[Senate Hearing 115-241]
[From the U.S. Government Publishing Office]
S. Hrg. 115-241
NOMINATIONS OF JELENA McWILLIAMS, MARVIN GOODFRIEND, AND THOMAS E.
WORKMAN
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
ON
THE NOMINATIONS OF:
Jelena McWilliams, of Ohio, to be Chairperson and a Member, Board of
Directors, Federal Deposit Insurance Corporation
__________
Marvin Goodfriend, of Pennsylvania, to be a Member, Board of Governors
of the Federal Reserve System
__________
Thomas E. Workman, of New York, to be a Member, Financial Stability
Oversight Council
__________
JANUARY 23, 2018
__________
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__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada JON TESTER, Montana
TIM SCOTT, South Carolina MARK R. WARNER, Virginia
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
JERRY MORAN, Kansas DOUG JONES, Alabama
Gregg Richard, Staff Director
Mark Powden, Democratic Staff Director
Elad Roisman, Chief Counsel
Brandon Beall, Professional Staff Member
Elisha Tuku, Democratic Chief Counsel
Amanda Fischer, Democratic Professional Staff Member
Corey Frayer, Democratic Professional Staff Member
Dawn Ratliff, Chief Clerk
Cameron Ricker, Deputy Clerk
James Guiliano, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
----------
TUESDAY, JANUARY 23, 2018
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 35
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
NOMINEES
Jelena McWilliams, of Ohio, to be Chairperson and a Member, Board
of Directors, Federal Deposit Insurance Corporation............ 4
Prepared statement........................................... 35
Biographical sketch of nominee............................... 37
Responses to written questions of:
Senator Brown............................................ 85
Senator Scott............................................ 89
Senator Rounds........................................... 89
Senator Menendez......................................... 90
Senator Schatz........................................... 90
Senator Cortez Masto..................................... 92
Marvin Goodfriend, Ph.D., of Pennsylvania, to be a Member, Board
of Governors of the Federal Reserve System..................... 5
Prepared statement........................................... 44
Biographical sketch of nominee............................... 45
Responses to written questions of:
Senator Brown............................................ 96
Senator Menendez......................................... 98
Senator Warner........................................... 99
Senator Schatz........................................... 101
Senator Cortez Masto..................................... 102
Thomas E. Workman, of New York, to be a Member, Financial
Stability Oversight Council.................................... 6
Prepared statement........................................... 74
Biographical sketch of nominee............................... 75
Responses to written questions of:
Senator Brown............................................ 105
Senator Scott............................................ 107
Senator Warner........................................... 107
Senator Schatz........................................... 107
Senator Cortez Masto..................................... 108
Additional Material Supplied for the Record
Letters submitted in support of the nomination of Jelena
McWilliams..................................................... 111
Letters submitted in support of the nomination of Marvin
Goodfriend..................................................... 115
Letters submitted in support of the nomination of Thomas E.
Workman........................................................ 120
(iii)
NOMINATIONS OF JELENA McWILLIAMS, MARVIN GOODFRIEND, AND THOMAS E.
WORKMAN
----------
TUESDAY, JANUARY 23, 2018
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:05 a.m. in room SD-538, Dirksen
Senate Office Building, Hon. Mike Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. This hearing will come to order.
This morning we will consider the nominations of Ms. Jelena
McWilliams to be the Chairperson of the Federal Deposit
Insurance Corporation; Dr. Marvin Goodfriend to be a Member of
the Board of Governors of the Federal Reserve System; and Mr.
Thomas Workman to be a Member of the Financial Stability
Oversight Council.
Welcome to all of you and congratulations to you on your
nominations.
I see friends and family sitting behind you, and I welcome
them here as well today.
We are fortunate to have three highly qualified individuals
to consider for these positions, which are critical to ensuring
a safe, sound, and vibrant financial system and a healthy,
growing economy.
I am particularly excited that one of these nominees, Ms.
McWilliams, is a former staffer of mine, and is no stranger to
the Members of this Committee who have been on this Committee
over the past several years. Ms. McWilliams did outstanding
work while she was at the Committee, and I am fully confident
she will bring the same diligence, work ethic, and intellect to
the FDIC that she showed here.
In addition to working at the Committee, Ms. McWilliams
also worked as an attorney at the Federal Reserve during the
financial crisis, and she currently is the Chief Legal Officer,
Corporate Secretary, and Executive Vice President of Fifth
Third Bank.
These varied experiences have provided her with the
particular background and expertise needed to run the FDIC. As
head of the FDIC, Ms. McWilliams would be in charge of
administering the Deposit Insurance Fund. Additionally, in its
role as a prudential regulator, the FDIC plays a critical role
in ensuring the safety and soundness of the financial system
while also promoting economic growth.
Dr. Goodfriend also has an impressive background, having
worked at the Federal Reserve Bank of Richmond for close to 30
years. He has written extensively about monetary and regulatory
policy, and he testified before this Committee in 2016.
The Fed is currently in the midst of normalizing monetary
policy by winding down its balance sheet and raising interest
rates after years at the zero lower bound.
With respect to regulatory policy, the Federal Reserve is
reviewing many of the rules put in place following the crisis.
If confirmed, I look forward to working with Dr. Goodfriend on
further regulatory and monetary policy improvements.
Finally, we will consider Mr. Workman to serve as the
independent insurance expert on the Financial Stability
Oversight Council. The Council is charged with identifying
risks and responding to emerging threats to financial
stability, which has significant implications for both banks
and nonbank financial companies.
Mr. Workman will be well equipped and is well equipped to
fill the insurance expert role, bringing over four decades of
practical insurance industry experience, including serving as
the head of a major New York State insurance trade group,
representing over 70 life insurance companies.
During my meeting with Mr. Workman, I was encouraged by his
commitment to independence and his desire to facilitate better
collaboration between regulators and with regulated entities.
At this time, I ask unanimous consent to enter into the
record 17 letters endorsing the witnesses. Without objection,
so ordered.
Chairman Crapo. Congratulations again on your nominations
and thank you and your families for your willingness to serve.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman, for convening this
hearing. Thanks to the three nominees. I had interesting
discussions with each of you. Thank you. Thanks for your
willingness to serve the public. Thank you to your families for
being willing to support you during this.
Ten years ago, in January 2008, Bank of America announced
it would buy Countrywide, which at the height of the bubble was
financing one out of every five mortgages in America.
At that time Wall Street thought it was a rare business
opportunity. But it only took Countrywide a few months to go
from a darling of bank analysts to an anchor around the
Nation's largest bank and a threat to our economy. Though
consumer advocates knew that Countrywide was peddling predatory
loans, Wall Street and regulators all failed to see how a large
regional mortgage lender could pose a threat to a $1.7 trillion
bank and to the wider financial system.
That is why we passed Wall Street Reform--to hold watchdogs
and large banks to a higher standard, especially when things
appear to be rosy.
Now, 10 years later, the crisis has faded from memory. Bank
profits are back to record levels. Big tax cuts, especially for
large financial institutions, are on the way. But at the same
time, though the same consumer advocates that warned us about
Countrywide are cautioning us not to roll back the rules, too
many policymakers have forgotten the lessons of the last crash.
I talk often in this Committee about the collective amnesia we
have about what happened a decade ago.
But Ohioans have not forgotten. While banks got bailed out
and executives made off with golden parachutes, families at
kitchen tables in Cleveland, in Mr. Workman's Columbus, in Ms.
McWilliams' Cincinnati, families at kitchen table across Ohio,
were left with impossible choices: Should we pay our mortgage
or our medical bills? Should we buy our prescription drugs or
make our car payment?
Ms. McWilliams, if confirmed, you will be in a key position
to ensure that this never happens again. You will follow in the
footsteps of two dedicated public servants--Marty Gruenberg, a
Democrat; Sheila Bair, a Republican--who led the FDIC through
the most challenging period since the Great Depression. You
know that. I hope you take their counsel. I hope you listen to
their counsel and take it seriously.
You will be charged with stewardship of our Nation's
community banking system. We know that when Wall Street creates
a crisis, small banks are dragged down with a sinking economy.
During the last crisis, we lost community banks across Ohio--in
Lakeview, in Cleveland, in Milford, and Parma and West Chester.
This Committee has heard a number of times my recalling the
year 2007 in the ZIP Code where I live, 44105, in Cleveland,
Ohio, the first half of that year there were more foreclosures
than any other ZIP Code in America. At the same time financial
crises are a large part of why there are so many fewer
community banks serving small businesses and families today
then there were 30 years ago.
Dr. Goodfriend, I appreciated our amiable conversation in
my office, but I am troubled by your long-held views on our
Nation's monetary and regulatory policies. You have questioned
the Fed's mandate to fight unemployment. You have suggested a
regressive tax on the cash in workers' wallets. You have
endorsed legislation that would gut the CFPB and undermine the
institution for which you work.
I am worried that, if confirmed, you would not defend the
independence of our central bank. You seem to be more concerned
with threats of inflation than you are with people losing jobs
and livelihoods.
Mr. Workman, thank you for your service and your long
career in Ohio and your service to our country. Many people
back home expressed their appreciation for your qualifications.
You made quite an impact when you were in Ohio. I am interested
in learning about how you would shift to this new watchdog
role, how you will protect our economy when FSOC is dismantling
our post-crisis reforms. Look at the Treasury reports coming
out of Secretary Mnuchin's office, all about deregulation. From
deregulating AIG, whose toxic credit default swaps amplified
the crisis, to dropping its effort to regulate MetLife, I am
concerned that FSOC is abandoning its mission in only 12 months
of the Trump administration. Hardly clearing the swamp, the
White House looks more like a retreat for Goldman Sachs
executives.
Much like the run-up to the 2008 crisis, Wall Street
profits and household debts are at record highs, and
corporations and the wealthy are enjoying windfall tax cuts.
Meanwhile, working families have not seen a real raise in 15
years. As policymakers, I expect each of you to resist the
collective, all too present amnesia that has settled in across
Washington, DC. I expect you to use your positions to make the
economy work better for American families.
Thank you.
Chairman Crapo. Thank you, Senator Brown.
At this point we will administer the oath. Would each of
you please rise and raise your right hands? Do you swear or
affirm that the testimony you are about to give is the truth,
the whole truth, and nothing but the truth, so help you God?
Ms. McWilliams. I do.
Mr. Goodfriend. I do.
Mr. Workman. I do.
Chairman Crapo. And do you agree to appear and testify
before any duly constituted Committee of the Senate?
Ms. McWilliams. I do.
Mr. Goodfriend. I do.
Mr. Workman. I do.
Chairman Crapo. Thank you. You may be seated.
Your written statements will be made a part of the record
in its entirety, and as I always do, I encourage you to
remember to follow the clock. We have allocated each of you 5
minutes. We would like you to stick to that for your oral
presentation so we have plenty of time for questions from the
Senators.
And, with that, Ms. McWilliams, you may proceed.
STATEMENT OF JELENA McWILLIAMS, OF OHIO, TO BE CHAIRPERSON AND
A MEMBER, BOARD OF DIRECTORS, FEDERAL DEPOSIT INSURANCE
CORPORATION
Ms. McWilliams. Thank you, Senator. Chairman Crapo, Ranking
Member Brown, Members of the Committee, as a former staff
member, it is my privilege to appear before you today. I am
truly honored and humbled to be the President's nominee to lead
the Federal Deposit Insurance Corporation. I am grateful to the
President for this nomination and grateful to Senators Crapo,
Shelby, and Olympia Snowe for the opportunity to serve our
country. I am forever indebted to these public servants for
their trust and confidence.
I am also grateful to my family; they are sitting behind me
today: my father, Obrad Obrenic, a World War II veteran who
taught me that nothing can substitute personal integrity and
hard work; my mother, Branka, who taught me that I can do
anything I aspire to do; my daughter, Maya, whose humility
reminds me every day to be a better person; and my brother,
Nenad, a beekeeper and a great father. Without them, I would
not be here today.
My father was born in 1925 in impoverished Montenegro. He
was born in a kingdom, fought fascism and Nazism in his youth,
survived communism and socialism in adulthood, and is now
finally living out his golden years in a democracy. It was his
difficult
journey that was pivotal in my decision to leave the former
Yugoslavia for a system built upon the rule of law. In 1991, on
my 18th birthday, with $500, I left the former Yugoslavia and
arrived in the United States. Appearing before you 26 \1/2\
years later is nothing short of an American Dream.
The FDIC is an independent agency created by the act of
Congress to maintain financial stability and public trust by
insuring deposits; examining, regulating, and resolving
financial institutions; and managing receiverships.
I believe that my background and professional experience
have prepared me well for this challenge ahead. I currently
serve as the Chief Legal Officer, Executive Vice President, and
Corporate Secretary of Fifth Third Bancorp in Cincinnati, Ohio.
I serve on the bank's executive committee and advise the senior
management and the board of directors on legal, compliance, and
regulatory matters. In addition, I oversee a staff of over 70
attorneys and support staff.
Prior to joining Fifth Third, I had the honor and the
privilege to serve on this Committee under then-Chairman Shelby
and Chairman Crapo in various capacities, most recently as
Chief Counsel and Deputy Staff Director. My experiences on this
Committee and as a staff attorney at the Federal Reserve Board
of Governors have prepared me uniquely for the challenge ahead,
to lead the FDIC in its mission, to protect the financial
stability of the United States, while making sure that consumer
products are available to a broad swath of consumers, focusing
on consumer protection, and making sure that the Deposit
Insurance Fund is equally protected.
Also, having served as a corporate officer of a regulated
entity, I have a 360-degree view of our regulatory system and
the entities that regulate it. If confirmed, I am confident
that I can execute the FDIC's mission effectively.
One of the side effects of the civil war that broke apart
the former Yugoslavia was a total collapse of its financial
system. My parents' meager savings were wiped out overnight
when a local bank closed its doors. Yugoslavia did not have
deposit insurance, and as a result, my then-68-year-old father
went to work as a day laborer. I can assure you that the FDIC's
mission resonates profoundly with me on a personal level, and
if confirmed, I will not take this mission or my duties
lightly.
Thank you.
Chairman Crapo. Thank you.
Dr. Goodfriend.
STATEMENT OF MARVIN GOODFRIEND, Ph.D., OF PENNSYLVANIA, TO BE A
MEMBER, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Goodfriend. Chairman Crapo, Ranking Member Brown, and
Members of the Committee, thank you for the opportunity to
appear before you today. I am honored to have been nominated by
President Trump to serve as a Member of the Board of Governors
of the Federal Reserve System. None of this would have been
possible without the support of my best friend and wife,
Marsha, who is sitting behind me, and without the support of my
sister Miriam, who is watching at home. I would also like to
recognize my parents for developing in me at an early age a
keen interest in public policy.
As the Nation's central bank, the Federal Reserve has many
responsibilities that are at the foundation of our economic
prosperity and well-being. Guided by the goals of maximum
sustainable employment, price stability, and financial
stability, and with lessons from its past, the Federal Reserve
must be alert to future challenges.
I have spent my 40-year career as an economist focused on
central banking in general and the Federal Reserve in
particular. The Federal Reserve Bank of Richmond had been my
primary place of employment for more than 25 years when, in
2005, I joined the faculty of Carnegie Mellon University in
Pittsburgh. I have written about and contributed to the policy
debate from both ``inside'' and ``outside'' the Fed. If
confirmed, I look forward to putting my knowledge and
judgment--developed as both an academic and practitioner--to
work as a Governor and to contributing my voice and experience
to addressing current policy issues. I intend to draw on my
academic and professional experience to promote policies that
would further increase transparency and accountability at the
Fed.
My years at the Federal Reserve Bank of Richmond gave me a
deep appreciation of the role of a regional Reserve banks in
the Federal Reserve System. The regional system encourages
diverse perspectives and innovative thinking. As a Member of
the Board of Governors, I would look forward to hearing and
considering this diversity of views in making policy.
I have also gained policy experience at other Government
and central banking institutions. These experiences ranged from
being a staff economist for the Council of Economic Advisers in
the Reagan administration, to serving in central bank advisory
roles, and participating in external reviews of several central
banks abroad.
My publications use monetary theory, central bank practice,
and Federal Reserve history to investigate policy issues. I
have enjoyed my past 12 years teaching courses in monetary
policy, money and banking, and international trade and finance
at Carnegie Mellon's Tepper School of Business.
I would like to thank the Committee for the opportunity to
appear before you today and for considering my nomination. If
confirmed, I look forward to working with you in the years
ahead. I would be pleased to answer any questions you have.
Thank you.
Chairman Crapo. Thank you.
Mr. Workman.
STATEMENT OF THOMAS E. WORKMAN, OF NEW YORK, TO BE A MEMBER,
FINANCIAL STABILITY OVERSIGHT COUNCIL
Mr. Workman. Chairman Crapo, Ranking Member Brown, and
Members of the Committee, it is my honor to appear before you
today. I am grateful to be President Trump's nominee for
Independent Member with Insurance Expertise of the Financial
Stability Oversight Council, and I thank you and your staffs
for helping me prepare for this hearing.
First, I would like to introduce my wife, Pam, who is here
behind me, and our son, Chris, who is also here today. Pam, my
forever friend and life partner of 52 years, is a professional
artist who paints still lives and portraits of strangers. She
is a lifetime mother and educator as well. Our son, Chris, is a
partner at MSD Capital and a U.S. Army veteran who served as a
tank platoon leader in the First Armored Division. His wife,
Catherine, is a developmental pediatrician and neonatologist.
They have two children and live in New York City. Our daughter,
Sarah, is the mother of four. She is a lawyer and the founder
and leader of Post-Partum Society of Florida helping mothers
suffering with post-partum depression. Her husband, Mark, is a
facial plastic surgeon, and they live in Sarasota.
I would also like to recognize Roy Woodall, the current
Independent Member of FSOC, right behind me here--he is also a
former Kentucky insurance commissioner--and our good friend,
Lee Covington, a former Ohio insurance director.
I grew up in north-central Ohio, 2 miles from the Leesville
Rural School that I attended. My father had a small Chevrolet
dealership, and my mother worked as a mother, secretary, and
bookkeeper. My sister, Elaine, and I both graduated from The
Ohio State University. And after law school there, I served
nearly 4 years as a captain in the U.S. Army Judge Advocate
General's Corps. Then I returned to Columbus to practice law at
Bricker & Eckler, the firm founded by John W. Bricker from
Ohio. He was a three-term Governor and two-term United States
Senator. With my office next to his for many years----
Senator Brown. If I could interrupt, the Vice Presidential
nominee in 1944, causing the only time Ohio did not vote for
the winner in the 1944 Presidential election.
[Laughter.]
Senator Brown. Sorry to interrupt. I would never interrupt
a witness in the middle, but I had to.
Mr. Workman. Thank you, Senator. That is very helpful. I
thought about adding that, but, you know, there is a limitation
on time.
Chairman Crapo. We will give you a few extra seconds.
[Laughter.]
Mr. Workman. OK, good. Thank you so much.
With my office next to his for many years, I am certain
that he would be delighted that I am before you today.
The first question I was asked at the firm was: Would you
do some insurance work? I spent the next 26 years doing
insurance regulatory, legislative, and business-related work
including many areas--formation of companies, licensing,
admission, sale, acquisition, rehabilitation, liquidation,
reserving, State taxation, agent licensing, governance,
underwriting, claims, admitted and non-admitted assets, and
more. I also represented the Association of Ohio Life Insurance
Companies and developed the firm's insurance law practice.
I served on the Board of the Ohio Farmers Insurance Company
for 24 years. Formed in 1848, it is a leading Midwestern,
multi-line property/casualty insurance company. I chaired the
Governance & Nominating Committee, served on the Compensation
Committee, and twice served on the committee to select a CEO.
In 1999, I was recruited to become President and CEO of the
Life Insurance Council of New York. For the next 17 years, I
was
involved in nearly all regulatory and legislative issues
related to life insurers in New York State and, to a large
degree, nationally.
