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Michael S. Barr

What to expect from bank regulator hearings this week

The Biden Administration’s bank and credit union regulators will testify before the Senate Banking Committee and House Financial Services Committee in back-to-back hearings starting today.

These hearings tend to cover a lot of disparate policy ground, from climate change risks to the financial system to nonbank regulation.

But this week, we know that one big issue is going to take up a whole lot of lawmakers’ time from both sides of the aisle – capital reform. Banks have been worried about this for months, but their lobbying has taken on a more feverish quality in recent weeks.

This is extremely technical stuff we’re talking about, but don’t underestimate the economic importance. The rules that banks follow when it comes to safety and soundness play a fundamental role in how profitable certain activities can be, like in mortgages or small business lending. The less profitable an activity is, the less likely the regulated banking system will try to engage in it.

Financial regulators led by Federal Reserve Vice Chair for Supervision Michael Barr have been working toward stricter capital rules since 2022. That effort took on fresh urgency after the mini-banking crisis in March. Also testifying today will be Federal Deposit Insurance Corp. Chair Martin Gruenberg, acting Comptroller of the Currency Michael Hsu and National Credit Union Administration Chair Todd Harper.

When we say “capital reform,” we’re not talking about just one proposal but several. That includes the finalization of international standards known as Basel III and changes to how authorities weigh the regulatory costs of long-term debt.

Barr will take the brunt of questions about capital reform. Republicans will attack regulators’ approach to the proposal from several angles, arguing the proposed rules could weigh heavily on the U.S. economy while running afoul of regulatory or administrative procedures.

“Vice Chairman Barr has not been responsive to our extensive requests for quantitative analysis on capital reform, on Basel III endgame,” Rep. Andy Barr (R-Ky.) said. “The administrative process is totally flawed. The fact that, after they proposed it, now they’re seeking data from the industry? That’s backwards.”

Progressive Democrats, on the other hand, are chiefly concerned that the Fed may bow to political pressure and water down its proposed changes. Sen. Elizabeth Warren (D-Mass.) said the current rules are overdue for an update.

“It’s been 15 years that those regulations have been pending,” Warren said. “It’s time to get them done.”

But there are differences in opinion among Democrats. Sen. Mark Warner (D-Va.) said he was worried about how the rules could shift financial activity from the banking system to the nonbank sector. “I’ve got questions about the amount of seepage beyond the regulatory perimeter,” Warner said.

Policymakers will be listening to regulators’ responses closely for any hints as to how these capital proposals could — or won’t — change before they’re finalized.

One more thing: We strongly suspect the FDIC’s Gruenberg will get sharp questions about this Wall Street Journal investigation into the agency’s “toxic” culture among some of its regional hubs. Gruenberg has led the agency as chair twice since 2012 and served on its board since 2005. That will open up the veteran regulator to questions about his awareness of these problems over the previous two decades.

— Brendan Pedersen

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Editorial photos provided by Getty Images. Political ads courtesy of AdImpact.