Bank Regulation

On The Hill, Banking’s Biggest Get Grilled

The biggest names in banking came to the Hill, repping seven of the largest financial firms in the United States. Ten years after the financial crisis, the rebound has been palpable, but risk abound, too — watch out for cyber fraud and shadow banking, warned JPMorgan’s Jamie Dimon, Goldman Sachs’ David Solomon and others.

Seven up and, depending on how one likes their congressional hearings, less than lucky number seven? The top executives of seven of the biggest banks in the U.S. were grilled, and even roasted, on Capitol Hill, specifically in front of the U.S. House Committee on Financial Services.

The questioning of these seven CEOs turned out to be robust, which should have surprised no one. After all, the hearing was titled “Holding Megabanks Accountable: A Review of Global, Systemically Important Banks 10 years after the Financial Crisis.”

Financial reform has been top of mind for the newly installed Democratic majority in the House. The Trump administration has promised — and, in some cases, has been executing on promises — to roll back at least some of the regulations contained in the Dodd-Frank tenets that took shape a decade ago.

The CEO names are well-known. The full roster includes JPMorgan Chase’s Jamie Dimon, BNY Mellon’s Charles Scharf, Bank of America’s Brian Moynihan, Goldman Sachs’ David Solomon, Morgan Stanley’s James Gorman, Citigroup’s Michael Corbat and State Street Corporation’s Ronald O’Hanley.

It should be noted that the Wednesday (April 10) testimony, en masse, represented the largest gathering of banking heads since the financial crisis itself.

Disparate lines of questioning took discussion, from the state of the financial system to guns, and from cryptos to executive compensation. Some lawmakers defended the actions of the banks and executives, pointing to job creation, for example, while others criticized pay gaps that represented chasms between what the CEOs and more junior employees made in terms of take-home pay.

The Big Picture

In terms of general sentiment, weighed in by the septet, the financial system’s health has improved — markedly so since the crisis, during which the banks at the hearing had garnered hundreds of billions of dollars in funds from the government to help them weather the storm of the Great Recession.

“I am concerned that several of these institutions are simply too big to manage their own operations, too big to serve our communities and too big to care about the harm they have caused,” said Representative Maxine Waters (D-CA), chair of the committee. She added that multiple fines have been paid by the banks for what she termed “consumer abuses” and “violations of the law,” with the banks having treated fines as a “cost of doing business.”

Some of the executives who offered testimony sought to paint a picture that lessons have been learned, and that things have gotten better even against the backdrop of slowing economic growth.

JPMorgan Chase’s Dimon echoed some of the positive sentiments in his annual shareholder letter that debuted last week, telling the committee that “there is no doubt that the strength, stability and resiliency of the financial system has been fundamentally improved over the course of the last 10 years. Post-crisis reforms have made banks much safer and sounder in three important areas: capital, liquidity and resolution, and recovery.”

Some firms highlighted the winnowing down of business lines, as JPMorgan Chase has closed 17 of them, while others highlighted moves to embrace consumer financial services more fully. Goldman’s Solomon pointed out in his written testimony that it launched Marcus in 2016, a move toward digital services, such as online savings accounts and certificates of deposits.

Questioning from lawmakers focused on small business lending as well, where banks have, according to stats cited at the hearing, accounted for only 25 percent of lending to those firms. Bank of America’s Moynihan spotlighted a $36 billion dollar small loan portfolio at his bank, with loans under $1 million in size, “a major business for us … we are heavily involved in small business” across 9 million businesses directly.

Moynihan also pointed to the impact FinTech will have on banking (with a nod toward greater efficiencies), amid the continued emergence and adoption by consumers of mobile banking. Dimon pointed to the speed in which loans can be done through digital means, both P2P and B2C.

The Risks

Things may have indeed changed over the last year, and that includes what lurks amid possible threats to the system. Consider the fact that mortgages did not seem to be a key concern for the executives (even though they were a prime mover in the financial crisis), as risks were explicitly stated to be connected to cybersecurity, perhaps among the biggest concerns. Cyber risks were cited by five of the seven CEOs in response to the question by Representative Steve Stivers (R-OH) of identifying the biggest risks.

Others mentioned shadow banks, which are non-bank lenders. (Dimon called out the shadow banking concerns in last week’s letter.) He said that “leveraged lending” and “student lending [are] growing rapidly, and deteriorating rapidly.” Goldman’s Solomon said that direct lending from non-banking firms is not scrutinized, and is obscured, while not yet posing a systemic risk.

“Let the record reflect that cyber was a consensus item, as was slowing growth around the world, and a big tip of the hat to folks [who] also mentioned the non-regulated financial industries,” Stivers said.

It was Dodd-Frank’s passage, said some of the CEOs, that helped make the financial system more secure and, per Solomon, a decade shows that it may be time to see if there should be “improvements.” Dimon offered a cautionary nod toward new accounting standards that may stifle smaller lenders, such as community banks, if a financial crisis hits again.

Some executives, such as Citigroup’s Corbat, said that there should be more “harmonization” among regulatory agencies.

On Guns And Cryptos

Firearms were part of the discussion, as Representative Carolyn Maloney (D-NY) said JPMorgan Chase still maintained ties to the gun industry, which has now been shunned by Citigroup and Bank of America. Dimon said a more formal policy ending its relationships with firearms firms would be under consideration.

Cryptos? They were there, too, as Solomon said Goldman Sachs continues to watch the space, yet did not have plans to open a cryptocurrency-focused trading desk.

Separately, in response to one lawmaker’s concerns that the U.S. is “lagging behind” in cryptos due to an uncertain regulatory environment, and that JPMorgan Chase seems to have reversed course from earlier thoughts that cryptos are not viable, Dimon said blockchain is being tested, and is real. However, he added that most cryptos are “not supported by anything other than what the next person will pay for them.”

Conversely, he said the JPM Coin is supported by a deposit at JPMorgan Chase. He noted, too, that such payments “come with data, and everyone would have the same data at the same time,” amid the use of blockchain. BNY Mellon’s Scharf added that among the biggest issues facing banks in terms of cryptocurrencies is anti-money laundering and KYC.

Looking ahead, Representative Waters said the CEOs would likely be called to the Hill again, though perhaps not all together, and that they should not push for more rollbacks. She warned them not to “overwhelm us with requests for deregulation that you really don’t need, and please don’t go around us to [regulatory] agencies.”

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