```

[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]

                        IMPLEMENTING BASEL III:
                       WHAT'S THE FED'S ENDGAME?

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
                          AND MONETARY POLICY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 14, 2023

                               __________

       Printed for the use of the Committee on Financial Services      
  

                           Serial No. 118-45
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                               __________

                   U.S. GOVERNMENT PUBLISHING OFFICE                    
54-177 PDF                  WASHINGTON : 2024                    
          
-----------------------------------------------------------------------------------     

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

               PATRICK McHENRY, North Carolina, Chairman

FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California, Ranking 
PETE SESSIONS, Texas                     Member
BILL POSEY, Florida                  NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         BRAD SHERMAN, California
BILL HUIZENGA, Michigan              GREGORY W. MEEKS, New York
ANN WAGNER, Missouri                 DAVID SCOTT, Georgia
ANDY BARR, Kentucky                  STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas                AL GREEN, Texas
FRENCH HILL, Arkansas, Vice          EMANUEL CLEAVER, Missouri
    Chairman                         JIM A. HIMES, Connecticut
TOM EMMER, Minnesota                 BILL FOSTER, Illinois
BARRY LOUDERMILK, Georgia            JOYCE BEATTY, Ohio
ALEXANDER X. MOONEY, West Virginia   JUAN VARGAS, California
WARREN DAVIDSON, Ohio                JOSH GOTTHEIMER, New Jersey
JOHN ROSE, Tennessee                 VICENTE GONZALEZ, Texas
BRYAN STEIL, Wisconsin               SEAN CASTEN, Illinois
WILLIAM TIMMONS, South Carolina      AYANNA PRESSLEY, Massachusetts
RALPH NORMAN, South Carolina         STEVEN HORSFORD, Nevada
DAN MEUSER, Pennsylvania             RASHIDA TLAIB, Michigan
SCOTT FITZGERALD, Wisconsin          RITCHIE TORRES, New York
ANDREW GARBARINO, New York           SYLVIA GARCIA, Texas
YOUNG KIM, California                NIKEMA WILLIAMS, Georgia
BYRON DONALDS, Florida               WILEY NICKEL, North Carolina
MIKE FLOOD, Nebraska                 BRITTANY PETTERSEN, Colorado
MIKE LAWLER, New York
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee

                     Matt Hoffmann, Staff Director
       Subcommittee on Financial Institutions and Monetary Policy

                     ANDY BARR, Kentucky, Chairman

BILL POSEY, Florida                  BILL FOSTER, Illinois, Ranking 
BLAINE LUETKEMEYER, Missouri             Member
ROGER WILLIAMS, Texas                NYDIA M. VELAZQUEZ, New York
BARRY LOUDERMILK, Georgia, Vice      BRAD SHERMAN, California
    Chairman                         GREGORY W. MEEKS, New York
JOHN ROSE, Tennessee                 DAVID SCOTT, Georgia
WILLIAM TIMMONS, South Carolina      AL GREEN, Texas
RALPH NORMAN, South Carolina         JOYCE BEATTY, Ohio
SCOTT FITZGERALD, Wisconsin          JUAN VARGAS, California
YOUNG KIM, California                SEAN CASTEN, Illinois
BYRON DONALDS, Florida               AYANNA PRESSLEY, Massachusetts
MONICA DE LA CRUZ, Texas
ANDY OGLES, Tennessee
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 14, 2023...........................................     1
Appendix:
    September 14, 2023...........................................    39

                               WITNESSES
                      Thursday, September 14, 2023

Baer, Greg, President and CEO, Bank Policy Institute (BPI).......     5
Broeksmit, Robert D., President and CEO, Mortgage Bankers 
  Association (MBA)..............................................     6
Olmem, Andrew, Partner, Mayer Brown LLP..........................     8
Philo, Alexa, Senior Policy Analyst for Banking, Systemic Risk, 
  Economic Justice & Racial Equity, Americans for Financial 
  Reform (AFR)...................................................    10

                                APPENDIX

Prepared statements:
    Baer, Greg...................................................    40
    Broeksmit, Robert D..........................................    57
    Olmem, Andrew,...............................................    66
    Philo, Alexa.................................................    76

              Additional Material Submitted for the Record

Baer, Greg:
    Written responses to questions for the record from 
      Representative Barr........................................    89
    Written responses to questions for the record from 
      Representative Donalds.....................................    90
    Written responses to questions for the record from 
      Representative Waters......................................    92
Broeksmit, Robert D.:
    Written responses to questions for the record from 
      Representative Barr........................................    93
    Written responses to questions for the record from 
      Representative Donalds.....................................   106
    Written responses to questions for the record from 
      Representative Waters......................................   107
Olmem, Andrew:
    Written responses to questions for the record from 
      Representative Donalds.....................................   108
    Written responses to questions for the record from 
      Representative Waters......................................   110
Philo, Alexa:
    Written responses to questions for the record from 
      Representative Barr........................................   112
    Written responses to questions for the record from 
      Representative Donalds.....................................   117
    Written responses to questions for the record from 
      Representative Waters......................................   118

 
                        IMPLEMENTING BASEL III:
                       WHAT'S THE FED'S ENDGAME?

                              ----------                              

                      Thursday, September 14, 2023

             U.S. House of Representatives,
     Subcommittee on Financial Institutions
                       and Monetary Policy,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:02 a.m., in 
room 2128, Rayburn House Office Building, Hon. Andy Barr 
[chairman of the subcommittee] presiding.
    Members present: Representatives Barr, Posey, Luetkemeyer, 
Williams of Texas, Loudermilk, Rose, Timmons, Norman, 
Fitzgerald, Kim, De La Cruz, Ogles; Foster, Sherman, Meeks, 
Scott, Green, Beatty, Vargas, Casten, and Pressley.
    Ex officio present: Representatives McHenry and Waters.
    Also present: Representative Himes.
    Chairman Barr. The Subcommittee on Financial Institutions 
and Monetary Policy will come to order.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Today's hearing is entitled, ``Implementing Basel III: 
What's the Fed's Endgame?''
    I now recognize myself for 4 minutes to give an opening 
statement.
    Federal banking regulators recently proposed several new 
rules to rewrite regulations in the financial system on a 
largely partisan basis. The proposed rule that would have the 
largest effect is a so-called Basel III Endgame proposal. That 
proposal is underdeveloped and misleadingly motivated, and was 
written behind closed doors principally by the Fed's Vice Chair 
for Supervision as part of his holistic review. That proposal 
is being sold partly under the guise of implementing the Basel 
Committee on Banking Supervision's recommended Basel III 
framework, thereby outsourcing U.S. standards to an opaque 
global governance committee in Europe.
    But the proposal put forward goes far beyond those 
recommendations. It would unfortunately put the U.S. ahead in a 
race to a gold-plated top for global capital requirements and 
push the U.S. to the bottom for global competitiveness. The 
proposal would install arbitrary and extreme increases in 
required capitalization for what regulators, Biden 
Administration officials, and Fed stress tests have said is an 
already resilient, well-capitalized U.S. banking system. The 
proposal is partisan, as evidenced by the Fed's and the FDIC's 
Board votes and the lack of consensus and unanimity among Fed 
Governors and FDIC Directors. Partisan rulemaking by Democrat-
appointed Federal banking regulators is a tacit admission that 
they are content surrendering independence of their agencies 
for short-term political gain.
    The Basel-related capital proposal lacks a convincing 
foundation and it is cynical to put it forward as a rationale 
for the non-credible evaluation of the March banking 
instability authored and engineered solely by the Vice Chair 
for Supervision at the Fed. The proposal appears, in many 
areas, to simply be arbitrary and capricious. The proposal was 
put forward with shockingly little quantitative analysis of 
what the impacts would be, and where the unintended 
consequences would be felt, and there is no substantive cost-
benefit analysis.
    Members of this committee from both sides of the aisle 
asked for analysis from the Fed's Vice Chair of Supervision, 
yet the request was essentially ignored. The proposal also 
presents unexplored threats to capital markets, including 
markets for Treasury securities, and no one knows how the 
proposal will interact with other recent proposals by the 
regulators, with yet more seemingly on the horizon.
    In a time of historic inflation, the fastest increases in 
interest rates in modern history, and a growing likelihood of a 
credit crunch, now is not the time to raise capital levels. 
Such action threatens to further constrain credit availability 
and put already-sensitive sectors, such as commercial real 
estate, in further peril. The proposal would be an effective 
repeal by rule-writing of bipartisan congressional intent in 
the S. 2155 Tailoring law, a repeal that has been a partisan 
goal for some even before the March banking stresses and has 
essentially been instructed by President Biden.
    The Basel III Endgame proposal is just a start for 
Democrat-appointed Federal bank regulators. Since that proposal 
was made in July, proposals for long-term debt and resolution 
plans have been put forward, which this subcommittee will 
consider in our next hearing, and we have heard that even more 
is in the pipeline. Yet the regulators in charge will not 
directly tell Congress or the American people and possibly even 
their fellow board members of their plans.
    Federal banking regulation under the Biden Administration 
has become unnecessarily divisive and partisan, which itself is 
an emerging threat to stability. The divisive, underdeveloped, 
and arbitrary Basel III Endgame proposal should be withdrawn 
and replaced with a proposal that focuses on addressing 
problems that exist and uses adequate input from the private 
sector and Congress, as well as robust impact and economic 
analysis.
    The Chair now recognizes the ranking member of the 
subcommittee, the gentleman from Illinois, Mr. Foster, for 4 
minutes for an opening statement.
    Mr. Foster. Thank you, Chairman Barr, and thank you to our 
witnesses for joining us. Today, we will discuss Federal 
prudential regulators' joint proposals to implement the final 
components of Basel III agreements and modify capital 
calculations for U.S. global systemically important banks (G-
SIBs). These proposals modify capital requirements for the 
largest U.S. banks with a goal of ensuring that they 
appropriately account for the risk of their activities and hold 
the necessary assets and reserve to weather periods of 
significant stress in the financial system.
    The 2008 financial crisis and the subsequent taxpayer-
funded bailout of banks and the long-lasting damage to the 
financial health of our country demonstrated the need for 
reforms to ensure the safety and soundness of the U.S. banking 
system. In the years that followed the financial crisis, 
Congress enacted the Dodd-Frank Act, and global regulators 
convened to develop what would become the Basel III framework, 
many facets of which have already been implemented.
    During the passage and implementation of the Dodd-Frank Act 
and the initial implementation of phases of Basel III, many 
predicted that the higher capital requirements would damage the 
competitiveness of the banking industry in the United States. 
They predicted that the increased capital requirements, 
particularly focused on the largest U.S. banks, would make it 
hard for large U.S. banks to remain profitable and to compete 
against both their international competitors and against their 
smaller competitors in the United States.
    In practice, the exact opposite has proven true. These 
firms continued to lend at record levels and earned record 
profits and outcompeted their foreign competitors in the stable 
and growing economy that followed those reforms. But as history 
has shown, threats to the financial system are dynamic, 
difficult to predict, and constantly evolving. Until recently, 
bank failures have been controlled, and have not required bank 
regulators to utilize emergency measures to head off systemic 
risk and contagion in the banking system. In an age of rapid 
financial innovation, internet-driven bank runs, rising 
geopolitical tensions, pandemics, and climate change, 
regulators and Congress must respect the lessons learned from 
the financial crises of our past, while also looking ahead and 
adjusting prudential standards as necessary to account for 
emerging risks.
    The proposals that we are discussing today are necessarily 
complex, totaling more than 1,100 pages. The details are 
important since they will undoubtedly have effects on the 
lending activity, market behavior, and internal operations both 
of the large U.S. banks, which will be directly affected, and 
the other players in the economy which will have to adapt to a 
new equilibrium. Because of that complexity, it is important 
that the public have maximum visibility into both the rules 
themselves and the quantitative consideration that led to the 
final choices made.
    For that reason, in July, I joined Chairman Andy Barr in 
sending a letter to the Federal Reserve Vice Chair for 
Supervision, requiring details of the analysis and supporting 
data used to carry out the holistic review of capital 
requirements that led to the proposals we are discussing today, 
as well as any other supporting data or key assumptions that 
have to be made. We must recognize that this is not a purely 
quantitative operation. The analyses of bank requirements have 
important assumptions that have to be made regarding the 
probability of financial failures for a given level of banking 
and the cost of those financial failures, although it is 
unlikely those will be exactly calculable ever, but it is 
important the public see the key assumptions.
    The Federal Reserve's response to date has not included 
this information we asked for, and I urge them to be more 
forthcoming. With that said, I look forward to hearing the 
perspectives of our witnesses today, and thank you again, Chair 
Barr, for holding this hearing.
    Chairman Barr. Thank you to the ranking member. The Chair 
now recognizes the Chair of the full Financial Services 
Ccommittee, the gentleman from North Carolina, Chairman 
McHenry, for 1 minute.
