Waters: Wells Fargo Fraud Underscores Need for Strong Fed Supervision

WASHINGTON, D.C. - Congresswoman Maxine Waters (D-CA), Ranking Member of the Committee on Financial Services, stressed the need for robust regulatory oversight of financial institutions in her opening statement at a hearing today with Federal Reserve Chair Janet Yellen.

“The Dodd-Frank Act has required regulators to increase capital and liquidity standards, reduce interconnection in the financial markets, and more closely scrutinize large financial firms’ risk management,” Waters said. “However, there is much work left to be done.”

Waters noted that the “enormous failure of risk management at Wells Fargo” serves as a reminder of the need for our regulatory reforms in the wake of the financial crisis.

“Fraudulent retail banking practices may not in and of themselves pose systemic risk, but they surely indicate mismanagement that could be catastrophic in riskier and more complex divisions of a bank holding company,” Waters continued. “Supervisors and law enforcement must continue to hold both institutions and individuals accountable.”

The full text of Waters’ statement, as prepared for delivery, is below.

Thank you, Mr. Chairman, for holding this hearing, and thank you Chair Yellen for making yourself available to testify today.

Just a few weeks ago, we passed the ninth anniversary of the Lehman Brothers failure. Leading up to 2008, much of the risk in our banking system went entirely unchecked by regulators. Failure to quickly address fraud and mismanagement resulted in the loss of more than 8 million jobs as unemployment topped 10 percent, millions of families lost their homes, and entire industries were on the brink of collapse.

Congress responded to this devastation by passing the most comprehensive overhaul of our financial system since the Great Depression – the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Dodd-Frank Act greatly increased the Fed’s responsibility and authority for safeguarding the financial system, but also set minimum standards to ensure that regulators didn’t lose sight of emerging risks again.

The Dodd-Frank Act has required regulators to increase capital and liquidity standards, reduce interconnection in the financial markets, and more closely scrutinize large financial firms’ risk management. However, there is much work left to be done.

As we have seen from the enormous failure of risk management at Wells Fargo, it’s important to remind the Committee – and the public – why these reforms were necessary in the first place. Fraudulent retail banking practices may not in and of themselves pose systemic risk, but they surely indicate mismanagement that could be catastrophic in riskier and more complex divisions of a bank holding company. Supervisors and law enforcement must continue to hold both institutions and individuals accountable. Chair Yellen, I know you will keep that in mind over the next several weeks as you review living wills from the five banks that failed their submissions in April – and that includes Wells Fargo.

Chair Yellen, I am eager to hear about the Fed’s progress in implementing Wall Street reform, and how the Board’s supervision practices have evolved over the last several years. Specifically, I am interested to hear more about how the Fed is using the flexibility embedded in Dodd-Frank to tailor regulations appropriate to the sizes and risks of different types of banks.

Dodd-Frank also provided the Fed, in consultation with the Financial Stability Oversight Council, with new responsibility to regulate the activities of systemically risky non-banks – entities such as the insurance company AIG, whose near-failure imposed dire, systemic consequences on our economy just eight years ago. Since the passage of Dodd-Frank, Congress has given the Federal Reserve additional authority in setting capital standards for insurance firms subject to enhanced supervision. I look forward to hearing about the Board’s progress on regulating insurers.

Yet just a few weeks ago in this Committee, Republicans pushed a bill that would severely undermine efforts by the Fed to regulate the financial system. The Chairman’s misguided legislation would repeal the Financial Stability Oversight Council’s ability to designate non-banks for enhanced supervision by the Fed – creating a huge swath of unmonitored risk in our financial system. The legislation would also replace carefully considered limits on banking activities with nothing but an insufficient 10 percent equity cushion, encouraging the reckless and risky behavior that nearly destroyed our economy in 2008.

Moreover, as we in Congress consider another funding resolution, we must be mindful of continued attempts to defund regulators’ work implementing Dodd-Frank. For the first time in recent memory, economic data indicates that the middle class is benefitting from the recovery. Failure to heed the lessons of the past will put that progress in jeopardy.

Thank you, I yield back.

###