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S. HRG. 115–82 

FOSTERING ECONOMIC GROWTH: REGULATOR 

PERSPECTIVE 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

ON 

RECEIVING LEGISLATIVE AND REGULATORY RECOMMENDATIONS FROM 

FINANCIAL REGULATORS ON FOSTERING ECONOMIC GROWTH 

JUNE 22, 2017 

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

( 

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

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

MIKE CRAPO, Idaho, Chairman 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

PATRICK J. TOOMEY, Pennsylvania 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

DAVID PERDUE, Georgia 

THOM TILLIS, North Carolina 

JOHN KENNEDY, Louisiana 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

BRIAN SCHATZ, Hawaii 

CHRIS VAN HOLLEN, Maryland 

CATHERINE CORTEZ MASTO, Nevada 

GREGG RICHARD, Staff Director 

MARK POWDEN, Democratic Staff Director 

ELAD ROISMAN, Chief Counsel 

JOE CARAPIET, Senior Counsel 

GRAHAM STEELE, Democratic Chief Counsel 

LAURA SWANSON, Democratic Deputy Staff Director 

DAWN RATLIFF, Chief Clerk 

CAMERON RICKER, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

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(III) 

C O N T E N T S 

THURSDAY, JUNE 22, 2017 

Page 

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

Opening statements, comments, or prepared statements of: 

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

WITNESSES 

Jerome H. Powell, Member, Board of Governors of the Federal Reserve System ......................................................................................................................... 4 

Prepared statement .......................................................................................... 36 

Responses to written questions of: 

Senator Brown ........................................................................................... 111 

Senator Reed .............................................................................................. 114 

Senator Tester ........................................................................................... 115 

Senator Scott ............................................................................................. 116 

Senator Cotton ........................................................................................... 117 

Senator Warner ......................................................................................... 120 

Senator Warren ......................................................................................... 122 

Senator Tillis ............................................................................................. 124 

Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation ......... 6 

Prepared statement .......................................................................................... 40 

Responses to written questions of: 

Senator Brown ........................................................................................... 131 

Senator Heller ........................................................................................... 137 

Senator Reed .............................................................................................. 138 

Senator Tester ........................................................................................... 140 

Senator Scott ............................................................................................. 141 

Senator Sasse ............................................................................................ 142 

Senator Warner ......................................................................................... 152 

Senator Warrer .......................................................................................... 153 

Senator Tillis ............................................................................................. 157 

Senator Heitkamp ..................................................................................... 162 

Senator Cortez Masto ................................................................................ 164 

J. Mark McWatters, Acting Board Chairman, National Credit Union Administration ................................................................................................................... 7 

Prepared statement .......................................................................................... 67 

Responses to written questions of: 

Senator Brown ........................................................................................... 165 

Senator Scott ............................................................................................. 167 

Senator Sasse ............................................................................................ 172 

Senator Warner ......................................................................................... 175 

Senator Rounds ......................................................................................... 176 

Senator Kennedy ....................................................................................... 178 

Senator Tillis ............................................................................................. 185 

Keith A. Noreika, Acting Comptroller, Office of the Comptroller of the Currency ...................................................................................................................... 9 

Prepared statement .......................................................................................... 75 

Responses to written questions of: 

Senator Brown ........................................................................................... 191 

Senator Scott ............................................................................................. 193 

Senator Sasse ............................................................................................ 194 

Senator Cotton ........................................................................................... 202 

Senator Warner ......................................................................................... 203 

Page

IV 

Keith A. Noreika, Acting Comptroller, Office of the Comptroller of the Currency—Continued 

Responses to written questions of—Continued 

Senator Tillis ............................................................................................. 204 

Senator Kennedy ....................................................................................... 207 

Senator Cortez Masto ................................................................................ 209 

Charles G. Cooper, Banking Commissioner, Texas Department of Banking, 

on behalf of the Conference of State Bank Supervisors .................................... 10 

Prepared statement .......................................................................................... 90 

Responses to written questions of: 

Senator Sasse ............................................................................................ 212 

Senator Tillis ............................................................................................. 216 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter submitted by the U.S. Chamber of Commerce .......................................... 220 

Letter submitted by the Consumer Bankers Association ..................................... 222 

Letter submitted by the Credit Union National Association ............................... 227 

Letter submitted by FIA ......................................................................................... 230 

Letter submitted by the Financial Services Roundtable ...................................... 234 

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FOSTERING ECONOMIC GROWTH: 

REGULATOR PERSPECTIVE 

THURSDAY, JUNE 22, 2017 

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

The Committee met at 10:19 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of the Committee, 

presiding. 

OPENING STATEMENT OF CHAIRMAN MIKE CRAPO 

Chairman CRAPO. This hearing will come to order. Welcome, 

everyone. I apologize that we had to set the hearing back a few 

minutes, and you will see there are no Republicans in the room 

right now. They are having a conference right now on health care, 

and—— 

Senator DONNELLY. Can we have a few Committee votes here? 

[Laughter.] 

Senator HEITKAMP. Where is the room? 

[Laughter.] 

Chairman CRAPO. I will tell you where. If you look at where almost every reporter in the complex is, it is right in the middle of 

that circle. 

Senator BROWN. ‘‘Conference’’ would suggest ‘‘confer.’’ 

Chairman CRAPO. That is right. I figured we might get into that. 

Senator BROWN. Sorry, Mr. Chairman. 

Chairman CRAPO. But, anyway, thank you. They should be coming. I had to leave that conference early, and I expect that we will 

see more Republicans coming. You are going to the conference now? 

Senator DONNELLY. I am, yeah. 

[Laughter.] 

Senator DONNELLY. And I am as well informed as the rest of 

them. 

[Laughter.] 

Senator TESTER. We are heading to the briefing, Mike. 

Chairman CRAPO. All right. We do get along on this Committee. 

Senator HEITKAMP. I am hanging with you. 

Chairman CRAPO. Thank you, Heidi. You did well after Sherrod. 

So now let me re-collect my thoughts. The hearing is already in 

order, and we will hear from our financial regulators today to receive legislative and regulatory recommendations that would foster 

economic growth. 

Based on conversations I have had with current and former regulators, recommendations in Treasury’s recent report, testimony at 

2 

hearings before this Committee, and the recent EGRPRA report, I 

am convinced that there is growing support for legislation that promotes economic growth. 

I have had conversations with Members on both sides of the aisle 

who have told me that they are committed to pursuing bipartisan 

improvements. 

One of my key priorities in this Congress is passing bipartisan 

legislation to improve the bank regulatory framework and promote 

economic growth. 

In March, Senator Brown and I began our process to receive and 

consider proposals to help foster economic growth, and I appreciate 

the valuable insights and recommendations we have received. 

Most recently, we heard from small financial institutions and 

from midsize and regional banks about the need to tailor existing 

regulations and laws to ensure that they are proportional and appropriate. For example, something that witnesses highlighted that 

has bipartisan agreement is that the regulatory regime for small 

lenders is unnecessarily burdensome. 

There also seems to be genuine interest by Members in assessing 

whether certain rules applied based on asset threshold alone reflect 

the underlying systemic risk of financial institutions. 

Specifically, there is interest in finding bipartisan solutions 

aimed at: tailoring regulation based on the complexity of banking 

organizations; changing the $50 billion threshold for SIFIs; exempting more banks from stress testing; simplifying the Volcker rule; 

and simplifying small-bank capital rules. 

These are just a few of the many issues that the Committee is 

reviewing. 

Today I look forward to hearing recommendations from our financial regulators on these issues. And as this process continues, 

I will be working with all Members of the Committee from both 

sides of the aisle to bring strong, robust bipartisan legislation forward. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman, for holding today’s 

hearing. I would like to welcome our five witnesses. Thank you for 

joining us, those who have been here a while and done this and 

those who are new to this Committee and to this process. 

I am guessing that none of our witnesses today had their homes 

foreclosed on in the last decade. I would make the assumption that 

none of you lost your jobs because of what happened because your 

company went out of business. I would bet that none of you saw 

almost your entire savings, retirement savings, disappear. But perhaps you know someone that did. Perhaps, as Lincoln said, we all 

need to get out and get our public opinion baths more than we do 

as elected officials and as regulators, or as Pope Francis said, admonished his parish priests, ‘‘Go out and smell like the flock.’’ Perhaps we all need to do that better than we do. 

Wall Street greed, the resulting financial crisis, what it did to 

millions of Ohioans and so many of our constituents is a lesson, collective amnesia in this body notwithstanding, is a lesson we need 

3 

to learn, to remember, and to act on. We must never forget those 

stories. 

Many of you have heard, my colleagues have, my wife and I live 

in Cleveland, Ohio, ZIP Code 44105. Ten years ago right now, they 

had more foreclosures in my ZIP Code, 44105, Cleveland, than any 

ZIP Code in the United States of America. 

Wall Street reform created a more stable financial sector by 

strengthening the capital position of the Nation’s largest banks. 

American consumers have recovered $12 billion of their hardearned money because we now have an independent agency, the 

CFPB, protecting them from scams and abuse. Senator Reed, the 

most senior Democrat on this Committee, is working on legislation 

particularly aimed at the work and to expand the work Holly 

Petraeus did at CFPB on behalf of servicemembers, and if we have 

military bases in our States, we all know what kind of characters 

hang right outside these military bases—payday lenders, other 

predators scamming these servicemen- and -women who are often 

vulnerable in their economic situation. It is a question, as Ms. 

Petraeus and Senator Reed said yesterday, when they have their 

financial security so challenged by scam artists. 

That is why the report that the Treasury Department released 

last week is just misguided. Their report is a Wall Street wish list 

specifically targeting the capital and liquidity rules for the largest 

banks and seeking to undermine the CFPB. The report takes as 

gospel that more lending and leverage is the best way to create economic growth. Data shows that lending has, in fact, been healthy 

and at sustainable levels since the crisis. The last thing we should 

advocate for is going back to the levels of 2001 and 2002 and 2003 

which led to the subprime crisis, a time period which the Treasury 

report holds up as an example. 

There is no evidence that relaxing rules will lead banks to lend 

more. It is just as likely that bank executives will pass any savings, 

if history is an indication, it just as likely they will pass any savings along to themselves, shockingly, and their shareholders. I am 

concerned that many of Treasury’s recommendations will undermine or delay the effectiveness of bank supervision, something that 

was severely lacking leading up to the crisis. These misguided 

ideas include additional layers of cost-benefit analysis, more obstacles to supervisory actions, weakened leverage rules, changes to 

stress tests that will allow the banks to game the stress tests, and 

changes to living wills. These recommendations would make the 

watchdogs’ jobs harder and prevent them from spotting risks before 

they again balloon out of control. They would make our system less 

stable. They would leave consumers more vulnerable. 

The Treasury report missed an opportunity to put forth an agenda that actually does create real economic growth for our country. 

At every turn, the Administration has advocated for an agenda 

that hurts average Americans, more handouts for Wall Street, 

more tax cuts for millionaires and billionaires, less health care for 

working people, cuts to programs that help those who need it the 

most. 

There are ideas worth considering in the Treasury report, as evidenced by the overlap with some of the recommendations in the 

agency’s EGRPRA review for small institutions. But many of 

4 

Treasury’s recommendations seem like a steep price to pay for our 

country after the 2008 financial crisis. We have seen the damage 

that happens when the Administration pushes financial watchdogs 

to prioritize special interests over working people. It is pretty telling that Treasury met with 17 representatives for every one advocate for ordinary Americans—17 representatives for every one advocate for ordinary Americans—and that 31 out of 40 requests 

made by those representing the biggest banks were included in the 

reports. 

The five of you have a very, very important job. I hope that you 

do not have that same bias that this Treasury Department does. 

Again, 31 out of the 40 requests put forward by the largest banks 

were included in this report. I hope this Committee can focus on 

the issues that will reduce burdens for small institutions and 

struggling communities, will help consumers, and in the end will 

create long, sustainable economic growth. 

Mr. Chairman, I look forward to working with you and our colleagues, but it would be a shame if we forgot so soon in less than 

a decade, or in about a decade, the lessons of the Great Recession. 

Chairman CRAPO. Thank you, Senator Brown. 

Now we will turn to oral testimony, and first we will receive testimony from Governor Jay Powell, a Member of the Board of Governors of the Federal Reserve System. 

Next we will hear from Chairman Martin Gruenberg, Chairman 

of the Federal Deposit Insurance Corporation. 

Then we will hear from Acting Chairman Mark McWatters, Acting Chairman of the National Credit Union Administration. 

Next we will hear from Acting Comptroller Keith Noreika—did 

I get that right? 

Mr. NOREIKA. Close enough. 

Chairman CRAPO. Thank you—who is Acting Comptroller of the 

Office of the Comptroller of the Currency. 

And, finally, we will hear from Commissioner Charles Cooper, 

Commissioner of the Texas Department of Banking, on behalf of 

the Conference of State Bank Supervisors. 

Each witness is recognized for 5 minutes. Mr. Powell, you may 

proceed. 

STATEMENT OF JEROME H. POWELL, MEMBER, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. POWELL. Thank you, Chairman Crapo, Ranking Member 

Brown, and Members of the Committee. I appreciate the opportunity to testify here today on the relationship between regulation 

and economic growth. We need a resilient, well-capitalized, wellregulated financial system that is strong enough to withstand even 

severe shocks and support economic growth by lending through the 

economic cycle. And the Federal Reserve has approached the postcrisis regulatory and supervisory reforms with that outcome in 

mind. 

There is little doubt that the U.S. financial system is stronger 

today than it was a decade ago. As I discuss in significantly more 

detail in my written testimony, loss-absorbing capacity among 

banks is substantially higher as a result of both regulatory requirements and stress testing exercises. 

5 

The banking industry, and the largest banks in particular, face 

far less liquidity risk than before the crisis, and progress in 

resolution planning by the largest firms has reduced the threat 

that their failure would pose. These efforts have made U.S. banking firms both more robust and more resolvable. 

Turning to the subject of today’s hearing, evidence overwhelmingly shows that financial crises can cause severe and lasting damage to the economy’s productive capacity and growth potential. 

Post-crisis reforms to financial sector regulation and supervision 

have been designed to significantly reduce the likelihood and severity of future financial crises, and we have sought to accomplish this 

goal in significant part by reducing both the probability of the failure of a large banking firm and the consequences of such a failure 

were it to occur. 

As I mentioned, we substantially increased the capital, liquidity, 

and other prudential requirements for large banking firms. These 

measures are not free. Higher capital requirements increase bank 

costs, and at least some of those costs will be passed along to bank 

customers and shareholders. But in the longer term, stronger prudential requirements for large banking firms will produce more 

sustainable credit availability and economic growth through the 

cycle. 

Our objective should be to set capital and other prudential requirements for large banking firms at a level that protects financial 

stability and maximizes long-term, through-the-cycle credit availability, and economic growth. And to accomplish that goal, it is essential that we protect the core elements of these reforms for our 

most systemic firms in capital, liquidity, stress testing, and resolution. 

With that in mind, I will highlight briefly five key areas of focus 

for regulatory reform. 

The first is simplification and recalibration of regulation of smalland medium-sized banks. We are working to build on the relief 

that we have provided in the areas of call reports and exam cycles, 

by developing a proposal to simplify the generally applicable capital 

framework that applies to community bank organizations. 

The second area is resolution plans. The Fed and the FDIC believe that it is worthwhile to consider extending the cycle for living 

will submissions from annual to once every 2 years and focusing 

every other of these filings on topics of interest and material 

changes from the prior submission. We are also considering other 

changes as detailed in my written testimony. 

Third, the Fed and others are looking at the Volcker rule implementing regulation and asking whether it most efficiently achieves 

its policy objectives, and we look forward to working with all four 

other Volcker agencies to find ways to improve that regulation. In 

our view, there is room for eliminating or relaxing aspects of the 

implementing regulation in ways that do not undermine the 

Volcker rule’s main policy goals. 

Fourth, we will continue to enhance the transparency of stress 

testing and CCAR. We will soon seek public feedback concerning 

possible forms of enhanced disclosure, including a range of indicative loss rates predicted by our models for various loan and securities portfolios, and information about risk characteristics that 

6 

contribute to the loss estimate ranges. We will also provide more 

detail on the qualitative aspects of stress testing in next week’s 

CCAR announcement. 

Finally, the Federal Reserve is taking a fresh look at the enhanced supplementary leverage ratio. We believe that the ratio is 

an important backstop to the risk-based capital framework, but 

that it is important to get the relative calibrations of the leverage 

ratio and the risk-based capital requirements right. 

In conclusion, U.S. banks today are as strong as any in the 

world. As we consider the progress that has been achieved in improving the resiliency and resolvability of our banking industry, it 

is important for us to look for ways to reduce unnecessary burden. 

We also have to be vigilant against new risks that develop. In all 

of our efforts, our goal is to establish a regulatory framework that 

helps ensure the resiliency of our system, the availability of credit, 

economic growth, and financial market efficiency, and we look forward to working with our fellow agencies and with Congress to 

achieve these goals. 

Thank you. 

Chairman CRAPO. Thank you, Mr. Powell. 

Mr. Gruenberg. 

STATEMENT OF MARTIN J. GRUENBERG, CHAIRMAN, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. GRUENBERG. Thank you, Mr. Chairman. 

Chairman Crapo, Ranking Member Brown, and Members of the 

Committee, I appreciate the opportunity to testify today on legislative and regulatory relief recommendations. 

It has been nearly a decade since the onset of the worst financial 

crisis since the 1930s. In that time, the U.S. banking industry has 

experienced a gradual but steady recovery that has put it in a 

strong position to support the credit needs of the economy. 

The economic expansion that began in 2009 is now approaching 

its ninth year, making it the third longest expansion on record. 

While this expansion has been marked by the slowest pace of economic growth and the lowest short-term interest rates of any expansion of the past 70 years, the sustained period over which it has 

occurred, combined with the regulatory changes implemented in 

the post-crisis period, have enabled FDIC-insured institutions to 

make substantial progress in strengthening their capital and liquidity, improving their asset quality, and in raising their net income to record highs. 

The improvements have occurred across the industry, including 

at community banks, which have outpaced noncommunity banks by 

a number of measures during this post-crisis period. 

The experience of the crisis and its aftermath suggests that a 

strong and well-capitalized banking system is a source of strength 

and support to our national economy. The reforms implemented in 

the post-crisis period, particularly in regard to large institutions, 

have been aimed at making the system more resilient to the effects 

of future crises or recessions and better able to sustain credit availability throughout the business cycle. 

Nonetheless, the FDIC remains cognizant of the costs imposed by 

regulatory requirements, particularly for smaller institutions, 

7 

which operate with fewer staff and other resources than their larger counterparts. 

In March, the FDIC, along with the OCC and the Federal Reserve, submitted a report to Congress pursuant to the Economic 

Growth and Regulatory Paperwork Reduction Act, or EGRPRA. 

The agencies jointly have taken or are in the process of taking a 

number of actions to address comments received during the 

EGRPRA process. 

In addition to actions already taken to reduce examination frequency, reduce reporting requirements, and ease appraisal requirements, the agencies are developing a proposal to simplify the generally applicable capital framework for small banks. 

Additionally, the FDIC would support three legislative reforms 

raised by EGRPRA commenters. First, the FDIC would support raising the $10 billion in total as- sets threshold to $50 billion for conducting annual stress tests required by statute, while retaining supervisory authority to require 

stress testing if warranted by a banking organization’s risk profile 

or condition. 

Second, the FDIC would be receptive to legislation further increasing the asset threshold for banks eligible for an 18-month 

exam cycle from $1 billion to $2 billion. 

Finally, the FDIC supports legislative changes that would create 

a new appraisal residential real estate threshold exemption that 

would minimize burden for many community banks. 

In addition to these EGRPRA reforms, the FDIC and the Federal 

Reserve are exploring ways to improve the living will resolution 

planning process. We believe it is worthwhile to consider extending 

the cycle for living will submissions from annual to once every 2 

years, and focusing every other filing on key topics of interest and 

the material changes from the prior full plan submission. In addition, there may be opportunities to reduce the submission requirements for a large number of firms due to their relatively small, 

simple, and domestically focused banking activities. Such an approach could limit full plan filing requirements to firms that are 

large, complex, or have a systemically critical operation. 

Mr. Chairman, it is desirable that financial regulations be simple 

and straightforward, and that regulatory burdens and costs be 

minimized, particularly for smaller institutions. In considering 

ways to simplify or streamline regulations, however, it is important 

to preserve the gains that have been achieved in restoring financial 

stability and the safety and soundness of the U.S. banking system 

in the post-crisis period. 

Mr. Chairman, that concludes my statement, and I would be glad 

to respond to questions. 

Chairman CRAPO. Thank you, Mr. Gruenberg. 

Mr. McWatters. 

STATEMENT OF J. MARK MCWATTERS, ACTING BOARD 

CHAIRMAN, NATIONAL CREDIT UNION ADMINISTRATION 

Mr. MCWATTERS. Good morning, Chairman Crapo, Ranking 

Member Brown, and Members of the Committee. Thank you for the 

opportunity to participate in this important hearing on regulatory 

relief for financial institutions. 

8 

Since 1987, the NCUA has undertaken a rolling 3-year review of 

all of our rules, and although not required by law, the NCUA is an 

active participant in the EGRPRA process. After independent analysis, the agency has agreed to comply with the spirit of the recently 

issued Executive orders addressing the regulation of the financial 

services sector and the overall structure of the Federal financial 

regulators. 

The NCUA is unique among Federal financial regulators because 

of its structure as a one-stop shop. The NCUA insures, regulates, 

examines, supervises, charters, and provides liquidity to credit 

unions. My mandate to staff is to make the NCUA even more efficient, effective, transparent, and fully accountable while protecting 

America’s $1.3 trillion credit union community, its 108 million 

largely middle-class account holders, and the safety and soundness 

of the National Credit Union’s Share Insurance Fund. 

The NCUA is committed to promulgating targeted regulation 

accompanied by a thoughtfully tailored supervisory and examination programs as ill-considered, scattershot rules and compliance 

protocols stifle innovation and the ability of credit unions to offer 

appropriately priced services to their members. The agency endeavors to identify emerging adverse trends in a timely manner and remains mindful that regulators should learn from the past, yet focus 

on the future. Fighting the last battle gave us the S&L, leveraged 

buyout, dot-com crises and laid the foundation for the near collapse 

of our economy in September 2008. A prudently regulated credit 

union community grows, thrives, and prospers and, as such, protects the taxpayers from bailout risk. This approach is consistent 

with the theme of the report recently issued by the U.S. Treasury 

Department and the view that well-capitalized and appropriately 

managed financial institutions warrant a reduced regulatory burden. 

Along these lines, within the past 18 months, the NCUA has: 

one, implemented a broad-based change to our member business 

lending rule; two, modernized our field of membership rule; three, 

revised our entire examination approach; four, worked to enhance 

the due process rights of credit unions and their members; five, 

issued a proposed regulation requiring the disclosure of compensation payments related to a voluntary merger; six, developed an approach to streamline and modernize the rules for corporate credit 

unions and the stress testing of the largest credit unions; seven, 

issued an ANPR requesting comments on the issuance of supplemental capital for risk-based net worth purposes; eight, invited 

comments and revisions on our call report; nine, implemented our 

enterprise solutions modernization program; ten, undertaken the 

development of a credit union advisory council; and, eleven, initiated a full review of the NCUA’s operations and management. 

In addition to these actions, I intend to consider revisions to the 

agency’s risk-based net worth rule before its effective date in 2019. 

The recent EGRPRA report also highlights three beneficial legislative measures that would: one, provide the NCUA with greater 

flexibility in designing capital standards for credit unions; two, permit all credit unions to add underserved areas to expand access to 

financial services for the unbanked and the underbanked; three, 

9 

provide credit unions with more flexibility to extend credit to small 

businesses to fuel economic growth. 

In closing, the NCUA remains committed to providing regulatory 

relief for the credit union community in compliance with the Federal Credit Union Act and streamlining and modernizing the operations of the agency while focusing on our prime role as a prudential regulator. We also stand ready to work with you and your colleagues on your legislative priorities. 

I look forward to your questions. Thank you. 

Chairman CRAPO. Thank you, Mr. McWatters. 

Mr. Noreika. 

STATEMENT OF KEITH A. NOREIKA, ACTING COMPTROLLER, 

OFFICE OF THE COMPTROLLER OF THE CURRENCY 

Mr. NOREIKA. Thank you, Mr. Chairman. 

Chairman Crapo, Ranking Member Brown, and Members of the 

Committee, thank you for the opportunity to testify. We all share 

the goal of a strong national economy. Since becoming the Acting 

Comptroller, I have worked with staff and colleagues to promote 

economic growth and opportunity. I am honored to serve in this 

role until the Senate confirms the 31st Comptroller. 

During my service, the OCC will carry out its mission to maintain the safety and soundness of our Federal banking system and 

will do so consistently with the President’s Executive Order on 

Core Financial Principles and the recent Treasury report. 

Our country has the world’s most respected banking system. 

When running well, it powers economic growth and prosperity. To 

run well, we must balance prudent regulations with sound opportunities for expansion. It has been 10 years since the Great Recession 

began. It is time again for a constructive, bipartisan conversation 

about how to recalibrate our regulatory framework. In doing so, we 

must carefully consider the cumulative effects of our actions, especially on community and midsize banks. 

When I arrived at the OCC 6 weeks ago, I sought the views of 

all affected parties on the issues facing the agency and the industry. I sought ideas from our boots on the ground to reduce unnecessary regulatory requirements and encourage economic growth. Our 

staff has submitted more than 400 suggestions and are excited to 

use our collective expertise to contribute to more efficient and effective regulation. 

I also sought the views of colleagues at the Federal and State 

levels, bankers, trades, scholars, community groups, and others on 

what we can do to make our regulatory framework better for everyone. The response has been overwhelming. People from all sectors 

have accumulated 10 years of experience and want to share it so 

that we can continue to have the strongest banking system in the 

world. 

My testimony offers legislative options for your consideration 

that address two general issues that have become apparent in my 

canvassing of affected parties. 

First, I repeatedly hear about regulatory redundancy. My support of legislative action to rationalize our regulatory framework 

relies on our organically developed decentralization of authority 

and responsibility. Independent regulators for different and unique 

10 

financial sectors ensure multiple points of view and important 

checks and balances. But we must be mindful that as our system 

has evolved, it has created unnecessary regulatory burden and 

overlap. The need now is to recalibrate roles and responsibilities to 

maximize efficiency and eliminate growth-inhibiting redundancy. 

Second, it has become apparent that we need a right-sizing of 

regulation to eliminate inflexible, one-size-fits-all requirements 

that result in banking regulation that simultaneously under- and 

over-regulates bank activities. I want to highlight four ideas from 

my written testimony that respond to these issues. 

First, Congress could streamline the regulation of smaller, less 

complex bank holding companies by amending the law so that 

when a small depository institution constitutes the majority of its 

holding company’s assets, the Federal regulator of the depository 

institution would have sole examination and enforcement authority 

for the holding company as well. 

Second, Congress could eliminate 19th century impediments for 

smaller, less complex national banks to operate without a holding 

company by allowing these banks to have the same access as State 

banks to the publicly traded markets. 

Third, Congress could eliminate a statutory barrier to entry for 

new community banks by allowing de novo banks to obtain deposit 

insurance automatically when chartered by the OCC. 

Finally, a bipartisan consensus is emerging that the Volcker rule 

needs clarification and recalibration to eliminate burden on banks 

that do not engage in covered activities and do not present systemic risks. Various options exist that can be pursued at both the 

congressional and agency levels. I hope that we, the agencies, can 

move forward on seeking public comment on this topic soon. 

My testimony provides a summary of the EGRPRA report as well 

as other ideas to consider. Today’s conversation is a healthy one, 

and I look forward to working with the Committee as we move 

ahead. 

Thank you, and I look forward to answering your questions. 

Chairman CRAPO. Thank you, Mr. Noreika. 

Mr. Cooper. 

STATEMENT OF CHARLES G. COOPER, BANKING COMMISSIONER, TEXAS DEPARTMENT OF BANKING, ON BEHALF OF 

THE CONFERENCE OF STATE BANK SUPERVISORS 

Mr. COOPER. Good morning, Chairman Crapo, Ranking Member 

Brown, and Members of the Committee. My name is Charles Cooper. I am the Commissioner of the Texas Department of Banking, 

and I serve as the immediate past Chair of the Conference of State 

Bank Supervisors. It is my pleasure today to testify on behalf of 

CSBS. 

We applaud the Committee’s focus on economic growth and banking. I have more than 47 years in the financial service industry, 

both as a banker and as a State and Federal regulator. Over these 

years, few things have become more evident than the value of community banks. They are vital to our economy and our financial stability. 

11 

Also over these years, I have seen many swings in the regulatory 

pendulum. Extreme swings to either side are wrong. We must all 

seek ways to ensure a balanced approach. 

State banking regulators charter and supervise over 78 percent 

of our Nation’s banks. We continue to see firsthand that community banks are disproportionately burdened by oversight that is not 

tailored to their business model or activities. 

Looking beyond the industry’s aggregate performance data, we 

have lost 2,156 banks over the last 8 years. That is 300 banks a 

year, nearly a community bank every day. And we have had only 

five new banks coming in. 

This consolidation cannot continue if we are to have a robust 

banking sector. There are many factors to blame for this consolidation, but regulatory burden is certainly one of them. 

We may have the best opportunity in years to appropriately calibrate our regulatory approach, especially for community-based institutions. I believe that this can be done while maintaining strong 

and effective regulation that ensures safety and soundness, protects our consumers, and meets the economic needs of our communities. 

State regulators were part the EGRPRA process, and we engaged 

with the Treasury Department in their recent work. With nearly 

100 recommendations in the Treasury report and 440 pages of comments and recommendations in the EGRPRA report, there is no denying that we have a problem with the volume, complexity, and 

overall approach of the regulatory framework. 

I would like to point out that the sheer volume of regulations 

confounds the best of our bankers, but the issue of regulatory burden goes well beyond the laws and regulations. It includes the interpretations and supervisory techniques that are utilized. How we 

operate our agencies can contribute to regulatory burden. How or 

why we got to this point is not as important at the opportunity we 

have to come together to address it. There are tangible recommendations in these reports that present opportunities for both 

Congress and regulators to have a positive impact on the banking 

industry and our citizens. 

My written testimony makes several recommendations for rightsizing bank regulation. 

Number one, reducing the complexity of the capital rules for 

smaller banks; 

Two, mortgage rule relief for community banks holding loans in 

portfolio; 

Three, greater transparency and timeliness in fair lending supervision for community banks; 

And, number four, an activities-based approach to defining community banks for regulatory relief. 

Our community banks need the relief to do what they do best, 

and that is to serve their communities and their customers. Regardless of the charter or agency, we are all in this together. We 

must ensure that sound judgment and appropriate flexibility are 

central to our supervisory approach. 

Thank you for the opportunity to testify today, and I look forward to your questions. 

12 

Chairman CRAPO. Thank you, Mr. Cooper. And I want to also 

thank all of you for the work you do and for the excellent testimony 

you have just provided. You each provided some significant insights 

and some significant suggestions for how we could improve. I appreciate that. 

My first question I would like to have each one of you answer, 

and when we do this, it sometimes takes up our whole time if we 

get long answers. So if you could, I would appreciate the panel 

being as concise as you can be so that I can get through a few questions. 

The first question is: Over the past few years, Congress has been working with the regulations to change the $50 billion SIFI threshold. I appreciate your willingness to work with me on this issue. 

Do you agree that changing the $50 billion SIFI threshold would 

be appropriate? And I will start with you, Governor Powell. 

Mr. POWELL. Yes. 

Chairman CRAPO. That is a good, short answer. 

Mr. Gruenberg. 

Mr. GRUENBERG. Chairman, I would have some caution in regard 

to that. I would not argue that a $50 billion institution is necessarily systemic. On the other hand, from the perspective of the 

deposit insurer, I would note that the most expensive bank failure 

in this crisis and in the history of the FDIC was the failure of a 

$30 billion thrift institution, IndyMac, which ultimately cost the 

Deposit Insurance Fund over $12 billion. So I would just note that 

even though an institution of that size might not raise systemic implications, it could still have significant consequences certainly for 

the Deposit Insurance Fund. 

Chairman CRAPO. So are you saying you do not believe we should 

address the $50 billion threshold or that we should have some tailoring and adequate ability to analyze the risks? 

Mr. GRUENBERG. I would be more inclined toward tailoring, Senator. 

Chairman CRAPO. All right. Thank you. 

Mr. MCWATTERS. Mr. MCWATTERS. Yes, but when it comes to the credit union community itself, and concepts of increasing that number to $50 billion 

for stress testing, I think we need to be thoughtful on the range 

between $10 and $50 billion. A $30 billion credit union loss to the 

Share Insurance Fund would be quite a bit more dramatic than a 

$30 billion loss to the FDIC Fund. 

Thank you. 

Chairman CRAPO. Thank you. 

Mr. Noreika. 

Mr. NOREIKA. Thank you, Chairman Crapo. Yes, we believe the 

$50 billion threshold needs to be changed or reevaluated. What 

concerns us is that it is being used as a competitive barrier to 

entry because the costs of regulation increase dramatically as you 

cross that $50 billion threshold. For the largest banks, the gap is 

about 33 times that of smaller banks. The largest banks get a competitive advantage off that. And we have only ever seen one or two 

banks cross that threshold. That is not good for the competitive environment or consumers. 

Chairman CRAPO. Thank you. 

13 

Mr. Cooper. 

Mr. COOPER. Yes, subject to risk profiling. 

Chairman CRAPO. All right. Thank you. And my next question is 

also one that I am going to ask each of you to address. It is a more 

general question, but, again, if you could be very concise, I would 

appreciate it. 

I would just like to ask each of you to identify one area that we 

should examine—and you may have already done so in your testimony, if that is what you want to pick—of where tailoring of our 

regulation is needed. Governor Powell? 

Mr. POWELL. I will start with Volcker. Volcker was designed to 

address proprietary trading, and the insight that that should not 

happen in a depository institution probably could have been limited 

to a handful of firms. But the law applies to all banks. So, you 

know, we probably have some authority under the statute to do 

this, but I think we would support a significant tailoring of the application of Volcker so that really it falls on the banks that have 

big trading books, and it falls much more lightly as you go down. 

It is very important that, you know, the intensity of regulation be 

tailored appropriately for the risks that the institutions present. 

Chairman CRAPO. All right. Thank you. 

Mr. Gruenberg. 

Mr. GRUENBERG. Mr. Chairman, I think I would focus on the 

issues relating to small-bank capital compliance, particularly riskbased capital. I do think there is an opportunity there for smaller 

institutions, say under $10 billion, that are strongly capitalized on 

the leverage ratio to provide some relief in regard to risk-based 

capital, particularly if they are not engaged in a limited set of specified activities. 

Chairman CRAPO. Thank you. 

Mr. McWatters. 

Mr. MCWATTERS. I would like to see the Federal Credit Union 

Act amended to give all credit unions the ability to add underserved areas to their field of membership. Currently, that is limited, believe it or not. So people who are unbanked and underbanked, where there may be a credit union within a specific field 

of membership, simply cannot join that credit union. 

Chairman CRAPO. Thank you. 

Mr. Noreika and Mr. Cooper, I have 22 seconds. 

Mr. NOREIKA. Thank you. I would just refer you to our testimony 

where we talk about a regulatory traffic light system so that where 

there are overlapping jurisdictions between the regulators, we have 

a system where one regulator can take the lead and the others 

then can join or be foreclosed. 

Chairman CRAPO. Thank you. 

Mr. Cooper. 

Mr. COOPER. Reduce the complexity of capital rules for smaller 

banks. 

Chairman CRAPO. Thank you, and I appreciate you working with 

me on the timeframe. 

Senator Brown. 

Senator BROWN. Well done. 

Last week, Treasury, as I mentioned in my opening statement, 

put out a report suggesting changes to the regulatory structure. We 

14 

know the impact of deregulatory policies advocated by Departments 

of Treasury in past Administrations, and following the Chairman’s 

construct, I would like to as a series of questions, and I think you 

can do these with ‘‘yes’’ or ‘‘no.’’ I would ask you if you would. 

All five of your represent independent agencies. And starting 

with you, Governor Powell, do you commit to being independent 

from the Administration? 

Mr. POWELL. Yes. 

Mr. GRUENBERG. Yes 

Mr. MCWATTERS. Yes. 

Mr. NOREIKA. Yes. 

Mr. COOPER. Yes. 

Senator BROWN. OK. Thank you. Again, do you commit to speaking out if you think a legislative or regulatory recommendation 

threatens the financial stability of our economy or the safety and 

soundness of our banking system? Governor? 

Mr. POWELL. Yes, sure. 

Mr. GRUENBERG. Yes. 

Mr. MCWATTERS. Yes. 

Mr. NOREIKA. Yes. 

Mr. COOPER. Of course. 

Senator BROWN. And, last, do you commit to make consumer protection a priority? 

Mr. POWELL. Absolutely. 

Mr. GRUENBERG. Yes. 

Mr. MCWATTERS. Absolutely. 

Mr. NOREIKA. Yes. 

Mr. COOPER. Yes. 

Senator BROWN. OK. Thank you. 

Last year, the Fed—and this is for Governor Powell. Thank you. 

And thanks for your years of service and your work with this Committee over the years. And, Mr. Gruenberg, you, too. 

Governor Powell, last year the Fed proposed adding capital surcharges into the biggest banks’ stress tests. Governor Tarullo last 

week said the biggest banks’ capital requirements ‘‘are still somewhat below where they should be,’’ and that incorporating the surcharges into CCAR will protect against contagion from one of these 

banks infecting, spreading to the rest of the financial system. By 

your testimony, you suggest that the Fed will integrate the stress 

test into the banks’ regulatory requirements. I assume that means 

the Fed is moving forward with adding the capital surcharge into 

the stress tests? 

Mr. POWELL. That is the plan, yes. We have asked staff to work 

up some options on that. We are working on it. There is no specific 

data upon which we bring that forward, but we would like to have 

it in place. 

Senator BROWN. I would like to encourage you to do that as 

quickly as possible. Is there a reason you cannot move quickly? 

Mr. POWELL. No; just we want to get it right. 

Senator BROWN. And you do not plan to wait until new Board 

members on the Fed are nominated and confirmed? That is not 

part of the delay? 

Mr. POWELL. No. We have ongoing things; we are doing stuff all 

the time. We are announcing CCAR results this afternoon. This is 

15 

another thing that is in the pipeline, and we will get to it when 

we need to get to it. 

Senator BROWN. OK. Thank you, Governor. 

Mr. Gruenberg, there have been recent press reports that any additional profits that the money center banks make from deregulation will go to stock buybacks and dividends up, to $30 billion in 

one estimate. Is that what banks will do with their profits if we 

relax the stress tests? 

Mr. GRUENBERG. I do not know that we have evidence to the contrary in regard to that, Senator. 

Senator BROWN. Governor Powell, your comments on that? 

Mr. POWELL. What banks would do with the profits? 

Senator BROWN. Yeah. 

Mr. POWELL. I think it is hard to know. Some of it would go to 

shareholders; some of it would go to management; some of it would 

go in pricing and customers, I suppose. 

Senator BROWN. Shouldn’t we want to know whether a decreased 

regulatory burden on banks will lend to more lending and economic 

growth if the money goes to stock buy—certainly an imperfect analogy, but what happened with the bank holiday of—or the tax holiday on overseas—money kept overseas from corporations brought 

back, it did not exactly work because there were no strings attached the way a lot of policyholders thought. So shouldn’t we 

know if banks are going to save money because of a decreased regulatory burden that it will, in fact, lend to more lending and economic growth or just increase dividends? 

Mr. POWELL. I guess I would look at it from the other end, which 

is we should make sure that we do not impose unnecessary costs 

through regulation. Regulation should not cost any more than it 

needs to. It does not make the economy any better to raise banks’ 

costs. If we can cut those costs without affecting safety and soundness, we cut them. And I think that, you know, that funding will 

help the economy, and it should help the economy in a very general 

way, but in a broad way I would think. 

Senator BROWN. So, to the two of you, Mr. Gruenberg and Mr. 

Powell, what do you think of the idea that if money—if banks do 

better, are more profitable because of deregulation, that maybe the 

best way to increase economic growth would be to ban buybacks 

and limit dividends in order to ensure the banks increase lending 

and contribute to economic growth? Mr. Gruenberg first. 

Mr. GRUENBERG. Senator, let me say I think in terms of reducing 

regulatory burden, the biggest bang for the buck is to reduce burden on smaller institutions that serve their communities and will 

either strengthen those institutions or strengthen their ability to 

serve their communities. I would be cautious in terms of making 

changes, particularly for the large systemic institutions. I think 

there we really need to preserve the prudential standards that we 

have established. 

Senator BROWN. Thank you, Chairman Gruenberg. 

Governor Powell, if you would just answer that, and I am done. 

Mr. POWELL. I would be wary of prescriptive things like limiting 

dividends and that sort of thing. And, again, I would just go back 

to this. I do not think what we are talking about here amounts to 

deregulation or broad deregulation. I think it amounts to making 

16 

regulation more efficient, protecting the important gains that we 

have made. We are not really talking about some massive program 

here. 

Senator BROWN. OK. 

Chairman CRAPO. Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. 

One of the main tenets all of you know of the recently released 

Treasury Department report regarding core principles for financial 

regulation is calling for Federal financial regulators to conduct 

cost-benefit analysis for all economically significant regulations. 

That is something I have long advocated for right here in this Committee. 

I will start with you, Governor Powell. Do you believe that conducting cost-benefit analysis when you are determining or considering financial regulations is very important not only to the regulatory body itself but to the consumer, to the bank system, all of 

it? 

Mr. POWELL. Yes, I do, and we have always tried to implement 

regulations in the way that is faithful to what Congress has asked 

us to do in the least costly and least burdensome way. More recently, we have actually tried to up our game more and take a 

more analytical approach to that. We are doing more on that front. 

We actually are planning on hiring a few people, but we are waiting until the hiring freeze rolls off to do that. 

Senator SHELBY. But that could be very important to the whole 

banking system and to the American people, could it not? 

Mr. POWELL. I think it is our obligation, and it is an important 

obligation. 

Senator SHELBY. Marty? 

Mr. GRUENBERG. I agree with that, Senator. I think doing costbenefit analysis has value, and particularly including it in proposed 

rulemakings to give the industry an opportunity to comment and 

get their feedback. And evaluating both the impact of the proposed 

rule as well as alternatives to the rule does have value, and that 

is something we are doing in the preamble of every rulemaking 

that we do. 

Senator SHELBY. Mr. McWatters? 

Mr. MCWATTERS. Yes, Senator, I do, but we have to be thoughtful about this. It is an art more than a science, and it would be 

helpful if all of us had a consistent methodology as to how to compute and conduct the cost-benefit analysis across the board. So the 

NCUA is not doing one on an ad hoc basis, or the FDIC, the Fed, 

or the OCC. But we had some consistency and well thought out, 

bring some economists in, work through this, come up with a protocol that can be implemented in a transparent way that people 

will take a step back and say, yeah, that is fair. 

Senator SHELBY. Yes, sir? 

Mr. NOREIKA. Thank you, Senator. My own view is in regulating 

a dynamic industry, we must always look at the costs and benefits 

not only of the new regulations but of the existing ones as well, 

and, importantly, what we are doing here, looking at the statutory 

basis as well. 

Senator SHELBY. Mr. Cooper? 

17 

Mr. COOPER. Senator Shelby, I certainly agree with cost-benefit 

analysis on the regulations. I do feel very strongly that it has to 

go beyond just regulations. It has to include the way we operate 

our agencies. We have to be efficient, and not only efficient in the 

use of our time but efficient in the use of our banks’ time. 

Senator SHELBY. I will direct this to the Comptroller’s office. In 

your testimony, Mr. Noreika, you stated that financial institutions’ 

risk should not be determined strictly by their size. I agree with 

that. In your view, what should be considered when tailoring regulations for small- and mid-sized banks? And could you elaborate on 

what specific regulations should be further tailored through administrative or congressional action? 

Mr. NOREIKA. Sure. Thank you. 

Senator SHELBY. That is a lot of work. 

[Laughter.] 

Mr. NOREIKA. I think we have many options on how to gauge the 

risk of institutions. Size is one of them, but it is not the only one 

of them. There are risk profiles as well. Just because you are bigger does not mean you are riskier. Just because you are smaller 

does not mean you are less risky all the time. So I think we have 

to make both a quantitative and a qualitative judgment before determining what we impose, and then those regulations that follow 

are based on the riskiness of the institution. Controls would include capital requirements, liquidity requirements, perhaps activity 

restrictions as well. So I think all of those would go into that calculus, Senator. 

Senator SHELBY. Mr. Powell, I think the word ‘‘redundancy’’ was 

brought up earlier, and that is important. There are a lot of overlapping regulations in the banking field. What could be done to do 

away with some of the redundancy which costs money for banks to 

comply with? 

Mr. POWELL. I think that is part of the exercise now we are undergoing to try to identify those and limit them or eliminate them, 

if possible. And I would say if you think about Volcker, to come 

back to that, the insight of not wanting proprietary trading in 

these big firms probably makes sense. But before the crisis, we did 

not have strong capital requirements, and under the trading book 

we did not have liquidity requirements. We did not have the stress 

tests, which are very tough on those things. So trading by the big 

banks is supported by several other policy initiatives, it gives us a 

little more freedom to think about how we can draw back the scope 

of Volcker and make it less burdensome. 

Senator SHELBY. Thank you. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. And thank you 

all for your testimony. 

Chair McWatters, let me ask you, there are more than 300 credit 

unions that have been certified as CDFIs. Community development 

credit unions like the North Jersey Federal Credit Union in 

Totowa, New Jersey, have stepped up to supply banking services 

in underserved neighborhoods and communities across the country, 

the very communities that President Trump said he wanted to 

18 

help. And in terms of doing that, the CDFI Fund is critical to those 

credit unions that work in low-income communities. 

So do you believe that Congress should eliminate the CDFI Fund 

as proposed in the President’s budget? 

Mr. MCWATTERS. No, I do not. 

Senator MENENDEZ. I appreciate that because the Treasury Department released a report just a few weeks ago that said, ‘‘CDFIs 

are often the only source of credit and financial services in impoverished urban and rural low- and moderate-income areas with limited access to the banking system.’’ So it defies their own logic, and 

I am glad to see you share the view that it is critical to maintain 

the fund. 

Chairman Gruenberg, the Treasury report includes recommendations to reform the Community Reinvestment Act examination 

process and ratings system. The report argues that the CRA examinations play a role in preventing certain banks from merging and 

opening new branches. What is your view of this argument? 

Mr. GRUENBERG. First of all, Senator, CRA is an important statute that encourages banks to meet the credit and basic banking 

services needs of all of their communities. So the function it performs is a very important one. Most institutions, as you know, get 

satisfactory or better ratings under the CRA. There are opportunities for local organizations to raise issues when an institution files 

an application for a merger or other activity as part of the statute. 

That happens in relatively few cases. So as a general proposition, 

I do not think it is a significant impediment. 

Senator MENENDEZ. So most of them receive satisfactory ratings; 

therefore, it should not impede mergers of those who desire a merger. 

Mr. GRUENBERG. The local organizations still have an opportunity to raise the issue, but in terms of actually impacting significant activity, I do not think it does. 

Senator MENENDEZ. I appreciate that response because it seems 

to me that the Administration should be focused on ensuring that 

the evaluation and ratings system is holding institutions accountable in providing equitable access to credit rather than focusing its 

efforts on weakening the Community Reinvestment Act. And, 

frankly, it is a little difficult to take seriously the recommendation 

of the Treasury Secretary when his only experience on the matter 

is running a bank that so struggled to meet its obligations to provide equitable access to credit in and of itself. 

Governor Powell, let me ask you, just shy of 9 years ago, Lehman 

Brothers filed for a bankruptcy, the largest bankruptcy in history, 

one that sent shock waves throughout the entire financial system. 

In short order, numerous other entities failed, leading to unprecedented support from the U.S. Government and taxpayers to bail 

out the institutions that had been playing fast and loose without 

guard rails and subjecting Americans’ hard-earned savings to unjustifiable risk. It became abundantly clear in that moment that we 

needed a process to deal with the adverse market effects of the failure of a large, complex, and interconnected financial firm. 

In response, we created the Orderly Liquidation Authority in 

Title II of Dodd-Frank. This process, thankfully, has not been needed. But if it were to be utilized, it is designed to protect taxpayers 

19 

and the market at large by ensuring that the burden of the failure 

falls on the owners and managers of the firm, that you do not privatize profit and collectivize risk. 

Do you agree, Governor, that this authority to resolve firms 

whose failure would present a threat to U.S. financial stability is 

critically important? 

Mr. POWELL. I do, Senator. Working with the FDIC, we have 

made a lot of progress under Title I, but I think it is absolutely essential that we keep Title II as a backup. 

Senator MENENDEZ. Chair Gruenberg, do you have anything to 

add to that? 

Mr. GRUENBERG. I strongly agree with that. The Orderly Liquidation Authority really is the last recourse but a critically important backstop to assure an orderly failure, even of a systemic firm. 

And as you point out, Senator, to assure that the stakeholders in 

the firm—the shareholders, the creditors, the management of the 

firm—are held accountable. 

Senator MENENDEZ. Finally, the Federal Reserve Bank of New 

York highlighted in November that there has been an uptick in delinquency rates on auto loans made to borrowers with subprime 

credit scores. I would like to hear from each of you your thoughts 

regarding this trend. Is this something that you are concerned 

about? I see it going—since 2013, 90-day delinquency rates made 

to borrowers with subprime credit scores have risen by more than 

40 percent. Is that an early bird warning here? 

Mr. NOREIKA. Our agency has been tracking this since about 

2014, and we do notice an uptick, and it is something that we are 

certainly making our regulated entities aware of to keep track of. 

Senator MENENDEZ. Is there something we should be doing? 

Mr. NOREIKA. Our job as regulators is to watch and monitor credit risk and to flag where we are seeing increased risks. This is one 

of those areas. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Heitkamp. 

Senator HEITKAMP. Thank you, Mr. Chairman. 

A couple quick questions because I know the Chairman wants everyone to keep this brief. I just want to associate myself with the 

comments on the Volcker rule. When you look, many current and 

former regulators also publicly state that the Volcker rule is way 

too complicated. It is my experience when a rule is too complicated, 

there is not much compliance, so it does not really get you what 

you need. 

I think that what I am hearing today is no one wants to go back, 

but everybody wants to tailor a rule or find a rule that can, in fact, 

accomplish the purpose without overly burdening, you know, all 

manners of banks and certainly something that makes common 

sense. So I want to just kind of put that on the record, and thank 

you all for your comments. 

My questions are to Governor Powell. Are you aware of the bills 

that have been introduced, bipartisan bills that have been introduced at this Committee regarding relieving midsize banks from 

Dodd-Frank stress tests and exempting community banks from the 

requirements of the Volcker rule and the qualified mortgage rule? 

20 

Mr. POWELL. Generally, yes, aware. 

Senator HEITKAMP. Have you had a chance to review those proposals? 

Mr. POWELL. Our staff has. I have not had a chance to review 

them carefully, but I am generally aware that they are there. 

Senator HEITKAMP. OK. I think it is critically important that we 

get your input moving forward. We obviously think there is broad 

bipartisan support for these kinds of changes and would love to see 

the Banking Committee produce some bills that would fulfill the 

commitment that we all privately have made to not only our small 

community banks but also our midsize banks. I think the time for 

talking is over and the time for doing is now. 

Marty, I am really concerned about what is happening right now 

at ag lending in my State, and I think you guys frequently can be 

on the tip of the spear, the leading indicator of challenges that we 

are going to have. I obviously have argued before for flexibility in 

these kinds of cyclical environments, especially in agriculture. And 

so just a couple questions. 

Have you experienced or observed meaningful changes in terms 

of the risk in the ag economy? And how is the FDIC approaching 

ag lenders who continue to provide credit, absolutely essential credit, to our producers who now are being squeezed by low commodity 

prices? 

Mr. GRUENBERG. So, Senator, we do have a changing environment, as you know well, in the ag sector. We are seeing low commodity prices and some decline in land values in the agricultural 

areas. And we are starting to see some pressure in regard to the 

banks that are focused on agricultural lending. 

So from a supervisory standpoint, the institutions are still as a 

general matter in pretty good shape, but they are under some pressures, and the trend seems to be toward increasing pressure. So 

from a supervisory standpoint, this is something we are paying 

close attention to. 

Senator HEITKAMP. I think it is critical that we be aware of what 

those indicators are and that we work together with the private 

lending industry to make sure that we do not let cyclical changes 

in agriculture shut down especially our small family farmers, who 

struggle the most in this kind of environment. And so I think before we see widespread pressure from the examiners to do things 

in that space that would, in fact, cutoff liquidity for farmers, we 

need to have a conversation here, because what you do will have 

ripple effects in the ag economy. Can I have your commitment that 

you will stay on top of this and let us know? 

Mr. GRUENBERG. You do, Senator. 

Senator HEITKAMP. OK. I want to just close out with a question 

on appraisals. As part of the EGRPRA process, regulators identified access to timely appraisals, especially in rural America, as a 

major challenge for small lenders. Yet the report itself did little to 

address residential appraisal requirements. 

Governor Powell, do you share my concerns that the appraisal 

system in rural America really does not work and that we need to 

have special attention paid to how we can make those changes? 

Mr. POWELL. Yes, Senator, I think we are sensitive to the problem and would like to do more. 

21 

Senator HEITKAMP. Right, and have you had any discussions 

about what that ‘‘do more’’ would look like? 

Mr. POWELL. Not recently, but this is something we are going to 

come back to. 

Senator HEITKAMP. Well, we will follow up because most of you 

know I come from a small town of 90 people. People say you want 

to, you know, see kind of the average sale, good luck getting that. 

It is not going to happen. And it is a huge challenge in terms of 

mortgage lending for our small community banks, and so this appraisal issue is not going away. I want you to come up with solutions to this and cut our small community banks some slack. OK? 

Chairman CRAPO. Thank you. 

Senator Kennedy. 

Senator KENNEDY. Thank you, Mr. Chairman. And I want to 

thank all the members of our panel today for your service and for 

being here. 

I want to talk about flood insurance, which, of course, is extraordinarily important to my State, Louisiana, but, frankly, most 

States. The current National Flood Insurance Program expires September 30th. We have to renew it. This Committee will be working 

hard to do so under the leadership of our Chairman and our Ranking Member. But here is a question that I think goes to what undermines the entire program. 

About 53 percent of the people that should carry—excuse me— 

are required to carry flood insurance carry it. What do we do about 

that? I am sorry. Excuse me. What do you think we should do 

about that? 

Let me put it another way. Let me ask our FDIC Chairman— 

before I choke to death. 

[Laughter.] 

Senator KENNEDY. I am just so overwhelmed with emotion at 

that health insurance bill that I am almost speechless. 

Mr. Chairman, do you think it would be a good idea to ask 

FEMA to compile a list of mortgages in high-risk flood areas so we 

will know who is supposed to carry insurance and who does not? 

Mr. GRUENBERG. Senator, actually I think that is a good idea. 

One of the challenges in this area is a lack of reliable data—— 

Senator KENNEDY. Yes, sir. 

Mr. GRUENBERG.——really to assess the extent of compliance 

with the flood insurance requirement. Getting better data would 

have real value here, and I think FEMA as the agency responsible 

for the National Flood Insurance Program would probably be the 

appropriate agency to do that. 

Senator KENNEDY. How do we get FEMA to do that, other than 

just asking pretty please? 

Mr. GRUENBERG. Well, on that score, Senator, you probably 

would have a better feel for that than we would. 

Senator KENNEDY. OK. Governor Powell, I saw where we recently had a bank—Sun Trust Bank was fined $1.5 million for violations regarding mandatory compliance with the National Flood 

Insurance Act. How did the Fed determine that they had a pattern 

and practice of noncompliance? What is a pattern and practice? 

Mr. POWELL. Senator, I remember that case. I do not remember 

the specifics of that case, though, to be honest. A pattern or 

22 

practice would be I think what it sounds like, which is something 

that happens repeatedly. 

Senator KENNEDY. Well, what triggered the review? 

Mr. POWELL. I should not talk about a particular enforcement action, and I am actually not deeply familiar with the individual facts 

of that case. I could get back to you on that. 

Senator KENNEDY. Would you? That would be very helpful. 

Mr. POWELL. I would be glad to. 

Senator KENNEDY. Let me open this up to anyone. I do not want 

to add to the regulatory burden on our community banks. I do not. 

But at the same time, when somebody does not carry flood insurance who is required to carry flood insurance and they flood, somebody else has to help them recover. And that is not fair to the 

American taxpayer, and it is not really fair to the people who do 

the right thing and carry the flood insurance. 

I am going to go to each of you. I only have a minute, but give 

me your thoughts about what we can do to increase participation 

from 53 percent. That is embarrassing. 

Mr. POWELL. This is for flood insurance? 

Senator KENNEDY. Yes, sir. 

Mr. POWELL. Well, I cannot improve on your idea of FEMA. 

Senator KENNEDY. How about Mr. Cooper? 

Mr. COOPER. Senator, obviously knowing a little bit about what 

happened in your State, I would agree with your recommendation. 

One of the concerns that I have is that, I believe, in several places 

in your State, several of the places never flooded before flooded this 

time. And so—— 

Senator KENNEDY. That is true. 

Mr. COOPER. It is hard, these lines of who floods and who does 

not flood, they blur, and, quite frankly, we have to deal with that. 

And I am not sure how to do that. 

Senator KENNEDY. OK. 

