Regulators talk crypto, capital, climate change, bank mergers and more at Senate hearing

Crypto and stablecoins, capital requirements, climate change, bank mergers and more were among the topics that federal financial institution regulators touched on during testimony Tuesday before the Senate Banking Committee.

In presenting their testimony for the committee’s semiannual oversight hearings of financial regulators (in compliance with the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act [Dodd-Frank]), the top leaders and a top supervisor from four agencies offered their views on several like topics. However, each leader also offered comments on issues specific to their agencies and the institutions they regulate. The agencies are the Federal Deposit Insurance Corp. (FDIC), Federal Reserve, National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC).

Regulators appearing before the committee, and among the key topics they raised, were:

Federal Reserve Board Vice Chair for Supervision Michael Barr: The Fed’s top supervisor said his agency is “taking a holistic look” at the bank capital framework to assess how well it works and if the framework supports a resilient financial system. He said that includes looking at the surcharge for Global Systemically Important Banks (G-SIBS), the enhanced supplementary leverage ratio, stress testing, the countercyclical capital buffer, and other measures. Those include requirements known as the “Basel III endgame” standards, the final piece of international standards issued after the financial crisis of 2008 which set guidelines for addressing market risk, operational risk, credit risk, and leverage ratios. Barr outlined three key principles in considering improvements: the capital framework should be forward-looking, should be tiered so that the highest standards apply to the riskiest firms, and should support a safer and fairer financial system.

On crypto-asset-related activities, Barr said the Fed (along with the OCC and FDIC) are assessing risk and opportunities posed by activities in that area, and to clarify which are legal for banks to conduct safely and soundly, protect consumers and financial system stability. Barr said legislative action is necessary on crypto-assets in general, and on stablecoins in particular, to “help promote responsible innovation and protect the financial system.”

FDIC Board Acting Chairman Martin Gruenberg: On climate change, the acting leader of the bank deposit insurance agency board (who was nominated Monday by President Joe Biden [D] for a five-year term as chairman) noted that his agency is not responsible for climate policy. He said that means the FDIC will not be “involved in determining which firms or business sectors financial institutions should do business with. These types of credit allocation decisions are the responsibility of financial institutions.” He urged banks to “fully consider climate-related financial risks – as they do all other risks – and continue to take a risk-based approach in assessing individual credit and investment decisions.” He said the agency is in the beginning stage of work on climate-related financial risks, adding that the FDIC will expand efforts to address those through a thoughtful and measured approach. “We will emphasize risk-based assessments and collaboration with other supervisors as well as with stakeholders in the banking industry, and our actions will complement actions that have been taken domestically and internationally,” he said.

NCUA Board Chairman Todd Harper: The credit union regulator’s board leader urged the senators to pass two pieces of legislation advocated by the agency. The first would provide a permanent adjustment to agent-member requirements for the agency’s Central Liquidity Facility (CLF, a lending source to credit unions administered by the agency). The second would give the agency the ability to oversee third-party vendors.

Harper said the CLF legislation would cost taxpayers nothing (as scored by the Congressional Budget Office [CBO]) but must be passed by year’s end, when stop-gap legislation offered to offset the impact on credit unions of the coronavirus crisis expires. “Without legislative action, by year’s end, three out of every four credit unions – including most minority credit unions – will soon lose access to an important liquidity backstop,” he said. “And, the credit union system’s capacity to address liquidity events will shrink by almost $10 billion. With growing interest rate risk and rising liquidity concerns, now is not the time to decrease access to the system’s liquidity shock absorber.”

On third-party vendor oversight, Harper said legislation (which has passed the House in the current Congress, and which is the subject of a bill pending in the Senate) would give his agency parity with other federal financial institution regulators and “is critical given credit unions’ increased reliance on third-party vendors and credit union service organizations.”

Acting Comptroller of the Currency Michael Hsu: On revisiting rules implementing the Bank Merger Act, the national bank regulator said his agency is planning a public symposium in February to “explore this important issue further.” He said the OCC, along with the Fed, FDIC and the Department of Justice (DOJ), are considering updates to the merger regulatory framework of the Bank Merger Act “to ensure that resulting entities continue to meet the convenience and needs of the community, support financial stability, enhance competition, and are safe and sound.”

“OCC considers each merger application on its merits against these statutory factors and associated regulatory criteria,” he added.

Testimony by Vice Chair for Supervision Barr on supervision and regulation

Remarks by FDIC Acting Chairman Martin J. Gruenberg before the Senate Banking Committee on Oversight of Financial Regulators: A Strong Banking System for Main Street

NCUA Chairman Todd M. Harper’s Oral Testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs

Acting Comptroller of the Currency Testifies on Regulatory Priorities