subcommittee will come to order todays hearing on the tarp financial services and bailouts of public and private programs subcommittee is entitled the changing role of the fdic we have before us today the secure two fundamental principles first americans have a right to know that the money washington takes from them is well spent second americans deserve an efficient effective government that works for them our duty on the oversight and government reform committee is to protect these rights our solemn responsibility is to hold government accountable to taxpayers because taxpayers have a right to know what they get from their government we will work tirelessly in partnership with citizen watchdogs to deliver the facts to the american people and bring genuine reform to the federal bureaucracy this is the mission of the oversight and government reform committee i now recognize myself for five minutes for an opening statement as i said we are pleased to welcome  endeavors todays discussion allows members to better understand the role of the fdic during the financial crisis the new regulatory authorities issued by dodd frank and the health of fdic insured banks since two thousand and seven is self funded by the banking industry due to the fdics role as a safety and soundness regulator for most of the worlds largest financial institutions the dodd frank act positions the corporation as a key player in preventing future financial crisis dodd frank requires or authorizes the fdic to implement forty four new regulations and grants the regulator various enforcement authorities many that stem directly from dodd franks hope to end too big to fail among these regulations are risk retention rules that will dramatically impact the secondary mortgage market and other areas of securitization as well as increase capital standards set out under dodd frank and being retention rules could reduce the amount of lending to an already crippled housing market while extreme capital standards may jeopardize the global competitiveness of u s financial institutions just yesterday acting comptroller standards he specifically cautioned that higher capital fosters a safer banking system but if carried too far the economy suffers when banking activity is not sufficient to support the desired levels of real economic activity i think we all share those concerns and finding that balance as part of todays hearing is to understand your thought process on that each member of this subcommittee hears from constituents and businesses that are struggling to access capital thus before instituting a regulation it is imperative that regulators consider the flexibility that our small and community banks need to serve our communities i look forward to chairman bairs explanation as to how the fdic and other regulators will work to avoid one size fits all regulations that would deteriorate job growth and our economy additionally while some insist that the fdics new regulatory authority under dodd frank will put an end to the bailout culture and too big to fail it appears the opposite is true the special inspector general for the troubled asset relief program has reported to congress that even after dodd frank the largest institutions continue to enjoy access to cheaper credit based upon the existence of the implicit government guarantee against failure ironically dodd frank has actually made big banks even bigger five of the largest financial institutions in this country are twenty percent larger than they were before the crisis this is not directed at the fdic but rather many of these things are design failures in the legislation we passed and i will have some questions about that and how you see that implementation and perhaps some legislative relief on some things you dont think are quite appropriate going forward even secretary geithner noted the possibility of future bailouts when months ago he sta federal government might have to do exceptional things again i know you have been questioned about that before but the moral hazard of such explicit and implicit guarantees cannot be overstated these concerns along with s history washington mutual and indymac bank in addition in the aftermath of the crisis chairman bair has actively engaged in implementing the necessary reforms to prevent another financial crisis as comes to a close i believe her insight and perspective will be invaluable to the subcommittees oversight of the events that comprised the financial crisis as well as the implementation of dodd frank and other reforms aimed at bringing greater transparency and stability our financial markets while there were multiple causes of the financial crisis it is widely acknowledged that regulatory failure through gaps in oversight insufficient tools and weakening of bank regulations was a significant factor therefore dodd frank addresses these failures by creating the financial stability oversight council to ensure coordination among multiple banking regulators it also extends the fdics resolution authority for failing depository institutions to large non bank financial firms and requires strong capital standards for the largest financial institutions these and other provisions have significantly altered the authority and responsibility of the federal banking regulators including the fdic i was heartened by the chairmans past statements that through the orderly liquidation authority and capital requirement provisions the regulators have the tools to end too big to fail still i am concerned by the fact that in two thousand and nine bank of america chase citi group and wells fargo controlled fifty six percent of domestic banking assets up from thirty five percent in two thousand while the top ten u s banks controlled seventy five percent of domestic deposits up from fifty four percent i hope todays hearing will provide an update on the implementation of these too big to fail provisions there are also a number of fdic related provisions under dodd frank that are critical