November 21, 2022

Banking Regulators Testify on Economic and Regulatory Developments

In separate hearings (see here and here), the Senate Banking Committee and the House Financial Services Committee heard testimony on economic and regulatory developments from FRB Vice Chair for Supervision Michael S. Barr, FDIC Acting Chair Martin Gruenberg, Acting Comptroller Michael J. Hsu and NCUA Chair Todd M. Harper.

The Chairs reported that banks have recovered well from the pandemic and are well positioned to handle any potential downside risk as the industry enters a time of economic uncertainty. They expressed concern that high levels of volatility and uncertainty in the nonbank financial sector may spill over to the banking industry. They said that while innovation has the potential to provide significant benefits and that nonbanks have improved competition and resiliency, innovation also carries significant risk, as highlighted by the recent turmoil in the digital asset industry.

Among other things, the regulators noted the following:

  • Mr. Barr said that regulators need to strike the right balance between creating an environment that supports innovation and one that manages related risks to businesses, households and the stability of the financial systems. He said that large banks are well prepared and have sufficient capital to handle stressful conditions, so the focus should be on keeping pace with innovation to ensure that newly emerging risks are identified and addressed as quickly as possible. He said that tighter financial conditions and increased uncertainty have contributed to a weaker economy and increased stress on families, so the FRB will focus on maintaining strong liquidity, credit and interest-rate risks as supervised institutions manage the changing financial conditions. Mr. Barr also stated that he is "taking a holistic look" at the FRB's bank capital framework, including the enhanced supplementary leverage ratio, the countercyclical capital buffer, and stress testing. He said that the capital frameworks should (i) be forward-looking, (ii) be tiered so that higher standards correspond to riskier firms and (iii) "support a safer and fairer financial system." Mr. Barr also identified crypto activities as an area of regulatory priority, emphasizing in particular that legislation addressing stablecoins "would help promote responsible innovation and protect the financial system."

  • Mr. Gruenberg outlined the FDIC's efforts toward strengthening the Community Reinvestment Act ("CRA"), noting that the rule has not undergone revisions since 1995. He said that under the proposed amendments, access to new data metrics will allow for greater transparency and certainty for banking institutions in meeting their CRA responsibilities under the retail lending and the community development financing tests. He said that the FDIC is also working with other regulators to review policies such as the bank merger policies, crypto asset engagement policies, climate-related risk policies and, diversity and inclusion policies.

  • Mr. Hsu said that banks cannot become complacent with the current status quo, warning that complacency may result in economic decline. He said that fighting complacency is especially important now, given the current state of economic uncertainty. He encouraged banks to remain vigilant to the unique risks that a new technology may pose, especially risks relating to IT operations and cybersecurity. Mr. Hsu also said that as the banking industry becomes increasingly digitalized, the OCC will focus on monitoring new technologies to ensure that the transition to an online banking environment does not pose any threat to consumers or financial stability. He said that the OCC will also continue to focus on reviewing bank merger policies, climate-related risks and will continue to support community and minority lending and banking institutions.