Mr. NOREIKA. Senator, certainly this is something that is a very 

high priority for our agency, and we take very seriously our supervisory obligations to examine our banks to make sure that loans 

have the proper flood insurance for those areas. So while I do not 

know the percentages off the top of my head, this is something that 

I know our supervisors and our examiners in our institutions take 

very seriously, and there are mandatory penalties that come if they 

do not—— 

Senator KENNEDY. Well, I am out of time, but I will be contacting 

you individually to talk about what we can do to help get the compliance right. We need to do a better job. 

Mr. NOREIKA. Thank you. 

Senator KENNEDY. And we need to start with our friends at 

FEMA. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. Thank you all for 

being here today. 

So last week, the Treasury Secretary issued a report that included about 100 recommendations for changing our financial 

rules, and these recommendations were basically cut and pasted 

23 

from the banking industry’s lobbying priorities. In fact, one bank 

lobbyist was brutally honest, saying, ‘‘The report is basically our 

entire wish list.’’ 

Now, most of these changes do not require any congressional action. Federal agencies can make the changes all by themselves, and 

that means all of you at the banking regulatory agencies have a 

lot of power to decide whether to hold the line on financial rules 

or to make every wish come true for giant banks. 

So, Governor Powell, the Federal Reserve is responsible for many 

of the rules governing the country’s biggest banks, and you are now 

the point person at the Fed for regulatory issues. You are also on 

record as being a fan of cost-benefit analysis, so let us do that here. 

The potential cost of implementing recommendations in the 

EGRPRA report seems pretty clear to me. It could increase the risk 

of another financial crisis and another bailout. 

So I want to ask about what the potential benefit is letting banks 

add to the already record profits they have generated in the past 

several quarters. Where is the benefit side? 

Mr. POWELL. Well, Senator, I guess I see it as a mixed bag. 

There are some ideas in the report that make sense, maybe not exactly as expressed there, but that would enable us to reduce the 

cost of regulation without affecting safety and soundness. There are 

some ideas, of course, that I would not support, that we would not 

support as well. But I guess I see it as mixed. 

Senator WARREN. Well, I get your point about mixed. The only 

benefit you see then is just cost reduction? 

Mr. POWELL. I think we have an obligation to make our regulation no more costly than it need be. 

Senator WARREN. Fair enough. Fair enough. But I am just asking about any other benefits because I was—the Treasury report, 

actually I want to read a direct quote from it about our financial 

rules on capital and liquidity, and it explained the rules on capital 

and liquidity saying that these can decrease the resources—the 

current rules can decrease the resources a bank has available for 

customer loans. 

So let me ask it that way since that is what the Treasury Department claims is the reason for reducing capital. Do you agree 

with that, Mr. Powell? 

Mr. POWELL. Let me say this: I do not support and we do not 

support reducing risk-based capital requirements. So that is not 

the idea. But I think of it a little bit differently. Capital is more 

expensive than debt, so if we raise capital standards, you are raising costs. Some of those costs will be passed through to customers. 

The question is: Where is the cost-benefit analysis? And I happen 

to think we have got it about right today. 

Senator WARREN. You know, because I am really worried about 

this, because the big banks obviously would like to see capital requirements reduced. And I started looking at what happened recently with JPMorgan Chase. The biggest bank in the country 

spent $26 billion in the last 5 years on stock buybacks. They had 

$26 billion they could have spent on anything they wanted to spend 

it on, and they could have spent it on lending to customers, but, 

no, what they decided to do with the money is to spend $26 billion 

to pump up their share price. And, in fact, every one of the big 

24 

banks in the country has spent billions and billions of dollars in 

the past 5 years on stock buybacks. 

So it sounds like to me that these banks have plenty of capital 

available to them. Governor Powell? 

Mr. POWELL. Well, I think their obligation is to meet their minimum capital standards and even more relevant for the biggest 

banks to meet their CCAR requirements. And once they do that, 

you know, they are entitled to pay dividends or buy back stock as 

long as post-stress and post-minimums—you know, as long as they 

meet those capital requirements. 

Senator WARREN. But what I am hearing you say—— 

Mr. POWELL. They do have plenty of capital. 

Senator WARREN. That is right, that they have plenty of capital 

and there is no reason to reduce their capital standards here. 

Mr. POWELL. We are not in favor of that. 

Senator WARREN. All right. I think that is very helpful because, 

you know, the team at Goldman Sachs that is running financial 

policy for this Administration really wants to boost profits for the 

Wall Street banks, and I think that is what the Treasury report 

is all about. And here is what is going to happen if regulators make 

the changes for the big banks that they want, and that is that bank 

stock prices will go up, bonuses for bankers will go up, bank stock 

buybacks will go up, and the risk of another financial crisis and 

bailout will go up. 

You know, I recognize that the bank lobbyists will be thrilled by 

this report and be thrilled if that happens. CEOs will be thrilled. 

But we will not see any increase in lending, and I do not think we 

are going to see a boost to our economy from it. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Cotton. 

Senator COTTON. Thank you. And thank you, gentlemen. 

You know, since that Treasury report came out, I have heard a 

lot of complaints, like Senator Warren’s complaint today but many 

others, not just from Senators and Congressmen in the Congress 

but outside observers as well, about how many of those changes 

could be made without congressional action. I think I have heard 

something like two-thirds of the proposed changes could be made 

without congressional action. That may be the case. It may not. I 

do not know. But I would suggest that that would counsel us to 

stop giving so much power to unelected regulators in Washington, 

DC—not just in the financial services arena but in every single 

area. 

All you gentlemen are extremely capable professionals. We may 

have our disagreements here or there. But none of you are in 

Washington because you won an election and are, therefore, accountable to the American people. We are on this dais. There are 

537 people who are. They should be making the rules that govern 

the conduct of the American people so they can be held accountable 

at the next election. 

I have got to break the news to everyone watching at home. I am 

sorry that I have to bring the scales down from your eyes. Many 

Congressmen and Senators like to punt the ball to regulators like 

these gentlemen. They like to pass laws like Dodd-Frank or 

25 

Obamacare or anything else that does not require them to make a 

hard choice and be held accountable. Because what do they do? 

They declare victory when the law passes, and then 2 or 3 years 

later when the CFPB or the SEC or the Department of Labor or 

the EPA makes the regulation, they declare victory a second time 

by denouncing the unelected bureaucrats who make the rules that 

do not implement their guidance. That is not the way we should 

govern ourselves in this country. 

A second point. We are having a hearing today about financial 

regulators, and we have five gentlemen here at the table—four 

from the Federal Government, one representing a consortium of 

State regulators. That is a lot of people to look to. On the Armed 

Services Committee, when we have a hearing about strategy in Afghanistan or the Islamic State, there is one person sitting at the 

table: the Secretary of Defense. Why is that? Because the military 

believes in the unity of chain of command, and if you are a private 

in Nangarhar Province today or outside Mosul, you know exactly 

who is in your chain of command from your squad leader all the 

way up to the President of the United States. And one of the most 

common complaints I hear from our bankers in Arkansas is that 

they have to answer to multiple masters who, if they do not issue 

conflicting rules, they at least give conflicting interpretations or 

guidance or even attitudes. And I think that is something that we 

need to address. 

So, Mr. Noreika, of all the banking agencies, you were the only 

one that provided what Bloomberg News called a ‘‘sweeping list of 

recommendations to streamline oversight.’’ My question about this 

multiplicity of regulators is this: In the context of today’s meeting, 

how do you think we ought to approach your recommendations and 

how should we prioritize them, given how difficult it has been to 

get anything done in Washington, DC, lately? 

Mr. NOREIKA. Thank you, Senator, and thank you for the question. As you point out, there is a real risk, actually and in practice 

of regulatory redundancy happening here in Washington with respect to the financial services industry. And one of the things that 

we are proposing is having a statutory traffic light system among 

the Federal regulators so that when one regulator acts to effectuate 

regulation, others will be foreclosed. And what we are seeing in 

practice is both under- and over-regulation at the same time. And 

the CFPB is a great example. When we consider banks $10 to $50 

billion where the CFPB has exclusive jurisdiction, we do not see 

much activity of the CFPB regulating those institutions at all. So 

they have actually in many ways gotten less regulation since DoddFrank has passed. 

And yet if we go in and we examine them with our backup authority, as we do, if there is an issue, you may see the CFPB come. 

And so while they are underregulated until we regulate them, then 

they become overregulated. 

So I think what we are trying to do in our testimony with the 

long list of regulatory suggestions for consideration is to start a 

dialogue and identify what the problems are, and you have put 

your finger on one of the biggest problems, and to start a bipartisan, constructive conversation about how we recalibrate our regulation of this dynamic industry. 

26 

Senator COTTON. Thank you. My time is almost expired. I just 

want to suggest to the Members of this Committee and the Chairman and the Ranking Member, who I know have been working together very carefully to try to craft some bipartisan compromises, 

that this is something we should look at. I do not see any reason 

why we could not have bipartisan agreement on an effort to put 

more accountability in our own hands, since we are the ones elected to make these decisions and the only ones accountable to the 

American people; and, second, to streamline somewhat the multiplicity of regulators that our bankers, especially our small bankers, 

who do not have the capital base to respond to multiple requests 

from multiple regulators, to give them a little bit of an eased burden. 

Chairman CRAPO. Thank you. 

Senator CORTEZ MASTO. 

Senator CORTEZ MASTO. Thank you, Mr. Chair. Thank you, gentlemen, for your testimony today. It has been very helpful, enlightening, and I really appreciate it. 

I, however, would like to start with Mr. Noreika. Your testimony, 

including your written testimony, includes a lot of ideas about how 

to restructure our financial regulatory system. I want to focus on 

your recommendations related to the Consumer Financial Protection Bureau, and let me put this in perspective. I am a new Senator. I was not here—— 

Mr. NOREIKA. I am new, too, Senator. 

Senator CORTEZ MASTO. Well, and I recognize that. But where I 

was previously was the Attorney General of the State of Nevada 

during the worst crisis we have ever seen. And I will tell you this: 

I supported the CFPB after what I had seen, and I know the CFPB 

was created because before the crisis, we in our States trusted the 

safety and soundness regulators like the OCC to oversee consumer 

protection, and they failed to do so, threatening both the homeowners in my State and across this country. In fact, one former 

State prosecutor who tried to stop the banks’ predatory lending 

said about the OCC, and I quote, ‘‘Not only were they negligent, 

they were aggressive players attempting to stop any enforcement 

action. Those guys should have been on our side.’’ In that particular case, you were actually representing the bank that was 

being sued. Yet in your testimony you suggest that we return examination and supervision authority for all depository institutions 

back to their primary banking or credit union regulator. 

In other words, this would strip the CFPB of its ability to go in 

and routinely supervise big banks for noncompliance with the laws 

that protect consumers, seniors, students, and servicemembers. 

This represents a return to the bad old days and would undermine 

an essential pillar of the Wall Street reform. 

You come to the OCC, as you said, on an interim basis from a 

prominent law firm where you represented big banks. Under special hiring authority, you can serve for only 130 days. But, in exchange, you get to avoid Senate confirmation, and you do not have 

to sign the typical ethics pledge. And here we get a recommendation from you to roll back the regulations for CFPB. That concerns 

me. And how is the CFPB supposed to catch wrongdoing and 

27 

enforce the law if they are not able to examine and supervise the 

largest banks? 

As a former law enforcement official, I know how difficult it is 

to identify fraud as it is happening. It seems like it would be more 

difficult for the Bureau to quickly stop the mortgage servicing debt 

collection and credit card abuses if it is not inside the big banks 

monitoring them. How do we address that? 

Mr. NOREIKA. Thank you, Senator, and thank you for the opportunity to respond to your question. As I responded to Senator Cotton earlier, this is a big concern of ours to actually increase the 

consumer compliance and monitoring at the smaller banks within 

the CFPB’s exclusive jurisdiction to ensure compliance with the relevant consumer protection laws. 

Since Dodd-Frank, we have a CFPB that writes rules, and as you 

will see from my written testimony, that is something we support 

them doing. The real question now is the correct allocation of 

scarce regulatory resources to enforce those rules. And what we are 

seeing in practice is that the CFPB is not enforcing those rules 

against the midsize banks, the large small banks to the small big 

banks. And so we do have a problem of both over- and under-inclusion. When we get up to the bigger banks, we have a little bit of 

overlap and overkill there. So we need some better system of coordination. 

Now, whether that involves taking that responsibility and putting it back with the prudential bank regulators who can balance, 

as they traditionally have, the supervisory priorities of the bank or 

adopting, as I have said twice before, a statutory traffic light system, I think both of those are options. And yet we have to talk 

about what the problems are first. 

Senator CORTEZ MASTO. I appreciate the comments. I do not understand them. Quite frankly, in one breath you are saying that 

there are scarce regulatory resources with the CFPB so that means 

that we should give them the resources they need to supervise, and 

in other breath giving it back to the same regulators who were not 

there when I was in my State trying to help homeowners who were 

not enforcing the laws. It does not make sense to me. 

Chairman Gruenberg—— 

Mr. NOREIKA. I am happy to meet with you to discuss it more. 

Senator CORTEZ MASTO. Chairman Gruenberg, as a banking regulator, would you say that having the independent Consumer Bureau has been successful? And do you think that the CFPB’s existence is a threat to the FDIC? 

Mr. GRUENBERG. Yes to the first, and no to the second, Senator. 

Senator CORTEZ MASTO. Thank you. 

Chairman CRAPO. Thank you. 

Senator CORTEZ MASTO. Let me just say this, finally, Mr. Chair, 

and thank you. The CFPB has returned $12 billion to 29 million 

consumers. I really do not understand the motivation behind stripping the Bureau of its powers. And I will tell you this: As somebody 

who has focused for 8 years on consumer protection, there is a need 

for the CFPB. And to roll back any regulations and say that we 

cannot find a balance somehow and still look at how we address 

the regulatory burdens that are happening right now with our 

banks, and particularly with our community banks and our credit 

28 

unions, I think we need to calibrate there. There is no doubt about 

it. I think we need to work in that space. But we need to find this 

balance, and the balance is not doing away with consumer protection completely, because it is working. And that is all I am looking 

for, in this day and age, is somebody reasonable to come up and 

figure out how we find that balance. I am not for rolling back any 

of those regulations because that is going to continue to harm the 

homeowners that I fought for for 8 years in my State. And I am 

concerned about the future. 

Chairman CRAPO. Thank you. 

Senator Rounds. 

Senator ROUNDS. Thank you, Mr. Chairman. That is one of the 

nice things in the Banking Committee: you get to hear some diverse points of view. Rest assured when it comes to the CFPB, I 

think there is a group of us out here that feel that they are flat 

out out of control and that there are no controls on them that Congress can come in, bring them in and ask questions. Their budget 

is not part of the budget that we authorize. And we think that 

there most certainly is room to be able to allow for consumer protection based upon the original agencies who had the responsibility, 

and if you were not living up to those responsibilities, I think it 

would have been more appropriate for Congress to have come back 

and demanded that or to provide you with the tools in order to do 

that as opposed to creating a new behemoth type of an agency 

there that is just flat out, in my opinion, out of control. If I could 

repeal it, I would. And if I cannot do that, the least we ought to 

do is put it under the control of the appropriations process up here. 

But it is always interesting to hear the different points of view 

when it comes to something as controversial as the CFPB. 

I did want to spend just a few minutes and talk about the TAILOR Act. We have reintroduced it again this year. The idea behind 

it is to allow for the regulatory entities within the banking systems 

to be able to look at the individual types of business models that 

individual banks have. Community banks have a different business 

model than some of those that do international banking and so 

forth. 

It looks to me like if you had the appropriate direction from 

Congress that you most certainly in almost every phase of the regulatory process you could really do a better job of tailoring the regulatory approach based upon the size and business model, specifically the business model of the individual banks themselves. 

I would just like, if you could, can you just very, very briefly suggest whether or not the introduction of the TAILOR Act or the 

adoption of the TAILOR Act would be of benefit in giving direction 

to you as agencies that oversee these financial institutions? 

Mr. POWELL. Senator, I have not looked at the TAILOR Act in 

a few months, but just in general, I would say I agree with what 

you are suggesting. You know, what Dodd-Frank did was it put 

these numerical cliffs in, and those are nondiscretionary. They are 

sort of arbitrary in a way. And that was a choice that Congress 

made for that. 

A different choice would have been to let us think about the size 

and business model, and I think we can work with either. In fact, 

for the largest institutions there is more discretion in who got 

29 

designated. So Congress really did both. I think if you wanted to 

change the way the thresholds worked and put us in a situation 

of being more discretionary and looking at size and business model, 

we could certainly work with that, and it would help us. 

Senator ROUNDS. Mr. Gruenberg? 

Mr. GRUENBERG. Senator, I would want to look more closely at 

the statutory language. The issue you raise is a critical one. Appropriately tailoring regulation to the size and complexity and business model of the particular institution in some ways is the core 

challenge for us as bank regulators. So I think you are certainly 

focusing our attention on the right issue. I am glad to engage with 

you on it, but I would want to look at the specific statutory language. 

Senator ROUNDS. Fair enough. 

Mr. McWatters? 

Mr. MCWATTERS. Regulations should be targeted with a laser. 

Shotguns do not work. Shotgun regulation creates collateral damage, unintended consequences. But in order to target a regulation 

to the real problem that is out there, the future problem that is out 

there, you have to understand the business that you are regulating. 

You have to understand the business model. You have to understand how they make money. You have to understand their ambitions. So focusing in on that will allow me to target regulations and 

stay away from the scattershot approach with unintended consequences and collateral damage. 

Senator ROUNDS. Thank you. 

Mr. Noreika? 

Mr. NOREIKA. Thank you, Senator. Certainly, as I mentioned earlier in my testimony, we are concerned about under- and over-inclusiveness of regulation to make sure it is most efficient and effective. And certainly the idea of tailoring regulation is very important. 

With respect to your bill, we are happy to work with you. 

Senator ROUNDS. Thank you. 

Mr. Cooper? 

Mr. COOPER. Senator, I cannot remember all the provisions of 

your bill, but obviously the thought process behind it we would 

support. 

The one thing I would like to say is, again, I have been around 

this for a long time. We have been talking about this for a long 

time, and we need to start working toward making some solutions. 

Senator ROUNDS. Thank you. 

I have one real quick one, and I am just going to ask this of Governor Powell and Mr. Gruenberg. The SLR and the ESLR, you have 

diverging points of view regarding that. I am concerned about mutual funds and where they place their accountable. Right now it 

looks to me like we have got a real problem between European 

banks, which have one capital requirement, versus the American 

banks with the ESLR makes them less competitive when it comes 

to the costs of providing those custodial services. Shouldn’t we be 

trying to address the costs for mutual funds? When it comes to 

these custodial banks—there are not a lot of them—shouldn’t we 

be able to make our American banks as competitive as those in 

other parts of the country regarding custodial accounts? Can you 

30 

explain to me the reason why you have divergent points of view as 

to why we have not done something about the—at least allowing 

for the accounts that are being held where we are placing deposits 

with the central bank. It looks to me like we ought to be able to 

help these folks out a little bit and bring down the cost of what it 

is for a custodial bank to bring in and maintain mutual fund relationships. 

Mr. POWELL. Senator, briefly, we look at the leverage ratio as a 

backup to binding risk-based capital, and the leverage ratio sees a 

junk bond the same as a bank deposit, the same as a Treasury, and 

makes it uneconomic for banks that have a model, a business 

model that involves having a lot of deposits in cash and puts that 

money, for example, at a reserve bank. So we want it to be a binding backstop so that banks cannot game the risk-based capital, but 

we feel it is time to rethink the calibration. 

Senator ROUNDS. Mr. Gruenberg, you had kind of a differing 

point of view. 

Mr. GRUENBERG. Yes, Senator. We do see the strengthening of 

the leverage ratio as one of the core reforms that have been put 

in place with the large systemic institutions to deal with one of the 

important lessons of the crisis. The lesson was that in that stressed 

environment, leverage capital had credibility with the financial 

markets as opposed to risk-based capital. So we think it is really 

quite important from a safety and soundness and systemic risk 

standpoint to have rough comparability between risk-based capital 

and leverage capital. Prior to the crisis, the leverage capital requirements were lower. The changes we made were really designed 

to produce that comparability because both measures of capital— 

and I will keep this brief—both measures of capital have strengths 

and issues. 

Risk-based capital has the strength of being linked to the risk of 

the activities taken by the institution. It has the downside of being 

subject to manipulation and, frankly, we saw some of that during 

the crisis. 

Leverage capital has the strength of being a simple, loss-absorbing measure of capital that is not manipulatable. It has the downside of not being risk-sensitive. 

The two together, roughly comparable, we think, make the 

strongest basis for a capital system. 

Senator ROUNDS. Mr. Chairman, thank you for your patience. It 

just seems as though we have really got an issue with regard to 

deposits that are central bank deposits and whether or not we 

should be not giving some leniency for folks that are depositing 

with the central bank and making them very uncompetitive with 

other banks around the world. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Senator Van Hollen. 

Senator VAN HOLLEN. Thank you, Mr. Chairman. I thank all of 

you for your testimony today. 

Mr. Noreika, as you know, many of us were troubled by the 

mechanism procedure that was used to put you in your current position because it kind of short-circuited the advice and consent 

process. I know it is not a permanent position, but it is a position 

31 

of incredible public trust. I think you would agree with that, would 

you not? 

Mr. NOREIKA. Yes, Senator. 

Senator VAN HOLLEN. And barring that process, one of the things 

that the Trump administration has touted as a mechanism for upholding the public trust has been their ethics pledge. So my question to you today is: Will you uphold or sign that Trump administration ethics pledge? 

Mr. NOREIKA. Well, Senator, I do not have a position that is subject to the ethics pledge. 

Senator VAN HOLLEN. So even though you have got the top position in the department, in OCC, you are saying that the Trump administration did not write its ethics protections in a way that 

would cover that position? 

Mr. NOREIKA. It was President Obama who wrote that policy and 

the Trump administration—— 

Senator VAN HOLLEN. No, I am talking—— 

Mr. NOREIKA. Senator, it is President Obama’s policy that the 

Trump administration is following with respect to special Government employees. So I think when you make the characterization of 

President Trump writing the policy, I think that is the wrong characterization. 

Senator VAN HOLLEN. Well, OK. But I think you know that 

President Trump tried to sell his ethics pledge as much more robust than that of the Obama administration. I am going to go on. 

And I would like to ask you, Governor Powell, about the issue 

of the foreign banking organizations, and specifically Deutsche 

Bank, but the others as well. As you know, during the financial crisis the Fed provided about $538 billion in emergency loans to European banks, and as part of that, we also provided some oversight. 

Recently, the Department of Treasury has suggested rolling back 

some of those provisions. I think all of us on this Committee want 

to look for ways to provide relief for community banks and want 

to make sure that all our regulations are tailored to accomplish 

their purpose. We are talking here about major foreign banks. I 

want to ask you if you support their proposal that would loosen or 

weaken the requirements for loss-absorbing long-term debt. Are 

you familiar with that particular recommendation? 

Mr. POWELL. For foreign banks? 

Senator VAN HOLLEN. Yeah. They want to scale back—— 

Mr. POWELL. This is from the Treasury report? 

Senator VAN HOLLEN. This is the Treasury report. 

Mr. POWELL. I would have to look at it, Senator. I mean, it is 

a lot of recommendations. 

Senator VAN HOLLEN. OK. And I would appreciate it if you could 

get back to us on that. 

How about their other recommendations regarding foreign banking organizations? Have you had a chance to look at the other 

ones? 

Mr. POWELL. Yes, our view at the beginning was that we should 

look to the U.S. assets rather than the global assets in designating 

these companies for purposes of Section 165, and it went the other 

way. So we would actually be comfortable with that change. But I 

will come back to you on the other ones. 

32 

Senator VAN HOLLEN. I appreciate that. And I want to thank you 

and Mr. Gruenberg for your service. 

And, Chairman Gruenberg, if you could please comment both on 

that proposal that was made by the Treasury Department regarding the long-term debt, the loss-absorbing long-term debt, but also 

this issue of just looking at U.S.-based assets. On the one hand, I 

understand that. On the other hand, these are major multinational 

banking organizations, and my sense is that if they melt down in 

their operations outside the United States, it is going to have a 

dramatic impact here in the United States. If you could comment 

on those? 

Mr. GRUENBERG. So I would want to look at the specifics in regard to foreign institutions. As a general proposition, one of the important rules that the Federal Reserve has adopted is to require a 

minimum level of loss-absorbing debt for large institutions, which 

includes some of the foreign banking organizations. It is an important resource to have so that if one of these institutions gets into 

difficulty and begins to fail, that resource can be utilized in a resolution to recapitalize the bank, imposing the costs of the recapitalization on the creditors of the institution and protecting the taxpayer. We view it as one of the key changes that have been made, 

and we are highly supportive of the Federal Reserve rule that has 

been adopted. We think it has been properly calibrated to allow an 

appropriate level of debt to ensure that these institutions in resolution could be recapitalized in a way that would be credible with the 

markets and allow for the orderly failure of the institution. So it 

is quite important. 

Senator VAN HOLLEN. And the other provision, if I could—— 

Mr. GRUENBERG. The other thing we do think is important in 

evaluating the U.S. operations of these institutions is that certainly 

the foreign operations can impact them. But in looking at their 

U.S. operations, we should not and have not allowed them to rely 

on an expectation of support from the foreign parent. One of the 

lessons we learned during the crisis is that support may not be 

forthcoming, so they need to have the appropriate standards here 

to protect the U.S. operations based on the U.S. requirement—— 

Senator VAN HOLLEN. On a stand-alone basis. Yeah, OK. Thank 

you. 

Chairman CRAPO. Thank you. 

Senator Tillis. 

Senator TILLIS. Thank you, Mr. Chair. Gentlemen, thank you all 

for being here. 

Governor Powell, I know that a couple of the former regulators 

appointed by the Obama administration have either called for a reduction in the complexity of Volcker; I think at least one of them 

has called for its outright repeal. Can you give me an idea of where 

you think we need to be? On that spectrum of just changes, can you 

talk a little bit about specific things that we should be looking at 

or expecting in terms of regulatory relief as it relates to Volcker? 

Mr. POWELL. Yes, Senator. What we have been focusing on is laying the statute side by side with the rule and looking at the 

degrees of freedom we have to make the rule less burdensome consistent with both the letter and the spirit of the law. And I would 

say our—and it is complicated, down-in-the-weeds stuff, but I think 

33 

we have a significant amount of freedom—we do—to tailor for large 

institutions versus small institutions, those with big trading books 

in particular. 

Senator TILLIS. Can you give me an idea of some of those weeds 

that would get whacked? 

Mr. POWELL. I would. I would be delighted to. I think in general, 

we believe we have the authority to draw a line below those with 

the big trading books—maybe $10 billion and up—and have sort of 

that group regulated in one way, and then everybody else regulated 

a lot less. A lot less. 

I think we also believe we can change the definition of ‘‘trading 

account,’’ which I think that some of the choices that were made 

in the regulation go well beyond what is in the statute, for example, the rebuttable presumption, the definition of a covered fund 

when you get to the fund side. Quite a lot of those things—not all 

of them, but quite a lot of those were drafting choices made in the 

regulation, and so we believe, really based on 2 1⁄2 years of experience and 5 years of discussion, that we can go back and revisit 

those and do a lot. 

I would say Congress could play a role here. It, in effect, could 

exempt banks below a certain level, just completely exempt them 

from this. There would be no loss to safety and soundness and an 

appreciable gain to cost-effectiveness. 

Senator TILLIS. That is a point I want to make. I think it was 

Senator Warren that brought it up. I do not see how those sorts 

of changes create any significant risk. I see how it makes the regulations leaner. But I do not really understand. What would be the 

argument for saying that considering those signs of changes are 

going to create a greater risk? 

Mr. POWELL. We are committed to not doing things that create 

a significantly—— 

Senator TILLIS. That is a bad thing—— 

Mr. POWELL.——greater risk. The whole idea is to preserve—in 

my view, and I think our view, the important core reforms that we 

have made, but to go back and clean up our work. I think our obligation is to do that. I think Volcker is a very, very difficult statute 

to implement, and I think if you look at it, it is implemented in 

a way that is too costly. I think it is on us to address that as supervisors and regulators. So that is how I see it. 

Senator TILLIS. Anybody else have a comment on that? 

Mr. GRUENBERG. I would just add, Senator, I think the basic 

premise of the Volcker rule, which is that risky proprietary trading 

should not be supported by insured deposits, by the public safety 

net, is a premise that is generally accepted. I think the issue is the 

implementation of the Volcker rule. I think there is a general view 

that there are opportunities to simplify compliance while achieving 

the purposes of the rule. And I think there will be an effort among 

the regulators to do that. 

I think obviously here the key is to strike a balance between trying to simplify compliance while being sure that we are achieving 

the purpose of the rulemaking. 

I would say on the exemption side, I would be more inclined toward a regulatory safe harbor for institutions, smaller institutions 

that engage in traditional banking activities rather than trying to 

34 

have a flat exemption because then that would capture the vast 

number of institutions, say, below $10 billion. But you do not want 

to create a vehicle for a small number of those institutions to be 

used for the proprietary trading activity. So striking a balance 

there seems to me would make some sense. 

Mr. NOREIKA. And as the third Volcker agency at this table, we 

strongly support a full review of the Volcker rule, putting it out for 

comment to get the views of the affected parties as far as what we 

can do, what works, what does not work. Where the costs vastly 

exceed the benefits, we need to, revise it and streamline it. 

Senator TILLIS. Mr. Chair, I am not going to go to far over, even 

though I am the last person here, because I have another commitment. But I really believe that we have to go through the process 

of regulatory reform, and I think it was Mr. McWatters that said 

something about we should not be using a shotgun as a method for 

rightfully going in and making sure that financial institutions are 

complying with regulations that expose our economy to risk or financial sector to a risk. But I think we have got some pretty dumb 

ways for doing that today. I think that we have to take a look at 

the risk profiles of banking institutions, get away from arbitrary 

thresholds so that we are actually making sure that the green light 

and the red light is being driven by common-sense assessments of 

the risk that a given institution represents, and it goes far beyond 

many of the regulations that I think that are driving our agencies 

today. And I look forward to a lot of recommendations that we can 

fast-track to get to that point, to get to the minimum amount of 

regulation to cover the risk and to free up financial services institutions, free up market makers, do the kind of things that we know 

we need to do if we are going to be serious about getting to the 

kind of economic growth we need to get to in this country. 

Thank you all for being here. I will have several questions for the 

record. 

Senator TILLIS. Thank you, Mr. Chair. 

Chairman CRAPO. Thank you very much, and that does conclude 

the questioning. I again want to thank our witnesses for not only 

your time and effort to appear here today, but the work that you 

do in helping us to administer the financial governance of our system in the United States. 

I also appreciate the fact that each of you provided very helpful 

suggestions to the process that we are going through. And I will 

be quick, too, in wrapping up, in line with what Senator Tillis was 

just talking about. 

We are, as you know, engaged in an effort to identify where 

statutorily we can make things better. I do not think that it necessarily always does—in fact, it often does not come down to trying 

to figure out how to analyze the cost and benefit of allowing risk 

to go up in return for some kind of efficiency in the system. There 

are many efficiencies in the system that we can achieve that will 

not cause increase in risk and, in fact, might even reduce risk. And 

it is those kinds of efforts that I think we are primarily focused on 

today. 

We need to get the right balance in our system so that we can 

have the strongest economic engine that we possibly can in our 

country. That is what will provide the kind of strength and reduce 

35 

risk in maybe the biggest way possible, in my opinion. But you are 

literally on the front lines, and the advice that you provide is tremendously helpful to this Committee, and I appreciate it. 

You will receive some additional questions from Senators, as 

Senator Tillis just indicated. For the Senators, their questions will 

be due within 7 days, which will be next Thursday. I ask you to 

be very prompt in your responses because we are literally actively 

engaged right now in moving forward with developing this legislation. 

With that, thank you again for coming today, and this hearing 

is adjourned. 

[Whereupon, at 12:04 p.m., the hearing was adjourned.] 

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

36 

PREPARED STATEMENT OF JEROME H. POWELL 

MEMBER, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

JUNE 22, 2017 

Chairman Crapo, Ranking Member Brown, and Members of the Committee, I appreciate the opportunity to testify at today’s hearing on the relationship between 

regulation and economic growth. We need a resilient, well-capitalized, well-regulated financial system that is strong enough to withstand even severe shocks and 

support economic growth by lending through the economic cycle. The Federal Reserve has approached the post-crisis regulatory and supervisory reforms with that 

outcome in mind. 

As a result of an improving economy and actions taken by both the Federal regulators and the industry, the U.S. financial system is substantially stronger and more 

stable than it was before the financial crisis erupted nearly a decade ago. In this 

testimony, I will highlight the considerable gains made since the crisis and reflect 

on the principles that should guide us in the next phase. I will also discuss some 

specific actions that align with these principles that we have recently taken or expect to take that are designed to reduce regulatory burden without compromising 

safety and soundness and financial stability. 

Post-Crisis Regulatory and Supervisory Reform 

There is little doubt that the U.S. financial system is stronger today than it was 

a decade ago. As I will discuss, loss-absorbing capacity among banks is substantially 

higher. The banking industry, and the largest banking firms in particular, face far 

less liquidity risk than before the crisis. And progress in resolution planning by the 

largest firms has reduced the threat that their failure would pose. These efforts 

have made U.S. banking firms both more robust and more resolvable. And history 

shows that when U.S. banking firms are financially strong, they are able to better 

serve their customers. 

Today I will highlight developments in the four key regulatory areas designed to 

improve and maintain the resiliency of the banking industry: capital, stress testing, 

liquidity, and resolution planning. 

Regulatory capital reforms 

The U.S. banking agencies have substantially strengthened regulatory capital requirements for large banking firms, improving the quality and increasing the 

amount of capital in the banking system. High-quality common equity tier I capital 

(CETI) is important because it is available under all circumstances to absorb losses. 

Since the financial crisis, U.S. banks have been required to meet new minimum 

requirements for CETI to ensure a base of protection against losses. U.S. banks also 

have been required to meet capital conservation buffers that incentivize banking 

firms to keep their capital levels well above the minimums in order to maintain full 

flexibility to allocate profits to shareholders and employees. For the U.S. global systemically important banks (G–SIBs), we have also imposed an additional capital 

surcharge designed to reduce the threat that a failure of any of these firms would 

pose to financial stability. 

Stress testing 

The Federal Reserve also conducts the Comprehensive Capital Analysis and Review (CCAR), a stress test that assesses whether large banking firms have enough 

capital to withstand severely adverse macroeconomic and financial market stress. 

We also use this process to assess the quality of the capital planning processes of 

large banking firms. The U.S. bank holding companies (BHCs) subject to CCAR 

have more than doubled the dollar amount of their CETI from around $500 billion 

in 2009 to $1.2 trillion in the first quarter of 2017, and have more than doubled 

their CETI risk-based capital ratios from 5.5 percent to 12.4 percent over that period. 

Liquidity regulation reforms 

The banking agencies have also required large banking firms to substantially reduce their liquidity risk. Our key reforms in this area include a liquidity coverage 

ratio (LCR) that requires large banking firms to keep enough high-quality liquid assets (HQLA) to meet net stressed cash outflows over a 30-day period. The Federal 

Reserve has also adopted the Comprehensive Liquidity Analysis and Review (CLAR) 

supervisory program for evaluating the liquidity of the most systemic banking firms. 

In addition, the banking agencies have proposed a net stable funding ratio (NSFR) 

regulation that would help ensure that large banking firms maintain a stable funding profile over a 1-year horizon. 

37 

1See, for example, Robert F. Martin, Teyanna Munyan, and Beth Anne Wilson (2014), ‘‘Potential Output and Recessions: Are We Fooling Ourselves?’’ IFDP Notes (Washington: Board of Governors of the Federal Reserve System, November 12), www.federalreserve.gov/econresdata/ 

notes/ifdp-notes/2014/potential-output-and-recessions-are-we-fooling-ourselves-20141112.html; 

and Olivier Blanchard, Eugenio Cerutti, and Lawrence Summers (2015), ‘‘Inflation and Activity—Two Explorations and Their Monetary Policy Implications, IMF Working Paper WP/15/230 

(Washington: International Monetary Fund, November), https://www.imf.org/external/pubs/ft/ 

wp/2015/wp15230.pdf. 

Liquidity positions within the U.S. banking system have improved substantially 

since the financial crisis. The U.S. G–SIBs increased their holdings of HQLA from 

about $1.5 trillion to about $2.3 trillion between 2011 and the first quarter of 2017. 

The same institutions have also reduced their reliance on short-term wholesale 

funding from approximately 35 percent of assets in 2006 to about 15 percent of assets today. 

Large bank resolvability reforms 

As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act 

(Dodd-Frank Act), the Federal Reserve has been working with the Federal Deposit 

Insurance Corporation (FDIC) to improve resolution planning by banks. Through 

thoughtful resolution planning, firms can reduce the risk that their failure would 

have disruptive effects on the financial system and the economy. The resolution 

planning process has caused the largest U.S. banking firms to substantially improve 

their internal structures, governance, information collection systems, and allocation 

of capital and liquidity in ways that both promote resolvability. The Federal Reserve 

also has helped improve the resolvability of the largest banking firms by requiring 

U.S. G–SIBs and the U.S. intermediate holding companies of foreign G–SIBs to 

meet long-term debt and total loss absorbing capacity (TLAC) requirements. 

Effect of regulation on U.S. banks 

Evidence overwhelmingly shows that financial crises can cause severe and lasting 

damage to the economy’s productive capacity and growth potential.1 Post-crisis reforms to financial sector regulation and supervision have been designed to significantly reduce the likelihood and severity of future financial crises. We have sought 

to accomplish this goal in significant part by reducing both the probability of failure 

of a large banking firm and the consequences of such a failure were it to occur. We 

have substantially increased the capital, liquidity, and other prudential requirements for large banking firms, and these increases are not free. Stronger capital requirements increase bank costs, and at least some of those costs are passed along 

to bank customers. But in the longer term, stronger prudential requirements for 

large banking firms will produce more sustainable credit availability and economic 

growth. Our objective should be to set capital and other prudential requirements for 

large banking firms at a level that protects financial stability and maximizes longterm, through-the-cycle credit availability and economic growth. 

Guiding Principles to Simplify and Reduce Regulatory Burden 

As we near completion of the major post-crisis regulatory reforms, this is a good 

time to assess the effectiveness and efficiency of these reforms. Several principles 

are guiding us in this effort. First, we should protect the core elements of the reforms for our largest banking firms in capital regulation, stress testing, liquidity 

regulation, and resolvability. Second, we should continue to tailor our requirements 

to the size, risk, and complexity of the firms subject to those requirements. In particular, we should always be aware that community banks face higher costs to meet 

complex requirements. Third, we should assess whether we can adjust regulation in 

common-sense ways that will simplify rules and reduce unnecessary regulatory burden without compromising safety and soundness. And finally, we should strive to 

provide appropriate transparency to supervised firms and the public regarding our 

expectations. 

Areas of Focus for Recalibration and Simplification 

Small- and medium-bank regulatory simplification 

Over the course of the last year, the Federal Reserve and the other U.S. banking 

agencies finalized significant burden-reducing measures for smaller banks. The 

banking agencies significantly streamlined Call Report requirements for banks with 

less than $1 billion in total assets. This streamlined Call Report resulted in 24 

fewer pages than the previous total of 85, and reduced data items required to be 

reported by small banks by 40 percent. The banking agencies also increased the 

number of institutions eligible for 18-month, rather than 12-month, cycles for safety 

and soundness and Bank Secrecy Act exams. And the Federal Reserve implemented 

38 

a desirable statutory change to raise the threshold of its Small Bank Holding Company Policy Statement from $500 million to $1 billion in assets. 

In addition, earlier this year, the U.S. banking agencies issued a report under the 

Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) that outlined additional measures that the agencies committed to completing to reduce regulatory burden. Perhaps most notably, the agencies committed to developing a proposal to simplify the generally applicable capital framework that applies to community banking organizations. Among other things, this proposal is being designed to 

simplify the current regulatory capital treatment of commercial real estate exposures, mortgage-servicing assets, and deferred tax assets. The agencies would seek 

industry comment on the proposal through the normal notice and comment process. 

The agencies also expect to further reduce burden on small banks by additional 

streamlining of Call Reports. 

The Federal Reserve has also supported increases in various statutory thresholds 

in the Dodd-Frank Act to more narrowly focus financial stability reforms on larger 

banking firms. For example, we believe that small banking organizations could be 

exempted from the Volcker rule and from the incentive compensation requirements 

of the Dodd-Frank Act. We also would support an increase in the $10 billion DoddFrank Act asset threshold for company-run stress tests and risk committee requirements, and in the $50 billion threshold for enhanced prudential standards under 

section 165 of the Dodd-Frank Act. 

Resolution plans 

The U.S. G–SIBs have made substantial progress in improving their resolvability 

and have taken concrete steps to implement important organizational, governance, 

and operational measures developed in the course of their resolution planning exercises. These firms will be filing new plans on July 1 that should incorporate agency 

feedback and guidance. The Federal Reserve and FDIC will engage in a full review 

of these plans. 

We are exploring with the FDIC ways to improve the resolution planning process. 

We believe it is worthwhile to consider extending the cycle for living will submissions from annual to once every 2 years, and focusing every other of these filings 

on key topics of interest and material changes from the prior full plan submission. 

In addition, there may be opportunities to greatly reduce the submission requirements for a large number of firms due to their relatively small, simple, and domestically focused activities. Such an approach could limit full plan filing requirements 

to firms that are large, complex, or have systemically critical operations. 

Volcker rule 

The Federal Reserve is reassessing whether the Volcker rule implementing regulation most efficiently achieves its policy objectives, and we look forward to working 

with the other four Volcker rule agencies to find ways to improve the regulation. 

In our view, there is room for eliminating or relaxing aspects of the implementing 

regulation that do not directly bear on the Volcker rule’s main policy goals. We also 

believe it would be constructive for Congress to consider focusing the Volcker rule 

on entities with significant trading books and eliminating the requirement that 

smaller firms be subject to the rule. In the meantime, we believe that it is worthwhile for the agencies to consider further tailoring of the implementing rule as it 

applies to smaller firms and firms with small trading books, and to consider ways 

to streamline or reduce the paperwork and reporting burden associated with the 

rule. 

Enhancements to stress testing and CCAR 

The Federal Reserve is committed to increasing the transparency of the stress 

testing and CCAR processes. We will soon seek public feedback concerning possible 

forms of enhanced disclosure. One such disclosure would be a range of indicative 

loss rates predicted by the Federal Reserve’s models for various loan and securities 

portfolios. We would also disclose more information about risk characteristics that 

contribute to the loss-estimate ranges. 

When we release CCAR results next week, we will disclose more detailed information on CCAR’s qualitative assessment. We will also publish a document later this 

year summarizing the performance of the industry on qualitative matters. Many of 

our largest banking firms have made substantial progress toward meeting supervisory expectations for capital planning. If that progress continues, I believe it will 

be appropriate to consider removing the qualitative objection from CCAR for those 

firms that achieve and sustain high-quality capital planning capabilities. We would 

continue to assess the capital planning practices of these firms as part of our ongoing supervisory processes. I would also see it as appropriate to adjust CCAR’s assumptions regarding the balance sheet and capital distributions. These adjustments 

39 

would take place in conjunction with the integration of the stress test into a firm’s 

regulatory capital requirements. 

Leverage ratio 

In light of the substantial progress in the build-out of our overall regulatory capital and stress testing frameworks over the past few years, the Federal Reserve is 

taking a fresh look at the enhanced supplementary leverage ratio. We believe that 

the leverage ratio is an important backstop to the risk-based capital framework, but 

that it is important to get the relative calibrations of the leverage ratio and the riskbased capital requirements right. Doing so is critical to mitigating any perverse incentives and preventing distortions in money markets and other safe asset markets. 

Changes along these lines also could address concerns of custody banks that their 

business model is disproportionately affected by the leverage ratio. 

Conclusion 

U.S. banks today are as strong as any in the world, as shown by their solid profitability and healthy lending over recent years. As we consider the progress that has 

been achieved in improving the resiliency and resolvability of our banking industry, 

it is important for us to look for ways to reduce unnecessary burden. We must also 

be vigilant against new risks that may develop. In all of our efforts, our goal is to 

establish a regulatory framework that helps ensure the resiliency of our financial 

system, the availability of credit, economic growth, and financial market efficiency. 

We look forward to working with our fellow regulatory agencies and with Congress 

to achieve these important goals. 

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* NCUA is the independent Federal agency created by the U.S. Congress to regulate, charter, 

and supervise Federal credit unions. With the backing of the full faith and credit of the United 

States, NCUA operates and manages the National Credit Union Share Insurance Fund, insuring 

the deposits of 108 million account holders in all Federal credit unions and the overwhelming 

majority of State-chartered credit unions. At MyCreditUnion.gov and Pocket Cents, NCUA also 

educates the public on consumer protection and financial literacy issues. 1 12 U.S.C. 3311. 

2See 12 USC 1813(q). 

PREPARED STATEMENT OF J. MARK MCWATTERS 

ACTING BOARD CHAIRMAN, NATIONAL CREDIT UNION ADMINISTRATION * 

JUNE 22, 2017 

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

Acting Chairman of the National Credit Union Administration Board, I appreciate 

the invitation to testify about regulatory relief. I was sworn in as a Member of the 

NCUA Board in 2014 and named Acting Chairman by President Trump on January 

23, 2017. 

As requested in your letter of June 6, my testimony today addresses recommendations to achieve real relief while maintaining safety and soundness and compliance 

with all legal requirements. I cover recommendations in the most recent report 

under the Economic Growth and Regulatory Paperwork Reduction Act, EGRPRA, 

and in the U.S. Treasury Department’s June 2017 report, ‘‘A Financial System That 

Creates Economic Opportunities Banks and Credit Unions.’’ I also discuss the 

NCUA Board’s most recent efforts to reduce regulatory and examination burdens for 

credit unions to help create economic growth. 

Economic Growth and Regulatory Paperwork Reduction Act 

The NCUA voluntarily participates in the ongoing interagency review process created by the Economic Growth and Regulatory Paperwork Reduction Act of 1996 

(EGRPRA).1 EGRPRA requires the Federal Financial Institutions Examination 

Council and its member agencies to review their regulations at least once every 10 

years to identify rules that might be outdated, unnecessary, or unduly burdensome. 

Overview of the NCUA’s Participation in EGRPRA 

The NCUA is not required by law to participate in the EGRPRA review process, 

because the NCUA is not defined as an ‘‘appropriate Federal banking agency,’’ 

under EGRPRA.2 Nonetheless, the NCUA embraces the objectives of EGRPRA and, 

in keeping with the spirit of the law, the NCUA participates in the review process. 

(The NCUA also participated in the first EGRPRA review, which ended in 2006). 

The categories used by the NCUA to identify and address issues are: 

• Agency Programs; 

• Applications and Reporting; 

• Capital; 

• Consumer Protection; 

• Corporate Credit Unions; 

• Directors, Officers and Employees; 

• Money Laundering; 

• Powers and Activities; 

• Rules of Procedure; and 

• Safety and Soundness. 

These categories are comparable, but not identical, to the categories developed 

jointly by the banking agencies covered by EGRPRA, and reflect some of the fundamental differences between credit unions and banks. For example, ‘corporate credit 

unions’ is a category unique to the NCUA. For the same reason, the NCUA decided 

to publish its notices separately from the joint notices used by the banking agencies, 

although all of the notices were published at approximately the same time. The 

NCUA included in its EGRPRA review all rules over which the NCUA has drafting 

authority, except for certain rules that pertain exclusively to internal operational or 

organizational matters at the agency, such as the NCUA’s Freedom of Information 

Act rule. 

The NCUA is also mindful that credit unions are subject to certain rules issued 

or administered by other regulatory agencies, such as the Consumer Financial Protection Bureau (CFPB) and the Department of the Treasury’s Financial Crimes Enforcement Network. Because we have no independent authority to change such 

68 

3 A challenge of this rule by the American Bankers Association is currently pending. 

4See Pub. L. No 113–252 (December 18, 2014). 

rules, our notices (like the joint notices prepared by the other agencies) advise that 

comments submitted to us but focused on a rule administered by another agency 

will be forwarded to that agency for appropriate consideration. 

Response to EGRPRA Comments: 

Field of Membership 

Credit unions are limited to providing service to individuals and entities that 

share a common bond, which defines their field of membership. The NCUA Board 

diligently implements the Federal Credit Union Act’s directives regarding credit 

union membership. In October 2016, the NCUA Board modified and updated its 

field of membership rule addressing issues such as: 

• The definitions of local community, rural district, and underserved area; 

• Multiple common-bond credit unions and members’ proximity to them; 

• Single common-bond credit unions based on a trade, industry, or profession; and 

• The process of applying for a new charter or expanding an existing Federal 

credit union.3

Member Business Lending 

Congress has empowered the Board to implement the provisions in the Federal 

Credit Union Act that address member business loans. A final rule adopted by the 

NCUA Board in February 2016 was challenged by the Independent Community 

Bankers of America, but was affirmed by the District Court for the Eastern District 

of Virginia in January 2017. The final rule, approved unanimously by the Board, 

is wholly consistent with the Act, as the Court reinforced, and contains regulatory 

provisions which: 

• Give credit union loan officers the ability, under certain circumstances, to no 

longer require a personal guarantee; 

• Replace explicit loan-to-value limits with the principle of appropriate collateral 

and eliminating the need for a waiver; 

• Lift limits on construction and development loans; 

• Exempt credit unions with assets under $250 million and small commercial loan 

portfolios from certain requirements; and 

• Affirm that nonmember loan participations, which are authorized under the 

Federal Credit Union Act, do not count against the statutory member business 

lending cap. 

Federal Credit Union Ownership of Fixed Assets 

In December 2016, the NCUA Board issued a final rule that eliminated the requirement that Federal credit unions have a plan by which they will achieve full 

occupancy of premises within an explicit timeframe. The final rule allows Federal 

credit unions to plan for and manage their use of office space and related premises 

in accordance with their strategic plans and risk-management policies. It also clarified that, ‘‘partial occupancy’’ means occupation of 50 percent of the relevant space. 

Expansion of Share Insurance Fund Coverage 

With the enactment by Congress of the Credit Union Share Insurance Fund Parity Act in December 2014, the NCUA was expressly authorized to extend Federal 

share insurance coverage on a pass-through basis to funds held on deposit at federally insured credit unions and maintained by attorneys in trust for their clients, 

without regard to the membership status of the clients.4 Many industry advocates, 

including some EGRPRA commenters, urged the NCUA to consider ways to expand 

this type of pass-through treatment to other types of escrow and trust accounts 

maintained by professionals on behalf of their clients. The NCUA Board issued a 

proposed rule in April 2015, inviting comment on ways in which the principles articulated in the Parity Act might be expanded into other areas and types of account 

relationships. 

Reviewing the numerous comments received in response to this invitation, the 

agency undertook extensive research and analysis and concluded that some expansion of this concept into other areas was warranted and legally permissible. Accordingly, in December 2015, the NCUA Board unanimously approved the issuance of 

a final rule in which expanded share insurance coverage on a pass-through basis 

would be provided for a licensed professional or other fiduciary that holds funds for 

69 

5See https://www.ncua.gov/newsroom/Pages/NW20150406NSPMSecondaryCapital.aspx for 

more information about the low-income credit union secondary capital announcement. 6Located within the U.S. Department of the Treasury, the Community Development Financial 

Institutions Fund’s mission is to expand the capacity of financial institutions to provide credit, 

capital, and financial services to underserved populations and communities in the United States. 

the benefit of a client or a principal as part of a transaction or business relationship. 

As noted in the preamble to the final rule, examples of such accounts include, but 

are not limited to, real estate escrow accounts and prepaid funeral accounts. 

Improvements for Small Credit Unions 

The credit union system is characterized by a significant number of small credit 

unions. The NCUA is acutely aware that the compliance burden on these institutions can become overwhelming, leading to significant expense in terms of staff time 

and money, strain on earnings, and, ultimately, consolidation within the industry 

as smaller institutions are unable to maintain their separate existence. While this 

is a difficult, multi-faceted problem, the NCUA is committed to finding creative 

ways to ease the regulatory burden without sacrificing the goal of safety and soundness throughout the credit union system. 

The agency has approached this problem from several different angles. Among the 

adjustments and improvements implemented in recent years are the following: 

• Responding to requests to facilitate access to and use of secondary capital by 

low-income credit unions (of which a significant percentage are also small), the 

agency has developed a more flexible policy. Investors can now call for early redemption of portions of secondary capital that low-income credit unions may no 

longer need. These changes also were designed to provide investors greater clarity and confidence.5

• Low-income designated credit unions have expanded powers to serve their members. The process by which credit unions may claim the low-income designation 

has also been streamlined and improved. Now, following an NCUA examination, 

credit unions that are eligible for the designation are informed by the NCUA 

of their eligibility and provided with a straightforward opt-in procedure through 

which they may claim the low-income designation. During the 6-year period 

ending December 31, 2016, the number of low-income credit unions increased 

from 1,110 to 2,491, reflecting an increase of 124 percent over that timeframe. 

Today more than 40 percent of credit unions have the low-income designation. 

Together, low-income credit unions had 39.3 million members and more than 

$409 billion in assets at year-end 2016, compared to 5.8 million members and 

more than $40 billion in assets at the end of 2010. 

• Explicit regulatory relief: Small credit unions have been expressly exempted 

from the NCUA’s risk-based capital requirements and the NCUA’s rule pertaining to access to sources of emergency liquidity. 

• Expedited exam process: The NCUA has created an expedited exam process for 

well-managed credit unions with CAMEL ratings of 1, 2, or 3 and assets of up 

to $50 million. These expedited exams require less time by examiners onsite 

and focus on issues most likely to pose threats to the smallest credit unions. 

• CDFI enhancements: The NCUA signed an agreement in January 2016 with the 

Department of the Treasury’s Community Development Financial Institutions 

Fund to double the number of credit unions certified as Community Development Financial Institutions within 1 year. The NCUA is leveraging data it routinely collects from credit unions to provide a pre-analysis and to assist in the 

streamlining of the CDFI application process. In addition, the NCUA recently 

adopted several technical amendments to its rule governing the Community Development Revolving Loan Fund. The amendments update the rule and make 

it more succinct, improving its transparency, organization and ease of use by 

credit unions.6

Expanded Powers for Credit Unions 

Enhanced powers for regulated institutions, consistent with statutory requirements, can have a significant beneficial effect that is similar in some ways to a 

reduced compliance burden. The NCUA has taken several recent steps to provide 

Federal credit unions with broader powers. These enhancements, as discussed 

below, have positioned credit unions to take better advantage of the activities Congress has authorized to strengthen their balance sheets. 

• In January 2014, the NCUA Board amended its rule governing permissible investments to allow Federal credit unions to invest in certain types of safe and 

legal derivatives for hedging purposes. This authority enables Federal credit 

70 

7Letter to Credit Unions 15–CU–04. https://www.ncua.gov/Resources/Documents/LCU2015- 

04.pdf. 8 In contrast to the agencies, the NCUA’s rule contains no distinction, with respect to the appraisal requirement, between commercial loans for which either sales of real estate parcels or 

rental income derived from the property is the primary basis for repayment of the loan, and 

loans for which income generated by the business itself is the primary repayment source. Under 

12 CFR part 722, the dollar threshold for either type of commercial loan is $250,000; loans 

above that amount must be supported by an appraisal performed by a State certified appraiser. 

By contrast, the banking agencies’ rule creates a separate category for the latter type of commercial loan and establishes a threshold of $1 million; loans in this category but below that 

threshold do not require an appraisal. 

unions to use simple ‘‘plain vanilla’’ derivative investments as a hedge against 

interest rate risk inherent in their balance sheets. 

• In February 2013, the NCUA Board amended its investments rule to add Treasury Inflation Protected Securities to the list of permissible investments for Federal credit unions. These securities provide credit unions with an additional investment portfolio risk-management tool that can be useful in an inflationary 

economic environment. 

• In March 2016, the NCUA Board further amended its investments rule to eliminate language that unduly restricted Federal credit unions from investing in 

bank notes with maturities in excess of 5 years. With this change, Federal credit unions are now able to invest in such instruments regardless of the original 

maturity, so long as the remaining maturity at the time of purchase is less than 

5 years. This amendment broadens the range of permissible investments and 

provides greater flexibility to credit unions, consistent with the Federal Credit 

Union Act. 

• In December 2013, the NCUA Board approved a rule change to clarify that Federal credit unions are authorized to create and fund charitable donation accounts—styled as a hybrid charitable and investment vehicle—as an incidental 

power, subject to certain specified regulatory conditions to ensure safety and 

soundness. 

Consumer Complaint Processing 

Responding to comments received by interested parties, the NCUA conducted a 

thorough review of the way in which it deals with complaints members may have 

against their credit union. In June 2015, the agency announced a new process, as 

set out more fully in Letter to Credit Unions 15–CU–04.7 The new process refers 

consumer complaints that involve Federal financial consumer protection laws for 

which the NCUA is the primary regulator to the credit union, which will then have 

60 days to resolve the issue with its member before the NCUA’s Office of Consumer 

Financial Protection and Access considers whether to initiate a formal investigation 

of the matter. Results of the new process have been excellent, with the majority of 

complaints resolved at the level closest to the consumer and with a minimal NCUA 

footprint. 

Interagency Task Force on Appraisals 

12 CFR part 722 of the NCUA’s rules and regulations establishes thresholds for 

certain types of lending and requires that loans above the thresholds must be supported by an appraisal performed by a State-certified or licensed appraiser. The rule 

is consistent with an essentially uniform rule that was adopted by the banking 

agencies after the enactment of FIRREA. The rule covers both residential and commercial lending.8

In response to comments received through the EGRPRA process, the NCUA joined 

with the banking agencies to establish an interagency task force to consider whether 

changes in the appraisal thresholds are warranted. Work by the task force is underway, including the development of a proposal to increase the threshold related to 

commercial real estate loans from $250,000 to $400,000. Any other recommendations developed by the task force will receive due consideration by the NCUA. 

