Today, Congresswoman Maxine Waters (D-CA), Ranking Member of the Committee on Financial Services, gave the following floor statement in opposition to H.R. 4296, a bill to decrease operational risk capital requirements for the nation’s largest banks:
As Prepared for Delivery
Mr. Speaker, I rise in strong opposition to H.R. 4296. This bill is simply another rollback of rules put in place after the financial crisis. It would undermine the stability of our country’s largest banks by restricting the way regulators set capital requirements for those institutions.
Before I get into why this bill is problematic, let me take a moment to clarify what capital is and what it is not. Some have said that capital is money that is held on the side or in reserve, and cannot be used to lend to borrowers. This couldn’t be further from the truth. Capital is not a reserve. Capital refers to the terms of the financing a bank receives. In the most simplistic example, a bank receives funds from customers making deposits, loans it receives from other institutions, and stock it has issued to investors. The bank uses all of these sources of funding to make mortgages and other loans to customers. However, there are important differences. Bank debt has terms like regular interest payments that if the bank stops paying, the bank fails. However, a bank can stop paying dividends on its stock without it failing. Banks funded with lots of debt are described as being higher leveraged, and risky, because only a small drop in the value of their mortgages and other assets can cause them to default. Funding a bank through higher levels of capital makes the bank stronger because even if the loans it has made lose value, the bank can avoid default by temporarily halting payments to their investors or lowering the value of the stock.
H.R. 4296 would impact something called “operational risk capital,” which is the capital used to cover the possibility of losses to the largest banks caused from their operational failures, such as rogue traders, fraudulent sales practices, and cyber breaches.
H.R. 4296 would diminish this type of capital, which only about 10 megabanks are required to maintain under an enhanced framework, by restricting the information that regulators can use to determine the appropriate balance of safe funding like bank stock versus debt that megabanks should have to address potential operational losses that may occur. The bill would direct regulators to primarily consider a megabank’s current activities, and not their past behavior, when setting the capital level, thereby enabling the bank to take on more debt.
According to Americans for Financial Reform — a nonpartisan coalition of more than 200 civil rights, consumer, labor, business, investor, faith-based, and civic and community groups, “While current activities are obviously central to operational risk, and are already treated as such, the recent loss experience of banks is the best concrete evidence regulators usually have as to the magnitude of current and future risks. Recent past activities are also vital to understanding the future exposures of the bank, including potential legal exposures.”
Thus, this change to how regulators determine the appropriate amount megabanks should maintain for operational risks is imprudent. A megabank’s past actions are often the best indicators of future potential risks that it may experience. Well, memories seem to quickly fade in Congress about the problems that led to the last financial crisis. So, let me list some of the examples of past megabanks’ operational failures like JPMorgan’s “London Whale” trades and Wells Fargo’s long list of violations that have ripped off millions of consumers, including those harmed by their fraudulent accounts scandal. Given these examples of past misconduct and that megabanks have collectively paid more than $160 billion in fines since 2010, it is absurd to suggest that their past behavior shouldn’t be taken into account when determining how much capital they should hold.
Even the Basel Committee, which several of President Trump’s appointees now serve on, agreed in December when they finalized Basel III reforms, from where the operational risk capital originates, writing,“[B]anks which have experienced greater operational risk losses historically are assumed to be more likely to experience operational risk losses in the future.” So it makes no sense to have a forward-looking assessment that de-emphasizes a megabank’s past failures in setting these capital requirements.
The nonpartisan Congressional Budget Office estimated that the bill’s changes would cost the Federal government $22 million. This calculation was based on the fact that the capital change would not only affect the bank’s probability of failure but also the magnitude of future losses to our entire financial stability, which in turn affects the overall US economy. This is not a bill to help community banks. Let me repeat that. This is not a bill to help community banks. This is a bill for the 10 largest banks in this country.
And so the megabanks on Wall Street are hoping Congress will let them take on riskier debt by directing the regulators to downplay—if not outright ignore—their recent and extensive operational failures. Mr. Jamie Dimon, CEO & Chairman of JPMorgan Chase wrote in his 2016 annual letter to shareholders that, “Operational risk capital should be significantly modified, if not eliminated.”
Let’s think about it like this. Most adult consumers in this country have a credit score. Banks use those credit scores to determine whether or not to lend to a consumer, and if so, under what terms. These credit scores are based on a consumer’s past payment history because this information is considered one of the best indicators of a person’s likelihood to default on future credit obligations. Now, we all know that credit scores are problematic. But no one, including me, is proposing to get rid of them because we can all agree that past payment information is a good indicator of how someone will handle credit in the future. But this bill takes that principle and throws it out the window when it comes to the 10 largest banks in this country. Keep in mind, these same banks will continue to use a consumer’s credit score for underwriting and rating of mortgages and other consumer loans. But the megabanks themselves are asking this Congress not to judge them on their past behavior as they judge consumers, and to let them have a clean slate moving forward. If that isn’t a double standard, Mr. Speaker, I’m not sure what is.
Mr. Speaker, bank profits reached an all-time record high in 2016, compensation for Wall Street CEOs has shot back up to levels last seen in 2006, and business lending is up 75 percent since 2010. All this happened while U.S. banks added more than $700 billion in capital to absorb potential losses. There is a simple reason for this—healthy banks lend. U.S. banks also lent significantly more than their European counterparts because our banks boosted their capital levels, while the European banks did not.
So, despite Republicans’ “chicken little” arguments about the dire consequences of the Dodd-Frank Act and related regulatory reforms, the data speaks for itself. Banks are making more money than ever and lending more than ever, but apparently that is not enough. So I am here again today appealing for Congress to continue to uphold common sense safeguards for consumers, the broader economy and the megabanks, and reject this Wall Street giveaway.
I urge my colleagues to oppose this harmful legislation, and I reserve the balance of my time.