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[Senate Hearing 112-183]
[From the U.S. Government Publishing Office]

                                                        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 DODD-FRANK 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 /

                               ----------
                         U.S. GOVERNMENT PRINTING OFFICE 

71-127 PDF                       WASHINGTON : 2011 

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Washington, DC 20402-0001 

            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia             MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina

                     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)

                            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
        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

 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 
Dodd-Frank 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 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.
    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.
    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 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 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 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 
over-the-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 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 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 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.

        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 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.
    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.
    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 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 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.
    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.
    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 financial 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 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.
    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?
    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.
    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 Dodd-
Frank 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.
    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 Dodd-Frank 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 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.
    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?
    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 net-net 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 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 ``bail-in'' 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.
    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 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.
    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 proposed 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 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. 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 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:]
            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 foundations 
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 rulemaking; 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.
    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.
    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 
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 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.
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 within 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 Dodd-Frank 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 necessary 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.
---------------------------------------------------------------------------
    \1\ The 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.
---------------------------------------------------------------------------
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 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 over-the-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 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 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\
---------------------------------------------------------------------------
    \1\ Reinhart, Carmen and Ken Rogoff. This Time Is Different: Eight 
Centuries of Financial Folly. Princeton: Princeton University Press. 
2009. p. xxv.

    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 on-balance-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 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.
---------------------------------------------------------------------------
    \2\ See http://www.bis.org/publ/bcbs164.htm.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \3\ See: ``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.
    \4\ See: 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.
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    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 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.
    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 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.
---------------------------------------------------------------------------
    \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.
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    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 incentive 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 
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\
---------------------------------------------------------------------------
    \6\ Hearings before the U.S. Senate Committee on Banking, Housing, 
and Urban Affairs: July 16, 2009; November 16, 2010; December 1, 2010.
---------------------------------------------------------------------------
    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 institutions 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 long-term, 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 FDIC-supervised 
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\
---------------------------------------------------------------------------
    \7\ See http://www.fdic.gov/news/news/financial/2010/fil10002.html.
    \8\ See http://www.fdic.gov/news/conferences/
symposium_irr_meeting.html.
---------------------------------------------------------------------------
    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.
    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.
                                 ______
                                 
                    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).*
---------------------------------------------------------------------------
    * 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.
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    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 Dodd-Frank 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\
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    \1\ See Section 112(a)(1).
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    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 tracking 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 on- and 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 mission\2\ 
        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.
---------------------------------------------------------------------------
    \2\ See section 112.
    \3\ See section 113(a)(1).
---------------------------------------------------------------------------
    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 risks, the company should be required to sell or otherwise 
transfer assets or off-balance items to unaffiliated entities.\4\
---------------------------------------------------------------------------
    \4\ See section 121.
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    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\
---------------------------------------------------------------------------
    \5\ See section 112.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \6\ See section 622.
    \7\ See section 619.
    \8\ See section 215.
    \9\ See section 115.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \10\ See section 112.
    \11\ See section 165.
    \12\ See section 112.
    \13\ See section 112.
    \14\ See section 119.
---------------------------------------------------------------------------
    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 resolution 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.
---------------------------------------------------------------------------
    \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.

    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:
---------------------------------------------------------------------------
    \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.

    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 rulemaking. The study endorses 
the robust implementation of the Volcker Rule and makes ten broad 
recommendations for the agencies' consideration.\17\
---------------------------------------------------------------------------
    \17\ See: Financial Oversight Council, Study & Recommendations on 
Prohibitions on Proprietary Trading & Certain Relationships with Hedge 
Funds & Private Equity Funds, (January 2011) at 3.
---------------------------------------------------------------------------
    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, analytical 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 non-bank 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 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 members. The OCC is 
committed to providing its expertise and perspectives and in helping 
the Council achieve its mission.
                                 ______
                                 
                 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.
---------------------------------------------------------------------------
    \1\ The 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.
---------------------------------------------------------------------------
    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 
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 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 Dodd-Frank 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\
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    \2\ See 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.

