top firms on Wall Street. Those 

firms do not just recruit from our School of Business. They do not 

just recruit from the Department of Economics. They love the 

School of Engineering. Now, we are taking the Nation’s key 

innovators and putting them on Wall Street. This type of competition for people who the economy might be better served doing innovative things I think is one of those other indicators that perhaps 

it is getting too big. 

Senator WARREN. That is a very helpful comment, Mr. Spriggs, 

and, in fact, given the conclusion of the IMF paper, it looks like to 

me that our question today should be how to push banks toward 

investing in the real economy instead of investing in complex, highrisk activities that produce very little economic value. I take it you 

would agree with that? 

Mr. SPRIGGS. Yes. 

Senator WARREN. Yeah. So the IMF paper had another interesting finding that I want to talk about for a second here. Expanding access to the financial sector always had a positive impact on 

growth, so more access helped growth. To me, that means one of 

the best things we can do to promote economic growth in this country is to make every effort to provide basic banking services to the 

40 million unbanked households in this country. 

So let me ask you this, Mr. Spriggs: For the past few years, I 

have argued that the post office should be permitted to provide 

basic banking services, just checking, savings, bill paying, that sort 

of thing. This would be a win–win for consumers and for the post 

office. 

Do you think it would also help promote economic growth if postal banking expanded access to the financial system for some of the 

40 million households that are locked out today? 

Mr. SPRIGGS. Yes, it would, Senator. I mean, one of the key factors is that we have improved on the public sector side in how we 

can deliver transfer funds, how we can help low-income families. 

We can do this electronically. But because they are unbanked, we 

22 

end up with lots of leakages. In fact, my State, Virginia, had to 

take some steps because we used to do the State income tax refund 

that way. Many people found out that it cost more to access the refund because of that than the refund was worth, and the State has 

tons of dollars wasted because of that. 

Reaching the unbanked would provide the stability in those 

economies, those local economies, those micro economies, that helps 

small businesses to develop. And one of the difficulties at the 

smaller level, the neighborhood level, is the managing of cash-flow. 

The problem with payday lenders is part of people trying to manage their own cash-flow because they do not have access to banking. And that would help small businesses at the neighborhood 

level. 

Senator WARREN. That is very helpful, Mr. Spriggs, and I really 

do appreciate it. You know, a lot of Americans have known for a 

long time that the financial sector has gotten too big, too complex, 

and too powerful. And now there is a big stack of research to back 

that up. 

It seems to me that our job here on this Committee is to advance 

policies to make the economy grow, not policies just to make big 

banks even bigger. Reining in the big banks is good for financial 

stability and avoiding bailouts, and it is good for the economy. 

There is no tradeoff here between regulation and growth. They 

work hand in hand if done right. And I hope that will be the focus 

of this Committee and Congress. Thank you very much. 

Thank you, Mr. Chairman. 

Senator COTTON [presiding]. Thank you. 

Mr. Heller, in your written testimony, you say there are two 

basic ways to increase bank safety: one is more regulation, one is 

more capital. Could you explain a little bit more for the Committee 

about the tradeoff from those two choices and what might be the 

wiser course of action as a matter of policy? 

Mr. HELLER. Well, like I say in the statement, if we have wellcapitalized banks—and Senator Warren was citing IMF studies. 

There are also IMF studies that, for instance, show that banks, 

once they reach about 15 percent capital, the marginal benefit, the 

incremental benefit of that additional capital really is very close to 

zero. So by well capitalized, I would say somewhere between 10, 15 

percent, roughly in that range, according to the IMF data, basically, banks do not fail. If banks do not fail, that means that they 

can serve the communities very well, and they do not need all the 

regulatory restrictions in order to make them safer. So that is the 

tradeoff that we have, and I think the CHOICE Act does exactly 

that. It says if you are a well-managed, well-capitalized bank, then 

you are relieved from the regulatory straitjacket that we are talking about. 

Senator COTTON. Is it fair to say that having a higher capital 

standard is a simpler, less complicated way to ensure bank safety 

than having exquisitely refined regulations written by a multiplicity of banking regulators? 

Mr. HELLER. Exactly, Senator. And, furthermore, it is a much 

cheaper way because you do not have to have all the armies of regulators coming in. We have plenty of regulatory agencies that supervise even small banks. They come in; there is a lot of manVerDate Nov 24 2008 12:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\03-28 ZZDISTILLER\32817.TXT JASON
23 

power. And then the bank staff has to respond to them, and as a 

result, there is an endless dialogue between the regulators and the 

banks. And the compliance staff is growing, and that does not 

make the economy more efficient, and it does not make the banks 

more efficient. 

Senator COTTON. Who, in your opinion, in the industry would resist such higher capital standards in lieu of greater regulation? 

Mr. HELLER. Well, traditionally—I mean, I am an old man. I remember Walter Wriston arguing at Citibank that they did not need 

any capital at all; you know, zero was enough. Clearly, that was 

wrong. So, typically, large financial institutions tend to resist it 

more than the smaller institutions. But also for the smaller institutions, it clearly means that they are not earning as much on every 

dollar invested in the institution. So, in a sense, they say less is 

better. 

But I think your role in Congress is to say that—give people a 

choice, either regulation or the capital requirements. Please do not 

do both. 

Senator COTTON. Mr. Powell, I saw you nodding your head, perhaps in agreement, perhaps in fond memory of some of the same 

battles fought years ago when you were at one of these agencies. 

Would you care to share your thoughts? 

Mr. POWELL. You have got to remember I was CEO of a bank in 

the late 1980s that almost failed. We were in a cease-and-desist 

order. So I have tattooed on my chest, ‘‘Capital.’’ 

I am kidding. It is not on my chest, but it is very sacred to me. 

Having said that, I think—I do not want to give the wrong impression from my view that regulation is not necessary. It is. Just 

as self-assessment is not one of my virtues, all of us need some 

type of oversight. When you have FDIC insured and the United 

States treasury is at risk, you have got to have some type of regulatory. Capital is extremely important, but I do not think it replaces that you should ignore regulation. So I think the balance is 

very important, that we try to get it right. We go to extremes every 

time there is a crisis one way or the other. 

So I think reassessing, rethinking about what the regulatory environment is for small and large institutions—and, incidentally, the 

large institutions have been getting batted around a little bit. I was 

on the board of Bank of America, so I have been at a community 

bank and I have been at large institutions. Clearly, those institutions provide a service and provide an economic engine for entities 

that the community banks cannot take care of. 

So I think capital is extremely important, but you have got to remember, Senator, shareholders want a return. So you have got to 

attract capital, so if you attract too much and the return is not 

much, there is no capital there. 

So you have got to understand that shareholders want a return 

and that there is a base of capital there that, as you said, there 

is no return for it. But I do not want anybody to have the impression that we do not need any regulation from my point of view, because we do. 

Senator COTTON. Thank you. My time has expired. 

Senator Heitkamp. 

Senator HEITKAMP. Thank you, Mr. Chairman. 

24 

Just a couple points on previous conversations. Mr. Spriggs, Dr. 

Spriggs, we have got a little bit of a chicken-and-egg problem as 

it relates to big versus small, right? You said, well, look, you know, 

the big threat to small institutions is the growth of large institutions. But by overregulating the small institutions, what was supposed to be too big to fail has become too small to succeed, driving 

business up. And so we have got to figure out the small business 

and the small bank piece of this. 

We have been working very hard on compromises, trying to advance some additional regulatory relief, taking a look at a lot—a 

lot of the discussion that we have had here today is very helpful. 

Senator Perdue said, look, we have a problem that we are not 

moving enough capital into business. I am not sure I agree with 

that, but I do agree with that as it relates to small rural counties 

and communities. And I just want to give you some statistics, and 

this is for Mr. Heller and Mr. Powell mainly. If you look at economic studies, from 2010 to 2014 U.S. counties with 100,000 or 

fewer residents combined to lose more businesses than they created, despite a growing national economy and a falling unemployment rate. 

In a recovery beginning in 1992, by comparison, those counties, 

those same counties created a third of the Nation’s new business 

on net. Moreover, nearly two out of three rural counties lost business in this recovery, on net, from 2010 to 2014, and that is up 

from just two in five counties in the early 2000s. 

What is happening? And how do we fix this? And I know that 

that is a bigger question probably than just the banks, but capital 

formation is obviously a key component to economic growth. So 

what do we do to turn this around? Because we saw the reaction 

to this in this last election. And people keep saying, ‘‘What is going 

on in rural America?’’ This is what is going on in rural America. 

So how do we fix this? 

Mr. HELLER. I fully agree with you, Senator, with what you are 

saying, if I understood you right. In the current expansion, there 

was less business formation than in previous expansions. 

Senator HEITKAMP. In rural counties. 

Mr. HELLER. In rural counties, and especially among small firms, 

and that is exactly the point I am making in my testimony. Firms 

are actually leaving currently at a faster clip than there are entering new ones, so we have net losses. We also have the same phenomenon on the small bank side. There are no new banks coming 

in, rural or urban, basically none. And both of those things hang 

together. The topic of today is: What does the financial sector contribute to economic growth? And the financial sector in these rural 

counties especially is weak, and there is no new lifeblood coming 

in, and nobody can afford—and Mr. Powell, who is more of a rural 

small town banker than I am—I am a suburban small banker—can 

speak to that, I am sure. 

It is very difficult to get the additional funds and to be able to 

stand the regulatory burden for these small institutions. So they 

are just not being formed. 

Senator HEITKAMP. Mr. Powell. 

Mr. POWELL. Senator, I think that is a valid point. I think one 

of the things—it is a complex question because quality-of-life 

25 

issues, there are a lot of issues that contribute to that. But from 

a bank standpoint, if I were going to put a bank in a rural community, I have got to see economic activity. I have to get a return on 

my capital. So I have a choice where I go. My capital will follow 

where I make money. So one way I can make money is that the 

regulatory burden—I am not saying free ride, free lunch, and all 

those things. I hope you understand that. 

Senator HEITKAMP. Yes. 

Mr. POWELL. But I cannot be worrying about assembling data. I 

cannot be worrying about a qualified mortgage when I have a farmer who has got a farm that is clear and he wants to borrow a 100 

percent loan on the house. I cannot worry about stuff like that. 

So you have got to give me a different set of regulations in order 

that I can breathe and exist, because I have choices, and I am not 

going to go to that rural market unless I can make a buck. And 

if you burden me with regulations to open a bank there and to try 

and engage in banking, I am not going to do it. 

Senator HEITKAMP. You know, the dirty little secret is that these 

community banks are relationship bankers. 

Mr. POWELL. Absolutely. 

Senator HEITKAMP. And I can tell you, I grew up in a town of 

90 people, and you could look at a balance sheet of one guy and 

say he is—you know, just on the numbers, he is the guy that you 

should be giving money to. No one in town is going to give him 

money because he does not pay his bills. 

Mr. POWELL. Absolutely. 

Senator HEITKAMP. And you can see the guy come in whose balance sheet is net loss, and you know he is going to pay you back 

because you know him. It is character banking, and we are losing 

it in this country. And it is part of why rural America is not—is 

retracting, I believe, is that we do not have that anymore. 

Mr. POWELL. But, Senator, they cannot make that loan. They 

cannot make that loan under current regulations. 

Senator HEITKAMP. Right. I agree. 

Mr. POWELL. They cannot do it. 

Senator HEITKAMP. We have got to unleash it. But I think that 

rural economic development is so complex, and one of you raised 

the quality-of-life issues. I have a test: Can they stream Netflix? 

You know, it seems like such a small thing, but I can tell you, 

housing and quality of life, we have—we used to say in rural America that if you created primary sector jobs, you build it, they will 

come. Guess what? We have 80 open primary sector jobs in places 

in my State where they cannot get workforce. And so we have got 

to build back these communities, but that bank, that community 

corner bank, has always been a huge part of that economic development, and we are losing it as a result of overregulation of the community banks and the credit unions. There is no doubt in my mind. 

And so we are adamant that this is going to get fixed, but I do 

not want to walk out of here and not point out that the most despair economically in this country is in rural America. 

Mr. POWELL. Right. 

Senator HEITKAMP. Thank you, Mr. Chairman. 

Senator COTTON. Senator Van Hollen. 

26 

Ms. VAN HOLLEN. Thank you, Mr. Chairman. Thank you to all 

our witnesses. Just a couple points on some of the issues that have 

been raised. 

Clearly, we need good capital requirements in banks, but I agree 

with Mr. Powell, they cannot be a complete substitute for some 

kind of reasonable regulation. 

Mr. Chairman, I would just like to put in the record an article 

that appeared in the American Banker called, ‘‘Risk Weights or Leverage Ratio? We Need Both’’, by Aaron Klein at Brookings on this 

topic. 

Senator COTTON. Without objection. 

Ms. VAN HOLLEN. The other issue I would like to just raise and 

tag and am interested in maybe feedback later is this issue of community banks and commercial banks generally, because a lot of the 

discussion is that you saw this rapid decline after Dodd–Frank. 

And I would just point out—and I have this chart, put together by 

the FDIC, 2014, which indicates a dramatic drop in commercial 

banks in the United States, starting back in the mid-1980s where 

we had over 14,500 commercial banks, and before the financial 

crash, that was cut almost in half—in fact, a little more than half. 

And the decline since then is just on the same trajectory that it 

was before Dodd–Frank. 

Mr. Powell, could you comment on that? 

Mr. POWELL. Yes, Senator. I think some of the things we have 

talked about here today is that if I have—if I am going to capitalize 

an entity, capitalize a bank, I have choices. So I have got to have 

a return on my capital. I have got to expect that I am going to be 

able to increase my capital and continue to make money, so I will 

look at the handicaps and the burdens of that. I will look at the 

community; I will look at a lot of things. But one of the things and 

a primary factor, very frankly, Senator, is the burden of regulation. 

And it is more than the written burden of regulation. It is the tone, 

the attitude. I could tell you that plays very important in the decision. 

I mean, I can read the regulations and understand what the cost 

of the regulation is. But when a regulator comes in and how he or 

she addresses those issues is critical. It is really, really important. 

And that is the reason in my testimony I said agency heads, leadership, these agency heads are critical. 

Ms. VAN HOLLEN. And I agree with that, and I agree we need 

to find ways to strengthen community banks. I just think it is important to recognize that the drop in the number of commercial 

banks in the United States is something that long preceded Dodd– 

Frank—in fact, even more dramatically so. So there are other 

things that are going on. 

Mr. POWELL. That is right. 

Ms. VAN HOLLEN. Not that we do not need to address them. We 

do. 

In Dr. Heller’s testimony, his written testimony, you reference 

the fact that in the 1970s and 1980s we had a lot of companies providing the defined benefit retirement plans, and we have obviously 

gotten away from that a lot with the defined contribution plans. 

And you indicate, Dr. Heller, in your testimony that that puts conVerDate Nov 24 2008 12:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\03-28 ZZDISTILLER\32817.TXT JASON
27 

sumers in charge of their own ‘‘financial destiny,’’ and that is much 

more true today. 

The problem we have got is that there are many companies, 

more than half of companies and businesses in the United States 

do not provide their employees right now access to 401(k) plans. In 

fact, according to Brookings Institute, 52 percent of employers with 

50 to 99 workers do not offer retirement plans, and among companies with fewer than 10 employees, that proportion rises to 80 percent. 

Now, in the State of Maryland and some other States, we have 

adopted legislation, bipartisan legislation, signed by the Republican 

Governor of Maryland, to create these State-based retirement plans 

that employees can voluntarily enter into if their employer is not 

providing access to 401(k)s. And you are finding lots of people, especially a lot of young people, signing up for this. 

At the same time, right here in Congress, we have a piece of legislation coming through that could undermine those efforts. 

Dr. Spriggs, could you comment on this? Because we all know 

that trying to build a secure retirement requires providing more access to these vehicles? Could you comment on the legislation and 

the whole concept? And then I would be interested—— 

Mr. SPRIGGS. Well, that type of legislation that you speak of is 

actually a compromise because part of it is to figure out a way to 

handle the fiduciary responsibility of the company that initially collects that savings. And that is a compromise at the State level in 

how we handle that so that it can, in fact, take place. 

That type of compromise, as long as it is in law and protects the 

workers, we are very much in favor of it, and States are responding 

to Congress not expanding Social Security. The best thing we could 

do is to expand Social Security. But without that taking place, having States take the initiative is a good thing, and particularly for 

low-wage workers: school cafeteria workers who are no longer part 

of the public system, they have been privatized; the school crossing 

guard. These people are vital to our community and have been cutoff from this access to retirement savings, and this is a way to let 

States begin to address that. And as I mentioned, in each case that 

it has happened so far, it has been a compromise to protect the savings of those workers, and I think it is a thing to encourage, not 

a thing to discourage, because it is one time where the States as 

a laboratory are leading. 

Ms. VAN HOLLEN. Thank you, Mr. Chairman. I realize my time 

is up, but if Dr. Heller or others have time and any interest in a 

written response, I would be interested in your comments. Thank 

you for raising the issue in your testimony. Thank you. 

Senator TILLIS [presiding]. Thank you, Senator Van Hollen. 

Thank you all for being here today. I happen to be next in the 

order and sitting in the chair. We have got people cycling through 

like me with three different committees many of us are bouncing 

between, so I apologize for not being here earlier. 

Mr. Powell, I want to start with you. You wrote an interesting 

article just recently back in January that was titled, ‘‘Why Dodd– 

Frank Is Unfair to Banks’’. I apologize if people have asked this 

question before, but I would like to go back and maybe in the context of all my questions, answer it in the context of what I consider 

28 

to be the financial services ecosystem, which I think is out of balance now. I will give you my prejudice. 

You know, at the high end are the big banks, then the regional 

banks, and then the community banks and credit unions. But other 

financial institutions that are at that base of the pyramid provide 

access to money in an orderly fashion, if it is regulated properly, 

that people may not otherwise be able to get. So can you tell me 

in the context of that ecosystem which banks Dodd–Frank is unfair 

to and what you think we should consider as a matter of regulatory 

reform? 

Mr. POWELL. Yes, Senator, thank you. That piece, the caption 

was a little bit misleading in that the sense of that was due process. So I think that is something that we have forgotten about. I 

mean, it is an American—— 

Senator TILLIS. And I love the way that you—I should have entered that into my question or thought about it in my question. The 

board that you are talking about to actually provide due process 

that has a balance of people with banking industry experience, regulatory experience at the State and Federal level, how does that 

play out, again, within that ecosystem, knowing that as you get 

further down to the base of the financial ecosystems, people’s resources are limited? But I think that that is a great example. We 

could use better due process in a lot of regulatory contexts, but if 

you could explain it in that manner, I would appreciate it. 

Mr. POWELL. Sure. Well, it is alive at the top and at the bottom 

on that whole process. I think it would enable the bottom. I think 

it would enable—I think it would give power—it would be an enabler to the bottom because of resources. I mean, if larger—midsized and larger institutions have an array of attorneys and an 

array of compliance officers at their disposal. So whereas the smaller institutions, they do not have that, and when they have a dispute or a disagreement with the regulator, what are they going to 

do? They are going to forget about it. Whereas, large institutions 

have a lot of resources to combat that. So I think that particular 

thought—my suggestion was—that is just one suggestion. There 

may be others. It would empower those people. 

Senator TILLIS. And, Ms. Del Rio, I was not here, but I know that 

you having some experience with credit unions and credit unions 

have what I think is an appropriate exemption that is not extended 

to maybe other peers at the base of the pyramid, why is it fair for 

one area to have that exemption and others not? 

Ms. DEL RIO. Thanks for the question. I actually do not think 

that credit unions should have wholesale exemptions, or any institution. My credit union, as I discussed earlier, is a communitybased small financial institution that focuses on serving low-income 

and immigrant communities, and, you know, yes, we have costs of 

regulation. We are under lots of regulation, not just Dodd–Frank. 

And we try our best to embrace that and to recognize that there 

are bigger needs for that that, you know, we do have exemptions 

as CDFI-certified credit unions from certain rules. But, by and 

large, I am not aware of wholesale credit union exemptions, nor 

would we support that per se. 

Senator TILLIS. Nor am I. I am getting more to the point of 

other—I think that we have to look at the different strata of the 

29 

financial services ecosystem and figure out whether or not we have 

a fair or consistent treatment with those who are at, I think, the 

base of the ecosystem, as I think credit unions are, community 

banks, and other lending resources. There is always a question 

about how you regulate it for consumer protection, and I get that. 

But how do you have a more consistent treatment for the people 

whose customer base and the nature of their products have similarities and should either enjoy the same exemptions or not have 

them? 

I have a general question so that I can move to Senator Schatz, 

and it is around—I think that we are at our best when we set expectations right for what we can do around this building for regulatory reform. And I think there are a lot of opportunities for small 

‘‘R’’ regulatory reform—reforms that reduce the disproportionate 

burden that goes on smaller financial institutions for regulatory 

compliance. We clearly needs regs to ensure consumer protections 

and market viability, but do it in a way that I think is beneficial 

to the financial services community. 

I heard it said in this Committee that we need to focus less on 

the financial services community and more on the real economy. 

The real economy does not exist without a thriving and secure financial services community. I do not see how the two work. Who 

underwrites risk? Who provides the funding for long-term capital 

investments, et cetera? 

So I am probably going to stick around for another round, but, 

Mr. Deas, I want to tell you that I was even skeptical about small 

‘‘R’’ regulatory reform until South Carolina made it to the Final 

Four. Now I know anything is possible. So if I have time for a second round, I am going to go back and ask this question again. 

Senator Schatz? Or, I am sorry, it is Senator Cortez Masto. 

Senator CORTEZ MASTO. Thank you, Mr. Chair, and I apologize 

for bounding back and forth as well in the Banking Committee. 

And let me just say to the Chair, I am an alum of Gonzaga, so we 

will see you at the Final Four. 

Senator TILLIS. I am counting on them to win in the Final Four 

and then lose against my Tar Heels. 

[Laughter.] 

Senator CORTEZ MASTO. We will see. We will see. 

So let me just say I am from Nevada. As you well know, 

subprime mortgages had a devastating impact on us. I was the Attorney General at the time, and I will say this: I am not for a 

wholesale rollback of Dodd–Frank just because we can. I think it 

was important regulations that were put in place, an important 

law to address a horrific thing that happened with subprime mortgages and will continue to support it. 

However, I am also about finding the balance, and I think there 

are times when we do overregulate, and we need to figure that out. 

