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MAKING A FINANCIAL CHOICE: MORE CAPITAL 

OR MORE GOVERNMENT CONTROL? 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

JULY 12, 2016 

Printed for the use of the Committee on Financial Services 

Serial No. 114–96 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

July 12, 2016 ..................................................................................................... 1 

Appendix: 

July 12, 2016 ..................................................................................................... 65 

WITNESSES 

TUESDAY, JULY 12, 2016 

Allison, John A., former President and Chief Executive Officer, Cato Institute 6 

Levitin, Adam J., Professor of Law, Georgetown University Law Center .......... 10 

Newell, Jeremy, General Counsel, The Clearing House Association .................. 13 

Nussle, Hon. Jim, President and Chief Executive Officer, Credit Union National Association ................................................................................................. 8 

Pollock, Alex J., Distinguished Senior Fellow, R Street Institute ....................... 12 

Purcell, Jim R., Chairman, State National Bank of Big Spring, Texas, and 

Chairman, Texas Bankers Association ............................................................... 15 

APPENDIX 

Prepared statements: 

Hinojosa, Hon. Ruben ....................................................................................... 66 

Allison, John A. ................................................................................................ 67 

Levitin, Adam J. ............................................................................................... 70 

Newell, Jeremy ................................................................................................. 92 

Nussle, Hon. Jim .............................................................................................. 116 

Pollock, Alex J. ................................................................................................. 221 

Purcell, Jim R. .................................................................................................. 225 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Hill, Hon. French: 

Article from the Arkansas Democrat-Gazette entitled, ‘‘Four of state’s 

banks generate most profits,’’ dated June 19, 2016 ................................... 231 

Waters, Hon. Maxine: 

Written statement of Americans for Financial Reform ................................. 234 

Letter to Hon. Jeb Hensarling and Hon. Randy Neugebauer from various 

undersigned organizations, dated July 11, 2016 ........................................ 248 

Letter to Hon. Jeb Hensarling from Steptoe & Johnson LLP, dated July 

11, 2016 .......................................................................................................... 253 

(1) 

MAKING A FINANCIAL CHOICE: 

MORE CAPITAL OR MORE 

GOVERNMENT CONTROL? 

Tuesday, July 12, 2016 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:05 a.m., in room 

2128, Rayburn House Office Building, Hon. Jeb Hensarling [chairman of the committee] presiding. 

Members present: Representatives Hensarling, Royce, Lucas, 

Garrett, Neugebauer, Pearce, Posey, Fitzpatrick, Luetkemeyer, 

Huizenga, Duffy, Hurt, Mulvaney, Hultgren, Ross, Pittenger, Wagner, Barr, Rothfus, Schweikert, Guinta, Tipton, Williams, Poliquin, 

Love, Hill, Emmer; Waters, Maloney, Velazquez, Sherman, Meeks, 

Scott, Cleaver, Himes, Carney, Sewell, Foster, Kildee, Murphy, 

Delaney, Sinema, Beatty, and Vargas. 

Chairman HENSARLING. The Financial Services Committee will 

come to order. 

Without objection, the Chair is authorized to declare a recess of 

the committee at any time. 

Today’s hearing is entitled, ‘‘Making a Financial Choice: More 

Capital or More Government Control?’’ 

I now recognize myself for 3 minutes to give an opening statement. 

Regrettably, we remain stuck in the slowest, weakest economic 

recovery since at least World War II. The economy simply isn’t 

working for tens of millions of working Americans who cannot get 

ahead and who fear for the future of their families. 

Their paychecks remain stagnant, and their savings have declined. They are losing hope. 

Why is this happening? One of the principal reasons is the DoddFrank Act, a grave mistake Washington foisted upon the American 

people nearly 6 years ago. Simply put, Dodd-Frank has hurt the 

economy, hurt consumers, codified bank bailouts, and made our financial system less stable. 

It is time for a new paradigm in banking and capital markets. 

It is time to offer all Americans opportunities to raise their standards of living and achieve financial independence. 

In a phrase, we need economic growth for all and bank bailouts 

for none. There is a better way forward and it is called the Financial CHOICE Act, an acronym standing for Creating Hope and Opportunity for Investors, Consumers, and Entrepreneurs. 

2 

The Financial CHOICE Act rests on the belief that a high level 

of private bank capital is the most basic element in making a financial system healthy, resilient, and reliable for economic growth. 

The Financial CHOICE Act will relieve financial institutions 

from growth-strangling regulations that create more economic burden than benefit in exchange for voluntarily meeting higher, yet 

simpler, capital requirements. 

Our reform stops investors from making risky bets with taxpayer 

money. It once and for all ends taxpayer bailouts, period. 

It is quite simply a market-based, equity-financed Dodd-Frank 

offramp. 

To avail themselves of this exchange, many larger banks will 

have to raise significant additional equity capital. Most community 

banks and credit unions will have to raise little to no additional 

capital. 

Under our plan, banking organizations that maintain a simple 

leverage ratio of at least 10 percent at the time of the election, and 

have a composite CAMELS rating of one or two, may elect to be 

functionally exempt from the post-Dodd-Frank supervisory regime 

of Basel III capital and liquidity standards, and a number of other 

regulatory burdens that predate Dodd-Frank. 

Banking organizations that make a capital election will still be 

supervised and regulated by the banking agencies, but the presumption will be that such institutions are operating safely and 

soundly. 

Importantly, the CHOICE Act relies upon a leverage ratio approach to measuring capital adequacy rather than the discredited 

risk-based capital regime advanced by the Basel Committee on 

Banking Supervision that proved so destructive during the last crisis. 

Nothing is riskier than one centralized, politicized, globalized 

view of financial risk. 

While maintaining a large capital buffer does not guarantee that 

a bank will never fail, it should be noted that among all insured 

depository institutions that entered 2008 with a leverage ratio of 

at least 10 percent, 98 percent survived the financial crisis. Of 

those that did fail, none was of sufficient size or scale to even remotely present any systemic issues. 

It is also important to note that a 10 percent simple leverage 

ratio will provide a far greater capital buffer than required under 

either Basel or the Dodd-Frank Act. 

Seven-plus years of Obamanomics and 6 years of Dodd-Frank 

have delivered nothing to the American people but stagnant paychecks and diminished savings. 

Freeing well-capitalized, well-managed financial firms from the 

chokehold of an overly intrusive, heavily politicized regulatory regime will help create a healthier economy for all struggling Americans. 

I now yield 1 minute to the gentleman from New Jersey, Mr. 

Garrett, chairman of our Capital Markets Subcommittee. 

Mr. GARRETT. Thank you, Mr. Chairman. 

I am sure you all know it was Einstein who was credited with 

saying that the definition of insanity is doing the same thing over 

and over again while expecting different results. 

3 

For too long our financial regulatory system has been governed 

by global networks of really detached elites who believe they are 

smarter than the market and the people when it comes to allocating and assessing risk. 

Prudential regulator bigwigs that make up the Basel Committee 

have for years gamed capital standards to ensure that investment 

flowed into politically favored asset classes, whether it was the 

debt of nations or the subprime market. And this approach failed 

spectacularly back in 2008 and in the years since. 

But unfortunately, the regulators in the Obama Administration 

have now doubled down on the failed policy of the past and they 

expect different results this time. 

Today, the risk weight capital regime of Basel is even more complex, more costly, and more risky than ever before, and I have no 

doubt, if left unaddressed, it will continue to the next crisis as well. 

So, fortunately, the CHOICE Act offers us a way out by pointing 

us towards a system that will allow the people and the markets to 

determine the risk of financial institutions and make it unlikely 

that the taxpayers will ever be called on again to bail out Wall 

Street and the bad decisions of the regulators who oversee it. 

And so I look forward to the witnesses today. 

And I yield back to the chairman. 

Chairman HENSARLING. The Chair now recognizes the ranking 

member for 5 minutes. 

Ms. WATERS. Thank you, Mr. Chairman. 

Since the passage of Dodd-Frank, we have seen piecemeal attempts by our colleagues on the other side of the aisle aimed at undercutting Wall Street reform, whether through legislation in this 

committee or budget riders on the House Floor or through endless, 

meritless investigations. 

There has been a drumbeat of effort aimed at weakening the 

rules we put forward in response to the worst financial crisis since 

the Great Depression. 

This is all part of a massive deregulatory agenda not to make 

America great, but to put the needs of special interests above those 

of working Americans and leave taxpayers footing the bill. 

The legislation we will consider today, the wrong CHOICE Act, 

is the centerpiece of this deregulatory agenda and is the culmination of 6 years of Republican efforts to gut financial reform. 

It recycles every bad idea this committee has ever generated, 

adds a few more bad ideas on top, and creates an omnibus of special interest giveaways that invites the next financial crisis. 

The hearing convened today is especially focused on Title I of the 

wrong CHOICE Act which gives banks a hall pass from Wall Street 

reform if they achieve a 10 percent capital ratio. 

Let me be clear. This idea is not serious. While credible financial 

reformers have proposed strengthening capital requirements in exchange for some regulatory relief for community banks, this, the 

wrong CHOICE Act, is not that bill. In fact, it takes the names of 

true financial experts in vain by stealing their ideas and weakening them. It then tries to rebrand these weak ideas as reform. 

Namely, the wrong CHOICE Act contains none of the guardrails 

of the other proposals, including limits on banks’ derivatives activity. It has no caps on bank mergers, meaning big banks will only 

4 

get bigger. And the capital standards in this bill are far weaker 

than those proposed in bipartisan Senate legislation, which itself 

doesn’t also repeal Dodd-Frank as this bill does. 

It is why Governor Tarullo of the Federal Reserve, when asked 

about this legislation, said it would, ‘‘incentivize banks to move forward such riskier assets,’’ and that capital levels ‘‘would have to be 

substantially higher to make regulators comfortable.’’ 

What’s more, this bill makes other radical changes to our financial regulatory framework that would harm consumers and the 

greater economy by repealing the living wills requirement. It does 

nothing to shrink mega firms or ensure that they could be resolved 

if they fail. 

And while the bill claims to end taxpayer bailouts, it would actually put us right back to where we were in 2008 when the largest 

banks had an implicit taxpayer guarantee. 

The list goes on. The legislation would repeal the Volcker Rule 

which prevents banks from gambling with taxpayer money. It 

would repeal the Financial Stability Oversight Council’s (FSOC’s) 

ability to designate our largest, non-bank firms, like AIG, for 

heightened regulation. It would all but gut the enforcement authority of the Securities and Exchange Commission. 

And importantly, the bill would make it nearly impossible for the 

Consumer Financial Protection Bureau (CFPB) to actually protect 

borrowers from financial abuse. 

Indeed, by turning the bureau into a partisan, gridlocked commission, eliminating its independent funding and bogging it down 

in onerous cost/benefit analysis, it would render the CFPB totally 

toothless and unable to protect consumers from predatory mortgages, payday lending, discriminatory automobile financing, forced 

arbitration contracts or other harmful products and practices. 

To me, this does not make good sense. When we have an agency 

that has returned $11.4 billion to 25 million consumers in 5 short 

years, why would anyone want to hamstring its work in this way? 

So it is clear to me that this bill is the wrong choice for consumers, for investors, and for the entire financial system. Instead 

of spending so much time and energy trying to repeal Dodd-Frank, 

we should be building on its reforms and ensuring that our regulators can implement them effectively. 

That is the work of this committee and that is the work that this 

committee should be focused on. 

I thank you and I yield back the balance of my time. 

Chairman HENSARLING. The gentlelady yields back. 

The Chair now recognizes the gentleman from Texas, Mr. Neugebauer, chairman of our Financial Institutions Subcommittee, for 1 

minute. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

The Financial CHOICE Act serves as an important proposal that 

offers a clear alternative to the complex and faulty regulatory 

framework banks currently operate under. 

The CHOICE Act’s capital provisions offer financial institutions 

the choice of holding higher equity in exchange for less government-directed management of their businesses. 

5 

A simple leverage ratio supplants the ill-conceived risk weighting 

of assets, which leads to asset crowding, political manipulation and 

incredible compliance costs for community financial institutions. 

Risk weighting failed to adequately be a predictor of bank stability during the financial crisis. While the 10 largest banks had 

tier one capital on the average of 7 percent, their average leverage 

ratio was below 3 percent. 

According to FDIC Vice Chairman Thomas Hoenig, the leverage 

result will result in a more effective, more efficient, and more costeffective supervisory regime. 

While the leverage ratio will certainly help improve the supervisory regime, one cannot understate the benefits of financial stability that will also result. 

As we saw during the financial crisis, run-like behavior was exacerbated by the fears that highly leveraged firms couldn’t withstand periods of extreme market stress. Research shows that higher levels of equity funding decreases the danger of runs on banks. 

There is no benefit to getting to the bank first. 

I fully support the shift to a simpler, more stable regulatory 

framework. 

Chairman HENSARLING. The time of the gentleman has expired. 

We will now turn to our panel. 

Our first panelist is Mr. John Allison who comes to us with a 38- 

year career in banking, the last 19 years as CEO of BB&T, which 

he helped grow into the 10th-largest bank holding company in 

America. He also is the recently retired president and CEO of the 

Cato Institute. Mr. Allison is a Phi Beta Kappa graduate of the 

University of North Carolina, has a master’s degree in management from Duke University, and is a graduate of the Stonier Graduate School of Banking. 

The Honorable Jim Nussle was our colleague and served in the 

House from 1991 to 2007. He served in this institution as the 

chairman of the House Budget Committee. He was my chairman. 

We will find out how much he enjoys being on the other side of the 

witness table today. He also served as the Director of the OMB 

under President Bush. He is a graduate of Luther College and 

Drake University Law School. 

Mr. Adam Levitin is a professor of law at Georgetown University 

Law Center. He serves on the CFPB’s Consumer Advisory Board. 

He is a graduate of Harvard Law School, Columbia University, and 

Harvard College. 

Mr. Alex Pollock is a distinguished senior fellow at the R Street 

Institute. He comes to us with a 35-year banking career, part of it 

serving as president and CEO of the Federal Home Loan Bank of 

Chicago. He is a published author, and a graduate of Princeton 

University, the University of Chicago, and Williams College. 

Mr. Jeremy Newell is the executive managing director, head of 

regulatory affairs, and general counsel at the Clearing House Association. Mr. Newell is a graduate of Yale Law School and is a faculty member of the Banking Law Fundamentals Program at the 

Berkeley Center for Law, Business, and the Economy, and Boston 

University Law School. 

Last but not least, Mr. Jim Purcell. And for his introduction, I 

yield to the gentleman from Texas, Mr. Neugebauer. 

6 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Jim Purcell serves as the CEO and the chairman of State National Bank in Big Spring, Texas, which, by the way, is in the 19th 

Congressional District of Texas. He is also the newest chairman of 

the Texas Bankers Association. Jim has a great understanding of 

the issues facing community banks as he has been a community 

banker for multiple years in the community of Big Spring, Texas, 

which is a rural community of about 30,000 people. 

Jim has been a longtime friend and constituent of mine. And I 

am thankful for his insight into community banking and the importance of it to those communities, but also to the overall economy. 

And so I am glad to have Mr. Purcell here with us today, Mr. 

Chairman. 

Chairman HENSARLING. We will now turn to all of our witnesses. 

Each of you will be recognized for 5 minutes to give an oral presentation of your testimony. 

And without objection, each of your written statements will be 

made a part of the record. 

Mr. Allison, we will go from left to right, physically and not 

philosophically, and we will begin with you. You are now recognized for your testimony. 

STATEMENT OF JOHN A. ALLISON, FORMER PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, CATO INSTITUTE 

Mr. ALLISON. Thank you, Mr. Chairman. Good morning. 

I have a unique experience. I was heading the lending business 

of BB&T in 1980 and then CEO in 1990 when we went through 

another financial crisis, which gives me kind of a different context. 

I am absolutely certain that the policies of the Federal Reserve, 

both the monetary policies and the regulatory policies, were major 

contributors to the recent crisis. 

In regards to regulation, they made three big mistakes. One, 

they didn’t regulate. Two, they encouraged a misallocation of capital to politically correct purposes like affordable housing or in Europe to sovereign debt, and then they got obsessed with Basel in 

terms of capital standards and they got lost in the mathematics. 

Banks and regulators fooled themselves about risk because of the 

complexity of these mathematical models. 

During the crisis this time, they made a really severe mistake, 

which had a big effect on the economy, and hurts our growth today. 

In the early crises, the regulators attacked the unhealthy banks 

and allowed them to fail. In this crisis, they attacked the whole industry. 

In the past, BB&T could help our customers through the crisis. 

We took on a lot of healthy customers of unhealthy banks, but we 

couldn’t do that this time. They forced us to stop doing the kind 

of lending that allowed us to get through the crisis without any 

kind of financial problems, without a single quarterly loss. 

They stopped what I call venture capital lending. Venture capital 

lending is where you make a judgment of the individual and the 

project instead of the mathematics. I did a lot of those loans that 

have created hundreds of thousands of jobs. And my friend Bernie 

Marcus, who started Home Depot, has told me that he couldn’t 

7 

start Home Depot today under the standards that exist. And that 

has had a big impact on growth. 

After the crisis, because the regulators have wanted to keep 

things tight, they continue to stop venture capital lending and that 

has kept growth from happening in the economy and it has reduced 

competition which actually has been a subsidy to big businesses. 

We have been subsidizing big businesses. 

I have a friend who owns a restaurant chain and he talks about 

how much easier it is in the restaurant chain because nobody is 

starting up restaurants because they can’t get bank financing 

today. 

It has also slowed growth in the economy, lowered productivity, 

and lowered the standard of living for the average consumer. 

It is a big mistake to believe that regulators know the proper 

level of risk. They had no idea what was going on before the financial crisis. They didn’t predict it. In fact, Ben Bernanke said we 

weren’t having a recession after the recession had already started. 

Today they are doing exactly the opposite. They have tightened 

standards way too much and it is hurting the normal growth rate 

in the economy. They didn’t predict the financial crisis. Last year, 

they didn’t predict what was going to happen to energy; energy was 

a very low-weighted loan from a risk perspective in Basel until this 

year after the horse was out of the barn. 

In my 40 years experience in the banking business, the singlebiggest determinant—not the only determinant and not a perfect 

determinant—of the health and safety of a bank is its capital position. A sound capital position radically reduces the risks of bank 

failures. Very few banks fail with proper capital. 

I strongly believe that capital position has to be understandable, 

it has to be a clear goal, and it cannot be too complex because I 

guarantee you the big banks will game the system. They do it 

every single time. You need a simple, clear standard. 

It is interesting that at the end of last year, Citigroup had a leveraged capital ratio, a supplemental leveraged capital ratio of 6.4 

percent. I will guarantee you that Citigroup would be a lot less 

risky if they were forced to have a leveraged capital ratio of 10 percent versus having 10,000 regulators go micromanage Citigroup. I 

tell you that with certainty. 

The opt-out in this bill is very important because it actually creates market pressure to get a rational banking size. 

Those of you who are opposed to big banks and too-big-to-fail, 

this is a way to deal with that problem. There is no way to arbitrarily decide how big a bank will be. But management will manage to the capital standards and get rid of unprofitable businesses, 

which will be very good for the economy and the market will force 

banks to do that. Because if you don’t opt out, the market will say, 

hey, you are a high-risk institution. 

By the way, that is why some of the big banks will be opposed 

to this bill. 

In the kind of society we have, banks play a critical role of helping businesses get started and helping businesses change their 

model so they can grow. And we can’t do that today. 

8 

I can tell you, it is harder to make a small-business loan today 

than it has been in my 40-plus-year career in banking and that is 

not good for the economy and it is not good for the consumer. 

And the irony is we can actually reduce risk and improve the 

performance of the economy by having higher capital standards 

and much less regulation. 

[The prepared statement of Mr. Allison can be found on page 67 

of the appendix.] 

Chairman HENSARLING. Thank you, Mr. Allison. 

We now turn to you, Chairman Nussle. 

STATEMENT OF THE HONORABLE JIM NUSSLE, PRESIDENT 

AND CHIEF EXECUTIVE OFFICER, CREDIT UNION NATIONAL 

ASSOCIATION 

Mr. NUSSLE. Thank you, Mr. Chairman. 

And thank you, Ranking Member Waters. 

It’s great to be back before you. And I want to thank the members of the committee. Thank you for the opportunity to testify and 

give America’s credit unions’ perspective and views on Title I of the 

chairman’s Financial CHOICE Act. 

I have been at the Credit Union National Association now for almost 2 years. And the constant refrain I hear from my members 

wherever I go is that they are being crushed by regulations implemented mostly in response to a crisis that they neither caused or 

contributed to. 

And so the time and financial costs of regulatory burden is impeding their ability and credit unions’ ability to serve members and 

is really a leading driver to the credit union consolidation that we 

see across the country, which has accelerated since 2010 and that 

consolidation is now at a record pace. 

We estimate the regulatory cost to America’s credit unions and 

their members at $7.2 billion in 2014 alone, which is up from $4.4 

billion in 2010. 

And Mr. Chairman, I have attached a regulatory burden study 

that was done by a third party, that I would be glad to share with 

the committee, and is part of my written testimony. 

This is money that is not being put to use to benefit credit union 

members, but they are definitely paying for it. If the regulatory 

burden costs were reduced, credit unions would and could invest 

more in their members in the communities through better rates on 

savings and loans, stronger capital positions, and the development 

of alternative delivery channels. 

This would allow credit unions to make an even more powerful 

impact on the lives of their members and communities. 

Credit union executives and board members have a hard time 

understanding why they must comply with rules designed primarily for the largest financial institutions and abusers of consumers, and have an even harder time understanding why their 

elected officials have a difficult time doing anything about it. 

So we are here to engage in the process, not because this bill will 

solve all of the regulatory burden challenges facing credit unions, 

but because we think this is a good place to start the discussion 

on removing barriers so credit unions can more fully serve their 

9 

members. And we hope the committee will engage in this process 

in a bipartisan manner. 

As you know, credit unions are subject to a statutory capital requirement already under the Federal Credit Union Act. In order to 

be considered well-capitalized for purposes of prompt corrective action, a credit union must maintain a net worth ratio of at least 7 

percent. That is 1 percentage point higher, by the way, than the 

current requirement for banks. 

Unlike banks, credit unions are not-for-profit cooperatives and 

the only source of capital for credit unions is their retained earnings. With this limited ability to raise capital, and given the relatively conservative market strategy which is inherent in credit 

unions’ cooperative structure, many credit unions currently operate 

with a leverage ratio in excess of 10 percent already. 

Title I would create a path forward and would allow for greater 

operation with that 10 percent. 

To give you a sense of how this legislation would impact my credit unions today, nearly 4,000 of the 6,000 insured credit unions 

have a leveraged ratio greater than 10 percent. This represents 

about 65 percent of all credit unions. It represents about 62 percent 

of all credit union assets and serving nearly 60 percent of the 100 

million credit union members. 

We believe many of these credit unions would take advantage of 

the regulatory process provided under Section 102, which would include relief from, among other things, NCUA’s regulations on interest rate risk, liquidity requirements, and the recently finalized 

risk-based capital requirements. 

So we appreciate that this legislation structures the higher capital threshold as an option rather than a requirement. And we 

would ask that you resist efforts to require credit unions to hold 

additional capital because this actually could reduce their ability to 

lend to credit union members. 

Further, such a requirement would be inappropriate and unnecessary for credit unions because they don’t really have a history of 

capital inadequacy. 

Nevertheless, providing credit unions relief who have demonstrated with their history of operating with higher capital levels 

and developing a process for remediation in the event that capital 

levels fall below 10 percent, I think that strikes an appropriate balance. And we think that is an appropriate part of this legislation. 

So we appreciate the committee considering the legislation to 

provide meaningful regulatory relief for many of the credit unions. 

We look forward to working with you. We know this is a work in 

progress and we stand ready to work with you in order to try and 

accomplish some regulatory relief and remove barriers between our 

credit unions and our members. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Nussle can be found on page 116 

of the appendix.] 

Chairman HENSARLING. Thank you, Chairman Nussle. 

Professor Levitin, you are now recognized for 5 minutes. 

10 

STATEMENT OF ADAM J. LEVITIN, PROFESSOR OF LAW, 

GEORGETOWN UNIVERSITY LAW CENTER 

Mr. LEVITIN. Chairman Hensarling, Ranking Member Waters, 

and members of the committee, thank you for inviting me to testify 

today. 

It is only possible to evaluate the CHOICE Act’s signature Title 

I regulatory opt-out in the context of the Act’s other provisions. 

This is because the Title I regulatory opt-out would occur against 

a background of massive, preexisting deregulation for all financial 

firms irrespective of how well-capitalized they are. 

This deregulatory background makes the additional Title I regulatory opt-out all the riskier. 

The CHOICE Act has several deregulatory elements that open 

the door to an enormous amount of additional risk in the financial 

system even before we get to Title I. 

First, the CHOICE Act eliminates key prudential regulations for 

all firms irrespective of their capital levels. Thus, the CHOICE Act 

repeals the Volcker Rule, eliminates regulation of critical financial 

market utilities, and repeals the risk retention requirement for 

securitizations. 

Second, the CHOICE Act virtually eliminates Federal consumer 

financial protection. 

Third, the CHOICE Act would significantly reduce the SEC’s deterrence power. 

Fourth, the CHOICE Act strips the Federal Reserve and the 

FDIC of key crisis response tools. 

And finally, the CHOICE Act ensures that all Federal regulators 

will be subjected to constant political interference and congressional micromanagement such that they will not be able to use 

their remaining regulatory tools effectively. 

Now, the CHOICE Act’s provisions outside of Title I not only increase the likelihood of a financial crisis through across-the-board 

deregulation, but they also ensure that crisis resolution will be a 

disaster. 

Title II of the CHOICE Act would eliminate Dodd-Frank’s orderly liquidation authority and replace it with an unworkable 

bankruptcy-based resolution system. This bankruptcy system cannot work. This is because private capital markets are incapable of 

providing the level of financing that would be required for a bridge 

company for a large financial institution at a time when markets 

are frozen and with no notice. 

A bridge company might need $50 billion or $100 billion of capital the next day. Capital markets have never provided a DIP loan 

of more than $9 billion. Only the government unfortunately is capable of coming up with that kind of money. 

Even if the CHOICE Act’s bankruptcy provision worked, however, it would have the perverse effect of ensuring that Wall Street 

creditors get paid in full while Main Street creditors, vendors, and 

retirees, as well as tax authorities, get paid little or nothing. That 

is just wrong. 

Moreover, the CHOICE Act’s priority system creates an enormous moral hazard and reduces market discipline because it removes all credit risk on swaps, derivatives, and other qualified financial contracts. 

11 

The result will be to encourage excessive use of those products. 

It is in this context of a denuded regulatory system and a nonfunctional resolution system that we need to consider Title I of the 

CHOICE Act. 

As a starting point, let me point out that there is no basis whatsoever for the 10 percent leveraged ratio number. It is not supported by any research. As far as I can tell, the 10 percent number 

is plucked out of thin air and it is grossly irresponsible to use as 

a basis for a regulatory system. 

The particular leveraged ratio number, though, is not the most 

serious problem with Title I. Title I’s simple leveraged ratio is 

drafted as a single option for all financial institutions, but it actually functions as two distinct options, a quite reasonable one for 

community banks and a very dangerous one for mega banks. 

Community banks are given the choice between a simple leveraged ratio and the Basel III risk-weighted leverage ratios. Now, I 

have some concerns about the particulars of the CHOICE Act in 

this regard, but I am generally supportive of allowing community 

banks to use a simple leveraged ratio. There are a lot of problems 

with risk-weighted leverage ratios. 

The problem, though, the real problem is the deal offered to the 

mega banks. Mega banks get a much better deal under the 

CHOICE Act than community banks. Mega banks are allowed to 

opt out, not only from Basel III, but also from Dodd-Frank’s heightened prudential standards. 

The danger of letting mega banks substitute higher capital for 

the multifaceted regulatory scheme of Dodd-Frank is that capital 

is a necessary, but insufficient protection against financial crises. 

Ounce for ounce, capital may be the best protection against firm 

failure, but requiring only capital is like an Atkins diet for financial institutions. It is not a balanced diet; it is not healthy in the 

long run. 

Indeed, a simple leverage requirement alone actually incentivizes 

risky bank behavior. It encourages banks to load up on high-risk, 

high-return assets in order to compensate for the lower return on 

equity caused by higher capitalization. 

To prevent this, capital needs to be combined with other regulatory tools, such as credit exposure limits and liquidity requirement that curb excessive risk-taking. 

The choice is not either capital or regulation, but there is another 

option, there are both. 

All told then, the CHOICE Act is a bad choice. It is a recipe for 

financial disaster. It prioritizes ideologically driven positions over 

careful and serious policy analysis and reasoning. And the fate of 

the U.S. economy is too important to stake on an ideological gamble like the CHOICE Act. 

[The prepared statement of Mr. Levitin can be found on page 70 

of the appendix.] 

Chairman HENSARLING. Thank you, Professor Levitin. 

Mr. Pollock, you are now recognized for 5 minutes. 

12 

STATEMENT OF ALEX J. POLLOCK, DISTINGUISHED SENIOR 

FELLOW, R STREET INSTITUTE 

Mr. POLLOCK. Thank you, Mr. Chairman, Ranking Member 

Waters, and members of the committee. 

Adam, the title of my remarks is, ‘‘An Excellent Choice.’’ 

Now, let me start with this thought, ‘‘Detailed intrusive regulation is doomed to fail.’’ This is the conclusion, in my view correct, 

of a prominent expert in bank regulation. It is true because nobody 

knows enough about the future to tell other people what to do 

about it in a detailed way. 

Surely there is a better way to proceed than promoting unfettered bureaucratic agencies trying to do something at which they 

are doomed to fail. 

I believe the CHOICE Act offers the opportunity of a better way 

precisely by the fundamental choice it provides. 

The lack of sufficient capital in banks is a permanent and irresistible temptation to governments to pursue intrusive microregulation. This has an underlying logic to it. After all, in a world in 

which governments explicitly and implicitly guarantee bank creditors, the government is in effect supplying risk capital to the banks 

who don’t have enough of their own. 

However, the greater the equity capital of a bank is, the less rationale there is for the detailed regulation. 

This suggests indeed a fundamental and sensible trade-off: more 

capital, reduced intrusive and onerous regulation. 

Want to run on less capital? You get the intrusive regulation. 

Thus, the CHOICE Act offers to banks a very logical decision between two options, which I would characterize like this: 

Option one, put enough of your equity investors’ own money in 

between your creditors and the risk that other people will have to 

bail the creditors out if you make mistakes. Mistakes are inevitable 

when dealing with the future, and this includes mistakes by bankers, by regulators, by central bankers, and by everybody else. 

The defense is equity capital. Have enough so the government 

can’t claim you are living on the taxpayers’ credit and indeed don’t 

be living on the taxpayers’ credit. 

Option two, don’t get your equity capital up high enough and instead live with the luxuriant regulation of Dodd-Frank as the imposed cost of using the taxpayers’ capital instead of your own. 

I believe the choice thus offered is a truly good idea. To my substantial surprise, the Washington Post editorial board agrees. They 

write, ‘‘More promising and more creative is Mr. Hensarling’s plan 

to offer relief from some of Dodd-Frank’s more onerous oversight 

provisions for banks that hold at least 10 percent capital. Such a 

capital cushion can offer as much or more protection against financial instability as intrusive regulations do and do so more simply.’’ 

Very true and very well-stated. 

Of course, we have to answer the question, how much capital 

makes the capital high enough? 

To consider the matter first in principle, without doubt, there is 

some level of capital at which this trade-off makes sense, some 

level of capital at which everyone would agree that the Dodd-Frank 

burdens become superfluous. But what is the practical level for a 

rational and realistic trade? 

13 

My written testimony discusses numerous bank capital proposals. 

And Adam, I think if you consider that you will find that 10 percent fits into a quite elaborate and extensive literature and empirical study of bank capital. 

Of course, we do have to make a judgment because there is no 

pure market test. 

The CHOICE Act uses, as has been said, the simple and direct 

measure of tangible leverage capital. This, in my judgment, is superior to the complex and opaque measures of risk-adjusted assets 

and risk-based capital. And I explain this further in my written 

testimony, in particular, that the risk weightings and risk-based 

capital are bureaucratic compromises, whereas real risk is dynamic 

and changing. 

So for purposes of setting up the choice for banks in the proposed 

Act, I believe the simplicity of tangible leveraged capital is the 

right answer. 

In sum, the CHOICE Act’s proposed choice between option one 

and option two makes perfect sense. And in my judgment, it ought 

to be enacted. 

Thank you for the chance to share these views. 

[The prepared statement of Mr. Pollock can be found on page 221 

of the appendix.] 

Chairman HENSARLING. Thank you, Mr. Pollock. 

Mr. Newell, you are now recognized for 5 minutes. 

STATEMENT OF JEREMY NEWELL, GENERAL COUNSEL, THE 

CLEARING HOUSE ASSOCIATION 

Mr. NEWELL. Chairman Hensarling, Ranking Member Waters, 

and members of the committee, thank you for your invitation 

today. 

My name is Jeremy Newell and I am the general counsel of the 

Clearing House Association. 

Owned by 24 of the largest banks operating in this country, we 

are a nonpartisan organization that contributes research, analysis, 

and data to the public policy debate. We welcome this opportunity 

to discuss how capital and other rules could be rationalized and tailored to better serve consumers’ businesses and economic growth 

while still ensuring the resilience and stability of our financial system. 

As a first principle, it is useful to consider these questions in the 

context of the substantial capital strength of the U.S. banking system today. 

The quantity and quality of capital that all banks must hold has 

increased substantially due to core post-crisis reforms, reforms that 

we strongly support. For our 24 owner banks, the strongest form 

of capital has nearly tripled over the last 7 years to more than 

$950 billion. 

The strength of banks’ current capital position was evident in the 

Federal Reserve’s most recent CCAR stress test in which large 

banks were required to weather an extraordinary hypothetical 

stress, everything from a sharp 5 percentage point jump in unemployment to an 11,000 point plunge in the Dow, all while continuing to do business as usual. 

14 

In last month’s results, every single one of the 33 CCAR banks 

demonstrated that they would exceed the regulatory minimums 

after that stress, and they did so with substantial capital to spare. 

Together, those 33 banks held $275 billion in common equity tier 

one capital over and above their required co-stress minimums. 

Those numbers speak for themselves. The U.S. banking system 

does not need even more capital. 

And yet, there are pending or planned new regulations from U.S. 

and international regulators that would do just that, including a 

Basel IV project to rewrite, again, the capital framework, a planned 

increase in required post-stress capital under CCAR and a new 

counter-cyclical capital buffer. All are ill-advised. 

We should instead be considering the effects of existing rules on 

economic growth and taking steps to better rationalize or tailor 

those that have high costs, but only minimal benefits. The 

CHOICE Act includes several promising ideas to help achieve that 

objective. 

A number of other opportunities to improve regulation in this 

way are described in my written testimony, so I will focus here on 

one that may be of most interest as the CHOICE Act would expand 

its use, and that is the U.S. supplementary leveraged ratio. 

The supplementary leveraged ratio measures the capital adequacy of a bank by dividing its capital by its total assets and offbalance-sheet exposures. Although sometimes viewed as an alternative to risk-based capital, the leveraged ratio is in fact also a 

risk-based measure of capital, albeit it a very inaccurate one. 

It assesses the risk of holding every asset to be exactly the same, 

akin to setting the same speed limit for every road in the world, 

whether it is a highway or a school zone. 

Although the risk weights used and risk-based measures can 

sometimes be wrong about the risk of an asset, a leveraged ratio 

is almost always wrong. 

This inaccuracy is especially pronounced for banks engaged in 

capital markets or custodial activities or those holding large 

amounts of liquidity. All involve large quantities of cash, Treasuries, and other truly low-risk assets which a leveraged ratio penalizes harshly, requiring much more capital than economics or 

risk would otherwise suggest. 

To be clear, the leveraged ratio can be useful as a simple backstop to other primary measures. But because its one-size-fits-all 

view of risk is so inconsistent with the actual economics and risks 

of banking, if it is set at a level that binds, either by choice or by 

mandate, a leveraged ratio will inevitably alter and distort the allocation of credit to the economy. 

Indeed, even at the current 6 percent leveraged ratio that applies 

to the largest U.S. banks, we already see substantial impediments 

to banks’ ability to support consumers and businesses. 

For example, banks are currently holding over $50 billion in capital against the cash on their balance sheets, capital that could be 

supporting new loans or other activities. 

The current leveraged ratio is also having sizable adverse effects 

on capital markets and custodial services. An even higher supplementary leveraged ratio would only exacerbate these effects. 

15 

Accordingly, while we support the CHOICE Act’s goal of reducing 

unnecessary regulation for well-capitalized banks, we suggest that 

its use of the supplementary leveraged ratio be reconsidered. 

With respect to other elements of the CHOICE Act discussion 

draft, there are a number of promising ideas, including the basic 

concept of more tailored regulation for well-capitalized banks, process enhancement to CCAR, and better analysis of costs and benefits in regulation. 

I would be happy to discuss these and anything else during Q&A. 

I look forward to your questions. 

[The prepared statement of Mr. Newell can be found on page 92 

of the appendix.] 

Chairman HENSARLING. Thank you, Mr. Newell. 

And Mr. Purcell, you are now recognized for 5 minutes. 

STATEMENT OF JIM R. PURCELL, CHAIRMAN, STATE NATIONAL BANK OF BIG SPRING, TEXAS, AND CHAIRMAN, 

TEXAS BANKERS ASSOCIATION 

Mr. PURCELL. Chairman Hensarling, Ranking Member Waters, 

and distinguished members of this committee, I thank you for the 

opportunity to come before you to testify. 

State National Bank is a time-tried and panic-tested bank that 

originated in 1909 under the Currie family. It continues to this 

day. We are about $300 million. We are in a town of 28,000. We 

are in rural parts. One of the locations is about 7,000 people and 

another one, if you take the employees out of the bank, it is probably about 500 people in that location. 

I started in bookkeeping after an injury. The doctor told me not 

to get on a horse for a year or a tractor for a year, and I got into 

banking. 

I don’t know if that was a wise choice. 

[laughter] 

I took the lowest-paying job that was offered to me, it had the 

fewest benefits, and it was in the coldest part of Texas at Dalhart, 

Texas, when I started. 

It had the largest number of elder statesmen in the bank. All of 

them wore hearing aids, and some of them used a cane, so I 

thought that would be a pretty good place to start. 

I started in bookkeeping, but I also understood what community 

banking was because of the efforts of those employees of Citizen 

State Bank in Dalhart. 

But right now, I started in bookkeeping, let us talk about some 

numbers. In June of 2010 when the Dodd-Frank Act was being finalized, there were 626 FDIC-insured banks in the State of Texas. 

As of last quarter, the end of March of this year, we were down 

to 477, a decline of 149 institutions. 

That is in a State that has one of the healthiest economies in our 

country. 

Of course, no one is ascribing that the decline of this 24 percent 

of the banks in the State of Texas was entirely because of the 

Dodd-Frank Act. But these are the numbers and we certainly do 

not think it is coincidental to the Dodd-Frank. 

As a community banker, my belief is that the Dodd-Frank Act 

has been negative, not just for community banking, but for large 

16 

banks and also medium-sized banks across the industry. It has 

likely had a negative impact on the country by restraining the 

bank industry’s ability to mediate our depositors’ funds into loans 

and companies and other worthy borrowers as otherwise would 

have been the case. 

For this reason, the Texas Bankers Association strongly supports 

the Financial CHOICE Act as a path to reform through the option 

of establishing a capital threshold for relief from the hopelessly 

complex Basel III requirements and other counterproductive regulations. 

This bill would utilize a capital standard of 10 percent which is 

double the current definition of a well-capitalized bank. A variation 

of this approach could also be included in a simplified risk-based 

aspect, as what has been proposed. Or perhaps a component suggested by FDIC Vice Chairman Hoenig, which would incorporate a 

business activities test. 

Four years ago when I testified before this committee, I mentioned that Senator Dodd said, ‘‘In a nation with more than 6,000 

banks, the bulk of the bill’s new regulations apply only to a few 

dozen of the largest ones, each holding more than $50 billion in assets.’’ 

No prediction could be farther from the mark. 

In terms of the former chairman’s reference to the total number 

of U.S. banking institutions, it still is above 6,000, at 6,122, but 

that is down a staggering 1,708 from the number of U.S. banks just 

prior to the enactment of the Dodd-Frank Act. 

Most alarmingly of all, just three new banks have been chartered 

since 2010 when the Dodd-Frank Act passed. 

Our message to the Congress is drawn from the very outset of 

seeing how the Dodd-Frank Act was being implemented, has been 

on the need for additional flexibility so that regulators can tailor 

policies and examinations to a bank’s business model. 

What I hear from bankers in Texas and around the country is 

that the pendulum in bank examination over the past 5 years has 

been transposed from prudent oversight to compliance overreach. 

The message is getting through for different things. 

Perhaps there is a Dodd-Frank business model that works, but 

we haven’t seen it yet. 

I would like to close by saying that we got out of the mortgage 

business because of high-priced mortgages. We couldn’t accommodate the debt-to-income ratios, and for self-employed individuals 

there is not a way to do it. 

In conclusion, Chairman Hensarling and Ranking Member 

Waters, the Texas Bankers Association appreciates all the work 

which obviously went into the preparation of this legislation and 

we look forward to working with you on the reforms on both sides 

of the aisle. 

[The prepared statement of Mr. Purcell can be found on page 225 

of the appendix.] 

Chairman HENSARLING. Thank you, Mr. Purcell, for your testimony. 

The Chair now yields himself 5 minutes for questions. 

Mr. Allison, I think I would like to begin with you. 

17 

Clearly, we know that our economy continues to suffer. We are 

limping along at just a little better than 50 percent of our typical 

economic growth. The real unemployment rate, when you add in 

those who have dropped out of the labor force, and those who are 

underemployed, is really about 10 percent. 

So the fundamental question, I think, that is posed to us is really, which system will maximize economic growth and minimize systemic risk? And is that system high levels of private equity bank 

capital or high levels of government control and intrusion? 

So you bring almost 4 decades of banking experience to the witness table. You helped build a very small, local, regional bank in 

to the nation’s 10th-largest bank. 

In your testimony you say that the financial service industries 

are now focused on compliance instead of innovation and productivity, that this is paralyzing the industry, speaking of regulation, 

and slowing innovation, creativity, and economic growth, and that 

lower-income individuals are the most negatively damaged by this 

sad situation. 

So how is the current regulatory environment harming the economy? And how would the Financial CHOICE Act change that? 

Mr. ALLISON. Mr. Chairman, I strongly believe that the current 

regulatory environment has basically forced bankers to focus on the 

wrong thing. They are focused internally on a massive set of rules 

and regulations, a massive set of mathematical formulas, instead 

of doing what they are supposed to do, which is identify ways to 

help their clients grow their businesses. 

And then because regulators have overreacted, and I have seen 

this every time, this is the extreme of overreaction in my career, 

too loose before, too tight now, but keeping banks from doing what 

banks would naturally do if they were freed up. 

Now, would some banks make mistakes? Of course, but if they 

had the proper capital position, there would be no losses and no 

risks to the taxpayers. 

The banks that failed and got in trouble in the financial crisis 

were all grossly undercapitalized 

One of the fundamental problems with Dodd-Frank is banks 

can’t be properly capitalized. In response to what Professor Levitin 

said, they can’t be properly capitalized and afford the regulatory 

costs of Dodd-Frank. So they have a choice and the choice is to be 

focused on regulation and that is what regulators want them to do, 

instead of being properly capitalized and really focused on running 

their business. 

I know that we are not making loans that we would have made 

in my 40-year career, and that is hurting the economy. 

Chairman HENSARLING. Let us talk a little bit about systemic 

risk. 

In your testimony, Mr. Allison, I think pretty early in the written 

testimony, you say, ‘‘Investors, rightly so, assumed bank regulators 

were controlling industry risk and investors were lulled to sleep. 

Without the perception that regulators knew what the risks were, 

investors would have studied the industry far more carefully. The 

market was fooled by banking regulators.’’ 

So how does this current regulatory regime take away from market discipline? 

18 

Mr. ALLISON. It takes away because the markets naturally believe that regulators have the inside information, that they know 

what is going on in the industry, they know who is going to fail 

and they are going to put out some warning in that regard. 

In my career, I have never seen the regulators identify a bank 

that was a bad bank before we already knew it was a bad bank. 

They are always closing the barn door after the horse is out of the 

barn. 

And today, of course, I think that they have probably reduced the 

risk of banks failing but at the expense of economic growth. And 

banks should be taking some risks and a few banks should fail 

every once in a while. 

What we don’t want is systematized risk, forcing everybody to 

the same standards, which is what a Basel does, forcing everybody 

to take the same risks, which is what affordable housing does, is 

when you get systematic problems instead of individual failures. 

Individual failures are okay, that is what happens in business. 

It is a mass failure, and you don’t have mass failures when banks 

are properly capitalized. 

Chairman HENSARLING. Mr. Pollock, I would like to turn to you 

now in my remaining time, same theme, which system can reduce 

systemic risk more. 

We have had discussions on risk weighting, and some of our panelists believe that you need risk weighting. 

In your testimony, you say, ‘‘The deepest problem with risk 

weightings is that they are bureaucratic while risk is dynamic and 

changing. Designating an asset as low risk is likely to induce flows 

of increased credit, which end up making it high risk. What was 

once a good idea becomes a ‘crowded trade,’ and what was once a 

tail risk becomes instead a highly probable unhappy outcome.’’ 

So are you saying risk weightings can actually lead to more systemic risk? 

Mr. POLLOCK. Yes, Mr. Chairman, I am saying precisely that. 

And a good example is Greek government debt with zero risk 

weighting. This was mentioned by several members. 

I will just add that the payout of the 2012 restructuring of Greek 

debt was 25 cents on the dollar, hardly a risk-free outcome. 

Chairman HENSARLING. Thank you. My time has expired. 

The Chair now recognizes the ranking member for 5 minutes. 

Ms. WATERS. Thank you. 

Professor Levitin, in defense of Title I of the wrong CHOICE Act, 

my colleagues in the Majority claim that a simple capital level is 

easier for regulators to enforce and a better predictor of bank 

health and stability than the complex systems of accountability in 

the Dodd-Frank Act and Basel. 

They also say it is less politicized and less subject to banks gaming the system. 

However, can you discuss how the effectiveness of the capital requirements in the bill would be undercut by the provisions in the 

bill? For example, the legislation would allow banks to challenge 

regulators’ supervisory decisions, would repeal regulators’ independent funding, and would vastly increase the instances where 

private sector entities could seek judicial review of the independent 

regulatory decisions. 

19 

Wouldn’t these provisions make it difficult for regulators to get 

a clearer view of bank health and take action to remediate banks’ 

pre-failure? 

Mr. LEVITIN. They absolutely would. That is why the choice offered in Title I of the CHOICE Act is so problematic. If it was just 

a freestanding choice without the other provisions in the CHOICE 

Act, there would be, I think, a reasonable discussion to have about 

it. 

But when it is combined with all the other provisions from the 

CHOICE Act that basically render Federal regulators completely 

ineffective, it becomes very dangerous because then we are relying 

on nothing other than banks’ own representation of what their capital is to protect us from a systemic crisis. 

Ms. WATERS. So basically, have you concluded that if in fact you 

eliminate or interfere with regulators’ ability to do anything, we 

would be relying solely on capital representation? 

Mr. LEVITIN. That is basically where we end up. 

Ms. WATERS. Let me just go further. The wrong CHOICE Act offramp is currently based on bank capital on the last day of the 

quarter. How could this open up the ratio to gaming via capital relief trays? What did we witness during the crisis with instances, including Lehman Brothers’ exotic repos, in terms of how this could 

be disastrous? 

Mr. LEVITIN. The problem is the way the CHOICE Act takes its 

measurement of capital measures it is on a particular day at the 

end of the quarter. That is a system that is very easily gamable. 

Lehman Brothers showed the blueprint for it. 

Lehman Brothers had a set of transactions called repo 105, 

where basically on the last day of each quarter, Lehman Brothers 

would transfer a bunch of assets in a sale where there is an agreement that they were going to repurchase them the next day. And 

what that meant was on the measurement date, Lehman looked 

much better capitalized than it in fact was. 

So, I have no doubt that aggressive bank lawyers and accountants will be able to come up with ways to end run a measurement 

system that uses a particular calendar day rather than, say, a running average. 

Ms. WATERS. You made an interesting statement when you were 

talking about the capital market’s ability to be able to provide the 

finance that is needed at any given time. Would you repeat that? 

Mr. LEVITIN. Sure. I am by training a bankruptcy lawyer. And 

I love the bankruptcy system. I have a great opinion of the U.S. 

bankruptcy courts. I would love to see a bankruptcy system that 

could handle financial institution bankruptcies. 

But here is the problem, and this is not a political opinion, this 

is just a fact. If you want a bankruptcy to work you need to have 

financing. You need to be able to pay the bills to keep the lights 

on, to retain employees, and to be able to keep valuable assets, like 

contracts. 

The CHOICE Act requires that the bridge institution, if it wants 

to assume any of the financial contracts, the failed bank is going 

to have to provide assurances that it can actually perform those 

contracts. Therefore, it needs financing. 

20 

It is going to need massive financing. It is not going to need a 

hundred million or something, it is going to need tens or hundreds 

of billions if you had a bank like JPMorgan. 

Ms. WATERS. But how much is available at any given time? 

Mr. LEVITIN. The largest DIP loan, the largest bankruptcy financing, debtor-in-possession financing that we have ever seen 

from private capital markets was $9 billion. 

Ms. WATERS. And so explain a little bit further how $9 billion is 

not enough. 

Mr. LEVITIN. If you need, say, $50 billion, $9 billion just isn’t going to cut it. And $50 billion might be for just one firm. Suppose 

you have multiple firms that go down at the same time. There just 

isn’t the ability in private capital markets to come up with that 

amount of money overnight at a time when there is panic in the 

markets. That capacity just doesn’t exist. 

If you want to have a bankruptcy system work for financial institution resolution, it is going to have to involve some sort of government financing. 

I know that is anathema to many members, but that is just the 

plain truth. The system isn’t going to work if we rely on private 

capital markets. 

Ms. WATERS. And nothing in this wrong CHOICE Act anticipates 

that. 

Mr. LEVITIN. No, it does not. 

Ms. WATERS. Thank you, I yield back. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from New Jersey, Mr. 

Garrett, the chairman of our Capital Markets Subcommittee. 

Mr. GARRETT. I thank the chairman. And I thank the chairman 

for holding this very important hearing today. 

I have a whole bunch of questions, and I’ll start with Mr. Newell. 

A couple of weeks ago before a Senate Banking Committee, Greg 

Baer was testifying for the clearinghouses at a hearing. And in his 

written testimony, he appeared to endorse Title I of Dodd-Frank, 

and in his written testimony, he appeared to endorse Title II of 

Dodd-Frank. He went into living wills and core post-crisis reforms 

and what have you. 

In his oral testimony, Mr. Baer also appeared to endorse Title 

VIII of Dodd-Frank conceding that was even against interest, as he 

put it, given that clearinghouses were designated as a market utility. I am sure you saw his testimony. 

So just to be clear, does the Clearing House, which obviously 

through its member companies includes some of the largest commercial banks, support, in essence, Title I in Dodd-Frank and Title 

II of Dodd-Frank as was testified last 2 weeks ago by Greg Baer 

for the Clearing House? 

Mr. NEWELL. Thank you. We certainly support Title II. We think 

it is an important tool to financial stability. 

Mr. GARRETT. Right, and also Title I and VIII that he referenced. 

Mr. NEWELL. Yes, as Mr. Baer said, we certainly support the core 

capital liquidity reforms that have been enacted since the crisis. 

We continue to think that there are aspects of those rules that 

frankly provide only minimal benefits, but have high costs, and we 

think those pieces should be tailored. 

21 

Mr. GARRETT. Okay. So let me kick that over to Mr. Allison then. 

Does it surprise you that the largest banks support Dodd-Frank? 

And we heard from Mr. Purcell at the other end that maybe with 

the smaller guys not so much. 

Mr. ALLISON. I think the fact is the smaller banks are the real 

victims of Dodd-Frank. And the healthy banks are the victims of 

Dodd-Frank. 

My bank, BB&T, that went through the financial crisis without 

a single quarterly loss, has had to incur much more costs than 

unhealthy banks have because we had to change our basic business 

model which was local decision-making. We had a series of community banks. We have been hurt much more than Citigroup has. 

In addition, the large banks know they can own the system. They 

have figured it out already and they are going to control the regulatory process in a way. And they also get the biggest benefit. This 

gets pretty esoteric. 

But on capital, for most banks, having more capital is not really 

expensive because it actually brings down part of your debt cost. 

Mr. GARRETT. Right. 

Mr. ALLISON. But if you have an implicit government guarantee, 

like a Citigroup, you don’t want more capital because it doesn’t 

bring down your debt cost. 

Mr. GARRETT. Right. So the takeaway from the testimony today 

and 2 weeks ago is that big guys benefit under Dodd-Frank. The 

smaller guys—Mr. Purcell is nodding his head right now—are the 

ones who are paying the price. 

Let me just say with you, Mr. Allison. We saw a thing behind 

you, you can’t see the screen, earlier, a quote from Governor 

Tarullo from the Federal Reserve. He says a leveraged ratio was 

the only requirement that was put in place that banks would be 

incentivized to move forward towards much riskier assets because 

their capital requirements wouldn’t change. 

You have seen Governor Tarullo make those comments. But the 

problem with Governor Tarullo’s comments is that is not the history of the Fed and Basel being able to get that right. 

Governor Tarullo over there at the Fed, look, they were wrong 

when it came to subprime mortgages, saying that they were less 

risky. They were wrong and he was wrong when talking about 

Greek debt being less risky than some corporate bonds. And they 

were wrong and Basel was wrong, too, with regard to things like 

green bonds issued by the World Bank, that they should be receiving preferable treatment because they are moving towards some 

sort of social goal. 

So doesn’t Tarullo totally, absolutely, 100 percent miss the point? 

If he is worried about banks being incentivized to move riskier assets, should he recognize that they already were encouraged to do 

under Basel and through the prudential regulators? Isn’t that true? 

Mr. ALLISON. Absolutely. In fact, one reason BB&T didn’t get in 

trouble is, we didn’t manage by Basel. We actually managed by the 

leveraged ratio. We did Basel because we had to. The banks that 

got in trouble were managing by Basel. 

Mr. GARRETT. And if we moved away from that system where 

some of the folks like Basel and the elites at the Fed who got it 

wrong repeatedly, should we move to a system where the markets 

22 

make that assessment? And when I say the markets, I am actually 

saying the people, because the markets are basically made up of 

the people. Wouldn’t the people do a lot better than some opaque 

system overseas or opaque system here in the United States? 

Mr. ALLISON. Absolutely. Also, you have to assume that bankers 

aren’t totally stupid. And if banks were allowed to fail, which I 

would vote for let banks fail, then the smart banks would survive, 

so banks care about liquidity. It is just because they have a leveraged ratio isn’t the only thing we were going to focus on. We didn’t 

manage against regulatory standards, we managed for our own 

safety and soundness. We weren’t fools. 

Mr. GARRETT. Yes. And I see I have 2 seconds left. I will yield 

those back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from New York, Ms. 

Velazquez. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Professor Levitin, you stated in your written testimony that the 

CHOICE Act will only help mega banks, not community banks. 

Can you elaborate? 

Mr. LEVITIN. Not that it will only help mega banks, it will help 

both, but it is going to help mega banks more than it will help community banks. 

The CHOICE Act lets everyone, mega banks and community 

banks, opt out of Basel III. But the CHOICE Act also allows mega 

banks to opt out of Dodd-Frank’s heightened prudential standards 

and out of certain other longstanding provisions, such as the Riegle-Neal deposit concentration cap that limits bank size to 10 percent of deposits in the United States. 

So what that means is if you are a mega bank you are getting 

a better deal under the CHOICE Act. You are getting more for 

making the election under the CHOICE Act. 

And it is pretty astounding to me that one of the benefits you get 

is that you can grow to more than 10 percent of deposits in the 

United States. That is just exacerbating the too-big-to-fail problem. 

Ms. VELAZQUEZ. Are there better ways to help community banks? 

Mr. LEVITIN. Absolutely. A simple way, not necessarily the way 

I think is optimal, but a very simple way would be just to limit the 

election in Title I of the CHOICE Act to community banks, to 

banks with less than $10 billion of consolidated assets. That would 

be a very simple fix. 

Ms. VELAZQUEZ. Thank you. 

And Professor, the Financial CHOICE Act repeals the Volcker 

Rule, Dodd-Frank’s ban on speculative trading in certain investments in hedge funds and private equity funds by banking entities 

with access to the Federal safety net. Doesn’t this repeal expose 

taxpayers to losses associated with banks’ proprietary trading 

which amplifies the costs associated with the 2008 crisis? 

Mr. LEVITIN. It absolutely does. And this is really a mega bank 

problem. It is not a problem with credit unions or community 

banks, this is a mega bank problem. And the CHOICE Act repeals 

the Volcker Rule for all banks irrespective of what their capitalization is. So that is a real concern. 

23 

Ms. VELAZQUEZ. Okay. And in 5 short years, the CFPB has al- ready been extremely successful, returning $11.4 billion to over 25 

million consumers. Unfortunately, however, the Financial CHOICE 

Act guts the CFPB by turning it into a commission, eliminating its 

independent funding and forcing the bureau to conduct onerous 

cost/benefit analysis. 

How will the changes made by the Financial CHOICE Act make 

it easier for special interests to challenge its rules and how will the 

CFPB work across a number of key areas? 

Mr. LEVITIN. So the Financial CHOICE Act makes it a lot easier 

for businesses to bring litigation challenges against CFPB rules. 

And it is kind of ironic that it does that because the CHOICE Act 

also slams the door shut to the courts for consumers by taking 

away the CFPB’s power to restrict binding mandatory arbitration. 

So here is how the CHOICE Act would facilitate litigation by 

businesses. It would overturn longstanding Supreme Court precedent about judicial deference to agency decisions, known as the 

Chevron doctrine. That is a bedrock of administrative law that 

would be repealed by the CHOICE Act. 

That would mean that basically there would be a totally fresh judicial review by non-expert judges of technical expert decision-makings. It would also require agencies, like the CFPB, to go through 

cost/benefit analysis on pretty much everything. 

And that is ironic because you think whether we should use cost/ 

benefit analysis should itself be subjected to cost/benefit analysis. 

Cost/benefit analysis is not always actually an effective thing. And 

pretty much the academic consensus on this is for financial regulation cost/benefit analysis is not very appropriate because it is hard 

to figure in things like systemic risk. 

Minuscule chance that we have an absolute meltdown in the 

economy is just a hard thing to figure into an equation in any kind 

of scientific way. But having the cost/benefit analysis requirement 

opens the door for yet another thing that can be challenged by financial institutions that don’t like a regulation. 