not only to ensuring financial stability but also to leveling the playing field between the largest financial institutions which have only expanded since the crisis and the community banks and credit unions these provisions relate to capital standards as well as the manner in which the f prominence through her fierce advocacy not just for community banks but also for consumers in this regard i commend you for your tireless efforts to hold accountable our nations mortgage servicing industry this is an industry that continues to engage in alleged systemic abuses and misconduct against homeowners across the country in your own words the mortgage servicing and documentation problems are yet another example of the implications of lax underwriting standards and misaligned incentives in the mortgage process despite numerous investigations and regulatory actions taken by federal and state regulators and law enforcement officials against the mortgage servicers more allegations of misconduct have s therefore i look forward to hearing from the chairman regarding further steps that can be taken by both regulators and policymakers to hold the servicers accountable and protect our constituents and communities from wrongful foreclosures again i thank you i thank the chairman that the witness answered in the affirmative again thank you chairman bair you have served under republican and democratic presidents you have had a distinguished career in government service and we wish you the best going forward with that we recognize you for five minutes f fdic my testimony today is focused on two very important lessons learned from the crisis first in order to restore discipline in the marketplace large complex banks and other financial companies must without exception be allowed to fail  become non viable the problem of financial companies that are perceived by the market as too big to fail unfortunately has been about for decades but the bailouts of several badly managed systemically important financial institutions during the crisis removed all doubt about their implicit government backing these bailouts were made necessary by the absence of fdic resolution powers for non bank financial institutions as well as for bank holding companies and their non bank affiliates the massive disruptions caused by the lehman failure made clear that the bankruptcy process was ill suited to the orderly resolution of large financial entities forcing bank holding companies into a bankruptcy process was not a risk the government was willing to take the bailouts have consequences they undermine market discipline they inhibit restructuring of troubled financial companies and the recognition of losses they keep substandard management in place and preserve a suboptimal allocation of economic resources in contrast smaller banks are fully exposed to the discipline of the marketplace some three hundred and seventy fdic insured institutions have failed since i became fdic chairman this is how capitalism is supposed to work failed companies give way to successful companies and the remaining assets and liabilities  restructured and returned to the private sector bailouts are inherently unfair they violate the fundamental principles of limited government on which our free enterprise system is founded that is why the fdic was so determined to press for a more robust resolution framework as a centerpiece of the financial reform legislation we were early advocates for a sifi receivership authority that operates like the one we have applied thousands of times to insured banks in the past we pushed for liquidation skepticism as to whether the sifis can actually be made resolvable in a crisis for the very largest institutions it will be difficult but we have many important tools which if used correctly can end too big to fail under dodd frank we will have more information about these institutions on an ongoing basis stronger prudential requirements living wills prepared in advance as well as the authority to require if necessary organizational changes that rationalize business lines and legal entities to assure that they can be broken up and sold back to the private sector in an orderly way i hope this is an area where the industry will work collaboratively with the government the expectation of bailouts creates funding advantages for weak large banks creating competitive disadvantages not only for smaller institutions but also for the better managed large institutions most importantly the reputation of the entire industry is damaged when poorly managed institutions are bailed out by taxpayers and escape responsibility for their own actions because of the  resentment and cynicism toward the banking sector remains very high the second lesson of the crisis involves the dangers of excessive debt and leverage the single most important element of a strong and stable banking system is its capital base capital is what a and institution to absorb losses while maintaining the confidence of its counter parties and its capacity to lend after the last banking crisis in the early s congress passed a number of important banking reforms that included stronger capital requirements the capital requirements were watered down over the years through rules that permitted use of capital with debt like qualities that encouraged banks to move assets off the balance sheet and that set regulatory capital thresholds based on internal risk models the result was an increase in financial system leverage particularly at bank holding companies and on bank financial companies that weakened the ability of the industry to absorb losses during the crisis and has led to a dramatic de leveraging of banking assets in its wake the problems of excess leverage extend far beyond banking our tax system rewards the use of debt financing over equity for businesses and households alike making them more vulnerable to financial distress governments too have relied on debt to postpone the cost of paying for services that