    Chairman McHenry. Thanks, Chairman Barr. The Biden-
appointed Federal banking regulators had the opportunity to 
learn from the March banking instability. They had the chance 
to productively engage with Congress and propose reasonable 
changes to regulation to improve safety, soundness, and 
stability. Instead, they took advantage of a crisis to justify 
their long-held, politically-motivated priorities.
    Members of this committee on both sides of the aisle have 
asked for the economic analysis to justify the Basel-related 
proposals. The Fed's Vice Chair for Supervision has essentially 
ignored that request. We need to know how this will impact 
inflation, which accelerated in August. What about the Fed's 
rate policy, how does it affect that, or credit availability, 
how does it affect that or the cost of credit? We need to 
answer these questions for the American people whose day-to-day 
lives will only get harder if this is implemented. That is why 
Committee Republicans sent a letter this week calling on 
Biden's regulators to rescind this deeply-flawed proposal. We 
need to see the economic analysis, the American people need to 
understand the justification, and we need to hold them 
accountable. I yield back.
    Chairman Barr. The gentleman yields back. The Chair now 
recognizes the ranking member of the Full Committee, the 
gentlewoman from California, Ranking Member Waters, for 1 
minute.
    Ms. Waters. Thank you very much. We certainly did receive a 
wake-up call this spring with the failures of Silicon Valley 
Bank, Signature Bank, and First Republic Bank. It became clear 
that we need to improve safety and soundness rules for large 
banks, given the systemic risks they can pose. To that end, 
regulators propose to strengthen bank capital requirements for 
the largest banks to ensure that, among other things, they hold 
sufficient capital for unrealized losses in their securities 
portfolios.
    I am talking about the Federal Reserve, the Federal Deposit 
Insurance Corporation, and the Office of the Comptroller of the 
Currency. They all are urging us to make sure that we do what 
is necessary to ensure the safety and soundness of our banks. 
Their proposal would also implement an international agreement 
that the United States made with other countries in 2017 that 
Mr. Trump's regulators ignored while they prioritized 
deregulating big banks that could put our economy at risk. Here 
is the bottom line: We need stronger rules, not deregulation, 
to avoid future crises.
    Chairman Barr. The gentlelady's time has expired.
    Ms. Waters. I yield back.
    Chairman Barr. Today, we welcome the testimony of Mr. Greg 
Baer, the president and chief executive officer of the Bank 
Policy Institute; Mr. Robert Broeksmit, the president and CEO 
of the Mortgage Bankers Association; Mr. Andrew Olmem, a 
partner at Mayer Brown; and Ms. Alexa Philo, a senior policy 
analyst for banking, systemic risk, economic justice & racial 
equity at Americans for Financial Reform. We thank each of you 
for taking the time to be here.
    Each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony. And without objection, 
each of your written statements will be made a part of the 
record.
    Mr. Baer, you are now recognized for 5 minutes for your 
oral remarks.

    STATEMENT OF GREG BAER, PRESIDENT AND CEO, BANK POLICY 
                        INSTITUTE (BPI)

    Mr. Baer. Chairman Barr, Ranking Member Foster, and members 
of the subcommittee, thanks for the invitation to testify 
today. Congressional attention here is important, given the 
stakes for the U.S. economy. It is further warranted because 
the agency's proposal would constitute a de facto repeal of 
regulatory tailoring legislation that Congress passed on a 
bipartisan basis in 2018.
    Before getting into the details of the proposal, I would 
like to dispel three misunderstandings that have arisen around 
it. First, some have suggested that it is a response to the 
failure of Silicon Valley Bank and a few others in March 2023. 
Those banks failed for two reasons: interest rate risk; and 
liquidity risk. The proposed Basel rule has nothing to do with 
liquidity risk or interest rate risk. It is about everything 
else: credit risk, market risk, operational risk, counterparty 
credit risk, and risk on derivative instruments. It is apples 
and oranges or apples and refrigerators.
    Second, some have suggested that this proposal is needed 
because bank capital models understated risk and caused the 
global financial crisis. An undisputed fact: No U.S. bank had 
adopted the internal models approach to capital assessment by 
2008. The global financial crisis occurred on the watch of a 
Basel-standardized approach, remarkably, a standardized 
approach that this proposal will continue.
    Third, some believe that while significantly higher capital 
charges will push activity out of the banking system, there is 
no problem with that, as nonbanks will pick up the slack. There 
are a lot of problems with that. Banks lend at intermediated 
lower rates than nonbanks not because they are kinder or 
dumber, but rather because their deposit base gives them a 
lower cost and more stable source of funding. As a result, 
banks are the only reliable lenders during an economic 
downturn.
    I remember asking a fintech executive in March of 2020 how 
her firm had weathered the crisis. Her answer was, ``It was 
easy. We just stopped lending.'' Consistent with that, very 
recent research from the Bank for International Settlements 
found that non-financial firms cut lending by about 50 percent 
more than banks in the face of financial shocks.
    Turning to the proposal, the second half of the proposal 
was a series of formulas setting a risk weight for every bank 
loan or exposure, and the first half is a description of those 
formulas. What the proposal is oddly lacking is any explanation 
for how those risk weights were, in fact, derived. The proposal 
contains almost no analysis of the absolute or relative risk of 
the underlying assets or exposures. The absence of detailed 
historical analysis is incredible, given that the agency 
possess a massive database of historical experience and have 
easy access to market data. In place of analysis, the agency 
simply set the 2017 agreement negotiated by Agency staff in 
Basel as a minimum requirement for U.S. banks, but that 
agreement is not a treaty, and it carries no legal weight in 
this country. Furthermore, it was adopted before the Federal 
Reserve began to impose a stress capital charge for many of the 
very same risks contained in the Basel agreement.
    Most importantly, the proposal ignores reality. Since 2010, 
the nation's largest banks have weathered very large 
macroeconomic shocks and market turmoil, benefiting from 
diversification across both product and geographic lines. In 
contrast, the proposed rule implicitly finds that every large 
bank in this country is undercapitalized and requires, on 
average, 16 percent more capital. The proposed rule is 
calibrated at such a high level that it will be difficult to 
offer products that the Basel formulas and the Fed stress 
testers favor. Thus, and to an unprecedented extent in the 
history of this country, the decision of whether you get that 
loan and how it will be priced would be shifted from banks and 
their loan officers to the formula writers in Basel and the 
stress testers at the Federal Reserve.
    Lastly, I should note that while the agency frequently 
refers to this as an implementation of the Basel agreement, the 
clear understanding at the time the Basel agreement was 
announced in 2017 was that it would not increase capital for 
the covered banks and would probably decrease capital. This is 
completely inconsistent with that understanding. If the 
proposed rule were adopted, banks operating in the United 
States would be the only major banks in the world being 
assessed solely based on a standardized approach, would be the 
only banks in the world experiencing an explicit stress capital 
charge on top of that standardized charge, and would be the 
only banks in the world facing a variety of capital add-ons 
above the Basel-agreed risk rates. And we don't know why, 
particularly for the regional banks, which Congress 
specifically said should be exempt from this kind of treatment.
    Thank you for your time.
    [The prepared statement of Mr. Baer can be found on page 40 
of the appendix.]
    Chairman Barr. Thank you, Mr. Baer. Mr. Broeksmit, you are 
now recognized for 5 minutes to give your oral remarks.

 STATEMENT OF ROBERT D. BROEKSMIT, PRESIDENT AND CEO, MORTGAGE 
                   BANKERS ASSOCIATION (MBA)

    Mr. Broeksmit. Chairman Barr, Ranking Member Foster, and 
members of the subcommittee, my name is Bob Broeksmit, and I 
appreciate the opportunity to testify this morning on behalf of 
the Mortgage Bankers Association, the national association 
representing more than 2,200 member firms in an industry that 
employs 390,000 individuals and provides real estate finance-
related services in virtually every community across our 
nation. My over 35 years of experience in real estate finance 
gives me a unique appreciation for the complexity of the 
housing finance system as well as the importance of ensuring 
that it works for all participants.
    MBA believes that this notice of proposed rulemaking (NPR) 
poses unwarranted risks to the U.S. economy, to housing, and 
real estate markets, specifically, and contradicts many of the 
Biden Administration's policy goals. This includes efforts to 
close the racial homeownership and wealth gaps, the provision 
of affordable housing, the promotion of competition over 
consolidation, and the upcoming unveiling of a final Community 
Reinvestment Act rule.
    It is still unclear how the NPR interacts with other 
regulatory proposals and how these rules collectively could 
stunt economic growth and credit access needed to support the 
creation of more affordable housing from the largest providers 
of capital in the country. It is also unclear what specific 
problems the NPR is trying to, solve considering that the 
Federal Reserve and the U.S. Treasury have consistently stated 
that the banking system is strong. For example, capital ratios 
of large banks operating in the U.S. have more than doubled 
since the great financial crisis, and more than a decade of 
real-life experience has demonstrated that banks have adequate 
capital to withstand significant economic shocks. In fact, 
recent stress test results confirm that the banking system is 
safe and well-capitalized.
    The large increases in capital standards will likely stunt 
macroeconomic growth and reduce banks' participation as single-
family and commercial multi-family lenders and servicers, and 
as providers of warehouse lines and mortgage servicing rights 
financing. The proposed changes effectively increase capital 
requirements at larger banks by about 15 to 20 percent, large 
enough to impact which lines of business banks choose to 
withdraw from or support.
    The proposal makes significant changes to how banks 
calculate their risk-weighted assets and imposes several 
additional requirements on banks with assets of $100 billion or 
more, including lowering the cap on regional banks' holdings of 
mortgage servicing rights to 10 percent of capital less than 5 
years after it was raised to 25 percent to encourage more banks 
to service mortgages. And under the proposal--get this--every 
million dollars of capital an impacted bank allocates to 
mortgage lending would translate to at least $7 million less 
lending to first-time homebuyers who can't come up with a 20-
percent down payment.
    This, in turn, could cause banks to pull back even further 
from the mortgage business, making homeownership less 
attainable to first-time homebuyers and low- and moderate-
income borrowers with smaller down payments. These borrowers 
overwhelmingly rely on low down payments to attain 
homeownership, and the proposed capital rule could discourage 
bank portfolio lending to these borrowers, driving all low-
down-payment activity to the Government-Sponsored Enterprises 
(GSEs) or government-insured and guaranteed programs. As a 
result, the proposed requirements could undercut the Community 
Reinvestment Act (CRA) and Special Purpose Credit Programs that 
leverage portfolio lending as strategies to close the racial 
homeownership and wealth gaps.
    The failure of the proposal to provide any credit 
whatsoever for private mortgage insurance effectively defeats 
the purpose of that insurance and significantly increases costs 
for homebuyers. A capital regime that recognizes the mitigation 
of credit risk provided by private mortgage insurance is not 
only far more efficient, but also reduces costs and improves 
affordability for first-time and underserved homebuyers who 
cannot make a 20-percent down payment. Given ongoing affordable 
housing challenges, regulators should be taking steps that 
encourage banks to better support real estate finance markets. 
This proposal does precisely the opposite, despite near record 
low single-family delinquencies and pristine underwriting.
    In conclusion, MBA strongly opposes certain provisions of 
the proposal that undermine the mortgage market, and takes 
exception to the extremely scant economic analysis regarding 
how the changes will affect the economy, the single-family 
housing market, and the commercial real estate finance markets. 
Thank you for the opportunity to testify this morning, and I 
look forward to answering your questions.
    [The prepared statement of Mr. Broeksmit can be found on 
page 57 of the appendix.]
    Chairman Barr. Thank you. Mr. Olmem, you are now recognized 
for 5 minutes.

      STATEMENT OF ANDREW OLMEM, PARTNER, MAYER BROWN LLP

    Mr. Olmem. Chairman Barr, Ranking Member Foster, and 
members of the subcommittee, thank you for the opportunity to 
discuss the recently-proposed Basel III Endgame proposal. My 
testimony today is given in my personal capacity and not on 
behalf of Mayer Brown or any of its clients.
    The Basel III Endgame proposal represents a major shift in 
bank regulatory policy. By design, the proposal will have 
substantial long-term consequences for American households, 
businesses, and the overall economy. Yet, the significance of 
the proposal is not only its economic impact. The proposal does 
not satisfy well-established, congressionally-prescribed 
procedural requirements intended to ensure transparency, 
informed decision-making, and accountability.
    As if these errors are not enough of a problem, there is a 
more fundamental problem with the proposal. It disregards 
Congress' mandates governing capital requirements. The 
problematic nature of the proposal is particularly 
consequential because capital requirements are among the most 
important regulations in economic policy. They not only ensure 
that the banking system is safe and sound but also influence 
the allocation of credit, determining if and on what terms 
credit is extended and by whom. Improperly-calibrated capital 
requirements can undermine economic growth and potentially 
threaten the stability of the financial system. It is therefore 
critical that capital requirements are appropriately calibrated 
and durable, yet this proposal falls short on both accounts.
