▶ 0:21:35The subcommittee on financial institutions will come to order. Without objection, the chair is authorized to declare a recess of the committee at any time. Today's hearing is titled right sizing the US bank capital framework, a return to tailoring economic growth and competitiveness. Without objection, all members will have five legislative days within which to submit extraneous materials to the chair for inclusion in the record.
▶ 0:22:02I now recognize myself for four minutes for an opening statement. Today, this subcommittee turns its attention to an issue that sits at the heart of American economic strength, our bank capital framework. For years, Washington has layered rule upon rule on American banks, forcing them to retain capital at levels that far exceed standards applicable to our global competitors. And the results have been detrimental to US firms.
▶ 0:22:32We have a capital system that is increasingly gold plate that increasingly goldplates international requirements, imposes one-sizefits-all mandates on institutions with different risk and business profiles and undermines the competitiveness of American institutions. Let me be clear, Republicans on this committee support a tailored common sense capital framework that protects the safety and soundness of the American financial system.
▶ 0:23:01But what we do not support is a regulatory framework that needlessly restricts credit, penalizes growth, and places American banks at a disadvantage against foreign competitors who are held to lesser standards. The Basel 3 endgame framework should not be solely focused on international harmonization. It should be focused on economic growth as well.
▶ 0:23:25Capital should be rightsized to protect the economy, not inflated for ideological reasons, not used as a tool to achieve political objectives, and not calibrated without regard to the real world impacts on lending, liquidity, and the economic vitality of local community This is why the Bos the Biden administration's initial Basel 3 endgame proposal was deeply flawed and received bipartisan criticism.
▶ 0:23:50It threatened to elevate capital burden so far above international norms that entire categories of banking business lines from residential mortgages to market making could have migrated to offshore institutions. Fortunately, the bipartisan message was clear. The Basel 3 endgame must be reproposed and that reproposal is not just an opportunity but a responsibility but a responsibility to get this right. We need a framework that is proportional, tailored and grounded in empirical analysis.
▶ 0:24:20We need a framework that recognizes the diversity of the American banking system. We must build upon the bipartisan S2155 to ensure capital requirements are tailored based on a bank's size, complexity, and risk profile. Indeed, a regional bank focused on traditional lending should not be subject to the same standards intended for institutions engaged in significant trading, crossber activities or complex market operations.
▶ 0:24:45We must account for growth in the economy by indexing regulatory and category thresholds. This way, banks do not stifle their growth when it is needed most. If we get this right, if we rightsize capital, eliminate unnecessary gold plating, and build a framework that tailors requirements to actual risk, we can preserve what makes American banking exceptional. We do not want a barbell banking system in this country with a number of small banks and gibs and nothing in between.
▶ 0:25:11Achieving this stems from a well-calibrated capital framework that incentivizes growth and competition while maintaining safety and soundness. We must ensure that community banks continue to serve as economic anchors in small towns and rural communities. We must keep US institutions competitive on the global stage and we must create a regulatory environment that supports not strangles growth, innovation and opportunity.
▶ 0:25:35So today I look forward to hearing from our witnesses about how we can design a capital framework that strength strengthens stability without sacrificing competitiveness that respects the structure of the American banking system that promotes the heterogeneity and diversity of that system and reigns in the excesses of prior regulatory overreach. I thank our witnesses for being here today to provide their valuable insights and perspectives and I yield back.
▶ 0:26:05I now recognize the ranking member of the subcommittee, Dr. Foster, for four minutes for his opening statement.
▶ 0:26:11Thank you, Chairman Bar and to our witnesses. You know, I represent Woodstock, Illinois, where the film Groundhog Day was filmed. So, here we go. One going to once again examine the cap regulatory capital framework for US banks. uh part of the credential regulatory umbrella, capital standards provide a buffer against insolvency when financial institutions take losses, helping them weather economic downturns, failed investments or the missteps of management.
▶ 0:26:37The 2008 financial crisis highlighted flaws in the regulatory framework for US banks when the true risk of assets did not match the corresponding capital charge assigned to them. supposedly well-regulate, well-rated mortgage back securities and off-balance sheet exposures received little supervisory attention leading to massive losses and a crisis of confidence in the banking system uh when those same assets dropped by enormous amounts.
▶ 0:27:02In response to this crisis and the taxpayer funded bailout of the US financial system, Congress passed the Wall Street DoddFrank Wall Street Reform and Consumer Protection Act to enhance the supervision and regulation of the financial system. DoddFrank took a tiered approach, applying the most stringent capital to the largest and most complex banks that pose the greatest risk to financial stability.
▶ 0:27:24The largest banks became subject to sta safe safeguards meant to prevent a similar crisis, including higher capital ratios, stress testing, resolution planning, and other credential requirements. Following the financial crisis, financial regulators around the world, including the United States, convened in forums like the Basel Committee on Banking Supervision to facilitate cooperation between member company countries and enhance financial stability.
▶ 0:27:47These forums are important as the this cooperation prevents a race to the bottom that would ultimately make global financial system much less safe. Since the enactment of DoddFrank, Congress has revisited several credential standards to respond to changes in the banking economy.
▶ 0:28:03a risk to financial stability change over time and new risks emerge which for example everything having to do with technology that should be our focus today and unfortunately instead of repeating the the same you know same debate that's crystallized around 2009 hasn't changed in almost 15 years.
▶ 0:28:22Um and the the regional banking crisis for example in 2023 demonstrated that bank runs following steep losses can occur much faster than previously thought and they're going to become faster when agentic AI makes uh bank runs possible at the speed of AI rather than the speed of internet gossip. I worry that these type of events will be much more common with the commoditization of AI, the introduction of emerging volatile assets into the banking system.
▶ 0:28:49Banking regulators have a duty to ensure that the banks and their agencies are ready to deal with these types of runs and to strengthen safeguards against rapid withdrawals and dramatic price swings in various asset classes. Under President Trump, the banking regulators have taken steps that undermine this financial stability, namely by dismantling the Consumer Financial Protection Bureau, which was created by DoddFrank to stop the very same predatory lending practices that contributed to the global financial crisis.
▶ 0:29:16They've also moved to weaken weaken stress testing for the largest banks, cut staffing at at EPSOC and its member agencies and are pushing firms to engage with digital assets that can experience extremely high price volatility. We expect banking regulators will soon propose a revised rule to implement the principles of the Basel 3 endgame under the last iteration of the proposal.
▶ 0:29:39Members of this committee raised certain concerns about the proposal related to the capital treatment of mortgages, small business loans, tax equity, and derivatives used for risk management. So, I encourage regulators to consider these concerns as they develop the new proposal and the and the combined impact of financial stability with the other changes uh being advanced on leverage, stress testing, and other areas.
▶ 0:30:02My colleagues on this committee uh should call for a robust costbenefit analysis for the coming proposal as they did with the last proposal and push regulators to back up their proposals with data. Thank you again, Chair Bar, and I yield back.
▶ 0:30:17The gentleman yields back. I now recognize the chairman of the full committee, Mr. Hill, for one minute for an opening statement.
▶ 0:30:24Thank you, Chairman Bar. The US banking systems at a pivotal juncture [clears throat] right now. Regulators have the opportunity to establish credit and capital standards that strengthen financial security without unduly limiting economic growth or banks ability to compete on an international scale. Even so, small and community banks continue to fa face disproportionate compliance and capital burdens that were never intended for institutions of their size.
▶ 0:30:52Despite these challenges, US banks remain, as chairman pal has mentioned many times, well- capitalized, resilient, and able to support lending, investment, and economic growth. This does not mean we should ignore the inefficiencies in the current framework. And particularly under Chairman Bar's leadership, the Congress must encourage regulators to tailor capital requirements based on bank size, complexity, and risk profile rather than applying a one-sizefits-all approach.
▶ 0:31:20Thoughtful tailoring can free up capital for productive uses, helping banks support small businesses, home buyers, and economic expansion across all of our districts. Thank you, and I yield back. I now recognize the ranking member of the full committee, Mrs. Waters, for a one minute opening statement.
▶ 0:31:39Uh, thank you very much. Uh, I look forward to the testimony, uh, as we discuss bank capital. Trump's regulators and Republicans are tearing down the safeguards that keep our banks safe to ensure stable economic growth. Reducing capital for our largest banks will make them less resilient, less likely to lend during periods of stress and more likely to fail.
▶ 0:32:05Weakening these safeguards, these guard rails uh leads hardworking Americans to bear the consequences. We saw this in 2008 when banks gambled with borrowed money and families, workers, and small businesses and whole communities paid the price.
▶ 0:32:22If we want to strengthen our financial system for the benefit of small businesses and their workers as well as community banks and credit unions, then I hope Chairman Hill will work with me to advance overdue deposit insurance reforms. And on this issue of capital and uh the continued efforts by the Republicans to reduce the capital uh that the bank should hold, we're going to have a Gentle lady's time is expired.
▶ 0:32:51Today we welcome the testimony of some outstanding uh witnesses. First, Miss Margaret Tyer, head of financial institutions at Davis Pulk. Miss Amanda Eversol, president and chief executive officer of Financial Services Forum. Mr. Andrew Olman, managing partner and co-leader of the financial services group at Mayor Brown. Mr. Mike Flood, the other Mike Flood, head of the center for capital markets competitiveness at the US Chamber of Commerce, and Mr.
▶ 0:33:20Simon Johnson, professor of entrepreneur entrepreneurship at the MIT Sloan School of Management. We thank each of you for taking the time to be here. Each of you will be recognized for five minutes to give an oral presentation of your testimony. Without objection, your written statements will be made part of the record. Miss Tyer, you are now recognized for five minutes for your oral remarks.
▶ 0:33:40Chairman Bar, Ranking Member Foster, and members of the subcommittee, thank you for asking me to testify. Capital regulation is long overdue for a rethink, and this subcommittee should encourage the banking regulators to move quickly to appropriately implement the Basel 3 endgame with appropriate data, appropriate costbenefit analysis. I'd like to leave you with three thoughts this morning. First, capital is very important, but it is not the only tool in the financial stability kit.
▶ 0:34:11Second, choices about the calibration of capital are political economy choices that involve credit engineering. They can also change the regulatory perimeter. Third, our economy and our banking sector are complex. Tailoring uh as the chairman has noted is the solution so that we do not treat large banks the same as community banks. Capital is an important thing but it is not everything. We cannot expect it to be the sole insurance against financial stability.
▶ 0:34:39We should see it as part of an integrated system that also includes early intervention, resolution planning, credit concentration, contingency planning, risk management, TAC deposit insurance and hands-on supervision. And we should understand that capital absorbs losses, but it's not liquidity regulation. So it doesn't help against quick deposit runs. Capital regulation involves political economy choices.
▶ 0:35:06How much financial stability insurance should a banking organization be required to purchase? Any increase in bank capital requirements increases the cost of funding. I think we can all agree that capital levels going into the great financial crisis were too low. But today I think we have to ask whether current capital levels also come at a cost to the real economy. Risk rating for purposes of riskbased capital requirements is a form of credit engineering.
