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S. HRG. 112–183 

OVERSIGHT OF DODD-FRANK IMPLEMENTATION: 

MONITORING SYSTEMIC RISK AND PROMOTING 

FINANCIAL STABILITY 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

ON 

CONTINUING OVERSIGHT OF THE IMPLEMENTATION OF THE DODDFRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT 

(DODD-FRANK ACT), FOCUSING ON PROVISIONS RELATED TO MONITORING SYSTEMIC RISK AND PROMOTING FINANCIAL STABILITY 

MAY 12, 2011 

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

( 

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

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

DWIGHT FETTIG, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

CHARLES YI, Chief Counsel 

LAURA SWANSON, Policy Director 

COLIN MCGINNIS, Professional Staff Member 

BRETT HEWITT, Legislative Assistant 

ANDREW OLMEM, Republican Chief Counsel 

HESTER PEIRCE, Republican Senior Counsel 

MICHAEL PIWOWAR, Republican Senior Economist 

DAWN RATLIFF, Chief Clerk 

LEVON BAGRAMIAN, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)
(III) 

C O N T E N T S 

THURSDAY, MAY 12, 2011 

Page 

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

Opening statements, comments, or prepared statements of: 

Senator Shelby .................................................................................................. 2 

Prepared statement ................................................................................... 34 

WITNESSES 

Neal S. Wolin, Deputy Secretary, Department of the Treasury .......................... 3 

Prepared statement .......................................................................................... 34 

Responses to written questions of: 

Senator Shelby ........................................................................................... 71 

Senator Reed .............................................................................................. 75 

Senator Crapo ............................................................................................ 77 

Senator Corker .......................................................................................... 78 

Senator Vitter ............................................................................................ 80 

Senator Toomey ......................................................................................... 81 

Senator Moran ........................................................................................... 83 

Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve 

System ................................................................................................................... 4 

Prepared statement .......................................................................................... 42 

Responses to written questions of: 

Senator Corker .......................................................................................... 84 

Senator Moran ........................................................................................... 86 

Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation .................... 6 

Prepared Statement ......................................................................................... 44 

Responses to written questions of: 

Senator Shelby ........................................................................................... 86 

Senator Reed .............................................................................................. 88 

Senator Hagan ........................................................................................... 92 

Senator Crapo ............................................................................................ 93 

Senator Corker .......................................................................................... 95 

Senator Vitter ............................................................................................ 96 

Senator Toomey ......................................................................................... 98 

Senator Kirk .............................................................................................. 101 

John Walsh, Acting Comptroller of the Currency ................................................. 8 

Prepared Statement ......................................................................................... 54 

Responses to written questions of: 

Senator Shelby ........................................................................................... 101 

Senator Reed .............................................................................................. 102 

Senator Crapo ............................................................................................ 111 

Senator Corker .......................................................................................... 114 

Senator Vitter ............................................................................................ 116 

Senator Toomey ......................................................................................... 117 

Senator Kirk .............................................................................................. 119 

Mary L. Schapiro, Chairman U.S. Securities and Exchange Commission 

Prepared Statement ......................................................................................... 60 

Responses to written questions of: 

Senator Shelby ........................................................................................... 119 

Senator Hagan ........................................................................................... 121 

Senator Crapo ............................................................................................ 123 

Senator Vitter ............................................................................................ 125 

Senator Toomey ......................................................................................... 126 
Page

IV 

Mary L. Schapiro, Chairman U.S. Securities and Exchange Commission— 

Continued 

Responses to written questions of—Continued 

Senator Moran ........................................................................................... 131 

Gary Gensler, Chairman, Commodity Futures Trading Commission 

Prepared Statement ......................................................................................... 66 

Responses to written questions of: 

Senator Shelby ........................................................................................... 132 

Senator Crapo ............................................................................................ 134 

Senator Vitter ............................................................................................ 136 

Senator Toomey ......................................................................................... 136 
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OVERSIGHT OF DODD-FRANK IMPLEMENTATION: MONITORING SYSTEMIC RISK AND 

PROMOTING FINANCIAL STABILITY 

THURSDAY, MAY 12, 2011 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 9:37 a.m. in room SD–538, Dirksen Senate Office Building, Hon. Tim Johnson, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN TIM JOHNSON 

Chairman JOHNSON. I would like to call this hearing to order. 

Today, as the Committee continues its oversight of the DoddFrank Wall Street Reform and Consumer Protection Act, I welcome 

our witnesses back to talk about systemic risk and financial stability. Last year, when this Committee set out to respond to the 

worst economic crisis in generations, addressing systemic risk and 

‘‘too big to fail’’ were key tasks. Any serious financial reform effort 

had to include an early warning system that could detect systemic 

risk before it could threaten to bring down the entire economy. 

Equally important was creating a new orderly liquidation process 

to prevent future bailouts and to force large risky financial firms 

to plan ahead for their own possible failure. 

In Dodd-Frank, we accomplished these goals, but those changes 

cannot just take place at the flick of a switch. Today our witnesses 

will provide us with an update on the implementation of the provisions related to monitoring systemic risk and promoting financial 

stability less than 10 months after the legislation was signed into 

law. Each of these agencies here is part of the Financial Stability 

Oversight Council, or FSOC, established to be the early warning 

watchdog for our financial system. 

It is important to note that the seats of two voting members of 

the FSOC remain vacant—the CFPB Director and the independent 

insurance member. We need to nominate and confirm those members as soon as possible. Any political game plan surrounding these 

nominees to try to subvert critical Wall Street reforms would be irresponsible and risk our Nation’s economic recovery. 

One of FSOC’s early tasks is to write rules for designating large 

risky nonbank financial institutions for enhanced supervision. The 

so-called shadow banking system was one of the key pieces that led 

to the crisis. And while it is important to provide oversight of the 
2 

shadow banking system, it is also important that this designation 

does not become a synonym for ‘‘too big to fail.’’ 

The Dodd-Frank Act ended ‘‘too-big-to-fail’’ bailouts by establishing the orderly liquidation authority to unwind failing financial 

firms without putting the financial system or taxpayers at risk. In 

fact, Ranking Member Shelby worked closely with then-Chairman 

Dodd to craft an amendment that became the final text of this provision in Dodd-Frank, and I want to thank Ranking Member Shelby for his work. 

While we will never be able to anticipate every possible cause of 

a future crisis, we are much better equipped to deal with the next 

crisis if and when it occurs. We should never forget the magnitude 

of the costs of the financial crisis, especially the destruction of millions of jobs and trillions of dollars of household wealth. 

Opponents of financial reform may want to use revisionist history, but Americans have not forgotten that the recession was 

caused in part by excessive risk among some of the largest financial firms. With Dodd-Frank, we have created a new, sound economic foundation that will protect against the entire economy 

being exposed the next time a large financial firm rolls the dice on 

a bet it cannot back up. The effective, timely, and well-coordinated 

implementation of these reforms is critical to our economic security. 

I want to remind my colleagues and the witnesses that as soon 

as we have a quorum present, we will move into executive session 

to report our six nominees. When finished with the nominees, we 

will return to our hearing. Given the time constraints today, only 

the Chairman and the Ranking Member will deliver opening statements. 

Ranking Member Shelby. 

STATEMENT OF SENATOR RICHARD C. SHELBY 

Senator SHELBY. Mr. Chairman, to expedite the hearing, I ask 

unanimous consent that my opening statement, which is lengthy, 

be made part of the record, and we can get on with the witnesses. 

Chairman JOHNSON. It will be included. 

Senator SHELBY. Mr. Chairman, I believe I am right on the number, but you are the counter. I believe we just need one more person to show up to have a quorum. 

[Pause.] 

Chairman JOHNSON. Mr. Wolin, please proceed—we have a 

quorum. 

[Whereupon, at 9:42 a.m., the Committee proceeded to other 

business and reconvened at 9:55 a.m.] 

Chairman JOHNSON. Before I begin the introductions of our witnesses today, I want to remind my colleagues that the record will 

be open for the next 7 days for any materials you would like to submit. 

Our witnesses today have all been before this Committee numerous times this year, so I will keep the introductions brief. 

The Honorable Neal S. Wolin is Deputy Secretary of the U.S. Department of the Treasury. 
3 

The Honorable Ben S. Bernanke is currently serving his second 

term as Chairman of the Board of Governors of the Federal Reserve System. 

The Honorable Sheila C. Bair is Chairman of the Federal Deposit 

Insurance Corporation. Chairman Bair recently announced that 

she will be stepping down as the Chairman of the FDIC at the beginning of July when her current term expires. Sheila, I would like 

to thank you for all your work you have done to serve the people 

of the United States. I will truly miss you come July, and we wish 

you well in any future endeavors that you pursue. 

The Honorable Mary L. Schapiro is Chairman of the U.S. Securities and Exchange Commission. 

The Honorable Gary Gensler is the Chairman of the Commodity 

Futures Trading Commission. 

Mr. John Walsh is Acting Comptroller of the Currency of the Office of the Comptroller of the Currency. 

I thank you all for being here today. Secretary Wolin, you may 

begin your testimony. 

STATEMENT NEAL S. WOLIN, DEPUTY SECRETARY, 

DEPARTMENT OF THE TREASURY 

Mr. WOLIN. Thank you, Mr. Chairman. 

Chairman Johnson, Ranking Member Shelby, members of the 

Committee, I appreciate the opportunity to update you on the 

Treasury Department’s implementation of the Dodd-Frank Act. 

Although our economy and financial markets have made progress 

toward recovery, we cannot forget why the Congress passed and 

the President signed the Dodd-Frank Act last year. 

In the fall of 2008, we witnessed a financial crisis of a scale and 

severity not seen in decades. The crisis exposed fundamental failures in our financial system. Our system favored short-term gains 

over stability and growth. Our system was weak and susceptible to 

crisis, and our system left taxpayers to save it in times of trouble. 

We had no choice but to build a better, stronger system. Enacting 

Dodd-Frank was the beginning of that process, and as we move forward with implementation, our efforts are guided by broad principles. 

We are moving quickly but carefully. Treasury and regulators 

are seeking public input and are committed to getting the details 

right. 

We are conducting this process in the open, bringing full transparency to implementation. We are consulting broadly, making 

input on rulemakings publicly available, and posting the details of 

senior officials’ meetings online so that the American people can 

see who is at the table. 

Wherever possible, we are seeking to streamline and simplify 

Government regulation. Dodd-Frank consolidates organizational 

structures and oversight responsibilities, updating and 

rationalizing patchwork regulations built up over decades. 

We are creating a more coordinated regulatory process. Regulators are working together to close gaps and to prevent breakdowns in coordination—and within the Financial Stability Oversight Council, we are working across agencies and instilling joint 

accountability for the strength of the financial system. 
4 

We are working to ensure a level playing field. We are working 

hard internationally to develop similar frameworks on the key 

issues where global consistency is essential, such as liquidity, leverage, capital, and OTC derivatives. 

We are working hard to achieve a careful balance and to protect 

the freedom for innovation that is absolutely necessary for growth. 

We are keeping Congress fully informed of our progress on a regular basis. 

Treasury has made significant progress in the short time since 

the Dodd-Frank Act was enacted. In those months, we have stood 

up the FSOC, which is working to identify risks to U.S. financial 

stability and promote market discipline, while developing procedures for deciding which nonbank financial institutions and financial market utilities will be subject to heightened prudential standards. 

We have made significant progress in creating the Office of Financial Research, which is working to improve the quality of financial data available to policymakers and to facilitate more robust 

and sophisticated analysis of the financial system. 

Dodd-Frank creates, and the Treasury is standing up, the Consumer Financial Protection Bureau, which is working to protect 

consumers, making sure they have the information they need to 

understand the terms of financial products. 

Treasury is also working to enhance our ability to monitor the 

insurance sector through the Federal Insurance Office, which, for 

the first time provides the U.S. Government dedicated expertise regarding the insurance industry. 

We have made significant progress in the 10 months since enactment. Continuing to move forward is essential to our country’s financial well-being. There is no responsible alternative because if 

we do not invest in reform now, we run the unacceptable risk that 

we will pay dearly later. We cannot allow that. 

Dodd-Frank Act was enacted to make sure that our financial system is the world’s strongest, most dynamic, and most productive. 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you, Mr. Wolin. 

Chairman BERNANKE. 

STATEMENT BEN S. BERNANKE, CHAIRMAN, BOARD OF 

GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. BERNANKE. Thank you. Chairman Johnson, Ranking Member 

Shelby, and other Members of the Committee, thank you for the 

opportunity to testify on the Federal Reserve Board’s role in monitoring systemic risk and promoting financial stability, both as a 

member of the Financial Stability Oversight Council and under our 

own authority. 

The Dodd-Frank Act created the FSOC to identify and mitigate 

threats to the financial stability of the United States. During its 

existence thus far, the FSOC has promoted interagency collaboration and established the organizational structure and processes 

necessary to execute its duties. 

The FSOC and its member agencies also have completed studies 

on limits on proprietary trading and investments in hedge funds 

and private equity funds by banking firms—the so-called Volcker 
5 

rule—on financial sector concentration limits, on the economic effects of risk retention, and on the economic consequences of systemic risk regulation. The FSOC is currently seeking public comments on proposed rules that would establish a framework for 

identifying nonbank financial firms and financial market utilities 

that could pose a threat to financial stability and that, therefore, 

should be designated for more stringent oversight. Importantly, the 

FSOC has begun systematically monitoring risks to financial stability and is preparing its inaugural annual report. 

In addition to its role on the FSOC, the Federal Reserve has 

other significant financial stability responsibilities under the DoddFrank Act, including supervisory jurisdiction over thrift holding 

companies and nonbank financial firms that are designated as systemically important by the Council. The act also requires the Federal Reserve (and other financial regulatory agencies) to take a 

macroprudential approach to supervision and regulation; that is, in 

supervising financial institutions and critical infrastructures, we 

are expected to consider the risks to overall financial stability in 

addition to the safety and soundness of individual firms. 

A major thrust of the Dodd-Frank Act is addressing the ‘‘too-bigto-fail’’ problem and mitigating the threat to financial stability 

posed by systemically important financial firms. As required by the 

act, the Federal Reserve is developing more stringent prudential 

standards for large banking organizations and nonbank financial 

firms designated by the FSOC. These standards will include enhanced risk-based capital and leverage requirements, liquidity requirements, and single-counterparty credit limits. The standards 

will also require systemically important financial firms to adopt socalled living wills that will spell out how they can be resolved in 

an orderly manner during times of financial distress. The act also 

directs the Federal Reserve to conduct annual stress tests of large 

banking firms and designated nonbank financial firms and to publish a summary of the results. To meet the January 2012 implementation deadline for these enhanced standards, we anticipate 

putting out a package of proposed rules for comment this summer. 

Our goal is to produce a well-integrated set of rules that meaningfully reduces the probability of failure of our largest, most complex 

financial firms and that minimizes the losses to the financial system and the economy if such a firm should fail. 

The Federal Reserve is working with other U.S. regulatory agencies to implement Dodd-Frank reforms in additional areas, including the development of risk retention requirements for 

securitization sponsors, margin requirements for noncleared overthe-counter derivatives, incentive compensation rules, and risk 

management standards for central counterparties and other financial market utilities. 

The Federal Reserve has made significant organizational changes 

to better carry out its responsibilities. Even before the enactment 

of the Dodd-Frank Act, we were strengthening our supervision of 

the largest, most complex financial firms. We have created a centralized multidisciplinary body to oversee the supervision of these 

firms. This Committee uses horizontal, or cross-firm, evaluations to 

monitor interconnectedness and common practices among firms 

that could lead to greater systemic risk. It also uses additional and 
6 

improved quantitative methods for evaluating the performance of 

firms and the risks that they might pose. And it more efficiently 

employs the broad range of skills of the Federal Reserve staff to 

supplement supervision. We have established a similar body to 

help us effectively carry out our responsibilities regarding the oversight of systemically important financial market utilities. 

More recently, we have also created an Office of Financial Stability Policy and Research at the Federal Reserve Board. This office 

coordinates our efforts to identify and analyze potential risks to the 

broader financial system and the economy. It also helps evaluate 

policies to promote financial stability and serves as the Board’s liaison to the FSOC. 

As a complement to those efforts under Dodd-Frank, the Federal 

Reserve has been working for some time with other regulatory 

agencies and central banks around the world to design and implement a stronger set of prudential requirements for internationally 

active banking firms. These efforts resulted in the agreements 

reached in the fall of 2010 on the major elements of the new Basel 

III prudential framework for globally active banks. The requirements under Basel III that such banks hold more and better quality capital and more robust liquidity buffers should make the financial system more stable and reduce the likelihood of future financial crises. We are working with the other U.S. banking agencies 

to incorporate the Basel III agreements into U.S. regulations. 

More remains to be done at the international level to strengthen 

the global financial system. Key tasks ahead for the Basel Committee and the Financial Stability Board include determining how 

to further increase the loss-absorbing capacity of systemically important banking firms and strengthening resolution regimes to 

minimize adverse systemic effects from the failure of large, complex 

banks. As we work with our international counterparts, we are 

striving to keep international regulatory standards as consistent as 

possible, to ensure both that multinational firms are adequately supervised and to maintain a level international playing field. 

Thank you, and I would be pleased to take your questions. 

Chairman JOHNSON. Thank you, Chairman Bernanke. 

Chairman BAIR. 

STATEMENT OF SHEILA C. BAIR, CHAIRMAN, FEDERAL 

DEPOSIT INSURANCE CORPORATION 

Ms. BAIR. Thank you, Mr. Chairman. Chairman Johnson, Ranking Member Shelby, and Members of the Committee, thank you for 

the opportunity to testify today on behalf of the FDIC. 

The recent financial crisis has highlighted the critical importance 

of financial stability to the functioning of our real economy. While 

emergency measures taken in the crisis stabilized financial markets and helped end the recession, in its wake, almost 14 million 

Americans remain out of work and our nation faces a number of 

other serious economic challenges. 

Consistent with historical precedent, a central cause of the crisis 

was excessive debt and leverage in our financial system. In the fall 

of 2008, many of the large intermediaries at the core of our financial system had too little capital to maintain market confidence in 

their solvency. In the period leading up to this crisis, we saw excess 
7 

leverage of financial institutions and securitization structures and 

in real estate loans that made our entire system highly vulnerable 

to a decline in home prices and a rise in problem mortgages. The 

need for stronger bank capital requirements is being addressed 

through Basel III and through implementation of the Collins 

Amendment here in the United States. 

One of the most powerful inducements toward excess leverage 

and institutional risk taking before the crisis was the de facto policy of ‘‘too big to fail.’’ With the expectation of a Government backstop the largest financial companies are insulated from the normal 

discipline of the marketplace that applies to smaller banks and 

practically every other private company. This situation represents 

a dangerous form of state capitalism, in which the market expects 

these companies to receive generous Government subsidies in times 

of financial distress. Unless reversed, the result is likely to be more 

concentration and complexity in the financial system, more risk 

taking at the expense of the public, and in due time, another financial crisis. 

However, the Dodd-Frank Act does provide the basis for a new 

resolution framework designed to make it possible to resolve systemically important financial institutions, or SIFIs, without a bailout and without sparking a systemic crisis. Being designated as a 

SIFI will in no way confer a competitive advantage by anointing an 

institution as ‘‘too big to fail.’’ The heightened supervisory requirements placed on SIFIs, including higher capital requirements and 

the need to maintain resolution plans, seems to represent a powerful disincentive for large institutions to seek SIFI status. 

A key consideration in designating a firm as a SIFI should be 

whether it could be resolved in a bankruptcy process without systemic impact. Provided we have sufficient information to evaluate 

the resolvability, it is likely that relatively few non-bank financial 

companies will ultimately be designated as SIFIs and subject to the 

heightened supervisory requirements. But we do need the information to make that determination. 

The orderly liquidation authority has been called a bailout mechanism by some and a fire sale by others, but neither is true. Instead, it is, I believe, a highly effective resolution framework that 

greatly enhances our ability to provide continuity and minimize 

losses and financial institution failures. 

Excess leverage is a problem that extends beyond the purview of 

financial regulators to a broader range of economic policies that encourage the use of debt as opposed to equity, and this is where I 

hope the Members of the Senate Banking Committee can perhaps 

play a leadership role in promoting economic policies, including tax 

measures and fiscal reforms that can reduce or eliminate incentives 

for excess leverage in our financial system and our economy. 

There are two additional risk management issues that I feel 

should be high priorities for the new Financial Stability Oversight 

Council under its mandate to identify and address emerging risks 

to financial stability. First, mortgage servicing deficiencies remain 

a serious area of concern. Although the FDIC does not supervise 

the largest loan servicers, over 4 years ago, we began identifying 

and trying to address these problems using the authorities at our 

disposal. Problems in mortgage servicing are yet another result of 
8 

the misaligned incentives in the mortgage process, where fixed 

compensation provides few incentives to implement the more costly, labor intensive servicing techniques that are necessary to deal 

with high volumes of problem loans. Not only do these problems 

represent significant operational, reputational, and litigation risks 

to mortgage servicers, which we insure, they are also holding back 

the recovery of U.S. housing markets. The FSOC needs to consider 

the full range of potential exposure to this problem and the related 

impact on the industry and the real economy. 

We also believe the FSOC needs to actively monitor interest rate 

risk, or the vulnerability of borrowers and financial institutions to 

sudden volatile spikes in interest rates. Borrowers and depository 

institutions may be subject to sudden increases in interest costs 

when interest rates rise—and they will inevitably rise. This issue 

takes on particular urgency now in light of the current low level 

of interest rates and rapid growth in U.S. Federal debt. Developing 

policies that clearly demonstrate the sustainability of the U.S. fiscal situation will be of utmost importance in maintaining investor 

confidence and ensuring a smooth transition to higher interest 

rates in coming years. 

Thank you again for the opportunity to testify about these critically important issues. I would, of course, be pleased to answer 

your questions. 

Chairman JOHNSON. Thank you, Chairman Bair. 

Because our Republican colleagues need to leave shortly, I ask 

that the remaining witnesses’ testimony be submitted for the 

record. We will now move directly to questions. 

STATEMENT OF JOHN WALSH, ACTING COMPTROLLER OF 

THE CURRENCY 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, I appreciate the opportunity to provide an update on the OCC’s 

work to implement the Dodd-Frank Act provisions related to monitoring 

systemic risk and promoting financial stability, and our perspectives on the 

functions and operations of the Financial Stability Oversight Council, or 

FSOC. 

The Dodd-Frank Act includes several provisions to address systemic issues 

that played a role in the financial crisis. These include constraining excessive risk taking, instituting stronger capital requirements and more robust 

stress-testing requirements, and bridging regulatory gaps. The OCC is 

among the financial regulators that have rulewriting authority for many of 

these provisions, and my testimony describes our progress in these areas. 

One of the key provisions of the Dodd-Frank Act created the Financial Stability Oversight Council, which brings together the views, perspectives, and 

expertise of the financial regulatory agencies and others to identify, monitor, and respond to systemic risk. 

FSOC has three major objectives: to identify risks to the financial stability 

of the United States; to promote market discipline, and to respond to 

emerging threats to the stability of the U.S. financial system. 

In some cases, the Council has direct responsibility to make decisions and 

take actions. This includes designating certain non-bank financial companies to be supervised by the Federal Reserve and subject to heightened prudential standards should the Council determine that material financial distress at such companies would pose a threat to the financial stability of the 

United States. In other areas, the Council’s role is more of an advisory body 

to the primary financial regulators, such as conducting studies and making 

recommendations to inform future agency rulemakings. 
9 

The varied roles and responsibilities that Congress assigned to the Council 

appropriately balance and reflect the desire to enhance regulatory coordination for systemically important firms and activities, while preserving and 

respecting the independent authorities and accountability of primary supervisors. 

As detailed in my written statement, FSOC has taken action on a number 

of items, including the publication of two required studies and proposed 

rulemakings on the designation of systemically important non-bank financial firms and financial market utilities. 

The Council and its committees are also making strides in providing a more 

systematic and structured framework for identifying, monitoring, and deliberating potential systemic risks to the financial stability of the United 

States. Briefings and discussions on potential risks and the implications of 

current market developments on financial stability are a key part of the 

closed deliberations of each Council meeting. 

While I believe FSOC enhances the agencies’ collective ability to identify 

and respond to emerging systemic risks, I would offer two cautionary notes. 

First, I believe the Council’s success ultimately will depend on the willingness and ability of its members and staff to engage in frank and candid discussions about emerging risks, issues, and institutions. These discussions 

are not always pleasant as they can challenge one’s longstanding views or 

ways of approaching a problem. But being able to voice dissenting views or 

assessments will be critical in ensuring that we are seeing and considering 

the full scope of issues. 

In addition, these discussions often will involve information or findings that 

require further verification or that are extremely sensitive to the operation 

of either an individual firm or an entire market segment. In some cases, 

the discussions, if misconstrued, could undermine public and investor confidence and create or exacerbate problems in the financial system. As a result, I believe that it is critical that these types of deliberations—both at 

the Council and staff level—be conducted in a manner that assures their 

confidential nature. 

Second, even with fullest deliberations and best data, there will continue 

to be unforeseen events that pose substantial risks to the system, markets, 

or groups of institutions. We should not expect FSOC to prevent such occurrences. FSOC will, however, provide a mechanism to communicate, coordinate, and respond to such events to help contain and limit their impact. 

The issues that the Council will confront in carrying out these duties are, 

by their nature, complex and far-reaching in terms of their potential effects 

on our financial markets and economy. Developing appropriate and measured responses to these issues will require thoughtful deliberation and debate among the member agencies. The OCC is committed to providing its 

expertise and perspectives and in helping FSOC achieve its mission. 

Thank you, and I’ll be happy to respond to your questions. 

Chairman JOHNSON. Senator Shelby. 

Senator SHELBY. Mr. Chairman, thank you for yielding to us. We 

are all, as you know, going down to the White House to meet with 

the President. I yield my time to Senator Toomey. 

Senator TOOMEY. Senator Shelby, thank you very much. I appreciate that as well as all of your cooperation in this process and in 

many other matters. Thank you. 

Mr. Chairman, thank you very much for holding this hearing. I 

think it is a very important topic and I appreciate your doing this, 

and to all the witnesses, I know how busy you are and I am grateful that you are here once again to answer our questions. 

I would like to zero in, if I could, on the process by which the 

Council will be designating non-bank financial institutions as 

SIFIs. I think this is a very, very important issue, and I will confess up front, I am hoping that this Council will cast the narrow 

net rather than a very broad net, and I think it is vitally important 
10 

that we have a well defined and very objective process by which we 

make these designations. 

The Notice of Proposed Rulemaking that came out in January, I 

would suggest, lacked the necessary specificity that we need to understand how this process is going to unfold. As I think everybody 

knows, it essentially restated the statute and did not provide the 

kind of guidance on how the statute will be applied. 

Now, I think several of you, maybe all of you, have acknowledged 

in your written testimony the intent to provide additional guidance, 

and I appreciate that. But I feel very strongly that the form that 

that additional guidance takes really needs to be a new proposed 

rule, and that new proposed rule needs to have a comment period, 

and that comment period needs to be at least 60 days because we 

just have not had a chance for anybody to evaluate how this is 

going to be applied. 

So I would appreciate it if each of you would confirm that it is 

your intent to issue a new proposed rule and to provide such a comment period. 

Mr. WOLIN. Senator, as our written testimonies have indicated, 

we will be issuing additional guidance. It will be in the form of 

some public rulemaking and we will be seeking public comment. I 

think the Council has not yet landed on precisely how the rule will 

be styled and exactly what the length of the comment period will 

be. Obviously, we want to make sure that we get sufficient public 

input, as we think we have already given a few opportunities for 

public input. I think as we provide further clarification as to how 

this process will unfold, we will want to make sure we provide adequate opportunity for people to react and provide their views. 

Senator TOOMEY. If I could, just very briefly, I appreciate that. 

I just would like to underscore there has been really no opportunity 

to respond yet on how the statute will be applied, and so the President’s Executive Order called for all agencies to, as a general matter, provide 60 days. I really think that is a minimum that is necessary, but I am sorry. I am interrupting. 

Mr. BERNANKE. Senator, I think more details are necessary. I 

favor providing more information to the public and getting robust 

input and comment. 

I should say that while I think we can provide more information 

in terms of the metrics and criteria, I do not think that we could 

provide an exact formula that will apply mechanically without any 

application of judgment. I think, ultimately, we are going to have 

to look at a whole variety of issues which cannot always be put into 

a numerical metric. That being said, I certainly agree with you that 

we should get all the input we can from the public on this process. 

Ms. BAIR. Yes, we support going out for comment again with 

more detailed metrics, and the 60-day comment period is something we have tried to adhere to in our rulemaking for major 

rulemakings. So, I think it is important to get public comment and 

to provide more clarity and hard metrics. 

That said, I would agree with Chairman Bernanke. I do not 

think we can provide complete bright lines. There will need to be 

some area for judgment. But clearly, we can do a better job than 

we have done so far in getting more detailed metrics out. 
11 

Senator TOOMEY. And is it your view that the form that that 

should take would be a Notice of Proposed Rulemaking? 

Ms. BAIR. That is a good question, Senator. I would be fine with 

that. I understand there may be a legal issue with the FSOC’s ability to write rules with this kind of criteria versus guidance and I 

would defer to the Treasury Legal Counsel on the format. If we 

have legal authority to do it as a rule, I think that would be fine, 

but I would defer to Treasury on that. 

Ms. SCHAPIRO. Senator, I agree with, really, everything that has 

been said, and particularly with Chairman Bernanke about the 

need to balance reliance on objective factors with the exercise of 

reasonable judgment. But that said, I think more transparency and 

more specificity about this process would be very valuable, and I 

think a robust comment period will inform the process greatly, so 

I would be very supportive of that. 

Mr. GENSLER. Senator, just concurring, again, I think Chairman 

Bernanke said it well. I think it is a mixture of judgment and 

metrics. I think it would be good to put the metrics out to public 

comment. We at the CFTC have generally used 60 days. I think 

that is a good period of time. Whether it is guidance or an actual 

rule, I really have not had an informed view on and largely have 

to hear from Treasury as to the—the guidance, I think, works very 

well, often, as well, as long as we get the public input. 

Mr. WALSH. Well, going sixth, it would be hard to think of something new to say—— 

[Laughter.] 

Mr. WALSH.——but certainly, going out again with greater detail 

and greater clarity and seeking views and pursuing a process of review and comment, I think is entirely appropriate. 

Senator TOOMEY. Let me just strongly urge that we go with a 

Notice of Proposed Rulemaking as the mechanism by which we do 

this and we have at least 60 days. I think this is very important. 

I would also like to stress, I think we really have to have this 

as objective as possible. The implications for a firm being designated are huge, as you know very, very well. It is really profound. 

And so it is perfectly reasonable for firms to be able to expect to 

be able to anticipate whether or not they will be brought in by virtue of these objective standards. So I would strongly urge you to 

pursue that. 

If I have time for one quick additional question, Mr. Chairman—— 

Chairman JOHNSON. Yes. 

Senator TOOMEY. Thank you very much. I would like to touch on 

specifically the question of mutual funds, and again, I will say that 

by their very nature, their inherent characteristics, I think as a 

general matter, it is very unlikely that mutual funds are systemically significant to the degree that would justify this designation. 

I understand certain issues surrounding money market funds that 

occurred during the crisis are very important, but I also know that 

the SEC has taken significant steps to address some of these in the 

rules of last year, in a new set of rules or regulations that are 

being contemplated now that deal with issues like liquidity and reserves. 
12 

So my question is, are money market funds currently under consideration for this designation, and if so, why? Mr. Wolin? 

Mr. WOLIN. Senator, I think it is premature for me to be able to 

answer that question. The deputies of the FSOC have been putting 

together some preparatory material. I think as we just confirmed 

to you, we are planning on putting out additional guidance for the 

public to comment, and until we do that and get the responses from 

the public and until the FSOC principals have an opportunity to 

have these kinds of conversations, I think it is hard to know what 

the right answer to that question is. We will move forward, obviously, with the public’s input and with the transparency that the 

FSOC has been providing to date. 

Senator TOOMEY. Would anybody else like to comment? 

Ms. SCHAPIRO. Senator, I would just add that I think the SIFI 

determination is really an institution-by-institution designation 

and not an entire sector. So under any circumstances, I think we 

would have to look at individual entities. And we held a one-day 

roundtable this week exploring the systemic risk issues that are 

implicated with respect to money market funds and how they invest, and I think that will inform us at the SEC as we go forward 

in making determinations about what further efforts we might 

make specifically with regard to the regulation of money market 

funds. Also, all FSOC members were represented at that roundtable and were able to participate in a very robust discussion directly with the mutual fund industry as well as with European regulators. So I think we will be well informed when we get to the 

process of thinking about institution-by-institution designation in 

the money market fund or mutual fund area. 

Senator TOOMEY. I see my time has long since expired, so I 

thank you, Mr. Chairman. 

Chairman JOHNSON. Thank you, Senator Toomey. 

Secretary Wolin, Chairman Bernanke, and Chairman Bair, Titles 

I and II are important cornerstones of the Dodd-Frank Act, yet the 

House Republican budget proposal includes the repeal of Title II. 

In addition, other legislation has been introduced in both Houses 

to repeal the entire Dodd-Frank Act. What do you think of these 

repeal efforts? Should we go back to the system of regulation that 

existed before the financial crisis? 

Mr. WOLIN. Mr. Chairman, as I said in my opening comments, 

I think that there is no alternative but to move forward with the 

Dodd-Frank statute as enacted. The idea that taxpayers would continue to be on the hook in these moments of stress is one that is 

unacceptable and I think the statute clearly puts an end to. We 

think it is critical that in the areas that you discussed in your 

opening statement, orderly liquidation authority and the resolution 

plans that need to be put forward to both the Fed and to the FDIC, 

that these are critical elements of making sure that we end ‘‘too big 

to fail’’ and that we make certain that taxpayers are no longer on 

the hook. 

Chairman JOHNSON. Chairman Bernanke? 

Mr. BERNANKE. Mr. Chairman, it was clear that the regulatory 

system that was existing during the crisis was insufficient. There 

has been a long and thoughtful process about how to reform financial regulation. I would reiterate what Mr. Wolin said about the 
13 

importance of addressing ‘‘too big to fail.’’ Chairman Bair also mentioned this. The new legislation addresses this on a number of levels, including enhanced oversights, tougher capital liquidity requirements, and the resolution regime, which is also very important. Just getting rid of ‘‘too big to fail’’ would be a very important 

step. 

More generally, the philosophy of Dodd-Frank, which is to encourage a systemic or macro prudential approach to regulation 

where broad systemic risks are taken into account as well as individual firm or market risks, I think is a very important step and 

one that is being adopted globally as well as by the United States. 

Chairman JOHNSON. Chairman Bair? 

Ms. BAIR. Yes. I think it would be very harmful to repeal it. 

There is a lot of work going on now that is moving toward ending 

‘‘too big to fail.’’ The tools are there. The implementation capability 

is there. I would not want that work to be diverted. I think repealing and trying to revert back to a bankruptcy process, we know 

bankruptcy does not work, and so that will be an open invitation 

to more bailouts if there is no alterative to that. 

So we are working very hard to implement this authority, to convince the market that it can and will be used. There were some 

very highly important and constructive improvements sponsored by 

Senators Dodd and Shelby during consideration of the Dodd-Frank 

Act that passed overwhelmingly—I think the vote was 93 in 

favor—that put in additional important safeguards, like the 

clawback authority. So I do think it is a very good provision and 

one that we are taking very seriously to implement and I hope will 

be getting bipartisan support to continue that process. 

Chairman JOHNSON. According to Chairman Angelides of the 

FCIC, who testified before the Committee on Tuesday, as well as 

others, the fear of the Federal bank regulators to address the significant consumer protection issues contributed to the financial crisis. Secretary Wolin and Chairman Bair, would you please discuss 

why we need an independent consumer protection agency and how 

this new agency can identify and mitigate systemic risks. 

Mr. WOLIN. Mr. Chairman, I think that it is clear that failures 

of consumer protection were very much at the core of what caused 

the financial crisis we have just been through. The Federal Government was not well equipped to make sure that consumer protection 

issues were handled well. The responsibility for consumer protection was spread out across a wide range of agencies in the Federal 

Government. It is absolutely critical, in our view, that there is an 

agency that focuses very intensely on consumer protection issues. 

We need to ensure that consumers have the information they need 

to make responsible choices, to make sure that the kinds of judgments—which contributed in the individual and certainly in the aggregate so mightily to our financial stress—are looked after. 

The Consumer Financial Protection Bureau implementation team 

is off to a very strong start. They are making sure that they put 

together a set of rules, efficient but nonetheless clear, that consumers can use to make sure they understand the implications of 

their judgments—to make sure that those rules are adhered to 

across the financial system, not just amongst banks, but also 

amongst the non-bank parts of the financial system, which have 
14 

heretofore not been something that the Federal Government has 

had authority to focus on. 

Chairman JOHNSON. Chairman Bair? 

Ms. BAIR. Yes, I think the regulatory arbitrage for consumer protections was a very profound problem leading up to the crisis. We 

had a Community Banking Advisory Committee meeting yesterday. 

We have a number of community banks on our Advisory Committee 

that are mortgage originators and in the years leading up to the 

crisis, as the craziness continued, they lost significant market 

share to essentially completely unregulated third-party mortgage 

originators that had not much in the way of consumer protection 

requirements. So I think these are good lenders and people who 

want to do the right thing for their customer and they are regaining market share again in this area. 

But as we get farther and farther away from the crisis, a lot of 

this could startup again and I think we really do need an agency 

to provide good, strong, common sense standards across the board. 

I think it will be good for consumers and I think it will also be good 

for more heavily regulated sectors and for the good players in the 

industry who are trying to do the right thing. 

That said, I think it is important for there to be a market approach to consumer regulation, and the focus is, as I think the current leadership has indicated, on having simpler disclosures and 

better information to consumers so they can make their own decisions. That is really what we need, and I think that will be a very 

important value added from the consumer agency. 

Chairman JOHNSON. Senator Brown. 

Senator BROWN. Thank you very much, Mr. Chairman. I appreciate that. 

I have questions for the panel concerning the SIFIs, but I am 

going to say a couple of things first. Before any institution will be 

subject to stronger examination and rules for capital risk, it must 

first be designated as a SIFI, and the Council will soon be missing 

five full-time members, and I am sorry our colleagues are not here 

to hear this because I do want to speak pretty bluntly about this. 

The five are the heads of the FDIC, the CFPB, OCC, FHFA, and 

the insurance representative, and that will undoubtedly make it 

harder to designate new companies as systemically important. We 

need strong nominees who will not be afraid to take bold steps to 

prevent a new financial crisis. 

But if qualified nominees for these important positions are 

blocked, it will increase the likelihood we have another AIG or Lehman Brothers. I would urge everyone on the Committee to remember what happened to the financial system and the economy 3 

years ago and that this is serious business and should not be so 

politicized that they block nominee after nominee after nominee. I 

think we all—I am sure people on the panel agree with that. I am, 

again, sorry my colleagues are not here to at least discuss this and 

think clearly through what actually can happen. 

My question for Deputy Secretary Wolin is about the financial 

crisis. It was in large part precipitated by shadow banking complex 

activities initiated by Wall Street firms that typically fell outside 

the scope of regulation. The designation of systemically important 

financial institutions is supposed to address this problem. 
15 

I want to agree with Senator Toomey’s comments and his questions to each of you that the Council-proposed rule seems like a reflection, not an elaboration or road map to determine what is systemically important. It is not clear to me, and I guess from the answers to his questions, from you, at what point a large, highly leveraged hedge fund becomes systemically important. It is impossible to know whether heavily regulated Main Street property and 

casualty insurers would be systemically important. 

And my question, Mr. Secretary, is do you believe that mutual 

companies engaging in personal lines of insurance, do you think 

they pose a threat to the financial stability of our economy? Should 

they be categorized as systemically important? 

Mr. WOLIN. Senator, thank you for that question. We are amidst 

a process under which we are going to provide further elaboration. 

I think it is, again, premature for me to make judgments about 

who is in and who is out. It is a firm-specific kind of consideration, 

as Chairman Schapiro mentioned. The statute obviously lays out 

the factors that are relevant. 

The Council will put out additional guidance and clarification 

about how we think about those various factors. Firms, in the first 

instance, will make judgments about whether they think they are 

of sufficient size, sufficient interconnectedness, sufficient leverage, 

and so forth. I think until that process reaches a further level of 

maturity, until the members of the Council have an opportunity to 

have conversations about how to think about those criteria, I am 

not in a position to rule any particular firm in or out. 

Firms can make judgments based on whether they have those 

kinds of attributes or not based on the additional guidance that we 

give, and we will be giving firms an opportunity to be heard on 

these questions. That is in the statute. We have laid out in our own 

rulemakings what the process will be. Even before there is a proposal for a designation, they will have an opportunity to come to 

the FSOC and lay out what they think about the application of 

these factors to their particular circumstance. So there will be a 

long process in which individual firms have a very substantial opportunity to be heard and their views be considered before any designations are made. 

Senator BROWN. Thank you, and thank you, Mr. Chairman. I just 

wanted to say to Chairman Bair, thank you for your service the 

last half-decade. You have served your country well and you have 

been very helpful to so many of us. Thank you. 

Chairman JOHNSON. Senator Bennet. 

Senator BENNET. Thank you, Mr. Chairman, and thank you very 

much for holding this hearing. Thank you to all of you for everything you are doing to try to implement this bill so that we do not 

have the kind of systemic risk we faced on the front end of the crisis, and I think the oversight of this Committee is a very important 

part of this. 

And it is in that spirit I wanted to ask Secretary Wolin and 

Chairman Bernanke whether, in your analysis of what we are facing in the economy right now, that there is anything that would 

create more systemic risk to our economy than the U.S. Congress 

failing to raise the debt ceiling of the United States. 
16 

Mr. WOLIN. Well, Senator Bennet, I think it is absolutely unthinkable that we would not raise the debt ceiling in order to make 

good on obligations that Congresses and Presidents in the past 

have made. Secretary Geithner has spoken many times publicly 

about the wide range of catastrophic implications to failing to raise 

the debt limit as necessary with respect to, first of all, losing this 

great national asset that we have, which is that the full faith and 

credit of the United States has been considered sacred. The real 

implications with respect to funding rates and interest rates, that 

will affect not just the U.S. Government, ironically, which has its 

own set of fiscal implications, but also individuals—— 

Senator BENNET. Let me just stop you there for 1 second. Has 

its own set of fiscal implications in the sense that it would actually 

make our fiscal condition worse rather than better? 

Mr. WOLIN. It would, Senator, because it would require us to 

spend more money to finance the deficit that has already built up. 

If the interest rates go up, our funding rates go up. 

Senator BENNET. And you were headed—I interrupted you, but 

where you were headed was what the implications were for people 

living in places like Colorado, so—— 

Mr. WOLIN. Right. So every American, whether they are buying 

a house or buying a car or just paying off their credit card bills will 

have to experience higher interest rates, which will have very real 

effects on their pocketbooks. But I think more broadly, the effects 

on wealth and so forth, people’s balances in their mutual fund accounts and so forth, all will be put in jeopardy in ways that are 

unthinkable. The implications are enormous. It is something that 

we think of as enormous risk. 

We have said and we believe that, as has been the case in the 

past, Congress will increase the debt limit. It is absolutely critical 

that that happen and that we work through the broader set of fiscal issues, which are obviously enormously important and ones that 

the President has been very clear need to be addressed, but that 

we not hold the debt limit as hostage to those critically important 

discussions. 

Senator BENNET. Mr. Chairman? 

Mr. BERNANKE. Senator, first, let me say that this is in the context of a broader discussion about fiscal sustainability and fiscal 

discipline, and I fully support all the efforts of the Congress—and 

I know they are very difficult challenges—to bring the long-term 

fiscal situation into something closer to balance. So in no way do 

I disagree with those objectives. 

That being said, I think using the debt limit as a bargaining chip 

is quite risky. We do not know exactly what would happen if the 

debt limit was not approved. There are certainly significant operational problems, legal problems associated with making sure that 

the debt is paid. Even if the debt is paid, there is the issue of market confidence and how the market will respond to the risk of default or even the default on non-debt obligations. So I think it is 

a risky approach, not to raise the debt limit at a reasonable time. 

Again, the costs. At minimum, the costs would be an increase in 

interest rates, which would actually worsen our deficit and would 

hurt all borrowers in the economy, including mortgage borrowers 

and the like. The worst outcome would be one in which the finan-
17 

cial system was again destabilized, as we saw following Lehman, 

which, of course, would have extremely dire consequences for the 

U.S. economy. 

Senator BENNET. Well, I share, obviously, your concern about the 

fiscal conditions, as well, and I believe that we are going to be able 

to have a constructive conversation about it. 

One thing I would like to say, or ask you, Secretary Wolin, 

maybe in particular, is the longer this goes on the debt ceiling, is 

there not risk that the markets will react even before the August 

date that Secretary Geithner has given us to get this done? Or is 

there risk? 

Mr. WOLIN. Senator, we have not seen it to date, but there is 

that risk if we get too close and the markets do not see a credible 

way through this, yes. 

Senator BENNET. Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Reed. 

Senator REED. Thank you very, very much, Mr. Chairman. 

Thank you, ladies and gentlemen. 

Chairman Bair, let me join my colleagues and thank you for your 

extraordinary service and wish you well. Your testimony reflects on 

one of the most pressing economic problems we have throughout 

the country, and that is the housing crisis. We have taken extraordinary measures to assist the financial sector. We have taken very 

few effective measures to assist homeowners. Twenty-eight percent 

of homeowners in the United States are underwater today. That is 

probably the biggest, in my view, drag on the economic expansion 

and recovery we face, yet the most recent attempt by the regulators 

to provide some clarity in my view is woefully inadequate. I wonder 

if you might comment on that and what we have to do to be as fair 

to homeowners as we have been to the financial industry. 

Ms. BAIR. Well, I do think the regulatory orders are just one 

step, and the examinations were focused on process issues. They 

did not really get into broader issues of whether loan modifications 

were appropriately evaluated and approved or denied. 

We have done some broader analysis of banks that service loans 

under loss share agreements and have found not insignificant error 

rates in making a net present value determination about whether 

the borrower should qualify for a mortgage modification. 

So, we think in the next phase of this—the third-party lookback 

that the orders require—it is very important that they view 100 

percent of consumer complaints and certainly 100 percent of modification denials, because we are seeing that there are, again, a not 

insignificant number of errors in these calculations based on the 

sampling we have done with our loss share acquirers. 

I think more broadly we need to be thinking about simplifying 

the servicing process, the modification process, as well as the relocation process for borrowers who are not going to make it, and 

there are some out there. 

We have also been exploring ways to provide relocation assistance as an incentive when there is not the possibility of a loan 

modification for the borrower because they simply do not have the 

income to make an economically viable restructuring. We think 

that will save us money because the foreclosure process is so 

backed up now, and this is one of the reasons the housing market 
18 

is not clearing, and it cannot recover until it clears. The short sales 

or relocation assistance can shorten the time that it takes to get 

the property back on the market, and that also can mitigate losses, 

which we see is in our financial interest to do. 

So, yes, I think there needs to be much more aggressive action 

in terms of looking back for the borrowers that have already been 

harmed. Looking forward, we need more streamlined processes. We 

need single points of contact to make sure there is one person, 

which would be an important quality control on servicing to make 

sure that the borrower is appropriately dealt with and loss mitigation and loan restructuring efforts occur where they should. So I 

think that is positive. But there is just a lot more work to be done, 

and the market is not going to clear until we get this fixed. 

Senator REED. You know, what you have said—and I agree with 

it—has been said repeatedly for the last 2 years, and yet all of you 

collectively as the Federal regulators had the chance to make these 

things happen. And essentially what I think you chose to do was 

to just kick the can down the road a bit further, let the banks appoint an independent evaluator to go in and look again. 

Can I ask you, what is the definition of ‘‘independent’’? Would 

this be someone who has never done any business with the bank 

before? Is this a division of a company that has big contracts with 

all these banks and would be independent in the sense that the 

rating agencies were independent? 

Ms. BAIR. Well, we are not the primary regulator of any of the 

major servicers, so the representatives of the primary regulators 

might want to respond to that. 

We do have one bank that originates loans for a servicer who has 

problems, and we put an order on that bank—to tell the bank that 

the servicer for them needed to take some significant remedial 

steps. Our view is that the third party does need to be independent, and there also needs to be some validation process done 

independently by the regulators. 

Senator REED. But from your participation, there is no definition 

of ‘‘independence’’? 

