House Financial Services Committee
Federal Regulator Perspectives on Financial Regulatory Reform Proposals
September 23, 2009
Members Present:
Barney Frank (D-MA), Carolyn McCarthy (D-NY), David Scott (D-GA), Paul Kanjorsky (D-PA), Brad Miller (D-NC), Emmanuel Cleaver (D-MO), Ron Klein (D-FL), Al Green (D-TX), Spencer Bachus (R-AL), Randy Neugebauer (R-TX), Mike Castle (R-D), Scott Garrett (R-NJ), Judy Biggert (R-IL), Jeb Hensarling (R-TX), Tom Price (R-GA), Ed Royce (R-CA)
Witnesses:
Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation
John C. Dugan, Comptroller, Office of the Comptroller of the Currency
John E. Bowman, Acting Director, Office of Thrift Supervision
Joseph A. Smith, Jr., North Carolina Commissioner of Banks on behalf of the Conference of State Bank Supervisors
Opening Statements:
Castle: We need to tighten the regulation of financial services in this country, but how we do it and the creation of new authority is a matter that is very important, so we’re very interested in what you have to say about it. We’re also very interested in the memo that is being circulated about the CFPA.
Scott: My major concern is that there needs to be a heightened awareness about what we’re doing to restore the confidence of the American people in our financial system. We have forgotten to place this necessary emphasis on doing something to help Main Street because we’ve been too concerned about Wall Street.
Garrett: We all agree that reform is necessary. We look to you for the expertise as how to best go about this. We have the Administration’s proposal and now one from the Chairman, and we’re waiting to hear whether or not we can narrow the legislation down and go in the direction of the Chairman.
Frank: I’d like to hear from you about consumer protection and the continued problem of lending. I understand that examiners in your agencies have difficult situations. We are told by community bankers that they find examiners difficult in terms of the lending. This takes constant work because we’re trying to change culture.
Neugebauer: Geithner has a different view about how to best go about fixing consumer protection, and he basically wants to take that authority away from you. If you think you should continue that role, why do you think that’s necessary? Why should you get to keep that authority? We seem to be moving to consumer protection, but many people think we’re taking away consumer choices.
Highlights from Witness Testimony:
Bair: One of the lessons learned is that regulation is not enough. We need to stop future bailouts and instill market discipline. We need disincentives for excessive risk taking. We need a strong oversight council that will closely monitor the system.
Dugan: We’re concerned about consolidating all rule writing and enforcement authority of consumer protection into one agency. The proposal falls short in two aspects. 1. The rules would not be uniform because it would expressly allow states to adopt different rules. 2. The rules do not afford meaningful input from banking supervisors. The new agency needs this input into the CFPA rulemaking. There are real benefits to an integrated approach to this. Moving bank examinations and enforcement functions to the CFPA would distract it from its most important functions. The CFPA’s resources should be focused on this regulatory gap.
Bowman: I want to emphasize that we will not solve future problems by consolidating the regulation into one agency. There are five reasons why consolidation would not work. 1. The OTS should supervise thrift holding companies for many consumer and community lenders. They did not contribute to the financial crisis and should not have to pay for it. 2. There is no efficiency to be gained by merging regulatory agencies that do not fit together. 3. Trillion-dollar mega-banks have nothing in common with small community thrifts. The needs of the community majority would be overlooked by the bureaucracy. 4. Multiple viewpoints among regulators lead to better regulation. 5. Consolidating agencies will take years and cost millions of dollars.
Smith: The states have made the financial services industry more diverse and accountable. States serve as incubators and models of consumer protection. These proposals will undermine diversity and accountability and move to consolidation. It would be in conflict with the health of the states. 1. It is important to preserve the role of state law and the ability to set stronger consumer protection. 2. Creating a single monolithic regulator relies on the faulty assumption that regulatory consolidation leads to more efficiency. A single federal regulator would harm the banking system and the diversity. 3. Reform must directly address and end “too big to fail.”
Questions and Answers:
Frank: What do you think about the proposal to replace OCC and OTS with one national bank supervisor? Bowman: I support that proposal. Frank: People seem to be in favor of other people losing their jurisdiction rather than their own. I think institutional position does have some impact on people’s views in this. Do you think an agency with too rigorous of protection for consumers might undercut safety and soundness? Dugan: As we do our supervision for safety and soundness, we often find consumer protection issues. There are some places that undermine safety and soundness in their proposal. Frank: If we had a mechanism for resolving issues with you and the CFPA, would that make it better? Dugan: It would help, but that’s not the only issue. Bair: I think a good quality consumer compliance examination supports consumer protection.
Neugebauer: What was the FDIC doing with consumer protection over the last 5 years? Bair: We don’t have the authority to write consumer rules. Two years ago I came to you and asked you for the ability to do that. We have tried for stronger consumer protection in many areas, but the examiners are only as good as the rules they have. We can do better though. We’ve increased our examiners and I think we have a good record. We care about consumer protection. We feel that we didn’t have strong enough rules to address it in a consumer protection standpoint. Dugan: We think we did a decent job with what we had. Consumer protection did contribute to the crisis, but a big part of it was underwriting problems. So you had two different rules systems applying to the regulated and the unregulated. Bowman: We do have some rule-writing authority. We have some that relates to deceptive advertising, which we have used to enforce those rules. I’m concerned about the number of complaints that exist outside of our authority that we don’t have the authority to regulate. Neugebauer: So if you had a uniform set of rules, your agencies are capable of enforcing that and making it part of your standard regulatory process, but you haven’t really been given the opportunity to do that.
