▶ 0:13:19The Committee on Financial Services will come to order and without objection the chair is authorized to declare recess of the committee at any time. if I can just get get the attention of my colleagues. we first and foremost wanted wanted to have an acknowledgement here today before we got started.
▶ 0:13:46We would be remiss if we did not acknowledge the passing of our colleague and friend Representative David Scott and obviously represented by the flowers at his at his spot.
▶ 0:14:01I think I can speak for many in the committee that once you got to know David the layers and depth that that was there was impressive and he and I had actually excuse me he and I had actually had a chance to work on a few pieces of legislation together but didn't really get to know each other until we sat on an airplane next to each flying down to flying down to Atlanta as I was doing a rather circuitous
▶ 0:14:31route back to to Michigan but I really truly believe that that was an opportunity to get a picture into what David was about and he was a fascinating guy very smart man very experienced man and for me personally and I think on behalf of all of all of us we'd like to extend our prayers and deepest condolences to his family his friends his staff and
▶ 0:14:58and I'm frankly all that had worked alongside of him both on this committee as well as agriculture and his work And in honor of his life and dedication of to service this house this committee and to the people of Georgia I ask that we observe a brief moment of
▶ 0:15:32Godspeed David. A race well run. Hard to transition from that but we must get back to to our business as well.
▶ 0:15:45Today's hearing is titled prioritizing Main Street evaluating the impact of capital proposals on economic growth and American communities and without objection all members will have five legislative days with when within which to submit extraneous materials to the chair for inclusion in the record. And I will now recognize myself for four minutes for an opening statement.
▶ 0:16:10Today's hearing will examine the recently released capital proposals from our prudential regulators concerning Basel III the standard approach and the GSIB surcharge. That GSIB surcharge has been debated for a long time. In March the OCC the FDIC and the Federal Reserve released revised Basel III regulations aimed at updating US bank capital requirements for the largest banks.
▶ 0:16:36These revisions respond to bipartisan and widespread concerns raised about the earlier 2023 proposal in attempt to refine how capital standards are applied across They also released a proposal that would make certain adjustments to the standardized approach capital rule which applies generally to banks. Additionally the Fed issued a proposal to adjust the capital surcharge application to globally systemically significant banks or GSIBs.
▶ 0:17:06Right-sizing bank regulation is critical to ensure that capital standards are appropriately tailored to risk and do not restrict lending by institutions that play a critical role in supporting our local economies. Capital requirements should promote investment not compound on one another and impose capital levels well above what actual risk warrants. We must also pay special attention to America's competitive position on the world stage.
▶ 0:17:33The 2023 proposal contained requirements that diverge significantly from global standards placing US financial institutions at a disadvantage. This revised framework takes steps to realign US requirements with international norms.
▶ 0:17:48American capital markets are the broadest and deepest in the world and it's important that bank capital requirements promote their proper The prior administration's overly punitive proposal would have had significant consequences for bank securities underwriting hedging securitization and equity investments in funds.
▶ 0:18:11The revised proposal does more to ensure that banks continue their crucial work as intermediaries that risk flow to those most able to manage them. As we review these proposals we must ensure they strike the right balance between preserving safety and soundness in our financial system while fostering the kind of economic growth that benefits every American.
▶ 0:18:33Committee Republicans have consistently advocated for a capital framework that works not just for regulators or large institutions but for everyday Americans who depend on access to credit to buy homes start businesses and invest in their futures.
▶ 0:18:47For example the this revised proposal abandons the punitive mortgage risk weights from the 2023 proposal that drew bipartisan criticism from this committee helping protect America helping to protect access to affordable home loans for American It is Congress's ability responsibility to ensure these proposals are clear appropriately targeted and do not create unintended consequences that could ripple through our economy.
▶ 0:19:15With that I look forward to hearing from our witnesses today and I yield back. So I will now recognize the ranking member of the Subcommittee on Financial Institutions Dr. Foster for one minute for an opening statement. Thank you Mr. Chairman and to our witnesses and I before I get into that I just wanted to thank you for the recognition of David Scott.
▶ 0:19:35You know he and I had a shared affection for the fireplace in the speakers lobby and the quiet conversations we had there when all the other members were out smoozing on the floor between votes and stuff were some of the memories that I will carry from this institution with greatest fondness. Now um today our committee is going to examine proposed reforms to bank capital, liquidity, and stress testing regimes, rules that go to the core of the safety and soundness of our financial system.
▶ 0:20:01The prudential regulators have seemingly taken to heart some of the bipartisan concerns that were raised about the 2023 proposals. Certain revisions to the treatment of mortgages, small business lending, tax equity investments, and legitimate risk management activity are all welcome, but they deserve careful review. We simply cannot ask whether these proposals are better than what came before. We must ask whether, when taken together, they will strengthen financial stability, support access to credit, and prepare us for what lies ahead.
▶ 0:20:30And that is uncertain, from geo- political instability to AI-enabled cyber threats, to climate-related financial risk, the growing connections between banks and private markets, regulators must account for all these risks before they become systemic. We must also preserve, not undermine, the ability of prudential regulators and the CFPB to supervise financial institutions effectively.
▶ 0:20:53This includes providing adequate resources and staffing, and preserving the independence of the Federal Reserve's monetary policy, which underpins a well-functioning US economy. So, thank you, and I yield back. Uh, gentleman yields back, and I appreciate your recognition of, uh, Congressman Scott, as well. Uh, with that, I recognize the chair of the Subcommittee on Financial Institutions, Mr. Barr, for 1 minute for an opening Good morning, and thank you to our witnesses for joining us today.
▶ 0:21:21Last Congress, uh, this committee devoted significant time encouraging our banking regulators to get bank capital right. We called for a careful assessment of both the costs and benefits of Basel III finalization, and a recognition that banks today hold substantially more and higher quality capital than they did two decades ago.
▶ 0:21:41We were clear that the original 2023 proposal lacked sufficient economic analysis, failed to account for overlapping requirements, and risked unnecessary disruptions to essential bank lending and capital markets activities. It's encouraging to see our banking regulators under the Trump administration address many of these bipartisan concerns, and move to a more pro-growth, tailored, and evidence-based approach in the recently released capital proposals.
▶ 0:22:07These proposals reduce unnecessary complexity and gold plating that put US banks at a competitive disadvantage. As we evaluate these changes, our goals remain the same: a strong, resilient banking system that supports American homebuyers, small businesses, and farmers. I yield back. Gentleman yields back. And apparently we've become a construction zone, as well.
▶ 0:22:30So, I don't know if we're, uh, we're going to be enduring that throughout the, uh, throughout the hearing, or if that's just a temporary situation, but, uh, today, uh, we have a great panel of five, uh, five guests who are here, um, and we welcome the testimony of Mr. Greg Baer, the president and CEO of the Bank Policy Institute. Good to see you, sir.
▶ 0:22:52Uh, Robert Broeksmit, uh, the president and CEO of the Mortgage Bankers Association, uh, Luigi Genji, uh, partner at Davis Polk and Wardwell, uh, Mr. Reggie Griffith, the global head of regulatory compliance at Louis Dreyfus Company, uh, here on behalf of the Commodity Markets Council, and, uh, Maya Rodriguez uh, Vayartis, the managing principal of the MRV Associates.
▶ 0:23:18So, we, uh, thank each one of you for taking the time to be here, and you'll each be recognized for 5 minutes to give a oral presentation of your testimony. And without objection, your written statements will be made part of the record. So, with that, Mr. Baer, you are recognized now for 5 minutes for your oral oral remarks. Thanks. Vice Chair Huizenga, Congressman Foster, members of the committee, thanks for the chance for being here today. The capital proposals being reviewed by the committee reflect a new and cogent approach to capital regulation.
▶ 0:23:47The agencies focus on risk, assess it asset by asset, and show their work. The result will be a capital regime that better reflects risk with substantial benefits to US economic growth. That said, there are significant ways that the proposal undoubtedly overstates capital needs. First, it presumes perfect correlation in losses among credit, market, and operational risk, and simply adds up the capital for each. But in many cases, those risks are not correlated at all.
▶ 0:24:14For example, loan losses are not correlated with AML or consumer protection fines that are now the largest cause of operational risk losses. So, the same dollar of capital can serve as a cushion against both. Second, while the agencies helpfully acknowledged double counting between the Fed's stress test and the Basel rules, they have not presented a comprehensive way to reduce it, particularly with respect to market risk. Finally, on credit, some of the Basel risk weights are clearly overstated.
▶ 0:24:42For over a decade, large banks reported the results of their internal credit models, providing a robust data set on what an appropriate risk weight should be. That data shows that the business for a business rated investment grade by a merits a risk weight of approximately 30%, less than half the 65% it would receive in the Basel proposal.
▶ 0:25:02The risks for other loans are similarly My testimony reviews the proposals in great depth, so I will use my remaining time just to debunk a few canards that have arisen about capital regulation. The first is that banks with more capital fare better in a crisis, and thus any increase in capital requirements is a good thing. Certainly, ex post, in crisis, banks do better that banks with more capital do better. Of course, they do.
▶ 0:25:29The trillion-dollar question, though, is whether the costs of carrying that capital at all times exceed the As an analogy, wearing a helmet would be helpful if you fell down or when were in a car crash, but we don't wear helmets all day and night because that comes with costs. There is no dispute among regulators or serious academics that higher bank bank capital requirements reduce the availability and increase the cost of bank lending and intermediation. That's what makes capital regulation hard.
▶ 0:26:00A related canard is that banks should be indifferent to capital levels because higher capital improves their credit ratings and reduces the cost of issuing Of course, if this were true, bank investors, analysts, and customers wouldn't much care about higher capital requirements, but of course, we know that they care quite a lot. And bank CFOs allocate capital to each business line, and adjust the amount of capital when regulatory capital requirements change.
▶ 0:26:26That's because capital requirements are a very important cost of doing business in the real world. A third canard is that the failure of Silicon Valley Bank somehow argues for higher capital for all banks. Notably, the banking agencies have never argued this point, even in the 2023 capital proposal. That's because they understand that SVB failed for interest rate risk and depositor concentration. The pending capital proposals are about credit, market, operational, and derivative counterparty risk.
▶ 0:26:57The agencies have responded appropriately to SVB by refocusing examination on material risk, updating their liquidity rules, proposing a gradual phase-out of the AOCI filter, and reforming the FDIC's broken resolution and recovery process. A final canard is that banks need more capital because there are rising geopolitical and cyber risks.
▶ 0:27:18The Federal Reserve actually runs a stress test, which recognizes that banks lose money when unemployment rises, GDP falls, and housing prices fall. It does not matter why those things happen, a war, a virus, technological change, the drivers of loss are the same. And so, the Fed properly focuses on the loss drivers, and wisely does not try to predict geopolitical or pandemic events and adjust capital accordingly.
▶ 0:27:45Furthermore, it is worth noting that capital does not actually protect a bank against the cyber attack or many similar risks, as important as those risks are. It reminds me of a Far Side cartoon with a picture of a horse and a chart entitled Equine Medicine. Two Two columns show diagnosis and treatment. The diagnoses vary, broken leg, runny nose, fever, ornery, but the treatment was always the same: shoot.
▶ 0:28:14For some, the treatment of any bank problem is similarly the same, more capital ad infinitum. Fortunately, the banking agencies have decided to say nay to that approach, and instead use thoughtful analysis to build a capital regime from the ground up. That's it for me. Thanks for your time. And I appreciate you ending on a dad joke, uh, Mr.
▶ 0:28:36Baer, uh, but, uh, it does generationally say something with Far Side, so I, too, am, uh, am a fan, and we'll have to explain Far Side to the, uh, youngers in the room. So, uh, appreciate that. Uh, Mr. Broeksmit, you are now recognized for 5 Vice Chairman Huizenga, Ranking Member Sherman, and members of the committee, thank you for this opportunity to testify.
▶ 0:29:01I am Bob Broeksmit, president and CEO of the Mortgage Bankers Association, and a certified mortgage banker with more than 40 years experience in the mortgage industry. I want to step back from the technical language of risk weights, and instead briefly tell you what these capital rules mean to a family buying or renting a home. First, let me say clearly, the agencies have listened.
▶ 0:29:26This new proposal is meaningfully better than the current bank capital framework and the proposed revisions in 2023 that would have caused serious disruption to both residential and commercial real estate markets. Let me focus on three areas of the proposal where the details will have real consequences for real people.
▶ 0:29:48When a bank originates a mortgage and sells it into the secondary market, it often retains the right to collect payments, the mortgage servicing asset or MSA. That servicing right has value and it's a key component of how banks price new loans. In 2013, under the first phase of Basel III, regulators raised the risk weight on MSAs from 100% to 250% with no empirical justification.
▶ 0:30:17In practical terms, this took the capital requirement on the value of mortgage servicing from 8 cents on the dollar to 20 cents on the dollar. The result was predictable. Banks looked at that capital cost and walked away from mortgage servicing with their share of single-family servicing falling from 88% in 2012 to 39% today. That's not a market trend, that's a regulatory Here's why that matters for borrowers.
▶ 0:30:47The value of a servicing right is a direct input into mortgage pricing. When bankers are active and consistent buyers of servicing, that competition drives the value of the MSA and every increase in servicing value translates directly into lower costs for the borrower at origination. A 25 basis point increase in servicing value is a 25 basis point reduction in closing costs.
▶ 0:31:13That's a thousand dollars in savings on a $400,000 loan. It's not abstract, it goes right back into the borrower's MBA strongly supports reducing the MSA risk weight back to 100% and as the agencies propose eliminating the cap on MSAs that can be included in tier one capital. Both changes are needed together.
▶ 0:31:38Another paramount issue involves warehouse lines of credit, the short-term liquidity that allows independent mortgage banks that originate more than 60% of US home loans to fund loans before selling them. Today, those warehouse lines carry a 100% risk weight. Here's the thing that defies logic. If a mortgage company fails to repay, the bank takes possession of the underlying mortgage note.
▶ 0:32:06At that point, the bank holds a whole loan which carries a 50% risk weight. I'll say that again. Under the current framework, the capital requirement is cut in half if the bank's counterparty defaults. That is the only asset class I'm aware of where the bank is in a better position after its customer fails. That's not a rational risk framework, that's an anomaly that needs to be corrected.
▶ 0:32:33The risk weight on warehouse lines should be aligned with the risk weight of the mortgages that collateralize them. The third area I'd like to focus on is the capital treatment of commercial and multi-family mortgages, the loans that build our communities. Banks are essential to this market, accounting for 38% of all commercial and multi-family debt outstanding. And these loans are important to banks, being some of the best performing loans on bank balance sheets in recent decades.
▶ 0:33:02Regrettably, high capital charges have kept banks from playing their appropriate role in this market. We support the structure and direction of changes regulators have proposed to address this, including basing the risk weights for commercial mortgages held by the largest banks on the loan-to-value ratio of the loans. Further fine-tuning is needed.
▶ 0:33:24We're also urging the agencies to give appropriate capital relief to essential community investment and rental housing tools such as multi-family loans and the low-income housing tax credit investments. The performance of these products has been strong and capital requirements should reflect that. This proposal gives us a real opportunity to fashion capital requirements that reflect actual risk and provide more affordable mortgage and real estate credit to American families and communities.
▶ 0:33:54I'm happy to take your Gentlemen, time has expired. Mr. you are now recognized for 5 minutes. Vice Chairman Huizenga, Congressman Foster, and members of the committee, good morning and thank you for the opportunity to participate in the hearing today.
▶ 0:34:15Recognizing that it is impossible in a few minutes to try to summarize the potential impact of 538 pages of rule text and explanatory guidance, I'll limit my observations to making four main points.
▶ 0:34:30First, in many ways, and especially for credit and counterparty credit risk, the proposed rules are an overdue modernization of the standardized approach to calculating risk-weighted assets in banks' capital ratios and are intended to make them more accurately reflect the risks of the various Instead of applying a single risk weight to a category of exposure, such as residential mortgages, they would apply a range of risk weights that
▶ 0:35:00depend on factors that measure the relative degree of risk of the These factors include, for residential mortgages and commercial real estate exposures, loan-to-value ratios on the basis that as loans are repaid, the amount of loss that a bank can suffer if the borrower defaults also decreases. For credit cards and other retail exposures, borrowers' usage and repayment histories.
▶ 0:35:27And for corporate exposures, investment grade criteria to distinguish between the relative creditworthiness of corporates. Taken together, these changes are intended to make the rules more risk-sensitive compared to the current standardized approach. Lower risk weights for lower risk exposures, higher risk weights for riskier exposures.
▶ 0:35:54the 2026 version of the proposed rules compared to the 2023 version, in my view, are better at avoiding add-ons on top of the internationally agreed Basel standards and in tailoring the rules to better fit characteristics of the US banking sector. For example, the proposed rules do not assign higher risk weights than the Basel standards do for residential mortgages and retail exposures, such as credit cards.