▶ 0:35:31The 0% risk waiting for treasuries, the 50% risk waiting for mortgages and the international basel committee's 1,250% risk waiting for crypto assets reflect political economy choices that are appropriate for this committee to For example, if implemented, the crypto assets risk waiting would seem to be contrary to the Genius Act. Another point is that any capital framework will need updating and renewal from time to time.
▶ 0:36:00Even though the debates share patterns, that update should be data-driven, understanding it'll never be perfect. Markets and technology and geopolitics aren't waiting around for the Basel 3 endgame. In fact, calling this last latest round of rulemaking Basel 3 in-game is kind of a misnomer, implying that once the next round of rules takes effect, we're done. And I think we should not think of capital as a Marvel movie with a with a tidy ending.
▶ 0:36:30The economy, the financial system will remain in constant flux, and banking regulators should periodically review capital regulation. Capital regulation should be tailored. The tailoring principle is especially critical in the United States given the complexity of our economy, the largest economy in the world, the geographic spread. We have a banking sector whose structure is very different from most other countries with our many different sizes of banks, and we need to avoid that barbell.
▶ 0:36:56Wisely, the banking regulators did not impose every new complexity on every banking organization. But it is fair to question whether we're appropriately tailored and whether there should be some indexing particularly for um e as the economy grows. All policy choices have tradeoffs but our focus should be on the real economy, jobs, American competitiveness and wealth creation. This should not be a red team, blue team issue.
▶ 0:37:25We should approach it in a spirit of bipartisanship as a purple issue. And in that spirit, I am wearing a purple jacket today. Thank you. Thank you.
▶ 0:37:37Thank you. Very good. Um [clears throat] uh Miss Eversol, you're now recognized for your testimony.
▶ 0:37:44Great. Thank you, Chairman Bar, Chairman Hill, Ranking Member Foster, and Ranking Member Waters, members of the subcommittee. Uh my name is Amanda Eversol and I'm president and CEO of the Financial Services Forum which represents the eight global systemically important banks or GSIBs headquartered in the United States. Every day, forum members and their nearly 700,000 employees across this nation provide the capital that fuels America's economy.
▶ 0:38:11Forum members provide nearly half of all consumer lending by banks in the United States by helping Americans purchase their first homes, buy a family car, or start a business. Foreign members also support our vibrant, highly liquid capital markets, ensuring that they remain the envy of the world. And foreign members play a critical role in meeting the funding needs of other financial institutions, including community and regional banks.
▶ 0:38:38Above all, we remain committed to ensuring a strong, stable, and healthy financial sector and economy. The USGIBs have never been more capitalized and more resilient. They are subject to the most stringent regulatory standards among both US and foreign competitors. Over the past 15 years, the USGIPS have tripled their capital and now maintain more than $1 trillion dollar in highquality capital.
▶ 0:39:09But more capital isn't always better. There are economic trade-offs to higher requirements. According to academic research, a 3% increase in required capital cost can cost the c the US economy between 100 and $150 billion per year. And it's critical we that we get the balance right.
▶ 0:39:28After years of post-crisis implementation, now is the time to modernize large bank capital regime so US banks can better support American families, small businesses, and our capital markets. We appreciate efforts by the administration and regulators to take a comprehensive approach to capital. There are three important factors that should be considered as this committee explores this issue further. First, capital requirements must be supported by data and calibrated accordingly.
▶ 0:39:57The Basel 3 endgame proposal uh from 2023 serves as a prime example. That proposal and the regulatory approach to the Basel 3 endgame would have increased capital for forum members by 25% without any clear justification or analysis. More than 97% of commenters raised concerns with the proposals and 86% of those comments came from outside of the banking industry, which is an important fact to note.
▶ 0:40:26Capital rules have a clear and significant impact on homeowners, small businesses, retirees, manufacturers, and farmers. It's critical that we take the economic impacts into consideration when determining capital rules and we look forward to the revised Basel 3 in-game proposal that meets the needs of the US economy. Second, several aspects of the large bank capital framework make it harder for US banks to compete pushing activity to foreign banks and less regulated non-banks.
▶ 0:40:53This migration of risk makes the system less safe and less stable. The GIB searchcharge is perhaps the best example of a self-inflicted disadvantage with our foreign competitors. The US approach to the GIB searchcharge is nearly twice that of our foreign competitors, resulting in an additional $100 billion in capital that could be deployed into the US economy.
▶ 0:41:14We appreciate the commitment by regulators to review this rule and we look forward to a proposal that will harmonize the USGS searchcharge with the international standard to better meet the needs of US business and hardworking American families. Third, enhanced transparency and public accountability is the bedrock principle of good government. The Federal Reserve's initiative to improve the transparency of stress testing models and scenarios will improve bank risk management, reduce volatility, and allow banks to better serve their clients and customers.
▶ 0:41:44We look forward to providing our comments in this proposal. The world has changed over the last 15 years, and regulations haven't kept pace. Thankfully, regulators have begun to address this problem by recalibrating the enhanced supplementary leverage ratio, a move that will enable banks to intermediate the US Treasury market without sacrificing overall financial stability. We we look forward to continued progress in this important area.
▶ 0:42:09Now is the time to modernize capital requirements so we can unleash our full economic potential, boost lending to small businesses and consumers, and drive America's economy forward. Of course, we can do that while protecting the safety and soundness of the best financial system in [clears throat] the world. Thank you for the opportunity to testify today, and I look forward to your questions.
▶ 0:42:31Thank you, Mr. Olman. You're now
▶ 0:42:33Chairman Bar, ranking member Foster, Ranking Member Waters, and the members of the subcommittee. I appreciate the opportunity to testify today on right sizing US Bank Capital Framework. My testimony is given in my personal capacity and not on behalf of Mayor Brown or any of his clients. I want to start by commending the subcommittee for holding this hearing because capital requirements are at the core of effective bank regulation. They have a major impact on the safety and soundness of the banking system as well as on the overall economy and each American household.
▶ 0:43:03It is therefore critical that they are appropriately calibrated. This committee's oversight of the prior Basel 3 endgame proposal played a valuable role in raising bipartisan concerns about its potential adverse consequences. Those concerns prompted the banking regulators to pause and reconsider the proposal. Thanks to this committee's work, the Basel endgame is moving in a better direction.
▶ 0:43:25As the subcommittee now prepares to evaluate the upcoming revised Basel 3 endgame proposal, I've included in my written written testimony several recommendations for your consideration. I concur with the prior uh remarks of my panelists about the importance of basing capital requirements on the best data and research available and that choices about capital requirements are public policy choices. I'd like to highlight three additional points from my written testimony.
▶ 0:43:52First, it is important to view any capital proposal within the context of the larger regulatory reforms the banking regulators are currently undertaking. The most important in my view of these is the ongoing reform of bank supervision. Effective supervision is an essential companion to capital requirements because supervisors can identify and address risks that do not show up on balance sheets. Unfortunately, bank supervision has become far too bureaucratic with supervisory matters lingering for years unresolved.
▶ 0:44:22Supervision should be focused on identifying problematic and material risks, addressing them, and returning a bank to normal operations. Reforming bank supervision will facilitate better compliance with bank capital requirements as well as faster resolution of problems with bank capital and other safety and soundness matters. The banking regulators efforts to reform bank supervision should have Congress's full support.
▶ 0:44:46Second, one-sizefits-all regulation can um undermine competition and the ability of banks to devise unique business models to serve their communities and customers. As noted that to address this problem, Congress has statutoily mandated in both the DoddFrank Act and in the Economic Growth Regulatory Reform and Consumer Protection Act, known as S125, that the banking regulators tailor enhanced credential regulation.
▶ 0:45:12This mandate sensibly seeks to prevent a $300 billion bank from being regulated in the same manner as a two, three, or four trillion dollar bank. However, changes in the marketplace and inflation can push banks into inappropriate tailoring categories. Given the clear congressional mandate, the banking regulators have reasonable grounds for revising and updating the existing tailoring categories.
▶ 0:45:34Finally, it's important to consider the vital national interest at stake in ensuring that the US has the world's safest, most sophisticated, and technologically advanced financial regulatory system. The US benefits greatly by being the world's financial capital where all major financial institutions want to participate and invest. These benefits include lower financing costs for not only US consumers and businesses but also for the federal government's now $ 38 trillion debt.
▶ 0:46:00Furthermore, the dynamic 30 trillion US e economy requires an equally dynamic financial system that can fund the remarkably diverse and complex needs of consumers and businesses. Unfortunately, US bank regulation has diminished the attractiveness of the US market and made the banking system less innovative and less adaptable. These trends need to be corrected. Otherwise, Americans will face higher cost of living in the short run and will build wealth at a slower pace in the long run.
▶ 0:46:28The finalization of the Bosengame proposal, updating the tailoring thresholds, and reforming bank supervision are important step steps for modernizing US bank regulation and ensuring that the US has the banking system it needs to see the economy thrive and American households living standards rise. Thank you.
▶ 0:46:48Thank you, Mr. Flood. You're now recognized for five minutes. Good morning, Chairman Bar, Ranking Member Foster, Ranking Member Waters, members of subcommittee. Thank you for the opportunity to testify on right sizing the US bank capital framework. My name is clearly the other Mike Flood. With over 27 years of experience in financial services industry, I'm honored to represent the US Chamber of Commerce, the world's largest business association representing businesses of all sizes.
▶ 0:47:18Capital decisions affect every consumer business. Every consumer and business in your district, whether they're a first-time home buyer, a local tailor, or new business. Since the release of the previous Basel 3 endgame proposal in 2023, both parties in Congress, numerous state and local governments, industry, and bank customers have all raised significant concerns.
▶ 0:47:41In reaction, the previous Federal Reserve vice chair bar recognized that not only raising capital, but raising it beyond global standards should be recalibrated. We applaud the current leaders of credential regulators for continuing this process, including updating the enhanced supplementary leverage ratio and reforming the stress testing framework. We thank the members of this committee also for your continued oversight and engagement. There are three reasons why businesses care about capital.
▶ 0:48:10First, banks supplied substantial majority of small business financing. Last year, banks provided 9.1 million small business loans, of which the GIPS comprise 25%. Two, increased capital increases costs or reduces credit availability. A chamber survey of over 300 treasurers, not 300 bank treasures, 300 treasurers, makes clear that capital increases are felt by businesses and consumers.
▶ 0:48:37It found that 87% of businesses have been negatively affected by financial regulation and more importantly 40% have decreased services to their customers. Furthermore, a Basel study stated that for every 1% increase in capital, we should expect a 13 basis point increase in loan spreads. Think about that if we were to increase capital by 20%.