So I am willing to work with my colleagues to figure out what we 

can do to tweak it or improve it. But at the end of the day, when 

it comes to homeowners who suffered and people who had no control, who are still suffering in Nevada, I am going to be there fighting for them every step of the way. So I am about reasonable, commonsense laws and legislation. 

30 

Here is my concern, and I am going to open this up to all of you. 

A few weeks ago, the Trump administration released their ‘‘skinny 

budget’’ for the coming fiscal year. And while the document lacked 

many key details, it did outline a 15-percent cut relative to the 

housing and urban development funding bill that passed the Senate committee last year. 

Last week, my office released a report on the proposed budget’s 

impact to Nevada which found that, if enacted, the Trump budget 

would cause my State to lose over $39 million in grant assistance 

and more than 1,300 housing vouchers. If we are interested in promoting economic growth, does it make sense to severely cut investments in community infrastructure such as sidewalk repairs, accessibility, enhancements for people with disabilities, social services 

like youth mentoring, food pantries, and transportation to take elderly people to medical appointments, and affordable housing construction? These are all types of programs that would be defunded 

in Nevada. I am curious if any of you have a comment on what I 

have just talked about. 

Mr. SPRIGGS. Well, Senator, if I may go first, thank you for the 

question. One of the key elements in the real economy is the 

growth of the labor force. This downturn has slowed labor force 

participation. The labor force participation rate especially for 

American women flattened back in 2000, and we cannot continue 

to have—or we cannot return to faster growth until we find ways 

to increase our labor force participation rates. 

The U.S. has lagged all other countries. We have now fallen behind, in terms of female labor force participation, countries which 

we thought culturally were not predisposed to it. So we now have 

a lower labor force participation rate for American women than for 

Japanese women, as an example. 

Compared to Canada, we have also done worse, and that is our 

neighbor and very similar in many ways to the U.S. 

One of those key elements is the provision of adequate child care. 

Those funds that are going to be cut to Nevada and to other American communities go straight to funding child care. Without that, 

we cannot get American women back to work. Without having assistance to people with disabilities, we cannot get their labor force 

participation rate up. Without the kind of infrastructure that 

makes it possible to get to work on time that the housing community development funds provide, we cannot have the infrastructure 

in many communities that lock people out from access to jobs. We 

need to find ways to invest in Americans and to make that investment where it counts, and where it counts for growth is you have 

to have a faster labor force participation rate—a higher labor force 

participation rate and faster labor force growth. 

So these things are going to hurt growth, and the chicken or the 

egg in all of this, it is not that businesses then get us people. The 

causation runs the other way. The causation is wages go up. These 

are now new potential customers, and businesses develop to take 

advantage of that, to see where the opportunity is, and that creates 

a virtuous cycle. But the causation is wages go up, then you get 

the businesses. And so if you do not have widespread income 

growth, if you do not serve the communities that will be hurt by 

31 

these cuts, then you are not going to see the customer base grow 

widely. 

Senator CORTEZ MASTO. Thank you. And, Mr. Chair, I see my 

time is up. If there is a second round of questions, I would like to 

ask one more. Thank you very much. 

Senator TILLIS. Senator Cortez Masto, also happy birthday tomorrow. 

Senator Schatz. 

Senator SCHATZ. Thank you, Mr. Chairman. Thanks to all the 

panelists for an interesting discussion. 

I want to talk to you about student loan debt, and the reason for 

that is that I think in the context of the U.S. Congress, there is 

a lot of conversation about student loan debt as a sort of family 

issue, as a personal issue, and none of us escape it, whether we are 

parents or grandparents or kids or some of us paying off debt while 

we are saving up for our own children. But that is not the part I 

want to talk to you about. I want to talk to you about it as a national economic issue. And it seems to me that there is Fed data 

that indicates that it is quickly becoming a real macroeconomic 

question. The Fed says that student loan debt now tops $1.3 trillion and continues to grow. It has surpassed all other kinds of consumer debt except for mortgages. And it is not sustainable. The 

Fed shows that about 50 percent of all borrowers have not begun 

repaying, and 30 percent of borrowers who are in repayment are 

delinquent on their loans. 

So the question becomes two things, in my view: First of all, it 

is clearly crowding out the ability for consumers to afford other 

things, right? To purchase cars, to purchase consumer items, to get 

a mortgage, to get on their feet financially. So that is one aspect 

of how it is impacting the overall national economy. 

The other thing is it seems to me that even though we spend 

more and more in real dollars and in inflation-adjusted dollars on 

Pell grants and subsidies on the Federal side than ever, we continue to see the cost of college rise more than ever. 

And so now we have got this system where we are throwing free 

money at the system, right? And yet we have got massive disincentives. For the very first time, you can sit down with a 17-year-old, 

and it is an open question whether or not it makes economic sense 

for them to pursue a higher education. And that is not just a personal question. That is not just a political or ideological question. 

That is a question of our national economic strategy. If we have 

configured a system where we are disincentivizing our young people from going to college or we are saddling them with so much 

debt that they cannot even get on their feet once they are done, it 

seems to me that has got macroeconomic impacts. And I would like 

each one of the panelists to quickly comment, starting from left to 

right. 

Mr. HELLER. A very important topic, Senator. First of all, let us 

look at the cost side of the equation that you have just talked 

about. I used to be a professor at UCLA. We used to teach two or 

three courses a week. You know how much they teach now? One. 

That means the cost of an education has doubled or even tripled. 

You know, there is a relationship between how many professors 

teach how many students. 

32 

I think it is almost unconscionable what is happening in many 

of the universities around the country. So you have got to increase 

teaching loads, and that will bring down the cost of college educations for the individual. 

Senator SCHATZ. In the interest of time, that is compelling and 

provocative, so I will just move on so we can hear from everybody 

else. 

Mr. HELLER. Thank you. 

Senator SCHATZ. Mr. Powell. 

Mr. POWELL. Senator, I recently served on the Board of Regents 

of Texas A&M University system, which is a large system. I will 

give you some data. 

Of the graduates at Texas A&M, the flagship institution, only 30 percent of the graduates have debt, and it is less than $30,000. So 

there is a way to do it. Now, part of it—it is a complex question. 

Some of it is efficiency. Some of it is a lot of other things. But part 

of it is culture, also. Part of it is culture, and part of it is sacrifice, 

part of it is—I think this has been fed because of some Government 

programs. It is easy to get debt. It is very easy. I can get, anybody 

can get student debt. So we have got to change those standards, 

too, and then we have got to look at success ratios. 

Senator SCHATZ. Mr. Deas. 

Mr. DEAS. Thank you, Senator. I am speaking as director of the 

University of South Carolina Educational Foundation, and I can 

say from the time I graduated in 1972 to now, the percentage of 

support from the State of South Carolina to the university has decreased greatly. We just completed a $1 billion capital campaign, 

one of the principal purposes for which was to support students 

who would otherwise be unable to afford our education. 

Senator SCHATZ. Thank you. 

Mr. Spriggs. 

Mr. SPRIGGS. I think that last point is the key. In the 1970s, 60 

percent of the budget came from State and local governments. Now 

it is 30 percent. We have asked students to catch up with that gap, 

and that has driven universities to be tuition-driven. They need the 

money. And if you look at the growth in income inequality, remember that the top 20 percent of income distribution consumes 60 percent of the education budget. So if you are running a university, 

you are chasing those dollars. Specifically, you are chasing the 1 

percent. 

So if you look at tuition increases, they follow the increase of income for the 1 percent. Because the 1 percent have had faster income growth than the median or even the 20 percent, that is where 

the gap is coming from. And we have asked students to fill that 

gap. So the key is to reinvest as a Nation in our students. 

Senator SCHATZ. Ms. Del Rio. 

Ms. DEL RIO. Thank you. So at the beginning of my testimony, 

I made the point that although credit is vital, it should not be advanced as a sole solution to deeper issues, and this is an example 

where student loan debt, especially when placed on very low income students, has been advanced to fill the gaps left by public investment in higher education. Payday lending has been advanced— 

these usurious 400-percent interest rate loans have been advanced 

as a solution to the fact that people are not earning living wages. 

33 

These are the examples that really have impact not just on people 

and communities but on the economy ultimately, as you see this 

$1.3 billion in student loans being amassed. 

Our organization operates a free legal-financial justice hotline in 

New York City, and I just want to point out that some of the calls 

that we used to get around student loan debts really exemplified 

another public policy issue, which is that these student loans, especially when they are made to cover tuition at for-profit and often 

fraudulent schools, are by and large subsidized by the Federal Government in the form of student loan guarantees. And this business 

model has been well documented. These are schools that are set up 

not to provide education but to siphon public dollars by using these 

low-income individuals and their eligibility for Federal guarantees. 

And not only is that a poor use of public subsidies and dollars, but 

those individuals then, once they did not get their degree or they 

were not able to get a job or they found out the degree they had 

was actually not—was worthless, they were not able to then get 

Federal student loans to go and attend a sound school because they 

had used it up for these shoddy schools. 

Senator SCHATZ. Thank you—— 

Ms. DEL RIO. So there are layers and layers, so thanks for the 

question. 

Senator SCHATZ. Thank you very much, and I thank the Chair 

for his indulgence. 

Senator TILLIS. Thank you, Senator Schatz. 

I think that Senator Cortez Masto and I both have plans to ask 

a second round. And, Senator Cortez Masto, as a birthday gift, I 

will let you go before me. 

Senator CORTEZ MASTO. Thank you, Mr. Chair. 

I am interested in the discussion on how we grow the economy, 

and one of the areas that is important for me is the issue that I 

believe—and I have seen the statistics to show—that if we just 

passed comprehensive immigration reform, that would grow our 

economy. I know—and I have seen and let me just run through it 

really quickly—the studies that are consistent that show President 

Trump’s Executive order would reduce our Nation’s cumulative 

GDP over 10 years by $4.7 trillion. An article in Politico today that 

says the Hispanics, who make up two-thirds of the Nation’s undocumented population, are critical players in the building and sale 

of single-family homes, which account for about one-sixth of the 

U.S. economy. 

I am curious from your perspective, Ms. Del Rio, is that true, 

that you see a correlation between economic growth and passing 

comprehensive immigration reform? 

Ms. DEL RIO. There are ample stories that show different cities 

and towns throughout the country that were experiencing economic 

disinvestment that were revitalized as a result of immigration to 

these new areas, often for the first time. These were sort of not the 

traditional immigration corridors. 

Our organization for many years ran an immigrant financial justice project that tried to address barriers and worked very hard 

with a broad section of groups and lenders and advocates and others to address and eliminate barriers that immigrants face with respect to our economy, and these include things as fundamental as 

34 

basic bank access. New York City, as you may know, our population is 40 percent foreign-born, and yet the biggest banks routinely impose identification requirements that go far beyond what 

the law requires, that basically exclude low-income and undocumented immigrants. There are no requirements right now, there 

are no legal barriers to immigrants, regardless of status, participating in the economy through purchasing homes, starting businesses, and, in fact, many do, and so on. And yet banks, which are 

supposed to be the gateway into the economy, have consistently put 

up barriers. 

I think that is a really critical issue to examine because I think 

if immigrants that are here now have pathways to status and also 

have pathways into the real economy and are not relegated to sort 

of these high-cost, fraudulent, often unregulated sectors, it would 

do a lot for the overall economy. 

And just one other note. You know, immigration status—yes, immigration reform we believe would go far toward advancing fairness and economic growth overall. But, you know, immigration status even without comprehensive reform can be very fluid, and, you 

know, the Deferred Action program is one example. You have now 

hundreds of thousands of people across the country who have this 

status where they are able to work, they are able to get work permits, Social Security numbers, and participate in the open in the 

system, and yet financial institutions are not by and large serving 

that population either. And so I think that this is an unrecognized 

by really critical issue. 

Senator CORTEZ MASTO. Thank you very much. 

Thank you, Mr. Chairman. 

Senator TILLIS. Thank you, Senator Cortez Masto. 

Back on a point that Senator Schatz was making—and I think, 

Mr. Heller, you went on a good path, because instead of answering 

how do we continue to address the increasing cost of education, 

how do you get to the underlying cost drivers, you used one example. Another one, in North Carolina, the public university system 

there estimates that they spend about $1.2 billion a year in regulatory compliance, and it disproportionately harms the smaller institutions. 

So one of the ways, if we are really going to get serious about 

addressing student loan debt and affordability of college, we need 

to understand that we are also the root cause of some of the spiraling costs. And we have got to work on that, and I am glad that 

Senator Schatz brought it up. It is something we need to work on. 

It is not in this lane, but it is critically important because it affects 

those who want student loans, bending the curve. 

Mr. Deas, since I took a shot at the University of South Carolina 

earlier, I am going to start with you, but in a positive way. I actually like the Gamecocks except when they are playing a couple 

other teams down in the Carolinas. But I want to ask you and Mr. 

Heller to explain to me how large, medium, and small financial 

services institutions are helping U.S.-based companies get access to 

international markets and whether or not you think that is important. 

Mr. DEAS. Senator, I think it is very important, and companies 

have a network of banks providing committed credit, and since 

35 

committed credit is the most important thing they need, they frequently rely on those banks to provide other ancillary services, especially those that would take advantage of their international networks for documentary letter of credit collection and other activities through the financial system that would facilitate trade, exports, and other activities. So it is very important. 

Senator TILLIS. Mr. Heller. 

Mr. HELLER. Yes, I have testified that all financial institutions 

are important, different sizes, and that we need a mix of them. But 

if you focus specifically on international trade, obviously, the large 

institutions are the ones that really play the important role. A community bank just cannot be involved in international trade finance 

or offer various facilities to make international commerce easier for 

the corporations. So you need specialized institutions or large institutions that offer these very specialized services. In this country, 

we are interested in increasing our exports, so we have got to have 

export finance, private export finance available. You have got to 

have receivable finance, and by its very nature the time periods are 

longer. It takes 2 or 3 weeks until the ship gets over to Europe or 

to Asia. So these larger institutions play a vital role there, and foreign exchange services, all those things together. 

Senator TILLIS. And, Mr. Deas, I just have one other question for 

you. I know in your testimony you talked a little bit about the impact of rules that are promulgated on the end users. Can you talk 

a little bit more maybe in specific terms about risk mitigation instruments an end user may have had at their disposal at one point 

in time but through the regulatory process it is not a factor in their 

process of seeking capital or financing? 

Mr. DEAS. Yes, sir. Thank you for that question. From the enduser’s standpoint—and I have had the privilege of working for 

American manufacturing companies for almost 40 years—we view 

the financial system as very similar to the electric transmission 

system that takes electricity from where it is generated and transmits it to where it is needed. And the financial system for us does 

the same thing. It takes funds from wherever they may be generated and in excess and transmits then to where they are needed. 

They do the same thing for the transmission of risk, if we have 

one company that is exporting and selling in a foreign currency, it 

needs to lay off that foreign currency risk to somebody that may 

be importing and needs to purchase the foreign currency. 

And so when there is a burden that is placed on this transmission system, it inevitably raises the cost to end users. And so 

through the actions of Chairman Crapo and others on this Committee in the last Congress, we were able to get a clear exemption 

from the end-user margin requirement that would have required us 

to post cash to offset derivative positions. But now the bank capital 

requirements are imposing the exact same economic burden on end 

users through the imposition of—the capital that we would have 

paid in margin is now capital banks have to set aside against our 

derivative positions. And when that transmission of risk becomes 

too complicated, companies do not take the risk. They do not 

produce, and ultimately they do not hire more American workers. 

Senator TILLIS. Thank you. I could go on forever, particularly 

since I have got the gavel right now. 

36 

[Laughter.] 

Senator TILLIS. But, Mr. Spriggs, I did have one final question 

for you, and it relates to the line of comments and questions that 

Senator Cortez Masto had on immigration reform. 

What is your opinion on what she said and the extent to which 

immigration reform is important for economic growth and American job growth in the United States? 

Mr. SPRIGGS. Well, thank you very much for that question, Senator, because I think it is very important. When workers do not 

have the security of the certainty of their status, it means they 

have to be in the shadows. Their companies have to be in the shadows. And it means that we have a poorly regulated labor market. 

The protections to make sure that workers do not have their wages 

stolen, be safe at work—all of those things disappear. 

When workers have the certainty of their status, several things 

happen. The labor market becomes more dynamic. They are free to 

move. They are free to take the job that they would like to take. 

And a more dynamic labor market, a labor market in which workers are free, is one of the prerequisites for getting wages to go up. 

They need to be able to bargain. Workers without status would not 

dare risk forming a union because they know they are going to be 

in trouble right away. Workers who do not have a clear status are 

not going to go to the Department of Labor, even though the Department of Labor, while I was there, made sure to let workers 

know that we enforce the laws of the United States, period. 

But all of those things mean that the labor market does not function as well; workers are not in the positions that would be the 

most productive. And giving them that certainty, giving them that 

path to know that I am going to be free to move around in the 

labor market benefits all workers. No one benefits by having 11 

million people in the shadow, and we should understand that this 

is not a ‘‘them’’ and then an ‘‘us.’’ People who are undocumented 

are married to American citizens. They have American citizen children. So this is not kind of a—— 

Senator TILLIS. Let me just ask one follow up, and then we will 

bring the Committee to an end. Let us assume, now that we know 

anything is possible, that we move into some immigration reform 

dialogue. The next logical step or one of the components in immigration reform would obviously be the consideration for work visas 

at the full spectrum, highly skilled STEM resources to lower-skilled 

resources. How does that weave into your concept of comprehensive 

immigration reform suggested by Senator Cortez Masto? 

Mr. SPRIGGS. We believe that workers always have to have a 

path to citizenship. Temporary visa programs—the H–2B program, 

the H–1B visa program—all exploit workers and work to the detriment of American workers and to those workers. And we have 

seen the abuse of the H–1B for high-end workers where Americans 

recently in the University of California hospital system had to forfeit their jobs and train a set of workers to replace them—— 

Senator TILLIS. Do you believe that there is a sufficient number 

of American citizens and the population that is illegally present to 

fulfill the H–1B visa needs of this Nation and a 3- to 3.5-percent 

GDP growth? I do get the exploitation. That is why we want to find 

the businesses that do that, that actually discredit visa programs. 

37 

But do you believe that we have sufficient labor force to meet a 

growing economy at 3.5-, 4-percent GDP growth? 

Mr. SPRIGGS. If we continue to make the proper investment in 

American—— 

Senator TILLIS. But I am talking about today. 

Mr. SPRIGGS. Today we have enough workers. If we continue— 

if we can return to making the proper investment in American children and believe in them, we can educate enough people to do the 

job. During the downturn, we continued to bring in H–1B visa 

workers even though we were laying off workers in that industry 

and even though we were continuing to graduate students desperate for jobs. That generation—anyone born between 1985 and 

1994 is going to pay a permanent lower wage penalty because of 

the size and duration of this downturn, including those who got advanced degrees in computer science. 

And I would just note, you know, they are smart enough to know 

this. My son is going to graduate in electrical engineering because 

we do not do H–1B visas in electrical engineering. Students in engineering know this. They know that if you do certain fields, there 

are no H–1B visas. And they know if you do other fields, you face 

that competition. 

Senator TILLIS. I have completely swum out of the lane of banking into my position on the Immigration Subcommittee in Judiciary, and what I am hoping—and maybe that is an appropriate committee for you or others to come before. But I think that there is 

a way to—if we are going to get serious about immigration reform, 

we have to recognize that these are all levers that need to be available. They need to be scaled up and ramped down based on the 

needs of the U.S. economy and the supply of the resources to fill 

some of the roles. When we see the analytics, we may disagree on 

the outcomes on some of them, but I do think that that is a key 

part of—otherwise, we are just going to continue the 40-year-old 

chorus of failing to fix immigration reform in this country. 

But I appreciate you all being here today. On behalf of Chairman 

Crapo, I thank you all for spending the time here. 

We will bring the Committee to an end, but we will leave the 

record open for 1 week so that any additional information or questions from the Members can be submitted to you for your response. 

Thank you all so much for being here. The meeting is adjourned. 

[Whereupon, at 11:37 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

38 

PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO 

A strong and vibrant economy is important for American consumers, businesses, 

and the stability of the financial sector. 

Financial companies of all sizes and forms provide critical services to businesses 

and consumers, helping businesses manage operations, entrepreneurs get funding to 

start companies, and average citizens buy a first home or deal with a financial 

emergency. 

As policymakers, we must diligently and frequently study the state of our economy, our regulatory framework, the use of capital, and provision of financial services. 

According to recent studies, since the crisis, large businesses are experiencing a 

more robust recovery than small firms and entrepreneurs. 

One of the main drivers of underperformance by new and small firms compared 

to their larger counterparts is their limited access to credit. 

There are direct links between post-crisis regulation and restricted finance. 

Data from the St. Louis Federal Reserve shows that a mere decade ago, small 

banks made more business loans compared to larger banks. That is no longer the 

case. Consumers, many on the periphery of mainstream banking, are seeing certain 

products and product features disappear. 

For example, one product line, short-term, small-dollar credit, is expected to see 

a 60–70 percent decrease in market size—according to the CFPB—with virtually no 

other avenue for product users to access credit. 

These are a few examples that support the need for a thorough review of our regulatory framework and the role of financial companies in the economy. 

I have been encouraged by President Trump’s executive orders and memoranda 

on regulations and core principles for regulating the financial system. 

The Treasury Department has begun its review, and I look forward to seeing the 

recommendations it puts forth on how well existing laws and regulations promote 

or inhibit economic growth. 

Last Monday, Ranking Member Brown and I announced a formal process to receive stakeholder proposals that will help consumers, market participants, and financial companies responsibly participate in the economy in a more effective and 

efficient manner. 

And last Tuesday, the Federal banking regulators released their EGRPRA report, 

which sought to identify regulations or laws that are outdated, unnecessary, or unduly burdensome. 

Taken together, these actions will provide a clearer picture of what is working 

and what is not working within our financial regulatory framework. 

Today, this Committee will study how financial companies participate in the economy, with a goal of better understanding their role in fostering economic growth. 

Our witnesses have diverse backgrounds, and I look forward to hearing their 

unique perspectives on this issue. 

For example, why are community financial institutions important in local communities, and what happens when communities begin losing financial institutions? 

What services do financial companies provide businesses of all sizes, and are services being deployed in an effective and efficient manner? 

How can large financial companies help U.S.-based companies compete in global 

markets? 

Ranking Member Brown and I have started working together on a bipartisan 

basis to hear the thoughts and concerns of various stakeholders and Members of the 

Committee. 

It is my hope that Members will find this to be a thorough, inclusive process, and 

one that is structured for success. 