Ms. VELAZQUEZ. Thank you. 

Mr. Chairman, I yield back. 

Chairman HENSARLING. The gentlelady yields back. 

The Chair now recognizes the gentleman from Texas, Mr. Neugebauer, chairman of our Financial Institutions Subcommittee. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Mr. Allison, you mentioned that in your former employment at 

BB&T, you really had to change the whole business model after 

Dodd-Frank. So now that you have the CHOICE Act you have to 

sit down and analyze, would we continue to do business under 

Dodd-Frank or do we take our choice and do the CHOICE Act? 

Can you kind of walk us briefly through what that process would 

look like? 

Mr. ALLISON. I think at BB&T it would be a no-brainer because 

the regulatory cost has been horrendous. It has far exceeded our 

cost of taxes. It has radically reduced the company’s financial performance. We went 20 years with record financial performance 

every year and Dodd-Frank has hurt healthy institutions. 

The fundamental difference is we used to have community banks 

that we allowed to make local decisions. And one reason we didn’t 

24 

get in trouble is, we weren’t all making the same mistake, whereas 

large companies, really large companies, BB&T is large, it was a 

very decentralized company, now we have to make central decisions because the regulators wanted to control us. Right? You can’t 

control local decision-making, even though it produces a better outcome. 

If I were still CEO, we had a leveraged ratio over 10 percent at 

one time, we actually brought it down because the big banks were 

bringing theirs down under Basel and they were going to buy us 

unless we brought our ratio down. 

So I would do the 10 percent, and I would go back to community 

banking. It would improve our profitability. 

And most importantly, bankers are human beings. We want our 

communities to do well. I enjoyed helping businesses get started, 

and we just can’t do that anymore. 

Mr. NEUGEBAUER. Doesn’t it allow you to adapt the bank to your 

customers rather than adapt your financial institution to the government? 

Mr. ALLISON. Exactly. Right now we are totally being driven by 

what makes regulators happy instead of what makes customers 

successful. 

Mr. NEUGEBAUER. Mr. Purcell, you mentioned something that 

you and I have had a lot of conversation about, and that is the concern we have about the diminishing number of community banks 

particularly in Texas. And while that might not be an issue in 

some of the communities that ‘‘over-banked’’ in the 19th Congressional District, in many cases now in some of our smaller communities, they have one bank or one credit union and some have none. 

Do you look at the CHOICE Act as possibly a way to reverse that 

trend a little bit? 

Mr. PURCELL. We would hope that it would be the beginning of 

the conversation to reverse the trend. 

We can agree that things are not real good in the financial industry at this time. And we can look at the numbers and let it frame 

the story. And when you lose 24 percent of your independent banks 

and your small-community banks that some no longer have a bank 

in that community so the community will dry up, it has an astounding effect. 

I don’t know if it is part of the Basel start that, if we changed 

the rule for everybody to drive in the United States on the lefthand side like England does, we would have chaos for a good while. 

And that is kind of what we did when we adopted the Basel Act 

in that we had a European system that addressed financial systems that weren’t anything like ours. 

Part of the strength of America and what is the envy of the 

world in the financial world is that we have community banks that 

are dealing with people. We don’t have to have startup new funds 

like maybe in Central America for small businesses. We have the 

infrastructure in place at this time. 

But if we don’t look at the numbers and work together, when is 

it enough? Is it after we have lost 50 percent of the family banks? 

It is pretty tough. 

Mr. NEUGEBAUER. If you could start to reverse that trend of the 

money that you have spent, and you have shared some numbers 

25 

with me of what it has cost you to ramp up, to be in compliance 

with some of the new things that have come out, how does it— 

Mr. PURCELL. We have it on our balance sheet that last year we spent about $300,000 in compliance and we made about a millionand-a-half. 

Mr. NEUGEBAUER. Yes. And so what would putting 300,000 more 

dollars back in your community do for the community in Big 

Spring? 

Mr. PURCELL. We have talked about the Consumer Financial 

Protection Bureau is to protect the consumer and I am for that. We 

have to go to school with those or our kids go to school with the 

kids of the community, we coach baseball, we do all that. But how 

is it taking care of our customer? And that is who is paying the 

price, when before we did a balloon mortgage based on the amount 

that they were paying in rent or how much they could afford and 

that makes it unsound? 

How is it that you treat a family who has been doing business 

with your bank for four generations and the matriarch comes in 

and says if I don’t send someone in there you better watch him because they will take advantage of you? When you have customers 

who can mark an ‘‘X’’ because they can’t sign their name and you 

are hurt by the CFPB in the name of helping consumers, but you 

can’t deal with the consumer? 

You start looking at a check box and every peg has to have a 

square hole for a square peg. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Scott. 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

This is, in my opinion, a very dangerous bill and it could very 

well place our economy in a very dangerous situation. 

And of course, I say that with all due respect to my distinguished 

chairman who is a friend; we have worked together on many 

things. 

But let me tell you the two most dangerous parts of this bill, to 

me. The first one is in Title I and this overzealous effort to get out 

from under the regulatory regime of the Federal Reserve and to 

use just this arbitrary, out-of-the-sky 10 percent to apply in the 

place of a very good regime that we worked out. As the chairman 

knows, we both were here together working on Dodd-Frank and 

both Republicans and Democrats realized we had to do something. 

And so we came up with this plan to be able to perform with certain types of capital requirements that the Fed would place there 

and the ability to come back and do annual stress tests, to take a 

peek-a-boo every now and then to see and make sure things were 

going right. 

Now, why did we do that? The reason we did that was because 

Lehman Brothers was gaming the system in a manner and in a 

way that they very well will do again under the chairman’s bill. 

Danger number one. 

Danger number two, to remove the Volcker Rule? I don’t know 

that people understand what the Volcker Rule is. But the Volcker 

Rule prohibits banks from using their customers’ deposits. Everybody sitting here has a bank account. We go and we make our deVerDate Nov 24 2008 20:16 Mar 05, 2018 Jkt 025875 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\25875.TXT TERI
26 

posits. You mean to tell me we want to give away for the banks 

to be able to take our deposits and make risky bets on those? No. 

That is a dangerous situation, so dangerous that if you recall 

such a situation happened with the London Whale. Remember 

that? They went in, they used. 

And so this bill comes about in a way and in a manner, and I 

am sure he has good intentions, but on those two counts alone, to 

remove Volcker and to get the Federal Reserve and give an offramp 

to get out beyond rules and regulations that have worked very well 

and have produced a very stabilizing situation. 

So with all due respect, I think it is a dangerous bill and also 

a dangerous area. 

Now, Mr. Levitin, let me ask you, where am I going right here, 

where am I going wrong? What is your take on this? And where 

did the 10 percent come from? And wouldn’t you think it would put 

us in a terrible situation if we go back to letting banks use their 

depositors’ money, their customers’ to make risky bets? 

Mr. LEVITIN. I think your analysis is spot on. I want to be really 

clear, the Volcker Rule does not prohibit banks from using deposits 

to make loans. 

Mr. SCOTT. Federally insured. 

Mr. LEVITIN. Right. They are allowed to make loans, but they are 

not allowed to go and speculate on stocks for their own account 

using customers’ money. 

So it is a limitation on some of the riskier investment activities 

of banks. 

Regarding the 10 percent, with all due respect to Alex here, the 

10 percent figure has absolutely no basis. If you look at the Republican memorandum on the CHOICE Act, there is only one citation, 

it is to a speech by Andrew Haldane, who is the chief economist 

at the Bank of England. 

Mr. Haldane, however, does not endorse 10 percent. That number is derived from a reading of a graph of his, which is not a statistically significant graph, for figuring out whether 10 percent is 

the right number. And Mr. Haldane actually says you need capital 

and a whole bunch of other things, such as better regulatory tools. 

So it is hardly an endorsement of 10 percent. 

Now, Mr. Pollock in his written testimony and in an op-ed, I 

think it was in American Banker, cites a number of studies that 

have a range of percentages. And one of those he cites is by Professor Charles Calomiris for 10 percent. The thing is that is not 

what Professor Calomiris actually wrote. 

Professor Calomiris used 10 percent as an illustration of how 

CoCo bonds work. He was not endorsing 10 percent as being the 

right number. So there is no one out there who has actually said 

10 percent is the right number. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Luetkemeyer, chairman of our Housing and Insurance Subcommittee. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Mr. Nussle, you haven’t had anybody ask you a question yet, so 

I am going to try and start with you right quick here. 

27 

How many credit unions went under in 2008 as a result of the 

crisis? 

Mr. NUSSLE. Year by year, the way I would put it is about 1,900 

since the crisis in that— 

Mr. LUETKEMEYER. Okay, that is a consolidation, though, right? 

Mr. NUSSLE. Correct, that is everything. 

Mr. LUETKEMEYER. Okay. My question would be— 

Mr. NUSSLE. Oh, during the actual— 

Mr. LUETKEMEYER. Yes, how many went under as a result of 

being undercapitalized? 

Mr. NUSSLE. I’m sorry. At that time, it was, I think, about 167 

if I remember correctly. 

Mr. LUETKEMEYER. Okay. All right, very good. So you believe 

that the 10 percent—you made a good point a while ago with regards to the 10 percent number in that 4,000, roughly two-thirds 

of your members already are at 10 percent. 

And of that hundred-and-some, how many of them were capitalized at 10 percent or more, do you know off-hand? 

Mr. NUSSLE. No, I don’t know right off-hand. 

Mr. LUETKEMEYER. Okay. That would be a great number to get 

back to us with. I would sure appreciate if you would because it 

would certainly give us some ammunition to refute Professor 

Levitin. 

Mr. NUSSLE. Sure, I would be happy to. 

Mr. LUETKEMEYER. My good friend sitting next to me, Mr. 

Schweikert, has all kinds of data which will shoot down Mr. 

Levitin’s comment here in a minute, but I will let Mr. Schweikert 

be able to load his gun on that. 

A quick question for Mr. Purcell and Mr. Pollock and Mr. 

Allison’s standpoint that we continue to be concerned about 10 percent being a magic number that suddenly banks don’t have to be 

regulated anymore, suddenly they are going to be the Wild, Wild 

West, they will be able to do anything they want to do. 

There are still going to be a lot of regulations on the banks, are 

there not? The regulators, they are going to come in, there are still 

a lot of things that they can come in and examine and put pressure 

on banks to do. 

Mr. Pollock, do you want to give me a quick answer? 

Mr. POLLOCK. That is absolutely right, Congressman. 

Mr. LUETKEMEYER. Mr. Purcell? 

Mr. PURCELL. That is correct. They will still be there. 

Mr. LUETKEMEYER. Mr. Allison? 

Mr. ALLISON. That is correct, and markets regulate, too. 

Mr. LUETKEMEYER. Absolutely. 

Mr. ALLISON. Markets discipline everything else in the economy 

and we don’t have massive wipeouts in the other segments of the 

economy. The one segment of the economy that had big problems 

is the one that is the most regulated. Surprised? 

Mr. LUETKEMEYER. And one of the arguments, I think, for doing 

this is that—and we were considering this, I am one of the subcommittee Chairs and so we were working very closely with the 

chairman on the bill, is that looking at it and saying, well, it is not 

necessarily for every bank. The big banks may not want to do this, 

but they are only capitalized at 6 percent. And Mr. Newell has alVerDate Nov 24 2008 20:16 Mar 05, 2018 Jkt 025875 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\25875.TXT TERI
28 

ready made the comment that it is going to be very difficult for 

them to get there. 

Our hope was that this will be for the community banks, which 

Professor Levitin said that for anybody under 10, that would be a 

great idea. 

So if we can give them the relief that they need, and let me just 

give you a reason why I think this is very important. 

In my State of Missouri at the end of 2015, 26 of 44 banks under the size of $50 million, now, that is the little, bitty guys, but they 

take care of a community, $50 million bank, 26 of the 44 lost 

money last year. So that tells me we have 26 banks that are in a 

bubble. They are getting ready to either get closed or they are 

going to get merged. Now, that is communities that are going to 

be hurt by having that happen. 

And why? It is because of compliance costs. And this bill tries to 

take care of helping the smaller community banks reduce some of 

their compliance costs. 

And again, it is not for everybody. It is an individual decision 

that they make. I can see where if a bank wants to go out and purchase another bank, wants to merge, they may drop underneath 

the 10 percent for a while until until they can get their capital 

back up or have an influx of capital to make it happen, you want 

to grow your bank, and if you want to get down to 10 percent and 

you are at 91⁄2 right now, maybe you will contract your bank to get 

down there to get underneath some of this. 

It is an incentive to manage your bank in a different way. It is 

not an incentive to get away with something wrong. Examiners are 

still going to come in and look at you, right? They are still going 

to manage what you try and do. 

It is interesting to see the perspective sometimes of some of the 

decisions here, but it is not a get-out-of-jail-free card. It is another 

management tool for banks and credit unions to be able to better 

manage themselves in their communities and with their asset liability makeup. 

Mr. Allison, you also made a comment with regards to regulation 

causes less competition. Would you like to elaborate on that a little 

bit? Because I think that is important from the standpoint of the 

regulations which most of the community banks are going through 

right now. 

Mr. ALLISON. In the banking industry obviously it causes less 

competition by driving community banks out of business. But in 

the economy, banks generate a lot of competition. 

We are venture capital lenders. We start a lot of small businesses and we particularly help a lot of small businesses change 

their business model and grow. And I personally did that a lot. 

Those loans don’t necessarily fit the regulatory model even 

though the history of their losses is very low. A properly financed 

institution, capitalized institution can afford to do that. We did 

that at BB&T and had no trouble during the financial crisis. 

Today, we are a strong bank, we can’t do that anymore. 

Mr. LUETKEMEYER. The thing about the capital that we need to 

remember, it is just like if you make a loan to an individual, they 

have to have equity in their business or in their home, that is what 

this capital is to a bank. It is the equity in there that gives you 

29 

the cushion to be able to withstand whatever crisis, whatever problems, just like a homeowner or just like a business would have to 

overcome. 

With that, I yield back to the chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes another gentleman from Missouri, Mr. 

Cleaver, ranking member of our Housing and Insurance Subcommittee. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

And I thank you and the ranking member for the hearing. 

We have six witnesses. I want to ask each of you a yes-or-no 

question. 

And I will start with you, Mr. Allison. 

Did you have any idea that prior to the passage of Dodd-Frank, 

this committee held 41 hearings related to financial reform? 

Mr. ALLISON. I knew you had some hearings; I didn’t know exactly what the hearings were. 

Mr. CLEAVER. Mr. Nussle, did you have any idea that the committee held five markups on provisions included in Dodd-Frank? 

Mr. NUSSLE. I recollect that ballpark figure, yes. 

Mr. CLEAVER. Mr. Levitin, did you have any idea that over 55 

hours of markup debate was held? 

Mr. LEVITIN. I did not know the specific number of hours. 

Mr. CLEAVER. Mr. Pollock, did you know that there were 120 Republican amendments considered in Dodd-Frank? 

Mr. POLLOCK. I know that the Dodd-Frank discussions were extensive and lengthy and very partisan, as was the final vote. 

Mr. CLEAVER. Mr. Newell, there were 134 Democratic amendments. Were you aware of that? 

Mr. NEWELL. I am not sure I was aware of the exact number, but 

that is certainly consistent with my memory. 

Mr. CLEAVER. Mr. Purcell, do you have any idea of how many 

hours this committee spent in debate on Dodd-Frank? 

Mr. PURCELL. I am not sure of the exact hours, I know there was 

quite a bit. But now that we have a history of what has been accomplished, maybe we need to spend some more time on it. 

[laughter] 

Mr. CLEAVER. We are today—48 hours. 

Now, spending a lot of time and doing all these things I have 

asked you about doesn’t necessarily mean the bill is perfect and the 

fact that we are imperfect humans means that rarely are we going 

to have perfect legislation. 

I also believe we need to do something about the community 

banks. But I don’t want anybody to get the impression that this 

was just thrown together and there was not a lot of thought into 

it. And in spite of thought, we can still make mistakes. 

But sometimes when we get into these hearings, the impression 

is sent out that it was just kind of run in and do something quickly. 

And I have one question for Mr. Nussle, because this is the part 

of my colleagues’ legislation that I am confused about. 

There is concern, and I heard it all along as well as from a friend 

and homeboy from Missouri, Mr. Luetkemeyer, that Dodd-Frank is 

30 

putting small banks out of business and so we need to pass this 

bill to stop that. Is that pretty much what you think? 

Mr. NUSSLE. No, I wouldn’t say it is the only, there are lots of 

factors that go into reasons why, and I can only speak for credit 

unions, of why there has been consolidation, why there has been 

challenges. 

But there is no question that regulatory burden has added to a 

lot of the consolidation speed, the quantity of regulations that all 

credit unions, all small institutions have to be mindful of. 

There are 222 rules that have passed from 15 different agencies 

representing over 6,000 pages in the Federal Register. And I don’t 

care what size institution you are, you have to know all of that. 

And that adds to the consolidation and the challenges that I think 

are out there. 

So I wouldn’t say it is the only thing, Congressman, but it certainly is a huge part of it. 

Mr. CLEAVER. Yes, because if that is a consideration at all in the 

legislation, if we need to curb concentration in the banking industry, this legislation actually repeals the limits on mergers, including the one that no bank can hold more than 10 percent of the insured deposits in the country. 

So if this bill is passed and we are removing these limits, doesn’t 

that encourage consolidation? 

Anybody? 

Mr. LEVITIN. I think it gives a green light to consolidation and 

for the largest banks to become even larger. It is pretty surprising 

to me to see that the 10 percent cap would be removed in the bill 

because that is something that benefits only, by definition, the very 

largest banks in the United States. 

Mr. CLEAVER. Do the rest of you agree? 

Mr. POLLOCK. I don’t agree. I think the most important point of 

the bill is to make the smaller banks and all banks more competitive, freer, and well-capitalized to take away using the taxpayers’ 

capital. When those banks are freer and more energetic, they obviously have a more successful future. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Michigan, Mr. 

Huizenga, chairman of our Monetary Policy and Trade Subcommittee. 

Mr. HUIZENGA. Thank you, Mr. Chairman. 

I am going to move quickly and I will resist the temptation of 

asking you each a yes-or-no question about whether you knew of 

that pay ratio, Volcker Rule, conflict minerals, most of Title IX, 

SEC reserve funds and the Durbin amendment were all airdropped 

in without a single hearing or discussion here publicly. But we can 

leave that for another time. 

I do, Mr. Allison, want to talk a little bit about this 10 percent 

leveraged ratio being plucked out of thin air, I believe as was put 

forward. 

I, too, was a part of the discussion as to what that leveraged 

ratio should be. And I am curious, would it surprise you to learn 

that according to the FDIC data that 98 percent of the insured depositories that entered the crisis with a leveraged ratio of 10 percent or better weathered the storm and of those that did fail none 

31 

of it was of sufficient size or scale to present any kind of systemic 

risk? Would that surprise you at all? 

Mr. ALLISON. No, it doesn’t. Being in the industry, the single factor, and there are other factors that you can look at, is strong capitalized banks very seldom fail, and a leveraged ratio of 10 percent 

is kind of a rule of thumb. I think there is some science behind it. 

But it is one that has had very good success with the industry 

over a long period of time. 

Mr. HUIZENGA. And you can feel free to answer this. I am curious, Mr. Pollock, as well. I was stunned by this notion of it doesn’t 

really matter what the effects of regulations, the cost/benefit analysis shouldn’t be done. Do you care to address that at all? 

Mr. POLLOCK. Thanks, Congressman. I think cost/benefit analysis is essential to any regulatory regime, as is appropriate governance of regulatory bodies and their control by the elected representatives of the people. 

If I could, Congressman, could I just point out on this question 

of 10 percent, that the International Monetary Fund recently conducted a large study in which they conclude that 15 to 23 percent 

risk-based capital would have avoided creditor losses. That doesn’t 

mean bank failures, that means no losses to creditors. In the vast 

majority of banking crises, they continue, this range is consistent 

with a 9.5 percent total leverage exposure. That is to say— 

Mr. HUIZENGA. I’m sorry, could you repeat that? It almost sounds 

like the IMF agrees with this committee that— 

Mr. POLLOCK. It does. 

Mr. HUIZENGA. —10 percent would be sufficient. 

Mr. POLLOCK. Their number is 9.5 percent, which I think it 

would be fair to say is pretty close to 10. 

Mr. HUIZENGA. Interesting, okay. Well, I think it’s fair enough to 

say that this wasn’t plucked out of thin air. It clearly was debated, 

and has been debated by academics for a long time as well. 

I do want to also hit on another issue here in my remaining 2 

minutes here. I Chair the Monetary Policy and Trade Oversight 

which has oversight of the Fed. 

The Federal Reserve, in my opinion—I wasn’t here for the creation of it; I am just trying to clean up the mess of Dodd-Frank— 

really has become a super regulator under Dodd-Frank. And I 

think it is blurred, unfortunately, that line between regulator and 

monetary policy. 

And either Mr. Allison or Mr. Pollock, one, how does the Fed basically virtually control every major corner of the financial services 

space right now? 

Mr. ALLISON. They definitely control it and it’s definitely dangerous. You definitely should separate monetary policy from regulatory policy. 

Clearly during the financial crisis, they made many decisions 

that weren’t related to monetary policy, but individual Federal Reserve Governors who were involved in the process didn’t want their 

bank to get in trouble and so they made decisions to protect that 

bank maybe at the expense of monetary policy and maybe at the 

expense of the economy. 

32 

Remember, these are human beings who who don’t want to look 

bad. And I think mixing regulation and monetary policy is a really 

bad format. 

Mr. HUIZENGA. Should they be able to shield those regulatory activities from the American people and frankly congressional oversight by sort of hiding behind this cloak of independence? 

Again, just so I am clear with my friends on the other side, we 

are not talking about monetary policy independence; we are talking 

about regulatory independence that they somehow have magically 

no oversight. 

Mr. ALLISON. I can’t see any reason why you would want the Fed 

not to be responsible to Congress in the same way that any other 

agency is. And regulation is regulation. It is just like any other 

agency. 

Mr. HUIZENGA. I am going to ask Mr. Pollock here for the last 

15 seconds. 

Mr. POLLOCK. I just want to agree with my colleague and you, 

Congressman, that the Federal Reserve, like every public servant, 

needs to be accountable in its actions and, in my judgment, in all 

of its actions. 

Mr. HUIZENGA. With that, I will do the equivalent of a mic drop 

and yield back. 

[laughter] 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Sherman. 

Mr. SHERMAN. Mr. Chairman, we worked together to try to stop 

the TARP bailout, but Congress passed the law. 

In 2007, we had a loose regulatory system that provided enormous capital to the subprime mortgage market. The only way to 

prevent the next bailout is to make sure that too-big-to-fail is toobig-to-exist. 

I agree with you that just a host of regulations of the giant financial institutions won’t by themselves work and is a departure from 

free market capitalism. Free market capitalism is there is never an 

institution that can call this government and tell us we have to bail 

them out, otherwise they are going to take the country down with 

them. And free market capitalism does recognize that at times a 

bank will fail. But it needs to fail as an independent entity, not 

drag our entire economy with them. 

Mr. Chairman, I note with regret that your bill removes rather 

than strengthens the Frank and Sherman provisions on credit rating agencies. These are the agencies that destroyed our economy. 

They gave AAA to Alt-A and the reason they did it is because they 

are selected and paid by the issuer. 

This makes as much sense as a baseball league where the umpire is selected and paid by one of the teams. 

Mr. Levitin, I am trying to understand how the chairman’s proposal would work. Imagine two well-run banks, one continues to be 

well-run and somehow meets the 10 percent capital, and the other 

one decides on a high-risk, high-bonus strategy. They double what 

they pay on deposits, so they attract an awful lot of FDIC-insured 

deposits and they invest in junk bonds, Willard, the guy in my disVerDate Nov 24 2008 20:16 Mar 05, 2018 Jkt 025875 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\25875.TXT TERI
33 

trict who makes really bad pizza, but he is willing to pay 20 percent for an expansion loan, and Zimbabwe bonds. 

As you understand this statute, that bank, as long as it had been 

well-run in the past, the bank could have 10 percent capital and 

devote all of its lending to those categories of high-risk instruments? 

Mr. LEVITIN. That is correct. So the CHOICE Act requires that 

at the time that a bank makes it selection to go to the 10 percent 

capital that it have a CAMELS rating, that is a basically bank 

safety and soundness rating of one of the highest two levels. 

Mr. SHERMAN. Right. 

Mr. LEVITIN. But thereafter, there is no requirement that it 

maintain that CAMELS rating. Its CAMELS rating could go down 

to the bottom. 

Mr. SHERMAN. So at least for a few years, my Zimbabwe bonds 

could be doing very well and I could be getting enormous, enormous bonuses as an executive of this bank. I could be taking in deposits, there would be a line of people to give me FDIC-insured deposits at double the prevailing rate. And if the Zimbabwe bonds go 

down, I retire to Aruba and the FDIC takes over. 

If only I had a plan as to how to execute this, I might cosponsor 

the bill. 

But I want to move on, and I think this just illustrates that no 

exact amount of capital is enough if you allow the bank, having 

passed one test, to then have its executives go into a high-risk direction. If you are going to go in a high-risk direction you need 

more than 10 percent capital. 

But Mr. Nussle, the purpose of this hearing is to focus on more 

capital, more capital for financial institutions and more capital, 

and that allows you to be able to lend capital to businesses in our 

districts. 

If a credit union thought, hey, we would like to expand, we would 

like more capital, we would like to issue subordinated debt, in 

order to do that, would the Federal Government interfere with 

those efforts to get more capital? 

Mr. LEVITIN. Yes. 

Mr. SHERMAN. Would they prohibit those efforts to get more capital? 

Mr. NUSSLE. As you know, yes, they would. 

Mr. SHERMAN. So instead of the Federal Government—so with 

other parts of the financial institutions area, we in 2008 gave them 

capital. With regard to credit unions, we prohibit you from raising 

capital in the private sector. 

Mr. NUSSLE. Yes, our capital is from our own retained earnings. 

Mr. SHERMAN. And that is the only place and you are not allowed 

to go to— 

Mr. NUSSLE. Zimbabwe. 

Mr. SHERMAN. —to those who would invest in— 

Mr. NUSSLE. We don’t go to Zimbabwe, Congressman. 

Mr. SHERMAN. Okay. So Zimbabwe bonds yes, subordinated debt 

for credit unions no. Okay, thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Wisconsin, Mr. 

Duffy, chairman of our Oversight and Investigations Subcommittee. 

34 

Mr. DUFFY. Thank you, Mr. Chairman. 

And welcome, panel. 

I missed some of the first part of your testimony. I was at a 

Transatlantic Group meeting with some of the elected officials from 

the European Union, which makes me think that our U.S. regulatory system is becoming more like the European regulatory system where we have a one-size-fits-all paradigm which I don’t think 

actually works very well. 

So just quickly, 22,000 pages of new regulation in Dodd-Frank. 

Does anyone on the panel think that this is going to stop too-bigto-fail, Dodd-Frank? 

Mr. Newell, you do? 

Mr. NEWELL. Yes, I do. I would point to two things. First, more 

generally and it is often overlooked, the substantial increase both 

in the capital liquidity position of the largest banks at first made 

it much less likely that they would fail. And second, we now have 

today both the legal and operational framework that will assure 

that even the largest bank can be resolved in an orderly fashion 

without posing risks to the taxpayer or to the financial system 

more broadly. 

Mr. DUFFY. Okay. And I would just note that I think your position is even disagreed with by my friends across the aisle, Democrats. It has been a bipartisan issue that too-big-to-fail hasn’t 

ended. This is not just a Republican issue. Even Democrats admit 

that their bill hasn’t ended too-big-to-fail. It has become a common 

talking point from the left. 

Elizabeth Warren still talks about too-big-to-fail. And so if DoddFrank was the end of it, you are even in disagreement with some 

of the Democrats who agree that they haven’t accomplished that 

goal, which was the auspices for this massive new regulation. 

We had bank failures, taxpayers bailed them out, Americans 

were angry, and so Democrats said let us end too-big-to-fail and 

this is the bill that is going to do it. A massive new regulation that 

actually doesn’t resolve the problem that they set out allegedly to 

fix. 

So I think it is pretty unique. Mr. Hensarling’s bill here has a 

little bit different approach, giving banks the choice to hold more 

capital in exchange for less regulation. 

And the debate today is, as you are seeing it break down, is between regulators and capital. Can regulators stop the next crisis or 

can capital stop the next crisis? 

Did regulators fail in the last economic crisis of 2008, Mr. Pollock? 

Mr. POLLOCK. Yes, without a doubt, and not only in this country. 

Mr. DUFFY. But around the world. Mr. Allison? 

Mr. ALLISON. Absolutely they failed. And I do not believe we 

have solved the too-big-to-fail problem. Under the exact same circumstances, the regulators today would act to save the biggest. 

They shouldn’t, but they would. 

Mr. DUFFY. Mr. Nussle? 

Mr. NUSSLE. Yes, our model, because it is locally controlled and 

members manage it, it is inherently more conservative. And so I 

think it is not only a failure generically of regulators and I suppose 

policymakers, having been one of them myself, but it is also, I 

35 

think, a failure of the way we do business if in fact the chairman’s 

right that we are trying to balance the need for growth with inherent risk. 

Assuming that one entity in Washington can manage all of that 

without the involvement of consumers, without the involvement of 

real people and the market making that decision, I think that is 

inherently problematic. 

So I think it is more than just a failure of the regulators in that 

instance. 

Mr. DUFFY. But regulators are human, right? 

Mr. NUSSLE. Correct. 

Mr. DUFFY. Humans make errors. And whether you are a regulator or a banker, you will make mistakes. And the way you blunt 

those mistakes is holding more capital. 

Is that a fair assessment, Mr. Pollock? 

Mr. POLLOCK. Yes, it is. It is so fair that I say it in my written 

testimony. 

[laughter] 

Mr. DUFFY. That is very well said. 

I only have a minute left. So quickly, Mr. Allison, would you 

agree that banking regulations increased from 1997 to 2008? 

Mr. ALLISON. Oh, yes. Banking regulation increased exponentially. It was things like the Patriot Act and the Privacy Act and 

Sarbanes-Oxley. You can count the pages, it was a massive increase in regulation. There was no deregulation of the banking industry. That is an absolute myth. 

Mr. DUFFY. So even with more regulation, we still had the failure. And I think that point needs to be made. 

One of my concerns is risk weighting. Is it fair to say with risk 

weighting that through regulation we will consolidate risk not just 

in one bank, but across the banking sector? So mortgage-backed securities, we say they are safe or today we will say that government 

debt is safe, causes systemic potential risk throughout the whole 

banking system. 

Mr. Pollock? 

Mr. POLLOCK. I think that is true. I think a wonderful example, 

which we haven’t mentioned today, is the risk weighting applied to 

Fannie Mae and Freddie Mac under the U.S. capital standards, in 

which their debt and even their preferred stock were given extremely low capital risk weightings and induced an excess flow of 

credit with disastrous results. 

Mr. DUFFY. Well said, and I think diversification across the industry, which is outside then risk weighting, would make a lot of 

sense to make sure we don’t have systemic failures in the future. 

My time is up, I yield back, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from New Mexico, Mr. 

Pearce, for 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. I appreciate the opportunity to ask questions. 

So Mr. Purcell, if you did not have one regulation coming from 

the Federal Government, would you choose to make discriminatory 

loans? 

36 

Mr. PURCELL. No. The success of our community and the success 

of our business means that we have to serve everyone. If our community doesn’t do well, we do not do well. 

Mr. PEARCE. What is the demographic in Big Spring? By the 

way, I live in Hobbs, so Big Spring was always a vacation destination for us. We read the billboard and thought that it was actually 

a big spring. It is just a big spring for our area. 

Mr. PURCELL. It is kind of like banking. It used to have a big 

spring. 

Mr. PEARCE. Yes. So what is the demographic in Big Spring? 

Mr. PURCELL. It is probably 50/50. 

Mr. PEARCE. Actually, I just looked it up on the internet. It is 

53 percent minority and 44.7 Anglo. So I don’t think you could even 

stay in business. 

I know that I am not in the retail banking business, but I am 

in a retail business. I have to sell myself. My district is 60 percent 

minority. So this idea, among many outlandish comments, comes 

from Mr. Levitin saying financial liberty also apparently includes 

the right to engage in discriminatory lending. 

And I just find that absolutely incredible that it would be in 

print, because I look at New Mexico and a businessman could not 

stay in New Mexico, and I suspect in west Texas, if they discriminated because that is at least half and maybe more of the market 

and every one of the single towns. 

On page five, you suggest that you all have gotten out of the 

mortgage lending. So since you, who used to provide loans, mortgage loans, to the full spectrum of your community are not in the 

business, who provides those mortgage loans and how satisfactory 

is it? 

Mr. PURCELL. Actually, the ones that provide the mortgage loans 

now for the larger mortgage loans, there is a market for that that 

would be called a prime mortgage. However, the ones that in the 

rural area it would be below $50,000, it is owner-financed, there 

may be a few loan sharks out there that will do one at 15 or 20 

percent, but the banks have pulled back from that. 

Mr. PEARCE. So basically the bottom end of the spectrum is illserved because of what the Dodd-Frank regulations did. It did it 

in our State, too. In my district, 50 percent of the houses are trailer 

houses and so the people in that spectrum, you just can’t find lending for it because the geniuses on Wall Street are certainly not 

going to come out there. And Dodd-Frank, regardless of what everything else it does, benefits the big players, not the small players. 

Now, the people getting out, your report talks about the bankers 

getting out of the business, why are they getting out? Just two or 

three main reasons. 

Mr. PURCELL. One, the amount of paperwork. And then if you are 

wrong, it used to be if you had a pattern or practice, you had something that regulators would get onto you, now it is one single occurrence and that is pretty substantial. 

If you comply with all of the mortgage lending and someone 

wants to borrow $25,000, do you think they are going to read the 

125 pages of pre-notice? 

37 

Mr. PEARCE. Yes. So basically, people are getting out because it 

is complex. 

Now, again, among the comments that Mr. Levitin makes, he 

says that in unfettered markets the bad will drive out the good as 

consumers cannot readily distinguish good actors from bad actors. 

Mr. Allison, do you find that the consumers are that 

unknowledgeable? 

Mr. ALLISON. I think that is absurd. 

Mr. PEARCE. I think it is absurd, too. Because what actually happens is what Mr. Purcell was talking about. The regulations drive 

out the people who will bring honesty and transparency. And the 

people who live there are the ones who will get lawyers and beat 

the system and they will come in and they will stick you. 

And so all the stuff that the regulations from the left tell us are 

going to happen, actually it is not going to happen under a free 

market, it is going to happen under the regulatory processes put 

in place by the Dodd-Frank. And they come up with ludicrous suggestions like those in this amazing report. 

I yield back, Mr. Chairman. 

Chairman HENSARLING. The gentleman yields back. The Chair 

now recognizes the gentlelady from New York, Mrs. Maloney, ranking member of our Capital Markets Subcommittee. 

Mrs. MALONEY. Thank you. 

Mr. Newell, some people claim that the problem with the riskweighted capital requirements before the crisis was that the risk 

weights were inaccurate. They treated certain mortgage debt and 

sovereign bonds as safer than they actually turned out to be. 

But under the chairman’s bill, the solution is a leveraged ratio 

which means even less accurate risk weights. 

Isn’t the better solution to inaccurate risk weights more accurate 

risk weights? 

Mr. NEWELL. Yes. And in fact, the problem with the leveraged 

ratio is the one that you point out. It effectively treats the risk of 

all assets exactly the same, which, of course, isn’t true in fact. So 

it results in measurements that aren’t accurate. 

Certainly risk weights can be wrong. And Greek bonds and other 

examples have been provided today. 

But again, I think the better answer there is to improve the risk 

weights. I think part of that is improving the process at the Basel 

committee and here in the United States to make sure that we 

have better transparency and public debate and less politicization 

of those risk weights. 

I would also say that we are in a better position today than we 

have been in the past because of the CCAR stress testing exercise. 

And again, what that really is is a dynamic annual assessment of 

the risk of each individual asset in a crisis. And so in that sense, 

it is as much an annual stress test of the risk weights as it is a 

stress test of the banks. 

And for those reasons, again, I guess the one thing I would also 

mention is it is important to step back and just think about what 

the impact of moving to a higher leveraged ratio is. 

Here at the Clearing House we did just some very preliminary 

estimates, again. And those showed that if the entire U.S. banking 

industry were to move to a 10 percent supplementary leveraged 

38 

ratio, whether that is by choice or by mandate, the current capital 

in the U.S. banking system would support $4.8 trillion less in loans 

and other economically productive activities than it currently supports today. So that is a very real and significant impact. 

Mrs. MALONEY. And I would like to ask Professor Levitin, the 

chairman’s bill would exempt banks with a leveraged ratio of over 

10 percent from any and all regulations addressing capital or liquidity. 

In your view, does this dramatically roll back the banking regulators’ authority? Doesn’t this leave the regulators with even less 

authority to maintain the safety and soundness of banks than they 

had before Dodd-Frank? 

Mr. LEVITIN. Absolutely. There is a question about how broadly 

the language in the bill should be interpreted. But I think arguably 

it would prevent regulators from ordering prompt, corrective action 

because that is based on capitalization levels. 

Basically, the regulators could not tell a firm that was headed for 

a collision that it needs to raise more capital pronto. I don’t think 

they would have that ability under the CHOICE Act. 

Mrs. MALONEY. Do you think it is dangerous to prohibit the 

banking regulators from imposing liquidity requirements on any 

subset of banks, no matter how well-capitalized? 

Mr. LEVITIN. I think it is absolutely reckless. 

Mrs. MALONEY. Thank you, okay. 

Also, Mr. Newell, the chairman’s bill would repeal Dodd-Frank’s 

orderly liquidation authority, which is intended to give regulators 

the authority to safely unwind the Nation’s biggest banks. 

I am concerned that even with the 10 percent leveraged ratio in 

the chairman’s bill, repealing the orderly liquidation authority 

would leave our financial system dangerously exposed to another 

Lehman Brothers. 

What is your viewpoint on repealing the orderly liquidation authority? Does this make it less safe? Does it make it safer or less 

safe? 

Mr. NEWELL. Yes, so we would not support repeal of the Title I 

regime. We think that it would make the financial system less safe. 

Again, we think Title II is a very important tool to make sure 

that under any circumstances a large firm can be resolved in an 

orderly fashion, again, without putting the taxpayers at risk. 

Certainly, bankruptcy always should be the preferred option. 

And indeed, that is why we support the enhancements to the bankruptcy code included in the discussion draft. But it is very important to have Title II as a backstop. 

And I would say, again, that really is in the interest of financial 

stability. It is, at the end of the day, the very largest banks that 

actually bear the cost of the Title II regime. Under the Fed’s TLAC 

rule, the largest banks are going to have to hold $11⁄2 trillion in 

total loss absorbing capacity, which is to say equity and long-term 

debt. 

If a large bank would go into failure, it is the shareholders and 

long-term debt holders of that bank who have to absorb the losses. 

And then, again, in the incredibly unlikely circumstance if there 

were to be a shortfall in the orderly liquidation fund, it is the 

banks that have to fund that. 

39 

So, again, we support Title II and that is notwithstanding the 

fact that banks are first, second, and third in line in terms of bearing the costs of that regime. 

Mrs. MALONEY. We now use the leveraged ratio as a backup. And 

going back to that in my remaining seconds, in your view, does 

using a 10 percent leveraged ratio as the primary capital requirement make the financial system safer or does it encourage banks 

to get rid of their safest assets and load up on riskier assets? 

Mr. NEWELL. Yes, so it uses a primary measure, particularly at 

that level. It would have exactly that sort of effect of misincentives. 

It would discourage lower-risk assets and encourage higher risk. 

Mrs. MALONEY. Thank you. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Arizona, Mr. 

Schweikert. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

Forgive my tone or my frustration because I have heard a few 

things here that have made me realize how few have actually read 

the legislation. Because a couple of the comments that have 

bounced around here are bordering on absurd if you have actually 

read the language. 

I accept the fact that to many of my brothers and sisters on the 

other side, Dodd-Frank is a faith-based text. But a little intellectual consistency here of, one time we will have an argument here 

of how we need to lower down payments to spur the economy and 

help home buyers, oh, but over here we want more. Just a little 

intellectual consistency. 

Mr. Allison, I want to walk through just a couple, and work with 

me because I want to be intellectually credible, not sarcastic. 

But in function, we are having an argument here of what makes 

a financial institution more robust, paper and file cabinets put in 

by dozens and dozens if not tens of thousands of regulators around 

the Nation. So regulators sitting in a bank or cash sitting in a 

bank? 

How many regulators were sitting in IndyMac the very day it 

went under? Wasn’t it in the hundreds? 

Mr. ALLISON. My view is the regulators very, very seldom identify problems in advance. As I said, in my career I have never seen 

a case of that. But they are so lost in the trees they can’t see the 

forest. 

Capital reduces the risk of banks, things like cash and liquidity. 

And also, this kind of bizarre motivation that bankers don’t care 

how healthy their banks are, this idea that we are all trying to 

make money and go off to the Caribbean. That is crazy. 

Are there a few bankers who do that? Yes. Will markets clear 

them out in a short period of time if the government doesn’t bail 

them out? Yes. 

BB&T has been in business since 1872. We care about the safety 

and soundness; we don’t need the regulators to tell us about that 

stuff. That is what we do. And we know about it because that is 

what we do. 

Mr. SCHWEIKERT. And Mr. Newell, I am going to ask you on this 

one. In some of the comments, and tell me if I am misinterpreting 

what you said, aren’t you conflating the risk-weighting mechanics 

40 

with cash? Because you are almost making an argument that is 

saying it is our risk-weighting mechanics, because we are so brilliant we absolutely know what tomorrow’s black swan is, not to 

grab a Talebish quote but what tomorrow’s black swan is where 

cash is the ultimate flexible repairer of sins. 

Did I misunderstand you what you said a moment ago? 

Mr. NEWELL. Yes, well, keep in mind here what we are talking 

about is capital, right, and the amount of capital that you need to 

hold against a given asset, right? 

Mr. SCHWEIKERT. But, no, back up with me. First on the risk 

weighting, the belief that we are all so brilliant now that somehow 

we know what tomorrow’s cascade event that damages the banking 

system, and therefore we can build a risk-weighted model that gets 

it right where at least cash always gets it right. 

Mr. NEWELL. Yes. So what I would say there, so certainly, right, 

we are not always going to get every single risk weight right, which 

is why I think we should be having continual discussions, Basel in 

here. 

Mr. SCHWEIKERT. But if it is not going to get right, isn’t cash the 

ultimate— 

Mr. NEWELL. The problem is— 

Mr. LEVITIN. Clarification— 

Mr. SCHWEIKERT. We will come back to you, Professor. 

Mr. NEWELL. The problem is, when you are talking about cash 

under the leveraged ratio, right, it is always going to get it wrong, 

right? The way to think about the leveraged ratio, what it says is 

every single asset gets a hundred percent risk weight. 

Mr. SCHWEIKERT. No, no, no, that is not, no, that is absolutely, 

that is not—okay. 

Mr. Allison, we have this conversation and I am actually one of 

those who do believe the money-centered banks, we have too much 

concentration in our financial markets. Isn’t the most rational way 

to reduce the size of a money-centered bank is not the crazy theory 

of let us go in and break up a bank because we are all so brilliant 

we will know what business units actually can stand and serve the 

economy, but compete away part of their largeness and you need 

a vibrant, flexible, regional, local banking system to do that competition? 

Mr. ALLISON. Absolutely. And the large money banks are uncomfortable with this because what they are really going to do, instead 

of raising more capital, is they are going to shrink. And the assets 

are going to be redistributed to companies that can use them better 

and produce better returns. 

So the subsidy that too-big-to-fail creates for the large banks is 

going away out of this process. That is why they are uncomfortable 

with it and why they would rather have Basel and risk-based because they have a much bigger chance of beating that system because they are great at mathematics. They have a lot of Ph.D.s in 

mathematics. 

So yes, there are problems with the leveraged ratio, but there are 

a lot more problems when you can game the system. 

Mr. SCHWEIKERT. I know we are almost out of time. 

And Professor, I promise this summer I will look for some of your 

reviewed articles and read them because I have never read your 

41 

stuff before. But I have binders of this type of material of every institution that failed in 2008 and their ratios. And binder after binder, I will see that you get some of it. 

Thank you, Mr. Chairman. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Ohio, Mrs. Beatty. 

Mrs. BEATTY. Thank you, Mr. Chairman. 

And thank you, Ranking Member Waters. 

Let me also thank the panelists. While I was not here earlier, I 

had the privilege to watch by video much of the discussion. 

And in reviewing the discussion draft which I did read of the Financial CHOICE Act, I have to admit that I didn’t get very far into 

it before it gave me great pause and that I had a lot of concerns. 

As a matter of fact, when I first started reading it on page one, 

the fact that the short description of the Financial CHOICE Act 

found on the first page in its statement that says that this bill repeals the provisions of the Dodd-Frank Act that make America less 

prosperous, less stable, and less free, I started asking myself this 

question, how is America less prosperous now than it was prior to 

the passage of Dodd-Frank? 

How is America less stable now than it was before the passage 

of the Dodd-Frank? How is America less free now than it was prior 

to the passage of Dodd-Frank? 

And certainly not to be sarcastic, but when I think about specifically if these ideas are part of the GOP’s platform for financial regulatory reform heading into this fall and into the 115th Congress, 

how does this legislation make America great again, and how is 

America greater now than it was prior to the Dodd-Frank? 

When I look at the data, Mr. Chairman, the Consumer Financial 

Protection Bureau has returned over $11 billion to over 25 million 

consumers, has the longest streak of private sector jobs growth we 

have had in 76 months, over 14 million jobs created, the Dow Jones 

average is up over 80 percent, and I could keep going and going. 

So Mr. Levitin, when I think about the author of the Financial 

CHOICE Act, it frequently cites Federal Deposit Insurance Corporation Vice Chairman Thomas Hoenig’s proposal for regulatory 

relief and a simple 10 percent capital leveraged ratio as evidence 

of broad support for the ideas being proposed in this bill. 

Also, his regulatory relief proposal did not depend strictly on the 

size of the bank, but on the activity and the complexity of the bank. 

In addition to keeping a 10 percent equity-to-capital ratio, the 

vice chairman’s proposal would require banks to effectively hold 

zero trading assets or liabilities. Does the Financial CHOICE Act 

also include this requirement for regulatory relief? 

Mr. LEVITIN. No. The Financial CHOICE Act does not include 

many of the protections that Vice Chairman Hoenig retains in his 

proposal. 

For example, the Volcker Rule would remain in place under Vice 

Chairman Hoenig’s proposal. It is gone in the CHOICE Act. 

Mrs. BEATTY. Okay. The proposal would also require banks to 

have virtually no derivative positions. Does the Financial CHOICE 

Act also include this requirement in the regulatory relief? 

Mr. LEVITIN. No, it does not. And the Financial CHOICE Act is 

really about capital and nothing more. 

42 

And just a clarification that unfortunately Mr. Schweikert is not 

here for, capital is not the same as cash. Capital can be in illiquid 

assets and that is one of the problems with the CHOICE Act is it 

does not require any liquidity for large financial institutions. You 

can have a solvent institution that fails because it is illiquid. 

Mrs. BEATTY. So if a bank is heavily engaged in derivative trading, a practice that Warren Buffet stated in his 2002 letter to 

shareholders as time bombs for the economic system and described 

them as financial weapons of mass destruction, is it possible they 

could get regulatory relief under the Financial CHOICE Act? 

Mr. LEVITIN. Absolutely. And under the Financial CHOICE Act, 

banks would be incentivized to load up on the riskiest derivative 

positions possible. This is what Mr. Newell was saying. 

When you have just a simple leveraged ratio, there is the incentive to pursue riskier assets in order to maximize the return on equity. 

And then when you add in Title II of the CHOICE Act, which 

basically removes all credit risk from derivative contracts by ensuring that they are going to get paid a hundred cents on the dollar 

in a bankruptcy, why wouldn’t you pursue those derivative contracts if you are a bank? 

And in fact, you can structure your loans through derivative contracts and get better treatment that way. 

Mrs. BEATTY. Okay, thank you very much. 

Thank you, Mr. Chairman. 

And thank you, Ranking Member Waters. 

Chairman HENSARLING. The gentlelady yields back. 

The Chair now recognizes the gentleman from California, Mr. 

Royce, chairman of the House Foreign Affairs Committee. 

Mr. ROYCE. Thank you, Mr. Chairman. 

Mr. Chairman, banks with stronger capital positions maintain 

higher levels of lending over the course of economic cycles with 

those that have less capital on hand. I think the FDIC has noted 

that better-capitalized banks compete favorably in the market and 

survive economic shocks without failing or without requiring bailouts. 

So I was going to ask a question of Mr. Allison here. 

I have been struck by a view which I think is rather myopic, a 

view from some of the critics of the Financial CHOICE Act who 

have suggested that the required higher capital levels will result 

in a sharp contraction in credit availability. 

Don’t we also have to factor in the sharp reduction in compliance 

costs that will result from being freed from Basel III and freed 

from Dodd-Frank’s endlessly complex mandates? Isn’t that part of 

the equation here? 

And wouldn’t it be that what is proposed by the chairman, 

wouldn’t it be so that that would free up these significant resources 

that would be redirected to lending and redirected to job-creating 

activities? 

Mr. ALLISON. Absolutely. I think today banks are focused on the 

wrong thing. They are focused on making government bureaucrats 

happy instead of investing in their business and in their customer 

base. 

43 

So yes, technically, okay, we have to raise more capital. But if 

that capital can be used productively to grow the economy, that is 

a good thing. It is just kind of like it is bad for banks to raise capital, that is a pretty strange argument to me. 

Today banks aren’t doing what they are supposed to be doing because they are trying to make regulators happy instead of making 

good loans. 

Mr. ROYCE. And let me get back to this Basel III aspect of the 

question I asked about. And I will ask Mr. Purcell and Mr. Nussle. 

We have heard you and we have heard others say that the Basel 

III accord was intended to apply only to large, complex and internationally active institutions. However, the rules released by U.S. 

regulators would apply certain new capital rules to community 

banks and to large institutions alike. 

And you have the NCUA that has followed suit with its new riskbased rule. So is one-size-fits-all the right approach here? 

Mr. PURCELL. It never has been the right approach in that we 

make up a different part of the economy, I don’t even know what 

some of the ones that claim to be banks are compared to what we 

do in Big Spring. We don’t worry about a lot of the leverages that 

go, we want to serve our community. 

And it isn’t just the regulations, it is the customers being afraid 

of everything they have to go through to be treated like a criminal 

to apply for a loan. But Basel does not apply to the small banks. 

Mr. ROYCE. I want to jump in here on another question to Mr. 

Newell, if I could. 

Because as we just heard, community financial institutions are 

concerned about Basel III, but you raised something in your testimony that caught my eye. You said Europe is moving ahead with 

Basel IV discussions, contemplating yet another change to the regulation of bank capital. 

From what you know of the proposal so far, what would the impact be on our U.S. institutions? Do we have a seat at this table? 

Should we have a seat at this table? 

Mr. NEWELL. Sure. So I think the impact is very, very likely to 

be negative. These are actually a series of 11 separate proposals all 

being hashed out in piecemeal fashion by the Basel committee. We 

are still waiting to see the final details, but they seem very likely 

to raise the amount of capital, again, it has to be held against trading activities. It seemed very likely to raise the amount of capital 

that has to be held against credit card lines, home equity lines, financing lines to businesses. 

Again, these are all very, very impactful, important proposals 

and they frankly are getting no airtime here in the United States, 

and we don’t really have a clear sense of what position the U.S. 

regulators are going to take there, notwithstanding the fact that 

they would have very, very serious consequences here in the 

United States. 

Mr. ROYCE. Mr. Chairman, to be frank, I am concerned that 

while we sit here today discussing what the right capital standards 

should be for our U.S. financial institutions, foreign regulators are 

having similar discussions, and they are having theirs behind 

closed doors. 

44 

So what is to stop U.S. regulators from adopting these changes, 

as they have done with Basel III, these changes from Basel IV that 

is underway with little notice, with little opportunity for comment, 

with no opportunity for a cost/benefit analysis? 

I yield back, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from New York, Mr. 

Meeks. 

Mr. MEEKS. Thank you, Mr. Chairman, and Ranking Member 

Waters. 

First, I want to affiliate myself with some of the comments of 

Mrs. Beatty. Because I don’t know who would want to go back to 

2008, if that is what make us, that going back, great again, I don’t 

know that. 

But I would admit that there are no perfect bills and we can 

make improvements to all bills, including Dodd-Frank. In fact, this 

committee could pass comprehensive measures to provide meaningful relief to over 95 percent of banks in the Nation. 

And I want to emphasize that we could actually work on measures that can pass both chambers of Congress, both the House and 

the Senate, and be signed by the President and offer meaningful 

regulatory relief to almost 6,000 banks in this country, especially 

small and community and MDIs. 

So I am really disappointed that we have been so divided that 

we will end up accomplishing here nothing at all. At a time we all 

agree that banks can do more to help revitalize communities, that 

they need more financial services, and we are all debating proposals that are going far too far that we will never be able to pass 

and never agree upon, that we are debating something that is far 

too risky, that are not targeted to community financial institutions 

and, hence, that cannot gain the great majority and consensus 

needed to become law at all. 

A few days ago I had the privilege of welcoming OCC Comptroller Curry in my district in Queens, New York. We went on a 

tour and visited small banks in downtown Jamaica, New York, and 

we made stops at bank branches that had closed, highlighting the 

challenges that banks are facing today. 

We then proceeded to visit community development projects 

funded by banks through CRA incentives. And as we talked to 

these community bankers and local economic developers, there is 

consensus that Congress can do more to help these banks do more 

in their communities. 

And again, I stress that we can provide significant relief today 

to more than 95 percent of banks in the Nation without repealing 

the very foundation of the Dodd-Frank Act, which has greatly 

strengthened our banking sector and capital markets from the 

riskiest activities that caused the financial crisis in the first place. 

Regrettably, Mr. Chairman, I think the CHOICE Act is just far 

too extreme and goes way wrong and would send a dangerous message to our financial markets. How can we undermine FSOC and 

our ability to deal with systemic risk and TBFT financial institutions? How can we undermine our ability to have an orderly liquidation authority which is so central in containing contagion? 

45 

How can we remove the Volcker Rule for large banks and couple 

with that the removal of risk weighting, which together are meant 

to limit the riskiest activities that pose the greatest risks to our 

banking institutions? 

Mr. Chairman, the proposal almost exclusively relies on the leveraged ratio. The leveraged ratio only deals with quantity of assets and is awfully insufficient when it comes to discouraging the 

riskiest activities and assets that banks are tempted to hold for 

higher returns. 

And the CHOICE Act goes further. It removes the liquidity safeguards that were imposed as one of the great lessons of the failures 

during the financial crisis. I can hardly comprehend how we could 

encourage such a dangerous combination of removing all of these 

crucial safeguards at this time. 

Let me just ask Mr. Levitin a quick question. 

Banks that get in trouble often do so because they often get too 

aggressive or too greedy in their banking strategy and take on too 

much risk. In fact, we have learned from the financial crisis that 

bankers’ behavior toward excessive risk-taking was a major cause 

of this crisis. 

And hence, I am concerned about the message the CHOICE Act 

would send to bankers about their ability to take on more risk. 

Can you comment on how this Act can change risk-taking in 

banking and why we should be concerned about that? 

Mr. LEVITIN. Sure. The CHOICE Act, first of all, makes it possible for all banks, regardless of their capital level, to use depositor 

funds to speculate on the stock market, to speculate on derivatives 

because it repeals the Volcker Rule. So regardless of how well-capitalized a bank is, the CHOICE Act frees it up to engage in gambling with insured deposits. 

Secondly, because the CHOICE Act uses a simple leveraged ratio 

without any additional safeguards, it encourages banks to load up 

on higher-risk, higher-return assets. 

There are a lot of problems with risk-weighted capital ratios. I 

would not disagree with any of the criticisms made of them. But 

a simple leveraged ratio has its problems, too, and that is why it 

needs to be combined with other safeguards. 

The CHOICE Act, though, relies solely on that, on simple leveraged ratio. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Illinois, Mr. 

Hultgren. 

Mr. HULTGREN. Thank you, Mr. Chairman. 

And thank you all for being here. 

I want to address first questions to Mr. Allison, and I would love 

to get your response kind of from this last discussion, in your response as well. 

But let me ask you a question and then if you can kind of put 

it together that would be great. 

I know on June 15, 2015, there was a letter written to the editor 

of The Wall Street Journal by FDIC Vice Chairman Hoenig, and 

he wrote, ‘‘Higher capital doesn’t contribute to lower lending, the 

data shows that the opposite is true. Banks with stronger capital 

positions maintain higher levels of lending over the course of ecoVerDate Nov 24 2008 20:16 Mar 05, 2018 Jkt 025875 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\25875.TXT TERI
46 

nomic cycles than those with less capital. Additionally, better-capitalized banks compete favorably in the market and survive economic shocks without or requiring bailouts.’’ 

I would like to hear from you about the long-term growth strategy you put in place for BB&T while you served as its CEO. What 

decisions did you make leading up to the financial crisis that 

helped BB&T weather such a severe economic shock? And how 

much focus did you put into managing BB&T’s leveraged ratio? 

Chairman HENSARLING. I’m sorry, would the gentleman suspend? 

A procedural vote has been called on the House Floor. There are 

14 minutes and 16 seconds left. We will continue with the hearing, 

and perhaps Mr. Pittenger, Mr. Tipton, and Mr. Rothfus could go 

vote and return immediately. And Mr. Hultgren can continue. 

The gentleman may proceed. 

Mr. HULTGREN. Mr. Allison? 

Mr. ALLISON. Okay. In terms of the question, Professor Levitin 

assumes that bankers are fools, there is no discipline, we are going 

to just go take crazy risks. And just because we have a stronger 

capital position, that is not true. 

One reason that BB&T got through the financial crisis is we had 

a stronger capital position and we chose before the crisis not to do 

the kinds of loans that were very destructive during the crisis because we knew they wouldn’t work out. 

So we wanted to be in business for the long term. And we were 

able and willing, although the regulators wouldn’t let us, to lend 

through the crisis. We had lent through the 1980s crisis, we went 

through the 1990s crisis. This time they stopped us from doing 

what we were prepared to do, which was make loans to our customers and get them through the crisis. 

Regulators put a lot of people out of business unnecessarily and 

that is why the crisis ended up being so deep. 

Mr. HULTGREN. Thank you. 

Mr. Purcell, in practice, do you have an estimate of how many 

banks would elect to increase their capital to the requisite level to 

achieve regulatory relief under the CHOICE Act? As we know, raising capital can be expensive, but so is complying with reams of new 

regulation from Dodd-Frank and Basel. 