▶ 0:49:01Furthermore, the Basel committee itself said higher capital and liquidity requirements are assumed to increase the cost of bank credit. Three, more capital is unnecessary. Results and statements from the regulators themselves do not support increasing capital. First, in the past three year, past three stress tests reveal that banks can withstand quote a substantial downturn, remain above minimum capital requirements and lend to the US economy.
▶ 0:49:28Two, bank capital has more than tripled since 2009. And let's not forget that CO was a real life stress test. And if you don't believe me, let's believe the results from the FDIC. Over the past 5 years, 11 banks have failed, equal to a 0.052% failure rate. At the same time, bank charters have decreased by 3% annually with a mere 45 new charters granted. So, what's the impact on your constituents? I'm going to give you through a few examples that the chamber's analysis of the previous proposal found.
▶ 0:50:00One, private companies will pay more than public companies if we have excessive capital. Despite that, 99% of US companies are private companies. They are seen by Basel 3 Endgame as more risky than public companies. Quite frankly, it's hard to imagine outside of taste how Five Guys, a private company, and Shake Shack, a public company, are different. Two, lines of credit under Basel 3 endgame would be more expensive. This is the monthly lifeblood of nearly any business.
▶ 0:50:30Your local tailor will pay more for the used line of credit and oddly pay more for the unused line of credit. And again, this is beyond global standards. Three, mortgages, credit cards, and automotives will cost more, especially for constituents with low credit scores and individuals with low and moderate incomes will be most affected.
▶ 0:50:52In conclusion, at a time of significant affordability concerns, it is critically important to calibrate the entire bank capital structure to fit the size and complexity of the US banking system. This does include all banks, local, community, regional, super regional, national, international, and global banks. The chamber appreciates the current regulator regulatory efforts to update the capital frame framework and bring supervision back to We therefore urge regulators to adopt the following recommendations.
▶ 0:51:22Calibrate any final rule to preserve affordable lending, marketmaking liquidity, and a competitive US banking system. Two, base requirements on robust economic analysis that considers the impact on lending and economic growth. and three, update and tailor capital requirements as well as thresholds to reflect the size and risk profile of individual institutions for all categories of banks. Thank you and I look forward to answering your
▶ 0:51:50Thank you. And finally, Mr. Johnson, you're recognized. [clears throat]
▶ 0:51:53Thank you, uh, Chairman Bar, Ranking Member Foster, members of the subcommittee, thank you for asking me to testify at this timely and important hearing. My name is Simon Johnson. I'm a professor at MIT. I was previously the chief economist at the International Monetary Fund. I'm a former board member at Fanny May. I'm currently co-chair of the CFA Institute systemic risk council. I would like to make three points. Uh the first is about the numbers.
▶ 0:52:19Tier one capital as you know is the strongest form of capital because it is fully lossabsorbing. This includes shareholders equity and retained earnings. The supplementary leverage ratio, SLR, calculates the amount of tier one capital in 13 large banks relative to their total leverage exposure, which includes total assets and certain off-balance sheet items such as derivatives and loan commitments.
▶ 0:52:47The weighted average SLR for the eight American globally systemically important banks, the GIBs, peaked at close to 7% in 2017, and it's now 5.8%. That's an increase in leverage. This is all from their publicly available data as compiled by the Kansas City Fed. European and Canadian Gibs are more leveraged with an average SLR at 4.89%.
▶ 0:53:14Now this is exactly the same relative situation as prevailed before the global financial crisis of 2008. The biggest European banks are more leverage than the biggest US banks. But when a crisis breaks, more leverage means more vulnerability for individual banks and the financial system. Thank goodness that the FDIC pre208 resisted attempts to allow more leverage in the US banking system.
▶ 0:53:42By insisting on lower leverage, the FDIC under Sheila Bear helped protect the taxpayer, limit the fiscal damage, and reduce the number of jobs lost when the crisis hit. It is not, and I repeat, not to the European advantage that their big banks are more leveraged. That is a major vulnerability for them, exposing their taxpayers and their workers and their non-financial businesses to more risk. Do not race the Europeans to the bottom.
▶ 0:54:09Second, unfortunately, the FJIC today is in the exact opposite position to what it was before 2008 and just signed off along with the Federal Reserve and the OC on reducing the SLR. Now, based on the regulator's own calculations, this recent rule change will allow the SLR, so again setting the maximum leverage for big banks to reach around 3.8% for those 13 mega banks.
▶ 0:54:34And we're now discussing how to adjust risk weighted capital and stress tests and other things will allow the banks to move closer to that leverage. The regulators have clearly signaled that we're heading back towards the leverage ratios that prevailed before the crisis of 2008. And we're doing this without a proper costbenefit analysis, without any kind of robust economic analysis. What we need is a careful and complete study from the regulators of what will happen to the system stability with lower capital requirements. They have not provided this despite re repeated requests from responsible parties.
▶ 0:55:06Third, the arrival of artificial intelligence is a gamecher for finance as was discussed and emphasized at the House Financial Services Committee hearing yesterday. One presumed impact is that decision-m will speed up globally. AI agents will rush into trades pushing up asset prices. These same algorithms will also rush out creating various kinds of potential runs and fire sales. We are quite likely to experience as Dr. Foster said various forms of AI agentic runs on our banks. What happened to Silicon Valley Bank will will seem slow by comparison.
▶ 0:55:37Bank capital protects against insolveny. This is the lossabsorbing buffer. If the world is becoming more unstable, we should want our big banks to have more lossabsorbing capital. Instead, the regulators are pushing in a reckless manner towards allowing less capital. In summary, capital at the largest banks is eroding. This undermines our system and our economy. It makes us weaker in the global economy. In 2008, we barely had enough capital in our biggest banks. Since 2008, the world has become more unstable.
▶ 0:56:04pandemic, uh, global financial crisis, rise of China, AI, the arrival, the US economy needs a resilient banking system. The regulators are failing you and failing the American people when they allow leverage to rise to pre208 levels. And finally, I would like to quote from the national security strategy just released by the White House.
▶ 0:56:23quote starts, "We want a resilient national infrastructure that can withstand natural disasters, resist and thwart foreign threats, and prevent or mitigate any events that might harm the American people or disrupt the American economy. No adversary or danger should be able to hold America at risk." End quote. To achieve this goal, as stated in this document, you need more lossabsorbing equity capital in the banking system, not less. Thank you very
▶ 0:56:52Uh, thank you, Mr. Johnson. We're now going to turn to member questions. I now recognize myself for five minutes for questioning. Mrs. Eversol, uh, the, um, the word of the day in Washington is affordability and making life easier for the American people by lowering the cost of living. How can regulatory tailoring and enhancing US bank competitiveness through rightsizing the capital framework lower the cost of capital and help lower the cost of living for
▶ 0:57:19Mr. Chairman, thank you very much. It's a affordability is a huge issue and I think when as it relates to bank capital one size doesn't fit all and so we have a sophisticated system in fact the best most highly liquid vibrant capital markets in the world and we have uh the ability to make sure that we get it right and I appreciate the fact that this hearing has happened today. The Basel 3 endgame getting make making sure we get that right is a perfect example.
▶ 0:57:42If we can have if we can get that done, the impacts go to small businesses, main street through lower cost of borrowing and that helps drive the
▶ 0:57:50getting this wrong. Um and uh overregulation of the banking se sector will drive up the cost of credit period. Uh that is a simple uh and and and absolutely true fact and and that's why we've got to get this right. Mr. flood. Miscalibrated capital rules are extremely burdensome on small institutions that keep credit flowing to mainstream America. Community and regional banks are often the only lenders serving rural towns, family farms, small manufacturers, and firsttime home buyers.
▶ 0:58:17What are the downstream effects of inflated risk weights under the Biden administration's Basel 3 endgame that would affect community and regional banks ability to provide mortgages, agricultural loans, and small business credit?
▶ 0:58:29Thank you for the question, uh, Mr. Bar. We surveyed those 300 corporate treasures. We found that most small businesses use banks for their financing. They use an average of four banks. And as I think you can see from our analysis, the amount of banks in the country is decreasing. So the simple answer is a your consistent your constituents will either see increased costs or lack of availability of credit at banks.
▶ 0:58:51Second, we also or third, we also know that increased compliance costs affect every bank and we've seen how that has led to consolidation at the lowest levels. And finally, community banks like to replenish their capital. How do they do that? They sell loans or products to bigger banks. If those bigger banks have increased costs or increased risk weights for those same products, they're going to charge more to your smaller bank. So, a downstream
▶ 0:59:16Yeah. This is this is trickle down regulation. It's not just about the big banks. It's about community banks and making sure that the capital framework does not inadvertently shrink access to credit in underserved markets. Miss Tire in 2023 when the vice chair bar the other bar proposed the Basel 3 endgame it received bipartisan and nearly universal criticism from lawmakers in the public.
▶ 0:59:37In fact, more than 97% of the comments on the proposal were negative with more than 80% of those comments submitted by interested parties outside of the banking sector. The message was clear that we needed a reproposed endgame. But even under the reproposed endgame, the expectation is that US banks will face materially higher risk weighted assets from revised credit market and operational risk frameworks. Yet the leverage ratio remains unchanged, which creates a potential for double counting of capital requirements.
▶ 1:00:05How should regulators appropriately account for reforms to Basel 3 endgame to ensure that bank leverage ratios do not bind institutions during low risk, lowrisisk, high liquidity environments.
▶ 1:00:17Double counting is a real issue. Chairman Bar and I'm glad you asked the question. I think what happened in 2023 is that the banking regulators did not do a bottoms up data-driven analysis and currently it's a bottomup data driven analysis that is being promised by the banking regulators.
▶ 1:00:36the leverage ratio became the binding constraint as treasury markets expanded uh given the fiscal situation and my own view is that there should be a real rethink of the leverage ratio which affects as you know not just the biggest banks but all of the banks
▶ 1:00:52thank you Mr. Alman, final question. Uh, as you know, uh, Fed Vice Chair of Supervision Michelle Bowman has said that the regulatory thresholds should not be static and FDIC acting chair Travis Hill recently finalized a rule that seeks to index regulatory thresholds on a bienial basis. U, I have introduced legislation, the tier act, uh, to ensure that our regulatory system isn't static and that it's designed with growth in mind, which uh, while maintaining safety and soundness.
▶ 1:01:20Can you please speak to the importance of indexing regulatory thresholds and how this will help ensure banks are holding appropriate capital that accurately corresponds with their size, risk, and scope of activities?
▶ 1:01:31Thank you for that question, Mr. Chairman Bar. Um, put simply, if we don't uh index the thresholds, eventually we won't have tailoring because over time inflation will move institutions into higher and higher categories. Already since 2019 when the categories were adopted, we've seen inflation run at about 25%. nominal GDP is up 30%. That already is uh threatening to put institutions into higher categories simply because of nominal changes in the economy.
