U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

66–872 PDF 2011

FDIC OVERSIGHT: EXAMINING 

AND EVALUATING THE ROLE OF 

THE REGULATOR DURING THE 

FINANCIAL CRISIS AND TODAY 

HEARING 

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

MAY 26, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–34 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SHELLEY MOORE CAPITO, West Virginia, Chairman 

JAMES B. RENACCI, Ohio, Vice Chairman 

EDWARD R. ROYCE, California 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JEB HENSARLING, Texas 

PATRICK T. MCHENRY, North Carolina 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

MICHAEL G. GRIMM, New York 

STEPHEN LEE FINCHER, Tennessee 

CAROLYN B. MALONEY, New York, 

Ranking Member 

LUIS V. GUTIERREZ, Illinois 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

GREGORY W. MEEKS, New York 

STEPHEN F. LYNCH, Massachusetts 

JOHN C. CARNEY, JR., Delaware 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

May 26, 2011 ..................................................................................................... 1 

Appendix: 

May 26, 2011 ..................................................................................................... 45 

WITNESSES 

THURSDAY, MAY 26, 2011 

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

(FDIC) ................................................................................................................... 6 

APPENDIX 

Prepared statements: 

Bair, Hon. Sheila C. ......................................................................................... 46 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Luetkemeyer, Hon. Blaine: 

Written responses to questions submitted to Hon. Sheila C. Bair ............... 107 

Westmoreland, Hon. Lynn: 

Written statement of Jeff Betsill ..................................................................... 111 

Written statement of Richard R. Harp ........................................................... 114 

Written statement of Tom Reese ..................................................................... 116 

(1) 

FDIC OVERSIGHT: EXAMINING 

AND EVALUATING THE ROLE OF 

THE REGULATOR DURING THE 

FINANCIAL CRISIS AND TODAY 

Thursday, May 26, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 9:38 a.m., in room 

2128, Rayburn House Office Building, Hon. Shelley Moore Capito 

[chairwoman of the subcommittee] presiding. 

Members present: Representatives Capito, Renacci, Royce, Manzullo, McHenry, Westmoreland, Luetkemeyer, Huizenga, Duffy, 

Canseco, Grimm, Fincher; Maloney, Baca, Scott, Velazquez, and 

Carney. 

Chairwoman CAPITO. First of all, I want to apologize for the 

delay. We are having a little organizational issue here. 

So this hearing will come to order. And I would like to thank the 

members of the subcommittee and our witness, the chairman of the 

FDIC, for coming today. 

It sounds like we are going to have our first series of votes 

around noon or 12:30, so we will hopefully have this concluded by 

then, because we are going to be in a lengthy series of votes. That 

is the plan for this hearing. 

Today we are joined, as we know, by FDIC Chairman Sheila 

Bair, who will be leaving her position in July of this year. 

First of all, I would like to thank the chairman for her dedicated 

service. I think one thing you could say is that it hasn’t been a dull 

5 years for you. You have had a lot of activity. And I thank you 

for your service to our country. 

It is my hope that this will provide a forum for our members to 

gain a better understanding of the role of the FDIC in the financial 

crisis, the Corporation’s new role in the regulatory regime presented by the Dodd-Frank Act, and the current state of FDIC-insured banks in general. 

The recent passage of Dodd-Frank further enhances the role of 

the FDIC in our Nation’s regulatory structure, as they will be 

charged with unwinding failed large financial institutions as provided in the Orderly Liquidation Authority, or OLA. 

2 

I am interested to hear from Chairman Bair about the FDIC’s 

ability to balance these new powers with the traditional role of a 

prudential regulator. 

Insuring deposits is the FDIC’s duty with which most people are 

familiar. An unfortunate effect of the financial crisis has been an 

increase in bank failures across the country. The rate of bank failures has increased dramatically over the last 2 years, with 140 failing in 2009, and 157 in 2010. 

These failures have significantly depleted the Deposit Insurance 

Fund, known as the DIF, and the FDIC has been forced to utilize 

emergency assessments on banks to replenish the fund, as well as 

requiring banks to pre-pay premiums for the years 2010 through 

2012. 

Despite these efforts, the Deposit Insurance Fund still has significant challenges. I look forward to hearing from Chairman Bair 

on this and the status of the Deposit Insurance Fund. 

Although I fully understand the need to replenish the Fund, I am 

concerned about the future needs for pre-payments of premiums. 

This could have an unintended consequence, I believe, of reducing 

the amount of funds available for lending. 

The one common thing I hear from the community banks across 

my district is that they feel hamstrung by the regulators in their 

ability to lend. So we need to find a balance here to ensure we have 

a safe and sound Deposit Fund, while not encumbering lending by 

our institutions. 

Regulatory burden is not limited to the assessments placed on 

banks. I am very interested to learn what measures Federal financial regulators are taking to ensure new regulations are not duplicative with other agencies or existing regulations. 

We need to ensure that new regulations provide enough flexibility for small institutions to meet the needs of their customers 

and not be encumbered by a one-size-fits-all regulation geared to 

the largest institutions in our Nation. A diverse financial institution is good for all market participants. 

I am very interested to hear from Chairman Bair how she envisions the FDIC working with the newly created Consumer Financial Protection Bureau on enforcement of consumer protection regulation. 

Finally, I would like to touch on the Orderly Liquidation Authority that was granted to the FDIC by the Dodd-Frank Act. I know 

that Chairman Bair sincerely believes that these new powers effectively end too-big-to-fail. And I sincerely hope that she is correct. 

I still have reservations about this resolution authority and 

would prefer to see a different form—and we have talked about 

this several times—of resolution where there is absolutely no taxpayer exposure. 

Let us work together to ensure that the message is clear to market participants: There will be no more government bailouts. 

I would now, if she is ready, like to introduce the ranking minority member, the gentlelady from New York, Mrs. Maloney, for the 

purpose of making an opening statement. 

Mrs. MALONEY. I just want to join you, Madam Chairwoman, in 

welcoming our distinguished and outstanding Chairman Bair. I 

know that this is her last appearance before our committee. 

3 

And I wanted to express my deep appreciation for your service, 

especially during the most recent financial crisis and your attention 

to communities, to details, to Members of Congress. I truly believe 

you have done an incredibly outstanding job. 

Thank you. 

The FDIC was forced to take significant measures during the crisis, and continues to act in the wake of the crisis to ensure the 

health of our banking system. 

Your involvement and leadership was critical during this difficult 

time. We can now say that we are recovering from a crisis, not a 

depression. And I think you played a meaningful and significant 

role in our being able to say that. 

This hearing is very timely because it is happening during your 

last few weeks in your tenure at the FDIC, but also because it is 

happening during a period of recovery, when we have the benefit 

of hindsight. 

During this most recent crisis, we saw 8.5 million jobs lost and 

over $15 trillion in household wealth lost in America. And although 

we are trending up in terms of job creation, it is slower than any 

of us would like. 

This crisis highlighted how important it is to have a sound financial system in terms of the functioning of our overall economy. We 

know of the fear that can set in on Main Street when institutions 

on Wall Street are challenged and in some cases failing. 

And we know that overleveraged, overcapitalized financial institutions contribute to the problem. Structured finance products that 

were unregulated, opaque, and highly risky ran rampant. And you, 

the regulators, did not have the tools you needed to rein them in. 

Congress changed that with the enactment of Dodd-Frank last 

year. The law now gives the regulators the authority to wind down 

failing institutions and more power to regulate the institutions. 

And we made significant changes that directly affect FDIC-insured institutions. For example, we made the $250,000 deposit insurance limit permanent to increase public confidence in their financial institutions. And you played a meaningful role in helping 

to make that happen. 

We changed the formula for deposit insurance assessment, so 

larger institutions that are engaged in riskier activities will pay 

more than smaller institutions that pose less of a potential threat 

to the FDIC. 

And we increased the minimum level required in the DIF to provide a better cushion in troubled economic times so that smaller 

banks are protected from having to foot the bill if there is a need 

to raise additional funds. 

All of the actions we took in Dodd-Frank were meant to both 

help prevent another economic crisis and to help soften the blow 

when unanticipated things happen. 

So I am looking forward to hearing from Chairman Bair, because 

I know there are a number of new requirements on regulators, how 

you believe the system has fared since the crisis, what you see as 

challenges going forward, and to hear any words of wisdom you 

have for us before you leave your position. 

4 

I just want to underscore again how much I appreciate your service. I am looking forward to the next chapter. I know you will continue to make meaningful contributions to our great country. 

Thank you for your leadership and your service. 

Chairwoman CAPITO. Thank you. 

I would like to recognize Mr. Royce for a minute-and-a-half for 

the purpose of an opening statement. 

Mr. ROYCE. Thank you, Madam Chairwoman. 

And, Chairman Bair, I would just like to welcome you. Thank 

you for your years of service. I have enjoyed our conversations. As 

you know, I am still concerned that Dodd-Frank hasn’t ended toobig-to-fail, but has left us with a number of massive institutions 

with a much lower cost of capital, that are going to continue to expand at the expense of their competitors because their borrowing 

costs are lower. 

There is a 78-basis-point advantage, I think, according to the 

studies that you have done. 

And, at the end of the day, it is a system that enables the use 

of government funds in resolving an institution, and relies on the 

prudence of regulators during a crisis to avoid overpayment to 

creditors and counterparties. 

I think that the very fact that you have that lower cost of capital 

just shows that it is human nature—that the way we set this up; 

there is the presumption. We have created additional moral hazard 

in the equation. 

So while I hope that this committee works to eliminate the Orderly Liquidation Authority in a move to a more objective enhanced 

bankruptcy, I believe we can take steps in the near term, in the 

meantime, to tighten up the resolution authority and minimize 

some of the unintended, and frankly probably some of the intended, 

consequences of this legislation. 

I appreciate your efforts in this regard and certainly your 

thoughts today, especially on this particular theme. 

Thank you very much. 

Chairwoman CAPITO. Thank you. 

I would like to recognize Mr. Luetkemeyer for a minute-and-ahalf for the purpose of an opening statement. 

Mr. LUETKEMEYER. Thank you, Madam Chairwoman. 

Years ago in another life, when I was a bank examiner, our mission was to work in cooperation with institutions to ensure that 

they understood the regulations to which they are subjected. There 

now seems to be a shift in the attitude of the regulators. Instead 

of a partnership, I hear time and time again that relationships between financial institutions and the regulators are more like a 

game of ‘‘gotcha.’’ 

Like many of my colleagues, I have heard stories of overzealous 

examiners who practice little or no regulatory forbearance. One 

bank in my district has been profitable and sound for many years 

but was put on the problem list at a recent examination. 

And it was noted to me that the examiner had been scolded the 

previous day for having not done a good enough job in predicting 

another bank that he had recently been in be put on the list. That 

bank, by the way, since then has had no problems since it was put 

on the problem list, similar to what it was prior to that. 

5 

The bottom line is we need regulators to do their job. We need 

the FDIC and other agencies to promote sound financial practices 

and ensure consumer protections. No more, no less. 

What we do not need are overzealous examiners who have no regard for any sort of forbearance or upper management to stick its 

head in the sand and refuse to recognize what is going on in the 

field or in our economy. 

I urge the FDIC to take a look at your practices, communicate 

with your examiners, and work with institutions so that together 

we can work to get our economy moving again. 

I look forward to the discussion. I yield back. 

Thank you, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. 

I would like to recognize the gentleman from Texas, Mr. Canseco, 

for 1 minute, for the purpose of an opening statement. 

Mr. CANSECO. Thank you, Madam Chairwoman, for holding this 

hearing on the oversight of a very important Federal agency. 

My hope is that today’s hearing addresses a simple yet very important question: Did the Dodd-Frank Act institutionalize too-bigto-fail or did it really level the playing field and disallow further 

taxpayer bailout, as some politicians and regulators have argued? 

I am concerned that recent developments, including market data 

showing borrowing costs are currently much lower at big banks 

than small ones, and the continuing questions surrounding the 

FDIC’s new authority lead us to believe that too-big-to-fail is still 

very much alive, and the taxpayers could yet again be asked to 

pick up the bailout tab in the future. 

I look forward to hearing from Chairman Bair today on this important and ongoing issue. 

Thank you. 

Chairwoman CAPITO. Thank you. 

I would like to recognize our newest member of the subcommittee, and welcome him to the subcommittee, Mr. Fincher 

from Tennessee, for 1 minute for the purpose of an opening statement. 

Mr. FINCHER. Thank you, Madam Chairwoman. 

And thank you, Chairman Bair, for coming today and taking 

time for us. 

It is a privilege to be here this morning to discuss the issues and 

concerns regarding the FDIC and its role during the financial crisis 

of 2008. 

As the newest member of the Financial Services Committee, I am 

pleased to have the opportunity to deal with, hopefully, what are 

going to be things that are going to fix the problems in the future. 

I was not in Congress in 2008 when the financial crisis roared 

across the communities of our district. However, as a small business owner, I felt its effects firsthand as the bottom dropped out 

of our economy. 

One major principle that I did take away from those terrible days 

was that access to credit is vital in helping our small businesses 

function. Until our financial institutions, in my opinion, are allowed to responsibly do their jobs again and loan money to qualified borrowers, we are not going to see businesses creating new 

jobs. 

6 

But too many times, Washington is not the answer. It is the 

problem. We need to make sure that we do what is right. 

Again, thank you for your service. And I look forward to hearing 

what you have to say today. 

I yield back. 

Chairwoman CAPITO. Thank you. 

I would like to recognize Mr. Westmoreland, from Georgia, for 2 

minutes for the purpose of an opening statement. 

Mr. WESTMORELAND. Thank you, Chairwoman Capito, for calling 

this hearing. I think this is a very important hearing. 