With 43 years of working with insurers, regulators, and
legislators in New York, Ohio, and other States, I have, in
effect, prepared to be the FSOC Independent Member with
Insurance Expertise all my life. I know insurance and how vital
it is to families and businesses and to our economy. I have
great respect for insurers and the regulators and legislators
who wrestle with insurance issues. They all share the same
objectives: to assure promises are kept and customers are
treated fairly.
The purposes of FSOC are to identify risks to the stability
of the U.S. economy, to promote market discipline, and to
respond to emerging threats. The Independent Member exists to
make sure someone with substantial insurance knowledge takes
part in FSOC deliberations affecting insurers and insureds. I
am grateful for the support of Roy Woodall, and I aspire to
perform this duty as masterfully as he has.
I am also grateful to report that yesterday the officers of
the National Association of Insurance Commissioners authorized
me to tell you that they believe I am a well-qualified
candidate for this position, and they look forward to working
with me.
I would greatly appreciate this opportunity. If confirmed,
I would be dedicated to the highest level of honorable public
service. Thank you, Mr. Chairman, Ranking Member Brown, and
Members of the Committee. I look forward to answering any
questions you may have.
Chairman Crapo. Thank you, Mr. Workman.
I will start the questioning, and first I would like to go
to you, Ms. McWilliams. Improving economic growth has been one
of the key priorities for Congress over the past year, and one
way to improve economic growth is by addressing areas where
financial regulations can be improved. Financial regulations
should promote a
vibrant, growing economy while still assuring a safe and sound
financial system. If confirmed, what will be some of your key
priorities?
Ms. McWilliams. Thank you, Senator, for that question. If
confirmed, I would like to focus on the regulatory burden on
community banks. There has been a tremendous trend in
consolidation of the community banking sector over the past
three decades, and especially since the financial crisis. I
would like to also focus on de novo charters for community
banks. The only way to aid in the formation of the community
banking sector and its expansion is to create more banks. From
2000 to 2008, the FDIC has chartered a number of FDIC-insured
de novo banks, and since 2009, there have been only eight. That
is a problem because we lost hundreds and thousands over the
last 30 years.
Additionally, I would like to focus on the cybersecurity
issues and how they impact the banking sector in general, and
especially community banks. And I would also like to take a
look at how some of the international regulatory framework,
like Basel regulations, affect community banking sector.
Chairman Crapo. Thank you very much.
Dr. Goodfriend, what are some of the ways to improve the
transparency, accountability, and communications at the Federal
Reserve?
Mr. Goodfriend. Thank you for the question. There are three
ways in which I think transparency could be improved. One of
them would be--and we can talk about this in more detail--
around the stress tests. The second one would be around a
reference rule which we might consider. And the third would be
around what I call the boundaries and clarification of
resolution policy.
Chairman Crapo. Well, thank you. And if we have time, we
will get into that. But we are limited to 5 minutes up here
ourselves, so I want to move on to Mr. Workman.
In your opening statement, Mr. Workman, you stated, ``The
Independent Member exists to make sure someone with substantial
insurance knowledge takes part in FSOC deliberations affecting
insurers and insureds.'' Can you discuss in more detail how you
envision your role on FSOC and what type of expertise you bring
to the Council?
Mr. Workman. Mr. Chairman, I would begin by just saying
that the first duty in my view is in this role to be
independent, to be truly independent, and also in that role to
be working diligently for the public interest. My only interest
would be the public interest. Having 40 years of experience in
insurance, I can put that to work in the interest of Americans.
As far as steps that I would like to take, I believe that
there is a continuing need for more transparency in the
process. I recognize that much of the activity of FSOC cannot
be public. It has to be kept private. However, I think more
knowledge among regulators and among the insureds and insurers
is helpful.
Also, I believe more engagement with the primary
regulators--and in America, we are talking about State
insurance regulators--more collaboration with them and with the
entities that are under consideration, and also I think
attention to particularly in the area of designations,
considering a cost-benefit analysis.
And then, last, what occurs is I think an overarching
interest in promoting a level playing field in the marketplace.
Chairman Crapo. Well, thank you, and I will finish with
you, Mr. Workman. I have got about 30 seconds left. But as you
know, FSOC has designated four nonbank financial companies as
systemically important financial institutions and subsequently
voted to rescind designations on two of those companies. In
November, the Treasury Department published a report with a
series of recommendations to improve the designation process.
What are your thoughts on the current designation process
for nonbank SIFIs? And I apologize, you are going to need to do
that in about 15 or 20 seconds.
Mr. Workman. Sure. Mr. Chairman, I think the key point I
would make is that the Treasury put forth the concept of
considering an activities-based or an industry-based approach,
looking at products and activities. That is something that the
IAIS is also doing. I think that is an area that does deserve
consideration.
Chairman Crapo. Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
Mr. Goodfriend, you have previously dismissed financial
regulations saying, ``The only way that consumers' households
can be protected against finance, against purchasing consumer
products, against anything in the market is by being demanding
shoppers. The whole philosophy of regulation,'' still your
words, ``seems to be that the Government can protect consumers
from themselves. I think that is wrong. If we turn that around,
that would do a lot to move us in another direction from the
European Socialist model that the Government needs to be our
protectors.''
So I guess you are saying we should let demanding shoppers
decide which banks are sound and which are the next
Countrywide. So does that mean you think that the job Ms.
McWilliams, the agency she has been nominated to is just a bad
idea, should not exist?
Mr. Goodfriend. Let me start again with what I think about
these matters. I think protection of consumers is incredibly
important, not only for consumers but for the market economy.
And what I meant in that context was that regulation, to the
extent that it focuses on firms, which is a good thing to
create standards and----
Senator Brown. Well, I am not going to let you filibuster
this. I am sorry but--and you can tell me your whole
philosophy. But I am reading your words, and you are saying
that consumers should be demanding shoppers. So does that mean
that the FDIC is simply not necessary because consumers should
figure out which of these banks are about to go under?
Mr. Goodfriend. Absolutely not. Consumers need to be
informed. And the other half of regulation is informing
consumers about the products that they are choosing between.
That was the point that I was making in that comment. And
consumers----
Senator Brown. OK, well, do you think--I am sorry. Do you
think that we are on a path to the European Socialist model in
this country?
Mr. Goodfriend. No, I do not.
Senator Brown. OK. Because it sounds like you might sort of
think that. Maybe this nomination has illuminated some things.
If we gut regulations and consumers are supposed to use
their purchasing power to demand safer financial products,
shouldn't we prohibit mandatory arbitration agreements that
deny consumers their day in court?
Mr. Goodfriend. So, if confirmed, as a Governor I will look
into that matter. It is not something that I have thought
about.
Senator Brown. OK. In 2011, you told the Wall Street
Journal that, ``Inflation scares are likely to recur and become
more severe.'' You remember, amnesia around here aside, just 2
years earlier when President Obama took office we were losing
800,000 jobs a month. It began to turn around with the auto
rescue in 2010. We have had month after month, consecutive
months, and through this first year of the Trump administration
of economic growth. So that was the state of the economy. So
keep that in mind when you said--and I know you have studied
the risks and drivers of inflation. But you stated also many
times you believe the Fed would be better off with a single
mandated focused just on inflation rather than a dual mandate,
which includes full employment. In a May 2012 interview, you
called the idea of getting the unemployment rate, then at 8.1
percent, to below 7 percent a ``Herculean task that could lead
to rising inflation that would be disastrous to the economy.''
At the end of 2017, unemployment was 4.1 percent. The inflation
rate remains below 2 percent.
Why were you so wrong so many times?
Mr. Goodfriend. Senator, throughout this period of the last
10 years, I have been commenting on monetary policy. I am not
going to--the essence of the Federal Reserve's position to
stimulate the economy was based on years of generated
credibility for anchoring long-run inflation. That credibility
was critically important in order for the Federal Reserve to
keep stimulus in place for the last few years without
generating inflation until we brought the unemployment rate
down to something in the vicinity of----
Senator Brown. So would they have done so well if they had
listened to your warnings that we should not have a dual
mandate, we should only focus on inflation? Would this economy
be in this good a shape if they had listened to Marvin
Goodfriend during this period?
Mr. Goodfriend. The questions that I was answering were
academic. The dual mandate is large--is very well--it works
because the two goals of low unemployment and low inflation are
complementary, and that is exactly what was the case in the
last----
Senator Brown. That is what you say now, but you say they
were academic. You were in an academic setting. But now you are
in a policymaking setting if you are confirmed, and you still
seem to hold this view--or do you reject that view that there
should not be a dual mandate? Will you say to us absolutely
there should be a dual mandate with equal emphasis on inflation
and unemployment?
Mr. Goodfriend. I absolutely agree to that. In fact, I talk
about inflation because the key to getting the unemployment
rate down over the past 40 years in the United States has been
credibility for low long-run inflation, and that again is why
we were able to keep stimulus in place for the last 5 years, 10
years.
Senator Brown. OK. Last question. Discussing inequality,
you said you need to at all times talk about what is good for
the country as a whole. You cannot worry about how to help
people who have less unless you try to make the pie as big as
possible. It is a fairly easy question for me to answer about
basic indifference or unconcern about addressing inequality. We
know the recent tax cuts, 81 percent of the recent tax cuts go
to the wealthiest 1 percent in this country. Doesn't your view
have the potential to make inequality worse?
Mr. Goodfriend. Senator, I do not believe the things that I
say about monetary policy have bearing on income inequality.
What the Federal Reserve wants to do is to create the lowest
unemployment rate that is consistent with price stability. That
is what our tools are designed to do, and that is what I would
do if confirmed as a Governor.
Senator Brown. Thank you, Mr. Chairman.
Chairman Crapo. Senator Shelby.
Senator Shelby. Thank you. Mr. Chairman, I think all three
of these nominees are eminently qualified by their experience
and education and everything. Of course, we both know and a lot
of us know more than a little bit about Ms. McWilliams, who
served ably, honorably, in this Committee. Welcome back.
Ms. McWilliams. Thank you.
Senator Shelby. I also congratulate on your nomination
because you are going to take a big pay cut. All of you will.
Ms. McWilliams. I am used to it, Senator. Thank you.
[Laughter.]
Senator Shelby. She worked for us, both of us, so your
money was not forthcoming. I can tell you that.
I have long been an advocate, as, Ms. McWilliams, you know,
of cost-benefit analysis--Senator Crapo got into that a minute
ago--for all Government rulemaking and regulations. Right now
we are focused on the financial regulation authority. How
important is cost-benefit analysis in the decisions that come
before the FDIC? I am going to pose this to all three nominees.
Ms. McWilliams?
Ms. McWilliams. Thank you, Senator, for that question, and
thank you for your words.
I believe the cost-benefit analysis is crucial for an
agency, and here is why. While I was at the Federal Reserve, we
worked on consumer protection regulations, and if we did not do
an appropriate cost-benefit analysis, we would not know how a
consumer would in the end be affected by the regulation. And I
was taught at that point in time that consumer credit is like a
balloon. If you squeeze it here, it will come out there. And
before you squeeze it, you better know who is going to pay for
it, how it is going to come out, and are you comfortable with
the outcome. So I do believe that proper cost-benefit analysis
benefits the consumer as well as the ability of the financial
institutions to provide the lowest-cost products and services
to their base.
Senator Shelby. Dr. Goodfriend, the Federal Reserve, as you
well know, we have been talking about cost stability and full
employment, stability of the monetary system and full
employment. But the Federal Reserve is also a huge bank
regulator. What about your view on cost-benefit analysis?
Should it be done? And should it be done right? And should it
be transparent, too?
Mr. Goodfriend. Absolutely, I think cost-benefit analysis
is important to decide which regulations to be put in place,
which are deserving, which are not. I think the--my impression
is that the Federal Reserve has moved in this direction, and if
I am confirmed as Governor, I would help it move in this
direction even further.
Senator Shelby. Mr. Workman, your work will be a little
different from theirs, but in some ways overlap. What about
cost-benefit analysis?
Mr. Workman. Yes, Senator, that is, I think, a critically
important element of the analysis that I would want to make,
and hopefully the Council would as well.
Senator Shelby. Dr. Goodfriend, we talked about this a
little earlier. Could you elaborate before the Committee today
how the modern economy may have changed the way global
indicators are viewed? And could you describe your views on the
Federal Reserve's objective regarding price stability?
Mr. Workman. Yeah, you know, the global economy has become
much more integrated over the last 10, 20 years, and many
people think that that may impact the Fed's ability to
stabilize the U.S. economy. My view is that that is not really
the case. We have what we call a ``flexible exchange rate
system,'' which I believe gives the Federal Reserve the
independence to act on domestic issues irrespective of
globalization, at least for monetary policy and price
stability.
Senator Shelby. Mr. Workman, I am trying to move on because
I have just got a few more seconds in my time, but do you agree
with me that banks are one entity, insurance companies are
another, their structure is different, their role is different,
their obligations are different and so forth?
Mr. Workman. Yes, Senator, they are functionally different.
They have a lot of similarities, of course. However, the
significant difference is the duration of the risk. For
example, a life insurance company could have 40 years, 50 years
of bearing risk, and it is not as able to be subject to a run
much like a depository bank would.
Senator Shelby. Should that all be taken into account when
you are making a designation?
Mr. Workman. Senator, indeed, and I think that is part of
the role that I would need to play.
Senator Shelby. You will be playing.
Mr. Workman. Yes.
Senator Shelby. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Dr. Goodfriend, during a hearing last May, you called the
Federal Reserve's dual mandate ``incoherent,'' and you
suggested eliminating the full employment mandate. You said
that, ``Whether or not unemployment is 1 percent or 20 percent
over a sustained period of time is largely due to factors
outside of monetary policy control.''
However, in a speech last June, Governor Powell said, ``The
problems that some commentators predicted have not come to
pass. Accommodative policy did not generate high inflation or
expensive credit growth; rather, it helped restore full
employment and return inflation closer to the 2 percent goal.''
So do you disagree with Governor Powell's assessment?
Mr. Goodfriend. No, I do not.
Senator Menendez. And so then your analysis was incorrect
then?
Mr. Goodfriend. No. I would like to say that I regret the
word ``incoherent.'' What I was talking about was in the long
run it is inconsistent for the Federal Reserve to control both
employment and inflation. The Federal Reserve has agreed, most
central bank economists agree that over the long run central
banks can control only inflation. But that is not a statement
against the dual mandated. Again, what I believe is true is it
is critically important to anchor long-run inflation in order
to get the capacity for monetary stimulus to drive the
unemployment rate down to the natural rate or to the vicinity
of full employment.
Senator Menendez. But let me just take--let me follow up on
Senator Brown's questions about your Bloomberg quote when you
said: ``It is really doubtful whether or not the Fed can
achieve 7 percent unemployment. Even if the Fed did succeed, it
would give rise to a rising inflation rate in the next few
years, which would be disastrous for the economy.'' However,
today--that is your quote. I am taking it straight from
Bloomberg. However, today unemployment is 4.1 percent,
inflation is still running below 2 percent, despite the fact
that the Fed waited more than 3 years after that interview to
increase rates.
So knowing what we know today, do you honestly still think
the Fed should have followed your advice in 2012 and raised
rates before inflation neared its target?
Mr. Goodfriend. No, I do not. But those statements are out
of context. What I was warning about was in the past the Fed
has had trouble getting unemployment down, and the reason was
we had zero interest, and we had lost the stimulative power,
the ordinarily stimulative power of monetary policy. My point
was in the context of that conversation, and I----
Senator Menendez. Can you point out any--you know, with all
due respect--and I am sure academically there is no question
that you are a very bright person. But how am I not to hear
everything you have said in the past and then what you are
saying today as a confirmation conversion about the dual
mandate obligation of----
Mr. Goodfriend. Again, it is not my--what I am saying is
that the history and thinking about monetary policy has said if
we want to get unemployment down to the natural rate to the
vicinity of full employment, we as central banks need to
stabilize long-run inflation but----
Senator Menendez. Can you give me----
Mr. Goodfriend. That is all I am saying.
Senator Menendez. Can you give me anything, show me, direct
me to anything that you have said in the past that suggests
that you support and affirm the dual mandate of the Federal
Reserve?
Mr. Goodfriend. I can show you some publications in which
the point of my work was to say we--our goal is to get
unemployment down to the natural rate, and, therefore, I am
supportive of a long-run inflation target. I have worked on
that for decades. It has proven to be the case that that has
worked in the last decade, and I will stand by that. Whether or
not I have talked about the dual mandate, I totally support it.
In fact, the reason for stabilizing inflation over the long run
is exactly to make the economy operate at full employment.
Senator Menendez. All right. Let me turn to Ms. McWilliams.
The Administration is actively searching for ways to diminish
banks' responsibilities to serve those very communities through
undermining the Community Reinvestment Act, something that many
of us strongly support. Shouldn't the Administration be focused
on strengthening, not weakening, a tool that ensures banks are
held accountable for serving low- and moderate-income
communities? And what assurances can you give us that the FDIC
under your leadership will guarantee banks are meeting the home
mortgage, small business, and other credit needs of low- and
moderate-income communities?
Ms. McWilliams. Senator, thank you for that question. The
Community Reinvestment Act is the law of the land, and it is
the duty of the Federal Deposit Insurance Corporation to follow
the law of the land. The unbanked and underbanked communities
are a vital part of our economy, and I can tell you for a fact
that a number of banks are seeking opportunities to bank those
communities not only for the purposes of the CRA, but also
because they need to expand their customer base, and that is
the organic way to grow the company.
I can also assure you on a personal level, as somebody who
was a part of the low- and moderate-income community, that the
mission of the CRA resonates profoundly with me on a personal
level as well, and I can give you my commitment that I will
ensure that the FDIC fully executes the mandate of the CRA.
Senator Menendez. Thank you for that.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Toomey.
Senator Toomey. Thanks, Mr. Chairman.
Dr. Goodfriend, would you agree with the characterization
that a stable currency--in our case, obviously the dollar--a
long-term stability in the currency is a very, very important
condition for maximizing employment?
Mr. Goodfriend. Absolutely.
Senator Toomey. And, therefore, if you had a sustained
policy where you deviated from that stability, for whatever
reason, even if it were for a good intention like maybe
lowering the unemployment rate, but if in the process you
undermined the stability of the dollar, wouldn't it actually be
counterproductive for employment?
Mr. Goodfriend. I do believe that that is true.
Senator Toomey. The last time in the United States that we
had an extended period of very high inflation I believe was the
1970s and early 1980s. What was the unemployment rate like
during that period?
Mr. Goodfriend. On average, 2 or 3 percentage points higher
than it has been since price stability.
Senator Toomey. Yeah, so I think it is an important point
that we should all keep in mind. Price stability is a necessary
condition for maximizing employment.
With respect to the recent history of the Fed's behavior,
you know, I have been concerned about what the Fed has done,
the completely unprecedented history of the monetary policy,
including monetizing the debt of our Government, which I think
is a fair characterization, increasing our balance sheet to
over $4 trillion. And it is true, there has been no recent huge
run-up in inflation, but can anybody say with certainty that we
are not right now living with some asset prices that could be
vulnerable? Sovereign debt prices are pretty hard to explain,
actually. Equity prices are extremely high, some real estate
markets. Can you be certain that there are no bubbles out
there?
Mr. Goodfriend. No, and what I hope to do, if I am
confirmed as Governor, is worry about exactly this kind of
issue and to try to do the best I can to guide interest rate
policy on the basis of incoming data, to balance the goals of
sustainable maximum employment, which is kind of where we are,
keeping inflation low, and also worrying about financial
stability because that is an equally complementary part of the
Fed's mandate.
Senator Toomey. And I would also like to suggest one other
consideration, which is just that it strikes me as a dangerous
idea for the central bank to be purchasing assets like
mortgage-backed securities, which end up being an allocation-
of-credit decision, which should be left to the market and not
to the central bank, in my view.
Mr. Goodfriend. I agree with that, and the Fed, to my
understanding, has a policy of aiming to get its balance sheet
back to what we call ``all Treasurys.''
Senator Toomey. All right. Thank you.