Recommendations in the June 2017 Treasury Study 

The June Treasury Department report, written pursuant to Executive Order 

13772, seeks to align the regulation of financial institutions to help meet the needs 

of our economy more efficiently and effectively. It calls for the tailoring of rules to 

target specific problems areas and recommends greater cooperation among financial 

regulators. These recommendations combine to form a framework that is consistent 

with my approach as Acting Chairman and many of the efforts the NCUA Board 

has been pursuing in the past several months, which are addressed in this testimony. 

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9Pub. L. No. 111–22 (May 20, 2009), § 204(f). 

Several of the report’s specific recommendations could be particularly effective in 

achieving regulatory reform, depending on how they are implemented. For example, 

the proposal to allow institutions with at least 10 percent capital to achieve regulatory relief could be important for all types of financial institutions. 

The report also recognizes that the interests of consumers and financial inclusion 

must be integral pillars of regulatory reform. At the same time, the Treasury report 

reflects the realization that consumer protection rules are among the most burdensome that financial institutions face. In that regard, the report makes a number of 

recommendations for regulatory relief, including key changes to the Ability to 

Repay/Qualified Mortgage rule. 

Credit union-specific proposals include raising the threshold for stress testing requirements for federally insured credit unions to $50 billion in assets (from assets 

of $10 billion) and relief in the examination process, two key areas the NCUA has 

reviewed. The report also supports greater coordination among the NCUA, CFPB, 

and State regulators to streamline the supervisory process. 

Additional NCUA Initiatives 

The NCUA Board is actively considering several initiatives to reduce the regulatory burden on credit unions and to update and improve our rules. These are likely to be implemented within the relatively near term. 

Possible Temporary Corporate Credit Union Stabilization Fund Proposal for 

Early Termination 

Congress authorized the creation of the Temporary Corporate Credit Union Stabilization Fund in 2009.9 The availability of this fund allowed the agency to respond 

to the insolvency and failure of five large corporate credit unions without immediate 

depletion of the Share Insurance Fund, which protects the deposits and savings of 

credit union members. This fund also enabled the agency to fund massive liquidation expenses and guarantees on notes sold to investors backed by the distressed 

assets of the five failed corporate credit unions. 

Current projections are that the distressed assets underlying the notes will perform better than initially expected. In addition to improved asset performance, significant recoveries on legal claims have created a surplus that may eventually be 

returned to insured credit unions. The NCUA is exploring ways to speed up this 

process, principally by closing the Stabilization Fund and transferring its remaining 

assets to the Share Insurance Fund more quickly than initially anticipated. Doing 

so would bolster the equity ratio of the Share Insurance Fund, leading to a potential 

distribution of funds in excess of the Share Insurance Fund’s established equity 

ratio. 

Call Report Enhancements 

The NCUA intends to conduct a comprehensive review of the process by which 

it conducts its offsite monitoring of credit unions, namely through the Form 5300 

Call Report and Profile. As the data reflected in these reports affect virtually all 

of the NCUA’s major systems, the agency’s exploration of changes in the content of 

the Call Report and Profile will be on the front end of the NCUA’s recently announced Enterprise Solutions Modernization initiative, which will be a multi-year 

process. Started in the summer of 2016, this effort is comprehensive, ranging from 

the content of the Call Report and Profile to the systems that collect and use these 

data such as CU Online and the Automated Integrated Regulatory Examination 

System or AIRES. Throughout the process, we will seek input from external stakeholders to ensure our overarching goals are met. 

The imperative driving this modernization effort is—quite simply—that credit 

unions, like other depository institutions, are growing larger and more complex 

every day. At the same time, smaller credit unions face significant competitive challenges. In such an environment, it is incumbent on the NCUA to ensure its reporting and data systems produce the information needed to properly monitor and supervise risk at federally insured credit unions while leveraging the latest technology 

to ease the burden of examinations and reporting on supervised institutions. 

For these reasons, three of the other FFIEC agencies—the FDIC, OCC, and Federal Reserve—are currently reviewing their Call Report forms with an eye to reducing reporting burden. 

The NCUA’s goals in reviewing its data collection are: 

• Enhancing the value of data collected in pre-exam planning and offsite monitoring; 

72 

10 81 Fed. Reg. 36,600 (June 7, 2016). 11 12 USC 1790d(o)(2); see Legislative Recommendations, infra, for additional discussion about 

this requirement and the NCUA’s support for amending this provision. 12 12 CFR part 702, subpart A; see 80 Fed. Reg. 66,706 (October 29, 2015). 13 Although the exam cycle immediately prior to 2009 had been in the 18-month range, for 

most of its history the NCUA has followed an exam cycle of approximately 1 year. 

• Improving the experience of users; 

• Protecting the security of the data collected; and 

• Minimizing the reporting burden for credit unions. 

The NCUA will review all aspects of its data collection for federally insured credit 

unions. This review will go beyond reviewing the content of the Call Report and Profile to look at the systems credit unions use to submit data to the NCUA—namely 

CU Online. The agency has already conducted a broad canvassing of internal and 

external stakeholders to obtain their feedback on potential improvements to the Call 

Report and Profile. We have engaged stakeholders through a variety of methods, including a request for information published in the Federal Register with a 60-day 

comment period.10 The comment period was intended to provide all interested parties an opportunity to provide input very early in the process. We also developed 

a structured focus group process to aid in assessing ideas (to complement internal 

and State regulatory agency input), and we have created data collection systems 

that can be used to activate the focus group. 

Supplemental Capital 

The NCUA plans to explore ways to permit credit unions that do not have a lowincome designation to issue subordinated debt instruments to investors that would 

count as capital against the credit union’s risk-based net worth requirements. At 

present, only credit unions having a low-income designation are allowed to issue secondary capital instruments that count against their mandatory leverage ratios. For 

credit unions that do not have the low-income designation, only retained earnings 

may be used to meet the leverage requirements of the Federal Credit Union Act.11

Consistent with its regulatory review objectives, the NCUA issued an advance notice 

of proposed rulemaking regarding certain constraints that, if applied to subordinated debt instruments issued by credit unions, would enable institutions to count 

those instruments as capital for purposes of the risk-based capital rule. 

Risk-Based Capital 

I intend to revisit the NCUA’s recently finalized risk-based capital rule in its entirety and to consider whether significant revision or repeal of the rule is warranted.12

Examination Flexibility 

In response to the financial crisis and the Great Recession that ensued, the NCUA 

determined in 2009 to shorten its examination cycle to 12 months.13 The agency also 

hired dozens of new examiners at that time. Since then, the agency policy has been 

that every Federal credit union, and every federally insured, State-chartered credit 

union with assets over $250 million, should undergo an examination at least once 

per calendar year. 

In an effort to implement regulatory relief and to address some inefficiencies associated with the current program, the agency has undertaken a comprehensive review of all issues associated with examiner time spent onsite at credit unions, 

including both frequency and duration of examinations. The relatively strong health 

of the credit union industry at present supports addressing exam efficiencies. A 

working group within the agency was established, and it solicited input from the 

various stakeholders, including from within the agency, State regulatory authorities, 

and credit union representatives. The working group issued recommendations, 

which the Board incorporated into the agency’s 2017–18 budget. These included the 

recommendation that the agency provide greater flexibility in scheduling exams of 

well-managed and well-capitalized credit unions, consistent with the practices of 

other Federal financial regulators and the agency’s responsibility to protect the safety and soundness of the Share Insurance Fund. 

Other objectives for consideration include evaluating the feasibility of incorporating a virtual examination approach, as well as improvements to examiner 

training and a movement away from undue reliance on ‘‘best practices’’ that are 

unsupported by statute or regulation. In addition, the agency intends to revisit its 

recently enacted rule on stress testing for the largest credit unions to consider 

whether it is properly calibrated, and also to explore whether to move this important function in-house and out of the realm of expensive third-party contractors. The 

73 

ultimate goal of the NCUA’s examination review and other initiatives has been and 

remains that safety and soundness will be assured with minimal disruptive impact 

on the well-managed credit unions subject to examination. 

Enterprise Solutions Modernization 

The NCUA’s Enterprise Solutions Modernization program is a multi-year effort to 

introduce emerging and secure technology that supports the agency’s examination, 

data collection and reporting efforts in a cost effective and efficient way. The 

changes in our technology and other systems will improve the efficiency of the examination process and lessen, where possible, examination burdens on credit 

unions, including cost and other concerns identified during our EGRPRA review. 

Over the course of the next few years, the program will deploy new systems and 

technology in the following areas: 

• Examination and Supervision—Replace the existing legacy examination system and related supporting systems, like the Automated Integrated Regulatory 

Examination System or AIRES, with modernized tools allowing examiners and 

supervisors to be more efficient, consistent, and effective. 

• Data Collection and Sharing—Define requirements for a common platform 

to securely collect and share financial and nonfinancial data, including the Call 

Report, Credit Union Profile data, field of membership, charter, diversity and 

inclusion levels, loan and share data, and secure file transfer portal. 

• Enterprise Data Reporting—Implement business intelligence tools and establish a data warehouse to enhance our analytics and provide more robust data 

reporting. 

Additionally, the NCUA envisions introducing new processes and technology to 

improve its workflow management, resource and time management, data integration 

and analytics, document management, and customer relationship management. Consistent with this vision, the NCUA intends to consider ways to more transparently 

streamline its budget and align its priorities with its budget expenditures. 

Additional Areas of Focus 

Several other areas present opportunities for the NCUA to focus on improving and 

enhancing its body of regulations and its oversight of the credit union industry. 

These include: 

• Appeals Procedures. At present, the procedures by which a credit union or 

other entity aggrieved by an agency determination may seek redress at the level 

of the NCUA Board are inconsistent and poorly understood. As a result, the 

NCUA has developed proposed uniform rules to govern this area, both with respect to material supervisory determinations and other significant issues warranting review by the Board. 

• Corporate Rule (Part 704). Reform and stringent controls over the corporate 

credit union sector was necessary during the financial crisis that began in 2008. 

Nine years later, a reconsideration of the corporate rule and an evaluation of 

whether restrictions therein may be loosened is appropriate. The NCUA will 

consider a proposed rule at the Board’s monthly meeting this Friday. 

• Credit Union Advisory Council. Development of such a council would enable 

the agency to listen to and learn from industry representatives more directly, 

enhancing our efforts to identify and eliminate unnecessarily burdensome, expensive, or outdated regulations. 

Legislative Recommendations 

The Committee asked the NCUA to identify ways to ease credit union regulatory 

burdens through legislation. 

Looking ahead, the NCUA has several proposals to share with the Committee related to regulatory flexibility, field of membership requirements, member business 

lending, and supplemental capital. 

Regulatory Flexibility 

Today, there is considerable diversity in scale and business models among financial institutions. As noted earlier, many credit unions are very small and operate 

on extremely thin margins. They are challenged by unregulated or less-regulated 

competitors, as well as limited economies of scale. They often provide services to 

their members out of a commitment to offer a specific product or service, rather 

than a focus on any incremental financial gain. 

The Federal Credit Union Act contains a number of provisions that limit the 

NCUA’s ability to revise regulations and provide relief to such credit unions. 

74 

14 12 U.S.C. 1751 et. seq. 15The Federal Credit Union Act presently requires an area to be underserved by other depository institutions, based on data collected by the NCUA or Federal banking agencies. 12 U.S.C. 

1759 (c)(2)(A)(ii). The NCUA has implemented this provision by requiring a facilities test to determine the relative availability of insured depository institutions within a certain area. Congress could instead allow the NCUA to use alternative methods to evaluate whether an area 

is underserved to show that although a financial institution may have a presence in a community, it is not qualitatively meeting the needs of an economically distressed population. 16See 12 U.S.C. 1759(f)(1). 

Examples include limitations on the eligibility for credit unions to obtain supplemental capital, field-of-membership restrictions, investment limits, and the general 

15-year loan maturity limit, among others.14

To that end, the NCUA encourages Congress to consider providing regulators with 

enhanced flexibility to write rules to address such situations, rather than imposing 

rigid requirements. Such flexibility would allow the agency to effectively limit additional regulatory burdens, consistent with safety and soundness considerations. 

As previously noted, the NCUA continues to modernize existing regulations with 

an eye toward balancing requirements appropriately with the relatively lower levels 

of risk smaller credit unions pose to the credit union system. Permitting the NCUA 

greater discretion with respect to scale and timing when implementing statutory 

language would help mitigate the costs and administrative burdens imposed on 

smaller institutions, consistent with congressional intent and prudential supervision. 

The NCUA would like to work with Congress so that future rules can be tailored 

to fit the risk presented and even the largest credit unions can realize regulatory 

relief if their operations are well managed, consistent with applicable legal requirements. 

Field-of-Membership Requirements 

The Federal Credit Union Act currently permits only Federal credit unions with 

multiple common-bond charters to add underserved areas to their fields of membership. We recommend Congress modify the Federal Credit Union Act to give the 

NCUA the authority to streamline field of membership changes and permit all Federal credit unions to grow their membership by adding underserved areas. The language of H.R. 5541, the Financial Services for the Underserved Act, introduced in 

the House during the 114th Congress by Congressman Ryan of Ohio, would accomplish this objective. 

Allowing Federal credit unions with a community or single common-bond charter 

the opportunity to add underserved areas would open up access for many more 

unbanked and underbanked households to credit union membership. This legislative 

change also could enable more credit unions to participate in programs offered 

through the congressionally established Community Development Financial Institutions Fund, thus increasing the availability of affordable financial services in distressed areas. 

Congress may wish to consider other field of membership statutory reforms, as 

well. For example, Congress could allow Federal credit unions to serve underserved 

areas without also requiring those areas to be local communities. Additionally, Congress could simplify the ‘‘facilities’’ test for determining if an area is underserved.15

Other possible legislative enhancements could include elimination of the provision 

presently contained in the Federal Credit Union Act that requires a multiple common-bond credit union to be within ‘‘reasonable proximity’’ to the location of a group 

in order to provide services to members of that group.16 Another legislative enhancement that recognizes the way in which people share common bonds today, would 

be to provide for explicit authority for web-based communities as a basis for a credit 

union charter. 

The NCUA stands ready to work with Congress on these proposals, as well as 

other options to provide consumers more access to affordable financial services 

through credit unions. 

Member Business Lending 

The NCUA reiterates the agency’s long standing support for legislation to adjust 

the member business lending cap, such as S. 836, the Credit Union Residential Loan 

Parity Act, which Senators Wyden and Murkowski have introduced. This bipartisan 

legislation addresses a statutory disparity in the treatment of certain residential 

loans made by credit unions and banks. 

When a bank makes a loan to purchase a one- to four-unit, non-owner-occupied 

residential dwelling, the loan is classified as a residential real estate loan. If a credit 

union were to make the same loan, it is classified as a member business loan and 

75 

* Statement Required by 12 U.S.C. § 250: The views expressed herein are those of the Office 

of the Comptroller of the Currency and do not necessarily represent the views of the President. 

is, therefore, subject to the member business lending cap. To provide regulatory parity between credit unions and banks for this product, S. 836 would exclude such 

loans from the statutory limit. The legislation also contains appropriate safeguards 

to ensure strict underwriting and servicing standards are applied. 

Supplemental Capital 

The NCUA supports legislation to allow more credit unions to access supplemental capital, such as H.R. 1244, the Capital Access for Small Businesses and Jobs 

Act. Introduced by Congressmen King and Sherman, this bill would allow healthy 

and well-managed credit unions to issue supplemental capital that would count as 

net worth. This bipartisan legislation would result in a new layer of capital, in addition to retained earnings, to absorb losses at credit unions. 

The high-quality capital that underpins the credit union system was a bulwark 

during the financial crisis and is key to its future strength. However, most Federal 

credit unions only have one way to raise capital—through retained earnings. Thus, 

fast-growing, financially strong, well-capitalized credit unions may be discouraged 

from allowing healthy growth out of concern it will dilute their net worth ratios and 

trigger mandatory prompt corrective action-related supervisory actions. 

A credit union’s inability to raise capital outside of retained earnings limits its 

ability to expand its field of membership and to offer more products and services 

to its membership and eligible consumers. Consequently, the NCUA has previously 

encouraged Congress to authorize healthy and well-managed credit unions to issue 

supplemental capital that will count as net worth under conditions determined by 

the NCUA Board. Enactment of H.R. 1244 would lead to a stronger capital base for 

credit unions and greater protection for taxpayers. 

Conclusion 

In conclusion, we must slow, if not stop, the machine that grinds out a relentless 

flow of new regulatory burdens. We must also do much more to improve how we 

regulate and to consider the costs, as well as the benefits, of each new regulation. 

Credit unions cannot afford to let time slip through their fingers because they are 

too busy complying with unnecessary and burdensome regulations. Instead, they 

must focus on today’s challenges and risks while thoughtfully preparing for the future. Absent safety and soundness concerns, the NCUA must not stand in the way 

of credit unions’ efforts to develop and execute their business plans, meet the expectations of their members, and build a robust and dynamic credit union community 

for the future. 

Thank you again for the invitation to testify. I am happy to answer your questions. 

PREPARED STATEMENT OF KEITH A. NOREIKA 

ACTING COMPTROLLER OF THE CURRENCY, COMPTROLLER OF THE CURRENCY * 

JUNE 22, 2017 

I. Introduction 

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

you for the opportunity to testify today about fostering economic growth by strengthening our Nation’s financial institutions. I am grateful for the courtesy you have 

shown me since I became the Acting Comptroller of the Currency on May 6, and 

I appreciate your ongoing interest in the Office of the Comptroller of the Currency 

(OCC) and its role in the effective administration of the Federal banking system. 

I am honored to serve in this important position and to support the statutory mission of the OCC: to ensure that national banks and Federal savings associations 

(banks) operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations. The 

agency is comprised of extraordinary professionals who share a deep commitment 

to this mission, and I am proud to serve alongside them until the Senate confirms 

the 31st Comptroller of the Currency. 

During my service, I look forward to engaging with my colleagues, stakeholders, 

and Congress to initiate a robust dialogue and explore opportunities to foster economic growth. For our part, we at the OCC will move ahead to do what we can 

within our current authorities to foster economic growth and opportunity. Our efforts will be informed by the financial regulatory policy of this Administration, as 

76 

1 Executive Order 13772 (February 3, 2017). 

2 U.S. Department of the Treasury, ‘‘A Financial System That Creates Economic Opportunities; 

Banks and Credit Unions’’ (June 2017). 

articulated in the President’s Executive Order entitled ‘‘Core Principles for Regulating the United States Financial System’’1 and developed more fully in the recent 

report prepared by the Department of the Treasury (Treasury Report).2

The banks that the OCC supervises should be—as they are today—engines of economic growth for the Nation. When the Federal banking system is running well, it 

can power growth and prosperity for consumers, businesses, and communities across 

the country. Our job as bank supervisors is to strike the right balance between supervision that effectively ensures safety, soundness, and compliance, while—at the 

same time—enabling economic growth. To achieve that balance, we need to avoid 

imposing unnecessary burden and creating an environment so adverse to risk that 

banks are inhibited from lending and investing in the businesses and communities 

they serve. Regulation does not work when it impedes progress, and banks cannot 

fulfill their public purpose if they cannot support and invest in their customers and 

communities. 

In the less than 2 months that I have served as Acting Comptroller, I have already taken several important steps to promote a regulatory environment that is 

balanced and that provides the certainty needed to encourage investment. In particular, I have met with various trade groups, scholars, community groups, and my 

colleagues at the Federal and State levels to begin a constructive, bipartisan dialogue on how our regulatory system might be recalibrated to foster economic growth. 

For example, I have sought the views of my colleagues at the other Federal banking agencies about simplifying the regulatory framework implementing the Volcker 

Rule. In recent years, many of the Nation’s financial institutions have struggled to 

understand and comply with these regulations, devoting significant resources that 

could have been put to more productive uses. There is near unanimous agreement 

that this framework needs to be simplified and clarified. I have recommended that 

we invite stakeholders to share their thoughts and ideas at an early stage to help 

inform how the agencies should proceed. Our conversation on this issue is ongoing, 

and it is my hope that the effort we undertake will lead to solutions that the agencies can implement and that also will inform Congress’s consideration of legislation 

in this area. 

The Volcker Rule provides a practical example of how conflicting messages and 

inconsistent interpretation can exacerbate regulatory burden by making industry 

compliance harder and more resource intensive than necessary. Under my leadership, the OCC is undertaking improvements in our internal operations to attack 

that problem in ways that are within our control. For example, I have emphasized 

the importance of the OCC speaking with one voice. The banks that we supervise 

must hear a clear and consistent message, regardless of whether it comes from 

Washington, DC, or our field offices. A single voice provides certainty, without 

which businesses and consumers are reluctant to invest in the future, and it instills 

in the American people confidence in our Government. 

I also have made a point of seeking the views of our agency’s ‘‘boots on the 

ground’’ for ideas to reduce unnecessary regulatory burden and improve efficiency 

in our supervision and regulation of the Federal banking system in order to promote 

economic growth. The response has been overwhelming. To date, we have over 400 

suggestions. OCC employees are excited to operationalize our collective experience 

and to contribute to efficient and effective regulation of the Federal banking system. 

In this way, the OCC will play our part to help to minimize the burden associated 

with regulation and maximize regulatory certainty that will promote healthy lending by banks. The investments by the banking sector in customers, local communities, and businesses will, in turn, drive economic growth. The next section of my 

testimony discusses the opportunities that I see to maximize regulatory efficiency 

and promote the availability of credit to fund the needs of consumers and businesses. The third section summarizes the results of the recently completed Economic 

Growth and Regulatory Paperwork Reduction Act (EGRPRA) regulation review. As 

noted below, I also include an appendix containing a number of legislative ideas and 

recommendations for the Committee’s consideration. 

II. Opportunities to Foster Economic Growth 

Overview 

The United States has the strongest financial system in the world, and one that 

others want to emulate, in part because it has proven to be dynamic, resilient, and 

adaptable to changing conditions. Most would agree that whatever improvements we 

77 

3The OCC’s proposals also contain suggestions for updating laws that may impede economic 

growth because they no longer reflect modern business practice. 

seek to make to that system and the way it is regulated ought to reinforce those 

qualities, not undermine them. I also believe that now—nearly 10 years after the 

events that sparked the Great Recession and 7 years after the enactment of the 

Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)— 

is a good time to take stock of how well our financial system is working and to 

strive for balance and improvements in the system and in how we regulate it. 

This sort of reevaluation has occurred, typically on a bipartisan basis, at intervals 

throughout our history. The alphabet soup of financial legislation enacted in modern 

memory—CEBA, FIRREA, FDICIA, GLBA, and, earlier, the Banking Act of 1933 

and the laws creating Federal deposit insurance and bank holding companies 

(BHC)—were responses to then-current events that compelled a shift in the scope 

or tenor of the Government’s oversight of the financial system. So it is not unusual—in fact, it has been our national practice—to revisit financial regulation from 

time to time and to make the adjustments that can attract a consensus for reform. 

In that same spirit, today I offer recommendations for improvements that would 

promote the dynamism and resiliency of the Federal banking system while addressing areas that I believe unnecessarily encumber economic growth. In my view, 

bringing balance to financial regulation in a way that encourages economic investment and expansion involves eliminating unnecessary or duplicative regulatory activities, streamlining and updating regulatory processes to enhance effectiveness 

and efficiency, and providing regulatory clarity to promote confidence and certainty 

for market participants. The appendix to this testimony describes each of the OCC’s 

recommendations, and I will highlight a few of them here. In most cases, there are 

a number of approaches that could achieve the objectives of promoting economic 

growth and trimming burden. I would like to start a dialogue about which ones are 

best. 

Our recommendations are informed by two straightforward ideas. First, while the 

content of some regulations can rightly be described as burdensome because, for example, the regulation is needlessly prescriptive or complex, it also is the case that 

a multiplicity of regulators performing overlapping functions can contribute substantially to regulatory burden and hinder economic growth. Our system sometimes 

deploys multiple regulators to solve the same problem. That is an approach that can 

lead to waste, redundancy, and duplication of resources both in the regulatory agencies and for the institutions we supervise. I have suggestions for where we might 

streamline supervision to reduce regulatory redundancy. 

Second, our system sometimes covers more institutions or broader categories of 

activity than it needs to in order to contain or mitigate the risks it seeks to address. 

This has often been referred to as a lack of appropriate ‘‘tailoring’’ or, conversely, 

as a ‘‘trickling-down’’ to lower-risk institutions or activities of regulatory standards 

or approaches that really are only appropriate for high-risk institutions or activities. 

I have suggestions to offer in this category as well.3

The OCC’s recommendations are consistent with the Treasury Report, which is 

guided by free-market principles and aimed at maximizing sustainable, economic 

growth. The Treasury Report includes proposals to break the cycle of sluggish 

growth, improve access to credit, maintain liquid markets, and engage in a holistic 

analysis of the cumulative impact of the regulatory environment. The Treasury Report is a thoughtful addition to the ongoing discussion of how to promote economic 

growth, and I appreciate Treasury’s consultation with the OCC in developing it. 

Maximizing Economic Growth by Minimizing Regulatory Inefficiency 

Our organically developed, uniquely American system of independent banking regulators risks, at times, unnecessary regulatory burden and overlap. Accordingly, we 

need to be mindful to calibrate regulatory jurisdiction to maximize regulatory efficiency by minimizing unnecessary regulatory duplication. 

As the Treasury Report notes, many of the changes that would streamline regulation and free up resources that could fuel economic growth are not possible under 

the current statutory framework. In some instances, Federal banking law allocates 

jurisdiction to regulators in a way that actually promotes duplication and redundancy. Congress could foster economic growth by reducing regulatory overlap and 

increasing coordination within the Federal financial regulatory framework. 

For example, under current law (subject to certain exemptions, like the one for 

banks that conduct only fiduciary activities) companies that own banks are regulated as BHCs by the Board of Governors of the Federal Reserve System (Federal 

Reserve Board) under the Bank Holding Company Act. Their depository institution 

subsidiaries, however, are often regulated at the Federal level by a different 

78 

4The regulator of the insured depository institution (IDI) subsidiary of the BHC will be the 

OCC in the case of national banks and Federal savings associations, the Federal Deposit Insurance Corporation (FDIC) in the case of State-chartered banks that are not members of the Federal Reserve System (FRS), and the Federal Reserve Board itself in the case of State-chartered 

banks that are FRS members. 

regulator.4 This means that most companies that own banks have at least two regulators, even if they are small and even when the depository institution subsidiary 

comprises the vast majority of the company’s assets so that there is no meaningful 

distinction between the business of the company and the business of its bank subsidiary. Congress could reduce regulatory redundancy in this situation by amending 

the Bank Holding Company Act to provide that when a depository institution constitutes a substantial portion of its holding company’s assets (e.g., 90 percent), the 

regulator of the depository institution would have sole examination and enforcement 

authority for both the holding company and the depository institution. This change 

would eliminate supervisory duplication and its inherent inefficiencies, freeing resources to meet the needs of banks’ customers and communities. It could be limited 

to BHCs of a certain asset size. At the same time, banking law would continue to 

recognize that it is appropriate to have a separate regulator for large companies 

that conduct complex activities, including securities and derivatives businesses, as 

well as consumer and commercial banking. The proposed change simply would extend to smaller banking organizations the benefits of having a single Federal regulator at both the bank and holding company levels that State banks that are members of the FRS and their holding companies already enjoy today. 

Another approach to the problem of multiple regulators would be to eliminate 

statutory impediments for firms that want the choice to operate without a holding 

company. Congress could modernize the corporate governance requirements for national banks by allowing them to adopt fully the governance procedures of, for example, the State in which their main office is located, the Delaware General Corporation Law, or the Model Business Corporation Act. This change would put these 

banks on the same footing as BHCs and benefit banks that wish to operate and access the capital markets without a holding company. 

A second example of regulatory duplication in banking law is the allocation of authority to the Consumer Financial Protection Bureau (CFPB) to examine and supervise the activities of IDIs over $10 billion in asset size with respect to compliance 

with the laws designated as Federal consumer financial laws. This division of 

authority means that two separate regulators—the CFPB and the prudential regulator—conduct examination and supervision activities with respect to the same institutions. 

There are many options Congress could consider to address this overlap. For example, Congress could return examination and supervision authority with respect 

to Federal consumer financial laws to the Federal banking agencies for the institutions that they otherwise have jurisdiction to supervise, without regard to an institution’s asset size. Under this approach, the CFPB would continue to set the standards with respect to the Federal consumer financial laws, supervise nondepository 

institutions, and take enforcement action. Depository institutions would have a single supervisor overseeing compliance with Federal consumer financial and other 

laws, as well as their safety and soundness, reinforcing the interdependency between sound banking practices and fair treatment of a bank’s customers. As is the 

case today, the primary prudential regulator would retain enforcement authority 

with respect to institutions at or under $10 billion in asset size. The primary regulator also would retain the current ‘‘back-up’’ enforcement authority with respect to 

institutions over $10 billion in asset size, which enables it to bring an enforcement 

action when warranted if the CFPB declines to do so. 

This approach would reduce regulatory burden and provide regulatory certainty 

by eliminating the need for an institution to prepare for multiple, potentially overlapping examinations and to meet the differing expectations of multiple regulators. 

This approach also could result in a more effective deployment of limited regulatory 

resources and thus facilitate more effective and efficient supervision with existing 

resources. In this regard, it may be useful—either as the predicate for or an alternative to this revision to current law—for Congress to require a study of how the 

CFPB’s authorities are currently used. It has been the OCC’s experience that the 

CFPB has focused its examination and supervisory resources primarily on the largest banks that serve the greatest number of consumers. If that observation is accurate, then returning supervisory responsibility to the primary regulator should result in a more appropriate level of oversight for midsize institutions. 

As the Treasury Report describes, the formation of new financial institutions is 

crucial to maintain a vibrant and growing economy. Federal law currently requires 

79 

5 12 U.S.C. 5515(c)(3). 

6 12 U.S.C. 1831c(d)(2). 

the approval of two regulators to form an IDI—the chartering authority (i.e., the 

OCC for national banks and Federal savings associations) and the FDIC. This requirement for dual approval has slowed the formation of de novo institutions in recent years. To facilitate new entrants into the market, Congress could streamline 

the process of forming de novo banks by allowing banks that receive deposits (other 

than trust funds) to obtain FDIC deposit insurance upon certification of the OCC 

when the OCC charters and authorizes new banks to commence business. This was 

the state of the law prior to 1991, and I believe it is preferable to the current process which requires applicants for a bank charter to submit two applications covering 

the same proposal to two different Federal agencies, each of which reviews the proposal for essentially the same issues. 

The current process wastes resources, results in unnecessary delays, and represents a significant barrier to entry into the banking business. Instead, we should 

ensure that our processes tilt in favor of chartering and insuring entities that can 

qualify under the statutory standards. Congress also could explore providing the 

FDIC with a specified time period—such as 30 days—within which to object to the 

grant of deposit insurance to a particular new bank and provide written reasons for 

its objection. Statutory consequences would attach to the FDIC’s action. The FDIC’s 

failure to object would result in the grant of insurance; the FDIC’s objection, together with its rationale, would be reviewable in court as final agency action. 

The options above—the allocation of supervisory authority over consumer compliance matters and the role of the primary regulator in the decision to grant deposit 

insurance—suggest an approach that might be used more generally to address situations where there has been an unnecessary overlap of regulators. The approach is 

akin to a system of traffic lights. One regulator has the lead responsibility or primary authority: it has a ‘‘green light’’ to act. Other regulators that have concurrent 

or back-up authority have a ‘‘red light.’’ They wait to act until a contingency provided in the law has occurred. 

There are a number of places where the banking laws use this approach today. 

The backup authority that primary regulators have to the CFPB with respect to the 

enforcement of consumer laws in the case of institutions over $10 billion in asset 

size, discussed above, is one example.5 The primary regulators’ back-up examination 

authority with respect to the conduct of bank-permissible activities by nondepository 

institution subsidiaries of a BHC is another.6 In my view, the primary Federal prudential regulator ordinarily should have the lead responsibility for matters pertaining to an entity supervised by that regulator. But providing for the exercise of 

back-up, secondary, or contingent authority in well-defined circumstances by another Federal regulator with a statutory interest in the conduct of activities of the 

supervised entity can provide an orderly mechanism for accomplishing the objectives 

of multiple statutes that apply to the entity. 

Right-Sizing Regulation 

The statutes do not always provide the Federal banking agencies with sufficient 

flexibility to tailor their regulations to the risk profiles of different institutions. This 

is true despite the fact that the risks inherent in large, complex institutions are 

markedly different in type and scope from those of smaller institutions. As a result, 

statutes that were intended to address the systemic risks typically associated with 

larger institutions often must be applied to smaller ones that do not pose such 

broad, systemic risks. This portion of my testimony provides a few examples of unintended consequences that could be reversed if specific statutes were amended to 

eliminate the most onerous consequences for smaller banks. 

For purposes of this discussion, ‘‘right-sizing’’ certainly means tailoring rules to 

fit the community bank business model. In some cases, such as the Volcker Rule, 

that may mean exempting community banks altogether from the obligation to comply with a rule because they simply do not engage in the type of activity or present 

the levels of risk that the rule was designed to address. 

In my view, right-sizing also means tailoring rules to the business models of 

midsize, or regional, banks. For midsize institutions, the threshold approach taken 

in a number of provisions in the law—$50 billion commonly defines the line between 

midsize and large institutions—represents a barrier to growth because, above that 

line, compliance costs rise so dramatically. The effect is to discourage competition 

with the largest institutions. For that reason, while asset size can appropriately be 

used as one measure of when and how to tailor regulations, in many cases, it should 

be supplemented by measures that better capture the level of risk an institution 

presents. The nature and scope of the institution’s activities are one such measure. 

80 

7The Treasury Report also recommended that the OCC, FDIC, and Federal Reserve Board 

continue their ongoing work to simplify the Call Report. I fully support this work and have encouraged these efforts at the OCC. 

So is a prudential regulator’s judgment—based on the qualitative and quantitative 

results of the regulator’s examinations—about the institution’s effectiveness in managing the risk that it does take on. 

Application of the Volcker Rule again illustrates the point. In reforming the 

Volcker Rule, it is preferable to create an ‘‘off-ramp’’—a clear path to exit for those 

institutions that do not present the risks that the Volcker Rule was designed to address. In my view, while size could be a factor in constructing the off-ramp, it is 

equally important to identify the nature and level of the activities that would bar 

an institution from the use of an off-ramp. In some cases, such as with community 

banks, an organization’s size generally reflects its traditional, noncomplex activities. 

Because the activities of an organization will change over time as banks enter new 

business lines, perhaps in new ways, I favor using notice-and-comment rulemaking, 

undertaken by the Federal banking agencies, as the best way to decide how to define them. 

Similarly, section 165 of the Dodd-Frank Act requires an annual stress test for all banks with assets of more than $10 billion, limiting regulators’ flexibility to determine when and within what parameters a stress test should be conducted. In certain circumstances, the burden of annual stress testing, particularly in accordance 

with prescriptive statutory requirements, is not commensurate with the systemic 

risks presented by an institution. 

The Treasury Report recommends raising the threshold for these stress tests from $10 billion to $50 billion, recognizing that institutions in this size range, as a practical matter, generally do not present the risks that require annual stress testing. 

In addition, the Treasury Report would grant the banking regulators authority to 

further calibrate the threshold for banks above the $50 billion threshold to account 

for risk and complexity. Another option to address this issue would be for Congress 

to give the Federal banking agencies broad authority to tailor by rule the statutory 

stress testing requirement, without regard to an asset threshold. This approach is 

consistent with the principle of bringing balance to financial regulation I discussed 

earlier in my testimony. It would avoid the potential for over and under inclusiveness associated with fixed-asset thresholds. It also provides regulators flexibility to 

calibrate rules and requirements to be commensurate with the systemic risks presented by individual or groups of institutions. 

Congress also could simplify the capital requirements currently applicable to community banks by exempting banks that do not use models-based capital requirements from section 171 of the Dodd-Frank Act (the ‘‘Collins Amendment’’). This provision was adopted to prevent banks using models-based capital requirements from 

holding less than the generally applicable amount of capital. But smaller banks do 

not use models-based capital requirements, so the Collins Amendment may limit 

bank regulators from tailoring capital requirements to these smaller institutions 

even when the original purpose of the Collins Amendment is not present. Adopting 

this change would allow the Federal banking agencies to tailor the capital rules to 

match the size and complexity of the institutions to which this provision applies, 

consistent with the recommendations of the Treasury Report. One such approach 

that the agencies could pursue with this legislative change is the idea to exempt 

community banks from the Basel-based capital standards that currently apply, provided they comply with a robust leverage ratio requirement—10 percent, for example—and also do not engage in a set of risky activities that the regulators should 

define through notice-and-comment rulemaking. 

Congress also could streamline the reporting requirements to which community 

banks are subject, freeing the banks’ employees to return to the business of banking. 

For example, Congress could repeal section 122 of the Federal Deposit Insurance 

Corporation Improvement Act, which requires the Federal banking agencies to collect unneeded information on small business lending.7 Congress could repeal other 

unnecessary information collection provisions, such as the requirement stemming 

from section 1071 of the Dodd-Frank Act that banks gather extensive information 

on business loans, the benefits of which are unclear. 

The potential legislative changes I have discussed seek to strike the right balance 

between maintaining the strength of the Federal banking system through appropriate oversight of the Nation’s banks, while simultaneously enabling economic opportunity and encouraging economic growth. The balance can be achieved by eliminating duplication and redundancy and providing appropriate flexibility and discretion to promulgate rules that are effective and appropriately tailored. Balanced and 

coherent regulation, in turn, results in minimizing the cost of effective supervision 

81 

8 A discussion of the significant issues raised in the EGRPRA review and the agencies’ responses are included in the Joint Report to Congress, Economic Growth and Regulatory Paperwork Reduction Act (March 2017) (EGRPRA Report), at 22–78. 

and regulation and maximizing regulatory certainty and efficient compliance in 

order to promote growth and lending by banks that drives economic growth. 

III. EGRPRA 

The agency already has streamlined and reduced duplication and redundancy in 

several of its regulations following the recently completed EGRPRA process. 

EGRPRA requires the OCC, FDIC, and Federal Reserve Board, along with the Federal Financial Institutions Examination Council (FFIEC), to conduct a review of 

their regulations at least once every 10 years to identify outdated or otherwise unnecessary regulatory requirements imposed on IDIs. 

The agencies completed the first decennial EGRPRA review in 2007, and in June 

2014, they began the second EGRPRA review. Over an 18-month period, the agencies jointly published four Federal Register notices, inviting the public to consider 

every rule applicable to the institutions they supervise, including the then-recently 

finalized capital rules and rules issued pursuant to the Dodd-Frank Act, and to 

identify outdated, unnecessary, or unduly burdensome regulations. 

In each notice, the agencies identified specific issues for the public to consider, 

such as whether a rule or underlying statute imposed unnecessary requirements, 

created competitive disadvantages, or failed to account for the unique characteristics 

of a particular type of financial institution. The agencies also asked specific questions about how the regulations or underlying statutes affected community banks 

and other small IDIs. These questions reflected the agencies’ particular concern 

about the effect of regulatory burden on smaller institutions and their understanding that smaller institutions do not have the resources that larger institutions 

can bring to bear on regulatory compliance. 

To broaden public participation in the EGRPRA review, the agencies hosted six 

public outreach sessions in geographically diverse areas across the country, including a session focused on rural banks in Kansas City, Missouri. These outreach sessions provided the public with an opportunity to present their views directly to the 

agencies. Agency principals and staff participated in each session, as did representatives from banks, community and consumer groups, and other interested parties. 

Live and recorded audio and video broadcasts of each session were accessible on the 

agencies’ joint EGRPRA website to extend the reach of the EGRPRA review. 

From the beginning and throughout the review, the agencies received a steady 

stream of public feedback with ideas about how to reduce regulatory burden. Although the commenters identified a wide range of issues, they singled out certain 

areas where agency or legislative action could lead to meaningful burden reduction, 

including regulatory reporting, exam frequency, real estate appraisals, and the capital rules.8

The agencies took important steps to address issues raised by commenters while 

the review was still in process. As noted in the Treasury Report, they finalized Call 

Report revisions, including a streamlined Call Report for institutions having only 

domestic offices and less than $1 billion in total assets. This new Call Report reduced the number of data items required by approximately 40 percent and can be 

used by approximately 90 percent of all institutions required to file Call Reports. 

The agencies also finalized rules to raise the asset threshold for well capitalized 

and well managed institutions to qualify for an 18-month (rather than a 12-month) 

safety and soundness examination cycle. An additional 600 institutions now can 

qualify for this extended examination cycle. Institutions that qualify for the 18- 

month examination cycle also should be subject to less frequent Bank Secrecy Act 

(BSA) exams because an institution’s BSA compliance program is typically reviewed 

during its safety and soundness examination. In response to commenters’ concerns, 

the agencies also clarified when less burdensome evaluations can be performed in 

place of appraisals on real estate loans and issued guidance advising institutions of 

measures to address the shortage of State certified and licensed appraisers, particularly in rural areas. 

In addition to these interagency projects, the OCC independently took steps prior 

to the completion of the EGRPRA review to address comments received during the 

EGRPRA process, as well as to make other burden-reducing changes identified by 

OCC staff. For example, the OCC revised its licensing rules to provide expedited 

and simplified procedures for certain transactions and simplified requirements applicable to Federal savings associations. As always, the agency’s actions were 

framed by its statutory authority and calibrated to preserve the right balance where 

prudent oversight provides ample room for economic growth and investment. Upon 

82 

completion of the EGRPRA review, in March 2017, the agencies published the 

EGRPRA Report. This report summarizes the significant issues raised by the more 

than 230 written comments received in response to the Federal Register notices and 

the many comments from the panelists and attendees at the outreach sessions, each 

of which was carefully reviewed and considered. The EGRPRA Report highlights ongoing work, as well as steps the agencies plan to pursue jointly, in response to 

issues raised by commenters, including: 

• Replacing the complex treatment of high-volatility commercial real estate exposures in the current, capital framework with a more straightforward treatment 

for most acquisition, development, or construction loans; 

• Simplifying the regulatory capital treatment for mortgage servicing assets, certain deferred tax assets, and holdings of regulatory capital instruments issued 

by financial institutions; 

• Simplifying the limitations on minority interests in the current regulatory capital framework; 

• Increasing from $250,000 to $400,000 the threshold for when an appraisal is required for commercial real estate loans; 

• Adjusting certain asset-size thresholds that trigger the prohibition on a management official of one depository organization serving as a management official 

of an unaffiliated depository organization; and 

• Clarifying our flood insurance guidance on the escrow of flood insurance premiums, force-placed insurance, and detached structures. 

The EGRPRA Report also details individual agency efforts to address comments 

received during the EGRPRA process, including OCC projects to: 

• Continue to integrate national bank and Federal savings association rules to 

promote economic growth by reducing regulatory burden, ensuring fairness in 

supervision, and creating efficiencies; 

• Remove redundant and unnecessary supervisory information requests; 

• Improve the planning of onsite and offsite examinations; and 

• Make the examination process more efficient and less burdensome by leveraging 

technology. 

The agencies are aware that regulatory burden does not emanate only from statutes and regulations, but also from the processes and procedures related to examinations and supervisory oversight. In this regard, through the FFIEC, the agencies 

are jointly reviewing the examination process, examination report format, and examination report preparation process to identify further opportunities to minimize 

burden, principally by rethinking traditional processes and the use of technology. 

This effort is consistent with the Treasury Report’s recommendation that the regulators expand on current efforts to coordinate and rationalize examination procedures to promote accountability and clarity. 

The OCC also is continuing its work to enhance supervision with respect to consumer protection and compliance; to address our Community Reinvestment Act performance evaluation backlog; and to provide guidance on compliance with respect 

to the BSA and consumer protection matters. At the same time, the OCC continues 

its ongoing practice of reviewing and updating its supervisory and examiner guidance to align it with current practices and risks and to eliminate unnecessary or 

outdated guidance. 

The EGRPRA review and the resulting EGRPRA Report represent a significant 

effort on the part of the agencies and provided us and the public with an opportunity to take stock of how our regulations affect the institutions to which they 

apply and the improvements that we can make. The information we learned from 

this effort will inform our work to reduce regulatory burden, and I will ensure that 

these efforts continue during my time at the OCC. 

IV. Conclusion 

During my tenure as Acting Comptroller of the Currency, I will support the OCC’s 

efforts and work with my colleagues at the other Federal banking agencies to foster 

economic growth, including by championing regulatory and legislative changes that 

eliminate unnecessary regulatory burden and promote the health and vitality of the 

banking system. I will pursue opportunities to make this system more inclusive to 

new banks engaged in the business of banking. I will work to ensure accountability 

within the agency. 

Thank you for the opportunity to provide this Committee with my views on fostering economic growth by strengthening our Nation’s financial institutions. I look 

forward to working with you to achieve this goal. 

83 

APPENDIX 

Legislative Proposals to Foster Economic Growth by Strengthening our 

Nation’s Financial Institutions 

I. Proposals to Maximize Economic Growth By Minimizing Regulatory Inefficiency 

1. Streamline the Supervision of Holding Companies in Certain Circumstances 

Summary: This proposal would provide the appropriate Federal banking agency 

(i.e., the OCC, FRB, or FDIC) with sole examination and enforcement authority for 

a BHC and savings and loan holding company with total assets below a certain 

threshold where a bank or savings association comprises a substantial amount (e.g., 

90 percent) of the assets of the holding company. Under this approach, the FRB 

would retain authority to issue regulations implementing the Bank Holding Company Act and the provisions of the Home Owners’ Loan Act (HOLA) relating to savings and loan holding companies. 

Explanation: Depository institutions often comprise a substantial amount of the 

assets of holding companies. This is certainly true for those holding companies with 

less than $50 billion in assets. However, in most cases the depository institution and 

the holding company have different supervisors. Smaller institutions where the depository institution makes up the bulk of the assets in the holding company do not 

engage in the expansive activities that give rise to the types of complexity and interconnectedness that raise macroprudential concerns (such as resolvability). Requiring 

these institutions to respond to two supervisors is inefficient, redundant, and burdensome on the institution. Legislative changes that require a single regulator to 

oversee both the holding company and its depository institution and other subsidiaries would streamline the regulatory process, reduce the potential for supervisory 

duplication and inefficiencies, strengthen the regulators’ accountability, and enhance opportunities for economic growth by reducing regulatory burden. The proposal simply would extend to smaller institutions the benefits of having a single 

Federal regulator at both the bank and holding company levels that State banks 

that are members of the FRS and their holding companies already enjoy today. 

2. Modernize the Corporate Governance Procedures Applicable to National Banks 

Summary: This proposal would repeal the residency and stock ownership requirements for directors in 12 U.S.C. 72 and harmonize and modernize the shareholder 

notification and meeting requirements for mergers in 12 U.S.C. 214a, 215 and 215a. 

It would also allow national banks to fully adopt the corporate governance procedures of, for example, the law of the State in which the main office of the bank is 

located, the Delaware General Corporation Law, or the Model Business Corporation 

Act. 

Explanation: National banks currently have the option to adopt the corporate governance procedures identified above, but only to the extent not inconsistent with 

corporate governance procedures set forth in applicable Federal banking statutes or 

regulations, or bank safety and soundness (12 C.F.R. § 7.2000). Amending relevant 

law to allow national banks to fully adopt a corporate governance regime would 

modernize corporate governance for national banks and enhance efficiencies for 

banks with public stock. The National Bank Act (NBA) and other relevant law contains a number of corporate governance procedures that are inflexible and outdated 

compared to State corporate law, such as requiring shareholder supermajorities, requiring notice to shareholders by publication and certified mail, requiring formal 

meetings, and requiring explicit shareholder votes. These proposals would modernize these corporate governance provisions and place national banks on the same 

footing as BHCs and State banks. Modernization of these provisions would benefit 

national banks by providing them flexibility to operate more efficiently and access 

the capital markets without having to employ a holding company structure and 

being subject to the associated regulatory burden. 

3. Modernize and Add Flexibility to the Federal Savings Association 

Charter 

Summary: This proposal would amend the HOLA to give Federal savings associations the ability to elect to exercise national bank powers subject to restrictions applicable to national banks without changing their charters. HOLA could also be 

amended to streamline the ability of savings associations to issue securities. 

Explanation: HOLA requires that a specified percentage of the assets of a savings 

association be in qualified thrift investments. Under existing law, a Federal savings 

association must convert to a bank charter to implement a strategic decision to 

84 

engage in commercial or consumer lending to a greater extent than is permitted by 

HOLA. The charter conversion process can be time consuming and burdensome, particularly for smaller institutions. Federal mutual savings associations face especially 

hard choices, since they must convert to the stock form of organization before they 

can convert to a bank charter. 

In addition, section 4(h) of HOLA (12 U.S.C. 1463(h)) provides that no savings association shall: (1) issue securities which guarantee a specific maturity except with 

the specific approval of the appropriate Federal banking agency; or (2) issue any securities the form of which has not been approved by the appropriate Federal banking agency. The limitation of section 4(h) of HOLA is an inhibitor to savings associations’ access to the capital markets. 

Amending HOLA to provide Federal savings associations with additional flexibility to adapt to changing economic conditions and business environments without 

having to change their corporate form would enable them to better meet the needs 

of their communities. In addition, streamlining the ability of savings associations to 

issue securities would enhance their capacity to raise capital which they could deploy to make loans and invest in consumers, local businesses, and communities and 

support economic growth. National banks are not subject to restrictions of the type 

set forth in section 4(h). The OCC’s experience with national banks does not demonstrate a need for these restrictions. OCC regulations already require approval for 

national banks and Federal savings association to increase capital in appropriate 

circumstances, such as when a national bank or Federal savings association issues 

securities for consideration other than cash, or is required to obtain agency approval 

pursuant to the terms of an enforcement action. 

4. Streamline Supervision and Enforcement of Federal Consumer Financial Laws 

Summary: This proposal would amend the Dodd-Frank Act to return examination 

and supervision authority with respect to Federal consumer financial laws (as defined in the Dodd-Frank Act) to the Federal banking agency for the financial institutions over which it has jurisdiction, without regard to an institution’s asset size. 

Under this approach, the CFPB would continue to set the standards with respect 

to Federal consumer financial laws, supervise nondepository institutions, and take 

enforcement action. In connection with, or as an alternative to, this proposal, Congress could require a study of how the CFPB’s authorities are currently used. 

Explanation: Providing for a single regulator to oversee a depository institution’s 

compliance with Federal consumer financial laws, in addition to its safety and 

soundness and compliance with other laws and regulations, would reduce regulatory 

burden and enhance opportunities for economic growth. It would minimize redundancy and enhance regulatory certainty by eliminating the need for a depository institution to prepare for multiple, potentially overlapping examinations and to meet 

the differing expectations of two separate regulators. Currently, the CFPB and prudential regulator examinations for depository institutions over $10 billion in assets 

may overlap because the prudential regulators have supervisory responsibility for 

a number of consumer-related laws (including the Fair Housing Act, the Community 

Reinvestment Act, the Servicemembers Civil Relief Act, and the unfair or deceptive 

acts or practices prohibitions of section 5 of the Federal Trade Commission Act) that 

intersect with the Federal consumer financial laws under the CFPB’s supervisory 

jurisdiction. Also, each agency that examines a bank for compliance with consumerrelated laws reviews aspects of the bank’s compliance management system and assigns a Consumer Compliance Rating, raising the potential for unnecessary burden 

created by differing expectations or inconsistent findings. 

A study of how the CFPB’s authority is currently used would assist Congress in 

identifying any gaps in the enforcement of Federal consumer financial laws and determining how best to allocate regulatory resources to ensure an appropriate level 

of oversight. 

5. Simplify the Process for National Banks to Obtain Deposit Insurance 

Summary: This proposal would simplify the process for national banks to obtain 

deposit insurance. One approach would be to restore the process that existed under 

the Federal Deposit Insurance Act (FDI Act) prior to 1991. Under that process, a 

national bank engaged in the business of receiving deposits other than trust funds 

would become an insured bank upon chartering by the OCC and being authorized 

by the OCC to commence business. A separate application to the FDIC was not required. In addition to its other chartering requirements, the OCC, among other 

things, was required by statute to give consideration to the same factors that the 

FDIC currently must consider under the FDI Act in granting deposit insurance. The 

85 

OCC would issue a certificate to the FDIC that consideration had been given to 

those factors. 

Congress could also explore providing the FDIC with a specified time period— 

such as 30 days—within which to object to the grant of deposit insurance to a particular entity. Inaction by the FDIC would result in the grant of insurance. An FDIC 

objection would have to specify the reasons for the objection and would constitute 

a final agency action subject to judicial review. 

Explanation: Congress amended the FDI Act in 1991 to require national banks 

to apply to the FDIC separately for deposit insurance. The statute also adopted a 

similar process for State banks. As a result, applicants to become nationally or State 

chartered depository institutions must submit two parallel applications covering the 

same proposal to two different Federal agencies that review the proposals essentially for the same matters. This creates duplication, the need to spend extra resources and time, and the potential for delay. In the case of national banks this duplication is particularly unwarranted since the Comptroller of the Currency is a coequal Federal bank regulator and is a member of the FDIC’s board. A separate application for insurance at the FDIC in effect permits the FDIC to overrule OCC decisions about chartering. Moreover, the proposal would ensure that obtaining deposit 

insurance can be as efficient as other fundamental aspects of the chartering process. 

Specifically, while national banks are required to become members of the FRS as 

part of the chartering process, Federal law does not require a separate application 

and approval by the FRB. The decision of the OCC to grant a charter is sufficient 

to confer FRS membership. 

6. Require an EGRPRA-Like Review Process for Bank Secrecy Act 

(BSA) Regulations 

Summary: This proposal would require Treasury to conduct a periodic review of 

all BSA regulations in order to identify outdated, unnecessary, or unduly burdensome requirements for financial institutions. Most of these regulations are issued 

by the Financial Crimes Enforcement Network (FinCEN). The proposal could require Treasury to consult with the Federal banking agencies, law enforcement agencies, and other stakeholders, as appropriate. It could require Treasury to solicit public comment and to submit a report to Congress on the results of its review. It could 

also require Treasury to specifically solicit public comment on technology that could 

reduce cost and burden on financial institutions, including community banks. 

Explanation: During the most recent EGRPRA review, the OCC, FDIC, and FRB 

received many comments about the burdens imposed on financial institutions—particularly community banks—by FinCEN’s BSA rules. This new requirement would 

give financial institutions an opportunity to express their concerns directly to the 

agency with the authority to issue, repeal, and modify BSA rules and require review 

and response by that agency. 

7. Require Information Sharing in Connection with the Stress Test Requirements of Section 165 

Summary: This proposal would amend section 165(i) of the Dodd-Frank Act to require the FRB to provide the appropriate primary financial regulatory agencies access to the models used to conduct its supervisory stress tests. Additionally, this 

proposal would require that the FRB provide the agencies with the model assumptions and the derivation of those assumptions. This proposal would also amend section 165(i) of the Dodd-Frank Act to require that the FRB share the results of supervisory stress tests with the appropriate financial regulatory agencies in a timely 

manner before those results are released to the public. 

Explanation: Section 165(i)(1)(A) of the Dodd-Frank Act requires the FRB to conduct supervisory stress tests of nonbank financial companies supervised by the FRB 

and BHCs with total consolidated assets of $50 billion or more ‘‘in coordination with 

the appropriate primary financial regulatory agencies and the Federal Insurance Office.’’ Section 165 also requires ‘‘all other financial companies’’ (i.e., banks and savings associations) with $10 billion or more in assets to conduct company-run stress 

tests in accordance with regulations that the Federal primary financial regulatory 

agencies have issued. 

The FRB develops and operates its own models to conduct the supervisory stress 

tests known as the Comprehensive Capital Analysis and Review (CCAR). In many 

instances, an IDI is the primary driver of a BHC’s CCAR results. In addition to 

CCAR, those IDIs are required to complete depository institution-level stress tests 

under section 165(i)(2), known as Dodd-Frank Act stress testing (DFAST). The FRB 

frequently uses the CCAR stress test models and assumptions as a basis for developing the DFAST stress tests. The other Federal banking agencies should have 

access to the FRB’s CCAR stress test models and assumptions to enhance their 

86 

9 ‘‘Banking entity’’ is statutorily defined to include any IDI, any company that controls an IDI, 

or that is treated as a BHC for purposes of section 8 of the International Banking Act of 1978, 

and any affiliate or subsidiary of such entity. 12 U.S.C. § 1851(a)(1); 12 U.S.C. § 1851(h)(1). 

assessment of the DFAST stress tests performed by IDIs. The OCC and FDIC also 

need time to review the results of CCAR supervisory stress tests before they are 

released to the public to ensure that the OCC and FDIC understand the underlying 

reasons for the results, which allows the OCC and FDIC to improve supervision and 

respond to questions from the public. The proposal would ultimately enhance the 

consistency and robustness of stress testing processes. 

8. Make the OCC’s and FDIC’s Authority to Clear PRA Notices Consistent with that of the FRB 

Summary: This proposal would amend the Paperwork Reduction Act (PRA), specifically, 44 U.S.C. 3507(i), to direct the Office of Management and Budget (OMB) 

to designate an officer of the OCC and the FDIC to approve proposed collections of 

information for all agency purposes. This change would give the OCC and FDIC the 

same authority as the FRB to clear their own collections of information. 

Explanation: The PRA requires each Federal agency to establish a process for reviewing collections of information, to solicit public comment on proposed collections 

of information, and to submit proposed collections of information to the OMB for review and approval. The process of reviewing a collection of information, soliciting 

public comment on it, and obtaining OMB approval generally takes about 4 months. 