Ms. BAIR. Again, I would defer to Mr. Walsh and Mr. Bernanke, 

if they want to share thoughts on that, because they are the primary regulators of these servicers. But I agree with you. I think 

there are a lot of professional banking consultants out there that 

may be independent in the sense that they do not work for the 

bank, but they may have other business with them or future business they would like to do with them. So I think this is a huge 

issue, and there needs to be some validation process—— 

Senator REED. Let me ask another question, and that is, you indicated that the loan modification process was explicitly excluded 

from this review. Is that correct? 

Ms. BAIR. This review was focused on mortgage document processing. 

Senator REED. Again, 2 years of struggling through this, multiple 

times we have attempted to fix it. The problem is foreclosure and 

modification together, not one or the other. And this to me is just 

a way of defining away the problem. And, frankly, it is very disappointing. 
19 

My time has expired. If there is an opportunity again, I will raise 

this with the primary regulators. But, frankly, one of the reasons 

I raised it with you is that I think you have been very forthright, 

and the FDIC going back to 2007 has been effective, where the 

other agencies have been more apologetic than effective. 

Thank you. 

Chairman JOHNSON. Senator Schumer. 

Senator SCHUMER. Well, thank you, Mr. Chairman. 

First, Chairman Bernanke, I have a couple of statements that 

were recently made by the Speaker of the House, John Boehner, 

and I would like to ask you about them. The first is he said, ‘‘We 

are calling for an end to the Government spending binge that is 

crowding out private investment and threatening the availability of 

capital needed for job creation.’’ 

Now, several economists have refuted the notion that given particularly now with our current slack in the economy and corporate 

America having lots of money and still being reluctant to invest it 

for other reasons, so they have disputed the notion that we are 

crowding out private investment with Government spending. 

Do you agree with Speaker Boehner’s statement that Government spending is at this time crowding out private investment? 

Mr. BERNANKE. Well, in the near term, I do not think that there 

is a lot of crowding out. As you point out, interest rates are quite 

low. There is a lot of excess resources available for firms that need 

to hire additional workers. 

That being said, if we do not address the fiscal trajectory we are 

on, we are going to be facing increasingly severe crowding out problems and perhaps financial stability problems in the future. 

Senator SCHUMER. But it is not occurring now? 

Mr. BERNANKE. Not to a substantial extent. I do think that if we 

had a long-term plan to reduce our long-term fiscal deficit, it might 

help to lower interest rates and increase confidence today. But 

under conventional definitions of crowding out in terms of credit 

markets and labor markets, we are not seeing too much of that. 

Senator SCHUMER. Thank you. 

The second statement is the inverse of that. Speaker Boehner 

said, ‘‘The recent stimulus spending binge hurt our economy and 

hampered private sector job creation in America.’’ 

CBO’s own analysis seemed to contradict that statement. Do you 

agree with Speaker Boehner’s statement that the stimulus spending hurt our economy and hampered private sector job creation in 

America? 

Mr. BERNANKE. Well, again, I would distinguish, Senator, between the short run and the long run. 

Senator SCHUMER. Now we are just talking about the stimulus. 

Mr. BERNANKE. We have a very significant long-run problem, and 

to the extent that we are pushing our debt situation further and 

further into the red, we are taking greater risks. 

That being said, I have cited the CBO analysis in the past as 

being a reasonable analysis of—— 

Senator SCHUMER. Do you disagree with Speaker Boehner’s view 

that the stimulus, the stimulus we passed last year, hurt our economy and particularly hampered private sector job creation? 
20 

Mr. BERNANKE. My best guess is that the stimulus increased employment. 

Senator SCHUMER. Thank you. I am glad you disagree. 

Next question. This is also for you. This one is not the same type 

of question. 

[Laughter.] 

Senator SCHUMER. The Fed, along with other prudent regulators 

and the CFTC, issued proposed rules relating to when counterparties in derivative transactions are required to post margin, that is, 

put up cash as security for their obligations. As you know, I had 

spoken to you about this shortly after the rules were announced, 

and several members of the New York delegation sent you a letter 

on this. 

I am concerned with the part of the proposal—we all are in the 

New York delegation—that would apply only to U.S. firms and 

would result in them facing competitive disadvantages vis-a-vis 

international competitors. 

Here is the basic issue as reported last week in the Financial 

Times: If a German car manufacturer were to do an interest rate 

swap with a U.S. bank’s London arm, it would have to cough up 

margin; but if the German car maker did a swap with a British 

bank, it would not have to. That is the Financial Times’ summation 

of this. 

So do you agree that this might cause U.S. firms to be at a competitive disadvantage? 

Mr. BERNANKE. Yes, I do agree. In transactions with U.S. customers, both foreign and domestic banks have the same rules. In 

transactions with foreign customers, we have put out margin and 

capital rules, which have a good purpose, which is increase the 

safety of our financial system. 

Currently, under the Basel agreement, similar capital rules will 

probably be in effect for foreign banks, but at this point they have 

not yet done the margin—— 

Senator SCHUMER. So that leads to my last question with the 

Chairman’s indulgence, since I have 16 seconds left. What is Treasury doing, Secretary Wolin, to ensure that European regulators 

adopt the same or very similar rules? And would we go forward 

and enact our rules before they did if it put our U.S. firms at a disadvantage? Because, obviously, I would like to see American institutions do as much foreign business as possible. It creates jobs in 

New York. 

Mr. WOLIN. Senator Schumer, we are working very hard with the 

Europeans in Brussels and also in individual European capitals to 

make sure that we have absolutely as much as possible a level 

playing field. I think we are making good progress on that, but we 

will have to stay vigilant. 

On the question of whether we would put forward rules, I would 

obviously defer to the Chairman and to the market regulators as 

to how they would move forward. But I think it is, of course, important, as we have said repeatedly, to have essentially level playing 

fields so as not to disadvantage U.S. businesses where that is 

avoidable. 

Senator SCHUMER. I assume you are urging the regulators to do 

just that right here. 
21 

Thank you, Mr. Chairman. 

Chairman JOHNSON. Senator Merkley. 

Senator MERKLEY. Thank you very much, Mr. Chair, and thank 

you all for your testimony. 

I was just downstairs in the gathering of the HELP Committee 

in a hearing that was wrestling with the impact on the middle 

class over the last 30 years and essentially the hollowing out of the 

middle class in America. And I think there is a chart that captures 

much of the concern. It is a chart that shows how middle-class 

wages rose with the productivity of the country over the 30 years 

following World War II, but starting in roughly 1975, 1974, for the 

next 30 years enormous divergence in which middle-class working 

wages, inflation adjusted, stayed flat. But we had a tremendous increase in the wealth of the country and the productivity of the 

country, but working families did not share in that. And it really 

raises the question of what kind of a country do we want. Do we 

want a country where families participate in the wealth of this Nation, where they are able to send their children to college, plan for 

their retirement, own a home, be part of an ownership society, or 

one in which essentially fewer and fewer families are in a position 

to access those fundamental instruments related to quality of life? 

And it is discouraging to see that path over this last 30 years. 

In some ways many of the issues that we dealt with in DoddFrank Act are related. We have seen basically a doubling of the national debt under the Bush administration and then a tripling of 

the national debt as a result of the house of cards that was built 

in the mortgage deregulation by the Bush administration. And now 

we are seeing the recommendations from the House that say, OK, 

well, let us dismantle what is left of the programs to provide support for families as a consequence of the debt, even though the debt 

was created by strategies that were not designed to support the 

middle class to begin with. The entire picture troubles me. 

There is a link between this and the Financial Stability Oversight Council and a couple issues that trouble people in our working communities. One is the ongoing foreclosure crisis, and certainly that is related to financial stability. Another is the speculation driving up the cost of petroleum. And I do not know if you 

have all addressed either of these, but if you have, feel free to be 

short. But these are kind of nitty-gritty, on-the-ground economic 

issues that may not have to do with whether the financial system 

as a whole collapses, but it is certainly related to the performance 

of the financial system as it affects families. 

So with the anticipated additional wave of foreclosures, almost 5 

million on the horizon, the impact of that on the construction industry, which affects almost every aspect of my State economy, and 

the rising cost of oil, have these been topics that have been wrestled with the Financial Stability Oversight Council? Should they 

be? And I will just open it up to whoever would care to comment? 

Mr. BERNANKE. Senator, first, you talk about a number of broad 

macro issues, and I cannot do justice to them, but I would just note 

that the Federal Reserve in its monetary policy is trying to address 

unemployment, which, of course, is a major source of foreclosures, 

as well as mortgage interest rates and other factors affecting the 

foreclosure crisis. So we are addressing it in that respect. 
22 

Attempting to address the foreclosure crisis directly, you know, 

there has been a lot of effort and so far only modest success. It has 

proven very difficult to find solutions in many cases. In other cases, 

the process has not, you know, been adequate in the case of banks, 

and we have already discussed here a bit the recent review of servicing practices. The Federal Reserve and the OCC, with the support of the FDIC, have reviewed those practices. We have issued 

cease-and-desist orders to try to stop bad practices and to try to require banks to go back and discover who was harmed and to help 

offset those problems where possible. Going forward, we expect to 

assess civil money penalties as well. 

But you are right that this remains a very, very difficult problem, and at some level it is a problem of regulation and a problem 

of bank operation. But at some level it is also a macroeconomic 

problem, and that needs to be addressed in terms of global and national employment and economic conditions. 

Senator MERKLEY. Anyone else care to comment on this? 

Mr. GENSLER. Well, I just thought I would say the Financial Stability Oversight Council has not talked about some of these matters, about the rising commodity prices, as a council. It may have 

at staff levels. I think the Dodd-Frank Act has a number of features that helps market regulators like the CFTC have broader 

oversight that the markets work better for the American public. We 

are not a price setter, and that is not what Congress or the American public is asking the market regulator to be. But the DoddFrank Act gave us broader authority to see the whole market, the 

whole derivatives market, swaps, stronger anti-manipulation authority in our case, more similar to the SEC’s, to actually bring in 

some of the foreign boards of trade, some foreign exchanges, and 

also to move forward with what I think Congress said with regard 

to limiting some of the size of the speculators’ positions in these 

marketplaces. 

So we have put proposals out on all of these matters consistent 

with congressional intent, and we look forward to public comment 

and trying to finalize the rules. 

Senator MERKLEY. Thank you. 

Chairman JOHNSON. Senator Tester. 

Senator TESTER. Yes, thank you, Chairman Johnson. 

I appreciate all of you being here today. I want to talk about 

debit interchange, of course. Chairman Bernanke, we were here in 

February. We talked about the serious risk that the Durbin amendment would have on small community banks and credit unions because of the lack of ability to enforce the $10 billion and under exemption. You have gotten more information since then. Do you still 

feel, with the information you have got on hand, that an exemption 

can work? 

Mr. BERNANKE. Well, to be honest with you, we were agnostic. 

We still are not sure whether it will work. A number of the networks have expressed their interest or willingness to maintain a 

tiered interchange fee system, but that is not required. There is no 

law which says they have to do that. 

A suggestion that we got was that we should ask or even require 

the networks to make public what the interchange fees were that 

they were charging, and that would be of at least some value in 
23 

terms of the transparency. But, again, there are market forces that 

would work against the exemption. 

Senator TESTER. OK. You have been in the business for a long 

time, and you are a very intelligent guy. And I know we are in a 

political process here, and I know you probably have been getting 

a lot of pressure from people, or at least one person from the Senate. I am talking about rural America here. I am talking about 

community banks and credit unions that if they go away, it is another nail in our coffin. It is really important. I think it is really 

important. Is it going to work? 

Mr. BERNANKE. I cannot say with certainty, but I think there is 

good reason to be concerned about it. 

Senator TESTER. Very good reason to be concerned about it. And 

if it does not work, what are the impacts on rural America? 

Mr. BERNANKE. Well, it is going to affect the revenues of the 

small issuers, and it could result in some smaller banks being less 

profitable or even failing. 

Senator TESTER. OK. Thank you. Wouldn’t it seem the prudent 

thing to do to step back and get more information? Wouldn’t you 

agree the amendment was put in rather quickly? 

Mr. BERNANKE. It was put in quickly, but I think I have to defer 

to Congress on what kind of information you want to get. We have 

done one review, and we have gotten 11,000 comments. 

Senator TESTER. Can you make good decisions with bad information? 

Mr. BERNANKE. I—— 

Senator TESTER. Can you? 

Mr. BERNANKE. You cannot, of course, but—— 

Senator TESTER. Can you make good decisions with little or no 

information? 

Mr. BERNANKE. That is not a problem. We have plenty of information. We have received 11,000 comments, and we have done an 

enormous amount of surveying of the industry and so on. 

Senator TESTER. And you have been able to wade through those 

comments? 

Mr. BERNANKE. That is why we wrote to this Committee that we 

were going to be late with our rule, but we are making considerable 

progress, yes. 

Senator TESTER. OK. Chairwoman Bair, before I get done, I want 

to thank you for your service. I very, very much appreciate all the 

work you have done. As Senator Brown said, you have been very 

good at what you have done. 

The same issue. From your vantage point, do you think it is possible to exempt community banks from the debit interchange? 

Ms. BAIR. I think it is questionable. We had suggested that the 

Fed perhaps could try to use the authority under Reg. E to require 

that the networks accept two-tier pricing, and our lawyers probably 

have different perspectives on that, and I think that is obviously 

the Fed’s call because it is the Fed’s rule. So if their view is that 

there is no legal authority to require that, I think it does become 

even more problematic. And so I do think this is going to reduce 

revenues at a number of smaller banks, and they will probably 

have to pass that on to customers in terms of higher fees, primarily 

for transaction accounts. 
24 

So I think that is going to happen, and, again, is that the right 

result, the result Congress wanted? You need to determine that. 

But I think that is what will happen. 

Senator TESTER. Well, any impact on their safety and soundness? 

Community banks I am talking about. 

Ms. BAIR. In our initial analysis, it does not look like it would, 

but it would clearly stress some institutions. Putting them to the 

point of failure, no, we do not think that will happen, but clearly 

it would stress some, and if there are other challenges that are confronting the community banking sector, it is probably something 

they do not need to be dealing with right now. 

Senator TESTER. OK. So you talked about you did not know if 

this is what the impact that Congress would have. I trust that this 

would potentially mean or probably mean or most certainly mean 

higher fees in other areas for consumers? 

Ms. BAIR. Yes, it would have to be passed on in other fees. 

Senator TESTER. OK. Mr. Walsh, do you have anything you 

would like to add to this issue? 

Mr. WALSH. Only that we provided a comment letter that did not 

address particularly this distinction. It dealt more with the flexibility the Fed has to set the overall interchange level. But we have 

been doing a fair amount of outreach to community bankers, and 

certainly it has been a key concern for them. 

Senator TESTER. The impact on community banks, do you see it 

very similar to the way—how do you see it? I do not want to put 

words in your mouth. 

Mr. WALSH. Well, I would just say that to the extent that it 

works out as is suggested where it cuts into revenue for community 

banks, it is one more stress on them. 

Senator TESTER. Right. Do you think an exemption can be implemented? 

Mr. WALSH. I have not really studied the issue of whether that 

can work. 

Senator TESTER. OK. 

Mr. WALSH. I would defer on that one. 

Senator TESTER. All right. Thank you. Thank you all very much. 

Chairman JOHNSON. Senator Warner. 

Senator WARNER. Well, thank you, Mr. Chairman, and let me say 

it is great to see you all again. Let me start by adding my comments to so many of my other colleagues in thanking Chairman 

Bair for her, I think, extraordinary service and lots of help I know 

personally to me and Senator Corker as we tried to navigate 

through some of these issues. 

I hope, Mr. Chairman, we are going to get—since we are down 

to the few at this point, maybe we can get a second round of questions because I have got lots of things I would love to raise. 

First of all, for Deputy Secretary Wolin, I continue to think the 

jury is out on whether at least this member’s hope and aspiration 

of what the FSOC would be will be accomplished. I think it is a 

critically important early warning signal. One of the things that I 

think will make the FSOC a more informed entity will be the active creation of the OFR, and I was wondering as my first question, 

Do you have any sense of when we might actually get a nominee 

for the OFR? 
25 

Mr. WOLIN. Senator Warner, we certainly hope soon. I expect, 

you know, the President will make a nomination for that important 

job soon. I want to assure you that in the meantime we are working with an awful lot of intensity and focus to stand up the OFR, 

to make it the important addition to the landscape that it is beginning to be and that it will be. 

We have made, I think, very good progress in hiring senior people. We have just now in the last few weeks brought on Dick 

Berner, a very accomplished individual with lots of experience in 

the markets and in risk, with impeccable credentials, to lead the 

stand-up effort. We have hired a chief business officer, someone to 

run the data center; a chief operating officer and a range of other 

folks. They are, I think, together beginning the work with the other 

members of the FSOC in evaluating risk and trying to work 

through the kinds of debt issues that will be critical for the OFR 

to work through in order to—— 

Senator WARNER. I have got a lot of questions, but I would like 

to—again, I appreciate that, but it has been 11 months. We need 

a nominee. 

I want to also re-echo what a number—Senator Toomey and Senator Brown mentioned as well in terms of the SIFI designation. 

You know, we have got to give some more clarity here, the sooner 

the better, and, you know, one of the notions, at least I personally 

believe, is that if we give guidance to a firm in kind of a quasi-safe 

harbor, if they can take actions to ensure they are not SIFI designated, I think that inures to the benefit of the system. That 

means that, in fact, they will be managing—limiting their risk exposure so they do not get this designation. Again, I think that netnet helps us move along in this process, and I concur with Chairman Bernanke’s comments. This cannot be done with a strict kind 

of simple metric of dollars a sense. There has got to be a subjective 

judgment. But the sooner we can move this forward the better, and 

the notion of some sense of a safe harbor, whether it is mutual insurance funds, some of the money market funds, I think is helpful. 

I would put one other caveat here, that from some of our financial institutions that repeatedly would come and appeal to me—and 

perhaps Chairman Johnson remembers this as well—during the 

formation of Dodd-Frank, when they said, ‘‘Please, please, do not 

give us firm guidelines in the legislation. Leave it to the regulators.’’ And now they are coming back and saying, ‘‘Oh, my gosh, 

the regulators have got so much to do.’’ Hopefully those in the audience who were visiting my office when they were saying please 

do not, Congress, legislate specifics, that you will recall that this 

is some of what you asked for. 

I would also urge that—again, some of our colleagues were not 

here, and I know one of my other colleagues asked, the point of 

some of this kind of chipping-away effort, my sense is that there 

is enormous—while not complete agreement with what we have 

done, but across the EU, across the UK, around the world, they are 

glad we went first. And any effort to try to retract that would be, 

I think, potentially devastating to international implementation. 

And I wanted to—I know my time is gone, but, Chairman 

Bernanke, one of the things that you think about with the G–20— 

and my fear is that as the crisis gets further away, this financial 
26 

harmonization issue kind of falls down the level a little bit. How 

do we make sure that on Basel III we really do get there? How do 

we make sure that as the UK and the EU look at kind of ‘‘bailin’’ options rather than some of the resolution activities we have 

gotten—maybe Chairman Bair could address this as well—that we 

keep this international implementation and international—perhaps 

slightly different rules, but at least a unified approach on track? 

Mr. BERNANKE. Well, that is a major priority of the whole process, and I think on the whole it has gone pretty well. People have 

joined in in good faith to try to create a level playing field. 

So while there are some international differences, at this point 

I do not see very many. Senator Schumer talked about some aspects of margin requirements and things of that sort. But for banking in general, I do not see many irresolvable differences at this 

point. 

Moreover, a very important part of this is ensuring that the rules 

are both implemented in a consistent way across countries and enforced in a consistent way across countries. And part of what the 

Basel Committee and the Financial Stability Board are doing is 

trying to set up frameworks for looking at those things as well as 

at the paper rules. 

Senator WARNER. Do you or—and my time has expired, but I will 

stay around for a second round. Do you or Chairman Bair want to 

comment about potential challenges on resolution, for example, 

with the UK’s bail-in? 

Ms. BAIR. Well, I think there has been a lot of work. I think that 

the international consensus is you do need special resolution regimes for large financial entities. No one is trying to use a bankruptcy process. It is just not suited for it. It should be used as 

much as it can, but in some instances it is just not suited for it. 

And I think the G–20 over a year ago approved core principles for 

resolution regimes. We each co-chaired the Cross-Border Resolution 

Group at the Basel Committee and played a leading role in devising those. So, there is clearly progress moving forward, and I think 

bail-in is another tool in the toolkit. I think we have agreement 

with the UK on that. We think bail-in as one tool in the toolkit is 

a good thing. They are not suggesting it can replace resolution regimes, because it cannot. You will always need that backstop, I 

feel. 

Also, bail-in as a post-resolution tool, in other words, converting 

some of the unsecured debt into an equity investment in the new 

institution, I think there is a lot of progress. Again, it is one of the 

structures we might pursue in our resolution planning. 

So I think there is a tremendous amount of progress. We have 

entered bilateral agreements already with the UK, China, and 

have a number in development with other European countries. 

Also—the EU is moving forward with development of special resolution regimes. So I think there is tremendous progress, both domestically and internationally, and I hope we can continue that forward progress. As I said before, there is good bipartisan political 

support for it. 

Chairman JOHNSON. At the suggestion of Senator Reed, we will 

proceed with a brief second round. 
27 

For all the panelists, currently there are several vacancies at the 

financial services regulatory agencies. This summer, there will be 

several more vacancies. I am increasingly concerned about comments by some of my colleagues that any and every nominee will 

be blocked. Not having strong individuals in place at the agencies 

as we continue to implement Dodd-Frank seems to me to be detrimental to our fragile economic recovery and financial stability. 

What do you believe is the impact of these vacancies? 

Mr. WOLIN. Mr. Chairman, these are important roles, and it is 

important to fill them. The President I think will be making nominations on these open positions soon, those that he has not already 

made nominations for. I think that it is, of course, important to 

have leaders in these seats. 

Having said that, the work of these various agencies goes on, and 

the FSOC has been off to a very strong start and has been very 

effective in its early days and will continue to be so. But that is 

not to suggest that it is not important to get folks in these various 

jobs. 

Chairman JOHNSON. Chairman Bernanke. 

Mr. BERNANKE. Mr. Chairman, while I do think the agencies are 

continuing to do their work, the leadership does set direction and 

tone, and I think it is important to have highly qualified people at 

the heads of these agencies. 

That being said, of course, the Senate has to do its duty of advise 

and consent and ensuring that these are qualified people. But I 

hope there will not be unnecessary delays and politically motivated 

blockages that prevent those qualified people from undertaking 

their duties. 

Chairman JOHNSON. Chairman Bair. 

Ms. BAIR. Yes, I think this is very important. At my own agency, 

after I depart on July 8th, our OTS board member will be gone 

July 21st, which is obviously the transfer date for the OTS. We 

could rapidly go from five to three directors quickly and actually 

down to two because one of our internal directors right now is on 

holdover status and has other opportunities. 

So I think that this is very important, and I think having a 

Presidentially appointed, Senate-confirmed nominee is very important. It is important for the Senate to have their say and their role 

in the process. It is important for the President to have his prerogatives as the one who is constitutionally charged with nominations 

and appointments. 

So I do think, too, if members want independent thought at an 

agency, it is important for that Presidential appointment and Senate confirmation process. I look back on my last 5 years and all the 

tough decisions I had to make, and if I had been in an acting capacity, it would have been inhibiting to me in making some of the 

tough decisions I had to do. So I hope the process can move forward. 

Chairman JOHNSON. Chairman Schapiro. 

Ms. SCHAPIRO. I think, Mr. Chairman, for five-member commissions such as the Securities and Exchange Commission, it is really 

critical that we have, and always maintain, our full complement of 

Commissioners. I think it is particularly true right now given the 

huge volume of work that the agency is facing, both with respect 
28 

to our law enforcement activity but most particularly with respect 

to the rule-writing responsibilities that we have taken on under 

Dodd-Frank. 

We have no vacancies at the moment, although we do have one 

Commissioner whose term expired a year ago and has been holding 

over in that position. 

Chairman JOHNSON. Chairman Gensler. 

Mr. GENSLER. Like the Securities and Exchange Commission, we 

are a five-person commission and we are fortunate to have five 

very able and thoroughly engaged Commissioners, but we do have 

a term that comes up. Commissioner Dunn, after serving two 

terms, will be up in June, and yesterday, the President did forward, or at least announced that he is forwarding a nomination to 

the Senate. So I was glad to see that and I would look forward to 

maintaining a full Commission—I think it is very helpful to always 

have five Commissioners who are actively and thoughtfully engaged. 

Chairman JOHNSON. Comptroller Walsh? 

Mr. WALSH. Well, as the one acting agency head here at the 

table, I guess I would add the thought that Secretary Geithner invited me to do this job and certainly encouraged me to do the job 

as if it was my job, but the fact is that I have said to him and said 

repeatedly that I do think it is very important for independent supervisory agencies to have nominated and confirmed heads in 

place. It is important for that independence and for the perception 

of independence, and I think it is obviously the right way to proceed since that is the structure that exists. So I would join others 

in support of that thought. 

Chairman JOHNSON. Senator Merkley, do you have any follow-up 

questions? 

Senator MERKLEY. You bet. First, I want to join my colleagues 

in thank you, Chairman Bair, for your hard work during an incredibly difficult time in America’s financial picture, so I wish you well 

in the next chapter of your life and will continue to, I am sure, 

many of us, look to your insights and advice. 

One of the things I wanted to pursue, and Deputy Secretary 

Wolin, I think it is probably appropriate to ask you about this, and 

that is if we turn the clock back a year and a half, there was and 

there continues to be a real challenge in terms of lending capacity 

at a lot of our community banks and often our healthy community 

banks. In wrestling with this and talking to many, many experts 

and stakeholders, we have produced a plan called Small Business 

Lending Fund which was to essentially counter the irrational fear 

that had followed the irrational exuberance as that fear related to 

capitalizing community banks. And that capitalization, as leveraged, could provide up to $300 billion in community bank lending. 

That was something that was amended into the small business jobs 

bill in a bipartisan fashion. 

And I have banks coming to me now who are applying and saying there is no sign that Treasury is ever going to respond to our 

applications. It just seems like the process is absolutely frozen. 

What is wrong and how is Treasury going to fix it? This is an important issue to putting our economy back on track. 
29 

Mr. WOLIN. Thank you, Senator, for that question. The Small 

Business Lending Fund is a critical element of getting credit flowing again to small businesses. We support it very strongly and are 

spending a lot of energy implementing it. We have now received 

lots of applications. I think you can expect that we will start making announcements very quickly in response to those applications. 

Senator MERKLEY. That is great news, and I thank you, and I 

will not have the same stream of folks coming and asking me what 

is going wrong. 

The second question I wanted to ask, and let me turn to Chair 

Schapiro, is related to follow-up to the flash crash from a year ago. 

The SEC, I believe, has had the ability to address greater audit 

trail for about 20 years and the flash crash kind of put an exclamation point on the need to both develop a real-time audit trail 

and to develop other issues related to preferential treatment for 

high volume, high speed trading. Maybe you can update us on 

where the SEC process is and your personal perspectives on how 

important this is in terms of the confidence of small investors and 

others. 

Ms. SCHAPIRO. I would be happy to, and let me start with the 

last part first. I think it is absolutely essential to the confidence 

of small investors that we have a market structure that is resilient 

and capable and perceived by all market participants to be fair and 

that is fair. 

Coming off of May 6, we very quickly made a number of changes 

to the market structure to deal specifically with the extraordinary 

volatility we saw on that day. We instituted single stock circuit 

breakers so that if the price of a stock moves more than 10 percent 

in a five-minute period, trading is halted. It gives time for people 

to catch their breath, contraside interest in trading the security to 

come back into the marketplace. 

We also eliminated the rules that would permit stub quotes, those executions at one cent and $100,000 that we saw on that day. 

The exchanges clarified the rules of the road for when they would 

break trades that were clearly erroneous or were not valid trades 

in the marketplace, because about 20,000 trades were broken on 

that day in May last year. 

And finally, we banned naked access to the market so that customers and broker-dealers’ orders must go through a risk management system and cannot directly enter the marketplace. So important things have been done. 

Our next step with respect to May 6 is to move to a limit up, 

limit down proposal, proffered by the exchanges, that would actually limit the ability to even put into the marketplace an order that 

was out of a reasonably tight range around the current trading, 

and I think that will be an important improvement, as well. 

But we have broader issues that we are very focused on. Many 

of them were raised in our concept release of about 14 months ago, 

15 months ago, and they focused a lot on high-frequency trading 

and the strategies that are used by algorithmic traders. We are 

moving forward with that in pieces and hopefully will begin to take 

some action in that area. 

Two of the most important pieces are the consolidated audit trail 

and the large trader reporting system that were specifically pro-
30 

posed by the agency a year ago, or almost a year ago, and it is my 

hope that those will come back to the Commission for final approval in the next couple of months. They are absolutely essential 

to our ability to reconstruct trading after an eventful day like May 

6, but also for us to be able to determine whether people are manipulating the markets or taking advantage of other market participants in any way. And so the consolidated audit trail, which 

brings together the data from the many trading venues that exist 

in the U.S. markets, is really a critical regulatory tool. It simply 

has not been done and we are going to move ahead and try to get 

it done in the next couple of months. 

Senator MERKLEY. I appreciate that it remains something that 

you are hard at work on, and thank you. 

Ms. SCHAPIRO. I am absolutely committed to it. 

Chairman JOHNSON. Senator Warner? 

Senator WARNER. Thank you, Mr. Chairman. 

I want to pick up where Senator Merkley left off just as kind of 

a quick comment. I appreciate the actions that the SEC has taken. 

I still have some concerns that can you keep up with the technological challenges, collocation, the sniffing techniques, some of the 

other technology aspects. And one of the things, Mr. Chairman, I 

find a little curious is that there are—some of our colleagues on the 

other side have attacked the new Consumer Bureau because of its 

ability to have a funding source, and I think we all, as we were 

trying to get this bill in place, wanted to make sure that the prudential supervisors were in at least parity if not a preeminent role 

vis-a-vis the new consumer entity, and it is curious that one of the 

ways you do that, particularly with the SEC, would have been to 

make sure they had adequate funding so they could upgrade their 

technology, so when they deal with flash crash technology challenges, when we are thinking about perhaps loading on a new challenge to the SEC in terms of reporting back as major publicly traded companies are subjects of cyber attacks, we keep layering on additional challenges, and if we are going to maintain that parity and 

keep the prudential supervisor, I think, appropriately in the preeminent role, they have got to have the resources to do it. 

And that brings me now to one of the areas that I want to ask 

both Chairman Schapiro and Chairman Gensler on. We are seeing 

as, I guess, normally through this process on some of the swap execution challenges the difference between the SEC’s approach to and 

the notion that Chairman Gensler has of trying to, let us get five 

quotes. I have got—I am not sure where this should all play out, 

but I am anxious to see how we, between the two entities, have 

that reconciliation and whether at some point, you know, is this 

where we will—ultimately it will be bumped up to an FSOC—recognize you have got different markets, but at some point having 

some type of clarity and will this ultimately end up at the FSOC, 

on swap execution facilities. 

Ms. SCHAPIRO. Let me begin and then I will turn it over to Gary. 

I think it should not be a surprise that we have some different approaches with respect to specific rules. Some of those are a result 

of our having different statutory foundations and different traditions of how we regulate, but also because there are differences in 

some of the products based on their liquidity characteristics and 
31 

how they trade, and that really argues for, in some instances, a different regulatory approach. 

But I will say we are working together extremely closely. We are 

still at the proposing stage for all of these rules. We have sought 

cross comment. So if the CFTC took a different approach, for example, SEFs, as they did, then we sought cross comment. We asked 

questions about whether that was a better approach or whether the 

SEC approach was better or was there an entirely different way to 

go. We continue to review each other’s comment letters on our proposals, so we have a good understanding, and we continue to meet 

with industry and other interested parties to talk about what is the 

optimum approach for fulfilling the statutory mandate to bring 

these products under a regulatory regime, but to do it in a way 

that is cost efficient and effective and does not have institutions in 

particular subjected to different sets of regulations where that 

would be silly and unnecessarily costly. 

So we are very focused on all of these issues and our staffs continue to do really fabulous work together to try to narrow those differences, and I expect as we get to the stage where we begin to 

adopt rules, you will see differences continue to narrow. 

Mr. GENSLER. If I could just come back to the one core piece, 

transparency is a key part of how markets work best. I truly believe that open and competitive and transparent markets are what 

helps the American public and lowers the systemic risk of a future 

crisis. 

In terms of our working relationship, it has been remarkably 

close in a dozen or 15 joint roundtables and sharing all the comment letters, as Chairman Schapiro said, and asking cross comments. 

More particularly, on the swap execution facility rule, one of the 

challenges that we have is that the futures regime, the regime for 

trading futures, was mandated in the 1930s that all of it is on a 

central exchange. One hundred percent of it has to be transparent 

and out there for the public to see. That is a good thing, I think, 

for the American public. The securities laws are a bit different. So 

there are gaps when we start between securities and futures. 

So as we come up with rules for swaps, like interest rate swaps, 

we have to be mindful that they are not so far off from the futures 

market that we start to undermine even our futures markets that 

worked very well in this country, even through the crisis. So we are 

focused not just on the gap between security-based swaps and 

swaps, but we are also focused on are we creating something that 

undermines the futures markets when we do this rule writing for 

something called swap execution facilities. So it is trying to marry 

that up. 

Senator WARNER. I just want to make sure that we do not have 

an indirect result of, for those non-exchange-traded swaps, that if 

we have too high a threshold in terms of additional quotes, that we 

push it into some—— 

Mr. GENSLER. Well, actually, Senator Warner, this only relates 

to something that is cleared. It has to be cleared. It has to be made 

available for trading. And third, it cannot be a block. The way that 

both of us looked at this rule, it was this is for the smaller trade. 
32 

This is for the $5 or $10 million interest rate swap, not $250 million or $500 million interest rate swap—— 

Senator WARNER. Right. 

Mr. GENSLER.——and it is not for the bilateral swaps. It is not 

for those swaps done with corporate America as opposed to—or the 

non-financial corporate America. This is just financial entity to financial entity, a transaction that is cleared, made available for 

trading, and is not a block. So it is that. 

Senator WARNER. Two last questions, very briefly, and I appreciate the Chairman’s granting me this. One is, and I am not—we 

clearly need to move as many of these transactions as possible onto 

clearinghouses. I just raise a question, not a critique, but we want 

to have an open access, to not just create such a limited number 

of clearinghouses. I do have some questions whether your $50 million capital base—I sure want to make sure that $50 million capital base requirement for any clearinghouse is true capital and we 

get that right. I think trying to have robust competition among 

clearinghouses is good, but we have got to make sure that they 

really have the ability to give that counterparty assurance. 

Mr. GENSLER. This is important to ensure robust competition 

amongst dealers. What has happened in this world right now, it is 

a very closed, concentrated group of dealers. 

Senator WARNER. Right. 

Mr. GENSLER. In the futures world and in the securities world, 

there are many members of clearinghouses, and that is allowed. 

There are 60 to 70 members of the Chicago Mercantile clearinghouse, for instance. In the swaps world, it is very closed, and I 

think there were high and, I believe, arbitrary limits, that you had 

to have $5 billion of capital and a $1 trillion swap book, and I 

think that was in part done to keep a barrier to entry, frankly. 

And I think Congress addressed that by saying that clearinghouses have to have open access. We have put a proposal rule out 

for comment to hear from the public. But it is also for pension 

funds and asset managers to have more choices as to who is going 

to be their clearing member, who is going to represent them on the 

buy side. So I think this is actually a rule that helps pension funds, 

the asset managers of America, the financial entities who are not 

swap dealers, have access to this clearing and not be constrained 

and have to go through a handful of big Wall Street firms. 

Senator WARNER. And finally, just again, Secretary Wolin, I do 

hope that, and it sounds like the SEC and the CFTC are working 

well together, but at some point, it was at least this member’s hope 

that so that we would not have this patchwork and siloed approach 

and duplicative sets of regulations, the FSOC was hopefully that 

place that would help resolve these issues. At some point there 

needs to be that umpire, and I hope Secretary Geithner will realize, not just in this particular case, but in a series of others, if you 

have any closing comments. And again, I thank the indulgence of 

the Chair. 

Mr. WOLIN. Senator Warner, as you heard from the two Chairmen, I think they are still early in their process and will move forward. I think while respecting the independence of the regulators, 

obviously, the FSOC does have a responsibility to look at things 

that have systemically important implications and to try to bring 
33 

to bear consistency across the system where those issues are systemically relevant. That is something we have been focused on. 

There is also, of course, from Treasury’s perspective, a need to 

worry about the international dimensions so that not only do we 

have consistency where we can here within the United States, but 

also what is going on elsewhere in the G–20 and beyond, again, for 

the sort of level playing field kinds of implications that we think 

are important. 

Chairman JOHNSON. Today’s hearing has been very helpful and 

given us all a better understanding of the important provisions in 

the Dodd-Frank Act to promote financial stability in our nation’s 

economy going forward. We cannot afford to go back to the old financial system that destroyed millions of jobs and cost the economy 

trillions of dollars. The creation of the FSOC and the other new 

tools given to our Federal regulators to monitor systemic risk and 

to unwind failing financial institutions address many of the weaknesses in the old system and this will help the regulators better 

manage future crises. 

Thanks again to my colleagues and our panelists for being here 

today. 

This hearing is adjourned. 

[Whereupon, at 11:32 a.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 
34 

PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY 

Thank you, Mr. Chairman. 

Today’s hearing will examine the difficult task of defining and regulating systemic 

risk. Dodd-Frank established the Financial Stability Oversight Council and charged 

it with monitoring risk in the U.S. financial system. The Council is also responsible 

for designating firms for special, systemic risk regulation by the Federal Reserve. 

Unfortunately, Dodd-Frank provides little guidance on exactly which firms should 

be designated for systemic risk regulation and what that regulation should involve. 

Instead, these decisions were left to the discretion of the regulators through broad 

delegations of authority. Accordingly, before regulators move forward, they will need 

to devise a well-considered and transparent regulatory scheme that limits adverse 

consequences. 

So far, regulators appear to be divided on what the final rules should look like 

and what entities should be designated as systemically significant financial institutions. It is not surprising that regulators are having difficulty determining how to 

regulate firms for systemic risk. Many commentators have questioned whether it is 

even possible to make such a determination with any degree of accuracy. Indeed, 

Secretary Geithner recently told the Special Inspector General for TARP: ‘‘You won’t 

be able to make a judgment about what’s systemic and what’s not until you know 

the nature of the shock.’’ 

Despite the divergent views of its members, the Council is moving forward with 

its framework for designating nonbank financial entities for extra regulatory scrutiny. Unfortunately, the Council has not yet released for public comment the detailed rules on how they will designate firms. Instead, the Council has issued proposed rules that merely restate the broad statutory parameters. As a result, there 

is a great deal of confusion about how the Council will proceed with its rulemaking. 

This has created uncertainty in our markets as firms are unsure which types of activities will cause them to be subject to systemic risk regulation. 

Accordingly, I want to hear more details from our witnesses about how they envision systemic risk regulation will function in practice. I am particularly interested 

in hearing how they will address the potentially adverse consequences that could 

arise. Most importantly, how will regulators ensure that selecting a handful of firms 

for enhanced regulation will not increase moral hazard if markets believe that regulators will never allow a designated firm to fail? 

As we saw during the recent financial crisis, regulators may go to great lengths 

to rescue a firm in order to cover up their mistakes. In other words, does the Council’s designation responsibility threaten to undermine one of the Council’s other responsibilities—the promotion of market discipline by eliminating expectations that 

the Government will bail out financial institutions if there is a crisis? 

In addition, I am interested in hearing how regulators believe designating firms 

will impact the competitiveness of our markets. In the lead up to the financial crisis, 

our regulators failed on a grand scale to monitor the activities of individual institutions. There is good reason to doubt whether our regulators can effectively monitor 

the risks posed system-wide. 

Thus, the burden is on our regulators to demonstrate that they know exactly what 

they are doing before they begin to implement this new form of regulation. The last 

thing our fragile economy needs is a far-reaching Government experiment that destabilizes the financial system it is intended to protect. 

Thank you. 

PREPARED STATEMENT OF NEAL S. WOLIN 

DEPUTY SECRETARY, DEPARTMENT OF THE TREASURY 

MAY 12, 2011 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, I 

appreciate the opportunity to provide an update on the Treasury Department’s implementation of the Dodd-Frank Act. 

Last year, the President signed into law the most sweeping financial reforms 

since the Great Depression. Although our economy and our financial markets have 

made important progress on the path toward recovery, we cannot forget why we enacted this legislation. 

In the fall of 2008, we witnessed a financial panic of a scale and severity not seen 

in decades. The crisis was brought about by fundamental failures in our financial 

system. The failures were many and they were varied. The crisis erased trillions of 

dollars of wealth, put Americans out of work across the country, and shook the foun-
35 

dations of our entire economy. And the crisis exposed the fundamental flaws in our 

financial system. 

There was no alternative to reform. The system we had favored short-term gains 

for individual firms over the stability and growth of the economy as a whole. The 

system we had was weak and susceptible to crisis. And the system we had left taxpayers to save it in times of trouble. 

We had no choice but to build a better, stronger system. That’s why we proposed, 

Congress passed, and the President signed into law a sweeping set of reforms to do 

just that. 

But enacting this law was just the beginning. 

We are now undertaking the difficult and complex process of implementation, and 

today I’d like to discuss some of our accomplishments and our next steps as we approach the 10 month mark since enactment. 

Before I describe how we are implementing the Dodd-Frank Act, I want to detail 

the broad principles guiding our efforts. First, we are moving as quickly and as carefully as we can. 

Wherever possible, we are quickly providing clarity to the public and the markets. 

But the task we face cannot be achieved overnight. We are writing rules in some 

of the most complex areas of finance; consolidating authority that was previously 

spread across multiple agencies; setting up new institutions for consumer protection 

and for addressing systemic risks; and negotiating with countries around the world. 

In getting this done, we are making sure to get it right. 

After the Dodd-Frank Act was signed into law, many who criticized the legislation 

said that it lacked details, and that the uncertainty of the shape of final regulations 

made it difficult for businesses to plan for the future. These critics called for clarity 

without delay. 

Now many of these same critics suggest that the pace of implementation, as prescribed by law, is moving too fast. 

Treasury and regulators have consistently indicated—then and now—that we 

would move quickly but carefully to implement the legislation, that we would seek 

public input into the process, and that it was critical to get the details right. Over 

the past 10 months, Treasury and regulators have been doing just that—implementing the statute in a careful, considered, and serious manner. 

Second, we are conducting this process out in the open, bringing full transparency 

to implementation activities. 

As new rules have been proposed, we have consulted with a broad range of groups 

and individuals. The American people are able to see who is at the table. Comments 

have been made publicly available. Treasury has made public the topics of meetings 

on Dodd-Frank implementation and the names of the attendees. 

In addition to providing transparency across Treasury’s activities, the studies and 

rulemaking processes conducted at Treasury or through the Financial Stability 

Oversight Council (FSOC or Council) have benefited from significant public outreach 

and comment, often through both Advanced Notice of Proposed Rulemaking and Notice of Proposed Rulemaking. This process allows interested parties the opportunity 

to provide input, as well as understand the evolution of rules. 

The Office of Financial Research (OFR), Federal Insurance Office (FIO) and Consumer Financial Protection Bureau (CFPB) have all provided transparency and 

sought public input in their efforts to implement Dodd-Frank reforms. 

Third, wherever possible, we are seeking to streamline and simplify Government 

regulation. 

Over the years, our financial system has accumulated layers upon layers of rules, 

which can be overwhelming. That is why alongside our efforts to strengthen and improve protections through the system, we seek to avoid duplication and to eliminate 

rules that do not work. For example, Dodd-Frank exempts small companies from 

complying with certain internal control rules of Sarbanes-Oxley. 

The Dodd-Frank Act recognizes the need to update and rationalize the patchwork 

regulatory framework that was built over decades. Consolidation of organizational 

structures and oversight responsibilities are a critical part of the statute’s reforms. 

In addition, the statute requires many joint rulemakings, and even where rules 

are not required to be issued jointly, agencies must often coordinate to adopt comparable rules for functionally or economically similar products or entities. Through 

this process we seek to avoid overlapping and inconsistent rules. 

These efforts build on a core priority of President Obama. In January, the President issued an Executive Order relating to streamlining and simplifying regulations, 

seeking to ensure cost-effective, evidence-based regulations that are compatible with 

economic growth, job creation, and competitiveness. Among other things, the Order 

requires that agencies: consider costs and benefits and choose the least burdensome 

path (to the extent consistent with law); encourage public participation in rule-
36 

making; attempt to coordinate, simplify, and harmonize regulations to reduce costs 

and promote certainty; and conduct retrospective analyses of rules, on a periodic 

basis, to identify rules that ‘‘may be outmoded, ineffective, insufficient, or excessively burdensome.’’ 

We are following these priorities as we implement Dodd-Frank. Indeed, we believe 

that the enactment of Dodd-Frank provides a historic moment for all of the affected 

agencies to pause and take stock: an opportunity to ensure that future regulation 

is consistent with these priorities, and that rules currently on the books are serving 

their intended purposes. Properly applied, these priorities and guidelines can help 

strike the right regulatory balance: ensuring that regulations protect our financial 

system and improve the performance of our economy, without imposing unreasonable costs on society. 

Fourth, we are creating a more coordinated regulatory process. 

Dodd-Frank requires regulators, more than ever before, to work together to close 

gaps in regulation and to prevent breakdowns in coordination—this is a central 

change brought about by the law. Beyond joint rules and consultation required on 

specific rulemakings, the statute requires working together where issues cut across 

multiple agencies, to make the pieces of reform fit together in a sensible, coherent 

way. 

While our financial regulatory system is built on the independence of regulators— 

and given the importance of Dodd-Frank implementation, independent regulators 

will have different views on complicated issues—working through differences is an 

important part of getting the substance right. 

The Dodd-Frank Act preserves agency independence, while providing a new forum 

for collaboration and consultation among regulators. The Financial Stability Oversight Council, which is a key component of Dodd-Frank, has a mandate to coordinate across agencies and instill joint accountability for the strength of the financial 

system. 

Already, we have worked through the FSOC to develop an integrated roadmap for 

implementation, to coordinate an unprecedented six-agency proposal on risk retention, and to develop unanimous support for recommendations on implementing the 

Volcker Rule. As Chair of the FSOC, the Secretary of the Treasury will continue 

to make it a top priority that the work of the regulators is well-coordinated. 

Fifth, we are working to ensure a level playing field. 

We are working hard at the international level to make sure that others put in 

place similar frameworks on the key issues where international consistency is essential—such as OTC derivatives, and financial institutions’ liquidity, leverage, and 

capital. 

The details of these rules governing complex markets and institutions are critical 

and when different jurisdictions implement commonly agreed-to international principles, disagreements may arise. That is why in addition to dialogue in international 

fora like the G–20 and the Financial Stability Board, we work every day with our 

foreign counterparts, especially in Europe, through our financial market and regulatory dialogue. 

But as we work in the international sphere to promote a level playing field, we 

must not fail to implement our reforms at home. U.S. leadership on reform is essential to making sure that a level playing field is in place. Ultimately, if we fail to 

do what is necessary to reform and protect our system, we put at risk its fundamental strength and resilience. 

Detailed rules of financial regulation will always vary among sovereign nations. 

What’s important, what we have made good progress on—and what we are committed to—is closing regulatory gaps, ending opportunities for geographic arbitrage, 

and preventing a global race to the bottom. 

Sixth, we are working to protect the freedom for innovation that is absolutely necessary for growth. 

Before the crisis, our financial system allowed too much room for abuse and excessive risk. But as we put in place rules to correct those mistakes, we have to achieve 

a careful balance and safeguard the freedom for competition and innovation that is 

essential for growth. 

For example, as enhanced capital requirements are introduced, we will work to 

achieve a balanced regime that strengthens firms so they can withstand stress, but 

that also allows U.S. firms to compete effectively on a global basis. 

Moreover, new provisions in Dodd-Frank will increase transparency and reduce 

risks in the derivatives markets. These electronic trading and central clearing provisions will tighten spreads, reduce costs, and increase understanding of risks for 

market participants. These new transparent structures will promotes efficient markets, capital formation, and growth in the broader economy, while reducing the risk 

and potential costs of another destabilizing financial crisis. 
37 

Implementation of Dodd-Frank will result in a strong, stable financial system, 

which is the foundation needed to foster competition, innovation and economic 

growth. 

Seventh, we are keeping Congress fully informed of our progress on a regular 

basis. 