Ms. McWilliams, thanks for taking the time to have a chat
recently. I enjoyed our discussion in my office. I wanted to
follow up on the issue that you raised regarding de novo banks.
Ms. McWilliams. Yes.
Senator Toomey. As we discussed briefly, it used to be
routine in America that 100 or more community banks would be
launched every year, and it struck me as a wonderful mechanism
to bring credit to growing communities wherever it was needed.
But as you pointed out, for something like the last 9 or 10
years, I think we have averaged about 1 per year as opposed to
over 100 per year.
Now, some have suggested that is just because interest
rates have been low, and I will concede that that may have
contributed to discouraging new startups. But I am also
convinced, as someone who has a community banking background,
that the regulatory burden has also contributed to the lack of
new banks.
Is that your view? And do you have any specific ideas on
how we might be able to relieve that burden, keeping in mind
that these institutions are not systemically important even to
their community, much less the country?
Ms. McWilliams. Senator, thank you for that question, and
thank you for our discussion as well. I absolutely agree with
you that the de novo charter banking has been an issue that has
been on my mind for a long time because we need to replenish
the banks that closed down because of various circumstances.
I do believe that the regulatory burden plays a key
component in the consolidation of the community banking
industry, and if confirmed, that is something that I would like
to take a look at. Especially, I would like to take a look at
the capital and liquidity requirements on community banks and
understand how the Basel framework applies to those banks. A
number of Basel requirements are not applicable to community
banks, but, nonetheless, while I served on this Committee, I
have heard from a significant number of community banks that
the Basel requirements do apply to them; even if it is not by
regulation, it is by a trickle-down effect.
So I can commit to you that it is something that I will
willingly and gladly take a look at and take under
consideration if confirmed as Chair.
Senator Toomey. Thank you very much.
Mr. Chairman, thank you, and I would just observe I think
we have three terrific nominees here.
Chairman Crapo. Thank you, and I agree.
Senator Tester.
Senator Tester. Thank you, Mr. Chairman.
The first question is for you, Ms. McWilliams. The FDIC
completes the EGRPRA process last year. A portion of that
review talked about synchronization and streamlining, and I
believe it is key that regulators do work together to make sure
that regulations are not duplicative. It is a major complaint
that I have heard from my community banks.
As FDIC head, what would you do to ensure that the
examination process is modernized and that duplication is
eliminated as much as possible?
Ms. McWilliams. Thank you, Senator Tester, for that
question. The FDIC Chair also sits on the Federal Financial
Institutions Examination Council, which is a great venue to be
able to streamline banking examination, both in terms of the
relaxation of duplicative requirements by different agencies
and to provide uniformity in how prudential banking regulators
approach examination and regulation of banks. We need to have
uniformity. The Federal Deposit Insurance Corporation has the
largest number of community banks under its primary supervision
among the three regulators, but the Federal Reserve, if I
recall correctly, has about 800 and the OCC has a significant
number as well. So it is crucial that they have uniform
standards that are applicable across all three banking
regulators.
Senator Tester. And I have got it, and you are right. And
so as FDIC, you would be encouraging communication. How would
you do that?
Ms. McWilliams. Well, I would want to take a look at what
has been done at the FFIEC in terms of uniformity and
standardization of the examination process and regulatory
approach to community banks, as well as have the FDIC, if
necessary, go through the interagency working group to better
understand what can the agencies do.
Senator Tester. So you would commit to reducing duplication
where you can without harming safety and soundness of
financial----
Ms. McWilliams. Absolutely, Senator.
Senator Tester. OK. Mr. Workman, this was addressed a
little bit earlier about transparency with the FSOC. The FSOC
underwent a number of changes last Congress. Those included
notifying companies when they moved between stages, making
public the calculation for Stage 1 evaluation, providing more
information to companies as they go through the annual review.
I assume that you agree with those changes?
Mr. Workman. Mr. Chairman, those sound very good. I am not
absolutely certain of each one, but they sound like they are
certainly consistent with my view, yes.
Senator Tester. So once you get into this position,
assuming you will be confirmed, and you look at these changes
and you think they are positive, do you think it would be
necessary to codify the changes?
Mr. Workman. Mr. Chairman and Senator, that is sort of
slipping into the area of policy and congressional
responsibility, so----
Senator Tester. You are right. You are not going to do it.
We would do it. But assuming they work, I mean assuming you
think they are good--I do not want to put any words in your
mouth, but assuming that they are a step in the right
direction, because I think the process does need to be as
transparent as possible, your support for codifying those laws
could make a difference.
Mr. Workman. Senator, it is something I would certainly
give serious consideration to.
Senator Tester. All right. There has been much discussion
on on-ramp and off-ramp for companies as they go through the
FSOC process. Would you share your thoughts with me on that, if
you think it is a good idea to have on-ramps and off-ramps, and
where you would apply them?
Mr. Workman. Yes, Senator, I do believe that, in fact, this
has been articulated in a recent report of Treasury on
designations and the deliberations of FSOC. And I think it is
important for entities that are being considered for
designation and those entities that are already designated,
that they have the opportunity to understand exactly what the
Council is thinking and have good collaboration and engagement.
Senator Tester. Thank you for that.
Dr. Goodfriend, I will just keep this question very, very
simple, and it is an easy one. Do you believe that we need a
Government guarantee and the continuing existence of a 30-year
fixed-rate mortgage for housing purposes?
Mr. Goodfriend. I think the 30-year mortgage is a very
popular and useful instrument. I do not believe it needs a
Government guarantee. Banks should be regulated and the economy
should be stabilized in a way that these mortgages work.
Senator Tester. Do you think banks would put a 30-year
mortgage out without a Government guarantee?
Mr. Goodfriend. To the extent that we have in place
Government guarantees, if you want to call it that way, it is
something that the Congress needs to decide. A Government
guarantee is not a matter for the Federal Reserve. So I am
happy with that at this point.
Senator Tester. OK. Thank you.
Thank you, Mr. Chairman.
Senator Brown. [Presiding.] Senator Heller.
Senator Heller. Thank you, Mr. Chairman, and I appreciate
our list of panelists. I appreciate you being here, and I am
very grateful to your families for lending you to this process.
And I do want to tell the Chairman how pleased I am that we
have such a highly qualified group of panelists with us today.
There was no State that got hit harder--and I have said
that numerous times here on this Committee--during the economic
meltdown than the State of Nevada, both in housing and in
banking. We had at one point 60 percent of all the homes in
Nevada underwater, and we lost half of our community banks in
our State.
Fortunately, that has bounced back. Our underwater is 10,
15 percent, and yet we still do not see a growth of community
banks in our State.
There has been a massive consolidation of banking in the
State, and it has led and coincided to the fact that Nevada is
probably one of the most underbanked or unbanked States in the
country.
That brings me to you, Ms. McWilliams, and we talked about
this in our offices about ILCs. The industrial loan companies
have played an important role in the State of Nevada. I think
there has been a real lack of leadership under the FDIC under
previous leadership. I am hoping that under your watch that
will change.
Give me your thoughts on ILCs and the expansion of them.
Ms. McWilliams. Thank you, Senator, for that question. If I
can first tell you that I used to live in Stockton, California,
which, during the foreclosure crisis, when 1 in 33 homes were
foreclosed in the United States, had about 1 in 11, so I fully
understand the impact of the crisis and the foreclosures in the
State of Nevada.
With respect to the ILCs, the law of the land is that the
ILCs exist. It is a statutory mandate. And the job of the FDIC
is to give each ILC application due consideration and, if
appropriate, proceed with the approval.
I do not know how much work has been done on the ILCs in
the last few years. I assume not a lot because I have not seen
any new charters. I have a list of the ILC chartered
institutions, and if confirmed, I am happy to work with your
office to understand where the holdup has been in the approval
process.
Senator Heller. And I appreciate that. Do you share the
same viewpoint of former Chairman of the FDIC that ILCs pose no
greater safety or soundness risk than any other charter type?
Ms. McWilliams. I do.
Senator Heller. OK. And will you encourage new applications
for ILC charter?
Ms. McWilliams. I will certainly make sure that the FDIC
moves swiftly in due consideration, and if that encourages more
applicants to send the applications in, then I guess my answer
is yes.
Senator Heller. If an ILC meets FDIC standards, will you
support the approval of that ILC charter?
Ms. McWilliams. If it means the ILC standards as currently
set up by the FDIC, I believe there should be no obstacles in
the application program.
Senator Heller. Thank you. Moving to community banks, you
talked about regulations. Senator Toomey proposed to you what
you would do to make necessary changes to allow and to help
support and encouraging the chartering of these community
banks. And you also talked a little bit about Basel
requirements.
What would you do to stop the consolidation, the
consolidations that have been occurring amongst these small-
and mid-sized banks?
Ms. McWilliams. Senator, I am actually quite concerned
about the consolidation, especially in rural counties.
Currently, out of 1,049 rural counties in the United States,
625 do not have a locally chartered community bank. And I
believe that 35 counties do not have a single banking presence,
which is quite concerning because you have small businesses and
consumers who have to drive 20, 30, 40 miles to the nearby
county to get small dollar bills and other banking services. So
it is something I would like to take a look at.
In terms of what specifically I would do, I would like to
take a look at how the FDIC has structured the regulatory
framework around capital and liquidity requirements for small
banks. Some of the requirements, I believe, are not applicable,
and I would like to revisit them within the statutory mandates
currently set up. One example I can give you is the Volcker
Rule. Community banks do not do proprietary trading.
Nonetheless, they have to do compliance, which, for a bank of
the size of my current employer, is quite comprehensive. I can
only imagine for a bank that has $500 million in assets and two
or three people in the compliance department, it is probably
nearly impossible to do an appropriate amount of work to
respond to the regulatory burden. So that is something I would
like to focus on.
Senator Heller. Ms. McWilliams, thank you, and to our
panelists, again, sorry I did not get to ask questions, but I
want to thank you again for being here and for showing your
support.
Mr. Chairman, thank you. My time has run out.
Senator Brown. Senator Warren.
Senator Warren. Thank you, Mr. Chairman. And thank you to
each of our nominees for being here and for your willingness to
serve.
Dr. Goodfriend, as you know, the Fed has a dual mandate to
maximize employment while keeping inflation in check. And if
you are confirmed as a Fed Governor, then one of your main
responsibilities will be to set interest rates that satisfy
that dual
mandate, which means you are going to need to make accurate
projections about inflation. So I think it is time to take a
look at your track record on how you have done making inflation
projections in the past.
In July 2011, you told the Wall Street Journal that the Fed
should not be reluctant to ``move interest rates up
preemptively against inflation at this stage in the business
cycle.''
You also said, ``The Fed needs to restore positive real
short-term interest rates fairly soon.'' That was 2011.
``Otherwise, higher trend inflation and inflation scares will
force the Fed in the future to more than reverse any short-run
gains in employment that it might otherwise achieve in the
present.''
Now, we are almost 7 years past that statement. Meanwhile,
real short-term interest rates are still negative, and
inflation is undershooting the Fed's 2-percent target. So do
you agree that you got that projection wrong?
Mr. Goodfriend. Absolutely.
Senator Warren. OK. That is good. Let us take a look at
another one. Senator Menendez raised this, but I think it is
worth repeating. In May 2012, you said:
Even if the Fed did succeed in the Herculean task for getting
the unemployment rate down to 7 percent, we could never be sure
that the unemployment rate was below what we call the `natural
rate,' in which case it would give rise to a rising inflation
rate in the next few years, which would be disastrous for the
economy.
Now, as you know, the Fed did succeed in getting the
unemployment rate below 7 percent, and in the 5-plus years
since you made that statement, the unemployment rate has
steadily fallen, and now it is about 4 percent. Meanwhile,
inflation remains below the Fed's 2-percent target.
So I did not hear a clear answer in response to Senator
Menendez, so let me just ask it directly. You got that one
wrong, too, right?
Mr. Goodfriend. Let me remember the context. The context
was, I think, for this comment that I was saying if you look at
only the unemployment rate and not the inflation rate, you
could make a mistake. But as long as the inflation rate was
low, I would be in favor of maintaining monetary stimulus.
Senator Warren. Well, but you actually said just the
opposite in the past, and you have talked about preemptively
raising interest rates. You know, I am concerned about this
because these wrong predictions are not outliers for you. They
have been part of your overall approach to monetary policy,
which effectively ignores the Fed's full employment mandate and
instead focuses solely on speculative concerns about inflation.
This matters because focusing only on inflation does enormous
harm to the economy and to working families.
You know, you were talking about raising interest rates
back in 2011 when the unemployment rate was 9 percent. A year
later you worried about the Fed letting unemployment drop below
7 percent. You know, the difference between that 9 percent
unemployment rate or that 7 percent unemployment rate, the 4
percent unemployment rate we have got now is millions and
millions of jobs, millions of families that have those jobs and
are out there working and able to support themselves and their
families.
I think based on the kind of judgment that you have
demonstrated, American families are very lucky that you were
not on the Fed Board over the past several years, and I think
it would be a mistake to put you on the Fed Board now.
Thank you, Mr. Chairman.
Senator Brown. Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman. Congratulations
to all three of you.
Would any of you disagree with the assertion that we are
excessively regulating community banks, defined as banks of $10
billion or less of assets? Would any of you disagree with that
assertion?
Ms. McWilliams. No, Senator.
Mr. Goodfriend. Not at all.
Senator Kennedy. OK. Dr. Goodfriend, do you believe at this
moment in time we have financial institutions in America that
are too big to fail?
Mr. Goodfriend. I hope not, and I think given the progress
we have made----
Senator Kennedy. Well, I hope not, too, but do you believe
they exist?
Mr. Goodfriend. No, I really do not.
Senator Kennedy. OK. What do you think would happen or
should happen if, God forbid, JPMorgan Chase knocked on
Secretary Mnuchin's door this afternoon and said, ``We are
about to go under, and I need money, I need liquidity''? What
do you think would be Government's proper role? And what do you
think should be Government's proper role?
Mr. Goodfriend. Let me say, Senator, that I think the
issue--you have put your finger on a critical issue, and I
would hope that the procedures that we put in place where you
would try to go for bankruptcy first and then only to come to
the Government with some kind of orderly liquidation have been
clarified, and the boundaries of responsibility have been put
in place already----
Senator Kennedy. Do you think they have been?
Mr. Goodfriend. Frankly, I think there is reason to go look
again and make sure that they are in the right place. This is
such an important issue----
Senator Kennedy. I am trying to understand. Not to
interrupt, but do you think they are in the right place?
Mr. Goodfriend. You know, I have not looked at the details
of the proposal, of the clarity, of boundaries, but should I be
confirmed as Governor, this would be one of the issues that I
would like to make sure we are in the right place, because
without clarity, without boundaries, we do not have
accountability, and that is how we got the Great Recession.
Senator Kennedy. OK. Do you believe in quantitative easing?
Mr. Goodfriend. Well, it depends when and where it was
used. In the crisis----
Senator Kennedy. Well, let me put it this way. Do you think
the quantitative easing pursued by the Fed over the last few
years, in light of the Great Recession of 2008, was
appropriate?
Mr. Goodfriend. I think so-called QE1 and 2, that was
during the crisis, and given that we had not had the clarity
beforehand that I just spoke of, I think it was OK to do that
to save the system. QE3 was not an emergency, and it was more
or less used as a routine tool for stabilization. I think that
was not called for.
Senator Kennedy. OK. Why is inflation so low?
Mr. Goodfriend. It takes some time to talk about that, but
basically----
Senator Kennedy. How about 30 seconds?
[Laughter.]
Mr. Goodfriend. You know, I think it is a puzzle, first of
all, around the world, so I would not be here and be able to
give you the answer. But one reason is that the central banks
around the world have put in place a credibility for rising
inflation that has cutoff the inflation tail, if you will, and
plus central banks with policy that is near zero interest have
lost some of the punch of monetary policy in that direction. So
that would be my short answer.
Senator Kennedy. If the Federal Reserve did nothing, where
do you think inflation in the United States would be a year
from now?
Mr. Goodfriend. My view is that inflation is slowly rising,
the Fed is more or less on the right path going forward, and I
have every reason to think that we could get to 2 percent,
which is the target, in a year or so.
Senator Kennedy. OK. If you were--I am trying to understand
your overall philosophy. If you were advising Prime Minister
Abe about how to revive the Japanese economy, what would you
tell him?
Mr. Goodfriend. I have been supportive of Japanese efforts
to keep monetary stimulus in place until the inflation rate has
risen to their target, which is around 2. And, in fact, I have
been an adviser for the Bank of Japan for years and years.
Senator Kennedy. Have you?
Mr. Goodfriend. And basically on that side of that
argument. So, you know, they need to do that.
Senator Kennedy. Did you advise the Bank of Japan on the
quantitative easing?
Mr. Goodfriend. I did not advise the bank, but I was an
honorary adviser to the Bank of Japan.
Senator Kennedy. OK. And you think they are on the right
track there, or you disagree with their approach?
Mr. Goodfriend. No, I think they--you know, in the
circumstance they need to stimulate the economy, get the
inflation rate up, and they have been doing well, and now
employment is doing much better than before.
Senator Kennedy. OK. Thank you for that.
Ms. McWilliams, what role, if any, do you think the FDIC
has in helping us establish a National Flood Insurance Program
that looks like somebody put it together on purpose?
Ms. McWilliams. Senator, the National Flood Program is a
creature of Congress. It is not to the agencies to decide what
is appropriate or not. It is for Congress to decide and for
agencies to implement----
Senator Kennedy. Right, but I am asking your opinion. Let
me be more specific. Many of our financial institutions do a
great job enforcing the requirement of flood insurance. Some do
not. And when some get caught, they just get a minor fine,
which sends the signal--if you believe in the deterrence
paradigm of compliance, which sends the signal that it is
cheaper just to ignore the rule. What do you think we can do
about that, if anything?
Ms. McWilliams. Well, I believe the banks should be
supervised appropriately, and if the flood insurance is not
required on certain loans, I think that is a problem----
Senator Kennedy. What if it is required?
Ms. McWilliams.----if they are in a flood zone.
Senator Kennedy. What if it is required and some aspects of
the financial system are not enforcing the requirement? What,
if anything, should the FDIC do?
Ms. McWilliams. It should regulate those banks
appropriately, which is to find them in disobedience of the
regulatory requirements.
Senator Kennedy. OK. Mr. Workman, why do you think--Senator
Toomey made this point. Why do you think over the last, let us
say, 9 or 10 years--am I over, Mr. Chairman?
[Laughter.]
Chairman Crapo. [Presiding.] Only by 2 \1/2\ minutes.
Senator Kennedy. I am sorry.
Senator Brown. Senator Kennedy, I would not dare cut you
off during your discussion of flood insurance.
Senator Kennedy. I looked at my--I apologize. I was looking
at----
Chairman Crapo. I was going to hand this down the aisle
there.
[Laughter.]
Senator Brown. Mr. Chairman, when he talks about flood
insurance, he does not know when to stop.
Senator Kennedy. Please, my apologies. I really did not
mean to--it was going up instead of down.
[Laughter.]
Chairman Crapo. It was not up to 5 yes, was it?
Senator Kennedy. I am sorry.
Chairman Crapo. Thank you, Senator.
Senator Cortez Masto.
Senator Kennedy. I was having fun.
Senator Cortez Masto. Thank you. Welcome to all of you.
Thank you for your willingness to serve. Welcome to your
families. It is great to see you all here.
I only have 5 minutes, so I am going to get right into it,
and I am going to start with Mr. Goodfriend. In your writings
you recommend taxing currency by placing magnetic strips on
dollar bills. You argue that in order to keep bills in
circulation, the Government should tax people who hold money in
a disaster kit or safe deposit box. If you are appointed to a
14-year term on the Federal Reserve, will you seek to tax
people who choose to maintain a cash reserve?
Mr. Goodfriend. Absolutely not.
Senator Cortez Masto. Do you want to explain your
discussion?