PREPARED STATEMENT OF ROBERT HELLER 

FORMER GOVERNOR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

MARCH 28, 2017 

Chairman Crapo, Ranking Member Brown, and Members of the Committee, thank 

you very much for inviting me to testify on the contribution made by financial institutions to foster economic growth and the role of regulation in that context. 

Having spent most of my career in banking and related financial sectors of our 

economy, I had the honor of serving as a member of the Board of Governors of the 

Federal Reserve System, where I served as the chairman of the Committee on Bank 

Supervision and Regulation. Currently I am on the board of directors of Bank of 

39 

Marin, a community bank located in the San Francisco Bay Area. It is my pleasure 

to offer the following observations. 

The Role of the Financial System in the Economy 

Every student of economics knows about the vital role played by the financial system in supporting and fostering economic growth. In the interest of time, I will focus 

my remarks mainly on the role of the banking system, but there are many other 

financial service companies that perform similar or complementary functions as 

well. 

The variety of financial services offered by our Nation’s banks is truly extraordinary and ranges from simple payments and banking services to highly complex 

financial products. 

Consumers benefit from having convenient, secure and efficient payments and depository facilities like checking, savings, and money market accounts available to 

them. Credit cards allow them to buy now and pay later for their purchases. As people go through the various phases of their life, they may have a need to finance 

their college tuition, buy a car with the help of an automobile loan or lease, or take 

out a mortgage or home-equity loan to purchase a house and to furnish it. Over a 

lifetime, people also want to accumulate enough resources to provide for a secure 

retirement and maybe fund a trust account to provide for the needs of loved ones. 

Large and small businesses also have an ever-changing need for a broad range 

of financial services. Small companies may need simple cash management services 

as well as a loan to finance inventory or to buy new equipment. Larger corporations 

may want to issue bonds and stocks to finance their growth and expansion. Companies that are active in international markets will also need foreign exchange and 

remittance services. Finally, large multinational corporations may want to avail 

themselves of a myriad of complex financial services, such as swaps and derivatives, 

which enable corporations to shift risk from their own balance sheet to others 

through hedging activities carried out with the help of experienced financial intermediaries. In addition, they may need local banking services in the foreign countries 

around the world where they do business. 

In a sense, the financial flows pulsing through our financial system and supporting the economy at large are akin to the lifeblood coursing through our body 

and nourishing all vital organs. Without the financial flows nourishing the economy, 

the rest of the economy would wither and die. 

Loan Growth Parallels Economic Growth 

Over the economic cycle, loan growth tends to parallel economic growth as is 

shown in Figure 1, which depicts the growth rates of GDP and that of commercial 

and industrial loans made by banks since 1980. 

40 

Each recession is accompanied by a decline in loan growth and once economic 

growth recovers, loan growth also tends to accelerate. The relationship works in 

both directions: higher economic growth calls for new financing of supplies and 

equipment, and new loans by banks help to spur economic activity. Economic growth 

and financial activity go hand in hand. 

Our Multifaceted Economic and Financial System 

Our economic system is composed of a multitude of enterprises of various sizes. 

All enterprises start small and, if they are successful, they grow into huge multinational enterprises. It is truly amazing that in our dynamic economy, two companies founded during our lifetime in Bentonville, Arkansas, and Cupertino, California, grew into some of the largest corporations in the world. Small, dynamic companies often experience the highest growth rates and create the most new jobs. 

The same holds true for our financial institutions, which range in size from small 

community banks to trillion-dollar strong, multinational financial corporations that 

span the globe. 

Community banks have always been a mainstay of the American financial system. 

They are generally small, community-based institutions, which tend to focus on relationship banking. They serve the banking needs of the consumers and the smallto mid-sized businesses within their footprint. They know their customers well and 

have established relationships that often last for decades. Community bankers know 

their customers by name and are intimately familiar with the customers they lend 

to—often because they live next door to them. They do not tend to compete on price, 

but on the quality of the services they provide on the basis of personal relationships. 

Community banks that have a solid credit culture and avoid risky exposures can 

do very well by serving their established customers. 

At the other end of the spectrum, we have a handful of large banks that offer a 

broad range of financial services to their customers. These trillion-dollar strong universal banks provide a broad range of depository services and loans as well as sophisticated financial products and services to their customers from coast-to-coast 

and indeed around the world. Their services encompass consumer-oriented products 

as well as products oriented towards middle-market firms. They also offer sophisticated financial services to multinational corporations that include nationwide payments services as well as all the traditional investment banking services available 

in today’s sophisticated capital markets. 

It was not always that way. 


32817025.eps
41 

Until the 1980s, our financial system was mostly composed of community banks 

and even sizeable institutions consisted basically of a large number of community 

banks under one common umbrella. 

In those days, the Nation’s banking system was fragmented along geographic and 

functional lines. In addition to the community banks, there were specialized financial institutions that served the unique needs of their customers. There were investment houses that catered to the needs of corporations wanting to issue stocks or 

bonds; savings banks that specialized in the issuance of mortgages; and even credit 

card banks to issue credit cards. Moreover, traditional commercial banks were largely prohibited from crossing State lines. 

Several factors combined to lead to the elimination of these geographic and functional barriers. There were the insights of academic and financial experts that 

pointed to the risk-reducing advantages of diversified business activities and portfolios. While one set of activities was lagging, other sectors might be booming. Thus, 

the enterprise as a whole would have a more stable income stream. Asset or loan 

portfolios would be better balanced and able to weather unexpected risks. Diversification along both geographic and functional lines was seen as making financial 

institutions safer. 

Regulations Shaping Our Financial System 

Besides these fundamental academic insights on diversification, there were new 

laws and regulations that shaped the financial landscape as it exists today. The financial services sector has always been highly regulated, and legal and regulatory 

actions have fundamentally influenced the structure of the industry. Let us look at 

just a few seminal events in recent history. 

Geographic Barriers 

Until the 1980s, financial institutions were strictly regulated along geographic 

lines. The depression era McFadden Act of 1927 prohibited federally chartered 

banks from branching outside their home State. While one might argue that this 

was in contravention to the interstate commerce clause, it established equality between federally chartered and State-chartered institutions, which were restricted to 

just that one State in their operations. Furthermore, many States were so-called 

unit-banking States, where branch banking was prohibited and where banks were 

restricted to a single locality to conduct their business. 

Eventually, bank holding companies overcame some of these restrictions by combining individual banks under a bank-holding company umbrella. But these banking 

confederations were limited in their ability to lend by being separately capitalized 

and therefore severely restricted in their lending limits. Each bank also had its own 

separate board of directors, which was not only an expensive proposition, but also 

required multiple decisions made by often independently minded directors who 

wanted to move in different directions. 

The double-dip recession of the early 1980s hit various parts of the country with 

different intensities. It affected many of the unit banks negatively and resulted in 

a record number of bank failures. It became clear that geographic diversification 

would add considerable strength to the American banking system and the Riegle– 

Neal Interstate Banking and Branching Efficiency Act of 1994 legalized interstate 

banking and permitted branching across State lines. The passage of this legislation 

enabled many multistate bank holding companies to consolidate and made de novo 

interstate branching, as well as acquisitions across State lines, possible. 

The resulting banks were safer because they were more diversified geographically 

and enabled to serve their commercial customers on a nationwide basis. The result 

was greater efficiency for the banks as well as better service for their customers— 

especially nationwide corporations. 

Functional Barriers 

Ever since the Glass–Steagall Act was passed in 1933 at the height of the Great 

Depression, American consumers and businesses were served separately by commercial banks and investment banks for their financial needs. This was not the case 

in the rest of the world, where the ‘‘universal’’ banking model prevailed and financial institutions were allowed to serve both the commercial and investment banking 

needs of their customers. 

As the U.S. economy expanded during the 1970s and 1980s, both consumers and 

companies began to argue increasingly in favor of allowing one banking institution 

to serve all their financial needs. For instance, the Employee Retirement Income Security Act (ERISA) of 1974 enabled consumers to save tax-free for their retirement. 

At the same time, many corporations terminated their defined-benefit retirement 

plans and switched to defined-contribution plans or IRA accounts. Increasingly, consumers were in charge of their own financial destiny. But commercial banks could 

42 

1For my own role in this process, see: Robert Heller, The Unlikely Governor, Maybridge Press, 

2015, p. 287. 2President Clinton, who signed the Gramm–Leach–Bliley Act into law, also believes that the 

legislation helped to stabilize the American banking system during the crisis. He stated so in 

the following exchange between himself and Maria Bartiromo (BusinessWeek, September 23, 

2008) 

Maria Bartiromo: Mr. President, in 1999 you signed a bill essentially rolling back Glass– 

Steagall and deregulating banking. In light of what has gone on, do you regret that decision? 

Former President Clinton: No, because it wasn’t a complete deregulation at all. We still have 

heavy regulations and insurance on bank deposits, requirements on banks for capital and for 

disclosure. I thought at the time that it might lead to more stable investments and a reduced 

pressure on Wall Street to produce quarterly profits that were always bigger than the previous 

quarter. But I have really thought about this a lot. I don’t see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which 

was much smoother than it would have been if I hadn’t signed that bill. 3That includes President Roosevelt (Homeowners Refinancing Act of 1934 and the Home 

Owners’ Loan Corporation Act. Fannie Mae was created in 1938), President Carter (Community 

Reinvestment Act of 1977), President Clinton (Housing and Community Development Act of 

1992) and President George W. Bush who advocated the ‘‘Ownership Society.’’ 

only offer a rather limited product range to their customers. Consumers questioned 

why they could not conveniently avail themselves also of investment products, such 

as stocks, bonds and annuities, through their own familiar banking institution. 

Some commercial banks therefore tried to ‘‘follow their customers’’ and began to 

acquire brokerage firms. For instance, Bank of America acquired the Charles 

Schwab Company in 1983. 

At the same time, commercial banks wanted to increase their investment banking 

services to their corporate customers as well. The regulatory agencies slowly responded to these demands by increasing the magnitude of the securities activities 

permitted for commercial banks from virtually nothing to 10 percent. 1 But it took 

legislative action in the form of the Financial Services Modernization Act of 1999, 

also known as the Gramm–Leach–Bliley Act (GLB Act), to give banks the power to 

offer both commercial and investment banking services under one roof. President 

Clinton signed this bill into law on November 12, 1999. 

By this legislative act, commercial banks were enabled to also offer their retail 

customers a complete line of investment products and asset management services 

under one roof. 

Similarly, the new universal banks could offer their corporate customers the complete line of payments, loan and securities products that they needed. For instance, 

a bank that had helped a small start-up company grow by financing their first receivables and equipment, was now also able to introduce the growing company to 

the securities market and to issue stocks and bonds. 

The Gramm–Leach–Bliley Act also made American banks more competitive with 

their foreign counterparts in Europe and Asia, which had always benefitted from 

the integrated universal banking model. 

At the height of the 2007–08 banking crisis, many financial institutions were 

under severe stress. Those exposed to the subprime mortgage sector either through 

their mortgage origination activities, such as Countrywide Financial, or through 

their syndication and trading activities, like Lehman Brothers and Bear Stearns, 

were hit particularly hard. 

During the crisis, which culminated in the collapse of the Lehman Brothers investment bank on September 15, 2008, all major American investment banks were 

either merged into commercial banks or took out bank charters themselves. For example: JPMorgan acquired Bear Stearns and Bank of America absorbed Merrill 

Lynch. Both Goldman Sachs and Morgan Stanley became bank holding companies. 

They became universal banks, subject to supervision by the Federal Reserve and 

gaining access to the discount window as well as other credit facilities. 

Some observers have argued that the elimination of the Glass–Steagall barriers 

made banks more vulnerable during the financial crisis of 2007–08. I believe that 

nothing could be further from the truth. Without the ability to merge commercial 

and investment banks, the banking crisis would have been much deeper and widespread than it was and there would have been more Lehman-like failures or the 

Government would have had to engage in many additional large bailouts. 2

Of course, that judgment begs the question of what caused the crisis that triggered the Great Recession in the first place. It is evident that both subprime mortgages and mortgage-backed securities were at the center of the crisis. 

Prior to the crisis, many American presidents 3 championed the idea of widespread 

home ownership. Much legislation and regulation promoted the idea that homeownership should be supported by our financial institutions above and beyond the levels 

43 

that would result if regular market forces were left alone to determine the level of 

mortgage loans made. Many of these subprime loans were made to people who could 

not afford to service them. Subsequently, they were packaged into complex and little-understood financial securities that were then sold to third parties, such as 

Fannie and Freddie. Thus, a toxic brew of opaque and risky securities was created 

that eventually imploded when delinquencies reached unexpected levels. 

But as President Clinton pointed out, if the Glass–Steagall barriers had still been 

in place, the crisis might well have been even worse than actually experienced. 

Regulation Versus Capital 

Extensive legislative and regulatory rules govern the conduct of all commercial 

banks. Everyone will agree that our financial organizations—and especially our depository institutions—should be as safe as possible and that a repeat of the financial 

turmoil experienced a decade ago needs to be avoided. 

There are two basic methods to increase bank safety: more regulation or more 

capital. Let us consider each in turn. 

Regulation 

Rules and regulations are one way in which financial institutions can be made 

more safe and secure. They will prohibit especially risky behavior and limit the 

scope of risk-taking by the institution. But as one rule is established, the drive to 

serve their customers and to make more profits often leads managers to develop 

ways to circumvent the rule and to develop new products that are not governed by 

the existing regulations. 

The natural reaction by regulators is to counter with the imposition of even more 

rules. As a consequence, an ever-tighter and more cumbersome straightjacket of regulations develops that becomes more and more complicated to implement and follow. 

One look at the three-page contract that I signed in order to obtain my first mortgage many years ago, compared to the six-inch stack of papers and supporting documents and dozens of signatures that I had to sign to obtain my latest refinancing 

loan, tells the story of increased regulation over the decades. 

Bank supervision is also by its very nature a backward-looking process. It looks 

at what has actually happened in the past and whether any transgressions or rule 

violations have occurred. 

A friend of mine, who spent his entire career in the automobile-manufacturing 

sector, always espouses the mantra that ‘‘quality should be built into the production 

process—and not inspected-in afterwards.’’ By this he means that it is much more 

efficient to build a high-quality automobile in the first place than to try and find 

defective cars at the end of the assembly line through an arduous inspection process. The same applies to financial institutions. Auditors may be able to identify bad 

loans, but it is much more efficient not to make any questionable loans in the first 

place. At Bank of Marin, we endeavor to make only solid loans and during the entire 27-year history of the bank, we have foreclosed on only one single loan that we 

originated. Regulators, consumers and trade magazines recognize this attention to 

quality. For instance, American Banker has consistently ranked Bank of Marin 

among the Top 100 community banks. 

We have tried to make only solid loans in the first place and have worked diligently with the customer, if he should encounter difficulties in servicing the loan. 

That’s what relationship banking is all about. 

Nevertheless, at Bank of Marin our Compliance Department expenses have more 

than doubled since 2009. But these direct costs do not tell the whole story. In addition, lenders and branch personnel have to undergo costly compliance training and 

a great deal of compliance-related information has to be collected and documented 

throughout the new loan approval and boarding process. Our staff also spends considerable time in compliance working group meetings to assure that all developments and updates are communicated throughout the organization. Then there are 

the internal and external auditors to look over the shoulders of the line officers to 

make sure that all is in order and well-documented and is able to stand scrutiny 

by the regulators. 

Since the passage of the Dodd–Frank Act, there is even a federally chartered organization to scrutinize the work of the independent auditors: the Public Company 

Accounting Oversight Board (PCAOB). 

When will there be enough layers of supervision and control? 

Capital 

In a modern company, capital consists of the financial resources provided by the 

shareholders of the corporation. It is invested in the means of production, be that 

land, equipment or human resources. It is also an essential part of the financial reVerDate Nov 24 2008 12:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00047 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\03-28 ZZDISTILLER\32817.TXT JASON
44 

4 Jihad Dagher, Giovanni Dell’Ariccia, Lev Ratnovski, and Hui Tong, ‘‘Capital Buffers’’, International Monetary Fund, Finance and Development, September 2016. 

sources that enable a company to operate. Finally, it is an important cushion to absorb any losses. Scarce capital provides a powerful incentive to management and directors to make only prudent investment and loan decisions. This will enable the 

institution to make profits, which will in turn accrue to the owners of the capital 

stock. 

Capital is not cheap, and because it is the cushion that will have to absorb any 

losses, shareholders (as the owners of the capital) have a vital interest in making 

sure that the institution follows prudent policies in their lending department as well 

as in other risky activities, such as trading. 

Higher capital levels provide important protection against failure of a financial institution. A recent study by the International Monetary Fund points out that an optimal level of capital takes into account not only the costs and benefits to bank 

shareholders, but also to the overall economy. The study concludes that additional 

bank capital is beneficial at first, but has rapidly diminishing values above a riskweighted capital to asset ratio of 15 to 23 percent. 4 The law of diminishing returns 

applies to capital as well. 

In the United States, the overall ratio of bank regulatory capital to risk-weighted 

assets is now close to this 15 percent level, as shown by the solid line in Figure 

2. However, the ratio of bank capital to total assets (shown by the dash-dot line) 

is somewhat lower. In any case, we may conclude that these increased capital levels 

have made the American banking system much safer and more resilient. 

The Choice Between Capital and Regulation 

The question remains whether higher capital levels or more regulation offer a better protection for depositors, shareholders, and taxpayers alike. 

Based on my experience, both as the Chairman of the Committee on Bank Supervision and Regulation at the Federal Reserve Board and my banking experience, I 

would argue that strong capital requirements are generally much more effective 

than a myriad of regulations in keeping a financial institution healthy. 

First of all, capital is a flexible buffer that protects the shareholder, depositor, and 

taxpayer alike against all the activities carried on in various parts of the bank. One 

year, commercial loans may be experiencing particularly high losses and in another 


32817026.eps
45 

5 I was honored that the Preamble to the Financial Choice Act cites my recommendation to 

that effect in: House Committee on Financial Services, The Financial CHOICE Act, 

www.FinancialServices.House.Gov/CHOICE, June 23, 2016, pp. 6–7. The citation is from: Robert Heller, The Unlikely Governor, Maybridge Press, 2015, p. 231. 

year, it may be mortgages that are stressed. A large bank may experience losses 

in its trading or underwriting activities, while the regular banking business flourishes. 

In contrast, regulations are a straightjacket where each and every activity is constrained in its own right. It is almost impossible to take advantage of unusual opportunities that avail themselves, even if they are not particularly risky under the 

circumstances. 

I believe that the financial sector, and thereby indirectly the entire economy, will 

thrive best if there are as few rules and regulations as possible. Efficiency is not 

obtained by having so many rules that essentially all institutions are forced to follow a similar business model. That amounts to central planning more appropriate 

for a command economy. One size does not fit all and leaves no room for innovation. 

A centrally planned economy is certainly not immune to errors, and command 

economies have suffered many economic setbacks and generally low growth. Similarly, regulators are not exempt from the potential to make errors in their guidance. 

As recent history shows, when the governmental authorities attempted to encourage 

more lending than the mortgage sector could safely bear, the results were not pretty. 

Furthermore, bank supervision is by its very nature a backward-looking activity 

that tries to catch errors and transgressions made in the past. 

Regulation also results in never-ending meetings between regulators and management. It drives up staffing costs in the compliance department as well as in the 

operational departments that have to supply the necessary information to the compliance officers. In addition, the staff of the regulators needs to be paid. 

Of course, capital is expensive, but given a choice between higher capital and 

more regulations, I would generally recommend the higher capital levels. This will 

enable financial institutions to deploy their capital in a flexible manner, so that the 

growth of the economy at large can be supported in an optimal manner. The economy at large will thrive if banks and other financial institutions can accommodate 

the needs of their customers in a flexible, but safe manner. 

One such way to ease the regulatory burden for financial institutions is proposed 

in the Financial CHOICE Act, which gives regulatory relief to financial institutions 

that are not only well-managed, but also maintain very high capital levels. This approach will allow banks to essentially ‘‘self-regulate’’ if they have enough skin in the 

game in the form of high capital levels. 5

Allowing banks to obtain relief from onerous micro-regulations by electing to 

maintain higher capital levels benefits everybody: the banks gain flexibility to manage their own affairs and have lower compliance costs; consumers and corporations 

will benefit from being able to deal with more flexible and responsive banks; shareholders will receive higher returns; and bank regulators will save in personnel and 

other oversight costs. 

Eliminating Overlapping Regulation 

There is one further improvement in the financial services sector that would considerably lower costs and thereby enhance economic growth. This is the elimination 

of overlapping regulatory agencies in the financial sector. 

Among the Federal financial regulators, we have the Federal Reserve System, the 

Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, the newly formed Consumer Financial Protection Agency, the Commodity Futures Trading Commission for institutions 

active in the derivatives markets. In addition, there are the State bank supervisors 

for State-chartered institutions. Moreover, institutions offering insurance products 

are also subject to the supervision of the relevant State insurance regulators. 

A typical financial institution is subject to the supervision and regulation of at 

least two or three of these regulators and the more complex organizations may be 

subject to the supervision of six or even seven regulators. 

In fact, there are now so many regulatory agencies that there exist even additional agencies to coordinate and streamline the regulators. The Federal Financial 

Institutions Examination Council (FFIEC) is tasked to coordinate the rulemaking by 

the various agencies. In addition, the Financial Stability Oversight Council (FSOC) 

is there to coordinate and, if necessary set aside, regulations of the various agencies 

in the interest of overall financial stability. 

46 

6 Robert Heller, ‘‘The Time Has (Finally) Come for a Single Regulator’’, American Banker, December 7, 2016. 7 Hester Peirce, Ian Robinson, and Thomas Stratmann, ‘‘How Are Small Banks Faring Under 

Dodd–Frank?’’ Mercatus Center at George Mason University, Working Paper, February 27, 

2014. 8 House Financial Services Subcommittee, ‘‘Subcommittee Examines Chilling Impact of Dodd– 

Frank on New Financial Institutions’’, Press Release, March 21, 2017. 

The time has come to simplify this regulatory jungle. 6 If we need special councils 

to coordinate the regulators, we have a few regulators too many and one layer of 

bureaucracy should be eliminated. 

Ideally, there should be only one Federal regulator for each federally chartered 

financial institution. This simplification would not only result in less confusing and 

possibly contradictory regulatory requirements, but also bring about significant 

manpower and cost savings to the industry and budgetary saving to the Government. 

The Impact of Regulation on Small Banks 

While the Dodd–Frank legislation was mainly aimed at the large financial institutions that were deemed as being systemically important or as ‘‘too big to fail,’’ its 

impact was probably more heavily felt by the Nation’s community banks—those 

with less than $10 billion in assets. 