Guided by these principles, we have made significant progress since Dodd-Frank 

was enacted almost 10 months ago. I’d like to update you on a few of the institutions at the heart of this legislation—the Financial Stability Oversight Council, the 

Office of Financial Research, the Federal Insurance Office and the Consumer Financial Protection Bureau. 

FINANCIAL STABILITY OVERSIGHT COUNCIL 

The Dodd-Frank Act created the Financial Stability Oversight Council to coordinate across agencies and instill joint accountability for the stability of the financial 

system. The Council is mandated to identify and monitor risks to U.S. financial stability, respond to any emerging threats in the system and promote market discipline. The Act also provides the Council with a leading role in several important 

regulatory decisions, including which nonbank financial institutions and financial 

market utilities will be designated for heightened prudential standards. 

The Council has made significant progress in the short time since the Dodd-Frank 

Act was signed into law. Since enactment, the Council has: (1) built its basic organizational framework; (2) laid the groundwork for the designation of nonbank financial companies and financial market utilities; (3) initiated monitoring for potential 

risks to U.S. financial stability; (4) carried out the explicit statutory requirements 

of the Council, including the completion of several studies; and (5) served as a forum 

for discussion and coordination among the agencies implementing Dodd-Frank. 

COUNCIL STRUCTURE AND OPERATIONS 

We have built a structure for the Council that is designed to promote accountability and action. Every 2 weeks, a Deputies Committee comprised of senior officials from each of the member agencies meets to set the Council’s agenda, and to 

direct the work of the Council’s Systemic Risk Committee and five functional committees. The functional committees are organized around the Council’s ongoing statutory responsibilities: designations of nonbank financial companies, designations of 

financial market utilities, heightened prudential standards, orderly liquidation and 

resolution plans, and data. 

In the 10 months since Dodd-Frank was enacted, the Council’s principals have 

met four times and plan to meet again later this month—significantly more often 

than the statutorily required quarterly meetings. 

At each meeting to date, the Council has held a public session. This exemplifies 

a commitment to conduct its work in as open and transparent a manner as practicable given the confidential supervisory and sensitive information that is at the 

heart of the Council’s work. 

DESIGNATIONS 

For the first time, Dodd-Frank requires consolidated supervision of and heightened prudential standards for the largest, most interconnected nonbank financial 

companies that could pose a threat to the financial system. The statute also authorizes heightened standards be applied to designated financial market utilities and 

payment, clearing and settlement activities. 

The Council is engaging in two parallel rulemakings to establish a process and 

define criteria for these designations that are robust and transparent. While the 

statute carefully outlines the considerations and process requirements for making 

these designations, the Council is conducting rulemakings to ensure transparency 

and to obtain input from all interested parties. 

For its nonbank designations work, the Council issued an Advanced Notice of Proposed Rulemaking or ‘‘ANPR’’ in October 2010 and a Notice of Proposed Rulemaking 

or ‘‘NPRM’’ in January 2011 providing guidance on the statutorily mandated criteria 

and defining the procedures that the Council will follow in considering the designation of nonbank financial companies. For designations of financial market utilities, 

public comments from last November’s ANPR informed an NPRM released in 

March. The comment period for that NPRM is 60 days and closes on May 27. The 

Council’s member agencies continue to work in close collaboration, having received 

significant input from market participants, non-profits, academics, and members of 

the public to develop an analytical framework for designations that will provide a 

consistent approach and will incorporate the need for both quantitative and qualitative judgments. We plan to provide additional guidance regarding the Council’s 

approach to designation and we will seek public comment on it. 
38 

It is important to understand that the Council needs to retain flexibility to exercise judgment as it considers both quantifiable metrics and the unique risks that 

a particular firm may present to the financial system. Moreover, flexibility is needed 

because financial markets are dynamic and the designation process must take into 

account changes in firms, markets and risks. That is one of the key reasons that 

the statute mandates an annual reevaluation of any designation made by the Council. 

The Council’s commitment to a robust designations process goes beyond transparency during the rulemaking process. Every designation decision will be firm-specific and is subject to judicial review. Moreover, even before the Council votes on 

a proposed designation, a company under consideration will have the opportunity 

to submit written materials to the Council on whether, in the company’s view, it 

meets the standard for designation. Only after Council members have reviewed that 

information will they vote on a proposed designation, which requires the support of 

two-thirds of the Council (including the affirmative vote of the Chair) and requires 

the Council to provide the company with a written explanation of the basis of the 

proposed designation to the firm. If challenged, the proposed designation is subject 

to review through a formal hearing process and a two-thirds final vote. Upon the 

final vote approving the designation, the Council must then submit a report to Congress detailing its final decision. 

MONITORING THREATS TO FINANCIAL STABILITY 

Monitoring threats to financial stability is the cornerstone of the Council’s responsibilities. This macroprudential role demands coordination, collaboration and information sharing among each of the members of the Council. We are working together 

to bring the best information to bear, while protecting the security and confidentiality of sensitive information. 

The Council has established a committee structure to support its monitoring function. The structure is intended to balance the need for an interdisciplinary and 

cross-cutting approach with the need to leverage existing expertise and experience, 

and is the locus of accountability for systemic risk monitoring. 

Through this structure, the FSOC focuses on identifying and analyzing cross-cutting risks that may affect financial institutions and financial markets in the medium and longer term. With respect to financial institutions, the FSOC focuses on 

structural issues such as trends in leverage or funding structure, new products, or 

exposures to particular risks. With respect to financial markets, the FSOC focuses 

on issues such as trends in volatility or liquidity, market structure, or asset valuations. 

In addition, the FSOC serves as a forum for agencies to discuss emerging issues 

of immediate importance as well as share information about issues that arise in the 

course of their supervisory and oversight work that could impact financial stability. 

The Dodd-Frank Act provides for a public report to Congress detailing this monitoring in the form of an annual report on the activities of the Council and the health 

of the financial system. As stated in the statute this report will: outline the activities of the Council, including any designations or recommendations made with respect to activities that could threaten financial stability; detail significant financial 

market and regulatory developments, including insurance and accounting regulations and standards; and, describe potential emerging threats to the financial stability of the United States. The statute also requires that the report provide recommendations to enhance the integrity, efficiency, competitiveness, and stability of 

United States financial markets; promote market discipline; and maintain investor 

confidence. 

Staff at each of the member agencies is hard at work preparing the Council’s first 

annual report. 

STUDIES 

On January 18, the Council released a study and recommendations on the implementation of the Dodd-Frank Act’s ‘‘Volcker Rule.’’ The Council sought input from 

the public in advance of the study on issues associated with the statutory required 

considerations and received more than 8,000 comments. The study recommends 

principles for implementing the Volcker Rule and suggests a comprehensive framework for identifying activities prohibited by the Rule. That framework includes an 

internal compliance regime, quantitative analysis and reporting, and supervisory review. 

Also, at its January meeting, the Council approved a study of the effects of the 

Dodd-Frank Act’s limits on the concentration of large companies on financial stability and released the study’s recommendations for public comment. The Council’s 

study found that the concentration limit will reduce moral hazard, increase financial 
39 

stability, and improve efficiency and competition within the U.S. financial system. 

The study also made largely technical recommendations to mitigate practical difficulties likely to arise in the administration and enforcement of the concentration 

limit, without undermining its effectiveness in limiting excessive concentration 

among financial companies. The Council received six comments and is currently reviewing those comments to determine whether any of the recommendations should 

be modified. 

The Council continues to have specific responsibilities to study key issues outlined 

in Dodd-Frank. For instance, the Council must complete a study regarding the 

treatment of fully secured creditors in the context of the Act’s orderly liquidation 

authority by July and a study regarding contingent capital instruments by July 

2012. 

INTERAGENCY REGULATORY COORDINATION 

The Council also has served as a forum for discussion and coordination among the 

agencies implementing the Dodd-Frank Act. For the Council’s first meeting in October 2010, the staff of member agencies developed a detailed, public road map for 

implementation of the legislation. This integrated roadmap outlined a coordinated 

timeline of goals, both for the Council and its independent member agencies, to fully 

implement the Dodd-Frank Act. 

As Chair of the Council, the Treasury Secretary is required to coordinate several 

major rulemakings under the Dodd-Frank Act. For example, to facilitate the joint 

rulemaking on credit risk retention, Treasury staff held frequent interagency discussions beginning shortly after the Dodd-Frank Act was passed to develop the rule 

text and preamble. This joint rulemaking required reaching consensus among six 

rulemaking agencies. The proposed rule, released on March 31, demonstrates our 

ability to promote effective collaboration, and it is a significant step toward 

strengthening securitization markets. Treasury staff is currently engaged in a similar process with the staff of member agencies tasked with drafting the Volcker Rule. 

The Council’s regulatory coordination role is greater than the specific statutory instances where coordination is required. Deputies meetings have served as a forum 

for sharing information about significant regulatory developments, particularly 

those that impact the work of more than one member agency and relate to financial 

stability. For example, the Federal Reserve recently briefed deputies on the results 

of its Comprehensive Capital Analysis and Review. Treasury has provided updates 

on housing finance reform. 

OFFICE OF FINANCIAL RESEARCH 

In order to constrain systemic risk effectively, the Council and its members must 

have the ability to effectively monitor it. 

The Dodd-Frank Act established the Office of Financial Research (OFR) to improve the quality of financial data available to policymakers and facilitate more robust and sophisticated analysis of the financial system. 

In the lead-up to the financial crisis, financial reporting failed to adapt to a rapidly evolving financial system. Supervisors and market participants lacked data 

about the increasing leverage in the rapidly growing shadow banking system. Policymakers and investors responded to the crisis with inadequate information about 

the interconnectedness of firms and associated risks to the financial system. 

The Dodd-Frank Act established two complementary centers within the OFR—one 

focused on data, and one focused on research and analysis—to help ensure that, 

going forward, regulators’ understanding of the risks within the financial system 

can keep pace with innovation and with market developments. 

The OFR will standardize and provide data and analytical tools for OFR researchers, the FSOC, its members, and the public. In collecting information, the OFR will 

minimize the reporting burden on industry by, whenever possible, relying on data 

already in the regulatory system, and by assisting Council members in standardizing information collected by those members. The OFR is already working to accomplish both goals and its staff is working closely with the regulatory community 

to catalog data already collected to help ensure duplication will not occur. And the 

OFR is collaborating with the SEC and CFTC to standardize reporting of parties 

to swap transactions. 

More broadly, the OFR is exploring ways in which it can help make Government 

more efficient. For example, the OFR is investigating how it might act as a central 

warehouse of data for the regulatory community and other ways in which it could 

facilitate data sharing. The OFR has also been soliciting input from FSOC member 

agencies to find ways to support their efforts. 

The OFR’s Research and Analysis Center, will measure and analyze factors affecting financial stability and help to develop policies that promote it. The OFR will also 
40 

report to the Congress and the public on its analysis of significant financial market 

developments, potential emerging threats to stability and policy responses. The combination of better, more granular data, and new analytic capabilities focused on systemic threats can help all market participants—industry as well as regulators—better understand risks within the financial system. 

Attracting and hiring top quality senior leadership is critical to OFR and in guiding its mission. 

The search for an OFR Director is ongoing and a high priority for the Administration. The Administration is evaluating candidates based on a combination of strong 

analytical ability, experience in financial services, management experience, and 

communication skills. In the meantime, key personnel have been hired. 

Richard Berner recently joined the Treasury Department as Counselor to the Secretary with the responsibility to oversee the implementation of the Office of Financial Research. Mr. Berner is a well-respected economist who will bring judgment 

and leadership to the OFR implementation team, along with critical risk management and financial industry expertise. 

The OFR also is filling senior personnel roles including its Chief Operating Officer, Chief Data Officer and Chief Business Officer. The OFR is hiring top-tier talent 

with deep industry experience in data management, technology, and risk management. Industry experience will help ensure that the organization will collect data 

in a systematic, structured, and non-duplicative way, with clear benefits to industry 

and regulators. 

The OFR is also making progress in establishing its research team and network, 

which will include academics from across the country and in a variety of disciplines. 

The interdisciplinary research team will add significant capacity to the FSOC’s ability to measure and analyze the many dimensions of financial stability. 

We project that by the end of September, the OFR will have over 60 full-time employees. Treasury is committed to providing this implementation team with needed 

support and guidance, and I, along with other senior Treasury officials, are meeting 

with the team weekly to make sure priorities are identified, progress is measured 

and that the stand-up of the OFR is well executed. 

As the OFR continues to recruit highly qualified individuals to lead and support 

its work, current staff is already working with regulators and industry to standardize financial reporting. This will improve the ability of policymakers and private 

industry to aggregate information-critical to risk management. It will also facilitate 

more efficient processing by private firms and markets. 

The OFR’s first step in this direction has been to promote the establishment of 

a global standard for identifying parties to financial transactions: a legal entity 

identifiers (LEI). During the financial crisis, a LEI could have given policymakers 

and private institutions a clearer understanding of the interconnections among financial institutions. 

The LEI initiative is moving forward quickly. The OFR is working closely with 

U.S. and foreign financial regulators to define consistent requirements, and is using 

established international forums, such as the Financial Stability Board, to engage 

in multilateral discussions. The OFR already published a framework in its November Policy Statement, consistent with the requirements set forth by the SEC and 

CFTC in their Notices of Proposed Rulemakings for swap transaction reporting. 

Meanwhile, various financial trade associations and their members formed a global 

coalition to produce a common set of requirements for such a standard. Last week 

they published a white paper that lays out draft requirements, and they are seeking 

input from public and private entities. The International Organization for Standardization—which has deep expertise in this area and representation from industry and 

regulators—is moving quickly to define a new standard that it intends to be consistent with public and private requirements. 

In addition to these efforts, OFR staff is supporting the work of the Financial Stability Oversight Council. This includes data and analysis in support of the FSOC’s 

evaluation of nonbank financial companies for designation and its report on systemic risk. 

The OFR is also establishing forums and networks to allow experts within and 

outside the regulatory system to contribute to the Council’s mission. This year, the 

OFR will host along with the National Science Foundation, a conference that brings 

together top academics in finance, economics, and computer science, and members 

of industry and the regulatory community on systemic risk monitoring and potential 

responses. OFR staff also will be participating in the academic community through 

its publications. 
41 

CONSUMER FINANCIAL PROTECTION BUREAU 

While the Council and the Office of Financial Research are designed to help us 

monitor and address risk in the broader financial system, the Consumer Financial 

Protection Bureau was created to address a specific gap in our regulatory structure—the need for a single agency dedicated to consumer protection. 

The CFPB, which will assume existing authorities of seven Federal agencies on 

July 21, 2011, will work to make sure that consumers have the information they 

need to understand the terms of their agreements with financial companies. It will 

also work to make regulations and guidance as clear and streamlined as possible 

in order to ease the burden on providers of consumer financial products and services. 

The CFPB will consolidate existing Federal rulemaking authorities with respect 

to consumer financial products and services, have enforcement and supervision authority for depository institutions with over $10 billion in assets and their affiliates, 

as well as supervise the consumer financial services activities of many non-bank financial firms that sell consumer financial services. 

The Act charges the Secretary of Treasury with standing up the CFPB until a director is appointed. Under his leadership we set up an implementation team with 

a clear mandate shortly after enactment. 

Elizabeth Warren, as Special Advisor to the Secretary, is leading Treasury’s effort 

to build the CFPB. The CFPB implementation team, now consisting of over 200 staff 

members, is focused on setting up key functions of the bureau such as bank supervision, fair lending and enforcement programs and research, markets, and regulation teams. In order to do this, CFPB is making major investments in infrastructure 

and human capital. The CFPB implementation team has reached agreement with 

the six agencies transferring staff with regards to a process for transferring staff 

to CFPB that will minimize disruption to existing agencies while allowing CFPB to 

gain from existing expertise. 

The CFPB implementation team has made a concentrated effort to reach out to 

the public, industry, and other concerned groups during the initial stand up of the 

CFPB. As an example of this extensive outreach, Elizabeth Warren has made it a 

priority to meet with community bankers and credit unions from all 50 States. She 

has also met with dozens of CEOs and other executives of the largest financial institutions and consumer advocates. The CFPB’s office of servicemember affairs, led by 

Holly Petraeus, is actively working with the Department of Defense to help inform 

and protect servicemembers from financial tricks and traps. 

The CFPB is well on track to meet the statutory deadlines for reports mandated 

by Dodd-Frank, and the CFPB implementation team is planning and preparing for 

the promulgation of certain rules mandated by the Dodd-Frank Act. For example, 

the CFPB implementation team is actively working to complete initial steps toward 

the consolidation of the TILA/RESPA mortgage disclosure forms. This consolidation 

will allow us to reduce the regulatory burden on industry and provide consumers 

with more of the information they need to make the right decision. 

There has been significant progress toward standing up core elements of the 

CFPB by the designated transfer date of July 21, 2011. In addition to its bank supervision program, the CFPB will stand up components of its consumer response 

system and be prepared to take over rule writing projects that will transfer over 

to the bureau. 

And the agency will be accountable in executing these tasks. Dodd-Frank includes 

several provisions to ensure the agency’s accountability. 

The CFPB must submit annual reports to Congress, the Director must testify 

multiple times each year on the agency’s budget and activities, and the GAO audits 

the CFPB’s expenditures annually. Furthermore, the CFPB is currently subject to 

the oversight of the inspectors general of Treasury and the Federal Reserve. And, 

most importantly, there is direct oversight of the agency’s rulemaking: the FSOC 

can review and even reject the CFPB’s rules, and, as with any other regulator, Congress has the ability to overturn any of the CFPB’s rules. 

The goal of the CFPB is to make markets for consumer financial products and 

services work for Americans—whether they are applying for a mortgage, choosing 

among credit cards, or using any number of other consumer financial products. The 

CFPB implementation team is on track to standing up an agency capable of accomplishing this goal. 

FEDERAL INSURANCE OFFICE 

In addition to providing for new regulatory protections and oversight for consumers, the Dodd-Frank Act enhances the Federal Government’s ability to monitor 

the insurance sector and coordinate and develop Federal policy on major domestic 

and international insurance issues. The crisis highlighted the lack of expertise with-
42 

in our Federal Government regarding the insurance industry. In response, the Act 

establishes the Federal Insurance Office (the ‘‘FIO’’), which will provide the U.S. 

Government—for the first time—dedicated expertise regarding the insurance industry. 

The FIO will monitor for problems or gaps in insurance regulation that can contribute to a systemic crisis in the insurance industry or the financial system; gather 

data and information on the industry and insurers; and coordinate Federal policy 

in the insurance sector. 

The Act does not provide the FIO with general supervisory or regulatory authority 

over the business of insurance. The States remain the functional regulators. 

Through the FIO, however, the Federal Government will work toward modernizing 

and improving our system of insurance regulation. 

Secretary Geithner announced at the March FSOC meeting that Michael McRaith 

has been selected to become the Director of the FIO. Mr. McRaith is currently the 

Director of the Illinois Department of Insurance, and will bring significant experience and judgment to the FIO. 

Treasury also recently announced that the Department will establish a Federal 

Advisory Committee on Insurance. The objective of the Committee is to present advice and recommendations to the FIO to assist the Office in carrying out its duties 

and authorities. The Advisory Committee will reserve half of its membership for the 

State insurance commissioners so that the FIO will benefit from the knowledge and 

regulatory experience of our functional regulators. The remaining members will represent a diverse set of expert perspectives from the various sectors of the insurance 

industry (life, property and casualty, reinsurance, agents and brokers), as well as 

academics, consumer advocates, or experts in the issues facing underserved insurance communities and consumers. 

The FIO has served an important consultative role in advising on several DoddFrank studies, rule writing processes and ongoing responsibilities. These include 

providing expert advice on the Volcker Rule study and rule writing, Orderly Liquidation Authority rule writing and participating in the FSOC insurance working 

group. 

The Federal Insurance Office has become a provision member of the International 

Association of Insurance Supervisors (IAIS), where it will represent the United 

States, and it is expected to be voted-in as a full member in the fall. The FIO is 

also leading the U.S. delegation for the insurance and pensions committee of the Organization for Economic Co-operation and Development. 

The Secretary of the Treasury, supported by the FIO, together with the United 

States Trade Representative, is now empowered to negotiate certain international 

agreements regarding prudential insurance measures. We anticipate that the FIO 

will be actively involved, for example, in working with the representatives of other 

countries on reinsurance collateral and U.S. equivalence under Solvency II. 

CONCLUSION 

The Dodd-Frank Act builds a stronger financial system by addressing major gaps 

and weaknesses in regulation. It puts in place buffers and safeguards to reduce the 

chance that another generation will go through a crisis of similar magnitude. It protects taxpayers from bailouts. It brings fairness and transparency to consumers of 

financial services. And it lays the foundation for a financial system that is pro-investment and pro-growth. The Act and its successful implementation will help ensure that our financial system becomes safer, stronger and, just as in the past century, the world leader. 

Thank you very much. 

PREPARED STATEMENT OF BEN S. BERNANKE 

CHAIRMAN, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

MAY 12, 2011 

Chairman Johnson, Ranking Member Shelby, and other Members of the Committee, thank you for the opportunity to testify on the Federal Reserve Board’s role 

in monitoring systemic risk and promoting financial stability, both as a member of 

the Financial Stability Oversight Council (FSOC) and under our own authority. 

Financial Stability Oversight Council 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 

Act) created the FSOC to identify and mitigate threats to the financial stability of 

the United States. During its existence thus far, the FSOC has promoted interagency collaboration and established the organizational structure and processes nec-
43 

1The FSOC’s internal structure consists of a Deputies Committee—composed of personnel 

from all of the voting and nonvoting members—and six other standing committees, each with 

its own specific duties. The Deputies Committee, under the direction of the FSOC members, coordinates the work of the six committees and aims to ensure that the FSOC fulfills its mission 

in an effective and timely manner. 

essary to execute its duties.1 The FSOC and its member agencies also have completed studies on limits on proprietary trading and investments in hedge funds and 

private equity funds by banking firms (the Volcker rule), on financial sector concentration limits, on the economic effects of risk retention, and on the economic consequences of systemic risk regulation. The FSOC is currently seeking public comments on proposed rules that would establish a framework for identifying nonbank 

financial firms and financial market utilities that could pose a threat to financial 

stability and that therefore should be designated for more stringent oversight. Importantly, the FSOC has begun systematically monitoring risks to financial stability 

and is preparing its inaugural annual report. 

Additional Financial Stability-Related Reforms at the Federal Reserve 

In addition to its role on the FSOC, the Federal Reserve has other significant financial stability responsibilities under the Dodd-Frank Act, including supervisory 

jurisdiction over thrift holding companies and nonbank financial firms that are designated as systemically important by the council. The act also requires the Federal 

Reserve (and other financial regulatory agencies) to take a macroprudential approach to supervision and regulation; that is, in supervising financial institutions 

and critical infrastructures, we are expected to consider the risks to overall financial 

stability in addition to the safety and soundness of individual firms. 

A major thrust of the Dodd-Frank Act is addressing the ‘‘too-big-to-fail’’ problem 

and mitigating the threat to financial stability posed by systemically important financial firms. As required by the act, the Federal Reserve is developing more-stringent prudential standards for large banking organizations and nonbank financial 

firms designated by the FSOC. These standards will include enhanced risk-based 

capital and leverage requirements, liquidity requirements, and single-counterparty 

credit limits. The standards will also require systemically important financial firms 

to adopt so-called living wills that will spell out how they can be resolved in an orderly manner during times of financial distress. The act also directs the Federal Reserve to conduct annual stress tests of large banking firms and designated nonbank 

financial firms and to publish a summary of the results. To meet the January 2012 

implementation deadline for these enhanced standards, we anticipate putting out a 

package of proposed rules for comment this summer. Our goal is to produce a wellintegrated set of rules that meaningfully reduces the probability of failure of our 

largest, most complex financial firms, and that minimizes the losses to the financial 

system and the economy if such a firm should fail. 

The Federal Reserve is working with other U.S. regulatory agencies to implement 

Dodd-Frank reforms in additional areas, including the development of risk retention 

requirements for securitization sponsors, margin requirements for noncleared overthe-counter derivatives, incentive compensation rules, and risk-management standards for central counterparties and other financial market utilities. 

The Federal Reserve has made significant organizational changes to better carry 

out its responsibilities. Even before the enactment of the Dodd-Frank Act, we were 

strengthening our supervision of the largest, most complex financial firms. We created a centralized multidisciplinary body called the Large Institution Supervision 

Coordinating Committee to oversee the supervision of these firms. This committee 

uses horizontal, or cross-firm, evaluations to monitor interconnectedness and common practices among firms that could lead to greater systemic risk. It also uses additional and improved quantitative methods for evaluating the performance of firms 

and the risks they might pose. And it more efficiently employs the broad range of 

skills of the Federal Reserve staff to supplement supervision. We have established 

a similar body to help us effectively carry out our responsibilities regarding the 

oversight of systemically important financial market utilities. 

More recently, we have also created an Office of Financial Stability Policy and Research at the Federal Reserve Board. This office coordinates our efforts to identify 

and analyze potential risks to the broader financial system and the economy. It also 

helps evaluate policies to promote financial stability and serves as the Board’s liaison to the FSOC. 

International Regulatory Coordination 

As a complement to those efforts under Dodd-Frank, the Federal Reserve has 

been working for some time with other regulatory agencies and central banks 
44 

around the world to design and implement a stronger set of prudential requirements 

for internationally active banking firms. These efforts resulted in the agreements 

reached in the fall of 2010 on the major elements of the new Basel III prudential 

framework for globally active banks. The requirements under Basel III that such 

banks hold more and better-quality capital and more-robust liquidity buffers should 

make the financial system more stable and reduce the likelihood of future financial 

crises. We are working with the other U.S. banking agencies to incorporate the 

Basel III agreements into U.S. regulations. 

More remains to be done at the international level to strengthen the global financial system. Key tasks ahead for the Basel Committee and the Financial Stability 

Board include determining how to further increase the loss-absorbing capacity of 

systemically important banking firms and strengthening resolution regimes to minimize adverse systemic effects from the failure of large, complex banks. As we work 

with our international counterparts, we are striving to keep international regulatory 

standards as consistent as possible, to ensure that multinational firms are adequately supervised, and to maintain a level international playing field. 

Thank you. I would be pleased to take your questions. 

PREPARED STATEMENT OF SHEILA C. BAIR 

CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION 

MAY 12, 2011 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, 

thank you for the opportunity to testify today on behalf of the Federal Deposit Insurance Corporation (FDIC) on issues related to monitoring systemic risk and promoting the stability of our financial system. 

The recent financial crisis has highlighted the critical importance of financial stability to the functioning of our real economy. In all, over eight and a half million 

jobs were lost in the recession and its immediate aftermath, and over half of these 

were lost in the 6-month period following the height of the crisis in September 2008. 

While the economy is now in its eighth consecutive quarter of expansion, to date 

only about 20 percent of the jobs lost in the recession have been regained, and the 

number of private sector payroll jobs stands at the same level it did 12 years ago, 

in the spring of 1999. 

A central cause of this crisis—as has been the case with most previous crises— 

was excessive debt and leverage in our financial system. At the height of the crisis, 

the large intermediaries that make up the core of our financial system proved to 

have too little capital to maintain market confidence in their solvency. The need for 

stronger capitalization of our financial system is being addressed in part by 

strengthening bank capital requirements through the Basel III capital protocols and 

implementation of the Collins amendment. We also learned in the crisis that leverage can be masked through off-balance-sheet positions, implicit guarantees, 

securitization structures, and derivatives positions. The crisis showed that the problem with leverage is really larger than the bank balance sheet itself. Excessive leverage is a general condition of our financial system that is subsidized by the tax 

code and lobbied for by financial institutions and borrower constituencies alike, to 

their short-term benefit and to the long-term cost of our economy. 

The ability of many large financial institutions to operate with relatively thin levels of capitalization was enabled by the market’s perception that they enjoyed implicit Government backing; in short, they were ‘‘too big to fail.’’ This market perception was ratified in the heat of the crisis when policymakers were faced with the 

dilemma of providing this assistance or seeing our economy endure an even more 

catastrophic decline. 

As a consequence, the Dodd-Frank Act mandates higher prudential standards for 

systemic financial entities. Importantly, the Act authorizes the creation of a new 

resolution framework for systemically important financial institutions (SIFIs) designed to ensure that no institution is too big or too interconnected to fail, thereby 

subjecting every financial institution to the discipline of the marketplace. My testimony will summarize the progress to date in implementing the elements of this 

framework and will highlight specific areas of importance to their ultimate effectiveness. 

In addition to discussing FDIC efforts to implement provisions of the Dodd-Frank 

Act that address key drivers of the recent financial crisis, I will also discuss future 

risks to our system which I believe must be proactively addressed by the Government. These include deeply flawed servicing practices which have yet to be corrected 

and the resulting overhang of foreclosures and looming litigation exposure which is 
45 

1 Reinhart, Carmen and Ken Rogoff. This Time Is Different: Eight Centuries of Financial Folly. 

Princeton: Princeton University Press. 2009. p. xxv. 

further depressing home prices. Also of concern is interest rate risk and the impact 

sudden, volatile spikes in interest costs could have on banks and borrowers who rely 

upon them for credit. 

Excessive Reliance on Debt and Financial Leverage 

A healthy system of credit intermediation, where the surplus of savings is channeled toward its highest and best use by household and business borrowers, is critically important to the modern economy. Without access to credit, households cannot 

effectively smooth their lifetime consumption and businesses cannot undertake the 

capital investments necessary for economic growth. But a starting point for understanding the causes of the crisis and the changes that need to be made in our economic policies is recognition that the U.S. economy has long depended too much on 

debt and financial leverage to finance all types of economic activity. 

In principle, debt and equity are substitute forms of financing for any type of economic activity. However, owing to the inherently riskier distribution of investment 

returns facing equity holders, equity is generally seen as a higher-cost form of financing. This perceived cost advantage for debt financing is further enhanced by the 

standard tax treatment of payments to debt holders, which are generally tax deductible, and equity holders, which are not. In light of these considerations, there is a 

tendency in good times for practically every economic constituency—from mortgage 

borrowers, to large corporations, to startup companies, to the financial institutions 

that lend to all of them—to seek higher leverage in pursuit of lower funding costs 

and higher rates of return on capital. 

What is frequently lost when calculating the cost of debt financing are the external costs that are incurred when problems arise and borrowers cannot service the 

debt. As we have witnessed so many times in this crisis, the lack of a meaningful 

commitment of equity capital or ‘‘skin in the game’’ feeds subpar underwriting and 

imprudent borrower behavior that ultimately results in defaults, workouts, repossessions, or liquidations of repossessed assets in order to satisfy the claims of debt 

holders. These severe adjustments, which tend to occur with high frequency in economic downturns, impose very high costs on economic growth and our financial system. For example, foreclosures dislodge families from their homes, create high legal 

costs, and, when experienced en masse, tend to lower the values of nearby properties. Commercial bankruptcies impose losses on lenders and tend to remove assets 

from operating businesses and place them on the open market at liquidation prices. 

When financial institutions cannot meet their obligations, the result can be, at best, 

an interruption in their ability to serve as intermediary and, at worst, destabilizing 

runs that may extend across the financial system. 

As demonstrated in the recent financial crisis, the social costs of debt financing 

are significantly higher than the private costs. When a household, business or financial company calculates the cost of financing its spending, it can no doubt lower its 

financing costs by substituting debt for equity—particularly when interest costs on 

debt are tax deductible. In good economic times, when few borrowers are forced to 

default on their obligations, more economic activity can take place at a lower cost 

of capital when debt is substituted for equity. However, the built-in private incentives for debt finance have long been observed to result in periods of excess leverage 

that contribute to financial crisis. 

As Carmen Reinhart and Kenneth Rogoff describe in their 2009 book This Time 

Is Different: 

If there is one common theme to the vast range of crises we consider in this 

book, it is that excessive debt accumulation, whether it be by the Government, banks, corporations, or consumers, often poses greater systemic risks 

than it seems during a boom.1

This is precisely what was observed in the run up to the recent crisis. Mortgage 

lenders effectively loaned 100 percent or more against the value of many homes 

without underwriting practices that ensured borrowers could service the debt over 

the long term. Securitization structures were created that left the issuers with little 

or no residual interest, meaning that these deals were 100 percent debt financed. 

In addition, financial institutions not only frequently maximized the degree of onbalance-sheet leverage they could engineer; many further leveraged their operations 

by use of off-balance-sheet structures. For all intents and purposes, these off-balance-sheet structures were not subject to prudential supervision or regulatory capital requirements, but nonetheless enjoyed the implicit backing of the parent institution. These and many other financial practices employed in the years leading up to 
46 

2See http://www.bis.org/publ/bcbs164.htm. 3See: ‘‘Interim Report on the Cumulative Impact on the Global Economy of Proposed Changes 

in the Banking Regulatory Framework,’’ Institute of International Finance, June 2010. http:// 

www.iif.com/press/press+151.php. 4See: Admati, Anat, Peter M. DeMarzo, Martin R. Hellwig and Paul Pfleiderer. ‘‘Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not 

Expensive.’’ Stanford Graduate School of Business Research Paper No. 2065, March 2011. 

http://www.gsb.stanford.edu/news/research/Admati.etal.html. 

Hanson, Samuel, Anil Kashyap and Jeremy Stein. ‘‘A Macroprudential Approach to Financial 

Regulation.’’ Working paper (draft), July 2010. http://www.economics.harvard.edu/faculty/ 

stein/files/JEP-macroprudential-July22-2010.pdf. 

Marcheggiano, Gilberto, David Miles and Jing Yang. ‘‘Optimal Bank Capital.’’ London: Bank 

of England. External Monetary Policy Committee Unit Discussion Paper No. 31, April 2011. 

http://www.bankofengland.co.uk/publications/externalmpcpapers/extmpcpaper0031revised.pdf. 

the crisis made our core financial institutions and our entire financial system more 

vulnerable to financial shocks. 

One important element to restraining financial leverage and enhancing the stability of our system is to strengthen the capital base of our largest financial institutions. The economic costs of the crisis were very much on the mind of the Basel 

Committee on Bank Supervision (BCBS) when it published the December 2009 

paper that ultimately led to the Basel III capital accord.2 Basel III is not perfect, 

but it is a great improvement over what came before. The accord not only addresses 

the insufficient quality and quantity of capital at the largest banks, but also requires capital buffers over and above the minimums so that the macroeconomy is 

not forced into a deleveraging spiral as banks breach these minimums during a period of high losses. Importantly, Basel III includes an international leverage requirement, a concept that was met with derision when I proposed it in 2006 but has now 

been embraced by the Basel Committee and the G–20. Finally, the Basel Committee 

has committed to additional capital and liquidity requirements for large, systemically important institutions that are higher, not lower, than those applicable to 

small banks. I firmly believe that this extra capital requirement must result in a 

meaningful cushion of tangible common equity capital. Moreover, I believe we 

should impose even higher capital charges on systemic entities until they have developed a resolution plan which has been approved as credible by their regulators. 

This would help ensure that large institutions in all BCBS member countries take 

seriously their obligation to demonstrate that they can be unwound in an orderly 

way should they fail. 

As the Basel Committee has considered ways to strengthen capital requirements, 

the financial industry has repeatedly warned of economic harm if it is required to 

replace debt financing with equity. A 2010 report by the Institute of International 

Finance argued that the new, higher capital requirements and other reforms will 

raise bank funding costs, raise the cost of credit in the economy, and have a significant adverse impact on the path of economic activity.3 But the bulk of credible research shows that higher capital requirements will have a relatively modest effect 

on the cost of credit and economic activity. These studies, conducted by economists 

at Harvard, Stanford, the University of Chicago, Bank of England and the Bank for 

International Settlements, account for not only the private costs and benefits of 

funding through equity capital, but also the social costs and benefits.4 As we saw 

in 2008, when a crisis hits, highly leveraged financial institutions dramatically contract credit to conserve capital. FDIC-insured institutions as a group have reduced 

their balances of outstanding loans during nine of the last 10 quarters, and their 

unused loan commitments have declined by $2.5 trillion since the end of 2007. As 

we have seen, these procyclical lending policies can have a devastating impact on 

the real economy. As we move forward with important regulatory changes to improve institutional structures in finance, we must do so with an eye to what is in 

some ways a larger, built-in distortion in our financial system—excessive reliance 

on debt as opposed to equity. 

Under the provisions of Section 941 in the Dodd-Frank Act, the FDIC and other 

agencies recently issued proposed rules to address the excessive risk-taking inherent 

in the originate-to-distribute model of lending and securitization. These rules require originators of asset-backed securities to retain not less than 5 percent of the 

credit risk of those securities, and define standards for Qualifying Residential Mortgages (QRMs) that will be exempt from risk retention when they are securitized. 

The proposal sets forth a flexible framework for issuers to achieve the 5 percent risk 

retention requirement. Together, the risk retention and QRM rules will help to limit 

leverage and better align financial incentives in asset-backed securitization, and 

give loan underwriting, administration, and servicing much larger roles in credit 

risk management. They are an important step in restoring investor confidence in 
47 

a market where the volume of issuance remains depressed in the aftermath of the 

crisis. 

Ending Too Big to Fail by Facilitating Orderly Resolutions 

One of the most powerful inducements toward excess leverage and institutional 

risk-taking in the period leading up to the crisis was the lack of effective market 

discipline on the largest financial institutions that were considered by the market 

to be ‘‘too big to fail.’’ The financial crisis of 2008 centered on the so-called shadow 

banking system—a network of large-bank affiliates, special-purpose vehicles, and 

nonbank financial companies that existed not only largely outside of the prudential 

supervision and capital requirements that apply to federally insured depository institutions in the United States, but also largely outside of the FDIC’s process for 

resolving failed insured financial institutions through receivership. 

Several large, complex U.S. financial companies at the center of the 2008 crisis 

could not be wound down in an orderly manner when they became nonviable. Major 

segments of their operations were subject to the commercial bankruptcy code, as opposed to bank receivership laws, or they were located abroad and therefore outside 

of U.S. jurisdiction. In the heat of the crisis, policymakers in several instances resorted to bailouts instead of letting these firms collapse into bankruptcy because 

they feared that the losses generated in a failure would cascade through the financial system, freezing financial markets and stopping the economy in its tracks. 

As it happened, these fears were realized when Lehman Brothers—a large, complex nonbank financial company—filed for bankruptcy on September 15, 2008. Anticipating the complications of a long, costly bankruptcy process, counterparties 

across the financial system reacted to the Lehman failure by running for the safety 

of cash and other Government obligations. Subsequent days and weeks saw the collapse of interbank lending and commercial paper issuance, and a near complete 

disintermediation of the shadow banking system. The only remedy was massive 

intervention on the part of governments around the world, which pumped equity 

capital into banks and other financial companies, guaranteed certain non-deposit liabilities, and extended credit backed by a wide range of illiquid assets to banks and 

nonbank firms alike. Even with these emergency measures, the economic consequences of the crisis have been enormous. 

Under a regime of ‘‘too big to fail,’’ the largest U.S. banks and other financial companies have every incentive to render themselves so large, so complex, and so 

opaque that no policymaker would dare risk letting them fail in a crisis. With the 

benefit of this implicit safety net, these institutions have been insulated from the 

normal discipline of the marketplace that applies to smaller banks and practically 

every other private company. 

Having recently seen the nation’s largest financial institutions receive hundreds 

of billions of dollars in taxpayer assistance, the market appears to expect more of 

the same going forward. In February, Moody’s reported that its ratings on the senior 

unsecured debt of eight large U.S. banking organizations received an average ‘‘uplift’’ of 2.2 ratings notches because of the expectation of future Government support. 

Meanwhile, the largest banks continue to enjoy a large competitive advantage over 

community banks in funding markets. In the fourth quarter of last year, the average interest cost of funding earning assets for banks with more than $100 billion 

in assets was about half the average for community banks with less than $1 billion 

in assets. Indeed, I would also argue that well-managed large banks are disadvantaged by ‘‘too big to fail’’ as it narrows the funding advantage they would otherwise 

enjoy over weaker competitors. 

Unless reversed, we could expect to see more concentration of market power in 

the hands of the largest institutions, more complexity in financial structures and 

relationships, more risk-taking at the expense of the public, and, in due time, another financial crisis. However, the Dodd-Frank Act introduces several measures in 

Title I and Title II that, together, provide the basis for a new resolution framework 

designed to render any financial institution ‘‘resolvable,’’ thereby ending the subsidization of risktaking that took place prior to these reforms. 

The new SIFI resolution framework has three basic elements. First, the new Financial Stability Oversight Council, chaired by the Treasury Secretary and made up 

of the other financial regulatory agencies, is responsible for designating SIFIs based 

on criteria that are now being established by regulation. Once designated, the SIFIs 

will be subject to heightened supervision by the Federal Reserve Board and required 

to maintain detailed resolution plans that demonstrate that they are resolvable 

under bankruptcy—not bailout—if they should run into severe financial distress. Finally, the law provides for a third alternative to bankruptcy or bailout—an Orderly 

Liquidation Authority, or OLA, that gives the FDIC many of the same trustee powers over SIFIs that we have long used to manage failed-bank receiverships. 
48 

I would like to clarify some misconceptions about these authorities and highlight 

some priorities I see for their effective implementation. 

SIFI Designation It is important at the outset to clarify that being designated 

as a SIFI will in no way confer a competitive advantage by anointing an institution 

as ‘‘too big to fail.’’ The reality is that SIFIs will be subject to heightened supervision and higher capital requirements. They will also be required to maintain resolution plans and could be required to restructure their operations if they cannot 

demonstrate that they are resolvable. In light of these significant regulatory requirements, the FDIC has detected absolutely no interest on the part of any financial institution in being named a SIFI. Indeed, many institutions are vigorously lobbying against such a designation. 

We believe that the ability of an institution to be resolved in a bankruptcy process 

without systemic impact should be a key consideration in designating a firm as a 

SIFI. Further, we believe that the concept of resolvability is consistent with several 

of the statutory factors that the FSOC is required to consider in designating a firm 

as systemic, those being size, interconnectedness, lack of substitutes and leverage. 

If an institution can be reliably deemed resolvable in bankruptcy by the regulators, 

and operates within the confines of the leverage requirements established by bank 

regulators, then it should not be designated as a SIFI. 

What concerns us, however, is the lack of information we might have about potential SIFIs that may impede our ability to make an accurate determination of resolvability before the fact. This potential blind spot in the designation process raises the 

specter of a ‘‘deathbed designation’’ of a SIFI, whereby the FDIC would be required 

to resolve the firm under a Title II resolution without the benefit of a resolution 

plan or the ability to conduct advance planning, both of which are so critical to an 

orderly resolution. This situation, which would put the resolution authority in the 

worst possible position, should be avoided at all costs. Thus, we need to be able to 

collect detailed information on a limited number of potential SIFIs as part of the 

designation process. We should provide the industry with some clarity about which 

firms will be expected to provide the FSOC with this additional information, using 

simple and transparent metrics such as firm size, similar to the approach used for 

bank holding companies under the Dodd-Frank Act. This should reduce some of the 

mystery surrounding the process and should eliminate any market concern about 

which firms the FSOC has under its review. In addition, no one should jump to the 

conclusion that by asking for additional information, the FSOC has preordained a 

firm to be ‘‘systemic.’’ It is likely that, after we gather additional information and 

learn more about these firms, relatively few of them will be viewed as systemic, especially if the firms can demonstrate their resolvability in bankruptcy at this stage 

of the process. 

The FSOC issued an Advanced Notice of Proposed Rulemaking (ANPR) last October and a Notice of Proposed Rulemaking (NPR) on January 26, 2011 describing the 

processes and procedures that will inform the FSOC’s designation of nonbank financial companies under the Dodd-Frank Act. We recognize the concerns raised by several commenters to the FSOC’s ANPR and NPR about the lack of detail and clarity 

surrounding the designation process. This lack of specificity and certainty in the 

designation process is itself a burden on the industry and an impediment to prompt 

and effective implementation of the designation process. That is why it is important 

that the FSOC move forward and develop some hard metrics to guide the SIFI designation process. The sooner we develop and publish these metrics, the sooner this 

needless uncertainty can be resolved. The FSOC is in the process of developing further clarification of the metrics for comment that will provide more specificity as 

to the measures and approaches we are considering using for designating non-bank 

firms. 

SIFI Resolution Plans A major—and somewhat underestimated—improvement 

in the SIFI resolution process is the requirement in the Dodd-Frank Act for firms 

designated as SIFIs to maintain satisfactory resolution plans that demonstrate their 

resolvability in a crisis. 

When a large, complex financial institution gets into trouble, time is the enemy. 

The larger, more complex, and more interconnected a financial company is, the 

longer it takes to assemble a full and accurate picture of its operations and develop 

a resolution strategy. By requiring detailed resolution plans in advance, and authorizing an onsite FDIC team to conduct pre-resolution planning, the SIFI resolution 

framework regains the informational advantage that was lacking in the crisis of 

2008. 

The FDIC recently released a paper detailing how the filing of resolution plans, 

the ability to conduct advance planning, and other elements of the framework could 

have dramatically changed the outcome if they had been available in the case of 
49 

5 ‘‘The Orderly Liquidation of Lehman Brothers Holdings under the Dodd-Frank Act,’’ FDIC 

Quarterly, Vol. 5, No. 2, 2011. http://www.fdic.gov/regulations/reform/lehman.html. 

Lehman.5 Under the new SIFI resolution framework, the FDIC should have a continuous presence at all designated SIFIs, working with the firms and reviewing 

their resolution plans as part of their normal course of business. Thus, our presence 

will in no way be seen as a signal of distress. Instead, it is much more likely to 

provide a stabilizing influence that encourages management to more fully consider 

the downside consequences of its actions, to the benefit of the institution and the 

stability of the system as a whole. 

The law also authorizes the FDIC and the Federal Reserve Board to require, if 

necessary, changes in the structure or activities of these institutions to ensure that 

they meet the standard of being resolvable in a crisis. In my opinion, the ultimate 

effectiveness of the SIFI resolution framework will depend in large part on the willingness of the FDIC and the Federal Reserve Board to actively use this authority 

to require organizational changes that promote the ability to resolve SIFIs. 

As currently structured, many large banks and nonbank SIFIs maintain thousands of subsidiaries and manage their activities within business lines that cross 

many different organizational structures and regulatory jurisdictions. This can 

make it very difficult to implement an orderly resolution of one part of the company 

without triggering a costly collapse of the entire company. To solve this problem, 

the FDIC and the Federal Reserve Board must be willing to insist on organizational 

changes that better align business lines and legal entities well before a crisis occurs. 

Unless these structures are rationalized and simplified in advance, there is a real 

danger that their complexity could make a SIFI resolution far more costly and more 

difficult than it needs to be. 

Such changes are also likely to have collateral benefits for the firm’s management 

in the short run. A simplified organizational structure will put management in a 

better position to understand and monitor risks and the inter-relationships among 

business lines, addressing what many see as a major challenge that contributed to 

the crisis. That is why—well before the test of another major crisis—we must define 

high informational standards for resolution plans and be willing to insist on organizational changes where necessary in order to ensure that SIFIs meet the standard 

of resolvability. 

Orderly Liquidation Authority (OLA) There also appear to be a number of 

popular misconceptions as to the nature of the Orderly Liquidation Authority. Some 

have called it a bailout mechanism, while others see it as a fire sale that will destroy the value of receivership assets. Neither is true. While it is positioned as a 

backup plan in cases where bankruptcy would threaten to result in wider financial 

disorder, the OLA is actually a better-suited framework for resolving claims against 

failed financial institutions. It is a transparent process that operates under fixed 

rules that prohibit any bailout of shareholders and creditors or any other type of 

political considerations, which can be a legitimate concern in the case of an ad-hoc 

emergency rescue program. Not only would the OLA work faster and preserve value 

better than bankruptcy, but the regulatory authorities who will administer the OLA 

are in a far better position to coordinate with foreign regulators in the failure of 

an institution with significant international operations. 

The FDIC has made considerable progress in forging bilateral agreements with 

other countries that will facilitate orderly cross-border resolutions. In addition, we 

currently co-chair the Cross Border Resolutions Group of the Basel Committee. It 

is worth noting that not a single other advanced country plans to rely on bankruptcy to resolve large, international financial companies. Most are implementing 

special resolution regimes similar to the OLA. Under the OLA, we can buy time, 

if necessary, and preserve franchise value by running the institution as a bridge 

bank, and then eventually sell it in parts or as a whole. It is a powerful tool that 

greatly enhances our ability to provide continuity and minimize losses in financial 

institution failures. 

While the OLA strictly prohibits bailouts, the FDIC could use the authority to 

conduct advance planning, to temporarily operate and fund the institution under 

Government control to preserve its value as a going concern, and to quickly pay partial recoveries to creditors through advance dividends, as we have long done in 

failed-bank receiverships. The result would be a faster resolution of claims against 

the failed institution, smaller losses for creditors, reduced impact on the wider financial system, and an end to the cycle of bailouts. 