▶ 0:36:25the proposed changes to the rules for market risk and for operational risk both introduce more overlap between the minimum capital requirements and the stress capital buffer that is added on top of the minimum requirements based on stress testing.
▶ 0:36:43For example, both the new market risk rule and the global market shock component of stress testing are intended to estimate market risk losses under stressed economic conditions, not current economic conditions. There is therefore a greater likelihood that banks would have to hold capital twice for the same potential losses.
▶ 0:37:08Now, the banking agencies recognize this problem and the Federal Reserve intends to address it in proposed changes to its stress testing models and But it remains to be seen whether that approach, as opposed to recalibrating the minimum risk requirements, would [clears throat] in fact fully address this overlap on an ongoing basis.
▶ 0:37:32the banking the banking agencies have now performed a more thorough impact and economic analysis of both the proposed rules and the cumulative effect of other finalized or proposed rule changes to the capital or stress testing framework.
▶ 0:37:49And they explicitly recognize that there are tradeoffs between the level of capital requirements and their impact on the availability and pricing of bank lending and bank trading products and In my view, the ultimate impact of the proposed rules should be measured by two [clears throat] things. One, whether they accurately reflect reflect the various risks to which banks are exposed.
▶ 0:38:17And two, whether they allow banks to continue to be competitive in financing and otherwise contributing to US economic activity. Thank you. I look forward to answering your questions. And a very generous 40 seconds left on your testimony, so duly noted and thank With that, Mr. Griffith, you are recognized for 5 minutes. Chairman, ranking member, and members of the committee, thank you for the opportunity to testify today.
▶ 0:38:47My name is Reggie Griffith. I'm the global head of regulatory compliance at the Louis Dreyfus Company, a global merchant and processor of agricultural commodities. I'm honored to appear before this council on behalf of the Commodity Markets Council. CMC is a leading trade association bringing together ag and energy market together with commodity exchanges. CMC advocates for an open and competitive marketplace and supports market-based policy.
▶ 0:39:16Louis Dreyfus, like other large ag merchants and processors, commonly called commercials, rely on the futures markets to manage These markets allow commercials to offer fair and competitive pricing to producers and end users while also serving as key risk management To avoid disruption to this process, the ag sector needs two fundamental elements from the futures market, both of which potentially impacted by the proposed bank capital
▶ 0:39:47rules. First, we need liquid, well-functioning futures markets supported by robust risk we need sufficient clearing capacity for the Ag sector to manage risk at a reasonable cost.
▶ 0:40:04The 2026 capital proposals take a more balanced approach than the 2023 The 2026 proposals serve both essential requirements and allow the Ag sector to continue to continue to use the futures market as it does today.
▶ 0:40:19By contrast, the 2023 proposal would have one, pushed hedging activity and liquidity away from the cleared model, two, reduce clearing capacity, and three, significantly increase the cost of using the futures markets.
▶ 0:40:35Collectively, those outcomes would have increased risk and cost throughout the Ag sector, leading to less income for and higher food prices for the American Bipartisan efforts to strengthen the risk controls since the financial crisis have been a tremendous success. Volume in our markets have drastically increased, and the markets have demonstrated resilience during periods of extreme volatility, leading to the US commodity markets being the global benchmark for all markets globally.
▶ 0:41:07The 2026 proposals add safeguards without impairing the markets we depend In contrast, the 2023 proposals would have driven liquidity away from regulated, transparent markets back towards less standardized, over-the-counter activity. The second critical requirement is ensuring the futures markets maintain sufficient clearing capacity for the Ag sector to properly manage risk at a reasonable cost.
▶ 0:41:35Commercials serve multiple functions in the Ag sector, including providing transparent prices for buying and selling commodities, and offering risk management for producers and end users. To access the futures markets, commercials generally must transact through a futures commission merchant. Due to their trading size, large commercials are typically limited to using bank-owned FCMs, most of which are directly affected by the proposed bank capital rules.
▶ 0:42:03If bank-owned FCMs are subject to overly burdened capital requirements, the result would be a reduction in clearing capacity, and higher cost for clearing In some cases, such requirements would drive banks to exit the FCM business altogether, while clearly discouraging new entrants. This would constrain our ability to hold position sizes necessary to properly manage risk, and would significantly raise our cost. These impacts would ultimately be felt throughout the Ag and food sector.
▶ 0:42:32The 2026 proposals support long-term stability of the Ag markets while striking an appropriate balance between strengthening safeguards while preserving market liquidity and clearing On behalf of members of the Commodity Markets Council, I appreciate the opportunity to testify today, and I look forward to answering any questions you guys may have. Uh we seem to have a contest going on. 51 seconds left in that our 5 minutes. So, uh thank you. Uh with uh with that, Ms.
▶ 0:43:02Rodriguez uh Vialares, uh you are recognized for 5 minutes, or up to 5 minutes, whatever you would choose. Uh Chairwoman Singa, Ranking Member Waters, and distinguished members of the House Committee on Financial Services, thank you for the honor to testify. I am Maida Rodriguez Vialares, Managing Principal of MRE Associates. Millions of Americans have no lobbyists in this building. They have regulators, legislators, and strong bank rules.
▶ 0:43:32Strip those away, and you strip away the protection between ordinary families and the next financial crisis. On March 19th, the agencies released three notices of proposed rulemaking that would collectively reduce capital requirements at our nation's largest banks by nearly 5%. Combined with proposed changes to stress tests and the enhanced supplementary leverage ratio, the eight globally systemically important banks face a 6% reduction in Tier 1 capital requirements.
▶ 0:44:01That is $60 stripped from the buffers meant to protect ordinary Americans in the next crisis. Capital should be designed to help banks survive unexpected losses, so taxpayers do not have to bail them out. The primary justification is that lower capital will mean more lending, especially mortgage lending. This claim does not hold up. Even the president of the Mortgage Bankers Association stated that he didn't expect to see change in who does mortgages.
▶ 0:44:31Banks spent 15 years dismantling their mortgage infrastructure. What lower capital will do is fuel trading, increase lending to non-banks, such as private credit, dividends, and buybacks. And history is unambiguous. The banks buying the most stock aggressively in 2006-2007 were the same ones that needed taxpayer rescue in 2008. I ran a stress test calibrated to the 2007-2009 financial crisis.
▶ 0:45:01The results are sobering. The reduced buffers could push some of the top 20 US banks dangerously close to the 4.5% minimum, and those stress scenarios do not even include today's added risks, such as geopolitical conflicts, cybersecurity threats, AI AI exposures, or climate change. Not one argues for loosening bank capital rules. The Federal Reserve's own vice chair for for supervision dissented. Not a technicality.
▶ 0:45:32It signals a credible internal argument that these changes go too far. Meanwhile, bank regulators have all seen significant staff reductions, eroding the supervisory capacity between Wall Street and Main Street. We are living through elevated geopolitical tensions. GDP now forecast just 1.2% growth, down from 3.1% 2 months ago. Consumer sentiment is at a 74-year low. Credit card delinquencies are rising.
▶ 0:45:59Americans are using pay now, buy later to pay to pay later to buy groceries. Since Basel III and Dodd-Frank were implemented, US banks have grown over 100%. Net income is up nearly 300%, and dividend payouts are at all-time records. Better capitalized banks have lower borrowing costs, and they lend more. There is no quantitative justification for weakening the safeguards on our banking system. My former boss at the New York Fed, Mr.
▶ 0:46:27Jerry Corrigan, used to say banks are special. They are. They are the connective tissue of our entire economy, interconnected to municipalities, pension funds, small businesses, and families. When a bank fails, the harm radiates widely. In the 2002-2007-2009 crisis, unemployment doubled. Those numbers mean destroyed lives, lost homes, and shattered retirements.
▶ 0:46:53American depositors, borrowers, and workers are counting on bank regulators and you to protect them. I respectfully urge this committee to act on the following policy recommendations drawn from my written testimony. First, extend the liquidity coverage ratio to category four banks, those that are $100 to $250 billion in assets. These proposals do nothing to close that gap. Second, retain a binding 72.5% output floor on internal risk models.
▶ 0:47:21Without it, the largest banks can systematically engineer their way to lower capital. The Basel III standard includes this floor. The US proposal discards it. Third, restrict dividends and buybacks for any banks within 200 basis points of the post NPR minimum. The proposals release $40 to $70 billion.
▶ 0:47:43Additionally, I urge Congress to hold joint oversight hearings before June 18th, requiring a single, analysis of all three NPRs' combined impact, and codify liquidity standards for category four banks through targeted amendments to Dodd-Frank.
▶ 0:48:01My full testimony contains 12 additional recommendations on dress addressing G-SIB surcharge methodology, AOCI, commercial real estate concentration risk, and a mandatory 36-month quantitative review of the final will leave the entire financial system more vulnerable, and the Americans most exposed are the ones who had the least to begin with. They are counting on you. Please, do not let them down. Thank you. General ladies, time has expired.
▶ 0:48:31With that, we'll turn to member questions, and I now recognize myself for 5 minutes for questioning. Uh one of the key changes in the updated Basel framework is the move towards more standardized, and in some cases more conservative I I know that may bother someone in in a description of that,
▶ 0:48:50but uh more conservative and right-sized risk weighting methodologies across asset classes. I think De Gengio had you had succinctly put it, lower risk equals lower risk weights, higher risk equals higher risk weights. Um uh Mr. Barr, I want to ask you, uh how do these revised risk weights improve the accuracy of capital allocation across different types of exposures?
▶ 0:49:18Uh there's been a claim that more risk I'm sorry, more capital actually improves that lending. I think that was one of the things that uh you had addressed as one of your canards that you had brought out. And and I'm curious, how does that translate into safer and more efficient flow of credit to households and businesses. Sure, thanks. Um a central feature of the Basel is the new expanded risk-based approach. Um and that is a more granular look at risk.
▶ 0:49:47It differentiates into more risk buckets. So, for example, it can it considers the loan-to-value ratio on mortgages, which previously was not a consideration. They were all in the same bucket. Uh so, by doing that, I think you'll see greater granularity. There's greater accuracy and more efficient capital allocation.
▶ 0:50:05Um it is interesting that the US, unlike other jurisdictions, has chosen not to retain internal ratings-based models, known as the advanced approaches here, where banks model debt risk subject to examiner oversight. Um you know, that is an option in Europe, UK, but the US has decided to go all standardized. Um that said, the US also has a stress test, which other jurisdictions do not, and I believe the regulators are counting on that stress test to provide additional sort of risk capture.
▶ 0:50:35Uh because, while there are hypothetical scenarios in the in the stress test, they do actually use bank balance sheets, and so that's probably the most granular and accurate look at a bank's capital position. Uh so so, do you expect this to reduce the likelihood of risk being underpriced in certain asset classes, as we saw in the lead-up to the financial crisis? Yeah, clearly. I mean, the the central challenge of of of capital regulation is how detailed you want to get.
▶ 0:51:00Um if it's too detailed, it's it's basically the government setting the terms of loans, but also it's incredibly burdensome and complicated. On the other hand, you don't want to do what Basel 1 did, which was just to establish a few general risk buckets and treat all corporate loans the same, all mortgage loans the same. I think here the agency struck a good balance, where they have a standardized approach that is more more risk-focused, more granular, but then they also have in the United States a stress test that'll give you a good look at risk at each bank.
▶ 0:51:30Appreciate that. Um I'm going to turn to you, Mr. DeGengis. Um you're looking to minimize the double counting between stress testing and Basel 3 capital Could you explain how incorporating operational risk that accounts for overlaps with existing stress testing with those stress testing buffers can strengthen the reliance of resilience of banks to non-credit shocks such as fraud, cyber events, system failures, and and why that matters for everyday
▶ 0:52:03Um certainly, thank you. Let me first address the overlap or double counting issue. Obviously, that's a problem if you require banks to hold risk to hold capital twice for the same Under the current rules, operational risk is measured solely under the advanced approaches, not under the standardized approach.
▶ 0:52:25These new rules would now require banks to hold capital against operational risk in the standardized approach. The advanced approaches are being removed. Stress testing um though [clears throat] is measured currently only against the standardized approach capital requirements, not against advanced approaches.
▶ 0:52:48So, because the current standardized approach has no operational risk component, stress testing provided that additional operational risk component as part of stress testing to require banks to hold capital against operational risks in stressed conditions.
▶ 0:53:05But now that the rules are going to be changed and you're going to have an operational risk capital requirement in the standardized approach, if you keep stressing operational risks in the stress testing [clears throat] models without making changes to those risks, you're going to capture the same risk twice. Okay. And that means higher potentially [clears throat] less availability for that service from
▶ 0:53:30All right. Unfortunately, I have about 10 seconds left. Oh, Mr. Brickman, I was hoping to have a little more time and and I'll follow up written question, but how important is it that banking organizations have the right incentives to compete for provide to provide mortgage credit? It's It's super quick.
▶ 0:53:46It's the central question because more competition equals more choices for consumers and better execution and pricing. All right. With that, my time has expired. The chair now recognizes the ranking member of the full committee, Ms. Waters, for for five, I believe, actually first for a point of personal privilege, followed by 5 minutes for questioning.
▶ 0:54:06Thank you very much. Last week, we tragically lost our dear friend and colleague, Representative David Scott. David was a dedicated member of our committee, who spent his entire life fighting on behalf of the American people, particularly for working families and underserved communities.
▶ 0:54:27And what's maybe not as well known is that he was encouraged to run for office for the first time by Coretta Scott And so, David was beloved by his district. Every year, he would hold an annual job fair that have countless people in his community find meaningful, purpose-driven work. These fairs would have upward of 6,000 openings.
▶ 0:54:57During his tenure on the House Financial Services Committee, David was a leader in advancing policies to expand economic opportunity and to ensure that American financial system worked well for everyone.
▶ 0:55:14As chairman, then ranking member of the House Agriculture Committee, he worked tirelessly on behalf of farmers and working families and rural communities and to ensure greater equity in our agricultural My condolences are with his wife, Alfredia, his daughters, Dana and Marcia, the entire Scott family, his friends, and all those who had the privilege of knowing and serving
▶ 0:55:45David was a man of compassion, conviction, and unwavering commitment to public service. His passing is a huge loss for our committee and our country, and he will be deeply missed. Thank you, Mr. I would like to draw your attentions to a particular issue, and I'm going to call on you, Ms. Veladares.
▶ 0:56:12The Trump administration has been advancing a variety of harmful policies that deregulates Wall Street, while making everyday life more expensive for working Americans. First came his erratic, illegal tariffs, then efforts to manipulate and undermine the independence of the Federal Reserve.
▶ 0:56:36And now we have this reckless deregulation for Wall Street, while consumers are suffering through an affordability crisis. Risk are on the rise, including gas prices going through the roof from the war in Iran. New cybersecurity risk emerging connected to artificial intelligence and consumers being defrauded and scammed by bad actors.
▶ 0:57:06This administration has took away the financial cops on the beat, including the Consumer Financial Protection Bureau. They have reduced bank supervisory staff and weakened oversight standards by narrowing the risks that can be monitored. Strong capital requirements are the cornerstone and essential to the health and strength of our banking system. So, Ms.
▶ 0:57:32Veladares, why should we lower our standards now? Doesn't this push our banking system a number of steps closer to a 2008 global financial crisis? Thank you, ranking member ranking member Waters.
▶ 0:57:50And thank you very much for enumerating, indeed, the tremendous amount of risks that exist at the moment in elevated oil prices and inflation and geopolitical risks, and of course, the tremendous uncertainty of the tariffs that is really, really impacting American consumers as well as businesses.
▶ 0:58:07So, this is truly a terrible, terrible time to weaken any kind of bank regulations, especially when it's important to look not just at these three proposed NPRs that do, indeed, weaken the capital rules, and what the banks are going to do is increase their risk. They're going to trade riskier derivatives, riskier securitizations.
▶ 0:58:32They're going to do continue to increase their lending to non-banks, which has skyrocketed, especially lending to private equity and to private credit, which are incredibly opaque and very interconnected to the banks. So, we should definitely be very concerned about that. Now, when banks complain about burdensome regulation, we have to go back and remember that history matters. It is the banks that did not want the Basel Accord.
▶ 0:58:59They didn't want Basel 1 because they felt that it wasn't risk-sensitive enough. And risk sensitivity means, then, that you're using complex models, and you have to have that lead, then, to audits and lead to compliance officers and and all of that. And so, it's it's impossible to have a regulatory framework that is going to be a simple, right? I keep hearing they want more simplicity.
▶ 0:59:24They want less burden, but it's impossible because banks, by their very, very nature, are complex. And everything that the banks do will end up hurting American consumers if they are not well capitalized and sufficiently Ms. Waters, there's something that's bothering me. Uh, have you heard about this buy now, pay later Yes, ma'am.
▶ 0:59:47scheme that is advancing more and more where people are buying groceries on credit? Yes, sadly that is a big problem. Americans are also dipping into their savings which were are which obviously have been decreasing Americans are having to dip into their pensions. So, it is a and and many of Americans are not getting paid a living wage. So, all of those things have to be considered. They're part of the context.
