▶ 0:18:46Chair Scott: The committee will come to order. Did it work? Ok. Now that we have a quorum the committee can come to order and we will begin the executive session on the committee's budget resolution. I moved to approve the committee's budget resolution by voice vote. If there is no discussion all in favor say aye.
▶ 0:19:16Chair Scott: The ayes have it. The resolution is adopted and it is ordered reported to the full senate. I ask unanimous consent that the staff be able to make technical and conforming changes and the court on will be waived during hearing no objections the executive session is adjourned and we will proceed to the hearing. I would like to invite the witnesses to come to the table.
▶ 0:19:54Chair Scott: Thank you. Good morning. Thank you all for being with us today. We are here to address an issue that strikes at the core of what it means to live in a free and fair society, access to financial services. Every federally legal business and law abiding citizen deserves to be treated equally, regardless of political views or ideological leanings.
▶ 0:20:25Chair Scott: This is an issue that is deeply personal to me. My grandfather was growing up in the jim crow south, banks did business with people they felt look the right way, based on the color of their skin. One's ability to get a loan to finance their home or start a business was based primarily on the color of the skin.
▶ 0:20:48Chair Scott: In the 1940's, a mother experienced the same redlining that has been persistent, pervasive, and unfortunate for decades. Thankfully, our nation continues to evolve in the right direction. In the 1990's when I was starting my small business I went to a bank and I look for an opportunity to get a loan.
▶ 0:21:13Chair Scott: Without question, that time a kid growing up in poverty in a single-parent home, my best asset was a 199010-year-old car with 353,000 miles. One would not consider that an asset. Perhaps a liability. It was my only means of transportation. I will tell you without a doubt for me it was an asset. The bank, however, helped me understand it was not.
▶ 0:21:41Chair Scott: However, in those days someone could get a character loan because of your time in the community, because of your relationships with local and community banks, and because of that not only was my financial life changed and my american dream become a reality, but more importantly my mother's american dream became a reality. We saw the strengthening of confidence in our banking system because things had changed in the right direction.
▶ 0:22:14Chair Scott: With that loan, everything seemed to get better. Had I not gotten that line of credit, I may not be here sharing this committee today -- sharing this committee today. My story is so consistent with so many other stories that really reflects positively on the american dream. In this country, access to credit is one of the cornerstones of building your american dream.
▶ 0:22:44Chair Scott: Owning a home and starting a business are challenging journeys, filled with complexities, and achieving success is never a guarantee, nor should it be. That is why access to financial services is so important. The united states is home to a vast, competitive network of banks and payment providers creating one of the most robust financial ecosystems on the planet.
▶ 0:23:11Chair Scott: It is this incredible landscape that offers countless opportunities for homeowners, entre nous is to build a healthy foundation and make strides towards achieving their version of the american dream.however , it's incredibly alarming and disheartening to hear stories about financial institutions cutting off services to digital asset firms, political figures, and conservative-aligned businesses and individuals.
▶ 0:23:43Chair Scott: Under the biden administration we have seen the rise of what many are calling operation choke point 2.0, or for federal regulators exploiting power to cut off thanks to individuals and businesses with conservative dispositions or folks aligned with industries they just didn't like.
▶ 0:24:10Chair Scott: Like the color of one's skin and my family's history. I wholeheartedly believe that debanking someone over there political ideology is un -american and those against the core values our nation was founded upon.
▶ 0:24:33Chair Scott: Today, we will have an opportunity to hear from anchorage digital's ceo whose bank was debanked. Old glory bank ceo who started a bank for those who had been debanked. And a ceo with experience navigating these abuses. And from a policy expert at the brookings institution.
▶ 0:25:03Chair Scott: This hearing will also examine how practices similar to the original operation choke point persisted despite assurances that they would end. We will investigate the role that regulators and financial institutions have played in these harmful practices which hurt not just businesses but consumers and our entire economy.
▶ 0:25:32Chair Scott: This issue should concern every single american regardless of political affiliation. That is why I am committed to a bipartisan solution to stop this form of discrimination. In this hearing is just the beginning. We are here to shine a bright light on these unacceptable practices and to hold those responsible accountable. The message is crystal clear.
▶ 0:26:01Chair Scott: No regulator and no bank is above the principles of fairness and market access. Speaking of shining a light, I was so glad to see that just a couple of hours ago the fdic under president trump's leadership released a fresh set of never before seen supervisory documents, which further proved that chokepoint to does
▶ 0:26:33Chair Scott: Choke point -- that choke point to 2.0 was real. They paint a disgusting and disheartening picture of abuse. As acting chair he'll characterize them, these and other actions sent the message to banks that it would be difficult if not impossible to move forward with crypto-related activities.
▶ 0:27:02Chair Scott: I commend the new fdic leadership for its commitment to transparency, but it is a shame that it took an election, an election for the agency to begin following the laws of our country. Thank you. I look forward to hearing from our witnesses and working with colleagues on both sides of the aisle to stop debanking and protect every american's right to participate fully in the economy. Ranking member moran.
▶ 0:27:32Sen. Warren: Thank, Mr. chairman. Thank you for holding this hearing on debanking. It is a real problem and something I hope we can work on together. People need access to a banking account in order to thrive in today's economy. The same goes for businesses. Without a banking account you really can't go on.
▶ 0:27:54Sen. Warren: Debanking happens when a bank shuts down a customer's bank account because they think that that account poses a financial, legal, or reputational risk to the bank. Once the bank shuts someone out, the bank may share that information with companies that get paid to maintain a do not bank list, with the result that the customer is blacklisted everywhere. For me, this is straightforward.
▶ 0:28:25Sen. Warren: It doesn't matter who you voted for, what you believe in, or the origin of your last name, people should not be arbitrarily denied access to their banks, blocked out of their accounts, or stripped of their banking privileges.
▶ 0:28:40Sen. Warren: To help identify what is going on, my staff reviewed the consumer financial protection bureau's complaint database, looking for cases where consumers reported that they were unable to open accounts or that their accounts were wrongly closed, classic debanking. Mr. chairman, we put together a supplemental memo on this data. I would like to make that part of the committee record.
▶ 0:29:07Sen. Warren: My staff identified 11,955 complaints. That is only the people who took the time to file complaints and only during the past three years. All of these complaints reported common themes. No warning, no explanation, no chance to dispute or appeal. These people described how one day, all of a sudden, they lost their place in the banking system.
▶ 0:29:39Sen. Warren: We know from the consumer complaint hotline that millions of americans of all political stripes have had the same experience. Tens of millions of customers have been blacklisted by the banking industry, because they overdrafted their account a few times. Formerly incarcerated americans have been de-banked because of their criminal history.
▶ 0:30:06Sen. Warren: Some have been debanked because they have the same name as someone who has a criminal history. Muslim americans and armenian americans have faced debanking on account of their last names. Nonprofits and charities operating internationally have been debanked through no fault of their own. Lawful cannabis businesses have been unable to open accounts, and employees of those businesses have been debanked.
▶ 0:30:36Sen. Warren: This should not be happening. We need to figure out why and who is responsible. My staff did some more work here as well. They found that just four big
▶ 0:30:49Banks: Bank of america, j.p. Morgan, wells fargo, citi bank, accounted for half of the complaints filed. Donald trump was on to real problem many criticized inc. Of america for its debanking practices. Thanks may be taking shortcuts when it comes to assessing risk.
▶ 0:31:12Banks: Rather than investing the time and resources to identify true criminal risks and shutting down those accounts, big banks are relying on black box algorithms and middlemen companies and shutting down accounts without doing careful due diligence. We can prevent these abuses.
▶ 0:31:34Banks: I know the consumer I natural protection bureau is a favorite whipping boy of the republicans on this committee, but the cfpb is the main agency in our government actively working to stop unfair debanking. Let me say that again. The cfpb is the one agency that is actively working to stop unfair debanking.
▶ 0:32:00Banks: Right now, the agency has five different rules either in place or in progress that would help prevent debanking by addressing some of the root causes, from overdraft fee practices to religious discrimination.the cfpb is working to hold banks accountable when they close law-abiding citizens' and businesses' accounts for no good reason.
▶ 0:32:27Banks: I sent a letter to president trump today that walks through the cfpb's work, and I would like to make that part of the committee record. I said the cfpb is the one agency fighting back against debanking, but that may be at risk.
▶ 0:32:43Banks: Earlier this week, treasury secretary and acting cfpb director scott bessent halted all cfpb rulemaking, enforcement, investigations, and litigation against financial institutions breaking the law, including the banks that are wrongfully debanking their customers.
▶ 0:33:10Banks: The freeze secretary bess and put on the cfpb means that more americans across this country will be unfairly deep bank -- unfairly debanked and they will lose the one agency working to help them.
▶ 0:33:25Banks: There is additional work to be done by the federal reserve, the fbi, and other regulators to issue clear anti-money laundering rules and guidance for banks to follow that would reduce using debanking as a form of risk management. I appreciate you holding this hearing.
▶ 0:33:48Banks: Debanking is a real problem and I am eager to work with you and president trump to support the cfpb's efforts to make sure that everyone is treated fairly and that we put an end to this debanking.
▶ 0:34:00Chair Scott: I recognize our first witness, Mr. nathan mccauley, ceo and cofounder of anchorage digital.
▶ 0:34:09Mr. Mccauley: Thank you, chairman. Ranking member and distinguished members of this committee for having me as a witness on the important issue of debanking. My name is nathan mccauley come the ceo and cofounder of anchorage digital, an institutional crypto platform home to the nation only federally chartered crypto bank.
▶ 0:34:30Mr. Mccauley: I grew up in economy, indiana population 150, although I came from what many call flyover country and one of my first jobs was grilling burgers at mcdonald's I had big dreams. I wanted to be a computer engineer and entrepreneur. Early in my career I worked on cryptography as a security engineer. In 2017 after being asked for years by friends to help them manage the private keys to their crypto wallets, we started a company to offer a safe way for crypto at scale.
▶ 0:35:01Mr. Mccauley: That company is anchorage digital with 400 employees around the globe, including 280 two employees across 37 different U.S. states and offices in south dakota, new york, portugal, and singapore. We started as a state trust company, I believe our clients and industry would benefit from the highest regulatory standards. It chose to pursue a national bank charter under the occ that would allow us to offer crypto custody staking settlements and other services to our institutional clients.
▶ 0:35:31Mr. Mccauley: We receive the charter in january of 2021, the first and still only of its kind. Today, we are privileged to safeguard billions of dollars of crypto from critical protocols, to asset managers, to sovereign funds. I'm here to talk about something I couldn't have imagined when I started the company, not in america. How we were virtually shut out of the federal banking system despite being a federal think ourselves.
▶ 0:35:58Mr. Mccauley: Since january of 2021, we held a corporate bank account with a partner bank which held client fees from custody and other services, along with the general corporate funds for day-to-day experiences like payroll and administrative expenses. One day in june of 2020 three, we received an urgent email from the bank saying that they needed to speak to us that day. On the call, they told us that they were closing our account in 30 days because they were not comfortable with our crypto clients and their transactions.
▶ 0:36:26Mr. Mccauley: They refused to provide further explanation or allow us to speak with a risk management team. Needless to say, I was shocked. We had a positive relationship with the bank for nearly 2.5 years and not once had they raised any issues with our account. At the time that we were told our account would be closed, we were in an active talk to expand our relationship and new partnerships.
▶ 0:36:50Mr. Mccauley: Separately, following the closure of the banks where we held our capital reserves and fiat clients for clients, we talked about 40 banks across the country and were rejected by all of them, many telling us that they had a blanket policy against serving crypto clients. Why did this happen? I believe that regulators pressured banks to shut entire industry out of the federal banking industry. Why do I think this? Two things.
▶ 0:37:22Mr. Mccauley: A series of crypto regulatory actions from 2021-2023 and my own lived experience. In my written testimony I go into detail about the long list of anti-crypto regulatory actions that led to mass debanking of our industry. In my view, the nail in the coffin was the joint statement from the fed, fdic, and occ in january of 2023 warning national banks from serving crypto clients or engaging in crypto activities of their own. I want to talk about my lived experience.
▶ 0:37:51Mr. Mccauley: Outside of our company, I am an investor in four crypto companies that struggled to obtain and keep bank records. During this time, some had to shut down. Further, I have at least two employees who have debanked because of what they believe was their association with crypto agency, including one in december of last year. Finally, I've spoken to dozens of crypto leaders who have been debanked personally or had their crypto companies debanked.