Mr. Goodfriend. Briefly, yes. I wrote a paper in 1999 for a
Federal Reserve System conference which was asked what happens
if interest rates go to zero and what could the Federal Reserve
do. And in that paper there are two ways the Federal Reserve
could have gone. It could do quantitative easing. That was the
first place that was put out. Or it could make interest rates
negative. That would also be an option. I did not propose that.
That was an academic paper showing what could be done, and that
was forward-looking in the sense that the world went to zero
rates and negative rates in some----
Senator Cortez Masto. If you had the opportunity to tax
people based on your policy discussion, would you do so?
Mr. Goodfriend. No. I do not support--that is not a
proposal. It was an emergency measure we considered just as a
matter of first thinking on these things before anybody had
ever imagined anything would happen like that.
Senator Cortez Masto. OK. In 2014, the Federal Reserve
published research refuting that Freddie Mac and Fannie Mae's
affordable housing goals played no role in the crisis. After
the financial crisis, analysis by staff of the Fed's Board of
Governors found that, and I quote, ``The available evidence to
date does not lend support to the argument that the Community
Reinvestment Act is a root cause of the subprime crisis.''
It appears you disagree with the Fed's conclusion. Is that
true?
Mr. Goodfriend. No, I do not--I think----
Senator Cortez Masto. Do you agree with the Fed's
conclusion?
Mr. Goodfriend. I am not--I have not--if you can repeat the
question, because I----
Senator Cortez Masto. Sure. The Federal Reserve published
research refuting that Freddie Mac and Fannie Mae's affordable
housing goals played no role in the crisis.
Mr. Goodfriend. It is not a subject that I have had much
professional expertise on, so I would rather not comment.
Senator Cortez Masto. OK. Thank you.
Mr. Workman, the November report from the Treasury
Department essentially called for abandoning nonbank SIFI
designations, and the Treasury's General Counsel said that the
FSOC would
reduce such oversight. Do you think nonbank SIFI designations
should be tossed out as a tool?
Mr. Workman. Senator, I have looked at the Treasury report,
and among the areas of recommendation, one is going to, as I
mentioned earlier, an activities-based approach. But, in
addition, there is a line of thought that I think still stands
in that recommendation, and I am reading it as someone who has
been studying it of late. But, essentially, it indicates that
FSOC ought to first look at the marketplace, look at what the
concerns may be, and then go to the primary regulators, which
in the case of insurance are the State insurance regulators.
Senator Cortez Masto. Right, and for that reason--I am
sorry to cut you off. I only have so much time. But you talk
about an activities-based approach, but is the FSOC really
prepared to force other Federal regulators to adopt those
rules?
Mr. Workman. Senator, I am not sure. I do not know about
that.
Senator Cortez Masto. Because isn't it true that FSOC would
really have little power to constrain risky activities in the
insurance industry since it is regulated at the State level?
Mr. Workman. Well, certainly the State insurance regulators
are expressly considered to be primary regulators for purposes
of FSOC actions.
Senator Cortez Masto. OK. Thank you.
Ms. McWilliams, what will you do as head of the FDIC to
encourage sustainable home ownership for Latinos, African
Americans, and millennials whose access continues to lag?
Ms. McWilliams. Senator, thank you for that question. As I
mentioned, I lived in the State of California where the Latino
community in particular is almost as prevalent as it is in the
State of Nevada. I do believe that the agency's duties are to
ensure that banking products are available to everybody. The
question that I would like to tackle is: How much have the
agencies done to encourage home ownership and what is the
appropriate role for the FDIC to partake in that? And if
confirmed and I realize that something has not been done, I am
happy to bring you the initiatives and technical assistance
should you choose to pursue other venues.
Senator Cortez Masto. Thank you. I appreciate that. Thank
you all for answering my questions.
I notice my time is up. Thank you.
Chairman Crapo. Thank you, and thanks for getting us back
on track.
Senator Tillis.
Senator Tillis. Thank you, Mr. Chair. I will keep all my
questions----
Chairman Crapo. You only have 3 minutes.
Senator Tillis.----to Senator Kennedy's standard.
Chairman Crapo. Just kidding.
[Laughter.]
Senator Tillis. Mr. Goodfriend, it is ironic that somebody
whose last name is Goodfriend is getting so many unfriendly
questions, but I have a question for you, and it is really just
can you give me your thoughts on what you think is more
corrosive on the middle class--low growth or low inflation?
Mr. Goodfriend. Low growth is probably the more corrosive
in the sense that growth enables a lot of things to get done.
People can live their lives. The country can do more. And low
inflation, unless it is too low, is, I do not think, anywhere
near as corrosive.
Senator Tillis. Thank you.
Ms. McWilliams, I have got a hypothetical situation. You
mentioned, I think, in response to Senator Toomey's questions
that community banks or smaller banks are not subject to the
Volcker Rule if they do not do proprietary trading?
Ms. McWilliams. They are subject, but they should not be
because they do not engage in proprietary trading.
Senator Tillis. Well, let me give you a hypothetical
situation. Let us say that there is a bank out there that wants
to go green, and it is going to take a little while for them to
get there. And so in the process of coming up with a viable
strategy for a community bank, they all of a sudden get
involved in a business activity which makes perfect sense for
them to go green, but it actually make them wade into something
that falls under Volcker. Can you give me maybe a scenario
where we talk about the--I am trying to also interpret that in
terms of the regulatory cost impacts on smaller institutions.
Ms. McWilliams. Certainly, Senator. I am actually aware of
financial institutions that are trying to go ``green'' and made
a commitment on being fully ``green'' by a certain period in
time. They would change the light bulbs, windows, et cetera,
but they may have hundreds plus or just five branches, and
getting branches to the point of a ``green'' standard is a
costly and a multi-year effort. So some of the banks have
engaged in purchasing ``green'' credits, basically renewable
energy purchase agreements, and in order for a bank to actually
engage in that discussion, it needs to do an appropriate
Volcker compliance analysis. I am aware of a bank that had to
comprise a committee of 22 people and have multiple meetings on
whether the purchase of ``green'' energy, the renewable energy
contract, would in fact, trigger proprietary trading under
Volcker, which I believe undermines the purpose of the act.
Senator Tillis. Yeah, and I think it undermines the
objective of the industry trying to go green. To me, it is a
good working example of why we need to right-size regulations
and remove some of these impediments that simply do not make
any sense. So thank you for that.
Also, on the cost-benefit analysis, has there been--when we
talk about cost-benefit--and I think the Chair and Senator
Shelby asked the question--I do not think we really do a good
job of explaining at the atomic level, the consumer level, the
price that they are paying for regulations. I was just using--
there was one example that was in the Wall Street Journal
earlier this week that one of the major banks is now going to
not allow free checking for certain accounts that fall below a
certain level. In some ways I have got to believe that has been
stimulated by pressure on the cost of doing operations. They
have got to find revenues somewhere. They have a fiduciary
responsibility to their investors to try and provide a return
on their equity.
Has there been much work done at that atomic level to say
when you implement these additional regulations, which may go
further than you need to, beyond the right size of a
regulation, the real individual impacts, do we ever do cost-
benefit analysis at an atomic level, and should we?
Ms. McWilliams. Senator, I believe that we should. How much
has been done is difficult for me to ascertain because a lot of
that work is behind the scenes. So what you would see in the
Federal Register in terms of the proposed rulemaking or the
final rulemaking is just the tip of the iceberg. I know for a
fact when I was at the Federal Reserve we struggled at times to
ascertain how a certain regulation would impact consumers, but
it is a task that should be undertaken anyway. The regulators
should not shrink from their responsibilities, because it is an
easy thing to do. I believe that they need to engage on a deep
level, to understand who is going to pay for this, how it is
going to affect the communities, and are we willing to live
with the consequences.
Senator Tillis. Thank you.
Mr. Workman, I did not have an opportunity to meet with you
in my office. I do know that you met with my staff, and I know
it was a productive meeting. And you have answered a lot of the
questions that I have had for you, so I will not ask them
again. We are working on a bill, particularly around Fed
supervision, about savings and loan holding companies and
getting them right-sized. I look forward, after you are
confirmed, to working with you and have you in my office. I
want to congratulate all three of you. You are outstanding
nominees. I look forward to supporting your nomination, and
congratulations to your family and friends. This should be a
very proud moment for you.
Ms. McWilliams. Thank you.
Mr. Goodfriend. Thank you.
Mr. Workman. Thank you.
Senator Tillis. Thank you, Mr. Chair.
Chairman Crapo. Thank you.
Senator Jones.
Senator Jones. Mr. Chairman, thank you very much, and thank
you for the nominees to be here. Congratulations to you and
your families. Ms. McWilliams, I am especially appreciative of
you being here with your role with my colleague Senator Shelby
and your work with him. I know that you probably also learned a
lot about something else very dear to Senator Shelby's heart,
but I am going to resist the urge to give you a pop quiz about
University of Alabama football.
[Laughter.]
Ms. McWilliams. Thank you.
Senator Jones. I do appreciate your comments and your
answers to previous questions about community banks in
underserved areas. That was an issue, and I appreciate your
answers to that very much.
So let me move to Dr. Goodfriend. I would like to go back
briefly to comments you alluded to earlier and some earlier
comments in 2010 where you referred to consumer protection as a
false premise and essentially said that consumers should be
left to police themselves. I agree with you that consumers need
to take personal responsibility, but I also think there are
some kind of bad actors out there.
The Federal Reserve has a Division of Consumer and
Community Affairs, known as DCCA. In reading from the mission
statement from DCCA, it says, ``It is to support the board's
efforts to implement Federal laws intended to protect and
inform consumers in credit and other financial service
transactions, ensuring that consumers receive comprehensive
information and fair treatment and promoting economic
development and community lending in historically underserved
areas.'' And I will tell you, Dr. Goodfriend, Alabama has a lot
of those underserved areas.
So my question is: If you are confirmed by the Senate,
would you continue to support the DCCA's efforts to not only
inform but to protect consumers? And would you recommend any
changes to the Division's mission?
Mr. Goodfriend. I would absolutely support that mission. I
think consumers need to have regulation on the product side,
and they need to be informed. These are two halves of making
consumers protected, and I absolutely support the Federal
Reserve's mission.
Senator Jones. And the DCCA mission as written, you would
not make any changes to that to lessen anything?
Mr. Goodfriend. Well, if confirmed as a Governor, I would
like to look into this, because I think it is so important that
we maintain confidence in consumers, confidence in the market
system. The ability to make that system work absolutely depends
on consumers feeling confident in the way as demanding
customers and feel safe in markets. That is absolutely a goal
that I would support.
Senator Jones. OK. Fair enough. I also have seen comments
that seem to be a little bit conflicting in the past, Dr.
Goodfriend, in which at one point you had talked about that you
seemed to advocate for a very independent, activist Fed that
should push back against Congress, but in recent years you seem
to have pushed back for less independence of the Fed, including
Congress appropriating the Fed's budget.
In my view, independence is important, especially in our
current economic and political climate. So can you give me your
view now, how important is the Fed to be an independent body?
Mr. Goodfriend. Absolutely, the Fed needs to be absolutely
independent of politics so we can do monetary policy, financial
regulation, and in order to support the dual mandate. That is
something I completely believe in, and I have said so many
times in many papers in the past.
Senator Jones. Do you still favor Congress appropriating
the budget for the Fed?
Mr. Goodfriend. I do not favor that.
Senator Jones. OK. Have you ever favored that?
Mr. Goodfriend. No.
Senator Jones. OK. Maybe I am mistaken.
That is, I think, all the questions I have, Mr. Chairman.
Thank you. Thank you to each of the nominees. I appreciate your
being here.
Chairman Crapo. Thank you, Senator.
Senator Cotton.
Senator Cotton. Thank you all to the nominees for your
appearance. Congratulations on your nomination. Congratulations
to your families as well.
Ms. McWilliams, the FDIC recently proposed a new rule for
high volatility, acquisition, development, and construction
loans, also known as HVADC. That would replace the current rule
on high volatility commercial real estate loans. I am concerned
that the proposed rule would remove contributed equity
exemptions for future acquisition, development, and
construction loans and would instead treat them all virtually
the same in terms of the risk assessment, and it strikes me,
therefore, that the regulators would be ignoring the proactive
steps that lenders are taking to in essence get a bigger
downpayment, to put it in layman's terms, to reduce risk and,
therefore, increase safety and soundness.
The House has already acted on this measure. The House
Financial Services Committee passed a bill 59-1. It passed the
House chamber by a voice vote. I suspect the Senate will soon.
Could you commit that you will take a look at this issue and
perhaps hit the pause button until the Congress has a chance to
review it this year.
Ms. McWilliams. Senator, thank you for that question. Since
the rule is at the proposed rulemaking stage, I am not sure
when, if I am so fortunate to be confirmed, I would be able to
take a look at the rule to understand what work the FDIC has
done behind the scenes. But if it does happen that I am
confirmed before the rule is finalized, I would certainly like
to know what the staff at the FDIC has done. As you know, the
rules are subject to the Administrative Procedures Act, so
there is a notice and comment period during which the FDIC
rulemaking process will be informed based on comments from
various stakeholders and affected entities, including consumers
and users of this type of credit.
So I can assure you that, if I get confirmed in time, I
would like to take a look at those comment letters as well and
understand what is going on.
Senator Cotton. Good. Thank you, because there is both a
process point and a substantive point. The process is if
Congress does finally get its act together and take legislative
action on this, I do not think we would want to go through the
whole rigmarole of notice and comment rulemaking with a final
rule that will simply modified or overturned, therefore the
substance of the point I made about not, you know, discouraging
lenders from entering into these loans with, you know, high
equity contributions by making them be treated in the same
fashion in terms of the risk assessment.
Second topic. FDIC obviously plays a large role in the
supervision and enforcement of the Bank Secrecy Act and anti-
money-laundering regulations. That is a topic that this
Committee has increasingly scrutinized over the last month. How
right now would you assess the division of responsibility for
anti-money-laundering regulations and the Bank Secrecy Act
compliance between the FDIC, FinCEN, other regulators, and
financial institutions?
Ms. McWilliams. So the BSA and AML regulations are
promulgated by FinCEN in conjunction with their regulatory
agencies. It is the job of the regulatory agencies--in this
case, the FDIC--to examine and ensure compliance with both BSA
and AML. So the
actual work gets done at the FDIC level while the rulemakings
and the requirements get set up in a multi-agency effort.
Senator Cotton. Are you open to reviewing those processes
and trying to find ways that we can both still be strict and
prevent, you know, intelligence officers, terrorists, drug
runners, deadbeat ex-husbands from manipulating our banking
system, but at the same time reducing the costs that we are
imposing on gigantic and tiny institutions alike?
Ms. McWilliams. Senator, absolutely. And I can tell you
from my current experience, banks are required to file a
suspicious activity report, or SAR, every time there is a
dollar threshold or they suspect a certain activity is taking
place. I think this is making it more difficult under the
current regime for the regulatory bodies to examine effectively
and efficient for SARs compliance and AML and BSA violations
when you have as many SARs filed as we do under the current
framework. So I would like to take a look if it is possible to
streamline while maintaining safety and soundness of the
system.
Senator Cotton. Good. Thank you.
Ms. McWilliams. Thank you.
Senator Cotton. Mr. Workman, the FSOC's process to
designate systemically important financial institutions has
been a topic of conversation here to include about nonbanks. I
would like to ask, at a philosophical level, given the
criticism the FSOC has received about the opacity of that
process, do you think the criteria by which the FSOC makes
these judgments should be more like a posted speed limit,
encouraging people to stay on whichever side of the line they
want to be, or a speed trap, hiding in the trees to catch
someone once they cross unstated criteria?
Mr. Workman. Senator, I like the posted speed limit.
Senator Cotton. I do like the posted speed limit as well. I
think it is consistent with the rule of law and a well-
functioning market-based economy.
My time has exactly expired.
Chairman Crapo. Good timing.
Senator Reed.
Senator Reed. Well, thank you, Mr. Chairman. And welcome to
the witnesses, and I apologize for my tardiness. Senator Cotton
and I were at a classified hearing on the nuclear posture
review, so nice to be out here with you all.
Let me ask a question to each one, beginning with Ms.
McWilliams. Cybersecurity is becoming increasingly critical to
every aspect of American life, and so in your different roles--
FDIC, Federal Reserve, and FSOC--can you give a brief statement
about what you think you can do and should do immediately with
respect to cybersecurity?
Ms. McWilliams. Thank you for that question, Senator. I can
tell you for a fact now that I work for a regulated entity that
it is one of the foremost issues on the mind of the governing
body at the bank as well as the board of directors. I believe
that the regulator's job is to provide a blueprint for how
banks are supposed to handle cybersecurity breaches in terms of
notifications and just give a sense to the public and to
Congress what regulated entities are supposed to do if there is
a cyber breach.
I understand that in 2016 there was an Advanced Notice of
Proposed Rulemaking by the Federal Reserve, OCC, and FDIC
seeking comments and input on how the cybersecurity framework
should be structured, and I would like to follow up, if
confirmed, to understand what kind of comments have been
received and what the FDIC can do.
Senator Reed. Thank you.
Dr. Goodfriend.
Mr. Goodfriend. I completely agree. This is a very
important issue, and I will do what I can, if confirmed, to
lend my support and whatever expertise I can to this.
Senator Reed. One of the things that we have done, several
my colleagues and I have legislation that would require a
simple disclosure in publicly reporting companies that they
either have someone on the board or they have made arrangements
to deal with the issue of cybersecurity so that it is an
action-forcing device for every company. Does that make sense
to you?
Mr. Goodfriend. As a principle, it makes sense to me.
Senator Reed. Thank you. And, Mr. Workman, please?
Mr. Workman. Yes. Senator, certainly cybersecurity is a
critically important element in the insurance world. I would
just observe two actions that have been taken, one by the New
York Department of Financial Services. I am sure you are well
aware of that. But they acted early, put together a proposal,
took it to the NAIC, and it to a very large degree influenced
the NAIC action just this past year. The New York reg. is
nearing completion of implementation, and the States now have a
model from the NAIC. So I think much has been done, but never
enough.
Senator Reed. Thank you very much. And the Rhode Island
superintendent of insurance supports our approach, too, so they
are very bright in Rhode Island. I cannot explain it, but they
are.
Turning quickly, Dr. Goodfriend--when Governor Powell was
here, he testified in response to my questions about the
orderly
liquidation authority, and he said that his preferred option is
bankruptcy. However, he indicated there may come a time when
bankruptcy is not going to work in a very stressful situation
that really threatens the economic health of the country, just
like what happened in 2007, 2008, and 2009. In that case we
would really need a backup in the form of something like
orderly liquidation authority. What is your view of the orderly
liquidation authority?
Mr. Goodfriend. I agree with Governor Powell's statement,
and I think this is a very important matter. It deserves, I
think, reconsideration given how important it was that there
was lack of clarity and boundaries when we had the last crisis.
This is so important that I think it deserves another look-see,
and if I am confirmed as Governor, I would certainly make this
a priority.
Senator Reed. We have an orderly liquidation authority in
place, so the look would be to----
Mr. Goodfriend. To make sure that it would work in
practice. I have not seen it in detail. I think there is plenty
of opportunity to kind of model this thing in various ways and
check whether there is clarity. There are boundaries that make
accountability for all the actors that would get involved in
this orderly liquidation
authority to think through scenarios in which that would work.
And this is so important, again, that I think it deserves
another look.
Senator Reed. And the look would be, as I presume from your
comments, to ensure it works in practice, not that it be
abandoned or ignored?
Mr. Goodfriend. Right. I have no predilections one way or
the other, but I do believe, knowing what I know about the
subject in general, these things are complicated. And I think
we have not gotten to the end of the line yet on where we want
to be.
Senator Reed. Thank you very much. Thank you all.
Ms. McWilliams. Thank you.
Chairman Crapo. Thank you, Senator Reed, and we are going
to have a short second round. I am going to yield my 5 minutes
and turn to Senator Shelby.
Senator Shelby. Thank you.
