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S. HRG. 115–106 

FOSTERING ECONOMIC GROWTH: MIDSIZED, REGIONAL, AND LARGE INSTITUTION PERSPECTIVE 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE CURRENT STATE OF MIDSIZED, REGIONAL, AND 

LARGE INSTITUTIONS, INCLUDING THEIR REGULATORY REQUIREMENTS, IMPACT ON CLIENTS, AND THEIR ROLE IN PROMOTING ECONOMIC GROWTH 

JUNE 15, 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 

TRAVIS HILL, Senior Counsel 

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 

THURSDAY, JUNE 15, 2017 

Page 

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

Opening statements, comments, or prepared statements of: 

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

WITNESSES 

Harris H. Simmons, Chairman and Chief Executive Officer, Zions 

Bancorporation, on behalf of the Regional Bank Coalition .............................. 4 

Prepared statement .......................................................................................... 27 

Greg Baer, President, The Clearing House Association ....................................... 6 

Prepared statement .......................................................................................... 32 

Robert R. Hill, Jr., Chief Executive Officer, South State Corporation, on 

behalf of Mid-Size Bank Coalition of America ................................................... 7 

Prepared statement .......................................................................................... 51 

Responses to written questions of: 

Senator Brown ........................................................................................... 96 

Senator Sasse ............................................................................................ 99 

Senator Tillis ............................................................................................. 100 

Saule T. Omarova, Professor of Law, Cornell University .................................... 9 

Prepared statement .......................................................................................... 52 

Responses to written questions of: 

Senator Brown ........................................................................................... 102 

Senator Sasse ............................................................................................ 104 

Senator Reed .............................................................................................. 108 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Statement submitted by the Independent Community Bankers of America ...... 111 

Statement submitted by the American Bankers Association ............................... 116 

Statement submitted by Fifth Third Bank ............................................................ 123 

Statement submitted by the Institute of International Bankers ......................... 127 

Statement submitted by Texas Capital Bank ....................................................... 130 

GSIB scores .............................................................................................................. 133 

(III)

(1) 

FOSTERING ECONOMIC GROWTH: MIDSIZED, 

REGIONAL, AND LARGE INSTITUTION PERSPECTIVE 

THURSDAY, JUNE 15, 2017 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 9:49 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. 

Last week, we received testimony on the role financial institutions play in fostering economic growth in local communities. The 

hearing focused on community lenders, and we heard about the 

need for additional tailoring, the increasing cost of compliance, and 

common-sense reforms to rules such as QM, TRID, HMDA, and 

Volcker. 

Today we will hear about the regulatory framework that midsize 

banks, regional banks, and larger financial institutions face. 

Midsize and regional banks are often subjected to costly post-crisis 

rules designed for the most systemically important banks. Many of 

these rules are applied based on asset thresholds that do not reflect 

the underlying systemic risk of financial institutions. 

While the size of a bank is one factor in measuring systemic importance, there are many other aspects of an institution that are 

relevant to how difficult the company would be to resolve and how 

consequential its distress or failure would be to financial markets. 

The result is a regulatory regime that is insufficiently tailored 

for many of the firms subject to it, for example, stress testing. 

Former Fed Governor Tarullo is among those who have stated that 

the $10 billion threshold for company-run stress tests is too low. 

Additionally, CCAR is a very costly, time-consuming process that 

is overly burdensome, especially for noncomplex regional banks. 

Another example is the Volcker rule, which has proven far too complicated to implement and incredibly difficult to comply with. 

One of my key priorities this Congress is passing legislation on 

a bipartisan basis to improve the bank regulatory framework and 

stimulate economic growth. In March, Senator Brown and I began 

our process to receive and consider proposals to help foster economic growth, and I appreciate all the valuable insights and recommendations that we have received. Also in March, the Federal 

2 

banking agencies issued their EGRPRA report to Congress with 

their recommendations. 

And earlier this week, the Treasury Department issued the first 

of its reports examining how best to improve our regulatory framework. The report focused on banks and credit unions and provided 

a substantial number of helpful regulatory and legislative suggestions corresponding to the President’s Executive Order on ‘‘Core 

Principles for Regulating the Financial System’’. 

I commend Secretary Mnuchin and his staff at Treasury for all 

the work that went into this report and for the thoughtful recommendations they have provided. 

I am particularly encouraged by a number of specific recommendations for midsize and regional banks, including changing 

the $50 billion SIFI threshold; exempting midsize banks from company-run stress tests; exempting banks without significant trading 

activity from the proprietary trading prohibition of the Volcker 

rule; and improving the transparency and process of CCAR and living wills. 

With the hundreds of recommendations that we have received 

through our economic growth submission process, the testimony we 

are receiving at these hearings, the EGRPRA report, and this 

Treasury report, the Committee has no shortage of ideas to consider as we work to improve our regulatory framework. 

As this process continues, I look forward to working with all 

Members of the Committee from both sides of the aisle to bring 

strong, robust bipartisan legislation forward. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

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

today’s hearing. Thank you to the four witnesses for joining us 

today. 

Based on the current Wall Street reform debate, the activity in 

the House and the report put out by Treasury earlier this week, 

I am concerned that some seem to have forgotten that we even had 

a financial crisis a decade ago. I can assure you that families in 

my home State still remember and continue to live with the consequences of the crisis. I have told this Committee before, but my 

Zip code in Cleveland where my wife and I live, 44105, in the year 

2007, the first half of that year, had more foreclosures than any Zip 

code in the United States, and I see what a foreclosure on a home 

means to my neighbors. 

That crisis of a decade ago, when the unemployment rate for our 

Nation reached more than 10.5 percent, we had 14 consecutive 

years of increasing foreclosures, some 400,000 homes lost in 5 years 

at the height of the housing crisis in my State. That is to say nothing of the psychological damage caused by lost jobs and children 

being forced to move away from their friends and families. 

Just one example, 17 percent of Ohio homeowners still owe more 

on their mortgages than their home is worth—the second highest 

rate in the Nation behind the States of two Members of this Committee, Senator Cortez Masto and Senator Heller. 

With these experiences fresh in our mind, Congress passed Wall 

Street reform, including some of the most sweeping changes to fiVerDate Nov 24 2008 11:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\06-15 ZDISTILL\61517.TXT JASON
3 

nancial regulation in 70 years. Wall Street and its allies are attacking rules like living wills and orderly liquidation that are meant to 

ensure that a $1 trillion megabank can fail without bringing down 

the economy with it. At the same time, they attack the capital 

rules that are meant to reduce the likelihood that banks will fail 

in the first place. 

Let me be clear. Proposals to weaken oversight of the biggest 

banks have no place in this Committee’s process. Wall Street banks 

caused a financial crisis that cost our economy up to $14 trillion 

and took $160 billion in taxpayer bailouts. They made the market 

for the late and unlamented predatory lenders that have left more 

than one-fifth of Cleveland homeowners still underwater. One-fifth. 

Letting them run wild again will not help economic growth. It will 

just put our economy at risk once again. 

Having said that, I am optimistic there is room for agreement on 

a modified regime for overseeing regional banks. This will be the 

fifth hearing dedicated to the issue of these enhanced prudential 

standards since July of 2014. The last 3 years, I have been encouraged by steps that the agencies have taken to better tailor standards like stress tests and living wills. We have heard that these 

two rules plus liquidity requirements may impose the most burdens 

with the least amount of benefits to financial stability when they 

are applied to regional banks. I think we all understand that. 

We have heard from both midsize banks and their regulators, as 

the Chairman cited, that changes should be considered to the 

Dodd–Frank-required stress tests. I look forward to working with 

the Chairman and our colleagues to explore what might make the 

oversight regime work better for both midsize and regional banks 

as long as financial stability and safety and soundness and consumer protections are not compromised. 

Let me close with a different topic, if I could, Mr. Chairman, in 

the last couple of minutes. Wall Street reforms’ opponents accuse 

the law of being too partisan despite the fact that it received Republican votes in both the House and Senate and that it included 

15 Republican-sponsored floor amendments. They say it was not 

well conceived even though we held more than 30 Committee hearings and Chairman Dodd spent months discussing the bill with Republicans on this Committee, some of them still on this Committee. 

The bill spent more than a month on the Senate floor. 

Contrast that, Mr. Chairman, and I want to point out that right 

now a small group of Republican Senators—maybe a dozen, we 

read; we do not really know—is crafting a health care bill behind 

closed doors. They are doing it with no participation from Democrats. As the case with Dodd–Frank, contrast how Democrats 

passed the Affordable Care Act a number of years ago. It took more 

than a year, dozens and dozens of hearings in my Committee alone, 

then the Health, Education, Labor, and Pension Committee. We accepted 150 Republican amendments, open process, lots of debate. 

But look at what has happened now with the Affordable Care Act. 

The Chairman of the Finance Committee—Senator Crapo and I 

both sit on that Committee, as does Senator Scott. That Committee 

has no plans to hold even a single hearing on the bill. Both Dodd– 

Frank and the Affordable Care Act were the product of painstaking 

legislative work. We were doing our job bipartisanly. We put those 

4 

together. It put money back in the pockets of American families 

through lower health care costs and lower credit card and mortgage 

fees. We owe it to these families on that issue and other issues to 

have an open and honest debate about the Republican health care 

bill. There is no sign that Senator McConnell is going to do that. 

No sign at all. 

Nothing could be more important to economic growth than safeguarding the health and the financial well-being of working families. This Committee can play a role in that. I am hopeful that we 

will. 

Thank you. 

Chairman CRAPO. Thank you. 

At this point we will move to the testimony of our witnesses. Before we do so, however, I want to alert both the witnesses and the 

Members that we have three votes scheduled at 11 o’clock, so we 

are going to need to wrap this hearing up by 11 o’clock, which 

means to my colleagues the 5-minute rule really must be honored, 

and I will honor it strictly with you. And to our witnesses, sometimes a question comes in right in the last few seconds of the 5 

minutes. Please keep your answers brief to that so we can move 

on and let every Senator have an opportunity to ask questions. 

As each of you know, you have been allocated 5 minutes for your 

oral remarks, and we welcome them. You will also have plenty of 

opportunities to enhance your testimony in response to questions. 

Finally, I wanted to indicate to everyone, I have to testify in the 

Judiciary Committee in just a few minutes, so I will step out. But 

I will be back, and I look forward to reviewing and listening to all 

of your comments. 

With that, first we will receive testimony from Mr. Harris Simmons, chief executive officer and chairman of Zions Bancorporation, 

on behalf of the Regional Bank Coalition. 

Following him we will hear from Mr. Greg Baer, president of The 

Clearing House Association. 

Then we will hear from Mr. Robert Hill, chief executive officer 

of South State Corporation, on behalf of Mid-Size Bank Coalition 

of America. 

And, finally, we will hear from Ms. Saule Omarova—did I get 

that right? 

Ms. OMAROVA. Yes, you did. 

Chairman CRAPO. Thank you. Professor of law at Cornell University. 

Mr. Simmons, you may proceed. 

STATEMENT OF HARRIS H. SIMMONS, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, ZIONS BANCORPORATION, ON BEHALF 

OF THE REGIONAL BANK COALITION 

Mr. SIMMONS. Thank you very much, Mr. Chairman. I appreciate 

the opportunity to present some views to the Committee this morning. I am Harris Simmons. I am the chairman and CEO of Zions 

Bancorporation. We are a $65 billion in assets regional bank 

headquartered in Salt Lake City. We operate across the Western 

United States, including in the Chairman’s home State of Idaho. 

We particularly focus on small, medium, and mid-market kinds of 

businesses. We do a lot of commercial lending, the kind of lending 

5 

that we believe creates a lot of jobs and supports a great deal of 

economic activity in the Western United States. We serve these 

businesses, their employees, their owners, and a number of municipalities across the West, many in rural locations, particularly in 

the Intermountain West. 

For the past several years, Zions Bancorporation has been the 

smallest of the systemically important financial institutions as defined by the Dodd–Frank Act. Sometimes we joke about ourselves 

as being an ‘‘itty-bitty SIFI.’’ And we have felt, I think, perhaps 

disproportionately, the brunt of the burden of complying with the 

enhanced prudential standards and other requirements of Dodd– 

Frank that are applicable to the SIFI group. But that is the common lot of the regional banks generally. 

It has forced us to hold capital that is at the north end of our 

peer group. It has retarded our growth and has hampered the ability of relationship managers, those on the front lines, to serve customers in the manner that they used to be able to do. 

In particular, the Comprehensive Capital Analysis and Review 

process, or CCAR as it is known, has been costly, it has been frustrating, and perhaps most of all, it has been incredibly opaque, and 

challenging to understand what the evolving requirements have 

been and what kind of standard is required of us as we think about 

the economics of our own business. It creates uncertainty, which in 

turn stifles planning and prudent risk taking. 

The liquidity coverage ratio is another feature that is applicable 

to the SIFI group. In the case of banks under $250 billion but over 

$50 billion in size, a modified liquidity coverage ratio will become 

a constraint. I think it has not been particularly constraining. Over 

the past few years, the industry has been awash in liquidity. But 

it will become a constraint, and it will become a constraint at the 

worst possible time. And at a time when liquidity is at a premium, 

we will find ourselves as an industry withdrawing, and that will 

not be good for the economy. 

Finally, the banking regulatory apparatus has become a Rube 

Goldberg contraption with overlapping regulators, redundant regulations, such as the various capital regimes, scores of compliance 

trip wires that cumulatively are overly expensive, sometimes conflicting in their objectives, and they consume an enormous amount 

of management and board time and resources. 

They also have produced a lot of growth in the shadow banking 

system outside of the regulated banking system. They have, I believe, slowed the housing recovery and resulted in slower capital 

formation and small business credit availability. 

The Treasury Department’s outline for reform provides, I think, 

a great blueprint for beginning to tackle many of these issues, and 

we look forward to working with other financial institutions and 

with members of Congress and Members of this Committee in trying to come with solutions that will leave the industry safer and 

sounder but that will foster economic growth. 

Thank you very much. 

Senator SCOTT [presiding]. Thank you, Mr. Simmons. 

Mr. Baer, you may proceed. 

6 

STATEMENT OF GREG BAER, PRESIDENT, THE CLEARING 

HOUSE ASSOCIATION 

Mr. BAER. Thank you, Senator Scott, Ranking Member Brown. I 

am pleased to appear before the Committee today to discuss how 

regulatory reform could stimulate economic growth. 

I should emphasize at the outset that if the goal is economic 

growth, it cannot be achieved while excluding large and regional 

banks from that effort. Community bank relief is warranted, but as 

the Treasury Department noted in its report this week, community 

banks hold only 13 percent of U.S. banking assets. The 25 banks 

that own The Clearing House fund more than 40 percent of the Nation’s business loans held by banks and more than 75 percent of 

loans to households. Large banks originated 54 percent of small 

business loans in 2015 by dollar amount and about 86 percent by 

number. 

The starting point for any review of the American banking system is one that is extremely resilient. Regulatory changes have 

helped to increase the quality and quantity of capital. Post-crisis, 

the aggregate Tier 1 common equity ratio for The Clearing House’s 

25 banks has nearly tripled and increased from $331 billion to over 

$1 trillion in capital. 

Similarly, U.S. banks now hold unprecedented amounts of cash 

and cash equivalents to protect against a run. Today such assets 

compose nearly a quarter of U.S. large bank balance sheets. 

While much has been gained in fortifying the Nation’s largest 

banks, some overly stringent capital liquidity, and other rules have 

diminished their ability to lend and intermediate in financial markets. For example, Fed data show that approval rates for small 

businesses were just 45 percent at large banks subject to heightened capital requirements for such loans, but 77 and 60 percent, 

respectively, at CDFIs and small banks. 

Similarly, with respect to mortgage lending, our research demonstrates that the Federal Reserve CCAR test is imposing dramatically higher capital requirements on residential mortgage loans 

than bank internal stress test models or the standardized approach 

to capital developed by the Basel Committee. As a result, over the 

past 6 years, residential real estate loans declined 0.5 percent per 

year at banks subject to the CCAR stress test while they have 

risen 4.0 percent at banks not subject to the test. 

Capital markets have also been affected. Indeed, post-crisis regulation by banking regulators has affected securities markets more 

than regulation by securities regulators. Bank regulations have 

made it significantly more expensive for broker-dealers affiliated 

with banks, which now include all the largest broker-dealers, to 

hold, fund, and hedge securities positions. And the Volcker 

rulemakes the holding of market-making inventory a potential 

legal violation. 

The greatest impact has been felt by smaller companies. Issuance 

of corporate bonds by small and midsize firms has fallen over the 

past few years even as issuance by larger firms has increased. 

Supervision is also playing as large a role as regulation in constraining credit as examiners increasingly dictate how bank resources are to be allocated. For example, leveraged lending is an 

important type of financing for growing companies, which carry a 

7 

lot of debt. Based on no empirical evidence, the Federal banking 

agencies have issued guidance setting arbitrary limits on such 

lending. Some of the guidance makes little sense. For example, regulators require banks, in evaluating whether a company is leveraged, to assume that all its lines of credit are drawn, which is akin 

to lowering a consumer’s credit score because their credit line has 

been increased for good payment history. As a result, some Fortune 

500 companies with investment grade debt are now deemed by the 

regulators to be highly leveraged and, therefore, risky. 

More broadly, we believe that bank supervision has lost its way 

post-crisis and requires a comprehensive reexamination. Even as 

banks have dramatically improved their financial condition, supervisors have transformed supervisory grades from a measurement of 

financial condition to a measurement of compliance. They have created unwritten rules that lead isolated compliance problems serving as a barrier to expansion, in some cases for years, and particularly for midsize and regional banks. 

Another result is simply a massive cost, which must be passed 

along to consumers, as described in a recent CEO letter to shareholders: ‘‘At M&T, our own estimated cost of complying with regulation has increased from $90 million in 2010 to $440 million in 

2016, representing nearly 15 percent of our total operating expenses. During 2016 alone, M&T faced 27 different examinations 

from six regulatory agencies. Examinations were ongoing during 50 

of the 52 weeks of the year.’’ 

Much of this burden comes as rules that make sense for large 

complex firms are applied to firms that present few of the same 

risks. Certainly the answer to a bad rule is not to apply it to fewer 

people, and there are many rules that fit that description. But 

there are other rules that make sense for some but not all. My 

written testimony sets forth numerous rules in both categories and 

ideas for how they could be reformed. 

There is no need for fundamental changes to post-crisis regulation, but there is certainly room for improvement, and particularly 

if the goal is stronger economic growth. 

Thank you. 

Senator SCOTT. Thank you, Mr. Baer. 

Now, from the great State of South Carolina, Mr. Hill. 

STATEMENT OF ROBERT R. HILL, JR., CHIEF EXECUTIVE OFFICER, SOUTH STATE CORPORATION, ON BEHALF OF MID-SIZE 

BANK COALITION OF AMERICA 

Mr. HILL. Chairman Crapo, Ranking Member Brown, Senator 

Scott, and Members of the Committee, I am Robert Hill, CEO of 

South State Corporation. I am grateful that your leadership has 

provided a nonpartisan platform to hear from bankers like myself. 

Today I represent my company, South State Bank, and also the 

Mid-Size Bank Coalition, which is the voice of 78 midsize banks in 

the U.S. with headquarters in 29 States. Our member banks are 

primarily between $10 billion and $50 billion in assets and serve 

customers and communities through more than 10,000 branches in 

all 50 States, the District of Columbia, and three U.S. territories. 

Midsize banks most often are the largest local bank serving their 

community, many for more than a century. 

8 

South State specifically was founded in 1933 on the heels of the 

Great Depression in rural South Carolina. Today we serve communities both large and small in North Carolina, South Carolina, and 

in Georgia. 

In January of this year, our bank crossed the $10 billion in asset 

threshold, and I have had the opportunity to see firsthand how this 

threshold is having a negative impact on economic growth. 

At South State, not unlike my peers in the coalition, we operate 

a very simple business model. We offer depository services, and we 

lend money in local communities. This is very similar to the business model we operated when we were a very small community 

bank. We have stable deposit funding from our customers, revenues 

that are driven from traditional banking services, and that are well 

understood by both our regulators and our management team. And 

we have never done any proprietary trading. 

South State and other midsize banks have prudent business 

models that contribute to economic growth and support financial 

stability. Our company never lost money during the financial crisis. 

We never did subprime lending. We never stopped lending to our 

customers during the crisis. 

As the largest banks in many of our States, midsize banks can 

have a significant impact on our communities, but some banks are 

choosing not to cross this huge threshold or cross it and shift their 

focus from investing in the businesses that they have to investing 

in the preparation for large bank regulation. 

Under Dodd–Frank, crossing the $10 billion in asset threshold 

has had very harsh implications for midsize banks. This is happening to a segment of our industry not based on risk but based 

purely on asset size. And I assure you that adding $1 in incremental assets as we cross $10 billion did little to change the risk 

profile of our company. 

While we value many parts of Dodd–Frank and we like the way 

our industry has been strengthened since the crisis, I have yet to 

see the value to the public in any appreciable way of the arbitrary 

$10 billion threshold. These requirements drain resources of 

midsize banks, divert dollars from investment in our customers to 

investment in large bank regulation. For example, South State was 

impacted by over $20 million per year, a significant sum for a bank 

our size. What impacts did this have on our local communities? For 

us, that equates to 300 jobs. Approximately 10 percent of our 

branches were closed, and even more jobs were diverted from lending to regulatory compliance. 

As banks that support Main Street and not Wall Street, we need 

our communities and our communities deserve regulation that encourages prudent behavior and also protects our customer. But we 

also need to have common-sense regulation that does not impose 

burdens or slow economic growth in our communities. In our view, 

we must move away from the Dodd–Frank $10 billion regulatory 

threshold. 

Again, I appreciate the opportunity the Committee has given the 

Mid-Size Bank Coalition and myself to express these views today. 

Senator SCOTT. Thank you, Mr. Hill. 

Professor Omarova. 

9 

STATEMENT OF SAULE T. OMAROVA, PROFESSOR OF LAW, 

CORNELL UNIVERSITY 

Ms. OMAROVA. Senators, thank you for the opportunity to testify 

on this important issue. 

We are all here today because 9 years after the worst financial 

crisis in generations, the banking industry is now waging a massive campaign to roll back the Dodd–Frank Act and the entire regime of post-crisis systemic risk regulation. The banks claim that 

regulation is what directly prevents them from lending to small 

businesses and struggling families and, thus, prevents them from 

fostering America’s economic growth. You should take these claims 

with extreme skepticism. 

First, it is important to understand what the banking industry 

really means by growth. What America needs is real economic 

growth—sustainable, socially inclusive, long-term growth of the 

real, nonfinancial, sector of the American economy. We need to restore the Nation’s eroding industrial base, rebuild and modernize 

our infrastructure, and create sustainable, well-paying jobs. What 

we do not need is to have another stock market or real estate bubble fed by cheap credit and speculation in secondary markets. 

Yet if Congress, you, deregulate big banks, that is precisely what 

will grow. Big Wall Street banks derive the bulk of their profits not 

from small business lending but from massive high-risk trading 

and dealing in secondary markets. They feed speculation, not real 

economic growth. That speculation is precisely what caused the latest financial crisis, and it will inevitably cause another one on your 

watch. 

In a strategically savvy move, big banks are aligning themselves 

with the smaller and midsized and regional banks as far more sympathetic petitioners, almost the Jimmy Stewart bank types. Almost 

but not quite. Even the tiniest among them have more than $10 

billion in assets, and the bigger ones, well over $300 and sometimes $400 billion in assets. True, they are smaller and less dependent on speculative trading than Wall Street megabanks, and 

perhaps they do deserve a lighter regulatory load. But if trying to 

help these smaller banks you grant their request for a massive regulatory rollback, the principal beneficiaries of the deregulation will 

be Wall Street megabanks. Deregulation will reduce smaller banks’ 

compliance costs, but it will also enable megabanks to expand the 

high-risk speculative trading, which is at the core of financial instability and crisis. 

To guard against that, you should require banks to provide concrete evidence that they will actually use their savings from specific deregulatory measures primarily, if not exclusively, to increase 

lending to productive economic enterprise. At the very least, banks 

should give you the exact amounts of prudent, productive loans 

that they were ready to make but were forced to decline solely because they did not have enough money left after paying for regulatory compliance. I doubt that such evidence exists. Yet there is 

plenty of evidence that all banks, regardless of their size, generate 

healthy net profits, in fact, to the tune of $175 billion only in 2016 

and choose to return the bulk of those profits to their shareholders 

through dividend payments and share buybacks. Only last year, insured banks paid out $103 billion in cash dividends, an amount 

10 

second only to the record high of $110 billion in bank dividends 

paid in 2007, the last pre-crisis bubble year. 

High dividends increase banks’ stock price and management bonuses, so that is where most of their money seems to go, not to 

lending or regulatory compliance. That is a far cry from rebuilding 

America’s industrial base or helping struggling American families 

to get out of poverty. 

Unless banks put their own money where their very loud and 

very well paid mouths are, you should not read their claims about 

fostering growth as anything more than convenient rhetoric. Indeed, it is much more likely that big banks’ massive push for deregulation is driven by their desire to generate high speculative 

trading profits, increase their executives’ bonuses, and return more 

dividend cash to their shareholders. Right now, all of these things 

are significantly limited by the Dodd–Frank regime of enhanced 

prudential supervision, including heightened capital ratios, supervisory stress testing, and living will requirements applicable to 

large systemically important financial institutions, or SIFIs. 

No wonder that the banking industry attacks the key elements 

of this post-crisis regulatory regime as supposedly arbitrary and insufficiently ‘‘tailored’’ to their unique circumstances. For example, 

banks are demanding that SIFI designation is conducted on a strict 

case-by-case basis with every bank getting the same tailored process as MetLife got, and we all know how perfectly efficient and 

problem-free that process turned out to be. If you allow this to happen, it will effectively kill the entire regime of enhanced SIFI oversight. 

The same goes for banks’ demands to force the Federal Reserve 

to publish its stress test scenarios for public notice and comment 

and to restrict the Fed’s ability to conduct and use its own test 

models. Yes, that will make stress tests fully transparent, just like 

giving the students exam questions before the exam will make that 

exam transparent. And it will also make it absolutely useless for 

its intended purposes. I know better than to give my students such 

a special gift, and you should know better than to do the same for 

the banks. 

In conclusion, I urge you to keep focus not on what banks want 

for the sake of their own profitability, but on what the American 

economy and the American people need: not another speculative 

frenzy but sustainable, employment-generating growth of the real 

economy. Financial deregulation will hinder, not foster, such 

growth. 

Thank you. 

Senator SCOTT. Thank you, Professor. 

And I will just remind all of us that we have votes at 11 o’clock, 

and our goal is to be out by 11 a.m., so keeping our questions to 

5 minutes would be very helpful. I will start off our questions. 

Mr. Hill, thank you for being here today. Certainly it is always 

good to have a homegrown South Carolina product like yourself 

and your company do very well, and thank you for being here to 

testify before us today. 

I think it is critical that the Committee hears from voices representing all parts of our country. It ensures we get a holistic perspective on how to grow our economy for everyone. That is why I 

11 

am so glad that Mr. Hill is testifying today. His company, South 

State Bank, is the largest financial institution headquartered in 

South Carolina. It has less than $12 billion in assets, but States 

like mine rely heavily on midsize banks and regional banks to provide small business loans, mortgages, and consumer financial services. 

The Dodd–Frank Act created a lot of hoops for companies like 

South State to jump through. Much of the added regulatory burden 

is triggered by specific asset thresholds. It seems to me that if you 

tell someone that they will get hammered by the Federal Government if they hit XYZ number, everyone is going to do all that they 

can to avoid hitting that number. The collateral damage is to economic growth. 

Mr. Hill, can you speak to the distortions in the market and business behavior as institutions approach these thresholds? 

Mr. HILL. Yes, Senator Scott. First, I want to thank you for the 

nonpartisan support of the CLEAR Act, as well as Senators 

Heitkamp and Moran. It is this type of bipartisan sensible legislation that I do think is moving the ball forward to help deal with 

some of these issues. 

Senator SCOTT. Thank you. 

Mr. HILL. The changes as you approach this threshold is 

versus—I think of a threshold as a small step forward. This is a 

meaningful leap for a bank of $10 billion. I have been in the business for 30 years. I have dealt with a lot of regulation. I do not ever 

remember even fathoming the fact that a customer could add one 

more dollar to a checking account or savings account to take you 

to $10 billion and you would be saddled with a $20 million burden 

and be treated as a large bank. 

So it is doing two things. It is, one, driving banks out of our industry. Senator Perdue certainly sees it in his State. Senator Tillis, 

Senator Scott, we certainly see it in ours. They cannot compete, 

and as you get larger, they realize they do not want to go over that 

$10 billion hurdle and they elect to exit. 

The other is for those that elect to stay in like our company, we 

are an 80-plus-year-old company. We are vitally important to many 

of the communities we serve. We wanted to stay in. But try to take 

the Dodd–Frank Act and put it over a bank with a little bit more 

than 100 offices compared to a national bank with 5,000 or 6,000. 

The burden is huge. So it ends up resulting on different forms of 

behavior. Companies decide to sell, or they have to cut expenses. 

In our case, we closed 10 percent of our branches. All of that money 

went toward regulatory reform, and it has taken the attention of 

our board and our management team and a lot of our employees 

over 3 years to be able to make this journey. And now we have just 

crossed it. Now we begin to be treated as a large company. 

Senator SCOTT. Thank you, Mr. Hill. Facts and figures aside, at 

the end of the day I am worried about the Aiken family that is trying to buy their first home or the Nichols small business owner 

who just survived the flood and is now trying to get back on their 

feet. 

Mr. Hill, what is the impact of enforcing these arbitrary thresholds on economic growth and on the people of South Carolina? Specifically, you mentioned—my words, not yours—$9.9 billion in asVerDate Nov 24 2008 11:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\06-15 ZDISTILL\61517.TXT JASON
12 

sets versus $10 billion in assets, 10 percent closing of your locations, maybe up to $20 million of additional regulatory burden. 

How does that impact the average person in our State looking to 

borrow money for a home or restore their business after a major 

flood? 

Mr. HILL. Well, the midsize banks fill a very important gap between the smallest banks and the largest banks in our country. Because we are the community bank for South Carolina, we are very 

focused on communities like Aiken. Many of the large national 

banks would not know where that community would be. It does two 

things. One, it drives costs up. That is very simple, very clear. It 

is 15 to 20 percent. It takes flexibility away. It does not allow us 

to treat customers uniquely based on their needs, both financially 

and also their situation. And it paints in a one-size-fits-all regulatory environment. 

Senator SCOTT. Thank you, sir. 

Ranking Member Brown. 

Senator BROWN. Thank you, Senator Scott. 