How would you as a banker weigh these costs and benefits? And 

what is the process for raising additional capital? Obviously, this 

varies by institution, but do you think there are willing investors 

and, as we hear far too often, banking is a tough business nowadays? 

So I would like to get your thoughts on how this would impact. 

Mr. PURCELL. In rural America, raising capital is not an easy solution. You can retain your earnings and that is something that we 

have done over the past couple of years in our bank trying to get 

the capital up to 10 percent. And we are nearly there. 

The Texas Bankers Association had a tour and we toured all of 

Texas in a week’s period, went to 17 different locations. And we 

asked the same question, and it was approximately 50/50; about 

half of the banks in Texas currently have the 10 percent and there 

are a number that don’t. 

47 

But we are still assessing what is satisfied at 10 percent. Should 

it be 9 percent? But it is not going to be easy. If you are not in 

a high-growth area, it is not going to be easy to raise capital. 

Mr. HULTGREN. Yes, thank you. 

Congressman Nussle, if I could address this to you. I wonder, did 

credit unions play a significant role in causing the financial crisis? 

If not, why would Democrats force a bill through Congress that 

subjected you to significantly more stringent regulatory requirements? 

Mr. NUSSLE. I am not sure I can respond to the second except 

to say that I think there is a tendency to apply one-size-fits-all solutions. It just seems to be a tendency of our policy process these 

days, unfortunately. And I think we were kind of folded into that 

as a result. 

But no, we don’t feel like we caused the crisis. Our insurance 

fund was not impacted by the crisis. We held strong capital ratios. 

We do now, we continue to do now. We don’t raise capital easily 

and so it is something that is very precious to our institutions. And 

we have a very conservative model which in and of itself, I think, 

helps mitigate the risks of some of the other challenges that might 

be out there that I know Professor Levitin has referred to. 

Mr. HULTGREN. Yes. Mr. Nussle, really quickly, do you believe 

the capital election provision in Title I of the CHOICE Act would 

provide meaningful regulatory relief to credit unions with the most 

conservative balance sheets? And what percent of credit unions 

maintain a simple leveraged ratio at or above 10 percent? 

Mr. NUSSLE. We are over 60 percent now and quite a few that 

are close and I think would move very quickly toward a 10 percent 

number if in fact that is what is decided. 

Mr. HULTGREN. Great, thank you. 

Thank you all. 

I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Maine, Mr. 

Poliquin. 

Mr. POLIQUIN. Thank you, Mr. Chairman. 

Thank you all very much for being here today. I appreciate it. 

For those of you who haven’t planned your summer vacation to 

Maine it is not too late. 

[laughter] 

We are a beautiful State of hardworking people, independentminded. We have blueberry pie and lobster and moose and the 

whole thing up there. And our district is very much like yours, Mr. 

Purcell. We have two population centers: Bangor, with 35,000 people; and Lewiston/Arbor, which we call LA, that has 35,000 people, 

and we have 400 small towns. 

And if you drive through the small towns in our district, what 

you will find is a police station, usually a volunteer fire department, a little library, a convenience store, maybe a little league 

field and a community bank or a credit union. 

And the communities in these small towns throughout America, 

not only Maine, revolve around these institutions. It is so important to make sure that we have a government that helps these institutions and not hurts them. 

48 

Now, we all know and it has been discussed here today that for 

years Washington regulators made it very easy for a lot of folks to 

own homes, buy homes and they couldn’t afford them. And then 

when the real estate market collapsed, it took the economy with it. 

And of course, Washington responded the way it usually does— 

it overreacts and it tries to come in and save everybody with a 

smothering set of regulations. And they were really designed for 

these large, money-centered banks, not for our credit unions, not 

for our small, local banks. 

But we are caught in the same net and it is really a shame because now when you travel in our district, just like yours, Mr. Purcell, that you said, you listen to our folks who run credit unions 

and local banks and they are just unable to make the car loan or 

a home mortgage, extend the home mortgage or a small-business 

loan they way they could before, even though they know the families and have for three or four generations. 

So what I have found in my work in the private sector is that 

when regulations go up, costs go up. When costs go up, choice goes 

down. So it is no wonder that we don’t have free checking accounts 

throughout our industry, this industry, and haven’t for a long time. 

It is no wonder why the monthly fees that your credit union bank 

or bank charges are going up. 

So I would like to extend this question to you, Mr. Purcell. 

Most of the community banks, local banks throughout our country and our credit unions have plenty of capital to operate safely 

and effectively. If the CHOICE Act becomes law, could you be really specific with the folks who are there listening, the folks back in 

my district in Maine, what behavior might change at your local 

bank when it comes to services offered, reduction of fees, extension 

of more credit? 

Mr. PURCELL. That is a tough one because I am not sure what 

all relief is coming with the CHOICE Act. 

The 10 percent is attainable, it is realistic to not have a complicated business and have the regulations tailored for our business, I think is extremely important. 

I think the attitude of our customers as well as the employees 

of the institution would be significantly different. If people said you 

make and you live with your decisions, and if you don’t you go out 

of business, but if we do not change we are going to be absorbed 

by someone else. 

Mr. POLIQUIN. Mr. Nussle, would you mind commenting with respect to the credit unions. And in particular, I am asking, I am not 

trying to lead the witness, I am really asking you a straightforward 

question, if there is relief as dictated in the CHOICE Act that has 

extended to our credit unions, what might you see on the ground 

with respect to the extension of credit, growing economy, more jobs 

in these communities? 

Mr. NUSSLE. It gives the—certainly having the ability to lend 

and to have some of those costs that are certainly restricting that 

at this point in time and as well as just time constraints would 

make that easier. 

But I have an actual—I have talked to a few of my credit unions 

about this, and interestingly enough, you will find this interesting 

as almost maybe a case study on how behavior will change. 

49 

Already those credit unions that are well-capitalized to above 7 

strive for more capital because they see a change in the examinations and the examiners that come through. The higher capital 

ratio, the more they tend to not be quite as restrictive or concerned. 

And so they already see a behavioral change on the part of regulators the more capital that they retain. So it is kind of interesting. 

So I think that behavior is going to manifest itself in a law like 

this as well. 

Mr. POLIQUIN. Thank you, gentlemen. 

Chairman HENSARLING. The time of the gentleman has expired. 

Pending conclusion of the single vote on the Floor, the committee 

will stand in recess. 

[recess] 

Mr. HUIZENGA [presiding] The committee will come to order. 

And at this point, the Chair recognizes Mr. Ross, of Florida, for 

5 minutes. 

Mr. ROSS. Thank you, Mr. Chairman. 

I want to thank the panel for being here. 

Mr. Allison, I agree with you and your opening statement. And 

I firmly appreciate it. I think that the regulators were asleep at the 

switch. I think that they forced too many of our lending institutions to use their capital in areas that were not prudent. And that, 

in and of itself, compiled into a terrible situation for us in 2007. 

And here we see an overreaction where we think, well, more regulation because we know best, because we are the regulators. And 

yet, none of them have spent any time on Main Street, none of 

them have spent any time trying to be an entrepreneur. 

When you state that the founder of Home Depot couldn’t start 

his business today, that is a sad state of affairs for America, a 

country that was founded on the entrepreneurial spirit that is so 

dependent on the lifeblood of commerce and the availability of capital. 

And so my question to you is, what are the consequences when 

Washington imposes one-size-fits-all rules that dictate who they 

can and cannot lend to, no matter their character? Aren’t lower-income Americans disproportionately harmed? 

Mr. ALLISON. No question. Dodd-Frank has been terrible for lowincome Americans. And we are talking about this income gap that 

is happening in America and we are ignoring the regulatory cause 

of this. It is not the only cause by any means, but it is definitely 

a cause. 

Mr. ROSS. And when you look at, let us say, 10 percent, for the 

sake of conversation, for the sake of the CHOICE Act we have said 

10 percent capital requirements, but yet we are not saying then 

you are free and easy. You still have the CAMELS rating that you 

have to uphold by. And is that not in and of itself an opportunity 

for the regulatory environment to continue to subjectively prevent 

a lending institution from exempting themselves, even if they have 

a 10 percent capital ratio? 

Mr. ALLISON. Absolutely. But I will say again, in my years of experience I have seen very few times the regulators actually identified things in advance. 

50 

What I think less regulation would lead to is more market discipline. 

Mr. ROSS. I agree. And not only that, but if they can leverage 

that capital that is well over 10 percent being held and they make 

it available to the consumer, whether it be residential, whether it 

be consumer, whether it be commercial, whomever, and they make 

it available at a lower rate and you start spawning investment, 

then you also create competition. And would it not mean that market discipline would then suggest that, by golly, if X, Y, Z institution is doing this and doing well, why would I not do the same 

thing and increase my capital reserves instead of saying, well, I 

will just hold it and play risk because this is what I can get by 

with with the regulatory environment? 

Mr. ALLISON. Absolutely. It would create more market discipline, 

more competition between banks. But also by banks being willing 

to start up more businesses, it would be more competition in the 

economy as a whole. 

We have created a massive subsidy for big businesses. You can’t 

start anything up; therefore, if I am in business I don’t have to invest because, hey, I have no new competitors. 

Mr. ROSS. And that is a little frightening because we see the government get in the business of business more and more as we move 

on, whether it be the insurance business, whether it be in the 

banking business, whatever it may be. If they want to instead tax, 

take a premium and call it whatever they want, that is what we 

are going into. 

So my question to the panel would be, this Administration has 

embraced itself since the passage of Dodd-Frank on enhancing access to credit. Is there any evidence that that has been made available prior to the Dodd-Frank passage? 

Is there any, whether it be anecdotal or actual, is there any evidence that this Administration has increased access to credit? 

Mr. Newell? 

Mr. NEWELL. Yes, Congressman, if I may. I think, certainly, because we follow these figures quite closely, you continue to see 

major headwinds against credit and you especially see that, again 

to where you started against, in terms of folks who have less than 

pristine credit and credit availability to them. 

I think maybe just one specific example because it is something 

that we worry a lot about in terms of how the current regulatory 

regime is driving some of these impacts is the CCAR exercise. 

Mr. ROSS. Right. 

Mr. NEWELL. The CCAR exercise, because it involves an area 

that has a very, very large jump in unemployment. What that 

means is loans to folks or small businesses that are very sensitive 

to unemployment changes, and those typically tend to be loans to 

folks of smaller means or smaller small businesses, those are the 

ones that are actually impacts the most harshly under CCAR. And 

so that impact can create a very strong disincentive, again, relative 

to other activities for that kind of activity. 

Mr. ROSS. Do you believe that these rules that are being suggested here, the rules for the capital requirements, should apply to 

smaller financial institutions? Not the ones, there are more community banks, the credit union ones that have a higher capital reVerDate Nov 24 2008 20:16 Mar 05, 2018 Jkt 025875 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\25875.TXT TERI
51 

serve, and yet they are paying probably greater proportionally in 

compliance costs than the larger institutions. Shouldn’t they be 

susceptible to at least be able to take advantage of this? 

Mr. ALLISON. Yes. 

Mr. NEWELL. Sure. 

Mr. ROSS. Thanks. I realize my time is up. 

Mr. POLLOCK. For sure, Congressman. 

Mr. ROSS. Thank you all. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. Pittenger. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

And I thank each of you for being here today. I have learned a 

great deal. 

I would like to respond to some comments that my loyal opposition made a few minutes ago regarding the merits of the CHOICE 

Act and whether it is prosperous and stable and free. 

And I would think we should consider the present course of our 

economy with 11⁄2 percent economic growth, 12 to 20 million people 

who are unemployed or underemployed, it is seasonal factors there, 

low-income minority individuals or demographic group has risen 

the least in this economy in the last 7 years. We have 10 percentplus real unemployment when you consider the underemployed and 

unemployed. 

And they tout 14 million jobs since 2008. That comes to about 

160,000 jobs a month. That is below the low end of our recovery 

in the 1980s where after 2 years we were creating 300,000 jobs and 

400,000 jobs and 500,000 jobs and in 1 month a million jobs, growing at 6 percent. 

So I would like them to reflect a little deeper on the merits of 

this current economy and as such the impact that the Dodd-Frank 

bill has had. 

Mr. Purcell, having grown up in Texas, I have an appreciation 

for the State. And certainly, you are from a rural area. 

You did say in your testimony that there have only been three 

startup banks since 2010. Is that correct? 

Mr. PURCELL. To the best of my knowledge, and that wasn’t just 

in Texas; that was in the United States. 

Mr. PITTENGER. I believe you are right. But I am glad to have 

that clarified. 

Mr. Purcell, having served on a community bank for a decade, I 

certainly appreciate the merits of the banking system and the 

small banks and what they offer. But what would you consider 

should be done to provide this type of access to capital for small 

businesses, particularly those that are in rural areas? 

How has economic growth been impeded? And what have been 

the factors that have kept small banks and community banks from 

having startups for capital to be invested in these types of good 

businesses? 

Mr. PURCELL. I am kind of slow, I am not sure I will get all your 

questions answered or if I can remember them all. But one thing 

is you cannot legislate a perfect world. And so for everything that 

we do, there are going to be consequences because of our actions 

later on. 

52 

But if we look at the history of things, it was not the community 

banks in rural America that caused the problems, but yet they are 

sharing the responsibilities for cleaning it up. 

We have to have hope, our people have to have hope in the ability to succeed and better themselves, either as an entrepreneur in 

a new job or in taking care of their family. And once they lose hope, 

we have a tough battle. And right now there are a lot of people who 

have lost hope and they don’t see any way to comply with all of 

the regulations, whether it be from the individual in the bank or 

whether it be from our customers. 

Mr. PITTENGER. Thank you. 

Mr. Nussle, quickly, I would like to ask you, kind of help me understand the significant role that credit unions played in causing 

the financial crisis. 

Mr. NUSSLE. Of course, we don’t feel like we did either. I would 

share Mr. Purcell’s comment on that and feel like we are part of 

the solution that you should be turning to if we want to create opportunities and jobs. 

As you know, people in search of credit are going to go find 

money. And the question is, do you want them to go through a regulated, safe and sound institution or do you want them to go into 

a predatory institution or a predatory situation? 

And I think what we are doing is we are making it more difficult 

for the people that we are trying to help, all of us, that you are 

trying to help to build that credit and establish that credit in a safe 

and sound way. 

Mr. PITTENGER. The enactment of the Dodd-Frank Act clearly 

has impacted your industry. Would you just give us quickly some 

salient points to that regard? 

Mr. NUSSLE. Since 2010, we have seen about a $3 billion increase 

in annual regulatory costs year after year. That is the kind of challenge I said before, all of the different pages of regulations. And 

whether you are a big institution or a small, you have to comply, 

you have to look at all of those. Even if you have an exemption as 

a smaller institution, you have to read all 6,000 pages to find out 

where your exemption is. 

So, it is that kind of thing that makes it difficult to continue to 

establish and build the credit with the people that you are serving. 

Mr. PITTENGER. Thank you, my time has expired. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Pennsylvania, Mr. 

Rothfus. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

And like my colleague from North Carolina, I, too, was struck by 

some of the suggestions across the aisle that Dodd-Frank has not 

made us less prosperous. And I think simply put, if you look at the 

numbers that my colleague was talking about, from North Carolina, this simply isn’t your parents’ recovery, it is not your grandparents’ recovery when you look at the drag that we have had and 

the average economic growth coming out of recessions and depressions over the last 80 years. And this is anemic growth at 1 percent, 2 percent. 

53 

And the differential is fewer jobs, looking at the lowest labor participation rate since 1978 and less income. People aren’t getting 

raises because the economy has not been prosperous. 

Indeed, Chair Yellen was here a couple of weeks ago and for the 

third time talking at length about the ‘‘headwinds’’ that have been 

facing the economy, often referring to geopolitical events and other 

uncontrollable external factors. 

I contend that many of the headwinds are man-made, anthropogenic to borrow a phrase. 

Mr. Allison, in your testimony, you remarked, ‘‘One tragic irony 

is that by tightening lending standards, the Federal Reserve has 

undermined its monetary policy. They cannot get the money supply 

to grow because the velocity of money has slowed because banks 

are only making loans to large businesses.’’ You also add that the 

Fed is effectively subsidizing large firms. 

What are the main provisions in the CHOICE Act that will help 

to alleviate this self-inflicted constraint on growth? 

Mr. ALLISON. The fact that banks can significantly eliminate a 

big chunk of the regulatory burden will get them back to doing the 

core lending that they used to do, not just before the financial crisis, but for 40 years. 

So banks today are focused on making regulators happy instead 

of going out and making the kind of loans and they can’t literally 

make the kind of loans that drive the economy. 

And I do think it is ironic that the Fed keeps printing money, 

but it doesn’t do anything, because banks are money multipliers by 

making loans. And they have destroyed the money multiplier. 

Mr. ROTHFUS. Yes. With this kind of accommodative monetary 

policy, you would expect us to be booming. 

Mr. ALLISON. We should be booming or maybe highly inflationary. But if you destroy the multiplier, because banks, savings 

and loans, credit unions can make loans, then the multiplier is collapsed. 

Mr. ROTHFUS. You may have noticed a slide on our screen 

quoting Fed Governor Tarullo that a 10 percent leveraged ratio is 

too rigid, it can be gained by simply increasing balance sheet risks. 

But doesn’t Mr. Tarullo assume that the stock price of the financial 

institution would not react to the risk? He would be correct if the 

Fed keeps bailing out banks. But under CHOICE’s bankruptcy regime, wouldn’t shareholders face the full risk of their decisions? 

Mr. ALLISON. I think you are exactly right. What Mr. Tarullo 

says is totally wrong. If you had less evidence, if it was clear that 

the banks could not be bailed out, then markets would discipline 

banks and they would care how much capital and how much risk 

they were taking. 

And it is also not in the long-term advantage of somebody running a bank to make crazy decisions if they are going to be punished by being allowed to fail. 

Mr. ROTHFUS. You would expect those investors to be a form of 

discipline. 

Mr. ALLISON. They discipline all other companies, right? Now, 

that doesn’t mean that there won’t be some banks that fail because 

investors aren’t perfect, but investors will be disciplinaries if banks 

are not perceived to be protected. 

54 

Mr. ROTHFUS. Mr. Nussle, credit unions have previously testified 

that they have had to cease offering certain products and services 

to their customers as a result of increased regulations. What are 

some of the products and services that have been most affected? 

Mr. NUSSLE. For instance, mortgages. Just take that. Some of 

the smaller institutions who don’t do that many—they are in smaller communities or it is an area that they provide for their members, that is one that I often will hear that is curtailed and severely. 

And again, if you are trying to establish credit, if you are trying 

to buy a home or whatever it might be, that is pretty tough for people in their community to not have that access. So that would probably be the marquee one that I would put out there. 

Mr. ROTHFUS. Other remaining products and services they offer, 

it is generally the case that compliance costs are passed along to 

customers. If so, to what extent have costs increased for frequently 

used financial products of the credit unions? 

Mr. NUSSLE. Yes, they have to be. Certainly a credit union, while 

it is a cooperative and is peer-to-peer lending, is members helping 

members—we have to run a business with a bottom line to be able 

to maintain safety and soundness. And so, of course, we have to be 

able to pass on those costs, if incurred, throughout, spread out, 

whether it is in lower returns on deposits, or it has to be higher 

rates for lending. 

Mr. ROTHFUS. I thank the chairman, and I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Missouri, Mrs. 

Wagner. 

Mrs. WAGNER. Thank you, Mr. Chairman. 

Thank you all for joining us today to discuss an important topic 

on how we rethink financial regulation in order to make our system safer and to boost financial growth. 

Since Dodd-Frank, we have seen bank small-business loans decline by 11 percent, and 58 percent of startups report unmet financing needs. Consistently, we see the effects of increased bank 

regulation fall disproportionately, as discussed, on smaller businesses that have few alternative sources of finance. A lot of this 

comes from what I consider this one-size-fits-all regulation being 

applied to banks and institutions of all sizes. 

Mr. Purcell, what has your institution had to do to ensure compliance with these regulatory mandates? And what kinds of investments have you had to make as a result? 

Mr. PURCELL. Our loan demand in Big Spring is not very great 

right now. We are in the Permian Basin so there has been some 

stress in the oil- and gas-producing parts of the United States. 

We got completely out of the mortgage business because the type 

of loans that we made did not comply because they were a balloon 

note. 

I had dinner last night with some bankers from Mississippi and 

there were five there and they said they do not even make mobile 

home loans now. 

Mrs. WAGNER. Unbelievable. 

Mr. PURCELL. I don’t know what status you are in society, but 

if you are not receiving the small loans to buy a house or you are 

55 

not able to buy a mobile home, I would say that is not helping the 

low income. 

Mrs. WAGNER. So not only is it affecting the cost of compliance 

for your bank, your institution, you are actually seeing these regulatory burdens, what they mean for actual consumers and your 

ability to provide them the credit that they need, especially when 

it comes to small-business loans or small loans of this kind of purchase. 

Mr. PURCELL. Yes, ma’am. 

Mrs. WAGNER. Mr. Allison, as you operated BB&T during the financial crisis, would you say financial regulation was already highly complex back then? And if you could then go on to comment, 

have things become more complex? 

Mr. ALLISON. Absolutely. The financial industry was the most 

regulated industry in the United States based on just the number 

of pages of regulation and the multiple regulators before the financial crisis. It is not surprising the most regulated industry is where 

we had the biggest problem. And there should be a lesson in that. 

But instead of saying, well, hey, maybe these regulations made 

a mess, we ended up with many, many more regulations that are 

doing just what you said. It is making it very difficult for banks 

to make small-business loans and the traditional loans to consumers. 

My bank used to do a lot of the real estate kind of financing, 

small houses, somebody wants to add a carport, can’t do it interestingly enough because the consumer compliance rules keep you from 

helping consumers. 

Mrs. WAGNER. So one-size-fits-all on these financial institutions 

is definitely disproportionately affecting smaller-sized people who 

want to invest or want to take out a loan. Is that what I am hearing from both of you? 

Mr. ALLISON. Yes, it is hurting smaller institutions more. But by 

the way, I would say a lot of these rules are destructive for everybody, like the tightening of lending standards for traditional mobile 

homes and things like that. It is actually bad for the economy. 

So yes, it is hurting smaller institutions more and a number of 

these things are bad for everybody. 

Mrs. WAGNER. Let me ask, Mr. Allison, the EU is currently undergoing an exercise called a call for evidence and it is looking at 

all their post-financial-crisis regulations that have been released 

and how they could be simplified for economic growth. 

Additionally, the CHOICE Act offers a simplified approach to 

capital requirements to replace a myriad of complex Dodd-Frank 

regulations. 

Could you comment, sir, on how moving toward simplification in 

our financial regulations not only helps make our system safer, but 

also helps to boost economic growth? 

Mr. ALLISON. No question about it. If something is not understandable, is overly complex, then it is easy to screw it up and it 

is easy to mismanage it. And simplification will allow financial institutions to spend a lot less time on regulation and I think banks 

would rather have higher, worse, whatever, and more simple regulation because then they can manage against them. And that will 

allow them to get back to their business instead of focusing on regVerDate Nov 24 2008 20:16 Mar 05, 2018 Jkt 025875 PO 00000 Frm 00059 Fmt 6633 Sfmt 6633 K:\DOCS\25875.TXT TERI
56 

ulators and the regulatory costs. They can go help people make 

more successful businesses and happier consumers. 

Mrs. WAGNER. Great, thank you, Mr. Allison. I appreciate it. 

I appreciate all of your time being here today. 

Mr. Chairman, I yield back. 

Chairman HENSARLING. The gentlelady yields back. 

The Chair now recognizes the gentleman from Kentucky, Mr. 

Barr. 

Mr. BARR. Thank you, Mr. Chairman. And thank you for your 

leadership in introducing the Financial CHOICE Act. 

Mr. Allison, a question for you. As the former CEO of a regional 

bank, a mid-sized bank, you have a view of the kind of institutions 

that are smaller than you and the institutions that are larger than 

you. 

So I am interested in your take on the following questions. What 

kind of a regulatory regime benefits small institutions? Is it a highly regulated environment with high costs? Does that benefit the 

community bank or does that benefit the larger Wall Street mega 

banks? 

Mr. ALLISON. I started out at BB&T when it was a small bank 

and then it grew to be a larger bank, so I really have personal experience with that. 

The regulatory cost is much higher in a smaller institution because the CEO has to spend his time doing that. The bigger the 

company gets, the more you can hire other people to do that kind 

of work. And the CEOs and the relatively small number of people 

actually impact the productivity of smaller institutions more. 

Mr. BARR. So in other words, the more volume, the more complexity of regulation, the better it is from a competitive standpoint 

for larger institutions. 

Mr. ALLISON. Yes. And I think Jamie Dimon basically said that. 

He basically said Dodd-Frank is a competitive advantage for us. It 

is probably true. 

Mr. BARR. How about orderly liquidation authority that arguably 

gives larger institutions a funding advantage, do you see that? 

Does the orderly liquidation authority that is codified in DoddFrank, does that help small banks, community banks, or does that 

help large banks in terms of competitiveness within the banking 

marketplace? 

Mr. ALLISON. It creates the perception of too-big-to-fail. And I 

think that is why large banks like it, right? 

I have to say, I have a very different perspective of the financial 

crisis. I think big banks should have been allowed to fail. I don’t 

think the world was getting ready to go crazy, it was just a huge 

flight of quality. Money was going to healthy institutions, away 

from unhealthy institutions. 

Markets can deal with failures, they just can’t deal with ambiguity. 

Mr. BARR. So what I am hearing you testify today is that DoddFrank’s regulatory approach has actually helped Wall Street banks 

and hurt small-community banks. 

Mr. ALLISON. It has helped them relatively. 

Mr. BARR. Relatively. 

57 

Mr. ALLISON. It will help them in the long term because if you 

destroy the competitors that are coming up, it actually subsidizes 

them in the long term. 

Mr. BARR. Is it fair to say that Dodd-Frank creates an unlevel 

playing field for larger institutions over smaller community banks? 

Mr. ALLISON. It does. And a couple of people have talked about 

this. Theoretically, a lot of smaller institutions are immune from 

Dodd-Frank. That is not what is going to happen in the real world. 

In the real world, if I am regulating a small institution, I am a 

regulator, I am going to apply the same rules to that because if a 

small bank gets in trouble I am going to look bad and I am worried 

about my career. And so being exempt is a joke. 

Mr. BARR. And so since the enactment of Dodd-Frank, there are 

about 1,500 fewer institutions in America. Has that actually helped 

to consolidate and concentrate risk as opposed to diffuse risk? 

Mr. ALLISON. No question. 

Mr. BARR. Okay. 

Mr. ALLISON. It has actually increased it. 

Mr. BARR. Okay. And finally one final question, what is the 

greater risk to our financial system, heavily regulated, under-capitalized banks or less regulated and highly capitalized banks? 

Mr. ALLISON. No question, less regulated, highly capitalized. And 

there is a trade-off and I want to reemphasize this: Banks simply 

cannot afford to pay the regulatory costs of Dodd-Frank and be 

highly capitalized. 

As I mentioned earlier, Citigroup is only at 6.4 percent leveraged 

capital ratio. The reason the regulators haven’t raised it higher is 

they know it won’t work. But they would prefer regulation because 

that is their job over capital, and there is a definite trade-off. 

Mr. BARR. In my final time, Mr. Newell, a question for you. 

This relates to Professor Levitin’s comments that irrespective of 

the capital requirement opt-in provision in the Financial CHOICE 

Act, some of the deregulatory measures that occur in Financial 

CHOICE, regardless of the choice made by an institution, he contends are destabilizing to the financial system, for example, repeal 

Volcker, repeal of the risk retention requirement, and some of the 

changes to the derivatives regulation. 

Do you care to respond to those allegations or those arguments? 

Mr. NEWELL. Certainly. So I think, with respect to the various 

provisions of the CHOICE Act, I think some of them are net positive to financial stability, I think some of them are net negative to 

financial stability. So I think fortunately it really just depends on 

the individual provision one is talking about. 

Mr. BARR. Mr. Pollock, do you think that repeal of Volcker would 

be destabilizing to the financial system? 

Mr. POLLOCK. Congressman, I do not. I don’t think Volcker had 

much to do with the crisis and that the rule didn’t have a lot of 

solid rationale in the first place, so we can get rid of it. 

Mr. BARR. Thank you. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Colorado, Mr. Tipton. 

58 

Mr. TIPTON. Thank you, Mr. Chairman. Thank you for your leadership on the CHOICE Act, and I thank our panel for taking the 

time to be able to be here. 

Mr. Purcell, I thought it was interesting as you were talking because you were describing in Texas what we see in my rural district in Colorado, oftentimes as mobile homes are the homes that 

people have access to, but just looking at the impact on a community, that the rules and regulations that we are seeing under DoddFrank. 

I assume in your bank—I served on a small-community bank 

board as well, and we had plumbers, electricians, and home builders all impacted with those mortgage loans that were being made. 

And you have a collateral of domino effect that actually moves in. 

Is there a concern? Because we have had, I think, abundant testimony frankly from Chair Yellen, Governor Tarullo, and all of the 

Administration officials in terms of the trickle-down effect of rules 

and regulations. 

Right now we are still waiting for 40 percent of Dodd-Frank to 

be able to come into play. How is this going to have a real impact 

on those community banks, their ability to be able to make those 

loans to the communities that frankly right now and be able to buttress, to a little bit of Mr. Pittenger’s comments, of the impacts of 

an economy that is not working for all Americans? For the first 

time since we have been keeping statistics, we have more small 

businesses shutting down than there are new business startups. 

That typically describes rural America. 

Mr. PURCELL. And the shoe hasn’t dropped yet because I believe 

the CFPB is going to start investigating how they can help on the 

small-business lending and start passing out fines on that, too. So, if it costs you $125 or $130 a loan to make in compliance costs, what do you have to charge a $500 borrower to get your 

money back? You are going to lose money on it. 

How many businesses can keep going when they lose money? 

They can’t. So the size of the loan keeps growing up to cover those 

costs and then you have the CFPB coming in saying let us go 

ahead and attack the small business. It has nothing to do with the 

economy, it is just that you guys don’t know how to loan money. 

Or better yet, let the Post Office do it. 

Mr. TIPTON. Great. 

Mr. Allison, would you maybe like to comment a little bit in 

terms of the impact of those regulations, in terms of startups and 

small businesses? 

Mr. ALLISON. I think they have been traumatic. As I said earlier, 

I started my career as a small-business lender. That is what BB&T 

did, that was our core business. We did a lot of what I would call 

venture capital lending where you make a judgment of the individual and the idea instead of just the numbers. 

I was fortunate enough to help a lot of small businesses become 

bigger businesses. And it is not just startup. There is a moment 

where a business says, I am going to have two locations or I am 

going to have a hundred. And at that moment you have to make 

a judgment call. You cannot do that in today’s marketplace. 

The way the regulators have tightened lending standards, they 

would immediately make you charge that loan off or they would reVerDate Nov 24 2008 20:16 Mar 05, 2018 Jkt 025875 PO 00000 Frm 00062 Fmt 6633 Sfmt 6633 K:\DOCS\25875.TXT TERI
59 

quire so much down payment that the guy couldn’t do it. It kills 

that market. 

And that market, even though only a small percentage of them 

get to be bigwigs, that is a huge job creator and really important 

in terms of prosperity. 

Mr. TIPTON. I find it interesting, we have had a lot of commentary, a lot of testimony, your comments here today on the importance of our community banks, our small credit unions, delivering a service to communities. 

But Mr. Purcell points out, in Texas they lost 149 community 

banks. I assume mergers probably took place. Is Dodd-Frank actually driving a self-fulfilling prophecy and rather than eliminating 

too-big-to-fail actually driving it into a more consolidated market, 

which is going to create far more challenges, far more risks for the 

economy as we move forward? 

Mr. Allison? 

Mr. ALLISON. No question it is encouraging consolidation. And I 

will have to say this: I am not sure the Fed doesn’t like that because the Federal Reserve would much rather regulate a relatively 

small number of banks which they can have a huge control over 

than a lot of banks running in a different direction. 

So it may not be a conscious policy, but I am almost positive it 

is an unconscious policy. They like the consolidation process because it gives them more control and that is what they think is 

good. 

Mr. TIPTON. I appreciate that. 

And Mr. Chairman, I think as we listen to this testimony, I am 

hearing stories about communities, I am hearing Home Depot 

would not start up under the regulatory environment today. I am 

hearing from credit unions that are saying that they are struggling 

to be able to provide a service to rural communities. 

And I want to applaud your leadership in regards to the 

CHOICE Act to try and be able to open those markets back up to 

our local communities to be able to make those real decisions at the 

local level. 

To be able to make something, Mr. Allison, you spoke to in terms 

of a character loan, people who actually know their customers, to 

be able to open that economy, that real capital so that we can get 

this economy moving and let all Americans share in some future 

prosperity. 

I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Utah, Mrs. Love. 

Mrs. LOVE. Thank you, Mr. Chairman. 

I would like to thank all of you for being here today. It is really 

beneficial for me to hear your expertise and just your experiences 

in this area. 

I want to change gears a little bit and focus on the Volcker Rule. 

From its inception, the Volcker Rule has been a solution in 

search of a problem. It seeks to address the activities that have 

nothing to do with the financial crisis and the practical effect has 

been to undermine the financial stability rather than preserve it. 

The Volcker Rule will increase borrowing costs for businesses, 

lower investment returns for households, and reduce economic acVerDate Nov 24 2008 20:16 Mar 05, 2018 Jkt 025875 PO 00000 Frm 00063 Fmt 6633 Sfmt 6633 K:\DOCS\25875.TXT TERI
60 

tivity overall because it constrains market-making activities that 

already reduce liquidity in key fixed-income market-making activities. 

Repeal of the Volcker Rule, as the CHOICE Act provides, will 

promote more including the corporate bond markets and will promote more stable financial systems. 

So this is my question for Mr. Pollock: Why have the five regulators charged with implementing the Volcker Rule yet to find any 

connection between the Volcker Rule and the precipitous drop in 

bond market liquidity? 

Mr. POLLOCK. There is something else they haven’t found, Congresswoman, which, as you said in the beginning, is a link between 

the financial crisis and the things prevented by the Volcker Rule 

in the first place. 

If you are committed to the rule, of course, you don’t want to find 

things that are wrong with it. That would be a speculation of mine. 

Mrs. LOVE. Okay. Has the Volcker Rule, in your opinion, had any 

impact on cost of hedging risk? And what consequences does that 

have for businesses and other customers of banks? 

Mr. POLLOCK. I am not an expert on this particular topic, Congresswoman, but I believe that it is true what you say, that whenever you tie up an activity with more and more regulation you are 

going to create problems that you didn’t mean to create, but you 

have created them anyway. 

Mrs. LOVE. Mr. Allison, do you have anything to add to that? 

Mr. ALLISON. Yes. I would say, again, it is not my area of expertise, but I would say almost certainly the Volcker Rule has reduced 

liquidity in bond markets. It would have to because it makes it 

harder for big banks to hold bond portfolios. So it has definitely reduced liquidity. 

Mrs. LOVE. Okay. 

Mr. ALLISON. And I would just reemphasize what Mr. Pollock 

said. There is no evidence that a problem the Volcker Rule was trying to deal with had anything to do with the financial crisis. So 

why did it get thrown in? 

Mrs. LOVE. Okay. So if proprietary trading has no social good or 

value in creating liquidity and creating markets, why then did Congress exempt U.S. obligations and those of States and municipalities from proprietary trading then? 

Mr. ALLISON. Obviously, they believed it really does have some 

good or they wouldn’t have exempted themselves. 

Mr. POLLOCK. That is a wonderful rhetorical question, Congresswoman, and you answered your own question. 

Mrs. LOVE. Just asking, would you agree that the net effect of 

post-crisis regulations is to remove productive capital out of the 

real economy and leave it stranded in government securities? 

Mr. ALLISON. No question. The mathematics will support that. 

But even more important is what I call intellectual capital. And if 

you have all the brains in the financial services industry, which is 

a massive, productive industry that creates thousands and thousands of jobs, thinking about regulations, instead of about how to 

provide better products, how to improve technology, that has a 

huge impact on economic well-being. 

61 

And there has been basically no innovation in the industry since 

Dodd-Frank. And that is a big cost. There is not just a capital cost 

on that. A human resource is the most important resource. And we 

put balls and chains around our human resource. 

Mrs. LOVE. Okay. And I just have one more. I guess I would ask 

the two gentlemen this question again: Are we already seeing the 

impacts of the real economy, even though many of these regulations are just being implemented? What are your thoughts about 

what is just being implemented and what the future looks like 5, 

10, 15 years down the road? 

Understand that my background is, I am a mayor, and I have 

seen how these community banks have literally built our city. I am 

not just talking about a teacher who is building an expansion of 

her school that helps 4-year olds read, but I am talking about people who have built our community. 

Chairman HENSARLING. The time of the gentlelady has expired. 

Members are advised there is a pending procedural vote on the 

Floor, with 10 minutes, 13 seconds left. 

The Chair will recognize the last Member, Mr. Hill from Arkansas, and then we will adjourn the hearing. 

The gentleman from Arkansas is recognized. 

Mr. HILL. Thanks, Mr. Chairman, and I thank the ranking member as well for holding this hearing on the CHOICE Act. 

I have been in banking on and off in my career for a long time, 

since the 1970s, since before the Monetary Control Act was passed, 

Garn-St. Germain, so I have a little experience. 

I would like to ask unanimous consent to enter in the record an 

article from The Arkansas Democrat-Gazette dated 6/19/2016. 

Chairman HENSARLING. Without objection, it is so ordered. 

Mr. HILL. This article talks about the return on assets of community banks in Arkansas, which 104 banks, by the way that is about 

half of what it was when I was involved in starting my last company, offered an RoA of 129. Pretty good. 

But if you back out the four big banks that are chartered in Arkansas, it is only a .8, 40 basis points less, and that is endemic to 

the struggle I think that our community banks have in coping with 

the competitive situation and the costly situation brought about by 

Dodd-Frank, reducing consumer lending, reducing small-business 

lending and trying to comply with all the rules. 

For even if those small banks are ‘‘exempt’’ from an exam by the 

CFPB, they are not in any way exempt from the costs and regulations promulgated by the CFPB. 

The other thing I wanted to mention before I ask a question is 

my good friend from Missouri, Mr. Cleaver, went through a long 

litany and you guys participated in the give-and-take on all the due 

diligence that had happened before the Dodd-Frank Act was passed 

by the House and the Senate in 2010. 

What he failed to mention, though, is that the Congress commissioned a financial inquiry commission to find out what in fact took 

place in the financial crisis and make recommendations to this 

body as to what to do about it. But I would report to you that 

Dodd-Frank passed 6 months before that commission issued their 

report. So that is my response to Mr. Cleaver. 

62 

I want to talk about the leveraged ratio and get some give-andtake. As I understand in the discussion draft the committee has 

put out that it uses the supplementary leveraged ratio that Mr. 

Newell talked about extensively, which includes, of course, off-balance-sheet items. 

And for my way of thinking, I think the straight GAAP, tier-one 

leveraged ratio might be superior and certainly be related to the 

vast, vast majority of banks in the country. Plus, we can all measure it pretty easily by looking at the call report data. 

Mr. Newell, would you start on that and comment on that point, 

please? 

Mr. NEWELL. Certainly. And obviously, we have concerns just at 

the general level with the supplementary leveraged ratio in terms 

of its inaccuracy. 

I guess I would also say, in terms of the off-balance-sheet exposures, there is a very long laundry list of very technical requirements in terms of how you translate all the off-balance sheets and 

convert them into on-balance-sheet assets for purposes of the supplementary leveraged ratio, which actually makes it, I think, much 

more complicated and transparent than people might otherwise 

think. 

But I can certainly imagine on the one hand that for smaller 

banks, like Mr. Purcell’s, there is probably not a whole lot of offbalance-sheet exposures that would be worth that incredibly cumbersome exercise. 

Mr. HILL. So do you think that perhaps then for smaller banks 

that don’t report on the call report any off-balance-sheet exposure 

that maybe they could use the more strict tier-one GAAP ratio instead of— 

Mr. NEWELL. Yes. I certainly would not think that the complicated conversion would be, add any net benefit. 

Mr. HILL. Mr. Purcell, do you want to comment on that? 

Mr. PURCELL. For instance, we are probably 9.7 percent on our 

capital. We do not have the off-balance-sheet problems, and yet the 

type of bank we are, we are over 30 percent on our risk based because maybe our deposits at Fed may be a little bit suspect, but 

typically we hold quite a bit of cash and bonds in agencies and government. 

But I don’t think the off-balance-sheet items will affect us at all. 

Mr. HILL. Thank you very much. 

Mr. Allison, in looking at the proposed list of regulatory relief 

that one would get if they held the 10 percent capital ratio, can you 

think of another area besides the ones that are included in the bill 

that might be useful? 

Of course, we talk about Basel III, we talk about the CFPB, we 

talk about Volcker, for example. But how about in the non-DoddFrank arena, are there things that would benefit our institutions, 

that there might be some relief there in another area? 

Mr. ALLISON. If I were in charge, I would go across the whole 

spectrum. I think a lot of regulations are counterproductive for the 

economy and counterproductive for the people they are supposed to 

help. 

So you are making a good step, but I would do more. 

Mr. HILL. Thank you. 

63 

Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

I would like to thank our witnesses for their testimony today. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. 

I ask our witnesses to please respond as promptly as you are 

able. 

Also, without objection, Members will have 5 legislative days to 

submit extraneous materials to the Chair for inclusion in the 

record. 

This hearing stands adjourned. 

[Whereupon, at 1:26 p.m., the hearing was adjourned.] 

(65) 

A P P E N D I X 

July 12, 2016 

66 


25875.001

Representative Ruben Hinojosa 

FINANCIAL SERVICES COMMITTEE 

Page 1 ofl 

"Making a Financial Choice: More Capital or More Government Control? 

Remarks for the Record: 

Wednesday, July 12,2016 

Raybum2l28 

lO:OOAM 

The Financial Choice Act represents a dangerous return to an unregulated and highly susceptible 

financial services industry that was embraced in the years leading up to, and contributed to the 

financial crisis of 2008. This bill not only severely constrains our regulators, but also, eliminates 

common sense protections for the American economy and consumers. Time and time again, we 

have seen that when we ignore reasonable safeguards and place misguided faith in market 

discipline to regulate itself or in the ability of new, opaque and sophisticated financial 

instruments to eliminate risk, we not only create more risk, but, face the increased possibility of 

financial ruin. We should be working together to strengthen and protect our financial system 

rather than dismantling the Dodd-Frank Act and the very framework that has made our financial 

system safer and is our greatest defense against another financial catastrophe. 
67 


25875.002

The Committee on Financial Services 

Making a Financial Choice: More Capital or More Government Control 

July 12, 2016 

John A Allison 

! was the longest serving CEO in the US of a major financial institution, BB& T, at the time of the recent 

financial crisis. BB& T went through the financial crisis without experiencing a single quarterly loss. I had 

the unique experience and perspective of leading BB&T's lending business during the severe correction 

of the early 1980's and was CEO during the early 1990's recession. 

The Federal Reserve's monetary and regulatory policies were major contributors to the 2007-2009 Great 

Recession. On the regulatory side an excessive focus on Sarbanes Oxley, the Patriot Act, and the Privacy 

Act created a total lack of safety and soundness regulation. Investors, rightly so, assumed bank 

regulators were controlling industry risk and the investors were lulled to sleep. Without the perception 

that regulators knew what the risk were, investors would have studied the industry far more carefully. 

The market was fooled by banking regulators. 

In addition, the implementation by the banking regulators of the BASEL capital standards increased 

leverage (less capital) in large financial institutions. Using extremely complex mathematical models, 

large banks, with support from the banking examiners, convinced themselves they could take high risk 

with little capital because they could manage the risk. In addition, banking regulators were motivated to 

underestimate risk for political purposes. A financial institution was required to hold half as much capital 

for an affordable housing (subprime mortgage) as for a loan to Exxon. In Europe, banks were not 

required to hold any capital for a loan to Greece. 

The financial industry regulators seriously mishandled the 2007-2009 economic correction which is 

continuing to negatively impact economic growth. The regulators made the correction far worse than it 

needed to be. During the early 1980's and 1990's recessions the bank examiners let unhealthy banks 

and savings and loans fail. However, they did not interfere with healthy banks' lending practices. They 

allowed healthy financial institutions with rational lending standards to continue to make loans and 

support their customers and also to finance good customers who were leaving unhealthy banks. 

Unfortunately, this time, the examiners forced healthy institutions like BB& T to unnecessarily put out of 

business many small businesses who we would have supported and who would be in business today. 

These businesses would be creating good jobs and economic growth. The regulators destroyed many 

entrepreneurs unnecessarily. 

The banking regulators tightened lending standards at exactly the wrong time. They closed the barn 

door after the horse was out of the barn. These very tight lending standards remain in place for venture 

capital small business loans. Venture capital small business loans are when the lender while considering 

the financial projections primarily makes the loan based on a judgement of the borrower and the 

concept. In the current regulatory environment, while existing slow growing small businesses can often 

obtain financing, small business startups are frozen out of the market and highly innovative aggressive 

expansion plans for existing small firms will not be financed significantly slowing the growth of the firms. 
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I began my banking career as a small business/middle market lender. I was fortunate to help a number 

of small businesses which have expanded significantly and created thousands of jobs. These loans which 

were critical to the growth of these firms could not be made today. Bernie Marcus, the founder of Home 

Depot, has told me on several occasions that he could not have started and grown Home Depot in the 

current regulatory environment. 

The lack of small business venture capital funding from banks and the inability of banks to finance the 

expansion of more aggressive entrepreneurs has slowed innovation {in all industries except technology) 

and thereby significantly reduced competition. Because of the lack of competitive pressure existing 

firms are not motivated to invest for the future. They would rather cut cost and buy back shares of 

stock. The effect is to slow the growth in productivity which ultimately determines economic wellbeing 

because we cannot consume more than we produce. In the financial services industry firms are focused 

on compliance instead of innovation and productivity. 

One tragic irony is that by tightening lending standards the Federal Reserve has undermined its 

monetary policy. They cannot get the money supply to grow because the velocity of money {the money 

multiplier) has slowed because bank's are only making loans to large businesses. The Federal Reserve is 

effectively subsidizing large firms. 

Unfortunately, Dodd Frank and the related regulatory regime has not only slowed economic growth, it 

has not effectively dealt with the issues which caused the financial crisis. The "too big to fail" problem 

has not been solved. 

We all want a safe and sound financial system. However, history shows that it is naTve to believe that 

excessive regulation will accomplish this goal. The Federal Reserve economist and the banking 

regulators did not foresee the recent financial crisis. In fact, they made the crisis much worse by using 

Basel capital rules and risk weighting assets for political not economic reasons {affordable housing, 

Greek debt). Why would anyone believe regulators will not make the same mistake in the future or the 

opposite mistake which they are making today by requiring excessively tight standards for small 

business loans? Markets participants make mistakes, but they pay the price. Government regulators 

force all firms to make the same mistakes and the whole economy to pay the price. 

History has consistently shown that the best method to reduce the risk of bank failures is strong capital 

positions. During the recent correction, which was the worst recession since the Great Depression, very 

few properly capitalized banks failed. In my 40 plus year career, I do not know of a single case where 

banking regulators knew a bank was in trouble before we did and few cases where properly capitalized 

banks could not handle economic corrections. 

By far the most important aspect of this proposed legislation is the provision which allows properly 

capitalized banks to opt out of the regulatory nightmare which is paralyzing the industry and slowing 

innovation, creativity and thereby economic growth. lower income individuals are the most negatively 

damaged by this sad situation. 

For those primarily focused on safety and soundness, there can be a debate about which is the best 

capital standard. However, it is enlightening to note that after massive regulatory cost and intrusion 

over almost 8 years, Citigroup has a leverage ratio according to their recent quarterly report of only 

6.4%. If I were CEO of Citi I could not sleep at night with this low of leverage ratio. I will state with 
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certainty after many years in the banking industry that raising Citi's leverage ratio to 10% would reduce 

the risk of Citi failing far more then hiring 5000 or 10000 more regulators to micromanage the company. 

It is important that the capital ratio be reasonably simple and understandable or large banks will game 

the system. 

Also, for those who want to break up large banks logically raising capital requirements is a far more 

rational approach then arbitrarily deciding on a maximum size. Economic analysis will force the banks to 

decide to divest business segments which do not earn satisfactory returns which will significantly 

enhance the allocation of resources in the economy. 

However, there must be a tradeoff between regulatory cost and stronger capital. Financial institutions 

cannot survive with the stifling cost of Dodd Frank and higher capital. Interestingly, the regulators know 

this even those they will not admit it. Why have they not insisted on more capital already? Because they 

know the regulatory cost/capital equation implied in Dodd Frank will not work. They have chosen more 

regulation over more capital because that is their job and expands their perceived importance. 

The opt out provision instead of a forced strategy is an optimal concept. I believe that markets will 

quickly conclude that those institutions which do not opt out are weak. Who would voluntarily 

participate in the regulatory quagmire of Dodd Frank? The opt out process will increase capital in the 

industry thereby reducing risk. The reduced regulatory cost will make financial intermediaries far more 

efficient and encourage innovation in the industry. Core financial institutions, such as community banks, 

will be able to get back to their business of growing their communities. 

There are no examples of healthy economies without healthy banks. 

Resume: 

UNC-Chapel Hill: BS in Business Administration, Phi Beta Kappa, 1971 

Duke University: Masters in Management, 1974 

CEO BB&T: 1989-2008 (Joined BB&T in 1971} 

Chairman BB& T: 1989-2009 

Distinguished Professor of Practice: Wake Forest University 2009-2012 

President and CEO Cato Institute 2012-2015 

Executive in Residence: Wake Forest University 2015-Present 

Six Honorary Doctorate Degrees 
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Adam J. Levitin 

Professor of Lalt· 

GEORGETOWN UNIVERSITY LAW CENTER 

Written Testimony of 

Adam J. Levitin 

Professor of Law 

Georgetown University Law Center 

Before the United States House of Representatives 

Committee on Financial Services 

"Making a Financial Choice: More Capital or More Government Control" 

July 12,2015 

10:00 am 

Rayburn House Ollice Building 2128 
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2 

Witness Background Statement 

Adam J. Levitin is a Professor of Law at the Georgetown University Law Center, in 

Washington, D.C., where he teaches courses in financial regulation, structured finance, contracts, 

bankruptcy, and commercial law. Among his publications is Financial &structuring: Business 

Bankruptcy in the Modern Commercial IJ7or!d (\'Volters Kluwer 2015). 

Professor Levitin has previously served as the Bruce W. Nichols Visiting Professor of Law at 

Harvard Law School, as the Robert Zinman Scholar in Residence at the American Bankruptcy 

Institute, as Special Counsel to the Congressional Oversight Panel supervising the Troubled Asset 

Relief Program (fARP), and on the Consumer Financial Protection Bureau's Consumer Advisory 

Board. 

Before joining the Georgetown faculty, Professor Levitin practiced in the Business Finance 

& Restructuring Department ofWeil, Gotshal & Manges, LLP in New York, and served as law clerk 

to the Honorable Jane R. Roth on the United States Court of Appeals for the Third Circuit. 

Professor Levitin holds a J.D. from Harvard Law School, an M.Phil and an A.M. from 

Columbia University, and an A.B. from Harvard College. In 2013 he was awarded the American 

Law Institute's Young Scholars Medal. 

Professor Levitin has not received any federal t-,>rants or any compensation in connection 

with his testimony, and he is not testifying on behalf of any organization. The views expressed in 

his testimony are solely his own. 

© 2016, Adam J. Levitin 
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3 

~Q_!'<'_'l'E_~TS 

I. A SIMPLE LEVERAGE REQUIREMENT ALONElS INADEQUATE TO ENSURE FINANC!ALSTABlLITY 5 

A. The CHOICE Act Actually Involves Two Choices, One of Which Is Reasonable, and the Other of Which Is 

Dangerous ................. _ .................................................................................................... -··-································ 5 

B. The CHOICE Act's TJVo-Tracked Approach to Financial Stability Courts Disaster .................................. 6 

C. Shm~holder Dircipline Is Inefftctive and Often Counterproducti?Je for Managing Risks at Financial 

Institutions ............................................................. -........................................................................................... 7 

D. Tbe CHOICE Act Does Not Address Illiquidity, Which Is the Immediate Cause of Financial Crises ....... 7 

E. The Use of a Sinrple Leverage Ratio Without Other Protections Incentivi<fs Risky Bank Behm!ior .............. 8 

E The CHOICE Act's 10% Leverage Ratio Is Gameable ............................................................................. 8 

G. There Is No Evztlential)• Basis for the Choice of a 10% Let;erage Ratio ....................................................... 8 

H. The CHOICE Act Eliminates Protections A,gainst Excessive Risk-Taking by Financial Institutions ........ 9 

I. The CHOICE Act Eliminates Key RegulatOI)' Tools for Responding to Cri.res ........................................... 11 

]. The CHOICE Act H.nsures that Regulators !Viii Be Inefftctive u•ith Their Remaining Tools by Subjecting 

Them to Political Harassment and Micromanagement ...................................................................................... 11 

K The CHOICE Act Is About Helping Mega banks, Not Community Banks; There Are Better W .rys to 

J Ie!p Community Banks .................................................................................................................................. 12 

II. THE CHOICE ACT WOULD EFFECTIVELY ELIMINATE CONSUMER PROTECTION AGAINST 

SHARP FINANCIAL PRACTICES AND DISCRIMINATORY LENDING ............................................................ 12 

A. The CHOICE Act Would Eliminate Effictive f'ederal Consumer Financial Protection .. -........................ 13 

B. Elimination of the "Abusive" Standard Will AI lou' for Sbmp Practices that Do Not Meet the Narron' 

Definition.< rf 'Unfair" and "Deceptive" .......................................................................................................... 13 

C. The CHOICE Act Facilitate.r Discriminatory Lending ............................................................................. 14 

D. The CHOiCE Act Effectively Prevents R~gulation ofP.ryd.ry Lending in d!!J' State ................................ 14 

E. The CHOICE Act Facilitates Risky Mortgage Lending ........................................................................... 1 S 

F. The CHOICE Act Will Produce a Brain-Drain at the CFPB ................................................................. 15 

G. The CHOiCE Act Prioritizes Bank Profits Over Fairness to Consumers ................................................ 16 

III. THE CHOICE AcT'S FINANCIAL INSTITUTION BANKRUPTCY PROPOSAL Is UNWORKABLE, 

PRIORITIZES WALL STREET OVER MAIN STREET, AND WOULD RESULT IN MORE BAILOUTS ............ 16 

A. Bankmptcy Is Not Desi,gned to Handle J).rtemic Ri.rk Issues, and the Pressures ofSystemic Risk Concerns 

Will Warp the Ride ofL!JV ............................................................................................................................. 17 

B. The CHOICE Acts Bankntptcy Alternative Will Not Work Because There Is No Liquidity Source for the 

Bridj!,e Company ............................................................................................................................................... 17 

C. The CHOICE Act's 48-Hour Stay.for Qualified ~Financial Contracts lf/il/ Result in Runs and Make It 

Harder to Self the Equity of the Brirf.ge Compan)' ............................................................................................. 19 

D. The CHOICE Act Makes No Provision for Re.ro!ution of Cros.r-Border A.rsets ....................................... 20 

E. The CHOICE Act Has a '7Vall Street First" Priority Scheme ................................................................ 20 

F The CHOICE Act Encourages Moral Hazard and Preferential Transfors to Insider Creditors ................. 20 

G. Because the CHOICE Acts Bankrttptcy Route h Umvorkable, Ad Hoc Bailouts Will Inevitably Happen 

in Response to Crise.r ........................................................................................................................................ 21 

CONCLUSION .................................................................................................................................................... 21 

© 2016, Adam J. Levitin 
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4 

Chairman Hensarling, Ranking Member Waters, Members of the Committee; 

Good morning. Thank you for inviting me to testifY at this hearing. My name is Adam 

Levitin. I am a Professor of Law at the Georgetown University, where I teach courses in financial 

regulation and bankruptcy, among other topics. I am here today solely as an academic who studies 

financial regulation and insolvency and am not testifying on behalf of any organization or regulated 

entity. l also have no financial interest implicated by the proposed legislation beyond that of an 

ordinary citizen. 

Today's hearing is on the Financial CHOICE Act, which is billed as an alternative to the 

Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act is overall an 

excellent piece of legislation that represents a giant leap forward in financial regulation from where 

the United States stood at the time of the financial crisis. The Dodd-Frank Act is not perfect, 

however. It does not end too-big-to-fail, and it will not necessarily prevent future bailouts. The 

CHOICE Act, though, is the wrong solution to Dodd-Frank's shortcomings, and would seriously 

endanger the U.S.'s financial stability. Simply put, the CHOICE Act is a prescription for a financial 

crisis. 

CHOICE Act represents a choice; a choice to prioritize laissez-faire ideology over careful 

and serious policy analysis and reasoning. And make no mistake: that laissez-faire ideology 

translates directly into a massive subsidy for the too-big-to-fail banks and for the bad actors in tl1e 

financial services industry. However many times the lofty terms "choice" and "hope" and "liberty" 

and "freedom" and "accountability" are used in the bill's section headings, the CHOICE Act is 

nothing more than giant giveaway to the biggest banks and to outright fraudsters. 

Take, for example, one relatively minor provision in the CHOICE Act, section 335, which 

would repeal the bipartisan Durbin Interchange Amendment to the Dodd-Frank Act.' The repeal 

of the Durbin Interchange Amendment would result in merchants paying an extra $8 billion a year 

in debit card swipe fees to the 11 0 largest banks. Much of that extra $8 billion in additional fees will 

get passed through to consumers in tl1e form of higher prices and worse service. Put another way, 

section 335 of the CHOICE Act is an $8 billion annual tax on consumers and merchants that is then 

handed over to subsidize the 110 largest banks in the United States. How is consistent with ending 

too-big-to-fail? The CHOICE Act would actually subsidize too-big-to-fail megabanks. 

And what about the 12,138 community banks and credit unions that are not affected by the 

Durbin Interchange Amendment's price caps? The CHOICE Act leaves them to compete on an 

uneven playing field against the mega banks. 2 The CHOICE Act would make it harder for 

community banks and credit unions to compete for deposit business by ensuring that the 

megabanks could use swipe fees to fund rewards proh>rams to attract consumers and thus dominate 

the deposit market. (Don't think for a second that those rewards you get are "free"-there's no 

such thing as a free lunch in finance.) So there is a choice here: a choice to subsidize the 

megabanks at the expense of Main Street, consumers, community banks, and credit unions. This 

provision, in a nutshell, captures the hypocrisy of tbe CHOICE Act. The CHOICE Act is a choice 

of Wall Street over Main Street, a choice to favor megabanks over community banks, and a choice 

to favor predatory financial firms over consumers. 

1 CHOICE Act§ 335. 2 James DiSalvo & Ryan Johnston, Hoo' Dodd-Frank Affects Small Bank CoJis, Fed. Reserve Bank of Phila. 

