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91–244 PDF 2015

S. HRG. 113–471

THE FINANCIAL STABILITY OVERSIGHT COUNCIL

ANNUAL REPORT TO CONGRESS

HEARING

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED THIRTEENTH CONGRESS

SECOND SESSION

ON

REVIEWING THE FINANCIAL STABILITY OVERSIGHT COUNCIL’S ANNUAL 

REPORT

JUNE 25, 2014

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

Available at: http://www.fdsys.gov/


BANKI-41578DSA with DISTILLER
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

KAY HAGAN, North Carolina 

JOE MANCHIN III, West Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

MIKE CRAPO, Idaho 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

TOM COBURN, Oklahoma 

DEAN HELLER, Nevada

CHARLES YI, Staff Director 

GREGG RICHARD, Republican Staff Director

LAURA SWANSON, Deputy Staff Director 

GLEN SEARS, Deputy Policy Director 

BRETT HEWITT, Policy Analyst and Legislative Assistant

GREG DEAN, Republican Chief Counsel 

JELENA MCWILLIAMS, Republican Senior Counsel

DAWN RATLIFF, Chief Clerk 

TAYLOR REED, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor

(II)


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CONTENTS

WEDNESDAY, JUNE 25, 2014

Page

Opening statement of Chairman Johnson ............................................................. 1

Opening statements, comments, or prepared statements of: 

Senator Crapo ................................................................................................... 2

Senator Shelby .................................................................................................. 35

WITNESS 

Jacob J. Lew, Secretary, Department of the Treasury ......................................... 3

Prepared statement .......................................................................................... 35

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

The 2014 Financial Stability Oversight Council Annual Report to Congress .... 42

(III)


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BANKI-41578DSA with DISTILLER
(1)

THE FINANCIAL STABILITY OVERSIGHT 

COUNCIL ANNUAL REPORT TO CONGRESS 

WEDNESDAY, JUNE 25, 2014

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 10:10 a.m. in room 216, Hart Senate Office Building, Senator Tim Johnson, Chairman of the Committee, 

presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. I call this hearing to order. 

Today, we welcome Secretary of the Treasury Jack Lew back to 

the Committee for his testimony on the 2014 Financial Stability 

Oversight Council Annual Report to Congress. 

FSOC has played a critical role in coordinating the implementation of the Wall Street Reform Act among State and Federal regulatory agencies. 

Since the last hearing on the FSOC Annual Report, the agencies 

have reached some important milestones for Wall Street Reform 

implementation, including a finalized Volcker Rule, new bank capital and leverage rules, enhanced prudential standards for large 

U.S. banks and the U.S. operations of large foreign banks, and 

clearing requirements in swaps markets. And, for the first time, 

FSOC made final determinations with respect to systemically important nonbank financial companies. 

Secretary Lew has, on numerous occasions, stated the importance of finalizing the financial reform rulemakings, and I look forward to hearing about the continued progress. 

In addition, the 2014 Annual Report lays out a number of potential risks that could threaten the stability of the financial system. 

These include issues that have been noted by FSOC in the past, 

such as reliance upon short-term wholesale funding, the risk-taking 

incentives of large institutions and operational risks like cyber-attacks. It also includes newly identified risks, such as potential 

threats to the financial stability from new financial products, business practices and regulatory arbitrage. 

The recommendations made by the Council address structural 

vulnerabilities that remain in the system and point to the need for 

heightened risk management and supervisory attention. 

Now, nearly 4 years after the passage of the Wall Street Reform 

Act, regulators should continue to collaborate with each other and 

with the private sector to determine what is working and what 

more needs to be done, to ensure that financial markets remain 


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2

safe, transparent and stable. I have no doubt that FSOC will continue to play a key role in leading that effort. 

Secretary Lew, I look forward to your testimony. 

I will now turn to Ranking Member Crapo for his opening statement. 

STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. Thank you, Mr. Chairman. 

I look forward to Secretary Lew’s testimony on FSOC’s 2014 Annual Report. 

This year’s report covers many areas of the Council’s activities 

and lists a number of potential emerging threats to the financial 

stability of the United States. One of the issues highlighted in the 

report is the need for a broad reform of the housing finance system 

and the return of private capital into mortgage finance. 

We have referred bipartisan legislation out of this Committee, 

and Chairman Johnson and I continue to engage with our colleagues on this important issue. 

As I said at the last FSOC hearing, and I will repeat it today, 

the U.S. capital markets must remain the preferred destination for 

investors throughout the world. Unfortunately, regulatory uncertainty and infighting among U.S. financial regulators, and with 

their overseas counterparts, are causing investors to look elsewhere. 

I encourage Secretary Lew to lead an effort among FSOC members to identify other measures Congress should consider to ensure 

that our financial markets remain competitive. 

The frustration from foreign regulators over the lack of international coordination on financial reform is an ongoing concern. 

The European Commission just announced that it will grant 

equivalence to foreign clearinghouse rules in Australia, Hong Kong, 

India, Japan and Singapore but not the United States in what 

some observers view as regulatory backlash. 

Last year, I suggested the Secretary Lew engage with foreign 

regulators to address cross-border conflicts and the unnecessary 

costs imposed by them. I look forward to hearing about the 

progress Secretary Lew has made in that area. 

I continue to have concerns about the lack of transparency of 

FSOC’s process for designating nonbanks, Systemically Important 

Financial Institutions, or SIFIs. I have requested the Government 

Accounting Office to review FSOC’s nonbank SIFI designation process and look forward to reviewing that report when it is finalized 

later this summer. 

There must be a transparent and measurable process to determine whether or not companies could become SIFIs. In order to 

make that determination, everyone needs to know what criteria 

FSOC is using. 

The FSOC should either publish such criteria in the Federal Register for public comment or, at the very least, specify in great detail 

why each of the already designated nonbank SIFIs qualified. Unfortunately, the publicly released documents designating the three 

nonbank SIFIs to date have provided little useful insight into the 

specific criteria FSOC used. 


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The SIFI designation process cannot take place in a black box. 

Too much is at stake. That is why FSOC must be accountable and 

in full public view. 

Lastly, I am concerned that the report on the asset management 

firms issued by the Office of Financial Research last fall does not 

properly account for the role asset managers play in our financial 

system. The Securities and Exchange Commission’s decision to put 

the OFR report out for public comment was a good step forward toward transparency and giving the public the opportunity to comment. 

I encourage Secretary Lew to consider making nonbank SIFI designation criteria also available for public comment. 

I look forward to discussing these and other issues at today’s 

hearing. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you, Senator Crapo. 

Are there any other Members who would like to give a brief 

opening statement? 

Senator SHELBY. Mr. Chairman, I would like my written statement to be made part of the record. 

Chairman JOHNSON. Without objection. 

Chairman JOHNSON. I want to remind my colleagues that the 

record will be open for the next 7 days for opening statements and 

any other materials you would like to submit. 

Today’s witness is the 76th Secretary of the U.S. Department of 

the Treasury. 

Secretary Lew, welcome back to the Committee. Please begin. 

STATEMENT OF JACOB J. LEW, SECRETARY, DEPARTMENT OF 

THE TREASURY 

Mr. LEW. Thank you, Mr. Chairman and Ranking Member Crapo 

and Members of the Committee. I appreciate this opportunity to 

testify today on the Financial Stability Oversight Council’s 2014 

Annual Report. 

Nearly 4 years ago, President Obama signed into law the DoddFrank Wall Street Reform and Consumer Protection Act, creating 

the strongest safeguards for consumers and investors since the 

aftermath of the Great Depression. After an anomalous first quarter, where bad weather and other factors were at play, we expect 

to see strengthening growth in the remainder of the year. 

As everyone here recognizes, a stable, thriving financial sector is 

critical to our economic growth and prosperity. That is why these 

historic safeguards were established. 

Today, our financial system is more resilient, confidence in our 

markets is robust, and the agencies charged with protecting consumers and investors are in a strong position to respond to emerging threats that could hurt our economy, damage Main Street businesses and destroy jobs. 

One of the lessons from the financial crisis was recognizing how 

important it is to detect and mitigate risks to financial stability because in the lead-up to the crisis individual regulators were focusing on individual institutions, functions or markets. This siloed approach allowed risks to fall through the cracks. 


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4

Congress changed that by creating the Financial Stability Oversight Council. Now, regulators are obligated by statute to collectively monitor the stability of the entire U.S. financial system, to 

look over the horizon to identify potential risks and to respond to 

threats that have been detected. 

In short, the Council’s work to detect possible risk is not only 

mandated by law; it is sound economic policy. 

That is why it both defies common sense and ignores recent history that some have suggested curtailing the Council’s ability to 

analyze information regarding particular financial sectors, firms or 

activities. The Council cannot simply cordon off any sector or activity that could pose a threat. That would be a dereliction of its responsibilities and a complete disregard for the very purpose of the 

Council. 

Some have even gone so far as to suggest the Council should be 

prohibited from simply asking questions about certain activities or 

companies that could threaten financial stability. We have to be allowed to ask questions. As everyone knows, during the run-up to 

the financial crisis, regulators should have asked more questions 

about institutions and activities, not fewer. 

And, to be clear, asking questions does not equal regulatory action. Sometimes questions result in a conclusion that the Council 

does not need to act, that it needs to examine the issue further or 

that it needs to gather more information. 

The Council asks questions with an open mind and without a 

predetermined outcome. In that vein, the Council’s procedures are 

transparent. It has put in place a comprehensive, deliberative approach to its evaluation of risks, and it solicits public input and 

carefully considers all points of view. 

In fact, the Council’s Annual Report exemplifies the Council’s 

commitment to transparency and collaboration. It reflects the collective analysis and conclusions of council members regarding the 

key risks to financial stability, and it is an important example of 

how the Council shares information about its work with the Congress and the public. 

Each Annual Report also provides a road map for the Council’s 

agenda for the upcoming year—what areas it will focus on, what 

areas will likely require additional attention and how the Council 

expects to address them. 

This year’s report focuses on nine areas that warrant continued 

attention and possibly further action from its members. These 

areas include wholesale funding markets, the housing finance system, cyber-security threats, risk-taking by large financial institutions and potential interest rate volatility. 

Before closing, let me point out that since the Council’s last Annual Report, we have reached a number of key milestones in financial reform implementation. That means home buyers, retirees and 

investors have better safeguards and protections. 

And, to that end, the Volcker Rule has been finalized, qualified 

mortgage standards have gone into effect, tough capital standards 

are now in place, over-the-counter derivatives are now moving onto 

electronic trading platforms and into centralized clearing, fines 

have been imposed for abusive actions related to the manipulation 

of LIBOR and other financial benchmarks, and the international 


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community is making progress on increasing the stability of the 

global financial system. 

Mr. Chairman, I want to thank the other members of the Council 

and all the staff involved in the 2014 Annual Report for their tireless work and commitment. 

As the Council fulfills its obligations to strengthen our financial 

system and limit risk to our economy, we will continue to work 

with you, the Committee and Congress to make real progress for 

all Americans. 

Thank you very much, and I look forward to answering your 

questions. 

Chairman JOHNSON. Secretary Lew, thank you for your testimony. 

Will the Clerk please put 5 minutes on the clock for each Member’s questions? 

Before I begin my questions, Secretary Lew, I would like to 

apologize in advance that I will need to excuse myself shortly to attend to other Committee-related matters. Senator Reed has kindly 

agreed to take the gavel for the remainder of the hearing, and I 

will follow up with you personally if I have any further questions. 

Secretary Lew, the current Export-Import Bank authorization 

ends in September. As you know, this program has been historically supported by members on both sides of the aisle but recently 

has become more partisan. 

Why is it important for U.S. companies and workers that Congress reauthorize the Export-Import Bank? 

Mr. LEW. Mr. Chairman, I think the Export-Import Bank is extremely important for our companies, large and small, that are exporting in a world market where other countries have export support programs. 

For us not to have an Export-Import Bank would be for us to 

unilaterally remove our support while other countries are giving 

support to their companies, and it would disadvantage U.S. exporters. I think that this would immediately translate into lower sales 

and, therefore, lower jobs. 

It is a whole different question if there were to be an international agreement that everyone would step back from export support programs, but to fail to extend the Export-Import Bank would 

be a unilateral action that, I think, would hurt the American economy. 

Chairman JOHNSON. Secretary Lew, I want to thank you and 

your staff for all the hard work in helping the Committee revise 

and mark up housing finance reform legislation. I appreciate your 

support for S. 1217 as amended. 

Could you explain to the Committee why legislation is necessary 

to reform the housing finance system? 

Mr. LEW. Well, Mr. Chairman, we worked, as you have noted, 

closely with you and with Senator Crapo, as we did with Senator 

Corker and Senator Warner earlier, and we believe that the unfinished business of housing reform is really the unfinished business 

that we need to attend to in terms of what actions are required 

after the financial crisis. 

We all saw and understood clearly a few years ago how exposed 

U.S. taxpayers were to the current system. We have seen since 


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then a move away from private lending in the marketplace. Most 

mortgages are either made by FHA or supported by the GSEs. 

We know that this is an area where, were there another financial 

crisis, we are still in a very exposed position, and U.S. taxpayers 

are still in a very exposed position. 

I think the elements of housing finance reform that are important are many. 

One is to make sure that there is a private market for mortgage 

lending. 

Another is to make sure that there is access to credit that is fair 

and widely spread and that helps to even the playing field for those 

who have trouble getting mortgages now. 

A third is that any backstop has to be clearly defined and very 

narrow, and it has to come after a very secure position by private 

parties who absorb the first risks themselves. 

I think that any of us writing legislation alone might do it differently than we do when we try to come up with a consensus product or a bipartisan product, but we think this is an important area 

for Congress to act on. 

Chairman JOHNSON. There has been a lot of focus on FSOC’s designation process, including concerns about transparency and due 

process. 

Broadly speaking, how does FSOC address those concerns, especially when a firm is at stage two or three in the process? 

Mr. LEW. Mr. Chairman, I actually think that the process that 

FSOC goes through with companies is an excellent process that 

protects the right of parties, both to confidentiality of information 

that should not be public but also full access to the process to make 

their views known. 