Professor Omarova, the Wall Street Journal recently said it is 

hard to miss how much the Treasury report would benefit top Wall 

Street banks. That comes from the paper of record, if you will, for 

Wall Street. By my count, the report includes about two dozen of 

The Clearing House’s recommendations. You talked in your testimony, Professor Omarova, about the argument that rolling back 

rules for Wall Street banks would help lending. What are the implications of rolling back the capital and the leverage rules and the 

Volcker rule restrictions against proprietary trading? Would that, 

in fact, lead to more lending or economic growth? 

Ms. OMAROVA. Well, there is absolutely no evidence that it will, 

in fact, lead to more lending or economic growth. There is a lot of 

confusion about what capital rules do, because banks always tell 

us, oh, you know, capital just traps cash and we cannot lend money 

out. And nothing could be further from truth. Capital is not cash 

in the vault. It is not some kind of gold that, you know, they have 

to put away. Capital is just an accounting concept. It is basically 

shareholders’ equity, and banks are forced by regulation to hold 

these cushions of shareholder equity to protect creditors from losses 

on their assets. They can get away with much thinner cushions 

than, you know, a normal company could get away with in the capitalist market because the Government protects creditors of the 

banks from banks’ failure. 

And so if you roll back capital requirements, what will happen 

is that the banks will be able to take more risks. And because 

banks are privately owned, profit-seeking enterprises, quite legitimately they would look for investments in assets that generate 

higher returns, which typically entails higher risks. And that is 

what will happen. There is no evidence that somehow Dodd–Frank 

Act is what prevents banks from lending. You know, banks choose 

how to use their cash, and they choose their—for example, they 

choose to declare dividends out of their cash. And that directly 

takes away cash from lending. 

In my view, basically if we roll back these regulations, what we 

will have on our hands will be another crisis, and everybody in this 

room should be warned about that. 

13 

Senator BROWN. Thank you. 

Let me ask everybody on the panel—and I would prefer a yes or 

no, and I think you can answer this yes or no. This Committee has 

talked for some time—and the sitting Chairman was a leader in 

this issue 3 or 4 years ago—about housing finance reform and its 

importance to economic growth. I will not ask you for detailed 

thoughts because that would be a long, long answer from each of 

you. But if you would answer yes or no, do you think we should 

have hearings on the topic of housing finance reform and have an 

open process where you can weigh in and we can discuss it? Mr. 

Simmons. 

Mr. SIMMONS. Absolutely. 

Senator BROWN. Mr. Baer. 

Mr. BAER. Yes. 

Senator BROWN. Mr. Hill. 

Mr. HILL. Yes. 

Senator BROWN. Professor Omarova. 

Ms. OMAROVA. Yes. 

Senator BROWN. OK. Thank you. If that is the case for housing 

reform—I will start again on the left—do you think it should also 

be the case for the significant changes to health care? 

Mr. SIMMONS. It is not the purpose of the hearing, but yes. 

Senator BROWN. Mr. Baer. 

Mr. BAER. I do not know. It is not my area of expertise. 

Senator BROWN. But you are a citizen. 

Mr. BAER. I am a citizen who has saved a lot of time in my life 

by not thinking about health care reform because it is so difficult 

to understand, and I am sort of full up on bank regulatory—— 

Senator BROWN. But do you think we should have an open process and discuss it? 

Mr. BAER. I think in general open processes are better than 

closed processes. 

Senator BROWN. Mr. Hill. 

Mr. HILL. I tend to think health care is important to the vital 

health of the local economies, and that the more discussion we can 

have to move that along, the better. 

Senator BROWN. Professor Omarova. 

Ms. OMAROVA. Absolutely. There must be an open, democratic, 

and fully vetted process for deciding such an important issue. We 

all have to know what is going on. 

Senator BROWN. OK. Thank you. And if we screw up either effort, whether it is Dodd–Frank, whether it is housing finance reform, whether it is health care, clearly the economy pays a price. 

I mean, we know that. 

Let me ask one last question, Professor Omarova, and give your 

answer as short as you can in complying with the President’s request—the Chairman’s request. You are not the President. 

[Laughter.] 

Senator BROWN. Professor, you said reasonable people may disagree and argue about whether the current size threshold, $50 billion in assets, is the right one or whether a higher or lower number 

would be more socially beneficial. How do we balance providing— 

as we talk about tailoring Section 165, as I think we should, how 

14 

do we balance providing appropriate relief for regional banks 

against the intent of 165 to mitigate risk to financial stability? 

Ms. OMAROVA. Well, that is a complicated question, but the one 

clear answer is that we should not just simply remove all regulation from regional banks because they are less than $1 trillion in 

assets. As a group, they still present significant risks. If they fail 

as a group in a correlated set of failures, that will probably tank 

regional economies and maybe the national economy. 

Think about the S&L crisis in the 1980s. Those were also very 

small and traditional lenders, and when they were deregulated, 

those small traditional lenders almost brought down the financial 

system. And that is what we should think about today. We cannot 

look at these regionals in isolation. We definitely should think 

about how to tailor regulatory burden for them, but we cannot just 

blankly remove all the regulations because they are smaller. 

Senator BROWN. Thank you, Mr. Chairman. 

Chairman CRAPO [presiding]. Thank you. 

Senator Tillis. 

Senator TILLIS. Thank you, Mr. Chair, and thank you all for 

being here. I cannot imagine anyone sitting up at this dais would 

suggest just a blanket repeal of all regulations. It does not make 

sense. Regulations exist for a reason. Some of them are good. Some 

of them are awful. And I think that there are some manifestations 

of regulations that have been promulgated under Dodd–Frank that 

are absolutely awful. 

Mr. Baer, I want to ask you a question about the concept of tailoring the—instead of these simplistic, you know, $50 billion, $250 

billion sorts of thresholds that we create to determine the regulatory burden on the institution, I am more of a proponent of tailoring. I am getting to a point to where the regulatory burden is 

proportionate to the risk of the target being regulated. Could you 

give me some thought with respect to the regulatory environment 

that we have today—most of it is driven by Dodd–Frank; some of 

it pre-dated it—that you think lends itself to that kind of thought 

process and the benefits that you think would accrue by doing 

that? 

Mr. BAER. Yes, Senator, sure. I think when it comes to tailoring, 

you need to think about what risks does the institution present. 

You know, for example, does it have a capital markets business? 

Does it have multiple subsidiaries or only one? Is it primarily funded by deposits or is it funded in other ways? Then you think about 

what rule are we talking about here? Is it a living will? Is it capital 

requirements? Is it liquidity requirements? And then marry those 

two up. 

So, for example, the notion of having a living will for a small deposit-funded firm which is going to be in any event resolved, you 

know, under the pre-existing FDIC resolution process does not 

seem to make a lot of sense. 

There may be other rules. I mean, if you believe that there 

should not be proprietary trading, perhaps some of those rules 

should continue to apply. But, again, I think you need to make the 

decision based on firms in categories in terms of the risks they 

present and then the type of the rule you are talking about. 

15 

Senator TILLIS. The other thing that I find interesting, at least 

in some of the prior committees—I am sorry I was not here earlier; 

we have got four committees meeting at the same time, so I did not 

get to hear the testimony. But with an eye toward lean regulation, 

let us say that we go through that stratification, and we come up 

with a more coherent way of actually determining what regulatory 

burdens should be placed on a financial services institution. What 

about other areas in terms of executing— and this is for anyone, 

but when I hear the big banks who would be at the highest level 

and have the highest amount of regs—and I guess in some cases 

if you get the methodology right, appropriately so. But would it 

make—how can it possibly make sense to have the stress test submissions be in the hundreds of thousands of pages? I mean, isn’t 

there any thought given to how you create a leaner design around 

this and get the paperwork and the time and the costs associated 

with that out of it so that the consumers accrue a benefit, the 

money is being spent on value to the consumer versus compliance 

with the Government? Anyone have any opinion on specific things 

that we could potentially do to reduce that burden? 

Mr. BAER. I will just say briefly on CCAR, again, I think the 

length of the submission should vary with the complexity of the 

firm. There may be large firms that need very complex submissions. In fact, our view is with respect to the stress test that the 

DFAST models run by the banks, which are granular down to loan 

level, are actually appropriate and a better measure of capital perhaps than the opaque model that the Federal Reserve is running. 

But certainly for less complex firms, I think less burden would be 

appropriate. 

Mr. HILL. Senator, I would just add, if you look at—I could sit 

down and explain our balance sheet to you in about 5 minutes. It 

is pretty simple. It does not take complex algorithms and quants 

to be able to figure out the sensitivity of our company. I think it 

ultimately comes down to capital, how much you hold—that is 

what is going to protect all of us when we have the next downturn. 

And I think the Basel limits, I think looking at capital rules, actually provide much more sound banking practices than some theoretical analysis on sensitivity. 

Mr. SIMMONS. I might just add, you know, our CCAR submission 

runs over 12,000 pages. You reach points of diminishing return 

pretty quickly in a very straightforward business model. We find 

the process itself to be useful, but the incredible degree of precision 

to which the Federal Reserve has pushed this does not yield benefits commensurate with the cost. 

Senator TILLIS. We all know that has a disproportionate impact 

on smaller banking institutions, but all of the regulations that we 

are heaping on that I think have reached a point of diminishing returns we have got to look at and right-size. There was clearly a 

risk in 2008 that we had to produce regulations to avoid in the future, but we have clearly gone too far. And I have to take exception 

with anybody who thinks that everybody who wants a loan can get 

it today. The reality is a lot of people—it is sort of like people who 

leave the labor market, and so they are just not searching for work 

anymore. There are entire business enterprises that are not looking 

for capital because they do not think they can get it or the cost of 

16 

getting it is just too great. And it is having a chilling effect on our 

economic growth. That is one of the reasons why we have such anemic economic growth. And unless we start right-sizing some of 

these regulations and recognize there is a lot of pent-up demand 

for capital and that the root of that are a lot of regulations that 

overreached in Dodd–Frank, then we are not going to get to the 

sort of economic activity that we need to get to, to then dig ourselves out of this $20 trillion in debt. 

On the report, I had a lot of questions to ask you, but I have 

gone over, and I normally do not go over, Mr. Chair. 

Chairman CRAPO. We will take it out of next time. 

Senator TILLIS. But there are a number of things that, if I may 

in follow-up questions for the record, I would like to go into the report itself, and some of the priorities and objectives, we would like 

your input, because I think this is critically—it is one of the most 

critical things we can do to really get economic activity where we 

need it to be. 

Thank you all for being here. 

Chairman CRAPO. Thank you. 

Senator Donnelly. 

Senator DONNELLY. Thank you, Mr. Chairman. I actually only 

have one question, and that would be for Mr. Hill. 

Senator Toomey and I have previously introduced a bill to increase CFPB examination thresholds from $10 billion to $50 billion. How would that make things better for your customers—not 

so much the bank, but what does that do for your customers? 

Mr. HILL. Senator, it is a great question. I think that you can 

take the CFPB, but you can take numerous parts of Dodd–Frank 

legislation and really kind of put them all under the same umbrella. Removing that $10 billion threshold for the company and 

also for a customer, it just makes things less complex. If we want 

to talk about getting more money to Main Street, more money to 

the individual, having one more regulator is not a way to accomplish that. We have multiple regulators already, and now we will 

have an additional one now that we just crossed CFPB. 

So I think a lot of this is about what makes sense and what simplifies it. We have a very close relationship with our regulators—— 

Senator DONNELLY. And it would not reduce safety or stability in 

your organization, would it? 

Mr. HILL. No, sir. Our primary regulator is the FDIC. We have 

a very close relationship. They are in—— 

Senator DONNELLY. Those are obviously critical elements. 

Mr. HILL. Absolutely. And I think they should be. I just think 

they can be done by our existing regulatory bodies. 

Senator DONNELLY. All right. Thank you. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you, Senator Donnelly. 

Senator DONNELLY. I made up for Mr. Tillis. 

Chairman CRAPO. You did, and I appreciate it very much. 

As I indicated at the beginning of the hearing, we have a hard 

stop at 11 because we have three votes, and so I appreciate that 

time. You will get an extra credit. 

Senator Kennedy. 

17 

Senator KENNEDY. Thank you, Mr. Chairman. I, too, am sorry I 

am late, but I was not watching ‘‘The Price Is Right’’. I was in a 

committee, OK? 

[Laughter.] 

Senator KENNEDY. Mr. Hill, I wanted to—you have been there. 

Do you still run a bank? I notice you have been president and chief 

operating officer. 

Mr. HILL. Yes, sir. I am actively running the bank day to day 

and have been for the last 22 years. 

Senator KENNEDY. About $8 billion in assets? 

Mr. HILL. We just crossed $10 billion in January. We are roughly $11.5 billion today. 

Senator KENNEDY. How many people do you have in your compliance department? 

Mr. HILL. This is an estimate, but it would be roughly 50 direct 

employees, but then there are numerous compliance people embedded in our lines of business across our company. 

Senator KENNEDY. So some do it full-time, some do it part-time. 

Mr. HILL. And some are just in a full-time compliance role, and 

some are in the active day-to-day administering of the process. And 

so there is some overlap there. But compared to 5 or 6 years ago, 

that is probably tenfold. 

Senator KENNEDY. OK. That was my question. Tenfold. 

Mr. HILL. And if you look at the cost of that—I look at ultimately 

what does that mean to the customer. I think Senator Donnelly’s 

question was: What does it mean to the customer? What this 

means to the customer for a mortgage loan is our cost to deliver 

a mortgage loan is roughly $1,000 more today than it was just a 

few years ago, mainly because of the increased compliance costs. 

Senator KENNEDY. OK. Let me break that down, though. Today 

you have roughly 50, plus a number of employees that are parttime, if you will, and that is tenfold. OK? 

Mr. HILL. Yes. 

Senator KENNEDY. How much are you spending on those 50 employees? 

Mr. HILL. It would be, you know—I guess it would be in the several million dollars range. 

Senator KENNEDY. OK. And do you believe that these additional 

employees are a direct result of Dodd–Frank? 

Mr. HILL. Oh, they are. Yes, sir. To comply with the rules and 

regulations, two things happened: We had to close ten offices. We 

saved almost $5 million from closing those ten offices. All that 

money was spent directly on complying with Dodd–Frank. 

Now, there is a lot more than just that $5 million, but that all 

was directly spent—a large part of that was in process and compliance-related efforts. 

Senator KENNEDY. How much did your bank make last year? 

Mr. HILL. Our company last year made—this is an estimate. 

Senator KENNEDY. Sure. 

Mr. HILL. In the $65 million range. 

Senator KENNEDY. OK. Has Dodd–Frank helped at all? 

Mr. HILL. Yes, sir. I do believe there have been parts of Dodd– 

Frank that have been positive. I think the most important piece is 

the capital. The banking industry as a whole is holding more capVerDate Nov 24 2008 11:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\06-15 ZDISTILL\61517.TXT JASON
18 

ital today than we did. We are less leveraged as an industry. That 

is the ultimate safety net. Regulation is not the ultimate safety net. 

Capital is the ultimate safety net. And banks across the board 

today are holding more capital—our bank included. But we never 

levered up like many of the large companies did. We are still holding more capital than we have. 

So there have been things that have been done that have been 

vitally important. But to go back to the $10 billion threshold, we 

are choking out the most vitally important part of our community 

banking system by having this arbitrary threshold. And it is making people leave the industry or significantly limiting their ability 

to impact their local community because we are—while we are in 

the same industry as the large banks, we are really significantly 

different companies. 

Senator KENNEDY. You have been in this business—well, you all 

have. Has there ever been a time when the Federal Government 

and its regulation of your industry really did sit down and say 

what are the costs and what are the benefits and make the sort 

of calculation that normal people do every day in their business or 

in their family? Or is that just lip service? Have we ever done it 

right? 

Mr. HILL. Senator, I have been doing this 30 years. I have seen 

a lot of regulation come and go. Most of it has been constructive. 

You figure out a way to deal with it. And I have never felt the need 

to reach out to a Senator about that regulation until now. But this 

arbitrary $10 billion threshold is a painful process that is costing 

our consumer and our communities and local economies, and we 

are overregulating a systemically important part of our economy, 

which is our community banks. 

Senator KENNEDY. Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Cortez Masto. 

Senator CORTEZ MASTO. Thank you, Mr. Chairman. 

I am actually over here in the corner. Good morning. Thank you 

for joining us. 

So let me start off with the first question, and I will open it up 

to the panel. As a new Senator from the great State of Nevada, I 

was not here for the debate on Wall Street reform, but let me tell 

you, as the Attorney General there for 8 years watching as the crisis unfolded and the impact to the State of Nevada, I was paying 

close attention. If you do not know, it was ground zero for the foreclosure crisis, highest unemployment, more people in foreclosure 

than, I think, in the rest of the country. At one point in time, 64 

weeks, we had the highest rate of foreclosure, highest loan-to-value 

ratio, 70 percent of homeowners underwater. Devastating. 

And so I am curious your thoughts on this. One thing I am concerned about what I have seen is that President Trump’s Executive 

order on financial regulation did not once mention consumer or investor protection. And in looking at the 150-page report that was 

released by the Treasury Department this week in response to that 

Executive order, they did not offer one single example where additional protections for students, servicemembers, or seniors were 

needed. 

19 

If we are going to do a wholesale review of financial rules, 

shouldn’t we look at both additional needed protections and regulatory relief? Isn’t that the type of balance we should be looking at? 

I open that up to all of you. 

Mr. BAER. Senator, I agree. I think absolutely, you know, any review of post-crisis regulation should include consumer regulation. 

I think, you know, one issue that we focused on—— 

Senator CORTEZ MASTO. Not consumer regulation. Consumer protection and regulations to protect consumers. 

Mr. BAER. Absolutely. 

Senator CORTEZ MASTO. Right. 

Mr. BAER. I agree. 

Mr. SIMMONS. In my view, a lot of the products—we operate in 

Nevada. It is Nevada State Bank. And we suffered huge losses, not 

from mortgages but from financing land improvements and from 

businesses. And so we certainly experienced a lot of that pain. 

There have been a lot of consumer protections put in and many 

of them probably necessary. We ought to be looking at both. But 

the combination, the layering of all of this has made this industry 

increasingly sclerotic and unable to meet the legitimate needs of 

customers in a way that is sensible and prudent and logical. 

And so I think any of us would be open to looking at are there 

needs for additional consumer protections. That should be on the 

table. But that is not where the real problem is from the point of 

view of us who are trying to deliver services to consumers and businesses who are in need of them today. 

Senator CORTEZ MASTO. So one of the consumer protections that 

I thought was very important and I fought for as Attorney General 

were servicing standards. I think we need those, and I am concerned that there is this idea that we need to do away with them, 

roll those back somehow. I am curious your thoughts on that. 

Mr. SIMMONS. I am not aware of any argument being made by 

the industry to roll back any protections for consumers in the servicing standards. I do not think that is what we are here to defend. 

Senator CORTEZ MASTO. Great. Thank you. 

Anyone else have any other comments in general about consumer 

protection and that should be a part of this discussion? 

Mr. HILL. Senator, we are a community bank. We have roughly 

700,000 customers. I think the overarching thing for us is doing 

away with the $10 billion threshold because we are treating community banks like large banks. And I think that consumer protection is a vitally important part of the role for regulatory bodies and 

also for the banks. But I just think it can be done by our existing 

regulator. We do not need a new regulator for a community bank 

with 100 offices to be able to do that. FDIC is in our offices almost 

year round, knows our company very, very well, and I think it effectively enforces that protection. 

Senator CORTEZ MASTO. Thank you. 

Dr. Omarova, do you have any comments? 

Ms. OMAROVA. I just have a general sort of observation that 

banks will never publicly say anything against consumer protection 

per se because that is bad PR, and yet they always admit that the 

second that regulatory costs increase, they will immediately pass 

20 

those regulatory costs on to consumers. And then they say, therefore, you should not regulate us because it is costly. 

To me, that is not consumer protection. Banks’ shareholders, 

banks’ managers, those are the guys who should be eating those 

additional regulatory costs. To me, that is the essence of consumer 

protection in practice. 

Senator CORTEZ MASTO. Thank you. Go ahead. 

Mr. BAER. Senator, not, you know, purely consumer protection, 

but I do think there is a lot of research to be done, and we have 

done some research, including a recent edition of our quarterly 

magazine, around the question of income inequality and bank regulation. I think the evidence shows that one outcome of a lot of the 

post-crisis rules, including even down to the level of stress testing, 

where the assumption is that there is a very large rise in unemployment, which tends to cause banks to, you know, more highly 

price loans to people who are subject to that or are likely to be affected by that spike in unemployment. There has definitely been an 

increase in the price of credit to people at the lower-income end of 

the spectrum, and a lot of that in very subtle but very meaningful 

ways has to do with regulation. And so, yes, consumer protection 

is really important, but we also think access to credit for consumers, particularly low- and moderate-income consumers, is really 

important. And that is the reason that we have devoted increasing 

amounts of our research to it, but we really think others should as 

well. 

Senator CORTEZ MASTO. Thank you. I notice my time is up. 

Thank you very much for your comments. 

Chairman CRAPO. Thank you. And as I have indicated before, we 

have a hard stop at 11 o’clock. I have not asked my questions yet. 

That makes three of us if no one else comes. I am going to have 

Senator Cotton and then Senator Warren go. That will give me a 

couple of minutes at the end, and maybe I can scoot it a little past 

11 and get my 5 minutes in, too. 

Senator Cotton. 

Senator COTTON. Will I get my bills and amendments voted on 

earlier if I give my time to you? 

[Laughter.] 

Chairman CRAPO. Oh, yeah. There is extra credit here. 

Senator COTTON. Mr. Hill, I know you have spoken about the various threshold levels, $10 billion, $50 billion, and the burdens 

those bring. I want to talk a little bit about the arbitrariness of 

that. Obviously, anytime you pick a number, it is somewhat arbitrary, you know, whether it is the designation for a systemically 

important financial institution or a speed limit or an age to vote 

or an age to drink alcohol. But in this field, I mean, what are we 

talking about here in terms of an institution that might hit a $10 

or a $50 billion threshold? Are we talking about thousands or hundreds of thousands of institutions? Or are we talking of a scale of 

maybe a few dozen? 

Mr. HILL. Well, if you look at the 10 to 50 ranks, there are 79 

of us. 

Senator COTTON. OK. That is what I thought. It would seem that 

that could be done on a more discriminating basis than an arbitrary threshold, wouldn’t it? 

21 

Mr. HILL. Yes, sir. It is just not a risk-based approach, and companies—customers are different and banks are different. A riskbased approach versus a one-size-fits-all regulation does not make 

sense. In my mind, it is quite simple. The role here is risk management. We do not want another financial crisis. And the risks come 

from the ‘‘too big to fail’’ banks. So, to me, we need to regulate 

them as one industry, and then outside of that, they are mostly 

community banks or large community banks like our company. And 

I think those are very different type banks. 

Senator COTTON. So, in principle, you could have a $50 billion bank, or a $500 billion bank for that matter, that is relatively plain 

vanilla, conservative, and, therefore, not all that risky? 

Mr. HILL. Well, I cannot speak to all the 500. I can speak to the 

10 to 50s, and I think I can speak to a bank somewhat like Mr. 

Simmons’, which is basically just a larger community bank. But because we have done things right, because we have attracted customers, because we help small businesses, we have grown. And 

today we are penalized when we take that incremental dollar over 

$10 billion. 

Senator COTTON. And when you say ‘‘community bank’’ there, to 

be exact, in this context, I think I understand you to mean focusing 

on the functions that a bank performs. 

Mr. HILL. Operating as a community bank. While we are $11.5 

billion today, our operating model is the same as it was when we 

were $400 million. We are just in more communities. 

Senator COTTON. Isn’t there an old joke about taking it in at 3, 

lending it out at 6, and hitting the golf course by 3:00? 

[Laughter.] 

Mr. HILL. I think that was before I joined the industry. 

Senator COTTON. But the point being that this risk analysis is 

primarily—or this analysis should be primarily risk-based, based 

on the nature of the institutions, or the nature of the functions an 

institution performs, and, therefore, a relatively large institution 

can be engaged in relatively low-risk activities. But by the same 

token, an institution of less than $50 or less than $10 billion, because of the nature of its positions and interlocking counterparties 

could actually be quite risky. Correct? 

Mr. HILL. Correct. And I think just the opposite of that. We want 

to incent less risk in our financial services industry. So what better 

way to do that than hold the adequate amount of capital, be in the 

less risky businesses. We have never done any proprietary trading. 

So if you are in that business, hold more capital. You are going to 

have more regulation. But if you do operate a simple business 

model that positively impacts our community, those are the ones 

that we have to be careful that we do not go too far. Dodd–Frank 

did a lot of good things. It overreached in this $10 to $50 billion 

sector and treated that sector as it does many of the large banks 

in our country. 

Senator COTTON. OK. Just to tie a bow on this part of the conversation, I would say that I think the size of an institution obviously needs to be a part of this analysis, but a simple size-based 

approach does not seem to make much sense to me. And given the 

number of institutions we are discussing here, you would think 

that our financial regulatory agencies could have a more discrimiVerDate Nov 24 2008 11:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\06-15 ZDISTILL\61517.TXT JASON
22 

nating approach. Again, we are not dealing with, you know, millions of Americans who become 18 years old every year and, therefore, we just have to draw an arbitrary line, even though we all 

know that some 17-year-olds are very mature and exercise good 

judgment and plenty of 19-year-olds do not, when you are talking 

about something on the order of a few dozen institutions that we 

can take a more sensible and case-by-case approach, with size 

being one factor in that analysis. 

I will yield 40 second back to the Chairman so I can get a chit 

in the future. 

Chairman CRAPO. We will keep that record. 

Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. 

So after the financial crisis, Congress determined that banks 

with more than $50 billion in assets—this is about roughly the 40 

biggest banks in the country—posed a greater risk to the economy 

than community banks and credit unions. And so we required the 

Federal Reserve to apply tougher rules and more oversight to those 

banks. And now those banks want to eliminate the $50 billion 

threshold. They want to cut all but the very biggest banks loose 

from stricter oversight, and they want to restrict the Federal regulators from applying tougher rules except under somewhat more 

limited circumstances. So, in other words, this is about rolling back 

a big part of Dodd–Frank, and I just want to take a look at that. 

Mr. Simmons, you are the CEO of Zions Bank, which is one of 

the banks that would avoid tougher rules under the industry’s proposal. And in your written testimony, you argue that the current 

approach covers too many banks given the minimal risks posed by 

banks like yours, and that we are unnecessarily making it harder 

for banks like yours to lend. Do I have that about right? 

Mr. SIMMONS. Yeah. 

Senator WARREN. Yeah, OK. Now, those arguments sounded very 

familiar to me, so I went back and looked, and it turns out that 

back in September of 2006, just 2 years before the financial crisis, 

you were the head of Zions Bank, and you testified before the 

House Financial Services Committee. Your testimony strongly opposed guidance from Federal regulators that increased the oversight for banks that had a high concentration of commercial real 

estate loans. Regulators were worried that the banks were overly 

exposed to one category of lending and that might put them at 

greater risk of failing. You thought, ‘‘Ah, there is no problem.’’ And 

in opposing the guidance—I want to quote you on this—you said, 

‘‘The guidance has been proposed at a time when the banking industry is exceptionally healthy.’’ 

Another one from you in this testimony: ‘‘Commercial real estate 

loans in particular have performed exceptionally well.’’ 

Another one: ‘‘By using blanket industry-wide guidance to address concentrations, the regulators risk choking off the flow of 

credit from banks that are engaging in commercial real estate lending in a safe, sound, and profitable manner.’’ 

Now, within 2 years of your testimony, the bank you led, Zions, 

needed nearly $1.5 billion in taxpayer bailout money to stay afloat. 

And here is the kicker: That was in part because your bank was 

highly concentrated in commercial real estate lending, the exact 

23 

thing that you told Congress was not an issue, nothing to worry 

about. 

So, Mr. Simmons, when you say today that Congress can safely 

roll back the rules on banks like yours and there will not be any 

risks to taxpayers, why should anyone believe you? 

Mr. SIMMONS. Well, listen, what we are saying is that the enhanced prudential standards in Section 165 of Dodd–Frank are industrial strength and intended, in my way of thinking about this, 

for institutions that pose a—— 

Senator WARREN. Mr. Simmons, let me stop you right there because I know we are really trying to do this quickly. I am not asking you to repeat your argument. We have already agreed on what 

your argument is. The question I am asking, given your previous 

testimony about how there is no problem here, and then it turned 

out you needed $1.5 billion in bailout money on exactly the thing 

you testified was not a problem, I am asking why anybody should 

believe you when you come in here today and say no problem in 

this area, let the $50 billion and above banks go ahead. I am just 

trying to understand why you have any credibility on this issue. 

Mr. SIMMONS. Well, listen, because I deal with it every day, and 

because—— 

Senator WARREN. Well, you dealt with it every day back when you testified in 2006, and the taxpayers had to pony up $1.5 billion 

to save your bank. 

Mr. SIMMONS. Listen, every large bank took TARP money and 

without—— 

Senator WARREN. I am sorry. So your argument is that you were 

right or wrong—— 

Mr. SIMMONS. The one large bank that did not receive it, National City, was sold a week later. This was a matter of preserving 

confidence across the industry. Our capital, our equity capital, always remained above the regulatory minimums. 

Senator WARREN. I am sorry, Mr. Simmons. Are you trying to 

make the argument that you did not have a problem? You know, 

because actually—— 

Mr. SIMMONS. We incurred stress, but we never saw equity capital, common equity capital—— 

Senator WARREN. Let us just be clear about—— 

Mr. SIMMONS. —decline below the regulatory minimums. 

Senator WARREN. ——the problem. The regulators actually went 

back in 2013 to reexamine their earlier guidance, the guidance you 

had said was unnecessary, and they found, ‘‘During the 3-year economic downturn, banks with high commercial real estate concentration levels proved to be far more susceptible to failure. Specifically, 23 percent of the banks that were highly concentrated in 

commercial real estate lending,’’ what you had testified about, 

‘‘failed compared with only one-half of 1 percent of the banks that 

were not.’’ 

So I understand we are out of time. I just want to say here, you 

know, what I notice about this is whenever things are going OK, 

the banks come in here and say, ‘‘Yay, let us reduce the rules, let 

us let everybody go out. What could possibly go wrong?’’ And then 

when things go wrong, banks like yours line up and say to the taxpayers, ‘‘Bail me out.’’ 

24 

Our job is to make sure that we do not permit the next failure 

to happen because it helps short-term bank profits. Our job is to 

watch out for the taxpayers and the security of this economy. 

Thank you, Mr. Chairman. I apologize for going over. 

Chairman CRAPO. We are going to put that on your record, too. 

[Laughter.] 

Chairman CRAPO. Just kidding. 

Senator WARREN. Well, it is not the first time. 

Chairman CRAPO. Thank you. And I will take my questions now. 

