79–006 

115TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 2d Session 115–574 

TO PLACE REQUIREMENTS ON OPERATIONAL RISK CAPITAL REQUIREMENTS FOR BANKING ORGANIZATIONS ESTABLISHED BY AN APPROPRIATE FEDERAL BANKING AGENCY 

FEBRUARY 23, 2018.—Committed to the Committee of the Whole House on the State 

of the Union and ordered to be printed 

Mr. HENSARLING, from the Committee on Financial Services, 

submitted the following 

R E P O R T 

together with 

MINORITY VIEWS 

[To accompany H.R. 4296] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on Financial Services, to whom was referred the 

bill (H.R. 4296) to place requirements on operational risk capital 

requirements for banking organizations established by an appropriate Federal banking agency, having considered the same, report 

favorably thereon with an amendment and recommend that the bill 

as amended do pass. 

The amendment is as follows: 

Strike all after the enacting clause and insert the following: 

SECTION 1. OPERATIONAL RISK CAPITAL REQUIREMENTS FOR BANKING ORGANIZATIONS. 

(a) IN GENERAL.—An appropriate Federal banking agency may not establish an 

operational risk capital requirement for banking organizations, unless such requirement— 

(1) is based primarily on the risks posed by a banking organization’s current 

activities and businesses; 

(2) is appropriately sensitive to the risks posed by such current activities and 

businesses; 

(3) is determined under a forward-looking assessment of potential losses that 

may arise out of a banking organization’s current activities, businesses, and exposures, which is not solely based on a banking organization’s historical losses; 

and 

(4) permits adjustments based on qualifying operational risk mitigants. 

(b) DEFINITIONS.—For purposes of this section: 

(1) APPROPRIATE FEDERAL BANKING AGENCY.—The term ‘‘appropriate Federal 

banking agency’’— 

(A) has the meaning given such term under section 3 of the Federal Deposit Insurance Act; and 


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1https://www.bis.org/publ/bcbs195.pdf. 

(B) means the National Credit Union Administration, in the case of an 

insured credit union. 

(2) BANKING ORGANIZATION.—The term ‘‘banking organization’’ means— 

(A) an insured depository institution (as defined under section 3 of the 

Federal Deposit Insurance Act); 

(B) an insured credit union (as defined under section 101 of the Federal 

Credit Union Act); 

(C) a depository institution holding company (as defined under section 3 

of the Federal Deposit Insurance Act); 

(D) a company that is treated as a bank holding company for purposes 

of section 8 of the International Banking Act; and 

(E) a U.S. intermediate holding company established by a foreign banking 

organization pursuant to section 252.153 of title 12, Code of Federal Regulations. 

PURPOSE AND SUMMARY

Introduced by Representative Luetkemeyer on November 8, 2017, 

H.R. 4296 restricts federal banking agencies from establishing 

operational risk capital requirements for banking organizations unless they are sensitive to, and based on, an organization’s current 

activities or businesses; are determined by a forward-looking assessment of an organization’s potential losses and not based solely 

on its historic losses; and allow for adjustments based on qualifying 

operational risk mitigants. 

BACKGROUND AND NEED FOR LEGISLATION

In response to the 2008 financial crisis, the Basel Committee on 

Banking Supervision (Basel Committee), of which the United 

States is a member, agreed to modify internationally negotiated 

bank regulatory standards known as the Basel Accords to increase 

bank capital requirements and other regulatory measures. The 

Basel Accords are international banking regulations negotiated between participating regulators, but they rely on local implementation to take effect in a nation’s financial regulatory regime. 

The Dodd-Frank Wall Street Reform and Consumer Protection 

Act (P.L. 111–203) codified the Basel III capital standards and the 

U.S. federal banking regulators—including the Federal Deposit Insurance Corporation (FDIC), Board of Governors of the Federal Reserve System (Federal Reserve), and Office of the Comptroller of 

the Currency (OCC)—promulgated rules to implement these standards on July 9, 2013. 

As defined by the Basel Committee, operational risk refers to 

‘‘. . . the risk of loss resulting from inadequate or failed internal 

processes, people and systems or from external events . . . [t]his 

definition includes legal risk, but excludes strategic and 

reputational risk.’’ 1 In other words, a bank’s own direct actions or 

relationships could lead to losses, and therefore should be accounted for by regulators when establishing capital requirements to 

ensure financial stability. 