Research has shown that the burden of complying with the Dodd–Frank Act was 

particularly burdensome for these small banks. 7 A full 90 percent of the respondents to a survey stated that their compliance costs had increased in response to the 

passage of the Dodd–Frank legislation, with 83 percent stating that their costs had 

increased by more than 5 percent. Nearly 64 percent of the institutions anticipated 

making changes to their residential mortgage offerings. Ten percent anticipated discontinuing their mortgage banking activities entirely, with 5 percent having already 

done so by 2014. In spite of the fact that the CFPB has no direct supervisory authority over small banks (those with less than $10 billion in assets), 71 percent of 

the surveyed banks reported that the Bureau affected their business activities and 

in particular their mortgage offerings negatively. 

By adding approximately 20,000 pages of complex rules and regulations to the 

American banking system, the Dodd–Frank Act made it more difficult for financial 

institutions to operate efficiently and maybe even to survive. 

Perhaps the most drastic effect of the Dodd–Frank legislation has been its impact 

on the entry of new banks. Figure 3 shows that in the decade before 2010, each year 

100 to 200 new banks were established. In contrast, during the 5 years after the 

passage of the Dodd–Frank Act, only two new banks were formed. 

Furthermore, the total number of FDIC-insured banks decreased from 6,533 in 

2010 to 5,349 by 2015, representing an overall decline in the number of banks by 

approximately 19 percent. 

Just last week, the House Financial Services Subcommittee held hearings on the 

chilling impact of the Dodd–Frank Act on the formation of new financial institutions. One of the key takeaways from the Hearing was that the number of new or 

‘‘de novo’’ banks and credit unions has declined to historic lows since the passage 

of the Dodd–Frank Act. 8

47 

9 Hee Sung Kim and Juan M. Sanchez, ‘‘Financial Conditions—Do the Ups and Downs Affect 

the Rest of the Economy?’’ Federal Reserve Bank of St. Louis, The Regional Economist, First 

Quarter 2017. 

While other reasons were also contributing to this virtual cessation in new bank 

formation, such as generally low interest rates accompanied by low net interest 

margins; the evidence is nevertheless very troublesome. The Dodd–Frank Act, together with the low interest rates engineered by the Federal Reserve, which was 

supposed to stimulate the economic recovery, created an absolutely toxic environment for formation of new banks. 

The Financial Sector and Economic Growth 

Finally, let us turn to the relationship between growth in the financial sector and 

overall economic growth. In a recent study by the Federal Reserve Bank of St. 

Louis, the authors conclude that financial conditions do indeed affect real economic 

activity. As might be expected, the impact is stronger for smaller firms and for industries that depend more heavily on external financing for investment. But the authors caution that the overall effect is rather moderate. 9

Let us examine the nexus between small community-based banks and the formation of new firms a bit more closely. Many new firms have to rely on financial resources from community-based banks. These local banks may even know the founders or owners of the new company personally. In many cases, these new firms rely 

on personal loans, credit cards or home-equity lines of credit for the initial financing 

of their company’s equipment and supply purchases because the firm itself is not 

yet creditworthy. 

It is therefore not surprising that during the same time period that saw virtually 

no new bank formation, we also experienced a very low rate of entry by new establishments. As solid line in Figure 4 shows, during the 4 years prior to the passage 

of the Dodd–Frank legislation (2006–09), on average 740,000 new establishments 

were formed. That number dropped to an average of 652,000 in the 4 years after 

the passage of the Act (2011–15). 

As a matter of fact, in the years 2009 and 2010 the exit rate of new firms (dashed 

line in Figure 4) exceeded the entry rate (solid line) for the first time in 2009 as 

firms were leaving in greater numbers than new firms being formed. These were 

the years of the Great Recession that also saw virtually no new bank formation. 

While other factors were also at work, low bank formation rates and low entry rates 


32817027.eps
48 

for firms certainly go hand-in-hand, showing the nexus between the banking system 

and the business sector. 

The Dodd–Frank Act of 2010 was passed one year after the Great Recession 

ended. It was supposed to make the financial system safer, but also resulted in 

many new restraints and additional costs to the financial system. As Figure 5 

shows, GDP growth ranged between only 1.7 and 2.7 percent during the subsequent 

recovery, making it the slowest recovery on record since World War II. 

During the recovery, the Federal Reserve maintained a highly expansionary monetary policy and the Federal Government ran a very stimulative fiscal policy. The 

Federal Reserve not only kept the Federal Funds rate at zero until 2015, but also 

added $2.8 trillion in Treasury and mortgage-backed securities to its portfolio, 

thereby vastly expanding the lending power of banks. Federal deficits during the period of 2010–2016 ranged between $438 billion and $1.3 trillion per year, adding a 

total of over $4.5 trillion to the Federal debt since the end of the Great Recession. 

Not since World War II has the Nation experienced a similar period of highly expansionary monetary and fiscal policies. 


32817028.eps
49 

As both monetary and fiscal policies were exceptionally stimulatory, the reason 

for the slow economic growth rate during the current expansion must be found 

somewhere else. It is difficult not to come to the conclusion that it was the regulatory policy focused on the financial sector that was holding the economy back. 

Conclusion 

We have examined in some detail the nexus between the financial system and the 

economy and have established the important role that financial institutions, both 

large and small, play in fostering economic growth. 

The financial system is a highly regulated sector of the economy and legislative 

and regulatory changes play an important role in shaping the lending behavior of 

commercial banks as well as other institutions. 

During the 1980s and 1990s, important changes allowed banks to expand across 

both geographic and functional barriers that had previously existed. First of all, the 

Riegle–Neal Interstate Banking and Branching Efficiency Act of 1994 legalized 

interstate banking and permitted branching across State lines, thereby enabling geographic diversification. Second, the Gramm–Leach–Bliley Act of 1999 gave banks 

the power to offer both commercial and investment banking services under one roof, 

thereby allowing greater product diversification and creating ‘‘universal’’ banks. 

As a result of increased geographic and product diversification, the American 

banking system was made both safer and more efficient. 

But at the same time, other regulations pushed financial institutions to make a 

large number of sub-prime mortgages that could not be served properly by the 

homeowners. Many of these mortgages were packaged and sold to investors in the 

form of mortgage-backed securities. When a large number of these often highly complex mortgages and securitized loans went into default starting in 2007, it triggered 

a major financial crisis. 

In turn, the financial collapse sparked the Great Recession, which affected many 

consumers and businesses adversely and led to a sharp decline in GDP. 

After the crisis had begun, the Federal Reserve did act swiftly by providing liquidity and emergency capital to the affected financial institutions. Moreover, the regulators facilitated the merger of many endangered institutions across previously existing industry barriers and an even worse financial and economic calamity was 

avoided with the help of the Government. In the absence of these actions, the crisis 

could have been even worse. But many consumers, businesses and their employees 

suffered greatly as a result of the Great Recession. 


32817029.eps
50 

But it should also be pointed out that the regulatory and supervisory agencies did 

not see the crisis coming and did little to prevent the calamity from occurring in 

the first place. They only acted after the horse had bolted from the barn. 

The main legislative reaction was the imposition of many more highly complex 

regulations through the Dodd–Frank Act. While this legislation was largely designed to prevent large banks from failing in the future, it also affected adversely 

virtually all community banks that had little or nothing to do with triggering the 

financial crisis. The new regulations, as well as the low interest rate policy implemented by the Federal Reserve and the accompanying low lending margins, brought 

new bank formation to a total standstill. 

These circumstances made it more difficult for many consumers and small businesses to obtain financing and the rate of new business formation dropped precipitously. The entrepreneurial spirits that drive new economic growth were severely 

constrained, making the recovery the slowest one on record in the post-war period. 

My suggested financial sector reform solutions to restore financial vitality and 

thereby help to reignite economic growth are twofold: first of all, allow small banks 

and maybe even banks of all sizes to ‘‘opt out’’ from the regulatory straightjacket 

by holding a sufficiently large capital cushion. Second, eliminate the multiple layers 

of regulatory authorities that financial institutions of all sizes have to cope with at 

the present time. Instead, have only one Federal regulatory agency be responsible 

for each institution under its supervision. The resulting increases in efficiency and 

cost savings will be beneficial to bankers, consumers, businesses and taxpayers 

alike. 

Thank you very much for giving me this opportunity to express my views on this 

important topic. 

PREPARED STATEMENT OF DONALD POWELL 

FORMER CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION

MARCH 28, 2017 

Chairman Crapo and Ranking Member Brown, Members of the Committee, thank 

you for the opportunity to testify. 

I have spent 40 plus years working in the financial service industry. My experience includes serving as an employee, CEO, owner and board member of various 

small- and mid-size banks. Additionally, I’ve served as a banking regulator as 

Chairman of the FDIC. Furthermore, I’ve served on the board of one of the world’s 

largest financial institutions. 

All of these experiences have caused me to understand and respect the critical 

role a bank has in the success of a community, State, and in our Nation. The quality 

of life in a community has a direct link to the bank’s activities and services, including the creation of jobs, the caliber of education, the excellence of health care, and 

the general prosperity of a community. The bank is the alter ego of a community. 

Banks, both large and small, contribute to the well-being of a community. Most 

banks have a culture that demands that all of its employees participate and provide 

leadership in all that is good within the community. 

The data is overwhelming as to the role banks play in economic activity, and 

when banks are not engaged in lending or in providing other services, the local, 

State, and national economy suffers and economic growth becomes anemic. Thus, it 

is important that the Nation have viable, safe and sound banks serving this great 

country. Part of the confidence placed in banks is a result of depository protection 

offered by the FDIC and of the supervision of each insured institution. Confidence 

in the soundness of an institution is critical to the success of the banking system, 

and thus, the free enterprise system. 

During my career, I have experienced good and bad economic times and have observed the various reactions to these cycles by the marketplace, policy makers, regulators and other stakeholders. I have studied the cause and effect of each downturn. 

After each decline, Congress, as well as banking regulators, have attempted to address the issues attributed to the slump in our banking system. All of the banking 

supervisors have reacted by creating more stringent rules and a tougher oversight 

process. 

Today’s examination and supervisory process includes, as expected, more focus on 

threats to our way of life and to treating every potential customer in a fair, transparent, and forthright manner. Laws and supervision oversight may be fluid depending upon the latest threats, risk, and conditions within the banking industry. 

There has been discussion, supported by data, that banks today, especially smaller banking institutions, are not the vehicle that breathes economic life into a comVerDate Nov 24 2008 12:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00054 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\03-28 ZZDISTILLER\32817.TXT JASON
51 

munity because of the unnecessary burden of the examination process and of certain 

regulations. Often, after a downturn, the tone, attitude and trust between banks 

and regulators become strained, which results in negative energy and a nonproductive environment. It is important to understand the cost of regulation and to distinguish between sound policy and unnecessary rules, laws and policies that stifle economic activity. The overriding issue is how does this policy, law, or regulation support economic activity without burdening the consumer, small business owner, or 

other business ventures? 

I remain active in the financial services industry and have direct knowledge of 

the supervisory process and would offer some guiding principles rather than specific 

regulations, policies, and laws that are valid in all seasons. Without the principles— 

laws, policies and regulations might be neutered or weakened. 

1. Every banking regulator must be fiercely independent and cannot be politically 

influenced. The independence includes no political agenda and activity must follow 

the mission established by law. Accountability is balanced with term limits and 

oversight from an independent Inspector General. Regulators should not be intimidated by any force of direct or indirect influences, and should not be a political tool 

for any agenda. 

2. Leadership at the various regulator agencies is critical. As with any enterprise, 

leadership sets the tone and mood for the entity. The ability to work with all stakeholders without compromising the mission should be a tenet for all leaders. Obviously the confirmation process should measure leadership that is validated by life’s 

experiences. 

3. Disputes must have a due process path. Without a trustworthy, reliable and 

transparent due process, an American core principle is lost. There is not a valid due 

process existing today to resolve disputes between regulator and banker. I have offered a solution and the paper is attached for the record. 

4. Rule making should be transparent and common sense and judgment should 

prevail. Experience is vital to an understanding of the banking industry and the 

process should be deliberate and seek input from all interested parties. Rule making 

does not include making laws or incorporating a political agenda into the regulation. 

5. Accountability follows authority and a vigorous review process is important; 

proper oversight by a responsible IG is important. 

While there are certain core principles to a safe and sound banking system, banking cannot be commoditized as every community market is different and judgement 

must be part of the process. Banking laws and regulations must be followed, but 

policy makers must understand the cost, burden and intentions of these laws and 

amend them when necessary. Today’s data indicates that there is more emphasis 

on compliance than on safety and soundness. It is important to understand that 

without the soundness of a bank the community cannot thrive. We must get compliance with laws, safety and soundness all collaborated to benefit the community. 

Finally, after experiencing several banking crises first hand and participating in 

mistakes, and questioning myself and industry leaders, my conclusion is that there 

will continue to be cycles and new risks will emerge but these common themes are 

present in those entities that survive: 

1. Sufficient Capital 

2. Liquidity to support the apparent risk and the unexpected events. 

3. Management that understands risk and provides oversight with the proper balance between serving community, return on capital, and commitment to the basics without complexity. 

52 


32817001.eps

Specials! Jason H<rdzev.icz, lelt,IIIXks al his poGI on !he floor of !he New Y<Jk Slodi Exchange. Weooesday, OcL 

5, 2016. Richaldll!ew-AP 

Why Dodd-Frank Is Unfair to Banks 

Donald E Powell 

Jan 26, 2017 

President Trump has been in office less than a week, but so far it seems 

he and Congress share similar ~ie s as Wall Street: Less regulation is 

better, particularly when it comes to Dodd-Frank Act that aims to 

pre1·ent a repeat of the 2008 financial crisis. 

While amending certain parts of the landmark law would certainly 

reduce the burden on the financial services industry and thus assist in 

providing a spark to the economy to increase lending and job creation. 

But one should pause to renect on the risky banking practices that led 

to the collapse of the financial system in 2008. We should also 

acknowledge that Dodd Frank and certain changes in the regulatory 

regime have made for a more safe, and sound banking system, which 

has served as the backbone of free enterprise. 

It is also important to remember that regulations are imperfect, 

especially the process by which regulators regulate U.S. banks: one 

man's red tape is another man's accountability. Howe1•er, the cost of 

regulation has been well-documented and without credit, the economy 
53 


32817002.eps

will not create jobs or contribute to individual prosperity. We need to 

strike a balance between the need to protect customers from abuse, 

perceived or real, and the need to attract capital that will produce a 

return to shareholders. The problem is the process to execute the 

principles of the law: when a dispute arises between regulator and the 

regulate -the financial institution -the process fails to provide the 

most basic or all constitutional rights. 

This problem dates back before Dodd-Frank. More than 20 years ago 

in 1994, Congress created an internal regulatory appeals process to add 

additional protection in resolving disputes between financial 

regulators and bankers. However, many industry observers believe 

reform efforts have failed, while most bankers do not believe that a 

clear, fair, and object·ive process is available when a dispute arises. 

Here's the crux of the problem: the regulator is the prosecutor that 

initiates the action. If the bank chooses to challenge the matter, the 

regulator is the judge and jury. Any appeal is stacked against the 

accused. The dispute may go to an internal review committee or to an 

ombudsman, who reports to the agency head, or may go loan 

administrative law judge who has been appointed by the agency. 

Even if the ftx on the appeal circu it magically went in the accused's 

favor, the final decision ultimately returns to the very regulator who 

initiated the action. This is just wrong and offensive to our basic 

notions or due process. 

Thus, the banker does not challenge or appeal because of the defective 

process and the threat of retribution. One can only observe the history 

of conclusion by the various banking regulators to see why most 

bankers believe that when there is a dispute there is not equitable and 

reasonable recourse when they have a legitimate objection to a 

purported regulatoty violation or decision. 

I am not saying that the banking industry does not need a strong, 

independent banking regulator that is committed to fulfilling its 

mission. And it is critically important that dishonest, incompetent 

bankers who have harmed customers be removed from the system and 

the regulator should hare every tool to enforce its mission. But again, 

not without due process. Not all bankers are crooks and not all 

regulators are unbiased and objectire. 

One alternative that could improve the existing process would be an 

opportunity for the accused bank to go before a five-mem her panel 

that would make a binding decision. The panel would be appointed for 

five years. Members would be paid only expenses plus a per diem fee 

and include two members from the banking industry who aren't 

currently working at a bank but have the financial expertise that others 

don't (one from a large institution and the other from a small one). 

The other two members would come from the regulatory agency (one a 

federal regulator and the other a state regulator), plus a single member 

representing the generJ.l public. 
54 


32817003.eps

All individuals must have depth of e.xperienee in their background, and 

have no direct or indirect interest in any insured financial institution. 

The panel would be selected by the board of the FDIC from a list of 20 

names submitted by the bipartisan leadership of the House Financial 

Servioes Committee and Senate Banking Committee. The panel would 

have the ability to drawn upon experts from time to time and its 

authority and limitation would be part of its charter established by 

Congress. 

I hal'eworked within the banking industry for over 40 years in both a 

small/mid-sized and large financial institution as well as having 

banking regulatory experience at the federal level. There are 

honorable, well-meaning, and smart people representing both the 

banking industry and the regulatory agencies, but on occasion, wellmeaning people have disputes and for that reason, it is important that 

a valid "due prooess" system be in plaee. 

It's possible in America to have a robust, safe and sound banking 

system along with a fair regulatory system. It doesn't have to be a 

choice of one over the other. 

Donald E. Powell, a banker for ouer 40 years, was chairman of the 

FDIC from 2001-2005. 
55 

PREPARED STATEMENT OF THOMAS C. DEAS, JR. 

CHAIRMAN, NATIONAL ASSOCIATION OF CORPORATE TREASURERS

MARCH 28, 2017 

Chairman Crapo, Ranking Member Brown, and the other Members of this Committee: Thank you for the opportunity to testify at this important hearing focusing 

on our country’s future economic growth. I am Thomas C. Deas, Jr., recently retired 

vice president and treasurer of FMC Corporation and current chairman of the National Association of Corporate Treasurers (NACT), an organization of treasury professionals from several hundred of the largest public and private companies in the 

country. I also represent the NACT on the Steering Committee of the Coalition for 

Derivatives End Users (the Coalition), comprised of several hundred companies that 

employ derivatives to manage risks in their day-to-day business activities, principally through the dedicated efforts of their corporate treasurers. 

At the outset, I would like to thank you, Chairman Crapo, for your efforts to make 

sure that end users are able to engage in prudent risk-management activities without facing costs that could make such activities prohibitively expensive. We appreciate your efforts to move a bill, enacted in the last Congress, to exempt end users 

from unnecessary margin requirements. 

Background on End-Users’ Interactions With the Financial System 

I am thankful you have asked me to assist your efforts to foster future economic 

growth by ensuring that American Main Street companies can interact in ways that 

make sense economically with the financial system you help to oversee. The financial system is critical to the day-to-day business activities of end-user companies, 

including through activities such as: 

• Collecting payments from customers 

• Concentrating cash collections in secure depository institutions 

• Sending cash safely from where it was collected and concentrated to wherever 

it is needed to meet the company’s day-to-day business obligations to suppliers, 

employees, Government entities, investors, and others due payments 

• Borrowing or investing to meet temporary or longer term cash shortfalls or surpluses 

• Managing the company’s capital structure with adequate committed credit and 

appropriate amounts of debt and equity capital with repayment obligations to 

investors structured to limit risks, especially anticipating future periods when 

liquidity may be constrained 

• Identifying and hedging the company’s financial risks from exposures to such 

factors as: 

• Interest rates 

• Foreign exchange rates 

• Commodity prices 

End users are fundamentally different from financial companies in that they use 

the financial system to facilitate their business operations and they do not engage 

in speculative, inherently risky position-taking as do some financial firms. For example, end users employ derivatives to reduce risks arising from operating their 

businesses and do not engage the kind of transactions that roiled the markets during the financial crisis. End users comprise less than 10 percent of the notional 

amount of the over-the-counter (OTC) derivatives market and do not meaningfully 

contribute to systemic risk. However, in markets as complex and interrelated as we 

have now in the global financial system, there is a clear need for a regulatory framework that recognizes these complex interactions. We have been gratified at the bipartisan consensus that has developed since the financial crisis that: 

• end users employ the financial markets to reduce risk and, therefore their activities should not be unduly burdened, and 

• recognizing that the financial markets in today’s world are truly global, American companies and their workers should have a consistent, predictable, and 

level regulatory playing field in which they do not suffer any relative disadvantages compared to their foreign competition. 

We believe a clear understanding of end-users’ interactions with the financial system is critical to maintaining a regulatory framework that does not burden the enduser producers and job creators with the costs of well-intentioned measures more 

56 

1 Bank for International Settlements OTC derivatives statistics at http://www.bis.org/statistics/derstarts.htm. 

appropriately applied to financial firms. With these complexities in our increasingly 

interrelated markets, it can easily be the result that a regulatory change at one end 

produces an unintended consequence and higher costs on end users several steps 

down the chain. Further, foreign regulators have in certain cases granted exemptions to end users that are not available under U.S. law, placing American end 

users at a competitive disadvantage compared to their foreign competitors. 

Since its start in the early 1980s, the OTC derivatives market has grown to be 

the largest financial market in the world with outstanding transactions totaling 

nearly $700 trillion in notional amounts. 1 Transactions between swap dealers and 

other financial intermediaries represent most of the trades, with nonfinancial end 

users comprising less than 10 percent of derivatives activity, as mentioned above. 

However, much of the trading by financial intermediaries can be assumed to be 

transactions to balance risk positions that originated with end-user trades. The exponential growth in the derivatives market came in significant part from end users 

in the real economy needing to hedge their exposures to changes in interest rates, 

commodity prices, and foreign exchange rates, along with credit exposures to customers or suppliers, exposures to equity prices, and other commercial risks they face 

in their day-to-day business operations. OTC derivatives can be matched exactly as 

to timing, currency, rates or amounts of the underlying exposures in ways that the 

futures markets, with round lots and fixed settlement dates could not. The 

customization available in the OTC derivatives market has been essential in allowing end users to match exactly derivatives with underlying business exposures so 

that they move in equal, but opposite ways. Additionally, OTC derivatives together 

with relevant regulatory exemptions allow end users to negotiate credit support 

measures individually with their derivatives counterparties. 

Today I propose to focus on a few areas in which certain regulatory changes could 

benefit Main Street companies so that we can grow our businesses and increase employment opportunities for our American workers. 