    First, the proposal fails to provide the data supporting 
its policy choices and prevents an effective notice-and-comment 
period. Under the Administrative Procedure Act (APA), notice 
and comment is part of the process of formulating the rule. It 
is designed to provide an agency with valuable information from 
the public about how a rule could operate and its potential 
impact so that the agency can then use the information to 
improve the rule. That is why it is hard to understand why the 
banking agencies omitted the supporting data. The public could 
have used the data to provide more-informed comments and 
thereby help improve the rule. If the proposal is sound, the 
data will support it. If not, the proposal should be changed as 
the APA requires.
    The proposal also provides inadequate information about its 
potential impacts, including on lending to consumers and small 
and medium-sized businesses. It also does not discuss whether 
it could trigger mergers or change the structure of the banking 
industry. The rush to complete this proposal has left key 
questions unanswered. It has also left the proposal vulnerable 
to legal challenges under the APA.
    In addition, the proposal disregards Congress' specific 
directive contained in both the Dodd-Frank Act and S. 2155 that 
the Federal Reserve tailor capital requirements. The law 
clearly states that the Federal Reserve, ``shall differentiate 
among companies based on the individual basis by category, 
taking into consideration their capital structure, riskiness, 
complexity, financial activity, size, and any other risk-based 
factors the board deems appropriate.''
    Despite that clear language, the proposal embraces uniform 
capital requirements for all banking organizations with $100 
billion or more in assets, and all but eliminates the 
prudential tailoring scheme adopted by the Fed just 4 years 
ago. In the entire 1,087-page proposal, tailoring is mentioned 
only in a single footnote. A uniform one-size-fits-all 
regulation may be easier for banking agencies to implement and 
enforce, but Congress recognized that it does not account for 
the diversity of business models that are essential to finance 
the U.S.'s $23-trillion economy.
    That is why Congress enacted tailoring mandates in not one, 
but in two statutes in just the last 13 years. If the banking 
agencies believe that the tailoring mandates impede their 
ability to craft appropriate capital standards, the 
constitutionally-prescribed course is to request that Congress 
change the statute. Otherwise, tailoring and the APA remain the 
law of the land. It is the legal obligation of independent 
agencies to follow the statutory mandates established by this 
institution, not to selectively choose which to disregard.
    Going forward, what should be done to address the serious 
problems with the proposal? There is a common-sense solution. 
For the Basel II Capital Accord, the banking agencies first 
issued an advance notice of proposed rulemaking (ANPR). The 
banking agencies should now follow this precedent using a 
revised proposal that complies with their statutory mandates. 
Proceeding first with an ANPR allows for more time for 
thoughtful analysis of the proposal's potential impacts. 
Analysis and the law should determine how the Basel Endgame 
proceeds. It is something we all should be able to agree upon. 
If Congress can help facilitate this prudent shift in approach, 
the country will be better for it. Thank you.
    [The prepared statement of Mr. Olmem can be found on page 
66 of the appendix.]
    Chairman Barr. Thank you. Ms. Philo, you are now recognized 
for 5 minutes to give your oral remarks.

 STATEMENT OF ALEXA PHILO, SENIOR POLICY ANALYST FOR BANKING, 
SYSTEMIC RISK, ECONOMIC JUSTICE & RACIAL EQUITY, AMERICANS FOR 
                     FINANCIAL REFORM (AFR)

    Ms. Philo. Thank you very much. Good morning. Thank you, 
Chairman Barr and Ranking Member Foster, for the opportunity to 
testify, and thank you, Chairman McHenry and Ranking Member 
Waters.
    I am the senior policy analyst on banking and systemic risk 
at Americans for Financial Reform (AFR), a coalition-based 
organization dedicated to advocating for a financial sector 
that serves workers and communities in the real economy, and 
for economic and racial justice. Before joining AFR, I worked 
at the Fed and in the banking industry on risk frameworks and 
regulatory adherence.
    I would like to talk about the importance for financial 
stability of the agencies following through on the capital 
proposals, the large bank proposal, and the Fed's proposed 
rulemaking on this systemically important bank surcharge. These 
proposals will strengthen banks' ability to withstand stresses 
that can otherwise imperil banks' financial viability, and hurt 
depositors and customers in the economy. Just 6 months ago, we 
were powerfully reminded of how important it is for banks to be 
well-capitalized by the failures of Silicon Valley Bank, First 
Republic Bank, and Signature Bank, the second, third, and 
fourth largest banks to fail in this country. It is notable 
that all three were in the asset size band for which regulators 
had loosened guardrails in 2019.
    We continue to have a dangerous combination of, on the one 
hand, undercapitalization of some products, and, on the other 
hand, compensation practices that incentivize outsized risk-
taking, which puts all banks at greater risk of succumbing to 
contagion like that observed in March 2023. And as we learned, 
without the right standards, a bank can look well-capitalized 
on paper but still lack a sufficient capital cushion to weather 
severe stresses. These capital proposals take very important 
steps to address that.
    One important feature is that the Basel III Endgame 
finishes incorporating lessons from 2008. The megabanks' 
internal models fell short in the 2008 crisis. Regulators have 
placed limits on their use, but as former FDIC Chair Sheila 
Bair notes, the large banks are still relying on internal 
models that in some cases understate their risks and allow them 
to boost their returns. To address this, the Endgame requires 
reduced reliance on internal models, and tells firms to make 
the transition to improved, standardized approaches designed to 
be more risk-sensitive.
    Another important feature incorporates lessons from 2023. 
The proposal restores Basel III requirements for banks in the 
same asset band as the ones that failed in 2023, removes an 
opt-out clause showing unrealized securities losses in 
regulatory capital for the same band and the band above it in 
total asset size. Without an opt-out clause, banks will need to 
be more transparent about the impact of unrealized securities 
losses on capital in a high-interest-rate environment. And 
supervisors, depositors, and investors will be able to more 
clearly appreciate the massive impact the underwater securities 
would have on capital. This capital proposal will put a stop to 
the opt-out that makes these securities losses less clear.
    Now, a main claim of those against the proposals is that 
higher capital standards reduce lending. We disagree. As FDIC 
Chair Gruenberg noted, and as has been validated in studies, 
this is not the case. Equity capital is not locked away from 
supporting the real economy. Rather, it is deployed in numerous 
ways that benefit the bank, its stakeholders, and the economy. 
Also, more-robust capital standards reduce the risk of 
financial crises, which research shows are longer and more 
damaging than other recessionary periods and have a 
disproportionate impact on Black and Latinx, and, I believe, 
rural and other underserved communities. The issue is the 
bankers and bank lobbyists want lower and lower standards that 
make it easier for them to build up excessive risk positions, 
and they have compensation that incentivizes it. Lower capital 
standards also will enable more stock buybacks and dividends 
that also increase compensation.
    To sum up, the agencies should move forward on these 
proposals. More well-capitalized banks are better able to 
provide credit to customers and communities, advancing economic 
justice, and helping the economy work for everyone. Thank you 
very much for the opportunity to testify today.
    [The prepared statement of Ms. Philo can be found on page 
76 of the appendix.]
    Chairman Barr. Thank you. We will now turn to Member 
questions. And the Chair now recognizes himself for 5 minutes 
for questioning.
    At the outset, let me offer, without objection, a statement 
for the record from the Financial Services Forum. Without 
objection, that document will be submitted for the record.
    Let me start with Mr. Baer. I am very concerned about the 
impact on mid-sized and regional banks with the Basel III 
Endgame as proposed. Vice Chair Barr's de facto repeal of the 
bipartisan S. 2155 undoes tailoring, confirming capital 
requirements for all banks above $100 billion, which will 
result in a barbell banking system. We will have some community 
banks that are exempted from this proposal, and we will have 
too-big-to-fail Wall Street banks, but the regional banking 
sector is really in the crosshairs here. And this will result, 
as I said, in a barbell banking system, and it will eradicate 
the diversity that makes the U.S. banking system the envy of 
the world.
    Mr. Baer, please comment on the proposal's impact on the 
regional banking sector?
    Mr. Baer. Sure. Thank you. First, I would just note that 
regional banks now are actually well-capitalized. Their 
challenge currently is actually an earnings challenge, 
especially at a time when deposit costs are rising and loan 
rates are not, and, of course, this would add a massive cost to 
them. If you think about the proposal, under the Basel, they 
were supposed to benefit credit because more granular risk 
weights would lower their credit charges, but here, the U.S. 
regulators have done add-ons, which they like to call, ``gold 
plating.'' Regional banks will also see large operational risk 
charges, so they definitely come out net losers under this.
    And then, more broadly on tailoring, even away from credit 
risk, they are subjected to a whole panoply of regulations that 
are not really fit for them. That includes detailed reporting 
on market risk--and they don't take a lot of market risk--
resolution planning, and the supplementary leverage ratio, 
again, things that aren't really important substantively, but 
also come with a massive compliance burden. And, of course, 
that is one reason Congress enacted S. 2155.
    Chairman Barr. Thank you very much.
    Mr. Olmem, I was very impressed with your testimony 
relating to the Administrative Procedure Act. I suspect that 
many lawyers are salivating at the arbitrary and capricious 
nature of this rulemaking. It was proposed with no meaningful 
public input or quantitative analysis or cost-benefit analysis. 
The Fed said it will begin collecting an onerous amount of data 
from banks after they release the NPR, and the agencies have 
indicated that the provisions in the rule might change over 
time as the agencies speak with the public sector. These are 
process failures, and they mean that the public does not have 
the data on the final proposal to assess during the comment 
period to provide meaningful input on the proposal.
    Mr. Olmem, can you please touch on these many 
administrative law fouls? If the Fed was still molding the 
proposal and collecting data, shouldn't they have proposed an 
ANPR to allow industry experts to provide input?
    Mr. Olmem. Yes, thank you for the question, and just to be 
clear, these aren't just technical process problems. These are 
statutory violations. The Administrative Procedure Act is a 
Federal law enacted by this institution to make sure that when 
agencies engage in rulemaking, they have established a process 
that allows the public to engage and that requires agencies to 
act in an informed basis using the best available data. So, an 
agency simply can't decide on its whim to take a particular 
action. It has to be reasoned and informed to help make sure 
there is good rulemaking in this country.
    Chairman Barr. Thank you.
    Mr. Broeksmit, I want to talk about commercial real estate. 
You talked about residential real estate, so let me talk about 
commercial real estate. I am very concerned that we have $1.5 
trillion of commercial real estate loans coming due. Many of 
them are set at 3.5 percent. They are going to have to 
refinance at 7, 7.5, or 8 percent because of higher interest 
rates; $5.5 trillion of commercial real estate debt is out 
there, and about 50 percent of this is held by commercial 
banks. These loans were financed when rates were around zero 
percent. We know that financial markets will be affected 
immediately by the onslaught of new and onerous regulations. Is 
now the time to undermine the ability of banks to lend and to 
intermediate in commercial real estate markets?
    Mr. Broeksmit. Chairman Barr, we are very concerned about 
the same issue, and it goes back to the issue that all three of 
us have discussed, about the lack of any economic underpinning 
not only to the rule itself, but how it interacts with other 
rules. You have another rule that is being made final for the 
Community Reinvestment Act that discourages banks from making 
multi-family loans for new apartments, for instance, and this 
will interact with that in a way that can really slow down our 
economy.
    Chairman Barr. My time has expired, but I would hope that 
some of the political people at the White House would inform 
the Fed that they don't want a recession right before an 
election. The gentleman from Illinois, Mr. Foster, is now 
recognized.
    Mr. Foster. Thank you, Mr. Chairman. It seems like the 
rubber hits the road here with the risk weighting of assets, 
and there are sort of three general approaches. You can just 
allow the banks to use their in-house home-brew models, which 
are obviously open to gaming. If you suggest standardization 
but simple rules, then the objection you get is, oh, it is just 
a one-size-fit-all. It fits all. It doesn't really reflect the 
idiosyncrasies of our particular bank. And then, if you adopt 
standardized but complex things, people say, oh, that is too 
long, it is too complex. How do you view the tradeoffs between 
those three? Just to get started, do you think that 
directionally, it is a good thing to move away from in-house 
modeling of these risks? Is there anyone who thinks that it is 
a mistake to move away from in-house modeling? Mr. Baer?
    Mr. Baer. Yes. By the way, I think that was a terrific 
summary of why capital regulation is very difficult. It 
actually involves all of the tradeoffs you mentioned and it is 
not easy, so while we are critical, we understand this is not a 
simple matter. But if you talk about the Basel Accord on credit 
risk, the entire purpose of the Basel Accord in 2017 was to 
preserve the use of bank models. That was its core, and as 
Europe and the U.K. have implemented it, they have continued to 
use bank models.
    The idea was that you would allow banks to use models, but 
then there would be a floor to how low the risk weight could be 
produced, and they set that floor at 72.5 percent after a lot 
of haggling. So basically, your internal risk models can't show 
less than 72.5 percent of what a standardized charge would do. 
That seemed like a pretty good compromise.
