[Senate Hearing 115-306]
[From the U.S. Government Publishing Office]
S. Hrg. 115-306
NOMINATIONS OF RICHARD CLARIDA AND MICHELLE W. BOWMAN
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
ON
THE NOMINATIONS OF:
Richard Clarida, of Connecticut, to be a Member and Vice Chairman,
Board of Governors of the Federal Reserve System
__________
Michelle W. Bowman, of Kansas, to be a Member, Board of Governors of
The Federal Reserve System
__________
MAY 15, 2018
__________
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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
Joe Carapiet, Senior Counsel
Travis Hill, Senior Counsel
Elisha Tuku, Democratic Chief Counsel
Laura Swanson, Democratic Deputy Staff Director
Amanda Fischer, 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, MAY 15, 2018
Page
Opening statement of Chairman Crapo.............................. 1
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
NOMINEES
Richard Clarida, of Connecticut, to be a Member and Vice
Chairman, Board of Governors of the Federal Reserve System..... 4
Prepared statement........................................... 27
Biographical sketch of nominee............................... 28
Responses to written questions of:
Senator Brown............................................ 57
Senator Reed............................................. 63
Senator Menendez......................................... 64
Senator Warner........................................... 67
Senator Warren........................................... 70
Senator Cortez Masto..................................... 73
Michelle W. Bowman, of Kansas, to be a Member, Board of Governors
of the Federal Reserve System.................................. 5
Prepared statement........................................... 50
Biographical sketch of nominee............................... 51
Responses to written questions of:
Senator Brown............................................ 83
Senator Reed............................................. 91
Senator Menendez......................................... 92
Senator Warner........................................... 95
Senator Warren........................................... 97
Senator Cortez Masto..................................... 100
Additional Material Supplied for the Record
List of Federal Reserve Enforcement Actions from January 2015-May
2018 submitted by Richard Clarida and Michelle W. Bowman....... 116
Joint letter submitted in support of the nomination of Richard
Clarida........................................................ 122
ICBA letter submitted in support of the nomination of Michelle W.
Bowman......................................................... 124
Excerpt from the December 2012 FDIC Study submitted by Senator
Brown.......................................................... 126
(iii)
NOMINATIONS OF RICHARD CLARIDA AND MICHELLE W. BOWMAN
----------
TUESDAY, MAY 15, 2018
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:17 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. The hearing will come to order.
This morning we will consider the nominations of the
Honorable Richard Clarida to be a Member and Vice Chairman of
the Board of Governors of the Federal Reserve System, and
Commissioner Michelle Bowman to be a Member of the Board of
Governors of the Federal Reserve System.
Welcome and congratulations to each of you for your
nominations to these positions. I see friends and family
sitting with you, and I welcome them here as well. You are
certainly welcome to introduce them.
We are fortunate to have two highly qualified nominees
appearing today. These positions are critical to ensuring safe,
sound, and vibrant financial systems and a healthy, growing
economy.
Dr. Clarida currently serves as managing director and
global strategic advisor at PIMCO, a position he has held since
2006.
Previously, he served as Assistant Secretary of the
Treasury for Economic Policy from 2002 to 2003 and as a senior
staff economist with the Council of Economic Advisers from 1986
to 1987.
In his academic career, he was an assistant professor at
Yale University from 1983 to 1988 and has served as a professor
of economics at Columbia University in various capacities since
1988.
If confirmed, Dr. Clarida will serve as the Federal
Reserve's Vice Chairman and will play an important role in
monetary policy normalization.
Dr. Clarida has written extensively about monetary policy,
and I look forward to hearing more about his views. Such
expertise will be especially important as the Fed continues to
wind down its balance sheet and raise interest rates after
years at the zero lower bound.
Commissioner Bowman is currently the State Bank
Commissioner of Kansas, a position she has held since February
2017. Previously, Commissioner Bowman worked as a Vice
President at Farmers & Drovers Bank, a community bank with $175
million in assets, from 2010 through 2017.
She has also served in a number of Government roles,
including as a staffer in both the Senate and House and in
various roles at the Department of Homeland Security.
With past experience as a community banker and as a bank
regulator, Commissioner Bowman is well equipped to fill the
Federal Reserve Board role reserved for someone with community
banking experience.
Rightsizing our regulation for community banks has been a
critical goal of mine as Chairman. Earlier this year, the
Senate passed Senate bill 2155, a bipartisan bill focused on
providing regulatory relief for community banks.
If confirmed, Commissioner Bowman will play a key role in
implementing the bill, if it is signed into law. In addition,
the Federal Reserve continues to review many of the rules put
in place following the crisis.
If confirmed, I look forward to working with Dr. Clarida
and Commissioner Bowman on further regulatory and monetary
policy improvements. 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. I want to
congratulate the two of you and welcome your families to the
Committee. Thank you for your willingness to serve our country
In the last Congress, two of President Obama's nominees to
serve as Members of the Federal Reserve Board of Governors were
denied even consideration by this Committee. Mr. Allan Landon,
a Republican, was nominated in January 2015. He waited for 2
years for a hearing--a hearing he never got. Ms. Kathryn
Dominguez waited nearly as long--a year and half. Again,
nothing. It sounds a lot like what the Republicans did on a
Supreme Court nominee.
As a result, President Trump will be able to nominate six
of the seven members to the Board of Governors of the Federal
Reserve. His first picks, Chair Powell and Vice Chair Quarles,
have already been confirmed; Mr. Goodfriend has had his
hearing.
Today's nominees, the Honorable Richard Clarida and
Commissioner Michelle Bowman, bring relevant experience to the
Federal Reserve Board. Dr. Clarida, who is nominated to serve
as Vice Chair of the Board, has spent his career studying
monetary policy.
As we enter our ninth year of the recovery since the Great
Recession, even though job growth in the last couple years has
not been quite what it was, with the Fed funds rate still below
2 percent and inflation finally nearing the Fed's target,
expertise in that area is critical.
Ms. Bowman has been nominated to serve in the role reserved
for an individual with experience working in or supervising
community banks. She has done both.
But experience is only useful if you have learned the right
lessons from it. So despite the nominees' experience, I am
concerned. We have seen the Treasury's recommendations urging
that
we ``tailor'' and ``recalibrate'' the financial protections put
in place after the crisis. It sound a lot like Wall Street's
wish list.
We have heard the Fed's Vice Chair of Supervision's plans
for bank rules. We have seen actions with the Fed's recent
capital and leverage proposals, spoken out in opposition by
Sheila Bair and Tom Hoenig, two prominent Republican
regulators. We see they decrease the amount of capital required
by the biggest banks by $121 billion. So we have banks with
some of the most--the highest profitability rates in their
history. We have a huge tax cut bestowed on the financial
services industry. We have legislation that has passed the
Senate and will likely soon pass the House, rolling back even
more rules and regulations for banks. It just never seems to be
enough for them.
It matters more than ever, because of that, who will be
voting on proposals to weaken bank rules. The Fed, the OCC, the
Office of Thrift Supervision, and other watchdogs spent the
decade--``watchdogs,'' I use that term loosely--leading up to
the crisis weakening bank rules and failing to protect
communities.
In the first half of 2007, my ZIP Code in Cleveland--
44105--had more foreclosures than any other ZIP Code in the
United States.
Factories closed; neighborhoods and towns emptied out. The
population in Slavic Village where I live dropped 27 percent,
down to 20,000 people. At the same time the subprime lending
industry swept in.
As early as 2000, the Cuyahoga County Treasurer and other
local officials went to the Federal Reserve asking them to take
action against subprime lenders preying on homeowners. As early
as 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007.
The Fed did nothing.
Dr. Clarida, you have said that the financial crisis
resulted from serious failures by regulators of securities
markets and banks to adequately understand and supervise
markets. I appreciated your comments in my office and the
vigilance which I hope you show.
The financial crisis followed a decade of deregulation of
the financial industry, and now too many people who informed
the policies before the crisis are back.
Dr. Clarida admitted we got it wrong.
Ms. Bowman knows firsthand how bank failures impact
communities across the country: 462 failures starting in 2008,
including bank failures in your home State and Senator Moran's
home State of Kansas. Employment in Kansas is only 1.5 percent
higher than at the pre-crisis peak 10 years ago.
I wish others in the Administration and Congress would
remember the devastating impacts of the financial crisis.
As I consider the nominations for each of you, I am not
just looking to what expertise you bring to these positions.
You do that. I want to know that you remember the people behind
the numbers. I am looking at how you will approach the numerous
issues considered by the Board: monetary policy, small bank
regulation with which you are so familiar, Ms. Bowman, but also
big bank regulation and supervision, enforcement actions, and,
most importantly, whether you will push back on policies that
weaken financial stability. Do not just rely on Vice Chair
Quarles, who is Director of Supervision. Study it. Push back on
him when he is wrong. Push back on him when he deregulates
beyond what he should, which already seems imminent.
Thank you.
Chairman Crapo. Thank you.
At this point we will administer the oath. Will the
nominees 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?
Mr. Clarida. I do.
Ms. Bowman. I do.
Chairman Crapo. And do you agree to appear and testify
before any duly constituted Committee of the Senate?
Mr. Clarida. I do.
Ms. Bowman. I do.
Chairman Crapo. Thank you. You may sit down.
I will advise the witnesses that your written statements
will be made a part of the record in its entirety. As you can
see, we have got a clock there. We ask you to try to keep your
presentations to 5 minutes, if possible, so we will have time
for questions from the Senators. And, Dr. Clarida, you may
proceed first.
STATEMENT OF RICHARD CLARIDA, OF CONNECTICUT, TO BE A MEMBER
AND VICE CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE
SYSTEM
Mr. Clarida. Thank you very much. Chairman Crapo, Ranking
Member Brown, and Members of the Committee, thank you for the
opportunity to appear before you today. I am grateful for the
Committee's consideration for the important positions for which
I have been nominated. I am also honored to have been nominated
by the President to be Vice Chair of the Federal Reserve Board
of Governors and a Member of the Board of Governors.
I am grateful for the support of my family who is with me
here today: my wife of 29 years, Polly Barry, and my sons
Matthew and Russell.
The Federal Reserve has been charged by the Congress with a
dual mandate responsibility of maximum employment and price
stability. I fully support both pillars of this dual mandate
and, if I am confirmed, will support a balanced approach to
achieving these important objectives.
The Federal Reserve also plays a central role in ensuring
the safety, soundness, and stability of our financial system.
If I am confirmed, I will support policies that are effective,
efficient, and appropriately tailored; but I will also want to
preserve the important gains in resiliency and stability of our
financial system that have resulted from the significant
improvements and reforms put in place since the financial
crisis.
I believe I am well qualified for the positions for which I
have been nominated. In my published work, I have developed,
along with others, a framework for monetary policy analysis
that has been widely cited at the Fed and central banks around
the world. Although I have served most of my career in
academia, I have had two opportunities to serve in economic
policy positions in the Federal Government, in the executive
branch: as a senior staff economist with Council of Economic
Advisers in 1986 and 1987; and as Assistant Secretary of the
Treasury for Economic Policy between 2002 and 2003. These
experiences taught me the importance of doing economic analysis
that is practical, that is relevant, and that gives insights
into the way that economic policy impacts the lives of real
Americans.
I have also had an opportunity to advise investment firms
on economics and strategy, and I think these experiences have
given me some insights into the interplay between
macroeconomics and financial markets.
The Federal Reserve has an enormous responsibility to
achieve the objectives assigned to it by the Congress, to
communicate the rationale for these policies, and to explain
how the policies will achieve the goals assigned. If I am
confirmed, I look forward to working with Chair Powell and my
other colleagues to satisfy the assignments given to the
Federal Reserve and, importantly, to foster the transparent
communication and accountability that is so important for the
Fed's independent and nonpartisan status.
Thank you again for the privilege of appearing before you
today, and I look forward to answering your questions.
Chairman Crapo. Thank you, Dr. Clarida.
Commissioner Bowman.
STATEMENT OF MICHELLE W. BOWMAN, OF KANSAS, TO BE A MEMBER,
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Ms. Bowman. Good morning, Chairman Crapo, Ranking Member
Brown, and Members of the Committee. Thank you for this
opportunity to appear before you today. I am deeply honored
that the President has nominated me to serve as a Member of the
Board of Governors of the Federal Reserve System. Because
community banking is a vital and ongoing part of my family's
legacy, I am also humbled that, if I am confirmed, I will be
holding the position designated for someone with community
banking experience.
I am also grateful to my family and my husband's family for
their continued support and belief in me. My husband, Wes, our
children Jack and Audrey, my sister Maggie, who is a school
teacher in Kansas City, Missouri, and my parents, Jan and Hank
White, are with me today. My father, Hank, is a fourth-
generation banker. He is a farmer and a rancher, a Vietnam
veteran, and a retired U.S. Air Force officer. My mother, Jan,
is a great inspiration. She taught me that with hard work,
anything is possible. My in-laws, John and Sherry Bowman, and
Sherry's 91-year-old mother, Mary Hopkins, could not be here
with us today, but they are watching from Everest, Kansas.
My family and I have been in community banking for
generations. In 1882, my great-great-grandfather, W.H. White,
helped to charter the Farmers & Drovers Bank. The bank was
named for the customers it served then and continues to serve
today: the farmers and ranchers of the Flint Hills of Kansas.
Today the fourth and fifth generation of my family continue
this long tradition of service through the bank and through
active participation in the community and through volunteer
work in our community of 2,300 people. I know firsthand that
community banks are a vital part of the backbone of small,
rural, agricultural towns, and they play a
critical role in providing access to credit and fostering
economic activity in communities across our country. Without
these institutions, many communities and many of our citizens
will see their economic opportunities suffer significantly.
I joined my family's bank in 2010, and I learned the
business from the front line to the back office. My most
challenging role was as compliance officer--working with our
small team to implement many of the post-crisis regulations.
Although the crisis revealed weaknesses in the U.S. financial
system that needed to be addressed, I have witnessed firsthand
how the regulatory environment created in the aftermath of the
crisis has disadvantaged community banks. And if confirmed, I
will bring this perspective to my work at the Board to ensure
that rules preserve the resiliency of the financial system, but
that they are appropriately tailored to the size, complexity,
and risk of an institution.
As a community banker, it was my job to support local
businesses and consumers. This experience has given me a
personal and deep understanding of how the Federal Reserve's
goals of fostering maximum employment and stable prices
directly affect the financial system and the broader economy.
The dual mandate is critically important to our economy, to our
businesses, to our families, and our communities. If I am
confirmed, I will be very focused on how we can do the best job
possible to fulfill that mandate.
I currently serve as the Kansas State Bank Commissioner,
and our office oversees hundreds of State-chartered banks,
trust companies, money transmitters, and other nondepository
financial service institutions. Our mission is both proactive
oversight and protection of the consumers our financial
institutions serve. As commissioner, I am accountable to the
people of Kansas. And as I carry out my regulatory mission, my
goal is to treat every consumer and every institution fairly,
respectfully, and with open communication.
I believe the experiences I have described qualify me for
this important role, and if confirmed by the Senate, I will be
committed to accountability, transparency, and clear
communication in all of my responsibilities at the Federal
Reserve.
Thank you for the honor of this hearing, and I look forward
to answering the Committee's questions.
Chairman Crapo. Thank you very much, Commissioner Bowman.
I will proceed with the first questioning. My first
question is really to both of you, so I would like you each to
respond to this. There has been a lot of discussion here in the
Senate and, frankly, here today about the concept of tailoring
and whether--some view tailoring as rolling back regulations
that should be in place. Others views tailoring as getting the
correct requirements of regulation focused properly on the risk
that is presented by individual financial institutions.
I would just like to have your perspective on both of
those. I think it is very clear that one way to improve
economic growth is by addressing areas where financial
regulations can be improved. Financial regulations should
promote a vibrant, growing economy, but should still ensure a
safe and sound financial institution. And I personally believe
that those two objectives can be achieved. I would simply like
your perspectives on that. Dr. Clarida, would you go first?
Mr. Clarida. Well, thank you, Mr. Chairman. And, yes, I
would agree very much with that sentiment. I think that
tailoring and efficiency are goals, but within the context of
preserving the important improvements in the financial
stability and soundness in our financial system. And certainly
were I to be confirmed, that would be my focus on any
particular matter that I would vote on as a member, namely, to
seek out efficiencies and tailoring to specifics as best as
possible, but not putting the system at risk in an unnecessary
way.
Chairman Crapo. Thank you.
Commissioner Bowman?
Ms. Bowman. Chairman Crapo, a great deal of work has gone
into improving the levels of both capital, liquidity, the
stress testing that has been put in place, and also the
resolvability of institutions has improved greatly since the
crisis. I think when we are talking about appropriateness of
regulation and applying it to different institutions in our
financial system, we need to be very aware of the complexity,
the size, and the risk of those institutions as we are looking
to ensure the safety and soundness of our financial system.
I believe it is appropriate to consider those
characteristics within the context of safety and soundness and
looking to apply the most appropriate level of regulation to
each institution.
Chairman Crapo. Well, I appreciate your answers, and to
basically just summarize what I heard, we all agree that the
primary objective of our regulatory system should be to assure
the safety and soundness of our financial institutions in this
country. Within that standard there can be a level of
regulation, depending on the size, complexity, business model,
and financial risk that is posed by an individual financial
institution.
I probably just have time for one more question, and so I
am going to ask that of you, Dr. Clarida, and this goes not to
regulation but to basically economic policy. The Fed recently
began the process of shrinking its balance sheet, which
currently sits above $4 trillion. In a speech last year,
Chairman Powell cited long-run estimates of the appropriate
size of the balance sheet as about $2.4 to $2.9 trillion by
2022. I would just like your opinion on these factors. What
factors do you expect to focus on in determining the pace and
ultimate scope of the balance sheet reduction?
Mr. Clarida. Thank you, Mr. Chairman. Let me begin by
saying that certainly I think the Fed does need a smaller
balance sheet, and so I am very much in support of the efforts
commenced last year to begin to shrink that balance sheet. The
ultimate destination for the balance sheet should be a lot
smaller than it is today. I am aware of Chairman Powell's
comments on that.
One factor determining the size of the balance sheet is the
amount of currency in circulation, and that number is growing.
So the Fed will have a larger balance sheet, I imagine, at the
end of this process, whenever it ends, than it did before the
crisis.
I would look forward, if I am confirmed, to working with my
colleagues to assess the appropriate metrics for determining
when to stop to shrink the balance sheet. So I think the
numbers that the Chair has mentioned, that Chair Powell has
mentioned, makes sense to me, but I have not studied it deeply
and would look forward to talking with my colleagues about
that, if confirmed.
Chairman Crapo. Thank you very much.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
A question for both of you. I will start with you,
Commissioner Bowman. Do you believe the Federal Reserve is
intended to be independent from the President of the United
States?
Ms. Bowman. Absolutely.
Senator Brown. Dr. Clarida?
Mr. Clarida. Absolutely. It is essential.
Senator Brown. Thank you. My understanding is that,
Commissioner Bowman, you did not meet with the President and,
Dr. Clarida, you did before the nomination?
Mr. Clarida. I did meet with the President, yes.
Senator Brown. Ms. Bowman, you did not?
Ms. Bowman. Correct.
Senator Brown. OK. When you were interviewed by the
President, Dr. Clarida, did he say anything that gives the
impression that he did not view the central bank as
independent?
Mr. Clarida. Absolutely not, and let me just state
definitively that I had a number of meetings over several
months with a number of officials, including the President, and
in no meeting and at no time did I ever have any reason to
question the independence of the Federal Reserve. Absolutely
not.
Senator Brown. OK. Thank you.
Ms. Bowman, I appreciated the story of your family and the
bank, and I must admit maybe I should have listened more to
Senator Moran. I did not know what a drover was until I saw
the----
[Laughter.]
Senator Brown. It is not a word, not a thing that we do in
Ohio, but the farmers and drovers, so I like that. Your
family's bank is profitable. It serves its community. It has
maintained a Tier 1 leverage ratio of well over 20 percent,
which is five times the required ratio, to my understanding
throughout your time working there. Do you agree that banks
with higher capital levels tend to lend more, not less, through
the ups and downs of the business cycle?
Ms. Bowman. Senator, I agree that capital is a very
important part of the stability of our financial system, and
capital is one of the ways that banks have credit available or
funds available to loan to their communities or to their loan
customers. It is a very important part of the system. One of
many of the four pillars that have been strengthened since the
crisis is capital, and liquidity as well. Both of those are
important parts of the----
Senator Brown. And you--sorry to interrupt. You have been
able to serve your community well, your bank--you were not
there during all this time, I understand. With those higher
capital levels, you were able to serve the community well in
good times and bad times, correct?
Ms. Bowman. That is my understanding, yes, correct.
Senator Brown. OK. The Fed last month proposed weakening
the required leverage rules for the very largest banks, which
already many experts think are too low at 5 percent. My
question to both of you, and I will start with you, Ms. Bowman:
Will you commit to oppose any Federal proposal that weakens
leverage rules for the largest banks?
Ms. Bowman. Senator, I think it is important to understand
the details of all of those proposals so that should I be
asked, and if I am confirmed, to participate in discussions
regarding those proposals, that I am fully informed, that I
have the opportunity to speak with my colleagues, and that I
can vote in a way that I feel is appropriate.
Senator Brown. Thank you for that. I did not expect
anything less--or anything more indirect. If you come to the
conclusion after talking to Supervision Chair Quarles, Vice
Chair Quarles, whatever, and you analyze this and you believe
in your mind that these weakened leverage rules--weakening the
required leverage rules, you would oppose it?
Ms. Bowman. Senator, I would certainly express my opinion
and ask questions so that I would be----
Senator Brown. But if your conclusion was, yes, these rules
would weaken required leverage rules, would that mean you would
oppose it?
Ms. Bowman. I would feel free to vote as I felt
appropriate, and if that were how I felt, I would certainly do
so.
Senator Brown. Dr. Clarida, would you like to comment on
the same question?
Mr. Clarida. Just briefly, just to say that, as I mentioned
in my opening statement, a priority of mine in any
consideration on any item I would vote on in this area would be
I would need to be assured that are preserved the substantial
gains in safety and soundness and resiliency that we have in
place. So I would look at it on a case-by-case basis, and I
agree with the prior comment.
Senator Brown. That is a bit of a surprise answer from you,
Dr. Clarida. In 2010, you wrote, ``Financial history suggests
`never again' eventually becomes `this time it is different.'
`This time it is different' eventually sets the stage for the
next financial crisis.''
Based on that, you give the same answer?
Mr. Clarida. My answer would simply be, as I mentioned, I
would want to preserve what we have in place. I would look on
it, if confirmed, on a case-by-case basis. But I would
certainly hope that I would never fall victim to the ``this
time it is different'' with regards to the financial crisis
because it was enormously costly to the economy, to individual
communities, and certainly that is not a lesson that I will
forget.
Senator Brown. Well, thank you. I am concerned that we
have--well, I am concerned when we have a very aggressive Vice
Chair of Supervision now at the Fed who has had a history of
supporting deregulation, in some cases ignoring signs of--well,
suffering perhaps, as many on this Committee do, from
collective amnesia about what happened a decade ago. We have
regulators in this Government who were in the Government before
and did not see it coming. In fact, many contributed in their
vigor and their aggressiveness--their vigor and interest in
deregulating. And I am very concerned with the collective
amnesia, with the regulators in place in other agencies and at
the Fed, who want to deregulate. I am very concerned about the
strength and aggressiveness of the two of you in pushing back.
I will leave it at that, and I will remind you of your comments
later perhaps.
Chairman Crapo. Senator Scott.
Senator Scott. Thank you, Chairman.
To the panel, thank you both for being here and thank you
for your willingness to serve. Commissioner Bowman, I would
like to say to your family, especially to your father, thank
you for your service as an Air Force officer, a banker, a
farmer. I guess in the tradition of Kansas, he is just a real
Renaissance man. I am not quite sure what your kids do to have
to be punished here by sitting through a Banking hearing.
[Laughter.]
Senator Scott. I apologize on behalf of this topic for your
kids, but I do want to make a couple of points.
The unemployment rate is at 3.9 percent. Wages have
increased over the last year by 2.9 percent, the highest
increase since 2009. Our economy is growing pretty quickly, 2.9
percent the last quarter of 2017, 2.3 percent the first quarter
of this year. With tax reform I would imagine that we can
anticipate 3 percent or higher growth in our economy.
Despite all the positive indicators, the market had several
days of volatility, typically around the swearing-in of
Chairman Powell. If I look back at the recent past, the Federal
Reserve has cited stock market volatility as a reason not to
raise interest rates. The Fed backed down so many times that
this seemed to become learned behavior. Stock market volatility
meant no interest rate hikes.
I will ask both of you: Is the stock market a pillar of
monetary policy? And would stock market volatility deter you
from plans to raise interest rates?
Mr. Clarida. I guess let me begin by saying, Senator Scott,
thank you for that question. First of all, to me stock market
volatility is not a pillar of monetary policy in and of itself.
I would not think it would be a factor. Sometimes stock market
volatility is associated with other developments that you do
pay attention to.
Senator Scott. Yes.
Mr. Clarida. But stock market volatility alone, absolutely
not, as far as I am concerned.
Senator Scott. Thank you. Commissioner?
Ms. Bowman. I would agree with Dr. Clarida that this should
perhaps be one of the several factors that should be
considered, but not in and of itself as a guiding factor.
Senator Scott. I am glad to hear your answer is basically.
Congress says to seek maximum employment and stable prices, no
more, no less. I have highlighted in the past what people often
seem to forget about low interest rates. It has a negative
impact on savers and particularly seniors on a fixed income. So
when interest rates go from 4 percent to 3 percent, if you have
a $1 million nest egg, that is a $10,000 swing in what you are
able to live off of. So it is really important to me, but let
me move to a different topic.
I sold insurance for my professional life. I have said it
many times that our State-based system of insurance regulation
is the best in the world. The President's executive order on
financial
regulation favors a deferential approach by the Fed to working
with primary financial regulators, and when it comes to
insurance, that means State-based insurance regulators.
How will you integrate State-based insurance regulators
into your work? Both of you, please.
Ms. Bowman. Well, I would be happy to take that. As the
Kansas State Bank Commissioner, it is very important from where
I sit now to be able to have a dialogue about those issues that
impact State-chartered institutions or institutions that are
regulated at the State level. I believe that it is important to
continue that dialogue between the Federal and the State level,
and my understanding is that there is a mechanism for that to
continue, and that would be something that I would believe
would be important to continue.
Senator Scott. I am running out of time, so I want to ask
you a different question. Thank you for your answer.
I favor an activities-based approach to nonbank SIFI
designations and more clarity around what gets you designated
and what gets you de-designated. What are your thoughts?