When a company is in stage three, which is the time when there 

is an active back and forth, there are just numerous, probably hundreds, of exchanges of information in writing and verbally where 

a company makes its positions known, the FSOC staff gets to ask 

questions, and it is briefed up to the members of FSOC in a way 

that permits a balanced and fair judgment to be made. At the end 

of the process, a company has the right to ask for a face-to-face 

hearing. 

There have been eight designations of nonbank utilities, two designations of insurance companies. Only one of those firms has 

sought the face-to-face hearing. It was granted. 

It was actually an excellent hearing. I have talked to the company afterwards. They felt the same way. And it helped the process 

to both be open to the party that was potentially to be named and 

also informed the FSOC about the issues it was going to be deciding on. 

I think that, you know, there is also judicial review of FSOC determinations, and I think it is interesting to note that there has 

been no judicial review taken of any of the actions that I have mentioned. 

Chairman JOHNSON. Senator Crapo. 

Senator CRAPO. Thank you, Mr. Chairman. 

Before I get into my main questions, I wanted to follow up on the 

Chairman’s question about housing finance reform and, frankly, 


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just again, to thank you for your increased and continued focus on 

the criticality of that issue. 

I think, as you said, the U.S. taxpayers continue to be very much 

on the hook and at risk as we do nothing to reform our system and 

maintain the current structure in which we have Fannie Mae and 

Freddie Mac under U.S. Government control. So thank you for your 

renewed focus on that. 

In my opening statement, I indicated the FSOC should either 

publish a list of criteria that it uses to designate a firm as a SIFI 

or to provide a detailed analysis of why a firm has been designated 

so that other firms have some guidelines on whether or not they 

could become SIFIs. 

Are you willing to publish such specific criteria? 

Mr. LEW. Well, Senator, the numerical threshold for being a 

stage one company is well known. It is published. It is something 

that all of the financial institutions are aware of. 

The process of going through the review of each firm obviously 

depends on what kind of a business it is in, how it is interconnected to the financial markets and what the risks of a failure 

at that firm would mean in terms of potential spread to other parts 

of the financial system. 

So I think that the stage three process is one where companies 

see very clearly what kinds of considerations are being thought 

through. They submit voluminous information and data to support 

a decision that, presumably, is informed by their point of view. 

And I think we have to be kind of careful about having there be 

too rigid a standard because it is not just a question of size alone. 

There can be a very large firm that does not present systemic risk. 

There can be a smaller firm that because of the kind of business 

it is in that presents a greater systemic risk. 

And we are trying in a fairly new process to be very systematic 

and disciplined about it, and I am very proud of the quality of work 

that has been done. 

Senator CRAPO. Well, from what I understand, it is a different 

picture than you paint here today, from the information that I received from many of those going through the process. 

They certainly would agree with you, I think, that tremendous 

amounts of information are begin requested and that there is this 

process of significant back and forth that goes on. 

But there is a lack of understanding or information being provided about what the purpose of the information is, how it is to be 

used, how they could better analyze or help to analyze the issue 

being address, and so forth. 

Although I agree with you also, that we do not want to get into 

rigid standards that do not have the flexibility needed for the circumstances at bay, I do believe that a significant focus needs to be 

made on whether or not the adequate transparency is being provided and adequate explanation of criteria being used is being 

made to those who are potentially going to be designated. And I 

would just encourage you to pay greater attention to that issue. 

Mr. LEW. Senator, we value transparency and openness highly. 

We have tried to come up with a balance between transparency but 

also protecting the legitimate concerns of firms for having their 

proprietary information not be in the public space. 


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You know, it is obviously a new organization, and we are developing these procedures in real time, and we will continue to try to 

get that balance right. 

Senator CRAPO. All right. Thank you. 

On a related issue, early in June, the Fed and the FDIC and 

OCC published the first of a series of requests for comments to 

identify outdated, unnecessary or unduly burdensome regulations 

that are imposed on insured depository institutions. I think that is 

a very positive development. 

Mr. LEW. I agree. 

Senator CRAPO. And I am very hopeful that that will result in 

our ability to go in and, if you will, weed out some of the unnecessary and overly burdensome regulations in our system, to help 

streamline them and make them more effective, without sacrificing 

any safety or soundness in the system. 

Are you prepared to encourage other FSOC members to review 

existing regulations and to lead similar efforts among other agencies? 

Mr. LEW. Senator, I have been encouraging agencies to do that 

in multiple roles for many years. When I was OMB Director, we 

did a look-back for all the executive branch agencies that OMB has 

oversight over. We asked for the independent regulators to do the 

same thing at the time. 

I think it is an excellent thing that the agencies are moving in 

that direction and it is the right way for us to deal with the kind 

of accumulation of issues. There are things that made sense 20 

years ago that if you look at them now do not reflect decisions we 

would make today. 

And I totally agree; it does not mean unwinding anything that 

gets to safety and soundness. 

It is a question of asking, are there things in place that you do 

not need any more or you would do differently? 

Senator CRAPO. Well, let me make just one specific recommendation in that regard, and that is over the last few years we have had 

a lot of different witnesses talk to us about the impact that the 

community banks are facing under the cumulative regulatory system they now face. 

I think that maybe at one of your next FSOC meetings it would 

be very helpful for the relevant agencies to undertake a similar effort as they are with insured depository institutions in general, to 

focus on community banks and see if we cannot do exactly what 

you and I have just talked about—identify ways we can reform and 

streamline our regulatory system with regard to them. 

Mr. LEW. I cannot speak to whether there has been a look-back, 

I suspect, because they are just beginning now to do the look-back. 

It is just happening, so in real time. 

But I can tell you that as new regulations come out there is not 

a regulator that we work with—and we work with all of them—

who is not very much attentive to the special concerns and needs 

of community banks and the value that they play in our system. 

So I suspect there would be an openness to asking that kind of 

question. 

Senator CRAPO. Thank you. I hope you will be willing to do that. 

Chairman JOHNSON. Senator Reed. 


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Senator REED. Well, thank you very much, Mr. Chairman. 

Thank you, Mr. Secretary. 

One of the issues that is rapidly emerging as a major systemic, 

or at least macroeconomic, problem is the student debt. 

And there are many facets of this, but I was interested in the 

comment that Deputy Treasury Secretary Sarah Bloom Raskin 

made about looking back and comparing the way the service industry for mortgages was underperforming when the crisis hit and 

suggesting that it might be fruitful work to look at student loan 

servicers. 

But just in general, can you describe how FSOC is dealing with 

the issue of the student debt and student loans? It is growing as 

an issue. 

Mr. LEW. Student debt is definitely growing as an issue. 

And I think that we have to separate the question of what does 

it mean in terms of the economic capacity of students who are burdened with debt, what does it mean in terms of potential finance 

stability concerns, and what does it mean in terms of how well we 

are running our programs? 

I think that while it is a very large number, to date, I have not 

seen issues raised that suggest that it is of systemic risk the way 

other things have been. 

But there are macroeconomic concerns because if the overhang of 

student debt is causing individuals to not start their own household and not either rent or purchase and do all of the other consumer activity that is associated with that, that cumulatively 

makes a difference in terms of our economy. 

It also makes a big difference in terms of the career paths that 

people choose and the kinds of options they have that the education 

that they have paid for is supposed to open up. 

And I know that Senator Warren has introduced legislation in 

this area. We have supported that legislation. 

I think it is a complicated area where, frankly, we do not fully 

understand all of the ramifications, and it is something that we 

have to continue focusing on each of those three aspects. 

Senator REED. Just one of the issues here perhaps can be described as mechanical. We discovered in the housing market, when 

we were trying to modify mortgages, that the servicers were just 

not built to do that. They had a one-way ratchet. They collected 

premiums and distributed them out. 

I would hate to get to the point where we make a policy decision 

that we are going to go ahead and somehow help students refinance and discover that the mechanics do not work. 

Is that an issue that FSOC or someone within your——

Mr. LEW. Well, I do not know that it is FSOC per se. 

Senator REED. But somebody? 

Mr. LEW. I know Treasury has been working with the Department of Education on the kind of plumbing of the system to make 

sure that it is capable of doing things that we might ask for it to 

do. 

Senator REED. So, as the Secretary of the Treasury—you are 

working on it? 

Mr. LEW. Yeah, and I have been working with Secretary Duncan 

for the entire time that I have been in my current role. 


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Senator REED. Let me shift to another issue which has huge 

macroeconomic consequences. That is the housing market. 

The Treasury Department has obligated a total of about $38 billion for foreclosure prevention and stabilization. To date, only 

about $12 billion has been spent. There is $25 billion, roughly, that 

is out there to put into the market, which would have a huge effect 

in terms of stimulus demand, giving people on Main Street a better—why can’t we get this done? 

I mean, this is not a situation where we have good intentions 

and no resources. We have got the resources. 

Mr. LEW. Senator, I think that if you look at the money that is 

available, some of it has actually been spent; other has been obligated and, because of the nature of the program, will be spent 

when homeowners reach certain trigger points. You know, after a 

certain period of time you have a certain amount of principal forgiveness or other support. 

Our estimate is that roughly $25 billion is on a path toward 

being spent, which is 65 percent of the money, even though it has 

all been obligated. 

We are constantly looking at funds that are obligated that may 

or may not be spent, and we are looking at the authorities we have 

to see if there are things we can do to help the homeowners who 

it was intended to be helping. Our commitment is to use those resources to help the people it was designed for. 

Senator REED. Well, the faster those resources are deployed, the 

better off people will be——

Mr. LEW. I agree. 

Senator REED.——and the better off the economy will be. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. Thank you, Mr. Chairman. 

Mr. Secretary, basically, this has been raised before. Is there 

some type of collaboration between FSOC and the FSB? 

For example, considering the timeliness and the commonalities 

between SIFI and G–SIFI designations, it is hard to believe the 

process is not conducted sometimes with some level of collaboration. Some even reference the relationship between FSOC and the 

FSB as collusion. 

Actually—my question to you—how likely is the FSOC to make 

an independent determination that a firm designated as a G–SIFI 

will not be designated by the FSOC as a SIFI? 

Mr. LEW. Senator, there is a great deal of cooperation between 

members of FSOC and the FSB. 

Senator SHELBY. Cooperation rather than collusion, right? 

Mr. LEW. Yeah. I think that what is important to know is that 

the FSB does not make decisions for national authorities. National 

authorities make their own judgments. They are parallel processes. 

Now I am not going to say that when you ask the same questions 

and analyze the same data you necessarily reach different conclusions, but that is that appropriate level of cooperation. 

There is no decision that FSOC has made, or I believe will make, 

on a designation other than decisions based on the process run by 

FSOC where we have our staff work up the analysis and we go 


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through all of the processes. And that means that we may, at some 

point, not make judgments that are identical to the FSB. 

But I do think it is important to look at the quality of the work 

that we are doing in the FSB as bringing international standards 

closer to our own, which makes our financial system more secure. 

Senator SHELBY. You are not letting the international standards 

be our standards without a lot of thought, I hope. 

Mr. LEW. No. I actually think that if you were to ask the other 

participants in FSB, they think we are driving them to our standards in general, whether it is on capital, on leverage, on how we 

treat nonbank institutions. 

Our schedules are not entirely in sync, and that creates this parallel process where sometimes we make decisions in a different 

timeframe. 

Senator SHELBY. Could you outline for the Committee, briefly, 

the specific quantitative measures used to determine the minimum 

level of interconnectedness for both bank and nonbank SIFIs and 

the difference between the two standards? 

Mr. LEW. Senator, I would have to get back to you on the arithmetic. 

Senator SHELBY. OK. Would you do this for the record? 

And how does that FSOC quantify the interconnectedness, for example, of Prudential Financial? 

Mr. LEW. If I could answer the question a bit more qualitatively 

than quantitatively, what we do whenever we review a firm is we 

look at the complete financial picture of the firm. We look at how 

connected it is to other sensitive parts of our financial system. And 

we look at what happened in circumstances that are not really of 

our imagination. 

We know what the financial crisis looked like in ’07–’08. We 

know what the Great Depression looked like. There are kind of 

very high-stress scenarios that have historical roots. It does not 

mean that you go through every scenario under the sun. 

I do think that one of the parts of our review that is important 

is we do not ask what happens in good times only; we ask what 

happens in bad times because that is when you face the real risk. 

Senator SHELBY. I have just got a minute. So in a recent 

speech—you are familiar with this, I am sure—the Managing Director of the International Monetary Fund, Christine LaGarde, suggested that increasing the capital standards 2.5 above Basel III for 

our largest banks would work to reduce the systemic risk a trilliondollar bank by a quarter. 

Have you seen her speech, and have you looked at the possibility 

of raising capital standards above the Basel framework and how it 

could reduce systemic risk and maybe you would not need the designations? 

Mr. LEW. Well, Senator, I think that we have made enormous 

progress raising capital, which is essentially a buffer so that companies, banks and financial institutions have on their books the resources to absorb the shocks or losses they may experience. We 

have actually already been more aggressive than Basel, and our 

regulators have taken more steps than Basel required in terms of 

capital. 


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I actually think the concern we have is that the rest of the world 

needs to give as much attention to capital as we do because of the 

global interconnection of the system, and that is a conversation I 

have with my international counterparts on a regular basis. 

Senator SHELBY. How are you doing with that challenge? 

Mr. LEW. You know, I think we are doing better. I think we are 

doing better, but I do think there is more work to do. 

You know, we have some important discussions that are going on 

now in terms of how the gone-loss absorbency capacity of institutions will be met. It is an important area where we think banks 

have to have a deeper cushion of reserve. 

We are going to keep pressing for more progress here. And I 

think we have most of the world actually agreeing with us, but it 

is a situation where we need to get consensus. 

Senator SHELBY. Thank you. 

Chairman JOHNSON. Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary, for your good work. 

I want to go back to the SIFI designation process for nonbanks. 