the constituencies are reluctant to do without as the crisis has shown over reliance on leverage is a short term strategy with a big down side over the longer term that is why the fdic has been so committed to following through on the capital reforms that are taking place through the b and thirty three public confidence and financial stability have been the core missions of the fdic we understand the economic cost of financial crises one of the most important lessons i have drawn from my experience has been the need for regulators to have the political courage to stand firm against weak practices and excessive risk taking in the good times my main regret is that we did not have better information and better resolution tools in place at the height of the crisis to prevent the bailouts of a number of our nations largest financial companies bailouts were necessary under the limitations we faced but they have slowed the recovery they have undermined support for government in all forms tainted the reputation of well run banks and tilted the competitive balance toward weak mega banks our support for a more  robust sifi resolution regime and stronger capital standards in the wake of the crisis speaks to our determination that this experience never be repeated thank you and i would be happy to take your questions mister mcheny thank you for your testimony i now recognize myself for requirement that is too high ms bair i think there certainly could be but i dont think the numbers we are talking about really come anywhere close to that we are working through the basal committee process i think it is very important to have international agreement on the appropriate standards and the basal committee has done a lot of analytical work on this looking at the cost of the crisis the amount of losses on financial institution balance sheets and how much additional capital would have been needed to absorb those losses to avoid this walsh that we would be looking at higher loss absorption capacity for the very largest institutions that is the process now i have been on record as thinking at three hundred basis points a ten percent standard would be about right that is actually moderate when you look at most of the actually threw out fifteen percent i thought it was interesting the benchmark they were using was what the market demands of a smaller finance company which clearly has no government support whatsoever and the market demands a fifteen percent capital requirement think the ten percent actually is moderate by all analytics we have looked at i would also add this is going to go out for comment whatever the number the basal committee agrees to will go out for comment it will explain the analytics behind the number and people will have a chance to provide public comm think perhaps he is looking at historical number but historically i think there is probably a prudent case that this financial system has not had sufficient capital which is why we continue to have these cycles a very severe one recently also if you are looking at am not asking about the health of european banks but in terms of international competitiveness isnt it important that we are harmonized globally with these capital requirement levels so we are not disadvantaged ms bair i think it problems they are having with greece and other distressed countries with their sovereign debt and the inability to restructure that is related to the high levels of leverage in their banking system and the inability of some of their banks to withstand the writedowns on that debt if there was a debt restructuring i worry about capital levels in europe and i worry about the impact that could have coming back to the united states i think international agreement is important to get those capital levels up  your thoughts with that i recognize the ranking member mister quigley mister quigley thank you coming from illinois small banks community banks you touched a little bit on competitive disadvantages what else can we do at the number of community banks that got in trouble as a percentage of assets as well as numbers it is much much smaller than the kind of distress we saw with the large institutions most of them actually managed through this very well they managed their commercial real estate concentrations pretty regulatory approach i do think that regulatory requirements that may be driven by problems we have seen with larger banks if you apply them across the board to small banks even if they have not much to do with the business model of small banks can make it very expensive the terms they are using harsh regulatory examinations depressing impacts these practices have on their ability to lend and support the fragile economic recovery some very specific stuff the senior regulators in d being extended then obviously you do want to get an appraisal i have said this specifically we have said it in writing we have disseminated this information to banks so they know what the rules are if they feel examiners are doing it inconsistently they can tell that to the examiner we have told  mentioned this as well we dont know the health of their balance sheet we dont know if they have overexposure in raw land for instance so they are telling their customers it is the regulator that wont let me do it when in reality it is an imbalance in their balance where there is an issue that procedure has not been followed appropriately those can be brought to our attention in a way that we encourage dont penalize so we can look into it it has frustrated me because i get a lot of generalized  another question that kind of goes hand in hand with this you saw the news last week or the week before with jamie dimons question of chairman bernanke sort of the cumulative effect of  these regulations and the impact they will have on the cost and availability of credit has there been a holistic review by the regulators or at the fsac level about the cost of these  regulations because certainly we agree and i think it