I will try not to go 5 minutes because we do have a vote starting 

in about 1 minute. 

Mr. Simmons, I would like to ask you to finish the comment that 

you were making just a moment ago with Senator Warren about 

your equity capital back at the time when the stress started to 

arise and the collapse in the housing market. 

Mr. SIMMONS. Well, listen, capital across the industry has increased dramatically. It has for us. It has more than doubled. It is 

about 120 percent of what it was back in 2006. Common equity 

capital, relative to risk-weighted assets, has increased from about 

5.5 percent to about 12.2 percent. So we have not only a strong industry, but we have the strongest banking industry in the world. 

So there is a lot of equity capital in the industry today. 

Chairman CRAPO. All right. Thank you. And again, Mr. Simmons, over the past few years, a number of financial regulators 

have made comments before this Committee supporting changes to 

the $50 billion SIFI threshold, including Federal Reserve Chair 

Yellen, former Federal Reserve Governor Tarullo, and former 

Comptroller Curry, and these are those who are the regulators, in 

some cases were the regulators who are tasked with getting it right 

to deal with the risk in our economy. 

While there are different views on what to replace the threshold 

with, it seems to me there is general bipartisan agreement that a 

bank is not systemically important simply because its assets exceed 

$50 billion. If the SIFI threshold was amended so that noncomplex 

banks like Zions were no longer subject to those enhanced standards, how would that impact the broader economy? 

Mr. SIMMONS. Well, it would—as I indicated, we have become, I 

think, as an industry quite—just sclerotic in terms of our ability to 

do business. I have a letter here from a customer up in Seattle. It 

says, ‘‘When Kerri’’—I talked to one of our people up there. ‘‘When 

Kerri Knudsen informed me last week the bank could not provide 

construction financing for my upcoming development project, I was 

shocked. The concept that a $3 million construction loan was not 

possible left me dumbfounded. It leaves me incredulous that a 

multi-billion-dollar institution is maxed out.’’ It goes on to talk 

about this. ‘‘After 22 years of doing business together, I hit the 

streets looking for a construction loan.’’ 

We find ourselves trying to guess what is in the Federal Reserve’s models, in their CCAR models. We know that it is—I mean, 

we have some vague outline of how—you know, what the results 

are, but we do not know really how it is treating individual loans. 

This lack of transparency is my major beef with the CCAR regime. 

But the overlay of all of these regulations has made it increasingly 

difficult to do business, and for us, small businesses are sort of our 

25 

forte, and we feel kind of crippled in terms of our ability to serve 

them. 

Chairman CRAPO. Well, thank you. And I actually get letters and 

visits from businessmen and women in Idaho who have the same 

kind of concerns about the inability to get the kind of financing 

that just seems so obviously appropriate. So I understand the point 

you are making. And one other point there quickly. If banks over $50 billion right now were no longer subject to the SIFI thresholds, the $50 billion 

SIFI threshold, isn’t it true that they are still subject to very extensive safety and soundness regulation across the system? 

Mr. SIMMONS. Absolutely. Always have been, always will be. And 

stress testing will remain a central part of what we do. 

Chairman CRAPO. And they will still conduct stress tests. 

Mr. SIMMONS. Absolutely. 

Chairman CRAPO. I wanted to make it clear. Some make it look 

like there is an exemption of regulation being discussed here. It is 

a refinement and a tailoring of the type of regulation that we are 

talking about. 

Obviously, my time is up, and I think you heard the bells go off, 

so this is going to have to be my last question, and this is for you, 

Mr. Hill. I apologize to the other witnesses. I do have questions for 

you, too. I will submit those. 

But you mentioned in your opening testimony that your bank recently crossed above the $10 threshold and as a result needs to 

comply with numerous additional requirements, including the 

Dodd–Frank Act stress test known as DFAST. Can you explain the 

various steps your bank has had to take to comply with this requirement? 

Mr. HILL. Well, I think from a financial perspective, the overall 

cost is several million dollars, and most of that is in terms of buying very sophisticated models to stress-test our bank under various 

different circumstances and add the quantitative—the employees 

who have a quantitative background to be able to do that. And so 

the ultimate impact is several million dollars, more overhead, more 

complexity, for a balance sheet that is relatively simple. 

Chairman CRAPO. And has that caused the cost of a mortgage to 

your customers to go up? 

Mr. HILL. Our costs of our mortgage loans have risen multifaceted. I do not think you could put it all on DFAST or QM or any 

others. But when you put all that regulation together that comes 

with that $10 billion threshold, for every mortgage loans we make 

it costs us $1,000 more to make it today than it did just a few 

years ago. 

Chairman CRAPO. And who pays that $1,000? 

Mr. HILL. It ends up out of the customer’s pocket. 

Chairman CRAPO. So if we were talking about consumer protection, if we could reduce the cost of that mortgage and still maintain 

the safety and soundness, would that not be some of the best consumer protection we could achieve? 

Mr. HILL. It seems very logical to me, Senator. 

Chairman CRAPO. Well, thank you. 

And to the others here, I apologize I did not get toy with my 

questions. I apologize to everybody. Usually we have the time to go 

26 

on and have even a second round of questions. But today we are 

wrapping up an Iran sanctions bill, and we are going to be doing 

the final three votes on it starting right now. 

So before I close this hearing, I want to alert all Senators that 

they should submit their further questions by Thursday, and you 

will probably receive some further written questions. I urge you to 

respond to those written questions as promptly as you can. 

Again, I want to thank all of you for coming and giving us your 

time and your advice today. I assure you that both your written 

and your oral testimony is very thoroughly reviewed and utilized 

by us, and we are working together to try to build a very strong 

package. 

As you probably are aware, we are not calling it ‘‘regulatory reform.’’ We are calling it ‘‘economic growth.’’ And we are looking for 

statutory and regulatory reforms that will help to grow the economy while still maintaining safety and soundness in our financial 

institutions. I think that is achievable. Thank you for being here 

to help us on that. 

With that, this hearing is adjourned. 

[Whereupon, at 11:07 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

27 

1See, e.g., remarks of Federal Reserve Board Governor Daniel K. Tarullo in his testimony 

before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, March 19, 2015. 

PREPARED STATEMENT OF HARRIS H. SIMMONS 

CHAIRMAN AND CHIEF EXECUTIVE OFFICER, ZIONS BANCORPORATION, ON BEHALF OF

THE REGIONAL BANK COALITION

JUNE 15, 2017 

I. Introduction 

Chairman Crapo, Ranking Member Brown, and Members of the Committee, thank 

you for the opportunity to appear before you this morning. I am Chairman and CEO 

of Zions Bancorporation, a $65 billion dollar (total assets) bank holding company 

headquartered in Salt Lake City, Utah. We primarily operate in 11 western States, 

with local management teams and brand names, from Texas to the West Coast, including the Chairman’s home State of Idaho, where we are the third largest bank 

in the market, and where we have consistently been the largest SBA lender. Indeed, 

we have a particular focus on serving small and midsized businesses and municipalities throughout the West. We believe we are very good at serving such customers, and are proud to have been consistently recognized by small and middlemarket businesses as one of the best banks in the Nation in providing banking services to such clients, as measured by the number of Excellence Awards conferred 

through Greenwich Research Associates’ survey of approximately 30,000 small and 

middle market businesses across the country each year. Virtually all our banking 

activities are very traditional in nature, with a straightforward business model that 

is highly focused on taking deposits, making loans, and providing our customers 

with a high degree of service. We are primarily a commercial lender, which is to 

say that we are especially focused on lending to businesses. We provide approximately one-third as much credit to businesses, in loan sizes between $100,000 and 

$1,000,000, as Bank of America does in aggregate—underscoring our focus on serving smaller businesses in the markets we serve. And we do so without presenting 

the type of systemic risk that is characteristic of the very largest banking organizations. Together with other regional banks, we are highly focused on delivering credit 

and depository services to the small and midsized businesses that have been America’s engine of economic growth. 

Zions Bancorporation has the distinction of currently being the smallest of the 

Systemically Important Financial Institutions—or ‘‘SIFIs’’—in accordance with the 

$50 billion asset threshold for the determination of systemic importance as defined 

in section 165 of the Dodd–Frank Act. And while we are proud of the services we 

provide to our customers, and believe we incrementally make a real difference in 

the local markets in which we operate, we certainly do not consider ourselves to be 

systemically important to the United States economy. We in fact half-jokingly refer 

to our company as an ‘‘Itty Bitty SIFI,’’ and we see evidence that an increasing 

number of thoughtful observers, including our own regulators, are of the opinion 

that we, and other regional banks, are of neither the size, complexity nor critical 

importance to the workings of the U.S. economy to warrant the scope, intensity and 

cost of additional regulation that the automatic designation as a SIFI carries with 

it. 1

II. Regional Banks Have Simpler Business Models That Fundamentally 

Pose Less Risk Than the Nation’s Largest Money Center Banks 

Regional banks overwhelmingly operate with straightforward, traditional business 

models that focus on receiving deposits and making loans. In my own bank’s case, 

only 4.8 percent of our total assets are financed with short-term nondeposit liabilities. And the great majority of our loans are secured with various forms of collateral, providing a secondary means of repayment. Like community banks, regional 

banks focus on providing credit not only to consumers, but to small and midsized 

businesses. For example, in the case of Zions Bancorporation, business loans between $100,000 and $1 million in size comprise 19 percent of our entire commercial 

loan portfolio, as compared to approximately 2 percent for Citigroup and 7 percent 

for JPMorgan Chase. 

The revenue streams of regional banks are primarily generated through lending 

spread income and the provision of ancillary services to customers with long-term 

relationships with the bank. There is much less focus on ‘‘transactional’’ income 

from trading and capital markets activities. Indeed, approximately 90 percent of the 

banking industry’s total trading income last year was generated by five of the industry’s largest banks, each of which is considered by regulators to be a Global Systemically Important Bank (G–SIB), and none of which was a regional institution. 

28 

2Office of Financial Research Brief Series, 15-01, February 12, 2015. 

3The Federal Reserve also provides large, complex banking organizations (which it generally defines as those with over $250 billion in assets) with a qualitative assessment of stress testing 

and capital planning processes. Regional banks have previously been given such qualitative asUsing a more fulsome measure of risk than sheer asset size, 2 years ago the 

Treasury Department’s Office of Financial Research (OFR) published a report on the 

relative systemic risk posed by 33 U.S. bank holding companies. 2 The methodology 

employed was a systemic risk scorecard developed by the Basel Committee on Bank 

Supervision (Basel Committee) and published by the Financial Stability Board 

(FSB), using data provided by bank holding companies on Federal Reserve Form Y15 with regard to an institution’s size, interconnectedness, substitutability, complexity and cross-jurisdictional activities. The highest score, denoted as a percentage, belonged to JPMorgan Chase & Co., with a score of 5.05 percent, followed by 

Citigroup at 4.27 percent. Applying the OFR/Basel Committee methodology to the 

two dozen regional banks with assets of over $50 billion, and thus designated as 

Systemically Important Financial Institutions (SIFIs) under provisions of the Dodd– 

Frank Act, the aggregate risk score of the regionals as a group (including banks as 

large as U.S. Bancorp and PNC Financial Services Group, Inc.) is less than the 

score of either JPMorgan Chase or Citigroup. The very largest banks, which pose 

the type of systemic risk to the economy that Section 165 of the Dodd–Frank Act 

was meant to circumscribe, are characterized by not only substantially larger nominal asset exposures than those presented by regional banks, but also by complex— 

and often global—organizational structures, substantial off-balance sheet and market-making activities, and a high degree of interconnectedness throughout the financial sector and in the larger economy. For example, while JPMorgan Chase & Co.’s 

balance sheet is 39 times the size of Zions Bancorporation’s, it’s total payments activity last year was 616 times larger than Zions’ levels, and its total derivatives exposures are 5,253 times larger than ours. The same general relative risk exposures 

characterize the entire regional bank group. 

III. The Dodd–Frank Act’s Arbitrary Asset Thresholds Are Stifling Our Ability To Serve Customers and Foster Economic Growth 

a. Stress Testing and Capital Planning 

As a covered institution, or SIFI, under section 165 of the Dodd–Frank Act, Zions 

Bancorporation is subject not only to the Act’s rigorous stress testing (Dodd–Frank 

Act Stress Test, or ‘‘DFAST’’) requirements, but to the annual Comprehensive Capital Analysis and Review (CCAR) conducted in conjunction with the annual DFAST 

exercise. The DFAST process is intensive, time-consuming and costly. It involves the 

development and continual maintenance of sophisticated statistical models designed 

to project a bank’s performance over the course of a hypothetical nine-quarter period 

of severe economic stress, using scenarios incorporating a variety of macroeconomic 

variables supplied annually by the Federal Reserve, and supplemented by a bank 

holding company’s own variables and assumptions reflecting any of its idiosyncratic 

risk exposures. These statistical models are expected to be capable of projecting the 

likely outcomes and interrelated effects of each line item on a bank holding company’s income statement and balance sheet, and the resulting impact on capital levels, based on a granular analysis of a bank’s individual assets and liabilities. They 

must be developed based on historical performance, back-tested, validated, audited, 

and documented. So-called ‘‘challenger’’ models must also be developed to identify 

potential weaknesses inherent in the more material primary models. And the entire 

process must be conducted under a rigorous governance process involving both the 

bank’s management and board of directors. 

Each of the bank holding companies required to participate in the Federal Reserve’s supervisory stress test exercise furnishes the Federal Reserve with millions 

of data elements derived from individual loans and other balance sheet items on 

Form FR Y-14. This data is used both in the banks’ internal stress tests and in the 

Federal Reserve’s own models to project risk-weighted assets and capital levels during, and at the conclusion of, the hypothetical period of severe stress in an attempt 

to ensure that capital levels under stress will not breach minimum regulatory 

standards. The CCAR exercise builds on the DFAST process by incorporating a 

firm’s projected capital actions over the nine-quarter projection period. The objective 

is to determine that a bank holding company’s projected capital actions would not, 

during a period of stress such as that reflected in the stress test, impair capital levels below required regulatory capital thresholds. 

After evaluating the results of its own and the banks’ stress tests and capital 

plans, the Federal Reserve provides each covered institution with a quantitative assessment of its capital levels. 3 Zions Bancorporation has been a participant in the 

29 

sessments; however, the Federal Reserve announced on January 30, 2017, that it would discontinue that practice, while at the same time tightening regulations regarding capital distributions to shareholders without seeking Federal Reserve Board approval. 4Former Federal Reserve Board Governor Daniel K. Tarullo, in remarks to the U.S. Senate 

Committee on Banking, Housing, and Urban Affairs, March 19, 2015. 5Federal Reserve Board Vice Chairman Stanley Fischer, speaking at the Riksbank 

Macroprudential Conference, June 24, 2015. 6Former Federal Reserve Governor Daniel K. Tarullo—before the U.S. Senate Committee on 

Banking, Housing, and Urban Affairs, March 19, 2015. 7 CNBC, June 1, 2017, Steve Liesman interview with Governor Jerome Powell. 

CCAR process for the past several years. We have spent well over $25 million in 

outside consulting feels, and many thousands of hours of management and board 

time focused on CCAR. We annually submit the equivalent of approximately 12,500 

pages of detailed mathematical models, analysis and narrative to the Federal Reserve incorporating our CCAR projections and capital plans. We also complete a 

mid-year stress test exercise to complement the more intensive annual submission. 

I view stress testing as a fundamentally important tool in the management of a 

bank’s risk and the assessment of its capital adequacy. The value of the insights 

it yields, however, does not increase in linear proportion to the investment made 

in the exercise, and this is particularly true for less complex regional banking institutions. There are diminishing returns from this exercise for both the banking institutions and the regulators. Former Federal Reserve Governor Daniel K. Tarullo has 

noted that ‘‘ . . . the basic requirements for the aggregation and reporting of data 

conforming to our supervisory model and for firms to run our scenarios through 

their own models do entail substantial expenditures of out-of-pocket and human resources. This can be a considerable challenge for a $60 billion or $70 billion bank. 

On the other side of the ledger, while we do derive some supervisory benefits from 

inclusion of these banks toward the lower end of the range in the supervisory stress 

tests, those benefits are relatively modest, and we believe we could probably realize 

them through other supervisory means.’’ 4

Ideally, the stress testing process should inform management’s and the board’s 

thinking about managing credit concentrations, interest rate risk, underwriting 

standards, pricing, and maintaining an appropriate balance of risks in its portfolio. 

In our own experience, these objectives are largely thwarted by the reality that the 

results of the Federal Reserve’s internal models trump our own internally modeled 

results. Although the Federal Reserve has posed no material objection to Zions 

Bancorporation’s qualitative processes in recent CCAR cycles, its own modeled 

measures of my firm’s capital ratios after nine quarters of severely adverse economic 

conditions have been consistently and materially below our own projected outcomes. 

Such variances in outcomes beg a reconciliation of the models used by each organization if the results are to be truly useful in the management of the company. And 

while Federal Reserve officials argue that ‘‘transparency around the stress testing 

exercise improves the credibility of the exercise and creates accountability both for 

firms and supervisors,’’ 5 they continue to maintain that it is important not to disclose details of their models, lest firms ‘‘manage to the test.’’ Certainly it is not difficult to understand a regulator’s perspective about this, but the notion that the 

rules—which are effectively incorporated into those models’ algorithms—governing 

banks’ capital distributions to the firms’ owners should be kept secret finds little 

if any parallel in our legal and regulatory system. 

This lack of transparency has the effect of creating uncertainty, and because the 

Federal Reserve’s modeled capital results become the ‘‘binding constraint’’ for capital 

planning by most banks, including my own, we are necessarily led to attempt to 

‘‘manage to the test’’—even if it’s not clear how the test works. This uncertainty 

echoes recent comments by former Federal Reserve Governor Daniel K. Tarullo, who 

noted that ‘‘while enhanced prudential standards are important to ensure that larger banks can continue to provide credit even in periods of stress, some of those same 

enhancements could actually inhibit credit extension by rendering the reasonable 

business models of middle-sized and smaller banks unprofitable.’’ 6 Federal Reserve 

Governor Jerome Powell, Chairman of the Fed’s Committee on Supervision and Regulation, recently indicated in a televised interview his desire to have the Fed provide ‘‘much more granular information about our expectations for loss rates on particular portfolios, of corporate loans and other types of loans.’’ 7 While any improvement in communicating outcomes is welcomed, real transparency will only be attained when the Federal Reserve publishes details about the actual content and mechanics of the models it uses to effectively govern banks’ capital levels, opening 

them to the kind of outside scrutiny and debate which would inevitably result in 

stronger modeling processes. 

30 

8 5 Office of the Comptroller of the Currency, FDIC and Board of Governors of the Federal 

Reserve System: Concentrations in Commercial Real Estate Lending, Sound Risk Management 

Practices, December, 2006. 

In the absence of such transparency, banks are left to guess what level of capital 

is required for each type of loan, and indeed for each individual loan, since every 

loan has a unique blend of borrower strength, collateral support and other characteristics that define risk. 

The uncertainty surrounding the Fed’s modeling processes in CCAR can cause 

banks to withdraw or limit certain types of lending. In our own case, we’ve in particular established limits on construction and term commercial real estate lending 

that are significantly more conservative than those incorporated in current interagency guidelines on commercial real estate risk management. 8 Another example 

of the uncertainty around the Federal Reserve’s models involves small business 

loans. The detailed FR Y-14 data templates used for the Federal Reserve’s models 

to capture granular data on collateral values and other factors useful in evaluating 

potential loss exposures for commercial loans expressly exclude loans of less than 

$1 million and credit-scored owner-occupied commercial real estate loans, the combination of which comprises a substantial portion of our total loan portfolio. Rather, 

such loans are reported on a supplemental schedule that includes only the loan balances. We can therefore only suppose that such loans are treated relatively more 

harshly in the Federal Reserve’s models, resulting in uncertainty in terms of how 

much credit of this type we can afford to grant, and at what price, in order to reduce 

the risk of a quantitative ‘‘miss’’ in the Federal Reserve’s calculation of our required 

capital. 

b. Liquidity Management 

Having been designated as a Systemically Important Financial Institution, Zions 

Bancorporation is also subject to the Modified Liquidity Coverage Ratio. The three 

primary Federal banking regulatory agencies, in implementing the Basel III liquidity framework, jointly adopted the Liquidity Coverage Ratio (LCR) rule in September, 2014. The rule is applicable to internationally active banking organizations, 

generally those with $250 billion or more in total consolidated assets or $10 billion 

or more in on-balance-sheet foreign exposure. At the same time, the Federal Reserve 

went beyond the Basel Committee’s LCR framework, and adopted a somewhat less 

stringent rule, the Modified Liquidity Coverage Ratio (MLCR), applicable to bank 

holding companies with $50 billion or more in consolidated assets but that are not 

internationally active. This quantitative measurement supplements a qualitative liquidity management framework introduced in early 2014 to fulfill Enhanced Prudential Standards requirements, including liquidity standards, required by section 

165 of the Dodd–Frank Act. The MLCR requires a bank holding company to hold 

a narrowly defined portfolio of ‘‘High Quality Liquid Assets’’ (HQLA) equal to or 

greater than expected net cash outflows over a 21-day period, in accordance with 

a prescribed set of run-off calculations established in the rule. The qualitative liquidity management framework requires, among other things, monthly internal liquidity stress tests to supplement the prescriptive MLCR in determining the size 

of the institution’s required minimum liquidity buffer. The full extent of the impact 

of the liquidity rules on SIFIs is almost certainly not fully apparent in the current 

economic environment. We have experienced a prolonged period of low interest rates 

without precedent, and liquidity in the banking system has been abundant by virtually any historical measure. But liquidity comes at a cost, and the true cost of 

these rules will become manifest as interest rates and liquidity levels eventually 

normalize. While it is important for every depository institution to maintain appropriate levels of reserves to deal with normal fluctuations in cash flows, maintaining 

additional liquidity buffers as an insurance policy against times of extreme stress 

is a costly exercise for banks and for the economy at large. Every dollar invested 

in high quality liquid assets is a dollar that cannot be loaned out and put to more 

productive use. In times of liquidity stress, the impact will likely be most particularly acute for smaller and middle-market businesses that do not have ready access 

to the capital markets, and for whom bank credit is their financial lifeblood. As 

noted earlier. regional banks subject to the MLCR and the additional enhanced prudential liquidity standards imposed by the Dodd–Frank Act provide a disproportionate share of credit to such businesses. 

c. Other Consequences of SIFI Designation 

Since the financial crisis, Zions Bancorporation has more than doubled its staffing 

in areas such as compliance, internal audit, credit administration and enterprise 

risk management. In an effort to manage costs, these increases have been accomVerDate Nov 24 2008 11:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00034 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\06-15 ZDISTILL\61517.TXT JASON
31 

panied by offsetting reductions in other areas of the organization, including many 

customer-facing functions. Many, though not all, of these increases in risk management staffing are directly attributable to the Enhanced Prudential Standards requirements of the Dodd–Frank Act and other regulatory requirements that have 

arisen in the wake of the financial crisis. We have also embarked on an ambitious 

program to replace core software systems, revamp our chart of accounts and establish a data governance framework and organization in order to ensure our ability 

to meet the substantial data requirements necessary to fully comply with the stress 

testing and liquidity management protocols applied to SIFIs. While we will derive 

ancillary benefits from modernizing our systems, ensuring regulatory compliance 

has been a significant factor in our decision to make these investments which are 

in the hundreds of millions of dollars in size. Additional investments have been 

made in software systems directly related to compliance with the Enhanced Prudential Standards. An example is the expenditure of approximately $3 million for software that facilitates compliance with incentive compensation governance requirements. In addition to the software investment, thousands of hours have been spent 

redesigning incentive plans and validating their compliance with regulatory requirements. We have also spent millions of dollars on the annual production of resolution 

plans, or ‘‘living wills,’’ in accordance with requirements of the Dodd–Frank Act. 

This is despite the fact that, like other regional banks, we have a simple organizational structure, with a total of 20 (mostly very small) subsidiaries, as compared to 

an average of 1,670 subsidiaries for each of the Nation’s six largest banks. 

IV. Alternative Means of Designating Systemic Importance 

There is no apparent analytical foundation for the Dodd–Frank Act’s establishment of a $50 billion asset size threshold for the determination of an institution’s 

systemic risk. Indeed, there is a lack of consistency in applying the Enhanced Prudential Standards of Section 165 to all insured depository institutions with over $50 

billion in assets, with the result that some federally insured depository institutions 

with total assets greater than those of my own bank holding company are not automatically subject to these rules. For example, USAA, a diversified financial services 

company with $147 billion in assets, and whose federally insured USAA Federal 

Savings Bank subsidiary has over $70 billion in assets, is not subject to the requirements of section 165, since USAA is not a bank holding company. Likewise, the Nation’s largest credit union, Navy Federal Credit Union, with $81 billion in assets, 

is not subject to these requirements. 

We are supportive of an approach to the determination of systemic importance 

that removes the hard-coded $50 billion asset threshold currently incorporated in 

the Dodd–Frank Act, and that substitutes banking regulators’ thoughtful and transparent analysis, consistently applied, taking into account not only an institution’s 

size, but its complexity, interconnectedness with the domestic and international financial system, substitutability, cross-jurisdictional activities and any other factors 

the Congress or regulators may deem relevant. We believe that any such analysis 

would find that Zions Bancorporation and most, if not all, other regional banking 

institutions would not be found to be systemically important using such an approach, and that the net benefit to the U.S. economy from redirecting the resources 

these institutions currently expend on compliance with section 165 requirements to 

the prudent extension of credit and other banking services to customers would be 

significant. 

V. Other Regulations That Retard the Ability of Regional Banks To Serve 

Customers and Foster Economic Growth 

There are numerous other regulations as well as instances of regulatory guidance, 

that hamper (or threaten to impair) the ability of regional banks to serve the credit 

and depository needs of their customers. These include greatly heightened requirements for compliance with Bank Secrecy Act/Anti-Money Laundering regulations 

and the policing of ‘‘our customers’ customers’’; ambiguous and ever-changing rules 

with respect to Fair Lending and other anti-discrimination laws; and, highly prescriptive and evolving rules with respect to the governance and oversight of thirdparty vendor relationships. Two areas seem to me to be especially worthy of concern. 

The first pertains to the incredible thicket of regulations that has developed 

around the issuance of residential mortgages. Mortgage lending has long been subject to a host of laws and regulations. But the additional layers of regulation emanating from the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 

(SAFE Act), tighter appraisal standards at a time when there is a nationwide shortage of qualified appraisers, Dodd–Frank’s Ability to Repay and Qualified Mortgage 

Standards, and others, has stifled the ability of many banks to conduct straightVerDate Nov 24 2008 11:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00035 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\06-15 ZDISTILL\61517.TXT JASON
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forward mortgage operations with traditional mortgage products—even when the resulting mortgage is held in a bank’s loan portfolio. These issues have been particularly challenging for self-employed borrowers. In our own case, the cumulative effect 

of these many rules has dramatically retarded our ability to originate mortgage 

loans in our smaller branches, resulting in a substantial reduction in the origination 

of straightforward fixed rate, fully amortizing mortgages in our branch network in 

recent years. 

A second prospective issue which I believe is deserving of Congressional focus 

arises from outside the traditional bank regulatory establishment, in the form of a 

new accounting standard on the horizon. Under the Financial Accounting Standards 

Board’s ‘‘Current Expected Credit Loss’’ impairment standard, slated to take effect 

in 2020, banks and other SEC registrants will be required to set aside loss reserves 

not only for incurred losses inherent in a loan portfolio, but for all expected future 

losses, as well. This will be a challenging accounting standard for all lenders to implement, not least because it requires well-documented prognostication about an uncertain future. But the impact on the economy, and on borrowers in particular, is 

likely to arise from the fact that this accounting standard may be expected to 

produce the result that lenders will be incentivized to shorten the tenor of loans, 

such that the period over which losses must be estimated is shortened, and required 

reserves are accordingly reduced. This would, I believe, provide banks with incrementally more liquid balance sheets, and lower reserve requirements. But this will 

not be a good outcome for borrowers, who will become less liquid with shorter maturities or face the alternative of higher borrowing costs for longer-duration loans. 

This will not be a positive outcome for capital formation, which is critical to economic growth. 

Thank you very much for allowing me the opportunity to present my institution’s 

views on these important subjects. 

PREPARED STATEMENT OF GREG BAER 

PRESIDENT, THE CLEARING HOUSE ASSOCIATION

JUNE 15, 2017 

Chairman Crapo, Ranking Member Brown, and Members of the Committee, my 

name is Greg Baer and I am the President of The Clearing House Association and 

General Counsel of The Clearing House Payments Company. Established in 1853, 

we are the oldest banking association and payments company in the United States. 

The Clearing House Association is a nonpartisan advocacy organization dedicated 

to contributing quality research, analysis and data to the public policy debate. 

The Clearing House is owned by 25 banks which provide commercial banking 

services on a regional or national basis, and in some cases are also active participants in global capital markets as broker-dealers and custodians. Our owners fund 

more than 40 percent of the Nation’s business loans held by banks, which include 

almost $200 billion in small business loans, and more than 75 percent of loans to 

households. Reflecting the composition of our membership, throughout my testimony, I will focus on the effects of regulation on U.S. global systemically important 

banks, U.S. regional banks of all sizes, and the U.S. operations of foreign banking 

organizations with a major U.S. presence. 

After nearly a decade of fundamental and continuing changes to financial regulation, now is an opportune time to review the efficacy of our current bank regulatory 

framework. My testimony will focus on reforms that could directly and immediately 

enhance economic growth. Certainly, there are many other areas where reform is 

urgently needed—for example, the regulatory regimes for anti-money laundering, cybersecurity, the Community Reinvestment Act, and corporate governance, as well as 

a general breakdown in transparent administrative procedure at the regulatory 

agencies—but those involve other priorities, and have a more indirect effect on the 

economy. 

I should emphasize at the outset that if the goal of regulatory reform is to prompt 

economic growth, that goal cannot be achieved while excluding regulation of large 

and regional banks from that effort. As the Treasury Department noted in its report 

this week, community banks hold only 13 percent of U.S. banking assets, so reform 

limited to those firms will not have a significant economic impact. And large 

banks—defined as those in holding companies with at least $50 billion in assets— 

originated 54 percent small business loans in 2015 by dollar amount and 86 percent 

by number. 

33 

1See The Clearing House eighteen53 Blog, ‘‘The Canard That Won’t Go Away: Correcting the 

Record (Again)’’ (April 21, 2017), available at https://www.theclearinghouse.org/eighteen53- 

blog/2017/april/21%20-%20icba. 2For example, the recent research by Viral Acharya, et al., finds that banks subject to stress 

tests have reduced the supply of credit to relatively risky borrowers. In particular, the supply 

of credit is reduced to large corporate borrowers that exhibit high risk, commercial real estate, 

credit card, and small business borrowers who also tend to be relatively risky. See Acharya, 

Viral V., and Berger, Allen N., and Roman, Raluca A., ‘‘Lending Implications of U.S. Bank 

Stress Tests: Costs or Benefits?’’ (May 23, 2017). Available at SSRN: https://ssrn.com/ 

abstract=2972919. 