I mean, I believe very strongly a nonbank entity can be SIFI, but 

I wonder at times. There seems to be a lot of concern in the industry that FSOC, being dominated by banking regulators, is applying 

banking standards in a bank-centric approach to nonbank entities. 

Did you feel comfortable that within the FSOC or the OFR you 

are getting or that you have enough expertise to really look at not 

simply asset size but as we will get capital standards but actually 

lines a business in terms of the whole nonbank SIFI designation? 

Mr. LEW. Senator, I believe that there—first of all, that FSOC 

includes the market regulators as well as the banking regulators. 

Senator WARNER. I am aware. 

Mr. LEW. And there is a very thorough discussion. Even the OFR 

study that we have discussed a bit, on asset managers, was heavily 

commented on by the market regulators as it was developed. 

I guess it is important to distinguish the determination of systemic risk from what the remedies are. 

And I do think that if you look at how risks spread from nonbank 

institutions in the financial crisis in ’07–’08, there is no doubt that 

it spread into the broader financial system from a number of 

nonbank entities. 

So I think that when you look at where the burden of dealing 

with that fell at the time, it often fell to institutions like either the 

Fed or Treasury to deal with some of the consequences. 

So I do not think you can separate the discussion, saying market 

regulators should look at one thing; banking regulators should look 

at another. 

FSOC was created so we would look across the silos and see the 

systemic risk that comes from that. 

Senator WARNER. I understand that. I was involved in the creation. 

But I sometimes feel that it appears from the outside that we are 

looking more at assets on a manager or asset size when it may be 

line of business that may actually be the systemically important 

component. 


BANKI-41578DSA with DISTILLER
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Mr. LEW. I actually do not think that is how the discussion has 

been going on, and again, I will use asset managers as an example. 

There has been a lot of discussion as if a decision has been made. 

No decision has been made. 

OFR did a study. There is a process of review going on in FSOC. 

There are many factors being considered. And I think there actually is a keen sensitivity to the fact that custodial assets are different from other assets. 

There are questions about systemic risk that have to be asked 

and answered. Until you go through that, it does not get to the 

point of a remedy. 

We benefit from the fact that there are multiple points of expertise flowing into the process, and I actually think that is the 

strength of the FSOC. 

Senator WARNER. But one of the things—and I know what kind 

of—this is a process of first impression now with these nonbank 

SIFI designations and trying to get it right. 

I do wonder whether waiting until stage three before the FSOC 

engages with the institution at the principals’ level really makes 

sense, whether there ought to be some—you know, after the first 

round of questions, one level of kind of principals’ presentation, and 

then you might have a second round as well. 

But are you comfortable that waiting to stage three is the right 

process? 

Mr. LEW. We often hear from firms because they know that they 

are at a size level that clears the kind of initial stage one threshold. So I think there is a back and forth even before there is an 

active notification that there is a process underway. 

I do think there is a tension. If we notify a company and engage 

with them, then do they have to make public disclosures that there 

is that process underway even if it is just in the most preliminary 

stages and it may not end up going anywhere? 

So I do not know that it actually serves the interest of firms to 

be brought in, in a formal way, earlier. 

Stage three is the kind of heart of the process. I think they have 

full access to the process at the point when the meaningful decisions are being made, and the analysis of public information is 

what really fuels stage one and stage two. 

Senator WARNER. But this is the tension, and I think Senator 

Crapo raised it as well. I think you make a point that you do not 

want to have such hard and fast rules because they are unique 

firms. Yet, if there is not the appearance of due process, since we 

are not aware of all of the back and forth, we are only hearing perhaps one side of this argument. 

And I think getting particularly, as you move through stage 

three, these first few nonbank SIFI designations right so that industry at large feels the process is fair is really important. 

Mr. LEW. Well, I totally agree with that, Senator. And we are 

committed to a process where every firm that we review has full 

visibility, and hundreds and hundreds of pages go back and forth, 

and there are more numerous conversations than can be counted. 

I actually think the firms that have gone all the way through the 

process have recognized a lot of what I have said, at least in private. 


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Senator WARNER. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman. 

And, Mr. Secretary, thank you for being here and for your service. 

I know that many of us shamelessly run our own book at these 

meetings, and I am going to gladly participate in that. 

Mary Miller gave a speech on GSEs recently, where she said it 

would take 20 years to capitalize them. I think that was a shock 

to a lot of people that have not been involved in looking where they 

are. 

Would you care to comment on that? 

Mr. LEW. Well, I think that the current GSEs; even in the course 

of the last few weeks, we have seen estimates of what kind of exposure they might have in a distressed situation, and it would take 

a very long time. I would defer to Mary’s analysis on the length of 

time. 

There were a couple of years of very strong GSE profits, but people, I think, have misread that. There were a lot of profits that 

came from really accounting changes in terms of the treatment of 

certain taxes. 

To buildup the kind of capital reserves that they would need to 

fully bear the risks that they would face in an economic downturn 

would take a very long time. 

Senator CORKER. Well, listen, thank you for those comments, and 

as Mr. Crapo mentioned, thank you for your assistance in helping 

move legislation through. Hopefully, at some point we will actually 

have a solution that works for our country. 

Let me ask you a question on Dodd-Frank Section 121, and we 

have asked this over at the Fed; we have asked it several places. 

Do you think Section 121, regarding the FSOC, should have the 

Fed break up a firm if it is too big or too complex even if it is 

healthy? 

I mean, this is a question we keep asking folks. 

I think the language in 121 gives the Fed that ability, to actually 

break up a firm even if it is healthy if, through a bankruptcy process—and let me specify that because I know we actually have sort 

of two different standards. 

We have the resolution that is laid out in Dodd-Frank, and that 

is a different process from bankruptcy. 

But through a bankruptcy process, if a firm could not resolve 

itself through bankruptcy without creating problems within our 

system, does the Fed itself have the ability, even if they are 

healthy, to break them up? 

Mr. LEW. Senator, I think that what the Fed has done in reviewing stress tests, in reviewing living wills, in terms of evaluating the 

health of certainly the largest financial firms; we have come a very 

long way. 

They have not gotten to the question yet that you are raising, 

and I do not know that I should get ahead of the process. 

The challenge is to have standards where the precautions that 

we have put in place to make sure that these institutions are resolvable actually work effectively. 


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I think that some of the actions taken by the Fed reflect both 

qualitative and quantitative concerns. The quantitative concerns 

we kind of understand more simply because it is a question of how 

much capital do they have. The qualitative concerns get to the 

question of are they too complicated to carry out the resolution 

plans that they quantitatively could meet. 

I think that we are still in the early stages of implementing some 

very important reforms that were part of Dodd-Frank. And I think 

the regulators, not just the Fed but the Fed and the FDIC and others, are pressing ahead on this. 

The idea of going all the way to the point of breaking up firms 

is kind of an end of all other things did not work, and I do not 

want to get ahead of the process. 

Senator CORKER. It kind of seems to be, though, an issue that we 

ought to either know or not know. I am not saying this in any way 

to be confrontational to you. 

Mr. LEW. No, I did not take it that way. 

Senator CORKER. Just, so we passed this bill. I think it probably 

pretty clearly states that they have the ability to break up firms 

even if they are healthy. And it seems to me that we might want 

to figure out, as a Committee, what that is going to mean in process, what it is going to mean—you know, how they are going to go 

about doing that. And I wonder if you might—again, this is not 

confrontational. 

Mr. LEW. No, I did not take it that way. 

Senator CORKER. Nobody really has addressed this issue. 

Mr. LEW. I actually think it is a very important question. 

You know, in some ways, it would be easier to say simply yes or 

no, but I actually think it is more complicated than that. 

The fact that they have an authority does not mean that it was 

the desire of the legislation to use it unless they needed to. 

And I think they are in a process where the purpose was to create a situation where there was transparency and resolvability and 

the ability to make sure the taxpayers do not end up having to step 

in again in the future. 

I do not know the answer to the precise question you are asking 

because I have not seen all of those things. 

I do know that it is still a very complicated financial system. 

There are still challenges in making sure that we have the degree 

of transparency that was intended. 

Senator CORKER. Well, my time is up. 

Really just speaking to my colleagues here, I know that Senator 

Toomey wrote a bill relative to revising the bankruptcy code. 

But since Dodd-Frank refers specifically to bankruptcy, not resolution, I have to believe that we have firms in our Nation today 

that if they fail and went through the bankruptcy process it would 

be highly detrimental to our system. And, I mean, I have got to believe that is the case. 

And it seems to me that maybe that is an issue that this Committee needs to look at a little more closely, see whether the bankruptcy rules, which I know are not in our jurisdiction, but whether 

they are adequate, but also, what this statute actually means and 

how we should go about, really, oversight relative to what the Fed 

is doing in this regard. 


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But I am taking too much time. You might want to comment. 

Mr. LEW. Mr. Chairman, may I just comment briefly? 

Senator REED. [Presiding.] Please. 

Mr. LEW. I think it is important as one asks those questions that 

we would be happy to look at questions regarding bankruptcy 

issues. 

I do not think it should be either/or. 

It should not be that we take the very well-developed resolution 

process and say let’s go from there to bankruptcy. 

It may well be that there are additional tools that would be helpful. I just do not think it is particularly helpful to think of them 

as alternatives. 

Senator CORKER. Yes. Thank you so much. 

Senator REED. Senator Menendez, please. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Mr. Secretary, since the financial crisis, consumer debt burdens 

have been a major factor holding back our economy, and high levels 

of mortgage and other debt have caused consumers to defer expenses, cut back on other spending, which has led businesses to reduce investments and create fewer jobs, feeding a cycle that has 

been difficult to escape and, in my view, slowing our recovery. 

And consumers have worked hard to reduce their debt, often at 

great cost, but we are not out of the woods yet. Nationwide, we 

have more than 6 million homes that still have underwater mortgages, including more than 14 percent of homes in my home State 

of New Jersey, and another 10 million have less than 20 percent 

equity. 

Do you agree that stronger consumer balance sheets would reduce risk in the financial system, both directly and by promoting 

stronger and broader-based economic growth? 

Mr. LEW. Senator, I think that we have seen some considerable 

healing in household balance sheets. We still have problems, as you 

have noted, but we are in a much better place than we were before. 

We are actually seeing consumer borrowing in many areas going 

up, and one has to ask, you know, keep an eye on that in terms 

of making sure that people are not getting back into trouble in 

some cases. 

I think that there are pockets that are particularly slow to recover, and that is one of the reasons why we need to make sure 

that we continue to use the tools we have to help underwater 

homeowners. And that is what I was discussing with Senator Reed. 

Senator MENENDEZ. Yes, mortgages are only one example of consumer debt. You still have significant credit card debt. 

Mr. LEW. Yes. 

Senator MENENDEZ. You have student loan debt. 

Should we be considering policy actions that help consumers continue to reduce their debt burden? 

Mr. LEW. Well, I think we have taken a lot of policy actions. 

I am not sure which of the aspects of consumer debt you are talking about. 

Senator MENENDEZ. Well, you could, for example, allow the 

Menendez-Boxer bill to help refinance at historically lower rates 

and eliminate a series of barriers that exist. That would signifiVerDate 0ct 09 2002 22:39 Feb 28, 2015 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 S:\DOCS\91244~1.TXT SHERYL

BANKI-41578DSA with DISTILLER
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cantly reduce mortgage debt for a fair number of Americans in this 

country. 

Mr. LEW. Which we have supported, yes. 

Senator MENENDEZ. You could look at student loans. The President has talked about helping refinance student loans as a way of 

reducing consumer debt. 

Mr. LEW. Right. 

Senator MENENDEZ. Those are the types of initiatives that I am 

thinking of as we talk about if you can reduce the debt burden, 

then you have greater spending capacity, which creates a ripple effect in the economy. 

Mr. LEW. There is no doubt, when we were discussing the issue 

of student loan debt in particular a few moments ago, I do believe 

there is a macroeconomic significance to people being highly constrained by indebtedness. If you do not feel you can start a new 

household, then you are not buying a home, or renting a home, and 

you are not engaging in all of the consumer transactions that we 

all know go into starting a new household. That has an effect on 

the economy. 

If you look at the recovery to date, the area where it has really 

been the most behind is construction and housing, and I do not 

think it is unrelated to consumer indebtedness. It is more than 

that. 

I think that there is a question of confidence and people took a 

hard hit from the recession, and feeling comfortable to go out on 

their own is more than just a question of do they have a job today. 

So I do not think it is just that one issue, but I do think it is 

part of it. 

Senator MENENDEZ. Let me ask you to turn your attention to 

something else that I have concerns with, and that is Treasury’s 

implementation of Section 908 of the Affordable Care Act, which 

imposes an annual fee on manufacturers or importers of prescription drugs. 

When the Finance Committee, which I have the privilege of sitting on as well, imposed the pharmaceutical fee during the ACA 

mark-up process, the Congressional intent, I can tell you very 

clearly, was to exclude drugs used to specifically treat orphan diseases. These are diseases that obviously do not have broad-based, 

mainstream demands which can compensate a company. 

But I continue to be concerned that the Department’s current interpretation of this provision, as expressed in its temporary branded prescription drug fee regulation, would create disparate treatment between FDA-designated orphan drugs by requiring that the 

exemption from the pharmaceutical fee be contingent only upon receipt—receipt—of the orphan drug tax credit for that particular 

product. 

The orphan exemption from the pharmaceutical fee would logically be based on a drug’s designation as an orphan drug and not 

just its tax status. 

Would you agree that the most logical tax policy outcome would 

be to allow the exemption for all FDA-designated orphan drugs, not 

just those of a certain tax status? 

Mr. LEW. Senator, I am happy to take a careful look at the orphan drug issue. 


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Senator MENENDEZ. Here is my problem; every time you tell me 

you are going to take a careful look, I never hear back. 

So, on this and on FIRPTA, since your nomination I have been 

pursuing these questions, and I would like to get a response. If you 

are going to give me a negative response, give me one, but I would 

like to get a response. 

Mr. LEW. I am happy to follow up with you, Senator. 