In October 2013, the OCC, FDIC, and Federal Reserve, in conjunction with the Treasury Department, published a final rule 

‘‘. . . that requires some and permits other qualifying banks to use 

an internal ratings-based approach to calculate regulatory credit 

risk capital requirements and advanced measurement approaches 


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2https://www.federalreserve.gov/reportforms/formsreview/BaselIIIl20131011lffr.pdf. 

to calculate regulatory operational risk capital requirements.’’ 2 The 

rule took effect on January 1, 2014. 

Because operational risk capital requirements substantially dictate a bank’s capital levels, it is important that any future Basel 

approach-turned-U.S. rule does not unnecessarily increase capital 

requirements at the expense of consumers’ credit needs. Unreliable 

and under-calibrated calculations could result in hundreds of billions of dollars in capital that could be more efficiently deployed to 

meet consumers’ credit needs. 

All banking organizations should adopt policies and procedures 

to identify and manage operational risk that are appropriate based 

on their size, activities, and product offerings in order to ensure a 

stable and resilient financial industry. But, requiring banking organizations to ‘‘look back’’ and hold operational risk capital against 

discontinued business activities or products distorts the risk environment and may force misguided over-retention of capital. This 

over-retention of capital is a problem because it reduces a bank’s 

lending capacity, which in turn harms both consumers and businesses of all sizes as it drastically limits the amount of available 

credit in the marketplace. 

H.R. 4296 limits the imposition of operational risk capital requirements to a bank’s current activities and businesses and permits adjustments for operational risk mitigants. Doing so will ensure that banks have the proper incentives financial to mitigate 

operational risk, and if a bank exits one or more business lines, the 

regulatory response does not increase complexity and retain the 

backward-looking nature of current operational risk capital requirements. H.R. 4296 will ensure a vibrant consumer credit market. 

HEARINGS

The Committee on Financial Services held a hearing examining 

matters relating to H.R. 4296 on April 26, 2017 and April 28, 2017. 

COMMITTEE CONSIDERATION

The Committee on Financial Services met in open session on November 14, 2017, and November 15, 2017, and ordered H.R. 4296 

to be reported favorably to the House without amendment by a recorded vote of 43 yeas to 17 nays (Record vote no. FC–108), a 

quorum being present. 

COMMITTEE VOTES

Clause 3(b) of rule XIII of the Rules of the House of Representatives requires the Committee to list the record votes on the motion 

to report legislation and amendments thereto. The sole recorded 

vote was on a motion by Chairman Hensarling to report the bill favorably to the House without amendment. The motion was agreed 

to by a recorded vote of 43 yeas to 17 nays (Record vote no. FC– 

108), a quorum being present. 


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COMMITTEE OVERSIGHT FINDINGS

Pursuant to clause 3(c)(1) of rule XIII of the Rules of the House 

of Representatives, the findings and recommendations of the Committee based on oversight activities under clause 2(b)(1) of rule X 

of the Rules of the House of Representatives, are incorporated in 

the descriptive portions of this report. 

PERFORMANCE GOALS AND OBJECTIVES

Pursuant to clause 3(c)(4) of rule XIII of the Rules of the House 

of Representatives, the Committee states that H.R. 4296 will restrict banking regulators from establishing operational risk capital 

requirements for banking organizations unless they are sensitive 

to, and based on, an organization’s current activities or businesses; 

are determined by a forward-looking assessment of an organization’s potential losses and not based solely on its historic losses; 

and allow for adjustments based on qualifying operational risk 

mitigants. 

NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX

EXPENDITURES

In compliance with clause 3(c)(2) of rule XIII of the Rules of the 

House of Representatives, the Committee adopts as its own the estimate of new budget authority, entitlement authority, or tax expenditures or revenues contained in the cost estimate prepared by 

the Director of the Congressional Budget Office pursuant to section 

402 of the Congressional Budget Act of 1974. 

CONGRESSIONAL BUDGET OFFICE ESTIMATES

Pursuant to clause 3(c)(3) of rule XIII of the Rules of the House 

of Representatives, the following is the cost estimate provided by 

the Congressional Budget Office pursuant to section 402 of the 

Congressional Budget Act of 1974: 

U.S. CONGRESS, 

CONGRESSIONAL BUDGET OFFICE, 

Washington, DC, February 21, 2018. 

Hon. JEB HENSARLING, Chairman, Committee on Financial Services, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 4296, a bill to place requirements on operational risk capital requirements for banking 

organizations established by an appropriate Federal banking agency. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contacts are Kathleen Gramp and 

Sarah Puro. 

Sincerely, 

KEITH HALL, 

Director. 

Enclosure. 


