Bank bosses on their way to congress over demolished barbecue due to declining credit

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Wall Street banks spent the pandemic making record profits. Now Democratic lawmakers want them to explain why they haven’t used more of that money to help the struggling Americans.

Frustration with the pace of consumer and small business lending – largely due to lack of demand, according to bankers – is likely to be a focus when the heads of the six largest US corporations appear before Congress this week. Executives plan to highlight the industry’s role in putting together government aid programs that have provided hundreds of billions of dollars in incentives. But Senator Elizabeth Warren and other critics plan to ask whether banks prioritize buying back stocks and rewarding employees over supporting the real economy.

Photographer: Greg Nash / The Hill / Bloomberg

“One of the things I want to understand better is how these banks are doing in the public interest while having millions of dollars in CEO bonuses and not enough for consumer credit,” Warren, a Massachusetts Democrat, said in an interview. She predicted that the hearings would be “fun,” at least for lawmakers.

The two days of testimony mark the first time top bankers – albeit on video – have been publicly cross-examined since the Democrats took control of the Senate and White House earlier this year. The chief executive officers, aware of Washington’s leaning to the left, have prepared extensively to hold courtesy meetings with lawmakers, practice sessions on the “homicide committee,” and announce new initiatives to increase the pay of lower-level workers and provide banking services to minorities .

More than a decade after the 2008 financial crisis, executives say their banks have come out stronger and are full of capital thanks to the Dodd-Frank Act that helped them weather the turmoil in Covid-19. They argue that the relief of more than $ 500 billion in forgeable loans granted last year under the federal paycheck protection program was a huge success.

With the appointment of Jane Fraser of Citigroup Inc. as the first female executive director of a giant US bank, not all white men will answer questions from lawmakers. The industry has rallied because of its lack of diversity, even when the executives last appeared before the congress in 2019. There are signs that they get the message. Just last week, JPMorgan Chase & Co. signaled that two women were the best candidates to succeed Jamie Dimon.

Along with Fraser, Dimon, David Solomon of Goldman Sachs Group Inc., Brian Moynihan of Bank of America Corp., James Gorman of Morgan Stanley and Charles Scharf of Wells Fargo & Co. will testify.

CEOs expect some of the toughest questions to come from Republicans who have traditionally been allies. But likes movements from lenders Citigroup and Bank of America, which are curtailing business with arms manufacturers and the broader industry to avoid controversial oil projects, have hurt the relationship. Republican anger is compounded by the freeze on the campaign dues introduced by many corporations in the U.S. Capitol after the January 6 riot.

President Biden attends the Virtual Leaders Summit on climate

Jane Fraser during the Virtual Leaders Summit on Climate.

Source: White House / Bloomberg

Here are topics that executives are likely to be interviewed about if they show up on the Wednesday before Senate Banking Committee and Thursday before House Financial Services Committee:

Gaps in lending

JPMorgan earned $ 14.3 billion in the three months that ended in March – the centuries-old company’s best quarter ever. Banks like Goldman Sachs and Citigroup jointly reported record profits. However, the industry’s total loan share of deposits has fallen to historic lows.

Executives at major corporations have repeatedly stated that there is little appetite for credit. In calls for earnings last month, they told investors that borrowers are currently focused on paying off their debts and are expected to seek an inflow of funding later this year. At this point, the banks will eagerly provide these.

Nevertheless, the legislature is likely to question whether the lowest lending rates are due to excessively strict lending standards. Democrats, who have raised concerns that the pandemic has exacerbated wealth gaps, plan to ask if underserved communities will be denied access to finance.

Senator Robert Menendez, a Democrat from New Jersey, said his focus at the banking committee hearing will be on discussing ways to “keep the bank disconnected”.

Archegos and Risk Management

Bankers argue that they have made significant strides in managing risk since the 2008 collapse. Still, there have been several missteps, including Wells Fargo’s fake accounts, internal control errors at Citigroup that resulted in a $ 400 million fine last year, and Goldman’s role in facilitating bribes in the 1MDB fund scandal in Malaysia.

The industry’s newest black eye is Archegos Capital Management’s implosion, which combined resulted in more than $ 10 billion in losses for banks in March, helped ease the family office’s false bets on stocks.

Fortunately for the CEOs who testified this week, only Gorman’s Morgan Stanley was hit hard by the debacle. However, lawmakers will likely still ask executives if the event is the latest evidence that their businesses are too big to manage.

Diversity and inclusion

Democratic leaders have long urged American corporations to add diversity to their boardrooms and C-suites, and the financial industry has been an integral part of that push. At an awkward moment during a hearing two years ago, the bank’s CEOs were asked to raise a hand if they thought their successor would be a woman or a minority group. No hands went up.

Fraser’s appointment shows an improvement, as does JPMorgan’s May 18 announcement that two women, Marianne Lake and Jennifer Piepszak, would be the lead candidates to acquire the largest bank in the United States. But progressive groups warn that, from their point of view, a few attitudes at the top will not be enough.

“Criticism of diversity and inclusion will not go away because the problem has not been resolved,” said Gregg Gelzinis, policy analyst at the Center for American Progress, a Washington-based think tank. “The racial and gender diversity on Wall Street is still pathetic, especially at the C-suite level.”

Gorman in particular may have been preparing for specific questions last week when he named a list of potential successors, mostly made up of white men.

Climate change

The Biden government has made it clear that banks and other financial firms will be vital in their efforts to combat climate change. Treasury Secretary Janet Yellen issued an early warning last month saying that industry must help reduce carbon emissions by resolving to “raise and allocate capital.” Then President Joe Biden signed an executive order last week requiring Yellen to consider a number of policy measures, including assessing how a warming planet could threaten financial stability.

Regulators appointed by Biden have separately signaled that they want companies to have a better view of how hurricanes, floods, droughts and other extreme weather events can undermine profits and even spark another economic crisis. At this week’s hearings, Democrats will likely seek assurances that banks share these priorities.

GOP exam

Republicans have consistently expressed frustration when banks cut back on lending to perfectly legal companies that still pose political and reputational threats. The list includes energy companies, weapons manufacturers, payday Lenders, private prison companies, and gambling websites.

As a sign of what banks can expect, Senator Thom Tillis said in an interview that he saw a contradiction in companies that refuse to fund Alaska oil exploration while maintaining relationships with clients like Saudi Aramco.

“I just want to know what the risk profile was,” said the Republican from North Carolina of the banks’ refusal to fund drilling in the Arctic. “Was it more this growing, bright capitalism?”

– With support from Laura Litvan and Steven T. Dennis



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