NCRC Just Economy Conference 2023 — Recorded March 30, 2023
FDIC Chairman Martin Gruenberg discussed the ongoing banking crisis and the upcoming final rule on CRA reform with NCRC President and CEO Jesse Van Tol at the National Community Reinvestment Coalition’s 2023 Just Economy Conference.
Speakers: FDIC Chairman Michael Gruenberg; NCRC President and CEO Jesse Van Tol
NCRC video transcripts are produced by a third-party transcription service and may contain errors. They are lightly edited for style and clarity.
JESSE VAN TOL: As many of you know, I’m sure that Marty Gruenberg, chairman of the FDIC needs no introduction. He’s had a busy week. He was, of course scheduled to speak to us yesterday, but had congressional testimony to do some six hours or so have it five hours five, what is five? Just five. So he’s heroic for being here today. It’s been an interesting time in the banking industry, and Marty, if I might, obviously, that’s the elephant in the room.
Let me ask you your perspective, about the current crisis, the current moment. you had given a speech in December sort of, in a sense warning about this not not the particulars, of course, but but the general problem, you’ve been dubious and skeptical of some, some crypto involved in the banking industry, there are aspects of this, that that have troubled you for some time. And I wonder if you might share your perspective with our audience?
MARTIN GRUENBERG: Well, Jesse, thank you, and good to see you all. And I’m really glad I could make it even if it’s at the end of the program. And thank you all for sticking around. I really, I really appreciate it. You know, I did spend the last two days in congressional hearings on the subject. So if you want to be bored, I do have a pretty lengthy testimony that sort of laid out, you know, some of the background to the this recent episode, I would just say, to me, what this episode suggests is that institutions a lot smaller than we’ve generally considered as posing a risk to financial stability, can, in the right circumstance, really have an impact on the system. And, you know, we’ve generally in the past been focused on the very largest global systemically important banks. But in this episode, we really had two institutions. Frankly, in the lower end of the spectrum, in terms of size, in our regional banks, you know, one institution 200 billion, the other 100, whose failures really posed a risk of contagion to other institutions, with potential destabilizing effects on the system. And that’s really what brought about the actions that were taken, particularly the the decision to allow these banks to fail, which is really important. I mean, worth keeping in mind that these two institutions failed. There, shareholders lost their investment, their creditors, took losses, in accordance with the losses of the firm, their boards and management were, were removed. And, and, and their conduct will be investigated by the FDIC that’s required by law. And if any misconduct occurred, we have authorities to bring to take action in regard to them. And in terms of the the only thing that was done was protecting the uninsured deposits at these two institutions, because we were concerned about the, frankly, the knock on effects at other institutions. But any cost of the Deposit Insurance Fund from covering those uninsured deposits, will have to be paid for by a special assessment that the FDIC is required by law to impose on the banking industry. So we think the measure did provide accountability for these failed institutions, but also will protect and stabilize the system. And I will say that I’ll just conclude on this because I know we’ve obviously got other subjects to talk about. It has significant policy implications, that if the failure to banks of this size can have this kind of potential consequence. It really raises some basic questions for us as bank regulators on the prudential requirements that these institutions are subject to relating to capital and liquidity and interest rate risk and the resolution resources these institutions need to maintain in order to be able to bail in an orderly way, including potentially a long term debt requirement to absorb losses and resolution. It’s a complicated set of issues. I do think this was a consequential episode, we’re going to need to look carefully at the experience here. And both we and the Fed are going to be doing reviews of these two failed institutions. The FDIC is going to undertake a comprehensive review of our deposit insurance system, to think through the implications of what occurred here for the future of deposit insurance in the United States. And I think we’ll have the opportunity also to look at some of the key prudential requirements for institutions in this category, and see if changes should be made in light of this episode. So, you know, that’s my short five minute version of this thing I have gone on for several hours over the last couple of days. So I’ll spare you that. But this was a consequential episode. And, and we’re, I think we’re gonna have to learn from it.
VAN TOL: Thanks, Marty. And if I if I might just say, more of a comment than a question. I mean, in some sense, the system worked. Obviously, there are consequences, as you pointed out their implications. But But you and I were present for the financial crisis. This was not a moment of going to Congress, risking failure of some intervention measure. You took action, as you said, You wiped out the management that didn’t happen, that’s going to last. A lot of the critique from our perspective was in the bailouts of the financial crisis, you know, sort of management was made whole shareholders were made whole customers were not, and in this case, is really the opposite, isn’t it?
GRUENBERG: No, I think that’s an important point. I mean, frankly, and I was around in 2008. So it dates me a little bit. But, you know, in 2008, the public support was provided to the to the biggest institutions, on what we call an open institution basis, meaning we provided public support that protected the shareholders, and the creditors, and the boards and management of these institutions. And they were not allowed to fail. And that is an important distinction with what occurred here, that these two banks did fail, as I pointed out, there was accountability for the shareholders, the creditors, the boards and the management. And the costs will ultimately be borne by the banking industry. So I, you know, I think we, in a difficult circumstance, made some reasonable judgments to impose accountability on these banking institutions, at the same time, helping to stabilize the system, and to protect the broader public interest. So I think they were a reasonable set of judgments.
