June 13, 2018

House Financial Services Committee “Financial Industry Regulation: the Office of the Comptroller of the Currency”

Key Topics & Takeaways

  • Volcker Rule: Otting fielded multiple questions about the Volcker rule. He stated that increasing liquidity is important, and while we have not yet been in a time of stress to test it, the rule could have the potential to impair liquidity. Otting also said it has been a “remarkable task” to bring the agencies together to agree on a path forward.
  • BSA/AML Compliance: Otting said that the current BSA/AML system is both labor- and paper-intensive, and it is not certain that the effort is having the intended results. Otting said the most burdensome components of the current structure include a number of SARs that need to be filed, and the fact that there is not a risk-based assessment process.
  • Community Reinvestment Act (CRA): Otting fielded a number of questions about CRA. Otting stated that we need a “more objective” way to measure banks’ success, as they are currently evaluated in a subjective points process. Otting also noted that there is a narrow definition of CRA activities and we need to expand the definition of what activities qualify.

Witness

Opening Statements

Rep. Jeb Hensarling (R-Texas), Chairman, House Financial Services Committee

In his opening statement, Hensarling stated that the economy is “booming” and “consumer confidence is at the highest level in 14 years.” Hensarling noted unemployment is low, African American unemployment is the lowest on record, the best wage growth in eleven years, and last month there were more job openings than there were unemployed Americans. Hensarling credited these achievements to the Tax Cuts and Jobs Act, as well as the efforts of the current administration and banking regulators who have “right-sized” regulation to the benefit of American consumers. Hensarling said it was important to ensure regulations are working for working people, and to have regulators committed to the growth of the economy. 

Rep. Maxine Waters (D-Calif.), Ranking Member, House Financial Services Committee

In her opening statement, Waters called on Congress to ensure that “our economy and laws work fairly for everyone” and warned that the deregulatory actions of the current administration have had the opposite effect. Waters raised concerns that protections put in place following the financial crisis were being rolled back, which she said would hurt main street, and opined on whether the Office of the Comptroller of the Currency (OCC) would continue deregulatory efforts.  Waters expressed her support for the modernization of the Community Reinvestment Act (CRA) to ensure banks are meeting the needs of their communities, but warned that reform should refrain from weakening requirements, particularly in the prevention of discriminatory “redlining.”

Rep. Blaine Luetkemeyer (R-Mo.)

In his opening statement, Luetkemeyer expressed frustration with eight years of “failed economic policies that led to the slowest recovery in economic history” and an inflow of excessive regulation following the financial crisis. He expressed concern with the trend of “de-risking,” and urged the Comptroller to clearly communicate his positions and to ensure that the examiners of the OCC use their positions to ensure “safety and soundness in our financial system” rather than advance a political agenda.

Testimony

The Honorable Joseph Otting, Comptroller, Office of the Comptroller of the Currency

In his testimony, Otting outlined a set of goals and objectives to reduce the regulatory burden and ensure economic growth while maintaining the safety of financial institutions. Otting noted that the OCC is unique in that it is the sole regulator dedicated to prudential supervision, overseeing small community banks and the largest, most globally active banks in the country. Otting listed his three major priorities since his appointment in November: 1) the modernization of the CRA, 2) the encouragement of banks to meet “short-term, small dollar credit needs” for the consumer, and 3) enhancing Bank Security Act (BSA) anti-money laundering (AML) compliance. Otting then acknowledged additional objectives, including the simplification of regulatory capital requirements, recalibration of the Volcker rule, and ensuring that the OCC works efficiently and in the interest of the consumer. Otting underscored the role that the OCC plays in maintaining a safe and efficient financial system and preventing consumer abuse.

Question & Answer

Community Reinvestment Act (CRA)

Otting fielded a number of questions about CRA. Rep. Gregory Meeks (D-N.Y.) inquired whether fair lending should play a role in CRA examinations, to which Otting replied that the CRA never included fair lending components, but rather looked at whether a bank is “serving the entire community” in which it operates.