The history of the recent crisis is replete with examples of missed opportunities 

to sell or recapitalize troubled institutions before they failed. But with bailout now 

off the table, management will have a greater incentive to bring in an acquirer or 

new investors before failure, and shareholders and creditors will have more incen-
50 

tive to go along with such a plan in order to salvage the value of their claims. These 

new incentives to be more proactive in dealing with problem SIFIs will reduce their 

incidence of outright failure and also lessen the risk of systemic effects arising from 

such failures. 

In summary, the measures authorized under the Dodd-Frank Act to create a new, 

more effective SIFI resolution authority will go far toward reducing leverage and 

risktaking in our financial system by subjecting every financial institution, no matter its size or degree of interconnectedness, to the discipline of the marketplace. 

Prompt and effective implementation of these measures will be essential to constraining the tendency toward excess leverage in our financial system and our economy, and in creating incentives for safe and sound practices that will promote financial stability in the future. In light of the ongoing concern about the burden arising 

from regulatory reform, I think it is worth mentioning that none of these measures 

to promote the resolvability of SIFIs will have any impact at all on small and 

midsized financial institutions except to reduce the competitive disadvantage they 

have long encountered with regard to large, complex institutions. There are clear 

limits to what can be accomplished by prescriptive regulation. That is why promoting the ability of market forces to constrain risk taking will be essential if we 

are to achieve a more stable financial system in the years ahead. 

Macroprudential Supervision 

Beyond the regulatory steps to ensure that the core of our financial system is 

more resilient to shocks, we also need a regulatory process that is much more attuned to developing macro risks and how they may affect systemically important institutions. This task, generally referred to as macroprudential supervision, has been 

assigned collectively to the FSOC. Among other things, the Dodd-Frank Act directs 

the FSOC to facilitate regulatory coordination and information sharing among its 

member agencies regarding policy development, rulemaking, supervisory information, and reporting requirements. The FSOC is currently working on a number of 

fronts to better identify and respond to emerging risks to our financial system. The 

Dodd-Frank Act requires that the FSOC produce annual financial stability reports 

and that each voting member submit a signed statement stating whether the member believes that the FSOC is taking all reasonable actions to mitigate systemic 

risk. 

The success of the FSOC in accomplishing its goals will depend on the diligence 

and seriousness about those goals on the part of the members. So far, the FDIC believes that the FSOC member agencies are committed to the success of the Council, 

and we have been impressed with the quality of staff work in preparation for the 

meetings as well as the rigor and candor of the discussions. We also believe that 

the FSOC has provided an efficient means for agencies to jointly write rules required by the Dodd-Frank Act and to seek input from other agencies on independent 

rules. The FDIC strongly supports the FSOC’s collective approach to identifying and 

responding to risks. Conducting multidisciplinary discussion and review of issues 

that cut across markets and regulatory jurisdictions is a highly effective way of 

identifying and mitigating risks, even before they become systemic. 

In response to the Committee’s request for additional information on potential 

risks to the financial stability of the United States, I would like to offer some observations on two specific topics: problems in mortgage servicing documentation and 

interest rate risk at financial institutions in light of rapid growth in U.S. Government debt. 

Problems in Mortgage Servicing Documentation Mortgage servicing is a serious area of concern and one which the FDIC identified years ago. As early as the 

Spring of 2007, we were speaking to the need for mortgage servicers to build programs and resources to restructure troubled mortgages on a broad scale. When, over 

a year ago, we proposed a new safe harbor for bank-sponsored securitizations, we 

included requirements for effective loss mitigation and compensation incentives that 

reflect the increased costs associated with servicing troubled loans. In my testimony 

at the end of last year, in the wake of mounting problems with mortgage servicing 

and foreclosure documentation at some of the nation’s largest servicing companies, 

I emphasized the need for specific changes to address the most glaring deficiencies 

in servicing practices, including a single point of contact for distressed borrowers, 

appropriate write-downs of second liens, and servicer compensation structures that 

are aligned with effective loss mitigation. 

The FDIC believes that mortgage servicing documentation problems are yet another example of the implications of lax underwriting standards and misaligned incentives in the mortgage process. In particular, the traditional fixed level of compensation for loan servicing proved wholly inadequate to cover expenses required to 
51 

6 Hearings before the U.S. Senate Committee on Banking, Housing, and Urban Affairs: July 

16, 2009; November 16, 2010; December 1, 2010. 

implement the high-touch and specialized servicing on the scale needed to deal with 

the huge increase in problem mortgage loans caused by risky lending practices. 

We now know that the housing bust and the financial crisis arose from a historic 

breakdown in U.S. mortgage markets. While emergency policies enacted at the 

height of the crisis have helped to stabilize the financial system and plant the seeds 

for recovery, mortgage markets remain deeply mired in credit distress and private 

securitization markets remain largely frozen. Serious weaknesses identified with 

mortgage servicing and foreclosure documentation have introduced further uncertainty into an already fragile market. 

The FDIC is especially concerned about a number of related problems with servicing and foreclosure documentation. ‘‘Robo-signing’’ is the use of highly automated 

processes by some large servicers to generate affidavits in the foreclosure process 

without the affiant having thoroughly reviewed facts contained in the affidavit or 

having the affiant’s signature witnessed in accordance with State laws. The other 

problem involves some servicers’ inability to establish their legal standing to foreclose, since under current industry practices, they may not be in possession of the 

necessary documentation required under State law. These are not really separate 

issues; they are simply the most visible of a host of related problems that we continue to see, and that have been discussed in testimony to this Committee over the 

past several years.6

As you know, even though the FDIC is not the primary Federal regulator for the 

largest loan servicers, our examiners participated with other regulators in horizontal reviews of these servicers, as well as two companies that facilitate the loan 

securitization process. In these reviews, Federal regulators cited ‘‘pervasive’’ misconduct in foreclosures and significant weaknesses in mortgage servicing processes. 

Unfortunately, the horizontal review only looked at processing issues. Since the 

focus was so narrow, we do not yet really know the full extent of the problem. The 

Consent Order, discussed further below, requires these servicers to retain independent, third parties to review residential mortgage foreclosure actions and report 

the results of those reviews back to the regulators. However, we have heard concerns regarding the thoroughness and transparency of these reviews, and we continue to press for a comprehensive approach to this ‘‘look back.’’ 

I want to underscore that the housing market cannot heal and begin to recover 

until this problem is tackled in a forthright manner and resolved. As the insurer 

of the deposits at these banks, we will not know the full extent of the problems and 

potential litigation exposure they face until we have a thorough review of foreclosed 

loan files. 

These servicing problems continue to present significant operational risks to mortgage servicers. Servicers have already encountered challenges to their legal standing 

to foreclose on individual mortgages. More broadly, investors in securitizations have 

raised concerns about whether loan documentation for transferred mortgages fully 

conforms to applicable laws and the pooling and servicing agreements governing the 

securitizations. If investor challenges to documentation prove meritorious, they 

could result in ‘‘putbacks’’ of large volumes of defaulted mortgages to originating institutions. 

There have been some settlements regarding loan buyback claims with the GSEs 

and some institutions have reserved for some of this exposure; however, a significant amount of this exposure has yet to be quantified. Given the weaknesses in the 

processes that have been uncovered during the review, there appears to be the potential for further losses. Litigation risk is not limited to just securitizations. Flawed 

mortgage banking processes have potentially infected millions of foreclosures, and 

the damages to be assessed against these operations could be significant and take 

years to materialize. The extent of the loss cannot be determined until there is a 

comprehensive review of the loan files and documentation of the process dealing 

with problem loans. This is one reason that I have urged the servicers and the State 

Attorneys General to reach a global settlement. We believe that the FSOC needs 

to consider the full range of potential exposure and the related impact on the industry and the real economy. FSOC members have a range of relevant expertise in regulating the various participants and processes associated with the foreclosure problem. We need to fully understand the potential risks and develop appropriate solutions to address these deficiencies. 

In April 2011, the Federal banking agencies ordered fourteen large mortgage 

servicers to overhaul their mortgage-servicing processes and controls, and to compensate borrowers harmed financially by wrongdoing or negligence. The enforcement orders were only a first step in setting out a framework for these large institu-
52 

7See http://www.fdic.gov/news/news/financial/2010/fil10002.html. 8See http://www.fdic.gov/news/conferences/symposiumlirrlmeeting.html. 

tions to remedy deficiencies and to identify homeowners harmed as a result of 

servicer errors. The enforcement orders do not preclude additional supervisory actions or the imposition of civil money penalties. Also, a collaborative settlement effort continues between the State Attorneys General and Federal regulators led by 

the U.S. Department of Justice. It is critically important that lenders fix these problems soon to remedy the foreclosure backlog, which has become the single largest 

impediment to the recovery of U.S. housing markets. 

Interest Rate Risk At the end of 2010, the U.S. domestic financial and nonfinancial sectors owed credit market debt totaling just over $50 trillion, a figure that 

is some 92 percent higher in nominal terms than it was just a decade ago. Much 

of this debt was issued during the recent period of historically low interest rates. 

Not only did the Federal Open Market Committee lower the Federal funds target 

rate to a 49-year low of 1 percent for a 12-month period in 2003 and 2004, but it 

has continuously held the fed funds target rate at an all-time low of 0 to 0.25 percent since December 2008. Long-term rates have also been at historic lows during 

this period. The average yield on 10-year Treasury bonds over the past decade was 

the lowest for any 10-year period since the mid-1960s. It is clear that the most likely direction of interest rates from today’s historic lows is upward. The question is 

how far and how fast interest rates will rise, and how ready lenders and borrowers 

will be to cope with higher rates of interest. 

In theory, rising interest rates will represent a zero-sum game in which the higher interest payments demanded of borrowers will be perfectly offset by the higher 

interest income of savers in the economy. In practice, however, rising interest rates 

can impose considerable distress on borrowers or lenders depending on how debts 

are structured. Floating-rate or short-term borrowers will see their interest costs 

rise over time with the level of nominal interest rates. Not only will this have an 

effect on their bottom line, but higher borrowing costs could lead them to demand 

a lower volume of credit that they did at lower rates. However, in the case of longterm, fixed-rate debt, it is often the lender that suffers a capital loss, a decline in 

operating income, or both as interest rates rise. Depository institutions are traditionally vulnerable to losses of this type in times of rising interest rates because 

their liabilities are typically of shorter duration than their assets. 

Given the prospect for higher interest rates going forward, effective management 

of interest rate risk will be an essential priority for financial institution risk managers in coming years. Unfortunately, there is a tendency during periods of high 

credit losses, such as the past few years, for risk managers to focus their attention 

mostly on credit risk, and to divert their attention away from interest rate risk at 

just the time that their portfolio is becoming more vulnerable to rising rates. It was 

just this type of inattention to the implication of rising interest rates that contributed to growth in structured notes in the early to mid-1990s, when a number of 

banks took on complex and interest-rate-sensitive investments that they did not understand in search of higher yields. 

The FDIC has been actively addressing the need for heightened measures to manage interest rate risk at this critical stage of the interest rate cycle. In January 2010 

we issued a Financial Institution Letter (FIL) clarifying our expectations that FDICsupervised institutions will manage interest rate risk using policies and procedures 

commensurate with their complexity, business model, risk profile, and scope of operations.7 That same month, the FDIC hosted a Symposium on Interest Rate Risk 

Management that brought together leading practitioners in the field to discuss the 

challenges facing the industry in this area.8

Effective management of interest rate risk assumes a heightened importance in 

light of the recent high rates of growth in U.S. Government debt, the yield on which 

represents the benchmark for determining private interest rates all along the yield 

curve. Total U.S. Federal debt has doubled in the past 7 years to over $14 trillion, 

or more than $100,000 for every American household. This growth in Federal borrowing is the result of both the temporary effects of the recession on Federal revenues and outlays and a long-term structural deficit related to Federal entitlement 

programs. In 2010, combined expenditures on Social Security, Medicare and Medicaid accounted for 44 percent of primary Federal spending, up from 27 percent in 

1975. The Congressional Budget Office (CBO) projects that annual entitlement 

spending could triple in real terms by 2035, to $4.5 trillion in 2010 dollars. According to CBO projections, Federal debt held by the public could rise from a level equal 

to 62 percent of gross domestic product in 2010 to an unsustainable 185 percent in 

2035. 
53 

The U.S. has long enjoyed a unique status among sovereign issuers by virtue of 

its economic strength, its political stability, and the size and liquidity of its capital 

markets. Accordingly, international investors have long viewed U.S. Treasury securities as a haven, particularly during times of financial market uncertainty. However, as the amount of publicly held U.S. debt continues to rise, and as a rising portion of that debt comes to be held by the foreign sector (about half as of September 

2010), there is a risk that investor sentiment could at some point turn away from 

dollar assets in general and U.S. Treasury obligations in particular. 

With more than 70 percent of U.S. Treasury obligations held by private investors 

scheduled to mature in the next 5 years, an erosion of investor confidence would 

likely lead to sharp increases in Government and private borrowing costs. As recent 

events in Greece and Ireland have shown, such a reversal in investor sentiment 

could occur suddenly and with little warning. If investors were to similarly lose confidence in U.S. public debt, the result could be higher and more volatile long-term 

interest rates, capital losses for holders of Treasury instruments, and higher funding costs for depository institutions. Household and business borrowers of all types 

would pay more for credit, resulting in a slowdown in the rate of economic growth 

if not outright recession. 

Over the past year, the U.S. fiscal outlook has assumed a much larger importance 

in policy discussions and the political process. Members of Congress, the Administration, and the Presidential Commission on Fiscal Responsibility and Reform have 

all offered proposals for addressing the long-term fiscal situation, but political consensus on a solution appears elusive at this time. It is likely that the capital markets themselves will continue to apply increasing pressure until a credible solution 

is reached. Already, the cost for bond investors and others to purchase insurance 

against a default by the U.S. Government has risen from just 2 basis points in January 2007 to a current level of 42 basis points. 

Financial stability critically depends on public and investor confidence. Developing policies that will clearly demonstrate the sustainability of the U.S. fiscal situation will be of utmost importance in ensuring a smooth transition from today’s historically low interest rates to the higher levels of interest rates that are inevitable 

in coming years. Government policies to slow the growth in U.S. Government debt 

will be essential to lessening the impact of this shock and reducing the likelihood 

that it will result in a costly new round of financial instability. 

Conclusion 

The inherent instability of financial markets cannot be regulated out of existence. 

Nevertheless, many of the Dodd-Frank Act reforms, if properly implemented, can 

make the core of our financial system more resilient to shocks by restoring market 

discipline, limiting financial leverage, and making our regulatory process more 

proactive in identifying and addressing emerging risks to financial stability. 

Working together on these reforms, regulators and the financial services industry 

can improve financial stability and minimize the severity of future crises. With this 

in mind, the FDIC will continue to carefully and seriously perform its duties as a 

voting member of FSOC, expeditiously complete rulemakings, and actively exercise 

its new authorities related to orderly liquidation authority and resolution plans. 

The stakes are extremely high. To continue the pre-crisis status quo would be to 

sanction a new and dangerous form of state capitalism, where the market assumes 

that large, complex, and powerful financial companies are in line to receive generous 

Government subsidies in times of financial distress. The result could be a continuation of the market distortions that led to the recent crisis, with all of the attendant 

implications for risk-taking, competitive structures, and financial instability. In 

order to avoid this outcome, we must follow through to fully implement the authorities under the Dodd-Frank Act and thereby restore market discipline to our financial system. 

Finally, I would like to emphasize that many of the problems and challenges confronting the financial sector are beyond the control of the regulatory community. 

Obviously, restoration of fiscal discipline is the province of the executive and legislative branches. Similarly, tax code changes that could reduce or eliminate incentives 

for leverage by financial institutions and borrowers must be acted upon by Congress. So it is my hope that Senate Banking Committee members can play a leadership role in making sure that the ongoing budget and tax discussions include consideration of the ramifications of different policy options for the stability of the financial system going forward. 

Thank you again for the opportunity to testify about these critically important 

issues. I would be pleased to answer any questions. 
54 

* Statement Required by 12 U.S.C. § 250: The views expressed herein are those of the Office 

of the Comptroller of the Currency and do not necessarily represent the views of the President. 1See Section 112(a)(1). 

PREPARED STATEMENT OF JOHN WALSH 

ACTING COMPTROLLER OF THE CURRENCY

OFFICE OF THE COMPTROLLER OF THE CURRENCY

MAY 12, 2011 

I. Introduction 

Chairman Johnson, Ranking Member Shelby, and Members of the Committee, I 

appreciate the opportunity to provide an update on the Office of the Comptroller of 

the Currency’s (OCC) implementation of the Dodd-Frank Act, and in particular, 

those provisions related to monitoring systemic risk and promoting financial stability, and on the operations and activities of the Financial Stability Oversight 

Council (FSOC).* 

As I described before this Committee in February, the OCC is actively working 

on approximately 85 Dodd-Frank Act projects. Broadly speaking, these projects fall 

into three major categories: our extensive efforts to prepare to integrate the OTS’s 

staff and supervisory responsibilities into the OCC, and to facilitate the transfer of 

specific functions to the CFPB; our consultative role in a variety of rulemakings 

being undertaken by other agencies; and our own rule-writing responsibilities for 

implementing key provisions of the Act. 

There are numerous provisions within the Dodd-Frank Act that address systemic 

issues that contributed to, or that accentuated and amplified the effects of, the recent financial crisis. These provisions include those that address flawed incentive 

structures and are designed to constrain excessive risk-taking activities; those that 

strengthen the resiliency of individual firms to financial shocks through stronger 

capital requirements and more robust stress-testing requirements; and those that 

address previous regulatory gaps, including the supervision of systemically important non-bank financial companies, and the orderly resolution of large banking organizations and non-bank financial companies in the event of failure. The OCC, along 

with other financial regulators, has rule-writing authority for many of these provisions, and I am pleased to report that we are making good progress on our rulemaking efforts on these critical provisions. Since I last appeared before the Committee, the OCC and other agencies have issued notices of proposed rulemaking on 

the following provisions: 

• Section 956, that prohibits incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial institutions and are 

deemed to be excessive, or that may lead to material losses; 

• Section 941, that addresses adverse market incentive structures by requiring a 

securitizer to retain a portion of the credit risk on assets it securitizes, unless 

those assets are originated in accordance with conservative underwriting standards established by the agencies in their implementing regulations; 

• Sections 731 and 764, that establish, for security-based swap dealers and major 

swap participants, capital requirements and margin requirements on swaps 

that are not cleared. 

In my role as a director of the Federal Deposit Insurance Corporation, I also have 

approved the issuance of the FDIC’s recent rulemakings under Title II of the DoddFrank Act related to its orderly liquidation authority. 

Certainly one of the key provisions of the Dodd-Frank Act as it relates to systemic 

risk and financial stability, and the focus of my testimony today, is the creation of 

the Financial Stability Oversight Council. The FSOC brings together the views, perspectives, and expertise of Treasury and all of the financial regulatory agencies to 

identify, monitor, and respond to systemic risk. As my testimony will detail, Congress has set forth very specific mandates regarding the role and function of FSOC 

in a number of areas, but certainly the overarching mission that Congress assigned 

to the Council is to identify risks to the financial stability of the United States, to 

promote market discipline, and to respond to emerging threats to the stability of the 

U.S. financial system.1

I believe FSOC enhances the agencies’ collective ability to fulfill this critical mission by establishing a formal, structured process to exchange information and to 

probe and discuss the implications of emerging market, industry, and regulatory developments for the stability of the financial system. Through the work of its committees and staff, FSOC also is providing a structured framework and metrics for track-
55 

2See section 112. 3See section 113(a)(1). 

ing and assessing key trends and potential systemic risks. I would note that FSOC’s 

activities and mandates complement the separate roles, responsibilities, and authorities that the OCC and other financial regulators have with respect to implementing specific provisions of the Dodd-Frank Act and more broadly in monitoring 

risks and conditions within the financial industry. For example, the OCC will continue to use our National Risk Committee and the insights we gain through our onand offsite supervisory activities to identify, monitor, and respond to emerging risks 

to the banking system. We will, of course, also continue to share our insights and 

expertise with the FSOC in its deliberations. 

While the process and systems that FSOC has created are positive steps forward, 

I would offer two cautionary notes. 

First, FSOC’s success ultimately will depend not on its structure, processes, or 

metrics, but on the willingness and ability of FSOC members and staff to engage 

in frank and candid discussions about emerging risks, issues, and institutions. 

These discussions are not always pleasant as they can challenge one’s longstanding 

views or ways of approaching a problem. But being able to voice dissenting views 

or assessments will be critical in ensuring that we are seeing and considering the 

full scope of issues. In addition, these discussions often will involve information or 

findings that will need further verification; that are extremely sensitive either to the 

operation of a given firm or market segment; or if misconstrued, that could undermine public and investor confidence and thereby create or exacerbate a potentially 

systemic problem. As a result, the OCC believes that it is critical that these types 

of deliberations—both at the Council and staff level—be conducted in a manner that 

assures their confidential nature. 

Second, even with fullest deliberations and best data, it is inevitable that there 

will still be unforeseen events that may result in substantial risks to the system, 

markets, or groups of institutions. Business and credit cycles will continue. It is not 

realistic to expect that FSOC will be able to prevent such occurrences. However, 

FSOC will provide a mechanism to communicate, coordinate, and respond to such 

events so as to help contain and limit their impact, including, where applicable, the 

resolution of systemically important firms. 

The remainder of my testimony focuses on FSOC, with a discussion of the specific 

mandates Congress has given to the FSOC; its structure and operations; and finally 

its achievements to date. 

II. FSOC’s Statutory Mandates 

FSOC’s primary mission, as set forth in section 112 of the Dodd-Frank Act is to: 

1) Identify risks to the financial stability of the United States that could arise 

from the material financial distress or failure, or ongoing activities, of large, 

interconnected bank holding companies or non-bank financial companies, or 

that could arise outside the financial services marketplace; 

2) Promote market discipline by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the Government 

will shield them from losses in the event of failure; and 

3) Respond to emerging threats to the stability of the U.S. financial system. The 

Dodd-Frank Act assigns FSOC a variety of roles and responsibilities to carry 

out its core mission2 that are described in greater detail throughout the Act. 

In some cases, the Council has direct and ultimate responsibility to make decisions and take actions. Most notable of these is the authority given to FSOC 

to determine that certain non-bank financial companies shall be supervised by 

the Federal Reserve Board and subject to heightened prudential standards, 

after an assessment as to whether material financial distress at such companies would pose a threat to the financial stability of the United States.3 Similarly, the Council is charged with the responsibility to identify systemically important financial market utilities and payment, clearing, and settlement activities. 

In addition, affirmation by two-thirds of the Council is required in those cases 

where the Federal Reserve determines that a large, systemically important financial 

institution poses a grave threat to the financial stability of the United States such 

that limitations on the company’s ability to merge, offer certain products, or engage 

in certain activities are warranted, or if those actions are insufficient to mitigate 
56 

4See section 121. 5See section 112. 6See section 622. 7See section 619. 8See section 215. 9See section 115. 10See section 112. 11See section 165. 12See section 112. 13See section 112. 14See section 119. 

risks, the company should be required to sell or otherwise transfer assets or off-balance items to unaffiliated entities.4

The FSOC is also empowered to collect information from member agencies and 

other Federal and State financial regulatory agencies as necessary in order to monitor risks to the financial system, and to direct the Office of Financial Research 

under the Treasury Department to collect information directly from bank holding 

companies and non-bank financial companies.5

The Dodd-Frank Act also identified specific areas where the Council is to provide 

additional studies, including recommendations, to inform future regulatory actions. 

These include studies of the financial sector concentration limit applicable to large 

financial firms imposed by the Act;6 proprietary trading and hedge fund activities;7

the treatment of secured creditors in the resolution process;8 and contingent capital 

for nonbank financial companies.9

In other areas, the Council’s role is more of an advisory body to the primary financial regulators. For example, the Dodd-Frank Act requires the Council to make recommendations to the Federal Reserve concerning the establishment of heightened 

prudential standards for risk-based capital, liquidity, and a variety of other risk 

management and disclosure matters for non-bank financial companies and large, 

interconnected bank holding companies supervised by the Board.10 The Federal Reserve, however, retains the authority to supervise and set standards for these 

firms.11 The Council is also given authority to review, and as appropriate, may submit comments to the Securities and Exchange Commission and any standard-setting 

body with respect to an existing or proposed accounting principle, standard, or procedure.12 Similarly, FSOC is assigned a consultative role in several rulemakings by 

member agencies, including for all of the rules that the FDIC writes pursuant to 

Title II of the Dodd-Frank Act regarding the orderly liquidation of failing financial 

companies that pose a significant risk to the financial stability of the United States. 

The Council may also recommend to member agencies general supervisory priorities 

and principles 13 and issue nonbinding recommendations for resolving jurisdictional 

disputes among member agencies.14

The varied roles and responsibilities that Congress assigned to the Council appropriately balance and reflect the desire to enhance regulatory coordination for systemically important firms and activities while preserving and respecting the independent authorities and accountability of primary supervisors. For example, under 

section 120, FSOC has the authority to recommend to the primary financial agencies that they apply new or heightened standards and safeguards for a financial activity or practice conducted by firms under their respective jurisdictions should the 

Council determine that the conduct of such an activity or practice could create or 

increase the risk of significant liquidity, credit, or other problems spreading among 

financial institutions, the U.S. financial markets, or low-income, minority, or underserved communities. Each agency retains the authority to not follow such recommendations if circumstances warrant and the agency explains its reasons in writing to the Council. 

III. FSOC Structure and Operations 

The FSOC has established committees and subcommittees comprised of staff from 

the member agencies to help carry out its responsibilities and authorities. These 

groups report up through a Deputies Committee of senior staff from each agency. 

The Deputies Committee generally meets on a bi-weekly basis to monitor work 

progress, review pending items requiring consultative input, discuss emerging systemic issues, and help establish priorities and agendas for the Council. A Systemic 

Risk Committee and subcommittees on institutions and markets provide structure 

for the FSOC’s analysis of emerging threats to financial stability. Five standing 

functional committees support the FSOC’s work on the following specific provisions 

assigned to the Council: designations of systemically important non-bank financial 

companies and of financial market utilities and payment, clearing, and settlement 

activities; heightened prudential standards; orderly liquidation authority and resolu-
57 

15 A copy of the study is available at: http://www.treasury.gov/initiatives/Documents/ 

Study%20on%20Concentration%20Limits%20on%20Large%20Firms%2001-17-11.pdf. 16 A copy of the study is available at: http://www.treasury.gov/initiatives/Documents/ 

Volcker%20sec%20%20619%20study%20final%201%2018%2011%20rg.pdf. 

tion plans; and data collection and analysis. OCC staff are active participants and 

contributors to each of these committees. In addition to these groups, the FSOC also 

has an informal interagency legal staff working group that assists with various legal 

issues concerning the Council’s operations and proceedings. Each of these committees and work groups is supported by staff from Treasury. 

IV. Accomplishments To Date 

Since its creation with the enactment of the Dodd-Frank Act, the Council has met 

four times, with meetings occurring approximately every 6 weeks. As with any 

newly formed body, a large proportion of the Council’s early work was focused on 

the necessary administrative rules and procedures that will govern the Council’s operations. In addition to the creation and staffing of the aforementioned committees, 

this work has included the adoption of a transparency policy for Council meetings; 

rules of organization that describe the Council’s authorities, organizational structure, and the rules by which the Council takes action; establishment of a framework 

for coordinating regulations or actions required by the Dodd-Frank Act to be completed in consultation with the Council; approval of an initial operating budget for 

the Council; and the publication of a proposed rulemaking to implement the Freedom of Information Act requirements as it pertains to Council activities. 

The Council has also taken action on a number of substantive items directly related to its core mission and mandates. These include the following: 

• Study and Recommendations Regarding Concentration Limits on Large Financial Companies 15—Section 622 of the Dodd-Frank Act establishes a financial 

sector concentration limit that generally prohibits a financial company from 

merging, consolidating with, or acquiring another company if the resulting company’s consolidated liabilities would exceed 10 percent of the aggregate consolidated liabilities of all financial companies. Pursuant to the mandate in section 

622, on January 18, 2011, the Council approved the publication of this study 

of the extent to which the concentration limit would affect financial stability, 

moral hazard in the financial system, the efficiency and competitiveness of U.S. 

financial firms and financial markets, and the cost and availability of credit and 

other financial services to households and businesses in the United States. The 

study concludes that the concentration limit will have a positive impact on U.S. 

financial stability. It also makes a number of technical recommendations to address practical difficulties likely to arise in its administration and enforcement, 

such as the definition of liabilities for certain companies that do not currently 

calculate or report risk-weighted assets. 

• Study and Recommendations on Prohibitions on Proprietary Trading and Certain Relationships with Hedge Funds and Private Equity Funds 16—As mandated by the Dodd-Frank Act, FSOC conducted a study on how best to implement section 619 of the Act (commonly known as the ‘‘Volcker Rule’’), which is 

designed to improve the safety and soundness of our nation’s banking system 

by prohibiting propriety trading activities and certain private fund investments. 

To help formulate its recommendations, the Council published a Notice and Request for Information in the Federal Register on October 6, 2010, and received 

more than 8,000 comments from the public, Congress, and financial services 

market participants. Key themes in those comments urged agencies to: 

• Prohibit banking entities from engaging in speculative proprietary trading or 

sponsoring or investing in prohibited hedge funds or private equity funds; 

• Define terms and eliminate potential loopholes; 

• Provide clear guidance to banking entities as to the definition of permitted and 

prohibited activities; and 

• Protect the ability of banking firms to manage their risks and provide critical 

financial intermediation services and preserve strong and liquid capital markets. 

After careful consideration of these comments, on January 18, 2011, the Council 

approved publication of its study and recommendations that are intended to help 

inform the regulatory agencies as they move forward with this difficult and complex 
58 

17See: Financial Oversight Council, Study & Recommendations on Prohibitions on Proprietary 

Trading & Certain Relationships with Hedge Funds & Private Equity Funds, (January 2011) 

at 3. 

rulemaking. The study endorses the robust implementation of the Volcker Rule and 

makes ten broad recommendations for the agencies’ consideration.17

As I noted at the Council meeting at which this matter was considered, the OCC 

believes this study strikes a fair balance between identifying considerations and approaches for future rulemaking, and being overly prescriptive. As noted earlier, this 

is an area where Congress chose to make a careful and, in my view, judicious distinction in authorities—requiring the Council to conduct the study and make recommendations, but leaving responsibility for writing the implementing regulations 

to the relevant supervisory agencies. Recognizing this distinction is essential to the 

process because the rulewriting agencies are required by law to invite—and consider—public comments as they develop the implementing regulations. This means 

the agencies must conduct the rulemaking without prejudging its outcome. We and 

the other agencies are in the midst of developing the proposed implementing rule 

and will be soliciting comment on all aspects of it when it is published. 

• Proposed Rulemakings on Authority to Require Supervision and Regulation of 

Certain Non-bank Financial Companies—As noted earlier, in contrast to the 

Volcker Rule where the Council’s role is primarily one of an advisory body, the 

Council is directly given authority under the Dodd-Frank Act to designate systemically important non-bank financial firms for heightened supervision. On 

October 1, 2010, the Council approved for publication an advance notice of proposed rulemaking (ANPR) that sought public comment on the implementation 

of this provision of the Dodd-Frank Act. Approximately 50 comments were received on the ANPR. On January 18, 2011, the Council approved publication 

of a notice of proposed rulemaking (NPRM) that outlines the criteria that will 

inform the Council’s designation of such firms and the procedures the FSOC 

will use in the designation process. The NPRM closely follows and adheres to 

the statutory factors established by Congress for such designations. The framework proposed in the NPRM for assessing systemic importance is organized 

around six broad categories, each of which reflects a different dimension of a 

firm’s potential to experience material financial distress, as well as the nature, 

scope, size, scale, concentration, interconnectedness, and mix of the company’s 

activities. The six categories are: size, interconnectedness, substitutability, leverage, liquidity, and regulatory oversight. 

The comment period for this NPRM closed on February 25, 2011, and staffs are 

in the process of reviewing the comments received and assessing how we should 

move forward with implementing this important provision of the Dodd-Frank Act. 

In response to concerns raised by commenters, there appears to be general agreement among the agencies on the need to provide and seek comment on additional 

details regarding FSOC’s standards for assessing systemic risk before issuing a final 

rule. I fully support this decision. It is critical that FSOC strikes the appropriate 

balance in providing sufficient clarity in our rules and transparency in our designation process, while at the same time avoiding overly simplistic approaches that fail 

to recognize and consider the facts and circumstances of individual firms and specific industries. Ensuring that firms have appropriate due process throughout the 

designation process will be critical in achieving this balance. In this regard, consistent with statutory provisions, the designation of a non-bank firm as systemically 

important will require consent by no fewer than two-thirds of the voting members 

of the Council, including the affirmative vote of the Chairperson of the Council. Before being designated, a firm will be given a written notice that the Council is considering making a proposed determination with an opportunity to submit materials 

applicable to such a determination. Firms also are provided the right to a hearing 

once they receive a written notice of proposed determination. 

• Proposed Rulemakings on Authority to Designate Financial Markets Utilities as 

Systemically Important—Section 804 of the Dodd-Frank Act provides FSOC 

with the authority to identify and designate as systemically important a financial market utility (FMU) if FSOC determines that the failure of the FMU could 

create or increase the risk of significant liquidity or credit problems spreading 

among financial institutions or markets and thereby threaten the stability of 

the U.S. financial system. On December 21, 2010, the Council published an 

ANPR regarding the designation criteria in section 804. The Council received 

12 comments in response to the ANPR. At its March 18, 2011, meeting, the 

Council approved the publication of a NPRM that describes the criteria, analyt-
59 

ical framework, and process and procedures the Council proposes to use to designate an FMU as systemically important. The NPRM includes the statutory 

factors the Council is required to take into consideration and adds subcategories 

under each of the factors to provide examples of how those factors will be applied. The NPRM also outlines a two-stage process for evaluating and designating an FMU as systemically important. This process includes opportunities 

for a prospective FMU to submit materials in support of or opposition to a proposed designation. Consistent with statutory provisions, any designation of an 

FMU will require consent by the same supermajority and affirmative vote procedure described above for designation of non-bank firms. The Council must 

also engage in prior consultation with the Federal Reserve Board and the relevant Federal financial agency that has primary jurisdiction over the FMU. 

• Systemic Risk Monitoring—The Council and its committees are also making 

strides in providing a more systematic framework for identifying, monitoring, 

and deliberating potential systemic risks to the financial stability of the U.S. 

Briefings and discussions on potential risks and the implications of current 

market developments—such as recent events in Japan, the Middle East, and 

Northern Africa—on financial stability are a key part of the closed deliberations 

of each Council meeting, allowing for a free exchange of information and insights. As part of these discussions, members assess the likelihood and magnitude of the risks, the need for additional data or analysis, and whether there 

is a current need to supplement or redirect current actions and supervisory 

oversight to mitigate these risks. In addition, the Council’s Data Subcommittee 

has overseen the development and production of a standard set of analyses that 

FSOC members receive prior to each Council meeting that summarize current 

conditions and trends related to the macroeconomic and financial environment, 

financial institutions, financial markets, and the international economy. 

• Annual Systemic Risk Report—Section 112 of the Dodd-Frank Act requires the 

FSOC to annually report to and testify before Congress on the activities of the 

Council; significant financial market and regulatory developments; potential 

emerging threats to the financial stability of the United States; all determinations regarding systemically important non-bank financial firms or financial 

market utilities or payment, clearing and settlement activities; any recommendations regarding supervisory jurisdictional disputes; and recommendations to enhance the integrity, efficiency, competitiveness, and stability of U.S. 

financial markets, to promote market discipline, and to maintain investor confidence. Work is under way in preparing the first of these reports and much of 

the aforementioned work on systemic risk monitoring will help shape its content. It is our understanding that Treasury plans to issue the report later this 

year. 

• Consultative and Regulatory Coordination—FSOC and its committees have also 

facilitated consultation and coordination on a number of important Dodd-Frank 

Act rulemakings. For example, Treasury played a coordinating role in the recently released notice of proposed rulemaking that would implement section 941 

on credit risk retention, and is engaged in a similar role with respect to the 

Volcker rulemaking activities. As part of each Deputies Committee meeting, 

Treasury circulates a bi-weekly consultation report that provides a snapshot of 

pending rules for consultation. In this regard, the Council’s Resolution Authority/Resolution Plans Committee has provided input to the FDIC and FRB, and 

recommendations to the Council, on issues related to the various Title II rulemaking initiatives. These have included input on the FDIC’s and FRB’s recent 

joint rulemaking to implement resolution plan requirements for certain nonbank financial companies and bank holding companies pursuant to Section 

165(d) and the FDIC’s rulemakings on its orderly liquidation authority pursuant to Section 209. 

V. Conclusion 

The Dodd-Frank Act has assigned FSOC important duties and responsibilities to 

help promote the stability of the U.S. financial system. The issues that the Council 

will confront in carrying out these duties are, by their nature, complex and farreaching in terms of their potential effects on our financial markets and economy. 

Developing appropriate and measured responses to these issues will require 

thoughtful deliberation and debate among the members. The OCC is committed to 

providing its expertise and perspectives and in helping the Council achieve its mission. 
60 

1The views expressed in this testimony are those of the Chairman of the Securities and Exchange Commission, a member of FSOC, and do not necessarily represent the views of the full 

Commission. 

PREPARED STATEMENT OF MARY L. SCHAPIRO 

CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION

MAY 12, 2011 

Chairman Johnson, Ranking Member Shelby, Members of the Committee: 

Thank you for the opportunity to testify 1 regarding the Securities and Exchange 

Commission’s efforts to monitor systemic risk and promote financial stability, two 

functions that are critical in fulfilling our mission to protect investors, maintain fair, 

orderly, and efficient markets, and facilitate capital formation. Over the past few 

years, all financial regulators have been faced with key issues of systemic risk and 

financial stability. At the SEC, our activities have included a broad-based appraisal 

of both the strengths and weaknesses of our current equity market structure, and 

our capacity to monitor trading across all trading venues and to enforce the securities laws and regulations and self-regulatory organization (SRO) rules. 

With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection 

Act (‘‘Dodd-Frank Act’’), Congress provided the SEC with important tools to better 

meet the challenges of today’s financial marketplace. These provisions included a 

mandate for oversight of the over-the-counter derivatives marketplace, private fund 

adviser registration and reporting, and rulemakings related to nationally recognized 

statistical rating organizations (‘‘NRSROs’’). Additionally, Title I of the Dodd-Frank 

Act created the Financial Stability Oversight Council (‘‘FSOC’’), and with it, a formal structure for coordination amongst the various financial regulators to monitor 

systemic risk and to promote financial stability across our nation’s financial system. 

Each of these developments has enhanced the Commission’s ability to protect America’s investors and oversee financial markets. 

Strengthening Market Structure 

Market structure encompasses all aspects of the organization of a market, including the number and types of venues that trade a financial product and the rules 

by which they operate. Although these issues can be complex and the rules technical, a fair, orderly and efficient market structure is the backbone of the equity 

markets and has significant implications for our financial system more broadly. The 

Commission has undertaken a broad-based appraisal of both the strengths and 

weaknesses of our current equity market structure. This review includes an evaluation of recent market structure performance and an assessment of whether rules 

have kept pace with recent significant changes in trading technology and practices. 

The goal of this evaluation is to effectively address any market structure weaknesses while preserving its strengths. 

In addition, last year, the SEC published a concept release on equity market 

structure in (the ‘‘Concept Release’’). The Concept Release described the current 

market structure and then broadly requested comment from the public on three categories of issues: (1) the quality of performance of the current market structure, (2) 

high frequency trading, and (3) undisplayed liquidity in all its forms. 

To date, the Commission has received more than 200 comments in response to the 

Concept Release. A number of commenters identified benefits of the current market 

structure, in particular noting that it has fostered competition among trading 

venues and liquidity providers that has lowered spreads and brokerage commissions. These investors cautioned against regulatory changes that might lead to unintended consequences. Other commenters, however, raised concerns about the quality 

of price discovery and questioned whether the current market structure continues 

to offer a level playing field to investors in which all can participate meaningfully 

and fairly. These commenters suggested a variety of possible initiatives. 

The Commission continues to evaluate these issues in a responsible, timely, and 

comprehensive fashion, with particular focus on obtaining the appropriate data and 

analysis to support our decisions to proceed with or to table any particular initiative. 

Responses to May 6 Trading Disruption 

Just over 1 year ago, the U.S. equity markets experienced one of the most significant price declines and reversals since 1929. In September, the staffs of the SEC 

and the Commodity Futures Trading Commission (CFTC) published their second 

joint report on their inquiry into the day’s events. Producing the report required an 

extraordinary amount of staff resources. On the securities side in particular, much 
61 

of the time and effort was devoted to collecting and then painstakingly sifting 

through the data necessary to reconstruct trading. These efforts highlighted the 

pressing need for enhanced data functionalities in the securities markets. 

The joint report lays out the multiple factors that in our view significantly contributed to the liquidity failure and disruptive trading on that day, outlining the 

complex interplay of multiple factors across the securities and futures markets. This 

interplay is significant because it demonstrates the need for a multi-faceted regulatory response that addresses the full scope of the risks in a comprehensive and 

responsible way. 

It is vital that the rules that govern market structure and market participant behavior support equity markets that warrant the full confidence of investors and listed companies. The Commission recently has adopted a number of important initiatives to further this goal: 

• Less than 2 weeks after May 6, the Commission posted for comment proposed 

exchange rules that would halt trading for certain individual stocks if their 

price moved 10 percent in a 5-minute period. Barely more than 6 weeks after 

the event, exchanges began putting in place a pilot uniform circuit breaker program for S&P 500 stocks. In September, the program was extended to stocks 

in the Russell 1000 Index and specified exchange-traded products. The aim of 

this program is to halt trading under disorderly market conditions, which in 

turn should help restore investor confidence by ensuring that markets operate 

only when they can effectively carry out their critical price-discovery functions. 

• In September, the Commission approved pilot exchange rules designed to bring 

order and transparency to the process of breaking ‘‘clearly erroneous’’ trades. 

On May 6, nearly 20,000 trades were invalidated for stocks that traded 60 percent or more away from their price at 2:40 PM. That 60 percent benchmark, 

however, was set after the fact. We now have consistent rules in place governing clearly erroneous trades that will apply to a future disruption. 

• In November, the Commission approved exchange rules to enhance the 

quotation standards for market makers. In particular, the new rules eliminate 

‘‘stub quotes’’—a bid to buy or an offer to sell a stock at a price so far away 

from the prevailing market that it is not intended to be executed, such as a bid 

to buy at a penny or an offer to sell at $100,000. Executions against stub quotes 

represented a significant proportion of the trades that were executed at extreme 

prices on May 6 and were subsequently broken. 

• Also in November, the Commission took an important step to promote market 

stability by adopting a new market access rule. Broker-dealers that access the 

markets themselves or offer market access to customers will be required to put 

in place appropriate pre-trade risk management controls and supervisory procedures. The rule effectively prohibits broker-dealers from providing customers 

with ‘‘unfiltered’’ access to an exchange or alternative trading system. By helping ensure that broker-dealers appropriately control the risks of market access, 

the rule should prevent broker-dealers or their customers from engaging in 

practices that threaten the financial condition of other market participants and 

clearing organizations, as well as the integrity of trading on the securities markets. 

• In addition, the Commission recently proposed exchange and FINRA rules that 

provide for a limit up/limit down procedure that would directly prohibit trades 

outside specified parameters, while allowing trading to continue within those 

parameters. This procedure should prevent many anomalous trades from ever 

occurring, as well as limiting the disruptive effect of those that do occur. 

In addition to these rules, the Commission has proposed large trader reporting requirements and a consolidated audit trail system to improve our ability to regulate 

the equity markets. These proposals would tremendously enhance regulators’ ability 

to identify significant market participants, collect information on their activity, and 

analyze their trading behavior. Both of these initiatives seek to address significant 

shortcomings in the agency’s present ability to collect and monitor data in an efficient and scalable manner and to address discrete market structure problems. 

Today, there is not a standardized, automated system to collect data across the 

various trading venues, products and market participants. Some, but not all, markets have their own individual and often incomplete audit trails. As a result, regulators tracking suspicious activity or reconstructing an unusual event must obtain 

and merge a sometimes immense volume of disparate data from a number of different markets. And even then, the data does not always reveal who traded which 

security, and when. To obtain individual trader information the Commission must 

make a series of manual requests that can take days or even weeks to fulfill. In 
62 

2See Release No. IA–3110, Rules Implementing Amendments to the Investment Advisers Act 

of 1940 (November 19, 2010), http://www.sec.gov/rules/proposed/2010/ia-3110.pdf. 3See id. 

4See Release No. IA–3111, Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers with Less Than $150 Million in Assets Under Management and Foreign Private Advisers (November 19, 2010), http://www.sec.gov/rules/proposed/2010/ia-3111.pdf. 

brief, the Commission’s tools for collecting data and surveilling our markets do not 

incorporate the technology currently used by those we regulate. Further, they do not 

provide the Commission with adequate information to conduct timely reconstructions of market events. 

If implemented, the consolidated audit trail would, for the first time, allow SROs 

and the Commission to track trade data across multiple markets, products and participants simultaneously. It would allow us to rapidly reconstruct trading activity 

and to more quickly analyze both suspicious trading and unusual market events. It 

is important to recognize, however, that implementation of the consolidated audit 

trail is a significant undertaking, and thus will need to be implemented in phases 

over time. In addition, in order to obtain the maximum benefit from this new infrastructure, the Commission’s own technology and human resources will need to be 

expanded beyond their current levels. 

Finally, a principal lesson of the financial crisis is that, because today’s financial 

markets and their participants are dynamic, fast-moving, and innovative, the regulators who oversee them must continuously improve their knowledge and skills to 

regulate effectively. In response to the ever-changing nature of our financial system, 

the SEC’s Office of Compliance, Investigations and Examinations and our Division 

of Enforcement have adopted new approaches to promote fair, orderly and efficient 

operation of the markets. 

New Tools Provided by the Dodd-Frank Act 

The Dodd-Frank Act includes over 100 rulemaking provisions applicable to the 

SEC. Several of those provisions will play an important role in enhancing the Commission’s ability to mitigate systemic risk and promote financial stability. 

Over-The-Counter Derivatives. The Dodd-Frank Act mandates oversight of the 

OTC derivatives marketplace. Title VII of the Act provides that the Commission will 

regulate security-based swaps and the CFTC will regulate other swaps. To implement the security based swap provisions, the SEC is writing rules that address, 

among other things, mandatory clearing, the operation of security-based swap execution facilities and data repositories, capital and margin requirements and business conduct standards for security-based swap dealers and major security-based 

swap participants, and regulatory access to and public transparency for information 

regarding security-based swap transactions. This series of rulemakings should improve transparency and facilitate the centralized clearing of security-based swaps, 

helping, among other things, to reduce counterparty risk. It should also enhance investor protection by increasing disclosure regarding security-based swap transactions and helping to mitigate conflicts of interest involving security-based swaps. 

In addition, these rulemakings should establish a regulatory framework that allows 

OTC derivatives markets to continue to develop in a more transparent, efficient, accessible, and competitive manner. 

Private Fund Adviser Registration and Reporting. Under Title IV of the DoddFrank Act, hedge fund advisers and private equity fund advisers will be required 

to register with the Commission, which is expected to occur in the first quarter of 

2012. Under the Act, venture capital fund advisers and private fund advisers with 

less than $150 million in assets under management in the United States will be exempt from the new registration requirements. In addition, family offices will not be 

subject to registration. To implement these provisions, the Commission has proposed: 

• Amendments to Form ADV, the investment adviser registration form, to facilitate the registration of advisers to hedge funds and other private funds and to 

gather information about these private funds, including identification of the private funds’ auditors, custodians and other ‘‘gatekeepers;’’2

• To implement the Act’s mandate to exempt from registration advisers to private 

funds with less than $150 million in assets under management in the United 

States; 3

• A definition of ‘‘venture capital fund’’ to distinguish these funds from other 

types of private funds;4 and 

• A rule to exempt ‘‘family offices’’ and a definition of ‘‘family office’’ that focuses 

on firms that provide investment advice to family members (as defined by the 
63 

5See Release No. IA–3098, Family Offices (October 12, 2010); http://www.sec.gov/rules/proposed/2010/ia-3098.pdf. 6See Release No. IA–3145, Reporting by Investment Advisers to Private Funds and Certain 

Commodity Pool Operators and Commodity Trading Advisors on Form PF (January 26, 2011), 

http://www.sec.gov/rules/proposed/2011/ia-3145.pdf. 7The senior officials are the Secretary of the Treasury (Chairperson); Chairman of the Board 

of Governors of the Federal Reserve; Comptroller of the Currency; Director of the Consumer Financial Protection Bureau; Chairman of the Securities and Exchange Commission; Chairperson 

of the Federal Deposit Insurance Corporation; Chairperson of the Commodity Futures Trading 

Commission; Director of the Federal Housing Finance Agency; and Chairman of the National 

Credit Union Administration. See Dodd-Frank Act § 111(b)(1). 8The State financial regulators include a State insurance commissioner designated by the 

State insurance commissioners; a State banking supervisor designated by the State banking regulators; and a State securities commissioner designated by the State securities commissioners. 