I want to follow up just for a minute on the area that
Senator Tillis was going to earlier, cost-benefit analysis,
explaining what regulation costs, what are the benefits for it
to the consumer, because we are all consumers. I agree with
him; I do not believe that has been explained. Oftentimes the
regulators--you all would be regulators--come up with
regulations, and we say, ``Gosh, they make no sense,'' or at
least some of us, maybe we are laymen and we do not know. But
how do we actually develop the methodology, which is
important--Dr. Goodfriend, you understand this well. The
methodology is important in arriving at something.
Mr. Goodfriend. That is right.
Senator Shelby. And what are you trying to do? You are
trying to arrive at the truth. How can we help consumers make
good choices? We know we cannot do everything. How can we put
cost on a regulation that increases the cost of doing business
and it ultimately falls on them?
Mr. Goodfriend. In terms of principles, I agree completely
with your description of the issues. There has been a tendency
in some quarters to think--well, first of all, I should say I
think consumer protection is critical, so to me it is a
question of where we want to put the emphasis. We want to
balance, we want to put some of it on the firms, but we also, I
think, need to really focus better than my sense is on consumer
knowledge, educating consumers, because that would mean that
consumers could be in charge of their own lives. And really the
only way to prevent a consumer from really being exploited is
to put them in the driver's seat, make sure that they are aware
of what products are doing, and that is where I would be in
principle. My sense is that we have been doing some of that at
the Fed, but I think there is scope for doing more of that.
Senator Shelby. Ms. McWilliams, do you have any comments on
that?
Ms. McWilliams. Senator, I can give you my commitment that,
if confirmed, the cost-benefit analysis is something I would
like to take a close look at while at the FDIC. As somebody who
worked on regulations and had to take into account in some
rulemakings thousands and thousands of comment letters, it is
crucial that we understand how our regulations are going to
impact consumers
before we promulgate them. So, yes, you have my commitment that
I will take a look at that.
Senator Shelby. Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Brown.
Senator Brown. Thank you, and I will make this as brief as
I can.
Mr. Workman, again, welcome. Based on the $50 billion bank
threshold in the Wall Street Reform Act, the FSOC uses a $50
billion threshold as a factor to determine if a shadow bank
could cause systemic risk, as you know. If the Chairman's bank
deregulation bill is enacted, would you recommend that FSOC
also raise its threshold fivefold to the $250 billion that the
Chairman is suggesting?
Mr. Workman. Senator, I can just say that is treading into
an area I have not yet adequately learned about, so I cannot
really speak on that issue.
Senator Brown. OK. Thank you for your candor. There is a
reasonable chance that you will be asked to at some point.
Mr. Workman. Yes, indeed.
Senator Brown. You understand that, OK.
Ms. McWilliams, it was an honor to speak to you, and I look
forward to meeting your Cincinnati family in a few minutes
after we are done.
Ms. McWilliams. Thank you.
Senator Brown. Vice Chair Quarles last week promised to the
largest banks that the Fed would soon weaken leverage rules.
Reportedly, this is despite resistance from FDIC. The
Chairman's bank deregulation bill would undercut the leverage
ratio for some of the Nation's largest banks. Democratic,
Republican, and Independent FDIC officials--Chair Gruenberg,
Chair Bair, Vice Chair Hoenig--have all warned about
undermining capital standards that, like leverage limits, harm
financial stability. If confirmed, will you protect the Deposit
Insurance Fund by continuing the FDIC's opposition to weakening
leverage rules for the largest banks?
Ms. McWilliams. Senator, thank you for that question. If
confirmed, it is going to be my mandate and my duty to protect
the DIF. I would like to take a look at the leverage rules. As
you know, the Federal Deposit Insurance Corporation does not
have large banks as its primary supervisory entities. The
largest bank in the FDIC portfolio does not rise to the
advanced approaches level currently set at $250 billion. The
leverage rules for smaller banks should look a little bit
different than the rules for the largest participants. I can
assure you that I would like to take a look at that and make
sure they are applicably and appropriately calibrated for the
size, scope, and risk of the bank.
Senator Brown. Would you agree that a central cause of the
2008 crisis was too much leverage at the largest banks and a
failure of risk-weighted capital standards?
Ms. McWilliams. Senator, I do not know that I can agree
with that statement wholly. I would want to understand the
context in which it is made.
Senator Brown. Well, the context was what happened a decade
ago. Was a central cause of the 2008 crisis too much leverage
at the largest banks?
Ms. McWilliams. The FDIC just recently issued a report on
the crisis, and its outcome, and I have to tell you I have not
gotten through the entire report fully in preparation for the
hearing, but I am happy to circle back on that question with
you when I am done.
Senator Brown. The Minnesota Fed recently recommended a
leverage ratio of 15 percent to protect Americans from future
bailouts. Dr. Goodfriend had said he does not think there are
banks that are too big to fail. Some here think that, some do
not. I just want to urge you to look into the fact that
weakening the leverage ratio for the largest banks can be
problematic. Our job here collectively is to protect the safety
and soundness of our banking institutions--I am not accusing
you for sure--but not to protect the largest banks and not to
enhance the profitability of America's largest banks.
Thank you to the three of you.
Chairman Crapo. Thank you, and that concludes the
questioning and the hearing with the exception of final
announcements.
Before I do that, though, I want to thank all of you again
for coming and participating today and for being willing to
serve your country. And, again, I extend thanks to your
families for supporting you and helping you to be able to do
that.
For all Senators, follow-on questions need to be submitted
by Tuesday, January 30th. And for our witnesses, responses to
those questions are due by the following Monday morning,
February 5th. So please respond quickly when you receive
questions.
With that, this hearing is adjourned.
[Whereupon, at 11:52 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
January 23, 2018
This morning, we will consider the nominations of Ms. Jelena
McWilliams to be Chairperson of the Federal Deposit Insurance
Corporation; Dr. Marvin Goodfriend to be a Member of the Board of
Governors of the Federal Reserve System; and Mr. Thomas Workman to be a
Member of the Financial Stability Oversight Council.
Welcome to all of you and congratulations on your nominations to
these important offices.
I see friends and family sitting behind you and I welcome them here
today, as well.
We are fortunate to have three highly-qualified individuals to
consider for these positions, which are critical to ensuring a safe,
sound, and vibrant financial system and a healthy, growing economy.
I am particularly excited that one of these nominees, Ms.
McWilliams, is a former staffer of mine, and is no stranger to Members
who have been on this Committee over the past several years.
Ms. McWilliams did outstanding work while she was at the Committee,
and I am fully confident she will bring the same diligence, work ethic,
and intellect to the FDIC that she showed here.
In addition to working at the Committee, Ms. McWilliams also worked
as an attorney at the Federal Reserve during the financial crisis, and
she currently is the Chief Legal Officer, Corporate Secretary, and
Executive Vice President of Fifth Third Bank.
These varied experiences have provided her with the particular
background and expertise needed to run the FDIC.
As head of the FDIC, Ms. McWilliams would be in charge of
administering the Deposit Insurance Fund.
Additionally, in its role as a prudential regulator, the FDIC plays
a critical role in ensuring the safety and soundness of the financial
system, while also promoting economic growth.
Dr. Goodfriend also has an impressive background, having worked at
the Federal Reserve Bank of Richmond for close to 30 years.
He has written extensively about monetary and regulatory policy,
and he testified before this Committee in 2016.
His appointment comes at a critical time for the Federal Reserve.
The Fed is currently in the midst of normalizing monetary policy by
winding down its balance sheet and raising interest rates after years
at the zero lower bound.
With respect to regulatory policy, the Federal Reserve is reviewing
many of the rules put in place following the crisis.
If confirmed, I look forward to working with Dr. Goodfriend on
further regulatory and monetary policy improvements.
Finally, we will consider Mr. Workman to serve as the independent
insurance expert on the Financial Stability Oversight Council.
The Council is charged with identifying risks and responding to
emerging threats to financial stability, which has significant
implications for both banks and nonbank financial companies.
Mr. Workman is well-equipped to fill the insurance expert role,
bringing over four decades of practical insurance-industry experience,
including serving as the head of a major New York State insurance trade
group, representing over 70 life insurance companies.
During my meeting with Mr. Workman, I was encouraged by his
commitment to independence and desire to facilitate better
collaboration between regulators and with regulated entities.
At this time, I ask unanimous consent to enter into the record 14
letters endorsing the witnesses. Without objection, so ordered.
Congratulations again on your nominations and thank you and your
families for your willingness to serve.
______
PREPARED STATEMENT OF JELENA McWILLIAMS
To Be Chairperson and a Member, Board of Directors, Federal Deposit
Insurance Corporation
January 23, 2018
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
as a former staff member, it is my privilege to appear before you
today. I am truly
honored and humbled to be nominated to lead the Federal Deposit
Insurance Corporation (FDIC). I would like to thank the President for
entrusting me with this
nomination, and Senators Crapo, Shelby and Olympia Snowe for giving me
an opportunity to serve our country.
I would also like to thank my father, Obrad Obrenic, a World War II
veteran who taught me there is no substitute for personal integrity and
hard work; my mother, Branka, who always believed in me; my brother,
Nenad, a beekeeper and a great father; and my daughter, Maya
McWilliams, whose humility reminds me every day to be a better person.
My father was born in 1925 in impoverished Montenegro. He was born
in a kingdom, fought fascism and Nazism in his youth, survived
communism and socialism as an adult, and is now living out his golden
years in democracy. His difficult journey was pivotal in my decision to
leave the former Yugoslavia for a system built upon the rule of law. I
arrived in the United States by myself on my 18th birthday with $500.
Appearing before you 26 \1/2\ years later as the nominee to lead a
historic Federal agency is nothing short of an American Dream.
The FDIC is an independent agency created by the Congress to
maintain financial stability and public confidence by insuring
deposits; examining, supervising and resolving financial institutions;
and managing receiverships.
I believe that my background and professional experience have
prepared me well for this challenge. I currently serve as the Chief
Legal Officer, Corporate Secretary, and Executive Vice President of
Fifth Third Bancorp, a regional bank headquartered in Cincinnati, Ohio.
I serve on the bank's executive committee and advise the senior
management and the Board of Directors on legal, compliance, and
regulatory matters. I oversee over 70 attorneys and support staff.
Prior to joining Fifth Third, I had the honor and privilege to
serve on this Committee under Chairman Crapo's and former Chairman
Shelby's leadership, most recently as Chief Counsel and Deputy Staff
Director. My experiences on this Committee and as a staff attorney at
the Federal Reserve Board of Governors have uniquely prepared me to
oversee the FDIC and to coordinate its multi-agency initiatives in the
United States and abroad.
Also, having served as a corporate officer of a regulated entity,
the totality of my experiences has afforded me a 360-degree view of our
financial system and the institutions that regulate it. If confirmed, I
am confident that I can effectively lead the FDIC in its mission to
ensure the safety and soundness of insured depositories while balancing
consumer protection and the need for available credit to grow the
economy.
One of the side effects of the civil war that broke apart the
former Yugoslavia was a collapse of its financial system. My parents'
meager savings disappeared overnight when a local bank closed its
doors. Yugoslavia had no deposit insurance and my then 68-year old
father returned to work as a day laborer. I can assure you that the
core mission of the FDIC resonates profoundly with me and, if
confirmed, I will not take its mission or my duties lightly. Thank you.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
______
PREPARED STATEMENT OF MARVIN GOODFRIEND
To Be a Member, Board of Governors of the Federal Reserve System
January 23, 2018
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
thank you for the opportunity to appear before you today. I am honored
to have been nominated by President Trump to serve as a Member of the
Board of Governors of the Federal Reserve System. None of this would
have been possible without the support of my best friend and wife
Marsha, who is sitting behind me, and without the support of my sister
Miriam, who is watching at home. I would also like to recognize my
parents' for developing in me at an early age a keen interest in public
policy.
As the Nation's central bank, the Federal Reserve has many
responsibilities that are at the foundation of our economic prosperity
and well-being. Guided by the goals of maximum sustainable employment,
price stability, and financial stability, and with lessons from its
past, the Federal Reserve must be alert to future challenges.
I have spent my 40-year career as an economist focused on central
banking in general and the Federal Reserve in particular. The Federal
Reserve Bank of Richmond had been my primary place of employment for
more than 25 years when, in 2005, I joined the faculty of Carnegie
Mellon University in Pittsburgh. I've written about and contributed to
the policy debate from both ``inside'' and ``outside'' the Fed. If
confirmed, I look forward to putting my knowledge and judgment--
developed as both an academic and practitioner--to work as a Governor,
and to contributing my voice and experience to addressing current
policy issues. I intend to draw on my academic and professional
experience to promote policies that would further increase transparency
and accountability at the Federal Reserve.
My years at the Federal Reserve Bank of Richmond gave me a deep
appreciation of the role of the regional Reserve Banks in the Federal
Reserve System. The regional system encourages diverse perspectives and
innovative thinking. As a Member of the Board of Governors, I would
look forward to hearing and considering this diversity of views in
making policy.
I have also gained policy experience at other Government and
central banking institutions. These experiences ranged from being a
staff economist for the Council of Economic Advisers in the Reagan
administration, to serving in central bank advisory roles, and
participating in external reviews for several central banks abroad.
My publications use monetary theory, central bank practice, and
Federal Reserve history to investigate policy issues. I've enjoyed my
past 12 years teaching courses in monetary policy, money and banking,
and international trade and finance at Carnegie Mellon's Tepper School
of Business.
I would like to thank the Committee for the opportunity to appear
before you today and for considering my nomination. If confirmed, I
look forward to working with you in the years ahead. I would be pleased
to answer your questions.
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PREPARED STATEMENT OF THOMAS E. WORKMAN
To Be a Member, Financial Stability Oversight Council
January 23, 2018
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
it is my honor to appear before you today. I am grateful to be
President Trump's nominee for Independent Member with Insurance
Expertise of the Financial Stability Oversight Council, and I thank you
and your staffs for helping me prepare for this hearing.
First, I would like to introduce my wife, Pam, and our son, Chris,
who are here today. Pam, my forever friend and life partner of 52
years, is a professional artist who paints still lives and portraits of
strangers. She is a lifetime mother and educator as well. Our son,
Chris, is a partner at MSD Capital, and a U.S. Army veteran who served
as a Tank Platoon Leader in the First Armored Division. His wife,
Catherine, is a Developmental Pediatrician and Neonatologist. They have
two children, and live in New York City. Our daughter, Sarah Checcone,
is the mother of four. She is a lawyer and the founder and leader of
Post-Partum Society of Florida helping mothers suffering with post-
partum depression. Her husband, Mark, is a Facial Plastics Surgeon, and
they live in Sarasota.
I would also like to recognize Roy Woodall, Independent Member of
FSOC and former Kentucky Insurance Commissioner, and our good friend,
Lee Covington, former Ohio Insurance Commissioner.
I grew up in North Central Ohio--two miles from the Leesville Rural
School that I attended. My father had a small Chevrolet dealership, and
my mother worked as a mother, secretary, and bookkeeper. My sister,
Elaine, and I both graduated from The Ohio State University. After law
school there, I served nearly 4 years as a Captain in the U.S. Army
Judge Advocate General's Corps. Then I returned to Columbus to practice
law at Bricker & Eckler, the firm founded by John W. Bricker, the
three-term Governor and two-term United States Senator from Ohio. With
my office next to his for many years, I am sure he would be delighted
that I am before you today.
The first question I was asked at the firm was--would I do some
insurance work? I spent the next 26 years doing insurance regulatory,
legislative, and business-related work including formation, licensing,
admission, sale, acquisition, rehabilitation, liquidation, reserving,
State taxation, agent licensing, governance, underwriting, claims,
admitted and non-admitted assets, and more. I also represented the
Association of Ohio Life Insurance Companies, and developed the firm's
insurance law practice.
I served on the Board of the Ohio Farmers Insurance Company for 24
years. Formed in 1848, it is a leading, midwestern, multi-line
property/casualty insurance company. I chaired the Governance &
Nominating Committee, served on the Compensation Committee, and twice
served on the Committee to select a CEO.
In 1999, I was recruited to become President & CEO of the Life
Insurance Council of New York. For the next 17 years, I was involved in
nearly all regulatory and legislative issues related to life insurers
in New York State, and to a large degree, nationally.
With 43 years of working with insurers, regulators and legislators
in New York, Ohio, and other States, I have, in effect, prepared to be
the FSOC Independent Member with Insurance Expertise all my life. I
know insurance, and how vital it is to families and businesses and to
our economy. I have great respect for insurers, and the regulators and
legislators who wrestle with insurance issues. They share the same
objectives--to assure promises are kept and customers are treated
fairly.
The purposes of FSOC are to identify risks to the stability of the
U.S. economy, to promote market discipline, and to respond to emerging
threats. The Independent Member exists to make sure someone with
substantial insurance knowledge takes part in FSOC deliberations
affecting insurers and insureds. I am grateful for the support of Roy
Woodall and I aspire to perform this duty as masterfully as he has.
I would greatly appreciate this opportunity. If confirmed, I would
be dedicated to the highest level of honorable, public service.
Thank you, Mr. Chairman, Ranking Member Brown, and Members of the
Committee. I look forward to answering any questions you may have.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JELENA
McWILLIAMS
Q.1. The FDIC has a responsibility to protect the Deposit
Insurance Fund (DIF) and has continuous examination authority
for insured depository institutions with more than $100 billion
in assets. With that mandate and responsibility in mind, do you
think that leverage requirements for banks with over $250
billion in consolidated assets should be lowered in the future,
versus current requirements? To revisit a question I posed at
your nomination hearing, how did large bank and investment bank
leverage contribute to the 2008 financial crisis?
A.1. At the hearing you asked whether I agree that ``a central
cause of the 2008 crisis was too much leverage at the largest
banks and a failure of risk-weighted capital standards.'' The
2008 financial crisis traces its roots to a myriad of causes
that created a chain of events which essentially led to the
financial crisis. Bank leverage is certainly one of the factors
that contributed to the crisis.\1\ The leverage requirements at
banks with consolidated assets above $250 billion should not be
viewed in a vacuum but in conjunction with capital and
liquidity requirements, and other safety and soundness
mechanisms already at the disposal of regulators.
---------------------------------------------------------------------------
\1\ As noted in ``The Financial Crisis Inquiry Report: Final Report
of the National Commission on the Causes of the Financial and Economic
Crisis in the United States'' (i.e., ``The Commission concludes that
the collapse of the housing bubble began the chain of events that led
to the financial crisis. High leverage, inadequate capital, and short-
term funding made many financial institutions extraordinarily
vulnerable to the downturn in the market in 2007.''). See p. 230 at
https://www.gpo.gov/fdsys/pkg/GPO-FCIC/content-detail.html.
---------------------------------------------------------------------------
If confirmed, I will monitor bank leverage and will work
with the FDIC staff to understand what has been done in this
area, what conclusions have been drawn by agency staff, what
requirements are necessary to protect the safety and soundness
of our financial system while reducing systemic risk, and learn
what relevant knowledge can be gained through the public
comment process.
Q.2. Last November, FDIC Chair Gruenberg cautioned that ``the
seeds of banking crises are sown by the decisions banks and
bank policymakers make when they have maximum confidence that
the horizon is clear.''\2\ Bank profits are at a record high,
the tax bill just put billions in the coffers of the financial
services industry, and policymakers in Congress and in the
Administration are again trying to relax the rules for the
banking industry. Do you agree with Chair Gruenberg that crises
are built by many small decisions made in good times?
---------------------------------------------------------------------------
\2\ https://www.brookings.edu/wp-content/uploads/2017/11/
es_20171114_fdic_transcript.
pdf.
A.2. Financial crises trace their roots to a myriad of causes,
including decisions made by regulators and financial
institutions in good times and bad. Banks and financial
institutions are currently well capitalized. However, the
fundamental factor in preventing another crisis is a balanced
approach to prudential regulation and safety and soundness,
while ensuring that financial products and services are widely
available. If confirmed, I will continue to maintain a strong
---------------------------------------------------------------------------
FDIC by ensuring that banks operate in a safe and sound manner.