▶ 1:00:13Well, I'm worried about people dipping into their retirement accounts and what's going to happen to them in later years when they have no money to be able to survive on. This is a crisis that is confronting us, the And anything that you can offer to help assist us in trying to make the American people understand why it is going on and what we must do. What do you have? What any advice? Right.
▶ 1:00:42Well, number one, do not weaken bank regulations plain and simple because banks are interconnected to the entire economy. Number two, make sure that all banks are liquid. What does liquid mean? Simply that you have to have enough cash and cash equivalents to meet your obligations. If American consumers need to be liquid, if we need to pay our debts, then banks also have to be ready to pay their debts at all times. And this isn't about when you wear a helmet and when you don't wear a helmet. The problem is you don't know when the crash is coming.
▶ 1:01:10You don't know when there could be a problem with AI or cybersecurity. So, that's why capital and liquidity are so critical. Thank you so very much.
▶ 1:01:19The chair recognizes the chairman of our task force on monetary policy, Mr. Lucas of Oklahoma. Thank you, Mr. Chairman, and thank you to our witnesses for being here today. The Basel re-proposal we're discussing today is a dramatic improvement from the 2023 proposal. And I laud Vice Chair Bowman's hard work to release it less than a year after assuming her role.
▶ 1:01:44This proposal reflects the agreement reached in 2017 by the Basel Committee and rightly reverses the unnecessary and harmful gold plating in the last As Chair Powell has testified, capital levels are about right. This proposal ensures capital requirements do not reduce our lending capacity, market liquidity, or other market making activity that banks provide to support the economy.
▶ 1:02:08The previous Basel proposal received a record volume of comments expressing concerns over the negative impact it would have had on lending capacity in our banking systems. I'm glad this re-proposal was responsive to those widespread concerns and has corrected many of those errors. I hope that we'll continue to see robust engagement during this comment period so that our regulators have a fullsome understanding of the anticipated effects on financial system.
▶ 1:02:35And as additional refinements are suggested, I hope our regulators will be responsive as Mr. Barr. I was pleased to see this proposal included some recognition of the risk-reducing benefits of cross-margining margining. As Chairman Atkins has testified, lower margin requirements through are only beneficial if our capital requirements appropriately account for this reduction in portfolio risk.
▶ 1:03:04This is especially important in the Treasury market, particularly as the SEC clearing implementation date is swiftly In fact, the task force on Treasury Market Resilience is having a hearing tomorrow on this very topic. In your view, should capital calculations reflect a reduction in risk through hedging activity as adjustments needed to the current proposal? As you know, it's it's a significant development that the Treasury market is moving to central clearing.
▶ 1:03:33And when it does so, margin requirements or margin demands are going to increase Thus, cross-margining across Treasuries, Treasury repo, Treasury futures is going to become very important in order to reduce the required margin and make that that market function. The SEC has taken actions to allow that from their perspective under their rules. But currently under the bank rules, that you don't get it get credit for that cross-margining.
▶ 1:03:59Now, there is some basis risk in those trades, but but it is not the case that that you are not getting a risk reduction benefit when you are you are doing netting across those trans-estates. I just I could add add one other thing. You know, I I thought it was helpful that you noted that Chair Powell had said that capital was about right. The committee might want to know, he first said that in 2019.
▶ 1:04:21Since 2019, capital has increased 8% for the G-SIBs and category two banks, 6% for the category three and four banks. So, this proposal which only lowers it 4.8% for category one and two, 5.2% for three and four, still would have us significantly higher than it was when it was about Fair enough. Mr. Griffith.
▶ 1:04:44What does it mean for ag and energy end users if banks reduce their intermediation activity due to an incomplete recognition of hedging I appreciate the question and and I think this is the biggest concern, uh, you know, for the agricultural and energy industry. The futures market is the key to managing risk.
▶ 1:05:05And if we can manage risk appropriately, that can lead to better prices for farmers, we better prices for end users, and ultimately better prices for the American consumer. However, if we cannot deploy the risk we need to properly our businesses, that's going to inject risk into the system, it's going to inject cost into the system, and that's going to lead to less money for farmers, it's going to lead to, you know, higher prices for the American consumer, and as I think from an unnecessary
▶ 1:05:35standpoint, inject risk throughout the entire food chain. Continuing with you, Mr. Barr, do you anticipate additional comments on the G-SIB surcharge calculation in this proposal? And what adjustments would you like to see the regulators consider? The major adjustment that's necessary but when the when the Fed adopted it in they did so with fixed coefficients and using data from 2012 and 2013 in terms of the size of the economy.
▶ 1:06:05They acknowledged at the time, as the economy grows, the G-SIBs are going to grow along with it. That doesn't make them any more systemically important, they are still relative to the economy the same. The proposal oddly says, "Okay, we are going to adjust as we promised in 2015 for economic growth, but only back to our 2019." That adjustment, if they are true to their word and principle and logic, would go all the way back to Thank you, Mr. Chairman. I yield back. Gentlemen, yields. The chair recognizes the ranking member of subcommittee on capital markets, Mr.
▶ 1:06:35Sherman of Pay is too low, prices are too high, and people need to borrow money just to make ends meet, whether it be on the credit card or these new, buy now, pay later, uh, programs. Uh, if our regulation is too tough on banks, uh, that shrinks the economy. If it's too, uh, too loose, we get 2008.
▶ 1:07:01We need to do the hard work of configuring these regulations in a way that is logical and focuses on real Uh, the Basel III proposal has gotten better in a number of respects. Uh, I think most important is a recognition of the need to mark-to-market losses on held-for-sale securities. Uh, if this had been done, we wouldn't have had Silicon Valley Bank.
▶ 1:07:31Another improvement, and I enjoyed working with Mr. Casten on this, is uh, fair treatment of, uh, clean energy tax credits. Uh, I'll talk later about mortgages. When it comes to commercial loans, the original proposal discriminated in favor of companies that were publicly held and giant companies, that has been ameliorated.
▶ 1:07:55And as ranking member on capital markets, I'm pleased to see that capital market trading activities are no longer being penalized, uh, by these Mr. Gianhi, I hope I'm pronouncing that right.
▶ 1:08:13I think you were right to bring to our, uh, attention this possibility that there were a problem, situation where [clears throat] they're double counting the counterparty risk. We want banks to hedge their risks. Uh, they do so by acquiring derivatives. There is, of course, the risk that the counterparty will not come through. Uh, but the current draft seems to double count that.
▶ 1:08:42I'll point out that Silicon Valley Bank did hedge their risks and then unhedged, sold their hedges at a profit. So, we like them to hedge their risk and keep and and and and not undo it. Um, and I commend you for addressing our attention to the need, uh, to make sure that we're not counting the risk and then counting the market noticing that the risk exists. That's double counting.
▶ 1:09:11we, uh, uh, s- one concern I have, uh, uh, Mr. uh, Brooks Smith, is the private mortgage insurance. People need private mortgage insurance when they can't come up with a 20% down payment, which is every young couple I know. Um and it's my understanding that these proposed rules don't give the bank credit for the fact that there's private mortgage insurance.
▶ 1:09:42Do I have that right? Yes, you do. The The rule does ask what the appropriate treatment of private mortgage insurance should be and of course we will say that it's loss absorbing capital before the bank and it should be given credit when you look at the risk weights by loan to value ratio. Otherwise, a bank might buy a mortgage without private mortgage insurance and be treated the as if it was the same risk same mortgage with private mortgage insurance.
▶ 1:10:11Uh as I said, we want banks to hedge their risks and one way to hedge the risk is to have uh private mortgage insurance. We've got uh through the mortgage process, you need the warehouse line of credit credit for 10 or 20 days while the package is put together and sold uh on the market. Uh Mr.
▶ 1:10:34Brick Smith, could you explain uh how this works and how um these proposed rules will unduly penalize those who are playing that critical role, those 20 days between when I get the money for my house and when investors uh buy that mortgage on the market? Yes, as I mentioned in my oral testimony, the risk weight for warehouse lenders is 100%.
▶ 1:10:57If the counterparty fails, the warehouse lender seizes the note, now owns a whole loan and it's a 50% risk weight. It drops in half if the counterparty fails. This does not make sense and the risk weight for warehouse lending should be the same as the underlying asset that collateralizes the loan. This provides liquidity and stability through all economic phases and we want banks to continue to participate in this important activity. Thank you.
▶ 1:11:24Uh I look forward to us dealing with also the internal modeling approach that Silicon Valley took. Um which was manipulated in making sure that we don't have a manipulation of internal bank models to hide their risk and I yield back. Gentleman yields. Chair recognizes the gentleman from Texas, Mr. Sessions for 5 minutes. Mr. Chairman, thank you very much. Uh You pay attention to the market.
▶ 1:11:55You pay attention to the daily turns of our country, of the world. You look at things and come and help us to put a fine point on them. And I'm delighted that you are here today. Some believe that we are going through on any given two or three week period changes that might have taken place in a And it means that you do have to pay attention. You do have to weigh risk.
▶ 1:12:26Uh I'm delighted to hear each of you except for perhaps one say that the stress test equals the risk and that that means that you have the ability to pay attention. But I would also say that as I sat here I looked and as of April 28th, 2026, the average 30-year fixed mortgage rates are holding around at around 6.12 to 6.34
▶ 1:12:57while a 15-year rates are generally 5.3 to 5.6. When I graduated from college, it was We had Jimmy Carter in office. Uh jobs were not available.
▶ 1:13:13I also checked the number of open jobs in this I had to haul hay for a bit and work in an industry where we made And the bottom line is there's about 7 million open jobs seeking people at this And if you just listen to some of the things that are said up here, you hear fear and you hear anxiety and you hear
▶ 1:13:44that it's not working. The bottom line is I think each of you by and large have said the American dream is working. It's working at a time when the country moves dramatically forward. It moves forward in health care. As a matter of fact, we saw directly this last month where health care jobs, the opportunity to greet people the opportunity have technology moving America forward is working.
▶ 1:14:14This is the American dream. And I want you to know to sit through this and hear about the processes that you're talking about knowing that you do believe that risk is captured by the stress test that this this administration regularly That the opportunity to speak with each of you about the capital requirements of where that balance is is really helpful. So, Mr.
▶ 1:14:42Chairman, I have fewer real questions than I do to say I'm listening to the aggregate of what you're saying. I go back home to Texas every weekend and I listen to employers. I listen to I was delighted to hear that most of you talked about the relationship to agriculture, prices, commodities, the things that really do also matter to every one of us.
▶ 1:15:13Whether you have a job or don't have a job, whether you're working or whether you are living in a way where you're retired. We do have to focus on these. I would ask each of you think about the agriculture and food Does anyone have additional ideas about the stability of that marketplace in adding in what we're talking about Yes, sir.
▶ 1:15:42I do and I think you talked about it earlier. I mean, the markets are working. And specifically the futures markets, which is really where the ag sector manages its risk. I mean, after Dodd-Frank, everyone worked together to put extremely robust controls in place that have stood up to times of extreme Um and so as we look forward, it's been tested over and over and it works.
▶ 1:16:04So, we need to be very cautious of putting overly burdensome controls in place that are only going to lead to, you know, I think unnecessary um you know, consequences up and down the ag sector. I mean, when you put overly burdensome controls, you're going to lead to you know, more cost in the system. You're going to lead to less money for farmers and you're clearly going to lead to, you know, higher prices to the American consumer.
▶ 1:16:28So, every time you look at more controls, you need to look at the negative downside and and specifically when you look at the ag you need to look at the futures market and it works and it works well. So, we don't need to go overly uh overboard, you know, on additional controls because I think there are a lot of unintended consequences that people aren't looking for. Mr. Chairman, thank you. Mr. Chairman, thank you for having this meeting today. The American dream works.
▶ 1:16:54Our systems are working and we have jobs that are available for people. Thank you very much. I appreciate each of you taking time to be this
▶ 1:17:02Thank you. Mr. Chairman, I yield back my Gentleman yields. The chair recognizes the ranking member of the House Foreign Affairs Committee, Mr. Meeks of New York for 5 minutes. Thank you, Mr. Chairman. As a member of Congress and as a New Yorker representing the financial capital of the world I lived through the 202008 financial And I saw what happens when our financial system fails. Families losing their homes, businesses shutting down, communities across the country paying the price.
▶ 1:17:30That experience is a reminder that maintaining the safety and soundness of our financial institutions is in everyone's best interest. And at the end of the day, this is about getting that balance right. It's about making sure we maintain stability and safety while also allowing access to affordable credit and mortgages especially for communities that too often have been left behind.
▶ 1:17:56When the original Basel III proposal came out a few years ago, my colleagues and I were concerned with the unintended impact of the proposed changes. So, we sent letters to the regulators raising concerns that certain parts of that proposal could drive up mortgage costs, especially for borrowers with smaller down payments or that it could potentially widen the racial homeownership gap or discourage lending to CDFIs and MDIs.
▶ 1:18:25So, it's my belief that the economic mobility and the safety and soundness of our financial institutions and banks must be at the center of everything that we do in this committee. So, I ask Mr. Brick Smith can you walk me through how the updated Basel III proposal addresses those same concerns we raised on mortgage affordability and access to credit especially for underserved Thank you, Mr. Meeks.
▶ 1:18:53I echo your concerns with the previous proposal, the 2023 proposal about which I also testified in front of this body and I'm happy to say that the agencies have listened and removed what we referred to as the gold plating in the capital requirements for loans on banks' balance sheets.
▶ 1:19:11For some reason, they chose to go 20 percentage points above the Basel numbers, which made it would have made it prohibitively capital expensive for banks to make loans to people with a low down payment who as you mentioned are often people who have been underserved in the past, minority borrowers, low and moderate income borrowers, first-time home buyers.
▶ 1:19:34So, this proposal eliminates that and it it gradates the capital required by the loan-to-value ratio. I mentioned before that private mortgage insurance needs to be included in the mix so that those loans to people with less than a 20% down payment can still be made by banks. Thank you for that. Let me just ask Mr.
▶ 1:19:55with banks holding less capital under this proposal, how confident are you that this will translate into increased lending for CDFIs and MDIs and strengthen community reinvestment? Sure. I mean, they'll be holding less capital, but as I noted before, they'll still be holding significantly more capital than they were holding as of 5 years ago. We believe there's significant room for capital relief here that the agencies have provided.
▶ 1:20:23And again, it is it is absolutely clear and somebody worked at a bank, I know the job of the CFO is to assign capital out to each line of And if the cost of that capital goes up because the regulatory requirements go the allocation is going to go down and there's going to be less of it. That's true across all products.
▶ 1:20:41Completely separate from your concern, but today there was a report in the Financial Times that as a result of a reduction in the enhanced supplementary leverage which basically penalizes holding low-risk assets like Treasury, since that change was made, bank-affiliated broker-dealers have added $150 billion in Treasury inventory. Now, some would say, "Oh, that wouldn't have mattered." And some did say that, but it matters. It matters whether it's CDFI lending or securities trading. Thank you.
▶ 1:21:07And you know, I just have to ask Miss Valdetas, you know, I'm the ranking member of the House Foreign Affairs Committee and I spent a lot of time working with our partners around the world. And now as the world's largest economy with the deepest and most financial markets, is it not in the United States interest to adhere to international standards like the Basel framework? And if we didn't have a coordinated international framework, what would that mean for the stability of the global financial system and would that not be a race to the bottom?
▶ 1:21:38Thank you, Mr. Meeks, and thank you for serving New York where I live. This idea of gold plating has been exaggerated. Our banks are indeed the best. They are well, it's precisely because of regulations, because they are well capitalized, they are liquid, and their misdeeds have cost them $250 billion. All those fines would be so much better used if banks had serious operational risk management and weren't involved in mortgage fraud and so many other misdeeds.
▶ 1:22:11deregulation, which is what this is, this wave of deregulation is a big problem and by not adhering to Basel III Mr. Chairman, I have a unanimous consent request to into the record several statements and from experts and stakeholders Without objection.
▶ 1:22:30including a fact sheet from Better Markets entitled The Main Street Economy Will Suffer if capital is reduced for Wall Street's eight mega banks, a Punchbowl interview with former FDIC Chair Sheila Bair where she said, "Why are they reducing capital?" And testimony last December from Nobel laureate and former IMF chief economist Simon Johnson. Without objection.
▶ 1:22:56The chair now recognizes the chair of our subcommittee on capital markets, Mrs. Wagner of Missouri. I thank the chairman. I thank our witnesses. Last year, ranking member Sherman and I sent a letter to the prudential regulators asking them to carefully consider the implications of the securitization framework while deliberating a new Basel III endgame proposal.
▶ 1:23:25The original 2023 Basel III proposal would have had drastic consequences on which plays a vital role in helping banks manage their balance sheets and making credit, most importantly credit, more affordable and available to constituents who need need it to to finance a home purchase or perhaps a The capital benefits of securitization depend on carefully calibrating
▶ 1:23:55several parameters, including something called the P factor, which determines the additional capital required for a pool of securitized Under the previous [clears throat] this P factor would have doubled, greatly increasing borrowing costs for consumers and reducing the availability of credit for millions of Americans.