I would like to throw out some numbers for Chairman Bair: 63, 

that is the number of banks that have failed in Georgia since 2008; 

12, that is the number of bank failures in Georgia in just 2011; and 

10, that is the number of banks headquartered in my district that 

have failed since 2008, including on this past Friday. 

This number is much larger if you factor the banks that have 

failed that only have branches in the district. 

Chairman Bair, these numbers are unacceptable. Therefore, 

today I will be introducing a bill directing the FDIC Inspector General to study FDIC’s loss share agreements, banks failing due to 

paper losses, the lack of an ability to modify or work out an application of the FDIC policies by examiners in the field. 

This study is not only vital for surviving banks. It is so the FDIC 

and this committee can learn from the problems that have faced 

Georgia over the last 3 years. 

It is my hope that the FDIC and my colleagues will support this 

bill so we can have an honest assessment of the FDIC’s handling 

of this bank crisis. Georgia is in a vicious cycle right now, going 

the wrong way. Failures begot more write downs and more failures. 

I have borrowed a lot of money from banks in my business career, and I know there will be more failures in Georgia this year. 

But I am here to say that when a Georgia bank fails, my office 

will be here asking why, searching for answers, and holding the appropriate regulators accountable. 

And with that, Madam Chairwoman, I yield back. 

Chairwoman CAPITO. Thank you. 

That concludes our opening statements. 

I would like to now introduce Ms. Sheila Bair, Chairman of the 

Federal Deposit Insurance Corporation, for the purpose of making 

an opening statement. 

And, again, thank you for coming today. 

STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, 

FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) 

Ms. BAIR. Chairman Capito, Ranking Member Maloney, and 

members of the subcommittee, thank you for the opportunity to testify today on the state of the banking industry and the Federal Deposit Insurance Corporation and on future challenges to our economic and financial stability. 

Much has been written and said about the events associated with 

the recent financial crisis and the factors that led up to it. My written testimony summarizes four factors that I consider the most important: excessive reliance on debt financing; misaligned incentives 

in finance; regulatory arbitrage; and an inadequate resolutions 

7 

framework that allows some financial companies to become too-bigto-fail. 

The FDIC was created in 1933 in response to the most serious 

financial crisis in American history to that time. Our mission then, 

as now, is to promote financial stability and public confidence in 

banking through bank supervision, deposit insurance, and the orderly resolution of failed banking institutions. 

Working with our regulatory counterparts, the FDIC has played 

an instrumental role in addressing the recent crisis. Our actions 

have helped restore financial stability and pave the way for economic recovery. My written testimony includes a comprehensive account of those actions. 

I am proud of all that the FDIC has accomplished during the 

past 5 years. My greatest satisfaction lies in the knowledge that 

through 368 failures, including the largest failures in FDIC history, 

we kept pace with the depositors we were established to protect. 

We have maintained the FDIC’s 78-year record of no losses to 

any insured depositor. And we did it without borrowing a penny 

from taxpayers. 

But we still have important work to do. Our first task must be 

to follow through on the Dodd-Frank Act reforms that will end toobig-to-fail. At the height of the crisis, we lacked the necessary tools 

to resolve large, complex financial companies in an orderly manner 

and were forced to authorize government bailouts that further insulated these companies from the market discipline that applies to 

smaller banks and practically every other private company. 

Too-big-to-fail really represents state capitalism. 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. 

The Dodd-Frank Act provides the tools to restore market discipline and put an end to the cycle of government bailouts under 

too-big-to-fail. These tools will be effective and the large systemically important institutions, or SIFIs, will be resolvable in the 

next crisis only if regulators show the courage today to fully exercise their authorities under the law. 

The success of this new resolution framework critically depends 

on the ability to collect information about potential SIFIs to determine whether they are, in fact, resolvable under bankruptcy. It will 

also require the willingness of the FDIC and the Federal Reserve 

Board to actively use their authority to require structural changes 

at SIFIs that better align business lines, legal entities, and funding 

well before a crisis occurs. 

Unless organizations 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. 

These authorities are being shaped now in the interagency rulemaking process. If properly implemented, they can make our financial system more stable by restoring market discipline to systemically important institutions. 

But if we fail to follow through on these measures now, when 

market conditions are relatively calm, we will have no hope of preventing bailouts in the next crisis. 

8 

My testimony describes the role played by excessive leverage 

among both banks and non-bank financial companies in bringing 

the crisis about. Strong capital standards are of fundamental importance in maintaining a safe and sound banking system that supports economic growth. 

Supervisory processes will always lag innovation and risk-taking 

to some extent. And restrictions on activities can be difficult to define and enforce. Hard and fast objective capital standards, on the 

other hand, are easier for supervisors to enforce and provide an additional cushion to absorb losses when mistakes are inevitably 

made. 

Skeptics argue that requiring banks to hold more capital will 

raise the cost of credit and impair economic performance. But the 

experience of the crisis shows that the social costs of debt financing 

are extremely high in such a downturn, and that the lack of an 

adequate capital cushion makes lending highly procyclical. 

While there will always be business cycles, the massive 

deleveraging which occurred during the financial crisis led to the 

most severe downturn since the Great Depression. 

Loans and leases held by FDIC-insured institutions alone 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. 

I would also like to highlight the urgent need for Congress and 

the Administration to address the rapid growth in U.S. Government debt, which has doubled in just the past 7 years. Financial 

stability critically depends on public investor confidence, which can 

never be taken for granted. 

There is no greater threat to our future economic security and financial stability than an inability to control the size of U.S. Government debt. 

But as strongly as I feel about this issue, I feel just as strongly 

that a technical default on U.S. Government obligations would 

prove to be calamitous. 

Any signal that policymakers might fail to make good on these 

obligations risks permanently destroying the inviolable trust that 

investors have placed in our Nation for more than 2 centuries. 

I urge Congress to reaffirm this trust by committing to a responsible increase in the debt ceiling. 

As I conclude, I would like to share with you one of the central 

lessons I have drawn from my experience as FDIC chairman. It is 

that the most important attribute of effective regulation is the 

courage to stand firm against weak practices and excessive risktaking in the good times. 

It is during a period of prosperity that the seeds of crisis are 

sown. It is then that overwhelming pressure is placed on regulators 

to relax capital standards, to permit riskier loan products, and to 

allow higher concentrations of risk both on and off balance sheets. 

The history of the crisis shows many examples when regulators 

acted too late or with too little conviction, when they failed to use 

authorities they already had or failed to ask for the authorities 

they needed to fulfill their mission. As the crisis developed, many 

9 

in the regulatory community were too slow to acknowledge the danger and remained behind the curve in addressing it. 

The fact is that regulators are never going to be popular or glamorous, whether they act in a timely manner to forestall a crisis or 

fail to act and allow it to take place. The best they can hope to 

achieve is the knowledge that they exercised the statutory authority entrusted to them in good faith and to its fullest effect in the 

interests of financial stability and the broader economy. 

Thank you very much. I would be happy to answer your questions now. 

[The prepared statement of Chairman Bair can be found on page 

46 of the appendix.] 

Chairwoman CAPITO. Thank you, Chairman Bair. 

We will now begin the questioning portion of the hearing. And 

I will begin my 5 minutes of questioning. 

We have had ongoing discussions with you and your staff concerning the relationship of the FDIC and the CFPB for consumer 

protection. It is my understanding that the FDIC just recently announced a new consumer division within the Corporation. 

I am interested in how that is going to work in relation to CFPB. 

If the CFPB comes down with regulations understanding that 

smaller institutions are exempted out in theory, do you envision a 

consumer protection within the FDIC that then takes the regulations that come from the CFPB and modifies them for the other institutions? 

There has to be some coordination here. Are we creating a twotiered system here? 

Ms. BAIR. Under the statute, for institutions with assets less 

than $10 billion, the supervision and enforcement remains with the 

primary banking regulators. 

Chairwoman CAPITO. Right. 

Ms. BAIR. And we have most of the smaller banks. So the lion’s 

share of our institutions stay with us in terms of examination and 

enforcement of rules. 

We have never had the authority to write consumer rules. That 

authority has been with the Federal Reserve. And now most of that 

is being transferred to the CFPB. So this coordination issue for us 

is not new. We have never had the ability to write the rules. The 

Fed has written the rules. 

We have coordinated with them. We provide input to them and 

comment, and obviously, examine and enforce the rules that they 

promulgate. 

The CFPB Director, when that person is installed, will be on the 

FDIC board. And I think that will help assure coordination, appropriately so. 

I am hoping that this will help also increase the understanding 

of the CFBP’s Director about broader banking regulatory issues on 

the safety and soundness side, some of the concerns of the FDIC, 

and our perspective on the various issues that we have to deal with 

on a day-to-day basis. 

In terms of creating the new division, I do want to emphasize 

that we did not create new examination staff. Actually, the examination staff reporting structures in the regions stay the same. 

10 

This is an organizational change. There were a very few additional administrative staff to support the organizational separation 

of consumer and depositor protection from risk management. It 

was really more to make sure that the FDIC had an appropriate 

policy focus on consumer protection. 

And I would say the focus is for more effective consumer regulation. 

I am sensitive to the concerns of community banks that have 

been expressed, that perhaps sometimes under consumer compliance, as well as risk management, there has been more of a focus 

than there should be on the kind of ‘‘gotcha’’ violations that other 

members expressed concern about, such as reporting violations or 

what have you. 

We have tried to refocus the examination force on those areas 

where there is actually consumer harm. And I think that has been 

a good outcome of this new policy-level focus of the FDIC on consumers. 

This will be a way for us to have a better focus on consumer protection, making consumer protection supervision more effective as 

applied to banks, and enabling better coordination with the new 

consumer agency, which, again, I think will have somewhat of an 

advantage because the Director of the CFPB eventually will be on 

our board. 

Chairwoman CAPITO. Okay. I want to go to another question 

quickly. But it sounds like the structure that is being enacted while 

these institutions under $10 billion are exempted—it sounds as 

though they really aren’t going to be exempted, which is their fear, 

because—or not their fear, their fear of the unknown more than 

anything else—because it will be coordinated through your institution. 

Ms. BAIR. That is right. The exemption is just with regard to examination and enforcement. It is not really an exemption. It preserves what we have always done. The primary banking regulator 

will be the entity that examines and enforces for compliance with 

consumer rules. 

The consumer agency now has rule-writing for all institutions. So 

whatever rules they write, those will apply to all institutions. 

Chairwoman CAPITO. Right. 

Ms. BAIR. They can, on their own, exempt small banks. I have 

spoken in favor of a two-tiered regulatory structure. I think in certain areas it is appropriate. We will have an ability to engage and 

have input with the new consumer agency because eventually that 

person will be on our board as well. 

Chairwoman CAPITO. Okay. Over the last several years, there 

has been increasing consolidation of the banking industry. 

Ms. BAIR. Right. 

Chairwoman CAPITO. Some of the opening statements talked 

about the advantages that the larger institutions have. The smaller 

banks, the smaller institutions and community banks are concerned about being able to staff the regulatory issues, the legal 

issues that they now see in front of them because of Dodd-Frank. 

How do you see this playing out, the consolidation? Is this a concern for you? And I think it is a concern for, really, Main Street 

America. 

11 

Ms. BAIR. Right, right. It is a concern. We have a Community 

Banking Advisory Committee. And we have talked with them a lot 

about this. 

I think on the process side, the Dodd-Frank Act did have some 

important reforms for community banks. Certainly, raising the deposit insurance limit to $250,000 had been long advocated by community banks and will help them address funding disparities by 

having a higher deposit insurance limit. 

Also, the change in our assessment base is going to probably save them about $4 billion in assessments over a period of time in assessment fees. So there were some process improvements in the 

Dodd-Frank Act that will benefit community banks.. 

However, there are some concerns with the Durbin amendment. 

And I commend you on your leadership on that issue. 

We are trying very hard to make sure that the law is implemented as Congress intended, which was to insulate community 

banks from the lion’s share of the reforms that really were targeted 

at larger institutions. And we will continue that focus. 

We are obviously very concerned about the differentials in funding costs as well. That existed pre-crisis. It has existed for far too 

long. 

The rules need implementation. We will talk more about that 

later. Title II can help get these funding costs up for large banks, 

as will higher capital requirements. 

Chairwoman CAPITO. Thank you. 

Mrs. Maloney? 

Mrs. MALONEY. Thank you. 

Thank you, Madam Chairwoman, for holding this hearing and 

giving us this opportunity to be with Sheila Bair one last time. 

I would like to ask you to respond to what critics have claimed, 

that the new Orderly Liquidation Authority promotes bailouts because it allows the FDIC to pay creditors 100 cents on the dollar. 

Ms. BAIR. Right. 

Mrs. MALONEY. And isn’t it true that this is erroneous in light 

of the fact that the law requires the FDIC to ensure that creditors 

bear losses? 

Ms. BAIR. That is right. 

Mrs. MALONEY. And secondly, the FDIC’s authority to pay creditors more than they would have received in a liquidation bankruptcy is very limited and is subject to the requirement that creditors bear losses. 

So your comments, please, Madam Chairman. 

Ms. BAIR. Thank you. 

I think it is important and we clearly have a job ahead of us in 

terms of educating folks about our process and assuring them that 

it is every bit as harsh as bankruptcy. It is basically the same creditor priority that you see in bankruptcy. 

The statute limits our ability very narrowly to differentiate 

among creditors in a way that is consistent with our traditional receivership powers. 

And basically, that is two situations. First, to continue with essential operations—things like paying the IT folks to keep IT services going; paying your security people; and paying the employees. 

That is also recognized in bankruptcy. 

12 

The second situation relates to maximizing value, and is simply 

a mathematical determination. We see this in bank resolutions. 

Frequently when we bid out a bank, the potential acquirers will 

pay us a premium to cover all insured and uninsured deposits, because it impairs franchise value to impose losses on their larger 

uninsured depositors. 