A 4-month delay in information collection activities to seek approval from OMB, an 

agency that does not have expertise in banking or financial services regulation or 

practices, can significantly hinder the OCC’s and FDIC’s ability to address emerging 

issues in individual institutions and in the larger financial system; this has the potential to undermine the effectiveness and efficiency of supervision by the OCC and 

FDIC. The OMB has provided the FRB with the authority to review and approve 

its own collection of information requests, collection of information requirements, 

and collections of information in current rules. The OCC and FDIC should have the 

same authority as the FRB. 

II. Proposals to Right-Size Regulation 

9. Volcker Rule: Exempt Community Banks, Provide an Off-Ramp for 

Midsize Banks, and Simplify Requirements 

Summary: This proposal would revise the Volcker Rule to limit its scope and focus 

on banking entities that are materially engaged in risky trading activities that have 

the potential to trigger systemic consequences. Community banks, given the nature 

and scope of their activities, would be exempted altogether. Other institutions would 

be exempted if they qualify for an ‘‘offramp.’’ While asset size could be a factor in 

designing the off-ramp, qualification for the offramp would also depend on whether 

an institution engages in the type of activities, or in activities that present the type 

of risk, that the Volcker Rule was designed to restrict. The activities measure could 

be based on the nature or the scope of the bank’s trading activities. A bank could 

qualify for the off-ramp if its trading activities are low-risk, if the volume of its trading is relatively low, or if its trading revenues do not comprise a significant percentage of its total revenues. A combination of these measures could be used as well. 

The features of this off-ramp should be determined through a notice-and-comment 

rulemaking. 

Institutions that did not qualify for the off-ramp would continue to be subject to 

the Volcker Rule, but the Rule’s prohibitions and requirements would be simplified. 

The proprietary trading definition would be revised so that the determination 

whether trading is proprietary does not depend on the purpose of a trade. Instead, 

regulators would use bright-line, objective factors, such as applying the rule only to 

trading positions covered by the Market Risk Capital Rule. In addition, the requirements for permitted activities, such as market-making and risk-mitigating hedging, 

would be streamlined. Similarly, the covered fund prohibition could be simplified by 

narrowing the prong of the covered fund definition that refers to sections 3(c)(1) and 

3(c)(7) of the Investment Company Act of 1940 so that the definition of a covered 

fund would only cover funds with certain characteristics. 

Explanation: The statutory prohibition applies to any ‘‘banking entity.’’9 As a result, the Volcker Rule applies to many entities that do not engage in the activities 

or present the risks that the Rule was designed to address. Applying the Rule to 

community banks engaged primarily in traditional banking activities or to institutions that are not materially engaged in risky trading activities does not further the 

statutory purpose. Exempting community banks and providing an off-ramp for larger institutions depending on the nature and scope of their trading activities would 

87 

reduce complexity, cost, and burden associated with the Volcker Rule by providing 

a tailored approach to addressing the risks the Rule was designed to contain. 

The Volcker Rule’s proprietary trading and covered fund provisions are complex 

and needlessly burdensome. Streamlining these provisions would facilitate institutions’ ability to engage in permissible activities, such as market-making and riskmitigating hedging, and would reduce compliance costs so that resources could be 

put to more productive uses. For example, if proprietary trading was redefined to 

include only Market Risk Capital Rule-covered positions for banks, the proprietary 

trading restrictions would apply to a smaller number of banks, and banks and the 

regulators could determine whether an activity constitutes proprietary trading without examining intent. This would promote efficiency and conserve resources for both 

banking entities and the agencies charged with implementing the rule. 

10. Eliminate Size Thresholds and Frequency Requirements for DFAST 

Summary: This proposal would eliminate the $10 billion threshold and the requirement that stress tests of ‘‘all other financial companies’’ (including banks and 

savings associations) be conducted annually under section 165(i)(2) of the DoddFrank Act. Instead of proposing alternative statutory requirements for size thresholds and frequency, this proposal would direct the primary Federal financial regulatory agencies to each issue rules establishing the frequency for stress testing of 

institutions of various sizes and characteristics. Legislation could set out factors for 

the agencies to consider in issuing those rules, such as asset size and complexity. 

Explanation: Supervisors should have more flexibility, within certain parameters, 

about when and under what scenarios DFAST stress tests are conducted, and to 

which institutions they must apply. These changes would tailor stress testing requirements to fit the needs and risk profiles of various types of institutions. 

11. Exempt Community Banks from the Collins Amendment 

Summary: This proposal would modify section 171 of the Dodd-Frank Act (commonly referred to as the ‘‘Collins Amendment’’) to exempt banks that do not use 

models-based capital requirements from having to comply with the ‘‘generally applicable’’ capital rules. 

Explanation: The Collins Amendment currently requires the Federal banking 

agencies to apply a common set of ‘‘generally applicable’’ capital requirements to all 

depository institutions, nearly all depository institution holding companies, and 

nonbank financial institutions supervised by the FRB (except for certain insurance 

companies), without regard to asset size or amount of foreign exposure. This requirement was included in the Dodd-Frank Act to prevent the Federal banking 

agencies from permitting relatively large banking organizations to use advanced 

models-based approaches to determine regulatory capital requirements that could be 

lower than the standardized requirements applied to smaller, less complex institutions. 

An exemption from the Collins Amendment for banks that do not use modelsbased capital requirements would free the Federal banking agencies from impediments that currently prevent the agencies from tailoring their capital rules for 

highly capitalized smaller institutions that wish to escape the regulatory burden of 

calculating and complying with the standardized capital requirements. The exemption would allow the agencies to tailor the capital rules to match the size and complexity of the institutions to which the Collins Amendment applies to reduce regulatory burden for smaller and less complex institutions, which would contribute to 

economic growth. 

12. Exempt Certain Community Banks from Capital Standards 

Summary: This proposal would exempt smaller, less complex depository institutions from the Basel-based capital standards that currently apply if those institutions comply with a robust leverage ratio requirement (e.g., 10 percent) and do not 

engage in a set of risky activities identified by the Federal banking agencies by rule. 

Explanation: Simplifying capital requirements for these smaller, less complex depository institutions would reduce regulatory burden and contribute to economic 

growth. 

13. Focusing the Scope of Section 165 of the Dodd-Frank Act 

Summary: This proposal would raise the threshold for application of enhanced 

prudential standards under section 165 of the Dodd-Frank Act to some higher level, 

or use a qualitative assessment process, to more specifically capture the companies 

that present the types of risks requiring application of enhanced prudential standards. 

Explanation: The enhanced prudential standards under section 165 of the DoddFrank Act apply to BHCs with $50 billion or more in total consolidated assets. 

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While enhanced prudential standards should apply to the largest, most complex 

companies, they should not apply to regional institutions that have business models 

more like a community bank. Raising the threshold for the application of, or using 

an assessment process that more closely aligns with the risk being addressed by, 

the enhanced prudential standards under section 165 would reduce regulatory burden for BHCs with a more traditional business model. Such companies would not 

have to comply with enhanced prudential standards that are more appropriately imposed on larger and more complex companies. 

Moreover, given the multitude of requirements and burdens that are imposed by 

the enhanced standards of section 165 of the Dodd-Frank Act, when the thresholds 

associated with these standards are set at a low level, they become an effective barrier to competition that protects the market position and competitive advantage of 

the largest, most complex firms. All firms subject to section 165 of the Dodd-Frank 

Act, whether they have trillions of dollars in assets or just $50 billion in assets, 

must comply with the enhanced prudential standards and the associated costs and 

burden. Because these burdens and costs tend to be proportionally larger and higher 

for smaller institutions, larger firms have a return-on-cost advantage that increases 

as their asset size increases, and they can more effectively absorb the impact of 

dealing with enhanced prudential standards. In addition, smaller firms crossing the 

threshold simply lack the resources and regulatory know-how to navigate the labyrinth of these enhanced prudential standards. Because competition fosters innovation that makes the banking system more vibrant and banking products more 

cheaply available over time, the barrier to entry created by a dollar threshold that 

is set too low harms the health of the system, consumers, and ultimately economic 

growth. 

14. Reduce Regulatory Burden by Repealing Unnecessary Call Report 

Requirement to Collect Data on Small Business Lending 

Summary: This proposal would repeal section 122 of the Federal Deposit Insurance Corporation Improvement Act. 

Explanation: Section 122 of the Federal Deposit Insurance Corporation Improvement Act of 1991 requires the Federal banking agencies to collect data on small 

business lending in the Call Report; however, the agencies do not use this information. Eliminating this section would reduce burden on the banking industry and contribute to economic growth. The Federal banking agencies received comments from 

numerous bankers that providing this information is particularly burdensome and 

should be eliminated. Agency staff does not use this information for any supervisory 

or examination purpose, yet it must still be collected due to the statutory requirement. 

15. Reduce Regulatory Burden by Repealing the Small Business Data 

Collection Requirement in Section 1071 of the Dodd-Frank Act 

Summary: This proposal would repeal section 1071 of the Dodd-Frank Act. 

Explanation: Section 1071 of the Dodd-Frank Act amends the Equal Credit Opportunity Act to require a financial institution making a business loan to obtain and 

maintain information on whether the loan is being extended to ‘‘a women-owned, 

minority-owned, or small business.’’ Moreover, the financial institution must collect 

additional granular data from each loan applicant in the form and manner provided 

in section 1071, and any data that the CFPB ‘‘determines would facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of 

women-owned, minority-owned, and small businesses.’’ The Dodd-Frank Act directs 

the CFPB to write regulations or issue guidance, as necessary, to implement this 

section. 

The CFPB has just begun the rulemaking process and has not yet issued a proposed regulation for implementation of this section. It likely will be very difficult 

to come up with workable definitions for this type of data collection in the small 

business lending context, and the rulemaking process itself could be protracted and 

burdensome. Moreover, once issued, the regulation implementing this section is likely to impose new and burdensome reporting requirements on financial institutions, 

including smaller banks that will be challenged to find the resources to comply with 

the new requirements, and the benefits from such reporting in the promotion of fair 

lending and community development are uncertain. 

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III. Proposals to Provide Regulatory Certainty and Promote Economic 

Growth 

16. Support Clarification of the Applicability of the ‘‘Valid when Made’’ 

Doctrine 

Summary: This proposal would overturn the Second Circuit’s decision in Madden 

v. Midland Funding, LLC by providing that the rate of interest on a loan made by 

a bank, savings association, or credit union that is valid when the loan is made remains valid after transfer of the loan. 

Explanation: This proposal reduces uncertainty by reestablishing well-settled 

black-letter law that a loan is valid when made and the interest rate charged by 

a national bank legally at origination remains legal upon assignment of the loan to 

a third-party. It would also create a uniform standard so that there is no longer a 

difference in the treatment of loans made in different judicial circuits. The proposal 

supports economic growth by facilitating the ability of banks, savings associations, 

and credit unions to sell their loans, thereby promoting liquid markets. 

17. Modernize Receivership Authorities for Uninsured National Banks 

and Federal Branches 

Summary: This proposal would modernize the powers available to receivers of uninsured national banks, as well as uninsured Federal branches and agencies of foreign banks (‘‘uninsured Federal branches’’) by amending the NBA to provide the 

OCC with the same receivership authorities provided to the FDIC under the FDI 

Act. An alternative proposal would be to amend the FDI Act to specify the FDIC 

as the entity to serve as the receiver for OCC-chartered banks and OCC-licensed 

branches, without distinction between insured and uninsured status. For uninsured 

national banks, this would restore the status quo to the framework established by 

Congress when the FDIC was created in 1933, which existed until the enactment 

of the Federal Financial Institutions Reform, Recovery, and Enforcement Act in 

1989. 

Explanation: Currently, the OCC appoints and supervises receivers for uninsured 

national banks and Federal branches. The OCC’s receiver liquidates the institution 

or the branch pursuant to receivership powers and directives set forth in the NBA. 

These statutory provisions date back to the creation of the national banking system 

in 1863. The receiver for an uninsured Federal branch exercises the same rights, 

privileges, powers, and authority as a receiver for an uninsured national bank, pursuant to the International Banking Act. This proposal would provide uninsured national banks and Federal branches with additional certainty and clarity about the 

receivership process. It would also provide the OCC with updated authority to help 

address issues faced by modern institutions. 

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM JEROME H. POWELL 

Q.1. Governor Powell, in a speech in April, and echoed in your 

written testimony for this hearing, you have suggested changes 

that ‘‘allow boards of directors and management to spend a smaller 

portion of their time on technical compliance exercises and more 

time focusing on the activities that support sustainable economic 

growth.’’ The issues at Wells Fargo seem to indicate that bank 

boards do need to play a more active oversight role, and compliance 

is especially important to ensure that activities aren’t happening in 

the bank that can cause consumer, employee and reputational 

harm. 

Do you think the lesson from the Wells Fargo episode is that the 

Board should have been less involved in Bank oversight? 

A.1. The Federal Reserve Board (Board) strongly agrees with your 

assertion that boards need to play an active role in bank oversight. 

As supervisors, we need to refocus our expectations to redirect 

boards’ time and attention toward fulfilling their core responsibilities, including oversight of bank compliance. 

In my April speech, the reference to ‘‘technical compliance’’ exercises was a recognition that over the years, the Board has issued 

supervisory guidance that in the aggregate include hundreds of expectations for boards and senior management concerning a broad 

range of topics. Some of these expectations are outdated or redundant, some are overly prescriptive or improperly focused, and many 

fail to differentiate between the roles of boards and senior management. 

Consequently, many boards feel compelled to devote a significant 

amount of time to satisfying these expectations rather than focusing on their core responsibilities, such as guiding the development 

of a firm’s strategy and risk appetite, overseeing senior management and holding them accountable, supporting the stature and 

independence of the independent risk management and internal 

audit functions, and adopting effective governance practices. 

To that end, the Board recently proposed new guidance for large 

financial institutions, such as Wells Fargo, identifying the key attributes of effective boards of directors, and more clearly distinguish between the roles and responsibilities of boards and senior 

management. In particular, the proposal emphasizes a board’s responsibility to hold senior management accountable for, among 

other things, adhering to the firm’s strategy and risk appetite and 

remediating material or persistent deficiencies in risk management 

and control practices. The Board also proposed to eliminate or revise supervisory expectations for boards included in certain existing 

Board Supervision and Regulation letters to ensure that guidance 

is aligned with the Board’s current consolidated supervisory frameworks for both smaller and larger firms. 

112 

Q.2. The Treasury Report released on June 12 recommended that 

the FDIC be removed from the process to approve banks’ living 

wills. Governor Powell, do you believe that the FDIC should remain 

part of the process? 

A.2. I do. The Board and Federal Deposit Insurance Corporation 

(FDIC) have developed a strong and productive working relationship in their oversight of the living will process. Each agency has 

made important contributions and brought relevant experience to 

the process. The FDIC is the agency that acts as the receiver, or 

liquidating agent, for failed federally insured depository institutions and that perspective has been highly valuable to the process. 

Q.3. A working paper by Federal Reserve Board economists concluded that ‘‘optimal [tier 1] bank capital levels in the United 

States range from just over 13 percent to over 26 percent [relative 

to risk-weighted assets].’’ Current capital ratios for the largest U.S. 

GSIBs are between 8 and 11.5 percent. In your oral testimony, you 

said: 

Higher capital requirements increase bank costs, and at least some of those 

costs will be passed along to bank customers and shareholders. But in the 

longer term, stronger prudential requirements for large banking firms will 

produce more sustainable credit availability and economic growth through 

the cycle. Our objective should be to set capital and other prudential requirements for large banking firms at a level that protects financial stability and maximizes long-term, through-the-cycle credit availability, and 

economic growth. And to accomplish that goal, it is essential that we protect the core elements of these reforms for our most systemic firms in capital, liquidity, stress testing, and resolution. 

To get optimal results, it seems that capital requirements should 

be increased further. Do you agree? 

A.3. No. I do not believe that current capital requirements are too 

low. I believe that the combination of bank capital standards and 

stress tests has raised overall levels of capital to appropriately high 

levels. Capital requirements are one of the strongest prudential 

tools available for maintaining a stable financial system, although 

there is a tradeoff between the increased resiliency arising from 

higher levels of bank capital and the associated increase in costs, 

some of which are passed along to bank customers and shareholders. The paper referenced in the question attempts to estimate 

the costs and benefits associated with various capital levels but 

many assumptions are required of the analysis. Changes to the assumptions could result in either higher or lower levels of optimal 

bank capital. The paper is a staff working paper that does not represent the views of other Federal Reserve staff or the Board. 

Through various post-crisis reforms, including strengthened regulatory capital rules that improved the quality and quantity of regulatory capital as well as supervisory stress testing, regulatory capital at large banks is at its highest level in decades. Additionally, 

the largest and most complex U.S. and foreign banks are required 

to maintain sufficient amounts of long-term debt, which can be converted to equity during resolution, thereby further increasing their 

loss absorbing capacity. The 2017 supervisory stress test projections suggest that, in the aggregate, the U.S. banks subject to the 

stress test would experience substantial losses under a hypothetical 

stress scenario but could continue lending to businesses and houseVerDate Nov 24 2008 12:03 Apr 25, 2018 Jkt 046629 PO 00000 Frm 00116 Fmt 6601 Sfmt 6601 S:\DOCS\26901 SHERYL
113 

holds. This speaks to the resiliency of the current U.S. regulatory 

regime and financial system. 

Q.4. As a response to questions from several senators you said that 

you support changes to the Volcker rule. That said, the Treasury 

Report recommends changes to the Volcker Rule and changes to 

capital and liquidity requirements, stress tests, and other enhanced 

prudential standards. What would be the impact on financial stability if changes were made to weaken both rules to limit proprietary trading in bank holding companies and enhanced prudential 

standards, including capital and liquidity rules, stress tests, and 

others, applicable to the largest bank holding companies? 

A.4. Material weakening of the post-crisis regulatory framework 

would not support a strong and stable banking system or economy. 

However, there may be some targeted changes to streamline regulations and reduce burdens that can be made without compromising the underlying goals and benefits of the regulations. For example, the Board is pursuing further tailoring of regulations, including the Volker Rule and capital regulations, to reduce burdens 

for smaller firms while maintaining the benefits of the regulations 

for U.S. financial stability and safety and soundness. 

The Volcker Rule seeks to prevent financial institutions with access to the Federal safety net—FDIC insurance and the Board discount window—from engaging in proprietary trading and to limit 

their ability to invest in hedge funds and private equity funds. The 

goal of capital and liquidity regulation is to ensure the safety and 

soundness of the banking system and to protect financial stability 

for the whole economy. The crisis revealed that the pre-crisis capital and liquidity regulatory framework was insufficient. The regulatory changes to this framework that have been made post-crisis 

are critical to the safety and soundness of the financial system as 

well as broader financial stability. 

Q.5. This week, the House approved the FY 2018 Financial Services and General Government Appropriations bill. Included in this 

bill is the provision from the CHOICE Act to bring all independent 

financial regulatory agencies’ budgets under the appropriations 

process. What would be the impact on the Federal Reserve System 

if its budget for nonmonetary policy activities were appropriated? 

A.5. The impact of this change could be quite serious. Congress 

wisely led the way in establishing political independence as a cornerstone of central bank independence. 

The Board should be and is accountable to the American people 

and their elected representatives. The Board is a prudent steward 

of taxpayer resources, and is transparent about our operations. 

The Board’s monetary policy, supervisory, and financial stability 

functions have always been closely connected and have become 

even more tightly connected following the financial crisis. Robust 

supervisory and financial stability programs, with steady and reliable funding, are a crucial support for the Board’s monetary policymaking. During the financial crisis, the deep knowledge and expertise of banking supervisors was critical to the Board’s efforts to 

assess and address the challenges facing the financial system. Our 

examiners at the major banking firms, coupled with extensive data 

collection, provide critical insights relevant to the judgments of 

114 

policymakers on many questions that are extremely important in 

the conduct of monetary policy, such as the assessment of overall 

conditions in credit markets, evidence of imbalances in particular 

sectors or markets, signs of emerging liquidity pressures or indications of a withdrawal from risk-taking. Accurate and early readings 

on such issues are very useful to the Board in determining the appropriate stance of monetary policy. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED FROM 

JEROME H. POWELL 

Q.1. Some have called for the FDIC to be removed from the living 

will process. Do you believe the FDIC should be removed from this 

process? 

A.1. The Federal Reserve Board (Board) does not support removing 

the Federal Deposit Insurance Corporation (FDIC) from the living 

will process. The Board and FDIC have developed a strong and productive working relationship in their oversight of the living will 

process. Each agency has made important contributions and 

brought relevant experience to the process. The FDIC is the agency 

that acts as the receiver, or liquidating agent, for failed federally 

insured depository institutions and that perspective has been highly valuable to the process. 

Q.2. Many of us have come to recognize that the Orderly Liquidation Authority is an incredibly important part of the Wall Street 

Reform and Consumer Protection Act. Could you please explain in 

plain terms why OLA is so important? 

A.2. A key lesson we learned from the financial crisis was that we 

needed a better way to deal with a large financial firm that fails. 

In the crisis, Government authorities were faced with the choice 

between a Government bailout of a failing large financial firm (for 

example, AIG), or a chaotic and disorderly collapse of the firm (for 

example, Lehman Brothers). The Orderly Liquidation Authority 

(OLA) in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act provides the Government with a workable 

framework for the orderly resolution of a large financial firm that 

fails—thus reducing the need for Government bailouts in any future financial crisis. 

OLA has a number of key strengths as a resolution regime. First, 

it allows the FDIC, as resolution authority, to move quickly to reorganize the failed firm and prevent a disorderly unraveling of the 

financial contracts of the failed firm. Second, it enables tire FDIC 

to coordinate effectively with tire foreign regulators of the crossborder operations of the failed firm. Third, it allows tire FDIC to 

provide temporary funding to stabilize the failed firm’s operations 

if necessary. Critically, it does not allow for Government capital injections and requires that taxpayers suffer no losses from the resolution. 

The primary beneficiary of an OLA resolution would be the U.S. 

financial system and, by extension, taxpayers. In an OLA resolution, the shareholders of the failed firm would bear full losses. 

Long-term creditors of the failed firm would bear any additional 

losses. But there would be mechanisms to minimize excessive 

115 

1See The Volcker Rule: Community Bank Applicability (Dec. 10, 2013), available at: http:// 

www.federalreserve.gov/newsevents/press/bcreg/bcreg20131210a4.pdf. 

shocks to the financial system and the economy that could negatively impact Main Street. Market discipline would be maintained 

and taxpayers protected. 

Bankruptcy should be the preferred route for a failing firm. We 

have made great strides through the living will process to make 

our largest banking firms easier to resolve under the traditional 

bankruptcy code. However, given the uncertainties around how financial crises unfold, it is prudent to keep OLA as a backstop resolution framework. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TESTER 

FROM JEROME H. POWELL 

Q.1. Chair Gruenberg and Governor Powell, you’ve both talked 

about the Volcker Rule and the complexity that comes along with 

this rule. And in the past, Comptroller Curry had suggested that 

we could exempt community banks entirely. After having conversations with many of my community banks I agree with Mr. Curry 

and believe they should be entirely exempt from Volcker Rule compliance. Following these lines, I have introduced a bill with Senator 

Moran that would exempt community banks with less than $10 billion from compliance. 

Q.1.a. Is this a bill that both the FDIC and the Federal Reserve 

would support at this juncture? 

Q.1.b. Does eliminating the Volcker Rule for banks with less than $10 billion pose any real risk to our financial system? 

Q.1.c. Absent Congress passing legislation related to the Volcker 

Rule, does the FDIC or the Federal Reserve have any plans to 

make any changes on their own to the Volcker Rule? 

A.1.a.–c. The Volcker Rule is an area where relief for smaller institutions would be helpful. The risks identified by the Volcker Rule 

exist almost exclusively in larger financial institutions. Community 

banks rarely engage in any of the activities prohibited by the 

Volcker Rule.1 Accordingly, the Federal Reserve Board (Board) supports exempting community banks with total consolidated assets of 

less than $10 billion from the statutory provisions. Moreover, in 

the event where the trading or investment funds activity of a community bank might raise concerns that could be addressed through 

our normal examination process. 

As part of the rules implementing the Volcker Rule, the agencies 

charged with implementing that statutory provision endeavored to 

minimize compliance burdens for banking entities by reducing the 

compliance program and reporting requirements applicable to 

banking entities with $10 billion or less in total consolidated assets. This was based in part on information that indicated that 

banking entities of this size generally have little or no involvement 

in prohibited proprietary trading or investment activities in covered funds. Exempting banking entities of this size from the 

Volcker Rule would provide relief for thousands of community 

banks that incur ongoing compliance costs simply to confirm that 

their activities and investments are indeed exempt from the 

116 

statute. At the same time, an exemption at this level of assets 

would not be likely to increase risks to U.S. financial stability. The 

vast majority of activity and investment that the Volcker Rule addresses takes place at the largest and most complex financial firms, 

whose failure could have a significant effect on the stability of the 

financial system. Moreover, even with an exemption, the Federal 

banking agencies could continue to use existing prudential authority to address unsafe and unsound practices at a community bank 

that engaged in imprudent trading or investment activities. 

The Board is working with the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Commodity Futures Trading Commission, and the Securities and Exchange Commission to identify areas of the implementing regulations that 

could be simplified. The core premise of the Volcker Rule is relatively straightforward: that financial institutions with access to 

the Federal safety net—Federal Deposit Insurance Corporation insurance and the Board’s discount window—should not engage in 

proprietary trading. The Volcker Rule’s statutory provisions, however, are complex, which has led to a complex rule. There are some 

ways to streamline and simplify the Volcker Rule while adhering 

to the underlying goals. For example, the Volcker Rule could be focused on larger banks that engage in more material trading activities. Supervisors have taken some steps to mitigate compliance 

burdens for smaller firms, but a change to the law to exempt smaller firms would be a cleaner and more comprehensive way to reduce 

burdens for smaller firms. Even without a statutory change, there 

may be ways to streamline and simplify the interagency Volcker 

Rule regulation to reduce burdens without sacrificing key objectives, and the Board is exploring possibilities. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCOTT 

FROM JEROME H. POWELL 

Each of you serve at agencies that are members of the Financial 

Stability Oversight Council (FSOC). Insurance has been regulated 

at the State level for over 150 years—it’s a system that works. But 

FSOC designations of nonbank systemically important financial institutions (SIFIs) have made all of you insurance regulators, despite the fact that you are bank regulators at your core. 

Strong market incentives exist for insurers to hold sufficient capital to make distress unlikely and to achieve high ratings from 

financial rating agencies, including incentives provided by risk sensitive demand of contract holders and the potential loss of firms’ 

intangible assets that financial distress would entail. Additionally, 

insurance companies are required by law to hold high levels of capital in order to meet their obligations to policyholders. Bottom line: 

Insurance companies aren’t banks, and shouldn’t be treated as 

such. 

In March, my colleagues and I on the Senate Banking Committee 

sent a letter to Treasury Secretary Mnuchin indicating our concerns regarding the FSOC’s designation process for nonbanks. I 

support efforts to eliminate the designation process completely. 

I was pleased that President Trump issued a ‘‘Presidential 

Memorandum for the Secretary of the Treasury on the Financial 

117 

Stability Oversight Council’’ (FSOC Memorandum) on April 21, 

2017, which directs the Treasury Department to conduct a thorough review of the designation process and states there will be no 

new nonbank SIFI designations by the FSOC until the report is 

issued. Relevant decisionmakers should have the benefit of the 

findings and recommendations of the Treasury report as they carry 

out their responsibilities with respect to FSOC matters. 

Please answer the following with specificity: 

Q.1. What insurance expertise do you and your respective regulator 

possess when it comes to your role overseeing the business of insurance at FSOC? 

A.1. The Federal Reserve System contains a significant amount of 

insurance expertise and resources with prior experience in the insurance industry. Staff who participate in the development of policy concerning and supervision of insurance companies subject to 

Federal Reserve Board (Board) supervision include former State insurance regulators, practitioners from insurance advisory services, 

catastrophe modeling specialists, and analysts from credit rating 

agencies that cover insurance companies, as well as life and property/casualty actuaries and accountants versed in U.S. Statutory 

Accounting Principles. 

In its consolidated supervision of insurance firms, the Board remains committed to tailoring its supervisory approach to the business of insurance. The Board’s supervisory program, complementary to and in coordination with the States in their protection of 

policyholders, continues to be tailored to consider the unique characteristics of the firms and their insurance operations. 

Board principals at the Financial Stability Oversight Council 

(FSOC) are briefed by these experts, or senior staff that oversee 

them, in advance of FSOC discussions on insurance matters. 

Q.2. Do you support the Senate Banking Committee’s recent legislative effort, the Financial Stability Oversight Council Insurance 

Member Continuity Act, to ensure that there is insurance expertise 

on the Council in the event that the term of the current FSOC 

independent insurance member expires without a replacement having been confirmed? 

A.2. The independent member with insurance expertise has provided important contributions to the work of the Council. However, 

membership in the Council is a matter for Congress to decide. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR COTTON 

FROM JEROME H. POWELL 

Q.1. President Trump issued an Executive order in February establishing Core Principles for Regulating the United States Financial 

System. One of the principles is to prevent taxpayer-funded bailouts. Presumably that includes considering what could cause a disruption to the financial system. One potential cause is a requirement that banks publicly publish granular details of a complex liquidity regulatory metric called the Liquidity Coverage Ratio 

(LCR). Regulators already receive information daily to monitor a 

firm’s liquidity position, but now the Fed is requiring banks to 

118 

publicly disclose these complex and technical liquidity details. If 

misunderstood, the disclosure could destabilize markets. 

How is this requirement in keeping with the President’s core 

principles? And how will the Fed manage through the next financial crisis and get banks to meet the funding needs of households 

and small business when meeting such needs will hurt banks’ 

LCR? 

A.1. The purpose of the Liquidity Coverage Ratio (LCR) public disclosure requirements is to provide market participants broad information about the liquidity risk profile of large banking organizations to support market discipline and encourage covered companies to take adequate steps to appropriately manage their liquidity 

positions. In addition, during times of stress, public disclosures can 

enhance stability by providing relevant information about firms. 

Without information about the liquidity strength of their counterparties, market participants may assume the worst about their 

counterparties and draw back from the market, exacerbating the 

problem. Thus, the LCR public disclosure requirements are consistent with enhancing financial stability and the principle of preventing taxpayer-funded bailouts. 

To serve this purpose, the information disclosed must be sufficiently informative and timely. In order to mitigate potential financial stability and firm-specific risks related to the disclosure of realtime liquidity information, the LCR public disclosure rule requires 

covered companies to disclose average values of broad categories of 

liquidity sources and uses over a quarter, with a 45-day lag after 

the end of the quarter. In addition, as part of its LCR disclosures, 

a covered company is required to disclose a qualitative discussion 

of its LCR results to facilitate the public’s understanding of its liquidity risk profile and ensure that the LCR disclosures are not 

misunderstood by the public. The Federal Reserve Board (Board) 

will carefully monitor the implementation of these requirements 

going forward. If warranted, I would be willing to revisit aspects 

of the LCR disclosures that result in significant undesirable or unintended consequences. 

The LCR rule is designed to ensure that large banking organizations can withstand idiosyncratic or market liquidity stress without 

pulling back from meeting the funding needs of households and 

small business or resorting to fire sales of illiquid assets. The LCR 

rule requires covered companies to hold a minimum amount of high 

quality liquid assets to meet outflows over a 30-day stress scenario. 

It encourages banking organizations to fund extensions of credit 

with longer term debt or relatively stable deposits rather than 

short-term wholesale funding. In addition, the calibration of the 

LCR rule treats transactions with retail clients and wholesale 

counterparties favorably relative to transactions with financial sector entities. Importantly, the LCR rule is designed to allow banking 

organizations to use high quality liquid assets when needed to 

meet liquidity stresses and does not require a company to reduce 

lending if it depletes its liquid assets. 

A company must notify its supervisor when it has an LCR shortfall, and the supervisor will monitor and respond appropriately to 

the unique circumstances that are giving rise to the company’s 

shortfall. 

119 

1See 12 CFR 213.61. Certain large and internationally active bank holding companies must 

make the public disclosures described in 13 tables in 12 CFR 217.173. 2See 12 CFR217.212. 

3See https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDal8cbq 

nRxZRg==. 

Q.2. How do the required data points for Liquidity Coverage Ratio 

(LCR) disclosure compare in both quantity and granularity to other 

mandatory public disclosures? 

A.2. Consistent with the Board’s longstanding commitment to public disclosure, firms are required to provide the public with various 

disclosures and reports that provide insight on their financial condition and risk management. The requirements of each report or 

disclosure are tailored to its purpose. 

The LCR public disclosures have quantitative and qualitative 

risk management components. The quantitative LCR public disclosures are quarterly average amounts of broad categories of sources 

and uses of liquidity under the LCR rule. The LCR disclosures are 

contained in one summary level table that includes three categories 

for a firm’s high quality liquid asset holdings, 11 categories of outflows, and 7 categories of inflows, and the covered company’s LCR 

ratio. 

The LCR disclosures are less granular than disclosures of 

borrowing from the Board’s discount window, which includes transaction-specific information about a bank’s business decision to 

borrow at the window including the amounts borrowed and the collateral provided to secure each loan. 

The LCR public disclosures are both less numerous and less 

granular than the qualitative and quantitative disclosures that 

bank holding companies with total assets greater than $50 billion 

are required to make about their capital adequacy and risk profile.1

These disclosures address the composition of capital, measures of 

capital adequacy, and specific information about a range of granular exposure types, such as general credit risk, securitization, equity risk, and interest rate risk. They are described in 10 tables in 

the regulatory capital rule and typically require quarter-end values 

rather than quarterly averages. In addition, bank holding companies that must calculate risk-weighted assets for market risk must 

disclose a range of risk measures for each material portfolio of covered positions on a quarterly basis, as well as more granular information about specific risks and qualitative risk management information.2

The LCR public disclosures are also less numerous and less 

granular than the Board’s FR Y–9C Consolidated Financial Statement for Holding Companies, which collects basic financial data 

and requires firms to provide a balance sheet, an income statement, and detailed supporting schedules.3 Typically this data is as 

of quarter-end. 

Q.3. The Basel III capital requirements increase the risk-weighting 

of Mortgage Service Rights (MSR) held by banks from 100 percent 

to 250 percent. Mortgage servicing is a stable and important revenue stream, especially for smaller banks, and allows banks to 

preserve a vital customer interface after they have sold the originated mortgage on the secondary market. 

120 

Basel III increases the risk-weighting for MSRs by a factor of 2.5 

can you please justify this significant increase in capital required 

of banks to hold mortgage servicing assets, and detail the methodology used to quantify the risk associated with MSRs? 

A.3. The Board recognizes community banks’ concerns with respect 

to the burden and complexity of certain aspects of the U.S. regulatory capital framework, including the current treatment of mortgage servicing assets (MSAs). As described in the report on the review of the Economic Growth and Regulatory Paperwork Reduction 

Act, the Federal banking agencies are jointly developing a proposal 

to simplify certain aspects of the regulatory capital framework, including the treatment of MSAs, while maintaining safety and 

soundness of the banking system. 

The Board and the other Federal banking agencies have long 

limited the inclusion of MSAs in regulatory capital due to the high 

level of uncertainty regarding the ability of banking organizations 

to realize value from these assets, especially under adverse financial conditions. These limitations help protect banks from sudden 

fluctuations in the value of MSAs and from the inability to quickly 

divest these assets at their full estimated value during periods of 

financial stress. In developing the current regulatory capital rule, 

the Federal banking agencies took into consideration statutory limitations related to MSAs, invited public comment on the proposed 

regulatory capital treatment of MSAs, and addressed industry comments in the final rule. In addition, the Federal banking agencies 

considered whether the capital rule appropriately reflects the risk 

inherent in banking organizations’ business models. Prior to 

issuing the capital rule, the Federal baking agencies conducted a 

pro-forma economic impact analysis that showed that the vast majority of small banking organizations would meet the rule’s minimum capital requirements on a fully phased in basis, including 

the treatment of MSAs. 

A study by the Federal banking agencies, together with the National Credit Union Administration, similarly concluded that MSA 

valuations are inherently subjective and subject to uncertainty because they rely on assessments of future economic variables (see 

the July 2016 Report to the Congress on the Effect of Capital Rules 

on Mortgage Servicing Assets). The results of the study support a 

conservative treatment of MSAs for purposes of regulatory capital. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR WARNER 

FROM JEROME H. POWELL 

Q.1. Gov. Powell, there seems to be developing consensus that 

there are improvements that can be made to the Volcker Rule’s implementing rule such that the policy goals of prohibiting proprietary trading are preserved, while potential unintended consequences, such as illiquidity in the fixed income markets, are 

avoided or minimized. Can you please describe a) whether the Federal Reserve shares this view; and b) how the Federal Reserve 

may, along with the other four agencies responsible for 

implementing the Volcker Rule, be approaching this issue to protect taxpayers while minimizing adverse consequences for the markets? 

121 

1The FBIIC consists of representatives from the Department of the Treasury, American Council of State Savings Supervisors, Commodity Futures Trading Commission, Conference of State 

Bank Supervisors, Consumer Financial Protection Bureau, Farm Credit Administration, Federal 

Deposit Insurance Corporation, Federal Housing Finance Agency, Federal Reserve Bank of Chicago, Federal Reserve Bank of New York, Federal Reserve Board, National Association of Insurance Commissioners, National Association of State Credit Union Supervisors, National Credit 

Union Administration, North American Securities Administrators Association, Office of the 

Comptroller of the Currency, Securities and Exchange Commission, and Securities Investor Protection Corporation. 2The FFIEC is an interagency body empowered to prescribe uniform principles, standards, 

and report forms for the Federal examination of financial institutions by the Board of Governors 

of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit 

Union Administration, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau, and to make recommendations to promote uniformity in the supervision 

of financial institutions. In 2006, the State Liaison Committee (SLC) was added to the Council 

as a voting member. The SLC includes representatives from the Conference of State Bank Supervisors, the American Council of State Savings Supervisors, and the National Association of 

State Credit Union Supervisors. 

A.1. The core premise of the Volcker Rule is relatively straightforward: that financial institutions with access to the Federal safety net—Federal Deposit Insurance Corporation insurance and the 

Federal Reserve Board (Board) discount window—should not engage in proprietary trading. The Volcker Rule’s statutory provisions, however, are complex, which has led to a complex rule. While 

many changes to the Volcker Rule would require amendment to the 

statute, there may be ways to streamline and simplify the interagency Volcker Rule regulation to reduce burdens without sacrificing key objectives. The Board is exploring possibilities and is 

working with the other agencies. 

Q.2. Cybersecurity regulation is receiving increased emphasis by 

all financial institution regulators. How do your agencies coordinate with each other to harmonize the promulgation of new 

cybersecurity regulations? With the increased use of the NIST Cybersecurity Framework by both Federal agencies and the private 

sector, how do your agencies intend to achieve greater alignment 

between the framework and your own regulatory initiatives? 

A.2. The Federal Reserve is an active participant in the Financial 

and Banking Information Infrastructure Committee (FBIIC),1

which coordinates efforts to improve the reliability and security of 

the financial sector infrastructure. Federal Reserve staff chair a 

harmonization subcommittee of the FBIIC focused on achieving 

greater harmonization of cyber requirements and examination approaches across FBIIC member entities. We intend to achieve 

greater alignment with National Institute of Standards and Technology (NIST) by using the subcommittee to map the cybersecurity 

requirements of the FBIIC member agencies to NIST and analyzing any gaps and differences. The Board also coordinates our examination of cybersecurity risks with the other Federal banking 

agencies through the Federal Financial Institutions Examination 

Council (FFIEC).2 The FFIEC agencies are actively sharing the lessons learned from our individual examinations to promote greater 

consistency in supervisory practices and to reduce unnecessary regulatory burden on supervised institutions. 

122 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR WARREN 

FROM JEROME H. POWELL 

Q.1. At the hearing, you stated that you did not support changing 

‘‘risk-based capital’’ standards for the country’s biggest financial institutions. Do you support changing any capital, leverage, or liquidity standards for banks with more than $500 billion in assets? If 

so, please describe which standards you support modifying and 

why. 

A.1. The safety and soundness of large banks is crucial to the stability of the U.S. financial system. To clarify, I do not support reducing risk-based capital requirements for firms with total consolidated assets of more than $500 billion. The Federal Reserve Board 

(Board) does review and update its regulations on an ongoing basis 

to ensure that they are achieving their intended objectives, to address developments in the banking industry, and to limit regulatory burden. In addition, the Board is considering revising certain 

requirements for firms subject to its Comprehensive Capital Analysis and Review, which would include firms with more than $500 

billion in total assets. Specifically, the Board is contemplating ways 

to better integrate the Board’s regulatory capital rule and the capital requirements related to the annual supervisory stress test in 

a manner that simplifies the Board’s overall approach to capital 

regulation. With respect to other requirements applicable to these 

firms, the Board also intends to review the current calibration of 

its enhanced supplementary leverage ratio standards in order to 

mitigate possible adverse incentives or market distortions that it 

may create. 

Q.2. The common argument in favor of reducing capital standards 

for large financial institutions is that it will increase lending and 

economic growth. I am aware of research showing that well-capitalized institutions actually provide more loans than less-well capitalized competitors. Can you provide any empirical research that demonstrates that the opposite is true? 

A.2. As stated in my testimony, stronger capital requirements increase bank costs, and at least some of those costs are passed along 

to customers. But in the longer term, stronger prudential requirements for large banking firms will produce more sustainable credit 

availability and economic growth. Our objective should be to set 

capital and other prudential requirements for large banking firms 

at a level that protects financial stability and maximizes long-term, 

through the cycle credit availability and economic growth. 

Existing economic research provides mixed results regarding the 

link between bank capital requirements and economic growth. 

There are studies on both sides of the issue, some suggesting that 

higher capital levels increase economic growth and others suggesting the opposite. Recent studies focusing on the costs and benefits of bank capital suggest that heightened capital requirements 

are good for economic growth up to some point, but would have a 

negative impact on social welfare beyond that point. 

While there are several studies which suggest that raising capital standards reduces bank lending, these studies typically do not 

address the broader impact of capital standards on economic 

123 

1Furfine, Craig (2000). ‘‘Evidence on the Response of U.S. Banks to Changes in Capital Requirements.’’ BIS Working Papers No. 88. 2 Berrospide, Jose M. and Rochelle M. Edge (2010). ‘‘The Effects of Bank Capital on Lending: 

What Do We Know, and What Does It Mean?’’ Federal Reserve Board Finance and Economics 

Discussion Series 2010–44. 3Francis, William B. and Matthew Osborne (2012). ‘‘Capital Requirements and Bank Behavior 

in the United Kingdom: Are There Lessons for International Capital Standards?’’ Journal of 

Banking and Finance, 36, 803–816. 4Martynova, Natalya (2015). ‘‘Effect of Bank Capital Requirements on Economic Growth: A 

Survey.’’ DNB Working Paper No. 467. 5 Basel Committee on Banking Supervision (2010). ‘‘An Assessment of the Long-Term Economic Impact of Stronger Capital and Liquidity Requirements.’’ 6 Brooke, Martin et al. (2015). ‘‘Measuring the Macroeconomic Costs and Benefits of Higher 

U.K. Bank Capital Requirements.’’ Bank of England Financial Stability Paper No. 35. 7Federal Reserve Bank of Minneapolis (2016). ‘‘The Minneapolis Plan to End Too Big To Fail.’’ 

8Firestone, Simon, Amy Lorenc, and Ben Ranish (2017). ‘‘An Empirical Economic Assessment 

of the Costs and Benefits of Bank Capital in the United States.’’ Federal Reserve Board Finance 

and Economics Discussion Series 2017–034. 

growth. For example, Furfine 1 analyzes data on large U.S. commercial banks between 1989 and 1997 and concludes that a 1-percentage point increase in capital standards reduces loan growth by 

5.5 percent. Berrospide and Edge 2 find a more modest impact. 

Using U.S. bank holding company data from 1992 to 2009, the authors conclude that a 1-percentage point increase in capital requirements reduces loan growth by roughly 1.2 percentage points. 

Other studies tell a similar story using non-U.S. data. For instance, 

Francis and Osborne 3 find, using U.K. data, that a 1-percentage 

point increase in capital requirements reduces bank lending by approximately 1.2 percent. Finally, Martynova’s 4 survey of the literature—mostly of studies using non-U.S. data—shows that an increase in capital requirements by 1 percentage point reduces loan 

growth by 1.2 to 4.6 percentage points. 

There is a growing body of research regarding the costs and benefits of bank capital that addresses the impact of capital standards 

on economic growth. A number of studies, including the Basel Committee on Banking Supervision,5 the Bank of England,6 the Federal 

Reserve Bank of Minneapolis,7 and Firestone et al.8 suggest that 

higher bank capital requirements (up to a point) are good for longterm credit availability and economic growth, and only at levels of 

capital beyond that point is social welfare decreased. While the optimal level of capital varies between studies, the basic framework 

is the same. 

A variety of assumptions are required of all studies in the literature, and changes to the assumptions could result in either 

higher or lower levels of optimal bank capital. The current calibration of our risk-based capital requirements for U.S. banks is roughly in line with the optimal level of capital found under a wide 

range of these studies. 

Q.3. You have said that you support providing banks with more 

‘‘transparency’’ into the stress test process. The goal of the stress 

test is to gauge how banks would fare in times of severe economic 

distress. Historically, the source of that economic distress is unforeseen, as we witnessed during the 2008 crisis. Indeed, the very reason there is economic distress is that banks and regulators have 

failed to anticipate the source or severity of that distress. In light 

of that, please explain how it is consistent with the goal of the 

stress tests to provide banks with more advance knowledge of what 

kinds of stresses they can expect to face? 

124 

A.3. Capital stress tests, which play a critical role in bolstering 

confidence in the capital position of the U.S. firms in the wake of 

the financial crisis, have become one of the most important features of our supervisory program in the post-crisis era. Stress tests 

better ensure that large firms have sufficient capital to continue 

lending through periods of economic stress and market turbulences, 

and that they are sufficiently capitalized for their risk profile. 

The Board’s annual Comprehensive Capital Analysis and Review, 

or CCAR, is the binding capital constraint for many of the largest 

firms, and their concerns about transparency are warranted. The 

Board has made a wide variety of information available about our 

stress testing process, and is committed to finding ways to safely 

enhance the transparency of that process. However, because of the 

concerns you raise in your question and other issues discussed 

below, we have not disclosed the full details of our stress testing 

models, nor have we provided firms with our stress scenarios in advance of the stress testing cycle. 

One implication of releasing all details of the models is that 

firms could use them to guide modifications to their businesses 

that change the results of the stress test without changing the 

risks faced by the firms; that is, full disclosure could encourage 

firms to ‘‘manage to the test.’’ In the presence of such behavior, the 

stress test could give a misleading picture of the actual 

vulnerabilities faced by firms. Further, such behavior could increase correlations in asset holdings among the largest banks, making the financial system more vulnerable to adverse financial 

shocks. Another implication is that full model disclosure could 

incent banks to simply use models similar to the Board’s, rather 

than build their own capacity to identify, measure, and manage 

risk. That convergence to the Board’s model would create a ‘‘model 

monoculture,’’ in which all firms have similar internal stress testing models which may miss key idiosyncratic risks faced by the 

firms. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TILLIS 

FROM JEROME H. POWELL 

Q.1. I’m a proponent of tailoring regulations based off of the risk 

profiles of financial institutions, as opposed to having strict asset 

thresholds that do not represent what I believe is the smart way 

to regulate. But, my question here is really about the importance 

of ensuring that we have a system that is rooted in fundamental, 

analytical, thoughtful regulation so that we can achieve and execute on goals, whether balancing safety and soundness with lending and growth, or encouraging more private capital in the mortgage market to protect taxpayers and reform the GSEs. 

Q.1.a. Do you think that we should use asset thresholds as a way 

to regulate—yes or no? If no, can you provide me with the metrics 

or factors by which a depository institution should be evaluated? If 

yes, please explain. 

Q.1.b. Section 165 of Dodd-Frank requires enhanced supervision 

and prudential standards for banks with assets over $50 billion. 

This applies to any bank that crosses the asset threshold, without 

regard to the risks those banks pose based upon the complexity of 

125 

the business model. This includes heightened standards on liquidity and capital under the Liquidity Coverage Ratio (LCR) and the 

Comprehensive Capital Analysis and Review (CCAR) which have a 

various assumptions built in that may drive business model. 

i. I understand under these two regulatory regimes, banks 

have changed certain lending behaviors because of the assumptions Federal regulators have made regarding certain 

classes of assets and deposits. Can you provide some examples of how the LCR and CCAR have changed the types of 

loans, lending, and deposits your institution holds? 

ii. Construction lending by banks over the $50 billion threshold 

has been a source of concern, namely because these enhanced prudential standards have treated construction loans 

punitively. This includes construction lending for builders of 

apartments, warehouses, strip malls, and other projects that 

may have varying risk profiles associated with them. However, under the CCAR and DFAST assumptions, the regulators have assigned all these categories of lending the same 

capital requirements. The result is an overly broad capital 

requirement for varying loans that have different risks, a 

capital requirement that may be greater for some loans and 

lower for others, influencing the decision of many banks over 

the $50 billion threshold to hold less of these assets due to 

the punitive capital requirements associated with them. 

Have you seen a similar corresponding issue with construction loans because of the heightened prudential standards? 

iii. Under the CCAR regulations, Federal regulators routinely 

assign risk weights to certain assets that Bank Holding Companies have on their balance sheets. These risk weights often 

time changes the costs associated with holding certain investments, such as Commercial Real Estate. Has this changed 

the type of assets that institutions hold, or caused institutions to alter their business plans because of the regulatory 

capital costs? If so, can you provide examples of this? 

iv. Do you think that regulators, on a general basis, get the risks 

weights right? 

v. Fed Governor Tarullo, has argued that the $50 BB threshold 

is too low in terms of an asset threshold for enhanced prudential standards; does this number make sense? Why do we 

need such arbitrary thresholds? Shouldn’t we get away from 

these thresholds and move toward a regulatory system that 

evaluates substance and activities of an institution as opposed 

to an arbitrary number? Why can’t we do that? 

• Does Title I allow the Fed to treat a $51 BB bank in a similar manner to a $49 BB bank for the purposes of enhanced 

prudential standards? 

A.1. In all of our efforts, our goal is to establish a regulatory framework that helps ensure the resiliency of our financial system, the 

availability of credit, economic growth, and financial market efficiency. The Federal Reserve has been working for many years to 

make sure that our regulation and supervision is tailored to the 

size and risk posed by individual institutions. 

126 

1 Board of Governors of the Federal Reserve System (2015), ‘‘Regulatory Capital Rules: Implementation of Risk-Based Capital Surcharges for Global Systemically Important Bank Holding 

Companies,’’ final rule, Federal Register, vol 80 (August 14), pp. 49082–49116. 2For evidence on the link between bank distress and economic growth, see Mark A. Carlson, 

Thomas King, and Kurt Lewis (2011) ‘‘Distress in the Financial Sector and Economic Activity,’’ 

The B.E. Journal of Economic Analysis & Policy: Vol. 11: Iss. 1 (Contributions), Article 35. For 

evidence on the link between financial market functioning and economic growth, see Simon Gilchrist and Egon Zakrajsek (2012), ‘‘Credit Spreads and Business Cycle Fluctuations,’’ American 

Economic Review, Vol. 102 ( 4): 1692–1720. 3 Board of Governors of the Federal Reserve System (2017), ‘‘Amendments to the Capital Plan 

and Stress Test Rules; Regulations Y and YY,’’ final rule, Federal Register, vol 82 (February 

3), pp. 9308–9330. 

The failure or distress of a large bank can harm the U.S. economy. The recent financial crisis demonstrated that excessive risktaking at large banks makes the U.S. economy vulnerable. The crisis led to a deep recession and the loss of nearly nine million jobs. 

Our regulatory framework must reduce the risk that bank failures 

or distress will have such a harmful impact on economic growth in 

the future. 

The Federal Reserve Board (Board) has already implemented, via 

a regulation that was proposed and adopted following a period of 

public notice and comment, a methodology to identify global systemically important banking organizations (GSIBs), whose failure 

could pose a significant risk to the financial stability of the United 

States.1 The ‘‘systemic footprint’’ measure, which determines 

whether a large firm is identified as a GSIB, includes attributes 

that serve as proxies for the firm’s systemic importance across a 

number of categories: size, interconnectedness, complexity, cross-jurisdictional activity, substitutability, and reliance on short-term 

wholesale funding. 

There are many large financial firms whose failure would pose 

a less significant risk to U.S. financial stability, but whose distress 

could nonetheless cause notable harm to the U.S. economy (i.e., 

large regional banks). The failure or distress of a large regional 

bank could harm the U.S. economy in several ways: by disrupting 

the flow of credit to households and businesses, by disrupting the 

functioning of financial markets, or by interrupting the provision of 

critical financial services, including payments, clearing, and settlement. Economic research has documented that a disruption in the 

flow of credit through banks or a disruption to financial market 

functioning can affect economic growth.2 Some level of tailored enhanced regulation is therefore appropriate for these large regional 

banks. 

The application of tailored enhanced regulation should consider 

the size, complexity, and business models of large regional banks. 

The impact on economic growth of a large regional bank’s failure 

will depend on factors such as the size and geographic distribution 

of the bank’s customer base and the types and number of borrowers 

that depend on the bank for credit. Asset size is a simple way to 

proxy for these impacts, although other measures may also be appropriate. For large regional banks with more complex business 

models, more sophisticated supervisory and regulatory tools may be 

appropriate. For example, the Board recently tailored our Comprehensive Capital Analysis and Review (CCAR) qualitative assessment to exclude some smaller and less complex large regional 

banks, using asset size and nonbank assets to measure size and 

complexity, respectively.3 In other contexts, foreign activity or 

127 

4See Figure 6 from Cindy M. Vojtech (2017), ‘‘Post-Crisis Lending by Large Bank Holding 

Companies,’’ FEDS Notes, Washington: Board of Governors of the Federal Reserve System, July 

6, 2017. https://www.federalreserve.gov/econres/notes/feds-notes/post-crisis-lending-by-largebank-holding-companies-20170706.htm. 5See Figure 7 from Vojtech (2017). 

6See, Vojtech (2017). 

short-term wholesale funding may be another dimension of complexity to consider. Any characteristics or measures that are used 

to tailor enhanced regulation for large regional banks should be 

supported with clear analysis that links them with the potential for 

the bank’s failure or distress to cause notable harm to the U.S. 

economy. 

The Board currently has only limited authority to tailor the enhanced prudential standards included in section 165 of the DoddFrank Wall Street Reform and Consumer Protection Act (DoddFrank Act). In particular, Congress required that certain enhanced 

prudential standards must apply to firms with $10 billion in total 

assets, with other standards beginning to apply at $50 billion in 

total assets. 

I understand that Congress is currently considering whether and 

how to raise these statutory thresholds. The Board has supported 

increasing these thresholds. As an alternative to simply raising the 

thresholds, your question asks whether Congress should move 

away from an asset-size threshold. As my answer above noted, I believe that it would be logical to use a wider range of factors than 

asset size to determine the application of tailored enhanced regulation for large regional banks. The Board stands ready to work with 

Members of Congress to pursue either approach: raising the dollar 

thresholds, or providing for the Federal Reserve to decide which 

firms are subject to enhanced prudential standards. 

Several parts of your question concern the impact of enhanced 

prudential standards, including the liquidity coverage ratio (LCR) 

and CCAR, on commercial real estate lending at banks with assets 

greater than $50 billion. A recent study that evaluates pre-and 

post-crisis lending by large bank holding companies above and 

below the $50 billion asset threshold found no noticeable difference 

in commercial real estate loan growth since the implementation of 

enhanced prudential standards.4 Commercial real estate lending 

has consistently grown faster at the smaller banks all the way back 

to 2001, perhaps reflecting a structural competitive advantage held 

by smaller banks. In addition, the study notes that banks’ lending 

standards for commercial real estate loans, as measured by the 

Federal Reserve’s Senior Loan Officer Opinion Survey, are similar 

for banks above and below the $50 billion threshold.5

More broadly, post-crisis reforms to the supervision and regulation of the large banks were informed by the substantial body of 

research that has reached a consensus indicating that well-capitalized banks with strong liquidity positions are best able to support 

sustainable lending to creditworthy borrowers through the full 

business cycle. Indeed, overall bank lending has remained robust 

since post-crisis reforms began to be phased in—bank lending grew 

significantly faster than nominal GDP between 2013 and 2016.6 As 

such, the strong capital and liquidity positions of U.S. banks could 

128 

7For example, a study that finds that the 2011 CCAR had a negative effect on the share of 

jumbo mortgage originations and approvals at banks subject to that exercise is Calero, Paul S. 

and Correa, Ricardo and Lee, Seung Jung, Prudential Policies and Their Impact on Credit in 

the United States (2017). BIS Working Paper No. 635. Available at SSRN: https://ssrn.com/ 

abstract=2967129. Another recent study that finds that the stress tests have led to a reduction 

in bank lending to riskier borrowers is Acharya, Viral V. and Berger, Allen N. and Roman, 

Raluca A., Lending Implications of U.S. Bank Stress Tests: Costs or Benefits? (2017). Journal 

of Financial Intermediation, Forthcoming. Available at SSRN: https://ssrn.com/ 

abstract=2972919. 

be said to have contributed to a stronger recovery from the financial crisis in the United States compared with other countries. 