▶ 1:01:57Thank you. My time is expired, but I'll just note for the record that when Dr. Foster and I traveled to Basil, Switzerland, uh it was interesting to hear the Basel committee themselves say that uh vice chair, former vice chair Bar's proposal had goldplated uh American capital requirements over and above what they recommended. Uh with that, I will now recognize the ranking member of the subcommittee, Dr. Foster, for five minutes for questions.
▶ 1:02:20Yeah. Well, thank you and thank you for referring to our our bipartisan trip uh to visit all the the banking centers. Um it was interesting because there was a lot of anxiety in the European uh banking sector that despite their lower capital requirements, they were being outco competed by the the big banks of the United States.
▶ 1:02:38Uh so that the argument I think one of the witnesses here referred to it as a trope that the regulators um should look at the fact that we're actually increasing market share in our with our giant banks compared to our offshore competitors as a as you know something that maybe the regulator shouldn't look at. I think if we're losing market share the regulators should look at it and the fact that we're increasing market share the regulators should consider in whether our capital requirements are too stringent.
▶ 1:03:06But, you know, my biggest worry about this is that we're arguing about, you know, the last few um basis points of of capital requirements when the the big elephant in the room is artificial intelligence, agentic AI and everything that is going to disrupt financial services and the the businesses that many banks have loaned uh money to.
▶ 1:03:27And and this is something I was very disappointed that we had um there was a what I guess it was I think m Miss Emerols uh that's when she made reference to um the num the commentators on this. You can't open any financial u journal or anything without seeing people comment on the bursting of the AI bubble and are we really robust against that. There is probably no commentator that hasn't pined on that.
▶ 1:03:54And yet when we recently wrote a letter to FSOC to say, "Hey, could you please have a look at this? We were unable, frankly, to get any of my Republican colleagues uh to co-sign this." And all of the Democrats essentially signed on to it. And so I think this is why we created EPSC to keep to look around the corner. Um yeah, Mr. Johnson, you actually u mentioned this in your testimony. Could you say a little bit more about what AI could do to the stability of our financial
▶ 1:04:24Yes. I I I think Dr. Foster, you're totally right. This is this is the big issue of of the day and and and of the days to come. We don't know. Nobody knows exactly what will be the impact of AI on the American economy or on the French system. But it does seem very likely that will increase volatility. There'll be relatively few foundation models. There'll be relatively few big tech players producing those models. Everyone will be using some version, some application of those models. So there'll be a lot of crowding in terms of spotting opportunity and crowding in.
▶ 1:04:51So we may well get more run-ups in in asset prices, but also crowding on the way out. So you referred to the run from Silicon Valley Bank, which of course we know was speeded up by social media. No AI was involved. AI can make decisions much faster than than humans can. So once they spot a weakness or a perceived potential insolveny because of capital deficiency, it'll be seconds, not minutes before the cap before the deposits run out the door.
▶ 1:05:16Yeah. And well, in fact, they can respond to rumors. You know, many of the AI personal AI agents will be understanding orders that if you read a rumor out on Reddit that your bank's in trouble, get my money the heck out. And it will be um you know, things like customer loyalty uh will be a thing of the past. And this is not only going to affect banks, it will affect every business that depends on customer loyalty because the the personal agents are not going to be loyal. They're going to be instructed to get the best price.
▶ 1:05:44And this is going to squeeze the the profit margin um out of every consumer-f facing uh business in the country. And there going to be a lot of loans that will go bad because business models will blow up that way. And so, you know, this is not the time to lower capital requirements. You know, this is I'm in my bipartisan way, I'm also wearing a red pin here. This is the red pin of the 110th Congress where under a Republican president and under a Republican regulators.
▶ 1:06:10This pin had the the pleasure of voting for TARP under a situation where the Republicans who voted for the lower capital requirements and deregulation refused to provide the votes to rescue our economy and the and rescue our economy had to be done with Democratic votes.
▶ 1:06:25And so, you know, this is a um a foundational memory and many of us on this side of the aisle who live through that and and you know, we don't repeat history, but it echoes we're, you know, we're in a situation when we have a historically unpopular president once again and regulators who are uh have this mantra of deregulate, deregulate, deregulate, modernize. You know, all of the all of the words you can read in 2007 the the exact same mantra.
▶ 1:06:54Um, and so, you know, there are things that make sense that we have to, you know, punishing bank capital because they're holding treasuries, you know, I never thought made sense. And that's the sort of thing we could be looking at, but but the idea of just lowering capital requirements in general right now until we understand the effect, I I think is is premature. So, I' I'd like to to thank you all for your testimony.
▶ 1:07:17It's nice to see that the arguments haven't changed in 15 years, but the future's coming at us fast and we should look forward not backward. Thank you. The gentleman from Michigan, Mr. Heisinger, is now recognized.
▶ 1:07:29Thank you, Chairman Bar. Um I and good to see our panel again or most of you and welcome Mrs. Eversol. Uh the uh Mr. Flet, I'm going to start with you. A lot of discussion this morning has been centering around uh how higher capital requirements for financial institutions will be harmful. Obviously, not everybody agrees with that uh on the panel, but um I I happen to agree with uh with that sentiment that it is or can be harmful.
▶ 1:07:59What's often overlooked though and from my perspective is Main Street America. And that's really what I'm I'm concerned about. You know, those small businesses that are the backbone of local communities that we all represent. I'm a small business owner myself, families in construction. I've lived through the ups and the downs and the downs are tough. Um, and we've had to rely on lines of credit uh recently actually ended my own line of credit because it was costing me while I wasn't actually accessing it.
▶ 1:08:29Uh, and uh my business partner, my cousin and I looked at each other and were like, "Well, this makes zero sense." Um, so, uh, we've we've got a lot of issues as you can see it as it pertains to small businesses, but yeah, just give us your thoughts on how this affects maybe Main Street and those small entrepreneurial or in my case a third generation family business.
▶ 1:08:49Sure. And I imagine your business was a private business.
▶ 1:08:52Uh, yes. Heising Gravel is not a publicly traded company, thank goodness. And I have no intention of subjecting ourselves to the SEC. So,
▶ 1:09:00well, that puts you at 99% of US companies. Yeah. And I'll give you three concrete examples. The first one was the line of credit and you've clearly experienced that. What surprised me is the risk waiting for both the funded and unfunded increased. There's no reasoning why and it goes above goldplated levels. So you you've just said what what happens. One, your line of credit either gets more expensive or they shrink it. So if you need more money, you'd have to go get another one. And I'm sure they'd see that as more risky.
▶ 1:09:28Not not to mention, by the way, when the regulators come in and say, "Oh, by the way, even though we're, you know, we've been banking with the same bank for three generations, uh, we're not sure of their credit risk."
▶ 1:09:39Correct. And simply because two, simply because you're a private company as an example of excessive capital, Basel 3 endgame treats you differently. And let's assume that a public company has an interest rate of 7%. And let's presume a 12% return on capital. That same private company is going to have a 10 and a half% interest rate. That's how different it is. Then there's the third part which is I want to bring up something called risk mitigation.
▶ 1:10:08It's exactly what it sounds like. And we mix that up with derivatives a lot. So now let's think about a farmer who wants to mitigate their their um crop because they've seen climate issues. So they go to the bank and they say, "Hey, I want to buy a hedge from you." And the bank should say, "That's great. That makes you less risky to me and me less risky to you." But somehow, oddly, we've priced that higher. So the hardest thing for our businesses to understand is
▶ 1:10:35so so lowering risk is actually going to cost me more than if I had just maintained the status quo. Those are some of the confounding things in the regs that we have.
▶ 1:10:43Okay. Um, Mrs. Eversol, I want to touch base on you. You represent the largest uh of of the banks. Uh, does the current framework disadvantage US-based in institutions compared to their international peers?
▶ 1:10:58Uh, thank you very much, Congressman, for the question. Indeed it does. Um, the fact of the matter is even when if you look at something like the GSIB searchcharge, um, we are twice that of our international competitors. Um, and I think that we are at an app,
▶ 1:11:11but we just heard that that's necessary and that maybe we don't have enough
▶ 1:11:14Yeah, respectfully, I would I would disagree with that premise and I think it's a perfectly appropriate conversation to ask the question is more always better. And to your earlier question, um, it it doesn't it's not free. It comes at a cost and the cost is borne by consumers, the very people that need these.
▶ 1:11:32It's not the banks. uh consu I think from a consumer perspective it you can see the cost of credit is increased by higher capital.
▶ 1:11:40Um uh uh Mrs. Tyer uh let me switch slightly on this. Uh what are the macro effects on the economy of this one-sizefits-all approach?
▶ 1:11:51Well, I think what it's doing is it is leaning us towards the dreaded barbell. Um I think the statement was made that our biggest banks are more competitive than the EU banks. That is clearly right. They're out competing. But if we look at the midsize range banks, say from 10 up to about 250 or more, they they are they and the community banks are the engines of growth for small and mediumsiz enterprises, for religious entities, for NOS's in smaller towns and the macro impact on them.
▶ 1:12:22And then we we're now at a place where we want to have a lot of more credit in the heartland of the country, Michigan, where you and I are both from. Um, and that's going to be hard to get if we insist on goldplating of capital
▶ 1:12:37And Mr. Chairman, I'm just afraid that we're losing the other end of that barbell with the smaller community banks and those regional banks. So with that, I yield back.
▶ 1:12:44Gentleman yields. The gentleoman from California, Miss Waters, is now
▶ 1:12:50Thank you very much, Professor Johnson. While Republicans may want to roll back capital requirements, I think there is a much more important and bipartisan policy that Congress should consider. In 2023, after Silicon uh Valley Bank had the fastest bank run in the United States history, many businesses got nervous about their payroll accounts been held by smaller banks and moved their funds to the mega banks, thinking they
▶ 1:13:20were too big to fail. A year later, a much smaller bank in Oklahoma failed as well. But that failure was too small for regulators to use emergency tools to protect depositors. The failure resulted in small businesses, churches, other customers with more than $250,000 to lose some of their money.
▶ 1:13:44It was the 37th time uninsured depositors lost money in a bank failure since 2007. To sum up, small businesses that banked at Silicon Valley Bank were protected while those that banked at this Oklahoma bank lost money. How is that fair?
▶ 1:14:03My bill the Employee Paycheck and Small Business Protection Act, would address this problem with a datadriven approach to expand deposit insurance in a deliberate way, considering the benefits and costs uh to ensure a higher threshold is set so community banks and credit unions can compete for small business deposits in their communities and those businesses and their workers are better protected.
▶ 1:14:32My bill would also provide for emergency transaction account guarantee or tag authority allowing the FDIC to temporarily ensure deposits for up to nine months without needing congressional approval first. I appreciate that Chairman Hill held a hearing to consider my bill uh and we had a good discussion.
▶ 1:14:57Are these reasonable reforms that this committee should act on for the benefit of community banks, credit unions, and the communities they serve? Mr. Johnson?
▶ 1:15:07Yeah. Yes, Congresswoman. Those are very reasonable, highly well-informed proposals, and I and I do think further study. The datadriven approach that you're recommending is exactly the right way to go about it.