▶ 0:38:21Mr. Mccauley: While anchorage digital was eventually able to find banks willing to partner with us, the impact of nearly being shut out of the banking system was devastating. It was extremely disruptive to our business and clients and contributed to the difficult decision to lay off 70 employees in the united states, about 20% of our staff. To this day, our clients lack the ability to send wire transfers to third parties, a basic banking service that we previously had access to.
▶ 0:38:49Mr. Mccauley: Furthermore, it abruptly ended opportunities to provide sub custody to other national banks who are actively exploring partnerships with us. The irony of having trouble accessing the federal banking system despite the fact that we ourselves are a federally chartered bank cannot be overstated. Congress is right to investigate what happened to us and our peers across the industry, to protect and promote fair and open access to banking services for all law-abiding citizens.
▶ 0:39:20Mr. Mccauley: Thank you for the opportunity to appear today and I look forward to answering questions.
▶ 0:39:22Chair Scott: Mr. stephen gannon, partner at davis wright tremaine, you are recognized.
▶ 0:39:26Mr. Gannon: Good morning. Thank you and members of the committee.
▶ 0:39:30Chair Scott: Hit your button.
▶ 0:39:32Mr. Mccauley: Thank you, Mr. chairman. Good morning. Thank you and other members of the committee for the opportunity to address you on the underlying policies, processes, and norms that allow debanking to continue. I am a partner at the law firm davis wright tremaine. Prior to that was a senior legal executive at several large banks and aunt-owned corporate dealers.
▶ 0:39:55Mr. Mccauley: Debanking has come to my attention in in-house roles in private practice as a lawyer who represents banks and digital asset firms. Debanking of course is not new. This committee is familiar with the unfortunate history of operation choke point 1.0 in which bill isaak described it as one of the most dangerous programs that he had experienced in his 45 years of service in the government and private sector.
▶ 0:40:22Mr. Mccauley: The committee also has seen examples of debanking this morning and on the record. One more challenge posed to banks by virtually unbound supervisory discretion. A small bank had been making tax refund anticipation loans. They were legal then and are legal now. The fdic however instructed it to stop that business the bank refused.
▶ 0:40:50Mr. Mccauley: According to a report by the fdic oig, the bank and its tax preparers became the subject of a special horizontal review staffed by 400 fdic examiners. I will now address the building blocks used by regulators to engage in debanking activity. They depend on broad, vague, malleable term subject to reinterpretation by supervisors. You could call it strategic ambiguity.
▶ 0:41:24Mr. Mccauley: Reputation risk doesn't relate to the financial condition of a bank but rather how an examiner perceives the reputation of the bank. Because reputation risk can impact any asset of bank management and bank risk, it is literally everywhere and subject to unlimited discretionary judgment of bank examiners. In the same vein, so our terms such as safety and risk of future harm.
▶ 0:41:48Mr. Mccauley: The turn management, the m element of the camels rating system. Management has come to mean anything supervisors find unacceptable, regardless if there is an impact on the financial health of a bank. A poor management rating can add disastrous consequences for banks business going forward. Compounding the problem, this kind of arbitrary discretion isn't subject to meaningful challenge.
▶ 0:42:15Mr. Mccauley: Supervisory examinations are shrouded in secrecy and not available for any effective review by the very banks whose information is being analyzed. Bank regulators contend that everything done within the envelope of an examination is confidential supervisory information. That csi is the property of the regulator itself. Even though that argument rests on weak legal and constitutional grounds the digital asset industry has felt this impact with great intensity.
▶ 0:42:44Mr. Mccauley: For example, in 2021-20 22, using interpretive letters, each banking agency promulgated an unusual prior restraint requirement called a supervisory non-objection before any bank could engage in permissible crypto activities. Notably, these letters met the definition of a rule under the congressional review act, but they were never submitted to this body for review under that law and no bank has dared to disobey their mandates.
▶ 0:43:16Mr. Mccauley: This exercise of nearly limitless regulatory discretion suffers from a fundamental problem. It distorts the relationship between a regulatory agency and congress. Under article one, the entirety of an agency's power is delegated to it by congress.not some of it . All of it. If agency wishes to make a legal business illegal, it must ask congress for that power.
▶ 0:43:42Mr. Mccauley: Debanking of legal businesses ignores that fundamental concept and also contravenes this administration's recent executive order stating regulatory agencies are to "protect and promote fair access to banking services." the good news is, there are a series of remedies that can be implemented, some starting today , as we discussed in our written statement. While those remedies look forward, it cannot be stated strongly enough that the challenge remains to provide full and complete remedies for those already harmed by debanking.
▶ 0:44:13Mr. Mccauley: Commentators wrote after operation chokepoint 1.0 we have to demand accountability or risk setting a terrible precedent that ideology can control our regulatory agenda at the expense of banks and small businesses alike. Despite the best efforts of congress, the spirit of operation choke point one plano did not end in 2017 into operation choke point 2.0. Mr.
▶ 0:44:39Mr. Mccauley: Chairman, history teaches us that this time there is no real accountability and genuine remedies for the actual damage done, one thing is certain. There will be in operation choke point 3.0.
▶ 0:44:53Chair Scott: Mike ring, president, ceo, and cofounder of old glory bank.
▶ 0:44:59Mr. Ring: Thank you you, chairman scott, ranking member warren, members, thank you for allowing me to share the story of old glory bank which launched from elmore city, oklahoma in april of 2023 and became a market solution to debanking. Chairman scott, we are a community bank that does do character loans, and we would love to have your business. Nathan, we have a program being the on and off ramp for crypto, and we would love your business.
▶ 0:45:31Mr. Ring: [indiscernible] you bet. I'm honored to speak on behalf of 50,000 customers across 50 states, our 88 passionate employees, and our pro-america cofounders, some of whom are here today. Radio and tv host larry elder is here with us today, the future governor of california, I hope.
▶ 0:45:52Mr. Ring: The 27th governor of oklahoma and future member of congress with us, mary christiansen, our other co-founder the former copresident of fox news and white house deputy chief of staff or communications for president trump's first term, and our brilliant and beautiful chief legal officer, my wife of 20 years, and two of our cofounders who could not be here today, Dr. carson and america's favorite patriot country music icon john rich.
▶ 0:46:22Mr. Ring: Hopefully he is tweeting now talking about this. I also want to thank Mr. wade christiansen, who is with us from the great state of oklahoma, whose family previously owned the bank that we purchased to launch old glory bank and are now co-owners of the bank. As we have heard today, lots of debanking going on, and there are two types the way that I define it. The regulatory type of debanking, which other folks more than I will talk about.
▶ 0:46:48Mr. Ring: And operation choke point 1.0, 2.0, and probably 0.5 in there somewhere. It cannot be a coincidence that in april of 2020 two both the fbi see put out f I l 1622 and the sec put out seb 121.
▶ 0:47:17Mr. Ring: Those are big organizations and they were clearly working together to choke out not only banks acting as a custodian for other people's, customers' crypto, but to stop the demand deposit services of a bank. If crypto cannot provide that on and off or have you choke out the business, and that is what happened in america. The more interesting part is the participant debanking.
▶ 0:47:43Mr. Ring: That is the volunteer effort by the big banks to debanking americans who disagreed on the issues that we all know, whether it is covid, the vaccines, or who supported donald trump, including his wife, who was debanked, as we know, and other conservative causes.
▶ 0:48:04Mr. Ring: I don't know the first lady but I assure you she was not a money laundering risk and she was debanked p the founders of old glory bank saw what many of us all, but instead of sitting around and complaining we got together and created old glory bank as a market response. We purchased a one branch bank in beautiful elmore city, oklahoma on november 30, 2022. Five months later, working hard, we launched the best digital first bank in america.
▶ 0:48:35Mr. Ring: We grew to 170 million deposits. We grew from 300 customers in elmore city to more than 50,000 customers across all 50 states. We serve over 2000 small businesses. We have respectfully better products than the megabanks, but our service is in durrant, oklahoma and not offshore. Our customers love us and we love our customers.
▶ 0:49:00Mr. Ring: As part of our market solution, in less than two years we did a 360 degree approach. Our own version of cancel-prove paypal called old glory pay, a cancel-proof version of gofundme called old glory alliance, our customers can walk into one of 88 locations across america and deposit cash. Talk about the friction point of banking online, how do you deposit cash? We solved that. We are serving middle america.
▶ 0:49:32Mr. Ring: The one that I'm the most proud of is old glory protect. We have a free $100,000 line of duty theft benefit for our protectors, godfrey protectors, godfr for bed they're killed in the line of duty and john rich and I show up at your house and we give you 100,000 dollars at old glory bank. Law enforcement, military, firefighters, including volunteer firefighters, and importantly U.S. border patrol agents.
▶ 0:49:57Mr. Ring: We all know that debanking is wrong, but I believe that the simple solution is a market solution, not regulatory, with all respect. We have to keep making it easier for banks to start and run. I will close with this. In the last two years, 229 banks closed. Only four emerged, eight started. We lost 70% of our banks in four years. It isn't sustainable.
▶ 0:50:28Mr. Ring: We have to make it easier to start and run banks.
▶ 0:50:34Chair Scott: Thank you, sir. Next, Mr. aaron klein, senior fellow at brookings institution.
▶ 0:50:44Mr. Klein: Thank you, chairman scott, ranking member warren, members of the committee for the opportunity to testify on the pernicious consequences of debanking in america. All of the views I offer today are my own. 10% of american households are currently unbanked or were at some point in the last year. Not having a bank account adds a significant cost, makes people less healthy, makes it impossible to fully participate in america's increasingly digital economy. People are debanked because the cost of basic banking is too high.
▶ 0:51:12Mr. Klein: There are unpredictable fees, banks don't offer the services that they want, there is a lack of trust in banks, concerns about privacy, problems opening an account due to identification or bad credit history. Checking accounts are free for those who always have money while those living paycheck-to-paycheck pay a myriad of fees that can easily reach over $500 a year making basic banking out affordable. My written testimony illustrates how debanking harms consumers and businesses and enumerates ideas for reform.
▶ 0:51:42Mr. Klein: I want to highlight five proposals to combat debanking. First, require all banks to offer and credit unions to offer bank on style accounts. Bank on accounts are affordable, low fee, non-overdraft accounts that are wildly popular among consumers and are considered a best practice by the american bankers association. Why should any federally insured bank or credit union not be required to offer a best practice account?
▶ 0:52:10Mr. Klein: Two, reduced penalties and surprise fees that debank the financially vulnerable. Many small banks and credit unions voluntarily reformed practices. Many did not. The cfpb's overdraft regulation recognizes the economic fact that overdraft is credit and treats it accordingly. The rule should be allowed to go forward.
▶ 0:52:37Mr. Klein: However, the rule erred in not exempting banks and credit unions under $10 billion, including many institutions whose overdraft practices ought to raise serious concerns. Armed forces bank. They generate $92 of overdraft per customer compared to just over $1 per customer from bank of america.
▶ 0:53:03Mr. Klein: How is that a bank or any bank that generates a majority or the totality of its profit year after year on overdraft operating in a safe and sound practice? Regulators need to treat it as such. Three, we need to improve the design of the financial system to better serve working people. How can amazon get anything to almost anyone's door faster than it takes two banks to transfer an electronic fund?
▶ 0:53:30Mr. Klein: If america instituted real-time payments when england did, people would have saved over $100 billion in overdraft fees, check-cashing fees, and payday loan fees alone. 70% of people go to a tech casher and they have a bank account. Why? The check cash or gives them cash immediately and the bank doesn't the federal reserve has been required by law to lower the amount of time that a bank can sit on your check and they ignore the law for 37 years.
▶ 0:53:59Mr. Klein: Even when the past cfpb director called for modernization, legislation introduced by senator warren and senator van hollen, the payments modernization act, would hardwire this into law and fix this problem and would be the most effective thing that I can think of to combat debanking by improving the quality of services that banks offer to people living on the edge. Four, reform aml.
▶ 0:54:24Mr. Klein: When congress established the $10,000 ctr limit in 1972, you could buy a fully loaded brand-new cadillac in cash and not trigger that report. I don't know if your used car would trigger a ctr.
▶ 0:54:38Chair Scott: I'm not sure that it would trigger anything, but thank you very much.
▶ 0:54:42Mr. Klein: If you adjust $10,000 for inflation you would be over $75,000 today. What is the government doing looking at things at such a different level? In addition, banks filed 2.5 million suspicious activity reports today, an increase of 10 times more than they did 20 years ago.