Mr. Clarida. Well, Senator, obviously SIFI designation is a
part of the process that is now in place. I believe that is
handled at the level of the Stability Oversight Council. It is
not a subject that I myself have studied. If I were confirmed,
I would certainly look forward to learning more about it. But,
in general, as a proposition I think an activities-based
approach makes a lot of sense. But beyond that, I have not
really studied the issue.
Senator Scott. OK. Thank you. Let me add a little to the
question. Oftentimes an insurance company may have a small bank
presence under their umbrella.
Mr. Clarida. Right.
Senator Scott. If we treat that entire insurance company as
if it were a bank, we are only increasing the cost to every
single policyholder, even though a sliver of the overall
picture of that insurance company has anything to do with a
bank. So if you punish an insurance company by treating it like
a bank, you are actually not punishing the insurance company.
You are punishing the policyholders of the insurance company.
So having a delineation between nonbank presence as it relates
to SIFI designation is an incredibly important part that I hope
you will take some time and learn more about.
Thank you both for your answers and congratulations and
condolences for being chosen.
Chairman Crapo. Thank you.
Senator Reed.
Senator Reed. Well, thank you very much, Mr. Chairman. Let
me begin, as Senator Scott did, by commending and thanking the
families for being here. And, Mr. White, thank you very much
for your service in Vietnam and the Air Force. And, Mr.
Clarida, your family, a great sacrifice. They could be relaxing
in Westerly, Rhode Island, right now.
Mr. Clarida. Absolutely.
Senator Reed. I appreciate the sacrifice.
We all are pleased that the unemployment rate is 3.9
percent, but behind that number is a labor participation rate
that is falling. And there are perhaps many factors, but one is
the continuing
innovation, automation of jobs, et cetera, and, you know, there
is at least a theoretical possibility that several years from
now we could have a very low unemployment rate but a huge
number of people without jobs.
I will start with you, Dr. Clarida. In terms of your
mandate to maintain full employment in this new technological
era, how do you factor in job loss? How do you emphasize
training and adaptation? Because my sense is that many of these
individuals are mid-career who have worked very hard, have
skills--but those skills are no longer marketable in many
cases? So let me begin with that general question, and then Ms.
Bowman.
Mr. Clarida. Well, Senator Reed, you are absolutely right.
The economy is changing. The unemployment rate of 3.9 percent,
as you say, is welcome, but behind that one number is a very,
very complex picture. Technology, as you mentioned, is changing
rapidly. It creates winners, it creates losers.
I believe with regards to monetary policy, if I were to be
confirmed, I would not focus solely on the unemployment rate
but on broader measures of the labor market, including labor
force participation. My sense is that with regards to
technology and education in mid-career, the policies that could
best address those challenges are probably policies for the
Congress and the executive branch to consider. I think the Fed
can do its part by responsibly trying to achieve maximum
employment for the economy as a whole.
Senator Reed. So there is a fiscal component of this which
requires investment in training and job transition and a host
of other things.
Mr. Clarida. And I believe that is what the research does
say.
Senator Reed. Thank you.
Commissioner, your comments?
Ms. Bowman. Senator, I would frankly rely on my experience
in my community. When I returned to Kansas in 2010, we
recognized that there were many people unemployed as a result
of the financial crisis. There were many partnerships that were
developed with training schools, vocational and community
colleges that assisted in the development of skills that could
be used within perhaps a new industry or a new technology that
they might be able to utilize.
In my view, while it is very important in the context of
monetary policy and maximum employment, it is also very
important for communities to understand the needs of their
workers and of their businesses so that they can work to
address those things at a local level. That would be one thing
that I think is a very critical part of trying to address that.
I do not believe that the Fed has tools that are in its
toolbox to be able to address those particular issues, and as
Dr. Clarida said, it would be something that Congress would
likely need to enact some sort of law that could address those
kinds of things. But I have great faith in our communities to
recognize the challenges that they face and try to address
those.
Senator Reed. Thank you. One aspect that just seems to be
ubiquitous is the cybersecurity threats to every aspect of our
life, and we have been trying to encourage the Securities and
Exchange Commission to take what I think is a very modest step,
which is to require someone on a public company's board to have
either knowledge of cybersecurity or have some other mechanism,
just simply informational to the shareholders. The bank holding
companies are particularly, as you both recognize, targets of
this type of disruption effect.
Can you take or should you take action as a supervisor of
the bank holding companies to make sure that they have at every
level, and particularly--the biggest ones I assume have it; it
is the smaller bank holding companies--have someone or some
capacity for cybersecurity on an active basis? My time has
expired, so this might be just a yes or a no.
Mr. Clarida. I agree that cybersecurity is a very
significant threat to the economy and obviously the financial
system. If I am confirmed, I would look forward to
understanding what actions the Fed currently takes in that
area, but I agree it is absolutely critical.
Senator Reed. Thank you, Doctor. Ma'am?
Ms. Bowman. I would absolutely agree with the threat of
cybersecurity and the importance of having some expertise
within an institution to be able to address those risks.
Senator Reed. Thank you very much.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Tillis.
Senator Tillis. Thank you, Mr. Chairman. Thank you both for
being here, and thank you for the time in the office last week.
When we talk about deregulation around here, I think that
some people will kind of position the question as we are going
to deregulate and we are going to expose ourselves to the
underlying risk that that regulation was intended to resolve.
It does not seem to me that that would be the way that you
would go about taking a look at rightsizing and deregulating.
Let me give you an example of a few things I would like for you
to expand on.
One is the regulatory reform bill that we got bipartisan
support out of this Committee, S. 2155. Could you characterize
how you think that is--or take a position one way or the other
how you think that is the right kind of method for going and
trying to find regulations that fit the activities the size and
scale of the institutions to which the regulations would be
applied? And we will start with you, Commissioner.
Ms. Bowman. Senator Tillis, I appreciate that question. At
the State level, I oversee banks that range in size from $7
million in assets with three employees to $3.2 billion in
assets. All of those qualify by the Federal standard as
community banks. It is important to be able to understand the
burden on a staff of three to
implement the same regulations that apply to much larger
institutions.
Senator Tillis. So about one-third of that bank is probably
in regulatory compliance, right?
Ms. Bowman. Probably 100 percent of the time.
Senator Tillis. Yes, OK. And then, Dr. Clarida, we talked
about international standards like Basel III.
Mr. Clarida. Right.
Senator Tillis. So you see these standards that are being
formulated. I worked in an accounting firm. I am not an
accountant, but I worked in an accounting firm, and we were
very much engaged in that. So you create maybe these
international standards, and then we have those suggestions
come into our rulemaking process, and then suddenly you have
got a lot of community banks that suddenly find out that they
have Basel III regulatory requirements.
Is that a good thing? Or what should we be doing
differently as we are being instructed by emerging
international standards and making sure that, on the one hand,
we provide regulatory relief through the bill like S. 2155, but
on the other hand, we come on the back end and just layer on
another set of regulations that may not make sense for the
nature of the institution targeted?
Mr. Clarida. Well, Senator, yes, as I understand, the Fed
does participate in these international discussions, but
ultimately any rulemaking has to go through a process with
comment and affirmative votes of the members. And so certainly
the situation you describe would be a situation that I would be
concerned about.
So, again, if I am confirmed for this position, I will look
at each of those on a case-by-case basis, but would certainly
want to respect and really pay attention to the comments and
the feedback that the Fed would be getting on any such proposed
rulemaking.
Senator Tillis. Thank you. By the way, I appreciate the
answers to the questions by the Ranking Member about your
independence. I saw President Erdogan from Turkey on Bloomberg
this morning who was talking about he needs to be the ultimate
person deciding some monetary policy or interest rates in
Turkey. And I think if you see the Turkish currency right now,
maybe the markets do not necessarily agree with that. So I
appreciate you all continuing to be independent on that scale.
I think that is a very vital role that you play.
I do want to associate myself with comments by Senator
Scott on insurance savings and loan holding companies. That is
an area that we are working on legislation on a bipartisan
basis to, again--we are not talking about going to no
regulation. We are talking about really taking a look at the
nature of the business activities in these institutions and
making sure that we have lean regulations that manage the risk
but do not actually put certain financial institutions out of
business. For anyone to look at the banking sector in North
Carolina and see that we have half as many community banks
today as we had pre-crisis and suggest that the regulatory
overreach of Dodd-Frank was not a contributing factor, I would
love to see how they could present a case otherwise. Do you
agree with that?
Ms. Bowman. I think there are many things that contribute
to the reason why we have had either mergers, acquisitions, or
failures. I would say that regulatory burden is part of that.
Senator Tillis. And some of the mergers and acquisitions
are a survival decision: I can no longer be a three-person bank
with the regulatory construct of a large regional bank or a
national bank. So some of it was a natural part of the
ecosystem being consumed; as banks get larger, you buy their
portfolio, and you build it in. But some of it is just purely a
survival decision. I cannot imagine that half the community
banks in North Carolina would be gone purely because they were
good acquisition targets. And I think we have to look at that
so that we have a thriving pyramid, an ecosystem, financial
ecosystem that today I do not think we really have.
Thank you all and congratulations to the family, and I look
forward to supporting your confirmation.
Mr. Clarida. Thank you.
Ms. Bowman. Thank you.
Chairman Crapo. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman. Congratulations
to both of you on your nominations.
I want to follow up on Senator Brown's questions and make
sure we are clear on the question of independence. Mr. Clarida,
in your meetings with President Trump, did he ask you how you
would vote on proposed increases to the Federal funds rate?
Mr. Clarida. Absolutely not.
Senator Menendez. Good. Did the President indicate a
preference one way or the other for how you should approach
decisions on whether to increase the Federal funds rate?
Mr. Clarida. Absolutely not.
Senator Menendez. Good. Now, for both of you, we are tasked
with examining your qualifications for 14-year terms, terms
that will outlast this Administration and the next. So it is
critical--Senator Tester says, ``Most of us.''
[Laughter.]
Senator Menendez. So it is critical that your decisions--I
hope not for you, Jon. So it is critical that your decisions be
guided by the Federal Reserve's dual mandate and remain
independent of any political pressure or interference from the
Administration, this one or any other.
Will each of you commit today that, if confirmed, you will
ignore any political pressure or interference, whether it is
direct or indirect, from the President or any other member of
the Administration in your decisionmaking?
Ms. Bowman. Senator, I would just say that the Fed makes
decisions based on sound economic policies and judgments, and
politics has no place in that.
Senator Menendez. So the answer is yes?
Ms. Bowman. Yes.
Mr. Clarida. The answer is absolutely yes.
Senator Menendez. Thank you. We have made significant
progress from the darkest days of the recession, but in many
ways our economic recovery continues to be uneven. Today we are
looking at an economy with 3.9 percent unemployment but still
very sluggish wage growth. As corporations have reaped billions
of dollars in benefits from the new tax law, hardworking
families are still waiting to see their paychecks rise.
In a tight labor market, workers, I think, should be able
to transform corporate profits as part of it into higher pay,
but any acceleration in wages seems to be accruing only to
high-paid executives and managers.
This question is to both of you. Do you agree that the
achievement of full employment should be associated with strong
and broad-based wage growth for average workers, not just
senior executives and managers?
Mr. Clarida. I will begin with that, Senator Menendez.
Absolutely, that is something that we would like to see
associated with full employment. It is the case in recent
decades that there has been more dispersion between, you know,
workers in different categories, and there are a number of
factors that impact that. I think the Fed's focus--if I am
confirmed, I think the Fed's focus should be on getting that
unemployment rate at a level that is on average consistent with
a healthy labor market, but acknowledge that there are factors
at work that are impacting different workers in different ways.
Senator Menendez. I am not quite sure--what about wage
growth?
Mr. Clarida. Wage growth will be a function of the growth
of the economy. It will be a function of productivity, of
technology. There are a number of factors. I think what the Fed
can do, Senator, on wage growth is to keep the economy as close
as it can to that full employment mandate that Congress has
given it.
Senator Menendez. Commissioner?
Ms. Bowman. Senator, wage growth is a very important issue,
and I think that as the economy improves, it is important that
all benefit from the economic conditions. It is a factor that
should be considered and looked at within the context of full
employment or maximum employment, which is one of the mandates
that Congress has given the Fed. It is something that I think
is very important, and I would be happy to speak with you
further about that if that is an issue that, should I be
confirmed----
Senator Menendez. Well, I appreciate your answers. I think
a tight labor market, forcing employers to offer higher and
more competitive wages normally, that is not what we are
seeing. As a matter of fact, wages are up about 2.6 percent
annually, which is only slightly higher than the rate at which
they have been rising for the better part of 3 years. So that
says to me something about the recovery, and the recovery for
average Americans not being realized.
Last, the Administration is planning to offer a proposal to
make changes to the Community Reinvestment Act with 97 percent
of banks receiving satisfactory or outstanding ratings, yet
African American and Latino families continue to be
disproportionately denied mortgage loans, even when controlling
for income, loan amount, location. It seems to me that in that
respect we have a problem. But I have real concerns that the
new proposals will lead to weakened enforcement by regulators
and a discounted importance of physical bank branches.
This is for both of you. Do you agree with Federal Reserve
Governor Brainard that it is important to retain a focus on
place as the Fed contemplates CRA changes? In essence, do you
agree that in some low-income and hard-to-reach communities,
physical branches are sometimes the only way to meet local
credit needs?
Ms. Bowman. Senator, if you do not mind, I would be very
happy to start with that. I think in any case discrimination is
absolutely unacceptable, whether that is based on race,
religion, any of those characteristics. It is important, as we
are looking at reviewing the Community Reinvestment Act, that
we keep in mind how the country has evolved since the time that
that Act was enacted in 1979. There are many changes to the
industry, to how our communities are shaped and how they look
now, but it is very important that we continue to understand
the needs of the community from all parts of the community and
that they are addressed appropriately.
Senator Menendez. Mr. Clarida?
Mr. Clarida. Senator Menendez, I would just simply say the
Community Reinvestment Act has been on the books for 40 years.
It would be a very high priority of mine, if confirmed, to make
sure that it is enforced. And, obviously, if there are
discussions for improving or bringing it up to date, I would be
open-minded to that. But the essential mission of the Act I
think needs to be respected.
Senator Menendez. Well, let me close by just simply saying,
40 years later, African American families and Latino families
are still disproportionately discriminated against, and so
something is wrong. And I look forward to seeing how you would
respond to that discrimination.
Thank you, Mr. Chairman.
Chairman Crapo. Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman. And
congratulations to our two nominees. Let me start with Dr.
Clarida.
Dr. Clarida, it is my view that the Fed contributed to the
financial crisis by virtue of monetary policy in the years
preceding it, specifically very low interest rates for an
extended period of time, including negative real interest
rates, that coincided, not coincidentally but coincided
chronologically, with a housing boom that really turned into a
bubble, the bursting of which, of course, was one of the
essential features of the crisis.
Do you agree with the view that the Fed probably
contributed to the financial crisis in this fashion?
Mr. Clarida. Senator, I enjoyed our conversation in your
office on this and other topics very much. I fully agree that
monetary policy was one part. I think it is tough--I think
other factors were also at play, so it is difficult to parse
particular quantities of contribution. But, yes, monetary
policy did play a part.
Senator Toomey. Commissioner Bowman, what is your view on
that same question?
Ms. Bowman. I would agree with Dr. Clarida that monetary
policy did play a part.
Senator Toomey. Well, I think that is a really, really
important thing to keep in mind. I think we need to learn the
lessons of the mistakes that have been made. I agree it is
difficult to quantify exactly what portion of the crisis
originated in this fashion, but it was part of it.
I think from our discussion, Dr. Clarida, my understanding
is you support the idea of continuing the normalization of
interest rates.
Mr. Clarida. Absolutely.
Senator Toomey. And that that you believe is important, and
I agree. I guess the question I would like to explore a little
bit is: Given the unprecedented behavior of the Fed in recent
years, what is normal? You know, what is the new normal, if
there is a new normal? And one of the things specifically I
would like your thoughts on is the extraordinary quantitative
easing exercises. The Fed went for almost 100 years without
engaging in anything of the sort, and then we had these
repeated rounds of massive buying of fixed-income instruments,
including in 2013 when our economy was growing at over 2
percent, unemployment was coming down, the inflation rate was
just below 2 percent. So there was no crisis. There was no
recession even. And yet we launched another $85 billion-a-month
bond-buying program, which included mortgage-backed securities.
So is it your view that during a period like we had in 2013
it would be normal for the Fed to engage in a massive-scale
bond-buying program?
Mr. Clarida. Perhaps I can begin on that, Senator. My
general feeling and what I have written and said about QE is
that there are benefits and costs, and initially I would have
argued and did at the time think that it made sense in the
depths of the period in 2008 for the Fed to pursue that option,
acknowledging that it had not been tried before. But at least
in my memory, the U.S. had not been essential at zero rates
before. But I do believe that the benefits of QE diminished as
more and more rounds were added and that the cost of QE went
up. I do not know how, frankly, sir, I would have voted if I
had been on the Fed at that time, but I am very sympathetic to
your view that any discussion and thinking about QE would have
to take a serious look at the cost as well as the benefit.
Senator Toomey. And would you consider non-Treasury
instruments like mortgage-backed securities in a separate
category? In other words, do you acknowledge that when the Fed
gets into selecting which category of non-Treasury securities,
it is really allocating credit?
Mr. Clarida. Yes, absolutely, my preference certainly right
now going into this would be for the Fed to end up with a
Treasury-only portfolio. I do agree that the Fed began to buy
the mortgages under duress at a challenging time for the
economy. But as a general proposition, my preference would be
to have the Fed's balance sheet as much as possible in Treasury
securities.
Senator Toomey. And, Ms. Bowman, would you like to share
your views on the kinds of securities that the Fed should be
buying?
Ms. Bowman. Senator, I agree with Dr. Clarida's comments
about the discussion that you were having previously. Having
not been a part of the decisionmaking process, I view the Fed
from a prospective perspective at this point. I agree that
normalizing the balance sheet is a good idea and that that is
the appropriate path forward. And my understanding is as that
happens, the balance of Treasurys versus other types of assets
will be more normalized, and that would be something that I
think would be a good idea.
Senator Toomey. I see I have run out of time. Thank you,
Mr. Chairman.
Chairman Crapo. Thank you, Senator Toomey.
Senator Tester.
Senator Tester. Thank you, Mr. Chairman. I also want to
congratulate both of you on your nominations. I appreciate your
being here and appreciate your willingness to serve. You have
been very succinct with your answers, and I hope you can do
that with me, too, because this one you can take all my time
and I do not want you to.
I will start with you, Commissioner Bowman. I come from a
rural State. You have been a community banker in a past life in
a rural State. How would you advocate for rural America? And
where do you believe the biggest disconnect is?
Ms. Bowman. Senator Tester, I appreciate your perspective
being from a rural community, and I certainly also appreciate
the partnership that I know that you share with your State
commissioner and learning more about their efforts at the State
level with your banking industry.
I think it is important to understand that since the crisis
there have been 1,500 mergers that have occurred within that
community banking space across the country.
Senator Tester. Yes.
Ms. Bowman. And last year alone, there were just over 250.
Kansas experienced 16 of those in our State, and when you have
just over 200 to supervise and oversee, that is a pretty
significant decline.
I think it is important that we understand the pain points
for those community banks, understand the importance of safety
and soundness within those institutions, but also recognize
that in some cases the regulatory framework could be more
tailored to appropriately supervise the risk. Their activity
basis, their complexity, and also their asset size is
critically important in my view with respect to that.
Senator Tester. Mr. Clarida, Connecticut is a more urban
State. Do you have anything to add to her comments? Do you
agree with what she said?
Mr. Clarida. I completely agree. I will only say, Senator,
that I grew up in downstate Illinois in a coal mining town with
8,000 people, proud graduate of the University of Illinois. So
I understand how those communities can be impacted.
Senator Tester. OK. Recently, the Federal Reserve imposed
growth restrictions on Wells Fargo in response to some
abhorrent treatment of their customers and lack of internal
controls. Would you assure me that you will not support
releasing them from these growth restrictions until they
significantly change the way they do business?
Mr. Clarida. Perhaps I can begin. First, let me say that
just based upon the news accounts, which, of course, is all I
have to go on, the activities of Wells Fargo in this domain are
egregious and unacceptable, and I was as shocked as anyone to
read about it in the newspaper. If I am confirmed and this
matter came before me, as it looks like it would, I would
certainly individually want to be absolutely convinced that
appropriate steps had been taken and could be verified.
Senator Tester. OK. Commissioner?
Ms. Bowman. I would concur with Dr. Clarida's comments. The
actions of Wells Fargo were absolutely inappropriate, and I
would certainly want to make sure that any concerns are
addressed by the bank prior to any discussion.
Senator Tester. OK. Thank you both.
I want to talk a little bit about housing finance right
now. Basically, do you guys believe there should be a
Government guarantee for a 30-year fixed-rate note?
Ms. Bowman. Senator, in my view as a community banker, it
is important that our community members have access to 30-year
fixed-rate notes.
Senator Tester. OK.
Ms. Bowman. Those are very important loan vehicles or
mortgage vehicles. Without some kind of guarantee, banks cannot
withstand that 30-year interest rate risk.
Senator Tester. That is correct.
Ms. Bowman. So, in my view, it would be very important to
maintain that access to credit.
Senator Tester. Dr. Clarida?
Mr. Clarida. I would simply say the 30-year fixed-rate
mortgage has served this country well for many, many decades,
and I would imagine that going forward it is going to be a
crucial part of the system.
Senator Tester. Do you support it?
Mr. Clarida. That is the status quo. I certainly support
it.
Senator Tester. OK, good. The GSEs are in conservatorship.
Do you believe that is having any negative impact on the
economy?
Mr. Clarida. Senator, the GSEs have been in conservatorship
since 2008. I am not an expert on housing finance, but
obviously for the housing agencies to be in this State is
probably not desirable. I am not an expert on housing finance,
but----
Senator Tester. That is all right. That is good.
Commissioner?
Ms. Bowman. I would agree with Dr. Clarida.
Senator Tester. OK. Thank you all. I have got some other
questions for the record that we will present to you, but I
appreciate your answers not only to me but to previous
questioners, too.
Senator Tester. Thank you for being here.
Mr. Clarida. Thank you.
Ms. Bowman. Thank you.
Chairman Crapo. Thank you.
Senator Moran.
Senator Moran. Chairman, thank you very much. Ranking
Member, nice to know that we have educated you on the word
``drovers.'' And I look forward to you listening to me more
often than you sometimes do.
[Laughter.]
Senator Moran. Let me welcome both of our nominees here
today. Doctor and Commissioner, thank you for joining us.
Congratulations on your nomination.
For as long as I have been a Member of the U.S. Senate and
a Member of the Banking Committee, I have had conversations
with individuals who have sat in the seats that you now sit in
after they have been confirmed, mostly about the overregulation
or community or what I call ``relationship banks.'' Our
financial institutions in rural America are very special and
important. For as long as I have been in Congress, I have been
explaining to my colleagues that, where I come from, economic
development is often whether or not there is a grocery store in
town. That is something that many in Congress do not
understand, and certainly many within an Administration would
find, of course, there is a grocery store.
I think these two things are related. What I have concluded
over a period of time is that if we are going to have a grocery
store in town, it is dependent upon a financial institution
that understands the needs of their community and is not overly
regulated in a way in which they cannot make a loan to a
business that may not on paper be as financially capable as a
regulation may require.
This recently hit home with me again. In our State of
Kansas, we had fires across a significant portion of
grasslands, particularly in southwest and western Kansas and
the ranching community of Ashland. The county is Comanche; the
county seat is a town of 900 people. That is the biggest town
in the county. And 80 percent of the ground was burned, and
most of the cattle died in that as a result.
What hit home with me is that those bankers responded to a
crisis for those ranchers. The ranchers, with the death of
their cattle, had no collateral. But the bankers continued to
make loans, working capital, a line of credit was kept open to
keep the ranchers in business.
We are in the process, in the House in particular but soon
in the Senate, to debate a farm bill. We often talk about the
farm bill as being a safety net for agricultural producers. It
is. But so is our community or relationship bankers. In the
absence of the ability to access credit in difficult times,
either as a result of a fire or low commodity prices, both of
which we are having in Kansas today, it is our bankers who keep
our farmers in business. It is our bankers who keep our
ranchers raising cattle and earning a living.
And so this is an important day for me, particularly with
the Commissioner. You, Doctor, and I are going to have a
conversation later today, and I will pursue this in further
detail. But I know that Ms. Bowman understands the
circumstances that it is not just a Kansas issue but it is
across the country in rural America, and why this is so
different or what I expect to be so different from, I hope,
both of you is that every time I have had a conversation about
the overregulation of a community bank--a bank, incidentally,
that if it was insolvent, would cause no problems for the
country, although significant challenges for the stockholders
and the community--I get what I would describe as mostly lip
service. The Federal Reserve or the FDIC or the Comptroller of
the Currency will tell me, ``Well, we have an advisory
committee, we take seriously our community banks,'' and yet it
seems to me that there is an attitude among many of our
regulators that it would be simpler to regulate a lot fewer
financial institutions than the number we have today. And,
unfortunately, we are on that path, but that is not the
solution to the future of the places that I represent.
So I would give you the opportunity, Commissioner and
Doctor, to tell me again how you see the role of regulators,
FDIC in your regulatory capacity, in regard to financial
institutions that, in my view, if we are not careful, become
products--their lending practices become a product of a
computer program that spews out whether the answer is yes or no
as compared to the relationship they have with the lenders,
sometimes for generations. What you see in Ashland is a
community bank owned by generations of a bank family lending to
a set of people who are long-time generational ranchers. And
the issue here for me is what can you do to convince me that,
once you are a member of the Federal Reserve, you will advocate
in a way different than just the idea that we are going to
appoint an advisory committee to make certain we do not have
overreach?
Let me make a final conclusion before my 14 seconds
concludes. I am at a stage in life, Ms. Bowman, in which I know
the previous generation. I now know people's parents better
than I know, in this case, you and I pay tribute to your Mom
and Dad who are here and to the effect, the consequence that
their lives have had in the community of Council Grove and
Morris County and the surrounding area in the Flint Hills. The
joy of being a community banker today is a lot less than it
used to be. The idea of the satisfaction that comes with a job
is diminished, but your parents and your family have made a
tremendous difference in a community in Kansas. And as a result
of their profession, Council Grove and the surrounding
communities of Dwight and all the places that you and I know
have a brighter future as a result of the work of your Mom and
Dad. And I am very grateful to them, and from what I know about
you, I would tell them thank you for raising a great daughter
as well.
Chairman Crapo. Thank you, Senator Moran.
Senator Moran. Apparently, you do not have to respond.
[Laughter.]
Chairman Crapo. Senator Warren.