I. The Case for Reform of Bank Regulation 

Room for reform. The starting point for any review of post-crisis regulation is an 

American banking system that is extraordinarily resilient. U.S. banks now hold substantial amounts of high-quality capital; since the crisis, the aggregate tier 1 common equity ratio of TCH’s 25 owner banks nearly tripled to 12.2 percent at the end 

of last year. In absolute, dollar terms, that is an increase in tier 1 common equity 

from $331 billion to over $1 trillion. Similarly, U.S. banks now hold unprecedented 

amounts of high-quality liquid assets (HQLA) to ensure that they can survive a period of persistent liquidity stress (a run, in other words): today, nearly a quarter 

of U.S. large bank balance sheets consists of cash, U.S. Treasury bonds, and similarly low-risk and highly liquid assets. 

Moreover, we now have in place a comprehensive legal and operational framework 

that ensures that even the largest and most complex banks can go bankrupt like 

any other company, without taxpayer support and without risk to the broader financial system, ending too-big-to-fail and replacing moral hazard with market discipline. Markets clearly have recognized as much, as bank holding company debt is 

now priced on the assumption that bondholders will not be bailed out, and rather 

will be bailed in in order to recapitalize the institution. 1

As discussed below, there is considerable evidence that bank capital and liquidity 

levels have now been pushed beyond what is reasonably necessary for safety and 

soundness and financial stability purposes. And other restrictions on banking activity have been imposed without sufficient analysis or evidence—and without regard 

to current capital and liquidity levels. Here, and generally, when I refer to ‘‘banks,’’ 

I am including their nonbank affiliates, which increasingly are now subject to the 

same restrictions (while providers of financial services that are not affiliated with 

banks are effectively unregulated). 

Need for reform. While much has been gained in fortifying the Nation’s largest 

banks, it is also clear that the banking system is playing an unnecessarily diminished role in fostering economic growth and vibrant capital markets, and that systemic risk is building up outside of the banking system, which has been the sole 

focus of many post-crisis reforms. A key driver here is the recent sea change in 

banking whereby large and regional banks generally no longer allocate capital and 

make business decisions based on their own assessment of economic risk, with regulatory capital as a backstop; rather, because regulatory capital requirements are so 

high and prescriptive, regulation often dictates how capital—and therefore credit to 

the economy—is allocated. 2 A similar phenomenon is occurring with respect to postcrisis liquidity requirements. 

As described in detail below, there are numerous opportunities to better align existing capital and liquidity requirements with the goal of economic growth—without 

jeopardizing, and likely enhancing, the strength and resiliency of the financial system. Three areas of regulatory impact highlight the significant potential for reform. 

Small business lending. As demonstrated in the chart below from the recent 

Treasury report, bank lending has lagged significantly in the current recovery. 

34 

3See Federal Reserve Banks of Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, 

Minneapolis, New York, Philadelphia, Richmond, Saint Louis, and San Francisco, ‘‘Small Business Credit Survey’’ (April 2017), available at www.newyorkfed.org/medialibrary/media/ 

smallbusiness/2016/SBCS-Report-EmployerFirms-2016.pdf. 4See The Clearing House eighteen53 Blog, ‘‘Myth Versus Reality on Small Business Lending’’ 

(March 24, 2017), available at www.theclearinghouse.org/eighteen53-blog/2017/march/24- 

small-business-lending. 

Much of the lag is attributable to small business lending. In April 2017, the Federal Reserve published an inaugural nationwide survey of small business credit conditions, the Small Business Credit Survey (SBCS), which reports widespread evidence of tight credit conditions for small businesses. 3 In particular, according to the 

results of the SBCS, approximately 36 percent of small businesses reported not having all of their borrowing needs satisfied. More specifically: 

• About 60 percent of small businesses reported having faced financial challenges 

over the past 12 months. 

• Of those, approximately 45 percent cited lack of credit availability or ability to 

secure funds for expansion as a reason. 

• About 75 percent of those firms facing financial challenges said they used owners’ personal funds to address this problem. 

• About 45 percent of small businesses applied for financing over the past 12 

months. Of those that applied for credit, 24 percent received none of the funds 

requested and 36 percent received only some portion of what they requested. 

Notably, credit availability for small businesses is tighter at large banks that are 

subject to the highest capital and liquidity regulations. At these banks, approval 

rates were just 45 percent for small businesses with less than $1 million in revenues. In contrast, community development financial institutions and small banks reported approval rates of 77 percent and 60 percent, respectively. This fact is significant because, as noted, large banks originate a sizable share of small business loans 

that cannot realistically be replaced by smaller banks: 54 percent by dollar amount 

and 86 percent by number of loans. 4

Moreover, our own research has shown that the U.S. stress tests are constraining 

the availability of small business loans secured by nonfarm nonresidential properties, which accounts for approximately half of small business loans on banks’ 


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35 

5See The Clearing House, ‘‘The Capital Allocation Inherent in the Federal Reserve’s Capital 

Stress Test’’, https://www.theclearinghouse.org//media/TCH/Documents/TCH%20WEEKLY/ 

2017/20170130lWPlImplicitlRisklWeightslinlCCAR.pdf. 6 Recent research by economists at the Federal Reserve Bank of New York has found that 

CDS have become much more costly to hold in large part because of the capital that dealers 

are required to hold against the transaction. Boyarchenko, Nina, Pooja Gupta, Nick Steel, Jacqueline Yen, (2016) ‘‘Trends in Credit Market Arbitrage’’, Federal Reserve Bank of New York 

Staff Reports No. 784, July 2016, p. 18. 

books. Our analysis indicates that subjecting a bank to the U.S. supervisory stress 

tests leads to a reduction of more than 4 percentage points in the annual growth 

rate of its small business loans secured by such properties, which translates to a 

$2.7 billion decrease in the aggregate holdings of these small business loans each 

year on average. 

Mortgage lending. Another example of an asset class unnecessarily burdened by 

post-crisis regulation is home mortgage lending, and here again, capital regulation 

is a major driver. As demonstrated in our own research, the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) stress test is imposing dramatically 

higher capital requirements on residential mortgage loans than bank internal (Federal Reserve-approved) models and the standardized approach to risk-based capital 

developed by the Basel Committee on Banking Supervision. 5 Indeed, for first-lien 

mortgage loans, CCAR capital requirements are 45 percent higher than under 

banks’ own projections and 95 percent higher than under the Basel III standardized 

approach. Because smaller banks are subject to less stringent capital requirements, 

they can act as a control group in assessing the impact of new regulations on the 

supply of credit. Between the fourth quarter of 2010 and the end of 2016, residential 

real estate loans declined 0.5 percent on average on an annual basis at banks subject to the CCAR stress test, while they rose 4.0 percent on average over the past 

6 years on an annual basis at banks not subject to that test. 

Capital markets. In the United States, much of the lending to the private nonfinancial sector and most of the borrowing by the Government sector occurs outside 

the banking system, in capital or money markets. Indeed, banks provide only about 

one-third of credit in the United States. Large bank holding companies facilitate financial market intermediation both by making markets in securities traded in those 

markets and by providing funding to other market participants who transact in 

those markets. 

Interestingly, post-crisis regulation by banking regulators has affected securities 

markets more than regulation by securities regulators. In particular, bank regulations have made it significantly more expensive for broker-dealers affiliated with 

banks—which includes, post-crisis, all of the largest dealers—to hold, fund, and 

hedge securities positions. Higher capital charges make holding of inventory more 

expensive, and the Volcker Rule makes holding such inventory a potential legal violation. The surcharge for global systemically important banks (GSIBs) and liquidity 

rules make securities financing more expensive. It has become more difficult for 

dealers to hedge the risk associated with holding the inventories of the bonds using 

credit default swaps. 6

The greatest impact has been felt by smaller companies, as the capital rules impose lower capital charges on more liquid securities, which tend to be issued by larger companies; broker-dealers, forced to ration their balance sheets, are serving their 

largest customers first. As shown in the chart below, issuance of corporate bonds 

by small and midsized nonfinancial firms has fallen over the past few years while 

issuance by larger firms has risen. 

36 

7See The Clearing House, ‘‘Shortcomings of Leverage Ratio Requirements’’, (Aug. 2016), 

www.theclearinghouse.org/-/media/tch/documents/20160809ltchlresearchlnote 

lleveragelratio.pdf?la=en. 

As another example, the efficiency and liquidity of financial markets are maintained by the ability of asset managers to take leveraged positions in mispriced assets to earn a profit when the asset price returns to normal. Such positions are financed in the market for repurchase agreements. Broker dealers are often the intermediary between two financial institutions, engaging in a repo with one and an 

identical matched repo with another. While such matched transactions are nearly 

riskless, the leverage ratio requirement forces banks to hold considerable capital 

against their reverse repos. Moreover, if the net stable funding ratio were adopted 

as proposed, banks would be required to finance the loans with a material amount 

of longer-term funding rather than a matched repo borrowing. As explained in a recent TCH research note, these types of requirements make such transactions more 

expensive, and dealers are passing those costs along. 7

Thus, more than four-fifths of the respondents to the Federal Reserve’s Senior 

Credit Officer Opinion Survey in June 2015 indicated that liquidity and market 

functioning in Treasury markets had deteriorated. Over 80 percent of those respondents reporting a deterioration indicated that the most important cause was a decreased willingness of securities dealers to expand their balance sheet for marketmaking purposes as a result of regulatory change. 

II. Reforming Capital Regulation 

A. Stress Testing 

When enough should be enough. Certainly, a key lesson of the financial crisis is 

the critical importance of maintaining capital levels sufficient to absorb outsized 

losses that typically accompany periods of financial stress. Responding to that lesson, banks have significantly increased the amounts of high-quality capital they 

maintain, and regulators have enacted a range of reforms that require these heightened levels of capital to remain in place over time. 

Implementation of Basel III changes has increased the quality of capital, focusing 

on common equity as opposed to hybrid debt/equity instruments. In the United 

States, there is an increased and wise emphasis on stressed rather than static 

measures of capital adequacy—in particular, the Federal Reserve’s CCAR exercise 


61517002.eps
37 

8 It is worth noting that neither banks nor their regulators place exclusive focus on a single 

scenario; rather, banks run, and the Federal Reserve monitors, numerous stress scenarios, including ones chosen by each bank to focus on its unique vulnerabilities. 

and the banks’ own internal stress tests. These are important improvements to the 

bank capital framework that resolve key shortcomings revealed by the financial crisis, and we support them. 

Unfortunately, these sensible reforms have been accompanied by other changes to 

the U.S. capital framework which have introduced a significant degree of unnecessary opacity, subjectivity and uncertainty to capital regulation in the United States. 

Large U.S. banks today are subject to dozens of different capital requirements. Of 

those, the Federal Reserve’s CCAR stress test and the enhanced supplementary leverage ratio (eSLR) are set at such high levels that they most frequently dictate 

bank’s decision making. In addition, U.S. regulators have consistently implemented 

capital reforms in a manner that both significantly exceeds agreed-upon international standards and is much more stringent than necessary to support safety, 

soundness, and financial stability. 

Of course, a crucial question is how much capital is enough. TCH’s 25 owners hold 

roughly triple the amount of capital they did pre-crisis, but should it be quadruple, 

or double? We believe three benchmarks are useful here. First, consider the results 

of the Federal Reserve’s severely adverse scenario under CCAR, which presents for 

large banks a greater economic and market shock than was present in the global 

financial crisis. Then, compare the losses projected under that stress scenario to the 

loss absorbency currently held by those banks, as detailed in the following chart. 

In sum, CCAR imposes a stress scenario significantly harsher than the previous 

financial crisis. 8 Yet as of 2016 tangible common equity was five times the losses 

implied under that scenario. Total loss absorbency—which includes debt holders 

who would be ‘‘bailed in’’ as part of a bankruptcy under the Title I living will process or the Title II Orderly Liquidation Process, was ten times those losses. 

Consider as a second benchmark JPMorgan Chase, which is universally considered to have had sufficient capital to have weathered the past financial crisis without need for taxpayer assistance, while making two acquisitions and continuing to 

lend and make markets. Thus, one could reasonably suppose that the amount of 

capital it held pre-crisis was sufficient (and would have been all the more sufficient 

if all other firms had held that amount as well). Today, JPMorgan Chase holds douVerDate Nov 24 2008 11:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00041 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\06-15 ZDISTILL\61517.TXT JASON

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9See Sarin, Natasha, and Lawrence H. Summers; ‘‘Have Big Banks Gotten Safer?’’, Brooking 

Papers on Economic Activity, Fall 2016. 

ble the capital it did pre-crisis. More importantly, all large banks are now required 

to hold similar levels of capital (with some variation based on the size of any GSIB 

surcharge). And the firms subject to those capital rules today include the largest 

broker dealers—which is significant, because pre-crisis, monoline investment banks 

like Bear Stearns and Lehman Brothers were not subject to bank-like capital requirements and operated with a fraction of the capital of large banks. 

And consider as a third benchmark long-term debt spreads and CDS spreads of 

large U.S. banks, which have remained stable over the past five years. While we 

have not seen a significant financial crisis during this period, we observed a large 

trading loss at one large U.S. bank in mid-2012, volatility around the Brexit vote 

in the United Kingdom in the middle of last year, a significant consumer scandal 

at another large U.S. bank in the second half of last year, and more generally, a 

fair amount of international political instability in recent months. 

There is also reason to believe that higher capital standards have reached levels 

at which they are having a counterproductive effect. In a recent paper, Sarin and 

Summers (2016) point out that by several capital markets-based measures, including stock price volatility and CDS spreads, banks appear to be riskier now than they 

were before the crisis, even as bank capital and liquidity standards have been substantially raised over that same period of time. 9 The authors conclude that the most 

likely explanation is that banks’ franchise values have declined. Specifically, a 

bank’s franchise value depends on its ability to generate earnings and increase 

those earnings over time. The tightening of regulations that has occurred since the 

crisis, while increasing loss absorbency, has also reduced the profitability of banks. 

While no one would recommend a return to the low and uneven capital levels that 

existed pre-crisis, or to treating as capital hybrid instruments that did not prove to 

be loss absorbing, the largest U.S. banks are now overcapitalized by any objective 

measure. Hundreds of billions of trapped capital is not necessary to meet any quantifiable safety and soundness need, and could be redeployed to furthering economic 

growth—either through more lending or returning excess capital to shareholders for 

reinvestment elsewhere. 

Potential for reform. The Federal Reserve’s stress testing framework attempts to 

measure the ability of banks to withstand a very severe economic downturn (and, 

where relevant, a market shock). Under CCAR, the Federal Reserve runs its own 

proprietary models to determine the effect of various supervisory scenarios on 

banks’ capital adequacy—that is, the estimated net losses and resulting reduction 

in capital under those scenarios. After this stress, a large bank must meet a series 

of capital requirements, including a 4.5 percent common equity tier 1 ratio. And it 

must do so assuming that it does nothing to shrink its balance sheet, reduce its dividend, or postpone planned share repurchases under severely adverse economic conditions—almost certainly deeply counterfactual assumptions. Thus, a large bank 

that passes the CCAR exercise not only has sufficient capital to avoid failure under 

historically unprecedented adverse conditions—it has enough capital to emerge from 

such an event doing business as usual, and without taking actions that would be 

normal (or even compelled) under the circumstances. 

Stress testing is an important tool for assessing the health of the banking system 

because it incorporates a forward looking, dynamic assessment of capital adequacy, 

and is therefore less reliant on recent historical performance. However, the Federal 

Reserve’s CCAR stress tests are highly and unnecessarily opaque, relying upon macroeconomic scenarios that are never published for public comment and a series of 

unidentified models (combined in unspecified ways) that have never been subject to 

peer review or public comment. 

To the best of our knowledge, which is necessarily limited by the opacity of the 

CCAR process, the accuracy of the Federal Reserve’s models, individually and collectively, has never been back-tested. The results of this nonpublic process continue to 

differ markedly from the results of the banks’ own, more robust earnings forecasting 

models—models that the Federal Reserve itself subjects to rigorous review. (The 

bank process is part of what is known as DFAST, short for ‘‘Dodd–Frank Act Stress 

Test’’.) At this point, there is no basis to conclude that the Federal Reserve’s models 

do a better job of projecting losses than the banks’ own (Federal Reserve-approved) 

models. 

Both the quantitative test of CCAR and the qualitative test described below also 

are needlessly complex and consume enormous resources at the largest banks, 

which resources could be more effectively redeployed; the CCAR annual submissions 

for the largest banks average in excess of 50,000 pages. 

39 

10 Capital Allocation in CCAR, supra note 5. 11See id. 12 Capital Allocation in CCAR, supra note 5. 13 Capital Allocation in CCAR, supra note 5. 14See Bank of England (2015) ‘‘The Bank of England’s Approach to Stress Testing the U.K. 

Banking System’’ (October 2015). Available at http://www.bankofengland.co.uk/ 

financialstability/Documents/stresstesting/2015/approach.pdf. 15See Gallardo, German, Til Schuermann, and Michael Duane (May 2016), ‘‘Stress Testing 

Convergence’’, Journal of Risk Management in Financial Institutions 9, pp. 32–45. 

Effects on economic activity. Collectively, the opacity, subjectivity, and overall 

stringency of the CCAR framework act as a significant constraint on lending, economic growth, and liquid capital markets. As we have demonstrated in detailed empirical research, this is largely the result of the excessively high amounts of capital 

banks are required to hold against their small business lending, mortgage lending, 

and trading book assets to pass the test. 10 Under banks’ own DFAST projections, 

capital requirements for small business loans and home mortgage loans are 80 percent and 45 percent higher than under the Basel III standardized approach, respectively. For trading assets, the higher capital requirements under CCAR are driven 

by the Federal Reserve’s prescribed global market shock that is part of the CCAR 

scenarios for banks with large trading operations. However, the market shock also 

applies to the DFAST stress tests that are calculated using the banks’ own models, 

and the capital requirement for the trading book under CCAR is 20 percent higher 

than DFAST. 11

CCAR’s excessively high capital requirements for small business loans and home 

mortgages likely reflect in large part the severity of the stress scenario used in the 

test. The stress test includes increases in unemployment that are more sudden in 

some cases more severe than seen in the global financial crisis, and other parameters that go beyond any historical experience. 

The inevitable result is that banks are shifting away from cyclically sensitive sectors (where loss of employment is likely to trigger default) like small businesses and 

households with less-than-pristine credit. Bank behavior is consistent with this set 

of incentives: 

• Small commercial real estate loans, which account for approximately half of 

small business loans outstanding on banks’ books, declined about 2 percent on 

average over the past 5 years. 12

• On the residential real estate lending side, home equity lines of credit declined 

more than 6 percent per year over the past 5 years, despite the significant appreciation in housing prices, and are about 110 basis points more expensive 

than they were pre-crisis. 13

• The declines in these categories of lending have been larger at banks subject 

to CCAR than at banks not subject to CCAR. 

Substantial benefits to economic growth could be achieved through three limited 

reforms to CCAR, all of which would increase banks’ capacity and propensity to 

make these types of loans. 

First, banks’ more robust, Federal Reserve-approved models should be used to estimate stress losses for purposes of the CCAR quantitative assessment. The Federal 

Reserve should use its own, more simplified models as a check on the bank models. 

With the Federal Reserve models no longer binding in the first instance, no concentration of risk or ‘‘gaming’’ concern would prevent their being made transparent. 

Notice and comment or other peer review would doubtless improve their accuracy. 

We note that such an approach is not a theoretical construct, but current practice 

at the Bank of England where banks’ own models play the central role in the United 

Kingdom’s supervisory stress tests. 14 Banks use of their own models motivates 

them to better develop their own stress scenarios, which are than more tailored to 

their business models. That said, the Bank of England does not rely entirely on 

banks own models and has its own suite of models for peer-benchmarking and to 

ensure consistency of results across participating banks. In adopting the system, the 

Bank of England has noted that it does not want its own models to drive capital 

requirements at the risk of stifling stifle innovation in risk management at banks. 

More generally, if a set of unique models being used is overly conservative, the efficiency of the financial system would be reduced. Conversely, if those models are vulnerable to a particular source of risk, the entire system could be undercapitalized 

during a period of financial stress. 15

Second, annual stress test scenarios should be subject to a 30-day public notice 

and comment period to ensure that they meet the Federal Reserve’s identified 

40 

16See Basel Committee on Banking Supervision, ‘‘Basel III: A Global Regulatory Framework 

for More Resilient Banks and Banking Systems’’ (June 2011), available at www.bis.org/publ/ 

bcbs189ldec2010.pdf. 17See 79 FR 187. 18See Federal Financial Analytics, Inc., ‘‘Mutual-Assured Destruction: The Arms Race Between Risk-Based and Leverage Capital Regulation’’ (Oct. 13, 2016). 

standard—consistency with post-war U.S. recessions. While we believe that standard is sensible, it should be subjected to notice and comment rulemaking. 

Third, counterfactual and incorrect assumptions about how banks would behave 

in a crisis (e.g., continuing share repurchases and balance sheet growth under severe stress) should be corrected. 

B. Leverage Ratio 

A leverage ratio measures the capital adequacy of a bank by dividing its capital 

by its total assets (and, in some cases, off-balance-sheet exposures) without taking 

into account the risk of any particular asset or exposure. Requiring the same 

amount of capital to be held against every asset makes the holding of low-risk, lowreturn assets relatively more costly when compared with the holding of higher-risk 

assets, higher-return assets. Put another way, if a capital regulation requires a 

bank to hold the same amount of capital against each asset, the bank will by necessity gravitate to relatively higher-risk, higher-return assets. 

A leverage ratio can still be a useful tool as a backup measure when banks collectively misunderstand the risk of a certain asset class (as they did with mortgages 

and mortgage-related securities in the past crisis), but serious problems have 

emerged for U.S. banks because U.S. regulators have set the minimum leverage 

ratio for the largest U.S. banks at nearly double the international standard, without 

adequate analysis of (i) whether such a high leverage ratio is necessary to prevent 

excessive risk taking or (ii) the impact of such a high leverage ratio on lending, market activity and economic growth. These are the very same banks that provide support to U.S. capital markets and ensure the safekeeping of investor assets, and in 

the course of doing so hold large amounts of low-risk, liquid assets like central bank 

placements and Treasury securities. 

More specifically Basel III introduced a 3 percent supplementary leverage ratio 

for internationally active banks, which includes both on-and off-balance-sheet assets. 16 U.S. regulators have not only applied this 3 percent supplementary leverage 

ratio requirement to all larger banks, but have also imposed a still-higher requirement for U.S. GSIBs—an eSLR of 5 percent at the holding company level and 6 percent at depository institution subsidiaries. 17 Consequently, for several of the largest 

U.S. banks, the eSLR, as opposed to a risk-based requirement, that acts as a current or potential future binding constraint and therefore affects bank capital and 

business planning. 18

The overall impact of the leverage ratio as a measure of capital adequacy, and 

the resulting misallocation of capital, have increased dramatically in recent years 

as a result of other regulatory mandates. As noted, large banks presently are required by liquidity regulations to hold about a quarter of their balance sheets in 

high quality liquid assets (HQLA)—predominantly cash, Treasury securities and 

other Government securities. Large banks now hold approximately three times as 

much of these assets as they did pre-crisis. Those assets rightly receive a zero or 

low risk weight in risk-based capital measures, but the leverage ratio completely ignores their actual risk and requires banks to hold capital against these assets. 

Banks with sizeable custody, treasury services or other businesses that employ a 

servicing business model or take sizeable corporate deposits are particularly affected. In practice, this means that, under the liquidity rules, these banks must hold 

cash or Treasury securities against these deposits, on the assumption that up to 100 

percent of them will run in a crisis (although the outflow rate during the financial 

crisis was substantially lower) and then hold 6 percent capital against the same 

cash and U.S. Treasury bills that the regulators require they hold for liquidity purposes. Of systemic concern, these problems are likely to become more pronounced 

in periods of financial market uncertainty, as institutional investors seek to lower 

their risk exposure by raising cash and banks must manage the resulting deposit 

inflows in the most conservative way possible, via placements at the Federal Reserve and other national central banks. 

Another issue that has received recent notice is how the supplementary leverage 

ratio makes it more costly for U.S. banking organizations to provide clearing member services to clients on centrally cleared derivatives. While risk-based capital rules 

allows banking organizations to exclude from their denominator any initial margin 

posted by their clients on derivatives transaction—and rightly so, as the bank bears 

41 

19See Timothy Massad, Keynote Address by Chairman Timothy G. Massad before the Institute of International Bankers (March 2, 2015), available at www.cftc.gov/PressRoom/ 

SpeechesTestimony/opamassad-13. 20See Bank of England, ‘‘Financial Policy Committee Statement and Record From Its Policy 

Meeting’’, July 25, 2016 (August 2016), available at www.bankofengland.co.uk/publications/ 

Pages/news/2016/062.aspx. 21See Peter Rudegeair, Reuters, ‘‘Trading Scandals, Legal Fines May Ramp Up U.S. Banks’ 

Capital Needs’’ (June 9, 2014), available at www.reuters.com/article/us-banks-opriskidUSKBN0EK1M520140609. 

no risk of loss on such margin—the leverage ratio does not. As a result, the leverage 

ratio exaggerates the exposure amount of these derivatives and effectively requires 

banks to hold un-economic amounts of capital when providing clearing services to 

clients. Because of this, at least three major dealers have exited the business. Accordingly, former CFTC Chairman Massad called for the U.S. leverage ratio to be 

amended to take account of segregated margin. 19

In sum, under the eSLR, U.S. GSIBs are currently required to trap approximately 

$53 billion in capital against cash reserve balances deposited at the Federal Reserve, and an additional $15 billion against U.S. Treasury securities. These are assets whose value banks are at no risk of misjudging; capital allocated to them could 

be far better deployed to lending or supporting market liquidity. Thus, the answer 

is not to dispense with the leverage ratio but rather to eliminate the enhanced supplementary leverage ratio, and to deduct from the denominator of the supplementary leverage ratio high-quality liquid assets like central bank reserves and 

Treasury securities, as well as segregated client margin. 

It is sometimes said that deducting these assets would begin a ‘‘slippery slope.’’ 

This worry is difficult to understand—bank regulation is replete with line drawing. 

For example, the liquidity coverage ratio gives 100 percent credit for a central bank 

reserve or U.S. Treasury security as a liquid asset; this has not created a ‘‘slippery 

slope’’ whereby loans have been given 100 percent credit as a liquid asset. The Bank 

of England, on July 25, 2016, began deducting central bank reserves from the leverage ratio denominator for U.K. banks—and no ‘‘slippery slope’’ has emerged whereby 

it has felt the need to do so for, say, subprime loans. 20

C. Operational Risk 

Large institutions currently are required to build and maintain models to measure operational risk for capital purposes based on a Federal Reserve-approved Advanced Measurement Approach. Because it is exceedingly difficult to base a capital 

charge on a subjective assessment of the risk inherent in a bank’s current operations, these models generally look at past large litigation losses and treat them as 

a proxy for the risk of something going wrong in the future. 

In contrast to international peers, the U.S. banks are often prohibited from excluding losses from their models even when the bank has exited the business line 

that caused the loss, or sold such business to another institution. (The acquirer also 

assumes the capital charge associated with the past event, effectively doubling the 

capital requirement on an aggregate basis.) U.S. banks are prohibited from using 

expert judgment to lower the output of their model even when factors make certain 

operational losses less likely in the future, while non-U.S. banks are permitted to 

make such adjustments. Similarly, banks may put in place a range of other risk 

mitigants, such as insurance or hedges, but none of these are meaningfully recognized or reflected in the current operational risk capital framework. Finally, for 

some banks, the regulators add to any modeled results a ‘‘supervisory overlay,’’ 

which is a completely arbitrary add-on presented with no analytical or evidentiary 

basis. 

As a result of all these factors, operational risk capital charges are inflated and 

extremely sensitive to any data anomalies or extreme events. At least one bank was 

reported in 2014 to be holding over $30 billion in operational risk capital, 21 and as 

a general matter, U.S. banks currently hold significantly more operational risk capital than their international counterparts. It is also worth noting that operational 

risk losses tend to be idiosyncratic and thus uncorrelated, so extraordinarily high 

capital is being held against a risk that is unlikely to be systemic. (Clearly, some 

operational risks of the mortgage business did prove correlated during the financial 

crisis; however, even here, those losses were experienced years after the associated 

credit and market losses.) 

An ongoing Basel Committee review of operational risk capital could rectify these 

problems if an improved regime could be constructed appropriately and—importantly—adopted by U.S. regulators without ‘‘gold plating.’’ The result would be to 

free up billions of dollars of capital for more productive uses. 

42 

22See The Clearing House, State of American Banking (2016) at exhibit 3 (updated). 23See The Clearing House, ‘‘The Basel III Liquidity Framework: Impacts and Recommendations’’ (Nov. 2, 2011), available at www.theclearinghouse.org/-/media/files/association 

%20documents/20111102lliquidlliquidity%20coverage%20ratio.pdf. 24 Id. 

III. Reforming Liquidity Regulation 

A. Liquidity Coverage Ratio 

A key lesson of the financial crisis was the need for banks to maintain sufficient 

liquidity to survive periods of financial stress. The regulatory response includes 

Basel III’s liquidity coverage ratio (LCR), which requires banks to maintain a sufficient stock of liquid assets to cover a 30-day run on the bank with no access to additional funding, plus a Dodd–Frank Act requirement that large banks conduct liquidity stress tests on a monthly basis across at least overnight, 30-day, 90-day, and 1- 

year time horizons, and maintain a sufficient ‘‘liquidity buffer’’ based on their expected liquidity needs under these stress tests. These are concrete improvements to 

the bank liquidity framework, which we generally support. 

These regulations have dramatically increased the ratio of HQLA to total assets 

in the U.S. banking sector. The largest 33 banks held 12 percent of their assets in 

HQLA in 2008; today they hold 24 percent of their balance sheets in these assets. 

Compared to the onset of the crisis, this improvement is even more pronounced, 

with the proportion of HQLA increasing nearly five times since the end of 2006 (i.e., 

from 5.75 to 24 percent). 22 The question, of course, is whether this large an expansion of bank balance sheets is necessary, and whether it is having unintended effects. 