▶ 0:55:03Mr. Klein: Banks spend a lot of money making them and they pass them along to consumers and small businesses and the results are low profit customers are pushed out and high profit customers keep their bank account. Look at othani. He kept his bank account despite someone fraudulently impersonating him and wiring $70 million into the account of a bookie.
▶ 0:55:28Mr. Klein: Plenty of low income people, 11,955 people lost their account. It has to do with the economics. States -- there is a cannabis banking issue that deals with sars as well this a banking act was a good step forward but needs to go further. We need to reform these do not bank systems like chex where you get kicked out for being poor, not for fraud.
▶ 0:55:56Mr. Klein: The bank on program has helped solve that and that ought to be done across the board. I thank you all for holding this important hearing and I look forward to answering your questions.
▶ 0:56:06Chair Scott: Thank you, Mr. klein. I will start the questions and then we will go to the raking member and go back and forth. Mr. ring, the biden administration took several actions that likely contributed to the debanking of crypto firms. In january of 2023 prudential regulators issued a joint statement urging banks to limit their exposure to cryptocurrency activities and associated risks.
▶ 0:56:32Chair Scott: The fbi -- the fdic ig said because letters of may of 2023 asking them to pause planned or ongoing crypto related activities and provide additional information.as I said earlier, we received validation today with care validation today with cahair hill's actions. 121 prevented banks from holding digital assets with custody.
▶ 0:57:03Chair Scott: These actions collectively help to create an environment where banks became reluctant to work with crypto firms, fearing regulatory backlash. You have worked to create a banking environment focused on being a home for so many americans and businesses who have been debanked. I hope you can share what your interactions have been like with our federal banking regulators.
▶ 0:57:25Mr. Ring: I like to say that I'm standing between the regulators and america, and I am the only bank executive who is not intimidated by the regulators. I definitely fly too close to the sun, but you have to to protect america. What was disappointing about fil 1620 two that you referenced is on its face if you read it it was not entirely unreasonable about safety and soundness.
▶ 0:57:52Mr. Ring: The examiners took that to stop banks from even being the on and off ramp. If you are a legal crypto business, it's one thing that there could be challenges holding a customer's tokens and keys, but to think that you cannot be that legal business's bank account was the real problem with fil 1622. 121, I don't know how that passed the laugh test.
▶ 0:58:21Mr. Ring: If you have a book that is a liability and you put capital against it is ridiculous and thankfully that has been rescinded.
▶ 0:58:27Chair Scott: Mr. mccauley, anchorage digital has the honor of being the only occ federally chartered crypto bank in the united states. This stamp of approval from the occ should provide your company with legitimacy and access to traditional banking services. However, as you detailed in your testimony, anchorage has struggled to access the traditional banking system, despite you are a bank. This is unacceptable.
▶ 0:59:00Chair Scott: Could you elaborate on anchorage's experience and your impact on business operations including making payroll and going beyond the 20% layoffs, devastating for any business? Our employees are like our families when you are in business. I would love for you to share in addition other issues and challenges that you face because they don't want you to be a bank?
▶ 0:59:22Mr. Mccauley: Thank you. I think that the first effect that was so pernicious about the debanking going on the last several years has been the betrayal of the bargain that is the american experiment. We were taught growing up that we would have a fair legal system and fair justice system that we could face our accusers.
▶ 0:59:49Mr. Mccauley: I would say that the most devastating part of this to the crypto industry has been that betrayal of trust. I think as we look forward to the new administration coming in and thinking about the path forward, that is probably the most important thing to reestablish. This industry's trust in the reliability of the american banking system and the legal justice system.
▶ 1:00:13Chair Scott: Anytime you see the weaponization of government against you or your industry, it makes you not only cautious but leery of the entire system itself. I wonder, because of your day to day interaction with crypto firms, how widespread is debanking in the crypto space?
▶ 1:00:33Mr. Mccauley: An anecdote that I can share is I was speaking at a meet up of 100 crypto founders in san francisco. As a show of hands, I said, who has had trouble getting a bank account or has had debanking issues? All of the hands and the room went up. To say that this is pervasive is an understatement. It has been across the entire industry. Everyone has dealt with this. It became so commonplace to us that it became background noise.
▶ 1:01:04Mr. Mccauley: It was just assumed that if you were a crypto company you would have trouble getting banking services.
▶ 1:01:09Chair Scott: Ranking member warren.
▶ 1:01:10Sen. Warren: Debanking is a real problem and we need to work across the aisle to solve it. I have a stack of stories sent in by consumers and organizations that were debanked and I would like to submit them for the record. These stories are from muslim americans, from cannabis businesses, from formerly incarcerated individuals all of whom lost their bank accounts for no apparent reason. I want to talk about what kind of recourse consumers have or don't have when they are debanked.
▶ 1:01:43Sen. Warren: Mr. mccauley, you testified your company lost its bank account and when you try to open a new one dozens of banks, including some of the biggest banks in the country, close dude -- turned you down. Which offered you an account?
▶ 1:01:55Mr. Mccauley: I don't think it is productive to name individual banks. I believe the banks were the victims here.
▶ 1:02:01Sen. Warren: I just want to get it into the record because we have recourse. Did you get an opportunity to appeal the decision with any of those banks?
▶ 1:02:10Mr. Mccauley: No, senator. There was no room for discussion with the banks.
▶ 1:02:15Sen. Warren: No appeals at all. That is unfortunate. The cfpb accepted 11,955 complaints from consumers and organizations unable to open accounts or their accounts were wrongly closed in the last three years. Do you agree that it is useful to have database for this information so that we can identify trends, the types of individuals or businesses targeted and the banks where this is happening?
▶ 1:02:43Mr. Mccauley: Senator, more data and more transparency will help.
▶ 1:02:47Sen. Warren: Good. I don't think for a second that you should be locked out of our banking system. In many cases, it is wrong for banks to close accounts and threaten the ability to make payroll or pay rent on time without providing an explanation so long as you are following the law. Mr.
▶ 1:03:09Sen. Warren: Mccauley, do you agree that people who are illegitimately debanked deserve rules to protect them and an appeals process if they lose their accounts?
▶ 1:03:18Mr. Mccauley: Yes, senator. Some things should be done to make sure regulators don't do this again.
▶ 1:03:24Sen. Warren: If banks are adopting policies that routinely debank people based on their beliefs or illegitimate reasons, that is wrong, it needs to be stopped. Mr. mccauley, should consumers be protected from being debanked based on political or religious beliefs?
▶ 1:03:43Mr. Mccauley: Yes, senator. Many individuals in the crypto industry were debanked and I wished industries would help them.
▶ 1:03:50Sen. Warren: And you would carry that over to those debanked for other reasons as well because of their beliefs. The cfpb has been on the front lines combating debanking for years. In 2022, they added debanking to the list of illegal practices that bank examiner should be on the lookout for.
▶ 1:04:12Sen. Warren: Last year they wrote rules to crack down on debanking by payment apps and the third-party data aggregators that the banks used to decide who to kick out of the financial system. Last month, they proposed a rule to stop companies like paypal that considered finding users for certain types of speech on their platform -- fining users for certain types of speech on the platform. How with the cfpb rules put a stop to unfair debanking?
▶ 1:04:42Mr. Klein: Cfpb is on the forefront of looking after consumers, making sure consumers have access to high-quality unfair banking practices, as opposed to bank regulators who are too often focused on the bank.
▶ 1:05:01Mr. Klein: I can think of five rules the bureau has, the contract rule, the unfair discriminatory practices rule, the larger participant rule which would give them authority over places like venmo and paybal, the broker rule which reports agencies like the chex. There is no economics to require those things to be accurate. It is simply limited appeal process. And the overdraft rule.
▶ 1:05:30Mr. Klein: When you ask people who have lost their bank account or are out of the banking system, why don't you have a bank account? The number one reason is it is too expensive and the overdraft fees, which some estimates were up to $30 billion a year or more, part of the larger reason that people leave. Those five rules that the bureau put out would all calm that debanking in various ways.
▶ 1:05:49Sen. Warren: The cfpb is ready for this fight. Every day that the cfpb is locked out of doing its job people are getting debanked. If the president is serious about stopping debanking, he needs a strong cfpb as its partner to get this done. Thank you, Mr. chairman.
▶ 1:06:11Sen. Warren: >> I think as many of you can see in this room, the different directions we are talking about in terms of the direction we need to go. Some of us are interested in having the regulatory oversight actually be identified as the problem versus suggesting that the big, bad banks are doing this on their own. Mr. mccauley, it is good to see you again.
▶ 1:06:36Sen. Warren: I'm glad that you decided south dakota was the right homebase wen yu wen y -- when you started. You shared with us the challenge that you had in getting banked. First of all, you're the first and only federally charted crypto bank?
▶ 1:06:52Mr. Mccauley: That is correct. >> anchorage digital is a qualified custodian and has a traditional occ bank charter. What is the nature of the accounts at the other banks?
▶ 1:07:04Mr. Mccauley: Basic checking accounts and holding our capital reserves, and further, as a condition of charter hold cash for partners and banks. >> is any of that illegal?
▶ 1:07:20Mr. Mccauley: Absolutely not. >> did you ever overdraft? It is not a business reason why no one would want to do business with you other than the fact that you were -- you would hold crypto in trust for other people? And that was a no-no?
▶ 1:07:38Mr. Mccauley: To put a finer point on it, the bank that you banked -- that debanked us was actively trying to work with us more. >> there seems to be a point they don't want to do this with you anymore. Did they not want to bank with you? What was the case?
▶ 1:07:57Mr. Mccauley: They wanted to bank with us. Many of the banks that we reached out to after the bank account was closed also wanted to work with us. This was consistent. The banks wanted to work with us but they were worried about regulatory risks.
▶ 1:08:11Sen. Rounds: You are not doing an illegal activity like cannabis that is federally illegal to do? You were not over drafting? You are simply part of a legal industry that banks were told by regulators would be a problem for the bank? Is that correct?
▶ 1:08:29Mr. Mccauley: That's right. I'm a bit of a square. I like rules. I like following rules. We have always followed the rules and regulations.
▶ 1:08:39Sen. Rounds: Mr. gannon, you represented financial institutions. Are you finding that these banks simply do not want to do business with people or is it a matter for people who follow the law and are not violating the law and are not business risks of simply over drafting their accounts, these banks want to look for business but because of a regulatory environment that they have been in, they have been forced to decide if they want to do business with certain types of industries, whether
▶ 1:09:12Sen. Rounds: They were gun manufacturers, people who sold guns, people who did the terrible thing of being in the business of crypto activity, and so forth were suddenly being identified because of the type of business that they had, which was a legal business, by regulators coming down hard? What can a regulator due to a bank that doesn't want to comply with their demand? Whether it be written or implied?
▶ 1:09:34Mr. Gannon: Senator, the regulators can do quite a bit. The banks are not making this up. They like to have customers, like all businesses like to have customers. Regulators have a lot of tools subject almost to their complete discretion.
▶ 1:09:50Sen. Rounds: Supervisory in nature. The auditors walk in and they say, guess what, you have a problem. What happens if a camel rating changes for a bank going from a 2 to a 3. Do they get bonded?
▶ 1:10:07Mr. Gannon: They don't. That is a very bad result, senator. You are pretty much locked out of any ability to expand. Your insurance goes up. And there are other strictures on what you can do as you go forward and attempt to grow your business. That really is the big hammer that the regulators have. Management rating can be almost anything.
▶ 1:10:34Mr. Gannon: One of the things that is remarkable is if you look at the fed's supervisory report from november of 2024, you will find out that they say 2/3rds of the large banks in the united states are not well managed. We have a chart in our written statement. Those same banks have record levels of capital and liquidity.
▶ 1:10:59Mr. Gannon: They also invest enormous amounts in technology, community reinvestment, etc., perhaps higher than any time in history. But two thirds of them are not well managed? That does not make sense.
▶ 1:11:11Sen. Rounds: I appreciate you having the time to have this hearing and the focus on what is happening with banks that want to do business with legitimate businesses and the struggles they've had with a supervisory approach for the last several years which put pressure on them for what they consider to be inappropriate types of illegal businesses. This has to stop.
▶ 1:11:31Chair Scott: Your questions were illuminating.
▶ 1:11:35Sen. Reed: Thank you for your testimony. One of the factors involved in this discussion is reputational risk. That is often the justification for the actions and rules of the central banking regulators. Last year, we had a very positive discussion about the safe banking act.
