Banking Regulators on the Hill: Gruenberg and Basel Dominate
May 21, 2024
Last week, financial regulators from the Fed, FDIC, and OCC testified before the House Financial Services Committee (HFSC) and the Senate Banking Committee (SBC).
Why it matters: As we previewed last week, the hearing comes amidst turmoil within FDIC leadership and potential revisions to the Basel Endgame proposal. Regulators briefly mentioned monitoring CRE in their opening remarks but did not engage in detailed discussions on the topic during the hearing.
FDIC and Gruenberg Focus: The majority of the hearings revolved around FDIC Chair Gruenberg and the results of an independent investigation that found pervasive sexual harassment and workplace misconduct at the FDIC. Note: Gruenberg announced yesterday that he will resign upon confirmation of a successor.
- Republicans called for Gruenberg to step down. Some Democrats harshly criticized him, but most stopped short of calling for his resignation, including HFSC Ranking Member Maxine Waters (D-CA) and SBC Chairman Sherrod Brown (D-OH).
- Sen. Elizabeth Warren (D-MA) contended that Chair Gruenberg’s resignation would “do nothing to improve the toxic culture at the FDIC,” adding that Republicans calling for his resignation are engaged in a “purely political exercise.”
- Despite these calls, Gruenberg reiterated his commitment to implementing changes at the FDIC, stating that he is working on overhauling the agency’s culture and processes for addressing workplace misconduct.
- There are political and policy reasons to keep Gruenberg in place. Without him, the FDIC would lose the majority of Biden appointees and would be unlikely to pass proposals like the Basel Endgame.
What they’re saying: Lawmakers also discussed the Basel III Endgame proposal, inquiring mostly about its implementation and potential modifications.
- Additionally, Members delved into other recent regulatory actions, including the Fed’s long-term debt proposal and last Friday’s Financial Stability Oversight Council (FSOC) report on nonbank mortgage servicers.
Basel Endgame
- Chairman Patrick McHenry (R-NC) asked Fed Vice Chair Michael Barr to commit to re-proposing the Basel III rule for notice and comment.
- Barr responded that the Fed “has not made a decision on process yet” and is mostly focused on “getting the substance right.” Barr indicated in responses to several lawmakers that the Fed is considering “broad and material changes” across all three areas of the proposal, including operational, credit, and market risk.
- Sen. Mike Rounds (R-SD) argued that broad and material changes would trigger the need for a withdrawal/re-proposal under the Administrative Procedures Act.
- In both hearings, Barr assured lawmakers the Fed will comply with the law and the Administrative Procedures Act. He reiterated they will turn to the question of an appropriate process once the substance of the proposal is determined.
- Sen. Mark Warner (D-VA) echoed Sen. Rounds’ concerns, highlighting that much of the opposition to the Basel III proposal stemmed from the lack of evidence-based documentation regarding the cumulative effects of the proposed rule changes. He urged Vice Chair Barr to make these impact estimates public, particularly those related to credit availability.
- Reps. Brad Sherman (D-CA) and Sean Casten (D-IL) questioned the proposal’s treatment of clean energy tax credits. Rep. Casten specifically asked if regulators support revising the risk weights for tax equity. Chair Gruenberg confirmed the issue received heightened attention and agencies are still reviewing comments.
- Rep. Ritchie Torres (D-NY) asked Barr if he agreed with Fed Chair Powell’s statement made during a March hearing that the level of capital in the U.S. banking system is “about right.” Barr affirmed the overall banking system is sound and resilient, and noted the Basel III proposal is designed to correct specific weaknesses in the system.
Other topics included rising insurance costs, the regional bank long-term debt proposal, and FSOC’s recent recommendation on nonbank residential mortgage servicers.
- Sen. Tina Smith (D-MN) addressed the increase in home insurance rates linked to severe weather events caused by climate change. She inquired about the Federal Reserve's efforts in collaboration with financial institutions to manage these risks. Vice Chair Barr responded that the Fed is actively monitoring how major banks are addressing these risks and that conducting exercises with them to gain deeper insights.
- On the FSOC nonbank mortgage report, Rep. French Hill (R-AR) contended that Dodd Frank has driven the mortgage servicing business away from regulated institutions and toward the nonbank sector. Comptroller Hsu responded to Rep. Bill Foster’s (R-IL) questions on risk that disruptions to services in the nonbank mortgage sector could be severe and negatively impact many people. Rep. Bill Foster (R-IL) expressed concerns about the potential severe disruptions to the nonbank mortgage sector and their negative impact on many people's financial well-being. The discussion around the Basel III Endgame proposal highlights the ongoing scrutiny and potential revisions in regulatory frameworks to ensure the stability and resilience of the banking system amidst evolving market dynamics and policy considerations.
The bottom line: While Vice Chair Barr declined to commit to a Basel re-proposal, he did continue to telegraph material changes to the proposal.
Contact David McCarthy (dmccarthy@crefc.org) and Sairah Burki (sburki@crefc.org) with questions.