[House Report 115-574]
[From the U.S. Government Publishing Office]
115th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 115-574
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TO PLACE REQUIREMENTS ON OPERATIONAL RISK CAPITAL REQUIREMENTS FOR
BANKING ORGANIZATIONS ESTABLISHED BY AN APPROPRIATE FEDERAL BANKING
AGENCY
_______
February 23, 2018.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 4296]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 4296) to place requirements on operational risk
capital requirements for banking organizations established by
an appropriate Federal banking agency, having considered the
same, report favorably thereon with an amendment and recommend
that the bill as amended do pass.
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. OPERATIONAL RISK CAPITAL REQUIREMENTS FOR BANKING
ORGANIZATIONS.
(a) In General.--An appropriate Federal banking agency may not
establish an operational risk capital requirement for banking
organizations, unless such requirement--
(1) is based primarily on the risks posed by a banking
organization's current activities and businesses;
(2) is appropriately sensitive to the risks posed by such
current activities and businesses;
(3) is determined under a forward-looking assessment of
potential losses that may arise out of a banking organization's
current activities, businesses, and exposures, which is not
solely based on a banking organization's historical losses; and
(4) permits adjustments based on qualifying operational risk
mitigants.
(b) Definitions.--For purposes of this section:
(1) Appropriate federal banking agency.--The term
``appropriate Federal banking agency''--
(A) has the meaning given such term under section 3
of the Federal Deposit Insurance Act; and
(B) means the National Credit Union Administration,
in the case of an insured credit union.
(2) Banking organization.--The term ``banking organization''
means--
(A) an insured depository institution (as defined
under section 3 of the Federal Deposit Insurance Act);
(B) an insured credit union (as defined under section
101 of the Federal Credit Union Act);
(C) a depository institution holding company (as
defined under section 3 of the Federal Deposit
Insurance Act);
(D) a company that is treated as a bank holding
company for purposes of section 8 of the International
Banking Act; and
(E) a U.S. intermediate holding company established
by a foreign banking organization pursuant to section
252.153 of title 12, Code of Federal Regulations.
PURPOSE AND SUMMARY
Introduced by Representative Luetkemeyer on November 8,
2017, H.R. 4296 restricts federal banking agencies from
establishing operational risk capital requirements for banking
organizations unless they are sensitive to, and based on, an
organization's current activities or businesses; are determined
by a forward-looking assessment of an organization's potential
losses and not based solely on its historic losses; and allow
for adjustments based on qualifying operational risk mitigants.
BACKGROUND AND NEED FOR LEGISLATION
In response to the 2008 financial crisis, the Basel
Committee on Banking Supervision (Basel Committee), of which
the United States is a member, agreed to modify internationally
negotiated bank regulatory standards known as the Basel Accords
to increase bank capital requirements and other regulatory
measures. The Basel Accords are international banking
regulations negotiated between participating regulators, but
they rely on local implementation to take effect in a nation's
financial regulatory regime.
The Dodd-Frank Wall Street Reform and Consumer Protection
Act (P.L. 111-203) codified the Basel III capital standards and
the U.S. federal banking regulators--including the Federal
Deposit Insurance Corporation (FDIC), Board of Governors of the
Federal Reserve System (Federal Reserve), and Office of the
Comptroller of the Currency (OCC)--promulgated rules to
implement these standards on July 9, 2013.
As defined by the Basel Committee, operational risk refers
to ``. . . the risk of loss resulting from inadequate or failed
internal processes, people and systems or from external events
. . . [t]his definition includes legal risk, but excludes
strategic and reputational risk.''\1\ In other words, a bank's
own direct actions or relationships could lead to losses, and
therefore should be accounted for by regulators when
establishing capital requirements to ensure financial
stability.
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\1\https://www.bis.org/publ/bcbs195.pdf.
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In October 2013, the OCC, FDIC, and Federal Reserve, in
conjunction with the Treasury Department, published a final
rule ``. . . that requires some and permits other qualifying
banks to use an internal ratings-based approach to calculate
regulatory credit risk capital requirements and advanced
measurement approaches to calculate regulatory operational risk
capital requirements.''\2\ The rule took effect on January 1,
2014.
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\2\https://www.federalreserve.gov/reportforms/formsreview/
BaselIII_20131011_ffr.pdf.
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Because operational risk capital requirements substantially
dictate a bank's capital levels, it is important that any
future Basel approach-turned-U.S. rule does not unnecessarily
increase capital requirements at the expense of consumers'
credit needs. Unreliable and under-calibrated calculations
could result in hundreds of billions of dollars in capital that
could be more efficiently deployed to meet consumers' credit
needs.
