Economic Growth, Regulatory Relief, and Consumer Protection Act

Floor Speech

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Mr. WARNER. Mr. President, today I wish to speak about some specific provisions S. 2155.

I was proud to be one of the original drafters of Dodd-Frank legislation. We didn't get everything right in that bill. With the benefit of 8 years of hindsight, we have been able to see what has worked and what hasn't.

Most of what hasn't worked well has been the excessive burdens put on community banks. The bill the Senate considered today, one that I am a proud cosponsor of, the Economic Growth, Regulatory Relief, and Consumer Protection Act, does a lot of good for community banks and many regional banks by reducing some of the compliance costs these banks face, so that they may better compete and end the phenomenon of ``too small to survive.''

Since the crisis, however, what has worked best is increased capital requirements and an updated capital planning regime for medium and large-sized banks. Put simply, no amount of prudential regulation on products or business lines can substitute for requiring banks to keep robust capital cushions. Ensuring that banks hold significant loss absorbing, capital is the best protection we have against the failure of banks during a crisis. It is also the best tool we have to make sure that even in an economic downturn, banks still have the ability to lend to creditworthy borrowers, so that we can rebound quickly from a downturn.

Critically, S. 2155 makes no changes to the risk-based capital regime for regional and large banks that has been the centerpiece of the Federal Reserve's post-crisis work.

The international Basel III capital accord was agreed by banking regulators in 2010 to 2011. As implemented in the US, Basel III requires a minimum Common Equity Tier 1, CET1, ratio of 4.5 percent, up from 2 percent in Basel II. Minimum tier 1 capital increased from 4 percent in Basel II to 6 percent in Basel III, which includes additional 1.5 percent on top of the required CET1 ratio. The U.S. has finalized rules to implement two additional capital buffers on top of this 6 percent baseline tier 1 capital requirement: a mandatory capital conservation buffer, as adjusted by a risk-weighted capital surcharge on U.S. G-SIBs, and a discretionary countercyclical buffer, which the Fed can use to require additional capital during periods of high credit growth.

These risk-based capital requirements, as implemented by the U.S. banking regulators, have formed a core part of the U.S. bank regulatory response to the financial crisis. S. 2155 changes none of these requirements for regional and large banks.

An important complement to risk-based capital requirements is supervisory stress testing. Stress tests help make sure that banks have adequate capital to absorb losses and more still to lend even in a serious recession so that they will be able to continue to lend to households and businesses. S. 2155 did not modify the requirement that banks larger than $250 billion must continue to undergo annual supervisory stress tests. Regional banks between $100 billion and $250 billion must also continue to undergo what Chair Powell called before the Banking Committee meaningful, strong, and frequent stress tests.

Let me make clear: S. 2155 uses the same language as Dodd-Frank to describe the stress test that should apply to banks between $100 billion and $250 billion because we believe the stress tests applied to those banks should continue to be meaningful assessments of the capital adequacy of those institutions under severely adverse conditions. The requirement in section 401 to conduct stress tests of those banks would be satisfied by continuing to apply the section 165 supervisory stress tests to those banks. We have chosen to single out stress tests for banks between $100 billion and $250 billion because we believe it is the most important enhanced prudential standard in section 165 of Dodd- Frank.

We believe it is prudent for the Federal Reserve to have discretion to apply the other enumerated enhanced prudential standards in section 165 to those or a subset of those banks as part of the strong and tailored regime that should apply to those banks going forward. Indeed, under the bill, the Fed can apply an enhanced prudential standard to those banks for financial stability reasons or simply to ``promote the safety and soundness'' of a bank, which is a low standard. Although the Fed is the entity that is best positioned to make the determination for many enhanced prudential standards, Congress believes that meaningful, strong and frequent stress tests are non-negotiable.

