March 16, 2016

Shelby Delivers Speech at American Bankers Association Summit

WASHINGTON, DC – Wednesday, March 16, 2016 – U.S. Senator Richard Shelby (R-Ala.), Chairman of the United States Senate Committee on Banking, Housing, and Urban Affairs, delivered the following remarks at the American Bankers Association Summit this morning:

“It is a pleasure to be with you this morning and to have the opportunity to discuss the impact of our current regulatory framework on the future of banking in the U.S.  As Chairman of the Senate Banking Committee, I have made the oversight of federal financial regulators and the promotion of a stronger financial system a top priority. 

“A diverse and healthy banking sector is an essential component of our financial system and critical for a thriving economy. And while some regulation is needed, its goal should be, first and foremost, to ensure the safety and soundness of our financial institutions. 

“More regulation does not necessarily mean better regulation or a financial system that is less prone to crisis.  In fact, an over-reliance on regulators to achieve financial stability can sometimes mean just the opposite.    

“I worry that there is a false confidence that regulators will be able to predict and prevent future crises when they have repeatedly failed to do so in the past.  Yet some supporters of Dodd-Frank now ask for even more regulation.  Shouldn’t we evaluate our current regime to see what is working and what is not before we even consider more regulation? And if something is not working, Congress has the responsibility to fix it. 

“There has been much discussion lately regarding transformational overhauls of the financial system.  Some have called for additional regulatory and capital requirements that would virtually turn banks into public utilities.

“Make no mistake, I have always been a proponent of strong and transparent capital for banks.  I believe that a well-capitalized banking system is much more preferable to the Dodd-Frank approach of regulatory micromanagement.  Where there is sufficient capital, there should be no need for excessive regulation.   

“Furthermore, the right level of capital should ensure that there is financial stability and should eliminate the risk of taxpayer bailouts.  Such goals are paramount.  But, they would not be accomplished by making banks utilities.  Utilities have their place in our economy - albeit limited - but it is not in banking. 

“Such an approach would reduce competition and consumer choice.  It would limit innovation aimed at providing better, more efficient services in the marketplace.  It would escalate the problem of too-big-to fail by providing explicit government support.  It would increase the reliance on taxpayer bailouts.  It would sever the link between risk and return by shielding entities from losses.  It would set prices not by supply and demand, but by edict. 

“We have seen what happens when government plays a role in setting prices.  Such programs end up either insolvent or requiring heavy subsidies from taxpayers.  To name a few examples: Fannie Mae and Freddie Mac, The Federal Housing Administration, The National Flood Insurance Program, The Postal Service, and Amtrak.  I do not want our banking system to become Amtrak. 

“We must ask, do we want a regulatory framework that encourages growth and innovation, or one that restrains them? Are all of the current regulations necessary and appropriate?  What is the cumulative effect of financial regulation?  Are less burdensome alternatives available?   I can assure you that none of our financial regulators are seriously examining these questions.  And even when they do, less most certainly becomes more.

“For example, the CFPB’s new mortgage rules reduced real estate closing disclosures from 6 pages to 5 pages, a modest improvement.  Unfortunately, this minor consolidation effort took nearly 1,900 pages of regulatory text to eliminate that one page.

“The benefits of this massive effort remain unclear and the costs have yet to be calculated.   This type of counterintuitive rulemaking and supervision are present at all levels of banking.

“The head of a small bank told me recently that his regulator recommended a stress-testing regime for his $1 billion bank similar to stress tests for substantially larger banks. Consequently, he had to hire a Chief Risk Officer and implement new architecture akin to what you’d find on Wall Street.  This makes no sense and it needs to stop.

“Given the increasing cost of multiple layers of compliance, it should come as no surprise that so few are applying for new bank charters.  As more time and resources are spent on compliance, we are seeing a concomitant reduction in lending which leads directly to economic stagnation.

“What is more, the burdens are disproportionately negative for smaller institutions.  Community banking remains the lifeblood of many towns and cities across the country because it drives small business growth.  629 counties in the United States are served by a single community bank.  Six million U.S. residents depend on small institutions for their daily banking needs. Community banks provide about half of small-business loans issued by U.S. banks.  That number is even higher for rural areas.

“Unfortunately, Dodd-Frank has put in place a structure where Main Street banks and other financial companies that had nothing to do with the crisis are treated as if they caused it. 

“Regional banks, too, are often subject to the same regulation as banks on Wall Street with much riskier business models.  Such banks have been placed in this framework because of an arbitrary asset threshold established in Dodd-Frank.

“In numerous meetings and hearings with regulators, it has become evident that the automatic, $50 billion threshold for systemic risk regulation has no evidentiary basis. I believe that it is a blunt instrument that acts as a substitute for more sophisticated and thoughtful supervision.

“While it is not a perfect science, our regulators know more now than they knew six years ago about what makes an institution systemically risky.  The framework for regulating these institutions should take into account their actual systemic risk instead of applying regulation based on a dividing line that has been invalidated by data.  A one-size-fits-all policy is not right for financial regulation or our banking system – now or in the future.

“The Financial Regulatory Improvement Act of 2015, which was reported out of the Banking Committee in May of last year, addresses these important issues.  It addresses dozens of concerns raised by small and community banks.  It also holds regulators more accountable and provides for a regulatory framework based on an institution’s systemic risk profile, and not just its size.  It encourages financial institutions to become less systemically-risky, instead of the current approach that aims to mitigate risk through more regulation. 

“Our goal should be less risk in the system and therefore less of a need for government intervention.  At one of our hearings last year, I asked the Treasury Secretary if he thought fewer systemically risky institutions would be preferable.  To my surprise, he didn’t say ‘yes.’ 

“I believe that less systemic risk in our financial system is a good thing.  And it is certainly better than more and more government bureaucracy.  We should want to have a system where banks are well-capitalized, well-managed and well-regulated, but not over regulated.

“An integral part of a strong and vibrant financial system is an appropriate regulatory regime that maintains safety and soundness but does not stifle innovation and growth.  This should be a bipartisan goal. 

“I believe it is possible to garner strong bipartisan support through these shared principles.  We just need to get past the politics so that we can deal with the policies. 

“I remain willing to work with Senators from both parties in order to provide needed regulatory changes and to reduce systemic risk.   We should ask, what will the future of banking be if we do nothing?  Many officials in this administration as well as Members of Congress have simply said, ‘no,’ to any changes to our regulatory regime or Dodd-Frank.  I do not think we should take ‘no’ for an answer, and I do not plan to as Chairman of the Banking Committee. 

“I urge you to meet with Members of Congress and tell them why the status quo is not acceptable.   Tell them why changes are necessary to ensure a strong and growing economy in each of your respective states.

“In the coming months, I will continue to conduct oversight hearings and push regulators for increased accountability and appropriate supervision that promotes stability and growth.  I also hope to move forward commonsense reforms that foster a stable and strong banking system in the future.  With your help, this remains an achievable goal.  Thank you.”