Although the LCR is conceptually sound, in practice it makes assumptions about 

which liabilities will run, and which assets can be sold, that a TCH study shows 

have no empirical bases and appear inconsistent with even crisis-era experience. 23

For example, while the LCR assumes that 30 percent of liquidity lines of credit provided to nonfinancial corporations in a future 30-day period of systemic and idiosyncratic stress would be drawn, the highest draw on such lines at large commercial 

banks (including several that failed or nearly failed) over any month in the financial 

crisis was 10 percent. While the LCR assumes that 100 percent of the nonoperational deposits of financial institutions would be drawn, the worst experience 

during the crisis was 38 percent. 24

These seemingly arcane calibration errors have major real-world consequences. In 

recent years, U.S. companies of all sizes have complained that standby letters of 

credit are unavailable, or more expensive and difficult to obtain. A major reason is 

because banks must assume that in crisis those lines will be drawn in amounts 

three times greater than even the worst historical experience would indicate, and 

therefore hold cash or cash-equivalent assets to fund those draws. And, in turn, 

under the leverage ratio, they must hold significant amounts of capital against those 

riskless or low-risk assets. 

B. Net Stable Funding Ratio 

The net stable funding ratio (NSFR) is intended to establish a maximum safe 

amount of liquidity transformation that a bank can engage in by ensuring that 

banks have sufficient ‘‘sticky’’ liabilities to fund assets that would be unable to liquidate easily over a 1-year horizon. When the NSFR was first proposed by the Basel 

Committee in 2009, the metric was designed to ensure that a bank with an NSFR 

greater than 100 percent would be able to weather a 1-year episode of idiosyncratic 

liquidity stress. The NSFR thereby was meant to be a complement to the LCR requirement, which was designed to ensure that a banking organization could weather 

a shorter (30-day) but more severe period of stress. 

In those initial formulations of the NSFR, the ‘‘extended stress’’ was defined by 

specific characteristics—for example, ‘‘a potential downgrade in a debt, counterparty 

credit or deposit rating by any nationally recognised credit rating organisation.’’ 

That benchmark was not included in the final NSFR standard released by the Basel 

Committee, or in the proposed rule to implement the NSFR in the United States. 

Nor was any other benchmark included, making it unclear what goal(s) the NSFR 

is intended to achieve and how it was calibrated. 

Moreover, for U.S. banks already subject to the LCR, uniquely stringent liquidity 

stress testing under the Dodd–Frank Act requirements, a Comprehensive Liquidity 

Analysis and Review and a U.S.-only short-term-wholesale funding surcharge as 

part of the GSIB surcharge, it is unclear what additional risk the NSFR would mitigate that is not sufficiently addressed by these requirements. 

43 

25See The Clearing House eighteen53 Blog, ‘‘The Net Stable Funding Ratio: Neither Necessary Nor Harmless’’ (July 5, 2016), available at www.theclearinghouse.org/eighteen53-blog/ 

2016/july/05-research-note-nsfr. 

The NSFR, if implemented, would significantly inhibit economic growth and liquid 

financial markets due to its flawed design and lack of transparency with respect to 

its calibration to ensure its efficiency and effectiveness. As demonstrated in our research, The Net Stable Funding Ratio: Neither Necessary nor Harmless, over time, 

the NSFR, if implemented in the United States, could be expected to significantly 

limit lending and capital markets activity. 25 If central bank reserve balances and 

retail deposits shrink in line with the Fed’s forecast for policy normalization, and 

banks shift their funding toward wholesale deposits in line with historical experience many individual banks would not comply unless they took some compensating 

action. In particular, we show that the annual growth in bank lending would have 

to be cut by about 3.5 percentage points, to near zero, even to offset only half of 

the projected decline in the NSFR. 

IV. Reforming the Bank Living Will Process 

Title I of the Dodd–Frank Act requires each large bank holding company to construct a plan for its rapid and orderly resolution, and requires regulators to review 

the credibility of that plan. 

Regulators have required bank holding companies to file living wills on an annual 

basis, against ever shifting, often nonpublic standards, even though the regulators 

have been generally unable to review them and provide feedback within that timeframe. Recognizing that section 165(d) of the Dodd–Frank Act requires the submission of livings wills on a ‘‘periodic,’’ not annual, basis, an appropriate and sensible 

approach is to eliminate the formal requirement for an annual submission in favor 

of submission cycle that is better tailored to the objectives of the living will process. 

The Federal Reserve and FDIC also have required, through the living will process, 

substantial amounts of liquidity and capital to be pre-positioned—and therefore, 

trapped—at numerous subsidiaries. The most recent living will guidance issued in 

April 2016 states that bank holding companies must assume, counterfactually, that 

a net liquidity surplus in one material entity cannot be transferred to meet liquidity 

deficits at another material entity (even between branches of the same banking 

legal entity). Further, the guidance also requires bank holding companies to assume 

that cash balances held by material entities (including branches of the bank) within 

their primary nostro accounts with the main bank entity of the firm are unavailable 

in a stress prior to, and during resolution. The guidance imposes similar requirements with respect to pre-positioning of loss absorbing capital resources at material 

entities. None of this guidance has been published for notice and comment. Reform 

here could take the form of a statement that for any firm using the single-pointof-entry resolution strategy and in compliance with the TLAC requirement for holding company loss absorbency, the living will process should not include any incremental liquidity requirement at the operating subsidiary level; for all firms, we 

would recommend withdrawing the presumption that liquidity cannot be transferred 

among subsidiaries. 

Currently, each Federal (and State) banking agency is authorized to impose its 

own set of recovery and resolution planning requirements on different parts of a 

banking organization, leading to an unnecessary amount of duplicative and at times 

contradictory requirements. Many of these requirements were not subject to a rigorous impact analysis, and are not appropriately tailored. This may also reinforce 

ring fencing of entities as bank regulators focus only on the entities for which they 

are responsible. 

We would recommend eliminating the separate insured depository institutionlevel resolution and recovery planning regimes. At a minimum, the agencies should 

be required to coordinate among themselves to establish a single set of consistent 

recovery and resolution planning requirements. 

V. Reforming Activity Limitations 

Post-crisis regulation has included not only capital and liquidity regulation to reduce the risk of bank failure to the taxpayer and the broader system, but also direct 

limits on bank activities—however well capitalized and funded they are. In some 

cases, these limits are unjustified. 

A. Leveraged Lending 

Leveraged lending is an important type of financing for growing companies, which 

tend to carry a lot of debt. Although these companies therefore represent a greater 

repayment risk than more established firms, this risk is one that banks have considVerDate Nov 24 2008 11:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00047 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\06-15 ZDISTILL\61517.TXT JASON
44 

26Sooji Kim et al., Liberty Street Economics, ‘‘Did the Supervisory Guidance on Leveraged 

Lending Work?’’ (May 2016), available at http://libertystreeteconomics.newyorkfed.org/2016/05/ 

did-the-supervisory-guidance-on-leveraged-lending-work.html. 

erable experience managing. Banking organizations have long played a critical role 

in arranging, originating, and administering funding for leveraged loans as part of 

their larger role as credit intermediaries. Following the financial crisis, capital requirements have increased significantly for such loans, as have requirements for 

modeling their risks. 

Nonetheless, the Federal banking agencies have issued guidance setting arbitrary 

limits on such lending, based on no empirical evidence—in particular, any evidence 

that the capital supporting such activity is somehow inadequate. It is a classic example of bank regulators substituting their judgment for lenders and markets without any meaningful analysis or evidence. For example, regulators require banks, in 

evaluating whether a company is leveraged for purpose of the new restrictions, to 

assume that all lines of credit are drawn, and to ignore cash held by the company. 

As a result, some Fortune 500 companies with investment grade debt are now 

deemed by the regulators to be highly leveraged, and thus subject to limits on their 

bank borrowing. 

It also appears that this guidance has been supplemented by further direction, 

from examiners to banks, to limit lending activities in the area—although the precise details of such direction are unknown as they are deemed by the agencies to 

be ‘‘confidential supervisory information,’’ and therefore immune to public scrutiny. 

Of course, these loans are subject to capital requirements, and the regulators have 

not identified any flaws in those standards (including, in the case of the Federal Reserve, its own CCAR models) that would cause these types of loans to be uniquely 

undercapitalized. Nor have the agencies presented any data to show that there is 

an unhealthy concentration of these loans in the banking system. Also, consistent 

with post-crisis behavior in a range of areas, the banking agencies have implemented these substantial new limits on bank lending through guidance and ‘‘frequently asked questions,’’ rather than formal notice-and-comment rulemaking and 

regulation. They have nonetheless deemed the guidance binding, and enforced it just 

as if it were a rule. 

As a result of the leveraged lending guidance and examiner pressure, banks have 

been forced to turn away hundreds of millions, perhaps billions, of dollars of loans 

to growing businesses. Furthermore, there is scant evidence that leveraged lending 

guidance and subsequent direction have constrained the risk perceived by the Federal banking agencies. Despite any potential concerns regarding poorly underwritten 

or low-quality loans, a bank-centric approach is simply shifting risk rather than limiting it, and increasing the cost to borrowers, as banks tend to be lower cost providers of credit. Recent research by a team of Federal Reserve Bank of New York 

economists illustrates that the guidance has had the effect of reducing bank activity 

in this area, but has also increased nonbank activities, demonstrating limited effectiveness from a macroprudential view. 26 Notably, those nonbanks do not appear to 

be experiencing the outsized losses that the bank regulators implicitly predicted in 

forcing banks to abandon much of this lending. 

We recommend that the guidance be rescinded immediately and in its entirety, 

which would provide an immediate boost to economic growth as a large number of 

growing companies once again became eligible for bank credit. 

B. The Volcker Rule 

Section 619 of the Dodd–Frank Act (commonly referred to as the ‘‘Volcker Rule’’) 

generally prohibits U.S. insured depository institutions, U.S. operations of foreign 

banks and their affiliates from engaging in ‘‘proprietary trading’’ and sponsoring or 

investing in hedge and private equity funds subject to some limited exceptions, including exceptions for customer-related activities such as market-making. Prior to 

the enactment of the Volcker Rule, very few of the firms now subject to the Rule 

engaged in proprietary trading activities. Of those that did, many of them were in 

the process of divesting or ceasing their proprietary trading activities. Today, trading businesses of covered financial institutions are focused solely on serving client 

needs and hedging the attendant risk. 

The final regulations implementing and interpreting the Volcker Rule are voluminous and complex, contained in 964 pages, including an 893 page preamble. Under 

these rules, the five U.S. Federal financial agencies charged with implementing and 

enforcing the Volcker Rule have interpreted it in a highly restrictive way, with a 

broad spectrum of trading activity (i.e., not only short-term, speculative activities 

that the Volcker Rule was intended to target) presumed to be prohibited proprietary 

trading unless proven otherwise. 

45 

27See Jack Bao, Maureen O’Hara, and Alex Zhou (2016), ‘‘The Volcker Rule and Market-Making in Times of Stress, Finance and Economics Discussion Series 2016-102’’. Washington: Board 

of Governors of the Federal Reserve System, available at https://doi.org/10.17016/ 

FEDS.2016.102. 

Market-making. Under the rules, a covered banking entity is required to go to extraordinary lengths to prove that its routine market making and underwriting activities (included related hedging) do not constitute ‘‘proprietary trading.’’ The agencies have adopted a broad definition of proprietary trading with strict requirements 

for permissible activities that could potentially captures legitimate market making 

in less liquid securities, particularly when markets are under stress and there is 

less demand. For example, banking organizations are required to strictly limit their 

inventory to the reasonably expected near-term demand of customers or counterparties. For debt of smaller companies, which may trade only weekly or even monthly 

(especially during times of stress), banking organizations may be required to unduly 

limit their positions, thus prohibiting them from taking any action to stabilize markets. 

Recent research has begun to bear out longstanding reports from market participants that the regulations that implement the Volcker Rule are inhibiting economic 

growth and reducing market liquidity by constraining the ability of banking groups 

to buy, sell and underwrite securities, including corporate bonds that could help finance the operations of corporate customers. A Federal Reserve staff study released 

in December 2016, The Volcker Rule and Market-Making in Times of Stress, finds 

that the illiquidity of stressed bonds has increased after the Volcker Rule, as dealers 

regulated by the rule have decreased their market-making activities. 27 Other research indicates that with many brokers constrained in their ability to hold inventory as a result of the Volcker Rule and other post-crisis regulations, the secondary 

market for smaller issuers’ debt has tightened. The impact is that since the enactment of the Dodd–Frank Act in 2010, new debt issuances by smaller firms has generally declined. When lower liquidity puts debt markets out of reach of smaller 

firms, it impedes their ability and the economy at large to grow. 

Notably, Congress specifically exempted market making from the Volcker rule. 

Fault here thus lies not with the statute but the regime chosen to implement it. 

Funds. The Volcker Rule also prohibits banks from engaging in proprietary or 

speculative trading by investing in private equity or hedge funds, notwithstanding 

the absence of evidence that such investments contributed to the financial crisis or 

have otherwise caused outsized losses. While the agencies must implement the statute as Congress has enacted it, they have extended its reach to numerous other 

types of funds that bear little in relation to either private equity or hedge funds. 

This has created enormous and unnecessary compliance challenges for institutions 

with asset management businesses serving customers seeking to save and build 

wealth, as well as for market making in a number of asset classes, including 

securitized products, covered bonds, and non-U.S. public funds. 

More specifically, the regulation’s overly broad definitions of ‘‘hedge fund’’ and 

‘‘private equity fund’’ (so-called ‘‘covered funds’’ under the regulations) include vehicles that are not traditionally considered to be hedge funds or private equity funds 

and require extensive analysis and documentation of a banking entity’s determination of whether a particular vehicle is a covered fund or qualifies for an exclusion 

or exemption. Moreover, the Volcker Rule regulations restricts banking entities from 

engaging in activities that could promote lending, capital formation and job creation, 

through investing in vehicles such as certain types of credit funds, infrastructure 

funds, energy funds, real estate funds and REITs. In addition, the Volcker Rule, as 

implemented, makes it difficult for a bank-owned asset manager to seed and test 

new asset management strategies for customers as a result of the 3 percent statutory limits on ultimate bank ownership after an initial 1-year seeding period, the 

unduly burdensome process for extending the temporary seeding period, and the 

lack of clarity on use of bank assets to fund separate account seeding structures 

under the proprietary trading rules. Making the rule more rational through appropriately tailored definitions of ‘‘hedge fund’’ and ‘‘private equity fund’’ and more reasonable ancillary requirements would lead to more efficient regulations, promote 

lending, capital formation and job creation, and enhance customer offerings and financing opportunities. 

Asset-liability management. Firms use portfolios of liquid assets to hedge firmwide risk. These positions are managed by the corporate treasury, not traders in the 

investment bank; are not short-term trading positions; and are not engaged in to 

benefit from short-term price movements. Nonetheless, the regulators have imposed 

the same compliance obligations on this activity. 

46 

28Government Accountability Office, ‘‘Proprietary Trading: Regulators Will Need More Comprehensive Information to Fully Monitor Compliance With New Restrictions When Implemented’’ (July 2011), available at www.gao.gov/assets/330/321014.pdf. 

Enforcement. Five U.S. Federal financial agencies are tasked with examining and 

enforcing compliance with the Volcker Rule, thereby complicating efforts by financial institutions to comply with its requirements on an enterprise-wide basis and to 

receive interpretive guidance relating to its restrictions. 

The whole approach to Volcker Rule compliance differs radically from the standard supervisory paradigm, whereby firms are charged with compliance and subject 

to enforcement action if they fail to comply. Only with the Volcker Rule have the 

agencies set themselves on a ‘‘pre-crime’’ mission, performing constant monitoring 

for compliance. 

This ‘‘pre-crime’’ approach is even odder and more unnecessary given a GAO report on proprietary trading during the financial crisis, which demonstrated that proprietary trading was not a cause of the financial crisis. 28 Given the idiosyncratic 

nature of proprietary trading’s losses (and gains), it does not represent a systemic 

risk, and the prudential risks that both trading and fund activities pose are now 

subject to significantly higher capital charges under the Basel 2.5 and Basel III reforms. Notwithstanding the relatively low demonstrable risk profile of the activities 

in question, the regulations have nonetheless implemented a wide-ranging and highly complex set of requirements that have and will continue to impair markets and 

slow the real economy. These consequences are only exacerbated by the extra-territorial manner with which the agencies have implemented the Volcker Rule’s restrictions. 

Impact on asset-liability management. The risk of proprietary trading in a corporate treasury function, where assets are held in available-for-sale or held-to-maturity accounts, is remote at best. But the Volcker compliance regime is not tailored 

to the risk that proprietary trading will actually occur, and therefore corporate 

treasuries face high burdens in defending business-as-usual activity. 

Needed reforms. Given the breadth and scope of these problems, the financial regulators should revise their Volcker Rule regulations to establish simpler criteria for 

identifying what trading and fund activities are impermissible and a simpler and 

more reasonable process for conducting examinations and issuing interpretive guidance. They should eliminate the regulation’s odd presumption that all trading activity is illegal unless it can be proven to supervisory satisfaction, through detailed 

analysis and continuous monitoring, to meet a laundry list of specific criteria. Proprietary trading can be easily distinguished by just a few key features. These regulatory changes should be complemented with a shift in the compliance regime from 

real-time enforcement to traditional reliance on bank compliance and internal audit 

functions, with examiners reviewing their results; specialized compliance program 

requirements and unnecessary metrics should be eliminated. The result would be 

a substantial improvement in market liquidity and investment in funds that promote capital formation and job creation. 

VI. Reforming Supervision, Examination, and Enforcement 

We believe that bank supervision (as opposed to regulation) has lost its way postcrisis, and requires a comprehensive reexamination. While the link to economic 

growth in this area is less direct than in the others cited, it is very real. 

In sum, three developments have converged to restrict or even halt the ability of 

many banks to open branches, invest, or merge to better meet the needs of their 

customers. First, even as banks have dramatically improved their financial condition by increasing their capital, liquidity, and asset quality positions, supervisors 

have transformed the supervisory scorecard (the CAMELS rating system) from a 

measurement of financial condition to a measurement of compliance. Second, supervisors have adopted a series of unwritten rules that produce lower CAMELS ratings. 

Third, supervisors have adopted another series of unwritten, or in some cases written, rules (albeit none with any basis in statute) that translate those low ratings 

and other supervisory issues into a bar on expansion. The result is a regime, effectively invented by bank supervisors without notice and comment or Congressional 

input, that makes an examiner’s expectations regarding bank compliance matters a 

fundamental determinant of whether banks can invest and grow. 

For perspective, consider that we routinely see serious compliance violations 

across a wide range of American industries. Those companies are subjected to enforcement proceedings and are required to pay fines and remediate their practices, 

but no one ever suggests that while those proceedings are pending they should be 

stopped from opening new franchises, building new plants, developing new drugs, 

designing new cars, or launching new apps. Yet somehow we have reached the point 

47 

29M&T Bank Chief Executive Office Robert G. Wilmers, 2016 Annual Report Message to 

Shareholders (Mar. 9, 2017), available at https://newsroom.mtb.com/document-archive/annualreport-letters/2016-annual-report-message-to-shareholders.htm. 

in banking where the punishment for a compliance problem routinely includes, in 

addition to a vast array of civil and criminal liabilities imposed by a wide array of 

Federal and State authorities (often by multiple authorities for the same underlying 

conduct), a prohibition on any type of expansion by the bank. The opportunity lost 

is not just for the bank but for its customers, and ultimately an economy that relies 

on its banking system for financing. 

Of course, banking is different in the sense that bank deposits are insured by the 

FDIC. But that gives Government a special interest in the financial condition of 

banks. As a result, Congress has in limited instances linked expansion to financial 

condition. As we will see, though, financial condition is no longer what banks are 

being graded on, and the penalties for a bad grade now vastly exceed what Congress 

has authorized. 

Another result is simply a massive cost, which must be passed along to consumers, as described in M&T Bank’s most recent annual report message to shareholders: 

At M&T, our own estimated cost of complying with regulation has increased 

from $90 million in 2010 to $440 million in 2016, representing nearly 15 

percent of our total operating expenses. These monetary costs are exacerbated by the toll they take on our human capital. Hundreds of M&T colleagues have logged tens of thousands of hours navigating an ever more entangled web of concurrent examinations from an expanding roster of regulators. During 2016 alone, M&T faced 27 different examinations from six 

regulatory agencies. Examinations were ongoing during 50 of the 52 weeks 

of the year, with as many as six exams occurring simultaneously. In advance of these reviews, M&T received more than 1,200 distinct requests for 

information, and provided more than 225,000 pages of documentation in response. The onsite visits themselves were accompanied by an additional, 

often duplicative, 2,500 requests that required more than 100,000 pages to 

fulfill—a level of industry that, beyond being exhausting, inhibits our ability to invest in our franchise and meet the needs of our customers. 29

A. CAMELS Ratings 

The centerpiece of bank supervision is the CAMELS rating system. It was created 

by examiners in 1979 as a scorecard to evaluate an institution’s ‘‘financial condition 

and operations’’—in other words, its safety and soundness. (Interestingly, the creation of the CAMELS system was not specifically mandated by any statute or regulation.) The CAMELS system evaluates a bank across six categories—Capital, Asset 

quality, Management, Earnings, Liquidity, and Sensitivity to market risk, especially 

interest rate risk—and assigns a composite rating, all on a scale of 1 (best) to 5. 

With the sole exception of a few small changes in 1996 (most notably, the addition 

of the ‘‘S’’ component), the CAMELS standards have not been materially updated 

in the almost 40 years since their adoption—not after adoption of the original Basel 

Accord on capital in 1988, the Basel III regime in 2010, the Comprehensive Liquidity Analysis and Review in 2012, or the Liquidity Coverage Ratio in 2014. 

The result is a system that is hopelessly out of date. Detailed capital, liquidity, 

and other rules have been expressly designed and carefully calibrated to evaluate 

the key components of the CAMELS ratings: capital, liquidity, and, less obviously, 

earnings and asset quality, which are now evaluated through stress testing for certain banks. Thus, for example, the published standards that examiners apply in deciding the capital component of the rating do not include consideration of any post1978 regulatory capital standards—or any market indicators, which also have grown 

in sophistication over the past 40 years. There is no mention of CCAR, the self-described Comprehensive Capital Analysis and Review. Rather, the published standards speak vaguely of factors like ‘‘the ability of management to address emerging 

needs for additional capital.’’ This is not to say that there cannot be cases where 

a bank that is deemed well-capitalized under the current 35-plus different capital 

tests could not, in theory, still require more capital. It is, however, pretty unlikely. 

It is worth examining the predictive ability of CAMELS ratings. Consider the 

number of banks rated as weak (CAMELS 3, 4, or 5 in Exhibit 1). 

48 

This chart seems to demonstrate little predictive ability for CAMELS ratings, 

even when they were focused on financial condition. In 2007, a small percentage 

was rated as weak, but hundreds failed. 

Changing the subject: The move from financial condition to compliance. The appropriate response to the diminished value of CAMELS as a measure of financial condition would have been to decrease its importance in the supervisory process or incorporate better measures of financial condition. To their credit, the Federal Reserve 

and other banking agencies adopted several crucial post-crisis reforms to improve 

bank resiliency: most notably, CCAR stress testing, Basel III, and the LCR. However, exactly because more objective, analytically sound standards have overtaken 

the CAMELS system as a gauge of financial condition, examiners have shifted their 

emphasis to the one entirely subjective component: management. And not management as viewed through the lens of maintaining sound financial condition, but rather through the lens of ‘‘compliance’’—not just with laws, but with examiner guidance 

and criticisms too. 

Various ‘‘unwritten rules’’ reportedly have been adopted as part of this shift: 

• All components do not count equally toward the composite rating; the management rating counts the most, and it increasingly appears that the composite rating cannot be higher than the management rating. This elevation of management as the ‘‘super component’’ has never been subject to public comment. A 

1996 update to the CAMELS standards stated that ‘‘the management component is given special consideration when assigning a composite rating.’’ Over 

time, it has become the dominant consideration. 

• The management rating does not depend primarily on the financial condition 

of the bank (because, if it did, it would track the other ratings), but rather on 

compliance with banking agency rules and guidance. In practice, any compliance problem resulting in enforcement action or penalty, regardless of its materiality, can result in a downgrade of management; so, too, can unresolved ‘‘Matters Requiring Attention’’ (a confidential examiner criticism). 

• Management ratings increasingly are driven by the results of a consumer compliance rating that was adopted as an independent evaluation. 

Thus, the examination system has changed from primarily an evaluation of the 

safety and soundness of an institution to, increasingly, an evaluation of routine compliance matters and the readiness with which management accedes to examiner 


61517004.eps
49 

criticism. And this change has been accompanied by a substantial increase in the 

consequences of a low rating, with supervisors raising the stakes dramatically. 

While compliance matters are important, they are not uniquely and exclusively important, and should not pollute a system designed for an altogether different, and 

vital, safety and soundness purpose. 

Consequences. Bankers now routinely refer to being in the ‘‘penalty box,’’ where 

they cannot expand through investment, merger, or adding a branch. Mid-size and 

regional banks are particularly affected. There are various ways into the penalty 

box: 

• As described above, a ‘‘3’’ rating for management operates as a halt on expansion. Under section 4(k) of the Bank Holding Company Act, a financial holding 

company whose bank receives a ‘‘3’’ rating for management must receive Federal Reserve approval to expand certain nonbanking activities. Regulators now 

extend that to almost any type of expansion, or at least to any expedited review 

of branching or other applications. 

• Any AML consent order operates as a multiyear ban on expansion for any purpose, regardless of the seriousness of the conduct motivating the order or the 

progress made by the firm in remediating it. While consent orders bring to 

mind large banks in highly publicized cases, small and midsized banks routinely receive such orders. 

• A ‘‘Needs Improvement’’ CRA rating also operates as a multiyear ban, regardless of what triggered it or how it is being remediated. While some statutes governing expansion require an assessment of management (for example, the Bank 

Holding Company Act, governing bank acquisitions), many do not. And of those 

that do, each speak in particular to ‘‘management resources’’—presumably, the 

ability of management to oversee an integration—and not compliance issues. 

Large banks have sufficient resources to remediate problems in one area while 

expanding in another area—for example, to remediate an AML issue at an overseas subsidiary while opening a new branch in the Midwest United States. 

The results of this new supervisory regime are significant: 

• Many banks—of all sizes, but particularly midsized banks—have been blocked 

from branching, investing, or merging to meet their customers’ needs. 

• Bank technology budgets often are devoted primarily not to innovation but to 

redressing frequently immaterial compliance concerns. 

• Board and management time is diverted from strategy or real risk management 

and instead spent remediating frequently immaterial compliance concerns and 

engaging in frequent meetings with examiners to ensure that they are fully satisfied. Numerous banks report that their boards now spend a majority of their 

time on regulation and compliance. 

Of course, for examiners interested in having their compliance criticisms acknowledged and immediately remediated, this system works well. But as we note, it is 

not a tool that regulators in any other industry feel they need, and it has important 

economic consequences. 

Recommendations. A few core reforms are necessary. The first is an unequivocal 

statement that the purpose of a CAMELS rating is to assess the financial condition 

of the bank from the perspective of its potential risk to the Deposit Insurance Fund. 

The second is the withdrawal of the Federal Reserve’s SR Letter 14-02 and all other 

restrictions on bank expansion that do not have a basis in statute or a regulation 

adopted pursuant to the Administrative Procedure Act. The third is a complete overhaul of the CAMELS regime (including its potential replacement) that emphasizes 

clear, cogent, and objective measures of financial condition over vague, arbitrary, 

and subjective ones. 

B. Tailoring of Enhanced Prudential Standards 

As we have described above, post-crisis regulatory reforms have established a 

myriad of new prudential requirements for banking organizations. The scope of application varies by requirement, but in many cases new regulations have been applied in a uniform fashion to large and diverse cohorts of banks of differing sizes, 

business models and risk profiles. For example, the Federal Reserve has implemented a number of so-called ‘‘enhanced prudential standards’’ under section 165 

of the Dodd–Frank Act (including capital, liquidity, and other requirements) on the 

basis of asset size thresholds. 

While the Federal Reserve has made some effort to tailor its enhanced prudential 

standards (e.g., by providing for a modified LCR for some firms and recently eliminating the CCAR qualitative assessment for others), it has generally done so based 

50 

on arbitrary size thresholds rather than careful consideration of the scope and type 

of regulation warranted by different business models, risk profiles and other more 

meaningful criteria. And in many cases, the Federal Reserve has established onesize-fits-all rules that are not tailored at all. The result is insufficiently tailored regulatory regime for many banks that imposes unnecessary burdens and unduly limits 

their ability to lend to and otherwise support businesses and consumers. There is 

therefore a clear need to review all enhanced prudential standards established 

under section 165 of the Dodd–Frank Act in order to identify and implement more 

appropriate and robust tailoring of their scope and extent of application; doing so 

would better enable banks unduly and unnecessarily burdened by the current regime to lend and otherwise serve customers and the economy. 

C. Regulation of Foreign Banking Organizations 

Generally outside the notice of policymakers, foreign bank operations in the 

United States have decreased somewhat in recent years. 

Certainly, one cause of this retrenchment has been a delay in foreign banks’ recapitalization post-crisis, global economic instability, and a general need to reduce 

balance sheet size. However, U.S. requirements have been another key driver, as 

recent years have also seen extensive revision to the rules and regulations governing foreign banking organizations (FBOs) that have U.S. operations. In particular, the Federal Reserve has required that, on the basis of asset size thresholds, 

many FBOs operating in the United States establish intermediate holding companies (IHCs) through which their U.S. activities must be operated and managed. 

These IHCs in turn are now subject to a wide range of new prudential requirements, including capital, liquidity, stress-testing, resolution planning and other 

rules. The resulting regime is one that is simply not appropriately tailored to the 

varying sizes, business models, and risk profiles of different types of FBOs and the 

inherently sub-consolidated nature of their U.S. operations. 

For example, the stand-alone capital and liquidity requirements applied to the 

U.S. IHC of an FBO effectively hinder the foreign parent’s ability to allocate capital 

and liquidity across its entire global business. All internationally active banks 

(whether foreign or domestic) manage their capital and liquidity on a consolidated, 

global basis, oftentimes acting nimbly to allocate financial resources to geographic 

locations or business operations where it is needed in a time of stress. Stand-alone 

U.S. capital and liquidity requirements effectively trap those resources in the FBO’s 

U.S. IHC, making them unavailable for use elsewhere. The U.S. regime, which also 

mandates stress testing at the IHCs, ignores (and duplicates) similar consolidated 

requirements imposed on the FBOs by their home country authorities. And of 

course, for the various U.S. capital and liquidity rules that are applied to the U.S. 

IHC of FBOs, the general concerns and recommendations that we have highlighted 

earlier in this paper are just as relevant, and apply equally. 