    I would also note that bank internal models used in the 
United States, which is only really the largest banks under 
what is called the advanced approaches, are back-tested 
constantly. They are back-tested by compliance staff, risk 
staff, audit staff, and, most importantly, by Federal 
examiners. We have been doing this for quite some time. We have 
not seen enforcement actions for gaming or misstating. Research 
that one of my colleagues here and another Ph.D. economist did 
showed that there is actually no evidence that there are 
significant deviations among banks when it comes to modeling 
whether a credit is investment grade or not. So, it is odd to 
expect some of that----
    Mr. Foster. Okay. I would like to spread out the answers a 
little bit, because it is my memory that the internal risk 
models failed pretty spectacularly back in 2008.
    Ms. Philo, do you want to comment on internal risk 
modeling?
    Ms. Philo. You bet. Internal models have been a primary 
focus of the proposal for a reason. There has indeed been 
substantial variation, and the variation is a tremendous 
challenge to be able to interpret and have a level of 
transparency around the models. In modeling, there is something 
called assumptions, limitations, and weaknesses. If you have 
good oversight, your assumptions will be robust. And yet, I 
think for the industry at large, assumptions, limitations, and 
weaknesses is something they are all progressing on, and I 
think we have to have the appropriate humility. So, I believe 
the internal models have been a substantial problem coming out 
of the 2008 crisis, and I believe this proposal is essential to 
remedy that.
    Mr. Foster. Okay. And what about the complexity issue? I 
don't think there is any way to write a brief rule here that 
really reflects the big variety of bank business models. Do any 
of you have any comments on that? Are your objections mainly to 
the details of what is in this complex, and you wish this 
coefficient were different in that there were better data 
behind the coefficient, or do you have problems with the whole 
approach of a complex thing that really reacts differently to 
different businesses?
    Mr. Broeksmit. Ranking Member Foster, I wanted to go back 
to your original question about the three ways one could do 
this, and I think the Basel III risk weights for mortgages has 
that right mix. It is based on loan-to-value, and clearly, a 
loan with a bigger down payment is less risky than a loan with 
a smaller down payment, and that is what the Basel III 
recommendations recommend.
    Mr. Foster. That is loan-to-value at origination or----
    Mr. Broeksmit. Yes.
    Mr. Foster. Okay. Because, obviously, the risk of a half-
paid-off mortgage is a whole lot smaller.
    Mr. Broeksmit. Yes, but it is----
    Mr. Foster. That is, for example, a complexity that you 
could add to this that would reflect the evolving risk of a 
mortgage as it gets paid off.
    Mr. Broeksmit. Which would lower the capital requirements 
as equity improved. Of course, we would be happy if that were a 
part of it. What I am saying is that I think they hit the 
middle ground, but then the regulators gold-plated it by 20 
percentage points, and it is just not warranted.
    Mr. Olmem. What I would add there is, this is why there 
needs to be more data. As you know, capital requirements are 
very complex and there needs to be a very robust process. I 
would note also that the Basel II process took several years. 
There was an ANPR, and multiple proposals, and my testimony 
contains a whole list of all the hearings that this committee 
held over the past several years.
    Chairman Barr. The gentleman's time has expired. The 
gentleman from Florida, Mr. Posey, is now recognized for 5 
minutes.
    Mr. Posey. Thank you very much, Mr. Chairman.
    Mr. Baer, have the Federal Basel III regulators conducted 
an impact study?
    Mr. Baer. Yes. The discussion of costs and benefits in the 
proposal is extremely cursory, contains no data, and does not 
include potential overlaps between that rule and other rules, 
including, most notably, the Fed's stress test. I think 
everyone in academia and regulation understands, contrary to 
some other testimony, that there are costs to raising capital. 
In fact, the whole reason the regulators want a countercyclical 
capital buffer is because they know that when you raise 
capital, that diminishes economic activity.
    In past crises, the regulators have relaxed capital 
standards explicitly to increase growth. The Basel Committee 
estimate is that every 1 percentage point increase in capital 
requirements reduces annual GDP by 16 basis points, which means 
that this proposal would permanently reduce U.S. GDP by $67 
billion a year. That is the Basel Committee of which these 
regulators are a part.
    There is uniform agreement on this in academia. The tough 
thing, of course, is trading off that diminishment in GDP with 
any reduction in the risk to the banking system and a reduction 
in financial stability risk, but this proposal does not do that 
weighing at all. It is a benefit-benefit analysis.
    Mr. Posey. Okay. So, they did a cost-benefit analysis?
    Mr. Baer. There is no rigor whatsoever. I think it is maybe 
a couple of paragraphs, maybe a couple of pages, but it 
basically says, we thought about it and we believe that the 
benefits exceed the cost, but there are no numbers attached to 
that.
    Mr. Posey. Wow. I was going to ask you for the impacts, and 
you have talked about some of the impacts already. After the 
dramatic failure of the banks' supervision related to Silicon 
Valley Bank, might it be more beneficial to reform the banks' 
supervision and promulgate new capital rules, in other words, 
for the bank supervisors to clean up their own house first?
    Mr. Baer. I think part of it was a failure of supervision 
and not incidentally bank management, but again, this was a 
liquidity problem, a depositor concentration problem. If you 
think about it, you never used to ask, ``Do all my depositors 
know each other?'' Well, in Silicon Valley Bank, they were all 
on the same text chain. That is not something other banks do. 
That is not a difficult problem to solve. I think other banks 
have demonstrated that actually their depositors don't know 
each other. They are in different industries in different parts 
of the country.
    I think that should have been the initial focus for how to 
fix this. There are some very smart things you can do around 
ensuring that banks are prepared to borrow with a discount 
window or that the Fed is prepared to lend. There are a whole 
series of smart things you could do here to make the system 
safer. But the answer to a liquidity crisis at a bank that had 
a unique balance sheet is not to say, Truist needs to hold more 
capital for its mortgage loans, or JPMorgan needs to hold more 
capital for its market making. It doesn't have anything to do 
with that. There is nothing holistic about this. This is not a 
tailored or a smart response to what happened in March 2023.
    Mr. Posey. Thank you very much. I had a couple of other 
questions, but you answered them in the context of the other 
questions. So, Mr. Chairman, I thank you for the time, and I 
yield back.
    Chairman Barr. Thank you. The gentleman yields back, and 
now the gentlewoman from California, Ms. Waters, is recognized.
    Ms. Waters. Thank you very much. I will address my first 
question to Ms. Philo. While big banks and Republicans complain 
that this proposal to strengthen capital requirements will stop 
lending and crush the economy, I think it is very important 
that we put their critiques into perspective. To start with, 
Ms. Philo, isn't it true that this proposal does not apply to 
community banks at all? It only applies to large banks with 
more than $100 billion in assets or those with extensive Wall 
Street-like trading operations?
    Ms. Philo. Correct. Thank you, Ranking Member Waters. It 
does not impact community banks, and the preponderance of the 
impacts are on the largest banks, those banks which have relied 
most on internal models in the past, and also in the realm of 
operational risk, where they have had substantial operational 
incidents in their past. Community banks are not impacted, and 
as we know, community banks are essential for making sure 
lending is available through the lifecycle for some of the most 
vulnerable communities in our country.
    Ms. Waters. Ms. Philo, while we have heard some say capital 
was not an issue with the regional bank failures earlier this 
year, we had a Republican witness at an earlier hearing affirm 
that capital was part of the problem with Silicon Valley Bank's 
failure, specifically relating to available-for-sale securities 
for regional banks. As I recall it, there was a run on Silicon 
Valley Bank, and that run occurred when they had to sell off 
their securities portfolio at a big discount and they went to 
the market looking for capital, and that is when everything 
broke out and investors began to understand. So capital, or the 
lack thereof, did play a role in that failure, wouldn't you 
say, Ms. Philo?
    Ms. Philo. Yes, I believe that a critical factor here was 
that you had a certain amount of capital, but there was a lack 
of transparency on how the underwater securities would impact 
that capital. And investors, when faced with uncertainty and a 
lack of transparency, all of a sudden that capital cushion or 
that confidence capital cushion really, frankly, may not be 
enough, and we certainly learned that in 2008. I think there 
are corollaries here in the Silicon Valley Bank context in 
terms of how the investors reacted to the level of capital once 
they knew about those and were face to face with the realized 
losses. Thank you.
    Ms. Waters. I asked Margaret Taylor, a partner at Davis 
Polk, about this when she testified before the committee in 
May. And she responded that, ``I also think that the not 
passing through AOCI in capital, which is something that has 
been on the books since 2013, should be revisited.'' So going 
further, indeed, the Fed found that there was a $1.9-billion 
capital shortcome or nearly 2 percent of its capital when 
Silicon Valley Bank was able to have their unrealized losses in 
their securities portfolio exempted from its capital 
requirements.
    This is an issue that would be addressed in this proposal. 
Fed Vice Chair Barr explained, ``If the bank had already been 
required to include those losses in its reported capital, it is 
less likely that the market and depositors would have reacted 
the same way.'' Furthermore, banks that were required to 
reflect unrealized losses on available-for-sale securities in 
regulatory capital managed their interest rate risk more 
carefully, suggesting that the requirement to include gains and 
losses on available-for-sale securities in regulatory capital 
leads to stronger risk management as well.
    Ms. Philo, we heard testimony from others today that 
capital was not an issue with the failure of Silicon Valley 
Bank. Do you agree with me that we need to reiterate that 
capital clearly was an issue, and that we need to strengthen 
capital requirements by our largest banks, given the risk that 
they pose?
    Ms. Philo. I do. I do believe that capital was an issue, 
and it will potentially remain an issue for that band of total 
assets. Silicon Valley Bank was a highly-vulnerable firm in 
ways that Silicon Valley Bank's board of directors, senior 
management, and Federal Reserve's supervisors failed to act on, 
and one reason for that was a lack of true transparency around 
the precise level of their capital.
    Chairman Barr. The gentlelady's time has expired.
    Ms. Philo. Thank you.
    Chairman Barr. The gentleman from Missouri, the Chair 
Emeritus of this subcommittee, and the current Chair of our 
National Security Subcommittee, Mr. Luetkemeyer, is now 
recognized.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. And I thank the 
witnesses for being here this morning. We had testimony from 
the regulators as well as the bankers involved in the March 
banking crisis in a hearing that we had, and it would appear to 
me that the regulators are probably as much to blame as the 
banks. All of them had business models outside the norm and 
were allowed to continue that outside-the-norm business model 
by the regulators, who, quite frankly, admitted in front of us 
that they didn't do their job.
    So now, it looks to me like we have the regulators saying 
the old adage of, never let a crisis go to waste. It looks like 
we are sitting here now with the regulators, who should be 
finding a way to clean up their own act, of now using this as a 
way to institute a Basel, which, to me, is something we 
shouldn't be concerned about.
    Mr. Baer, why is it a good idea to implement Basel III 
standards, which are European standards, on our American banks, 
on the American banking industry? I see you chuckle, because 
you are like me. This is nonsense.
    Mr. Baer. There is a notion that there should be 
international comity--that is, ``ity,'' not, ``edy''--with 
respect to capital standards, so it is not a bad notion to go 
off and talk about it and try to get banks more or less around 
the world on something for----
    Mr. Luetkemeyer. Wouldn't it be a better idea for the 
European banks to actually follow our models, because we have 
one of the biggest and best financial markets in the world, and 
we want to turn it around and use a failed model of the 
European banks, which are all bankrupt and government takeovers 
basically at this point?
    Mr. Baer. I think the worst of this is that the agency 
staff, not even at the Board level, went over and negotiated 
this, but then have, again, continually added on and 
implemented it here in a way that is not fit-for-purpose.
    To me, the best example of that is, whether it is 
operational risk, market risk, particularly market risk, while 
Basel was considering all of this, the Federal Reserve 
implemented a global market shock and a stress capital buffer 
to cover those risks, then over the years they negotiated in 
Basel a second way to cover that. And every other country in 
the world, I believe, is going to implement the one in Basel 
and we are going to implement both.
    In terms of holistic reviews, you can think about Basel as 
a good place to start, but that does not relieve the agencies 
of the obligation to document the risk weights, to prove--and 
maybe things have changed since 2017--where they got the risk 
weights, why they think this is appropriate, and then to 
consider what else they are doing and how it relates.
    Mr. Luetkemeyer. Okay.
    Mr. Olmem, it would seem to me that by implementing this, 
it would send a message that their stress tests are inadequate 
to actually be able to do the job of predicting a problem, 
understanding how a situation could be resolved, understanding 
how strong a bank may be. If you are going to have to jump up 
the capital ratios here, it looks to me like it is a testimony 
to the fact that stress tests aren't working. How would you 
comment on that?
    Mr. Olmem. One of the interesting things about the proposal 
is it doesn't reflect all of the other work that has been done 
over more than a decade, starting with Dodd-Frank, which I 
think at the time was sold as the final chapter in bank 
regulation, and yet, since then, we have had a whole series of 
additional pile-on regulations. I think a common-sense way to 
think about this is, when is enough enough? And the reaction 
every time a bank fails, which happens in commerce, capitalism, 
is that we go on and have another wholesale revision of capital 
requirements.