On FIRPTA, we have had several conversations, and I wish I had 

a tool to deal with it. The legislative proposal that we have made 

I do believe is the right way to deal with it. If you have other ideas 

about the administrative options, we can have a conversation about 

that as well. 

Senator MENENDEZ. I thank you, Mr. Chairman. 

Senator REED. Senator Moran. 

Senator MORAN. Mr. Chairman, thank you very much. 

Mr. Secretary, thank you for your presence this morning. 

While certainly the economics of our country is front and center 

and particular in light of today’s announcement about a significant 

drop in first quarter GDP, we ought to be spending a lot of time 

talking about the economy and job growth, but let me take you to 

a topic that in my mind relates to your and your Department’s 

credibility. I want to ask you the Watergate-kind of question about 

what did you know and when did you know it related to the IRS. 

I grew up with Watergate in the background of my life—the political influence of the way I look at things. And the 18 1⁄2 minute 

gap is a significant component at the downfall of a president. 

And I find it difficult to give credibility to the belief that these 

emails have disappeared by mistake, in an error, something uncontrollable. 

And my question is, what do you know; when did you know it? 

Have you asked the commissioner of the IRS and others at the 

IRS independently—let me ask this question; have you investigated 

this independently of what you have been told by the IRS? 

Do you have additional information to provide to us than what 

the commissioner has testified to in front of the House in recent 

days? 

Mr. LEW. Senator, Commissioner Koskinen has testified, and the 

IRS has presented a lengthy report to the Congress, about 10 pages 

detailing what happened, and I would refer you both to the commissioner and to that report. 

I think if you look at the broader issue, in terms of the whole 

set of activities at the IRS, a year ago when we got a report from 

our IG saying that there was a problem in this unit, we took immediate action. We brought in an acting commissioner, who I think 

did a lot very quickly to fix the situation in that he brought in new 

managers all the way down to the program level, changed the procedures, followed every one of the IG’s recommendations. 

I understand, and I share, the frustration that a broken hard 

drive has led to a gap in what is available. 

But I do want to point out that what the IRS has done is extraordinary in terms of going back and trying to recreate after a mechanical problem as complete a record as is possible. And 70,000 

emails have been provided. They have gone through the recipient 


BANKI-41578DSA with DISTILLER
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emails to trace back, not just from the sender but from the recipient. 

And I have no reason to believe that I have anything to add to 

what the commissioner has said. 

Senator MORAN. Have you analyzed this independent of what the 

commissioner has said? 

Mr. LEW. I mean, we have been in contact, obviously, and understand what they have done, but the IRS is managing this. 

Senator MORAN. I do not mean these questions in any particular 

political context, but the idea—I mean, I assume you understand 

the nature of the IRS and what it expects of the American people 

and the sense of what a double standard this is, that the IRS cannot find records and, yet, American taxpayers are required to maintain. 

You also have an ongoing lawsuit in which, by the Code of Civil 

Procedure, they are required to keep the emails. 

So it seems to me there are a series of problems that the IRS 

faces as a result of the loss of this hard drive. 

And it goes in a broader sense to me about the relationship between the Treasury Department and Congress in trying to establish some level of credibility as we have conversations about what 

the truth is. 

And it seems to me that this is one more example of what I find 

very difficult in dealing with the Department, in getting answers 

to questions that have substance. 

Mr. LEW. Senator, the IRS put together an analysis of what happened, and when that analysis was complete and they knew all the 

facts, they shared it with Congress. I think that it is fair to say 

that it was their sharing of that information with Congress which 

is why it is known to all of us. 

So I think Commissioner Koskinen is one of the most outstanding public servants I have ever worked with. He is a person 

who spent five decades building a reputation on both sides of the 

aisle for integrity and character, and I have total confidence in 

him. 

Senator MORAN. Mr. Secretary, thank you for your responses. I 

have other questions that we will pursue if I have additional time. 

Senator REED. Thank you very much. 

Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. 

Secretary Lew, it is nice to see you again. Thank you for being 

here. 

The FSOC’s report identifies short-term wholesale funding as a 

potential source of financial instability. Governor Trujillo—Federal 

Reserve President of New York Bill Dudley has had some interesting things to say. I will follow up with you in a letter with the 

QF, if you would give us questions for—with questions for the 

record. I will get that to you soon after this hearing. 

I want to go a couple of other places. 

Last July, you said, ‘‘If we get to the end of this year we cannot, 

with an honest, straight face, say that we have ended too-big-tofail. We are going to have to look at other options.’’

That was about a year ago. 

December, you basically said, mission accomplished. 


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You said, ‘‘Based on the totality of reforms we are putting in 

place, I believe we will meet that test.’’

This is despite the views of Federal Reserve Chair Yellen, Governor Trujillo, the FDIC, the OCC, that our work on too-big-to-fail 

is not finished. It almost does not matter what they say because 

the markets still say that on too-big-to-fail the work is not finished. 

Yesterday, you appeared to have a perhaps slight change of heart 

when you told Chairman Hensarling, I am not sure we will know 

the answer to that question until we have the next financial crisis. 

Now that we all agree we cannot honestly say that too-big-to-fail 

is over, what are we going to do to finally put the issue to rest? 

Mr. LEW. Senator, I have said on many occasions that the real 

test only comes in the next financial crisis, which I believe is the 

case. We have to take the steps that we believe are most effective, 

and we do our analysis, but the only real moment when you know 

for sure is when there is a crisis. 

I believe if you look at what we have done we have done an enormous amount. The capital that these institutions have——

Senator BROWN. I have never questioned whether you have done 

a decent amount. 

I have questioned that the markets still say there are advantages 

for the largest banks on the capital markets, and so many others 

are saying that. 

Mr. LEW. On the question of the advantage, obviously, there is 

a lot of work being done. There is a GAO report that is being completed I believe at your request. 

There are a lot of market indicators that show that the assumption that there is a price advantage is going way down. I am not 

saying it is eliminated. It might be. There are some who argue. 

But I think that in terms of the market advantage, it is certainly 

shrinking, if not gone. I do not know that that is the only test. 

Senator BROWN. If not gone? 

Mr. LEW. I am just saying there are people who have expressed 

the view that it is shrinking, others who have said that it is gone. 

Senator BROWN. And your view is which? 

Mr. LEW. It is definitely dramatically reduced. 

The data are still being analyzed, and we will continue to look 

at it. 

Senator BROWN. Well, one of——

Mr. LEW. We are not going to defer to a rating agency or one 

other. We have to keep looking. 

Senator BROWN. Well, it is way more than rating agencies that 

contend that. 

Mr. LEW. Yeah. 

Senator BROWN. I mean, FSOC’s mission is under the DoddFrank. One of its missions is that we restore discipline to the markets through our clear message that no institution is immune from 

failure. 

And you know that. That is your responsibility. 

Your statements have been a little, I think, off of that, but I——

Mr. LEW. Well, I actually do not think so. 

I mean, I think we need to do everything that we can to reduce 

the risk. The law has been changed so that we do not have 

rules——


BANKI-41578DSA with DISTILLER
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Senator BROWN. But implying mission accomplished does not—

implying or saying mission accomplished does not get us there. 

Mr. LEW. I actually did not say—I did not say mission accomplished. 

I said we have to stay vigilant and keep asking questions and 

our work is not done. I have raised issues about shadow banking. 

I have raised issues about international collaboration. 

I think we have a lot more work to do. 

The question of whether or not—you know, I do think it is important to look at things like capital standards, like the Volcker Rule, 

like the resolution authority. There is enormous progress. 

I am not sure that anyone sitting where I sit should ever be comfortable that they are done with their work. 

To the extent that these institutions are so very complex, as I 

was saying earlier, I think that presents issues that require our ongoing attention. 

So I am not saying that we are done with our work, but I do 

think that on the question of whether or not these institutions can 

now absorb losses and economic shocks that they could not before, 

we are in a very different place than we were a few years ago. 

Senator BROWN. OK, OK. Let me close with a quick statement, 

Mr. Chairman. 

Respond, if you would like, Mr. Secretary. 

I am concerned about financial deregulation and disarmament, if 

you will, through international regulations. Last year, Chairman 

Bernanke told this Committee that Basel III, international capital 

accordance—he said, least common denominator. 

We saw an example of that 2 weeks ago when the E.U.’s finance 

minister came to Washington and lobbied the Fed to delay a rule 

requiring large banks to have minimum levels of loss-absorbing 

capital and long-term debt. 

I am especially worried that including financial services in TTIP 

could undermine U.S. financial regulations. Our safety and soundness rules are obviously superior to theirs. 

We have heard concerns that negotiations on capital standards 

for international insurers could move the U.S. to a European model 

of regulation. 

From what I have heard, the Administration—and I thank you 

for this—both you and Ambassador Froman, have stood firm on not 

including financial services in TTIP, the Translation Trade and Investment Partnership. I urge you to continue that advocacy in 

international negotiations, to preserve U.S. regulators’ authority to 

do whatever is necessary to make sure that our financial system 

is safe and sound. 

So I thank you for that. 

Mr. LEW. Senator, we totally agree on that. I have made clear 

to our negotiating partners that we do not think it is appropriate 

to bring prudential regulatory standards into a trade negotiating 

context and a trade dispute resolution process. 

What we do try to do is use entities like the G–20 and the FSB 

to drive international standards up. It ought to be a race to the top, 

and I do think it is important that we remain very engaged in that 

process. 

Senator BROWN. Thank you, Mr. Secretary. 


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Thank you, Mr. Chairman. 

Senator REED. Senator Toomey. 

Senator TOOMEY. Thank you, Mr. Chairman. 

Thank you, Secretary Lew, for being with us today. 

Just a few quick points I would like to make before I get to a 

couple of questions. 

One is I wholeheartedly agree with Senator Menendez’s point 

about the orphan drugs. It is a very, very real issue. I think it is 

an unintended consequence of the way the policy was drafted. 

And I would just ask you, as you respond to him on this issue, 

if you would please include me in your response——

Mr. LEW. Happy to. 

Senator TOOMEY.——because he and I have been working together on this. He is exactly right about the substance of the problem. 

Very quickly on the Ex-Im Bank, which came up earlier, I understood you to say, if I could paraphrase, essentially, since our leading trading competitors engage in Government-sponsored export financing, we need to do it too in order to remain competitive. But 

you went on to say it would be a different question if everyone 

would step back from this Government-sponsored export financing. 

Of course, that stepping back will not happen by itself. It is going 

to require some leadership. 

And so I, in fact, at the last reauthorization debate, proposed exactly this encouragement, that we would have a mutual steppingback from forcing all of our respective taxpayers to subsidize certain companies in their exports. 

Would you support pursuing an effort to engage our trading partners and competitors in this mutual and reciprocal scaling-back of 

Government-sponsored export financing? 

Mr. LEW. Senator, we actually are engaged in conversations like 

that. Just 2 weeks ago there was a meeting at Treasury with 15 

countries, discussing this. I am not going to suggest that it is very 

far along, but there is an engagement on this. 

It is just I do not believe the same to think of it as a unilateral 

decision as to think about what would happen if the world community took action together. I am not particularly optimistic that it 

will have the resolution that would have everyone step back, but 

I do think it is a different question then. 

Senator TOOMEY. Yes, well, it is a different question. 

Surely, we will not make progress in that direction without 

American leadership. So I hope that you will help to provide that 

leadership. It would be a better world and better for Americans if 

our taxpayers were not at risk to these financing exercises. 

I would like to follow up on an issue that Senator Crapo raised, 

and this is something on which we may disagree, but I feel very 

strongly that there ought to be more transparency in the SIFI designation process. 

And, specifically, I do very much agree with Senator Crapo, as 

I understood his comments, to suggest that we ought to have objective criteria disclosed in advance for a variety of reasons, including, 

in my view, an institution that is potentially subject to a SIFI designation ought to have the opportunity to consider changing its 

business model, divesting itself or otherwise being able to avoid the 


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criteria that the FSOC deems to be sufficiently risky for such a 

designation. And I do not think there is enough transparency for 

a company to make that judgment. 

So shouldn’t a company be able to make a judgment about 

whether they want to pursue lines of business that result in the 

SIFI designation? 

Mr. LEW. Yeah, I think it is a fair question. We will continue to 

strive to strike the best balance between transparency and other 

considerations in the process, like the protecting the private information that companies have. 

I think that on the question of whether companies get enough 

feedback to know, I think in stage three companies have ample opportunity to know what the standards are. 

And it is also not a one-time determination. There is an annual 

review after a determination. So a company can choose afterwards 

also to make a change. 

I am happy to look at this question more. 

It is not that we are lacking transparency here. I think that it 

is there are very different kinds of firms, and I think that it is a 

question of whether there is one set of criteria that would be appropriate for all of them. 

Senator TOOMEY. OK. Well, certainly, I am not suggesting that 

there is one set of criteria. Right, totally different kinds of firms. 

That is one of the problems I have with this. 

The idea that we would, for instance, impose bank-type capital 

requirements on, say, fund managers which are not acting as principals but, rather, as agents is completely inappropriate. 

But I still think that the transparency need not be about the specific information about a given firm but, rather, the criteria that 

FSOC would use. And I would encourage greater transparency in 

that space. 

The last thing I wanted to touch on briefly is my understanding 

is that our regulators are in the process of proposing the implementation of the Liquidity Coverage Rule, which originated with Basel, 

of course. Two concerns I have with this: 

One, it is my understanding this was meant to address liquidity 

challenges that would arise specifically from multinational/international activity, and yet, the criteria for applying it is an asset 

size, which is $250 billion in assets. 

And there are some banks in America, for instance, who might 

be of that size but do not engage in much cross-border activity. 

They actually look more like a series of community banks than a 

money center bank. 

Second—and if you could just comment on both of these—is the 

fact that there is an extremely high capital requirement on 

securitized credit facilities, which I think you could argue is actually less of a credit risk than direct lending sometimes for a variety 

of reasons, and yet, this rule would require 10 times the capital 

that direct lending would apply. 

Are those issues of concern to you? 