So it actually maximizes our recoveries to cover the uninsured 

deposits and sell all the deposits to the acquirer, as opposed to imposing a loss on those uninsured depositors, because we are making more money with the premium that the acquirer pays. 

That is an example where you would maximize value by differentiating. And again, that is pretty much a mathematical formula. To 

emphasize it more, we have said in an interim final rulemaking 

that we don’t think there would ever be any situation where a 

longer-term creditor—that is one longer than a year—would either 

maximize value or be necessary for essential operations. 

And for unsecured creditors with shorter terms, they are probably going to take losses as well. But again, they would have to 

meet these narrow tests. 

We have tried very hard to assure people that the losses imposed 

on creditors will be every bit as harsh as it is in bankruptcy. The 

97 cents on the dollar issue, I think that comes from an analysis 

that our staff did on the Lehman bankruptcy and how it might 

have been resolved under Title II. 

So the 97 cents was simply a reflection of what we think the recoveries would be for the senior debt holders based on the capital 

cushions and subordinated debt cushions that existed in Lehman 

at the time of its failure, and our prediction of what the losses 

would have been on their bad assets. 

The recovery in Lehman, as it would be with any other Title II 

resolution, will be driven by the extent of losses and the amount 

of equity and subordinated debt under their senior debt holders. 

But I would say, as a matter of market discipline, if senior debt 

holders want to protect themselves, they should look at the equity 

capitalization levels and the sub-debt below them. 

Mrs. MALONEY. To put it in a framework that is helpful to us, 

could you explain the extent to which having the Orderly Liquidation Authority during the financial crisis could have prevented bailouts and mitigated systemic effects? 

Ms. BAIR. It would have. We have the ability, if you have time, 

and there was a lot of time with Lehman. There were months of 

alarm signals before the institution finally failed. 

Firstly, under the Dodd-Frank Act, all systemic entities, including all bank holding companies above $50 billion, are required to 

have resolution plans on file with us. So we we will have a blueprint on resolvability well before any time that they would get into 

trouble. 

The bankruptcy trustee and others who have analyzed the Lehman bankruptcy have all spoken to the need for advanced planning 

to resolve these larger complex financial institutions. So there 

would have been a game plan in place. 

We would have been in the institution months in advance. We 

anticipate having an ongoing presence in these large SIFIs, just as 

we do with larger bank holding companies now. 

13 

I think just the fact that there was a resolution process that 

would have imposed losses on shareholders and creditors, would 

have replaced the board, and would have replaced management, 

that, in and of itself, would have been a strong incentive for the 

leadership of Lehman to right their own ship and go out and sell 

themselves at a reasonable price, which they were unwilling to do. 

We see this all the time with banks. Banks know that if they fail 

and they go into our process, their shareholders are wiped out; 

their unsecured creditors are wiped out; their boards are gone; and 

their executives lose their jobs. 

It is a powerful incentive to take care of yourself. About 25 percent of banks that are on our projected failure list end up not failing because they go out and they recapitalize. They are very motivated. And I think that would be an important factor that we didn’t 

have during the crisis. 

It also, frankly, provides us a defense against blackmail, right? 

During the crisis, a lot of institutions were coming in and saying, 

‘‘You know, if we go down, you are going to have all these problems.’’ And there was no orderly process to put them into. 

Now, we have a process. Even if it is an emergency situation, we 

can put them into a bridge and provide temporary liquidity support, but their shareholders and unsecured creditors are all exposed to loss and their boards are gone. And actually under the 

Dodd-Frank Act, there is a claw-back of up to 2 years of compensation for management if you have a failed entity. 

Chairwoman CAPITO. The gentlewoman’s time has expired. Sorry. 

Ms. BAIR. There are just a lot of tools that we would have in the 

future that we didn’t have going into the crisis. 

Chairwoman CAPITO. The gentleman from Ohio, Mr. Renacci? 

Mr. RENACCI. Thank you, Madam Chairwoman. 

And thank you, Chairman Bair, for being here. 

I want to focus today on the composition of your board of directors, and under Dodd-Frank the new composition, which includes 

the Director of the CFPB being one of the members on your board. 

Coming from the private sector and the business sector and sitting on many boards, I was always concerned. And I think the 

setup of all boards, there was always concern about apparent, perceived, direct, indirect conflict of interest. 

Knowing that you are going to have to work on a regular basis 

with one of the individuals who would be the Director of the CFPB, 

I am a little concerned that there is a conflict of interest, especially 

when it comes to your seat on the FSOC, basically. 

Because as we know right now, FSOC can review, stay, and block 

a CFPB rule, but it takes two-thirds to do that. 

Ms. BAIR. Right. 

Mr. RENACCI. I know my colleague, Mr. Duffy, introduced some 

legislation last week or the week before to try and talk a little bit 

about this. 

But when you have to work with somebody on your board on a 

regular basis, and then you go over to FSOC and you have a vote, 

and it takes today 7 out of 10 to block a rule by the Director who 

sits on your board— 

Ms. BAIR. Right. 

14 

Mr. RENACCI. —and that person also has a vote out of the 10, 

and you would have a vote out of the 10, you start to limit down 

the ability to really have oversight by using the Financial Stability 

Oversight Council. 

Ms. BAIR. Right. 

Mr. RENACCI. So my concern is, when you have that kind of conflict of interest, is it good policy? Is it good procedure? I have actually drafted a bill that I am going to introduce next week which 

would simply replace the Director of the CFPB with the Chairman 

of the Fed. 

And the reason I am doing that is because I believe we need to 

focus on safety and soundness, and get any perceived conflict of interest out of the way. 

Ms. BAIR. Right. 

Mr. RENACCI. I just want to hear your thoughts on that potential 

conflict of interest. 

Ms. BAIR. I think it is a good question. I think a lot of people 

had suggestions during the consideration of Dodd-Frank about who 

should replace the OTS on the FDIC’s Board, and the Fed was one 

option. I was supportive of that. I said I would like some reciprocity. I think that would be helpful. 

The advantage and the argument for putting the consumer bureau head on the FDIC Board is that perhaps it might help sensitize that person to some of the safety and soundness issues that 

are associated with deposit insurance and the intersection with 

consumer protections. 

Frankly, there is a close connection. They are really two sides of 

the same coin. To the extent people were worried about the consumer bureau head not being aware of the larger context of bank 

regulation, it might help educate that person to have them on the 

FDIC Board. That is the argument for it. 

Again, we wouldn’t mind some reciprocity. If you go to a commission structure for the CFPB, that might be a nice thing to have as 

well. 

But, we are fine with it. Again, earlier iterations did have the 

Fed on the Board. We were fine with that, too. We would have 

liked some reciprocity if that was the structure. 

But in terms of the conflict, I would also point out, though, that 

FSOC actually has the ability to intercede with pretty much all the 

regulators, if they think one of the regulators is doing something 

that could create systemic risk or is not appropriately addressing 

systemic risk. 

So arguably, there could be a conflict for the OCC for instance, 

as well. If the OCC wasn’t doing as good a job as they should in 

regulating large banks, and the FSOC was going to intervene in 

that, I guess you could make the same argument there. 

So these are difficult questions. And I think we can certainly live 

with what is in the law right now. 

Mr. RENACCI. It is interesting, as you mentioned, you would 

bring on that Director so they can be briefing on the safety and 

soundness aspect. 

Ms. BAIR. Right. 

15 

Mr. RENACCI. And I read the CFPB’s mission statement yesterday, and out of the 764 words, there is no talk about safety or 

soundness in their mission, which is— 

Ms. BAIR. A safe and sound bank—a bank that doesn’t fail—is 

the best bank for customers. As good a job as we do with protecting 

depositors, it is always better to avoid a failure. 

Similarly, consumer abuses eventually, as we saw with the mortgages, can have profound safety and soundness ramifications, too. 

So there really needs to be a lot of cross-communication and collaboration on this. I couldn’t agree more. 

Mr. RENACCI. Thank you. 

In regard to the Orderly Liquidation Authority, there have been a number of examples. And I have Continental Illinois Bank, $400 

billion in assets, 57 offices in 14 States. It took 7 years to resolve 

at a cost of $1 billion to the fund. 

The Bank of Clark County, Washington, $440 million in assets, 

50 bank employees, a 3-day weekend to resolve. Citigroup, $1.9 trillion in assets, the time, the energy, the staff 

that you needed—and I know I am running out of time, but maybe 

I can catch you on the second round. 

I would like to find out how you believe that the manpower, time, 

and strain on the fund will take to wind down simple institutions, 

and how you will be able to be able to exercise authority over much 

larger institutions. 

So I will yield back. 

Chairwoman CAPITO. We will give you lots of time to think about 

that. 

Mr. Baca, from California, for 5 minutes. 

Mr. BACA. Thank you, Ms. Blair, for being here. 

I understand that the FDIC has issued an internal financial final 

report and proposed rule to implement an Orderly Liquidation Authority. 

Could you briefly discuss these rules, particularly to the extent 

to which they would align an orderly liquidization process without 

a bankruptcy or a failed bank resolution, and ensure that creditors 

bear losses and the institution itself does not survive? 

Ms. BAIR. The statute is very clear: It bans bailouts. And the 

claims priority that we follow is pretty much the same claims priority that is followed in bankruptcy. 

To the extent the government would need to provide liquidity 

support to keep the institution operational as it is broken up and 

sold off, those are administrative expenses that are paid off the top 

back to the government before any other expenses are paid. 

So it really is a process that is every bit as harsh as bankruptcy. 

It resembles bankruptcy in the claims priority. And I think we 

need to reassure folks on that. 

The purpose of this was to end too-big-to-fail, not to reinforce it. 

We have engaged with the rating agencies on this. Some have decided to continue or have sought comment on whether they should 

continue to have a bump up for large institutions. 

And we say to them: read the statute. The statute prohibits bailouts. They actually think the Congress is going to do it. They just 

can’t imagine that the Congress, even if the regulators can’t, that 

the Congress would not step in. 

16 

So I know you don’t want to do that. I know you don’t want to 

face the Secretary of the Treasury and the Chairman of the Federal 

Reserve coming up and asking for $700 billion to do a lot of things 

that none of us like to do. 

The tools are there to require credible resolution plans. The tools 

are there to require structural changes as well as downsizing if 

they cannot come up with a plan that shows that they can be resolved in an orderly way. 

Mr. BACA. But do you think they will downsize? 

Ms. BAIR. I think some of them may need to. I think some of 

them are already. 

Mr. BACA. And who will enforce that? 

Ms. BAIR. It is jointly with the Fed and the FDIC. And the FSOC 

as a group can also, with a supermajority vote, require a divestiture if that is necessary. 

Mr. BACA. It seems that many people overlook or underestimate 

the importance of the rapid resolution or living will requirement, 

which the Feds and the FDIC jointly are in process of implementing. 

Could you please discuss the importance of a living will, both as 

an ongoing regulatory tool that will help ensure appropriate risk 

management and that mitigate against failure of large complex financial institutions as a planning took that will make disorderly 

resolutions less likely and hopefully a rare event at large and financial failures. 

Ms. BAIR. It is a statutory requirement jointly of the Fed and the 

FDIC. It requires that the institutions have plans in place that can 

show the orderly resolution through a bankruptcy process. It is a 

very high standard. 

For several institutions, this is going to require some structural 

changes. I think they have thousands of legal entities that have 

been accumulated over the years, through acquisition activity or 

what have you, that they just never bothered to rationalize. 

And so getting their business operations aligned with their legal 

structure—so that if they start to fail, there is a strategy to be able 

to break them up and market them in marketable-size pieces—is 

going to be a key part of this. 

I think for those with international operations, there may be 

some level of subsidiarization that is required. That is that they 

need to separate themselves as a separate legal entity in certain 

foreign jurisdictions, perhaps where they have significant business 

activities. 

There are several banks, though, in particular Santander and 

HSBC, that already operate with a subsidiarization model, and 

they do so quite profitably. 

So it may not be required for all of them, but I think it is the 

kind of thing that we need to look at and may be required for some 

if they can’t otherwise show that they could be resolved on an orderly way even in an international context. 

Mr. BACA. Thank you. I yield back the balance of my time. 

Chairwoman CAPITO. Thank you. 

Mr. Luetkemeyer for 5 minutes for questions. 

Mr. LUETKEMEYER. Thank you, Madam Chairwoman. 

17 

Chairman Bair, recently the FDIC completed a pilot program on 

small dollar loans and had a couple of different programs, one for 

under $1,000, and another one for under $2,500. Can you just 

recap some of your findings on that? 

Ms. BAIR. Our small dollar loan pilot program? 

Mr. LUETKEMEYER. Yes, on your pilot program. 

Ms. BAIR. We were very pleased. It was very successful. The delinquency rates were a little bit higher than they are for other 

forms of lending. But the default rates and losses were very much 

in line. 

The banks that participated in the pilot were very pleased and 

gave us the information, which we have, in turn, made more broadly available to banks in general. 

There is a particular need for small dollar credit right now. The 

options for a lot of consumers are not good. They can be very high 

cost. 

Having proven models to provide reasonably priced small dollar 

lending was important to us. We were very pleased, as well as the 

banks, with their success. 

Mr. LUETKEMEYER. Okay. What interest rate did you see on the 

small dollar loans actually worked? 

Ms. BAIR. What industry? 

Mr. LUETKEMEYER. Yes, what interest rate? 

Ms. BAIR. These were consumer loans. Oh, interest rate. I am 

sorry. 

Mr. LUETKEMEYER. Interest rate, yes. What interest rate did— 

Ms. BAIR. They were all below 36 percent, which is pretty high. 

We have guidance out that says that we will actually give CRA 

credit for those who can offer this— 

Mr. LUETKEMEYER. Did they think they could make any money 

at that? 

Ms. BAIR. Sorry? 

Mr. LUETKEMEYER. Did they think that they could make any 

money at that? 