▶ 1:15:17Well, thank you very much. Uh we have been in considerable discussion and um much of discussion is around how much more uh should be protected and I hope we get to some resolution on it because I think it's very important. Let me move on and talk a little bit about um bank capital. Professor Johnson, over the course of our nation's history, we've routinely seen banks fail due to capital inadequacy.
▶ 1:15:46Whether it was the savings and loan crisis of the 1980s and 1990s or the 2008 global financial crisis that cost our economy trillions of dollars and cost millions of families their jobs, homes, and life savings. Moreover, research shows that better capitalized banks lend more, including in times of stress compared to weak banks that lend less.
▶ 1:16:11Would you briefly discuss why strong capital requirements are so important and who suffers when capital levels are reduced too much?
▶ 1:16:20Capital levels are important, Congresswoman, because that's the buffer against losses. And when an individual bank is in trouble and faces potential insolveny, that's what causes a potential bank run. And if that those fears are spread across the broader economy, then you have a financial crisis just like the one we experienced in 2008. And that is devastating to small businesses. That's devastating to communities everywhere. The costs of that for economic growth are absolutely absolutely enormous. So bank capital is a way that we attempt to reduce those risk.
▶ 1:16:48You can't reduce them to zero, but we attempt to reduce the risk of devastating economic collapse.
▶ 1:16:53Well, I I want you to know that they tell us uh that if you require too much capital, we won't have the money to lend to all of the small businesses that need money. Yet, we don't see any real loans going to small businesses. What do you know about that?
▶ 1:17:10Well, I I think providing credit to small businesses is tremendously important and that's why we have the Federal Reserve and that's why the Federal Reserve sets interest rates and otherwise determines monetary policy because they're affecting credit conditions. That's their responsibility. I think what we need from the from the banks is to retain strong uh community banks, strong credit unions, exactly with the deposit guarantee uh extension that you're proposing and the and the tag. Um and and I think that that combination will strengthen lending to those communities.
▶ 1:17:37If you're just going providing support in crisis to two big to fail banks, which is why they have a loss low cost of of of uh of debt, that is not helping um communities across
▶ 1:17:48Well, thank you very much. We had a um a mark up and on the floor yesterday uh invest act and we're talking about capital formation. At some point in time, we need to talk about the responsibility of the banks instead of looking all over the world for more capital for small business.
▶ 1:18:04Gentle lady's time is expired. The gentleman from Texas, Mr. Williams, is now recognized.
▶ 1:18:08Thank you, Mr. Chair, and thank all of you for being here today. Good to see my friends. Uh, I'm a small business owner in the great state of Texas. I'm a car dealer. Uh, and the previous Bosle 3 endgame proposal would have pushed capital standards well beyond what a strong and stable banking system requires. And as chairman of the small business committee here in Congress, I'm concerned that the proposal would limit credit access for small businesses, especially giving different differing risk weights for loans to public versus non-public firms.
▶ 1:18:35So, Miss Eversol, uh, what changes to the Basel 3 proposal would ensure equal credit access for small businesses like mine or of all sizes and why is this so important to get it right?
▶ 1:18:47Congressman, thank you very much for your question. Look, you've outlined it correctly. We need to update and change the risk waiting uh because there shouldn't be a thumb on the scale for public companies versus private companies. uh we there is an impact on more capital uh on the end users and what we need to do is ensure that we continue to have a strong economy and you know full well that that starts with small businesses. So we need to get we look forward to seeing that proposal. Uh we appreciate the leadership of the vice chairman of supervision at the Fed and we uh we look forward to getting that
▶ 1:19:1799% of the businesses are small right now in America. Uh Mr. flood. When regulators raise capital requirements, banks are forced to redirect more of their balance sheet toward meeting these requirements instead of supporting new lending. We've been talking about that. And that shift reduces the pool of credit and available available to small businesses that rely on steady access for financing day-to-day operations and growth. Need to mention payrolls. And even modest increases in required capital can drastically change a bank's lending capacity, tightening credit exactly where is needed most.
▶ 1:19:47So, for a small business uh trying to uh renew a line of credit uh or finance equipment, how directly uh would these higher capital changes translate into fewer dollars available to lend to the main thing we're talking about, Main Street
▶ 1:20:01Great question. Um just to give you an idea for the drawn part, just using again Basel 3 endgame as a as example of excessive capital. For the drawn part of your line of capital, the risk weight in increases by 10%. Again, above and beyond uh global standards and oddly for the undrawn part, it goes from 20 to 50%. So even for the money you're not using, it increases by 30%. So likely your line shrinks or you pay more.
▶ 1:20:30Um, Miss Tyer, when uh uh government rules and regulations become overly complex, banks must dedicate significant time and effort to compliance rather than serving borrowers and strengthening their businesses. Sometimes keeps you from making a loan. And this can be especially challenging for institutions competing in global markets where other banks may face simpler or more modernized frameworks. And these burdens can affect everything from product development to long-term strategic planning.
▶ 1:20:56So my question to you miss Ty does increasing the complexity of a federal framework force US banks to divert resources away from innovation technology and customer service and does at the end of the day this reduce our ability to compete internationally.
▶ 1:21:10Yes sir it does. In fact, if we look back, there were many wonderful changes that came out of the financial crisis, but the intense uh internal investment at banks in compliance personnel, risk personnel, um at technology to support them and the same thing happening at the regulators has massively increased complexity in the system, makes it harder for uh Congress to engage in appropriate oversight.
▶ 1:21:36Um, and AI may well change these things, but you know, AI is something that we're going to have to look at carefully and it needs to be controlled. Um, and and it is just so hard to to to to get the the full weight of the internal bureaucracies that have been created at the banks which just take away from the main mission.
▶ 1:22:00Um, and if I may one minor just quick comment, capital absorbs losses, but it's not liquidity. A deposit run, which I agree AI is going to make riskier, that's not going to be capital absorbing that loss. That's liquidity regulation or deposit insurance. Cap capital doesn't solve liquidity.
▶ 1:22:21Main Street America, keep it simple. Let it grow. Employ people. Pay taxes. I yield my time back. Thank you. The gentleoman from New York, Miss Velasquez, is now recognized.
▶ 1:22:33Thank you, Mr. Chairman. Uh, Mr. Johnson, I heard discussion this morning about affordability. I'm glad to hear this because I never thought that it was a hoax. Can you talk about affordability for workingclass families in times of economic stress if the banks fail?
▶ 1:22:56Abs. Absolutely, Congresswoman. So I I think it's one of the great tragedies actually of our generation, the current America, that we went through this massive financial crisis in in 2008 that was absolutely devastating to communities. It destroyed businesses. It completely disrupted the housing market. Many of the problems that we're struggling with today in terms of providing goods at at through through competition and at reasonable prices with reasonable supplies are because of that financial crisis.
▶ 1:23:21We um didn't build 4 million uh housing units after the crisis and we've never built them, Congress. We've never caught up. So for ordinary Main Street America, the financial crisis of 2008 was absolutely devastating. And when we say there's a bailout, a bailout was provided.
▶ 1:23:37It was a, let's be very clear, it was a bailout to the creditors,
▶ 1:23:41particularly of large banks, the shareholders got a pretty good deal, too. But the workers across the economy, the people who run non-financial businesses, the people outside of the financial sector, they were crushed. and they were crushed because our banks took on too much risk. They did not have enough capital. We did not have the kind of protection that uh chairwoman uh Waters was talking about in terms of the deposit insurance, not sufficiently.
▶ 1:24:08That combination is absolutely toxic to ordinary Americans and we see it now reflected exactly in today's affordability crisis
▶ 1:24:16and we shouldn't forget the lessons of CO 19. banks were sitting in capital trillions of dollars in capital reserve and yet small businesses not were not getting loans.
▶ 1:24:31It was uh ranking member um Maxim Waters, myself and Speaker Pelosi who called uh the secretary of the treasury and we put a set aside of $60 billion to be lent to underserved communities. Uh Professor Johnson, you testified before this subcommittee last February.
▶ 1:24:56As part of your testimony, you stated over the business credit cycle, well- capitalized banks are better able to sustain lending than banks with relatively little capital that fund themselves with more debt relative to equity. Can you explain this statement and what does the research tell us?
▶ 1:25:18Well, the research and and the practical experience and and what we've seen from around the world over a hundred years is that when investors are concerned that a bank is deficient in capital, when they think there's a probability of insolveny, that's what happened with Silicon Bank. There was concern about insolveny, then you get a run. That's again what happened in Silicon Bank. And then the run spreads across other supposedly similar institutions. At the moment, humans make those decisions. But as Dr. Foster said very soon it's going to be agentic AI making that kind of decision.
▶ 1:25:48So then we have concerns about insolveny becoming a systemwide run. If we don't have adequate tools, the authorities do not have adequate tools to respond to that then you have a major financial crisis as we saw in 2008. So the best way congresswoman to to withstand that the best way to ensure the kind of national security that the White House is talking about is precisely to have a well- capitalized resilient banking system to prevent this from happening.
▶ 1:26:14And isn't it true that even after the first part of the Basil 3 capital regime was implemented in 2016, US banks continue to lend and make record profits while the economy continued to grow.
▶ 1:26:30Absolutely, Congressman. I'm looking here at the the data provided or compiled by the Kansas City Fed and we can see that exactly when you're discussing in the in the mid2010s. Um there was a lot less leverage in in the big banks than there is today. And by the way, the the smaller community banks have have maintained less leverage throughout this period than than the big banks. That's their choice. That's not what's forced on by regulation. That's sensible bigness big practice. It's the big banks that have a large implicit guarantee from the US taxpayer.
▶ 1:27:01That's what too big to fail means. Their debt is subsidized implicitly by the American taxpayer. That's too big to fail. They of course want as much leverage as they can get because their date is super cheap because of the subsidy that they get from US
▶ 1:27:19Thank you. I yield back. The gentleman from Tennessee, Mr. Rose, is now recognized for five minutes.
▶ 1:27:28Thank you, Chairman Bar and Ranking Member Foster for holding this important hearing. And thank you to all of our witnesses for taking time to be with us today and lend your expertise. Mr. Olman, the 2023 Basel 3 in-game proposal would have raised capital requirements by 16% on average with some banks seeing increases over 20%. The proposal received overwhelming criticism and was ultimately withdrawn.
▶ 1:27:54As regulators prepare a revised proposal, what are the most important principles they should follow to ensure the final rule appropriately balances risk waiting with the statutory mandate from Congress to tailor requirements based on bank size and risk profile?
▶ 1:28:11Thank you for that question. Well, first of all, making sure that the risk weights are based on the best available data. uh capital should correspond to risk. That's the first one. Two is simplicity. Capital requirements have become simply too complex. Um u and hard to really understand. I think it makes it difficult was referring to it's hard for the public to understand even what capital requirements are. It makes it very difficult for Congress to eva evaluate and also banks to comply with.