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H.R. 4296—A bill to place requirements on operational risk capital 

requirements for banking organizations established by an appropriate Federal banking agency 

Summary: H.R. 4296 would direct federal banking regulators to 

revise one of the formulas used to calculate the minimum amount 

of capital held by certain large, systemically important banks. Specifically, the bill would change the method banks use to estimate 

operating risk—the risk of losses stemming from inadequate or 

failed internal controls, fraud or errors caused by people and systems, or external events such as cyberattacks. Regulators currently 

require banks to estimate operating risk based in part on historical 

experience. Under the bill, such risk would be calculated largely on 

the basis of forward-looking models that reflect each bank’s business activities. 

CBO estimates that enacting H.R. 4296 would increase the def- icit by $22 million over the 2018–2027 period. That figure includes 

an increase of $26 million in direct spending and an increase of $4 

million in revenues. Because enacting the bill would affect direct 

spending and revenues, pay-as-you-go procedures apply. 

CBO estimates that enacting H.R. 4296 would not increase net direct spending or on-budget deficits by more than $2.5 billion in 

one or more of the four consecutive 10-year periods beginning in 

2028. 

H.R. 4296 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act (UMRA). 

Estimated cost to the Federal Government: The estimated budgetary effect of H.R. 4296 is shown in the following table. The costs 

of the legislation fall within budget function 370 (advancement of 

commerce). 

By fiscal year, in millions of dollars— 

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2018– 

2022 

2018– 

2027 

INCREASES IN DIRECT SPENDING 

Estimated Budget Authority ...................... 0 1 2 3 4 4 3 3 3 3 10 26 

Estimated Outlays ..................................... 0 1 2 3 4 4 3 3 3 3 10 26 

INCREASES IN REVENUES 

Estimated Revenues .................................. 0 0 0 0 0 0 1 1 1 1 0 4 

NET INCREASE IN THE DEFICIT FROM INCREASES IN DIRECT SPENDING AND REVENUES 

Effect on the Deficit .................................. 0 1 2 3 4 4 2 2 2 2 10 22 

Basis of estimate: The budgetary effects of the bill stem from the 

small chance that the Federal Deposit Insurance Corporation 

(FDIC) would incur additional costs to resolve failed financial institutions. For this estimate, CBO assumes that the bill will be enacted near the end of 2018. 

CBO’s estimates for H.R. 4296 are based on the analysis underlying the projections for deposit insurance in its June 2017 baseline. Those projections incorporate a small probability of a financial 

crisis in any given year during the projection period and the more 

likely scenario of an average number of bank and credit union failures in any given year. As a result, the estimated cost of this legislation represents a weighted probability of outcomes—including 

some cases for which the probability is very low but for which the 

costs to the Deposit Insurance Fund (DIF) or the Orderly LiquidaVerDate Sep 11 2014 04:46 Feb 24, 2018 Jkt 079006 PO 00000 Frm 00006 Fmt 6659 Sfmt 6602 E:\HR\OC\HR574.XXX HR574

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1 Regulators use several other methods of assessment, including information on a bank’s 

standard measure of risk-weighted assets, a bank’s assets adjusted for off-balance sheet activities, and the level of assets needed to absorb losses during times of stress. 2See Marco Migueis, Forward-Looking and Incentive-Compatible Operational Risk Capital 

Framework, Finance and Economics Discussion Series 2017–087 (Federal Reserve Board, May 

2017), https://doi.org/10.17016/FEDS.2017.087 (PDF, 383 KB). 

tion Fund (OLF) are much larger than in average years. Costs incurred by the DIF are recovered over time by assessments on insured depository institutions (IDIs). Fees paid to recover costs incurred by the OLF are classified in the budget as revenues. Both 

funds are administered by the FDIC. 

CBO anticipates that the directives in H.R. 4296 would apply to 

around 10 bank holding companies and their insured depository 

subsidiaries that currently estimate capital requirements using 

what the FDIC refers to as advanced approaches. The net effect of 

implementing the bill would vary among those institutions because 

the measure that reflects operating risks is only one of many methods used by federal regulators to determine how much capital a 

bank must hold.1 CBO estimates that in fiscal year 2017, the advanced-approaches formula was used to determine capital requirements for companies that accounted for about 20 percent of the assets held by bank holding companies subject to that standard and 

for about 5 percent of the assets held by IDIs. 

Using studies by the Federal Reserve and others, CBO anticipates that changing to forward-looking models as required by H.R. 