Supervisory stress tests alone, however, do not set any capital ratios or limit any capital actions by the banks. The Federal Reserve's Comprehensive Capital Analysis and Review, CCAR, framework, however, integrates supervisory stress testing with risk-based capital requirements to assess the overall capital adequacy of banks, making it the most important supervisory tool the Federal Reserve has for larger banks. Specifically, CCAR requires evaluations of whether each bank's capital provides an adequate buffer for the losses that would be incurred during the stress scenarios, whether its risk management and capital planning processes are appropriately well-developed and governed and how its dividend or buyback plans could affect its ability to remain viable in stressed conditions. The Federal Reserve may object--and has objected--to a capital plan based on quantitative or qualitative concerns. If it does, the bank is not permitted to make any capital distribution without Fed authorization.

The Federal Reserve, without direction from Congress, has taken actions under both former Chair Yellen and Chair Powell to refine the CCAR process to reduce regulatory burdens. For example, in 2016, the Fed announced that smaller banks subject to CCAR would not need to be subject to the same qualitative requirements as larger, more complex banks. That was a sensible change.

Congress has shown it knows how to exercise its article I prerogative in many places in S. 2155 to adjust, tailor, and modify thresholds for applicability for rules that apply to banks that have $50 billion or more in assets, but Congress has not made any changes to CCAR in S. 2155. The omission of CCAR and the capital plan rule from the changes that S. 2155 has made to section 165 and some regulations affecting some banks is intentional and reflects the continued importance this Congress places upon the continued existence of a robust CCAR process and the premise that the Fed will continue to use this most important supervisory tool appropriately.

That covers risk-based capital, but let me reiterate a point I made in my prior floor speech on this bill, about the importance of the leverage ratio. Basel III requires 3 percent tier 1 capital divided by the bank's average total consolidated assets. The U.S. implementation goes further and requires a minimum leverage ratio of 6 percent for SIFI banks and 5 percent for their bank holding companies. That is generally a good thing. One of the many lessons of the financial crisis was that regulators and bankers alike should approach risk modeling with a degree of humility. A strong leverage ratio is an important backstop to risk-based requirements that depend on banks and regulators' abilities to predict the future.

Current and former Federal Reserve officials from Governor Tarullo, to former Chair Volcker, and former Chair Yellen, to Chair Powell have said that the leverage ratio should in general not be the binding capital constraint for banks, as it tends to be for the custody banks today. The leverage ratio is meant to be, in the words of Jay Powell, ``an important backstop to the risk-based capital framework,'' but noted that ``it is important to get the relative calibrations of the leverage ratio and the risk-based capital requirements right'' because ``doing so is critical to mitigating any perverse incentives and preventing distortions in money markets and other safe asset markets.''

Let's be clear. Section 402 provides relief to only three banks: Bank of New York Mellon, State Street, and Northern Trust. I have seen some raise the concern that the language in section 402 could be read to provide relief to a broader set of banks. That is not a credible reading of the statutory language or our legislative intent. Section 402 says that, in order to receive relief, a ``custody bank'' must be ``predominantly engaged in custody, safekeeping, and asset servicing activities'' to gain the benefit of this provision. This provision does not mean that, if a bank has a large custodial business, it should get relief, nor is this an invitation to exclude other assets from the calculation of total assets for purposes of the leverage ratio. This is a targeted fix for a narrow problem.

So what is the net result of all this technical capital planning and stress testing work that the Federal Reserve and other banking regulators have developed since 2008? Today, U.S. G-SIBs are have two times the amount of capital than they had precrisis. Even if we went through an economic downturn worse than the financial crisis, banks would have 50 percent more capital after absorbing losses than they did in 2008. The substantial increase in capital extends to banks that are smaller than the G-SIBs. The common equity capital ratio of the 34 bank holding companies in the 2017 CCAR has more than doubled from 5.5 percent in the first quarter of 2009 to 12.5 percent in the first quarter of 2017. This reflects an increase of more than $750 billion in common equity capital to a total of $1.25 trillion by the first quarter of 2017.

That is exactly where we should be.

I am proud to have contributed significantly to both Dodd-Frank and the Economic Growth, Regulatory Relief, and Consumer Protection Act. S. 2155 is in many ways as notable for what it doesn't do, particularly with respect to capital requirements, as much as what it does do.

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