All banking organizations should adopt policies and
procedures to identify and manage operational risk that are
appropriate based on their size, activities, and product
offerings in order to ensure a stable and resilient financial
industry. But, requiring banking organizations to ``look back''
and hold operational risk capital against discontinued business
activities or products distorts the risk environment and may
force misguided over-retention of capital. This over-retention
of capital is a problem because it reduces a bank's lending
capacity, which in turn harms both consumers and businesses of
all sizes as it drastically limits the amount of available
credit in the marketplace.
H.R. 4296 limits the imposition of operational risk capital
requirements to a bank's current activities and businesses and
permits adjustments for operational risk mitigants. Doing so
will ensure that banks have the proper incentives financial to
mitigate operational risk, and if a bank exits one or more
business lines, the regulatory response does not increase
complexity and retain the backward-looking nature of current
operational risk capital requirements. H.R. 4296 will ensure a
vibrant consumer credit market.
HEARINGS
The Committee on Financial Services held a hearing
examining matters relating to H.R. 4296 on April 26, 2017 and
April 28, 2017.
COMMITTEE CONSIDERATION
The Committee on Financial Services met in open session on
November 14, 2017, and November 15, 2017, and ordered H.R. 4296
to be reported favorably to the House without amendment by a
recorded vote of 43 yeas to 17 nays (Record vote no. FC-108), a
quorum being present.
COMMITTEE VOTES
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
sole recorded vote was on a motion by Chairman Hensarling to
report the bill favorably to the House without amendment. The
motion was agreed to by a recorded vote of 43 yeas to 17 nays
(Record vote no. FC-108), a quorum being present.
COMMITTEE OVERSIGHT FINDINGS
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the Committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
PERFORMANCE GOALS AND OBJECTIVES
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 4296
will restrict banking regulators from establishing operational
risk capital requirements for banking organizations unless they
are sensitive to, and based on, an organization's current
activities or businesses; are determined by a forward-looking
assessment of an organization's potential losses and not based
solely on its historic losses; and allow for adjustments based
on qualifying operational risk mitigants.
NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
CONGRESSIONAL BUDGET OFFICE ESTIMATES
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, February 21, 2018.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 4296, a bill to
place requirements on operational risk capital requirements for
banking organizations established by an appropriate Federal
banking agency.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Kathleen
Gramp and Sarah Puro.
Sincerely,
Keith Hall,
Director.
Enclosure.
H.R. 4296--A bill to place requirements on operational risk capital
requirements for banking organizations established by an
appropriate Federal banking agency
Summary: H.R. 4296 would direct federal banking regulators
to revise one of the formulas used to calculate the minimum
amount of capital held by certain large, systemically important
banks. Specifically, the bill would change the method banks use
to estimate operating risk--the risk of losses stemming from
inadequate or failed internal controls, fraud or errors caused
by people and systems, or external events such as cyberattacks.
Regulators currently require banks to estimate operating risk
based in part on historical experience. Under the bill, such
risk would be calculated largely on the basis of forward-
looking models that reflect each bank's business activities.
CBO estimates that enacting H.R. 4296 would increase the
deficit by $22 million over the 2018-2027 period. That figure
includes an increase of $26 million in direct spending and an
increase of $4 million in revenues. Because enacting the bill
would affect direct spending and revenues, pay-as-you-go
procedures apply.
CBO estimates that enacting H.R. 4296 would not increase
net direct spending or on-budget deficits by more than $2.5
billion in one or more of the four consecutive 10-year periods
beginning in 2028.
H.R. 4296 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act (UMRA).
Estimated cost to the Federal Government: The estimated
budgetary effect of H.R. 4296 is shown in the following table.
The costs of the legislation fall within budget function 370
(advancement of commerce).
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By fiscal year, in millions of dollars--
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2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2018-2022 2018-2027
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INCREASES IN DIRECT SPENDING
Estimated Budget Authority.................................. 0 1 2 3 4 4 3 3 3 3 10 26
Estimated Outlays........................................... 0 1 2 3 4 4 3 3 3 3 10 26
INCREASES IN REVENUES
Estimated Revenues.......................................... 0 0 0 0 0 0 1 1 1 1 0 4
NET INCREASE IN THE DEFICIT FROM INCREASES IN DIRECT SPENDING AND REVENUES
Effect on the Deficit....................................... 0 1 2 3 4 4 2 2 2 2 10 22
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Basis of estimate: The budgetary effects of the bill stem
from the small chance that the Federal Deposit Insurance
Corporation (FDIC) would incur additional costs to resolve
failed financial institutions. For this estimate, CBO assumes
that the bill will be enacted near the end of 2018.