4296 probably would lower firm’s estimates of their operating risks, 

thereby lowering the amount of capital they would be required to 

hold.2 Although there is considerable uncertainty surrounding the 

magnitude of such changes, CBO expects that the net change 

would be limited to the difference in capital identified by the new 

method and that identified by existing regulatory formulas. On balance, CBO estimates that, relative to current practice, enacting the 

bill would reduce the total capital held by the all of the large bank 

holding companies by less than 2 percent and for the IDIs subject 

to the standard by less than 0.5 percent. 

Changes in a bank’s capital requirements may affect its probability of failure or the magnitude of future losses, which in turn 

may affect costs incurred by the DIF or the OLF. Most of the costs 

of enacting the legislation would be incurred by the OLF, CBO estimates, because enacting the bill would have a greater effect on the 

capital held by bank holding companies. (The OLF is authorized to 

resolve financial difficulties for large, systemically important financial firms that become insolvent or are in danger of becoming insolvent.) CBO estimates that enacting the bill would increase the deficit by $22 million, or by roughly 0.03 percent of CBO’s June baseline projection of the 10-year cost of the FDIC’s programs. That 

amount includes an increase in direct spending of $26 million and 

an increase of revenues of $4 million. CBO estimates that most of 

those costs would be offset after 2027 by increases in fees paid by 

financial firms. 

Pay-As-You-Go considerations: The Statutory Pay-As-You-Go Act 

of 2010 establishes budget-reporting and enforcement procedures 

for legislation affecting direct spending or revenues. The net 

changes in outlays and revenues that are subject to those pay-asyou-go procedures are shown in the following table. 


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CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 4296, AS ORDERED REPORTED BY THE 

HOUSE COMMITTEE ON FINANCIAL SERVICES ON NOVEMBER 15, 2017 

By fiscal year, in millions of dollars— 

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2018– 

2022 

2018– 

2027 

NET INCREASE IN THE ON-BUDGET DEFICIT 

Statutory Pay-As-You-Go Impact ............... 0 1 2 3 4 4 2 2 2 2 10 22 

Memorandum: 

Changes in Outlays .......................... 0 1 2 3 4 4 3 3 3 3 10 26 

Changes in Revenues ....................... 0 0 0 0 0 0 1 1 1 1 0 4 

Increase in long-term direct spending and deficits: CBO estimates that enacting the legislation would not increase net direct 

spending or on-budget deficits by more than $2.5 billion in any of 

the four consecutive 10-year periods beginning in 2028. 

Mandates: H.R. 4296 contains no intergovernmental or privatesector mandates as defined in UMRA. 

Previous CBO estimate: On May 18, 2017, CBO transmitted a 

cost estimate for H.R. 10, the Financial CHOICE Act, as ordered 

reported by the House Committee on Financial Services on May 4, 

2017. H.R. 4296 is identical to section 152 of H.R. 10. The CBO 

cost estimates are different for this provision, however, because 

H.R. 10 also would eliminate the OLF. As a result, CBO’s cost estimate for section 152 of H.R. 10 did not include any costs to the 

OLF. 

Estimate prepared by: Federal costs: Kathleen Gramp and Sarah 

Puro; Mandates: Rachel Austin. 

Estimate approved by: H. Samuel Papenfuss; Deputy Assistant 

Director for Budget Analysis. 

FEDERAL MANDATES STATEMENT

This information is provided in accordance with section 423 of 

the Unfunded Mandates Reform Act of 1995. 

The Committee has determined that the bill does not contain 

Federal mandates on the private sector. The Committee has determined that the bill does not impose a Federal intergovernmental 

mandate on State, local, or tribal governments. 

ADVISORY COMMITTEE STATEMENT

No advisory committees within the meaning of section 5(b) of the 

Federal Advisory Committee Act were created by this legislation. 

APPLICABILITY TO LEGISLATIVE BRANCH

The Committee finds that the legislation does not relate to the 

terms and conditions of employment or access to public services or 

accommodations within the meaning of the section 102(b)(3) of the 

Congressional Accountability Act. 

EARMARK IDENTIFICATION

With respect to clause 9 of rule XXI of the Rules of the House 

of Representatives, the Committee has carefully reviewed the provisions of the bill and states that the provisions of the bill do not 

contain any congressional earmarks, limited tax benefits, or limited 

tariff benefits within the meaning of the rule. 