Ms. BAIR. They did make money. Most of them were significantly 

lower than 36 percent, usually around 18, 16, 12 percent. And they 

did make money, because they all— 

Mr. LUETKEMEYER. My information says that after 2 years, the 

FDIC, according to your report, found that the interest rate cap 

was not profitable for the participating bank. 

Ms. BAIR. Was not what? I am sorry. 

Mr. LUETKEMEYER. I said that after 2 years, the FDIC program— 

my information says that after 2 years, your pilot program showed 

that the interest rate cap was not profitable for participating 

banks. 

Ms. BAIR. There was no interest rate cap. There is guidance that 

says for the pilot, we wanted them to stay below 36 percent. But 

that is a voluntary program. 

And, I am sorry, Congressman. If we could take a look at the 

document you are looking at, because those were profitable. And 

they were significantly below 36 percent. 

Mr. LUETKEMEYER. Okay. We will work out the differences on 

that later. Thank you. 

Ms. BAIR. Sure. 

18 

Mr. LUETKEMEYER. With regards to the insurance fund, how 

solid are we right now? 

Ms. BAIR. We are still in negative territory, but we should be in 

positive territory by June 30th, by the end of the second quarter. 

The fund at the end of the first quarter was a negative $1 billion. 

That is up from a trough of negative $20.9 billion in 2009. 

So it is improving. That represents our equity position, not our 

cash position. Our cash position is a positive $45 billion. 

But the fund’s equity position should be in positive territory by 

the end of the second quarter. 

Mr. LUETKEMEYER. Do you anticipate any future assessments— 

Ms. BAIR. No. 

Mr. LUETKEMEYER. —to make up the difference in that— 

Ms. BAIR. No. No. As a matter of fact, we had a scheduled 3 basis 

point increase that we did not impose because the industry is recovering and our projected losses are going down. 

Mr. LUETKEMEYER. Okay. With regards to interchange fees, the 

other day we had Chairman Bernanke in front of us and asked him 

a question, whenever your regulators go in and you take a look at 

a bank, and they have to chalk off 13 percent of their income, are 

you going to forget about that lost income? Or are you going to require them to make that up somewhere? 

And he really had no answer to that. 

Ms. BAIR. Yes. 

Mr. LUETKEMEYER. He said, well, it is up to the bank to decide 

how they want to do that, but we certainly want to see them to 

continue to be capitalized. 

Yes, that is true. But his regulation is going to have—when he 

comes up with his interchange fee regulation, it is going to have 

a dramatic impact on the bottom line for a lot of the institutions. 

Ms. BAIR. Right. 

Mr. LUETKEMEYER. What are your thoughts on that? 

Ms. BAIR. We are concerned about it. In fairness to the Fed, they 

are implementing a provision that was in the Dodd-Frank Act. 

Mr. LUETKEMEYER. Right. 

Ms. BAIR. —and doing it as they see is consistent with the statute. 

We are very concerned about it, especially for the community 

bank impact. The statute specifically says, community banks under 

$10 billion in assets are supposed to not be subject to this cap. 

As a practical matter, can you really protect them, particularly 

if network providers are not required to take the higher fees they 

could continue to charge. 

Mr. LUETKEMEYER. Right. 

Ms. BAIR. We also think the 12 cents is too low. We filed a comment letter which I am happy to share with you. We think they 

should take anti-fraud measures into account. And that can be a 

significant expense. 

We also think they should do more to take in the incremental 

costs of small banks that provide for debit card usage. I think the 

cost structure they considered was mainly for the large institutions. Obviously, their incremental costs are less than the smaller 

banks. 

19 

I don’t know how they are going to come out with it. I think Congress may or may not still take some more time with this. If they 

don’t, I am hoping that if this goes final, that 12 cent-limit is 

raised, and that they can find a legal justification for requiring that 

networks accept two-tier pricing to protect the smaller banks. 

Mr. LUETKEMEYER. Thank you. And just a comment: I appreciate 

your comment on the capital requirements. 

Ms. BAIR. Right. 

Mr. LUETKEMEYER. I think that is important, even during good 

times, to retain adequate level of capital— 

Ms. BAIR. That is right. 

Mr. LUETKEMEYER. My dad told me that a long time ago. He 

lived through the Depression. And he lived to be able to explain 

why it was a good thing and show here with this last crisis why 

it actually worked. 

Thank you very much for your comment. 

Chairwoman CAPITO. Thank you. 

Mr. Scott, from Georgia? 

Mr. SCOTT. Thank you very much. 

Chairman Bair, I just want to first of all start off by thanking 

you for the excellent service you have done as the Chairman of the 

FDIC, and especially for responding to me. Each time I call your 

office, you get right on the phone and talk with me and help us to 

handle things. 

As you know, my State of Georgia has had just a plethora of very 

serious problems. Unfortunately, we have led the Nation in bank 

closures. 

But I want to ask you this first question: A number of banks, 

community banks especially, in my State of Georgia, are under regulatory orders from the FDIC. And I understand these orders are 

driven primarily by the performance of their loan portfolios and 

capital levels. 

These regulatory orders often require a bank to reduce their concentration in real estate loans to some artificial level. And that is 

forcing them to not renew even performing loans for some borrowers. That seems to hurt everyone, especially in States like Georgia that are so centered on real estate. 

The borrower has to find a new bank, which we know is difficult 

in these economic times, while the bank loses a performing loan. 

Surely there is a better way to enforce FDIC rules and regulations so that they don’t hurt the very consumers that they are designed to protect and the banks that they are designed to oversee. 

What might you say would be a better way? 

Ms. BAIR. Congressman, thank you for asking that question, because I think our policies are not consistent with what you are 

being told. 

And, again, I will say this to all members here: If there are specific examples where you feel that our policies are not being applied 

by our examiners, I personally want to know about it. 

I do stay engaged with the examiners. I do conference calls. I 

visit the regions. I cannot tell you how focused I personally have 

been on this. 

And the rule is quite simply this: if the loan is performing, if you 

have a creditworthy borrower with cash flow to keep making payVerDate Nov 24 2008 11:26 Sep 01, 2011 Jkt 066872 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\66872.TXT TERRIE
20 

ments on that loan, it doesn’t matter what the collateral is. If the 

loan is a good loan, it doesn’t need to be written down, no additional reserves, nothing, it is a fine loan. 

If you are just refinancing the unpaid principal, and you have a 

creditworthy borrower who can continue to make payments, you 

don’t have to write down that loan, even if the collateral has declined in value. 

If you are extending new credit, new money, yes, the bank needs 

to go make an appraisal of the collateral, because you are expending new money. That is just a basic tenet of banking. 

But regarding existing loans or refinancing of existing loans, if 

the borrower is creditworthy and can make the payments, you do 

not have to do an appraisal and you do not have to do a writedown. 

That is the rule. I went through this again yesterday as part of 

my hearing prep because I hear this a lot. And it is very frustrating to me. 

And, again, if you have specific examples, I do want to know 

about it. 

Mr. SCOTT. Okay, let me just ask you specifically then, what 

should my banks in Georgia do? You are saying that is not the way 

it should be. They are saying it is the way it is. So what should 

they do? 

Ms. BAIR. They could call me directly. Or, we have an Ombudsman that is set up as a confidential process. So, they can do it on 

a confidential basis. 

Also, they can call Sandra Thompson, the head of our Division 

of Risk Management. 

Mr. SCOTT. Who was that again, please? 

Ms. BAIR. Her name is Sandra Thompson. She is the head of our 

Division of Risk Management. 

There are any number of avenues to bring this to our attention. 

We do want to know about it. 

I have found a couple of cases where policies were misapplied, 

and we corrected it very quickly. 

I will tell you, though, other times when we drilled down, what 

we found was that the borrower really did have some problems. 

There may be a different perception about what a creditworthy borrower is, and sometimes that can be a judgment call. 

We individually review every single allegation. I promise you 

that. 

Mr. SCOTT. Right. Thank you very much. 

Just last week, two more banks failed in my home State of Georgia: First Choice Community Bank; and Park Avenue Bank. And 

this brings the number of banks that have closed this year to 10, 

which is by far the most of any other State. 

And unfortunately this is not unusual news, as banks in Georgia 

continue to struggle. 

Can you tell me what, in your opinion, makes small banks especially vulnerable to closure? 

Ms. BAIR. Early on, we had a lot of failures of banks that had 

grown too fast. They had taken deposits and grown their balance 

sheets very quickly, had not adhered to good underwriting, and had 

clearly made a lot of out-of-area lending, which is something that 

21 

generally is not good, unless you very carefully manage that exposure. 

Later, as we progressed into economically troubled times, more 

problems arose from weaknesses in risk management. But, they 

were succumbing to economic conditions as well. 

If the losses are mounting and the capital is insufficient to curb 

those losses and if they can’t raise additional capital, there is not 

a lot we can do about it. Under the statute, we have a prompt corrective action process that we follow. It is fairly rigid about when 

the banks— 

Mr. SCOTT. Very quickly, are there any specific things you could 

say right now that the FDIC can do to assist them? 

Ms. BAIR. I think we do try to work with them. I know we have 

a different role than they do. But it is not a confrontational role, 

and we don’t want that. 

We tell our examiners they need to understand what is going on 

in the bank. They need to talk to management. They need to listen 

to management. 

They must exercise their own independent judgment about the 

health and safety of that bank. But that should be informed by robust conversations with the bank management and the board. And 

we do that. 

Certainly, anything that we can do with an appropriate balance 

to help them recapitalize is in our interest. We don’t want these 

banks to fail. It costs us money every time it happens. 

But, nonetheless, if they can’t raise their capital and the losses 

are mounting, if you delay the closing of the bank for a long time, 

the losses will go even higher. That was the lesson learned during 

the S&L crisis, and which is why we have prompt corrective action 

now, and why we follow it. 

Mr. SCOTT. Thank you, Chairman Bair. 

And thank you, Madam Chairwoman, for your generosity of time. 

Chairwoman CAPITO. Thank you. 

Mr. Westmoreland, from Georgia, 5 minutes. 

Mr. WESTMORELAND. Thank you, Madam Chairwoman. 

Ms. Bair, in a meeting I had 2 weeks ago with your staff, they 

informed me that it is unlikely that the FDIC will wind down the 

use of loss share agreements in Georgia. 

Setting aside my strenuous objection to this, I have serious concerns about the loss-share agreements that will begin to mature in 

2 years. As the stop-date of a loss-share agreement approaches, I 

have serious concerns that the banks with these agreements will 

begin to rapidly sell off assets to take advantage of the agreement. 

This could lead to yet another downturn in real estate and make 

it harder for people to obtain loans. 

What is the FDIC’s plan for these maturities of loss-share agreements? 

Ms. BAIR. I am not sure where you got this 2-year figure. In 

practice, the terms of the loss-share agreements generally coincide 

with the tenure of the loans. 

But there is no cut-off point in 2 years where there is no longer 

any loss-share and it is going to get dumped on the market. That 

is not how it works. 

22 

Actually, we think that the loss-share prevented a lot of property 

going onto the market, because it facilitated our ability to sell the 

whole bank, with the deposits and the assets, to another insured 

depository institution. If we had not provided loss-share, the bank 

probably wouldn’t have taken the assets. 

We would have had to sell it on the open market at an extreme 

liquidation discount, or held it ourselves and managed it, which is 

inefficient and costly and difficult. 

So actually, I think the loss-share has helped keep a lot of assets 

in the hands of other, better-capitalized, stronger depository institutions. It has kept the property off the market. Also, I want to emphasize that we have very stringent rules in loss-share agreements 

about loss mitigation. 

If a loan restructuring will have greater value than a foreclosure, 

we want the loan restructured. We have very specific rules about 

that. And we audit that. If they don’t do that, they can lose their 

loss-share payment. 

Mr. WESTMORELAND. You all might want to send some folks out 

with your regulators who actually go out and do the work in the 

field, and see where the disconnect is. There is certainly— 

Ms. BAIR. I would. I do hear this. And again, if you have some 

specific examples, we would love to hear them— 

Mr. WESTMORELAND. The problem with giving examples is these 

banks are afraid to death of retaliation. 

Ms. BAIR. Yes. 

Mr. WESTMORELAND. And so we would be glad to give you examples, but trying to get some of these guys to come forward—I have 

been trying to do it for a long time now, and they are—I am being 

serious. They are desperately afraid of retaliation. 

And if you all think loss-share agreements are helping— 

Ms. BAIR. Right. 

Mr. WESTMORELAND. —then that could be the problem, because 

they are not. 

But let me ask before—and I don’t want to cut you off, but I do 

want to ask you one other question. 

Despite the occasional lip service that some of these regulators 

give for talking about they want these community banks to continue to be able to provide service to small business and local customers, the examiners continue to second-guess bank management 

policies and downgrade loans based not on the current status of the 

loan. In other words, some of these loans are performing loans. 

But based on a scenario where there is no economic recovery, and 

virtually every examination ends with significant downgrades not 

supported by professional outside loan review or by independent accountants, if the FDIC is serious about allowing banks to serve 

their customers, why are the banks being second-guessed on even 

the best-documented loans? 

And I don’t understand how a bank can get all ‘‘A’s’’ on a report 

card, and 6 months later get all ‘‘F’s’’ and do everything but call 

the board members crooks. 

Ms. BAIR. Again, it is hard to respond without knowing what the 

facts would be in the individual case. I would say that if the loan 

is performing, if the borrower has success, and the loan continues 

23 

to perform, it is a good loan, even if the collateral has gone down 

in value. Even if it needs to be refinanced, it is a good loan. 

Again, if you have examples, I do want to know about them. I 

will personally assure the banker that there will not be any retribution by bringing this to our attention. 

So I really don’t know what else I can say. I think examiners do 

need to exercise independence of judgment. They need to listen to 

bank management, and understand their reasoning. But bank 

managers are not always right. There have been some big mistakes. 