That said, it is difficult to isolate the effect that specific regulations have had on banks’ business decisions from other factors that 

affect those decisions. For instance, an important determinant of 

bank lending is the amount of demand for loans, and banks undoubtedly would have altered their lending standards to reflect a 

better understanding of the riskiness of certain business lines that 

were incorrectly perceived to be lower-risk prior to the financial crisis. To be sure, changes in regulation and supervision were designed to incentivize the banking industry to become safer and less 

prone to the type of systemic risks that built up during the mid2000s, and we believe that those intended effects are occurring. A 

relatively new and growing literature on bank responses to specific 

post-crisis regulations, like CCAR, is not yet comprehensive enough 

to fully understand how banks have adapted to the new regulatory 

environment, but it does provide some early evidence that banks 

are taking regulations into account when making business decisions.7 We remain vigilant, however, in research and monitoring efforts to understand and address any unintended effects of regulatory changes, and welcome discussions with the public and the 

industry about ways to address those challenges without undermining the increased safety and resiliency of the financial system. 

Finally, you ask whether risk weights, including those implied by 

the Federal Reserve’s CCAR supervisory stress test, are generally 

correct or whether they are overly broad, assigning the same capital requirement to loans with different risks. It is traditional risk 

weights, not CCAR, that group loans into broad categories. Those 

traditional risk weights do create an incentive for a bank to prefer 

the riskiest loans in a particular category, if a bank’s only consideration were to minimize its regulatory capital requirement. However, in CCAR, the Federal Reserve’s stress test models control for 

the most important risk drivers in a bank’s portfolio, down to the 

level of the individual loan in some cases. For example, commercial 

real estate loans are treated differently depending on the remaining maturity of the loan, the loan-to-value ratio, and whether the 

loan is collateralized by an income-producing property or is a construction loan. In addition, unlike traditional risk weights, stress 

tests account for the income generated by the loans as well as the 

potential losses under stress. Of course, traditional risk weights, 

stress tests, and any other individual measure of risk will necessarily be imperfect. Assessing capital using multiple perspectives—from traditional risk weights and stress tests—should 

produce a more stable and reliable treatment of risk over the various stages of the credit cycle. 

129 

Q.2. Governor Powell: Given the importance of international standards to both the United States and the global financial stability, 

would you agree with the U.S. Treasury Department’s recommendation that there should be more transparency for the public into the agenda of the Basel Committee? If so, do you think the 

Federal Reserve Board could be leading voice at the Basel Committee to shine some light into the agenda of that body and its proposed standards? And if, as goes the old adage says, ‘‘there’s no 

time like the present,’’ do you see any reason why we can’t start 

with more transparency on the proposal on the table relating to the 

finalization of the Basel III reforms? 

A.2. The Board strongly supports transparency in the international 

standard setting process. Over the years, the Board has led efforts 

to increase transparency in the context of the Basel standards, and 

is generally pleased with the progress that has been made to date. 

More remains to be done, however, and the Board will continue 

to use its influence to heighten openness around Basel standard 

setting, including the process for consideration of comments received through consultations and meeting agendas. The Basel Committee on Banking Supervision currently is studying approaches to 

increase external communication of work that is underway. The 

Board supports this effort and will be an active contributor to the 

deliberations. 

Q.3. Governor Powell: A number of President Obama’s regulators 

who helped devise the Volcker after the passage of Dodd-Frank 

have come out and called for additional legislative and regulatory 

changes to the law. Your former colleague Governor Tarullo has 

called for statutory changes and said the law is too complicated. 

Former Fed Governor Stein, again an Obama appointee, has called 

for its outright repeal. The Federal Reserve staff have concluded in 

a report that the rule is negatively impacting market liquidity. 

These are just a few of the calls for changes from respected Democratic regulators. Would you agree that we should revisit this provision of Dodd-Frank, which most people agree had nothing to do 

with the financial crisis and clarify that the statute does not impact legitimate market making? Can you provide me with specific 

legislative suggestions for how Congress can assist with your efforts to change Volker to cure its implementation issues? 

Q.3.a. There are many unintended consequences from Volker, and 

in the recent Treasury report, one of those consequences that was 

highlighted is the prohibition on a covered fund sharing the name 

of a bank-affiliated manager—even if the manager and the fund do 

not use the name of the bank. As the report stated: 

Q.3.a.i. ‘‘Although the prohibition on depository institutions sharing a name with the funds they sponsor is appropriate to avoid customer confusion as to whether the fund is insured, banking entities 

other than depository institutions and their holding companies 

should be permitted to share a name with funds they sponsor provided that the separate identity of the funds is clearly disclosed to 

investors.’’—Last Congress, H.R. 4096 was introduced to address 

this issue. Do you think that Congress should take up this measure, or are there ways by which the Fed or another regulatory body 

can address this issue? 

130 

8 12 U.S.C. 1851(d)(1)(G)(vi). 

Q.3.a.ii. Chair Yellen has indicated she has ‘‘some sympathy’’ for 

some of the changes that Treasury has proposed. Will the Fed address this technical, unintended consequence in what seems to be 

an over-broad application of the Volcker Rule? And soon—as I understand the compliance date is July 21st? 

A.3.a.i.–ii. The core premise of the Volcker Rule is relatively 

straightforward: that financial institutions with access to the Federal safety net—Federal Deposit Insurance Corporation insurance 

and the Board discount window—should not engage in proprietary 

trading. The Volcker Rule’s statutory provisions, however, are complex, which has led to a complex rule. While many changes to the 

Volcker Rule would require amendment to the statute, there may 

be ways to streamline and simplify the interagency Volcker Rule 

regulation to reduce burdens without sacrificing key objectives, and 

the Board is exploring possibilities. 

The Board is working with the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Commodities 

and Futures Trade Commission (CFTC), and Securities and Exchange Commission (SEC) (together, the agencies) to identify areas 

of the implementing regulations that could be simplified. There are, 

however, limits to addressing inefficiencies of the Volcker Rule 

through amendments of the implementing regulations. For example, a change to the statute to exempt smaller firms would be a 

cleaner and more comprehensive way to reduce burdens for smaller 

firms. Additional examples are the treatment of foreign excluded 

funds and the name-sharing restriction, discussed further below, 

which may require statutory changes to be addressed more fully 

than through regulatory amendment. 

You also ask about the name-sharing restriction of the Volcker 

Rule. This provision is imposed by the statute. The statute prohibits a banking entity from sponsoring a covered fund and defines 

‘‘sponsor’’ to mean ‘‘to share with a fund, for corporate, marketing, 

promotional, or other purposes, the same name or a variation of 

the same name.’’ The statute also prohibits a banking entity from 

sharing the same name or variation of the same name with a covered fund that the banking entity organizes and offers. In particular, the statute provides as a requirement to permissibly organize and offer a covered fund that ‘‘the banking entity does not 

share with the hedge fund or private equity fund, for corporate, 

marketing, promotional, or other purposes, the same name or a 

variation of the same name.’’8 The statute also defines the scope of 

the prohibition by defining the term ‘‘banking entity’’ to generally 

include any affiliate or subsidiary of an insured depository institution or any company that controls an insured depository institution. A change to the statute thus would be required to modify the 

scope of the namesharing provision, and any legislation is ultimately up to Congress to decide. 

Finally, you ask whether the Federal Reserve will address the 

technical, unintended consequences in the Volcker Rule. While we 

are restricted from granting burden relief that is in contravention 

of the requirements of the statute, we have provided relief for some 

provisions. Most recently, certain foreign noncovered funds 

131 

organized and offered outside the United States may have become 

subject to the Volcker Rule by virtue of typical corporate governance structures for funds sponsored by a foreign banking entity in 

a foreign jurisdiction or by virtue of investment by the foreign 

banking entity in the fond. In July, the agencies, in consultation 

with the SEC and the CFTC, issued a statement of policy that indicates the agencies would not propose to make a finding that a 

banking entity is out of compliance with respect to the provisions 

of the rule that may apply to such foreign noncovered funds for 1 

year while the agencies consider available avenues to address this 

issue. This issue could potentially be solved either through regulatory or legislative action. We will explore potential regulatory solutions to this issue in the context of the broader regulatory 

changes that we are working on. 

Q.4. Like community banks, there are a number of savings & loan 

holding companies that include small- and medium-sized insurance 

companies that serve the interests and needs of small farmers and 

businesses of all kinds. And, like community banks they provide 

critical financial services, in this case security from loss and loss 

prevention advice, that make it possible for small farms and other 

small businesses to exist, thrive, and employ. And, like community 

banks they are well regulated by their primary supervisor and are 

not systemically risky. Considering these facts, what are you doing 

to prevent and reduce unproductive regulatory burden on these insurers whose groups you supervise?’’ 

A.4. The Board recognizes the importance of community banks and 

insurance companies in providing services to small businesses and 

farmers. As you know, the Dodd-Frank Act mandates that the 

Board supervise the consolidated entity of any insurance savings 

and loan holding company (ISLHC). In doing so, the unique characteristics, risks, and activities of each ISLHC are considered in the 

supervisory approach. 

In order to mitigate regulatory overlap and burden in supervising these firms, the Board has been relying to the greatest extent possible on State insurance regulators’ work related to the 

business of insurance. The Board has information sharing Memorandums of Understanding with every State insurance regulator. 

Supervision staff from Reserve Banks and the Board regularly 

meet with State insurance regulators to coordinate examination 

and inspection activities and share information relative to supervision. The Board and the National Association of insurance Commissioners continue to discuss State and Federal supervision, any 

ongoing enhancements to the respective supervisory programs, potential for coordination, and possible areas of overlap. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM MARTIN J. GRUENBERG 

Q.1. The Treasury Report released on June 12 recommended that 

the FDIC be removed from the process to approve banks’ living 

wills. Chair Gruenberg, what would the impact of this recommendation be if adopted? 

132 

A.1. There are significant benefits to having both the FDIC and 

Federal Reserve involved jointly in the resolution plan process. 

The FDIC brings the unique perspective as the resolution authority responsible for winding down failed banks and ensuring 

market confidence. The Federal Reserve brings the important perspective of the bank holding company regulator. 

The FDIC’s review of living wills also supports the FDIC’s responsibilities to wind-down a financial institution pursuant to the 

Orderly Liquidation Authority. The information and insight that 

the firms generate about their own structure, business models, and 

risks is a source of essential information and structural improvement that enables the agency to help avoid bailouts and protect the 

U.S. financial system. 

Implementing the living will requirement over the past 7 years, 

the FDIC and the Federal Reserve have developed a close cooperative relationship. We issue joint guidance, hold joint meetings with 

firms, and our review teams train together and conduct their reviews in close collaboration. 

This joint process has yielded significant benefits toward improving the resolvability of systemically important banking institutions 

in the United States. Removing either the FDIC or the Federal Reserve from the process would, in my view, significantly reduce the 

quality of the process and undermine the goal of improving the resolvability of these systemically important financial institutions. 

Q.2. The largest banks have suggested that the results of the 

stress tests show that they have enough capital and that now is the 

time to loosen some of the Wall Street Reform capital and liquidity 

rules so that they can do more to lend and contribute to economic 

growth. Is that how capital requirements work? Is there a point 

when a bank has enough capital and it is appropriate to reduce the 

requirement? 

A.2. Capital requirements establish a minimum amount of equity 

that a banking organization must hold to support its business activities. The largest banks have performed well in recent stress 

tests; however, reducing capital requirements may have an adverse 

impact on their ability to continue to conduct business during periods of stress. It is critical that a sufficient amount of equity capital 

is held at the largest banking organizations to help ensure that 

they have the loss absorbing capacity necessary to serve as financial intermediaries through the economic cycle. Strong capital positions support banks’ ability to support economic activity through 

lending; for example, as noted in my testimony, large U.S. banking 

organizations are both better capitalized and have increased their 

lending to a greater extent than their European counterparts. 

Strong capital also serves as an important buffer during times of 

stress to reduce the probability of failure for banking organizations. 

Q.3. Chair Greenberg, can you describe the cost benefit analysis 

currently conducted by the FDIC as part of its rulemaking process? 

Some have suggested that the independent financial regulatory 

agencies should do more cost benefit analysis. They have introduced proposals in Congress or made recommendations to increase 

the requirements for cost benefit analysis and to subject 

133 

1See Atkinson, Tyler; Luttrel, David; and Rosenblum, Harvey, ‘‘How Bad Was It? The Costs 

and Consequences of the 2007–09 Financial Crisis,’’ Federal Reserve Bank of Dallas, Staff Paper 

No. 20, July 2013. https://www.dallasfed.org/assets/documents/research/staff/staff1301.pdf. 

independent agencies to OIRA review. What would be the impact 

of these proposals on FDIC rulemaking? 

A.3. The FDIC believes that analysis of expected costs and benefits 

is an integral part of the rulemaking process that helps produce 

more effective regulations. As an independent agency, the FDIC is 

not subject to the provisions of Executive Order 12866 and OMB 

Circular A–4. However, our procedures are broadly consistent with 

the OMB circulars and adhere to our own 2013 Statement of Policy 

as well as a number of statutory mandates. 

The Administrative Procedures Act (APA) establishes general 

requirements for a Notice and Comment process that helps to inform the design and analysis of each FDIC proposed or final rule. 

Consistent with both best practice and the OMB circulars, the preamble of each FDIC proposed and final rule addresses: the policy 

objectives of the rule, its likely economic effects, comments submitted by the public and the industry, and reasonable and possible 

alternatives to the rule. 

These practices help to ensure that the FDIC Board is well informed about the costs and benefits of each rule. By highlighting 

these considerations in the preamble, the rationale of each rule is 

made transparent to the public and the parties most affected. Recent audits of our rulemaking process by the Government Accountability Office (GAO) have identified no material weakness in our 

analytical processes. 

Subjecting independent agencies like the FDIC to review by the 

Office of Information and Regulatory Affairs within the Office of 

Management and Budget would compromise the independence of 

the rulemaking process. This would impair the agencies’ ability to 

respond quickly to emerging risks and to meet statutory deadlines 

for rulemaking. The resulting delays can be expected to increase 

the risk of financial instability and create uncertainty among affected entities. 

Recent proposals to increase requirements for cost benefit analysis could also impose unrealistic standards to quantify the effects 

of each rule. The expected benefits of many FDIC rules are difficult 

to quantify. They frequently center on reducing the likelihood and 

severity of future financial crises. Long-term financial stability, in 

turn, depends critically on behavioral factors such as public confidence and market liquidity that are prone to volatility, and therefore are difficult to model with precision. 

Despite these challenges, there is no question that the potential 

benefits of stability-enhancing rules are substantial. Recent experience clearly shows that a financial crisis can have a devastating effect on real economic activity as well as on the banking industry 

itself. Estimates vary as to the total cumulative loss in gross domestic product (GDP) compared to potential output during and 

after the latest crisis, but these estimates generally exceed $10 trillion.1

Requiring a strict quantification of the likely effects of each rule 

would limit the ability of the independent financial regulatory 

agencies to apply their ample expertise, experience and judgment 

134 

2 History of the Eighties, Lessons for the Future, Volume 1, p. 110. 

3 History of the Eighties, Lessons for the Future, Volume 1, p. 108. 

4 History of the Eighties, Lessons for the Future, Volume 1, p. 109. 

5 History of the Eighties, Lessons for the Future, Volume 1, pp. 31–32. 

6 History of the Eighties, Lessons for the Future, Volume 1, pp. 31–32. 

to promote long-term financial stability. We expect that the end result would be a more volatile financial system that is less consistent in its ability to support U.S. economic activity. 

Q.4. In his testimony, Acting Comptroller of the Currency Noreika 

suggested that the OCC be able to approve deposit insurance automatically when it charters a national bank. Currently, that authority lies with the FDIC. What do you think about this proposal? 

A.4. From the FDIC’s inception in 1933 through 1989, national 

banks and State member banks automatically received deposit insurance as a matter of law, upon receipt of certification by the 

FDIC from either the OCC or Federal Reserve. In reaction to the 

banking crisis of the 1980s, and because the chartering authority 

does not have the same incentives as the deposit insurer, Congress 

enacted legislation to protect the Deposit Insurance Fund (DIF). 

First, in 1989, FIRREA authorized the FDIC to comment on charter applications of national and State member banks. Then, in 

1991, FDICIA required institutions to apply for and be granted 

Federal deposit insurance by the FDIC.2

These changes in authority were a direct result of the chartering 

activity in the years prior to the crisis of the late 1980s and early 

1990s. For example, from 1982–85, well over 800 national bank 

charters were granted compared to about 400 State bank charters.3

However, just over half (51 percent) of all national banks chartered 

from 1980–87 were located in the Southwest, which was one of the 

regions most affected by bank failures during the crisis.4 Further, 

of the approximate 2,800 new banks (national and State chartered) 

chartered between 1980 and 1990, more than 16 percent had failed 

by 1994, compared with 7.6 percent of banks that were already in 

existence at year-end 1979—a failure rate that was more than 

twice as high.5 In the southwest, 33.3 percent of banks chartered 

from 1980–90 failed through 1994, compared to 21.4 percent of 

banks that were already in existence at year-end 1979.6 These 

higher failure rates of banks chartered under the more relaxed 

chartering regime of the 1980s substantially increased costs to the 

DIF. 

Although chartering authorities should account for a proposed 

bank’s potential to operate successfully, the chartering authority is 

not responsible for the resolution of a failed bank, and the analyses 

of the agencies regarding risk to the DIF can differ. Risk to the Deposit Insurance Fund is a statutory factor to be considered by the 

FDIC in evaluating deposit insurance applications, and by each of 

the Federal banking agencies in evaluating notices of change of 

control of an institution. 

As steward of the Fund, the FDIC has a fiduciary duty to administer the DIF, in large part by maintaining a comprehensive understanding of the risk profile of insured institutions and ensuring 

that, with respect to all insured institutions, appropriate supervisory and regulatory actions are taken when necessary, regardless 

of institution size, chartering authority, or primary Federal 

135 

regulator (PFR). Requiring all banks to apply formally to the FDIC 

for deposit insurance enables the potential costs of failure to betaken into account during the chartering process and serves to protect the DIF. 

Q.5. This week, the House approved the FY 2018 Financial Services and General Government Appropriations bill. Included in this 

bill is a provision from the CHOICE Act to bring all independent 

financial regulatory agencies’ budgets under the appropriations 

process. What would be the impact on the FDIC if its budget was 

appropriated? 

A.5. • Congressional control of funding could reduce the FDIC’s 

flexibility to address unforeseen and unfunded emergencies 

and exigent circumstances in the banking system. 

The FDIC must be able to act independently in the public interest to maintain public confidence and promote the safety and 

soundness of the banking system and the DIF. This requires that 

the FDIC, as deposit insurer, be able to make difficult decisions in 

a timely manner and maintain focus on the mission to protect the 

stability of our banking system. Sometimes this means recognizing 

risks, or even losses, when they occur rather than allowing potentially destabilizing risks to compound. 

The FDIC’s current funding structure allows the agency to respond appropriately and promptly in response to unforeseen emergencies and exigent circumstances. For example, the FDIC can 

change the size of its resolution and examination staff in response 

to changes in markets and bank risk-taking. 

• Subjecting the FDIC to the annual appropriations process 

could undercut efforts to promote safety and soundness. 

History shows us that when financial regulators are constrained 

in their ability to rein in inappropriate risk, the consequences can 

be dire. For example, in the early 1980s, the Federal Home Loan 

Bank Board (FHLBB) did not have control of either its funding levels or the purposes for which funds could be used. The FHLBB, 

therefore, could not allocate resources to increase examination 

staffing levels or to provide examination staff essential training to 

address changes in the savings and loan (S&L) industry. Unable to 

augment its examination staff, it was unable to prevent the worst 

of the S&L crisis. (National Commission on Financial Institution 

Reform, Recovery and Enforcement, Origins and Causes of the S&L 

Debacle: A Blueprint for Reform, July 1993, at p. 57.) 

Q.6. Is there any evidence that Wall Street Reform is the primary 

cause of driving of consolidation among community banks? 

A.6. Consolidation is a long-term banking industry trend that dates 

back to the mid-1980s. The number of federally insured bank and 

thrift charters has declined by two-thirds since 1985. Long-term 

consolidation in banking has taken place in the context of powerful 

historical forces—two banking crises and relaxation of restrictions 

on intra-State branching and interstate banking and branching. 

More recently, a pickup in the pace of voluntary mergers and a 

very slow pace of de novo bank formation have contributed to 

continued consolidation. These trends are likely related to the 

historically low interest rates and slow growth in economic activity 

136 

7 Adams, Robert M. and Gramlich, Jacob (2016), Where Are All the New Banks? The Role of 

Regulatory Burden in New Bank Formation, Review of Industrial Organization, 48(2), pp, 181– 

208. 

experienced during this recovery. While 95 percent of community 

banks were profitable last year, they clearly face some economic 

headwinds. Low interest rates have contributed to narrow net 

interest margins, subpar levels of profitability, and low market premiums as reflected in price-to-book ratios for banks. These conditions have made it less attractive to start new banks and more 

attractive to acquire existing banks. 

A 2016 study by Federal Reserve Bank of New York economists, 

Robert Adams and Jacob Gramlich, shows that at least 75 percent 

of the post-crisis decline in new bank formation could be attributed 

to economic factors, and would have occurred without any regulatory change.7 Our expectation is that once interest rates normalize, we will begin to see the pace of bank mergers and new 

bank formation return to more normal levels, thereby slowing the 

pace of consolidation. We are already seeing an increase in new applications for deposit insurance, and have approved six of these applications over the past 10 months. 

Q.7. After the financial crisis, the FDIC created the Division of Depositor and Consumer Protection. Your predecessor, Sheila Bair, 

stated that this division would complement the activities of the 

Consumer Financial Protection Bureau. 

Please describe your experiences working with the CFPB to protect consumers at FDIC supervised banks. Do you think further 

limiting the institutions CFPB supervises for consumer compliance 

would advance the FDIC’s mission to protect consumers and the 

Deposit Insurance Fund? 

A.7. Since it was established in 2011, the FDIC and CFPB have 

developed and maintained a positive, constructive relationship to 

protect consumers at FDIC-supervised banks, both in terms of rulewriting and through supervision of institutions to identify, mitigate, and prevent consumer harm. Through the legally mandated 

consultation process and meetings at multiple levels with the 

CFPB, we have seen increased coordination and communication between the FFIEC member agencies since 2011. Additionally, the 

FDIC, FRB, OCC and NCUA maintain a ‘‘Memorandum of Understanding on Supervisory Coordination’’ (https://www.fdic.gov/ 

news/news/press/2012/pr12061a.pdf) with the CFPB, which establishes mechanisms for cooperation between the Agencies in both 

supervision and enforcement, consistent with the Dodd-Frank Act. 

The FDIC and CFPB communicate regularly regarding supervisory 

activities, such as examination schedules and review of examination reports, regarding institutions where we share supervisory authority to ensure effective and coordinated supervision. 

The CFPB’s supervision for consumer compliance has not been 

an impediment to the FDIC’s ability to carry out its mission to protect consumers and the Deposit Insurance Fund. In fact, the CFPB 

has been an effective partner with the FDIC in addressing problematic practices identified at supervised institutions through enforcement actions. In 2012, the FDIC and CFPB, along with the 

Utah Department of Financial Institutions, partnered in an 

137 

investigation of three American Express subsidiaries, which led to 

an enforcement action in which $85 million was refunded to 

250,000 customers for illegal card practices. Additionally, our two 

agencies joined in another 2012 enforcement action, this time 

against Discover Bank (Discover) for deceptive telemarketing and 

sales tactics. Discover was ordered to return $200 million to more 

than 3.5 million consumers. 

In addition, nonbank consumer financial firms are now subject to 

Federal supervision for the first time due to the CFPB’s DoddFrank Act authority, creating a more level playing field between insured and supervised financial institutions and nonbank firms. On 

balance, this has benefited community banks, which have long 

been subject to Federal supervision. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR HELLER 

FROM MARTIN J. GRUENBERG 

Q.1. Does the FDIC welcome new industrial loan company (ILC) 

applications? 

A.1. The FDIC welcomes all deposit insurance applications, including industrial loan companies. Regardless of charter type, each filing is reviewed under the framework of statutory factors found in 

Section 6 of the FDI Act: 

• Financial History and Condition 

• Adequacy of Capital Structure 

• Future Earnings Prospects 

• General Character of Management 

• Risk to Deposit Insurance Funds 

• Convenience and Needs of Community 

• Consistency with Powers in FDI Act 

As stated in the FDIC’s Statement of Policy on Applications for Deposit Insurance, in general, the applicant will receive deposit insurance if all of these statutory factors plus the considerations required by the National Historic Preservation Act and the National 

Environmental Policy Act of 1969 are resolved favorably. 

Q.2. Do you believe that the FDIC has all the tools and resources 

to manage and oversee current and new ILCs properly? 

A.2. The FDIC believes that it has the statutory, regulatory, and 

supervisory frameworks necessary to oversee ILCs. Each institution is subject to the statutes and regulations applicable to other 

insured institutions, including those related to affiliate and insider 

transactions, consumer protection, community reinvestment, antitying, and others. Further, with respect to FDIC-supervised ILCs, 

the institutions are supervised in the same manner as other institutions in that supervisory strategies are customized to the risk 

profile of the institution. 

While there is generally no Federal Reserve Board-supervised 

holding company for an ILC, the FDIC has the authority to examine the affairs of any affiliate, including the parent and its subsidiaries, as maybe needed to disclose the relationship between the 

ILC and the affiliate, and the affiliate’s effect on the institution. 

138 

And, similar to other insured institutions, the FDIC can prohibit 

an insured ILC from engaging in activities with an affiliate or any 

third party that may cause harm to the ILC. 

In the event supervisory concerns are noted, the FDIC may pursue the same enforcement powers authorized with respect to any 

other insured institution. Parent companies of nonbank banks are 

considered institution-affiliated parties under the FDI Act and may 

be directly subject to enforcement actions by the FDIC. As with 

other FDIC-supervised institutions, section 38 of the FDI Act authorizes the FDIC to obtain guarantees of capital plans from the 

nonbank bank’s parent company in certain circumstances. The 

FDIC’s Board may terminate a depository institution’s insured status after a hearing if the institution violates a condition or written 

agreement imposed by the FDIC in connection with the approval 

of an application or other request by the depository institution. 

Additionally, the FDIC has pursued strategies to mitigate risks 

related to the parent company structure, including various parent 

company and operating agreements. These agreements may address a variety of circumstances regarding supervision, corporate 

governance, and financial support of the insured institution. 

Q.3. Do you believe that new ILCs should be insured by the FDIC 

if they meet underlying statutory factors for deposit insurance? 

A.3. The FDIC welcomes all deposit insurance applications, including industrial loan companies. Regardless of charter type, each filing is reviewed under the framework of statutory factors found in 

Section 6 of the FDI Act: 

• Financial History and Condition 

• Adequacy of Capital Structure 

• Future Earnings Prospects 

• General Character of Management 

• Risk to Deposit Insurance Funds 

• Convenience and Needs of Community 

• Consistency with Powers in FDI Act 

As stated in the FDIC’s Statement of Policy on Applications for Deposit Insurance, in general, the applicant will receive deposit insurance if all of these statutory factors plus the considerations required by the National Historic Preservation Act and the National 

Environmental Policy Act of 1969 are resolved favorably. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED FROM 

MARTIN J. GRUENBERG 

Q.1. Some have called for the FDIC to be removed from the living 

will process. Do you believe the FDIC should be removed from this 

process? 

A.1. There are significant benefits to having both the FDIC and 

Federal Reserve involved jointly in the resolution plan process. 

The FDIC brings the unique perspective as the resolution authority responsible for winding down failed banks and ensuring 

market confidence. The Federal Reserve brings the important perspective of the bank holding company regulator. 

139 

The FDIC’s review of living wills also supports the FDIC’s responsibilities to wind-down a financial institution pursuant to the 

Orderly Liquidation Authority. The information and insight that 

the firms generate about their own structure, business models, and 

risks is a source of essential information and structural improvement that enables the agency to help avoid bailouts and protect the 

U.S. financial system. 

Implementing the living will requirement over the past 7 years, 

the FDIC and the Federal Reserve have developed a close cooperative relationship. We issue joint guidance, hold joint meetings with 

firms, and our review teams train together and conduct their reviews in close collaboration. 

This joint process has yielded significant benefits toward improving the resolvability of systemically important banking institutions 

in the United States. Removing either the FDIC or the Federal Reserve from the process would, in my view, significantly reduce the 

quality of the process and undermine the goal of improving the resolvability of these systemically important financial institutions. 

Q.2. Many of us have come to recognize that the Orderly Liquidation Authority is an incredibly important part of the Wall Street 

Reform and Consumer Protection Act. Could you please explain in 

plain terms why OLA is so important? 

A.2. The Orderly Liquidation Authority (OLA) is an essential backstop for protecting taxpayers—and avoiding bailouts—in circumstances when the bankruptcy process cannot handle the orderly failure of a systemically important financial institution, putting the stability of the U.S. financial system at risk. 

During the financial crisis, policymakers lacked the tools for 

managing the failure of a potentially systemic financial institution 

and—when faced with that possibility—were forced to choose between two bad options: taxpayer bailouts or systemic disruption in 

bankruptcy. 

The Dodd-Frank Act established a framework for helping to ensure that a potentially systemic financial institution can fail in an 

orderly way. Bankruptcy is the statutory first option under the 

framework—and the Act established the living will process whereby firms demonstrate how they can fail, in bankruptcy, without 

threatening U.S. financial stability. 

While significant progress has been made through this process, 

we cannot rule out the possibility that in the future circumstances 

may arise where the bankruptcy process might not be able to handle the orderly failure of a systemically important financial institution. Title II of the Dodd-Frank Act established the Orderly Liquidation Authority as a backstop in such cases. OLA would allow 

the FDIC to wind-down and liquidate a failed financial firm—in an 

orderly way. This authority would protect taxpayers and avoid a repeat of the bailouts and financial disruption that occurred before 

OLA’s enactment. 

The Orderly Liquidation Authority provides the FDIC several authorities—not available under bankruptcy—that are broadly similar to those the FDIC has to resolve banks. They include the 

authority to establish a bridge financial company, to stay the 

termination of certain financial contracts, to provide temporary 

140 

liquidity that may not otherwise be available, and to coordinate 

with domestic and foreign authorities ahead of a resolution to better address any cross-border impediments. The critical abilities to 

plan in advance and to move quickly to deploy a team of professionals experienced in financial institution resolution in order to 

stabilize the failed financial institution are additional advantages 

the FDIC can bring to bear. The tools available under the OLA 

would enable the FDIC to carry out the process of winding down 

and liquidating the firm, while ensuring that shareholders, creditors, and culpable management are held accountable. By law, taxpayers cannot bear any losses. Losses must be paid for out of the 

assets of the failed firm and, if necessary, through assessments on 

large financial institutions. 

It is clear that without these authorities, we would be back in 

the same position as 2008, with the same set of bad choices. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TESTER 

FROM MARTIN J. GRUENBERG 

Chair Greenberg and Governor Powell, you’ve both tallied about 

the Volcker Rule and the complexity that comes along with this 

rule. And in the past, Comptroller Curry had suggested that we 

could exempt community banks entirely. After having conversations with many of my community banks I agree with Mr. Curry 

and believe they should be entirely exempt from Volcker Rule compliance. Following these lines, I have introduced a bill with Senator 

Moran that would exempt community banks with less than $10 billion from compliance. 

Q.1. Is this a bill that both the FDIC and the Federal Reserve 

would support at this juncture? 

Q.2. Does eliminating the Volcker Rule for banks with less than 

$10 billion pose any real risk to our financial system? 

Q.3. Absent Congress passing legislation related to the Volcker 

Rule, does the FDIC or the Federal Reserve have any plans to 

make any changes on their own to the Volcker Rule? 

A.1.–3. The agencies are currently reviewing the Volcker Rule to 

identify and reduce unnecessary complexity and burden. The agencies could establish a regulatory safe harbor for banking organizations that meet certain activities-based criteria. As long as a banking organization met the safe harbor requirements, it would not be 

required to prove compliance with the proprietary trading restrictions of the Volcker Rule. This would eliminate compliance concerns for smaller banking organizations, including most community 

banks with less than $10 billion in assets, provided that they genuinely do not engage in proprietary trading. 

Establishing such a safe harbor through regulation may be a better approach than a statutory exemption. While most community 

banks do not engage in activities covered by the Volcker Rule, such 

an exemption based solely on asset size could create an arbitrage 

opportunity for consultants and others to promote risky, otherwise 

impermissible, activities to small banks. 

141 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCOTT 

FROM MARTIN J. GRUENBERG 

Each of you serve at agencies that are members of the Financial 

Stability Oversight Council (FSOC). Insurance has been regulated 

at the State level for over 150 years—it’s a system that works. But 

FSOC designations of nonbank systemically important financial institutions (SIFIs) have made all of you insurance regulators, despite the fact that you are bank regulators at your core. 

Strong market incentives exist for insurers to hold sufficient capital to make distress unlikely and to achieve high ratings from 

financial rating agencies, including incentives provided by risk sensitive demand of contract holders and the potential loss of firms’ intangible assets that financial distress would entail. Additionally, 

insurance companies are required by law to hold high levels of capital in order to meet their obligations to policyholders. Bottom line: 

Insurance companies aren’t banks, and shouldn’t be treated as 

such. 

In March, my colleagues and I on the Senate Banking Committee 

sent a letter to Treasury Secretary Mnuchin indicating our concerns regarding the FSOC’s designation process for nonbanks. I 

support efforts to eliminate the designation process completely. 

I was pleased that President Trump issued a ‘‘Presidential 

Memorandum for the Secretary of the Treasury on the Financial 

Stability Oversight Council’’ (FSOC Memorandum) on April 21, 

2017, which directs the Treasury Department to conduct a thorough review of the designation process and states there will be no 

new nonbank SIFI designations by the FSOC until the report is 

issued. Relevant decisionmakers should have the benefit of the 

findings and recommendations of the Treasury report as they carry 

out their responsibilities with respect to FSOC matters. Please answer the following with specificity: 

Q.1. What insurance expertise do you and your respective regulator 

possess when it comes to your role overseeing the business of insurance at FSOC? 

A.1. The FDIC has an insurance industry monitoring team within 

its Complex Financial Institution branch, which is responsible for 

the monitoring of insurance companies designated as systemically 

important. Collectively, the team has over 20 years of insurance industry experience both from working for major U.S. insurers and 

covering the insurance industry as a private sector analyst. Other 

core areas of expertise within the team include investment banking 

and regulatory oversight of U.S. broker dealers during the 2008 financial crisis. In addition to the monitoring team, in 2016, the 

FDIC added an insurance specialist within its Legal Division to 

help further its work with resolution plans filed by systemically important insurers, orderly liquidation authority, and any insurance 

issues coming before the FSOC. The specialist has nearly 20 years 

of insurance expertise and served at the U.S. Department of Treasury, both in legal and policy capacities, including as senior advisor 

to the FSOC’s current independent member with insurance expertise, immediately prior to joining the FDIC. 

In addition to its insurance-focused staff, the FDIC has insurance 

experience gained through the execution of its core missions. 

142 

Among other duties, the FDIC regulates State-chartered banks 

that are not members of the Federal Reserve System. The FDIC 

has executed supervisory Memoranda of Understanding with State 

insurance authorities covering supervisory and examination responsibilities with regard to insured State-chartered nonmember 

banks with insurance affiliates. The FDIC also coordinates with insurance regulators, as appropriate. Some FDIC-regulated banks 

sell insurance products through licensed agent and broker affiliates, and while the FDIC’s focus is the safety and soundness of the 

bank, its examiners are familiar with bank-sold insurance. The 

FDIC may also be appointed as the receiver of failed insured depository institutions (IDIs). In that capacity, the FDIC has engaged 

with State insurance regulators and insurance receivers in those 

instances where cooperation is appropriate in resolving the IDI, 

and has gained practical experience with insurance receivership 

issues. The FDIC has also pursued and litigated insurance claims 

against insurance companies as part of its receivership responsibilities and has experience on insurance coverage matters. 

Q.2. Do you support the Senate Banking Committee’s recent legislative effort, the Financial Stability Oversight Council Insurance 

Member Continuity Act, to ensure that there is insurance expertise 

on the Council in the event that the term of the current FSOC 

independent insurance member expires without a replacement having been confirmed? 

A.2. The FDIC has not taken a position on the Financial Stability 

Oversight Council Insurance Member Continuity Act and has no 

objection to it. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM MARTIN J. GRUENBERG 

Q.1. Has the CFPB effectively coordinated with the FDIC on rulemaking and enforcement actions? If not, how could coordination be 

improved? 

A.1. As required by statute, the CFPB regularly consults with the 

FDIC and other prudential regulators during the course of its 

rulemakings. We have found the consultations to be meaningful 

and substantive on significant rulemaking efforts. In particular, we 

have found the CFPB to be interested in our perspective as the primary Federal supervisor for the majority of the Nation’s community banks. 

With regard to enforcement, coordination between the FDIC and 

the CFPB has been effective. The two agencies have issued some 

joint and some concurrent enforcement actions in cases where both 

agencies had authority over a particular matter. Coordination is 

managed through ongoing communications at the regional level 

and the Washington Office level. The regions share information related to schedules for supervisory actions, findings that may impact 

supervision, supervisory letters, and reports of examination. Much 

of this sharing is performed in accordance with the Memorandum 

of Understanding on Supervisory Coordination issued on May 19, 

2012 at https://www.fdic.gov/news/news/press/2012/pr12061a 

.pdf. 

143 

At the Washington Office level, coordination is accomplished via 

a recurring meeting between leadership in supervision and enforcement at each agency. 

Q.2. As you know, the CFPB may be moving forward on a rulemaking for Section 1071 of Dodd-Frank, which granted the CFPB 

the authority to collect small business loan data. I’ve heard some 

concerns that implementing Section 1071 could impose substantial 

costs on small financial institutions and even constrict small business lending. 

Q.2.a. Are you concerned how a Section 1071 rulemaking could 

hurt small business access to credit? 

A.2.a. As you note, Section 1071 of the Dodd-Frank Act requires 

the CFPB to collect small business loan data. The CFPB is currently in the process of gathering information prior to beginning 

the rulemaking process. As a result, it is too early in the process 

for the FDIC to make a judgment regarding the potential impact 

such future rulemaking may have on small business access to credit. The FDIC is currently engaged in a research effort to better understand small business lending by insured institutions, which may 

provide useful insight and context for future consideration of the 

impact of this rulemaking effort. 

Q.2.b. Has the FDIC coordinated with the CFPB to ensure that implementing these requirements does not constrict small business 

access to credit? 

A.2.b. The CFPB is currently in the process of gathering information prior to beginning the rulemaking process. No requirements 

have, as yet, been proposed. 

Q.3. The agencies’ EGRPRA report highlights newly streamlined call reports for banks with less than $1 billion in assets. However, 

I’m told by community banks in my State with under $1 billion in 

assets that these changes will not help them because the streamlined call report form just removes items that few community 

banks needed to report in the first place. 

Q.3.a. What more can the FDIC do to reduce the regulatory paperwork burden on community banks regarding call reports and more 

broadly? 

A.3.a. Effective March 31, 2017, the Federal banking agencies, 

under the auspices of the Federal Financial Institutions Examination Council (FFIEC), implemented a new streamlined FFIEC 051 

Call Report for eligible small institutions, initially defined, in general, as institutions with domestic offices only and less than $1 billion in total assets. Such institutions represent about 87 percent of 

all insured depository institutions. Eligible small institutions have 

the option of filing the FFIEC 051 Call Report or continuing to use 

the FFIEC 041 Call Report otherwise applicable to all institutions, 

regardless of size, with domestic offices only. Some burden-reducing 

changes to the FFIEC 041 and FFIEC 031 versions of the Call Report, the latter of which applies to institutions with foreign offices, 

also took effect as of March 31, 2017. Nearly 3,500 or slightly more 

than two thirds of the approximately 5,100 eligible small institutions filed the FFIEC 051 Call Report for the first quarter of 2017. 

Eligible small institutions that did not file the FFIEC 051 as of 

144 

March 31, 2017, may begin reporting on this new version of the 

Call Report as of June 30, 2017, or as of later report dates in 2017. 

The FFIEC 051 report was created by: (1) removing certain existing schedules and data items from the FFIEC 041 report and replacing them with a limited number of data items in a new supplemental schedule, (2) eliminating certain other existing FFIEC 041 

data items, and (3) reducing the reporting frequency of certain 

FFIEC 041 data items. These actions resulted in the removal of approximately 950 or about 40 percent of the nearly 2,400 data items 

in the FFIEC 041. Of the data items remaining from the FFIEC 

041, the agencies reduced the quarterly reporting frequency for approximately 100 data items in the proposed FFIEC 051 to either 

semiannual or annual. 

The agencies recognize that not all community institutions eligible to file the FFIEC 051 have seen a substantial reduction in burden by switching to this new version of the Call Report. Approximately 300 of the data items removed from the FFIEC 041 to create the FFIEC 051 were data items for which all institutions with 

assets less than $1 billion were exempt from reporting. Other items 

not included in the FFIEC 051 applied to institutions of all sizes, 

but may not have applied to every community institution due to 

the nature of each institution’s activities. For example, in creating 

the FFIEC 051, the agencies removed from the FFIEC 041 the data 

items on Schedule RC–L, Derivatives and Off-Balance Sheet Items, 

in which about 800 eligible institutions that have derivative contracts had been required to separately report the gross positive and 

negative fair values of these contracts by underlying exposure. On 

the other hand, the agencies reduced from quarterly to semiannual 

the reporting frequency in the FFIEC 051 of Schedule RCC, Part 

II, Loans to Small Businesses and Small Farms, which bankers 

have cited as one of the more burdensome Call Report schedules, 

and Schedule RC–A, Cash and Balances Due from Depository Institutions, which applies only to institutions with $300 million or 

more in total assets. About 90 percent of institutions with less than 

$1 billion in total assets have data to report in Schedule RC–C, 

Part II. Nearly all of the more than 1,400 institutions with between 

$300 million and $1 billion in assets report dollar amounts in 

Schedule RC–A. 

In addition, during the banker outreach activities the agencies 

conducted as part of their community bank Call Report burden-reduction initiative, bankers indicated that they routinely review the 

Call Report instructions for data items for which they have previously had no amounts to report to determine whether this remains the case. The reduction in the number of data items in the 

FFIEC 051 report compared to the FFIEC 041 report means that 

bankers will not need to review as many instructions for data items 

that are not applicable to their institutions, thereby reducing reporting burden. 

In their ongoing communications to the industry about the new 

streamlined report and the Call Report burden-reduction initiative 

itself, the FFIEC and the bankingagencies have emphasized that 

the introduction of the FFIEC 051 Call Report in March 2017 was 

not the end of their streamlining efforts and that they would be 

issuing additional burden-reducing Call Report proposals in 2017. 

145 

In this regard, the banking agencies, under the auspices of the 

FFIEC, published a Federal Register notice on June 27, 2017, that 

requests comment for 60 days on further proposed burden-reducing 

revisions to the three versions of the Call Report. These revisions 

are proposed to take effect March 31, 2018. 

These proposed revisions in the current proposal resulted from 

the review of responses from Call Report users at FFIEC member 

entities to the middle portion of a series of nine surveys of groups 

of Call Report schedules requiring users to explain their need for 

and use of the data items in these schedules. The FFIEC and the 

agencies also considered comments regarding the Call Report 

received during the EGRPRA review, feedback and suggestions 

received during banker outreach activities, and comments on the 

agencies’ August 2016 FFIEC 051 Call Report proposal. The agencies’ current Call Report proposal would remove, raise the reporting threshold for, or reduce the reporting frequency of approximately 7 percent of the data items in the FFIEC 051 Call Report 

for eligible small institutions. The proposal includes similar actions 

affecting 10 percent and 12 percent of the much larger number of 

data items in the FFIEC 041 and FFIEC 031 Call Reports, respectively. 

The Federal Register notice for the current Call Report proposal 

notes that the agencies plan to propose further burden-reducing 

changes resulting from their analysis of the responses to the final 

portion of the nine user surveys. The FFIEC and the agencies expect to issue this next proposal for public comment later this year. 

These proposed revisions also would have a planned effective date 

of March 31, 2018, but the actual effective date would be dependent on industry feedback. 

In addition, in their August 2016 Federal Register notice proposing the streamlined FFIEC 051 Call Report for eligible small institutions, the agencies stated their commitment to explore alternatives to the $1 billion asset-size threshold that, at present, generally determines an institution’s eligibility to file the FFIEC 051 

Call Report. In beginning this effort this quarter, the FFIEC member entities will be evaluating Call Report data from institutions of 

various sizes in excess of $1 billion, particularly with respect to institutions’ involvement in the complex and specialized activities for 

which only limited information is collected in the FFIEC 051 report 

compared to the more detailed data on these activities currently reported in the FFIEC 041 report. The FFIEC’s goal would be to ensure that any proposed expansion of the eligibility to file the 

FFIEC 051 Call Report would not result in a loss of data critical 

to effective supervision and the conduct of FFIEC member entities’ 

other missions. Any proposal to expand eligibility for the FFIEC 

051 report would be published in the Federal Register for public 

comment. 

Q.3.b. Do any of these changes require statutory authorization? 

A.3.b. No, the burden-reducing changes to the Call Report that the 

agencies have implemented and are continuing to propose do not 

require statutory authorization. 

146 

1See FDIC, Community Banking Initiative, Research and Reports. https://www.fdic.gov/regulations/resources/cbi/research.html. 

Q.4. Our financial system has become increasingly consolidated, as 

community banks and credit unions either close their doors or 

merge with larger institutions. 

Q.4.a. Are you concerned about this pattern? Why? 

Q.4.b. What services can these smaller institutions provide that 

larger institutions cannot provide? 

A.4.a.–b. Consolidation is a long-term banking industry trend that 

dates back to the mid-1980s. The number of federally insured bank 

and thrift charters has declined by two-thirds since 1985. Longterm consolidation in banking has taken place in the context of 

powerful historical forces—two banking crises and relaxation of restrictions on intra-State branching and interstate banking and 

branching. Since the financial crisis, voluntary mergers and a very 

slow pace of de novo bank formation have contributed to continued 

consolidation. These trends are likely related to the historically low 

interest rates and slow growth in economic activity that have been 

experienced during the post-crisis period. 

While 95 percent of community banks were profitable last year, 

they clearly face some economic headwinds. Low interest rates 

have contributed to narrow net interest margins, subpar levels of 

profitability, and low market premiums as reflected in price-to-book 

ratios for banks. These conditions have made it less attractive to 

start new banks and more attractive to acquire existing banks. Our 

expectation is that once interest rates normalize, we will begin to 

see the pace of bank mergers and new bank formation return to 

more normal levels, thereby slowing the pace of consolidation. We 

are already seeing an increase in new applications for deposit insurance, and have approved 6 of these applications over the past 

10 months. 

It should be pointed out that the consolidation of community 

bank charters does not necessarily diminish the influence of community banks in their local market. More than three-quarters of 

the community banks that have been acquired since the end of 

2015 were acquired by other community banks. After declining 

steadily in the years leading up to the crisis, the community bank 

share of industry loans has remained steady since 2007 at just over 

16 percent. On a merger-adjusted basis, annual growth in total 

loans at community banks has exceeded growth at noncommunity 

banks for five consecutive years. 

The FDIC is acutely aware of the importance of community 

banks to the U.S. financial system and our economy. In 2012, we 

initiated a community bank research initiative that has resulted in 

a comprehensive review of this sector and a continuing series of research papers designed to better understand how it is performing 

over time.1 While community banks hold 13 percent of industry assets, they hold 43 percent of small loans to farms and businesses. 

Community banks hold more than three-quarters of FDIC-insured 

deposits in over 1,200 U.S. counties, making them the lifeline to 

mainstream banking for rural counties, small towns, and urban 

neighborhoods across the country. 

147 

2 According to a May 12, 2017, article in Inside Nonconforming Markets, there has been an 

increase in the amount of non-QM mortgage lending leading to a re-emergence of mortgagebased securities backed by non-QM loans. This has helped lower interest rates for the product, 

according to this article. 

As relationship lenders, community banks have an ability to tailor their services to the needs of their customers. They play a 

unique role in small business lending, real estate lending, and the 

vitality of their local economies that large institutions often are unable to fill. The FDIC carries out its regulatory and supervisory responsibilities with this in mind. 

Q.5. Multiple anecdotes from constituents make it clear that there 

are several Nebraska counties where consumers cannot get a mortgage, due to CFPB regulations such as TRID and the QM rule. 

What is the best way to address this problem from a regulatory 

standpoint? 

A.5. As a general matter, we have not seen a QM rule-related effect on access to mortgage credit, Likewise, preliminary results 

from examinations on TRID show that banks are successfully complying with the rule. 

QM status involves important safeguards for lenders, borrowers, 

and the system, including basic underwriting standards and protections against products that proved to be particularly risky in the 

crisis, such as option ARMs, negatively amortizing loans, and certain balloon loans. Most of our institutions had already been making loans consistent with the QM standard prior to the rule being 

promulgated, as noted in a GAO study titled ‘‘Mortgage Reforms: 

Actions Needed to Help Assess Effects of New Regulations,’’ GAO– 

15–185 (June 2015). 

In addition, changes by the CFPB to the definitions of ‘‘small 

creditor’’ and ‘‘rural’’ further expanded the eligibility of community 

banks and allowed additional flexibility to comply with the Ability 

to Repay (ATR)/QM Rule. For example, such entities may offer balloon QM loans and are not constrained by QM debt-to-income limits. The vast majority of FDIC supervised institutions are small 

creditors and qualify as ‘‘rural’’ under the rules. 

Additionally, the FDIC and the other prudential bank regulators 

have issued guidance saying that, to the extent insured depositories are making non-QM loans, as long as the loan is made in a 

safe and sound manner, such loans will not be subject to criticism 

solely on the basis of being a non-QM loan. We are seeing reports 

in the trade press that non-QM lending is growing.2

TRID was promulgated in part because of longstanding industry 

concerns regarding required disclosures for mortgage transactions. 

Required disclosures under TILA and RESPA overlapped, which 

confused and overwhelmed consumers without providing needed 

clarity on details of the loan transaction. Concerns were also raised 

that consumers did not easily understand loan cost or pricing information. 

Since both the QM rule and the TRID rule went into effect, the 

merger-adjusted growth in 1-to-4 family mortgages made by community banks has improved (continuing a trend that began in 

2010) and has consistently outperformed noncommunity banks. 

148 

Q.6. Are there concrete ways in which you believe the CFPB has 

improperly tailored regulations to match the unique profile of 

smaller financial institutions? 

A.6. During the consultation process, we have generally found the 

CFPB to be interested in the FDIC’s perspective as the primary 

Federal supervisor of the majority of the Nation’s community 

banks. In our view, major rules typically take into account the profile of smaller financial institutions and make adjustments intended to address differences between community bank business 

models and business models of other institutions. For example, the 

CFPB established and then significantly broadened the definitions 

of ‘‘small creditor’’ and ‘‘rural’’ lender, allowing the majority of community banks to qualify for multiple exceptions contained in the 

new mortgage rules. The CFPB, through its rulemakings, has extended a number of accommodations that reflect the profile of 

smaller financial institutions, including: 

• A broader safe harbor for a small creditor’s Qualified Mortgage 

(QM) loans kept in portfolio for 3 years. 

• A significantly expanded exemption from the requirement to 

escrow for higher-priced mortgage loans for small creditors operating in rural or underserved areas; a small creditor now 

qualifies for this exemption if it makes just one mortgage loan 

in a rural area in the past year. In addition, these small creditors are able to offer QMs that have balloon payment features 

without regard to the 43 percent debt-to-income (DTI) limit in 

the standard QM. 

• An exemption for small servicers from the more process- and 

paperwork-intensive requirements of the new servicing rules, 

including those related to early intervention, continuity of contact, certain loss mitigation, the provision of periodic statements, and the requirement to maintain written policies and 

procedures. 

• A de minimis exception allowing occasional mortgage loan 

originators to participate fully in a bank’s profit-sharing plan; 

this exception is particularly helpful to the management and 

staff of smaller financial institutions that on occasion need to 

step in and cover for full-time loan originators. 

Q.7. My understanding is that very few banks have opened since 

the passage of Dodd-Frank. 

Q.7.a. Why do you believe this is the case? 

A.7.a. New or de novo bank formation has always been cyclical. De 

novo activity dropped to historically low levels after the last financial crisis in the 1980s and early 1990s, before recovering as the 

economy improved. De novo activity has surged in economic upswings, such as those of post-World War II, the mid-1990s, and the 

early 2000s. But in the recent post-crisis period, the pace of new 

bank formation has slowed to historic lows, averaging around one 

de novo institution per year since 2010. 

There are a number of factors that have slowed new bank formation. For potential bank investors, the opportunity to acquire failed 

or underperforming institutions represents an alternative to starting new banks. In periods with high levels of problem banks and 

149 

3 Adams, Robert M. and Gramlich, Jacob (2016), ‘‘Where Are All the New Banks? The Role 

of Regulatory Burden in New Bank Formation,’’ Review of Industrial Organization, 48(2), pp. 

181–208. 

failures and low price-to-book ratios, acquisitions may represent a 

more economical way for interested investors to acquire the operations of troubled banks, including loan and deposit platforms, personnel, and back office operations. These factors have likely increased the pace of voluntary mergers in recent years even as the 

annual number of crisis-related failures has fallen. 

Profitability ratios have also not been conducive to new bank formation in the post-crisis period. During this period, community 

bank earnings have recovered, and 95 percent of community banks 

had positive earnings in 2016. But historically low interest rates 

and narrow net interest margins have kept bank profitability ratios 

(return on assets and return on equity) well below pre-crisis levels, 

making it relatively unattractive to start new banks. A recent 

study by economists at the Federal Reserve suggests that economic 

factors alone—including a long period of zero interest rates—explain at least three quarters of the post-crisis decline in new charters.3 The authors conclude: 

The large, recent decline in new bank formation has been noted by industry 

observers, policymakers, and the public press. Concern has been expressed 

by some that the decline may be due to burdensome regulation. This paper 

addresses the hypothesis by investigating the factors that have led to the 

dramatic decline in new charters. Interest rates are known drivers of banking profitability, and regression results suggest that these rates—plus other 

nonregulatory influences such as weak banking demand—would have 

caused approximately 75 percent or more of the decline in new charters absent any regulatory effect. These nonregulatory effects have been under-emphasized in the popular press. 

To the extent that this model is accurate, one would expect the rate 

of new applications to rise as interest rates and other economic indicators normalize. We have seen an increase in de novo activity 

accompanying the recent interest rate increases by the Federal Reserve. The FDIC has approved deposit insurance for six de novo 

banks in the past 10 months, and is receiving increasing expressions of interest by groups considering starting a new bank. 

Q.7.b. What potential impacts does this have on our financial system? 

A.7.b. The entry of new banks helps to preserve the vitality of the 

community banking sector. The dearth of new bank formation since 

the financial crisis is therefore a matter of concern to the FDIC and 

a focus of our attention. 

Community banks are critically important to the U.S. financial 

system. FDIC research documents that community banks today account for approximately 13 percent of the banking assets in the 

United States, and approximately 44 percent of all small loans to 

businesses and farms made by all banks in the United States. 

These statistics may understate the importance of community 

banks because most of the small business lending by large banks 

is credit card lending. In fact, community banks are generally the 

lenders with the first-hand knowledge about the small business 

seeking a loan. Furthermore, FDIC research has also found that 

community banks are the only banking offices in more than 20 

150 

percent of counties within the United States, meaning that the only 

physically present banking institution for thousands of rural communities, small towns, and urban neighborhoods is a community 

bank. As a result, community banks matter significantly in providing basic banking services and credit to consumers, farms, and 

small businesses across the United States. 

Q.7.c. Is there anything more the FDIC can do to encourage the 

opening of new banks? 

A.7.c. The FDIC welcomes applications for deposit insurance, and 

is committed to working with any group with an interest in starting an insured depository institution. We have seen indications of 

increased interest in de novo charter applications in recent quarters. 

FDIC has undertaken a number of initiatives to encourage deposit insurance applications, including the following: 

• Issued two sets of answers to frequently asked questions associated with the FDIC’s Statement of Policy on Applications for 

Deposit Insurance to provide transparency and to aid applicants in developing proposals. Topics include; pre-filing meetings, processing timelines, capitalization, and business plans. 

• Provided an overview of the deposit insurance application process during a conference of State bank supervisory agencies, 

and hosted an interagency training conference to promote coordination among State and Federal banking agencies in the 

review of applications. 

• Returned the period of enhanced supervisory monitoring of 

newly insured depository institutions to 3 years from 7 years. 

• Designated subject matter experts or applications committees 

in the FDIC regional offices to serve as points of contact for deposit insurance applications. 

• Initiated industry outreach meetings to ensure industry participants are well informed about the FDIC’s application process, and are aware of the tools and resources available to assist 

organizing groups. Outreach meetings were held in all six of 

the FDIC’s Regions. 

• Consolidated application-related resources on the FDIC’s public website to provide better and more efficient access to applicable materials for organizers and other interested parties. 

• Issued a deposit insurance application handbook for public 

comment. This publication serves as a guide for organizing 

groups and incorporates lessons shared by de novo banker panelists during the outreach events. The publication also addresses the timeframes within which applicants may expect communication from the FDIC regarding the application review process. 

• Issued for public comment a procedures manual for processing 

and evaluating deposit insurance applications. The manual 

contains expanded instructions for FDIC staff as they evaluate 

and process deposit insurance applications, and addresses each 

stage of the insurance application process: from pre-filing activities to application acceptance, review, and processing; 

preopening activities; and postopening considerations. Making 

151 

these expanded instructions public is meant to enhance the 

transparency of FDIC’s evaluation processes. 

Further, several initiatives are underway and will be completed later this year. Among these, FDIC is conducting additional training for internal staff that, in part, addresses deposit insurance applications. FDIC will also be considering the 

need for additional answers to frequently asked questions associated with the FDIC’s Statement of Policy on Applications 

for Deposit Insurance. 

