WASHINGTON — Three Trump administration nominees chosen to fill bank regulatory posts faced a thorough grilling on Capitol Hill Tuesday, though Democrats reserved much of their fire for the president’s nominee to the Federal Reserve Board.

Testifying before the Senate Banking Committee were Jelena McWilliams, who was tapped to chair the Federal Deposit Insurance Corp.; Marvin Goodfriend, chosen to fill a Fed board term expiring in 2030; and Thomas Workman, nominated to a voting seat on the Financial Stability Oversight Council reserved for some with insurance expertise.

McWilliams, a former Republican staffer for the Senate committee as well as a former Fed attorney, is currently the chief legal officer at Fifth Third Bancorp. Goodfriend, who has spent much of his career as an economist at the Federal Reserve Bank of Richmond, is an economics professor at Carnegie Mellon University. Workman was until recently the president of the Life Insurance Council of New York, a trade group for the life insurance industry.

Here are some key takeaways from the hearing:

McWilliams is warmer to ILCs than previous FDIC officials

McWilliams — the only of the three nominees who would actually be tasked with running a federal agency — seemed to endorse industrial loan companies, or ILCs, outlining a relatively favorable opinion of the controversial charter. Her comments suggested she could direct the FDIC to move more quickly on approving ILC applications than the agency has done under current Chairman Martin Gruenberg and his predecessor, Sheila Bair.

Jelena McWilliams, nominee for FDIC chair
If confirmed to run the Federal Deposit Insurance Corp., Jelena McWilliams said she will “make sure that the FDIC moves swiftly in due consideration” of ILC charters. Bloomberg News

Opposition to the ILC charter, which allows nonfinancial companies to operate an FDIC-insured bank, grew before the crisis with Walmart's 2005 application to charter an ILC in Utah. Since then, relatively few charters have been granted.

More recently, SoFi and Square submitted ILC applications, raising the question of whether larger tech firms might follow suit, although SoFi subsequently withdrew its application.

Lawmakers have generally stayed away from the issue. Yet at the hearing, Sen. Dean Heller, R-Nev., told McWilliams that the FDIC had shown a “real lack of leadership” on ILC chartering, and he was “hoping under your watch that will change.”

“With respect of the ILCs, the law of the land is that ILC’s do exist … and the job of the FDIC is to give each ILC application due consideration,” McWilliams said. “I don’t know how much work has been done on the ILCs in the past few years — I assume not a lot, because I’ve not seen any new charters. If confirmed I will work with your office to find out where the holdup is in the approval process.”

McWilliams went on to say that she did not think ILCs pose a greater risk than any other charter type and that, if confirmed, she will “make sure that the FDIC moves swiftly in due consideration” of ILC charters, which she said could encourage more new applications.

Cybersecurity, capital rules among McWilliams’ priorities

McWilliams also cited cybersecurity concerns as among her top priorities if confirmed to run the FDIC, promising to follow through with an October advance notice of proposed rulemaking on cybersecurity standards put out with the Office of the Comptroller of the Currency and the Fed.

“I can tell you for a fact, now that I work for a regulated entity, that this is one of the foremost issues on the mind of the governing body at the bank as well as the board of directors,” McWilliams said, responding to a question from Sen. Jack Reed, D-R.I. “I believe that the regulators’ job is to provide a blueprint of how banks are supposed to handle cybersecurity breaches.”

She also said she has questions about certain regulatory requirements and how they affect community banks, including the Volcker Rule and capital standards outlined by the Basel III accords.

The Senate is poised in the coming weeks to consider a bill that would exempt most banks with less than $10 billion in assets from Volcker Rule requirements, and regulators are already working independently to develop some Volcker relief for community banks within the confines of the statute.

McWilliams acknowledged that many of the Basel III requirements do not apply to small banks, but said she wanted to undertake an examination of how those rules might “trickle down” to the community banking level, potentially contributing to a lack of de novo charters in the community banking space since the financial crisis.

“A number of the Basel requirements are not applicable to community banks, but nonetheless, while I served on this committee, I have heard from a significant number of community banks that the Basel requirements do apply to them,” McWilliams said. “Even if it’s not by regulation, it’s by the trickle-down effect.”

Goodfriend faces opposition from Senate Democrats

Democrats on the committee saved much of their most pointed questions for Goodfriend, taking exception to his past skepticism of the accommodative policies the Fed undertook in the wake of the crisis and fears that those policies would lead to rampant inflation.

For example, Goodfriend's apparent concerns about moral hazard, and the need for consumers to decide for themselves, led Sen. Sherrod Brown, D-Ohio, the committee's ranking member, to ask whether the nominee thinks Congress should rescind FDIC insurance.

“Does that mean that the agency [McWilliams has] been nominated to is a bad idea" and "shouldn’t exist?” Brown said.

Goodfriend responded that he believes "protection of consumers … is incredibly important, not only for consumers but for the market economy.”

But Brown was not satisfied. “You’re saying that the consumer should be demanding shoppers," the senator said. "So does that mean that the FDIC is simply not necessary because consumers should figure out which of these banks are about to go under?”

“Absolutely not,” Goodfriend said. “Consumers need to be informed and the other half of regulation is informing consumers about the products they are choosing between.”

Sen. Elizabeth Warren, D-Mass., also used the entirety of her five minutes to question Goodfriend and his judgment on monetary policy, saying that some of his fears about maintaining low rates in order to reduce unemployment would have destabilized prices. In reality, inflation has remained below the Fed’s 2% target, although many economists do not entirely understand why.

“I’m concerned about this because these wrong predictions are not an outlier for you,” Warren said. “It’s been part of your overall approach to monetary policy.”

Other members of the committee came to Goodfriend’s defense. Sen. Pat Toomey, R-Pa., suggested that while headline inflation may be low, Goodfriend’s predictions about the potential downsides of prolonged accommodative policy may still be proven correct if certain asset valuations come crashing down in the future.

“It’s true, there’s been no recent run up of inflation,” Toomey said. “But can anybody say with certainty that there hasn’t been any run-up in asset prices that could be vulnerable? Sovereign debt prices are pretty hard to explain, actually. Equity prices are extremely high. Some real estate markets — can you be certain that there are no bubbles out there?”

“No,” Goodfriend responded. “And what I hope to do if I’m confirmed as governor is worry about exactly this kind of issue, and to try to do the best I can to guide interest rate policy on the basis of incoming data, to balance the goals of sustainable maximum employment … keeping inflation low and also worrying about financial stability.”

Workman's views are consistent with a Trump-appointed FSOC

Workman, whose sole task would be to sit as a voting member of the FSOC for its deliberations, faced relatively light questioning during the hearing, with much of the questions having been directed toward Goodfriend and McWilliams.

But he did lay out his views about nonbank systemically important financial institution designation, which appear to be wholly in line with the Treasury Department’s views as described in its recent report on the process. He also said he believes that an activities-based approach to SIFI designation would be more appropriate than a company-by-company approach taken by the council in the past.

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