I think we are, hopefully, for the most part, through this. But 

early in this crisis, we did have a lot of very dramatic downgrades 

from banks that had very good supervisory ratings to ones that 

went to troubled status. And for that reason, we are putting more 

of an emphasis on what we call ‘‘forward-looking CAMELS’’ and 

asking banks to stress their portfolios and stress conditions. 

But that is just from a risk-management perspective. That 

doesn’t mean if the economy tanks unexpectedly that they have to 

start holding more capital now. No, we just want them to be prepared and think through all the scenarios. 

Mr. WESTMORELAND. And listen, I appreciate those comments. 

But I really hope that some of your senior management, or whatever, can go into some of these banks. And as my colleague from 

Georgia mentioned, we have a tremendous amount of them that 

are either under consent orders, cease-and-desist, on the problem 

bank list, that is still to come. 

And this is sucking wealth out of these communities. 

And the loss-share agreement and the immediate write-down is 

doing a reverse situation on our local economies. It is killing us. We 

need some help. 

Thank you, Madam Chairwoman, for your generosity. 

Ms. BAIR. If I could just indulge the Chair, I am actually going 

to be in Atlanta soon. I will go you one further. I am happy to go 

to your district and meet with a group of bankers personally if that 

would be helpful to you. 

Mr. WESTMORELAND. I may take you up on that. 

Chairwoman CAPITO. Mr. Carney, from Delaware, for 5 minutes. 

Mr. CARNEY. Thank you, Madam Chairwoman. 

And thank you for being here today, Chairman Bair. 

I would just like to add my voice to those who have expressed 

concern about banks being told that they had to do away with performing loans and creditworthy borrowers not getting access to 

that. So I would like to take you up on your offer to entertain those 

kinds of referrals and that discussion. 

I have heard it a number of times from the borrowers and from 

the banks themselves. 

I would just like to touch on and follow up on a couple of questions. And the first one is you addressed the issue of bailouts of 

banks and what the tools are that you have today that you didn’t 

have under Dodd-Frank. 

And the question really is, are you better positioned today? Are 

the regulators better positioned today to prevent government bailouts of those troubled financial institutions then they were before? 

24 

And you did it a minute ago, but if you could just highlight some 

of those things, how the incentives have changed, how your tools 

have been strengthened, and so on. 

Ms. BAIR. Yes, they have. We now have the authority to resolve 

the entire financial institution, whereas before, our receivership 

authority only went to the insured bank. And so now, at least for 

large bank holding companies, there is a whole list of authorities 

to put them into receivership, into our process, if that would avoid 

systemic consequences. 

And as I said before, the process is very rigorous, every bit as 

harsh as bankruptcy. Any temporary liquidity support that might 

be provided is paid off the top. There is no guarantee of liabilities. 

All unsecured creditors are exposed to loss. 

On the remote chance that there could be some remaining loss 

for the government—that has to be assessed against the industry. 

There is no way that taxpayers would pay—there are bells and 

whistles on this thing, and belts and suspenders. We pushed for 

that. 

We actually wanted a pre-funded reserve. We wanted an assessment to actually provide a pool of liquidity in advance, so we 

wouldn’t even have to borrow from the U.S. Treasury for even that 

temporary liquidity support. We didn’t get that. 

But nonetheless, even if there is temporary borrowing that is 

necessary, that gets paid off the top. In the unlikely event there 

would be losses after being paid off the top, that would be assessed 

against the industry. 

Mr. CARNEY. You mentioned some things that management— 

some incentives management has to resolve it themselves. 

Ms. BAIR. Yes, the boards are gone. The executive management 

is gone. 

Mr. CARNEY. These are really strong, you know— 

Ms. BAIR. It is quite harsh. Yes it is. And, there is the 2-year 

claw-back—a potential for a 2-year claw-back of compensation, too, 

for senior executives. So, yes. Which is why, again, I think a lot of 

the benefit is prophylactic as well. Managers, knowing what this 

process is now, don’t have the option of going to a bailout. The fact 

that this process is there and will be the scenario if they fail is 

going to give them a strong incentive to go out, raise capital, and 

sell themselves if necessary. 

Mr. CARNEY. The second question is really to follow up on my 

friend, Mr. Renacci’s, question about the conflict between the 

CFPB, potentially, and the safety and soundness regulators. What 

is your view on that? And as it relates as well to the governing bodies that you discussed with my colleague from the other side? 

Ms. BAIR. Right. I think there is a close intersection. And it will 

require a lot of collaboration with the new consumer head. There 

is a statutory requirement that the consumer agency consult with 

the bank regulators in writing rules. 

Again, I think the fact that the consumer head would be on our 

board will help further that sensitivity and knowledge and awareness of the intersection of safety and soundness with consumer protection. 

So I think it can work. Again, it is all about— 

25 

Mr. CARNEY. Do you have some reservations? You seem to express some. 

Ms. BAIR. Not really, no. Early on when the Congress was considering this, we were sympathetic to a board approach. We have a 

board. I like boards. Even though it is more difficult for me, I am 

not a dictator. I have to go get my five votes. 

The chairman of a committee has to do that. But I think it is a 

good process. Either way, though—you have the OCC with a single 

head—so you have both models in the financial regulatory sphere. 

So, no, I wouldn’t say I have reservations. I think there are arguments pro and con for either approach. But the statute provides an 

approach that we support and one we think we can work with. 

Mr. CARNEY. So the kinds of things that the CFPB might be 

doing around consumer protections, do you see a big conflict with 

safety and soundness issues? 

Ms. BAIR. No. There actually can be some safety and soundness 

advantages, particularly with regard to the ability of the consumer 

bureau to now examine and enforce consumer protection rules for 

non-banks. One of the things that put pressure and led to a lot of 

bad lending by insured banks was competitive pressure from the 

non-bank sector. 

You had a lot of non-bank mortgage originators who really had 

no regulation whatsoever. They were selling these loans to the 

securitization trusts. They weren’t retaining any of the risks of 

these loans which was really driving down lending standards. 

Having a more robust enforcement mechanism for the non-banks 

I think will actually help level the competitive playing field and 

make sure we don’t have competitive pressure on banks to lower 

their standards. 

Mr. CARNEY. Thank you. I see my time has expired. Thank you 

for your service. I appreciate it. 

Chairwoman CAPITO. Thank you. 

I would like to recognize Mr. Canseco, from Texas, for 5 minutes 

for questioning. 

Mr. CANSECO. Thank you, Madam Chairwoman. 

Good morning, Madam Chairman. 

Lehman Brothers, the FDIC’s report on the possible orderly liquidation; the FDIC said that had the resolution authority granted 

to them under Dodd-Frank been in place in September of 2008, the 

estimated losses to Lehman’s creditors would have only been 3 

cents on every dollar. 

However, officials at the Federal Reserve, including Chairman 

Bernanke, have stated that one of the primary reasons that the 

Fed did not step in to save Lehman was because the estimated 

losses were so large and Lehman did not have sufficient collateral 

to post to the Fed. 

Chairman Bernanke stated in his testimony to the Financial Crisis Inquiry Commission, ‘‘There was not nearly enough collateral to 

provide enough liquidity to meet the run on Lehman. The company 

would fail anyway. And the Federal Reserve would be left holding 

the very illiquid collateral, a very large amount of it.’’ 

So my question to you is, the FDIC seems to think that there 

was significant value in Lehman while the Federal Reserve 

thought that the risk was too large to lend to it. 

26 

How could the FDIC and the Federal Reserve come to such different conclusions? 

Ms. BAIR. I think a couple of things. First of all, the 97 cents on 

the dollar as the senior debt holder, that assumes that the sub-debt 

and equity is wiped out. So it is not all Lehman creditors. As you 

do with bankruptcy, you work your way up the capital stack with 

equity at the bottom, and sub-debt later. 

Because of the significant equity and sub-debt cushions, we think 

that the senior bond holders would have taken very small haircuts. 

That is based on very aggressive assumptions about what the loss 

rates would have been on their bad assets. 

I think there is a difference between what collateral was available to the Fed to lend, as well as the Fed’s legal constraints 

against lending into a failing institution. That really drove Chairman Bernanke’s comments. 

But the value of available unencumbered assets shouldn’t be confused with the broader franchise value of the institution and the 

ability of significant sub-debt and equity to absorb losses, which 

the Fed could not rely on because there was no resolution process, 

which we have now. 

Mr. CANSECO. Was this difference of conclusions between the two 

agencies discussed when the Federal Reserve and the FDIC issued 

the proposed rule for living wills? 

Ms. BAIR. Congressman, I don’t think there really is a difference. 

I think Chairman Bernanke was talking about the availability of 

quality collateral—they have very high standards for collateral 

when they lend. And they actually lent well over $100 billion into 

the broker-dealer. 

Because of the bankruptcy process, the derivative counterparties 

had the ability to pull all their collateral out—the Fed lent a lot 

already for liquidity needs and it was still a very disruptive process. 

I don’t think we are inconsistent in what we are saying. But we 

certainly, to your question about living wills, have closely collaborated on the living will rule. It is a joint proposal. 

Mr. CANSECO. Going back to the Lehman bankruptcy, the FDIC 

called its past experience with orderly wind downs of financial institutions ‘‘instructive.’’ The paper argues that the FDIC is readily 

equipped to handle the authority given it under Dodd-Frank because from 1995 through 2007, the agency was responsible for the 

orderly wind-down of 56 financial institutions. 

But a closer examination begs questions as to just how ready the 

FDIC is to handle its new responsibilities. According to data from 

the FDIC’s Web site, the total asset of those 56 financial institutions wound down from 1995 to 2007 was about $12.23 billion, or 

an average of $218 million per bank. Most of the banks were much 

smaller than that. 

So Lehman Brothers had $639 billion in assets when it failed. 

This was the largest bankruptcy in American history. And Lehman’s assets were 50 times greater than all the combined assets 

of the banks the FDIC shut down over a 12-year period. 

What makes the FDIC think it has the resources available to 

wind down such a large institution? 

27 

Ms. BAIR. More recent history may better attest to our capabilities. We have moved about $650 billion in failed bank assets over 

the past 21⁄2 years, since the beginning of 2008. WaMu, obviously, 

was over $300 billion and was resolved over a weekend in a process 

that would have been very similar to the process we would have 

used for Lehman. 

We insure these banks. We understand them. And, Congressman, I get this question sometimes—people try to paint us as understanding only little banks. But, we insure these big banks. We, 

regrettably, participated in some of the bailouts of these very large 

banks. Nobody questioned our expertise or authority to do that. 

So, I think we are quite prepared. I will match the expertise of 

my staff on capital markets, on derivatives, on complex financial 

structures against anybody at the Fed or the OCC or the Treasury. 

We have very smart people who do this for a living. 

We really are the only agency in the world that has the long experience in resolving large and small financial institutions. 

And others look to us. We are doing training in Europe and 

China. Others look to us for expertise as they are setting up their 

own resolution regimes. 

Mr. CANSECO. I notice that my time is up. But I sure hope that 

the FDIC has changed its own personnel and operating structure 

for the benefit of our financial system. 

Ms. BAIR. Congressman, I am very sensitive to this. We are designed to expand and contract very quickly. We also have reservoirs of contractor help, because our work is cyclical. And we are 

used to it. 

We are not perfect. This is a challenge for us. But, I think certainly compared to the expertise shown in the bankruptcy process—you saw what happened with Lehman—this is a good approach. And I want to prove to you that it can work. 

Mr. CANSECO. Thank you. 

Chairwoman CAPITO. The gentlewoman from New York, Ms. 

Velazquez, for 5 minutes. 

Ms. VELAZQUEZ. Thank you, Madam Chairwoman. 

Thank you, Honorable Sheila Bair. 

Last Congress, this committee held a hearing to examine community bankers’ concern that regulators were being overly restrictive. 

How has the FDIC addressed these concerns to work with banks 

that want to increase small business lending? 

And I am concerned, as the ranking member of the House Small 

Business Committee, we held a joint hearing with this committee 

to address the lack of access to affordable capital for small businesses. So I would like for you to comment on this. 

Ms. BAIR. I think this has been a major impediment in the 

broader economic recovery. And, certainly, given your expertise 

with the small business sector, you know that much better than I 

do. 

I think there are a variety of reasons. Risk aversion, perhaps, is 

part of it. But I think borrower demand is part of it, as well. Borrower demand is driven by a couple of different factors. One is, I 

think, uncertainty about how robust the economic recovery is. If 

they borrow money and commit capital to expand, or if we are in 

28 

another downturn a year from now, I think this is the problem that 

is dampening borrower demand. 

I also think because so much small business lending is 

collateralized by real estate, and real estate values have dropped 

so substantially, they don’t have the collateral anymore to borrow 

against as they did pre-crisis. 

We encourage lending. We focus on it. I was very disappointed 

when small business loan balances were down in the first quarter 

and even though C&I lending was up, small business lending was 

down. Commercial and industrial lending, the broader category, 

was up. 

We are trying to strike a very strong balance. We want our 

banks to lend. We especially want them to lend to small businesses. But, I think they obviously need to find creditworthy borrowers to do that, and a lot of the creditworthy borrowers are still 

standing on the sidelines. 

Ms. VELAZQUEZ. Okay. 

The FDIC recently implemented the Dodd-Frank mandate to expand the deposit insurance assessment fee, which will result in 

community banks paying 30 percent less in premiums while large 

banks pay more. What effect on small business lending will the 

new assessment systems will have? 

Ms. BAIR. I think if you are doing this for small banks, this is 

small business. I think it will help them. It will ease their assessment burden in a way that is quite consistent with our loss exposure based on the funding structures that larger institutions employ. 

So I think it will certainly help them. To the extent the small 

banks do about 40 percent of the small business lending done by 

insured depository institutions, it should free up resources to help 

them in that regard. 