▶ 1:28:40So making them simpler is is better. Certainly our many banks are complex institutions and there's a limits on how much simplicity we can we can get out of the system but it's certainly any efforts in that direction are are uh beneficial. I'd also note too that it's really important as we to take a uh a view of the totality of all the regulations that are going on. I think that is one of the things that I think Mr. Johnson misses is that this is not 2008.
▶ 1:29:09And I think back in 08, I would have shared some of his concerns about capitalization levels, but that is not where we are today. We have in addition all the reforms that have happened over the last 15 years. And we need to make sure they all work together. We have stress testing now. We have additional leverage ratios. We have the V Vulkar rule, risk retention rules, right? We have a 2,000page DoddFrank act of rules on banks that have substantially changed their risk profiles.
▶ 1:29:36And what the regulators are really doing right now is trying to make it all work together in a more efficient way. Um so that the u the banking system is certainly safe and sound, but that it's the distortions in credit allocation that are occurring because of of the lack of coordination amongst this system um are are
▶ 1:29:56Thank you. Uh Mr. flood. Increased capital requirements have already driven banks out of certain business lines. Residential mortgages dropped from 81% bank origination in 2007 to just 39% by 2022. In your testimony, you discuss how the original Basel 3 endgame proposal would have particularly affected lines of credit and warehouse lending.
▶ 1:30:20Can you explain what happens to credit availability and pricing when capital requirements increase for these specific
▶ 1:30:32Absolutely. Um couple things to think about again when we look at Basel 3 endgame which of course in many cases goes above and beyond uh global standards with a line of credit. I think I had explained before the the the funded part goes from 100 to 110%. And the unfunded goes uh uh risk weighting moves from 20 to 50%. So two things will happen.
▶ 1:30:57You either will pay more for your line of credit or you will have a smaller line of credit so that when you need more you'll have to get another and pay more. Um two uh and again I'll keep repeating this a private company 99% will pay more than a public company. And my example again is if you take a loan to the public company at 7% and you assume a 12% return on equity, the private company's going to pay a 10% loan. It's a significant difference.
▶ 1:31:24Then finally, the last one I would say is um there is a 10% capital charge on all retail. So put credit cards on the list, put autos on the list, and put mortgages on the list, and they all
▶ 1:31:37Wow. Thank you. Mr. Roman, you make the point in your testimonies that capital is critically um important, but it is not the only option in the regulatory toolkit. You note in your testimony that the banking uh regulators are undertaking important reforms to the supervisory process. Why is getting supervision right just as important as getting capital requirements right? And how do these work together to promote both safety and soundness and economic
▶ 1:32:05Thank you for that important question. uh supervision can spot those risks that aren't on the balance sheet, right? It's the it's the way supervisors can exercise judgment and understand how a bank management is addressing risks. Um the only way you can see that is knowing who the the bank managers are, understanding their strategies and working with them, understand how they're managing those risks. I think if you uh look at any u major bank bank failure, supervision is usually at the at the core of the problems.
▶ 1:32:33Supervision also is an effective and efficient way to make sure that uh banks are properly regulated without excessive regulation.
▶ 1:32:42Thank you. My time's expired. I yield
▶ 1:32:44Gentle gentleman's time is expired. Gentleman from Georgia, Mr. Scott is now
▶ 1:32:48Thank you, Mr. Chairman. Uh ladies and gentlemen, this is a very important but especially to our farmers uh sectors like agriculture that rely heavily on access to credit risk management tools and functioning derivative markets. [snorts] And so Miss Everole, let me come to you first.
▶ 1:33:19Our farmers operate in a world of So from supply chains, disruptions, fluctuating global demands, and extreme weather, there is no other sector of our economy that is as serious in terms of receiving these obstacles.
▶ 1:33:47So uh let me just ask you this. Uh large banks play a key role in providing risk management for agriculture producers through futures options and swaps. Now if Basil 3 makes it less attractive for our banks to provide these hedging services.
▶ 1:34:18What will be the direct effect on our
▶ 1:34:23Congressman, thank you very much from the for the question. I'm also from the great state of Georgia, so I I deeply appreciate the concern about farmers here. I mean the reality is it's going to make it more expensive and I mean you know very well the the the the how hard it is to manage risk. You know is there enough rain?
▶ 1:34:42How's the you know and and that all has an impact on the crops and u the ability to manage risk and understand where you're where you're coming out of this but the Basel 3 endgame has an impact on that and it's not it's not just about the farmers it's about where those products go. they end up on store shelves. It also impacts the price of fuel when you think about bofuels and ethanol. And so we need to get this right. Congressman,
▶ 1:35:08and and we have a good audience listening. Uh do you anticipate certain particular products would become less available to our farmers, customized or longer term derivatives? If we don't do this right, that will impact not only the cost but also the availability.
▶ 1:35:34And so we look forward to making sure that we get this proposal right and provide the certainty to America's farmers, especially in the great state of Georgia.
▶ 1:35:42Absolutely. And go dogs.
▶ 1:35:44Go dogs. Thank you so much, sir.
▶ 1:35:47Now, [clears throat] excuse me, Cole. Let me turn to you, Mr. Johnson. Do you believe that farmers businesses face any disadvantages if foreign competitors operating under slightly different capital rules have lower hedging costs?
▶ 1:36:16I think uh congressman it's very important to study this question and to examine exactly what kinds of um market facilities and also subsidies are available to farmers and and other competitors in other parts of the world. And sure if there are unfair forms of competition um those should be looked at and there are various um as you know legal and regulatory remedies available under those circumstances.
▶ 1:36:42However, Congressman, I do think that having a strong, resilient banking system of our own, including community banks, including credit unions, including those issues focused on farmers, that's incredibly important. And when I look at how much capital those institutions choose to have, they choose to have it. This is not what they're required to have. They have substantially less leverage than the two big to fail banks.
▶ 1:37:03So I I think that we have some fantastic um and very important financial institutions serving those communities, Congressman, and I I think we should aim to strengthen them and they are themselves choosing not to overlever and which I I really commend them.
▶ 1:37:17And uh finally, will US uh farmers and businesses face any disadvantages from these foreign countries?
▶ 1:37:29Unfair foreign competition is a problem, Congressman. needs to be addressed in in a careful well-regulated way and we have a long tradition of doing that in in the United States. I do think though that what we have currently as a result of the reforms after 2008 with regard to strengthening the financial system and lowering the leverage at least we lowered it until 2016 2018. I think that was helpful to farmers. Allowing the big banks to become overleveraged is not helpful to farmers.
▶ 1:37:55Thank you very much.
▶ 1:37:56The the gentleman from Georgia's time is expired. I'll just have to say as the husband of a Georgia bulldog, even though I'm a Kentucky Wildcat, to you and Miss Eversole, go dogs. All right.
▶ 1:38:07Way to go.
▶ 1:38:09The the gentleoman from California, Miss Kim, is now recognized for five minutes.
▶ 1:38:14Thank you, [clears throat] chairman and ranking member for hosting today's hearing. And I want to thank our witnesses for being here. Thank you. As you may [clears throat] know, I have been keenly focused on modernizing the community bank leverage ratio to uplift our community banks. And according to credential regulators, around 85% of our community banks qualify for CBLR. Yet only 45% of them actually use it.
▶ 1:38:43That's why I introduced Community Bank Lift Act that will modernize CBLR to ensure that more community banks in California are focused on consumers rather than regulatory red tape. Uh Mrs. Tyer, when you look at tailoring, do you agree that there is still more fine-tuning to be done regarding the community bank leverage ratio?
▶ 1:39:05Yes, I think there is. the uh vice chair and the the board have come out with a proposal as you know which would take it to 8% and also importantly would give a longer four credit grace period and it's not entirely clear to me exactly why only 40% of the community banks who could benefit from it but I think the cliff effect of a twoarter grace period which for a community bank is you know way way way too swift is part of the concern there I
▶ 1:39:35also think in terms of tailoring um picking up on something that Andrew said with growth in the economy and inflation when in a tailored system that growth and that inflation will simply have banks grow into the next asset threshold um when they really shouldn't be there.
▶ 1:39:52Thank you. You know today we heard a lot about the leverage of large banks today. So Mrs. tire. Can you explain how low-risk activities like treasury market uh intermediation are impacted by binding leverage requirements?
▶ 1:40:07So, and this this was obviously worse before the recent change than the ESLR, but it's still it's still part of the leverage ratio. The market for treasuries has simply exploded with the increase in the def in the deficit.
▶ 1:40:21That means that you have an impact on the market for treasuries because those entities that would have been trading in treasuries, if they are if the leverage ratio becomes binding on them, they're going to stay out of the treasury market and now we're more dependent on non-banks or on foreign actors in the market for treasuries. Maybe stable coins will eventually make a difference.
▶ 1:40:43I know that that is part of the hope, but what we've experienced in some of the kurfles in the treasury market is certainly bound up with the fact that the classic players just haven't been playing the way that they used to.
▶ 1:40:55Thank you. You know, as we continue to evaluate tailoring and capital requirements, the impact on small businesses must be kept top of mind. Many small businesses rely on affordable and reliable credit from regulated banks to grow and manage day-to-day operations. However, increased capital requirements such as those proposed under Bosler 3 and through the GSIP search charge can raise the cost of lending and reduce credit availability. So, I want to ask you, Mrs.
▶ 1:41:25Ever uh yeah, Eversur, um how are these capital rules impacting small businesses ability to access credit today? and what adjustments should regulators consider to ensure that credit remains affordable for Main Street without compromising safety and soundness? Congresswoman, thank you very much for the question. I I would note that my member companies have more than hundred billion dollars in outstanding loans to small businesses today.
▶ 1:41:53And that's really important because we we know that small businesses are the economic engine for growth in this country. um the Basel 3 endgame um as proposed in 2023 would have had inappropriate risk waiting uh that would have uh influed small business businesses negatively through the form of higher capital and I think as I've I've mentioned today higher capital isn't always better and it and it comes at a cost and I think the question about getting this right making sure that in the proposal we look forward
▶ 1:42:23uh to from the Federal Reserve hopefully uh as soon as possible getting it right really matters matters and we want to make sure that America's small businesses ha are protected but also can borrow money at a fair cost uh so they can get to the business of growing their
▶ 1:42:39Couldn't agree with you more. Thank you. You know, let's shift gears now. In today's era of banking, it appears that the success of your bank will not be dictated by innovation or competitive product offerings, but rather by how you can handle the comp compliances cost as you your financial institution continues to grow.
▶ 1:42:58We're almost forced to either defend DotFrank as banks fail around us or we find ways to tailor regulations to serve the dynamic economic roles that these financial institutions play. I know I'm running out of time but hopefully you will have time to answer this Mr. Orman. Has DoddFrank created the accurate precise regulation that was expected or has it created more regulation with little or to no benefit?