Research Dept., 14 16-17Q1 2016 (finding that "evidence dos not support the claim that competitive forces have 

effective imposed the interchange ceiling on small banks"). 

© 2016, Adam J. Levitin 
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5 

The CHOICE Act is a lent,>thy piece of legislation, and 1 do not attempt to critique it 

provision-by-provision in this testimony. Instead, my testimony focuses on the first three titles of 

the CHOICE Act, with occasional reference to provisions in other titles because the effect of these 

titles can only be understood when viewed together. 

Title I gives highly capitalized banks the ability to opt-out of Basel III capital and liquidity 

requirements and the Dodd-Frank heightened prudential standards systemic risk regulatory system. 

\'\!hile I believe there are serious problems with the proposed trade off of higher capital 

requirements for other types of prudential regulation, it is important to recognize that title I of the 

CHOICE Act cannot be sensibly analyzed in isolation from the CHOICE Act's other provisions. 

Not only does title I of the CHOICE Act remove regulators' ability to mitigate systemic risk from 

many of the largest banks, but title III of the CHOICE Act strips away effective consumer 

protections, giving unscrupulous financial institutions free rein to engage in predatory, but 

unsustainable lending practices, as happened in the run-up to the 2008 crisis. When a systemic crisis 

occurs, as it inevitably will under a CHOICE Act regime, title II of the CHOICE Act ensures that 

the result will be an unmanageable mess that will ultimately result in a messy bailout, as title 1 denies 

regulators key crisis response tools. The CHOICE Act throws fuel on the fire while taking away 

the fire department's hoses. In short, the CHOICE Act is a recipe for financial disaster. 

!,_ft. SIMPL]l LEVEJ!AGE REQUIREMF;NT ALONE Is INADEQUATE TO ENSURE FINANCIAL 

STABILITY 

The signature provision of the CHOICE Act is the replacement of a host of regulatory 

requirements designed to ensure against the failure of systemically important financial institutions 

with a simple, rather dun a risk-weighted leverage requirement. That simple leverage requirement is 

a ratio of 10% "tangible equity" to "leverage exposure",3 which is nothing more than the Basel Ill 

"Supplementary Leverage Ratio" (SLR) 4 

Specifically, the CHOICE Act would permit banks and credit unions with an SLR of at least 

10% and a composite CAMELS rating of 1 or 2 to elect to be exempted from various regulatory 

requirements, including Basel HI capital and liquidity standards, deposit concentration limits, and the 

"heightened prudential standards" applicable to larger financial institutions under section 165 of the 

Dodd-Frank Act, namely living wills, periodic credit exposure reports, credit exposure limits, shortterm debt limits, internal risk committees, and (for non-banks) stress tests. 

A. Tbe CHOICE Act Actually Involves Two Cboices, One of Wbicb Is Reasonable, and the 

Otber of Wbich Is Dangerous 

Although the CHOICE Act is structured as a single opt-out provision, it is important to 

recognize that the CHOICE Act is actually proposing fll'o separate regulatory traderfft because only the 

megabanks are subject to the Dodd--Frank heightened prudential standards: 

3 CHOICE Act§§ 101-102. It's ironic that the CHOICE Act section 335 proposes the repeal of the Durbin 

Interchange Amendment as an improper intervention in the market through price caps, yet imposing a similar type of 

fiat regulation in terms of financial instJrution capital requirements. 4 The numerator ln the CHOICE Act's ratio is tangible eyuity-Comrnon Equity Tier 1 plus additional Tier 1 

capital (and Trust Preferred Securities for smaller banks), while the denominator is the "total leverage exposure" as 

defined in 12 C.F.R. § 3.10(c)(4)(ii). This is just the "Supplemental Leverage Ratio" of 12 C.F.R. § 3.10(c)(4). 

© 2016, Adam J. Levitin 
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6 

(1) For community banks, the CHOICE Act would allow the use of the 10% SLR in lieu of 

the Basel III capital and liquidity standards. This means that community banks could 

use a simple leverage ratio instead of a risk-weighted leverage ratio. 

(2) For megabanks, the CHOICE Act would allow the use of the 10% SLR in lieu of the 

Basel III capital and liquidity standards and the Dodd-Frank heightened prudential standards. 

Recognizing that there are these two separate tradeoffs within the CHOICE Act is key to 

seeing the CHOICE Act's problems. The first trade, that of a simple leverage ratio for riskweighted leverage ratios and only for community banks, has much to commend it, although I believe 

it could be better designed. A simple leverage ratio has much to commend it over a risk-weighted 

leverage ratio because it can be less gamcable and distortionary if designed well. (Unfortunately, the 

CHOICE Act's leverage ratio is not well-designed, as discussed below.) Likewise, the use of a 

leverage ratio like the SLR that includes off-balance sheet exposures, is a better measure than one 

that only looks to on-balance sheet exposures, given the frequent reality of implicit recourse in the 

financial system. 

But the second trade, that of a simple leverage ratio for risk-weighted leverage ratios and 

relief from the Dodd-Frank heightened pleading standards is hugely problematic and is an 

unnecessary and dangerous giveaway to the megabanks. Ounce for ounce, the best approach to 

safety and soundness is requiring more equity. But it does not follow that the best regulatory 

approach is only a simple equity requirement. An effective financial regulatory system incorporates a 

strong capital requirement with a comprehensive range of other safety-and-soundness tools. Thus, 

other proposals for higher leverage requirements, such as the Brown-Vitter bill in the Senate5 and 

FDIC Vice-Chairman Hoenig's regulatory relief plan, would maintain additional regulatory 

safeguards against excessively risky business practices. Strong capital requirements are a necessary, 

but not sufficient condition for ensuring systemic financial stability. 

B. The CHOICE Act's Two-Tracked Approach to Financial Stability Courts Disaster 

For both community banks and megabanks, the CHOICE Act sets up a two-tracked 

approach to financial regulation: a track of financial institutions subject to a Basel III and a paireddown Dodd-Frank Act and a track of financial institutions that opt out of Basel Ill and the DoddFrank Act altogether. This is a remarkably bad idea that courts disaster not just for the opt-outs, but 

for those institutions that remain subject to the manque Dodd-Frank regime. If an opt-out 

institution fails, the effect will not just be borne by its shareholders. Instead, it may well drag down 

financia1 institutions that have not opted out of the Dodd· Frank regulatory regime and are relying on 

ex-ante regulation for safety-and-soundness, not on higher capital levels. 

In other words, the CHOICE Act does not prevent systemic externalities. Instead, it relies 

on nothing other than blind ideological faith on opt-out institutions not failing. If history has taught 

us anything it is that there are lots of ways for a financial institution to fail. Either all financial 

institutions need to be under the Dodd-Frank regulatory regime or they all need to have higher 

capital levels. The CHOICE Act's pick-your-own-adventure approach, however, could result in the 

worst of both worlds. 

s Terminating Bailouts for Taxpayer Fairness Act of 2013, S.798 (113rh Congress). 

© 2016, Adam]. Levitin 
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7 

C. Share holder Discipline Is Inc.ffectivc and Often Counterproductive for Managing Risks at 

Financial Institutions 

The CHOICE Act relies on shareholder discipline rather than on regulators to ensure that 

the financial institutions that opt out of Dodd-Frank do not take on excessive risks. While I share 

some of the CHOICE Act's sponsors' skepticism of the effectiveness of financial regulators,' relying 

on markets alone to discipline risk-taking is unrealistic. Financial institutions, particularly large, 

complex ones, have opaque balance sheets that make it hard for the market to know what a financial 

institution is up to until it is too late. Market discipline for financial institutions is often after-thefact. 

Market discipline can also push banks to take on excessive risks because shareholders often 

prioritize short-term gain over long-term value. Thus, during the housing bubble, Countrywide 

Financial, one of the most aggressive players in the mortgage market, was the market's darling from 

2001 until mid-2007, far outperforming other S&P 500 banks. 7 In contrast, JPMorgan Chase was 

more conservative than many of the other large banks, and its stock underperformed that of other 

S&P 500 banks during the same period." The market rewarded the risky, and ultimately disastrous 

strategy. So much for market discipline reliably preventing excessive risk-taking. 

There should be no more cautionary words in this regard than those of then-Citigroup CEO 

Charles E. Prince regarding why Citigroup continued to be long on the housing market despite 

Prince's doubts, "When the music stops, in terms of liquidity, things will be complicated .... But as 

long as the music is playing, you've got to get up and dance. We're still dancing."' Not long 

afterwards Citigroup was bailed out. 

Market discipline has a role to play in financial regulation, but market discipline alone will 

result in financial instability. Indeed, market discipline is likely to push firms that opt out of Basel III 

capital requirements to pursue grrater risks. Firms that opt out of Basel III under the CHOICE Act 

will be less highly leveraged than those that remain under Basel III. Opt-out firms will have to 

compete for capital with firms that are subject to Basel HI. Less leveraged firms have lower returns 

on equity, ail else being equal. Therefore, in order to compete for capital with more leveraged firms, 

a less leveraged firm has to assume greater risks in order to equal the more leveraged firms' return 

on equity. Put another way, market discipline on share prices is likely to encourage excessive risktaking at firms that opt-out of Basel III. 

D. The CHOICE Act Does Not Address Illiquidity, Which Is the Immediate Cause of 

Financial Crises 

A major shortcoming of the CHOICE Act's opt-out option for ail banks is that it only 

addresses solvency, not liquidity. If the policy goal is to prevent taxpayers from bearing the cost of 

the failure of systemically important financial institutions, then ensuring that these institutions are 

unlikely to fail is a good place to begin. A strong equity cushion is the best guard against insoillency, 

but the problem for systemically important financial institutions is not typically insolvency, but 

illiquidity. (Illiquidity ultimately begets insolvency, but it is illiquidity that results in the firm's failure.) 

While an equity cushion will help reduce ultimate losses from an insolvency, it will not prevent the 

6 See ,~dam J Levitin, Saft Banking. Finanee and Democracy, 83 U. CHIC L. REV. 357 (2016). 7 \'Xlilliam \\1. Bratton & Michad \X'achter, The Case At,ainst Shareholder Empowemtent, 158 U. PA. L. REV. 653, 716-

723 (2010). 8 Id. at 720-21. 

9 Stephen Kotkin, A Bear Saw Around the COma; N.Y. TIMES, Jan. 4, 2009, at BU2 (reviewing and quoting from 

JAMES GRANT, MR. MARKET MISCALCULATES: THE BUBBLE YEARS AND BEYOND (2008)). 

© 2016, AdamJ. Levitin 
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8 

market disruption and spillover effects from a firm being j]Jjquid, particularly when paired with the 

unworkable financial institution bankruptcy system envisioned by the CHOICE Act (discussed 

below) and the disabling of regulators' emergency response tools (also discussed below). A simple 

equity requirement does nothing to prevent against illiquidity. Unfortunately, notlung in tl1e 

CHOICE Act addresses ilie j]Jjquidity risk, which is ilie real regulatory problem. 

E. The Use of a Simple Leverage Ratio Without Other Protections Incentivizes Ris~ Bank 

Behavior 

The CHOICE Act gives banks ilie options of being subject to a simple leverage ratio instead 

of a risk-weighted leverage ratio. A simple leverage ratio has much to commend it relative to a riskweighted leverage ratio. Risk-weightings are imprecise (risks do not come only in buckets of 20%, 

50%, and 100%, but constitute a spectrum), politicized (e.g., lower risk-weighting for sovereign and 

mortgage assets), and gameable. A simple leverage ratio avoids all of iliose problems. On the other 

hand, a simple leverage ratio incentivizes banks to load on up riskier-and thus higher yieldingassets. This problem with a simple leverage ratio can be mitigated, but only if iliere are other 

regulatory tools, such as credit exposure limits and liquidity requirements. The CHOICE Act, 

unfortunately, would adopt a simple leverage ratio while eliminating the regulatory tools necessary to 

prevent banks from gaming the simple leverage ratio by seeking out high-risk assets. 

F. The CHOICE Act's 10% Leverage Ratio Is Gameable 

The CHOICE Act's measure of capital for the 10'Yo leverage ratio is gameable, enabling 

firms to opt out of Dodd-Frank wiiliout really having a 10% leverage ratio on a regular basis. The 

CHOICE Act measures firms' leverage ratios on the last day of the quarter. This enables a strategy 

similar to ilie infamous Lehman Brothers Repo 105, in which assets are moved off-balance sheet 

just for the day of capital measurement. While ilie CHOICE Act's leverage exposure measure 

includes off-balance sheet exposures, I have little doubt iliat bank lawyers and accountants will find 

work-arounds through various capital relief trades. A better approach would be to require a running 

daily average of capital ratios. 

G. There Is No Evidentiary Basis for the Choice of a 10% Leverage Ratio 

Even if one were to believe that a simple equity ratio alone is the right regulatory approach, 

there is the subsidiary question of wheilier 10% is ilie right level. There is no basis whatsoever for 

a 10% number. The 10% number adopted by the CHOICE Act is apparently indirectly derived 

solely from research by Bank of England Chief Economist Andrew Haldane.10 The problem is iliat 

the Haldane research does not in fact support a 10% simple leverage ratio, much less as a substitute 

for other regulatory supervision, and in fact no research supports a 10% leverage ratio. The 

CHOICE Act's 10% figure is just made up. 

The Republican memorandum on ilie CHOICE Act credits the Haldane research for the 

proposition that no bank with a simple leverage ratio of over 10% failed or was bailed out in the last 

financial crisis. 11 This is a narrowly correct reading of a graph in Haldane's research, but Haldane 

does not draw the conclusion that a 1 0% level is the right level for a simple leverage ratio. Instead, 

his point was merely that simple leverage ratios are generally more effective than risk-weighted 

10 House Committee on Financial Services, The Financial Choia Act: 

Consumers. and Entrepreneurs-A Republican Proposal to RJ;fonn rhe Finandal 

Andrew Haldane, Address at the Federal Reserve Bank of Kansas 

the Frisbee (Aug. 31, 2012), 

"!d. 

© 2016, Adam J. Levitin 

Creating Hope and ltmestors, 

SyJtem, June (citing 

economic policy symposium: The do,g and 
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9 

leverage ratios at predicting bank failure." He finds statistical significance regarding the use of 

simple leverage ratios, rather than risk-weighted ratios, as predictors of bank failure, 13 but nowhere 

does Haldane suggest that the simple leverage ratio should be 10%. Indeed, Haldane's data are 

incapable of supporting that conclusion. Haldane's research involved a sample of only 37 banks. 14 

Only one of those banks had a leverage ratio of over 10%, making it impossible for his data to 

support any statistically valid claim about a 10% leveL Moreover, whether or not banks failed in 

2008-2009 did not occur in a vacuum; but for the massive government intervention in those years 

surely more banks would have failed. And, Haldane's research does not control for the particular 

regulatory schemes applicable to those banks other than their capital levels. Haldane's research, 

then, supports the use of a simple leverage ratio, rather than a risk-weighted leverage ratio, but it 

says nothing about 10% being the proper threshold. 

It is also important to note that Haldane does not argue that a simple leverage ratio alone is 

all that is needed. In the same research relied upon by the Republican memorandum, Haldane 

outlines five interlaced policy measures needed to achieve financial stability, including 

"strengthening supervisory discretion" and "regulating complexity explicitly." 16 Thus, Andrew 

Haldane's work does not support the idea of a leverage requirement of any sort instead of other 

regulation. There is no evidentiary basis for choosing a 10°!.> leverage ratio. It is a number plucked 

out of the air. 

H. The CHOICE Act Eliminates Protections Against Excessive Risk-Taking by Financial 

Institutions 

Another reason the CHOICE Act's reliance on a 10% simple leverage ratio is inadequate is 

that the CHOICE Act eliminates key protections to ensure that capital adequacy is never put to the 

test in the first place. Among other provisions, the CHOICE Act: 

exempts nonbank financial institutions that make the capital election from virtually all 

federal pmdential regulation;17 

repeals the Volcker Rule, which prohibits financial institutions from engaging in proprietary 

investments using depositor funds 18 By repealing the Volcker Rule, the CHOICE Act is 

practically begging financial institutions to engage in high-risk speculative behavior; 

eliminates federal regulators' ability to prescribe risk management standards for critical 

financial market utilities such as clearinghouses. 19 The Dodd-Frank Act requires most types 

of swaps to be cleared through clearinghouses. 20 Mandated central clearing is preferable to 

bilateral clearing, it does have tl1e effect of making clearinghouses unique nodes of 

concentrated risk in the financial system. 21 A well-managed clearinghouse should be able to 

manage such risk. Accordingly, the Dodd-Frank Act gave regulators the power to prescribe 

12 Andrew Haldane, Address at the Federal Reserve Bank of Kansas 

The dog and the Frisbee (Aug. 31, 2012), 

llJdatll. 

14 !d. at 10. 

IS Id. at 29, Chart 5. 16 !tl at 14. 

"CHOICE Act§ 102(a)(8). 

''CHOICE Act§ 901. 19 CHOICE Act§ 251 (proposing repeal of Dodd-Frank Act ticle VIII). 20 Dodd-Frank Act section 723. 21 Adam]. Levitin, The Tenuous Casefor DeriPatives Cleannghoust"· 101 GEO. LJ. 445 (2013). 

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risk management standards for clearinghouses and similar utilities to ensure that they are 

well-managed. The tracking of risk and regulation reflects the Spiderman principle of 

financial regulation: with great risk goes great regulation. Unfortunately, the CHOICE Act 

keeps the clearinghouse requirement, but eliminates regulators' ability to ensure that 

clearinghouses are in fact well run. The result is an enormous government handout to the 

clearinghouses: the clearinghouses receive a legally blessed monopoly, but without any 

regulatory oversight; 

eliminates the risk retention requirement for securitizations of non-residential mortgage. 22 

The risk retention requirement is an anti-moral hazard provision that recognizes the 

temptation of securitizcrs to use their informational advantage over investors to shift greater 

risks to investors than the investors realize; 

makes it difficult for U.S. regulators to coordinate with foreign financial regulators for the 

purpose of monitoring and mitigating threats to financial stability.23 

The CHOICE Act also has numerous provisions that make it difficult for the SEC to pursue 

enforcement actions and achieve meaningful relief. These provisions reduce the SEC's deterrence 

ahilit:y and thereby embolden financial fraudsters whose malfeasance can reverberate throughout the 

financial system. Among other provisions, the CHOICE Act: 

requires the SEC to make additional findings before levying civil monetary penalties against 

issuers.24 Thus, while the CHOICE Act increases financial fraud penalties with the one 

hand,25 with the other it ensures that those penalties will rarely be imposed. 

repeals the SEC's authority to issue officer and director bans. 26 This means that even the 

worst fraudsters will continue to be able to participate in securities markets. 

eliminates automatic bad actor disqualification from securities law exemptions even for firms 

that have been convicted of jelonies. 27 Apparently a convicted felon cannot be trusted with the 

right to vote, but can be trusted with pension funds and retirees' savings. 

To be fair, the CHOICE Act arguably requires some degree of additional safety-andsoundness regulation by providing that the 10% simple leverage ratio alternative is available to banks 

only if they received a CAMELs rating of 1 or 2 as of their last examination before the election. 28 

The high CAMELs rating requirement, however, applies only to depository institutions, not to nonbanks, which do not have CAMELs ratings, and the CHOICE Act exempts non-banks from 

virtually all regulation by federal regulators." Thus, a non-bank financial institution need only meet 

the 10% capital requirement, nothing more, to avoid the Dodd-Prank heightened prudential 

standards. 

Moreover, the CAMELs rating requirement is a one-dme requirement that applies only 

when the bank elects the alternative ratio. A bank's CAMELs rating could fall thereafter, but it 

would not be resubjected to the full battery of Dodd-Frank Act regulatory requirements. In short, 

22 CHOICE Act§ 442. 

CHOICE Act§ 671. 

24 CHOICE Act§ 417. 

25 CHO£CE Act§§ 801-811 

"CHOICE Act§ 418. 

CHOICE Act§ 419. 213 CAMELs j::; an acronym for Capital adequacy, Asset quality, Management, Earnings, and Liquidity. 

29 CHOICE i\ct § 102(a)(8). 

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the CAMELs rating requirement does not do a lot of work. Under the CHOICE Act, there really is 

nothing but a cushion of 10% equity standing between a financial institution and failure, even if that 

failure has systemic consequences. 

I. The CHOICE Act Eliminates Key Regulatory Tools for Responding to Crises 

The CHOICE Act not only takes away regulators' tools for preventing crises, but it takes 

away their tools for responding to crises. The CHOICE Act repeals the FDIC's ability to create a 

widely available program to guaranty the obligations of solvent depositories and their holding 

companies during times of severe economic stress. 30 'lbe CHOICE Act also renders the Federal 

Reserve's emergency lender-of-last-resort power under section 13(3) of the Federal Reserve Act 

effectively unusable by requiring the Federal Reserve Board and all federal banking regulators with 

jurisdiction over the borrower to certify that the borrower is not insolvent at the time of initial 

borrowing. 31 Making an affirmative determination of solvency is timely and costly and not 

something that federal regulators can do on a market-wide scale during a crisis. As a result, if there 

is a fire in the financial sector, the firemen will be without hoses. 

]. The CHOICE Act Ensures that Regulators Will Be Ineffective with Their Remaining 

Tools by Suijecting Them to Political Harassment and Micromanagement 

The CHOICE Act not only takes away key crisis prevention and crisis response tools from 

regulators, but it also effectively ensures that regulators will not be able to adequately use even the 

tools they have left. The CHOICE Act ensures regulatory ineffectiveness by creating a system that 

facilitates political harassment and micromanagement of regulators. To wit, the CHOICE Act 

includes: 

an unprecedented prohibition against any significant new financial regulations from taking 

effect unless both Houses of Congress approve within 70 days.32 Given Congressional 

deadlock, this all but ensures that there will be no further financial regulation, period; 

the elimination of the long-standing Supreme Court precedent that requires courts to defer 

to the subject-matter experts in regulatory agencies when reviewing agency rulemakings. 33 

The lack of judicial deference will encourage financial institutions to bring court challenges 

to all actions taken by financial rq,,>ulators; 

an inappropriate cost-benefit analysis requirement for all financial regulatory rulemakings 

(without even subjecting the cost-benefit analysis requirement to cost-benefit analysis). 34 

Formal cost-benefit analysis requirements are nothing more than a way to slow the 

regulatory process and enable court challenges to regulation; 

3o CHOICE Act§ 241. 

3l CHOICE Act§ 707. I note that this provision is similar to that proposed in the Warren-Vitter bill in the 

Senate. \X!hile the provision has much to commend it in isolation, as it is in the Warren- Vitter bill, it is more problematic 

when combined with the other provisions of the CHOICE Act that incenrivize banks to engage in riskier behavior in the 

first place. 

32 CHOICE Act§ 632. 31 CHOICE Act§ G4L Apparently access to the courts is a good thing when it benefits businesses, but not 

when it benefits consumers. Cf. CHOICE Act § 338 (stripping CFPB of authority to limit binding mandatory 

arbitration). 

3

4 CHOICE Act 612. Regarding the appropriateness of cost~bencfit analysis in financial regulation, see John 

C. Coates IV, of Financial fugulation: Case Stndies and Implications, 124 YALE LJ. 882 (2015) (arguing 

that cost-benefit is only appropriate when its benefits exceed its costs, which arc unlikely in the fmanciaJ 

regulatory area because of the highly speculative nature of regulations' impacts on the economy). 

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a requirement that regulators spend time constantly reviewing past rulemakings with an eye 

toward deregulation." 

The CHOICE Act would also put all financial regulators onto appropriations, 36 creating the 

possibility of undue political interference with regulation and giving Wall Street a second bite at the 

apple through backroom influence on the appropriations process. Altogether, then the various 

provisions of the CHOICE Act will guaranty ineffective regulators. The result will be free rein for 

\'Vall Street to engage in systemically risky behaviors. 

K. The CHOICE Act Is About Helping Mcgabanks, Not Community Banks; There Are 

Better Ways to Help Community Banks 

To the extent that the CHOICE Act's 10% leverage ratio alternative is in fact meant to help 

primarily community banks, I applaud the goal, but I would underscore that there are better and 

more direct ways to do so. The Basel III capital and liquidity rules are a poor fit for America's 

community banks, and I support targeted regulatory relief, including different regulatory capital 

requirements and a separate charter, for community banks, which already struggle to compete in a 

market where economies of scale are often key. Community banks' operations and risks are simply 

different from mega banks, and so too should their regulation be different. 

The CHOICE Act, however, opens the door not just for regulatory relief for community 

banks, but also for megabanks. "That is particularly dangerous because the regulatory safeguards 

such as the Volcker Act that the CHOICE Act would eliminate are especially important for 

megabanks. An easy fix (although probably not the optimal one) would be the restrict Title I of the 

CHOICE Act to community banks (reasonably defined as having under $10 billion or, perhaps even 

under $2 billion in consolidated assets). 

It is hard to believe that the CHOICE Act is really about helping community banks. There's 

a telltale sign: the CHOICE Act would exempt firms with 10% leverage ratios from tbe Riegle-Neal 

Act limitation on a single bank acquiring by merger over 10% of the deposits in the United States. 3

' 

That is an exemption that, by definition, can only benefit a megabank. Thus, the CHOICE Act not 

only disarms financial regulators, but it paves the road for megabanks to get even bigger and riskier. 

Title I of the CHOICE Act, then, primes the pump for a financial disaster. Title III, 

discussed next, pours more fuel on the fire by gutting consumer financial protections. And Tide II 

of the CHOICE Act creates a regime for resolving the mess that will flow from Titles I and III. 

Unfortunately, that resolution regime is totally unworkable and because it is unworkable, the result 

will he ad hoc bailouts. 

II. THE C:I:!__QICE ACT -'~'9ULD EFfJ<:~I!VELY__.!3:LIMINAT!';_C.P.NSUMER PROTECTION AGAINST 

$HARP_l't~ANCIAL PRACTIC~AND DIS<;:JliMINATO!!.Y. LENDING 

Consumer spending drives the American economy, and consumer spending goes through 

the financial system. To the extent that pervasive problems emerge in the consumer finance space, 

they are likely to cause far-reaching economic problems. Accordingly, strong consumer financial 

protection is a key component of financial stability. The Dodd-Frank Act achieved a singular 

3s CHOICE Act§§ 615-616. 

36 CHOICE Act§§ 661-665. 37 CHOICE Act§ J02(a)(5) (exemption from section 18(c)(13) of the FDIC Act), 102(a)(9) (exemption from 

any federal law, rule, or regulation that would impose a deposit concentration limit). 

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success in this area with the creation of the CFPB, an effective, unconflicted regulator dedicated to 

consumer financial protection. The CFPB is the only federal financial regulator to finish all of its 

Dodd-Frank Act rulemakings on schedule, and in just a few years of existence it has already 

achieved over $11 billion in consumer relief, benefitting nearly 20 million consumers:" These 

results dwarf the relief achieved by nearly a dozen regulators over the course of the previous two 

decades. In short the CFPB has been a remarkably effective regulator. 

A. The CHOICE Act Would Eliminate Effective Federal Consumer Financial Protection 

The CHOICE Act would destroy the CFPB. It would do so in the most Orwellian fashion, 

creating a rebranded "Consumer Financial Opportunity Commission" that has litde real ability to 

undertake any rulemaking or enforcement. Indeed, the proposed Consumer Financial Opportunity 

Commission would literally fulfill its name-it would ensure that consumers are financial 

opportunities for businesses engaged in sharp practices. And in such an unfettered market, the bad 

'"ill drive out the good,39 as consumers cannot readily distinguish good actors from bad ones. This 

is a market that no honest business should want. 

The CHOICE Act destruction of the CFPB begins by changing the CFPB's structure from 

that of a single director to a commission. If that were the only change proposed, it would be an 

issue about which reasonable minds could disagree in good faith. I believe there are good reasons to 

have a single director, but there are credible arguments that can be made in favor of a commission 

structure. The problem is that the proposed change in leadership structure is not the only CFPB 

amendment proposed by the CHOICE Act. 'When the transformation to a commission structure is 

coupled with the complete neutering of the CFPB's rulemaking, supervision, and enforcement 

powers, intense political interference and micromanagement,'0 and provisions that will make it 

impossible for the CFPB to attract highly-qualified personnel, it is clear what is afoot: the CHOICE 

Act seeks to create an utterly ineffectual consumer financial services regulator so that bad actors will 

have free rein to take advantage of consumers, with the toothless agency serving as a beard against 

any constituent political pushback. In other words, the CHOICE Act will take consumer financial 

protection back to the pre-Dodd-Frank Act days when it did not exist in any meaningful way on the 

federal leveL 

B. Elimination of the "Abusive" Standard Will Allow for Sharp Practices that Do Not 

Meet the Narrow Definitions of "Unfair" and "Deceptive" 

To see just how the CHOICE Act neuters the CFPB, consider what the CHOICE Act does 

with tbe Dodd-Frank Act prohibltion on "abusive" acts and practices.41 The "abusive~' prohibition 

was one of the more controversial provisions of the Dodd-Frank Act. Critics have questioned what 

exacdy falls within the scope of the abusive prohibition, which is not defined by statute. (The 

statute imposes restrictions on the CFPB's ability to make rules designating acts and practices as 

21, 2015, at 

84 Q. J. ECON. 488 

(1970). 40 The CHOICE Act would subject the CFPB to Congressjonal appropriations. Although I appreciate the 

impulse for there to be democratic accountability for regulat01y agencies, the appropriations process is not simply about 

democratic accountabjJity. It is an opportunity for horse-trading, logrolling, and backdoor policy changes. Subjecting 

the CFPB to appropriations simply ensures that consumer financial protection can be held hostage every budget cyde. 

That is likely to result in a one-way dcret,¥Ulatory ratchet:. The whole reason the CFPB is not currently subject to 

appropriations is so it will not be dragged down by Congressional dysfunction and politics. 41 Dodd-Frank )\ct § 1036. 

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abusive, 12 but does not define "abusive" per se.) To date, the CFPB has not finalized any 

rulemakings under the abusive prohibition, and it has undertaken only a handful of enforcement 

actions that invoke the abusive standard. The prohibition on abusive acts and practices is a critical 

gap-filler for the traditional prohibition against unfair and deceptive acts and practices (UDAP). 

Too many things can fall between the cracks of "unfair" and "deceptive" as currently interpreted. 

Unfair requires a cost-benefit analysis that allows sharp practices to continue if they benefit some 

consumers even at the expense of others. Deceptive requires an actual misleading statement or 

omission. That is hardly the universe of sharp practices. For example, consider the following 

practices that might qualify as abusive, and that should, at the very least, give us pause: 

A lender lending to consumers whom the lender knows cannot repay in full and on-time 

~ikely because the lender receives high rollover or up front fees or has the ability to sell the 

loan to a third party); 

A lender whose business model anticipates default rates of over 50%; 

A loan broker steering consumers into higher cost loans when they qualify for lower cost 

ones because the high cost loan will result in greater compensation for the broker might 

both qualify as abusive. 

There is a reasonable critique of the "abusive" power as drafted, namely that the statute 

should actually define "abusive", rather than limit what the CFPB can do in terms of rulemaking. 

1be CHOICE Act, however, does not just restrict the CFPB's power under 12 U.S.C. § 1131 to 

undertake rulemakings desigoating certain acts and practices as "abusive." Nor does the CHOICE 

Act tighten the definition of "abusive." Instead, the CHOICE Act actually makes "abusive" acts 

and practices legal by also repealing 12 U.S.C. § 1136.43 Apparently financial liberty includes the 

liberty to engage in abusive acts and practices. 

C. The CHOICE Act Facilitates Discriminatory Lending 

Financial liberty also apparently includes the right to engage in discriminatory lending. 

Among the most invidious provisions in the CHOICE Act are a trio that would shield 

discriminatory lenders from legal repercussions. The CHOICE Act would nullify the CFPB's 

indirect auto lending guidance and impose an onerous process for any future guidance. 44 The 

CHOICE Act would reduce the data collected under the Home Mortgage Disclosure Act, a key antidiscriminatory lending law45 And under the cynical heading of "Right to Lend," the CHOICE Act 

would prohibit data collection on small business lending, ensuring that regulators will lack the data 

necessary to conduct examinations for discriminatory small business lending.'" The choice being 

made by the CHOICE Act is a choice to protect discriminatory lending. 

D. The CHOICE Act Effectively Prevents Regulation of Payday Lending in Any State 

The CHOICE Act showers love on payday lenders. Section 333 of the CHOICE Act allows 

states and Indian tribes to opt out of federal out of payday regulation. The opt-out can be renewed 

perpetually. There are other state opt-out provisions in federal consumer financial protection 

statutes, but those provisions are desigoed to allow for gnater not le.rser state consumer protection" 

43 CHOICE Act§ 44 CHOICE Act§ 334. 

45 CHOICE Act§ 1171(c). 46 CHOICEAct§ 1161. 

47 See, e.g., 12 U.S.C. § 3804. 

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More critical, however, is that lendm· in states and Indian tribes that opt-out offederal regulations are stzll 

permitted to lend across state lines. The result is to ensure that federal regulation of payday lenders 

ineffective even in states that want regulation. If the issue is states rights, states should be permitted 

to opt-out of the federal regulation, but lenders should also be limited to lending only in-state or 

within tribal territory. Indeed, if states rights are so important in financial regulation, then Congress 

should move to overturn the Supreme Court's Marquette decision that allowed national banks to 

export interest rates."' 

E. The CHOICE Act Facilitates Risky Mortgage Lending 

The CHOICE Act also eviscerates consumer protections in mortgage lending. In mortgage 

lending, the CHOICE Act raises the trigger threshold for what is considered a "high cost" mortgage 

loan,49 and thus subject to additional regulatory protections. It also creates a portfolio lending safe 

harbor for the Dodd-Frank Act's "ability to repay" requirement-'0 While portfolio lending does not 

have the same moral hazard potential as securitization, it does not guaranty an alignment of lender 

and borrower interests, and even if it did, we know from experience that portfolio lenders can make 

lots of mistakes-Washins>ton Mutual and Countrywide retained many of their option-ARMs in 

portfolio, and the entire S&L crisis was about portfolio lenders. 

F. The CHOICE Act Will Produce a Brain-Drain at the CFPB 

The CHOICE Act not only attacks the CFPB's substantive powers, but it also aims to create 

a calamitous brain drain at the CFPB. The CFPB has assembled an amazing talent pool, equaled by 

few, if any government agencies. Part of the attraction of working at the CFPB is its mission-driven 

culture, but part is undeniably that the CFPB offers more competitive pay. The alternative 

employment for many CFPB employees is with the private sector financial institutions the CFPB 

regulates. If the CFPB had to pay regular GS pay scale, as proposed by the CHOICE Act, 51 it would 

not be able to attract top-flight talent. 

Likewise, a key part of the CFPB, as an evidence-driven agency, is its research unit. The 

CHOICE Act would effectively destroy the CFPB's research unit's ability to get data and thus to 

attract talented researchers. Section 324 of the CHOICE Act requires that the CFPB (or CFOC) 

make public all data, studies, and other analysis on which its research papers are based52 It bears 

underscoring that CFPB research papers arc not policy positions, but studies by economists and 

other scholars who work for the CFPB." Those researchers come to the CFPB with the express 

understanding that they will have to commit a certain percentage of their time to working in support 

of CFPB regulatory activities, but that they will also have a certain percentage of their time available 

to purpose research of their choosing, as well as access to the agency's data. This is an incredible 

draw that enables the CFPB to compete with elite academic institutions for top-flight researchers. 

48 ,'l{arquette National Bank v. Fir.rt of Omaha Service Cotp., 439 U.S. 299 (1978). 

49 CHOICE Act§ 1101-1103. 

50 CHOICE Act§ 1116. 

51 CHOICE Act§ 325. It is a mark of the CHOICE Act's sponsors' animus toward the CFPB that the CFPB 

is singled out among federal financial regulators for a reduction in pay scale. 

sz CHOICE Act 324. 

53 The official the CFPB has put out, such as tho~c required by Congress under section 1028 of DoddFrank regarding arbitration, have been scmpulously non-interpretive, but simple pre!ientations of statistical information. 

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Many data sources that the CFPB has cannot be publicly disclosed as a matter of contract, 

and the CHOICE Act would make others prohibitively expensive to disclose. 54 Requiring 

publication of these data sources means that the CFPB will not be able to publish research papers, 

and that will create a serious brain drain (and adverse selection) in the CFPB's research unit. The 

result will be an ineffectual CFPB-just what Wall Street wants. 

G. The CHOICE Act Prioritizes Bank Profits Over Fairness to Consumers 

Most telling, though, about what really is motivating the CHOICE Act is section 332(b), 

which provides that the CFPB (or, to be precise, the rcbranded Consumer Financial Opportunity 

Commission) must consider "the impact of such rule on the financial safety or soundness of an 

insured depository institution". 55 "Financial safety or soundness" means profitability-an 

unprofitable institution is not safe or sound. In other words, the CFPB needs to consider how 

important an unfair or deceptive practice is to the profitability of an insured depository as part of a 

rulemaking. The only reason to undertake an unfair or deceptive act or practice, however, is because 

it is profitable. Thus, if a depository is only profitable because of an unfair or deceptive act or 

practice, the CFPB will have a difficult time making a rule that can withstand court challenge. Tlus is 

the equivalent of saying that it is legal to rob people ... as long as doing so is critical to your 

livelihood. The CHOICE Act cannot credibly claim to promote consumer protection when it is 

giving out free licenses to fleece consumers. 

In sum, the CHOICE Act replace a single director with a commission to ensure regulatory 

dysfunction, mandates a cost-benefit analysis that makes no sense in this context, 56 legalizes 

"abusive" practices, it ensures that payday lenders can operate without regulation, reduces the 

effectiveness of protections against predatory mortgage loans, 57 effectively prevents the CFPB from 

policing discriminatory lending, protects all kinds of otherwise illegal acts if they are profitable, and 

it deprives consumers of their right to a day in court by allowing businesses to forcing them into 

private arbitration. 58 This is not consumer protection, but consumer abuse. 

III. THE CHOICE Ac_:r's FINA.:NQAL lNSTITUTIOl'L BANKR(lfTCY P_R_QfQSAI. Is 

lJNWQRK.A»Ml,!'Jl.1QRITIZES_}Y}.._!.I._~1;:B.~Ji:LOVEJl.M~I!'! __ STR~J';I,_,~Nil WOULD.~SULT !!". 

MORE BAILOUTS 

To fully understand the problems created by Title I of the CHOICE Act, it is necessary to 

understand how they would be resolved. Title I of tbe CHOICE Act would eliminate a key set of 

prudential regulatjons for certain financial institutions. Title HI would effectively eliminate 

consumer financial protection. Combined these titles and other assorted provisions of the 

54 CHOICE Act § 331. The consumer notification provisions seem to be motivated by a completely 

unfounded belief that the CFPB has information about indiv-idual consumers' spending choices, as opposed to 

aggregated spending data. If the CFPB-or any government agency-regularly collected information about individual 

consumer's individual purchases, 1 would be gravely concerned. But the CFPB's critics simply do not understand the 

nature of the data the CFPB collects, and have substituted paranoia for facts in this regard. See Adam J. Levitin, The 

CFPB 's Data Collection Lr To Be Appla11ded, AM. BANKER. Aug. 18, 2015. See 11/so Hearing Before the Senate Judiciary 

Committee, Subcommittee on The Constitution, "The Administrative State v. 'The Constitution: Dodd-Frank at Five 

Years," July 23,2015 (oral testimony and written questions for the record of Prof. Adam]. Levitin). 

ss CHOICE Act§ 332(b). My read is that the statute intends this provision to apply to a gcnerk depository 

institution, rather than to an ach1al, specific depository institution, but the drafting is unclear in this regard. 

56 See Coates, note 34. 

'"CHOICE 1101-1103, 1116. 

ss CHOICE Act 338. 

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CHOICE Act guaranty financial crises. Unfortunately the CHOICE Act also strips regulators of 

key crisis management tools and instead, in title II, naively provides for financial institution 

resolution to be handled by the bankruptcy courts without any government assistance. The result 

will be spectacularly messy. 

Specifically, the CHOICE Act would replace title II of the Dodd-Frank Act (the Orderly 

Liquidation Authority title) with a new subchapter V to chapter 11 of the Bankruptcy Code designed 

for "covered financial corporations" --essentially large financial holding corporations and bank 

holding corporations. The proposed subchapter V institutes a "good bank/bad bank" structure 

through bankruptcy: the good assets of the failed institution, along with its "non-capital structure" 

debt would be transferred to a newly created bridge company (the "good bank"). The bad assets 

and the capital structure debt would remain with the debtor firm (the "bad hank"). If everytlung 

works right, then after the transfer, the good bank should have clearly positive equity value, whereas 

the bad bank is likely insolvent. The equity of the good bank would then be sold, with the proceeds 

going to satisfy the claims of the creditors of the bad bank. 

A. Bankruptry Is Not Designed to Handle Systemic Risk Issues, and the Pressures of 

Systemic Risk Concerns Will Warp the Rule of Law 

As an initial matter, it's worthwhile noting that this structure is basically a codification of the 

structure used in the Gl\I and Chrysler bankruptcies. 59 The adoption of this structure is rather 

surprising given the criticism of the GM and Chrysler bankruptcies by Chairman Hensarling when 

he was serving on the Cont,>ressional Oversight Panel for the Troubled Asset Relief Program60 

One of the complaints about the GM and Chrysler were their supposed failure to follow 

bankruptcy rules of priority. While this criticism is incorrect (the absolute priority rule applies only 

in a cramdown confirmation, and only to unsecured claimants and equity interests), it underscores a 

more fundamental point: the bankruptcy system is not designed for dealing with systemic financial 

crises. \'Vhen a non-Article HI judge with no expertise in the particular debtor firm or in financial 

markets generally is presented with a situation in which he is told that he has to immediately approve 

a transaction or else the US economy will collapse, that judge is put in an untenable position and is 

likely to approve the transaction, whether or not it complies with the law. The rule of law virtues of 

the bankruptcy system will inevitably become warped when the system is dragooned to handle 

systemic risks that trump any law. Put differently, it is bad for bankruptcy courts to deal with 

systemic risk, and it is bad for systemic risk to have bankruptcy courts managing the resolution 

process. 

B. The CHOICE Act's Bankruptry Alternative Will Not Work Because There Is No 

Liquidity Source for the Bridge Company 

First and foremost among the problems with the CHOICE Act's turn to bankruptcy is that 

the CHOICE Act provides no financing mechanism for the bridge company. It is j;zzpps.rible to conduct 

a liquidation or a ~~organization without financing. This is not a matter of opinion. It is something every 

first-year bankruptcy associate knows. Because there is no provision for reliable financing in 

subchapter V, it cannot work. Period. 

59 Jee Jeffrey McCracken et al. U.S. Tbrratms Br~nkruptcy for GM, Chrysler, WALL ST. J. Mar. :n, 2009 (describing 

use of bankruptcy for implementing good bank/bad bank plan). 6° CONGRESSIONAL OVERSIGHT PANEL, SEPTEMBER OVERSIGHT REPORT, USE OF TARP FuNDS IN Tl!E 

Sl'PPORT AND REORGANIZATION OF THE DOMESTIC AUTOMOTIVE INDUSTRY, Sept. 9, 2009, at 148, 160 (additional 

views of Rep. Jeb Hensarling). 

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The bridge company will need liquidity to operate from the vety moment it comes into 

existence. It will need to be able to pay to keep the lights on, retain employees, maintain insnrance 

coverage, pay ta.xes, etc. The bridge company must have the financial wherewithal to be able to 

assume the contractual assets of the bad bank. The bridge company is prohibited from assuming any 

of the bad bank's assets unless it can show that it is likely to be able to perform on any contracts it 

assumes. 61 Thus, unless the bridge company can obtain financing, the entire structure of the 

proposed subtitle V bankruptcy proceeding cannot work. 

\'IC'here will financing for the bridge company's operations come from? It cannot come from 

the sale of the bridge company's equity, because the proceeds of that equity sale are earmarked by 

statute for the creditors of the bad bank_62 Retained earnings represented another possible source of 

financing, but they will take too long to accumulate in sufficient volume to finance operations. 

Thus, the only way tl1e bridge company can get funding is going to be obtaining a loan from 

someone, and it will need that funding on day 1 of the bankruptcy. Who is going to make that loan? 

Perhaps tl1e buyer of the good bank, but that assumes that there is a buyer is waiting in the wings, 

who just wants to use the bankruptcy process as a way to scoop of the good assets, without the bad 

ones. That will not be the case in messier situations, and even when there is a stalking horse, few 

potential buyers will want to extend credit unless they are assured that their purchase bid will be 

successful. 

This leaves the private lending market as a financing source. It is absurd to t!Unk that private 

capital markets will be able to underwrite multi-billion dollar loans to a newly established firm with 

an uncertain equity value on little or no notice at a time when credit markets are in turmoil. In order 

to operate as a going-concern, a large financial firm needs substantial liquidity. JPMorgan Chase, for 

example, has around $500 billion in high quality liquid assets that cover peak short-term cash 

outflows.63 It is hard to imagine private capital markets coming up with much more than one onehundredth of that within the time necessary. 

Many of the assets assumed by the bridge will not be high quality liquid assets, particularly 

because of the all/ or nothing requirement regarding assumption of Qualified Financial Contracts 

(QFCs)- swaps, derivatives, securities and options contracts, forward and futures contracts, and 

master netting agreements." Moreover, outflows are likely to be high given the uncertainty of the 

bridge company's financial strength; the bridge company will be fighting a run. Even if the bridge 

company does not have immediate liquidity needs of hundreds of billions, counterparties will run if 

that funding is not there to provide reassurance. Thus, it's quite reasonable to assume that the 

bridge company would need a credit facility of tens or even hundreds of billions of dollars to 

assuage counterparties, and possibly much, much more. 

\'IC'ho is going to make a $50 or $100 billion loan on almost no notice at a time when credit 

markets are in turmoil? 65 Even in good conditions, with plenty of notice, a loan of that size would 

be difficult, if not impossible to arrange. Consider: the largest private syndicated loan in history was 

$75 billion, raised in November 2015 for AB InBev's takeover bid for SABJ'vlillct, and that syndicate 

61 CHOICE Act§ 232 (proposed section 1185(a)(6)). 

62 CHOICE Act§ 232 (proposed section 

Chase, Film Oven;iew, Feb. 23, at .hnns://W\v~~J.Q.!.\;{~_[l_chase . .£Q.lJlL<;:Q_rp.QJ~QY~;itOrN.Y. TlMES, Oct. 13, 2008, at 

!J.HP.:iL\l.c'!!J!22slliJ:JY£'!!1.l'gQ!I!.Ull.lliill.t.!LUJ'.llililk@J;'l.Q'~l!Jlilll!£ill~l!QY~§c.C.l>ill&.. (noting the difficulty obtaining DIP 

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took week.s to assemble for a solvent firm66 The largest private debtor-in-possession financing ever 

assembled was a mere $9 billion loan for Energy Futures Holdings in 2014.67 It's not reasonable to 

believe that private markets could produce immediate financing for the bridge company of much 

beyond $5-$10 billion during a crisis, and that is unlikely to be sufficient. Government financing is 

not an option-the CHOICE Act closes the door on such a possibility." 

The bottom line is this: it is not credible to suggest that a financial institution bankruptcy 

process can work without standby government financing. I recognize that such government 

involvement is ideologically anathema to many members, but government is capable for bearing 

certain risks that the private market cannot, and the risk of a need for a massive and immediate 

liquidity injection into a firm is such a risk. Even if the proposed bankruptcy process were modified 

to include a standby government financing provision for the bridge company, however, there are 

stiU enormous problems. 

C. The CHOICE Act's 48-Hour Stay for Qualified Financial Contracts Will Result in 

Runs and Make It Harder to Sell the Equity of the Bridge Company 

The CHOICE Act contemplates a stay of only 48 hours for QFCs69 This short stay creates a 

number of problems. First, it increases the likelihood of a run on the debtor and the bridge 

company as soon as 48 hours passes. The bridge company will not be able to consummate a sale of 

its assets within 48 hours of the filing, which will mean that there is some degree of uncertainty 

about whether it will ultimately be able to honor its contractual obligatjons. Faced with this 

uncertainty (not to mention the bridge company's problems obtaining financing), QFC 

counterparties are likely to accelerate, terminate, and liquidate their contracts, and once that begins, 

it will inevitably turn into a run, as no counterparty wants to be the last one left when faced with a 

firm with uncertain repayment ability. 

That means that the bridge company bas only 48 hours to decide which QFCs it wishes to 

assume and which to reject. This is not a realistic timeframe for evaluating which QFCs are valuable 

and which are not. Consider that a JPMorgan Chase has some $70 trillion in derivative exposures. 

It is not possible to sort through those contracts responsibly in 48 hours, particularly when all hell is 

breaking loose and key managers are spending their time shopping their resumes with other 

employers. 

Further complicating things is that the CHOICE Act requires that the bridge company 

assume all or none of the QFCs with a given counterparty. 711 The result will be that the bridge 

company will have to either assume bad QFCs in order to assume good ones or will have to reject 

good QFCs in order to avoid bad ones. Either way the bridge company will end up in a 

substantially weaker financial position. This will reduce the value of the bridge company's equity 

and thus the return for the creditors of the failed firm whose debts are not assumed. 

66 Alasdair Rei1ly & Tessa \XIalsh, AB InBett barks SABA1i!ler b!fY with record $75 billion loan, REUTERS, Nov. 13, 

2015, at bnp:/ /www.,Jc~Jt~ts...!Qillll~rti~kllls-ahinb~Y: LQ.e._ns-iillJ..~I::;_cJ·~·liYf019li~iH51113. 

''7 Billy Cheung, Energy Future Holding.< lining up $9 billion bankruptcy financing, REUTERS, Mar. 27, 2014, at 

hl.tp;Llwww.reuters.com/artici<Jm-r~n.~n.!ll2Lh9-loaQ,":il!1)$J\REA£Ql.30201403.ZZ. 

"CHOICE Act 707. 

69 CHOICE Act 232 (proposed section 1187(a)(3).) 

I note that CHOICE Act leaves open the \.]uestion of ·whether corporate affiliates count as a single 

counterparty or not. 71 This all·or nothing approach undermines the whole good bank/bad bank structure contemplated by 

subchapter V because the bridge company will not truly be a "good bank," as it will have to assume plenty of bad assets 

as well as good ones. 

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D. The CHOICE Act Makes No Provision for Resolution of Cross-Border Assets 

Large financial firms often operate internationally and have cross-border assets. Nothing in 

title II of the CHOICE Act even addresses the problem of assets outside of the United States, 

which may be a critical component of a financial firm's value. Chapter 15 of the Bankruptcy Code 

provides a mechanism for international cooperation between U.S. and foreign insolvency 

proceedings, but Chapter 15 is not designed to move on the same time table as subchapter V, and it 

is unclear how a foreign regulatory actions, rather than judicial actions would interface with a U.S. 

legal proceeding. If foreign regulators ring-fence the debtor firm's foreign affiliates (as they are 

likely to do), substantial value could be lost to foreit,'l1 creditors. The lack of attention to 

international restructuring problems is a glaring omission in the CHOICE Act. 

E. The CHOICE Act Has a "Wall Street First" Priority Scheme 

The CHOICE Act also creates a priority scheme that deviates significantly from traditional 

bankruptcy law priorities and ensures that Wall Street creditors get paid, while Main Street creditors 

get "bupkes": 

Only certain types of liabilities can be assumed by the bridge company (and thus paid 100 

cents on the dollar). QFCs are eligible for assumption by the bridge company72 In contrast, 

regular bond debt, deposit liabilities, and debts owed to suppliers, employees, retirees, and 

judgment creditors cannot be assumed by the bridge company and will be paid pennies on 

the dollar, if anything. Thus the CHOICE Act makes sure that Wall Street gets repaid, while 

Main Street does not.73 

\X'hen secured debts arc assumed by the bridge company, they must be paid 100 cents on the 

dollar, even if the debts are underwater.74 This is a complete deviation from the standard 

bankruptcy rule that secured creditors are guarantied a recovery only of the value of their 

collateral, not of the face amount of their debt. 75 The result is a huge boondoggle for 

secured creditors--Wall Street, not Main Street. 

F. The CHOICE Act Encourages Moral Hazard and Preferential Transfers to Insider 

Creditors 

Beyond the fundamental viability problems and skewed priority scheme, there arc a number 

of other flaws with the proposed bankruptcy subchapter. These flaws are not fatal to the operation 

of the proposed system, but are consistent with the ovcrarching theme in the CHOICE Act of 

interfering with regulators' ability to head off financial crises and enabling "head I win, tails you 

lose" behavior by financial institutions under the guise of "libertyn. 

1be CHOICE Act places the decision to file for bankruptcy solely in the hands of the 

debtor firm. 76 There is no involuntary bankruptcy allowed under subchapter V. The 

management of an insolvent firm has little incentive to file for bankruptcy, however, and 

every incentive to "gamble on resurrection," when it is insolvent and playing with creditors' 

72 CHOICE Act§ 232 (proposed section 1185). 73 Ironically, a similar problem exists with the FDIC's proposed Single· Point of Entry (SPOE) approach under 

title II of the Dodd-Frank Act. 74 CHOICE Act 232 (proposed section 1185(c)(3)(A)(i)). 

11 U.S.C. §§ 725, 1129~>)(2)(A). 

76 CHOICE Act§ (proposed section 77 CHOICE Act§ 232 (proposed section 

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21 

money. Thus, subchapter V might never be used, or it might only be used once it is too late 

and the systemic risk has metastasized. 

The CHOICE Act absolves directors of any liability for actions taken in contemplation of or 

in connection with" a bankruptcy petition or asset transfer to the bridge company. 78 While 

this provision might be intended to encourage directors to use subchapter V, it also creates a 

moral hazard because directors will not have liability for their pre-bankruptcy actions. 

The CHOICE Act prohibits actions to avoid transfers made "in contemplation or 

connection with" a subchapter V filing. 79 This means that debtors have free rein to engage 

in preferential transfers on the eve of bankruptcy. It also facilitates "gold parachute" 

payments to officers and directors if made in connection with the transfer to a bridge 

company. 

G. Because the CHOICE Act's Bankruptcy Route Is Unworkable, Ad Hoc Bailouts Will 

Inevitab(y Happen in Response to Crises 

What happens in a world in which Congress has mandaree! an unworkable bankruptcy 

process for dealing with the failure of large financial institutions? One of three things: 

The bankruptcy process will be abused as in GM and Chrysler to achieve the financial 

stability end sought by whatever administration is in office; 

There will be a questionably illegal bailout, with lots of finger-wagging after the fact, as 

occurred with the use of the Exchange Stabilization Fund to aiel Mexico in 1994; 

Congress will rapidly pass bailout legislation, much as it did with the Emergency Economic 

Stabilization Act in 2008. 

None of these arc desirable outcomes. Nobody likes bailouts. But realistically they are inevitable 

when things get bad enough because no one wants to deal with the political consequences of a true 

economic meltdown. 80 The realistic goal is not avoiding bailouts altogether, but finding a 

predictable legal framework for them that puts as much of the cost as possible on the beneficiaries 

of the bailout. Insisting on bankruptcy as a bailout alternative is ideologically-driven self-deception. 

We will end up with bailouts and worse ones that if we had a formalized (if flawed) process like title 

Il of Dodd-Frank. 

~QN_CLU_l;I()N_ 

The CHOICE Act is an amalgam of bad choices. It encourages risky behavior by banks and 

condones sharp and discriminatory practices. It takes away key tools from regulators and ensures 

that they will be ineffective using their remaining tools because of political harassment and 

micromanagement. The inevitable result will be another financial crisis, but this time crisis 

resolution will be handled by a bankruptcy system that is simply incapable of performing the task 

assigned to it. The result will be chaos and a hastily pieced-together bailout . . . and serious 

economic and political fallout ensuing. 

There are sensible reforms to be made to the Dodd-Frank Act, but those sensible reforms 

are not to be found in the CHOICE Act. Instead, the CHOICE Act is a full course meal of 

78 CHOICE Act§ 232 (proposed section 1183(c)). 

"CHOICE Act§ 232 section 1191). 

so Adam]. Levitin, l11 99 GEO. LJ. 435,439-40 (2011). 

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extreme, anti-regulatory ideology and bad choices. Blind faith in "free" markets should not trump 

sensible regulation. Unfettered financial markets are inherendy unstable and foster unfair, deceptive, 

and abusive practices, precisely because such practices are profitable (at least in the short term). The 

stability of the U.S. economy--of consumers' savings and of consumers' and businesses' ability to 

get funding-is simply too important to stake on an ideological gamble like the CHOICE Act. 

© 2016, Adam J. Levitin 
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Testimony of Jeremy Newell 

General Counsel 

The Clearing House Association 

Before the U.S. House Financial Services Committee 

At the Hearing Making a More or 

More Government Control? 

12,2016 

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Chairman Hensarling, Ranking Member Waters, and members of the 

Committee, my name is Jeremy Newell and I am Executive Managing Director, 

General Counsel and Head of Regulatory Affairs for The Clearing House 

Association. Established in 1853, The Clearing House is 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 24 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 owner 

banks fund more than 40 percent of the nation's business loans held by banks, 

including 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 capital regulation on U.S. globally 

systemically important banks ("G-SIBs"), U.S. regional banks of all sizes, and the 

U.S. operations of foreign banking organizations with a major U.S. presence. 

One might assume that eight years after the financial crisis would be a good 

time to assess the consequences of the established post-crisis regulation of bank 

capital. As I will discuss, however, the pace of regulatory change is not slowing, 

and U.S. and global regulators continue to pursue pending or anticipated proposals 

-most never envisioned by the Dodd-Frank Act that would fundamentally 

rework what has already been done. 

These pending regulatory efforts to introduce additional capital and other 

reforms are difficult to reconcile with the current capital position and resilience of 

the U.S. banking industry, which is extraordinarily robust, and the existing 

regulatory framework, which is extensive and stringent. Rather, we believe that 

now is the appropriate time to pause before considering additional changes and 

evaluate the efiectiveness and real-world consequences of capital reforms that 

have already been enacted with a view towards identifying: (i) reforms (or aspects 

thereof) whose benefits do not justify their costs, and (ii) ways in which post-crisis 

capital rules can be better tailored to the specific risk profiles and business models 

of different types of banks. 

In an effort to illustrate these issues, my testimony will have four parts: 

First, an overall description of both the benefits and costs of bank capital, 

which provides important context for the evaluation of enacted and still-pending 

capital refom1s. 

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Second, a description of the core post-crisis capital reforms that clearly 

have made commercial banks more resilient and resolvable, yielding benefits that 

are worth their economic costs. These benefits are sizeable and quantifiable. 