Q.3. Since 2013, the FDIC has had protections in place to
prevent banks from offering abusive ``deposit advance
products'' that are similar to payday loans. Keith Noreika,
while at the OCC, rolled back those rules for banks regulated
by the OCC. And OMB Director Mulvaney is undoing the CFPB's
payday lending rules and ending enforcement actions against
abusive lenders. Should banks be able to push people into short
term loans with high fees? If confirmed, will the FDIC revisit
its guidance to regulated entities regarding deposit advance
products?
A.3. No customer should be ``pushed'' or forced into any
financial product, regardless of whether it is short- or long-
term, high- or low-cost. If confirmed, I intend to review
FDIC's regulations and guidance, including in the consumer
protection area. It is worth noting that, as the primary
regulator for consumer financial issues, the CFPB's rulemaking
would be the controlling legal authority for oversight of these
products.
Q.4. The single costliest failure for the DIF was a large
regional bank--IndyMac. As you know, community banks end up
picking up the tab with higher insurance premiums when these
big regional banks go down. Under the Chairman Crapo's bill, S.
2155, the Federal Reserve would decide which banks more than
$100 billion but less than $250 billion in consolidated assets
would still be subject to strict oversight under Dodd-Frank's
Section 165 regime. Are you confident that you can trust the
Federal Reserve to decide which banks with between $100 billion
and $250 billion in consolidated assets are risky enough to
warrant subjecting them to Section 165 of Dodd-Frank? Are you
sure that the FDIC won't be on the hook for a large regional
bank failure? Do you think the FDIC should have joint authority
with the Federal Reserve under S. 2155 to decide who escapes
stricter requirements?
A.4. Congress enacted section 165 as part of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act). At the time, Congress chose to vest with the Board of
Governors of the Federal Reserve System (FRB) sole authority
for applying enhanced prudential standards for bank holding
companies (BHCs) with consolidated assets equal or greater than
$50 billion in section 165.\3\ Congress granted similar
authority to the FRB for nonbank financial companies supervised
by the FRB and recommended for enhanced prudential standards by
the Financial Stability Oversight Council (FSOC) under section
115.
---------------------------------------------------------------------------
\3\ According to the Senate Banking Committee Majority Staff Report
accompanying Dodd-Frank Act: ``To narrow the focus of the Federal
Reserve to its core functions, the bill strips it of its consumer
protection functions, and its role in supervising a relatively small
number of State banks, as well as smaller bank holding companies.
However, the Committee was persuaded that because of the Federal
Reserve's expertise and its other unique functions, it should play an
expanded role in maintaining financial stability. Thus, Title III
assigns the Federal Reserve the responsibility for the supervision of
bank and thrift holding companies with assets over $50 billion. (Other
aspects of the bill that address financial stability enhance the
Federal Reserve's oversight of systemically important payment systems,
direct the Federal Reserve to apply heightened prudential standards to
large bank holding companies, and give the Federal Reserve supervisory
responsibilities over designated nonbank financial companies.)'' See p.
28 at https://www.congress.gov/111/crpt/srpt176/CRPT-111srpt176.pdf.
---------------------------------------------------------------------------
In enacting the Dodd-Frank Act, Congress chose not to
extend to the FDIC joint authority on enhanced prudential
standards, outside of the recommendation process of the FSOC
under section 115 and with respect to the resolution plans
(i.e., if the FRB and the FDIC jointly determine that the
resolution plan of a company is not credible and would not
facilitate an orderly resolution under the bankruptcy code,
such company would have to resubmit resolution plans to correct
deficiencies). Congress entrusted the FRB with the formulation
and imposition of enhanced prudential standards for banks with
consolidated assets above $50 billion and certain nonbanks, and
furthermore chose not to grant joint authority to the FDIC in
this area. Should Congress choose to amend the law in this
area, it will be my duty, if confirmed, to fulfil FDIC's
statutory mandate, in its current form or however it may be
revised.
Q.5. In response to Senator Toomey's comments at your
nomination hearing, you said that ``regulatory burden plays a
key component of the consolidation in the community banking
industry.'' A 2014 study by Federal Reserve economists found
that, ``even without any regulatory changes following the
financial crisis, the weak economy and low interest rate
environment would have caused 75 to 80 percent of the current
decline in new charters.''\4\ Please describe the relative role
played by interest rates, macroeconomic conditions, regulatory
requirements and other factors in terms of the trend in
community bank consolidation and the decline in de novo
community bank charters.
---------------------------------------------------------------------------
\4\ https://www.federalreserve.gov/econresdata/feds/2014/files/
2014113pap.pdf.
A.5. The 2014 Federal Reserve study largely focused on the
impact historically low interest rates have had as a barrier to
de novo bank entry. Indeed, the net interest margin is an
important indicator for the entry of new bank applicants.
Similarly, a robust economy is nearly equally a factor in the
creation of new banks. However, these two factors alone would
not explain the current lack of new bank applications given we
have over 100 months of consecutive economic growth with
interest rates steadily increasing above the historic post-
crisis lows.
The Federal Reserve Bank of Richmond issued an economic
brief in 2015 indicating that regulatory activity may play a
role in declining new bank entry particularly if ``de novos are
absent due to the low interest rate environment and weak
economic recovery, then entry should increase as the economy
improves and the Fed raises interest rates. If regulatory costs
are the driving force behind low entry rates, then future entry
will depend on how those costs change over time.'' Given we are
now in a lengthy, sustained economic recovery with interest
rates continuing to rise off historic lows, the continued lack
of de novo applications would support the theory of regulation
impacting the entry of new de novo bank applications.
Q.6. In response to a question from Senator Heller about
whether you will encourage new applications for industrial loan
companies (ILC), you said that you will ``make sure that the
FDIC moves swiftly in due consideration'' of ILC applications,
and that ``if that encourages more applicants to send the
applications in, then I guess my answer is yes.'' In recent
years, financial technology firms have rapidly expanded their
presence and products in the financial system. This growth
occurred largely after the financial crisis and the pre- and
post-crisis moratoria on ILCs imposed by the FDIC and Congress.
Some fintech companies are now seeking an ILC charter.
Q.6.a. What additional prudential and consumer protection
requirements, if any, would you consider as part of the
approval process of an ILC application from a fintech company?
A.6.a. ILCs are unique entities as State-chartered financial
companies that are supervised by the FDIC and covered by the
DIF. As the prudential regulator of ILCs, the FDIC currently
applies significant prudential and consumer protections as part
of the supervisory process to oversee safety and soundness. I
would like to understand what work the FDIC staff has done in
this area to date, specifically with respect to prudential and
consumer protection requirement imposed on existing ILCs and
what prudential and consumer protection issues should be
addressed if the nature and scope of ILCs changes over time. If
confirmed, I will continue to apply these supervisory
authorities and examine whether changes are necessary to ensure
the safety and soundness of ILCs on a going forward basis while
maintaining the need for consumer protection.
Q.6.b. For purposes of compliance with the Community
Reinvestment Act, would you review the lending activities of
all affiliates and subsidiaries of a proposed fintech ILC's
parent company, or just the activities of the ILC?
A.6.b. ILCs are subject to the Community Reinvestment Act which
requires a review of the ILC and not all the affiliates or the
subsidiaries of the parent. However, should the parent company
undertake activities that call into question the safety and
soundness of the ILC or its impact on the DIF, it could warrant
a broader review by the FDIC outside of the CRA.
Q.6.c. Are you concerned that approving new ILC charters could
weaken the separation between banking and commerce by allowing
the intermingling of banking activities with nonbanking
activities that are currently impermissible under other bank
charters?
A.6.c. ILCs are uniquely structured compared to traditional
bank charters and allow the parent company to undertake
additional activities not traditionally authorized by BHCs or
national associations. This has largely occurred because of the
limited nature and number of ILCs. It is worth noting that ILCs
are subject to the restrictions imposed on banks by the Volcker
rule (i.e., the regulators did not exclude industrial companies
with FDIC-insured depository institution subsidiaries). Should
we experience a dramatic uptick in new ILC applications, due
consideration would be necessary to determine why the increased
volume of activity and whether additional safeguards are
necessary to properly manage and minimize the risk posed.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT FROM JELENA
McWILLIAMS
Q.1. Ms. McWilliams, here's a recent Wall Street Journal
headline: ``As Black-Owned Banks Struggle, a Community Sounds
the Alarm.'' Quote, ``Fewer banks serving low-income, minority
groups could expand `financial deserts'--communities with few
or no banking institutions.'' Tax reform included my
legislation, the Investing in Opportunity Act, to encourage
business formation in economically distressed communities. But
these small business owners are going to need a hand every once
in a while to meet payroll or stock inventory. That's why the
disappearance of minority-owned banks is so concerning. These
lenders are a part of their communities and know their
customers well. A perfect example is South Carolina Community
Bank in Columbia. Please answer the following with specificity:
Q.1.a. Are FDIC examiners attuned to the challenges facing
these banks? What will you do as Chair to make sure?
A.1.a. At this time, since I have not been privy to FDIC
examiners' work first-hand, I am unable to adequately respond
to your questions whether FDIC examiners are attuned to these
challenges. If confirmed, I will ensure that FDIC examiners
fully understand and are prepared to appropriately address
these challenges and look forward to working with your office
on any technical assistance your office may seek on these
issues.
Q.1.b. Will you commit to updating my office on the FDIC's
dealings with South Carolina Community Bank?
A.1.b. Yes.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS FROM JELENA
McWILLIAMS
Q.1. The regulation establishing what is considered a brokered
deposit is now 26-years old, and is not cognizant of the way
most Americans today open deposits with banking organizations.
The treatment of a deposit as ``brokered'' under the regulation
is consequential for banks.
Would you be willing to re-examine the regulations
involving brokered deposits in light of the structure of
deposit markets today?
A.1. Yes.
Q.2. One of the most important strengths of the FDIC is the
ability to maintain customers' access to their insured deposits
in the event of the failure of their bank. A few years ago, the
FDIC proposed changes to its approach to resolving banks with a
large number of insured deposits accounts. In practice,
however, there is concern that the implementation of the new
rules are far more complicated than necessary.
Would you be willing to take a fresh look at relevant
regulations and corresponding implementation issues to see if
they can be improved?
A.2. Yes.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM JELENA
McWILLIAMS
Q.1.a. It's been more than 4 months since Hurricane Maria hit
Puerto Rico, and a third of the island of Puerto Rico remains
without power and nearly 10 percent of the island's residents
still have no access to clean water. If that wasn't bad enough,
the island is on the verge of a potential foreclosure crisis,
with approximately one third of the island's homeowners behind
on their mortgage payments.
What steps can the FDIC take, pursuant to its safety and
soundness responsibilities, to encourage banks to impose or
extend a foreclosure moratorium and to extend or modify loan
terms for borrowers in distress due to the Hurricane?
A.1.a. The FDIC has at its disposal a number of safety and
soundness statutory mandates while most of its consumer
protection authorities have transferred over to the CFPB
pursuant to the Dodd-Frank Act. In addition, certain accounting
rules govern how banks have to treat asset categories deemed
nonperforming. While at this time I have not been privy to any
internal work the FDIC might have done in this specific area,
if confirmed, I will work with the FDIC staff to understand
what options are available to the agency to assist borrowers in
distress due to the Hurricane.
Q.1.b. Will you commit to examining every available option to
ensure banks are assisting distressed borrowers in Puerto Rico?
A.1.b. Yes.
Q.2. Compensation practices at large financial firms prior to
the crisis incentivized excessive risk-taking and created a
business environment with no guard rails where banks played
fast and loose with the savings and investments of hard-working
families. Those same families paid the price when the crisis
hit and they lost their homes to foreclosure and saw their
savings wiped away in the blink of an eye.
Congress passed a law requiring the financial regulators to
prohibit payment practices that encourage inappropriate risk-
taking-understanding that this is a joint rulemaking, can I
have your commitment that you will follow the law and work to
finalize the Dodd-Frank Section 956 incentive-based
compensation rulemaking?
A.2. The Dodd-Frank Act is the law of the land, and the FDIC
should fulfill its statutory duties under that law whether in
its current State or as may be amended by Congress. In my
experience as a regulatory attorney at the Federal Reserve
Board of Governors, joint rulemakings can take longer to
prepare and finalize because multiple agencies with varied
jurisdictions are involved. If confirmed, I will work to fulfil
FDIC's statutory mandates.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ FROM JELENA
McWILLIAMS
Q.1. A common refrain from this Administration is that
financial regulations are overly costly and burdensome. In
fact, the Federal Reserve has staffed a new office to conduct
cost-benefit analyses. However, there is little evidence that
financial regulations are a drag on the banking industry. On
the contrary, the facts show that banks are thriving:
LAccording to FDIC data, banks had record-breaking
profits in 2016 and the highest return on equity in
years. Data from 2017 shows banks may do even better
this year.
LAcross the board, banks have increased their
dividends to shareholders by 17 percent.
LCommunity banks' earnings have also been
increasing--they were up almost 10 percent this quarter
compared to last year.
LHousehold credit, such as home loans, car loans,
credit cards, has surpassed prerecession highs.
LAccording to the Fed, sluggish loan growth in the
commercial sector is due to a lack of demand.
Q.1.a. How do regulators account for the benefit of avoiding
another financial crisis in a cost-benefit analysis?
A.1.a. Regulations are an essential component of our Federal
regulatory framework for financial institutions. However, as
many scholars have noted, regulations do pose a burden on
financial institutions and the economy as a whole. Quite often,
the regulators are faced with a difficult task to ascertain how
much a particular regulation will cost the economy versus how
likely it is to prevent a certain type of conduct, risk, or
other action that could lead to a crisis. I believe that just
because that task is difficult does not mean the regulators
should shy away from it. The best way to ensure that
regulations strike preventative balance while ensuring that
financial products and services are available to consumers and
businesses to grow the economy is by having the regulators
engage in a meaningful, objective and empirical analysis. The
balance between regulation and constraints on the economy is
necessary and, if confirmed, I will work to ensure that proper
balance is achieved and maintained.
Q.1.b. If banks are making record profits, and the cost of a
financial crisis is enormous to the whole economy, do you think
it is appropriate to leave Dodd-Frank financial regulations in
place?
A.1.b. The proper balance between regulation and market
economics is important and if confirmed, I will ensure the FDIC
maintains such balance. The FDIC has a statutory mandate to
promulgate rules and regulations pursuant to laws passed by
Congress. The Dodd-Frank Wall Street Reform and Consumer
Protection Act is the law of the land, and the FDIC should
fulfill its statutory duties under that law whether in its
current state or as may be amended by Congress.
Q.1.c. Shouldn't we view the costs of complying with financial
regulations as banks internalizing the risk of a future
financial crisis, rather than leaving that risk on taxpayers'
shoulders?
A.1.c. Taxpayers should not bear the consequences of the
failure or any financial institution, which is why the DIF is
funded by financial institutions and shoulders the burdens of
any failed institution. If confirmed, I will ensure the
adequate oversight of FDIC-regulated institutions to protect
the DIF from taxpayer funded bailouts.
Q.2. In 2009, the FDIC completed a pilot program on small
dollar lending demonstrating that banks can profitably offer
affordable small-dollar loans as an alternative to predatory
payday loans.
Q.2.a. Do you think the FDIC should continue to provide
guidance and support to help community banks offer affordable
small-dollar loans?
A.2.a. The FDIC's pilot program predated the enactment of the
Dodd-Frank Wall Street Reform and Consumer Protection Act which
transferred 17 consumer protection statutes to the CFPB while
granting the CFPB additional authority in Title X of that act.
Pursuant to the Dodd-Frank Act, banks with more than $10
billion in assets have the CFPB as its primary regulator for
consumer protection, whereas safety and soundness regulation
continues to be performed by the prudential regulator. For
banks with $10 billion or less in assets, the rulemaking,
supervisory, and enforcement authorities for consumer
protection are divided between the CFPB and the prudential
regulators.
If confirmed, I intend to review FDIC's regulations and
guidance, including in the consumer protection area.
Q.2.b. If so, will you commit to working with my staff and me
to expand the FDIC's work in this area?
A.2.b. Given the Dodd-Frank Act's consolidation and transfer of
consumer protection statutes to the CFPB, I would have to defer
to the CFPB for general matters of consumer regulation. The
FDIC's work in this area should not contradict what has been
done by the CFPB in order to ensure regulatory consistency and
provide certainty to market participants and consumers alike.
If confirmed, I stand ready to offer any technical assistance
your office may seek on this and related consumer protection
issues, recognizing the CFPB's role in this space.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
JELENA McWILLIAMS
Q.1. The Financial CHOICE Act, (H.R. 10), which passed the
House on a partisan vote, would subject the Federal Deposit
Insurance Corporation to the congressional appropriations
process.
In your view, how would relying on congressional
appropriations impact the FDIC's ability to supervise 4,000
financial banks?
A.1. The FDIC receives no congressional appropriations--it is
funded by premiums that banks and thrift institutions pay for
deposit insurance coverage and from earnings on investments in
U.S. Treasury securities. The FDIC is not unique in this
respect as other Federal financial regulators are afforded a
unique position in the Federal budget and appropriations
process by funding operations outside of the congressional
appropriations process. This design has allowed the FDIC and
other Federal financial regulators to operate independent from
Congress.
Adequate resources are necessary for the FDIC, and other
financial regulators, to ensure appropriate staffing and
operations. However, this independent financial status should
be subject to strict oversight and accountability to ensure
that operations utilize only as many funds as necessary to
conduct the mission without waste, fraud, or abuse.
I am not sure how the FDIC's operational status, including
its supervisory and examination functions, would change if the
law were passed to subject the FDIC to congressional
appropriations. If confirmed, I would seek guidance from the
FDIC staff on the impact of potential congressional
appropriations on its operations, including supervisory
functions.
Q.2. Financial institutions have had a great deal of good news
recently. Financial institutions are making solid profits: $48
billion in the 3rd Quarter of 2017--5 percent increase from the
year earlier. Community banks reported $6 billion in net
income. An increase of 9 percent from the previous year. They
have higher net income. They are generating more loans. The
number of unprofitable banks and `problem banks' continued to
fall. However, there are still market gaps. The home ownership
rate between whites (73 percent) and African Americans (41
percent) is worse than it was when the Fair Housing Act was
enacted in 1968. Only 47 percent of Latinos are homeowners.
Q.2.a. To follow up on our discussion during your confirmation
hearing, please share some specific ideas for what will you do
as head of the FDIC to encourage sustainable home ownership for
Latinos, African Americans and millennials whose access
continues to lag?
A.2.a. Home ownership continues to be a challenge in certain
communities following the financial crisis, despite being one
of the key metrics for financial stability and wealth
generation. Regulators continue to utilize tools such as the
CRA and fair lending laws to ensure that access to financial
products and services is uniform. If confirmed, I would
continue to utilize these tools to ensure uniform access to
financial products and services, including home mortgages.
However, all financial regulators should also continue to
assess barriers to market entry for home ownership including a
lack of affordable housing, regulatory requirements that can
increase the cost of mortgages, the need for robust liquidity
and capital requirements, and consumers' access to entry level
products such as FHA and VA mortgages, among others.
Q.2.b. How will you ensure the 4,000 or so financial institutes
regulated by the FDIC meet their Community Reinvestment Act
obligations to provide loans and services in all communities in
which they take deposits?
A.2.b. As I stated in the hearing, the Community Reinvestment
Act (CRA) is the law of the land and it is the duty of the
regulatory agencies tasked with its implementation to ensure
full compliance with the law. The FDIC, like other prudential
financial regulators, maintains a robust and effective CRA
program as part of the supervisory process. If confirmed, I
intend to ensure that all of the 4,000 plus institutions are
operating safely and soundly while adequately serving their
markets.
Q.3. Since 2013, the FDIC has had protections in place to
prevent banks from offering abusive ``deposit advance
products'' that are similar to payday loans. Keith Noreika,
while at the OCC, rolled back those rules for banks regulated
by the OCC. And OMB Director Mulvaney is undoing the CFPB's
payday lending rules and ending enforcement actions against
abusive lenders.