Mr. LEW. Senator, I think that the overarching concern is to 

make sure that firms have a thick layer of capital that is there for 

them to turn to and that they not be overleveraged to the point of 

creating systemic risk. There is an interplay between the requireVerDate 0ct 09 2002 22:39 Feb 28, 2015 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 S:\DOCS\91244~1.TXT SHERYL

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ments in terms of which standard will be binding for a different 

firm, depending on what the composition of their assets is. 

The Fed has worked very hard on these rules. The FDIC is working on these rules. 

I am happy to go back and look at the question you are raising. 

Senator TOOMEY. I appreciate it. 

Thank you, Mr. Chairman. 

Senator REED. Thank you, Senator Toomey. 

Senator Manchin, please. 

Senator MANCHIN. Thank you, Mr. Chairman. 

And thank you, Secretary Lew, for being here. 

I know you touched on this briefly; I think with Chairman Crapo, 

but I want to go back to the Export-Import Bank because I think 

there are a few things that need to be talked about here. I know 

they are getting beat up pretty good right now. 

And the thing I am looking at is the facts of what we are dealing 

with: 

Returning over a billion dollars to the Treasury, one of the few 

agencies to actually make money for our Government. 

And for supporting 205,000 American jobs, and these are real 

jobs in States like mine, of West Virginia, and every State up here. 

And also, helping about 3,400 companies, a lot of small companies. 

We just had a seminar and had the Export-Import Bank in West 

Virginia to really expose them more. 

I have small businesses that are really poised to export, but they 

do not know how to get into that market and are afraid to get into 

that market. They do not have the wherewithal, and they will not 

tiptoe in that without the support of Export-Import Banks. 

And I want to give my colleagues—I am trying to give my colleagues a comfort level on the other side of the aisle, if they would, 

and work with us. They have before. 

And I am just trying to find that middle ground if I can because—tell me where we are poised on a global market without 

this type of tool, if you will, the Export-Import Bank, and how we 

can go it alone without that also. 

Mr. LEW. Senator, I think the Export-Import Bank provides enormous benefit to both small and large firms—different kinds of benefit. For the small firms, as you are mentioning, it is a pathway 

to understanding how to export. With the larger firms, there is a 

real need to level the playing field. 

You look at areas like aviation sales. If other countries are subsidizing their aircraft and we do not have export supports, that is 

going to have a direct impact on jobs. 

Senator MANCHIN. We are not even asking for a subsidy. 

Mr. LEW. No. 

Senator MANCHIN. We just basically are guaranteeing that, and 

they are paying the full. 

Mr. LEW. Now it is a support to the export. 

Senator MANCHIN. Sure. 

Mr. LEW. I do not think we can say it is not a support. I think 

ours are actually more appropriate than the subsidies that others 

provide. 


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But what I do know is that whether it is a small firm or a large 

firm, if we would remove the Export-Import Bank, both access to 

exports would be reduced and the level playing field would be made 

much more anticompetitive to the United States. 

Senator MANCHIN. What happens to us in September if we do not 

have a reauthorization? 

Mr. LEW. I believe the Export-Import Bank loses its ability to 

enter into the guarantees. 

Senator MANCHIN. Anymore guarantees, basically, from that 

point going forward? 

Mr. LEW. I do not know what happens to the ones in the pipeline. That is a question I would have to ask. 

Senator MANCHIN. If you could find that out for me, sir, I 

would—I just think it would be devastating. If it was not for the 

export markets right now, our economy would be very much hurting in West Virginia and I am sure around other States around 

this country. 

Mr. LEW. And I know that, whether it is construction equipment 

or aviation equipment or small manufactured goods, exports are an 

area of enormous potential for our economy and big firms and 

small firms. 

Senator MANCHIN. And, sir, I finally want to touch on one other 

thing, which is the big fix. Ever since the first day I arrived here, 

I thought we needed to do a financial overhaul, and I continue to 

feel that way. 

When I was Governor, I know we did some big things. In the 

first 7 days I was there I called a special session. It was all about 

finances. Get our financial house in order. 

Our economy took off unbelievable after that, and we never 

looked back during the recession because people had confidence. 

They were investing. They knew they would be treated fair, and 

they knew there was a fair system in place. 

The uncertainty we have in our system right now, I think, makes 

that questionable, and people are looking. 

Are we protecting winners and losers? 

Are we trying to give too much to the people we think have not 

had a fair shot and trying to balance this thing out but without 

really having a concise financial or tax plan for corporations and 

our individuals? 

Mr. LEW. I could not agree with you more. We have a lot of unfinished business. If we could do business tax reform, I think it 

would help enormously in terms of——

Senator MANCHIN. Do you all intend to go after that in the last 

2 years of this Administration? 

Mr. LEW. Well, we——

Senator MANCHIN. Let me just say one other thing real quick, 

and then you can go ahead. 

The economy shrank 2.9 percent in this first quarter. I know it 

was a shock to all of us to see that much. There could be a lot of 

contributing factors; I understand that—tough winter, things of 

that sort. But it really set us back on our heels a little bit. 

I just believe that if you are going to leave a legacy, fixing this 

financial mess, whether you inherited it, whether we have help creVerDate 0ct 09 2002 22:39 Feb 28, 2015 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 S:\DOCS\91244~1.TXT SHERYL

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ate it, whether we are all at fault, Democrats and Republicans, this 

would be a tremendous legacy to leave. 

Mr. LEW. Yeah, there is no question that the first quarter of this 

year was not good performance, but I do think there are idiosyncratic factors that explain it, ranging from the weather to the fact 

that in the fourth quarter of last year we had a huge inventory 

buildup that got drawn down in the first quarter. 

And there is something in terms of the demand for health care 

goods, health care services, that is throwing these numbers into a 

place that feels very anomalous. 

Senator MANCHIN. In your heart of hearts, do you think that we 

will tackle—do you think that the President and the Administration will tackle a major overhaul of our finances? 

Mr. LEW. Well, if you mean our tax system? 

Senator MANCHIN. Our tax system. 

Mr. LEW. Look, I think the President remains committed to it. 

The President put a proposition on the table that I think is one 

Congress should come back to, which is do business tax reform, use 

a one-time savings to fund infrastructure investment and solve two 

problems we have to get our economy moving. We can replace a tax 

code that is riddled with loopholes by lowering the statutory rate, 

and we can pay to fix our bridges, roads and ports so we can compete in the next century. 

I think it is win-win. 

Senator MANCHIN. And you are OK if we dedicate that additional 

revenue toward infrastructure only——

Mr. LEW. Yes. 

Senator MANCHIN.——so we do not grow the size of Government? 

Mr. LEW. Absolutely. It is one-time savings. You could not use 

the one-time savings to cut rates or you would lose money in the 

out years. 

Senator MANCHIN. No, I know that. 

I am just saying, if you are on record as wanting that, that would 

be great. 

Mr. LEW. Absolutely. 

Senator MANCHIN. Thank you, sir. 

Senator REED. Thank you. 

Senator Vitter. 

Senator VITTER. Thank you, Mr. Chairman. 

Mr. Secretary, I want to return to the IRS scandal that my colleague touched on. 

The IRS first said that there was no targeting of political groups. 

Then it said that it was a few rogue agents in Cincinnati. Then it 

said that there was also equal scrutinization of progressive groups. 

All of those things have been now provided untrue. 

Now it is saying that these Lois Lerner emails have lost forever 

because of a hard drive crash. And then only when asked, they disclosed—the IRS disclosed—that six other hard drives belonging to 

IRS officials being investigated had also crashed. 

Given all that history, do you personally believe that ‘‘crash’’ was 

truly an accident and a coincidence? 

Mr. LEW. Senator, I do not agree with the history that you cited. 

I think there is no evidence that has come forward to show any 

political involvement in the whole 501(c)(4) decisions. 


BANKI-41578DSA with DISTILLER
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I think that the actions taken by this Administration and by myself have been clear, that we need to replace the people who made 

decisions in senior positions. 

And I have——

Senator VITTER. Mr. Secretary, do you personally believe that 

this hard drive crash was both an accident and a coincidence? 

Mr. LEW. Senator, I have no reason to believe it is not just a 

hard drive that broke. Hard drives do break. 

Senator VITTER. So you believe it was an accident and a coincidence. 

Mr. LEW. Look, I know that in 2011, when the hard drive broke, 

it was reported. There was an attempt made to reconstruct it. It 

was a hard drive that broke. 

Senator VITTER. You believe it was an accident and a coincidence, basically, according to your testimony before, because folks 

at the IRS told you that? 

Mr. LEW. Senator, sometimes a broken hard drive is just a broken hard drive. 

Senator VITTER. But you do not understand the fact that the 

American people think somebody other than folks at the IRS 

should look at this? 

Mr. LEW. Look, I——

Senator VITTER. Doesn’t that make fundamental sense? 

Mr. LEW. I defer to the IRS commissioner who has addressed this 

at great length. They have and will continue to respond to questions. 

Senator VITTER. When is the last time a hard drive broke like 

this at the IRS? 

Mr. LEW. I do not know, Senator. 

Senator VITTER. So you have not asked that question? 

Mr. LEW. I do know that hard drives periodically break. 

Senator VITTER. Do you know if it has ever happened before, say 

in the last 10 years, at the IRS? 

Mr. LEW. Senator, I am not an IT expert. I would have to get 

our IT expert. 

Senator VITTER. And you have not asked that question? 

Mr. LEW. Senator, I do know that hard drives break. They break 

in the Congress. They break in agencies. They break in our homes. 

And, when a hard drive breaks, you try to recover what you can. 

What the IRS has done is gone above and beyond in terms of 

reaching out, not just to the broken hard drive but to the——

Senator VITTER. Mr. Secretary, the point is nobody trusts the 

IRS to be the only person looking at this issue. 

It is a fundamental point. No one thinks only the folks who could 

get in trouble over it should investigate it. 

You do not think that is a fair response because that is certainly 

the dominant response of the American people? 

Mr. LEW. Senator, I think that the IRS has gone through a thorough review. They made a report to the Congress. They are testifying and answering questions, and——

Senator VITTER. Let me ask you this way; when a taxpayer files 

a tax return and takes a bunch of deductions and the IRS asks 

questions about those deductions and the taxpayer has no receipts, 

no documentation of the deductions, because the dog ate them, 


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should the IRS accept that without any further outside investigation? 

Mr. LEW. Well, actually, the IRS policy, when a taxpayer has lost 

information because of something like a broken hard drive, is to 

work with the taxpayer to recover what can be recovered and to 

make determinations based on the data that are available. 

Senator VITTER. That is interesting. I think there are going to be 

a lot of broken hard drives happening in the next few months. So 

I would warn the IRS about that. 

An archivist of the United States testified yesterday that the IRS 

did not follow the law when it failed to report the loss of records 

belonging to a senior IRS executive. 

What consequences will there be for that failure? 

Mr. LEW. Senator, the IRS IG is looking at this whole matter. So 

there are independent eyes being put on it, and I would defer to 

the IRS IG for those matters. 

Senator VITTER. Also, a number of IT professionals disagree that 

these emails are unrecoverable. 

What, if anything, are you doing to bring those professionals into 

the process? 

Mr. LEW. Senator, I am happy to take back any questions that 

arise. 

I am not, as I say, an IT professional. I have been told that extraordinary steps have been taken to recover the data. 

Senator VITTER. I just want to emphasize, Mr. Secretary, that in 

the real world, when I talk to folks in Louisiana—Democrat, Republican, Independent—their reaction to the notion that this is a 

pure accident and coincidence ranges from some who are very, very 

dubious to most who think that that assertion is laughable. 

And this is growing the distrust gap enormously between Washington and the American people. Something needs to be done about 

it. 

Mr. LEW. Well, Senator, I obviously do not disagree that it is unfortunate that the hard drive broke. 

I am answering your questions. The IRS is answering questions. 

It was from 2011, when the hard drive broke, until now that every 

effort has been made to recover. 

Senator VITTER. And the only folks looking into it work at the 

IRS. The only folks looking into it are those who work at the IRS. 

Mr. LEW. Senator, the IG is looking into it. 

Senator REED. Senator Warren, please. 

Senator WARREN. Thank you, Mr. Chairman. 

And thank you, Mr. Secretary, for being here. 

You know, Mr. Secretary, there are two tools to address the ongoing too-big-to-fail problem. We could address the to-fail part by 

trying to eliminate all the different ways that massive financial institutions could take on too much risk, or we could address the toobig part of it by breaking up the biggest banks so that even if they 

did take on too much risk we could let them fail without worrying 

that they would bring down the whole economy. 

Now Dodd-Frank focused principally on the first approach, trying 

to address the sources of risk in the system. 

But since Congress enacted that law, the risks have changed. 

Banks have gotten more involved in the ownership and trading of 


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physical commodities like aluminum, oil and gas. They have started offering securities backed by subprime auto loans, which look an 

awful lot like the subprime mortgage-backed securities that cause 

the 2008 crisis. 

It seems like we are playing a game of Whack-A-Mole. As we address some sources of risk, others start popping up. 

So my question is given how quickly the amount and types of 

risk change for these massive financial institutions and how difficult it is for regulators to master these new challenges, how confident are you that we can solve the too-big-to-fail problem by focusing only on regulating risk rather than using a combination of 

regulating risk and reducing size? 

Mr. LEW. Senator, I actually think that size does not always correlate with risk. You could have a smaller institution that creates 

more risk. 

Senator WARREN. Let me just stop you there, Mr. Secretary, just 

because you and I have had this conversation before. 

Mr. LEW. We have. 

Senator WARREN. And this part of it we can just rehearse very 

quickly by saying the question is not whether it always correlates. 

The question is whether or not a large institution that takes on 

more risk poses more risk to the economy than a smaller institution that takes on more risk. 

And it is a question of using one tool—that is, you are just trying 

to manage risk—or using two tools, that risk and size matter. 

Mr. LEW. Senator, I think that if you look at the approach we 

have taken—and when I say we, I do not mean just Treasury but 

the regulators have taken—it imposes substantial burdens on large 

firms by requiring higher capital reserves, by putting tougher 

standards in place. 

So there has not been an ignoring of size. It has been to impose 

internalized costs to reduce the risk. 

