May 15, 2018

Senate Banking, Housing, and Urban Affairs Committee Nomination Hearing

Key Topics & Takeaways

  • Regulatory Reform: Both nominees expressed a willingness to tailor financial regulations in their testimony.  Clarida said he was open to finding efficiencies through tailoring regulations but said he did not want new rules to put the financial system at risk. Bowman noted that much work has been done to improve bank’s levels of capital and liquidity, and said that regulators should consider size, complexity, and risk profile of firms when tailoring regulations.
  • Capital and Liquidity Requirements: The hearing also featured numerous questions about the Federal Reserve’s recently-released proposal to revise regulatory capital rules. Both nominees discussed the importance of capital requirements as a method of ensuring financial market stability but declined to comment at length on the Federal Reserve’s proposal. Clarida said that he believed there are opportunities today to appropriately tailor regulations while maintaining the resiliency of the financial system

Nominees

Opening Statements

Chairman Mike Crapo (R-Idaho), Senate Banking Committee

In his opening statement, Crapo introduced the nominees, stating that they are both highly qualified for the positions and stressing the importance of each position in ensuring safe and sound financial systems. He continued that if confirmed, Bowman will play a critical role in implementing S. 2155 into law.

Ranking Member Sherrod Brown (D-Ohio), Senate Banking Committee

In his opening statement, Brown echoed Crapo’s comments about the well-qualified nominees, adding that Clarida spent his entire career studying monetary policy. He continued that while he agrees each are qualified, he is concerned that Treasury’s recommendations to tailor and recalibrate regulations implemented after the financial crisis is part of “Wall Street’s wish list.” Brown noted that due to Bowman’s experience, she has seen first-hand how the failure of the banks during the crisis directly impacted consumers and Main Street. He stressed the need for the nominees to “push back” on policies that may weaken the stability of the financial system, and called on them to push back on the Fed’s Vice Chair of Supervision Randy Quarles when necessary.

Testimony

The Honorable Richard Clarida, Member and Vice Chairman-Designate, Board of Governors of the Federal Reserve System

In his testimony, Clarida noted his support for the Fed’s dual mandate of maximum employments and price stability, adding that he will support effective, efficient and appropriately tailored policies if confirmed. Clarida explained that his experience in monetary policy makes him well-qualified for the position, adding that his analyses have been cited by the Fed and central banks around the world, and that he has also served in the executive branch in economic policy positions. He concluded that if confirmed, he will work with Fed Chairman Jerome Powell and other Fed colleagues to ensure transparency and accountability within the Fed.

Michelle Bowman, Member-Designate, Board of Governors of the Federal Reserve System

In her testimony, Bowman explained that community banking is part of her family’s legacy, as her father is a fourth generation banker. She then stressed the importance of community banks, as they play a critical role in helping Americans access credit and spur economic activity through lending. Bowman stated that her most challenging role was as a compliance officer, as she witnessed first-hand how the post-crisis regulatory environment disadvantaged community banks, and that she will bring that perspective to the Fed. She continued that she will work to ensure rules and regulations are appropriately tailored to an institution’s size, complexity and risk. Bowman then stated her commitment to ensuring transparency, communication and accountability at the Fed if confirmed.

Question & Answer

Regulatory Reform
Crapo noted that both nominees discussed tailoring regulations in their testimony and asked them to further explain. Clarida replied that his focus will be to find efficiencies and tailor regulations as best as possible without putting the financial system at risk. Bowman added that much work has been conducted on improving levels of capital and liquidity, as well as stress testing and the resolvability of a financial institution post-crisis. She continued that in tailoring regulations, the complexity, size and risk of institutions must be considered to ensure the safety and soundness of the financial system.

Sen. Thom Tillis (R-N.C.) asked the nominees for their thoughts on the application of Basel III standards to community financial institutions. Clarida noted that international rules require domestic rulemakings to implement, and that if confirmed he would carefully review the comments of financial institutions who stand to be impacted by internationally-negotiated standards.