See Dodd-Frank Act § 111(b)(2). 9See Dodd-Frank Act § 111(b)(2). 10See Dodd-Frank Act § 112(a)(1). 11See Dodd-Frank Act §§ 112(a)(2)(H) and 113. 12See Dodd-Frank Act § 112(a)(2)(I). 13See id. 

rule), certain key employees, charities and trusts established by family members and entities wholly owned and controlled by family members.5

In addition, following consultation with staff of the member agencies of the Financial Stability Oversight Council (FSOC), the Commission and CFTC jointly proposed 

rules to implement the Act’s mandate to require advisers to hedge funds and other 

private funds to report information for use by the FSOC in monitoring for systemic 

risk to the U.S. financial system.6 The proposal, which builds on coordinated work 

on hedge fund reporting conducted with international regulators, would institute a 

‘‘tiered’’ approach to gathering the systemic risk data, which would remain confidential. Thus, the largest private fund advisers—those with $1 billion or more in hedge 

fund, private equity fund, or ‘‘liquidity fund’’ assets—would provide more comprehensive and more frequent systemic risk information than other private fund advisers. 

Financial Stability Oversight Council 

FSOC was created by Title I of the Dodd-Frank Act and has 10 voting members: 

the senior officials at each of the nine Federal financial regulators7 and an independent member with insurance expertise appointed by the President. FSOC’s composition also includes five nonvoting advisory members: three from various State financial regulators 8 as well as the Directors of the new Federal Insurance Office and 

Office of Financial Research (‘‘OFR’’).9

Under the Dodd-Frank Act, Congress has given FSOC the following primary responsibilities: 

• identifying risks to the financial stability of the United States that could arise 

from the material financial distress or failure—or ongoing activities—of large, 

interconnected bank holding companies or nonbank financial holding companies, 

or that could arise outside the financial services marketplace; 

• promoting market discipline by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the Government 

will shield them from losses in the event of failure (i.e., addressing the moral 

hazard problem of ‘‘too big to fail’’); and 

• identifying and responding to emerging threats to the stability of the United 

States financial system.10

In fulfilling its responsibilities, FSOC is charged with identifying and designating 

certain nonbank financial companies as systemically important financial institutions 

(‘‘SIFIs’’) for heightened prudential supervision by the Board of Governors of the 

Federal Reserve System (‘‘Federal Reserve Board’’).11 In addition, FSOC may make 

recommendations to the Federal Reserve Board concerning the establishment and 

refinement of heightened prudential standards for firms designated under the SIFI 

process and large, interconnected bank holding companies already supervised by the 

Federal Reserve Board.12 Such recommendations may address, among other things, 

risk-based capital, leverage, liquidity, contingent capital, resolution plans and credit 

exposure reports, concentration limits, enhanced public disclosures and overall risk 

management.13 In addition, FSOC must identify and designate financial market 
64 

14See Dodd-Frank Act §§ 112(a)(2)(J) and 804(a). 15See Dodd-Frank Act § 112(a)(2)(C)–(G). 16See Dodd-Frank Act § 112(a)(2)(A)–(B). 17Section 803(6) of the Dodd-Frank Act defines a financial market utility as ‘‘any person that 

manages or operates a multilateral system for the purpose of transferring, clearing, or settling 

payments, securities, or other financial transactions among financial institutions or between financial institutions and the person.’’ 18See Dodd-Frank Act § 802. 

utilities (‘‘FMUs’’) and payment, clearing, and settlement activities that are, or are 

likely to become, systemically important.14

The recent financial crisis demonstrated the potential for risks to quickly spread 

across the financial sector and undermine general confidence in the financial system. To address issues of ‘‘siloed’’ information and the potential for regulatory arbitrage, another key responsibility of FSOC is to monitor the financial markets and 

regulatory framework to identify gaps, weaknesses and risks and make recommendations to address those issues to its member agencies and to Congress.15 In 

addition, by combining the information resources of its member agencies and working with the OFR, FSOC is responsible for facilitating the collection and sharing of 

information about risks across the financial system.16

FSOC Activities Update 

Since passage of the Dodd-Frank Act, FSOC has taken steps to create an organizational structure, coordinate interagency efforts, and build the foundation for meeting its statutory responsibilities. In the weeks leading up to the inaugural October 

1, 2010 meeting of the principals of the FSOC agencies, staff from the Treasury Department coordinated interagency staff work to establish by-laws and develop a 

transparency policy. During that period, FSOC also formed several interagency committees to address specific statutory requirements. 

Designation of Systemically Important Financial Institutions 

To begin defining and implementing the process to identify and designate SIFIs 

for heightened supervision by the Federal Reserve Board, FSOC established a SIFI 

designations committee and several staff subcommittees to tackle specific tasks. 

On October 6, 2010, FSOC issued an advanced notice of proposed rulemaking soliciting public comment on the specific criteria and analytical framework for the 

SIFI designation process, with a focus on how to apply the statutory considerations 

for such designations. FSOC received over 50 comment letters from trade associations, financial firms, individuals, and others. These comment letters included views 

on the designation process itself, as well as suggestions on the specific criteria and 

metrics to be used and the frameworks for their application. 

On January 26, 2011, FSOC issued a notice of proposed rulemaking regarding the 

SIFI designation process. The proposed rule describes the criteria that will inform— 

and the processes and procedures established under the Dodd-Frank Act for—designations by FSOC. Such criteria would be rooted in the eleven statutory considerations set forth in the Dodd-Frank Act for such designations, and would include, 

among other considerations, a firm’s size, leverage, liquidity risk, maturity mismatch, and interconnectedness with other financial firms. The proposed rule also 

implements certain other provisions of the designation process, including: (1) the 

anti-evasion authority of FSOC; (2) procedures for notice of, and the opportunity for 

a hearing on, a proposed determination; and (3) procedures regarding consultation, 

coordination, and judicial review in connection with a determination. We plan to 

provide additional guidance regarding the Council’s approach to designations and 

will seek public comment on it. 

Designation of Systemically Important Financial Market Utilities 

Financial Market Untilities (FMUs) are essential to the proper functioning of the 

nation’s financial markets.17 These utilities form critical links among marketplaces 

and intermediaries that can strengthen the financial system by reducing 

counterparty credit risk among market participants, creating significant efficiencies 

in trading activities, and promoting transparency in financial markets. However, 

FMUs by their nature create and concentrate new risks that could affect the stability of the broader financial system. To address these risks, Title VIII of the DoddFrank Act provides important new enhancements to the regulation and supervision 

of FMUs designated as systemically important by FSOC (‘‘DFMUs’’) and of payment, 

clearance and settlement activities. This enhanced authority in Title VIII should 

provide consistency, promote robust risk management and safety and soundness, reduce systemic risks, and support the stability of the broader financial system.18 Importantly, the enhanced authority in Title VIII is designed to be in addition to the 
65 

19See Dodd-Frank Act § 805. 20Section 804(a)(2) of the Dodd Frank Act provides that these considerations are: (1) the aggregate monetary value of transactions processed by the FMU or carried out through the PCS 

activity; (2) the aggregate exposure of the FMU or a financial institution engaged in PCS activities to its counterparties; (3) the relationship, interdependencies, or other interactions of the 

FMU or PCS activity with other FMUs or PCS activities; (4) the effect that the failure of or 

a disruption to the FMU or PCS activity would have on critical markets, financial institutions, 

or the broader financial system; and (5) any other factors that FSOC deems appropriate. 21See Dodd-Frank Act § 112(a)(2)(N). 

authority and requirements of the Securities Exchange Act and Commodity Exchange Act that may apply to FMUs and financial institutions that conduct designated activities.19

FSOC established an interagency DFMU committee to develop a framework for 

the designation of systemically important FMUs, in which staff from the SEC has 

actively participated. On December 21, 2010, FSOC published an advanced notice 

of proposed rulemaking seeking public comment on the designation process for 

FMUs. In response, FSOC received twelve comment letters from industry groups, 

advocacy and public interest groups, individual FMUs and financial institutions. 

Among other things, commenters generally encouraged the development of metrics 

and an analytical framework to further define the statutory considerations for designation contained in Title VIII, and also emphasized the need for FSOC to apply 

consistent standards for all FMUs under consideration for designation that incorporate both qualitative and quantitative factors. 

On March 28, 2011, FSOC published a notice of proposed rulemaking to provide 

further information on the process it proposed to follow when reviewing the systemic 

importance of FMUs. FSOC is considering using a two-stage process for evaluating 

FMUs prior to a vote on a proposed designation by the Council. The first stage 

would consist of a largely data-driven process to identify a preliminary set of FMUs 

whose failure or disruption could potentially threaten the stability of the U.S. financial system. In the second stage, FMUs so identified would be subject to a more indepth review, with a greater focus on qualitative factors and FMU- and market-specific considerations. Under the proposal, the Council expects to use the statutory 

considerations as a base for assessing the systemic importance of FMUs.20 Application of this framework, however, would be adapted for the risks presented by a particular type of FMU and business model. 

Systemic Risk Assessment 

In addition to initiating work on the identification of SIFIs and DFMUs, FSOC 

has established a Systemic Risk Committee that seeks to identify, highlight and review possible risks that could develop across the financial system. The Dodd-Frank 

Act also requires FSOC to report annually to Congress regarding these risks,21 and 

we expect the work of this committee will inform that report. 

Other Activities 

In addition to seeking to identify possible risks in the financial system, FSOC was 

required under Section 619(b) of the Dodd Frank Act to study and make recommendations on implementing the Act’s restrictions on proprietary trading, commonly referred to as the ‘‘Volcker rule,’’ to achieve certain goals enumerated in the 

statute, including: 

• to promote and enhance the safety and soundness of banking entities; 

• protect taxpayers and consumers; and 

• enhance financial stability by minimizing the risk that insured depository institutions and their affiliates will engage in unsafe and unsound activities. 

On January 18, 2011, FSOC released its study and recommendations on implementation of the Volcker rule. The study recommends the creation of rules and a 

supervisory framework that effectively prohibit proprietary trading activities 

throughout ‘‘banking entities’’—as defined by the Dodd-Frank Act—and appropriately distinguish prohibited proprietary trading from statutorily described permitted activities. The recommended supervisory framework consists of a programmatic compliance regime, metrics, supervisory review and oversight, and enforcement procedures for violations for the respective regulatory agencies conducting 

supervisory review and oversight. In addition, the study identified potential challenges in delineating prohibited proprietary trading activities from permitted activities, including potential difficulties in determining whether a position was taken in 

anticipation of near term customer demand or for non-permissible prop trading purposes. 
66 

The study also recognizes that effective oversight by the agencies will require specialized skills and be resource intensive. For example, the study notes agencies will 

need additional resources to develop appropriate data points, build infrastructure to 

obtain and review information, and hire and train additional staff with quantitative 

and market expertise to identify and investigate outliers and questionable trading 

activity. 

Money Market Fund Roundtable 

Earlier this week, the SEC hosted a Money Market Fund Roundtable, which included representatives of each of the voting members of FSOC. The roundtable featured an in-depth discussion of various policy options to address the risk that a run 

on money market funds could have on the broader financial markets. Participants 

at the roundtable included money market fund sponsors, investors, academics, industry observers and representatives from entities that issue the commercial paper 

in which many money market funds invest. The roundtable enabled SEC Commissioners, FSOC principals and their representatives to discuss first-hand—and in a 

public forum—a significant issue related to the ongoing monitoring of systemic risk. 

I look forward to continued work on coordination with FSOC with respect to money 

market funds. 

Next Steps 

While FSOC has made substantial progress in taking up its new responsibilities, 

its efforts are ongoing, and much remains to be done. Some of the most challenging 

issues regarding the potential designation of systemically important financial institutions and FMUs lie ahead, and public input both generally on this process—and 

specifically with respect to the notices of proposed rulemaking—will be critically important. In addition, as Dodd-Frank implementation proceeds, the coordination of 

the FSOC agencies will continue to be a vital consideration. 

Conclusion 

In sum, the Commission recognizes the importance of monitoring systemic risk 

and promoting financial stability, and has responded to the challenges presented by 

recent market developments. As the Commission moves forward, we will look comprehensively at the issues, and take appropriate steps, both within the Commission 

and with our regulatory partners in the FSOC, to address any threats to our nation’s financial system in a balanced manner that preserves the strengths of the system and protects investors. As we move ahead, we look forward to working closely 

with Congress to continue addressing these critical issues. Thank you for inviting 

me to testify today. I would be happy to answer any questions you may have. 

PREPARED STATEMENT OF GARY GENSLER 

CHAIRMAN, COMMODITY FUTURES TRADING COMMISSION

MAY 12, 2011 

Good morning Chairman Johnson, Ranking Member Shelby and Members of the 

Committee. I thank you for inviting me to today’s hearing on monitoring systemic 

risk and promoting financial stability. I am pleased to testify alongside my fellow 

regulators. 

This morning I will provide an update on the status of the Commodity Futures 

Trading Commission’s (CFTC’s) process to implement the derivatives titles of the 

Dodd-Frank Wall Street Reform and Consumer Protection Act and discuss the how 

the CFTC has contributed to the Financial Stability Oversight Council (FSOC). Before I begin, I’d like to thank my fellow Commissioners the hardworking staff of the 

CFTC for their continued efforts to implement the Dodd-Frank Act. 

Dodd-Frank Implementation Status 

The CFTC is working deliberatively, efficiently and transparently to implement 

the Dodd-Frank Act. At this point, we have substantially completed the proposal 

phase of our rule-writing to implement the Dodd-Frank Act. Since the President 

signed the Dodd-Frank Act last July, the Commission has promulgated rules covering all of the areas set out by the Act for swaps regulation, with the exception 

of the Volcker Rule, for which the Act set a different timeline. 

With the substantial completion of the proposal phase of rule-writing, the public 

now has the opportunity to review the whole mosaic of rules. This will allow market 

participants to evaluate the entire regulatory scheme as a whole. 
67 

To further facilitate this process, last month the Commission approved reopening 

or extending the comment periods for most of our Dodd-Frank proposed rules for 

an additional 30 days. 

This time will allow the public to submit any comments they might have after 

seeing the entire mosaic at once. As part of this, I am hopeful that market participants will continue to comment about potential compliance costs as well as phasing 

of implementation dates to help the agency as we go forward with finalizing rules. 

We will begin considering final rules only after staff can analyze, summarize and 

consider comments, after the Commissioners are able to discuss the comments and 

provide feedback to staff, and after the Commission consults with fellow regulators 

on the rules. 

One component that we have asked the public about is phasing of rule implementation. Earlier this month, CFTC staff worked with SEC staff to host a roundtable 

to hear directly from the public about the timing of implementation dates of DoddFrank rulemakings. Prior to the roundtable, CFTC staff released a document that 

set forth concepts that the Commission may consider with regard to the effective 

dates of final rules for swaps under the Dodd-Frank Act. We also opened a public 

comment file last month to hear specifically on this issue. The roundtable and public 

comments help inform the Commission as to what requirements can be met sooner 

and which ones will take a bit more time. 

Though we have substantially completed the proposal phase of rule-writing, the 

public will not be adequately protected until the agency completes final rules. 

Rules Relating to Systemic Risk 

The CFTC has proposed rules in three primary areas that are intended, in part, 

to lower systemic risk: regulating swap dealers, promoting transparency in the swap 

markets and requiring clearing of standardized swaps. 

Regulating Swap Dealers 

The financial crisis demonstrated the risk to the public of ineffectively regulated 

swap dealers. The Dodd-Frank Act addresses this by requiring comprehensive oversight of swap dealers. The CFTC has proposed rules to fulfill the Dodd-Frank Act’s 

mandate that dealers meet minimum capital requirements to prevent a dealer’s failure. We also have proposed rules mandated by the Dodd-Frank Act to require margin—or collateral—requirements to help prevent one financial entity’s failure from 

spreading through the financial system to other entities and the broader economy. 

Congress recognized the different levels of risk posed by transactions between financial entities and those that involve non-financial entities, as reflected in the nonfinancial end-user exception to clearing. Consistent with this, the CFTC’s proposed 

margin rules focus only on transactions between financial entities rather than those 

transactions that involve non-financial end-users. Further, we have proposed business conduct standards, including documentation, confirmation and portfolio reconciliation requirements. Each of these is an important tool to lower risk that the 

swap markets pose to the economy. 

We also have proposed rules under the Dodd-Frank Act that set business conduct 

rules and set position limits to promote market integrity and protect against fraud, 

manipulation and other abuses. This helps ensure that the users of derivatives get 

the benefit of transparent, open and competitive markets. 

Promoting Transparency 

The Dodd-Frank Act includes essential reforms to bring sunshine to the opaque 

swaps markets. Economists and policymakers for decades have recognized that market transparency benefits the public. Transparency also helps lower systemic risk. 

The more transparent a marketplace is, the more liquid it is for standardized instruments, the more competitive it is and the lower the costs for hedgers, borrowers 

and, ultimately, their customers. 

The CFTC has proposed rules to implement the Dodd-Frank Act’s mandate to 

bring transparency to the swaps market in each of the three phases of a transaction. 

First, we have proposed rules to bring transparency to the time immediately before 

the transactions are completed, so-called pre-trade transparency. This will be required for those standardized swaps—those that are cleared, made available for 

trading and not blocks—that the Dodd-Frank Act mandates be traded on exchanges 

or swap execution facilities (SEFs). 

Exchanges and SEFs will allow investors, hedgers and speculators to meet in a 

transparent, open and competitive central market. This will benefit end-users by 

providing better pricing on derivatives transactions. 

Second, as required by the Dodd-Frank Act, the CFTC has written rules to bring 

real-time transparency to the pricing immediately after a swap transaction takes 

place. This post-trade transparency provides all end-users and market participants 
68 

with important pricing information as they consider whether to lower their risk 

through a similar transaction. 

Third, the CFTC has proposed rules as mandated by the Dodd-Frank Act to bring 

transparency to swaps over the lifetime of the contracts. End-users and the public 

will benefit from knowing the valuations of outstanding swaps on a daily basis. If 

the contract is cleared, proposed rules would require the clearinghouse to publicly 

disclose the daily settlement price for each swap cleared by the clearinghouse. If the 

contract is bilateral, proposed rules would require swap dealers to share mid-market 

pricing with their counterparties every day and agree on valuation methodologies 

in their swap documentation. This daily valuation will help prevent similar scenarios to 2008 when we were unable to price ‘‘toxic assets.’’ 

Additionally, we have proposed rules to make the swaps markets transparent to 

regulators through swap data repositories. The Dodd-Frank Act Act includes robust 

recordkeeping and reporting requirements for all swaps transactions so that regulators can have a window into the risks posed in the system and can police the markets for fraud, manipulation and other abuses. 

Lowering Risk through Central Clearing 

The Dodd-Frank Act also requires that standardized swap transactions between 

financial entities be brought to clearinghouses. Central clearing has been a feature 

of the U.S. futures markets since the late-19th century. Clearinghouses act as middlemen between two parties to a derivatives transaction after the trade is arranged. 

They protect the financial system and the broader economy from the failure of a 

swap dealer. They require dealers to post collateral so that if one party fails, its failure does not harm its counterparties and reverberate throughout the financial system. They have functioned both in clear skies and during stormy times—through 

the Great Depression, numerous bank failures, two world wars and the 2008 financial crisis—to lower risk to the economy. 

Currently, swap transactions stay on the books of the dealers that arrange them, 

often for many years after they are executed. Like AIG did, these dealers engage 

in many other businesses, such as lending, underwriting, asset management, securities trading and deposit-taking. These dealers often are interconnected with other 

financial entities. This interconnectedness heightens the risk that a dealer’s failure 

will reverberate throughout the economy as a whole. Uncleared swaps allow the failure of one institution to potentially cascade, like dominoes, throughout the financial 

system and ultimately crash down on the public. 

The CFTC has proposed rules to implement the Dodd-Frank Act’s clearing mandate and its requirement for enhanced oversight of clearinghouses. In close consultation with our fellow domestic and international regulators, and particularly with the 

Federal Reserve and the Securities and Exchange Commission (SEC), the CFTC 

proposed rulemakings on risk management for clearinghouses. These rulemakings 

take account of relevant international standards, particularly those developed by the 

Committee on Payment and Settlement Systems and the International Organization 

of Securities Commissions. 

The Financial Stability Oversight Council 

The Dodd-Frank Act established the FSOC to ensure protections for the American 

public. The Council is an opportunity for regulators—now and in the future—to ensure that the financial system works better for all Americans. The financial system 

should be a place where investors and savers can get a return on their money. It 

should provide transparent and efficient markets where borrowers and people with 

good ideas and business plans can raise needed capital. 

The financial system also should allow people who want to hedge their risk to do 

so without concentrating risk in the hands of only a few financial firms. One of the 

challenges for the Council and for the American public is that the financial industry 

has gotten very concentrated around a small number of very large firms. As it is 

unlikely that we could ever ensure that no financial institution will fail—because 

surely, some will in the future—we must do our utmost to ensure that when those 

challenges arise, the taxpayers are not forced to stand behind those institutions and 

that these institutions are free to fail. 

There are important decisions that the Council will make, such as determinations 

about systemically important nonbank financial companies and systemically important financial market utilities, such as clearinghouses, resolving disputes between 

agencies and completing important studies as dictated by the Dodd-Frank Act. 

Though these specific decisions are important, to me it is essential that the Council 

make sure that the American public doesn’t bear the risk of the financial system 

and that the system works for the American public, for investors, for small businesses, for retirees and for homeowners. 
69 

The Council’s eight current voting members have coordinated closely. Treasury’s 

leadership has been invaluable. To support the FSOC, the CFTC is providing both 

data and expertise relating to a variety of systemic risks, how those risks can 

spread through the financial system and the economy and potential ways to mitigate those risks. We also have had the opportunity to coordinate with Treasury and 

the Council on each of the studies and proposed rules issued by the FSOC. 

I will focus this portion of my testimony discussing a number of matters that have 

been on the FSOC’s agenda. 

Clearinghouses 

Title VIII of the Dodd-Frank Act gives the FSOC important roles in clearinghouse 

oversight by authorizing the Council to designate certain clearinghouses as systemically important. Title VIII also permits the Federal Reserve to join in the examination of such clearinghouses and to recommend heightened prudential standards in 

certain circumstances. 

The FSOC’s notice of proposed rulemaking on designating systemically important 

financial market utilities complements the CFTC’s rulemaking efforts that I described above. Public input will be valuable in determining how the Council should 

apply statutory criteria to determine which clearinghouses qualify for designation 

as systemically important. 

Volcker Rule Study 

Section 619 of the Dodd-Frank Act provides that, other than certain permitted activities, ‘‘a banking entity shall not engage in proprietary trading, including trading 

in futures, options on futures and swaps.’’ The CFTC is directed to adopt rules to 

carry out this requirement with respect to any entity ‘‘for which the CFTC is the 

primary financial regulatory agency.’’ 

As part of the Volcker rule’s coordinated rulemaking requirement, CFTC staff has 

been meeting frequently with other agencies, including the Federal Deposit Insurance Corporation (FDIC), Federal Reserve, Office of the Comptroller of the Currency 

(OCC), SEC and Treasury Department. The goal of these meetings is to ensure, to 

the extent possible, that our rules on section 619 are comparable and provide for 

consistent application. 

The FSOC’s Study & Recommendations on Prohibitions on Proprietary Trading & 

Certain Relationships with Hedge Funds & Private Equity Funds, also known as 

the Volcker Rule study, provides thoughtful recommendations to carry out 

Congress’s intent to separate proprietary trading from otherwise permitted activities 

of banking entities. The study also provides a basis upon which each of our agencies 

can move forward with the required rule-writing to carry out Congress’s mandate. 

In particular, the study covers financial instruments both in the cash market and 

in the derivatives and swaps markets. This is significant, as any risk that a banking 

entity could take on in the cash markets also could be expressed through swaps and 

derivatives. The inclusion of both prevents regulatory arbitrage. In addition, the 

study indicates that the books of banking entities, including swap dealers, would not 

be precluded from the definition of a trading account regardless of whether those 

accounts held illiquid financial instruments, such as swaps, and regardless of 

whether those positions are short-term or long-term. 

Supervision of Certain Nonbank Financial Companies and Concentration Limits 

Title I of the Dodd-Frank Act authorizes the FSOC to determine whether certain 

activities of nonbank financial companies could pose a threat to the financial stability of the United States. Those companies would be supervised by the Federal Reserve and subject to specific prudential standards. In January, the FSOC issued a 

proposed rulemaking concerning its Authority to Require Supervision of Certain 

Nonbank Financial Companies. Effective regulation of systemically important 

nonbank financial entities is essential to preventing the next AIG from threatening 

the financial system. 

The Dodd-Frank Act also includes a provision that no financial company be permitted to grow through either merger or acquisition if the resulting companies’ consolidated liabilities would exceed 10 percent of all the aggregate consolidated liabilities of all financial companies. The FSOC’s Study & Recommendations Regarding 

Concentration Limits on Large Financial Companies is an important step in implementing Congress’s direction. These limits are designed to promote financial stability by preventing the liabilities of the financial sector from becoming too concentrated in any given financial entity. The 2008 financial crisis demonstrated the 

potential repercussions to the American public of concentration within our financial 

sector. 
70 

Annual FSOC Report to Congress 

Under section 112 of the Dodd-Frank Act, the FSOC is to report annually to Congress. Staff of the CFTC, including in our Chief Economist’s office, Division of Market Oversight, and Division of Clearing and Intermediary Oversight, have been contributing to that effort. I believe this annual report can serve as an important 

means for the Council to communicate to Congress on the stability of the financial 

system and make recommendations to enhance the U.S. financial markets and protect the public. 

Coordination with FSOC Member Agencies 

The CFTC is consulting heavily with the member agencies of the FSOC to implement the Dodd-Frank Act. We are working very closely with the SEC, Federal Reserve, FDIC, OCC and other prudential regulators, which includes sharing many of 

our memos, term sheets and draft work product. We also are working closely with 

the Treasury Department and the new Office of Financial Research. CFTC staff has 

had more than 600 meetings with other regulators on implementation of the Act. 

This close coordination has benefited the rulemaking process and will strengthen 

the markets. The CFTC will consider final rules only after we have the opportunity 

to consult with our fellow regulators. 

Conclusion 

Thank you for the opportunity to testify. I’d be happy to take questions. 
(71) 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM NEAL S. WOLIN 

Q.1. Currently one of the voting seats of the FSOC is empty; no 

insurance expert has been nominated for the Council. Will any decisions with respect to the designation of insurance companies be 

made before an insurance expert has been named? 

A.1. On June 27, the President nominated Roy Woodall as the 

FSOC’s independent member having insurance expertise. Mr. 

Woodall is a former Commissioner of Insurance for the Commonwealth of Kentucky. He has also served as a Senior Insurance Policy Analyst at the Department of the Treasury, an Insurance Consultant for the Congressional Research Service, and as President of 

the National Association of Life Companies (NALC). Expeditious 

Senate confirmation of Mr. Woodall to this position will allow him 

to begin offering his considerable expertise to the FSOC. 

In the meantime, as the FSOC works carefully and deliberately 

to satisfy its responsibilities under the Dodd-Frank Act, two of its 

non-voting members have substantial insurance expertise: Federal 

Insurance Office Director Michael McRaith, who most recently 

served as the Director of the Illinois Department of Insurance, provides relevant expertise that helps inform the FSOC’s work, and 

John Huff, the Director of the Missouri Department of Insurance, 

Financial Institutions and Professional Registration, offers the important perspective of the primary functional insurance regulators. 

Q.2 The SEC and CFTC are regulating an overlapping set of market participants engaging in transactions in similar products. They 

are taking two different approaches to the regulatory mandates 

they have been given. Is the Council considering whether the fact 

that two regulators are regulating in the same space will dilute accountability and lead to regulatory arbitrage that could endanger 

the financial system? 

A.2. One of the duties of the FSOC, which the Secretary of the 

Treasury chairs, is to facilitate information-sharing and coordination among the member agencies regarding rulemaking, examinations, reporting requirements, and enforcement actions. However, 

while the Dodd-Frank Act establishes the FSOC as a forum for collaboration and consultation, it also preserves the independence of 

regulators such as the SEC and CFTC. The FSOC has worked to 

develop an approach that recognizes that independence while acting as a coordinator to facilitate a consistent and integrated approach to implementation. The SEC and CFTC, as independent 

regulators, are working together on their derivatives rulemakings 

to develop a consistent approach that reduces regulatory arbitrage. 

Treasury, as Chair of the FSOC, has and will continue to prioritize 

coordination among the regulators, including the SEC and CFTC 
72 

on their derivatives rulemakings, to promote financial stability and 

market discipline. 

Q.3. In your testimony you mentioned how valuable a recent executive order by President Obama was in ‘‘seeking to ensure cost-effective, evidence-based regulations that are compatible with economic 

growth, job creation, and competitiveness.’’ What are you doing to 

encourage the agencies charged with Dodd-Frank rulemaking to 

undertake cost-effective, evidence-based regulations that are compatible with economic growth, job creation, and competitiveness? 

Will the FSOC’s rulemaking be subject to the executive order? 

A.3. The Treasury Secretary has encouraged FSOC members to 

adopt the principles and guidelines set forth in the President’s Executive Order 13563 of January 18, 2011 ‘‘Improving Regulation 

and Regulatory Review.’’ Although the Executive Order does not 

apply to independent regulatory agencies, the Secretary encouraged 

all FSOC members agencies to adopt the principles and guidelines 

it sets forth. In addition, earlier this month, the President signed 

Executive Order 13579, asking the independent regulatory agencies 

to follow the cost-saving, burden-reducing principles in Executive 

Order 13563. These priorities and guidelines can help strike the 

right regulatory balance: ensuring that regulations improve the 

performance of our economy and protect consumers and investors, 

without imposing unreasonable costs on society. 

The FSOC strives to perform its duties efficiently and effectively 

in achieving its mandate under the Dodd-Frank Act while avoiding 

undue burdens on the private sector. In addition, the FSOC works 

to fulfill its statutory mandate under the Dodd-Frank Act to coordinate across member agencies and, where practicable, ensure consistent regulation. 

Q.4. Your testimony mentions that the Council has begun monitoring for potential risks to U.S. financial stability. Please provide 

more detail about who is conducting the monitoring, how it is being 

done, and how the monitoring differs from monitoring that individual Council members undertook prior to the establishment of 

the FSOC. 

A.4. The Dodd-Frank Act established the FSOC as a forum for regulators to work together on a permanent basis to identify issues 

that could affect financial stability and impact the economy. The 

FSOC members—nine Federal regulators, an independent member 

with insurance expertise, the Office of Financial Research (OFR) 

Director, the Federal Insurance Office (FIO) Director, and State 

banking, insurance, and securities supervisors—contribute their expertise about sectors and institutions to develop a broader view of 

trends, risks, and challenges in the financial system. The FSOC 

has collective accountability for identifying, monitoring and responding to threats to U.S. financial stability. 

The FSOC has designed a collaborative structure to promote the 

appropriate coordination, cooperation, information-sharing and 

transparency necessary for FSOC members to identify, analyze and 

respond to vulnerabilities in the system and emerging threats to 

U.S. financial stability. The FSOC has instituted a three-pronged 

committee structure: the Deputies Committee, the Systemic Risk 

Committee and the standing functional committees. These commit-
73 

tees, which are composed of staff of FSOC member agencies with 

supervisory, examination, data, surveillance, and policy expertise, 

share information to assess risks that affect financial markets and 

institutions. The Systemic Risk Committee, with its subcommittees 

on financial institutions and markets, is accountable for interagency coordination and information-sharing regarding issues that 

could impact financial stability. The OFR is also working closely 

with the FSOC and member agencies to support this work, including through the development of tools for risk measurement and 

monitoring. 

Q.5. The FSOC has an ambitious mandate. It is not clear how this 

mandate will work in practice. Has the FSOC developed a strategic 

plan for achieving its goals? If so, please provide the plan. 

A.5. The FSOC has identified goals that it is working diligently to 

achieve. These goals include building an effective forum for collaboration and coordination between its members; carrying out the 

statutory requirements of the Dodd-Frank Act; identifying, monitoring, and responding to potential risks to U.S. financial stability; 

and laying the groundwork for designations of nonbank financial 

companies and financial market utilities. 

To meet these goals, the FSOC has met six times since inception, 

exceeding the statutory requirement. Each of the FSOC member 

agencies has also designated a senior official to serve on the Deputies Committee, which meets every 2 weeks to discuss and make 

decisions that advance the FSOC’s work. In addition to the Deputies Committee, the FSOC has established a Systemic Risk Committee and various standing functional committees focused on policy areas including heightened prudential standards, resolution, 

and data. These committees, which are composed of member agency officials and staff who have relevant supervisory, examination, 

data, surveillance, and policy expertise, communicate and meet regularly to support the FSOC’s ongoing work. The FSOC’s statutorily 

required annual report, which the FSOC expects to release later 

this month, will reflect the extensive discussions and analysis that 

have occurred through this collaborative interagency process. 

Q.6. The FSOC’s transparency policy states that the FSOC will 

close meetings, inter alia, under circumstances that ‘‘necessarily 

and significantly compromise the mission or purposes of the FSOC, 

as determined by the Chairman with the concurrence of a majority 

of the voting member agencies or by a majority of the voting member agencies.’’ What types of circumstances would call for holding 

closed meetings under this provision of the transparency policy? 

A.6. The FSOC’s transparency policy states that a central mission 

of the FSOC is to monitor risk and emerging threats to U.S. financial stability. To fulfill this mission, the FSOC will discuss confidential supervisory information and market-sensitive data during 

Council meetings. This information may concern individual firms, 

as well as specific transactions and markets. Protection of this information is necessary to prevent destabilizing market speculation 

that could occur if the information were to be disclosed publicly. 

The FSOC is committed to holding open meetings and will hold 

closed meetings only when appropriate. It is important to note that 

the FSOC has held four public meetings since its inception. 
74 

Q.7. In January, the Council issued a Notice of Proposed Rulemaking Regarding Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies. There have been 

questions about whether the Dodd-Frank Act gives the Council the 

authority to adopt such a rule. Does the Council have the authority 

to adopt this rule? 

A.7. The FSOC has the authority to issue its proposed regulations 

on the process for determining that a nonbank financial company 

will be supervised by the Federal Reserve, and to re-propose those 

rules for further public comment. The FSOC has already exercised 

its rulemaking authority to issue a notice of proposed rulemaking 

and plans to issue for further public comment additional guidance 

regarding its approach to designations of nonbank financial companies. The FSOC plans to release a final rule and guidance that will 

reflect the input received on its proposals. 

Q.8. The Council has established a Deputies Committee and six 

other standing committees. Please identify the members of the 

Deputies Committee, the six committees, and their subcommittees. 

Please also identify the permanent staff and detailees on the FSOC 

staff and provide a synopsis of their qualifications. 

A.8. Each of the FSOC member agencies has designated a senior 

official to serve on the Deputies Committee. Treasury has designated Jeffrey Goldstein, the Under Secretary for Domestic Finance. In addition to the Deputies Committee, the FSOC also has 

established a Systemic Risk Committee and various standing functional committees focused on policy areas including heightened prudential standards, resolution, and data. These committees are composed of member agency officials and staff who have relevant supervisory, examination, surveillance, and policy expertise. Moreover, the FSOC itself is supported by a Treasury Deputy Assistant 

Secretary and a small number of permanent career Government 

employees, all of whom have the necessary experience and expertise to help coordinate and implement the policies set by the FSOC 

members’ agencies. Finally, the FSOC member agencies have made 

various personnel available through short-term detail arrangements to offer the FSOC additional support and subject-matter expertise. 

Q.9. Under Dodd-Frank, swap data repositories, before sharing any 

information with a regulator other than their primary regulator, 

must obtain an indemnification agreement with that other regulator. Will this requirement adversely affect regulators’ ability to 

obtain a comprehensive view of the swaps markets? 

A.9. The Dodd-Frank Act requires swap data repositories (SDRs) 

and security-based swap data repositories (SB–SDRs) to make data 

available, on a confidential basis, to certain domestic and foreign 

regulators. The Dodd-Frank Act further requires regulators (other 

than the primary regulator) that request data to execute a written 

confidentiality and indemnification agreement with the SDR or 

SB–SDR prior to receiving any data. The CFTC and the SEC have 

proposed rules for SDRs and SB–SDRs, respectively, that require 

such confidentiality and indemnification agreements (see 75 FR 

80808 (December 23, 2010) and 75 FR 77306 (December 10, 2010), 

respectively). 
75 

Both agencies acknowledged in their proposed rules that the indemnification requirement could affect other regulators’ access to 

the information maintained by SDRs and SB–SDRs. However, both 

agencies also highlighted the importance of ensuring that other 

regulators have access to swap data to carry out their regulatory 

mandates and responsibilities. The CFTC and SEC have requested 

comment on the required confidentiality and indemnification agreements and are evaluating feedback. 

Q.10. One of the Council’s purposes is to monitor systemic risk and 

alert Congress and regulators of any systemic risks it discovers. 

What are the most serious systemic risks presently facing the U.S. 

economy? 

A.10. The Dodd-Frank Act charges the Council with the responsibility for identifying risks to the financial stability of the United 

States, promoting market discipline, and responding to emerging 

threats to the stability of the U.S. financial system. To help satisfy 

its mandate, the FSOC established a Systemic Risk Committee 

which identifies, analyzes, and monitors vulnerabilities in the financial system and emerging threats to maintaining stability. As 

part of its ongoing efforts, the Council and its members monitor 

emerging issues such as the state of mortgage foreclosures in the 

United States, sovereign fiscal developments in Europe and the 

United States, and natural disasters such as the earthquake and 

tsunami in Japan. The Council will continue to think broadly about 

threats to stability from external shocks as well as structural 

vulnerabilities within the system. Later this month, the Council 

will address a number of these issues in its statutorily required annual report. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED 

FROM NEAL S. WOLIN 

Q.1. In early January, I was assured by Secretary Geithner that 

Treasury is committed to working with the other FSOC member 

agencies to mobilize all tools available to fix that nation’s system 

of mortgage servicing and foreclosure processing. What tools have 

been mobilized? Do these consent orders represent a full mobilization of all the tools available to FSOC member agencies? Why or 

why not? What additional tools do you believe are necessary? 

A.1. The consent decrees issued in April 2011 by the OCC, OTS, 

and Federal Reserve to certain financial institutions represent just 

one of the tools available to address mortgage servicer misconduct. 

Other tools follow from the work that Federal agencies, including 

Treasury and other FSOC member agencies, and their State partners are doing to coordinate a law enforcement effort that addresses mortgage servicer misconduct and improper foreclosure processing. Among other things, members of this group have been conducting onsite reviews of major mortgage servicers and vendors. 

These reviews revealed critical deficiencies in foreclosure processing and mortgage servicing, including the failure to follow State 

and Federal law. Servicers that engaged in improper foreclosure 

processing in violation of the law must be held fully accountable for 

their actions, and any deficiencies must be corrected. 
76 

In addition, Treasury is working with the OCC, the Federal Reserve, the Federal Housing Finance Agency (FHFA), and the Federal Deposit Insurance Corporation (FDIC) to develop national 

mortgage servicing standards. Work underway includes a study of 

measures that would improve borrower protections and provide 

clarity and consistency to borrowers and investors regarding their 

treatment by servicers, especially in the event of delinquency. The 

working group is building on modification standards Treasury developed for its Making Home Affordable Program (MHA). The MHA 

standards have improved mortgage modifications, including short 

sales and deeds-in-lieu of foreclosure, across the industry and have 

made key changes in the way mortgage servicers assist struggling 

homeowners. Treasury also supports the FHFA’s review of servicing compensation structures and possible alternatives, which 

could help improve incentives for servicers to invest the time and 

effort to work with borrowers to avoid foreclosure. 

Treasury believes continued coordination among Federal and 

State partners will be important for developing additional tools for 

addressing issues related to foreclosure processing and mortgage 

servicing. 

Q.2. The GAO also recommended that the Federal Reserve, OCC, 

OTS, and FDIC ‘‘assess the risks of potential litigation or repurchases due to improper mortgage loan transfer documentation’’ and 

‘‘require that the institutions act to mitigate the risks, if warranted’’ Has this been done? What are the estimated costs of potential litigation? Has this issue been discussed or considered by 

FSOC? What is Treasury doing, as Chair of the FSOC, to ensure 

that these recommendations are considered? 

A.2. Treasury cannot speak on behalf of the independent regulators 

regarding analysis, potential litigation, or the specific regulatory 

actions they may undertake. However, the Dodd-Frank Act charges 

the FSOC with the responsibility for identifying risks to the financial stability of the United States, promoting market discipline, and 

responding to emerging threats to the stability of the U.S. financial 

system. Working groups addressing mortgage servicing and foreclosure processing have briefed the FSOC, which the Treasury Secretary chairs, on these issues, and the FSOC will continue to monitor developments. 

Q.3. On April 29th, the Department of the Treasury announced its 

intention to exempt foreign exchange swaps and forwards from the 

scope of Dodd-Frank. Why should the foreign exchange swaps and 

forwards not be subject to the same transparency provisions as the 

rest of the derivatives marketplace? Please explain in detail. 

A.3. Recognizing that the unique characteristics and existing oversight of the foreign exchange swaps and forwards market already 

incorporate many of Dodd-Frank’s objectives for reform—including 

high levels of transparency, effective risk management, and financial stability—Congress provided the Secretary of the Treasury 

with the authority to determine whether central clearing and exchange trading requirements should apply to foreign exchange (FX) 

swaps and forwards. On May 5, 2011, Treasury requested public 

comment on a Notice of Proposed Determination to exempt FX 

swaps, FX forwards, or both, from the definition of a ‘‘swap’’ under 
77 

the Commodity Exchange Act (CEA). As explained in the notice, FX 

swaps and forwards trade in a highly transparent market with 

well-developed settlement protections. Market participants already 

have access to readily available pricing information through multiple sources, and the prevalence of electronic trading platforms in 

these markets—approximately 41 percent and 72 percent of FX 

swaps and forwards, respectively, already trade on these platforms—also provides a high level of pre-and post-trade transparency. The Dodd-Frank Act will further heighten this transparency by subjecting all derivatives, including FX swaps and forwards, to mandatory reporting to swap data repositories. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM NEAL S. WOLIN 

Q.1. According to the American Banker, Annette L. Nazareth, a 

former SEC Commissioner, called the timetables imposed by the 

Dodd-Frank Act ‘‘wildly aggressive.’’ ‘‘These agencies were dealt a 

very bad hand,’’ she said. ‘‘These deadlines could actually be systemic-risk raising.’’ Given the importance of rigorous cost-benefit 

and economic impact analyses and the need for due consideration 

of public comments, would additional time for adoption of the 

Dodd-Frank Act rules improve your rulemaking process and the 

substance of your final rules? 

A.1. A guiding principle for implementation of the Dodd-Frank Act 

has been to move quickly and carefully. Regulators are working to 

meet statutory deadlines and to quickly provide clarity to the public and the markets. At the same time, rulewriters understand the 

importance of getting the rules right and are taking additional time 

where necessary to improve the process and substance of their final 

rules. 

The Dodd-Frank Act does not require the FSOC to issue substantive regulations. Nonetheless, the FSOC has chosen to conduct 

rulemakings on the designations of nonbank financial companies 

and financial market utilities to promote transparency regarding 

the FSOC’s decisionmaking process, to solicit public input, and to 

provide clarity on the criteria and process for designations. 

Q.2. Chairman Bair’s testimony was unclear regarding whether the 

FSOC has the authority to issue a revised rule on the designation 

of nonbank financial institutions. She and others indicated some 

type of guidance might be issued instead. Is it in fact the case, in 

general, that the FSOC does not have authority to issue rules 

under Title I that have the force and effect of law? If the FSOC 

has the authority in general to issue such rules on designation, 

why specifically would the FSOC be precluded from re-proposing a 

rule that is currently pending? Is there additional authority the 

FSOC would need from Congress to issue such rules or to proceed 

with re-proposing its NPR on designation? If yes, what specific authority would the FSOC need from Congress for the FSOC to have 

the ability to proceed? 

The FSOC has the authority to issue its proposed regulations on 

the process for determining that a nonbank financial company will 

be supervised by the Federal Reserve, and to re-propose those rules 

for further public comment. The FSOC has already exercised its 
78 

rulemaking authority to issue a notice of proposed rulemaking and 

plans to issue for further public comment additional guidance regarding its approach to designations of nonbank financial companies. The FSOC plans to release a final rule and guidance that will 

reflect the input received on its proposals. 

Q.3. In an August speech at NYU’s Stern School of Business, 

Treasury Secretary Geithner outlined six principles that he said 

would guide implementation, and then he added, ‘‘You should hold 

us accountable for honoring them.’’ His final principle was bringing 

more order and integration to the regulatory process. He said the 

agencies responsible for reforms will have to work ‘‘together, not 

against each other. This requires us to look carefully at the overall 

interaction of regulations designed by different regulators and assess the overall burden they present relative to the benefits they 

offer.’’ Do you intend to follow through with this commitment with 

some form of status report that provides a quantitative and qualitative review of the overall interaction of all the hundreds of proposed rules by the different regulators and assess the overall burden they present relative to the benefits they offer? 

A.3. One of the duties of the FSOC, which the Secretary of the 

Treasury chairs, is to facilitate information-sharing and coordination among the member agencies and other Federal and State 

agencies regarding financial services policy development, 

rulemakings, examinations, reporting requirements, and enforcement actions. In this capacity, the Secretary recently sent FSOC 

members a letter encouraging them to review their regulations in 

accordance with the principles and guidelines identified in the 

President’s Executive Order 13563 ‘‘Improving Regulation and Regulatory Review.’’ The Treasury Department, after conducting its 

own review, published a preliminary plan under which it will periodically review its existing significant regulations in order to identify rules that may be outmoded, ineffective, insufficient, or excessively burdensome. The principles and guidelines set forth in the 

Executive Order can help ensure that regulations protect our citizens and improve the performance of our economy without imposing unreasonable costs on society. 

In addition, the FSOC has worked to develop an approach to coordination that recognizes the independence of the regulators while 

bringing consistency and integration to the regulatory process. For 

example, soon after Dodd-Frank’s passage, the FSOC worked with 

member agencies to release an ‘‘Integrated Implementation Roadmap’’ that sets forth a coordinated timeline of statutory and nonstatutory goals for implementation. The FSOC is also coordinating 

implementation of rulemakings, including the Volcker Rule, so that 

the regulations issued by the various agencies will be comparable 

and consistent. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORKER 

FROM NEAL S. WOLIN 

Q.1. Your institutions have been assigned the task of macro prudential risk oversight. Specifically, the Dodd-Frank Act tasked the 

FSOC with ‘‘identifying risks to the financial stability that could 

arise from the material financial distress or failure of large inter-
79 

connected bank holding companies or nonbank financial companies.’’ As you know nearly all banks carry U.S. Treasury bills, 

notes, and bonds on their balance sheet with no capital against 

them. They are deemed, both implicitly and explicitly, as risk free. 

But with a $14 trillion debt, no one can guarantee that the bond 

market will continue to finance U.S. securities at affordable rates. 

What steps have you taken to ensure that systemically important 

financial institutions could withstand a material disruption in the 

U.S. Treasury market from an event such as a major tail at an auction, the liquidation of securities by a major investor such as a foreign central bank, concerns that the United States will attempt to 

inflate its way out of its debt obligations, an outright debt downgrade by a major rating agency, or market concern over the prospects for a technical default? What impact would an event such as 

the loss of market confidence in U.S. debt and subsequent increase 

in U.S. borrowing rates have on the institutions in your purview? 

And what steps can you take to ensure that the balance sheets of 

systemically important institutions could withstand such an event 

and that such an event would not lead to a systemic crisis similar 

to or worse than that experienced in 2008? 