▶ 1:24:23How does this new Basel, the new one, proposal strike a balance between safety and soundness while preserving the role of securitization in our economy? Uh thank you for your question. So, [clears throat] what this proposal is it borrows from a couple of elements of the Basel framework.
▶ 1:24:46The Basel framework actually has a simplified securitization framework where that P factor stays at 0.5 where the risk floor, the minimum risk floor for securitizations goes down to 10%. Now, the 2023 proposal did not adopt that framework, took the P factor, doubled it to one, and then set the minimum floor at 20%.
▶ 1:25:13What this proposal does is it's a hybrid solution. It takes the 0.5 P factor from the simplified Basel framework and keeps that in place for all securitizations in the United States. And then, consistent with the Basel framework, takes a 20% minimum risk factor floor to all securitizations. They don't go down as far as 10%. Sorry, they reduce it to 15%. They reduce it to 15%.
▶ 1:25:41Barr, Schmidt, uh for too many Americans, uh the prospect of owning a home seems out of reach. While supply remains a key issue, the availability of affordable mortgages has also played a role. Many banks and financial institutions have that have long been lenders in the mortgage market have pulled out.
▶ 1:26:03And especially in urban and largely suburban districts like my own, this can lead to less competition and fewer options for home buyers. In your opinion, if prudential regulators get these rules right, could we see new entrants and more competition from banks in our mortgage markets? What what potential positive effects could first-time home buyers see in places like my hometown of St. Sure.
▶ 1:26:33Well, I certainly think that getting the capital rules right for loans held on bank balance sheets will encourage them to make more of them and that's really the start. And the other thing that is very encouraging is President Trump's executive order on mortgage affordability. There are all sorts of good ideas that the regulatory bodies can do to ring cost out of the system and make mortgages more available. We also think that Fannie Mae and Freddie Mac have a role to play here.
▶ 1:27:03They have something called loan level price adjustments, which we think could be reduced to make mortgages more affordable for everyday Americans. Thank you. And Mr. Barr, while the most direct impacts of the new Basel III endgame proposal will be felt by by the globally systemically important banks, G-SIBs, and other large financial institutions, every change in regulation of this scale and magnitude is likely to have a variety of impacts downstream, including on regional
▶ 1:27:33and smaller community banks who often have the closest banking relationships with constituents in districts like mine. How do you think changes to the capital requirements and risk weights for larger banks will help the broader financial ecosystem, including regional Missouri and and community banks that serve Missouri's 2nd District? Yeah, the regulators have been very careful held to ensure that banks of all sizes will see capital relief and rationalization. They've recently lowered the community bank leverage ratio from 9% to 8%.
▶ 1:28:03Regional banks will have a standardized approach that is somewhat of a discount to current, but also the opportunity to opt into the same regime that the largest
▶ 1:28:12My time has expired. I'd ask you to add any of other additional comments in writing. Thank you. I yield back. The gentlelady yields back. Uh the ranking member of our subcommittee on digital assets, Mr. Lynch, is recognized. Thank you, Mr. Chairman. I want to thank the witnesses for your your testimony this morning. Very The collapse of Silicon Valley Bank a few years ago, which which actually lost $42 billion in a single day.
▶ 1:28:39It was and also the collapse of Signature Bank and Republic Bank were were largely precipitated by uh very very poor risk or or no risk which allowed the concentration of of large uninsured deposits that that far exceeded the FDIC uh cap of 250,000 per account.
▶ 1:29:05Those deposits were held by a narrow class of of depositors, including venture capital firms, uh some fintech firms, and and a couple of uh crypto-related firms like Circle, which is a large stable coin institution financial institution. The only reason this was a this was a a very troubling time for the members on this committee watching what was going on in the banking industry.
▶ 1:29:33The only reason that we did not have a systemic spread of that collapse was that the Federal Reserve Bank Treasury FDIC got together. It was a Sunday night. I remember it distinctly and uh they basically came out with a statement that they were going to make everybody whole even the uninsured depositors and that calmed the markets.
▶ 1:29:56But if they had not done that emergency session that night Sunday night when the banks opened on Monday morning, there would have been held to pay. We would have had a major disaster on our hands. It would have spread across the banking industry. And uh It it affected basically a bailout what it was because we what we did was we rescued the uninsured people by requiring the taxpayer to step in on their behalf.
▶ 1:30:26Uh so that the the banks that were doing the right thing and and depositors and and taxpayers we basically picked up the we we we covered the risks of those risk-takers takers.
▶ 1:30:44the fail the Fed bailed out those uh those banks and also arranged a friendly takeover by I know in particular JP Morgan Chase stepped in and became even even bigger. Now we have and and Ms. Rodriguez Valderas I'd like you to address this because you've got a great I really appreciate your your testimony very lengthy.
▶ 1:31:09I know you weren't able to talk about all of it in your your oral testimony, but uh now we've got these three NPRs these notice of proposed rule makings and uh you know one of them is talking about lowering the capital reserves. Another one is 60 billion dollars that they're lowering the buffer that would normally protect banks that were in that difficult situation.
▶ 1:31:35Uh we want to lower the the rigor of our our uh uh stress tests and we want to when we have also in the meantime we've passed the genius act which allows allows banks basically to be in the same position that Silicon Valley Bank allows banks like Silicon Valley Bank to hold uninsured deposits every reserve for these stable coin issuers like Circle.
▶ 1:32:04So we've we've continue to erode and and these proposals want to erode the protections that we have. What are the risks? You talk about them in your your paper. What are the risk to taxpayers, the risk to depositors, the risk to the banking community and you know the banking system at large created by these suggestions?
▶ 1:32:25I mean the biggest risk of course is that banks the size of SVB or even larger would fail and in fact it's the regional banks that could have way more trouble than the G-SIBs because they are way more concentrated both on the asset side and the liability side.
▶ 1:32:38And plain and simple when banks fail, it destabilizes the rest of the financial system and it means that the Fed FDIC OCC everybody has to run around on that weekend precisely to solve everything on a Sunday and they're already the resources that these agencies have are way less than they have been. We have to keep that in mind. We still need these people and there's fewer of them. A lot of a lot of talent has left.
▶ 1:33:03So that means that if we have a crisis now, it would be much harder and in my analysis and my stress test when you apply those GFC scenarios, many of the banks would barely be at a minimum and many of the Congress people who have now left the room have talked about agriculture and that sector the best thing you can do to help that sector. My father was a potato and mint farmer in Indiana where I was where I was born so that and I lived in Texas. So that sector means a lot to me personally.
▶ 1:33:29But the best thing you can do for those farmers is help them make a living wage and keep banks from failing.
▶ 1:33:35Gentleman's time is expired. Thank you. I yield back. I thank the gentle lady. Thank you. Gentleman, thank you. The gentleman's time is expired. Thank you. I now recognize myself for 5 minutes and at the outset I'd like to submit for the record a letter submitted by SIFMA evaluating the impact of capital proposals without objection that will be submitted for the record. Um so Ms.
▶ 1:34:00Valderas Valderas today has repeated an argument that I recall former vice chair Michael Barr making during the 2023 proposal Mr. Barr I'll have you comment on this. The argument goes something like this.
▶ 1:34:17Higher capital requirements lead to higher credit ratings for banks which help lower borrowing costs for banks which in turn allows them to pass on pass on those lower costs to American consumers in the form of more lending and lower cost of credit. Um this seems pretty counterintuitive given that higher capital requirements constrain the ability of banks to deploy capital into the real economy. Can you address this this this argument? Sure.
▶ 1:34:46It is clearly the case that to the to an ex the extent a bank has more capital its credit ratings will go up and it should be able to borrow marginally less cheaply. So that is a benefit. On the other hand, there is a cost and the most expensive way for a bank or any other company for that matter to fund itself is through equity and that is why most companies try to diminish the amount of equity that they have to hold.
▶ 1:35:09Again as someone who's worked inside a bank the CFO the corporate folks, they know how much equity costs. They know their cost of capital and they they monitor it and they meet it out to the to the lines of business that can earn the highest return on that equity. They do not ignore the cost of equity. And of course, you know, if if you read any analyst report any invest talk to any investor, they're all very focused on this proposal.
▶ 1:35:34Um under that analysis they would be completely indifferent because the increase in cost for equity would be would be matched by decrease in cost for debt, but everybody operating in the markets all people invest in banks know that's not the Mr. Dengue Dengue I'll have you also address that argument and how does the revised framework um ensure that higher capital requirements do not unnecessarily constrain lending to creditworthy borrowers?
▶ 1:36:02I think they do so by becoming more risk-sensitive in calculating the risk-adjusted amount of bank exposures. I mean one of the things I would note is that under the new rules, risk weights do not just go down. They also go up. So there's more risk sensitivity. If capital requirements in the aggregate go down, it's probably because banks exposures are concentrated at the lower risk end of the scale.
▶ 1:36:32If banks exposures were concentrated at the higher risk end of the scale, then capital requirements would go up under the new proposals. So I do think they are more risk-sensitive and therefore allow a more risk-sensitive pricing and availability of services.
▶ 1:36:47But just going back to the 2023 proposal, is it fair to say that this argument that the higher capital requirements would have led to more lending is is that a debatable I I think it's debatable based on my experience as a lawyer advising banks.
▶ 1:37:05Banks pay careful attention to the risk-weighted asset impact of any asset class and they have a hurdle rate an internal hurdle rate and if if an exposure doesn't meet that internal hurdle rate, they will change the pricing or change the availability.
▶ 1:37:20And I think a lot of the economic analysis on the 2023 proposal was that in fact lending would would go down substantially materially. Let me go to this gold plating argument back to you Mr. Barr. Mrs. Valderas makes this argument that more regulation actually enhances the reputation of American banks and American banks become more competitive with gold plating. Do you disagree with that?
▶ 1:37:49And why is and do you think that the most recent proposal on Basel III moves us away from gold plating? It is true that one reason US banks have done well is that they and the regulators in the immediate aftermath of global financial crisis were quicker to rebuild capital than those in Europe and other places. So that that is certainly But around the gold plating I mean the the fact is the current proposal is closer to Basel norms than the 2023.
▶ 1:38:19The 2023 proposal just spuriously added capital requirements to Basel. So here whether it's the risk weights around consumer mortgage the securities listing requirement that I believe Congressman Sherman mentioned, we are now more in line with the EU and UK adoption of of that of that proposal. The real the remaining big gold plating really is in the stress test and as I think as Luis you mentioned with regard to op risk it's a double count and certainly with regard to market risk.
▶ 1:38:48Well that that corroborates somewhat the Basel Committee actually told a bipartisan delegation that that traveled to Basel was that the 2023 proposals actually moved away from Basel III proposal because it was excessive relative to what the international standards were. Um my time is expired. The chair now recognizes the ranking member of our subcommittee on housing and insurance, Mr. Cleaver, for 5 minutes. Uh, thank you, Mr. Chairman.
▶ 1:39:17Uh, I want to follow follow up on what the ranking member said earlier, and I uh, I sit here and observe what was going on um, because almost all of the people since the ranking member uh, men and women who were in this very room as I think uh, Mr. uh, Meeks suggested.
▶ 1:39:47when we were informed about what what was happening in the uh, markets and in the banks in Uh, and I I can remember you know, when I look back over the the the months before the the uh, 2008 collapse we had people coming in here telling us everything was great. Everything including the credit credit rating agencies.
▶ 1:40:18we didn't even catch on when the the first bank went down contrary to what many people say, the first bank to collapse was Douglas uh, State Bank in Kansas City. Uh, it actually uh, collapsed uh, in January. And then uh, we we don't generally look at Lehman Brothers uh, on the 15th of September.
▶ 1:40:46Uh, and then of course as all of us will will remember there were 20 25 bank um, it just threw a wrench into everybody's life but uh, poor people in particular.
▶ 1:41:05and so we you could understand at least I hope that we we we went through through this Bear Stearns, it was a bad bad experience. And so um, as I [snorts] I'm sitting here listening and and also thinking about uh, this discussion uh, uh, I think that's the one who who made the the statement
▶ 1:41:35about uh, remember the past or you'll be condemned to repeat it. and I I'm this discussion you know, brings me back to that point.
▶ 1:41:51Uh, especially uh, when I look at the uh, bank uh, mortgage lenders which uh, originates more than 50% right now of home loans and they service the the the overwhelming uh, majority of federally backed right now.
▶ 1:42:17my concern is we have essentially you know, stripped the CFPB of [snorts] its authority. It is it is a weakened agency.
▶ 1:42:36but the one of their roles was to uh, into uh, enforce consumer protection uh, that regulated financial products and services including mortgages. Uh, Ms. Valderas, do you believe that there are risks now as a result of the fact uh, that we have essentially eliminated uh, the CFPB. Yes, very significant risks.
▶ 1:43:06I mean, when you don't have the same level of of talent and brain pool at the CFPB, so many people gone and the same problem to a lesser extent, but nonetheless a lot of staff has left the Fed, the FDIC. So, you have fewer people keeping their eye on the many many risks that banks take and banks will take more risks when you deregulate when you decrease their capital. They are not, ladies and gentlemen, they are not all of a sudden going to be lending to mortgage borrowers.
▶ 1:43:35They are not going to be lending to the farmers in South Texas where I grew up or in Indiana where I'm from as I said. That's not what they're going to do. They're going to increase their lending to private credit, to private equity, to other kinds of non-depository financial institutions. They take more risks. I worked at JP Morgan in the emerging markets as a Russian analyst. I work with these traders. I know exactly what they're like. They take risks. They thrive on that. That's great. It makes great profits for JP Morgan, but it doesn't help the American people.
▶ 1:44:03When those banks fail it's the regular people who have nothing to do with the party on Wall Street. They're the ones that end up paying and that's that's why I'm here. And it's too bad that the congressman from Texas was talking about the American dream. Absolutely the American dream is is is alive and well. I'm I'm a product of that, but I want to make sure that other people also have the American dream. And so if you let banks fail and those people lose their
▶ 1:44:26has expired. those banks are not going to come help them. Thank you. Thank you. The chair now recognizes the chair of our subcommittee on national security, Mr. Davidson, for 5 minutes. Uh, thank you, Chairwoman. Thank you for our witnesses. Appreciate your work in this space. Uh, the safety and soundness of our financial system is uh, paramount to America's strength. You know, with less than 5% of the world's population, we got over 50% of the invested capital.
▶ 1:44:54Uh, the banking sector makes a lot of that possible and the reserve currency status certainly helps us a lot. Um, but when you look at all these things, we keep looking at the Europeans. Most of Americans don't know there's a place called Basel, Switzerland and somehow Basel seems to exert all this impact. I felt it as a small business guy uh, not long after Dodd-Frank passed and they started stress testing the G-SIBs and I had a G-SIB as a bank.
▶ 1:45:23Couple hundred employees in a manufacturing company and my banker comes to me and says, you know, did you ever think about growing more slowly and playing more golf? I'm like not really. Why would you want me to do that? It seems like it's working pretty well for you guys. And basically explained how they were going to treat lines of credit as if you're using all of it. This is stuff they come up with in meeting rooms and uh, solving problems that aren't really problems. You know, our company was strong but it was in manufacturing.
▶ 1:45:54And today you have the same sort of scared capital. I agree with the lady who's talking about, yeah, they're fine flooding private credit that are buying up all these companies, putting stress on our small and mid-market firms but the lenders and capital aren't going And when you look one of the dynamics uh, in the around the time that the financial crisis was going on in '08, '09 the Federal Reserve started paying direct payments of interest to banks
▶ 1:46:24for required reserves. And then they said, you know, it actually be easier to monetize all this if we just paid you interest on all your reserves. So, in light of that, you know, do we even need capital requirements? They seem to be hoarding lots of cash there. They're getting a 4% rake with zero risk, zero management of the own treasury. So, Mr. Barr is a bank policy institute guy. What lets banks do their thing cuz right now with all these dynamics, we see a lot of non-bank lenders. So, clearly the banks aren't meeting the market need.
▶ 1:46:55And Basel's approach is to make it harder to meet the need. What's the future like? Uh, actually quite relevant to to your prior experience. Um, one of our concerns about the proposal is that it's actually requiring the capitalization of unconditioned cancelable commitments. Um, this isn't like a like a credit card line or a HELOC where the customer can draw at any time. These are lines where the bank has to reapprove and can cancel.
▶ 1:47:20Um, it was phrased as a clarification in the proposal, but we actually but it's a major substantive change that would affect businesses like like your old one. So, you know, it's an unbelievably comp complicated proposal. There are a lot of these little things in there. That's why it's hundreds of pages as long and I don't even want to know how our comment long our comment letters going to be. But it's really important as we look to the ability of businesses to thrive that we make sure we get all these risk weights right. Right.