Day-to-Day Business Examples of End-Users’ Interaction With the Financial 

System 

End-user corporate treasuries today routinely use the financial system to facilitate 

their day-to-day business tasks. However, they are matching exactly in amount, currency, and duration the financial transactions with the business flows they are managing. Instead of speculating, for example in foreign currencies, through a foreign 

exchange transaction unmatched to a committed business transaction, an end user 

is offsetting a known transaction to lock in the price and manage the risk of future 

movements in the currency markets. 

Corporations engaged in manufacturing activities with their costs in one currency 

and selling into foreign markets in another currency have access to derivatives 

transactions that will allow them to hedge this cross-currency risk. Depending on 

the predictability of future sales, they can enter into forward sales of the selling currency while taking back payments in the currency in which they are incurring their 

manufacturing costs. Since the future sale is not yet recorded on the corporation’s 

financial statements, it is important to achieve the objective of reduced earnings volatility, that changes in the derivative’s valuation be deferred from being recognized 

in income until the anticipated sale is actually made and recorded on the end-users’ 

financial statements, creating an offset. Accounting rules in the U.S. and Europe 

generally permit this treatment. 

Multinational manufacturing groups have often sought to locate production facilities where they can match the currency exposures of their production costs with anticipated revenues in the same currency. This is referred to as creating a ‘‘natural 

hedge’’ of like-currency offsets and reduces the need to hedge in the OTC derivatives 

market. Multinationals are monitoring the increasing costs and operational complexities of cross-border derivatives regulatory compliance. By keeping end-users’ 

regulatory burdens appropriate to the actual financial risks their transactions represent, we sustain U.S. manufacturers’ ability to produce at home, export abroad, 

and manage the cross-border currency risks with derivatives whose costs are not too 

expensive. 

Commodity derivatives are used by end-users’ corporate treasuries to manage 

movements in prices of raw materials used in their production or goods they sell. 

Consider a manufacturer using natural gas in its production. It can fix the price 

of this important cost component by entering into a fixed-price contract with one of 

several deregulated natural gas suppliers. This effectively embeds a derivative in its 

supply agreement. Alternatively, it can enter into a floating-price purchase contract 

57 

2See 7 U.S.C. §2(h)(7); 7 U.S.C. §6s(e)(4). 

and have its corporate treasury arrange a matching commodity derivative in which 

it pays a fixed price and receives the floating price it passes on to its supplier. With 

either arrangement, there is a risk to the corporation that its price-locked structure 

fails when the mark-to-market is in the money to the corporation. It is generally 

far easier to monitor the creditworthiness of a swap counterparty, often a regulated 

financial or trading institution, than to try to monitor an energy supplier. This in 

part is why end-user businesses are increasingly relying on the derivatives market 

to hedge commodity price risks. 

Another important use of commodity derivatives is to allow structuring cross-border bartering transactions. Consider a multinational agricultural chemicals manufacturer selling into Brazil. Like its fellow BRIC countries, Brazil has plentiful land 

and labor as classic economic inputs to production, but less access to capital and 

associated financial markets. The multinational chemicals company can, however, 

access the global derivatives markets. Its customer in Brazil needs crop-protection 

chemicals at planting time, but can only pay 6 months in the future, at harvest 

time. During this period, the Brazilian farmer has commodity price risk and currency risk. The multinational manufacturer arranges a barter trade where the Brazilian farmer agrees to pay in soybeans at harvest time 6 months forward for the 

chemicals it needs to apply at planting time. The farmer has transferred the commodity price risk to the chemicals manufacturer, which can enter into a customized 

OTC commodity derivatives locking in the U.S. dollar price 6 months in the future, 

thereby hedging its risk in the derivatives market. 

In some cases, large sales requiring several years to fulfill may motivate a supplier to enter into a credit default derivative to hedge the risk that its customer goes 

bankrupt before it is paid. A credit default derivative can be structured for a notional principal amount sufficient to mitigate the payment risk. As discussed below, 

the amount of capital regulated swap counterparties have to hold against this type 

of trade as an aftermath of the financial crisis make it a costly hedge for most corporate treasuries to enter into. 

By reducing the overall volatility of its business results, the end-user corporate 

treasurer contributes to the stability and predictability of his or her business. If 

done consistently and communicated properly to stakeholders, the result is a lower 

overall riskiness for the end-user business, justifying a lower risk-adjusted discount 

rate for its estimated future cash flows and hence a higher valuation. 

Capital Requirements 

A bipartisan effort in the last Congress, supported by the leadership of Chairman 

Crapo, resulted in the enactment of a clear end-user exemption from having to post 

cash margin for end-users’ derivatives positions. 2 However, we are increasingly concerned that the uncleared OTC derivatives we seek to continue using to reduce our 

business risks will become too costly because of much higher regulatory capital requirements imposed on the financial companies that we rely on as our derivatives 

counterparties. 

The Prudential Banking Regulators have now finalized rules implementing Basel 

III capital requirements which increase the capital bank counterparties are required 

to hold against derivatives. Additionally, other bank capital measures, including the 

net stable funding ratio (NSFR) and the supplemental leverage ratio (SLR), risk further increasing derivatives transaction pricing and loans for end users. 

Credit Valuation Adjustment 

European policymakers have implemented capital charges on derivatives positions 

significantly more favorable to end users than the U.S. Prudential Banking Regulators. The European approach recognizes that end-users’ hedging activities are in 

fact reducing risks, and accordingly, exempts end-user derivatives transactions from 

the credit valuation adjustment (CVA) risk capital charge, which would otherwise 

require the calculation and subsequent holding of capital to mitigate counterparty 

credit risk in a derivatives transaction. The absence of a U.S. exemption puts American companies at a meaningful competitive disadvantage compared to our European competitors. 

The lack of a CVA exemption for U.S. end users that are hedging their commercial risks would deny or significantly reduce the end-user community the benefits 

of the statutory exemptions from clearing and margin requirements as end users 

that engage with banking organizations that are the subject of the CVA charge imposed by the U.S. Prudential Banking Regulators see those charges passed through 

in the form of higher pricing. Such a result thwarts the will of Congress to provide 

clear exemptions for American end-user companies. 

58 

Further, the CVA charge may force end users to post collateral to offset banks’ 

CVA capital requirements. If banks require collateral, end users may be put in the 

position of borrowing from financial institutions to obtain the cash required to support those transactions, resulting merely in a shift of risk between financial institutions. The result of requiring the posting of collateral contradicts the objective of facilitating end-users’ access to capital, drives costs directly to end users, and does 

nothing to mitigate risk within the financial system, as the risk is simply being 

transferred from one bank to another. 

Net Stable Funding Ratio 

We believe the Prudential Regulators’ June 2016 proposal on the NSFR could lead 

to billions in additional funding requirements for end-users’ derivatives and borrowing activities. This is especially concerning given that many of the provisions of 

the NSFR would further restrict end-users’ ability to hedge by increasing the cost 

of risk management and could lead to decreased liquidity in the derivatives markets. We are concerned that long-term funding costs required under the NSFR 

might limit and discourage dealer involvement in derivatives and derivatives-related 

transactions, effectively reducing liquidity in the market that end users rely on to 

hedge risk. Additionally, costs associated with capital-raising in a less liquid market 

would inevitably be borne by derivatives end users and consumers. The immediate 

impact of the NSFR can already be seen as fewer bank counterparties are willing 

to extend longer-term credit, including in the form of swaps used to hedge end-users’ 

long-term business exposures. Additionally, the costs to hedge are likely to be 

passed on to end-user companies in the form of increased fees or transaction costs, 

less favorable terms, and collateral requirements. 

These concerns are particularly reflected in the add-on costs associated with 

counterparty payables; the treatment of uncollateralized receivables; the lack of collateral offsetting provisions; and the liquidity squeeze related to the treatment of 

corporate debt. For example, requiring dealer counterparties to provide required stable funding for 20 percent of the negative replacement cost of derivative liabilities 

(before deducting variation margin posted) is a clear example of the direct burdens 

that would affect end-users’ ability to mitigate risk efficiently. 

Another concern under the NSFR is the treatment of dealers with respect to 

uncollateralized net receivables, which could require 100 percent long-term funding. 

As we are now seeing, end users are being required to collateralize transactions 

with cash margin to meet the stringent Basel III leverage ratio requirements. Or, 

if a dealer counterparty did not demand collateral, the costs of long-term funding 

could simply be passed on to end users through embedded derivatives fees. 

Moreover, we believe that disproportionate discounting of the collateral posted by 

end users forces dealers to mitigate costs elsewhere. As a result, in implementing 

the NSFR, the Prudential Banking Regulators should align collateral posted by commercial end users with long-term funding obligations under NSFR. This is particularly true because, while most end users are exempted from posting margin for their 

derivatives with bank counterparties, the ‘‘back-to-back’’ hedges entered into by 

banks to offset end-user transactions are still subject to mandatory clearing and 

margin requirements. Consequently, the costs borne by banks to offset end-user 

transactions are passed on to the very end users that were meant to be exempt from 

the costs of mandatory clearing and margin requirements—and ultimately to consumers. 

Further, the NSFR’s treatment of corporate debt could hinder end-user capitalraising efforts. The NSFR does not take into account the maturity of end-user-issued 

debt when determining a dealer’s required stable funding and would restrict liquidity in the corporate debt markets by requiring dealers to raise 50–85 percent longterm funding to support their inventory of end-user notes, which would discourage 

market making. End users rely on market-based funding and the importance of liquid markets for corporate bonds and commercial paper (CP). To cite a real-world example of the costs and diminished liquidity from these rules, many corporate treasuries issue CP daily to balance their funding requirements. If they are faced with 

a same-day payment that they identify too late in the day to complete a placement 

in the market of the required CP, their bank CP dealer frequently will take the 

paper overnight for its own account and fund out the requirement the next day in 

the market. The NSFR rules require the bank to hold 85 percent of that overnight 

funding as long-term funding—at a cost multiple times the overnight amount. Ultimately this liquidity will no longer be available to end-user treasury departments. 

Accordingly, the Prudential Banking Regulators should carefully consider the impact of the NSFR’s 50–85 percent long-term funding requirements on end users. 

59 

Supplemental Leverage Ratio 

The SLR is another capital requirement imposed on financial institutions that 

flows through to end users through the lack of an end-user exemption. The SLR penalizes high-quality assets and acts as a disincentive to market participants to provide clearing services. The SLR does not permit the clearing member to take ‘‘credit’’ 

for the segregated initial margin posted by its customers, including end users, even 

though the initial margin is expressly for the purpose of limiting the clearing member’s exposure to the derivative it is clearing. Further, segregated initial margin in 

the form of cash may be required to be added to a clearing member’s balance sheet 

exposure, requiring additional capital. On the whole, the SLR seems to ignore the 

fact that for derivatives cleared on behalf of a customer, the customer’s segregated 

initial margin must be held to margin the customer’s positions and cannot be used 

as leverage by the clearing firm. 

Ultimately, the failure of the SLR to recognize the risk-reducing effect of segregated client collateral will likely lead to fewer banks willing to provide clearing 

services for customers, thus constraining the ability of end users that clear derivatives to access central clearing. Further, even end users that do not clear their derivatives will likely see the impact of the SLR in the form of increased costs for 

hedging, as their bank counterparties will see their clearing costs increase on their 

back to back hedges and will pass those costs along to end users. We are hopeful 

that regulators can work together to get this right in the United States and abroad. 

In summary, although a bipartisan consensus in the last Congress confirmed the 

original legislative intent of the Dodd–Frank Act to exempt end users from having 

to use their own capital for mandatory margining of derivatives transactions, capital 

requirements imposed on banks would seem to undermine this intent by forcing our 

bank counterparties to hold much more of their own capital in reserve against endusers’ derivatives positions, passing on the increased costs to these end users and 

ultimately consumers. 

Cross-Border Harmonization of Regulations in the Global Financial System 

NACT and the Coalition appreciate the important efforts being undertaken by 

U.S. and foreign regulators to resolve differences in how their regulations apply to 

cross-border transactions. Applying derivatives reform rules in a global marketplace 

is an inherently complex undertaking. Unlike most stock market transactions, a derivative creates an ongoing relationship between parties that continues from its initial inception until its final termination in the future. Thus, many transactions exist 

between parties in different jurisdictions for many years. While the United States 

has completed many of its derivatives rules, other regulators around the world are 

just now finalizing and implementing many of their rules. Consequently, derivatives 

end users now find themselves simultaneously subject to multiple regulatory regimes. Understanding and implementing compliance structures for derivatives rules 

across multiple jurisdictions is a significant and costly undertaking. Accordingly, 

American end users are subject to incentives to avoid complication by limiting their 

transactions to counterparties located in their same jurisdiction. The lack of regulatory harmonization can cause fragmented and less efficient markets for end users, 

and can raise the cost of delivering stable prices to consumers. We believe it is critical that you urge U.S. regulators to continue working closely with their foreign 

counterparts and move quickly to recognize equivalency and substituted compliance 

with foreign regulatory regimes when the objectives of foreign regulations are comparable to those under the Dodd–Frank Act and where foreign regulations do not 

unduly burden U.S. end users. 

Commodity Derivatives To Hedge End-Users’ Commodity Price Risks 

End users are subject to the risks of changing prices for such items as commodity 

inputs to their manufacturing processes and energy consumed in manufacturing 

their final products. To hedge these exposures, they prefer to arrange properly constructed commodity derivatives contracts with one of their banks. The Federal Reserve Board proposes to issue a final rule imposing limitations and restrictions on 

the physical commodity activities of the financial holding companies it regulates. 

Among other things, it would make physical commodities trading by financial holding companies more expensive by imposing up to a 1,250 percent risk weighting, 

even on some physical commodities that are widely traded such as oil and certain 

other petroleum-based products. NACT is concerned that: 

• Financial holding companies already are being forced to exit the physical commodity markets and end users that rely on bank counterparties for physical 

commodities transactions are having to find substitutes that can be less creditworthy and less strictly regulated than their banks 

60 

3The New York Times, Dealbook, September 7, 2008, ‘‘Money-Market Fund ‘Breaks the 

Buck’ ’’. 

• The exit of banks from these markets brings about reduced liquidity resulting 

in higher costs from less competition 

• New documentation is being required that is less credit efficient in the sharing 

of risks among counterparties, also bringing higher costs 

End Users and Money Market Mutual Funds 

There is no question that liquidity is the lifeblood of any business. Without having 

ample liquidity, production comes to halt, inventories run low, and bills are not paid 

on time. The cyclical nature of many businesses places significant importance on the 

availability of committed financing so that they can operate efficiently and without 

disruption. To illustrate the interconnectivities between end users and the financial 

markets, it is useful to consider their use of money market mutual funds (MMMFs). 

This has been a market of more than US$2.5 trillion not only selling short-term investments to handle treasurers’ temporary excess cash, but on the other side, buying the commercial paper corporate treasurers issue to finance the day-to-day funding needs of their companies. However, in September 2008 the Primary Fund of the 

Reserve Fund group of mutual funds ‘‘broke the buck’’ when it reported a net asset 

value per share that rounded to less than a dollar. 3 In the period since the financial 

crisis, regulators have sought new rules for MMMFs to strengthen the market during times of financial stress. MMMFs had always operated with fixed net asset values (NAV) with a price per share greater than US$0.995 and less than US$1.005, 

so that the NAV rounded to the nearest cent was one dollar per share. 

Congress felt it unnecessary to include additional reforms for MMMFs in the 

Dodd–Frank Act as the SEC had already enhanced regulations under its Rule 2a7 changes in 2010. However, additional changes went into effect on October 14, 2016 

that impose liquidity fees and redemption gates to spring up during periods of market stress. A requirement for a prime fund’s NAV to float and be reported to the 

nearest hundredth of a cent significantly complicates investments in prime funds for 

corporate treasurers. The floating NAV requirement does not apply to MMMFs investing in Government securities, however. 

The practical implications of the new rules are daunting for corporate treasurers. 

Corporate treasury and financial reporting systems up until now have treated fixed 

NAV MMMFs as cash equivalents. Now MMMF shares in nongovernment funds will 

have a floating NAV per share that must be tracked essentially in real time. For 

Federal and State income tax purposes, a floating NAV requires treasurers to keep 

track of gains and losses when they inevitably buy MMMF shares at one price and 

sell them at another in the routine redemption of their investment. Since treasury 

systems must compete with other departments for internal IT resources, the question of what alternatives are available must be answered. Corporate treasurers can 

abandon the prime MMMF market and instead invest in Government MMMFs that 

can retain the dollar per share fixed NAV. However, prime funds are important to 

treasurers not only as a flexible alternative for investments of temporary excess 

cash balances, but also as providers of short-term funding by buying corporate CP 

notes. As the graph below shows, in the year running up to the October 14, 2016, 

implementation of the new regulations, fund purchases of corporate CP declined significantly. 

61 

Concerns about investors fleeing prime MMMFs have indeed proven true, declining by US$1 trillion to US$376 billion since the rule became final (see Chart below). 


32817004.eps 32817005.eps
62 

The cure proved worse than the disease for many fund managers as they closed 

almost 200 institutional prime funds (see Chart below). 

The cumulative effect of the regulatory changes on MMMFs caused US$1 trillion 

to leave prime funds with much of that moving to Government funds unaffected by 

all the same rules. Corporate treasury investors in these funds were unable to justify or implement quickly enough changes to their treasury and financial reporting 

systems required by the new rules. End-user companies were adversely affected not 

only through fewer choices for the investment of their cash, but for many, an uptick 

in CP borrowing costs as an important investor base went away. 

Summary 

A bipartisan consensus in the last Congress confirmed that the legislative intent 

of the Dodd–Frank Act was to exempt end users from having to use their own capital for mandatory margining of derivatives transactions, which would have diverted 

these funds from investments to build inventories for higher sales, conduct research 

and development activities, expand plant and equipment, and ultimately grow jobs. 

However, the imposition of additional capital requirements by the Prudential Banking Regulators on financial institutions acting both as derivatives counterparties 

and lenders to end users would undermine this intent by forcing banks to hold much 

more of their own capital in reserve against end-users’ derivatives and borrowing 

positions, passing on these increased costs to end users and ultimately their customers. 

The cumulative effect of new derivatives regulation threatens to impose undue 

burdens on end users. The indirect effects of this regulation of end users through 

bank capital and liquidity requirements serves to discourage end-user risk management through hedging and would effectively negate the benefits of Congress’ clear 

intent to exempt end users from margin requirements. There are also several adverse effects on end-users’ funding costs from the way certain bank capital requirements are applied. We urge you to direct financial regulators to conduct a study of 

major regulatory initiatives for cumulative impacts on end users directly and indirectly through financial institutions. Many NACT members participated in a recent 

survey by the U.S. Chamber of Commerce, which underscores the need to examine 

our financial services regulatory structure. The Chamber’s report, Financing 

Growth: The Impact of Financial Regulation, asked more than 300 corporate finance 

professionals, including CFOs and treasurers, to report on the impact of financial 


32817006.eps
63 

1 [Cite—http://www.nytimes.com/2015/11/14/nyregion/victims-of-debt-collection-scheme-innew-york-win-59-million-in-settlement.html; www.neweconomynyc.org/resource/sykes-v-mel-sharris-associates] 

services regulatory reform on the availability and cost of the products and services 

most crucial to the growth of Main Street businesses. 

One key finding from the report includes the fact that access to credit remains 

their top concern. However, more than three-quarters of American companies of all 

sizes believe that the cumulative effect of financial regulations adopted over the 

past 6 years is making it harder for them to access the financial services they need. 

In addition, 79 percent of respondents indicate that they are affected by changes in 

financial services regulation, resulting in 39 percent of respondents absorbing higher costs and 19 percent delaying or cancelling planned investments. 

We need a regulatory system that allows Main Street companies to use the financial system to hedge day-to-day commercial risks, securely manage their cash flows, 

fund their businesses in the most cost-effective way, and play on a level field with 

their foreign competitors. By having a regulatory system that allows businesses to 

improve their planning and forecasting, manage unforeseen and uncontrollable 

events, offer more stable prices to consumers, end users can more readily contribute 

to economic growth. 

End users are using the financial system to mitigate the business risks they face 

in their day-to-day business activities. In this respect, they are fundamentally different from financial companies who maintain an open book of exposures and who 

seek profit through properly structured speculative positions. However, when rules 

intended to apply to financial institutions directly or indirectly burden end users, 

it is the end-user segment of our economy that bears the higher costs. The imposition of unnecessary burdens on end-user businesses restricts job growth, decreases 

investment and undermines our ability to meet and beat international competition, 

leading to material adverse cumulative impacts on corporate end users, American 

workers, and our economy. 

The consequences of getting the right balance in the regulation of our financial 

system will benefit American business, our customers and our workers. 

Thank you. I will do my best to address any questions you may have. 

PREPARED STATEMENT OF DEYANIRA DEL RIO 

COEXECUTIVE DIRECTOR, NEW ECONOMY PROJECT

MARCH 28, 2017 

Chairman Crapo, Ranking Member Brown, and Members of the Committee, thank 

you for the opportunity to testify at today’s hearing. My name is Deyanira Del Rio 

and I am the codirector of New Economy Project, an economic justice center based 

in New York City. For more than 20 years, our organization has worked with an 

array of community, labor, civil rights and other organizations to press for fair lending and financial inclusion, as a matter of racial justice and equitable neighborhood 

development. I am pleased to share our experiences and perspective about the vital 

role that responsible financial institutions play in fostering economic growth and opportunity—as well as the devastating and destabilizing impact of abusive and unregulated lending on communities and the economy. 

