WASHINGTON — Federal regulators supported several changes the banking industry has been seeking in a hearing at the Senate Banking Committee on Thursday, acknowledging the need to limit the Volcker Rule and better define systemically important banks.
Yet there was little sign that sweeping changes will clear the panel, as Democrats continued to raise concerns that changes meant to help small banks would instead benefit larger institutions. Sen. Sherrod Brown, D-Ohio, blasted a Treasury Department report last week that outlined regulatory relief, calling it "misguided" and noting that the department sought banking industry advice versus consumer group input by a count of 17 to 1.
Other Democrats warned regulators not to go too far in granting relief on their own.
“Federal agencies can make changes all by themselves, and that means all of you, the banking regulatory agencies, have a lot of power to decide whether to hold the line on financial rules or to make every wish come true for giant banks,” said Sen. Elizabeth Warren, D-Mass.
The hearing was the third for the panel on regulatory relief, with the first focused on small banks, the second on regionals and larger institutions and this one on regulators' view. Senate Banking Committee Chairman Mike Crapo told reporters after the hearing that he has not made a decision yet on whether to hold another hearing before moving forward with a legislative package. He may also decide to hold out for a larger deal later in the year.
“It depends on how everything goes,” Crapo said.
The hearing was notable in part because it also featured a regulator criticizing a fellow agency. Acting Comptroller of the Currency Keith Noreika, one of two Trump administration picks currently heading a financial services regulator, suggested that the Consumer Financial Protection Bureau was not doing enough to regulate regional and midsize institutions for consumer issues and has played a duplicative role when supervising larger banks.
Noreika said that the OCC often detects consumer problems at large banks before the CFPB, which joins in after the fact.
If the OCC goes “in to examine” a bank “with our backup authority, as we do if there is an issue, you may see the CFPB come in,” Noreika said. As a result, the bank goes from "underregulated” to “overregulated.”
Noreika's comments appeared to be related to criticism by House Republicans that the CFPB acted too late to curb abuses at Wells Fargo. A recent House Financial Services Committee report by the Republican majority claimed that the CFPB relied on the actions of others, including the L.A. city attorney and the OCC, when penalizing Wells for opening millions of fake accounts. The CFPB has disagreed with such claims. (CFPB Director Richard Cordray was not invited to testify at the hearing on Thursday.)
A CFPB spokeswoman responded that the agency has had "regular and robust coordination with the OCC" and taken several actions against midsize banks, including First National Bank of Omaha and TCF. "Our vigorous supervision of the companies within our jurisdiction is based on our assessment of the risks posed to consumers," she said. "Where we see harm, we follow up and take action when warranted."
Overall, Noreika said, there was too much redundancy in the system.
“There is a real risk and actually, in practice, regulatory redundancy happening here in Washington with respect to the financial services industry," he said. "One of the things that we proposed in our proposals is having a statutory traffic light system among the federal regulators so that when one regulator acts to effectuate regulation, others will be foreclosed."
But the hearing also focused on areas of agreement, such as changing the $50 billion threshold that the Dodd-Frank Act set for systemically important financial institutions.
Federal Deposit Insurance Corp. Chairman Martin Gruenberg, a former Democratic Senate staffer who is arguably the most hawkish of the regulators on the issue, agreed that some "tailoring" would be appropriate. But he added that he “would have some caution in regard to” raising the threshold.
Gruenberg said that while a $50 billion-asset bank may not be “necessarily systemic," the failure of IndyMac, which was well below the $50 billion threshold, has proven to be the FDIC's most costly failure. It is estimated to have cost the Deposit Insurance Fund $12 billion.
Mark McWatters, acting chairman of the National Credit Union Administration, also expressed concern about a straight increase in the threshold for credit unions, and said he would prefer some stress testing requirements remain in place.
“When it comes to the credit union community itself and concepts of increasing that number to $50 billion for stress testing, I think we need to be thoughtful on the range between $10 billion and $50 billion and what a $30 billion” credit union failure “would mean to the shared insurance fund. It would quite a bit more dramatic than a $30 billion loss to the FDIC fund,” McWatters said.
Noreika, meanwhile, supported an increase in the $50 billion threshold, arguing it his holding back growth for institutions near that level.
“What concerns us is it is being used as a competitive barrier to entry,” said Noreika, who added that only a few banks have gone over $50 billion since the threshold has been implemented.
There was more consensus when it came to the Volcker Rule. Federal Reserve Board Gov. Jerome Powell said that he would apply the Volcker Rule just to big banks if he was given the chance to change just one regulation.
The Volcker Rule “probably could have been limited to a handful of firms, but the law applies to all banks,” Powell said. “We probably have some authority under the statute to do this, but we would support significant tailoring of the application of Volcker, so really it falls on the banks with big trading books.”
During the hearing, regulators also supported keeping the FDIC's orderly liquidation authority, which allows the government to seize and unwind a failing megabank. The Trump administration has targeted those powers for potential repeal, while House Republicans have already passed a bill that would scrap those powers. Powell said regulators would prefer that a failure be handled through bankruptcy, but it's "absolutely essential that we" keep OLA as a backup.
"The orderly liquidation authority really is the last recourse, but a critically important backstop to assure an orderly failure, even of a systemic firm," he said.