Now whether there is more that needs to be done is something 

we need to continue to look at. 

Senator WARREN. But, Mr. Secretary, what has been the consequence of your having imposed these, as you put them, costs on 

size? We have watched over the last 5 years the largest financial 

institutions have gotten substantially larger. 

So it is not that these tools have been effective to reduce the size. 

They have grown. 

Mr. LEW. Well, they also have much higher capital reserves, and 

they are in a position that is not the same as the position they 

were in at the beginning of the process. 

I mean, at some level, if the price of being big means having 

larger capital reserves and you can build in more protections, the 

question, which I think is a fair question, is, is that enough? 

But the approach taken has not been to ignore size is what I am 

saying. 

Senator WARREN. Well, all right, but they have gotten bigger. So 

whatever you are doing is obviously not causing them to get smaller, and that adds additional risk. 

So let me ask the question then a different way. 


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I know that the Treasury Department has supported the big 

banks and objected to steps that would reduce their size, such as 

imposing asset caps or reinstituting Glass-Steagall. 

But the GAO will release a report shortly on whether the big 

banks continue to profit from their too-big-to-fail status. 

Now if that report confirms that too-big-to-fail is still a serious 

problem, will the Department rethink its opposition and support 

taking steps directly to reign in the size of the biggest financial institutions? 

Mr. LEW. Senator, I look forward to reading that report and 

other analyses of the issue because, obviously, it is an important 

question—whether there is a funding advantage—and the data, as 

we have discussed many times, are imperfect and not as current 

as we would all like. 

And we are always looking at what we can do to make our financial system safer and sounder. 

My reluctance to directly answer the question about kind of setting arbitrary size limits is that I worry that that perhaps misses 

the real risks, and I look forward to continuing the conversation. 

Senator WARREN. Well, I appreciate that, Mr. Secretary. 

You said yesterday—and I will close here since I am over time. 

But you said yesterday, in testimony before the House, that we 

will not really know whether we have solved the too-big-to-fail 

problem until there is another crisis. I hope that does not mean 

that nothing will change your mind on the question of addressing 

the fact that the biggest financial institutions in this country are 

getting bigger by the day and that size intersects with risk. 

Believing that we are using only one tool, and that is trying to 

regulate the risk, without paying attention to size, I think, runs 

some enormous risks. 

I know I do not have to remind you; we cannot afford another 

financial meltdown, and these big banks pose a risk to the entire 

economy. 

Mr. LEW. Senator, I think that there should not be a day when 

we do not look forward at what the risks of the future are and challenge our assumptions that we have come to today with and ask, 

do we have the tools we need for the future? That is how I approach every issue. 

And we have to rethink things. So I do not have views that are 

locked in based on the past. 

But I do think that if you look at what we have been doing we 

have been keeping a focus on where we think the risks are the 

greatest. So we are keeping a lot of pressure on the regulators to 

act on shadow banking. We are keeping a lot of pressure on the 

international system to meet U.S. capital standards so our exposure is not so great in our complex, global financial system. 

And I look forward to continuing to look at all these issues. 

Senator WARREN. I appreciate that. 

I appreciate your willingness to consider and reconsider the impact of size and also to continue to take a very hard look. These 

banks are taking on new forms of risk and that—I apologize. 

Mr. LEW. I know you are over time and I am over time, but I 

actually think size is not necessarily the only issue. Complexity is 

an issue that may be more important than size. 


BANKI-41578DSA with DISTILLER
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Senator WARREN. Hence, the reason to use two tools and not just 

one. 

Mr. LEW. But I do not think that leads to an arbitrary limit that 

would not necessarily deal with that problem. 

Senator WARREN. Many ways to deal with size without calling it 

an arbitrary limit—I will not let him get the last word. 

Thank you, Mr. Chairman. 

Senator REED. Senator Heller. 

Senator HELLER. Mr. Chairman, thank you. 

And to the Secretary, thank you for being here also. 

I want to begin by saying that I do not share your confidence in 

Commissioner Koskinen. I have been here for 7 1⁄2 years and have 

never seen a more arrogant witness in my time here. And coming 

from a city that breeds arrogance, that is really saying something. 

I want to begin by following up with Senator Moran’s and Senator Vitter’s questions on the IRS scandal. 

Before I do so, I would like to start with a quote from the President last year that said, ‘‘The IRS has to operate with absolute integrity, and the Government has to conduct itself in a way that is 

true to the public trust.’’

And I would argue that this Administration has completely failed 

on every single one of those points, and I think there are many 

here in this room that would agree with me. 

Going back to Senator Moran’s questions and being very specific, 

Secretary Lew, when were you first personally aware—when were 

you first personally aware that Lois Lerner’s emails were lost? 

Mr. LEW. Senator, as I testified yesterday, I became aware of it 

roughly at the time Congress did, just days before. 

Our attorneys were talking to each other, and I think correctly 

said that they should fully understand the whole situation and 

then bring it forward and disclose it completely, and that is what 

they did. 

Senator HELLER. So they found out in April and did not tell you 

until you heard on TV? 

Mr. LEW. No, no, I said I learned just before. 

Senator HELLER. So a week ago? 

Mr. LEW. I would have to——

Senator HELLER. Days ago? A week ago? 

Mr. LEW. I learned, you know, a day or two before. 

Senator HELLER. OK, you said days ago. 

Did you give or receive any directives of how the IRS should handle that? 

Mr. LEW. I am sorry I did not hear you. 

Senator HELLER. Did you give the IRS, or have you had opportunity to give them, any directives? 

Mr. LEW. Our general counsels engaged on this, and the direction——

Senator HELLER. Are you engaged? 

Mr. LEW. The direction that was given was figure out what happened and share that information when you thoroughly can explain 

where it is. I think that was the right guidance. 

Senator HELLER. But I just want to know. What are the discussions between Treasury and the IRS? What has been taking place 

since you found out? 


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Mr. LEW. The IRS is responsible in this area, and Commissioner 

Koskinen has been answering questions on it, and I have remained 

abreast of what is going on. 

But, obviously, I am not the IT expert. I cannot go back and go 

through the details of——

Senator HELLER. Are you responsible for the IRS? Are you responsible? 

Mr. LEW. The IRS is part of the Treasury Department. 

Senator HELLER. Right, right. So you have a hands-off approach? 

Mr. LEW. No, I did not say I have a hands-off approach. 

Senator HELLER. It sounds to me you have a hands-off approach 

moving forward on this. 

Mr. LEW. Senator, I do not pretend to be an IT expert. 

Senator HELLER. I am not asking you to be an IT expert. 

All I am asking you is, are you having discussions today, as head 

of the Treasury Department, with the IRS on this issue? Are you 

having discussions? 

Mr. LEW. There——

Senator HELLER. You can tell me no. That is all right. 

Mr. LEW. No. The direction which was given by Treasury was to 

get to the bottom of this and to understand it and to share the information. That is, I think, what was the right thing to do. 

Obviously——

Senator HELLER. Have you had any personal discussions with 

the White House about these lost emails? 

Mr. LEW. I am not going to get into specific conversations, but 

there has been—this is something that the IRS has analyzed and 

shared everything that they know. 

Senator HELLER. So, as part of your hands-off approach, you 

have not even talked to the White House about this? 

Mr. LEW. Look, the IRS is an agency that I think appropriately 

operates within Treasury with a great deal of independence because I do not think it would be in anyone’s interest for there to 

be any political interference with the IRS. 

But on questions——

Senator HELLER. We can just move on. 

The Federal Records Act requires that all agencies back up all 

official documents and communications. 

Do you believe that the IRS has broken any laws? 

Mr. LEW. The IRS IG is taking a look at this, and I will obviously 

read that report. 

Senator HELLER. Can we go somewhere else besides the Treasury 

IG or the IRS IG? 

Can we get an independent review? I think that is what Senator 

Vitter was trying to get to. 

Can we get outside the Treasury Department, outside the IRS, 

and get an independent review of this? 

Mr. LEW. You know, I have never heard a question raised about 

the independence of the IRS IG. 

Senator HELLER. Well, you are hearing it. You are hearing it. 

Can we? 

Mr. LEW. The IG is an independent investigator. 

Senator HELLER. Would you support outside the Treasury Department taking a look at this? 


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There is a real lack of confidence. 

Mr. LEW. I think the IG investigation is appropriate and is underway. 

Senator HELLER. You are sounding just like the commissioner 

now. You are sounding just like the commissioner. 

Mr. LEW. Senator——

Senator HELLER. Can you get an independent counsel outside the 

Treasury to take a look at this issue? 

Mr. LEW. Senator, I think the IG review is the appropriate step. 

Senator HELLER. So you are saying no. 

Mr. LEW. I am telling you what I think the appropriate step is. 

Senator HELLER. Your answer is no. 

Thank you, Mr. Chairman. 

Senator REED. Thank you, Senator Heller. 

I am informed that Senator Shelby has one question. 

Senator SHELBY. One question, I hope. 

Senator REED. Asking that question, I will recognize Senator 

Shelby. 

Senator SHELBY. Mr. Secretary, I have before me a Treasury 

Order 10105, which breaks down the relationship and supervision 

of officials in the Department of Treasury. That is, you designate 

under the order the Deputy Secretary is authorized to work in your 

behalf and so forth. It has got a list of the Under Secretaries, and 

number 11 is the Commissioner of Revenue. 

The IRS Commissioner, as I understand it, according to your directive here, reports directly to the Deputy Secretary of the Treasury, which reports—the Deputy reports to you. Is that right? 

Mr. LEW. That is correct. 

Senator SHELBY. OK. Now——

Mr. LEW. I mean, it is a bit more independent than other 

subunits; we should clear. 

Senator SHELBY. Not totally? 

Mr. LEW. Not totally, no, no, no. I never said it was. 

Senator SHELBY. Do you believe that the integrity of the IRS is 

of the utmost importance to the functioning of this Government? 

Mr. LEW. Look, I have said many times, and I believe deeply——

Senator SHELBY. Yes or no—do you believe that? 

Mr. LEW.——that in a functioning democracy the integrity of the 

IRS is critical. 

Senator SHELBY. Do you realize—you, the Secretary of the Treasury—that the IRS’s integrity has been called into question all over 

America, in other words, for what has been going on at the IRS the 

last several years? 

People do not trust the IRS. They do not believe that those tapes 

and hard drives just disappeared. 

You know all this. I think you are an honorable man. I have 

known you a long time. 

But isn’t it time—isn’t it past time—for us to get past you looking at internally, even by an inspector general, and get a special 

prosecutor to restore the integrity of the IRS, whatever the cost, 

wherever it leads? 

Mr. LEW. Senator, I believe that if you look at the amount of investigation that has been done, that has produced no evidence of 


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any political interference in this process, if one looks at the record, 

the record should actually be reassuring. 

Obviously, there is a desire to keep asking questions. I understand that, but I do not think it is because the questions have not 

been thoroughly examined by committee after committee of Congress, independently looking at all of the evidence, interviewing 

people, going through millions of pages of documents. No evidence 

of political interference—at some point, the process has to recognize that. 

Senator SHELBY. Well, I think most people would think there has 

been a lot of interference by the IRS. 

Mr. LEW. There is no evidence of it. 

Senator SHELBY. Not just the disappearance of the tapes but 

what went on before them, when they were stonewalling different 

designations that should have been approved. 

But the integrity of the IRS is what is important, and the American people—I think that is in question now. 

How do you restore it? I believe you get to the bottom of this. 

And I do not believe Treasury and the inspector general and others can do this. We need outside special prosecutors to do it because it is important, not only to this Administration but to the 

functioning of Government, period. 

Thank you. 

Senator REED. Thank you, Senator Shelby. 

Thank you, Mr. Secretary, for your testimony. 

As many of my colleagues indicated, they will submit written 

questions to you, and we ask for your prompt response. 

With that, I will say, the hearing is adjourned. 

[Whereupon, at 11:49 a.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 


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PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY 

Thank you, Mr. Chairman. 

My position on the Financial Stability Oversight Council, or FSOC, is well known. 

As I have said in the past, I have strong concerns with the Council, which, I believe, 

was one of Dodd-Frank’s ways of preserving and codifying preferential treatment for 

large institutions with any hand in financial markets. 

I am afraid that my concerns with the structure of the Systemically Important 

Financial Institution, or SIFI, designation process have proven eerily true for financial firms of all sectors. It seems to me that not only is the process thoroughly 

opaque, but aside from an introductory threshold, the qualifications for designation 

are devoid of any quantitative data. What constitutes interconnectedness? What specific metric does FSOC use to determine a systemically important level of interconnectedness? Mr. Chairman, we don’t know. 

Further, as I have outlined before, I remain concerned with the ideology of a SIFI 

designation entirely. The Federal Government should not pick winners and losers 

in the market. Yet, that is exactly what a designation does; it chooses which firms 

are too-big-to-fail. Mr. Chairman, I understand that this Committee has already had 

this debate; however, I do not believe it is over. I believe stronger-still capital standards for the major market players should be on the table. I look forward to hearing 

Chairman Lew’s perspective on this matter and on many of these other concerns, 

and I hope he shares them. 

Thank you Mr. Chairman. 

PREPARED STATEMENT OF JACOB J. LEW

SECRETARY, DEPARTMENT OF THE TREASURY

JUNE 25, 2014

Chairman Johnson, Ranking Member Crapo, and Members of the Committee, 

thank you for the opportunity to testify today regarding the 2014 annual report of 

the Financial Stability Oversight Council. 

Nearly 4 years ago, President Obama signed into law the Dodd-Frank Wall Street 

Reform and Consumer Protection Act (Dodd-Frank Act), the most comprehensive set 

of reforms to our financial regulatory system since the Great Depression. As a result 

of the implementation of these new rules, consumers have access to better information about financial products and are benefiting from new protections. Financial 

markets and companies have become more resilient. Regulators have become better 

equipped to monitor, mitigate, and respond to threats to financial stability. And 

today, our financial system is better capitalized, more transparent, and better prepared to withstand shocks. 