What will you do to enable banks to provide lower-cost
small dollar loans as alternatives to short-term high-fee
payday loans?
A.3. If confirmed, I intend to review FDIC's regulations and
guidance, including in the consumer protection area. It is
worth noting that, as the primary regulator for consumer
financial issues, the CFPB's rulemaking would be the
controlling legal authority for oversight of these products.
Q.4. Last November, FDIC Chair Gruenberg cautioned that, ``the
seeds of banking crises are sown by the decisions banks and
bank policymakers make when they have maximum confidence that
the horizon is clear.'' Bank profits are at a record high, the
tax bill just put billions in the coffers of financial services
firms, and policymakers in Congress and in the Administration
are again pushing deregulation.
Do you agree with Chair Gruenberg that crises are built by
many small decisions made in good times?
A.4. Financial crises trace their roots to a myriad of causes,
including decisions made by regulators and financial
institutions in good times and bad. Banks and financial
institutions are currently well capitalized. However, the
fundamental factor in preventing another crisis is a balanced
approach to prudential regulation and safety and soundness,
while ensuring that financial products and services are widely
available. If confirmed, I will continue to maintain a strong
FDIC by ensuring that banks operated in a safe and sound
manner.
Q.5. The FDIC's 2012 community banking study found that bigger
banks grew faster than smaller banks over the last 30 years, in
large part because Congress loosened rules and they were able
to acquire smaller banks. In fact, the number of banks with
more than $10 billion in assets grew eleven-fold since 1984.
They now hold more than 80 percent of industry assets.
Will loosening the rules for large regional banks encourage
acquisitions that will lead to fewer community banks?
A.5. Industry consolidation continues to be a challenge,
particularly among community banks. The Dodd-Frank Act and
subsequent regulations have posed a significant implementation
challenge for community and mid-sized banking institutions,
particularly because they lack the size and the economies of
scale compared to larger financial institutions that can spread
the cost of compliance over a larger asset base. The key to
address this incentive for size and the economies of scale is
to properly calibrate and tailor regulations commensurate to
the risk of the financial institution. By effectively tailoring
regulation, the incentives to increase size (by merger or
otherwise) and scale may be limited.
Q.6. The FDIC's 2012 community banking study noted that the
worst periods for community bank failures were after periods of
deregulation and lax oversight from regulators--the S&L crisis
of the late '80s/early '90s, and the 2008 crisis. Congress and
regulators are again proposing to pull-back on rules,
supervision and enforcement.
Are you concerned that another period of financial
instability caused by deregulation could create yet another
wave of community bank failures?
A.6. If confirmed, I will ensure the FDIC maintains a robust
supervisory and examination process with emphasis on the safety
and soundness of supervised institutions. A part of this
mandate is to ensure that community banks can function and
serve their community in safe and sound manner, while limiting
the likelihood of their failure.
Q.7. Even as Congress and regulators are in the process of
undoing Wall Street Reform, a whole host of rulemakings remain
incomplete. For example, ``source of strength'' requirements to
protect insured deposits and compensation rules to prevent
excessive risk-taking.
If confirmed, is the FDIC under your direction going to
complete work on these rules?
A.7. If confirmed, I will ensure that the FDIC fulfills its
statutory requirements and meet its statutory obligations to
conduct necessary rulemakings.
Q.8. Fifth Third Bank spent $1.6 billion on stock buybacks in
2017. By contrast, the bank announced that they'll spend around
$23.6 million on employee raises and bonuses because of the tax
bill. That's 68 times more spent on buybacks than workers.
Q.8.a. Do you think that stock buybacks are a good use of the
windfall from the tax bill?
A.8.a. Fifth Third Bank, like other financial institutions
subject to the Federal Reserve's Comprehensive Capital Analysis
and Review (CCAR) process, is required by regulation to seek
prior approval of any stock buyback and/or capital
distribution. As such, the 2017 stock buybacks were approved by
the Federal Reserve prior to the passage of the Tax Cuts and
Jobs Act. Stock buybacks and shareholder distributions that
occur in the normal course of business are necessary for the
capital markets to operate efficiently.
The tax reform legislation has allowed Fifth Third Bank to
provide additional incentives to employees as part of a
comprehensive compensation package to share benefits with the
employees, their families, and the communities it serves.
Moreover, even before the tax reform legislation, Fifth Third
Bank has manifested its commitment to the communities it serves
by committing to lend or invest $30 billion to low- and
moderate-income (LMI) borrowers and in LMI communities over a
5-year period from 2016 to 2020.
Q.8.b. Do you think that banks will meaningfully raise pay for
workers or lower prices for consumers as a result of the tax
bill?
A.8.b. As has been reported in the media, many banks and
corporations are passing along some of those tax savings to
employees and customers through a host of different methods as
a direct result of the Tax Cuts and Jobs Act.
Q.8.c. Fifth Third has been profitable for a while--the bank
made over $2 billion in profits over the last four quarters.
Why did the bank choose now to raise its wages?
A.8.c. The Tax Cuts and Jobs Act provided a unique opportunity
for Fifth Third to pass along some of those savings directly to
bank employees.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM MARVIN
GOODFRIEND
Q.1. Asked by Senator Cortez Masto about your currency-tax
proposal, you claimed that you ``didn't propose that,''
explaining that ``it was an academic paper showing what could
be done.'' But in an August 2000 Federal Reserve Bank of
Richmond paper, you wrote: ``I recommend that a central bank
put in place systems to raise the cost of storing money by
imposing a carry tax on its monetary liabilities.'' By offering
a concrete policy recommendation, you engaged in more than an
abstract academic exploration of ways to overcome the zero
bound on interest rate policy. Do you still believe that this
proposal is wise policy? Why or why not?
A.1. I have spent my 40-year career thinking, writing, and
teaching about issues in the field of economics. On many
occasions, I have been asked to consider theoretical issues in
order to contribute to the robust debate among central bankers
here in the United States and around the world. As an academic-
practitioner at the Federal Reserve Bank of Richmond, I
presented an academic paper to a Federal Reserve conference in
1999 to imagine monetary policy options that would be available
should interest rates hit the zero interest bound. I discussed
negative interest rate policy and quantitative easing. Indeed,
economists have been studying various aspects of negative
interest rates for most of the last century. And today, some
major central banks abroad have implemented negative interest
rate policy together with other policy initiatives, including
quantitative easing. The current focus of U.S. monetary policy
is on continuing the path of gradually removing accommodation
as the labor market strengthens and there is continued progress
toward the 2 percent inflation objective. If confirmed, I would
be committed to working with my colleagues on the Federal Open
Market Committee (FOMC) to promote the economic well-being of
the United States by fostering maximum employment and stable
prices.
Q.2. Asked by Senator Jones about your views on Fed
independence, you stated that the Fed ``absolutely needs to be
independent of politics,'' including with respect to ``monetary
policy'' and ``financial regulation.'' Asked further whether
you ``still favor Congress appropriating the budget for the
Fed,'' you responded, ``I don't favor that.''
But you are listed as a supporter \1\ of the Financial
CHOICE Act of 2017,\2\ which includes several provisions that
would decrease the Fed's independence. For example, section 365
would bring the nonmonetary-related-functions of the Board of
Governors into the
appropriations process; section 1001 would constrain the FOMC's
monetary policy, including through a requirement that the FOMC
explain to Congress any departure from the Taylor rule; section
1008 would place additional restrictions on the Fed's section
13(3) powers; and section 1010 would require a GAO ``audit'' of
the Fed's monetary policy. Some of these proposals are similar
to ideas you have advanced in your own writings. In a 2011
``Shadow Open Market Committee'' paper, you advocated more
forceful congressional oversight over the Fed, which included
proposals similar to sections 1001 and 1008.
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\1\ https://financialservices.house.gov/news/
documentsingle.aspx?DocumentID=400837.
\2\ https://www.congress.gov/bill/115th-congress/house-bill/10?r=1.
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Accordingly, I would like to clarify your views on Fed
independence.
LDo you support section 365 of the Financial CHOICE
Act?
LDo you support sections 1001, 1008, and 1010 of the
Financial CHOICE Act? How would these provisions
enhance the Fed's independence? Also, how would you
envision these provisions working--in practice?
LDo you stand by the proposals described in your
2011 Shadow Open Market Committee paper,
``Congressional Oversight of the Federal Reserve''? How
would these provisions enhance the Fed's independence?
LIf the Fed were faced with the imminent threat of
another financial crisis and it determined that the
purchase of non-Treasury assets was necessary to stop
that crisis or reduce its impact, could a delay in
obtaining congressional authorization worsen the
crisis?
A.2. The foundational concept of the legislation is that
financial firms are given a choice to hold higher levels of
capital in exchange for regulatory relief. That is a general
principle that I support. Moreover, I strongly support efforts
to further tailor regulations so that they are appropriate for
the size, complexity, and risk of individual institutions,
particularly community banks. If confirmed, I would work with
Congress and my colleagues at the Federal Reserve Board (Board)
and the other Federal banking agencies to ensure that the
regulatory and supervisory frameworks promote sustainable
credit availability and economic growth.
Throughout my career, both within the Federal Reserve and
in academia, I have been a strong supporter of the independence
of the Federal Reserve. As I noted in my hearing, the Federal
Reserve must remain insulated from political influences so that
it can effectively conduct monetary policy in support of the
dual mandate and promote a safe and sound financial system
through its regulatory and supervisory responsibilities.
Subjecting the Federal Reserve to appropriations would make the
conduct of monetary policy and regulatory and supervisory
policy vulnerable to political influence. At the same time, the
Federal Reserve is accountable to the Congress and the American
people. If confirmed, I would work with my colleagues on the
Board and the FOMC to further enhance the transparency of the
Federal Reserve.
Q.3. Asked by Senator Reed about your view of the Orderly
Liquidation Authority (OLA), you testified that you ``agree
with Governor Powell's statement.'' Governor Powell had stated:
``There may come a time when a bankruptcy is not going to work
in a very stressful situation that really threatens the
economic health of the country just like what happened in 2007,
2008, and 2009. And in that case we really will need a backup
in the form of something like Orderly Liquidation Authority.''
But you elaborated that you believe the OLA ``deserves . . .
reconsideration,'' referring to ``lack of clarity and
boundaries'' during the last crisis. You further explained that
it would be important to make sure the OLA ``works in
practice,'' and check whether it has enough clarity and
boundaries to ensure ``accountability.'' Asked further whether
any further ``look'' would be to ensure that it works in
practice rather than ``abandoned,'' you responded that you
``have no predilections one way or the other.'' This comment,
which implies that you do not have a view as to whether the OLA
should exist, is inconsistent with your support of the
Financial CHOICE Act of 2017, which would repeal the OLA.
Accordingly, I would like to clarify your views on the OLA.
LDo you believe that Congress should repeal the OLA?
Why or why not?
LIf confirmed, would you support the use of the OLA
in a situation where bankruptcy is not a practicable
alternative? Why or why not?
LHow would a bankruptcy-oriented resolution system
work in practice for large, systemically important
financial institutions?
LHow would a large, systemically important financial
institution obtain debtor-in-possession financing from
the private markets in a bankruptcy-oriented resolution
system in time to stop a widespread financial crisis?
A.3. I agree with many experts in this area that bankruptcy
should be the preferred route for resolving a failing financial
company. However, a key lesson of the recent crisis was that
the Government needed a better way to deal with the failure of
a large financial firm, and in response, Congress created the
Orderly Liquidation Authority (OLA). If confirmed, I would
certainly consider whether the circumstances of any impending
failure of a systemically important financial company warranted
resolution under the current OLA rather than the Bankruptcy
Code. As a matter of principle, clarity in the boundary of
responsibilities around the resolution process is critically
important; it must be in place beforehand, so that parties can
be accountable for their role in a future crisis. I am aware
that Members of Congress are examining this authority. If
confirmed, I look forward to studying the issue and helping
Congress in any way that I can.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR MENENDEZ FROM MARVIN
GOODFRIEND
Q.1. Compensation practices at large financial firms prior to
the crisis incentivized excessive risk-taking and created a
business environment with no guard rails where banks played
fast and loose with the savings and investments of hard-working
families. Those same families paid the price when the crisis
hit and they lost their homes to foreclosure and saw their
savings wiped away in the blink of an eye.
Congress passed a law requiring the financial regulators to
prohibit payment practices that encourage inappropriate risk-
taking-understanding that this is a joint rulemaking, can I
have your commitment that you will follow the law and work to
finalize the Dodd-Frank Section 956 incentive-based
compensation rulemaking?
A.1. Incentive compensation is an important tool in successful
management of financial institutions and is critical to
attracting qualified employees and executives. However,
improperly structured incentive-based compensation arrangements
may encourage inappropriate risk-taking at financial
institutions. If confirmed, I look forward to engaging with
Federal Reserve Board members and staff to better understand
the impact of incentive compensation practices on the safety
and soundness of financial institutions.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER FROM MARVIN
GOODFRIEND
Fed Balance Sheet
Q.1. The FOMC has begun to normalize the Fed balance sheet. At
the same time, the European Central Bank has signaled that its
support of the European government bond market will eventually
decrease.
LDo you think that the resulting material drop in
Fed demand for longer-dated Treasuries and agency debt,
when combined with the expectations of a significant
drop in European Central Bank demand for long-dated
European government debt securities due to ECB
tapering, will result in a global oversupply of long-
dated Government paper that could significantly push up
U.S. bond rates?
LHave you been able to quantify how much you think
long-end U.S. rates could move up if there is an
overlap in ECB and Fed balance sheet normalization?
LAs a result, do you think there could be a
significant negative effect on U.S. mortgage rates?
Housing is an area of the economy that still has room
to grow compared to historic norms.
A.1. Last year, the Federal Reserve initiated a plan it
described as normalizing the size of its balance sheet. Under
the plan, the Federal Reserve stated that it would scale back
the extent to which it reinvests principal payments on its
existing securities holdings. As a result, the balance sheet
will gradually decline over a period of several years. A number
of studies have suggested that this process could put some
modest upward pressure on longer-term rates over time. That
said, many analysts have projected that longer-term interest
rates, both here and abroad, will remain quite low for many
years to come. If confirmed, analyzing and understanding the
Federal Reserve's expectations of the effect of balance sheet
normalization will be one of my first priorities. I would also
look forward to working with you and continue to discuss any
questions or concerns that you might have in this area.
Monetary Policy
Q.2. You have been an advocate for more rules-based approach to
monetary policy and have criticized the Fed for increasing
uncertainty in the markets.
Q.2.a. How do you think rules-based monetary policy, like the
Taylor Rule, would have affected the U.S. economy over the last
decade during and since the crisis?
A.2.a. Policy rules, such as the Taylor rule, provide a
mechanical link between the setting of the Federal funds rate
and a small number of economic variables, such as the inflation
rate and an estimate of resource slack in the economy. Such
rules embody several key principles of good monetary policy,
and the Federal Open Market Committee (FOMC) routinely reviews
policy recommendations from a variety of benchmark rules. Such
policy rules have provided a useful ``focal point'' around
which current policy actions can be compared and justified
against historical circumstances, and in fact have served this
purpose during the past decade. However, while policy rules can
provide useful guidance, their use requires careful judgments
about the measurement of their inputs and the many
considerations that such rules do not take into account. If
confirmed, I would look forward to working with my colleagues
on the FOMC to promote policies that would further increase
transparency and accountability at the Federal Reserve, by
giving policy rules more prominence in its communications,
including a more robust discussion of the use of rules to guide
the conduct of monetary policy.
Q.2.b. What do you believe is the purpose of the Fed's dual
mandate of targeting inflation and employment? Are you
committed to targeting not just inflation but ensuring full
employment level in the United States?
A.2.b. Congress set forth the mandate for monetary policy in
the Federal Reserve Act, which directs the Federal Reserve to
conduct monetary policy so as to promote maximum employment and
stable prices. If confirmed, I would be fully committed to
pursuing the goals that Congress has given to the Federal
Reserve. Both objectives of the dual mandate are critical in
promoting the economic well-being of the United States.
Economic models have shown that monetary policy that is
directed at minimizing deviations of employment from longer-run
normal levels and inflation from a low target rate tends to be
in the best interest of households and businesses over time. As
noted in the FOMC's Statement of Longer-Run Goals and Monetary
Policy Strategy, the Federal Reserve's statutory objectives are
generally complementary. Recent history provides an example of
how the Federal Reserve's commitment to anchoring long-run
inflation and inflation expectations enables the Federal
Reserve to maintain an accommodative policy until the
unemployment rate can be brought down to the vicinity of full
employment.
Q.2.c. Given that the U.S. economy is running above potential,
would you expect any short-term stimulative effect of the tax
proposals will contribute to inflation?
A.2.c. If confirmed, my role as a Member of the FOMC would be
to fulfill the Federal Reserve's mandate of maximum employment
and price stability. Fiscal policy can certainly affect the
economic outlook that FOMC Members consider in setting monetary
policy. However, it is one of many considerations. If
confirmed, I would certainly be mindful of any factors,
including fiscal policy, that might affect the economic
outlook.
Q.2.d. Do you believe that the Dodd-Frank Title II Orderly
Liquidation Authority should be preserved and used in
circumstances in which bankruptcy is inadequate to address the
failure of a large financial institution?
A.2.d. I agree with many experts in this area that bankruptcy
should be the preferred route for resolving a failing financial
company. However, a key lesson of the recent crisis was that
the Government needed a better way to deal with the failure of
a large
financial firm, and in response, Congress created the Orderly
Liquidation Authority (OLA). If confirmed, I would certainly
consider whether the circumstances of any impending failure of
a systemically important financial company warranted resolution
under the current OLA rather than the Bankruptcy Code. As a
matter of principle, clarity in the boundary of
responsibilities around the resolution process is critically
important; it must be in place beforehand, so that parties can
be accountable for their role in a future crisis. I am aware
that Members of Congress are examining this authority. If
confirmed, I look forward to studying the issue and helping
Congress in any way that I can.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ FROM MARVIN
GOODFRIEND
Q.1. A common refrain from this Administration is that
financial regulations are overly costly and burdensome. In
fact, the Federal Reserve has staffed a new office to conduct
cost-benefit analyses. However, there is little evidence that
financial regulations are a drag on the banking industry. On
the contrary, the facts show that banks are thriving:
LAccording to FDIC data, banks had record-breaking
profits in 2016 and the highest return on equity in
years. Data from 2017 shows banks may do even better
this year.
LAcross the board, banks have increased their
dividends to shareholders by 17 percent.
LCommunity banks' earnings have also been
increasing--they were up almost 10 percent this quarter
compared to last year.
LHousehold credit, such as home loans, car loans,
credit cards, has surpassed prerecession highs.
LAccording to the Fed, sluggish loan growth in the
commercial sector is due to a lack of demand.
Q.1.a. How should the Federal Reserve account for the benefit
of avoiding another financial crisis in conducting cost-benefit
analyses of financial regulation?
Q.1.b. If banks are making record profits and the cost of a
financial crisis is enormous to the whole economy, do you think
it is appropriate to leave Dodd-Frank financial regulations in
place?
Q.1.c. Should we view the costs of complying with financial
regulations as banks internalizing the risk of a future
financial crisis, rather than leaving that risk on taxpayers'
shoulders?
A.1.a.-c. I understand the Federal Reserve generally takes
costs and benefits into consideration in developing its rules.
I also understand that the Federal Reserve has established a
unit to focus on cost-benefit analysis for significant
rulemakings, which I believe will be a helpful step in the
rulemaking process. In response to the financial crisis, over
the past several years, a number of important changes to
regulation and supervision have been put in place to improve
the resiliency of financial firms and the banking system and to
address the weaknesses that contributed to the crisis, as well
as enhance the ability of financial firms to withstand economic
downturns. As possible changes to the post-crisis structure of
regulation and supervision are considered, I agree with the
Federal Reserve's stated goals of better tailoring supervision
and regulation to be more efficient while maintaining the
resilience of the financial system. If confirmed, I look
forward to working with my colleagues on the Federal Reserve
Board in these efforts.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
MARVIN GOODFRIEND
The Financial Choice Act (H.R. 10)
Q.1. Your support for the Financial CHOICE Act of 2017, (H.R.
