On Wednesday at 9:30 am ET, the Senate Committee on Banking, Housing, and Urban Affairs will conduct a hearing on the “Oversight of Financial Regulators.” The witnesses will be: The Honorable Joseph M. Otting, Comptroller of the Currency, Office of the Comptroller of the Currency; The Honorable Randal K. Quarles, Vice Chair for Supervision, Board of Governors of the Federal Reserve System; The Honorable Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation; and The Honorable Rodney E. Hood, Chairman, National Credit Union Administration.
The Committee previously discussed regulation earlier this year, specifically the supervision of financial institutions, in a hearing titled “Guidance, Supervisory Expectations, and the Rule of Law: How do the Banking Agencies Regulate and Supervise Institutions?”
“Banks receive significant forms of government support and benefits, including deposit insurance and access to the Fed’s discount window,” said Committee Chair Mike Crapo. “In exchange for these benefits, which ensure that American consumers have stable access to their deposits, banking agencies supervise banks and in return expect them to operate in a safe and sound manner.”
In her testimony, Margaret Tahyar, Partner, Davis Polk & Wardwell LLP discussed the “shadow” regulatory systems, or oral principles, not made public nor written down. This includes the practice of regulation by negotiation in the application process.
“An illustrative example, which can be used because it is one of the few to become public, comes from applications by Citicorp, J.P. Morgan, and Bankers Trust New York Corporation in 1987 to underwrite and deal in municipal revenue bonds, mortgage related securities and commercial paper,” Tahyar said. “During negotiations with agency staff, each applicant ‘voluntarily’ consented to market share limitations while protesting that they saw no need for them. When considered for review by the Federal Reserve Board of Governors, the banks admitted that they agreed to the limitations only to ‘expedite the applications.’”
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