Scope of inquiry
Members of Congress peppered the bank leaders with both criticism and praise, at times emphatic and at times effusive. Given the state of the global economy, the geo-political landscape and the pending November mid-term elections, it is not surprising that, in addition to oversight investigation, there was a healthy dose of partisan politics in the members’ questions. A wide variety of topics were covered, including among others:
- Inflation & the economy – soft or hard landing/ recession
- Dodd Frank – success and challenges, capital requirements and stress tests
- Innovation and technology in banking services – block chain, digital currency, digital identification tokens
- Consumer protection and fraud – electronic payments & credit reporting impacts
- Housing opportunity and preventing discrimination – additional means of assessing credit worthiness
- Access to banking – the impacts of banking fees and banking the unbanked
- Community investment and affordable housing
- DEI – advancing inclusion & equity throughout institutions including pipeline, promotion and leadership
- ESG – the costs and benefits of ESG focus as well as the governance impact of sustainability investors and proxy voting
My key takeaways
We should expect continued (and likely heightened) focus on disparate customer impacts including lending approval disparities, fee impacts, and equality of customer access and experience.
We may see increased focus and further action regarding the use of arbitration clauses. We may see activity regarding employee organizing efforts. We likely will see follow up and trending requests regarding increasing diversity in banking, including senior executive and board leadership.
Regional banks and financial services institutions should consider themselves on notice of a number of particular home state issues members raised.
Non-bank financial institutions should consider themselves on notice that regulators (and even potential future committee hearings) will be addressing their practices with regard to a variety of these highlighted themes.
Going forward, we will see how consumers, institutions and legislators respond to evolving global economic conditions.
Continuing oversight & pressure for improvement
The Committee Chairs’ opening remarks set the tone.
The opening statements at both hearings provide insight into the legislative and regulatory landscape in which financial institutions are operating.
Senate banking chair’s opening comments
Senate Banking Chair Brown indicated “we must hold [the largest retail banks] accountable to their workers, to their customers, and to the American people.” He questioned the benefits and impact of “rubber-stamped mergers.” He outlined his own expectations:
“I expect all of your banks to build up capital, and to use it to invest in communities – not your shareholders, not just your own compensation. I expect you to treat all customers fairly. And I expect you to take steps to make banking work better for your customers and your workers. Steps like: eliminating overdraft and excessive fees, lowering the costs of basic bank accounts, ending forced arbitration, offering home loans to all eligible borrowers in all communities. It means paying your workers – including contractors who feed you, who clean your office, who keep your banks and offices safe – a living wage.“ Brown Statement 9-22-22.pdf (senate.gov).
House financial services chair’s opening comments
House Financial Services Chair Waters did not issue a written statement, but her opening remarks were as pointed as Brown’s. Among other things, she noted the title of the hearing to hold large banks accountable. She emphasized the need for improvements to access to affordable credit. She also questioned the impact of bank mergers and noted that branch closings harm communities and reduce basic banking services. She posited that the racial wealth gap is widening and discrimination against people of color continues in banking services. She noted harm to customers in connection with credit reporting, imposition of banking fees and electronic payments scams.
Other notable viewpoints
Ranking Members in both committees unsurprisingly took a different tenor in their opening statements. Senate Banking Ranking Member Patrick Toomey (R-Pennsylvania) emphasized his view that “banks are essential for supporting the economy and advancing American competitiveness.” He asked each CEO to identify an example of an innovation or program of which their bank is proud. Toomey also expressed his personal concern that “activist regulators and some of [his] colleagues see banks as a tool by which they can advance their social policy.” He expressed concern about what he perceives as “politicization of our financial regulators and our central bank.” He emphasized his view that “addressing political issues requires difficult decisions involving tradeoffs. In a democratic society, those tradeoffs must be made by elected representatives, who are accountable to the American people.” Toomey Statement 9-22-22.pdf (senate.gov).
In his verbal opening remarks, House Financial Services Ranking Member Patrick McHenry (R- North Carolina) suggested the Committee should “hold agencies accountable” and went a step further calling the House hearing “theater not oversight.”
For more detail access the live hearing video on the Committees’ hearing websites (weblink above). Also posted there is the written testimony of each institution CEO, including highlighted accomplishments and strategy as well as certain responses to pre-hearing advance information queries.
Core themes across both hearings
Themes addressed by the respective committee members included the following topics, among others.
Access to banking & fair banking services
Members in both chambers were keenly focused on expanding banking services to people of color and low and moderate income (LMI) customers. Members focused on a variety of aspects including queries and data regarding:
- Racial disparities in mortgage application underwriting approvals;
- Disproportionate imposition of banking services fees including overdraft and NSF fees on LMI customers, often persons of color;
- Branch closings and access to banking services in rural areas as well as in LMI communities;
- The need for more affordable housing and seeking feedback on how to unlock more resources for affordable housing finance and spur construction;
- The unbanked and eliminating obstacles to banking them, including:
- lack of trust;
- lack of physical access;
- high fees;
- building more brick and mortar branches;
- enabling internet access to electronic banking services; and
- providing banking services in multiple languages.
Advocacy and queries also focused on support for fair banking services and community reinvestment legislation including the Senate Fair Access to Financial Services Act (S.4619) and House Making Communities Stronger through the Community Reinvestment Act (H.R. 8833), discussed in this previous insight.
Global economy and inflation
Many members expressed views regarding capital requirements and stress tests results, with differences of opinion generally lining up on party lines about the adequacy of current capital levels. A number of members were focused on assessing whether recession is imminent and, if so, whether we might expect a hard or soft landing. Some members expressed the view that imposing additional capital requirements in the current economy will eliminate liquidity and lending from the markets which may inhibit growth and exacerbate inflation challenges.
In the sphere of geo-politics, several members questioned whether US banking institutions should continue to be engaged in investments and projects involving the Chinese government and Russian institutions.
Electronic transfers and payments
Many members raised questions and expressed opinions about perceived significant consumer harm from electronic payments fraud and scams. Several members advocated expansion of Reg. E liability requiring banks to be responsible for customer authorized fraud scam transactions which occur through a platform associated with the bank. Certain members, including the Senate Banking Chair, acknowledged (a) that there is even more substantial consumer harm deriving from transfers involving non-banks and (b) that holistic consumer solutions will require continuing customer education, additional technological innovations and broader regulation of non-bank participants.
Cybersecurity & digital currencies
Members on both sides of the aisle expressed concern and posed queries regarding increasing cybersecurity threats and the adequacy of bank threat detection assessments, testing and budgets. Members acknowledged that cybersecurity solutions and threat avoidance requires substantial cooperation among institutions and government agencies in the US and abroad. Several members addressed digital currencies in connection with cyber issues. A few members also focused on the potential benefits developing secure digital identification. Members commented that AML Know Your Customer (KYC) rules would be impacted and likely will need to evolve to address these issues.
Inclusion & work place equity
Many members encouraged the banks to do more to increase diverse representation in leadership roles. Many asked specifically how the Banks are engaging with HBCUs to develop opportunities for and attract people of color. Many members focused on the banks’ commitments to and engagement with CDFIs and MDIs, urging banks to do more. Several members in both chambers expressed their support for bank workforce organizing efforts and giving more voice to employees.
Wrap up
None of the issues addressed at the large bank oversight hearings are especially surprising. They reflect the current economy and our current political and social discourse. What will be interesting to watch is how each financial services regulatory agency takes its cues from the queries and testimony. Our BCLP global Banking Sector team will continue to monitor these developments and can assist in evaluating and mitigating bank risk issues and exposures in addition to advising and supporting banking business transactions and strategies.