Q.7.d. Is there anything more Congress should do to encourage the 

opening of new banks? 

A.7.d. The FDIC believes that new bank formation is primarily 

driven by economic conditions and the interest rate environment, 

as these are factors that heavily influence overall economic activity 

within a market and the profitability of a proposed institution. As 

conditions improve, we expect to see renewed interest in new bank 

formation. In fact, the FDIC has approved a number of applications 

in recent months, and has seen indications of additional interest on 

the part of organizing groups. 

As such, we believe the appropriate statutory and regulatory 

structure is in place. Further, we believe the various initiatives undertaken by the FDIC with respect to deposit insurance applications will aid interested parties in pursuing the formation of additional insured depository institutions. 

Q.8. I’m concerned that our Federal banking regulatory regime relies upon too many arbitrary asset thresholds to impose prudential 

regulations, instead of relying on an analysis of a financial institution’s unique risk profile. 

Q.8.a. Should a bank’s asset size be dispositive in evaluating its 

risk profile in order to impose appropriate prudential regulations? 

A.8.a. The use of dollar thresholds has always been an integral 

part of bank regulation, but this is only one consideration within 

a comprehensive process in assessing institution risk. Establishing 

cohorts based on asset size provides benefit for supervisors. For example, regulatory Call Reports group institutions based on asset 

size, loan review processes establish dollar thresholds for review 

samples, and community and large bank thresholds are established 

for analytical purposes. Use of asset size allows regulators to conduct comparative analysis of institutions based on standardized reporting requirements. 

However, it is important to note that these thresholds are a 

starting point, and are only one of many factors considered in assessing the risk profile of an institution. It is essential that regulators are granted flexibility within statutory requirements to tailor 

supervisory programs based on risk identified to apply more robust 

standards and review to those institutions with complex business 

models and less to less complex institutions, regardless of asset 

size. 

Q.8.b. If not, what replacement test should regulators follow instead of, or in addition to, an asset-based test? 

A.8.b. As mentioned above, establishment of asset thresholds is a 

long-standing principle within supervisory frameworks. This metric 

152 

is not a standalone measure of risk, but acts as one input in 

assessing risk at individual institutions or industry-wide. The concept of risk-based supervision is critical in implementing an effective supervisory program, which allows for efficient allocation of resources to address emerging risk within the industry. The risk-focused examination process attempts to assess an institution’s ability to identify, measure, evaluate, and control risk. If management 

controls are properly designed and effectively applied, they should 

help ensure that satisfactory future performance is achieved. In a 

rapidly changing environment, a bank’s condition at any given 

point in time may not be indicative of its future performance. The 

risk-focused examination process seeks to strike an appropriate 

balance between evaluating the condition of an institution at a certain point in time and evaluating the soundness of the bank’s processes for managing risk. 

Regulators may also identify business lines or products that 

show building risk features and conduct horizontal reviews to assess potential systemic risks posed. 

Large institutions are subject to enhanced supervision given that 

a relatively small number of insured institutions represent a significant majority of industry assets. This risk-focused view is a 

well-established concept embedded in existing supervisory frameworks. 

Q.9. Both Mr. Noreika and Governor Powell testified on the need 

to further tailor the Volcker Rule. Do you agree? Why or why not? 

A.9. I understand that certain aspects of the Volcker Rule may be 

complicated, particularly for smaller banking organizations. I think 

that it is important for the agencies to review the Volcker Rule to 

identify and reduce unnecessary complexity and burden. There is 

a lot that can be done in this area through the rulemaking process 

and I believe that the agencies should exhaust the rulemaking 

process before seeking statutory change. For example, the agencies 

could look at providing a safe harbor to banking organizations that 

meet certain activities-based criteria. As long as a banking organization met. the safe harbor requirements, it would not be required 

to prove compliance with the proprietary trading restrictions of the 

Volcker Rule. This would greatly reduce compliance concerns for 

most smaller banking organizations. 

RESPONSE TO WRITTEN QUESTION OF SENATOR WARNER 

FROM MARTIN J. GRUENBERG 

Q.1. Cybersecurity regulation is receiving increased emphasis by 

all financial institution regulators. How do your agencies coordinate with each other to harmonize the promulgation of new cybersecurity regulations? With the increased use of the NIST Cybersecurity Framework by both Federal agencies and the private sector, 

how do your agencies intend to achieve greater alignment between 

the framework and your own regulatory initiatives? 

A.1. The FDIC, the Federal Reserve Board, and the Office of the 

Comptroller of the Currency (the Federal banking agencies) have 

not issued any cybersecurity regulations. The Federal banking 

agencies have, however, coordinated to publish a joint advance 

153 

notice of proposed rulemaking on Enhanced Cyber Risk Management Standards in October 2016. The agencies are considering the 

comments received. 

The FDIC, as a member of the Federal Financial Institutions Examination Council (Council), collaborates with the Board of Governors of the Federal Reserve System, the Consumer Finance Protection Bureau, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the State Liaison Committee to harmonize any new cybersecurity guidance, policies and 

procedures. The Council is a formal interagency body empowered 

to prescribe uniform principles, standards, and report forms for the 

examination of financial institutions and to make recommendations 

to promote uniformity in the supervision of financial institutions. 

The Council’s Task Force on Supervision meets monthly, and each 

agenda includes a discussion of cybersecurity issues. 

• In June 2013, the FFIEC announced the creation of the Cybersecurity and Critical Infrastructure Working Group to enhance 

communication on these areas among the FFIEC members. 

This working group has created work programs and other tools 

to coordinate the members’ cybersecurity examinations. 

• On June 30, 2015, the Council released a Cybersecurity Assessment Tool (Assessment) in response to requests from the 

industry for assistance in determining preparedness for cyber 

threats. The Assessment was updated in May 2017, to address 

industry feedback after use. Institution use of the Assessment 

is voluntary. The Assessment incorporates cybersecurity-related principles from the FFIEC Information Technology (IT) 

Examination Handbook and regulatory guidance, and concepts 

from other industry standards, including the NIST Cybersecurity Framework. Appendix B of the assessment provides a 

mapping of the Assessment to the NIST Cybersecurity Framework. 

The FDIC, as a member of the Financial and Banking Information 

Infrastructure Committee (FBIIC), is evaluating ways to further 

align guidance, exam procedures, and tools (like the Assessment) 

with the NIST Cybersecurity Framework. For example, the Committee has received industry feedback on the value of creating a 

common cybersecurity lexicon, based on NISI material, which 

would be used consistently across agencies. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR WARREN 

FROM MARTIN J. GRUENBERG 

Q.1. The House of Representatives recently passed the Financial 

Institutions Bankruptcy Act of 2017 (FIBA), which amends the 

bankruptcy code to allow big financial institutions to elect a new 

‘‘Subchapter V’’ bankruptcy process. While the legislation does not 

repeal Title II of the Dodd-Frank Act, many argue that if FIBA or 

similar legislation is enacted, Congress can safely repeal Title II. 

Q.1.a. Do you agree with that view? 

A.1.a. No. While we support efforts to improve the Bankruptcy 

Code with respect to the resolution of a large, complex financial institution with global operations, given the uncertainties 

154 

1http://nbconf.org/wp-content/uploads/2015/07/NBCLetter-re-Resolution-of-SystemicallyImportant-Financial-Institutions-March-17-2017.pdf. 

surrounding any particular failure scenario, a backstop is required 

for circumstances when failure in bankruptcy might threaten the 

financial stability of the United States. The Orderly Liquidation 

Authority (OLA) of Title II of the Dodd-Frank Act is an essential 

backstop for protecting taxpayers, avoiding bailouts, and ensuring 

that financial firms can fail in an orderly way. 

While FIBA or similar legislation may help improve failure in 

bankruptcy, it does not address all the key obstacles that could 

threaten orderly resolution of a potential systemic financial institution. For example, FIBA provides no liquidity or DIP financing 

should the institution lack, or be unable to secure, sufficient resources on its own. Title II, by contrast, provides the Orderly Liquidation Fund (OLF)—a dedicated, back-up source of liquidity not 

capital to be used, if necessary, in the initial stage of resolution 

until private funding can be accessed. This ensures that the institution will not have to resort to fire sales of assets to raise liquidity, which, in turn, would have systemic effects. This marks a critical difference between Title II and an amended Bankruptcy Code. 

No taxpayer funds may be used to repay any borrowings from the 

OLF. Repayments must come from the assets of the filed institution or through assessments on large financial institutions. Other 

key obstacles include the inability of a bankruptcy court to engage 

in cross-border cooperation and pre-failure planning. Development 

of cross-border relationships with key foreign jurisdictions are a 

key element to avoiding systemic effects where financial institutions engage in highly interconnected global operations—such as 

facilitating payments and processing the foreign exchange transactions that are vital to international finance. 

The OLA enables the FDIC to address these obstacles if necessary, in circumstances when failure in bankruptcy could not. 

Finally, it is important to note that many bankruptcy experts 

share the view that Title II should continue to remain available 

even if the Bankruptcy Code is amended. The National Bankruptcy 

Conference, a voluntary, nonpartisan, organization of 60 of the Nation’s leading bankruptcy judges, professors, and practitioners, 

stated in their letter to Congress in response to FIBA:1

. . . we are concerned that the bankruptcy process might not be best 

equipped to offer the expertise, speed and decisiveness needed to balance 

systemic risk against other competing goals in connection with resolution 

of a SIFI [systemically important financial institution]. Likewise, bankruptcy might not be the best forum in which to foster cooperation by nonU.S. regulators of foreign subsidiaries whose adverse actions could prevent 

the orderly resolution of the firm. Consequently, the Conference believes a 

regulator supervised resolution regime with resolution tools similar to those 

contained in OLA [Orderly Liquidation Authority] should continue to be 

available even if special provisions are added to the Bankruptcy Code with 

respect to the resolution of SIFIs. 

Q.1.b. If not, what do you think the risks would be to taxpayers, 

the financial system, and the economy of repealing Title II even if 

FIBA or similar legislation were enacted? 

A.1.b. During the financial crisis, policymakers lacked the tools for 

managing the failure of a potentially systemic financial institution, 

and—when faced with that possibility—were forced to choose 

155 

2We use pre-tax ROA to compare profitability across size groups because many community 

banks are organized as Subchapter S Corporations (35 percent of all banks with assets less than 

$10 billion at year-end 2016). Subchapter S Corporations pass income and tax obligations of the 

corporation through to shareholders. As a result, comparing net income on a pre-tax basis avoids 

overstating the relative profitability of Subchapter S Corporations. 

between two bad options: taxpayer bailouts or systemic disruption 

in bankruptcy. 

It is clear that without the Title II OLA, we would be back in 

the same position as 2008, with the same set of bad choices. 

Q.2. The FDIC closely monitors the health of the banking industry. 

Q.2.a. How would you describe the performance of so-called re- gional banks (those with between $50 billion and $500 billion in assets) in the last 5 years? 

A.2.a. Banks with assets between $50 billion and $500 billion 

accounted for 0.5 percent of all banks and 30 percent of total industry assets over the last 5 years. In aggregate, this peer group has 

been as profitable as the overall industry with an average pre-tax 

return on assets (ROA) of 1.47 percent compared to 1.48 percent for 

the industry.2

This peer group had higher revenues (as a percent of total assets) than the overall industry, in part due to a higher average net 

interest margin. 

These banks experienced loan growth greater than the industry 

5-year average at 5.3 percent while the industry grew only 4.6 percent. Regarding capital, their leverage capital ratio is above the industry average while their total risk weighted capital ratio is 

slightly below the industry average. 

Q.2.b. How does that performance compare to community banks 

(banks with under $10 billion in assets), mid-size banks (those with 

between $10 billion and $50 billion in assets), and the biggest 

banks (those with more than $500 billion in assets)? 

A.2.b. Banks with assets less than $10 billion accounted for 98 

percent of all banks and 19 percent of total industry assets over the 

last 5 years. With an average pre-tax ROA of 1.34 percent, this 

peer group was somewhat less profitable on a pre-tax basis than 

those banks with assets between $50 billion and $500 billion. 

These banks experienced a 5-year average loan growth rate of 5.8 

percent, higher than banks with total assets between $50 billion 

and $500 billion and higher than the industry average. These 

banks have a leverage capital ratio considerably higher than the 

industry average. 

Banks with assets between $10 billion and $50 billion accounted for 1.1 percent of all banks and 10 percent of total industry 

assets over the last 5 years. With an average pre-tax ROA of 1.79 

percent, this peer group was more profitable on average than those 

banks with assets between $50 billion and $500 billion. This group 

had the highest 5-year average loan growth at 7.9 percent, well 

above the industry average. These banks, as with those with total 

assets between $50 billion and $500 billion, have a leverage capital 

ratio slightly higher than the industry average. 

Banks with assets greater than $500 billion (the four largest FDIC-insured banks) accounted for 0.06 percent of all banks 

and 41 percent of total industry assets over the last 5 years. With 

156 

an average pre-tax ROA of 1.49 percent, this peer group has been 

as profitable as those banks with assets between $50 billion and 

$500 billion. However, these banks have not grown their loan portfolios as rapidly as the other groups and are well below the industry average with a 5-year average of 2.3 percent. These banks have 

a leverage capital ratio considerably less than the industry average. 

Q.2.c. Do you see evidence that being subject to tailored enhanced 

prudential standards has precluded regional banks from competing 

against banks of other sizes? 

A.2.c. Banks subject to enhanced prudential standards are a diverse group with business models that yield differing measures of 

performance. However, with a pre-tax ROA essentially the same as 

the overall industry, loan growth greater than the industry average, and with an overhead expense ratio (as a percent of total assets) less than that of banks with assets below $50 billion, there 

is no evidence at the aggregate level that this peer group is having 

difficulty competing against banks that are not subject to enhanced 

prudential standards. 

Q.3. At the Banking Committee hearing, you testified that you favored maintaining the $50 billion threshold for enhanced prudential standards rather than raising it or replacing it with a set of 

qualitative requirements. What are the risks of raising or replacing 

the threshold? 

A.3. The use of dollar thresholds as a supervisory tool has always 

been an integral part of the regulatory process. It is beneficial to 

use quantitative measures to assess and monitor risk on an ongoing basis. Such measures allow for supervisors to effectively and efficiently identify potential outliers and assign resources as needed 

to further analyze potential exposure. Establishing thresholds allows for effective comparative analysis among institutions, portfolios, business lines, or other operations of a financial institution 

to identify, monitor, and react to risk. 

In our judgment, the concept of enhanced regulatory standards 

for the largest institutions is sound and is consistent with our approach to bank supervision. It is appropriate to take into account 

differences in the size and complexity of banking organizations 

when assessing risk and developing regulatory standards, and the 

concept of risk-based supervision is a key tenant of an effective supervisory program. Asset thresholds are a starting point in terms 

of the overarching supervisory process and represent only one of 

many tools used in assessing risk of large institutions. It is important to maintain flexibility in our ability to apply supervisory 

standards. Clearly, there is a range of risk posed by the institutions with total assets over $50 billion, and the regulators’ goal is 

to tailor processes to address more complex and higher risk activities. From the perspective of a deposit insurer, the most expensive 

failure in the most recent financial crisis was that of an institution 

with $32 billion in assets that resulted in losses to the deposit insurance fund of approximately $12.8 billion. 

157 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TILLIS 

FROM MARTIN J. GRUENBERG 

Q.1. I’m a proponent of tailoring regulations based off of the risk 

profiles of financial institutions; as opposed to having strict asset 

thresholds that do not represent what I believe is the smart way 

to regulate. But, my question here is really about the importance 

of ensuring that we have a system that is rooted in fundamental, 

analytical, thoughtful regulation so that we can achieve and execute on goals, whether balancing safety and soundness with lending and growth, or encouraging more private capital in the mortgage market to protect taxpayers and reform the GSEs. 

Q.1.a. Do you think that we should use asset thresholds as a way 

to regulate—yes or no? If no, can you provide me with the metrics 

or factors by which a depository institution should be evaluated? If 

yes, please explain. 

A.1.a. The use of dollar thresholds has always been an integral 

part of bank regulation, but this is only one consideration within 

a comprehensive process in assessing institution risk. Establishing 

cohorts based on asset size provides benefit for supervisors. For example, regulatory Call Reports group institutions based on asset 

size, loan review processes establish dollar thresholds for review 

samples, and community and large bank thresholds are established 

for analytical purposes. Use of asset size allows regulators to conduct comparative analysis of institutions based on standardized reporting requirements. 

However, it is important to note that these thresholds are a 

starting point, and only one of many factors considered in assessing 

the risk profile of an institution. It is essential that regulators are 

granted flexibility within statutory requirements to tailor supervisory programs based on risk identified to apply more robust 

standards and review to those institutions with complex business 

models and less to less complex institutions, regardless of asset 

size. 

Q.1.b. Section 165 of Dodd-Frank requires enhanced supervision and prudential standards for banks with assets over $50 billion. 

This applies to any bank that crosses the asset threshold, without 

regard to the risks those banks pose based upon the complexity of 

the business model. This includes heightened standards on liquidity and capital under the Liquidity Coverage Ratio (LCR) and the 

Comprehensive Capital Analysis and Review (CCAR) which have a 

various assumptions built in that may drive business model. 

Q.1.b.i. I understand under these two regulatory regimes, banks 

have changed certain lending behaviors because of the assumptions 

Federal regulators have made regarding certain classes of assets 

and deposits. Can you provide some examples of how the LCR and 

CCAR have changed the types of loans, lending, and deposits your 

institution holds? 

Q.1.b.ii. Construction lending by banks over the $50 billion threshold has been a source of concern, namely, because these enhanced 

prudential standards have treated construction loans punitively. 

This includes construction lending for builders of apartments, 

warehouses, strip malls, and other projects that may have varying 

risk profiles associated with them. However, under the CCAR and 

158 

DFAST assumptions, the regulators have assigned all these categories of lending the same capital requirements. The result is an 

overly broad capital requirement for varying loans that have different risks, a capital requirement that maybe greater for some 

loans and lower for others, influencing the decision of many banks 

over the $50 billion threshold to hold less of these assets due to the 

punitive capital requirements associated with them. Have you seen 

a similar corresponding issue with construction loans because of 

the heightened prudential standards? 

Q.1.b.iii. Under the CCAR regulations, Federal regulators routinely assign risk weights to certain assets that Bank Holding 

Companies have on their balance sheets. These risk weights often 

time changes the costs associated with holding certain investments, 

such as Commercial Real Estate. Has this changed the type of assets that institutions hold, or caused institutions to alter their business plans because of the regulatory capital costs? If so, can you 

provide examples of this? 

A.1.b.i.–iii. FDIC Quarterly Banking Profile reports show that 

asset and loan growth has been generally strong post crisis. For 

full-year 2016, total loans and leases increased by $466 billion. 

Loan growth rates in the past 3 years are approaching those reported prior to the recession, and larger banks are the primary 

driver of loan growth trends for the industry. 

Many of the principles and standards required by the DoddFrank Act address issues that are within the existing scope of Federal banking agencies authority. For example, the agencies have 

the ability to: establish regulatory capital requirements, liquidity 

standards, risk-management standards, and concentration limits; 

to mandate disclosures and regular reports; and to conduct stress 

tests. These are important safety and soundness authorities that 

the agencies have exercised by regulation and supervision in the 

normal course and outside the context of section 165. 

Banks and bank holding companies are subject to risk-based capital rules separate and distinct from CCAR. The risk-weights were 

assigned deliberatively based on notice and comment, and the riskbased capital rules divide exposure types into broad risk weight 

categories. This is intended to assign lower capital charges to lowrisk credit exposures and higher capital charges to high-risk credit 

exposures. For example, the capital rules do impose a higher risk 

weight for certain acquisition, development or construction loans. 

However, commercial real estate lending remains robust across the 

banking industry which indicates that banking organizations are 

not dissuaded as a result of the risk weight. Unfunded commitments to make commercial real estate loans also are exhibiting robust growth, suggesting that there continues to be momentum for 

future commercial real estate lending growth. 

Q.1.b.iv. Do you think that regulators, on a general basis, get the 

risks weights right? 

A.1.b.iv. The risk-based capital rules provide a relative basis to 

separate lower risk activities from higher risk activities. The risk 

weights were assigned deliberatively based on notice and comment, 

and the risk-based capital rules divide exposure types into broad 

risk weight categories. This is intended to assign lower 

159 

capital charges to low-risk credit exposures and higher capital 

charges to high-risk credit exposures. Careful consideration is 

given to the tradeoff between the number of risk weight categories 

and risk sensitivity of the framework versus the desire to reduce 

unnecessary complexity. 

In general, the risk weights are designed to apply on a portfolio 

level so that, in the aggregate, low-risk and high-risk assets can be 

differentiated for risk-based capital purposes. The risk weights are 

subject to regular review to assure they are appropriately capturing relative risk. 

Q.1.b.v. Fed Governor Tarullo, has argued that the $50 BB threshold is too low in terms of an asset threshold for enhanced prudential standards; does this number make sense? Why do we need 

such arbitrary thresholds? Shouldn’t we get away from these 

thresholds and move toward a regulatory system that evaluates 

substance and activities of an institution as opposed to an arbitrary 

number? Why can’t we do that? 

A.1.b.v. Please refer to A.1.a. above. 

Q.1.b.vi. Does Title I allow the Fed to treat a $51 BB bank in a 

similar manner to a $49 BB bank for the purposes of enhanced 

prudential standards? 

A.1.b.vi. The thresholds established in the enhanced prudential 

standards legislative framework establish a starting point by which 

to apply more robust standards to larger institutions, and it is critical that regulators have sufficient flexibility in applying these 

standards based on risk. Over the past 7 years, the FDIC and other 

agencies have used that flexibility to tailor requirements for firms 

over $50 billion. 

Q.2.a. Since Section 29 of the Federal Deposit Insurance Act establishing brokered deposits was enacted in 1989; the has remained 

unchanged despite significant changes in the industry, technology 

and the financial regulatory structure, including the passage of 

Gramm-Leach-Bliley and Dodd-Frank. Furthermore, since 1989, 

the FDIC has written a series interpretive letters and FAQs that 

have significantly expanded the scope of deposits required to be 

classified as brokered, going well beyond the types of relationships 

and deposits that concerned Congress when adopting Section 29. 

Yet in the FDIC’s report stemming from Section 1506 of DoddFrank, the FDIC concluded that no statutory updating was necessary. In light of the significant legal, technological and marketplace changes that have occurred over the past quarter century, 

why has the FDIC refused to re-examine its positions regarding 

what is a brokered deposit? 

A.2.a. We recognize that what constitutes a brokered deposit is fact 

specific and needs to take account of changes in technology and the 

marketplace. In an effort to be responsive to the unique and evolving ways in which banks can gather deposits, FDIC staff continues 

to engage the industry. Through advisory opinions, staff is able to 

provide interpretations on new issues for example—whether deposits placed in new ways stemming from legal, technological, and 

marketplace changes would be considered brokered deposits. 

160 

1See FDIC’s Study on Core Deposits and Brokered Deposits, at p. 47. 

As background, Section 29 was enacted in 1989 as part of 

FIRREA to restrict troubled institutions from accepting deposits 

from a third party (a deposit broker). The legislative history of Section 29 reflects that many of the thrifts that failed during the S&L 

crisis relied on volatile funding, such as brokered deposits controlled by a few individuals, which could be quickly withdrawn, 

potentially destabilizing the institution. Further, many of these institutions attempted to grow themselves out of trouble with high 

cost brokered deposits. As a result, the institutions increased asset 

yields by taking on greater risks in order to balance the higher cost 

of funding, which ultimately resulted in a higher number of failures and higher costs to the insurance funds. 

In 2011, pursuant to the Dodd-Frank Act, the FDIC conducted, 

and subsequently submitted to Congress, a study on core deposits 

and brokered deposits. Based upon the study, which included public input and review of statistical analysis, the FDIC concluded that 

the brokered deposit statute continues to serve an important function. The key findings from the study include that: (1) banks that 

use brokered deposits have a higher growth rate and higher subsequent nonperforming loan ratios, which are both associated with a 

higher probability of failure; (2) deposits gathered through third 

parties or by offering high interest rates may leave the bank quickly; and (3) brokered deposits tend to increase the losses to the DIF 

when a bank fails. 

In 2015, in an effort to assist the industry and provide information on identifying and accepting brokered deposits (as provided by 

the statute, regulations, published advisory opinions, and the 

study) in one place, the FDIC issued Frequently Asked Questions 

(FAQs). That same year, staff held an industry call to discuss the 

FAQs and to respond to questions raised by the industry after the 

FAQs were issued. More than 1,400 industry participants listened 

to the call, and after gathering feedback, the FDIC requested comment on proposed updates to the original FAQs. After consideration 

of the public input (written comments and meetings with key 

stakeholders), the FDIC issued an updated set of FAQs in 2016. 

The FDIC intends to update the FAQs on a periodic basis, as needed. 

Q.2.b. Do you believe that legislation is needed to address presentday issues with Section 29? 

A.2.b. The brokered deposit statute provides an essential function 

and is sufficiently flexible to allow the FDIC to adapt to and address present-day issues. Based on the FDIC’s 2011 study, deposits 

placed through third parties and high interest rate deposits still 

present similar concerns to those existing in 1989. As noted in the 

study, ‘‘brokered deposits are correlated with behaviors that increase the risk of failure.’’1 The study also notes that on average, 

banks that accept brokered deposits typically rely on lower shares 

of core deposit funds than banks that do not, and, as a result, they 

face a higher probability of default in their loan portfolios. 

The findings of the FDIC study are consistent with other reviews. For example the Comprehensive Study on the Impact of the 

161 

2See Table 6, Page 50, Federal Deposit Insurance Corporation, Office of the Inspector General, Comprehensive Study on the Impact of the Failure of Insured Depository Institutions, 

EVAL–13–002, January 2013, https://www.fdicig.gov/reports13/13-002EV.pdf. 3Section 38(k) of the FDI Act, as amended, provides that if the Deposit Insurance Fund incurs 

a ‘‘material loss’’ with respect to an insured depository institution, the Inspector General of the 

appropriate regulator (which for the OCC is the Inspector General of the Department of the 

Treasury) shall prepare a report to that agency, identifying the cause of failure and reviewing 

the agency’s supervision of the institution. 4Federal Deposit Insurance Corporation, Office of Inspector General, Acquisition, Development, and Construction Loan Concentration Study, EVAL–13–001, October 2012, https:// 

www.fdicig.gov/reports13/13-001EV.pdf. 

Failure of Insured Depository Institutions 2 noted that material loss 

reviews 3 reflecting the most commonly reported contributing 

causes of failures of banks during the 2008–2009 financial crisis 

were ‘‘the institutions’ management strategy of aggressive growth 

that concentrated assets in CRE and ADC loans, often coupled with 

inadequate risk management practices for loan underwriting, credit 

administration, and credit quality review.’’ According to this study, 

a number of these IDIs also relied on ‘‘volatile funding sources’’ to 

support their growth. 

In contrast, the Acquisition, Development, and Construction 

Loan Concentration Study 4 found that ‘‘some institutions with 

ADC concentrations were able to weather the recent financial crisis 

without experiencing a corresponding decline in their overall financial condition. The factors that contributed to their survival validate the point that regulators have emphasized and reiterated for 

years—a well-informed and active Board, strong management, 

sound credit administration and underwriting practices, and adequate capital are important in managing ADC concentrations in a 

safe and sound manner.’’ In addition, the banks in the study ‘‘did 

not rely on brokered deposits to fund growth . . . ’’ 

The FDIC’s statistical analyses also show that brokered deposits 

are an indicator of higher risk appetite. Banks with significant reliance on brokered deposits typically have more rapid growth rates 

and higher subsequent nonperforming loan ratios, which are both 

associated with a higher probability of failure. In addition, brokered deposits tend to increase the FDIC’s losses when a bank 

fails. A traditional brokered deposit that remains at a bank when 

it fails has no franchise value. Bidders have repeatedly told the 

FDIC that they are not interested in paying for brokered deposits 

and the FDIC, as a result, does not seek bids for brokered deposits. 

While many brokered deposits do not usually pass to the acquiring 

institution (AI) when a bank fails, AIs have sometimes accepted 

certain deposits without paying a premium. Last, gathering deposits through a third party may attract volatile funding that may 

quickly leave the bank if the bank reduces its deposit rates or if 

a competitor offers more attractive terms. Because high rate or 

volatile deposits are not attractive to potential purchasers and do 

not add to a bank’s franchise value, this results in higher losses to 

the DIF and, in the long run, higher premiums for surviving institutions. 

162 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR HEITKAMP 

FROM MARTIN J. GRUENBERG 

Q.1. As part of the EGRPRA process, regulators identified access 

to timely appraisals—especially in rural America—as a major challenge for small lenders. Yet the report itself did little to address 

residential appraisal requirements. 

Q.1.a. Do you share my concerns that the appraisal system in rural 

America is broken? 

A.1.a. The FDIC shares concerns about appraisal issues in rural 

America. During the Economic Growth and Regulatory Paperwork 

Reduction Act process, a frequently commented upon issue was the 

scarcity of appraisers in rural areas and resultant delays or problems completing transactions because of the lack of appraisers. 

This was a particular concern of bankers at our Kansas City outreach session, which was focused on rural banking issues. Also at 

that session, there were what appeared to be some misinterpretations of the monetary thresholds set forth in the interagency appraisal regulations, with some bankers thinking that the regulations—or examiners—require appraisals even for transactions 

below the thresholds. 

Additionally, in an effort to respond to these concerns and as described in the EGRPRA report, the FDIC, along with the other regulators, has taken steps to address appraisal issues raised by rural 

bankers. 

Supervisory Expectations for Evaluations—On March 4, 

2016, the FDIC, along with the OCC and the FRB, clarified supervisory expectations for real estate evaluations, which are addressed 

in FDIC FIL–16–2016. This guidance addresses questions raised 

during outreach meetings held pursuant to the EGRPRA, and advises institutions that the agencies’ appraisal regulations allow the 

use of an evaluation in lieu of an appraisal for certain real estaterelated transactions, including those below the $250,000 monetary 

threshold. 

Advisory on Availability of Appraisers—On May 31, 2017, 

the FDIC, FRB, OCC, and NCUA issued an advisory on appraiser 

availability, which is addressed in FDIC FIL–19–2017. The advisory discusses two existing options that may help insured depository institutions and bank holding companies address appraiser 

shortages: temporary practice permits and temporary waivers. 

Appraisal Threshold—The 2017 EGRPRA Report to Congress 

states the agencies will develop a notice of proposed rulemaking, or 

NPR, to raise the appraisal threshold for commercial real estate 

transactions from $250,000. This NPR was issued on July 18, and 

includes a question seeking comment on whether the appraisal 

threshold for residential real estate should be raised. 

Q.1.b. In the EGRPRA report, you provide a ‘‘temporary waiver’’ 

option; however, most lenders view this as cumbersome and unworkable. How can you streamline this process and what steps 

have you taken to make this option accessible to lenders? 

A.1.b. The aforementioned May 2017 Interagency Advisory on the 

Availability of Appraisers (Advisory) addresses existing options 

that may help relieve appraiser shortages in rural areas. One 

existing option is the authority under Title XI of the Financial 

163 

Institutions Reform, Recovery, and Enforcement Act of 1989 (Title 

XI) for the Appraisal Subcommittee (ASC), with the approval of the 

FFIEC, to grant temporary waivers of requirements for appraisals 

needing to be performed by licensed or certified appraisers. 

The issuance of a temporary waiver would allow financial institutions lending in affected areas access to more individuals who 

would be considered eligible to complete the appraisals required 

under Title XI. Nevertheless, we have also heard views that the 

process for seeking temporary waivers appears cumbersome, and in 

the EGRPRA report, the FDIC and the other agencies have publicly stated that we will work with the ASC to streamline the process for the evaluation of temporary waiver requests. To that end, 

we are very interested in hearing ways to improve that process at 

our outreach sessions with rural bankers and rural bank supervisors. The agencies are reaching out to States to explain the waiver process and assist States in applying for the waivers. 

Q.1.c. What concerns would you have with raising the residential 

exemption threshold—which was last modified in 1994—above its 

current limit of $250K? 

A.1.c. As noted above, the NPR requests comment on the current 

residential appraisal threshold and whether it should be raised, 

consistent with consumer protection, safety and soundness, and reduction in unnecessary regulatory burden. The agencies view this 

as an open issue. 

Q.2. On several occasions before this Committee Governor Tarullo 

stated that the dollar asset thresholds in Dodd-Frank such as the 

$50 billion threshold for SIFI designation, is far too high [sic]. 

Q.2.a. Do you believe regulators could effectively address systemic risk if the threshold were raised above $50 billion? 

A.2.a. The $50 billion threshold applies to only a relatively few 

companies whose assets account for a large majority of industry assets. History has shown that the largest financial institutions may 

be vulnerable to sudden market-based stress. From the perspective 

of a deposit insurer, the most expensive failure in the FDIC’s history occurred in the most recent financial crisis when an institution 

with $32 billion in assets failed, resulting in losses to the deposit 

insurance fund of approximately $12.8 billion. Congress established the $50 billion threshold in section 165 of 

the Dodd-Frank Act. Congress also provided for significant flexibility in implementation of the enhanced prudential requirements. 

The agencies have made appropriate use of this flexibility thus far, 

and where issues have been raised by industry, we believe that we 

have been responsive. 

In our judgment, the concept of enhanced regulatory standards 

for the largest institutions is sound, and is consistent with our 

longstanding approach to bank supervision. Certainly, degrees of 

size, risk, and complexity exist among the banking organizations 

subject to section 165, but all are large institutions. Some of the 

specializations and more extensive operations of regional banks require elevated risk controls, risk mitigations, corporate governance, 

and internal expertise than what is expected from community 

banks. We should be cautious about making changes to the statutory framework of heightened prudential standards that would 

164 

result in a lowering of expectations for the risk management of 

large banks. 

Q.2.b. Are there specific provisions in Dodd-Frank which you believe are particularly costly or unnecessary for a certain subset of 

banks above the $50 billion threshold? 

A.2.b. The agencies are currently reviewing the Volcker Rule to 

identify ways to address industry concerns about complexity and 

burden. There is a lot that can be done in this area through the 

rulemaking process and I believe that the agencies should exhaust 

the rulemaking process before seeking statutory change. 

Q.2.c. Are there specific provisions in Dodd-Frank which you be- lieve are necessary for all banks above $50 billion in assets that 

should be retained in order to mitigate systemic risk? 

A.2.c. The ability to have information to help ensure the orderly 

failure of large institutions is critical for oversight of systemic institutions, and stress testing rules provide important insight into how 

large banks will respond to economic downturns, as well as providing supervisors with key insight into the effectiveness of an institution’s internal risk management process. We believe the living 

will and stress testing requirements should be retained for banks 

over $50 billion, appropriately tailored to the size and complexity 

of each institution. 

Q.2.d. What concerns do you have with having a purely qualitative 

test for identifying systemic risk? 

A.2.d. Longstanding regulatory programs seek to utilize both qualitative and quantitative measures to identify systemic risk. Relying 

on qualitative measures alone would significantly limit the ability 

of regulators to identify and analyze systemic risk. Quantitative 

measures allow supervisors to effectively and efficiently identify potential outliers and assign resources as needed to further analyze 

potential exposure. Establishing thresholds allows for effective 

comparative analysis among institutions, portfolios, business lines 

or other operations of a financial institution to identify, monitor, 

and react to risk. Furthermore, establishing asset thresholds provides transparency to regulated institutions as to what regulations 

will apply to them and allows them to adequately prepare for the 

regulation in advance of the effective date. 

RESPONSE TO WRITTEN QUESTION OF SENATOR CORTEZ 

MASTO FROM MARTIN J. GRUENBERG 

Q.1. In his written testimony to the Committee, Mr. Noreika of the 

OCC suggested that Congress revolve the CFPB’s authority to examine and supervise the activities of insured depository institutions with over $10 billion in assets with respect to compliance 

with the laws designated as Federal consumer financial laws. Mr. 

Noreika further suggested that Congress return examination and 

supervision authority with respect to Federal consumer financial 

laws to Federal banking agencies. 

When I asked him about this recommendation at the hearing, he 

noted that, ‘‘what we’re seeing in practice is that the CFPB is not 

enforcing those rules against the mid-size banks—the large-small 

165 

banks to the small-big banks. And so we do have a problem of both 

over- and under-inclusion. And so when we get up to the bigger 

banks, we have a little bit of overlap and overkill there. So we need 

some better system of coordination. And so when we get up to the 

bigger banks, we have a little bit of overlap and overkill there. So 

we need some better system of coordination.’’ 

• Does your experience suggest that the CFPB is failing to supervise and enforce consumer financial laws for ‘‘large-small 

banks’’ to the ‘‘small-big banks?’’ And is there ‘‘overkill’’ when 

it comes to CFPB supervision and enforcement of consumer financial laws for ‘‘bigger banks?’’ 

A.1. The FDIC and CFPB coordinate regularly regarding supervisory activities regarding State nonmember institutions with 

assets over $10 billion to ensure effective and coordinated supervision. The FDIC and CFPB employ risk-based supervisory strategies tailored to the risk, complexity, and business model of supervised institutions. The CFPB has been an effective partner with 

the FDIC in addressing problematic practices identified at supervised institutions of various sizes through enforcement actions to 

address illegal conduct. In 2012, the FDIC and CFPB, along with 

the Utah Department of Financial Institutions, partnered in an investigation of three American Express subsidiaries, which led to an 

enforcement action in which $85 million was refunded to 250,000 

customers for illegal card practices. Additionally, our two agencies 

joined in another 2012 enforcement action, this time against Discover Bank (Discover) for deceptive telemarketing and sales tactics. 

Discover was ordered to return $200 million to more than 3.5 million consumers. We are not aware of any situations where CFPB 

has failed to supervise or enforce consumer financial laws for 

‘‘large-small banks’’ or ‘‘small-big banks.’’ 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM J. MARK MCWATTERS 

Q.1. Credit unions’ primary mission is to serve their customers 

especially in areas underserved by other financial institutions. During your time on the board, have NCUA supervision teams identified and corrected any consumer protection issues? What do you 

believe is NCUA’s role to ensure that the credit unions you regulate protect their customers? 

The NCUA ensures credit unions protect their members through 

a variety of methods. They include: 

• Providing substantive guidance and regular outreach to credit 

unions about Federal consumer financial laws and protections; 

• Examining credit unions for compliance with consumer financial protection laws and regulations and requiring credit 

unions to take appropriate steps to address deficiencies and 

violations found as a result of the examination; 

• Resolving and investigating consumer complaints about credit 

unions; 

• Developing consumer financial protection policies and programs that allow credit unions to meet the financial needs of 

their members in a cost-efficient and effective manner; 

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• Promoting and developing financial literacy resources for both 

consumers and credit unions, that educate consumers about 

their financial protections; and 

• Increasing consumer access to credit union services with, as 

appropriate, the approval of new credit union charters and 

field of membership expansion requests. 

Given the above responsibilities and efforts, the NCUA has identified and worked to correct numerous consumer financial protection issues since joining the NCUA Board in August 2014. The majority of Federal consumer financial protection laws violations cited 

by the NCUA during the period from August 2014 to June 2017 involved the Truth in Lending Act, the Equal Credit Opportunity 

Act, and the Real Estate Settlement Procedures Act. The NCUA required credit unions to address these violations, as appropriate, by 

revising or implementing new credit union policies and procedures, 

increasing staff training or by imposing other administrative remedies. 

The NCUA’s role in ensuring that credit unions protect their 

members recognizes that a core credit union mission is to provide 

affordable financial services, benefiting both credit union members 

and their communities. The NCUA is dedicated to supporting credit 

union efforts to fulfill this mission, which is unique among financial institutions, and to comply fully with consumer financial protection laws and regulations. In addition to the Federal financial 

regulator responsibilities listed above, the NCUA has an important 

role in ensuring that consumer financial protections do not have 

the unintended consequences of limiting access and imposing unnecessarily burdensome costs on credit unions and their members. 

Q.2. This week, the House approved the FY 2018 Financial Services and General Government Appropriations bill. Included in this 

bill is a provision from the CHOICE Act to bring all independent 

financial regulatory agencies’ budgets under the appropriations 

process. What would be the impact on the NCUA if its budget was 

appropriated? 

A.2. Placing the NCUA’s budget under the annual appropriations 

process would require the Agency to make a multitude of systems 

and process changes, many of which are outlined below. The cumulative impact of these changes would be an increase in the fees assessed to the Federal credit unions as the NCUA made the conversion to the Federal appropriations process. 

A particularly significant change would remove the NCUA 

Board’s authority to determine independently its annual operating 

budget. The established Federal budget process does not allow for 

Federal agencies to engage stakeholders in its budget development, 

in the way that NCUA does. The budget process used by the NCUA 

provides for direct input from the credit union system, and is a 

process which is very nimble when changes are needed. The Board 

holds public meetings to discuss the budget and makes the proposed budget publicly available for stakeholder comments prior to 

final adoption of the budget. The Board has the authority to make 

adjustments to its budget during the course of the year, which for 

some Federal agencies requires a more time-consuming reprogramming process. The extent of direct stakeholder input and the 

167 

nimbleness of process are not hallmarks of the Federal appropriations process. 

On an administrative level, subjecting the NCUA to the Federal 

appropriations process would require the agency to make numerous 

systems and process changes, including the following: 

• The NCUA would need to move to a Federal fiscal year, subject 

to the terms and conditions of an appropriation (fixed period 

of availability, fixed amount of availability, reprogramming 

and transfer limitations set by the Congress in annual appropriations acts). The NCUA’s operating budget and its Share Insurance Fund now operate on a calendar-year business cycle. 

• The NCUA’s Operating Fund is currently accounted for under 

commercial accounting standards set by the Financial Accounting Standards Board (FASB). The appropriations process limits 

an agency’s ‘‘Budget Authority,’’ not its level of expenditure, 

during the fiscal year, whereas the NCUA operates with controls on its expenditures. The NCUA would need to adjust its 

financial management systems and processes to better recognize and record commitments and obligations of funds prior to 

expenditure and train staff accordingly. This would be a significant undertaking, affecting almost all nonpayroll transactions in the agency, including travel. 

• The NCUA would need to modify its billing process for operating fees it collects from Federal credit unions. The NCUA 

would likely need to adjust the timing for the collection of 

these fees, and it would need to create additional billing and 

refund processes with respect to the fees to adjust for changes 

made when the appropriation is enacted, assuming the annual 

appropriations were not enacted prior to the start of the fiscal 

year. 

• The NCUA would experience transition costs for systems 

changes (accounting system, budget system, and travel system), business process changes, and training. In addition, certain one-time charges likely would be needed to account for 

transactions under Federal budget procedures versus the current commercial accounting standards. An example of this is 

the treatment of the note (borrowing) between the Operating 

Fund and the Share Insurance Fund for the purchase of the 

NCUA’s Central office in the early 1990s. The outstanding 

amount of the note is about $8.9 million. Agencies receiving 

appropriations are generally prohibited from having capital 

leases or agreements such as this, unless the full amount of 

the lease (or, in this case, the note) is funded up-front with 

current appropriations. 

• The NCUA would need to hire additional staff familiar with 

the appropriations process. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCOTT 

FROM J. MARK MCWATTERS 

Each of you serve at agencies that are members of the Financial 

Stability Oversight Council (FSOC). Insurance has been regulated 

at the State level for over 150 years—it’s a system that works. But 

168 

FSOC designations of nonbank systemically important financial institutions (SIFIs) have made all of you insurance regulators, despite the fact that you are bank regulators at your core. 

Strong market incentives exist for insurers to hold sufficient capital to make distress unlikely and to achieve high ratings from financial rating agencies, including incentives provided by risk sensitive demand of contract holders and the potential loss of firms’ intangible assets that financial distress would entail. Additionally, 

insurance companies are required by law to hold high levels of capital in order to meet their obligations to policyholders. Bottom line: 

Insurance companies aren’t banks, and shouldn’t be treated as 

such. 

In March, my colleagues and I on the Senate Banking Committee 

sent a letter to Treasury Secretary Mnuchin indicating our concerns regarding the FSOC’s designation process for nonbanks. I 

support efforts to eliminate the designation process completely. 

I was pleased that President Trump issued a ‘‘Presidential 

Memorandum for the Secretary of the Treasury on the Financial 

Stability Oversight Council’’ (FSOC Memorandum) on April 21, 

2017, which directs the Treasury Department to conduct a thorough review of the designation process and states there will be no 

new nonbank SIFI designations by the FSOC until the report is 

issued. Relevant decisionmakers should have the benefit of the 

findings and recommendations of the Treasury report as they carry 

out their responsibilities with respect to FSOC matters. 

Please answer the following with specificity: 

Q.1. What insurance expertise do you and your respective regulator 

possess when it comes to your role overseeing the business of insurance at FSOC? 

A.1. I do not have a background in insurance, but, as a financial 

attorney with significant experience in corporate finance and mergers and acquisitions, and as a certified public accountant, I have 

a strong background in understanding the risks firms face when 

they deploy funds in financial markets. In addition, I have a deep 

understanding of the developments and factors that were important in the most recent financial crisis through my service on the 

Troubled Asset Relief Program Congressional Oversight Panel. 

As a fully participating member of the TARP Congressional 

Oversight Panel, we investigated the Treasury Department’s implementation of the TARP program and how the $700 billion of TARP 

money was deployed. But in doing that, we also investigated the 

fundamental causes of the financial crisis—who was at fault and 

why. We were required to report to Congress every month. The reports were usually about 100 to 150 pages long. The longest report 

was on the American International Group, Inc. (AIG), an American 

multinational insurance corporation, and it was around 350 pages. 

Through that work, I gained a strong appreciation for the role 

that insurance companies can play and risks they can pose in our 

financial system. For example, I came to understand that the magnitude of AIG’s operations and the company’s far-flung linkages 

across the global financial system led to multiple rounds of exceptional assistance from the Government. Only Fannie Mae and 

Freddie Mac, institutions in Government conservatorship, received 

169 

more assistance during this period. The Panel had to pay particular attention to AIG because it occupied a unique position in 

the financial system and because of the significant investment of 

taxpayer dollars required to avert the company’s collapse. In addition to the Panel’s June 2010 report, which focused solely on AIG, 

the Panel also held a hearing, in which I fully participated, to explore the rescue of AIG, its impact on the markets, and the outlook 

for the Government’s significant investment in the company. 

Although credit unions and insurance companies appear to be 

very different, they create value by managing the risk of their assets and liabilities. The channels through which distress at insurance companies would transmit or amplify risk have mostly to do 

with the interconnections and exposures to other financial institutions, rather than insurance operations. 

I am very familiar with these interconnections. The design of the 

Council ensures that each member of the FSOC will bring a unique 

perspective to the FSOC’s deliberations, informed by our particular 

areas of expertise and experience. In my case, that is a long career 

in and around the financial services industry and considerable experience in examining the features in the financial landscape that 

led to the financial crisis. The institutional structure of the Council 

ensures that a broad array of views about the financial system are 

considered in matters related to financial stability. Issues presented to the Council about insurance companies are, for the most 

part, about their connections and exposures to other financial institutions. 

The NCUA does not have insurance underwriting experts on 

staff. However, the NCUA does have experts in asset-liability management, capital market activity, interest-rate risk, and derivatives. As such, many NCUA employees, through their everyday 

work, have a deep understanding of the financial policy matters 

that are common to financial institutions that manage their assets 

by participating in credit markets. 

Further, many NCUA employees have considerable financial 

market experience, both from employment in the private sector and 

in other Government agencies such as the Federal Reserve, Federal 

Deposit Insurance Corporation, Securities and Exchange Commission, and the Department of the Treasury. They bring this experience to bear on credit union issues primarily, but their knowledge, 

experience, and training enables them to understand and comment 

knowledgeably on a wide variety of financial policy issues beyond 

the regulation of credit unions. 

It is also worth noting that NCUA, like the FDIC for banks, is 

the insurer of credit union deposits, maintaining the National 

Credit Union Share Insurance Fund. As such, NCUA is familiar 

with many of the issues facing other insurers. 

Q.2. Do you support the Senate Banking Committee’s recent legislative effort, the Financial Stability Oversight Council Insurance 

Member Continuity Act, to ensure that there is insurance expertise 

on the Council in the event that the term of the current FSOC 

independent insurance member expires without a replacement having been confirmed? 

170 

A.2. It is important that the FSOC have continuous access to a 

member with insurance expertise on the Council, just like it is important for the FSOC to have continuous access and input from 

regulators with banking industry experience or credit union experience. I would support legislation to ensure that the FSOC’s insurance expertise is maintained during transitions. 

Q.2.a. I served on the board of Heritage Trust Federal Credit 

Union, a great institution based in Charleston. During my time at 

Heritage Trust, we wanted to make loan decisions based on more 

than what people looked like on paper. We were able to do so because we had such close relationships with our members. Our loan 

delinquency rate was only 2 percent, I might add. 

I’ve been on the other side of the equation: I received my first 

car loan from a credit union. It wasn’t a handout—it was a hand 

up. The credit union sat me down and we talked about the importance of staying on top of my finances, the obligations associated 

with taking a loan, and how I could pay it back. 

As community banks and credit unions close up shop, we lose 

that personal touch. 

Regulatory burdens are driving the consolidation. I think too 

many regulators are acting without an eye to the consequences of 

their actions on economic growth. 

But the NCUA’s approach has been refreshing. 

After my friend, and now Director of the Office of Management 

and Budget, Mick Mulvaney introduced legislation mandating more 

budget transparency at the NCUA, you made it happen. 

You reduced the number of exams for well-capitalized credit 

unions, meaning they can hire more loan officers than compliance 

lawyers. 

You’ve also engaged in rulemaking on field-of-membership issues 

in economically distressed areas, which I think is encouraging. 

Please answer the following with specificity: 

What kind of economic cost-benefit analysis does the NCUA engage in? 

A.2.a. As an independent agency, the NCUA is not required to conduct formal cost-benefit analyses. As a matter of course, however, 

we always try to develop information and analyses that help us 

consider the relevant direct and indirect potential costs, as well as 

the direct and indirect potential benefits. 

That said, it’s well understood that cost-benefit analyses contain 

at least as much art as science, and reasonable people can and do 

disagree about net benefits. One of my goals is to ensure that the 

agency’s rulemakings are reasonable and cost-effective. As we consider a rule’s intended effects and try to analyze potential areas of 

unintended consequences, if we don’t think there are net positive 

benefits, we don’t make the rule. 

Although we have no specific cost-benefit analysis requirement, 

other Federal statutes do require us to develop analyses and reports that help us to develop a more complete picture of the costs 

and benefits of the rules we make. These include: (1) the Administrative Procedure Act which, among other things, requires Federal 

agencies to afford proper notice and comment as part of issuing a 

regulation; (2) the Regulatory Flexibility Act, which requires Federal agencies to prepare an analysis of any significant economic 

171 

impact a regulation may have on a substantial number of small entities; and (3) the Paperwork Reduction Act, which applies to 

rulemakings in which an agency creates a new burden on regulated 

entities or increases an existing burden. 

Q.3. What credit union specific proposals in the Treasury Department’s recent report on regulatory relief should Congress pursue to 

help grow the economy? 

A.3. I believe that, of the Treasury Department proposals, the credit union-specific recommendation that would have the largest impact on economic growth is the proposal to revise the risk-based 

capital requirement for credit unions with assets in excess of $10 

billion dollars or eliminate the requirement all together for credit 

unions satisfying a 10 percent simple leverage, or net worth, test. 

Eliminating the arbitrary restrictions on asset accumulation that 

may hinder credit union lending is an important and useful step 

that would, in my opinion, help to pave the way for future economic growth. 

Q.4. What specific revisions to the NCUA-issued risk-based capital 

rule that is slated to go into effect January 1, 2019, are you considering or pursuing? 

A.4. The NCUA Board has not taken action to change amend or repeal the capital rule scheduled to take effect January 1, 2019. However, I do intend to revisit this rule and consider whether it should 

be substantially amended or repealed. 

Q.5. Do you believe that the CFPB should consult with the NCUA 

when it is writing rules that impact credit unions? Do you think 

this coordination has been sufficient up until this point? 

A.5. Yes, the CFPB should and does consult with the NCUA when 

it is writing rules that affect credit unions. The NCUA’s Office of 

Consumer Financial Protection and Access coordinates and works 

with the CFPB on rulemaking and related matters affecting credit 

unions. This consultative process allows the NCUA to inform the 

CFPB how credit unions differ from other financial institutions, 

how a ‘‘one-size-fits-all’’ approach is not always appropriate, and 

how certain provisions may inadvertently disadvantage credit 

unions and their members. This process can, but does not often, result in regulatory language or changes to address the NCUA’s comments and concerns. 

Although the consultations are very informative, they do not generally result in regulatory relief for credit unions, as appropriate, 

for certain matters. With this goal in mind, on May 24, 2017, I 

wrote to Director Cordray outlining three areas where some type 

of relief for credit unions from the CFPB’s proposed or final regulations is justified. These three subject areas involve the Home Mortgage Disclosure Act, the Unfair, Deceptive and Abusive Acts or 

Practices Act and CFPB’s proposed rule regarding payday, title and 

other high-cost installment loans. I also recently met with Director 

Cordray to discuss this letter and additional matters of concern to 

the NCUA, credit unions and their members. 

In addition, on July 6, 2017, I wrote to Director Cordray asking 

for consideration of an exemption of federally insured credit unions 

from the examination and enforcement provisions of section 1025 

172 

of the Consumer Financial Protection Act of 2010. I believe the 

NCUA should be allowed to act as the primary agency responsible 

for the examination and enforcement of the consumer financial protection laws for the six federally insured credit unions with assets 

greater than $10 billion. These credit unions are currently subject 

to the CFPB’s exclusive examination and primary enforcement authority. The exemption I requested would continue to provide robust consumer financial protections for these credit union members 

and allow the CFPB to focus on the larger investor-owned, for-profit financial providers. The CFPB also would retain secondary enforcement authority to examine or take an enforcement action 

against these credit unions if it determines the NCUA is not adequately enforcing the consumer financial protection laws. In his 

July 21, 2017, reply to me, Director Cordray expressly rejected my 

requested exemption as inconsistent with the Dodd-Frank Act. I 

continue to believe, however, that the CFPB has such exemption 

discretion under the Dodd-Frank Act. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM J. MARK MCWATTERS 

Q.1. As you know, in 2016, 70 U.S. Senators and 329 U.S. Representatives separately wrote the CFPB, asking that it better tailor 

regulations to match the unique profile of small financial institutions. Unfortunately, as you pointed out in a May 24, 2017, letter 

to CFPB Director Richard Cordray on various regulatory issues, 

the CFPB’s tailor efforts have failed to provide sufficient regulatory 

relief for smaller financial institutions. For example, in the letter, 

you said that the CFPB could ‘‘alleviate the compliance burden of 

credit unions with respect to the Unfair, Deceptive, and Abusive 

Acts of Practices (UDAAP) requirements of [Dodd-Frank] without 

sacrificing consumer protection.’’ 

Q.1.a. How has the CFPB’s exercise of UDAAP authority increased 

the compliance burden of credit unions? 

A.1.a. Credit unions seek to be in full compliance with consumer 

financial protection laws and regulations, including Unfair, Deceptive, and Abusive Acts or Practices. The struggle to stay abreast of 

the increasing number of consumer financial protection requirements increases the burdens of credit unions, particularly those 

that have limited numbers of staff and resources. In addition, the 

CFPB’s assertions in legal and enforcement actions that certain behavior is considered to be ‘‘abusive,’’ without providing a clear definition of the meaning of this term, results in credit unions having 

difficulty determining what specific behavior is noncompliant. 

Q.1.b. How should the CFPB alleviate the compliance burden 

regarding the UDAAP authority? For example, should the CFPB 

conduct a rulemaking on its UDAAP authority? 

A.1.b. As I indicated in my May 24, 2017, letter to Director 

Cordray, the CFPB should promptly issue clear, transparent guidance that is reasonable, objective, and specifically tailored for the 

credit unions so that they can comply fully with the laws and meet 

the needs of members in a cost efficient and effective manner. I 

also recently met with Director Cordray to discuss this letter and 

173 

additional matters of concern to NCUA, credit unions and their 

members. 

Q.1.c. Your letter also highlighted disclosure requirements under 

the Home Mortgage Disclosure Act (HMDA) as a key regulatory 

burden on credit unions. How have HMDA requirements burdened 

credit unions? 

A.1.c. The Home Mortgage Disclosure Act provides valuable mortgage lending information and is an important tool for identifying 

housing needs and remedying credit discrimination. Credit unions 

that meet HDMA reporting thresholds have increased recordkeeping and reporting responsibilities. The activities require credit 

unions to expend resources for data gathering, retention, and 

reporting of a large number of data points mandated by law and 

regulation. An increase in the number of HMDA data points that 

credit unions are required to report about, particularly those that 

currently are not routinely disclosed as part of the mortgage lending process, increases a credit union’s reporting burden. 

Q.1.d. How could the CFPB better tailor HMDA requirements? 

A.1.d. The CFPB should consider raising the various HMDA 

reporting thresholds to a more substantive asset and transaction 

volume level to reduce the reporting burden on smaller credit 

unions. In addition, it should exempt credit unions from collecting 

and reporting the additional 14 data points imposed solely by the 

CFPB’s regulatory changes. 

Q.1.e. Are there other concrete ways in which you believe the 

CFPB has improperly tailored regulations to match the unique profile of credit unions? Does any of these changes require statutory 

authorization? 

A.1.e. The NCUA is not aware that the CFPB has acted ‘‘improperly’’ in tailoring regulations to address the credit union industry. 