A.1. The Treasury Department does not believe the potential disruptions to Treasury markets that you mention are likely to occur 

because we believe that Congress will raise the debt limit in a 

timely fashion. Demand for Treasuries remains extremely strong. 

Rates are at historically low levels, and auctions are showing high 

levels of coverage. This reflects the confidence that markets currently have in the creditworthiness of the United States. 

The Financial Stability Oversight Council (FSOC) continues to 

identify, monitor, and respond to vulnerabilities in the financial 

system and emerging threats to financial stability, including the 

risks you mention. More immediately, the threat posed by the failure to raise the debt limit grows every day that we fail to address 

it, and FSOC members remain focused on this issue. If the debt 

limit is not raised on a timely basis, the United States would be 

forced to default on the existing legal obligations made by past 

Congresses and Presidents of both parties. 

The Administration is committed to addressing the serious fiscal 

challenges our country faces and working with you and other Members of Congress to do so. The ongoing discussions convened by the 

President with leaders from both parties and both houses of Congress have been constructive and all participants are working to 

reach agreement as soon as possible. However, regardless of the 

path we choose to bring down our deficits, Congress must raise the 

statutory debt limit. 

Q.2. What other major systemic risks are you currently most concerned about? What steps are you taking to address these? 

A.2. The Dodd-Frank Wall Street Reform and Consumer Protection 

Act (Dodd-Frank Act) charges the FSOC with the responsibility to 

identify and monitor risks to the financial stability of the United 

States to promote market discipline, and to respond to emerging 

threats to the stability of the U.S. financial system. To help satisfy 

this mandate, the FSOC established a Systemic Risk Committee 

which identifies, analyzes, and monitors vulnerabilities in the fi-
80 

nancial system and emerging threats to financial stability. As part 

of its ongoing efforts, the FSOC and its members monitor emerging 

issues such as the state of mortgage foreclosures in the United 

States, sovereign fiscal developments in Europe, and natural disasters such as the earthquake and tsunami in Japan. The FSOC will 

continue to monitor and assess the threats to financial stability 

from external shocks as well as structural vulnerabilities within 

the system. Later this month, the FSOC will address a number of 

these issues in its statutorily required annual report. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM NEAL S. WOLIN 

Q.1. Dodd-Frank set forth a comprehensive list of factors that 

FSOC must consider when determining whether a company posed 

a systemic risk and deserves Fed oversight. The council, in its advanced notice of proposed rulemaking, sets forth 15 categories of 

questions for the industry to comment on and address. However, 

the proposed rules give no indication of the specific criteria or 

framework that the council intends to use in making SIFI designations-other than what is already set forth in Dodd-Frank. As a result, potential SIFIs have no idea where they may stand in the designation process. Will the council provide additional information 

about the quantitative metrics it will use when making an SIFI 

designation? 

A.1. The Council will seek comment on additional guidance regarding its approach to these designations. The Council is working to 

strike the right balance between the use of quantitative metrics 

and for the exercise of judgment when assessing the unique risks 

that a particular firm may present to the financial system. 

Q.2. Would the council agree that leverage is likely to be the one 

factor that is most likely to create conditions that result in systemic risk? If so, how will the council go about identifying which 

entities use leverage? 

A.2. The Dodd-Frank Act requires the Council to consider a variety 

of factors, including leverage, when evaluating what firms will be 

designated. No one factor will form the basis of a designation. 

Every designation will be firm-specific, taking into account each 

firm’s comprehensive risk profile. The FSOC intends to obtain relevant data from its members, the OFR, and publicly available information. The Council continues to work toward an approach that 

will allow firms to assess whether they are likely candidates for 

designation while maintaining flexibility as the nature of institutions and markets changes. 

Q.3. One of the first steps in the systemic designation process, as 

outlined in the proposed rule, is that after identifying a nonbank 

financial company for possible designation the FSOC will provide 

the company with a written preliminary notice that the council is 

considering making proposed determination that the company is 

systemically significant. Is receipt of such a notice a material event 

that might affect the financial situation or the value of a company’s 

shares in the mind of the investors? If so, wouldn’t it need to be 

disclosed to investors under securities laws? 
81 

A.3. The SEC is charged with determining the disclosure requirements applicable to public companies, and I respectfully defer to 

the SEC’s judgment on this question. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM NEAL S. WOLIN 

Q.1. As FSOC considers how to determine the systemic relevance 

of the investment fund asset management industry, wouldn’t it be 

more appropriate for FSOC to look at the various individual funds 

themselves, of which there may be several under one advisor, rather than focus on the advisor entity? 

a. Isn’t it true that each of those funds may operate with separate and distinct investment strategies, each with its own 

unique risks? 

b. Isn’t it the case that the vast majority of the assets are located at the funds and not at the adviser entity? 

A.1. Individual investment funds may operate with their own strategies and unique risk profiles, and for many asset management 

firms, most of the assets are not held on the balance sheet of the 

advisor entity. The FSOC recognizes that there are differences between the advisor entity and the individual funds, and both the 

funds and advisor may present different sets of risks. In accordance 

with the Dodd-Frank Act, in making determinations of nonbank financial companies to be supervised by the Federal Reserve, the 

FSOC will consider the extent to which assets are managed, rather 

than owned, by investment advisors. 

Q.2. What additional protection/supervision could the Fed provide 

for mutual funds that the SEC isn’t already providing? Do we really need to subject this industry to an additional layer of regulation, 

especially a ‘‘systemic risk’’ regulation? 

A.2. Section 113 of the Dodd-Frank Act gives the FSOC authority 

to designate U.S. nonbank financial companies ‘‘if the Council determines that material financial distress at the U.S. nonbank financial company, or the nature, scope, size, scale, concentration, 

interconnectedness, or mix of the activities of the U.S. nonbank financial company, could pose a threat to the financial stability of 

the United States.’’ Additionally, one of the 10 considerations the 

Dodd-Frank Act requires the FSOC to take into account during the 

designation process is ‘‘the degree to which the company is already 

regulated by one or more primary financial regulatory agencies.’’ 

Categorical exclusion of mutual funds, or any other type of 

nonbank financial company, from the possibility of designation 

without evaluating all of the considerations the FSOC is statutorily 

required to take into account would be premature. 

Q.3. Can you share with us what the FSOC, OFR, FDIC and Fed 

are contemplating by way of fees that they may assess on SIFIs? 

A.3. The Dodd-Frank Act created the Financial Research Fund to 

support the operations of the OFR and the FSOC. The Federal Reserve Board is required by statute to provide interim funding for 

the first 2 years after enactment of the Dodd-Frank Act. After this 

period, the Treasury Secretary, with the Council’s approval, must 
82 

establish by rule an assessment schedule for Federal Reserve-supervised bank holding companies and designated nonbank financial 

companies to cover these expenses. 

The FSOC and the OFR have not finalized their budget estimates beyond FY 2012; however, funding estimates for the Financial Research Fund for FY 2011 and FY 2012 were made public in 

the President’s budget request earlier this year. 

International Competitiveness 

Q.4.a. It is critical for the continued competitiveness of the U.S. 

markets that a regulatory arbitrage does not develop among markets that favors markets in Europe and Asia over U.S. markets. 

Will the FSOC commit to ensuring that the timing of the finalization and implementation of rulemaking under Dodd Frank does not 

impair the competitiveness of U.S. markets? 

Q.4.b. How will FSOC ensure that U.S. firms will have equal access to European markets as European firms will have to U.S. markets? 

Q.4.c. How will FSOC ensure that Basel III will be implemented 

in the United States in a manner that is not more stringent than 

in Europe, making U.S. firms less competitive globally? 

A.4.a.–c. The Council understands that major financial centers in 

Europe and Asia need to adopt strong measures similar to the 

Dodd-Frank Act to help maintain a level playing field for U.S. 

firms and reduce the opportunity for regulatory arbitrage. The 

United States has taken a leading role in laying the groundwork 

to set an international effort in motion, and the Council’s members 

are playing an important part in coordinating this effort so that 

implementation across national authorities is consistent and timely. 

The Council’s members are working through international forums like the G–20 and Financial Stability Board to build a global 

regulatory framework, including areas like capital standards and 

derivatives regulation, so that markets remain competitive and accessible. The Council’s members are also engaging with their counterparts around the globe, including through bilateral financial dialogues with the European Commission, Japan, China, India, Singapore, and Canada, to develop consistent approaches of regulating 

major financial jurisdictions. 

Q.5. Is a broker/dealer that is not self-clearing less likely to pose 

systemic risk because it receives the financial backing and risk 

management attention of its clearing firm which already performs 

extensive monitoring of risk for the broker-dealers and which in all 

likelihood will itself be a SIFI? 

A.5. As reflected in Title VII of the Dodd-Frank Act, central clearing is an important means of addressing the threats to the financial system posed by counterparty defaults in the context of certain 

derivatives transactions. However, these threats can also spread 

through other transmission mechanisms, including asset fire sales, 

withdrawals of funding or demands for additional collateral. As a 

result, broker-dealer clearing arrangements, including clearing 
83 

through a clearing firm, may reduce, but do not eliminate these 

risks. 

Q.6. Titles I and II of Dodd-Frank references an entity’s ‘‘asset 

threshold’’ or ‘‘total consolidated assets’’ several times. Are such 

calculations to be made in accordance with generally accepted accounting principles (GAAP)? 

A.6. When establishing capital measures, many U.S. regulators require an entity to adjust its GAAP-based results and apply regulatory accounting principles. This adjustment is made to ensure 

that the regulators’ objectives are met. 

For purposes of calculating ‘‘asset threshold’’ and ‘‘total consolidated assets,’’ we expect that regulators would adopt a similar approach. They would use the principles established under U.S. 

GAAP, but would require adjustments to these calculations to meet 

their objectives. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR MORAN 

FROM NEAL S. WOLIN 

Q.1. One of the first steps in the designation process is that after 

identifying a nonbank financial company for possible designation, 

the FSOC will provide the firm with a written notice that the 

Council is considering them for possible designation. Can you walk 

us through this step and describe possible scenarios in which there 

is some question as to a firm’s systemic significance? Who decides 

to whom the notice will be sent if no vote is taken? 

A.1. The FSOC issued a notice of proposed rulemaking regarding 

the criteria and procedures for the designation of nonbank financial 

companies. The FSOC requested public comment on various parts 

of the proposed rule, including on the provisions governing notice 

of a proposed determination. The FSOC is continuing to work 

through the details of this process, and expects to release for public 

comment additional guidance on the proposed procedures. 

Q.2. You are aware of my concerns with the structure established 

in Dodd-Frank. In fact, I favor the approach first sent to the Hill 

by your Administration almost 2 years ago; a 5-member Board. 

That being said, can you please tell us why it has taken more than 

10 months to secure a suitable candidate for this position? Back in 

November of 2010, Congressman Bachus asked Secretary Geithner 

when we might expect the President to nominate someone to head 

the CFPB and the Secretary responded ‘‘soon.’’ When will we see 

a nomination? Would it have been more appropriate for the first 

Director of this Bureau to be the individual hiring several hundred 

employees, establishing the agenda, setting a budget? 

A.2. Earlier this week, the President nominated Richard Cordray, 

who is currently the Chief of Enforcement at the CFPB, to serve 

as its Director. Mr. Cordray is a former Attorney General and State 

Treasurer of Ohio. Earlier in his career, Mr. Cordray was an adjunct professor at the Ohio State University College of Law, served 

as a Ohio State Representative, and was the first Solicitor General 

in Ohio’s history. In the Dodd-Frank Act, Congress granted the 

Secretary of the Treasury interim authority to stand up the CFPB 

before a Director is confirmed. To ensure an orderly stand-up of the 
84 

agency and a responsible transfer of functions from seven Federal 

agencies, this process has necessitated extensive research, planning, budgeting, and hiring. 

Q.3. My initial research tells me that over the past 100-years or 

more of U.S. history, there is not a single instance in which an 

agency of this size and status was filled with a recess appointed 

head in its inception. Can you commit to us that your Administration will not break this long-established precedent and make an 

end-run around the Senate? 

A.3. Filling existing vacancies, including the CFPB Director position, is a priority for this Administration. I cannot, however, speak 

for the President with respect to any particular nominations. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORKER 

FROM BEN S. BERNANKE 

Q.1. Your institutions have been assigned the task of macro prudential risk oversight. Specifically, the Dodd-Frank Act tasked the 

FSOC with ‘‘identifying risks to the financial stability that could 

arise from the material financial distress or failure of large interconnected bank holding companies or nonbank financial companies.’’ As you know nearly all banks carry U.S. Treasury bills, 

notes, and bonds on their balance sheet with no capital against 

them. They are deemed, both implicitly and explicitly, as risk free. 

But with a $14 trillion debt, no one can guarantee that the bond 

market will continue to finance U.S. securities at affordable rates. 

What steps have you taken to ensure that systemically important 

financial institutions could withstand a material disruption in the 

U.S. Treasury market from an event such as a major tail at an auction, the liquidation of securities by a major investor such as a foreign central bank, concerns that the United States will attempt to 

inflate its way out of its debt obligations, an outright debt downgrade by a major rating agency, or market concern over the prospects for a technical default? 

What impact would an event such as the loss of market confidence in U.S. debt and subsequent increase in U.S. borrowing 

rates have on the institutions in your purview? And what steps can 

you take to ensure that the balance sheets of systemically important institutions could withstand such an event and that such an 

event would not lead to a systemic crisis similar to or worse than 

that experienced in 2008? 

A.1. I agree that the fiscal situation is a serious problem that must 

be addressed. Currently, the Federal debt-to-income ratio is at levels not seen since World War II in part because the budgetary position of the Federal Government has deteriorated substantially during the past two fiscal years. The recent deterioration was largely 

the result of a sharp decline in tax revenues brought about by the 

recession and the subsequent slow recovery, as well as by increases 

in Federal spending needed to alleviate the recession and stabilize 

the financial system. Looking out a few years, under current policy 

settings, the Federal budget will be on an unsustainable path, with 

the debt-to-income ratio of the United States rising at an increasing pace. 
85 

That said, financial market participants evidently expect the 

Congress and the Administration to come to a solution that puts 

the United States on a sustainable fiscal path. Yields on 10-year 

Treasury bonds are currently at extremely low levels, consistent 

with investors requiring little compensation for the risk of lending 

the U.S. Government for an extended horizon. If investors were to 

seriously doubt the United States’ willingness to meet its obligations, the result could be widespread financial disruptions that 

could derail the recovery and that would almost certainly raise the 

long-term cost of borrowing for the Government, further complicating our fiscal problem. 

As a regulator, we have conducted extensive analyses of the impact that an abrupt rise in interest rates would have on the institutions we supervise and will continue to monitor any impact that interest rates increases have on these institutions. However, we recognize that a material disruption in the U.S. Treasury market from 

investor concerns about a sustainable fiscal path would not just affect these institutions but, as noted, would have more widespread 

consequences. 

Q.2. What other major systemic risks are you currently most concerned about? What steps are you taking to address these? 

A.2. There are a number of risks that we are monitoring and assessing in our role as a member of the FSOC, as well as in meeting 

the Federal Reserve’s independent responsibility to promote financial stability. The FSOC Annual Report, submitted to Congress in 

July, identifies a number of potential systemic risks and makes recommendations to mitigate these risks and promote financial stability. Among those identified are structural risks, including features of money market funds that make them susceptible to runs, 

fragilities in the tri-party repo market, inadequate mortgage servicing practices, and weaknesses in capital and liquidity risk management practices at some of the largest financial institutions. The 

Federal Reserve, as well as the FSOC, has publicly urged the SEC 

to take additional steps to mitigate the risk of runs in money market funds, including pursuing reform alternatives such as mandatory floating net asset value (NAV), capital buffers to absorb fund 

losses, or deterrents to redemptions. In addition, the Fed is an active participant in the Task Force on Tri-Party Repo Infrastructure, which is taking steps to reduce intraday credit exposures and 

strengthen collateral management practices to increase the stability of this market. As a banking supervisor, we are working to 

establish improved national mortgage servicing practices. We also 

conducted the Comprehensive Capital Analysis and Review exercise earlier this year, and have been working with institutions to 

further improve their capital planning processes, including contingencies for resolution that would facilitate resolvability without 

Government assistance. In addition, the Fed is working on proposed enhanced prudential standards for certain large and complex 

financial firms, which need to be implemented in a consistent manner across the global financial system, and is working with FSOC 

to designate systemically important nonbank financial institutions. 

There also are a number of emerging risks that the FSOC identified, including unexpected increases in interest rates, declining dis-
86 

cipline in underwriting standards for some financial assets, and 

more generally new and developing emerging financial products 

and practices, and the Federal Reserve is closely monitoring these 

developments. Going forward, the Federal Reserve will continue to 

work with the FSOC and its other member agencies to identify 

risks and structural vulnerabilities in the financial system, and to 

take steps to increase its resilience. 

RESPONSE TO WRITTEN QUESTION OF SENATOR MORAN 

FROM BEN S. BERNANKE 

Q.1. In a recent speech, Governor Tarullo stated that the list of 

‘‘systemically significant’’ institutions will be short, and that the 

standard for designation set by Congress ‘‘should be quite high.’’ 

There has been conflicting reports that there are some on the 

FSOC which would like a more inclusive group of firms, in effect 

casting a wider net. Do you agree with Governor Tarullo that the 

list is likely to be limited to a small group of truly interconnected 

institutions? 

A.1. I believe that the Financial Stability Oversight Council 

(FSOC) should designate any nonbank financial company if the 

FSOC determines that material financial distress at the nonbank 

financial company, or the nature, scope, size, scale, concentration, 

interconnectedness, or mix of the activities of the nonbank financial 

company, could pose a threat to the financial stability of the United 

States. Whether a firm meets this standard inevitably involves a 

judgment on the combined effect of all potential transmission channels from the firm to the broader financial system and economy. At 

this time, I expect that a relative handful of firms likely meet this 

standard. Because the FSOC is still developing its analytic framework and is still working on a final rule for the designation process, it is too soon to know how many firms the FSOC will designate. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM SHEILA C. BAIR 

Q.1. In your testimony, you note—and I agree—that allowing continuation of the pre-crisis status quo would be to sanction a new 

and ‘‘dangerous form of state capitalism.’’ However, you also state 

that ‘‘the FDIC should have a continuous presence at all designated 

SIFIs’’ and the FDIC and the Federal Reserve should ‘‘actively’’ use 

their authority to require organizational changes at SIFIs. Does 

such an active Government-financial institution partnership run 

the risk of laying the groundwork for, as you described it, a dangerous form of state capitalism in which a few large financial entities operate under the shadow and protection of the Government? 

A.1. It is important at the outset to clarify that being designated 

as a SIFI will in no way confer a competitive advantage or suggest 

that it operates under the protection of the Government by anointing an institution as ‘‘too big to fail.’’ SIFIs will be subject to 

heightened supervision and higher capital requirements. They also 

will be required to maintain resolution plans and could be required 

to restructure their operations if they cannot demonstrate that they 
87 

are resolvable. In light of these significant regulatory requirements, the FDIC has detected absolutely no interest on the part of 

any financial institution in being named a SIFI. Indeed, many institutions are vigorously lobbying against such a designation. 

As shown by the recent crisis, the larger, more complex, and 

more interconnected a financial company is, the longer it takes to 

assemble a full and accurate picture of its operations and develop 

a resolution strategy. By requiring detailed resolution plans in advance, and authorizing an onsite FDIC team to conduct pre-resolution planning, the SIFI resolution framework regains the ability to 

gather information that was lacking in the crisis of 2008. The FDIC 

should have a continuous presence at all designated SIFIs under 

the new resolution framework, working with the firms and reviewing their resolution plans as part of their normal course of business. Thus, our presence should in no way be seen as a sign of Government protection or a signal of distress. Instead, it is much more 

likely to provide a stabilizing influence that encourages management to more fully consider the downside consequences of its actions, to the benefit of the institution and the stability of the system as a whole. 

Q.2. Your testimony calls into question claims that higher capital 

requirements will adversely affect economic growth. If higher capital requirements had been in effect before the crisis, what effect 

do you think that would have had on the number of institutions 

that failed? 

A.2. At the height of the crisis, the large financial companies that 

make up the core of our financial system proved to have too little 

capital to maintain market confidence in their solvency. Thin levels 

of capital exacerbated the limited tools policymakers had to deal 

with several large, complex U.S. financial companies at the center 

of the 2008 crisis when they became nonviable. 

With respect to banks that failed during the crisis, failures were 

highest in certain areas of the country that were hardest hit by the 

collapse of the real estate market, such as the southern States of 

Florida and Georgia, the Great Lakes Region, and along the Pacific 

Coast. Many of these banks had other risk factors, such as high 

concentrations in construction loans and other higher-risk types of 

real estate loans, heavy reliance on noncore funding dependence, 

and poor underwriting and risk management practices, among others. However, even when operating in difficult markets, many 

banks survived because they took steps to mitigate risks, for example, by not engaging in lax underwriting or credit practices and by 

maintaining sufficient capital to absorb losses or successfully recapitalizing when market conditions changed. 

Q.3. One of the Council’s purposes is to monitor systemic risk and 

alert Congress and regulators of any systemic risks it discovers. 

What are the most serious systemic risks presently facing the U.S. 

economy? 

A.3. From the FDIC’s perspective, the most important systemic 

risks and emerging threats to our financial system at the present 

time involve excessive reliance on debt and financial leverage, continued lack of market discipline due to perceptions of ‘‘too big to 

fail,’’ lingering problems in mortgage servicing, and interest rate 
88 

risk. My written statement to the Committee describes these areas 

more fully, along with the steps being taken to address them. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED 

FROM SHEILA C. BAIR 

Q.1. At your speech at the Chicago FRB conference, you offered 

some interesting ways forward on the designation of nonbank financial institutions (SIFI). In that speech, you noted that the resolvability of the non-bank financial firm should be the ultimate 

deciding factor in the designation process. That approach seems 

logical—can you elaborate on how it would work? 

A.1. SIFIs will be subject to heightened supervision and higher 

capital requirements. They also will be required to maintain resolution plans and could be required to restructure their operations if 

they cannot demonstrate that they are resolvable. We believe that 

the ability of an institution to be resolved in a bankruptcy process 

without systemic impact should be a key consideration in designating a firm as a SIFI. Further, we believe that the concept of resolvability is consistent with several of the statutory factors that 

the FSOC is required to consider in designating a firm as systemic, 

those being size, interconnectedness, lack of substitutes, and leverage. If an institution can reliably be deemed resolvable in bankruptcy by the regulators, and operates within the confines of the 

leverage requirements established by bank regulators, then it 

should not be designated as a SIFI. 

The approach of using resolvability as the deciding factor in the 

SIFI designation process seems relatively straightforward. However, we are concerned with the lack of information we might have 

about potential SIFIs that may impede our ability to make an accurate determination of resolvability before the fact. This potential 

blind spot in the designation process raises the specter of a ‘‘deathbed designation’’ of a SIFI, whereby the FDIC would be required 

to resolve the firm under a Title II resolution without the benefit 

of a resolution plan or the ability to conduct advance planning, 

both of which are critical to an orderly resolution. This situation, 

which would put the resolution authority in the worst possible position, should be avoided at all costs. 

Thus, we need to be able to collect detailed information on a limited number of potential SIFIs as part of the designation process. 

We should provide the industry with some clarity about which 

firms will be expected to provide the FSOC with this additional information, using simple and transparent metrics such as firm size, 

similar to the approach used for bank holding companies under the 

Dodd-Frank Act. This should reduce some of the mystery surrounding the process and should eliminate any market concern 

about which firms the FSOC has under its review. In addition, no 

one should jump to the conclusion that by asking for additional information, the FSOC has preordained a firm to be ‘‘systemic.’’ It is 

likely that after we gather additional information and learn more 

about these firms, relatively few of them will be viewed as systemic, especially if the firms can demonstrate their resolvability in 

bankruptcy at this stage of the process. 
89 

Q.2. The interaction of global capital requirements (Basel III) and 

U.S. requirements (FSOC) could result in different criteria being 

applied to the same financial institution. For example, an institution could be deemed systemically important to the global financial 

system but not to the financial system in the United States. How 

is this being addressed? Does this pose any unique risks? 

A.2. Per the Dodd-Frank Act, all bank holding companies operating 

in the United States with $50 billion or more in assets have been 

deemed systemically important and thus subject to enhanced supervision and prudential supervision, including risk-based capital 

requirements. The asset threshold for globally systemically important banks (G–SIBs) set by the Basel Committee will likely be 

many times higher than that set by the Dodd-Frank Act. Therefore, 

it is unlikely that a U.S. bank holding company designated as G– 

SIB by the Basel Committee would not also be systemically important in the United States. 

As members of the Basel Committee, the U.S. banking agencies 

are actively participating in the Committee’s designation of G–SIBs 

and determining the capital surcharge that will be imposed. At the 

same time, in the United States, the FDIC and our fellow FSOC 

members are addressing any issues and potential risks as they 

arise to ensure both approaches are complementary. Finally, the 

implementation of both the Basel proposals for G–SIBs and the 

U.S. approach for systemically important bank holding companies 

will be subject to the U.S. notice and comment rulemaking process. 

Q.3. A number of commentators and academics have asserted that 

Basel III capital requirements are too low. For example, a recent 

Stanford University study (Admati et al, published in March 2011) 

stated that ‘‘equity capital ratios significantly higher than 10 percent of un-weighted assets should be seriously considered.’’ It also 

noted that ‘‘bank equity is not socially expensive’’ and ‘‘better capitalized banks suffer from fewer distortions in lending decisions 

and would perform better.’’ In addition, Switzerland has adopted 

capital ratios for its banks in excess of Basel III. What are the 

strengths and weaknesses of capital adequacy ratios in excess of 

those considered under Basel III? (Adinanti, DeMarzo, Hellwig, 

Pfleiderer, ‘‘Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is not Expensive.’’ 

Stanford Graduate School of Business Research Paper No. 2065, 

March 2011.) 

A.3. The FDIC agrees that strong, uniform capital requirements 

are an essential element of a stable banking system. The first and 

most obvious reason is that banking and financial crises have devastating effects on economic growth and job creation. Maintaining 

strong capital levels consistent with a safe-and-sound banking system both promotes long-term economic growth and makes bank 

lending less procyclical. 

The rapid depletion of capital in the early stages of the crisis 

contributed to a massive deleveraging in banks and other financial 

intermediaries. Loans and leases held by FDIC-insured institutions 

have declined by nearly $750 billion from peak levels, while unused 

loan commitments have declined by $2.5 trillion. Trillions more in 

capital flows were lost with the collapse of the securitization mar-
90 

ket and other ‘‘shadow’’ providers of credit. A similar pattern has 

been observed following previous financial crises around the world. 

Some observers, especially those representing banks, have expressed concern that higher capital requirements will curtail credit 

availability and hurt economic growth. However, the consensus of 

recent academic literature, including the March 2011 studies by 

Admati et al, is that increases in capital requirements, within the 

ranges currently being discussed, have a net positive effect on longterm economic growth. The reason for this conclusion is that the 

costs of banking crises for economic growth are severe, as outlined 

in my written testimony, so that reducing their frequency and severity is highly beneficial. On the other hand, the literature suggests the cost of higher capital requirements in terms of lost economic output is modest. 

Arguments that balance sheet constraints associated with higher 

capital requirements reduce banks’ ability to lend typically assume, 

explicitly or implicitly, that banks simply cannot raise new capital. 

Thus, according to this argument, the industry’s fixed dollar 

amount of capital can support less lending the higher the capital 

requirement. But it is the FDIC’s experience that most banks can 

and do raise capital when needed, often even banks in extreme financial difficulties. 

As I have testified previously, I was disappointed the Basel Committee did not propose somewhat higher capital requirements than 

were contained in the Basel III paper published in December 2010. 

I had hoped for a total common equity requirement across all 

banks of 8 percent, but the Committee agreed on 7 percent—a 4.5 

percent minimum plus a 2.5 percent capital conservation buffer, all 

comprised of common equity. Nonetheless, that is a significant improvement over the pre-crisis requirement of what was effectively 

2 percent common equity. 

Now the Basel Committee is working on an additional capital 

surcharge for globally systemically important banking organizations (G–SIBs). Switzerland has adopted an additional capital surcharge for their largest banks additional common equity and a requirement for contingent capital in addition to the additional common equity. The additional common equity Switzerland is requiring 

for its largest banks may prove to be in line with the Basel requirements for G–SIBs. 

Finally, although the focus has been on the risk-based capital ratios, the Basel Committee has taken the important step of proposing an international leverage ratio as a backstop for the riskbased capital ratios. A major shortcoming of the Basel II regime 

(the advanced approaches) is that it allowed large banks to use 

their own models to steadily reduce their capital requirements, 

while their leverage increased. The leverage ratio is an essential 

part of a strong regulatory capital framework. 

Q.4. In March, Bloomberg noted that 77 percent of the banking assets are held by the nation’s ten largest banks—with 35 banks 

holding assets of $50 billion or more. In February, Moody’s granted 

higher ratings to eight large U.S. banks because of an expectation 

of future Government support—implicitly suggesting that risky behavior by large banks would be more tolerated, and they would be 
91 

insulated from failure. Has systemic risk increased after the financial crisis? Why or why not? How is this being addressed? 

A.4. While banks and other financial companies continue to address elevated levels of problem assets and cope with refining their 

business plans during what has been a sluggish recovery, overall, 

bank balance sheets and the financial system as a whole are healing slowly. In the wake of the recent crisis, the FDIC and other 

regulators are working to implement an updated statutory mandate under the Dodd-Frank Act to reduce systemic risk by improving the resilience of our financial system. 

As described more fully in my written statement, several large, 

complex U.S. financial companies at the center of the 2008 crisis 

could not be wound down in an orderly manner when they became 

nonviable, which resulted in a terrible dilemma for policymakers: 

bail out these firms or expose the financial system to destabilizing 

liquidations through the normal bankruptcy process. While necessary, there is genuine alarm about the immense scale and seemingly indiscriminate nature of the Government assistance provided 

to large banks and nonbank financial companies during the crisis, 

and what effects these actions will have on the competitive landscape in banking. 

Nevertheless, the ‘‘uplift’’ in ratings for large financial institutions suggests that despite having recently seen the nation’s largest 

financial institutions receive hundreds of billions of dollars in taxpayer assistance, the market appears to believe that they are ‘‘too 

big to fail,’’ although rating agencies have recently indicated a reassessment of the likelihood of Federal support. Under a regime of 

‘‘too big to fail,’’ the largest U.S. banks and other financial companies have every incentive to render themselves so large, so complex, and so opaque that no policymaker would dare risk letting 

them fail in a crisis. With the benefit of this implicit safety net, 

these institutions have been insulated from the normal discipline 

of the marketplace that applies to smaller banks and practically 

every other private company. 

A major improvement in reducing systemic risk and restoring 

market discipline for large financial companies, and one that, in 

my opinion, has been somewhat underestimated by the skeptics, is 

the requirement for SIFI resolution plans. When a large, complex 

financial institution gets into trouble, time is the enemy. The larger, more complex, and more interconnected a financial company is, 

the longer it takes to assemble a full and accurate picture of its operations and to develop a resolution strategy. By requiring detailed 

resolution plans in advance, and authorizing an onsite FDIC team 

to conduct pre-resolution planning, the SIFI resolution framework 

regains the ability to gather information that was lacking in the 

crisis of 2008. 

The large financial companies that collapsed during the crisis 

(and many other companies today) maintained thousands of subsidiaries and managed their activities within business lines that 

cross many different organizational structures and regulatory jurisdictions. This can make it very difficult to implement an orderly 

resolution of one part of the company without triggering a costly 

collapse of the entire company. To solve this problem, the FDIC 

and the Federal Reserve must define high informational standards 
92 

for resolution plans and be willing to insist on organizational 

changes where necessary in order to ensure that large financial 

companies meet the standard of resolvability well before a crisis occurs. Unless these structures are rationalized and simplified in advance, there is a real danger that their complexity could make a 

large financial company resolution far more costly and more difficult than it needs to be. 

RESPONSE TO WRITTEN QUESTION OF SENATOR HAGAN 

FROM SHEILA C. BAIR 

Q.1. Chairwoman Bair, inherent in any discussion of capital levels 

is a tradeoff between economic growth and the possibility of disruptive bank failures. With high unemployment, sluggish output, and 

extraordinary monetary policy in many developed countries, the 

economic impact of higher capital levels requires special attention. 

It is my understanding that the Basel Committee on Banking 

Supervision and the Financial Stability Board are considering a 

further increase in capital requirements for Systemically Important 

Financial Institutions, including the possibility of as much as 300 

basis points on firms deemed to be systemically important on a 

global basis. 

One of the costs traditionally associated with a bank failure is 

the loss of proprietary information and knowledge at the institution. This is one argument for higher capital requirements. With 

the robust resolution mechanisms in place in the United States, 

should domestic banks face equal capital charges as institutions in 

jurisdictions with less robust resolution frameworks? 

A.1. A robust resolution framework, combined with resolution 

plans for large bank holding companies and SIFIs, can mitigate the 

impact on the financial system of the failure of a large, complex, 

and interconnected financial company. Even more importantly, we 

need a robust cross-border resolution framework internationally 

that harmonizes national resolution laws and processes. While 

there is much to be done internationally, we are making progress— 

there are new statutory regimes in Germany, the United Kingdom, 

and of course in the United States. 

To spur the development of robust resolution frameworks internationally, the Basel Committee’s consultative paper on the capital 

surcharge on systemically important banks includes the understanding that a country can add an additional 1 percent common 

equity requirement if the banking organization does not have an 

acceptable resolution and recovery plan This additional 1 percent 

would be on top of the 2.5 percent capital surcharge for globally 

systemically important banks, all of which will be filled with common equity. The Basel Committee and the Governors and Heads of 

Supervision agreed that there was too much uncertainty about contingent capital and bail-in debt to consider these hybrid capital instruments as loss absorbing capital for the capital surcharge. (The 

consultative paper on the capital surcharge for systemically important banks should be published in mid-July 2011.) 
93 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM SHEILA C. BAIR 

Q.1. According to the American Banker, Annette L. Nazareth, a 

former SEC Commissioner, called the timetables imposed by the 

Dodd-Frank Act ‘‘wildly aggressive.’’ ‘‘These agencies were dealt a 

very bad hand,’’ she said. ‘‘These deadlines could actually be systemic-risk raising.’’ Given the importance of rigorous cost-benefit 

and economic impact analyses and the need for the consideration 

of public comments, would additional time or adoption of the DoddFrank Act rules improve your rulemaking process and the substance of your final rules? 

Chairman Bair’s testimony was unclear regarding whether the 

FSOC has the Authority to issue a revised rule on the designation 

of nonbank financial institutions. She and others indicated some 

type of guidance might be issued instead. Is it in fact the case, in 

general, that the FSOC does not have authority to issue rules 

under Title I that have the force and effect of law? If the FSOC 

has the authority in general to issue such rules on designation, 

why specifically would the FSOC be precluded from re-proposing a 

rule that is currently pending? Is there additional authority the 

FSOC would need from Congress to issue such rules or to proceed 

with reproposing its NPR on designation? If yes, what specific authority would the FSOC need from Congress for the FSOC to have 

the ability to proceed? 

In an August speech at NYU’s Stern School of Business, Treasury Secretary Geithner outlined six principles that he said would 

guide implementation, and then he added, ‘‘You should hold us accountable for honoring them.’’ His final principle was bringing 

more order and integration to the regulatory process. He said the 

agencies responsible for reforms will have to work ‘‘together, not 

against each other. ‘‘This requires us to look carefully at the overall 

interaction of regulations designed by different regulators and assess the overall burden they present relative to the benefits they 

offer.’’ Do you intend to follow through with this commitment with 

some form of status report that provides a quantitative and qualitative review of the overall interaction of all the hundreds of proposed rules by the different regulators and assess the overall burden they present relative to the benefits they offer? 

A.1. The FDIC is actively engaged in striving to meet the mandated timeframes for the interagency rulemakings set forth in the 

Dodd-Frank Act. With respect to questions about the FSOC’s authority to issue regulations, the FDIC defers to the Treasury Secretary’s legal counsel. The FSOC issued an ANPR and NPR describing the processes and procedures that will inform the FSOC’s 

designation of SIFIs. Concerns have been raised about the lack of 

detail and clarity regarding the designation process, and the FDIC 

agrees that it is important that the FSOC seek further comment 

on its plans for designating firms and provide additional specificity, 

both qualitative and quantitative, that the Council expects to employ when making SIFI designations. 

One of the purposes of the FSOC is to facilitate regulatory coordination and information sharing regarding policy development, 

rulemaking, supervisory information, and reporting requirements. 

The FDIC and other financial regulators have had a longstanding 
94 

practice of information sharing, but the FDIC believes that the 

FSOC has provided more order and integration to that process. 

The FDIC assesses the costs or burden versus the benefits of its 

rulemakings in the normal course of our business. Many of our regulations are required by statute and/or are aimed at protecting the 

Deposit Insurance Fund. That being said, the FDIC has had a longstanding policy to ensure that the rules it adopts are the least burdensome to achieve those goals. The FDIC’s policy recognizes our 

commitment to minimizing regulatory burdens on the public and 

the banking industry and the need to ensure that our regulations 

and policies achieve legislative and safety and soundness goals effectively. 

The FDIC also follows express statutory requirements that mandate consideration of the economic and other effects of proposed 

rules, such as the Regulatory Flexibility Act (effect on small entities), the Paperwork Reduction Act, the Congressional Review Act, 

and the Federal Deposit Insurance Act (for example, in connection 

with assessments). The FDIC is fully prepared to cooperate with 

the Treasury Secretary, in the capacity as FSOC Chairman, if he 

decides to prepare an integrated status report of rulemaking cost 

benefit analyses across the FSOC agencies. 

As you know, the FDIC’s Office of Inspector General recently provided a review, at the request of you and some of your colleagues 

on the Senate Banking Committee, on the FDIC’s economic analysis performed in three specific rulemakings. The FDIC OIG reported that, in all three cases, the FDIC performed quantitative 

analysis of relevant data, considered alternative approaches to the 

extent allowed by the legislation, requested comments from the 

public on numerous facets of the rules, and included information 

about the analysis that was conducted and the assumptions that 

were used in the text of he proposed rule. In addition, the report 

notes that the FDIC is also considering the cumulative burden of 

all Dodd-Frank Act rulemakings. 

Q.2. On April 12, 2011, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, 

the Farm Credit Administration, and the Office of the Comptroller 

of the currency published proposed rules governing margin and 

capital requirements applicable to covered swap entities that are 

banks. The proposed rules appear (i) to require those covered swap 

entities to collect margin from nonfinancial end-users that exceed 

margin thresholds, and (ii) to specify that such margin be in the 

form of cash or cash equivalents only. Is this proposal consistent 

with section 731 of the Dodd-Frank Act which specifically provides 

that prudential regulators ‘‘shall permit the use of noncash collateral, as the regulator . . . determines to be consistent with . . . 

preserving the financial integrity of markets trading swaps; and 

. . . preserving the stability of the United States financial system’’? 

A.2. For swap dealers, major swap participants, and financial endusers, the Agencies were cautious in the proposed rule with respect 

to the allowable types of noncash collateral; limiting such collateral 

to only certain types of highly liquid, high-quality debt securities. 

The Agencies’ are concerned about the procyclicality associated 

with other forms of collateral. That is, during a period of financial 
95 

stress, the value of non-cash collateral pledged as margin is more 

likely also to come under stress just as counterparties default and 

the noncash collateral is required to offset the cost of replacing defaulted swap positions. However, the Agencies are mindful of the 

need to fully consider other forms of noncash collateral and have 

included in the NPR a request for comment on whether the Agencies should broaden the list of acceptable noncash collateral and, if 

so, what haircut should be applied to such collateral. 

The Agencies noted in the NPR that even without expanding the 

list of acceptable collateral, counterparties that wish to rely on 

other noncash assets to meet margin requirements could pledge 

those assets with a bank or group of banks in a separate arrangement, such as a secured financing facility, and could draw cash 

from that arrangement to meet margin requirements. For non-financial end-users, who are the most likely type of counterparty to 

wish to post noncash collateral, the proposed rule provides credit 

exposure thresholds, under which a covered swap entity may determine the extent to which available noncash collateral appropriately 

reduces the covered swap entity’scredit risk, consistent with its 

credit underwriting expertise. As such, commercial end-users will 

likely find that they will be able to continue to post the same forms 

of noncash collateral as they currently post. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORKER 

FROM SHEILA C. BAIR 

Q.1. Your institutions have been assigned the task of macro prudential risk oversight. Specifically, the Dodd-Frank Act tasked the 

FSOC with ‘‘identifying risks to the financial stability that could 

arise from the material financial distress or failure of large interconnected bank holding companies or nonbank financial companies.’’ As you know nearly all banks carry U.S. Treasury bills, 

notes, and bonds on their balance sheet with no capital against 

them. They are deemed, both implicitly and explicitly, as risk free. 

But with a $14 trillion debt, no one can guarantee that the bond 

market will continue to finance U.S. securities at affordable rates. 

What steps have you taken to ensure that systemically important 

financial institutions could withstand a material disruption in the 

U.S. Treasury market from an event such as a major tail at an auction, the liquidation of securities by a major investor such as a foreign central bank, concerns that the United States will attempt to 

inflate its way out of its debt obligations, an outright debt downgrade by a major rating agency, or market concern over the prospects for a technical default? What impact would an event such as 

the loss of market confidence in U.S. debt and subsequent increase 

in U.S. borrowing rates have on the institutions in your purview? 

And what steps can you take to ensure that the balance sheets of 

systemically important institutions could withstand such an event 

and that such an event would not lead to a systemic crisis similar 

to or worse than that experienced in 2008? 

A.1. Financial institutions as well as other investors have significant holdings in U.S. Government-related debt, so material events 

related to these investments could have a substantial credit impact 

on these firms. Moreover, as more fully described in response to 
96 

question 2 below, the loss of confidence in U.S. debt could create 

sudden volatility in interest rates, which could prove challenging to 

bank and bank-holding company revenue streams. These firms are 

in a substantially better position with regard to capital and liquidity to withstand stress than they were in 2008; however, depending 

on the length and depth of an event such as described, this would 

have a significant adverse impact on their operations. 

The largest banks and bank-holding companies are generally supervised by the Office of the Comptroller of the Currency and the 

Board of Governors of the Federal Reserve System (Federal Reserve). Nevertheless, in the normal course, the FDIC works with 

these agencies to evaluate the level of capital and liquidity they 

hold relative to specific asset classes and their overall risk structure and to evaluate these firms’ ability to withstand stress events. 

Going forward, Section 165 of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (Dodd-Frank Act) requires stress testing by the regulators and the firms themselves, for large banking 

organizations and systemically important nonbank financial institutions (SIFIs) supervised by the Federal Reserve. 

Additionally, just last week, Federal banking regulators issued 

supervisory guidance for comment to outline broad principles for a 

satisfactory stress testing framework and how stress testing can be 

employed as an important component of risk management. 

Q.2. What other major systemic risks are you currently most concerned about? What steps are you taking to address these? 

A.2. The primary purpose of the Financial Stability Oversight 

Council (FSOC) is to identify risks to financial stability, respond to 

emerging threats in the system, and promote market discipline. 

From the FDIC’s perspective, the most important systemic risks 

and emerging threats to our financial system at the present time 

involve excessive reliance on debt and financial leverage, continued 

lack of market discipline due to perceptions of ‘‘too big to fail,’’ lingering problems in mortgage servicing, and interest rate risk. My 

written statement to the Committee describes these areas more 

fully, along with the steps being taken to address them. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM SHEILA C. BAIR 

Q.1. Dodd-Frank set forth a comprehensive list of factors that 

FSOC must consider when determining whether a company posed 

a systemic risk and deserves Fed oversight. The council, in its advanced notice of proposed rulemaking, sets forth 15 categories of 

questions for the industry to comment on and address. However, 

the proposed rules give no indication of the specific criteria or 

framework that the council intends to use in making SIFI designations—other than what is already set forth in Dodd-Frank. As a result, potential SIFIs have no idea where they may stand in the designation process. Will the council provide additional information 

about the quantitative metrics it will use when making a SIFI designation? 

A.1. The FSOC issued an ANPR and NPR describing the processes 

and procedures that will inform the FSOC’s designation of SIFIs 
97 

under the Dodd-Frank Act. Concerns have been raised about the 

lack of detail and clarity regarding the designation process in the 

ANPR and NPR. The FDIC agrees that it is important that the 

FSOC move forward and develop some hard metrics to guide the 

SIFI designation process. The FSOC is in the process of developing 

further clarification of the metrics for comment that will provide 

more specificity as to the measures and approaches being considered. 

Q.2. Would the council agree that leverage is likely to be the one 

factor that is most likely to create conditions that result in systemic risk? If so, how will the council go about identifying which 

entities use leverage? 

A.2. The FDIC does not speak for the FSOC as a whole, but from 

the FDIC’s perspective, excessive reliance on debt and financial leverage is currently one of the most important systemic risks and 

emerging threats to our financial system, along with continued lack 

of market discipline due to perceptions of ‘‘too big to fail,’’ lingering 

problems in mortgage servicing, and interest rate risk. My written 

statement to the Committee describes these areas more fully, along 

with the steps being taken to address them. 

The Federal banking agencies that are members of FSOC closely 

monitor leverage in the banking system through the normal supervision process. Also, under the Dodd-Frank Act, the largest, most 

interconnected financial institutions—banks and nonbank financial 

companies—will be subject to enhanced prudential standards. Core 

elements of these enhanced standards will be strengthened capital 

and liquidity requirements. 

The FDIC believes that recent efforts to strengthen the capital 

base of our largest financial institutions are an important element 

to restraining financial leverage and enhancing the stability of our 

system. Going forward, the FSOC and its member agencies will 

need to continue to monitor and look for ways to reduce excess leverage throughout the system. 

Q.3. One of the first steps in the systemic designation process, as 

outlined in the proposed rule, is that after identifying a nonbank 

financial company for possible designation the FSOC will provide 

the company with a written preliminary notice that the council is 

considering making proposed determination that the company is 

systemically significant. Is receipt of such a notice a material event 

that might affect the financial situation or the value of a company’s 

shares in the mind of the investors? If so, wouldn’t it need to be 

disclosed to investors under securities laws? 

A.3. The FSOC is responsible for designating nonbank SIFIs. A 

company designated as a SIFI will continue to be required to comply with other applicable laws, such as the securities laws, which 

require certain public disclosures. The FDIC does not administer 

securities laws and thus defers to the Securities and Exchange 

Commission on questions regarding a public company’s disclosure 

requirements under U.S. securities laws. 

While a preliminary notice from the FSOC could be significant 

for a company, in many cases the market may already have anticipated such a designation with respect to the value of a company’s 

shares. 
98 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM SHEILA C. BAIR 

Q.1. Last week, Chairman Bernanke indicated that bank holding 

companies larger than $50 billion, designated as systemically significant by the Dodd-Frank Act, will be treated on a tiered scale 

when you establish enhanced supervisory standards. These institutions range from relatively basic commercial banks not much larger 

than the $50 billion to more complex and interdependent global financial firms that are up to 40 times the threshold. Do you expect 

the tiered standards to be based on a firm’s asset size or on factors 

more directly related to financial system risk, such as complexity 

of a firm’s businesses, its funding sources and liquidity, its importance to the daily functioning of the capital markets and its interconnectedness to other financial firms? 

A.1. The tiered standards mentioned in the question relate to the 

way the Federal Reserve will apply heightened prudential standards to bank holding companies as the primary Federal regulator 

of these companies. The FDIC will be dealing with these firms from 

a resolution perspective, and their resolution plans will reflect the 

complexity of their operations. While there will not be any formal 

tiering of plan review and monitoring at this point, there are some 

natural breaks in the size and complexity of the firms. The larger 

more complex and interdependent global financial firms’ resolution 

plans will be very large and will require substantial resources to 

analyze and monitor. They are expected to cover every aspect of a 

firm’s operations so the larger the firm the more extensive the 

plan. Smaller firms will be expected to have the same comprehensive coverage of their operations; however, because of the smaller 

size and less complex nature of their operations, the firm’s plans 

will be significantly smaller and therefore take less time to analyze 

and monitor. 

Q.2. As FSOC considers how to determine the systemic relevance 

of the investment fund asset management industry, wouldn’t it be 

more appropriate for FSOC to look at the various individual funds 

themselves, of which there may be several under one advisor, rather than focus on the advisor entity? 

• Isn’t it true that each of those funds may operate with separate and distinct investment strategies, each with its own 

unique risks? 

• Isn’t it the case that the vast majority of the assets are located 

at the funds and not at the adviser (sic) entity? 