▶ 1:47:47Yeah, thank you and you know, it's safe to say I don't think they've got the right approach right now. Mr. Griffith, what other things are we confronting in this uh, you know, Basel imposed you know, mandate on our own country that frankly's crushing Europe in terms of performance. Why would we take our guidance from them? I agree. I mean, we clearly I think talk since Dodd-Frank have done a fantastic job.
▶ 1:48:11I mean, there it wasn't perfect, but I but I think it's put us in a place where we are the benchmark for all, you know, futures exchanges globally. Um, you know, and I think we need to look at our own needs and our own requirements here and make sure we continue to stay the course and continue to become the gold standard as we move forward. Um, so I I would agree with you 100%.
▶ 1:48:33We need to look at our own needs and not necessarily trying to um, mimic, you know, other regimes which clearly have not done the job we have at least in regard to the futures markets. Yeah, thank you for that. Look, I I I think there there are so many layers here, but you know, our community banks, for example, generally aren't too big to fail and we've undermined those and we've shrunk the community bank sector by a lot with a lot of this heavy-handed regulation. I think that's made it hard to meet the addressable needs of the marketplace.
▶ 1:49:03So, I hope we re-embrace tailoring and re-embrace some of the things that have made banks responsive to market needs. I am highly concerned that private credit is really a signal that that banking hasn't met the market need and we haven't really captured some of the the the risk there. Um Anyone care to weigh in in the last few seconds about paying interest on bank reserves including excess reserves? Is that good policy or not? we we've written a fair amount of on this.
▶ 1:49:33A Paying interest on reserves is no different from paying interest on a Treasury bond. If you hold a Treasury bond you should get interest. If you hold reserves you should get interest. It's also extremely important for the efficacy of monetary policy. Uh so while you know it it it may not be popular, it is certainly necessary. Yep. Thank you, I yield. Gentleman's time has expired. With that the gentleman from California, Mr. Vargas is recognized for 5 minutes. Thank you very much, Mr. Chair and ranking member. Thank you for this hearing. Again, I want to thank all the witnesses here today.
▶ 1:50:03Uh Mr. Barr, you gave us a rather provocative analogy of the helmet. You said that you didn't specify I don't think if it was a motorcycle helmet or what kind of helmet, but if you wear the helmet all the time that in fact, you know, you you would be safer because in case you fell, you know, you would you would be safe because you had the helmet on.
▶ 1:50:22Of course, you could have taken the analogy the other way and said, "Well, actually when you're riding the motorcycle you don't have to ride wear the helmet all the time, only when you're going to crash." Only when you crash cuz otherwise you're wearing the helmet it's not really doing you any good because you're not crashing. It's not till you crash. The problem is you don't know when you're going to crash. That's why you wear the So, you do have to manage your risk.
▶ 1:50:45I mean, it it reminded me very much of the time when I was sitting on the San Diego City Council and the fire chief and the the police chief were in front of us and they were telling us how much money is wasted on false alarms if you will when someone calls and you get there 30% of the time it's nothing. And one of my colleagues said, "Well, why don't we just not send it when it's not a false alarm? You know, only when the real alarms." Of course, they said, "Well, we don't know when that is." And why do I say that? We don't know when there's going to be a crisis. That's why we do stress tests.
▶ 1:51:15That's why we want them to be prepared. That's why we don't want another 2008 because we don't know when the crash is going to happen. I mean, it it seems fair to say, wouldn't wouldn't you, that you know, you have to be somewhat prepared? That's why you wear a helmet. So, loving the analogy. Um you were the reason you wear a helmet when you ride a motorcycle is because there is a higher risk of a crash. Um I I'd analogize that to holding subprime mortgages.
▶ 1:51:44You don't wear a helmet when you go to bed and I'd analogize that to holding reserves at the Fed or a Treasury The challenge of bank regulation is to say where on that risk spectrum are we and how granular would do we want to be in assessing those risks. What I object to is those who just simply say more capital is always Um the the virtue of this proposal is that they have actually done the work I think in contrast to the 2023 proposal and actually gone through SFI asset and said, "Here's the risk.
▶ 1:52:14Is it more like a motorcycle ride or is it more like a good night's sleep?" And again, that's one of the great virtues of this of the Fed's stress test. It does not assume good times. It assumes times worse than the global financial crisis across every risk stripe. Um and and banks have to not only be able to hold the amount of capital to absorb all those losses but still be above all the the Basel minimums. So, that's a lot of capital. No, I I get that. I get that. So, you know, you have to figure out the risk. Now, Ms. Rodriguez or Yada Yada Yada, you're rather famous. You've been quoted more today than Mr. Powell or Mr.
▶ 1:52:44Barr by the people up here. So, um you did talk about unexpected risks though and you you enumerated a number of them. You didn't enumerate though private capital which it seems to be a risk and other things. I mean, what what about this continuum of of risk? I mean, it seems to me that, you know, there are these risks that are unexpected. Right.
▶ 1:53:05In fact, that is exactly the original definition of capital from the Basel Accord back in the 1980s is that capital is to help banks sustain unexpected losses. And in my written testimony I spent a lot of time writing about the tremendous increase of bank lending to non-depository financial institutions, right? Shadow banks, non-banks, all of those are synonyms. And the rise in lending to private credit has been astronomical.
▶ 1:53:35And we want to make sure that banks are well capitalized. In my written testimony and in the oral I didn't ask for more capital. I just asked that there not be less capital. And it's also not about capital. Of course, banks have to be liquid. That's why banks the size of Silicon Valley Bank need the liquidity coverage ratio. That's also why you need good talented supervisors and examiners.
▶ 1:54:01ask let me ask about that because you were asked by my um my colleague and friend, Mr. Cleaver, about the CFPB, but you weren't asked directly about the staff at the Fed because the supervisory staff at the Fed, that's one of the things that Mr. Barr talked about when he voted no was because of the big cuts there. Could you comment about that? Absolutely. This is something that worries me tremendously.
▶ 1:54:22One of the main things that I've done over the last 30 years is trained bank supervisors and examiners at the Fed, FDIC, OCC, the state bank regulatory entities. These people are smart, they work hard, and when you get rid of them you simply don't have enough people to be identifying and helping measure risks.
▶ 1:54:40Okay. And last Thank you so much, Ms. for your comments here, but you got to watch out when you say "Dodd-Frank did a fantastic job" because the other side may not invite you back.
▶ 1:54:52Well, relatively speaking, if you look where we were before and you look where we are now and look, we trade on every futures market globally and I will take the US post-Dodd-Frank regime over anywhere in the world. Thank you. Gentleman's time has expired. With that gentleman from Tennessee, Mr. Rose, is recognized for 5 minutes. Thank you, Chairman Hasinger. I want to thank Chairman Hill and ranking member Waters for holding this hearing and thank you to our witnesses for your time being with us today. Mr.
▶ 1:55:19Griffith, you note that farmers and other commercial users depend on access to enough futures clearing capacity at a reasonable cost to manage their risks. If bank capital rules were to significantly increase the cost of providing clearing, what specific risk do you see for liquidity and reliability of agricultural futures markets and how could that ultimately affect producers and end users?
▶ 1:55:47I appreciate the question and your concern for the ag markets. Um I think the biggest concern would be that the sector doesn't isn't able to fully manage its risks. That's number one and as bank capital goes up, the requirements go up, our access to clearing also could potentially be limited. So, that leads to not only higher prices, but it leads to more risk that's pushed down the food chain.
▶ 1:56:12So, you know, I I know we talked about we don't want banks to go under, but we also don't want farmers to have to hold unnecessary risk. And if the bank capital is overly burdensome, they're going to have to hold a lot more risk than they do today. I think the other thing that is is clear would happen is if costs go up, I mean, the large commercials may be able to absorb a little bit of that, but that's going to flow down to farmers.
▶ 1:56:35And the margins are al- already very thin in the farming community and the costs are only going to increase if we, you know, choose overly burdensome uh capital requirements on our banks. I think the 2026 proposal is a nice balance between the two. There's some additional safeguards, but I also think that it would um you know, be a balance that wouldn't be burdensome on the agriculture community or on farmers. Thank you. Agree entirely. Mr.
▶ 1:57:02Brooks met uh for most home buyers in my district terms like Basel III and mortgage servicing assets sound distant from their day-to-day lives. yet those rules can determine whether they qualify for a mortgage at all. Can you explain the link between how regulators set capital charges on mortgage servicing assets and the options pricing and approvals that individual borrowers see when they apply for a home loan? Yes, Mr.
▶ 1:57:31Rose and thank you again for your leadership on the TILA-RESPA Integrated Disclosure that just went into effect. It's it's materially improved the mortgage process. To your question directly, I mentioned during my oral testimony that every 25 basis point or quarter of a percentage point improvement in the value of the mortgage servicing asset, that that term that borrowers don't understand leads directly to a 25 basis point reduction in closing costs which on a $400,000 loan is $1,000. So, it's meaningful.
▶ 1:58:01It's real money and the overly burdensome uh regulation and capital treatment on mortgage servicing assets has led banks to go from an 88% share of the servicing market in 2012 before the Basel changes to a 39% share today. So, if we fix it, the borrowers will have more choices in a more competitive interest rate market. Thank you and certainly we all want to see that. I think it's safe to say. Mr.
▶ 1:58:31Brooks met uh can you explain how setting a more reasonable capital charge for warehouse credit can help ensure there is enough funding for single-family mortgages especially when demand spikes? Yes, independent mortgage banks do over 60% of mortgage loans in this country, but they depend on banks and the warehouse lines they provide for liquidity to fund those loans before they're sold on the secondary market.
▶ 1:58:56And overcharging the banks on the capital requirement means that banks at times of stress would be more likely to pull back that liquidity just at the time the market needs them to stay engaged. So, normalizing that will make the system more stable and continue to support the independent mortgage bankers who make so many of the loans in this And also, Mr.
▶ 1:59:18Brooks-Smythe, you and your members lived through the earlier proposal, which many of us felt did not give enough weight to stakeholder concerns. As regulators work through the current notice and comment process on the revised Basel III proposal, can you talk about how a genuine opportunity for feedback can help correct those And what is at stake for home buyers and communities if major capital rules move forward without fully considering that input?
▶ 1:59:47Well, I'd like to commend all three of the agencies for being very approachable and for listening to the concerns. We we've gone into each of them with our members, the real practitioners who tell stories about how these these proposed rules affect their constituents. We found an open door, and this proposal is miles better than the one in 2023. Certainly agree about that. Mr. Barr, I support the move in the revised Basel III Well, never mind. We're out of time. I yield back.
▶ 2:00:15Gentleman's time has expired, but I will uh note and remind all of our members that if you have a question for the witnesses, uh you are able to uh get that question in writing to the chair, which we will pass along to you, and then ask our witnesses to get back to us with an answer promptly. uh with that, the gentleman from Illinois, Mr. Casten, is recognized for 5 minutes. Thank you, Mr. Chair. Thank you all for being here. Um I want to echo the comments Mr.
▶ 2:00:45Sherman made that uh it was very glad to see Basel change the rules on tax equity. There was this this goofy business where certain types of tax equity had different risk weighting than other types of tax equity, which I I think it was just a drafting error, and I'm glad it was Mr. Barr, at at the risk of being greedy, um I I wonder what your thoughts are on a further change, because if I understand the current rule, up to 10% of the equity on your balance sheet gets a one-to-one risk rating.
▶ 2:01:14When you go over 10%, you go to you go to higher risk weighting, which makes sense if it's sort of equity in illiquid businesses. Right. But but tax equity, whether it's you know, whether it's housing or clean energy, really looks and feels a lot more like debt from a balance sheet.
▶ 2:01:31And I just wonder if you'd comment, is that from a from a risk and I'm I'm I'm all for like making sure that like we're appropriately risked, but but is that on all equity still appropriate when we think about the way that banks use tax equity? I I I will confess I've I have not done the math or asked anyone to do the math on that.
▶ 2:01:50I I share your belief that you know, you should get the right risk weight for the risk, but I mean, as you describe it, it does feel that that risk may be overstated, but I would be happy to run the numbers and come back to you on that. Okay. I mean, there's a long and goofy conversation that because of Senate rules, it's easier for us to make changes in the tax code than to make changes in policy.
▶ 2:02:10But the result is that we've now had banks filling that void. You know, and as a guy who used to be in the clean energy industry, tax equity from a from a company perspective looked and felt a lot like that. Yes. Right. And from a bank perspective, and that's just different in my view than taking a stake in a private company. Um I would welcome your thoughts offline. Um Ms. Ballard, as um moving over to you, the OCC has made a point for a long time that banks should engage [clears throat] in prudent risk-taking.
▶ 2:02:41I could find a zillion quotes on that. Um should banks have chief risk Should banks have What? I couldn't hear
▶ 2:02:48Chief risk officers. Banks, yes. I I thought you'd say that. When when we had the hearing after SVB went down, we we learned that the OCC had compelled SVB to get rid of their chief risk officer, and had never communicated that to the SEC.
▶ 2:03:07So, public markets went for 8 months without knowing that the bank didn't have a chief risk officer, during which time their balance sheet was growing, and their their CEO was actively selling down his equities. We had introduced legislation at the time that said, if you fire your chief risk officer, you need to A, notify the public, and B, if you go for an extended period of time We can quibble what the extent is.
▶ 2:03:33You should not be allowed to grow your balance sheet until that person's in Would you support that legislation? Do Yeah, I mean, first of all, the chief risk officer is not the only person responsible for the balance sheet, right? You've got the you've got the the chief accountants, you've got auditors, you've got a lot of people who knew that there were problems there, and the state bank regulator in California knew that there were problems. So did the FDIC. We've seen the documentation subsequently. But of course, there should be a chief risk officer.
▶ 2:04:01No, and and and no doubt, I'm certainly not suggesting that's the only office, but the fact that the regulators were saying, you have a risk management problem, and we want you we're going to compel you to get rid of your chief risk officer, and then investors never knew, and they could raise equity against that. Like it just it felt to me like an easy barn door to close, and we've we still haven't closed the door. Right. No, you need a chief risk officer. I I do not recall that it was not public knowledge, because I remember at the time I knew that the chief risk officer was not there, and I found that extremely bizarre, and I've written about it subsequently.
▶ 2:04:31So, yes, you need you need a CRO. Yes, I concur with you. With the with the minute that's left, um I wonder what your thoughts are just in general about as risk concentrates in the system. We learned after 2008 that if risk goes out of the G-SIBs and ends up in an insurance company, risk is still in the financial system, but if that's not a supervised entity, our regulators don't see it. For a brief period of time, we had a few insurance companies that were deemed systemic. That's now stopped.
▶ 2:05:02as we look at other, you know, changes in our economy now, we're seeing, you know, do risks exist in private credit? Do risks exist in the insurance company? Do risks exist on equity holders' balance sheet? I think so. But the way that we regulate, the way that we inspect risk in our financial system is really only limited to the Any thoughts on how we could take a more robust look to make sure that those of us who are responsible for thinking about where capital buffers need to be aren't just looking at, you know, the number of
▶ 2:05:33banks you can count on one hand? Right. Well, first of all, all the banks are regulated. Certainly, my friends over at community banks definitely know that they're regulated. Uh I think a real problem, and this is where you all can have a lot of influence, is that you need the NDFIs to be regulated, the non-depository financial institutions, because the big challenge is that they're incredibly heterogeneous, and right now they are not being regulated, and they are not being supervised from a risk-based perspective.
▶ 2:06:01So, you need a regulator who's looking at their levels of credit risk and liquidity risk and all the other problems. Yeah.
▶ 2:06:07chat. Welcome your comments offline. I yield back. Gentleman's time has expired. Uh gentleman from uh Pennsylvania, Mr. Meuser, is recognized for 5 minutes. Thank you, Mr. Chairman. We thank the witnesses for being here with us today. As has been discussed um for most of the late morning, uh a well-calibrated capital framework is one of the most important tools we have in ensuring the growth of our nation's economy uh and protecting small business' ability to access capital.
▶ 2:06:33Thanks to the terrific work of Fed Vice Chair Michelle the newly proposed framework seeks to achieve that goal, protecting our economy while avoiding overly stringent requirements uh that in the end restrict lending and hinder growth.
▶ 2:06:48The revised Basel III proposal reduces burdensome capital requirements on regional community banks to support of a pro-economic growth framework that avoids the negative effects of the previous proposals uh that truly would have harmed access to capital for every So, um Mr. Dung Genky, my apologies.
▶ 2:07:10Genky, we appreciate the the objective in ensuring that US G-SIBs remain resilient and well-capitalized under the The framework as proposed, uh it may result in higher surcharges relative to the Basel standard. Could you elaborate on the policy considerations supporting this calibration? How do you see regulators balancing the financial stability with the competitiveness globally? thank you for [clears throat] your question.
▶ 2:07:40I think they do so by striking um by number one, striking a balance um the risk sensitivity of a standardized approach and the elimination of advanced approaches. Advanced approaches, which are based on bank models, the banking agencies, all of them will admit, are more risk sensitive.