Rep. Ann Wagner (R-Mo.) asked what problems the OCC sees with the CRA. Otting answered that we need a “more objective” way to measure banks’ success, as they are currently evaluated in a subjective points process. Otting also noted that there is a narrow definition of CRA activities and we need to expand the definition of what activities qualify.

Rep. Ed Royce (R-Calif.) said that many local bankers are frustrated that more small business lending is not included in CRA and therefore there is not a complete picture of the impact banks are having in their communities, to which Otting agreed that the categories of products that are CRA-qualified should be more broad. 

FinTech Charter

Numerous committee members inquired about FinTech charters, noting that the OCC will soon decide whether to allow FinTech companies to operate under a national charter. Rep. Carolyn Maloney (D-N.Y.) asked if such companies would be subject to the same supervisory regime as banks. Otting confirmed that the companies would be under the same supervision as national banks, and that they would be subject to capital liquidity requirements and required to serve the community like any other bank. Otting also noted that he has been “directly involved” in conversations surrounding the issue. Otting said that some FinTech companies now would prefer to be classified as vendors who can provide services to banks, such as portals, in order to connect with customers, rather than operate under a special charter.

Rep. Andy Barr (R-Ky.) asked about conflicting state laws and regulations. Otting replied that some state agencies are trying to create coalitions so that companies can operate within states that have common laws. 

BSA/AML Compliance

Luetkemeyer noted that he is working on legislation to modernize BSA AML laws, and asked Otting to elaborate on the issue. Otting said that the current BSA/AML system is both labor- and paper-intensive, and it is not certain that the effort is having the intended results. Otting continued that modernization would improve ability to detect bad actors while lessening the burden on financial institutions. Otting also said that today’s technology can be used to look at entire databases, rather than individual suspicious activity reports (SARs), and can help detect when bad actors move money between institutions. Otting said the most burdensome components of the current structure include a number of SARs that need to be filed, and the fact that there is not a risk-based assessment process, but rather a one-size fits-all process. He added that banks need a safe harbor if they hold an account open for the benefit of law enforcement. 

Volcker Rule

Rep. Bill Huizenga (R-Mich.) asked about the Volcker rule, and whether the rule has impaired liquidity in times of stress. Otting replied that increasing liquidity is important, and while we have not yet been in a time of stress to test it, the rule could have the potential to impair liquidity. Huizenga asked about conflicting guidance from regulators on the Volcker rule, and Otting said it has been a “remarkable task” to bring the agencies together to agree on a path forward. Otting said that harmonization between agencies is the goal and noted that he is meeting regularly with the other agency heads on the issue.

Rep. Randy Hultgren (R-Ill.) said that the Volcker rule has had a “detrimental impact” to venture capital funds and the startups they support, and asked Otting if he believes venture capital funds should fall within the definition of private equity funds. Otting replied that he believes it does fall under the current definition, and it is a “legitimate, stable source” of funding for small companies. 

SIFI Designation

Rep. Nydia Velazquez (D-N.Y.) asked about changes to the systemically important financial institution (SIFI) designation threshold, and whether the OCC will tailor regulations to meet the actual systemic risk of the firm. Otting said that he is supportive of the new guidelines, and that bank risk management is the best it has been in 35 years. He noted that the new standard does not mean banks will not continue to perform their risk assessment functions, and the OCC will continue to look at them. Otting said that the OCC uses a risk-based system to conduct annual examinations, and if they observe imminent risk, they would allocate resources to address it.

Cybersecurity

Rep. Barry Loudermilk (R-Ga.) asked about cybersecurity and data protection, and what the OCC is doing to ensure consumer data is protected. Otting replied the OCC examines banks’ data security and technology, and request action when they find deficiencies. Otting added that the Department of Treasury is coordinating and taking the lead among agencies on cybersecurity efforts.

For more information on this hearing, please click here.