Senator Warren. Thank you, Mr. Chairman. And welcome to our
nominees and to your families.
Dr. Clarida, your views on monetary policy are well known,
but another critical part of your job at the Fed will be
helping regulate the big banks. So I want to get to your views
on bank regulation.
Do you agree that inadequate regulation of banks helped
lead to the 2008 financial crisis?
Mr. Clarida. I do.
Senator Warren. Yeah. So after the crisis, under former Fed
Chair Janet Yellen, the Fed imposed new rules on big banks
relating to capital, stress tests, liquidity, among other
things. Do you believe that those rules helped make the
financial system safer?
Mr. Clarida. I do.
Senator Warren. Good. So as you know, Randal Quarles is now
the new Fed Vice Chair for Supervision, the person who will be
responsible for the Fed's regulatory approach toward the
biggest banks. He recently put out a new proposal on capital
standards, and by his own admission, when he testified here a
few weeks ago, his proposal would reduce capital requirements
for every big bank in the country, and that is why both the
FDIC and Fed Governor Brainard opposed this plan.
So given your agreement that the new rules have made the
financial system safer, are you concerned that the Fed is
looking to reverse course and lower capital standards for the
biggest banks?
Mr. Clarida. Well, Senator, let me say that, as I mentioned
in my opening statement, I do think there are opportunities to
tailor regulations appropriately. But an equal priority is
preserving the substantial gains and resiliency and stability
of our financial system. And on any matter that would come
before me as a member to vote on, I would want to be assured
that we are not trading off that improved resiliency and
stability in that particular matter.
I cannot comment on this matter because I have not studied
it. I believe it is out for comment right now.
Senator Warren. I am sorry. You are being--this is a
hearing about your becoming Federal Reserve Board Chair, and
you have not read this proposal that would take a significant
step that, by Mr. Quarles' own admission, would reduce capital
standards for the largest banks? You have not read it, and you
are telling me you do not have an opinion about it?
Mr. Clarida. Senator, I am aware of it in broad ways. I
have not studied it in detail, and it is my understanding that
before any final decision on that, there would need to be
another vote on the matter once the comments are back.
Senator Warren. Well, I actually am having a hard time
understanding how you can sit here, how we evaluate you as a
Fed Reserve Member if you cannot tell us how you feel about
reducing capital standards for the largest financial
institutions.
I tell you what. Let me try this another way. Most experts
agree that too-big-to-fail is still a problem, and meanwhile
the biggest banks are making huge profits and are among the
biggest beneficiaries of the Republican tax bill. These banks
are now spending billions of dollars each quarter in stock
buybacks. So why on Earth would this be the time to reduce
capital standards for these too-big-to-fail banks?
Mr. Clarida. Again, Senator, I take the thrust of your
observation, and I think that if I am confirmed for this
position, I would certainly come to the issue with an open
mind. But as I mentioned, my priority would not be to sacrifice
any of the gains that we have achieved with the existing
policy----
Senator Warren. Can you just give me any reason why you
think it would be appropriate to reduce capital standards for
giant financial institutions that are spending billions of
dollars right now in stock buybacks?
Mr. Clarida. Senator, as I understand it, part of the
rationale for the proposal is some of the incentives in the way
that it is existing, that is implemented. But, again, beyond
that I would look forward to studying it, and I agree that it
would be important not to give up any of the gains in
resiliency and stability we have achieved.
Senator Warren. I will take that as, no, you cannot come up
with a reason, but you are not telling me you will commit to
keeping capital standards high.
Let me ask one more question. Can you identify a single Fed
rule on capital, on liquidity, on stress tests, or Board Member
obligations, risk management, anything else, that you think
should be made stronger than it is right now?
Mr. Clarida. Well, Senator Warren, I think in the area of
stress testing, I think it is vital. I think it is a crucial
part of our system right now, and it is my understanding that
the stress test exercises do take into account the loss of a
particular institution in stress scenarios. And if those stress
scenarios were to be more damaging, then the capital standards
would be raised as a function of the stress.
Senator Warren. I am sorry. So are you saying that you
think the rule on stress tests should be made tougher?
Mr. Clarida. No. I am saying that the stress scenarios that
are----
Senator Warren. OK, but--I am sorry. Let me just be clear
what my question was.
Mr. Clarida. Yes.
Senator Warren. There is a whole range of regulatory
issues: capital standards, stress tests, obligations of Board
Members. I am asking if you think there is a single regulation
that the Fed now has in place that ought to be made tougher.
Mr. Clarida. And I do not have one for you today.
Senator Warren. You do not have one. Look, Dr. Clarida, for
a long time leaders at the Fed seemed to think that the only
thing they needed to worry about was monetary policy. But as we
learned in the 2008 crash, an equally important part of the
Fed's job is regulating the giant banks. The defining economic
event of the last 50 years was the 2008 financial crisis, and
as Alan Greenspan later admitted, it was brought about in part
because the Fed did not do its job on regulation.
I am concerned about your lack of background on regulatory
issues, and I am concerned about your unwillingness today to
support strong capital standards for big banks. So I will be
following up with written questions.
Senator Warren. Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Cortez Masto.
Senator Cortez Masto. Thank you. Welcome to your family
members. Thank you both. It was a pleasure to meet both of you.
Thank you for taking the time.
I have only got 5 minutes, so let me get through this with
your indulgence, and let me associate myself with my colleague
from Massachusetts and her line of questioning and Dr. Clarida.
So let me ask you this: I come from Nevada. The foreclosure
crisis, we were ground zero for the foreclosure crisis. What
have you learned from that foreclosure crisis? And how will you
ensure we avoid another crisis?
Mr. Clarida. Well, certainly I think we have all learned
that we do not want to go back to the world of 2006 and 2007.
And as I have mentioned----
Senator Cortez Masto. Can you give me specifics? I think we
would all agree with that, but specifically--you are going to
be in a key position, so specifically can you talk about what
you have learned and how you will apply what you have learned
to your new position that you are being nominated to?
Mr. Clarida. Well, some specifics would obviously be higher
capital, stress testing at the banks, liquidity, but more
broadly in our financial system better understanding and better
accounting for the different parts of the system, including, I
think, moving certain transactions on to exchanges and
clearing. Those are all important steps forward, I think.
Senator Cortez Masto. OK. Thank you.
Ms. Bowman, I am going to associate myself with Senator
Menendez's questioning. When you are the last one to ask
questions, the questions usually have been answered. But this
is another one that is just as important, I think, for many of
us, the Community Reinvestment Act exams. I understand--and
Senator Menendez stated this--that 98 percent of the banks pass
the CRA exams with a satisfactory rating. Ninety-eight percent.
So what would it have taken for your bank to earn an
outstanding score or any bank to earn an outstanding score
based on your understanding?
Ms. Bowman. Senator, that is an excellent question. I think
those are discussions that I have on a community banking level
frequently. I think part of the review that I mentioned with
Senator Menendez was that the goalposts seem a bit unclear. I
think many of the banks, if not most of the banks that I am
aware of and familiar with, with respect to their Community
Reinvestment Act activities or activities that benefit that
process, there is not clarity for them in and an understanding
of the types of investments that they make, whether they are
extending credit, whether they are making other investments in
their communities if those types of activities can qualify for
the CRA. I think that would be something I would be very
interested to speak with you about further regarding looking at
those types of--how the rule is now and perhaps how communities
exist now and how the investments of banks can be improved with
respect to that.
Senator Cortez Masto. Thank you, and I appreciate your
candor, because the goalposts are unclear, and I guess that
goes back to the concerns of what factors do you think would be
helpful in determining whether small businesses, communities of
color, and low-income areas are truly receiving the support
that the law intended. I guess that is our challenge, and that
is what we are looking to you to help us identify that so we
can make sure that they are getting the help and the support
they need.
Ms. Bowman. Senator, on that topic in particular, at our
bank, when I was the community banker, we worked very closely
with our small business customers to help them understand how a
business plan should be formed, how they can qualify for
different types of credits, and how they can present to a
banker in a way that would assist with their approval process
with respect to their business plan. That is something that I
think community banks in particular are quite good at to help
educate their communities about the best ways to make
investments.
Senator Cortez Masto. Thank you. And then I have only got a
few seconds left. Can you talk about the Consumer Financial
Protection Bureau and the importance of it and your interaction
with it in this new position? And I will start with you, Dr.
Clarida.
Mr. Clarida. The Consumer Financial Protection Bureau, of
course, is part of the landscape now. As I understand it, a
number of the responsibilities were transferred over to the
CFPB in the Dodd-Frank legislation, and that is obviously an
important part of the way that the country oversees consumer
protection, which is an important goal.
Senator Cortez Masto. Ms. Bowman?
Ms. Bowman. I believe that the CFPB, Consumer Financial
Protection Bureau, is currently the agency that is responsible
for
assisting in the protection of consumers, and it promulgates
regulations that impact their ability to do that and the rest
of the prudential regulators and their ability to protect
consumers in different ways. It is important that there is open
communication and working together to ensure consistency in the
application of those regulations and enforcement of those.
Senator Cortez Masto. Thank you. I appreciate it.
Chairman Crapo. Senator Brown had a request.
Senator Brown. Thank you. Mr. Chairman, in light of
comments from Senator Tillis and others, I have two charts I am
going to--one brief study and one chart about community banks
and the number of them. This chart--and I know you cannot
really see it, but this just shows the number of U.S. community
banks as it has declined since 1981, and this sport right here
in when Dodd-Frank was enacted. So the decline, there is no way
to ascribe Dodd-Frank as accelerating the decline of community
banks, decline meaning either sell, merge, or go out of
business, or sell to another bank.
So it is pretty clear that Dodd-Frank did not cause the
demise of community banks. That is a greatest hit in this
Committee from a lot of my colleagues saying, well, it is all
because of Dodd-Frank that community banks have gone out of
business.
So, Mr. Chairman, I would just ask unanimous consent to put
this brief study and the charts into the record.
Chairman Crapo. Without objection, so ordered.
Senator Brown. Thank you.
Chairman Crapo. And with that, that concludes the
questioning and the hearing. I again thank both of you for
participating at our hearing today, and thank you for your
willingness to serve the country.
For Senators, all follow-on questions need to be submitted
by Tuesday, May 22nd. And for our witnesses, responses to those
questions are due by the following Tuesday morning, May 29th.
So please respond quickly to the questions you receive.
With that, the hearing is adjourned.
[Whereupon, at 11:40 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF RICHARD CLARIDA
To Be a Member and Vice Chairman, Board of Governors of the Federal
Reserve System
May 15, 2018
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
thank you for this opportunity to appear before you today. I am honored
that the President has nominated me to serve as a Member of the Board
of Governors of the Federal Reserve System and as the Board's Vice
Chairman, and I am grateful to have the privilege of the Committee's
consideration for these positions. I am also very grateful to have the
support of my family who is with me here today--my wife of 29 years,
Polly Barry, and my two sons, Matthew and Russell.
The Federal Reserve has been charged by the Congress with a mandate
to attain maximum employment and stable prices. I fully support both
pillars of this dual mandate and pledge to the Committee that if I am
confirmed by the Senate, I will support monetary policies that take a
balanced approach to achieving these important objectives. The Federal
Reserve also plays a central role in our Government's efforts to ensure
the safety and soundness and stability of the U.S. financial system as
it provides credit between households and businesses. If I am
confirmed, my priority will be to support policies that are effective,
efficient, and appropriately tailored and that preserve the far greater
resiliency and stability of the financial system that has been achieved
as a result of the significant reforms that have been put in place
since the financial crisis.
I believe I am well qualified to fulfill the responsibilities of
the positions for which I have been nominated. In my published
research, I have studied the formulation and communication of monetary
policies and developed, along with others, a framework for monetary
policy analysis that has been widely cited and used by monetary
policymakers and their staffs around the world. Although I have spent
most of my career in academia, I have had two opportunities to serve in
economic policy positions in the executive branch of the U.S.
Government--first, as a senior staff economist with Council of Economic
Advisers from 1986 to 1987 and second, as assistant Treasury secretary
for economic policy from 2002 to 2003. These experiences were
invaluable in providing me a perspective that places a premium on doing
economic analysis that is practical, robust, and relevant to better
understanding how economic policy affects individual Americans and
their communities. Over the years, I have also advised asset management
firms on economics and strategy, with a particular focus on global
monetary policy, and this experience has given me a deeper
understanding of the interactions between macroeconomic developments
and financial markets.
The Federal Reserve has an enormous responsibility to achieve the
mandates given to it by the Congress, to communicate the rationale for
its decisions, and to explain how its policies will enable it to meet
these objectives. If I am confirmed, I pledge to work closely with
Chairman Powell and my future colleagues to put in place policies that
best fulfill its obligation to meet the mandates that the Congress has
assigned to the Federal Reserve and to foster the transparent
communication and accountability that is so vital to preserving the
Federal Reserve's independent and nonpartisan status.
Thank you again for the privilege to appear before you today and I
look forward to your questions.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
PREPARED STATEMENT OF MICHELLE W. BOWMAN
To Be a Member, Board of Governors of the Federal Reserve System
May 15, 2018
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
thank you for this opportunity to appear before you today. I am deeply
honored the President has nominated me to serve as a Member of the
Board of Governors of the Federal Reserve System. Because community
banking is a vital and ongoing part of my family's legacy, I am also
humbled that, if confirmed, I will be holding the position designated
for someone with community banking experience.
I am also grateful to my family and my husband's family for their
continued support and belief in me. My husband, Wes, our children Jack
and Audrey, my sister Maggie, a school teacher in Kansas City,
Missouri, and my parents, Jan and Hank White, are here with me today.
My father, Hank, is a fourth generation banker, Vietnam veteran, and
retired U.S. Air Force officer. My mother, Jan, is a great inspiration.
She taught me that with hard work, anything is possible. My in-laws,
John and Sherry Bowman and Sherry's 91-year old mother Mary Hopkins,
could not be here with us today, but they are watching from home in
Everest, Kansas.
My family and I have been in community banking for generations. In
1882, my great great grandfather, W.H. White, helped to charter the
Farmers & Drovers Bank. The bank was named for the customers it served
then and continues to serve today--the farmers and ranchers of the
Flint Hills of Kansas. Today, the fourth and fifth generation of my
family continue this long tradition of service through the bank and
through active participation and volunteer work in our rural community
of 2,300 people. I know firsthand that community banks are a vital part
of the backbone of small, rural, agricultural towns and play a critical
role in providing access to credit and fostering economic activity in
communities across our country. Without these institutions, many
communities and many of our citizens will see their economic
opportunities suffer significantly.
I joined my family's bank in 2010, and I learned the business from
the front line to the back office. My most challenging role was as
compliance officer--working with our small team to implement many of
the new post-crisis regulations. Although the crisis revealed
weaknesses in the U.S. financial system that needed to be addressed, I
have witnessed firsthand how the regulatory environment created in the
aftermath of the crisis has disadvantaged community banks. If
confirmed, I will bring this perspective to my work at the Board to
ensure that rules preserve the resiliency of the financial system, but
are appropriately tailored to the size, complexity, and risk of an
institution.
As a community banker, it was my job to support local businesses
and consumers. This experience has given me a personal and deep
understanding of how the Federal Reserve's goals of fostering maximum
employment and stable prices directly affect the financial system and
the broader economy. The dual mandate is critically important to our
economy, businesses, families, and communities. If I am confirmed, I
will be very focused on how we can do the best job possible to fulfill
that mandate.
I currently serve as the Kansas State Bank Commissioner and our
office oversees hundreds of State-chartered banks, trusts companies,
money transmitters, and other nondepository financial service
institutions. Our mission is both proactive oversight and protection of
the consumers our financial institutions serve. As commissioner, I am
accountable to the people of Kansas. And as I carry out my regulatory
mission, my goal is to treat every consumer and institution fairly,
respectfully, and with open communication.
I believe the experiences I have described qualify me for this
important role. If confirmed by the Senate, I will be committed to
accountability, transparency, and clear communication in all of my
responsibilities at the Federal Reserve. Thank you for the honor of
this hearing, and I look forward to answering the Committee's
questions.
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM RICHARD
CLARIDA
Q.1. What is your view on what caused the 2008 financial
crisis? What responsibility does the Federal Reserve share in
terms of failures in regulatory and supervisory policy?
A.1. Put simply, by 2007 the U.S. financial system was highly
fragile. A buildup of leverage and maturity transformation in
the years leading up to the crisis left the U.S. and global
economy vulnerable to negative surprises. When the downturn in
the U.S. housing market occurred, these vulnerabilities
amplified the effects of the initial shocks and the result was
the financial crisis.
The crisis revealed shortcomings and failures at private
institutions, in the overall regulatory framework, and in the
actions of specific agencies, including the Federal Reserve.
In response to the crisis, the Federal Reserve increased
its regulatory and supervisory scrutiny of the largest
financial institutions, for example, putting in place a
comprehensive stress-testing regime. In my view, this response
has, broadly speaking, increased the resilience of the system.
The new regulatory regime for large banks ensures that the
largest institutions are sufficiently strong to continue to
function effectively as intermediaries even in periods of
substantial financial stress. Capital is critical to ensuring
resiliency, as are the availability of high-quality liquid
assets, appropriate management of risks, and the presence of a
plan for resolution in case needed. Progress has been made in
all of these areas, and newer tools like the stress testing
regime and the countercyclical capital buffer should also
contribute to the resiliency of the system going forward.
Q.2. How did large bank and investment bank leverage contribute
to the 2008 financial crisis?
A.2. The buildup of leverage to excessive levels was a key
contributor to the spread of the financial crisis. In the run
up to the crisis, the firms that experienced the worst problems
also had some of the highest leverage ratios. And when the
problems at Bear Stearns were resolved through its acquisition
by JPMorgan, market participants turned their attention to
other firms with similarly high levels of leverage.
However, leverage at large financial institutions alone was
not responsible for the 2008 financial crisis. When the housing
market turned down and housing-related assets fell in value, a
series of vulnerabilities amplified the effects of that shock,
including the reliance on short-term wholesale funding at large
financial institutions. Some of these institutions faced runs
by investors and had to sharply cut back their activities in
support of the real economy. And, more broadly, the financial
system was highly interconnected in opaque and surprising ways.
Q.3. How would you characterize current risk-weighted and
leverage capital levels for the largest U.S. banks--too low,
too high, or the correct amount?
A.3. It is critical to the safety and soundness of the largest
U.S. banks and to the broader U.S. financial system and economy
that these firms are well capitalized. Since the financial
crisis, the U.S. banking agencies have significantly
strengthened regulatory capital requirements for large banking
firms, which has made them much more resilient and able to
continue lending even when under financial stress.
If confirmed, I look forward to examining this question
more closely and consulting with my colleagues. Absent critical
supervisory information, it would be premature for me to judge
the precise appropriate capital levels. However, given its
importance, I am very encouraged by the steps that I have
observed the Federal Reserve has taken.
Q.4. As you know, the Federal Reserve recently proposed
reducing leverage requirements for the eight biggest U.S.
global systemically important banks (G-SIBs).\1\ In discussing
the impact of its proposal, the Federal Reserve noted that it
would reduce the amount of tier 1 capital required across the
lead insured depository institution (IDI) subsidiaries of the
G-SIBs by approximately $121 billion.
---------------------------------------------------------------------------
\1\ https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20180411a.htm.
Q.4.a. Could a reduction in IDI capital pose any risks to
---------------------------------------------------------------------------
depositors, taxpayers, or financial stability? Why or why not?
A.4.a. In setting capital requirements, there is a risk that
leverage ratios may become too binding. When a leverage ratio
becomes a binding constraint, it can create incentives for
firms to increase their investments in higher-risk, higher-
return assets and, conversely, reduce their participation in
lower-risk activities.
Q.4.b. What is your view on raising the enhanced prudential
standards threshold pursuant to Dodd-Frank section 165 from $50
billion to $250 billion in total consolidated assets, as
contemplated in S. 2155?
A.4.b. I support increased tailoring of regulation and
supervision. I believe that it was prudent for the Congress to
raise the $50 billion asset threshold for larger bank holding
companies in order to limit the scope of enhanced prudential
standards. In general, regulation and supervision should
continue to be tailored to the size, systemic footprint, and
risk profiles of institutions, and my understanding of the
Economic Growth, Regulatory Relief, and Consumer Protection Act
is that while it adjusts the $50 billion threshold, it still
allows the Federal Reserve to subject a firm with a higher risk
profile to more rigorous regulation.
Q.4.c. Federal Reserve Vice Chair Quarles has said that the
Volcker Rule ``is an example of a complex regulation that is
not working well.''\2\ Do you agree or disagree? Why?
---------------------------------------------------------------------------
\2\ https://www.reuters.com/article/us-usa-fed-quarles/u-s-
considering-material-changes-to-volcker-rule-feds-quarlesidUSKBN1GH2U8.
A.4.c. I think it makes sense to explore whether or not the
Volcker Rule can be implemented in a simpler, less burdensome
---------------------------------------------------------------------------
way while still achieving the objectives of the statute.
Q.4.d. What is your view of the Community Reinvestment Act?
Does it need to be altered or modernized by the Federal
Reserve? If so, what changes do you support?
A.4.d. The Community Reinvestment Act (CRA) has been a part of
banking regulation for 40 years. It would be a very high
priority of mine, if confirmed, to make sure that it is
enforced.
I support the CRA's goal of encouraging banks to meet their
affirmative obligation to serve their entire community, and in
particular, the credit needs of low- and moderate-income
communities. Doing so benefits low- and moderate-income
communities and helps them to thrive by providing opportunities
for community members, for example, to buy and improve their
homes and to start and expand small businesses.
If confirmed, I would be open-minded to discussions for
improving or bringing the CRA up to date, but the essential
mission of the act needs to be respected.
Q.5. On May 23, the FDIC released their Quarterly Banking
Profile. It shows that that bank profits increased 28 percent
over the last year, and even more for community banks.
Q.5.a. Do you think it is sound policy to reduce capital
requirements for banks that have profit levels this high?
A.5.a. The financial crisis demonstrated the importance of a
financial system that has sufficient capital to absorb losses
and allow banks to continue lending in an economic downturn.
Stronger and higher-quality regulatory capital requirements for
U.S. banking firms have therefore been an essential post-crisis
reform. However, I believe the banking agencies should continue
to examine whether the requirements remain effective over time
and adjust the capital framework as appropriate while
preserving the essential gains in resiliency and stability of
our financial system that have resulted from the reforms put in
place since the financial crisis.
Q.5.b. If confirmed, you will be a member of the Federal Open
Market Committee. What experience will you bring to this role?
Are there any changes in how monetary policy is currently
conducted that you will advocate for?
A.5.b. In my 35-year professional career, I have achieved
recognition among academics, policymakers, and financial market
participants as an expert on the economics of monetary policy.
My
academic work on monetary policy as a professor of economics
and international affairs since 1988 at Columbia University
(and before that at Yale University) has been frequently cited,
and the framework for a more effective monetary policy
developed in these papers has been widely consulted by
economists at the Federal Reserve and as well as at other major
central banks around the world. In this regard, since 2007 I
have served as a member of the Deutsche Bundesbank Academic
Research Council and have been chairman of this group since
2012. In 2009-2010, I served as an external member of the
Norges Bank monetary policy review committee, and since 2012
have served on the Academic Advisory Board of the Hong Kong
Monetary Authority's Institute for Monetary Research. Earlier
in my career--from 1991 to 1992 and again between 1995 and
1997--I was a consultant at the economic research department of
the Federal Reserve Bank of New York as part of a group of
academic experts that included Ben Bernanke and future Nobel
laureate Christopher Sims. And in 1999, I served as a
consultant to Paul Volcker and the Group of 30 and contributed
to their Project on Exchange Rate Regimes.
I have been an active member of the National Bureau of
Economic Research (NBER) since 1983, and since 2004 have served
as a co-organizer of the NBER's annual International Seminar on
Macroeconomics, which is typically hosted by a central bank in
Europe. I am also a regular participant in the annual Hoover
Institution Conference on Monetary Policy, and, last summer,
delivered a keynote address at the Bank for International
Settlements Annual Research Conference.
Although I have spent most of my career in academia, I have
had two opportunities to serve in economic policy positions in
the executive branch of the U.S. Government: first, as a Senior
Staff Economist with Council of Economic Advisers from 1986 to
1987 and second, as Assistant Treasury Secretary for Economic
Policy from 2002 to 2003. These experiences were invaluable in
providing me a perspective that places a premium on doing
economic analysis that is practical, robust, and relevant to
better understanding how economic policy impacts individual
American and their communities.
Since 2006, I have had the opportunity to advise Pacific
Investment Management on global economics and strategy, with a
particular focus on global monetary policy. While I myself do
not manage portfolios, I have worked with the firm's investment
committee to help them interpret and assess global economic and
monetary policy trends. I believe this experience has given me
an appreciation for the interaction between macroeconomic
developments and financial markets that I would not otherwise
have obtained.
The Federal Reserve's monetary policy decisions are guided
by its statutory mandate to promote maximum employment and
price stability. Over the past few years, the Federal Open
Market Committee (FOMC) has been gradually reducing monetary
policy accommodation. Last year, it raised the target range for
the Federal funds rate by \3/4\ percentage point, and in
October it initiated a balance sheet normalization program to
gradually reduce its securities holdings. These steps to
normalize the stance of monetary policy are welcome, as they
reflect the economy's recovery from the financial crisis and
recession, the durability of the economic expansion, and the
Committee's confidence that inflation will return to 2 percent
on a sustained basis. If confirmed, I look forward to working
with my colleagues on the FOMC to continue to promote maximum
employment and price stability.
Q.5.c. Since the crisis, do you think the Federal Open Market
Committee has been on the right course by gradually increasing
interest rates?
A.5.c. I believe that the gradual increases that the FOMC has
made since December 2015 in the target range for the Federal
funds rate have been consistent with its statutory mandate to
promote maximum employment and price stability. Over the past
few years, the FOMC has been gradually reducing monetary policy
accommodation, reflecting the improvement in the U.S. economy.
During 2017, it raised the target range for the Federal funds
rate by \3/4\ percentage point, and in October 2017, it
initiated a balance sheet normalization program that is
gradually reducing the Federal Reserve's securities holdings.
As I noted previously, these steps to normalize the stance
of monetary policy are welcome developments, as they are
responses to the U.S. economy's recovery from the financial
crisis and recession, the sustained nature of the economic
expansion, and the FOMC's confidence that inflation will return
to 2 percent on a sustained basis. In addition, as decisions on
the pace of policy firming have reflected the FOMC's assessment
of incoming data and the outlook for the economy, recent years'
monetary policy developments have underlined the fact that
monetary policy is not on a preset course; rather, it is data
dependent and is chosen to promote outcomes for the U.S.
economy most consistent with the statutory goals of maximum
employment and price stability. If confirmed, I look forward to
working with FOMC colleagues on shaping policy decisions in
pursuit of these goals.