▶ 2:08:03But at least with you have a new standardized approach that is more risk sensitive than the current standardized approach, that more accurately measures risk. You then have to make sure that the stress testing framework, which applies to all the larger banks, not just the G-SIBs, but all the larger banks, doesn't duplicate what the revised risk-based capital requirements are meant to capture, but instead only captures any incremental risk above that.
▶ 2:08:31If that's what the stress testing and you're accurately measuring the risk of the exposures held by banks, then I think you've got the capital requirements just about right. Great. Thank you. Mr. [clears throat] Barr, another concern with Basel III endgame has been its overlap with the stress tests, particularly around operational How do you believe the Fed has addressed this overlap? Does operational risk remain the primary driver?
▶ 2:08:57And are there still areas where the proposal could be Well, hopefully, I mean, the one thing they've done is acknowledge that there is an overlap, which previously had not been acknowledged. I I think Luigi described pretty well the overlap on operational risk, where that was not previously part of the standardized approach. So, the Fed put it in the stress test, and now they've added it to the standardized approach, and it's being counted twice. Um the equally important one and vastly more complex is market risk.
▶ 2:09:24Somewhat similarly, um the the the Basel uh 2.5 basically used a value at risk methodology to to check on market risk, which basically looks at the the most common occurrences, but not the tail risks. The Fed, in response to that, said, "You know what? We're going to run a global market shock. We're going to assume the worst of the worst. We're going to capitalize for the tail." That made sense. So, Basel was m- you know, business as usual, Fed Fed stress test was cat- catastrophic risk.
▶ 2:09:55But now they are updating the Basel proposal now with uh what's called the fundamental review of the trading book, and that is also going into the tail. So, now we're we're twice into the tail, as it were, and that's something needs to be rationalized. Again, it's very helpful that they've acknowledged that. It's incredibly complicated how to rationalize those two things, but I think they're working on it. All right, thank you. Uh lastly, Mr.
▶ 2:10:17Dung Nguyen Gi, under the proposal, large banks would apply a 10% credit conversion factor to their loan commitments, while smaller banks would continue applying 0%. Can you clarify the reason behind this uh differentiated treatment, particularly where the underlying risk characteristics may where they underlying risk characteristics may be Uh well, I can explain the rationale.
▶ 2:10:42I may not be able to defend it as easily, but the rationale is that um uh currently unconditionally cancelable commitments to extend credit get a zero conversion factor, and therefore it's as if they never show up on your balance sheet, and you hold no capital against it.
▶ 2:11:00I think the Basel Committee determined that in practice, unconditionally cancelable uh commitments do get drawn down because banks do agree in advance with borrowers on what the material terms are, even if they reserve the right to make a decision not to extend credit. And so, I think this is just an attempt to measure that empirical evidence of um Thank you. My time has expired. I yield back, Mr.
▶ 2:11:27Gentlemen's time has expired. Chair now recognizes the Congresswoman from Michigan, Ms. Tlaib, for 5 minutes. Thank you, Mr. Chairman. You know, one of the arguments here, um Ms. uh Veleta Gardes, is that they continue to try to make this claim that um that stronger capital requirements, which really protects all of us, cuz I mean, as taxpayers are the ones bailing them out when they mess up and they take these risks, that it will reduce lending, that it will hurt us.
▶ 2:11:57I know. So, in the years after 2008 financial crisis, when stronger capital requirements were implemented, as you remember, post uh again the 2008, we required more capital, what happened to the banks' profitability and lending to the real economy? What happened? It's really incredible. I mean, the profits and the dividend payouts, the share buybacks, the growth of assets
▶ 2:12:23really well. has gone up hundreds uh of percentage points in the different uh product classes. And given that return on wealth and income, I think most Americans, including myself, would be begging to be regulated, so that we could make that level of of profits. Our banks are the envy of the world precisely because of good regulations. So, if banks did quite well post-2008, why are we here once again? Faced with proposals to reduce the buffer.
▶ 2:12:52I don't call it buffer, it's Protection that, you know, uh for me, for the taxpayer, the the folks, from insolvency. I mean, they still fail because they take stupid risks. Really high risks that and then they come here and say, "Oh, we didn't know." And then the CEO's over there buying is selling off his shares. Uh I mean, we need to look at incentives facing these executives, really, too. I mean, and the boards.
▶ 2:13:20For the bank manager, right now, equity is expensive, and they want to have highest return on equity uh equity um possible. So, can you put that in plain language? Like we're talking to our moms, yeah. Like plain language, what incentive banks face to minimize capital they did they did they were required before? Well, they shouldn't be having less capital because it hurts consumers when they run into trouble. And when banks run into trouble and their CEOs, nothing happens to them, right?
▶ 2:13:49White-collar crime is rampant in this country. Nothing happens to them, and yet somebody who jumps a turnstile in a subway in New York City, somebody's chasing after him or her. So, that that
▶ 2:14:00It's worse though, y'all.
▶ 2:14:01I'm afraid that's your purview, not
▶ 2:14:02But you know, the legislators But it's like we bail them out. We keep bailing them out, so why not have the protection in place? Make them have more capital in place. They were fine. After 2008, we made them do it. They were fine. They make great profits. I don't Why are they here whining and crying to my colleagues that oh, this is not this it's not going to reduce lending. It didn't do it before, why would it do it now? So, the other question I have, what does the historical um record suggest banks will do when regulators cut capital requirements?
▶ 2:14:33What would you expect to see additional stock buybacks and shareholder distributions? That's exactly what they'll do. They'll pay more dividends, so that makes shareholders happy. That's great. They'll do more share buybacks. Uh that pushes up their bonuses. The problem is they're not going to all of a sudden decide to lend to the uh in Texas, and they're not going to all of a sudden going back to mortgage lending. That ship has sailed. They're not going back to mortgage lending. Yeah, I'm I'm really particularly worried about the context of these proposals.
▶ 2:15:03The Fed is slashing the number of of its bank examiners. Did you know that? That's a big problem.
▶ 2:15:08Uh while the FDIC and OCC have proposed limiting their oversight. Did you know At the same time, we face this tremendous uncertainty from the AI, climate-related financial risks, and private equity. Can you talk about the context in which these proposals are being made? I mean, look at the atmosphere in the the structures that are being placed right now to lessen again protection. And American taxpayers, the Americans, deserve to know this because we always end up fitting the bill when we don't do what is right.
▶ 2:15:38We've It's like we don't learn our lesson post-2008. I mean, we we literally set it up for failure. There's just too many risks, and you shouldn't be lessening capital. Banks are critical to our economy. They're interconnected to you and me, and interconnected to small businesses. There's a lot with AI that we don't know. There's a lot of cybersecurity threats, geopolitical tensions, all of that that we've discussed here. This is not the time to have this wave of deregulation. Mhm.
▶ 2:16:08I agree. Thank you so much, Mr. Chairman. I yield. Gentlelady yields back. Chair now recognizes the gentlewoman from California, Mrs. Kim, for 5 minutes. Thank you, Chairman. I want to thank all of our witnesses for joining us today.
▶ 2:16:22You know, under Biden-Harris administration, I was concerned that their proposal on Basel III would result in less access to capital for small businesses, and it would reduce mortgage lending to working families, and put American banks at a competitive But thanks to great work of Vice Chair Bowman and other prudential regulators, I'm confident that the newly submitted Basel III proposal addresses almost all of those concerns
▶ 2:16:52and puts Main Street Mr. uh Brooksmith, as we work to address the affordability crisis left behind by the Biden-Harris administration, how will lowering the current risk weights tied to multifamily housing enable more financing for rental properties? Thank you for the question.
▶ 2:17:15There's an important component in the housing bill that's winding its way through the House and the Senate that would increase the statutory limit for FHA multifamily uh loans, which a couple members of this committee have championed, and unfortunately, via a drafting error, it would actually reduce that amount.
▶ 2:17:35So, we're pressing for that to be fixed because we need more multifamily lending, particularly at FHA, where they focus on the more affordable units, and that would be a big help in that regard. Following the global financial crisis, we have seen a departure of bank in the origination and servicing of mortgage loans. So, again, Mr.
▶ 2:18:00Brooksmith, how much of that departure do you attribute to capital requirements that were adopted in a rush and were not based on any empirical data or analysis? Well, contrary to the the previous exchange you heard, the rules set for how much capital is devoted to an individual asset directly affects banks' behavior. Mr. Barr said that he worked at a bank. He worked at a very big bank.
▶ 2:18:27I worked at a regional bank that was focused on mortgage lending, and the the capital allocation required to make a loan directly affects what sorts of loan you make. So, we've heard a lot of concern about the previous proposal gold-plating, meaning requiring more capital than the Basel rules did for on-balance sheet loans. This rule fixes that, and it will have an impact in banks' appetites to make more mortgage loans, contrary to what you may have heard from others. Thank you.
▶ 2:18:56You know, for too long, capital requirements that have a direct impact on Main Street lending have not been grounded in actual economic data. Uh so, I'm thankful that under President Trump, we have a banking regulatory agenda that is driven by actually data and analysis as regulators evaluate the potential rule making. But, let me shift gears now. I want to focus on asset-based lending.
▶ 2:19:22Asset-based lending is typically secured by non-financial collateral, such as receivables and inventory. As a result, financial data shows that asset-based lending exhibits lower risk factors for loss severity as well. Mr. Barr, do you believe the lack of differentiation between asset-based lending and other secure exposures is an area that can be improved uh in the Basel III proposal? Sure.
▶ 2:19:50I mean, lending against inventory or accounts receivable is less risk than lending unsecured in any way. Um actually, interestingly, the Fed in its stress test gives recognition to that, but right now, the Basel proposal does not give any recognition to that and effectively treats it as unsecured. Now, clearly, it's it's less security than, you know, a Treasury as collateral, but it it is certainly the case that it should be worth something and should get some recognition.
▶ 2:20:16Um you know, I think the the agencies are going to have to do some work to try to figure out exactly how much, and we would certainly want to help them in that. Uh but yeah, it's something that needs to be recognized when you're trying to assess the true risk of that loan. Yeah. You know, there's a lot to like in the uh Basel III proposal, but this is one area where I believe small tweaks, right, will help uh lower costs to uh borrowers in the long term. Um Mr.
▶ 2:20:40Di Gangji, uh how do you think the availability of extensive data helped uh inform the Trump administration's proposed Basel III rule making when compared to Biden-Harris administration? Uh well, I think it's very simple. The 2023 rules were proposed in July 2023, but without any data collection from the affected banking organizations.
▶ 2:21:05The data collection was commenced by the Federal Reserve in October of 2023 and was completed in January of 2024. So, now with respect to this proposal, the banking agencies all had the benefit of the results of that data collection. Okay, perfect. Thank you very much. I yield back. Gentlelady's time has expired. Uh the chair now recognizes the ranking member of subcommittee on financial institutions, Dr. Foster of Illinois, for 5 minutes. Uh thank you, Mr. Chairman, to our witnesses.
▶ 2:21:36Um Ms. Palledaras, uh we often hear from the banking industry that operational risk is too harshly penalized uh and the is double counted in the regulatory capital, I think, is um because it's rolled on both the the direct calculations and in the stress testing.
▶ 2:21:55Uh do you agree with that assessment and um and do you think do you think it's too heavily weighted and do you think it is being appropriately adjusted given all of the uh technology-related risks that are coming in? I think it merits to look a little bit more finely at the double counting issue. I think it is important. However, we have to remember that operational risk has always been the neglected stepchild of the risks and has never really properly been taken care of.
▶ 2:22:22And in my view, when I work with banks, this is the biggest weakness, and there's a tremendous amount of challenges with how operational risk is identified, measured, how it's controlled, and how it's how it's monitored. So, I think we have to be careful. I don't have a problem with analyzing the double counting, see if it's really there, what can be uh tweaked, but I don't believe in throwing out that whole section because operational risk is very serious at banks.
▶ 2:22:47Yeah, it's very hard to quantify, you know, what's the probability that you're going to have one misconfiguration of your database and have a huge security problem. Right. Then, yeah, in your written testimony, you indicated a list of top 10 operational risks and it noted that for 17 consecutive years, uh cyber concerns have been on that list, and this year, it's number one. Uh so, yeah, what's what's your take on, you know, mythos and all of the and all of the threats there?
▶ 2:23:14You know, I personally been using these coding assistants for the last couple years, and it's the trajectory is just really amazing, uh including when you say, "Here's a piece of code, what's wrong with it?" And even the older models that they let, you know, just normal congressmen have access to, if you pay them a little bit, they're they're pretty impressive at finding flaws in code. And now, you're just seeing really frightening stories that that very solid code bases have been, you know, thousands of of flaws have been found in Right.
▶ 2:23:42I mean, Yeah, so what is your Yeah, what's the appropriate uh response to that? The appropriate response is not to listen capital, especially when we don't know the extent of the threats. AI is moving incredibly quickly, as you stated, and it's actually made It could end up being quite beneficial for banks, but it's also opened up a lot of threats. And so, I I think it's the wrong time to ignore that, and AI is not part of the current stress test.
▶ 2:24:09Uh the cybersecurity aren't enough of the stress test, either. So, that that's the problem with those issues right now. And if you look at everything that was uh discussed in the the famous or infamous Citrine research memo, you know, that that there would be there could there's the potential for very large macroeconomic uh level disruptions that will fall back on on the business models for many companies that have historically had very good uh records of of paying back their loans, and all of
▶ 2:24:39a sudden, they will become not such good bets, and the market uh reflected that. So, what's what's the appropriate action I mean, the appropriate action is to stop firing people. The Fed, FDIC, OCC, CFPB, make sure that there's the appropriate human resources to really keep their eye on the banks, and it's very important for the banks to dedicate more research more resources to all the challenges that are emanating from AI and from cybersecurity.
▶ 2:25:06And as I've said before, the whole wave of deregulation right now is is very dangerous to our banks and our financial stability. Now, one of the big changes that everyone anticipates is the switch to agentic finance, that businesses and banks and and consumers are all going to be operating through their AI agents. And this I think brings in a number of new risks that we may not have accounted for in our stress testing and so on.
▶ 2:25:30You're going to have bank runs, you know, not at the speed of internet gossip like S- SVB, you're going to have them at the speed of agentic gossip on Molbook. And you may just, you know, the normal normal person or business will just, as a matter of uh you know, they will have a personal AI financial agent, uh and they will be given standing orders that if you even hear a rumor that my bank's in trouble, just pull my money out, okay?
▶ 2:25:54And so, the you're going to have the possibility of bank runs that happen at a time scale that that we've not seen before. And what's the appropriate reaction? You know, what should we think How should we think about liquidity and capital rules in that light? I think it's going Unfortunately, we're not going These these proposals, whether they end up indeed being finalized the way they are and continue this deregulation, then we're opening ourselves to up to even more risk.
▶ 2:26:19And the Basel Committee, as well as our own regulators and legislators, need to spend a lot more time looking at what kind of regulation you need for AI because, as you correctly pointed out, you could end up having a bank run within half a second. Sure. Well, probably a little longer, but yeah.
▶ 2:26:38But this is Yeah, well, one big part of our job is to look around the the corner at coming risks.
▶ 2:26:42Gentleman's time has expired. Thank you much. I yield back. Gentleman's time has expired. The chair now recognizes the chairman on the subcommittee on digital assets, Mr. Steil from Wisconsin, for 5 minutes. Thank you very much, uh Chairman Himes. Thank all of our witnesses for being here today. Um reasonable and appropriate bank capital standards uh obviously play a really important role uh in making sure protecting their stability in our financial system, uh but you you you also got to get it right.
▶ 2:27:09Uh we've heard uh some of our colleagues say talk about uh inadequate bank capital standards, but I think there's a a really important dialogue about what happens as you turn that dial up. You know, what would occur if you turn the dial up, in particular, beyond that those that are maintained uh by our peer countries. Uh that's not always the right policy. Because there's real-world negative consequences as you turn that dial uh up.
▶ 2:27:34I think some of our stakeholders have pointed out um under the previous administration, you had poorly designed uh bank capital rules uh that I think were hindering our economic growth, that were restricting uh loans, and hurt workers, and hurt uh the US's competitiveness. And that's why I was glad to see earlier this year uh a rewrite of the flawed Biden proposals. And so, I look forward to kind of this discussion about where we were with the Biden proposal, where we are today, uh and to contrast that uh a bit.
▶ 2:28:06Um affordability obviously front of mind uh for American families. Mortgage rates have come down uh a few ticks. They were up at 8% uh maybe about 2 years ago or so. They've come down. They've kind of settled in that 6 to 6.5 range. High by historical recent historical standards, maybe not high by long-term historical standards, but high by recent standards, putting uh affordability for housing out of reach for some.