    Mr. Luetkemeyer. You mentioned the tailoring situation, and 
we discussed it, the chairman discussed it. It would appear to 
me that if we are going to basically repeal S. 2155 and replace 
it with this one-size-fits-all, that the small banks are going 
to be the losers in this. Would you comment on that?
    Mr. Olmem. I think that is one of the big concerns here, is 
that there is a remarkable diversity of institutions that are 
covered by this and you are going to have a one-size-fits-all 
approach to regulating them, and that over time, the risks will 
converge in business models because that is easier to regulate. 
And losing that diversity in business models really does 
undermine the vitality of our banking system.
    Mr. Luetkemeyer. Thank you for that.
    Mr. Broeksmit, you made a comment that for every million 
dollars worth of capital increase, we lose $7 million of 
lending ability, and I think Mr. Barr mentioned that this is 
going to cost $67 billion in GDP per year. Do you have a cost 
of what it would be for the home mortgage market, what the cost 
is going to be to the consumers, to the banks, and to the 
lenders?
    Mr. Broeksmit. The cost to consumers is that there will be 
fewer sources of mortgage financing and that mortgage servicing 
rights, which this proposal caps at 10 percent instead of 25 
percent, will go down in value. And that affects the price of 
every loan regardless of whether it is made by a bank covered 
by this proposal or anyone.
    Mr. Luetkemeyer. And that is going to really hurt the low- 
and moderate-income folks because of the increased cost of a 
loan.
    Mr. Broeksmit. That is correct.
    Chairman Barr. The gentleman's time has expired. The 
gentleman from California, Mr. Sherman, is recognized.
    Mr. Sherman. Mr. Baer is right to point out that increasing 
capital is not free. It does reduce economic activity, but 
having capital standards that are too low is very expensive. 
Just this year, we saw three banks go under. This was not a 
matter of just a liquidity problem. These banks were bankrupt, 
and the proof is the FDIC sold them for a negative $30 billion. 
So, the market looked at their assets and liabilities and said 
they were vastly underwater. The cost to our system is not just 
the $30 billion that will be recovered, in effect, from 
depositors over coming years, but the lack of confidence, 
particularly in regional and community banks, that are still 
impacting our economy and will for years to come.
    Banks face two types of risks, credit risk and interest 
rate risk, the risk that the borrower won't pay or the risk 
that the borrower will pay, but at a interest rate that is too 
low given the economic conditions at the time and the bank's 
cost of capital.
    In the last war, France relied on fixed fortifications, and 
we saw Blitzkrieg. 2008 was about credit risk, so now, we have 
Basel III. But 2023 was about interest rate risk, and while Mr. 
Barr says Basel III does nothing, he is only mostly right. It 
does way too little with regard to interest rate risk. And 
there is this myth, and I fear Jay Powell buys into it, that if 
interest rates go up, the banks will be fine because, although 
the loans they have made and their portfolios have declined in 
value, their depositors will be lazy and stupid and leave the 
money in low-interest bank accounts. And I don't think that a 
financial system based on the idea that depositors will be lazy 
and stupid over the long term is a sound basis for regulating 
banks.
    One thing that needs to be pointed out is that when you 
focus on credit risk, you take money away from local business 
loans and the construction loans that we need to build more 
apartment buildings because the rents are too high. When you 
fail to focus on interest rate risk, you incentivize the banks 
putting their money in 10-year Treasuries, and 30-year 
Treasuries. Apple can borrow all the money it needs, so a 
system that underrates the risk of lending money to Apple on a 
fixed rate, 20- to 30-year basis, and overstates the risk of 
making loans to people building apartment buildings, and 
building small businesses in my district, is a perverse system.
    Now, we do something under Basel III in the available-for-
sale securities. If they go down in value, that portion of the 
interest rate risk is captured. But what about those that are 
supposed to be held for maturity and what about just the basic 
loan portfolio that is in securities? Basel III is helpful in 
saying, we are not going to rely on the bank's own internal 
modeling, but that is only as good as the new modeling that the 
regulator's come up with, and let's see what they do.
    I am particularly interested, Ms. Philo, in the fact that 
the risk weight capitals on tax equity investments, where the 
bank buys the tax credit from the project developer, will 
increase from 100 percent to 400 percent for many banks. Tax 
equity investments can help low-income housing. That won't be 
affected, but under this rule, clean energy tax equity 
investments would face a four-fold increase under the proposal.
    Ms. Philo, what effect could that have on our ability to 
meet the standards of the Inflation Reduction Act and meet our 
requirements under climate change treaties?
    Ms. Philo. I do appreciate where you are coming from. 
Different risks have different weights, and we are relying on 
the regulators in this process to make sure that they align. I 
think this is one area where we may wish to see more of that. 
And may I say that----
    Mr. Sherman. On behalf of polar bears everywhere, yes. I 
want to go on to one other question.
    Mr. Broeksmit, I am told that we are going to have no 
credit for mortgage insurance. Does that make any sense?
    Mr. Broeksmit. Nonsense. It makes no sense at all. We 
should encourage banks to use other sources of loss-absorbing 
capital in our marketplace, and this gives no credit for 
private mortgage insurance.
    Mr. Sherman. Thank you.
    Chairman Barr. The gentleman's time has expired. The 
gentleman from Texas, Mr. Williams, who is also the Chair of 
the House Small Business Committee, is now recognized.
    Mr. Williams of Texas. Thank you, Mr. Chairman. As we have 
discussed at length today, the Federal Reserve unveiled the 
Basel III Endgame proposal that changes capital requirements 
for financial institutions. Multiple regulators, including Fed 
Chairman Powell, have come before this committee and testified 
that our banking system is already well-capitalized and 
resilient. This proposal is using the bank failures from 
earlier this year as a weak justification for this partisan 
rewrite of bank capital regulations without considering their 
impact. These proposed changes will dramatically affect the 
banking community, and there is a legitimate concern that Basel 
revisions will have a broad impact on small businesses' ability 
to access reliable credit and increase businesses' overall 
borrowing costs. Over the past year, we have seen a 2-percent 
drop in large banks' lending to small businesses. Should 
regulators move forward with the Basel proposal, that number 
will continue to increase.
    Mr. Baer, could you elaborate on how the Basel III proposal 
will impact bank lending and the cost of credit for borrowers, 
and what does this mean for small businesses trying to obtain a 
loan? I am a small business owner. I managed to inherit.
    Mr. Baer. Sure. Thank you. First, I would say it is already 
having an effect. If you listen to earnings calls this quarter, 
you hear about banks already, particularly regional banks, 
talking about risk-weighted asset optimization, which means 
basically shedding the assets that have the higher risk 
weights. There is already a credit crunch beginning in this 
country. One oddity of the proposal is, there is basically a 
100-percent risk weight for corporate loans. There is a 
possibility of a 65-percent risk weight to the extent that the 
bank's internal process rates those as investment grade. There 
is then a requirement in the Basel Accord that those also have 
to be listed on a securities exchange in order to get the lower 
risk weight.
    Europe and, I believe the U.K., did not adopt that. Our 
research shows that it is an entirely spurious requirement, 
that if you look at the actual data--and we have a lot of 
historical data on this--internally-rated investment grade 
loans do just as well, whether the company is listed or not. 
So, there is really no basis for that. But more importantly, we 
also have data through the advanced approaches on what the 
appropriate risk weight really is, and it is more like 38 
percent for corporate loans, and closer to 30 percent for 
investment grade. This proposal has us debating between 65 and 
100 percent, but the real answer is probably closer to 35 
percent. It is just another example of where there was not data 
in this proposal to justify the risk weights that were agreed 
to at Basel, and another example of where they have taken the 
Basel Accord and implemented it in a way that is uniquely harsh 
on American businesses.
    Mr. Williams of Texas. Okay. Thank you. The Biden 
Administration is out of control. Government spending has led 
to record-high inflation, and increased interest rates which 
have made it extremely hard for Americans to buy a home. Now, 
under this Administration, U.S. mortgage rates have shot up 
above 7 percent, the highest they have been in 22 years. The 
Basel III proposal will worsen mortgage markets and reduce 
mortgage availability. Banks will be forced to be more cautious 
when extending credit, making the dream of homeownership for 
many families more and more distant.
    So, Mr. Broeksmit, can you elaborate on the effects that 
Basel III will have on the mortgage market, and will we see 
heightened consequences in an already-struggling market out 
there?
    Mr. Broeksmit. Yes, we will. And the reason is that if 
these increased capital requirements go into effect, banks will 
make fewer mortgage loans and/or they will raise the price at 
which they are able to make those loans because they still have 
to return an appropriate level of return on capital to their 
shareholders, so there will be fewer loans available--less 
choice at a higher cost. And the servicing aspect of this will 
also raise prices on consumers because the mortgage servicing 
value is an integral part of how every mortgage is priced, not 
just mortgages made by these banks.
    Mr. Williams of Texas. My last question is, Federal 
regulators have made U.S. banking standards much more stringent 
than the standards European regulators are imposing on European 
banks, and we have heard this. The U.S. should not be 
pressured, let alone forced by our own regulators to constrain 
American banks. This proposal is creating an unlevel playing 
field with financial institutions and constraining U.S. G-SIBs. 
The gap between U.S. and European capital levels will continue 
to grow, and the consequences of these decisions will drive 
adverse and unwelcome challenges to market access and 
availability of credit.
    So in the time I have left, Mr. Olmem, can you expand on if 
the Basel standards will create a competitive advantage for 
European banks, and what will the effects of the European 
advantage be on the American public and U.S. competitiveness on 
the world stage?
    Mr. Olmem. Thank you for the question, and that is 
certainly one of the key questions that is left unanswered by 
this proposal. There is no real discussion of that competitive 
difference or study. I would just note from kind of a 
geopolitical interest that U.S. banks provide a really valuable 
role in the global financial system, and having them be active 
participants around the globe is good for the world's economy. 
This proposal does contain a series of charges that will make 
it more costly for them to be active in those markets, and I 
think that the long-term implications require further study.
    Mr. Williams of Texas. Thank you. I yield back.
    Chairman Barr. The gentleman from New York, Mr. Meeks, who 
is also the ranking member of the House Foreign Affairs 
Committee, is now recognized.
    Mr. Meeks. Thank you, Mr. Chairman. Let me pick up somewhat 
where my colleague just left off. I am very concerned about 
homeownership, and I know from talking to the NAACP and the 
National Urban League that they were very excited about the 
Special Purpose Credit Programs (SPCPs).
    Mr. Broeksmit, could you provide more background on what 
the Special Purpose Credit Programs are, and will this be 
affected at all by the Basel III Endgame?
    Mr. Broeksmit. It is good to see you, Mr. Meeks, and I 
would be happy to elaborate on this. The Special Purpose Credit 
Programs permit lenders to craft programs that make it easier 
for groups that have historically been disadvantaged in the 
home buying and home financing process to get loans. They can 
be based on majority-minority areas or they can be based on the 
characteristics of the individual borrower. Many banks have 
been very innovative in using SPCPs to tailor programs geared 
toward reducing the racial homeownership gap, which in turn 
reduces the racial wealth gap.
    This proposal increases the amount of capital that banks 
would have to retain on loans with less than 20 percent down, 
very significantly, like, by 40 percent. And that is where my 
earlier comment came in about for every million dollars in 
capital that a bank allocates to mortgages, they could make $7 
million less in mortgages with that amount of capital. So, the 
availability of those programs will go down and/or the rates 
will go up.
    Mr. Meeks. Thank you. And as indicated, I am also the 
ranking member also on the House Foreign Affairs Committee, and 
I do understand that the intent of the Basel III Endgame was to 
improve the comparability of the capital levels across 
institutions and jurisdictions, which makes sense to me because 
I believe in that mission, and I know how important the cross-
Atlantic harmonization is, especially because of how 
interconnectedness. And I think that is the reason why, in 
response to some how interconnected European economies are with 
the United States, whether we like it or not, what happens 
here, affects Europe, and what happens in Europe, affects here, 
so there needs to be that interconnectedness. The goal is 
harmonization to the degree that it would be possible.
    Now, I am told by some that our nation's proposed 
implementation of Basel III goes in a different direction than 
that of Europe. Is that correct, Mr. Baer?
    Mr. Baer. Yes, Congressman, I couldn't agree more. Again, 
starting from the place that when the agreement was announced 
in 2017, the expectation was that capital wouldn't go up in 
this country. It is going to go up 16 percent. Well, no, I 
guess that wouldn't be starting. The idea on credit risk was to 
retain internal models subject to an output floor or some 
parameters. This will be the only country I am aware of that is 
eliminating those, and again, the biggest difference is these 
other nations are not having a stress capital charge on top of 
this to cover many of the same risks. And we also in this 
country still have gold-plated, which is again a political 
parlance for higher G-SIB surcharges. Although they call it a 
G-SIB surcharge, it is really a capital markets surcharge 
because that is what all the components add up to.
    So, this will be the only country that has not only the 
higher market risk capital in the Basel proposal but also a 
separate surcharge that covers many of the same risks. We just 
put out some research on this in the last couple of months, and 
we are deviating significantly from what was agreed and how it 
has been implemented in both Europe and the U.K., and we are 
deviating every time upward.