▶ 1:11:59Sen. Reed: My colleagues to come up with a compromise that would still allow reputational risk to be a factor but to put up guardrails with regard to its application. Mr. klein, can you elaborate on the importance of maintaining reputational risk as a factor in valuation and the guardrails that might be in place?
▶ 1:12:22Mr. Klein: Yes. I think the compromise in the safe banking act on reputational risk effectively addressed that problem. At the end of the day all banks are a reputation-based business. Trust is the cornerstone of all banks. Consumers trust that the bank has their money. When a bank loses trust it has the possibility to have a run on it. Reputational risk is real and important.
▶ 1:12:49Mr. Klein: It is possible that it is abused and you need to have guardrails, but it is absolutely an important part of bank regulation and supervision.
▶ 1:12:56Sen. Reed: Thank you. Mr. ring, I know that you understand this very well. Back in 2024 you pointed out the dangers of money-laundering and terrorist financing.
▶ 1:13:13Sen. Reed: One of the aspects of crypto, it is a rather new phenomenon, is that it seems to be a very often used vehicle for the financing of places like north korea, financing illicit activities. Does that put more pressure on you to be more stringent and regulate and the regulators to be more careful in watching what you do?
▶ 1:13:39Mr. Ring: I believe that the bank secrecy act, which is what you're talking about. The bank secrecy act has nothing to do with the secrets, and nothing to do with your customer data, it is strictly money-laundering and what you are talking about. I am not in favor of the amount of delegation law enforcement has done on banks with respect to these types of issues.
▶ 1:14:09Mr. Ring: They are real issues, but banks should not be on the frontlines. What happens is that is the trojan horse for banks to do whatever they want. It is aml, bsa issues. This a you can't do crypto because of that, at the grocery store does the cashier and the bagger have to let the police know that you bought chemicals? Of course not. It is a trojan horse and should be a small component
▶ 1:14:43Sen. Reed: The bank regulators are trying to react.
▶ 1:14:50Mr. Ring: Because should not take 10 years.
▶ 1:14:54Sen. Reed: It is a situation looking from my perspective of national security, north korea makes a lot of money through crypto operations. A lot of these -- as you pointed out -- terrorist groups use it. There has to be a heightened awareness both in the industry and also within the regulators with respect to crypto.
▶ 1:15:19Sen. Reed: That is a factor that is not as prominent and other banking institutions that don't deal with crypto.
▶ 1:15:30Mr. Ring: I believe every bank has the same concern and I don't believe crypto is the overwhelming factor that the bank secrecy act, which is preventing -- will solve what you want respectfully.
▶ 1:15:48Mr. Klein: One of the promise we have that problem we have is created an economic structure where the costs are high. If you're a low profit customer, we don't want you. If you're a high profit customer, we will just pay the aml fine. I don't understand how a foreign national was wiring $17 million into 100,000 of increment.
▶ 1:16:14Mr. Klein: Listen to the doj filing and to the audio released to the interpreter saying I'm paying $200,000 to this illegal bookie's bank account for a car loan. Maybe more. The bank account was not closed. There's a very different world going on between wealthy people, wealthy businesses and banks who see aml as a fine and a cost. Some, not most.
▶ 1:16:44Mr. Klein: We have an amo system where the economics -- aml system that use this information to catch criminals. We are reporting too much information that is not useful and banks are being let off the hook too easily to pay a fine.
▶ 1:17:02Chair Scott: Senator tillis.
▶ 1:17:05Sen. Tillis: Thank you all for being here today. Mr. chairman, I was thinking about why I knew what a 90 day note was when I was 14 years old. My dad did construction work. He had a relationship with a couple of agents, insurance agents. That was my dad's work. I was a 14-year-old helper in the bank parking lot.
▶ 1:17:36Sen. Tillis: My dad would go into a bank in nashville, tennessee, and got a 90 day note. That is what paid the bills for the project and put food on our table. We have all but overregulated this personal relationships out of the business. My dad probably could not get that 90 day note. He would have some supervisor breathing down the bank's back about how to possibly give this man money living paycheck-to-paycheck and trying to feed six kids.
▶ 1:18:03Sen. Tillis: We are over regulating in way that is de-banking people. Senator warren mentioned -- they bounced a check of couple of times. That is called managing risk. I'm not saying they should not find a way to provide that person with help but then having a consistent pattern of bouncing checks is not help in the long term.
▶ 1:18:31Sen. Tillis: We need to figure out how to help them manage their finances, not force banks to carry and at risk customer on their portfolio. If we talk about -- we talked about -- we have the cannabis business. The cannabis business is illegal at a federal level. I think we should re-examine that.
▶ 1:18:52Sen. Tillis: We shouldn't do it by passing the bank secrecy act which makes it default legal before we take a firm position to provide clarity. If some but he wants to do that in a cohesive, sustainable way that does not skirt around the fact it's illegal at the federal level, count me in. Happy to do it.
▶ 1:19:14Sen. Tillis: We have a lot of regulator initiated the banking -- de-bank ing with reputational risk. People are going into banks. I don't know. These unsavory people are -- fill in the blank. I want your input on that. Let me tell you what I told every one in my office and their counterparts in europe.
▶ 1:19:45Sen. Tillis: If you act like a politician, I will treat you like a politician. You provide banking services, period. As a ceo, if you judge you want to do a bank that only banks blond headed, blue-eyed people and there is a market opportunity for that and a growth strategy, knock yourself out.
▶ 1:20:08Sen. Tillis: If you can prove to the investors and shareholders in your entity it is in the best interest of your bank to grow, find. But we have clearly seen reputational risk being overused by bank supervisors, bank examiners. Well, maybe you want to move out of there. It changes depending on who was in the white house. I don't think that is right. Banks should be able to figure out what they want to do to serve their customers.
▶ 1:20:38Sen. Tillis: Can you give me examples or thoughts on whether or not, Mr. gannon, you believe a lot of this banking is a result of regulators doing a wink and a nod?
▶ 1:20:52Mr. Gannon: I do think that. Regulators have taken the term reputation risk and made it incredible --
▶ 1:21:00Sen. Tillis: It's anything.
▶ 1:21:02Mr. Gannon: It's always the definition of subjective. It is not tied or linked to anything object if. One thing I can tell you, having sat in planning sessions for some fairly large banks, it's impossible to plan against that. When you don't know what the terms are of what your regulator and supervisor want you to do, it is really difficult to come up with a plan.
▶ 1:21:27Sen. Tillis: The consequence of all the stuff is it is costing banks more money. It is shutting down more market opportunities. It's making it more difficult to continue to bank the people that bounced a couple of checks. At some point you are affecting the business plan, the underlying success of the business and they have to close the aperture to the most profitable part of business. I feel like we need to -- I'm here to talk about the regulator initiated de-banking.
▶ 1:22:06Sen. Tillis: Anything you can provide for the record on some use cases of de-banking that was driven by regular interaction, that would be helpful. Sorry I'll have more time.
▶ 1:22:17Chair Scott: Senator warner.
▶ 1:22:19Sen. Warner: I will pick up where my friend senator tillis was on this reputational risk. I think it has been overused. I have been trying to use the -- push the banks to use the discount window before we had additional tools. The response is always reputational risk. I do agree with Mr. klein. Baking is a reputational-based business. If people start to lose confidence in that bank, they will move.
▶ 1:22:51Sen. Warner: Whatever the regulator does. That is why I have to ask, rhetorically at least, the united states dollar and the united states government and the full faith and credit are all building up the reputation of united states of america.
▶ 1:23:14Sen. Warner: If any of your institutions suddenly let somebody into your payment system that had no background in banking and no understanding of money flows and suddenly gets the ability without any screening to look at all of your customers' banking information, that would cost reputational risk. That is exactly what has happening in the united states treasury at this moment in time.
▶ 1:23:46Sen. Warner: We don't know if the doge crowd has clearance, and the others have -- we have no idea. We don't know for sure whether this is a read-only ability or read and write, which means that person can potentially go in and alter code or manipulate payments.
▶ 1:24:12Sen. Warner: I say to my republican friends, guys, can't we agree the risk of the united states is worth protecting? The idea that we have got people potentially manipulating our payment system and we have no idea. We will sit silently by? This isn't about efficiency. It's about the kind of payment system we will have in our country.
▶ 1:24:44Sen. Warner: Any financial institution let unscreened individuals into their payment book or into the private banking information about their customers, I believe the reputation would go straight to hell. >> absolutely, senator. I worked in the treasury department with top-secret clearance and I was going nowhere near that. This is not about efficiency.
▶ 1:25:12Sen. Warner: If you wanted to make the treasury system more efficient, move into a real-time payment network. It should have been done years ago. You wouldn't take read access to look at every single payment the U.S. treasury department does. Any bank that did that to customers would be indeed violation.
▶ 1:25:26Sen. Tillis: Also the fact the payment system and the treasury, that is not where determinations are made about whether something is illicit or illegal. That is a subject matter expertise at the agency that has oversight. Come on, guys. This is about the full faith and credit of the united states. It is about our reputation in the world. You are getting the same calls I'm getting.
▶ 1:25:56Sen. Tillis: They don't identify if they are democrats or republicans. The programs may or may not be arbitrarily eliminated by some way we don't even know who they are. -- somebody we don't even know for the are. Turning over the payment system to people that we don't have any idea who they are or what their goal is our what their mission is, where we can't even get a full answer whether they have read capabilities or read and write, it's in norma's difference -- in norma's --
▶ 1:26:28Sen. Tillis: Enormous difference in those words. There ought to be something we as the banking committee that are looking at the treasury, we ought to jointly want that. There's a 25-year-old there. I don't know the individual. I don't have the slightest idea of they have security clearances. I will tell you this. Mr. gannon, I was going to ask about something on crypto that I can get to.
▶ 1:26:58Sen. Tillis: How we promote innovation but don't overdo the risk side. We can do better than we have done so far. I have to tell you as someone who is chair of the intelligence committee and a and take that role incredibly important, the notion that somebody may be arbitrarily putting out these payment flows for something that looks kinda funky but they don't have any idea what it is will hurt the national security.
▶ 1:27:29Sen. Tillis: Candidly, and this is not classified, we find things sometimes under a cover -- fund. We put out this information and the bad guys find out, people's lives are risk. I implore you well as experts, my colleagues, this should not be a partisan issue.
▶ 1:27:49Sen. Tillis: Let's get to the bottom of who these people are, what kind of clearances they have, to make sure we don't put in further jeopardy the risk and reputation of the united states government, which I believe is under immediate and imminent attack from these unsanctioned individuals.
▶ 1:28:05Chair Scott: Thank you, Mr. warner. I want to respond to your comment. The treasury just put this out. The ongoing review of systems is not resulting in the supervision or rejection -- suspension or rejection of any payment instructions committed to treasury by other federal agencies across government.
▶ 1:28:29Chair Scott: The review at the fiscal services has not caused payments, social security and medicare to be delayed or rerouted. The agency's response ability is for making the payments. Treasury staff members working with a treasury employee will have read-only access.
▶ 1:28:54Sen. Tillis: Mr. chairman, you are saying it is read-only and not read and write?
▶ 1:29:00Chair Scott: That is what treasury just put out.
▶ 1:29:03Sen. Tillis: Dean of the identity of these individuals? Mr. krause has security parent. The other individuals who have been reported in the press, do they have security clearance, sir?
▶ 1:29:15Chair Scott: I will say this --
▶ 1:29:20S Sen. Tillis: --
▶ 1:29:24Chair Scott: Under the biden administration we had no clue who is doing what most of the time. Mr. kennedy.
▶ 1:29:35Sen. Kennedy: Senator warner is a reasonable man. Everybody on this committee knows that. He's a good man. I understand he's interested in process. I'm not saying that process is an important. -- isn't important.
▶ 1:30:01Sen. Kennedy: If united states of america has been taking taxpayer money and using it to produce a transgender opera in columbia, I want to know about it. I'm glad to know about it. It seems to me that is the main issue with respect to all of us. I look forward to talking further with my friend, Mr. warner, about that.
▶ 1:30:33Sen. Kennedy: For four years under president biden, as was his right, the topic of discussion in washington was who needs to pay more taxes. Who needs to pay more taxes. That is no longer the main question. The main question now, as it should be, what the hell happened to all the money? We are going to find out.