McCarthy: I’m concerned about the CFPA and what its rules and regulations are going to be. I think we need something like this, but we don’t want to strangle those corporations that we’re trying to help. How would a conflict between the CFPA and the regulators be solved and who will resolve it? Bair: Subprime is an example. When it was expanded, it was used properly. Later they didn’t perform. There can be differences of perspectives about this. Nobody caught it early on with safety and soundness or consumer protection sides. Dugan: If you only have one set of views, you can have a lot of problems. You need to have different views to balance when you have a situation like that. You need a mixture of the two, and to completely separate them is a problem. McCarthy: We’re still seeing tremendous amounts of predatory lenders on TV. This is one way I see that the two different entities are not working together.
Castle: I want to know, if we create this new agency, how will it mechanically deal with these problems but then also, what if we don’t create this agency? Bair: We can keep regulating banks and put more examiners in, but if someone else can offer a loan outside of that, it won’t make a difference. It’s exactly what happened with subprime. It needs to be focused on the non-bank sector. Castle: How important is uniformity in setting standards for national banks and what are the problems of the Administration’s proposal? Dugan: With the power of the Administration’s proposal, there has been a rule-writing gap and a problem of not having uniform standards. The ability to write rules at the federal level is an important power, but you also undermine this principle by inviting the states to add additional rules in each of these areas. With many different rules and standards, there are a lot of problems, including higher costs and tremendous legal uncertainty because you don’t know which rules apply. Castle: Do you think the creation of the CFPA will result in less competition and would force multi-state banks to operate in one state? Dugan: I don’t know if that would happen, but they might take a particularly large state and try to conform their system to the rules of that state. Smith: No one has ever said the states caused the sub-prime crisis. It’s astonishing to me to hear people say that states were involved in the crisis. We’ve worked with the federal government, and we’ve been doing it for years. So it’s unfair to say that allowing states to have higher standards to protect consumers somehow damages the financial system.
Miller: You’ve said that there were several practices that you stopped banks from doing. Can you give us some idea of what some of these were? Dugan: A bunch of those practices, the very worst subprime mortgage lending, were not occurring in banks but in unregulated firms. Some examples are payday lending, subprime lending and credit cards.
Scott: Why are we at the point where we are after spending $700 billion in TARP money and what are we doing to get these banks to unleash this money and make loans and mitigate loans and keep people in their homes? I think that’s the way we can stop bank foreclosures. Bair: On loan modifications, it’s something we advocated before. It’s not something we’re doing, but we definitely support it. It is helping. With getting banks to lend, we’ve taken a number of steps. Because there was too much credit out there, we’ve tried to strike a balance with our examiners.
Biggert: Did any of you actually write consumer protection rules? Bair: We do not have the authority to write any rules. We’ve filed comment letters to the Fed asking them to do it.
Hensarling: With the CFPA in the white paper and Chairman Frank’s bill, in your opinion, would it lead to less credit and more costly credit to families and small businesses? Bair: It depends on who is the head of the agency and how it’s structured. Potentially yes, but I don’t know. Dugan: Part of it is uniform standards for banks and thrifts, and I think that could lead to increased costs to consumers and restrict the availability of certain products. Bowman: I would agree with both of those answers, that it could result in that, but we have to wait and see how it ends up.
Price: I’m not convinced that the FDIC isn’t contributing to the problems that are still occurring. The FDIC has taken over some small community banks. They’ve been required to increase capitalization, etc. The consequences of the decisions of the FDIC are massive. With flexibility and reasonableness and openness, it’s important to have. Bair: We take this very seriously and I’m aware of the concerns. In instances, it did need to be done. In most states we have been successful. Price: In most instances, those people come in and know nothing about the communities. The local community is without a local lender. Bair: We try to avoid that. If an institution has insufficient capital, there’s not much we can do about that.
Green: “Too big to fail” is the right size to regulate. We must find a way to avoid another AIG. We have to do something. Did the CRA cause the economic crisis? Bair: No it did not. Green: I would hope that everyone would realize that. Did overregulation of the markets create the crisis? We hear that it was an overregulated market that caused the crisis. With the CFPA, whether we bifurcate or consolidate, should we have a consumer protection agency? Some say we don’t need one and that things will work themselves out. Bair: Yes we do need one. Green: We have the responsibility of being the watchdog for the public and we have the duty to action. If we don’t act, our inaction will become our action and we’ll have another crisis.
Royce: Bair said we need to develop a resolution regime that provides for the orderly wind-down of systemically large institutions. Geithner’s proposal says the regime should provide the ability to stabilize the institution, purchasing the assets, guaranteeing it, etc. It sounds like you have different views. Do you believe what the Secretary suggests, or is there a distinction that I’m missing? If there is any ambiguity, then the market is going to view that institution as government-backed. If that’s the perception, there will be a moral hazard. I think this is something we should avoid. Bair: I agree with you that it needs to be quite clear. It should be a wind-down, it shouldn’t be a government intervention. We should have a resolution mechanism in place for them. Royce: What about the costs associated with the CFPA if we create a new agency? Who will bear the costs of funding this agency? Dugan: Because we do have a regime already in place where we already examine people, it would be better to just keep it where it is instead of create a new place for it. I think the costs would be higher.
Klein: I’m concerned about the access to capital, the strictness and rigidity of banks dealing with existing loans, etc. Why is it that some of these concepts of borrowed capacity, idea of substitute collateral, are not being considered by banks? Bair: We do encourage our banks to work with their borrower and provide flexibility. This is a difficult judgment though because we can’t let the banks continuously defer loss. It’s a difficult balance, but we tell the examiners to work with their borrowers and try to restructure the loans and try to provide relief. Klein: That is not translating in any meaningful sense. I’m seeing a little bit of movement, but not enough.