However, I believe that it could do more to provide regulatory relief 

to credit unions. For example, the CFPB’s proposed rule on Payday, 

Vehicle Title and Certain High-Cost Installment Loans would, if 

issued as proposed, impose requirements on Federal credit unions 

that issue Payday Alternative Loans under the NCUA’s regulation. 

The NCUA crafted its Payday Alternative Loans regulation to permit Federal credit unions to issue safe small-dollar, short-term 

credit to members in need, protecting those borrowers from the 

predatory lending market. The CFPB should fully exempt the 

NCUA’s Payday Alternative Loans made by Federal credit unions 

in accordance with the NCUA regulations. 

Q.1.f. Has the CFPB effectively coordinated with the NCUA on 

rulemakings and enforcement actions? If not, how could coordination be improved? 

A.1.f. The NCUA’s Office of Consumer Financial Protection and Access coordinates and works closely with the CFPB on rulemaking 

and related matters. This consultative process allows the NCUA to 

inform the CFPB how credit unions differ from other financial institutions, how a ‘‘one-size-fits-all’’ approach is not always appropriate, and how certain proposed provisions may inadvertently disadvantage credit unions and their members. This process can, but 

does not often, result in regulatory language or changes to address 

174 

the NCUA’s comments and concerns. The CFPB provides advance 

notice of its interpretation of major consumer financial protection 

policy matters. 

The Dodd-Frank Act requires the CFPB and each prudential regulator to coordinate on supervision activity. The NCUA and the 

CFPB operate under three Memoranda of Understanding covering 

the supervision of, information sharing about and handling of complaints against credit unions with total assets over $10 billion. Coordination among the agencies could be improved with earlier notification of potential CFPB enforcement activities. 

In addition, on July 6, 2017, I wrote to Director Cordray asking 

for consideration of an exemption of federally insured credit unions 

from the examination and enforcement provisions of section 1025 

of the Dodd-Frank Act. I believe the NCUA should be allowed to 

act as the primary agency responsible for the examination and enforcement of the consumer financial protection laws for the six 

FICUs with assets greater than $10 billion. These credit unions are 

currently subject to the CFPB’s exclusive examination and primary 

enforcement authority for consumer financial protection laws. The 

exemption I requested would continue to provide robust consumer 

financial protections for these credit union members and allow the 

CFPB to focus on the larger investor-owned, for-profit financial providers. The CFPB also would retain secondary enforcement authority to examine or take enforcement action against these credit 

unions if it determines the NCUA is not adequately enforcing consumer financial protection laws. In his July 21, 2017, reply to me, 

Director Cordray expressly rejected my requested exemption as inconsistent with the Dodd-Frank Act. I continue to believe, however, 

that the CFPB has such exemption discretion under the DoddFrank Act. 

Q.2. As you know, the CFPB may be moving forward on a rulemaking for Section 1071 of Dodd-Frank, which granted the CFPB 

the authority to collect small business loan data. I’ve heard some 

concerns that implementing Section 1071 could impose substantial 

costs on small financial institutions and even constrict small business lending. 

Q.2.a. Are you concerned how a Section 1071 rulemaking could 

hurt small business access to credit? 

A.2.a. Yes, I am concerned that given the CFPB’s overly broad 

HMDA rulemaking activity, a Section 1071 rulemaking requiring 

the collection of business lending data might have the unintended 

consequence of limiting small business access to credit. However, 

I also appreciate the intent of Section 1071 which amends the 

Equal Credit Opportunity Act to require financial institutions to 

compile, maintain, and report information concerning credit applications made by women-owned, minority-owned, and small businesses. We intend to monitor this rulemaking and offer input to ensure it does not interfere with appropriate access to credit. 

Q.2.b. Has the NCUA coordinated with the CFPB to ensure that 

implementing these requirements does not constrict small business 

access to credit? 

A.2.b. The CFPB is currently seeking industry and public comment 

on the small business financing market and privacy concerns 

175 

related to the disclosure purposes of Section 1071. The NCUA intends to consult with the CFPB on information provided on these 

topics by the credit union industry and the CFPB’s Credit Union 

Advisory Council. We will also work with the CFPB in an attempt 

to ensure that any Section 1071 data collection requirements do not 

restrict access to credit or raise privacy concerns. 

RESPONSE TO WRITTEN QUESTION OF SENATOR WARNER 

FROM J. MARK MCWATTERS 

Q.1. Cybersecurity regulation is receiving increased emphasis 

by all financial institution regulators. How do your agencies coordinate with each other to harmonize the promulgation of new 

cybersecurity regulations? With the increased use of the NIST Cybersecurity Framework by both Federal agencies and the private 

sector, how do your agencies intend to achieve greater alignment 

between the framework and your own regulatory initiatives? 

A.1. The NCUA is a voting member of the Federal Financial Institutions Examination Council, which is a formal interagency body 

empowered to prescribe uniform principles, standards, and report 

forms for the Federal examination of financial institutions and to 

make recommendations to promote uniformity in the supervision of 

financial institutions. The NCUA actively participates on multiple 

FFIEC IT-related committees. 

The FFIEC was established on March 10, 1979, pursuant to title 

X of the Financial Institutions Regulatory and Interest Rate Control Act of 1978, Public Law 95–630. In 1989, title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 established The Appraisal Subcommittee within the Examination 

Council. 

In addition to the NCUA, the voting FFIEC members include the 

Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the 

Currency, and the Consumer Financial Protection Bureau. The 

State Liaison Committee is also a voting member. The State Liaison Committee includes representatives from the Conference of 

State Bank Supervisors, the American Council of State Savings 

Supervisors, and the National Association of State Credit Union 

Supervisors. 

With respect to cybersecurity regulation, in 2001, each financial 

institution regulator adopted guidelines for safeguarding customer 

information to implement certain provisions of the Gramm-LeachBliley Act. The GLB Act required the NCUA Board to establish appropriate standards for federally insured credit unions relating to 

administrative, technical, and physical safeguards for member 

records and information. These safeguards are intended to: insure 

the security and confidentiality of member records and information, 

protect against any anticipated threats or hazards to the security 

or integrity of such records, and protect against unauthorized access to or use of such records or information that could result in 

substantial harm or inconvenience to any member. 

The guidelines require credit unions to have an information security program and establish a risk management framework, which 

is an approach that has held up very well over time. The guidelines 

176 

strike an effective balance between the necessary regulatory structure to protect member information and flexibility to avoid a ‘‘onesize-fits-all’’ or overly prescriptive approach to address ever-changing technology issues and related threats, such as those posed by 

the current cyber threat environment. 

The NCUA works within the FFIEC construct to maintain an Information Technology Handbook as the official source of information technology regulatory guidance for financial institutions. The 

IT Handbook is a series of guidance booklets designed for examiners and financial institutions. The IT Handbook development 

process is collaborative and contributors consider numerous thirdparty standards, related controls, and practices most appropriate to 

financial institutions. 

In 2015, the FFIEC agencies also jointly developed the Cybersecurity Assessment Tool for financial institutions to assess their risk 

profiles and level of cybersecurity preparedness. FFIEC members 

developed the Assessment to help institutions’ management identify their risks and determine their cybersecurity preparedness. 

The Assessment provides a repeatable and measurable process that 

financial institutions’ management may use to measure their cybersecurity preparedness over time. In developing the assessment tool, 

the FFIEC leveraged best practices from the IT Handbook, the National Institute of Standards and Technology Cybersecurity Framework, and industry-accepted cybersecurity practices. 

The NCUA and the other FFIEC agencies collaborated with 

NIST to review and provide input on mapping the FFIEC assessment tool to the NIST Cybersecurity Framework, to ensure consistency with NIST Cybersecurity Framework principles, and to highlight the complementary nature of the two resources. The FFIEC 

has published this mapping on its website. The NIST cybersecurity 

framework addresses all types of infrastructures including public 

utilities whereas the FFIEC assessment tool is specific to financial 

institutions. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR ROUNDS 

FROM J. MARK MCWATTERS 

Q.1. The Consumer Financial Protection Bureau has been aggressively expanding its authority into areas more effectively regulated 

by others—including the turf of the National Credit Union Administration. I believe that the agency best suited to develop regulations tailored to credit unions is the agency exclusively focused on 

credit unions—your agency. You recently sent a letter to CFPB Director Richard Cordray highlighting areas where the Bureau’s 

broadsword approach to regulation could potentially harm credit 

unions and the members they serve. In that letter, you urged Director Cordray to expand the Bureau’s use of Section 1022 exemption authority for credit unions, something I support. 

Could you describe the Bureau’s receptiveness to meaningful collaboration with other Federal regulatory agencies? And more specifically, have you had the opportunity to discuss with Director 

Cordray the excellent points you raised in your letter? 

A.1. CFPB has demonstrated a willingness to listen to reasonable 

requests for adjustments to its regulations. In addition, the 

177 

NCUA’s Office of Consumer Financial Protection and Access coordinates and works closely with CFPB on rulemaking and related 

matters. This consultative process allows the NCUA to inform 

CFPB how credit unions differ from other financial institutions, 

how a ‘‘one-size-fits-all’’ approach is not always appropriate, and 

how certain provisions may inadvertently disadvantage credit 

unions, and their members. This process can result in regulatory 

language or changes to address NCUA comments and concerns. 

Last month, I met with Director Cordray and discussed the matters raised in my May 24, 2017, letter and additional matters of 

concern to the NCUA, credit unions and their members. Although 

the conversation was informative, it did not result in any progress 

on the matters detailed in my letter—namely regulatory relief for 

credit unions for certain Home Mortgage Disclosure Act and Unfair, Deceptive, and Abuse Acts or Practices matters. 

In addition, on July 6, 2017, I wrote to Director Cordray asking 

for consideration of an exemption of federally insured credit unions 

from the examination and enforcement provisions of section 1025 

of the Consumer Financial Protection Act of 2010. I believe the 

NCUA should be allowed to act as the primary agency responsible 

for the examination and enforcement of the consumer financial protection laws for the six federally insured credit unions with assets 

greater than $10 billion. These credit unions are currently subject 

to CFPB’s exclusive examination and primary enforcement authority for consumer financial protection laws. The exemption I requested would continue to provide robust consumer financial protections for these credit union members and allow CFPB to focus 

on the larger investor-owned, for-profit financial providers. CFPB 

also would retain secondary enforcement authority to examine or 

take an enforcement action against these credit unions if it determines the NCUA is not adequately enforcing consumer financial 

protection laws. In his July 21, 2017, reply to me, Director Cordray 

expressly rejected my requested exemption as inconsistent with the 

Dodd-Frank Act. I continue to believe, however, that the CFPB has 

such exemption discretion under the Dodd-Frank Act. 

Q.2. As a voting member of the FSOC, you have a role to play in 

helping to make certain that regulations promulgated from a myriad of agencies do not conflict with each other. What do you believe 

the FSOC should be doing to create a regulatory environment that 

provides certainty of compliance for entities that are acting in good 

faith? 

A.2. It is important that agency rules do not conflict so that regulated entities have clear guidelines for activities. Clear guidelines 

help to provide certainty of compliance for those entities that are 

making good faith efforts to comply. For the most part, the FSOC’s 

primary duties relate to financial stability, not directly to the regulations and structures adopted by independent agencies for their 

regulated companies. This means that there is limited scope for the 

FSOC to engage with its member agencies on rules that do not materially affect the stability of the financial system as a whole. Instead, conflicts, when they do appear, are approached on a bilateral 

basis. More generally, however, the FSOC’s inter-agency actions on 

its range of financial stability efforts are very helpful in improving 

178 

inter-agency communication and understanding of the issues each 

individual regulator faces. Enhanced communication and understanding among the regulators is important for minimizing the 

likelihood that agencies will adopt conflicting rules in the first 

place. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR KENNEDY 

FROM J. MARK MCWATTERS 

Q.1. I have made it a top priority to provide regulatory relief for 

America’s financial institutions. However, your agency has issued 

a new proposed regulation that would require thousands of hours 

of paperwork burdens and unnecessary costs for credit unions that 

have chosen to merge voluntarily. Why is your Government agency 

proposing more regulatory burdens at a time when the Trump administration and the Senate Banking Committee have a public 

mandate to reduce regulatory burdens? 

A.1. The NCUA is very cognizant of the need to reduce regulatory 

burdens and has been doing so whenever possible. In that regard, 

the NCUA has issued a number of rules over the past months that 

would lessen regulatory burden on credit unions. For example, 

some of these burden-reducing rules include initiatives to: 

• address fields of membership by, for instance, modifying and 

updating the definitions of local community, underserved areas 

and rural districts; 

• enhance alternative capital by establishing a more flexible policy for low-income credit unions (of which a significant percentage are small) designed to provide greater clarity and confidence for investors; 

• simplify member business loans by lifting limits on construction and development loans, replacing explicit loan-to-value 

limits with the principle of appropriate collateral, (eliminating 

the need for a waiver), exempting credit unions with assets 

under $250 million from certain requirements, and affirming 

that nonmember loan participations do not count toward the 

statutory member business lending cap; 

• implement examination flexibility this year by extending the 

examination cycle for well-capitalized and well-managed credit 

unions to periods longer than the previous 12-month requirement; 

• expand share insurance coverage on funds held on a passthrough basis, held on deposit at federally insured credit 

unions, and maintained by attorneys in trust for their clients 

to other types of escrow and trust accounts maintained by professionals on behalf of their clients; 

• assist corporate credit unions by proposing a rule in June to 

reduce certain restrictions placed on the corporates during the 

financial crisis; and 

• improve the processes by which credit unions appeal the 

NCUA’s decisions by proposing uniform rules to govern this 

area. 

179 

1http://www.cutoday.info/THE-tude/A-New-Reg-CUs-Asked-For-It. 

2The full supporting statements for the changes to Parts 708a and 708b are available at 

https://www.reginfo.gov/public/do/PRAViewICR?reflnbr=201705-3133-004 (708a) and 

https://www.reginfo.gov/public/do/PRAViewDocument?reflnbr=201705-3133-006 (708b). 

The proposed merger rule increases the merger-related information available to the member-owners of Federal credit unions so 

they can make an informed decision about the merger, but does not 

significantly increase the regulatory burden on merging credit 

unions. 

The NCUA has been informed by many credit unions and their 

members that the current merger regulation in place is insufficient 

to protect the member-owners of Federal credit unions. Michael 

Fryzel, a former NCUA Chairman and Board Member and the 

head of the NCUA transition team for the Trump administration, 

recently published an opinion that he believed the proposed merger 

rule was necessary to curb ‘‘abuses’’ in the merger process.1

Q.1.a. Why are you using your Government agency to interfere 

with free-market business decisions made by credit union boards of 

directors who were elected by their members? 

A.1.a. The proposed merger rule does not interfere with the business decisions of Federal credit unions’ leadership. In fact, it enhances free-market efficiency. Free markets function best when all 

participants in a transaction have access to all relevant information about the transaction. Members of merging Federal credit 

unions have a right to know how much of the credit union’s net 

worth—which they own—will be used to compensate officials and 

staff, how much will transfer to the continuing credit union, and 

how much will be paid out to members in the form of a merger dividend or share adjustment. The proposed merger rule simply facilitates delivery of this information to the member-owners of Federal 

credit unions, critical information needed to understand all facets 

of the transaction. Member-owners of Federal credit unions cannot 

cast an informed vote on the merger without access to relevant information. 

Q.1.b. How did you calculate the 8,832 hours or paperwork burden 

for your new proposed regulation? 

A.1.b. To calculate the estimated burden, the NCUA determined 

the proposed rule adds 560 burden hours (2 hours for the changes 

to Part 708a plus 558 hours for the changes to Part 708b).2 We 

then added the 560 new burden hours to the current burden of 

8,272 hours for a total of 8,832 hours. The exact number of hours 

will depend on how many credit unions propose transactions covered under Parts 708a and 708b of NCUA’s regulations. Based on 

the average number of voluntary mergers of Federal credit unions 

in the last 5 years, the NCUA estimated that one federally insured 

credit union per year will be subject to the changes to Part 708a 

of the NCUA’s regulations and 138 federally chartered credit 

unions will be subject to the changes to Part 708b. 

Q.2. I thought you would agree that consolidation is a healthy 

strategy to raise economies of scale and strengthen the competitiveness of American businesses. My understanding is that credit 

180 

unions are engaging in voluntary mergers for the same competitive 

reasons that banks are consolidating—to gain scale. 

Why is your Government agency deliberately slowing down voluntary mergers that would benefit thousands of credit union employees and hundreds of thousands of credit union members? 

A.2. The proposed rule changes the required minimum member notice period from 7 days to 45 days. The NCUA’s recent experience 

with several mergers indicates the current rule’s 7-day minimum 

notice period is often insufficient to provide Federal credit union 

member-owners with sufficient time to digest the information they 

need to cast an informed vote and determine the fate of their institution. The addition of a few weeks to the merger process is minimally intrusive as compared to the great benefit it will provide 

members by giving them sufficient time to analyze the terms of the 

proposed merger, return their ballots, or make plans to attend the 

meeting where the merger will be explained. 

Q.2.a. Would stopping voluntary mergers affect the competitiveness of the credit union movement? 

A.2.a. The NCUA does not wish to stop voluntary mergers, and the 

proposed rule does not do so. The proposed rule simply provides for 

full disclosure to members in a reasonable timeframe. 

Q.3. I am sure you would agree that small credit unions have less 

ability than larger institutions to absorb regulatory compliance 

costs, technology costs, and the severe impact of the accounting 

rule changes that will soon take effect. 

Wouldn’t your policy to discourage voluntary mergers actually 

cause small credit unions to lose capital and thus increase risks to 

the National Credit Union Share Insurance Fund? 

A.3. It is not the NCUA’s policy to discourage voluntary mergers. 

The proposed merger rule facilitates the NCUA’s policy of making 

the voluntary merger process fair and transparent to the memberowners. The proposed rule ensures that members of merging Federal credit unions are provided with all information relevant to the 

merger transaction. This in no way discourages mergers that are 

good for the credit unions and their members. The NCUA will continue to monitor the health of small credit unions, as it does for 

all credit unions. When a credit union is facing declining capital, 

the NCUA works with the credit union’s board and management to 

devise strategies to address the situation so that the credit union 

will not cause a loss to the Share Insurance Fund. The proposed 

merger rule does not change this approach. 

Q.3.a. Wouldn’t you agree that, in this context, voluntary mergers 

actually reduce risk to your fund and enable members to continue 

their relationship with a thriving credit union? 

A.3.a. Yes, we agree. In most cases, voluntary mergers are advantageous to the merging credit unions, their members, and the 

Share Insurance Fund. Accordingly, as noted above, the proposed 

rule does not discourage or hamper voluntary mergers; it only 

seeks to make them fair and transparent to credit unions and their 

members through adequate disclosure. 

Q.4. Several provisions in your new proposed regulation of voluntary mergers would add costs to credit unions but provide no 

181 

3See Lisa Freeman, Opinion: Does the Voluntary Merger Rule Make Credit Unions Look Bad?, 

Credit Union Journal (June 19, 2017) (available at https://www.cujournal.com/opinion/doesthe-voluntary-merger-rule-make-credit-unions-look-bad) (quoting Eric Richard, former general 

counsel for the Credit Union National Association). 4 Access to full and complete information is a key assumption in neoclassical economics and 

several noted economists have argued that the role of effective regulation is to eliminate inforContinued 

benefit to members. Why would NCUA require merging credit 

unions to ‘‘disclose all increases in compensation or benefits’’ for 

covered employees ‘‘during the 24 months before approving a merger agreement-regardless of whether the increases were made because of the merger’’? 

A.4. The NCUA respectfully disagrees that the proposed voluntary 

merger rule adds significant costs to the merger process and provides no benefits to members. The proposed rule recognizes the important status of a Federal credit union member as an owner of a 

not-for-profit financial cooperative. In recognition of the member’s 

ownership interests, the proposal protects the member’s right to receive full and fair disclosure of all relevant information prior to the 

merger vote. This is similar to the rights afforded to corporate 

shareholders. 

At least one industry expert suggests that Federal credit unions 

lag behind other corporate entities, including State-chartered credit 

unions, in terms of being required to disclose material information 

to members.3 The disclosure requirements in the proposed rule enable Federal credit union members to decide if a merger is in their 

best interests and determine if the merger presents any conflicts 

of interest for management officials resulting from merger-related 

financial arrangements paid by either the merging credit union or 

the continuing credit union. 

Furthermore, the proposed rule ameliorates a common communications problem for members of merging Federal credit unions by 

creating an easy, inexpensive, and reliable mechanism for those 

members to communicate with one another about the merger. Accordingly, the NCUA believes the proposed rule provides significant 

benefits to members for this and other reasons. 

The NCUA is specifically proposing to require the disclosure of 

any increase in compensation or benefits during the 24 months before a merger because those increases are frequently related to the 

merger. Setting this specific and limited, bright-line disclosure 

timeframe significantly simplifies the NCUA’s current approach, 

which is to analyze board minutes over a potentially open-ended 

timeframe to determine the existence of any merger-related financial arrangements. This has been an area of confusion for some 

merging credit unions, and the proposed rule addresses this problem in a way that is fair, transparent, and easy for merging credit 

unions to implement. 

Q.4.a. If these increases were not made because of a merger, why 

would your Government agency want to regulate free-market compensation and benefits? 

A.4.a. The proposed voluntary merger rule does not regulate compensation and benefits. Rather, the proposed rule addresses the 

current lack of sufficient information being disclosed to members of 

a merging credit union.4 Unless a particular compensation or 

182 

mational asymmetries where possible. See Joseph E. Stigliz, Information and the Change in the 

Paradigm in Economics, Nobel Prize Lecture (Dec. 8, 2001) (available at https:// 

www.nobelprize.org/nobellprizes/economic-sciences/laureates/2001/stiglitz-lecture.pdf); see 

also Ronald H. Coase, The Problem of Social Cost, 3 J. Law & Econ. 1 (Oct. 1960) (the role of 

law is to reduce transaction costs to allow effective bargaining) (available at http:// 

www.law.uchicago.edu/files/file/coase-problem.pdf). 

benefit arrangement presents a safety and soundness risk to the 

Federal credit union, the NCUA’s policy is to respect the business 

decisions of Federal credit union boards and members regarding 

employee compensation, provided there has been full and fair disclosure. 

Q.4.b. Why would you require such a violation of privacy for credit 

union employees? 

A.4.b. The voluntary merger rule does not violate the privacy of 

Federal credit union employees. As owners of the Federal credit 

union, members have a right to all information relevant to a proposed merger vote, including proposed compensation arrangements 

for employees and senior management. This approach is consistent 

with general corporate practice. Furthermore, this approach, which 

limits disclosure to members in the context of a merger, is far less 

intrusive than the disclosure requirements for other nonprofits, including State-chartered credit unions, which must report compensation and benefits information annually on IRS Form 990, 

which is publicly available. 

Q.5. You have attempted to justify your new proposed regulation 

of voluntary mergers by claiming it would provide ‘‘transparency’’ 

for credit union members. But when you require credit unions to 

disclose compensation and benefits that are not related to a merger, doesn’t that ‘‘transparency’’ really violate the privacy of credit 

union employees? 

A.5. As noted above, the proposed voluntary merger rule does not 

violate the privacy of Federal credit union employees. Federal credit unions are democratically owned, not-for-profit financial cooperatives. Their unique status as democratically owned institutions 

means that members have a right, as member-owners, to control 

and oversee credit union operations including employee compensation. The disclosure of employee compensation allows member-owners to more effectively fulfill their roles as the ultimate decisionmakers of the credit union. 

Q.6. One expert in the industry was recently quoted in The Credit 

Union Journal saying your new proposed regulation of voluntary 

mergers is, I quote: ‘‘One on the worst proposals in memory.’’ This 

expert predicts that if NCUA slows down the natural consolidation 

in the credit union marketplace, there will be fewer voluntary 

mergers, but more involuntary mergers. 

Q.6.a. Which is better: a voluntary merger or an involuntary merger? 

A.6.a. It is important to distinguish the underlying causes and motivations for credit union mergers. There are essentially three types 

of merger scenarios that we’ve experienced historically, and they 

differ quite significantly from one another as to why they occur: 

183 

1. Two viable credit unions that seek to combine for mutually 

agreed strategic reasons; or 

2. A credit union that is having difficulties remaining viable that 

seeks to merge into a stronger continuing credit union in 

order to perpetuate access to credit and other services for its 

membership; or 

3. A credit union operating under NCUA or State conservatorship, and that is not viable, being combined into a continuing 

credit union that has successfully bid to acquire the failing 

credit union. Please note, the NCUA does not officially use the 

term ‘‘involuntary merger.’’ There are circumstances where 

the agency utilizes a merger as the means to resolve a failing 

institution when it is under conservatorship. These are sometimes informally referred to as an involuntary merger. 

For mergers outlined in scenarios one and two above, the NCUA 

does not participate in the identification or selection process concerning voluntary mergers. The decision to merge is based on a 

business decision made by the respective credit unions’ boards of 

directors. The NCUA’s role in these situations is to ensure the required procedures are followed and that the combination does not 

pose a safety-and-soundness concern. 

The types of compensation arrangements the disclosure proposal 

is intended to address in practice would typically apply to the 

merger of two relatively healthy institutions. Also, the NCUA does 

not believe the additional disclosure will have any material impact 

on the speed of mergers. 

Q.6.b. Once a credit union reaches the point where they have no 

choice other than involuntary merger, hasn’t a tremendous amount 

of capital already been lost at this point? 

A.6.b. Not necessarily. Some credit unions aren’t viable because of 

the inability to replace retiring management and/or insufficient interest to maintain a volunteer board of directors. Others aren’t viable because of operational problems that don’t always result in the 

loss of capital. 

Q.6.c. Would you agree that involuntary mergers tarnish the reputation of the credit union industry as a whole? 

A.6.c. Not necessarily. The resolution of a failed credit union 

through a merger is an effective means to ensure that service for 

the members of record can be preserved through combination into 

a viable institution willing to provide the same or better services. 

The reasons for individual credit union failures vary and do not 

necessarily reflect on the industry as a whole. The NCUA does not 

believe the proposed regulation will have a material impact on 

mergers or credit union failures. 

Q.6.d. Do you agree or disagree that employees of a merging credit 

union have better employment prospects in a voluntary merger 

where they receive employment guarantees and improved benefits, 

compared to an involuntary merger where branches are closed and 

jobs are lost? Won’t your new proposed regulation further deplete 

the capital of financially constrained small credit unions because 

your merger process will take so long? 

184 

A.6.d. A merger of two viable institutions, often motivated by 

economies of scale considerations, can involve cost-cutting measures like branch closures and layoffs. A merger of a weaker 

institution into a healthy one can result in improved employment 

prospects for employees of the weaker institution and maintenance—and sometimes expansion—of service facilities for the membership of the weaker institution. Each situation and scenario is 

unique. Thus, it is not always, or even typically, the case that one 

type of combination effectuates better results for employees. In addition, the NCUA does not believe the proposed regulation will 

have a material impact on the completion time of mergers. 

Q.6.e. Who determines which credit unions receive involuntary 

mergers? 

A.6.e. Voluntary mergers are business decisions of the involved 

credit unions. The NCUA’s role is to review the safety and soundness of the combination and compliance with applicable rules and 

regulations, such as field of membership compatibility when the 

continuing institution is a Federal credit union. In those instances 

where the NCUA uses merger (or a purchase and assumption) to 

resolve a failed institution, the agency solicits bids from interested 

credit unions and selects the bid with the lowest cost to the Share 

Insurance Fund, with continued service to the membership whenever possible. 

Q.6.f. What criteria do you use to select the surviving credit union 

in an involuntary merger? 

A.6.f. In general, NCUA selects the bid with the lowest cost to the 

Share Insurance Fund while also seeking to preserve service to 

members. The process is addressed by NCUA Letters to Credit 

Unions 10–CU–11 and 10–CU–22. 

Q.6.g. Isn’t this why one industry consultant predicts that, I quote: 

‘‘NCUA Regional Directors will become like banana republic dictators controlling their fiefdoms by rewarding their loyal cronies 

with the spoils of involuntary mergers’’? 

A.6.g. The voluntary merger process is a business decision made by 

the credit unions involved. For failing institutions, the NCUA has 

a duty to achieve a least-cost resolution, and the agency seeks to 

preserve the interests of the members. In resolving failing institutions, the NCUA has a fair process with appropriate checks and 

balances for inviting credit unions to bid and selecting the winning 

bidder. 

Q.6.h. How do you ensure transparency in your selection of winners and losers in involuntary mergers? 

A.6.h. The process is addressed by NCUA Letters to Credit Unions 

10–CU–11 and 10–CU–22. The NCUA invites interested credit 

unions capable of safely acquiring a failing credit union to conduct 

due diligence and submit a bid. In general, the NCUA selects the 

bid with the lowest cost to the Share Insurance Fund while also 

seeking to preserve service to members. 

Q.7. I am sure you are aware of the serious legal implications of 

attempting to exert political influence over a financial institution’s 

examination. 

185 

Q.7.a. Have you or your staff ever given direction or guidance, or 

even the impression, that examiners should stop, slow or limit any 

credit union’s growth through voluntary mergers? 

A.7.a. Voluntary mergers are a business decision made by credit 

unions. The NCUA is required to review the safety and soundness 

of the transaction and compliance with applicable rules and regulations. The only time NCUA staff would intervene is if the proposed 

merger posed safety and soundness concerns or would violate a law 

or regulation. 

Q.7.b. Have you or your staff ever given direction or guidance to 

supervisory staff in the chain of command to override the findings 

of an Examiner-in-Charge? 

A.7.b. Our quality control process involves various layers of review. 

This can include a review of the examination report and areas of 

concern prior to, as well as after, the report’s issuance. In addition, 

once the report has been issued, the agency has both an informal 

and formal appeals process. The quality control and—if it is pursued—the appeals process could result in the appropriate override 

of examination findings. These safeguards help ensure the final examination product is correct and reasonable. The NCUA also maintains a strict prohibition on retaliation. Our Inspector General 

independently investigates any alleged retaliation. 

Q.7.c. How do you justify your Government agency targeting the 

fastest-growing credit unions and trying to slow their strategic 

growth? 

A.7.c. The proposed amendment ensures member owners have 

access to the necessary information to make an informed decision 

related to their credit union when asked to vote in a voluntary 

merger membership vote. The NCUA is not attempting to slow 

credit unions’ growth achieved through merger or any other appropriate means. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TILLIS 

FROM J. MARK MCWATTERS 

Q.1. I’m a proponent of tailoring regulations based off of the risk 

profiles of financial institutions, as opposed to having strict asset 

thresholds that do not represent what I believe is the smart way 

to regulate. But, my question here is really about the importance 

of ensuring that we have a system that is rooted in fundamental, 

analytical, thoughtful regulation so that we can achieve and execute on goals, whether balancing safety and soundness with lending and growth, or encouraging more private capital in the mortgage market to protect taxpayers and reform the GSEs. 

Q.1.a. Do you think that we should use asset thresholds as a way 

to regulate—yes or no? If no, can you provide me with the metrics 

or factors by which a depository institution should be evaluated? If 

yes, please explain. 

A.1.a. Yes, when appropriate. Asset thresholds can represent a 

simple yet elegant proxy for ensuring a rule is targeting specific 

risks and activities. As a general rule, I agree that tailoring regulations based on risk profiles is appropriate. However, under certain 

186 

circumstances, the NCUA has found that using asset thresholds 

can be an effective way to reduce regulatory burden without the 

need for complex risk-based criteria. It has allowed the agency to 

exempt some institutions—typically, smaller ones—from complying 

with some rules, or provisions within a rule, without having to decipher a potentially complex set of applicability standards. However, in some cases simple asset thresholds may not sufficiently 

correlate to the targeted risks or activities, and therefore a more 

precise approach is warranted. 

The NCUA formulates its financial regulations to include clear 

guiding principles that specify minimum risk management policies 

and programs necessary to conduct permissible activities in a safe 

and sound manner. By design, the NCUA’s regulatory and supervisory expectations increase commensurate with the size, scope, 

and complexity of an institution’s risk exposures. 

Q.1.b. Section 165 of Dodd-Frank requires enhanced supervision and prudential standards for banks with assets over $50 billion. 

This applies to any bank that crosses the asset threshold, without 

regard to the risks those banks pose based upon the complexity of 

the business model. This includes heightened standards on liquidity and capital under the Liquidity Coverage Ratio (LCR) and the 

Comprehensive Capital Analysis and Review (CCAR) which have a 

various assumptions built in that may drive business model. 

Q.1.b.i. I understand under these two regulatory regimes, banks 

have changed certain lending behaviors because of the assumptions 

Federal regulators provide some examples of how the LCR and the 

CCAR have changed the types of loans, lending, and deposits your 

institution holds? 

A.1.b.i. Credit unions are not subject to standards pertaining to 

Comprehensive Capital Analysis and Review or Liquidity Coverage 

Ratio. The NCUA has instituted regulations governing capital 

planning and capital stress testing for those consumer credit 

unions with assets in excess of $10 billion. These requirements are 

deemed important to demonstrate that credit unions can prudently 

manage the risks under their strategic initiatives to serve their 

members. The NCUA set this asset threshold for compliance, as we 

deem these institutions systemically important to the National 

Credit Union Share Insurance Fund. We did not base our standards on those used to define financial institutions systemically important to the U.S. financial system. 

We have not seen evidence that our capital planning and stress 

testing regulations have stifled growth. The stress testing requirements became effective in 2014. Since this time period loan growth 

has exceeded 9.8 percent and share (deposit) growth has exceeded 

8.4 percent for the covered credit unions in aggregate. We believe 

this evidences healthy growth for financial institutions. 

Q.1.b.ii. Construction lending by banks over the $50 billion threshold has been a source of concern, namely because these enhanced 

prudential standards have treated construction loans punitively. 

This includes construction lending for builders of apartments, 

warehouses, strip malls, and other projects that may have varying 

risk profiles associated with them. However, under the CCAR and 

DFAST assumptions, the regulators have assigned all these 

187 

1Less than 0.02 percent for Navy Fed if you need the precise number. 

categories of lending the same capital requirements. The result is 

an overly broad capital requirement for varying loans that have different risks, a capital requirement that may be greater for some 

loans and lower for others, influencing the decision of many banks 

over the $50 billion threshold to hold less of these assets due to the 

punitive capital requirements associated with them. Have you seen 

a similar corresponding issue with construction loans because of 

heightened prudential standards? 

A.1.b.ii. Credit unions are not subject to standards pertaining to 

CCAR and LCR. Construction and development lending is not a 

key strategic element for those credit unions subject to our capital 

planning and capital stress testing requirements. Only one credit 

union subject to stress testing engages in this activity, and the 

total volume is negligible.1 Even so, the NCUA evaluates the risks 

of all loans through processes that capture their underlying credit 

quality, not generalized capital assessments. As such, credit unions 

that would underwrite such loans prudently would exhibit less 

credit risk than those which adopt looser standards. 

Q.1.b.iii. Under the CCAR regulations, Federal regulators routinely assign risk weights to certain assets that Bank Holding 

Companies have on their balance sheets. These risk weights often 

time changes the costs associated with holding certain investments, 

such as Commercial Real Estate. Has this changed the type of assets that institutions hold, or caused institutions to alter their business plans because of the regulatory capital costs? If so, can you 

provide examples of this? 

A.1.b.iii. The NCUA’s current risk-based net worth requirement is 

applicable only to federally insured credit unions with total assets 

greater than $50 million and whose risk-based net worth requirement exceeds 6 percent. Generally, we have not seen evidence that 

the NCUA’s risk-weighted capital scheme has caused covered credit 

unions to alter their business plans. As of March 31, 2017, only 529 

federally insured credit unions were subject to the risk-based net 

worth requirement, and only three failed the risk-based net worth 

requirement. Since the implementation of the NCUA’s risk-based 

capital requirement in 2001, only a few credit unions have failed 

to maintain a sufficient level of net worth necessary to pass the 

test. Thus, regulatory capital standards for credit unions have not 

likely had a material impact on their asset composition or business 

plans, except for those few that took extreme risk positions. 

Q.1.b.iv. Do you think that regulators, on a general basis, get the 

risks weights right? 

A.1.b.iv. The overall goal for a risk-based capital system is to better relate risks to capital requirements and ensure institutions 

with significantly elevated levels of risk are required to hold commensurate levels of capital. In establishing risk weights, the goal 

is to ensure assigned weights properly reflect observed levels of 

risks for each asset type relative to other asset types and a given 

minimum benchmark level of capital. These goals are laudable. 

However, there are significant challenges in ensuring any broadly 

applicable risk weighting scheme is properly calibrated, does not 

188 

create unintended consequences, and the overall benefits exceed 

the costs. Thus, I think there is still work to do in narrowing the 

scope of institutions that should be subject to risk-based standards 

and in ensuring the asset classes and risk weights are properly 

calibrated. 

Q.1.b.v. Fed Governor Tarullo, has argued that the $50 BB threshold is too low in terms of an asset threshold for enhanced prudential standards; does this number make sense? Why do we need 

such arbitrary thresholds? Should we get away from these thresholds and move toward a regulatory system that evaluated substance and activities of an institution as opposed to an arbitrary 

number? Why can’t we do that? 

Does Title I allow the Fed to treat a $51 BB bank in a similar 

manner to a $49 BB bank for the purposes of enhances prudential 

standards? 

A.1.b.v. Credit unions are not subject to CCAR or the $50 billion 

threshold established in the Dodd-Frank Act. The NCUA has 

adopted $10 billion as its threshold to subject credit unions to enhanced supervisory standards. We set this asset-based threshold 

based on the systemic risk of these institutions relative to the balance of the National Credit Union Share Insurance Fund. At this 

time, there are six credit unions subject to these enhanced standards. 

The NCUA is contemplating raising the asset threshold. Any adjustment will follow careful scrutiny of the performance of our 

Share Insurance Fund and adoption of supervisory tools commensurate with prudent oversight of our largest credit unions. 

For all credit unions, the NCUA adopts specific supervisory practices commensurate with the unique risks posed by each credit 

union. Accordingly, we would enhance supervision of those credit 

unions that exhibit higher risk profiles. 

Q.2. While the NCUA has made it a priority over the past several 

years to provide regulatory relief to credit unions where warranted, 

it seems that even more can be done to allow them to continue to 

serve consumers. Are there areas where Congress could make 

changes that would allow credit unions to foster economic growth? 

Do you have specific recommendations for this body to consider? 

A.2. Yes, the NCUA has several proposals to share with the Committee related to regulatory flexibility, field of membership requirements, member business lending, and supplemental capital: 

Regulatory Flexibility—Today, there is considerable diversity 

in scale and business models among financial institutions. Many 

credit unions are very small and operate on extremely thin margins. They are challenged by unregulated or less-regulated competitors as well as by their limited economies of scale. They often provide services to their members out of a commitment to offer a specific product or service rather than a focus on any incremental financial gain. 

The Federal Credit Union Act contains a number of provisions 

that limit the NCUA’s ability to revise regulations and provide 

relief to such credit unions. Examples include limitations on the 

eligibility for credit unions to obtain supplemental capital, field-ofVerDate Nov 24 2008 12:03 Apr 25, 2018 Jkt 046629 PO 00000 Frm 00192 Fmt 6601 Sfmt 6601 S:\DOCS\26901 SHERYL
189 

2 12 U.S.C. 1751 et. seq. 3The Federal Credit Union Act presently requires an area to be underserved by other depository institutions, based on data collected by the NCUA or Federal banking agencies. 12 U.S.C. 

1759 (c)(2)(A)(ii). The NCUA has implemented this provision by requiring a facilities test to determine the relative availability of insured depository institutions within a certain area. Congress could instead allow the NCUA to use alternative methods to evaluate whether an area 

is underserved to show that although a financial institution may have a presence in a community, it is not qualitatively meeting the needs of an economically distressed population. 

membership restrictions, investment limits, and the general 15- 

year loan maturity limit, among others.2

To that end, the NCUA encourages Congress to consider providing regulators with enhanced flexibility to write rules to address 

such situations, rather than imposing rigid requirements. Such 

flexibility would allow the agency to effectively limit additional regulatory burdens, consistent with safety and soundness considerations. 

The NCUA continues to modernize existing regulations with an 

eye toward balancing requirements appropriately with the relatively lower levels of risk smaller credit unions pose to the credit 

union system. Permitting the NCUA greater discretion with respect 

to scale and timing when implementing statutory language would 

help mitigate the costs and administrative burdens imposed on 

smaller institutions, consistent with congressional intent and prudential supervision. 

The NCUA would like to work with Congress so that future rules 

can be tailored to fit the risk presented and even the largest credit 

unions can realize regulatory relief if their operations are well 

managed, consistent with applicable legal requirements. 

Field-of-Membership Requirements—The Federal Credit 

Union Act currently permits only Federal credit unions with multiple common-bond charters to add underserved areas to their 

fields of membership. We recommend Congress modify the Federal 

Credit Union Act to give the NCUA the authority to streamline 

field of membership changes and permit all Federal credit unions 

to grow their membership by adding underserved areas. The language of H.R. 5541, the Financial Services for the Underserved Act, 

introduced in the House during the 114th Congress by Congressman Ryan of Ohio, would accomplish this objective. 

Allowing Federal credit unions with a community or single-common-bond charter the opportunity to add underserved areas would 

open up access for many more unbanked and underbanked households to credit union membership. This legislative change also 

could enable more credit unions to participate in programs offered 

through the congressionally established Community Development 

Financial Institutions Fund, thus increasing the availability of affordable financial services in distressed areas. 

Congress may wish to consider other field of membership statutory reforms, as well. For example, Congress could allow Federal 

credit unions to serve underserved areas without also requiring 

those areas to be local communities. Additionally, Congress could 

simplify the ‘‘facilities’’ test for determining if an area is underserved.3

Other possible legislative enhancements could include elimination of the provision presently contained in the Federal Credit 

Union Act that requires a multiple-common-bond credit union to be 

190 

4See 12 U.S.C. 1759(f)(1). 

within ‘‘reasonable proximity’’ to the location of a group in order to 

provide services to members of that group.4 An enhancement that 

recognizes the way in which people share common bonds today 

would be to provide for explicit authority for web-based communities as a basis for a credit union charter. 

Member Business Lending—The NCUA reiterates the agency’s 

long standing support for legislation to adjust the member business 

lending cap, such as S. 836, the Credit Union Residential Loan 

Parity Act, which Senators Wyden and Murkowski have introduced. This bipartisan legislation addresses a statutory disparity in 

the treatment of certain residential loans made by credit unions 

and banks. 

When a bank makes a loan to purchase a one- to four-unit, nonowner-occupied residential dwelling, the loan is classified as a residential real estate loan. If a credit union were to make the same 

loan, it is classified as a member business loan and is, therefore, 

subject to the member business lending cap. To provide regulatory 

parity between credit unions and banks for this product, S. 836 

would exclude such loans from the statutory limit. The legislation 

also contains appropriate safeguards to ensure strict underwriting 

and servicing standards are applied. 

Supplemental Capital—The NCUA supports legislation to 

allow more credit unions to access supplemental capital, such as 

H.R. 1244, the Capital Access for Small Businesses and Jobs Act. 

Introduced by Congressmen King and Sherman, this bill would 

allow healthy and well-managed credit unions to issue supplemental capital that would count as net worth. This bipartisan legislation would result in a new layer of capital, in addition to retained 

earnings, to absorb losses at credit unions. 

The high-quality capital that underpins the credit union system 

was a bulwark during the financial crisis and is key to its future 

strength. However, most Federal credit unions only have one way 

to raise capital: through retained earnings. Thus, fast-growing, financially strong, well-capitalized credit unions may be discouraged 

from allowing healthy growth out of concern it will dilute their net 

worth ratios and trigger mandatory prompt corrective action-related supervisory actions. 

A credit union’s inability to raise capital outside of retained earnings limits its ability to expand its field of membership and to offer 

more products and services to its membership and eligible 

consumers. Consequently, the NCUA has previously encouraged 

Congress to authorize healthy and well-managed credit unions to 

issue supplemental capital that will count as net worth under conditions determined by the NCUA Board. Enactment of H.R. 1244 

would lead to a stronger capital base for credit unions and greater 

protection for taxpayers. 

The NCUA stands ready to work with Congress on these proposals, as well as other options to provide consumers more access 

to affordable financial services through credit unions. 

191 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM KEITH A. NOREIKA 

Q.1. In response to Senator Menendez’s question about regulatory 

concerns about the increase in auto loan delinquencies, you said 

that you ‘‘notice an uptick and you are certainly making our regulated entities aware of to keep track of.’’ You continued by saying, 

‘‘our job as regulators is to watch and manage credit risk and to 

flag where we are seeing increased risks.’’ 

Related to other OCC efforts to monitor increased credit risks, in 

2013, the OCC updated guidance on leveraged lending, in part as 

a reaction to the credit bubble in markets for leveraged loans experienced during the crisis (as described by the Financial Crisis Inquiry Commission), and because of increasing concerns about escalating leveraged lending with deteriorating underwriting criteria in 

the years following the crisis. The recent Treasury Report recommends re-issuing the leveraged lending guidance because of concerns that it has harmed businesses. Do you agree with this 

recommendation that the OCC and other regulators should pull 

back the guidance, even in light of the impact of leveraged lending 

during the crisis and the concerns raised following it? 

A.1. The interagency leveraged lending guidance was updated and 

re-issued in 2013. The updated guidance was issued in response to 

significant growth in the leveraged loan market and examinations 

identifying weaknesses in underwriting and risk management, 

such as liberal loan structures and deficient management information systems. Its primary purpose was to provide sound risk management guidance to banks involved in leveraged loan activities 

and to minimize excessive risk buildup in the leveraged loan market. Maintaining appropriate risk safeguards in the leveraged loan 

market helps to reduce volatility and the impact of adverse economic events during periods of stress, and thus help maintain 

banks’ ability to provide needed capital to the economy during 

weaker times. 

The guidance has had a positive effect on bank practices without 

adversely affecting leveraged lending volumes or access to capital. 

Agent banks have improved their underwriting and risk management processes to reduce and manage risk of leveraged lending exposure. In particular, most agent banks are now better equipped to 

project future cash-flows to assess borrower repayment capacity 

and enterprise valuations, which better align with basic safety and 

soundness principles. In addition, leveraged lending volumes remain robust. Following the 2007–2009 recession, syndicated leveraged lending issuance increased significantly each subsequent year 

to a record issuance of $1.1 trillion in 2013. This volume was substantially higher than the prior record level of $700 billion in 2007. 

Although annual issuance levels in 2014–2016 were lower than 

2013, these volumes were well above 2007 and represented the second, fourth, and third highest volumes on record, respectively. 

The agencies have conducted extensive industry outreach since 

issuing the guidance, and they have published leveraged lending 

Frequently Asked Questions (FAQ) to clarify the guidance and supervisory expectations. The purpose of the outreach and FAQ is to 

promote transparency and consistency for banks’ understanding 

and examiners’ application of the guidance. These outreach 

192 

activities have helped reduce the number of inconsistencies that 

bankers noted following the initial issuance of the guidance. The 

outreach has also indicated that certain parts of the guidance 

present continued challenges to banks. 

The Office of the Comptroller of the Currency (OCC) believes 

that the guidance is an appropriate and effective supervisory tool 

that has served the agencies and the banking industry well. Nonetheless, we recognize the challenges expressed during outreach regarding agency expectations and unintended consequences of the 

guidance. We are open to pursuing additional opportunities for the 

public to provide such input on the guidance and to considering 

whether such input necessitates clarifications to the guidance. As 

noted above, because the guidance is interagency, we will need to 

engage with the other agencies to ensure consistency. 

The OCC is committed to maintaining consistent, reasonable, 

and transparent application of the guidance. Supervisory guidance 

should complement the safe and sound activities of federally regulated financial institutions, and the guidance should remain relevant, appropriate, and meaningful to support banks’ activities. 

The OCC will continue to listen to institutions’ comments about 

what has worked well with the guidance and FAQ, and what opportunities exist to clarify the guidance and encourage economic 

growth in a safe and sound manner. 

Q.2. At the time of your appointment as Acting Comptroller of the 

Currency, you were representing Ant Financial, a Chinese company 

that is currently under review by CFIUS. 

Q.2.a. What, if any, conversations did you have with Treasury Secretary Mnuchin or Treasury staff about Ant Financial or the 

CFIUS process as you were being vetted to serve as Acting Comptroller? 

A.2.a. In line with its statutory confidentiality restrictions, Treasury does not discuss cases before the Committee on Foreign Investment in the United States (CFIUS), including whether or not any 

case has been filed with CFIUS. That said, I never had any conversations with the Secretary regarding any Ant Financial matter. 

My only communications with Treasury staff regarding Ant Financial during this time period were limited to my disclosures to ethics 

officials of my client lists as part of the ethics vetting process. 

Q.2.b. Do you believe that there are any conflict of interests by 

having conversations about a job position within Treasury as you 

were representing a foreign company that is being reviewed by 

Treasury as part of the CFIUS process? 

A.2.b. No. My only communications with Treasury officials about 

Ant Financial on any matter during this time period were limited 

to my disclosures of my client lists to Treasury ethics officials as 

part of the ethics vetting process. In addition, all ethical rules were 

observed in the course of my legal representation of Ant Financial 

to avoid any conflict of interest. 

Q.2.c. Separately, have you had communications with any U.S. 

Government officials about the Ant-MoneyGram transaction since 

you were appointed to your position? 

193 

A.2.c. Since I have become Acting Comptroller, my only communications with U.S. Government officials about Ant Financial on 

any matter were to alert officials, where applicable (e.g., ethics officials), of my prior client relationship to screen me from any possible involvement in any discussion on any Ant Financial matter. 

Q.2.d. Have you had any communications with any officials involved in the CFIUS review of that transaction? 

A.2.d. Since I have become Acting Comptroller, I have not had any 

discussions with any U.S. Government officials on any Ant Financial matters, other than as noted earlier, to alert officials (e.g., ethics officials) of my prior client relationship to screen me from any 

possible involvement in any discussion on any Ant Financial matter. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCOTT 

FROM KEITH A. NOREIKA 

Each of you serve at agencies that are members of the Financial 

Stability Oversight Council (FSOC). Insurance has been regulated 

at the State level for over 150 years—it’s a system that works. But 

FSOC designations of nonbank systemically important financial institutions (SIFIs) have made all of you insurance regulators, despite the fact that you are bank regulators at your core. 

Strong market incentives exist for insurers to hold sufficient capital to make distress unlikely and to achieve high ratings from 

financial rating agencies, including incentives provided by risk sensitive demand of contract holders and the potential loss of firms’ intangible assets that financial distress would entail. Additionally, 

insurance companies are required by law to hold high levels of capital in order to meet their obligations to policyholders. Bottom line: 

Insurance companies aren’t banks, and shouldn’t be treated as 

such. 

In March, my colleagues and I on the Senate Banking Committee 

sent a letter to Treasury Secretary Mnuchin indicating our concerns regarding the FSOC’s designation process for nonbanks. I 

support efforts to eliminate the designation process completely. 

I was pleased that President Trump issued a ‘‘Presidential 

Memorandum for the Secretary of the Treasury on the Financial 

Stability Oversight Council’’ (FSOC Memorandum) on April 21, 

2017, which directs the Treasury Department to conduct a thorough review of the designation process and states there will be no 

new nonbank SIFI designations by the FSOC until the report is 

issued. Relevant decisionmakers should have the benefit of the 

findings and recommendations of the Treasury report as they carry 

out their responsibilities with respect to FSOC matters. 

Please answer the following with specificity: 

Q.1. What insurance expertise do you and your respective regulator 

possess when it comes to your role overseeing the business of insurance at FSOC? 

A.1. As one of 10 voting members, the OCC brings considerable expertise to the Financial Stability Oversight Council (FSOC). Many 

of the areas of financial risk on which the OCC focuses as part of 

its supervision of financial institutions—for example, credit, 

194 

liquidity, interest rate, earnings and operational risk—are risks 

that the FSOC evaluates with respect to the criteria for designation of nonbank financial companies. 

In addition, since passage of the Gramm-Leach-Bliley Act of 

1999, national banks have express authority to own so-called ‘‘financial subsidiaries.’’ These subsidiaries are specifically authorized 

to engage in the same set of financial activities, including insurance activities that are permissible for financial holding companies 

supervised by the Federal Reserve. Thus, through our supervision 

and regulation of national banks and their financial subsidiaries, 

the OCC has acquired, and brings to FSOC, important experience 

and perspective concerning insurance. 

Q.2. Do you support the Senate Banking Committee’s recent legislative effort, the Financial Stability Oversight Council Insurance 

Member Continuity Act, to ensure that there is insurance expertise 

on the Council in the event that the term of the current FSOC 

independent insurance member expires without a replacement having been confirmed? 

A.2. We are supportive of efforts to ensure that there is continuity 

of service for the independent member. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM KEITH A. NOREIKA 

Q.1. Has the CFPB effectively coordinated with the OCC on rulemaking and enforcement actions? If not, how could coordination be 

improved? 

A.1. Rulemaking: The CFPB consults with the OCC regarding its 

significant rulemakings. However, as a general matter, the basic 

framework and policy direction of the CFPB’s rulemakings are already in place at the time the OCC is consulted. Early in the 

CFPB’s history, that agency was implementing statutorily required 

regulations in a compressed timeframe. Now that many of the required regulations are in place, coordination could potentially be 

improved by earlier consultations regarding the regulatory framework and direction being contemplated. The OCC stands ready to 

work with the CFPB to continue to improve coordination. 

Enforcement Actions: The OCC endeavors to coordinate with the 

CFPB on enforcement actions, at the examiner and supervisory levels and by way of conference calls and meetings between the enforcement staff of both agencies. Staff have also shared documents 

and other information related to possible enforcement actions. Further, OCC staff communicate with supervisory and enforcement 

staff in the CFPB’s Office of Fair Lending and Equal Opportunity 

to coordinate on supervisory and enforcement matters relating to 

banks for which the two agencies have overlapping jurisdiction. 

Q.2. As you know, in December of 2016 the OCC released a 

whitepaper discussing the possibility of a fintech charter, entitled, 

‘‘Exploring Special Purpose National Bank Charters for Fintech 

Companies.’’ 

Q.2.a. Do you intend to move the OCC forward on finalizing a 

fintech charter? Why or why not? If so, please provide a timeline 

on these efforts. 

195 

1 12 C.F.R. § S. 20(e)(1). 2 Exchequer Club Remarks at https://www.occ.gov/news-issuances/speeches/2017/pubspeech-2017-82.pdf. 

A.2.a. The OCC is continuing to consider in a deliberative way the 

special purpose national bank charter described in the December 

paper. We have no imminent or concrete plans to use the authority 

set out in our regulations1 to charter, or to accept applications to 

charter, an uninsured special purpose fintech national bank. Companies may, however, continue to apply for a charter as a fullservice national bank or Federal savings association, and they also 

may seek a charter under the OCC’s long-established authority to 

charter other types of special purpose national banks, such as credit card banks and trust companies. 

The OCC is continuing to hold discussions with fintech companies that may be interested in a bank charter to better understand 

diverse business models and identify potential risk. These meetings 

have been very informative and provide important insights into the 

changing landscape of the financial services industry. 

Yesterday, I explained these points in greater detail in remarks 

given before the Exchequer Club.2

Q.2.b. Does the OCC have sufficient statutory authorization to implement a fintech charter? Why or why not? 

A.2.b. The OCC has broad authority under the National Bank Act 

to grant charters for national banks to carry on the ‘‘business of 

banking.’’ That authority includes granting charters for special purpose national banks. The OCC clarified eligibility for receiving a 

special purpose national bank charter in 2003 in a regulation, 12 

CFR 5.20(e)(1). Specifically, a special purpose national bank that 

conducts activities other than fiduciary activities must conduct at 

least one of the following three core banking functions: receiving 

deposits, paying checks, or lending money. 

Two lawsuits have been filed, by the New York Department of 

Financial Services and the Conference of State Bank Supervisors, 

respectively, that challenge the OCC’s authority to grant special 

purpose national bank charters to fintech companies. We are currently preparing our responses in both cases, and will vigorously 

defend our authority to charter these special purpose national 

banks. 

Q.2.c. Under what legal circumstances is the OCC allowed to regulate fintech companies? 

A.2.c. As the chartering authority and the prudential regulator for 

national banks, the OCC has clear authority to regulate and supervise a fintech company that is engaged in the business of banking. 

Indeed, the OCC has made clear that a fintech company with a 

special purpose national bank charter would be regulated and supervised like similarly situated national banks. That regulation 

and supervision would include, for example, capital and liquidity 

standards, risk management and governance expectations, and regular examination by OCC examiners. 

The OCC also has authority under the Bank Service Company 

Act to regulate fintech companies if they are acting as third-party 

service providers to national banks or Federal savings associations. 

196 

Q.2.d. What concerns, if any, do you have with the OCC’s fintech 

charter, as outlined in the previously mentioned December 2016 

whitepaper? 

A.2.d. As I explained in my Exchequer Club remarks, in my view 

companies that offer banking products and services should be allowed to apply for national bank charters so that they can pursue 

their businesses on a national scale if they choose, and if they meet 

the criteria and standards for doing so. Providing a path to become 

national banks is pro-growth and in some ways can reduce regulatory burden for those companies. National charters should be one 

choice that companies interested in banking should have. That option should exist alongside other choices that include becoming a 

State bank or operating as a State-licensed financial service provider, or pursuing some partnership or business combination with 

existing banks. 

I also believe that a firm that provides banking products and 

services should be regulated and supervised like a bank. That is 

not the case today. Hundreds of fintechs presently compete against 

banks without the rigorous oversight and requirements facing national banks and Federal savings associations. That status quo disadvantages banks in many ways. While charters would provide 

great value to the companies that receive them, the supervision 

that accompanies becoming a national bank would help level the 

playing field in meaningful ways. 

