WASHINGTON, D.C. – U.S. Representative Ritchie Torres (NY-15), as a member of the House Financial Services Committee, today questioned key federal financial regulators as part of a statutorily required hearing entitled “Oversight of Prudential Regulators”.

Testimony was provided by four witnesses: the Hon. Michael Barr, Vice Chairman for Supervision, Board of Governors of the Federal Reserve System, the Hon. Martin Gruenberg, Chairman, Federal Deposit Insurance Corporation (FDIC), the Hon. Todd Harper, Chairman, National Credit Union Administration (NCUA), and the Hon. Michael Hsu, Acting Comptroller, Office of the Comptroller of the Currency (OCC).

The hearing examined supervisory and regulatory developments, rulemakings, and other activities the
agencies have undertaken since November 2022. Federal statute requires the Vice Chairman for
Supervision at the Fed to testify before the committee on a semiannual basis. The FDIC, OCC, and NCUA
do not have similar statutory requirements but were invited to participate as well.

Additional information can be found here.

VIDEO of Rep. Torres’s five minutes of questioning can be found here.

VIDEO of the full hearing can be found here.

A RUSH TRANSCRIPT of Rep. Torres’s remarks and questioning is below, as delivered:

REP. TORRES: Thank you, Mr. Chairman. This two-tiered banking system in the United States, if your bank is too big to fail, it has an implicit guarantee of unlimited deposit insurance. But if your bank is too small to have an implicit guarantee of unlimited insurance, and in some sense, it becomes too small to succeed. Too big to fail versus too small to succeed. Vice Chair Barr, how do you solve the problem of a two-tier banking system in the absence of unlimited deposit insurance?

THE. HON. MICHAEL BARR, Vice Chairman for Supervision, Board of Governors of the Federal Reserve System: Let me start by saying that overall, our banking system is sound and resilient. Our community banks are serving their community. They’re vibrant, they have been engaging and will engage in efforts to make sure that they are safe. All depositors should feel that they’re safe. If you look at the actions that banks have taken recently, attempt to make that the case and regulators have as well. So, I don’t think that we have a structure where depositors should feel differently about their deposits depending on their size.

REP. TORRES: But it’s fair to say there have been outsized deposit flows to the biggest banks, based on our perception of a two-tiered banking system?

MR. BARR: We did have a period of time in the acute stress moment in March where there were significant deposit outflows some regional institutions to larger institutions, with announcements that the agencies made and the establishment of the bank term funding program, deposit outflows for almost all institutions normalized to what they had been prior to that stressful incident.

REP. TORRES: I want to speak about a new source of stress. New York City has the largest commercial real estate market in the United States. Commercial real estate, particularly office, is confronting the worst of both worlds – declining property values and rising borrowing costs. The combination of work for home and rapidly rising interest rates and a calamity of office real estate, particularly class B and C. $270 billion in mortgages are reaching maturity in 2023 – a third of those mortgages are office. Vice Chair Barr or Chair Gruenberg, how high is the risk of commercial real estate causing a new wave of bank failures?

MR. BARR: We are looking carefully at commercial real estate risk. As you point out, there are some downtown office commercial real estate deals that are especially vulnerable. We are in a somewhat better position than in prior downturns in the sense that the loan to value ratios prior to the reset in pricing were muted. And so, the price resets that we’re likely to see, there’s more capital than there had been in prior crises to absorb that. There’s also a lot of heterogeneity around the United States in terms of how exposed different banks are to those risks. So, I would say…

REP. TORRES: Do you think any loan restructuring can or should be undertaken to prevent cascade of defaults in CRE market?

MR. BARR: I do think that banks already are in the process of working out commercial real estate loans where they see those risks in appropriate places.

REP. TORRES: For the Comptroller, before the creation of the OCC, there was no uniform national currency. Only a cacophony of currencies – each local bank could issue its own bank note, creating more confusion than clarity and ultimately, failure, hence the OCC. In January 2022, you gave a speech analogizing stablecoins to pre-Civil War bank notes. Left unmentioned in your speech, however, is the obvious difference between the two – the fact that stablecoins, particularly dollar stablecoins are pegged to a uniform national currency like the dollar. Is it fair to say a stablecoin system based on a uniform national currency like the dollar is qualitatively different from pre-Civil War banking system that had no basis in uniform national currency at all?

THE HON. MICHAEL HSU, Acting Comptroller, Office of the Comptroller of the Currency (OCC): Thank you for the question. So, I think the uniformity has multiple dimensions to it. So, one is what it’s pegged to– the one that you highlighted. I think that’s one form of uniformity that’s important.

REP. TORRES: Which was absent from the pre-Civil War banking system.

MR. HSU: Well, I think historians may debate that. I think the one in the free banking era, pre-Civil War, the issue where there was not uniformity was in the chartering and supervision of the different banks. I think that is the difference with stablecoins – the chartering, the supervision, and the standards to which stablecoins hold themselves are not consistent. And I think that that’s something to be wary of.

REP. TORRES: With respect to dollar stablecoins, or…?

MR. HSU: I think all stablecoins.

REP. TORRES: If you had a fully reserved stablecoin that’s pegged to the dollar, in your mind, it’s equivalent to a bank note that had no national banking system, no national uniform currency?

MR. HSU: Well, I think it’s important that’s one important element of having a stablecoin, but there’s other elements we want to pay attention to.

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