A.2. In March, the FSOC reviewed broad risks in the structure of 

a particular type of mutual fund, money market mutual funds 

(MMMFs), SEC regulatory actions to address these risks, and the 

additional risk-constraining options presented in the President’s 

Working Group on Financial Markets’ (PWG) report on MMMFs. 

As described in the PWG report, MMMFs can be a risk transmission mechanism for the financial system. For example, the September 2008 run on money market funds, which began after the 

failure of Lehman Brothers, caused significant capital losses at a 

large MMMF. Amid broad concerns about the safety of MMMFs 

and other financial institutions, investors rapidly redeemed MMMF 
99 

shares, and the cash needs of MMMFs exacerbated strains in 

short-term funding markets. 

These strains, in turn, threatened the broader economy, as firms 

and institutions dependent upon those markets for short-term financing found credit increasingly difficult to obtain. Forceful Government action was taken to stop the run, restore investor confidence, and prevent the development of an even more severe recession. Even so, short-term funding markets remained disrupted for 

some time. Last month, the FDIC participated with other FSOC 

members in an SEC-sponsored roundtable with interested stakeholders to discuss reform options further. 

While the FSOC has considered broad systemic risks related to 

MMMFs, the thrust of the question above appears to relate to 

whether and how the FSOC would designate mutual funds and/or 

their advisors as SIFIs. The SEC is the primary regulator of mutual funds, and we cannot dispute the statements above about the 

operations of mutual funds. Nevertheless, the process of designating which SIFIs will be subject to heightened supervision by the 

Federal Reserve under Title I of the Dodd-Frank Act is not yet 

complete. Therefore, it is still uncertain which entities will receive 

a SIFI designation. 

In determining the appropriate way to designate SIFIs, the FDIC 

is focused on getting the metrics right rather than identifying specific types of entities for designation. Importantly, and as described 

more fully above, the FDIC believes that the ability of an entity to 

be resolved in bankruptcy without systemic impact should be a key 

consideration in the SIFI designation process. 

Q.3. What additional protection/supervision could the Fed provide 

for mutual funds that the SEC isn’t already providing? Do we really need to subject this industry to an additional layer of regulation, 

especially a ‘‘systemic risk’’ regulation? 

A.3. The SEC is the primary regulator for mutual funds. As described above, the SIFI designation process is not yet complete. 

Therefore, no heighted prudential standards or capital requirements have been imposed by the Federal Reserve on any SIFI, nor 

have any additional regulations on a particular industry been proposed incident to the SIFI designation process. 

Q.4. Can you share with us what the FSOC, OFR, FDIC and Fed 

are contemplating by way of fees that they may assess on SIFIs? 

A.4. Section 155(d) of the Dodd-Frank Act requires the Treasury 

Secretary, beginning 2 years after enactment, to establish, by regulation, an assessment schedule applicable to bank holding companies with total consolidated assets of $50 billion or greater and 

nonbank financial holding companies supervised by the Federal Reserve to collect assessments equal to the total expenses of the Office of Financial Research (OFR). The FDIC is not aware of any 

proposed rule by the Treasury Secretary in this regard. The FDIC 

is not contemplating assessing fees on SIFIs and is not aware of 

any plans by FSOC to assess such fees. 

International Competitiveness 

Q.5. It is critical for the continued competitiveness of the U.S. markets that a regulatory arbitrage does not develop among markets 
100 

that favors markets in Europe and Asia over U.S. markets. Will 

the FSOC commit to ensuring that the timing of the finalization 

and implementation of rulemaking under Dodd Frank does not impair the competitiveness of U.S. markets? 

How will FSOC ensure that U.S. firms will have equal access to 

European markets as European firms will have to U.S. markets? 

A.5. The FSOC’s statutory duties under section 112(a)(2) of the 

Dodd-Frank Act include monitoring domestic and international regulatory proposals and developments and advising Congress and 

making recommendations in such areas that will enhance the competitiveness of U.S. financial markets as well as the integrity, efficiency, and stability of such markets. Also, under section 752 of the 

Dodd-Frank Act, the CFTC, the SEC, and the prudential regulators 

are required to consult and coordinate with foreign regulatory authorities on establishing consistent international standards with respect to the regulation of covered derivatives. 

Consistent standards will ensure equal access to all markets. The 

FDIC, however, would not support weak standards in order to be 

consistent with lower standards adopted by a foreign jurisdiction. 

With respect to timing, the prudential regulators, the CFTC, and 

the SEC have primary authority to address the effective date of derivatives reform regulations and are able to take international coordination into account. 

Q.6. How will FSOC ensure that Basel III will be implemented in 

the United States in a manner that is not more stringent than in 

Europe, making U.S. firms less competitive globally? 

A.6. International consistency in capital requirements is a worthy 

goal. We must, however, guard against pursuing the competitiveness of U.S. firms in a way that compromises their safety-andsoundness and the stability of our banking system. The cost of financial crises for the real economy is severe, and we need to pursue the changes in capital regulation needed to prevent a recurrence. 

The Federal banking agencies will have primary responsibility 

for implementing the Basel III capital and liquidity standards. 

Within the Basel Committee we have worked to ensure as level a 

playing field as possible for U.S. banking organizations, not only in 

Europe but across the rest of the global financial system. In seeking to restore the resilience of the international financial system, 

we have allied ourselves with those Basel Committee members 

seeking strong capital and liquidity standards. However, as always 

in the international arena, certain countries believe the Basel III 

capital and liquidity standards are too stringent. Of necessity, 

Basel III is a compromise. Even so, Basel III goes a long way toward addressing the weaknesses in the regulatory capital framework exposed by the financial crisis. 

The Basel capital standards always have been stated minimums 

and, in the United States, we consistently have had higher standards than Basel required (and many other Basel member countries 

are in the same situation). For example, the Basel I and Basel II 

minimum capital requirements were 4 percent tier 1 and 8 percent 

total risk-based capital ratios. However, in the United States, to be 

well capitalized a bank must have 6 percent tier 1 and 10 percent 
101 

total risk-based capital ratios. When Basel II was introduced in the 

United States, we set higher floors over a longer period to ensure 

that regulatory capital at the largest internationally active U.S. 

banks would not decline precipitously. Currently, we also are one 

of the few countries to have a leverage ratio that complements our 

risk-based capital requirements. We believe our higher capital requirements strengthen our banks and support their international 

competitiveness. However, we are aware that implementation of 

capital requirements across a number of Basel member countries 

is not as rigorous as in the United States, and we continually monitor this as part of our normal supervisory process and through the 

Basel Committee. 

RESPONSE TO WRITTEN QUESTION OF SENATOR KIRK 

FROM SHEILA C. BAIR 

Q.1. Much about SIFI designation focuses on ‘‘too big to fail’’ institutions. What about financial management practices that can 

weaken a number of smaller players in an industry? What can 

FSOC do to encourage best practices of asset/liability management, 

or assure the proper allocation of capital that reflects the risk underlying assets held? 

A.1. The primary purpose of the FSOC is to identify risks to financial stability, respond to emerging threats in the system, and promote market discipline. The statutory language of the Dodd-Frank 

Act in Section 112 addresses these responsibilities largely in terms 

of large interconnected bank holding companies and SIFIs because 

they can pose significant risks to the financial stability of the 

United States, as demonstrated in the recent crisis. 

However, as the primary Federal supervisor for most community 

banks in the United States, the FDIC is keenly aware of their importance in our financial system. Community banks provide credit, 

depository, and other financial services to consumers and businesses on main street, and are playing a vital economic role as cities and towns recover from the recession. As the FSOC discusses 

and issues recommendations regarding broad issues and best practices, including those described above, they should consider effects 

on all players in the financial system, large and small. In my capacity as an FSOC voting member and in the FDIC’s role as a community bank supervisor, I am particularly focused on ensuring that 

the Council considers community banks and the communities they 

serve in its deliberations. 

RESPONSE TO WRITTEN QUESTION OF SENATOR SHELBY 

FROM JOHN WALSH 

Q.1. One of the Council’s purposes is to monitor systemic risk and 

alert Congress and regulators of any systemic risks it discovers. 

What are the most serious systemic risks presently facing the U.S. 

economy? 

A.1. The potential loss of investor confidence in U.S. debt and the 

impact such a loss would have on interest rates and the overall 

economy, is a serious concern that we are monitoring closely. While 

current Treasury yields and implied volatilities remain relatively 
102 

low, suggesting continued market confidence, I share the views of 

many others that over the long term our nation’s current fiscal imbalance is not sustainable and must be addressed. More generally, 

we are concerned that the prolonged low interest rate environment 

has created incentives for banks and other investors to take on significant levels of interest rate risk. In response, the OCC and other 

U.S. banking agencies have been emphasizing the need for bankers 

to improve their interest rate risk management systems. 

As the economy begins to recover, we are seeing some signs of 

weakening underwriting standards, especially in the leveraged loan 

markets. While our recent annual underwriting survey did not indicate that standards have weakened systematically across lending 

products, we are concerned that banks not return to the lax underwriting practices that became widespread prior to the crisis. When 

we released our survey results, we cautioned national banks on the 

need to maintain prudent underwriting standards. The agencies’ 

Shared National Credit review, currently underway, will be another key window in helping us to evaluate the current quality of 

banks’ large credit portfolios and whether additional action is needed. 

The housing sector continues to be an area that poses substantial 

risk to the overall economy and many banks’ credit portfolios. 

While there are many factors affecting this market, the overhang 

of distressed properties that need to be resolved is certainly one of 

them. The action taken against the mortgage servicers under our 

jurisdiction to fix their servicing and mortgage foreclosure processing problems should help unblock the system. More broadly, we 

continue to closely monitor trends in mortgage loan portfolios, including mortgage modifications, through our comprehensive Mortgage Metrics database and reports. 

Through the FSOC’s systemic risk committee, we continue to 

monitor a number of other potential risk areas including the European debt situation, continued vulnerabilities in short-term funding 

markets, and concentrations within the financial sector. 

Finally, as noted in recent remarks before the Housing Policy 

Council of The Financial Services Roundtable, I agree with others 

that the sheer volume and magnitude of regulatory changes forthcoming under the Dodd-Frank Act and Basel III reforms has created uncertainty as supervisors and market participants attempt to 

digest and assess the cumulative impact that these changes may 

have on markets and business models. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED 

FROM JOHN WALSH 

Q.1.a. The Interagency Review of Foreclosure Policies and Practices notes that about 2,800 borrower foreclosure files in various 

stages of foreclosure were reviewed. 

The second footnote in The Interagency Review of Foreclosure 

Policies and Practices briefly explains how these files were selected, 

but please describe, with as much detail as possible, the sampling 

methodology and the population from which the samples were selected. What attributes were selected for testing? Please provide 

the deviations that were found. We would be particularly interested 
103 

in what factors affected ‘‘examiner judgment’’ in the selection of 

these files. 

A.1.a. The file review sample was judgmentally selected to include 

loans from all States where the servicer had foreclosure activity— 

both judicial as well as non-judicial States. In selecting file samples, examiners gave consideration to States with the highest foreclosure activity and those where internal self assessments noted 

issues or concerns. Examiners also considered complaints filed with 

the OCC. 

Q.1.b. How is the OCC confident that these 2,800 borrower files 

constitute a statistically significant sample size? 

A.1.b. The file review was not intended to make any statistical inferences with respect to foreclosure actions. Instead, it was intended to draw and support general conclusions about servicer 

processes, including the accuracy and compliance of legal filings. 

While this was not a statistical sample, it was an objective and unbiased reflection of each servicer’s foreclosure activities. 

Q.1.c. Of these 2,800 borrower foreclosure files, how many of these 

files reflected completed foreclosures? 

A.1.c. Of the 1,697 files reviewed at the eight OCC banks, 623 

were completed foreclosure sales. 

Q.2.a. The OCC’s Consent Order requires banks to hire an independent consultant to review foreclosures from 2009 and 2010 to 

ensure that everything was done in accordance with applicable 

laws and regulations. 

What factors, if any, prevented the OCC from conducting such a 

review? 

A.2.a. The extraordinary resource demands needed to conduct foreclosure reviews of the scope that the OCC will require, make it impossible for the OCC to perform that work within any reasonable 

timeframe. In addition, the Government procurement process for 

awarding contracts directly with third parties to conduct foreclosure reviews would be lengthy and significantly delay implementation of the foreclosure reviews and restitution to any affected customers. As described below, the OCC has applied a number of 

measures to assure that the consultants are independent and conduct their work independently. 

Q.2.b. Please describe all criteria to be used by the OCC in determining that an independent consultant is acceptable to the OCC. 

Will an independent consultant be expected to have expertise in 

servicing issues? If so, how will the OCC determine that this independent consultant has sufficient expertise to qualify as an independent consultant? 

A.2.b. The OCC considers various factors concerning a consultant’s 

prior work in determining the independence of the consultant. We 

also determine if the proposed consultant has sufficient resources 

and expertise to successfully complete the review. And we have required that specific language be included in the engagement letters 

entered into between the servicer and the consultant that makes 

clear that the consultant takes direction from the OCC, not the 

servicer. 
104 

Q.2.c. Please describe the process for the OCC to review the selection of an independent consultant and, if necessary, object to the 

selection. 

A.2.c. Per the Consent Orders, the OCC must approve the independent consultant and their engagement letter that sets forth: (a) 

the methodology for conducting the foreclosure review, including: (i) 

a description of the information systems and documents to be reviewed, including the selection of criteria for cases to be reviewed; 

(ii) the criteria for evaluating the reasonableness of fees and penalties; (iii) other procedures necessary to make the required determinations (such as through interviews of employees and third parties and a process for submission and review of borrower claims 

and complaints); and (iv) any proposed sampling techniques; and 

(b) expertise and resources to be dedicated to the foreclosure review. The independence, expertise and resources of each consultant 

will be reviewed by OCC examiners in consultation with OCC Enforcement and Compliance attorneys. 

Q.2.d. What is the definition of an ‘‘independent consultant’’? What 

is considered to be independent? Would an independent public accounting firm or contractor that has previously performed auditing 

services or other services for the bank be considered independent? 

A.2.d. Consultants hired to undertake the foreclosure review must 

function as true ‘‘independent’’ parties, with no conflicting interests 

or priorities. For example, firms and/or counsel that currently, or 

have in the past represented the servicer in any manner concerning areas addressed in the Consent Orders may not meet the 

standards of independence. In addition, sample segments and sizes 

must be decided by the independent consultant and final results 

must be the product and opinion of the independent consultant, unaffected by the views of the institution or its directors or management. 

The independent consultants may retain outside counsel to provide necessary legal expertise in completing the foreclosure review. 

However, any such outside counsel must be independent of the outside counsel retained by the institution to provide legal representation to the institution with respect to the Consent Orders or legal 

advice concerning matters covered by the Consent Orders. The 

independent consultant’s work may not be subject to direction or 

influence from counsel for the institution. 

Likewise, an independent public accounting firm that has previously performed auditing services or other services for the bank 

may be independent, but only if previous work performed does not 

conflict with foreclosure review and there is a clear separation of 

duties between auditors performing the foreclosure review and 

those performing other auditing services. 

Q.2.e. Who at the Bank will be engaging the independent consultant? The Board of Directors, the CEO, the CFO, an independent 

committee, or someone else? Will the OCC be a party to the engagement letter or have any rights under the engagement letter? 

A.2.e. The OCC requires the independent consultant to be retained 

by the bank, and the OCC will not be a party to the engagement 

letters. The Board of Directors is responsible for engagement of the 
105 

independent consultant, but it may delegate authority to execute 

the engagement letter to senior management. 

Q.2.f. Will the letters of engagement be made available to the relevant Congressional Committees? If the protection of proprietary 

information is a concern, will the OCC make the necessary arrangements to share these letters with the relevant Congressional 

Committees so that Congress may conduct its oversight role? 

A.2.f. The engagement letters are confidential supervisory information. 

Q.2.g. How will the OCC ensure that the consultant’s procedures 

for the Foreclosure Review will be sufficient? 

A.2.g. OCC onsite examiners will review action plans developed by 

independent consultants including methodology for conducting foreclosure reviews. In addition, the OCC will conduct a horizontal review of all engagement letters and action plans across banks to ensure consistency in foreclosure review methodology and identify 

and address common deficiencies. Per the Orders, the engagement 

letters will set forth: (a) the methodology for conducting the foreclosure review, including: (i) a description of the information systems and documents to be reviewed, including the selection of criteria for cases to be reviewed; (ii) the criteria for evaluating the 

reasonableness of fees and penalties; (iii) other procedures necessary to make the required determinations (such as through interviews of employees and third parties and a process for submission 

and review of borrower claims and complaints); and (iv) any proposed sampling techniques; and (b) expertise and resources to be 

dedicated to the foreclosure review. Onsite examiners will maintain 

ongoing contact with the independent consultants during the review process to ensure that the action plans are appropriately implemented. 

Q.3.a. As part of this review, the consultants are supposed to determine if any errors, misrepresentations, or other deficiencies 

identified in the review resulted in financial injury to the borrower. 

Will a consistent methodology be applied to ensure that the selection criteria provides for a representative sample? If not, why not? 

How will the sampling results be considered reliable absent a statistically valid sampling methodology? 

A.3.a. On May 20, 2011, the OCC provided and discussed Foreclosure Review guidance with all institutions subject to Consent 

Orders. The Foreclosure Review guidance addressed supervisory 

expectations for the review, including the process for selecting a 

representative sample of customer cases. Certain segments of the 

population of foreclosure cases may be subject to a statistically 

valid sampling methodology to achieve the objective of the foreclosure review, while other segments may require more extensive 

or 100 percent review. The guidance is expected to be applied consistently across OCC-supervised institutions. 

Q.3.b. If sampling is used, what methodology will OCC utilize to 

provide adequate compensation to all persons that were harmed? 

A.3.b. The OCC has instructed all institutions subject to the Consent Orders that any sampling methodology must include procedures for extensive investigation of identified errors, including fur-
106 

ther ‘‘deep-dive’’ reviews as necessary, to ensure that as many similarly affected borrowers as possible are identified for appropriate 

remediation. The biggest factor in determining an appropriate remedy is to determine the actual financial harm suffered by homeowners as a result of an improper foreclosure action. The Consent 

Orders require the independent consultants to develop and submit 

for OCC approval a plan to remediate all financial injury to borrowers caused by any errors, misrepresentations, or other deficiencies identified in the Foreclosure Review Report. The identification of financial harm will be done through the foreclosure review 

by the independent consultant. Given that every case is different, 

the remedy must be specific to the details of the individual case. 

This could include reimbursing impermissible or excessive penalties, fees, or expenses, or other financial injury suffered that 

could include taking appropriate steps to remediate any improper 

foreclosure sale. Restitution will begin after the OCC has provided 

supervisory non-objection to the remediation plan. 

Q.3.c. How will you ensure that this Foreclosure Review is comprehensive, fair, and reliable? What specifically, will you insist on 

regarding these points? 

A.3.c. OCC actions taken and/or planned to ensure the foreclosure 

review is comprehensive, fair and reliable include: 

1. On May 20, 2011, the OCC provided expectations for foreclosure reviews, including guidance on consultant independence, sampling methodology, scope of review, and the process 

for submission and review of customer complaints, to all of the 

banks and thrifts subject to Consent Orders. 

2. The OCC will review all engagement letters to determine 

their acceptability prior to the consultants beginning their review. This supervisory review will include an assessment of 

each engagement letter with the requirements of the Consent 

Order as well as foreclosure review guidance. Shortcomings 

will need to be corrected prior to commencing the review. 

3. The independent foreclosure review will achieve identification 

of harmed borrowers through two distinct means: 1) a public 

complaint process which will provide borrowers who believe 

they may have suffered financial harm as a result of the 

banks’ foreclosure process with the opportunity to have their 

complaint reviewed by the independent consultant, and 2) a 

sampling of loans to uncover, for example, borrowers in high 

risk segments. We intend to require mortgage servicers to deliver notice letters to every borrower covered by the look-back 

period to inform them of their right to have their complaint 

reviewed by an independent consultant. Multiple attempts to 

reach borrowers will be required for any returned notices. 

Servicers will be required to undertake a broad range of efforts to reach borrowers that includes broadscale advertising, 

outreach to State attorneys general, Department of Justice, 

and other Federal regulatory agencies to solicit information 

about borrowers who may have filed foreclosure-related complaints with those authorities in the 2009–2010 time period. 

As well, the consultants are required to conduct a targeted review of high risk segments that includes a robust and tar-
107 

geted sampling methodology to detect borrowers most at risk 

of harm. This might include a review of covered borrowers 

who were denied loan modifications, or those who submitted 

a foreclosure-related complaint to the servicer. Certain borrower segments will require a 100 per cent review such as 

borrowers protected by the Servicemembers Civil Relief Act 

and borrowers in bankruptcy whose mortgage was foreclosed 

upon and whose home was sold. 

4. Any foreclosure-related complaints received by the OCC’s Customer Assistance Group will be forwarded to the bank for review by the independent consultant. 

5. OCC examiners will review foreclosure review findings and results on an ongoing basis and require independent consultants 

to take action to address any supervisory concerns. 

6. Independent consultants must develop and submit for OCC 

approval a plan to remediate all financial injury to borrowers 

caused by any errors, misrepresentations, or other deficiencies 

identified in the Foreclosure Review Report. 

7. OCC will review all remediation plans submitted by independent consultants. Restitution will begin after the OCC has 

provided supervisory non-objection to the remediation plans, 

and the bank is required to provide the OCC with a report detailing all payments and credits made under the plan. 

Q.3.d. How will the OCC determine what qualifies as ‘‘financial injury’’ to the borrower or mortgagee? If an affiant, as part of a foreclosure affidavit, did not have personal knowledge of the assertions 

in the affidavit, would this qualify as ‘‘financial injury’’ according 

to the OCC? 

A.3.d. For purposes of OCC Consent Orders, ‘‘financial injury to 

the borrower or mortgagee’’ means monetary harm to the borrower 

or the mortgagee or owner of the mortgage loan directly caused by 

errors, misrepresentations, or other deficiencies identified in the 

foreclosure review. Monetary harm does not include physical injury, pain and suffering, emotional distress or other non-financial 

harm. This definition of financial injury will be used by independent consultants to determine financial injury. Cases involving 

affidavits prepared by affiants without personal knowledge will 

need to be evaluated by the independent consultant for the existence of financial harm. 

Q.3.e. If the independent consultant uncovers potentially illegal 

acts, how is the independent consultant expected to proceed? Will 

the consultant be required to report this to the Bank’s Audit Committee? Other than the OCC, are there other regulators who will 

be informed about these discoveries? Will these potentially illegal 

acts be covered and disclosed in the consultant’s written report? 

A.3.e. Potentially illegal acts discovered should be included in the 

Foreclosure Review Report prepared by the independent consultant. Under the OCC’s supervision, the findings from the Foreclosure Review Report will be submitted to the Board of Directors 

for review and action. 

Q.3.f. Why have you limited the scope of this review just to 2009 

and 2010? Is the OCC confident that prior to 2009, there were no 
108 

‘‘significant problems in foreclosure processing’’ among the banks 

under the OCC’s jurisdiction? As part of its normal examinations 

from year to year, did the OCC previously uncover the issues and 

problems cited in The Interagency Review of Foreclosure Policies 

and Practices? If so, how did the OCC address these issues and 

problems? If not, please explain why the OCC did not identify these 

issues earlier? 

A.3.f. OCC/OTS Mortgage Metrics data shows that the majority of 

foreclosure actions occurred in the 2009 and 2010 timeframe. The 

OCC did not previously identify the type of unsafe and unsound 

practices that were noted in the Interagency Review of Foreclosure 

Policies and Practices because: (1) supervisory efforts were focused 

on loss mitigation activities; (2) examiners placed reliance on internal audit and compliance functions and other third party, external 

reviews which did not identify major concerns; and (3) foreclosure 

processing was historically considered a low-risk activity performed 

with the assistance of outside legal counsel. 

Q.3.g. Once the consultant has completed the review, the consultant, per the OCC’s consent order, will be required to submit a written report detailing the findings of the foreclosure review. Will this 

written report be publicly available? If not, why not? If the protection of proprietary information will be the reason for not making 

this report public, will the OCC, at the very least, make the necessary arrangements to share this report with the relevant Congressional Committees so that Congress may conduct its oversight 

role? 

A.3.g. The Consent Orders require the independent consultants retained by the servicers to prepare a written report detailing the 

findings of the Foreclosure Review within 30 days of completion of 

the review, and to submit the report to the OCC. The reports constitute confidential supervisory information, subject to privilege 

and other legal restrictions on disclosure and, consequently, they 

will not be publicly available. However, we expect to provide a public interim report on the look-back process once the details of the 

look-back are finalized, and then to provide a public report on the 

results at the end of the process. 

Q.4.a. Also as part of this review, the independent consultant will 

be reviewing the bank’s loss mitigation activities. 

Will the OCC be requiring the independent consultant to review 

all denied loan modification files as part of this review? If not, why 

not? 

A.4.a. Foreclosures where the borrower was denied for a loan modification was discussed with the institutions as a distinct sampling 

segment that could be included in their foreclosure review. To the 

extent errors are found, we will extensively investigate identified 

errors, including further ‘‘deep-dive’’ reviews as necessary, to ensure that as many similarly affected borrowers as possible are 

identified for appropriate remediation. 

Q.4.b. The Interagency Review of Foreclosure Policies and Practices notes that the review ‘‘did not focus on the loan-modification 

process.’’ Why not, especially in light of the fact that you are asking 
109 

1 Anat R. Admati, Peter M. DeMarzo, Martin F. Hellwig, and Paul Pfleiderer, ‘‘Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive,’’ unpublished manuscript, Graduate School of Business, Stanford University, March 23, 

2011. 

the consultants to review loss mitigation activities as part of their 

review? 

A.4.b. The primary scope of the review was centered on foreclosure 

documentation preparation, governance and vendor management 

because of documented and publicized cases of ‘‘robo signing.’’ However, as part of this foreclosure review, examiners checked to determine if loss mitigation actions, including loan modifications, were 

offered to borrowers in the sample. If a borrower was denied a loan 

modification, examiners determined if there was a documented and 

sufficient reason for the denial. 

Q.5. The interaction of global capital requirements (Basel III) and 

U.S. requirements (FSOC) could result in different criteria being 

applied to the same financial institution. For example, an institution could be deemed systemically important to the global financial 

system but not to the financial system in the United States. How 

is this being addressed? Does this pose any unique risks? 

A.5. There are a number of areas where the Basel III capital requirements and the capital-related provisions of the Dodd-Frank 

Act intersect that the agencies will need to resolve and address as 

we move forward with our rulemakings. Sorting through and resolving these interactions is one reason why we have moved more 

slowly than originally anticipated on some of these initiatives. With 

respect the designation of systemically important financial institutions (SIFIs), we believe the $50 billion threshold established in 

Dodd-Frank will be more inclusive than the threshold that will be 

adopted for the so-called global SIFI provisions. Thus we do not believe it is likely that a U.S. bank would be deemed systemically important to the global financial system but not to the United States. 

Q.6. A number of commentators and academics have asserted that 

Basel III capital requirements are too low. For example, a recent 

Stanford University study (Admati et al, published in March 2011) 

stated that ‘‘equity capital ratios significantly higher than 10 percent of un-weighted assets should be seriously considered.’’ It also 

noted that ‘‘bank equity is not socially expensive’’ and ‘‘better capitalized banks suffer from fewer distortions in lending decisions 

and would perform better.’’ In addition, Switzerland has adopted 

capital ratios for its banks in excess of Basel III. What are the 

strengths and weaknesses of capital adequacy ratios in excess of 

those considered under Basel III? (Admati, DeMarzo, Hellwig, 

Pfleiderer, ‘‘Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive.’’ 

Stanford Graduate School of Business Research Paper No. 2065, 

March 2011.) 

A.6. While parts of the paper by Admati, DeMarzo, Hellwig, and 

Pfleiderer1 (hereafter ADHP) are thoughtful and well argued, many 

of their arguments are too simplistic in important respects. The 

framework used by ADHP to analyze the case for higher capital 

standards is incomplete, because there is no clear mechanism in 

the paper to create any upper limit to the required capital ratio. 
110 

In their hypothetical world, there is little or no downside to higher 

capital, because there are unlimited amounts of liquid assets for 

banks to hold, and unlimited amounts of equity capital that can be 

raised: 

[H]igher equity capital requirements do not mechanically limit banks’ activities, including lending, deposit taking and the issue of liquid, moneylike, informationally insensitive securities. Banks can maintain all their existing assets and liabilities and reduce leverage through equity issuance 

and the expansion of their balance sheets. (ADHP, p.ii) 

But the U.S. banking system is in fact fairly large relative to existing markets for equity and liquid securities, so the banking system cannot in practice adopt the approach suggested in the ADHP 

quote above. As a consequence, although ADHP use the reasoning 

above to dismiss suggestions that higher capital requirements 

might reduce the aggregate amount of banking activity, they conduct the discussion within a framework that is incapable of fully 

addressing the issue. 

With regard to higher proposed capital standards in other countries, it is correct that Switzerland recently announced minimum 

capital requirements well above those under discussion by the 

Basel Committee as part of Basel III, and that the UK has announced similar measures. However, these other countries face situations markedly different from the United States. In particular, 

both Switzerland and the UK are home to banks that are far larger 

relative to their domestic financial systems than is the case in the 

United States. Each of the three largest UK-based banks has assets that exceed the size of the British economy. The largest Swiss 

banks are two to three times the size of the entire Swiss economy. 

In contrast, in the United States the situation is reversed; annual 

U.S. GDP is about seven times the asset size of even the largest 

U.S. bank-holding company. 

As a result, countries such as Switzerland and the UK face a 

much different and more acute systemic challenge than the United 

States; failure or financial distress at firms of such sizes relative 

to the domestic economy would pose an almost insurmountable 

challenge for the sovereign. It should not be surprising that those 

governments feel compelled to take drastic measures to reduce the 

risks associated with large institutions, and might be willing to do 

so even at significant expected economic cost in the near-term. 

While it is important not to be complacent about the significant 

risks posed by large systemically important institutions in the 

United States, the nature and scale of the challenge is distinguishable from that in many other developed countries. The U.S. economy is much larger, as are the resources potentially available for 

addressing problems. This fact reduces the value of comparisons to 

other countries. 

Capital requirements that prevent instability are valuable because unstable banks can be extremely costly to the economy, as 

is evident during financial crises. But at some level, higher capital 

also tends to raise the cost of providing banking services, and higher costs lead to those banking services being provided at higher 

prices (higher interest rates on loans, lower interest rates on deposits, and so on), or to a reduction in the quantity of banking services 

provided to the economy, or both. 
111 

Q.7. In March, Bloomberg noted that 77 percent of the banking assets are held by the nation’s ten largest banks—with 35 banks 

holding assets of $50 billion or more. In February, Moody’s granted 

higher ratings to eight large U.S. banks with higher ratings because of an expectation of future Government support—implicitly 

suggesting that risky behavior by large banks would be more tolerated, and they would be insulated from failure. Has systemic risk 

increased after the financial crisis? Why or why not? How is this 

being addressed? 

A.7. The mergers and failures resulting from the financial crisis 

have left the banking sector more concentrated. Concentration 

within the financial sector is an issue that FSOC is discussing and 

addressing on a number of fronts. First and foremost are the efforts 

being led by the FDIC and Federal Reserve to implement the orderly liquidation authorities under Title II of the Dodd-Frank Act 

that will facilitate liquidation of large firms. An important corollary 

to this work will be heightened prudential capital, liquidity, and 

risk management standards that these firms will be required to 

meet. Pursuant to section 622 of the Dodd-Frank Act, the FSOC 

has also issued a study and made recommendations on the implementation of section 622 of the Dodd-Frank Act that establishes a 

financial-sector concentration limit generally prohibiting a financial 

company from merging, consolidating with, or acquiring another 

company if the resulting company’s consolidated liabilities would 

exceed 10 percent of the aggregate consolidated liabilities of all financial companies. The study, published for comment, concluded 

that a concentration limit will have a positive impact on U.S. financial stability. It also made a number of technical recommendations 

to address practical difficulties likely to arise in its administration 

and enforcement, such as the definition of liabilities for certain 

companies that do not currently calculate or report risk-weighted 

assets. Final recommendations, following the notice and comment 

period, are expected later this year. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM JOHN WALSH 

Q.1.a. According to the American Banker, Annette L. Nazareth, a 

former SEC Commissioner, called the timetables imposed by the 

Dodd-Frank Act ‘‘wildly aggressive.’’ ‘‘These agencies were dealt a 

very bad hand,’’ she said. ‘‘These deadlines could actually be systemic-risk raising.’’ Given the importance of rigorous cost-benefit 

and economic impact analyses and the need for due consideration 

of public comments, would additional time for adoption of the 

Dodd-Frank Act rules improve your rulemaking process and the 

substance of your final rules? 

A.1.a. I share the view that the Dodd-Frank Act requires the agencies to issue a very large number of rules that will affect businesses 

and consumers profoundly. The OCC recognizes that we must balance the requirement that we meet applicable statutory deadlines 

with the need to carefully consider the impact of regulations, and 

to provide a comment period that allows the public sufficient time 

to contribute meaningful comments. While meeting all of our statutory deadlines will be a challenge, in my view, we should not favor 
112 

speed over a robust process designed to ensure that we get a rule 

right. 

Q.1.b. Chairman Bair’s testimony was unclear regarding whether 

the FSOC has the authority to issue a revised rule on the designation of nonbank financial institutions. She and others indicated 

some type of guidance might be issued instead. Is it in fact the 

case, in general, that the FSOC does not have authority to issue 

rules under Title I that have the force and effect of law? If the 

FSOC has the authority in general to issue such rules on designation, why specifically would the FSOC be precluded from re-proposing a rule that is currently pending? Is there additional authority the FSOC would need from Congress to issue such rules or to 

proceed with re-proposing its NPR on designation? If yes, what specific authority would the FSOC need from Congress for the FSOC 

to have the ability to proceed? 

A.1.b. The FSOC has the authority to issue rules setting forth its 

understanding and interpretation of the governing statute. 

The process of making systemic risk determinations is a critical 

function of the FSOC. As I noted in my testimony, the FSOC must 

achieve the right balance between providing sufficient clarity in our 

rules and transparency in our designation process and avoiding 

overly simplistic approaches that fail to recognize and consider the 

facts and circumstances of individual firms and specific industries 

and fail to maintain the necessary flexibility to react to the evolving nature of firms and markets. In response to concerns raised by 

industry participants, the FSOC plans to seek comment on additional details regarding its standards for assessing systemic risk 

before issuing a final rule. 

Q.1.c. In an August speech at NYU’s Stern School of Business, 

Treasury Secretary Geithner outlined six principles that he said 

would guide implementation, and then he added, ‘‘You should hold 

us accountable for honoring them.’’ His final principle was bringing 

more order and integration to the regulatory process. He said the 

agencies responsible for reforms will have to work ‘‘together, not 

against each other. This requires us to look carefully at the overall 

interaction of regulations designed by different regulators and assess the overall burden they present relative to the benefits they 

offer.’’ Do you intend to follow through with this commitment with 

some form of status report that provides a quantitative and qualitative review of the overall interaction of all the hundreds of proposed rules by the different regulators and assess the overall burden they present relative to the benefits they offer? 

A.1.c. I agree that the various rules required by the Dodd-Frank 

Act involve complex issues and, as I have noted, they will interact 

in ways that we cannot yet envision. I believe that an accurate assessment of the overall interaction of all of the hundreds of rules 

being proposed by different regulators cannot be made until the 

final rules have been issued and we begin to judge the effect they 

have on how institutions conduct business. 

Q.2. On April 12, 2011 the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, 

the Farm Credit Administration, and the Office of the Comptroller 
113 

of the Currency published proposed rules governing margin and 

capital requirements applicable to covered swap entities that are 

banks. The proposed rules appear (i) to require those covered swap 

entities to collect margin from nonfinancial end-users that exceed 

margin thresholds, and (ii) to specify that such margin be in the 

form of cash or cash equivalents only. Is this proposal consistent 

with section 731 of the Dodd-Frank Act which specifically provides 

that prudential regulators ‘‘shall permit the use of noncash collateral, as the regulator . . .determines to be consistent with . . . preserving the financial integrity of markets trading swaps; and . . . 

preserving the stability of the United States financial system? 

A.2. Currently, the customer relationship between a bank swap 

dealer and a commercial end-user generally is broader than swaps. 

In addition to acting as the commercial firm’s swap dealer, the 

bank will typically also act as a lender to the commercial firm, extending working capital lines of credit and other types of loans. 

Like a line of credit, a swap transaction exposes the bank to 

credit risk—the risk that the counterparty will not be able to make 

future payments due under the terms of the swap transaction. Accordingly, banking regulators require banks under their supervision to manage the credit risk of the swaps aspect of their customer relationships the same way they manage other credit relationships, and to manage the combined credit risks of each customer on an aggregate basis. This includes steps such as performing independent credit underwriting of new customers to set a 

combined credit exposure limit for the particular customer, monitoring their financial condition and creditworthiness on an ongoing 

basis, and reporting all credit exposures with each customer to 

management on a combined basis. If a customer’s financial condition declines such that their existing credit limit is no longer justified, or if the customer’s credit exposure to the bank is nearing the 

limit for other factors—such as unanticipated changes in the market factors underlying swap transactions—banking regulators expect management of the bank to be proactive in addressing the situation. Appropriate steps by the bank include enhanced monitoring, working with the customer to reduce the credit exposure, 

working with other credit institutions to see if they will take over 

portions of the bank’s credit relationships with the customer, obtaining additional collateral, etc. This supervisory oversight is a 

core component of safety and soundness supervision, and the banking regulators have maintained published guidance requiring these 

measures for years. 

The proposed rule makes something of a change, in that it would 

codify the central tenet of this guidance into a regulation. But importantly, it does not contemplate any fundamental change in current practice. It simply requires banks, in determining whether to 

enter into a swap with a nonfinancial customer, to evaluate the 

range of credit exposure that is expected to arise under the swap 

and, if it exceeds the bank’s all-in credit exposure limit for that 

customer, decline the transaction or take other appropriate steps 

before proceeding, such as obtaining collateral, freeing up additional credit limit by reducing undrawn lines of credit, obtaining a 

guarantee, etc. If unexpected market factors cause the credit exposure to exceed the limit over the life of an executed swap trans-
114 

action, the bank would be expected to manage it proactively, as per 

current standards. But if the bank intends to enter into swaps exceeding its internal credit exposure limit for the customer, it must 

obtain margin. Any other approach would be contrary to core safety 

and soundness principles. 

On the topic of noncash collateral and commercial counterparties, 

the preamble of the proposed rule notes that banks may determine 

the extent to which available noncash collateral appropriately reduces the bank’s credit risk in setting the commercial counterparty’s credit limit, consistent with the bank’s credit underwriting 

expertise. We believe this appropriately allows commercial endusers to obtain the benefit of their noncash collateral in swap 

transactions consistent with section 731. There would be profound 

practical difficulties incorporating most types of noncash collateral 

into the definition of eligible collateral under the regulations. In 

order to serve the purpose of having margin requirements in the 

first place, margin collateral must be highly liquid in times of crisis 

and susceptible to certainty in its valuation. While certain forms of 

noncash items can meet this standard, such as very high quality 

debt instruments subject to regulatory-specified ‘‘haircuts’’ to account for their interest rate price risk and liquidity risk as observed in periods of previous market stress, it is impractical to attempt to establish haircuts for all the different possible types of 

noncash collateral that commercial counterparties might want to 

offer. In addition, the haircuts, in order to be prudent, would of necessity be quite steep. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORKER 

FROM JOHN WALSH 

Q.1. Your institutions have been assigned the task of macro prudential risk oversight. Specifically, the Dodd-Frank Act tasked the 

FSOC with ‘‘identifying risks to the financial stability that could 

arise from the material financial distress or failure of large interconnected bank holding companies or nonbank financial companies.’’ As you know nearly all banks carry U.S. Treasury bills, 

notes, and bonds on their balance sheet with no capital against 

them. They are deemed, both implicitly and explicitly, as risk free. 

But with a $14 trillion debt, no one can guarantee that the bond 

market will continue to finance U.S. securities at affordable rates. 

What steps have you taken to ensure that systemically important 

financial institutions could withstand a material disruption in the 

U.S. Treasury market from an event such as a major tail at an auction, the liquidation of securities by a major investor such as a foreign central bank, concerns that the United States will attempt to 

inflate its way out of its debt obligations, an outright debt downgrade by a major rating agency, or market concern over the prospects for a technical default? What impact would an event such as 

the loss of market confidence in U.S. debt and subsequent increase 

in U.S. borrowing rates have on the institutions in your purview? 

And what steps can you take to ensure that the balance sheets of 

systemically important institutions could withstand such an event 

and that such an event would not lead to a systemic crisis similar 

to or worse than that experienced in 2008? 
115 

A.1. The U.S. fiscal situation, and its potential impact on the market’s confidence in U.S. debt securities and on the role of the dollar 

as the principal international reserve asset, has been and continues 

to be an issue that FSOC is closely monitoring. Treasury Department staff provides periodic briefings on their assessments of the 

U.S. Treasury debt markets and available short-term tools to provide continued funding of the U.S. Government under the current 

statutory debt limit. Although current Treasury yields and implied 

volatilities remain relatively low, suggesting continued market confidence, I share the views of many others that over the long term, 

our nation’s current fiscal imbalance is not sustainable and must 

be addressed. And indeed there are some signs of increasing concerns by some market players. For example, the volume of trading 

on credit-default swaps insuring U.S. Treasuries is up sharply. 

U.S. Treasury securities represent a fairly small proportion of 

national banks’ total investment securities portfolios. As of March 

31, 2011, U.S. Treasury securities in national banks’ securities 

portfolios totaled approximately $137 billion, representing 8.4 percent of their total securities holdings and 1.6 percent of total assets. An additional $28 billion was held in national banks’ trading 

portfolios (representing only 4 percent of trading assets and 0.3 

percent of total national bank assets). While it is true that under 

the OCC’s risk-based capital rules, U.S. Treasuries are assigned a 

zero credit risk-weight, these holdings are included in a bank’s leverage capital ratio and in the market risk capital requirements for 

banks with significant trading portfolios. 

Rather than direct losses on their Treasury holdings, the greater 

risk posed to national banks from the loss of investor confidence in 

U.S. debt is the potential impact such a loss would have on interest 

rates and banks’ attendant interest rate risk exposures, and the 

secondary effects that higher interest rates would have on the overall economy, and hence banks’ credit portfolios. The potential effect 

of higher interest rates on banks’ capital and earnings is a risk 

that the OCC monitors and our examiners assess as part of our ongoing supervision of national banks. We have been particularly concerned that the prolonged low interest rate environment, coupled 

with a relatively steep yield curve and lackluster loan demand, has 

provided incentives for banks to take on additional interest rate 

risk. In January 2010, the OCC and other Federal banking agencies issued an advisory to all financial institutions on interest rate 

risk management. The advisory highlights the need for institutions 

to identify, monitor, and manage their interest rate risk exposures 

and to conduct periodic stress tests of their exposures beyond typical industry conventions, including changes in rates of greater 

magnitude (e.g., up and down 300 and 400 basis points) across different tenors to reflect changing slopes and twists of the yield 

curve. Monitoring and assessing banks’ interest rate risk continues 

to be an area of emphasis in our examinations. At large national 

banks that have significant trading operations, examiners likewise 

regularly evaluate the market, operational, liquidity, and credit 

risks arising from those activities. These assessments include evaluating the banks’ contingency funding plans, and the use of U.S. 

Treasury securities as collateral in those operations. 
116 

Q.2. What other major systemic risks are you currently most concerned about? What steps are you taking to address these? 

A.2. In addition to heightened interest rate risk, there are several 

other risk areas that we are closely monitoring. As the economy begins to recover, we are seeing some signs of weakening underwriting standards, especially in the leveraged loan markets. While 

our annual underwriting survey does not indicate that standards 

have weakened systematically across lending products, we are concerned that banks not return to the lax underwriting practices that 

became widespread prior to the crisis. When we released our survey results, we cautioned national banks on the need to maintain 

prudent underwriting standards. The agencies’ Shared National 

Credit review, currently underway, will be another key window in 

helping us to evaluate the current quality of banks’ large credit 

portfolios and whether additional action is needed. 

The housing sector continues to be an area that poses substantial 

risk to the overall economy and many banks’ credit portfolios. 

While there are many factors affecting this market, the overhang 

of distressed properties that need to be resolved is certainly one of 

them. The action taken against the mortgage servicers under our 

jurisdiction to fix their servicing and mortgage foreclosure processing problems should help unblock the system. More broadly, we 

continue to closely monitor trends in mortgage loan portfolios, including mortgage modifications, through our comprehensive Mortgage Metrics database and reports. 

Through the FSOC’s systemic risk committee, we continue to 

monitor a number of other potential risk areas including the European debt situation, continued vulnerabilities in short-term funding 

markets, and concentrations within the financial sector. 

Finally, as noted in recent remarks before the Housing Policy 

Council of The Financial Services Roundtable, I agree with others 

that the sheer volume and magnitude of regulatory changes forthcoming under the Dodd-Frank Act and Basel III reforms has created uncertainty as supervisors and market participants attempt to 

digest and assess the cumulative impact that these changes may 

have on markets and business models. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM JOHN WALSH 

Q.1. Dodd-Frank set forth a comprehensive list of factors that 

FSOC must consider when determining whether a company posed 

a systemic risk and deserves Fed oversight. The council, in its advanced notice of proposed rulemaking, sets forth 15 categories of 

questions for the industry to comment on and address. However, 

the proposed rules give no indication of the specific criteria or 

framework that the council intends to use in making SIFI designations—other than what is already set forth in Dodd-Frank. As a result, potential SIFIs have no idea where they may stand in the designation process. Will the council provide additional information 

about the quantitative metrics it will use when making an SIFI 

designation? 

A.1. In response to concerns raised by commenters and others, 

FSOC has agreed to provide and seek comment on additional de-
117 

tails regarding FSOC’s standards for assessing systemic risk before 

issuing a final rule. While the details of such additional guidance 

is still being developed, I anticipate it will include more specific examples of some of the metrics and thresholds that FSOC will consider in making these determinations. As I noted in my written 

statement, it will be critical that FSOC strikes the appropriate balance in providing sufficient clarity in our rules and transparency 

in our designation process, while at the same time avoiding overly 

simplistic approaches that fail to recognize and consider the facts 

and circumstances of individual firms and specific industries. Ultimately, the decision to designate a company must be based on an 

assessment of the unique risks that a particular firm may present 

to the financial system. 

Q.2. Would the council agree that leverage is likely to be the one 

factor that is most likely to create conditions that result in systemic risk? If so, how will the council go about identifying which 

entities use leverage? 

A.2. Yes, consistent with the statutory provisions and lessons 

learned from the financial crisis, leverage is one of the six categories of risk factors that FSOC has proposed to consider in making SIFI designations. As commenters have suggested, FSOC will 

need to consider and distinguish between different types and 

sources of leverage when evaluating the effect that such leverage 

may have on a firm. To the extent possible, FSOC will use information from existing public and supervisory sources to make initial 

assessments about a firm’s leverage and other risk factors. This information may be supplemented with requests for more specific information from the firm. 

Q.3. One of the first steps in the systemic designation process, as 

outlined in the proposed rule, is that after identifying a nonbank 

financial company for possible designation the FSOC will provide 

the company with a written preliminary notice that the council is 

considering making proposed determination that the company is 

systemically significant. Is receipt of such a notice a material event 

that might affect the financial situation or the value of a company’s 

shares in the mind of the investors? If so, wouldn’t it need to be 

disclosed to investors under securities laws. 

A.3. The FSOC has not taken up the issue of disclosure in this regard. The rulemaking is still pending and no designations have 

been made yet. As with other possible regulatory actions with respect to which institutions receive advance notice, an institution 

should consult counsel to determine whether receipt of the notice 

is a material event requiring disclosure under securities laws. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM JOHN WALSH 

Q.1. Last week, Chairman Bernanke indicated that bank holding 

companies larger than $50 billion, designated as systemically significant by the Dodd-Frank Act, will be treated on a tiered scale 

when you establish enhanced supervisory standards. These institutions range from relatively basic commercial banks not much larger 

than the $50 billion to more complex and interdependent global fi-
118 

nancial firms that are up to 40 times the threshold. Do you expect 

the tiered standards to be based on a firm’s asset size or on factors 

more directly related to financial system risk, such as complexity 

of a firm’s businesses, its funding sources and liquidity, its importance to the daily functioning of the capital markets and its interconnectedness to other financial firms? 