Q.3. As you know, the OCC recently released a bulletin entitled, 

‘‘Frequently Asked Questions to Supplement OCC Bulletin 2013– 

29,’’ which provided some regulatory guidance for banks that partner with fintech companies. However, I am told there is still confusion about such partnerships, including when fintech companies 

will be treated as third-party service providers, as well as the regulatory implications of this arrangement. 

Q.3.a. Should the OCC provide further guidance to banks about 

their partnership with fintech companies, including when fintech 

companies will be treated as third-party service providers, and the 

corresponding regulatory implications for banks? If so, please provide a timeline for such efforts. 

Q.3.b. Under what conditions have onsite bank examiners treated 

fintech companies as third-party service providers? 

A.3.a.–A.3.b. The OCC has issued guidance on the expectations for 

risk management of third-party relationships. The primary guidance document is OCC Bulletin 2013–29, ‘‘Third-Party Relationships: Risk Management Guidance’’ (October 30, 2013). OCC Bulletin 2017–7, ‘‘Supplemental Examination Procedures for ThirdParty Relationships’’ (January 24, 2017), provides examiners and 

banks steps on how to review third-party risk management systems. We published OCC Bulletin 2017–21, ‘‘Frequently Asked 

Questions to Supplement OCC Bulletin 2013–29,’’ (June 7, 2017), 

to address questions on third-party risk management, including 

several that relate to fintech companies. As is the OCC’s practice, 

we will continue to compile and review questions about third-party 

risk management and issue further guidance, when we deem necessary. We have no immediate plans to do so at this time. 

197 

As part of our supervisory process, we encourage banks to contact their local supervisory office or the appropriate headquarters 

divisions to seek clarification on our guidance on the management 

of third-party relationships. The OCC has also established the Office of Innovation, which serves as a central point of coordination 

for the OCC on banks’ interest in fintech, including partnerships. 

The OCC expects that if a financial institution engages, partners, 

or otherwise leverages the services of a third-party service provider, including a fintech firm, bank management should understand, assess, and appropriately manage the risk associated with 

services being provided through the third-party firm. The level of 

due diligence, control structures, monitoring, and oversight should 

be commensurate with the inherent risk of the activity or service 

provided. If the provider service or relationship is critical to the financial institution, we expect strong controls and regular oversight 

and monitoring. 

As part of the supervisory process, examiners may review a financial institution’s third-party risk management program, including a listing or inventory of such relationships. If a fintech is 

included in such a listing or inventory, the examiner would expect 

that relationship to be managed appropriately and in line with 

OCC guidance. If an examiner becomes aware of fintech or other 

companies with which the bank has a business arrangement are 

not being treated as third-party relationships, the examiner may 

follow-up to determine if the relationships are being appropriately 

managed. 

Q.4. As you know, the CFPB may be moving forward on a rulemaking for Section 1071 of Dodd-Frank, which granted the CFPB 

the authority to collect small business loan data. I’ve heard some 

concerns that implementing Section 1071 could impose substantial 

costs on small financial institutions and even constrict small business lending. 

Q.4.a. Are you concerned how a Section 1071 rulemaking could 

hurt small business access to credit? 

Q.4.b. Has the OCC coordinated with the CFPB to ensure that implementing these requirements does not constrict small business 

access to credit? 

A.4.a.–b. As I noted in my testimony, Congress could streamline 

the reporting requirements to which banks—particularly community banks—are subject, freeing the banks’ employees to return to 

the business of banking. In this regard, I specifically suggested 

that Congress could repeal unnecessary information collection provisions such as the requirement stemming from section 1071 of the 

Dodd-Frank Act that banks gather extensive information on business loans. The benefits of such information collection are unclear. 

Concerning CFPB coordination, I note that the CFPB conducts 

its coordination with respect to rulemaking on an interagency 

basis. Rather than consult with each Federal banking agency 

(FBA), it shares draft rulemakings with all the FBAs at the same 

time and collects and responds to comments in a similar fashion. 

The OCC has regularly participated, along with the other FBAs in 

these joint consultations on other rules. To date, the CFPB has 

made a presentation to an interagency task force on its small 

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business loan data rulemaking efforts, but has not yet begun consultations. 

Q.5. Constituents in my State tell me that the EGRPRA report 

came short in highlighting concrete ways to reduce the regulatory 

paperwork burden. 

Q.5.a. What more can the OCC do to reduce the regulatory paperwork burden on community banks? 

Q.5.b. Do any of these changes require statutory authorization? 

A.5.a.–A.5.b. There is broad consensus that community banks need 

regulatory burden relief, including paperwork burden reduction. 

While the Economic Growth and Regulatory Paperwork Reduction 

Act Report outlines ideas the agencies received from the public to 

address this need, shortly after arriving at the OCC, I solicited 

feedback from OCC staff, including the agency’s examiners, for additional ways to reduce burden and improve the efficiency of our 

supervision and regulation of the Federal banking system. I also 

have met with trade and community groups, scholars, and my Federal and State colleges to begin a constructive, bipartisan dialogue 

on how our regulatory system might be recalibrated. 

As the Treasury Report notes, however, congressional action is 

required to implement many of the changes needed to streamline 

regulation and free up resources, particularly for smaller institutions. My written testimony outlines a variety of legislative 

changes that would provide specific relief to community banks, 

thereby strengthening these financial institutions and fostering 

economic growth. I would be happy to work with Congress on any 

of the ideas I submitted. 

Q.6. Our financial system has become increasingly consolidated, as 

community banks either close their doors or merge with larger institutions. 

Q.6.a. Are you concerned about this pattern? 

Q.6.b. What services can these smaller institutions provide that 

larger institutions cannot provide? 

Q.6.c. Are there any benefits that come from consolidation? 

A.6.a.–c. I am concerned that a consolidation trend may result in 

fewer community banks. As I noted in my testimony, the formation 

of new financial institutions is crucial to maintain a vibrant and 

growing economy. To facilitate new entrants into the market, I 

have suggested options for how Congress could streamline the process of forming de novo banks by allowing banks that receive deposits (other than trust funds) to obtain Federal Deposit Insurance 

Corporation (FDIC) deposit insurance more quickly after the OCC 

charters and authorizes new banks to commence business. This approach would reduce the significant delays that plague the current 

process and dis-incent de novo formations. 

The OCC supervises over 1,000 national banks and Federal savings associations in its community bank supervision line of business. These community banks, which range from several million 

dollars to over $1 billion in total assets, play a crucial role in providing consumers and small businesses in communities across the 

Nation with essential financial services and a source of credit that 

199 

are critical to economic growth and job expansion. Throughout the 

country, community bankers help small businesses grow and thrive 

by offering ‘‘hands-on’’ counseling and credit products that are tailored to their specific needs. They fund home purchases; they lend 

to small businesses and farms; and they play key roles in civic, religious and public organizations. In addition, they often invest or 

assist in underwriting municipal bonds funding infrastructure improvements for local communities. Community banks and their 

employees strengthen our communities through their active participation providing staff and monetary resources to support civic life 

in their towns. 

Community banks are important to the OCC, and the OCC is 

committed to fostering a regulatory climate that allows well-managed community banks to grow and thrive. We have built our supervision of community banks around local field offices where the 

Assistant Deputy Comptroller (ADC) has responsibility for the supervision of a portfolio of community banks. We have based our 

community bank examiners in over 60 locations throughout the 

United States, living in the same communities served by the local 

banks they supervise. Approximately two-thirds of our examination 

staff is dedicated to the supervision of community banks. 

Through this supervisory structure, community banks receive the 

benefits of highly trained bank examiners with local knowledge and 

experience, supplemented by the resources and specialized expertise that a nationwide organization can provide. Our bank supervision policies and procedures establish a common framework, but 

tailor our expectations for banks based on each bank’s risk profile. 

We clearly communicate which, or to what extent, each piece of 

guidance applies to community banks. Each bank’s portfolio manager then tailors the supervision of each community bank to its individual risk profile, business model, and management strategies. 

We give our ADCs considerable decisionmaking authority, reflecting their experience, expertise, and first-hand knowledge of the institutions they supervise. 

OCC-supervised community banks, which demonstrated their resilience in the aftermath of the recent financial crisis and recession, face challenges in today’s operating environment. Strategic 

planning and governance risk pose a challenge as banks implement 

plans for adapting business models to respond to changing loan 

demand, a sustained period of low interest rates, and intense competitive pressures, including competition from nonbanks. Community banks also face challenges from demographic changes to the 

communities where they operate, technology advances impacting 

product and services, and attracting and retaining qualified staff. 

Consolidation is one strategic approach to these challenges—banks 

pursue merger and acquisition (M&A) activity to maximize shareholder or franchise value, gain economies of scale, increase market 

penetration, and improve efficiencies. Whether through such M&A 

activity or by growth and adaptation, community banks will continue to play a critically important role in the U.S. financial system 

and economy. 

Q.7. Multiple anecdotes from constituents make it clear that there 

are several Nebraska counties where consumers cannot get a mortgage, due to CFPB regulations such as TRIO and the QM rule. 

200 

What is the best way to address this problem from a regulatory 

standpoint? 

A.7. It is important for regulators, particularly those responsible 

for standard setting, to consider issues and concerns raised by 

stakeholders regarding the impact current regulations have on the 

availability of credit and to adopt appropriate responsive regulatory 

amendments. 

The CFPB has rulemaking authority for the Truth in Lending 

Act (TILA), which includes the TILA–RESPA Integrated Disclosures (TRIO) and Qualified Mortgage (QM) provisions. The OCC 

participates in rulemakings through the statutorily mandated consultation process and provides appropriate feedback to the CFPB 

regarding individual rules. The OCC supervises banks that range 

from small community banks and Federal savings associations to 

multi-trillion dollar institutions that are among the world’s largest 

financial companies. Our ongoing supervisory work offers an efficient channel for soliciting input from a range of supervised institutions regarding the impact of current regulations and any frustrations and concerns about current regulatory requirements. The 

input we receive from our institutions is a key component of the 

feedback that we have provided to the CFPB as part of the consultation process. 

Q.8. Are there concrete ways in which you believe the CFPB has 

improperly tailored regulations to match the unique profile of 

smaller financial institutions? 

A.8. As I stated in my testimony, the OCC is supportive of the need 

to tailor rules to fit the community bank business model. To the 

extent we receive input from community banks regarding concerns 

or frustrations with regulatory requirements, we share those views 

through the consultation process. 

Q.9. My understanding is that very few banks have opened since 

the passage of Dodd-Frank. 

Q.9.a. Why do you believe this is the case? 

Q.9.b. What potential impacts does this have for our financial system? 

Q.9.c. Is there anything more the OCC can do to encourage the 

opening of new banks? 

Q.9.d. Is there anything more Congress should do to encourage the 

opening of new banks? 

A.9.a.–d. Community banks are essential to our Nation’s economic 

growth and prosperity. They play a vital role in meeting the credit 

needs of consumers and small businesses across the country and 

help these businesses thrive by offering products and services tailored to their needs. 

While the OCC recently approved a charter application for a new 

national bank, you are correct that there has been a paucity of new 

bank charters issued since passage of the Dodd-Frank Act. The reasons for this are wide-ranging and include the cost of capital; competition from nonbank financial service providers; and the cost of 

complying with applicable statutory and regulatory requirements. 

In addition, as I noted in my testimony, under existing law, a new 

insured depository institution must obtain the approval of two 

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regulators—the chartering authority (i.e., the OCC for national 

banks and Federal savings associations) and the FDIC. This process results in significant delays and has slowed the formation of de 

novo institutions in recent years. I have suggested options for Congress to consider to address this particular issue. 

While the OCC cannot address all the factors that have caused 

the decrease in new bank charter applications, we are committed 

to minimizing unnecessary regulatory burden for these institutions 

and will continue to consider carefully the effect that current and 

future regulations and policies may have. 

At the same time, there are steps that Congress can take by providing new and existing community banks with more flexibility to 

reduce burdens. For example, as I discussed in my June 22, 2017, 

testimony, Congress could: 

• Modernize the corporate governance requirements for national 

banks by allowing them to adopt fully the corporate governance procedures of, for example, the State in which their main 

office is located, the State, the Delaware General Corporation 

Law, or the Model Business Corporation Act; 

• Provide regulatory relief to community banks, for example, by 

exempting community banks altogether from the obligation to 

comply with the Volcker Rule; and 

• Address areas of uncertainty that national banks face, for example, by codifying the ‘‘valid when made’’ principle (i.e., preserving the original interest terms following a transfer of a 

loan from a national bank) called into question by the Second 

Circuit in Madden v. Midland Funding, LLC. 

Each of these would help create an environment more conducive to 

community bank success and, thereby, encourage applicants for 

new bank charters. I look forward to working with Congress to encourage the formation of de novo banks. 

Q.10. I’m concerned that our Federal banking regulatory regime relies upon too many arbitrary asset thresholds to impose prudential 

regulations, instead of relying on an analysis of a financial institution’s unique risk profile. 

Q.10.a. Should a bank’s asset size be dispositive in evaluating its 

risk profile in order to impose appropriate prudential regulations? 

Q.10.b. If not, what replacement test should regulators follow instead of, or in addition to, an asset-based test? 

A.10.a.–10.b. I share your concern about the use of arbitrary asset 

thresholds for prudential regulation, particularly for midsize and 

regional banks. For midsize institutions, the commonly used $50 

billion threshold can create a barrier to growth as well as a competitive barrier to entry because compliance costs rise dramatically 

for banks with assets of $50 billion or more. Although asset size 

may be appropriate to use as one measure of when and how to tailor regulations, in many cases it may make sense to supplement 

the use of asset size with other measures that better capture a 

bank’s level of risk. For example, other factors to consider could include the nature and complexity of the bank’s activities and the 

prudential regulator’s judgment about the bank’s effectiveness in 

managing risk, which is based on the qualitative and quantitative 

202 

results of examinations. The precise mix of tailoring measures can 

and should vary depending on context. My written testimony provides several context-specific suggestions for how this type of tailoring could be achieved. For example, Congress could give the 

FBAs the authority to issue rules creating an ‘‘off-ramp’’ for the 

Volcker Rule that takes into consideration asset size and the nature and complexity of an institution’s activities. The use of both 

asset size and the nature of the institution’s activities would, in the 

Volcker Rule, allow the FBAs to recognize that smaller institutions 

generally do not engage in the types of risky activities the Volcker 

Rule was intended to address. In contrast, in the stress testing context, an asset threshold may not be necessary. Instead, Congress 

could give the FBAs the flexibility to issue rules that tailor the 

stress testing requirements to be commensurate with risks posed 

by individual institutions or groups of institutions. 

RESPONSE TO WRITTEN QUESTION OF SENATOR COTTON 

FROM KEITH A. NOREIKA 

In your testimony, you stated that the CFPB has a different supervisory approach to bank examinations than the OCC. 

Q.1. Can you explain the differences in approach between the agencies in examining national banks and Federal savings associations 

for compliance with consumer protection requirements? 

A.1. There are a number of differences in the OCC and CFPB approaches to examining for compliance with consumer protection 

laws. Based on the statutory and regulatory requirements, the 

OCC examines each of its institutions on a regular cycle, currently 

every 12 or 18 months depending on the bank’s asset size and rating. At each examination, the OCC reviews areas that are mandated by statute, regulation, or agency policy and also applies a 

risk-based approach to assess the bank’s operations and focus exam 

work on areas of highest risk. As an example, OCC supervisory offices are responsible for identifying and assessing fair-lending risks 

during each supervisory cycle. For institutions with assets of $10 

billion or less, the OCC has the authority to assess compliance with 

the 18 Federal consumer financial laws defined in Title X of DoddFrank, 12 U.S.C. 5481(14). These laws include the Equal Credit 

Opportunity Act, the Fair Debt Collection Practices Act, the Home 

Mortgage Disclosure Act of 1975, the Home Owners Protection Act 

of 1998, the Home Ownership and Equity Protection Act of 1994, 

the Truth in Lending Act, the Truth in Savings Act, and the Real 

Estate Settlement Procedures Act of 1974. In performing this responsibility, the agency focuses its examination resources on areas 

of greatest risk based on that bank’s particular retail business 

model and operations, in the context of the then-current state of 

the legal, regulatory and market environment. For banks with total 

assets of more than $10 billion, the OCC evaluates the quantity of 

risk and the quality of compliance risk management through the 

OCC’s Risk Assessment System and assigns consumer compliance 

ratings. 

The CFPB, however, does not have a similar statutory mandate 

to conduct consumer compliance examinations on a fixed schedule. 

Instead, as we understand it, the CFPB has developed a process 

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that focuses on identifying and addressing across all of its supervised institutions (institutions with over $10 billion in assets), the 

areas of highest risk to consumers throughout the financial services 

industry. We understand that the CFPB implements this approach 

each year by identifying focus areas of high risk to consumers, then 

identifying and scheduling for examination the financial services 

providers (both banks and nonbanks) that it believes pose the 

greatest risks to consumers in these areas. 

As a result of this targeted approach, the number of CFPB ex- aminations of OCC-supervised banks with more than $10 billion in 

assets each year may be limited. In addition, the scope of these 

exams may also be limited to specific rules, lines of business, products or services or other similar areas that have been identified as 

having the highest associated risk to customers. 

RESPONSE TO WRITTEN QUESTION OF SENATOR WARNER 

FROM KEITH A. NOREIKA 

Q.1. Cybersecurity regulation is receiving increased emphasis by 

all financial institution regulators. How do your agencies coordinate with each other to harmonize the promulgation of new cybersecurity regulations? With the increased use of the NIST Cybersecurity Framework by both Federal agencies and the private sector, 

how do your agencies intend to achieve greater alignment between 

the framework and your own regulatory initiatives? 

A.1. The FBAs (OCC, FRB, and FDIC) meet monthly to discuss 

topics of mutual interest. The FBAs also work very closely to assess 

any potential new regulation. The Federal Financial Institutions 

Examination Council (FFIEC) is more expansive in membership 

and includes the FBAs as well as the National Credit Union Administration, the CFPB, and the State Liaison Committee, which 

includes representatives designated by the Conference of State 

Bank Supervisors, the American Council of State Savings Supervisors, and the National Association of State Credit Union Supervisors. The FFIEC’s Task Force on Supervision includes two specific working groups that assess technology and cybersecurity: Cybersecurity Critical Infrastructure Working Group (CCIWG) and 

Information Technology Systems (ITS). These committees meet 

monthly with a primary objective of discussing shared interest and 

assessing and developing any new examiner guidance. 

The FFIEC has a legal mandate to develop common examination 

guidance for the banking sector. The FFIEC has historically and 

currently uses the National Institute of Standards and Technology 

(NIST) security and technology standards as a reference when assessing potential new regulations or developing examiner guidance. 

The CCIWG developed the Cybersecurity Assessment Tool (CAT) 

as a voluntary tool that institutions could use to provide a repeatable and measureable process to inform management of the institution’s risks and cybersecurity preparedness. The FFIEC published 

the CAT in June 2015. The FFIEC worked closely with the NIST 

during the development phase of the CAT and mapped many of the 

CAT declarative statements to standards set forth in the NIST Cybersecurity Framework. NIST references the CAT on their website 

as a tool that incorporates the NIST Framework. The OCC as a 

204 

bank regulator with individual rule writing authority and as a 

member of the FFIEC will continue to consult with the NIST and 

reference the NIST Framework during any consideration of new examiner guidance or potential regulation. 

The CAT does not represent new requirements or guidance. The 

CAT packages existing, often long standing, FFIEC guidance at the 

expected Baseline level to focus on cybersecurity. The CAT is publicly available on the FFIEC website for industry awareness in 

keeping with the regulators’ principle of transparency. The CAT 

may also be used by regulatory agencies during their normal duties. The OCC has implemented the FFIEC CAT in our normal supervisory processes to assess the Federal banking system’s cybersecurity preparedness. 

The OCC also attends the quarterly Federal Banking Information Infrastructure Committee (FBIIC) meetings. The FBIIC includes a broad group (18) of regulators and industry consortiums 

related to the financial services industry. The FBIIC serves as 

mechanism to discuss common approaches and items of mutual interest related to technology and cybersecurity. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TILLIS 

FROM KEITH A. NOREIKA 

Q.1. I’m a proponent of tailoring regulations based off of the risk 

profiles of financial institutions, as opposed to having strict asset 

thresholds that do not represent what I believe is the smart way 

to regulate. But, my question here is really about the importance 

of ensuring that we have a system that is rooted in fundamental, 

analytical, thoughtful regulation so that we can achieve and execute on goals, whether balancing safety and soundness with lending and growth, or encouraging more private capital in the mortgage market to protect taxpayers and reform the GSEs. 

Q.1.a. Do you think that we should use asset thresholds as a way 

to regulate—yes or no? If no, can you provide me with the metrics 

or factors by which a depository institution should be evaluated? If 

yes, please explain. 

A.1.a. Although in some cases asset size may be appropriate to use 

as one measure of when and how to tailor regulations, in many 

cases it may make more sense to supplement asset size with other 

measures that better capture the level of risk a bank presents. One 

such measure is the nature and complexity of the bank’s activities. 

Another is the prudential regulator’s judgment about the bank’s effectiveness in managing risk, which is based on the qualitative and 

quantitative results of examinations. 

The precise mix of tailoring measures can and should vary depending on context. My written testimony provides several contextspecific suggestions for how this type of tailoring could be achieved. 

For example, Congress could give the FBAs the authority to issue 

rules creating an ‘‘off-ramp’’ for the Volcker Rule that takes into 

consideration asset size as well as the nature and level of an institution’s activities. The use of both asset size and activities would 

be appropriate in the Volcker Rule context because it would allow 

the FBAs to recognize that smaller institutions generally do not engage in the types of risky activities the Volcker Rule was intended 

205 

to address. In contrast, in the stress testing context, an asset 

threshold may not be necessary. Instead, Congress could give the 

FBAs the flexibility to issue rules that tailor the stress testing requirements to be commensurate with risks posed by individual institutions or groups of institutions. 

Q.1.b. Section 165 of Dodd-Frank requires enhanced supervision 

and prudential standards for banks with assets over $50 billion. 

This applies to any bank that crosses the asset threshold, without 

regard to the risks those banks pose based upon the complexity of 

the business model. This includes heightened standards on liquidity and capital under the Liquidity Coverage Ratio (LCR) and the 

Comprehensive Capital Analysis and Review (CCAR) which have a 

various assumptions built in that may drive business model. 

Q.1.b.i. I understand under these two regulatory regimes, banks 

have changed certain lending behaviors because of the assumptions 

Federal regulators have made regarding certain classes of assets 

and deposits. Can you provide some examples of how the LCR and 

CCAR have changed the types of loans, lending, and deposits your 

institution holds? 

Q.1.b.ii. Construction lending by banks over the $50 billion threshold has been a source of concern, namely because these enhanced 

prudential standards have treated construction loans punitively. 

This includes construction lending for builders of apartments, 

warehouses, strip malls, and other projects that may have varying 

risk profiles associated with them. However, under the CCAR and 

DFAST assumptions, the regulators have assigned all these categories of lending the same capital requirements. The result is an 

overly broad capital requirement for varying loans that have different risks, a capital requirement that may be greater for some 

loans and lower for others, influencing the decision of many banks 

over the $50 billion threshold to hold less of these assets due to the 

punitive capital requirements associated with them. Have you seen 

a similar corresponding issue with construction loans because of 

the heightened prudential standards? 

Q.1.b.iii. Under the CCAR regulations, Federal regulators routinely assign risk weights to certain assets that Bank Holding 

Companies have on their balance sheets. These risk weights 

oftentime changes the costs associated with holding certain investments, such as Commercial Real Estate. Has this changed the type 

of assets that institutions hold, or caused institutions to alter their 

business plans because of the regulatory capital costs? If so, can 

you provide examples of this? 

A.1.b.i.–b.iii. Banks’ balance sheets have changed since the financial crisis. These changes, which include reducing reliance on shortterm funding, strengthening the quality and quantity of capital, 

streamlining business units, and improving and investing in data 

and associated infrastructure, are likely to improve banks’ resilience. Many factors are driving these changes including banks’ 

strategic reactions to the financial crisis, newly developed or enhanced capital and liquidity planning efforts, and statutory and 

regulatory changes such as the Comprehensive Capital Analysis 

and Review (CCAR) and liquidity coverage ratio (LCR). Banks 

206 

consider all of these factors as they manage their businesses and 

make portfolio decisions. 

It has been our experience that CCAR is consistently the most 

binding capital constraint. Banks often maintain a capital buffer 

above the CCAR requirements due to uncertainty surrounding the 

CCAR assessments and potential future changes in the Federal 

Reserve’s assumptions and model. The capital calculations within 

CCAR and Dodd-Frank Act Stress Test (DFAST) are based on the 

regulatory capital rule, which assigns risk weights based on the 

relative riskiness of broad categories of assets. With respect to commercial real estate (CRE) loans, the capital rule assigns a higher 

risk weight to certain CRE acquisition, development, and construction loans as historically most banks have experienced higher loss 

rates on such loans compared to loans that fund stabilized, completed CRE properties. Similarly, the OCC expects banks to model 

losses for the two categories of CRE loans separately for purposes 

of stress testing. 

Since the LCR rule was implemented, national banks have materially increased their portfolio of high quality liquid assets (or 

HQLA). Since 2009, as the LCR was being developed internationally, the 19 largest national banks added $1.7 trillion of highly liquid assets, a proxy for HQLA, which now represent 29 percent of 

those banks’ assets. The LCR also has transformed liabilities, as 

firms were encouraged to reduce reliance on funding from financial 

entities and short-term repo and increase core deposits and longerterm funding. Core deposits at national banks increased by nearly 

$2.9 trillion from 2009–2016. 

Q.1.b.iv. Do you think that regulators, on a general basis, get the 

risks weights right? 

A.1.b.iv. I think the relevant risk weights are generally appropriate. The regulatory capital rules assign risk weights to assets 

based on the relative riskiness of broad asset categories. The regulatory capital rules went through the public notice and comment 

process and the OCC, FDIC and Federal Reserve considered the 

public comments received when finalizing the rules. 

As part of the rulemaking process, the agencies considered the 

potential cost of the revised capital rules using regulatory reporting 

data, supplemented by certain assumptions and estimates if data 

needed for certain calculations were not available. The FBAs reviewed the results of their respective reviews, as well as the input 

received from commenters during the notice and comment process, 

and concluded that the vast majority of banks had regulatory capital sufficient to meet the revised minimum requirements on a fully 

phased-in basis. In fact, the vast majority had capital sufficient to 

exceed the fully phased-in capital conservation buffer, such that 

they would not face restrictions on capital distributions. 

Q.1.b.v. Fed Governor Tarullo has argued that the $50 BB threshold is too low in terms of an asset threshold for enhanced prudential standards; does this number make sense? Why do we need 

such arbitrary thresholds? Shouldn’t we get away from these 

thresholds and move toward a regulatory system that evaluates 

substance and activities of an institution as opposed to an arbitrary 

number? Why can’t we do that? 

207 

Q.1.b.vi. Does Title I allow the Fed to treat a $51 BB bank in a 

similar manner to a $49 BB bank for the purposes of enhanced 

prudential standards? 

A.1.b.v.–A.1.b.vi. I am concerned that the $50 billion threshold for 

the application of enhanced prudential standards (EPS) under 

section 165 of the Dodd-Frank Act creates an effective barrier to 

competition that protects the market position and competitive advantage of the largest, most complex institutions while imposing 

proportionally higher costs and larger burdens on institutions with 

assets closer to the $50 billion threshold. Consequently, I would 

support efforts to raise the threshold for application of EPS under 

section 165 of the Dodd-Frank Act. I would also support efforts to 

use a qualitative assessment process. Either approach would more 

specifically capture the companies that present the types of risk 

that would require EPS. 

There are several ways to implement these approaches. Congress could take action to amend the $50 billion threshold established by 

section 165 of the Dodd-Frank Act. In the alternative, section 115 

of the Dodd-Frank Act gives the FSOC the ability to make recommendations to the Federal Reserve about the establishment and 

refinement of EPS, including recommendations to differentiate 

among companies subject to EPS on an individual basis or by category, taking into consideration their capital structure, riskiness, 

complexity, financial activities, size, and any other risk-related factor, and recommendations for an asset threshold that is higher 

than $50 billion for contingent capital requirements, resolution 

plans, credit exposure reports, concentration limits, public disclosures, and short-term debt limits. In addition, under section 165(a) 

of the Dodd-Frank Act, the Federal Reserve could differentiate 

among companies with respect to application of EPS, either on its 

own or pursuant to a recommendation from the FSOC and, pursuant to a recommendation from the FSOC, could raise the asset 

thresholds for EPS addressing contingent capital requirements, 

resolution plans, credit exposure reports, concentration limits, public disclosures, and short-term debt limits. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR KENNEDY 

FROM KEITH A. NOREIKA 

Q.1. In response to a question from Chairman Crapo, you re- sponded by saying that not only was changing the $50 billion 

threshold appropriate, but that arbitrary thresholds in general act 

as barriers to entry to higher asset levels. Furthermore, in response to a question from Sen. Shelby, you responded that size is 

not the only factor to consider and that risk profiles are imperative 

when judging appropriateness. 

In light of these responses, do you think that a risk-based formula such as the one already developed and in use by the Federal 

Reserve to determine G–SIB surcharges, could be effectively and 

appropriately used to determine which firms are systemically important and should be subject to increased regulation? 

A.1. Regulators use a variety of measures to tailor their regulations 

to identify and take into account the level of risk an institution 

presents. The Federal Reserve’s risk-based formulas for identifying, 

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and assessing capital against, global systemically important bank 

holding companies (GSIBs) is one example of how a regulator can 

use a variety of measures to assess risk. The Federal Reserve’s formulas use a methodology based on metrics that are correlated with 

systemic significance: size, interconnectedness, cross-jurisdiction 

activity, substitutability, complexity, and short-term wholesale 

funding. To identify GSIBs, each institution is scored by category 

relative to aggregate global indicator amounts across other large, 

global banking organizations and an aggregate systemic indicator 

score is calculated. A bank holding company that exceeds a defined 

threshold is identified as a GSIB. 

This approach has some drawbacks. While metrics such as those 

used by the Federal Reserve to identify GSIBs should be taken into 

account when determining an institution’s level of systemic risk, 

these metrics do not always leave room for a prudential regulator’s 

judgment. Regulators should be able to leverage the insight into an 

institution’s effectiveness in managing risk that they have gained 

through the examination process. This insight is especially important when regulating sophisticated financial institutions. Furthermore, relying on relative measurements of systemic risk profiles 

can make it more difficult for an institution to alter its systemic 

importance through its own actions (such as a reduction in its risk 

profile), since its systemic indicator score is influenced not only by 

its own actions, but also by the actions of other institutions included in the aggregate global indicator. To the extent practicable 

we should strive for methodologies that minimize such relational 

distortions. 

Q.2. You both have spoken about the need to ‘‘right-size’’ or eliminate regulations that are duplicative, costly and that inhibit 

growth. Dodd-Frank added to an already complex set of overlapping capital regimes that could be considerably streamlined by your 

agency without the need for legislative action. Larger regional 

banks that do not pose the kinds of systemic risks as the larger 

global players remain subject to the Advanced Approaches regime 

under Basel. That regime compels regional banks to run complex 

internal capital models, deploying valuable resources and costing 

tens of millions of dollars in compliance costs, all for no risk management benefits. In fact, the Collins Amendment to the DoddFrank Act nullified the relevance of Advanced Approaches by 

requiring large regionals to adhere to the simpler Standardized Approach, which requires higher capital levels. 

Would you support either raising the threshold for application of 

the Advanced Approaches regime from $250B to capture only truly 

global banks, or giving large regionals the opportunity to opt-out of 

this regime? 

A.2. I fully agree that when setting an asset threshold in a regulation, financial institutions on different sides of the asset threshold 

are affected differently. As I said in my testimony, it is a bank supervisor’s job to strike the right balance between supervision that 

effectively ensures safety, soundness, and compliance, while at the 

same time enabling economic growth. Establishing a higher asset 

threshold is one way to provide regulatory relief to institutions that 

do not pose systemic risks. However, I believe that regulators are 

209 

likely to have more success in striking the right balance in the context of capital requirements if they have the flexibility to establish 

standards that are tailored to take risk into consideration. 

Allowing regulators to consider a broader array of factors—such 

as size, complexity, risk profile, and interconnectedness—when developing and implementing capital regulations would allow them to 

better capture the level of risk an institution presents. Using measures that consider the nature and scope of an institution’s activities 

complemented by the prudential regulator’s judgment are critical 

components of an efficient and effective regulatory framework. The 

OCC will work within our current authorities to achieve this aim 

and foster economic growth and opportunity. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORTEZ 

MASTO FROM KEITH A. NOREIKA 

Q.1. In your written testimony to the Committee, you suggested 

that Congress revoke the CFPB’s authority to examine and supervise the activities of insured depository institutions with over $10 

billion in assets with respect to compliance with the laws designated as Federal consumer financial laws. You further suggest 

that Congress return examination and supervision authority with 

respect to Federal consumer financial laws to Federal banking 

agencies. 

When I asked you about this recommendation at the hearing, you 

noted that: 

what we’re seeing in practice is that the CFPB is not enforcing those rules 

against the mid-size banks—the large-small banks to the small-big banks. 

And so we do have a problem of both over- and under-inclusion. And so 

when we get up to the bigger banks, we have a little bit of overlap and 

overkill there. So we need some better system of coordination. 

Q.1.a. Can you elaborate on your comments from the hearing and 

describe which rules the CFPB is not enforcing against ‘‘large-small 

banks’’ to ‘‘small-big banks?’’ Please list specific examples, to the 

best of your ability, of instances where the CFPB failed to catch or 

remediate misconduct at these institutions through the supervisory 

process. 

A.1.a. Based on the statutory and regulatory requirements, the 

OCC examines each of its institutions on a regular cycle, currently 

every 12 or 18 months depending on the bank’s asset size and rating. At each examination, the OCC reviews areas that are mandated by statute, regulation, or agency policy and also applies a 

risk-based approach to assess the bank’s operations and focus exam 

work on areas of highest risk. As an example, OCC supervisory offices are responsible for identifying and assessing fair-lending risks 

during each supervisory cycle. For institutions with assets of $10 

billion or less, the OCC has the authority to assess compliance with 

the 18 Federal consumer financial laws defined in Title X of DoddFrank, 12 U.S.C. 5481 (14). These laws include the Equal Credit 

Opportunity Act, the Fair Debt Collection Practices Act, the Home 

Mortgage Disclosure Act of 1975, the Home Owners Protection Act 

of 1998, the Home Ownership and Equity Protection Act of 1994, 

the Truth in Lending Act, the Truth in Savings Act, and the Real 

Estate Settlement Procedures Act of 1974. In performing this 

210 

responsibility, the agency focuses its examination resources on 

areas of greatest risk based on that bank’s particular retail business model and operations, in the context of the then-current state 

of the legal, regulatory and market environment. For banks with 

total assets of more than $10 billion, the OCC evaluates the quantity of risk and the quality of compliance risk management through 

the OCC’s Risk Assessment System and assigns consumer compliance ratings. 

The Consumer Financial Protection Bureau (CFPB), however, 

does not have a similar statutory mandate to conduct consumer 

compliance examinations on a fixed schedule. 

Instead, as we understand it, the CFPB has developed a process 

that focuses on identifying and addressing across all of its supervised institutions (institutions with over $10 billion in assets), the 

areas of highest risk to consumers throughout the financial services 

industry. We understand that the CFPB implements this approach 

each year by identifying focus areas of high risk to consumers, then 

identifying and scheduling for examination the financial services 

providers (both banks and nonbanks) that it believes pose the 

greatest risks to consumers in these areas. 

As a result of this targeted approach, the number of CFPB examinations of OCC-supervised banks with more than $10 billion in 

assets each year may be limited. In addition, the scope of these 

exams may also be limited to specific rules, lines of business, products or services or other similar areas that have been identified as 

having the highest associated risk to customers. This approach has 

resulted in a substantial number of OCC-supervised banks with 

more than $10 billion in assets that have not received an examination from the CFPB for multiple years. For example, based on information provided to us by the CFPB since 2012, we have calculated that only approximately one-third of OCC-supervised banks 

with more than $10 billion but less than $50 billion in assets are 

subject to consumer compliance examinations from the CFPB annually. As a result, approximately two-thirds of national banks and 

Federal savings associations within the CFPB’s jurisdiction lack 

the necessary supervisory examination of compliance with Federal 

consumer financial laws as the OCC does not have the authority 

to assess compliance for these institutions. 

Q.2. Please also describe specific examples where CFPB supervision of insured depository institutions has led to ‘‘a little bit of 

overlap and overkill’’ for ‘‘bigger banks.’’ What instances informed 

your views expressed in this comment? In what ways has the 

CFPB been too punitive toward ‘‘bigger banks?’’ 

A.2. We have observed an emerging trend of the CFPB focusing its 

supervisory and enforcement activities on banks with asset sizes 

over $50 billion. In 2015 and 2016, the records currently available 

to the OCC indicate that the CFPB examined 41 percent and 34 

percent, respectively, of the largest OCC-supervised banks. During 

the same period, our records indicate that the CFPB examined 12 

percent and 16 percent of OCC-supervised midsize banks (generally 

between $10 and $50 billion in assets). The cumulative result 

therefore, is that the ‘‘bigger banks’’ are the focus of more of the 

CFPB’s supervisory activity. Several of these banks also have, 

211 

during the 5 years of the CFPB’s existence, been subject to simultaneous consumer protection-related enforcement actions by multiple 

regulators. 

In my written testimony, I proposed an approach to address the 

overlap in supervisory authority over consumer compliance matters. In describing the OCC’s proposed approach, the testimony 

uses the analogy of traffic lights—one regulator has the lead responsibility or primary authority to act (i.e., ‘‘green light’’). The 

other regulators have concurrent or back-up authority (i.e., ‘‘red 

light’’). They wait to act until a contingency provided in the law has 

occurred. Such an approach avoids the current situation where, not 

only is there a trending CFPB focus on bigger banks, but there is 

also an emerging practice of multiple regulators taking actions at 

the same time for the same underlying reason. 

Q.3. Since joining the OCC several weeks ago, have you discussed 

with CFPB Director Cordray your concern that ‘‘large-small banks’’ 

and ‘‘small-big banks’’ are receiving inadequate oversight through 

the supervisory process? 

A.3. Yes. 

Q.4. Please describe the asset sizes or other characteristics that define, to your mind, ‘‘large-small banks,’’ ‘‘small-big banks,’’ and ‘‘bigger banks.’’ 

A.4. In my written testimony, I discussed the importance of ‘‘rightsizing regulation,’’ noting the unintended consequences of applying 

statutes intended to address systemic risks that are typically associated with larger, more complex institutions to smaller institutions 

that do not pose those broad, systemic risks. Right-sizing regulation emphasizes tailoring the rules to the business models and risk 

profiles of banks, rather than relying on arbitrary asset thresholds. 

While asset size can be an important consideration, it should be 

combined with considerations of the risks that are present in the 

institution. The latter are generally associated with factors such as 

an institution’s product and service offerings, customer base, target 

markets and geographic locations in which the institution or its 

customers conduct business. Adding these risk considerations may 

change the overall profile of the institution. Therefore, when 

viewed holistically, a bank that falls into the category of a large 

bank in terms of asset size, may have a risk profile that has traditionally been viewed as one associated with a bank that is small 

in asset size. 

In referring to the terms ‘‘large-small banks,’’ ‘‘small-big banks,’’ 

and ‘‘bigger banks,’’ the OCC is combining consideration of asset 

size and risk profile. Large-small banks could be viewed as banks 

that are small in terms of asset size, but have ‘‘large bank’’ risk 

profiles. Similarly, a small-big bank would be one that would be 

considered large in terms of asset size, but have a ‘‘small bank’’ 

risk profile. In these cases, applying the same regulation to all 

large or small banks in terms of asset size would be inappropriate 

as the risk profiles of the banks in each of these asset groups may 

vary. 

212 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM CHARLES G. COOPER 

Q.1. Our financial system has become increasingly consolidated, as 

community banks and credit unions either close their doors or 

merge with larger institutions. 

Q.1.a. Are you concerned about this pattern? Why? 

A.1.a. State regulators are very concerned about this pattern. 

Small, local banks continue to consolidate across the country, leaving many communities without access to financial services and reducing the diversity of the banking system. 

An astonishing 1,715 community banks have disappeared since 

2010, and this trend continues with 54 banks exiting the market 

in the first quarter of 2017. By contrast, only three community 

banks have closed due to failure in 2017. Consolidation leaves consumers with less choice, and diminishes healthy competition within 

the market. 

Prior to the financial crisis, this consolidation was countered by 

new bank formation. However, the current trend of consolidation 

lack a corresponding appearance of new entrants. State regulators 

are concerned that further consolidation and a lack of de novo applications could have drastic effects on credit availability. 

Q.1.b. What services can these smaller institutions provide that 

larger institutions cannot provide? 

A.1.b. According to the Federal Reserve’s 2016 Small Business 

Credit Survey, small banks are a primary source of credit for small 

businesses, and successful small business loan applicants are most 

satisfied with small banks. Community banks have an outsized role 

in small business lending—despite smaller asset size, community 

banks make 45 percent of all small loans to businesses in the 

United States. In fact, small business startups with assets under 

$1 million are most likely to be approved for financing at community banks. Small banks’ small business lending activity levels the 

playing field, allowing for small firms to gain a foothold in the local 

market. Furthermore, community banks hold majority market 

share in the agricultural lending space, originating upwards of 75 

percent of agricultural loans. 

State regulators have seen that these lending activities require 

an understanding of not only the borrower, but also the local community. The effectiveness of this relationship-lending model is reflected in the market share held by community banks in small 

business and agricultural lending, despite smaller asset size. 

Q.2. Multiple anecdotes from constituents make it clear that there 

are several Nebraska counties where consumers cannot get a mortgage, due to CFPB regulations such as TRID and the QM rule. 

What is the best way to address this problem from a regulatory 

standpoint? 

A.2. Regarding the Ability to Repay/Qualified Mortgage (ATR/QM) 

Rule, smaller and less complex institutions have reported that 

stringent documentation requirements to obtain safe-harbor status 

from qualified-mortgage (QM) rules have made mortgage lending 

increasingly unprofitable and more difficult to provide these loans 

to their customers. Recent research indicates that discontinuation 

213 

of residential mortgage origination by community banks is on the 

rise. The CFPB’s QM rule and the ability to repay (ATR) requirements, both made effective in 2014, have had a demonstrable effect 

on community bank residential lending activity. State supervisors 

find this to be a disconcerting trend, as community banks are the 

primary source of mortgage credit in many of our communities. 

State regulators recommend that banks that retain mortgages in 

portfolio should be subject to more flexible underwriting practices, 

as they are fully incentivized to ensure the borrower can meet the 

monthly obligations of a mortgage. Specifically, State regulators 

recommend granting QM status to all loans held in portfolio by 

community banks. This approach reflects the alignment of interest 

between the bank and the borrower, tailoring regulatory requirements to the relationship-based nature of community bank mortgage lending. 

Regarding the RESPA–TILA Integrated Disclosure Rule (TRID), 

State regulators were generally supportive of the Bureau’s efforts 

to streamline the incongruent disclosure requirements, language, 

and definitions in RESPA and TILA. State regulators are supportive of the enhanced consumer protections in the rule, but are 

cognizant of the fact that compliance has been costly and time consuming for smaller banks, leading to delays in the mortgage lending and closing process while providing little benefit to the customer. 

Among the more than 500 community banks that responded to 

the Federal Reserve/CSBS 2016 National Survey of Community 

Banks, 23 percent of total compliance costs were expended on compliance with TRID. In addition to being the most costly, the RESPA 

and TILA regulations were also identified by surveyed bankers as 

the most confusing to administer. Nearly 45 percent of surveyed 

bankers said that the rule either ‘‘slowed the pace of business’’ or 

‘‘delayed closings.’’ Frustration is reflected in the comment of one 

banker who said, ‘‘Only one person in the bank knows how to close 

a loan.’’ It seems that a rule intended to protect the consumer and 

increase understanding of the mortgage process has instead increased confusion for lenders and borrowers alike. State regulators 

believe that the CFPB should assess the quantitative impact of the 

TRID rule to ensure that the onerous compliance requirements are 

not preventing consumers from accessing mortgage credit. 

Q.3. Are there concrete ways in which you believe the CFPB has 

improperly tailored regulations to match the unique profile of 

smaller financial institutions? 

A.3. Examples of CFPB rules that are improperly tailored to the 

unique profile of smaller financial institutions include the Small 

Dollar Lending Rule proposed in 2016 and the 2015 Final HMDA 

Rule. 

The CFPB’s Small Dollar Lending Rule will require any lender 

that makes a single covered small-dollar loan to comply with a 

1,300-page rule. The rule fails to acknowledge the fundamental differences in business model between community banks and payday 

lenders. 

214 

Community banks do not generate a considerable profit from 

their small-dollar lending, and they generally offer these loans as 

an accommodation to existing customers. 

The Bureau has acknowledged that there will be significant consolidation in the payday lending industry as a result of the rulemaking. Following the rule’s finalization, consumer demand for 

small-dollar credit is unlikely to decrease. Therefore, borrowers 

could turn to depository institutions as sources of small-dollar credit. However, the complexity of the proposed rule is likely to discourage banks that currently offer small-dollar credit from continuing 

to do so. It will also make it unlikely that banks will innovate in 

this area by developing new products. 

In addition, the costs associated with the creation of a compliance program specific to small-dollar lending will be prohibitive for 

community banks, especially smaller banks in rural areas. To the 

contrary, large nondepository lenders who are able to automate installment lending that is compliant with the Bureau’s rule will 

have an advantage over relationship lenders. In multiple areas 

within the proposed rule’s commentary, the Bureau asked for comment on whether they should create a de minimis exemption for 

certain segments of the industry. State regulators believe that the 

Bureau should use their authority under Section 1022(3) of the 

Dodd-Frank Act to provide a de minimis exemption from all of the 

rule’s requirements for depository institutions. The exemption 

should apply to institutions that meet certain criteria regarding 

loan volume and the percentage of institutions’ gross revenue resulting from small-dollar lending. An exemption structured in this 

way would allow community banks, credit unions, and community 

development financial institutions (CDFIs) to continue to serve as 

a source of small-dollar credit. 

The 2015 HMDA Final Rule added 25 new data fields that, for 

2018 transactions, institutions must collect, record and (in 2019) 

report. The rule also modified 14 existing data points. In total, covered institutions will be required to collect and report on 48 data 

fields. With respect to the 13 new data points that were required 

to be collected by Dodd-Frank, State regulators generally believe 

that the Bureau has taken appropriate measures to implement the 

Dodd-Frank requirements. 

However, State regulators are very concerned that the new reporting requirements, when viewed as a whole, will impose a disproportionate cost burden on small reporters, especially community 

banks. With the new rule, the Bureau sought to decrease burden 

for small reporters by raising the loan volume threshold from one 

covered loan to 25 covered loans. State regulators are appreciative 

of the attempt to reduce burden on financial institutions that report less than 25 loans, however, it seems that the number was 

chosen primarily to shed more light on the lending practices of nondepository institutions, who previously had to report HMDA data 

only if they originated more than 99 loans. The one-size-fits-all 

loan volume threshold fails to take into account the relationship 

(portfolio) lending business model of small depository lenders. State 

regulators believe that the Bureau, under its delegated authority, 

should consider the necessity and benefit of the chosen threshold 

against the backdrop of every increasing regulatory burden for the 

215 

smallest financial service providers. State regulators believe that 

the Bureau should take a tiered approach to HMDA reporting. For 

example, the tiered approach could consist of a first tier where institutions that make less than 100 loans would be exempt from 

HMDA reporting. A second tier could apply the original HMDA reporting requirements to institutions that originate 100 to 300 

loans. A final tier would apply the expanded HMDA reporting requirements in the final rule to institutions that make in excess of 

300 loans. 

Q.4. My understanding is that very few banks have opened since 

the passage of Dodd-Frank. 

Q.4.a. Why do you believe this is the case? 

A.4.a. State regulators are concerned that the recent decline in the 

number of banks is due to a collapse of entry into commercial 

banking. There are a variety of factors at work that influence the 

lack of new banks—increased regulatory burden, macroeconomic 

factors, and effects of the crisis. Whatever the cause, it is a point 

of concern—a diverse field of banks is essential to meet the credit 

needs of local communities. State regulators have recognized a research gap when it comes to community banks, and consequently 

developed the CSBS–Federal Reserve Community Banking Research Conference, which is going into its fifth year. State regulators hope to identify, through data-driven analyses, which 

primary factors are influencing the lack of new banks. 

Q.4.b. What potential impacts does this have on our financial system? 

A.4.b. New banks encourage competition, innovation, and provide 

credit in communities that may otherwise not have it. Smaller and 

less-complex banks, by the nature of their business model, fulfill an 

important role in local communities. Per recent FDIC research, 

there are 1,200 U.S. counties, encompassing 16.3 million people, 

who would have limited access to mainstream banking services if 

not for community banking organizations. Community banks are 

much more likely to be in nonmetro areas and rural areas, and 

without access to fundamental banking services, those regional 

economies could be negatively impacted. 

Q.4.c. Is there anything more Congress should do to encourage the 

opening of new banks? 

A.4.c. In a general sense, Congress should consider a more tailored 

approach to regulation for the banking industry, one that takes 

into consideration smaller institutions and the way they operate. 

Further, it is essential that individuals with community bank supervisory experience be included at every stage of Federal rulemaking and supervisory process development. Without representation of individuals who understand how the banking business 

model that makes up the majority of the industry operates, de novo 

applications could remain stagnant. We encourage Congress to seek 

out the perspective of State regulators, as a local, on the ground 

perspective is critical to effective policy development. 

Q.5. I’m concerned that our Federal banking regulatory regime relies upon too many arbitrary asset thresholds to impose prudential 

216 

regulations, instead of relying on an analysis of a financial institution’s unique risk profile. 

Q.5.a. Should a bank’s asset size be dispositive in evaluating its 

risk profile in order to impose appropriate prudential regulations? 

A.5.a. No, a bank’s asset size should not be dispositive in evaluating its risk profile. Policymakers have often approached bank 

regulatory requirements based on an institution’s asset size. However, this has led to a fragmented and arbitrary regulatory framework that negatively impacts community banks. State regulators 

are concerned that the current approach to applicable regulation 

falls short in providing a tailored and reasonable approach to community bank regulation, which in turn harms these institutions 

and the communities they serve. For example, Commissioners have 

seen community banks approaching the $10 billion asset mark 

choose to acquire another institution to quickly achieve a size well 

beyond $10 billion (rather than organically grow) to absorb the increased costs of direct supervision by the Consumer Financial Protection Bureau (CFPB or Bureau). 

Q.5.b. If not, what replacement test should regulators follow instead of, or in addition to, an asset-based test? 

A.5.b. CSBS has developed an activities-based approach to defining 

community banks that is based on the Federal Deposit Insurance 

Corporation’s (FDIC) research definition, introduced in 2012. CSBS 

believes the FDIC research definition of a community bank—which 

considers an institution’s business activities, funding characteristics, and geographic footprint—provides a good foundation on which 

to build a more rational regulatory and supervisory framework for 

community banks. 

The FDIC’s research definition is activities-based, while also providing certainty, as the FDIC publishes on a quarterly basis the 

list of institutions meeting this definition. State regulators also 

propose that the FDIC’s research definition can be coupled with a 

petition process for institutions who fall outside the definition to 

petition their chartering authority for designation as a community 

bank. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TILLIS 

FROM CHARLES G. COOPER 

Q.1. I’m a proponent of tailoring regulations based off of the risk 

profiles of financial institutions, as opposed to having strict asset 

thresholds that do not represent what I believe is the smart way 

to regulate. But, my question here is really about the importance 

of ensuring that we have a system that is rooted in fundamental, 

analytical, thoughtful regulation so that we can achieve and execute on goals, whether balancing safety and soundness with lending and growth, or encouraging more private capital in the mortgage market to protect taxpayers and reform the GSEs. 

Q.1.a. Do you think that we should use asset thresholds as a way 

to regulate—yes or no? If no, can you provide me with the metrics 

or factors by which a depository institution should be evaluated? If 

yes, please explain. 

217 

A.1.a. No. Regulation and supervision should be tailored to the 

complexity and risk profile of the institution. As an example, CSBS 

has developed an activities-based approach to defining community 

banks that is based on the Federal Deposit Insurance Corporation’s 

(FDIC) research definition, introduced in 2012. CSBS believes the 

FDIC research definition of a community bank—which considers an 

institution’s business activities, funding characteristics, and geographic footprint—provides a good foundation on which to build a 

more rational regulatory and supervisory framework for community 

banks. 

The FDIC’s research definition is activities-based, while also providing certainty, as the FDIC publishes on a quarterly basis the 

list of institutions meeting this definition. State regulators also 

propose that the FDIC’s research definition can be coupled with a 

petition process for institutions who fall outside the definition to 

petition their chartering authority for designation as a community 

bank. As the complexity and risk profile increases, so should the 

regulatory scheme, with the highest level being the systemically 

important institutions. 

Q.1.b. Section 165 of Dodd-Frank requires enhanced supervision and prudential standards for banks with assets over $50 billion. 

This applies to any bank that crosses the asset threshold, without 

regard to the risks those banks pose based upon the complexity of 

the business model. This includes heightened standards on liquidity and capital under the Liquidity Coverage Ratio (LCR) and the 

Comprehensive Capital Analysis and Review (CCAR) which have a 

various assumptions built in that may drive business model. 

Q.1.b.i. I understand under these two regulatory regimes, banks 

have changed certain lending behaviors because of the assumptions 

Federal regulators have made regarding certain classes of assets 

and deposits. Can you provide some examples of how the LCR and 

CCAR have changed the types of loans, lending, and deposits your 

institution holds? 

A.1.b.i. State regulators experience to date has been that the impact of the LCR and CCAR alone on lending activity is difficult to 

isolate, particularly given market conditions. More broadly, there is 

no doubt that the LCR and CCAR have an impact on the firms by 

consuming resources and adding operating expenses as the banks 

endeavor to meet higher regulatory expectations. It is difficult to 

determine a dollar cost because LCR/CCAR support is woven 

throughout the organizations. 

Q.1.b.ii. Construction lending by banks over the $50 billion threshold has been a source of concern, namely because these enhanced 

prudential standards have treated construction loans punitively. 

This includes construction lending for builders of apartments, 

warehouses, strip malls, and other projects that may have varying 

risk profiles associated with them. However, under the CCAR and 

DFAST assumptions, the regulators have assigned all these categories of lending the same capital requirements. The result is an 

overly broad capital requirement for varying loans that have different risks, a capital requirement that may be greater for some 

loans and lower for others, influencing the decision of many banks 

over the $50 billion threshold to hold less of these assets due to the 

218 

punitive capital requirements associated with them. Have you seen 

a similar corresponding issue with construction loans because of 

the heightened prudential standards? 

A.1.b.ii. I am aware of industry concerns about this. From my position as a regulator, it is difficult to know what loans are not made; 

however, maintenance and the personnel cost of CCAR systems are 

inordinately expensive. It is easy to assume that some of this cost 

has been diverted away from the lending area. This emphasizes the 

need to require this type of testing only on the more complex institutions. 

Q.1.b.iii. Under the CCAR regulations, Federal regulators routinely assign risk weights to certain assets that Bank Holding 

Companies have on their balance sheets. These risk weights often 

time changes the costs associated with holding certain investments, 

such as Commercial Real Estate. Has this changed the type of assets that institutions hold, or caused institutions to alter their business plans because of the regulatory capital costs? If so, can you 

provide examples of this? 

A.1.b.iii. The goal of these risk weightings is to affect the mix of 

assets and investments banks hold, and State regulators have seen 

this occurring. 

Q.1.b.iv. Do you think that regulators, on a general basis, get the 

risks weights right? 

A.1.b.iv. Appropriately calibrating risk weights has proven to be a 

challenge as risk weightings tend to reflect the most recent crisis 

or backwards looking. The elevated risk weights for High Volatility 

Commercial Real Estate (HVCRE) and Mortgage Servicing Assets 

(MSAs) are two instances where risk weights may not accurately 

reflect the risks associated with the underlying asset class. In the 

2017 EGRPRA Report, the Federal banking agencies committed to 

revisiting these particular risk weights; an effort which we have 

and continue to encourage the Federal banking agencies to pursue. 

However, equally important to ensuring that the individual risk 

weights themselves are appropriately calibrated is ensuring that 

the risk weighting system as a whole is appropriately calibrated. 

Specifically, the new exposure categories and risk weights introduced under Basel III should be revisited and potentially eliminated for institutions, such as community banks, where greater 

granularity does not result in greater risk sensitivity but simply 

unnecessary compliance burden. 

Q.1.b.v. Fed Governor Tarullo, has argued that the $50 BB threshold is too low in terms of an asset threshold for enhanced prudential standards; does this number make sense? Why do we need 

such arbitrary thresholds? Shouldn’t we get away from these 

thresholds and move toward a regulatory system that evaluates 

substance and activities of an institution as opposed to an arbitrary 

number? Why can’t we do that? 

A.1.b.v. State regulators believe that a bank’s asset size should not 

be dispositive in evaluating its risk profile. Policymakers have 

often approached bank regulatory requirements based on an institution’s asset size. However, this has led to a fragmented and 

219 

arbitrary regulatory framework that negatively impacts community 

banks. 

Q.1.b.vi. Does Title I allow the Fed to treat a $51 BB bank in a 

similar manner to a $49 BB bank for the purposes of enhanced 

prudential standards? 

A.1.b.vi. No; however, if a bank is getting close to going over the 

threshold, regulatory expectations are that the institution should 

ramp up its processes to be prepared for the new standards. Some 

cite this is as the ‘‘trickle-down effect.’’ 

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