▶ 2:28:28Can you talk a little bit about how um the shift from the the flawed 2023 framework to today's framework is benefiting people that are looking to get into home ownership? Yes. Well, one of the main improvements as it relates to mortgages in this newer proposal, for which we commend the regulators, is to get rid of this gold plating I've been talking about where the previous proposal had as much as a 40% increase in how much capital a bank would have to hold to keep a loan on its balance sheet
▶ 2:28:58and that's done away with in this proposal and this proposal has also uh made the capital that you need to retain for a bank on the on your balance sheet lower if the borrower has more equity which makes common sense that you're if you have even if you have a failure you're not going to have a loss if you have a 60 LTV. As I was actually I had a a question teed up for Mr. Barr on the gold plating side. Um you I could let either of you you speak to this. I'll stay with you just for a minute though.
▶ 2:29:27Um as you look at this proposal do you think we fully removed the gold plating concerns that you have or do you think there's there's more work to be done? As it relates to mortgages on the balance sheet we're convinced it's been removed. Mr. Barr may have another point of view. Yeah, I just actually note so sort of the central perversity here which we haven't really gotten into which is the notion of having higher risk weights for mortgages for banks is the idea that if we don't they're going to make loans they're not going to have enough capital they're going to fail.
▶ 2:29:55That's going to impose losses on the deposit insurance fund. Actually at no time in history is the deposit insurance fund actually taken taxpayer money it's always been replenished by the banks but the assumption is that all the banks won't be able to deposit to replenish the deposit insurance fund and that's why we need higher capital but the alternative is we now have a system where all of that risk is moving to the government sponsored that are explicitly guaranteed by the taxpayer. So when you step back it's to quote Will Ferrell I feel like I'm taking crazy pills.
▶ 2:30:23So you know you need to to certainly have an appropriate risk weight for mortgages on bank balance sheet but you need to look at the whole picture. Part of the picture too is that banks are good at mortgage servicing. They like to work with customers. These are their customers so there's an intangible benefit to that as well. And then I just want to say one thing about an earlier colleague. It again looking at the big picture. Banks are making more profits than they did in 2010. Every industry in America is making more profits.
▶ 2:30:48That's because the the United States economy has grown significantly but over that period banks have significantly consistently underperformed the S&P 500. Um they have been labeled at various points uninvestable. It's why you've seen migration of the mortgage business a lot of the securities business. So yes they earn profits but you can't look at profits in isolation you have to look at where they are competitively as they compete for investors and capital. Mr. Barr now that was that well said but you threw in the Will Ferrell quote.
▶ 2:31:18I think there could be more of that in this committee hearing room um that are that are fitting. Um may maybe I'll just let you you summarize while while we're on you for a second. What do you think if you said there's one key improvement out of the 2026 proposal that you had to put your finger on what would it be?
▶ 2:31:32It it it's the challenge that the Federal Reserve um will will primarily face which is recognize well they have recognized but it's rationalizing the overlaps on operational risk and market risk as you you have and you have a global market shock and then you have a Basel FRTB with an expected shortfall test and those things look very much alike.
▶ 2:31:54Um you also have heroic assumptions about illiquidity I think out to three months in a lot of asset classes We're going to be up on time but I I I appreciate your testimony I appreciate all your testimony. Yield back. Gentlemen your time has expired. Uh with that the chair recognizes the gentlewoman from Georgia Ms. Williams for 5 minutes. Thank you Mr. Chairman and I thank Chairman Hill and Ranking Member Waters for holding this hearing today and for our witnesses for providing your expertise because I have people at home that have questions and they deserve answers.
▶ 2:32:25If you're a home buyer in Atlanta bank capital standards may not sound like something that affects your life but surprise they do. So I am here to get answers for my constituents. Bank capital is simply the financial cushion that banks are required to keep on hand so that they can weather hard times and keep lending. Last month the Federal Reserve released proposals to modernize the capital framework for banks.
▶ 2:32:50The proposals would adjust how much of the cushion banks are required to hold which will affect whether your bank will possibly give you a mortgage. Over the past decade mortgage lending has shifted away from banks and towards non-bank lenders as some of our witnesses just described. And they don't necessarily face the same level of oversight. Vice Chair for Supervision Michelle Bowman has argued that revisiting these capital rules is about getting banks back into the mortgage business.
▶ 2:33:18Getting more Atlanta families into homes is exactly my goal. More competition will mean better rates and options for buyers but Federal Reserve Governor Lisa Cook a fellow Georgian has also been very clear that if we get this wrong families my constituents they'll pay the price. The balance that I'm trying to understand today is exactly that. How do we strike that balance between the banks my constituents who are always my priority. Mr.
▶ 2:33:47Barr Schmitt according to a recent report Atlanta ranks among the top five US cities for first-time home buyers in 2026 and Vice Chairwoman says this proposal will increase mortgage servicing and origination for banks through reduced capital requirements which in theory would help more first-time home buyers. In plain terms very plain terms how does this capital rule change actually translate into more families getting mortgage loans? Thank you for the question Ms. Williams.
▶ 2:34:15My son is a proud new Atlanta homeowner as of last week so
▶ 2:34:19to be his congresswoman. Yeah yeah And the in plain terms the less capital a bank has to hold against a safe asset like a mortgage the more mortgages they can make and the lower the rate will be on those mortgages. Okay that was simple enough. Ms.
▶ 2:34:39Vallandingham as you stated in your testimony that there is little evidence these proposals would increase bank lending and that strong capital rules are what protect working families also my goal protecting working families. Help my constituents understand if these rules aren't actually getting families into homes what are they doing?
▶ 2:34:59There's a lot of things that the Basel III was designed and in order to help first-time home buyers or others there's a lot of other things that have to improve so the Fair Lending Act and other laws that obviously are are your purview. Now what Mr. Barr Schmitt said is correct if and only if the banks [snorts] actually decide to lend and go back into that business of mortgage borrowing.
▶ 2:35:26And in my written testimony I have about 10 or 12 citations of various academics lawyers and including the head of the Mortgage Bankers Association who say this isn't happening because the banks left started leaving over 15 years ago and so the strategies of banks have changed the technology has changed so there is zero evidence that these banks all of a sudden are going to come back to mortgage lending when they have indeed been increasing their lending
▶ 2:35:57to private equity to hedge funds and to lots of other counterparties where it is more profitable. May I may I respond to that since she Ms.
▶ 2:36:06Well I do have a follow-up for her to dig more into this. Um but if banks are receiving more capacity to lend under these proposals what's stopping them from from returning that capital to shareholders instead of putting it to work in communities like Atlanta and then if you want to give a follow-up to her follow-up. Sure. I I was quoting him from Politico where he was quoted but banks are not required to lend to mortgages.
▶ 2:36:32They can make choices as to where they want to lend so I think that's that's also important to
▶ 2:36:38that she
▶ 2:36:38so no one makes the banks go into the Just because the rules were changed to the detriment of banks' interest in the mortgage business 12 years ago does not mean they shouldn't be changed to make them equitable and what I said was there would not be a sea change. I've quoted several times Well every bank that makes another loan tomorrow because of this rule is more banks being involved.
▶ 2:37:07Will every bank get right back in it and have 100% share? No of course not. That's what I Thank you all for your testimony today and Mr. Chairman I do have more questions for the record because I am here to serve constituents just like your son to make sure I'm getting the answers for them and I want everyone to have access to capital so that they can buy that first-time home like your son. So Mr. Chairman with that I will submit my questions for the record and I yield
▶ 2:37:34I was going to say the gentlewoman is reminded that she can submit those questions to the chair. We will pass those along to the panelists and appreciate their prompt attention to Uh with that the chair now recognizes the gentleman from Wisconsin Mr. Fitzgerald for 5 minutes. Thank you Chairman. First I would like to ask unanimous consent to enter into the record a uh letter that is addressed to uh Honorable Michael Bowman and uh Jonathan Gould.
▶ 2:38:05It's improving housing affordability through bank capital modernization. Uh without objection other than the fact that it's Michelle Bowman. Oh Michelle I Without objection. Um Mr.
▶ 2:38:18Chairman I have in my hand February 20 joint letter from key mortgage and banking trade associations which I just entered into the record highlighted the important opportunity that exists with the modernization of bank capital standards to strengthen both financial stability and housing affordability by supporting a diverse mortgage market.
▶ 2:38:38Uh without objection I'd like to ask not only this be entered into the record, but also turn to Mr. Broeksmidt. the MBA has argued in favor of more clarity on the treatment of private credit enhancement, both private mortgage insurance and CRT and bank capital rules. Uh, could you please elaborate?
▶ 2:39:02I know you spoke about this earlier when I was here, on how providing this clarity can help improve just overall once again housing affordability uh, because it's such a major issue before the House of Representatives. Sure, and particularly as it relates to private mortgage insurance, if you put 10% down on a mortgage, you get 30% private mortgage insurance.
▶ 2:39:24That takes the risk of the bank from 90% to 67 and As written, this rule would make you hold capital as if your risk were 90% and you didn't have any first loss protection. So, we recommend that they do include some uh consideration for the effective loan to value after the mortgage insurance, because it's good to bring in loss absorbing private capital that would absorb the loss before the bank.
▶ 2:39:54And on on credit risk transfers more broadly, that's often used by the GSEs and larger financial institutions. Similarly, we support well capitalized uh transactions like that to provide uh loss absorbing capital to the banking Thank you.
▶ 2:40:12Yeah, I'd just like to note, I think of the last 2 and 1/2 hours, what you just said is the most important thing and should be the most important thing to members of the House of Representatives that are trying to figure out how to tackle the the housing issue. And I have the chairman of the subcommittee sitting right to my left, so maybe he'll follow up on that. Um, to Mr.
▶ 2:40:31Griffith, how do the revised capital proposals, particularly changes to risk weight and the treatment of trading activities, improve banks' ability to provide hedging and risk management services to producers, farmers, and maybe uh commercial end I appreciate the question. So, the majority of the risk in the futures market or the primary tool uh we use is Excuse me, the primary tool we use is the futures market.
▶ 2:41:00The majority of that risk has to flow through an FCM. And a lot of that sits with big bank Um, and if you Basically, if you increase the capital there, two things are going to happen. their you know, their ability to clear could go down. You could have people leave the uh the industry, which definitely injects risk into the system. I think that's worst case. Best case is that the costs go up. If the costs go up, that's clearly going to move down to the merchants and that's going to flow down to the producers.
▶ 2:41:29It's going to flow down to the end users and ultimately flow down to the American Very good. Thank you. Mr. Baer, um I just have a a minute here. One concern has been addressed again a couple times. Um One of the concerns with 2023 Basel proposal was the lack of I guess appropriate tailoring might be the way to describe it. How do the revised proposals better account for the difference in size, complexity, and business models across Sure.
▶ 2:41:57Um, you know, for the smallest banks, uh separate from this proposal, there's been a lowering of the community bank leverage ratio that community banks can opt into. Um, there's a legacy standardized that would be that would apply that does not apply to G-sibs, but could apply to all other banks and they have reduced some of the risk weights there. And then all any bank will also have the option into to uh to opt into the expanded risk based approach and get those better risk weights.
▶ 2:42:22But I would note there was another tailoring issue that's not an issue here, but which is very important, which is, you know, in in years after the global financial crisis, there were various thresholds set for heightened supervision. Um, there are probably more than a dozen of them. I have a chart. Um, those need to be indexed for a for GDP growth. Um, I I think the the agencies probably are on a path to doing that.
▶ 2:42:41They've had a lot of work to do recently, but it is really important for mid-size regional banks that they not be continued to be treated uh like banks much larger than simply because the economy's grown and they've grown along with it. Thank you. I thank Chairman, I yield back. Thank you. Gentleman yields back. Chair recognizes the chair of our subcommittee on housing and insurance, Mr. Flood for five of Nebraska for 5 minutes. Uh thank you, Chairman.
▶ 2:43:07I'm uh pleased to see the prudential regulators have acted quickly to provide some certainty around the newest Basel capital requirements. It's a welcome change from when I arrived in Congress and everyone was upset with what the Biden administration was doing. And I've heard repeatedly from industry that we need a resolution on this matter, so we can put it to bed and end the uncertainty. Uh Mr. Broeksmidt, can you explain the importance of removing the cap on mortgage servicing assets as assessed towards capital in the proposed rulemaking?
▶ 2:43:37Uh what kinds of effects do you expect this change to have on mortgage lending? I think we might have talked about this already, but Yeah, but that but the cap specifically I haven't covered much, so thank you for the question. The cap prevents banks that are good at and like to service mortgages from growing above a certain amount of their equity. And removing the cap will remove that constraint. We have member companies who have to sell servicing.
▶ 2:44:02They don't want to, have to sell servicing every quarter to stay below the cap, lest they have to hold dollar for dollar capital against the excess. So, good banks who like to do it and are good at it will no longer be forced to sell. I have one of those servicers in my district, Westgate Bank. They're good at it. They know what they're doing. They built a business and a great reputation on it, so I appreciate that. Uh continuing this line of questioning, Mr.
▶ 2:44:27Broeksmidt, I've long uh been interested in making it easier for banks to get back into the business of mortgage lending. Uh do you think the change in the treatment of the mortgage servicing assets will make it more likely that banks originate and retain the servicing on mortgages? Yes, I do. I'll again cite my statistics that when the uh mortgage servicing asset had a 100% risk weight in 2012, banks serviced 88% of mortgages. Today, they service 39% of mortgages.
▶ 2:44:57That doesn't mean that banks that totally got out are coming back in tomorrow, but it does mean more banks will originate and retain the servicing when this punitive capital treatment is eliminated. And what I think is important about this just from a a state that has a lot of community banks, you know, you go down the street to your local bank, you you get your mortgage, they sell it off to the GSEs. You go get your farm loan, it's backed by the FSA. You go get your business loan, you're going through the SBA.
▶ 2:45:24We need banks to be banks to be banks to be that decider of how to um to spread the capital out. Uh Mr. Baer, among your member institutions, do you think the capital changes proposed by Basel will significantly change their approach to mortgage lending? And if not, what could change their view on mortgage lending? completely agree with my fellow witness's comments. Um I was going to say Broeksmidt. It's been amazing how many different ways his name has been pronounced today.
▶ 2:45:51Um, but but yes, I I I would echo everything he has said between the mortgage servicing assets and the giving acknowledgement to loan to value ratios for purposes of the risk weight for the for the loan. I think there is a hope that banks will be able to keep more more loans on balance sheet um and then service them as well. So, big picture. Any timeline? How long is it going to take banks to kind of get confident with this? Well, you know, as I was saying earlier, I mean banks don't adjust immediately. I mean, you have to do multi-year plans.
▶ 2:46:21Uh you have to incorporate into those plans what the capital requirements will be. It's actually one of the I think the the under under appreciated benefits of this proposal, I should say all three proposals, which is, you know, it's been almost a decade since the Basel Accord in 2017. And there will be a benefit to banks with investors, simply that there will be finality and certainty.
▶ 2:46:43And so, that means not only that investors will I think will look more kindly on banks, but if you're at a bank trying to do capital planning, decide whether to get back into mortgages, you're going to know that for quite a while now what the risk weights weights are going to be and be more willing to do With that, I yield
▶ 2:46:59Uh uh the gentleman doesn't mind um if he would yield. I would yield to you, the chairman. Uh thank you. I've I've been uh sitting here trying to figure out if I would ever get a time to inject this Actually, when I graduated with my also employable political science uh I can always tell the poly sci majors uh who are watching. Um, I went into real estate full-time. Family's been in construction for a very long time. And this was in the early and mid '90s to to the late '90s.
▶ 2:47:28And that was that period of time that you were talking about where we were starting to see rapid change from banks holding those those mortgages and really seeing local banks servicing their customers. And it started the system just started to flip. And by the time we were doing developing in the early uh it had radically changed.
▶ 2:47:53And and I'm I'm just for one am glad that we are trying to restore that stability. Um, nothing against those others that are involved in the process, but uh this is a important cornerstone. So, with that, gentleman's time has expired and he yields back. Um, with that, the gentleman from Texas, Mr. Green, is recognized for Thank you, Mr. Chairman. I ask a unanimous consent that I be allowed to submit questions for the record.
▶ 2:48:21Uh without objection, uh so moved. Thank you. And the gentleman yields back. Uh with that, the chair recognizes the gentleman from California, Mr. Luccardo, for 5 minutes. Thank you, Mr. Chair. And thank you to all the witnesses who have taken their time to be here, including those who paid their own way on Amtrak. I I wanted to ask Mr. Baer and Mr.
▶ 2:48:47Brooksmith, and please forgive me, could you end the mystery and pronounce your last name for us?
▶ 2:48:53Brooksmith, thank you. Thank you, Mr. Uh my apologies for what we've done to slaughter your name. I guess maybe I'll I'll start with you since that you know a little bit about this business. Um The whole point of recalibrating the regulatory treatment of mortgage service uh it would seem to be to get banks back in the game of mortgage lending. Uh is that fair to say?