Third, a description of pending or recently enacted reforms that impose 

meaningful impediments to economic growth and access to credit by consumers 

and smaller companies, but provide few if any marginal benefits beyond what has 

already been achieved by the core reforms. In some cases these regulations are 

flawed conceptually or operationally; in others, their marginal benefit is small 

because they are duplicative (or triplicative) of other rules. And in many cases, a 

reform that might be reasonable for some has been applied on a one-size-fits-all 

basis to banks whose activities pose few if any relevant risks. 

Fourth, a description of several key considerations that should inform any 

effort to reevaluate and better rationalize existing capital requirements and postcrisis bank regulation more broadly. 

I. The Benefits and Costs of Bank Capital Regulation 

The financial crisis demonstrated that robust capital levels are essential to 

the resiliency of both individual banks and the larger financial system. The postcrisis regulatory response has rightfully focused on measures intended to improve 

and sustain the capital strength of the U.S. banking system. Although not a 

panacea, there is widespread consensus that capital is among the very best tools to 

protect the safety and soundness of banks, since capital acts as an all-purpose 

cushion that can absorb any potential losses that a bank might experience, 

whatever their cause or circumstances. For this reason, The Clearing House has 

and continues to support robust capital requirements for all banks. 

At the same time, just as there are benefits to higher bank capital, there are 

also costs. In particular, because equity is more expensive than debt funding, 

capital requirements constrain the extent to which a bank can make loans or 

engage in other financial activities that serve the needs of customers and 

businesses and support and drive economic growth. The more capital that must be 

maintained per dollar of lending or other activity, the less such activity may be 

supported per dollar of capital. This dynamic affects not only the amount of 

lending or other activity a bank may do, but also the type oflending or activity. 

This is because when capital and other costs of an asset exceed the return on that 

asset, it will become uneconomic for banks to engage in the activities that involve 

that asset. In other words, and simply put, the capital regulation of banks has real 

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and substantial power to determine how credit is allocated to the U.S. economy -

both in terms of who and how much. 1 

Given this interplay, it is important that capital regulation balances both the 

benefits and the costs of higher capital; at a certain point the incremental benefits 

of increasingly higher capital requirements for safety and soundness become 

attenuated at best, while the negative impact on lending and other key activities 

that support the economy become substantial and pronounced. It is in the context 

of finding that appropriate balance in capital regulation that I focus my remarks 

today. 

II. Core Post-Crisis Banking Reforms 

Core post-crisis banking reforms have generally sought to achieve two 

goals: resiliency and resolvability. The former significantly reduces the chance of 

bank failure through heightened capital, liquidity and other resiliency measures. 

The latter goal establishes a legal and operational framework that ensures that any 

bank can fail without systemic impact or taxpayer assistance. Each of these is 

described in detail below. 

a. Improvements to Resiliency through Enhanced Capital 

A key lesson of the financial crisis is the critical importance of maintaining 

sufficient capital and liquidity levels to ensure that banks can absorb outsize losses 

and heightened liquidity demands that typically accompany periods of financial 

stress. Responding to that key lesson, banks have significantly increased the 

amounts of high-quality capital and liquid assets they maintain, and regulators 

have enacted a range of reforms that require these heightened levels of capital and 

liquidity to remain in place over time. 

i. Current Capital Levels 

The numbers speak for themselves. The aggregate tier 1 common equity 

ratio ofTCH's 24 owner banks rose from 4.6 percent at the end of2008 to 

12.1 percent at the end of last year. In dollar terms, common equity tier 1 capital 

nearly tripled from about $326 billion to $956 billion over the past seven years. 

The Bank of England's recent decision to reduce the lJ.K. 's countercyclical capital buffer (CCyB) 

to spur economic activity in the wake ofBrexit is a good, real-world example of the overall 

relationship between capital requirements and the ability of banks to lend and support the 

economy. 

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As a benchmark for just how resilient large banks' capital positions have 

come post-crisis, consider the results of the Federal Reserve's stress test exercise 

(the "Comprehensive Capital Analysis and Review," or CCAR), which attempts to 

measure the ability of banks to withstand a severe economic downturn. For the 

2016 exercise, banks were required to demonstrate how they would perform under 

a sudden and severe recession and coincident market crisis that featured the 

following: 

);> A sudden jump in the unemployment rate of 4 percentage points (from 5 

percent to 9 percent) during the first 4 quarters of the scenario, which is 

nearly twice as severe as the increase that occurred during the 2007-

2009 financial crisis (when unemployment increased only 2 percentage 

points over the first year); 

);> A sudden decrease in GDP of more than 6 percentage points; 

);> An abrupt rise in the BBB corporate bond spread; 

);> A 50 percent drop in the equity market over four quarters, an 11,000 

point loss on the Dow; 

);> For banks with substantial trading and processing operations, the abrupt 

failure of their largest counterparty; and 

);> The emergence of negative short-term interest rates. 2 

After this stress, the 33 banks currently subject to CCAR must meet a series of 

capital requirements, including a 4.5 percent common equity tier 1 ratio. 3 And 

they must do so assuming they take no action to shrink balance sheets, reduce 

dividends, or postpone planned share repurchases - almost certainly deeply 

counterfactual assumptions. Thus, a bank that passes the CCAR exercise must not 

only have sufficient capital to avoid failure under historically unprecedented 

conditions- it must have enough capital to emerge from such an event resilient 

and doing business as usual. 

The results of the 2016 CCAR exercise, announced just a few weeks ago, 

make emphatically clear just how strong the capital position of the U.S. banking 

system has become. On a quantitative basis, after taking into account the extreme 

hypothetical downturn and banks' planned capital actions, every single one of the 

See Board of Governors of the Federal Reserve System, 20 I 6 Supervisory Scenarios for Annual 

Stress Tests Required under the Dodd-Frank Act Stress Testing Rules and the Capital Plan Rule 

(Jan. 28, 2016), available at 

lwww .federalreserve.gov /newsevents/press/bcreg!bcreg20 160 12 8a2 .pdf 

The quantitative assessment of a bank's capital plan also requires a tier I risk-based capital ratio 

above 6 percent, a total risk-based capital ratio above 8 percent and a tier 1 leverage ratio above 4 

percent. 

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33 banks subject to CCAR met their post-stress minimums. And they did so with 

substantial loss absorbency to spare. In the aggregate, on a post-stress basis, the 

CCAR banks held $275 billion in common equity tier I capital over and above 

their required post-stress minimums. Given the extraordinary amount of capital 

now held in the U.S. banking system, it is difficult to imagine on what basis one 

might conclude that either more capital or other regulatory intervention in the 

balance sheets of our nation's banks is needed at this time. 

ii. Core Capital Regulations 

The level of capital that now exists in the U.S. banking system is not 

merely a transitory trend; a series of regulatory requirements has helped to drive 

these changes and will sustain them over time. 

Increases in the quality of required capital. The financial crisis taught us 

that common equity should be the predominant component of tier 1 capital, the 

strongest class of capital, as it is most effective at absorbing losses. Accordingly, 

the Basel III capital standards and U.S. implementing rules establish common 

equity as the predominant component of capital. 

Increases in the quantity of required capital. The quantity of required bank 

capital has also increased substantially. This has been accomplished in two key 

ways- first, through a significant expansion of the denominator for capital ratios, 

and second, through a considerable increase in the minimum ratios themselves. In 

particular, Basel 2.5 more than doubled capital requirements for capital markets 

assets, and Basel III and U.S. implementing rules require banks to maintain a 

minimum risk-based common equity tier 1 ratio of 4.5 percent, as well as a 

"capital conservation buffer" of an additional 2.5 percent plus an additional 

capital surcharge for G-SIBs ranging from 1 to 4.5 percent. 4 

Emphasis on stressed rather than static measures of capital adequacy. 

Capital regulation now emphasizes stress testing to measure banks' capital 

adequacy. The first stress test deployed by the Federal Reserve was its 

Supervisory Capital Assessment Program (SCAP) exercise in 2009, which played 

a crucial role in ending the financial crisis. SCAP was subsequently codified in 

the form of the Dodd-Frank Act Stress Tests (DF AST) and the CCAR process 

described above. Although, as noted below, we have serious concerns about how 

CCAR is applied in practice along with the strong possibility that it may be 

revised in the near tem1, we nonetheless believe that it is a core reform as stress 

testing is an important and necessary tool for assessing the health of the banking 

See 78 Fed. Reg. 62018 (Oct.ll. 2013)(final rule). 

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system. In particular, stress testing represents a key improvement in capital 

regulation and supervisory practices because it incorporates a forward looking, 

dynamic assessment of capital adequacy, and is less reliant on static measures and 

recent historical performance. It also helps to address one of the key criticisms of 

a risk-based capital framework which is the concern that risk weights might 

underestimate the risk of an asset- particularly in a crisis. Stress testing provides 

a strong and dynamic backstop to guard against that potential worry. 

b. Resolvability: A Successful Legal & Operational Framework to 

Resolve Large Banks without Taxpayer Support 

Title I and Title II of the Dodd-Frank Act are core reforms that ensure that 

any banking organization can be resolved in a way that requires no taxpayer 

assistance and does not destabilize the broader financial system. For U.S. global 

systemically important bank holding companies (G-SIBs) engaged in substantial 

non-banking activities, this required a new framework, described below. For more 

traditional commercial banks that hold substantially all of their assets with an 

insured depository institution, the crisis showed that the FDIC possessed the 

necessary authority and expertise to resolve them, and major changes were not 

required. 

i. The Legal Framework: Titles I & II and Single-Point-Entry 

Resolution 

The Dodd-Frank Act established a legal framework for the resolution of a 

large banking organization, which the Federal Reserve and FDIC have 

implemented in a thoughtful way. For most U.S. G-SIBs, this progress includes 

the single-point-of-entry (SPOE) resolution strategy. Under the SPOE strategy, all 

of the losses across a U.S. G-SIB would be absorbed by shareholders and creditors 

of its parent holding company which would fail and be put into a Chapter ll 

bankruptcy. Bankruptcy should always be the preferred method of resolution- or, 

where circumstances require, an FDIC receivership under Title II of the DoddFrank Act. 

The two principal benefits of this strategy are that it: (i) makes it legally 

and operationally feasible to impose losses on holding company debt holders, 

thereby vastly expanding the loss absorbency of the relevant banks, and (ii) allows 

the material operating subsidiaries to remain open and operating, thereby 

minimizing the systemic consequences of a large banking organization failure. 

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ii. The Operational Framework: Resolution Stays on Financial 

Contracts and TLAC 

Two significant developments have greatly enhanced the credibility of 

SPOE as a resolution strategy. 

Resolution Stays on Financial Contracts. One potential shortcoming of the 

SPOE strategy was identified by regulators and market participants: if the parent 

holding company enters into a bankruptcy or resolution proceeding, then the 

counterparties of the holding company's subsidiaries might exercise "cross-default" 

rights and terminate their derivatives and similar financial contracts with the 

subsidiaries, and then seize and liquidate the collateral (even though the 

subsidiaries remain open, solvent, and performing on their contractual obligations). 

This would drain liquidity from the group in resolution, and the sale of the 

collateral into the market at a time of stress could have systemic consequences, as 

it did in the financial crisis. 

To prevent this outcome, each U.S. G-SIB (as well as most other G-SIBs 

globally) has voluntarily adhered to the ISDA 2015 Universal Resolution Stay 

Protocol, 5 which provides for the explicit recognition of resolution stays on crossdefault rights in financial contracts between and among the world's largest dealer 

banks. In order to extend this systemic protection beyond dealer bank transactions, 

the Federal Reserve recently proposed a rule that would generally require G-SIBs 

to include resolution stays in financial contracts with all of their counterparties. 

The Clearing House strongly supports this proposal, as the inclusion of resolution 

stays in financial contracts will make it easier to implement an SPOE resolution. 

Total Loss Absorbing Capacity. In order for SPOE to be effective, a firm 

must maintain sufficient Joss absorbing capacity that can be bailed-in to 

recapitalize the firm even after a massive loss, and that bail-in must be 

operationally feasible. The former is achieved by maintaining, at the holding 

company level, substantial liabilities that cannot run in stress (basically, equity and 

long-term debt). 

To ensure that sufficient loss absorbency remains in place over time, the 

Federal Reserve has proposed a "total loss absorbing capacity" (TLAC) rule that 

would require U.S. G-SIBs to maintain minimum total loss absorbing capacity 

equal to 21.5 percent to 23 percent of its risk-weighted assets, and 9.5 percent of 

International Swaps and Derivatives Association ("!SDA''), Adhering Parties: ISDA 2015 

Universal Resolution Stay Protocol (last updated June. 17, 2016), available at 

https:llwww2.isda.org/functional-areas/protocol-management/protocol/22, 

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its total assets. 6 The scale of this reform has not been widely appreciated: 

the eight US. G-S!Bs alone will be expected to maintain, on an aggregate basis, 

more than $1.5 trillion in total loss absorbing capacity. 

Operational feasibility is achieved by minimizing the types of other holding 

company creditors, thereby avoiding disputes among creditor classes in 

bankruptcy. The Federal Reserve's proposed rule would prohibit nearly all shortterm debt or other liabilities at the holding company, and make clear that operating 

liabilities of subsidiaries are senior to the bail-in/TLAC equity and debt at the 

holding company. Thus, a U.S. G-SIB's losses can be imposed entirely on the 

private sector without inducing the holders ofthe group's short-term debt or 

financial contracts to run, or the holders of its other operating liabilities to cut off 

critical services. 

Clear Evidence of Success. Investors and markets appear convinced that 

equity and long-term debt holders are fully at risk in the event of failure, and that 

government assistance will not be required, or available, to resolve a large banking 

organization. Put another way, they appear convinced that large banks are no 

longer "too big to fail." The spreads that debt markets charge large banks have 

risen dramatically from pre-crisis levels. A Government Accountability Office 

(GAO) study released in July 2014 stated, "[oJur analysis provides only limited 

evidence that large bank holding companies had lower funding costs since the 

crisis and instead provides some evidence that the opposite may have been true at 

the levels of credit risk that prevailed in those years." 7 The GAO found that any 

premium in the interest rates (that is, lower rates) that banks pay to borrow in the 

bond market had been significantly reduced, eliminated, or even reversed. Indeed, 

in half of the 42 models they employed, larger banks actually pay more to borrow 

than mid-sized banks issuing publicly traded debt. 

Similarly, the ratings agencies now rate debt in accordance with the market 

reality reported by the GAO. At the time of the 2014 study, two of the three large 

rating agencies had already eliminated any "uplift" in ratings of bank holding 

I also note that while we strongly support the TLAC requirement in principle, we do have several 

key concerns with the specific way in which the Federal Reserve has proposed to implement 

TLAC in the United States. See Letter from The Clearing House et al. to the Board of Governors 

of the Federal Reserve System (Feb. 19, 2016), available at 

www .theclearinghouse.org/issues/articles/20 16/02/20 160219-tcb-comments-on-fed-s-tlacproposal. 

Government Accountability Office, Large Bank Holding Companies: F_xpectations <?f 

Government Support (GA0-14-621) (July 2014) at 46. Academic research on post-crisis 

conditions is consistent with the GAO's findings. See also Javed Ahmed, Christopher Anderson, 

Rebecca Zarutskie, Are the Borrowing Costs of Large Financial Firms Unusual? (March 12, 

20 15), available at http://www.federalreserve.gov/econresdata/feds/20 J 5/files/20 15024pap.pdf 

9 
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company debt because of anticipated future government support. Since then, the 

third rating agency has also dropped any uplift for bank holding company debt. 

III. Regulatory Measures that Yield Benefits Less than their Economic 

Costs 

For the core reforms described above, it is reasonably clear that their 

benefits generally exceed their costs. But it is also clear that other current and 

anticipated regulations or particular aspects or applications of those regulations -

do not meet that test, with costs and consequences that have not been well 

measured or understood. 

Three keys to performing a regulatory cost-benefit analysis are as follows: 

First, each regulation contains mandates and incentives that, while implicit 

rather than explicit, are nonetheless clear. Bank regulation necessarily favors 

some activities over others; thus, when regulatory requirements are calibrated at 

high levels, they create strong incentives for banks to no longer allocate their 

balance sheets according to actual economic risk but rather according to regulatory 

requirements. There is a common misperception that banks faced with a higher 

capital requirement can react in only three ways: (i) accepting a lower return on 

equity, (ii) shrinking assets across the board, or (iii) increasing prices across the 

board. Under this view, regulation is agnostic or content neutral. In fact, banks 

identify the business lines that are causing the higher capital (or other regulatory) 

charge relative to actual economic risk, and then face a difficult decision of how 

much of that cost to require the business lines to earn back. For example, we see 

substantial evidence of this phenomenon in global capital markets businesses, 

where numerous large banks have either exited businesses entirely or dramatically 

reduced the amount of capital they are willing to commit to supporting market 

liquidity. Conversely, we have seen a strong trend globally for large banks to 

enter or expand private wealth management: this activity does not require 

significant capital or liquidity, and thus is a business smiled upon by the post-crisis 

regulatory regime. 

Second, in assessing the benefit of a given rule against its cost, it is not 

sufficient to identify its standalone benefit. What is relevant is its marginal 

benetit that is, what benefit it adds to the core reforms and others already 

enacted. For a rational cost-benefit analysis, it is not enough to simply say that a 

rule has the benefit of reducing the chances of a financial crisis like the last one: 

the question is what is the marginal benefit, given the presence of other rules, and 

how does it compare to the rule's cost (including that it might increase the chances 

of a financial crisis that is unlike the last one). 

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Third, in assessing benefits and costs, careful attention must be paid to 

whom the rule applies. This is because, in many cases, regulators have applied a 

particular reform to a wide range of banks on a nearly uniform basis. Such an 

approach to regulation, and to macroprudential regulation in particular, is 

inappropriate and inherently fails to account for the wide variety of business 

models and practices that exist among individual institutions. The application of 

prudential standards should not simply be a function of an organization's asset 

size, but should instead be based on the types of risk being run by the 

organization, driven largely by the types of activities it engages in. Unfortunately, 

it is often exactly this untailored, size-based approach that has been applied in 

practice- much of the post-crisis prudential framework, including the Basel III 

capital and liquidity framework and the enhanced prudential standards established 

under Title I of the Dodd-Frank Act, is not appropriately tailored to the diversity 

of banking organizations and business models that exist in the United States. 

With these three kinds of questions in mind, we have identified a range of 

capital-related reforms that yield benefits incommensurate with their costs. Many 

involve rules and regulations already enacted, but several involve additional 

reforms that have been proposed or are anticipated, but have not yet been 

finalized. All deserve careful evaluation and, where appropriate, revision to 

ensure an appropriate balance between their benefits and costs. 

a. Existing Capital Rules & Mandates 

i. CCAR 

The U.S. stress test is an important building block of the post-crisis banking 

regulations and we are, in principle, supportive of rigorous stress tests as a tool to 

assess the capital adequacy of large banks. At the same time, however, we have 

growing concerns about the Federal Reserve's CCAR exercise in practice. 

The stakes here are significant. CCAR is the binding constraint for most 

large banks and thus has tangible economic impacts. For example, by more 

severely stressing unemployment rate changes, the 2016 stress scenarios implicitly 

discourage small business lending and household lending, as these are the types of 

loans whose loss rates are most sensitive to increases in unemployment. 

One can think of CCAR as having three main components: (i) the stress 

scenario provided each year; (ii) the process by which the Federal Reserve decides 

how much each bank will lose, and thus how much capital it will have remaining 

after undergoing that stress; and (iii) the minimum remaining amount of capital a 

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bank must have left over after that stress. We have serious concerns with the 

current opacity of the first two of these components.8 Because confidence that 

CCAR appropriately balances the benefits and costs of higher capital depends, in 

part, on the reasonableness of both the scenarios and models that are the core of 

the CCAR exercise, greater transparency and public deliberation around both is 

needed. 

With respect to the stress scenarios, the Federal Reserve's own selfimposed standard states that the severely adverse scenario should consist of"a set 

of economic and financial conditions that reflect the conditions of post-war U.S. 

recessions." 9 The 2016 stress scenarios assume, however, a macroeconomic shock 

that is considerably more severe than the 2007-2009 financial crisis or prior postwar recessions. In particular, the increase in the unemployment rate in the 2016 

scenario is substantially more sudden than what was experienced during the 2007-

2009 crisis, which is likely to cause credit losses to accumulate rapidly and in 

greater amounts over the stress period. Although these scenarios are disclosed 

each year, they are not subject to prior notice and comment, and therefore neither 

their reasonableness nor their consistency with the Federal Reserve's own 

standards is subject to open debate. 

Similarly, and in contrast to other jurisdictions, the Federal Reserve uses its 

own internal model(s) to estimate stressed credit losses and net revenues. These 

models are enormously important drivers of the CCAR results for each bank. Yet 

the Federal Reserve provides virtually no detail regarding the specifications of 

these models -not only are they not subject to public review and comment they 

are not even publicly disclosed. 

CCAR also provides a useful example of a regulation that generally has 

been applied uniformly across a large range of banks with differing business 

models and risk profiles. As a result, and particularly in light of the immense 

operational and administrative burden that attends participation in CCAR, the 

various concerns noted are more pronounced for those banks with simpler balance 

sheets or smaller risk profiles, for whom the benefits of CCAR are likely to be 

significantly less in practice, while the costs remains substantial. 

As described below, we also have serious concerns with the anticipated future direction of the 

third component. the post-stress minimum capital requirements. 

See 12 C.F.R. part 252, Appendix A.4. 

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ii. Supplementary Leverage Ratio 

A leverage ratio measures the capital adequacy of a bank by dividing its 

capital by its total assets. Although the leverage ratio is seen as an alternative to 

risk-based measures of capital, the leverage ratio is in fact also a risk-based 

measure of capital, albeit a bad one. It assesses the risk of each asset to be exactly 

the same akin to setting the same speed limit for every road in the world. The 

risk of a Treasury security is deemed the same as that of a loan to a startup with 

uncertain cash flows. The risk ofholding a market-making portfolio of liquid, 

highly rated bonds is equated to the risk of holding a portfolio of illiquid loans to 

untested companies. 

The inherent inaccuracy of the leverage ratio- and the resulting 

misallocation of capital- has increased dramatically in recent years as a result of 

other regulatory mandates. In particular, liquidity rules (principally the liquidity 

coverage ratio, or "LCR") now effectively require large banks to hold 

approximately 30 percent 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 creates a powerful disincentive to hold low risk assets beyond 

those required by regulation. 

To put this in practical terms, consider the combined effects of regulation 

on the decision to make a small business loan. That loan must be funded, and 

unless it is funded with retail or other very "sticky" deposits, the LCR requires the 

bank to hold HQLA (cash or cash equivalents) against that funding. While this 

treatment under the LCR may be appropriate, the supplementary leverage ratio 

requires banks to hold capital against the HQLA- five or six percent in the case of 

G-SIBs, and three percent in the case of other large banks. This is not appropriate, 

and unnecessarily increases the cost of making the loan. 

The impact of the U.S. supplementary leverage ratio is especially 

pronounced on bank holding companies' capital markets activities, which are not 

funded by insured deposits. U.S. capital markets are the deepest, most liquid, and 

most efficient in the world, allowing U.S. companies as well as the government to 

finance growth and borrow more cheaply. At the heart of those markets arc 

broker-dealers, which facilitate the issuance and trading of securities, and provide 

funding to other financial institutions. The broker-dealer business model involves 

holding well-hedged temporary inventories in low risk assets, as well as standing 

between borrowers and lenders in offsetting and well-collateralized rcpo 

transactions. Both activities earn only narrow margins; promote the liquidity and 

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efliciency of financial markets; and entail little or no risk. However, both are 

balance-sheet sensitive; that is, they create assets on the books ofbrokcr-dealersassets that banks now have to fund in material part with expensive equity because 

of the supplementary leverage ratio requirement. Because of the thin margins 

earned in financial intermediation, the added cost from the supplementary leverage 

ratio requirement has a substantial impact on the amount of the activity. 

The impact of the U.S. supplementary leverage ratio is also pronounced for 

those banks that provide custody services, such as the operation of cash 

management accounts for investment funds and other institutional investors. Such 

banks are finding it increasingly challenging to accept certain cash deposits from 

customers, because the U.S. leverage ratio requires substantial capital against the 

low-risk, liquid assets in which those deposits are temporarily invested -generally 

cash and U.S. Treasuries. And current and future regulatory focus on this 

essentially riskless activity may not only impede custody banks' ability to provide 

traditional custody services - it could also have an adverse impact on financial 

stability by preventing banks from being able to accept cash deposits from their 

custodial clients during a crisis, denying those clients a safe haven to preserve 

their capital and potentially worsening a run on the banking system. 

Another problem with the supplementary leverage ratio is the way in which 

it works in opposition to the regulatory push for central clearing of derivatives. In 

particular, the leverage ratio requires banks to hold capital against client margin 

collected and held in a segregated account that unquestionably reduces the 

exposure of the bank, which ignores the fact that such margin not increases a 

bank's risk. As a result, it effectively requires banks to hold un-economic 

amounts of capital when they trade with a client and then clear the trade. Because 

of this, at least three major dealers have exited the business. Accordingly, CFTC 

Chairman Massad has called for the U.S. leverage ratio to be amended to take 

account of segregated margin. 

Notwithstanding these significant weaknesses a leverage ratio can, if 

calibrated appropriately, form a useful part of the larger bank capital framework. 

As we saw during the crisis, there will be times when banks (and other actors) 

seriously misjudge the risk of an asset class, and therefore undercapitalize it. 

Furthermore, if that asset class is illiquid and opaque to the markets (e.g., 

mortgages or mortgage-backed securities), then market confidence in riskweighted mea'lures will fall, and markets may resort to leverage measure 

themselves. 

Thus, there is reason to establish a minimum leverage ratio below which a 

bank cannot fall as a failsafe measure in the event of a widespread failure to 

measure risk. However, this ratio should be set as a backstop, and not as the 

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predominant capital standard in ordinary circumstances; the latter would drive 

daily misallocation of capital in the economy, as any measure that ignores risk is 

bound to do ({made a binding constraint. Here, the Basel Committee on Banking 

Supervision (the "Basel Committee") appears to have struck a fair balance by 

adopting a minimum leverage requirement of three percent. For U.S. G-SIBs, 

however, the U.S. banking agencies have set the ratio at six percent for bank 

subsidiaries and five percent for the consolidated bank holding company. Thus, 

banks subject to both the LCR and supplementary leverage ratio are currently 

required to hold $53 billion in capital against cash reserve balances deposited at 

the Federal Reserve, and an additional $19 billion against Treasury securities. 

These are assets whose value banks are at no risk of misjudging; the capital 

allocated to them could be far better deployed to lending or supporting market 

liquidity. 

iii. G-SIB Surcharge 

The capital surcharge for G-SIBs is designed to reduce the likelihood of 

failure such that the expected social cost of a G-SIB's failure is approximately 

equal to that of a large, but non-systemically important bank holding company. 

The Federal Reserve has established a complex methodology to calculate the 

G-SIB capital surcharge, which The Clearing House has studied in detail. As we 

summarize in a recently released research paper, the G-SIB surcharge's calibration 

has major shortcomings. 1° For example: 

The Federal Reserve's white paper includes the largest 50 banks each 

quarter. .. , a sample size that extends to banks that are so small that their 

experience may not be relevant. For example, at the end of the sample 

period, the set of 50 banks whose earnings were used to calculate the G-SIB 

surcharge had assets as low as $24 billion. However, in a 2014 response to 

a GAO study, the Federal Reserve expressed the view that it is 

inappropriate to compare such small banks to G-SIBs. Specifically, the 

Federal Reserve noted, that "a bank holding company with $10 billion in 

a<;sets is too small to make a meaningful comparison to a bank holding 

company with $1 trillion in assets ... A bank holding company of$50 billion 

in assets would provide a more relevant comparison ... " For example, the 

now defunct First City Bancorporation of Texas, one of the ten smallest 

banks in the sample at $11.2 billion in assets, failed in the late 1980s 

because of its concentrated exposure to energy and agricultural markets. It 

was also geographically highly concentrated, with 59 of its 60 subsidiaries 

&e The Clearing House, Overview and Assessment of the Methodology Used to Calibrate the U.S. 

GSJB Capital Surcharge (May 2016). 

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located in Texas .... [I]nclusion of this bank in the sample accounts for 36 

basis points of the G-SIB surcharge for an average G-SIB. 1 1 

As noted, the Federal Reserve has stated that the G-SIB surcharge is "designed to 

reduce a G-SIB's probability of default such that a G-SIB's expected systemic 

impact is approximately equal to that of a large, non-systemic bank holding 

company." 12 Thus, by definition, regulatory changes that reduce the systemic 

impact of a G-SIB's failure should reduce its G-SIB surcharge, but they do not. 

A company that holds sufficient TLAC to effectuate a SPOE strategy, agrees to 

the ISDA protocol, and increases its margin against uncleared swaps and securitybased swaps - all measures that regulators have justifiably stated have materially 

decreased systemic risk - would incur the same G-SIB surcharge as one that did 

not. 

Furthermore, the overstatement of the G-SIB surcharge also contains an 

implicit mandate: reduce the activities that add to the score, namely, capital 

markets activities. This mandate derives from the five factors that determine a 

G-SIB's surcharge under the binding U.S. standard: 

I! 

12 

'T The complexity factor includes almost exclusively securities and 

derivatives assets held in market making; 

> The inter-connectedness factor includes almost exclusively dealer-todealer trading assets held in order to hedge customer positions held in 

market making; 

> The cross-jurisdiction factor includes almost exclusively cross-border 

dealer-to-dealer trading of the type captured by the interconnectedness 

factor; 

'T The short-term wholesale funding factor includes almost exclusively the 

funding of securities positions; and 

> The size factor is not so exclusively focused on securities activities, but 

for the largest banks those assets constitute a large percentage oftheir 

total assets. 

Jd at 11. 

Risk-Based Capital Guidelines: Implementation of Capital Requirements for Global Systemically 

Important Bank Holding Companies, Proposed Rule, Federal Reserve System, 79 Fed. Reg. 

75473,75475 (Dec. 18, 2014). 

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Thus, the only effective way for a firm to reduce its G-SIB surcharge is to reduce 

its market making and other activities that provide market liquidity and generally 

support capital markets. 

Another fundamental shortcoming of the G-SIB surcharge calculation is the 

simplistic assumption that the social cost of a large bank's failure is a multiple of a 

firm's "systemic risk indicator score"-the score determined by the five factors 

listed above without providing any meaningful empirical evidence or analysis that 

these scores reflect the actual or relative systemic losses that the financial system 

would suffer upon a particular firm's failure. Not only would different plausible 

relationships between the score and the cost of failure lead to substantially 

different surcharges, as shown by the research paper, but other accepted methods 

of calculating the systemic importance of a bank yield noticeably different results. 

For instance, a recent IMF study that assessed the largest bank holding companies' 

contribution to systemic risk found a different ranking of, and less difference 

between, the largest banks. 13 

iv. Countercyclical Capital Buffer 

Perhaps the best example of a post-crisis capital requirement that would fail 

even the most basic cost-benefit analysis is the countercyclical capital buffer. The 

countercyclical capital buffer was developed by the Basel Committee and 

contemplates an additional capital requirement for larger U.S. banks of up to 

2.5 percentage points so as to "protect the banking system from the systemic 

vulnerabilities that may build-up during periods of excessive credit 

growth." 14 The Federal Reserve has recently issued a proposed policy statement 

describing when and why it might impose this buffer. 15 That proposal has serious 

legal and procedural problems, but I will emphasize here its fundamental 

conceptual problems. This untested capital requirement is simultaneously both too 

broad and too narrow to be effective as a macroprudential tool to limit the build-up 

of risks in a credit bubble too broad, because it would levy a hefty capital charge 

against all bank activities, not just the ones posing heightened risk, and too 

narrow, because it would do nothing to address any risks that arise outside of the 

banking system. Indeed, one can imagine that such a capital charge would only 

13 See "Gennany Financial Sector Assessment Program," International Monetary Fund (June 2016). 

14 78 Fed. Reg.at 62018 (Oct. 11, 2013) at 62038. 

15 See &I Fed. Reg. 5661 (Feb. 3, 20!6); !2 C.F.R. Part 217. 

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serve to accelerate the build-up of systemic risks by creating strong incentives for 

risk-taking to migrate outside the banking system. 16 

v. Ring Fencing for Foreign Banks 

Most of the post-crisis reforms have been applied, appropriately, to the U.S. 

operations of foreign banks. In some cases, however, foreign banks have received 

treatment that has unnecessarily and adversely affected their ability to assist U.S. 

customers. Specifically, foreign banks with significant U.S. operations have been 

required by the Federal Reserve (but not the Dodd-Frank Act) to ring-fence their 

U.S. non-branch assets, place them into a U.S. intermediate holding company 

(IHC), and then ensure that the IHC meets a variety of capital, liquidity, and other 

standards. The proposed TLAC rule makes it very difficult to fund the IHC, and 

other rules have imposed duplication of back office functions. 

For foreign banks that largely structure and manage their U.S. operations 

on a standalone basis and have adopted a multiple-point-of-entry strategy to 

resolution, such ring-fencing is generally consistent with their business operations 

and approach to resolution. 17 But many foreign banks manage and operate their 

U.S. and other subsidiaries on a global, consolidated basis; subjecting such foreign 

banks to this U.S.-style of mandatory, ex ante ring-fencing that has two principal 

shortcomings. 

16 

17 

These flaws are becoming an increasing focus of public discussion: for example, Federal Reserve 

Bank of Cleveland President Loretta Mester has publicly noted the shortcomings of the proposed 

countercyclical capital buffer approach in terms of both its unpredictability and uncoordinated 

nature. See Loretta J. Mester, Five Points about Monetary Policy and Financial Stability (June 4, 

20 16), available at www.clevelandfed.orglnewsroom-and-events/speechcs/sp-20 160604-fivepoints.aspx (noting that "the need to coordinate countercyclical macroprudential policy actions 

across multiple regulators in the U.S. adds a complication to effectively using such tools in a 

timely way" and describing the need to "devise ways to make the macroprudential tools more 

systematic and less discretionary." Similarly. Office of Financial Research Director Richard 

Berner has noted that "[t]argeted policies with clear, direct effects on a financial stability threat ... 

are preferable to general policies with diffuse effects (such as activating a countercyclical capital 

buffer)." Richard Berner, Remark~ a/the Conference on the Interplay Between financial 

Regulations, Resilience, and Growth (June 16, 20 16), available at 

www .financialresearch.gov /pu bl ic-appearances/20 16/06/16/ conference-on-the-interplay-betweenfinancial-regulations-resilliance-and-growth. 

The multiple-point-of-entry resolution strategy is designed to reduce interconnectivity and 

facilitate resolution at the host level - a resolution strategy under which the fHC should be 

resolved separately from its parent financial group, under a process largely led by U.S. regulators. 

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First, to the extent that foreign banks manage their capital and liquidity on 

a consolidated basis, these banks retain and rely on the flexibility to shift financial 

resources within the organization to their location of highest and best use, 

including- most crucially to a particular geographic or business operation in 

times of financial or market stress. Their ultimate strength resides in the ability to 

obtain support from the necessarily larger consolidated resources of the global 

enterprise. U.S.-style ring-fencing significantly undercuts this benefit and 

therefore could actually undermine financial stability. Second, ring-fencing has an 

undesirable effect of layering multiple capital and liquidity requirements on 

banking organizations, thereby increasing the regulatory burden and complexity. 

At a minimum, should U.S. policymakers unfortunately continue down 

their current path, they should abide by Congress' explicit direction in law to give 

due regard to the principle of national treatment and equality of competitive 

opportunity. They should also take into account the extent to which each FBO is 

subject on a consolidated basis to home country standards that are comparable to 

those applied to financial companies in the United States. In addition, we would 

urge policymakers to heed Congress' specific direction to take into account 

differences among financial institutions based on their systemic footprints and risk 

profiles. 

b. Additional Capital Reforms Pending 

Given the extraordinary stringency and complexity of post-crisis regulation, 

it is somewhat surprising that the pace of regulatory change continues at a high, 

and continuously more burdensome level. In particular, two additional sets of 

changes to capital regulation are pending or anticipated, both of which would 

entail costs well in excess of any potential benefits. 

i. Basel IV Changes to Capital Regulation 

The Basel Committee has undertaken a new effort, Basel IV, that is 

directed at further and extensive changes to nearly all aspects of the international 

capital framework. This ambitious undertaking may be surprising to some, given 

that the Basel Committee just completed an extensive overhaul of its capital 

framework Basel I!!, finalized by the Basel Committee in 2010 and implemented 

in the United States beginning in 2013. 

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Basel IV has not been presented for debate in the U.S., but is currently 

being finalized on an international basis. This is disconcerting as the breadth and 

scope of the proposed Basel IV revisions is difficult to overstate. For example, 

Basel IV includes the following separate proposals issued by the Basel Committee 

over the past year or so: 

18 

19 

20 

2l 

23 

> Revisions to the standardized approach for credit risk, 18 including: 

• Calibration of new risk weights for exposure classes based on QIS 

data; 

• Calibration of revised credit conversion factors, which a major 

determinant of the capital requirements for commitments to lend to 

both consumers and businesses; 19 

> Revisions to the leverage ratio framework; 20 

> Revisions to the standardized measurement approach for operational 

risk; 21 

> Fundamental review of the trading book, which includes revisions to the 

boundary between the banking book and the trading book; 22 

> The possible imposition of a step-in risk capital requirement; 23 

> Incorporation of minimum haircuts into the capital requirements for 

certain securities financing transactions;24 

Basel Committee, Second Consultative Document: Revisions to the Standardised Approach for 

Credit Risk_(Dec. 2015), available at: http://www.bis.org/bcbs/publ/d347.pdf. 

The Basel SACR's revised CCFs will necessarily lead to increased risk-based capital requirements 

for certain off-balance sheet commitments. If these same CCFs are ultimately incorporated into 

the current Basel Ill internationally agreed upon leverage ratio denominator exposure measure, 

leverage ratio capital requirements would necessarily increase. We are deeply concerned that this 

increase would be unjustified and would make the already blunt leverage ratio instrument more of 

a binding constraint and further depart, as a practical matter, from the Basel Committee's stated 

policy of the leverage ratio acting as a supplementary, back-stop measure to risk-weighted asset 

calculations. 

Basel Committee, Consultative Document: Revisions to the Basel III Leverage Ratio Framework 

(Apr. 2016), available at: http://www.bis.org/bcbs/publld365.pdf. 

Basel Committee, Consultative Document: Standardised Jvfeasurement Approachfor Operational 

Risk(Mar. 2016), available at: http://www.bis.org/bcbs/publ/d355.pdf; see also Basel Committee, 

Consultative Document: Operational Risk-- Revisions to the Simpler Approaches (Oct. 20 14), 

available at: http://www.bis.org/publ/bcbs29l.pdf. 

Basel Committee, Consultative Document: Fundamental Review of the Trading Book: 

Outstanding Issues (Dec. 2014), available at: http://www.bis.org/bcbs/publ/d305.pdf. 

Basel Committee, Consultative Document: Identification and Measurement of Step-In Risk (Dec. 

2015), available at: http://www.bis.org/bcbs/publ/d349.pdf. 

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> Incorporation of "simple, transparent and comparable" securitization 

criteria into the capital framework; 25 

> Introduction of three potential capital floors methodologies to the 

internal ratings-based approach, including one based on the 

Standardized Approach as a whole; 26 

> Review of the credit valuation adjustment risk framework; 27 

>- Revisions to Pillar 3 disclosures requirements/8 and 

>- Implementation of rules relating to the treatment of total loss absorbing 

capacity holdings. 29 

Taken together, these changes would effect a near wholesale revision of the Basel 

III capital framework, and are being undertaken in a series of separate steps where 

different elements are finalized at different times rather than through a deliberate, 

comprehensive and synchronized review. 

Both the substance and process of Basel IV present numerous concerns, and 

The Clearing House believes that there are compelling reasons for the United 

States to opt out of any changes agreed to as part of Basel IV. For example, 

although neither the Basel Committee nor U.S. regulators have yet undertaken an 

analysis of the effectiveness and consequences (intended and unintended) of the 

Basel III changes, the Basel IV process would substantially reshape, yet again, a 

large part of that framework. Clearly, it would be more appropriate to 

meaningfully assess and come to an informed view of the impact of these recent 

and extensive reforms before proceeding to make any further changes. 

Similarly, although the Basel Committee has stated that it does not intend 

for the changes to effectively raise capital requirements in practice, the substance 

of the various proposals that constitute Basel IV suggest that they would do 

24 

25 

26 

27 

28 

29 

Basel Committee, Consultative Document: Haircut Noorsfor Non-Centrally Cleared Securities 

Financing Transactions (Nov. 2015), available at: http://www.bis.org/bcbs/pub1/d340.pdf. 

Basel Committee, Consultative Document: Capital Treatment for "Simple, Transparent and 

Comparable Securitisations (Nov. 2015), available at: http://www.bis.org/bcbs/publ/d343.pdf. 

Basel Committee, Consultative Document: Capilal Floors: The Design(}( a Framework Based on 

Standardised Approaches (Dec. 20 14), available at: http://www.bis.org/bcbs/publ/d306.pdf. 

Basel Committee, Consultative Document: Application (if Own Credit Risk Acfjustments to 

Derivatives (Dec. 2011), available at: http://www.bis.org/publ/bcbs214.pdf. 

Basel Committee, Consultative Document: Pillar 3 Disclosure Requirements Consolidated and 

Enhanced Framework (Mar. 2016), available at: http://www.bis.org/bcbs/publ/d356.pdf. 

Basel Committee, Consultative Document: TLAC Flo/dings (Nov. 2015), m,aifable at: 

http://www.bis.org/bcbslpubl/d342.pdf. 

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precisely that. If bank capital requirements are to be further increased, it would 

seem that should be done explicitly, and not by accident. 

Perhaps mostly concerning, rather than present its Basel IV changes 

holistically, such that commenters (and the Basel Committee itself) could assess 

the cumulative impact of these changes in the aggregate, the Basel Committee has 

issued its proposals and final standards in a piecemeal fashion, with little 

meaningful assessment or explanation of how they may interact in practice. 

ii. Increased Minimum Capital Requirements through CCAR 

A second, very significant anticipated change to bank capital regulation is 

the Federal Reserve's stated plans to substantially raise minimum capital 

requirements for U.S. G-SIBs by incorporating its G-SIB capital surcharge into 

CCAR's post-stress minimum capital requirements. Although several Federal 

Reserve Board members have announced this forthcoming change in rather 

definitive terms, 30 no formal proposal has yet been issued for notice-andcomment, and therefore the Federal Reserve has not yet provided any detail about 

either its rationale or how it would effectuate such a change. 

Whatever the stated objective or method of implementation, however, The 

Clearing House believes that any such move would be inappropriate and 

unjustified at this time. As we have noted in a recent letter to the Federal 

Reserve, 31 there are multiple reasons that caution against doing so: 

30 

31 

> First, incorporating the G-SIB surcharge into CCAR would undem1ine 

its credibility and integrity as a stress test. According to the Federal 

Reserve, "[t]he Comprehensive Capital Analysis and Review (CCAR) is 

an annual exercise by the Federal Reserve to assess whether the largest 

bank holding companies operating in the United States have sufficient 

capital to continue operations throughout times of economic and 

financial stress .... " 32 As such, it is both a core safety and soundness 

protection and an important assurance to the investing and voting public 

about the resilience of the banking system. The incorporation of the 

Wall Street Journal, Fed's Tarullo Sees More Changes for Big Banks, Criticizes GOP Capital 

Proposal (July 2016), available at: http://www.wsj.com/articles/feds-tarullo-sees-more-changesfor-hig-banks-criticizes-gop-capital-proposal-1467840 182 

See The Clearing House, Incorporation of the GSIB Surcharge into CCAR, (June 2, 2016). 

See http://www.federalreserve.gov/bankinforeg/stress-tests-capital-planning.htm. 

22 
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G-SIB surcharge into CCAR would fundamentally alter its objective, 

which is to test a bank's resiliency under stress, such that CCAR results 

for U.S. G-SIBs would provide less meaningful information to banks, 

investors, and the public about banks' capacity to withstand stress. This 

outcome would be very unfortunate, as it would undermine a key postcrisis regulatory innovation that has been highly successful in enhancing 

the resiliency of the banking system and public confidence therein. 

);- Second, incorporating the G-SIB surcharge into the existing CCAR 

framework would effectively result in "double taxation" ofG-SIBs, as 

the existing CCAR framework already includes unique, incremental 

assumptions that increase stress loss estimates that apply only to G-SIBs. 

In particular, all eight U.S. G-SIBs are required to assume a 

eounterparty failure scenario, and six of the eight G-SIBs are required to 

assume an instantaneous global market shock. No non-G-SIB is 

subjected to either additional stress. 

> Third, as described above, the Federal Reserve's methodology for 

calibrating the G-SIB surcharge itself contains significant weaknesses 

and limitations, and the G-SIB surcharge rule fails to account for 

continuing regulatory developments that have substantially decreased 

the systemic risk of GSIBs making its calibration increasingly 

inaccurate and overstated. Each of these problems in the G-SIB 

surcharge itself makes its incorporation into CCAR particularly 

inappropriate. 

);- Fourth, given the substantial real world impact of the G-SIB surcharge 

itself: particularly as a tax on capital markets activities, incorporating it 

into CCAR would amplify the current deterioration of market liquidity 

and the increased likelihood of market volatility associated with the 

continuing shift from principal- to agency-ba~ed intermediation. 

Finally, at a more general level, it is difficult to identify the incremental 

benefits to safety and soundness or financial stability of higher capital 

requirements for G-SIBS after all, the Federal Reserve announced just a few 

weeks ago that all of the U.S. G-SIBs had substantially more capital than 

necessary to weather, largely unaflected, a recession significantly worse than the 

recent financial crisis. On the other hand, the potential costs are quite clear - the 

negative impact to lending and credit availability of increasing G-SIB capital 

requirements by up to $222 billion would be substantiaL Indeed, it is perplexing 

to juxtapose, on the one hand, the Bank of England's recent decision to reduce its 

countercyclical capital buffer requirement, as a means to spur its economy, and on 

the other, an anticipated decision in the United States to substantially increase its 

23 
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capital requirements notwithstanding continuing concerns about the strength of the 

U.S. economy. 

IV. Key Considerations in Rationalizing and Tailoring the Regulation of 

Bank Capital 

We support efforts to carefully evaluate the current regulatory framework, 

including capital, to identity areas in which the regulation of banks can be 

improved and their benefits and costs better balanced. We would suggest that any 

effort to do so take into account the following key considerations: 

> First, the importance of identifying areas in which further changes are 

pending or anticipated, and ensuring that no further action is taken until 

the cumulative impact and consequences of the very large body of postcrisis rules already enacted are evaluated and understood. We have 

identified two key examples as pertains to bank capital in Part III (e.g., 

Basel IV and the increase of minimum capital requirements through 

CCAR), but there are likely to be others. 

> Second, the need to identify aspects of those capital regulations already 

enacted that should be adjusted or improved, so as to ensure that their 

incremental benefits, relative to the post-crisis framework as a whole, 

are worth their costs. We have identified a number of these in Part III 

(e.g., CCAR, the leverage ratio, etc.), but again, there are likely to be 

others. 

> Third, the importance of identifying existing capital and other prudential 

rules that can better tailored to the differing risk profiles and business 

models of various banks. Opportunities for further tailoring are likely 

to exist across the broad spectrum of bank types and business models, 

including community banks, regional banks of various sizes, G-SIBs, 

and the U.S. operations offoreign banks. And indeed, to the extent that 

a key objective of that exercise is to ensure that U.S. banks are in a 

position to efficiently meet the needs of their customers and the U.S. 

economy as a whole, it is cmcial that steps to rationalize and better 

tailor the regulatory regime across the entire U.S. banking system. 

* * * * * 

Thank you for the opportunity to testify before the Committee today. I look 

forward to answering your questions. 

24 
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Credit Union Nat lana! Assoda!lon 

TESTIMONY 

OF 

THE HONORABLE JIM NUSSLE 

PRESIDENT AND CHIEF EXECUTIVE OFFICER 

CREDIT UNION NATIONAL ASSOCIATION 

BEFORE THE 

COMMITTEE ON FlNANC1AL SERVICES 

UNITED STATES HOUSE OF REPRESENTATIVES 

AT A HEARING ENT!Tl .ED, 

"MAK1NG A FJNANClAL CHOICE: MORE CAPITAL OR MORE GOVERNMENT 

CONI'ROL?" 

JULY 12.2016 
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Testimony 

Of 

The Honorable Jim Nussle 

President and ChiefExecutive Officer 

Credit Union National Association 

Before the 

Committee on Financial Services 

House of Representatives 

Hearing Entitled, 

"Making a Financial Choice: More Capital or More Government Control?" 

July 12, 2016 

Chairman Hensarling, Ranking Member Waters, Members of the Committee: 

Thank you very much for the opportunity to testify at today's hearing. My name is Jim Nussle, 

and I am the president and chief executive officer of the Credit Union National Association 

(CUNA). CUNA represents America's credit unions and their more than 100 million members. 

Credit unions play an important role in the financial lives of their members. With a mission to 

promote thrift and provide access to credit for provident purposes, credit unions were first 

established in the United States more than a century ago. As member-owned and not-for-profit 

cooperatives, credit unions are the original consumer protectors in the financial services sector. 

They are regularly commended for their high-quality, member-centric service; indeed, Consumer 

Reports recently identified credit unions as the rated sector they had ever reviewed. 1 

The purpose of my testimony today is to convey CUNA's views on Title I of Chairman 

Hensarling's Financial CHOICE Act. However, I would be remiss ifi did not also discuss why 

this and other legislation seeking to address regulatory burden are so important to credit unions 

and the members that they serve. 

Credit Unions Fared Very Well in the Financial Crisis Because the Cooperative Model 

Militates Against Excess Risk-Taking 

1 Blyskal, Jeff, "Choose the Best Bank for You." Consum!;r ReportS, available at 

http://www.consumerreports.org/banks-credit-llllions/choose-the-best-hank-for-you/ (Dec. 4, 2015). 

2 
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Credit union boards of directors are generally uncompensated volunteer members of the credit 

union. This lack of compensation incentivizes them to ensure the credit unions are run for the 

benefit of the member ovmers. This lack of compensation incentivizcs them to ensure that credit 

unions are run for the benefit of the member owners. The absence of stock for senior 

management and board members, and the absence of pressure from stockholders to maximize 

profits ensares that management will eschew higher-risk, higher-return strategies and run credit 

unions for the benefit of members. 

As a result, credit union operations are less risky, and to less volatility over the business 

cycle. For example, Jrom 1992 to 2015, the average annual net charge-off rate on credit union 

loans was 0.60%, with a standard deviation of0.22%. ln contrast, the similarly computed 

average at banks over the same period was 0.87%, with a much greater standard deviation of 

0.59%. 

Because of this lower-risk profile, credit union failures tend to be much less common than bank 

failures. For example, at the beginning ofthe financial crisis there were 8,504 federally insured 

banks and 8, l 01 credit unions. Since the of the financial crisis, credit unions reported 

a total of 172 failures (a 2.1% tltilure rate) and banks reported a total of 515 failures (a 6.0% 

failure rate). 

157 

2 Edward J. Kane and Robert J. Hendershott, The 

"-"'lliL!'.L>!"-!d!lli!l"-""'-.\!!1"-",.l!J!J~, 20 (September, 

1111 Banks (Total=515) 

0 CUs (Total= 172) 

presents credit union with incentives that are 

sn·ikingly from those faced by a for-profit financial institution, making it less feasible for credit union 

managers to benefit from high-risk strategies. 

3 
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During the crisis, the bank deposit insurance fund operated in the red (for the second time in 

recent history), while the credit union insurance fund remained well funded-reflected in a fund 

ratio that has consistently remained above $1.20 per $100 in insured deposits. 

Credit unions take on less risk, so they tend to be less affected by the business cycle. They 

therefore serve as an important counter cyclical economic force in local markets, softening the 

blow of tlnancial downtums in local economies. 

Insurance Fund Ratios 

fund Balances per $100 in Insured Deposits 

Recent history clearly demonstrates that--credit unions were able to continue the 

recent financial crisis, while other financial institutions failed or had to curtail onr'rntiom~ 

balance sheets caused by their less risk-averse in the run-up to the crisis. 

4 
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From June 2007. the onset of the financial crisis, to December 2015, small business loans at 

credit unions more than doubled-growing by over 130.0% or an average of 10.3% per year. In 

contrast, such loans at banks actually declined by 10.0% (or -1.2% per year). 

Business loan Growth 

2008 2009 2010 2011 2012 2013 2014 2015 

Ever-Increasing Regulatory Burden Reduces Credit Union Members' Access to Safe and 

Affordable Financial Services f1·om Cooperative Financial Institutions They Own 

l have been CUNA's CEO for nearly two years, and a constant refrain I hear from our member 

credit unions that they are being crushed by burden that has been in 

response to a clisis they neither caused nor contributed to. Regulatory burden credit 

unions· ability to fully serve their members and is the driver of credit union 

consolidation, which has accelerated since 2010 and is now at a record pace. While the top-line 

data show a healthy, strong and growing credit union sector, credit unions are hiring more 

cmnpl!m1ce officers than ofl:1cers. And, CEOs and volunteer board members tell us they 

would like to do even more for their members, but are often stifled by new 

requirements. 

Shortly after l took the helm, CUNA was asked to testify before the Senate Banking Committee. 

At that healing. Senators asked us to quantify the costs of regulatory burden on credit <mions and 

we commissioned a study by an indepc:ndentthll!'ll-l!1Hrtv that had rm,enttmnn! ""'"'rl'~" in credit 

unions and banks. (Sec ru,'L"'"u'·' L) The researchers took several credit unions through an 

intensive process to a model to produce credible estimate of what the regulations are 

credit unions and their members each year. It adds up to about $7.2 billion in 2014 

alone, up from $4.4 billion in 20 l 0. This is money that is not put to use to benefit credit 

5 
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union members, but they're surely paying for it. If credit unions' regulatory burden costs were 

reduced, they would invest more in their members through better rates on savings and loans, 

stronger capital positions, and the development of alternative financial product and service 

delivery channels. 

Credit union executives and volunteers have a hard time understanding why they must comply 

with the rules designed for the largest financial institutions and the abusers of consumers, and 

have an even harder time understanding why their elected representatives in Congress are not 

doing anything about it. So, we are here to engage in the process, not because we view the 

Financial CHOICE Act as a perfect bill and not because we believe it will solve all of the 

regulatory burdens facing credit unions, but because we think it is a good place to start the 

discussion on how to remove regulatory barriers so credit unions can more fully serve their 

members. We hope the Committee will engage in the process on a bipartisan basis. 

Title I- Regulatory Relieffor Strongly Capitalized, Well Managed Banking Organizations 

Title I of the Financial CHOICE Act would create a path for qualifying credit unions and other 

banking organizations to operate with a reduced regulatory burden. Under Section 1 0 I, 

qualifying credit unions would need to maintain an average leverage ratio (net worth) of at least 

10 percent. If a credit union meets this requirement and elects to operate under the provisions of 

Section 102 of the legislation, it would be exempt from certain provisions of the Federal Credit 

Union Act, and rules and regulations promulgated by the National Credit Union Administration 

(NCUA) that address capital or liquidity requirements or standards. The legislation includes 

processes for credit unions and the NCUA to follow in the event that a credit union's average net 

worth ratio falls below 10 percent; this process envisions the submission of a net worth 

restoration plan and provides for the immediate loss of election and corresponding regulatory 

relief benefits in the event the credit union's net worth ratio falls below 6 percent. 

Section 103 directs the Federal Reserve, the Federal Deposit Insurance Corporation and the 

Office of the Comptroller of the Currency each to study how to design a requirement that 

banking organizations issue contingent capital with a market-based conversion trigger. 

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Section I 04 directs the Governmental Accountability Office to study the benefits and feasibility 

of altering the current prompt corrective action rules and replacing the Basel-based capital ratios 

with the nonperforrning asset coverage ratio as the trigger for specific required supervisory 

interventions. 

Under the Federal Credit Union Act, credit unions are subject to statutory capital requirements. 

In order to be considered well-capitalized for the purposes of prompt corrective action, a credit 

union must maintain a leverage ratio of 7 percent. This is one percentage point higher than the 

requirement for banks. Unlike banks, most credit unions' only source of capital is the retained 

earnings of the credit union. With limited ability to raise capital and given the relatively 

conservative incentive strategy inherent in credit unions' cooperative structure, many credit 

unions operate with a leverage ratio in excess of 10 percent. To give you a sense of the portion 

of the credit union sector affected by this legislation, today 3,975 of the 6,078 insured credit 

unions have net worth ratios greater than 10 percent. This represents approximately 65 percent 

of credit unions that hold 62 percent of credit union assets and serve nearly 60 percent of credit 

union members. We believe many of these credit unions would take advantage of the regulatory 

relief provided under Section 102, which would include relief from, among other things, 

NCUA's regulations on interest rate risk, liquidity requirements, and the recently finalized riskbased capital requirements. 

We appreciate that this legislation structures the higher capital threshold as an option, and not a 

requirement. We would resist efforts by Congress or the regulator to require credit unions to 

hold additional capital because it would take operational decisions out of the hands of credit 

unions and reduce the ability to lend to credit union members; further, such a requirement would 

be inappropriate and unnecessary for credit unions because they do not have a history of capital 

inadequacy. Nevertheless, while we strongly believe all credit unions should receive regulatory 

relief, providing relief to credit unions that have demonstrated a history of operating at higher 

capital levels and providing a process for remediation in the event that capital levels fall below 

10 percent strikes an appropriate balance. It ensures the continued safety and soundness of the 

credit union, while at the same time removes barriers that keep credit unions from doing even 

more for their members. 

7 
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25875.058

This legislation recognizes the safe and sound practices in which credit unions already engage 

and provides incentives for all credit unions to consider maintaining a higher leverage ratio. This 

would provide an increased buffer against the National Credit Union Share Insurance Fund in 

exchange for reduced regulatory burden. While we are not in a position to speak on the 

suitability of this provision for other charter types, given the history and performance of 

America's credit unions, this option makes a lot of sense for credit unions. We note that several 

of the provisions in Section 102 would apply only to banks. While we believe that Congress 

should provide regulatory relief for all credit unions including those with a leverage ratio under 

10 percent, within the constructs of this proposal, we encourage the Committee to include 

additional exemptions from other statutory requirements including (but not limited to) loan 

maturity limits (Section 1757(5) of the Federal Credit Union Act) and credit union service 

organization investment limits (Section l757(5)(D) of the Federal Credit Union Act). Further, 

we ask the Cormnittee to provide qualifying credit unions relief similar to NCUA's Regulatory 

Flexibility Program, which was discontinued by former NCUA Chairman Debbie Matz. These 

are items that NCUA has historically deemed to not pose a significant safety and soundness issue 

for well capitalized credit unions. 