Capital and Liquidity Requirements

Brown asked the nominees if they agreed that capital requirements are the most important rules for ensuring banks can weather adversity and difficult economic conditions. Bowman agreed that capital requirements are impactful, though she noted that liquidity requirements are also important. Bowman declined to commit to opposing proposals at the Fed that would reduce the leverage requirements for large banks.

Sen. Elizabeth Warren (D-Mass.) asked for Clarida’s views on bank regulation, particularly capital and liquidity requirements. She noted Vice Chair for Supervision Quarles’ comments at his recent hearing before the committee where he stated capital requirements for the big banks will be reduced due to the new capital standards proposal. Clarida replied that there are opportunities to appropriately tailor regulations while maintaining the resiliency of the financial system, and that on any voting matter that comes before him if confirmed, he will ensure that resiliency and stability are not sacrificed. He added that while he has not studied in detail the capital standard proposal, he will have an open mind when it comes time to vote on the final rule after comments are received.

Sen. Catherine Cortez Masto (D-Nev.) echoed Warren’s concern about reducing capital requirements, to which Clarida stated that there is a need for a better understanding for different parts of the financial system, to include moving certain transactions to exchanges and clearing. 

Balance Sheet

Crapo discussed how the Fed is beginning to shrink their balance sheet, which is currently about $4 trillion, noting that Powell has discussed moving toward $2.4-2.9 trillion in the next few years. Clarida agreed that the Fed’s balance sheet needs to be smaller and that he supports the efforts to shrink it. He continued that while Powell’s balance sheet goal makes sense, he has not “studied it deeply” but will work with his colleagues at the Fed to assess the appropriate metrics in determine when the balance sheet no longer needs to shrink.

Sen. Patrick Toomey (R-Pa.) asked what normal interest rates look like given the “unprecedented behavior” of the Fed in recent year, to include the “extraordinary” quantitative easing process and buying billions of dollars’ worth of bonds like mortgage-backed securities (MBS). Clarida replied that there are costs and benefits to quantitative easing, and that while it may have made sense in 2008 for the Fed to pursue this option, he is not sure how he would vote if he were on the Fed at the time. He continued that he would prefer for the Fed to have a Treasury-only portfolio, to which Bowman concurred with.

Cybersecurity

Sen. Jack Reed (D-R.I.) discussed he and his colleague’s discussions with the Securities and Exchange Commission (SEC) to require public company boards of directors to have a member with cybersecurity experience. Reed noted that bank holding companies (BHCs) are particularly large targets for cyberattacks and asked the nominees if they would use their supervisory powers to push BHCs to have cyber professionals at the board of director’s level. Clarida agreed that cybersecurity is critically important for the financial services industry but declined to commit to such a program.

Monetary Policy

Sen. Tim Scott (R-S.C.) asked the nominees if stock market volatility would affect their decisions regarding interest rate increases. Clarida and Bowman agreed that stock market volatility should not impact interest rate decisions by itself but conceded that volatility should be considered in conjunction with other factors.

Toomey stated that the Fed’s monetary policy contributed to the financial crisis, to include interest rates that led to the housing boom and bubble. Clarida agreed that monetary policy was part of it, but that there were other factors and it is difficult to “parse the quantities of contribution,” to which Bowman agreed.

Housing Finance
Sen. Jon Tester (D-Mont.) asked the nominees if they believe there should be a government guarantee on certain MBS to preserve the 30-year fixed rate mortgage. Bowman replied that 30-year fixed rate notes are “very important” to community members and Clarida added that they are a “crucial part of the system,” voicing his support for them.

Tester then asked if having the government-sponsored entities (GSEs) in conservatorship is having a negative impact on the economy. Clarida noted that while he is not a housing finance expert, having the GSEs in a conservatorship since 2008 is “probably not desirable,” to which Bowman agreed.

For more information on this hearing, please click here.