Ms. VELAZQUEZ. Under the proposed rules for qualified residential mortgages, home buyers will have to put down 20 percent of 

the purchase price. As a Member who represents New York, we are 

very much concerned about this because it will have a significant 

potential impact in high-cost areas like New York City. 

Should QRM requirements be based on local market conditions 

instead of an across-the-board increase? 

Ms. BAIR. No. The QRMs are meant to be an exception to the 

general rule that if you are issuing a securitization, you need to retain 5 percent of the risk. 

And I think that 5 percent risk retention is important. The fact 

that securitizers did not have skin in the game with these loans, 

by and large, or meaningful skin in the game, led to a lot of the 

lax underwriting and abuses that we saw in the mortgage market. 

So the 5 percent risk retention, in my view, should be the rule. 

The QRM is the exception. As such, it is meant to be a narrow 

niche part of the market, not what the more broadly available 

standards will be. 

If you retain 5 percent of the risk or if you retain all of it with 

a portfolio loan, you have broad flexibility to underwrite the loan 

within prudential standards. So it only applies to what I think is 

going to be a small slice of the market. 

29 

Ms. VELAZQUEZ. Have you looked at any other alternatives to a 

20 percent downpayment that could reduce the number of defaults 

in the future? 

Ms. BAIR. The staff of all the agencies looked at this very carefully. Loan to value ratios are a significant driver of whether a loan 

defaults and what the losses are when the loan does default. And 

so no, we are out for comment on exactly that question, among others. And I anticipate this is a huge issue. We will get a lot of comments on it. 

But, the analytical work that the staff did indicates that a 20 

percent downpayment is a really strong indicator of credit quality. 

Ms. VELAZQUEZ. But you understand my point that it is not 

fair— 

Ms. BAIR. I do understand your point. 

Ms. VELAZQUEZ. —for places like Massachusetts— 

Ms. BAIR. I think for low- and moderate-income families, this is 

a huge issue. And I think, what is a meaningful downpayment for 

a lower-income person can be very different from what a meaningful downpayment is for those with other means. 

The question is, how do we meet those needs? 

And I think, again, my view is that with the 5 percent risk retention, you will have a robust market that will have prudent but 

more flexible underwriting standards to meet that swath. And, of 

course, we have the continuation of FHA programs. 

Ms. VELAZQUEZ. Thank you. 

Chairwoman CAPITO. Thank you. 

I would like to recognize Mr. Royce, from California, for 5 minutes for questioning. 

Mr. ROYCE. Thank you, Madam Chairwoman. 

Chairman Bair, let me first say that I think a lot of my colleagues here have been pretty impressed over time with the 

straightforward way that you respond to questions. It is not always 

the rule around here. 

Second, let me just say that I have laid out for you the arguments that I think are made by the studies that there is this 88 

basis point advantage, this presumption that is out there— 

Ms. BAIR. There is. 

Mr. ROYCE. —in terms of the systemically significant firms. 

And I think that the studies of the FDIC show the same relative— 

Ms. BAIR. They do, absolutely. 

Mr. ROYCE. —magnitude. 

So to go back to the markup or the conference committee, I put 

forward several amendments to try to overcome this tendency. One 

in particular required the FDIC to estimate at the outset of the 

resolution process what creditors would have received in bankruptcy and limit payment to bankruptcy less a haircut of 20 percent, which would act as sort of an insurance mechanism against 

future write-downs. 

If following the resolution process under that scheme there were 

additional funds, then the FDIC would have the authority to pay 

back all or part of that 20 percent premium. But I thought that 

might solve out in the market this presumption. 

30 

Let me go through the two arguments I made during the conference committee. We didn’t carry this argument, but I think it 

still holds true. 

First, there is this strong presumption that the regulators are 

going to err on the side of bailouts, especially for the most interconnected and largest firms that will likely get preferential treatment through the resolution process. 

With this understanding, creditors—and we are talking especially here about short-term creditors. Those creditors, by the way, 

are going to be considered essential under the FDIC’s proposed 

rule, right? 

So they are going to know that lending to these large complex 

financial firms, subject to the resolution authority, is basically riskfree or it is very close to that, because if these firms fail, creditors 

are going to be made immediately whole or very close to whole. 

And as a result, these firms are going to be able to borrow more 

cheaply. They are going to grow even larger. They are going to become more significant, systemically significant. And that is going to 

compound the too-big-to-fail problem. 

Now, there is a second problem also that arises. And that, to go 

back to it again, is the claw-back provision. Once that money is out 

the door to creditors, it is going to be very difficult to recover. And 

I think that is, again, why you see this basis point difference, bankruptcy over here for these firms versus resolution authority for the 

large one. 

It is not hard to foresee a situation where a recently bailed-out 

creditor strongly argues that handing over these sums may jeopardize their unstable firm. And this is an argument that regulators, having just bailed out these same creditors in the name of 

preserving financial stability, may find very difficult to resist. 

Additionally, there is no guarantee that a given creditor will be 

able to pay back the difference between the advances and what 

they would have received in bankruptcy under the Bankruptcy 

Code and under this mandate. 

So, I am just going to go to the Dallas Fed President, Richard 

Fisher, who recently said this about these arguments that I have 

made in the past: ‘‘A credible big bank resolution process that imposes creditor losses will be difficult to enforce, especially when 

regulators are explicitly directed to mitigate disruptions to the financial system, as they are in the reform bill.’’ 

So I understand that you believe regulators need broad authority 

to handle a crisis, but I think that the unintended consequences 

here have to be considered. And if we were to look to tightening 

the language while working with the resolution authority mechanism, are there steps we can take to minimize the potential for 

abuse down the road? And the argument, the amendment I made 

earlier, does that hold water with you? Is there a way to get at 

that? 

Ms. BAIR. So, a couple of things. 

We are all for tightening as much as we can. We do not want 

bailouts. We want market discipline back. 

As deposit insurer, there is obviously moral hazard associated 

with providing deposit insurance for these entities that have inVerDate Nov 24 2008 11:26 Sep 01, 2011 Jkt 066872 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\66872.TXT TERRIE
31 

sured banks. So we need market discipline to complement the regulatory process as a weapon against excessive risk-taking. 

So whatever we can do to tamp this down, believe me, we will 

work with you. 

We are trying to do a lot of this through regulation. We put a 

rule out that basically said that if you hold debt with a term over 

a year, forget it, there will never be any differentiation. Please do 

not interpret that to mean that if you hold debt with a term less 

than a year, you are going to get it, because you are not. Shortterm creditors are very much subject to loss absorption. 

I think one of the advantages of the government being able to 

provide liquidity is, for instance, if you had unsecured commercial 

paper, you could haircut that. Even though you would lose the 

funding, you replace it with government funding, and those creditors absorb the losses. 

The presumption for the short-term creditors should be that they 

are taking losses, too. Again, the only time I can see that wouldn’t 

happen is if the acquirer wanted to maintain those customer relations. 

And you might then find that, for instance, with a derivatives 

book. If they want to buy the failed institution’s derivatives book, 

maybe we don’t need to impose losses—even if there are some 

counterparties that are unsecured or undercollateralized. We find 

that now with uninsured deposits. 

But that is going to be a mathematical determination. Whatever 

is going to maximize recoveries, that is what we will do. 

So I do think we want it narrow. The statute does have some significant limitations. We are trying to tighten those even more with 

regulation. I am happy to look at language and talk with you about 

this further. 

Believe me, there is no entity more so than the FDIC that wants 

to end too-big-to-fail. 

Mr. ROYCE. Thank you, Chairman Bair. 

Chairwoman CAPITO. Thank you. 

Mr. ROYCE. Thank you, Madam Chairwoman. 

Chairwoman CAPITO. Mr. McHenry, from North Carolina, for 5 

minutes. 

Mr. MCHENRY. I thank the Chair. 

And, Chairman Bair, thank you so much for being here. I echo 

Mr. Royce’s comments. I appreciate your forthrightness. I know you 

have testified many times during your government service. And we 

thank you for your service. 

I wanted to ask you, based on something you had in your written 

statement, the Dodd-Frank Act, you said, ‘‘if properly implemented, 

will not only reduce the likelihood of future crises, but will provide 

effective tools to address large company failures when they do 

occur without resorting to taxpayer-supported bailouts or damaging 

the financial system.’’ 

I think we would like to believe that we won’t have future taxpayer bailouts. Many of us have concerns that, as constructed, it 

still leaves that door open. And I think that is Mr. Royce’s point. 

But we look at the breakneck pace of rulemaking, and you see 

regulators in many respects overwhelmed with the volume and the 

pace. 

32 

Ms. BAIR. Right. 

Mr. MCHENRY. Do you have concerns about the pace and the 

quality of the rulemaking? 

Ms. BAIR. I think from the FDIC’s perspective, we are comfortable with it. We did not have the huge number of rulemakings 

that the SEC and the CFTC did. So I think we feel like we are proceeding at a reasonable pace. And for anything major, we are giving 60-day comment periods. 

And so I think, at least from the FDIC’s perspective, we are comfortable with implementation so far. 

I do understand, especially in the derivatives area, some of the 

market regulation issues. There is a lot being done there at once. 

Frankly, there were a lot of problems, especially with the derivatives oversight. 

So I think the rulemaking needs to continue. Whether perhaps 

some sequencing could be done, that might have some merit. But, 

on the other hand, it is important to continue to proceed. And I do 

think the market needs to understand that at some point these 

rules will be in place. 

And I think, frankly, they need that to adapt as well. Markets 

can be very resilient. Once they know what the rules are, our financial sector is pretty good at complying with them and figuring 

out how to do it. 

But, some sequencing might well have some merit. 

Mr. MCHENRY. What about harmonization? 

Ms. BAIR. I think we are doing a pretty good job there, even on 

the international front. I know you hear different things from 

some. The FSOC is still getting its sea legs, but I think it is forcing 

all of us to get together and talk regularly and have our staffs talk 

regularly. 

And so I think there has been a good deal of harmonization, including on the international front. I think we have made a lot of 

progress in harmonizing international capital standards. In addition to resolution authority, I can’t overemphasize the need for 

strong capital buffers. 

So I think there has been some good work on harmonization, and 

we should continue to focus on that. But I know there is concern 

about treatment of commercial end users in the derivatives rules. 

And we are talking with each other about that. 

I do think, though, it may be that at some times you want some 

differentiation among end users. For instance, you are probably 

going to want more risk aversion with an insured bank than you 

are with an entity that is completely outside the safety net. 

So there may be some reasons for differentiation. But I think we 

are working hard at harmonization. 

Mr. MCHENRY. You mentioned two things that are of interest, 

this international harmonization— 

Ms. BAIR. Right. 

Mr. MCHENRY. —Basel III, ensuring sort of an international 

level playing field. 

Ms. BAIR. Right. 

Mr. MCHENRY. You also mentioned capital standards. I hear a 

lot from my community banks about their concern about— 

Ms. BAIR. Right. 

33 

Mr. MCHENRY. —raising capital standards. And I understand 

there is a balance here. We want to make sure that we have safety 

and soundness. But we also want to ensure lending and economic 

recovery. 

Are you wrestling with that? Do you believe that is— 

Ms. BAIR. I— 

Mr. MCHENRY. Do you weigh that when you are going through 

this process? 

Ms. BAIR. You do need to weigh it. But I think the primary focus 

has been with large institutions’ capital requirement—getting that 

sector to deleverage. 

And I think, back to the earlier point Congressman Royce was 

making about funding differentials, if you have higher capital 

standards, since capital is more expensive than debt, that will not 

only provide a better buffer for loss absorption, but it will help differentiate funding costs, or reduce the differentiation in funding 

costs. 

So I think the capital discussions have been targeted primarily 

at the larger institutions. There have been a few issues with smaller institutions’ holding companies, regarding the quality of capital. 

A lot of the holding companies—not the banks; it is not allowed 

for banks—use something called trust preferred securities that 

ended up to not have loss-absorbing capacity in the crisis. And I 

know there have been some concerns there. That is really the only 

capital issue relating to small institutions. 

Mr. MCHENRY. My time is short, but I want to ask you about the 

QRM. I think that private mortgage insurance should be a part of 

this to ensure a lower downpayment and an insured product that 

should be a part of the QRM. Can you comment on that? 

Ms. BAIR. Again, that is out for comment. My only caution on 

that—I started worrying when the government was relying on credit rating agencies, for instance. 

And so then we say, we will have better standards, review standards, if there is a private sector mortgage insurer. We need to 

know, who are the mortgage insurers? How well are they regulated? How good are their resources if we get into a down cycle? 

I think those are the things really to think about. And mortgage 

insurance can be a good product, but do we want demand for it 

driven by markets or driven by regulations, giving them an extra 

penny, frankly, for having a lower downpayment. 

I know you care about the markets the way I do. I think that 

may be the trade-off that we should think hard about. 

Mr. MCHENRY. Thank you. 

Chairwoman CAPITO. Thank you. 

Mr. Duffy for 5 minutes. 

Mr. DUFFY. Thank you, Madam Chairwoman. 

Good morning, Chairman Bair. 

Was it you who said that you thought that consumer protection 

and safety and soundness were two issues on the same side of the 

coin? 

Ms. BAIR. Right. Yes, it was me. 

Mr. DUFFY. Why is that? 

34 

Ms. BAIR. I think because consumer abuses generally will end up 

costing banks money. Mortgages are the prime example for any financial institution, not just banks. Mortgages are a prime example. 

Banks and other entities were making loans that the consumers 

couldn’t afford—and more of it was done outside of the banks. 

Eventually, the loans defaulted and a lot of losses occurred. So it 

didn’t help the consumer. It didn’t help the financial institution either. 

Mr. DUFFY. And so when we see these two going together, and 

we want to make sure our consumers are protected and treated 

fairly, and they are engaging in transactions that are transparent. 