We also encourage the Committee to consider adding NCUA to the list of agencies tasked in 

Section 104 with conducting studies on contingent capital instruments. While most credit unions 

are limited to retained earnings to build capital, some credit unions have access to supplemental 

forms of capital through the low-income designation; further, NCUA is contemplating issuing a 

supplemental capital rule as discussed by the agency when it finalized its risk-based capital rule. 

We have contemplated the suitability of a contingent capital instrument in the context of 

supplemental capital for credit unions; as long as the banking regulators are studying the 

implication of a contingent capital instrument, it may be worth the effort for NCUA to do the 

same. 

Otber Titles of tbe Financial CHOICE Act 

We are also currently reviewing the other Titles of the Financial CHOICE Act. We note that 

several provisions of Title III, VI and XI reflect legislative proposals that CUNA has supported 

8 
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in the past. There are also a small number of provisions with which CUNA has very serions 

concerns. We intend to communicate to the Committee our views on the remainder of the 

legislation very soon. 

Conclusion 

We appreciate that the Committee is considering legislation to provide meaningful regulatory 

relief for so many credit unions. We look forward to reviewing the remainder of the legislation 

and working with the Committee to remove statutory and regulatory barriers so credit unions can 

more fully serve their members. 

On behalf of America's credit unions and their more than 100 million members, thank you very 

much for the opportunity to testify today. 

9 
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25875.060

Credit Unions' Strongest AdvocateTM 

u 

EXECUTIVE SUMMARY 

Credit unions recognize that they operate in a regulated industry and must bear reasonable costs of regulation. 

However, the total financial impact of regulation on credit unions and their members is high and has increased 

dramatically since the recent financial crisis. 

With the support of state credit union Leagues, CUNA commissioned Cornerstone Advisors to perform a 

rigorous analysis of the current financial impact of regulation on credit unions, and how much it has changed 

since 2010. 

Cornerstone Advisors conducted a two~phased study to gain an in-depth examination and quantify the impact 

of regulation at small, medium and large credit unions. The study gathered data in terms of increased costs, 

including staffing, third party expenses and capitalized expenses, and reduced revenue opportunities. 

These financial impacts are considerable in terms of the scale- of credit union operations. 

Cost of 

Regulatory 

Burden to 

Credit Unions 

in 2011 

cuna.org!regburden 
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25875.061

Credit Unions' Strongest Advocate TM 

INCREASE IN REGULATORY IMPACT SINCE 2010 

The regulatory cost of 54 basis points of assets in 2014 represents a 15 basis point increase from the 39 basis 

point cost the study found in 2010. This means that regulatory costs for credit unions in 2014 were $1.7 billion 

higher than they would have been without the changes that occurred from 2010 to 2014. Adding the 10 basis 

point reduction in revenues ($1.1 billion) yields an increase in total financial impact of 25 basis points {$2.8 billion}, 

from 39 basis points to 64 basis points. 

Regulatory Cost Increase 

$1.7 Billion 

'-yJ '-yJ 

2010 2014 

lOST REVENUE 

Increase in Total Financial Impact 

Since 2010 

The study considered how revenue has been influenced by regulation, especially by changes in regulation. 

Participants identified a number of business lines that had been affected by regulatory changes, primarily 

related to !ending and interchange income. 

Although, lending revenue has no doubt been .Jffected by regulation, the amount is difficult to accurately 

quantify. Therefore, the only revenue reduction included in the study is that due to reduced interchange income 

as a result of the Durbin Amendment to the Dodd Frank Act. This means the study's $1.1 billion estimate for 

revenue reduction underestimates the actual amount. 

Small Credit Unions Bear the 

Brunt of Regulatory Burden 

SMALl 

CREDIT UNIONS Under $100 Mmlon 

--in Assets 

lARGE 

CREDIT UNIONS 

()v('r$1 Bi!l\on 

in AssetsCompares regulatory costs relative to assets 

REGUlATORY IMPACTS AND 

CREDIT UNION SIZE 

The study found dramatic evidence of differential impacts 

by credit union size. Cost impacts were much stronger at 

smaller versus larger credit unions. There are basic fixed 

costs associated with complying with regulations, and 

at larger credit unions these costs can be spread over a 

larger asset base. In contrast, adverse revenue impacts 

were stronger at larger than smaller credit unions. This is 

because members of larger credit unions are more likely 

to generate interchange income by using a debit card 

from their credit union. 

cuna.org/regburd€n 
127 


25875.062

Credit Unions' Strongest Advocate TM 

TYPES OF REGULATORY COST 

The study collected data on three types of costs related to regulation: staff costs, third party expenses and 

depreciation of capitalized costs. For each cost category, care was taken to include only that portion of the costs 

that are driven by regulatory requirements. For example, for compliance staff, time spent on compliance with 

internal policies not required by regulation was not included as a rc:gulatory expense. 

The largest component of regulatory expense was for staff, at 

7 4% of the total. This is not surprising as compensation typically 

accounts for about half of total credit union operation expenses. 

Of the staff costs driven by regulation, the largest component 

came in member+facing staff. This suggests that credit unions 

h;:we to employ more such staff than otherwise, and/or that 

member facing staff have to divert much of their attention from 

serving members to complying with regulations. 

cuna.org/regburden 
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25875.063

STRATEGIC IMPACTS 

The study solicited credit union CEOs' views on how the 

funds devoted to regulation would have been reallocated 

within the credit union had they not been drained by 

regulation. Better member pricing, better service delivery, 

and institutional strengthening topped the CEO's lists. 

!n addition to extensive data collection, the study solicited 

participating CEOs' viewpoints of where they had seen 

the greatest increase in regulatory impact in the areas of 

greater costs, reduced productivity, and reduced revenues. 

The greatest cost and productivity impacts occurred in 

compliance, mortgage and consumer lending and internal 

audit. The greatest revenue impacts were in mortgage 

lending, debit interchange and payments. 

KEY THEMES 

Credit Unions' StrongestAdoocateTM 

As a result of engaging with credit union executives over several months while conducting the study, 

Cornerstone Advisors analysts catalogued four key features of how credit unions view the impact of regulation: 

CONClUSION 

UNCERTAINTY 

&AMBIGUITY 

around written 

rules complicates 

compliance, 

A STEADY STREAM of NEW REGULATIONS 

creates costly 

change managem€'nt. 

INCONSISTENT 

INTERPRETATION 

of ru!es by examiners 

frustrates operations. 

"ONE SIZE FITS ALL" rules are unfair 

and ineffective. 

The study found that the costs that credit unions bear as a resutt of regulation, even when conservatively 

measured, are very high, and have increased substantially since the financial crisis and Great Recession. 

The burden is particularly egregious for smaller institutions. 

cuna.org/regburden 
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25875.064

Report of Fi dings 

Vincent Hui, Senior Director 

vhtJi@crnrstone.com 

Ryan Myers, Director 

rymers@crn rstone. corn 

Kaleb Seymour, Analyst 

kseymour@crnrstone.corn 
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Report of 

Executive Summary 2 

Assessment Approach and Overall 5 

Study and Approach 5 

Overall Findings 8 

Detailed and Conclusions 17 

Cost Impact 18 

Staff Costs 19 

3rd Party 26 

!:;,nit;>li7•'rl Costs 27 

Lost Revenues 30 

Income 30 

Reduction in Originations & Other Services 31 

How Regulatory Impact Has from 2010 to 2014 33 

Staff Increases: 20'10-2014 38 

Strategic Impacts 34 

Perceived vs Real 35 

Reallocation of Resources 35 

Key Participant Comments and Themes 37 

Member Impacts 39 

Conclusions 44 

Area for Further Study 45 

Appendix I 47 

Appendix II 54 
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25875.066

Credit unions operate in a regulated industry and recognize that there is a related cost of doing 

business. However, the level of cost that regulation imposes on credit unions is high (when 

compared to industry earnings and cost base), and has dramatically increased since the recent 

financial crisis and its aftermath. 

While there is recognition in Congress of the adverse effects of regulation, there has been 

no hard data on the actual costs of regulation. Consequently, the Credit Union National 

Association (CUNA) commissioned Cornerstone Advisors to conduct the first-ever study to 

quantify the regulatory cost imposed on credit unions. This report summarizes the findings from 

the study and describes the impact on credit unions, their members and the communities they 

serve. 

Cornerstone gathered detailed data from 53 credit unions nationwide on the financial impact 

of regulation today (as measured using 2014 results) as well as the increase in cost since 2010 

(the beginning of the Dodd-Frank era.) The study measures financial impact in two ways: 

1. Costs such as staff, technology and 3rd party support expenses incurred because of 

regulations 

2. Revenues not earned because of regulations, such as lost loan production and lower 

non interest income 

While there is a wide range of the study focused on the collection of banking and 

non-banking (e.g., Affordable Care Act, IRS, etc.) regulations that have the highest impact 

rather than trying to quantify the impact of each and every regulation. We also employed a 

conservative approach to quantifying the financial impact of regulations on credit unions in the 

following ways: 

In the data collection process, we instructed credit unions to only include costs and reduced 

revenues they could reasonably quantify. 

We instructed credit unions not to allocate overhead or other ancillary costs based on the 

amount of staff time devoted to regulatory impacts. 

• We excluded amounts that could not be validated or were incomplete. 
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Our primary findings are summarized below: 

Annual regulatory cost impacts on the credit union industry 2014 

Lost revenues in the form of interchange income 2014 

Total regulatory Financial Impact on the credit union industry 2014 

Increase in staff time on regulatory activities since 2010 

Increase in regulatory cost impact since 2010 

$6.1 billion or 

0.54% of assets 

$1.1 billion or 

0.10% of assets 

$7.2 billion or 

0.64% of assets 

91% 

$1.7 billion or 

0.15% of assets 

The median regulatory cost impact was 54 basis points of assets, and the median reduction 

in revenue was 10 basis points. Applying those findings to total credit union assets in 2014 

generates industry wide estimates of $6.1 billion in regulatory costs and $1.1 billion of lost 

revenue, for a total financial impact of regulation of $7.2 billion. This total regulatory financial 

impact represents 80% of 2014 credit union earnings (which was 0.80% return on assets) and 

5.9% of 2014 industry net worth. The cost impact represents 17% of industry 2014 operating 

expenses, and the revenue impacts represents 12.5% of credit union earnings. 

The estimated revenue impact actually understates the effect of regulation on credit union 

income. Many credit unions that new regulations had reduced loan volumes, especially 

in mortgages, but they had no way to quantify the amount of reduction. In keeping with our 

conservative approach to data collection, we did not include any estimate of reduced revenue from 

lower loan originations. Therefore, the $1.1 billion estimate of lost revenue understates the actual 

amount of revenue reduction due to increased regulation. 

Of the 54 basis points of assets ($6. 1 billion) devoted to regulatory costs in 2014, 15 basis points 

or $1.7 billion was an increase over regulatory costs in 2010, an increase of 39%1. It is important to 

note that we found substantial benefits from scale economies and the majority of the industry's growth 

has been at large credit unions. This concentration of growth likely understates the true industry-wide, 

additional cost of regulation since 2010. All of the revenue reduction was due to changes since 

2010. Therefore, the increase in total regulatory impact from 2010 to 2014 was $2.8 billion. 

The regulatory financial impact to credit unions affected all areas of the institution, with the biggest 

impacts in Risk Management, Member Services and Lending. The costs in Risk Management are 

primarily in the form of additional employees and increased legal & advisory expenses to comply 

with regulations. In Lending and Member Services, the impact represents increased time by memberfacing staff on regulatory activities (and less time with members) and higher technology costs to 

ensure their systems supported new regulations. Credit union-wide, the equivalent of about one staff 

member's time for every 4 employees is spent on regulatory compliance. 
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We also evaluated the results based on the size of the credit union: 

• Small credit unions (Less than $115 million in assets) 

• Mid-sized credit unions ($115 million to $1 billion in assets) 

Large credit unions (>$1 billion in assets) 

When segmented by size, the results highlighted the disproportionate impact on smaller credit 

unions, as measured by the financial impact of regulation as a percent of assets as shown in 

the following chart. The median financial impact at the smaller credit unions at 1.16% of assets 

is two and a half times greater than the 0.44% median impact at larger credit unions. While 

the relative cost for large credit unions is lower, the dollar impact is significant. As an example, 

the median cost for a $1 billion institution equals $4.4 million compared to a $1.1 million 

regulatory cost at a credit union with $100 million in assets. 

MEDIAN REGULATORY FINANCIAl IMPACT BY ASSET SIZE 

(As a % of Assets) 

1.50% 1.16% 

1.00% 

0.60% 0.64% 

0.44% O.SO% 

0.00$ 

Small Large Total 

We also asked Credit Union CEOs where the funds would have been reallocated if not spent on 

regulation. The vast majority of the reallocation focused on increasing member benefit either 

in terms of better rates, lower fees, and I or enhanced products & services, as shown in the 

chart below. 

REAllOCATION OF REGULATORY COSTS BY RESPONDENT CREDIT 

UNION CEOs 

Staff 

Development 

15% 

9% 

Other 

3% Better 

Better 

loan Rates 

12% 

Additional 

Physical 

Locations 

6% 

Our conservative estimate of the total financial impact of regulation on credit unions of $7.2 

billion can serve as a benchmark against which makers can compare the benefits of 

regulation. 
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Study Objectives and Approach 

the financial impact of 

regulations on credit unions. The study focused on extensive data collection to ensure that 

findings and conclusions are fact-based and by analytical rigor. 

Objectives and Scope 

The study measured regulatory financial impact in two primary categories: 

1. Costs such as staff, technology and 3rd party support expenses incurred because of 

regulations 

2. Revenues not earned because of 

non interest income 

such as lost loan and lower 

We summarize the findings in each of these categories and in the aggregate. In addition, we 

quantified the impacts into three groups based on asset size: 

• Small credit unions (less than $115 million in assets) 

• Mid-sized credit unions ($115 million to $1 billion in assets) 

large credit unions (More than $1 billion in assets) 

The study covered all areas of the credit union and looked at regulatory costs as of today 

(using 2014 data the most recent full year) as well as the changes to regulatory costs since 

the enactment of the Dodd-Frank Act (i.e., changes from 2010 to 2014). 

While there is a wide range of regulations, the study focused on those banking and nonbanking (e.g., ACA, IRS, etc) regulations that have the highest impact. Rather than quantifying 

the impact of each and every regulation, we collected data based on the aggregate impact of 

all regulations for each function or department within a credit union. 

Approach 

We conducted the study in two phases: 

Phase 1 -Initial Deep Dive Analysis of Three Credit Unions 

Phase 2 In-Depth Survey and Data Collection with 53 Credit Unions 
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Phase l 

The objective of Phase 1 was to identify the key regulations that had the most impact on the 

credit union industry, how those regulations affected credit union operations and how the 

effects differed based on the size of the institution. Three credit unions one in each size 

group- participated in this Phase. 

We conducted detailed interviews with management (including onsite visits), and reviewed 

credit union information & reports to identify the higher impact regulations that would form the 

basis for broader data gathering across the credit union industry as part of Phase 2. 

The regulations that had the most impact centered on three main areas: 

1. Lending (e.g., Card Act, Qualified Mortgages, etc.) 

2. Non-interest income (e.g., Durbin, etc.) 

3. Credit union-wide (e.g., IRS, Department of Labor, etc.) 

Phase 2 

Based on the findings from Phase 1, we sent an data collection survey to 53 credit 

unions nationwide. The respondents were evenly distributed across the three size groups: 

SURVEY RESPONSE DISTRIBUTION BY ASSET SIZE 

The survey covered the two primary impact categories: 

1. Costs 

2. Lost Revenues 

The Cost category regulatory staff costs in the credit union. These costs 

are defined as staff hired specifically to deal with regulatory compliance as well as staff time 

for other staff to perform regulatory-related activities. In addition, we captured technology 

and 3rd party service provider costs related to regulatory compliance across the entire credit 

union. We recognize that not all staff and non-staff costs are regulatory-related. As such and 

to be conservative, the cost estimate excluded costs related to non-regulatory activities (i.e., 
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good business practice). The survey measured the amount of time that credit union staff 

(e.g., lenders, branch personnel, operations, risk management, etc.) spent on regulatory 

responsibilities versus their primary roles. As an example, time and resources to conduct 

reviews for adherence to internal underwriting policies are related to good business practices 

and processes and are thus not counted as regulatory costs. 

We did not include any ancillary costs associated with the staff time driven by regulatory 

requirements such as occupancy costs or workstations for that staff. We included no allocation 

of overhead expenses. 

Finally, the survey considered Lost Revenues from and services no longer offered 

to members due to regulation as well as lower pricing (especially in interchange income) that 

reduced a credit union's ability to offer the breadth of products I services, better rates, and/ 

or lower fees to members. Although several types of revenue reduction were cited by credit 

unions, especially in the area of reduced lending due to new regulations, the only revenue 

reduction that we included in the data analysis was lower interchange fee income. This is 

because credit unions were unable to definitively quantify the amount of reduced lending. 

We reviewed the survey results, and incomplete information was discarded to ensure data 

completeness and consistency. In addition, information from the credit union's call report 

supplemented the survey responses to ensure data integrity and accurate size groupings. (See 

appendices for additional information on respondent demographics, an overview of the data 

collection & validation process and the survey sent to credit unions.) 
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Overall Findings 

In this section we summarize the overall findings, first in terms of total financial impact, and 

then for each of the major components of the impact. In the following section, we provide 

more detail on the findings. 

The median total financial impact of regulation for cost and revenue impacts equals 0.64% 

of assets with regulatory costs representing the bulk of the impact (0.54% of assets), and lost 

revenue making up the remainder at 0.10% of assets as shown in the chart below: 

MEDIAN CURRENT FINANCIAL IMPACT BY IMPACT TYPE 

(As a % of Assets) 

0.70% 

0.60% 

0.50% 

0.40% 

0.30% 

0.20% 

0.10% 

0.00% 

Costs Lost Revenues Total Financial Impact 

The median amount of 0.64% represents a significant portion of the 2014 industry net income 

or Return on Assets (ROA) of 0.80%. Even if the impact of Lost Revenues is excluded, the cost 

impact is about 68% of overall industry earnings and about 5% of the industry's $123 billion 

in net worth- representing a significant portion on a credit union's resources. The 0.54% 

cost impact industrywide equates to over $6 billion annually, and represents about 17% of the 

industry's $34.8 billion in operating expenses 

The amount of regulatory financial impact relative to assets varies considerably around the 

0.64% median as shown in the chart below. For a quarter of the credit unions studied, the total 

impact amounts to 0.32% of assets or less. However, for a quarter of credit unions, the impact 

of regulation represented at least 1.25% of assets. Most of this variation is driven by differences 

in the cost component as opposed to revenue impact. 
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ANNUAL REGULATORY FINANCIAL IMPACT BY IMPACT TYI'E 

(As a % of Assets) 

1.40% 

1.20% 

1.00% 

0.80% 

0.60% 

0.40% 

0.20% 

0.00% 

25th percentile 

Direct Expenses 

Median 

lost Revenues 

1.25% 

75th percentile 

0 Total 

This dispersion is attributable to the varying impacts based on the size of the institution. One 

common theme throughout the findings is that, relative to asset size, small and mid-sized credit 

unions carry a disproportionately higher cost as illustrated in the chart below. However, even 

though the financial impact as a percent of assets is relatively lower for larger credit unions, 

the dollar amounts are substantial. As an the median cost for a $1 billion institution 

equals $4.4 million, compared to $1 16 million regulatory impact at a credit union with $100 

million in assets. 

MEDIAN REGULATORY FINANCIAL IMPACT BY ASSET SIZE 

(As a % of Assets) 

1.50% 1.16% 

1.00% 

0.60% 

0.50% 

0.00% 

Small Mid~Size Large 

0.64% 

Total 
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Cost Impact 

The median regulatory cost impact is 0.54% of assets, which equates to $6 billion annually 

and is 17% of total industry operating expenses. The cost impact overall and by asset size is 

shown in the chart below and highlights how the impact skewed much higher for smaller credit 

unions, where the median impact is over three times higher for small credit unions (1 12% of 

assets vs 0.33% for large credit unions.) 

REGULATORY COST IMPACT- OVERAll AND BY ASSET SIZE 

(As a 

1.20% 

1.00% 

0.80% 

0.60% 

0.40% 

0.20% 

0.00% 

of Assets) 

Small Mid-Size Large Total 

As context, statistics released by the NCUA for 2014 showed the average Return-on-Assets 

ratio (ROA) and Expense-to-Assets ratio for credit unions with $10 million to $100 million in 

assets as 0.37% and 3.65%, respectively. The median regulatory cost for a small credit union 

of 1.12% exceeded the average earnings of this size group and represented about 31% of its 

operating expenses. The impacts are slightly lower for mid-sized credit unions (NCUA grouping 

of $100 million to $500 million), but still substantial (80% of 0.61% ROA) These credit unions 

do not expect their regulatory expenses to be zero, but their current levels are substantial and 

have increased dramatically over the past several years. 

Large credit unions have lower relative impact because of their scale (e.g., more members and 

assets to spread the cost.) However, the absolute dollar amounts are still substantial. A $1 

billion credit union with median regulatory cost of 0.33% would equate to over $3 million of 

regulatory-related expenses. Again, this represents a significant amount of dollars that could 

be reallocated to better serve members, improve savings or loan rates, reduce fees, or build 

capital. 

When reviewing the most prevalent expenses, the majority represents staff costs across the 

entire credit union (about three-quarters of annual regulatory costs regardless of credit union 

size). 3rd party expenses include costs such as technology, consultants and outsourced services 

to meet regulatory requirements, while capitalized expenses are primarily technology spending 

that is amortized into earnings. The distribution is similar across asset sizes and highlights the 

need to attract qualified staff to keep up with and manage new regulations, as well as the level 

of change in technology and processes to comply with new regulations. 
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REGULATORY COSTS BY EXPENSE TYPE - OVERAll AND BY ASSET SIZE 

100% 4% 5% 5% 4% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

Small Mid-Size large Total 

Staff Costs 3rd Party Expenses Depreciation of Capitalized Expenses 

Staff Costs 

While staff cost is the component of regulatory costs, we also wanted to understand 

the impact relative to overall credit union staffing levels. The chart below shows median 

values for the proportion of total Full Time Equivalent (FTE) staff in the credit union that 

are devoted to regulatory activities. Overall, about one in four FTEs focused their time on 

regulatory compliance. 

PROPORTION OF TOTAl FTES DEVOTED TO REGULATORY ACTIVITIES 

50% 

40% 

30% 

20% 

10% 

0% 

Small Mid-Size large Total 
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There are significant differences among the three asset classes, with smaller credit unions 

devoting almost half of their staff time to dealing with the impacts of regulations. Large credit 

unions have the scale to better absorb regulatory expenses in general, but this is especially 

true as it relates to staffing. A significant part of this is due to technology investments that can 

be made to increase the efficiency of several regulatory-related processes investments that 

smaller credit unions often cannot afford. 

Regulatory staff cost is not confined to the Risk area (e.g., compliance, internal audit, enterprise 

risk management, etc.) In fact, areas outside of Risk bear the largest regulatory staff costs. From 

a departmental perspective, over half of the regulatory staff impact occurs in member-facing 

groups such as branches, call centers and lenders, as shown in the chart below. While this is 

somewhat expected given regulatory consumer protections, the amount of re-directed activities 

toward regulatory compliance is substantial and reduces the amount of time that these memberfacing employees spend in solving member needs and problems. This results in either reduced 

service levels and/or increased headcount. Support areas such as deposit and loan operations, 

finance, and marketing are impacted primarily by the disclosure and reporting requirements 

imposed on credit unions. 

STAFF COST DISTRIBUTION BY STAFF TYPE - OVERALL AND BY ASSET SIZE 

100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

Risk Member Fadng Support 

The distribution of staff costs among Risk, Member Facing and Support varies by credit union 

size. Compared to their larger counterparts, small credit unions experienced a lower proportion of 

regulatory staff time in member facing areas, and correspondingly more in the other two categories, 

particularly in risk areas. This higher mix of Risk staff costs for smaller credit unions highlights their 

lack of scale in this area. In addition, while their proportion of member-facing regulatory staff is 

lower, it has an outsized impact on small credit unions' ability to provide basic member services 

given their overall smaller staff levels. For larger credit unions, their more complex lending mix 

(particularly in mortgage) and the related regulations account for the higher relative staff costs in 

member-facing areas. 
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lost Revenues 

In interviews and on the survey, credit unions described substantial reductions in revenue 

because of lost loans that otherwise would have been made and on noninterest income lost 

due to regulatory actions, as it relates interchange income. 

Smaller credit unions indicated significant negative revenue impact as regulatory requirements 

in areas like mortgages, open-ended lending and international wires forced them to terminate 

these products and services. The lost revenues are effectively a proxy in this case for a lower 

level of services to members. Credit unions in low income designated areas are most impacted 

as these are the type of products and services that members in those communities need. 

However, despite identifying the fact that lending volumes and services were reduced, many 

of the respondent credit unions found it difficult to estimate by how much. In keeping with our 

conservative approach, although we note that the impact is likely substantial, we did not quantify it 

The area where we could quantify lost revenues was interchange income which equated 

to about 10 basis points of credit union assets, as shown in the following chart. The Durbin 

Amendment had a direct impact on financial institutions over $10 billion in assets, but also 

created consequences that negatively impacted credit unions under $10 billion in assets. 

Specifically, the amendment created more competition among card processors (e.g., PI Niess 

debit, PIN Authenticated Visa Debit (PAVD)), resulting in lower average fees for both PIN and 

signature transactions. For this impact, we calculated lost revenues by applying the difference 

in the average transaction fees between 2010 and 2014 to the current transaction volume. 

While innovation and competition is generally positive, the positive impact has accrued to 

merchants at the cost of credit unions and ultimately members in terms of lower capital and 

fewer investment dollars available to support member growth and needs. In this particular 

case, larger credit unions had the greater impact given the higher penetration and usage of 

debit cards by their membership. 

LOST INTERCHANGE FEE INCOME OVERAlL AND BY ASSET SIZE 

(As iJ % of Assets) 

0.12% 

0.10% 

0.08% 

0.06% 

.04% 0.04% 

0.02% 

0.00% 

Small 
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Increased Regulatory Financial Impact Since 2010 

In addition to understanding the total regulatory financial impact today, the study also looked 

at how the financial impact has changed since 2010 when the Dodd-Frank Act was passed. 

The intent is to highlight how much additional financial impact credit unions incurred when 

their fundamental business models and mission have not changed much in that time frame. 

Regulatory cost impact rose from 0.39% in 2010 to 0.54% in 2014, a 39% increase since 2010-

a large increase given the long history of credit unions and the short time from the Dodd-Frank 

Act to today. Again, smaller credit unions had the highest percentage increase (43%) due to 

lack of scale, as shown in the chart below. 

% INCREASE IN REGUlATORY COST IMPACT SINCE 2010 

50% 

45% 

40% 

35% 

30% 

25% 

20% 

15% 

10% 

5% 

0% 

To put this increase in context, total industry assets and expenses only increased 21% and 16%, 

respectively, from 2010 to 2014, while the industry operating expenses as a percent of assets 

actually decreased from 3.19% in 2010 to 3.05% In other words, the industry's efforts to be 

more efficient and productive has been significantly offset by the higher regulatory costs. 
144 


25875.079

Staff cast is the most contributor to the increase in regulatory casts. The total staff 

time spent an regulatory compliance almost doubled since 2010 (91%), as shown in the chart 

below. Again, the increase in the burden was greatest far small and mid-sized credit unions. 

The double-digit average annual increase aver the last 4 years impacted all credit unions 

regardless of size and far exceeded credit union growth rates during that same period. 

CUMULATIVE CHANGE IN REGULATORY FTES- 2010 TO 2014 

120% 

100% 

80% 

60% 

40% 

20% 

0% 

Membership and Community Impacts 

The resources to support the current regulatory cost could be re-directed to other uses that 

would benefit the member and the community. We asked the CEOs of the credit 

unions where they would reallocate those resources, and the vast majority of the responses 

centered on providing better products I services and rates & fees to members. For larger 

credit unions, community giveback is also a high priority. The distribution of their responses is 

summarized in the following chart. 

REALLOCATION OF REGULATORY COSTS BY RESPONDENT CREDIT 

UNION CEOs 

Staff 

Development 

15% 

Marketing 

9% 

Build Capital 

22% 

Other 

3% Better 

Rates 

11% 

Better 

loan Rates 

12% 

Alternative 

Channels 

21% 

Additional 

Physical 

Locations 

6% 
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Conclusions 

The overall regulatory financial impact on the credit union industry is over $7.2 billion, with 

$6.1 billion (or 85% of the total impact) in costs. This is equivalent to 80% of industry earnings 

and 5.9% of net worth. The cost component of the financial impact 17% of industry 

expenses. All credit unions recognize that they are in a regulated industry and there will be 

a cost. However, the level of cost that regulations and regulators imposed has dramatically 

increased since the financial crisis and its aftermath. Annual regulatory costs as a percent of 

assets increased 39% since 2010 with higher staff and staff time devoted to regulatory activities 

making up most of that increase. 

The percentage cost relative to credit union asset size is heaviest on smaller credit unions. 

However, the impact in absolute dollars is much higher for larger credit unions. These dollars 

would be redeployed to better rates I fees and products & services for members as well as 

community development. 

There is no consensus on which regulations impose the greatest cost on credit unions. 

However, based on free form comments by respondents, four key themes emerged around the 

greatest causes of their current cost, est::Je·cially over the past few years: 

• Uncertainty and ambiguity around written rules 

Inconsistent application I interpretation of regulations by examiners 

• Steady stream of regulations that create high levels of change management (e.g., death by a 

thousand cuts) 

• One size fits all approach to regulation 

These themes and the higher regulatory costs today underscore the increased risk in several 

areas: 

• Operational- greater complexity in process and higher level of process change and training 

required 

Compliance more and continuous regulations to track, monitor and incorporate into 

business processes 

• Strategic diverts resources from core mission and reallocates resources away from core 

business activities 

The findings from this study will credit unions and other stakeholders 

with the facts to perform a more robust cost-benefit assessment of the regulations (passed and 

pending) to determine what is an appropriate level of regulatory cost in light of credit unions' 

current level of regulatory cost and credit unions' mission of community and member service. 
146 


25875.081

This section covers more results for each of the two major regulatory financial impact 

categories: Costs and Lost Revenues. In addition, it also addresses Strategic Impacts as they 

relate to resource allocation decisions. 

Costs 

lost Revenues 

Strategic Impacts 

Regulatory-related Staff and 3rd party expenses incurred 

throughout the major functional areas of the credit unions. 

Revenue reductions as a result of regulations. 

Impacts to the credit union through the viewpoint of the CEOs. 

Insight on how resources would have been allocated if not for 

regulatory cost. 

The regulatory financial impact estimates are based on data from systems of record from 

participants and conservatively calculated into quantifiable costs. Outlying data that appeared 

to be unrealistic due to the abnormally high financial impact was removed from the aggregate 

data in this study. To further demonstrate the full extent of regulatory financial impact, the 

study captured specific examples to explain impacts on credit unions and their members 

in addition to the conservatively estimates. (See appendices for an overview of 

the data collection & validation process as well as free form comments and themes from 

respondents to illustrate examples.) 

Our industry-wide estimates of the dollar cost and lost revenue impacts of regulation are 

derived by applying the medians of these impacts (expressed as a percentage of assets) at the 

study's subject credit unions to total assets for the credit union industry. 
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Cost Impact 

Regulatory costs represent 0.54% of assets or $6.1 billion in cost, per the chart below. 

Scale does matter as seen in the higher relative impact of regulatory costs on smaller credit 

unions. The median ratio of regulatory costs to assets falls from 1.12% for small credit 

unions to 0.54% for large credit unions, as shown below. Even the cut-off point marking 

the lowest 25% of small credit unions in terms of regulatory cost (0.80% of assets) is higher 

than the cut-off for the top 25% of large credit unions (0.52% of assets.) In other words, 

over three quarters of small credit unions have higher ratios of regulatory impact to assets 

than the cutoff for the 25% of large credit unions with the highest ratios of impact to assets. 

ANNUAL REGULATORY COST IMPACT- OVERALL AND BY ASSET SIZE 

(As a % of Assets) 

2.00% 

1.50% 

1.00% 

0.05% 

0.00% 

25th Percentile Median Percentile 

To estimate the cost amounts, we collected regulatory-related expenses across a variety 

of functions for the full calendar years of 2010 and 2014. We used the 2014 expenses 

to calculate the current total impact of regulatory cost, while using the 2010 data as a 

reference to determine how much regulatory expense changed over the last five years since 

implementation of the Dodd-Frank Act. The data collection also included both aggregate 

spending and the annual amortization & depreciation for capitalized costs as part of the study. 

Regulatory costs are comprised of three primary types of expenses: 

Staff costs 

3rd party expenses 

• Amortization I depreciation for 

December 31st, 2014. 

costs incurred between January 1st, 2010 and 
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25875.083

Per the chart below, staff costs make up about three-quarters of the total regulatory costs, with 

the mix very similar across asset sizes. 

REGULATORY COSTS BY EXPENSE TYPE -OVERAll AND BY ASSET SIZE 

100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

0% 

Small 

Staff Costs 

Mid-Size large Total 

3rd Party Expenses Depredation of Capitalized Expenses 

The following is a detailed review of each of the three cost components. 

STAFF COSTS 

Regulatory staff costs equate to about $3.9 billion annually, or 0.35% of assets. As a 

recurring theme, the impact is higherfor smaller credit unions as 

staff members usually perform multiple roles including regulatory compliance and 

these credit unions often cannot afford dedicated regulatory staff. For larger credit 

unions, the staff necessary to cover necessary regulatory activities can be spread over 

a larger asset base. The median regulatory staff cost for small credit unions (0.94% 

of assets) is nearly three and four times larger than mid-sized and large credit unions, 

respectively. 

TOTAL REGULATORY STAFF COSTS • OVERAll AND BY ASSET SIZE 

(As a % of Assets) 

1.00% 0_94%~ 

0.80% 

0.60% 

0.40% 

0.20% 

0.00% 

Small Mid-Size large Total 

"Median costs for suf>.categories may not add up to the median total cost for the combined categor_~ 
149 


25875.084

Small credit unions are doubly impacted as they lose interaction time with members and often 

cannot afford to bring additional branch, lending or member service staff to offset the lost 

interaction time. This is seen in the chart below where almost half of the small credit union staff 

time is dedicated to regulatory activities. For the entire study group, about one in four FTEs 

focus their time on regulatory compliance. 

PROPORTION OF TOTAl FTES DEVOTED TO REGUlATORY ACTIVITIES 

50% lis%· 

40% 

30% 

20% 

10% 

0% 

Small Mid-Size Large Total 

The study calculated staff costs by estimating the amount of staff and staff time dedicated to 

regulatory-related activities across all credit union functions and translating that time into cost 

amounts based on each credit union's average salary and benefit expense. We used three 

general classifications for the analysis: 

1. Risk Management staff: Employees who perform the following functions 

associated with regulation- Compliance, Internal Audit, Bank Secrecy Act (BSA} I AntiMoney Laundering (AML}, Enterprise Risk Management (ERM}, Vendor Management 

2. Member-Facing Staff: Employees who interact directly with members (e.g., tellers, branch 

and lending staff) or support a channel that directly interacts with a member (e.g., online 

banking) 

3. Support Staff: Employees who do not typically interact directly with members and support 

the member-facing staff {e.g., finance) 

The chart below shows the distribution of staff regulatory costs across the three staff groups, 

by credit union size and overall. Just over half {54%) of staff costs are incurred in the member 

facing areas, which not only impacts but also the credit union's ability to serve its 

members. Just over a quarter (27%) of regulatory staff costs are in risk management, and just 

under a fifth {19%) are in support areas. 
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STAFF COST DISTRIBUTION BY STAFF TYPE· OVERALL AND BY ASSET SIZE 

100% 

90% 

80% 

70% 

60% 

50% 

40% 

30% 

20% 

10% 

Oo/o 

Small Large Total 

Risk Member Facing 

Risk Management 

Our definition of Risk Management includes the following functions: 

1. General Compliance 

2. Internal Audit 

3. Bank Secrecy Act (BSA) I Anti-Money Laundering (AML) 

4. Enterprise Risk Management (ERM) 

5. Vendor Management 

The Risk Management staff cost using salary ;:md benefits) dedicated to regulatoryrelated activities made up a sizeable contribution to the total staff cost for all credit unions, 

making up 19% of total regulatory staff costs as shown in the above chart As with other 

regulatory related costs, Risk Management staff costs have a 

credit unions relative to assets. The median Risk Management regulatory staff expense as 

a percent of assets for small credit unions (0.23%) is five and ten times higher than those of 

mid-sized (0.05%) and large credit unions (0.02%), respectively. Scale is a significant factor in 

achieving Risk Management staff leverage. 

Not all Risk Management staffs' time is spent on regulatory compliance. Their responsibilities 

also relate to oversight of general business practices and policies, and their time spent on 

these activities is excluded from the regulatory cost estimates. 
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The distribution of regulatory staff costs across the various Risk Management functions is similar 

regardless of asset size and is shown in the chart below. Bank Secrecy Act and Anti-Money 

Laundering and General Compliance take up the bulk of staff expense in Risk areas. 

DISTRIBUTION OF REGULATORY DIRECT STAFF EXPENSE BY RISK 

MANAGEMENT FUNCTION 

Vendor 

10% 

The staff time devoted to BSA is the most significant category, with 40% of the 

total. Unlike other Risk Management functions, close to 100% of a BSA employee's time is 

related to regulatory requirements. It is common for financial institutions to centralize this 

function as much as possible to achieve scale to minimize the impact on other employees such 

as branch personnel. 

Member-Facing Staff 

The member-facing staff is the largest contributor to regulatory staff costs, accounting for 54% 

of total regulatory staff costs- with the highest proportion at larger institutions (69%), which 

have larger branch networks and staff as well as more member-facing lending The 

cost for member-facing staff equals $2.1 billion in cost, or 0.19% of assets (54% of the overall 

median regulatory staff costs of 0.35% of assets.) This amount does not include the impact of 

lower usage of products and services due to less sales and service time spent with members. 

When looking at how the amount of regulatory time compares to overall work time, more 

than 1 in 10 overall or total credit union staff are member-facing staff focused on regulatory 

requirements rather than serving members. The following chart shows the equivalent memberfacing staff performing regulatory activities as a percent of the total credit union staff. 
152 


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MEMBER-FACING REGULATORY STAFF AS A% OF CREDIT UNION STAFF -

OVERALL AND BY ASSET SIZE 

20% 

15% 

10% 

5% 

0% 

Similar to the Risk Management staff, small credit unions have the 

member-facing staff performing tasks. At the credit unions, these activities are 

typically a portion of an employee's and the time on activities would likely 

be reallocated from m'>mhPr-t:"·,nn activities like servicing and sales. As such, these may 

be considered more "soft costs" that may not show up in earnings, but still have 

economic impact. In addition, these smaller credit unions often cannot afford to hire 

additional member-facing staff to the lost member interaction time. 

Within member-facing staff, we them into three functions: 

1. lending: Mortgage, consumer and business originations 

2. Branch; All staff located at branches 

3. Other: Combination of other activities such as collections, call center and retail 

administration 

The highest portion of 

shown below, and this was consistent among all asset classes. 
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25875.088

MEMBER-FACING REGULATORY STAFF BY FUNCTION 

Although the overall allocation was 

slight difference observed within the function. Large credit unions more 

regulatory related staff in mortgage originations, while small and mid-sized credit unions 

showed more allocated to consumer loan originations. This is due to differences in the credit 

unions' business model and their lending focus, with smaller credit union being less active in 

mortgage lending. 

Support Staff 

The staff cost for support staff $1.0 billion in cost, or 0.09% of assets (27% of overall 

median regulatory staff costs of 0.35% of assets). Again, small credit unions have a higher 

portion of support staff dedicated to activities (14%) vs the overall median of 5%. 

The following chart shows the support staff performing regulatory tasks as a percent of the 

total credit union staff. 

SUPPORT REGULATORY STAFF AS A% OF TOTAL CREDIT UNION STAFF 

16% 

14% 14% 

12% 

10% 

8% 

6% 

4% 

2% 

0% 

Small Mid~Size Large Total 
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While the difference between small and large credit unions is significant for memberfacing staff, it is even more so for support staff. The spread in terms of regulatory staff as a 

percentage of total credit union staff between large and small credit unions is 11 percentage 

points (3% vs 14%) for Support staff vs only a 6 percentage point difference for memberfacing FTE (12% vs 18%). Support functions are more scalable operationally and this 

translates into the larger difference in the results above. In addition, the scalability is aided by 

investments in technology that larger credit unions can afford more than their smaller peers. 

It would appear the activities associated with regulatory compliance are more easily absorbed 

in back office, non-member facing positions due to the benefit of scale as described above. 

In other words, it is better to consolidate regulatory activities wherever possible away from the 

member so there are more opportunities for member-facing staff to interact with members. 

Regardless of asset size, the two largest support areas related to regulatory cost are Loan 

Operations, which consists of mortgage, consumer and business lending servicing, and 

Information Technology, as shown in the following chart. 

SUPPORT REGULATORY STAFF BY FUNCTION 

HR 

12% Deposit 

Operations 

14% 

Loan Operations deal with collections and servicing regulations, while the IT departments 

focus on implementing new regulatory requirements (e.g., reporting, new controls, etc.) 

within existing systems or new systems to comply. For example, one participant 

estimated that approximately 20% of the software releases are related to regulatory and IRS 

items. Moreover, each release required two staff members to perform testing and updates for 

2 3 weeks. While the IT employee time dedicated to regulatory related tasks is included in this 

category, the lost opportunity and delays to perform updates for business applications and its 

impact is not a quantifiable part of the study. 
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3RD PARTY EXPENSES 

3rd party expenses are the second largest cost category after staff costs, and equate to about 

$1.3 billion annually, or 0.12% of assets (22% of overall median regulatory costs of 0.54% of 

assets.) The 3rd party expenses spanned the entire credit union and covered activities such 

as Bank Secrecy Act, mortgage originations, online I mobile I ATM support, disclosures, legal 

and training. (Note that overhead costs such as workstations, etc. for additional 

regulatory-related staff are not included in the expense cost calculations due to the study's 

conservative approach, even though these are real costs related to regulation.) 

Survey participants provided 3rd party expense data for almost 30 sub-functions (See Appendix 

for more details). The following table describes the six broad groups used for analyzing 3rd 

party expenses, along with the description for each: 

lending 

Member Services 

Finance 

Information Technology (IT) 

Human Resources 

Risk 

• Mortgage Originations and Servicing 

• Consumer lending Originations and Servicing 

• Business lending Originations and Servicing 

Credit Administration 

Collections 

Other lending Expenses 

Branches 

• Retail Administration 

Call Center 

• Online, Mobile and ATM 

Disclosures 

• Deposit Operations 

• Finance 

• Asset Liability Management (ALM) 

"'"'"'"rrP•' 1-xn.~n'""' (e.g. Affordable Care Act mn"''~'orc Labor Reporting) 

• Internal Training (e.g., Training Materials) 

External Training (e.g., Conferences, Seminars) 

Compliance 

Audit 

• BSA/ AML 

Enterprise Risk Management (ERM) 

• Vendor Management 

• Legal 
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The distribution of 3rd party expenses across each of the groups is shown in the following 

chart. 

DISTRIBUTION OF REGULATORY 3RD PARTY EXPENSES BY FUNCTION 

IT 

17% 

Risk 

12% 

Lending 

20% 

Member Services 

29% 

The distribution is roughly the same across the three asset size groups. Member Services 

required higher 3rd party expenses primarily driven by the cost of updating and sending 

disclosures & branch-related expenses. Although the Finance group was the third lowest 

proportion of 3rd party expenses, the cost of regulatory reporting compliance was highly 

emphasized by CFOs- particularly for large credit unions where it accounted for 60% of 

Finance's regulatory expenses. 

CAPITALIZED COSTS 

regulatory costs represent 

a small component of regulatory costs. These costs are generally technology investments (e.g., 

licensing fees, computer hardware, etc.) that are amortized over a five year period. 

These costs equate to about $225 million annually, or 0.02% of assets (4% of overall median 

regulatory cost of 0.54% of assets.) While the annual expense is low, the actual capital 

expenditure outlay from 2010- 2014 is significant. Per the chart below, total regulatory capital 

expenditures over the last 5 years equal 0.11% of 2014 assets, or $1.2 billion dollars. 

Although survey participants provided capitalized costs incurred between 2010 and 2014 for 

regulatory compliance across the same set of nearly 30 sub-functions as previously referenced, 

only the annual amortization I depreciation is included in the regulatory costs for 2014. In other 

words, only one-fifth of regulatory capital expenditures incurred from 2010 to 2014 are included 

in the annual regulatory costs amounts. 

Capitalized costs relative to assets vary considerably by credit union size. They are substantially 

higher for small credit unions in part due to the fixed costs related to hardware and some 

software licenses. For example, a server will generally cost the same across all credit unions 

regardless of size. In fact, the absolute cost may sometimes be higher for smaller institutions 

since they do not benefit from volume discounts. 
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TOTAl CAPITALIZED COSTS FROM 2010-2014- OVERAll AND BY ASSET SIZE 

(As a % of 2014 Assets) 

.040% 

0.30% 0.29% 

0.20% 

0.10% 

0.00% 

Capitalized costs are into the same six categories as the 3rd party expenses. The 

distribution of these costs varies by credit union size, as shown in the following charts. The 

largest credit unions spent a considerable amount of capital expenditures in Lending given 

their broader and larger lending operations. In total, 25% of the large credit union respondents 

reported investments of over $2 million between 2010 and 2014. On the flip side, the 

proportion of funds invested in Member Services and Risk decreased with asset size due to 

scale. The relatively higher expenses in the Risk category for small and mid-sized size credit 

unions relate to investments for audit and BSA I AML where they combined to 

represent the majority of the in this area. Discontinuing some products and services 

(given lower relative volumes) to avoid making the investments contributed to lower 

non-Risk investments for smaller credit unions. 

DISTRIBUTION OF CAPITALIZED COSTS BY FUNCTION - SMAll CREDIT UNION 

Human Resources 

13% 

Finance 

11% 

Lending 

24% 
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DISTRIBUTION OF CAPITALIZED COSTS BY FUNCTION • 

MID-SIZED CREDIT UNION 

Human Resources 

12% 

Risk 

18% 

Finance 

3% 

DISTRIBUTION OF CAPITALIZED COSTS BY FUNCTION· 

LARGE CREDIT UNION 

IT 

12% 

Finance 

4% 

Risk 

Member Services 

15% 

Lending 

17% 
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The survey looked at several sources of lost revenues across credit unions and how the extent 

of any reductions varied widely based on size, strategy and member base. The study focused 

on the most notable sources of lost revenue based on feedback in Phase I of the study. The 

primary sources are as follows: 

• Interchange Income 

Qualified Mortgage (OM) Originations 

• Multi-Feature 

• Member Business Lending (MBL) Originations 

Non-Sufficient Funds (NSF) I Overdraft (OD) Income 

Although many credit unions described reductions in various types of lending brought about 

by new regulations, very few were able to quantify the impact. The impact on Non-Sufficient 

Funds (NSF) I Overdraft (OD) Income is driven primarily by member behavior rather than any 

specific regulations. The one exception is Regulation E's impact on courtesy pay adoption 

given confusion by both credit union staff and member as to rules and applicability. However, 

the impact could not be quantified reasonably. We also asked participants to provide revenue 

reductions incurred by Wealth Management, Insurance and Mortgage (if a separate affiliate), 

but results showed minimal impact in these areas. 

Based on the difficulty of quantifying most of these effects, and to be conservative in our 

estimates, the only revenue stream we for lost revenue is interchange income. 

Our results therefore understate the actual amount by which regulations have reduced credit 

union revenue. 

INTERCHANGE INCOME 

The only quantifiable contributor to Lost Revenues included in the study is lower interchange 

fees. The quantifiable impact of Lost Revenues is 0.10% of assets, or $1.1 billion. This 

represents 13% of 2014 industry earnings. The analysis used point of sale (POS) transactions 

and the proportion that are PIN vs signature as provided by the survey participants. It also 

utilized debit card interchange fees taken from a Federal Reserve study, "Average Debit 

Card Interchange Fee by Payment Card Network", revised as of May, 2015. Large credit 

unions generally had more detail regarding transactions than smaller credit 

unions. Therefore, the total amount of revenue reduction in this category is primarily found 

in the large credit unions where the data was available. The following chart shows the lost 

interchange revenues as a percent of assets. 
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25875.095

LOST INTERCHANGE FEE INCOME -OVERALL AND BY ASSET SIZE 

(As a % of Assets) 

0.20% 

0.15% 

0.10% 

0.05% 

0.00% 

25th Percentile Median ~75th Percentile 

The Durbin Amendment had a direct impact on financial institutions over $10 billion in assets, 

but also created unintended consequences that negatively impacted credit unions under $10 

billion in assets. Specifically, the amendment created more competition among card processors 

(e.g., PI Niess debit, PIN Authenticated Visa Debit (PAVD)), resulting in lower average fees 

for both PIN and signature transactions. For this impact, we calculated lost revenues by 

applying the difference in the average transaction fees to the current transaction volume. While 

innovation and competition is generally positive, the positive impact has accrued to merchants 

at the cost of credit unions and ultimately members- in terms of lower 

investment dollars available to support member growth and needs. 

and fewer 

It should be noted that total interchange revenues have actually increased through higher 

card usage volumes to offset the lower per-transaction fee. The lost revenues represent the 

revenues the credit unions would have earned at the historical rates vs the current lower rates. 

REDUCTION IN ORIGINATIONS & OTHER SERVICES 

As described above, the survey sought to estimate lost loan originations across mortgages, 

consumer loans and member business lending (MBL) due to regulations related to Qualified 

Mortgages (OM), Open-Ended Lending (e.g., CARD Act) and the MBL cap. While several credit 

unions reported a reduction in originations in one or more of the loan types above, over half of 

the survey participants (68%) did not report a reduction in originations for one of three reasons: 
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25875.096

1 . The product was never offered 

2. The credit union was not comfortable estimating a fair decrease 

3. The impact on originations was considered to be minimal 

Any reported impacts were relatively minor. In other words, there is a real impact to individual 

members who are no longer offered these loan products or could not qualify under the 

new rules, but the overall impact to the membership is relatively low. (While both survey 

respondents and the industry as a whole have been vocal about regulatory impacts to member 

lending, we asked participants to withhold from a estimate in lost 

originations if they were not able to do so with reasonable accuracy- consistent with the 

conservative approach of this study.) 

Although the total impact is small, it is critical to note there are individual credit unions where 

the impact is significant. For example, a large MBL originator very confidently reported a loss 

of $150 million in business loans per year, which equates to over $6 million in lost revenue. 

The MBL cap severely limited business growth on what they observe to be a relatively low risk 

portfolio. 
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How Regulatory Impact Has Changed from 2010 to 2014 

Regulatory changes have put both pricing pressure on revenues while increasing the 

regulatory requirements around core business processes such as lending, credit administration 

and financial reporting. 

The cost impact of regulation has risen considerably as regulations and more in-depth 

examinations have been implemented since 2010- in terms of both external spending 

and more staff and staff time spent on regulatory (fhis analysis excludes any 

capitalized costs that occurred over the last 5 years.) Regulatory cost impact rose from 0.39% 

in 2010 to 0.54% in 2014, a 39% increase since 2010 a large increase given the long history 

of credit unions and the short time from the Dodd-Frank Act to today. 

To put this increase in context, total industry assets and expenses only increased 21% and 

16%, respectively, from 2010 to 2014, while the industry operating expenses as a percent of 

assets actually decreased from 3.19% in 2010 to 3.05%. In other words, the industry's efforts 

to be more efficient and productive has been significantly offset by the higher regulatory 

costs. 

%INCREASED IN REGULATORY COST IMPACT SINCE 2010 

50% 

43% 

40% 40% 39% 

30% 28% 

20% 

10% 

0% 

Small Mid~ Size large Total 

The increase is highest for small credit unions (43%) given the lack of scale. Although large 

credit unions have the advantage of scale and may have the lowest percentage increase, they 

incurred the largest total dollar increase over the last 4 years. As an example, a $1 billion credit 

union would have been incurring about $2.6 million annually in regulatory-related costs as of 

2010 (based on the study's median calculation). However, that amount would have increased 

to about $3.3 million by 2014 to remain compliant. In absolute terms, the $700,000 increase 

for large credit unions is more than double the dollar increase of a small credit union. (A $100 

million credit union's regulatory cost would have increased $340,000 from $760,000 in 2010 

to $1.1 million in 2014.) 
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25875.098

STAFF INCREASES: 2010-2014 

Since 2010, credit unions nearly doubled the FTE for regulatory activities as shown in the chart 

below. This increase covered both additional staff as well as more time from existing staff spent 

on regulatory activities. As an mortgage processors spend more time on disclosures 

and other mortgage regulations, with the credit union bringing in more processors to handle 

person). In other words, the 

impact was additional headcount and lower 

CUMULATIVE CHANGE IN REGULATORY FTEs- 2010 TO 2014 

100% 

80% 

60% 

40% 

20% 

0%· 

108% 

Moreover, the benefits of scale for support staff played a critical role in limiting the total staff 

increases for larger credit unions, as shown in the following chart where the increase is 026% 

of assets for small credit unions compared to 0.10% and 0.07% for mid-size and large credit 

unions1 r<><;oc>rt>vr>lv 

CHANGE IN STAFF COSTS SINCE 2010- OVERALL AND BY ASSET SIZE 

(As a % of Assets) 

1.00% 0.94% 

0.80% 

0.60% 

0.40% ••tl:35% 0.32% 0.25% p:~b% 

0.20% 

0.00% 

Small Mid~ Size large Total 

2010 Increase to 2014 

Regardless of scale, the net increase in staff impact has been a hardship for all credit 

unions. A $1 billion credit union would have incurred an additional $1,000,000 in salary and 

benefits costs per year since 2010 (based on the ten basis point increase from 201 0-2014). 
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25875.099

Strategic Impacts 

In addition to the extensive data collection, the survey solicited respondent CEOs' viewpoints 

of where they saw the greatest increases in regulatory impacts in terms of increased expenses, 

reduced revenues, and reduced We also asked CEOs how their credit unions 

would have potentially reallocated the resources if those resources were not spent on 

regulatory activities. 

PERCEIVED VS REAl IMPACTS 

The perceived impacts to the credit union are nearly unanimous regardless of the asset size. 

The top three rankings are as follows: 

Direct Expenses 

1. Compliance 

2. Mortgage Lending 

3. Internal Audit I Risk Management 

Productivity Impacts 

1. Compliance 

2. Mortgage Lending 

3. Consumer Lending 

lost Revenues 

1. Mortgage Lending 

2. Debit Cards 

3. Payments (e.g., NSF, courtesy 

There was very little difference when comparing CEO responses across asset classes. The most 

notable difference was that the large credit union CEOs ranked Mortgage Lending as the 

highest impact in all three categories. This reflects mortgage lending being a significant part 

of large credit union's business model, while Compliance costs are more easily absorbed due 

to scale. The lost revenue related to Debit Cards is directly related to the significant decrease 

in interchange revenues felt across the industry, as discussed in the Lost Revenues section. 

The results of their responses are summarized in the following charts. 
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AREAS WITH HIGHEST REGUlATORY EXPENSES 

(Based on #of CEO selections) 

50% 

40% 

30% 

20% 

10% 

0% 

AREAS WITH GREATEST PRODUCTIVITY IMPACT 

(Based on # of CEO selections) 

40% 

30% 

20% 

10% 

0% 

AREAS WITH MOST LOST REVENUES 

(Based on tl of CEO selections) 

50% 

40% 

30% 

20% 

10% 

0% 
166 


25875.101

The ran kings from the CEOs aligned well with the quantified results described elsewhere in this 

report. The notable exception is that lost mortgage revenues are much more significant in CEO 

estimation than the data analysis. However, it should be noted that, although many respondents 

reported reduced originations due to new rules, they are not able to precisely estimate the 

amount of reduction. Therefore, the results are excluded from the Lost Revenues estimate. 

REAllOCATION OF RESOURCES 

When it came to how resources would have be reallocated, all credit unions focused on 

providing value to members and their communities either through better rates, lower fees or 

enhanced products, services & delivery channels for convenience. The differences are in which 

member "value levers" they wanted to focus on. The following charts show how the resources 

spent on regulatory changes from the last five years would have been allocated based on 

survey responses from CEOs. 

REAllOCATION OF REGUlATORY COSTS BY RESPONDENT CREDIT 

UNION CEOs 

Staff 

Development 

15% 

Other 

3% Better 

Rates 

11% 

Better 

Additional 

Physical 

Locations 

6% 

REAI.I.OCATI0!\1 OF REGUlATORY COSTS • SMAI.I. CREDIT UNION CEOs 

Better Deposit 

Rates 

Other 9% 

2°/o 

Staff Development 

16% 

Marketing 

16% 

Better loan 

Rates 

7% 

Enhanced Alternative 

Channels 

15% 

Build Capital 

30% 
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25875.102

REALLOCATION OF REGULATORY COSTS MID-SIZED CREDIT UNION CEOs 

Build Capital 

24°/o 

Better Loan 

Rates 

8% 

Additional Physical 

Locations 

8% 

Enhanced Alternative 

Channels 

27% 

REALLOCATION OF REGULATORY COSTS • LARGE CREDIT UNION CEOs 

Marketing 

5% 

Build Capital 

11% 

Better Deposit 

Rates 

21% 

Better loan 

Rates 

21n/o 

Additional Physical 

locations 

Enhanced Alternative 

Channels 

23% 

5% 

While the bulk of the reallocations directly benefit members, small and mid-sized sized credit unions 

focused a significant portion of their reallocation on building capital to support lending, safety & 

soundness, and future investments for member benefit. In other words, building capital benefits 

members indirectly. Expanding into new channels was an important category for all credit unions to 

meet member needs and their changing behaviors. 
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25875.103

KEY PARTICIPANT COMMENTS AND THEMES 

In addition to soliciting CEOs views on where regulatory impacts had increased the most, and 

how resources devoted to regulation might have been otherwise invested, the survey provided 

several opportunities for respondents to enter free form comments to clarify data and to 

provide context on regulatory impacts. Their key comments are summarized below: 

Volume of Regulations 

"From RBC to derivatives, there is constant stream of new uHJuu>•ctl> that must be evaluated 

and responded to." 

• "Increasing complexity in rulemaking in general requires more resources to analyze and 

interpret new rules." 

• "Increasing regulations are requiring more 3rd party validations/studies to the 

needed documentation for examiners." 

• "Prior to 2014 each head was in charge of compliance that dealt with their own 

area of responsibility. In 2013 the increase in regulation became too great to handle this 

way, so a full time officer was hired." 

• "Regs change our strategic prioritization and requires frequent re-staging of critical projects. 

Changes often need to at our 3rd party vendors which puts our planned upgrade/ 

enhancement requests at risk." 

IT I Vendor Management 

• "I have found that the examiners know even less than a small shop does about cyber 

security." 