Q.6. As you know, the Federal Reserve currently uses a variety
of monetary policy rules, including the Taylor rule, in its
analysis and monetary policy decisionmaking, but does not rely
solely on rules to determine interest rate adjustments.
Q.6.a. Do you agree with the Federal Reserve's current
approach, or will you advocate that the Fed use a single rule?
A.6.a. I understand that the simplicity of monetary policy
rules has some appeal. But the economy is very complex.
Conducting monetary policy based on simple formulas has a
long tradition in the research literature on monetary policy.
But economic models are, of necessity, always simplifications
of reality, and we need to ask ourselves whether adhering to
any simple rule--even if it worked well in an economic mode--
would in practice mean that we were implementing the monetary
policy that was most consistent with meeting our statutory
objectives.
No simple policy rule can capture the full range of
considerations that the FOMC must take into consideration when
making monetary policy decisions. For example, policymakers
must consider not just the current levels of economic
variable--which are the variables that appear in many simple
policy rule--but also the expected future paths of such
variables. In addition, we need to take account of possible
risks surrounding those paths and whether the costs associated
with particular economic outcomes could be especially high.
We also need to take account of unobservable structural
factors that may affect the economy. For example, factors that
may persistently lower the level of the neutral Federal funds
rate or that may affect the longer-run normal level of the
unemployment rate. In contrast, simple monetary policy rules
often embed the assumption that these longer-run levels of the
real interest rate or the unemployment rate are fixed.
In sum, policy rules' prescriptions can be useful inputs in
the FOMC's policy deliberations, but they are not an adequate
or satisfactory substitute for FOMC decisions on monetary
policy based on a wide range of information.
Q.6.b. While the unemployment rate continues to fall, the labor
force participation rate remains at about its lowest level in
40 years. What do you think is contributing to this?
A.6.b. Although we have seen solid job growth this year and
further declines in the unemployment rate, the labor force
participation rate is still quite low by historical standards.
Much of this is due to the movement of the large baby boom
cohort into ages when participation rates tend to fall sharply
as workers retire. That said, the labor force participation
rate for prime-age workers--especially men--has also not
rebounded to pre-recession levels. A recent survey paper by
Katherine Abraham and Melissa Kearney\3\ attributes much of the
longer-run decline in participation among prime-age men to
factors such as technical change and globalization. However, I
also think that this group could represent an additional margin
of slack in the sense that some of them could be enticed to
reenter the labor force as the demand for labor continues to
strengthen.
---------------------------------------------------------------------------
\3\ http://www.nber.org/papers/w24333.
Q.6.c. Do think the opioid addiction epidemic is related to the
---------------------------------------------------------------------------
decline in labor force participation among prime-age workers?
A.6.c. Yes I do. Economists Anne Case and Angus Deaton \4\ have
carefully documented the rise in ``deaths of despair'' in the
United States, to which the opioid epidemic has contributed. In
addition, Alan Krueger's research \5\ on the decline in labor
force participation among adult men suggests that the
proportion of adult men taking pain medication has risen
sharply over the past two decades and is one reason for the
decline in labor force participation among this population.
More generally, opioid addiction has adversely affected both
the health and economic situation of many individuals and their
families and is an important issue that needs to be addressed
by policymakers.
---------------------------------------------------------------------------
\4\ http://www.princeton.edu/accase/downloads/
Mortality_and_Morbidity_in_21st_
Century_Case-Deaton-BPEA=published.pdf.
\5\ https://www.brookings.edu/wp-content/uploads/2018/02/
kruegertextfa17bpea.pdf.
Q.6.d. Over the past 40 years the link between productivity and
wage increases has eroded. More and more, productivity gains
aren't shared with workers. Why do you think wage growth has
not kept pace with productivity growth? Is there anything the
Fed can do to increase wages? Can the Federal Reserve, through
monetary policy or regulatory policy, do more for individuals
and communities that have not experienced the benefits from the
---------------------------------------------------------------------------
economic recovery?
A.6.d. It is the case in recent decades that there has been
more dispersion between workers in different categories and
that some workers have fallen behind. There is no consensus on
the primary reason for this divergence, but economists tend to
attribute this to a number of factors, including globalization,
technological change, and a need to better equip workers with
the skills needed in today's labor market.
In the aggregate, wage growth is a function of the strength
of the economy and the growth in productivity. I think the
Federal Reserve can best promote faster wage growth by focusing
on its full employment mandate--that is, by getting the
unemployment rate to a level that is, on average, consistent
with a healthy labor market, but acknowledging that there are
factors at work that are impacting different workers in
different ways.
Q.6.e. If confirmed, how will you advocate for increased
diversity in the Federal Reserve System?
A.6.e. Diversity is a critical aspect of all successful
organizations, and it is important to have a diverse workforce
at all levels of an organization. I believe that better
decisions are made, including in the policy space, when there
are individuals with a broad range of backgrounds and
perspectives engaged in the process.
If confirmed, I will have the opportunity to meet and speak
with individuals and groups throughout the Federal Reserve
System, the financial and banking sectors, and regional and
community organizations. I will use those opportunities to
advocate for career opportunities at the Federal Reserve Board
(Board) and the System for individuals with diverse
backgrounds, experience, and perspectives. And I plan to
actively support Board and Federal Reserve Bank (Reserve Bank)
initiatives to identify and recruit individuals with diverse
backgrounds and perspectives for careers at the Board and the
Reserve Banks. Of course, I also recognize that attracting
diverse talent is only the first step. To meet our objectives,
we need to create an environment where all will thrive and
contribute.
Q.6.f. Federal Reserve Board of Governors nominee Marvin
Goodfriend, has recommended that the ``central bank put in
place systems to raise the cost of storing money by imposing a
carry tax on its monetary liabilities.'' Do you believe that
there should be a currency tax, or that there are financial
conditions that would call for a currency tax?
A.6.f. I am very skeptical that the real-world effects of a tax
on currency could justify imposing such a tax.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED FROM RICHARD
CLARIDA
Q.1. The Federal Reserve is one of the agencies authorized to
enforce the Military Lending Act (MLA), which is a bipartisan
law enacted in 2006 that sets a hard cap of 36 percent interest
for most loans to servicemembers and their families. On July
22, 2015, the Department of Defense finalized MLA rules that
closed prior loopholes that allowed unscrupulous lenders to
prey upon service-
members and their families.
Q.1.a. Do you support these stronger MLA rules? If confirmed,
will you ensure that the MLA is vigorously enforced?
A.1.a. In enacting the Military Lending Act (MLA), Congress
directed the Department of Defense to issue implementing
regulations after consulting with the Federal Reserve and other
agencies. I understand that Federal Reserve staff has worked
with Defense Department staff to carry out that mandate and, if
confirmed, I will support that effort and the Federal Reserve's
full enforcement of the MLA at the institutions it supervises.
Q.1.b. If changes are made to the Community Reinvestment Act
that lead to financial institutions, including those that have
an
online presence, to take deposits from communities but actually
make less of an effort to reinvest in these same communities,
would you consider that to be a good or bad outcome?
A.1.b. The Community Reinvestment Act (CRA) was enacted to
ensure that banks help meet the credit needs of the communities
where they are chartered to do business. It is important that
credit flow to consumers and businesses in all communities,
including in low- and moderate-income areas, consistent with
safe and sound lending to meet their credit needs and further
economic development and financial inclusion. Any revisions to
CRA that expand the area within which a bank's CRA performance
is evaluated should ensure that the new areas are consistent
with the original intent of the law.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM RICHARD
CLARIDA
Q.1. How many times did you meet with President Trump prior to
being selected as a nominee to the Federal Reserve?
A.1. I met with President Trump one time.
Q.2. In that/those meeting(s), did President Trump ask how you
would vote on proposed increases to the Federal funds rate?
A.2. The President did not ask how I would vote on proposed
increases to the Federal funds rate.
Q.3. Did the President indicate a preference, one way or the
other, for how you should approach decisions on whether to
increase the Federal funds rate?
A.3. The President did not indicate a preference for how I
should approach decisions on whether to increase the Federal
funds rate.
Q.4. After meeting with the President, do you believe he
understands the value of an independent central bank? If yes,
what did he say to give you that indication?
A.4. In addition to my meeting with the President, I had a
number of meetings over several months with a number of
officials in the Administration. In no meeting and at no time
did I ever have any cause for concern that anyone I met with
questioned the independence of the Federal Reserve to conduct
monetary policy that would best achieve the mandates assigned
to it by the Congress.
Q.5. Will you commit that if confirmed, you will ignore any
political pressure or interference, whether it be direct or
indirect from the President or any other member of the
Administration?
A.5. I have no reason to expect any political pressure or
interference, but I fully commit that if confirmed I would
completely ignore any political pressure or interference,
whether it be direct or indirect from any member of the
Administration.
Q.6. Do you agree that the achievement of full employment
should be associated with strong and broad-based wage growth
for average workers, not just senior executives and managers?
A.6. Absolutely, that is something that we would like to see
associated with full employment. It is the case in recent
decades that there has been more dispersion between workers in
different
categories and that some workers have fallen behind. There is
no consensus on the primary reason for this divergence, but
economists tend to attribute this to a number of factors,
including globalization, technological change, and a need to
better equip workers with the skills needed in today's labor
market.
I think the Federal Reserve can best promote faster wage
growth by focusing on its full employment mandate--that is, by
getting the unemployment rate to a level that is, on average,
consistent with a healthy labor market, but acknowledging that
there are factors at work that are impacting different workers
in different ways and encouraging policymakers to address those
inequities.
Q.7. Why isn't this tight labor market forcing employers to
offer higher and more competitive wages?
A.7. It is true that measures of nominal wage growth have been
increasing more slowly recently than during the strong labor
markets of the mid-2000s or late 1990s. While many factors may
be contributing to the relatively slow growth in wages, the
most important factor is likely the slowdown in productivity
growth over the past decade or so. Indeed, over the past couple
of years (and over the past decade), productivity growth
averaged 1 percent per year, well below the average rate of 2
\1/4\ percent since 1950. When productivity growth is lower,
employers cannot afford to increase wages by as much as
otherwise. Price inflation has also been slower over the past 2
years than the tight labor market of 2006-2007. As a result,
real wage growth, which is what matters for workers' welfare,
has not slowed as much as nominal wages. Even though current
wage growth is lower than previously, most measures of
aggregate wages have increased gradually as the labor market
has tightened, suggesting that the tighter labor market is
pushing up wages. If the labor market tightens further, I would
expect wage growth to rise as well, all else held constant.
Q.8. To what extent has workers' decreased leverage to
negotiate with their employers impacted their ability to demand
higher wages?
A.8. It is difficult to assess how much decreased negotiating
leverage has affected workers' ability to demand higher wages.
Workers' leverage has increased as the labor market has
tightened, producing higher wages and greater employment and
employer-provided training. Although wage growth is lower
currently than in previous periods of strong labor demand--
which would be consistent with decreased negotiating leverage--
several other factors are also likely holding down wages.
Productivity growth, which is ultimately responsible for the
increase in real wages over time, has been quite slow in recent
years, as has inflation which influences the rate of nominal
wage growth. It's possible that changes in technology may have
decreased worker negotiating leverage by, for example,
increasing employers' ability to monitor workers and automate
jobs, and by making it easier for employers to shift production
to different locations. But it is difficult to distinguish the
effect of any change in workers' negotiating leverage from the
influence of other factors.
Q.9. Do you agree with Federal Reserve Governor Brainard that
it is important to retain a focus on place as the Federal
Reserve contemplates changes to the Community Reinvestment Act?
Do you agree that in some low-income and hard to reach
communities, physical branches are sometimes the only way to
meet local credit needs?
A.9. Governor Brainard has stated that the time is right to
revise the Community Reinvestment Act (CRA) regulations and, in
particular, expand the area in which a bank's CRA activities
are evaluated. She also emphasized the importance of retaining
a core focus on place. In her statement, she cited research
that demonstrates that branches are an important vehicle for
reaching small business customers and low-income consumers.
I agree with her assessment that the agencies should be
thoughtful about how to make the area where CRA activity is
evaluated more meaningful to both banks and low- and moderate-
income communities.
Q.10. Do you agree that robust enforcement against
discriminatory or unfair and deceptive lending practices must
work hand-in-hand with any revisions to the Community
Reinvestment Act?
A.10. Discriminatory and other illegal credit practices are
inconsistent with helping to meet community credit needs and,
as such, have a negative effect on a bank's CRA performance. I
understand that the Federal Reserve takes evidence of
discrimination into account when assigning CRA ratings as
prescribed in the CRA regulations. It is important to retain
the connection between CRA, fair lending, and laws protecting
against other illegal credit practices to ensure that consumers
have fair access to credit. I would support examinations that
are data-driven, as much as possible, to examine for compliance
with fair lending laws and regulations.
Q.11. A Treasury Department report issued in April recommends
that the Federal Reserve adopt the OCC's new policy allowing
banks with failing CRA ratings to merge or expand so long as
they can demonstrate a potential benefit.
Do you think the Federal Reserve should adopt this policy?
A.11. The applications process serves as a means of enforcing
CRA, which requires that the appropriate Federal supervisory
agency consider a depository institution's record of helping to
meet the credit needs of its local communities and to take that
record and public comments into account in evaluating
applications for deposit-taking facilities, such as for
mergers, acquisitions, and branches.
I understand that the Office of the Comptroller of the
Currency (OCC) issued guidance last November on how it will
assess CRA ratings in the context of its review of a banking
application, which varies from the Federal Reserve's
guidance.\1\ If confirmed, I would want to understand better
how the agencies' respective guidance differ and ensure that
there is clarity and transparency so that banks can comply, and
applications can be evaluated in a manner that is consistent
with the congressional intent of enforcing the CRA.
---------------------------------------------------------------------------
\1\ OCC, Policy and Procedures Manual, ``Impact of CRA Ratings on
Licensing Applications'', PPM 6300-2, November 8, 2017,
www.occ.treas.gov/publications/publications-by-type/other-publications-
reports/ppms/ppm-6300-2.pdf.
Q.12. Prior to the financial crisis, regulators treated assets
like subprime mortgage-backed securities as ``low risk,'' which
allowed big banks to load up on risky assets without the
necessary capital backing. When the crisis hit, the Nation's
biggest banks didn't have the capital to withstand the losses.
Do you agree that regulators and banks misperceived risks
before the last crisis, and assigned low ratings to assets that
were actually toxic?
A.12. The financial crisis demonstrated the importance of a
financial system that has sufficient capital to absorb losses
and allow banks to continue lending in an economic downturn.
Since the crisis, the U.S. banking agencies have appropriately
strengthened and improved the quality of the regulatory capital
requirements for U.S. banking firms.
Q.13. Last month, the Fed and the OCC proposed a rule that
would weaken the enhanced supplementary leverage ratio, a
requirement that the Nation's biggest banks hold enough capital
to support lending and absorb losses in a downturn. Those banks
are required to meet leverage ratios at the holding company
level and at the depository institution level--where the
deposits are backed by taxpayers. According to the FDIC, this
proposal would result in the departure of more than $120
billion in capital--capital that our regulators unanimously
deemed necessary after the financial crisis to ensure our
Nation's largest banks can withstand losses. Federal Reserve
Governor Brainard voted against this proposal--the first
dissent in the history of Board votes it keeps on its website
(315 votes total)--and the FDIC declined to join the proposal,
a significant departure from other postcrisis rulemaking, even
though the Fed and FDIC jointly established this rule after the
crisis.
Are you at all concerned that without the backstop of an
adequate leverage ratio for the Nation's eight biggest banks,
banks will once again load up on so-called ``low risk'' assets,
and place taxpayers at risk of future bailouts?
A.13. In setting capital requirements, there is a risk that
leverage ratios may become too binding. When a leverage ratio
becomes a binding constraint, it can create incentives for
firms to increase their investments in higher-risk, higher-
return assets and, conversely, reduce their participation in
lower-risk activities. My understanding of the enhanced
supplementary leverage ratio proposal is that it was aimed at
striking an appropriate balance between leverage and risk-based
capital requirements. If I was to be confirmed, I would look
forward to better understanding the analysis underpinning the
proposal and the public comments that were received in
response.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER FROM RICHARD
CLARIDA
Q.1. I believe strongly in the importance of the Fed's
independence. Recent comments from another Fed candidate (and
former Fed Governor)--Kevin Warsh--suggest that President Trump
has been anything but shy in revealing his preference for a low
interest rate environment.
Q.1.a. Has the President--or anyone in the Administration--
impressed upon you their beliefs on how you should vote on
matters of monetary policy?
A.1.a. No. I had a number of meetings over several months with
a number of officials in the Administration including the
President. In no meeting and at no time did anyone impress upon
me their belief on how I should vote on matters of monetary
policy.
Q.1.b. Do you commit to safeguarding the independence of our
central bank?
A.1.b. Yes. I have no reason to expect any political pressure
or interference that would challenge the independence of our
central bank, but I fully commit that if confirmed I would
completely ignore any political pressure or interference,
whether it be direct or indirect from any member of the
Administration.
Q.1.c. What do believe is the biggest threat to financial
stability at the moment?
A.1.c. An important lesson of the global financial crisis was
the need for greater vigilance in monitoring the financial
system. This includes looking at asset valuations, leverage,
liquidity and maturity transformation, and the complexity of
the financial system. Understanding the key vulnerabilities in
the system is a necessary step in order to pursue effective
policies to ensure the health of our financial system should
vulnerabilities increase.
Given that we have enjoyed many years of solid growth amid
a stable financial system, in my view complacency is a
particular threat. Failure to remain vigilant even as the
financial system evolves and grows risks the possibility that
the reforms put in place since the crisis will lose their
effectiveness.
Q.1.d. Do you believe that Title II's Orderly Liquidation
Authority is an important tool available at the Fed's disposal
during a crisis? Would you vote to use the Authority if
bankruptcy was not an appropriate method for resolving a
systemic financial institution?
A.1.d. Bankruptcy should be the preferred resolution framework
for a failing financial firm. Companies, counterparties, the
markets, and investors understand the rules and procedures
under the Bankruptcy Code. Nevertheless, Title II's Orderly
Liquidation Authority provides an important backstop resolution
framework for extraordinary situations.
Every failure of a systemic financial firm is different,
and I would consider the facts and circumstances on a case-by-
case basis in deciding whether to vote in favor of recommending
that the Treasury Secretary use Title II's Orderly Liquidation
Authority. One aspect of Title II that would factor into my
analysis is that Title II does not allow for Government capital
injections and requires that taxpayers suffer no losses from
the resolution.
Q.1.e. Do you think current bank risk-based capital levels are
too high, too low, or about right? How about the leverage
ratio?
A.1.e. Maintaining the safety and soundness of the largest U.S.
banks is fundamental to maintaining the stability of the U.S.
financial system and the broader economy. To be safe and sound
financial institutions, these firms must be well capitalized.
The U.S. banking agencies have substantially strengthened
regulatory capital requirements for large banking firms,
improving the quality and increasing the amount of capital in
the banking system.
High-quality common equity tier 1 capital (CET1) is
important because it is available under all circumstances to
absorb losses. Since the financial crisis, U.S. banks have been
required to meet new higher minimum requirements for CET1 to
ensure a solid base of protection against losses. U.S. banks
also have been required to meet a new capital conservation
buffer on top of the minimum to preserve flexibility to make
capital distributions. For the U.S. global systemically
important banks (G-SIBs), the Federal Reserve has imposed an
additional capital surcharge designed to reduce the threat that
a failure of any of these firms would pose to financial
stability. (Commonly referred to as the G-SIB surcharge.) Large
U.S. banking firms have roughly doubled their capital positions
from before the crisis to today.
If confirmed, I look forward to examining this question
more closely and consulting with my colleagues. Absent critical
supervisory information, it would be premature for me to judge
the precise appropriate capital levels. However, given its
importance, I am very encouraged by the steps that I have
observed the Federal Reserve has taken.
Q.2. As you may know in S. 2155, we contemplate raising the
enhanced prudential standards from $50 billion to $250 billion,
with an 18 month-delayed effectiveness to give the Fed time to
do a rulemaking and decide whether it should apply any of the
enhanced prudential standards to banks between $100 billion and
$250 billion.
What do you see as the most important enhanced prudential
standards for these mid-size banks?
A.2. Throughout our banking regulatory system, we should
continue to protect the core tenets of regulatory reform--
capital, stress testing, liquidity, resolution planning, and
orderly liquidation authority. One important post-crisis reform
maintained for banks of that size by S. 2155 is periodic stress
testing.
The Federal Reserve further helps ensure the capital
adequacy of our largest banking firms through the annual stress
testing and Comprehensive Capital Analysis Review (CCAR)
exercises, which consider the losses these firms would suffer
under adverse economic scenarios on a forward-looking basis. In
doing so, these programs help determine firms' capital needs
when they will be needed most--in a serious economic downturn.
As we move away from the crisis and as banks continue to
add risk to their balance sheets, the stress testing and CCAR
programs will be critical to ensuring that banks are doing so
in a manner that does not jeopardize their safety and soundness
or the stability of the U.S. financial system.
Q.3. The urban-rural economic divide is an area of particular
interest for me and an area where I've done a lot of work. I
believe that someone shouldn't be forced to leave their
community to find a good paying job. As we've seen in the Great
Recession and the
recovery that's followed, the impacts of these macroeconomic
trends are not universal and, in this case, have often been
felt more harshly in rural areas.
What do you believe to be the driving forces behind
the decline of rural America? Is this trend the result
of globalization and technological change?
Do you believe these trends are irreversible?
A.3. Research has shown that employment growth relative to
population has been slower in rural areas in recent years than
in large cities, and several important measures of well-being
in rural areas have declined dramatically over recent decades.
While important research is being done to better understand
these disturbing trends, no firm conclusions regarding the
underlying causes have yet emerged. Research does suggest that
globalization and technological change have adversely affected
the wages and employment of lower-educated workers, many of
whom reside in rural areas. There is also some research that
suggests that the increased availability of opioid drugs has
also adversely affected employment and welfare in rural areas.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM RICHARD
CLARIDA
Q.1. Now that you have had more time to examine the Fed's
recent proposal on changes to capital standards, do you support
the proposal as currently written? If so, why do you think it
is appropriate to reduce capital requirements for the country's
largest banks at this time? If not, what changes would you need
to see to the proposal before supporting it?
A.1. We need a resilient, well-capitalized financial system
that is strong enough to withstand even severe shocks and
support economic growth by lending through the economic cycle.
Since the crisis, the U.S. banking agencies have substantially
strengthened regulatory capital requirements for large banking
firms, improving the quality and increasing the amount of
capital in the banking system. It would be important to me not
to give up any of the gains in resiliency and stability that
have been achieved since the crisis.
Risk-based and leverage capital requirements work best
together when leverage capital requirements generally serve as
a backstop to risk-based capital requirements. In cases where
the leverage ratio becomes a binding constraint, it can create
incentives for banking organizations to reduce their
participation in lower-risk, lower-return business activity,
such as repo financing, central clearing services for market
participants, and taking custody deposits, notwithstanding
client demand for those services.
I understand that the Federal Reserve's enhanced
supplementary leverage ratio (eSLR) proposal is designed to
maintain the eSLR standards as a meaningful constraint on
leverage while ensuring a more appropriate complementary
relationship between global systemically important banks' (G-
SIBs) risk-based and leverage-based capital requirements, and
to help ensure that the leverage-based capital requirements
generally serve as a backstop to risk-based capital
requirements. If confirmed, I would look forward to reviewing
the comments that the Federal Reserve receives on the proposal.
Q.2. Do you believe that any U.S. banks are Too Big to Fail?
If so, what can and should the Fed do to address
this problem?
If not, what evidence supports your conclusion?
A.2. I believe that the post-crisis regulatory reforms and
stronger supervision have resulted in a great deal of progress
being made in strengthening the financial system and making
large firms better able to absorb losses. Having said that, it
is important for financial supervisors to remain vigilant to
ensure that the financial system continues to remain resilient
as economic conditions and market practices evolve.
Q.3. Section 402 of S. 2155, which recently passed the Senate
and allows banks ``predominantly engaged in custody,
safekeeping, and asset servicing activities'' to have less
capital.
Do you believe that language applies to JPMorgan Chase and
Citigroup? Would that analysis hold if those two banks created
intermediate holding companies to house their custody services?
A.3. Section 402 of the Economic Growth, Regulatory Relief, and
Consumer Protection Act provides leverage ratio relief to firms
that qualify as ``custodial banks'' with respect to reserves
held at certain central banks. The bill defines a custodial
bank as any depository institution holding company that is
predominantly engaged in custody, safekeeping and asset
servicing activities (and any subsidiary depository institution
of such a holding company). The Federal Reserve Board (Board)
and the other Federal banking agencies have authority to issue
regulations implementing this section. By its terms, the bill
does not appear to apply to diversified holding companies, such
as JPMorgan Chase or Citigroup, because their custodial
operations constitute a relatively small percentage of their
overall businesses.
The Board applies regulatory capital requirements to bank
holding companies on a consolidated basis. Under this approach,
the top-tier bank holding company is required to aggregate all
its activities and the assets of its subsidiaries. As a result,
simply inserting an intermediate holding company would not
affect the activities or assets of the consolidated banking
organization or the analysis of whether the consolidated
organization was considered to be predominantly engaged in
custody, safekeeping, and asset servicing activities. This
result would apply to an intermediate holding company that
controlled the custody services of the banking organization as
well as to any other intermediate holding company in the
structure. An intermediate holding company therefore would not
affect the capital requirements of the consolidated banking
organization.
Q.4. Banks today reported record profits--up 27.5 percent from
the first quarter of last year. The economy is nearly a decade
into a long expansionary period.
Why is a reduction in capital requirements necessary or
appropriate at this time?
A.4. We need a resilient, well-capitalized financial system
that is strong enough to withstand even severe shocks and
support
economic growth by lending through the economic cycle. To that
end, the U.S. banking agencies have substantially strengthened
regulatory capital requirements for U.S. banking firms,
improving the quality and increasing the amount of capital in
the banking system. At the same time, it is important to
monitor the capital rules on an ongoing basis, to determine
whether the framework is effectively measuring and addressing
risk and working as intended, and to adjust the framework as
needed.
Reforms proposed by the Federal Reserve suggest that the
enhanced supplementary leverage ratio standards may be
currently calibrated too high, creating potential incentives
for firms to disengage from certain low-risk, low-return
financial activities that are beneficial for the economy.
Modest recalibration may reduce these negative incentives while
not materially changing overall large bank capital
requirements. As mentioned previously, if confirmed, I look
forward to reviewing the comments received on reform proposals.