New Economy Project has led efforts in New York to challenge predatory lending 

and other discriminatory economic practices, including by pressing for policy change 

and regulatory accountability at the local, State and Federal levels. Our accomplishments include winning strong antipredatory mortgage lending and foreclosure prevention legislation; keeping payday lending debt traps out of New York, through vigorous defense of New York State’s 25 percent usury cap and other consumer protections; ending in NYC an insidious form of employment discrimination based on a 

job applicant’s personal credit history; and settling a groundbreaking class action 

lawsuit brought against a debt buyer network, resulting in a $59 million monetary 

award and the imminent vacating of almost $800 million in debt collection default 

judgments. 1

My testimony today is additionally informed by my 15 years as a board member 

(and current board chair) of the Lower East Side People’s Federal Credit Union 

(LES People’s), a regulated, not-for-profit community development financial institution (CDFI) that serves a majority low-income and immigrant membership in New 

York City. I previously served on the board of directors of the National Federation 

of Community Development Credit Unions, which helped to establish the Federal 

64 

2 ‘‘Changes in U.S. Family Finances from 2007 to 2010: Evidence from the Survey of Consumer Finances’’, at www.federalreserve.gov/pubs/bulletin/2012/pdf/scf12.pdf. 3 ‘‘The Roots of the Widening Racial Wealth Gap: Explaining the Black–White Economic Divide’’ (Institute on Assets and Social Policy), at https://iasp.brandeis.edu/pdfs/Author/shapirothomas-m/racialwealthgapbrief.pdf. 4 ‘‘Troubled Asset Relief Program: More Efforts Needed on Fair Lending Controls and Access 

for Non-English Speakers in Housing Programs’’, at www.gao.gov/products/GAO-14-117. 5 ‘‘The Debt Collection Racket in New York: How the Industry Violates Due Process and Perpetuates Economic Inequality’’, at www.neweconomynyc.org/wp-content/uploads/2014/08/ 

DebtCollectionRacketUpdated.pdf. 

CDFI Fund in 1994 and continues to serve CDFI and low-income designated credit 

unions across the country. 

I have two overarching points that frame my testimony today: First, eliminating 

barriers to fair banking and credit access is important to ensuring economic inclusion and opportunity for all. Indeed, in communities across New York and around 

the country, unequal access to credit has long fueled housing segregation, racial disparities in homeownership and small business-ownership, and vast and deepening 

wealth inequality. 

Second, although affordable and appropriate financial services and credit are vital 

components of a healthy economy, we reject the notion that consumer credit is in 

itself a solution to structural inequities in our economy. Exploitative credit and debt 

can worsen these inequities, as we saw with subprime mortgages that led to the 

foreclosure crisis and wiped out hard-won homeownership gains among families of 

color; and payday loan debt traps that exploit working poor Americans struggling 

to make ends meet, and who would benefit from living wage laws and other measures to address root causes of economic insecurity. 

It must also be said up-front that efforts by the Trump administration and Congress to dismantle financial reform laws, if successful, will inevitably lead to new 

crises and further erode Americans’ trust in the financial services industry. On the 

one hand, we must do everything possible to preserve existing financial reforms and 

consumer protections, as inadequate as they are—thanks in no small measure to 

banks’ relentless lobbying to defeat even basic reforms. On the other hand, we need 

to change our financial services system more fundamentally, if we are to have an 

equitable system that serves the real economy, rather than a financialized economy 

that is intrinsically extractive and exploitative of people and communities. 

I would like to address three additional points in my testimony: 

1. The financial crisis inflicted enormous costs on communities, on our economy, 

and on responsible financial institutions—with repercussions that continue today. 

Communities of color, in particular, are still reeling from the crisis. 

The financial crisis exacerbated historical inequities in our financial services system and broader economy. Between 2007 and 2010, the median net worth of American families decreased by nearly 40 percent, driven primarily by a collapse in housing prices. 2 Losses were especially devastating for people of color, whose wealth was 

overwhelmingly concentrated in the form of homeownership, and whose neighborhoods were targeted by predatory mortgage lenders. Fully half of the collective 

wealth of black families and 67 percent of Latino families’ wealth—already far 

below that of whites—were destroyed during the Great Recession. 3

The big banks fueled this wave of predatory lending, by facilitating the 

securitization of high-cost loans and by directly acquiring or financing the worst 

subprime lenders. The banks further exacerbated the foreclosure crisis through abusive and often illegal mortgage servicing practices—including systematically failing 

to offer loan modifications equitably in communities of color. 4

Banks have also fueled the growth of the bottom-feeding debt buyer industry, 

which purchases charged-off consumer debts from banks and others, for pennies on 

the dollar, and pursues people through civil lawsuits and other aggressive methods—often violating Federal debt collection and consumer protection laws and people’s fundamental due process rights. These companies specialize in amassing court 

default judgments against consumers, which they use to garnish people’s wages and 

freeze their bank accounts—another form of wealth extraction that disproportionately harms communities of color. 5 Predatory lending, foreclosures, and abusive 

debt collection, meanwhile, appear in people’s credit reports and can block their access to housing, jobs, affordable insurance and other vital opportunities. 

Responsible lenders and the communities they serve were not spared the effects 

of the financial collapse and ensuing Great Recession, including loan losses resulting 

from long-term unemployment; and the ongoing challenges of operating in a depressed interest rate environment. According to the U.S. Treasury Department, the 

65 

6 ‘‘The Financial Crisis Response in Charts’’, at www.treasury.gov/resource-center/data-chartcenter/Documents/20120413—FinancialCrisisResponse.pdf. 7 ‘‘CDFI Certification: A Building Block for Credit Union Growth: Performance, Profiles, and 

Prospects for CDFI Credit Unions’’, at www.cdcu.coop/wp-content/uploads/2014/05/ 

CDFIlwhitepaperlfinal.pdf. 

U.S. economy lost 8.8 million jobs and $19.2 trillion in household wealth between 

2007 and 2009. 6

2. Strong prudential regulation and consumer protections—including a robust and 

independent Consumer Financial Protection Bureau—are crucial to avert future crises and to ensure a fair financial services system that meets the needs of people 

and communities. 

Congress enacted the Dodd–Frank Wall Street Reform and Consumer Protection 

Act in 2010, in the wake of undeniable regulatory failure and destructive lending 

that destabilized neighborhoods, exposed the financial system to broad, systemic 

risk, and nearly brought down the global economy. Among the Act’s provisions is 

a requirement that lenders assess borrowers’ ability to repay loans—a basic, common sense tenet of responsible lending that nevertheless has been cited by opponents of the Act as an example of unwarranted regulatory intrusion. 

New Economy Project and allies across New York and the country advocated for 

the creation of the Consumer Financial Protection Bureau (CFPB)—the first Federal 

agency with a core mission of protecting consumers in the financial services marketplace. Our organization has since testified at numerous CFPB field hearings; organized meetings between the CFPB and local groups, to elevate issues and inform 

the bureau’s rulemaking and enforcement; and pressed the CFPB to promulgate 

strong Federal rules to end predatory payday lending, debt collection, and abusive 

bank overdrafts. 

The CFPB plays an absolutely vital role in identifying and eliminating financial 

exploitation—a function that was sorely missing in the years leading up to the 

crash. To date, the Bureau has returned $12 billion to 29 million Americans, while 

bringing payday lenders, credit reporting agencies, and other powerful industries 

under meaningful supervision for the first time. The fact that banks are pushing 

relentlessly to weaken the CFPB is a testament to its effectiveness and its independence. 

LES People’s, the credit union whose board I chair, similarly welcomed the establishment of the CFPB and its efforts to level the playing field for responsible community development lenders. We have urged the CFPB to crack down on rampant 

abusive lending practices, including payday lending and hidden overdraft fees. 

These two financial products alone siphon billions of dollars from low income people 

and communities each year. In many markets, these high-cost loans additionally 

force a ‘‘race to the bottom’’ in which otherwise responsible lenders compete, for example, with payday lenders by mimicking the structure of these harmful loans; or 

rely on high and hidden overdraft loan fees that drain the accounts of low income 

bank and credit union customers, to compensate for low interest income and to compete with other financial institutions. 

3. Community development financial institutions (CDFIs) have a proven track 

record of meeting affordable housing, small business and consumer credit needs. 

The proposed gutting of the Federal CDFI Fund puts them at grave risk. 

After receiving trillions of dollars in TARP bailout money and no-interest loans 

from the Fed, banks have failed to meaningfully extend credit to small businesses 

and other vital sectors of the economy. New York City is 40 percent foreign-born, 

yet banks routinely bar immigrant NYC residents from opening accounts, through 

restrictive identification requirements and other discriminatory barriers. Not a single one of the big banks accepts NYC’s municipal identification card, IDNYC, as a 

primary form of ID, despite guidance from Federal regulators confirming they may 

do so, and despite pressing need. 

As banks continue to consolidate and become further removed from communities 

and local economies, community development financial institutions (CDFIs) play an 

increasingly important role in stimulating small business, affordable housing and 

other development in economically distressed neighborhoods, through fair and transparent loans and investments. CDFI-certified credit unions, including LES People’s, 

serve more than eight million people across 46 States and, despite serving low income communities, exceed the financial growth and performance of their mainstream peers. 7

Since 1994, the U.S. Treasury has provided CDFI certification and investments 

to qualifying institutions, shoring up their net worth and allowing them to grow deposits and loans, as well as attract other investors. (CDFIs must match Federal investments dollar for dollar with private sources.) CDFI investments have helped my 

66 

credit union, LES People’s, for example, to make more than $92 million in business, 

mortgage and consumer loans since our inception, and to grow in assets from $33 

million to $51 million in a few short years. Our members’ deposits are fully loaned 

out, and among the needs our credit union fulfills is lending to low income, limitedequity housing cooperatives in NYC—one of the few remaining avenues to homeownership that are accessible to low income New Yorkers. 

Given the CDFI Fund’s ability to achieve massive impact with relatively small investments, it has consistently garnered broad, bipartisan support. The Trump administration’s recently proposed FY2018 budget, however, virtually zeroes out the 

CDFI Fund, along with other vital community development programs. Federal disinvestment from a sector that is financing true economic growth and jobs would 

have a devastating impact on communities across the country, and we hope this 

funding is swiftly and fully restored. 

Thank you again for the opportunity to testify today. Unfortunately, we find ourselves in a position in which we must do everything possible to resist attacks on 

financial reform and consumer protection. I would be happy to respond to any questions you might have about the role of the financial sector in fostering economic 

growth, including our vision for a just and equitable economy. 

67 


32817007.eps

Absence of Bank Branches in Communities of Color 

New York City, 2016 

Bank Branches per 

1 0,000 Residents 

< 1 

1 -2 

- 2-3 

- 3-4 

- >4 

Population> 70% 

Non-White 

32817008.eps

NEW YORK CITY 

HIGH-COST REFINANCE LOANS MADE - 2007 

• 1 Dot a 1 Refinance Loan Made'* 

/// Population > SO% Black or Hispanic 

... fi!"fHien with onnu<t'l rotes of 304 

above: securities of comper«>te maturity 

(212) 680·5100 I www.nedap.org 

8,611 t-igh c;ost refin.,ce loens 

were made In NYC jn 2007 

[aE)Neighborhood Economic Development Advocacy Project (NEDAP) Q2009· NEDAP Any unauthorized use of this material is prohibited. 

FORECLOSURE PATTERNS - 2008 

• 1 Dot = 1 Mortgage Default* * 

/// Population > 50% Black or Hispanic 

lis of default tin nos 

were ftled ln NYC 1-4 ftsM!Iy hoMe$ In 2006. 

Sources: HMOA (2007); Profiles Publications; l/.S. Cens
69 


32817009.eps

Home Foreclosure Risk Patterns 

New York City, 2016 

Numbt! ol90-day pre fore<losure notkes 

pet 1,000 ownet-oc<upied units, by zip code 

1-25 

25 · 50 

. 50 -75 

• MO<ethan75 

// Population> 7096Non Wh~e 

Number of pre·foredosure notices in NYC: 41,942 

This <NpdisplaY' 90-day pre-fo<eclosure notices on 1·4 familyho.,... co- condos, and other homes (dupikatc notices !!J(cludcd> 

Sources: NYSO.potlmtntolfinor<idSM<Ice> /2016);~nCommunilySu"')'I201S) 
70 


32817010.eps

Conventional Home Purchase Lending per 100 Owner-Occupied Units 

New York City 

Conventional Home Purchase loans Made 

per 100 Owner·Occupied Units (2012). • 

O tess than 1 mortgage 

D 1 • 5 mortgages 

• More than 5 mortgages 

~pulation >SO% Black()( Hispani< 

*Conv<nbonol I<>W ll'acl~onol mcrtgages, not ln•:,.d by FHA 01 VA. 

Soorces: Home H<lttfl'fi" Dlsclo..,.• Act (2011); US. CMSUS (1010) 
71 


32817011.eps

New York, NY 

Default Judgments in Debt Collection Lawsuits 

Number of Default Judgments 

per 1,000 Residents, by zip code 

0-6 

6-7 

7-8 

· 8-12.6 

0 Population > 75% Non-White 

D NYC Civil Court Jurisdiction 

,.,,,tutepoptlatlon:To!a ~ exduclng noo-Hispa>< 

Sotms: NM Y«f< StmtOfflctofCO<Il A6Mstrotlon(1012); IJ.S. 
72 


32817012.eps

Mr. Thomas J. Cuny 

ComptrOller oft he Curreney 

Office of the Comptroller of the Cummcy 

Washington, DC 

regs.comments'iiO«.Ireas.gov 

Re: Exploring Special Purpose National B.1nk Charters ror Finll'fh Companies 

Dear ComptrOller Cuny: 

Janu;uy 13,2017 

The unde~igned consumer, civil rights, and conuuunily groups write to express our strong opposition to 

the proposed new federal nonbank lending chmers that would enable lenders 10 avoid stale interest rate 

caps, other stale protections, and Slate oversight State laws often operate as the primary line of defense 

for consume~ and small businesses; thus, lite proposal puis them at great risk. 

The OCC must not undermine slate rate caps. Interest rate caps are the ples~ most effective way to 

protect borrowers from unaffordable, high-rate loans and 10 align the interests oflende~ and borrowers. 

However, given the general absence of federal usury eaps, lenders underthe OCC's proposal would ha'"' 

no functional limit on the interest rates and related fees they could charge. This would effectively nullify 

critical existing stale rate caps. Today, over 90 million people live in 1 S stales plus D.C. that enforce rate 

caps to prevent abusive high-cost short~erm loans and collectively save over S8 billion in high-cost loan 

fees. Many more states have rate caps on longer term loans: a S2000, M'o-year loan that has an APR 

above 36%, including all fees, would violate the law in 30 slates and D.C. Many of these stales have 

never allowed high-cost loons, aggressively enforcing their stricl usury limits. Other states used 10 

authorize exemptions 10 their rate caps, but1\1versed course because of the damage caused 10 consumer.; 

and their communities. In both cases, stales have worked tirelessly over many years to enact and enforce 

laws 10 protect against the abuses ofhigh-coslloons and have wililslood numerous attempts by 

unscrupu ousle de~ to circumvent these protections. The OCC, with the Slroke of its pen, \\ill put 

millions of poople and yea~ of stale le\'ei enforcement at risk of exploitation by high cos tl ende~. 

Tht OCC must not wtaken stales' ability to O\'trset ltndtrs and take action to prtvtnt harmrul 

ltnding practices. Beyond interest rate caps, the proposal weakens states' ability to protect consu e~ 

and small businesses tilrough supmision and enforcement. The OCC's charter proposal enables 

companies to avoid stale licensing regimes and oversight by slate regul ~ and attorneys general. Even 

where AGs would retain enforcement authority, their ability to investigate abuses would he curtailed. 

The OCC alone cannot prevent every problem. Stales are closer to the ground and are more likely to lake 

quick action wben problems are still small and local, before abuses become nationwide problems 

aU!'3Cting the attention of !he OCC. The OCC should not take stale law enforcers off the btat of 

preventing predatooy lending. 

The OCC must nol undtrmint elforts to provide fair and inclusirt ltnding practicts, particularly for 

people of color and low- and moderate-income consumers, in the areas where they operate. While the 

fintech indusll)' has the potential to encourage innovation, we have also seen costly payday lenders hide 

behind the costume of•fintech.' The OCC's proposal promotes the expansion of questionable lending 

practices that are not only not subject to Slate interest rate limits or state-level enforcement, but also 
73 


32817013.eps

would not be subject to the Commtmity Rei.nvestmem Act's requirement to provide responsible, not 

predatory, cre<lit. 

The OCC's legal authority to charter non-depository lenders unilaterally, without congression.1l approval, 

is also doubtful. For all of the above reasons, theOCC should not charter such entities even if it has 

power to do so. 

We very much appreciate your allention to our concerns. 

Sincerely, 

A New Leaf 

Action Advocacy Law Office 

ACTION Housing Inc. 

ActionNC 

Advantage Housing, Inc 

AFSCME Monl1lna Council 9 

AlaskaPlRG 

Alexander Counl)• Habitat for Humanity 

Allied Progress 

Americans for Financial Reform 

AMOS Project 

Arcade Credit Union 

Arizona Commw1ity Action Association 

Arkansans Against Abusive Payday Lending 

Ashe,ille Area !Ubitat for Humanity 

Baltimore CASH Campaign 

Baltimore Community Real Estate Center, Inc 

Bonnie Wright & Associates 

BPFNA - Bautistas porIa Paz 

Bread for the World· Sou~1 Dakoca 

Brooklyn Legal Services Corporation 

Bucks County Women's Advocacy Coalition 

CAFE Montgomery MD 

California Rei.nvestment Coalition 

Cambridge Economic Oppo!1unity Comminee 

Carolina Small Business lkvclopmcnt Fund 

Catalyst Miami 

Catholic Community Sef\ices of Southern AZ 
74 


32817014.eps

Connecticut Citizen Action Group 

CCCS of WNC,Inc. DBA On Track Financial Education & Counseli118 

Cedar Grove lnstitU1e for Susuinablc Communities 

Ceiba 

Center for Economic Integrity 

Center for Housing and Communi!)• Studies 

Center for NYC Neighborhoods 

Center for Responsible Lending 

Central Florida Jobs with Justice 

Century Employees Savings Fund CU 

CEO Pipe OrgansiGoldcn Ponds Faon 

ChbayaCDC 

Children FirslfCommunities In Schools ofBuncornbe County 

Citizen Actionnllinois 

Civil Justice, Inc. 

Clarili 

Cambridge Neighbomood Apartment Housing Services (CNAHS), Inc 

Coalition on Hom<lessoess & Housing in O!lio 

Coatesville Center for Communi!)' Health 

Colorado Center on Law & Policy 

Colorado Coalition for rhe Homeless 

Community Action Association of Pennsylvania 

Communi!)' Action Committee of the I..ehigh Valley 

Community Development Nelwork of Maryland, Inc. 

CommWlil)' Economic Development Association of Michigan (CEO AM) 

Communi!)' Empowerment Fund 

Community lnvestm<nt Fund oflndiana 

Community Law Center, Inc. 

Community Legal Sel'\iccs, Inc., of Philadelphia 

Connecticut Association for Human Senices 

Connecticut Fair Housing Center 

Connecticut Legal SC!\ices, Inc. 

Consumer Action 

Consumer Federation of America 

Consumer Federation of California 

Consumers for Auto Reliability and Safety 
75 


32817015.eps

Coosumm Union 

CoP!RG 

Covenant House 

CWA 

Demos 

DiSirict Councii37Legal Services 

Durham Regional Financial Center 

Eastside CDC/lEAl' 

Eastside Community Development Corporation 

Economic Progress Institute 

Empire Justice Center 

Episcopal Diocese of North Carolina 

Every Child Matters in New I-L1mpshire 

Fair Share 

FayeUe\ille Area Habitat for Humanity 

Financial Pathways of the Piedmont 

Financial PrOiection taw Center 

First Unitarian Chlll'Ch of Philadelphia 

Florida Alliance for Consumer Protection 

Florida \ltia~ for onsl!lll~r Pro1~clioo (FI.ACP) 

F1otida Alliance for Retired Americans 

Florida Consumer Action Network 

Florida legal Services, Inc. 

Georgia Watch 

Gila County Community Services 

Gowen Consulting 

Granite State Organizing Project 

Greater Yellowstone Central Labor Council 

Greensboro Housing Coalition 

Habitat for Humanity CabatTUS Coun~· 

Habitat for Humanity Gc01gctown County 

fL1bitat for Humanity New York City 

Habitat for Humanity of Florida 

Habitat for Humanity of Forsyth County 

Habitat for Hllll1anity of Gaston Coun · 

Habitat for Humanity of Greater Greensboro 
76 


32817016.eps

Habitat for Hwnanity or Indiana 

Habitat for Humanity of Lancaster Cowlly (SC) 

Habitat for Humanity ofN011h Carolin.t 

Habitat for Humanity of Thomasville NC Area 

Hawaii Appleseed Center for Law and Economic Justice 

Ha)~' ood Habitat for Humanity 

Heallh, Education, and Le&al Assistance Project 

Heanland Alliance for Human Nee<ls & Human Ri&hts 

Helpin& Families In Need 

Henderson County Habitat for Humanity 

Hispanic Baptist Con'<ention of Texas 

Holistic TransfollWitions 

HomeFree-USA 

Homeword 

HOPE or Evansville 

Housin& AllianceofPe nsy v:~ ia 

Housin& and Family Sen-ices or Greater New York, Inc. 

Housin& Opportunities of Beaver County 

Howard County Office or Consumer Protection 

Ulioois Assel Bl!ilding Group 

Indiana County Community Action Pra&ram, Inc. 

Indiana Institute for Workin& Families 

Innovative Systems Group Inc. 

lrvin&ton Development Otganization 

Jacksonville Area Legal Aid, Inc. 

JASA!Legal Services for the Elderly in Queens 

Jesuit Social Research Institute 

Jewish Federntion of Greater Seanle 

JustHaMSt 

Keystone Progress 

Keystone Research Center 

Kin& Park Oevelop~ c"Ot Corporation/Build Fund 

La Fucrza Unida Community De\<elop!llent Corp 

Laborers' Local # 1686 

Latino Community Credit Union 

Law Foundation of Silicon Valley 
77 


32817017.eps

Lazarus FiJJaocial Planning, LLC 

Legal Aid Sociel)' of Palm Beaeh Coun~·, Inc. 

Legal Aid Society of the District ofColuml>ia 

Legal Senices NYC 

Legal SmicesofNew Jersey 

Legal Senices of Southern Piedmont 

Lexington Area Hal>itat for Humanity 

LifeStyles of Maryland Foundation, Inc. 

Lower East Side People's Federal Credit Union 

lutheran Adv001cy ~finistryin PA 

Main Street Alliance 

Maine Center for Economic Policy 

Making Work Pay PA Coalition 

MakingChange, Inc. 

Maryland CASH Campaign 

Maryland Consruner Rights Coalition 

MASSPIRG 

MFY Legal Seniees, Inc. 