And we also want banks to be profitable, and make sure that they 

are not going under. 

Do you have a concern when we separate consumer protection 

from safety and soundness? I think it was Mr. Renacci who commented that in the mission statement of the CFPB, there is no reference to safety and soundness. 

Ms. BAIR. Right. 

Mr. DUFFY. Does that give you some pause or some concern? Or 

are you okay with the oversight that comes from FSOC? It has 

been a political issue. 

Ms. BAIR. Right. 

Mr. DUFFY. And I don’t mean—I don’t want to— 

Ms. BAIR. No, I know. Yes, we support the consumer agency. 

There were different iterations of its structure early on in the process, but we support the final outcome. 

We think it is a positive thing, actually, that the consumer bureau will be on our board, because that will provide additional 

interaction to make sure that safety and soundness and consumer 

protection are considered together. 

That will work both ways, too, I think. 

Mr. DUFFY. But it is not on the CFPB. 

Ms. BAIR. I am sorry? 

Mr. DUFFY. The CFPB doesn’t have that consideration for safety 

and soundness— 

Ms. BAIR. Right. We are all for reciprocity. 

But, given that, we are fine with how the Dodd-Frank Act came 

out. And I do think it is important to understand, for the rule-writing piece of this, that has always been separate from the examination and enforcement process. 

Mr. DUFFY. But if you look at the—I know you have talked about 

reciprocity. And you really don’t have reciprocity, but for your 

FSOC, right, to review the rules that are coming from the CFPB. 

Ms. BAIR. Right. 

Mr. DUFFY. And one of my concerns is that the standard is so 

high. You need 7 out of 10 votes— 

Ms. BAIR. Right. 

Mr. DUFFY. —to overturn a rule from the CFPB. And the Director is one of the voting members. So it is really seven out of nine. 

Ms. BAIR. Right. 

Mr. DUFFY. It is incredibly high. And the risk there, it has to be 

systemic risk. We are talking about playing Russian roulette with 

our economy. 

Ms. BAIR. Right. 

35 

Mr. DUFFY. I introduced a bill that would reduce the requirement 

to just a simple majority, and take the director off, a 5–4 majority 

of some pretty significant folks who sit on FSOC. 

Ms. BAIR. Right. 

Mr. DUFFY. And we talked about reducing the standard that if 

the rule was inconsistent with the safe and sound operation of 

United States financial institutions, it could be overturned. 

Do you think that is reasonable that we have a little different 

standard in how we can coordinate consumer protection with safety 

and soundness? 

Ms. BAIR. There are a lot of things about the Dodd-Frank Act 

that all of us would have written differently. At the end of the day, 

it was a compromise product. 

But we can support the final product. I think it can work. 

Mr. DUFFY. But can we improve upon it? 

Ms. BAIR. Sorry? 

Mr. DUFFY. Can we improve upon it? 

Ms. BAIR. I fear you are going to draw me into a situation 

where— 

Mr. DUFFY. I will be gentle with you. 

Quickly, I am from a more rural district, with all community 

banks and credit unions. We don’t have big Wall Street banks in 

my district. 

And I hear this nonstop from my local bankers. They are talking 

about how they are crushed by so many rules and so many regulations, and the impact that it has on them, as they say, ‘‘Listen, we 

don’t have the ability to diversify this cost over a large base. And 

you make me hire a lawyer or a compliance officer—’’ 

Ms. BAIR. Yes. 

Mr. DUFFY. —‘‘and our costs go up. It makes it more difficult for 

us to compete with bigger banks.’’ Or sometimes they will go on, 

‘‘We can’t even stay in the market anymore.’’ And that is the lifeblood of our economy. 

Ms. BAIR. Right. 

Mr. DUFFY. And this is nonstop coming from them. I don’t know 

if you are hearing the same thing or trying to figure out how can 

we still be safe— 

Ms. BAIR. Right. 

Mr. DUFFY. —but still have rules that allow our local bankers, 

who didn’t have anything to do with the financial crisis, to do business. 

Ms. BAIR. I think they have a point. I think every time you have 

a new rule or a new compliance requirement for safety and soundness or a consumer requirement, the incremental costs of doing 

that are going to be significantly higher than they are for a large 

institution. 

We can and should do a better job of taking that into account. 

I have said this, and I will say it again; all the problems we have 

had with servicing, and we have had a lot of them, but as near as 

we can tell, these are problems of scale that affect the very large 

servicers. So, we should have two tiers of regulation. 

If there are going to be a lot of new rules for servicing, we don’t 

see a basis for layering all of that on the smaller banks as well. 

36 

From a diversification standpoint, smaller banks have really been 

relegated to specialty commercial real estate lenders. 

We would love to see them diversify their balance sheets, start 

doing more mortgages again or car loans or whatever. 

But the regulatory barriers to getting back into those lines of 

business may be an impediment. 

And servicing is one example. I would love to see community 

banks start making more mortgages again. I think they do a better 

job with the customer. 

So I am very sensitive to this. And I think we should look at 

more structured, two-tiered regulation, because the issues are completely different 

Mr. DUFFY. So that is something you are looking at? 

Ms. BAIR. Absolutely. And we have an advisory committee on 

community banking. They have given us a number of good ideas for 

making regulations more effective and streamlined when it comes 

to smaller banks. 

When we do a FIL, we already, at the very top, say whether this 

even applies to community banks or not. I require the staff to do 

an analysis of community bank impact and why we need this to 

apply to community banks. 

We are looking at more automation, too, in the forms banks have 

to fill out, putting those all on a system we have called 

FDICconnect. So instead of doing a new form every year, they can 

go in and update the old one. 

So we are trying on a number of fronts to deal with this. 

Mr. DUFFY. And I appreciate that, because, again, we hear that 

from the community banks and the credit unions. 

Ms. BAIR. Yes. 

Mr. DUFFY. To get them to agree on some issues, it is pretty impressive. That interchange are two things that they will talk about. 

And I appreciate you looking at that. Thank you. 

And I yield back. 

Chairwoman CAPITO. Thank you. 

The Chairman has consented to go to a second round of questioning, if that is—you were consented upon. 

And we are still going to be called for votes here in the next 

probably 15 to 20 minutes. 

So I will go ahead and start the second round, and I appreciate 

you spending the time with us. 

We had a recent hearing and we also had a discussion in the 

markup for the bill for the CFPB on the differences or the interchangeability or not of safety and soundness and profitability for 

banks. 

One witness said that safety and soundness is used as a code 

word by the institutions as profitability. And so by trying to reshape or reform maybe in the CFPB or something and using safety 

and soundness, we were being accused of protecting the profits of 

an institution. 

And while a safe and sound bank may realize a profit, and I 

think that is a good thing, a profitable bank is not necessarily safe 

or sound. 

Could you comment on this assertion in the interchangeability of 

that and how you see those two different phrases differently? 

37 

Ms. BAIR. I do think they are—and I have said this throughout 

my career—two sides of the same coin. I think if a product does 

not serve consumers or your customers long-term benefit, this is 

going to be a product that eventually loses money for you and could 

result in significant litigation exposure as well. 

We certainly saw that with all the lax funding on mortgages. We 

are seeing a lot of additional litigation on overdraft protection. So 

I think having some sensitivity of good business practices for the 

consumer side is important. Products that don’t serve consumer 

needs are eventually going to lose money. 

They will probably default, or the customers will start abusing 

them, or they could result in litigation exposure. 

On the other hand, since these are insured banks, you need to 

have a full analysis of changes, whether it is safety and soundness 

or consumer protection, of how that is going to impact the financial 

health of the institution, I would say, not the profitability. 

And so I think both factors need to be weighed. But again, I 

think with the consumer bureau needing to consult with the bank 

regulators and also serving on our board, I think there are ways 

now built into Dodd-Frank to facilitate that kind of communication 

and consideration of those factors. 

Chairwoman CAPITO. So, safe and sound consumer products will 

in the long run, in your opinion, and I agree with this, bring about 

a profitability for the institution? 

Ms. BAIR. Sustainable profitability. 

Chairwoman CAPITO. Yes. And I think that while there is a distinction between safety and soundness and profitability, I think 

that, as you said, the unsafe product or the non-well research product or the one that takes it too far is eventually going to be a nonprofitable instrument for the institution. 

My final question, we have talked a little bit about a commission—and I don’t want to draw you into a big political argument 

on that. But in looking at your own commission or corporation, you 

serve as the chair. The vice chair—you have a vice chair. You have 

an OCC, who is acting. We have no appointment there. 

Ms. BAIR. Right. 

Chairwoman CAPITO. We have the OCS, which is going to be 

grandfathered out, or however, in July, no longer exist on July 

21st. 

We have the CPFB chair, but we don’t have one. And I think I 

wouldn’t be stretching the imagination to say it is going to have to 

be—it can’t be a Senate-confirmed—it would be highly unlikely 

that it would be Senate-confirmed because of the timing. 

And then we have your independent director who has also is on 

an expired term. 

This really concerns me. We are losing your expertise and longevity and history. And I know you are not really going far, but in 

all fairness to you and to the Corporation, this needs to live on. 

Ms. BAIR. Right. 

Chairwoman CAPITO. What are we going to do about it? I guess 

for me, it is a political statement. I say to the President, get these 

appointments out. Get them Senate-confirmed. Let us have some 

stability here. Or we are going to end up in—not a la la land kind 

38 

of situation, but an ever-changing transitional situation where it 

causes me concern. 

Do you have concerns about that? 

Ms. BAIR. I have profound concerns. I am frustrated that there 

is not greater urgency and prioritization of this issue on the part 

of the Administration, as well as on the part of the Senate. 

And I am very worried about my agency. We could go down to 

three or two board members after I leave. 

There are some nominations in process. But the names are not 

up yet. There are still some vacancies where, as far as I know, no 

candidates have been vetted. 

And so thank you for flagging that, because I think that this is 

very urgent, when the financial system is healing, but it is not out 

of the woods yet. There are a lot of unknown factors out there. We 

need strong people in these jobs. And there are still reforms to be 

implemented in a commonsense, effective way. 

And you are right, having a two-member or three-member board 

making these kinds of decisions is not a good thing. 

Chairwoman CAPITO. Mrs. Maloney? 

Mrs. MALONEY. Thank you. 

And I thank you for raising your concern on having a Director 

of the CFPB in place on July 21st. This is a grave concern to me 

also. 

The difficulty is that 44 Senators have signed a letter saying that 

they will not confirm anyone unless bills that they want, that 

passed out of this committee, and other policy positions that they 

want such as moving the funding of the CFPB to the political appropriations process, which if we look at what happened to the 

SEC and the CFTC, they were basically cut, making it more difficult for them to do their job. 

So in other words, politicizing the funding of it. They said that 

they would not confirm anyone. I believe this is a tremendous 

abuse of the confirmation process, basically holding the entire Congress hostage, that you have to write legislation like we want. 

In this case, not what I am saying, but roughly five or six major 

editorial boards from the United States have said in their editorials, and good government groups and others have said, to remove it from politics or the Democratic and Republican perspective, 

that these bills would gut, dismantle, disrupt, and destroy the 

CFPB, the Consumer Financial Protection Agency. 

So this is a huge problem. They basically have given the President no choice but to make an interim appointment because they 

are saying they will have to gut the entire agency and make it basically a non-performing, toothless situation. 

So I believe the CFPB has a role to play in protecting consumers. 

Too often, consumers’ concerns were a second thought, a third 

thought, or not thought about at all. And we maybe would have 

been able to prevent the subprime crisis. I can’t imagine any consumer agency approving products that the degree of probability 

that they would end up on the street or hurting the family and the 

overall finances of our country were greater than the mortgage 

working them. 

The joke in New York during this time was if you can’t afford 

your rent, go out and buy a house. It was so easy to get a mortVerDate Nov 24 2008 11:26 Sep 01, 2011 Jkt 066872 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\66872.TXT TERRIE
39 

gage, a faulty mortgage, that became clogged in the system and 

helped bring down the financial crisis that we had. 

So we have a disagreement, a basic choice. It is a basic disagreement between the Republican Party and the Democratic Party. The 

Democratic Party supports the CFPB. The Republican Party has 

come forward with a series of bills that would dismantle, destroy, 

and gut the CFPB. 

And you have Republican Senators saying, ‘‘We will not confirm 

anyone unless you do exactly what we want,’’ using it, taking hostage the entire legislative process to get what they want. 

They have forced the President, really with no other choice, since 

he supports the CFPB. And I would say the overwhelming majority 

of the American people do. The American people would like someone looking at their loans, at their credit cards, at their student 

loans, and making sure that they are fair; not giving anyone an advantage, but making sure that there is a fair playing field that consumers can understand what the terms are; that they are in plain 

print out there for everyone to understand. 

So we have a basic disagreement between the Republican and 

Democratic Parties. 

But I do want to address my questions to our distinguished guest 

today in the area in which she has played such a fundamental role. 

I would like to go back to the too-big-to-fail, which is a huge issue. 

And I understand it is the next focus of the hearings we will be 

having on this committee. 

Some have argued repeatedly that the financial reform law, particularly the Orderly Liquidation Authority, perpetuates, rather 

than eliminates, too-big-to-fail. So I would like to ask you, what is 

your assessment of the allegation that the Authority perpetuates 

too-big-to-fail? 

Ms. BAIR. I do not believe it in any way perpetuates too-big-tofail. Too-big-to-fail was with us pre-crisis. It was reinforced by the 

bailouts. And we need to end too-big-to-fail now. 

And the Dodd-Frank Act gives us the tools to end it. It quite specifically bans the bailouts in language that we supported and wanted in. 

So I think it is there. The tools are there. The clear legislative 

intent is there. And I think, as I indicated in my testimony, implemented effectively, it will end too-big-to-fail. 