Q.5. Fed Chair Powell recently announced that the Fed's Board
of Governors would vote on whether to relieve Wells Fargo from
the growth restriction the Fed imposed on it pursuant to its
February 2018 consent order.
Q.5.a. What kind of changes at Wells Fargo would you need to
see before voting to lift the growth restriction?
A.5.a. First, let me say that just based upon the news
accounts, the activities of Wells Fargo in this domain are
egregious and unacceptable, and I was as shocked as anyone to
read about it in the newspaper. If I am confirmed and this
matter came before me, I would certainly individually want to
be absolutely convinced that appropriate steps had been taken
and could be verified. My understanding is that the firm must
fully comply with the terms of the Consent Order, which
requires a number of improvements to be made to the firm's
governance and risk management practices. If confirmed, I would
only vote to lift the asset cap if the required improvements
are implemented to the satisfaction of the Federal Reserve.
Q.5.b. Do you believe the Fed should place more emphasis on
finding diverse leaders for the regional banks?
A.5.b. Like many others, I was excited to see the appointment
of Raphael Bostic in 2017 as the first African American Reserve
Bank president and, more recently, the appointment of Andre
Anderson as the first African American First Vice President.
Andre's appointment to this senor leadership role was
particularly satisfying as I understand that he rose through
the ranks at the Federal Reserve, beginning at the Birmingham
Branch where he was hired to process municipal bonds.
Despite these recent appointments, I know that the senior
leadership of the Board, and indeed the System, agree that
there is a lot more work to be done to move the System toward
its objective of benefiting fully from a diverse workforce and
leadership. I and I know my potential future colleagues on the
Board as well, view this as critical first and foremost because
it allows the best possible job to be done in meeting the
responsibilities enumerated for the System in the Federal
Reserve Act.
If I am confirmed, I will arrive on the job eager to engage
with my colleagues across the System on this important issue. I
fully understand that the Federal Reserve Act assigns primary
responsibility for selecting senior leadership at the Reserve
Banks to their Class B and Class C directors. But the Act also
gives the Board of Governors the responsibility to approve such
appointments, and I intend to take that role seriously,
including by doing everything that I can to use my position to
help attract more diverse leaders to the System like Raphael
and Andre.
Q.5.c. If so, how do you recommend changing the current hiring
process so that it produces more diverse leaders?
A.5.c. Diversity is a critical aspect of all successful
organizations. In my experience, and in agreement with Chairman
Powell's sentiments, we make better decisions when we have a
wide range of backgrounds and voices around the table.
There is value in having a diverse workforce at all levels
of an organization. I am committed to achieving further
progress, and to better understanding the challenges to
improving and promoting diversity of ideas and backgrounds.
My understanding is that while different Reserve Banks
tried different approaches, diversity has been a point of
emphasis in all recent searches. Specific efforts of which I am
aware include advance engagement with community groups and
hiring of national search firms with specific expertise in
diversity. If confirmed I look forward to encouraging the
continuation of these efforts and I also commit to look for
additional proven approaches to further expand the Federal
Reserve's efforts.
Q.6. The Fed is apparently participating in an interagency
effort to reform regulations implementing the Community
Reinvestment Act. In April, the Treasury Department sent a memo
to the Fed, the OCC, and the FDIC recommending several rule
changes.
Q.6.a. Do you disagree with any of the Treasury
recommendations?
A.6.a. I understand that Treasury's recommendations were based
on the Department's outreach effort and the summary sent to the
agencies includes helpful insights. If confirmed, I look
forward to reviewing the recommendations in more detail and
supporting efforts to ensure that the agencies work together to
find ways to improve both effectiveness and transparency in
Community Reinvestment Act (CRA) supervision.
Q.6.b. What are your priorities for CRA reform?
A.6.b. If confirmed, I would work to better understand the
calls from banks, community development organizations and
others for making CRA evaluations more consistent and
transparent. As well as for calls to revise the CRA in a way
that encourages more lending and investment in underserved
areas.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
RICHARD CLARIDA
Community Reinvestment Act
Q.1.a. Should CRA be expanded to all nonbanks? Some assert that
in today's financial landscape, CRA compliance should be
expanded to all nonbanks, including credit unions, fintechs,
mortgage companies, investment, and others.
A.1.a. The Community Reinvestment Act (CRA) has been a part of
banking regulation for 40 years. It would be a very high
priority of mine, if confirmed, to make sure that it is
enforced.
I support the CRA's goal of encouraging banks to meet their
affirmative obligation to serve their entire community, and in
particular, the credit needs of low- and moderate-income
communities. Doing so benefits low- and moderate-income
communities and helps them to thrive by providing opportunities
for community members, for example, to buy and improve their
homes and to start and expand small businesses.
If confirmed, I would be open-minded to discussions for
improving or bringing the CRA up to date, but the essential
mission of the act needs to be respected.
Q.1.b. Do you support a full scope review for CRA exams? Do you
think geographical assessment areas should define CRA
accountability both where the majority of branch lending and
the majority of nonbranch lending occurs?
A.1.b. It is important that the agencies with rule writing
authority for CRA (the Federal Reserve, the Federal Deposit
Insurance Corporation, and the Office of the Comptroller of the
Currency) evaluate ways to provide a meaningful evaluation of a
bank's CRA activities in all of the communities it serves. I
understand that the agencies are considering ways to make the
area in which CRA performance is evaluated more reflective of
current banking practices, and I support that effort.
Q.1.c. If a fair lending exam detects a violation after a bank
has been graded for its CRA exam, do you think the bank should
receive a retroactive downgrade?
A.1.c. Discriminatory and other illegal credit practices are
inconsistent with helping to meet community credit needs. I can
understand why regulators would want to take into account
banks' records in fair lending when evaluating their
performance in the spirit of community reinvestment. What would
seem to be important is that there is clarity in the
application and the implications of the ratings on a bank's
supervisory record, particularly if the timing of the
examinations are different.
Q.2. Many Democratic, Republican and Independent current and
former regulatory officials raising concerns about the bank
deregulation bill range from former Fed Chair Paul Volcker,
former Fed Governor and Deputy Treasury Secretary Sarah Bloom
Raskin, former FDIC Chair Sheila Bair, former Counselor to the
Treasury Secretary Antonio Weiss, and former Deputy Governor of
the Bank of England Paul Tucker. These former banking
regulators either State that a $250 billion bank threshold is
too high to protect
financial stability or that we should not weaken the leverage
rules for the largest banks, or both.
Do you think anything in S. 2155 puts the financial system
at risk? Do you share the concerns raised by your predecessors?
If so, why? If not, why not?
A.2. Regulation and supervision should continue to be tailored
to firms' size, systemic footprint, and risk profiles. I
believe that it was prudent for the Congress to raise the $50
billion asset threshold for larger bank holding companies in
order to limit the scope of enhanced prudential standards. As I
understand the Economic Growth, Regulatory Relief, and Consumer
Protection Act, it adjusts thresholds but still allows the
Federal Reserve to subject a firm with a higher risk profile to
more rigorous regulation.
Q.3. There are a number of places in S. 2155 that would require
the Federal Reserve to conduct additional cost-benefit analysis
in order to regulate big banks.
Mr. Clarida, you have said that the Federal Reserve
underestimated the human costs of the financial crisis prior to
2008? What have you learned from your previous analytic
mistakes? How will you ensure you will not repeat those
previous errors?
A.3. The financial crisis and its effect on the economy clearly
harmed millions of Americans who lost their jobs, their homes,
their savings, access to credit, etc. The crisis served as a
cautionary tale about the critical importance of a resilient
financial system that supports economic growth and meets the
credit needs of businesses and consumers. I believe this
experience underpinned much of the post-crisis regulatory
agenda, and if I were to be confirmed, I would certainly keep
the importance of financial stability firmly in mind as a
policymaker.
Q.4. Chair Yellen was the first chair in Federal Reserve
history to share data with this Committee about racial economic
disparities during her semi-annual testimony. When she
presented that data, she touted significant progress, and
indeed, black unemployment fell from 11.8 percent at the
beginning of her term to the current historically low figure of
6.9 percent.
What do you attribute this trend to? Do you think the
attention that Janet Yellen paid to this issue and the policies
of the Federal Reserve deserve credit for the progress that has
been made?
A.4. The unemployment rate of African Americans has
historically been more cyclical than the unemployment rate for
the economy as a whole. It deteriorates more when the economy
goes into a recession and improves more during expansions.
Thus, the current historically low level of the African
American unemployment rate is a function of the long economic
expansion our country is currently experiencing. The efforts of
the Federal Open Market Committee (FOMC) to achieve its dual
mandate have likely contributed to the strong overall
macroeconomic performance, although many other factors have
also contributed. With respect to the attention paid by former
Chair Janet Yellen and the FOMC in recent years to racial
economic disparities, I would say that understanding the
heterogeneity in how different groups in the economy fare can
help to improve our understanding of the economy as a whole.
That said, the tools available to monetary policymakers are not
designed to ameliorate long-standing economic disparities.
Q.5. At that same testimony where Janet Yellen presented
information about racial economic disparities, she said, quote
``it is troubling that unemployment rates for these minority
groups remain higher than for the Nation overall, and that the
annual income of the median African American household is still
well below the median income of other U.S. households.''
Though African American unemployment is lower today, Chair
Yellen's point remains true. Do you think the recent progress
is sufficient? What more can be done to ensure that
unemployment among African Americans is equal to white
unemployment? In addition to increasing employment rates for
African Americans, what can the Fed do to increase wages and
wealth for African Americans and Latinos?
A.5. I have been heartened to see that, as you note, the steady
macroeconomic performance of recent years has measurably
improved employment and income among African American
households. That said, I believe more progress could be made.
However, the tools that the Federal Reserve has at its disposal
are not designed for ameliorating long-standing economic
disparities. The main way in which the Federal Reserve can
contribute is by promoting a healthy and stable economy, which
will provide economic opportunity for a broad range of
households. Moreover, to the extent allowed by law, the Federal
Reserve can also use its regulatory and supervisory role to
ensure that African Americans have equal access to credit and
the financial system so as to promote their economic well-
being. In addition, the Federal Reserve produces a variety of
datasets and research that can help inform our understanding of
the economy and policies that could be undertaken by those
outside of the Federal Reserve System to help close the gap
between African Americans and other U.S. households.
Q.6. Marvin Goodfriend, another nominee to the Federal Reserve
Board of Governors has urged the Federal Reserve to incent
spending by placing a tax on currency.\1\
---------------------------------------------------------------------------
\1\ Goodfriend, Marvin. ``The Case for Unencumbering Interest Rate
Policy at the Zero Bound.'' Carnegie Mellon University. September 15,
2015. Available at: https://www.kansascityfed.org//media/files/
publicat/sympos/2016/econsymposium-goodfriend-paper.pdf.
Q.6.a. Do you support Mr. Goodfriend's proposal to tax currency
---------------------------------------------------------------------------
kept outside of circulation?
A.6.a. I am very skeptical that a tax on currency could be
justified as a tool of monetary policy.
Q.6.b. If Mr. Goodfriend's proposal were to be implemented, can
you estimate what the impact would be on savers and low-income
depositors?
A.6.b. I do not have such an estimate, as I have not undertaken
research on this topic.
Q.7. The Consumer Financial Protection Bureau has endured new
leadership that is hostile to its mission. A number of
enforcement actions aimed at helping people receive redress
from fraud or overcharges has been stopped.
Q.7.a. If the Consumer Financial Protection Bureau's leadership
refuses to ask for adequate funding or takes steps that you
think are harmful to people or our economy, will you let Senate
Banking Committee Members know? If so, how? If not, why not?
A.7.a. I understand that the Federal Reserve Board (Board)
plays a consultative role in Consumer Financial Protection
Bureau (CFPB) rulemakings and coordinates in the examinations
as appropriate, but does not have any oversight of the CFPB
organizational or structural design, nor of CFPB enforcement
priorities.
If confirmed, I would support efforts to collaborate with
the CFPB, while supporting the Federal Reserve's efforts to
continue to carry out supervisory and enforcement
responsibilities for the financial institutions, and for the
laws and regulations under its authority to comply with all
applicable Federal consumer protection laws and regulations.
Q.7.b. The Federal Reserve retains supervision and enforcement
authority for financial institutions below $10 billion in
assets. Please provide a list of public enforcement actions
taken toward any Fed-regulated institutions in the past 3
years. Please note any fines or penalties assessed. Please note
if you agree or disagree with these enforcement actions.
A.7.b. Although I cannot comment on the specific circumstances
of actions the Federal Reserve has taken in the past, I believe
bank supervisors have a responsibility to ensure that the
institutions subject to supervision operate safely and soundly
and that they comply with applicable statutes and regulations,
and furthermore, that the Federal Reserve should use its formal
enforcement authority to achieve these objectives where
appropriate. A list of public enforcement actions taken against
institutions regulated by the Federal Reserve in the past 3
years, including any civil money penalties assessed against the
institution, is provided in Appendix A to this request.
Q.8. Some current Federal Reserve leaders support reducing
banks' capital requirements. This concerns me as capital
requirements have been a key tool in restoring the safety of
the financial system since the crisis. Ensuring modest leverage
ratios prevents banks from lending out more than they can
afford to, and especially keeps them away from riskier assets
like the ones that fueled the crisis.
For this reason, Democrats and Republicans in the House and
Senate, as well as FDIC Vice Chair (and former Kansas City Fed
President) Thomas Hoenig all support higher capital
requirements, not lower ones. Do you support any changes to the
current capital requirements for financial institutions? If so,
please describe.
A.8. The financial crisis demonstrated the importance of a
financial system that has sufficient capital to absorb losses
and allow banks to continue lending in an economic downturn.
Since the crisis, the U.S. banking agencies have strengthened
and improved the quality of the regulatory capital requirements
for U.S. banking firms. However, I believe the banking agencies
should continue to examine whether the requirements remain
effective over time and adjust the framework as appropriate
while preserving the essential gains in resiliency and
stability of our financial system that have resulted from the
reforms put in place since the financial crisis.
Q.9.a. In recent years, Federal Reserve policymakers have
warned that we should raise interest rates to counter asset
bubbles destabilizing the financial system. Board of Governor
Nominee Marvin Goodfriend has suggested replacing liquidity
coverage ratios and a host of other regulations with tighter
monetary policy.\2\
---------------------------------------------------------------------------
\2\ Senate Committee on Banking, Housing, and Urban Affairs, June
7, 2016, Hearing. Available at: https://www.gpo.gov/fdsys/pkg/CHRG-
114shrg21603/pdf/CHRG-114shrg21603.pdf.
---------------------------------------------------------------------------
Do you believe that the blunt tool of monetary policy can
be a substitute for sound financial protections? What is your
understanding of the historical evidence surrounding the
relationship between monetary policy and asset bubbles?
A.9.a. Monetary policy, which is already tasked with the goals
of price stability and full employment, should not be
considered a substitute for strong financial and supervisory
standards. Such standards are critical for ensuring stability
of the U.S. financial system. The excessive leverage and
maturity transformation in place in 2007 left the economy
vulnerable to a deterioration in the housing market and an
increase in investor concerns regarding the solvency and
liquidity of large, interconnected financial institutions.
Reforms since that time, enacted by Congress and
implemented by the appropriate agencies, have raised loss-
absorbing capacity within the financial sector and reduced the
susceptibility of the financial system to destabilizing runs.
Of course, gaps exist in financial regulation, and some
institutions, like hedge funds and many finance companies,
largely fall outside of the prudential regulatory perimeter.
Therefore, changes in interest rates could at times be
appropriate as a supplementary tool to address threats to full
employment and price stability emanating from widespread
imbalances or buildups of risk in areas where more-targeted
tools are
inadequate or nonexistent.
Asset-price swings owe to many factors, and monetary policy
has not generally been a prime factor in historical episodes
involving large increases in asset prices. Run-ups in asset
prices that are not supported by economic fundamentals usually
involve an increased tolerance for risk or a decreased
perception of risk.
Q.9.b. Besides monetary policy, what other tools are available
to temper asset bubbles?
A.9.b. It is always difficult to judge whether the price of an
asset has reached an unsustainable level, particularly in real
time. That said, it is important for the appropriate
authorities, including the Federal Reserve, to monitor asset
price developments and to consider whether, for example,
unusually rapid increases in asset prices are leading to
vulnerabilities that could jeopardize the efficient functioning
of the financial system, price stability, or full employment.
The difficulties associated with detecting asset bubbles as
they emerge highlight the need for strong and appropriately
tailored regulatory and supervisory standards at all times.
Negative shocks, including asset price declines, the sudden
failure of a major financial institution and so forth are
always possible. The core capital and liquidity regulations and
supervisory policies adopted by the Federal Reserve, including
stricter standards for the most systemic firms, are, in my
view, consistent with a view that the system should be
resilient to such shocks.
Q.10. In the years since the financial meltdown, the Federal
Reserve has played a key role in putting our economy back on
stable footing and setting the conditions for more robust
growth. Still, there have been bills introduced that would
eliminate the Fed's full employment mandate on the basis that,
according to the bill's findings ``at best, the Federal Reserve
may temporarily increase the level of employment through
monetary policy.''
Can you elaborate on how the Fed influences employment in
the short-run, and discuss whether failure to use monetary
policy effectively in the face of severe downturns could do
permanent damage to the level of unemployment in the economy?
A.10. In the short run, the Federal Reserve influences
employment by adjusting its target range for the Federal funds
rate and by influencing the expected future path of short-term
interest rates through its forward guidance. These monetary
policy actions affect the interest rates that many households
confront when deciding whether to borrow and spend, and that
businesses face when making their investment plans. Additional
spending by households and businesses will, in turn, cause
businesses to hire more workers to meet the higher demand for
their products and services. In this way, monetary policy can
be used to combat recessions and reduce the associated rise in
unemployment.
Q.11. Critics of quantitative easing have argued that it is
incompatible with the Fed's price stability mandate; however in
discussing quantitative easing the Fed has consistently noted
that the program is designed to promote a stronger pace of
economic growth and to ensure that inflation, over time, is at
levels consistent with the Fed's mandate.
Q.11.a. Can you comment on how the Fed's policies in recent
years have actually supported the Fed's price stability
mandate?
A.11.a. Faced with the most severe financial crisis since the
Great Depression, the FOMC cut short-term interest rates to
zero by the end of 2008. In order to address the economic
downturn and stem disinflationary pressures, the Federal
Reserve also turned to nontraditional tools such as asset
purchases and forward guidance, as means of providing the
additional accommodation. These policies put downward pressure
on longer-term interest rates and helped to make financial
conditions more accommodative, encouraging and supporting the
economic recovery. By providing a cushion for aggregate demand
during the recession and supporting spending during the
recovery, the Federal Reserve's monetary policy measures helped
to keep inflation close to 2 percent. In particular, in part
because aggregate demand was supported by monetary policy, the
U.S. economy avoided the severe downward pressure on the price
level that occurred during the Great Depression, which in turn
prevented inflation expectations from falling sharply below 2
percent.
Q.11.b. What does the latest research tell us about the
effectiveness of the Fed's large scale asset purchases?
A.11.b. Estimates of the effects of large-scale asset purchases
vary across studies, but most suggest that asset purchases put
downward pressure on term premiums and resulted in lower
longer-term interest rates than would otherwise have been the
case. Lower long-term interest rates, in turn, helped to
support asset prices more broadly and to bolster spending on
goods and services by households and businesses. That said,
there are costs as well as benefits to large-scale asset
purchases and certainly today I support the Federal Reserve's
program to shrink its balance sheet.
Q.11.c. Is there any evidence that the Fed's asset-purchase
program, which sought to support the economy by lowering long-
term interest rates, has been a drag on U.S. productivity as
some Republicans have suggested? Is there any evidence that the
program has created a ``false economy'' as Trump has asserted?
A.11.c. I am not aware of research suggesting that the Federal
Reserve's policies have contributed to the sluggish pace of
productivity growth observed over recent years. Studies
focusing on the slowdown in U.S. productivity growth point to
various developments such as weak capital spending in the wake
of the financial crisis, a slower pace of technological
advance, a decline business dynamism, and a deterioration in
workforce skills as factors contributing to recent productivity
trends.
Q.11.d. How would the economy have likely fared in terms of
unemployment, GDP, wage growth, etc., had the Fed chosen not to
pursue its asset purchase program?
A.11.d. The Federal Reserve conducts monetary policy to promote
maximum employment and stable prices. Various research studies
by academic and central bank economists suggest that the
Federal Reserve's asset purchase programs helped to make
financial conditions more accommodative, support economic
recovery, strengthen labor market conditions, and foster price
stability.\3\
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\3\ See, for example, Eric M. Engen, Thomas Laubach, and David
Reifschneider (2015), ``The Macroeconomic Effects of the Federal
Reserve's Unconventional Monetary Policies,'' Finance and Economics
Discussion Series 2015-005, Washington: Board of Governors of the
Federal Reserve System, February, http://dx.doi.org/10.17016/
FEDS.2015.005.
Q.11.e. Is there any evidence that the Fed's stimulus program
has paved the way for the next global meltdown, as Trump
---------------------------------------------------------------------------
claimed?
A.11.e. While there are many sources of risk and uncertainty in
the global economy, the Federal Reserve's conduct of monetary
policy has contributed to an improved global economic outlook
by supporting the U.S. economic expansion and maintaining low
and stable inflation.
Q.11.f. How does the Fed's balance sheet as a percentage of GDP
compare with the balance sheets of the next largest economies?
Do these countries have a dual mandate similar to the Fed?
A.11.f. The size of the Federal Reserve's balance sheet
relative to nominal GDP currently stands at about 23 percent.
Last October, the FOMC initiated its plan to normalize the size
of the Federal Reserve's balance sheet. Under that plan, the
size of the Federal Reserve's balance sheet will decline
gradually over coming years. With nominal GDP expected to rise
over that time, the size of the Federal Reserve's balance sheet
relative to nominal GDP will likely decline appreciably.
The size of the Federal Reserve's balance sheet as a
percent of GDP is smaller than those of many other major
foreign central banks. The size of the central bank balance
sheets relative to nominal GDP for the United Kingdom, the euro
area, Japan, and Switzerland are, very roughly, about 28, 40,
100, and 120 percent, respectively.
All of these central banks employed large-scale asset
purchase programs to address the implications of the financial
crisis in their countries. All of these central banks operate
with a single mandate to pursue price stability. However, in
many cases, this mandate is treated as medium-term objective,
and other goals, including output and employment stabilization
and financial stability, are cited to justify deviations from
price stability in the short run.
Q.12. It is my understanding that major central banks around
the world maintain and have drawn on their authority to
purchase a wide range of assets including corporate bonds,
commercial paper, real estate investment trusts, and equities
among other assets.
Q.12.a. Given the broad authorities available to other central
banks, rather than shrink the Fed's tool kit, do you think
Congress should consider expanding it?
A.12.a. As I indicated above, I believe the FOMC's existing
monetary policy toolkit--notably including forward guidance and
balance sheet policies--has served the Nation well and has
supported the U.S. economy in the wake of the financial crisis.
Currently, I do not see compelling reasons why the toolkit
needs to be expanded, but I do believe that the experience of
the past decade suggests the value of preserving the existing
toolkit.
Q.12.b. For example, with an expanded authority, could the Fed
play a useful role in supporting municipal finance, student
loan financing or other types of consumer credit during periods
where each of these sectors experienced heightened distress?
Would you support or oppose such expansion of the Fed's
authority?
A.12.b. The Federal Reserve conducts monetary policy to promote
its statutory goals of maximum employment and stable prices.
The Congress has granted the Federal Reserve authority to
purchase and sell certain types of assets in pursuit of these
goals. In general, the range of assets the Federal Reserve is
authorized to purchase is limited to very high quality assets
with minimal credit risk such as Treasury and agency
securities.
The Federal Reserve's purchases of Treasury and agency
securities during the crisis were effective in making financial
conditions more accommodative and helping to support economic
recovery and stem disinflationary pressures.
Limiting the Federal Reserve's authorities to a narrow
range of very high-quality assets helps to insulate the Federal
Reserve from political pressures that could undercut the
effective conduct of monetary policy and result in poor
macroeconomic outcomes. That theme was highlighted in the joint
statement issued by the Treasury and the Federal Reserve in
2009 on ``The Federal Reserve's Role in Preserving Financial
and Monetary Stability.''
That document noted that, ``Actions taken by the Federal
Reserve should also aim to improve financial or credit
conditions broadly, not to allocate credit to narrowly defined
sectors or classes of borrowers. Government decisions to
influence the allocation of credit are the province of the
fiscal authorities.''
Other central banks have the authority to purchase a broad
range of assets, and have utilized these authorities in
responding to the financial crisis. The Congress could consider
expanding the Federal Reserve's asset purchase authorities if
it wished. In doing so, the Congress would need to weigh the
possible benefits of expanded purchase authorities for the
Federal Reserve as a tool for addressing economic weakness
versus the possible costs associated with exposing the Federal
Reserve to heightened political pressures and involving the
Federal Reserve in decisions involving significant credit
allocation.
My own view is that the Federal Reserve's current
authorities for purchasing assets have served the country well,
and I do not see a compelling reason to expand those
authorities.
Q.12.c. As the Fed begins to shrink its balance sheet, what are
some of the negative impacts that Senate Banking Committee
Members should monitor? What concerns--if any--do you have
about shrinking the balance sheet? What will you do to monitor
the process of maturing securities to avoid a negative impact
on the economy?
A.12.c. I believe that the FOMC's gradual approach regarding
the removal of policy accommodation has supported the economy's
continued expansion, the ongoing strengthening of the labor
market, and a likely return to 2 percent inflation on a
sustained basis.
As part of this gradual approach, the FOMC initiated its
balance sheet program last October. This program will reduce
the Federal Reserve's securities holdings in a gradual and
predictable manner. The program has gone smoothly so far and
has not given rise to any unduly large reaction of financial
markets.
The FOMC has indicated that, consistent with the data
dependence of monetary policy, it could change the details of
its plans in light of economic and financial developments. If
confirmed, I will be monitoring developments very carefully
along with Board and FOMC colleagues for any signs that the
normalization of the Federal Reserve's balance sheet is
contributing to strains in the financial system.
In addition, if confirmed, I will advocate continued clear
communication by the FOMC about its longer-term plans regarding
the Federal Reserve's balance sheet.
With regard to the liabilities side of its balance sheet,
the FOMC has stated that it anticipates a reduction in the
quantity of reserve balances, over time, to a level appreciably
below that seen in recent years but larger than that prevailing
before the financial crisis. Federal Reserve officials have
indicated the aggregate level of Federal Reserve liabilities
will reflect the public's demand for currency, the banking
system's demand for reserve balances, and the Committee's
decisions about how to implement monetary policy most
efficiently and effectively in the future. These statements by
the FOMC and the Federal Reserve about the ultimate
policymaking framework strike me as appropriate and correct.
