WASHINGTON — Financial regulation is too complex and needs to be retooled to improve access to credit, President Trump’s nominees to two top banking regulators told the Senate Banking Committee on Thursday.

Though they faced tough questions from Democrats, both Randal Quarles, nominated as Federal Reserve Board vice chairman for banking supervision, and Joseph Otting, the pick for comptroller of the currency, appear headed for easy confirmation. Neither made any significant gaffes during their nomination hearing, generally endorsing the GOP’s view that banking regulation had become overly complex in the wake of the financial crisis.

“One of the ways in which I think that on a clean slate, financial regulation could be improved would to have a much simpler, clearer, less kaleidoscopic construction of the regulatory system that would make it easier for the regulators to understand where risk is and where it isn’t,” said Quarles, a former top Treasury Department official in the George W. Bush administration.

Comptroller-nominee Joseph Otting (left) and Fed Vice Chair-nominee Randal Quarles.
Comptroller of the Currency-nominee Joseph Otting (left) said banks should be able to offer small-dollar loans, while Federal Reserve Vice Chairman-nominee Randal Quarles said stress tests should be more transparent. Bloomberg News

Following is a guide to key moments during the hearing.

The stress tests should be more transparent

The stress tests run by the Fed are opaque and the central bank should offer more details about the economic scenarios that banks test against their balance sheet, according to Quarles.

“I think that transparency around the content of the test with the public in general, which include the regulated entities” would be beneficial, he said.

The banking industry has long sought to pry more specifics from the Fed about how it designs, conducts and judges the results of the Dodd-Frank Act and Comprehensive Capital Analysis and Review stress tests. But the central bank has resisted those calls, fearing that providing more information could help banks to effectively rig the results.

Quarles’ comments drew criticism from Sen. Elizabeth Warren, D-Mass., who called giving more information a big-bank giveaway.

For his part, Otting, the former president at OneWest Bank, called the current capital requirements for banks “highly complex” and said they need "to be examined.”

He also said an approach proposed by the Treasury Department to exclude low-risk assets such as cash or Treasury securities from the leverage ratio test would be an appropriate fix.

“If you look at some of the assets on the balance sheet, they have limited to no risk,” Otting said.

Banks should be able to offer small-dollar loans

Otting raised concerns about how best to help the unbanked and underbanked population. One possible fix may be allowing banks to offer small-dollar loans again.

“My big concern is that a lot of people at the lower end of the echelon … are not qualifying for banking products and services,” Otting said. “I think there needs to be a real focus on how do we make banking available for the lower-economic, ethnic people.”

Prior to 2013 guidance issued by the OCC and the Federal Deposit Insurance Corp., banks used to offer deposit advance products which were effectively small-dollar loans. Regulators expressed concern that the products were too similar to predatory payday loans and banks stopped offering them.

Since then, the market for small-dollar loans has shifted to less regulated businesses, providing consumers fewer protections.

“We have pushed” small-dollar loans “out of the banking sector,” Otting said. “I think they should be put back in the banking sector.”

He was also critical of a proposed Consumer Financial Protection Bureau regulation designed to rein in abusive practices in the small-dollar lending market.

“What came out of Dodd-Frank was ... highly complicated" and almost requires the underwriting of a $2,500 loan, Otting said.

Banks lament that underwriting such small loans doesn’t make economic sense, but Otting said automation could help reduce underwriting costs.

Treasury’s recent reform recommendations are a blueprint

Both nominees also endorsed a Treasury report released in June that included 150 pages of ways to improve financial regulation.

“I believe there were a lot of recommendations in that report. I would support many of those,” Otting said.

Quarles also said he supported a number of the proposals, and also cited recent recommendations by former Fed Gov. Daniel Tarullo, who effectively served as the vice chairman of supervision before departing in April.

Panel chairman Sen. Mike Crapo, R-Idaho, listed many of Treasury’s suggestions, including increasing the threshold that subjects banks to tougher regulatory requirements, simplifying a proprietary trading rule and simplifying capital requirements for community banks among others.

“I do agree with all of those, and” that is “very much how I would approach financial regulation,” Quarles said.

During the hearing, Quarles also endorsed the idea of multitiered regulatory system so that small banks are not regulated in the same way as larger institutions.

“I do think that we should look very carefully at tailoring capital regulation and other regulations to a particular institution,” Quarles said.

Quarles supports rules-based monetary policy

House Republicans have been active in promoting an approach to monetary policy that would take into account a number of economic indicators and adjust rates up or down based on the condition of the economy.

Fed Chair Janet Yellen has pushed back against the proposal, saying it would take away from the Fed’s independence and that monetary policy decisions are best left to the Federal Open Market Committee.

Quarles said he was open to the more mathematical approach, but he didn’t endorse the formula, which created by the economist and Stanford professor John Taylor and which has become known as the Taylor rule.

“The Taylor rule is merely one example of a rule, and I am not advocating the adoption of the Taylor rule to guide Fed policy,” Quarles said. He also added that obtaining the “full employment” portion of the Fed’s dual mandate, which it is supposed to balance with inflation concerns, would be important.

“That is an important element of the Federal Reserve’s obligations,” Quarles said.

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