Michigan Coalition Against Hornelessness 

1---Ulil~l)' A$1illl!llCC ProjQCI 

Mission Asset Fund 

Mississippi Center for Justice 

Missoula Area Centr:ll Labor Council, AFL·CIO 

Missorui Faith Voices 

Montana Organizing Project 

Montgomery County Commnnil)' Action Development Commission 

Montgomery County, ~13!) 1and Communi!)' Action Board 

MOl hers and Families of MurdeT<'<l Children 

Mountain State Justice 

Nonhem Arizona Council of Governments 

National Development Council 

National Association for Latino Community Asset Builders 

National Association of Consumer AdvO<:ates 

National Association of Social WOlters, West Virginia Chapter 

National Center for Law and Economic Justice 

National Co:llition ofiOO Blaek Women, Phoenix 
78 


32817018.eps

Natiooal Conswner uw Center (on be~alf of its low-ineome elients) 

Natiooal CoWlcil of La Raz.1 

Natiooal Fair Housing Alliance 

Natiooal Rural Social Wort Caueus 

NCAFL-CIO 

NC CoWlcil of Chutehes 

NC Justice Center 

NC Rural Center 

Ncar West Collaborative 

Neighborhood Economic Dev~lopmcnt Corp 

Neighborhood Trust Financial Partners 

Ncighbor\Votts Great Falls 

New Economy Project 

New Hampsltire Legal Assistance 

New Jersey Citizen Action 

NHS of Baltimore 

North Carolina Assets AUiance 

North Carolina Conference of the United Methodist Church 

North Carolina Conswners CoWlcil 

North Carolini PIRG 

North Carolina Veterans CoW1Cil 

North Dakola Economic Security and Prosperity Alliance 

Northwest Indiana Reinvestment Alliance 

NY StateWide Senior Action Council 

NYPIRG 

Ohio Valley En,ironmental Coalition 

Oklahoma Policy Institute 

One Colorado 

OneAmerica 

Open Htanh, Inc 

Opponunity Alliance Nevada 

()pi Inference LLC 

Oregon Food Bank 

Our Savior Lutheran Chutth & Campus Minislry 

PathWa}~ PA 

Pennsylvania Council ofChaJl(ers, Military Officers Association of America 
79 


32817019.eps

Pennsylvania Cooncil ofCbllJ'Ches 

Pennsylvania Pubtic Interest Research Group 

Pennsylvania War Veterans Council 

People's Action 

PICO National Nenvork 

Pisgah Legal Strvices 

Progressive Congress Action Fund 

Progressive Leadership Alliance of Nevada 

Prosperity Indiana 

Public Good Law Center 

Public Interest Law Center 

Reinvestment Fund 

Reinvestment Pallners 

Rural Dynamics, Inc 

Sargent Shriver National Center on Poverty Law 

SC Appleseed 

Soutl1 Baltimore Pa11nership 

South Carolina Association of Habitat Affiliates 

South Dakocans for Responsible Lending 

Soulhem Pov~rty Law Cenler 

SoutlllVCSt CDC 

St Barnabas Episcopal Church 

Statewide Poverty Action Network 

S)~ternic Change Team, Unitarian Universalist Church of the Nonh Hills 

Tennessee Citizen Action 

Texas Appleseed 

Texas Legal Ser\1ces Center 

The Capital Good Fund 

The Collaborative 

The Interfaith Alliance of Colorado 

The Leadership Conference on Ci,11 and Human Rights 

The Midas Collaborative 

The One Less Foundation 

The Working World 

Thermal Bell Habitat for Humanity 

Thrive Altiance 
80 


32817020.eps

Union-Snyder Community Action Agency 

Unitarian UniveiS<1list Legislative Advocacy Network (UUPLAN) 

Unitarian Universalist Pennsylvania Legislative Advocacy Network (UUPLAN) 

United Methodist Advocacy in Pennsylvania 

United Valley lnterfaitll Project 

United Way of Erie County 

United Way of Frederick Counl)' 

United Way of Greater Greensboro 

United Way of the National Capital tlrca 

Upper Y adkin Valley Habitat for Hwnanity 

Urban Affairs Coalition 

Urban Asse1 Builders 

Urban Community AgriNomics 

Urban llomesteading Assistance Board 

Virginia Citizens Conswner Council 

Virginia Olganizing 

VOCAL· NY 

Washington Asset Building Coalition 

Washington Heights and Inwood IXvelopment Coporation 

W~hington Low Income Hol!!ing Alliance 

Washington Student Association 

West Virginia Center on Budget and Policy 

West Virginia Citizen Action Group 

West Virginians for Affordable Health Care 

Westchester Residential Opportunities Inc. 

Westminster Eoooomic IXvelopmenJ Initiative, Inc. 

Westmoreland Community Action 

Wilson Area Habitat for Hwnanity 

Woodstock Institute 

Yakima County Asset Building Coalition 
81 

1Public Law 73–66 http://www.legisworks.org/congress/73/publaw-66.pdf. 2Public Law 111–203 https://www.gpo.gov/fdsys/pkg/PLAW-111publ203/html/PLAW111publ203.htm. 3Public Law 95–523, 92 Stat. 1887, https://www.gpo.gov/fdsys/pkg/STATUTE-92/pdf/ 

STATUTE-92-Pg1887.pdf. 

PREPARED STATEMENT OF WILLIAM E. SPRIGGS 

PROFESSOR OF ECONOMICS, HOWARD UNIVERSITY, AND CHIEF ECONOMIST, AFL–CIO 

MARCH 28, 2017 

Thank you to Chair Mike Crapo and Ranking Member Sherrod Brown for this invitation to give testimony before your Committee today on issues of policies to promote economic growth. I am happy to offer this testimony on behalf of the AFL– 

CIO, America’s house of labor, representing the working people of the United States; 

and based on my expertise as a professor in Howard University’s Department of Economics, whose alumni include your colleague Senator Kamala Harris. 

Financial firms and monetary policies can and do play a role in shaping economic 

growth. But, it is important to first note that economic growth characterizes events 

in the real economy; the production and sale of goods and services. The key elements of growth are the growth rate of the labor force, the skills of the labor force 

and the productivity of the labor force. Financial markets play a role in insuring 

that investments add to productive capital that can boost the productivity of workers, and there are fair terms for workers to make investment in their education and 

skill attainment. And, fair and equitable access to financial institutions can insure 

that households can have enough liquidity to smooth their consumption to be resilient during economic downturns and in retirement, and to make investments in capital, like housing, that can boost employment. 

To have sustained growth, the financial system must remain stable. When banks 

grow too large and present systemic risks to the system, or when banks can create 

shadow investments trading in their own debt, the system itself becomes a risk. 

Glass–Steagall, the Banking Act of 1933, 1 provided a period of such stability. The 

financial collapse of 2007–2008 clearly demonstrated that the financial system cannot self-regulate. The fallout in the real economy was deep and far reaching, causing 

a collapse in private and public investment, and the stripping of wealth of the 

household sector by depleting savings to keep households going. Nine years away, 

we have yet to restore public investment to the level needed to sustain strong 

growth. So, similarly to the lessons learned from the financial collapse of the Great 

Depression, Dodd–Frank, the Wall Street Reform and Consumer Protection Act of 

2010, 2 addresses the excesses that the financial collapse of the Great Recession 

demonstrated create a system of great economic risk. For that reason, the AFL–CIO 

supported the Dodd–Frank reforms and continues to believe it prudent to defend 

them as necessary for sustained growth. 

It is key for monetary policy to provide enough liquidity to the market to allow 

for investment in productive capital, and enough liquidity for households to make 

long term purchases like automobiles and houses; and with regulation to reduce systemic risks from market concentration and discrimination in access. A necessary 

condition for growth is monetary policy that adheres to the Humphrey–Hawkins 

Act, the Full Employment and Balanced Growth Act of 1978, to keep Americans at 

work, letting the economy run at a rate that keeps unemployment low. 3

In the real economy, many policies fostered a period of shared prosperity and 

rapid economic growth in the United States. From 1946 to 1979, the wages of American workers grew with their productivity. And, income gains were roughly equally 

shared throughout the income distribution. There were many Federal policies that 

invested in the American people and put the Government on the side of raising 

wages. In sum, these policies promoted shared prosperity, so incomes grew at each 

income quantile. Economists are converging on a consensus that equality promotes 

faster economic growth. And, equality provides the basis for enhancing social mobility and a more meritocratic society. 

Several key Federal programs stand out for enhancing shared prosperity. The GI 

Bill, gave many World War II veterans access to college by paying their tuition and 

giving them living stipends; home ownership through reduced down payments and 

low interest loans—two tickets to the middle class. 

The introduction in 1946 of Federal legislation to establish a national school lunch 

program decreased the food insecurity of children. Participation of children in interVerDate Nov 24 2008 12:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00085 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\03-28 ZZDISTILLER\32817.TXT JASON
82 

4 Craig Gundersen, Brent Kreider, and John Pepper, ‘‘The Impact of the National School 

Lunch Program on Child Health: A Nonparametric Bounds Analysis’’, Journal of Econometrics, Vol. 156 (January 2012): 79–91; Peter Hinrichs, ‘‘The Effects of the National School Lunch Program on Education and Health’’, Journal of Policy Analysis and Management, Vol. 29 (Summer 

2010): 479–505. 5Daniel Tope and David Jacobs, ‘‘The Politics of Union Decline: The Contingent Determinants 

of Union Recognition Elections and Victories’’, American Sociological Review, Vol. 74 (October 

2009): 842–864; Jake Rosenfeld, Patrick Denice, and Jennifer Laird, ‘‘Union Decline Lowers 

Wages of Nonunion Workers: The Overlooked Reason Why Wages Are Stuck and Inequality Is 

Growing’’, Economic Policy Institute, (August 30, 2016) at http://www.epi.org/files/pdf/ 

112811.pdf. 6George Wehby, Dhaval Dave, and Robert Kaestner, ‘‘Effects of the Minimum Wage on Infant 

Health’’, National Bureau of Economic Research, NBER Working Paper No. 22373 (June 2016); 

William M. Rodgers III, ‘‘The Impact of the 1996/97 and 2007/08/09 Increases in the Federal 

Minimum Wage on Food Security’’, manuscript, Rutgers University (September 2015) at 

https://www.researchgate.net/publication/266023361-The-Impact-of-the-199697-and-20070809- 

Increases-in-the-Federal-Minimum-Wage-on-Food-Security. 7Public Law 85–864 (September 2, 1958) https://research.archives.gov/id/299869; Saul B. 

Klaman, ‘‘The Postwar Pattern of Mortgage Interest Rates’’, in Saul B. Klaman (ed.) The Postwar Residential Mortgage Market (Princeton University Press, 1961) sited from: http:// 

www.nber.org/chapters/c2341.pdf, University of Pennsylvania, ‘‘University History, Tuition and 

Mandated Fees, Room and Board and Other Educational Costs at Penn Since 1900: 1950–1959’’ 

web page: http://www.archives.upenn.edu/histy/features/tuition/1950.html. 8Patrick Kline and Christopher Walters, ‘‘Evaluating Public Programs With Close Substitutes: The Case of Head Start’’, National Bureau of Economic Research, NBER Working 

Paper No. 21658 (October 2015); Hilary Shager, Holly S. Schindler, Katherine A. Magnuson, 

Greg J. Duncan, Hirokazu Yoshikawa, and Cassandra M.D. Hart, ‘‘Can Research Design Explain 

Variation in Head Start Research Results? A Meta-analysis of Cognitive and Achievement Outcomes’’, Educational Evaluation and Policy Analysis, Vol. 35 (March 2013): 76–95. 9David W. Brown, Amanda E. Kowalski, and Ithai Z. Lurie, ‘‘Medicaid as an Investment in 

Children: What Is the Long-Term Impact on Tax Receipts?’’ National Bureau of Economic Research, NBER Working Paper No. 20835 (January 2015). 

ventions to address basic food needs has been shown to improve the health of children and have lasting impacts on educational attainment. 4

During this period, broad political consensus maintained a neutral National Labor 

Relations Board that maintained balance in labor management relations. The period 

allowed for the continued ability of workers to exercise their right to organize. So, 

during this period, the share of workers who were organized rose, as did their diversity. At higher levels of union density all workers benefit, both union and nonunion 

in striking deals to divide the benefits of rising productivity. 5

Each President during the period signed legislation to raise the minimum wage 

and keep all wages in step with general growth in productivity and wage gains. This 

spread the benefits of increases in productivity to the wages of the lowest quantile; 

insuring that work paid. Increases in the minimum wage are linked to reducing food 

insecurity and lowering low-birth weight and premature babies for less educated 

women. 6

Republican President Dwight Eisenhower, when the former Soviet Union 

launched Sputnik in October 4, 1957, got the Democratic Senate to pass legislation 

in less than 1-year to launch the National Defense Student Loan program that assured American students could borrow enough money to cover an Ivy League education at interest rates below the prime rate. Students who were supported by the 

loans but accepted jobs in K–12 education had their loans forgiven. 

American became the world’s most educated country with the highest share of its 

workforce holding college degrees. The NDSL provided the money for the teacher 

corps that then produced the inventors of the personal computer and internet. 7

President Eisenhower also launched one of the largest peace time Government 

programs in creating our current modern interstate highway system. Not only did 

this create many middle-class construction jobs, it vastly improved America’s infrastructure and lowered transportation and production costs for American business. 

It spurred the expansion of new industries like motels and reduced the isolation of 

rural communities. 

In the 1960s, President Lyndon Johnson expanded the role of the Federal Government in investing in the early education of America’s children. The Head Start program, launched in 1965 has proven to be a valuable program in changing the longrun prospects for children from low-income families: increasing their success in 

school, earnings in adulthood and lowering criminal activity. 8

Also in 1965, President Johnson put in place Medicaid and Medicare. Medicaid 

has been shown to increase the educational attainment and earnings of women who 

had greater access to Medicaid as children, and boosts the taxes paid by young 

adults who were helped by Medicaid. 9 Medicare ended racial segregation in the proVerDate Nov 24 2008 12:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00086 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\03-28 ZZDISTILLER\32817.TXT JASON
83 

10Liz Westin, ‘‘OECD: The U.S. Has Fallen Behind Other Countries in College Completion’’, 

Business Insider (September 9, 2014) at http://www.businessinsider.com/r-us-falls-behind-incollege-competition-oecd-2014-9. 11Thomas Mortenson, ‘‘State Funding: A Race to the Bottom’’, American Council on Education 

(Winter 2012) at http://www.acenet.edu/the-presidency/columns-and-features/Pages/statefunding-a-race-to-the-bottom.aspx. 12 Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides, ‘‘Redistribution, Inequality, and Growth’’, IMF Staff Discussion Note, SDN/14/02 (February 2014) at https:// 

www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf. 13 Era Dabla-Norris, Kalpana Kochhar, Nujin Suphaphiphat, Frantisek Ricka, and Evridiki 

Tsounta, ‘‘Causes and Consequences of Income Inequality: A Global Perspective’’, IMF Staff DisContinued 

vision of health in the United States, improved the lives of older Americans and 

began narrowing the life expectancy gap between whites and African Americans. 

These investments in American children and the American people, and the investment in public infrastructure put the Federal Government clearly on the side of empowering Americans to achieve a high level of productivity. It provided American 

corporations the largest pool of highly educated and healthy workers to propel 

American growth. And, the Government was clearly on the side of American workers in getting their fair share of the increased productivity. Wages rising with productivity insured all the correct market signals in the labor market would encourage 

Americans to make the investment in their skills. And, by keeping unemployment 

rates low, fiscal, and monetary policy gave incentive to firms to train workers, invest in their productivity and aim at retaining those workers. 

Since that era, most of those policies have been undermined. In the 1980s and 

again in the 2000s the NLRB too often took positions favorable to management to 

limit workers organizing; raising the minimum wage went from a bipartisan effort 

to a partisan battle; the wages for the middle stagnated and the wages at bottom 

fell. Profits as a share of national income rose, but taxes from corporate America 

shrank, putting more of the Nation’s tax burden on workers as the wage share of 

national income fell. Once the United States stood out for its highly educated work 

force, as recently as 1995 ranking first for the share of workers with college degrees, 

but by 2012 the United States ranked 19th among 28 advanced economies. 10 In 

1975 State and local governments provided 63 percent of all expenditures on higher 

education, by 2010 that figure fell to 34.1 percent resulting in a trend of ever rising 

tuition for individual students. 11

The financial collapse of 2007–2008 further crippled American manufacturing, 

forcing American automobile manufacturing into bankruptcy and reorganization, 

and crushed public sector investment beyond de-investment in higher education. 

Falling values of pension investments and drops in revenue, led to the greatest drop 

in State and local public investment since the Great Depression. 

Americans see politicians that argue for tax breaks for the top 1 percent, and a 

retreat on policies to invest in them while their wages stagnate and corporations 

are given support to suppress those wages, hours and working conditions. This is 

a great source of cynicism as workers no longer believe in ‘‘trickle down’’ economics. 

Now most economists agree. The International Monetary Fund (MF) and the Organization for Economic Cooperation and Development (OECD) find that income inequality hurts growth. 

The IMF finds that near term growth over the business cycle, roughly 5 years, 

is slower and of shorter duration in those advanced economies where net income inequality is higher; where net income inequality considers market-based income (or 

gross inequality) net of income transfer programs (safety-net and other redistributive programs). 12 There are various reasons for this. At high levels of inequality, 

those at the bottom of the income distribution are more vulnerable and lack resiliency to absorb downward shocks in income. Workers also become highly leveraged 

to keep up when the economy expands, increasing systemic risks for the economy. 

Importantly, the IMF find that redistribution of income has no effect on growth, but 

inequality does. This means that concerns that safety-net programs slow growth by 

reducing labor supply and effort is not shown in the data. But, the effects of inequality do show. So, the net benefit of redistribution that lowers inequality is clear. 

Focusing on income distribution more specifically, the IMF finds that when 

growth goes up disproportionately to the top 20 percent of the income distribution 

that national income growth—GDP per capita—falls. Clearly, policies that aim to 

increase the post-tax income of the top do not trickle down; they instead slow overall 

growth. They further find that programs that increase access to education and 

health in particular, that help the middle class and the poor specifically, reduce inequality, and spur growth. 13 And, that labor market policies that do not exclude the 

84 

cussion Note, SDN/15/13 (June 2015) at https://www.imf.org/external/pubs/ft/sdn/2015/ 

sdn1513.pdf. 14Florence Jaumotte and Carolina Osorio Buitron, ‘‘Inequality and Labor Market Institutions’’, IMF Staff Discussion Note, SDN/15/14 (July 2015) at https://www.imf.org/external/ 

pubs/ft/sdn/2015/sdn1514.pdf. 15 ‘‘OECD, In it Together: Why Less Inequality Benefits All’’, (OECD Publishing: Paris, 2015) 

at http://www.keepeek.com/Digital-Asset-Management/oecd/employment/in-it-together-whyless-inequality-benefits-all-9789264235120-en#.V-FiwCgrKhc. 16 Aida Caldera Sanchez and Oliver Roehn, ‘‘How do Policies Influence GDP Tail Risks?’’ 

OECD Economics Department Working Paper (forthcoming). 17 Congress of the U.S., Congressional Budget Office, Trends in the Distribution of Income Between 1979 and 2007, October 2011 at http://www.cbo.gov/sites/default/files/cbofiles/attachments/10-25-HouseholdIncome.pdf. 18 Ryan Decker, John Haltiwanger, Ron S. Jarmin, and Javier Miranda, ‘‘Where Has All the 

Skewness Gone? The Decline in High Growth (Young) Firms in the U.S.’’, NBER Working Paper 

No. 21776 (December 2015) at http://www.nber.org/papers/w21776. 19Simon Gilchrist and Egon Zakrajsek, ‘‘Customer Markets and Financial Frictions: Implications for Inflation Dynamics’’, Federal Reserve Bank of Kansas City, 2015 Economic Symposium: 

Inflation Dynamics and Monetary Policy, (August 2015) at https://www.kansascityfed.org// 

media/files/publicat/sympos/2015/2015gilchristlzakrajsek.pdf?la=en. 

poor from accessing middle income jobs spur growth. In short, the very policies pursued by the United States across Democrat and Republican Presidencies during the 

1946 to 1979 era. 

The IMF further investigates and finds that the growth in inequality is mainly 

driven by gains at the top 10 percent and is tied together with a reduction in the 

share of workers in labor unions to bargain for a higher share of gains to the middle 

and the lowering value of minimum wages that protect earnings at the bottom. The 

report also found evidence that declining top marginal income tax rates increases 

inequality, as does financial deregulation. Technological change was not a driving 

force. 14

The OECD research finds a sizable impact on growing inequality and slowing 

growth. Specifically, the decline in the share of income for the bottom 40 percent 

of income distribution hurts growth the most. The OECD finds a clear link between 

the shrinking income share of the bottom 40 percent and a drop in educational investment. Clearly, an effect of rising inequality that can be mitigated is to increase 

public investment in education targeted toward the bottom 40 percent. They also 

find that policies that can increase women’s labor force participation, like supporting child care, paid sick days and family leave, also reduce inequality, and promote growth. And, raising labor standards to reduce nonstandard and irregular 

work, reduce poverty and inequality, and promote growth. 15

OECD research also finds that increased centralized bargaining structures, like 

those that can come from higher labor union density, help to reduce the risk of extreme failures from economic shocks. And, it is also the case that higher minimum 

wages reduce the risks of very negative extremes from economic shocks. Perhaps explaining stability in the United States economy during the 1946 to 1979 period. 16

The evidence from the IMF and OECD that has been built on a growing economic 

literature on the effects of inequality are reassuring in understanding what helped 

form greater political and social cohesion in the United States from 1946 to 1979 

when U.S. productivity, income growth and educational attainment led the world. 

The loss of faith of American workers in the system has risen with policies that 

have promoted inequality, that reversed patterns of investing in America and Americans and led to rising inequality that has slowed economic growth. There can be 

little social cohesion when policies consistently favor those at the top, as they do 

not help growth. 

Since 1979, incomes have grown very unequal in the U.S. 17 This growth in inequality has been accompanied by several other discouraging factors. Among those 

factors has been a decline in new establishment creation including small businesses. 