I support the FOMC's position that, in the longer-run, it
intends to hold no more securities than it will need to
implement monetary policy efficiently and effectively. I
believe that the Committee's expectation that the Federal
Reserve's balance sheet will consist
primarily of Treasury securities is appropriate and is
consistent with effective and efficient monetary policy
implementation.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM MICHELLE
W. BOWMAN
Q.1. What is your view on what caused the 2008 financial
crisis? What responsibility does the Federal Reserve share in
terms of failures in regulatory and supervisory policy?
A.1. A buildup of leverage and maturity transformation in the
years leading up to the crisis left the U.S. and global economy
vulnerable to shocks. When the housing market turned down, the
effects of that shock were amplified as leverage was wound down
and funding patterns shifted.The result was what we all
painfully experienced as the financial crisis.
Since then, post-crisis reforms have been designed to
reduce the likelihood and severity of future financial crises.
These efforts have been aimed at shoring up issues in the
private sector, in regulation, and in the mandates and tools of
the various regulatory agencies, including the Federal Reserve.
The Federal Reserve's response to the crisis included
boosting the resilience of the financial system through
stronger capital, liquidity, and other prudential requirements
for large banking firms. Capital is critical to ensuring
resiliency, as are the availability of high-quality liquid
assets, appropriate management of risks, and the presence of a
plan for resolution in case it is needed. Progress has been
made in all of these areas, and newer tools like the stress
testing regime and the countercyclical capital buffer should
also contribute to the resiliency of the financial system going
forward. I believe these actions have, broadly speaking,
increased the resilience of the financial system.
Q.2. How did large bank and investment bank leverage contribute
to the 2008 financial crisis?
A.2. The increase in leverage, along with the rise of other
vulnerabilities, contributed to the negative effects that were
felt when the housing market turned down sharply in the United
States. As the crisis unfolded in the Spring of 2008, markets
were focused on the firms that had the highest leverage ratios,
and it was one of the factors that led to investors putting
more pressure on some firms than others.
It would be a mistake, however, to focus only on leverage.
Maturity transformation, for example, also played a critical
role, as did other vulnerabilities. Many firms relied on short-
term wholesale funding that they then used to purchase longer-
term assets. When that funding dried up, firms had difficulty
finding new financing for those assets. As a result, assets
were sold, and the effects were felt throughout the financial
system and in the real economy.
Q.3. How would you characterize current risk-weighted and
leverage capital levels for the largest U.S. banks--too low,
too high, or the correct amount?
A.3. Maintaining the safety and soundness of the largest U.S.
banks is fundamental to maintaining the stability of the U.S.
financial system and the broader economy. To be safe and sound
financial institutions, these firms must be well-capitalized.
The U.S. banking agencies have substantially strengthened
regulatory capital requirements for large banking firms,
improving the quality and increasing the amount of capital in
the banking system. Indeed, large U.S. banking firms have
roughly doubled their capital positions from before the crisis
to today, making them significantly more resilient, as well as
able to support lending and financial intermediation in times
of financial stress. If confirmed, I look forward to looking
more closely at this question and consulting with my
colleagues.
Q.4. As you know, the Federal Reserve recently proposed
reducing leverage requirements for the eight biggest U.S.
global systemically important banks (G-SIBs).\1\ In discussing
the impact of its proposal, the Federal Reserve noted that it
would reduce the amount of tier 1 capital required across the
lead insured depository institution (IDI) subsidiaries of the
G-SIBs by approximately $121 billion.
---------------------------------------------------------------------------
\1\ https://www.federalreserve.gov/newsevents/pressreleases/
bcreg20180411a.htm.
Q.4.a. Could a reduction in IDI capital pose any risks to
---------------------------------------------------------------------------
depositors, taxpayers, or financial stability? Why or why not?
A.4.a. While capital is good for absorbing losses, the manner
in which capital requirements are determined can have important
consequences. If a leverage ratio becomes a binding constraint,
it can create incentives for banking organizations to reduce
their participation in lower-risk, lower return business
activity, such as repo financing, central clearing services for
market participants, and taking custody deposits,
notwithstanding client demand for those services. Similarly, it
can create incentives for firms to increase their participation
in higher-risk, higher-return activities.
Q.4.b. What is your view on raising the enhanced prudential
standards threshold pursuant to Dodd-Frank section 165 from $50
billion to $250 billion in total consolidated assets, as
contemplated in S. 2155?
A.4.b. I agree that regulation and supervision should be
tailored in a manner that allows the financial system to more
efficiently support the real economy. The Federal Reserve has
been working for many years to tailor regulation and
supervision to the size, systemic footprint, and risk profile
of individual institutions. Recognizing the levels and types of
risk of the different institutions in the financial system
improves the quality and efficiency of regulation, but I
believe more tailoring can and should be done.
It is reasonable for Congress to raise the $50 billion
asset threshold to limit the scope of the enhanced prudential
standards to larger bank holding companies. My understanding is
that the Economic Growth, Regulatory Relief, and Consumer
Protection Act (Act) preserves the ability of the Federal
Reserve to reach below the new $250 billion line, if warranted,
to subject a firm to more stringent regulation. In general, the
Act preserves the Federal Reserve's ability to adequately
monitor and regulate systemic risk of banking firms as well as
its ability to regulate banking firms for safety and soundness
objectives.
Q.4.c. Federal Reserve Vice Chair Quarles has said that the
Volcker Rule ``is an example of a complex regulation that is
not working well.''\2\ Do you agree or disagree? Why?
---------------------------------------------------------------------------
\2\ https://www.reuters.com/article/us-usa-fed-quarles/u-s-
considering-material-changes-to-volcker-rule-feds-quarlesidUSKBN1GH2U8.
A.4.c. While Congress recently enacted legislation excluding
smaller firms from the Volcker Rule, there is still room for
the Federal Reserve and the other responsible agencies to
tailor and reduce regulatory requirements to more efficiently
implement the policy objectives of the statute in a manner
consistent with the safety and soundness of the banking system.
It is worthwhile for the agencies to consider further tailoring
the implementing rule as it applies to firms that do not engage
in a large amount of trading activity, and to simplify the
requirements for satisfying exemptions for permitted activities
such as hedging, market making, and underwriting. These changes
would provide clarity to banking organizations and help them
more efficiently provide market liquidity and facilitate
---------------------------------------------------------------------------
capital formation.
Q.4.d. What is your view of the Community Reinvestment Act?
Does it need to be altered or modernized by the Federal
Reserve? If so, what changes do you support?
A.4.d. The Community Reinvestment Act's (CRA) goal of
encouraging banks to meet their obligation to serve their
entire community, including in low- and moderate-income
communities is critically important. All communities,
particularly low- and moderate-income communities, thrive when
they have access to credit on fair terms that increase
opportunities for investing in homes, starting businesses, and
education.
I believe that the current CRA supervisory and regulatory
framework could be improved based on feedback from industry and
community stakeholders, and that it is time to review the CRA
regulations to ensure they are effective in achieving the
important objectives set by Congress. In particular, the
regulation's definition of ``assessment area,'' should be
revised to reflect significant changes in the banking landscape
since CRA was enacted and the current CRA regulations were
adopted.
Technology and other industry advancements have enabled
banks to serve consumers in areas far from their physical
branches. As such, it is sensible for the agencies to consider
expanding the assessment area definition to reflect the local
communities that banks serve through delivery systems other
than branches.
I believe that additional input and analysis on this matter
will be needed to determine how best to define such assessment
areas and how to evaluate performance in those areas.
Q.5. On May 23, the FDIC released their Quarterly Banking
Profile. It shows that that bank profits increased 28 percent
over the last year, and even more for community banks.
Q.5.a. Do you think it is sound policy to reduce capital
requirements for banks that have profit levels this high?
A.5.a. We need a resilient, well-capitalized financial system
that is strong enough to withstand even severe shocks and
support
economic growth by lending through the economic cycle. To that
end, the U.S. banking agencies have substantially strengthened
regulatory capital requirements for U.S. banking firms,
improving the quality and increasing the amount of capital in
the banking system. At the same time, it is important to
monitor the capital rules on an ongoing basis, to determine
whether the framework is effectively measuring and addressing
risk and working as intended, and to adjust the framework as
needed.
Q.5.b. If confirmed, you will be a member of the Federal Open
Market Committee. What experience will you bring to this role?
Are there any changes in how monetary policy is currently
conducted that you will advocate for?
A.5.b. The Federal Reserve's mandate to promote maximum
employment and stable prices is critically important to our
economy, to businesses, families and communities, and if I am
confirmed, I will be very focused on how we can do the best job
possible to fulfill that mandate.
My views on employment and the labor market have certainly
been shaped by the experience of the last 10 to 15 years. We've
seen the Nation go from high levels of employment and solid
wage growth into a very deep recession. In the crisis, it was
clear that many people who were able to work lost their jobs
and could not find work, and businesses that had the capacity
to produce and grow could not find a market for their goods and
services. And when you have a huge gap between what the economy
can do and what it is currently doing, I believe that is where
policymakers like the Federal Reserve can take appropriate
action, sometimes quite strong action, and help the economy get
back to a more normal level of employment and output.
Of course, as I have seen in my career as a community
banker and as a regulator, the labor market, in a large,
diverse economy like ours, is quite complicated and there are
many factors to consider in measuring its health. For example,
who is available to work and what can they do? I have worked
with businesses that have trouble hiring, because there may be
a shortage of highly skilled workers. In some communities in my
home State, there are demographic changes--an aging workforce,
for example--that affects how much businesses can hire. My
family's bank lends to many consumers, and often we have seen
that a strong job market will bring people back into the
workforce and that is a good thing. And, of course, when there
is strong demand for workers and the economy is growing, we see
wages begin to grow. A strong economy supports strong wage
growth.
Given the complexity involved in looking at the labor
market, common sense tells me to be careful in assuming there
is a precisely right level of employment that we can be very
confident in saying is the right level for all economic
conditions. In general, my approach as a community banker and
regulator has been to take a look at all the best evidence and
analysis you can find, listen hard to many different views, and
then make your best judgment. And that is how I will approach
evaluating the health of the labor market, should I be
confirmed.
Stable prices and the level of overall inflation is a
critical part of the dual mandate and, should I be confirmed, I
will be focused on achieving this important goal. When
inflation gets too high or too low, or is too volatile, that
hurts everyone--consumers, businesses, and communities--because
making economic decisions and planning for the future becomes
more and more difficult.
I think one of the most important things the Federal
Reserve can do is make sure that the expectations that people
have for where inflation is heading remain stable. As a banker,
I never wanted people to be put in a position where they were
coming into my bank and showing me a business plan where they
were just unable to predict what price they would be paying for
a very broad range of important goods and services a year or
two from now. Of course, some prices will always be going up
while others will be going down. That is just how markets work.
What is important is that the general level of prices remains
fairly predictable. When people borrow money or make plans, it
is important that they feel confident that their future incomes
will support that debt and those plans. I want people focusing
on making good business decisions, not spending their time
guessing about inflation. So keeping inflation and inflation
expectations stable is very important to me.
I also think we have learned that inflation can be too low.
If demand is weak for a prolonged period of time, businesses
cannot sell goods, they lower prices further, lay people off,
keep wages down. And we have seen that is a tough cycle to
break free from. For the Federal Reserve, when you get interest
rates very low, it is hard to create additional incentives for
borrowing and investing. It is tough to go below zero. As a
policymaker, I would want to make sure we keep inflation at an
appropriate level, so we reduce our risk of getting back to the
so called Zero Lower Bound.
Finally, let me just say that there is a great deal of
complexity that goes into understanding why the general level
of prices change. For example, Kansas produces a lot of oil and
natural gas, so I am well aware of how swings in the supply and
demand for commodities can shape prices. But it is not always
clear how businesses and consumers set their expectations for
inflation. Productivity and technological change affect prices
too. This is an important area for more research, and I look
forward to learning more about these topics, if I am confirmed.
Q.5.c. Since the crisis, do you think the Federal Open Market
Committee has been on the right course by gradually increasing
interest rates?
A.5.c. I believe the Federal Open Market Committee's (FOMC)
monetary policy decisions should be guided strictly by its
responsibilities under current law to promote maximum
employment and price stability. The FOMC has been raising its
target for the Federal funds rate since December 2015 and
reducing the size of its holdings of Treasury securities and
mortgage-backed securities since October of 2017. The FOMC's
gradual approach to reducing monetary accommodation in this way
has been instrumental in supporting the economic recovery and a
return of inflation to the FOMC's 2 percent objective. The FOMC
has also stressed and I also believe that it is appropriate
that monetary policy is not on a preset course. Instead, it is
data dependent and chosen to best achieve the objectives set
forth by Congress. If confirmed, I would look forward to
working with other members of the FOMC to further promote the
attainment of the FOMC's statutory goals.
Q.6. As you know, the Federal Reserve currently uses a variety
of monetary policy rules, including the Taylor rule, in its
analysis and monetary policy decisionmaking, but does not rely
solely on rules to determine interest rate adjustments.
Q.6.a. Do you agree with the Federal Reserve's current
approach, or will you advocate that the Fed use a single rule?
A.6.a. The economy is very complex, and monetary policy is
determined in an environment in which a multitude of indicators
and conditions must be taken into account. Simple rules, by
definition, cannot accommodate such a wide variety of
considerations. For example, simple rules generally do not
accommodate variation in the expectations of investors and
consumers, risks to the economic outlook, or deep economic
conditions such as productivity growth that may be time
varying. All that said, simple monetary policy rules do have
some appeal because they capture some key elements of
appropriate policy, and I believe that it is useful for
policymakers to routinely consult the recommendations from a
variety of benchmark rules. I also believe it can be useful for
the FOMC to explain to Congress and the public the differences
between its policies and those prescribed by simple rules, and
the reasons for those differences.
Q.6.b. While the unemployment rate continues to fall, the labor
force participation rate remains at about its lowest level in
40 years. What do you think is contributing to this?
A.6.b. The labor market remains strong. Job gains have been
solid, on average, in recent months, and the unemployment rate
has fallen to 3.9 percent, the lowest level in many years. As
you note, however, the labor force participation rate is still
quite low by historical standards. To some extent, the downward
trend in the overall participation rate reflects demographic
forces, most prominently increased retirements among members of
the large baby boom generation. However, the labor force
participation rate for prime-age workers is also below its
level prior to the financial crisis, although it has risen more
recently in response to the tight labor market. Longer-term
trends in globalization and automation have likely contributed
to the decline in prime-age participation over time, but my
hope and expectation is that a strong labor market will
continue to pull many of these workers back into the labor
force.
Q.6.c. Do think the opioid addiction epidemic is related to the
decline in labor force participation among prime-age workers?
A.6.c. The opioid epidemic is a very serious crisis that has
had severe consequences for the affected individuals and their
families. In addition, the opioid epidemic undoubtedly has had
adverse effects on the economy. For example, I think the
evidence shows that opioid addiction adversely affects an
individual's ability to participate effectively in the labor
market and thus has contributed to the decline in labor force
participation among prime-age workers. Of course, causality may
go the other way as well, with a lack of job opportunities,
particularly in rural areas, contributing to both withdrawal
from the labor force and increased opioid abuse.
Q.6.d. Over the past 40 years the link between productivity and
wage increases has eroded. More and more, productivity gains
aren't shared with workers. Why do you think wage growth has
not kept pace with productivity growth? Is there anything the
Fed can do to increase wages? Can the Federal Reserve, through
monetary policy or regulatory policy, do more for individuals
and communities that have not experienced the benefits from the
economic recovery?
A.6.d. Wage growth is a very important issue, and while it is
encouraging that wages seem to be rising a little faster than a
few years ago, I would like to see stronger wage growth. In
addition, I think that, as the economy improves, it is
important that a wide range of individuals and communities
benefit from a strong labor market. However, monetary policy is
a blunt tool that is not well equipped to affect specific
sectors of the economy. Rather, the Federal Reserve can best
help individuals and communities by focusing on achieving its
dual mandate of full employment and stable inflation.
Q.6.e. If confirmed, how will you advocate for increased
diversity in the Federal Reserve System?
A.6.e. There is great value in having a diverse workforce at
all levels of an organization. Diversity, including diversity
of thought, perspective, and experience, is an important
attribute of all successful organizations. Better decisions are
made when we have a wide range of backgrounds and voices to
draw from.
I am committed to achieving further progress, and to better
understanding the challenges to improving and promoting
diversity of ideas and backgrounds at the Federal Reserve Board
(Board) and the Federal Reserve Banks (Reserve Banks),
including in the senior leadership ranks. My position will
provide opportunities to meet and speak with individuals and
groups throughout the System, the financial community, and
regional and community organizations.
Those opportunities will enable me to express strong
support for the System's initiatives to encourage individuals
with diverse cultural, academic, and professional backgrounds
to consider positions with the Federal Reserve. I will also
welcome the opportunity to work with Board and System groups to
enhance programs and initiatives to identify and recruit
individuals with diverse backgrounds and perspectives for
careers at the Board and the Reserve Banks, as well as to
create an environment where all will be successful.
Q.6.f. Federal Reserve Board of Governors nominee Marvin
Goodfriend, has recommended that the ``central bank put in
place systems to raise the cost of storing money by imposing a
carry tax on its monetary liabilities.'' Do you believe that
there should be a currency tax, or that there are financial
conditions that would call for a currency tax?
A.6.f. The United States dollar enjoys a well-earned status as
a store of value and a reliable means of exchange both
domestically and across the world. Any new policy that could
undermine the confidence that is placed in the dollar should be
thought through very carefully and undertaken only after a
great deal of study. Fortunately, the United States economy is
strong and inflation is close to 2 percent, so there is no need
to consider such a policy. Moreover, the Federal Reserve's main
monetary policy tools have helped to meet the goals set forth
for the Federal Reserve by statute.
Q.6.g. Please provide a complete list of The Bowman Group's
clients.
A.6.g. The Bowman Group provided consulting services to the
following entities in the United Kingdom and European Union
between 2004 and 2009: UK Industry and Parliament Trust; Titan
Corporation, UK LTD; Conservative Shadow Homeland Security
Spokesman Patrick Mercer, MP (Homeland Security Advisory
Panel); DKE Aerospace; Conservative Friends of America; and
Localis.
Q.6.h. Please describe in detail greater than you provided in
your Office of Government Ethics letter how you will comply
with the Federal Reserve Act requirement that you cannot hold
stock in any bank, banking institution, or trust company?
A.6.h. I will divest shares of bank stock currently held in my
name in accordance with the ethics agreement following
confirmation. In addition, following confirmation, in
accordance with the ethics agreement, the two trusts containing
bank stock will be rewritten with advice of counsel according
to a provision in Missouri trust law that provides for
``decanting''--or rewriting--the trusts to exclude me and my
heirs as beneficiaries of the trusts. While serving as a member
of the Board, I will not acquire any stock in a bank, banking
institution, or trust company.
Q.6.i. If confirmed, do you intend to serve for the entirety of
your term?
A.6.i. Should I be confirmed, I intend to serve the entirety of
the term.
Q.6.j. After your term as a member of the Federal Reserve Board
of Governors, do you have any plans to resume employment or
serve on the Board of your family's bank?
A.6.j. At this time, I do not intend to, nor have I been asked
to, return to employment or board service at my family's bank.
Q.7. This is the first time this Committee has considered a
nominee to fill the position on the Fed Board ``with experience
working in or supervising community banks having less than
$10,000,000,000 in total assets.''
Q.7.a. If confirmed, do you believe it is your role to advocate
for the community banking industry?
A.7.a. The Federal Reserve seeks to foster a strong and stable
financial system that serves banking needs in a fair and
transparent manner. I believe that this objective can best be
achieved when we have a diversified and competitive banking
industry that includes a healthy community bank segment. My
experience as a banker and State supervisor has shown me the
vital role community banks play in providing credit and
services to small businesses and communities both large and
small. Consequently, I believe it is
important to support the community bank model and avoid
imposing regulatory burdens that are unnecessary to ensure
their safe, sound, and fair operation.
Q.7.b. If confirmed, what would you like to achieve for
community banks?
A.7.b. I am strongly committed to working to tailor the
regulation and supervision of community banks in a manner that
ensures their safety and soundness but is appropriate to their
size and simplicity. I am particularly interested in working on
simplifying capital rules for these banks and reducing the
burden of their regulatory reporting requirements. As a
community banker and State bank supervisor, I have seen small
banks struggle with the burdens imposed by regulation. If
confirmed, I want to ensure that the Federal Reserve Board
fully considers the perspectives and challenges faced by these
banks when it formulates and implements its regulations.
Q.7.c. Can you clarify your answer to Senator Scott on whether
or not you believe the stock market is a pillar of monetary
policy?
A.7.c. Current law requires the Federal Reserve's monetary
policy decisions to be guided by its obligation to promote
maximum employment and price stability. Many factors must be
considered as inputs into monetary policy decisionmaking, and
the financial conditions facing business and households,
including stock market performance, are often relevant aspects
of the outlook for macroeconomic performance. However, the FOMC
should not take into account stock market performance for any
purpose outside of what is necessary to achieve its goals as
established by Congress. Fortunately, the United States economy
is strong and inflation is close to 2 percent, and financial
market conditions currently appear sufficiently accommodative
to further support macroeconomic performance.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED FROM MICHELLE W.
BOWMAN
Q.1. The Federal Reserve is one of the agencies authorized to
enforce the Military Lending Act (MLA), which is a bipartisan
law enacted in 2006 that sets a hard cap of 36 percent interest
for most loans to servicemembers and their families. On July
22, 2015, the Department of Defense finalized MLA rules that
closed prior loopholes that allowed unscrupulous lenders to
prey upon service-
members and their families.
Q.1.a. Do you support these stronger MLA rules? If confirmed,
will you ensure that the MLA is vigorously enforced?
A.1.a. The Military Lending Act (MLA) provides special consumer
protections for service members and their dependents. In
enacting the MLA, the Congress directed the Department of
Defense to issue implementing regulations after consulting with
the Federal Reserve and other agencies. I understand that
Federal Reserve staff has worked with Department of Defense
staff to carry out that mandate and, if confirmed, I will
support that effort as well as the Federal Reserve's full
enforcement of the MLA at the institutions it supervises.
Q.1.b. If changes are made to the Community Reinvestment Act
that lead to financial institutions, including those that have
an online presence, to take deposits from communities but
actually make less of an effort to reinvest in these same
communities, would you consider that to be a good or bad
outcome?
A.1.b. The Community Reinvestment Act (CRA) was enacted to
ensure that banks help meet the credit needs of the communities
where they are chartered to do business.
As a community banker and bank commissioner, it is my
interest to see credit flowing to consumers and businesses in
all communities consistent with safe and sound lending--
including in low- and moderate-income areas--to further
economic development and financial inclusion.
I believe that any revisions to CRA that expand the area
within which a bank's CRA performance is evaluated should
ensure that the new areas are consistent with the original
intent of the law, and that changes would include clear
guidance to banks so that they are able to comply.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM
MICHELLE W. BOWMAN
Q.1. Will you commit that if confirmed, you will ignore any
political pressure or interference, whether it be direct or
indirect from the President or any other member of the
Administration?
A.1. Yes.
Q.2. Do you agree that the achievement of full employment
should be associated with strong and broad-based wage growth
for average workers, not just senior executives and managers?
A.2. The labor market remains strong. Job gains have been
solid, on average, in recent months, and the unemployment rate
has fallen to 3.9 percent, the lowest level in many years.
However, wage growth is also a very important issue, and while
it is encouraging that wages seem to be rising a little faster
than a few years ago, I would like to see stronger wage growth.
In addition, I think that, as the economy improves, it is
important that a wide range of individuals and communities
benefit from a strong labor market. The Federal Reserve can
best help a broad range of workers by focusing on achieving its
dual mandate of full employment and stable inflation.
Q.3. Why isn't this tight labor market forcing employers to
offer higher and more competitive wages?
A.3. Even though wage growth has been slow relative to previous
decades, most measures of aggregate wages have increased
gradually over the past few years as the labor market has
tightened. Moreover, we have seen some indications that workers
are benefiting from a tighter labor market in ways other than
higher wages. Firms appear to be searching out workers whom
they might have previously passed over and seem to be more
willing to offer training to workers whose skills need to be
improved. I expect these trends to continue and expect workers
to reap greater benefits from the strong labor market.
Q.4. To what extent has workers' decreased leverage to
negotiate with their employers impacted their ability to demand
higher wages?
A.4. Over much of the recovery, many workers had very little
negotiating leverage with employers because labor was abundant,
but jobs were not. This has changed in recent years, and there
are signs that negotiating leverage for at least some workers
has increased. Some firms are exerting considerably greater
effort to find and sign workers, which gives sought-after
employees some negotiating leverage. Looking back over a longer
time period, it could be that changes in technology, or other
factors, may have decreased worker negotiating leverage by, for
example, increasing employers' ability to monitor workers,
automate tasks or shift production to different locations. But
it is difficult to know how much such longer-term developments
have affected negotiating leverage and wages.
Q.5. Do you agree with Federal Reserve Governor Brainard that
it is important to retain a focus on place as the Federal
Reserve contemplates changes to the Community Reinvestment Act?
Do you agree that in some low-income and hard to reach
communities, physical branches are sometimes the only way to
meet local credit needs?
A.5. In Governor Brainard's recent remarks on Community
Reinvestment Act (CRA) modernization, she stated that the time
is ``ripe for a refresh to make it even more relevant to
today's challenges.'' In particular, she focused on finding a
way to expand the area in which a bank's CRA activities are
evaluated, in addition to the importance of retaining a core
focus on location.
In her statement, she cited research that demonstrates that
branches are an important vehicle for reaching small business
customers and low-income consumers.
I agree with her assessment that the agencies should focus
on how to make the area where CRA activity is evaluated more
meaningful to both banks and low- and moderate-income
communities.
Q.6. Do you agree that robust enforcement against
discriminatory or unfair and deceptive lending practices must
work hand-in-hand with any revisions to the Community
Reinvestment Act?
A.6. Discrimination and other illegal credit practices are
barriers to helping to meet community credit needs and, as
such, are inconsistent with the CRA.
I understand why the regulators take evidence of
discrimination into account when assigning CRA ratings as
prescribed in the CRA regulations.
I believe that there is a connection between CRA, fair
lending, and laws protecting against other illegal credit
practices, and this connection should be clear to bankers
trying to comply with laws designed to ensure that consumers
and communities have fair access to credit.
Q.7. A Treasury Department report issued in April recommends
that the Federal Reserve adopt the OCC's new policy allowing
banks with failing CRA ratings to merge or expand so long as
they can demonstrate a potential benefit.