Mrs. MALONEY. My final question, and my time is running out, 

is which parts of the financial reform law do you think are the 

most critical to ending too-big-to-fail? 

Ms. BAIR. I think Title I and Title II, which gives us the Orderly 

Liquidation Authority powers for systemic non-banks. We already 

have it for banks. Title I is important, which requires the Fed to 

impose higher prudential standards and particular capital requirements on larger entities, as well as requires, jointly with the FDIC, 

living wills or resolution plans where they must demonstrate that 

they are resolvable. 

Mrs. MALONEY. I thank you for your testimony today. I thank 

you for your distinguished service to our country. 

And I thank you for your really nonpartisan response to questions and policies. I think you have done a magnificent job for our 

country. 

40 

Thank you. 

Chairwoman CAPITO. Thank you. 

Mr. Renacci, from Ohio? 

Mr. RENACCI. Thank you, Madam Chairwoman, again. 

And Chairman Bair, I do want to thank you again for being here, 

and your testimony, and your service to our country also. 

The one question I asked before, several people have already 

asked you, and I heard your answer. So I am going to move to another topic. And it regards the Orderly Liquidation Authority. I 

know several times in your testimony today, you have talked about 

how you believe—or at least the impression I got was that you believe the FDIC’s authority over liquidation is better than bankruptcy. 

Ms. BAIR. Yes. 

Mr. RENACCI. There are a number of— 

Ms. BAIR. —for financial institutions. 

Mr. RENACCI. —for financial institutions. 

There are a number of people in the bankruptcy community who 

believe that if the bankruptcy laws were changed, that bankruptcy 

would be better. 

Ms. BAIR. Right. 

Mr. RENACCI. And I know a lot of it deals with derivatives and 

making sure there is some timing on derivatives. 

Can you give me some ideas or thoughts where you might believe 

that bankruptcy would be better? Because one of the issues of 

bankruptcies, of course, is that we are looking out for the creditors 

as we wind things down. So I would like to hear your thoughts on 

some things that could be changed in the Bankruptcy Code that 

would actually make bankruptcy better. 

Ms. BAIR. I think you are right. How derivatives are treated is 

really very important. First of all, we would love to work with this 

committee and the Judiciary Committee on this. We deal a lot with 

bankruptcy courts because banks that we resolve are frequently 

part of holding company structures that go into bankruptcy. So we 

are quite familiar with some of the strengths and weaknesses of 

the process. 

I think how bankruptcy treats derivatives is a big problem. And 

having the ability to require counterparties to continue to perform 

on their derivatives contracts is important. Now they have the ability to terminate their contract and claim their collateral, which can 

be quite disruptive and was a major factor in the disruptions that 

surfaced with Lehman. 

So we would love to work with the Congress to make bankruptcy 

work better. For most of these financials companies—for instance 

CIT, we were opposed to any kind of bailout assistance for CIT. We 

didn’t think they were systemic. They weren’t. They went into a 

bankruptcy process. 

It was just fine. It was financial. They relied on a lot of shortterm funding through commercial paper, but they were the size 

where their bankruptcy was not systemic. And bankruptcy worked 

just fine. And I think there are ways to make bankruptcy work 

even better. 

For the larger entities, though, I think there will be a couple of 

things that we can do that bankruptcy courts will never be able to 

41 

do. First, we will be able to have a continuing on-site presence with 

these entities. We will be able to plan. 

We will have ongoing access to information about their 

counterparty exposures and the concentration of their overseas operations. The bankruptcy court is just never going to be able to do 

that. 

Similarly, we will be able to pre-plan and work with the international regulatory community, as an institution becomes more 

troubled, to find and identify any potential obstacles to resolving 

our domestic entity if they have foreign operations. 

We do that now. We resolved banks with international operations. 

We had a West Coast bank that owned branches through a subsidiary in China and Hong Kong. Several months in advance, we 

contacted the regulatory authorities there. We identified what we 

needed to do to make sure there was a smooth sale in our receivership process. 

And we did. We were able to keep the branches and subsidiary 

in Asia open. We got the regulatory approvals for the new buyer 

to take the failed bank. 

So it is hard to see how the bankruptcy court could ever engage 

in that kind of bilateral international coordination in the event of 

a failure, or be involved in pre-planning. 

Finally, we can provide immediate liquidity support, which can 

be very important to maintaining franchise value. They have debtor-in-possession financing mechanisms in bankruptcy, but generally those cannot be done immediately the way liquidity support 

can be provided by the FDIC. 

Mr. RENACCI. Thank you. 

I yield back. 

Chairwoman CAPITO. I am going to take the liberty and ask a 

question before I go to Mr. Carney, real quick, to piggyback on his 

question. 

When you say you can provide immediate liquidity support, is 

that through the ability to go to the Treasury? 

Ms. BAIR. That is. Under the bill, yes. For banks, we have the 

Deposit Insurance Fund that we use. But yes, for non-banks, it 

would be through the credit with Treasury. Yes. 

Chairwoman CAPITO. And I think that is where the rub is, really, 

in terms of the perception. Because if you— 

Ms. BAIR. I think that is right. 

Chairwoman CAPITO. —if you can go to the Treasury, you are 

going to the taxpayer. 

Ms. BAIR. Right. 

Chairwoman CAPITO. And can you help with that distinction? 

Ms. BAIR. Again, we wanted a pre-funded reserve, and that 

passed the House, but didn’t pass the Senate. But I do think it is 

very important to emphasize that any funds that are provided 

through that Treasury line are paid back and have priority over everything else. As assets are sold, they are paid off the top. 

I can’t believe there would ever be any losses on that because you 

are not guaranteeing any liabilities for the non-bank institutions. 

So whatever assets are sold, those recoveries go to Treasury first. 

42 

And if in the unlikely event there would be losses, there would 

be an assessment on the industry, just the way we assess now for 

deposit insurance. 

So I really think there are a lot of safeguards against taxpayers 

ever taking exposure on this. And I would say in turn, the fact that 

the industry would have to pay for any losses if that would occur, 

in and of itself will create industry pressure against any creditor 

differentiation, because they will know that if the receiver—we 

would never do this anyway—but if the receiver started trying to 

show favoritism, those losses would be assessed against the industry. And there will be a lot of industry pressure not to do that. 

Chairwoman CAPITO. Mr. Carney, from Delaware. 

Mr. CARNEY. Thank you, Madam Chairwoman. I am happy to 

yield any time you might need. 

Chairman Bair, thank you again. I have been really enjoying the 

hearing this morning. And I want to reiterate the comments that 

my colleagues have made on both sides of the aisle about your candor and straightforward answers. We don’t always get that. 

And I think it has a positive effect on the Members and the questions they ask, by the way, as well. 

You said a minute ago that you thought the financial system was 

healing, but not out of the woods yet. Could you expand a little bit 

on that? 

Ms. BAIR. Yes. I think they are still working some troubles out. 

Loan volume is down. And, again, I think there may too much 

risk aversion with some banks, but I think there is also a lack of 

borrower demand. And banks need to make loans to make money. 

That is what they are supposed to be doing with their funds, and 

that is what they need to do to make money. 

I think, longer term, as I have said in testimony and as I said 

in an op-ed last November, I think we are worried about the fiscal 

situation. We are in a very low-interest-rate environment and have 

been for some period of time. 

That means there are more low-interest assets on banks’ balance 

sheets. And even though the maturities have been shortening, obviously banks are heavily exposed to interest-rate volatility because, 

particularly, their liabilities are shorter than their assets. 

So I think anything that would undermine confidence in the fiscal strength of the United States Government could have an adverse, potentially volatile impact on interest rates. 

And so we are very much worried about that and hope very much 

that these discussions can produce a long-term deficit reduction 

plan. 

Also, as I mentioned in my testimony, we are not out of the 

woods with the housing market yet, either. 

Mr. CARNEY. Yes, that was my next, kind of, line of questioning. 

You said that we need to get mortgages—mortgage lending going 

on. What are the barriers there? 

I hear, as I said a minute ago, from my bankers and from borrowers that the regulators are tightening down, not allowing them 

to make those loans. 

Ms. BAIR. Actually, I think I would put more of a priority on 

business lending and small business lending. I think certainly 

mortgages and housing is an important part of our economy, but 

43 

I think we need to accept, going forward, it will be a smaller part 

of our economy— 

Mr. CARNEY. Right. 

Ms. BAIR. —and probably needs to be. It got bloated and overheated. But I do think ultimately, there needs to be a GSE exit 

strategy. We know that model didn’t work. And I think— 

Mr. CARNEY. Do you have a view on what model might work? 

Ms. BAIR. I think what we have said is that it is really outside 

my portfolio to— 

Mr. CARNEY. That is okay. There are just a few of us here now. 

Ms. BAIR. I will say this. I think it could go one way or the other. 

Regarding this hybrid model where you had a private for-profit 

shareholder-return-driven entity with an implied government backstop—providing this government support was absolutely the wrong 

model. What you got was the privatization of gains and the socialization of losses. 

So going forward, I would say if you are going to continue to 

have government support, make it explicit; charge for it up front, 

the way we do at the FDIC. Make sure it is actuarially sound, in 

terms of what is being charged for the credit support. And make 

that explicit. 

These implicit backstops— 

Mr. CARNEY. Explicit and narrower? 

Ms. BAIR. Explicit the way the FDIC charges insurance premiums for deposit insurance. If you are going to be guaranteeing 

mortgages, have the government determine the amount and charge 

a guarantee fee that accurately reflects risk. Yes. Or get out, one 

way or the other. 

Mr. CARNEY. And so, what about—there was some back-and-forth 

about lending standards. 

Ms. BAIR. Right. 

Mr. CARNEY. What is your view of that? Twenty percent is a 

huge— 

Ms. BAIR. Again, Congressman— 

Mr. CARNEY. I don’t see how that works. 

Ms. BAIR. That is supposed to be the exception, not the rule. 

There are mortgages out there with 20 percent downpayments, 

but that is meant to be a niche exception to the general rule that 

if you are going to securitize mortgages, you need to retain 5 percent of the risk. 

So the QRM standard is a way to get around the 5 percent risk 

retention. If you retain 5 percent risk, you have a lot of flexibility 

on the underwriting side. 

Mr. CARNEY. Okay. 

What sounds reasonable to you, in terms of the downpayment 

or— 

Ms. BAIR. I think it is a combination of factors. Clearly, with a 

borrower with a strong credit history, with a low debt-to-income, 

there may be other flexibilities that you can provide. And we provide that with banks now, with portfolio lending. 

I think you need to have some downpayment. I don’t want to— 

Mr. CARNEY. Let me squeeze one more question in. I only have 

a short amount of time. 

Ms. BAIR. Sure. 

44 

Mr. CARNEY. It is about credit agencies. You mentioned credit 

agencies. Do you have a view of what we should be doing there? 

Ms. BAIR. I think that one thing we are doing is getting rid of 

all references to credit rating agency ratings in our regulation. 

That is required by the Dodd-Frank Act. Pre-Dodd-Frank, we had 

already started telling banks that they needed to do their own 

independent analysis of the creditworthiness of the securities they 

invest in. They can’t rely just on the ratings. 

We used to use ratings for our deposit insurance assessments. 

We have gotten rid of that. So I think that has been in process for 

some time. 

If you are not using credit ratings, what are you going to replace 

them with? 

And so, that is really the hard question. And I don’t think we 

have figured that out yet. 

Mr. CARNEY. Thanks very much. 

Ms. BAIR. Sure. 

Chairwoman CAPITO. Thank you. This concludes our hearing. 

The Chair notes that some members may have additional questions 

for this witness which they may wish to submit in writing. Without 

objection, the hearing record will remain open for 30 days for members to submit written questions to this witness and to place her 

responses in the record. 

Again, thank you so much— 

Ms. BAIR. Thank you. 

Chairwoman CAPITO. —for, I think, a very productive hearing 

today. Good luck to you. And we appreciate, again, your great service to our country. 

This hearing is adjourned. 

[Whereupon, at 11:41 a.m., the hearing was adjourned.] 

(45) 

A P P E N D I X 

May 26, 2011 

46 


66872.001
47 


66872.002
48 


66872.003
49 


66872.004
50 


66872.005
51 


66872.006
52 


66872.007
53 


66872.008
54 


66872.009
55 


66872.010
56 


66872.011
57 


66872.012
58 


66872.013
59 


66872.014
60 


66872.015
61 


66872.016
62 


66872.017
63 


66872.018
64 


66872.019
65 


66872.020
66 


66872.021
67 


66872.022
68 


66872.023
69 


66872.024
70 


66872.025
71 


66872.026
72 


66872.027
73 


66872.028
74 


66872.029
75 


66872.030
76 


66872.031
77 


66872.032
78 


66872.033
79 


66872.034
80 


66872.035
81 


66872.036
82 


66872.037
83 


66872.038
84 


66872.039
85 


66872.040
86 


66872.041
87 


66872.042
88 


66872.043
89 


66872.044
90 


66872.045
91 


66872.046
92 


66872.047
93 


66872.048
94 


66872.049
95 


66872.050
96 


66872.051
97 


66872.052
98 


66872.053
99 


66872.054
100 


66872.055
101 


66872.056
102 


66872.057
103 


66872.058
104 


66872.059
105 


66872.060
106 


66872.061
107 


66872.062
108 


66872.063
109 


66872.064
110 


66872.065
111 


66872.066
112 


66872.067
113 


66872.068
114 


66872.069
115 


66872.070
116 


66872.071
117 


66872.072
118 


66872.073
119 


66872.074
120 


66872.075
121 


66872.076
122 


66872.077
123 


66872.078
124 


66872.079
125 


66872.080
126 


66872.081
127 


66872.082
128 


66872.083
129 


66872.084
130 


66872.085
131 


66872.086
132 


66872.087
133 


66872.088
134 


66872.089
135 


66872.090
136 


66872.091
137 


66872.092