The creation of new firms is related to product innovation and labor market reallocation. These two help increase aggregate productivity, a key to faster economic 

growth rates. 18

Firm growth is dependent on the growth of their customer base. 19 When there 

is broadly shared prosperity more households have their budget constraint expanded; resulting in a larger increase in potential customers. When the economy 

produced shared prosperity, new establishments were created without hurting the 

market share of large firms. But, when income growth is limited, there is a smaller 

increase in potential customers. Customer growth becomes a zero-sum game. Firms 

with adequate liquidity compete by lowering prices or buying competitors. But, lowering costs by lowering wages means a competition for customers that lowers the 

incomes of some households, further shrinking the aggregate customer base. In 1980 

85 

20Decker, Haltiwanger, et al. (2015). 21 Russell Sage Foundation Chartbook of Social Inequality at http://www.russellsage.org/ 

sites/all/files/chartbook/Income%20and%20Earnings.pdf. 

when the Federal Reserve deliberately created a slowdown in the economy, incomes 

dropped as did wages. The depth of the drop was the most severe since the Great 

Depression to that point. The slowdown was achieved greatly limiting access to liquidity. Real wages for Americans fell, accommodated by a fall in the real value of 

the minimum wage. The result was rise in income inequality, and a slowing of the 

growth of the customer base. And, a trend of declining new establishments ensued, 

as expected initially in the retail sector; the one tied directly most directly to need 

for the growth of a broad customer base. 20

Figure 1 shows the difference between the broadly shared growth of incomes from 

1947 and 1979 with the period from 1979 to 2012. Fast and equal growth before 

1979 has given way to negative growth at the bottom for workers like those who 

keep our schools in order as crossing guards, cafeteria workers or janitors (for those 

workers most affected by policies that keep unemployment rates too high and away 

from full employment) and meager growth for the rest of America’s workers in the 

bottom 80 percent. 21

Indeed, between 1992 and 2015, there is a high correlation between income 

growth in each portion of the income distribution and the growth rate in the formation of new establishments in the following year. But, that correlation is more pronounced for income growth from the bottom up through the upper middle income 

fifth than between the top 20 percent and new establishment formation. When incomes grow widely, more potential customers make it easier to create a firm to take 

advantage. Increases among the highest income groups are more likely to increase 

the intensity of demand (spending more money on the same things) than demand 

of more goods. With this correlation, clearly the rate of new establishments will be 

lower in the post 1979 era of rising inequality and modest income growth for the 

bottom 80 percent. 


32817021.eps
86 

22 Calculations based on authors calculations from U.S. Bureau of Labor Force Statistics, Consumer Expenditure Survey data, and Business Employment Dynamics data. The correlation is 

between pre-tax income growth by quintile reported in the Consumer Expenditure data and average quarterly New Establishment Rate data for each year from the Business Employment Dynamics data. The reverse correlation, using the rate of new establishments correlated to income 

growth the following year is much lower, suggesting the causation is more likely that income 

growth leads to new establishment formation. 23Federal Reserve Banks of New York, Atlanta, Boston, Cleveland, Philadelphia, Richmond, 

St. Louis, 2015 Small Business Survey Report on Employer Firms (March 2016) at https:// 

www.newyorkfed.org/medialibrary/media/smallbusiness/2015/Report-SBCS-2015.pdf. 

Figure 2 shows the correlation between income growth of the bottom 80 percent 

of the income distribution, roughly households with incomes less than $110,000 a 

year, and the rate of new establishment formation in the following year, and for the 

top 20 percent of the income distribution. The correlation for the bottom 80 percent 

is presented to summarize the relationship between each of the lower fifths of the 

income distribution (the lowest fifth of the household income distribution making 

less than roughly $22,500 like meat packers and textile workers, lower-middle income households making less than $42,600 like computer control machine tool operators and bus drivers, middle income households making less than $68,200 like airplane mechanics and fire fighters and those in upper middle income households like 

air traffic controllers and registered nurses) who are the backbone of America’s 

working families with new establishment formation. 22 New establishment creation 

needs accommodating financial conditions, but more importantly first needs customer growth through widely shared income growth. 

From 2014 to 2015 when all parts of the income distribution showed income 

growth, the share of small firms with employees reporting profitability and rising 

revenues increased from 15 to 27 percent, and from 21 to 26 percent. In 2015 among 

growing and start-up firms, credit availability ranked fourth among their challenges, mentioned half as often as the more highly ranked problems of hiring and 

cash flow. While only 47 percent of small firms with employees applied for funding, 

61 percent did so to expand their business. Firms were more successful borrowing 

from small banks than large banks; overall, 79 percent of firms who applied for 

funding received at least some funding. 23 So, the data on small business financial 

demand point to responding to growing opportunities from rising revenue and to 


32817022.eps
87 

fuel growth. They also point to the need of financial regulation to insure there is 

fair access to capital. 

The data suggest that promoting new establishments (including small business) 

requires an economy that creates broad based income growth for all workers, and 

supportive small banks close to the action of small business and willing to invest 

in their growth; that is an economy that needs regulations to protect workers and 

protect the viability of a competitive banking landscape. Legislation like Dodd– 

Frank is necessary to limit systemic risk and excesses of exploiting consumers. Sustained growth needs conscious Government investment in Americans, in their 

health and their education, and in the Nation, in its environment and its infrastructure. 

88 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM ROBERT HELLER 

Q.1. GDP grew 1.9 percent in the fourth quarter of last year. During the same period, community banks’ loan balances grew by over 

8 percent. According to the most recent NFIB survey, only 3 percent of small business respondents said that they were unable to 

get loans, and a record 67 percent said they had no interest in borrowing. Yet we hear from banks that if only there were fewer regulations, they could loan more. It seems to me that banks are having 

no problems growing their loan portfolios, while growth of goods 

and services produced is at a much slower pace. Figure 1 in your 

testimony appears to confirm the premise of this question. Isn’t it 

true that the only other time where the spread between GDP and 

growth in loans was this high during the credit bubble before the 

crisis? 

A.1. You are correct in noting that towards the end of 2016 the 

growth rate of overall bank lending exceeded that of economic activity. This is not atypical for the late phase of the economic cycle. 

In fact, during most expansions the growth rate of bank lending 

tends to exceed the economic growth rate late in the cycle. That is 

the time when exuberance can take over and sow the seeds for future loan losses. 

But, rather than focusing on very short periods for growth or 

lending comparisons, I believe it is also very important to look at 

longer periods, such as the decade before or after the passage of the 

Dodd–Frank Act, as I did in my testimony. 

The difficulty facing analysts at the present time is to distinguish between the cycle and the trend. In that context, the increased regulatory burden imposed by the Dodd–Frank legislation 

may well have contributed to the rather slow rate of expansion that 

we have experienced in the current cycle. The question is whether 

an easing of the regulatory burdens would lead to greater economic 

growth and a continuation of the expansion. I believe that this is 

the case and that an easing of some of the onerous and costly restrictions would be beneficial for economic growth. 

At the same time, it needs to be recognized that it is the responsibility of the banking industry to originate only quality loans. 

Banks should only make loans that will be able to perform during 

an economic slowdown and not to make loans for loan growth sake. 

This is where solid, experienced bank management comes into 

play. Disciplined management is the key to a healthy bank and a 

solid financial system. 

I currently serve on the board at Bank of Marin. It has a very 

disciplined, conservative management which has kept the bank 

safe, sound and highly profitable over the past decades. No amount 

of regulation alone is going to have the same effect. If you increase 

regulation, you just add complexity and expense, thereby punishing 

the well-run, strong-performing community banks. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM DONALD POWELL 

Q.1. GDP grew 1.9 percent in the fourth quarter of last year. During the same period, community banks’ loan balances grew by over 

89 

8 percent. According to the most recent NFIB survey, only 3 percent of small business respondents said that they were unable to 

get loans, and a record 67 percent said they had no interest in borrowing. Yet we hear from banks that if only there were fewer regulations, they could loan more. It seems to me that banks are having 

no problems growing their loan portfolios, while growth of goods 

and services produced is at a much slower pace. Might demand be 

a constraint on the growth of lending? 

A.1. Growth of loans outstanding at U.S. banks exceeded 5 percent 

per year in each of the years 2014, 2015, and 2016. During these 

years, bank loan growth significantly exceeded the growth of U.S. 

gross domestic product (GDP). This loan growth reflects that U.S. 

banks have recovered strongly from the crisis, both in terms of 

earnings and in terms of significantly stronger capital positions to 

support lending activity. 

That said, what banks are not able to do is generate as much 

new business through outreach and marketing efforts. For community banks the time and staff that would be available for marketing 

is increasingly devoted to filling out forms and other compliance activities. 

Moreover, the Fed’s latest Small Business Credit Survey for 2016 

(drawn from input from all 12 FR banks), reported the following: 

Forty-five percent of small business firms applied for financing, 

a slight tick down from 2015. Three-quarters said they received at 

least some financing, and 40 percent said they received the full 

amount—down from 50 percent the year before. Traditional bank 

lending remains the primary source of financing for the Nation’s 

small businesses, the small banks approving at least some of the 

amount requested for 67 percent of credit applicants, while large 

banks approved credit for 54 percent of applicants. Credit approval 

rates fell in all lender categories. Firms with revenue of more than 

$1 million were more likely to have credit approved. 

Loan demand appears to have been greater among larger business borrowers in recent years. Commercial and industrial loans 

outstanding at banks grew 21 percent during the 3 years period 

2014–2016. Construction loans outstanding at banks grew 40 percent during the same period, and commercial real estate loans secured by nonfarm, nonresidential property grew 19 percent. 

FDIC data show that loan growth slowed during the fourth quarter of 2016 across a number of loan categories. It is too soon to say 

whether this marks the beginning of a cyclical slowdown in lending 

activity. Anecdotal information suggests bankers continue to compete vigorously for lending business, notwithstanding the extra 

compliance burden not experienced by nonbanks. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER 

FROM DONALD POWELL 

Q.1. In Nevada, Industrial Loan Companies (ILCs) play an important role in our economy. Mr. Powell, you have stated in the past 

that ‘‘The FDIC believes the ILC charter, per se, poses no greater 

safety and soundness risk than other charter types.’’ Do you still 

believe that ILCs are safe and sound? Do you believe that the 

FDIC has all the tools and resources to manage and oversee curVerDate Nov 24 2008 12:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00093 Fmt 6602 Sfmt 6602 L:\HEARINGS 2017\03-28 ZZDISTILLER\32817.TXT JASON
90 

rent and new ILCs properly? Do you believe that new ILCs should 

be chartered if they meet FDIC standards? 

A.1. I have previously said and would still say that the safety and 

soundness of a given institution depends on the characteristics of 

the institution rather than its charter type. The risks posed depend 

on the appropriateness of the institution’s business plan and model, 

management’s competency to administer the bank’s affairs, the 

quality of the institution’s risk-management processes, and the institution’s level of capital. 

I do believe the FDIC has the tools necessary to properly oversee 

existing and newly insured ILCs. Generally, the FDIC focuses its 

supervisory efforts on the activities and risks of the institution and 

its holding company, regardless of charter type. ILCs are held to 

the same standards as other FDIC-insured institution. The FDIC’s 

supervisory efforts include ensuring that ILCs comply with all applicable laws and regulations and operate with sufficient capital. 

Parent companies of ILCs are subject to regulation or oversight by 

the State banking agency under which the ILC is chartered. While 

parent companies of ILCs are not generally required to meet regulatory requirements imposed by the Bank Holding Company Act of 

1956 (BHCA), the FDIC does have authority under the FDI Act to 

examine the affairs of any affiliate, including the parent company, 

as may be necessary to disclose fully the relationship between the 

institution and the affiliate, and to determine the effect of such relationship on the depository institution. 

The FDIC’s approach to ILC supervision was ultimately tested 

during the recent financial crisis, when several ILCs’ parent companies or affiliates experienced severe stress, but their ILCs did 

not fail. I would say, however, while the regulation and supervision 

of ILCs is adequate, consolidated supervision authorities provide 

important safety and soundness safeguards. 

Finally, I do believe that new ILCs should be insured if they 

meet the underlying statutory factors for deposit insurance. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM THOMAS C. DEAS, JR. 

Q.1. GDP grew 1.9 percent in the fourth quarter of last year. During the same period, community banks’ loan balances grew by over 

8 percent. According to the most recent NFIB survey, only 3 percent of small business respondents said that they were unable to 

get loans, and a record 67 percent said they had no interest in borrowing. Yet we hear from banks that if only there were fewer regulations, they could loan more. It seems to me that banks are having 

no problems growing their loan portfolios, while growth of goods 

and services produced is at a much slower pace. Might demand be 

a constraint on the growth of lending? 

A.1. End users view the financial system in very much the same 

way we see the electric transmission system. The electric grid takes 

electricity from where it is generated and transmits it to where it 

is needed. We hope it is regulated in a way that makes it function 

reliably and in the most cost-effective ways possible. For those of 

us who have had the privilege of serving in U.S. manufacturing 

companies, we seek to keep all our costs as low as possible. If the 

91 

costs of electric transmission rise too much, they will hamper manufacturing competitiveness and constrict growth in output and ultimately employment. End users have the same expectations for the 

functioning of the financial system. If a project has started up and 

is generating cash, the system should be able to take that cash and 

through a series of transactions and intermediaries move it in the 

most cost effective way to where it is needed for new investments. 

If excessive costs are imposed by regulators, less investment can be 

justified and fewer new projects will be started. Some of these regulations impose costs directly on end users, while others impose 

costs directly on banks. In either case, end users face higher costs, 

which can reduce capital expenditures and cost jobs. 

The National Association of Corporate Treasurers recently 

worked with the U.S. Chamber of Commerce through their Center 

for Capital Markets Competitiveness on a survey that is worthwhile to review. Responses were received from more than 300 financial professionals, including treasurers and CFOs. The study 

was published last year as Financing Growth: The Impact of Financial Regulation. In it more than three-quarters of American companies of all sizes responding saw the cumulative effect of the Dodd– 

Frank Wall Street Reform and Consumer Protection Act and other 

financial regulatory rules adopted over the past 6 years as making 

it harder for them to access the financial services they need. This 

was true among small, midsized, and large companies and was felt 

most acutely in a lack of access to services helping them manage 

day-to-day liquidity. Further, 79 percent of respondents indicated 

that they have been affected by changes in financial services regulation, resulting in 39 percent of respondents absorbing higher 

costs and 19 percent delaying or canceling planned investments. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM THOMAS C. DEAS, JR. 

Q.1. As you noted in your testimony, Congress recognized the important benefits to the economy when end users use OTC derivatives to manage their business risks. Title VII of Dodd–Frank included an end-user exemption from certain derivatives rules like 

central clearing and margin to reduce burdens that might otherwise prevent them from managing their risks. Are the current exemptions sufficient or should Congress reexamine them to ensure 

they do not unnecessarily burden productive firms in our economy? 

A.1. End users of derivatives are grateful for the bipartisan support they have received from Congress and for the passage of 

amendments to the Dodd–Frank Act exempting them from central 

clearing and requirements to post initial and variation margin for 

their derivatives positions. If end users had not been exempted, 

margin requirements would be a direct subtraction from limited 

funds that would otherwise be invested to grow inventory to support higher sales, to conduct research and development activities, 

to buy new plant and equipment, and to sustain and ultimately 

grow U.S. employment. While these exemptions are critical for end 

users, Congress should reexamine how certain financial regulations 

impact end users. 

92 

One relates to the Credit Valuation Adjustment (CVA) which is 

a capital charge imposed on bank counterparties to OTC derivatives transactions. The CVA causes increased costs to U.S. commercial businesses that are seeking to manage risks associated with 

their businesses and effectively undermines the exemptions from 

mandatory clearing and margin requirements that Congress expressly granted to end users. European regulators have provided 

an exemption from the CVA charge for a European bank’s trades 

with end users; however, the U.S. Prudential Banking Regulators 

have not provided a similar exemption for U.S. banks trading with 

end users and instead impose the CVA charge on end-user trades. 

This uneven playing field results in higher capital requirements for 

U.S. banks and ultimately higher costs for U.S. commercial businesses compared to their European competitors. 

Another area of concern involves the definition of ‘‘financial entity’’ in the Commodity Exchange Act. The definition as currently 

drafted inappropriately captures certain smaller financial affiliates 

of commercial end users (e.g., cash pooling entities, in-house insurance companies) and financial end users that are using swaps to 

hedge or mitigate commercial risks in the same way as nonfinancial end users. Other jurisdictions around the world have recognized this and provide exemptions from mandatory clearing and 

margin requirements for financial entities that do not exceed a de 

minimis threshold of nonhedging activities. Most recently, the European Commission has proposed to expand their clearing exemption (which is already broader than that in the U.S. rules) to include small financial companies. U.S. commercial end users and financial end users are again placed at a competitive disadvantage 

as compared to competitors around the world. 

Finally, we believe it is critical for financial regulators to conduct 

a study of the major financial regulatory initiatives to determine 

their cumulative effects on end users. Such a study should consider 

both direct and indirect effects on end users, looking both at regulations of end users and of their counterparty financial institutions. 

It also should consider the effects on the cross-border comparability 

of the regulations and their ultimate effects on U.S. competitiveness. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM DEYANIRA DEL RIO 

Q.1. Hard work isn’t paying off the way it used to. At the same 

time, predatory lenders often target workers that don’t make a living wage because they know these people are under constant financial pressure. What is the economic impact of predatory lending in 

low-income communities and how does the Consumer Financial 

Protection Bureau help here? 

A.1. Response not received in time for publication. 

Q.2. GDP grew 1.9 percent in the fourth quarter of last year. During the same period, community banks’ loan balances grew by over 

8 percent. According to the most recent NFIB survey, only 3 percent of small business respondents said that they were unable to 

get loans, and a record 67 percent said they had no interest in borrowing. Yet we hear from banks that if only there were fewer reguVerDate Nov 24 2008 12:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00096 Fmt 6602 Sfmt 6602 L:\HEARINGS 2017\03-28 ZZDISTILLER\32817.TXT JASON
93 

lations, they could loan more. It seems to me that banks are having 

no problems growing their loan portfolios, while growth of goods 

and services produced is at a much slower pace. Might demand be 

a constraint on the growth of lending? 

A.2. Response not received in time for publication. 

Q.3. At the hearing, Senator Perdue asked what we can do, and 

what our priorities should be, to best help small communities, including the small financial institutions in those communities, form 

small businesses, create jobs and grow the economy. Do you have 

other recommendations about how to strengthen community development lenders, particularly smaller institutions that are meeting 

small business, housing and consumer needs in neighborhoods 

across the country? 

A.3. Response not received in time for publication. 

Q.4. What other recommendations do you have to meet the needs 

of individuals that aren’t currently being met by private actors? 

A.4. Response not received in time for publication. 

Q.5. At the hearing, Senator Cortez Masto asked a question about 

the impact of the Trump administration’s ‘‘skinny budget’’ on communities. She detailed the cuts in grant assistance, housing vouchers and construction programs, investments in community infrastructure like sidewalk repairs and enhancements for people with 

disabilities, and social services like youth mentoring, food pantries, 

and transportation for elder Americas, among other cuts. What will 

be the impact of cuts to these types of programs in the communities you work in? 

A.5. Response not received in time for publication. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM WILLIAM E. SPRIGGS 

Q.1. How does predatory lending impact wealth inequality? How 

does the Consumer Financial Protection Bureau help? 

A.1. Response not received in time for publication. 

Q.2. GDP grew 1.9 percent in the fourth quarter of last year. During the same period, community banks’ loan balances grew by over 

8 percent. According to the most recent NFIB survey, only 3 percent of small business respondents said that they were unable to 

get loans, and a record 67 percent said they had no interest in borrowing. Yet we hear from banks that if only there were fewer regulations, they could loan more. It seems to me that banks are having 

no problems growing their loan portfolios, while growth of goods 

and services produced is at a much slower pace. Might demand be 

a constraint on the growth of lending? 

A.2. Response not received in time for publication. 

Q.3. At the hearing, Senator Perdue asked what we can do, and 

what our priorities should be, to best help small communities, including the small financial institutions in those communities, form 

small businesses, create jobs and grow the economy. What do you 

think? 

A.3. Response not received in time for publication. 

94 

Q.4. At the hearing, Senator Schatz asked a series of questions 

about the increase in student loan debt and the increase in the cost 

of college. Is there anything you’d like to add to your answer to his 

question? 

A.4. Response not received in time for publication. 

95 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

‘‘RISK WEIGHTS OR LEVERAGE RATIO? WE NEED BOTH’’, AMERICAN 

BANKER 


32817023.eps
96 


32817024.eps

The problem wilh risk-weighting is in the name: getting the risk weights right. Htnnans and 

models are not perfect judges of risk and wben they err, tltey can do so in a correlated and 

spectacular fashion. Historical experience and multiple regression anal)~is completely botched 

!he risk of subprime mortgages and the corresponding securities built off of !hose supposedly 

"low-risk" assets. A secondary problem is who runs the models and sets !he weights: !he banks, 

!he regulator. or both? Since banks 1utderwrite their assets. the industry has long argued that 

individual institutions should be given some control or deference to set risk weights. However, 

letting the banks run the models bas a fox·guarding·tlte·hcnhouse problem. 

Given the debate, it should come as no surprise that certain regulators are predisposed to either 

approach. Tite Federal O.:posit lnstrrance Corp. - in its role as insurer and resolver of failed 

institutions- has historically backed a strong leverage ratio as part of the capital regime. llJe 

Federal Reserve Board - in its role as economic modeler, monetary policy setter and 

quantitative regulator- has usually focused on risk-weighted tests. 

In dte years following the finrutcial crisis and passage of !he Dodd-Frank Act, both the leverage 

ratio and risk-weig)tted capital ratios were increased substantially. !loth were also tailored to 

specifically increase capital on the largest banks- whether through leverage surcharges on 

globally significant banks or through additional conservative assumptions in big-bank siress tests 

through the Fed's Comprehensil'e Capital nal}~ s and Review. 

Much of the focus oftlte cmrent debate around capital requir.:ments is on which measure -

leverage or risk·weig)tted - should be the "binding collStraint" for brutks, that is, which standard 

should detennine the adequate amount of capital a bank should hold. Some in tlte banking 

industry argue tltal increases in the simple leverage ratio have made that !he binding constraint 

for banks. Meanwhile, the debate continues as 10 whether additional capital is needed or whether 

regulators have gone too far. 

Policymakers, industry and the general public should become comfortable with a world in 1\itich 

the binding consiraint alternates between the simple leverage ratio and the complex risk· 

weig)tted test. Each has its own advantages and disadvantages and the relative value of those 

iradeoffs changes throughout tlte business cycle. It is tempting for one to skew toward each of 

the two sides at various moments, as some did in favoring the Basel II advrutced risk-weight 

approach rig)tt before the financial crisis (which in hindsig)tt was a clear mistake.) But the reality 

is that if both are set properly, each will take tums as !he ultimate decider of total capital. 

In that world. the chopsticks work together, and you can actually eat a meal. Otherwise we will 

continue to face warring factions, poking each other witlt sticks. 

Aaron Klein is a fellow at the Brookings /nstinrrion and policy director at the Center on 

Regulation and Markets.