▶ 2:49:21Let's just say level the playing field so that those who are good at it and want to be in it can be in it without being punished. Fair enough. And with these notice notices of proposed rule making, we're seeing estimates of tens of billions of dollars that could get back out into mortgage lending uh from banks. Is that Is that fair to say? I haven't seen quantification of it, but as I've said before, there are many banks that would do more. Okay.
▶ 2:49:52Given what we've seen and it's been I know there's been a lot written and and said about that the largest banks um in the first quarter of this year have returned uh 46 billion dollars to shareholders either through dividends or through stock repurchases. Uh more than half a billion dollars a I I I'm looking at Mr. Rodriguez's proposal.
▶ 2:50:19And I guess the question I ask, uh well, first, doesn't the substantial return of on the order of 46 billion dollars in a quarter would not reduce the amount of funds that banks would have available for lending? Well, I'll I think I'll defer to Mr. Baer on this specific question.
▶ 2:50:45to weigh in. Uh no, I'm glad you brought up the the issue of share repurchases. I mean, if what if you're running a bank, CEO, CFO, and and you have retained earnings, what you want to do is invest them in your Um that's what you get paid to do. Sure. You want to grow the business. Um that's what it's about being a The only And if if you can't do that or you don't have sufficient returns, maybe you do a little M&A.
▶ 2:51:13But and then you pay your dividend, which which shareholders really like. A share repurchase is the last resort for for a banker. Um and I think probably for people in other industries. It's basically an admission that we [clears throat] can't earn enough on this money that our shareholders will be happy with that rate of return. And so what we're going to do is we're going to give it back to the shareholders and let them invest it somewhere else. That's never a first option. That's in some ways almost an admission of defeat.
▶ 2:51:39So one of the hopes out of this proposal is that to the extent that you're lowering the cost of capital, you're able to increase return on equity for banks, and that will incentivize them to reinvest that money in the business as opposed to giving it back to the shareholders to invest in some other And and I I I don't disagree with the principles you've described. Um but shouldn't that make us seriously consider proposals like Mr.
▶ 2:52:02Rodriguez's uh that if we are going to loosen or accommodate regulatory requirements on banks to enable greater mortgage lending, shouldn't those also be accompanied in those cases where banks are beneath prudent thresholds for capital requirements, shouldn't we also impose restrictions on share repurchases and dividends?
▶ 2:52:31Well, I mean, if banks are are beneath their their thresholds including the requirements of the stress test, they're um restricted from making uh repurchases and distributions.
▶ 2:52:40Mr. Rodriguez is saying a bit more. Would you like to weigh in? When I ran a stress test using global financial crisis numbers and qualitative assumptions and applied it to the NPRs, a number of these banks would barely be at the minimum, right? And and that's that's not even including possibilities of problems with AI or other other issues that we've discussed, and that's what concerns me.
▶ 2:53:08So no, banks should not be increasing their dividends or doing share buybacks. They should be deploying that to actually lending, which they claim they're going to do and often don't, and it could also go for retained earnings, which you mentioned, which is higher quality capital. So I think that's very very important to remember because banks are not just any kind of company. They are very special because of their interconnections to the broader economy.
▶ 2:53:35I mean, just just to be clear, I mean, I think she's referring to her own personal stress test that she's conducted. The Fed has hundreds of people doing their stress tests. The banks have thousands, perhaps tens of thousands of people running their stress I I'd bet on them in terms of an accurate view of capital adequacy. Um Gentlemen, your time has expired. I'll perhaps ask for gentlemen's information offline. Thank you very much.
▶ 2:53:56Yes. And again, reminded that uh all members are able to submit questions uh for the panel through the chair, and we will pass those along. Uh with that, the chair recognizes the congresswoman from Massachusetts, Ms. Pressley, for 5 Thank you, Mr. Chair. I'll state the obvious to everyone apparently, but the Trump administration, uh we are in an affordability crisis.
▶ 2:54:19And while minority-owned small businesses in Massachusetts generated two and a half a billion dollars in revenue in 2023, many of these small businesses are minority-owned small businesses remain underserved by our financial system.
▶ 2:54:35Talking about, you know, their ability to access equitably uh loans, credit, and other supports uh from our financial In fact, I know many experienced a disparate impact from the pandemic and and never recovered.
▶ 2:54:53Uh I represent the Massachusetts 7th Congressional District, and uh more recently uh we have seen a number of our minority-owned small businesses um close to or or forced to shutter uh their doors, having never recovered from the pandemic. A legacy business, Final Touch Boutique, um in Roxbury, um is one of those such businesses. Uh Mr.
▶ 2:55:16Baer, uh during the uh pandemic, do you know how small uh minority-owned businesses were impacted compared to other businesses? Can you speak to that? I mean, I congresswoman, I I don't have statistics on that. I I I presume, I think as you suggested, that they they did worse um probably because they had less capital built up and were less resilient um and were smaller, and that was a tough thing to be even with, you know, PPP aid and things like that.
▶ 2:55:43Mhm, fair enough. Well, well, in fact, uh one Federal Reserve research paper found that Black-owned businesses went out of business at uh twice the rate of White-owned businesses and saw cash decline at nine times uh the level. Um Mr. Baer, when bank capital requirements are lowered like under Trump's Basel III proposals, do you have data on how much of that extra money actually goes back into communities for local small business loans?
▶ 2:56:12Well, I mean, it's difficult to predict um as the the rules are not final, so we would have to wait a year or two and see what the what the um what the results are. So I can't give you any kind of accurate estimate on on how much that would increase any type of lending, whether that's mortgage or securities intermediation or loans to small minority businesses.
▶ 2:56:34uh some of what I've I've found is that large banks are not necessarily reinvesting these dollars into underserved communities or lending more if they don't have to. So in fact, much of the research what it bears out is that increasing bank capital requirements can actually increase uh bank lending and resilience. And in 2023, we saw what the SVB bank collapse almost did to small businesses in districts like mine, the MA-7th, and around the country.
▶ 2:57:01So we need banks that lend more, but also uh protect people's money. Uh Ms. Valderas, would rolling back bank capital requirements through these proposals help or hurt small minority-owned businesses? I think unfortunately, the data and the history would show that it's very much likely to hurt them.
▶ 2:57:20If you see what happened during the financial crisis, about 50 per about 50% of of Hispanic Americans lost jobs and suffered, about 25% African Americans suffered, uh and about 10% of the white population suffered. Uh not only are there issues with discrimination, but as one of my fellow uh panelists described, yeah, there's issues with their access to capital, with their experience in taking out loans, all all of the, you know, these are these are complex issues.
▶ 2:57:49So there there's a lot of things, but there and especially under this administration, um I personally see no signs that there would be focus on helping underserved communities. None whatsoever. Thank you. Um you know, and in fact, uh these businesses are, you know, vital to the ecosystem of our communities, uh social and economic uh anchors, and uh they provide mobility as well. Um they provide jobs and services that meet local needs and help keep our city strong in times of economic downturn.
▶ 2:58:19Uh that's why I introduced the SPARK Act along with Senator Markey and others to ensure that small businesses are invested in and supported through grants and business loans. If Republicans are really serious about improving Main Street and economic growth, they would protect people's money and pass bills that invest dollars directly into the community. That is actually a policy choice we can make right now and improve the lives of the American people.
▶ 2:58:42And I just want to say to my constituents, while some may have forgotten how the 2008 global financial crisis impacted you, or how the COVID-19 pandemic and SVB bank collapse impacted you, or even how the history of slavery and racial have continued to impact you, I want you to know that your congresswoman has not forgotten you and will not stop fighting to make sure we repair past harm and prevent future harm to our businesses, communities, and families.
▶ 2:59:13I yield back. Gentle lady yields back. Uh, the chair recognizes the gentleman from Montana, Mr. Downing, for 5 minutes. Well, thank you, Mr. Chairman, and thank you, sorry to make you look sideways like that. Thank you, uh, to the witnesses for being here. Uh, I just want to start out by saying I'm really happy to see the bank regulators, uh, under the Trump administration propose a new Basel III rule that, uh, you know, actually reflect reflects the realities of of banks of all sizes.
▶ 2:59:42All banks of, you know, that that operate in that. Um, but I'm going to start with, uh, Mr. Barr here. And it seems that the original 2023 proposal operated under the assumption that banks were substantially So, do you believe that banks in the United States are undercapitalized? Well, I mean, I actually the the 2023 proposal made no findings about that at all. I mean, that was one of the concerning things about it. It really had no data or analysis to support any of the risk weights it imposed.
▶ 3:00:11But, you know, to to your to your question, by every measure, um, and I go through this to some extent in my testimony, US banks have ample capital. We've been Since 2010, we've had recessions, you know, pandemics, all kinds of stresses, um, and and US banks continue to show extraordinary resiliency. We talked earlier about, you know, Chair Powell is in 2019 said he thought the capital was about right.
▶ 3:00:36It's increased significantly that that since then, both for the largest banks and also for regional banks. The Fed stress test is an annual health checkup. Again, replaying something worse than the global financial crisis, all the mortgage settlements after the global financial crisis, um, and and worse shocks, I think, even the global financial crisis, and every year it shows that the nation's largest [clears throat] banks have sufficient capital. So, so in the face of all that, I think it's very difficult to to contend that US banks are undercapitalized.
▶ 3:01:05And then, of course, there's also the market check. I mean, if you look at analysts and investors, they certainly don't believe that US banks are under
▶ 3:01:13So, so to be painfully clear here, since the 2008 financial collapse, has there been any widespread evidence the American banking system is not Well, I mean, we've we've talked to some extent today about the Silicon Valley Bank failure, and there were some related ones. But, you know, that truly was a a kind of a unicorn moment where you had It did not fail for credit risk. It didn't fail for market risk. It didn't fail operational risk. It didn't fail for counterparty risk. Um, it failed for interest rate risk. Mhm.
▶ 3:01:42Um, it bought a bunch of mortgage-backed securities from the agencies and the treasuries, and it lost money cuz the Fed raised interest rates by 500 basis points. Those treasuries didn't default for credit. Um, and also, you know, the way I describe Silicon Valley Bank is all their depositors knew each other. They were all in the same tech chain. Right. That's not a great thing. Now, there's no rule you're going to write about that. There's Raising capital doesn't help for that.
▶ 3:02:07Um, that's just a failure, I think, of their own liquidity management and a failure of the examination staff that was overseeing them. Thank you. I appreciate that. I'm going to move on to Mr. Broeksmitt. Um, the original Basel proposal would have broadly raised capital requirements for banks with $100 million in assets or Uh, we've already discussed at length what effects that would have that that would have had on the availability of credit for an opportunity for growth.
▶ 3:02:32So, my question is, what downstream effects would this proposal have done or have had on some of the smallest banks in the United States, particular in very rural states like in Montana? Well, as I've said before, Mr. Downing, the appetite of banks, very much including small banks, to make mortgages is diminished when they are hit with punitive capital charges for those mortgages.
▶ 3:02:57Another thing I would note is that for smaller banks, the cost of compliance with all of the edicts that exist in this business, and when when for good intentions they're put on, somebody puts on another one, nobody goes back and looks at whether the last one is still required. So, we really welcome this executive order from the president to take a holistic look at this because it crushes small banks as well as other participants in the Right.
▶ 3:03:26With the impacts, uh, on rural financial institutions, what do you believe is the potential impact on housing affordability? I think, put most simply, fewer choices of lenders means less competition and higher prices for for lending. Thank you. Uh, as a former commissioner of insurance for the state of Montana, I was frequently frustrated by European regulatory bodies trying to force their standards on US companies. So, I'm going to go to Mr. D'Agnese.
▶ 3:03:57Uh, do you have any concerns about how the Basel Committee on Banking Supervision operates or is structured, and is the United States treated fairly? Well, fortunately, [clears throat] the Basel Committee can't actually pass laws, um, in any country. They can set international standards, but then it's up to the national governments to implement those standards. And so, in the United States, the banking agencies have taken a view that they will appropriately tailor the Basel requirements to fit the US market. Right. Yeah, I appreciate that.
▶ 3:04:27It was always a frustration for me dealing with not regulatory agencies, but, uh, on that, I've run out of time, unfortunately. So, on that, Mr. Chairman, I, uh, I yield. Gentleman's time has expired. Uh, with that, the chair recognizes the gentleman from Florida. Sorry, it's been a long morning. Uh, Mr. Heradopoulos for 5 minutes. Thank you, Mr. Chairman, and, uh, first of all, I want to mention that I really like this proposal versus 2026. I think it increases both transparency and clarity. And so, I'd like to ask a couple questions.
▶ 3:04:57Um, I'll start with, uh, Mr. Uh, D'Agnese. Uh, in in 2023 rule treated regional banks like Wall Street giants. How does the 2026 fit better tailor requirements to risk size and business model and management of that risk? So, I think the 2026 proposals
▶ 3:05:17basically recognize that there is a congressional mandate to tailor requirements. Um, that is a mandate. It's not It's not an option. Um, uh, and therefore, the enhanced risk-based, um, requirement, the new standardized requirement, uh, applies to the largest banks, the category one and category two institutions.
▶ 3:05:39And then, they've proposed a revised standardized approach, which is new, which the 2023 rules did not have, but the revised standardized approach is meant to apply to smaller banks. But, at the same time, to the extent that a regional bank does a side-by-side comparison and decides that there actually would be some benefit to adopting the more enhanced, more risk-sensitive approach, they have the option to do so.
▶ 3:06:07So, it really gives banks an option to decide what level of complexity of capital requirements they want to be subject to. Thank you. And Mr. Barr, how does this proposal keep Dodd-Frank capital floors in place while making smarter change gains, um, above them to unlock potential Right. Let me And I just follow up with the re- with the regional banks just to add cuz it hasn't really come up today cuz it isn't technically part of the hearing.
▶ 3:06:32But, I think for regional banks, you know, they are going to have good options with regard to capital, and they won't be discriminated against vis-à-vis the largest banks. But, a lot of the burdens are actually supervision. Um, the the burden of examination on them when they are not systemically important. And I I I think that's where a lot of the agency actions around defining safety and soundness material risks, um, things like that, I think are going to be really important for regionals. It's also why, as I as I noted a few minutes ago, why tailoring is going to be really important.
▶ 3:07:01You know, it it is the case, I mean, this proposal, although some try to lampoon it as something else, is very consistent with the Basel, um, approach. In fact, it is it hues more closely to Basel than the 2023 proposal did. Um, and and so, you know, it's very much in the mainstream of what was intended by Dodd-Frank and the Basel Committee. Um, and it really sets the US up again with a predictable, sensible, risk-sensitive approach, whether you're a G-SIB, a regional bank.
▶ 3:07:30And again, the smallest banks have the option to simply doing a leverage ratio cuz their balance sheets are not terribly complex, and they've received relief on that. So, I do think, you know, regardless of where you are on the complexity spectrum, you're going to see some sensible capital relief here that will incentivize you to make smart loans. Well, I think, you know, gentlemen, Mr. Chairman, I think the the the focus needs to be on that certainty and and stability that you're trying to offer banks, giving flexibility that fits fits their model best because the goal is to make access to capital less less expensive.
▶ 3:08:01And And when when the banks are given that option, I think they're going to meet those customer needs. Uh, the last question I'll ask Mr. Barr, and if others want to uh pipe in, it would be great. Um, I think the 2023 issue lacked clarity. As as I mentioned before, how does this new proposal actually increase transparency as well? I think it's one of the things that people want to see from the banking industry is that transparency. It's one of the things I've been pushing for in budget matters. But, how How this issue on uh really elevate the the transparency angle versus 2023?
▶ 3:08:31So, I mean I think when it when it comes to to Basel and the GSIB surcharge, it's status quo. I mean, the big change has been on the Federal Reserve stress test, um where the scenarios were never put out for comment, um and where the models were secret. Um the Fed, I think, has done an exemplary job. Um it took a lot of work, but they have now published both a scenario design guide. They'll be publishing the scenarios every year for public comment, not just bank public comment, but anybody's com- public comment, academics.
▶ 3:09:00Um and then the models are now public, as well. I think as a result of their being public and being subject to comment, they are going to get much more accurate and and much better. Again, the the remaining changes, particularly around market risk, where the models are fantastically complicated, it will be a matter [snorts] of reconciling those with what's in the standardized approach for market risk in the Basel proposal.
▶ 3:09:20But again, it is an underrated virtue of of this set of proposals that the US, and I would say in quite significant contrast to Europe, um is going to be a place where people invest in banks know what the rules are going to be, whereas I think European banks uh lumber under a series of sort of secret capital charges that they call pillar two. And I would just say, Mr. Chairman, I think this is one of the keys to take the mystery out of banking, and there's no better way than to have this type of clarity and transparency to take some of that mystery away. And with that, Mr. Chairman, I yield back. Gentlemen's time has expired.
▶ 3:09:51I'd like to thank all the witnesses for their testimony today. Without objection, all members will have five legislative days to submit additional written questions for for the witnesses to the chair. Questions will be forwarded to the witnesses for your response. We kindly ask that you reply by uh June 2, 2026. And with that, thank you again, and this hearing is