▶ 1:30:59Sen. Kennedy: Now, I need to get back to the subject, with the exception of Mr. klein, whose testimony I enjoyed. I understand his position. He wants to let the cfpb run america's banks. I appreciate that perspective. Mr. klein, that is not going to happen in your natural lifetime or mine. Let me turn to the other gentlemen. Mr. mccauley, Mr. ring, and Mr.
▶ 1:31:32Sen. Kennedy: Gannon saying some of america's banks have been discriminating de-banking customers because of religious beliefs, because they support the second amendment, or because they hate fossil fuels. I don't want to go with all three of you. Mr. ring, is that what you are saying?
▶ 1:31:57Mr. Ring: Yes sir.
▶ 1:31:59Sen. Kennedy: Which banks?
▶ 1:32:01Mr. Ring: It's been reported that bank of america has certainly picked and choose. I think chase bank has. I think citibank has. I think keybanc has. I will probably run out of names soon. The mega banks. Old glory bank is not. We love the second amendment and fossil fuels.
▶ 1:32:25Sen. Kennedy: We need to get those banks in here. . We need to get the ceos in here. Why -- I appreciate your candor. Why -- are banks doing this because they are scared of the regulators or or because the people running the banks are prosecuting their political
▶ 1:32:55Sen. Kennedy: Beliefs? When a bank holds seminar taking up valuable employee time to discuss weatherman can breast-feed, are they doing that because regulators are leaning on them or because the ceo really thinks that is a subject to debate?
▶ 1:33:28Mr. Ring: It is the latter. It is not the regulators. I don't believe the right leaders pushed the banks to de-banking conservative causes.
▶ 1:33:38Sen. Kennedy: You don't?
▶ 1:33:39Mr. Ring: I think it was their internal choice by the big banks.
▶ 1:33:42Sen. Kennedy: Why?
▶ 1:33:44Mr. Ring: The same reason big tech picks and chooses. Big banks can pick and choose winners they care about. That is why we need a market solution. You can't regulate that behavior with a having unintended consequences. Now every time you get a customer application you have to fill out five forms as to why you picked or did not pick that customer.
▶ 1:34:06Sen. Kennedy: Do you think that is the management of these banks that are just imposing their own politics on customers and ultimately to the detriment of the shareholders? Is that your testimony?
▶ 1:34:25Mr. Ring: Yes sir.
▶ 1:34:29Sen. Kennedy: Either of you disagree? >> I strongly disagree. I have spent time with a number
▶ 1:34:35Of Banks Will Sen. Kennedy: Who do you think it is?
▶ 1:34:40Mr. Gannon: I believe it is the regulators.
▶ 1:34:47Mr. Mccauley: They all wanted to work with crypto and were scared by the regulatory apparatus. >> Mr. ring, you work hard to protect your customers' sensitive information, do you not?
▶ 1:35:03Mr. Ring: Yes. >> you would not just turn it over to anyone who walked into your bank, we?
▶ 1:35:08Mr. Ring: No. >> is to mccauley, I'm assume the same is true for you.
▶ 1:35:14Mr. Mccauley: Yes. >> I want to bring of this issue that senator warner raised. What we are witnessing in real time is elon musk going into department of treasury and demanding access to highly sensitive personal information that could impact any american.
▶ 1:35:39Mr. Mccauley: The highest ranking civil service at the department of treasury resigned before he became complicit in turning over this information. I know that chairman scott had the lead but I want to underscore senator warner's point. I know that senator warren shares these views. This committee, which has personal jurisdiction over the department of the treasury, we should have an urgent hearing on this. This should be a top priority.
▶ 1:36:10Mr. Mccauley: I hope all of our colleagues regardless of party would want to know what is happening to this incredibly sensitive information. It has just been turned in -- turnover t -- turned over to somebody who happened to contribute over $250 million to president trump's reelection efforts. In my view it as a corrupt bargain. I think we should have a hearing urgently to address that matter.
▶ 1:36:42Mr. Mccauley: A lot of people derive banks but elon musk goes after the treasury department. It's a big heist of personal information. It is an abuse of power. I appreciate -- by the way, a lot of the statements that have been made regarding the use of some of these federal funds, whether by a id or foreign aid programs had been patently false.
▶ 1:37:13Mr. Mccauley: Made in some cases by the chief spokesperson at the white house. Just proven false. They have not been able to provide any information to substantiate those claims. I appreciate senator warren's pointing out cfpb has been on the front lines of trying to protect people against de-banking. It's ironic that many people who want to make sure we prevent de-banking are trying to get rid of the cfpb.
▶ 1:37:48Mr. Mccauley: I appreciate your statements regarding the issue of overdraft fees and pointing out for americans who live paycheck-to-paycheck and we are talking about tens and tens of millions of americans, their lack of access to real-time payments is causing them to incur these huge additional fees. Your estimate is $5 billion a year.
▶ 1:38:16Mr. Mccauley: In some cases it is resulting in getting them de-banking getting them de-bankied?
▶ 1:38:24Mr. Klein: Your account is closed. Say you withdraw standing and you close it but the bank says for that last month of your account you do not maintain a minimum amount. You owe $10. Please send the $10 to your old address but you close to your bank because you moved and never got the mail. That fee becomes another $10 a month, another $10 and they write often to collections. Your data gets put on this do not bank list because your bank account was closed in bad standing. That's exactly how that process works.
▶ 1:38:54Sen. Van Hollen: You referenced legislation senator warren and I introduced, the payments modernization act. You talk about how that would address this real problem.
▶ 1:39:04Mr. Klein: Absolutely. The expedited funds availability act requires that federal reserve to make payments move faster as technology allows. The fed has done nothing in 37 years to update that regulation. As a result, banks sit on your money. We can all agree on this committee and every american that friday was january 31.
▶ 1:39:27Mr. Klein: If you assured -- were short on your rent or obligations, you worked a second job, you got paid that friday and you deposited your check and took a picture of your check -- I was on this committee will be passed the check 21 act that was you deposit your check on your phone on friday. The bank and setting your money and it just became available yesterday. What happened between the 31st and the fourth? A bunch of bills got paid. The result, overdraft, overdraft, overdraft.
▶ 1:39:57Mr. Klein: Your legislation would force the fed's hand even though the law says shall, not may, but the fed ignores it. Your legislation would rewrite that to make sure your money would have been available in the first when your debits came out and your overdraft would not have hit in it would have saved people a tremendous amount of money. The bank of england did this in 2008. If we did it, $100 billion a year would have gone back to people from check cashers, payday lenders and overdraft fees.
▶ 1:40:28Mr. Klein: The best thing you can do to reduce income inequality without raising taxes or increasing government spending. I can't understand how amazon can get anything to your door faster than two things can clear check.
▶ 1:40:39Sen. Van Hollen: Thank you. >> I would like to welcome some alabamians in the audience, laura kate robertson, a senior in high school and outstanding start and I'm proud to have her here today. I want to say thank you for holding this hearing. It is clear and no secret our financial regulators have become increasingly politicized in the last four years.
▶ 1:41:09Sen. Van Hollen: We heard our ranking member talking about the number of complaints made to the cfp -- the cfpb. This committee, led by one of our democratic counterparts has not held a hearing diving into this. Thank you. This must stop. This is the united states and this is completely and totally unacceptable.
▶ 1:41:30Sen. Van Hollen: When you are prioritizing a social agenda or a political one instead of ensuring people have an opportunity and access to the american dream, we have to call that for what it is. Our large institutions play a vital role in our country and banking system but they need to stick to that banking, not politics. Mr. ring, what you testified to today is incredibly alarming. We need to get to the bottom of that.
▶ 1:41:58Sen. Van Hollen: I want to point out something my colleagues have to hear me say all the time. How grateful I am for our community banks and credit unions in alabama that serve our local communities and give people access to the american dream. That is actually what they are there for. Thank you to them. I want to get to the bottom of better understanding what spurred this de-banking and why certain industries and conservative aligned groups have been targeted over others. Importantly, how to prevent this moving forward.
▶ 1:42:30Sen. Van Hollen: I want to start by clarifying a few things for the record. The first trump administration finalized a fair access to banking rule focused specifically on addressing this issue. Mr. gannon, what happened to that rule?
▶ 1:42:43Mr. Gannon: The rule was revoked on january 20, 2021.
▶ 1:42:48Sen. Britt: Who revoked that?
▶ 1:42:52Mr. Gannon: The president.
▶ 1:42:52Sen. Britt: The day he was sworn in. He said we are not going to do this.
▶ 1:42:59Mr. Gannon: There were a number of rules that were revoked.
▶ 1:43:02Sen. Britt: Thank you, Mr. gannon. Is supervision of the reputational risk a directive from congress or found anywhere in law?
▶ 1:43:13Mr. Gannon: That's a little bit of a complex question. It is found in law in the sense that congress has directed the banking agencies to conduct supervisory activities. The details about how that activity is conducted is almost entirely generated by the regulators themselves.
▶ 1:43:32Sen. Britt: You mentioned the subjective nature of that. Does the reputational risk have any real connection to the material safety and soundness of a bank?
▶ 1:43:43Mr. Gannon: Almost on no occasion, at least a literature has been able to come up with, is there a connection between reputational risk and some of the basic elements of banking. Capital, liquidity, operations, and so on. There is a disconnect. In fact, the regulators, and this is interesting to me, they defined stakeholders for reputational risk. One of the stakeholders is themselves.
▶ 1:44:13Mr. Gannon: It's a little difficult to argue with the regulator when they say you have reputational risk because your arguing with a stakeholder that owns that reputational risk.
▶ 1:44:22Sen. Britt: You mentioned in your testimony about management rating. He said many times it has actually nothing to do with management. Can you dive into that more?
▶ 1:44:32Mr. Gannon: If you look at how banks are resilient today, how they have higher loads of capital today, more liquidity than ever, how they have invested, and interesting statistic. In 2016, a baseline the data comes from, which was not an easy year for banks. Mr.
▶ 1:44:58Mr. Gannon: Terrelo was the acting vice chair for supervision of the fed. Banks spent $100 on technology in terms of compliance. Last year banks would have spent $160 for the same activity. Banks have poured money into technology, into compliance, etc. Carvings perfect? No -- are banks perfect?
▶ 1:45:30Mr. Gannon: No. No one can doubt the commitment to invest in these sorts of things. Reputation risk doesn't have anything to do with that.
▶ 1:45:36Sen. Britt: My final few seconds, Mr. ring, just to level set. What are the real world impacts to a small legally operated business if they are denied access to our financial system? I know you have seen that firsthand.
▶ 1:45:52Mr. Ring: If you can't make payments and can't bank, you can't exist in america. It's happening in crypto and the second amendment space and among conservative causes. You can't exist without banking.
▶ 1:46:05Sen. Britt: Thank you for what you are doing. >> thank you. One of my colleagues had to leave, senator kennedy. Hi do you need to address this and I appreciate my colleague, senator warner, bringing this up. We should be identifying waste, fraud, and abuse. We all agree about that. We could do it and should be doing it as a congress.
▶ 1:46:34Sen. Britt: We should be doing it without giving a private, unelected citizen access to the federal treasury payments system that contains personal information of U.S. citizens. I hear my colleagues all the time invoking former president biden. If he had done this, I know my colleagues would be the first to call it out and we would -- I would be with you.
▶ 1:47:02Sen. Britt: This is such an important issue for us to stand together on. If we don't, who will? Who will? I'm frustrated along with my colleagues on this. Let me get back to the issue at hand. I want to address the overdressed piece. People complained to ag's. Losing access to bank accounts.
▶ 1:47:32Sen. Britt: Usually blame overdraft as the reason. We know that one of the areas of focus and enforcement is not the attorneys general. It is the kyiv p -- the cfpb. The cfpb took action to prevent illegal expensive overdraft fees. In november, the navy federal credit union agreed to refund more than $80 million to service members and their families.
▶ 1:47:59Sen. Britt: Service members of the number one group that's always cost on the taken advantage of in this area. The credit union also paid a $15 million civil penalty for charging illegal and deceptive overdraft fees. Mr. klein, you have been leading the call to end abuse of overdraft practices. We heard you today. Can you talk more about it? It is more than just somebody -- a bad check.
▶ 1:48:30Sen. Britt: Well, they are bad checks and they should be held accountable. It is more than that. Can you talk about that?
▶ 1:48:34Mr. Klein: It's about reordering transactions. You swipe your debit card during the day and maybe you run out of money at the end of the day, there are banks and credit union to go and reorder your transactions from the highest dollar amount to the lowest in order to maximize the number of overdraft you have. New york just put out some new regulation prohibiting that practice of reordering your account. There are things about systems of debits and credits.