A.1. The Federal Reserve has primary rulemaking authority for 

this provision of the Dodd-Frank Act. We expect to be consulting 

with the Federal Reserve as it moves forward with its rulemaking. 

Q.2. Can you share with us what the FSOC, OFR, FDIC and Fed 

are contemplating by way of fees that they may assess on SIFIs? 

A.2. While we are aware of the FDIC’s recent announced changes 

to its insurance assessment structure, the Federal Reserve and 

OFR have not yet disclosed their plans for assessing fees on systemically important institutions. 

International Competitiveness 

Q.3.a. It is critical for the continued competitiveness of the U.S. 

markets that a regulatory arbitrage does not develop among markets that favors markets in Europe and Asia over U.S. markets. 

Will the FSOC commit to ensuring that the timing of the finalization and implementation of rulemaking under Dodd Frank does not 

impair the competitiveness of U.S. markets? 

A.3.a. The OCC recognizes that the Federal banking agencies must 

proceed carefully as we implement the Dodd-Frank provisions, so 

that we do not create unnecessary limitations that restrict the ability of U.S. banking institutions to manage risk efficiently, and to 

compete internationally. As we draft regulations to implement 

these provisions, we have attempted to address these concerns to 

the extent possible given the statutory framework. We also support 

Treasury’s efforts to address any competitive inequalities caused by 

the Dodd-Frank Act through the G–20 process. 

Q.3.b. How will FSOC ensure that U.S. firms will have equal access to European markets as European firms will have to U.S. markets? 

A.3.b. Rules and regulations promulgated by the United States as 

well as foreign jurisdictions should be assessed periodically to ensure ‘‘equivalent/national treatment’’ across borders. The FSOC 

member agencies will have the ability to look across sectors and jurisdictions to identify areas where ‘‘equivalent/national treatment’’ 

is not afforded to U.S. firms. Where this is identified, U.S. agencies 

will work with their foreign counterparts to effect change, but also 

assess whether U.S. rules need to be changed. The FSOC may also 

seek legislative changes where needed. 

Q.3.c. How will FSOC ensure that Basel III will be implemented 

in the United States in a manner that is not more stringent than 

in Europe, making U.S. firms less competitive globally? 

A.3.c. To implement Basel III in the United States, a rule must 

first be drafted. Through the rulemaking process, areas of potential 

inconsistency with other jurisdictions may be identified and rectified to the extent possible. The U.S. agencies responsible for the 
119 

supervision of Basel III implementation are currently responding to 

questions from firms about Basel III and reviewing capital plans to 

determine how the firms are factoring Basel III into their capital 

planning processes. The U.S. agencies will coordinate to ensure 

consistent implementation by U.S. firms. 

On the international front, the Basel Committee on Banking Supervision (BCBS) has initiated an ‘‘evergreen’’ Basel III implementation questionnaire that will be completed periodically to gauge 

the progress of Basel III implementation by member jurisdictions. 

This process will also facilitate the identification of areas of inconsistency that may require clarification and/or more guidance from 

the BCBS regarding Basel III. The U.S. agencies are actively involved in the BCBS and will work with their global counterparts 

to address areas of inconsistency. 

RESPONSE TO WRITTEN QUESTION OF SENATOR KIRK 

FROM JOHN WALSH 

Q.1. Much about SIFI designation focuses on ‘‘too-big-to-fail’’ institutions. What about financial management practices that can 

weaken a number of smaller players in an industry? What can 

FSOC do to encourage best practices of asset/liability management, 

or assure the proper allocation of capital that reflects the risk underlying assets held? 

A.1. The OCC and other Federal banking agencies have well-established mechanisms in place to coordinate efforts to promote and encourage sound risk management practices for financial institutions 

of all sizes, including smaller community banks. Much of this work 

is facilitated by the Federal Financial Institutions Examination 

Council. Because of heightened concerns about interest rate and liquidity risk, in 2010 the agencies issued an interagency policy 

statement on funding and liquidity risk management, and a joint 

advisory on interest rate risk management. These policy statements provide guidance to bankers on sound practices for asset/liability management. Similarly, virtually all of the Federal banking 

agencies’ capital rules are developed and issued on a collaborative 

basis. As part of the implementation of the enhanced capital provisions set forth in Basel III, the agencies are considering and plan 

to propose revisions to the general risk-based capital rules that 

apply to small banking institutions. Such changes would only go 

into effect after a notice and comment process. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM MARY L. SCHAPIRO 

Q.1. If a public company is told by the Council that it is considering designating it as systemically significant, the company may 

believe that such information is material and must be disclosed to 

the public under the securities laws. What is your view on whether 

a company would have to publicly disclose the fact that it has been 

informed that it may be designated by the Council? 

A.1. There are currently no specific ‘‘line item’’ requirements to disclose that a company has been notified that it is being considered 

for possible designation or if it has been notified and not des-
120 

ignated. However, a company would need to review its description 

of its regulatory status and requirements to determine whether its 

disclosure requires updating. The company and its advisors would 

need to determine whether being notified that the company may be 

systemically important (and, once a determination has been made 

with regard to designation, the outcome of that determination) is 

material information that must be disclosed to investors. The test 

for materiality is whether there is a substantial likelihood that the 

disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. Whether a contingent or speculative 

event is material requires a balancing of both the indicated probability that the event will occur and the anticipated magnitude of 

the event in light of the totality of the company activity. 

If material, the company would need to disclose the possible designation and/or the final determination as to designation, for example, in an annual or quarterly report. The possible designation and/ 

or the final determination as to designation are more likely to be 

material if FSOC designations have had a material effect on other 

companies’ stock prices. The materiality determination also would 

be affected by the consequences of being designated systemically 

important, such as capital requirements and limitations on business activities. 

Q.2. You began your written testimony with a lengthy discussion 

of market structure issues. Do you believe these issues to be the 

biggest potential source of systemic risk on your regulatory agenda? If so, should the Council be paying more attention to market 

structure issues than it is now? 

A.2. The SEC’s regulatory agenda encompasses a broad range of 

complex financial activity and firms, including, among others, equity market structure, broker-dealers, clearing agencies, money 

market funds, hedge funds, and over-the-counter derivatives; and 

we have been working with the Council members on all of these. 

Clearly, however, maintaining the integrity of the U.S. equity market structure is a vitally important part of the SEC’s regulatory 

agenda. Accordingly, as discussed in my testimony, the SEC has 

undertaken a series of steps to promote fair and orderly trading 

and to help prevent extraordinary volatility in the future. 

Q.3. Under Dodd-Frank, swap data repositories, before sharing any 

information with a regulator other than their primary regulator, 

must obtain an indemnification agreement with that other regulator. Will this requirement adversely affect regulators’ ability to 

obtain a comprehensive view of the swaps markets? 

A.3. The Securities Exchange Act of 1934, as amended by the 

Dodd-Frank Act, requires a security-based swap data repository 

(SDR) to obtain a written agreement from certain domestic and foreign regulators whereby the regulator agrees to indemnify the SDR 

and the Commission for litigation expenses arising from the disclosure of data maintained by the SDR as a condition for the SDR to 

provide information directly to a regulator other than the Commission. 

Some domestic and foreign regulators have expressed concern 

about their ability to comply with the requirement to enter into an 
121 

indemnification agreement with an SDR in order to obtain information directly from the SDR. In a recent letter to Michel Barnier, 

European Commissioner for Internal Markets and Services, Chairman Gensler and I noted these potential difficulties, and set forth 

circumstances in which this requirement would not apply to foreign 

regulators, including when the SDR is also registered with a foreign regulator and that regulator, acting within the scope of its jurisdiction, seeks information from the SDR. 

The Commission staff is still considering issues relating to the 

indemnification requirement, and is consulting and coordinating 

with CFTC staff regarding such issues. Because the Commission 

staff has not yet completed its recommendations for final rules in 

this area, the Commission has not had the opportunity to fully consider the application of the indemnification provision in all scenarios involving requests from regulators for information in SECregistered trade repositories. I anticipate that the Commission will 

consider recommendations from our staff designed, consistent with 

the provisions of the Dodd-Frank Act and the statutes we administer, to facilitate the access to information at trade repositories 

that regulators need to carry out their responsibilities. 

Q.4. One of the Council’s purposes is to monitor systemic risk and 

alert Congress and regulators of any systemic risks it discovers. 

What are the most serious systemic risks presently facing the U.S. 

economy? 

A.4. The FSOC is working to complete its annual report called for 

by the Dodd-Frank Act, which will describe the overall macroeconomic environment, significant trends and risks, including systemic risks, and recommendations for regulatory action. 

RESPONSE TO WRITTEN QUESTION OF SENATOR HAGAN 

FROM MARY L. SCHAPIRO 

Q.1. Chairwoman Schapiro and Chairwoman Bair, In March Federal financial regulators published a proposed rule that would implement Section 956 of the Dodd-Frank Act. Section 956 requires 

regulators to issue rules that prohibit ‘‘covered financial institutions’’ from entering into incentive-based compensation arrangements that encourage inappropriate risks. 

‘‘Covered financial institutions’’ are defined to include investment 

advisers that have $1 billion or more in total consolidated assets 

(as opposed to assets under management). 

On what basis did the SEC choose to consider only consolidated 

assets on the balance sheet of the investment adviser and not take 

into account assets under management? 

A.1. Paragraph (f) of Section 956 of the Dodd Frank Act exempts 

covered financial institutions with ‘‘assets of less than 

$1,000,000,000’’ from the requirements of Section 956. In carving 

out institutions with less than $1 billion in assets, Congress thus 

determined that the ‘‘covered financial institutions’’ listed in Section 956(e) with $1 billion or more in assets are covered by Section 

956. 

In drafting the proposed rules, the SEC and the six other agencies charged with rulemaking under Section 956 (together, the 
122 

‘‘Agencies’’) considered that the statute uses the term ‘‘assets,’’ 

which is predominantly understood to mean the total assets of a 

firm, and does not refer to ‘‘assets under management,’’ which is 

predominantly understood to mean the assets that a firm manages 

on behalf of its clients. Additionally, the measurement of asset size 

for most firms generally is made with reference to the assets on the 

balance sheet of the firm. For example, we understand that the size 

of a bank generally would be described by reference to the total assets on the balance sheet of the bank, not by reference to the 

amount of customer assets the bank manages (for example, as the 

trustee of a customer’s trust). Similarly, an investment adviser’s 

assets under management generally do not appear as assets on the 

firm’s balance sheet because the assets under management belong 

to another individual or entity. As a result, the Agencies did not 

propose to include customer assets, such as assets under management, in the calculation of the $1 billion threshold. 

The other important factor to note is that Section 956 requires 

the Agencies to engage in joint rulemaking. The Agencies interpreted this statutory directive as requiring the Agencies to propose 

a rule that was substantially similar from agency to agency to the 

greatest extent practicable, and sought to maintain the general 

consistency of the rule from agency to agency, and between types 

of covered financial institutions regulated by the SEC (broker-dealers and investment advisers). Thus, the SEC proposed an asset test 

for investment advisers intended to mirror the way such asset tests 

are proposed to be calculated and applied to the other covered financial institutions, which are based on the total assets on the balance sheet of each firm, and which exclude in each case assets that 

are held for others. 

Finally, all of the covered financial institutions, except investment advisers, report to their respective regulator the amount of 

their ‘‘assets.’’ For example, banks regulated by the OCC, Federal 

Reserve, and FDIC report total assets on Call Reports, and brokerdealers regulated by the SEC file a year-end audited consolidated 

statement of their financial condition that includes ‘‘total consolidated assets.’’ The proposed rule would rely on the total assets reported in these reports to determine the size of each firm’s ‘‘assets’’ 

for purposes of section 956. Recently, the SEC proposed to require 

advisers to report on Form ADV whether they have $1 billion or 

more in total balance sheet assets. Requiring advisers to use the 

amount of total assets on their balance sheets, as proposed, would 

dovetail with this proposal and be consistent with the method for 

evaluating other intermediaries under the proposed rule. 

The Agencies requested comment on whether all of the Agencies 

should use a uniform method to determine whether an institution 

has $1 billion or more in assets, and whether any of the Agencies 

should define total consolidated assets differently than the proposed calculations. The Agencies also specifically requested comment on the proposed method of determining asset size for investment advisers, including whether the determination of total assets 

should be further tailored for certain types of advisers. The Agencies will carefully review and consider public comments that have 

been received discussing this and any other issues. The interagency 
123 

drafting committee will take all such comments into account when 

developing a final rule proposal for consideration by the Agencies. 

RESPONSE TO WRITTEN QUESTION OF SENATOR CRAPO 

FROM MARY L. SCHAPIRO 

Q.1. According to the American Banker, Annette L. Nazareth, a 

former SEC Commissioner, called the timetables imposed by the 

Dodd-Frank Act ‘‘wildly aggressive.’’ ‘‘These agencies were dealt a 

very bad hand,’’ she said. ‘‘These deadlines could actually be systemic-risk raising.’’ Given the importance of rigorous cost-benefit 

and economic impact analyses and the need for due consideration 

of public comments, would additional time for adoption of the 

Dodd-Frank Act rules improve your rulemaking process and the 

substance of your final rules? 

A.1. Implementation of the Dodd-Frank Act is a substantial undertaking. The Act’s requirements that a significant number of Commission rulemakings be completed within 1 year of the date of enactment poses significant challenges to the Commission. Throughout, the staff and Commission have been diligent in working to implement the requirements of the Act while also taking the time 

necessary to thoughtfully consider the issues raised by the various 

rulemakings. 

We recognize that many of our new rules may have near term 

market implications and costs and important long-term benefits. 

We must carefully consider these implications, including by engaging in a robust cost-benefit and economic impact analysis. As a result, we are providing market participants with sufficient time to 

understand the obligations that may apply to them as well as the 

potential costs and benefits, and economic implications, of those obligations. 

While we are eager to get these important rules in place, it is 

critical that we get the rules right, and that we promulgate the 

rules in a timely fashion, taking into account the complexities of 

the markets being regulated and the number of rulemakings involved. 

To help keep the public informed, we have a section on our Web 

site that provides detail about the Commission’s implementation of 

the Act. We also are taking steps to gather additional input on our 

implementation process where appropriate, such as the joint roundtable held on May 2 and 3 with the CFTC regarding the implementation of derivatives rules under Title VII. We value, and are committed to seeking, the broad public input and consultation needed 

to promulgate these important rules. 

Q.2. Chairman Bair’s testimony was unclear regarding whether the 

FSOC has the authority to issue a revised rule on the designation 

of nonbank financial institutions. She and others indicated some 

type of guidance might be issued instead. Is it in fact the case, in 

general, that the FSOC does not have authority to issue rules 

under Title I that have the force and effect of law? If the FSOC 

has the authority in general to issue such rules on designation, 

why specifically would the FSOC be precluded from re-proposing a 

rule that is currently pending? Is there additional authority the 

FSOC would need from Congress to issue such rules or to proceed 
124 

with re-proposing its NPR on designation? If yes, what specific authority would the FSOC need from Congress for the FSOC to have 

the ability to proceed? 

A.2. Like the FDIC, the Commission has not conducted its own 

independent legal analysis of this issue, but as discussed at the 

hearing, members of the FSOC have sought guidance from the Department of the Treasury, Office of the General Counsel. We understand from the Treasury Department that the FSOC has the authority to issue its proposed regulations on designations, and to repropose those rules for further public comment. The FSOC has already exercised its rulemaking authority to release a notice of proposed rulemaking on the designation of nonbank financial companies to be supervised by the Federal Reserve. The FSOC plans to 

seek further public comment on guidance regarding its approach to 

designations of nonbank financial companies, and release a final 

rule that will reflect the input received on the proposed rule and 

guidance. 

Q.3. In an August speech at NYU’s Stern School of Business, 

Treasury Secretary Geithner outlined six principles that he said 

would guide implementation, and then he added, ‘‘You should hold 

us accountable for honoring them.’’ His final principle was bringing 

more order and integration to the regulatory process. He said the 

agencies responsible for reforms will have to work ‘‘together, not 

against each other. This requires us to look carefully at the overall 

interaction of regulations designed by different regulators and assess the overall burden they present relative to the benefits they 

offer.’’ Do you intend to follow through with this commitment with 

some form of status report that provides a quantitative and qualitative review of the overall interaction of all the hundreds of proposed rules by the different regulators and assess the overall burden they present relative to the benefits they offer? 

A.3. We have been working closely, cooperatively, and regularly 

with our fellow regulators to develop the new regulatory framework 

and we are committed to continuing to do so. 

We meet regularly, both formally and informally, with other financial regulators. SEC staff working groups, for example, consult 

and coordinate with the staffs of the CFTC, Federal Reserve Board, 

and other prudential financial regulators, as well as the Department of the Treasury, on implementation of the Dodd-Frank Act. 

Our objective is to establish consistent and comparable requirements, to the extent possible, taking into account differences in 

products, participants, and markets, and this objective will continue to guide our efforts as we move forward. 

Finally, because the world today is a global marketplace and 

what we do to implement many provisions of the Act will affect foreign entities, we are consulting bilaterally and through multilateral 

organizations with counterparts abroad. The SEC and CFTC, for 

example, are directed by the Dodd-Frank Act to consult and coordinate with foreign regulators on the establishment of consistent 

international standards governing swaps, security-based swaps, 

swap entities and security-based swap entities. We believe that the 

recently formed IOSCO Task Force on OTC Derivatives Regulation, 

which the SEC co-chairs, and other international fora, as well as 
125 

bilateral discussions with international regulators, will help us 

achieve this goal. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM MARY L. SCHAPIRO 

Q.1. Dodd-Frank set forth a comprehensive list of factors that 

FSOC must consider when determining whether a company posed 

a systemic risk and deserves Fed oversight. The council, in its advanced notice of proposed rulemaking, sets forth 15 categories of 

questions for the industry to comment on and address. However, 

the proposed rules give no indication of the specific criteria or 

framework that the council intends to use in making SIFI designations—other than what is already set forth in Dodd-Frank. As a result, potential SIFIs have no idea where they may stand in the designation process. Will the council provide additional information 

about the quantitative metrics it will use when making an SIFI 

designation? 

A.1. As Department of the Treasury Under Secretary Goldstein 

noted in his letter to Senator Shelby: 

The Financial Stability Oversight Council (FSOC) recognizes the importance of a public review of its decisionmaking criteria and is working diligently to provide the public with greater detail on the process and framework for making designations. One of the FSOC’s key guiding principles is 

transparency and openness, as demonstrated by our deliberate emphasis on 

continued public input in the rulemaking process. 

The process of determining which companies pose a potential risk to U.S. 

financial stability is not an easy task, but it is imperative that the FSOC 

get it right. The FSOC continues to work toward an approach that will 

allow the financial industry to assess whether they are candidates for designation while maintaining flexibility as the nature of institutions and markets change. Of course, ultimately the decision to designate a company will 

be based on an assessment of the unique risks that a particular firm may 

present to the financial system. The FSOC plans to seek public comment 

on additional guidance regarding its approach to designations. 

In addition to public comments from industry participants, the FSOC will 

also rely on the expertise of its members and their agencies’ staff. These 

individuals have expertise that spans all aspects of the financial services 

industry. Any designation decision will draw on this experience. 

Q.2. Would the council agree that leverage is likely to be the one 

factor that is most likely to create conditions that result in systemic risk? If so, how will the council go about identifying which 

entities use leverage? 

A.2. Leverage is an important element of the systemic risk analysis 

and is identified as such in the criteria for making a SIFI determination under the Dodd-Frank Act. Leverage may be the factor 

that is most relevant for some institutions, but other factors may 

predominate for other firms. FSOC is pursuing the identification of 

specific metrics that could be used for different types of firms, including metrics with respect to leverage. 

Q.3. One of the first steps in the systemic designation process, as 

outlined in the proposed rule, is that after identifying a nonbank 

financial company for possible designation the FSOC will provide 

the company with a written preliminary notice that the council is 

considering making proposed determination that the company is 

systemically significant. Is receipt of such a notice a material event 
126 

that might affect the financial situation or the value of a company’s 

shares in the mind of the investors? If so, wouldn’t it need to be 

disclosed to investors under securities laws? 

A.3. There are currently no specific ‘‘line item’’ requirements to disclose that a company has been notified that it is being considered 

for possible designation or if it has been notified and not designated. However, a company would need to review its description 

of its regulatory status and requirements to determine whether its 

disclosure requires updating. The company and its advisors would 

need to determine whether being notified that the company may be 

systemically important (and, once a determination has been made 

with regard to designation, the outcome of that determination) is 

material information that must be disclosed to investors. The test 

for materiality is whether there is a substantial likelihood that the 

disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. Whether a contingent or speculative 

event is material requires a balancing of both the indicated probability that the event will occur and the anticipated magnitude of 

the event in light of the totality of the company activity. 

If material, the company would need to disclose the possible designation and/or the final determination as to designation, for example, in an annual or quarterly report. The possible designation and/ 

or the final determination as to designation are more likely to be 

material if FSOC designations have had a material effect on other 

companies’ stock prices. The materiality determination also would 

be affected by the consequences of being designated systemically 

important, such as capital requirements and limitations on business activities. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM MARY L. SCHAPIRO 

Q.1. One of the first steps in the systemic designation process, as 

outlined in the proposed rule, is that after identifying a nonbank 

financial company for possible designation the FSOC will provide 

the company with a written preliminary notice that the Council is 

considering whether to make a ‘‘proposed determination’’ that the 

company is systemically significant. Is receipt of such a notice a 

‘‘material event’’ that might affect the financial situation or the 

value of a company’s shares in the mind of investors? If so, 

wouldn’t it need to be disclosed to investors under securities laws? 

A.1. There are currently no specific ‘‘line item’’ requirements to disclose that a company has been notified that it is being considered 

for possible designation or if it has been notified and not designated. However, a company would need to review its description 

of its regulatory status and requirements to determine whether its 

disclosure requires updating. The company and its advisors would 

need to determine whether being notified that the company may be 

systemically important (and, once a determination has been made 

with regard to designation, the outcome of that determination) is 

material information that must be disclosed to investors. The test 

for materiality is whether there is a substantial likelihood that the 

disclosure of the omitted fact would have been viewed by the rea-
127 

sonable investor as having significantly altered the total mix of information made available. Whether a contingent or speculative 

event is material requires a balancing of both the indicated probability that the event will occur and the anticipated magnitude of 

the event in light of the totality of the company activity. 

If material, the company would need to disclose the possible designation and/or the final determination as to designation, for example, in an annual or quarterly report. The possible designation and/ 

or the final determination as to designation are more likely to be 

material if FSOC designations have had a material effect on other 

companies’ stock prices. The materiality determination also would 

be affected by the consequences of being designated systemically 

important, such as capital requirements and limitations on business activities. 

Q.2. As FSOC considers how to determine the systemic relevance 

of the investment fund asset management industry, wouldn’t it be 

more appropriate for FSOC to look at the various individual funds 

themselves, of which there may be several under one advisor, rather than focus on the advisor entity? 

• Isn’t it true that each of those funds may operate with separate and distinct investment strategies, each with its own 

unique risks? 

• Isn’t it the case that the vast majority of the assets are located 

at the funds and not at the adviser entity? 

A.2. It is true that each of these funds may operate with separate 

and distinct investment strategies, each with its own unique risks. 

But a manager could advise several funds (and even separate accounts) with similar or identical investment strategies in a parallel 

or similar manner. These advisers may aggregate the trades for 

many funds for execution and then allocate the securities among 

the various funds. For example, an asset manager could engage in 

same trading strategy (which can be of systemic relevance) across 

several of the funds it manages. While the assets may be owned 

by individual funds, their trading may be done jointly. Thus in assessing systemic risk we recognize that it is important to engage 

in robust process and examine the issue holistically. 

Q.3. What additional protection/supervision could the Fed provide 

for mutual funds that the SEC isn’t already providing? Do we really need to subject this industry to an additional layer of regulation, 

especially a ‘‘systemic risk’’ regulation? 

A.3. Under Title I, The Federal Reserve would have authority to 

impose enhanced prudential regulation over individual nonbank financial companies that are designated for oversight by two-thirds 

of the FSOC. However, one factor FSOC is required to consider 

when determining whether to designate any nonbank financial 

company for supervision by the Federal Reserve is ‘‘the degree to 

which the company is already regulated by one or more primary financial regulatory agencies.’’ We believe, therefore, that FSOC will 

consider whether designation is appropriate for firm after considering current regulation as well as the other factors the DoddFrank Act requires that FSOC consider before designating any 

nonbank financial company. It’s also important to note, that while 
128 

the SEC has significant legal authority in this area; (1) the SEC’s 

historic mission has been one of ‘investor protection’ rather than 

systemic risk; and (2) the SEC far fewer staff to perform examinations and oversee firm’s activities. 

Q.4. Can you share with us what the FSOC, OFR, FDIC and Fed 

are contemplating by way of fees that they may assess on SIFIs? 

A.4. I understand that such fees would be considered and adopted 

by the Federal Reserve Board as part of the authority assigned it 

by the Dodd-Frank Act to supervise SIFIs, rather than by FSOC 

or the Commission. 

International Competitiveness 

Q.5.a. It is critical for the continued competitiveness of the U.S. 

markets that a regulatory arbitrage does not develop among markets that favors markets in Europe and Asia over U.S. markets. 

Will the FSOC commit to ensuring that the timing of the finalization and implementation of rulemaking under Dodd Frank does not 

impair the competitiveness of U.S. markets? 

A.5.a The FSOC was created by Title I of the Dodd-Frank Act. 

Under the Dodd-Frank Act, Congress has given FSOC the following 

primary responsibilities: 

• identifying risks to the financial stability of the United States 

that could arise from the material financial distress or failure—or ongoing activities—of large, interconnected bank holding companies or nonbank financial holding companies, or that 

could arise outside the financial services marketplace; 

• promoting market discipline by eliminating expectations on the 

part of shareholders, creditors, and counterparties of such companies that the Government will shield them from losses in the 

event of failure (i.e., addressing the moral hazard problem of 

‘‘too big to fail’’); and 

• identifying and responding to emerging threats to the stability 

of the United States financial system. 

The FSOC has 10 voting members, including the Chairman of 

the SEC. The SEC is charged with regulating, among other areas, 

the security-based swaps markets, and in doing so we consider the 

potential impact on the global competitiveness of U.S. markets. To 

this end, we have been carefully considering the potential consequences of certain provisions of Title VII and our proposed rulemaking for domestic and foreign market participants—in particular 

the impact on the ability of U.S. market participants to compete effectively with foreign market participants that may not be subject 

to the Dodd-Frank Act. In fact, we are required to take into account potential burdens on competition when engaging in rulemaking, including rulemaking under the Dodd-Frank Act. Our goal 

is to establish a level playing field for all market participants while 

adhering to the regulatory requirements and objectives of the 

Dodd-Frank Act, and we are considering how to promulgate regulations in a way that accomplishes this goal. 

The SEC has been working closely with the CFTC, the Federal 

Reserve Board and other Federal prudential regulators who also 

are members of FSOC, in developing a harmonized approach to im-
129 

plementing the statutory provisions of Title VII to the extent practicable. 

As we move from the proposing stage to implementation, we recognize that part of balancing regulatory concerns with competitiveness concerns involves establishing an implementation process for 

derivatives regulation that permits market participants sufficient 

time to establish systems and procedures in order to comply with 

new regulatory requirements without imposing undue implementation burdens and costs. We also are cognizant of the timing of legislation, rulemaking and implementation in other jurisdictions. 

To this end, we have been discussing with our fellow regulators 

and with market participants what timeframes would be reasonable for the various rulemakings, and what steps market participants will need to take in order to comply with our proposed rules. 

Further, in addition to our consultation and coordination with the 

CFTC and other U.S. authorities, we have been engaged in ongoing 

bilateral and multilateral discussions with foreign regulators and 

have been speaking with many foreign and domestic market participants in order to better understand what areas of derivatives 

regulation pose such arbitrage opportunities. We have solicited and 

welcome comments on our proposed rulemakings regarding the potential impact they may have on the position of the U.S. securitybased swap markets, especially comments that offer suggestions for 

mitigating regulatory arbitrage opportunities while achieving the 

goals of the Dodd-Frank Act. 

As Dodd-Frank implementation proceeds, we expect to continue 

working closely with the other FSOC agencies. 

Q.5.b. How will FSOC ensure that U.S. firms will have equal access to European markets as European firms will have to U.S. markets? 

A.5.b. Many foreign jurisdictions, including the European Union, 

are in the process of adopting derivatives legislation and implementing regulations, and are at much earlier stages of development 

in their efforts than is the United States. While there are a range 

of views internationally on the appropriate level of derivatives regulation, the SEC has been actively engaged in ongoing bilateral 

and multilateral discussions with foreign regulators regarding the 

direction of international derivatives regulation generally, and the 

SEC’s efforts to implement Title VII’s requirements. 

For example, the SEC, along with the CFTC, the United Kingdom Financial Services Authority, and the Securities and Exchange 

Board of India, is co-chairing the International Organization of Securities Commissions Task Force on OTC Derivatives Regulation 

(‘‘Task Force’’). One of the primary goals of this task force is to 

work to develop consistent international standards related to OTC 

derivatives regulation. In addition, on behalf of IOSCO, the SEC, 

along with the European Commission and an international organization of central banks, co-chairs the Financial Stability Board’s 

OTC Derivatives Working Group (‘‘FSB Working Group’’). The 

CFTC and Federal Reserve Board also are members of the FSB 

Working Group. 

These and other bilateral and multilateral efforts serve to keep 

the SEC informed about emerging similarities or differences in po-
130 

tential approaches to derivatives regulation and provide us with an 

opportunity to work with our counterparts in other jurisdictions in 

order to foster the development of common frameworks and coordinate regulatory efforts as much as possible with a view to mitigating systemic risk and preventing regulatory arbitrage. 

The SEC expects to continue to work closely with the other members of the FSOC and recognizes that the FSOC can help bring 

agencies together to exchange information. 

Q.5.c. How will FSOC ensure that Basel III will be implemented 

in the United States in a manner that is not more stringent than 

in Europe, making U.S. firms less competitive globally? 

A.5.c. The Basel standards relate to bank capital adequacy and liquidity. The U.S. prudential regulators, including members of the 

FSOC have jurisdiction under Dodd-Frank for promulgating rules 

for capital and margin requirements for banks, and accordingly will 

utilize the Basel III agreement. The SEC has responsibility for promulgating capital and margin requirements under Dodd-Frank for 

nonbank security-based swap dealers. 

The SEC has been carefully considering the potential consequences of certain provisions of Title VII and our proposed rulemaking for domestic and foreign market participants—in particular 

the impact on the ability of U.S. market participants to compete effectively with foreign market participants that may not be subject 

to the Dodd-Frank Act. In fact, we are required to take into account potential burdens on competition when engaging in rulemaking, including rulemaking under Title VII. Our goal is to establish a level playing field for all market participants while adhering 

to the regulatory requirements and objectives of the Dodd-Frank 

Act, and we are considering how to promulgate regulations in a 

way that accomplishes this goal. 

Q.6. Is a broker/dealer that is not self-clearing less likely to pose 

systemic risk because it receives the financial backing and risk 

management attention of its clearing firm which already performs 

extensive monitoring of risk for the broker-dealers and which in all 

likelihood will itself be a SIFI? 

A.6. Broker-dealers that are not self-clearing (otherwise referred to 

as an introducing broker-dealer), as a general matter, are less likely to pose systemic risk than do clearing firms because they do not 

maintain custody of customer assets and usually do not have proprietary positions in substantial size such that their failure would 

result in exposure to other large firms or result in market impacts 

from the liquidation of assets. 

Whether a clearing firm would ever be a SIFI will depend on the 

approach taken by the FSOC to the designation of SIFIs. At a minimum, in order to be designated as a SIFI, any firm would first 

need to be evaluated by the FSOC with respect to size, leverage, 

concentrations, and other relevant factors. Under Commission 

rules, an introducing broker-dealer is required to enter into a contract with a clearing broker-dealer who agrees to both settle trades 

and maintain custody of customer assets. Further, under the Commission’s financial responsibility rules, a clearing broker-dealer 

must monitor all introduced accounts and take appropriate actions, 

including taking capital charges, in the event those accounts do not 
131 

have sufficient assets to be able to ‘‘self-liquidate.’’ The failure of 

an introducing broker-dealer that handles a large number of customer accounts could create disruption resulting from the need to 

transfer those accounts to one or more other introducing firms, but 

generally speaking it should not result in systemic effects of the 

type that might accompany the failure of a large clearing firm. 

Q.7. Titles I and II of Dodd-Frank references an entity’s ‘‘asset 

threshold’’ or ‘‘total consolidated assets’’ several times. Are such 

calculations to be made in accordance with generally accepted accounting principles (GAAP)? 

A.7. The terms ‘‘asset threshold’’ and ‘‘total consolidated assets’’ appear in a number of places in Title I and Title II, but the DoddFrank Act does not define them. While the terms appear in connection with the work of FSOC, they do not arise directly in connection with the Commission’s responsibilities. FSOC is considering 

what definitions or interpretations of such terms may be required. 

RESPONSE TO WRITTEN QUESTION OF SENATOR MORAN 

FROM MARY L. SCHAPIRO 

Q.1. Regarding this initial consultation phase which will occur 

prior to designation, should we assume that the markets and public 

will know to whom such notices are sent? Do you believe that public companies are obligated to disclose receipt of such a notice in 

their filings? What would happen if a firm that disclosed having received a notice was not designated as systemically significant? Is 

there a possibility that the markets would react to that news? 

A.1. There are currently no specific ‘‘line item’’ requirements to disclose that a company has been notified that it is being considered 

for possible designation or if it has been notified and not designated. However, a company would need to review its description 

of its regulatory status and requirements to determine whether its 

disclosure requires updating. The company and its advisors would 

need to determine whether being notified that the company may be 

systemically important (and, once a determination has been made 

with regard to designation, the outcome of that determination) is 

material information that must be disclosed to investors. The test 

for materiality is whether there is a substantial likelihood that the 

disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. Whether a contingent or speculative 

event is material requires a balancing of both the indicated probability that the event will occur and the anticipated magnitude of 

the event in light of the totality of the company activity. 

If material, the company would need to disclose the possible designation and/or the final determination as to designation, for example, in an annual or quarterly report. The possible designation and/ 

or the final determination as to designation are more likely to be 

material if FSOC designations have had a material effect on other 

companies’ stock prices. The materiality determination also would 

be affected by the consequences of being designated systemically 

important, such as capital requirements and limitations on business activities. 
132 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY 

FROM GARY GENSLER 

Q.1. You mentioned in your written testimony that it is important 

for ‘‘people who want to hedge their risk to do so without concentrating risk in the hands of only a few financial firms.’’ How much 

concentration of the market in the top firms is too much? Are you 

concerned that the aggressive approach that you have taken with 

respect to swap dealer regulation will cause the field of dealers to 

narrow, not broaden, thus further concentrating the swap dealer 

business? 

A.1. The Dodd-Frank Act brings essential reforms to the swaps 

markets that will benefit the American public and end-users of derivatives. While the derivatives market has changed significantly 

since swaps were first transacted in the 1980s, the constant is that 

the financial community maintains information advantages over 

their nonfinancial counterparties. When a Wall Street bank enters 

into a bilateral derivative transaction with a corporate end-user, 

for example, the bank knows how much its last customer paid for 

similar transactions. That information, however, is not generally 

made available to other customers or the public. The bank benefits 

from internalizing this information. The Dodd-Frank Act brings 

sunshine to the opaque swaps markets. The more transparent a 

marketplace is, the more liquid it is, the more competitive it is, and 

the lower the costs for hedgers, borrowers and their customers. 

In implementing the Dodd-Frank Act, the Commission is adhering closely to the statute with the intent to comply fully with its 

provisions and Congressional intent to lower risk and bring transparency to these markets. 

Q.2. You state that end-users will enjoy better pricing on derivatives transactions because of the rules that the CFTC is putting 

into place. Has your agency conducted economic analysis to support 

your conclusion that end-users will pay less for derivatives transactions under the Dodd-Frank framework? 

A.2. Economists and policymakers for decades have recognized that 

market transparency benefits the public. There are two types of 

transparency that Congress, through the Dodd-Frank Act, sought 

to bring to the swaps markets. The first is transparency to the regulators, which will include swap data repositories that will provide 

data to regulators. The second is transparency to the public. 

There are three phases that a swap transaction goes through 

that will be more transparent under the Dodd-Frank Act. The first 

occurs before the transaction takes place by moving standardized 

swap transactions onto exchanges or swap execution facilities 

(SEFs). 

These exchanges will allow investors, hedgers and speculators to 

meet in a transparent, open and competitive central market. The 

Act includes exceptions from this requirement for block trades and 

transactions involving commercial end-users. 

The second phase occurs immediately after the transaction takes 

place, when pricing data is made public in real time. Congress also 

has been very specific that market participants and end-users 

should benefit from such real-time reporting. This post-trade transparency—other than for block trades—must be achieved ‘‘as soon 
133 

as technologically practicable’’ after a swap is executed, which will 

enhance price discovery. This requirement applies to both cleared 

and uncleared swaps. 

The third phase occurs over the lifetime of the swap contract. 

The Dodd-Frank Act requires that swaps be marked to market 

every day until they expire and that such valuations be shared 

with market participants. If the contract is cleared, the clearinghouse will be required to publicly disclose the pricing of the swap 

every day. If the contract is bilateral, swap dealers will be required 

to share mid-market pricing on a daily basis with their counterparties. 

In implementing the Act, the Commission is adhering closely to 

the statute. 

Q.3. Judging from the proposed rules we have seen, the CFTC’s 

rulemaking to date has not been particularly well-coordinated with 

the SEC’s rulemaking. Are you willing to take your disputes to the 

Council for resolution before you move to the adopting stage, or are 

you planning to proceed with your preferred approach ahead of the 

SEC and hope that they will follow suit? 

A.3. See response to question 4. 

Q.4. Your agency is deeply engaged in rulemaking regarding overthe-counter derivatives. Judging from the proposed rules we have 

seen, your rulemaking to date has not been particularly well-coordinated. Are you willing to take unresolved disputes to the Council for resolution before you move to the adopting stage, or are you 

planning to proceed with your preferred approach before the SEC 

acts and hope that the SEC will follow suit? 

A.4. Throughout the Dodd-Frank rule-writing process, the Commission is consulting heavily with both other regulators and the broader public. We are working very closely with the SEC, the Federal 

Reserve, the Federal Deposit Insurance Corporation, the Office of 

the Comptroller of the Currency and other prudential regulators, 

which includes sharing many of our memos, term sheets and draft 

work product. CFTC staff has held over 600 meetings with other 

regulators on implementation of the Act. Our rule-writing teams 

are working with the Federal Reserve in several critical areas. 

With the SEC, we are coordinating on the entire range of rule-writing, including swap dealer regulation, clearinghouse regulation and 

swap data repositories, as well as trading requirements, real-time 

reporting and key definitions. So far, we have proposed two joint 

rules with the SEC as required by Congress. We will continue to 

work closely together through the implementation process. 

Q.5. Under Dodd-Frank, swap data repositories, before sharing any 

information with a regulator other than their primary regulator, 

must obtain an indemnification agreement with that other regulator. Will this requirement adversely affect regulators’ ability to 

obtain a comprehensive view of the swaps markets? 

A.5. Under the provision, domestic and foreign authorities, in certain circumstances, would be required to provide written agreements to indemnify SEC and CFTC-registered trade repositories, 

as well as the SEC and CFTC, for certain litigation expenses as a 

condition to obtaining data directly from the trade repository re-
134 

garding swaps and security-based swaps. Regulators in foreign jurisdictions have raised concerns regarding the potential effect of 

the provision. However, I believe that the indemnification provision 

need not apply when a foreign regulator, acting within the scope 

of its jurisdiction, seeks information directly from a trade repository registered with both the CFTC and the foreign jurisdiction. 

Under the CFTC’s proposed rules regarding trade repositories’ duties and core principles, foreign regulators would not be subject to 

the indemnification and notice requirements if they obtain information that is in the possession of the CFTC. 

Q.6. One of the Council’s purposes is to monitor systemic risk and 

alert Congress and regulators of any systemic risks it discovers. 

What are the most serious systemic risks presently facing the U.S. 

economy? 

A.6. Under section 112 of the Dodd-Frank Act, the Council must 

provide an annual report to Congress that sets forth what it believes are potential emerging threats to the financial stability of 

the United States. This annual report represents the Council and 

its members’ analyses of emerging threats to financial stability and 

potential systemic risks to the economy. The report is prepared by 

both prudential and market regulators and identifies both the most 

serious risks to the U.S. economy as well as developing risks that 

may become more dangerous in the future. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM GARY GENSLER 

Q.1. According to the American Banker, Annette L. Nazareth, a 

former SEC Commissioner, called the timetables imposed by the 

Dodd-Frank Act ‘‘wildly aggressive.’’ ‘‘These agencies were dealt a 

very bad hand,’’ she said. ‘‘These deadlines could actually be systemic-risk raising.’’ Given the importance of rigorous cost-benefit 

and economic impact analyses and the need for due consideration 

of public comments, would additional time for adoption of the 

Dodd-Frank Act rules improve your rulemaking process and the 

substance of your final rules? 

A.1. The Dodd-Frank Act provides the Commission with ample 

flexibility to phase in implementation of requirements. The CFTC 

and SEC staff held roundtables on May 2 and 3, 2011, and have 

solicited comments from the public regarding such concerns. This 

important input informs the final rulemaking process. 

We’ve also reached out broadly on what we call ‘‘phasing of implementation,’’ which is the timeline for rules to take effect for various market participants. This is critically important so that market participants can take the time now to plan for new oversight 

of this industry. 

Next month, it is my hope that we vote on two proposed 

rulemakings seeking additional public comment on the implementation phasing of swap transaction compliance that would affect the 

broad array of market participants. The proposed rulemakings 

would provide the public an opportunity to comment on compliance 

schedules applying to core areas of Dodd-Frank reform, including 

the swap clearing and trading mandates, and the internal business 
135 

conduct documentation requirements and margin rules for 

uncleared swaps. These proposed rules are designed to smooth the 

transition from an unregulated market structure to a safer market 

structure. 

Q.2. Chairman Bair’s testimony was unclear regarding whether the 

FSOC has the authority to issue a revised rule on the designation 

of nonbank financial institutions. She and others indicated some 

type of guidance might be issued instead. Is it in fact the case, in 

general, that the FSOC does not have authority to issue rules 

under Title I that have the force and effect of law? If the FSOC 

has the authority in general to issue such rules on designation, 

why specifically would the FSOC be precluded from re-proposing a 

rule that is currently pending? Is there additional authority the 

FSOC would need from Congress to issue such rules or to proceed 

with re-proposing its NPR on designation? If yes, what specific authority would the FSOC need from Congress for the FSOC to have 

the ability to proceed? 

A.2. The FSOC’s proposed rule concerning nonbank financial institutions described the framework that the Council would use to determine whether an entity should be designated as systemically important. In response to concerns that have been expressed, the 

FSOC is considering a variety of ways in which it may be able to 

provide greater guidance and more clarity. FSOC member agencies 

are collaborating to develop further guidance to be provided in a 

manner consistent with statutory requirements and are also considering the appropriate form that updated guidance should take. 

Q.3. In an August speech at NYU’s Stern School of Business, 

Treasury Secretary Geithner outlined six principles that he said 

would guide implementation, and then he added, ‘‘You should hold 

us accountable for honoring them.’’ His final principle was bringing 

more order and integration to the regulatory process. He said the 

agencies responsible for reforms will have to work ‘‘together, not 

against each other. This requires us to look carefully at the overall 

interaction of regulations designed by different regulators and assess the overall burden they present relative to the benefits they 

offer.’’ Do you intend to follow through with this commitment with 

some form of status report that provides a quantitative and qualitative review of the overall interaction of all the hundreds of proposed rules by the different regulators and assess the overall burden they present relative to the benefits they offer? 

A.3. The Commission is committed to consultation with fellow regulators here in the United States as well as in other countries. 

Throughout our rule-writing process, the Commission has shared 

term sheets and draft proposals with other regulators and sought 

their feedback. This coordination has helped to promote consistent 

and comparable standards. As we consider final rules, our teams 

are reviewing the proposals from other agencies as well to see how 

they interact with the Commission’s proposals. As part of our significant outreach with other regulators, CFTC staff has met more 

than 600 times with other regulators on Dodd-Frank implementation. 
136 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM GARY GENSLER 

Q.1. Dodd-Frank set forth a comprehensive list of factors that 

FSOC must consider when determining whether a company posed 

a systemic risk and deserves Fed oversight. The council, in its advanced notice of proposed rulemaking, sets forth 15 categories of 

questions for the industry to comment on and address. However, 

the proposed rules give no indication of the specific criteria or 

framework that the council intends to use in making SIFI designations—other than what is already set forth in Dodd-Frank. As a result, potential SIFIs have no idea where they may stand in the designation process. Will the council provide additional information 

about the quantitative metrics it will use when making an SIFI 

designation? 

A.1. I expect that the council will provide additional information in 

this regard. 

Q.2. Would the council agree that leverage is likely to be the one 

factor that is most likely to create conditions that result in systemic risk? If so, how will the council go about identifying which 

entities use leverage? 

A.2. Leverage may very well be a factor that the FSOC considers 

in assessing the systemic risk arising from a firm’s activities. Leverage is traditionally a measure of the relationship between a 

firm’s total assets and its equity. 

Q.3. One of the first steps in the systemic designation process, as 

outlined in the proposed rule, is that after identifying a nonbank 

financial company for possible designation the FSOC will provide 

the company with a written preliminary notice that the council is 

considering making proposed determination that the company is 

systemically significant. Is receipt of such a notice a material event 

that might affect the financial situation or the value of a company’s 

shares in the mind of the investors? If so, wouldn’t it need to be 

disclosed to investors under securities laws? 

A.3. This question is more appropriately answered by others on the 

panel. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM GARY GENSLER 

Q.1. Can you share with us what the FSOC, OFR, FDIC and Fed 

are contemplating by way of fees that they may assess on SIFIs? 

A.1. The FSOC recently received a briefing concerning appropriate 

enhanced prudential standards generally, including discussion of 

systemically important financial institutions. These matters are 

also being considered at the international level as prudential regulators seek to ensure the development of consistent standards, particularly with respect to global systemically important banks. The 

Federal Reserve and the Federal Deposit Insurance Corporation 

have taken the lead on these matters. 
137 

International Competitiveness 

Q.2.a. It is critical for the continued competiveness of the U.S. 

markets that a regulatory arbitrage does not develop among markets that favors markets in Europe and Asia over U.S. markets. 

Will the FSOC commit to ensuring that the timing of the finalization and implementation of rulemaking under Dodd Frank does not 

impair the competitiveness of U.S. markets? 

A.2.a. As a member of FSOC, I believe we should be aware of the 

competitive implications of FSOC decisions. I look forward to working with my fellow members on these issues as we move toward the 

finalization and implementation of Dodd-Frank rules. 

Q.2.b. How will FSOC ensure that U.S. firms will have equal access to European markets as European firms will have to U.S. markets? 

A.2.b. It is important that the FSOC consider not only how the regulatory structure in the United States affects both U.S. and foreign 

institutions, but also how foreign regulatory structures affect those 

institutions. As a member of FSOC and Chairman of the CFTC, I 

regularly review foreign regulatory standards and proposals and 

how those standards and proposals will affect U.S. firms. 

Q.2.c. How will FSOC ensure that Basel III will be implemented 

in the United States in a manner that is not more stringent than 

in Europe, making U.S. firms less competitive globally? 

A.2.c. As a member of the FSOC, I consult with prudential regulators concerning these matters in any way that proves helpful and 

will continue to do so going forward. 

Q.3. Is a broker/dealer that is not self-clearing less likely to pose 

systemic risk because it receives the financial backing and risk 

management attention of its clearing firm which already performs 

extensive monitoring of risk for the broker-dealers and which in all 

likelihood will itself be a SIFI? 

A.3. As a member of the FSOC, when deciding whether to designate an institution as a SIFI, I would consider the potential systemic risk that the firm’s activities may create, consistent with the 

statutory framework. I also would consider any factors that might 

mitigate such systemic risk. 

Q.4. Titles I and II of Dodd-Frank references an entity’s ‘‘asset 

threshold’’ or ‘‘total consolidated assets’’ several times. Are such 

calculations to be made in accordance with generally accepted accounting principles (GAAP)? 

A.4. As a member of FSOC, I look forward to working with my fellow members to determine how best to apply these statutory terms 

to different types of institutions, consistent with the statutory 

framework and Congressional intent.