Bank CEOs Headed to Congress Due for Grilling Over Drop in Loans

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

Frustration with the pace of lending to consumers and small businesses -- something bankers say is largely attributable to a lack of demand -- is poised to be a flashpoint when the heads of the six biggest U.S. firms appear before Congress this week. The executives plan to highlight the industry’s role in marshaling government assistance programs that doled out hundreds of billions of dollars in stimulus. But Senator Elizabeth Warren and other critics plan to ask whether banks are prioritizing buying back stock and rewarding employees over supporting the real economy.

“One of the things I’d like to understand better is how these banks hold themselves out as working in the public interest at the same time that they have millions of dollars for CEO bonuses and not enough for consumer lending,” Warren, a Massachusetts Democrat, said in an interview. She predicted the hearings would be “fun,” at least for the lawmakers.

The two days of testimony will mark the first time top bankers have faced a public cross-examination -- albeit on video -- since Democrats took control of the Senate and the White House early this year. The chief executive officers, well aware of Washington’s leftward tilt, have been busy preparing: holding courtesy meetings with lawmakers, conducting “murder board” practice sessions and announcing new initiatives that boost the pay of lower-level workers and provide banking services to minorities.

More than a decade after the 2008 financial crisis, the executives say their banks have emerged stronger and, thanks to the Dodd-Frank Act, chock full of capital that helped them weather the Covid-19 turmoil. Facilitating more than $500 billion in forgivable loans provided in last year’s federal Paycheck Protection Program was a major success, they argue.

It won’t be all white men responding to lawmakers’ questions, following the appointment of Citigroup Inc.’s Jane Fraser as the first female CEO of a giant U.S. bank. The industry has taken heat for its lack of diversity, including when the executives last appeared before Congress in 2019. There are signs it’s getting the message. Just last week, JPMorgan Chase & Co. signaled that two women are top contenders to succeed Jamie Dimon.

Joining Fraser in testifying will be Dimon, Goldman Sachs Group Inc.’s David Solomon, Bank of America Corp.’s Brian Moynihan, Morgan Stanley’s James Gorman and Wells Fargo & Co.’s Charles Scharf.

In a bit of an about-face, the CEOs expect some of the toughest queries to come from Republicans, who have traditionally been allies. But moves by lenders like Citigroup and Bank of America to curtail their business with gun manufacturers, and by the wider industry, to avoid controversial oil projects have soured the relationship. Adding to Republicans’ ire is the freeze in campaign contributions that many corporations instituted after the Jan. 6 insurrection at the U.S. Capitol.

Here are topics the executives are likely to be quizzed about when they appear Wednesday before the Senate Banking Committee and Thursday before the House Financial Services Committee:

Gaps in Lending

JPMorgan earned $14.3 billion for the three months that ended in March -- the centuries-old firm’s best quarter ever. Banks including Goldman Sachs and Citigroup joined it in reporting record profits. But the industry’s total loans as a share of deposits have fallen to historic lows.

Executives at the largest firms have repeatedly said that there is little appetite for credit. On earnings calls last month, they told investors that borrowers are currently focused on paying off their debts and are likely to seek an influx in financing later this year, at which point banks will eagerly provide it.

Still, lawmakers are likely to question whether the rock-bottom loan levels are a result of lending standards being too tight. Democrats, who’ve raised concerns that the pandemic has exacerbated the wealth divide, plan to ask whether underserved communities are being denied access to funding.

Senator Robert Menendez, a New Jersey Democrat, said his focus at the Banking Committee hearing will be on discussing ways of “getting the unbanked banked.”

Archegos and Risk Management

Bankers argue that they’ve made significant strides in risk management since the 2008 meltdown. Still, there have been multiple missteps, including Wells Fargo’s bogus accounts, internal control failures at Citigroup that prompted it to pay a $400 million fine last year and Goldman’s role in facilitating bribes as part of the 1MDB Malaysian fund scandal.

The industry’s latest black eye is Archegos Capital Management’s implosion, which in March triggered more than $10 billion in combined losses for banks that helped facilitate the family office’s wrong-way bets on stocks.

Fortunately for the CEOs testifying this week, only Gorman’s Morgan Stanley was hit hard by the debacle. But lawmakers are still likely to ask executives whether the event is the latest evidence that their firms are too big to manage.

Diversity and Inclusion

Democratic politicians have long urged corporate America to add more diversity to their board rooms and C-suites, and the financial industry has been a key part of that push. In an awkward moment during a House hearing two years ago, the bank CEOs were asked to raise a hand if they thought their successor would be a woman or minority. No hands went up.

Fraser’s appointment shows improvement, as does JPMorgan’s May 18 announcement that set up two women, Marianne Lake and Jennifer Piepszak, as the leading candidates to take over the U.S.’s largest bank. But progressive groups are warning that, from their perspective, a couple of hires at the top ranks isn’t going to suffice.

“The diversity and inclusion critiques won’t go away, because the issue hasn’t been solved,” said Gregg Gelzinis, a policy analyst at the Center for American Progress, a Washington-based think tank. “The racial and gender diversity on Wall Street is still pathetic, particularly at the C-suite level.”

Gorman, in particular, may have set himself up for pointed questions when he named a slate of potential successors last week that largely consisted of white men.

Climate Change

The Biden administration has made it clear that banks and other financial firms will be crucial in its effort to fight climate change. Treasury Secretary Janet Yellen issued an early warning last month, saying the industry must help reduce carbon emissions by how it decides to “marshal and allocate capital.” Then last week, President Joe Biden signed an executive order that requires Yellen to consider a number of policy actions, including assessing how a warming planet could threaten financial stability.

Biden-appointed regulators have separately signaled that they expect firms to get a better handle on how hurricanes, flooding, droughts and other extreme weather events could erode profits and even trigger another economic crisis. At this week’s hearings, Democrats are likely to seek assurances that banks share these priorities.

GOP Scrutiny

Republicans have regularly expressed frustration when banks curtail lending to perfectly legal businesses that nonetheless carry political and reputational peril. The list includes energy companies, firearms makers, payday lenders, private-prison firms and gambling websites.

In a sign of what banks can expect, Senator Thom Tillis said in an interview that he sees a contradiction in firms declining to finance oil exploration in Alaska while maintaining relationships with clients such as Saudi Aramco.

“I just want to know what the risk profile was,” the North Carolina Republican said of banks’ refusals to fund Arctic drilling. “Was it more this increasing woke capitalism?”

©2021 Bloomberg L.P.