▶ 1:49:04Mr. Klein: The outdated payment system runs on this technology called a batch. Think about your washing machine. You throw everything in, it all comes out clean at the same time. One of the big values is because piece by piece. Laundry by laundry. When you do a batch, you don't know what comes out. The question becomes, when the batch is clean do we put in your credits first or take out your debits? Which order you pick makes a big difference in the total quantity of overdraft.
▶ 1:49:34Mr. Klein: If you post your credits before you put the money into your account, right? That's another pernicious practice we see. This is how you see a bank like armed services generating $92 of overdraft for customer relative to other national banks that are around 1, 2, 5, $10. How can they get $90 of overdraft customer? It is these tricks. You are right, senator.
▶ 1:50:01Mr. Klein: In my research I keep finding these practices at military bases, at places that colocated in walmart or seek out other things. 9% of americans pay 80% of the overdraft. Those are very profitable customers for certain types of banks who try to bring them through the system. The last point as it relates to senator tillis about passing a few bad checks. Why did the check bounce?
▶ 1:50:28Mr. Klein: If bounce because of this time delay -- it bounced because of this time delay. They have seen their overdraft numbers fall by 50%. This is some of the types of reforms that would occur if you moved to a faster payment system and eliminated some of these checks. Sadly, the prudential regulators of the last four years have done nothing to stop these banks and credit unions who rely on overdraft for more than 100% of their profit. They are giving safe and sound ratings.
▶ 1:50:58Mr. Klein: I don't understand how their management has such a high rating. All they are doing is over drafting people. They should be a check catcher, not a bank.
▶ 1:51:07Sen. Cortez Mastro: Thank you. >> thank you very much. I want to thank chairman scott and ranking member warren for holding this hearing. Thank you to our witnesses today. Talking about this important topic. What we saw it in the last few years of the biden administration weaponizing government in all different levels.
▶ 1:51:38Sen. Cortez Mastro: To be able to push its liberal agenda on the rest of the country. We saw things like having the epa push ev mandates, homeland security ignoring illegal immigration. We saw a number of agencies do things. The fbi for example identified catholics as extremists. Sought to put spies into the catholic church.
▶ 1:52:04Sen. Cortez Mastro: All this undermines people's faith and belief in our system of government. What we are talking about now where we have regulators that are pushing their agenda does the exact same thing. It undermines the rule of law if regulators start pushing agendas, what they want to see, what businesses you do business with versus what you are allowed to do. Making sure we have a safe banking system that is compliant with rules and regulations.
▶ 1:52:35Sen. Cortez Mastro: A legal business should not lose access just because they deal in firearms or crypto or something like that because of regulator does not like that. That is simply wrong. That is what we have seen in the last two administrations. Chokepoint 1.0 and the obama administration. Firearms were prejudiced against and try to forced out of the financial system.
▶ 1:53:04Sen. Cortez Mastro: If you're out of the system, he ceased to exist as a business. -- you cease to exist as a business. More recently it is the crypto industry. This is near and dear to my heart. I came from the financial services industry. We have the most transparent, liquid capital markets in the world because of proper regulation. Regulation actually got us to the point where we have these great capital markets.
▶ 1:53:32Sen. Cortez Mastro: It is a risk when we have regulators undermine faith and that -- undermining faith and that. We cannot weaponize our regulators to push an agenda. Mr. gannon, during operation chokepoint 1.0 and 2.0, give regulators exceed their statutory authority by focusing on vague metrics and reputational risk instead of safety and soundness?
▶ 1:53:58Mr. Gannon: I would say that the effect of operation chokepoint 1.0 and 2.0 is many small legal businesses are no longer in operation. The people that ran those businesses lost their jobs, lost their bank accounts. Not sure what they are doing today.
▶ 1:54:18Mr. Gannon: That was a backdoor way to make those businesses illegal and getting to the point I made earlier, if the regulators wanted those businesses to be illegal they had to come to you and ask. They didn't. Instead they just executed their own agenda without the approval from congress. That is what I mean by a distortion of the relationship between leaders and congress. The power comes from you, not from the sky.
▶ 1:54:47Sen. Ricketts: Did bank regulators evade the notice and comment rulemaking requirements of the administrative procedures act by imposing requirements through formal guidance documents in both chokepoint operations?
▶ 1:55:04Mr. Gannon: They did, senator.
▶ 1:55:06Sen. Ricketts: Why do you think they were doing that?
▶ 1:55:09Mr. Gannon: Notice and comment -- the congressional review act has the effect of shining a light on the activities. You have to give notice, have to take into account the comments. Giphy going to pass a rule, you have to do a valid cost-benefit analysis. Those can be difficult. Economists should run those. It is hard.
▶ 1:55:35Mr. Gannon: By the way, rules that never got approved through the congressional review act process have never taken effect.
▶ 1:55:42Sen. Ricketts: To your point earlier, by issuing informal guidance they were purposely trying not to go to congress or his attention for what they are trying to do?
▶ 1:55:53Mr. Gannon: I can't get into their heads but that's the effect for sure.
▶ 1:55:57Sen. Ricketts: Mr. ring, your bank was one of many issued -- would you describe your relationship to have been collaborative or combative? Mr.
▶ 1:56:12Ring: It has gotten better recently. A great leader who spent 30 years there recently left and retired and invested in our bank is on the board. I think that has helped. They deftly do not make it easy to be a growing bank.
▶ 1:56:29Sen. Ricketts: My time is up but I want to wrap up by saying my experience in the financial services field was that when you had regulators that had a relationship with the community, that helped them do their job to find bad actors. We'll have an interest in bad actors in our industries.
▶ 1:56:50Sen. Ricketts: When you take an approach where you weaponize government, it is bad for the regulatory scheme because players -- companies that are good and trying to stay in business and follow the rules are discouraged because the regulators are acting in a political manner. Thank you for indulging me.
▶ 1:57:10Chair Scott: Senator kim.
▶ 1:57:13Sen. Kim: Mr. klein, I want to start with you. You meet some very poignant assessments about the suspicious activity reports in particular. You mentioned millions of these every year that are being used. As far as I could tell from your testimony, it does not seem like there's any feedback or any sense of our these useful. Is that correct?
▶ 1:57:39Mr. Klein: Correct. Banks are not judged on the quality of their performance. They are based on the quantity. The consequences, the bank has every incentive to file more without getting information as to the quality. This is how filings have increased tenfold in 20 years.
▶ 1:57:58Mr. Klein: In my written testimony eyesight work that shows -- icirte work that shows -- ici cite work that shows the primary purposes of aml has been extremely thin.
▶ 1:58:12Sen. Kim: The banks are filing millions and causing the money and time. We are not certain whether or not they are getting any real feedback in terms of whether or not those have been useful. You cited in terms of some reports it seemed like the iris prosecutors may be used only a few hundred of some out of millions of different reports that come before them, is that correct?
▶ 1:58:38Mr. Klein: 27 reports started a prosecution out of 27 million. That is a piece from nick anthony at cato. The thesis of the entire aml process is like a criminal is like a scuba diver swimming deep in the dark ocean to evade detection. The money from the criminal activity is like the bubbles that float to the air.
▶ 1:59:06Mr. Klein: The idea is that you use the data that comes to find the bubbles and go down. In point of fact, all we are doing is blowing air into the system. I don't understand who is reading all of these reports. This gets to the point about state licensed cannabis. The dea wants to shut down any cannabis company in the state, they can.
▶ 1:59:35Mr. Klein: You don't need a bank report to tell you where the cannabis shop is. It is called google maps. People work really well. Why are we forcing the banks to continue to file all these things?
▶ 1:59:44Sen. Kim: This is putting pressure on the banks. We talk about reputational risks, these are the calculations banks are making. You made a convincing argument in terms of the currency transaction reporting, the lifting of the number that has not been lifted in quite some time. I went ask more specific city -- specificity when it came to the suspicious activity reports.
▶ 2:00:14Sen. Kim: Is there more the committee should be looking into?
▶ 2:00:15Mr. Klein: Absolutely. On state licensed cannabis, if you're running a business, you should be treated like other businesses. If law enforcement once a deal with you, go to the state capital, find where you are. Why you are being treated differently makes no sense. Let's be clear on what the priorities are for banks to file.
▶ 2:00:39Mr. Klein: There are areas where more suspicious activity like elder abuse, the subject of another cfpb report, you could be providing more information. There's a host of different categories of activities. What we need is a blue sky approach where treasury's financial crimes enforcement network and the bank regulators are brought before this committee and the public to discuss a privatization of what we are going after.
▶ 2:01:06Mr. Klein: In the 50 years we have been doing this regime, we add more targets, never taking anybody off the list.
▶ 2:01:11Sen. Kim: I think that's right. Mr. mccauley, when I heard your testimony and I'm sorry for what you went through in that capacity. When we look at the reputational harm or risk the banks are considering here, yes, it seems like there's an excessive amount of reporting. Other things are adding to it.
▶ 2:01:32Sen. Kim: I hope we can all agree having greater sense of transparency across the board but also some sort of feedback loop, some process by which you try to appeal because it is not just on the sars. Also the customers are unaware something has been filed about them. There are multiple layers of lack of transparency on that front and I want to raise this. Mr.
▶ 2:02:00Sen. Kim: Klein, you showed with checkx and other components, the sense of transparency is missing , as well as the lack of ability to appeal. It seems like that is something systematic that the committee can hopefully dive in deeper on so thank you so much and I yield back.
▶ 2:02:18Chair Scott: Senator banks. Several ban -- Sen.
▶ 2:02:29Banks: Mr. mccauley, congratulations on your success. My question is obviously what happened to you is wrong and disruptive. It did not just affect you but it affected your employees and partners. Was there ever an opportunity for you to seek or recover any of the losses that occurred to you?
▶ 2:02:53Mr. Mccauley: There was not any opportunity to recover. The way it works is you spend a lot of time and effort but there's not some sort of a recouping. We did appeal to the regulator and let them know this was happening to us, our bank accounts were being closed and we were having disruption of services. They were not able to necessarily help. They could not say positive or negative things about any particular bank.
▶ 2:03:25Sen. Banks: Can you quantify the loss to you and others involved?
▶ 2:03:30Mr. Mccauley: We had a trading business that was doing hundreds of millions of volume per month that went to zero. We were no longer able to bring on our clients' cash and bring it into our institution. We had to part ways with some of our staff.
▶ 2:03:49Sen. Banks: I assume it was not just really rich people affected by that. Every day working class investors that were affected too?
▶ 2:04:02Mr. Mccauley: Hart serves institutional investors, many of which are creating the products that the retail investors use. For example, etf's that are now owned by a broad swath of the U.S. population.
▶ 2:04:15Sen. Banks: Let me ask this a different way. When an innovator gets hurt, it benefits the incumbent player in the industry. Do you think the big bank that de-bankin de-bankied you had incentives to do that?
▶ 2:04:34Mr. Mccauley: Idle do think they did that. Many of the large banks in the country were in active conversations to add crypto as an offering. They were looking to become crypto custodians. Did mesa clear this was not something they wanted to do. They did not want to de-bank crypto. They wanted to embrace crypto but they were suddenly forced to take a 180 direction and go the opposite direction.
▶ 2:05:04Mr. Mccauley: Not just stopping some of their crypto activity they were looking to expand into but actually closing account.
▶ 2:05:10Sen. Banks: The biden ministries and claimed that the crypto industry was a magnet for fraud and crime. You testified that anchorage met the same know your customer ent mono learning standards -- anti-laundering standards. Why were they suffocating the crypto industry?
▶ 2:05:33Mr. Mccauley: I cannot comment on motivations. If you look at the way the bsa works, it works in america via the banks. Thanks carry that out. The idea of keeping crypto out of the banking system was self-defeating. The way we get transparency, that we get monitoring of an industry is to have it be with the banking system. That his wife that de-banking -- why the de-banking was so wrongheaded and didn't make sense.
▶ 2:06:02Sen. Banks: I think of my services being taken away from me. Is there something in between? Banks that might put a hold on transactions or investments that we might not think of as de-bank ing but would be a similar type of political activity?
▶ 2:06:23Mr. Gannon: The technology exists to do it but is usually more broad-based than that. As an example, I'm aware of a vineyard where the wife of the owner happened to be an investor in the cannabis industry. The vineyard and the individuals that owned the vineyard lost their accounts. They had nothing to do with the cannabis industry. I guess it was a knock on effect as far as the regulators were concerned. All those accounts went away.
