The U.S. Senate Committee on Banking, Housing, and Urban Affairs turned its eye toward supervision on Tuesday. During Tuesday’s hearing, titled “Guidance, Supervisory Expectations, and the Rule of Law: How do the Banking Agencies Regulate and Supervise Institutions?” the committee heard from Greg Baer, President and CEO of the Bank Policy Institute, Margaret Tahyar, Partner, Davis Polk & Wardwell LLP, and Patricia McCoy, Professor of Law, Boston College Law School.
“Banks receive significant forms of government support and benefits, including deposit insurance and access to the Fed’s discount window,” said Committee Chair Mike Crapo. “In exchange for these benefits, which ensure that American consumers have stable access to their deposits, banking agencies supervise banks and in return expect them to operate in a safe and sound manner.”
In her testimony, Tahyar discussed the “shadow” regulatory systems, or oral principles, not made public nor written down. This includes the practice of regulation by negotiation in the application process.
“An illustrative example, which can be used because it is one of the few to become public, comes from applications by Citicorp, J.P. Morgan, and Bankers Trust New York Corporation in 1987 to underwrite and deal in municipal revenue bonds, mortgage related securities and commercial paper,” Tahyar said. “During negotiations with agency staff, each applicant ‘voluntarily’ consented to market share limitations while protesting that they saw no need for them. When considered for review by the Federal Reserve Board of Governors, the banks admitted that they agreed to the limitations only to ‘expedite the applications.’”
In addition to discussing the supervisory practices of the banks during this hearing, Crapo and the Senate Banking Committee discussed how they are working to reform housing finance, and prevent another major crash.
During a hearing earlier this year, the federal banking agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency proposed a rule to "limit the interconnectedness of large banking organizations and reduce the impact from failure of the largest banking organizations." In yet another hearing this year, Crapo and the Committee discussed Crapo’s housing finance reform outline. Under the outline, Crapo said that the new housing finance reforms would protect taxpayers by reducing the systemic, too-big-to-fail risk posed by the current duopoly of mortgage guarantors