VAN TOL: And so obviously, there’s, you know, a couple of emergency call consolidations that have happened here, sort of gets to my next question, really around bank merger review, and we would anticipate potentially some further consolidation in the industry, whether whether that’s an emergency situation, or not just the economics of banking, what this moment means for smaller banks. And one of the things, you know, in the financial crisis, and now that that sometimes gets sort of pushed to the backburner is, is the whole convenience and needs factor, the fairness factor? You know, it’s our view, looking at banking law, that there’s really a requirement that the public benefit and benefit from the consolidation of merging institutions, really written in some fundamental ways into banking law. And yet, in some cases, little evidence that that’s happened, you know, deposits paid on savings account had been, until recently, very low, the racial wealth gaps remained and have widened and millions remain unbanked. It’s not clear that we’re seeing strong competition or increasing competition leading to benefits for customers or that the kinds of things that banks can do at greater scale is being passed on to customers. So, you know, I think our members would love your view of the issues. How do we think about bank mergers, especially in light of potentially a wave of consolidation coming down the pike?
GRUENBERG: Well, you know, as you all know, before the recent few weeks we the banking agencies had on our agenda and it’s very much still on our agenda to undertake a review of how we consider merger applications, bank merger applications under the bank merger act. I think the three banking agencies, the Fed and the OCC, as well as the FDIC, are in agreement, we have not reviewed how we consider these applications in over 25 years. So it’s really timely to do. And we want to do this in conjunction with the Department of Justice, by the way, because DOJ has an important statutory role under the law to look at, in particular, the in particular the competition impact of these mergers, which is also very important to communities, by the way. So we are undertaking a review. And Jesse mentioned, you know, there are three statutory factors, we have to look at impact on competition, impact on safety and soundness and Prudential considerations, convenience and needs. And then a fourth added by the Dodd Frank Act, on financial stability. And all four factors, I think could benefit from a review as to how we apply them. And I think in in different ways, each of them has consequence for local communities. But clearly the one that most directly affects how banks serve local neighborhoods, and how a merger can impact access to banking services, is in the convenience and needs statutory factor. And I think all three of our agencies see a lot of opportunity there, to take a fresh look at the merger experience, how it impacts communities that are served by the two institutions that are proposing to be to be consolidated. And look at consumer compliance, look at community reinvestment, and not just backward looking, but in some sense, forward looking as well. How will this merger if it moves forward, prospectively impact access to banking services in the communities served by these institutions? So I think there’s a real opportunity here, I think there’s alignment among the banking agencies to pursue this. And and I think it’s going to be pretty high on our agenda. This year.
VAN TOL: I’m gonna ask the question that this audience cares quite a lot about and that’s about CRA, and I’m going to put it in light of recent events. So it’s not a question about recent events. But but just obviously, you’ve been busy with a few things. And we know you’re still working on a final CRA rule. And I guess the thing I want to point out, of course, when CRA was passed sensibly, the quid pro quo was, listen, you’re getting deposit insurance, you’re getting really at a more fundamental level that’s charter sanctioned by the government, the sort of quid pro quo is, is is you have to serve communities, you have to serve all communities equally, especially considering our history, history of redlining. You know, I guess I’d ask you one, does the current moment impact the timing of your rule or any way in which you think about CRA and when can we expect to potentially see something here?
GRUENBERG: So the short answer, I believe, is no. That this the issues we’re dealing with at the moment, I don’t believe will impact our timeline on completing the rulemaking. I mean, that has been as as you will know, an enormous priority for us and the three banking agencies are very focused on this. Our staffs are have been working, I will really give them credit, putting an enormous an enormous effort both in getting first the proposed rulemaking out and now finalizing the rulemaking tremendous dedication and and genuine passion, they understand the importance of this. There’s nothing else we can do that will we being the banking agencies can do that will actually impact local communities and the welfare of of households and families then this rulemaking, and I think we all we all, keenly feel that. So we’re, I do not think we’ll be delayed by this. And I’ll give you my best guess. But you know, this is not an exact science. If I may say, mid year, we want to get the final rule done.
VAN TOL: Thanks, Marty. Yeah. So Marty, earlier today, we heard from CFPB director, Rohit Chopra, who announced the 1071 rule, small business, lending and data collection, and he framed it in the context of, of both Honda and NCRA. Really, that data, in some ways goes hand in glove with examination with CRA, which we think of as an accountability law. How do you intend to incorporate 1071 day that not just in the CRA but supervisory activities as well? Can you speak to the importance of it?