▶ 2:06:53Mr. Gannon: That is the kind of -- it would be nice to think the regulators work with the scalpel, but is usually a five pounds sledge hammer and chisel.
▶ 2:07:02Sen. Banks: Interesting. I yield back.
▶ 2:07:05Chair Scott: Senator warnock.
▶ 2:07:08Sen. Warnock: Before I begin I want to read or write everquest ranking member warren and my democratic colleagues made to the chairman to hold an oversight hearing in this committee on elon musk's dangerous access to the treasury department's systems that control $6 trillion in annual payments to millions of american citizens, including social
▶ 2:07:39Sen. Warnock: Security, medicare, and tax refunds. The people of georgia are not taking any comfort in the notion that this unelected billionaire has access to the systems. I think it is urgent that this committee and the senate finance committee have a hearing to look into this matter to protect americans'private data.
▶ 2:08:05Sen. Warnock: Data they are required to provide and is now in the hands of elon musk and 22-year-old interns. We are approaching the two-year anniversary of the failures of silicon valley bank, signature bank, and first republic bank. Three of the largest bank failures in U.S. history.
▶ 2:08:31Sen. Warnock: A review of signature bank found the fbi se -- fdic, the regulator making sure our money is safe, did not properly staff the team dedicated to the bank with regular job vacancies -- regulatory job vacancies averaging 40% leading up to the failure. Bank examiners are overstretched and overworked.
▶ 2:09:01Sen. Warnock: Based on today's conversation it is clear banks are begging for more communication, more certainty, more clarity from other staffed bank regulators -- understaffed bank regulators. The last thing you want is a lack of clarity. This is why I was shocked by the fdic's decision to withdraw job openings last week. Mr. klein, do you agree fdic bank examiners are understaffed?
▶ 2:09:33Mr. Klein: Yes.
▶ 2:09:35Sen. Warnock: Do you agree this has consequences for bank examiners ability to communicate with banks to provide regulatory clarity, especially when they are dealing with newer businesses that offer risky financial products or services?
▶ 2:09:53Mr. Klein: Absolutely.
▶ 2:09:56Sen. Warnock: I'm hearing the trump administration's decision to rescind job offers to bank examiners at the fdic is going to make it less likely, less likely that some businesses, including the ones that my colleagues here today are concerned about, can access the traditional ranking system or they will be well served by it. Is that fair?
▶ 2:10:19Mr. Klein: What are my colleagues talked about the difference between doing things with the scalpel and a five pounds sledge hammer. This hiring freeze is a really big sledgehammer.
▶ 2:10:29Sen. Warnock: I agree with that. Not only did the trump administration resend bank examiner job offers, the emailed current examiners and basically encouraged them to quit. Which will only compound our staffing problems for all of these businesses. Mr. klein, in addition to harming access to the system, what might arise from understaffing the bank regulators?
▶ 2:10:57Mr. Klein: People talk about the need to create new banks. New banks have to be approved. It is a charter, not a license. You need people there to approve the charter. You need people to update your models. You need people to collect and promote data and information. There's a host of things that could be slowed down by simply being unstaffed. Fdic is like an ambulance.
▶ 2:11:26Mr. Klein: Becomes in -- it comes in when a bank fails. You need to have an emergency swat team ready to go and. The fdic does a fantastic job handling a failed bank. It closes friday evening, monday morning full access to money. That requires people and requires trained people, expert people, people with experience.
▶ 2:11:50Mr. Klein: Sometimes these things are more complicated in small town america where you cannot just show up and sit in a hotel and not raise some concerns. Understaffing this puts our ability to handle failures so people have access to their money immediately at great risk.
▶ 2:12:08Sen. Warnock: Sen. warnock: --
▶ 2:12:11Sen. Warnock: Is important because there's a baked in assumption that having regulators is a drag on the business. Your you are demonstrating is bad for business, bad for innovation. Everyone agrees legal businesses should not be systematically excluded from the financial system.
▶ 2:12:36Sen. Warnock: However, the way to do that is to hire and empower regulators who can ensure banks are safe and sound and provide clear guidance to banks on permissible levels of risk, revoking job offers for bank examiners and pushing these experts out of their jobs in the precipitous we have seen in the last two weeks puts all of us who rely on banks to keep our money safe at risk and it's a drag on the business. This is an issue I look forward to continuing to work with this committee on. Thank you for your testimony.
▶ 2:13:07Chair Scott: Senator cramer -- >> thank you for letting me take your spot. In the past four years I have seen a shocking number of industries and individuals being denied financial services in america. I spoke with a company, home state in an industry that is politicized but lawful.
▶ 2:13:31Chair Scott: And they have been denied business because of reputational risk will stop they are prevented from extending their credit facilities and denied insurance policies and denied the ability to renew coverage. These are shocking problems. The constellation of problems exist at multiple levels.
▶ 2:13:53Chair Scott: Parties seat -- partisan ideologues operate with risk committees exerting their influence to choke off these industries. You have externally banks being pressured by political activist groups. You have these shareholder proposals coming at the behest of a number of outside players, particularly enabled by proxy advisory firms, another issue this committee will get out.
▶ 2:14:22Chair Scott: Lastly, activist regulators that have abused their supervisory authority. They imposed policy agendas never authorized by actual banking statutes or the congress. Bank examiners subject risks are right for reviews --ripe for reviews. When regulators pressure them, they restrict confidentiality agreement.
▶ 2:14:51Chair Scott: -- requirements that restrict them from even mentioning the reasons for service denial. Clearly the banks concerned aboy retaliation. Whether this de facto de-banking stems from within the banks are within regulatory agencies, in both cases we have unelected individuals dictating what kind of companies can exist and thrive in our nation. With no directive at all from the american people or their representatives.
▶ 2:15:21Chair Scott: This morning fdic's acting chairman released 175 document related to with supervision of banks who are attempting to engage in crypto related activities. This confirms banks face extraordinary resistance and directives from supervisors to pause, suspend or refrain from expanding all types of crypto or block chain related activity. Mr.
▶ 2:15:46Chair Scott: Mccauley, have you seen this loose to other jurisdictions as a result of the hostile posture at the federal government?
▶ 2:15:56Mr. Mccauley: Thank you for that question. I printed out one of the documents that came from the fdic drop this morning. It is in plain letters. "we respect of the ask all crypto asset related activity. This is not a suggestion. This is right to the heart of it. Fdic was asking banks to pause their activity with crypto.
▶ 2:16:18Mr. Mccauley: The effect has been that a lot of the activity haspeople feel a fair shake, like they will get a fair opportunity to build their business. This has been damaging. Many businesses are the kind that we want in the united states. Crypto businesses, exchanges and stable coins. Thank you for your introduction of the bill about stable coins. Charting a path forward is important to us and thank you for your leadership.
▶ 2:16:48Sen. Hagerty: Is incredibly important in the innovation we like to see on american shores is being pushed off shore. Can you tell me who signed that memo you're looking at right now?
▶ 2:16:58Mr. Mccauley: This is signed eric guillot, regional director.
▶ 2:17:11Sen. Hagerty: This person is taking on the authority and responsibility and is deeply concerning. Important part of the regime that are susceptible to weaponization for political purposes. Senior public officials and families can be designated as politically exposed persons.
▶ 2:17:37Sen. Hagerty: Once your designated, former senator sam brownback was designated as such. How can the bsa regime effectively balance legitimate law enforcement concerns with the risks unwanted account closures will occur? The actual dampening effect and the chilling effect we have seen taking place, how do we balance that?
▶ 2:18:09Mr. Gannon: There are two things that can be done. The partnership between the banks and the regulators needs to get into the 21st century. Much better technology that exists rather than spending -- sending armies of people to go around filling out sars and currency transaction reports.
▶ 2:18:29Mr. Gannon: If youif you have that result, t better result, you could determine is somebody being debanked because they are a risk or because they have an association the regulators find unpleasant.
▶ 2:18:48Sen. Gallego: In your you talked about the bank managing risk with suspicious activity, how often would you say you suspect suspicious activity amongst your clients?
▶ 2:19:13Sen. Gallego: >> we have active monitoring programs, we think they go beyond what traditional banks are able to do. Not just .2 point transactions but because of the rich data available we are able to detect far more of that. Our client base that we serve is primarily institutional investors. This is not the place that is set up to have money launderers in there.
▶ 2:19:42Sen. Gallego: Any activity we detect is dealt with.
▶ 2:19:44Sen. Gallego: When you see something, everything else like that so it doesn't come down on you or your shareholders. Did you ever because of the potential risk or feeling of risk within your own discretion feel like it is not worth the hassle? Choose to not open up a client of any sort? >> there are use cases that our bank is not well set up to support.
▶ 2:20:16Sen. Gallego: There are client types or types of client activity that are not appropriate yet for the systems. We do express judgment on that whether or not we could properly take on any count or handle the risks.
▶ 2:20:30Sen. Gallego: Or just the hassle that may come with it, fighting back and forth for something that may not have a larger return on investment. >> I think this is a standard procedure.
▶ 2:20:43Sen. Gallego: Every bank and different regulators have different risk tolerances. I think that is a healthy thing for us to understand. We should be very wary of over correcting on the other end that could also increase risk to the banking system.
▶ 2:21:07Sen. Gallego: In your testimony, you had to deal with duplicative burden, redundant, sorry about that during the process. What specific processes were duplicative and how do you propose we serve these problems while making sure our regulators preserve their risk-based approach to monitoring safety? >> that's a great question.
▶ 2:21:36Sen. Gallego: To put this in perspective, we bought a $10 million bank with a $3 million loan. It took six months, three rounds of information and requests, 300 pages of submission and an all hands call. We had to deal with the federal reserve, even on the all hands call.
▶ 2:22:05Sen. Gallego: Respectfully, I have never talked to a regulator that was actually a banker in all respects. The faa is former pilots. So many organizations, they are former business people. I have only dealt with the federal regulators, these are people that never signed the front side of a check. They don't have the ability to apply judgment.
▶ 2:22:30Sen. Gallego: What specifically would you recommend? >> make sure you hire at least half of all regulators with prior banking experience. Who know the impact. I would go back and find the last chairman that actually was a banker. I think they need to quit stepping over dollars to pick up pennies.
▶ 2:22:59Sen. Gallego: If you think about the banks that failed it was lack of liquidity. We are focused on a minutia of banks. Such as loans and liquidity is what causes banks to fail. Not policy.
▶ 2:23:15Sen. Gallego: I think you have a different opinion. >> silicon valley bank didn't fail because of a lack of a quiddity it was a horrible investment strategy. The run occurs when you realize the bank is out of capital and the first people come when you are at a 93% uninsured deposit because you are running a $250 billion bank with four branches. It was a tech startup.
▶ 2:23:47Sen. Gallego: It was bailed out. The single largest depositor at silicon valley bank was a crypto stable coin company that had $3 billion. I can't dream of a better natural experiment to understand the solvency of the stable coin than that on friday afternoon that silicon valley bank was being closed under normal operations which would have occurred losses.
▶ 2:24:15Sen. Gallego: That stable coin went from one dollar to $.87 as people started to run. Sunday, the regulators bailed out, took all of our money, taxpayer money, fees that banks will charge back and bailed out $3 billion back to that crypto and it went right back to par. What you see is there is a connection in crypto and the banking system.
▶ 2:24:44Sen. Gallego: What you see is that banks fail for a variety of reasons. Primarily because of its strategy. I do agree on some of these concerns about the relationship between banks and regulators. The ceo sat on the board of the san francisco fed. >> thank you so much.
▶ 2:25:07Sen. Murray: -- Sen. moreno: one of the things I would like to say especially for the people watching this is this could be a clinical conversation where we talk about d banking. We have entrepreneurs that are absolutely getting devastated by these policies.
▶ 2:25:31Sen. Murray: It is hard for some of my colleagues who have been attorneys or career politician to know what it feels like as an entrepreneur to chase a dream and have that dream completely crushed not because you had a bad idea but because you had a government that was looking out for itself and not looking out for you. Let me start with you, Mr. mccauley, what kind of cryptocurrency did al capone use?
▶ 2:25:58Sen. Murray: >> I would say primarily the privacy coin known as the U.S. dollar.
▶ 2:26:09Sen. Moreno: How about pablo escobar? Look kind of crypto did he use? >> I don't think he used any crypto.
