July 27, 2017
Senate Committee on Banking, Housing, and Urban Affairs: Executive Session and Nomination Hearing
Key Topics & Takeaways
- Regulatory Burden: Sen. Mike Crapo (R-Idaho) asked if certain regulations should be reexamined, Federal Reserve nominee Randal Quarles replied that he agrees that certain reevaluations of existing rules were appropriate. Comptroller of the Currency nominee Joseph Otting agreed that there are many areas worth exploring in the current regulatory framework.
- Non-Bank SIFIs: Sen. Pat Toomey (R-Pa.) called the Financial Stability Oversight Council’s (FSOC) process for designating non-bank systemically important financial institutions (SIFIs) “badly flawed,” and “opaque.” Otting agreed, stating that greater definitions were needed before designating additional SIFIs.
- Mr. Joseph Otting, to be Comptroller of the Currency
- The Honorable Randal Quarles, to be a Member, Reappointment as a Member, and Vice Chairman for Supervision, Board of Governors of the Federal Reserve System
Sen. Mike Crapo (R-Idaho), Chair, Senate Committee on Banking, Housing, and Urban Affairs
In his opening statement, Crapo discussed Comptroller of the Currency nominee Joseph Otting’s long career in financial services and the extensive experience he would bring to the Office of the Comptroller of the Currency (OCC). Crapo also opined on Federal Reserve nominee Randal Quarles’s experience, stating he is no stranger to public service having served in multiple posts. Crapo continued that if confirmed, Quarles would play a key role in developing the regulatory and supervisory policy leading the Federal Reserve system.
Sen. Sherrod Brown (D-Ohio), Ranking Member, Senate Committee on Banking, Housing, and Urban Affairs
In his opening statement, Brown said he was glad to see the committee moving forward on nominees, as it failed to do so under the previous administration. Brown stated the nominees are dedicated public servants tasked with making the financial system safer, but expressed concerns about statements made by Quarles prior to the 2008 financial crisis about the purported health of the financial system at the time.
Mr. Joseph Otting, to be Comptroller of the Currency
In his testimony, Otting stated he would be honored to serve should his nomination be confirmed. Otting discussed his career and experience, including learning the value of business and leadership from his entrepreneur father, joining a finance training program early in his career, and how in his 34 year career has touched “every segment of the industry.” Otting stated he will work to ensure the industry operates in a safe and sound manner, treats customers fairly, and that he will honor the OCC mission.
The Honorable Randal Quarles, to be a Member, Reappointment as a Member, and Vice Chairman for Supervision, Board of Governors of the Federal Reserve System
In his testimony, Quarles stated the Federal Reserve system occupies a central position in promoting a strong economy and supporting the stability of the financial sector. Quarles ensured his strong commitment to the Federal Reserve’s objectives, including its role in ensuring the safety and soundness of the financial system. Quarles said that he believes some “refinements” of the regulatory system are in order, and that changes can be made without risking financial stability. Quarles highlighted his experience in the financial sector from “many points of view,” stating he would approach the position with openness to input from many sources.
Question & Answer
Sen. Pat Toomey (R-Pa.) called the Financial Stability Oversight Council’s (FSOC) process for designating non-bank systemically important financial institutions (SIFIs) “badly flawed” and “opaque,” and asked if it was appropriate halt designating any additional non-bank SIFIs until the process changes. Otting agreed, stating that greater definitions are needed before designating additional SIFIs.
Sen. Tim Scott (R-S.C.) discussed how the Federal Reserve and OCC oversee a large swath of the insurance industry, and asked the nominees if the insurance industry poses the same risks as banks. Quarles responded that systemic risk is created when an organization has short-term liabilities that can all be called very quickly, which are funding activities that are highly interconnected with the rest of the system. Quarles said this scenario is not practical to consider regarding the insurance industry, and therefore the risks are “quite different.” Otting agreed, stating insurance companies do not pose the same ricks as banks. Both nominees agreed with Scott’s suggestion that there should be a voting member on FSOC with insurance expertise.
Crapo asked Quarles if certain regulations should be reexamined, including the $150 million SIFI threshold, the Volcker Rule, and the capital regime for community banks. Quarles replied that he agrees that the suggested evaluations of existing rules are in line with how he would approach regulation. Quarles added that he would want transparency to be a central theme of the Federal Reserve’s regulatory activities, and that the agency must be clear about the principles driving its decisions.
Sen. Mike Rounds (R-S.D.) opined on the regulatory process, asking if the process should clearly define the rules, if there are regulations in place today that make it difficult for banks to understand the expectations, and if the supplemental leverage ratio (SLR) fails to account for safe investments like cash deposits. Quarles agreed that these are areas worth examining more closely. Otting expanded that the complexity of the SLR makes it difficult, because some assets held on the balance sheet have limited to no risk.
Toomey discussed that a flaw in Dodd Frank is the resolution authority granting discretion to regulators in the case of a failing financial institution, and highlighted his legislation to amend the bankruptcy code to make it applicable even to large, complex financial institutions so the loss incurred by a failed institution would be taken on by shareholders and creditors, rather than taxpayers. Toomey asked if this was an appropriate course of action. Quarles said his approach to policy is that the discretion of policymakers and regulators should be as constrained as possible, and their intended execution of policy should be as clear as possible in order to avoid uncertainty. Quarles stated he considers amending the bankruptcy code a “valuable effort” and the “right way” to approach the failure of a financial institution, so it may fail in the same way any other institution can fail.
Sen. Elizabeth Warren (D-Mass.) asked if the Volcker Rule should be cut back. Quarles responded that the complexity of the rule makes it difficult to apply, and it should therefore be simplified.
For more information on this hearing, please click here.