Do you think the Federal Reserve should adopt this policy?
A.7. One means of enforcing CRA is the bank applications
process. An institution's most recent CRA record is a
particularly important consideration in the applications
process. In addition to wanting to serve their communities,
banks know that CRA ratings are also important to their ability
to grow and expand.
I understand that the Office of the Comptroller of the
Currency's (OCC) guidance on how it will assess CRA ratings in
the context of its review of a banking application has recently
changed and varies from the Federal Reserve's guidance. If
confirmed to the Federal Reserve Board (Board), I would want to
understand how the Federal Reserve guidance is applied and the
nature of the differences between its guidance and the OCC's
approach.
Fundamentally, I believe that it is important to maintain
the Congress' intent to use the CRA as a measure in evaluating
banking applications, while ensuring that there is clarity and
transparency for banks to understand how the guidance is
applied.
Q.8. Prior to the financial crisis, regulators treated assets
like subprime mortgage-backed securities as ``low risk,'' which
allowed big banks to load up on risky assets without the
necessary capital backing. When the crisis hit, the Nation's
biggest banks didn't have the capital to withstand the losses.
Do you agree that regulators and banks misperceived risks
before the last crisis, and assigned low ratings to assets that
were actually toxic?
A.8. The financial crisis highlighted deficiencies in both the
quantity and quality of capital required by the banking
agencies' regulatory capital rules. Since the crisis, U.S.
banking agencies have substantially strengthened regulatory
capital requirements for large banking firms. Maintaining the
safety and soundness of the largest U.S. banks is fundamental
to maintaining the stability of the U.S. financial system and
the broader economy.
Q.9. Last month, the Fed and the OCC proposed a rule that would
weaken the enhanced supplementary leverage ratio, a requirement
that the Nation's biggest banks hold enough capital to support
lending and absorb losses in a downturn. Those banks are
required to meet leverage ratios at the holding company level
and at the depository institution level--where the deposits are
backed by taxpayers. According to the FDIC, this proposal would
result in the departure of more than $120 billion in capital--
capital that our regulators unanimously deemed necessary after
the financial crisis to ensure our Nation's largest banks can
withstand losses. Federal Reserve Governor Brainard voted
against this proposal--the first dissent in the history of
Board votes it keeps on it's website (315 votes total)--and the
FDIC declined to join the proposal, a significant departure
from other postcrisis rulemaking, even though the Fed and FDIC
jointly established this rule after the crisis.
Are you at all concerned that without the backstop of an
adequate leverage ratio for the Nation's eight biggest banks,
banks will once again load up on so-called ``low risk'' assets,
and place taxpayers at risk of future bailouts?
A.9. The supplementary leverage ratio is an important component
of the regulatory capital framework. The enhanced supplementary
leverage ratio standards applicable to U.S. global systemically
important banks were intended to serve as an appropriate
complement and strong backstop to these firms' risk-based
capital requirements. It is important to get the relative
calibration of the leverage and risk-based requirements right.
Experience suggests that the enhanced supplementary
leverage ratio standards are currently calibrated too high,
creating potential incentives for firms to disengage from
certain low-risk, low-return financial activities that are
beneficial for the economy. Similarly, they potentially incent
high-risk, high-return activities. Modest recalibration can
reduce these negative incentives while not materially changing
overall large bank holding companies' capital requirements.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER FROM MICHELLE
W. BOWMAN
Q.1. I believe strongly in the importance of the Fed's
independence. Recent comments from another Fed candidate (and
former Fed Governor)--Kevin Warsh--suggest that President Trump
has been anything but shy in revealing his preference for a low
interest rate environment.
Q.1.a. Has the President--or anyone in the Administration--
impressed upon you their beliefs on how you should vote on
matters of monetary policy?
A.1.a. I have had no communication with the President or
members of the Administration seeking to influence my position
or future vote, if confirmed, on monetary policy issues.
Q.1.b. Do you commit to safeguarding the independence of our
central bank?
A.1.b. I believe that Congress wisely chose to insulate
monetary policy decisions from short-term political influences.
Insulation from short-term political pressures is crucially
important for the effective conduct of monetary policy, the
Federal Reserve is and must also remain accountable to the
public. If confirmed, I will be committed to building on the
Federal Reserve's tradition of transparency, openness, and
accountability while maintaining the independence of the
Federal Reserve in the conduct of monetary policy.
Q.1.c. What do believe is the biggest threat to financial
stability at the moment?
A.1.c. We have enjoyed many years of economic growth since the
recession that followed the financial crisis. The financial
system has been relatively stable during that period. As a
result, there is a tendency to forget the lessons that we have
learned. When we forget, however, we make ourselves vulnerable
again.
A crucial lesson from the financial crisis is that we
always need to be prepared. The reforms that have been
implemented since the crisis have helped us to build a more
resilient financial system. However, we cannot rest. We must be
vigilant in monitoring the financial system, both the
vulnerabilities that were important contributors to the
financial crisis--like asset valuations, leverage, maturity
transformation, and complexity--as well as new vulnerabilities
that could emerge. Only with vigilance can we avoid the natural
slide toward complacency that overtakes us as the distance
between us and the crisis grows.
Q.1.d. Do you believe that Title II's Orderly Liquidation
Authority is an important tool available at the Fed's disposal
during a crisis? Would you vote to use the Authority if
bankruptcy was not an appropriate method for resolving a
systemic financial institution?
A.1.d. Bankruptcy should be the preferred resolution framework
for a failing systemic financial firm, in the same way that it
is the resolution framework for the holding companies of our
Nation's community banks. However, as the Treasury noted in
their report on Orderly Liquidation Authority and Bankruptcy
Reform, it is important to have an emergency tool for use in
extraordinary circumstances.
I would need to know all of the facts and circumstances
before deciding whether it was appropriate to vote in favor of
recommending that the Treasury Secretary use Title II's Orderly
Liquidation Authority in connection with a specific failure.
One aspect of Title II that I would weigh is that it does not
allow for Government capital injections and requires that
taxpayers suffer no losses from the resolution.
Q.1.e. Do you think current bank risk-based capital levels are
too high, too low, or about right? How about the leverage
ratio?
A.1.e. Maintaining the safety and soundness of the largest U.S.
banks is fundamental to maintaining the stability of the U.S.
financial system and the broader economy. To be safe and sound
financial institutions, these firms must be well-capitalized.
The U.S. banking agencies have substantially strengthened
regulatory capital requirements for large banking firms,
improving the quality and increasing the amount of capital in
the banking system. Indeed, large U.S. banking firms have
roughly doubled their capital positions from before the crisis
to today, making them significantly more resilient, as well as
able to support lending and financial intermediation in times
of financial stress.
It is my understanding that reforms proposed by the Federal
Reserve suggest that the enhanced supplementary leverage ratio
standards may be currently calibrated too high, creating
potential incentives for firms to disengage from certain low-
risk, low-return financial activities that are beneficial for
the economy. Additionally, I understand that modest
recalibration may reduce these negative incentives while not
materially changing overall large bank capital requirements.
Q.2. As you may know in S. 2155, we contemplate raising the
enhanced prudential standards from $50 billion to $250 billion,
with an 18 month-delayed effectiveness to give the Fed time to
do a rulemaking and decide whether it should apply any of the
enhanced prudential standards to banks between $100 billion and
$250 billion.
What do you see as the most important enhanced prudential
standards for these midsized banks?
A.2. I believe the bank regulatory framework should continue to
protect the core tenets of regulatory reform--capital, stress
testing, liquidity, resolution planning, and orderly
liquidation authority. However, not all standards are
appropriate for all banking organizations, and it is
appropriate to tailor regulation and supervision to the size,
systemic footprint, and risk profile of individual
institutions. Recognizing the levels and types of risk of the
different institutions in the system improves the quality and
efficiency of regulation.
Periodic supervisory stress testing is an important post-
crisis reform maintained for banks with assets between $100
billion and $250 billion by the Economic Growth, Regulatory
Relief, and Consumer Protection Act, and will help the Federal
Reserve Board ensure that these firms are engaged in less
burdensome but still robust, forward-looking capital
assessments.
Q.3. The urban-rural economic divide is an area of particular
interest for me and an area where I've done a lot of work. I
believe that someone shouldn't be forced to leave their
community to find a good paying job. As we've seen in the Great
Recession and the recovery that's followed, the impacts of
these macroeconomic trends are not universal and, in this case,
have often been felt more harshly in rural areas.
What do you believe to be the driving forces behind
the decline of rural America? Is this trend the result
of globalization and technological change?
Do you believe these trends are irreversible?
A.3. I agree that the relatively poor labor market outcomes in
rural areas in recent years is a big concern. Globalization and
technological change may be playing a role, but determining the
causes of these adverse trends is difficult. What's clearer to
me is that these trends are reversible. Public policy can
ameliorate, if not fully reverse, these trends by, for example,
increasing infrastructure investment and promoting greater
educational and job-training opportunities. Moreover, some
current or future changes in technology can prove favorable to
workers in rural areas by increasing their ability to work
remotely, or by making it easier for production to be located
in rural areas but still be connected to supply chains.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM MICHELLE
W. BOWMAN
Q.1. Do you believe that any U.S. banks are Too Big to Fail?
If so, what can and should the Fed do to address
this problem?
If not, what evidence supports your conclusion?
A.1. I believe substantial progress has been made in making the
financial system more resilient, particularly as a result of
stronger capital, liquidity, stress testing, and resolution
planning requirements that were introduced in the wake of the
financial crisis. Activities and risks in the financial sector
evolve quickly, however, especially at the largest firms, so I
also believe that regulators need to closely monitor risks to
the financial system over time and act accordingly.
Q.2. Section 402 of S. 2155, which recently passed the Senate
and allows banks ``predominantly engaged in custody,
safekeeping, and asset servicing activities'' to have less
capital.
Q.2.a. Do you believe that language applies to JPMorgan Chase
and Citigroup?
A.2.a. Section 402 of the Economic Growth, Regulatory Relief,
and Consumer Protection Act allows depository institution
holding companies that qualify as ``custodial banks'' to
exclude reserves
at certain central banks for purposes of leverage capital
requirements. This section defines a custodial bank as any
depository institution holding company that is predominantly
engaged in custody, safekeeping and asset servicing activities
(and any subsidiary
depository institution of such a holding company) and the
banking agencies could issue regulations to implement these
provisions. Diversified bank holding companies, such as
JPMorgan Chase and Citigroup, have significant custodial
operations but these operations are relatively small compared
to the companies' overall operations. Therefore, these
organizations would not appear to qualify as ``custodial
banks.''
Q.2.b. Would that analysis hold if those two banks created
intermediate holding companies to house their custody services?
A.2.b. The Federal Reserve Board's (Board) regulatory capital
rules are based on financial consolidation. Consolidation
combines the assets and activities of the top-tier company and
its subsidiaries so that they can be viewed holistically. In my
current understating, if a depository institution holding
company reorganized all of its custodial services under an
intermediate holding company but made no other changes, the
assets and activities of the top-tier, consolidated depository
institution holding company would not be affected. Housing the
custody services under an intermediate holding company
therefore would not affect whether a company received capital
relief under section 402 of the Economic Growth, Regulatory
Relief, and Consumer Protection Act.
Q.3. Banks today reported record profits--up 27.5 percent from
the first quarter of last year. The economy is nearly a decade
into a long expansionary period.
Why is a reduction in capital requirements necessary or
appropriate at this time?
A.3. It is clear that a resilient, well-capitalized financial
system that is strong enough to withstand even severe shocks
and support economic growth by lending through the economic
cycle is needed. To that end, the U.S. banking agencies have
acted to substantially strengthen regulatory capital
requirements for U.S. banking firms, resulting in improved
quality and an increase in our amount of capital in our banking
system. At the same time, it is important to monitor the
capital rules on an ongoing basis, to determine whether the
framework is effectively measuring and addressing risk and
working as intended, and to adjust the framework as needed.
Reforms proposed by the Federal Reserve suggest that the
enhanced supplementary leverage ratio standards may be
currently calibrated too high, creating potential incentives
for firms to disengage from certain low-risk, low-return
financial activities that are beneficial for the economy.
Modest recalibration may reduce these negative incentives while
not materially changing overall large bank capital
requirements.
Q.4. Fed Chair Powell recently announced that the Fed's Board
of Governors would vote on whether to relieve Wells Fargo from
the growth restriction the Fed imposed on it pursuant to its
February 2018 consent order.
Q.4.a. What kind of changes at Wells Fargo would you need to
see before voting to lift the growth restriction?
A.4.a. As specified in the Consent Order, the firm must adopt
and implement the remediation plans the Consent Order requires
to improve Wells Fargo's governance and risk management,
including internal controls and testing of those controls,
particularly for compliance and operational risk.
I understand that the firm must also engage a third party
to review the implementation of the plans and required
improvements.
And furthermore, that a number of improvements must be made
to the firms' governance and risk management practices to be
fully compliant with the terms of the Consent Order. If
confirmed, with regard to lifting the asset cap imposed, I
would only vote to do so if the required improvements are
implemented to the satisfaction of the Board.
Q.4.b. Do you believe the Fed should place more emphasis on
finding diverse leaders for the regional banks? If so, how do
you recommend changing the current hiring process so that it
produces more diverse leaders?
A.4.b. My impression is that the Federal Reserve System and its
leadership has placed considerable emphasis on increasing the
diversity of senior leadership, and with some significant
successes. However, I think all also agree that more must still
be done. If confirmed, I will join the Board with the intent to
devote time and attention to understanding the full range of
challenges in this space, and think creatively about how the
Board in particular can engage more effectively in support of
the shared goal of a more diverse senior leadership.
In reviewing recent searches, I have observed that search
committees have used a variety of new channels to solicit input
on important attributes for the districts' presidents, as well
as suggestions of specific individuals for consideration. They
have also worked to make the process as transparent as
possible. Outreach has occurred through social media--for
example, webinars and YouTube videos--and also through more
traditional efforts, such as meetings with key constituencies,
including nonprofit and advocacy groups as well as the business
community. All of this seems promising and important, and
represents a foundation on which I hope we can continue to
build.
I believe the Federal Reserve is committed to making
further progress and to better understanding the challenges to
promoting and improving diversity of ideas and backgrounds. It
has described this as an ongoing objective, and I assure you
that diversity will remain a high-priority objective for the
Federal Reserve, if I am confirmed.
Q.4.c. The Fed is apparently participating in an interagency
effort to reform regulations implementing the Community
Reinvestment Act. In April, the Treasury Department sent a memo
to the Fed, the OCC, and the FDIC recommending several rule
changes. Do you disagree with any of the Treasury
recommendations?
A.4.c. I understand that the Treasury's recommendations were
based on a broad outreach effort and the summary sent to the
agencies includes helpful insights.
As with any process, I believe that it is likely that some
recommendations may be difficult to implement as a practical
matter, such as the recommendation to standardize the
examination schedules across the regulatory agencies.
If confirmed, I would want to review the recommendations to
see which would result in improving the effectiveness of the
Community Reinvestment Act (CRA), while focusing on potential
ways to relieve regulatory burden for community banks.
I would like to see the agencies work together to find ways
to accomplish both goals.
Q.4.d. What are your priorities for CRA reform?
A.4.d. There is a great deal of consensus among banks,
community development organizations, and others regarding the
need to make CRA evaluations more consistent and transparent.
I also agree that CRA should be revised in a way that
encourages more lending and investment in underserved areas.
I believe these are good goals for the agencies to pursue
and that any revisions to the CRA regulations need to balance
the interests of both community and industry stakeholders.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM
MICHELLE W. BOWMAN
Community Reinvestment Act
Q.1.a. Should CRA be expanded to all nonbanks? Some assert that
in today's financial landscape, CRA compliance should be
expanded to all nonbanks, including credit unions, fintechs,
mortgage companies, investment, and others.
A.1.a. If confirmed, I assure you that I would be committed to
using the authorities available to the Federal Reserve to
identify and take action against discriminatory lending
practices. However, as the scope of the Community Reinvestment
Act (CRA) is mandated by statute, any expansion of its coverage
to nondepository institutions would require a statutory change.
Q.1.b. Do you support a full scope review for CRA exams? Do you
think geographical assessment areas should define CRA
accountability both where the majority of branch lending and
the majority of nonbranch lending occurs?
A.1.b. It is important that the agencies with rule writing
authority for CRA (the Federal Reserve, Federal Deposit
Insurance Corporation (FDIC), and the Office of the Comptroller
of the Currency) evaluate ways to provide a meaningful
evaluation of a bank's CRA activities in all of the communities
it serves.
My understanding is that the agencies are considering ways
to make the area in which CRA performance is evaluated more
reflective of current banking practices. I support that effort.
Q.1.c. If a fair lending exam detects a violation after a bank
has been graded for its CRA exam, do you think the bank should
receive a retroactive downgrade?
A.1.c. Discriminatory and other illegal credit practices hinder
access to credit, which can limit opportunity in communities,
and that is inconsistent with the spirit of the CRA.
I believe that regulators do take fair lending matters into
consideration when assigning CRA ratings, as prescribed in the
CRA regulations.
Given the importance of both the CRA and fair lending laws,
I believe it is critical to ensure clarity in the rules and an
understanding of compliance with those rules, and to ensure
credit is flowing to consumers and businesses in all
communities consistent with safe and sound lending, including
in low- and moderate-income areas. Doing so, will help meet
credit needs and further economic development and financial
inclusion.
Q.2. Many Democratic, Republican, and Independent current and
former regulatory officials raising concerns about the bank
deregulation bill range from former Fed Chair Paul Volcker,
former Fed Governor and Deputy Treasury Secretary Sarah Bloom
Raskin, former FDIC Chair Sheila Bair, former Counselor to the
Treasury Secretary Antonio Weiss, and former Deputy Governor of
the Bank of England Paul Tucker. These former banking
regulators either State that a $250 billion bank threshold is
too high to protect financial stability or that we should not
weaken the leverage rules for the largest banks, or both.
Do you think anything in S. 2155 puts the financial system
at risk? Do you share the concerns raised by your predecessors?
If so, why? If not, why not?
A.2. I believe that regulation and supervision should be
tailored in a manner that allows the financial system to more
efficiently support the real economy. The Federal Reserve has
been working for many years to tailor regulation and
supervision to the size, systemic footprint, and risk profile
of individual institutions. Recognizing the levels and types of
risk of the different institutions in the system improves the
quality and efficiency of regulation, but I believe more
tailoring can and should be done.
It is reasonable for Congress to raise the $50 billion
asset threshold to limit the scope of the enhanced prudential
standards to larger bank holding companies. My understanding is
that the Economic Growth, Regulatory Relief, and Consumer
Protection Act preserves the ability of the Federal Reserve to
reach below the new $250 billion line, if warranted, to subject
a firm to more stringent regulation. In general, the Act
preserves the Federal Reserve's ability to adequately monitor
and regulate systemic risk of banking firms as well as its
ability to regulate banking firms for safety and soundness
objectives.
I also support the Act's exemption for community banks from
the Volcker rule. Such a move provides relief for thousands of
small institutions that face ongoing compliance costs simply to
confirm that their activities and investments are indeed exempt
from the statute. An exemption at this level is not likely to
increase risk to the financial system.
Q.3. CRA regulations establish different CRA exams for banks
with different asset levels. Small banks, those with less than
$307 million in assets, have the most streamlined exam that
consists of only a lending test. Intermediate small banks
(ISB), those with assets of $307 million to $1.226 billion,
have exams that consist of a lending test and a community
development (CD) test. The CD test assesses the level of CD
lending and investing for affordable housing, economic
development, and community facilities. Large banks, those with
assets above $1.2 billion, have the most complex exams which
consist of a lending test, an investment test, and a service
test.
It is my understanding that your bank qualified as a small
bank, so it had a streamlined exam focused on lending only. In
your response to my question on what it would take for your
bank to earn an outstanding rating instead of a satisfactory
rating, you stated you found the exam guidelines unclear.
Please identify where you feel CRA guidelines for small banks
are unclear.\1\
---------------------------------------------------------------------------
\1\ CRA Examination Procedures Overview: Available at: https://
www.ffiec.gov/cra/pdf/cra_exsmall.pdf.
A.3. In general, community bankers seek to serve their
customers in ways that are safe and sound and within their
institution's ability. I believe that community bankers, in
spirit, would say they strive to be viewed as outstanding
bankers by their customers and in their communities.
The CRA examination procedures describe a variety of
factors that are taken into account, such as the economies and
opportunities that may exist in the markets that the bank
operates in. Given that such conditions can vary between
examinations, and that the regulations are not prescriptive, it
can be difficult for banks to have certainty as to what factors
may be viewed as more favorable and result in an
``Outstanding'' rating.
Q.4. Chair Yellen was the first chair in Federal Reserve
history to share data with this Committee about racial economic
disparities during her semi-annual testimony. When she
presented that data, she touted significant progress, and
indeed, black unemployment fell from 11.8 percent at the
beginning of her term to the current historically low figure of
6.9 percent.
What do you attribute this trend to? Do you think the
attention that Janet Yellen paid to this issue and the policies
of the Federal Reserve deserve credit for the progress that has
been made?
A.4. With the aggregate unemployment rate near its lowest point
since the 1970s, it is not surprising that the unemployment
rate for African Americans is also close to its lowest point
since then. Both figures reflect the long economic expansion
our country has been enjoying. Although our macroeconomic
performance cannot be attributed to any single factor, the
efforts of the Federal Open Market Committee (FOMC) to achieve
its dual mandate have likely been a contributing factor.
Moreover, while monetary policy is blunt tool, which works by
lifting the economy as a whole rather than by targeting the
well-being of any single group in our society, the efforts of
the Federal Reserve to pay attention to the diversity of our
economy contributes to a better understanding of how it works
for all Americans, which should help to improve policymaking.
Q.5. At that same testimony where Janet Yellen presented
information about racial economic disparities, she said, quote
``it is troubling that unemployment rates for these minority
groups remain higher than for the Nation overall, and that the
annual income of the median African American household is still
well below the median income of other U.S. households.''
Though African American unemployment is lower today, Chair
Yellen's point remains true. Do you think the recent progress
is sufficient? What more can be done to ensure that
unemployment among African Americans is equal to white
unemployment? In addition to increasing employment rates for
African Americans, what can the Fed do to increase wages and
wealth for African Americans and Latinos?
A.5. The economic disparities between African American
households relative to other U.S. households, with respect to
both unemployment and incomes, are long-standing, and I would
like to see the gap close further. By promoting a strong stable
economy, the Federal Reserve can create widespread economic
opportunities that both reduce unemployment and boost incomes
among all households. African-Americans have also had problems
accessing credit and other financial resources on an equal
footing, and the Federal Reserve can use its regulatory and
supervisory role to make sure that financial institutions meet
their obligations in this regard. However, the tools available
to the Federal Reserve cannot address many of the longstanding
challenges facing African American communities. These actions
would require action by Congress and State and local
governments.
Q.6. Marvin Goodfriend, another nominee to the Federal Reserve
Board of Governors has urged the Federal Reserve to incent
spending by placing a tax on currency.\2\
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\2\ Goodfriend, Marvin. ``The Case for Unencumbering Interest Rate
Policy at the Zero Bound.'' Carnegie Mellon University. September 15,
2015. Available at:https://www.kansascityfed.org//media/files/
publicat/sympos/2016/econsymposium-goodfriend-paper.pdf.
Q.6.a. Do you support Mr. Goodfriend's proposal to tax currency
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kept outside of circulation?
A.6.a. The United States dollar enjoys a well-earned status as
a store of value and a reliable means of exchange both
domestically and across the world. Any new policy that could
undermine the confidence the world places in the dollar should
be thought through very carefully and undertaken only after a
great deal of study. Fortunately, the United States does not
find itself in such a situation presently, as the U.S. economy
is strong and inflation is close to 2 percent, so there is no
need to contemplate such a tax.
Q.6.b. If Mr. Goodfriend's proposal were to be implemented, can
you estimate what the impact would be on savers and low-income
depositors?
A.6.b. The effects of a currency tax on savers and low-income
depositors are certainly part of the myriad of potential
consequences that would have to be investigated if this policy
were to be considered. As stated above, I believe that any new
policy that could undermine the confidence the world places in
the dollar should be thought through very carefully and
undertaken only after a great deal of study. Moreover, the
United States is not in a position of needing to consider such
a policy at present.
Q.7. The Consumer Financial Protection Bureau has endured new
leadership that is hostile to its mission. A number of
enforcement actions aimed at helping people receive redress
from fraud or overcharges has been stopped.
Q.7.a. If the Consumer Financial Protection Bureau's leadership
refuses to ask for adequate funding or takes steps that you
think are harmful to people or our economy, will you let Senate
Banking Committee Members know? If so, how? If not, why not?
A.7.a. My understanding is that the Consumer Financial
Protection Bureau (CFPB) consults with the Federal Reserve
Board (Board) in its rulemakings and coordinates in the
examinations as appropriate, but the Board does not have
oversight of the CFPB organizational or structural design.
If confirmed to serve on the Board of Governors, I would
fully support the Federal Reserve as it continues to carry out
its supervisory and enforcement responsibilities to ensure that
the banks it regulates are held accountable for compliance with
all applicable Federal consumer protection laws and
regulations.
Q.7.b. The Federal Reserve retains supervision and enforcement
authority for financial institutions below $10 billion in
assets. Please provide a list of public enforcement actions
taken toward any Fed-regulated institutions in the past 3
years. Please note any fines or penalties assessed. Please note
if you agree or disagree with these enforcement actions.
A.7.b. Bank supervisors have a responsibility to ensure that
the institutions subject to the Federal Reserve's supervision
operate safely and soundly and that they comply with applicable
statutes and regulations, and additionally, that the Federal
Reserve should use its formal enforcement authority to achieve
these objectives where appropriate. I cannot comment on the
specific circumstances of actions the Federal Reserve has taken
in the past. A list of public enforcement actions taken against
institutions regulated by the Federal Reserve in the past 3
years, including any civil money penalties assessed against the
institution, is provided in Appendix A to this request.
Q.8. Some current Federal Reserve leaders support reducing
banks' capital requirements. This concerns me as capital
requirements have been a key tool in restoring the safety of
the financial system since the crisis. Ensuring modest leverage
ratios prevents banks from lending out more than they can
afford to, and especially keeps them away from riskier assets
like the ones that fueled the crisis.
For this reason, Democrats and Republicans in the House and
Senate, as well as FDIC Vice Chair (and former Kansas City Fed
President) Thomas Hoenig all support higher capital
requirements, not lower ones. Do you support any changes to the
current capital requirements for financial institutions? If so,
please describe.
A.8. We need a resilient, well-capitalized financial system
that is strong enough to withstand even severe shocks and
support economic growth by lending through the economic cycle.