    Mr. Meeks. And that affects competitiveness?
    Mr. Baer. It certainly affects competitiveness, not in 
every area--U.S. mortgage lenders don't compete with French 
mortgage lenders. The competitiveness is more around capital 
markets. The bigger problem is that we are just wrong that our 
calibration is too high. And whether we are competing with a 
European or a Japanese or a British bank, it just means that 
U.S. businesses and homeowners are going to pay more for credit 
than they ought to, and that more of what has traditionally 
been a banking business will leak out to the non-bank sector, 
where, again, people will pay more and where the government is 
going to have to intervene more frequently because they are not 
equipped and motivated to continue lending in crisis. That is 
the real concern.
    Mr. Meeks. Okay. I only have 15 seconds left, so no one 
could answer my question. But I will just say I have concerns 
also to see whether or not the Basel III Endgame would affect 
money going to Minority Depository Institutions (MDIs) and 
Community Development Financial Institutions (CDFIs), another 
issue which is very important to me. I am out of time, so I 
yield back.
    Chairman Barr. Thank you, Mr. Meeks. The gentleman from 
Tennessee, Mr. Rose, is now recognized.
    Mr. Rose. Thank you, Chairman Barr, and thank you to our 
witnesses for taking the time to be with us today.
    Mr. Olmem, the Basel proposal is expected to increase the 
risk-weighted assets for banks' capital markets activities by 
75 percent, meaning that banks will have a significantly higher 
capital charge for critical capital markets activities that 
they conduct. One such activity that could be adversely 
impacted, in my opinion, is securitization. Do you have any 
concerns that Basel could negatively impact securitization in 
our economy and our capital markets?
    Mr. Olmem. Yes, thank you for that question. That is a 
particular area actually where the U.S. proposals differ 
significantly from the European, and there is not a factual 
foundation to understand why the calculations involved there 
have changed. I would also just note generally about the 
economic analysis around the capital risk is that in the 
proposal itself, it says that the impact on liquidity of the 
proposal is an area that requires further research. That is the 
extent of the economic analysis that is contained in the 
proposal.
    Mr. Rose. Thank you. I appreciate that. And, Mr. Olmem, 
Federal Reserve Governor Michelle Bowman has expressed concerns 
about the rolling back of regulatory tailoring provisions in 
the proposed rule, stating that, ``Collapsing capital 
categories II, III, and IV into a single prudential category 
may call into question whether the Federal Reserve is complying 
with the statutory requirements to tailor prudential 
requirements for large firms.'' Are you worried that the lack 
of tailoring will drive consolidation among regional banks to 
achieve the scale needed for compliance?
    Mr. Olmem. I think this is a serious issue, again, that has 
not been addressed, and it is a common-sense question that one 
would ask when one would put together a proposal like this. But 
again, there is no thorough analysis of that issue in the 
proposal.
    Mr. Rose. I agree. And, Mr. Olmem, do you feel that the 
lack of differentiation in capital rules across such a wide 
range of banks is appropriate?
    Mr. Olmem. Yes. And more importantly, this institution has 
passed, again, in 2 separate bills over the last 13 years, 
legislation saying that tailoring is important. And that is 
what is so striking to see, an independent agency whose charge 
is not to create, but to implement the policy that this 
institution and this committee devises. Instead, here you have 
a clear example of where the institution is disregarding a 
clear directive from Congress.
    Mr. Rose. Thank you. Mr. Broeksmit, home affordability is 
such a present problem due to various decisions, in my opinion, 
by this Administration. This new proposal seems like it would 
make it even more difficult to purchase a home, particularly 
for first-time homebuyers and borrowers who haven't yet saved 
up 20 percent for a down payment and are trying to get a 
conventional loan. Do you think this proposal will make home 
affordability worse, and if so, how?
    Mr. Broeksmit. Thank you, Representative Rose, and thank 
you for your leadership on the trigger lead issue, which we 
appreciate very much. Yes, as I have mentioned before, I do 
think that this will make mortgages even less affordable at a 
time when mortgage rates are at a generational high and when 
the supply of homes is very low, and, therefore, home prices 
keep on marching upward, so it is exactly the wrong time to do 
this. And there is no evidence that the additional capital 
requirements in this proposal have anything to do with the 
underlying risk of the loans themselves. And that is what the 
regulator should be focused on, and there is no evidence at all 
that they have done that.
    Mr. Rose. And what do you say to the regulators to fix 
these unforeseen albeit obvious downstream issues from this 
proposal?
    Mr. Broeksmit. The Basel III standards, which vary by loan-
to-value, meaning that you are allowed to hold less capital 
against a loan where the borrower made a higher down payment, 
are sensible. The additional 20 percentage points that the 
regulators are putting on top of them are nonsensical, so on 
the mortgage side, if you simply went with the Basel III rules, 
you would have a much better result.
    Mr. Rose. And, Mr. Baer, it will take all the time, but I 
will let you answer this for the record. The Basel III Endgame 
proposal seems as if it could negatively impact the housing 
market in an already difficult time, and, frankly, make 
commercial banking's incentive to stay in residential lending 
even less desirable. If your members start shrinking their 
residential lending businesses, what does that do to this 
housing market and to the GSEs? And I am sorry, we are out of 
time, so I will have to let you answer that in writing for the 
record. I yield back.
    Chairman Barr. The time has expired. The gentleman can 
answer that for the record.
    The gentleman from Georgia, Mr. Scott, is now recognized.
    Mr. Scott. Thank you, Mr. Chairman.
    Mr. Baer, let me start with you. You will recall that prior 
to the 2008 financial crisis, our nation's largest banks were 
overly relying on their own models for credit risk, and these 
models failed to predict the magnitude of credit losses during 
the collapse. And this is why our Financial Services Committee 
put strong capital requirements into Dodd-Frank to strengthen 
the banking industry's ability to withstand stresses and 
shocks.
    Since then, our banking system has successfully navigated 
very difficult periods, including the recent 2020 COVID 
economic shock. But now, I am very concerned with the 
unintended economic consequences of this proposed rule and its 
potential impact on our banking institutions as they engage in 
critical market activities. And there was considerable dissent 
and opposition for releasing the notice of rulemaking, 
including from Fed Chair Powell himself.
    On June 17th, Chairman Powell raised concerns that the 
costs of higher capital could diminish banks' roles as 
financial intermediaries and liquidity providers in critical 
markets. Chairman Powell voiced concerns with the scope of the 
proposal. He said, ``exceeding what is required by Basel, while 
also exceeding what we know of our plans for the implementation 
by other large jurisdictions,'' and he specifically referenced 
the EU and the U.K., and Chairman Powell went on to note that, 
``The need to strengthen supervision for firms with assets 
between $100 billion and $260 billion by tailoring these rules 
to reflect the size and risk of these institutions.''
    This proposed rule eliminates tailoring rules under Section 
165 of Dodd-Frank, which requires that the Federal Reserve, 
``shall differentiate among companies on an individual basis or 
by category.'' My question to you, Mr. Baer, is why is it 
important to consider things like risks and size and business 
models and complexities of individual institutions, and what do 
you have to say in reference to my good friend, Chairman 
Powell's, opposition to this rule?
    Mr. Baer. It is a great question, and I appreciate it. I am 
not sure he opposed it. I would characterize it as expressing 
misgivings, but he can speak for himself on that. You can think 
about the proposal as a whole or in parts. As a whole, it is 
raising capital requirements by 16 percent and effectively 
finding that every large bank in this country is 
undercapitalized, and there is no evidence for that. At the 
component levels, it also raises individual concerns, which I 
think the Chair and other Governors raised, like, why are we 
raising market risk capital by 75 percent when that is an 
area--again, completely away from Silicon Valley Bank--where 
banks are continuing to lower risk and still earn good returns?
    We have not talked at all about operational risk. If this 
thing was implemented, 30 percent of the risk-weighted assets 
held by banks would be operational risk assets. Those are 
phantom assets. They are not assets; they are just assets 
created to produce a capital charge. They are supposed to be 
about cyber attacks, but they are really about litigation 
judgments. But the notion that 30 percent of the capital being 
held by U.S. banks would be for a future fine that one of these 
same regulators might impose upon them seems distinctly odd, 
particularly when you realize how much that is going to cost 
borrowers. So right now, you pay a judgment that costs your 
shareholders, but in the future, it is going to cost all your 
customers because you are going to have to capitalize that.
    Mr. Scott. Thank you.
    Mr. Baer. It's wildly disproportionate. That is true for 
all banks. But certainly, for the regional banks, they are 
really in a tough fight right now. They do not need this layer 
of burden on top of the other challenges they are facing.
    Chairman Barr. The gentleman's time has expired.
    Mr. Scott. Thank you very much.
    Chairman Barr. I would let you go a little longer because 
that was good testimony. The gentleman from South Carolina, Mr. 
Timmons, is now recognized.
    Mr. Timmons. Thank you, Mr. Chairman, and I want to thank 
all of the witnesses for being here today. I feel like we are 
watching the same show over and over again but somehow expect 
it to end differently. Everyone wants a prosperous economy. I 
think we can all agree to that. We want it to be stable, and we 
want to be well-prepared to navigate the inevitably turbulent 
waters. They are well-intentioned policies, but they have no 
basis in the real world, and ultimately do more harm than good, 
and it happens again and again. This happened pre-2008, again 
in 2023 with Silicon Valley Bank and Signature Bank, and here 
we are again pushing overly burdensome reforms that will again 
do more harm than good.
    We are going to highlight the last three examples. Let's go 
back to pre-2008. Democrats strongly encouraged banks to loan 
money to people regardless of their credit scores or ability to 
repay those loans. Doing so would be allegedly discriminatory. 
The Financial Crisis Inquiry Commission, which was appointed by 
Congress to determine the causes of the subprime mortgage 
crisis, found that Federal housing policy either was primarily 
the cause of or, at the very least, was a substantial 
contributing factor to the crisis.
    Mr. Olmem, you were on the Hill during that time. Would you 
agree that Federal housing policy was a substantial 
contributing factor to that housing crisis?
    Mr. Olmem. Yes, and I think all studies back up that 
conclusion.
    Mr. Timmons. Okay. And this resulted in millions of 
Americans suffering severe hardship. People lost their jobs. 
People lost their houses. They couldn't buy houses they had 
been planning to buy. Let's go to Silicon Valley Bank and 
Signature Bank. Mr. Olmem, do you agree that Congress spending 
$7 trillion resulted in inflation, which then resulted in an 
increase in interest rates?
    Mr. Olmem. That's a little bit outside my area of 
expertise, but I think most economists would say that it had 
something to do with it.
    Mr. Timmons. Okay. And I just want to point out that if you 
were saving up for a $300,000 house in my district, you were 
expecting to pay around $1,100 or $1,200 a month in a mortgage 
payment. Now, because of interest rates going up, because my 
colleagues across the aisle spent $5 trillion ostensibly 
because of COVID, that same mortgage is about $2,400 or $2,500 
a month. So, they have essentially denied the dream of 
homeownership to the very people that they are allegedly trying 
to help.
    And here we are now discussing proposals to harden the 
economy, to make it more capable of overcoming turbulent 
economic waters to solve a problem that was created by policies 
in Washington. They spent trillions of dollars, they caused 
inflation to go up, interest rates rose, and Silicon Valley 
Bank and Signature Bank failed.
    Mr. Olmem, would you agree that but for interest rates more 
than doubling, would Silicon Valley Bank and Signature Bank 
have failed?
    Mr. Olmem. It is always difficult to do the counterfactual, 
but it is clear that the sharp increase in interest rates was a 
driving factor in the failure of those institutions----
    Mr. Timmons. They grew too fast, and they had to park some 
money somewhere, and they parked it somewhere that didn't work 
because they got upside down with their Treasuries. So now, 
they are proposing structural changes to harden the financial 
system of the United States because the policies that we pushed 
out--I keep saying, ``we'', but I was against all of these--
that they pushed out caused the problem, so now they are going 
to solve it. So, policies that were pushed out by Democrats 
created the problem, and we need to have these new policies 
that will further impede Americans' ability to get mortgages, 
and will further impede the economy's ability to grow.
    Mr. Olmem, do you agree that if all of Basel III is 
actually fully implemented, it will be harder for Americans to 
get a loan, or will it be easier?
    Mr. Olmem. First of all, that is one of the reasons why 
this process is so problematic is we don't really know, and the 
agencies are moving forward in an uninformed manner. They have 
not gone off and done that data to answer those basic 
questions. Now, I think you have heard from the testimony 
today, based on what we do know, that the high probability is 
yes.
    Mr. Timmons. I think we have seen this show again and 
again, and before the Democrats spent trillions of dollars, 
President Obama's Treasury Secretary, Larry Summers, said, 
``This is going to cause inflation.'' And here we are today 
saying that these proposed changes to our financial system will 
make it harder for Americans to get mortgages, will make it 
harder for the U.S. economy to grow, and we need to stop 
causing problems. The Federal Government needs to get out of 
the way.