On top of these capital, liquidity, and stress test requirements, the Federal Reserve also has required foreign GSIBs to ‘‘pre-position’’ extraordinarily high amounts 

of internal TLAC. This stands in contrast to the process described in the FSB’s term 

sheet on TLAC, which the Federal Reserve developed in coordination with foreign 

supervisors; that process identifies a range of potential internal TLAC requirements, 

with the precise requirement to be established on an institution-specific basis 

through collective dialogue among that institution’s home and host country supervisors. Instead, the Federal Reserve imposed internal TLAC requirements at the top 

end of the FSB range, unilaterally. Here, too, the result is insufficiently tailored regulatory regime for many FBOs that imposes unnecessary burdens and unduly limits 

their ability to lend to and otherwise support businesses and consumers. 

VII. Conclusion 

Our banking system now stands on a solid foundation of capital and liquidity. 

That foundation affords us the opportunity to consider whether particular components of the regulatory and supervisory regime are unnecessary, duplicative or more 

stringent than necessary to achieve safety and soundness and financial stability 

goals. Considerable economic benefits can be achieved through such a reexamination. 

51 

PREPARED STATEMENT OF ROBERT R. HILL, JR. 

CHIEF EXECUTIVE OFFICER, SOUTH STATE CORPORATION, ON BEHALF OF MID-SIZE

BANK COALITION OF AMERICA

JUNE 15, 2017 

Chairman Crapo, Ranking Member Brown, and Members of the Committee, I am 

Robert Hill, CEO of South State Corporation, which is the holding company of South 

State Bank. South State, founded in 1933, is headquartered in Columbia, South 

Carolina, and serves communities in South Carolina, North Carolina and Georgia. 

In January of this year, our bank passed the $10 billion in assets threshold, which 

subjects South State to unduly burdensome requirements under the Dodd–Frank 

Act. In light of this experience, I appreciate the opportunity to present the views 

of the Mid-Size Bank Coalition of America (MBCA) on the significant compliance 

burden placed on midsize banks as a result of Dodd–Frank. 

The MBCA is the voice of 78 midsize banks in the United States with headquarters in 29 States. MBCA member banks are primarily between $10 billion and 

$50 billion in asset size, average less than $20 billion, and serve customers and communities through more than 10,000 branches in all 50 States, the District of Columbia, and three U.S. territories. Midsize banks most often are the largest, local bank 

serving communities, many for more than a century. 

Unlike the largest banks in the country, for whom lending is largely automated, 

midsize banks are run by people who are focused on establishing long-term relationships with our communities and our customers on a daily basis. As a result, we are 

able to use actual knowledge of our customers and base our credit decisions on intangible factors, such as character and local economic conditions. We have also 

made the necessary risk and compliance investments that support our business 

models, which are uniformly based on stable deposit funding, revenues driven by 

traditional banking activities well-understood by bank management and regulators 

and limited or no trading operations or market-making activity. In sum, midsized 

banks have prudent business models that contribute to economic growth and support financial stability. To the extent restraints can be reduced, midsized banks can 

provide even more credit and support to small businesses and Main Street. 

Under Dodd–Frank, crossing the $10 billion in assets threshold has harsh implications for midsize banks. When banks cross $10 billion, they are considered 

midsized institutions—a designation that introduces an enhanced supervisory approach from regulators. These banks can expect more frequent compliance requirements, which may include full-scope examinations coupled with regular, targeted reviews. In connection with these additional burdens, midsize banks must allocate further resources to compliance, from business units to senior management and the 

board of directors. 

The imposition of these demands does not benefit the public in any appreciable 

way. These requirements drain resources of midsize banks, and less money is thus 

available to provide credit to individuals and small businesses in our communities. 

For example, as a result of this threshold, South State incurs costs over $20 million 

per year. 

In April of this year, the MBCA submitted a letter to the Chairman and Ranking 

Member urging the Committee to revisit the $10 billion number, an arbitrary figure 

that does not meaningfully capture systemic risk. In addition to the unfair consequences of using this number that already exists, the MBCA is deeply concerned 

the figure could become the default threshold for even more rules and regulations 

in the future. 

The MBCA’s highest priority would be to eliminate the $10 billion threshold and 

replace the number with an activities-based standard, which would focus regulation 

more closely on systemic risk, or, at a minimum, to raise the threshold to an appropriate level. The key sections of Dodd–Frank, which will need to be amended in this 

regard, are Sections 165, 1025, 1026, and 1075. 

As an example, Section 165 imposes a mandatory stress testing burden on banks 

between $10 billion and $50 billion, known as the Dodd–Frank Annual Stress Test 

(DFAST). Former Federal Reserve Governor Daniel Tarullo testified before Congress 

that such testing is not necessary, and, in fact, it is actually a burden on the regulators with no commensurate regulatory benefit. As CEO of an institution that recently passed the $10 billion threshold, I can personally attest to the significant 

compliance burden that follows and the cost that it entails. 

Independent Bank of Texas, an MBCA member bank with assets of just under $10 

billion, estimates the cost of implementing the mandatory stress testing required 

under Section 165, in the event it crosses the $10 billion threshold, would be $5– 

6 million in the year of implementation and $2–3 million per year thereafter. IndeVerDate Nov 24 2008 11:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00055 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\06-15 ZDISTILL\61517.TXT JASON
52 

pendent Bank has stated they will have to add a team of three to four people to 

manage this process. 

All of this cost would be for something Governor Tarullo has testified provides no 

regulatory benefit. In addition, the current regulatory regime imposed by Section 

165 forces midsize banks to divert capital away from the products we offer and the 

lending that drives growth and development in our communities. The MBCA believes freeing midsize banks from the unreasonable burdens posed by Section 165 

should be one of your highest priorities. 

To this end, we applaud Senators Moran, Tester, and Heitkamp for sponsoring 

S.1139, the Main Street Regulatory Fairness Act, which would remove the DFAST 

mandate currently imposed on banks between $10 billion and $50 billion in assets. 

As Senator Tester noted, ‘‘This bill cuts red tape and makes it easier for Main Street 

lenders to invest in entrepreneurs, families buying their first home and parents 

sending their kids to college.’’ 

The MBCA also applauds Senators Tester and Moran for introducing the CLEAR 

Relief Act of 2017, which would provide the Qualified Mortgage protections to loans 

originated and held in portfolio by banks under $10 billion. The MBCA, however, 

strongly urges the Committee, as it moves this legislation forward, to not limit this 

important relief to banks under $10 billion. The rationale for the Qualified Mortgage 

protections relates to the fact the banks with the status are holding the mortgage 

loans in portfolio. It has nothing to do with the size of the institution holding the 

mortgage. Using the arbitrary $10 billion figure once again reinforces this number 

with no rational basis. 

In our market, we have a lot of retirees, who do not have jobs. As a result, they 

do not meet the QM status requirements. If we are keeping the mortgages on our 

books, we believe we should be given QM status. Otherwise, it is not just the bank 

that is impacted, but our consumers are unfairly limited in their choices. 

Former House Financial Services Chairman Barney Frank, one of the principal 

authors of Dodd–Frank, has testified that he supports giving a safe harbor status 

on loans where the lender retains the risk by holding the loan in portfolio. A loan 

made by a bank and held to maturity is the strongest possible statement of confidence in the ability of the borrower to repay regardless of the size of the bank. 

We have only raised two examples where the $10 billion figure currently imposes—or may impose—an unnecessary burden on midsized banks. But there are 

a variety of thresholds that need to be eliminated, replaced by an activities-based 

standard or, at a minimum, raised substantially to capture systemic risk. This is 

not simply about fairness to midsize banks. It is fundamental to growing our economy. 

Recently, the MBCA asked its member banks to submit examples from their customers of specific, real-world customer impacts from the current regulatory system. 

The examples received included everything from mortgages rejected because of the 

ability to repay/qualified mortgages requirement to business loans not made. These 

examples have one thing in common—the absence of economic activity due to unnecessary regulatory requirements, which results in limited to no job creation and 

growth. 

As Main Street banks, we support a regulatory regime that encourages prudent 

behavior and protects our customers. But we also need common-sense regulation 

that does not unnecessarily impose burdens and impede the banking services communities need to create jobs and drive economic growth—and this, in our view, requires a move away from the Dodd–Frank $10 billion regulatory threshold. I am 

happy to answer any questions the Committee may have, and again appreciate the 

opportunity the Committee has given the MBCA to express its views. 

PREPARED STATEMENT OF SAULE T. OMAROVA 

PROFESSOR OF LAW, CORNELL UNIVERSITY

JUNE 15, 2017 

Dear Chairman Crapo, Ranking Member Brown, Members of the Committee: 

Thank you for inviting me to testify at this hearing. My name is Saule Omarova. 

I am Professor of Law at Cornell University, where I teach subjects related to U.S. 

and international banking law and financial sector regulation. Since entering the 

legal academy in 2007, I have written numerous articles examining various aspects 

of U.S. financial sector regulation, with a special focus on systemic risk containment 

and structural aspects of U.S. bank regulation. For 6 years prior to becoming a law 

professor, I practiced law in the Financial Institutions Group of Davis Polk & 

Wardwell and served as a Special Advisor on Regulatory Policy to the U.S. TreasVerDate Nov 24 2008 11:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00056 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\06-15 ZDISTILL\61517.TXT JASON
53 

1David Luttrell, Tyler Atkinson, Harvey Rosenblum, ‘‘Accessing the Costs and Consequences 

of the 2007–09 Financial Crisis and Its Aftermath’’, DallasFed Economic Letter, Vol. 8, No. 7 

(Sept. 2013), available at https://www.dallasfed.org/research/eclett/2013/el1307.cfm, at 1-2. 2See, Matt Scully, ‘‘Trumps’ America Is Facing a $13 Trillion Consumer Debt Hangover’’, 

Bloomberg.com (6 June 2017), available at https://www.bloomberg.com/news/articles/2017-06- 

06/trump-s-america-is-facing-a-13-trillion-consumer-debt-hangover?srnd=157391092. 3See, Robert Hockett and Richard Vague, ‘‘Debt, Deflation, and Debacle: Of Private Debt 

Write-Down and Public Recovery’’ (2013), available at https://www.interdependence.org/wp-content/uploads/2013/04/Debt-Deflation-and-Debacle-RV-and-RH1.pdf. 4Luttrell et al., supra note 1, at 3. 

5Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. No. 111-203, 

124 Stat. 1376 (2010) (codified at 12 U.S.C. §5301 et seq. (2012)). 

ury’s Under Secretary for Domestic Finance. I am here today solely in my academic 

capacity and am not testifying on behalf of any entity. I have not received any Federal grants or any compensation in connection with my testimony, and the views 

expressed here are entirely my own. 

The global financial crisis of 2007–09 has left a deep, crippling mark both on the 

American economy and on the lives of millions of Americans who lost their homes, 

their jobs, their savings, and their hopes for a better future. It threw the country 

into a prolonged economic recession, accompanied by growing levels of poverty, inequality, and political discord. According to an estimate by the Federal Reserve 

Bank of Dallas, the crisis resulted in an economy-wide output loss of up to $14 trillion, or $120,000 per single U.S. household—both of which amounts will easily double if the broader economic and societal effects of the crisis are permanent. 1 These 

output losses triggered a familiar vicious circle of economic stagnation and instability. Faced with steadily declining real incomes, Americans are forced to finance 

their consumption with an increasingly unsustainable debt, which already reached 

a record $13 trillion mark. 2 Debt overhang depresses consumer spending, which in 

turn leads to further contraction in production and employment. 3

Furthermore, neither economists’ estimates nor the actual statistics capture the 

enormous nonpecuniary—or human—costs of the crisis, including the lasting psychological effects of unemployment, underemployment, diminished job security and 

reduced opportunity. While difficult to quantify, these ‘‘hidden’’ costs of the financial 

crisis will be borne by the American people for years to come. 

Yet, the very same financial institutions whose reckless profit-seeking created the 

crisis in the first place were largely protected from the downside of their own excessive risk-taking, because the Federal Government was compelled to bail them out. 

Not only did the 2008–09 bailouts effectively exact ‘‘an unfair and nontransparent 

tax upon the American people’’ but they also significantly undermined public trust 

in the American capitalist system, thus undermining the system itself. 4

In this context, the Committee’s current efforts to evaluate the role of financial 

institutions in fostering America’s economic growth acquire particular significance. 

Promoting sustainable, stable long-term growth is an issue of enormous political as 

well as economic importance. It is the only way of remedying pervasive socially destructive consequences of the financial crisis: only by deliberately and systematically 

channeling public and private efforts toward the expansion of productive capacity 

and employment in the real (i.e., nonfinancial) sector of the national economy can 

we reverse the crippling effects of the extraordinary wealth transfer from the American taxpayers to the financial industry that the latest crisis laid bare for all to see. 

There is hardly a greater task facing Congress today, and the Committee’s decision 

to tackle it is a much needed act of public-minded statecraft. 

Ironically, however, the financial industry is using this opportunity to mount a 

massive lobbying effort to achieve the opposite goal: to reverse key post-crisis regulatory reforms enacted with an explicit goal of curbing financial institutions’ ability 

to generate—and then socialize—excessive levels of risk in the financial system. The 

industry explicitly targets the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (the ‘‘Dodd–Frank Act’’ or the ‘‘Act’’), the centerpiece of post-crisis financial regulation reform. 5 In effect, banks are trying to put the Dodd–Frank 

Act on trial under the rhetorical guise of ‘‘fostering economic growth.’’ It is, however, 

a dangerous misconception to equate economic growth with financial sector deregulation: not only are the two phenomena fundamentally different but, as explained 

below, they are often mutually exclusive. 

It is especially ironic—indeed, astounding—to watch the financial industry complain about its supposedly unbearable regulatory compliance costs, when the industry is doing exceptionally well for itself. All banks and their parent-companies, regardless of size, saw their profits increase steadily during the entire time after the 

54 

6The total number for 2016 is the sum of the revenant quarterly numbers. See, Federal Reserve Bank of New York, ‘‘Quarterly Trends for Consolidated U.S. Banking Organizations’’, 

available at https://www.newyorkfed.org/medialibrary/media/research/banking—research/ 

quarterlytrends2016q4.pdf?la=en. 7Letter to The Honorable Michael D. Crapo and The Honorable Sherrod Brown from Francis 

Creighton, Executive Vice President of Government Affairs of Financial Services Roundtable 

(Apr. 14, 2017) [the ‘‘FSR Letter’’], at 1. 8 ‘‘The Fundamental Logic of Speculative Manias and Crashes Has Been Explained and Documented Many Times’’. See, Charles P. Kindleberger and Robert Aliber, ‘‘Manias, Panics, and 

Dodd–Frank Act was passed in 2010. In 2016 alone, banking institutions earned a 

total of $175 billion in net profits. 6 This is not a sign of a struggling industry. 

Of course, it may be reasonable, and even desirable from the public policy perspective, to revisit the continuing efficacy of certain post-crisis laws and regulations 

or to recalibrate their application to certain small, low-risk financial institutions. If 

carefully designed and thoughtfully implemented, such recalibration may help to increase the availability of affordable local financing to small businesses in some rural 

and small-town areas. However, even under the best of circumstances, that possibility alone is not sufficient to support a wide-ranging repeal or rollback of the existing financial laws and regulations. Any such measure would directly and disproportionately benefit large, complex, systemically risky megabanks by removing all 

meaningful constraints on their ability to destabilize the Nation’s financial system 

and, once again, jeopardize American taxpayers’ long-term (and even short-term) 

well-being. It is against this background that the Committee should evaluate every 

proposal for regulatory reform submitted to it by self-interested industry players. 

I. Financial Deregulation Is Likely To Hinder, Not Foster, Real Economic 

Growth 

The starting point of all deregulatory proposals and arguments advanced by the 

financial industry is a blanket assertion to the effect that financial institutions’ core, 

if not sole, business purpose is to finance America’s economic growth. Accordingly, 

the argument goes, any regulatory constraint on financial institutions’ business activities, by definition, restricts their ability ‘‘to serve customers, grow the economy 

and create jobs.’’ 7 Therefore, an implicit conclusion follows, removing such regulatory constraint will necessarily and automatically improve customers’ lives, boost 

the economy, and create jobs. 

It is an inherently faulty argument, insofar as these financial institutions—regardless of their size or other attributes—are privately owned firms whose overarching business priority is to maximize their own profits and shareholder returns, 

not the Nation’s macroeconomic goals. It becomes a deliberately misleading and 

dangerous argument, however, when used by large financial institutions the bulk 

of whose profits comes from massive secondary-market trading and dealing operations. 

The financial industry’s argument either inadvertently conflates or deliberately 

confounds two very different things: (1) actual growth in the real economy, and (2) 

mere speculation-driven asset price inflation in the secondary markets. 

It is indisputable that what America needs is real economic growth: stable and 

sustainable long-term growth of the real—i.e. nonfinancial—sector of the national 

economy. We urgently need to grow our Nation’s industrial output and capacity, to 

facilitate employment- and wealth-generating technological advances, to rebuild and 

modernize the country’s physical and social infrastructure. We also need to ensure 

that the benefits of these real growth-promoting activities are distributed more 

equally and fairly, so as to restore the lost strength of America’s middle class and 

to enable lower-income American families to move up the ladder of economic and 

social success. It is this kind of real, sustainable, structurally balanced, and socially 

inclusive economic growth that is necessary in order to help the country recover 

from the post-crisis economic recession. 

It is also fundamentally different from the mere asset price inflation, or growth 

in prices at which various already existent assets—stocks, bonds, commodities, real 

estate, etc.—are traded in secondary markets. Because increases in market value of 

such tradable assets at least temporarily increase their owners’ individual wealth, 

the aggregate growth in the market value of all such assets is routinely and erroneously taken as a direct indicator of the aggregate economic ‘‘wealth’’ or national 

economic ‘‘growth.’’ Of course, an increase in the current market price of a particular 

company’s stock may reflect, at least in part, an increase in that company’s reallife productivity. But it may also reflect merely the generalized expectations of today’s stock buyers that those prices will be even higher tomorrow. In that sense, 

all asset price inflation is inherently speculative: it is not directly or necessarily 

linked to actual productive gains in the real economy. 8

55 

Crashes: A History of Financial Crises’’ (2005); Erik Gerding, ‘‘Law, Bubbles, and Financial Regulation’’ (2013). 9Financial Services Modernization Act (Gramm–Leach–Bliley Act), Pub. L. No. 106-102, 113 

Stat. 1338 (1999). 10See, Arthur E. Wilmarth, Jr., ‘‘The Dark Side of Universal Banking: Financial Conglomerates and the Origins of the Subprime Financial Crisis’’, 41 Conn. L. Rev. 963, 1002–46 (2009). 11See, Federal Reserve Bank of New York, ‘‘Quarterly Trends for Consolidated U.S. Banking 

Organizations’’, Fourth Quarter 2016, available at https://www.newyorkfed.org/medialibrary/ 

media/research/banking–research/quarterlytrends2016q4.pdf?la=en, at 13. 12See, Thomas Philippon, ‘‘Finance Versus Wal-Mart: Why Are Financial Services So Expensive?’’ Rethinking the Financial Crisis 235 (Alan Blinder et al., Eds. 2012). 

Moreover, speculative asset price inflation, in fact, significantly impedes real economic growth. There are two reasons why that is the case. 

First, by making purely speculative investments financially attractive, asset price 

inflation effectively diverts investment flows away from the primary markets in 

which companies raise new capital for expanding their productive capacity. Put simply, investors looking to put their money to use in financial markets face two competing choices: asset price speculation (an easy short-term commitment of capital 

with virtually no ‘‘hard’’ constraints on the upside) or productive investment in the 

real economy (a long-term commitment of capital with various real-life constraints 

on potential returns). In that sense, asset price inflation actively undermines the 

real economy’s potential for productive, employment-generating growth that America so desperately needs. 

Second, asset price inflation creates instability that directly threatens the economy’s ability to operate and grow. When speculation-induced asset price inflation 

reaches its peak, the inevitable market crash tends to be fast and furious. During 

these dramatic moments, markets tend to over-correct, sending asset prices far 

below the levels supported by the ‘‘fundamentals.’’ Thus, the ultimate bursting of 

an unsustainable speculative bubble wipes out not only the artificial, purely speculative gains in asset values but also a lot of real economic wealth. Massive defaults, 

bankruptcies, business closures, worker layoffs, and other familiar symptoms of a 

severe ‘‘market correction’’ extinguish both the fruits of the Nation’s past and the 

foundations of its future economic growth and prosperity. 

To appreciate these dynamics, one need not go as far back as the Great Depression and the Roaring Twenties that led to it. More recent history provides plenty 

of evidence to the same effect. 

In the era of massive financial sector deregulation, throughout the 1990s and all 

the way until 2008, America’s economic boom was based largely on secondary-market asset price inflation. This trend is particularly visible in the period after the enactment of the Gramm–Leach–Bliley Act of 1999 (the ‘‘GLB Act’’), which repealed 

the Glass–Steagall Act’s prohibition on combining, under the same corporate roof, 

traditional banking activities and full-blown dealing and trading in securities and 

other financial (and even nonfinancial) markets. 9 Throughout the 1990s, large financial institutions—both commercial banks and investment banks—lobbied for this 

‘‘regulatory relief’’ from the supposedly outdated Glass–Steagall rules, using the familiar rhetoric of ‘‘facilitating economic growth’’ and providing ‘‘more choices’’ and 

‘‘better services’’ to their customers. 

Once enacted, the GLB Act unleashed an unprecedented consolidation in the financial services industry and the emergence of a handful of extremely large FHCs 

that began aggressively growing their large-scale trading and dealing operations in 

securities, derivatives, short-term money-like instruments, and physical commodities. 10 Their core banking operations, while still a critical point of access to public 

subsidy, quickly lost their status as the ‘‘core’’ source of profitability. 11 In the short 

9 years between the enactment of the GLB Act and the near-collapse of the financial 

markets in the fall of 2008, these universal megabanks have effectively turned into 

universal dealers making secondary markets in everything and anything that could 

be quantified and turned into a trading asset. A result of this unprecedented growth 

of secondary market speculation was an equally unprecedented asset price inflation—a story aptly told by many an expert already. 

For present purposes, however, one point deserves special emphasis: As secondary 

market trading volume, stock price indices, and financial firms’ profits were all 

going up, domestic industrial production declined, manufacturing jobs were massively outsourced overseas, wages stagnated, and consumer debt (itself converted to 

a ‘‘securitized’’ trading asset) ballooned. In effect, this ‘‘financialization’’ of the American economy represented an unprecedented transfer of wealth from the real economy to the increasingly speculation-oriented financial sector. 12 The systematic redistribution of wealth from the Main Street makers to Wall Street takers was starkly exposed when the speculative craze—particularly, in mortgage-backed securities, 

56 

13See, Saule T. Omarova, ‘‘The New Crisis for the New Century: Some Observations on the 

‘Big-Picture’ Lessons of the Global Financial Crisis of 2008’’, 13 N.C. Banking Inst. 157 (2009). 14 According to official statistics, the top 50 largest BHCs’ total net income for the last quarter 

of 2016 was over $32B, while their average annualized return on equity was above 7 percent. 

Tellingly, the total quarterly income of just the top six BHCs—JPMorgan Chase & Co., Bank 

of America Corp., Wells Fargo & Co., Citigroup, The Goldman Sachs Group, and Morgan Stanley—was over $24B. Three of these largest institutions had annualized return on equity of almost 11 percent. Federal Reserve Bank of New York, Quarterly Trends for Consolidated U.S. 

Banking Organizations, Fourth Quarter 2016, available at https://www.newyorkfed.org/ 

medialibrary/media/research/bankinglresearch/quarterlytrends2016q4.pdf?la=en, at 36. 15 12 U.S.C. §5321. 16 12 U.S.C. §5323; 5325. 

underlying mortgage loans and houses—finally triggered the world’s first truly systemic financial crisis. 13 To protect the economy from collapse, American taxpayers 

were forced to bail out the same megabanks that fueled—and profited from—the crisis-inducing asset price inflation. Today, financial institutions are doing very well, 

in terms of profits and returns on their shareholders’ equity. 14 But the middle class 

and poor Americans, whose livelihood is tied to the real economy, continue to bear 

the full burden of the sluggish post-crisis recovery. 

The centerpiece of post-crisis regulatory reform, the Dodd–Frank Act, aims to 

minimize the likelihood of recurring speculative asset price inflation. Thus, the 

Dodd–Frank Act established a new systemic oversight body, the Financial Stability 

Oversight Council (FSOC). 15 The Act mandated enhanced prudential supervision of 

so-called ‘‘systemically important financial institutions’’ (SIFIs), which includes large 

bank holding companies (BHCs) with at least $50 billion in assets and certain 

nonbank financial institutions designated as SIFIs by FSOC. 16 As part of such enhanced prudential supervision, SIFIs are required to maintain higher capital and 

liquidity buffers, conduct regular stress tests, and prepare and submit to regulators 

comprehensive resolution plans (living wills). 

Among other things, these heightened requirements are designed to limit the ability of large financial conglomerates to create dangerous levels of risk through their 

massive dealing and trading operations in secondary markets. By restricting SIFIs’ 

ability to fuel destabilizing asset price inflation, the Dodd–Frank regime of enhanced prudential supervision also helps to channel investment away from socially 

destructive speculation (secondary markets) and toward productive investment in 

the real economy (primary markets). While it is not commonly perceived or discussed in these terms, this potential ‘‘channeling’’ effect of the Dodd–Frank Act on 

real economic growth should not be underestimated. Put simply, if investors find 

fewer lucrative opportunities in speculative assets trading, they will direct more of 

their money into nonspeculative investments. 

It is, therefore, no surprise that large financial conglomerates—Wall Street 

megabanks that dominate and profit from secondary market trading and dealing activities—are now asking Congress to reverse all of the major post-crisis regulatory 

reforms that threaten their ability to promote speculative asset price inflation. Rhetorically, these financial institutions are deliberately using the language of ‘‘fostering economic growth’’ and ‘‘creating jobs,’’ ostensibly through lending to ‘‘small 

businesses’’ and ‘‘American families.’’ Strategically, they are taking advantage of the 

fact that many smaller BHCs, regional lenders without meaningful trading operations, voice their own, qualitatively different, concerns about the unintended consequences of applying SIFI regulation to their more traditional banking-based business models. Neither of these clever tactics should sidetrack the Committee in its 

deliberations on how to foster sustainable, stable growth in the real economy, as opposed to mere speculation in secondary markets. 

II. The Financial Industry’s Deregulatory Proposals Will Not Foster Real 

Economic Growth 

The financial industry has submitted numerous letters and proposals for deregulatory reforms that would ostensibly promote economic growth. A comprehensive or 

detailed analysis of all such letters and proposals would make my testimony unwieldy. Instead, I will focus on the industry’s key deregulatory proposals targeting 

the Dodd–Frank’s regime of enhanced prudential supervision, including the process 

of SIFI designation and supervisory stress testing. While these proposals offer clear 

potential benefits from the standpoint of financial institutions’ own profitability and 

stock price (at least in the short run), the financial industry failed to establish how 

the proposed deregulatory measures would promote sustainable long-term growth of 

the American economy. 

57 

17See, e.g., Letter to The Honorable Michael D. Crapo and The Honorable Sherrod Brown 

from The Clearing House (Apr. 14, 2017) [the ‘‘TCH Letter’’]. 

A. Rolling Back Enhanced Prudential Regulation Will Promote Speculation-Driven 

Asset Price Inflation, Not Real Economic Growth 

The financial industry’s proposals nearly uniformly try to make a case that one 

of the key impediments to creating American jobs and fostering economic growth is 

the Dodd–Frank Act’s explicit focus on systemic risk prevention. This argument targets the FSOC’s general authority to designate SIFIs, the process and criteria for 

application of enhanced prudential standards, the substance of such standards, and 

the Federal regulators’ ability to exercise discretion in implementing their statutory 

oversight responsibilities. The principal justification for this sweeping attack on the 

core features of the post-crisis regulatory regime is that it increases individual financial institutions’ costs of compliance, compared to their pre-crisis regulatory compliance costs. 

This line of argument lacks merit. 

Every regulation, by definition, increases regulated firms’ costs of doing business: 

such costs may include both the direct expenses of complying with regulations and 

the foregone profits from the prohibited or restricted activities. Child labor laws, environmental regulations, anti-fraud rules all raise costs of doing business for those 

private firms that stand to profit from activities the society deems undesirable. The 

mere imposition, via regulation, of additional private costs is not an ‘‘unintended 

consequence’’ that must be avoided: it is the principal mechanism of protecting the 

public from potential harm caused by profit-seeking private actors. 

The appropriateness of additional private costs of regulation, therefore, must be 

weighted not against pre-regulation private costs but against potential public costs 

likely to accrue in the absence of regulation. None of the financial industry’s proposals offer any discussion, let alone quantification, of the full public costs of rolling 

back the Dodd–Frank regime of systemic oversight. In that sense, while styled as 

public policy proposals, these are merely requests for special private benefits. 

The rhetoric of ‘‘promoting economic growth’’ is meant to mask this fundamentally 

self-interested nature of the financial industry’s requests for deregulation. As discussed above, removing prudential restrictions on large financial institutions’ risktaking will hinder, not promote, the kind of real economic growth that the American 

people so urgently need. It will spur precisely the kind of secondary market speculation and asset price inflation that enriches Wall Street megabanks and further decimates America’s real productive capacity. 

Notably, all of the financial industry’s proposals to roll back Dodd–Frank’s enhanced prudential regulation use the same basic rhetorical device: they frame the 

issue as a clear binary choice between ‘‘arbitrary’’ and ‘‘tailored’’ rules. They claim 

that existing SIFI determination criteria (in particular, the $50B asset size threshold for treating BHCs as SIFIs), the Federal Reserve’s supervisory stress tests, and 

even the long-standing CAMELS rating system are ‘‘arbitrary’’ and should be either 

repealed or replaced with something that is ‘‘appropriately tailored’’ to each financial institution’s ‘‘unique’’ business and risk profile. 17

It is not my goal in this testimony to engage in any technical disputes regarding 

any specific capital requirements or stress test methodologies. My comments go to 

the overarching misconception that the industry actors’ concerted (possibly coordinated?) use of the false dichotomy—‘‘arbitrariness’’ vs. ‘‘tailoring’’—engenders. 

‘‘Tailored’’ SIFI Determination Is a Path to Eliminating SIFI Oversight 

Generally, setting a specific numeric threshold as a jurisdictional device—i.e., a 

criterion for subjecting a particular person to a particular set of legal rules—is not 

‘‘arbitrary,’’ per se. We all live with a myriad of such fundamentally ‘‘arbitrary’’ but 

practically necessary threshold-based rules every day: the legal age for voting is 18, 

the legal age for drinking is 21, the individual income tax rates are drawn on the 

basis of specified income thresholds, and so on. What would happen if we removed 

all such numerical thresholds as ‘‘arbitrary’’ and replaced them with ‘‘tailored’’ determinations seeking to establish with complete precision every single person’s 

‘‘unique’’ individual ability to exercise voting rights, consume alcohol, or pay income 

taxes? In theory, it could make everything better. In practice, however, it would create a far more arbitrary, unpredictable, and chaotic world in which nobody will be 

able to anticipate—or assess the fairness of—the ‘‘uniquely tailored’’ treatment they 

receive under voting, drinking, or tax laws. It would also require an enormous 

amount of Government resources to provide sufficiently individualized and ‘‘appropriately tailored’’ determination of every person’s many legal rights and obligations. 