is economic fact that they do have an impact additional capital does cost but there is a tipping point for safety and soundness by which you have to be there and interagency basis to look at this i do think there are interrelationships especially with what we are doing with the derivatives new rules and some of the restrictions on proprietary trading what kind of impact that will be and how they interrelate to capital i but again thank you for your service there are so many aspects of the impact of what we have tried to do in response to the many problems that occurred but i see it through the eyes of many of the people in my district who are facing issues locally i was intrigued by your comment that many of the smaller banks are the ones that are competing now at a disadvantage because of the rules that have been focused on the large banks i hear a lot in my community particularly in the housing sector homebuilders realtors bankers and there seems to be a game in which they are all sort of pointing to the other one and saying they are the ones responsible for not allowing us to get going everything that i have studied certainly indicates that a robust housing market is a key to getting out of an economic slump obviously with such an amount of under water mortgages we are not going to see but i also see small community bankers with responsible institutions who have weathered this area very well and builders with very good reputations who have proven their capacity to analyze the market right now some are actually saying this is a great time to take risks if you understand your market yet what i am understanding from talking and meeting with my homebuilders is that many of them are  concerned about hard caps for construction lending development lending what i really need to understand is whether or not this one hundred percent hard cap is really that is it advisory or are we creating the kind of hardline standard that locks in the inability for local bankers and local builders to do what they have been doing for generations which is to make sound judgments about each bair i think construction development lending is very high risk lending and if you look at the figures we have had for the smaller institutions they have been almost heavily driven by losses in construction development lending involvement in managing those risks there is a lot of scrutiny in c and d lending it is not a hard cap but i would say there is a lot of scrutiny of it and well justified given the number of banks we have seen that have failed because of heavy game will be the best way that we can discipline underwriting standards going forward i would like to bring the securitization market back i think it is a healthy part i would like to have banks have diversification in their funding of their lending activity but it needs to be brought back in the loan level disclosure in these securitizations investors buying these mortgage backed securities need to see the loans inside the securitizations before they make an investment decision that would also be a very good check on underwriting standards mister meehan your perspective is very important to us as is going to take a lot of hard work on our part on the banks part on the federal reserve boards part we do have the tools now to tackle it in a meaningful way at least one rating agency has signaled a possible downgrade of some of these large institutions removing the bump up they have gotten in the past from implied government support i view that as a positive sign i think we do have the tools to end it and over time will end it mister mchenry in terms of the orderly liquidation authority some  is our priority of claims is pretty much what you have in bankruptcy the thing that we can do that you cant do in bankruptcy is we can preplan we can be in these institutions with the fed on an ongoing basis collecting information we can preplan with their living will  can work with international regulators in advance of failure to navigate whatever their requirements might be for facilitating an international resolution and we have done that with smaller banks a lot already bankruptcy courts really cant do that the other thing th the bankruptcy process as well in terms of how creditors are treated it is very very similar to bankruptcy actually i think creditors will come out better in our process because we do have the ability to maintain the franchise it just doesnt fall apart when  as we do with banks now there is an advanced marketing process we try to get in as many bidders as possible that is one of the key parts of the living will process to make sure that the business lines are a line with legal entity so they can be broken up into marketable segments those loans i think sometimes the regulators are blamed and maybe the bank is just feeling the small business may be a little too risky but maybe it is easier for the customer relationship to say the regulator is making them do it as opposed to saying they dont think it is a good credit us to see the kinds of complaints that are coming in i think it has been helpful to the small businesses as well to understand what our rules say and do not say and what our examination processes allow banks to do and perhaps discourage them to do  mchenry what i am hearing from you today is you have some concern about the transparency of derivative transactions and the approach there ms bair i think transparency for derivatives is extremely way probably makes sense also in terms of the problems during the crisis i think derivatives all gets bunched together it was really the credit default swap market that was the big driver in the crisis so perhaps paying particular attention to that segment would be a good good structure project for the fsoc i think that makes a lot of sense mister mchenry thank you thank you for your testimony because we have votes on the house floor the members have departed and i took the liberty to ask a few questions before i depart but thank you