10) concerns me. H.R. 10 repeals many of the Dodd-Frank
protections surrounding systemically important financial
institutions. The bill allow banks to elect a simple leverage
ratio instead of risk-weighted capital requirements. It adds
impediments to enforcement (in the name of ``due process
rights'' which would allow banks to avoid accountability for
fraud or deceptive practices. It repeals the Orderly
Liquidation Authority in favor of less practical bankruptcy
provisions. It requires congressional approval before any major
financial regulation can take effect restricting the Fed's
ability to respond nimbly to markets. Section 1001 would
constrain the FOMC's monetary policy, including through a
requirement that the FOMC explain any departure from the Taylor
rule; and section 1008 would place additional restrictions on
the Federal Reserve's section 13(3) powers. It converts the
Consumer Financial Protection Bureau, Office of the Comptroller
of the Currency, and the Federal Housing Finance Agency into
bipartisan commissions more likely to slow actions, and
requires the Fed to describe its monetary policy in a more
detailed, rule-like manner.
Which of those provisions do you support and why? Which do
you oppose and why?
A.1. The foundational concept of the legislation is that
financial films are given a choice to hold higher levels of
capital in exchange for regulatory relief. That is a general
principle that I support. Moreover, I support efforts to
further tailor regulations so that they better take into
account factors such as the size, complexity, and risk profile
of individual institutions, particularly community banks. If
confirmed, I would work with Congress and my colleagues at the
Federal Reserve Board (Board) and the other Federal banking
agencies to ensure that the regulatory and supervisory
frameworks promote sustainable credit availability and economic
growth as well the safety and soundness of supervised
institutions.
Q.2. Despite your comments during the hearing supporting the
dual mandate and your statement that you ``regret'' saying it
was ``incoherent,'' you are well known for opposing the Federal
Reserve's obligation to reduce unemployment. Extensive evidence
strongly support the benefits of having our Nation's Central
Bank place weight on both sides of its mandate--full employment
and low inflation--resulted in lower unemployment, stronger
wage growth, tighter labor markets, and reduced racial economic
disparities.
Please explain your current views regarding the Federal
Reserve's full employment mandate. Please note your
understanding of the civil rights history of the full
employment mandate to create an economy where anyone who wants
employment can find it.
A.2. Congress established the Federal Reserve more than a
century ago to provide a safer and more flexible monetary and
financial system. Nearly 40 years ago, Congress directed the
Federal Reserve to conduct monetary policy to foster a dual
mandate of maximizing employment and maintaining price
stability. As you indicated, the maximum employment mandate
means all people who want to work either have a job or are
likely to find one fairly quickly. The goal of the price
stability requirement is to keep inflation low and stable
enough that it does not figure into households' and businesses'
economic decisions. Both objectives of the dual mandate are
critical in promoting the economic well-being of the United
States. As noted in the Federal Open Market Committee's (FOMC)
Statement of Longer-Run Goals and Monetary Policy Strategy, the
maximum level of employment is not directly measurable and may
change over time. However, maintaining full employment is
important in promoting price stability over time and vice
versa. If confirmed I would be fully committed to pursuing the
goals that Congress has given to the Federal Reserve.
Q.3. In 2012, you told Bloomberg that ``it is really doubtful
whether or not the Fed could achieve 7 percent [unemployment.]
. . . Even if the Fed did succeed by Herculean task getting the
unemployment rate down to 7 percent, we could never be sure
whether that unemployment rate was below what we call the
natural rate, in which case it would give rise to a rising
inflation rate in the next few years, which would be disastrous
for the economy.'' You made similar remarks to the Wall Street
Journal in July of 2011 saying that the Federal Reserve should
prioritize inflation over unemployment. During that time
period, the unemployment rate in Nevada was 12.9 percent--the
highest in the country. In your subsequent writings, you
continue to urge Congress to eliminate the Federal Reserve's
full employment mandate. For example, in July of 2011, you told
the Wall Street Journal that the Federal Reserve should
prioritize inflation over unemployment. In today's labor market
with 4 percent unemployment, we are finally starting to see
improvements in the labor force participation rate, and the job
market is finally starting to draw in less skilled workers. If
the Fed had followed your guidance, they would have begun
raising interest rates long before the recovery had a chance to
reach these communities.
Why were you so repeatedly wrong about the ability of the
Federal Reserve to increase employment and manage inflation in
the aftermath of the Financial Crisis?
What have you learned from your miscalculation and how
would you respond to future recessions based on your error?
Specifically, what benefits do you see to a tight labor market?
A.3. I have been surprised by the absence of inflation in the
years following the Great Recession. Economists are divided to
this day about the explanation for persistently low inflation.
I have taken this episode into account in my current thinking
on monetary policy. As noted in the FOMC's Statement of Longer-
Run Goals and Monetary Policy Strategy, the Federal Reserve's
statutory objectives are generally complementary. Recent
history provides an
example of how the Federal Reserve's commitment to anchoring
long-run inflation and inflation expectations enables the
Federal
Reserve to maintain an accommodative policy until the
unemployment rate is brought down to the vicinity of full
employment. If I am confirmed to the Board, I will use that
experience to help normalize monetary policy to maintain full
employment and low inflation.
Q.4. Both House Financial Services Chair Jeb Hensarling and
Ranking Member Maxine Waters have been critical of the Fed's
use of interest on excess reserves. The Chairman referred to it
as a ``subsidy'' to Wall Street, and the Ranking Member asked
whether the Fed can raise interest rates without relying so
heavily on ``paying the banks.'' Each time the Fed raises the
Federal funds rate, it also raises the rate that it pays to
commercial banks via interest on reserves. After several rate
hikes last year, the total amount paid to banks in interest on
reserves came to nearly $30 billion.
You have suggested replacing the liquidity coverage ratio
that was created by Dodd-Frank with heavier reliance on
monetary policy, especially interest on excess reserves. Can
you explain your position that we should eliminate the rule
aimed at limiting risky
investment and instead pay banks larger and larger sums of
risk-free money?
A.4. The payment of interest on reserves is a tool widely used
by central banks around the world. The payment of interest on
reserves encourages banks to hold reserves at the central bank,
which facilitates payments and also enhances the liquidity of
the banking system. And interest on excess reserves is the
critical tool that has allowed the Federal Reserve to raise
short-term interest rates before gradually shrinking the
balance sheet.
Stronger risk-based capital and liquidity regulations,
together with the stress testing regime, help ensure that large
U.S. banks are better positioned to continue lending through
periods of economic shocks and market turbulence. If confirmed,
I would look forward to further studying the interaction of
liquidity regulations and monetary policy tools to ensure that
we have the appropriate framework in place for protecting
safety and soundness, while promoting credit availability and
economic growth.
Q.5. During the hearing, you answered my question about your
report to tax currency by placing magnetic strips on dollar
bills. In the hearing, you explained that taxing currency was
an idea you presented in 1999 at a Federal Reserve Conference
and that you did not support such an idea. Yet, despite your
dismissal, you have promoted variations of this proposal for
nearly two decades, including a presentation promoted
variations of this proposal for nearly 20 years. At an August
2016 Economic Policy Summit in Jackson Hole, Wyoming, you
presented ``The Case for Unencumbering Interest Rate Policy at
the Zero Bound.'' When you updated the concept in 2015, you
left out the magnetic strips but the concept that a dollar
might not be worth a dollar remains the same.
How would your proposal affect savers and low-income
depositors? The national savings rate has fallen in the past
year, would tax currency discourage low- and middle-income
people from building up a nest egg?
You've written that this proposal is essentially a way of
achieving negative interest rates. Can you explain why you are
a proponent of negative interest rates?
A.5. I have spent my 40-year career thinking, writing, and
teaching about issues in the field of economics. On many
occasions, I have been asked to consider theoretical issues in
order to contribute to the robust debate among central bankers
here in the United States and around the world. As an academic-
practitioner at the Federal Reserve Bank of Richmond, I
presented an academic paper to a Federal Reserve conference in
1999 to imagine monetary policy options that would be available
should interest rates hit the zero interest bound. I discussed
negative interest rate policy and quantitative easing. Indeed,
economists have been studying various aspects of negative
interest rates for most of the last century. And today, some
major central banks abroad have implemented negative interest
rate policy together with other policy initiatives, including
quantitative easing. The current focus of U.S. monetary policy
is on continuing the path of gradually removing accommodation
as the labor market strengthens and there is continued progress
toward the 2 percent inflation objective. If confirmed, I would
be committed to working with my colleagues on the FOMC to
promote the economic well-being of the United States by
fostering maximum employment and stable prices.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM THOMAS E.
WORKMAN
Q.1. You've spent your distinguished career in the insurance
industry. While that provides you with valuable expertise to
bring to the FSOC, you don't have any experience as a
regulator.
Putting on a watchdog hat, are there any trends or
practices in the insurance industry that you're concerned
represent an emerging risk to financial stability?
A.1. If confirmed, I look forward to working with the other
FSOC Members to identify emerging risks to financial stability,
including any risks related to the insurance industry. FSOC's
2017 annual report discussed potential risks arising from
captive reinsurance, cybersecurity threats and the environment
of low but rising interest rates, and I look forward to working
with FSOC Members on those and other emerging risk issues.
Q.2. Asked by Senator Cortez Masto whether you think that
nonbank SIFI designations should be ``tossed out as a tool,''
you mentioned activities-based regulation and suggested that
FSOC ought to first ``go to the primary regulators,'' which in
the case of insurance are State insurance regulators. Asked
whether FSOC would have little power to constrain risky
activities in the insurance industry since it's regulated at
the State level, you further stated that ``insurance regulators
are expressly considered to be primary regulators for purposes
of FSOC actions.'' However, FSOC lacks the power to effectively
constrain risky activities in the insurance industry through
its activities-related powers. Under Section 120 Dodd-Frank, a
primary financial regulatory agency need not implement FSOC-
recommended standards if it ``explain[s] in writing to the
Council . . . why the agency has determined not to follow the
recommendation of the Council.'' Additionally, an attempt by
FSOC, a Federal agency, to compel a State authority to enforce
Federal standards would raise constitutional concerns under the
so-called ``anti-commandeering'' principle.\1\
---------------------------------------------------------------------------
\1\ See New York v. United States, 488 U.S. 1041 (1992); Printz v.
United States, 521 U.S. 898 (1997).
---------------------------------------------------------------------------
Do you agree that there are both statutory and
constitutional obstacles that would limit FSOC's power to force
State insurance regulators to adopt activities-based standards?
Why or why not? If so, do you believe that it is still
important that FSOC consider designations of entities under
Section 113 of Dodd-Frank? Why or why not?
A.2. FSOC has authority under Section 120 of the Dodd-Frank Act
to make nonbinding recommendations to primary financial
regulatory agencies, including State regulators. FSOC also has
other tools to respond to emerging risks, including working
collaboratively with regulators to address identified risks and
designating individual nonbank financial companies whose
distress or activities could threaten financial stability. If
confirmed, I look forward to working with the other FSOC
Members to identify how to best apply these tools to address
risks identified by FSOC.
Q.3. The November Treasury Report on FSOC designations said
that the FSOC shouldn't just consider whether a failure of a
nonbank would be catastrophic when making a designation
decision, but also should consider the ``likelihood'' of a
firm's failure.\2\
---------------------------------------------------------------------------
\2\ https://www.treasury.gov/press-center/press-releases/Documents/
PM-FSOC-Designations-Memo-11-17.pdf.
---------------------------------------------------------------------------
How is the FSOC supposed to assess the likelihood of firm
failing? Isn't the purpose of a designation to avoid a
catastrophic failure, even if it's a remote event?
A.3. If confirmed, I look forward to working with the other
FSOC Members to consider this and other recommendations made in
Treasury's November 2017 Report on FSOC designations. It is
worth noting that the Report ``recommends that the Council
assess the likelihood of a firm's material financial distress
as part of its determination whether designation would promote
U.S. financial stability.''
------
RESPONSE TO WRITTEN QUESTION OF SENATOR SCOTT FROM THOMAS E.
WORKMAN
Q.1. Mr. Workman, I enjoyed our discussion in my office. We
both know that our Nation's system of risk management is
critical for millions of Americans dealing with a crisis today
or planning for a better tomorrow. When it looked like FSOC
would lose its only insurance vote, I rang the alarm. Bank
regulators shouldn't be making such consequential decisions
about the business of insurance without someone like you in the
room. While the heads of the Federal Reserve, NCUA, and OCC are
very bright people, they have no insurance experience. Between
the President's executive order last spring and Treasury's
report last November, the Administration has been moving in the
right direction on nonbank SIFI designations. Please answer the
following with specificity:
LWe've regulated insurance on the State level for
150 years. How will you involve State insurance
commissioners in your work?
LWhat will your role be when it comes to insurance
regulation conversations at the international level?
A.1. If confirmed, I would work closely with State insurance
commissioners, including the leadership of the National
Association of Insurance Commissioners, and others engaged in
conversations at the international level, such as at meetings
of the International Association of Insurance Supervisors, to
most effectively fulfill my responsibilities as the Independent
Member with Insurance Expertise of the Council.
------
RESPONSE TO WRITTEN QUESTION OF SENATOR WARNER FROM THOMAS E.
WORKMAN
Q.1. In September of last year, FSOC voted to remove Federal
oversight of AIG, and in the last week the Government decided
to drop its appeal in the MetLife case, effectively
dedesignated MetLife.
Did you agree with these decisions?
A.1. Though I did not have the benefit of taking part in the
deliberations regarding designation or dedesignation of AIG or
MetLife, it appears that FSOC has taken a rigorous analytical
approach in its recent decisions with respect to nonbank
financial companies. If confirmed, I look forward to working
with FSOC Members in their analysis of nonbank financial
companies going forward.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ FROM THOMAS E.
WORKMAN
Q.1. Do you believe that when FSOC considers designating a
nonbank financial institution as systemically important, it
should take into consideration the burden of such a designation
on the institution?
A.1. Regulatory requirements can impose substantial costs on
companies. I believe it is appropriate for regulators to take
actions only when the anticipated benefits exceed the costs.
Q.2. The burden of a SIFI designation on a nonbank institution
is not one of the statutory considerations provided in the Wall
Street Reform Act.
What would be the statutory basis for FSOC to consider
``burden'' in making SIFI designations?
A.2. I believe that regulators should be permitted to consider
the costs and benefits of their actions. If confirmed, I look
forward to working with the other FSOC Members to consider how
best to implement FSOC's duties within the scope of its
statutory authorities.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
THOMAS E. WORKMAN
Subjecting FSOC to Appropriations
Q.1. There have been a number of legislative proposals that
would subject the Office of Financial Research, and thereby the
Financial Stability Oversight Council, to the whims of the
congressional appropriations process.
In your view, what concerns do you have about requiring the
systemic regular for the Nation's financial system to be
subject to congressional appropriations? Would subjecting the
FSOC to appropriations potentially impede the independence and
the ability of the Council to function?
A.1. It is important for FSOC to conduct its work with an
appropriate level of public transparency and congressional
oversight, while enabling FSOC to perform its functions
effectively and efficiently. It is also worth noting that
funding through the appropriations process is similar to that
which applies to other vital functions of the Federal
Government.
Nonbank Designations: AIG and MetLife
Q.2. FDIC Chair Gruenberg in his dissenting vote on FSOC's
determination that the giant insurance firm, AIG, was no longer
to be classified as ``systemically important'' noted, ``nothing
about the liquidity characteristics of AIG's liabilities and
assets has changed to diminish the concerns originally raised
by the FSOC.''
Do you agree or disagree with FDIC Chairman Gruenberg?
A.2. Though I did not have the benefit of taking part in the
deliberations regarding dedesignation of AIG, it appears that
FSOC has taken a rigorous analytical approach to its recent
determination decisions with respect to nonbank financial
companies, and it has provided transparency about the views of
individual members. AIG no longer engages in many of the risky
activities that led to the firm's near-failure in the financial
crisis, and it is half the size it was in 2008. If confirmed, I
look forward to working with FSOC Members to conduct required
analyses going forward, and assure the maximum transparency
possible in doing so.
Q.3. During the Financial Crisis, AIG needed a $182 billion
infusion from taxpayers. AIG has paid that back--plus $23
billion in interest--yet it still poses risks if AIG failed
again.
What are the risks to investors, employees, partners and
the economy if AIG could not fulfill promised insurance claims?
A.3. Insurance companies play a vital role in the U.S.
financial system and also provide important services to their
customers. Regulators should continue to work to protect
insurance customers and to promote the stability of the
financial system. Though I do not have firsthand knowledge of
the deliberations regarding AIG, it appears FSOC determined
that in its current form, AIG's potential distress does not
present a substantial risk to U.S. financial stability.
Q.4. Former Federal Reserve Chairman Paul Volcker and Ben
Bernanke criticized the decision to designate MetLife saying,
``it could, under stress, affect the stability of financial
markets more generally.'' According to publicly available
documents, the FSOC found that MetLife--a huge company with
more than $900 billion in assets, directly or indirectly
guarantees the value of more than $100 billion of investments
for large institutions. FSOC found that investors owned more
than $130 billion in MetLife debt--of which only $18.6 billion
was long-term debt--and that the firm also has 50 million
insurance customers and $275 billion in account liabilities.
FSOC realized that the magnitude of harm transmitted throughout
the financial system arising from a fire-sale of MetLife assets
would be greater than the harm caused by fire-sales at all but
nine other firms in the Nation.
What are the risks to investors, employees, partners, the
financial markets and the economy if MetLife cannot fulfill
promised insurance claims?
A.4. Insurance companies play a vital role in the U.S.
financial system and also provide important services to their
customers. Regulators should continue to work to protect
insurance customers and to promote the stability of the
financial system.
Q.5. Just because MetLife and AIG were de-designated does not
mean they cannot be redesignated.
What analysis would you consider to decide to re-designate
MetLife or AIG or designate a new insurance firm as
systemically important? At the hearing, you mentioned an
activities-based approach as an option. Can you expand on what
criteria you would consider? How would you collaborate with
State regulators to get a full scope of activities within an
insurance firm?
A.5. An activities-based or industry-wide approach should seek
to identify activities of financial companies that are widely
engaged in, or products that are broadly offered, and that may
pose risks to the financial system. FSOC should work with State
regulators to identify any such risks, analyze their scope, and
to impose any appropriate remedy. Of course, the statutory
authority to designate and the related determination standards
remain in place as a last resort.
Emerging Trends in the Insurance Industry
Q.6. Mr. Workman, you have spent your career in the insurance
industry. While that provides you with valuable expertise to
bring to the FSOC, you don't have any experience as a
regulator.
Putting on a watchdog hat, are there any trends or
practices in the insurance industry that you're concerned
represent an emerging risk to financial stability?
A.6. If confirmed, I look forward to working with the other
FSOC Members to identify emerging risks to financial stability,
including any risks related to the insurance industry. FSOC's
2017 annual report discussed potential risks arising from
captive reinsurance, cybersecurity threats and the environment
of low but rising interest rates, and I look forward to working
with FSOC Members on those and other emerging risk issues.
Pension Risk Transfers
Q.7. Companies are increasingly closing out defined benefit
plans and shifting pension risk to the insurance industry.
Are you at all concerned about the volume of liabilities
some of the largest life insurance companies are undertaking?
Do you have any concerns about whether the State insurance
guaranty fund system is capable of handling the failure of a
large life insurance company with huge pension plan
liabilities?
Are these pension buyouts and associated risks something
that the FSOC should look at?
A.7. Pensions play an important role in the U.S. financial
system. If confirmed, I look forward to working with the other
FSOC Members to identify emerging risks to financial stability,
including any risks that may be related to the insurance
industry.
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