Update 534 — Megabank CEOs Hit Hill:
Issues, Attacks Heard; Less So Consensus
The CEOs of the six “megabanks” testified before the Senate Banking and House Financial Services Committees this week, addressing issues ranging from the pandemic response to climate risk to racial justice to wage disparities. Some questions arose concerning the banking sector itself but fewer than usual, perhaps because the sector is producing a big and growing share of the nation’s wealth, perhaps because parties have forgotten how fast and badly things went in the last banking crisis now a dozen years ago.
Today, we focus on the banking issues that came up, as the bulk of the other issues are not within our ambit of expertise. The CEOs themselves seemed flummoxed by these and offered little new information. But relevant and important banking policy questions were raised and we review these below.
The administration released plans yesterday to submit a $6 trillion federal budget for FY22 to Congress after Memorial Day; we will cover the rewards and risks of a budget on this order.
Happy Memorial Day weekends all…
Bank CEO Hearings: Tough Questions, Little Substance
At Wednesday’s Senate Banking hearing, Chair Sherrod Brown criticized the banking industry for perpetuating inequality and called out the CEOs for high executive compensation and engagement in stock buybacks. Senate Democrats highlighted a drop in lending during the pandemic, but mostly asked about wide-ranging policy projects without an overarching narrative. In the House, Chair Maxine Waters and other Democrats focused on racial and economic inequality and climate risk.
Senate Republicans, led by Sen. Toomey, zeroed in on banks engaging in “stakeholder capitalism.” Toomey argued that banks should not make decisions based on “social policy objectives,” which he characterized as depriving shareholders of their property rights. Other Republicans tacked on, criticizing the banks for publicly opposing Georgia’s new voter law and institutions’ decisions to cut lending to fossil fuel and gun manufacturing companies. House Republicans engaged in similar rhetoric during Thursday’s hearing.
Banking Policy Issues
The hearings centered mostly on political point-seeking by both sides. But Democrats were able to call attention to a few important trends in the banking sector:
- Growth and Consolidation: The Big 6 weathered the pandemic better than most. Megabanks reported record profits in 2020, holding a combined $12.7 trillion in assets at the end of the year. The trend is only accelerating; in Q1 2021, these banks earned five to seven times more than they did the first three months of 2020. Near-zero interest rates and stimulus/spurred consumer spending and bank deposits. Fiscal stimulus improved the position of borrowers, reducing defaults and indirectly boosting banks’ balance sheets. Home lending increased 19 percent in 2020 as Americans migrated away from cities. With stocks rising by over 80 percent since March 2020, banks are benefiting from a multiplicity of factors while Main Street businesses continue to suffer.
Bank regulators have failed to stem the tide of mergers and acquisitions. Four of the six megabanks merged with or acquired other businesses in 2020, creating even more distance between themselves and the next largest banks. The six banks’ total assets grew by 26 percent over the past four years, with each now with over $1 trillion in assets.
- Banking Deserts: Despite accelerated growth in the banking sector, many Americans lack access to basic banking services. Thousands of bank branches around the country closed in the past decade, exacerbating bank deserts in underserved communities. A recent Federal Reserve study identified over 40 counties in the U.S. that had ten or fewer branches in 2012. They lost half of those branches within the next five years.
- Overdraft Fees: In the most effective moment of the hearings, Sen. Warren engaged in a sharp exchange with Jamie Dimon of JPMorgan Chase over the bank’s collection of nearly $1.5 billion in overdraft fees during the pandemic. Overdraft fees are at record levels. JPMorgan, Wells Fargo, and Bank of America each collected more than $1 billion in fees last year. Bank of America has settled a $75 million lawsuit for inappropriately charging multiple overdraft fees on a single transaction.
The Federal Reserve helped steward the economy through rough seas while also missing the mark on some issues. In terms of prudential regulation, bank executives and the general public should be thankful. Dodd-Frank provisions subjecting megabanks to capital, liquidity, and leverage requirements no doubt yielded stability and a much-needed sense of faith in the financial system. But the Fed’s emergency lending facilities achieved mixed results. The Main Street Lending Program and Municipal Liquidity Facility lent out only a fraction of their allocated funds.
A Progressive Banking Policy Agenda
Democrats can pursue substantive changes to financial policy to improve consumer protections, increase transparency, and improve accessibility in the banking sector. Such reforms include:
- Strengthening Oversight: The Trump administration deregulated the financial sector and lessened supervision of the big banks. President Biden can reverse this trend, in part by appointing vigilant regulators to key positions at the Federal Reserve and Office of the Comptroller of the Currency (OCC). A draft HFSC bill titled the Holding Megabanks Accountable Act would require regulators to outline how they would use their authorities to hold banks accountable for compliance failures resulting in consumer harm. Rep. Pressley’s Greater Supervision in Banking Act would require the largest bank holding companies to submit annual reports to the Fed on employee compensation, diversity, corporate governance, and other matters.
- Undoing Trump Regulations: Time is running out for the House to take up S.J. Res.15, which passed the Senate via the filibuster-proof Congressional Review Act earlier this month. This resolution would repeal the OCC’s “True Lender” rule, which allows nonbank lenders to circumvent state laws designed to keep interest rates low on consumer loans. The rule currently enables predatory lending and “rent-a-bank” maneuvers, harming both consumers and small businesses. Its repeal is a necessary step in reversing damage caused by the Trump Administration.
- Public Banking: Around 22 percent of Americans are either unbanked or underbanked, forcing millions to rely on costly financial services that lack proper oversight. With tens of thousands more bank locations shuttering since the pandemic, this problem will only grow larger. Congress should consider the following legislation:
- The Postal Banking Act (Sen. Gillibrand) would re-establish the postal banking system as an accessible alternative to private banking or payday lending. Under this proposal, individuals could deposit up to $20,000 at their post office, which would offer the same basic retail services as any bank.
- The Banking for All Act (Sen. Brown) would require Federal Reserve member banks to provide digital pass-through “FedAccounts” to individuals and businesses, without fees or balance requirements. Banks would partner with postal facilities to provide services accessible to all.
- The Public Banking Act (Rep. Tlaib) would create a federal framework to encourage the development of state and local public banks, including providing grants as start-up capital, allowing the Fed to provide low-cost lines of credit, and establishing an “incubator program” to give nascent public banks technical assistance.
Focusing on What Matters
It is hard enough to get busy members of Congress to focus on policy issues that don’t relate to their home districts or political prospects. But a panel of high-profile witnesses seen variously as goats or heroes is likely to produce an atmosphere more carnival than seminar. This week’s appearances before Senate Banking and House Financial Services did not disappoint if you seek theater. As for deliberation on policy issues that bear on our recovery and holding the custodians of banking accountable for their role in the recovery, it did do so, to some degree.