• "IT spends many hours each month and every year supporting the many requirements of 

vendor risk management." 

• "We were unable to upgrade an ATM to rnake it compliant with ADA. This ATM was at our 

one branch which, to save money has had its hours open cut. The ATM was sorely needed 

but could not be left in service or we could have been fined for it." 

Specific Regulations 

• "When changes are made to Reg Z, Reg CC, etc we are to change many down line 

reporting and operational dashboards. This tends to take precedence over other revenueproducing work." 
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25875.104

• "Due to changes in Reg Z, we discontinued the MFOEL product and replaced it with a 

different product. It took 780 staff hours to decipher the changes and determine the 

appropriate course of action." 

"Reg E immediately comes to mind in terms of increased training time for our call center 

employees." 

"Concentration risk limits are in theory just a guideline, however regulators have pushed to 

tighten the guidelines creating additional consequences like lower loan to share ratios and 

slower capital growth." 

"BSA/AML Compliance administration is evolving into its own "animal"" 

• "There is a growing burden related to BSA/CIP regulatory practices that is unfair to credit 

unions and applicable members both. While the regulations are clear on what is {or is not) 

required, regulators in practice create an unnecessary and unwarranted burden for credit 

unions who attempt to serve this of their membership." 

• "Health care premiums have increased substantially and we feel it is due to ACA." 

Lending 

• "Limits on our ability to do modifications have certainly impacted the number of 

modifications we have been able to do, ultimately resulting in higher charge offs when there 

may have been a chance to repair the member issue in advance." 

construction and development loans with over $25 million in lost loan opportunities." {due 

to MBL cap) 

• "All loans are close ended except kwik cash lines of credit. Too much hassle from examiners 

on the open end so we quit doing them." 

• "The Card Act requires us to verify income before extending credit of any kind. We are no 

longer able to offer secured credit cards to members who are unemployed, even though 

there is no risk for either the member or the credit union. In 2014 roughly 320 secured card 

applications were declined for income verification reasons." 

• "Operate in low income, credit challenged area. Need to bring on escrow accounting or pay 

a third party in order to with non-OM lending." 

"Do not originate non- OM loans and these were loans that we may have been willing to do 

prior to the change in regulation." 

"NCUA advised us to discontinue [non--OM loans] due to the regulatory burden." 
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25875.105

• "Allowance for Loan loss disclosure changes and the new CECL model are all items that add 

clarity to valuation however they are considerably late and are very much reactionary at this 

time. Additionally, there is very little guidance as to the purpose and the expected impact 

of the CECL model, however there are several expenses associated with CUs trying to learn 

now in anticipation of changing models in the coming months/years." 

"Bankruptcies are so complex & unclear that the ordinary employee can no longer manage 

them. Even attorneys can't give clear answers as CFPB complicates bankruptcies." 

Regulatory Exams 

• "We used to spend about a week for each examination and audit, now with the heightened 

focus on financial institutions, the areas of examination and audit have expanded to the 

point where preparation now takes nearly 1 month of time from the relevant parties to have a 

useful examination." 

smaller credit unions. Vacation schedules get upended, totally inefficient when a person with 

primary responsibility is not available and the NCUA wants to lower CAMEL ratings due to 

inadequate answers because the primary person was not there to answer fully." 

• "The biggest frustration is the annual review expectations of the regulators on regs such as 

BSAIAML. We would to risk rate them so if the last audit was clean, ..... we would not 

audit annually. Wastes audit resources that could be used on higher risk areas." 
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25875.106

KEY THEMES 

Based on respondent comments, we have identified several key themes as they relate to 

credit unions' views on the causes and drivers of regulatory costs. There was no consensus 

on which regulations imposed the most cost increase on credit unions. However, four key 

themes emerged around the greatest causes of their current impact, especially over the past 

few years: 

Uncertainty and ambiguity around written rules 

Inconsistent application I interpretation of regulations by examiners 

• Steady stream of regulations that create high levels of 

a thousand cuts) 

• One size fits a II to regulation 

Rule Ambiguity and Uncertainty 

management (e.g., death by 

needed for implementation 

are often ambiguous with clarifications often corning in piecemeal fashion. Mortgage 

disclosures are an example. Credit unions need to time and resources on re-work to 

ensure compliance and (in some instances) realize later that the regulation does not apply 

to them. The lost productivity and the likely use of external resources to understand new 

rules contribute to a higher impact. 

Examiner Rule-Making 

The ambiguity in regulations creates situations where examiners develop their own 

interpretations of the rules. While this is it is the inconsistency of scope 

and interpretations among examiners that creates the effect felt by credit unions. The 

inconsistency mainly manifests itself in situations where examiners have moved from "safety 

and soundness" to "managing the business". This occurs when examiners extend beyond 

findings to prescriptive actions which may not be aligned with best practices or not take 

into account the trade-offs associated with a action (i.e., disconnect between real 

world applicability to the desired outcome.) As an example, at one credit union in our study, 

an examiner told the credit union to take down its active production systems so that backups systems could be properly tested. While testing of back-ups is a good business practice, 

shutting down production systems to do so is not necessary, and is in fact a bad business 

practice because of the extremely high risk it creates. While there was good intention, the 

credit union felt a conflict on how to best comply with the examiner's prescribed action. In 

this case, one aspect of operational risk was traded-off for higher operational risk in another 

area as well as higher reputation risk if members can't access their accounts when the 

production systems are temporarily down. 
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25875.107

Steady Stream of Regulations 

Credit unions recognize that there will be regulations given the industry they operate in. 

However, the increased stream of new requirements from sources {e.g., Congress, 

CFPB, NCUA, state regulators) over the last 5 years resulted in the increased costs from 2010 

as discussed earlier. What compounds the impact is the lack of coordination across banking 

regulations that creates confusion on priorities and overlaps. This does not take into account 

non-banking regulations that impact all companies (e.g., Affordable Care Act, IRS rules changes, 

etc.) As an example, disclosures are constantly evolving in terms of the number of disclosures 

and their respective requirements. This requires multiple functions to be involved for one 

change (e.g., IT, training, legal, marketing, etc.) and is not the "simple" change that regulation 

had anticipated. 

This "death by a thousand cuts" distracts from the credit union's core mission which is to 

help members and the community ... the very thing that many ofthe regulations are intended 

to do. 

One Size Fits All 

regulatory environment is very much one size fits all without taking into account the underlying 

business model and inherent risks of a credit union. While this is readily seen in terms of impact 

to smaller credit unions, even larger credit unions are impacted. The relevance of a given 

regulation will vary across credit unions, but the level of effort to analyze and implement is 

often the same- creating unequal effects across credit unions. "One Size Fits All" also creates 

unintended consequences. The CARD Act was intended for credit cards but it effectively 

eliminated Multi-Feature Open Ended Lending {MFOEL) for some credit unions because of the 

costs to comply. This reduced member products especially for those who are credit-worthy. 

While some new products were introduced to replace MFOEL, it required incremental resources 

from the credit union while decreasing service levels to members. 

Surveyed credit union executives strongly believe that regulations are often written with a 

"least common denominator" mindset to protect the public from the small minority of poorly 

managed or unethical institutions. They believe the trade-off is that it creates an unduly high 

cost for credit unions whose mission is to help members and whose impact ultimately crowds 

out net worth that could be passed on to consumers in terms of more competitive pricing and 

or incremental services. 
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25875.108

Member Impacts 

Although the main purpose of the study was to the financial cost placed on credit 

unions due to regulation, the cost ultimately impacts members either directly or indirectly. 

Some examples are referenced throughout the report to additional context to both 

credit union and member impacts. In addition to previous illustrations, other impacts include 

discontinued products and services, increased fees, and general inconvenience. While these 

implications are not quantified, the credit union participants regularly frustration 

with the effects felt by members and offered a wide variety of <>vom,,.-,1,,< 

The most prevalent scenarios relate to the increased cost on applying for a mortgage. 

The limitations on OM may disqualify creditworthy members from obtaining a mortgage 

that the credit union would certainly make otherwise. Small and mid-sized credit unions in 

particular had to turn members away because they cannot afford to keep these non-OM 

loans on their portfolio. The additional rigor throughout the process also resulted in 

costs being passed on directly to members such as increased fees for appraisals. Small credit 

unions in particular were also forced to stop offering some products such as HELOCs due 

to the additional regulatory cost associated with supporting them. The greater 

requirements lengthen the loan processing time and add requirements for a 

member- effectively creating a regulatory cost on them, which is clearly not the intent for 

many of the mortgage regulations. 

Another issue that was often referenced as an unintended impact to members was 

international remittances. Five percent of that offered international remittances 

in the past discontinued the service altogether when new regulations came out while others 

increased the fees. For survey respondents still remittances in 2014, the average 

fee to members increased from $3S to $SO per transaction to cover the costs of additional 

compliance. 

Lastly, the overall time required for members to their banking activities has continued 

to increase. The above examples of for a mortgage and sending an international 

remittance take considerably more time to (if the product I service is offered). 

Credit unions also noted how long it takes to open a new member account. One credit union 

in particular has made attempts to streamline the process, but still documented an 

increase in processing time from 25 minutes to 40 minutes per application today. 

See previous section for free form comments from respondents. 
174 


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Conclusions 

The overall regulatory financial impact of regulation on the credit union industry is $7.2 

billion as of 2014, with $6.1 billion in costs and $1.1 billion in lost revenue. Due to the study's 

conservative approach when faced with a lack of adequate data, the $1.1 billion figure for 

reduced revenue very likely understates the actual amount. The overall amount is equivalent 

to 80% of industry earnings and 5.9% of 2014 industry net worth. The cost component 

represents 17% of industry 2014 operating expenses. Credit unions recognize that they are 

in a regulated industry and there will be a cost. However, the level of cost that regulations 

and regulators imposed has dramatically increased since the financial crisis and its aftermath. 

Annual regulatory costs have increased by 39% since 2010 and staff time devoted to regulatory 

activities almost doubled in the same period. This higher cost has increased operational, 

compliance, and strategic risks to credit unions. 

The percentage cost relative to asset size is heaviest on smaller credit unions. However, 

the impact in absolute dollars is much higher for larger credit unions. Surveyed credit union 

CEOs indicated these dollars would be redeployed to better rates, lower fees, and enhanced 

products & services for members as well as community rlc>vt>iinr•rn,ont 

The findings from this study will credit unions and other stakeholders 

with the facts to perform a more robust cost-benefit assessment of the regulations (passed and 

pending) to determine what is an appropriate level of regulatory cost in light of credit unions' 

mission of community and member service. 

AREA FOR FURTHER STUDY 

One of the areas that could benefit from additional is lending. CEOs highlighted 

reduced lending as one of the highest areas of regulatory impact Determining the extent 

of the reduction in lending was beyond the scope of this study, and therefore our estimates 

understate the cost Policymakers and credit unions would benefit from a rigorous analysis 

of the impacts on lending from recent regulations- both in terms of total volume and the 

different impacts across different member segments. 
175 


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Appendix 

Appendix 1 - Profile and 

Data Analysis Approach 48 

Respondent 48 

Data Collection and Validation 50 

Calculations and Methodology 53 

Appendix 2 to the Credit Unions 54 
176 


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APPENDIX 1 - RESPONDENT PROFILE AND DATA ANALYSIS APPROACH 

This Appendix details the demographics of the 

and validation processes. 

RESPONDENT DEMOGRAPHICS 

Phase 1 

Three credit unions were interviewed for the research in the first of the study. The 

three credit unions were of varying sizes in order to better understand the regulatory 

impacts felt relative to assets and ensure detailed data collection in the second phase 

would be relevant to all credit unions. 

The smallest credit union is located in the Midwest and had just over $60 million in 

assets as of 2014. The mid-size credit union is located in the Southeast and had over 

$650 million in assets. Lastly, the credit union interviewed is also located in the 

Midwest with approximately $1.5 billion in assets. 

Phase 2 

An in-depth data collection survey was received from 53 credit unions with 

across 28 states. A geographic overview of the locations is shown below. 

SURVEY RESPONDENT LOCATION BY NCUA REGION 
177 


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The respondents were evenly distributed across the three size groups based on 2014 year-end 

assets: 

Small credit unions (Less than $115 million in assets) 

• Mid-sized credit unions ($115 million to $1 billion in assets) 

• Large credit unions (>$1 billion in assets) 

DISTRIBUTION OF SURVEY RESPONDENTS BY ASSETS (millions) 

7 

6 

4 

2 

0 

*There were five credit unions with assets between $100 milffon 

small credit union to include these credit unions because 

with less than million in assets than those with 

de,moor<>ohic data coflected such as the 

challenges 

sur•snrw<e.nrrv more appropriate 

million. We defined the 

far more in common 

billion. This is 

and members. 

related regulations 

mid~sized, credit union for 

Surveyed credit unions had a combined $50 billion in assets with over 11,000 full-time 

equivalent (FTE) employees as of 2014. The median asset size for the population was $293 

million while the median number of FTEs was 110. Although one credit union had less than 

$500 thousand in assets, all other credit unions ranged from $15 million to nearly $6 billion. 

The surveyed credit unions serve over 2.5 million members (assuming minimal overlap) with 

the median reported number of members being over 21,000 as of 2014. Equivalent data from 

year-end 2010 was also collected to account for changes in assets and members. Most survey 

participants experienced growth from year-end 2010 through 2014 with a total median asset 

and member growth of 27% and 23%, respectively. This compares to asset and membership 

growth rates for all credit unions over the same period of 25% and 10%, respectively. 
178 


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DATA COllECTION AND VAliDATION 

This describes our approach to data gathering and validating the survey responses. It 

includes our steps to identifying the appropriate survey questions and approach to validating 

information. Lastly, it demonstrates our efforts to ensure data integrity and consistency as well 

as the support process to as they completed the survey. 

Phase 1 Research 

The three Phase 1 credit unions volunteered to participate and offered considerable staff time 

to onsite interviews for about two days each. Executives and various subject matter experts 

provided explanations on how products, services and general business functions were affected 

by existing regulations. 

They also provided clarity on regulations that did not impose significant cost on the 

organization. Additionally, the volunteers a considerable amount of detail through 

documentation such as financial reports, strategic plans and project lists. All of the information 

was reviewed to determine the most appropriate and valuable data that could be collected to 

represent the credit union industry as part of Phase 2. 

Phase 2 Data Collection and Volunteer Education 

Data for the study was collected through an online survey. Several steps were taken to ensure 

data integrity and conservative, accurate results. These efforts spanned throughout the second 

phase of the study including before and after the survey was available. 

To start, a webinar was conducted for credit unions that expressed interest in participating 

in Phase 2. Part of the session was dedicated to expressing the purpose of the study and 

expected time commitments. This provided an opportunity for potential volunteers to fully 

understand the scope and level of effort so they would invest the staff resources necessary 

to produce accurate information. Based on this webinar, several credit unions elected not to 

participate because they were not able to provide the level of rigorous data gathering that we 

needed. 

A survey guide was also created with details for all survey sections as well as several examples. 

Upon release of the survey and survey guide, a second webinar was hosted for credit union 

volunteers. The purpose was to walk through each section of the survey, answer questions 

and re-emphasize the conservative approach. In particular, there was a clear message that any 

request for estimates should only be fulfilled if they felt confident in a reasonable and 

justifiable answer. 

The survey was launched in August and participants had 6 weeks to submit their responses. 

We provided phone and email support for credit unions to answer any questions during the 

survey period. 
179 


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The data for the quantifiable expense and staff costs were collected across nearly 30 subfunctions of the credit unions. We requested this information throughout eight sections of the 

survey as shown below. 

Risk Management and 

Compliance 

!..ending 

Member Services 

Deposit Operations 

Finance 

Information Technology 

legal 

Human Resources 

• Compliance 

• Internal Audit 

• Bank Secrecy Act I Anti-Money Laundering 

• Enterprise Risk Management 

• Vendor Management 

Other Risk and Compliance 

• Mortgage Originations 

Mortgage Servicing 

Consumer Lending Originations 

• Consumer Lending Servicing 

• Business Lending 

Business Servicing 

Collections 

• Credit Administration 

• Other Lending 

• Branches 

Retail Administration 

• Call Center 

Online, Mobile and ATM 

• Deposit Operations 

Accounting I Finance 

Treasury I Asset Liability Management 

Information Technology 

Legal 

Human Resources 

Training 

The data was aggregated throughout the study to total 3rd party, car)ltai1Z€'d and 

staffing costs. However, the grouping of sub-functions varied on the purpose of the 

calculation. For example, staff costs were consolidated into only three main categories of Risk, 

Support and Member-Facing. This was fewer than the six categories (Risk, Lending, Member 

Services, Finance, IT and Human Resources) created for 3rd party expenses due to the different 

investments observed between the two types of costs. 
180 


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Data Cleaning 

Upon closure of the survey, the information was reviewed and cleaned over a period of 3 

weeks. Outliers were identified both relative to peers and relative to its business modeL For 

a credit union with a combined estimate of 5 FTEs dedicated to regulatory tasks 

would be captured as an outlier if they only had 8 total employees even though 5 FTEs is well 

within the norm for the small credit union asset range. Credit unions with outlier data were 

contacted in order to validate the responses, better understand why it is accurate or collect 

updated information if appropriate. 

All data was scrubbed prior to calculating expense and revenue impacts. The data scrubbing 

primarily consisted of removing remaining outliers from the final data set. It should be noted 

that some outliers were removed even if they were verified by the credit union. This was 

done in order to ensure the final results would fairly and conservatively represent the broader 

industry and not be skewed by any unique scenarios. As an example, data for one small credit 

union indicated nearly 100% of its staff was dedicated to regulatory tasks. However, this was a 

unique scenario because they relied on assistance from their volunteer board and others in the 

community where possible. 

Lastly, removing outlier data was also done in a conservative manner. This resulted in one of 

two impacts to the credit union results. For the first impact, such as for interchange, the value 

would simply be excluded from 25th percentile, median and 75th percentile calculations. The 

other impact would be the same as a zero value when calculating the overall impact for a given 

credit union. For example, outlier external training costs would not be included in the total 3rd 

party expenses; thus lowering the regulatory expenses for that credit union. 
181 


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CAlCUlATIONS AND METHODOlOGY 

There are multiple options to aggreqating the many reported data points into a single cost of 

regulation. Our approach to calculatinq total impacts and the breakdowns of the two major 

categories throuqhout the study primary took a "top down" view of the impacts by focusing on 

the overall financial impact on a given institution. At the hiqhest level, the total financial impact 

of regulation is a combination of the two primary categories: Costs and Lost Revenues. This 

study calculated the total median cost by calculating the median value of the two categories 

separately and adding them together. This method was selected because it was the clearest 

identification of how the individually calculated components affect the total impact. 

The two main categories were calculated using the combined impacts of their sub-categories. 

For example, costs are made up of 3rd party, staff costs and capitalized expenses. The median 

value for the category was calculated by adding the impact of the three sub-categories for 

each credit union and finding the median of the total. The difference in approach was adopted 

because this method best represents the experience of the credit union industry. There is a 

direct relationship between each of the sub-categories that is better normalized when viewing 

them in agqregate. To continue on the cost example, a credit union may rely more heavily on 

vendors for audit and compliance purposes, which would increase the 3rd party expenses. 

However, this would decrease the need for staff and, therefore, have lower staff expenses. 

Addinq the individual elements together prior to calculating total impacts by quartile would 

account for differences in credit union strategy. 

The same approach is applied to all sub-categories of impact. The approach was necessary at 

the lowest level of detail because there were nearly 30 data points (relatively high number of 

degrees of freedom) for cost impacts that would require a much larger sample population for 

more in-depth analysis. For example, the 3rd Party Expenses were a combination of expenses 

across six main categories (e.g., Lending, Member Services, Finance), but each of those 

may have also had sub-categories (Lending contains nine data points including mortgage, 

consumer, business, etc.). 

Lastly, some survey questions were asked to provide context, but excluded to avoid "double 

counting." For example, one question in the survey asked for the amount of time spent 

explaining Regulation D to members. However, we assume this time would be accounted for 

in the functional FTE estimates that were used to calculate regulatory costs. While this may 

not necessarily be true, excluding the additional time is consistent with our approach of being 

conservative whenever there was uncertainty. 
182 


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Appendix 2 

SURVEY TO THE CREDIT UNIONS 

A copy of the survey provided to the credit unions for data collection is available as a 

separate document. 

25875.118

CUNA Regulatory Burden Survey 

* 

YourName: _________________________________________ __ Your Email Address:----------------------------

Name institution: 

-----------------------------------------------

Location: 

NCUA Charter Number: 

----------------------------------------

25875.119

Please select which section to 

If you are unable to 

Continue Survey 

at your convenience. 

( ) Section 1 - Overall ( ) Section 2 - Risk and 

( ) Section 3 -

( ) Section 4 - Member Services ( ) Section 5 - L/,. • v·peJ:au•ons 

( ) Section 6 - Finance 

() Section 7 - Information 

( ) Section 8 -( ) Section 9 - Human Resources (HR) and 

a smgle click on the link at the top of the page that says "Sa

your e-mail address you will be sent a link in an email that you can use to 

25875.120

Overall Regulatory Impact 

1) Of the items listed below, please estimate the top THREE areas that have experienced the greatest INCREASE IN 

OPERATING EXPENSES over the past five years due to increased regulatory burden. Rank them from 1 through 3

the greatest INCREASE IN OPERATING EXPENSES. 

center, 

Comments: 

and Internal 

ATM, crmAt!nn~ and ),!,UU'U .. 1VU'> and 

25875.121

2) Of the items listed below, please estimate the top THREE areas that have experienced the greatest REDUCTION 

REVENUE over the past five years due to increased regulatory burden. Rank them from 1 through 3, with 1 being 

greatest REDUCTION IN REVENUE. 

____ Mortgage Lending (excluding home equity loans)- originations and servicing 

____ Consumer Lending (including home equity loans)- originations and servicing 

____ Payments (NSF, courtesy pay, etc.) 

____ Debit Cards 

____ Credit Cards 

____ New Deposit Accounts 

____ Member Business Lending 

____ Credit Union's Investment Portfolio 

____ Wealth Management and Insurance 

____ Other: (If Other, please explain below.) 

Comments: 

3) Of the items listed below, please estimate the top THREE areas that have experienced the greatest REDUCTION 

PRODUCTIVITY (e.g., longer cycle times, more time spent on lower value-added activity, etc.) over the past five ye

increased regulatory burden. Rank them from 1 through 3, with 1 being the greatest REDUCTION IN PRODUCTI

____ Compliance 

____ Internal Audit 

____ Other Risk Management (excluding Compliance and Internal Audit) 

____ Mortgage Lending home equity loans)- originations and servicing 

____ Consumer Lending (including home equity loans)- originations and servicing 

____ Finance (including Treasury) 

25875.122

Administration 

center, mobile, online, 

Comments: 

4) Imagine that there had been NO INCREASE in 

financial and resources that have been spent on 

allocated instead? (Please allocate to a total of 

___ Build 

Comments: 

rates 

loan rates 

in branches 

in new channels like online I mobile 

burden over the past five years. Where would the ad

with the increased burden of re!!:ulations have b

25875.123

Management Compliance 

1) Do you have a separate Compliance department? 

()Yes 

()No 

how many FTEs were in that 

activities? 

in 2010 and 2014, and how much of their time was devoted to 

Total ofFTEs % oftotal2010 FTE time % of total2014 FTE 

2010 that was Regulatory Total of FTEs 2014 that was Related Related 

Comments: 

25875.124

If not, estimate the FTEs that performed Compliance work in 2010 and 2014, and the amount of time devoted to regulato

activities (See Survey Guide for definitions). 

% oftotal2010 FTE time 

Total of FTEs 201 0 that was Regulatory 

Related 

Compliance 

--~·---~------- I 

----~·~-··~--~·~~--

Comments: 

2) Do you have a separate Internal Audit department? 

()Yes 

()No 

%of total2014 FTE 

Total of FTEs 2014 that was Regulat

Related 

If yes, how many FTEs were in that department in 2010 and 2014, and how much of their time was devoted to regulatory 

activities? (See Survey Guide for definitions) 

%of total 2010 FTE % of total2014 FTE 

Total of FTEs 2010 time that was Total of FTEs 2014 that was Regulat

Regulatory Related Related 

internal 

Audit ~-----------·--"~-------- Comments: 

25875.125

If not, estimate the FTEs that performed Internal Audit work in 2010 and 2014, and the amount of time devoted to regula

activities (See Survey Guide for definitions). 

Total of FTEs %of total2010 FTE time 

2010 that was Regulatory Related 

Internal 

Audit 

Comments: 

3) Do you have a separate BSA I AML department? 

()Yes 

()No 

If yes, how many FTEs were in that department in 2010 and 2014: 

Total2010 FTEs 

BSA/AML 

Comments: 

% of total2014 FTE 

Total of FTEs 2014 that was Regulato

Related 

Total2014 FTEs 

~~-----~---------

25875.126

If not, estimate the FTEs that performed BSA/AML work in 2010 and 2014 (See Survey Guide for definitions): 

Total2010 FTEs Total2014 FTEs 

BSA/AML 

Comments: 

4) Do you have a separate Enterprise Risk Management (ERM) department? 

()Yes 

()No 

If yes, how many FTEs were in that department in 2010 and 2014, and how much of their time was devoted to regulatory 

activities? (See Survey Guide for definitions) 

% oftotal2010 FTE time % oftotal2014 FTE 

Total of FTEs that was Regulatory Total ofFTEs 2014 that was Regulato

2010 Related Related 

ERM 

Comments: 

25875.127

If not, estimate the FTEs that performed ERM work in 2010, and the amount of time devoted to regulatory activities (Sec 

Survey Guide for definitions). 

Total ofFTEs % oftota12010 FTE 

2010 time that was Regulatory Related 

ERM 

Comments: 

5) Do you have a separate Vendor Management department? 

()Yes 

()No 

% oftotal2014 FTE 

Total of FTEs 2014 that was Regulato

Related 

If yes, how many FTEs were in that department in 2010 and 2014, and how much of their time was devoted to regulatory 

activities? (See Survey Guide for definitions) 

Total of FTEs % of total2010 FTE time %of tota12014 FT

2010 that was Regulatory Total ofFTEs 2014 that was Regulat

Related Related 

Vendor 

Management 

. 

Comments: 

25875.128

If not, estimate the FTEs that performed Vendor Management work in 2010 and 2014, and the amount of time devoted to 

regulatory activities (See Survey Guide for definitions): 

Total ofFTEs % oftotal2010 FTE time % oftotal2014 FTE 

2010 that was Regulatory Total ofFTEs 2014 that was Regulat

Related Related 

Vendor 

Management 

Comments: 

6) For these functions, how much was spent on 3rd Party Expense in 2010 and 2014? What percent of the spending was 

devoted to performing "Regulatory Related" work (see Survey Guide)? What was the total of capitalized spending on 3r

parties that was "Regulatory Related" for ailS years between 2010 and 2014? 

% of total 2010 Aggregat

3rd Party % oftota12014 3rd Capitalize

Total2010 3rd Expense that was Total2014 3rd Party Expense that Spending tha

Party Expense Regulatory Party Expense was Regulatory Regulatory R

Related Related from 2010 thr

2014 

Compliance 

Internal Audit 

25875.129

BSA/ AML 

Enterprise 

Risk 

Management 

Vendor 

Management 

Other Risk and 

Compliance 

Comments: 

7) Please estimate the impact of making adjustments after a new regulation is initially formalized. New 

regulations create a dynamic environment for many reasons: uncertainty about applicability to the credit 

union, lack of specificity that requires additional modification by regulators, varying interpretations by 

examiners, changes to the regulation even after a compliance date is set, etc. How much internal effort do y

typically incur annually to "re-work" after a regulation is first finalized? 

Estimated% of regulatory-related resource hours spent on 

Estimated %of new regulations where re-work is required: -----------------------

25875.130

8) The above questions cover the main areas previously identified as having the most regulatory burdens. Please share 

any significant regulatory burden in the Risk Management and Compliance area that we did not cover above. 

Area of 

Regulatory Comments 

Burden 

1 

- -

2 

- -

3 

- -

25875.131

Lending 

1) For the following functions, how many FTEs were employed in 2010 and 2014? What percent of that total FTE time w

devoted to performing "Regulatory Related" work (see Survey Guide) for each function? 

% oftota12010 FTE % oftota12014 

Tota12010 FTEs time that was Tota12014 FTEs time that wa

Regulatory Related Regulatory Rel

Mortgage 

Originations 

(excluding 2nd lien I 

home equity loans) 

Mortgage Servicing 

Consumer Lending 

Originations 

(including 2nd lien I 

home equity loans) 

Consumer Lending 

Servicing 

Business Lending 

25875.132

Business Servicing 

Credit 

Administration 

(including 

appraisals) Collections 

Comments: 

2) For these functions, how much was spent on3'd Party Expense in2010 and 2014? What percent of the spending was 

devoted to performing "Regulatory Related" work (see Survey Gnide)? What was the total of capitalized spending on 3

parties that was "Regulatory Related" for ailS years between 2010 and 2014? 

Aggrega

% oftotal2010 % oftotal2014 Capitaliz

3rd Party Expense Spending th

Total2010 3rd Party Total2014 3rd that was Regulatory R

3rd Party Expense that was Party Expense Regulatory from 2010 th

Expense Regulatory Related 2014 Related 

Mortgage 

Originations 

(excluding home 

equity loans) 

'--------

25875.133

Mortgage Servicing 

Consumer Lending 

Originations 

(including home 

equity loans) 

Consumer Lending 

Servicing 

Business Lending 

Business Servicing 

Credit 

Administration 

(including 

appraisals) Collections 

Other Lending 

Comments: 

25875.134

3) Under the Qualified Mortgage (QM) rules, have you discontinued or reduced making loans that would have m

underwriting criteria, but that do NOT meet QM requirements? (Select One) 

()Yes, we have discontinued or reduced non QM loans 

( ) No, we still make these loans as before 

Please estimate the number and dollar amount of additional loan originations you WOULD HAVE MADE if you 

discontinued or reduced non-QM lending. 

Estimated originations($) of"Lost" Non-QM loans per month:-------------------

Estimated# of "Lost" Non-QM loans per month:-----------------------

Comments: 

4) Do you offer Multi-Feature Open End Lending (MFOEL) to members? (Select One) 

()Yes 

()No 

If not, did you discontinue the product in the last 5 years and why? (Select One) 

()Yes 

()No 

Comments: 

For those still offering MFOEL, please estimate how much regulations (e.g., Reg Z, CARD Act) have decreased a

monthly origination volumes: 

Estimated originations($) of"Lost" MFOEL loans per month:-------------------

Estimated# of"Lost" MFOEL loans per month:---------------------

25875.135

Comments: 

For those no longer offering MFOEL, please estimate how much monthly loan volume you lost: 

Estimated originations($) of"Lost" MFOEL loans per month:----------------------

Comments: 

5) Do you offer Member Business Lending (MBL)? 

()Yes- We offer MBL 

()No- We do not offer MBL 

Are you subject to the 12.25% of assets MBL cap? 

( ) Yes -We are subject to the cap 

()No- We are not subject to the cap because we are grandfathered or have a low income designation 

Please estimate how much the Member Business Lending (MBL) cap reduced monthly originations($) i

either because your credit union is nearing the cap or the cap discourages investment in this area? 

Comments: 

25875.136

6) The above questions cover the main areas previously identified as having the most regulatory burden. Please share 

any significant regulatory burdens in the Lending area that we did not cover above. 

Area of I 

Regulatory Comments 

Burden 

I 

- -

2 

- -

3 

- -

25875.137

Member Services 1) For the following functions, how many FTEs were employed in 2010 and 2014? What percent of that total FTE time w

devoted to performing "Regulatory Related" work (see Survey Guide) for each function? 

% oftotal2010 FTE time % of total2014 FTE 

Total2010 FTEs that was Regulatory Total2014 FTEs that was Regulato

Related Related 

Branches 

Retail 

Administration 

Call Center Online, mobile, 

andATM 

Comments: 

25875.138

2) For these functions, how much was spent on 3ra Party Expense in 2010 and 2014? What percent of the spending was 

devoted to performing "Regulatory Related" work (see Survey Guide)? What was the total of capitalized spending on 3rd 

parties that was "Regulatory Related" for all5 vears between 2010 and 2014? 

Aggregate %of total 2010 %of total2014 Capitalize

3rd Party Expense Spending that 

Total2010 3rd Party Expense Tota12014 3rd that was Regulatory Re

3rd Party that was Party Expense Regulatory from 2010 thr

Expense Regulatory Related 2014 Related 

Branches 

Retail 

-

Administration 

Call Center 

Online, mobile, 

andATM ~·----------- ---------~ Comments: 

25875.139

3) What was your annual debit interchange income in 2010 and 2014? 

2010 2014 

Total Point of Sale debit 

transactions (See Survey Guide) 

Total Interchange income 

--

---

Comments: 

4) For debit cards, what was your split between PIN transactions and signature transactions in 2010 and 2014? Each col

should equal100% 

2010 

%of PIN debit transactions 

% of signature debit transactions 

Comments: 

5) Do you offer international remittance services to members? (Select One) 

( ) Yes We offer international remittance services 

()No- We do not offer international remittance services 

2014 

25875.140

If not, did you discontinue the service in the last 5 years and why? (Select One) 

() Yes- We discontinued this service in last 5 years 

()No- We've never offered this service 

Comments: 

Please estimate how much the international remittance rules have reduced monthly remittance volumes either because yo

credit union no longer offers these services or the rules discourages significant volumes in this area? 

Estimated# of monthly remittances "lost" due to the existence of the remittance rules: 

Comments: 

What is the fee that you charged your members per international remittance in 2010 and 2014? Please provide an amoun

years when the service was offered and "NA" if it was not offered in that year. 

2010 2014 

Fee charged to members for 

an international wire I 

remittance 

Comments: 

25875.141

6) What was your NSF and OD income in 2010 and 2014? 

2010 2014 

Annual NSF income 

Annual OD income 

Annual Combined NSF I OD 

Comments: 

7) Please estimate the impact of savings account withdrawal limits (i.e., Reg D)? 

Estimated monthly impact 

Estimated monthly number of transfers from savings or money market 

accounts that were denied due to withdrawal limits 

Estimated FTE hours spent monthly explaining Reg D to members 

Comments: 

25875.142

8) Privacy rules limit the sharing of information between affiliated companies, which impacts cross-sell capabilities and 

effectiveness. Please estimate how much privacy and related regulations resulted in lost or lower revenues? 

Estimated Annual revenue 

impact 

Wealth management I investment management 

Insurance 

Mortgage (if mortgage is a separate affiliate) 

Comments: 

9) What is your estimated cost of sending required regulatory disclosures? 

2010 2014 

Mailing and printing costs for required 

disclosures 

# of members at year end 

Comments: 

25875.143

10) The above questions cover the main areas previously identified as having the most regulatory burden. Please share 

any significant regulatory burdens in the Member Services area that we did not cover above. 

Area of 

Regulatory Comments 

Burden 

I 

- -

2 

- -

3 -~- _- - -

25875.144

Deposit Operations 

1) For the following function, how many FTEs were employed in 2010 and 2014? What percent of that total FTE time wa

devoted to performing "Regulatory Related" work (see Survey Guide) for each function? 

Total2010 % oftota12010 FTE time that was Total2014 % oftotal2014 FTE 

FTEs Regulatory Related FTEs that was Regulato

Related 

Deposit Operations 

Comments: 

25875.145

2) For the following function, how much was spent on 3rd Party Expense in 2010 and 2014? What percent of the spendin

devoted to performing "Regulatory Related" work (see Survey Guide)? What was the total of capitalized spending on 3

parties that was "Regulatory Related" for all 5 years between 2010 and 2014? 

%of total 

Aggregat

2010 3rd %of total2014 3rd Capitalize

Total2010 Party Total2014 3rd Party Expense that Spending tha

3rd Party Expense Party Expense was Regulatory Regulatory R

Expense that was Related from 2010 thr

Regulatory 2014 Related 

Deposit Operations 

Comments: 

3) Please share with us the top three areas of regulatory burden that impact Deposit Operations. 

Area of 

Regulatory Comments 

Burden 

l 

- -

2 

- -

3_ 

-

25875.146

Finance 

1) For the following functions, how many FTEs were employed in 2010 and 2014? What percent of that total FTE time w

devoted to performing "Regulatory Related" work (see Survey Guide) for each function? 

%of total2010 FTE time % oftotal2014 FTE 

Total2010 FTEs that was Regulatory Total2014 FTEs that was Regulato

Related Related 

Accounting I 

Finance 

Treasury I ALM 

Comments: 

25875.147

2) For these functions, how much was spent on 3'd Party Expense in 2010 and 2014? What percent of the spending was 

devoted to performing "Regulatory Related" work (see Survey Guide)? What was the total of capitalized spending on 3'

parties that was "Regulatory Related" for all5 years between 2010 and 2014? 

Aggrega

Total2010 %of total2010 3rd Total2014 % of total2014 3rd Capitaliz

3rd Party Party Expense that 3rd Party Party Expense that Spending tha

Expense was Regulatory Expense was Regulatory Regulatory R

Related Related from 2010 th

2014 

Accounting f 

Finance 

Treasury f ALM 

Comments: 

3) Please share with us the top three areas of regulatory burden that impact Finance. 

Area of 

Regulatory Comments 

Burden 

l 

- -

2 

- -

3 

.. 

- -

25875.148

IT 

1) For the following function, how many FTEs were employed in 2010 and 2014? What percent of that total FTE time wa

devoted to performing "Regulatory Related" work (see Survey Guide) for each function? 

%of total2010 FTE time % oftotal2014 FTE 

Total2010 FTEs that was Regulatory Total2014 FTEs that was Regulato

Related Related 

IT 

Comments: 

25875.149

2) For the following function, how much was spent on 3rd Party Expense in 2010 and 2014? What percent of the 

devoted to performing "Regulatory Related" work (see Survey Guide)? What was the total of capitalized spending on 3r 

parties that was "Regulatory Related" for all 5 years between 2010 and 2014? 

Aggregate % oftotal2014 Capitalize

% of total2010 3rd Party Expense Spending that 

3rd Party Expense Total2014 3rd that was Regulatory Re

Total2010 3rd that was Party Expense Regulatory from 2010 thr

Party Expense Regulatory Related 2014 Related 

IT 

Comments: 

3) Please share with us the top three areas of regulatory burden that impact IT. 

Area of 

Regulatory Comments 

Burden 

1 

- -

2 

- -

3 

,...__. ··=--

25875.150

Legal 

1) For the following function, how many FTEs were employed in 2010 and 2014? What percent of that total FTE time wa

devoted to performing "Regulatory Related" work (see Survey Guide) for each function? 

% of tota12010 FTE time % of total 2014 FTE 

Total2010 FTEs that was Regulatory Total 2014 FTEs that was Regulato

Related Related 

Legal 

Comments: 

25875.151

2) For the following function, how much was spent on 3rd Party Expense in 2010 and 2014? What percent of the 

devoted to performing "Regulatory Related" work (see Survey Guide)? What was the total of capitalized spending on 3r 

parties that was "Regulatory Related" for all 5 years between 2010 and 2014? 

Aggregate 

% oftotal2010 3rd % of total2014 3rd Capitalize

Total2010 3rd Party Expense that Tota12014 3rd Party Expense that Spending tha

Party Expense was Regulatory Party Expense was Regulatory Regulatory Re

Related Related from 2010 thr

2014 

Legal 

Comments: 

3) Please share with us the top three areas of regulatory burden that impact Legal. 

Area of 

Regulatory Comments 

Burden 

1 

- -

2 

- I -

3 

-

- I 

25875.152

Human Resources 

1) For the following functions, how many FTEs were employed in 2010 and 2014? What percent of that total FTE time w

devoted to performing "Regulatory Related" work (see Survey Guide) for each function? 

% oftotal2010 FTE time % of total 2014 FTE 

Total2010 FTEs that was Regulatory Total2014 FTEs that was Regulato

Related Related 

HR 

Training 

Comments: 

25875.153

2) For these functions, how much was spent on 3rd Party Expense in 2010 and 2014? What percent of the spending was 

devoted to performing "Regulatory Related" work (see Survey Guide)? What was the total of capitalized spending on 3r

parties that was "Regulatory Related" for ailS years between 2010 and 2014? 

Aggregat

% oftotal2010 3rd % oftotal2014 3rd Capitalize

Total2010 3rd Party Expense that Total2014 3rd Party Expense that Spending tha

Party Expense was Regulatory Party Expense was Regulatory Regulatory R

Related Related from 2010 th

2014 

HR 

Training 

Comments: 

3) How much external spending on training did you incur in 2010 and 2014 and what portion of training expense was sp

regulatory training (new, update, refresher)? 

2010 2014 

Total External Training 

Spending 

Estimated % of external training 

spending for regulatory training 

25875.154

Comments: 

4) On average, what is the estimated annual training days per employee focused on regulatory training and in total? 

2010 2014 

Total training days per 

employee 

% training days that is 

Regulatory training 

--

- -----· ---· -----------------

-------~-

-----

Comments: 

5) How much has the Affordable Care Act (ACA) increased costs to your credit union annually? 

AnnualJncreased Cost per Employee from ACA: ----------------------

Comments: 

6) The above questions cover the main areas previously identified as having the most regulatory burden. Please share wit

any significant regulatory burden in the Human Resources I Training area that we did not cover above. 

Additional Regulatory Burden:---------------------

Comments: 

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' 

7) The above questions cover the main areas previously identified as having the most regulatory burden. Please share wany significant regulatory burdens in the Human Resources I Training area that we did not cover above. 

Area of 

Regulatory Comments 

Burden 

1 

- -

2 

- -

3 

- -

Thank You! 
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Testimony of Alex J. Pollock 

Distingu·lshed Senior Fellow 

R Street Institute 

washington, DC 

To the Committee on Financial Services 

United States House of Representatives 

Hearing on "Making a Financial Choice: More Capital or More Government Control?" 

July 12, 2016 

An Excellent Choice 

Mr. Chairman, Ranking Member Waters, and Members of the Committee, thank you for the opportunity 

to be here today. I am Alex Pollock, a senior fellow at the R Street Institute, and these are my personal 

views. I spent 35 years in banking, including twelve years as President and CEO of the Federal Home 

Loan Bank of Chicago, and then eleven years as a fellow of the American Enterprise Institute, before 

joining R Street earlier this year. I have both experienced and studied many financial cycles, including 

the political contributions and reactions to them, and my work includes the issues of banking systems, 

central banking, risk and uncertainty in finance, housing finance and government-sponsored enterprises, 

and the study of financial history. 

"Detailed intrusive regulation is doomed to fail." This is the considered, and in my view correct, 

conclusion of a prominent expert in bank regulation, Sir Howard Davies, former Chairman of the U.K. 

Financial Services Authority and former director of the London School of Economics. Detailed, intrusive 

regulation is what we've got, and under the Dodd-Frank Act, ever more of it. "Financial markets cannot 

be directly 'controlled' by public authorities except at unsustainable cost," Davies adds. Surely there is a 

better way to proceed than promoting unfettered bureaucratic agencies trying through onerous 

regulation to do something at which they are doomed to fail. 

I believe the CHOICE Act offers the opportunity of a better way precisely by offering banks a 

fundamental choice. 

The lack of sufficient capital in banks is a permanent and irresistible temptation to governments to 

pursue intrusive micro-regulation which becomes micro-management. This has an underlying logic to it. 

In a world in which governments explicitly and implicitly guarantee bank creditors, the government in 

effect is supplying risk capital to the banks which do not have enough of their own. Suppose the real 

requirement in a true market would be for an equity capital ratio of 8% of assets, but the bank has only 

4%. The government is implicitly provides the other 4%--or halfthe required capital. We should not be 
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2 

surprised when the in effect 50% shareholder demands a significant say about how the bank is run, even 

if the resulting detailed regulations will not be successful. 

However, the greater the equity capital is, the less rationale there is for the detailed regulation. In our 

example, if the bank's own capital were 8%, the government's effective equity stake would be down to 

zero. This suggests a fundamental and sensible trade-off: more capital, reduced intrusive regulation. 

But want to run with less capital? You get the intrusive regulation. 

In other words, the CHOICE Act says to U.S. banks: "You don't like the endless additional regulation 

imposed on you by the bloated Dodd-Frank Act. Well, get your equity capital up high enough and you 

can purge yourself of a lot of the regulatory burden, deadweight cost, and bureaucrats' power grabs 

which were all called forth by Dodd-Frank." 

CHOICE does not set up higher capital as a mandate or an order to increase the bank's capital. Rather it 

offers a very logical decision to make between two options. These are: 

-Option One: Put enough of your equity investors' own money in between your creditors and the 

risk that other people will have to bail the creditors out if you make mistakes. Mistakes are inevitable 

when dealing with the future, by bankers, regulators, central bankers and everybody else. The defense 

is equity capital: have enough so that the government cannot claim you are living on the taxpayers' 

credit, and therefore cannot justify its inherent urge to micro-manage. 

-Option Two: Don't get your equity capital up high enough and instead live with the luxuriant 

regulation of Dodd-Frank. This regulation is the imposed cost of in effect using the taxpayers' capital 

instead of your own to support your risks. 

I believe the choice thus offered in the proposed act is a truly good idea. To my surprise, the 

Washington Post editorial board agrees. They write: 

"More promising, and more creative, is Mr. Hensarling's plan to offer relief from some of DoddFrank's more onerous oversight provisions to banks that hold at least 10 percent capital as a buffer 

against losses ... such a [capital] cushion can offer as much-or more-protection against financial 

instability as intrusive regulations do, and do so more simply." 

Very true, and very well stated. 

Making the choice, banks would have to consider their cost of capital versus the explicit costs and the 

opportunity costs of the regulatory burden. Some might conclude that Option Two will yield higher 

returns on equity than Option One; some will conclude that Option One is the road to success. I imagine 

some banks would choose one option, while some would choose the other. 

Different choices would create a healthy diversification in the banking sector. They would also create 

over time a highly useful learning experience for both bankers and governments. One group would 

prove to be sounder and to make greater contributions to economic growth and innovation. One group 

would in time prosper more than the other. The other group will end up less sound and less successful. 

Which would be which? I think the group with more capital, operating in relatively freer markets with 

greater market discipline, would prove more successful. But we would find out. Future think tank 

fellows could write highly instructive papers on the contrast. 
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3 

Of course, to establish the proposed choice, we have to answer the question: how much capital makes it 

high enough? For a bank to make the deal proposed in the CHOICE Act, it would have to have a tangible 

leverage capital ratio of at least 10%. That is a lot more than current requirements, but is it enough? 

Consider the matter first in principle: without doubt there is some level of equity capital at which this 

trade-off makes sense-some level of capital at which everyone, even habitual lovers of bureaucracy, 

would agree that the Dodd-Frank burdens become superfluous, or at least, cause costs far in excess of 

their benefits. 

What capital ratio is exactly right can be, and is, disputed. Because government guarantees, subsidies, 

mandates and interventions are so intertwined with today's banks, there is simply no market answer 

available. Moreover, we are not looking for a capital level which would remove all regulation-only the 

notorious overreaction and overreach of Dodd-Frank. For example, the CHOICE Act requires in addition 

to 10% tangible capital, to qualify for Option One, that a bank must have one of the best two CAMELS 

ratings by the regulator-"CAMELS" being assessments of Capital, Asset quality, Management, Earnings, 

liquidity, and Sensitivity to market risk. 

Numerous proposals for the right capital levels have been made. However, the fact that no one knows 

the exact answer should not stop us from moving in the right direction. 

Among various theories and studies, the International Monetary Fund concluded that "bank [risk-based] 

capital in the 15-23 percent range would have avoided creditor losses in the vast majority of past 

banking crises," and that this range is consistent with "9.5 percent of total leverage exposure." 

Obviously, a 10% level is somewhat more conservative than that. 

Economist William Cline recently concluded that "the optimal ratio for tangible common equity is about 

6.6 percent of total assets and a conservative estimate .. .is about 7.9 percent." 

Paul Krugman proposed a maximum assets-to-capital ratio of 15:1, which is equivalent to a leverage 

capital ratio of 6.7%. Anat Admati and Martin Hellwig came in much higher, arguing for a leverage 

capital requirement of 20% to 30%, however with no empirical analysis. Economists David Miles, Jing 

Yang and Gilberta Marcheggiano estimated optimal bank capital at about 20% of risk-weighted assets, 

which in their view means a 7% to 10% leverage capital ratio. 

In a letter to the Financial Times, a group of academics asserted a requirement for 15% leverage capital, 

but a study by economists Anil Kashyap, Samuel Hanson and Jeremy Stein proposed risk-based capital of 

12% to 15%, which means a leverage capital ratio of 6% to 8%. Banking expert Charles Calomiris 

proposed 10% leverage capital. 

All in all, it seems to me that the 10% tangible leverage capital proposed in the CHOICE Act to qualify for 

Option One is a fair level. It subtracts all intangible assets and deferred-tax assets from the numerator 

of the ratio, and adds the balance sheet equivalents of off-balance sheet items to the total assets in the 

denominator. Thus, it is a conservatively structured measure. 

In 2012, Robert Jenkins, then a member of the Bank of England's Financial Policy Committee, gave a 

speech to the Worshipful Company of Actuaries entitled "Let's Make a Deal," which put forward the 

same fundamental idea as does the CHOICE Act. The proposed deal was a "rollback of the rule book" in 
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exchange for banks' raising "their tangible equity capital to 20% of assets." He explained the logic as 

follows: 

-"We all agree that too many bankers got it wrong" 

-"We acknowledge that too many regulators got it wrong" 

So, the best solution is to increase the tangible equity and "in return we can pare back the rule 

book-drastically." 

4 

Under the CHOICE Act, In exchange for 10% tangible leverage capital, along with a high CAMELS rating, 

the deal is, to repeat, not to eliminate all regulation, but to exit from the excesses of Dodd-Frank. We 

should view Dodd-Frank in its historical context, as an expected political overreaction to the then-recent 

crisis. Now, for banks taking Option One, there would still be plenty of regulation, but not the 

notoriously onerous entanglements of Dodd-Frank. In exchange for Jenkins' suggested move to 20% 

leverage capital, one would rationally eliminate a lot more regulation and bureaucratic power--to pare it 

back, as he says, "drastically." The proposed act is more moderate. 

The CHOICE Act uses the simple and direct measure of tangible leverage capital. This is, in my judgment, 

superior to the complex and sometimes opaque measures of risk-adjusted assets and risk-based capital. 

Although in theory risk-based capital might have been attractive, in fact its manifestations have been 

inadequate, to say the least. Risk adjustments assume a knowledge in regulatory bureaucracies about 

what is more or less risky that does not exist-because risk is in the future. They are subject to 

manipulations and mistakes, and more importantly, to political factors. Thus, for example, Greek 

sovereign debt was given a zero risk weighting, and ended up paying lenders 25 cents on the dollar. The 

risk weightings of subprime MBS are notorious. Fannie Mae and Freddie Mac debt and preferred stock 

were given preferential risk weightings which helped inflate the housing bubble-a heavily political 

decision and a blunder. 

The deepest problem with risk weightings is that they are bureaucratic, while risk is dynamic and 

changing. Designating an asset as low risk is likely to induce flows of increased credit which end up 

making it high risk. What was once a good idea becomes a "crowded trade." What was once a tail risk 

becomes instead a highly probable unhappy outcome. 

Of course no single measure tells us all the answers. Of course, managing a bank or supervising a bank 

entails understanding multiple interacting factors. But for purposes of setting up the choice for banks in 

the proposed act, I believe the simplicity of tangible leverage capital is the right answer. 

In my judgment, the proposed choice between Option One and Option Two makes perfect sense. It 

definitely takes us in the right direction and ought to be enacted. 

Thank you again for the chance to share these views. 
225 


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Testimony of 

Jim R. Purcell 

Chairman, State National Bank of Big Spring 

Big Spring, Texas 

and 

Chairman, Texas Bankers Association 

hefore the 

Committee on Financial Services 

U.S. House of Representatives 

.July 12, 2016 

Chainnan Hensarling, Ranking Member Waters, distinguished members of the 

Committee on Financial Services, my name is Jim Purcell, and I am Chairman of the State 

National Bank of Big Spring. This year, I also have the honor of serving as Chairman of the 

Texas Bankers Association, which is the largest and oldest of the nation's 50 state banking 

associations. 

In another capacity, State National Bank of Big Spring is the bank plaintiff in the 

principal case challenging the constitutionality of the Dodd-Frank Act, but I am not appearing 

here today in that capacity. That case, I might add however, remains pending in federal court in 

the District ofColnmbia after the Circuit Court of Appeals recently affirmed the parties' standing 

to bring the suit. 

'I11e State National Bank of Big Spring opened in 1909 as a family-owned bank. Today, 

the bank operates in three offices, has total assets of $321 million, and is the only banlc 
226 


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headquartered in the west Texas town of Big Spring, which has a population of approximately 

28,000. Certainly we are a community bank as that phrase is generally understood, but I want lo 

mention that we also remain a family-owned bank with Mr. John Currie still providing valued 

input as our Chairman Emeritus. That is a unique and often overlooked factor in the 

understanding and regulation of the banking industry. 

I am a first generation banker and started my banking career in 1975 after an accident 

resulted in a doctor telling me I was not to get on a horse or a tractor for at least a year. After 

various interviews, and for reasons I'm still not sure, I chose the lowest paying job, with the 

fewest benefits, at a location which is one of the coldest places in Texas. It was at the Citizens 

State Bank in Dalhart, which also had the oldest group of officers of anyplace I interviewed. But 

they were very tied into the local community and I quickly leamed that that's what made them 

successful bankers. 

Since I started my career in bookkeeping, let me stmt with some numbers. In June, 2010, 

when the Dodd-Frank Act was being finalized, there were 626 FDIC-insured banking institutions 

in Texas. As of the last qua:rterreported by the FDIC (March 31, 2016), we are down to 477 or a 

decline of 149 institntions in a state with one of the healthiest economies in the country. 

Now, of course, no one is ascribing this 24-percent decline solely to passage of the DoddFrank Act, but these arc the numbers and we cc1tainly do not think this result is a 

coincidence. As a community banker, my belief is that the Dodd-Frank Act has been very 

negative not just for community banks but across the entire industry. More impmtantly, it has 

likewise had a negative impact on the country by restraining the bm1king industry's ability to 

intermediate our depositors' funds into loans for individuals, businesses, and other wmthy 
227 


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borrowers as would have otherwise been the case. In other words, it is an across-the-board 

problem for small, large and medium-sized banks. 

For this reason, the Texas Bankers Association strongly supports the Financial Choice 

Act as a path to reform through the option of establishing a capital threshold for relief from the 

hopelessly complex Basel III requirements and other aspects of counterproductive regulation. 

The bill would utilize a capital standard of ten percent, which is double the current definition of 

a "well-capitalized" bank, 1 for pw·poses of establishing the threshold for the Jesser regulatory 

structure. We are still in the process of analyzing the feasibility of that number across the 

full range of Texas banking institutions. One approach meriting further exploration is a leverage 

test that would include a simplified risk-based aspect (as distinct from Basel III) and perhaps a 

component, as has also been suggested by FDIC Vice Chaim1an Hoenig, which would 

incorporate a business "activities" test2 

As recently outlined in Congressional testimony, the American Bankers Association 

pointed out that U.S. regulators participated in the international discussions establishing the new 

Basel requirements without full input as to how the Basel plans would affect U.S. institutions, 

markets, and the overall economy, and that by the time that implementing regulations were 

proposed, 0 .S. regulators considered themselves committed to the global Basel plan. The 

problem, of comse, is that the community bank model with thousands of small local institutions 

is unique to the United States. It simply makes no sense for the banking regulators to take the 

1 FDIC Reg. 325.103(b)(l)(iii). 

2 FDIC Vice Chailman Thomas Hoenig, A Conversation about Regularory Relief and the Community Bank (201 5) at 

www.fdic.gov/news/news/speeches/spapril I 515.htmL 
228 


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capital rules developed as part of a program to unify capital standards for the largest banks in the 

world and apply them to every bank in the United States. 

Four years ago, when I last had the opportunity to testify before this committee, I cited 

this comment from Senator Dodd that: "in a nation with more than 6,000 banks, the bulk of the 

bill's new regulations apply only to a few dozen of the largest ones, each holding more than $50 

billion in assets''3 No prediction could be further off the mark. In terms of the fanner 

Chairman's reference to the total number of U.S. banking institutions, it is still above 6,000 

(6,122), but that is dO\:vn a staggering 1,708 from the number of U.S. banks just prior to the 

enactment of the Dodd-Frank Act. Most alarmingly of all, just three new banks were chartered 

since 20 I 0, which has been the consistent pattem over the six years since adoption of the DoddFrank Act. 

As we view it, the Financial Choice Act outlines meaningful direction for reform, but 

in the face of these numbers and in full candor, we need to do much more and need to do it much 

sooner than ca11 reasonably be anticipated from this stmting point. Our message to Congress, as 

drawn fi·om the very outset of seeing how the Dodd-frank Act was being implemented, has been 

on the need for additional flexibility so that regulators can tailor their policies and examinations 

to a bank's business model. What I hear fi·om bankers in Texas and around the country is that the 

pendulum in bank examinations over the last five years has been transposed from prudent 

oversight to compliance overreach. 

In that connection, we are also glad to see H.R. 2896, the Taking Account ofinstitutions 

with Low Operation Risk Act (TAILOR Act) of 2015, as introduced by Rep. Scott Tipton 

3 Five Myths about the Dodd-Frank Act, Washington Post (Nov. 19, 2011). 
229 


25875.164

included in the Financial Choice Act. That legislation is designed to have regulatory actions 

oriented to a bank's business model and risk profile regardless of asset size. 

Perhaps there is a post-Dodd-Frank business model that works by spreading the everrising costs of regulatory compliance over a growing or more affluent customer base, but that 

doesn't work for banks located in small towns and rural areas. The CFPB website says "We are 

the Consumer Financial Protection Bureau, a U.S. govemment agency that makes sure banks, 

lenders, and other financial companies treat you fairly."4 But how is it "fairer" to force our 

customers to go elsewhere for their real estate loans as a consequence of the fact that our 

m01tgage platform did not fit the Dodd-Frank/CFPB profile of a "Qualified Mortgage"? 

The problem for us, and I am sure many others, is that our bonowers generally sought 

relatively small mortgages for their prope1ties which meant that the loan's costs and fees had to 

be spread across a smaller principal balance. Even though we did not charge any application 

fees, origination fees, or any other type of fee, these were 5-year balloon notes which typically 

meant they would fall into the disfavored "high-cost" definition. fn addition, we ran into 

obstacles arising from the regulation's definition of maximum debt-to-income ratios for 

bonowers. The end result, at least for us, was that due to the increased regulatory burden and 

potential liability, State National Bank of Big Spring ceased making what we always deemed 

very good and cettainly very fair mortgage loans for the good of both our customers and the 

broader community. 