The sheer cost to the public of giving everyone their own ‘‘tailored’’ law will far outVerDate Nov 24 2008 11:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00061 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\06-15 ZDISTILL\61517.TXT JASON
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18See, Federal Deposit Insurance Corporation, ‘‘The S&L Crisis: A Chrono-Bibliography’’, 

available at https://www.fdic.gov/bank/historical/sandl/. 

weigh any private costs of having to live with ‘‘arbitrary’’ but universally applicable 

and clearly drawn boundaries. 

This simple common-sense logic should be applied to evaluating the financial in- dustry’s request to replace the Dodd–Frank’s $50B size threshold for treating BHCs 

as SIFIs with an ‘‘indicator-based’’ regime of specific case-by-case designation. 

Midsize banks worried about approaching the $50B threshold in the future and regional banks that already qualify as SIFIs based on their asset size are especially 

keen to see this part of the Dodd–Frank repealed and replaced. 

Reasonable people may disagree and argue about whether the current size thresh- old—$50 billion in assets—is the right one, or whether a higher or a lower number 

would be more socially beneficial. On the one hand, as midsize and regional banks 

argue, their traditional lending-based business model does set them qualitatively 

apart from Wall Street megabanks with massive and systemically risky trading and 

dealing activities. The fact that the top six megabanks’ size is measured in trillions 

of dollars further underscores that difference. On the other hand, $50 billion is by 

no means an insignificant number. Only 38 BHCs currently exceed that threshold. 

It is also instructive to remember that, in the 1980s, savings banks and thrifts— 

small, local traditional lenders squeezed by competitors—made very similar pleas 

for regulatory relief. The resulting S&L crisis showed that hasty deregulation of 

small lending-oriented financial institutions may create significant risks to the system. 18

These complexities notwithstanding, the existing regime should not be simply replaced with an ‘‘indicator-based’’ system under which the FSOC would be forced to 

go through a tedious and inevitably contentious exercise of determining whether any 

particular BHC’s scope, scale, nature, and mix of activities warrants a SIFI designation. While this ‘‘flexible’’ and ‘‘individually tailored’’ approach may sound good in 

theory, it will significantly undermine the entire post-crisis regulatory framework 

for safeguarding systemic stability. There are three main reasons why that is the 

case. First, mandating an individualized SIFI determination procedure for each potentially systemically significant BHC will impose an enormous, and completely unnecessary, financial and organizational burden on FSOC, Federal Reserve, and other 

regulators. The sheer costs of the ‘‘tailored’’ designation process—hiring and training 

dedicated personnel and devoting countless amounts of regulators’ time and energy 

to gathering and processing huge amounts of information, most likely over BHCs’ 

constant objections and complaints—will threaten to derail the entire regime of SIFI 

oversight. It is nearly a certainty that this costly and time-consuming process will 

effectively preclude both FSOC and the Federal Reserve from exercising their statutory responsibilities as systemic regulators. Notably, financial institutions advocating this measure deliberately ignore these public costs of giving them their own, 

individually ‘‘tailored’’ supervisory regime. Nor do they undertake to cover all of the 

additional regulatory costs of the ‘‘tailored’’ SIFI designation process. 

Second, individually ‘‘tailored’’ SIFI designation will immediately become vulnerable to the financial industry’s other favorite line of attack as being inherently unpredictable, unclear, and nontransparent: in other words, ‘‘arbitrary.’’ The very nature of the complex inquiry into various qualitative indicators of systemic riskiness 

of an individual financial institution is bound to open FSOC to potential allegations 

of misjudgment, misinterpretation, and misbehavior. The MetLife saga provides a 

vivid example of that tactic. Given what is at stake for large BHCs, the odds of 

FSOC being constantly embattled and ultimately incapacitated are unacceptably 

high. Instituting individually ‘‘tailored’’ SIFI designation process will virtually ensure the next round of industry lobbying, aiming to eradicate the very notion of enhanced SIFI supervision as ostensibly nonadministrable in practice. 

Third, there is significant danger that loosening the SIFI designation process, primarily to accommodate the demands of midsize and regional banks and BHCs, will 

pave the way for large Wall Street megabanks to seek additional deregulatory measures specially ‘‘tailored’’ to enable them to expand their lucrative secondary-market 

trading and dealing operations. While such activities are precisely what creates 

unsustainable levels of risk in the financial system, it will be much more difficult 

for lawmakers and (already significantly weakened) regulators to resist what will 

likely be framed as simply ‘‘further tailoring’’ of supervisory rules. 

Attacks on ‘‘Arbitrary’’ Stress Testing Are Attacks on Supervisory Discretion 

Ironically, even as the financial industry ostensibly wants FSOC to exercise individualized judgment instead of applying ‘‘arbitrary’’ generalized rules in the context 

of SIFI designation, the same industry vehemently attacks the exercise of individVerDate Nov 24 2008 11:48 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00062 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\06-15 ZDISTILL\61517.TXT JASON
59 

19See, TCH Letter, supra note 17. 

ualized judgment—or supervisory discretion—by the Federal Reserve in the context 

of supervising SIFIs. The key target of this attack is the post-crisis regime of supervisory stress testing. 

The largest megabanks appear particularly determined to limit the Federal Reserve’s ability to conduct meaningful Comprehensive Capital Analysis and Review 

(CCAR), mandated by the Dodd–Frank Act. Among other things, they seek to 

• subject the Federal Reserve’s annual stress test scenarios to a 30-day notice and 

comment period under the Administrative Procedure Act; 

• restrict the Federal Reserve’s ability to use its own independent assumptions 

in constructing test models; 

• mandate advance publication of the Federal Reserve’s stress test models for 

‘‘peer review;’’ 

• restrict the use of the Federal Reserve’s own models merely to a ‘‘supervisory 

assessment’’ of banks’ own models; and 

• eliminate CCAR’s qualitative assessment for all banks. 19

If implemented, these industry-advocated changes will effectively nullify the 

CCAR regime. The principal reason for subjecting SIFIs to both internal and supervisory stress tests is to create a reliable early-warning mechanism for identifying 

potential weaknesses in the firm’s capital planning and management. Forcing the 

Federal Reserve to disclose ahead of time its stress test models will enable financial 

institutions ‘‘to manage to the test,’’ thus defeating the whole purpose of stress testing. Moreover, subjecting its test scenarios or modeling methodologies to public notice and comment will inevitably create unnecessary delays in the implementation 

of stress tests. It will impose potentially prohibitive additional costs on the Federal 

Reserve, burdened with the duty to respond to numerous industry comments and 

criticisms. Finally, relegating the Federal Reserve’s models to a mere back-up reference function will render the entire exercise inherently unreliable. 

In sum, what the financial industry is advocating here is not a ‘‘more robust and 

transparent’’ stress testing process, but a de facto sidelining of the Federal Reserve 

by forcing it to surrender its key supervisory function to SIFIs themselves. Doing 

so will significantly endanger the country’s financial stability and increase the likelihood of another systemic crisis. Accordingly, it will hinder, not promote, America’s 

long-term economic growth. 

B. There Is No Evidence That Financial Deregulation Is Necessary To Foster Economic Growth 

Financial institutions’ deregulatory proposals claim that the post-crisis regime of 

enhanced prudential oversight directly prevents them from extending more loans to 

small businesses and struggling American families. They routinely assert that the 

more stringent capital requirements and the higher costs of regulatory compliance 

are the principal, if not the sole, reason why banks cannot increase their financing 

of productive economic enterprise. 

Constant repetitions of this blanket assertion are intended to condition the audience—including the Members of this Committee—to associate the rollback of Dodd– 

Frank (something the financial industry wants) with the creation of domestic manufacturing jobs (something the American people need). It is calculated to propagate 

dangerous confusion about the real causes of financialization, ongoing erosion of 

America’s industrial base, rising poverty and inequality, and other social and economic ills of the last several decades. In essence, the industry wants us to believe 

that forcing Citigroup and Bank of America to finance just 5 percent of their multitrillion-dollar high-risk assets with common shareholder equity is the root of all of 

the Nation’s economic woes. 

This is an incredible claim. There are three main reasons why it is fundamentally 

false: 

• First, capital regulation does not reduce banks’ cash available for lending: that 

notion is based on a fundamental misunderstanding of what bank capital is. 

• Second, banks are not short of cash necessary to expand their lending: banks’ 

soaring profits and record dividend payments in recent years show there is 

plenty of cash they could, but choose not to, lend out. 

• Third, there is no evidence that banks are striving to increase lending that 

would foster the economic growth: the industry offers no proof (beyond simple 

assertions) that individual banks’ asset allocation decisions are driven, in any 

meaningful way, by their desire to raise the rate of growth in the real economy. 

60 

20For a discussion of bank capital and a compelling argument that capital requirements 

should be much higher than they are presently, see Anat Admati and Martin Hellwig, ‘‘The 

Banker’s New Clothes’’ (2013). 21See id. 22Federal Deposit Insurance Corporation, ‘‘Statistics at a Glance’’, As of March 31, 2017, 

available at https://www.fdic.gov/bank/statistical/stats/. 23FDIC Quarterly Banking Profile, Fourth Quarter 2016, available at https://www.fdic.gov/ 

bank/analytical/qbp/2016dec/qbp.pdf, at 7. 24Federal Reserve Bank of New York, Quarterly Trends for Consolidated U.S. Banking Organizations, Fourth Quarter 2016, available at https://www.newyorkfed.org/medialibrary/media/ 

research/bankinglresearch/quarterlytrends2016q4.pdf?la=en, at 36. 

In the absence of such evidence, banks’ deregulatory demands should not be 

taken as bona fide proposals to foster America’s long-term economic growth. 

Enhanced Capital Levels Do Not Restrain Availability of Credit 

Higher capital requirements have nothing to do with reducing money available to 

banks for lending and productive investment. Capital is not cash in the vault. It is 

merely an accounting concept, the amount of shareholder equity on a bank’s balance 

sheet: i.e., amount contributed by the bank’s shareholders and not borrowed from 

depositors and other creditors. 20 Banks do not ‘‘hold’’ capital in the same way as 

they ‘‘hold’’ cash or gold—and in the exact same way as Exxon-Mobil or Microsoft 

are never said to ‘‘hold’’ their shareholder equity. Capital is simply what the owners 

of the corporation would receive if the corporation liquidated all of its assets and 

repaid all of its debts. In that sense, capital is a critical equity cushion that protects 

corporations’—including banks’ and BHCs’—creditors from losses. It is only because 

financial institutions’ creditors are explicitly or implicitly protected from such losses 

by the Federal Government that banks and BHCs are allowed to operate with much 

thinner equity cushions than would be sustainable in our free capitalist market. 21

It is therefore nonsensical to claim that reducing this creditor-protecting, loss-absorbing equity cushion will somehow ‘‘free up cash’’ for bank lending—and, specifically, for lending to small businesses and credit-needy Americans. How much a bank 

is willing or able to lend is a complex asset allocation decision that is driven primarily by considerations of bank’s own profitability: ‘‘Should we extend a long-term 

loan to a risky small startup, or should we use that money to increase our fee revenues from short-term derivatives trading?’’ The impact of this decision on the bank’s 

regulatory capital ratios or stress test results may be an important factor in its 

choice between lending and trading, but only insofar as it affects—indirectly and in 

combination with many other factors—that bank’s overall profits. 

In other words, capital regulation constrains banks’ (individually rational) propensity to choose ‘‘high risk, high return’’ assets and limits their ability to maximize 

shareholder profits by jeopardizing creditors. These regulatory capital constraints, 

however, still leave plenty of room for banks to choose whether to finance productive 

economic enterprise or to channel money into secondary market speculation. To the 

extent the latter increases short-term shareholder returns, it remains a potentially 

more attractive choice. The largest banks’ massive shift into secondary market trading and dealing, especially after the passage of the GLB Act, aptly illustrates that 

dynamic. 

If Congress grants these largest banks’ demands to weaken existing capital requirements, supervisory stress testing, and other elements of enhanced prudential 

regulation and supervision, it will affirmatively sanction virtually unconstrained 

growth in the volume and speculative riskiness of banks’ trading and dealing activities, not traditional ‘‘small-business’’ lending. That, in turn, will spur precisely the 

kind of speculation-driven asset price inflation that threatens the stability of the 

American financial and economic system and undermines the country’s long-term 

economic growth. 

Banks Are Not ‘‘Short of Cash’’ for Lending 

According to the FDIC statistics, the U.S. banking industry has fully recovered 

from the crisis and is doing exceedingly well. Thus, in the first quarter of this year, 

nearly 96 percent of all U.S. insured depository institutions were profitable; their 

average return on equity stood at a healthy 9.37 percent; and their total quarterly 

income reached $44 billion, which is 12.5 percent higher than a year earlier. 22 Insured banks’ total net income in 2016 exceeded $171 billion. 23 BHCs are also turning handsome profits. For example, in the last quarter of 2016, the total quarterly 

income of just the top six BHCs—JPMorgan Chase & Co., Bank of America Corp., 

Wells Fargo & Co., Citigroup, The Goldman Sachs Group, and Morgan Stanley— 

exceeded $24 billion. 24

These profits directly increase banks’ and BHCs’ shareholder equity—the capital 

cushion that is a subject of so many of the industry’s complaints—and are easily 

available for use in their lending or other growth-promoting activities. However, it 

61 

25FDIC Quarterly Banking Profile, Fourth Quarter 2016, available at https://www.fdic.gov/ 

bank/analytical/qbp/2016dec/qbp.pdf, at 7. 26FDIC Quarterly Banking Profile, Fourth Quarter 2007, available at https://www5.fdic.gov/ 

qbp/2007dec/qbp.pdf, at 5. 27FSR Letter, supra note 7, at 2. 28 Id. 29See, Gemma Acton, ‘‘These Three U.S. Bank Stocks Are My Top Sector Picks’’, CNBC.COM 

(22 Mar. 2017), available at http://www.cnbc.com/2017/03/22/these-three-us-bank-stocks-aremy-top-sector-picks-analyst.html; Rebecca Keats, Bank of America Declares a Quarterly Dividend, Marketrealist.com (31 Jan. 2017), available at http://marketrealist.com/2017/01/bank-ofamerica-declares-a-quarterly-dividend/; Stone Fox Capital, Citigroup: ‘‘Expect Another Big Dividend Hike To Move Stock’’, Seeking Alpha (4 Jan. 2017), available at https://seekingalpha.com/ 

article/4078558-citigroup-expect-another-big-dividend-hike-move-stock. 30Stone Fox Capital, supra note 29. 31 Id.; Keats, supra note 29. 

appears that a big chunk of these profits is instead being distributed to the banking 

institutions’ shareholders, in the form of cash dividends and share repurchases. 

Thus, in 2016, federally insured banks alone returned to their shareholders $103 

billion in cash dividends, 25 a number second only to the record high of $110 billion 

in cash dividends they paid in 2007, the last full pre-crisis year. 26

By any measure, $103 billion is an enormous amount of money that could be used 

both (1) to increase banks’ total loss-absorbing and risk-reducing regulatory capital 

cushion, and (2) to finance small family-owned businesses, entrepreneurial startups, 

medium-size industrials, aspiring students, and struggling families. In other words, 

using $103 billion of banks’ profits to increase lending to productive economic enterprise would advance both (1) the public interest in having a safer and more efficient 

system of credit allocation, and (2) the banks’ self-professed interest in fostering economic growth and creating American jobs. Yet, banks chose not to go that socially 

beneficial route. 

It is astonishing to see that, after voluntarily sending all that money to shareholders, the banking industry complains that the additional cost of complying with 

post-crisis regulations ‘‘takes capital away from small business loans, home purchases and other productive uses.’’ 27 ‘‘Every dollar spent on hiring compliance attorneys,’’ the argument goes, ‘‘is potentially $10 dollars of loans that could be made 

to improve someone’s economic opportunity.’’ 28 As the dividend numbers cited above 

show, every dollar diverted away from banks’ regulatory compliance would most 

likely improve only bank shareholders’ and managers’ ‘‘economic opportunity.’’ In 

fact, using the same mathematical logic, it follows that, in 2016 alone, banks have 

willingly deprived the real economy of a whopping $1.03 trillion in ‘‘small business 

loans, home purchases and other productive uses.’’ 

It is not my contention that banks should never declare shareholder dividends. 

The key point here is that bank dividend payouts expose the fundamental falsity 

of the industry’s claims to the effect that excessive regulatory costs deplete banks’ 

resources and prevent them from financing real economic growth. Banks have plenty of extra money for expanding their lending. They choose not to lend that money, 

instead ‘‘returning capital’’ to their shareholders. That is because stable and high 

dividends increase individual banks’ stock prices, which directly benefits not only 

bank shareholders but also their executives and managers. Higher stock price translates directly into higher bonuses. Higher volume of small-business lending does not. 

This basic fact about banks’ use of available capital may explain why these institutions—particularly, the largest Wall Street megabanks—are waging such an adamant campaign against CCAR, ‘‘living wills,’’ and other key elements of the Dodd– 

Frank’s systemic risk prevention regime. Under the current regime, SIFIs’ ability 

to pay shareholder dividends or repurchase their own shares is expressly conditioned on supervisory approval, based in part on the results of the latest stress 

tests. Not meeting supervisors’ expectations, therefore, limits their ability to pay 

dividends and depresses their stock price. It is telling, for example, that securities 

analysts and investment advisers have been buzzing about Citigroup’s and Bank of 

America’s recent and expected future hikes in dividend payouts after both of these 

firms performed better in the CCAR tests. 29 As one expert put it, ‘‘The ability to 

pay dividends is currently a hallmark of strength in the sector.’’ 30 Accordingly, deregulatory rollback of the Federal Reserve’s stress testing and other prudential regulations is expected to enable Citigroup, Bank of America, and other SIFIs to raise 

their dividends and share repurchases, thus lifting the value of their stock. 31

Thus, it appears that market experts have no confusion about the real benefits 

of massive financial deregulation: it will increase banks’ profits, dividend payouts, 

and stock prices. Whether or not it will also promote the country’s long-term economic growth does not seem to be part of the conversation. 

62 

There Is no Evidence That ‘‘Fostering America’s Economic Growth’’ Is a Meaningful Factor in Banks’ Business Decisions 

It is, of course, possible that, while returning massive amounts of capital to shareholders, banks and BHCs are nevertheless genuinely dedicated to their self-declared 

mission of financing America’s real economic growth. Rather than take their word 

for it, however, the Committee should require specific, robustly documented and empirically supported, evidence that that is indeed the case. 

For example, the Committee should ask each financial institution asking for regulatory relief to provide specific, quantified, and fully documented answers to the following questions: 

• What was your institution’s specific (i.e., quantified) annual contribution to the 

growth of your local, regional, and/or national economy, in the period between 

2010 and 2017 (after the enactment of Dodd–Frank)? What was it in the preDodd–Frank period between 2000 and 2009? 

• How much additional annual contribution to the growth of your local, regional, 

and/or national economy would your institution have made, but was prevented 

from making directly as a result of [insert a specific regulatory provision of the 

Dodd–Frank regime]? 

• In each year since 2010, what was the aggregate amount of commercial and industrial (C&I) loans that your institution refused to extend, solely because of 

[insert a specific regulatory provision of the Dodd–Frank regime]? 

• Does your institution have an enterprise-wide strategy for facilitating domestic 

job-creation and promoting the growth of your local, regional, and national economy? What are the core elements of that strategy? 

• How often does your institution’s Board of Directors and top management discuss the institution’s performance in implementing that strategy? 

This type of targeted inquiry would help to (1) establish the credibility of the financial industry’s claims; and (2) discover the real link, if any, between financial 

institutions’ deregulatory agenda and the country’s real economic growth. Presently, 

none of the financial industry’s numerous deregulatory proposals establish that link, 

relying instead on purely declarative rhetoric. They then demand effective removal 

of key regulatory safeguards against systemic financial crises, solely on the strength 

of that rhetoric. Assessing the public costs and benefits of any such deregulatory 

proposals, however, requires ascertaining that such steps are actually—and not just 

rhetorically—going to generate substantial growth in the country’s real economy. 

It is unlikely that any financial institution will be able to produce satisfactory answers to any of these questions. As private shareholder-owned firms, these institutions’ primary concern is their own profitability, not the overall performance of the 

American economy. They simply do not track, and are not equipped to track, the 

relevant macroeconomic data: measuring and worrying about such data is the Government’s responsibility, an inherently public task. That means that determining 

what should be done to spur America’s economic growth—and whether relaxing any 

of the existing financial regulations should be a part of that endeavor—is also an 

inherently public responsibility. The financial industry’s attempts to usurp or sidetrack the process of public deliberation on such an important matter should therefore be subjected to intense scrutiny. 

III. Broader Structural Solutions Are Needed To Channel Capital Into Productive Economic Activity and Sustainable Growth 

The Dodd–Frank regime of systemic oversight and enhanced prudential supervision of SIFIs correctly aims to limit potentially destabilizing speculation and asset 

price inflation in secondary markets. To the extent it strengthens the resilience and 

stability of our financial system, it lays down an important foundation for the Nation’s long-term economic growth. However, simply limiting the opportunities for diverting capital into speculative trading is not sufficient to spur and sustain such 

growth in practice. It is equally important to ensure that a significantly greater 

share of available financial capital is actively and consistently flowing into longterm productive investment. In other words, it entails cultivating new sources of, 

and creating new avenues for profitably deploying, truly ‘‘patient’’ capital. 

Abundant patient capital is what enables construction of large-scale physical and 

social infrastructures, supports transformative R&D projects, generates productivity 

gains, and creates sustainable well-paying jobs throughout the Nation. By the same 

token, the chronic shortage of patient capital—and persistent glut of speculative 

capital—is the key reason for the sluggishness of America’s real economy today. 

Incentivizing investor ‘‘patience’’ on the scale needed to spur the Nation’s longterm economic growth, however, is a difficult task that cannot be reduced simply 

63 

to a few deregulatory or tax-relief measures. Nor can it be left to the private sector 

alone. Private investors’ time horizons and risk tolerance levels are inherently limited by the finite nature of their economic resources and their biological lifespan. 

It is fundamentally rational for private investors to prefer shorter-term investments, 

which entail less unforeseeable future risk and promise returns within such investors’ reasonable lifetime horizons. Private investors’ short-term bias, therefore, is 

not a deviation from market rationality; it is a built-in feature of such rationality. 

Overcoming investor short-termism and facilitating the formation of ‘‘patient’’ capital requires new, more effective forms of public–private partnership. The public 

component of such partnership will bring into the investment process a number of 

unique advantages that public instrumentalities enjoy when they act as market participants: their vast scale, high risk tolerance, lengthy investment horizons, and direct backing by the full faith and credit of the United States. Combining these 

unique capacities of a public investor with private investors’ informational agility, 

superior knowledge of local conditions, and market expertise will help to channel 

both private and public resources into the critical growth-inducing projects. This 

new, patient public–private capital will finance the building of new roads, bridges, 

high-speed train lines, clean energy networks, and next-generation industrial plants. 

It will also create new well-paying jobs, offer new educational opportunities, and unleash new entrepreneurial energy of the American people. 

My colleague, Professor Robert Hockett, and I have developed a specific proposal 

for creating this new kind of infrastructural growth-oriented public–private partnership. A White Paper detailing our proposal is attached as an Appendix to this testimony. 

It is this kind of programmatic reform—not a massive rollback of the Dodd–Frank 

Act—that the American economy and the American people need. I urge the Committee to rise to this challenge and not allow banks’ self-serving deregulatory demands to distract its attention from what really matters to the American economy 

and the American public. 

Conclusion 

Promoting sustainable, socially inclusive long-term growth in America’s real economy is a task of enormous public significance. Massive financial deregulation urged 

by the banking industry, however, will not foster such real economic growth: it will 

merely spur speculation-driven asset price inflation in secondary markets. That is 

what generates Wall Street’s greatest short-term profits and causes wealth- and 

growth-destroying systemic crises. Weakening regulatory standards and effectively 

incapacitating FSOC, the Federal Reserve, the Consumer Financial Protection Bureau, and other Federal regulators will put us much closer to another financial disaster. 

Contrary to the financial industry’s assertions, massive dismantling of the Dodd– 

Frank regime of systemic regulation will not benefit small businesses and struggling 

families across America. There is no evidence that the additional cost of banks’ regulatory compliance with post-crisis regulations actually depletes banks’ resources 

and/or diverts them away from productive uses. Despite their complaints about regulatory costs, American banking institutions are highly profitable and awash in 

cash, which they could use for lending to small businesses but instead choose to return to their shareholders in the form of dividends and share repurchases. Against 

that background, it is impossible to take the industry’s attacks on Dodd–Frank seriously. 

The Committee should, therefore, reject the financial industry’s unsubstantiated 

claims and requests for massive deregulation and demolition of the Dodd–Frank 

Act. The Committee should focus its attention on finding real solutions to the real 

problems associated with speculative short-termism and persistent misallocation of 

capital, which impede economic growth. Devising such solutions is challenging but 

necessary in order to make finance serve the Nation’s long-term economic goals. 

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RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM ROBERT R. HILL, JR. 

Q.1. Your testimonies cited certain metrics for measuring your 

banks’ compliance costs. Of course, there are a variety of ways to 

measure a bank’s costs and compliance burden. To help the Committee better understand the overall compliance burdens on your 

institutions: 

Please provide the ratio of total employees in your bank’s workforce to employees. 

A.1. In 2009 and 2010, our compliance employees were housed in 

the Compliance Department. After the enactment of Dodd–Frank, 

the number of employees dealing with compliance grew dramatically; however, the growth was through employees throughout the 

bank and company, and not just in the Compliance Department. At 

the time, we did not endeavor to keep track of the number of compliance-related employees. In the last several years, however, we 

have endeavored to do so. The data below is a good faith effort to 

provide the requested numbers, but we would caution that they are 

conservatively stated in that we have employees in virtually every 

area of the bank working on compliance issues. As you will see, 

even on a conservatively stated basis, the number of compliance 

employees has gone up over eightfold. 

2009 2010 2011 2012 2013 2014 2015 2016 

Full time equivalents 

(FTEs) 

700 1,015 1,071 1,324 2,106 2,081 2,058 2,055 

Compliance FTEs 6 6 N/A N/A N/A N/A 40 51 

Ratio 0.86% 0.59% N/A N/A N/A N/A 1.94% 2.53% 

Q.2. Please provide your bank’s compliance costs for each year from 

2009 to the present. 

A.2. In reviewing the data below, please refer to the response 

above. As stated above, the data is difficult to capture with total 

precision. As noted above, the compliance costs in 2009 or 2010 

were largely contained in the Compliance Department. Today, they 

are spread over various areas of the bank and company. Again, this 

is our good faith effort to be responsive. 

2009 2010 2011 2012 2013 2014 2015 2016 

Estimated 

Total 

Compliance 

Costs 

$780,000 $840,000 N/A N/A N/A N/A $5,800,000 $7,500,000 

Q.3. Please provide the combined dollar value of your bank’s stock 

dividend payments and share repurchases for each year from 2009 

to the present. 

A.3. Below is the stock dividend information you requested. In reviewing these numbers, however, there are several factors you 

97 

should bear in mind so you will know that the growth of the bank 

and the number of its shareholders has changed dramatically over 

the course of the years for which you have asked us to provide information. For example, in 2013, the bank almost doubled in size 

and its number of shareholders, and capital, increased by roughly 

40 percent. As a result, the dollar amount of dividends went up significantly. The change did not reflect an equivalent increase in dividend income to individual shareholders; it was simply the function 

of the bank’s growth through acquisition. 

2009 2010 2011 2012 2013 2014 2015 2016 

Combined value of 

stock dividend 

payments and 

share repurchases (in 

thousands) 

$8,623 $8,935 $9,856 $11,080 $16,207 $20,702 $25,072 $33,136 

Q.4. Please provide your bank’s efficiency ratio for each year from 

2009 to the present. 

A.4. Below is the data on the bank’s efficiency ratios for the period 

in question. As you review this data, you should bear in mind that 

efficiency ratios are a function not just expenses but also revenue. 

Thus, as the bank grew through acquisitions, its revenue increased. 

In other words, it makes comparisons difficult. Further, in 2010, 

the bank recorded a nonrecurring gain. Absent that gain, the 2010 

efficiency ratio would have been 69.89 percent, not 46.68 percent. 

2009 2010 2011 2012 2013 2014 2015 2016 

Efficiency Ratio 61.17% 46.68% 68.77% 72.20% 75.85% 71.41% 64.19% 64.16% 

Q.5. Please provide your bank’s revenue from interchange fees 

linked to debit cards for each year from 2009 to the present. 

A.5. Below is the requested data. As I testified, South State Bank, for the relevant years, was under $10 billion. Thus, the Durbin 

Amendment interchange fee caps did not affect the bank’s interchange fee revenue. Also, as noted above, the bank grew significantly during the time period in question. As a result, the revenue 

from interchange grew significantly for that reason. 

2009 2010 2011 2012 2013 2014 2015 2016 

Interchange 

Fee Revenue 

(in thousands) 

$3,717 $7,261 $9,467 $11,178 $18,143 $25,192 $27,939 $31,801 

Q.6. During your testimony, you said ‘‘Under Dodd–Frank, crossing the $10 billion in asset threshold has had very harsh implications 

for midsize banks For example, South State was impacted by over 

98 

$20 million per year, a significant sum for a bank our size. What 

impacts does this have on our local communities? For us, that 

equates to 300 jobs. Approximately 10 percent of our branches were 

closed, and even more jobs were diverted from lending to regulatory compliance.’’ 

Your bank appears to have grown from roughly 50 branches before the passage of Dodd–Frank, to about 180 this year, assuming 

completion of your proposed merger with Park Sterling. The Park 

Sterling transaction will be the ninth merger or acquisition by your 

bank of another bank or its branches since the beginning of 2010. 

As you know, branch closures can occur for a variety of reasons 

not related to regulatory costs, for example, in 2010, your bank 

closed 10 of the 36 branches that it acquired through the purchase 

and assumption agreement related to Community Bank & Trust, 

well before you passed the $10 billion threshold. (In another example, you closed two branches in Orangeburg, SC, after acquiring 12 

Bank of America branches, reportedly because they were in close 

proximity to existing South State branches.) 