GRUENBERG: Yeah, no look terribly important, mandated by law. It this will give us a line of sight into small business lending, and for the first time be able to break down that lending demographically. So it’s a whole new data set for us to utilize in our examination process for fair lending, and be hugely important for the implementation of the new CRA rule. I mean, the lending evaluated under CRA, in particular focuses on mortgages and small business. And so 1071 will be foundational to provide us the granular data on small business lending that will allow us to undertake an effective implementation of the new rulemaking. And it’ll give us an important line of sight, though, that we haven’t had before. So we’re looking forward to utilizing it. It’s really very much built into our expectations for the rulemaking process for CRA. And we think this is really a very important step. And I commend the CFPB for for completing the rulemaking.
VAN TOL: Absolutely. One of our key issues, Marty issue, the racial wealth divide, which persists and even has gotten wider, and I put it in the context of the previous question, you know, as humble was important, understanding, you know, who is getting loans and homeownership, the racial homeownership gap? You know, sort of critical to the racial wealth divide. So to his business ownership, important in that sense, but beyond that, you know, what do you see as the role of the bank regulators, and in particular, the FDIC, in in addressing the racial wealth divide?
GRUENBERG: Well, I mean, looking at the things we can impact as bank regulators. The most obvious that comes to mind, frankly, is fair lending enforcement, which I think is is fundamental. In terms of trying to address this issue. Discrimination in lending, has historically had a foundational impact on differentials in wealth, because it is an entry point to access to credit, the ability to own a home, the ability to start a business, the ability to build wealth, and discrimination in lending has been a core obstacle that has put us in the position that we’re in and so So from looking at the things bank regulators can impact that’s the most first and most obvious thing that comes to mind. And second, and complementary to that is is cra, that this new CRA rulemaking, at its core, is going to expand the reach of CRA to not only communities where banks have a physical presence, that under the proposed rule and don’t want to jump ahead, but also to communities where banks are doing significant lending, where they may not have a significant presence. So it’ll expand the reach. And we’re now in this goes to the, to the 1071 point, we’ve now got a set of metrics to use to evaluate bank performance in a more systematic way than we’ve had in the past, we think this will strengthen the effectiveness of CRA and from the industry standpoint, you know, may provide a both transparency and predictability that the the banks also value so terribly important. And then a third issue that has been under the radar screen, but I give a lot of credit. And I’m sure you all are familiar with the interagency paved Task Force on an appraisal bias, which I think has been an underappreciated vehicle for discrimination in homeownership. And there’s really been a effort across a range of agencies, including all the banking agencies to focus attention on appraisal bias, which is a particularly challenging issue. And it’s one of the reasons, frankly, it is a vehicle for discriminatory practices, because it is difficult to get at. And two things that the banking agencies are looking at that would be relevant, would one the rule Rulemaking looking at these asset valuation models, and building into those models, a component relating to fair lending, to impact to evaluate how these models could have the implications, the the impact these models can have, potentially, for fair lending. And also, we’re looking at guidance, homeowners have the ability to request, if they feel that the appraisal on their home really has not been fair, they have the ability to request a reconsideration of the value of the appraisal, which can be a meaningful way for them to get a review of the purpose of the appraisal that’s been made, and perhaps a better outcome for them. There are a range of things. And we’re also by the way, building in to our examination, our compliance examination process and our fair lending review, appraisal bias, which is another way we can try to get at this issue. So and I think all of these are relevant, frankly, to the racial wealth gap. And these are things that fall within the ability of banking agencies to do that, that could have an impact.
VAN TOL: Great, final question, Chairman. And it relates to climate change, but I’m going to put it in a slightly broader perspective, you can think of pretty much every banking crisis that we’ve experienced in in some senses. Peter, people who are looking at short term problems, and short term risk and short term profitability, instead of a longer term perspective, certainly think about rising interest rates and managing interest rate risk and inflation risk that’s going up up and up and staying up for a long time. I think that contributed to Silicon Valley, certainly, but But you also can see that within, you know, context of, of, you know, think of that in terms of the mortgage crisis, people were making these loans and selling them off, so they didn’t care. Really, that was foundational to sort of the ESG movement and perspective was a notion of thinking about some things that are longer term risks, problems for profitability in the long term problems for the banking sector, in the long term. How do you think about from a regulatory perspective that the risk of climate change in the banking system has become politicized but it is a real risk and real concern from a banking perspective?
GRUENBERG: And no, I would very much agree with that. And when I say we, I think the three banking agencies are in alignment that. And I’ve said this to banking groups, you know, the FDIC is not responsible for environmental policy. And we don’t get to tell banks who to lend to. But we do have serious responsibility for financial risk. And there are genuine financial risks that are brought about by climate change. And you don’t have to be a climate scientist to understand that the frequency and intensity of climate events are increasing. And that there is an underlying transition taking place in our economy, from reliance on carbon emitting sources of energy to reliance on lower carbon emitting sources of energy. And both of those changes have consequences for banks, and for the financial system, and for financial risk. And we as regulators, and bankers themselves need to understand the consequences of those risks for the management with those institutions, and for their safety and soundness, and for the services they provide to communities.