In conclusion, Mr. Chairman, the Texas Bankers Association appreciates all the work 

which obviously went into the preparation of this legislation and we look forward to working 

4 www.consmncrfinance.gov. 
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with all members of the committee to advance the regulatory refom1s which would allow our 

industry to get back into the business of making loans as best tailored for om individual 

communities. We appreciate that there are many important issues coming before Congress, but 

in another week or so it will have been six years since the Dodd-Frank Act was signed into law. 

The result bas been, from the standpoint of Texas banks, more obstacles to lending, increased 

costs, and less ability to serve customer needs. 
231 


25875.166

"Four of state's banks generate most profits" 

By David Smith 

Arkansas Democrat-Gazette 

June 19, 2016 

Four of the largest banks in Arkansas are so profitable that they are masking the overall 

profitability of the state's banking industry, an executive with the Federal Reserve Bank 

of St. Louis said last week. 

The 104 banks in Arkansas have a combined average return on assets-- which is net 

income as a percentage of assets-- of 1.29 percent, a healthy indicator. 

Banks with a return on assets of 1 percent or higher are considered to be performing 

well. Only a third of the state's banks have a return on assets of 1 percent or better. 

But if four banks-- Bank of the Ozarks of Little Rock, Centennial Bank of Conway, First 

Security Bank of Searcy and Simmons Bank of Pine Bluff-- are removed from the 

equation, the other 100 banks in the state have a return on assets of only 0.89 percent, 

said Julie Stackhouse, senior vice president with the St. Louis bank. 

Bank of the Ozarks earned about $55 million, Centennial about $43 million, First 

Security about $26 million and Simmons about $26 million in the first quarter. If Arvest 

Bank of Fayetteville, which made $22 million, is included, the remaining 99 banks 

earned only about $78 million in the first quarter. 

"We know a few banks in Arkansas are really generating a lot of profits," Stackhouse 

said. 

What that highlights, Stackhouse said, is the challenge smaller banks in Arkansas are 

facing to generate profits. 

"Community banks will need to find a way to continue to be profitable even though their 

[size] is really starting to become a factor," Stackhouse said. 

Still, banks in Arkansas generally are doing well, said Garland Binns, a Little Rock 

banking attorney. 

"I believe banks in Arkansas are performing comparably with banks in other states," 

Binns said. 

Banks nationally have a return on assets of almost 1 percent, according to the Federal 

Deposit Insurance Corp. 

There are other issues also impacting community banks, Stackhouse said. 

The extended low interest rates environment is a challenge to relatively small 

community banks, she said. 
232 


25875.167

The cost of meeting regulatory requirements is higher, she said. And banks are having 

a difficult time attracting high-quality management to their towns who can lead the bank 

in the future, she said. 

"It makes it incredibly important that the board of directors and their leadership team 

plan for how to address the challenges in the years ahead," Stackhouse said. "Ideally 

building a pipeline of talent is the most effective way to address these challenges." 

A year from now, there won't be much discernible difference, because changes are 

moving so slowly, Stackhouse said. 

"But the board must understand that succession needs to exist and that that is part of 

the responsibility of a board," Stackhouse said. "Honestly, though, that's still tough. 

We've seen for many decades that family members often would move into leadership 

roles. That's not as common today so that makes the job of that board of directors even 

more difficult." 

The St. Louis bank has concerns about some current lending practices nationally, 

Stackhouse said. Regulators are monitoring commercial real estate lending closely, she 

said. 

"There has been a pretty quick ramp-up in [commercial real estate loans]." Stackhouse 

said. "We want to be sure that a couple things are occurring." 

One concern is that a bank's board of directors and management team consider how 

the bank is underwriting these loans, conservatively or aggressively, Stackhouse said. 

Secondly, regulators are asking boards where banks are aggressively increasing 

commercial real estate loans to determine how much risk will be allowed, she said. 

Binns noted that the FDIC released a report recently that also indicated there was a 

concern about the volume of commercial real estate loans. 

"What they are saying is that the risk is there [for something to go wrong]," Binns said. 

"For instance, if there was a change in the economy in a region, that might impact the 

performance of some of those loans." 
233 


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234 


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July 12,2016 

Dear Representative, 

On behalf of Americans for Financial Reform (AFR), 1 we are writing to our very grave 

concerns abont the "Financial CJ JOICE Act" and to you to oppose measure. Passage of 

this legislation would have a devastating effect on the of regulators to protect consumers 

and investors from exploitation and the from financial risk. It would expose consumers, 

investors, and the public to greatly heightened of abuse in their regular dealings with the 

financial system, and our economy as a whole to heightened risk of instability and crisis. 

This bill goes far beyond repealing major parts of the new Dodd-Frank protections passed in the 

wake of the disastrous financial crisis of2008.lt would also eliminate regulatory powers that 

long pre-date Dodd-Frank, making financial regulation significantly weaker than it was prior to 

the 2008 crisis. 

Proponents of the Financial CHOICE Act claim that certain portions of the bill actually improve 

financial protections. This claim is deeply misleading. In fact, the so-called protections in the bill 

are in many cases simply more disguised deregulation. For example, the bill banks that 

meet a l 0 percent leverage capital ratio from a broad range of laws and risk dating back 

in many cases many decades before the 2008 financial crisis. While increasing leverage capital 

would be a positive development, under the bill banks would then be exempted from a slew of 

rules designed to control risks that the moderately higher level of capital required in this bill 

cannot address. Banks which took advantage of this provision would almost certainly present a 

far greater risk to the public and this legislation would strip regulators of their ability to address 

those increased risks. 

The nearly 500 pages of this legislation range across every area of financial regulation, from the 

powers of the Consumer Financial Protection Bureau (CFPB) to protect consumers, to control of 

risks at big banks, to legal accountability for financial wrongdoing, to the ability of regulators to 

defend their actions from lawsuits by big banks. In all these cases, the net effect of the Financial 

CHOICE Act would be to reduce accountability and oversight, and increase risks to the public. 

Below, we provide additional discussion of some key features of the bill. 2 

The Bill Puts Unprecedented Limits On Regulators' Capacity to Oversee Wall Street 

Title VI of the Financial CHOICE Act contains a set of drastic new analytic, legislative, and 

legal requirements that financial re1,rulatory agencies must fulfill before enforcing any new 

1 Americans tor Financial Reform is an coalition of more than 200 national, state and local 

groups who have come together to reform financial Members of our coalition include 

consumer, civil investor, retiree. community, labor. A list of 

coalition members available at htt:p://ow:!ln,an•~ia.lse<:urity.or!ValJoult!our-cmrlitiion! 

2 This letter focuses on AFR's major objections to the bill as a whole and does not address every 

provision in the 498-page drall that AFR opposes. 

1629 K Street NW 10'" Floor Washington, DC 200061202.466.18851 ourfinancialsecurity.org 
235 


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financial rules. These requirements go far beyond any reasonable attempt to improve regulatory 

procedures and create unprecedented roadblocks to effective action. Indeed. these changes would 

reduce the effective authority of Federal financial regulators to its weakest point since prior to 

the Great Depression. 

Subtitle A contains a host of new analytic requirements a financial regulatory agency must 

complete before any rulemaking, any one of which could be material for a lawsuit by Wall Street 

interests seeking to block new rules. Section 612 of the bill contains several dozen new analyses 

an agency must perform to justify a rulcmaking, some of which are so broad and vague that they 

create metaphysical questions about whether they could ever be completely satisfied. For 

example, the legislation requires regulators to quantitatively measure all "anticipated direct and 

indirect" effects of a new regulation before it is implemented, and to perform an "assessment of 

all available alternatives to the regulation." Since all requirements in Section 612 are statutory, 

each would create a new tool for industry lawyers to file a lawsuit to stop a regulation. 

Subtitle B would require explicit approval by both houses of Congress of any significant new 

financial regulation. This unprecedented new requirement would make Wall Street oversight by 

administrative agencies subject to the same paralysis we see in Congress. 

Subtitle C would eviscerate longstanding Supreme Court precedents requiring courts to defer 

to subject-matter experts in regulatory agencies when deciding anti-regulation lawsuits. Instead, 

courts would be required to judge "de novo" claims involving the justification for and technical 

details of the regulation, reversing the precedent of more than three decades under the Chevron 

doctrine. This means that in any lawsuit claiming that a regulatory action was unjustified, the 

judge would be encouraged to substitute his or her views for that of the regulatory agency. 

These three subtitles in combination would create practically insurmountable barriers to 

completing any new rulemaking that was opposed by any financial entity with the resources to 

mount a lawsuit challenging the agency's implementation of any of the numerous new 

requirements in Subtitle A. 

In addition to these provisions, Subtitle E ofTitle VI and Section 312 would also eliminate the 

long-standing practice of independent funding for banking regulators. This practice is intended to 

shield financial regulators from the political pressures that can be brought to bear by well-funded 

financial interests through the appropriations process. Subtitle F would also impose major new 

barriers to international coordination between regulators. 

Bill Would Drastically Weaken Consumer Protections 

In the five years since the CFPB was established, the agency has made enormous strides in 

ensuring that the financial marketplace is fair to consumers. Its rules and supervision have 

already begun to reform the industry's conduct, making banks and other financial services 

companies more attentive to consumers' rights, and the agency's supervision and enforcement 

actions have returned more than$ I I billion to consumers' pockets. 

But the Financial CHOICE Act includes a series of legislative attacks that would greatly weaken 

and in some cases cripple the agency's ability to protect consumers. In addition to the barriers to 

all financial regulatory agency rulemaking created by Title VI of the bill, which apply to the 
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Bureau as well, Title III of the hill weakens the CFPB's structure and authority in several 

important ways: 

• Section 311 of the bill would change the structure of the CFPB from its current, effective 

single-director structure to a less effective five-member commission. A recent market 

analysis concluded "that shifting the CFPB's governance from a directorship to a 

commission would double the bureau's already elongated rulemaking timeline [and] cut 

its enforcement activity by 50% to 75%."3 CFPB supporters strongly and 

overwhelmingly agree that moving to a commission would dramatically diminish its 

ability to fulfill its consumer protection mission. 4 

• Section 328 of the bill would eliminate the CFPB's examination and enforcement 

authority for more than half of the banks it currently supervises. 

• Section 337 of the bill would repeal the CFPB's authority to stop abusive acts and 

practices in consumer finance, literally striking the prohibition on abusive acts and 

practices from the U.S. Code.5 

• Section 314 of the bill would jettison as a practical matter the CFPB's administrative 

enforcement process by giving industry defendants the option to move proceedings to 

federal court, losing the efficiency and specialization of the administrative adjudication 

process. 

• Section 316 would confuse the CFPB' s statutory purpose and mandate the creation of an 

unnecessary, duplicative bureaucracy within the agency. 6 

Beyond weakening CFPB authorities, the bill also seeks to directly block CFPB efforts to protect 

consumers in a number of key areas: 

Section 333 of the bill would allow a state to block implementation of new rules the 

CFPB is developing to protect against payday loan abuses for a period of five years. This 

proposed rule is designed to prevent abuse by ensuring that small dollar loans are made 

3 Ben Lane, Are Richard Cordray's days as CFPB director numbered?, Housing Wire (Jun. 3, 2016), 

http://www .housingwire.comlarticl es/3 7193 -are-richard-cordrays-days-as-cfpb-d i rector-

!l\l.DJbered?eid=}3!536434&bid=l4238QQ. 

4 Letter to Congress: AFR and 340 Organizations Urge Congress to Support the CFPB (Feb. 27, 2015), 

http:/ I ourfi nancialsecurity. org/20 15/0 3/letter-to-con gress-afr-and-3 4 !-organ izations-urgecongress-tosupport-the-cfpb/; Letter To Congress: AFR, 75 Organizations Urge Congress To Reject HR 1266 (Sep. 

29, 20 15), b!!Q;i/smrfinancials§uri tv. org/b1 gsfupsqntent/qlllti_n®cialsycurity~J!!2l oads/.20 15/Q9/H.R: 

1266-0ppo-Lettcr-9.29. 15l.pdf. 

5 Letter to Congress: AFR, 42 Organi7.ations Call on Congress to Preserve the CFPB's Authority to Slop 

Abusive Financial Practices (May 20, 2016), http://ourfinancialsecurity.org/20 16/05/letter-congress-afr42-organizations-call-congrcss-preserve-cfpbs-authority-stop-abusive-financial-practices/. 

6 Letter to Congress: AFR Opposes H.R. 5211, Legislation to Weaken the CFPB (June 21, 2016), 

http:// ourfinancialsecurity .org/20 16/06/1 etter -congress-afr -opposes-hr-5 21 1-legisl ation -weaken-cfpb/ 
237 


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only to those who can afford to repay them. States should not be able to deny their 

residents the protection of this basic federal standard. 7 

• Subtitles A, B, and D of Title XI of the bill would exempt a wide range of mortgages 

from new "Qualified Mortgage" rules designed to prevent the consumer abuses seen in 

the subprime mortgages that contributed so greatly to the 2008 financial crisis. These 

sections would exempt mortgages held on bank portfolios- including those originated by 

the largest Wall Street banks - from consumer protections. Loans to purchase 

manufactured housing would also lose consumer protections. 

• Section 338 of the bill would prevent implementation of the CFPB's proposed rule 

against forced arbitration clauses. These clauses deny consumers access to the courts to 

remedy financial abuses they have suffered.8 It is ironic that this legislation, which docs 

so much to assist large financial companies in using lawsuits to overturn rules, would 

block consumer access to the courts. 

• Section 334 of the bill seeks to stall the CFPB's enforcement of anti-discrimination laws 

in the auto industry, thereby allowing racial discrimination in auto lending to go 

unchecked.9 

• Section 327 of the bill would, as a practical matter, end the meaningful release of 

information about consumer complaints, eliminating an important public resource for 

understanding and avoiding consumer abuses. 

fn addition, Section 325 of the bill would require paying CFPB employees less than employees 

of all other federal financial regulators, undermining the agency's capacity to attract and retain 

highly-qualified financial professionals. Section 326 would weaken the CFPB's research and 

analysis capacities, and Section 331 of the bill would effectively bar the CFPB from collecting 

personally identifiable information (PH) even when that information is needed for bank 

supervision and law enforcement. Such a requirement would make bank examinations 

impractical and for that reason it applies to no other bank regulator. The provision is also 

unnecessary given that the CFPB already has extensive procedures in place to protect PH. And 

even this does not exhaust the list of unfounded and counterproductive attacks on the CFPB in 

Title III of the bill. 

The Bill Would Significantly Increase the Threat of"Too Big To Fail" 

7 Letter to Congress: AFR, 268 Groups Call On You To Oppose HR 40 I 8 and Support a Strong Payday 

Rule (Dec. 15, 20 15), http://ourfinancialsecurity.org/2015/12/letter-to-congrcss-212-groups-call-on-youto-oppose-hr -40 18-and-support -a-strong-payday -rule/. 

8 Letter to Congress: Reject Proposals That Interfere with CPFB's Authority on Mandatory Arbitration 

(May 19, 2016) (AFR and 70 organizations), http:l/ourfinancialsecurity.org/2016/05/letter-congress-2-2/. 

9 Letter to Congress: AFR, 65 Organizations Urge Congress to Stand Against Discriminatory Auto 

Lending and Reject HR 1737 (Nov. 16, 2015), http://ourfinancialsecurity.org/2015/IJ!letter-to-congressafr -65-organizati ons-urge-congress-to-stand-against -discriminatory-auto-lending-and -rej eel -hr-I 73 7 ( 
238 


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During the 2008 financial crisis, regulators provided unprecedented assistance to the largest Wall 

Street firms, using the excuse that they lacked the necessary tools to liquidate a failing financial 

finn without creating unacceptable economic fallout. Title II of the Dodd-Frank Act removed 

this excuse by creating an Orderly Liquidation Authority (OLA) under which the FDIC could 

take a large financial firm into receivership, liquidate the firm while limiting economic fallout 

using a temporary Treasury credit line, and hold the executives, directors, and officers of the firm 

responsible for reckless decisions leading to the firm's failure. 

Title II of the Financial CHOICE Act completely eliminates the Dodd-Frank liquidation 

authority. Subtitle C replaces it with a procedure that would grant special privileges under the 

bankruptcy code to large financial institutions and their key directors. Dodd-Frank's OLA 

contains specific provisions to hold executives and directors accountable for actions connected to 

a company's failure. By contrast, the special privileges granted in the Financial CHOICE Act 

would completely immunize the directors of a failing financial company from personal liability 

for actions in connection with the bankruptcy. 

By depriving the court of crucial elements of its supervision over a failing financial company, 

this section would also allow a large financial institution to avoid creditor claims that would 

apply to any normal company entering bankruptcy. It also appears likely that the rapid process 

laid out in Subtitle C could be inadequate to address financial instability resulting from the 

failure of a large financial firm, in that it provides no liquidity support and the finn might not be 

sufficiently restructured to remedy the issues that led to its failure. This would again leave 

regulators without necessary tools to address the failure of giant financial firms. 

Other provisions in Title II of the Financial CHOICE Act would dismantle the oversight system 

set up in the Dodd-Frank Act to ensure that regulators were able to detect and act upon threats to 

financial stability posed by large financial firms before they posed a major threat to the economy, 

and before such financial giants could try to hold up the public for a bailout: 

• Section211 of the legislation would strip the Financial Stability Oversight Council 

(FSOC) of most of its powers, including the power to designate extremely large nonbanks such as the insurance giant AIG for increased regulatory oversight. During the 

2008 financial crisis, AIG received the largest public bailout in U.S. history. 

• Section211 also makes the FSOC practically unmanageable by reducing its funding, 

opening all of its meetings to hundreds of attendees, and more than doubling its voting 

membership. 

• Section 251 of the bill would eliminate Dodd-Frank provisions for increased oversight of 

giant financial market utilities such as derivatives clearinghouses that are crucial to 

financial stability. 

The Bill Gravely Weakens Financial Oversight In Other Ways 

The issues above hardly exhaust the ways in which the Financial CHOICE Act would weaken 

and undermine regulation of Wall Street. To take just a few examples: 
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• Title IX of the bill repeals the Volcker Rule, a signature achievement of the Dodd-Frank 

Act. The bill's repeal of the Volcker Rule would allow banks to once again conduct 

proprietary financial gambles with depositors' money; 

• Section 468 of the bill would create a major gap in U.S. oversight of the critical market 

for financial derivatives by forcing U.S. regulators to defer to foreign oversight of 

derivatives transactions conducted through offshore subsidiaries of U.S. banks. Over half 

of the multi-trillion dollar U.S. derivatives market- a market critical in triggering the 

2008 financial crisis is conducted through such foreign subsidiaries; 

• Subtitle B of Title IV of the bill contains over a dozen provisions weakening key 

protections for investors, ranging from protections for pension funds seeking to ensure 

that their private equity fund investments are honestly managed and excessive fees are 

not charged, to protections for stockholders seeking information on executive 

compensation. 

• Section 325 of the bill would repeal Dodd-Frank's requirement that bank debit card fees 

charged by banks with more than $10 billion in assets be limited to the reasonable cost of 

the transaction. Even those who favor repeal of this regulation agree that this would allow 

the nation's largest banks to charge retailers and customers an additional $6 $8 billion 

per year in card fees. 10 It would do nothing to aid community banks, which are not 

covered by the rule and have actually increased their share of debit transactions since the 

regulation was implemented. II 

Regulatory Improvements Claimed By Proponents of the Bill Would Be Ineffective 

Advocates of the Financial CHOICE Act falsely claim that several sections of the bill improve 

financial protections. A prominent example is Title I of the bill, which exempts banks which 

choose to meet a I 0 percent leverage capital ratio from a broad range of laws and risk controls. 

Their claim that maintaining a l 0 percent leverage ratio will be so effective in protecting against 

irresponsible bank risk-taking that no other risk controls are necessary is patently false. 

Currently, the six largest U.S. banks have an average leverage ratio of approximately 6.5 percent, 

so it is accurate that a 1 0 percent leverage ratio would require them to raise a moderate but still 

significant level of additional capital, and that would be positive.I 2 However, these leverage 

ratios are not discounted for the riskiness of bank assets or activities, so banks could still take 

potentially enormous financial risks while maintaining a I 0 percent leverage ratio. Because of 

10 Todd Zywicki, et al., Price Controls on Payment Card Interchange Fees: The US. Experience (June 4, 

20 14), http:/ /papers.ssrn.com/sol3/papers.cfm?abstract_id=2446080 

11 James Disalvo & Ryan Johnston, Federal Reserve Bank of Philadelphia Research Department, Banking 

Trends at 4 (First Quarter 2016), https://www.philadelphiafed.org/-/media!research-anddata!publications!banking-trends/20 16/bt-how _dodd_ frank_ affects_ small_ bank __ costs.pdf?la=en. 

I

2 Supplementary leverage ratios drawn trom Q4 2015 earnings reports of JP Morgan, Bank of 

America, Wells Fargo, Citibank, Goldman Sachs, and Morgan Stanley. 
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the exemptions contained in this bill, regulators would be stripped of almost all the tools they usc 

to address these risks: 

• Under Section 102(a)(l) of the bill regulators would be forbidden to require additional 

capital for especially risky bank activities that might create higher losses. They would 

also be forbidden to impose any liquidity requirements at all, even though liquidity 

failure (the lack of cash to meet current obligations) directly causes bank failure. 

• Under Section 102(a)(2) of the bill, regulators would be required to let even the riskiest 

banks pay out capital to stockholders, rather than reserving it to cover potential losses, 

even if they saw that banks were undertaking activities that risked large future losses. 

• Under Section I 02(a)(3) of the bill, regulators would actually be banned from taking into 

account the risk the bank's activities posed to the financial stability of the United States. 

This would harmfully restrict regulators' ability to examine risks resulting from activities 

of non-bank subsidiaries of a bank holding company. Regulators would also be forbidden 

from preventing bank mergers that led to the creation of "too big to fail" entities or had 

an unacceptable effect on competitiveness in the banking system. 

Other elements of the bill would weaken regulatory tools still further. Exempting banks from 

such a wide range of risk-related rules would leave bank examinations as the only possible tool 

for addressing risks at major banks. But Subtitle H of Title XI of the bill would also gut the 

authority of bank examiners to take any action on risk-related issues, pennitting banks numerous 

appeals and back doors before any finding of a bank examiner could be judged valid. 13 

To make matters worse, loopholes included in the legislation make it uncertain that banks would 

even have to maintain a true 10 percent leverage ratio. For example, Section 105(5)(B) of the bill 

defines the "Quarterly Leverage Ratio" that qualifies a bank for the sweeping set of exemptions 

under the rule as the capital ratio on the "last day of the quarter," meaning that a bank could 

qualify for exemptions by meeting new capital standards only four days out of an entire year. 

While we support higher leverage capital ratios for banks, it is absurd to suppose that the 

leverage requirement included in this bill would protect the public from risks to the financial 

system under a regulatory regime where regulators were systematically barred from taking action 

to control bank risks. 

Title VIII of the bill, which increases maximum civil monetary penalties for various types of 

financial misconduct, is also held up as an example of increased financial sector accountability 

under the Financial CHOICE Act. It is a positive step to increase these penalties, as current 

statutory penalties are significantly outdated. But other elements of the bill will work against any 

increased accountability by reducing the ability of regulatory agencies to hold wrongdoers 

accountable through civil proceedings. 

13 AFR Letter to Congress Opposing the Exam Faimess Act (June 10, 2015), 

http://ourfinancialsecurity.orglwp-content/uploads/20 15/07/ AFR -HR -1941-Letter-Final-7 .28. J 5.pdf. 
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For example, Sections 413 to 417 of the bill would greatly weaken the ability of the Securities 

and Exchange Commission (SEC) to win administrative cases. Section 416 which would allow a 

defendant to opt-out of the administrative process in favor of court enforcement, while Sections 

418 and 419 of the bill would greatly narrow the SEC's ability to bar individuals found guilty of 

wrongdoing from working in a wide range of Wall Street jobs. 

Numerous other provisions in the bill reduce individual accountability still further: Section 449 

of the bill would eliminate a Dodd-Frank provision that required regulators to place controls on 

short-term bonuses for traders and executives at big Wall Street banks to prevent them fTom 

collecting bonus pay for actions that later caused catastrophic losses. This opens the door to a 

return of the short-sighted Wall Street bonus practices that helped cause the financial crisis. 

Section 44 7 of the bill would also limit the degree to which bonus pay that had been collected 

based on misrepresentations of company profits could be clawed back from executives. Section 

II II of the bill limits the ability of bank regulators to address criminal activities in banks. And 

as discussed above, the entire Title VI of the bill would act to prevent regulators from 

implementing rules addressing new forms of financial sector wrongdoing. 

In sum, the Financial CHOICE Act would be an unprecedented blow to effective oversight of the 

nation's financial sector and to the protection of ordinary consumers, investors, and members of 

the public who depend on the faimess, transparency, and stability of the financial system. We 

urge you to reject it. 

Thank you for your consideration. For more information, please contact AFR's Policy Director, 

Marcus Stanley at marcus@ourfinancialsecurity.org or 202-466-3672. 

Sincerely, 

Americans for Financial Reform 
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Following are the partners of Americans for Financial Reform. 

All the organizations support the overall principles of AFR and are working for an accountable, 

fair and securefinancial system. Not all of these organizations work on all of the issues covered 

by the coalition or have signed on to every statement. 

• AARP 

• A New Way Forward 

• AFL-ClO 

• AFSCME 

• Altiance For Justice 

• American Income Life Insurance 

• American Sustainable Business Council 

• Americans for Democratic Action, Inc 

• Americans United for Change 

• Campaign for America's Future 

• Campaign Money 

• Center for Digital Democracy 

• Center for Economic and Policy Research 

• Center for Economic Progress 

• Center for Media and Democracy 

• Center for Responsible Lending 

• Center for Justice and Democracy 

• Center of Concern 

• Center for Effective Government 

• Change to Win 

• Clean Yield Asset Management 

• Coastal Enterprises Inc. 

• Color of Change 

• Common Cause 

• Communications Workers of America 

• Community Development Transportation Lending Services 

• Consumer Action 

• Consumer Association Council 

• Consumers for Auto Safety and Reliability 

• Consumer Federation of America 

• Consumer Watchdog 

• Consumers Union 

• Corporation for Enterprise Development 

• CREDO Mobile 

• CTW Investment Group 

• Demos 

• Economic Policy Institute 

• Essential Action 
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• Green America 

• Greenlining Institute 

• Good Business International 

• Government Accountability Project 

• HNMA Funding Company 

• Home Actions 

• Housing Counseling Services 

• Home Defenders League 

• Information Press 

• Institute for Agriculture and Trade Policy 

• Institute for Global Communications 

• Institute for Policy Studies: Global Economy Project 

• International Brotherhood ofTeamsters 

• Institute of Women's Policy Research 

• Krull & Company 

• Laborers' International Union of North America 

• Lawyers' Committee for Civil Rights Under Law 

• Main Street Alliance 

• Move On 

• NAACP 

• NASCAT 

• National Association of Consumer Advocates 

• National Association of Neighborhoods 

• National Community Reinvestment Coalition 

• National Consumer Law Center (on behalf of its low-income clients) 

• National Consumers League 

• National Council of La Raza 

• National Council of Women's Organizations 

• National Fair Housing Alliance 

• National Federation of Community Development Credit Unions 

• National Housing Resource Center 

• National Housing Trust 

• National Housing Trust Community Development Fund 

• National NeighborWorks Association 

• National Nurses United 

• National People's Action 

• National Orban League 

• Next Step 

• OpenTheGovemment.org 

• Opportunity Finance Network 

• Partners for the Common Good 

• PICO National Network 

• Progress Now Action 

• Progressive States Network 
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• Poverty and Race Research Action Council 

• Public Citizen 

• Sargent Shriver Center on Poverty Law 

• SEIU 

• State Voices 

• Taxpayer's tor Common Sense 

• The Association for Housing and Neighborhood Development 

• The Fuel Savers Club 

• The Leadership Conference on Civil and Human Rights 

• The Seminal 

• TICAS 

• U.S. Public Interest Research Group 

• UNITEHERE 

• United Food and Commercial Workers 

• United States Student Association 

• USAction 

• V cri s Wealth Partners 

• Western States Center 

• We the People Now 

• Woodstock Institute 

• World Privacy Forum 

• UNET 

• Union Plus 

• Unitarian Universalists for a Just Economic Community 

List of State and Local Partners 

AlaskaPIRG 

Arizona PIRG 

Arizona Advocacy Network 

• Arizonans For Responsible Lending 

Association for Neighborhood and Housing Development, NY 

• Audubon Partnership tor Economic Development LDC, New York NY 

BAC Funding Consortium Inc., Miami FL 

Beech Capital Venture Corporation, Philadelphia PA 

California PIRG 

California Reinvestment Coalition 

Century Housing Corporation, Culver City CA 

• CHANGER NY 

• Chautauqua Home Rehabilitation and Improvement Corporation, NY 

• Chicago Community Loan Fund, Chicago IL 

Chicago Community Ventures, Chicago IL 

• Chicago Consumer Coalition 

• Citizen Potawatomi CDC, Shawnee OK 
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• Colorado PIRG 

Coalition on Homeless Housing in Ohio 

• Community Capital Fund, Bridgeport CT 

Community Capital of Maryland, Baltimore MD 

• Community Development Financial Institution ofthe Tohono O'odham Nation, Sells AZ 

• Community Redevelopment Loan and Investment Fund, Atlanta GA 

• Community Reinvestment Association of North Carolina 

Community Resource Group, Fayetteville AR 

• Connecticut PIRG 

• Consumer Assistance Council 

• Cooper Square Committee (NYC) 

Cooperative Fund of New England, Wilmington NC 

• Corporacion de Desarrollo Economico de Ceiba, Ceiba PR 

• Delta Foundation, Inc., Greenville MS 

• Economic Opportunity Fund (EOF), Philadelphia PA 

• Empire Justice Center NY 

• Empowering and Strengthening Ohio's People (ESOP), Cleveland OH 

Enterprises, Inc., Berea KY 

• Fair Housing Contact Service OH 

Federation of Appalachian Housing 

Fitness and Praise Youth Development, lnc., Baton Rouge LA 

Florida Consumer Action Network 

• Florida PIRG 

Funding Partners for Housing Solutions, Ft. Collins CO 

Georgia PJRG 

• Grow Iowa Foundation, Greenfield JA 

• Homewise, Inc., Santa Fe NM 

• Idaho Nevada CDFT, Pocatello ID 

Idaho Chapter, National Association of Social Workers 

Illinois PIRG 

• Impact Capital, Seattle W A 

Indiana PIRG 

• lowaPIRG 

Iowa Citizens for Community Improvement 

• JobStart Chautauqua, Inc., Mayville NY 

La Casa Federal Credit Union, Newark NJ 

Low Income Investment Fund, San Francisco CA 

• Long Island Housing Services NY 

MaineStream Finance, Bangor ME 

• Maryland PIRG 

• Massachusetts Consumers' Coalition 

MASSPJRG 

Massachusetts Fair Housing Center 

• Michigan PIRG 
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• Midland Community Development Corporation, Midland TX 

• Midwest Minnesota Community Development Corporation, Detroit Lakes MN 

• Mile High Community Loan Fund, Denver CO 

• Missouri PlRG 

• Mortgage Recovery Service Center of L.A. 

• Montana Community Development Corporation, Missoula MT 

• Montana PlRG 

• New Economy Project 

• New Hampshire PIRG 

• New Jersey Community Capital, Trenton NJ 

• New Jersey Citizen Action 

• New Jersey PTRG 

• New Mexico P!RG 

• New York PIRG 

• New York City Aids Housing Network 

• New Yorkers for Responsible Lending 

• NOAH Community Development Fund, Inc., Boston MA 

• Nonprofit Finance Fund, New York NY 

• Nonprofits Assistance Fund, Minneapolis MN 

• North Carolina PIRG 

• Northside Community Development Fund, Pittsburgh P A 

• Ohio Capital Corporation for Housing, Columbus OH 

• Ohio PIRG 

• OligarchyUSA 

• Oregon State PJRG 

• OurOregon 

• PennPJRG 

• Piedmont Housing Alliance, Charlottesville VA 

• Michigan PIRG 

• Rocky Mountain Peace and Justice Center, CO 

• Rhode Island PIRG 

• Rural Community Assistance Corporation, West Sacramento CA 

• Rural Organizing Project OR 

• San Francisco Municipal Transportation Authority 

• Seattle Economic Development Fund 

• Community Capital Development 

• TexP!RG 

• The Fair Housing Council of Central New York 

• The Loan Fund, Albuquerque NM 

• Third Reconstruction Institute NC 

• Vermont PIRG 

• Village Capital Corporation, Cleveland OH 

• Virginia Citizens Consumer Council 

• Virginia Poverty Law Center 
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• War on Poverty -Florida 

WashPIRG 

• Westchester Residential Opportunities Inc. 

Wigamig Owners Loan Fund, Inc., Lac du Flamheau WI 

• WISPIRG 

Small Businesses 

• Blu 

Bowden-Gill Environmental 

• Community MedP AC 

• Diversified Environmental Planning 

• Hayden & Craig, PLLC 

Mid City Animal IIospilal, Phoenix AZ 

UNET 
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The Honorable Jeb Hensarling 

House of Representatives 

Chairman, Financial Services Committee 

2129 Rayburn House Office Building 

Washington, DC 20515 

The Honorable Randy Neugebauer 

House of Representatives 

July 11, 2016 

Chairman, Subcommittee on Financial Institutions and Consumer Credit 

2129 Rayburn House Office Building 

Washington, DC 20515 

Dear Chairmen Hensarling and Neugebauer: 

We are writing to urge you to reconsider legislation to repeal financial reforms that are 

critical to U.S. businesses and our customers. The debit card fee and rule reforms prescribed in 

Section 1075 of the Wall Street Reform and Consumer Protection Act have provided significant 

relief to Main Street businesses from anti-free market practices employed by global credit and 

debit card brands. 

As cornerstones in the business community, we are staunch supporters of free 

enterprise, and generally do not support any market intervention unless markets are not 

functioning efficiently. Credit and debit card acceptance is a prime example of a nonfunctioning marketplace. 

In an age where electronic payments have become virtually ubiquitous, very few 

businesses can choose not to accept credit and debit cards and still remain competitive. This 

dynamic has enabled global card brands to leverage a business model whereby they can change 

the rules of card acceptance at any moment. In many instances, these rule changes constitute 

an enormous free market intrusion and overstep by limiting the flexibility of card acceptors to 

make decisions about how to best run their businesses and serve their customers. 

The competitive gap between international and U.S. payment card acceptors is growing 

every day that the U.S. market fails to move toward a more transparent, equitable, and free 

market for card acceptance. There are several reforms still needed in the credit card 

marketplace to improve payment acceptance as the United States continues to adopt new and 

innovative ways to pay in the mobile and e-commerce spaces. Debit card reforms have been a 

major step in the right direction, and any removal of those reforms would be a monumental 

step in the wrong direction for U.S. businesses and consumers. 
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Our undersigned companies oppose any efforts to repeal debit card fee and rule 

reforms, including the recently introduced legislation (H.R. 5465) to dismantle the substantial 

progress debit reforms have made in correcting in part an otherwise non-functioning, and 

largely non-transparent card acceptance marketplace in the United States. We strongly urge 

you to reconsider the inclusion of any debit reform repeal language with your committee's 

ongoing efforts to modify the current financial regulatory landscape, and encourage you to 

remove Section 335 from the Financial CHOICE Act. Existing debit card fee reforms matter a 

great deal to our individual businesses. 

Sincerely, 

6040 LLC 

7-Eieven, Inc. 

Ace Energy 

Aloha Petroleum, Ltd. 

Alon USA 

AMC Entertainment Inc. 

American Airlines 

Andronico's Community Markets 

Appleseed IGA 

Barnes & Noble Education 

B&B Theatres 

Bealls Inc. 

Best Buy Co., Inc. 

Boscov's Department Store LLC 

Bow Tie Cinemas 

BrandsMart USA 

Broadway Truck Stops 

Brookshire's 

Casey's General Stores, Inc. 

Celebration! Cinema 

Cinemagic Stadium Theaters 

Cinemark USA, Inc. 

Columbiana Foods, Inc. 

The Convenience Group, LLC 

CST Brands, Inc. 

Cumberland Farms, Inc. 

CVS Health 

Davis Oil Company 

Deluxe Truck Stop 

Detroiter Travel Center 

Dhaliwal & Associates, Inc. 

Dillard's, Inc. 
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Encore Franchises, LLC 

E-Z Mart Stores, Inc. 

Fast Food Stores 

Fausto's Food Palace, LLC 

Fiesta Foods 

Foot Locker, Inc. 

Fresh by Brookshire's 

Friedman's Fresh markets 

Gate Petroleum Company 

GCM The Big Store 

GE Foodland, Inc. 

Georgia Theatre Company 

Giant Eagle, Inc. 

Goetz Companies 

Goody Goody Liquors, Inc. 

Greater Chicago 1-55 Truck Plaza 

Harkins Theatres 

Harps Food Stores, Inc. 

The Home Depot 

The Hub Convenience Stores, LLC 

The Hub Restaurant Group, LLC 

JCPenny 

J&T Business Management 

Jubitz Corporation 

Kenly 95 Petro 

The Kent Companies 

Kings Liquors, Inc. 

Knowlan's Super Markets dba Festival Foods 

Kohl's Department Stores, Inc. 

The Kroger Co. 

Kum & Go 

Kwik Chek Food Stores 

KwikTrip 

L Brands 

Liberty Petroleum Distributors 

Longhorn Liquor 

Lowe's 

Lynchburg College Campus Store 

Mackenthun's Supermarkets, Inc. 

Malco Theatres 

MAP CO 

Martin's Supermarkets 

The Markets, LLC. 

Maverick, Inc. 
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Metropolitan Theatres Corp. 

Nelson Coleman Jewelers 

Nordstrom 

Old Port Card Works 

Old Port Candy 

Pacific/Arclight Cinemas 

Pilot Flying J Travel Centers 

Potash Markets 

Premiere Cinema Corp. 

Publix 

Puckett Food Stores, Inc. 

RaceTrac 

Ralston Discount Liquor 

Red Lobster 

Regal Entertainment Group 

Ricker's 

Roselynn Inc. 

QuikTrip 

QVC, Inc. 

Sapp Bros. Travel Centers, Inc. 

Sears 

Sheetz, Inc. 

ShowBiz Cinemas 

Southern Theatres 

Southwest Airlines 

Spec's Wines, Spirits & Finer Foods 

Speedway LLC 

The Spinx Company 

Spring Market 

Sprint Food Stores, Inc. 

Square One Markets Inc. 

Super 1 Foods 

Target 

Travel Centers of America 

Twin Liquors 

Varsity Bookstore 

Verc Enterprises 

Village Commons Bookstore 

Walla Walla's Harvest Foods 

Walmart 

Wakefern Food Corp. 

Wawa, Inc. 

WB Liquors of Texas 

White's Travel Center LLC 
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Wingert's Food Center 

Wray's Food & Drug 

CC: House leadership 

Members of the United States House of Representatives 
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Douglas S. Kantor 

202 429 3?75 

dkantor@steptoe.com 

1330 Connecticut Avenue, NW 

Washington, DC 20036-1795 

202 429 3000 main 

www.steptoe.com 

July 11, 2016 

Chairman Jeb Hensarling 

Chairman 

House Committee on Financial Services 

2228 Rayburn House Office Building 

Washington, DC 20515-4305 

Dear Chairman Hensarling: 

On behalf of the National Association of Convenience Stores {NACS) and the Society of 

Independent Gasoline Marketers of America (SIGMA)! thank you for the opportunity to comment on 

the discussion draft of the Financial Choice Act. NACS and SIGMA have grave concerns about the 

current draft of the Act because it includes a provision to repeal debit swipe fee reform, also known as 

the Durbin Amendment 2 

Debit swipe fee reform has succeeded in addressing a damaging failure in the debit card market 

-a lack of competition that has led to inflated prices for retailers and consumers alike. These comments 

will briefly walk through the problems that made reform necessary as well as the clear, unassailable 

benefits that reform has brought. Overall, however, we cannot overstate the importance of maintaining 

these reforms. The convenience store and fuel retailing industry handles approximately one of every 30 

dollars spent in the United States, processing over 73 billion payment transactions per year. Debit swipe 

fee reform has a huge impact on many of those transactions. As such, it is the top public policy issue 

facing our industry and the top public policy issue we have ever faced. Our thoughts on other aspects of 

the draft legislation so pale in comparison to the importance of debit swipe fee reform that we will not 

bother to discuss them in these comments. We cannot begin to have a conversation about potential 

changes to the Dodd-Frank Wall Street Reform Act if there is any potential threat to debit swipe fee 

reform. We hope that the draft Financial Choice Act will be revised to remove any reference or changes 

to debit swipe fee reform so that we can engage in a constructive discussion of other public policy 

provisions in this area. 

1 NACS is an international trade association representing the convenience store industry with more than 2,200 

retail and 1,800 supplier companies as members, the majority of whom are based in the United States. SIGMA 

represents a diverse membership of approximately 260 independent chain retailers and marketers of motor fuel. 

The convenience store industry as a whole operates approximately 154,000 stores across the United States. 

2 Sec. 1075, Wall Street Reform and Consumer Protection Act: Reasonable Fees and Rules for Payment Card 

Transactions. 
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Background on Debit Cards 

In order to discuss debit swipe fee reform, it is helpful to have some background on the history 

of these payment cards. The debit card had a forerunner which was known as an automated teller 

machine (ATM) card. Banks pioneered the ATM card in the late 1960s and early 1970s, but the cards 

really proliferated in the 1980s. The reason banks wanted ATMs and the cards to operate them was 

that they faced high costs when their customers wanted access to the funds they kept in their bank 

accounts. Prior to the ATM, there were two principal ways that consumers accessed their funds: 1) 

withdrawals of cash; and 2) writing a paper check. When customers withdrew cash, the banks faced 

high costs including having enough physical branches to meet customers' demand for access to their 

money and they needed to pay tellers to complete these transactions. These arrangements caused 

particular logistical problems on Friday afternoons and paydays when large numbers of customers 

would visit bank branches at the same time. 3 The result was not only that the bank had to have large 

numbers of tellers on duty at those times but also that customers became frustrated with the wait 

times. And, all of these transactions happened with paper withdrawal slips completed by customers and 

tellers. Processing all that paper added cost to the process as well. 

Paper checks did not provide banks with the level of relief they may have hoped from the many 

costs of in-person withdrawals. Processing the paper was still expensive and, until the last few years, the 

original paper check had to be physically processed through the relevant Federal Reserve bank in order 

to fully complete the transaction. Paper checks were an expensive way for customers to access their 

funds as well. 

ATMs, however, helped solve many of these cost issues. They replaced paper processes with 

electronic processes. The ATMs reduced the number of bank branches and tellers that banks needed to 

service their customers. And, ATMs could function around the clock so they reduced the Friday 

afternoon lines that frustrated bankers and their customers. By giving customers cards with magnetic 

stripes and personal identification numbers (PINs), those customers could access their funds at their 

convenience. 

What those ATMs and cards did not do, however, was replace the need for checks. People still 

needed access to their funds in stores when they did not have sufficient cash (or did not want to use 

cash). Bankers reasoned that if people could have electronic access to their funds in stores, they would 

have no need to write checks. That was the origin of debit cards, which were also and continue to be 

referred to as "check cards." The debit card allowed customers the convenience of a check at the store 

(and more) and gave the banks an electronic transaction which was much cheaper for them to handle 

than the paper check. 

3 See e.g., Bernardo Batiz-Lazo, The Atlantic, A Brief History of the ATM (Mar. 26, 2015), available at 

"The 

most successful took place in Europe, where bankers responded to increasing unionization and 

rising labor costs by soliciting engineers to develop a solution for after-hours cash distribution ... The ATM freed the 

average consumer from lengthy queues for services that had previously been limited to bank hours."). 
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This was so important as a way to help banks cut their costs that financial incentives were 

provided to many merchants in order to give those merchants an incentive to install the necessary 

hardware to be able to accept debit cards at their points of sale. For other merchants, the transactions 

were free. There was, in fact, vibrant debate among the banks and debit networks as to whether there 

should ever be any swipe fees associated with debit transactions and, if there were, whether those fees 

should flow from merchants to the bank issuers of cards or whether those fees should flow from the 

bank issuers of cards to the merchants that deployed the equipment to accept the cards (which is the 

direction those fees flow on ATM transactions themselves). 

Ultimately, the decision was for fees (if there were any) to flow to bank issuers, but the fees 

were very low for many years. Into the mid-1990s, for example, the fees for most debit networks 

remained about five cents per transaction. At that point, however, Visa began to institute a new 

strategy. Visa saw debit cards as similar to its credit cards and wanted to dominate the debit business in 

the way it had come to dominate the credit card business. Visa executives decided the way to do that 

was to guarantee banks that issued cards with its logo larger revenues, through swipe fees, than those 

issuers would get from other debit networks. The strategy worked. Visa drove swipe fees higher and 

higher- and banks issued more and more debit cards with the Visa logo on them. MasterCard and other 

debit networks have never really recovered from the head start Visa got with this strategy. Visa 

dominates debit cards today far more than it dominates credit cards. But, the fees it sets for card-issuing 

banks were not established based on a need or a cost or fraud or any reason other than Visa saw an 

opportunity to grab market share and took it. 

Addressing Price-Fixing and Market Failure 

Visa's ability to dominate debit cards was made possible by credit cards. By the mid-1990s, 

credit cards had become an essential part of everyday commerce in the United States. Visa and 

MasterCard both had market power in the credit card market and had become well-established as 

household names. Visa's plan to become dominant in debit cards relied upon merchants paying large 

fees to bank issuers through swipe fees and Visa had a way to do that. Visa required that any 

merchant that wanted to accept its credit cards was required to also accept its debit cards. Visa knew 

that credit cards were firmly entrenched and consumers wanted to use them. Merchants knew this as 

well and figured they had to go along because they could lose customers to their competitors if they 

didn't take the customer's preferred credit card. 

In antitrust law, what Visa did was referred to as "tying." Visa tied acceptance of one product 

(credit cards) to acceptance of another product {debit cards). There was a lawsuit over this and it 

resulted in the largest antitrust settlement in U.S. history at that time ($3 billion) and an order that Visa 

and MasterCard could no longer tie credit and debit card acceptance. But the suit took until 2003 to 

conclude and, by that time, debit card usage had become so popular in it own right that not much 

changed. Visa and MasterCard continued to drive up debit swipe fees throughout the 2000s. 

But what are these swipe fees? These are the fees that the bank that issued the card charges. 

Why do Visa and MasterCard have anything to do with these fees? After all, Visa and MasterCard do not 
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coordinate what fees banks charge consumers on checking accounts or what interest rates banks pay or 

charge customers. On every other fee and rate, banks compete with each other. That is how a capitalist 

economy works. Prices get set through competitors independently determining their own prices. They 

have incentives to push their prices as low as they can in order to take customers (and market share) 

from their competitors. 

Swipe fees do not operate in a competitive market. Visa and MasterCard each set the fees for 

their card issuing banks-and those banks all charge the schedule of fees as set by their networks. The 

banks do not compete with each other on price. That fixing of prices completely undercuts the way that 

prices are disciplined by competition in a capitalist economy. But, the dynamic of having two dominant 

card networks arguably makes the price fixing even worse. Visa wants banks to issue more of its cards 

rather than MasterCard's cards. MasterCard wants just the opposite. They each try to do this by setting 

their schedule of swipe fees that the banks will receive on debit transactions higher than the other 

network. The result is not only price-fixing but an upward spiral of price-fixing. 

And, U.S. retailers are particularly vulnerable to the upward spiral of price-fixing because the 

U.S. retail market is so fiercely competitive. In many ways, U.S. retail is the envy of the world. Prices are 

transparent, and businesses compete hard for customers. In our industry, motor fuel prices are 

advertised on large signs that are visible to everyone as they drive past our stores. We have found that 

customers will turn across a busy street to save one cent per gallon on gasoline- and will drive miles out 

of their way to save three to five cents per gallon even though they may bum fuel driving that distance, 

which ultimately costs more than they will save. Because of this competitiveness, retailers will do just 

about anything to retain and increase their customers. This includes doing what they can to accept 

payment the way their customers want to pay. Economists with the Kansas City Federal Reserve have 

studied this dynamic and concluded that one reason Visa/MasterCard and their banks are able to fix 

fees at such a high level is that retailers are trying to take customers from each other all the time.' They 

know, and customers know, that customers have become conditioned to pay with their cards. So, 

retailers will pay supra-competitive fees that in many cases exceed their profits to try to keep their 

customers. As long as the fees don't actually put them out of business, retailers have to take the fees 

the networks fix. 

That vicious dynamic has made swipe fees the second largest operating cost for U.S. retailers 

(second only to labor). And, for more than a decade, swipe fees have been the fastest-growing cost for 

U.S. retailers- growing faster than everything from health care to energy costs and it's not even close. 

For the convenience store industry, we have now spent the past decade paying more in swipe fees than 

we have collected in pre-tax profits. The costs are staggering. In 2014, for example, the industry paid 

$11.4 billion in card fees compared to $10.4 billion in pre-tax profits5 

44 See generally Fumiko Hayashi, Federal Reserve Bank of Kansas City, A Puzzle of Card Payment Pricing: 

Why Are Merchants Still Accepting Card Payments? (Dec. 28, 2004), available at 

!J.llils:Uwww .kansascityfed .QrgipJJQJJ!;;!_!L1lirl.n!!11lLYYP.Q:LI\IJ_<lU:b,\;!!r:.<:l.i:\<:.£~Jliance11_:lil:Q..1,m:IJ. 

' NACS, State of the Industry, Annual Report 2014. 
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CARD FE.£$ VS. PRETAX PROflT 

That is the central problem that debit swipe fee reform addressed. Spiraling price-fixed fees 

undercut any semblance of a functioning market. Reform was necessary. 

The Reforms 

There were two primary changes brought about by debit swipe fee reform." The first limited 

price-fixing to a reasonable level and the second protected competition among debit networks for 

handling transactions. 

The changes to swipe fee pricing are often misunderstood. The law .9fl!Y. applies to debit swipe 

fees that are centrally price-fixed by the card networks. Any bank that competes by setting its own fees 

rather than being part of the network price-fix is not subject to fee regulation. That means any bank can 

voluntarily exempt itself from the fee regulation. And, that is in addition to the vast majority of banks 

(more than ninety-eight percent of them) that are already exempt from fee regulation because they 

have less than $10 billion in assets. For those very large banks that do want to participate in the card 

network swipe fee price-fix, they are limited to the Federal Reserve's regulation on how much pricefixing is reasonable. One could argue that no price-fixing at all is reasonable or should be allowed, but 

the Federal Reserve provided far more room than that to the networks and banks. The Fed limited pricefixing to twenty one cents, plus a one cent fraud prevention adjustment plus 0.05 percent of the 

transaction amount to cover all of the mean bank's fraud losses.7 That has resulted in an average debit 

6 Sec. 1075, Wall Street Reform and Consumer Protection Act: Reasonable Fees and Rules for Payment Card 

Transactions. 

7 See 12 C.F.R. § 235.7; Federal Reserve, Final Rule, Debit Card Interchange Fees and Routing, 76 Fed. Reg. 43394, 

43467 (July 20, 2011), ovoilable at https://www.gpo.gov/fdsys_Lp.Js~2011-07-20/pdf/2011-16861.pdf. 
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swipe fee for covered issuers of twenty-four cents per transaction. Given that more than ninety percent 

of these transactions cost less than two cents for an issuing bank to authorize, clear and settle, they are 

looking at profit margins of more than one thousand percent.8 The Fed's regulation, thereby, limits 

price-fixing, but it doesn't limit it much. 

The second change brought by swipe fee reform is purely pro-competitive. Card networks 

charge their own fees to merchants on debit transactions. Those fees are over and above the swipe fees 

charged by card issuing banks. By the 2000s, the major card networks had worked to push their 

competitor debit networks like Star, Pulse, NYCE, Shazam and others out of the debit routing business. 

This was often done through financial deals with the largest handful of U.S. banks. Buying competition 

out of the market was driving small debit networks out of business. Debit reform put a brake on this 

trend by ensuring that there remain at least two competitive options of networks on debit transactions 

that the customer purchasing that service (the merchant) could choose9 This part of the reforms does 

nothing more than ensure that competition among debit networks will be protected into the future. 

Success of Debit Swipe Fee Reform 

Given the problems with debit swipe fees prior to reform, the changes predictably have been 

successful. Price-fixing, for example, has been a bit more limited. Unfortunately, it still goes on. Visa 

and MasterCard continue to price the fees that their banks charge on all debit transactions. We had 

hoped some banks would choose to leave the price-fixing system, but the fees that the Fed's regulations 

allow are still too high to give banks any real incentive to end price-fixing. But, there are at least some 

guardrails on price-fixing and that is an improvement. 

And, there is more competition and innovation among networks. Smaller debit networks have 

expanded their offerings so that they can handle transactions through a variety of authentication 

methods. Visa and MasterCard have done the same. These innovations were long overdue and provide 

more competitive choices. There remain issues to be resolved as Visa and MasterCard continue to try to 

find ways to evade competition and constrain merchants so that they cannot make competitive choices, 

but we remain hopeful that the regulators and congressional oversight will ensure that, over time, 

competition does fully take hold among debit networks without interference by Visa and MasterCard. 

All of this has meant that the amount of unnecessary friction and cost in debit transactions has 

been reduced. And that, after all, ought to be the goal of any payment system -reducing friction and 

cost so that transactions are more efficient. Economist Robert Shapiro has found that these changes 

resulted in consumer savings of $5.8 billion and merchant savings of $2.6 billion in the first year of debit 

It is interesting to note that when forced to compete (if only a little bit) by debit reform, banks have found ways 

to make debit transactions more efficient, which means they pocket even more of the debit swipe fees they 

collect. See Merchant Advisory Group, Volume and Cost Trends in the Debit Card Industry (2015) (finding that 

between 2009 and 2013, issuers' self-reported average cost of handling debit transactions had decreased by 42%, 

from 7.6 cents to 4.4 cents). 

9 12 C.F.R. § 235.7; 76 Fed. Reg. at 43468. 
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reform alone. 10 And, efficiency has other benefits as well. Consumers pay more when lower prices give 

them more purchasing power. Those benefits supported an additional 37,000 jobs in the first year of 

reform alone as well. Moody's has found that these savings have helped shield consumers from the 

higher prices they would have paid from other business costs going up and that merchants were not 

pocketing savings from reformn In our industry, gas prices provide a clear lesson of how consumers 

benefit when retailers' costs are reduced. Over the last few years, gas prices have fallen dramatically 

from as much as $4 per gallon to, at times, about half that amount. Lower business costs for retailers 

help consumers save throughout the economy. 

Debit card issuing and usage has continued to flourish. While some banks had argued that debit 

cards would not be offered anymore, that has proven false. And, of course, that false criticism flies in 

the face of the history of debit cards which were (and remain) a cost saving benefit for banks even if no 

swipe fee revenue had ever been associated with them. The Philadelphia Federal Reserve found that 

banks with less than $10 billion in assets had benefitted from reform by increasing their market share 

and continuing to charge about the same rates for debit transactions that they did prior to reform. 12 

The GAO and Federal Reserve Board made similar findings." 

One additional note is that some falsely claimed that swipe fee reform could reduce consumer 

access to free checking. Such a claim is nonsensical as free checking has its own market dynamics based 

on banks competing for individual customers. That is why, for example, free checking fell dramatically 

from 2009 to 2010 - the financial crisis upended the market dynamics in that market. Nonetheless, 

some made that silly claim and it has proved false -though some critics still try to point to the 2009 

number for free checking (one year before reform was passed and two years before it went into effect) 

to show a false premise that cannot be shown by real facts. The simple fact is that more consumers have 

access to free checking today than did when debit reform was passed. For 2010, when reform became 

10 Robert J. Shapiro, Sonecon, LLC, The Costs and Benefits of Half a Loaf: The Economic Effects of 

Recent Regulation of Debit Card Interchange Fees (Oct.l, 2013). 

11 Moody's Investors Service, New Debit Rules Hurt Banks and Reshape the Payment Processor Market (June 20, 

2012) at 10. 12 James DiSalvo and Ryan Johnston, Federal Reserve Bank of Philadelphia Research Department, Banking Trends: 

How Dodd-Frank Affects Small Bank Costs (1" Quarter 2016). 

13 See e.g., Government Accountability Office, Community Banks and Credit Unions: Impact of the Dodd-Frank Act 

Depends Largely on Future Rule Makings, GA0-12-881 (Sept. 2012); Board of Governors of the Federal Reserve 

System Report, Average Debit Cord Interchange Fee by Payment Card Network (May 1, 2012). 
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law, the American Bankers Association found that 53 percent of Americans had free checking.14 For 

2015, the American Bankers Association found that 61 percent of Americans had free checking. 1

s 

The bottom line is that debit swipe fee reform was and remains desperately needed. 16 This 

sensible reform, which merely limited price-fixing and increased competition, has been a dear success. 

Repealing it would only take the country backwards. It would leave Visa and MasterCard free to price-fix 

fees that banks charge without limitation. It would dramatically curtail competition among debit 

networks. And, repeal would increase costs for everyday consumers and merchants thereby depressing 

sales and hurting the economy. In short, repeal would be a lose-lose-lose proposition. Only the largest 

20 or so debit-issuing banks along with Visa and MasterCard would really benefit. Everyone else, 

including small banks, would be worse off after repeal. 

NACS and SIGMA urge you in the strongest terms to remove the repeal of debit swipe fee 

reform from the Financial Choice Act before it is introduced as a bill. 

Best Regards, 

DouglasS. Kantor 

Cc: Members, House Financial Services Committee 

14 ABA Survey Shows Majority of Bank Customers Pay Nothing for Monthly Bank Services (Oct. 7, 2010), 

http:/ /www.prnewswire.com/news-releases/aba-survey-shows-majority-of-bank-customers-pay-nothing-formonthly-bank-services-104516904.html. 

American Bankers Association, Survey: Most Americans Pay Nothing for Bank Services (Aug. 18, 2015), available 

at http:f!www.aba.com/Press/Pages/081815SurveyonBankCo~.i!.'il2'5· 

16 Notwithstanding the success of debit swipe fee reform, U.S. merchants continue to pay some of the highest 

debit swipe fees across the globe. For example, in 2015, U.S. merchants paid almost 4 times more per debit card 

transaction than merchants in Belgium, Hungary, Iceland, Poland, and Spain-and 3.5 times more than merchants 

in the U.K. See Federal Reserve Bank of Kansas City, Credit and Debit Card Interchange Fees in Various Countries 

August 2015 Update, available at 

https://www.kansascityfed.org/~/media/files/publicat/psr/dataset/intl if august2015.pdf; The Cost of Accepting 

Credit Card Payments: NA vs EU, available at !ltm:LL.www.valuepenguin.com/interchange-fees-na-vs-·eu (last 

visited July 9, 2016). 

0