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DUPLICATION OF FEDERAL PROGRAMS

In compliance with clause 3(c)(5) of rule XIII of the Rules of the 

House of Representatives, the Committee states that no provision 

of the bill establishes or reauthorizes: (1) a program of the Federal 

Government known to be duplicative of another Federal program; 

(2) a program included in any report from the Government Accountability Office to Congress pursuant to section 21 of Public 

Law 111–139; or (3) a program related to a program identified in 

the most recent Catalog of Federal Domestic Assistance, published 

pursuant to the Federal Program Information Act (Pub. L. No. 95– 

220, as amended by Pub. L. No. 98–169). 

DISCLOSURE OF DIRECTED RULEMAKING

Pursuant to section 3(i) of H. Res. 5, (115th Congress), the following statement is made concerning directed rulemakings: The 

Committee estimates that the bill requires no directed rulemakings 

within the meaning of such section. 

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Operational risk capital requirements for banking organizations 

This section prohibits a Federal banking agency from establishing an operational risk capital requirement for banking organizations, unless such a requirement: 

(1) is based primarily on the risks posed by a banking organization’s current activities and businesses; 

(2) is appropriately sensitive to the risks posed by such current activities and businesses; 

(3) is determined under a forward-looking assessment of potential losses that may arise out of a banking organization’s 

current activities, businesses, and exposures, which is not solely based on a banking organization’s historical losses; and 

(4) permits adjustments based on qualifying operational risk 

mitigants. 

This section also defines the various terms utilized within the 

Act. 

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

H.R. 4296 does not repeal or amend any section of a statute. 

Therefore, the Office of Legislative Counsel did not prepare the report contemplated by clause 3(e)(1)(B) of rule XIII of the Rules of 

the House of Representatives. 


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MINORITY VIEWS 

H.R. 4296 would place new, statutory conditions on how regulators implement a specific capital requirement relating to operational risk, and if the conditions are not satisfied, then the capital 

requirement would be prohibited. Operational risk capital is required to be held by a dozen or so of our largest, internationallyactive megabanks. And, it relates to operational risks, such as legal 

liability and operational breakdowns of these megabanks. These 

operational failures include JPMorgan’s ‘‘London Whale’’ trades 

and Wells Fargo’s long list of violations that have ripped off millions of consumers, including those harmed by their fraudulent account scandal. 

These same large Wall Street banks would benefit from changes 

to this capital requirement, which cause harm not only to consumers but the broader economy. According to Stanford professor, 

Anat Admati, ‘‘the fines banks paid in the past may well be indicative of future risk. There are enormous rates of recidivism in corporate misconduct.’’ 

According to a letter submitted to the Committee opposing H.R. 

4296 as a big bank giveaway, Americans for Financial Reform 

wrote, ‘‘operational risk capital is a new capital protection instituted at banks with over $250 billion in assets, to protect against 

the possibility that poor risk management or illegal behavior by 

bank employees will cause significant losses.’’ These critical areas, 

include past and present cyber risk, rogue traders, risk management, and legal judgements. In conclusion, AFR wrote, ‘‘HR 4296 

is a transparent attempt to pressure regulators to reduce capital 

protections at the nation’s largest banks, and must be rejected.’’ 

Furthermore, according to bank regulators and the Treasury Department, efforts have been underway internationally to make administrative and technical refinements to the operational risk capital requirement, and we should expect changes in the near future. 

Congress should closely monitor these developments to see if regulators strike the right balance, and if not, then consider a legislative response. 

Thus, H.R. 4296 is premature and possibly short-sighted to enact 

statutory conditions regarding the operational risk capital requirement. This framework would diminish, instead of strengthen, the 

incentive for megabanks to maintain stronger internal controls and 

risk management systems. 

After all, there has been tremendous progress since the financial 

crisis of 2007–2009 to create a far better capitalized banking system. As required by the Dodd-Frank Act—and in implementing the 

international Basel III capital accords—our banking regulators 

have required banks to maintain more and higher quality capital. 

Republicans have long argued that these financial reforms would 

crush lending and harm banks and the broader economy. However, 


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the facts tell a different story. Bank profits reached an all-time 

record high in 2016 and business lending is up 75 percent since 

2010. All this has happened while U.S. banks added more than 

$700 billion in capital to absorb potential losses. According to Third 

Way, these reforms, including capital rules that have made our financial system safer, are estimated to add $351 billion to the U.S. 

economy over 10 years. 

For these reasons, we oppose H.R. 4296. 

MAXINE WATERS. 

STEPHEN F. LYNCH. 

MICHAEL E. CAPUANO. 

VICENTE GONZALEZ. 

EMANUEL CLEAVER. 

AL GREEN. 

GWEN MOORE. 

DANIEL T. KILDEE. 

Æ 


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