    With that, Mr. Chairman, I yield back.
    Chairman Barr. The gentleman yields back. The gentleman 
from Illinois, Mr. Casten, is now recognized.
    Mr. Casten. Thank you, Mr. Chairman. I would like to follow 
up in a little more detail on the comments Mr. Sherman raised 
about tax equity markets, and I know it is familiar for some of 
my colleagues. This is where somebody who does something that 
entitles them to Federal tax incentives but doesn't have 
taxable income, finds a partner, typically a bank, who has 
taxable income, and they essentially buy the tax credit by 
buying a minority of the equity in the project in exchange for 
the preponderance of the tax attributes.
    Under the current rules, bank capital that is spent on tax 
equity only has a 100-percent risk weighting unless it is more 
than 10 percent of bank capital, at which point it takes on a 
400-percent risk weighting. The proposed rules in Basel would 
essentially take off the 10-percent cap, oddly and perhaps 
accidentally, except for tax equity on low-income housing. I 
want to park that for a moment. But what that means 
practically, particularly in light of the Inflation Reduction 
Act, which was primarily a tax incentive bill, is that here we 
have this huge investment, tons of investments of private 
capital, and every bank in this space is going to see a 400-
percent increase in their capital requirements if they are 
providing tax equity.
    Mr. Baer, I see you nodding your head on this, so let me 
start with you. But first, Mr. Chairman, I would like unanimous 
consent to introduce a letter from the American Council on 
Renewable Energy, dated August 22nd, to the White House, into 
the record.
    Chairman Barr. Without objection, it is so ordered.
    Mr. Casten. This letter says that annual tax equity 
investments in the clean energy sector could shrink by 80 
percent to 90 percent, and many banks could exit the renewable 
tax equity market entirely if this is implemented.
    Mr. Baer, do you agree with that statement? What are you 
seeing from your members as far as these tax equity 
consequences?
    Mr. Baer. Thanks. First, I will just say that was a better 
summary of the issue than I could have done, so I am glad you 
did it for me. No, we have talked to banks. They would 
absolutely exit this market if their risk weight went from 100 
to 400 percent, and the problem is even broader, which is we 
don't know why they decided to go from 100 to 400 percent. They 
obviously left it at 100 percent for low-income housing tax 
credits, okay, but why not these? Why not others?
    Mr. Casten. Let me stay on that because you are 
anticipating my next question. I don't understand that logic. 
Let's first just back up. Do you believe that the risk profile 
of bank capital that is in tax equity investments for low-
income housing tax equity is substantially different than the 
risk profile for other bank capital that is in tax equity 
investments?
    Mr. Baer. Yes, our understanding is that the loss 
experience, which, again, is what should drive capital rules, 
not the political favorability of the loss experience, with 
both of these has been very good and does not justify a 400-
percent risk weight, which is 4 times what you would have for 
basically a corporate loan. So, I don't believe that there is 
evidence that the loss rates on this are higher than any 
corporate loan you would make.
    Mr. Casten. Okay.
    Mr. Baer. Certainly, there is nothing in the proposal which 
demonstrates that.
    Mr. Casten. Yes. In Basel III, I think they refer to the 
low-income housing investments as community development 
investments, not subject to the 400-percent tax.
    Mr. Baer. Correct.
    Mr. Casten. Would you have any objection to just saying, 
well, let's just say that these tax equity investments in 
renewable energy are also community development investments? 
They preponderantly do help local communities after all.
    Mr. Baer. What I would say is that the Basel agreement is 
not a treaty that the Senate ratified or that this Congress 
passed as a law, so you can do whatever you want. You don't 
need to sidestep the vernacular of the Basel Accord. You can do 
whatever you think is the right thing to do based on the risk 
and the cost.
    Mr. Casten. Yes, I am inclined to agree, and I am just 
speculating. I am not sure this wasn't an oversight on their 
part. The U.S does some weird things to incentivize behaviors 
through the Tax Code that other governments don't do, and I 
could forgive European regulators for not necessarily 
appreciating all this, but I would hope that we can fix this in 
some other fashion.
    I hope maybe some of our colleagues could work with us 
because we did really pass the biggest clean energy bill ever 
passed by any government in history anywhere. We are really 
seeing these huge investments coming in. We do really have to 
leave a better planet for our children than the one we 
inherited from our parents. We have the tools to do it, and we 
shouldn't handicap it because of what, I agree with you, is no 
difference in the fundamental risk. And to be clear, I think it 
is important for our banks to be well-capitalized, but on this 
narrow point, if we agree that the risk profile isn't 
different, then let's not cut off our nose to spite our face. 
Thank you all, and I am out of time. I yield back.
    Chairman Barr. The gentleman yields back. The gentlewoman 
from California, Mrs. Kim, is now recognized.
    Mrs. Kim. Thank you, Mr. Chairman. We are all in agreement 
that Silicon Valley Bank's collapse was largely due to the 
failure of its leadership to manage the historical rate hike 
not seen in a couple of decades. And on top of the bank's 
mismanagement, the Fed's own review blames its supervisors for 
failing to act in a timely manner, and in my home State of 
California, we are still dealing with the ripple effects of the 
Silicon Valley Bank failure. So instead of venturing into new 
capital requirements that will increase financing costs for 
small businesses and first-time homebuyers, Federal financial 
regulators should follow their own reports and address their 
mishaps and supervisory breakdowns.
    Mr. Baer, Silicon Valley Bank purchased long-term debt to 
the point where it had breached its interest rate risk limits 
on and off since 2017. In your point of view, who is 
responsible for allowing the limit breach to happen, and who 
bears the responsibility for giving Silicon Valley Bank a break 
for breaching these limits?
    Mr. Baer. Sure. Thank you. It is an important question. 
Clearly, the primary responsibility lies with the management of 
the bank, and secondary, I think, would be the examiners who 
tolerated the breaches.
    Mrs. Kim. Would you say it is the San Francisco Fed?
    Mr. Baer. Yes, I believe that is correct.
    Mrs. Kim. Yes. Do you know if the San Francisco Fed was the 
only Reserve Bank allowing their member banks to purchase long-
term T-bills?
    Mr. Baer. It was more the duration than the nature of the 
instrument. So if you think about what was really happening, it 
was a perfect storm in the sense that all banks around the 
country, as a result of COVID and stimulus programs, got in 
massive amounts of deposits. Usually, when you are getting in 
lots of deposits, you are also having a lot of loan demand, so 
you take those deposits, and you make loans. There was no loan 
demand, again because of a lot of programs and the state of the 
economy, so they had tons of deposits, and they needed to put 
them somewhere, so they bought securities.
    The smarter banks, most of the banks, the banks really 
probably in all the other Reserve districts said, well, you 
know what? We are going to buy securities, but we are going to 
buy short-dated instruments because interest rates could rise, 
right? And a lot of the banks, and I talked to them, when they 
had their earnings calls, they got grief from analysts, 
investors, saying, why are you earning such a low yield? And 
what they responded responsibly was, I am managing my interest 
rate risk and I want to keep my duration short because rates 
could rise.
    Silicon Valley Bank and some other banks, not many, took a 
very different tack and they said, no, we are going to stretch 
for the yield. We are going to buy longer-dated instruments, 
and that is what ended up dooming them when there was a run. 
Again, if there had not been a run, they would never have had 
to realize the unrealized losses, but there was, and there was 
not a good way to monetize those securities.
    Mrs. Kim. Simply put, Silicon Valley Bank's collapse is 
being used as a red herring to increase capital requirements. 
Federal financial regulators have the tools, but they decided 
not to use them. According to a recent 10,000 Small Businesses 
survey, 70 percent of small businesses reported it was 
difficult to access capital.
    I want to ask you another question, Mr. Baer. Several 
groups wrote a letter to the Fed, the OCC, and the FDIC asking 
these three agencies to delay the Community Reinvestment Act 
(CRA) rules until after the capital rules are finalized. So, if 
Federal agencies proceed with their timelines, can you describe 
how these layers of new regulations could impact access to 
capital for small businesses and financing for consumers?
    Mr. Baer. I think this is a classic example of what a 
holistic review would look like in the sense that the CRA 
proposal is in some ways similar to this in that it is 
incredibly detailed and effectively a form of credit 
allocation, but it assumes where banks will make certain 
investments and how easy those investments are to make. Of 
course, that is now driven by a subsequent proposal on capital 
of over 1,000 pages, and I will confess, we have not even 
mapped out this CRA credit for this, how reasonable a business 
is that to be in now. I think a lot of this would be in the 
mortgage market. So for certain types of loans, is CRA 
incentivizing something that the Basel proposal is 
disincentivizing? I don't know yet, but I would love a chance 
to think about it and then comment on the CRA thing----
    Mrs. Kim. Let's move on, because I know my time is coming 
to an end quickly. But I also want to echo the comments that we 
heard from my colleagues about the proposal that will make it 
even harder for lenders to offer loans to buyers who do not put 
down the 20-percent down payment. We are talking about low-
income families, veterans, as much of the Americans of all 
different backgrounds to buy a home to live their American 
Dream. So, can you talk about what type of homeowners will be 
pushed out of the market?
    Mr. Broeksmit. Yes, I agree with you that first-time 
homebuyers who do not have generational wealth and don't have 
the ability to make a 20-percent down payment, will be affected 
most by this. And that is the very area where banks are being 
creative in loans on their balance sheet, and they should be 
encouraged instead of having massive surcharges to the capital 
they have to allocate on those loans.
    Mrs. Kim. Thank you.
    Chairman Barr. The gentlelady's time has expired. The 
gentlewoman from Massachusetts, Ms. Pressley, is now 
recognized.
    Ms. Pressley. Thank you. Earlier this year, we witnessed 
three of the largest bank failures in U.S. history, a direct 
consequence of Republican deregulation in 2018, which weakened 
bank regulations by exempting banks like Silicon Valley Bank 
from enhanced stress testing and stringent capital 
requirements. As has been proven, the Republicans' opposition 
to regulation comes at the expense of economic stability for 
working families. And now, they are doubling down on their 
prior mistakes, despite the harm that we saw just a few months 
ago ripple across our economy, especially in my district, the 
Massachusetts 7th.
    When Silicon Valley Bank collapsed, small businesses in my 
district couldn't accept payments, affordable housing 
development was slowed, it was suddenly in jeopardy, and tech 
companies couldn't make payroll.
    Ms. Philo, when banks lack sufficient capital, who bears 
the brunt of the cost when there is a financial crisis?
    Ms. Philo. Thank you very much, Congresswoman Pressley. 
Research shows that financial crises are extremely costly and 
have a disproportionate impact on Black and Brown communities, 
Black and Latinx communities and businesses, and rural and 
other underserved communities. The 2008 crisis cost $2.6 
trillion, and the set of capital reforms in these proposals are 
really essential to prevent that large-scale boom and bust of 
financial cycles that we found ourselves historically and that 
hurt all Americans and businesses, but disproportionately 
reduced the wealth and the access to credit for communities of 
color, rural, and other underserved communities and businesses. 
Thank you.
    Ms. Pressley. No, thank you. And adding insult to injury, 
and we have seen this happen time and time again, Silicon 
Valley Bank's CEO was paid millions of dollars, ostensibly for 
being incompetent, and rewarded for the harm that they caused. 
And every time banking regulators try to increase capital 
requirements, we hear this misleading corporate rhetoric like 
that of Jamie Dimon, who said that these proposed capital 
requirements are bad for America. And I am really quite tired 
of it, so let's set the record straight here today.
    Ms. Philo, isn't it true that better-capitalized banks are 
able to lend more even during periods of stress?
    Ms. Philo. Thank you very much. Yes, a bank can use capital 
to make more loans. Many bank executives and the bank lobby 
claim that increased capital requirements will undermine credit 
availability. We strongly disagree that increased capital 
requirements will undermine credit availability. Indeed, well-
capitalized and secure banks are essential to providing credit 
to businesses, families, and communities.
    A 2020 World Bank report summarized several studies which 
found that well-capitalized banks in the U.S. had higher loan 
growth than nearby banks with fewer capital reserves, that 
well-capitalized, large U.S. banks had higher loan originations 
and liquidity, and that better-capitalized international banks 
had lower funding costs that enabled them to increase lending. 
I recognize there are studies that say a lot of different 
things, but I found this to be credible, and I appreciate the 
time.
    Ms. Pressley. And similarly, some banks believe that this 
rule will slow down the U.S. economy, but do you believe that 
this will be the case given that implementation will be gradual 
and occur over years?
    Ms. Philo. I have recognized the question, and yet I do 
believe that these proposals will not slow down the economy. 
The proposals make the long implementation and the gradual 
phase-in explicit, and I believe that is the intention there to 
mitigate those impacts. So, I do not believe that that will be 
an overarching issue.
    Ms. Pressley. Thank you. The benefits of higher capital 
requirements are clear. They will enhance bank resilience and 
secure more stable lending in our economy. We have seen three 
bank failures this year, and this rule is necessary to 
strengthen our financial system so that it can weather future 
crises. The American people are paying close attention. 