As many of you know, one of the important reforms in the Dodd-Frank Act was 

the creation of the Financial Stability Oversight Council (Council). Before the Council, no single authority was accountable for monitoring and addressing risks to financial stability, and each regulator focused on the institutions, functions, or markets under its purview. As we learned, without a mechanism to look at the entire 

financial system, risks to financial stability can spread quickly across institutions 

and markets. This siloed approach allowed certain risks to fall through the cracks 

of the regulatory system and failed to protect us in the lead-up to the crisis. 

Congress changed that. With the establishment of the Council, senior regulators 

from across the system now meet regularly to facilitate a more coordinated approach 

to monitoring, identifying, and responding to potential threats to financial stability. 

Today, the Council provides a forum to foster regular and close collaboration among 

its members at both the Federal and State levels. This collaboration features frequent meetings between senior officials, as well as dedicated and ongoing engagement among staff on a near-daily basis. 

Independent regulators continue to be responsible for regulating the markets and 

institutions they oversee. But they are now also part of a process that enables them 

to look across markets and institutions to monitor the entire financial system and 

identify potential risks to U.S. financial stability. Some now suggest that this function should be curtailed, but hindering the Council’s ability to analyze information 

regarding particular sectors, firms, or activities runs the risk of missing the next 

threat to our financial system and the U.S. economy. This is an important responsibility that the Council must fulfill. 

Today, there are even some who challenge the notion that the Council should ask 

questions about whether certain activities or companies might pose risks to the stability of the U.S. financial system. But asking questions does not equal regulatory 

action. We learned from the financial crisis that regulators should have asked more, 


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not fewer, questions about the institutions and activities that they oversaw. And 

today we should ask these questions equally prepared to find a reason to take action 

or not. But if we avoid or are discouraged from asking questions altogether, our financial system will be more exposed to unseen risks, potentially leading to large 

scale problems. 

There are many possible outcomes associated with the Council examining a particular risk. If the Council determines there is a risk that requires action, Congress 

provided the Council with a broad range of authorities and potential remedies. The 

Council may also conclude that it does not need to act, that it needs to examine 

and issue further, or that it must gather additional data. What the Council should 

not do is cordon off any sector or activity without even considering it. That would 

be a dereliction of Council responsibilities and a complete disregard for the very 

purpose of the Council. 

Some also claim that the Council’s processes are opaque and its outcomes are predetermined, but that is simply wrong. The Council has voluntarily adopted a robust 

transparency policy and put in place a comprehensive, deliberative approach to its 

evaluation of risks, and it solicits public input and carefully considers all points of 

view. Its report, which I will be discussing today as the subject of this hearing, describes the work of the Council. 

As the distance in time since the financial crisis grows, we must not forget the 

financial and emotional pain endured by millions of American families who lost 

their homes, their retirement savings, or their jobs. We cannot return to a regulatory environment that failed to detect risks to financial stability and was 

unequipped to mitigate those risks and prevent the damage to our financial system 

and economy. 

In this context, the Council’s annual report stands as a testament to how the 

Council is executing on its statutory duty to identify and respond to potential 

threats to financial stability. The report reflects the collective judgment of Council 

members regarding the key risks to financial stability and provides an important 

example of how the Council shares information about its work with Congress and 

the public in a clear and transparent manner. Each annual report is the product 

of a highly collaborative analysis conducted by the Council’s member agencies to 

document for the public the Council’s sense of the risks present in all corners of the 

market, its assessment of how those risks might be transmitted to the broader financial system, and its recommendations for specific actions to mitigate those risks. 

The Council’s annual report also provides a roadmap for the Council’s agenda for 

the upcoming year—what areas it will focus on, what areas will likely require additional attention, and how it expects to address them. The 2014 annual report focuses on nine areas that warrant continued attention and possibly further action 

from the Council’s members:

• First, regulatory agencies and market participants should continue to take action to reduce vulnerabilities in wholesale funding markets, including tri-party 

repo and money market mutual funds, that can lead to destabilizing fire sales.

• Second, regulators should continue to work with policymakers to implement the 

significant structural reforms needed to reduce taxpayers’ exposure to risk in 

the housing market.

• Third, cybersecurity threats, infrastructure vulnerabilities, and other operational risks remain a top priority for the Council, and regulators should continue to take steps to prevent operational failures and improve resiliency.

• Fourth, as the financial system evolves in response to technological, competitive, and regulatory changes, regulators should remain attentive to financial innovations and the migration of certain activities outside of traditional financial 

intermediaries that could create financial stability risks.

• Fifth, U.S. regulators should continue to cooperate with foreign counterparts to 

address concerns about benchmark reference rates such as LIBOR.

• Sixth, regulators and institutions should remain vigilant in monitoring and assessing risks related to interest rate volatility, particularly as investors seek 

higher yields in a low interest rate environment.

• Seventh, Council member agencies should continue to work with the Office of 

Financial Research (OFR) to fill financial data gaps and address related issues 

of data quality and comprehensiveness.

• Eighth, regulators should continue implementation of Dodd-Frank reforms to 

reduce risk-taking incentives of large, complex, interconnected financial institutions.


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• And finally, there is a need for continued monitoring of adverse financial developments abroad and their potential impact on the U.S. financial system. 

Activities of the Council 

Since its 2013 annual report, the Council has continued to fulfill its statutory responsibilities to identify risks to U.S. financial stability, promote market discipline, 

and respond to emerging threats to the stability of the U.S. financial system. The 

Council regularly examines significant market developments and structural issues 

within the financial system. For example, over the past year, the Council considered 

issues such as market volatility, the Government shutdown and debt ceiling impasse, interest rate risk, economic developments in Europe and emerging economies, 

housing finance reform proposals, the NASDAQ trading halt in August 2013, and 

risks to financial stability arising from cybersecurity threats. Recognizing the need 

to be vigilant in responding to new and emerging challenges, the Council will continue to monitor potential threats to financial stability and to facilitate coordination 

among its member agencies. 

In addition, last year, the Council made its first designations of nonbank financial 

companies. The Council’s designations authority addresses a key weakness brought 

to light by the financial crisis: the existing regulatory structure allowed some large, 

complex nonbank firms to pose risks to financial stability that were not subject to 

adequate supervision. As a result, the Dodd-Frank Act allows the Council to designate nonbanks whose distress or activities could pose a threat to U.S. financial 

stability, and subject them to supervision by the Federal Reserve and enhanced prudential standards. The Council has used a thorough and transparent process when 

considering these companies for designation, giving each company numerous and extensive opportunities to engage with the Council and its staff and to understand the 

detailed reasons for any designation. 

The Council voted in July 2013 to make final determinations regarding American 

International Group (AIG) and General Electric Capital Corporation. In September 

2013, the Council voted to make a final determination regarding Prudential Financial. The Council had notified those companies in the fall of 2012 that they were 

under review for potential designation, and the companies submitted information for 

the Council to consider in its evaluations. The lengthy and careful analyses conducted by the Council included frequent and substantive interactions with the companies under consideration. 

Let me give you an example. For one of the companies that has been designated, 

Council staff spent over a year conducting an analysis that considered more than 

200 data submissions from the company that totaled over 6,000 pages. The Council 

or its staff met with the company 20 times. Prior to a final determination, the Council prepared and shared with the company an approximately 200-page document 

outlining the Council’s analysis and rationale for a proposed determination. The 

company responded to this document and discussed it with all the members of the 

Council before the Council made a final decision. This determination—and any others made by the Council regarding nonbank financial companies—was based on the 

standards set forth by Congress in the Dodd-Frank Act and followed the process laid 

out in the Council’s public rule and guidance. 

One final point I would like to make here is that given the global nature of the 

financial system, the United States has made strong commitments to international 

efforts to institute financial regulatory reforms comparable to and consistent with 

ours. Such efforts are important to safeguarding the U.S. financial system from 

threats resulting from weaker regulation abroad, as well as to promoting a level 

playing field for U.S. firms that operate internationally. 

The Council’s Governance and Transparency 

The Council is committed to conducting its work publicly. Indeed, as I noted publicly at our May meeting, the Council’s annual reports will continue to serve as a 

key tool for communicating our activities to the public and Congress. 

However, much of the Council’s work—particularly in regards to companies under 

consideration for potential designation—relies on sensitive company and industry 

data and information that would not be shared by firms or regulators without an 

expectation of confidentiality. Accordingly, the Council is committed to conducting 

its meetings in public whenever possible and to releasing minutes for all its meetings. Though no statute requires the Council to do so, we believe taking these steps 

helps provide the public with insight into the Council’s work. We have kept those 

commitments over the past three and a half years, including holding 12 open meetings and releasing minutes for 40 meetings. 

The Council also understands that it can always improve upon its commitments. 

To that end, beginning in 2013, the Council undertook a review of its governance 


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and transparency policies to determine whether it can even better enhance its openness and accountability to the public while still protecting sensitive information. 

This review has included consideration of the practices of other organizations with 

similar structures, memberships, or responsibilities as the Council. For example, 

during a public session in May, the Council revised its transparency policy to incorporate several enhancements to improve communication with the public. Additionally, the Council adopted bylaws for its Deputies Committee that will provide further visibility into some of its staff work. 

The Council understands that the perspective of the public enhances its analysis. 

Accordingly, it actively seeks input from outside parties to inform its work. For example, in December 2013, a representative from the banking sector joined a public 

meeting of the Council to discuss cybersecurity. In May, the Council hosted a public 

conference on asset management to hear directly from industry representatives, academics, and other stakeholders on topics related to asset management. The Council 

continues to work with State and foreign regulators in the course of its analysis on 

nonbank financial companies. The Council continues to benefit from this type of engagement with external stakeholders and expects to continue to be informed by outside experts on its work going forward. 

Progress on Financial Regulatory Reform 

The 2014 annual report discusses the significant progress that Council member 

agencies, both individually and collectively, have made in implementing Dodd-Frank 

Act reforms. As a result of the implementation of these reforms, consumers have 

access to better information about financial products and are benefiting from new 

protections. Financial markets and companies have become more resilient and 

transparent, and regulators have become better equipped to monitor, mitigate, and 

respond to threats to the financial system. 

Over the past year, the regulators reached a number of key milestones in financial reform implementation, including:

• finalization of the Volcker Rule, bank capital rules, a supplementary leverage 

ratio for the largest banks and bank holding companies, enhanced prudential 

standards for the U.S. operations of large foreign banks, and the development 

of clearing, trading, and registration requirements for certain swaps markets;

• proposed rulemakings on money market mutual fund (MMF) reform, risk retention for securitizations, and requirements for short-term liquidity coverage for 

large banking organizations; and

• significant reductions in intraday credit exposures in the tri-party repo market 

and significant progress on the strategy for financial institution resolution 

under the orderly liquidation authority.

On a related note, there has been continued progress toward achieving an international minimum standard that would allow national authorities in the majority 

of the world’s largest economies to wind down failing global banks without the use 

of taxpayer money. We also anticipate progress on a framework for cross-border cooperation in the future resolutions of global banks. Now let me provide greater detail about the nine areas of focus covered in the report. 

Areas of Focus of the Council’s 2014 Annual Report 

Wholesale Funding Markets 

The Council has highlighted run risks associated with MMFs and the tri-party 

repo market since our first annual report in 2010. Regarding MMFs, in June 2013 

the SEC proposed rules to reform the structure of MMFs in order to make them 

less susceptible to runs. This proposal includes a number of the same principles and 

concepts, such as requiring a floating NAV, that were part of the proposed recommendations for reform issued by the Council in November 2012. The Council recommends that the SEC move forward and adopt meaningful structural reforms designed to address MMF run risk. The Council also recommends that its member 

agencies examine the nature and impact of any structural reform of MMFs that the 

SEC implements to determine whether the same or similar reforms are appropriate 

for other cash-management vehicles. 

In the tri-party repo market, there has been significant progress in reducing market participants’ reliance on intraday credit from the clearing banks. The share of 

tri-party repo volume funded intraday by the clearing banks fell from 92 percent 

in December 2012 to under 20 percent in December 2013. Vulnerabilities to fire 

sales remain, particularly with respect to borrowers, such as broker-dealers, that 

rely heavily on these markets for financing. The Council acknowledges the work 

that has been done in the past year to reduce the reliance on discretionary intraday 


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credit, which is forecasted to be less than 10 percent by the end of 2014. Nevertheless, a default of a broker-dealer remains a key vulnerability that could lead to fire 

sales of repo collateral, and may lead to the disruption of certain asset and financing markets. The Council recognizes that regulatory reforms implemented since the 

crisis, such as increases in the amount of capital, liquidity, and margin changes for 

U.S. broker-dealers, may help to mitigate the risk of default. However, the Council 

advises all U.S. regulators of firms that rely on this market for funding to assess 

whether additional steps must be taken to protect borrowers from funding runs. 

Housing Finance Reform 

The housing finance system continues to require significant reform to enhance financial stability. The residential mortgage market relies heavily on Government 

guarantees, while private mortgage activity remains muted. Increasing the presence 

of private capital and reducing risk to taxpayers in housing finance remains a priority. Fannie Mae and Freddie Mac achieved their targets for risk-sharing transactions and reductions in their mortgage investment portfolios. Member agencies 

also made progress on the risk-retention rule, and infrastructure reforms such as 

the development of the Common Securitization Platform are moving forward. The 

annual report outlines the ongoing need for market participants, regulators, and 

Congress to work together to create structural reforms that will help reduce uncertainty in the housing finance market, provide access for creditworthy borrowers, and 

protect taxpayers. In the past year, progress was made toward establishing a new 

framework for housing policy, but ultimately Congress must pass legislation to 

achieve comprehensive housing finance reform. 

Operational Risks 

Cybersecurity remains a top priority for the Council, as deliberate attempts to disrupt institutions, markets, and commerce continue, as seen in the high-profile cyberattack on Target that resulted in the theft of bank card and customer information. 