▶ 2:26:21Sen. Moreno: There were some comments about dictators in north korea being powered by crypto, how about ferdinand marcos? >> he did not have one.
▶ 2:26:33Sen. Moreno: Joe kennedy? >> did not have one.
▶ 2:26:37Sen. Moreno: Maybe money laundering wasn't invented by digital currencies, without the fair to say? >> very fair to say.
▶ 2:26:46Sen. Moreno: Mr. gannon, your bank helped me start my business. Let me give that little disclaimer upfront. >> proud to know that.
▶ 2:26:57Sen. Moreno: Let me get that conflict out. I sold all of my businesses so I have no conflict. How much do you automatically forgive? I was a really good client. Made payments, when could I call you and ask you to forgive my loan? >> I don't believe you could do that.
▶ 2:27:18Sen. Moreno: There's a conversation from one of my fellow senators about the rogue miss of the trump administration. Joe biden illegally according to the supreme court for dave student loans -- forgave student loans.
▶ 2:27:44Sen. Moreno: Maybe my democratic colleagues think it's great that somebody becomes a gender studies major at brown, I have technicians working for me that racked up thousands of dollars in tool loans that the bank wasn't willing. What is wrong with a technician that a gender studies major should get their loans forgiven and why are we seeing outrage on that? Have you ever heard of such a thing?
▶ 2:28:10Sen. Moreno: >> I don't have a name, what I could say is some of my best friends were credit risk analysis. They look very hard at each loan and analyze the credit, if we make the loan we expect you to pay it.
▶ 2:28:26Sen. Moreno: That seems impossible. Let's move on with this topic, regulation. It seems like there is a debate in this room of -- the good news is we agree that there is debanking. >> that is the thing people were denying.
▶ 2:28:46Sen. Moreno: We have agreed on that. An incredible conclusion. The question becomes who is responsible? In your mind, do you think there is -- is it easy for a small community bank in montpelier, ohio to compete with jpmorgan chase or bank of america? >> it's almost impossible.
▶ 2:29:13Sen. Moreno: 75% of our time is spent serving regulators, 25% is serving customers. You cannot compete with the big guys. >> we have the same regulations as the big bank but less people and less money.
▶ 2:29:28Sen. Moreno: You don't have 2000 lawyers? >> I am the lawyer and ceo along with my life. -- wife.
▶ 2:29:37Sen. Moreno: I actually applaud your testimony around helping working-class americans. I think it is fair to say a lot of people know somebody or themselves have been screwed by banks. I think it's competition that ultimately makes that go away. There's a lot more banks, a lot more choices.
▶ 2:30:06Sen. Moreno: >> america has almost 10,000 banks and credit unions.
▶ 2:30:14Sen. Moreno: How many did we have 10 years ago? >> we had more. You couldn't bank in multiple states.
▶ 2:30:22Sen. Moreno: Competition has dropped dramatically. I hope my colleagues understand philosophically the most greedy organization on the planet is the government. You pay your taxes one daily, what do you pay a five dollar overdraft fee? Interest charges that would make the mafia jealous. There's a reason the government is so greedy.
▶ 2:30:50Sen. Moreno: There is no competition in government, we need more competition that will fix us. >> thank you. >> first of all, thank you to chair scott and ranking member warren for hosting today's hearing. I want to thank all of our witnesses for your participation.
▶ 2:31:14Sen. Moreno: I agree with all of the others you have heard today and believe we should be expanding access to credit and capital for all americans that were concerned about making sure we keep our financial system safe. I happen to believe we could do both at the same time.
▶ 2:31:37Sen. Moreno: I would like to say you have both spoken about the need to protect the integrity of our financial systems from politics. I could not agree more. These should be fairly easy questions that I have for both of you. You both run businesses that depend on maintaining the trust of your client.
▶ 2:32:01Sen. Moreno: With these clients trust you a view shared their most sensitive financial information with someone outside of your bank and without their consent? >> senator, they would not trust us. >> no. >> should an unelected billionaire be snooping on social security payments to my elderly parents, would you agree that was wrong?
▶ 2:32:30Sen. Moreno: >> if you're talking about elon musk, I believe the unintended consequences of that is probably offset by trying to save taxpayers money. >> you believe that your clients and other elderly people who find someone snooping around their social security payments would be ok with that? >> I don't know him but I don't think that's what they are doing. They are looking at actual tax air money going out the door.
▶ 2:33:00Sen. Moreno: >> if we hired an external auditor to look at our books to make sure we were doing a good job, I think our clients would be ok with that. >> you think they would be ok with someone doing that outside of your structure? Could I do that? Look at your clients information?
▶ 2:33:20Sen. Moreno: >> going through the right process and procedures for hiring and bringing that auditor in would be extremely important to make sure they have careful access to the data would be important. >> I would act -- echo senator warren and senator van hollen about having the courage to speak up about a practice I could tell you. I know you could never allow for your own clients.
▶ 2:33:51Sen. Moreno: My next question is for Mr. gannon, there have already been studies about how banks and bank regulators could better balance the need for safety with financial inclusion. A 2023 report examines circumstances where financial institutions indiscriminately in relationships with broad categories of people mitigating risk.
▶ 2:34:19Sen. Moreno: That report demonstrated it often results in less financial inclusion, less fairness, and ultimately consumes the small business owners being pushed to a less safe and less affordable product and service. That report recommended financial regulators promulgate rules that provide a supervisory culture with legitimate risk, mitigation, and strategies that include financial inclusion.
▶ 2:34:47Sen. Moreno: As far as you are aware have regulators adopted this 2023 recommendation? >> they have not. Regulators push banks to use systems and lists, bsa, aml, other types of risk. They do not adopt this. I have been extremely disappointed about what the prudential regulators have done.
▶ 2:35:14Sen. Moreno: This movement has done a much better job of trying to get a better screen to let folks in who are not fraud risks. I'm not aware of anything that has a greater risk of fraud than any type of account. I have seen too little adoption of alternative ways to bring people into the system and too slow by regulators to do something different. >> thank you.
▶ 2:35:44Sen. Moreno: The community reinvestment act is a law that encourages banks to meet the credit needs of under banked communities including low and moderate income neighborhoods. This requires agencies to assess banking institutions records of meeting the credit needs of its community. How could supervisory debanking make it hard for communities to meet their reinvestment obligations?
▶ 2:36:06Sen. Moreno: >> a lot of these overdraft creditor banks I have seen have gotten outstanding community reinvestment from their regulators to get a passing grade, even when the bank loses money on every element of its business model other than overdraft. I have seen some deeply problematic practices. >> thank you. >> we will turn to senator kramer.
▶ 2:36:31Sen. Cramer: We are having this important hearing, thank you ranking member warren as well. The title looks good on you.
▶ 2:36:47Sen. Cramer: I have to just state this hair on fire outraged by our democratic friends over successful businessman giving his time away from his business to look at the books of the federal government to identify waste, fraud, abuse, inefficiencies is some sort of a crime while the bank has never met a regulator that has a business background or a banking background.
▶ 2:37:17Sen. Cramer: The irony is really quite rich. I think we should have a few more business people looking at our federal books. Thank you for being here. My big interest in the debanking discussion, I'm interested in all of it. Both sides have brought up interesting issues. It is not the individual or even the individual company but rather the categorical discrimination against large swaths of businesses, entire industries of businesses.
▶ 2:37:49Sen. Cramer: Constitutionally protected industries, legal industries I find frightening. I want to reconcile at least in my own mind the different answers the three of you gave to senator kennedy about which came first, is this a problem with the regulators or the bank presidents? I would say yes.
▶ 2:38:11Sen. Cramer: The precursor to the regulators quite honestly, the precursor to this whole debanking thing was this bizarro esh movement -- esg movement in corporate america. We have another issue we could show that these guys.
▶ 2:38:29Sen. Cramer: I have talked to many bank presidents who very much support the legislation that me and 40 of my closest friends have introduced, the fair access to banking act which doesn't require a bank to do anything. It prohibits them from categorically discriminating against legal industries. The reason some of the bank presidents tell me they support it is they want his burden removed.
▶ 2:39:00Sen. Cramer: They want this political pressure from their staff or regulator they fear, the political movement of the day or the activist investors that are trying to impose their values, they want that removed. Let's not discriminate against large industry.
▶ 2:39:24Sen. Cramer: I guess I would just ask each of you, what is your sense on the fair access to banking act? It's not saying you have to bank . You are prohibited from discriminating. Does it seem like a radical idea? >> if I could go first, I think the regulators have pushed debanking industries.
▶ 2:39:54Sen. Cramer: Mid-level executives push individuals for political causes. My worry is with a good intentioned bill like that, you have to prove somehow that we follow the law so every time the relationship doesn't work out there would have to be some type of reporting. I think the free market is always the best way to solve these problems. If a pro-life bank wants to exist, let them. There is a bank that would love to bank planned parenthood.
▶ 2:40:25Sen. Cramer: >> if you would discriminate against large industries, should you be able to be insured by the federal government? >> what's unfortunate is the regulators were doing this through policies and guidelines. Digest those and that is how you stop it, holding the individual regulators accountable.
▶ 2:40:51Sen. Cramer: >> if I could respond to that by simply saying what needs to be done consistent with the act you have introduced, there is more transparency when these kinds of decisions are made. There has been a long sort of volume of executive orders coming out of the white house.
▶ 2:41:21Sen. Cramer: That executive order gives more due process to contest the access of regulators than the closet itself allows. >> a lot of that in statue would be better. >> thank you Mr. chairman, thank you ranking member. Today was the first time I have ever heard the term hotdog Mr.
▶ 2:41:57Sen. Cramer: Gannon, it's a pleasure to see you today. I want to thank you for everything you have done in the state of wyoming. I will start with you. In your legal opinion, what is reputational risk? >> that would be very difficult to define. It has no definition. It is malleable, it could be reinterpreted.
▶ 2:42:29Sen. Cramer: What is reputational risk today? It might be something different tomorrow. >> doesn't give banking executives licensed to censor viewpoints or on someone's subjective viewpoint? >> it can. >> let me show you that it does. Here's this quote from an internal excerpt.
▶ 2:42:58Sen. Cramer: It's a confidential federal reserve implementation handbook on account access. It requires federal reserve staff consider whether a person has made a controversial comment in making decisions about access to the payment system. Access to the payment system is a defining feature of a bank.
▶ 2:43:30Sen. Cramer: >> a bank is a vault. >> is it dangerous for the fed to serve as judge and jury on a particular banker's speech? >> I'm kind of absorbing that. It is quite unusual. I have never seen anything like that before.
▶ 2:43:56Sen. Cramer: It proves the comments I have been making what is controversial and what is not controversial. It is chilling to me that it is possible to access to the federal reserve payment system might be dependent on whether the applicant is engaged in some sort of controversial commentary or activities.
▶ 2:44:28Sen. Cramer: That is the kind of stuff that you see in countries that appear on lists. I don't see how it has any place in assessing the capabilities of an institution to have access to the federal banking system. We don't want to be in a place where free speech is chilled because there is a concern that I might not get access to banking services.
▶ 2:44:59Sen. Cramer: >> I agree very much and I have been deeply concerned by the kansas city federal reserve like the credit union in colorado from accessing payment system. That chart puts my hair on fire. >> if I might add to that I believe in litigation in wyoming.
▶ 2:45:22Sen. Cramer: I believe if we recall correctly , the position of the federal reserve is the bank of kansas city has complete and unfettered discussion as to how they allow access to the payment system. That is a lot of power. >> that is a concern of mine. I could see it now.
▶ 2:45:53Sen. Cramer: This is an internal memo. It says reserve bank staff should reserve the conduct of the institution and its leadership and association with the association poses undue reputational risk to the reserve bank. Is the leadership associated with controversial commentary or activities?
▶ 2:46:20Sen. Cramer: What is a controversial comment or activity? What is that? >> I have no idea. >> is it in the eye of the beholder? >> yes. >> what is a controversial commentary or activity? >> I feel like that was written for me.
▶ 2:46:47Sen. Cramer: >> it appears to be a tacit attempt to hold back speech that is considered undesirable. >> what I would call this is hard proof ooperation chokepoint. It has now been discovered by congress.
▶ 2:47:14Sen. Cramer: >> thank you for your thoughts and comments. Thank you to each of you for participating in today's very important hearing. This will not be the last time we have to talk about the banking administration. For senators who wish to submit questions for the record, witnesses have 45 days from that day to follow-up with answers. The committee is adjourned. >> thank you.