CBO's estimates for H.R. 4296 are based on the analysis
underlying the projections for deposit insurance in its June
2017 baseline. Those projections incorporate a small
probability of a financial crisis in any given year during the
projection period and the more likely scenario of an average
number of bank and credit union failures in any given year. As
a result, the estimated cost of this legislation represents a
weighted probability of outcomes--including some cases for
which the probability is very low but for which the costs to
the Deposit Insurance Fund (DIF) or the Orderly Liquidation
Fund (OLF) are much larger than in average years. Costs
incurred by the DIF are recovered over time by assessments on
insured depository institutions (IDIs). Fees paid to recover
costs incurred by the OLF are classified in the budget as
revenues. Both funds are administered by the FDIC.
CBO anticipates that the directives in H.R. 4296 would
apply to around 10 bank holding companies and their insured
depository subsidiaries that currently estimate capital
requirements using what the FDIC refers to as advanced
approaches. The net effect of implementing the bill would vary
among those institutions because the measure that reflects
operating risks is only one of many methods used by federal
regulators to determine how much capital a bank must hold.\1\
CBO estimates that in fiscal year 2017, the advanced-approaches
formula was used to determine capital requirements for
companies that accounted for about 20 percent of the assets
held by bank holding companies subject to that standard and for
about 5 percent of the assets held by IDIs.
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\1\Regulators use several other methods of assessment, including
information on a bank's standard measure of risk-weighted assets, a
bank's assets adjusted for off-balance sheet activities, and the level
of assets needed to absorb losses during times of stress.
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Using studies by the Federal Reserve and others, CBO
anticipates that changing to forward-looking models as required
by H.R. 4296 probably would lower firm's estimates of their
operating risks, thereby lowering the amount of capital they
would be required to hold.\2\ Although there is considerable
uncertainty surrounding the magnitude of such changes, CBO
expects that the net change would be limited to the difference
in capital identified by the new method and that identified by
existing regulatory formulas. On balance, CBO estimates that,
relative to current practice, enacting the bill would reduce
the total capital held by the all of the large bank holding
companies by less than 2 percent and for the IDIs subject to
the standard by less than 0.5 percent.
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\2\See Marco Migueis, Forward-Looking and Incentive-Compatible
Operational Risk Capital Framework, Finance and Economics Discussion
Series 2017-087 (Federal Reserve Board, May 2017), https://doi.org/
10.17016/FEDS.2017.087 (PDF, 383 KB).
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Changes in a bank's capital requirements may affect its
probability of failure or the magnitude of future losses, which
in turn may affect costs incurred by the DIF or the OLF. Most
of the costs of enacting the legislation would be incurred by
the OLF, CBO estimates, because enacting the bill would have a
greater effect on the capital held by bank holding companies.
(The OLF is authorized to resolve financial difficulties for
large, systemically important financial firms that become
insolvent or are in danger of becoming insolvent.) CBO
estimates that enacting the bill would increase the deficit by
$22 million, or by roughly 0.03 percent of CBO's June baseline
projection of the 10-year cost of the FDIC's programs. That
amount includes an increase in direct spending of $26 million
and an increase of revenues of $4 million. CBO estimates that
most of those costs would be offset after 2027 by increases in
fees paid by financial firms.
Pay-As-You-Go considerations: The Statutory Pay-As-You-Go
Act of 2010 establishes budget-reporting and enforcement
procedures for legislation affecting direct spending or
revenues. The net changes in outlays and revenues that are
subject to those pay-as-you-go procedures are shown in the
following table.
CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 4296, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON FINANCIAL SERVICES ON NOVEMBER 15, 2017
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By fiscal year, in millions of dollars--
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2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2018-2022 2018-2027
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NET INCREASE IN THE ON-BUDGET DEFICIT
Statutory Pay-As-You-Go Impact.............................. 0 1 2 3 4 4 2 2 2 2 10 22
Memorandum:
Changes in Outlays...................................... 0 1 2 3 4 4 3 3 3 3 10 26
Changes in Revenues..................................... 0 0 0 0 0 0 1 1 1 1 0 4
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Increase in long-term direct spending and deficits: CBO
estimates that enacting the legislation would not increase net
direct spending or on-budget deficits by more than $2.5 billion
in any of the four consecutive 10-year periods beginning in
2028.
Mandates: H.R. 4296 contains no intergovernmental or
private-sector mandates as defined in UMRA.
Previous CBO estimate: On May 18, 2017, CBO transmitted a
cost estimate for H.R. 10, the Financial CHOICE Act, as ordered
reported by the House Committee on Financial Services on May 4,
2017. H.R. 4296 is identical to section 152 of H.R. 10. The CBO
cost estimates are different for this provision, however,
because H.R. 10 also would eliminate the OLF. As a result,
CBO's cost estimate for section 152 of H.R. 10 did not include
any costs to the OLF.
