Jun 07 2012

Shelby: Bank Regulators Must Protect Taxpayers

U.S. Senator Richard Shelby (R-Ala.), ranking Republican on the Committee on Banking, Housing and Urban Affairs, today made the following statement at a hearing on financial reform and the effectiveness of banking regulators in fostering the safety and soundness of the financial system: 

Statement of Senator Richard C. Shelby

Committee on Banking, Housing and Urban Affairs

June 6, 2012


“Thank you, Mr. Chairman.

“Today, the Committee will hear from the financial regulators who supervise our nation’s banks.  The safety and soundness of our banking system depends on their efforts. 

“It was not so long ago, however, that our banking system began to collapse, notwithstanding the presence of a large and vigorous regulatory structure.  Hence, it is critical that this Committee conduct rigorous oversight to ensure that the financial regulators do not repeat the mistakes of the past.

“As the primary regulator of national banks, the OCC is responsible for ensuring the safety and soundness of the largest banks.  This means that the OCC supervises JPMorgan Chase, whose recent $2+ billion trading loss has been in the news.  Because taxpayers guarantee JPMorgan’s deposits, the American public has a right to know whether these trades threatened, or could have threatened, the solvency of the bank.

“In addition, this Committee has an obligation to determine whether this loss reveals any operational or regulatory weakness that could cause more serious problems in the future.  Next week, JPMorgan’s CEO, Jamie Dimon, will appear before this Committee to explain his bank’s actions. 

“Today, I would like to hear the OCC’s views on what happened at JPMorgan.  In particular, the Comptroller should give us his assessment of whether these trades ever threatened the safety and soundness of one of our nation’s largest banks.

“Banks are in the business of taking risks, and losses are an inescapable part of risk taking.  Job creation and economic growth depend on banks taking such risks.  It is the job of regulators, however, to prevent banks from taking risks that expose taxpayers.

“Some have used JPMorgan’s loss as an opportunity to argue for a stronger implementation of the Volcker rule.  No matter where you stand on the Volcker rule, this argument is a bit premature.  Most importantly, was the OCC’s current authority sufficient to prevent these trades from putting taxpayers at risk?  If so, did the OCC properly use its authority?  I look forward to hearing the Comptroller’s answers to these questions.

“Also with us today is the Acting Chairman of the FDIC.

“We have been told that Dodd-Frank will prevent future taxpayer bailouts and that insolvent financial institutions will be allowed to fail.  Yet, under the FDIC’s plan for implementing Dodd-Frank’s resolution authority, short-term creditors would still be bailed out.  The lesson we all should have learned from the TARP bailouts is that creditors of a failed firm should bear its losses. 

“Today, I hope Acting Chairman Gruenberg can reassure this Committee that the FDIC’s resolution authority will not institutionalize government bailouts.  Regrettably, the FDIC is not the only regulator that has taken actions that may institutionalize “too big to fail.”

“The Financial Stability Oversight Council, led by Treasury and the Federal Reserve Board, have recently used the authority granted by Dodd-Frank to designate several companies as systemically important and are preparing to designate a larger group soon.  The danger presented by such designations is that the market will view it as an implicit guarantee that the federal government will not allow the designated institution to fail.  This was the same problem that arose with Fannie and Freddie and ultimately led to a $200 billion taxpayer bailout.

“Accordingly, I would like to hear from the Treasury and the Federal Reserve Board as to how the designation process will eliminate, rather than create, “too big to fail” companies. 

“Finally, we will also hear from the Director of the Bureau of Consumer Financial Protection.  The Bureau’s regulation and supervision will impact the safety and soundness of our banking system.  However, unlike other bank regulators, the Bureau is not required to consider safety and soundness when it writes rules or takes actions against banks.  This is becoming apparent as the Bureau’s proposed rules will impose huge costs on banks and have created serious confusion about what banks need to do to comply with consumer protection laws.

“For example, the Director of the Bureau has unilateral authority to declare products to be “abusive.”  However, the Bureau has said that it will not write a regulation to clarify what the term “abusive” means.  The refusal to write a rule stands in stark contrast to the Director’s statements that the Bureau would give banks clear rules of the road.  The refusal of the Bureau to issue clear rules means that banks will have higher costs, more exposure to lawsuits, and less effective operations.

“In the end, it will be consumers that will pay the price in the form of higher costs, less access to credit, fewer choices, and more paperwork from less efficient banks.  This should come as no surprise, however.  After all, it was not our regulators or the banks that paid for the poor regulation and practices that lead to the financial crisis.  It was taxpayers and consumers.

“Thank you, Mr. Chairman.”