Guns, CECL and 'too big to manage': Big-bank CEOs on Hill

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WASHINGTON — House Democrats and Republicans could not be further apart when it comes to the country’s biggest banks, with Democrats arguing they must be shrunk, while Republicans defend them as safe and sound.

When the CEOs of seven of the eight largest U.S. banks testified before the House Financial Services Committee on Wednesday, Chairwoman Maxine Waters, D-Calif., made it clear that the Democratic-controlled chamber wants to rein them in.

“Despite all of the compliance failures under their watch, no one has made out better than the CEOs,” Waters said. “As policymakers we must evaluate what it will take to rein in chronic law-breaking by the biggest banks. … I’m concerned that several of these institutions are simply too big to manage their own operations, too big to serve our communities and too big to care about the harm they have caused.”

The committee’s ranking member, Rep. Patrick McHenry, R-N.C., immediately pushed back.

“This is a hearing in search of a headline,” McHenry said. “The economy has grown. As we know, bank profitability, bank revenue, tends to track GDP growth."

“We have seven of you with three different business models here before us because you’re big. I don’t think the majority called this hearing to talk about those systemic risk issues. I think that is a failure.”

During her question-and-answer session, Waters pressed the banks on whether they had ended certain business lines after the financial crisis and whether it made managing the institution easier. Most CEOs acknowledged that they had.

Size wasn’t the only issue that divided the parties. Last year, both Bank of America and Citigroup announced plans to curtail financial services to certain types of firearms manufacturers, moves that Democrats lauded and Republicans blasted.

Rep. Carolyn Maloney, D-N.Y., praised Bank of America and Citigroup, but called on JPMorgan Chase CEO Jamie Dimon to do more to curtail the industry after he wrote a letter to shareholders that the bank will only work with businesses of good character.

After several mass shootings, JPMorgan has still arranged $273 million of loans for firearms manufacturers. Last year, JPMorgan took partial ownership of Remington, a manufacturer of the gun used in the Sandy Hook shooting.

“Actions speak louder than words on guns, Mr. Dimon,” Maloney said. “From what I can tell, these are just words for you. … JPMorgan has refused to adopt a policy to ensure responsible lending to the gun industry, even though you claim that client selection is important.

“My question is: Will you live up to your own rhetoric? Will you commit to adopting a formal policy that ensures responsible lending in your bank’s business with the gun industry?”

Dimon said that JPMorgan has “a very small relationship with gun manufacturers” but that he would be willing to consider adopting a formal policy like Bank of America and Citigroup.

“We can certainly consider that, yes,” Dimon said.

On the other side, Rep. Bill Posey, R-Fla., took a critical tone with the banks that have cut off services to what he says are “legal” businesses.

“I have heard a recent trend to withhold or withdraw banking services from completely legal businesses, which seem to have found disfavor with the media or with some political groups,” Posey said.

Bank of America CEO Brian Moynihan defended his firm’s decision to cut off certain firearms businesses, saying the bank was doing what it thinks is best for employees.

“These are based on us taking a look at what we think the right thing for our teammates and communities we serve are. After having over 100 teammates that were directly affected by the horrible situations in places like Las Vegas. … It was based on our teammates.”

The CEOs also weighed in on the current regulatory framework, acknowledging that the 2010 Dodd-Frank Wall Street reforms have made the banking system more secure, while also maintaining that changes should be made.

“Dodd-Frank has made the system safer and we’ve made important progress in adopting to that regulatory environment,” said Goldman Sachs CEO David Solomon. “However, after 10 years of experience it seems appropriate to assess whether improvements can be made.”

Additionally, Dimon warned that the Financial Accounting Standards Board’s current expected credit loss accounting standard, or CECL, could put a strain on community banks. Publicly traded banks must convert to the new model by Jan. 1, 2020, followed by privately held institutions and credit unions, which have until Jan. 1, 2022.

"For JPMorgan, I don't have concerns,” Dimon said. “I do think you should be looking at what it will do to smaller banks."

He said it could put small banks in a position where if a crisis occurs, “they will virtually have to stop lending.”

The executives were also pressed on what they see as potential future risks to the financial system. Rep. Jim Himes, D-Conn., asked specifically about which financial products potentially pose systemic risks.

“As you sit here today, what product financing mechanism or market do you think is generating systemic risk that we should pay attention to?” Himes said.
Dimon and Moynihan both said that policymakers and the industry need to look at leveraged lending, while Citigroup CEO Michael Corbat said problems with leveraged lending are not systemic “because most of it has been outside of the regulated financial system.”

State Street CEO Ronald O’Hanley suggested that student loans and shadow banking pose potential risks.

“I’d be concerned about student loans and I’d also be concerned about anything that’s pushing activities into the shadow banking system,” O’Hanley said.

Solomon also suggested shadow banking is a concern, but that it isn’t a systemic risk yet.

The executives also said they were focused on strengthening data security in the face of massive breaches that have already compromised information for hundreds of millions of consumers.

Dimon mentioned that CEOs testifying at the hearing were planning to meet afterward with Treasury Secretary Steven Mnuchin and other administration officials to discuss cyber threats.

Moynihan said, “We are in effectively a war on cybersecurity.”

Both Dimon and Moynihan discussed how falling under multiple data security regimes can be counterproductive, and there needs to be a coordinated effort to share threat information.

“Any energy that is lost to give … the same information twice slows down the process of getting the information to all institutions,” Moynihan said. “The larger institutions funded a group to get that information out faster.”

Dimon, meanwhile, was put on the defensive about the gap between compensation for the chief executives of the big banks and that for the rest of their employees.

“This group pays all their employees quite well, between medical, retirement, the minimum wage is usually $18, $37,000 a year, something like that,” Dimon told Rep. Nydia Velazquez, D-N.Y.

But later, Rep. Katie Porter, D-Calif, asked Dimon how a single mother in her district earning $16.50 an hour at his bank, and living in a $1,600-per-month apartment, could manage a budget shortfall. She asked if that employee should open a JPMorgan Chase credit card or lean on overdraft protection.

“I don’t know, I’d have to think about it,” Dimon said.

But Rep. Lee Zeldin, R-N.Y., came to Dimon’s defense.

“During that break while Ms. Porter was speaking I took a couple minutes to look through some of the benefits of working at JP Morgan,” Zeldin said. “I was looking at health insurance, dental, vision, 401ks, life insurance. There was childcare benefits, there were pre-tax benefits to take care of expenses and the list goes on. And I think it’s unfair to come here and to be grilled like that when you’re the only one in her hometown providing an opportunity to that woman.”

At the end of the hearing, Waters warned the CEOs not to push for further deregulation, particularly as the banks have been reporting record profits. And she told the bankers that they will likely be called again next year, but not all together.

“Please do not overwhelm us with requests for deregulation that you really don’t need and please don’t go around us to our agencies,” Waters said.

But McHenry took issue with Waters' characterization that steps taken by policymakers to revise the post-crisis regime was "deregulation." He defended Congress’ easing of Dodd-Frank’s regulations on community banks in a bill that was signed into law last year, known as S. 2155.

“Perhaps we didn’t get it right with the first draft,” McHenry said. “Bipartisanship fixed what is the most egregious parts of Dodd-Frank. That’s not deregulation.”

Waters said she plans to call the same CEOs to testify again, but with a different format.

“Next year when you come, I will not have all of you come at one time, I am going to divide it up,” Waters added.

The hearing is ongoing and this article will continue to be updated as it takes place.

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Policymaking TBTF Corporate governance Jamie Dimon Brian Moynihan Michael Corbat House Financial Services Committee Citigroup Bank of America JPMorgan Chase