Republicans continue to oppose common-sense regulations in our 
banking industry. We know who will suffer and we know exactly 
whom to hold accountable. Thank you. I yield back.
    Mr. Fitzgerald. [presiding]. The gentlelady yields back. 
Chairman Barr has allowed me to sit in as Chair briefly, so I 
am going to recognize myself for 5 minutes.
    Thank you all for being here today. The interagency 
proposed rule for implementation of the Basel III regulatory 
framework would add up to 20 percentage points to 
internationally agreed-upon Basel III risk weights for 
mortgages. I don't want to be redundant; I know that we have 
kind of explored this area many times this morning.
    I was fortunate enough on the break that we just had to 
meet with Wisconsin REALTORS and Wisconsin bankers back to back 
in some roundtables, and I thought the conversation was 
actually fascinating. There is obviously an issue that has 
emerged in this economy, which is, adults 25- to 35-years-old 
have been completely frozen out of the market for the most 
part, and some of this came from feedback we were getting from 
some of the REALTORS. Some of them also happen to be mortgage 
brokers.
    I was wondering, first of all, Mr. Broeksmit, can you talk 
a little bit about this issue related to credit scores for 
consumers and this whole group of adults in that age range who 
have no credit score, which is what we are being told at this 
point, or if they end up being in a situation where they are a 
married couple, where one may have a credit score and the other 
one doesn't, so they are making changes and going through all 
these gyrations to try and put themselves in a place where they 
could qualify for a mortgage so they are first-time homebuyers?
    Mr. Broeksmit. One of the things about credit scoring that 
is frustrating is that most credit scores don't give credit for 
your rental payment history. There is nothing more predictive 
of your future ability to make a housing payment than how you 
are paying it today, whether it is an apartment or whether it 
is a home. So, there are efforts underway to get landlords to 
report that payment history to the credit bureaus, and there 
are also workarounds, although they are cumbersome, as I am 
sure your constituents told you, so that you can get credit for 
that rental experience. For instance, if you can get 12 monthly 
bank statements and it shows that amount going out about the 
same time every month, that is a big consideration in 
underwriting. So, there are some steps underway to ameliorate 
that for credit scoring.
    Mr. Fitzgerald. Yes. Also related to small business, as 
they continue to see credit lines, there are these unused 
portions of credit that are out there. And some banks right now 
have this discretion to simply cancel those credit lines and 
then try and reissue. I am wondering if you wanted to comment 
on that because it is kind of a confusing part of, once again, 
what most small businesses in America are looking at as they 
try and capitalize some of these new projects or purchases.
    Mr. Broeksmit. If I understand this voluminous proposal 
correctly, banks would be required to hold capital on the 
maximum amount that could be drawn rather than the amount that 
is outstanding. That could have a really chilling effect on the 
sort of small business credit you mentioned, and also home 
equity lines of credit, where consumers take that out and use 
it as they need it because they only pay interest if they use 
it. And then, if the banks are forced to hold capital against 
the whole line, it would make it much more expensive.
    Mr. Fitzgerald. Yes. Approximately 70 percent of small 
businesses right now in America are saying they are having a 
very difficult time accessing credit, which is up considerably 
from where it was even a year ago. What effect do you think it 
would have on the FICO scores for small business owners as 
well, which I know is part of the mix right now as you talk to 
many of the banks kind of across the country?
    Mr. Broeksmit. I think the main effect is that the cost 
would go up and the availability would diminish. If the 
business owner or the consumer makes timely payments on that 
credit, I think the credit score will be okay. It is really 
more a question of the availability and the cost.
    Mr. Fitzgerald. Yes.
    Mr. Baer, you talked about the credit crunch, I think is 
the way you described it before. If you see some of the banks 
kind of tighten up on not only the credit scores and the way 
they are evaluated, but if, in fact, they have to add more 
capital, which most of them and everyone that I have spoken to 
has said it is absolutely ridiculous that they would have to 
add capital at this point, it would make it much more 
difficult, which is kind of what I am hearing here this morning 
being reported back from the witnesses. Do you think that there 
would be a breaking point at which we see either changes in 
inventory when it comes to single-family homes or small 
businesses that are starting to either relocate or are unable 
to expand after the pandemic that had such a devastating 
effect? What do you see kind of across-the-board as to what 
that landscape would look like?
    Mr. Baer. Sure. It is obviously complex, but basically, if 
your required capital ratio goes up, you have a choice. You can 
increase the numerator, raise capital, retain earnings, or you 
can decrease the denominator, and that means getting out of the 
types of loans that are attracting the highest risk weights or 
the types of assets, and a lot of that are loans and 
particularly small business loans.
    Mr. Fitzgerald. Very good. Thank you. I yield back. Next, 
we are going to recognize Mr. Green from Texas for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. And I thank the ranking 
member, and I thank the witnesses for appearing today. I would 
like to further introduce the witnesses by way of observation. 
It appears to me that we have but one female on this panel of 
witnesses. If you are a female, would you kindly extend your 
hand so that I may validate?
    [Hand raised.]
    Mr. Green. Only one hand. Thank you. My vision is good. 
That appears to be Ms. Philo. Is that correct, ma'am?
    Ms. Philo. Yes, sir.
    Mr. Green. My observation also indicates to me that all of 
the persons appear to be what I would call Anglo, we commonly 
in this country refer to people as White. I really don't like 
the term, to be quite honest, but if you have documented 
yourself, perhaps on the Census, as something other than White, 
would you extend a hand into the air?
    [No response.]
    Mr. Green. Let the record reflect that we have none of the 
persons who have documented themselves as someone other than a 
White person. I am doing this, friends, because I happen to 
believe that there are people of color who can do what you do, 
but I could be wrong.
    So let me pick on you, Mr. Olmem. You have a storied 
career, by the way. I compliment you, sir, and your firm has 
done an outstanding job. I see that on November 17, 2022, 53 
lawyers made partner and counsel. And of that 53--this is 
fantastic--55 percent of those promoted were female. That is 
fantastic. Your firm is doing a great job. I compliment you. 
Let the world know that I have said it.
    Mr. Olmem. Thank you.
    Mr. Green. And the greatest number of promotions were in 
banking and finance. Outstanding, and I have one other comment 
about you. I am just absolutely impressed with your 
credentials. One other comment. The American Lawyer named you 
as one of their 2021 trailblazers, recognizing individuals who 
are agents of change in the legal industry. Agent of change, a 
trailblazer. Are there women of color who can do what you do, 
sir?
    Mr. Olmem. Certainly.
    Mr. Green. And are there women of color who can do what you 
do--my vision is not as good as I would like for it to be--but, 
Mr. Baer?
    Mr. Baer. Yes, I would agree, Congressman.
    Mr. Green. And our final witness, would you agree that 
there are women of color who can do this?
    Mr. Broeksmit. I would, and, in fact, the immediate past 
Chair of the Mortgage Bankers Association was just such a woman 
of color and she did a great job.
    Mr. Green. Thank you. I want to compliment all of you, but 
I must tell you I am a little bit disappointed that we have not 
arrived. We are not there yet because for some reason, there 
are no people of color on this panel, and it is not your fault, 
so please, it is not personal as it relates to you. There has 
to be someone who will point these things out. If no one points 
them out, 50 years from now, we will still have panels that are 
all White with no people of color. It appears that on my watch, 
I am that person.
    I would ask this: Do you think that we should continue to 
have all-White panels in a country where we have other persons 
who are capable, competent, and qualified, and happen to be of 
color? If you think so, extend your hand. I will make it easy 
for you, extend your hand.
    [No response.]
    Mr. Green. Let the record reflect that no hands have gone 
up. By the way, it was the Democrats that produced the one 
person who happens to be a female, so I compliment my 
Democratic colleagues and my Democratic ranking member for 
doing this. It is a bit late for you to answer this question, 
but, Ms. Philo, I would have asked you, and perhaps you will 
answer for the record, about this internal modeling that takes 
place. And I want you to please explain for the record how this 
complicates----
    Mr. Fitzgerald. The gentlemen's time has expired. I will 
allow the witness to answer the question.
    Mr. Green. No, I am asking her for the record how this 
complicates the job of those who have to monitor banking.
    And, Mr. Chairman, I would like to put in the record the 
article that I referenced related to Mr. Olmem's law firm, 
Mayer Brown, which has an outstanding record. I thank you, and 
I yield back.
    Mr. Fitzgerald. Without objection, it is so ordered.
    And the gentleman's time has expired. We now recognize the 
gentleman from Georgia, Mr. Loudermilk, for 5 minutes.
    Mr. Loudermilk. Thank you, Mr. Chairman. Thank you all for 
being here. I am here batting at the bottom of the order, 
partially because I have been spending about the last 50 
minutes with constituents from Georgia, one of our largest 
counties' chambers of commerce. And interestingly enough, there 
was a lot of discussion regarding this matter right here and a 
lot of concern about the U.S. and the government in general, 
especially the financial services sector, adopting 
international standards versus those that are designed and 
catered directly toward the U.S. industry.
    But I appreciate you all being here today. And in addition 
to the multitude of procedural material and sovereignty 
concerns that my colleagues and I have raised in letters, 
hearings, and discussions with regulators, I want to make it 
clear to the public that the Basel III proposed rule isn't some 
obscure regulation that only affects big banks. My colleagues 
and I are concerned that the 1,087-page Basel III proposed rule 
could tangibly increase the cost of capital, affecting 
businesses and homeowners nationwide.
    You have mostly answered a lot of the major concerns that I 
had, so I am not going to go through a lot of those, especially 
when it affects the mortgages and mortgage servicing rights 
(MSRs).
    Mr. Broeksmit, just kind of encapsulating everything based 
on the answers you have given to several of these questions, do 
you agree that borrowers would notice the effects of the Basel 
III NPRs treatment of MSRs?
    Mr. Broeksmit. I do, and, in fact, in 2011, just before the 
Basel agreements were put into place, banks serviced 91 percent 
of home mortgages. They now service 47 percent. If you make it 
even less attractive, they will service less.
    Mr. Loudermilk. What will be the alternative? Is it just, 
we would see an impact in the real estate market? Are there 
alternative places to borrow money?
    Mr. Broeksmit. To be clear, there are plenty of other good 
players who service mortgages, and independent mortgage bankers 
do a great job servicing loans. But from the consumer's 
perspective, the more sources of demand and sources of capital 
for mortgage servicing, the more valuable the asset. The more 
valuable the asset, the lower the mortgage rate, because the 
servicing value is an integral part of mortgage pricing.
    Mr. Loudermilk. It sounds like maybe competition tends to 
lower costs and prices.
    Mr. Broeksmit. Competition and choices for consumers, yes.
    Mr. Loudermilk. Exactly. I have shared with other people 
that back when I served in the Air Force and the military, I 
was involved in intelligence, and the Soviet Union was our 
adversary. And one defector during that time ended up coming to 
the United States, someone from the Soviet military. And at the 
first grocery store in the U.S. he went to, he was so amazed 
with the selection and the choices he had that he thought it 
was a setup by the CIA, and he said, ``Who needs 12 different 
types of raisin bran?'' And so again, choice is a part of our 
economy.
    Last question for you on this: Does the proposed rule 
contemplate the consumer confusion this would cause anywhere in 
the 1,087 pages? Have they addressed the confusion that this 
would bring?
    Mr. Broeksmit. In addition to all of the other things they 
have not addressed to justify this rule, that is one of them.
    Mr. Loudermilk. Okay. Thank you for that.
    Turning to Mr. Olmem, was there broad consensus among the 
regulators on the NPR?
    Mr. Olmem. No, there wasn't. In fact, there was, I think, a 
record number of dissents at the Board for a proposal, at least 
in recent memory, and there were two dissents at the FDIC.
    Mr. Loudermilk. Okay. And this is probably the last 
question I have time for: What should Congress take away from 
the reservations that several key banking regulators have 
expressed with the NPR? What should our reaction be? What 
should we do?
    Mr. Olmem. That there needs to be significantly more 
congressional oversight and involvement in this process, and to 
remember that policy on capital regulation is really set here 
at Congress, and Congress needs to make sure that the 
regulators are following what Congress has already set out in 
the Federal law.
    Mr. Loudermilk. Do you see this as being partisan, given 
that even people within this Administration have expressed 
concerns?
    Mr. Olmem. It shouldn't be. Historically, capital 
regulation, if you go back, those statutes, for the most part, 
with kind of Dodd-Frank being the one exception, have been 
passed with significant bipartisan majorities. So it shouldn't 
be, and that is the danger.
    Mr. Loudermilk. Okay. Thank you, Mr. Chairman. With that, I 
yield back the 1 second that I had left.
    Mr. Fitzgerald. The gentleman yields back. I would like to 
thank our witnesses for their testimony today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing is now adjourned.
    [Whereupon, at 12:02 p.m., the hearing was adjourned.]

                            A P P E N D I X

                           September 14, 2023
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