Big-bank CEOs head to the lion's den
WASHINGTON — The chief executives of seven of the nation's largest U.S. banks are likely to be pressed on everything from guns to climate change to the risks of leveraged lending when they testify to Congress this week, but the overall impact of the hearing on industry policy may be limited to the headlines the grilling will generate.
“This hearing is likely to be more politics than policy given the combination of bright lights and populist undercurrents,” said Isaac Boltansky, a policy analyst at Compass Point Research & Trading, in a note to clients. “There are undoubtedly substantive issues that could be considered when the CEOs of the nation’s largest banks meet legislative leaders in a public forum, but we doubt that this hearing will provide anything beyond curt questions, corporate sound bites, and a continuation of the status quo.”
The hearing in the House Financial Services Committee on Wednesday comes almost a year after the passage of a bill to ease some of the Dodd-Frank Act’s regulations on community and regional banks. The bill pitted moderate Democrats against progressives, who argued it was a giveaway to Wall Street, though it had little to no impact on the banks testifying.
Those banks are Citigroup, JPMorgan Chase, Morgan Stanley, Bank of America, State Street, Bank of New York Mellon and Goldman Sachs. Notably absent is Wells Fargo, which faced a number of scandals for more than two years, and whose chief executive, Tim Sloan, testified before the same panel last month and soon after announced his departure.
“This should be an interesting hearing because there is headline risk and there could be some fireworks,” said Ian Katz, an analyst at Capital Alpha Partners. “But they don’t have the kind of red meat that they had with Sloan on the Wells Fargo scandals. It may not be as satisfying to some Democrats as maybe they hope.”
Where the hearing is lacking in terms of a clear legislative objective, it will be ripe with opportunities for lawmakers to raise flags on issues of diversity, deregulation and social policy. Given other recent hearings, members will almost certainly probe the CEOs on their firms’ servicing of political sensitive industries, including firearms, private prisons and marijuana.
“The practice of banks defining social policy could prove to be the most intriguing part of the hearing as attempts to placate the left will undoubtedly frustrate the right,” Boltansky said.
“There are going to be Republicans who push against banks curtailing the gun industry,” said Brian Gardner, a policy analyst at KBW. “Democrats will push on the other side of the gun debate.”
With a renewed emphasis on diversity and inclusion in financial services being pushed by Chairwoman Maxine Waters, D-Calif., the executives will likely be asked about lending practices, particularly in low-income communities.
Katz said those questions could be uncomfortable for the CEOs. But they will also likely try to highlight different task forces and efforts they’ve initiated to promote financial inclusion.
“You are going to hear about lending practices,” Katz said. “Are they lending enough to the poor, are they lending enough to disadvantaged communities?
“Those questions are uncomfortable and could put the executives on the defensive. They’ll talk about whatever committees or task forces or efforts they have. They’ll point out the people toward the top who are minorities."
Also potentially on the agenda is discussion of the risks of leveraged lending. Regulators have warned for years about the growing risk of the sector, but it has proven to be a consistent moneymaker for many institutions. A Washington Post report over the weekend highlighting concerns may put the issue back on lawmakers' radar.
Wells Fargo’s absence, meanwhile, could leave progressive Democrats in a tricky position of how to handle another high-profile executive: JPMorgan Chase CEO Jamie Dimon. He is testifying less than a week after he sent a letter to shareholders urging policymakers to ease capital rules for big banks.
“It should be very interesting, given Jamie Dimon’s comments this week, how progressive Democrats interact with him,” Gardner said. “It will be a difficult task if they try and take him down a notch.
“He can give a full-throated defense of capitalism, while at the same time acknowledging what he sees as flaws in a capitalist system. For newer members who are not as familiar with him as some of the more senior members would be, they need to tread carefully.”
But Katz said even if the executives use the hearing as an opportunity to defend capitalism, they likely won’t insist that big banks need additional reg relief.
“I don’t think they are going to aggressively pursue a deregulatory agenda in that committee,” Katz said. “They will all try to make that nuanced point that they don’t oppose regulation or smart regulation. When asked, some of them may make the case that the G-SIBs, for instance, are making more than enough, as far as a buffer and in capital requirements.” (G-SIBs are global systemically important banks.)
The CEOs testifying at the hearing aren’t entirely free from scandal, even without Wells Fargo in the room.
Members could target Goldman Sachs over for its alleged role in the 1MDB scandal. A former partner at the firm has been accused of laundering money from a Malaysian wealth fund, known as 1Malaysia Development Bhd, or 1MDB.
And they could also single out Citigroup, whose main bank subsidiary was fined $25 million to settle allegations that it failed to offer home loan discounts to thousands of borrowers, in violation of the Fair Housing Act.
“We expect a pronounced focus on Citigroup’s Fair Housing Act violation and Goldman’s Malaysian misadventure,” Boltansky said.
Still, the industry is confident in the progress it has made since the financial crisis.
“This is an opportunity for these industry leaders to have a constructive conversation with members of Congress regarding the very significant improvements to the financial system and the nation’s financial stability, which is a result on substantial efforts of lawmakers, and regulators and I think the institutions themselves,” said Kevin Fromer, president and CEO of the Financial Services Forum, which represents the eight largest U.S. banks.