▶ 1:43:23You know, Miss Roman, you're you're going to have to submit that answer in writing. Uh the gentleoman's time is
▶ 1:43:29Thank you.
▶ 1:43:29Um the gentleman from California, Mr. Sherman, is now recognized.
▶ 1:43:33Thank you, Mr. Chairman. I think we all agree if capital standards are too low, we face the risk of needing bailouts. If they're too high, our economy is smaller than it otherwise would be. But we should also agree that if you discriminate against certain borrowers and help other borrowers, you pick winners and losers.
▶ 1:44:00But what's worse is if you pick the wrong winners and the wrong losers. Uh banking is too important to just focus on the bank. It allocates capital in a society dedicated to capitalism. Now, there's real risk in loaning money to Jack's Pizzeria in Tarzana. And we should state that fairly and have adequate reserves.
▶ 1:44:26But we shouldn't understate that risk just because the pizza's delicious. Uh we shouldn't understate that risk just because we love small business. But when we look at Basel 3's current configuration, we see a system designed to oppress to discriminate against small business, new home buyers and all home buyers and US taxpayers for absolutely irrational reasons except for the fact that the people in Basil all just feel
▶ 1:44:56real comfortable with giant corporations and their long-term bonds. Uh first is to home buyers. First, there's a proposal here to increase the risk weight beyond the Basel levels for all home mortgages. And then, as I've commented before in this room, they ignore private mortgage insurance.
▶ 1:45:18So, you have a system that discriminates against all home buyers and then doubly discriminates against the firsttime home buyers with the low down payment that need the private mortgage insurance. I've heard no defense of this. It's just people jump up and down and say, "Basel, Basle, wonderful town. Let's just do what's in the document. Don't read it too carefully." Then we have intentional discrimination against small businesses in two ways. As Mr.
▶ 1:45:42Flood points out, if it's a public company, we uh discriminate in favor of them and against the private company. But second, small businesses don't piss in interest rate risk because they tend to have floating rates or short-term loans. the 30-year fixed rate bond um is discriminated in favor of because we don't mark to market. Had we done that, we would have realized that Silicon Valley Bank had $17 trillion in unrealized losses.
▶ 1:46:13But even after that, we've got a system that discriminates against the small business uh and in favor of the competing 30-year corporate bond uh that is not marked to market. Then Mrs. The taser says we should also discriminate in favor of the cryptobillionaire bubble creators. Um I just say you don't have to be a genius to recognize uh that uh crypto assets are very volatile.
▶ 1:46:40Um and in the area of long-term bonds, we discriminate in favor of the corporate bond and against the treasury bond by treating them both the same even though the treasury bond doesn't have the risk and the corporate bond does. So, we design we have a system here designed to unfairly discriminate against home buyers, particularly first-time home buyers, small business as opposed to uh publicly traded big uh business and the US government and its taxpayers. Gee, what could go what's what's the matter with that?
▶ 1:47:10Um, Ms. ever saw. Um the uh Basel 3 in-game proposal for 2023 included higher risk weights for mortgages than recommended by the Basel committee. Uh as I pointed out uh it discriminates in favor of publicly traded companies. Uh how do your banks take capital requirements into or uh when making a small business loan or a home loan?
▶ 1:47:38And would the consequences of this be fewer loans for home buyers and small businesses?
▶ 1:47:43Congressman, you said it very well. The the the impact is straightforward. It would reduce the amount of loans made and it would make the ones that are made more expensive. It was a bad flawed proposal and we need to see uh we look forward to seeing uh the reproposal that we expect uh as soon as possible.
▶ 1:48:01Uh Ms. Almo then um we've got a system that pretty much ignores PMI. It does not uh uh follow the FHF FA enterprise regulatory capital framework for F that Fanny and Freddy use.
▶ 1:48:20What should the Basil uh uh what should this regulation do with regard to uh uh uh Um, I think the u the the risk weights that were originally put in the original proposal were were too high and need to be revised.
▶ 1:48:38Thank you. Uh, gentleman's time has expired. We're going to uh just go out of order just for a minute for a a parliamentary request from the gentleman from Texas.
▶ 1:48:51Thank you, Mr. Chairman. Mr. Chairman, uh, because I have three hearings taking place today, I ask unanimous consent that I be allowed to place questions in the record for the witnesses, and I beg that I be excused to take care of the many things that I have to do. Without objection. Thank you very much.
▶ 1:49:07So ordered. Uh, the gentleman from Georgia, Mr. Louderdermilk. A lot of lot of Georgia Bulldogs here today. The gentleman from Georgia, Mr. Louderdermilk, is now recognized for five minutes.
▶ 1:49:16Well, thank you, Mr. Chairman, and I appreciate everybody being here today. profile. All [clears throat] of America is likely not glued to their television watching this hearing as they may be some other high-profile hearings. Uh, nonetheless, the subject matter that we're discussing here is extremely important to all Americans and their livelihood and their financial stability going forward.
▶ 1:49:38So for too long, financial regulators have taken one-sizefits-all approach to regulation, applying the same regulatory standards to small and midsized institutions as they would to large and well-resourced institutions. While the biggest banks often have the resources to comply with new regulations, small firms and even some midsize firms might struggle to meet these same regulatory requirements.
▶ 1:50:03So, I'm glad to see us focusing on this topic and I'm proud of the work that this committee and the Trump administration are doing to rightsize regulations on financial institutions of all sizes. Um, Miss Tyer, uh, I have a bill entitled the Taylor Act, which would require that all future regulations be tailored to the risk profile of the regulated institution.
▶ 1:50:27Are there other proposals out there that you believe would provide the right balance between safety and soundness in minimizing harm to community banks?
▶ 1:50:36Yes, I think so. Um, the there are a number of challenges that community and smaller banks face, among which is succession planning because many of them are family-owned. They are private companies. um and making kind of M&A applications easier and uh more certain I think would be helpful for community banks. Um we have we don't want the barbell but we've got you know 4,000 banks and 4,000 credit unions.
▶ 1:51:05So some degree of consolidation seems to me to be fruitful. Other elements on tailoring are indexing the tailoring and then I think the shift that the vice chair has uh put in place away from processoriented supervision which just takes so much you know community bank may have 15 people at the bank. Um a regional bank is not going to have the hundreds of thousands that a large bank has.
▶ 1:51:31So moving away from process checklists just to show things just to show things um minutes of meetings that you know so that someone can look at them and check whether they they did thing. I think we'll focus banks back on what they need to do and we'll focus the supervisors on material financial and operational risks.
▶ 1:51:53I've had community bankers tell us that uh what they face is the death of a thousand cuts. Yes. because of the requirements. With with that in mind, are community banks at a structural disadvantage as compared to the large banks who you know can have teams of compliance specialists um when implementing these capital complex capital frameworks.
▶ 1:52:15They are and I think that's what the community bank leverage ratio is about which hasn't been taken up as much as it could be. It's very much a structural disadvantage for smaller banks. you know that to to make a mortgage is you know the paperwork looks like this
▶ 1:52:30and uh that wasn't the way it was before but mortgages were what community banks did in the small communities they knew the people they could make the mortgages now it's been much much harder since DoddFrank for community banks to make mortgages and we've seen this flow out of mortgages from the banking sector to the non-banking sector
▶ 1:52:48it's interesting you bring up mortgages one of the first bills that I passed after coming on this committee was to uh institutions that have zerointerest mortgages such as the the nonprofits Habitat for Humanity to exempt them from this massive uh regulatory framework just to issue a zerointerest mortgage.
▶ 1:53:10Anyhow, um in your testimony you write that any capital framework will need updating and renewal from time to time as markets and technology change. Do you have any thoughts on as to how the framework like that should be structured and how often those reviews should
▶ 1:53:28Well, under the regulations, um, they're supposed to be reviewed every 10 years and that is very much not honored and that's for all of the banking regulations. Um, the it I don't want to frontr run whatever. We're going to we're going to see a Basel 3 proposal from the banking regulators quite soon, I hope. And so I I don't want to make suggestions about what should happen in the onward onward, but what I did want to open folks minds to is we call it endgame,
▶ 1:53:58but it's not the end of the game. There's been mentions of agentic AI and various other changes. And I I just want us to keep in mind that there is no end to game. There's no end to keeping up with what's happening in technology and the market.
▶ 1:54:15Thank you, Mr. Chairman. I yield back.
▶ 1:54:16Gentleman yields back. The gentleman from Massachusetts, Mr. Lynch, is now recognized for five minutes.
▶ 1:54:24Thank you very much, Mr. Chairman. I want to thank the witnesses for your your your help this morning. Uh Mr. Johnson, uh earlier, Mr. Olman said uh correctly. Uh we're not in 2008. However, uh I I was here in 2008 on this committee and uh so we had the reason we're not in 2008 is because of DoddFrank. uh we put in enhanced uh capital requirements.
▶ 1:54:50We we uh we put in greater credential standards. We stop the banks from engaging in some uh very risky activity. and and now now if you listen to uh Michelle Bowman, the vice chair of the Fed for supervision, uh we're seeing a a market change.
▶ 1:55:14We're we're we're moving away from those uh the the the more demanding stress tests that we put in place. Uh we're relaxing well, there's a recommendation to relax the supplemental leverage ratio. uh we're not doing like I said we're not doing the stress testing and and again those credential standards are dropping.
▶ 1:55:36So, so with all of that, oh, let me let me also add uh Vice Chair Bowman also gave a speech in in in Madrid uh last month where she said that banks should be able to compete with non-banks in cryptocurrencies and digital assets uh which introduces a whole pile of risk into the into the banking uh industry.
▶ 1:56:01and and if we're and I think we're all in agreement that as others have stated um capital requirements should should reflect the risk that's being engaged in. So with all of that, aren't we aren't we heading back towards 2008? Well, we're heading back towards a financial crisis of the of the magnitude or bigger than 2008. Absolutely, Congressman. So, you're right that DoddFrank helped a great deal and that's what reduced leverage in the bank system.
▶ 1:56:28all of those measures combined and we can see from the data provided through the Kansas City Fed that uh leverage would was at its lowest point in the mid2010s and since then there's been an erosion as you say on multiple fronts and um vice chair Bowman seems to be determined along with the other regulators the FDC and the OC to allow more leverage at the same time the world around our financial system has become a lot more dangerous financial panics repeatedly um including the Silicon Valley bank a pandemic the rise of China abs absolutely transformative
▶ 1:56:58the arrival of AI and of course you're right to to emphasize crypto whatever we think about the future of crypto whether it's bright or not it's certainly highly volatile and if the the the the regulators are allowing the banks to become more intertwined either directly with a cryptocurrency or within an entity that is itself speculating on cryptocurrencies then that's a lot more risk the the only way to handle risk in in from a financial system stability point of view is to have more capitals don't want to do it congressman because they have these massive subsidies,
▶ 1:57:28the too big to fail subsidies. They love the leverage. The bank bank executives who the big banks get paid on the basis of return on equity unadjusted for risk. So they want to load up on risk. They don't want to care about capital. They want to shove the cost onto the taxpayer. They get the upside. The taxpayer and regular Americans get the downside. So that's 2008 again.
