On March 28, 2017, the Senate Banking Committee held a hearing entitled “Fostering Economic Growth: The Role of Financial Companies.” Sen. Mike Crapo (R-Idaho), the Chairman of the Committee, delivered opening remarks emphasizing the contribution of financial companies to the economy. He noted that smaller financial companies are underperforming compared to larger companies in part due to “their limited access to credit,” which he attributed to post-financial crisis regulation. Sen. Crapo expressed support for President Donald Trump’s executive orders requiring an evaluation of the current regulatory framework and outlining principles for financial regulation (which we have discussed in a previous post). Ranking Member Sen. Sherrod Brown (D-OH) offered a different perspective in his opening statement, praising financial regulatory reform as making the financial system more stable, and emphasizing that “finance is a means to an end.”

Below is a summary of the prepared witness statements:

Hon. Robert Heller (Former Governor, Board of Governors of the Federal Reserve System): Governor Heller testified to the vital role financial companies play in the broader economy, including the benefits they provide to consumers. He provided an overview of how financial regulation and legislation have shaped the financial system. He emphasized that strong capital requirements are more effective than layers of financial regulation in making financial institutions more stable. He advocated reducing regulation and simplifying regulatory structures.

Hon. Donald Powell (Former Chairman, Federal Deposit Insurance Corporation): Chairman Powell offered several “guiding principles” for balancing financial regulation and growth, including: (1) Bank regulators should be independent and non-political; (2) Leadership of bank regulators should be able to work with all stakeholders without compromising the regulators’ missions; (3) Disputes between banks and regulators should be resolved through a transparent processes; (4) Rulemaking should be transparent and based on an understanding of the banking system; and (5) Regulators should be accountable. Powell also noted that the hallmarks of entities that survive banking crises include sufficient capital, liquidity to support unexpected events, and proper management.

Hon. William Spriggs (Professor of Economics, Howard University; Chief Economist, AFL-CIO): Professor Spriggs focused on the role of financial markets in contributing capital to improve worker productivity and providing fair and equitable access to liquidity. He argued that the government should invest in and protect workers in order to reduce income inequality, advance labor productivity, and promote economic growth.

Ms. Deyanira Del Rio (Co-Director, The New Economy Project): Ms. Del Rio focused on the need for fair banking and access to non-exploitative credit for all communities. In particular, she emphasized the disproportionate costs of the financial crisis on communities of color, which she attributed to predatory lending, the securitization of high-risk loans, and unfair debt collection practices. She advocated for strengthening prudential regulations and consumer protections, and maintaining the independence of the Consumer Financial Protection Bureau. She opposed the potential de-funding of community development financial institutions under the Administration’s proposed budget.

Mr. Thomas C. Deas Jr. (Chairman, National Association of Corporate Treasurers): Mr. Deas focused on risk management activities of end-user companies, such as collecting payments and transferring cash, borrowing, investing, and hedging financial risks. He cautioned that regulatory changes intended to strengthen the financial markets can have unintended impacts on end-users of financial services and products. For example, he noted that: (1) capital requirements on financial firms increase cost of business for end-user companies in over-the-counter derivative transactions; (2) the lack of cross-national regulatory harmonization complicates compliance for end-users; (3) proposed risk-weighting on some physical commodities hedges would increase costs for end-users; and (4) the requirement that net asset values of non-government money market mutual funds float makes it difficult to track and price shares.

Following the witness statements, committee members questioned the witnesses concerning the costs and benefits of the Dodd-Frank Act, its impact on community banks and consumers, and the broader role of the financial sector in the economy.