While companies and financial markets become more dependent on complex technologies and networks, the frequency, severity, and sophistication of such incidents 

are likely to rise. The Council recommends that financial regulators continue their 

efforts to assess cyber-related vulnerabilities facing their regulated entities and 

identify gaps in oversight that need to be addressed. In addition, the Council recognizes the importance of removing legal barriers to information sharing between public and private sector partners to enhance overall awareness of cyber threats, 

vulnerabilities, and attacks in a manner that continues to protect privacy and civil 

liberties, including the passage of comprehensive cybersecurity legislation by Congress. 

Market continuity and confidence were also challenged this past year with an increase in outages and failures resulting from technological and infrastructure 

vulnerabilities. Some of these incidents led to the temporary suspension of trading. 

Other incidents involved software failures that sent involuntary orders through 

automated trading systems, leading to large losses. The vulnerabilities that are associated with such incidents may be heightened, particularly in fragmented markets, by high-frequency or low-latency automated trading activities. The Council recognizes that alternative trading venues and methods may present operational and 

other risks by magnifying system-wide complexity. As such, the Council recommends that regulators focus not only on centrally traded products, but also on 

a broader set of financial products and trading methods off exchanges. 

Financial Innovation and Migration of Activity 

The financial system is constantly evolving, with the development of new products, services, and business practices. These changes can provide a number of benefits to the financial system, but they may also present new risks. While new products or services are often developed as a result of technological and competitive 

forces, sometimes they are created to circumvent regulation. In other instances, the 

migration of some activities may move a regulated activity outside of the regulatory 

perimeter. The changing landscape of the post-financial crisis world has fostered 

many innovations which should be monitored for the potential to create risks to financial stability. 

Reference Rates 

Beginning in the second half of 2012, investigations uncovered multiple instances 

of systematic false reporting and manipulation of widely used survey-based benchmark interest rates, such as LIBOR and EURIBOR, by reporting banks. More recently, concerns have been raised about the integrity of certain foreign exchange 

(FX) rate benchmarks. One important insight from the recent allegations in FX marVerDate 0ct 09 2002 22:39 Feb 28, 2015 Jkt 000000 PO 00000 Frm 00043 Fmt 6621 Sfmt 6621 S:\DOCS\91244~1.TXT SHERYL

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kets is that transactions-based benchmarks can also be subject to manipulation and 

adversely impact related markets. 

While some progress has been made to find viable alternative interest-rate benchmarks, more work is needed. The Council recommends U.S. regulators continue to 

cooperate with foreign regulators and international bodies to identify alternative interest rate benchmarks anchored in observable transactions and supported by appropriate governance structures, and to assess market practices and benchmarks in 

the FX markets. The Council also recommends development of a plan to implement 

a smooth and orderly transition to any new benchmarks. 

Resilience to Interest Rate Volatility 

The prolonged period of low interest rates and low volatility has provided incentives for investors and financial institutions to search for yield by extending the duration of their portfolios, investing in lower-quality credit, increasing leverage, or 

easing underwriting standards. Such strategies may increase short-term profits, but 

at the risk of large losses in the event of a sudden yield curve steepening or a large 

rise in rates. 

Despite the relatively benign impact on financial stability of last year’s sharp rise 

in interest rates, volatility remains a potential threat to financial stability. For this 

reason the Council recommends that supervisors, regulators, and financial firm 

management continue to monitor and assess the growing risks resulting from 

search-for-yield behaviors as well as the potential risk of severe interest rate shocks. 

Data Quality and Comprehensiveness 

High quality and readily available access to financial data is critical for regulators, supervisors, and financial firms, but access to comprehensive data is limited. 

For example, regulators lack sufficient data to thoroughly analyze all repo markets, 

and they are still unable to effectively monitor securities lending transactions and 

the reinvestment of cash collateral. In addition, some regulators still face difficulties 

in accessing data stored at swap data repositories. However, regulators have made 

significant progress in addressing financial data gaps in recent years. They now collect real-time data from various markets and institutions. There has also been 

progress in improving the standardization of certain financial data, including the 

legal entity identifier (LEI), which will help to identify parties to financial transactions. The widespread adoption of LEI both domestically and globally, together 

with the work to enhance the consistency and availability of swaps data reported 

by swaps data repositories, would improve the ability of regulators to monitor 

emerging risks in the financial system. The Council supports these efforts and recommends that member agencies and the OFR continue to work together to promote 

high-quality data standards and fill data gaps where they exist. 

Risk-taking Incentives of Large, Complex, Interconnected Financial Institutions 

Historically, when large, complex, interconnected financial institutions became 

distressed, official authorities often intervened to maintain financial stability. The 

Dodd-Frank Act addresses the incentives and abilities of large, complex, interconnected financial institutions to engage in excessive risk-taking that could result 

from implicit expectations of future official sector intervention. Financial regulatory 

reforms have created much stronger financial institutions, with capital levels doubling compared to pre-crisis levels, significantly reducing the likelihood of failure. 

Reforms have also been designed to minimize the damage that any single firm’s failure would have on the broader financial system. 

During 2013, the largest U.S. financial institutions continued to reduce their complexity in some dimensions. Additionally, credit rating agency assessments of potential Government support to U.S. bank holding companies reflect declining expectations of the likelihood of Government support. However, rating agency opinions continue to explicitly factor in the possibility that the Government will provide support 

to the largest banks if they become financially distressed. The full implementation 

of the orderly liquidation authority, and the phasing in of enhanced prudential 

standards in coming years, should help reduce remaining perceptions of Government support for large, complex, interconnected financial institutions. 

Foreign Markets Risks 

In 2013, domestic market participants remained concerned about the adverse consequences of financial developments abroad. However, the areas from which these 

risks emanate have changed considerably. In previous years, stability in peripheral 

Europe was a key area of concern for global financial markets. Over the past year, 

economic and financial conditions in the euro area have stabilized. At the same 

time, potential risks emanating from emerging markets have become more prominent. Beginning in the late spring of 2013, emerging market economy exchange 


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rates and asset prices became much more volatile, and economic growth subsequently slowed in some of these economies. The potential spillover effects on the 

United States from emerging markets’ stresses appear limited, but a substantial 

worsening of these stresses is a risk. 

Conclusion 

In summary, the Council plays a critical role in our financial regulatory system 

by bringing together Federal and State financial regulators to identify potential 

risks across the system and prevent problems from falling through the cracks. The 

annual report is a reflection of the collaboration and collective judgment of these 

officials. Its findings and recommendations are a critical statement that guides action, promotes transparency, and creates accountability. 

I strongly believe that the actions of the Council and its member agencies have 

made the financial system more stable and less vulnerable to future economic and 

financial stress. Still, the Council must continue to remain vigilant to new risks 

while focusing on the risks highlighted in the annual report. 

I want to thank the other members of the Council, as well as their staffs, for their 

work over the last year, their efforts in preparing the 2014 annual report, and their 

ongoing contributions to the important work of the Council. We look forward to 

working with this Committee, and with Congress as a whole, to continue to make 

progress in creating a more resilient and stable financial system.


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ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD


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BANKI-41578DSA with DISTILLER91244B.176
71


BANKI-41578DSA with DISTILLER91244B.177
72


BANKI-41578DSA with DISTILLER91244B.178
73


BANKI-41578DSA with DISTILLER91244B.179
74


BANKI-41578DSA with DISTILLER91244B.180
75


BANKI-41578DSA with DISTILLER91244B.181
76


BANKI-41578DSA with DISTILLER91244B.182
77


BANKI-41578DSA with DISTILLER91244B.183
78


BANKI-41578DSA with DISTILLER91244B.184
79


BANKI-41578DSA with DISTILLER91244B.185
80


BANKI-41578DSA with DISTILLER91244B.186
81


BANKI-41578DSA with DISTILLER91244B.187
82


BANKI-41578DSA with DISTILLER91244B.188
83


BANKI-41578DSA with DISTILLER91244B.189
84


BANKI-41578DSA with DISTILLER91244B.190
85


BANKI-41578DSA with DISTILLER91244B.191
86


BANKI-41578DSA with DISTILLER91244B.192
87


BANKI-41578DSA with DISTILLER91244B.193
88


BANKI-41578DSA with DISTILLER91244B.194
89


BANKI-41578DSA with DISTILLER91244B.195
90


BANKI-41578DSA with DISTILLER91244B.196
91


BANKI-41578DSA with DISTILLER91244B.197
92


BANKI-41578DSA with DISTILLER91244B.198
93


BANKI-41578DSA with DISTILLER91244B.199
94


BANKI-41578DSA with DISTILLER91244B.200
95


BANKI-41578DSA with DISTILLER91244B.201
96


BANKI-41578DSA with DISTILLER91244B.202
97


BANKI-41578DSA with DISTILLER91244B.203
98


BANKI-41578DSA with DISTILLER91244B.204
99


BANKI-41578DSA with DISTILLER91244B.205
100


BANKI-41578DSA with DISTILLER91244B.206
101


BANKI-41578DSA with DISTILLER91244B.207
102


BANKI-41578DSA with DISTILLER91244B.208
103


BANKI-41578DSA with DISTILLER91244B.209
104


BANKI-41578DSA with DISTILLER91244B.210
105


BANKI-41578DSA with DISTILLER91244B.211
106


BANKI-41578DSA with DISTILLER91244B.212
107


BANKI-41578DSA with DISTILLER91244B.213
108


BANKI-41578DSA with DISTILLER91244B.214
109


BANKI-41578DSA with DISTILLER91244B.215
110


BANKI-41578DSA with DISTILLER91244B.216
111


BANKI-41578DSA with DISTILLER91244B.217
112


BANKI-41578DSA with DISTILLER91244B.218
113


BANKI-41578DSA with DISTILLER91244B.219
114


BANKI-41578DSA with DISTILLER91244B.220
115


BANKI-41578DSA with DISTILLER91244B.221
116


BANKI-41578DSA with DISTILLER91244B.222
117


BANKI-41578DSA with DISTILLER91244B.223
118


BANKI-41578DSA with DISTILLER91244B.224
119


BANKI-41578DSA with DISTILLER91244B.225
120


BANKI-41578DSA with DISTILLER91244B.226
121


BANKI-41578DSA with DISTILLER91244B.227
122


BANKI-41578DSA with DISTILLER91244B.228
123


BANKI-41578DSA with DISTILLER91244B.229
124


BANKI-41578DSA with DISTILLER91244B.230
125


BANKI-41578DSA with DISTILLER91244B.231
126


BANKI-41578DSA with DISTILLER91244B.232
127


BANKI-41578DSA with DISTILLER91244B.233
128


BANKI-41578DSA with DISTILLER91244B.234
129


BANKI-41578DSA with DISTILLER91244B.235
130


BANKI-41578DSA with DISTILLER91244B.236
131


BANKI-41578DSA with DISTILLER91244B.237
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BANKI-41578DSA with DISTILLER91244B.238
133


BANKI-41578DSA with DISTILLER91244B.239
134


BANKI-41578DSA with DISTILLER91244B.240
135


BANKI-41578DSA with DISTILLER91244B.241
136


BANKI-41578DSA with DISTILLER91244B.242
137


BANKI-41578DSA with DISTILLER91244B.243
138


BANKI-41578DSA with DISTILLER91244B.244
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BANKI-41578DSA with DISTILLER91244B.245
140


BANKI-41578DSA with DISTILLER91244B.246
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BANKI-41578DSA with DISTILLER91244B.247
142


BANKI-41578DSA with DISTILLER91244B.248
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BANKI-41578DSA with DISTILLER91244B.249
144


BANKI-41578DSA with DISTILLER91244B.250
145


BANKI-41578DSA with DISTILLER91244B.251
146


BANKI-41578DSA with DISTILLER91244B.252
147


BANKI-41578DSA with DISTILLER91244B.253
148


BANKI-41578DSA with DISTILLER91244B.254
149


BANKI-41578DSA with DISTILLER91244B.255
150


BANKI-41578DSA with DISTILLER91244B.256
151


BANKI-41578DSA with DISTILLER91244B.257
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BANKI-41578DSA with DISTILLER91244B.258
153


BANKI-41578DSA with DISTILLER91244B.259
154


BANKI-41578DSA with DISTILLER91244B.260
155


BANKI-41578DSA with DISTILLER91244B.261
156


BANKI-41578DSA with DISTILLER91244B.262
157


BANKI-41578DSA with DISTILLER91244B.263
158


BANKI-41578DSA with DISTILLER91244B.264
159


BANKI-41578DSA with DISTILLER91244B.265
160


BANKI-41578DSA with DISTILLER91244B.266
161


BANKI-41578DSA with DISTILLER91244B.267
162


BANKI-41578DSA with DISTILLER91244B.268
163


BANKI-41578DSA with DISTILLER91244B.269
164


BANKI-41578DSA with DISTILLER91244B.270
165


BANKI-41578DSA with DISTILLER91244B.271
166


BANKI-41578DSA with DISTILLER91244B.272
167


BANKI-41578DSA with DISTILLER91244B.273
168


BANKI-41578DSA with DISTILLER91244B.274
169


BANKI-41578DSA with DISTILLER91244B.275
170


BANKI-41578DSA with DISTILLER91244B.276
171


BANKI-41578DSA with DISTILLER91244B.277
172


BANKI-41578DSA with DISTILLER91244B.278
173


BANKI-41578DSA with DISTILLER91244B.279
174


BANKI-41578DSA with DISTILLER91244B.280
175


BANKI-41578DSA with DISTILLER91244B.281
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BANKI-41578DSA with DISTILLER91244B.282
177


BANKI-41578DSA with DISTILLER91244B.283
178


BANKI-41578DSA with DISTILLER91244B.284
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BANKI-41578DSA with DISTILLER91244B.285
180


BANKI-41578DSA with DISTILLER91244B.286
181


BANKI-41578DSA with DISTILLER91244B.287
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BANKI-41578DSA with DISTILLER91244B.288
183


BANKI-41578DSA with DISTILLER91244B.289
184


BANKI-41578DSA with DISTILLER91244B.290
185


BANKI-41578DSA with DISTILLER91244B.291
186


BANKI-41578DSA with DISTILLER91244B.292
187


BANKI-41578DSA with DISTILLER91244B.293