▶ 1:57:46Yeah. Let me let me ask you about there's there's much faith being put on AI. Uh but but from from this committee's perspective, we're seeing a small handful of AI firms that are really going to dominate and so so their products uh will be used by hundreds maybe thousands of banks.
▶ 1:58:05So they're all going to be operating off the same uh the same recommendations, the same Doesn't that create a a concentration risk if if multiple banks perhaps hundreds of banks are are actually making decisions based on the same
▶ 1:58:27Yes. And we'll see concentration risk exactly there where banks make decisions but also what Dr. Foster was talking about which was agentic AI on the on the part of investors. So investors will be coming into assets and leaving assets really very fast. They'll be interacting with other AI. They'll be gaming the system. This is all volatility uh congressman and the only way to ensure the system against volatility is with more capital not less.
▶ 1:58:50Right. So with with all these added elements especially with the crypto piece of this um and and the president certainly the white house is is is inducing banks to get uh more involved with crypto. Wouldn't it make sense to increase the the the capital requirements for those firms that are engaging in in crypto activities?
▶ 1:59:15Yes, absolutely. Crypto is is dangerous and and I would point out that the leverage is going down in community banks and regional banks. It's the too big to fail banks that are leveraging up and they're the ones that want to pile into crypto. It makes no sense. It's super dangerous.
▶ 1:59:27Thank you, Mr. Chairman. I yield back.
▶ 1:59:29Gentleman yields back. The gentleman from Nebraska, the other Mr. Flood is recognized for five minutes.
▶ 1:59:35Thank you, Mr. Chairman. And to our student, the record should reflect that I do represent the people of Nebraska. The other Mike Flood, though, is welcome to do all my town halls next year in I will afford you that opportunity. With that, uh, Mr. Eversol and Mr. flood. As chairman of the subcommittee on housing and insurance, I'm concerned that overcalibrated capital requirements are limiting consumers access to affordable and reliable mortgages.
▶ 2:00:03What reforms should we consider to ensure that consumers continue to access safe, reliable products and services such as
▶ 2:00:14Thanks very much for the question. You know, I think it's important to note as we have reflected on changes since 2008. In 2008, only 20% of mortgages uh were made outside of the banking system. And today, more than 60% are made outside of the banking system. And when we think about risk, um we know that America has a highly regulated, safe, sound banking system.
▶ 2:00:37And when we're pushing things outside of the banking system, we should ask our qu the question is, is this because of regulatory arbitrage or is this because of a good, sound, competitive marketplace? So, I think that's point one. point too is it's time to see a Basel 3 endgame proposal uh that gets this right because the costs to firsttime home buyers to small businesses um we should not be h placing inappropriate risk waiting on that and so we look forward to the new proposal
▶ 2:01:04Mr. flood.
▶ 2:01:05I just add a couple comments. Clearly agree with Miss Eversol on making sure that the risk ma matches uh the product. But one thing that I would point out as you consider affordability um when we look at Basil a lot of times it will treat especially on the commercial side a privately done affordable deal with no backing differently than one that's supported by the GSC's.
▶ 2:01:28And I I get the concept, but if we're going at, as you well know, if we need all hands in the boat on affordability, that's definitely an area that should be looked at. And clearly the risk weights for for residential mortgages as well.
▶ 2:01:40To miss as Eversol's point, like we have this fantastic banking system. It's diverse. It's better than anything Europe has. We have federal banks, state banks, community banks, regionals, GIS, but what kind of connection will they have to main street if, like you say, 60% of this is done? And we're going to be talking about GSSE reform sometime in this Congress. Is it a capital requirements issue? Um, you know, like Mrs. Tire, like is it a capital requirements issue?
▶ 2:02:08Can we uh make changes so that banks are more incentivized to get in the mortgage business? Because I I think they're going to lose their link to Main Street if they don't have that relationship with the consumer.
▶ 2:02:19I strongly agree with that and I think it's more than a capital requirement. I mean what small banks have to do to do a mortgage loan to somebody in their community who they've known for 30 years um it since DoddFrank has become enormously complex. Obviously there were problems in the financial crisis with the with the you know the liars loans and not checking income.
▶ 2:02:39But what we've done basically is we've made it too hard for community banks to do what was done for my aunt 30 years ago which is she was in the state department. She was stationed in a foreign country. She needed to have a home equity loan. And the guy from the community bank, she from the mortgage she'd already paid off, walked down to the house, walked around the house, came back and told her what he could give her. I don't think that would happen today. Mr.
▶ 2:03:07Flair, if I may, I think there are three concrete things that should be looked at in the Basel rules. One, mortgage servicing rights. servicing while chamber has absolutely no bias towards who wins in competition between banks and non-banks a level playing field is important
▶ 2:03:22and I think we've seen the migration of servicing out of banks into non-banks and I think the reason is entirely for capital reasons so we should think about whether we are biasing one form towards another would be warehouse lines we should look at that and finally of course the risk weights around mortgages Very good. I'll I'll finish up here quickly, but uh Mr. Olman and Mrs.
▶ 2:03:49Tyer, do you think that the complexity of bank capital requirements can drive further bank consolidation? I mean, I have banks in my district, in the largest city, that are afraid to grow because they're bumping up against, you know, a new assessment that's going to be painful. You don't want that. When that happens, they'll be more likely to say, "Oh, we'll sell to a big regional." Um what do you think
▶ 2:04:14it's the cliff effect of thresholds which have created that adverse incentive and it's certainly something that the the current supervisors are looking at.
▶ 2:04:23Yeah, I fully agree. I think this is one of the key issues at stake with these reforms is whether whether or not we are going to be able to have regional banks in the United States u going forward.
▶ 2:04:33We need him in Wman. With that, I'll yield back.
▶ 2:04:35Gentleman yields. The gentleman from North Carolina, Mr. Moore, is now recognized. Thank you, Mr. Chairman. During the last administration, banking regulators drifted away from their core statutory mission of protecting safety and soundness towards subjective judgments, political priorities. That shift has created uncertainty and imposed disproportionate burdens on the community and midsize institutions that drive credit formation.
▶ 2:05:00Now, we finally have an opportunity to restore some regulatory discipline and return to a framework where requirements are truly riskbased and proportional. working to revive this principle of regulatory tailoring because the requirements should match an institution's actual risk profile as several of the witnesses have already testified to. Uh Miss Tyer, we have emphasized the need to strengthen tailoring especially across categories two, three, and four banks.
▶ 2:05:26What specific changes to capital and liquidity requirements should be made to ensure midsize and regional banks are not subjected to requirements that simply don't match their their actual risk. So I think um you know the you've got in the tailoring statute you've got a hundred billion but there are other numbers that are not in the statute and I think they should all be revisited.
▶ 2:05:48There is a proposed TAC proposal that's out there that would calibrate a long-term debt requirement for midsize banks really as high as what the GIBs have. And I think there should be data driven thinking to bring that calibration of TAC down.
▶ 2:06:06And then I think there should be in the same way as the community bank leverage ratio there should you know a bank that hits a hundred billion has to start its large bank program when it's at 75 80 billion and then there's this enormous kind of process checklist kind of thing and I think the more efficient supervision um and more transition periods as thresholds are met as well as the indexing of thresholds would all be
▶ 2:06:34Thank you. You know, Charlotte that's in my district is home to some of the most strategically important banks in our country. Uh these institutions don't just compete domestically, but also with major foreign institutions subject to very different regulatory schemes. So, Miss Eversol, how do US capital proposals compare internationally? And what risk do you see if the United States ends up materially higher uh with its requirements than our global peers?
▶ 2:07:00Thank you very much for the question, Congressman. uh just for the eight largest banks, one one of which is headquartered uh in Charlotte, um you know, we pay twi we have we owe twice the capital as a consequence of the GIB search charge uh in using method 2 versus our international counterparts applying method one. And it it really doesn't have to be that way. That doesn't drive additional safety and soundness to the system.
▶ 2:07:24And so it is in all of our interest to ensure that uh that we have the safest, most liquid, most vibrant capital markets and we serve our customers in the very best possible way. Uh but goldplating just simply doesn't make sense and we should revisit that.
▶ 2:07:38Thank you. You know, we need to get we need to get back to a capital framework that supports growth and competition both at home and abroad. So uh I'll go to Mr. Man. Currently only about 40% of eligible community banks opt into the community bank leverage ratio. How should the CBLR be reformed so that it truly reduces burden and can be used by qualifying banks?
▶ 2:08:02Uh thank you for that question. The uh current proposal that has been out to revise the uh community bank leverage ratio I think is a good step in the right direction. um it will uh lower the overall leverage ratio uh to 8% but also um that it will not it will allow it exempt institutions from having to still calculate the risk based as well which is pretty expensive and oftentimes institutions if they have to calculate it they'll just go ahead and comply because a lot of the compliance costs are there removing that requirement also
▶ 2:08:32should help take up so I'm hopeful that the existing proposal uh should improve the takeup rate
▶ 2:08:38you know when the Biden administration released the original Basel 3 endgame proposal. They received an overwhelming number of critical comments. One analysis found that 97% of con of commenters opposed the proposal. Uh and more than 85% came from outside the banking industry, including farmers, small businesses, housing advocates, manufacturers, all citing concerns about higher costs for goods, services, and lending that of course we've seen impact the economy.
▶ 2:09:05Uh so Miss Evers what are the impacts of increased bank capital requirements beyond just the balance sheets right
▶ 2:09:11I at the end of the day there are consequences to more capital it doesn't come it doesn't come for free and the consequences as you articulate them uh from the prior proposal on the Basel 3 endgame would have had a disproportionate impact on privately held companies like small businesses across America America's farmers America's savers America's retirees we need to get the proposal right and we look forward referred to the proposal that's coming out.
▶ 2:09:37So, so regulators had determined that capital levels were about right in 2020. What changed?
▶ 2:09:45I'm going to have to ask you to respond for the record because
▶ 2:09:48I believe we're out of time. Thank you, Mr. Chairman. Appreciate
▶ 2:09:50you, Mr. Chairman. And I want to thank all of our witnesses for their testimony today. and I request unanimous consent to enter into the record an op-ed that I authored in support of HR 1761, legislative legislation notice for this hearing uh that I'm leading with Representative Wilson of South Carolina celebrating the 250th anniversary of our republic, cited as the Donald J. Trump $250 bill act that directs the Secretary of Treasury to print Federal Reserve notes in the denomination of $250 featuring a portrait of Donald J.
▶ 2:10:21J. Trump. Without objection, all members will have five legislative days to submit additional written questions for the witness to the chair. The questions will be forwarded to the witnesses for the response. Witnesses, please respond no later than January 15th, 2026. This hearing is adjourned.