Hensarling Opening Statement at Federal Reserve Oversight Hearing
September 28, 2016 -
WASHINGTON- Financial Services Committee Chairman Jeb Hensarling (R-TX) delivered the following opening statement at today’s full committee hearing with Federal Reserve Chair Janet Yellen on the Semi-Annual Testimony on the Federal Reserve’s Supervision and Regulation of the Financial System:
As we all know, the Dodd-Frank Act vastly increased the powers of the Fed way beyond its traditional monetary policy responsibilities. The Act has made the Fed omnipotent but it cannot make it omniscient. No Act can. Through the exercise of so called “heightened prudential standards,” the Fed can now functionally control the largest financial institutions in our economy.
Former Fed Governor Kevin Warsh recently wrote, “Central Bank power is permissible in a democracy only when its scope is limited, its track record strong, and its accountability assured.” None of that do we observe today.
Where has the Fed’s omnipotence taken us? The big banks are now bigger, the small banks are fewer, economic growth lags, and there is scant evidence our economy is more stable.
Two new Fed expanded authorities granted under Dodd-Frank – living wills and stress tests – have been particularly controversial and problematic.
The secrecy surrounding the stress tests makes it almost impossible to measure the effectiveness of the Fed’s regulatory oversight or the integrity of the tests’ findings. As Columbia University Professor Charles Calomiris testified, “It is hard to believe that the current structure of stress tests could occur in a country like the United States, which prizes the rule of law, the protection of property rights, and adherence to due process.”
Dodd-Frank’s living wills grant the FDIC and the Fed unbridled – and unreviewable – discretion to fundamentally restructure private businesses under a standard-less process that relies entirely upon the personal discretion of Washington regulators.
Indeed, the Fed stands at the center of Dodd-Frank’s codification of Too Big To Fail. It functionally occupies the boardrooms of the largest financial institutions in our nation and decides how they can deploy their capital, sending a clear signal that Washington will bail them out if they get in trouble.
And despite claims by the Fed that it “tailors” regulations to fit the size of financial institutions, we know small banks are suffering disproportionately under Washington’s thumb. As we lose, on average, one community financial institution per day, consumers lose options to help them achieve financial independence – small businesses lose opportunities to grow jobs and the big banks just keep getting bigger.
There is a better way.
Former Fed Chair Alan Greenspan has said, “Lawmakers and regulators, given elevated capital buffers, need to be far less concerned about the quality of the banks’ loan and securities portfolios since any losses would be absorbed by shareholders, not taxpayers. This would enable the Dodd-Frank Act on financial regulation of 2010 to be shelved, ending its potential to distort the markets — a potential seen in the recent decline in market liquidity and flexibility.”
Tom Hoenig, current FDIC Vice-Chair has said, “U.S. banks engaged in core banking activities and operating with reasonable levels of capital should not incur the same regulatory burden as those that do not.”
Former FDIC Chairman Sheila Bair has also expressed support for the use of higher capital levels in place of regulatory risk-weighting. She has said, “The Fed doesn’t know what’s risky. The FDIC doesn’t know what’s risky. Didn’t we learn anything from the crisis?”
The Financial CHOICE Act approved by this committee offers a better way. It has been endorsed by renowned economists nationwide, including three Nobel Prize winners. By promoting substantially higher loss absorbing bank capital in exchange for relief from job-killing regulations, the Financial CHOICE Act fosters economic growth for all, bank bailouts for none, and ensures the Fed is accountable and remains focused on good monetary policy.