To that end, the U.S. banking agencies have substantially
strengthened regulatory capital requirements for U.S. banking
firms, improving the quality and increasing the amount of
capital in the banking system. At the same time, it is
important to monitor the capital rules on an ongoing basis, to
determine whether the framework is effectively measuring and
addressing risk and working as intended, and to adjust the
framework as needed.
Q.9.a. In recent years, Federal Reserve policymakers have
warned that we should raise interest rates to counter asset
bubbles destabilizing the financial system. Board of Governor
Nominee Marvin Goodfriend has suggested replacing liquidity
coverage ratios and a host of other regulations with tighter
monetary policy.\3\
---------------------------------------------------------------------------
\3\ Senate Committee on Banking, Housing, and Urban Affairs, June
7, 2016, Hearing. Available at: https://www.gpo.gov/fdsys/pkg/CHRG-
114shrg21603/pdf/CHRG-114shrg21603.pdf.
Do you believe that the blunt tool of monetary policy can
be a substitute for sound financial protections? What is your
understanding of the historical evidence surrounding the
---------------------------------------------------------------------------
relationship between monetary policy and asset bubbles?
A.9.a. Monetary policy is the primary tool through which the
Federal Reserve works to achieve the goals of price stability
and full employment. To use that tool for other purposes could
undermine its effectiveness for those goals, and thus monetary
policy should not be considered a substitute for prudent
financial and supervisory standards. As we learned in the
crisis, the lack of such standards had significant consequence.
The buildup of leverage and maturity transformation in the
years leading up to the crisis left the U.S. and global economy
vulnerable to shocks. When the housing market turned down, the
effects of that shock were amplified as leverage was wound down
and funding patterns shifted. The result was what we all
painfully experienced as the financial crisis.
Post-crisis reforms have raised loss-absorbing capacity
within the financial sector and reduced the susceptibility of
the financial
system to destabilizing runs. Of course, gaps exist in
financial regulation, and therefore, changes in interest rates
could at times be
appropriate as a supplementary tool to address threats to full
employment and price stability emanating from widespread
imbalances or buildups of risk in areas where more-targeted
tools are
inadequate or nonexistent.
Understanding movements in asset prices is very difficult,
and there are many factors that contribute to their short- and
long-term movements. Monetary policy has not generally been a
prime factor in historical episodes involving large increases
in asset prices.
Q.9.b. Besides monetary policy, what other tools are available
to temper asset bubbles?
A.9.b. Making a determination about the appropriate value of an
asset is extremely difficult. Many factors come into play in
the
determination of both the short-term and long-term value.
Instead of trying to determine every assets' appropriate value,
it is important to monitor asset prices more broadly, along
with the other crucial vulnerabilities that contribute to
financial market difficulties, like leverage, maturity
transformation, and interconnectedness. When shocks occur, it
is those vulnerabilities that amplify the effects of the shocks
and jeopardize the efficient functioning of the financial
system, price stability, or full employment.
Because determination of the appropriate level of asset
prices is difficult, we need to be prepared at all times by
ensuring the safety and soundness of our financial institutions
and our financial system through prudent regulations and
supervisory standards. We never know when a negative shock can
occur, including asset price reversals. As a result, the
prudent capital, liquidity, and other regulations and policies
adopted by the Federal Reserve are critical for the protection
of our financial system going forward.
Q.10. In the years since the financial meltdown, the Federal
Reserve has played a key role in putting our economy back on
stable footing and setting the conditions for more robust
growth. Still, there have been bills introduced that would
eliminate the Fed's full employment mandate on the basis that,
according to the bill's findings ``at best, the Federal Reserve
may temporarily increase the level of employment through
monetary policy.''
Can you elaborate on how the Fed influences employment in
the short-run, and discuss whether failure to use monetary
policy effectively in the face of severe downturns could do
permanent damage to the level of unemployment in the economy?
A.10. In the short run, the Federal Reserve influences
employment primarily through its effect on the financial
conditions facing households and businesses. For example, lower
interest rates promote household spending by reducing the cost
of borrowing for big-ticket purchases such as houses and cars.
Similarly, lower interest rates make it less costly for
businesses to invest in new plants and equipment. This
additional demand, in turn, leads to higher production, faster
job growth, and rising household income and wealth. A failure
to use monetary policy to effectively combat a severe downturn
would risk persistently high unemployment and perhaps even risk
falling into a harmful deflation where wages and prices
actually fall.
Q.11. Critics of quantitative easing have argued that it is
incompatible with the Fed's price stability mandate; however in
discussing quantitative easing the Fed has consistently noted
that the program is designed to promote a stronger pace of
economic growth and to ensure that inflation, over time, is at
levels consistent with the Fed's mandate.
Q.11.a. Can you comment on how the Fed's policies in recent
years have actually supported the Fed's price stability
mandate?
A.11.a. Faced with the most severe financial crisis since the
Great Depression, the FOMC cut short-term interest rates to
zero by the end of 2008. The Federal Reserve also turned to
nontraditional tools such as asset purchases and forward
guidance, as means of providing the additional accommodation.
These policies put downward pressure on longer-term interest
rates and helped to make
financial conditions more accommodative, encouraging and
supporting the economic recovery. By providing a cushion for
aggregate demand during the recession and supporting spending
during the recovery, the Federal Reserve's monetary policy
measures helped to keep inflation close to 2 percent. In
particular, in part because aggregate demand was supported by
monetary policy, the U.S. economy avoided the severe downward
pressure on the price level that occurred during the Great
Depression, which in turn prevented inflation expectations from
falling sharply below 2 percent.
Q.11.b. What does the latest research tell us about the
effectiveness of the Fed's large scale asset purchases?
A.11.b. It is difficult to say with certainty what the effects
of large-scale asset purchases have been, but most studies find
that the purchases put
downward pressure on long-term interest rates, which in turn
lowered borrowing rates for businesses and consumers, and
boosted stock prices. These effects served to bolster spending
on goods and services by households and businesses, supporting
the recovery.
Q.11.c. Is there any evidence that the Fed's asset-purchase
program, which sought to support the economy by lowering long-
term interest rates, has been a drag on U.S. productivity as
some Republicans have suggested? Is there any evidence that the
program has created a ``false economy'' as Trump has asserted?
A.11.c. I find it unlikely that the Federal Reserve's policies
have contributed to the sluggish pace of productivity growth
observed over recent years. It is more likely that factors such
as subdued spending on investment and research and development
by businesses, as well as a reduction in the skills of the
labor force resulting from the financial crisis and ensuing
recession, have weighed on productivity.
Q.11.d. How would the economy have likely fared in terms of
unemployment, GDP, wage growth, etc., had the Fed chosen not to
pursue its asset purchase program?
A.11.d. The Federal Reserve conducts monetary policy to promote
maximum employment and stable prices. Various research studies
by academic and central bank economists suggest that the
Federal Reserve's asset purchase programs helped to make
financial conditions more accommodative, support economic
recovery, strengthen labor market conditions, and foster price
stability.\4\
---------------------------------------------------------------------------
\4\ See, for example, Eric M. Engen, Thomas Laubach, and David
Reifschneider (2015), ``The Macroeconomic Effects of the Federal
Reserve's Unconventional Monetary Policies,'' Finance and Economics
Discussion Series 2015-005, Washington: Board of Governors of the
Federal Reserve System, February, http://dx.doi.org/10.17016/
FEDS.2015.005.
Q.11.e. Is there any evidence that the Fed's stimulus program
has paved the way for the next global meltdown, as Trump
---------------------------------------------------------------------------
claimed?
A.11.e. While there are many sources of risk and uncertainty in
the global economy, I believe the Federal Reserve's conduct of
monetary policy has contributed to an improved global economic
outlook by supporting the U.S. economic expansion and
maintaining low and stable inflation.
Q.11.f. How does the Fed's balance sheet as a percentage of GDP
compare with the balance sheets of the next largest economies?
Do these countries have a dual mandate similar to the Fed?
A.11.f. The size of the Federal Reserve's balance sheet
relative to nominal GDP currently stands at about 23 percent.
Last October, the FOMC initiated its plan to normalize the size
of the Federal Reserve's balance sheet. Under that plan, the
size of the Federal Reserve's balance sheet will decline
gradually over coming years. With nominal GDP expected to rise
over that time, the size of the Federal Reserve's balance sheet
relative to nominal GDP will likely decline appreciably.
The Federal Reserve's balance sheet as a percentage of GDP
is smaller than those of most other major foreign central
banks. The central bank balance sheets of the United Kingdom,
the euro area, Japan, and Switzerland are about 28, 40, 100,
and 120 percent of their nominal GDP, respectively. All of
these central banks employed large-scale asset purchase
programs to address the implications of the financial crisis in
their countries.
All of these central banks operate with a single mandate to
pursue price stability. However, in many cases, this mandate is
treated as medium-term objective, and other goals, including
output and employment stabilization and financial stability,
are cited to justify deviations from price stability in the
short run.
Q.12. It is my understanding that major central banks around
the world maintain and have drawn on their authority to
purchase a wide range of assets including corporate bonds,
commercial paper, real estate investment trusts, and equities
among other assets.
Q.12.a. Given the broad authorities available to other central
banks, rather than shrink the Fed's tool kit, do you think
Congress should consider expanding it?
A.12.a. As mandated by Congress, the Federal Reserve conducts
monetary policy to promote maximum employment and price
stability. It is important that the Federal Reserve has the
tools it needs to fulfill this mandate. The Federal Reserve's
purchases of Treasury securities and agency securities in the
wake of the financial crisis were designed to ease financial
conditions and promote the recovery.
The Federal Reserve is quite limited in the kinds of assets
it can purchase, and those limits seem appropriate to me.
Expanding the Federal Reserve's authority to allow it to
purchase a broad range of securities could expose the Federal
Reserve to pressures to influence the allocation of credit to
particular sectors. Such pressures could threaten the Federal
Reserve's independence, which is essential to allow the Federal
Reserve to make decisions in the best interest of the Nation as
a whole. Of course, it is up to Congress to determine the
Federal Reserve's authorities.
Q.12.b. For example, with an expanded authority, could the Fed
play a useful role in supporting municipal finance, student
loan financing or other types of consumer credit during periods
where each of these sectors experienced heightened distress?
Would you support or oppose such expansion of the Fed's
authority?
A.12.b. Please see response to question 12a.
Q.12.c. As the Fed begins to shrink its balance sheet, what are
some of the negative impacts that Senate Banking Committee
Members should monitor? What concerns--if any--do you have
about shrinking the balance sheet? What will you do to monitor
the process of maturing securities to avoid a negative impact
on the economy?
A.12.c. I believe that the gradual approach to removing policy
accommodation that the FOMC has been pursuing has supported the
economic recovery and helped the Committee make progress toward
its 2 percent inflation objective. The program has proceeded
smoothly thus far with no outsized financial market movements.
If confirmed, I would support a continuation of clear
communication about the FOMC's plans to shrink the Federal
Reserve's balance sheet. My understanding is that, in the
longer-run, the Federal Reserve intends to hold no more
securities than it will need to implement monetary policy
efficiently and effectively. I also understand that the Federal
Reserve expects its holdings will eventually consist primarily
of Treasury securities. The FOMC has stressed and I believe it
is appropriate that the shrinking of the balance sheet remains
data dependent, and that it could change its plans if
confronted with a substantial deterioration in the economic
outlook.
Q.13. Ms. Bowman, in your testimony, you stated, ``the
regulatory environment created in the aftermath of the crisis
has disadvantaged community banks. If confirmed, I will bring
this perspective to my work at the Board to ensure that rules
preserve the resiliency of the financial system, but are
appropriately tailored to the size, complexity, and risk of an
institution.''
As you know, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (P.L. 111-203) rules are tailored so larger
banks have higher standards than smaller banks. Of the 14
``major'' rules issued by banking regulators pursuant to the
Dodd-Frank Act, 13 either include an exemption for small banks
or are tailored to reduce the cost for small banks to comply.
Supervision and enforcement are also structured to pose less of
a burden on smaller banks than they do on larger banks, such as
by requiring less frequent bank examinations for certain small
banks.
Q.13.a. Please explain which rules you think ``have
disadvantaged community banks?'' Please explain which rules you
think should be changed and how?
A.13.a. In my experience, both as a community banker and as the
Kansas State Bank Commissioner, two aspects of bank regulation
can be particularly problematic for community banks: complexity
and a one-size-fits-all approach that does not sufficiently
differentiate between large and small banks. I believe it is
worth exploring whether some regulations can be made simpler
while still achieving their prudential aims (the regulatory
capital framework for community banks, for example, could
perhaps be simplified). Likewise, I would support exempting
small banks from regulations that address large-bank issues,
such as the Volcker rule.
Q.13.b. Do you think community banks, those with less than $2
billion in assets, should follow Federal consumer protection
rules?
A.13.b. Decisions about the application of Federal consumer
protection rules and compliance by particular institutions are
for Congress to decide through law, and as implemented by the
responsible rulewriting agency. In this case the rulewriting
agency is the CFPB.
That being said, I believe that consumer protection is
important regardless of where a consumer chooses to bank or to
seek credit or other financial products. I also believe there
is agreement across the industry that one-size-fits-all
regulation does not always work. Exemptions to rules are
sometimes warranted, and asset size of financial institutions
can be a factor used to make that determination.
Q.13.c. Do you think community banks should comply with the
requirement that loans should be made to people who can repay
them? This is called the ``know before you owe'' rule.
Community banks are largely exempt from both mortgage
origination and servicing rules because they are small
creditors with less than $2 billion in assets or service fewer
than 500 loans.
A.13.c. I feel strongly that we should not allow the risky
underwriting standards used by many originators prior to the
housing crisis to return. It is also important, however, that
laws and rules do not needlessly prevent creditworthy borrowers
from getting a mortgage.
Decisions about which banks must comply with consumer
financial service laws are up to Congress through statute or
implementation of the statute by the CFPB, as the responsible
rulewriting agency, through regulation.
As Congress and the CFPB consider which banks should comply
with particular underwriting rules, it is important to consider
the impact of any rule on a community bank's ability to provide
credit to reliable borrowers but whose creditworthiness may be
difficult to capture in a broad, universally applied rule.
Q.13.d. Rules protecting people who send remittances apply to
any financial institution that sends more than 100 remittances
a year. Do you support changes to Regulation E/Electronic Fund
Transfers? If so, how would you change this rule?
A.13.d. Under the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act), the CFPB has exclusive rule
writing authority to implement most consumer laws, including
the Electronic Fund Transfer Act provisions governing
remittance transfers, which the Bureau implements through
Regulation E.
The CFPB, however, generally is required to consult with
prudential regulators or other Federal agencies, including the
Board, prior to proposing a rule and during the comment process
regarding consistency with prudential, market, or systemic
objectives administered by such agencies. (Sec. 1022(b) of the
Dodd-Frank Act). If confirmed, I will work to ensure that the
Board continues to fulfill its consultative role in Bureau
rulemakings, including any rulemakings related to remittance
transfers.
Q.13.e. Dodd-Frank limited compensation requirements for loan
originators to prevent steering to high-cost loans. Only
originators that make fewer than 10 loans in a 12-month period
are exempt. Do you support changes to the Loan Originator
Compensation Requirements (Regulation Z)?
A.13.e. Under the Dodd-Frank Act, the CFPB has exclusive rule
writing authority to implement most consumer laws, including
the compensation rules for loan originators issued under the
Truth in Lending Act. The Dodd-Frank Act also provides that the
CFPB's rules are not subject to approval or review by the
Board.
However, the Dodd-Frank Act also requires the CFPB to
consult with prudential regulators, which includes the Board,
before and during any rulemaking regarding the rules'
consistency with prudential, market, or systemic objectives
administered by the respective agency.
If confirmed, I will work to ensure that the Board
continues to fulfill its consultative role in connection with
the CFPB's rulemakings, including any rulemaking related to the
loan originator compensation rules.
Q.13.f. Mortgage Servicing Rules under Regulation X and Z are
designed to protect home buyers from high-cost loans. Servicers
with fewer than 5,000 mortgage loans are exempted from some of
these rules. What changes do your recommend to Regulations X
and/or Z?
A.13.f. The CFPB has exclusive rule writing authority to
implement most consumer laws, including the mortgage servicing
rules under Regulation X and Z. The Dodd-Frank Act also speaks
to the autonomy of the CFPB's rulemaking authority by
providing, for example, that no rule can be subject to approval
or review by the Board. (Sec. 1012(c) of the Dodd-Frank Act).
Therefore, changes to the mortgage servicing rules under
Regulations X and/or Z are up to the CFPB to decide.
The Dodd-Frank Act requires that the CFPB engage in an
interagency consultation process during the proposed and final
rulemaking process with all the prudential regulators.
If the CFPB decided to amend the mortgage servicing rules,
I would expect that Board staff would participate in the CFPB's
process, and review rulemakings to identify principal areas of
concern and potential effects with respect to credit
availability, safety and soundness, regulatory burden, consumer
protection and compliance supervision.
Q.13.g. Do you think banks that make more than 25 mortgage
loans should share the loan and borrower characteristics
through the Home Mortgage Disclosure Act database?
A.13.g. Decisions about what information banks should provide
under the Home Mortgage Disclosure Act (HMDA) are up to
Congress through statute or as implemented by the CFPB, as the
responsible rulewriting agency, through its regulation.
HMDA is a valuable public disclosure law, with the data
reported being instrumental in enhancing supervisory and
research efforts for more than 30 years.
I am aware that an intent of the recently passed Economic
Growth, Regulatory Relief, and Consumer Protection Act is to
provide regulatory relief from the HMDA data collection and
reporting requirements as expanded by the Dodd-Frank Act for
certain banks that have a lower volume of loan origination. I
am also aware that the CFPB plans to revisit its 2015
rulemaking under HMDA to re-evaluate institutional and
transactional coverage, as well as what data should be
collected and reported under HMDA.
As noted above, Congress requires the CFPB to engage in an
interagency consultation process during the rulemaking process.
If confirmed, I will work to ensure that the Board continues to
fulfill its consultative role in connection with such
rulemakings, including any rules under HMDA.
Q.13.h. Banks with assets under $50 billion are not required to
comply with the liquidity coverage ratio. Do you think they
should be? Why or why not?
A.13.h. Prudent liquidity management is important at all banks.
Longstanding supervisory guidance emphasizes the importance of
banks regularly monitoring their liquidity positions and
maintaining sufficient levels of liquidity to meet anticipated
and unexpected demands for funding. Supervisors monitor banks'
liquidity levels using financial data provided by banks on
quarterly Call Reports and review liquidity risk management
practices in depth during bank examinations to ensure that
banks are managing their liquidity in a safe and sound manner.
In my experience, this supervisory approach has been effective
for smaller banks. For larger, systemically important banks
that have more complex funding profiles, the liquidity coverage
ratio requirements are more important. In the case of these
entities, the liquidity coverage ratio helps ensure that
acceptable levels of liquidity are maintained in order to
minimize the risk that a liquidity strain at one large bank
causes broader disruptions to the financial system.
I understand that the recently enacted Economic Growth,
Regulatory Relief, and Consumer Protection Act provides
additional discretion to the Federal Reserve to determine the
appropriate supervisory tools to monitor liquidity in
institutions with assets between $50 billion and $250 billion.
If confirmed, I look forward to studying the liquidity coverage
ratio and its effectiveness more closely and working with my
Board colleagues to ensure that Federal Reserve supervision
continues to promote effective liquidity risk management in all
institutions under its supervision, regardless of their size or
complexity.
Q.13.i. Banks with assets under $250 billion are not required
to comply with regulatory capital rules. Do you think they
should be? Why or why not?
A.13.i. Banks of all sizes must maintain adequate capital to
ensure their safety and soundness. All banks are required to
comply with regulatory capital rules. I believe it is
appropriate that large banks are subject to more stringent
capital requirements, reflecting their greater complexity and
the greater risk they pose to the stability of the U.S.
financial system.
Q.13.j. The Volcker rule which prohibits proprietary trading
applies to all banks but has streamlined policies and
procedures for banks with less than $10 billion in assets. Do
you think banks under a certain size should be allowed to
invest in hedge funds and private equity funds on their own
behalf? Do you think the Volcker Rule should not apply to banks
under a certain size?
A.13.j. Congress has recently spoken to this question by
enacting legislation that excludes certain small banking
organizations from the restrictions of the Volcker Rule. These
firms do not have large trading operations in relation to their
size. I believe that this reform will reduce regulatory burdens
on community banks without causing harm to the financial system
because these banks do not engage in the type of trading that
the Volcker Rule was intended to restrict. Additionally, I
believe that the regulatory regime that applies outside of the
Volcker Rule is sufficient to protect the safety and soundness
of community banks.
Q.13.k. Collateralized debt obligations backed by Trust
Preferred Securities are restricted. Do you think banks under a
certain size that hold CDO-TruPs should not have to comply with
restrictions?
A.13.k. Interconnectedness in the banking system increases when
banking organizations invest in other banking organization's
capital securities, including through structured products. This
interconnectedness heightens the likelihood that instability at
one banking organization will spread to others, regardless of
the size of the banking organizations involved.
Q.13.l. Debit card interchange fees and routing requirements do
not apply to banks that have fewer than $10 billion in assets.
Do you think banks under this size should comply with
interchange fees and routing requirements?
A.13.l. I believe that it is a matter for Congress to decide
what, if any, additional exemptions from these provisions
should be provided.
Q.14. Let me ask you about other regulations that apply to
banks but were not enacted by the Dodd-Frank Wall Street Reform
and Consumer Protection Act.
Q.14.a. Do you think the ``primary duty'' of a bank's board of
directors is ``to ensure the bank operates in a safe and sound
manner''?
I believe that an effective board of directors is integral
to the continuing safety and soundness of a banking firm,
including its compliance with laws and regulations. I
understand that the Federal Reserve has proposed guidance on
board effectiveness in part, and in recognition that the
supervisory expectations in existing guidance did not
consistently focus on the core responsibilities of boards. The
proposed guidance would eliminate unnecessary or outdated
expectations and encourage boards to devote more time and
attention to their core responsibilities, which when exercised
effectively, promote the safety and soundness of the firm.
Q.14.b. Do you have recommendations for changes to the Bank
Secrecy or Anti-Money Laundering rules?
A.14.b. Banks are required to comply with the Bank Secrecy Act
and Anti-Money Laundering (BSA/AML) laws and regulations in
order to safeguard the U.S. financial system from the risks of
money laundering and terrorist financing. In my time as a
banker at Farmers & Drovers Bank in Kansas, and as the Kansas
State Bank Commissioner, I know that banks take this
responsibility seriously, but this compliance incurs
significant costs and resources, especially for smaller banks.
BSA/AML regulations are generally issued by the Department
of Treasury's Financial Crimes Enforcement Network (FinCEN) or
on an interagency basis, which means that most BSA/AML
requirements are handled on an interagency basis. Further, I
understand that the Federal Reserve participates in several
groups designed specifically for BSA/AML issues. Notably, the
Federal Reserve participates, along with other Federal banking
agencies and the Conference of State Banking Supervisors, in
the Federal Financial Institutions Examination Council (FFIEC)
BSA/AML Working Group, which meets regularly to discuss various
BSA/AML supervisory and policy matters. The Federal Reserve
also participates in the BSA Advisory Group (BSAAG), which
brings together Federal and State financial regulatory
agencies, FinCEN, law enforcement and industry.
I do not have any recommendations for changes to the BSA/
AML laws and regulations at this time; however, I support
continuation of the Federal Reserve's interagency efforts to
increase the efficiency, transparency, and effectiveness of the
supervision and regulation of financial institutions, including
those related to compliance with BSA/AML rules.
Q.15. In 2017, when you served as the Banking Commissioner of
Kansas, George and Agatha Enns conspired with Plains State Bank
employees to launder money. The Enns were sentenced to 3 years
of probation and forfeited nearly $2 million in ill-gotten
gains.
Q.15.a. What was the Enns' crimes? What was the role of the
Kansas Banking Commission and your role personally in this
investigation and lawsuit?
A.15.a. The Office of the State Bank Commissioner (OSBC) shares
regulatory authority with Federal agencies in enforcing banking
laws. The Department of Justice, in consultation with the FDIC,
IRS and DEA, prosecuted George and Agatha Enns and certain
employees of the Plains State Bank for crimes of conspiracy to
commit money laundering, failing to file a Suspicious Activity
Report, and money laundering that occurred from 2011 to 2014.
The indictments were unsealed in April 2015. The Department of
Justice did not consult with the OSBC in this matter, and no
Kansas Bank Commissioner has played a role in this Federal
criminal action. The charges alleging that the Plains State
Bank employees failed to file SAR reports for activity
conducted 2011-2014 were dropped in this case.
Q.15.b. Please describe other criminal and civil lawsuits that
occurred during your tenure as Commissioner.
A.15.b. The OSBC is currently involved in an ongoing case filed
in 2008 resulting from the actions of a previous Bank
Commissioner as described below.
Columbian Financial Corporation v. Bowman, in her official capacity as
Bank Commissioner of Kansas, et al.
Columbian Bank and Trust Company was a State-chartered bank
regulated by the OSBC. On August 22, 2008, the then-Kansas Bank
Commissioner declared the bank insolvent and appointed the FDIC
as receiver due to a liquidity failure. Shortly thereafter,
Columbian Financial Corporation, as the sole shareholder of
Columbian Bank and Trust Company, began litigating the
Declaration of Insolvency and Tender of Receivership in State
and Federal courts. Most recently, Columbian Financial
Corporation filed in the District Court of Kansas alleging
violations of 42 U.S.C. 1983 by the Bank Commissioner of
Kansas in the Commissioner's official capacity. Due to being
appointed as the Bank Commissioner of Kansas, I was substituted
as a defendant in this official capacity on September 18, 2017.
In 2008, Columbian Financial Corporation alleged that the
Bank Commissioner in his official capacity denied Columbian
Bank and Trust Company and Columbian Financial Corporation due
process by declaring the bank insolvent, seizing the bank's
assets and not providing adequate constitutional protections
and remedies before and after the declaration and seizure. The
allegations contained in the suit arise from the actions of the
former Bank Commissioner who made the decision to close the
bank. On November 21, 2017, I, in my capacity as Bank
Commissioner, filed a motion for
summary judgment and alterative motion for judgment on the
pleadings based on the doctrinal bars of res judicata and
collateral estoppel alleging Columbian Financial Corporation
had a full and fair opportunity to litigate these allegations
in an administrative hearing and judicial review in the Kansas
court system. On May 17, 2018, the District Court of Kansas
granted the Commissioner's motion for summary judgment and
dismissed the case finding the previous State proceedings did
not fall below the minimum procedural requirements of the Due
Process Clause. As of this writing, Columbian Financial
Corporation has not filed an appeal.
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