    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\
---------------------------------------------------------------------------
    \3\ See id.

    A definition of ``venture capital fund'' to distinguish 
        these funds from other types of private funds;\4\ and
---------------------------------------------------------------------------
    \4\ See 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.

    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 rule), certain key 
        employees, charities and trusts established by family members 
        and entities wholly owned and controlled by family members.\5\
---------------------------------------------------------------------------
    \5\ See Release No. IA-3098, Family Offices (October 12, 2010); 
http://www.sec.gov/rules/proposed/2010/ia-3098.pdf.

    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.
---------------------------------------------------------------------------
    \6\ See 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.
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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 
regulators\7\ 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\
---------------------------------------------------------------------------
    \7\ The 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).
    \8\ The 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).
    \9\ See Dodd-Frank Act  111(b)(2).
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    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\
---------------------------------------------------------------------------
    \10\ See Dodd-Frank Act  112(a)(1).

    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 utilities (``FMUs'') and 
payment, clearing, and settlement activities that are, or are likely to 
become, systemically important.\14\
---------------------------------------------------------------------------
    \11\ See Dodd-Frank Act  112(a)(2)(H) and 113.
    \12\ See Dodd-Frank Act  112(a)(2)(I).
    \13\ See id.
    \14\ See Dodd-Frank Act  112(a)(2)(J) and 804(a).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \15\ See Dodd-Frank Act  112(a)(2)(C)-(G).
    \16\ See Dodd-Frank Act  112(a)(2)(A)-(B).
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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 Dodd-Frank 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 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\
---------------------------------------------------------------------------
    \17\ Section 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.''
    \18\ See Dodd-Frank Act  802.
    \19\ See Dodd-Frank Act  805.
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    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 in-depth 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.
---------------------------------------------------------------------------
    \20\ Section 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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \21\ See Dodd-Frank Act  112(a)(2)(N).
---------------------------------------------------------------------------
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.
    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.
    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 Dodd-Frank 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 non-
financial 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 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.
    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.
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.

 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 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 committees, 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.

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).
    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.
    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 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 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 non-statutory 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 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. 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 financial 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?

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. LIsn't it true that each of those funds may operate with 
        separate and distinct investment strategies, each with 
        its own unique risks?

  b. LIsn'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 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 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 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.
    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 discipline 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 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 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.

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 market 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 long-term 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 risk-based 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 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 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.)
                                ------                                

 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 Dodd-Frank 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 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 
end-users, 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 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 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 
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.
                                ------                                

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?

   LIsn't it true that each of those funds may operate 
        with separate and distinct investment strategies, each 
        with its own unique risks?

   LIsn'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 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 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-and-soundness 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 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 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 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.

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 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 further ``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. LOn 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. LThe 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. LThe 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 targeted 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. LAny foreclosure-related complaints received by the OCC's 
        Customer Assistance Group will be forwarded to the bank 
        for review by the independent consultant.

  5. LOCC 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. LIndependent 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. LOCC 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 ``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 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 
Pfleiderer\1\ (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. 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:
---------------------------------------------------------------------------
    \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.

        [H]igher equity capital requirements do not mechanically limit 
        banks' activities, including lending, deposit taking and the 
        issue of liquid, money-like, 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.

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 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 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 
transaction, 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 end-users 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?

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.

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 
details 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 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 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 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 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.

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 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 SEC-registered 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 ``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 broker-dealers 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 
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 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 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 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 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. 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?

   LIsn't it true that each of those funds may operate 
        with separate and distinct investment strategies, each 
        with its own unique risks?

   LIsn'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 Dodd-Frank Act requires that FSOC 
consider before designating any nonbank financial company. It's 
also important to note, that while 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:

   Lidentifying 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;

   Lpromoting 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

   Lidentifying 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 
implementing 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. security-based 
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 potential 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 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 Dodd-Frank 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.
                                ------                                

   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 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 
over-the-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 regarding 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 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.
                                ------                                

   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.

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.
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