Estimate prepared by: Federal costs: Kathleen Gramp and
Sarah Puro; Mandates: Rachel Austin.
Estimate approved by: H. Samuel Papenfuss; Deputy Assistant
Director for Budget Analysis.
FEDERAL MANDATES STATEMENT
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995.
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
ADVISORY COMMITTEE STATEMENT
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
APPLICABILITY TO LEGISLATIVE BRANCH
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
EARMARK IDENTIFICATION
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
DUPLICATION OF FEDERAL PROGRAMS
In compliance with clause 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
DISCLOSURE OF DIRECTED RULEMAKING
Pursuant to section 3(i) of H. Res. 5, (115th Congress),
the following statement is made concerning directed
rulemakings: The Committee estimates that the bill requires no
directed rulemakings within the meaning of such section.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Operational risk capital requirements for banking
organizations
This section prohibits a Federal banking agency from
establishing an operational risk capital requirement for
banking organizations, unless such a requirement:
(1) is based primarily on the risks posed by a
banking organization's current activities and
businesses;
(2) is appropriately sensitive to the risks posed by
such current activities and businesses;
(3) is determined under a forward-looking assessment
of potential losses that may arise out of a banking
organization's current activities, businesses, and
exposures, which is not solely based on a banking
organization's historical losses; and
(4) permits adjustments based on qualifying
operational risk mitigants.
This section also defines the various terms utilized within
the Act.
CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
H.R. 4296 does not repeal or amend any section of a
statute. Therefore, the Office of Legislative Counsel did not
prepare the report contemplated by clause 3(e)(1)(B) of rule
XIII of the Rules of the House of Representatives.
MINORITY VIEWS
H.R. 4296 would place new, statutory conditions on how
regulators implement a specific capital requirement relating to
operational risk, and if the conditions are not satisfied, then
the capital requirement would be prohibited. Operational risk
capital is required to be held by a dozen or so of our largest,
internationally-active megabanks. And, it relates to
operational risks, such as legal liability and operational
breakdowns of these megabanks. These operational failures
include JPMorgan's ``London Whale'' trades and Wells Fargo's
long list of violations that have ripped off millions of
consumers, including those harmed by their fraudulent account
scandal.
These same large Wall Street banks would benefit from
changes to this capital requirement, which cause harm not only
to consumers but the broader economy. According to Stanford
professor, Anat Admati, ``the fines banks paid in the past may
well be indicative of future risk. There are enormous rates of
recidivism in corporate misconduct.''
According to a letter submitted to the Committee opposing
H.R. 4296 as a big bank giveaway, Americans for Financial
Reform wrote, ``operational risk capital is a new capital
protection instituted at banks with over $250 billion in
assets, to protect against the possibility that poor risk
management or illegal behavior by bank employees will cause
significant losses.'' These critical areas, include past and
present cyber risk, rogue traders, risk management, and legal
judgements. In conclusion, AFR wrote, ``HR 4296 is a
transparent attempt to pressure regulators to reduce capital
protections at the nation's largest banks, and must be
rejected.''
Furthermore, according to bank regulators and the Treasury
Department, efforts have been underway internationally to make
administrative and technical refinements to the operational
risk capital requirement, and we should expect changes in the
near future. Congress should closely monitor these developments
to see if regulators strike the right balance, and if not, then
consider a legislative response.
Thus, H.R. 4296 is premature and possibly short-sighted to
enact statutory conditions regarding the operational risk
capital requirement. This framework would diminish, instead of
strengthen, the incentive for megabanks to maintain stronger
internal controls and risk management systems.
After all, there has been tremendous progress since the
financial crisis of 2007-2009 to create a far better
capitalized banking system. As required by the Dodd-Frank Act--
and in implementing the international Basel III capital
accords--our banking regulators have required banks to maintain
more and higher quality capital. Republicans have long argued
that these financial reforms would crush lending and harm banks
and the broader economy. However, the facts tell a different
story. Bank profits reached an all-time record high in 2016 and
business lending is up 75 percent since 2010. All this has
happened while U.S. banks added more than $700 billion in
capital to absorb potential losses. According to Third Way,
these reforms, including capital rules that have made our
financial system safer, are estimated to add $351 billion to
the U.S. economy over 10 years.
For these reasons, we oppose H.R. 4296.
Maxine Waters.
Stephen F. Lynch.
Michael E. Capuano.
Vicente Gonzalez.
Emanuel Cleaver.
Al Green.
Gwen Moore.
Daniel T. Kildee.
[all]