Finally, it appears that you closed 13 of 140 branches in 2015, 

or about 9 percent, before you crossed the $10 billion threshold, 

and nine of your 127 branches last year and one so far this year, 

or about 8 percent of your branches. This compares to 2010, when 

you closed 10 of 86 branches, a rate of nearly 12 percent. 

Please explain the rationale behind the 10 percent closure number that you cited, and please provide supporting evidence that explains why these closures were caused by the various $10 billion 

thresholds contained in Dodd–Frank, as opposed to other potential 

factors. 

A.6. As it relates to our branch closing strategy, well before officially crossing the $10 billion asset threshold in early 2017, we 

began estimating the costs associated with, and resources required, 

to operate a bank with assets over $10 billion. Beginning approximately 3 years ago, we started examining the magnitude of these 

expenses and thinking through steps to pay for them. In my testimony, I stated that we closed about 10 percent of our branches in 

order to cover these increased costs of growing to over $10 billion. 

Closing branches does reduce cost and can help pay for this burden, but this step alone does not pay for the costs of crossing $10 

billion. As you can see in the data above, the incremental compliance costs are approximately $6–8 million per year for our company plus we will lose approximately $17 million dollars in interchange income beginning in 2018 due to impact from the Durbin 

amendment. In total, we will realize an approximate $25 million 

pre-tax negative impact to earnings by crossing this threshold. On 

average, it costs us approximately $500,000 annually to operate a 

branch. If we were to accomplish all of the savings through branch 

closures alone, we would have to close roughly 50 branches and 

eliminate over 250 jobs. Whether we close branches or find other 

ways to pay for these expenses, the burden is considerable. The $25 

million represents approximately 15 percent of the net income of 

our company in 2016. 

99 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM ROBERT R. HILL, JR. 

[From Robert R. Hill, Jr.—We have prepared responses to many 

of the follow up questions submitted by Senators Brown, Sasse, and 

Tillis. Some of the questions pertained to banks larger than South 

State or touched on macro-economic issues that we did not feel 

equipped to answer and therefor respectfully did not supply an answer. What follows are the questions to which we do offer an answer.] 

Q.3. As you know, Dodd–Frank imposed new stress test requirements on banks above $10 billion. 

How should policymakers balance providing more transparency 

and guidance to regulated entities about passing stress tests, without enabling regulated entities to, as some have suggested, ‘‘game’’ 

these processes? 

A.3. We believe that, in general, policymakers should focus on minimum acceptable capital ratios as opposed to arbitrary stress tests. 

Q.4. Do stress tests accurately depict how a firm would perform 

during a financial crisis? If not, what should be done, if anything, 

to improve their accuracy? 

A.4. To help improve the accuracy of stress tests, focus on the 

amount of risk weighted assets each firm holds would, in our opinion, be beneficial. 

Q.5. Are stress tests properly tailored to match the unique risk 

profile of smaller financial institutions? 

A.5. Stress test are currently structured based on the asset size of 

financial institutions and do not focus on the risk profile of the institutions. As stated above, focusing on the amount of risk weighted assets each firm holds would more properly align with the institution’s risk profile. 

Q.6. As you know, House Financial Services Chairman 

Hensarling’s legislation, the Financial CHOICE act—in part— 

would allow banks to opt-out of various regulatory requirements, in 

exchange for meeting a 10 percent leverage ratio. 

What are the most persuasive arguments for and against relying 

upon a leverage ratio as a significant means of reducing systemic 

risk in the financial system? 

A.6. The most persuasive argument for relying upon a leverage 

ratio as a significant means of reducing systemic risk in the financial system is the 10 percent leverage ratio, which is a simple approach and represents a significant amount of capital. The most 

persuasive argument against relying on the ratio is that the leverage ratio does not take into consideration the risk rating of the assets and the loan loss reserve. 

Q.7. Under this legislation, is the 10 percent leverage ratio the 

right level? If not, where should policymakers set the level at? 

A.7. A 10 percent leverage ratio is the right level. 

Q.8. What evidence do you find or would you find to be the most 

persuasive in discerning the proper capital levels under this proposal? 

100 

A.8. Different asset categories carrying different degrees of risk, so 

focusing on risk rating the assets, rather than cash and loans being 

equal, would seem logical. 

Q.9. I’m concerned that our Federal banking regulatory regime relies upon arbitrary asset thresholds to impose prudential regulations, instead of an analysis of a financial institution’s unique risk 

profile. 

Should a bank’s asset size be dispositive in evaluating its risk 

profile in order to impose appropriate prudential regulations? 

A.9. No, a bank’s asset size should not be dispositive in evaluating 

its risk profile in order to impose appropriate prudential regulations. 

Q.10. If not, what replacement test should regulators follow instead 

of an asset-based test? 

A.10. As a replacement test, regulators should focus on the levels 

of risk based capital and the amount of debt the financial institution has, as better tests for evaluating a bank’s Risk Profile. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS 

FROM ROBERT R. HILL, JR. 

Q.1. I’m a proponent of tailoring regulations based off of the risk 

profiles of financial institutions, as opposed to having strict asset 

thresholds that do not represent what I believe is the smart way 

to regulate. But, my question here is really about the importance 

of ensuring that we have a system that is rooted in fundamental, 

analytical, thoughtful regulation so that we can achieve and execute on goals, whether balancing safety and soundness with lending and growth, or encouraging more private capital in the mortgage market to protect taxpayers and reform the GSEs. 

On the latter point, I would like for you to comment on the downstream consequences that the wave of new mandates have on housing finance reform—whether Dodd–Frank, regulatory rules and/or 

Basel prudential requirements—and, specifically, the ability to 

bring private capital as we look to reform the GSEs? 

A.1. Recent regulatory reform which specifically impacts the mortgage industry has placed a wave of burden and uncertainty on us 

as originators of mortgage loans. The Dodd–Frank reforms specifically limited access to credit for many borrowers. Borrowers who fit 

into the credit box of the GSEs are exempt from some of the QM 

requirements as long as the GSEs are in conservatorship or until 

2021. Due to the unknown liability and litigation expenses, our 

bank has tightened our credit box in our portfolio lending, specifically around the 43 percent DTI. 

Basel Requirements have burdened many institutions in their 

ability to originate new loans which they service themselves. This 

has forced them to sell loans to aggregators that they would desire 

to retain as customers and earning assets on the books. These are 

not large institutions and their holding of MSRs is not a driver of 

the performance of their institutions, however it is restricting how 

they do business and forcing them to send more loans to what are 

likely SIFI. 

101 

Other regulations such as TRID, HMDA, and other CFPB enforcement has been implemented with many questions still unanswered. This causes disparities in practices in our industry which 

put institutions that are playing by the rules at a competitive disadvantage. This lack of clarity has also increased the cost to originate a loan, which today is now above $7,000 where it was close 

to $4,000 6 years ago. This is increasing the cost to the customer 

and limiting competition in the mortgage space as it has driven 

consolidation. 

Regulations should be based more on the type of lending that is 

done and should focus on firms who are purposely defying regulations rather than institutions afraid of clerical errors which can 

cost exorbitant enforcement fees and personnel costs. 

GSE reform is absolutely necessary as we continue to rebuild a 

sound secondary mortgage market. The GSEs perform a critical 

task in offering a 30-year fixed option that is liquid and with clear 

guidelines. The GSEs have done a great job in the past few years 

of focusing on their customers and what can enable us to lend to 

more borrowers. The ability of the benefits the GSEs bring the 

market is imperative to continue into the future. With that said, 

taxpayers should not be exposed to the risk present in this market 

and credit risk should be transferred to the private sector. We 

would hope that the GSEs or their future state can continue with 

some mandate to offer affordable housing support with low-down 

payment options and less restrictive credit standards than private 

entities would likely offer. 

Q.2. Can you give me your opinion on where the current credit box 

is, how consumers get loans both for personal, business, etc., how 

about in the mortgage space? Is it harder to get a mortgage today 

versus in years past? 

How does this impact underserved and underbanked populations 

in the U.S.? 

A.2. Underbanked and underserved borrowers are not being fully 

served today. Borrowers with little or no credit are immediately not 

within the credit parameters set forth by programs offered by the 

GSEs, FHA, and USDA. The current FICO models reward borrowers with very established credit that underbanked populations 

do not necessarily possess. Buyback and compare ratio risks from 

the agencies have forced lenders to place overlays on the agency 

credit parameters which limit an underserved borrower’s ability to 

find lending options. It is critical for the FHFA to continue to promote access to these programs and find ways to encourage responsible but broad lending across the credit spectrum. 

Q.3. Can you tell me how, in addition to other macroeconomic variables that affect lending, the regulatory environment has played a 

role in lenders’ willingness/ability to extend mortgage credit? What 

needs to change? 

I see evidence that suggests that nonbanks now make up the predominate percentage in the mortgage market, what is your view of 

how this affects the stability of servicing mortgages in a crisis environment and how does this affect access to financing? 

A.3. Nonbanks now make up more than 50 percent of originations 

based on 2016 HMDA data. These loans are typically sold to SIFA 

102 

institutions and large national servicers. These servicers will continue to be slow to react in a crisis and not able to meet the needs 

of all customers. 

Nonbank mortgage lenders are typically regulated by States and 

do not receive the scrutiny as a federally regulated bank and enforcement for noncompliance is rare. A smaller nonbank lender offering riskier products that may be taking advantage of borrowers 

may never see the types of audits a bank does. A bank will err on 

the side of caution in order to remain in compliance while making 

decisions that hurts its ability to compete fairly in the marketplace. 

Q.4. Just to be clear—from my perspective I’m not advocating to 

return to the lending standards of the sub-prime/pre-crisis era, but 

I do believe that we need to evaluate some the regulations such as 

the use of the False Claims Act, having unified servicing standards, 

TILA–RESPA, etc., so that we can help expand credit safely to both 

first-time buyers and refinancers, and I would like your perspective 

on how we (1) address larger regulatory reform in the banking ecosystem; and (2) how your institutions and similarly situated ones 

play a role in providing credit to consumers. 

A.4. A bank like ours has shown through years of prudent lending, 

low complaints, and positive financial performance our ability to 

properly run our business while meeting the lending needs of the 

communities we serve. We agree that the lending standards precrisis were well below where they should have been, however the 

pendulum has swung too far alongside regulation by enforcement 

that quite frankly scares prudent lenders like us from offering anything but the basic products for our customers. The uncertainty in 

recent regulations has forced us to take a competitively disadvantaged position to our nonbank peers. Regulation uncertainty has 

also put our teams in a position to constantly question what is 

right or the intent of the law. Loans are taking longer to close, at 

a higher cost, and with more uncertainty sometimes to the borrower due to recent regulations, namely TRID. 

Regulatory reform in the mortgage market should be based not 

just on size, but on the types of lending. The biggest help that our 

regulators can give us is clarity. Confusion leads us to always take 

the most conservative route which has downstream effects such as 

limited access to borrowers and higher costs to lenders. 

Q.14. Are assets alone the single most important factor for determining systemic risk? If not, why use that as a threshold at all? 

A.14. Yes, assets are the single most important factor for determining systematic risk, but the focus should be on the type and 

risk of assets rather than just the total amount of assets. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM SAULE T. OMAROVA 

Q.1. Can you please describe the nature of banking agencies’ socalled ‘‘safety and soundness’’ authority? Would you be concerned 

by any proposals to interfere with the existing safety and soundness regime? 

A.1. Ensuring ‘‘safety and soundness’’ of the banking system is, and 

has always been, the fundamental substantive goal of U.S. bank 

103 

regulation. In addition to performing vital functions of taking deposits and facilitating payments, banks play a critical role in the 

transmission of monetary policy. Yet, the very nature of their business makes banks especially vulnerable to runs and other shocks 

that can quickly bring them down. Traditionally, banks’ primary liabilities are short-term (e.g., demand deposits), while their assets 

are long-term and illiquid (e.g., loans). The concept of ‘‘safety and 

soundness’’ reflects the long-standing recognition of this built-in 

vulnerability of the banking business model and the importance of 

preserving banks’ solvency and ability to operate uninterrupted. 

Accordingly, Federal and State banking agencies’ authority to 

continuously monitor, evaluate, and act to enhance individual 

banks’—and the entire banking system’s—safety and soundness is 

very broad. The agencies’ mandate to maintain and ensure safety 

and soundness permeates and underlies the entire regime of U.S. 

bank regulation and supervision. In that sense, it is difficult to describe precisely the scope or the specific nature of that authority. 

In effect, every specific rule governing banking institutions’ activities represents a particular articulation of the safety and soundness requirement. Moreover, it is impossible to reduce the safety 

and soundness mandate to any specific, limited, quantifiable factor 

or rule. It empowers and obligates the regulatory and supervisory 

agencies to exercise an inherently context-specific judgment as to 

whether any particular activity, transaction, or business practice 

potentially threatens stable and reliable operation either of an individual bank or of the banking/financial system more generally. 

Most, if not all, legal rules applicable to U.S. banks expressly provide for the relevant regulators’ authority to make a particularized 

substantive determination of permissibility or legality of an otherwise permissible action based on its potential safety and soundness 

consequences. 

Put simply, this authority may be analogized to the medical professionals’ maxim of ‘‘Do no harm.’’ And just like any attempt to 

limit or qualify that principle would undermine not only the integrity but the very efficacy of medical care, so would any attempt to 

limit or qualify bank regulators’ authority to ensure safety and 

soundness of the banking system undermine that system’s integrity 

and efficacy. 

Reflecting the dramatic lessons of the latest financial crisis, the 

Dodd–Frank Act strengthened Federal bank regulators’ mandate to 

ensure safety and soundness of the U.S. financial system. The creation of the Financial Stability Oversight Council (FSOC), heightened prudential oversight of certain large bank holding companies 

(BHCs) and nonbank financial firms designated by FSOC as systemically important financial institutions (SIFIs), mandatory periodic stress testing and submission of ‘‘living wills’’ by large BHCs 

and SIFIs—all of these post-crisis regulatory innovations are merely an updated version of the centuries-old safety and soundness regime. They constitute a coherent framework for ensuring vital stability of today’s complex and dynamic financial system. Regulators 

need all of these tools to be able to monitor the levels of risk in 

the financial system and to prevent potentially destructive systemic 

shocks. Taking away or in any way limiting regulators’ and supervisors’ flexibility and ability to exercise discretion in determining 

104 

how and when to act in the name of the safety and soundness of 

the U.S. financial system would be unacceptably reckless. It will effectively guarantee another systemic financial crisis. 

Any legislative reform that seeks to eliminate, limit, or weaken 

the Dodd–Frank Act’s regime of system-wide prudential oversight, 

therefore, goes directly against the most important public interest 

in preserving the safety and soundness of the American financial 

system. The list of such dangerous reforms includes proposals to 

limit FSOC’s power to designate SIFIs and the Federal Reserve’s 

power to supervise them, to lower existing capital adequacy requirements, to make stress testing more easily predictable and 

thus subject to ‘‘gaming,’ to replace the Orderly Liquidation Authority, and so forth. None of these proposed reforms will strengthen our financial system. To the contrary, they will make it a lot 

more vulnerable and dysfunctional. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM SAULE T. OMAROVA 

Q.1. Federal Reserve Governor Powell testified at the April 14, 

2016, Senate Banking Committee hearing entitled ‘‘Examining 

Current Trends and Changes in the Fixed-Income Markets’’. He 

said that ‘‘some reduction in market liquidity is a cost worth paying in helping to make the overall financial system significantly 

safer.’’ 

Is there also a risk that reducing liquidity in the marketplace 

also makes the marketplace unsafe? 

If so, how should regulators discern the difference between an 

unsafe reduction in liquidity and a safe reduction in liquidity? 

A.1. There are trade-offs in every regulatory choice. For example, 

prohibiting distribution of marijuana protects people from serious 

drug addiction, but it also reduces availability of marijuana for 

medical or recreational purposes. How should we discern the difference between an unsafe reduction in availability of marijuana 

and a safe reduction in such availability? In that context, lawmakers often don’t seem to spend too much time on finding the precise scientifically proven level of ‘‘safeness’’ and take a principled 

normative stand: one public policy goal is more important than the 

other. 

The same logic should apply to this theoretical debate on ‘‘safety 

vs. liquidity’’ in financial markets. There is no objective, scientific 

mark for an absolute optimal level of market liquidity. It all depends on the context and the consequences. There was plenty of liquidity in the years before the latest crisis, and then that liquidity 

evaporated overnight. ‘‘Liquidity’’ was merely another word for unproductive churning and excessive speculation. It was bad for the 

market and for the American economy. So, clearly, we cannot use 

the pre-crisis ‘‘liquidity’’ measures as our reference point for ‘‘safe 

vs. unsafe’’ determinations. That choice is not scientific; it is fundamentally normative. We as a society should make a normative, 

political choice whether it is more important for us to enable uninhibited financial speculation (for which ‘‘market liquidity’’ is often 

a euphemism) or to prevent financial crises. 

105 

Q.2. As you know, regulators imposed numerous capital requirements after the 2008 financial crisis. 

Have Federal regulators sufficiently studied the cumulative impact—including on liquidity in the marketplace—of these various 

changes? 

If not, how should Federal regulators resolve this issue? For example, some have called to delay the imposition of new financial 

rules and regulations in order to facilitate a broader study of these 

issues. 

A.2. Industry actors’ calls for delaying the application of capital 

rules, ostensibly for the purposes of ‘‘studying’’ their impact, are 

merely a strategy to avoid higher capital requirements—and thus 

to continue to operate with high levels of leverage. There is no absolute, scientifically precise level of capital that is perfectly optimal 

under any circumstance. How much equity (i.e., capital) a particular bank should have at any single point depends on how volatile the value of its assets is—and that can change quickly in response to various internal business decisions and external forces in 

the markets. That is why, for example, countercyclical capital buffer requirements are especially important: they provide the necessary cushion for absorbing sudden losses when an asset price 

boom turns to the inevitable bust. 

Thus, financial regulators and supervisors should have sufficient 

flexibility and discretionary authority to determine, on the ground 

and in the context of a particular institution, whether that institution has sufficient capital to withstand the loss of asset value without hurting its creditors. Regulators and supervisors are best 

equipped to render such determinations. They should be given a 

broader authority to do just that. Saddling regulators with the inherently meaningless task of studying ‘‘cumulative effects’’ of all 

capital requirements on all financial firms will effectively render 

them incapable of doing their job. The only real-world effect of that 

strategy will be more leverage, more risk, and more instability in 

the financial system. No real new knowledge produced as a result 

of any such studies will be even remotely worth that risk. 

Q.3. As you know, Dodd–Frank imposed new stress test requirements on banks above $10 billion. 

How should policymakers balance providing more transparency 

and guidance to regulated entities about passing stress tests, without enabling regulated entities to, as some have suggested, ‘‘game’’ 

these processes? 

Do stress tests accurately depict how a firm would perform during a financial crisis? If not, what should be done, if anything, to 

improve their accuracy? 

Are stress tests properly tailored to match the unique risk profile 

of smaller financial institutions? 

A.3. I discuss the issue of stress tests’ transparency at length in 

my written statement. 

To add to that discussion, I would like to emphasize how misguided it is to judge the efficacy or public benefits of stress tests 

by reference to how ‘‘accurately’’ they depict the actual behavior of 

any specific firm in an actual crisis. No such predictions or assessments can be made, and that is not the purpose of stress testing. 

106 

Stress tests play out a variety of scenarios, including extreme ones, 

as a way of identifying serious weaknesses in the institution’s financial condition and risk management. Going through the process 

of stress testing is just as important as passing the tests. It is that 

aspect of stress testing—the dynamic, learning, procedural aspect— 

that is critical for preserving financial stability more broadly. Forcing the Federal Reserve to be more ‘‘transparent’’ about its methodologies and assumptions will significantly weaken, or even eliminate, that beneficial effect of stress testing. It will only benefit financial institutions, but not the financial system—and not the 

American economy. 

Q.4. As you know, House Financial Services Chairman 

Hensarling’s legislation, the Financial CHOICE act—in part— 

would allow banks to opt-out of various regulatory requirements, in 

exchange for meeting a 10 percent leverage ratio. 

What are the most persuasive arguments for and against relying 

upon a leverage ratio as a significant means of reducing systemic 

risk in the financial system? 

Under this legislation, is the 10 percent leverage ratio the right 

level? If not, where should policymakers set the level at? 

What evidence do you find or would you find to be the most persuasive in discerning the proper capital levels under this proposal? 

If the leverage ratio was set at the right level, do you find merit 

in eliminating a significant portion of other regulatory requirements, as with the Financial CHOICE Act? Are there any regulations that you would omit beyond those covered by the Financial 

CHOICE Act? 

What impact would this proposal have on liquidity in the marketplace? 

A.4. A straight leverage ratio is important as a useful baseline for 

judging the level of capital adequacy of financial institutions. Unlike risk-based capital ratios, the leverage ratio does not allow for 

risk-weighting of asset values, which can be easily and dangerously 

miscalculated (either intentionally or unintentionally). In that 

sense, it provides a critical corrective to the malleable risk-based 

capital ratios. 

As explained above, there is no scientifically derived, theoretically ‘‘perfect’’ level of capital for all banks at all times. True, the 

leverage ratio of 10 percent would be a significant improvement 

over the current requirement of 5 percent–6 percent at maximum. 

However, it is not a magical number that will somehow eliminate 

the need for close regulatory and supervisory oversight, stress 

tests, and other systemic risk-reducing measures. 

To the extent we do have any sort of an ‘‘objective’’ benchmark 

for judging the functional leverage ratio levels, the market gives us 

a number much higher than 10 percent. A 10 percent leverage ratio 

is woefully low compared to the level of equity at nonfinancial 

firms. Thus, publicly traded nonfinancial firms typically have 30 

percent–40 percent in shareholder equity on their balance sheets: 

i.e., their leverage ratio is in the 30 percent–40 percent range. If 

a company has less equity, it has to pay higher price for its debt. 

This is how the free capitalist market operates in the absence of 

a public subsidy. 

107 

Banks enjoy such a subsidy, which is precisely why they prosper 

with such extremely low levels of true equity. The multifaceted system of bank regulation and supervision exists as the necessary substitute for the missing market discipline. Any attempt to weaken 

such system of oversight will only free banks to incur more leverage and risk, and to shift the risk and the ultimate losses onto the 

American taxpayer. A 10 percent leverage ratio will not prevent 

that result. Perhaps a 30 percent–40 percent leverage ratio would, 

but even that is debatable. 

Q.5. I’m concerned that our Federal banking regulatory regime relies upon arbitrary asset thresholds to impose prudential regulations, instead of an analysis of a financial institution’s unique risk 

profile. 

Should a bank’s asset size be dispositive in evaluating its risk 

profile in order to impose appropriate prudential regulations? 

If not, what replacement test should regulators follow instead of 

an asset-based test? 

A.5. In my written statement, I discussed at length the reasons 

why it is fundamentally misleading to characterize asset size-based 

thresholds for enhanced prudential supervision as ‘‘arbitrary.’’ We 

live with a myriad of ‘‘arbitrary’’ but practically necessary threshold-based rules every day: the legal age for voting is 18, the legal 

age for drinking is 21, and so forth. If all such numerical thresholds were deemed unacceptably ‘‘arbitrary’’ and replaced with ‘‘tailored’’ determinations of every single person’s individual ability to 

exercise voting rights or consume alcohol, it would create a far 

more arbitrary, unpredictable, and chaotic world. Nobody would 

ever seriously propose such a ‘‘reform’’ in the name of ‘‘tailoring’’ 

law to every person’s ‘‘unique’’ circumstances. Similarly, replacing 

clear bright-line rules by a requirement that Federal regulators assess each financial firm’s unique risk profile and circumstances 

would be impractical and ineffective. Doing so will impose unbearable costs on the public and essentially eliminate the entire regime 

of enhanced oversight of systemically important financial institutions. That would be an extremely dangerous result. 

A better, more pragmatic way to accommodate the inevitable differences between megabanks and smaller institutions, which currently fall into the same SIFI category, could be to allow for a discretionary downward adjustment of the intensity of the enhanced 

supervision regime for certain institutions, based on a combination 

of their size and business activities. In other words, it may be desirable to have a formalized process whereby, e.g., a traditional 

midsized bank with assets above $50 billion could petition the regulators for a lighter regulatory or supervisory treatment. The petitioning bank would have the burden of proving to the regulators 

why such special dispensation would be reasonable in its case—and 

why it would not create any unreasonable risks to the safety and 

soundness of the U.S. financial system. 

This approach would properly place the burden of securing a special private benefit (lower compliance costs) on those private entities that seek it, and not on the public that finances Federal regulatory agencies. Moreover, this system would be in line with the 

fundamental free-market principles: the firms that want to have 

108 

their own, uniquely tailored law will have to pay for it and bear 

responsibility for its outcomes. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED 

FROM SAULE T. OMAROVA 

Q.1. This Committee heard testimony last week from Professor 

Adam Levitin that since the Wall Street Reform and Consumer 

Protection Act, the cumulative pre-tax return on equity in the 

banking sector has been 225 percent for community banks and 320 

percent for megabanks. At the same time, since 2010, real income 

has actually fallen by 0.6 percent for the average American family. 

These statistics highlight that banks, and especially large banks, 

have done very well in the years since the Wall Street Reform Act, 

while the typical American family’s real income is now less than 

before the bill. In order to grow the economy, wouldn’t pursuing 

policies that increase productivity and lift middle class wages be 

better than deregulating banks? 

A.1. This is absolutely correct. To stimulate healthy long-term 

growth of the national economy, it is critical to ensure that the 

maximum number of Americans actually receive wages that are 

regular, stable, and sufficiently high to enable them to increase 

their spending—without incurring potentially dangerous amounts 

of debt. Higher incomes for more ordinary Americans will translate 

directly into higher demand for consumer goods and services, which 

will stimulate expansion in production of such goods and services. 

That, in turn, will translate into broader industrial growth, further 

job creation, technological innovation, and research and development. It is in that fundamental sense that, ultimately, consumer 

demand is the key catalyst of the Nation’s economic growth. 

Importantly, however, financing demand through consumer debt 

is an unsustainable and extremely dangerous strategy. As the financial crisis of 2007–09 demonstrated, cheap credit booms inevitably lead to wealth-destroying economic crashes. Only by lifting 

Americans’ real income levels can we create the conditions necessary for spurring sustainable long-term growth of the American 

economy. Currently, Americans are forced to resort to borrowing to 

make up for their steadily declining real incomes, so that the aggregate consumer debt now stands at a record high of about $13 

trillion. Such high debt burden, combined with stagnating wages 

and continuing erosion of America’s manufacturing base, is bound 

to depress consumer demand and, as a result, hold back economic 

growth. 

Deregulating banks will not remedy this underlying dynamic. 

Banks currently have plenty of cash available for lending. The real 

problem here is not some alleged contraction of banks’ lending capacity because of regulatory compliance costs: it is the lack of effective and sound demand for credit from over-extended consumers 

and struggling businesses in the sluggish real economy. Deregulating banks will only enable them to use more of their money for 

speculative trading, shareholder dividends, and executive bonuses. 

It will not magically create a robust real economy that can put that 

cash to productive use. 

109 

Q.2. Many of us have come to recognize that the Orderly Liquidation Authority is an incredibly important part of the Wall Street 

Reform and Consumer Protection Act. Could you please explain 

why OLA is so important to our constituents, especially those who 

may be working multiple jobs just to make ends meet? 

A.2. The Orderly Liquidation Authority (OLA) is a special new regime for handling the failure of a major financial institution. It was 

created in response to the financial crisis of 2007–09, which made 

it clear that large financial firms—banks, securities firms, insurance conglomerates, etc.—are fundamentally different from any 

regular private company in a free-market economy. When a nonfinancial company fails, the ordinary bankruptcy process—governed 

by the general Bankruptcy Code and administered by bankruptcy 

courts—aims to use the company’s remaining assets to satisfy 

claims of its direct creditors: lenders, employees, suppliers, utility 

providers, etc. 

When a large financial institution like JPMorgan or Goldman 

Sachs fails, however, this time-consuming court-administered process does not work as well. Large financial institutions are highly 

leveraged, much more so than nonfinancial firms. Their debt obligations are much more varied, complex, and difficult to value. 

Many of these institutions’ creditors trade in financial markets 

and, therefore, cannot afford to wait for the bankruptcy court to decide how much money they will get from the bankrupt firm. If 

these trading counterparties don’t get paid on time, they may default on their own obligations or try to avoid that by rapidly selling 

their own financial assets (such as stocks, bonds, etc.): in either 

case, these creditors’ behavior may trigger a dangerous chain reaction. Financial institutions provide services of critical public importance: they are central to the smooth operation of the payments 

and clearing systems, they manage ordinary Americans’ savings 

and investments, they insure against various risks, etc. The bankruptcy of a large financial institution threatens to disrupt performance of these functions and thus cause much unanticipated distress 

in the broader economy. 

OLA is designed to provide a tailored approach to handling the 

failure of such an institution. It is simply a special version of corporate bankruptcy, which shifts the primary focus toward minimizing systemic disruptions that are likely to occur when a large, 

systemically important financial firm goes down. Among other 

things, OLA enhances the ability of the relevant Federal regulatory 

agencies to (1) monitor the financial condition, solvency and liquidity of all big banks, investment banks, and other financial firms; 

(2) mandate that all such financial firms have in place reliable 

plans for raising money and addressing any sudden shocks to their 

solvency or liquidity, before such shocks actually hit them; and (3) 

put in place the necessary ‘‘safety net’’ (i.e., access to last-resort 

emergency funding, international agreements with other countries’ 

regulators, etc.) to ensure that the failure of a systemically important financial institution does not cause a major breakdown in the 

provision of financial services to the public. 

Put simply, the OLA regime is designed to ensure that, even if 

a major bank is about to collapse, ordinary Americans can keep 

going about their daily business without worrying about accessing 

110 

their cash at ATMs, having their checks cleared, getting their 

wages deposited and their credit card payments go through. By 

strengthening the resilience of the financial system to the failure 

of any single firm, the OLA regime is critical for preventing fullon financial crises and subsequent economic depressions. It is a 

well-established fact that working-class and middle-class people get 

hit the hardest by such crises. That means that every hard-working 

American directly benefits from the existence and proper functioning of the OLA regime and other complementary elements of 

the Dodd–Frank regulatory system. Repealing or weakening the 

Dodd–Frank’s OLA provisions, by contrast, will weaken and expose 

the American economy to increasingly frequent and devastating financial crises. Therefore, it is in the interest of every hard-working 

American to keep the OLA regime in place. 

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ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

STATEMENT SUBMITTED BY THE INDEPENDENT COMMUNITY 

BANKERS OF AMERICA 


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STATEMENT SUBMITTED BY THE INSTITUTE OF INTERNATIONAL 

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STATEMENT SUBMITTED BY TEXAS CAPITAL BANK 


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GSIB SCORES 


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